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, 2005
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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 |
(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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Indexed Linked Notes on the S&P 500® Index due November 26, 2007 |
Depositary shares representing a one-tenth interest in 65/8%
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JPMorgan Market Participation Notes on the S&P 500® Index due |
cumulative preferred stock (stated value$500)
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March 12, 2008 |
61/8% subordinated notes due 2008
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
6.75% subordinated notes due 2008
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September 22, 2008 |
6.50% subordinated notes due 2009
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Guarantee of 7.50% Capital Securities, Series I, of J.P. Morgan Chase
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October 30, 2008 |
Capital IX
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan
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January 21, 2009 |
Chase Capital X
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JPMorgan Market Participation Notes on the S&P 500® Index due |
Guarantee of 57/8% Capital Securities, Series K, of J.P. Morgan Chase
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March 31, 2009 |
Capital XI
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Guarantee of 6.25% Capital Securities, Series L, of J.P. Morgan
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July 7, 2009 |
Chase Capital XII
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Guarantee of 6.20% Capital Securities, Series N, of JPMorgan
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September 21, 2009 |
Chase Capital XIV
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Consumer Price Indexed Securities due January 15, 2010 |
Guarantee of 6.35% Capital Securities, Series P, JPMorgan Chase Capital XVI
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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 |
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, 2005 was approximately $123,459,434,538.
Number of shares of common stock outstanding on January 31, 2006: 3,485,553,836
Documents Incorporated by Reference: Portions of the Registrants proxy statement for the
annual meeting of stockholders to be held on May 16, 2006, 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 |
136140 |
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Return on equity and assets |
22, 133, 136137 |
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Securities portfolio |
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141 |
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Loan portfolio |
6472, 106107, 142144 |
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Summary of loan and lending-related commitments loss experience |
7374, 107108, 145146 |
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Deposits |
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146 |
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Short-term and other borrowed funds |
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147 |
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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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7 |
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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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9 |
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Executive officers of the registrant |
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9 |
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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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11 |
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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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11 |
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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 and executive officers of the Registrant |
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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 |
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12 |
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Item 14 |
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Principal accounting fees and services |
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12 |
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Part IV |
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Item 15 |
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Exhibits, financial statement schedules |
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Part I
Item 1: Business
Effective July 1, 2004, Bank One Corporation (Bank One) merged with and into JPMorgan Chase &
Co. (the Merger), pursuant to an Agreement and Plan of Merger dated January 14, 2004. As a result
of the Merger, each outstanding share of common stock of Bank One was converted in a
stock-for-stock exchange into 1.32 shares of common stock of JPMorgan Chase & Co. (JPMorgan Chase
or the Firm). The Merger was accounted for using the purchase method of accounting. The purchase
price to complete the Merger was $58.5 billion.
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 the combined Firm and six months of heritage JPMorgan Chase; the results of
operations for all other periods prior to 2004 reflect only the operations of heritage JPMorgan
Chase.
Overview
JPMorgan Chase 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 $1.2 trillion in
assets, $107 billion in stockholders equity and operations worldwide.
JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank, National Association
(JPMorgan Chase Bank), a national banking association with branches in 17 states, and Chase Bank
USA, National Association (Chase USA), a national banking association that is the Firms credit
card-issuing bank. JPMorgan Chases principal nonbank subsidiary is J.P. Morgan Securities Inc.
(JPMSI), 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.
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, 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 & Wealth 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 31 on page 130.
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, 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 geographies 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 1999
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
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Part I
permissible for bank holding companies that are not financial holding companies. At December
31, 2005, 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 and Chase USA are regulated by the Office of the
Comptroller of the Currency (OCC). The Firms securities and investment advisory activities are
regulated by the SEC, and insurance activities are regulated by state insurance commissioners.
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 and Chase USA, 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 23 on page 121 for the
amount of dividends that the Firms principal bank subsidiaries could pay, at January 1, 2006 and
2005, 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%.
Tier 1 components: Capital surplus, common stock and noncumulative perpetual preferred stock are
the most basic components of Tier 1 capital. The Federal Reserve Board also permits cumulative
perpetual preferred securities to be included in Tier 1 capital but only up to certain limits. 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 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 securities, to 15% of total core
capital elements, net of goodwill less any associated deferred tax liability. At December 31, 2005,
JPMorgan Chases restricted core capital elements were 16.5% of total core capital elements.
JPMorgan Chase expects to be in compliance with the 15% limit by the March 31, 2009, implementation
date. Trust preferred securities are generally issued by a special-purpose trust established and
owned by JPMorgan Chase. Proceeds from the issuance to the public of the trust preferred securities
are lent to the Firm for at least 30 (but not more than 50) years. The intercompany note that
evidences this loan provides that the interest payments by JPMorgan Chase on the note may be
deferred for up to five years. During the period of any such deferral, no payments of dividends may
be made on any outstanding JPMorgan Chase preferred or common stock or on the outstanding trust
preferred securities issued to the public. As a result of the Firms implementation of Financial
Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), JPMorgan Chase does not consolidate these trusts on its balance sheet.
Tier 2 components: Long-term subordinated debt (generally having an original maturity of 1012
years) is the primary form of JPMorgan Chases Tier 2 capital.
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.
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.
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JPMorgan Chase will be required to implement advanced measurement techniques in the U.S. by
employing internal estimates of certain key risk drivers to derive capital requirements. Prior to
implementation of the new Basel II Framework, JPMorgan Chase will be required to demonstrate to its
U.S. bank supervisors that internal criteria meet the relevant supervisory standards. JPMorgan
Chase expects to be in compliance within the established timelines with all relevant Basel II
rules.
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: FDICIA also requires the FDIC to establish a risk-based assessment
system for FDIC deposit insurance. Under the FDICs risk-based insurance premium assessment system,
each depository institution is assigned to one of nine risk classifications based upon certain
capital and supervisory measures and, depending upon its classification, is assessed insurance
premiums on its deposits. In February 2006, a bill intended to reform the deposit insurance system
was enacted. This law will generally not be effective until the FDIC issues final regulations
implementing the new law. It is not possible to fully assess the impact of the law until such final
regulations are promulgated.
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 and Chase USA, 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, 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 of any subsidiary of the Firm that is an insured depository institution, such
as JPMorgan Chase Bank or Chase USA, the public noteholders would be treated differently from, and
could receive, if anything, substantially less than the depositors of the depository institution.
The USA PATRIOT Act: The USA Patriot Act of 2001 (Patriot Act) substantially broadens existing
anti-money laundering legislation and the extraterritorial jurisdiction of the United States;
imposes new compliance and due diligence obligations; creates new crimes and penalties; compels the
production of documents located both inside and outside the United States, including those of
non-U.S. institutions that have a correspondent relationship in the United States; and clarifies
the safe harbor from civil liability to customers. The United States Department of the Treasury has
issued a number of regulations that further clarify the Patriot Acts requirements or provide more
specific guidance on their application.
The Patriot Act requires all financial institutions, as defined, to establish certain anti-money
laundering compliance and due diligence programs. The Act 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. JPMorgan Chase
believes its programs satisfy the requirements of the Patriot Act. Bank regulators are focusing
their examinations on anti-money laundering compliance, and JPMorgan Chase continues to enhance
its anti-money laundering compliance programs.
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 the 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.
3
Part I
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.
The Firms bank 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
and Chase USA, 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 JPMSI and other broker-dealer subsidiaries, all of which
are subject to the regulations of the SEC and the National Association of Securities Dealers, Inc.
(NASD). JPMSI 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 types of activities in which
the non-U.S. branches of JPMorgan Chase Bank 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 and Chase USA as consumer lenders also are subject to
regulation under various federal laws, including the Truth-in-Lending, the Equal Credit
Opportunity, the Fair Credit Reporting, the Fair Debt Collection Practice and the 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.
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 non-public 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
non-affiliates, 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 30 on page 129. For a discussion of non-U.S. loans, see Note 11 on page
106 and the sections entitled Country exposure in the
MD&A on page 70, Loan portfolio on page 142 and Cross-border
outstandings on page 143.
Item 1A: Risk factors
The following discussion sets forth some of the more important risk factors that could affect
the Firms business and operations. However, other factors besides those discussed below 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 significantly
affect 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 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 which can
materially adversely affect such businesses and the Firm.
4
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, 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 non-depository 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
may also require the Firm to make additional capital investment in its businesses in order to remain
competitive, which investments may increase expenses, or which 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.
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 clients, suppliers and other business partners, as
well as with employees.
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 may also 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 are likely to 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.
5
Part I
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 will
likely 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 affect on the Firms ability to conduct its business and 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 in various legal actions, 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 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 or 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 reputation 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. If the Firms risk management framework proves ineffective, 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
impacted.
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, as 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 material to the Firm.
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 which could be material.
Item 1B: Unresolved SEC Staff comments
None.
6
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 12.3 million
square feet of commercial office space and retail space in New York City.
JPMorgan Chase and its subsidiaries also own or lease significant administrative and operational
facilities in Chicago, Illinois (5.1 million square feet), Houston and Dallas, Texas (6.8 million
square feet), Columbus, Ohio (2.9 million square feet), Newark and Wilmington, Delaware (2.2
million square feet), Phoenix, Arizona (1.4 million square feet), Tampa, Florida (1.0 million
square feet), Jersey City, New Jersey (1.2 million square feet), and Indianapolis, Indiana (900
thousand square feet).
Outside the United States, JPMorgan Chase owns or leases facilities in the United Kingdom (2.7
million square feet) and in other countries (2.6 million square feet).
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 2,641 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. There is no
assurance that the Firm will be able to dispose of its 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 pages 2930.
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). The settlement is subject to approval by the United States District Court for the
Southern District of Texas. The Newby settlement does not resolve Enron-related actions filed
separately by plaintiffs who opt out of the class action, or by certain plaintiffs who are
asserting claims not covered by that action.
The remaining Enron-related actions 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
discovery in these actions is mostly complete. Plaintiffs in two of the bank lender cases have
moved for partial summary judgment, which the Firm will oppose.
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 filed 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.
In a putative class action on behalf of JPMorgan Chase employees who participated in the Firms
401(k) plan are alleging 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.
A petition has been filed by the plaintiffs seeking review of the denial of class certification in
the United States Court of Appeals for the Second Circuit, which petition remains pending. The Firm
has also moved for summary judgment seeking dismissal of this ERISA lawsuit in its entirety.
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 stock 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 JPMorgan Chase 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 June
30, 2005, the United States Court of Appeals for the Second Circuit granted the underwriter
defendants petition for permission to appeal the district courts class certification decision,
and the appeal currently is being briefed. The Second Circuit likely will hear oral argument
sometime during the first half of 2006.
In addition, 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 is now scheduled for 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
7
Part I
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. 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 JPMSI and
other underwriters (the LaSala Actions), together with motions to stay proceedings in each case.
To date, JPMSI is a defendant in more than half of the approximately 100 pending LaSala Actions. On
August 30, 2005, the Court stayed until resolution of the proposed issuer settlement the LaSala
Actions then pending against JPMSI 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. The Court did,
however, grant Plaintiffs leave to replead and noted that the stay of the LaSala Actions remains in
effect. Plaintiffs thereafter filed amended complaints in the lead and other LaSala Actions in
which Plaintiffs are purportedly seeking equitable restitution on a breach of fiduciary duty claim
a claim that sought damages in the initial LaSala complaints and was dismissed on the ground
that it was time-barred. 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. The motion currently is being briefed.
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 motion for rehearing en banc in the Second Circuit was denied on January 11, 2006.
A wholly separate antitrust class action lawsuit on behalf of a class of IPO issuers alleging that
JPMSI and other underwriters conspired to fix their underwriting fees in IPOs is in discovery.
National Century Financial Enterprises litigation. JPMorgan Chase, JPMorgan Chase Bank, JPMorgan
Partners, Beacon Group, LLC and three current or 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. are also named as defendants. JPMorgan Chase
Bank and Bank One, N.A. are 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 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 current or 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 securities 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 on behalf of the JPMorgan Chase entities, the Bank One entities and
the Defendant Employees are currently pending. In the UAT action, JPMorgan Chase Bank and Bank One
are sued in their roles as indenture trustees. Claims are asserted under the Federal Racketeer
Influenced and Corrupt Organizations Act (RICO), the Ohio Corrupt Practices Act and various
common-law claims. On March 31, 2005, motions to dismiss the UAT action were filed on behalf of
JPMorgan Chase Bank. These motions are currently pending. On February 22, 2006, the JPMorgan Chase
entities, the Bank One entities and the Defendant Employees reached a settlement with the holders
of $1.6 billion face value of Notes (the Arizona Noteholders), and reached a separate agreement
with the UAT. The settlements are contingent upon the entry of certain orders by the MDL court and
bankruptcy courts. Assuming the contingencies are met, the Firm has agreed to pay the Arizona
Noteholders the sum of $375 million for all claims and potential claims held by them and has agreed
to pay the UAT the sum of $50 million for all claims or potential claims held by it.
In addition, the Securities and Exchange Commission has served subpoenas on JPMorgan Chase Bank and
Bank One, N.A. (Bank One) 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 that it is
considering recommending that the Commission bring a civil injunctive action against Bank One and a
former employee alleging violations of the securities laws in connection with Bank Ones role as
indenture trustee for the NPF XII note program. On July 8, 2005, the staff of the Midwest Regional
Office of the Securities and Exchange Commission wrote to advise that it is considering
recommending that the Commission bring a civil injunctive action against two individuals, one
present and one former employee 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 Commission 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.
8
In addition to the various cases, proceedings and investigations discussed above, JPMorgan
Chase and its subsidiaries are named as defendants in a number of other legal actions and
governmental proceedings arising in connection with their businesses. Additional actions,
investigations or proceedings may be brought 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 or penalties 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.
Item 4: Submission of matters to a vote of security holders
None.
Executive officers of the registrant
|
|
|
|
|
|
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Name |
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Age (at December 31, 2005) |
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Positions and offices held with JPMorgan Chase |
|
|
|
|
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|
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William B. Harrison, Jr.
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|
|
62 |
|
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Chairman of the Board since December 31, 2005, prior to which he was Chairman and
Chief Executive Officer from November 2001. He was President and Chief Executive
Officer from December 2000 until November 2001 and Chairman and Chief Executive Officer from
January through December 2000. |
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|
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|
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James Dimon
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|
|
49 |
|
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President and Chief Executive Officer since December 31, 2005, prior to which he was
President and Chief Operating Officer. Prior to the Merger, he had been Chairman and
Chief Executive Officer of Bank One Corporation since March 2000. Before joining
Bank One Corporation, he had been a private investor from November 1998 until March 2000,
prior to which he held various senior executive positions at Citigroup Inc., its
subsidiary, Salomon Smith Barney, and its predecessor company, Travelers Group, Inc. |
|
|
|
|
|
|
|
Austin A. Adams
|
|
|
62 |
|
|
Chief Information Officer. Prior to the Merger, he had been Chief Information Officer of
Bank One Corporation since March 2001. Before joining Bank One Corporation, he had
been Chief Information Officer at First Union Corporation (now known as Wachovia
Corp.). |
|
|
|
|
|
|
|
Frank Bisignano
|
|
|
46 |
|
|
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
|
|
|
53 |
|
|
Co-Chief Executive Officer of the Investment Bank since March 2004, prior to which he had
been Deputy Head of the Investment Bank since January 2001 and Head of Institutional
Equities business since 2000. Prior to joining JPMorgan Chase in 2000, he had been
Vice Chairman of Citigroup Inc. subsidiary, Salomon Smith Barney. |
|
|
|
|
|
|
|
John F. Bradley
|
|
|
45 |
|
|
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. He had been
Co-Head of Global Human Resources at J.P. Morgan & Co. Incorporated. |
|
|
|
|
|
|
|
Michael J. Cavanagh
|
|
|
39 |
|
|
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, Treasurer from 2001 until 2003, and Head of Strategy and
Planning from May 2000 until 2001 at Bank One Corporation. |
9
Part I
|
|
|
|
|
|
|
Ina R. Drew
|
|
|
49 |
|
|
Chief Investment Officer since February 2005, prior to which she was Head of Global
Treasury. |
|
|
|
|
|
|
|
Joan Guggenheimer
|
|
|
53 |
|
|
Co-General Counsel since July 2004. Prior to the Merger, she had been Chief Legal Officer
and Corporate Secretary at Bank One Corporation since May 2003. She had served in
various positions with Citigroup Inc. and its predecessor entities from 1985 until 2003,
and immediately prior to joining Bank One Corporation was General Counsel of the Global
Corporate and Investment Bank and also served as Co-General Counsel of Citigroup Inc. |
|
|
|
|
|
|
|
Samuel Todd Maclin
|
|
|
49 |
|
|
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
|
|
|
43 |
|
|
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 from
September 2000 until August 2002, prior to which he had been Senior Executive Vice President of
Private Client Sales and Marketing at Salomon Smith Barney. |
|
|
|
|
|
|
|
William H. McDavid
|
|
|
59 |
|
|
Co-General Counsel since July 2004. Prior to the Merger, he had been General Counsel. |
|
|
|
|
|
|
|
Heidi Miller
|
|
|
52 |
|
|
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. from January 2001 until
March 2002, prior to which she had held several executive positions at Priceline.com and
at Citigroup Inc., including Chief Financial Officer. |
|
|
|
|
|
|
|
Charles W. Scharf
|
|
|
40 |
|
|
Head 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 from June 2000 at Bank One
Corporation. Prior to joining Bank One Corporation, he had been Chief Financial Officer
at Citigroup Global Corporate and Investment Bank. |
|
|
|
|
|
|
|
Richard J. Srednicki
|
|
|
58 |
|
|
Chief Executive Officer of Card Services from July 2004, prior to which he was Executive
Vice President of Chase Cardmember Services. |
|
|
|
|
|
|
|
James E. Staley
|
|
|
49 |
|
|
Global Head of Asset & Wealth Management since 2001, prior to which he had been Head
of the Private Bank at J.P. Morgan & Co. Incorporated. |
|
|
|
|
|
|
|
Don M. Wilson III
|
|
|
57 |
|
|
Chief Risk Officer. He had been Co-Head of Credit & Rate Markets from 2001 until July
2003, prior to which he headed the Global Trading Division. |
|
|
|
|
|
|
|
William T. Winters
|
|
|
44 |
|
|
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. He had
been Head of Global Markets at J.P. Morgan & Co. Incorporated. |
Unless otherwise noted, during the five fiscal years ended December 31, 2005, 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.
10
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 133. JPMorgan Chase declared quarterly cash dividends on its common stock in
the amount of $0.34 per share for each quarter of 2005, 2004 and 2003. The common dividend payout
ratio, based upon reported net income, was: 57% for 2005; 88% for 2004; and 43% for 2003. At
January 31, 2006, there were 225,105 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 July 20, 2004, the Board of Directors approved an initial stock repurchase program in the
aggregate amount of $6.0 billion. This amount includes shares to be repurchased to offset issuances
under the Firms employee stock-based plans. The actual amount 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 stock
repurchase program has no set expiration date.
The Firms repurchases of equity securities during 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total open |
|
Average |
|
Dollar value of |
For the year ended |
|
market shares |
|
price paid |
|
remaining authorized |
December 31, 2005 |
|
repurchased |
|
per share(a) |
|
repurchase program |
|
First quarter |
|
|
35,972,000 |
|
|
|
$ 36.57 |
|
|
|
$ 3,946 |
|
Second quarter |
|
|
16,807,465 |
|
|
|
35.32 |
|
|
|
3,352 |
|
Third quarter |
|
|
14,445,300 |
|
|
|
34.61 |
|
|
|
2,853 |
|
|
October |
|
|
5,964,000 |
|
|
|
35.77 |
|
|
|
2,640 |
|
November |
|
|
8,428,600 |
|
|
|
37.90 |
|
|
|
2,321 |
|
December |
|
|
11,913,900 |
|
|
|
39.29 |
|
|
|
1,853 |
|
|
Fourth quarter |
|
|
26,306,500 |
|
|
|
38.05 |
|
|
|
1,853 |
|
|
Total for 2005 |
|
|
93,531,265 |
|
|
|
$ 36.46 |
|
|
|
$ 1,853 |
|
|
|
|
|
(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 were as follows for 2005:
|
|
|
|
|
|
|
|
|
For the year ended |
|
Total shares |
|
|
Average price |
|
December 31, 2005 |
|
repurchased |
|
|
paid per share |
|
|
First quarter |
|
|
6,993,164 |
|
|
|
$ 37.22 |
|
Second quarter |
|
|
680,851 |
|
|
|
35.10 |
|
Third quarter |
|
|
386,526 |
|
|
|
34.90 |
|
|
October |
|
|
67,885 |
|
|
|
33.99 |
|
November |
|
|
31,110 |
|
|
|
37.77 |
|
December |
|
|
19,362 |
|
|
|
39.09 |
|
|
Fourth quarter |
|
|
118,357 |
|
|
|
35.82 |
|
|
Total for 2005 |
|
|
8,178,898 |
|
|
|
$ 36.91 |
|
|
Item 6: Selected financial data
For five-year selected financial data, see Five-year summary of consolidated financial
highlights (unaudited) on page 22.
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 84. Such information
should be read in conjunction with the Consolidated financial statements and Notes thereto, which
appear on pages 87 through 132.
Item 7A: Quantitative and qualitative disclosures about market risk
For information related to market risk, see the Market risk management section on pages 75
through 78 and Note 26 on page 123.
Item 8: Financial statements and supplementary data
The Consolidated financial statements, together with the Notes thereto and the report of
PricewaterhouseCoopers LLP dated February 24, 2006 thereon, appear on pages 86 through 132.
Supplementary financial data for each full quarter within the two years ended December 31, 2005,
are included on page 133 in the table entitled Supplementary information selected quarterly financial data (unaudited). Also included is a Glossary of terms on page 134.
Item 9: Changes in and disagreements with accountants on accounting and financial disclosure
None.
11
Parts II, III & IV
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, Chief
Executive Officer and 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 evaluation, the Chairman, Chief Executive Officer and Chief Financial Officer concluded that
these disclosure controls and procedures were effective. See Exhibits 31.1, 31.2 and 31.3 for the
Certification statements issued by the Chairman, 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 are likely to 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 85 for Managements report on
internal control over financial reporting, and page 86 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
2005 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 and
executive officers of the Registrant
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, 2005 |
|
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 |
|
|
292,248 |
|
|
|
$ 36.64 |
|
|
|
260,367 |
|
Employee stock-based incentive plans not approved by shareholders |
|
|
150,452 |
|
|
|
42.37 |
|
|
|
|
|
|
Total |
|
|
442,700 |
|
|
|
$ 38.59 |
|
|
|
260,367 |
(a) |
|
|
|
|
(a) |
|
Future shares will be issued out of the shareholder-approved 2005 Long-Term Incentive
Plan (2005 Plan). The 2005 Plan replaces three existing stock compensation plans the 1996
Long-Term Incentive Plan, as amended, and two nonshareholder approved plans all of which expired
in May 2005. |
Item 13:
Certain relationships and
related transactions
Information related to JPMorgan Chases Executive Officers is included on pages 910. 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
2006 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
2005 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 87. |
|
2. |
|
Financial statement schedules |
|
|
|
Financial statement schedules are omitted since the required information is either not
applicable, not deemed material, or is shown in the respective Consolidated financial
statements or in the Notes thereto. |
12
Part IV
|
|
|
3.
|
|
Exhibits |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of JPMorgan Chase & Co. (incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
|
|
|
3.2
|
|
By-laws of JPMorgan Chase &
Co., effective December 31,
2005. |
|
|
|
4.1
|
|
Deposit Agreement, dated as of February 8, 1996, between J.P. Morgan & Co. Incorporated
(succeeded through merger by JPMorgan Chase & Co.) and Morgan Guaranty Trust Company of New York
(succeeded through merger by JPMorgan Chase Bank), as Depository
(incorporated by reference to Exhibit 4.7 to the Registration
Statement on Form 8A (File No. 1-5805) of The Chase
Manhattan Corporation (now known as JPMorgan Chase & Co.) filed
December 20, 2000). |
|
|
|
4.2
|
|
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). |
|
|
|
4.3(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. |
|
|
|
4.3(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. |
|
|
|
4.3(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. |
|
|
|
4.4(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. |
|
|
|
4.4(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. |
|
|
|
4.4(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. |
|
|
|
4.4(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. |
|
|
|
|
|
|
4.5(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. |
|
|
|
4.5(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. |
|
|
|
4.5(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. |
|
|
|
4.5(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. |
|
|
|
4.5(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. |
|
|
|
4.6(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. |
|
|
|
4.6(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. |
|
|
|
4.7
|
|
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 (File
No. 333-52826) of J.P. Morgan Chase & Co. filed
June 13, 2001). |
|
|
|
4.8(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). |
|
|
|
4.8(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). |
|
|
|
4.8(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). |
13
Part IV
|
|
|
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 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). |
|
|
|
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 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). |
|
|
|
4.9(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, 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). |
|
|
|
4.10(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). |
|
|
|
4.10(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). |
|
|
|
4.10(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, 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). |
|
|
|
4.11(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). |
|
|
|
4.11(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). |
|
|
|
4.12(a)
|
|
Form of Indenture, dated as of December 1, 1995, between First Chicago NBC Corporation (succeeded through merger by JPMorgan Chase & Co.) and The
Chase Manhattan Bank (National Association) (succeeded by U.S. Bank Trust National Association), as Trustee (incorporated by reference to Exhibit
4.12(a) to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
|
|
|
4.12(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.), JPMorgan Chase Bank, as Resigning Trustee, and U.S. Bank Trust National
Association, as Successor Trustee, to the Indenture, dated as of December 1, 1995 (incorporated by
reference to Exhibit 4.29 to the Registration Statement on Form S-3
(File No. 333-116822) of JPMorgan Chase & Co. filed
June 24, 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. |
|
|
|
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
|
|
The Chase Manhattan Corporation 1996 Long-Term Incentive Plan. |
|
|
|
10.7
|
|
Key Executive Performance Plan of JPMorgan Chase & Co., as restated as of January 1, 2005. |
|
|
|
10.8
|
|
Excess Retirement Plan of The Chase Manhattan Bank and Participating Companies, restated
effective January 1, 2005. |
|
|
|
10.9
|
|
1984 J.P. Morgan & Co. Incorporated Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31, 2004). |
|
|
|
10.10
|
|
1992 J.P. Morgan & Co. Incorporated and Affiliated Companies Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10.10 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
|
|
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). |
14
|
|
|
10.12
|
|
1998 J.P. Morgan & Co.
Incorporated and Affiliated Companies Performance Plan (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, 2004). |
|
|
|
10.13
|
|
Executive Retirement Plan of The Chase Manhattan Corporation and Certain Subsidiaries. |
|
|
|
10.14
|
|
Benefit Equalization Plan of The Chase Manhattan Corporation and Certain Subsidiaries. |
|
|
|
10.15
|
|
Summary of Terms of JPMorgan Chase & Co. Severance Policy. |
|
|
|
10.16
|
|
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). |
|
|
|
10.17
|
|
Summary of Terms of Pension of William B. Harrison, Jr. (incorporated by reference to Form
8-K Item 1.01 of JPMorgan Chase & Co. filed February 28, 2005 (File No. 1-5805)). |
|
|
|
10.18
|
|
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). |
|
|
|
10.19
|
|
Summary of Bank One Corporation
Director Deferred Compensation Plan. |
|
|
|
10.20
|
|
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). |
|
|
|
10.21
|
|
Bank One Corporation Deferred Compensation Plan. |
|
|
|
10.22
|
|
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). |
|
|
|
10.23
|
|
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). |
|
|
|
10.24
|
|
Bank One Corporation Key Executive Change of Control Plan, as amended (incorporated by
reference to Exhibit 10(G) to the Form 10-K of Bank One Corporation (File No. 1-15323) for the
year ended December 31, 2003). |
|
|
|
10.25
|
|
Bank One Corporation Planning Group Annual Incentive Plan, as amended (incorporated by
reference to Exhibit 10(H) to the Form 10-K of Bank One Corporation (File No. 1-15323) for the
year ended December 31, 2003). |
|
|
|
10.26
|
|
Bank One Corporation Investment Option Plan. |
|
|
|
10.27
|
|
First Chicago Corporation Stock Incentive Plan (incorporated by reference to Exhibit 10.28 to
the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
|
|
|
10.28
|
|
NBD Bancorp, Inc. Performance Incentive Plan, as amended (incorporated by reference to
Exhibit 10.29 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
|
|
|
10.29
|
|
Bank 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). |
|
|
|
10.30
|
|
Bank 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). |
|
|
|
10.31
|
|
Form of JPMorgan Chase & Co.
Long-Term Incentive Plan Award Agreement of January 2005 stock appreciation rights. |
|
|
|
10.32
|
|
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). |
|
|
|
10.33
|
|
Form of JPMorgan Chase & Co.
Long-Term Incentive Plan Award Agreement of October 2005 stock appreciation rights. |
|
|
|
10.34
|
|
Amendment and Restatement of Letter
Agreement between JPMorgan Chase & Co. and Charles W. Scharf, dated December 29, 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 (to be filed by amendment
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. |
|
|
|
31.3
|
|
Certification. |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
JPMorgan Chase hereby agrees to furnish to the Securities and Exchange Commission, upon
request, copies of instruments defining the rights of holders for the outstanding nonregistered
long-term debt of JPMorgan Chase and its subsidiaries and certain other long-term debt issued by
predecessor institutions of JPMorgan Chase and assumed by virtue of the mergers with those
respective institutions. These instruments have not been filed as exhibits hereto by reason that
the total amount of each issue of such securities does not exceed 10% of the total assets of
JPMorgan Chase and its subsidiaries on a consolidated basis. In addition, JPMorgan Chase hereby
agrees to file with the Securities and Exchange Commission, upon request, the Junior Subordinated
Indentures, the Guarantees and the Amended and Restated Trust Agreements for each Delaware business
trust subsidiary that has issued Capital Securities, the guarantees for which have been assumed by
JPMorgan Chase & Co. by virtue of the mergers of the respective predecessor institutions that
originally issued such securities. The provisions of such agreements differ from the documents
constituting Exhibits 4.8(a), (b) and (c) to this report only with respect to the pricing terms of
each series of capital securities; these pricing terms are disclosed in Note 17 on page 117.
15
Table of contents
Financial:
22 |
|
Five-year summary of consolidated financial highlights |
Managements discussion and analysis:
23 |
|
Introduction |
|
25 |
|
Executive overview |
|
27 |
|
Consolidated results of operations |
|
31 |
|
Explanation and reconciliation of the Firms use of non-GAAP financial measures |
|
34 |
|
Business segment results |
|
55 |
|
Balance sheet analysis |
|
56 |
|
Capital management |
|
58 |
|
Off-balance sheet arrangements and contractual cash obligations |
|
60 |
|
Risk management |
|
61 |
|
Liquidity risk management |
|
63 |
|
Credit risk management |
|
75 |
|
Market risk management |
|
79 |
|
Operational risk management |
|
80 |
|
Reputation and fiduciary risk management |
|
80 |
|
Private equity risk management |
|
81 |
|
Critical accounting estimates used by the Firm |
|
83 |
|
Accounting and reporting developments |
|
84 |
|
Nonexchange-traded commodity derivative contracts at fair value |
Audited financial statements:
85 |
|
Managements report on internal control over financial reporting |
|
86 |
|
Report of independent registered public accounting firm |
|
87 |
|
Consolidated financial statements |
|
91 |
|
Notes to consolidated financial statements |
Supplementary information:
133 |
|
Selected quarterly financial data |
|
134 |
|
Glossary of terms |
|
135 |
|
Forward-looking statements |
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. (JPMorgan Chase). The Merger was accounted for using the purchase method of accounting. Accordingly, the Firms results of operations for 2004
include six months of the combined Firms results and six months of heritage JPMorgan Chase
results only and 2003 results of operations reflect the results of heritage JPMorgan Chase only. For additional information
regarding the Merger, see Note 2 on page 92 of this Annual Report.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 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, |
|
2005 |
|
|
2004 |
(e) |
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
34,702 |
|
|
$ |
26,336 |
|
|
$ |
20,419 |
|
|
$ |
17,436 |
|
|
$ |
17,943 |
|
Net interest income |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
|
|
12,178 |
|
|
|
11,401 |
|
|
Total net revenue |
|
|
54,533 |
|
|
|
43,097 |
|
|
|
33,384 |
|
|
|
29,614 |
|
|
|
29,344 |
|
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
|
4,331 |
|
|
|
3,182 |
|
Noninterest expense before Merger costs and Litigation
reserve charge |
|
|
35,549 |
|
|
|
29,294 |
|
|
|
21,716 |
|
|
|
20,254 |
|
|
|
21,073 |
|
Merger and restructuring costs |
|
|
722 |
|
|
|
1,365 |
|
|
|
|
|
|
|
1,210 |
|
|
|
2,523 |
|
Litigation reserve charge |
|
|
2,564 |
|
|
|
3,700 |
|
|
|
100 |
|
|
|
1,300 |
|
|
|
|
|
|
Total noninterest expense |
|
|
38,835 |
|
|
|
34,359 |
|
|
|
21,816 |
|
|
|
22,764 |
|
|
|
23,596 |
|
|
Income before income tax expense and effect of accounting
change |
|
|
12,215 |
|
|
|
6,194 |
|
|
|
10,028 |
|
|
|
2,519 |
|
|
|
2,566 |
|
Income tax expense |
|
|
3,732 |
|
|
|
1,728 |
|
|
|
3,309 |
|
|
|
856 |
|
|
|
847 |
|
|
Income before effect of accounting change |
|
|
8,483 |
|
|
|
4,466 |
|
|
|
6,719 |
|
|
|
1,663 |
|
|
|
1,719 |
|
Cumulative effect of change in accounting principle (net
of tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
$ |
1,663 |
|
|
$ |
1,694 |
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: Basic |
|
$ |
2.43 |
|
|
$ |
1.59 |
|
|
$ |
3.32 |
|
|
$ |
0.81 |
|
|
$ |
0.83 |
(f) |
Diluted |
|
|
2.38 |
|
|
|
1.55 |
|
|
|
3.24 |
|
|
|
0.80 |
|
|
|
0.80 |
(f) |
Cash dividends declared per share |
|
|
1.36 |
|
|
|
1.36 |
|
|
|
1.36 |
|
|
|
1.36 |
|
|
|
1.36 |
|
Book value per share |
|
|
30.71 |
|
|
|
29.61 |
|
|
|
22.10 |
|
|
|
20.66 |
|
|
|
20.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average: Basic |
|
|
3,492 |
|
|
|
2,780 |
|
|
|
2,009 |
|
|
|
1,984 |
|
|
|
1,972 |
|
Diluted |
|
|
3,557 |
|
|
|
2,851 |
|
|
|
2,055 |
|
|
|
2,009 |
|
|
|
2,024 |
|
Common shares at period-end |
|
|
3,487 |
|
|
|
3,556 |
|
|
|
2,043 |
|
|
|
1,999 |
|
|
|
1,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on common equity (ROE) |
|
|
8 |
% |
|
|
6 |
% |
|
|
16 |
% |
|
|
4 |
% |
|
|
4 |
% |
Return on assets (ROA)(a) |
|
|
0.72 |
|
|
|
0.46 |
|
|
|
0.87 |
|
|
|
0.23 |
|
|
|
0.23 |
|
Tier 1 capital ratio |
|
|
8.5 |
|
|
|
8.7 |
|
|
|
8.5 |
|
|
|
8.2 |
|
|
|
8.3 |
|
Total capital ratio |
|
|
12.0 |
|
|
|
12.2 |
|
|
|
11.8 |
|
|
|
12.0 |
|
|
|
11.9 |
|
Tier 1 leverage ratio |
|
|
6.3 |
|
|
|
6.2 |
|
|
|
5.6 |
|
|
|
5.1 |
|
|
|
5.2 |
|
Selected balance sheet data (period-end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
$ |
770,912 |
|
|
$ |
758,800 |
|
|
$ |
693,575 |
|
Securities |
|
|
47,600 |
|
|
|
94,512 |
|
|
|
60,244 |
|
|
|
84,463 |
|
|
|
59,760 |
|
Loans |
|
|
419,148 |
|
|
|
402,114 |
|
|
|
214,766 |
|
|
|
216,364 |
|
|
|
217,444 |
|
Deposits |
|
|
554,991 |
|
|
|
521,456 |
|
|
|
326,492 |
|
|
|
304,753 |
|
|
|
293,650 |
|
Long-term debt |
|
|
108,357 |
|
|
|
95,422 |
|
|
|
48,014 |
|
|
|
39,751 |
|
|
|
39,183 |
|
Common stockholders equity |
|
|
107,072 |
|
|
|
105,314 |
|
|
|
45,145 |
|
|
|
41,297 |
|
|
|
40,090 |
|
Total stockholders equity |
|
|
107,211 |
|
|
|
105,653 |
|
|
|
46,154 |
|
|
|
42,306 |
|
|
|
41,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
7,490 |
|
|
$ |
7,812 |
|
|
$ |
4,847 |
|
|
$ |
5,713 |
|
|
$ |
4,806 |
|
Nonperforming assets(b) |
|
|
2,590 |
|
|
|
3,231 |
|
|
|
3,161 |
|
|
|
4,821 |
|
|
|
4,037 |
|
Allowance for loan losses to total loans(c) |
|
|
1.84 |
% |
|
|
1.94 |
% |
|
|
2.33 |
% |
|
|
2.80 |
% |
|
|
2.25 |
% |
Net charge-offs |
|
$ |
3,819 |
|
|
$ |
3,099 |
|
|
$ |
2,272 |
|
|
$ |
3,676 |
|
|
$ |
2,335 |
|
Net charge-off rate(c) |
|
|
1.00 |
% |
|
|
1.08 |
% |
|
|
1.19 |
% |
|
|
1.90 |
% |
|
|
1.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
168,847 |
|
|
|
160,968 |
|
|
|
96,367 |
|
|
|
97,124 |
|
|
|
95,812 |
(g) |
Share price (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
40.56 |
|
|
$ |
43.84 |
|
|
$ |
38.26 |
|
|
$ |
39.68 |
|
|
$ |
59.19 |
|
Low |
|
|
32.92 |
|
|
|
34.62 |
|
|
|
20.13 |
|
|
|
15.26 |
|
|
|
29.04 |
|
Close |
|
|
39.69 |
|
|
|
39.01 |
|
|
|
36.73 |
|
|
|
24.00 |
|
|
|
36.35 |
|
|
|
|
|
(a) |
|
Represents Net income divided by Total average assets. |
(b) |
|
Excludes wholesale purchased held-for-sale (HFS) loans purchased as part of the Investment
Banks proprietary activities. |
(c) |
|
Excluded from the allowance coverage ratios were end-of-period loans held-for-sale; and
excluded from the net charge-off rates were average loans held-for-sale. |
(d) |
|
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. |
(e) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
(f) |
|
Basic and diluted earnings per share were each reduced by $0.01 in 2001 because of the impact
of the adoption of SFAS 133 relating to the accounting for derivative instruments and hedging
activities. |
(g) |
|
Represents full-time equivalent employees, as headcount data is unavailable. |
|
|
|
|
|
|
22
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|
JPMorgan Chase & Co. / 2005 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 134135 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 135 of this Annual Report) and in the JPMorgan Chase Annual Report on Form 10K (Form
10K) for the year ended December 31, 2005, in Part I, Item 1A: Risk factors, to which reference
is hereby made.
JPMorgan Chase & Co. (JPMorgan Chase or the Firm), a financial holding company incorporated
under Delaware law in 1968, is a leading global financial services firm and one of the largest
banking institutions in the United States, with $1.2 trillion in assets, $107 billion in
stockholders equity and operations worldwide. The Firm is a leader in investment banking,
financial services for consumers and businesses, financial transaction processing, asset and wealth
management and private equity. Under the JPMorgan, Chase and Bank One 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), a national banking association with branches in 17 states; and Chase Bank USA, National Association, a
national bank that is the Firms credit card issuing bank. JPMorgan Chases principal nonbank
subsidiary is J.P. Morgan Securities Inc. (JPMSI), 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 & Wealth Management. The Firms
consumer businesses comprise Retail Financial Services and Card Services. A description of the
Firms business segments, and the products and services they provide to their respective client
bases, follows.
Investment Bank
JPMorgan Chase is one of the worlds leading investment banks, as evidenced by the breadth of the
Investment Bank client relationships and product capabilities. The Investment Bank (IB) has
extensive relationships with corporations, financial institutions, governments and institutional
investors worldwide. The Firm provides a full range of investment banking products and services in
all major capital markets, including advising on corporate strategy and structure, capital raising
in equity and debt markets, sophisticated risk management, and market-making in cash securities and
derivative instruments. The Investment Bank also commits the Firms own capital to proprietary
investing and trading activities.
Retail Financial Services
Retail Financial Services (RFS) includes Home Finance, Consumer & Small Business Banking, Auto &
Education Finance and Insurance. Through this group of businesses, the Firm provides consumers and
small businesses with a broad range of financial products and services including deposits,
investments, loans and insurance. Home Finance is a leading provider of consumer real estate loan
products and is one of the largest originators and servicers of home mortgages. Consumer & Small
Business Banking offers one of the largest branch networks in the United States, covering 17 states
with 2,641 branches and 7,312 automated teller machines (ATMs). Auto & Education Finance is
the largest noncaptive originator of automobile loans as well as a top provider of loans for
college students. Through its Insurance operations, the Firm sells and underwrites an extensive
range of financial protection products and investment alternatives, including life insurance,
annuities and debt protection products.
Card Services
Card Services (CS) is one of the largest issuers of credit cards in the United States, with more
than 110 million cards in circulation, and is the largest merchant acquirer. CS offers a wide
variety of products to satisfy the needs of its cardmembers, including cards issued on behalf of
many well-known partners, such as major airlines, hotels, universities, retailers and other
financial institutions.
Commercial Banking
Commercial Banking (CB) serves more than 25,000 clients, including corporations, municipalities,
financial institutions and not-for-profit entities with annual revenues generally ranging from $10
million to $2 billion. While most Middle Market clients are within the Retail Financial Services
footprint, CB also covers larger corporations, as well as local governments and financial
institutions on a national basis. CB is a market leader with superior client penetration across the
businesses it serves. Local market presence, coupled with industry expertise and excellent client
service and risk management, enable CB to offer superior financial advice. Partnership with other
JPMorgan Chase businesses positions CB to deliver broad product capabilities including lending,
treasury services, investment banking, and asset and wealth management and meet its clients
financial needs.
Treasury & Securities Services
Treasury & Securities Services (TSS) is a global leader in providing transaction, investment and
information services to support the needs of corporations, issuers and institutional investors
worldwide. TSS is one of the largest cash management providers in the world and a leading global
custodian. The Treasury Services (TS) business provides a variety of cash management products,
trade finance and logistics solutions, wholesale card products, and short-term liquidity management
tools. The Investor Services (IS) business provides custody, fund services, securities lending,
and performance measurement and execution products. The Institutional Trust Services (ITS)
business provides trustee, depository and administrative services for debt and equity issuers. TS
partners with the Commercial Banking, Consumer & Small Business Banking and Asset & Wealth
Management businesses to serve clients firmwide. As a result, certain TS revenues are included in
other segments results. TSS combined the management of the IS and ITS businesses under the name
Worldwide Securities Services (WSS) to create an integrated franchise which provides custody and
investor services as well as securities clearance and trust services to clients globally. Beginning
January 1, 2006, TSS will report results for two divisions: TS and WSS.
|
|
|
|
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|
JPMorgan Chase & Co. / 2005 Annual Report
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|
23 |
Managements discussion and analysis
JPMorgan Chase & Co.
Asset & Wealth Management
Asset & Wealth Management (AWM) provides investment advice and management for institutions and
individuals. With Assets under supervision of $1.1 trillion, AWM is one of the largest asset and
wealth managers in the world. AWM serves four distinct client groups through three businesses:
institutions through JPMorgan Asset Management; ultra-high-net-worth clients through the Private
Bank; high-net-worth clients through Private Client Services; and retail clients through JPMorgan
Asset Management. The majority of AWMs client assets are in actively managed portfolios. AWM has
global investment expertise in equities, fixed income, real estate, hedge funds, private equity and
liquidity, including both money market instruments and bank deposits. AWM also provides trust and
estate services to ultra-high-net-worth and high-net-worth clients, and retirement services for
corporations and individuals.
2005 Business events
Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately
$663 million, Collegiate Funding Services, a leader in student loan servicing and consolidation. This acquisition will enable the Firm to
create a comprehensive education finance business.
BrownCo
On November 30, 2005, JPMorgan Chase sold BrownCo, an on-line deep-discount brokerage business, to
E*TRADE Financial for a cash purchase price of $1.6 billion. JPMorgan Chase recognized an after-tax
gain of $752 million.
Sears Canada credit card business
On November 15, 2005, JPMorgan Chase purchased Sears Canada Inc.s credit card operation, including
both the private-label card accounts and the co-branded Sears MasterCard® accounts. The
credit card operation includes approximately 10 million accounts with $2.2 billion (CAD$2.5
billion) in managed loans. Sears Canada and JPMorgan Chase entered into an ongoing arrangement
under which JPMorgan Chase will offer private-label and co-branded credit cards to both new and
existing customers of Sears Canada.
Chase Merchant Services, Paymentech integration
On October 5, 2005, JPMorgan Chase and First Data Corp. completed the integration of the companies
jointly owned Chase Merchant Services and Paymentech merchant businesses, to be operated under the
name of Chase Paymentech Solutions, LLC. The joint venture is the largest financial transaction
processor in the U.S. for businesses accepting credit card payments via traditional point of sale,
Internet, catalog and recurring billing. As a result of the integration into a joint venture,
Paymentech has been deconsolidated and JPMorgan Chases ownership interest in this joint venture is
accounted for in accordance with the equity method of accounting.
Neovest Holdings, Inc.
On September 1, 2005, JPMorgan Chase completed its acquisition of Neovest Holdings, Inc., a
provider of high-performance trading technology and direct market access. This transaction will
enable the Investment Bank to offer a leading, broker-neutral trading platform across asset classes
to institutional investors, asset managers and hedge funds.
Enron litigation settlement
On June 14, 2005, JPMorgan Chase announced that it had reached an agreement in principle to settle,
for $2.2 billion, the Enron class action litigation captioned Newby v. Enron Corp. The Firm also
recorded a nonoperating charge of $1.9 billion (pre-tax) to cover the settlement and to increase
its reserves for certain other remaining material legal matters.
Vastera
On April 1, 2005, JPMorgan Chase acquired Vastera, a provider of global trade management solutions,
for approximately $129 million. Vasteras business was combined with the Logistics and Trade
Services businesses of TSS Treasury Services unit. Vastera automates trade management processes
associated with the physical movement of goods internationally; the acquisition enables TS to offer
management of information and processes in support of physical goods movement, together with
financial settlement.
WorldCom litigation settlement
On March 17, 2005, JPMorgan Chase settled, for $2.0 billion, the WorldCom, Inc. class action
litigation. In connection with the settlement, JPMorgan Chase increased the Firms Litigation
reserve by $900 million.
JPMorgan Partners
On March 1, 2005, the Firm announced that the management team of JPMorgan Partners, LLC, a private
equity unit of the Firm, will become independent when it completes the investment of the current
$6.5 billion Global Fund, which it advises. The buyout and growth equity professionals of JPMorgan
Partners will form a new independent firm, CCMP Capital, LLC, and the venture professionals will
separately form a new independent firm, Panorama Capital, LLC. JPMorgan Chase has committed to
invest the lesser of $875 million or 24.9% of the limited partnership interests in the fund to be
raised by CCMP Capital, and has committed to invest the lesser of $50 million or 24.9% of the
limited partnership interests in the fund to be raised by Panorama Capital. The investment
professionals of CCMP and Panorama will continue to manage the JPMP investments pursuant to a
management agreement with the Firm.
Cazenove
On February 28, 2005, JPMorgan Chase and Cazenove Group plc (Cazenove) formed a business
partnership which combined Cazenoves investment banking business and JPMorgan Chases U.K.-based
investment banking business in order to provide investment banking services in the United Kingdom
and Ireland. The new company is called JPMorgan Cazenove Holdings.
Subsequent events
Sale of insurance underwriting business
On February 7, 2006, JPMorgan Chase announced that the Firm has agreed to sell its life insurance and
annuity underwriting businesses to Protective Life Corporation for a cash purchase price of
approximately $1.2 billion. The sale, which includes both the heritage Chase insurance business and
the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal
regulatory approvals and is expected to close in the third quarter of 2006. JPMorgan Chase
anticipates the transaction will have no material impact on earnings.
|
|
|
|
|
|
24
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
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 liquidity, capital,
credit and market risks, and the critical accounting estimates, affecting the Firm and the lines of
business, this Annual Report should be read in its entirety.
Financial performance of JPMorgan Chase
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions, except per share and ratio data) |
|
2005 |
|
|
2004 |
(a) |
|
Change |
|
|
Total net revenue |
|
$ |
54,533 |
|
|
$ |
43,097 |
|
|
|
27 |
% |
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
37 |
|
Total noninterest expense |
|
|
38,835 |
|
|
|
34,359 |
|
|
|
13 |
|
Net income |
|
|
8,483 |
|
|
|
4,466 |
|
|
|
90 |
|
Net income per share diluted |
|
|
2.38 |
|
|
|
1.55 |
|
|
|
54 |
|
Average common equity |
|
|
105,507 |
|
|
|
75,641 |
|
|
|
39 |
|
Return on common equity (ROE) |
|
|
8 |
% |
|
|
6 |
% |
|
|
|
|
|
Loans |
|
$ |
419,148 |
|
|
$ |
402,114 |
|
|
|
4 |
% |
Total assets |
|
|
1,198,942 |
|
|
|
1,157,248 |
|
|
|
4 |
|
Deposits |
|
|
554,991 |
|
|
|
521,456 |
|
|
|
6 |
|
|
Tier 1 capital ratio |
|
|
8.5 |
% |
|
|
8.7 |
% |
|
|
|
|
Total capital ratio |
|
|
12.0 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
(a) |
|
Includes six months of the combined Firms results and six months of heritage JPMorgan
Chase results. |
Business overview
2005 represented the Firms first full year as a merged company; 2004 included six months of
the combined Firms results and six months of heritage JPMorgan Chase results. Therefore,
comparisons between the two years are significantly affected by the Merger. In addition, other key
factors affecting 2005 results included litigation charges to settle the Enron and Worldcom class
actions, a special provision for credit losses related to Hurricane Katrina, the impact of the new
bankruptcy legislation on credit card charge-offs and the sale of BrownCo, as well as the global
economic and market environments.
In 2005, the Firm successfully completed a number of milestones in the execution of its Merger
integration plan. Key accomplishments included: launching a national advertising campaign that
introduced a modernized Chase brand; the conversion of 1,400 Bank One branches, 3,400 ATMs and
millions of Bank One credit cards to the Chase brand; completing the operating platform conversion
in Card Services; and executing a major systems conversion in Texas that united 400 Chase and Bank
One branches and over 800 ATMs under common systems and branding. These accomplishments resulted in
continued efficiencies from the Merger, and the Firm made significant progress toward reaching the
merger-related savings target of approximately $3.0 billion by the end of 2007. The Firm realized
approximately $1.5 billion of merger savings in 2005, bringing
estimated cumulative savings to $1.9 billion, and the annualized run-rate of savings
entering 2006 is approximately $2.2 billion. In order to achieve these savings, the Firm expensed
merger-related costs of $722 million during the year, bringing the total cumulative amount expensed
since the Merger announcement to $2.1 billion. Management continues to estimate remaining Merger
costs of approximately $0.9 billion to $1.4 billion, which are expected to be expensed over the
next two years.
The Board of Directors announced in the fourth quarter that James Dimon, President and Chief
Operating Officer, would succeed Chairman and Chief Executive Officer William B. Harrison, Jr. as
Chief Executive Officer on December 31, 2005. Mr. Harrison remains Chairman of the Board.
The Firm reported 2005 net income of $8.5 billion, or $2.38 per share, compared with net income of
$4.5 billion, or $1.55 per share, for 2004. The return on common equity was 8% compared with 6% in
2004.
Results included $2.0 billion in after-tax charges, or $0.57 per share, which included nonoperating
litigation charges of $1.6 billion and Merger costs of $448 million. Excluding these charges,
operating earnings were $10.5 billion, or $2.95 per share, and return on common equity was 10%.
Operating earnings represent business results without merger-related costs, nonoperating
litigation-related charges and recoveries, and costs related to conformance of accounting policies.
In 2005, both the U.S. and global economies continued to expand. Gross domestic product increased
by an estimated 3.0% globally with the U.S. economy growing at a slightly faster pace. The U.S.
economy experienced continued rising short-term interest rates, which were driven by Federal
Reserve Board actions during the course of the year. The federal funds rate increased from 2.25% to
4.25% during the year, and the yield curve flattened as long term interest rates remained broadly
steady. Equity markets, both domestic and international, reflected positive performance, with the
S&P 500 up 3% and international indices increasing over 20%. Capital markets activity was very
strong during 2005, with debt and equity underwriting and merger and acquisition activity
surpassing 2004 levels. The U.S. consumer sector showed continued strength buoyed by overall
economic strength, which benefited from good levels of employment and retail sales that increased
versus the prior year. This strength came despite slowing mortgage origination and refinance
activity as well as significantly higher bankruptcy filings due to the new bankruptcy legislation
which became effective in October 2005.
The 2005 economic environment was a contributing factor to the performance of the Firm and each of
its businesses. The overall economic expansion and strong level of capital markets activity helped
to drive new business volume and sales growth within each business. The interest rate environment
negatively affected both wholesale and consumer loan spreads, though wholesale liability spreads
widened over the course of the year, benefiting Treasury & Securities Services and Commercial
Banking. Additionally, the credit quality of the loan portfolio continued to remain strong,
reflecting the beneficial economic environment, despite the impacts of accelerated bankruptcy
filings and Hurricane Katrina.
The discussion that follows highlights, on an operating basis and excluding the impact of the
Merger, the performance of each of the Firms lines of business.
Investment Bank operating earnings benefited from higher revenue and a continued benefit from the
Provision for credit losses, which were offset by increased compensation expense. Revenue growth
was driven by higher, although volatile, fixed income trading results, stronger equity commissions
and improved investment banking fees, all of which benefited from strength in global capital markets
activity. Investment banking fees had particular strength in advisory, reflecting in part the
benefit of the business partnership with Cazenove, which was formed in February of 2005. As in
2004, the
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
25 |
Managements discussion and analysis
JPMorgan Chase & Co.
Provision for credit losses in 2005 was a benefit to earnings, mainly due to continued
improvement in the credit quality of the loan portfolio. The increase in expense was primarily the
result of higher performance-based incentive compensation due to increased revenues.
Retail Financial Services operating earnings benefited from the overall strength of the U.S.
economy, which led to increased deposit, home equity and mortgage balances. In addition to the
benefit from higher balances, revenues increased due to improved mortgage servicing rights (MSRs)
risk management results. Expenses declined, reflecting ongoing efficiency improvements across all
businesses even as investments continued in retail banking distribution and sales, with the net
addition during the year of 133 branch offices, 662 ATMs and over 1,300 personal bankers. These
benefits were offset partially by narrower spreads on loans due to the interest rate environment
and net losses associated with loan portfolio sale activity. The provision for credit losses
benefited from improved credit trends in most consumer lending portfolios and from loan portfolio
sales, but was affected negatively by a special provision related to Hurricane Katrina.
Card Services operating earnings benefited from lower expenses driven by merger savings and greater
efficiencies from the operating platform conversion, which resulted in lower processing and
compensation costs. Revenue benefited from higher loan balances and customer charge volume
resulting from marketing initiatives and increased consumer spending. Partially offsetting this
growth were narrower spreads on loan balances due to an increase in accounts in their introductory
rate period and higher interest rates. The managed provision for credit losses increased due to
record levels of bankruptcy-related charge-offs related to the new bankruptcy legislation that
became effective in October 2005 and a special provision related to Hurricane Katrina. Despite
these events, underlying credit quality remained strong, with a managed net charge-off ratio of
5.21%, down from 5.27% in 2004.
Commercial Banking operating earnings benefited from wider spreads and higher volumes related to
liability balances and increased loan balances. Partially offsetting these benefits were narrower
loan spreads related to competitive pressures in some markets and lower deposit-related fees due to
higher interest rates. The provision for credit losses increased 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. However, the underlying credit quality in the portfolio was strong
throughout the year, as evidenced by lower net charge-offs and nonperforming loans compared with
2004.
Treasury & Securities Services operating earnings grew significantly in 2005. Revenue growth
resulted from business growth and widening spreads on, and growth in, liability balances, all of
which benefited from global economic strength and capital market activity. Partially offsetting
this growth were lower deposit-related fees due to higher interest rates. Expenses decreased due to
lower software impairment charges, partially offset by higher compensation expense resulting from
new business growth, the Vastera acquisition completed in April, and by charges taken in the second
quarter to terminate a client contract.
Asset & Wealth Management operating earnings benefited from net asset inflows and asset
appreciation, both the result of favorable capital markets and improved investment performance,
which resulted in an increased level of Assets under management. Results also benefited from the
acquisition of a majority interest in Highbridge Capital Management in the fourth quarter of
2004 and growth in deposit and loan balances. Expenses increased due primarily to the acquisition
of Highbridge and higher performance-based incentive compensation related to increased revenue.
Corporate segment operating earnings were affected negatively by repositioning of the Treasury
Investment portfolio. This decline was offset partially by the gain on the sale of BrownCo of $1.3 billion
(pre-tax) and improved Private Equity results.
The Firm
had, at year-end, total stockholders equity of $107 billion, and a Tier 1 capital ratio
of 8.5%. The Firm purchased $3.4 billion, or 93.5 million
shares of common stock during the year.
2006 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 2006 should be viewed against the backdrop of the global economy,
financial markets and the geopolitical environment, all of which are integrally linked. While the
Firm considers outcomes for, and has contingency plans to respond to, stress environments, the
basic outlook for 2006 is predicated on the interest rate movements implied in the forward rate
curve for U.S. treasuries, the continuation of favorable U.S. and international equity markets and
continued expansion of the global economy.
The performance of the Firms capital markets and wholesale businesses are affected by overall
global economic growth and by financial market movements and activity levels. The Investment Bank enters 2006 with a strong
investment banking fee pipeline and continues to focus on new product expansion initiatives, such
as commodities and securitized products, which are intended to benefit growth and reduce volatility
in trading results over time. Compared with 2005, the Investment Bank anticipates lower credit portfolio revenues due
to reduced gains from loan workouts. Asset & Wealth Management anticipates continued growth driven
by continued net inflows to Assets under supervision. Treasury & Securities Services and Commercial
Banking expect growth due to increased business activity and product sales.
Retail Financial Services anticipates benefiting from the expanded branch network and salesforce,
and improved sales productivity and cross-selling in the branches, partially offset by pressure on
loan and deposit spreads due to the higher interest rate environment. The acquisition of Collegiate
Funding Services is expected to contribute modestly to earnings in 2006.
Card Services anticipates that managed receivables will grow in line with the overall credit card
industry, benefiting from marketing initiatives, new partnerships and the acquisition of the Sears
Canada credit card business. Revenues and expenses also will reflect the full-year impact of the
Paymentech deconsolidation and the acquisition of the Sears Canada credit card business.
The Corporate segment includes Private Equity, Treasury and other corporate support units. The
revenue outlook for the Private Equity business is directly related to the strength of the equity
markets and the performance of the underlying portfolio investments. If current market conditions
persist, the Firm anticipates continued realization of private equity gains in 2006, but results
can be volatile from quarter to quarter. It is anticipated that Treasury net interest
|
|
|
|
|
|
26
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
income will gradually improve and that the net loss in Other Corporate will be reduced as
merger savings and other expense reduction initiatives, such as less excess real estate, are
realized.
The Provision for credit losses in 2006 is anticipated to be higher than in 2005, primarily driven
by a trend toward a more normal level of provisioning for credit losses in the wholesale
businesses. The consumer Provision for credit losses in 2006 should reflect generally stable
underlying asset quality. However, it is anticipated that the first half of 2006 will experience
lower credit card net charge-offs, as the record level of bankruptcy filings in the fourth quarter
of 2005 are believed to have included bankruptcy filings that would otherwise have occurred in
2006. The second half of 2006 is expected
to include increased credit card delinquencies and net charge-offs as a result of
implementation of new FFIEC minimum payment rules.
Firmwide expenses are anticipated to benefit as the run rate of merger savings is expected to reach
approximately $2.8 billion by the end of 2006 driven by activities such as the tri-state retail
conversion and data center upgrades. Offsetting the merger savings will be continued investment in
distribution enhancements and new product offerings; extensive merger integration activities and
upgrading of technology; and expenses related to recent acquisitions, such as the Sears Canada
credit card business and Collegiate Funding Services.
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, 2005. 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. For a discussion of the Critical accounting
estimates used by the Firm that affect the Consolidated results of operations, see pages 8183 of
this Annual Report.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Investment banking fees |
|
$ |
4,088 |
|
|
$ |
3,537 |
|
|
$ |
2,890 |
|
Trading revenue |
|
|
5,860 |
|
|
|
3,612 |
|
|
|
4,427 |
|
Lending & deposit related fees |
|
|
3,389 |
|
|
|
2,672 |
|
|
|
1,727 |
|
Asset management, administration
and commissions |
|
|
10,390 |
|
|
|
8,165 |
|
|
|
6,039 |
|
Securities/private equity gains |
|
|
473 |
|
|
|
1,874 |
|
|
|
1,479 |
|
Mortgage fees and related income |
|
|
1,054 |
|
|
|
806 |
|
|
|
790 |
|
Credit card income |
|
|
6,754 |
|
|
|
4,840 |
|
|
|
2,466 |
|
Other income |
|
|
2,694 |
|
|
|
830 |
|
|
|
601 |
|
|
Noninterest revenue |
|
|
34,702 |
|
|
|
26,336 |
|
|
|
20,419 |
|
Net interest income |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
|
Total net revenue |
|
$ |
54,533 |
|
|
$ |
43,097 |
|
|
$ |
33,384 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
2005 compared with 2004
Total net revenue for 2005 was $54.5 billion, up 27% from 2004, primarily due to the Merger, which
affected every revenue category. The increase from the prior year also was affected by a $1.3
billion gain on the sale of BrownCo; higher Trading 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 reflected continued strength in advisory, equity and debt
underwriting, with particular growth in Europe, which benefited from the business partnership with
Cazenove. Trading revenue increased from 2004, reflecting strength in fixed income, equities and
commodities. For a further discussion of Investment banking fees and Trading revenue, which are
primarily recorded in the IB, see the IB segment results on pages 3638 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 4748 and 4950, respectively, of this
Annual Report.
The increase in Asset management, administration and commissions revenue was driven by incremental
fees from several new investments, including a majority interest in Highbridge Capital Management,
LLC, the business partnership with Cazenove and the acquisition of Vastera. Also contributing to
the higher level of revenue was an increase in Assets under management, reflecting net asset
inflows, mainly 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 3638, AWM on pages 5152 and TSS on
pages 4950 of this Annual Report.
|
|
|
|
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|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
27 |
Managements discussion and analysis
JPMorgan Chase & Co.
The decline in Securities/private equity gains reflected $1.3 billion of securities losses, as
compared with $338 million of gains in 2004. The losses resulted primarily from repositioning the
Firms Treasury investment portfolio in response to rising interest rates. The securities losses
were offset partly by higher private equity gains due to a continuation of favorable capital
markets conditions. For a further discussion of Securities/private equity gains, which are recorded
primarily in the Firms Treasury and Private Equity businesses, see the Corporate segment
discussion on pages 5354 of this Annual Report.
Mortgage fees and related income increased due to improvements in risk management results related
to MSR assets. Mortgage fees and related income exclude the impact of NII and AFS securities gains
related to home mortgage activities. For a discussion of Mortgage fees and related income, which is
recorded primarily in RFSs Home Finance business, see the segment discussion for RFS on pages
3944 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;
rewards expense; and the impact of the deconsolidation of Paymentech, which was deconsolidated upon
completion of the integration of Chase Merchant Services and the Paymentech merchant processing
businesses in 2005. For a further discussion of Credit card income, see CS segment results on pages
4546 of this Annual Report.
The increase in Other income primarily reflected a $1.3 billion pre-tax gain on the sale of BrownCo
to E*TRADE Financial; higher gains from loan workouts and loan sales; and higher revenues
as a result of a shift from financing leases to operating leases in the auto business. These gains
were offset partly by write-downs on auto loans that were transferred to held-for-sale and a
one-time gain in 2004 on the sale of an investment.
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, home equity and credit card loans. These increases were offset partially by
narrower spreads on consumer and wholesale loans and on trading assets, as well as reduced Treasury
investment portfolio levels. The Firms total average interest-earning assets in 2005 were $916
billion, up 23% from the prior year. The net interest yield on these assets, on a fully
taxable-equivalent basis, was 2.19%, a decrease of six basis points from the prior year.
2004 compared with 2003
Total net revenues, at $43.1 billion, rose by $9.7 billion, or 29%, primarily due to the Merger,
which affected every category of Total net revenue. The discussion that follows highlights factors
other than the Merger that affected the 2004 versus 2003 comparison.
The increase in Investment banking fees was driven by significant gains in underwriting and
advisory activities as a result of increased global market volumes and market share gains. Trading
revenue declined by 18%, primarily due to lower portfolio management results in fixed income and
equities.
Lending
& deposit related fees were up from 2003 due to the Merger. The rise was offset partially by lower deposit-related fees, as clients paid for services with deposits
versus fees due to rising interest rates. Throughout 2004, deposit balances grew in response to
rising interest rates.
The increase in Asset management, administration and commissions was driven also by the full-year
impact of other acquisitions such as EFS in January 2004, Bank Ones Corporate Trust business in
November 2003 and JPMorgan Retirement Plan Services in
June 2003 as well as the effect of global
equity market appreciation, net asset inflows and a better product mix. In addition, a more active
market for trading activities in 2004 resulted in higher brokerage commissions.
Securities/private equity gains for 2004 rose from the prior year, primarily fueled by the
improvement in the Firms private equity investment results. This change was offset by lower
securities gains on the Treasury investment portfolio as a result of lower volumes of securities
sold, and lower gains realized on sales due to higher interest rates. Additionally, RFSs Home
Finance business reported losses in 2004 on AFS securities, as compared with gains in 2003. For a
further discussion of securities gains, see the RFS and Corporate segment discussions on pages
3944 and 5354, respectively, of this Annual Report.
Mortgage fees and related income rose as a result of higher servicing revenue; this improvement was
offset partially by lower MSR risk management results and prime mortgage production revenue, and by
lower gains from sales and securitizations of subprime loans as a result of managements decision
in 2004 to retain these loans. Mortgage fees and related income exclude the impact of NII and
securities gains related to home mortgage activities.
Credit card income increased from 2003 as a result of higher customer charge volume, which resulted
in increased interchange income, and higher credit card servicing fees associated with an increase
of $19.4 billion in average securitized loans. The increases were offset partially by higher
volume-driven payments to partners and rewards expense.
The increase in Other income from 2003 reflected gains on leveraged lease transactions, the sale of
an investment in 2004 and higher net results from corporate- and bank-owned life insurance
policies. These positive factors in 2004 were offset partially by gains on sales of several
nonstrategic businesses and real estate properties in 2003.
Net interest income rose from 2003 as growth in volumes of consumer loans and deposits, as well as
wider spreads on deposits, contributed to higher net interest income. These positive factors were
offset partially by lower wholesale loan balances in the IB and tighter spreads on loans,
investment securities and trading assets stemming from the rise in interest rates. The Firms total
average interest-earning assets for 2004 were $744 billion, up $154 billion from 2003. The net
interest yield on these assets, on a fully taxable-equivalent basis, was 2.25% in 2004, an increase
of four basis points from the prior year.
|
|
|
|
|
|
28
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Provision for credit losses
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. 2004
included accounting policy conformity adjustments as a result of the Merger. Excluding these items,
the consumer portfolio continued to show strength in credit quality.
The Firm had total nonperforming assets of $2.6 billion at December 31, 2005, a decline of $641
million, or 20%, from the 2004 level of $3.2 billion. For further information about the Provision
for credit losses and the Firms management of credit risk, see the Credit risk management
discussion on pages 6374 of this Annual Report.
2004 compared with 2003
The Provision for credit losses of $2.5 billion was up $1.0 billion, or 65%, compared with 2003.
The impact of the Merger and accounting policy conformity charges of $858 million were offset
partially by releases in the allowance for credit losses related to the wholesale loan portfolio,
primarily due to improved credit quality in the IB, and the sale of the manufactured home loan
portfolio in RFS.
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Compensation expense |
|
$ |
18,255 |
|
|
$ |
14,506 |
|
|
$ |
11,387 |
|
Occupancy expense |
|
|
2,299 |
|
|
|
2,084 |
|
|
|
1,912 |
|
Technology and communications
expense |
|
|
3,624 |
|
|
|
3,702 |
|
|
|
2,844 |
|
Professional & outside services |
|
|
4,224 |
|
|
|
3,862 |
|
|
|
2,875 |
|
Marketing |
|
|
1,917 |
|
|
|
1,335 |
|
|
|
710 |
|
Other expense |
|
|
3,705 |
|
|
|
2,859 |
|
|
|
1,694 |
|
Amortization of intangibles |
|
|
1,525 |
|
|
|
946 |
|
|
|
294 |
|
Merger costs |
|
|
722 |
|
|
|
1,365 |
|
|
|
|
|
Litigation reserve charge |
|
|
2,564 |
|
|
|
3,700 |
|
|
|
100 |
|
|
Total noninterest expense |
|
$ |
38,835 |
|
|
$ |
34,359 |
|
|
$ |
21,816 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
2005 compared with 2004
Noninterest expense was $38.8 billion, up 13% from the prior year, primarily due to the full-year
impact of the Merger. Excluding Litigation reserve charges and Merger costs, Noninterest expense
would have been $35.5 billion, up 21%. 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 other 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 7 on pages 100102 of
this Annual Report.
The increase in Occupancy expense was primarily due to the Merger, partially offset by lower
charges for excess real estate and a net release of excess property tax accruals, compared with
$103 million of charges for excess real estate in 2004.
Technology and communications expense was down only 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 mostly offset 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 expense-management initiatives.
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.
The increase in Other expense reflected incremental expenses related to investments made in 2005,
as well as an increase in operating charges for legal matters. Also contributing to the increase
was a $93 million charge 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. These items were offset
partially by lower software impairment write-offs, merger-related savings and other efficiencies.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 15 and Note 8 on
pages 114116 and 103, respectively, of this Annual Report.
The 2005 nonoperating Litigation reserve charges that were recorded by the Firm were as follows: a
$1.9 billion charge related to the settlement of the Enron class action litigation and for certain
other material legal proceedings and a $900 million charge for the settlement costs of the WorldCom
class action litigation; these were partially offset by a $208 million insurance recovery related to certain
material litigation. In comparison, 2004 included a $3.7 billion nonoperating charge to increase
litigation reserves. For a further discussion of litigation, refer to Note 25 on page 123 of this
Annual Report.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
29 |
Managements discussion and analysis
JPMorgan Chase & Co.
2004 compared with 2003
Noninterest expense was $34.4 billion in 2004, up $12.5 billion, or 57%, primarily due to the
Merger. Excluding $1.4 billion of Merger costs, and Litigation reserve charges, Noninterest expense
would have been $29.3 billion, up 35%. The discussion that follows highlights other factors
affecting the 2004 versus 2003 comparison.
Compensation expense was up from 2003, primarily due to strategic investments in the IB and
continuing expansion in RFS. These factors were offset partially by ongoing efficiency improvements
and merger-related savings throughout the Firm, and by a reduction in pension costs. The decline in
pension costs was attributable mainly to the increase in the expected return on plan assets
resulting from a discretionary $1.1 billion contribution to the Firms pension plan in April 2004,
partially offset by changes in actuarial assumptions for 2004 compared with 2003.
The increase in Occupancy expense was offset partly by lower charges for excess real estate, which
were $103 million in 2004 compared with $270 million in 2003.
Technology and communications expense was higher than in the prior year as a result of higher costs
associated with greater use of outside vendors, primarily IBM, to support the global infrastructure
requirements of the Firm. For a further discussion regarding the IBM outsourcing agreement, see the
Corporate segment discussion on page 53 of this Annual Report.
Professional & outside services rose due to higher legal costs associated with litigation matters,
as well as outside services stemming from recent acquisitions primarily Electronic Financial
Services (EFS), and growth in business at TSS and CS.
Marketing expense rose as CS initiated a more robust marketing campaign during 2004.
Other expense was up due to software impairment write-offs of $224 million, primarily in TSS and
Corporate, compared with $60 million in 2003; higher operating charges for legal matters; and
growth in business volume. These expenses were offset partly by a $57 million settlement related to
the Enron surety bond litigation.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 15 and Note 8 on
pages 114116 and 103, respectively.
In June of 2004, JPMorgan Chase recorded a $3.7 billion addition to the Litigation reserve. By
comparison, 2003 included a charge of $100 million for Enron-related litigation.
Income tax expense
The Firms Income before income tax expense, Income tax expense and effective tax rate were as
follows for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except rate) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Income before income tax expense |
|
$ |
12,215 |
|
|
$ |
6,194 |
|
|
$ |
10,028 |
|
Income tax expense |
|
|
3,732 |
|
|
|
1,728 |
|
|
|
3,309 |
|
Effective tax rate |
|
|
30.6 |
% |
|
|
27.9 |
% |
|
|
33.0 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
2005 compared with 2004
The increase in the effective tax rate was primarily the result of higher reported pre-tax income
combined with changes in the proportion of income subject to federal, state and local taxes. Also
contributing to the increase were lower 2005 nonoperating 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 of $55 million recorded in connection with the repatriation of
foreign earnings.
2004 compared with 2003
The reduction in the effective tax rate for 2004, as compared with 2003, was the result of various
factors, including lower reported pre-tax income, a higher level of business tax credits, and
changes in the proportion of income subject to federal, state and local taxes, partially offset by
purchase accounting adjustments related to leveraged lease transactions. The Merger costs and
accounting policy conformity adjustments recorded in 2004, and the Litigation reserve charge
recorded in the second quarter of 2004, reflected a tax benefit at a 38% marginal tax rate,
contributing to the reduction in the effective tax rate compared with 2003.
|
|
|
|
|
|
30
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
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
8790 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.
In addition to analyzing the Firms results on a reported basis, management reviews the Firms and
the lines of business results on an operating basis, which is a non-GAAP financial measure. The
Firms definition of operating basis starts with the reported U.S. GAAP results. Operating basis
excludes: (i) merger costs, (ii) the nonoperating litigation charges taken and insurance recoveries
received with respect to certain of the Firms material litigation; and (iii) costs related to the
conformance of certain accounting policies as a result of the Merger. Management believes these
items are not part of the Firms normal daily business operations and, therefore, not indicative of
trends, as they do not provide meaningful comparisons with other periods. For additional detail on
nonoperating litigation charges, see the Glossary of terms on page 134 of this Annual Report.
In addition, the Firm manages its lines of business on an operating basis. In the case of the
Investment Bank, noninterest revenue on an operating basis includes, in trading-related revenue,
net interest income related to trading activities. Trading activities generate revenues, which are
recorded for U.S. GAAP purposes in two line items on the income statement: trading revenue, which
includes the mark-to-market gains or losses on trading positions; and net interest income, which
includes the interest income or expense related to those positions. The impact of changes in market
interest rates will either be recorded in Trading revenue or Net interest income depending on
whether the trading position is a cash security or a derivative. Combining both the trading revenue
and related net interest income allows management to evaluate the economic results of the
Investment Banks trading activities, which for GAAP purposes are reported in both Trading revenue
and Net interest income. In managements view, this presentation also facilitates operating
comparisons to competitors. For a discussion of trading-related
revenue, see the IB on pages 3638
of this Annual Report.
In the case of Card Services, operating basis is also referred to as managed basis, and excludes
the impact of credit card securitizations on total net revenue, the provision for credit losses,
net charge-offs and loan receivables. This presentation is provided
to facilitate operating comparisons to competitors. Through securitization, the Firm transforms a
portion of its credit card receivables into securities, which are sold to investors. The credit
card receivables are removed from the consolidated balance sheet through the transfer of the
receivables to a trust, and the sale of undivided interests to investors that entitle the investors
to specific cash flows generated from the credit card receivables. The Firm retains the remaining
undivided interests as sellers interests, which are recorded in Loans on the Consolidated balance
sheets. A gain or loss on the sale of credit card receivables to investors is recorded in
Other
income. Securitization also affects the Firms Consolidated
statements of income as interest income, certain fee revenue, recoveries in excess
of interest paid to the investors, gross credit losses and other trust expenses related to the
securitized receivables are all reclassified into credit card income. For a reconciliation of reported to managed basis of Card Services
results, see page 46 of this Annual Report. For information regarding loans and residual interests
sold and securitized, see Note 13 on pages 108111 of this Annual Report. JPMorgan Chase uses the
concept of managed receivables to evaluate the credit performance and overall financial
performance of the underlying credit card loans, both sold and not sold: as the same borrower is
continuing to use the credit card for ongoing charges, a borrowers credit performance will affect
both the loan receivables sold under SFAS 140 and those not sold. Thus, in its disclosures
regarding managed loan receivables, JPMorgan Chase treats the sold receivables as if they were
still on the balance sheet in order to disclose the credit performance (such as net charge-off
rates) of the entire managed credit card portfolio. In addition, Card Services operations are
funded, operating results are evaluated, and decisions are made about allocating resources such as
employees and capital based upon managed financial information.
Finally, commencing with the first quarter of 2005, operating revenue (noninterest revenue and net
interest income) for each of the segments and the Firm is presented on a tax-equivalent basis.
Accordingly, revenue from tax exempt securities and investments that receive tax credits are
presented in the operating 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. The Corporate sectors and the Firms operating
revenue and income tax expense for the periods prior to the first quarter of 2005 have been
restated to be similarly presented on a tax-equivalent basis. This restatement had no impact on the
Corporate sectors or the Firms operating earnings.
Management uses certain non-GAAP financial measures at the segment level because it believes these
non-GAAP financial measures provide information to investors in understanding the underlying
operational performance and trends of the particular business segment and facilitate a comparison
of the business segment with the performance of competitors.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
31 |
Managements discussion and analysis
JPMorgan Chase & Co.
The following summary table provides a reconciliation from the firms reported GAAP results to operating results:
(Table continues on next page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
2005 |
|
|
2004 |
|
|
|
|
(in millions, except |
|
Reported |
|
|
Credit |
|
|
Nonoperating |
|
|
Tax-equivalent |
|
|
Operating |
|
|
Reported |
|
|
Credit |
|
|
Nonoperating |
|
|
Tax-equivalent |
|
|
Operating |
|
per share and ratio data) |
|
results |
|
|
card(b) |
|
|
items |
|
|
adjustments |
|
|
basis |
|
|
results |
|
|
card(b) |
|
|
items |
|
|
adjustments |
|
|
basis |
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
4,088 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,088 |
|
|
$ |
3,537 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,537 |
|
Trading revenue(c) |
|
|
6,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,019 |
|
|
|
5,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,562 |
|
Lending & deposit
related fees |
|
|
3,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,389 |
|
|
|
2,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,672 |
|
Asset management,
administration and
commissions |
|
|
10,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,390 |
|
|
|
8,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,165 |
|
Securities/private
equity gains |
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473 |
|
|
|
1,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,874 |
|
Mortgage fees and
related income |
|
|
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,054 |
|
|
|
806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
806 |
|
Credit card income |
|
|
6,754 |
|
|
|
(2,718 |
) |
|
|
|
|
|
|
|
|
|
|
4,036 |
|
|
|
4,840 |
|
|
|
(2,267 |
) |
|
|
|
|
|
|
|
|
|
|
2,573 |
|
Other income |
|
|
2,694 |
|
|
|
|
|
|
|
|
|
|
|
571 |
|
|
|
3,265 |
|
|
|
830 |
|
|
|
(86 |
) |
|
|
118 |
(3) |
|
|
317 |
|
|
|
1,179 |
|
|
|
|
Noninterest revenue(c) |
|
|
34,861 |
|
|
|
(2,718 |
) |
|
|
|
|
|
|
571 |
|
|
|
32,714 |
|
|
|
28,286 |
|
|
|
(2,353 |
) |
|
|
118 |
|
|
|
317 |
|
|
|
26,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(c) |
|
|
19,672 |
|
|
|
6,494 |
|
|
|
|
|
|
|
269 |
|
|
|
26,435 |
|
|
|
14,811 |
|
|
|
5,251 |
|
|
|
|
|
|
|
6 |
|
|
|
20,068 |
|
|
|
|
Total net revenue |
|
|
54,533 |
|
|
|
3,776 |
|
|
|
|
|
|
|
840 |
|
|
|
59,149 |
|
|
|
43,097 |
|
|
|
2,898 |
|
|
|
118 |
|
|
|
323 |
|
|
|
46,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,483 |
|
|
|
3,776 |
|
|
|
|
|
|
|
|
|
|
|
7,259 |
|
|
|
2,544 |
|
|
|
2,898 |
|
|
|
(858 |
)(4) |
|
|
|
|
|
|
4,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger costs |
|
|
722 |
|
|
|
|
|
|
|
(722 |
)(1) |
|
|
|
|
|
|
|
|
|
|
1,365 |
|
|
|
|
|
|
|
(1,365 |
)(1) |
|
|
|
|
|
|
|
|
Litigation reserve charge |
|
|
2,564 |
|
|
|
|
|
|
|
(2,564 |
)(2) |
|
|
|
|
|
|
|
|
|
|
3,700 |
|
|
|
|
|
|
|
(3,700 |
)(2) |
|
|
|
|
|
|
|
|
All other noninterest
expense |
|
|
35,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,549 |
|
|
|
29,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,294 |
|
|
|
|
Total noninterest
expense |
|
|
38,835 |
|
|
|
|
|
|
|
(3,286 |
) |
|
|
|
|
|
|
35,549 |
|
|
|
34,359 |
|
|
|
|
|
|
|
(5,065 |
) |
|
|
|
|
|
|
29,294 |
|
|
|
|
Income before income
tax expense |
|
|
12,215 |
|
|
|
|
|
|
|
3,286 |
|
|
|
840 |
|
|
|
16,341 |
|
|
|
6,194 |
|
|
|
|
|
|
|
6,041 |
|
|
|
323 |
|
|
|
12,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
3,732 |
|
|
|
|
|
|
|
1,248 |
|
|
|
840 |
|
|
|
5,820 |
|
|
|
1,728 |
|
|
|
|
|
|
|
2,296 |
|
|
|
323 |
|
|
|
4,347 |
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
|
|
|
$ |
2,038 |
|
|
$ |
|
|
|
$ |
10,521 |
|
|
$ |
4,466 |
|
|
$ |
|
|
|
$ |
3,745 |
|
|
$ |
|
|
|
$ |
8,211 |
|
|
|
|
Earnings per
share diluted |
|
$ |
2.38 |
|
|
$ |
|
|
|
$ |
0.57 |
|
|
$ |
|
|
|
$ |
2.95 |
|
|
$ |
1.55 |
|
|
$ |
|
|
|
$ |
1.31 |
|
|
$ |
|
|
|
$ |
2.86 |
|
|
|
|
Return on common equity |
|
|
8 |
% |
|
|
|
% |
|
|
2 |
% |
|
|
|
% |
|
|
10 |
% |
|
|
6 |
% |
|
|
|
% |
|
|
5 |
% |
|
|
|
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on equity
less goodwill |
|
|
14 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
17 |
|
|
|
9 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
16 |
|
|
|
|
Return on assets |
|
|
0.72 |
|
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
|
0.84 |
|
|
|
0.46 |
|
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
|
0.81 |
|
|
|
|
Overhead ratio |
|
|
71 |
|
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
|
60 |
|
|
|
80 |
|
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
|
63 |
|
|
|
|
Effective income tax rate |
|
|
31 |
|
|
|
NM |
|
|
|
38 |
|
|
|
NM |
|
|
|
36 |
|
|
|
28 |
|
|
|
NM |
|
|
|
38 |
|
|
|
NM |
|
|
|
35 |
|
|
|
|
LoansPeriod-end |
|
$ |
419,148 |
|
|
$ |
70,527 |
|
|
|
|
|
|
|
|
|
|
$ |
489,675 |
|
|
$ |
402,114 |
|
|
$ |
70,795 |
|
|
|
|
|
|
|
|
|
|
$ |
472,909 |
|
Total assets average |
|
|
1,185,066 |
|
|
|
67,180 |
|
|
|
|
|
|
|
|
|
|
|
1,252,246 |
|
|
|
962,556 |
(a) |
|
|
51,084 |
(a) |
|
|
|
|
|
|
|
|
|
|
1,013,640 |
(a) |
|
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
The impact
of credit card securitizations affects CS. See pages 4546 of this Annual Report for further
information. |
(c) |
|
Trading-related net interest income reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
Trading revenue reported (d) |
|
$ |
5,860 |
|
|
$ |
3,612 |
|
|
$ |
4,427 |
|
|
|
|
|
Trading-related NII |
|
|
159 |
|
|
|
1,950 |
|
|
|
2,129 |
|
|
|
|
|
|
|
|
|
|
Trading revenue adjusted (d) |
|
$ |
6,019 |
|
|
$ |
5,562 |
|
|
$ |
6,556 |
|
|
|
|
|
|
|
|
|
|
Net interest income reported |
|
$ |
19,831 |
|
|
$ |
16,761 |
|
|
$ |
12,965 |
|
|
|
|
|
Trading-related NII |
|
|
(159 |
) |
|
|
(1,950 |
) |
|
|
(2,129 |
) |
|
|
|
|
|
|
|
|
|
Net interest income adjusted |
|
$ |
19,672 |
|
|
$ |
14,811 |
|
|
$ |
10,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Reflects Trading revenue at the Firm level. The majority of Trading
revenue is recorded in the Investment Bank. |
|
|
|
|
|
|
32
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
(Table continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
Reported |
|
|
Credit |
|
|
Nonoperating |
|
|
Tax-equivalent |
|
|
Operating |
|
results |
|
|
card (b) |
|
|
items |
|
|
adjustments |
|
|
basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,890 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,890 |
|
|
6,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790 |
|
|
2,466 |
|
|
|
(1,379 |
) |
|
|
|
|
|
|
|
|
|
|
1,087 |
|
|
601 |
|
|
|
(71 |
) |
|
|
|
|
|
|
89 |
|
|
|
619 |
|
|
|
22,548 |
|
|
|
(1,450 |
) |
|
|
|
|
|
|
89 |
|
|
|
21,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,836 |
|
|
|
3,320 |
|
|
|
|
|
|
|
44 |
|
|
|
14,200 |
|
|
|
33,384 |
|
|
|
1,870 |
|
|
|
|
|
|
|
133 |
|
|
|
35,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,540 |
|
|
|
1,870 |
|
|
|
|
|
|
|
|
|
|
|
3,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,028 |
|
|
|
|
|
|
|
|
|
|
|
133 |
|
|
|
10,161 |
|
|
3,309 |
|
|
|
|
|
|
|
|
|
|
|
133 |
|
|
|
3,442 |
|
|
$ |
6,719 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.24 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.24 |
|
|
|
16 |
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
0.87 |
|
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
|
0.83 |
|
|
|
65 |
|
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
|
62 |
|
|
|
33 |
|
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
|
34 |
|
|
$ |
214,766 |
|
|
$ |
34,856 |
|
|
|
|
|
|
|
|
|
|
$ |
249,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
775,978 |
|
|
|
32,365 |
|
|
|
|
|
|
|
|
|
|
|
808,343 |
|
|
Nonoperating Items
The reconciliation of the Firms reported results to operating results in the accompanying table
sets forth the impact of several nonoperating items incurred by the Firm in 2005 and 2004. These
nonoperating items are excluded from Operating earnings, as management believes these items are not
part of the Firms normal daily business operations and, therefore, not indicative of trends as
they do not provide meaningful comparisons with other periods. These items include Merger costs,
nonoperating litigation charges and insurance recoveries, and charges to conform accounting
policies, each of which is described below:
(1) |
|
Merger costs of $722 million in 2005 and $1.4 billion in 2004 reflect costs associated with the
Merger. |
|
(2) |
|
Net nonoperating litigation charges of $2.6 billion and $3.7 billion were taken in 2005 and
2004, respectively. |
|
(3) |
|
Other income in 2004 reflects $118 million of other accounting policy conformity adjustments. |
|
(4) |
|
The Provision for credit losses in 2004 reflects $858 million of accounting policy conformity
adjustments, consisting of a $1.4 billion charge related to the decertification of the sellers
interest in credit card securitizations, partially offset by a benefit of $584 million related to
conforming wholesale and consumer credit provision methodologies for the combined Firm. |
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
|
|
|
|
|
|
Reported
|
|
Net income* / Average common equity |
Operating
|
|
Operating earnings* / Average common equity |
Return on equity less goodwill(a)
|
|
|
|
|
|
Reported
|
|
Net income* / Average common equity less goodwill |
Operating
|
|
Operating earnings*/ Average common equity less goodwill |
Return on assets
|
|
|
|
|
|
Reported
|
|
Net income / Average assets |
Operating
|
|
Operating earnings / Average managed assets |
Overhead ratio
|
|
|
|
|
|
Reported
|
|
Total noninterest expense / Total net revenue |
Operating
|
|
Total noninterest expense / Total net revenue |
* |
|
Represents earnings applicable to common stock |
(a) |
|
The Firm uses return on equity less goodwill, a non-GAAP financial measure, to evaluate
the operating performance of the Firm. The Firm utilizes this measure to facilitate operating
comparisons to competitors. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 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 business
segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking,
Treasury & Securities Services and Asset & Wealth Management, as well as a Corporate segment. The
segments are
based upon the products and services provided, or the type of customer served, and reflect the
manner in which financial information is currently evaluated by management. Results of these lines
of business are presented on an operating basis.
In connection with the Merger, business segment reporting was realigned to reflect the new
business structure of the combined Firm. Treasury was transferred from the IB into Corporate. The
segment formerly known as Chase Financial Services had been comprised of Chase Home Finance, Chase
Cardmember Services, Chase Auto Finance, Chase Regional Banking and Chase Middle Market; as a
result of the Merger, this segment is now called Retail Financial Services and is comprised of Home
Finance, Auto & Education Finance, Consumer & Small Business Banking and Insurance. Chase
Cardmember Services is now its own segment called Card Services, and Chase Middle Market moved into
Commercial Banking. Investment Management & Private Banking was renamed Asset & Wealth Management.
JPMorgan Partners, which formerly was a stand-alone business segment, was moved into
Corporate. Corporate currently comprises Private Equity (JPMorgan Partners and ONE Equity
Partners) and Treasury, and the corporate support areas, which include Central Technology and
Operations, 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. Beginning January 1, 2006, TSS will report results for two divisions: TS and WSS.
WSS was formed by consolidating IS and ITS.
Segment results for periods prior to July 1, 2004, reflect heritage JPMorgan Chase-only results and
have been restated to reflect the current business segment organization and reporting
classifications.
Segment results Operating basis(a)(b)
(Table continues on next page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Total net revenue |
|
|
Noninterest expense |
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Investment Bank |
|
$ |
14,578 |
|
|
$ |
12,605 |
|
|
|
16 |
% |
|
$ |
9,739 |
|
|
$ |
8,696 |
|
|
|
12 |
% |
Retail Financial Services |
|
|
14,830 |
|
|
|
10,791 |
|
|
|
37 |
|
|
|
8,585 |
|
|
|
6,825 |
|
|
|
26 |
|
Card Services |
|
|
15,366 |
|
|
|
10,745 |
|
|
|
43 |
|
|
|
4,999 |
|
|
|
3,883 |
|
|
|
29 |
|
Commercial Banking |
|
|
3,596 |
|
|
|
2,374 |
|
|
|
51 |
|
|
|
1,872 |
|
|
|
1,343 |
|
|
|
39 |
|
Treasury & Securities Services |
|
|
6,241 |
|
|
|
4,857 |
|
|
|
28 |
|
|
|
4,470 |
|
|
|
4,113 |
|
|
|
9 |
|
Asset & Wealth Management |
|
|
5,664 |
|
|
|
4,179 |
|
|
|
36 |
|
|
|
3,860 |
|
|
|
3,133 |
|
|
|
23 |
|
Corporate |
|
|
(1,126 |
) |
|
|
885 |
|
|
NM |
|
|
|
2,024 |
|
|
|
1,301 |
|
|
|
56 |
|
|
Total |
|
$ |
59,149 |
|
|
$ |
46,436 |
|
|
|
27 |
% |
|
$ |
35,549 |
|
|
$ |
29,294 |
|
|
|
21 |
% |
|
|
|
|
(a) |
|
Represents reported results on a tax-equivalent basis and excludes the impact of credit
card securitizations; Merger costs, litigation reserve charges and insurance recoveries deemed
nonoperating; and accounting policy conformity adjustments related to the Merger. |
|
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(c) |
|
As a result of the Merger, new capital allocation methodologies were implemented during the
third quarter of 2004. The capital allocated to each line of business considers several factors:
stand-alone peer comparables, economic risk measures and regulatory capital requirements. In
addition, effective with the third quarter of 2004, goodwill, as well as the associated capital, is
only allocated to the Corporate line of business. Prior periods have not been revised to reflect
these new methodologies and are not comparable to the presentation beginning in the third quarter
of 2004. |
|
|
|
|
|
|
34
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a
stand-alone business. The management reporting process that derives these results allocates income
and expense using market-based methodologies. Effective with the Merger on July 1, 2004, several of
the allocation methodologies were revised, as noted below. As prior periods have not been revised
to reflect these new methodologies, they are not comparable to the presentation of periods
beginning with the third quarter of 2004. Further, the Firm continues to assess the assumptions,
methodologies and reporting reclassifications used for segment reporting, and further refinements
may be implemented in future periods.
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. These
revenue-sharing agreements were revised on the Merger date to provide consistency across the lines
of business.
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 Corporate. The allocation process is unique to
each business and considers the interest rate risk, liquidity risk and regulatory requirements of
its stand-alone peers. 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. In
the third quarter of 2004, FTP was revised to conform the policies of the combined firms.
Expense allocation
Where business segments use services provided by support units within the Firm, the costs of those
support units are allocated to the business segments. Those expenses are allocated based upon their
actual cost, or the lower of actual cost or market cost, as well as upon usage of the services
provided. Effective with the third quarter of 2004, the cost allocation methodologies of the
heritage firms were aligned to provide consistency across the business segments. In addition,
expenses related to certain corporate functions, technology and operations ceased to be allocated
to the business segments
and are retained in Corporate. These retained expenses include parent company costs that would not
be incurred if the segments were stand-alone businesses; adjustments to align certain corporate
staff, technology and operations allocations with market prices; and other one-time items not
aligned with the business segments. During 2005, the Firm refined cost allocation methodologies
related to certain corporate functions, technology and operations expenses in order to improve
transparency, consistency and accountability with regard to costs allocated across business
segments. Prior periods have not been revised to reflect these new cost allocation methodologies.
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. At the time of the Merger, goodwill, as well as
the associated capital, was allocated solely to Corporate. Effective January 2006, the Firm expects
to refine its methodology for allocating capital to the business segments to include any goodwill
associated with line of business-directed acquisitions since the Merger. U.S. GAAP requires the
allocation of goodwill to the business segments for impairment testing (see Critical accounting
estimates used by the Firm and Note 15 on pages 8183 and 114116, respectively, of this Annual
Report). See the Capital management section on page 56 of this Annual Report for a discussion of
the equity framework.
Credit reimbursement
TSS reimburses the IB for credit portfolio exposures the IB manages on behalf of clients the
segments share. At the time of the Merger, the reimbursement methodology was revised to be based
upon pre-tax earnings, net of the cost of capital related to those exposures. Prior to the Merger,
the credit reimbursement was based upon pre-tax earnings, plus the allocated capital associated
with the shared clients.
Tax-equivalent adjustments
Segment and Firm results reflect revenues on a tax-equivalent basis for segment reporting purposes.
Refer to Explanation and reconciliation of the Firms non-GAAP financial measures on page 31 of
this Annual Report for additional details.
Segment results Operating basis(a)(b)
(Table continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Operating earnings |
|
|
Return on common equity goodwill(c) |
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Investment Bank |
|
$ |
3,658 |
|
|
$ |
2,948 |
|
|
|
24 |
% |
|
|
18 |
% |
|
|
17 |
% |
Retail Financial Services |
|
|
3,427 |
|
|
|
2,199 |
|
|
|
56 |
|
|
|
26 |
|
|
|
24 |
|
Card Services |
|
|
1,907 |
|
|
|
1,274 |
|
|
|
50 |
|
|
|
16 |
|
|
|
17 |
|
Commercial Banking |
|
|
1,007 |
|
|
|
608 |
|
|
|
66 |
|
|
|
30 |
|
|
|
29 |
|
Treasury & Securities Services |
|
|
1,037 |
|
|
|
440 |
|
|
|
136 |
|
|
|
55 |
|
|
|
17 |
|
Asset & Wealth Management |
|
|
1,216 |
|
|
|
681 |
|
|
|
79 |
|
|
|
51 |
|
|
|
17 |
|
Corporate |
|
|
(1,731 |
) |
|
|
61 |
|
|
NM |
|
|
NM |
|
|
NM |
|
|
Total |
|
$ |
10,521 |
|
|
$ |
8,211 |
|
|
|
28 |
% |
|
|
17 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
35 |
Managements discussion and analysis
JPMorgan Chase & Co.
JPMorgan Chase is one of the worlds leading investment banks, as evidenced by the breadth of
its client relationships and product capabilities. The Investment Bank has extensive relationships
with corporations, financial institutions, governments and institutional investors worldwide. The
Firm provides a full range of investment banking products and services in all major capital
markets, including advising on corporate strategy and structure, capital raising in equity and debt
markets, sophisticated risk management, and market-making in cash securities and derivative
instruments. The Investment Bank also commits the Firms own capital to proprietary investing and
trading activities.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
Advisory |
|
$ |
1,263 |
|
|
$ |
938 |
|
|
$ |
640 |
|
Equity underwriting |
|
|
864 |
|
|
|
781 |
|
|
|
699 |
|
Debt underwriting |
|
|
1,969 |
|
|
|
1,853 |
|
|
|
1,532 |
|
|
Total investment banking fees |
|
|
4,096 |
|
|
|
3,572 |
|
|
|
2,871 |
|
Trading-related revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income and other |
|
|
5,673 |
|
|
|
5,008 |
|
|
|
6,016 |
|
Equities |
|
|
350 |
|
|
|
427 |
|
|
|
556 |
|
Credit portfolio |
|
|
116 |
|
|
|
6 |
|
|
|
(186 |
) |
|
Total trading-related revenue(b) |
|
|
6,139 |
|
|
|
5,441 |
|
|
|
6,386 |
|
Lending & deposit related fees |
|
|
594 |
|
|
|
539 |
|
|
|
440 |
|
Asset management, administration
and commissions |
|
|
1,724 |
|
|
|
1,400 |
|
|
|
1,217 |
|
Other income |
|
|
615 |
|
|
|
328 |
|
|
|
103 |
|
|
Noninterest revenue |
|
|
13,168 |
|
|
|
11,280 |
|
|
|
11,017 |
|
Net interest income(b) |
|
|
1,410 |
|
|
|
1,325 |
|
|
|
1,667 |
|
|
Total net revenue(c) |
|
|
14,578 |
|
|
|
12,605 |
|
|
|
12,684 |
|
Provision for credit losses |
|
|
(838 |
) |
|
|
(640 |
) |
|
|
(181 |
) |
Credit reimbursement from (to) TSS(d) |
|
|
154 |
|
|
|
90 |
|
|
|
(36 |
) |
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
5,785 |
|
|
|
4,893 |
|
|
|
4,462 |
|
Noncompensation expense |
|
|
3,954 |
|
|
|
3,803 |
|
|
|
3,840 |
|
|
Total noninterest expense |
|
|
9,739 |
|
|
|
8,696 |
|
|
|
8,302 |
|
|
Operating earnings before
income tax expense |
|
|
5,831 |
|
|
|
4,639 |
|
|
|
4,527 |
|
Income tax expense |
|
|
2,173 |
|
|
|
1,691 |
|
|
|
1,722 |
|
|
Operating earnings |
|
$ |
3,658 |
|
|
$ |
2,948 |
|
|
$ |
2,805 |
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
18 |
% |
|
|
17 |
% |
|
|
15 |
% |
ROA |
|
|
0.61 |
|
|
|
0.62 |
|
|
|
0.64 |
|
Overhead ratio |
|
|
67 |
|
|
|
69 |
|
|
|
65 |
|
Compensation expense as
% of total net revenue |
|
|
40 |
|
|
|
39 |
|
|
|
35 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Trading
revenue, on a reported basis, excludes the impact of Net interest income related to IBs trading
activities; this income is recorded in Net interest income. However, in this presentation, to
assess the profitability of IBs trading business, the Firm combines these revenues for segment
reporting purposes. The amount reclassified from Net interest income to Trading revenue was $0.2
billion, $1.9 billion and $2.1 billion for 2005, 2004 and 2003, respectively. The decline from
prior years is due to tightening spreads as short-term funding rates have risen sharply and also,
to a lesser extent, increased funding costs from growth in noninterest-bearing trading assets. |
|
(c) |
|
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
$752 million, $274 million and $117 million for 2005, 2004 and 2003, respectively. |
|
(d) |
|
TSS is
charged a credit reimbursement related to certain exposures managed within the IB credit portfolio
on behalf of clients shared with TSS. For a further discussion, see Credit reimbursement on page 35
of this Annual Report. |
The following table provides the IBs total net revenue by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
4,096 |
|
|
$ |
3,572 |
|
|
$ |
2,871 |
|
Fixed income markets |
|
|
7,242 |
|
|
|
6,314 |
|
|
|
6,987 |
|
Equities markets |
|
|
1,799 |
|
|
|
1,491 |
|
|
|
1,406 |
|
Credit portfolio |
|
|
1,441 |
|
|
|
1,228 |
|
|
|
1,420 |
|
|
Total net revenue |
|
$ |
14,578 |
|
|
$ |
12,605 |
|
|
$ |
12,684 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
2005 compared with 2004
Operating earnings of $3.7 billion were up 24%, or $710 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 partially offset by higher compensation expense. Return on equity was
18%.
Net revenue of $14.6 billion was up $2.0 billion, or 16%, over the prior year, representing the
IBs highest annual revenue since 2000, 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 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 $7.2 billion increased 15%, or $928
million, driven by stronger, although volatile, trading results across commodities, emerging
markets, rate markets and currencies. Equities 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.
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.
2004 compared with 2003
In 2004, Operating earnings of $2.9 billion were up 5% from the prior year. Increases in Investment
banking fees, the improvement in the Provision for credit losses and the impact of the Merger were
partially offset by decreases in trading revenues and net interest income. Return on equity was 17%
for 2004.
Total net revenue of $12.6 billion was relatively flat from the prior year, primarily due to lower
Fixed income markets revenues and Credit portfolio revenues, offset by increases in Investment
banking fees and the impact of the Merger. The decline in revenue from Fixed income markets was
driven by weaker portfolio management trading results, mainly in the interest rate markets
business. Credit portfolio revenues were down due to lower net interest income,
|
|
|
|
|
|
36
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
primarily driven by lower loan balances; these factors were partially offset by higher trading
revenue due to more severe credit spread tightening in 2003 relative to 2004. Investment banking
fees increased by 24% over the prior year, driven by significant gains in advisory and debt
underwriting. The advisory gains were a result of increased global market volumes and market share,
while the higher underwriting fees were due to stronger client activity.
The Provision for credit losses was a benefit of $640 million, compared with a benefit of $181
million in 2003. The improvement in the provision was the result of a $633 million decline in net
charge-offs, partially offset by lower reductions in the allowance for credit losses in 2004
relative to 2003.
For the year ended December 31, 2004, Noninterest expense was up 5% from the prior year. The
increase from 2003 was driven by higher Compensation expense, resulting from strategic investments
and the impact of the Merger.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratio data) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue by region |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
8,223 |
|
|
$ |
6,870 |
|
|
$ |
7,250 |
|
Europe/Middle East/Africa |
|
|
4,627 |
|
|
|
4,082 |
|
|
|
4,331 |
|
Asia/Pacific |
|
|
1,728 |
|
|
|
1,653 |
|
|
|
1,103 |
|
|
Total net revenue |
|
$ |
14,578 |
|
|
$ |
12,605 |
|
|
$ |
12,684 |
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
598,118 |
|
|
$ |
473,121 |
|
|
$ |
436,488 |
|
Trading assetsdebt and
equity instruments |
|
|
231,303 |
|
|
|
173,086 |
|
|
|
156,408 |
|
Trading assetsderivatives receivables |
|
|
55,239 |
|
|
|
58,735 |
|
|
|
83,361 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained(b) |
|
|
42,918 |
|
|
|
36,494 |
|
|
|
40,240 |
|
Loans held-for-sale(c) |
|
|
12,014 |
|
|
|
6,124 |
|
|
|
4,797 |
|
|
Total loans |
|
|
54,932 |
|
|
|
42,618 |
|
|
|
45,037 |
|
Adjusted assets(d) |
|
|
455,277 |
|
|
|
393,646 |
|
|
|
370,776 |
|
Equity(e) |
|
|
20,000 |
|
|
|
17,290 |
|
|
|
18,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
19,769 |
|
|
|
17,478 |
|
|
|
14,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(126 |
) |
|
$ |
47 |
|
|
$ |
680 |
|
Nonperforming assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(f) |
|
|
594 |
|
|
|
954 |
|
|
|
1,708 |
|
Other nonperforming assets |
|
|
51 |
|
|
|
242 |
|
|
|
370 |
|
Allowance for loan losses |
|
|
907 |
|
|
|
1,547 |
|
|
|
1,055 |
|
Allowance for lending related commitments |
|
|
226 |
|
|
|
305 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate(c) |
|
|
(0.29 |
)% |
|
|
0.13 |
% |
|
|
1.69 |
% |
Allowance for loan losses to average loans(c) |
|
|
2.11 |
|
|
|
4.24 |
|
|
|
2.56 |
|
Allowance for loan losses to
nonperforming loans(f) |
|
|
187 |
|
|
|
163 |
|
|
|
63 |
|
Nonperforming loans to average loans |
|
|
1.08 |
|
|
|
2.24 |
|
|
|
3.79 |
|
Market riskaverage trading and
credit portfolio VAR(g)(h)(i) |
|
|
|
|
|
|
|
|
|
|
|
|
Trading activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income(g) |
|
$ |
67 |
|
|
$ |
74 |
|
|
$ |
61 |
|
Foreign exchange |
|
|
23 |
|
|
|
17 |
|
|
|
17 |
|
Equities |
|
|
34 |
|
|
|
28 |
|
|
|
18 |
|
Commodities and other |
|
|
21 |
|
|
|
9 |
|
|
|
8 |
|
Diversification(i) |
|
|
(59 |
) |
|
|
(43 |
) |
|
|
(39 |
) |
|
Total trading VAR |
|
|
86 |
|
|
|
85 |
|
|
|
65 |
|
Credit portfolio VAR(h) |
|
|
14 |
|
|
|
14 |
|
|
|
18 |
|
Diversification(i) |
|
|
(12 |
) |
|
|
(9 |
) |
|
|
(14 |
) |
|
Total trading and credit
portfolio VAR |
|
$ |
88 |
|
|
$ |
90 |
|
|
$ |
69 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Loans retained include Credit Portfolio, Conduit loans, leverage leases, bridge loans for underwriting
and other accrual loans. |
|
(c) |
|
Loans held-for-sale, which include 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. |
|
(d) |
|
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, which excludes certain assets considered to have a low risk profile, provides a more
meaningful measure of balance sheet leverage in the securities industry. |
|
(e) |
|
Equity includes $15.0 billion, $15.0 billion and $14.6 billion of economic risk capital
assigned to the IB for the years ended 2005, 2004 and 2003 respectively. |
|
(f) |
|
Nonperforming loans include loans held-for-sale of $109 million, $2 million and $30 million as
of December 31, 2005, 2004 and 2003, respectively. These amounts are not included in the allowance
coverage ratios. |
|
(g) |
|
Includes all fixed income mark-to-market trading activities, plus available-for-sale securities
held for proprietary purposes. |
|
(h) |
|
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and
mark-to-market hedges of the accrual loan portfolio, which are all reported in Trading revenue.
This VAR does not include the accrual loan portfolio, which is not marked to market. |
(i) |
|
Average
VARs are less than the sum of the VARs of its market risk components, due to risk offsets resulting
from portfolio diversification. The diversification effect reflects the fact that the risks are not
perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum
of the risks of the positions themselves. |
According to Thomson Financial, in 2005, the Firm improved its ranking in U.S. Debt, Equity and
Equity-related from #5 in 2004 to #4 and in U.S. Equity and Equity-related from #6 in 2004 to #5.
The Firm maintained its #3 position in Global Announced M&A with 24% market share and its #1
position in Global Syndicated Loans. The Firm maintained its #2 ranking in U.S. Long-Term Debt, but
dropped from #2 to #4 in Global Long-Term Debt.
According to Dealogic, the Firm was ranked #2 in Investment Banking fees generated during 2005.
Market shares and rankings(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Market |
|
|
|
|
|
|
Market |
|
|
|
|
|
|
Market |
|
|
|
|
December 31, |
|
Share |
|
|
Rankings |
|
|
Share |
|
|
Rankings |
|
|
Share |
|
|
Rankings |
|
|
Global debt, equity and
equity-related |
|
|
6 |
% |
|
|
#4 |
|
|
|
7 |
% |
|
|
#3 |
|
|
|
8 |
% |
|
|
#3 |
|
Global syndicated loans |
|
|
16 |
|
|
|
#1 |
|
|
|
19 |
|
|
|
#1 |
|
|
|
20 |
|
|
|
#1 |
|
Global long-term debt |
|
|
6 |
|
|
|
#4 |
|
|
|
7 |
|
|
|
#2 |
|
|
|
8 |
|
|
|
#2 |
|
Global equity and
equity-related |
|
|
7 |
|
|
|
#6 |
|
|
|
6 |
|
|
|
#6 |
|
|
|
8 |
|
|
|
#4 |
|
Global announced M&A |
|
|
24 |
|
|
|
#3 |
|
|
|
24 |
|
|
|
#3 |
|
|
|
16 |
|
|
|
#4 |
|
U.S. debt, equity and
equity-related |
|
|
8 |
|
|
|
#4 |
|
|
|
8 |
|
|
|
#5 |
|
|
|
9 |
|
|
|
#3 |
|
U.S. syndicated loans |
|
|
28 |
|
|
|
#1 |
|
|
|
32 |
|
|
|
#1 |
|
|
|
34 |
|
|
|
#1 |
|
U.S. long-term debt |
|
|
11 |
|
|
|
#2 |
|
|
|
12 |
|
|
|
#2 |
|
|
|
12 |
|
|
|
#2 |
|
U.S. equity and
equity-related |
|
|
9 |
|
|
|
#5 |
|
|
|
8 |
|
|
|
#6 |
|
|
|
11 |
|
|
|
#4 |
|
U.S. announced M&A |
|
|
24 |
|
|
|
#3 |
|
|
|
31 |
|
|
|
#2 |
|
|
|
14 |
|
|
|
#7 |
|
|
|
|
|
(a) |
|
Source: Thomson Financial Securities data. Global announced M&A is based on 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 the years ended December 31, 2004 and 2003 are presented on a
combined basis, as if the merger of JPMorgan Chase and Bank One had been in effect during the
periods. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
37 |
Managements discussion and analysis
JPMorgan Chase & Co.
Composition of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
Trading- |
|
|
Lending & |
|
|
management, |
|
|
|
|
|
|
|
|
|
|
December 31,(a) |
|
Investment |
|
|
related |
|
|
deposit |
|
|
administration |
|
|
Other |
|
|
Net interest |
|
|
Total net |
|
(in millions) |
|
banking fees |
|
|
revenue |
|
|
related fees |
|
|
and commissions |
|
|
income |
|
|
income |
|
|
revenue |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
4,096 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,096 |
|
Fixed income markets |
|
|
|
|
|
|
5,673 |
|
|
|
251 |
|
|
|
219 |
|
|
|
365 |
|
|
|
734 |
|
|
|
7,242 |
|
Equities markets |
|
|
|
|
|
|
350 |
|
|
|
|
|
|
|
1,462 |
|
|
|
(88 |
) |
|
|
75 |
|
|
|
1,799 |
|
Credit portfolio |
|
|
|
|
|
|
116 |
|
|
|
343 |
|
|
|
43 |
|
|
|
338 |
|
|
|
601 |
|
|
|
1,441 |
|
|
Total |
|
$ |
4,096 |
|
|
$ |
6,139 |
|
|
$ |
594 |
|
|
$ |
1,724 |
|
|
$ |
615 |
|
|
$ |
1,410 |
|
|
$ |
14,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
3,572 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,572 |
|
Fixed income markets |
|
|
|
|
|
|
5,008 |
|
|
|
191 |
|
|
|
287 |
|
|
|
304 |
|
|
|
524 |
|
|
|
6,314 |
|
Equities markets |
|
|
|
|
|
|
427 |
|
|
|
|
|
|
|
1,076 |
|
|
|
(95 |
) |
|
|
83 |
|
|
|
1,491 |
|
Credit portfolio |
|
|
|
|
|
|
6 |
|
|
|
348 |
|
|
|
37 |
|
|
|
119 |
|
|
|
718 |
|
|
|
1,228 |
|
|
Total |
|
$ |
3,572 |
|
|
$ |
5,441 |
|
|
$ |
539 |
|
|
$ |
1,400 |
|
|
$ |
328 |
|
|
$ |
1,325 |
|
|
$ |
12,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
2,871 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,871 |
|
Fixed income markets |
|
|
|
|
|
|
6,016 |
|
|
|
107 |
|
|
|
331 |
|
|
|
84 |
|
|
|
449 |
|
|
|
6,987 |
|
Equities markets |
|
|
|
|
|
|
556 |
|
|
|
|
|
|
|
851 |
|
|
|
(85 |
) |
|
|
84 |
|
|
|
1,406 |
|
Credit portfolio |
|
|
|
|
|
|
(186 |
) |
|
|
333 |
|
|
|
35 |
|
|
|
104 |
|
|
|
1,134 |
|
|
|
1,420 |
|
|
Total |
|
$ |
2,871 |
|
|
$ |
6,386 |
|
|
$ |
440 |
|
|
$ |
1,217 |
|
|
$ |
103 |
|
|
$ |
1,667 |
|
|
$ |
12,684 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
IB revenues comprise the following:
Investment banking fees includes advisory, equity underwriting, bond underwriting and loan
syndication fees.
Fixed income markets includes client and portfolio management revenue related to both market-making
and proprietary risk-taking across global fixed income markets, including government and corporate
debt, foreign exchange, interest rate and commodities markets.
Equities markets includes client and portfolio management revenue related to market-making and
proprietary risk-taking across global equity products, including cash instruments, derivatives and
convertibles.
Credit portfolio revenue includes Net interest income, fees and loan sale activity, as well as
gains or losses on securities received as part of a loan restructuring, for 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 6970 of the Credit risk management section of this Annual Report for a further
discussion.
|
|
|
|
|
|
38
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Retail Financial Services
RFS includes Home Finance, Consumer & Small Business Banking, Auto & Education Finance and
Insurance. Through this group of businesses, the Firm provides consumers and small businesses with
a broad range of financial products and services including deposits, investments, loans and
insurance. Home Finance is a leading provider of consumer real estate loan products and is one of
the largest originators and servicers of home mortgages. Consumer & Small Business Banking offers
one of the largest branch networks in the United States, covering 17 states with 2,641 branches and
7,312 automated teller machines (ATMs). Auto & Education Finance is the largest noncaptive
originator of automobile loans as well as a top provider of loans for college students. Through its
Insurance operations, the Firm sells and underwrites an extensive range of financial protection
products and investment alternatives, including life insurance, annuities and debt protection
products.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
1,452 |
|
|
$ |
1,013 |
|
|
$ |
486 |
|
Asset management, administration
and commissions |
|
|
1,498 |
|
|
|
1,020 |
|
|
|
459 |
|
Securities / private equity gains (losses) |
|
|
9 |
|
|
|
(83 |
) |
|
|
381 |
|
Mortgage fees and related income |
|
|
1,104 |
|
|
|
866 |
|
|
|
803 |
|
Credit card income |
|
|
426 |
|
|
|
230 |
|
|
|
107 |
|
Other income |
|
|
136 |
|
|
|
31 |
|
|
|
(28 |
) |
|
Noninterest revenue |
|
|
4,625 |
|
|
|
3,077 |
|
|
|
2,208 |
|
Net interest income |
|
|
10,205 |
|
|
|
7,714 |
|
|
|
5,220 |
|
|
Total net revenue |
|
|
14,830 |
|
|
|
10,791 |
|
|
|
7,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses(b) |
|
|
724 |
|
|
|
449 |
|
|
|
521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
3,337 |
|
|
|
2,621 |
|
|
|
1,695 |
|
Noncompensation expense |
|
|
4,748 |
|
|
|
3,937 |
|
|
|
2,773 |
|
Amortization of intangibles |
|
|
500 |
|
|
|
267 |
|
|
|
3 |
|
|
Total noninterest expense |
|
|
8,585 |
|
|
|
6,825 |
|
|
|
4,471 |
|
|
Operating earnings before
income tax expense |
|
|
5,521 |
|
|
|
3,517 |
|
|
|
2,436 |
|
Income tax expense |
|
|
2,094 |
|
|
|
1,318 |
|
|
|
889 |
|
|
Operating earnings |
|
$ |
3,427 |
|
|
$ |
2,199 |
|
|
$ |
1,547 |
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
26 |
% |
|
|
24 |
% |
|
|
37 |
% |
ROA |
|
|
1.51 |
|
|
|
1.18 |
|
|
|
1.05 |
|
Overhead ratio |
|
|
58 |
|
|
|
63 |
|
|
|
60 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
2005
includes a $250 million special provision related to Hurricane Katrina allocated as follows: $140
million in Consumer Real Estate Lending, $90 million in Consumer & Small Business Banking and $20
million in Auto & Education Finance. |
2005 compared with 2004
Operating earnings were $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
partially
offset by narrower spreads on retained loan portfolios, the special provision for Hurricane Katrina
and net losses associated with portfolio loan sales in the Home Finance and Auto businesses.
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 banking fees. These benefits were offset in part by losses on portfolio loan
sales in the Home Finance and Auto businesses.
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 partially offset by the Merger and higher provision expense related to the decision to retain
subprime mortgage loans.
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.
2004 compared with 2003
Operating earnings were $2.2 billion, up from $1.5 billion a year ago. The increase was due largely
to the Merger. Excluding the benefit of the Merger, earnings declined as lower MSR risk management
results and reduced prime mortgage production revenue offset the benefits of growth in loan
balances, wider spreads on deposit products and improvement in credit costs.
Total net revenue increased to $10.8 billion, up 45% from the prior year. Net interest income
increased by 48% to $7.7 billion, primarily due to the Merger, growth in retained loan balances and
wider spreads on deposit products. Noninterest revenue increased to $3.1 billion, up 39%, due to
the Merger and higher mortgage servicing income. Both components of total revenue included declines
associated with risk managing the MSR asset and lower prime mortgage originations.
The Provision for credit losses was down 14% to $449 million despite the impact of the Merger. The
effect of the Merger was offset by a reduction in the Allowance for loan losses resulting from the
sale of the manufactured home loan portfolio, and continued positive credit quality trends in the
consumer lending businesses.
Noninterest expense totaled $6.8 billion, up 53% from the prior year, primarily due to the Merger
and continued investment to expand the branch network. Partially offsetting the increase were
merger-related expense savings in all businesses.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
39 |
Managements discussion and analysis
JPMorgan Chase & Co.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
224,801 |
|
|
$ |
226,560 |
|
|
$ |
139,316 |
|
Loans(b) |
|
|
197,299 |
|
|
|
202,473 |
|
|
|
121,921 |
|
Core deposits(c) |
|
|
161,666 |
|
|
|
156,885 |
|
|
|
75,850 |
|
Total deposits |
|
|
191,415 |
|
|
|
182,372 |
|
|
|
86,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
226,368 |
|
|
$ |
185,928 |
|
|
$ |
147,435 |
|
Loans(d) |
|
|
198,153 |
|
|
|
162,768 |
|
|
|
120,750 |
|
Core deposits(c) |
|
|
160,641 |
|
|
|
120,758 |
|
|
|
80,116 |
|
Total deposits |
|
|
186,811 |
|
|
|
137,404 |
|
|
|
89,793 |
|
Equity |
|
|
13,383 |
|
|
|
9,092 |
|
|
|
4,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
60,998 |
|
|
|
59,632 |
|
|
|
32,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs(e) |
|
$ |
572 |
|
|
$ |
990 |
|
|
$ |
381 |
|
Nonperforming loans(f) |
|
|
1,338 |
|
|
|
1,161 |
|
|
|
569 |
|
Nonperforming assets |
|
|
1,518 |
|
|
|
1,385 |
|
|
|
775 |
|
Allowance for loan losses |
|
|
1,363 |
|
|
|
1,228 |
|
|
|
1,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate(d) |
|
|
0.31 |
% |
|
|
0.67 |
% |
|
|
0.40 |
% |
Allowance for loan losses to
ending loans(b) |
|
|
0.75 |
|
|
|
0.67 |
|
|
|
1.04 |
|
Allowance for loan losses to
nonperforming loans(f) |
|
|
104 |
|
|
|
107 |
|
|
|
209 |
|
Nonperforming loans to total loans |
|
|
0.68 |
|
|
|
0.57 |
|
|
|
0.47 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Includes loans held for sale of $16,598 million, $18,022 million and $17,105 million at December 31, 2005,
2004 and 2003, respectively. These amounts are not included in the allowance coverage ratios. |
|
(c) |
|
Includes demand and savings deposits. |
|
(d) |
|
Average loans include loans held for sale of $15,675 million, $14,736 million and $25,293
million for 2005, 2004 and 2003, respectively. These amounts are not included in the net charge-off
rate. |
|
(e) |
|
Includes $406 million of charge-offs related to the manufactured home loan portfolio in 2004. |
|
(f) |
|
Nonperforming loans include loans held for sale of $27 million, $13 million and $45 million at
December 31, 2005, 2004 and 2003, respectively. These amounts are not included in the allowance
coverage ratios. |
Home Finance
Home Finance is comprised of two key business segments: Prime Production & Servicing and
Consumer Real Estate Lending. The Prime Production & Servicing segment includes the operating
results associated with the origination, sale and servicing of prime mortgages. Consumer Real
Estate Lending reflects the operating results of consumer loans that are secured by real estate,
retained by the Firm and held in the portfolio. This portfolio includes prime and subprime first
mortgages, home equity lines and loans, and manufactured home loans. The Firm stopped originating
manufactured home loans early in 2004 and sold substantially all of its remaining portfolio in
2004.
Selected income statement data by business
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Prime production and servicing |
|
|
|
|
|
|
|
|
|
|
|
|
Production |
|
$ |
692 |
|
|
$ |
728 |
|
|
$ |
1,339 |
|
Servicing: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing revenue,
net of amortization |
|
|
635 |
|
|
|
651 |
|
|
|
453 |
|
MSR risk management results(b) |
|
|
283 |
|
|
|
113 |
|
|
|
784 |
|
|
Total net revenue |
|
|
1,610 |
|
|
|
1,492 |
|
|
|
2,576 |
|
Noninterest expense |
|
|
943 |
|
|
|
1,115 |
|
|
|
1,124 |
|
Operating earnings |
|
|
422 |
|
|
|
240 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate lending |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
2,704 |
|
|
|
2,376 |
|
|
|
1,473 |
|
Provision for credit losses |
|
|
298 |
|
|
|
74 |
|
|
|
240 |
|
Noninterest expense |
|
|
940 |
|
|
|
922 |
|
|
|
606 |
|
Operating earnings |
|
|
935 |
|
|
|
881 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Home Finance |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
4,314 |
|
|
|
3,868 |
|
|
|
4,049 |
|
Provision for credit losses |
|
|
298 |
|
|
|
74 |
|
|
|
240 |
|
Noninterest expense |
|
|
1,883 |
|
|
|
2,037 |
|
|
|
1,730 |
|
Operating earnings |
|
|
1,357 |
|
|
|
1,121 |
|
|
|
1,332 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
For
additional information, see page 42 of this Annual Report. |
2005 compared with 2004
Operating earnings were $1.4 billion, up $236 million from the prior year, primarily due to the
Merger, higher loan balances, reduced expenses and improved MSR risk management results.
Operating earnings for the Prime Production & Servicing segment totaled $422 million, up $182
million from the prior year. Net revenue of $1.6 billion increased by $118 million, reflecting
improved MSR risk management results. The increase in MSR risk management results was due in part
to the absence of prior-year securities losses on repositioning of the risk management asset.
Decreased mortgage production revenue attributable to lower volume partially offset this benefit.
Noninterest expense of $943 million decreased by $172 million, reflecting lower production volume
and operating efficiencies.
Operating earnings for the Consumer Real Estate Lending segment increased by $54 million to $935
million. The current year included a loss of $120 million associated with the transfer of $3.3
billion of mortgage loans to held-for-sale, and a $140 million special provision related to
Hurricane Katrina. Prior-year results included a $95 million net benefit associated with the sale
of a $4.0 billion manufactured home loan portfolio and a $52 million charge related to a transfer
of adjustable rate mortgage loans to held-for-sale. Excluding the after-tax impact of these items,
earnings would have been up $242 million, reflecting the Merger, higher loan balances and lower
expenses, partially offset by loan spread compression due to rising short-term interest rates and a
flat yield curve, which contributed to accelerated home equity loan payoffs.
Home Finance uses a combination of derivatives, AFS securities and trading securities to manage
changes in the fair value of the MSR asset. These risk management activities are intended to
protect the economic value of the MSR asset by providing offsetting changes in the fair value of
the related risk management instruments. The type and amount of instruments used in this risk
management activity change over time as market conditions and approach dictate.
|
|
|
|
|
|
40
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
During 2005, positive MSR valuation adjustments of $777 million were partially offset by losses
of $494 million on risk management instruments, including net interest earned on AFS securities. In
2004, negative MSR valuation adjustments of $248 million were more than offset by $361 million of
aggregate risk management gains, including net interest earned on AFS securities. Unrealized losses
on AFS securities were $174 million, $3 million and $144 million at December 31, 2005, 2004 and
2003, respectively. For a further discussion of MSRs, see Critical accounting estimates on page 83 and Note 15 on pages 114116 of this Annual
Report.
2004 compared with 2003
Operating earnings in the Prime Production & Servicing segment dropped to $240 million from $918
million in the prior year. Results reflected a decrease in prime mortgage production revenue, to
$728 million from $1.3 billion, due to a decline in mortgage originations. Operating earnings were
also adversely affected by a drop in MSR risk management revenue, to $113 million from $784 million
in the prior year. Results in 2004 included realized losses of $89 million on the sale of AFS
securities associated with the risk management of the MSR asset, compared with securities gains of
$359 million in the prior year. Noninterest expense was relatively flat at $1.1 billion.
Operating earnings for the Consumer Real Estate Lending segment more than doubled to $881 million
from $414 million in the prior year. The increase was largely due to the addition of the Bank One
home equity lending business but also reflected growth in retained loan balances and a $95 million
net benefit associated with the sale of the $4 billion manufactured home loan portfolio; partially
offsetting these increases were lower subprime mortgage securitization gains as a result of
managements decision in 2004 to retain these loans. These factors contributed to total net revenue
rising 61% to $2.4 billion. The provision for credit losses, at $74 million, decreased by 69% from
a year ago. This improvement was the result of an $87 million reduction in the allowance for loan
losses associated with the manufactured home loan portfolio sale, improved credit quality and lower
delinquencies, partially offset by the Merger. Noninterest expense totaled $922 million, up 52%
from the year-ago period, largely due to the Merger.
Home Finances origination channels are comprised of the following:
Retail Borrowers who are buying or refinancing a home are directly contacted by 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.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios and |
|
|
|
|
|
|
|
|
|
where otherwise noted) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Origination volume by channel (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
83.9 |
|
|
$ |
74.2 |
|
|
$ |
90.8 |
|
Wholesale |
|
|
50.4 |
|
|
|
48.5 |
|
|
|
65.6 |
|
Correspondent |
|
|
14.0 |
|
|
|
22.8 |
|
|
|
44.5 |
|
Correspondent negotiated transactions |
|
|
34.5 |
|
|
|
41.5 |
|
|
|
83.3 |
|
|
Total |
|
|
182.8 |
|
|
|
187.0 |
|
|
|
284.2 |
|
Origination volume by business (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
128.7 |
|
|
$ |
144.6 |
|
|
$ |
259.5 |
|
Home equity |
|
|
54.1 |
|
|
|
42.4 |
|
|
|
24.7 |
|
|
Total |
|
|
182.8 |
|
|
|
187.0 |
|
|
|
284.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Third-party mortgage loans
serviced (ending)(b) |
|
$ |
467.5 |
|
|
$ |
430.9 |
|
|
$ |
393.7 |
|
MSR net carrying value (ending) |
|
|
6.5 |
|
|
|
5.1 |
|
|
|
4.8 |
|
End-of-period loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held-for-sale |
|
|
13.7 |
|
|
|
14.2 |
|
|
|
15.9 |
|
Mortgage loans retained |
|
|
43.0 |
|
|
|
42.6 |
|
|
|
34.5 |
|
Home equity and other loans |
|
|
76.8 |
|
|
|
67.9 |
|
|
|
24.1 |
|
|
Total end of period loans owned |
|
|
133.5 |
|
|
|
124.7 |
|
|
|
74.5 |
|
Average loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held-for-sale |
|
|
12.1 |
|
|
|
12.1 |
|
|
|
23.5 |
|
Mortgage loans retained |
|
|
46.4 |
|
|
|
40.7 |
|
|
|
32.0 |
|
Home equity and other loans |
|
|
70.2 |
|
|
|
47.0 |
|
|
|
19.4 |
|
|
Total average loans owned |
|
|
128.7 |
|
|
|
99.8 |
|
|
|
74.9 |
|
Overhead ratio |
|
|
44 |
% |
|
|
53 |
% |
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate(c) |
|
|
1.61 |
% |
|
|
1.27 |
% |
|
|
1.81 |
% |
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
25 |
|
|
$ |
19 |
|
|
$ |
26 |
|
Home equity and other loans(d) |
|
|
129 |
|
|
|
554 |
|
|
|
109 |
|
|
Total net charge-offs |
|
|
154 |
|
|
|
573 |
|
|
|
135 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
0.05 |
% |
|
|
0.05 |
% |
|
|
0.08 |
% |
Home equity and other loans |
|
|
0.18 |
|
|
|
1.18 |
|
|
|
0.56 |
|
Total net charge-off rate(e) |
|
|
0.13 |
|
|
|
0.65 |
|
|
|
0.26 |
|
Nonperforming assets(f) |
|
$ |
998 |
|
|
$ |
844 |
|
|
$ |
546 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Includes prime first mortgage loans and subprime loans. |
|
(c) |
|
Excludes delinquencies related to loans eligible for repurchase as well as loans repurchased
from GNMA pools that are insured by government agencies of $0.9 billion, $0.9 billion and $0.1
billion, for December 31, 2005, 2004 and 2003, respectively. These amounts are excluded as
reimbursement is proceeding normally. |
|
(d) |
|
Includes $406 million of charge-offs related to the manufactured home loan portfolio in 2004. |
|
(e) |
|
Excludes mortgage loans held for sale. |
|
(f) |
|
Excludes nonperforming assets related to loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by government agencies of $1.1 billion, $1.5 billion
and $2.3 billion for December 31, 2005, 2004 and 2003, respectively. These amounts are excluded as
reimbursement is proceeding normally. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
41 |
Managements discussion and analysis
JPMorgan Chase & Co.
The table below reconciles managements disclosure of Home Finances revenue into the reported
U.S. GAAP line items shown on the Consolidated statements of income and in the related Notes to
Consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
Prime production and servicing |
|
|
Consumer real estate lending |
|
|
Total revenue |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net interest income |
|
$ |
426 |
|
|
$ |
700 |
|
|
$ |
1,556 |
|
|
$ |
2,672 |
|
|
$ |
2,245 |
|
|
$ |
1,226 |
|
|
$ |
3,098 |
|
|
$ |
2,945 |
|
|
$ |
2,782 |
|
Securities / private equity gains (losses) |
|
|
3 |
|
|
|
(89 |
) |
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(89 |
) |
|
|
359 |
|
Mortgage fees and related income(b) |
|
|
1,181 |
|
|
|
881 |
|
|
|
661 |
|
|
|
32 |
|
|
|
131 |
|
|
|
247 |
|
|
|
1,213 |
|
|
|
1,012 |
|
|
|
908 |
|
|
Total |
|
$ |
1,610 |
|
|
$ |
1,492 |
|
|
$ |
2,576 |
|
|
$ |
2,704 |
|
|
$ |
2,376 |
|
|
$ |
1,473 |
|
|
$ |
4,314 |
|
|
$ |
3,868 |
|
|
$ |
4,049 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Includes
activity reported elsewhere as Other income. |
The following table details the MSR risk management results in the Home Finance business:
MSR risk management results
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Reported amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustments(b) |
|
$ |
777 |
|
|
$ |
(248 |
) |
|
$ |
(253 |
) |
Derivative valuation adjustments
and other risk management gains (losses)(c) |
|
|
(494 |
) |
|
|
361 |
|
|
|
1,037 |
|
|
MSR risk management results |
|
$ |
283 |
|
|
$ |
113 |
|
|
$ |
784 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Excludes
subprime loan MSR activity of $(7) million and $(2) million in 2005 and 2004, respectively. There
was no subprime loan MSR activity in 2003. |
|
(c) |
|
Includes gains, losses and interest income associated with derivatives, both designated and not
designated, as a SFAS 133 hedge, and securities classified as both trading and available-for-sale. |
Consumer & Small Business Banking
Consumer & Small Business Banking offers a full array of financial services through a branch
network spanning 17 states as well as through the Internet. Product offerings include checking and
savings accounts, mutual funds and annuities, credit cards, mortgages and
home equity loans, and loans for small business customers (customers with annual sales generally
less than $10 million).
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Noninterest revenue |
|
$ |
2,929 |
|
|
$ |
1,864 |
|
|
$ |
828 |
|
Net interest income |
|
|
5,476 |
|
|
|
3,521 |
|
|
|
1,594 |
|
|
Total net revenue |
|
|
8,405 |
|
|
|
5,385 |
|
|
|
2,422 |
|
Provision for credit losses |
|
|
214 |
|
|
|
165 |
|
|
|
76 |
|
Noninterest expense |
|
|
5,431 |
|
|
|
3,981 |
|
|
|
2,358 |
|
Operating earnings (loss) |
|
|
1,684 |
|
|
|
760 |
|
|
|
(4 |
) |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
2005 compared with 2004
Operating earnings totaled $1.7 billion, up $924 million from the prior year. While growth largely
reflected the Merger, results also included increased deposit balances and wider spreads, as well
as higher debit card and other banking fees. These factors contributed to net revenue increasing to
$8.4 billion from $5.4 billion in the prior year. The Provision for credit losses of $214 million
increased by $49 million; excluding the special provision of $90 million related to Hurricane
Katrina, the Provision would have decreased by $41 million from the prior year, reflecting lower
net charge-offs and improved credit quality trends. Noninterest expense increased by $1.5 billion
to $5.4 billion, as a result of the Merger and continued investment in branch distribution and
sales, partially offset by merger efficiencies.
2004 compared with 2003
Operating earnings totaled $760 million, up from a loss of $4 million in the prior-year period. The
increase was largely due to the Merger but also reflected wider spreads on deposits and lower
expenses. These benefits were partially offset by a higher Provision for credit losses.
Total net revenue was $5.4 billion, compared with $2.4 billion in the prior year. While the
increase was primarily attributable to the Merger, total net revenue also benefited from wider
spreads on deposits.
The Provision for credit losses increased to $165 million from $76 million in the prior year. The
increase was in part due to the Merger but also reflected an increase in the allowance for credit
losses to cover high-risk portfolio segments.
The increase in Noninterest expense to $4.0 billion was largely attributable to the Merger.
Incremental expense from investment in the branch distribution network was also a contributing
factor.
|
|
|
|
|
|
42
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios and |
|
|
|
|
|
|
|
|
|
where otherwise noted) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Small business loans |
|
$ |
12.7 |
|
|
$ |
12.5 |
|
|
$ |
2.2 |
|
Consumer and other loans(b) |
|
|
1.7 |
|
|
|
2.2 |
|
|
|
2.0 |
|
|
Total loans |
|
|
14.4 |
|
|
|
14.7 |
|
|
|
4.2 |
|
Core deposits(c) |
|
|
152.3 |
|
|
|
146.3 |
|
|
|
66.4 |
|
Total deposits |
|
|
181.9 |
|
|
|
171.8 |
|
|
|
76.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Small business loans |
|
$ |
12.4 |
|
|
$ |
7.3 |
|
|
$ |
2.1 |
|
Consumer and other loans(b) |
|
|
2.0 |
|
|
|
2.1 |
|
|
|
2.0 |
|
|
Total loans |
|
|
14.4 |
|
|
|
9.4 |
|
|
|
4.1 |
|
Core deposits(c) |
|
|
149.0 |
|
|
|
109.6 |
|
|
|
64.8 |
|
Total deposits |
|
|
175.1 |
|
|
|
126.2 |
|
|
|
74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
2,641 |
|
|
|
2,508 |
|
|
|
561 |
|
ATMs |
|
|
7,312 |
|
|
|
6,650 |
|
|
|
1,931 |
|
Personal bankers |
|
|
7,067 |
|
|
|
5,750 |
|
|
|
1,820 |
|
Personal checking accounts (in thousands)(d) |
|
|
7,869 |
|
|
|
7,235 |
|
|
|
1,984 |
|
Business checking accounts (in thousands)(d) |
|
|
924 |
|
|
|
889 |
|
|
|
347 |
|
Active online customers (in thousands) |
|
|
4,231 |
|
|
|
3,359 |
|
|
NA |
|
Debit cards issued (in thousands) |
|
|
9,266 |
|
|
|
8,392 |
|
|
|
2,380 |
|
Overhead ratio |
|
|
65 |
% |
|
|
74 |
% |
|
|
97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail brokerage business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Investment sales volume |
|
$ |
11,144 |
|
|
$ |
7,324 |
|
|
$ |
3,579 |
|
Number of dedicated investment sales
representatives |
|
|
1,449 |
|
|
|
1,364 |
|
|
|
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Small business |
|
$ |
101 |
|
|
$ |
77 |
|
|
$ |
35 |
|
Consumer and other loans |
|
|
40 |
|
|
|
77 |
|
|
|
40 |
|
|
Total net charge-offs |
|
|
141 |
|
|
|
154 |
|
|
|
75 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Small business |
|
|
0.81 |
% |
|
|
1.05 |
% |
|
|
1.67 |
% |
Consumer and other loans |
|
|
2.00 |
|
|
|
3.67 |
|
|
|
2.00 |
|
Total net charge-off rate |
|
|
0.98 |
|
|
|
1.64 |
|
|
|
1.83 |
|
Nonperforming assets |
|
$ |
283 |
|
|
$ |
299 |
|
|
$ |
72 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Primarily community development loans. |
|
(c) |
|
Includes demand and savings deposits. |
|
(d) |
|
Prior periods amounts have been restated to reflect inactive accounts that should have been
closed during those periods. |
Auto & Education Finance
Auto & Education Finance provides automobile loans and leases to consumers and loans to
commercial clients, primarily through a national network of automotive dealers. The segment is also
a top provider of loans to students at colleges and universities across the United States.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Total net revenue |
|
$ |
1,467 |
|
|
$ |
1,145 |
|
|
$ |
842 |
|
Provision for credit losses |
|
|
212 |
|
|
|
210 |
|
|
|
205 |
|
Noninterest expense |
|
|
751 |
|
|
|
490 |
|
|
|
291 |
|
Operating earnings |
|
|
307 |
|
|
|
270 |
|
|
|
206 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
2005 compared with 2004
Operating earnings were $307 million, up $37 million from the prior year. The current year included
a net loss of $83 million associated with a $2.3 billion auto loan securitization; a net loss of
$42 million associated with a $1.5 billion auto loan securitization; a $40 million charge related
to the dissolution of a student loan joint venture; a benefit of $34 million from the sale of a $2
billion recreational vehicle loan portfolio; and the $20 million special provision for credit
losses related to Hurricane Katrina. The prior-year results included charges of $65 million related
to auto lease residuals. Excluding the after-tax impact of these items, operating earnings would
have increased by $90 million over the prior year, primarily due to the Merger and improved credit
quality. Results continued to reflect lower production volumes and narrower spreads.
2004 compared with 2003
Operating earnings totaled $270 million, up 31% from the prior year. The increase was due to the
Merger, offset by narrower spreads and reduced origination volumes reflecting a competitive
operating environment.
Total net revenue increased by 36% to $1.1 billion from the prior year. This increase was due to
the Merger, which more than offset a decline in net interest income, reflecting the competitive
operating environment in 2004, and incremental charges associated with the Firms auto lease
residual exposure.
The following is a brief description of selected terms used by Consumer & Small Business Banking.
|
|
Personal bankers Retail branch office personnel who acquire, retain and expand new and
existing customer relationships by assessing customer needs and recommending and selling
appropriate banking products and services. |
|
|
|
Investment sales representatives Licensed retail branch sales personnel, assigned to support
several branches, who assist with the sale of investment products including college planning
accounts, mutual funds, annuities and retirement accounts. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
43 |
Managements discussion and analysis
JPMorgan Chase & Co.
The Provision for credit losses totaled $210 million, up 2% from the prior year. The increase
was due to the Merger but was largely offset by a lower Provision for credit losses, reflecting
favorable credit trends.
Noninterest expense increased by 68% to $490 million, largely due to the Merger.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios and |
|
|
|
|
|
|
|
|
|
where otherwise noted) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
End-of-period loans and lease related assets
Loans outstanding |
|
$ |
44.7 |
|
|
$ |
54.6 |
|
|
$ |
33.7 |
|
Lease related assets(b) |
|
|
5.2 |
|
|
|
8.0 |
|
|
|
9.5 |
|
|
Total end-of-period loans and lease
related assets |
|
|
49.9 |
|
|
|
62.6 |
|
|
|
43.2 |
|
Average loans and lease related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding(c) |
|
$ |
48.5 |
|
|
$ |
44.3 |
|
|
$ |
32.0 |
|
Lease related assets(d) |
|
|
6.6 |
|
|
|
9.0 |
|
|
|
9.7 |
|
|
Total average loans and lease
related assets(c)(d) |
|
|
55.1 |
|
|
|
53.3 |
|
|
|
41.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overhead ratio |
|
|
51 |
% |
|
|
43 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate |
|
|
1.65 |
% |
|
|
1.55 |
% |
|
|
1.42 |
% |
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
257 |
|
|
$ |
219 |
|
|
$ |
130 |
|
Lease receivables(d) |
|
|
20 |
|
|
|
44 |
|
|
|
41 |
|
|
Total net charge-offs |
|
|
277 |
|
|
|
263 |
|
|
|
171 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Loans(c) |
|
|
0.57 |
% |
|
|
0.52 |
% |
|
|
0.43 |
% |
Lease receivables |
|
|
0.32 |
|
|
|
0.49 |
|
|
|
0.42 |
|
Total net charge-off rate(c) |
|
|
0.54 |
|
|
|
0.52 |
|
|
|
0.43 |
|
Nonperforming assets |
|
$ |
237 |
|
|
$ |
242 |
|
|
$ |
157 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Includes operating lease-related assets of $0.9 billion for 2005. Balances prior to January 1,
2005, were insignificant. |
(c) |
|
Average loans include loans held for sale of $3.5 billion, $2.3 billion and $1.8 billion for,
2005, 2004 and 2003, respectively. These are not included in the net charge-off rate. |
(d) |
|
Includes operating lease-related assets of $0.4 billion for 2005. Balances prior to January 1,
2005, were insignificant. These are not included in the net charge-off rate. |
Insurance
Insurance is a provider of financial protection products and services, including life
insurance, annuities and debt protection. Products and services are distributed through both
internal lines of business and external markets. On February 7, 2006, the Firm signed a definitive
agreement to sell its life insurance and annuity underwriting business.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Total net revenue |
|
$ |
644 |
|
|
$ |
393 |
|
|
$ |
115 |
|
Noninterest expense |
|
|
520 |
|
|
|
317 |
|
|
|
92 |
|
Operating earnings |
|
|
79 |
|
|
|
48 |
|
|
|
13 |
|
Memo: Consolidated gross
insurance-related revenue(b) |
|
|
1,642 |
|
|
|
1,191 |
|
|
|
611 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Includes
revenue reported in the results of other businesses. |
2005 compared with 2004
Operating earnings totaled $79 million, an increase of $31 million from the prior year, on net
revenues of $644 million. The increase was due primarily to the Merger. Results also reflected an
increase in proprietary annuity sales commissions paid and lower expenses from merger savings and
other efficiencies.
2004 compared with 2003
Operating earnings totaled $48 million on Total net revenue of $393 million in 2004. The increases
in Total net revenue and Noninterest expense over the prior year were due almost entirely to the
Merger.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except where otherwise noted) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Business metrics ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets |
|
$ |
7,767 |
|
|
$ |
7,368 |
|
|
$ |
1,559 |
|
Policy loans |
|
|
388 |
|
|
|
397 |
|
|
|
|
|
Insurance policy and claims reserves |
|
|
7,774 |
|
|
|
7,279 |
|
|
|
1,096 |
|
Term life sales first year annualized
premiums |
|
|
60 |
|
|
|
28 |
|
|
|
|
|
Term life premium revenues |
|
|
477 |
|
|
|
234 |
|
|
|
|
|
Proprietary annuity sales |
|
|
706 |
|
|
|
208 |
|
|
|
548 |
|
Number of policies in force direct/assumed
(in thousands) |
|
|
2,441 |
|
|
|
2,611 |
|
|
|
631 |
|
Insurance in force direct/assumed |
|
$ |
282,903 |
|
|
$ |
277,827 |
|
|
$ |
31,992 |
|
Insurance in force retained |
|
|
87,753 |
|
|
|
80,691 |
|
|
|
31,992 |
|
A.M. Best rating |
|
|
A |
|
|
|
A |
|
|
|
A |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The following is a brief description of selected business metrics within Insurance.
|
|
Proprietary annuity sales represent annuity contracts marketed through and issued by subsidiaries
of the Firm. |
|
|
|
Insurance in force direct/assumed includes the aggregate face amount of insurance policies
directly underwritten and assumed through reinsurance. |
|
|
|
Insurance in force retained includes the aggregate face amounts of insurance policies directly
underwritten and assumed through reinsurance, after reduction for face amounts ceded to reinsurers. |
|
|
|
|
|
|
44
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Card Services is one of the largest issuers of credit cards in the United States, with more
than 110 million cards in circulation, and is the largest merchant acquirer. CS offers a wide
variety of products to satisfy the needs of its cardmembers, including cards issued on behalf of
many well-known partners, such as major airlines, hotels, universities, retailers and other
financial institutions.
JPMorgan Chase uses the concept of managed receivables to evaluate the credit performance of the
underlying credit card loans, both sold and not sold: as the same borrower is continuing to use the
credit card for ongoing charges, a borrowers credit performance will affect both the receivables
sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables,
JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to
disclose the credit performance (such as net charge-off rates) of the entire managed credit card
portfolio.
Operating results exclude the impact of credit card securitizations on revenue, the Provision for
credit losses, net charge-offs and receivables. Securitization does not change reported Net income
versus operating earnings; however, it does affect the classification of items on the Consolidated
statements of income.
Selected income statement data managed basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a)(b) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management,
administration and commissions |
|
$ |
|
|
|
$ |
75 |
|
|
$ |
108 |
|
Credit card income |
|
|
3,351 |
|
|
|
2,179 |
|
|
|
930 |
|
Other income |
|
|
212 |
|
|
|
117 |
|
|
|
54 |
|
|
Noninterest revenue |
|
|
3,563 |
|
|
|
2,371 |
|
|
|
1,092 |
|
Net interest income |
|
|
11,803 |
|
|
|
8,374 |
|
|
|
5,052 |
|
|
Total net revenue |
|
|
15,366 |
|
|
|
10,745 |
|
|
|
6,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses(c) |
|
|
7,346 |
|
|
|
4,851 |
|
|
|
2,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
1,081 |
|
|
|
893 |
|
|
|
582 |
|
Noncompensation expense |
|
|
3,170 |
|
|
|
2,485 |
|
|
|
1,336 |
|
Amortization of intangibles |
|
|
748 |
|
|
|
505 |
|
|
|
260 |
|
|
Total noninterest expense |
|
|
4,999 |
|
|
|
3,883 |
|
|
|
2,178 |
|
|
Operating earnings before
income tax expense |
|
|
3,021 |
|
|
|
2,011 |
|
|
|
1,062 |
|
Income tax expense |
|
|
1,114 |
|
|
|
737 |
|
|
|
379 |
|
|
Operating earnings |
|
$ |
1,907 |
|
|
$ |
1,274 |
|
|
$ |
683 |
|
|
Memo: Net securitization
gains (amortization) |
|
$ |
56 |
|
|
$ |
(8 |
) |
|
$ |
1 |
|
Financial metrics |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
16 |
% |
|
|
17 |
% |
|
|
20 |
% |
Overhead ratio |
|
|
33 |
|
|
|
36 |
|
|
|
35 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
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, Noninterest expense and
pre-tax earnings have been reduced to reflect the deconsolidation of Paymentech. There is no impact
to operating earnings. |
(c) |
|
2005 includes a $100 million special provision related to Hurricane Katrina. |
2005 compared with 2004
Operating earnings of $1.9 billion were 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 partially offset by the
impact of increased bankruptcies.
Net revenue was $15.4 billion, up $4.6 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 partially offset by narrower loan spreads and the
reversal of revenue related to increased bankruptcies. Noninterest revenue of $3.6 billion was up
$1.2 billion, or 50%, due to the Merger and higher interchange income from higher charge volume,
partially offset by higher volume-driven payments to partners, higher expense related to rewards
programs and the impact of the deconsolidation of Paymentech.
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 the new 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
partially offset 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 $5.0 billion increased by $1.1 billion, or 29%, primarily due to the Merger,
which included the acquisition of a private label portfolio. Merger savings, including lower
processing and compensation costs and the impact of the deconsolidation of Paymentech, were
partially offset by higher spending on marketing.
2004 compared with 2003
Operating earnings of $1.3 billion increased by $591 million compared with the prior year,
primarily due to the Merger. In addition, earnings benefited from higher loan balances and charge
volume, partially offset by a higher Provision for credit losses and higher expenses.
Total net revenue of $10.7 billion increased by $4.6 billion. Net interest income of $8.4 billion
increased by $3.3 billion, primarily due to the Merger and higher loan balances. Noninterest
revenue of $2.4 billion increased by $1.3 billion, primarily due to the Merger and increased
interchange income resulting from higher charge-off volume. These factors were partially offset by
higher volume-driven payments to partners, reflecting the sharing of income and increased rewards
expense.
The Provision for credit losses of $4.9 billion increased by $1.9 billion, primarily due to the
Merger and growth in credit card receivables. Credit ratios remained strong, benefiting from
reduced contractual and bankruptcy charge-offs. The net charge-off ratio was 5.27%. The 30-day
delinquency ratio was 3.70%.
Noninterest expense of $3.9 billion increased by $1.7 billion, primarily related to the Merger. In
addition, expenses increased due to higher marketing expenses and volume-based processing expenses,
partially offset by lower compensation expenses.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
45 |
Managements discussion and analysis
JPMorgan Chase & Co.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except headcount, ratios |
|
|
|
|
|
|
|
|
|
and where otherwise noted) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
% of average managed outstandings: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8.65 |
% |
|
|
9.16 |
% |
|
|
9.95 |
% |
Provision for credit losses |
|
|
5.39 |
|
|
|
5.31 |
|
|
|
5.72 |
|
Noninterest revenue |
|
|
2.61 |
|
|
|
2.59 |
|
|
|
2.15 |
|
Risk adjusted margin(b) |
|
|
5.88 |
|
|
|
6.45 |
|
|
|
6.38 |
|
Noninterest expense |
|
|
3.67 |
|
|
|
4.25 |
|
|
|
4.29 |
|
Pre-tax income (ROO) |
|
|
2.21 |
|
|
|
2.20 |
|
|
|
2.09 |
|
Operating earnings |
|
|
1.40 |
|
|
|
1.39 |
|
|
|
1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Charge volume (in billions) |
|
$ |
301.9 |
|
|
$ |
193.6 |
|
|
$ |
88.2 |
|
Net accounts opened (in thousands) |
|
|
21,056 |
|
|
|
7,523 |
|
|
|
4,177 |
|
Credit cards issued (in thousands) |
|
|
110,439 |
|
|
|
94,285 |
|
|
|
35,103 |
|
Number of registered
Internet customers (in millions) |
|
|
14.6 |
|
|
|
13.6 |
|
|
|
3.7 |
|
Merchant
acquiring business(c)
Bank card volume (in billions) |
|
$ |
563.1 |
|
|
$ |
396.2 |
|
|
$ |
261.2 |
|
Total transactions (in millions)(d) |
|
|
15,499 |
|
|
|
9,049 |
|
|
|
4,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
71,738 |
|
|
$ |
64,575 |
|
|
$ |
17,426 |
|
Securitized loans |
|
|
70,527 |
|
|
|
70,795 |
|
|
|
34,856 |
|
|
Managed loans |
|
$ |
142,265 |
|
|
$ |
135,370 |
|
|
$ |
52,282 |
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Managed assets |
|
$ |
141,933 |
|
|
$ |
94,741 |
|
|
$ |
51,406 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
67,334 |
|
|
$ |
38,842 |
|
|
$ |
17,604 |
|
Securitized loans |
|
|
69,055 |
|
|
|
52,590 |
|
|
|
33,169 |
|
|
Managed loans |
|
$ |
136,389 |
|
|
$ |
91,432 |
|
|
$ |
50,773 |
|
|
Equity |
|
|
11,800 |
|
|
|
7,608 |
|
|
|
3,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
18,629 |
|
|
|
19,598 |
|
|
|
10,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
7,100 |
|
|
$ |
4,821 |
|
|
$ |
2,996 |
|
Managed net charge-off rate |
|
|
5.21 |
% |
|
|
5.27 |
% |
|
|
5.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency ratios |
|
|
|
|
|
|
|
|
|
|
|
|
30+ days |
|
|
2.79 |
% |
|
|
3.70 |
% |
|
|
4.68 |
% |
90+ days |
|
|
1.27 |
|
|
|
1.72 |
|
|
|
2.19 |
|
Allowance for loan losses |
|
$ |
3,274 |
|
|
$ |
2,994 |
|
|
$ |
1,225 |
|
Allowance for loan losses to
period-end loans |
|
|
4.56 |
% |
|
|
4.64 |
% |
|
|
7.03 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Represents Total net revenue less Provision for credit losses. |
(c) |
|
Represents 100% of the merchant acquiring business. |
(d) |
|
Prior periods have been restated to conform methodologies following the integration of Chase
Merchant Services and Paymentech merchant processing businesses. |
The financial information presented below reconciles reported basis and managed basis to
disclose the effect of securitizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
6,069 |
|
|
$ |
4,446 |
|
|
$ |
2,309 |
|
Securitization adjustments |
|
|
(2,718 |
) |
|
|
(2,267 |
) |
|
|
(1,379 |
) |
|
Managed credit card income |
|
$ |
3,351 |
|
|
$ |
2,179 |
|
|
$ |
930 |
|
|
Other income
Reported data for the period |
|
$ |
212 |
|
|
$ |
203 |
|
|
$ |
125 |
|
Securitization adjustments |
|
|
|
|
|
|
(86 |
) |
|
|
(71 |
) |
|
Managed other income |
|
$ |
212 |
|
|
$ |
117 |
|
|
$ |
54 |
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
5,309 |
|
|
$ |
3,123 |
|
|
$ |
1,732 |
|
Securitization adjustments |
|
|
6,494 |
|
|
|
5,251 |
|
|
|
3,320 |
|
|
Managed net interest income |
|
$ |
11,803 |
|
|
$ |
8,374 |
|
|
$ |
5,052 |
|
|
Total net revenue(b) |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
11,590 |
|
|
$ |
7,847 |
|
|
$ |
4,274 |
|
Securitization adjustments |
|
|
3,776 |
|
|
|
2,898 |
|
|
|
1,870 |
|
|
Managed total net revenue |
|
$ |
15,366 |
|
|
$ |
10,745 |
|
|
$ |
6,144 |
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period(c) |
|
$ |
3,570 |
|
|
$ |
1,953 |
|
|
$ |
1,034 |
|
Securitization adjustments |
|
|
3,776 |
|
|
|
2,898 |
|
|
|
1,870 |
|
|
Managed provision for credit losses |
|
$ |
7,346 |
|
|
$ |
4,851 |
|
|
$ |
2,904 |
|
|
Balance sheet average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
74,753 |
|
|
$ |
43,657 |
|
|
$ |
19,041 |
|
Securitization adjustments |
|
|
67,180 |
|
|
|
51,084 |
|
|
|
32,365 |
|
|
Managed average assets |
|
$ |
141,933 |
|
|
$ |
94,741 |
|
|
$ |
51,406 |
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Reported net charge-offs data
for the period |
|
$ |
3,324 |
|
|
$ |
1,923 |
|
|
$ |
1,126 |
|
Securitization adjustments |
|
|
3,776 |
|
|
|
2,898 |
|
|
|
1,870 |
|
|
Managed net charge-offs |
|
$ |
7,100 |
|
|
$ |
4,821 |
|
|
$ |
2,996 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Includes
noninterest revenue and Net interest income. |
(c) |
|
2005 includes a $100 million special provision related to Hurricane Katrina. |
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, portfolio 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 the merchants. |
|
|
|
Total transactions Represents the number of transactions and authorizations processed for the
merchants. |
|
|
|
|
|
|
46
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Commercial Banking serves more than 25,000 clients, including corporations, municipalities,
financial institutions and not-for-profit entities with annual revenues generally ranging from $10 million to $2 billion. While
most Middle Market clients are within the Retail Financial Services footprint, CB also covers
larger corporations, as well as local governments and financial institutions on a national basis.
CB is a market leader with superior client penetration across the businesses it serves. Local
market presence, coupled with industry expertise and excellent client service and risk management,
enable CB to offer superior financial advice. Partnership with other JPMorgan Chase businesses
positions CB to deliver broad product capabilities including lending, treasury services,
investment banking, and asset and wealth management and meet its clients financial needs.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
575 |
|
|
$ |
441 |
|
|
$ |
301 |
|
Asset management, administration
and commissions |
|
|
60 |
|
|
|
32 |
|
|
|
19 |
|
Other income(b) |
|
|
351 |
|
|
|
209 |
|
|
|
73 |
|
|
Noninterest revenue |
|
|
986 |
|
|
|
682 |
|
|
|
393 |
|
Net interest income |
|
|
2,610 |
|
|
|
1,692 |
|
|
|
959 |
|
|
Total net revenue |
|
|
3,596 |
|
|
|
2,374 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses(c) |
|
|
73 |
|
|
|
41 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
661 |
|
|
|
465 |
|
|
|
285 |
|
Noncompensation expense |
|
|
1,146 |
|
|
|
843 |
|
|
|
534 |
|
Amortization of intangibles |
|
|
65 |
|
|
|
35 |
|
|
|
3 |
|
|
Total noninterest expense |
|
|
1,872 |
|
|
|
1,343 |
|
|
|
822 |
|
|
Operating earnings before income
tax expense |
|
|
1,651 |
|
|
|
990 |
|
|
|
524 |
|
Income tax expense |
|
|
644 |
|
|
|
382 |
|
|
|
217 |
|
|
Operating earnings |
|
$ |
1,007 |
|
|
$ |
608 |
|
|
$ |
307 |
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
30 |
% |
|
|
29 |
% |
|
|
29 |
% |
ROA |
|
|
1.78 |
|
|
|
1.67 |
|
|
|
1.87 |
|
Overhead ratio |
|
|
52 |
|
|
|
57 |
|
|
|
61 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
IB-related and commercial card revenues are included in Other income. |
(c) |
|
2005 includes a $35 million special provision related to Hurricane Katrina. |
Commercial Banking operates in 10 of the top 15 major U.S. metropolitan areas and is divided
into three customer segments: Middle Market Banking, Mid-Corporate Banking and Real Estate. General
coverage for corporate clients is provided by Middle Market Banking, which covers clients with
annual revenues generally up to $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, serves investors in, and
developers of, for-sale housing, multifamily rental, retail, office, and industrial properties. In
addition to these
three customer segments, Commercial Banking offers several products to the Firms entire customer
base: Chase Business Credit, the #1 asset-based lender for 2005, provides asset-based financing,
syndications, and collateral analysis, and Chase Equipment Leasing offers a variety of equipment
finance and leasing products, with specialties in aircraft finance, public sector, and information
technology. Given this structure, Commercial Banking manages a customer base and loan portfolio
that is highly diversified across a broad range of industries and geographic locations.
2005 compared with 2004
Operating earnings of $1.0 billion were up $399 million from the prior year, primarily due to the
Merger.
Net revenue of $3.6 billion increased by $1.2 billion, or 51%, primarily as a result of the Merger.
In addition to the overall increase from the Merger, Net interest income of $2.6 billion was
positively affected by wider spreads on higher volume related to liability balances and increased
loans, partially offset by narrower loan spreads. Noninterest revenue of $986 million was lower due
to a decline in deposit-related fees due to higher interest rates, partially offset by increased
investment banking revenue.
Each business within Commercial Banking demonstrated revenue growth over the prior year, primarily
due to the Merger. Middle Market revenue was $2.4 billion, an increase of $870 million over the
prior year; Mid-Corporate Banking revenue was $548 million, an increase of $181 million; and Real
Estate revenue was $534 million, up $166 million. 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, down $255 million.
Noninterest expense of $1.9 billion increased by $529 million, or 39%, primarily due to the Merger
and to an increase in allocated unit costs for Treasury Services products.
2004 compared with 2003
Operating earnings were $608 million, an increase of 98%, primarily due to the Merger.
Total net revenue was $2.4 billion, an increase of 76%, primarily due to the Merger. In addition to
the overall increase related to the Merger, Net interest income of $1.7 billion was positively
affected by higher liability balances, partially offset by lower lending-related revenue.
Noninterest revenue of $682 million was positively affected by higher investment banking fees and
higher gains on the sale of loans and securities acquired in satisfaction of debt, partially offset
by lower deposit-related fees, which often decline as interest rates rise.
The Provision for credit losses was $41 million, an increase of $35 million, primarily due to the
Merger. Excluding the impact of the Merger, the provision was higher in 2004. Lower net charge-offs
in 2004 were partially offset by smaller reductions in the allowance for credit losses in 2004
relative to 2003.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
47 |
Managements discussion and analysis
JPMorgan Chase & Co.
Noninterest expense was $1.3 billion, an increase of $521 million, or 63%, primarily related to
the Merger.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue by product: |
|
|
|
|
|
|
|
|
|
|
|
|
Lending |
|
$ |
1,076 |
|
|
$ |
764 |
|
|
$ |
396 |
|
Treasury services |
|
|
2,299 |
|
|
|
1,467 |
|
|
|
896 |
|
Investment banking |
|
|
213 |
|
|
|
120 |
|
|
|
66 |
|
Other |
|
|
8 |
|
|
|
23 |
|
|
|
(6 |
) |
|
Total Commercial Banking revenue |
|
|
3,596 |
|
|
|
2,374 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
2,369 |
|
|
$ |
1,499 |
|
|
$ |
772 |
|
Mid-Corporate Banking |
|
|
548 |
|
|
|
367 |
|
|
|
194 |
|
Real Estate |
|
|
534 |
|
|
|
368 |
|
|
|
206 |
|
Other |
|
|
145 |
|
|
|
140 |
|
|
|
180 |
|
|
Total Commercial Banking revenue |
|
|
3,596 |
|
|
|
2,374 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
56,561 |
|
|
$ |
36,435 |
|
|
$ |
16,460 |
|
Loans and leases |
|
|
51,797 |
|
|
|
32,417 |
|
|
|
14,049 |
|
Liability balances(b) |
|
|
73,395 |
|
|
|
52,824 |
|
|
|
32,880 |
|
Equity |
|
|
3,400 |
|
|
|
2,093 |
|
|
|
1,059 |
|
|
Average loans by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle market |
|
$ |
31,156 |
|
|
$ |
17,471 |
|
|
$ |
5,609 |
|
Mid-corporate banking |
|
|
6,375 |
|
|
|
4,348 |
|
|
|
2,880 |
|
Real estate |
|
|
10,639 |
|
|
|
7,586 |
|
|
|
2,831 |
|
Other |
|
|
3,627 |
|
|
|
3,012 |
|
|
|
2,729 |
|
|
Total Commercial Banking loans |
|
|
51,797 |
|
|
|
32,417 |
|
|
|
14,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
4,456 |
|
|
|
4,555 |
|
|
|
1,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
26 |
|
|
$ |
61 |
|
|
$ |
76 |
|
Nonperforming loans |
|
|
272 |
|
|
|
527 |
|
|
|
123 |
|
Allowance for loan losses |
|
|
1,392 |
|
|
|
1,322 |
|
|
|
122 |
|
Allowance for lending-related commitments |
|
|
154 |
|
|
|
169 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate |
|
|
0.05 |
% |
|
|
0.19 |
% |
|
|
0.54 |
% |
Allowance for loan losses to average loans |
|
|
2.69 |
|
|
|
4.08 |
|
|
|
0.87 |
|
Allowance for loan losses to
nonperforming loans |
|
|
512 |
|
|
|
251 |
|
|
|
99 |
|
Nonperforming loans to average loans |
|
|
0.53 |
|
|
|
1.63 |
|
|
|
0.88 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Liability
balances include deposits and deposits swept to on-balance sheet liabilities. |
Commercial Banking revenues are comprised of 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 products provide clients with sophisticated capital-raising alternatives, as
well as balance sheet and risk management tools, through:
|
|
Loan syndications |
|
|
|
Investment-grade debt |
|
|
|
Asset-backed securities |
|
|
|
Private placements |
|
|
|
High-yield bonds |
|
|
|
Equity underwriting |
|
|
|
Advisory |
|
|
|
Interest rate derivatives |
|
|
|
Foreign exchange hedges |
|
|
|
|
|
|
48
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Treasury & Securities Services
Treasury & Securities Services is a global leader in providing transaction, investment and
information services to support the needs of corporations, issuers and institutional investors
worldwide. TSS is one of the largest cash management providers in the world and a leading global
custodian. The TS business provides a variety of cash management products, trade finance and
logistics solutions, wholesale card products, and short-term liquidity management tools. The IS
business provides custody, fund services, securities lending, and performance measurement and
execution products. The ITS business provides trustee, depository and administrative services for
debt and equity issuers. TS partners with the Commercial Banking, Consumer & Small Business Banking
and Asset & Wealth Management businesses to serve clients firmwide. As a result, certain TS
revenues are included in other segments results. TSS combined the management of the IS and ITS
businesses under the name WSS to create an integrated franchise which provides custody and investor
services as well as securities clearance and trust services to clients globally. Beginning January
1, 2006, TSS will report results for two divisions: TS and WSS.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
728 |
|
|
$ |
647 |
|
|
$ |
470 |
|
Asset management, administration
and commissions |
|
|
2,908 |
|
|
|
2,445 |
|
|
|
1,903 |
|
Other income |
|
|
543 |
|
|
|
382 |
|
|
|
288 |
|
|
Noninterest revenue |
|
|
4,179 |
|
|
|
3,474 |
|
|
|
2,661 |
|
Net interest income |
|
|
2,062 |
|
|
|
1,383 |
|
|
|
947 |
|
|
Total net revenue |
|
|
6,241 |
|
|
|
4,857 |
|
|
|
3,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
7 |
|
|
|
1 |
|
Credit reimbursement (to) from IB(b) |
|
|
(154 |
) |
|
|
(90 |
) |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
2,061 |
|
|
|
1,629 |
|
|
|
1,257 |
|
Noncompensation expense |
|
|
2,293 |
|
|
|
2,391 |
|
|
|
1,745 |
|
Amortization of intangibles |
|
|
116 |
|
|
|
93 |
|
|
|
26 |
|
|
Total noninterest expense |
|
|
4,470 |
|
|
|
4,113 |
|
|
|
3,028 |
|
|
Operating earnings before income
tax expense |
|
|
1,617 |
|
|
|
647 |
|
|
|
615 |
|
Income tax expense |
|
|
580 |
|
|
|
207 |
|
|
|
193 |
|
|
Operating earnings |
|
$ |
1,037 |
|
|
$ |
440 |
|
|
$ |
422 |
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
55 |
% |
|
|
17 |
% |
|
|
15 |
% |
Overhead ratio |
|
|
72 |
|
|
|
85 |
|
|
|
84 |
|
Pre-tax margin ratio(c) |
|
|
26 |
|
|
|
13 |
|
|
|
17 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio
on behalf of clients shared with TSS. For a further discussion, see Credit reimbursement on page 35
of this Annual Report. |
(c) |
|
Pre-tax margin represents Operating earnings before income tax expense divided by Total net
revenue, which is a comprehensive measure of pre-tax performance and is another basis by which TSS
management evaluates its performance and that of its competitors. Pre-tax margin is an effective measure of TSS earnings, after all operating costs are taken into
consideration.
|
2005 compared with 2004
Operating earnings were $1.0 billion, an increase of $597 million, or 136%. 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.
TSS net revenue of $6.2 billion increased $1.4 billion, or 28%. Net interest income grew to $2.1
billion, up $679 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 $4.2 billion increased by $705 million, or 20%, 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 $11.2 trillion, primarily driven by market value appreciation and new business, along
with growth in wholesale card, securities lending, foreign exchange, trust product, 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.
TS net revenue of $2.6 billion grew by $628 million, Investor Services net revenue of $2.2 billion
grew by $446 million, and Institutional Trust Services net revenue of $1.5 billion grew by $310
million. TSS firmwide net revenue, which includes TS net revenue recorded in other lines of
business, grew to $8.8 billion, up $2.3 billion, or 35%. Treasury Services firmwide net revenue
grew to $5.2 billion, up $1.6 billion, or 43%.
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.
Noninterest expense of $4.5 billion was up $357 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.
2004 compared with 2003
Operating earnings for the year were $440 million, an increase of $18 million, or 4%. Results in
2004 include an after-tax gain of $10 million on the sale of an IS business. Prior-year results
include an after-tax gain of $22 million on the sale of an ITS business. Excluding these one-time
gains, operating earnings would have increased by $30 million, or 8%. Both net revenue and
Noninterest expense increased primarily as a result of the Merger, the acquisition of Bank Ones
Corporate Trust business in November 2003 and the acquisition of Electronic Financial Services
(EFS) in January 2004.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
49 |
Managements discussion and analysis
JPMorgan Chase & Co.
TSS net revenue improved by 35% to $4.9 billion. This revenue growth reflected the benefit of
the Merger, the acquisitions noted above, and improved product revenues across TSS. Net interest
income grew to $1.4 billion from $947 million as a result of average liability balance growth of
46%, to $126 billion, a change in the corporate deposit pricing methodology in 2004 and wider
deposit spreads. Growth in fees and commissions was driven by a 22% increase in assets under
custody to $9.3 trillion as well as new business growth in trade, commercial card, global equity
products, securities lending, fund services, clearing and ACH. Partially offsetting these
improvements were lower deposit-related fees, which often decline as interest rates rise, and a
soft municipal bond market.
TS net revenue grew to $2.0 billion, IS to $1.7 billion and ITS to $1.2 billion. TSS firmwide net
revenue grew by 41% to $6.5 billion. TSS firmwide net revenues include TS net revenues recorded in
other lines of business.
Credit reimbursement to the Investment Bank was $90 million, compared with a credit from the
Investment Bank of $36 million in the prior year, principally due to the Merger and a change in
methodology. TSS is charged a credit reimbursement related to certain exposures managed within the
Investment Bank credit portfolio on behalf of clients shared with TSS.
Noninterest expense totaled $4.1 billion, up from $3.0 billion, reflecting the Merger, the
acquisitions noted above, $155 million of software impairment charges, upfront transition expenses
related to on-boarding new custody and fund accounting clients, and legal and technology-related
expenses.
Treasury & Securities Services firmwide metrics include certain TSS product revenues and liability
balances reported in other lines of business related to customers who are also customers of those
other lines of business. In order to capture the firmwide impact of TS and TSS products and
revenues, management reviews firmwide metrics such as liability balances, revenues and overhead
ratios in assessing financial performance for TSS. Firmwide metrics are necessary, in managements
view, in order to understand the aggregate TSS business.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except headcount and where |
|
|
|
|
|
|
|
|
|
otherwise noted) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services |
|
$ |
2,622 |
|
|
$ |
1,994 |
|
|
$ |
1,200 |
|
Investor Services |
|
|
2,155 |
|
|
|
1,709 |
|
|
|
1,448 |
|
Institutional Trust Services |
|
|
1,464 |
|
|
|
1,154 |
|
|
|
960 |
|
|
Total net revenue |
|
$ |
6,241 |
|
|
$ |
4,857 |
|
|
$ |
3,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Assets under custody (in billions)(b) |
|
$ |
11,249 |
|
|
$ |
9,300 |
|
|
$ |
7,597 |
|
Corporate trust securities
under administration (in billions)(c) |
|
|
6,818 |
|
|
|
6,676 |
|
|
|
6,127 |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
US$ ACH transactions originated (in millions) |
|
|
2,966 |
|
|
|
1,994 |
|
|
NA |
Total US$ clearing volume (in thousands) |
|
|
95,713 |
|
|
|
81,162 |
|
|
NA |
International electronic funds transfer
volume (in thousands)(d) |
|
|
89,537 |
|
|
|
45,654 |
|
|
NA |
Wholesale check volume (in millions) |
|
|
3,856 |
|
|
NA |
|
|
NA |
Wholesale cards issued (in thousands)(e) |
|
|
13,206 |
|
|
|
11,787 |
|
|
NA |
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
26,947 |
|
|
$ |
23,430 |
|
|
$ |
18,379 |
|
Loans |
|
|
10,430 |
|
|
|
7,849 |
|
|
|
6,009 |
|
Liability balances(f) |
|
|
164,305 |
|
|
|
125,712 |
|
|
|
85,994 |
|
Equity |
|
|
1,900 |
|
|
|
2,544 |
|
|
|
2,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
24,484 |
|
|
|
22,612 |
|
|
|
15,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSS firmwide metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services firmwide revenue(g) |
|
$ |
5,224 |
|
|
$ |
3,665 |
|
|
$ |
2,214 |
|
Treasury & Securities Services
firmwide revenue(g) |
|
|
8,843 |
|
|
|
6,528 |
|
|
|
4,622 |
|
Treasury Services firmwide overhead ratio(h) |
|
|
55 |
% |
|
|
62 |
% |
|
|
62 |
% |
Treasury & Securities Services
firmwide overhead ratio(h) |
|
|
62 |
|
|
|
74 |
|
|
|
76 |
|
Treasury Services firmwide liability balances(i) |
|
$ |
139,579 |
|
|
$ |
102,785 |
|
|
$ |
64,819 |
|
Treasury & Securities Services firmwide
liability balances(i) |
|
|
237,699 |
|
|
|
178,536 |
|
|
|
118,873 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
2005 assets under custody include approximately $530 billion of ITS assets under custody that have not been
included previously. At December 31, 2005, approximately 5% of total assets under custody were
trust-related. |
(c) |
|
Corporate trust securities under administration include debt held in trust on behalf of third
parties and debt serviced as agent. |
(d) |
|
International electronic funds transfer includes non-US$ ACH and clearing volume. |
(e) |
|
Wholesale cards issued include domestic commercial card, stored value card, prepaid card, and
government electronic benefit card products. |
(f) |
|
Liability balances include deposits and deposits swept to on-balance sheet liabilities. |
(g) |
|
Firmwide revenue includes TS revenue recorded in the Commercial Banking, Consumer & Small Business
Banking and Asset & Wealth Management businesses (see below) and excludes FX revenues recorded in
the IB for TSS-related FX activity. 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 $382 million,
$320 million and $256 million for the years ended December 31, 2005, 2004 and 2003, respectively. |
(h) |
|
Overhead ratios have been calculated based on 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. |
(i) |
|
Firmwide liability balances include TS liability balances recorded in certain lines of business.
Liability balances associated with TS customers who are also customers of the Commercial Banking
line of business are not included in TS liability balances. |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Treasury Services revenue reported in
Commercial Banking |
|
$ |
2,299 |
|
|
$ |
1,467 |
|
|
$ |
896 |
|
Treasury Services revenue reported in
other lines of business |
|
|
303 |
|
|
|
204 |
|
|
|
118 |
|
|
|
|
|
|
|
|
50
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Asset & Wealth Management
Asset & Wealth Management provides investment advice and management for institutions and
individuals. With Assets under supervision of $1.1 trillion, AWM is one of the largest asset and
wealth managers in the world. AWM serves four distinct client groups through three businesses:
institutions through JPMorgan Asset Management; ultra-high-net-worth clients through the Private
Bank; high-net-worth clients through Private Client Services; and retail clients through JPMorgan
Asset Management. The majority of AWMs client assets are in actively managed portfolios. AWM has
global investment expertise in equities, fixed income, real estate, hedge funds, private equity and
liquidity, including both money market instruments and bank deposits. AWM also provides trust and
estate services to ultra-high-net-worth and high-net-worth clients, and retirement services for
corporations and individuals.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management, administration
and commissions |
|
$ |
4,189 |
|
|
$ |
3,140 |
|
|
$ |
2,258 |
|
Other income |
|
|
394 |
|
|
|
243 |
|
|
|
224 |
|
|
Noninterest revenue |
|
|
4,583 |
|
|
|
3,383 |
|
|
|
2,482 |
|
Net interest income |
|
|
1,081 |
|
|
|
796 |
|
|
|
488 |
|
|
Total net revenue |
|
|
5,664 |
|
|
|
4,179 |
|
|
|
2,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses(b) |
|
|
(56 |
) |
|
|
(14 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
2,179 |
|
|
|
1,579 |
|
|
|
1,213 |
|
Noncompensation expense |
|
|
1,582 |
|
|
|
1,502 |
|
|
|
1,265 |
|
Amortization of intangibles |
|
|
99 |
|
|
|
52 |
|
|
|
8 |
|
|
Total noninterest expense |
|
|
3,860 |
|
|
|
3,133 |
|
|
|
2,486 |
|
|
Operating earnings before
income tax expense |
|
|
1,860 |
|
|
|
1,060 |
|
|
|
449 |
|
Income tax expense |
|
|
644 |
|
|
|
379 |
|
|
|
162 |
|
|
Operating earnings |
|
$ |
1,216 |
|
|
$ |
681 |
|
|
$ |
287 |
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
51 |
% |
|
|
17 |
% |
|
|
5 |
% |
Overhead ratio |
|
|
68 |
|
|
|
75 |
|
|
|
84 |
|
Pre-tax margin ratio(c) |
|
|
33 |
|
|
|
25 |
|
|
|
15 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
2005
includes a $3 million special provision related to Hurricane Katrina. |
|
(c) |
|
Pre-tax margin represents Operating earnings before income tax expense divided by Total net
revenue, which is a comprehensive measure of pre-tax performance and is another basis by which AWM
management evaluates its performance and that of its competitors. Pre-tax margin is an effective
measure of AWMs earnings, after all costs are taken into consideration. |
2005 compared with 2004
Operating earnings of $1.2 billion were up $535 million from the prior year due to the Merger and
increased revenue, partially offset by higher compensation expense.
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 Capital Management 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 client segment revenue of $1.7 billion increased by $135 million. Retail client
segment revenue of $1.5 billion increased by $360 million. Institutional client segment revenue was
up $504 million to $1.4 billion due to the acquisition of a majority interest in Highbridge Capital
Management. Private Client Services client segment revenue grew by $486 million, 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.
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.
2004 compared with 2003
Operating earnings were $681 million, up 137% from the prior year, due largely to the Merger but
also driven by increased revenue and a decrease in the Provision for credit losses; these were
partially offset by higher Compensation expense.
Total net revenue was $4.2 billion, up 41%, primarily due to the Merger. Additionally, fees and
commissions increased due to global equity market appreciation, net asset inflows and the
acquisition of JPMorgan Retirement Plan Services (RPS) in 2003. Fees and commissions also
increased due to an improved product mix, with an increased percentage of assets in higher-yielding
products. Net interest income increased due to deposit and loan growth.
The Provision for credit losses was a benefit of $14 million, a decrease of $49 million, due to an
improvement in credit quality.
Noninterest expense was $3.1 billion, up 26%, due to the Merger, increased Compensation expense and
increased technology and marketing initiatives.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ranking |
|
|
|
|
|
|
|
|
|
data, and where otherwise noted) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue by client segment |
|
|
|
|
|
|
|
|
|
|
|
|
Private bank |
|
$ |
1,689 |
|
|
$ |
1,554 |
|
|
$ |
1,437 |
|
Retail |
|
|
1,544 |
|
|
|
1,184 |
|
|
|
774 |
|
Institutional |
|
|
1,395 |
|
|
|
891 |
|
|
|
681 |
|
Private client services |
|
|
1,036 |
|
|
|
550 |
|
|
|
78 |
|
|
Total net revenue |
|
$ |
5,664 |
|
|
$ |
4,179 |
|
|
$ |
2,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Client advisors |
|
|
1,430 |
|
|
|
1,333 |
|
|
|
651 |
|
Retirement Plan Services participants |
|
|
1,299,000 |
|
|
|
918,000 |
|
|
|
756,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of customer assets in 4 & 5 Star Funds(b) |
|
|
46 |
% |
|
|
48 |
% |
|
|
48 |
% |
% of AUM in 1st and 2nd quartiles:(c) |
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
|
69 |
|
|
|
66 |
|
|
|
57 |
|
3 years |
|
|
68 |
|
|
|
71 |
|
|
|
69 |
|
5 years |
|
|
74 |
|
|
|
68 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
41,599 |
|
|
$ |
37,751 |
|
|
$ |
33,780 |
|
Loans |
|
|
26,610 |
|
|
|
21,545 |
|
|
|
16,678 |
|
Deposits(d) |
|
|
42,123 |
|
|
|
32,431 |
|
|
|
20,576 |
|
Equity |
|
|
2,400 |
|
|
|
3,902 |
|
|
|
5,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
12,127 |
|
|
|
12,287 |
|
|
|
8,520 |
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
51 |
Managements discussion and analysis
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
23 |
|
|
$ |
72 |
|
|
$ |
9 |
|
Nonperforming loans |
|
|
104 |
|
|
|
79 |
|
|
|
173 |
|
Allowance for loan losses |
|
|
132 |
|
|
|
216 |
|
|
|
130 |
|
Allowance for lending-related commitments |
|
|
4 |
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate |
|
|
0.09 |
% |
|
|
0.33 |
% |
|
|
0.05 |
% |
Allowance for loan losses to average loans |
|
|
0.50 |
|
|
|
1.00 |
|
|
|
0.78 |
|
Allowance for loan losses to nonperforming loans |
|
|
127 |
|
|
|
273 |
|
|
|
75 |
|
Nonperforming loans to average loans |
|
|
0.39 |
|
|
|
0.37 |
|
|
|
1.04 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Star
rankings derived from Morningstar and Standard & Poors. |
|
(c) |
|
Quartile rankings sourced from Lipper and Standard & Poors. |
|
(d) |
|
Reflects the transfer in 2005 of certain consumer deposits from Retail Financial Services to
Asset & Wealth Management. |
AWMs client segments are comprised of the following:
Institutional serves large and mid-size corporate and public institutions, endowments and
foundations, and governments globally. AWM offers these institutions comprehensive global
investment services, including investment management across asset classes, pension analytics, asset-liability management, active risk budgeting and overlay strategies.
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.
Retail provides worldwide investment management services and retirement planning and administration
through third-party and direct distribution channels.
Private Client Services offers high-net-worth individuals, families and business owners
comprehensive wealth management solutions that include financial planning, personal trust,
investment and banking products and services.
Assets under supervision
2005 compared with 2004
Assets under supervision (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. Assets under
management (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. 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. Custody, brokerage, administration, and deposits were
$302 billion, down $13 billion due to a $33 billion reduction from the sale of BrownCo.
2004 compared with 2003
Assets under supervision at December 31, 2004, were $1.1 trillion, up 45% from 2003, and Assets
under management were $791 billion, up 41% from the prior year. The increases were primarily the
result of the Merger, as well as market appreciation, net asset inflows and the acquisition of a
majority interest in Highbridge Capital Management. The Firm also has a 43% interest in American
Century Companies, Inc., whose AUM totaled $98 billion and $87 billion at December 31, 2004 and
2003, respectively. Custody, brokerage, administration, and deposits were $315 billion, up 55%, due
to market appreciation, the Merger and net inflows across all products.
|
|
|
|
|
|
|
|
|
Assets under supervision(a) (in billions) |
|
|
|
|
|
|
As of or for the year ended December 31, |
|
2005 |
|
|
2004 |
|
|
Assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
238 |
|
|
$ |
232 |
|
Fixed income |
|
|
165 |
|
|
|
171 |
|
Equities & balanced |
|
|
370 |
|
|
|
326 |
|
Alternatives |
|
|
74 |
|
|
|
62 |
|
|
Total Assets under management |
|
|
847 |
|
|
|
791 |
|
Custody/brokerage/administration/deposits |
|
|
302 |
|
|
|
315 |
|
|
Total Assets under supervision |
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
|
|
|
|
|
|
Assets by client segment |
|
|
|
|
|
|
|
|
Institutional |
|
$ |
481 |
|
|
$ |
466 |
|
Private Bank |
|
|
145 |
|
|
|
139 |
|
Retail |
|
|
169 |
|
|
|
133 |
|
Private Client Services |
|
|
52 |
|
|
|
53 |
|
|
Total Assets under management |
|
$ |
847 |
|
|
$ |
791 |
|
|
Institutional |
|
$ |
484 |
|
|
$ |
487 |
|
Private Bank |
|
|
318 |
|
|
|
304 |
|
Retail |
|
|
245 |
|
|
|
221 |
|
Private Client Services |
|
|
102 |
|
|
|
94 |
|
|
Total Assets under supervision |
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
|
|
|
|
|
|
Assets by geographic region |
|
|
|
|
|
|
|
|
U.S./Canada |
|
$ |
562 |
|
|
$ |
554 |
|
International |
|
|
285 |
|
|
|
237 |
|
|
Total Assets under management |
|
$ |
847 |
|
|
$ |
791 |
|
|
U.S./Canada |
|
$ |
805 |
|
|
$ |
815 |
|
International |
|
|
344 |
|
|
|
291 |
|
|
Total Assets under supervision |
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
|
|
|
|
|
|
Mutual fund assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
182 |
|
|
$ |
183 |
|
Fixed income |
|
|
45 |
|
|
|
41 |
|
Equity |
|
|
150 |
|
|
|
104 |
|
|
Total mutual fund assets |
|
$ |
377 |
|
|
$ |
328 |
|
|
|
|
|
|
|
|
|
|
|
Assets under management rollforward(b) |
|
|
|
|
|
|
|
|
Beginning balance, January 1 |
|
$ |
791 |
|
|
$ |
561 |
|
Flows: |
|
|
|
|
|
|
|
|
Liquidity |
|
|
8 |
|
|
|
3 |
|
Fixed income |
|
|
|
|
|
|
(8 |
) |
Equity, balanced and alternative |
|
|
24 |
|
|
|
14 |
|
Acquisitions /divestitures(c) |
|
|
|
|
|
|
183 |
|
Market/performance/other impacts(d) |
|
|
24 |
|
|
|
38 |
|
|
Ending balance, December 31 |
|
$ |
847 |
|
|
$ |
791 |
|
|
Assets under supervision rollforward(b) |
|
|
|
|
|
|
|
|
Beginning balance, January 1 |
|
$ |
1,106 |
|
|
$ |
764 |
|
Net asset flows |
|
|
49 |
|
|
|
42 |
|
Acquisitions /divestitures(e) |
|
|
(33 |
) |
|
|
221 |
|
Market/performance/other impacts(d) |
|
|
27 |
|
|
|
79 |
|
|
Ending balance, December 31 |
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
(a) |
|
Excludes Assets under management of American Century. |
|
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(c) |
|
Reflects the Merger with Bank One ($176 billion) and the acquisition of a majority interest in
Highbridge Capital Management ($7 billion) in 2004. |
|
(d) |
|
Includes AWMs strategic decision to exit the Institutional fiduciary business ($12 billion) in
2005. |
|
(e) |
|
Reflects the Merger with Bank One ($214 billion) and the acquisition of a majority interest in
Highbridge Capital Management ($7 billion) in 2004, and the sale of BrownCo ($33 billion) in 2005. |
|
|
|
|
|
|
52
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The Corporate sector is comprised of 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, 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.
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
(d) |
|
2003 |
(d) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Securities / private equity gains |
|
$ |
200 |
|
|
$ |
1,786 |
|
|
$ |
1,031 |
|
Other income(b) |
|
|
1,410 |
|
|
|
315 |
|
|
|
303 |
|
|
Noninterest revenue |
|
|
1,610 |
|
|
|
2,101 |
|
|
|
1,334 |
|
Net interest income |
|
|
(2,736 |
) |
|
|
(1,216 |
) |
|
|
(133 |
) |
|
Total net revenue |
|
|
(1,126 |
) |
|
|
885 |
|
|
|
1,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses(c) |
|
|
10 |
|
|
|
(110 |
) |
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
3,151 |
|
|
|
2,426 |
|
|
|
1,893 |
|
Noncompensation expense |
|
|
4,216 |
|
|
|
4,088 |
|
|
|
3,216 |
|
|
Subtotal |
|
|
7,367 |
|
|
|
6,514 |
|
|
|
5,109 |
|
Net expenses allocated to other businesses |
|
|
(5,343 |
) |
|
|
(5,213 |
) |
|
|
(4,580 |
) |
|
Total noninterest expense |
|
|
2,024 |
|
|
|
1,301 |
|
|
|
529 |
|
|
Operating earnings before income
tax expense |
|
|
(3,160 |
) |
|
|
(306 |
) |
|
|
548 |
|
Income tax expense (benefit) |
|
|
(1,429 |
) |
|
|
(367 |
) |
|
|
(120 |
) |
|
Operating earnings (loss) |
|
$ |
(1,731 |
) |
|
$ |
61 |
|
|
$ |
668 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Includes $1.3 billion (pre-tax) gain on the sale of BrownCo in 2005. |
|
(c) |
|
2005 includes a $12 million special provision related to Hurricane Katrina. |
|
(d) |
|
In 2005, the Corporate sectors and the Firms operating results were presented on a
tax-equivalent basis. Prior period results have been restated. This restatement had no impact on
the Corporate sectors or the Firms operating earnings. |
2005 compared with 2004
Operating loss of $1.7 billion declined from earnings of $61 million in the prior year.
Net revenue was a loss of $1.1 billion compared with revenue of $885 million in the prior year.
Noninterest revenue of $1.6 billion decreased by $491 million and included securities losses of
$1.5 billion due to the 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 a further discussion on the sale of BrownCo, see Note 2 on page 93 of
this Annual Report.
Net interest income was a loss of $2.7 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.
Noninterest expense was $2.0 billion, up $723 million, or 56%, from the prior year, primarily due
to the Merger and the cost of the accelerated vesting of certain employee stock options. These
increases were offset partially by merger-related savings and other expense efficiencies.
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.
2004 compared with 2003
Operating earnings were $61 million, down from earnings of $668 million in the prior year.
Noninterest revenue was $2.1 billion, up 57% from the prior year. The primary component of
noninterest revenue is Securities/private equity gains, which totaled $1.8 billion, up 73% from the
prior year. The increase was a result of net gains in the Private Equity portfolio of $1.4 billion
in 2004 compared with $27 million in net gains in 2003. Partially offsetting these gains were lower
investment securities gains in Treasury.
Net interest income was a loss of $1.2 billion compared with a loss of $133 million in the prior
year. The increased loss was driven primarily by actions and policies adopted in conjunction with
the Merger.
Noninterest expense of $1.3 billion was up $772 million from the prior year due to the Merger. The
Merger resulted in higher gross compensation and noncompensation expenses. Allocations of
compensation and noncompensation expenses to the businesses were lower than the gross expense
increase due to certain policies adopted in conjunction with the Merger, which retain in Corporate
overhead costs that would not be incurred by the lines of business if operated on a stand-alone
basis, and costs in excess of the market price for services provided by the corporate staff and
technology and operations areas.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions, except headcount) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments(b) |
|
$ |
16,808 |
|
|
$ |
14,590 |
|
|
$ |
4,076 |
|
Investment portfolio(c) |
|
|
54,481 |
|
|
|
65,985 |
|
|
|
65,113 |
|
Goodwill(d) |
|
|
43,475 |
|
|
|
21,773 |
|
|
|
293 |
|
Total assets |
|
|
160,720 |
|
|
|
162,234 |
|
|
|
104,395 |
|
|
Headcount |
|
|
28,384 |
|
|
|
24,806 |
|
|
|
13,391 |
|
|
Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses) |
|
$ |
(1,502 |
) |
|
$ |
347 |
|
|
$ |
999 |
|
Investment portfolio (average) |
|
|
46,520 |
|
|
|
57,776 |
|
|
|
56,299 |
|
Investment portfolio (ending) |
|
|
30,741 |
|
|
|
64,949 |
|
|
|
45,811 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Represents
Federal funds sold, Securities borrowed, Trading assets debt and equity instruments and Trading
assets derivative receivables. |
|
(c) |
|
Represents Investment securities and private equity investments. |
|
(d) |
|
As of July 1, 2004, the Firm revised the goodwill allocation methodology to retain all goodwill
in Corporate. Effective with the first quarter of 2006, the Firm will refine its methodology to
allocate goodwill to the lines of business. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
53 |
Managements discussion and analysis
JPMorgan Chase & Co.
Private equity
2005 compared with 2004
Private Equitys operating earnings for the year were $821 million compared with $602 million in
the prior year. This improvement in earnings reflected an increase of $262 million in private
equity gains to $1.7 billion, a 15% reduction in noninterest expenses and a $62 million decline in
net funding costs of carrying portfolio investments. Private equity gains benefited from continued
favorable markets for investment sales and recapitalizations, resulting in nearly $2 billion of
realized gains. 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.
2004 compared with 2003
Private Equitys operating earnings for the year totaled $602 million compared with a loss of $290
million in 2003. This improvement reflected a $1.4 billion increase in total private equity gains.
In 2004, markets improved for investment sales, resulting in $1.4 billion of realized gains on
direct investments, compared with realized gains of $535 million in 2003. Net write-downs on direct
investments were $192 million in 2004 compared with net write-downs of $404 million in 2003, as
valuations continued to stabilize amid positive market conditions.
The carrying value of the Private Equity portfolio at December 31, 2004, was $7.5 billion, an
increase of $247 million from December 31, 2003. The increase was primarily the result of the
acquisition of ONE Equity Partners as a result of the Merger. Excluding ONE Equity Partners, the
portfolio declined as a result of sales of investments, which was consistent with managements
intention to reduce over time the capital committed to private equity. Sales of third-party fund
investments resulted in a decrease in carrying value of $458 million, to $641 million at December
31, 2004, compared with $1.1 billion at December 31, 2003.
Selected income statement and
balance sheet data Private equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Private equity gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments
Realized gains |
|
$ |
1,969 |
|
|
$ |
1,423 |
|
|
$ |
535 |
|
Write-ups / (write-downs) |
|
|
(72 |
) |
|
|
(192 |
) |
|
|
(404 |
) |
Mark-to-market gains (losses) |
|
|
(338 |
) |
|
|
164 |
|
|
|
215 |
|
|
Total direct investments |
|
|
1,559 |
|
|
|
1,395 |
|
|
|
346 |
|
Third-party fund investments |
|
|
132 |
|
|
|
34 |
|
|
|
(319 |
) |
|
Total private equity gains (losses) |
|
|
1,691 |
|
|
|
1,429 |
|
|
|
27 |
|
Other income |
|
|
40 |
|
|
|
53 |
|
|
|
47 |
|
Net interest income |
|
|
(209 |
) |
|
|
(271 |
) |
|
|
(264 |
) |
|
Total net revenue |
|
|
1,522 |
|
|
|
1,211 |
|
|
|
(190 |
) |
Total noninterest expense |
|
|
244 |
|
|
|
288 |
|
|
|
268 |
|
|
Operating earnings (loss) before income
tax expense |
|
|
1,278 |
|
|
|
923 |
|
|
|
(458 |
) |
Income tax expense |
|
|
457 |
|
|
|
321 |
|
|
|
(168 |
) |
|
Operating earnings (loss) |
|
$ |
821 |
|
|
$ |
602 |
|
|
$ |
(290 |
) |
|
Private equity portfolio information(b) |
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments |
|
|
|
|
|
|
|
|
|
|
|
|
Public securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
479 |
|
|
$ |
1,170 |
|
|
$ |
643 |
|
Cost |
|
|
403 |
|
|
|
744 |
|
|
|
451 |
|
Quoted public value |
|
|
683 |
|
|
|
1,758 |
|
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private direct securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
5,028 |
|
|
|
5,686 |
|
|
|
5,508 |
|
Cost |
|
|
6,463 |
|
|
|
7,178 |
|
|
|
6,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party fund investments |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
669 |
|
|
|
641 |
|
|
|
1,099 |
|
Cost |
|
|
1,003 |
|
|
|
1,042 |
|
|
|
1,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private equity portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
6,176 |
|
|
$ |
7,497 |
|
|
$ |
7,250 |
|
Cost |
|
$ |
7,869 |
|
|
$ |
8,964 |
|
|
$ |
9,147 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
For further
information on the Firms policies regarding the valuation of the private equity portfolio, see
Note 9 on pages 103105 of this Annual Report. |
|
|
|
|
|
|
54
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Selected balance sheet data
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
36,670 |
|
|
$ |
35,168 |
|
Deposits with banks and Federal funds sold |
|
|
26,072 |
|
|
|
28,958 |
|
Securities purchased under resale agreements
and Securities borrowed |
|
|
204,174 |
|
|
|
141,504 |
|
Trading assets debt and equity instruments |
|
|
248,590 |
|
|
|
222,832 |
|
Trading assets derivative receivables |
|
|
49,787 |
|
|
|
65,982 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
47,523 |
|
|
|
94,402 |
|
Held-to-maturity |
|
|
77 |
|
|
|
110 |
|
Loans, net of allowance for loan losses |
|
|
412,058 |
|
|
|
394,794 |
|
Other receivables |
|
|
27,643 |
|
|
|
31,086 |
|
Goodwill and other intangible assets |
|
|
58,180 |
|
|
|
57,887 |
|
All other assets |
|
|
88,168 |
|
|
|
84,525 |
|
|
Total assets |
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
554,991 |
|
|
$ |
521,456 |
|
Securities sold under repurchase agreements
and securities lent |
|
|
117,124 |
|
|
|
112,347 |
|
Trading liabilities debt and equity instruments |
|
|
94,157 |
|
|
|
87,942 |
|
Trading liabilities derivative payables |
|
|
51,773 |
|
|
|
63,265 |
|
Long-term debt and capital debt securities |
|
|
119,886 |
|
|
|
105,718 |
|
All other liabilities |
|
|
153,800 |
|
|
|
160,867 |
|
|
Total liabilities |
|
|
1,091,731 |
|
|
|
1,051,595 |
|
Stockholders equity |
|
|
107,211 |
|
|
|
105,653 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
Securities purchased under resale agreements and Securities sold under repurchase agreements
The increase in Securities purchased under resale agreements was due primarily to growth in
client-driven financing activities in North America and Europe.
Trading assets and liabilities debt and equity instruments
The Firms debt and equity trading instruments consist primarily of fixed income securities
(including government and corporate debt) and equity and convertible cash instruments used for both
market-making and proprietary risk-taking activities. The increase over December 31, 2004, was
primarily due to growth in client-driven market-making activities across interest rate, credit and
equity markets. For additional information, refer to Note 3 on page 94 of this Annual Report.
Trading assets and liabilities derivative receivables and payables
The Firm uses various interest rate, foreign exchange, equity, credit and commodity derivatives for
market-making, proprietary risk-taking and risk management purposes. The decline from December 31,
2004, was primarily due to the appreciation of the U.S. dollar and, to a lesser extent, higher
interest rates, partially offset by increased commodity trading activity and rising commodity
prices. For additional information, refer to Credit risk management
and Note 3 on pages 6374 and
94, respectively, of this Annual Report.
Securities
The AFS portfolio declined by $46.9 billion from December 31, 2004, primarily due to securities
sales (as a result of managements decision to reposition the Treasury investment portfolio to
manage exposure to interest rates) and maturities, which more than offset purchases. For additional
information related to securities, refer to the Corporate segment discussion and to Note 9 on pages
5354 and 103105, respectively, of this Annual Report.
Loans
The $17 billion increase in gross loans was due primarily to an increase of $15 billion in the
wholesale portfolio, primarily from the IB, reflecting higher balances of loans held-for-sale
(HFS) related to securitization and syndication activities, and growth in the IB Credit
Portfolio. Wholesale HFS loans were $18 billion as of December 31, 2005, compared with $6 billion
as of December 31, 2004. For consumer loans, growth in consumer real estate (primarily home equity
loans) and credit card loans was offset largely by a decline in the auto portfolio. The increase in
credit card loans primarily reflected growth from new account originations and the acquisition of
$1.5 billion of Sears Canada loans on the balance sheet. The decline in the auto portfolio
primarily reflected a difficult auto lending market in 2005, $3.8 billion of securitizations and
was also the result of a strategic review of the portfolio in 2004 that led to the decisions to
de-emphasize vehicle leasing and sell a $2 billion recreational vehicle portfolio. For a more
detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk
management on pages 6374 of this Annual Report.
Goodwill and Other intangible assets
The $293 million increase in Goodwill and Other intangible assets primarily resulted from higher
MSRs due to growth in the servicing portfolio as well as an overall increase in the valuation from
improved market conditions; the business partnership with Cazenove; the acquisition of the Sears
Canada credit card business; and the Neovest and Vastera acquisitions. Partially offsetting the
increase were declines from the amortization of purchased credit card relationships and core
deposit intangibles and the deconsolidation of Paymentech. For additional information, see Note 15
on pages 114116 of this Annual Report.
Deposits
Deposits increased by 6% from December 31, 2004. Retail deposits increased, reflecting growth from
new account acquisitions and the ongoing expansion of the retail branch distribution network.
Wholesale deposits were higher, driven by growth in business volumes. For more information on
deposits, refer to the RFS segment discussion and the Liquidity risk management discussion on pages
3944 and 6162, respectively, of this Annual Report. For more information on liability balances,
refer to the CB and TSS segment discussions on pages 4748 and 4950, respectively, of this
Annual Report.
Long-term debt and capital debt securities
Long-term debt and capital debt securities increased by $14.2 billion, or 13%, from December 31,
2004, primarily due to net new issuances of long-term debt and capital debt securities. The Firm
took advantage of narrow credit spreads globally to issue opportunistically long-term debt and
capital debt securities throughout 2005. Consistent with its liquidity management policy, the Firm
raised funds sufficient to cover maturing obligations over the next 12 months and to support the
less liquid assets on its balance sheet. Large investor cash positions and increased foreign
investor participation in the corporate markets allowed JPMorgan Chase to diversify further its
funding across the global markets while lengthening maturities. For additional information on the
Firms long-term debt activity, see the Liquidity risk management discussion on pages 6162 of
this Annual Report.
Stockholders equity
Total stockholders equity increased by $1.6 billion from year-end 2004 to $107.2 billion at
December 31, 2005. The increase was the result of net income for 2005 and common stock issued under
employee plans, partially offset by cash dividends, stock repurchases, the redemption of $200
million of preferred stock and net unrealized losses in Accumulated other comprehensive income. For
a further discussion of capital, see the Capital management section that follows.
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JPMorgan Chase & Co. / 2005 Annual Report
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55 |
Managements discussion and analysis
JPMorgan Chase & Co.
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 Firms capital
framework is integrated into the process of assigning equity to the lines of business.
Line of business equity
The Firms framework for allocating capital is based upon the following objectives:
|
|
Integrate firmwide capital management activities with capital management activities within each
of the lines of business. |
|
|
|
Measure performance consistently across all lines of business. |
|
|
|
Provide comparability with peer firms for each of the lines of business. |
Equity for a line of business represents the amount the Firm believes the business would require if
it were operating independently, incorporating 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.
For performance management purposes, the Firm initiated a methodology at the time of the Merger for
allocating goodwill. Under this methodology, in the last half of 2004 and all of 2005, goodwill
from the Merger and from any business acquisition by either heritage firm prior to the Merger was
allocated to Corporate, as was any associated equity. Therefore, 2005 line of business equity is
not comparable to equity assigned to the lines of business in prior years. The increase in average
common equity in the following table for 2005 was attributable primarily to the Merger.
|
|
|
|
|
|
|
|
|
(in billions) |
|
Yearly Average |
|
Line of business equity |
|
2005 |
|
|
2004 |
(a) |
|
Investment Bank |
|
$ |
20.0 |
|
|
$ |
17.3 |
|
Retail Financial Services |
|
|
13.4 |
|
|
|
9.1 |
|
Card Services |
|
|
11.8 |
|
|
|
7.6 |
|
Commercial Banking |
|
|
3.4 |
|
|
|
2.1 |
|
Treasury & Securities Services |
|
|
1.9 |
|
|
|
2.5 |
|
Asset & Wealth Management |
|
|
2.4 |
|
|
|
3.9 |
|
Corporate(b) |
|
|
52.6 |
|
|
|
33.1 |
|
|
Total common stockholders equity |
|
$ |
105.5 |
|
|
$ |
75.6 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
2005 includes $43.5 billion of equity to offset goodwill and $9.1 billion of equity, primarily
related to Treasury, Private Equity and the Corporate Pension Plan. |
Effective January 1, 2006, the Firm expects to refine its methodology for allocating capital to
the lines of business, and may continue to refine this methodology. The revised methodology, among
other things, considers for each line of business goodwill associated
with such line of business
acquisitions since the Merger. As a result of this refinement, Retail Financial Services, Card
Services, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management will
have higher amounts of capital allocated in 2006, while the amount of capital allocated to the
Investment Bank will remain unchanged. 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 will assign to the Corporate segment an
amount of equity capital equal to the then-current book value of goodwill from and prior to the
Merger. In accordance with SFAS 142, the lines of business will continue to perform the required
goodwill impairment testing. For a further discussion of goodwill and impairment testing, see
Critical accounting estimates and Note 15 on pages 8183 and 114116, respectively, of this
Annual Report.
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the underlying risks of the Firms
business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic
capital based primarily upon five risk factors: credit risk, market risk, operational risk and
business risk for each business; and private equity risk, principally for the Firms private equity
business.
|
|
|
|
|
|
|
|
|
(in billions) |
|
Yearly Average |
|
Economic risk capital |
|
2005 |
|
|
2004 |
(a) |
|
Credit risk |
|
$ |
22.6 |
|
|
$ |
16.5 |
|
Market risk |
|
|
9.8 |
|
|
|
7.5 |
|
Operational risk |
|
|
5.5 |
|
|
|
4.5 |
|
Business risk |
|
|
2.1 |
|
|
|
1.9 |
|
Private equity risk |
|
|
3.8 |
|
|
|
4.5 |
|
|
Economic risk capital |
|
|
43.8 |
|
|
|
34.9 |
|
Goodwill |
|
|
43.5 |
|
|
|
25.9 |
|
Other(b) |
|
|
18.2 |
|
|
|
14.8 |
|
|
Total common stockholders equity |
|
$ |
105.5 |
|
|
$ |
75.6 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
Additional capital required to meet internal debt and regulatory rating objectives. |
Credit risk capital
Credit risk capital is estimated separately for the wholesale businesses (Investment Bank,
Commercial Banking, Treasury & Securities Services and Asset & Wealth Management) and consumer
businesses (Retail Financial Services and Card Services).
Credit risk capital for the overall wholesale credit portfolio is defined in terms of unexpected
credit losses, 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 differentiated by several principal drivers of credit risk: exposure at
default (or loan equivalent amount), likelihood of default, loss severity, and market credit
spread.
|
|
Loan equivalent amount for counterparty exposures in an over-the-counter derivative transaction
is represented by the expected positive exposure based upon potential movements of underlying
market rates. Loan equivalents for unused revolving credit facilities represent the portion of an
unused commitment likely, based upon the Firms average portfolio historical experience, to become
outstanding in the event an obligor defaults. |
|
|
|
Default likelihood is based upon current market conditions for all publicly traded names and
investment banking clients, by referencing the growing market in credit derivatives and secondary
market loan sales. This methodology produces, in the Firms view, more active risk management by
utilizing a forward-looking measure of credit risk. This dynamic measure captures current market
conditions and will change with the credit cycle over time impacting the level of credit risk
capital. For privately-held firms in the commercial banking portfolio, default likelihood is based
upon longer term averages over an entire credit cycle. |
|
|
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|
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56
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JPMorgan Chase & Co. / 2005 Annual Report |
|
|
Loss severity of exposure is based upon the Firms average historical experience during
workouts, with adjustments to account for collateral or subordination. |
|
|
|
Market credit spreads are used in the evaluation of changes in exposure value due to credit
deterioration. |
Credit risk capital for the consumer portfolio is intended to represent a capital level sufficient
to support an AA rating, and its allocation is based 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 portfolios are adjusted upward to ensure that capital
is consistent with external benchmarks, including subordination levels on market transactions and
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 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 7578 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 potential offset as a result of the use of risk-transfer products. The Firm believes the
model is consistent with the new Basel II Framework and expects to propose it eventually for
qualification under the advanced measurement approach for operational risk.
Business risk capital
Business risk is defined as the risk associated with volatility in the Firms earnings due to
factors not captured by other parts of its economic-capital framework. Such volatility can arise
from ineffective design or execution of business strategies, volatile economic or financial market
activity, changing client expectations and demands, and restructuring to adjust for changes in the
competitive environment. For business risk, capital is allocated to each business based upon
historical revenue volatility and measures of fixed and variable expenses. Earnings volatility
arising from other risk factors, such as credit, market, or operational risk, is excluded from the
measurement of business risk capital, as those factors are captured under their respective risk
capital models.
Private equity risk capital
Capital is allocated to 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 (FRB), 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 and Chase Bank USA, National
Association.
The federal banking regulatory agencies issued a final rule that makes permanent an interim rule
issued in 2000 that provides regulatory capital relief for certain cash-collateralized securities
borrowed transactions, effective February 22, 2006. The final rule also broadens the types of
transactions qualifying for regulatory capital relief under the interim rule. Adoption of the rule
is not expected to have a material effect on the Firms capital ratios.
On March 1, 2005, the FRB issued a final rule, which became effective April 11, 2005, that
continues the inclusion of trust preferred 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 securities, to 15% of total core capital elements, net
of goodwill less any associated deferred tax liability. At December 31, 2005, JPMorgan Chases
restricted core capital elements were 16.5% of total core capital elements. JPMorgan Chase expects
to be in compliance with the 15% limit by the March 31, 2009, implementation date.
On July 20, 2004, the federal banking regulatory agencies issued a final rule that excludes assets
of asset-backed commercial paper programs that are consolidated as a result of FIN 46R from
risk-weighted assets for purposes of computing Tier 1 and Total risk-based capital ratios. The
final rule also requires that capital be held against short-term liquidity facilities supporting
asset-backed commercial paper programs. The final rule became effective September 30, 2004. In
addition, both short- and long-term liquidity facilities are subject to certain asset quality tests
effective September 30, 2005. Adoption of the rule did not have a material effect on the capital
ratios of the Firm.
The following tables show that JPMorgan Chase maintained a well-capitalized position based upon
Tier 1 and Total capital ratios at December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios |
|
|
|
|
|
|
|
|
|
Well-capitalized |
|
December 31, |
|
2005 |
|
|
2004 |
|
|
ratios |
|
|
Tier 1 capital ratio |
|
|
8.5 |
% |
|
|
8.7 |
% |
|
|
6.0 |
% |
Total capital ratio |
|
|
12.0 |
|
|
|
12.2 |
|
|
|
10.0 |
|
Tier 1 leverage ratio |
|
|
6.3 |
|
|
|
6.2 |
|
|
NA |
|
Total stockholders equity to assets |
|
|
8.9 |
|
|
|
9.1 |
|
|
NA |
|
|
Risk-based capital components and assets
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Total Tier 1 capital |
|
$ |
72,474 |
|
|
$ |
68,621 |
|
Total Tier 2 capital |
|
|
29,963 |
|
|
|
28,186 |
|
|
Total capital |
|
$ |
102,437 |
|
|
$ |
96,807 |
|
|
Risk-weighted assets |
|
$ |
850,643 |
|
|
$ |
791,373 |
|
Total adjusted average assets |
|
|
1,152,546 |
|
|
|
1,102,456 |
|
|
Tier 1 capital was $72.5 billion at December 31, 2005, compared with $68.6 billion at December
31, 2004, an increase of $3.9 billion. The increase was due primarily to net income of $8.5
billion, net common stock issued under employee plans of $1.9 billion, $1.3 billion of additional
qualifying trust preferred securities and a decline of $716 million in the deduction for
nonqualifying intangible assets as a result of amortization. Offsetting these increases were
dividends declared of $4.8 billion, common share repurchases of $3.4 billion, an increase in the
deduction for goodwill of $418 million and the redemption of $200 million of preferred stock.
Additional information regarding the Firms capital ratios and the federal regulatory capital
standards to which it is subject is presented in Note 24 on pages 121122 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
|
|
|
|
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|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
57 |
Managements discussion and analysis
JPMorgan Chase & Co.
accord (Basel I), in effect since 1988. The goal of the Basel II Framework is to improve the
consistency of capital requirements internationally, make regulatory capital more risk-sensitive,
and promote enhanced risk management practices among large, internationally active banking
organizations. JPMorgan Chase supports the overall objectives of the Basel II Framework.
U.S. banking regulators are in the process of incorporating the Basel II Framework into the
existing risk-based capital requirements. JPMorgan Chase will be required to implement advanced
measurement techniques in the U.S. by employing internal estimates of certain key risk drivers to
derive capital requirements. Prior to implementation of the new Basel II Framework, JPMorgan Chase
will be required to demonstrate to 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.
Dividends
The Firms common stock dividend policy reflects JPMorgan Chases earnings outlook, desired
payout ratios, need to maintain an adequate capital level and alternative investment opportunities.
In 2005, JPMorgan Chase declared a quarterly cash dividend on its common stock of $0.34 per share.
The Firm continues to target a dividend payout ratio of 30-40% of operating earnings over time.
Stock repurchases
On July 20, 2004, the Board of Directors approved an initial stock repurchase program in the
aggregate amount of $6.0 billion. This amount includes shares
to be repurchased to offset issuances under the Firms employee stock-based plans. The actual
amount 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. Under the stock repurchase program, during 2005, the Firm
repurchased 93.5 million shares for $3.4 billion at an average price per share of $36.46. During
2004, the Firm repurchased 19.3 million shares for $738 million at an average price per share of
$38.27. As of December 31, 2005, $1.9 billion of authorized repurchase capacity remained.
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 2005 Form 10-K.
Offbalance sheet arrangements and contractual cash obligations
Special-purpose entities
JPMorgan Chase is involved with several types of off-balance 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 can be 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 a further discussion of SPEs and the Firms accounting for them, see Note 1 on
page 91, Note 13 on pages 108111 and Note 14 on pages 111113 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 prohibit employees from acting on behalf of
the Firm in transactions with which they or their family have any significant financial interest.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the
credit rating of JPMorgan Chase Bank 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 $71.3 billion and $79.4 billion at December 31, 2005 and 2004, respectively.
Alternatively, if JPMorgan Chase Bank 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 its $71.3 billion in 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,
included in the following table. Of the $79.4 billion of liquidity commitments to SPEs at December
31, 2004, $47.7 billion was included in the Firms other unfunded commitments to extend credit and
asset purchase agreements. As a result of the Firms consolidation of multi-seller conduits in
accordance with FIN 46R, $32.4 billion of these commitments, compared with $31.7 billion at
December 31, 2004, are excluded from the following table, as the underlying assets of the SPEs have
been included on the Firms Consolidated balance sheets.
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., MTM gains and losses) recorded in Trading revenue. Such MTM gains and losses are not
included in the revenue amounts reported in the table below.
The following table summarizes certain revenue information related to 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 custodial fee income. For a
further discussion of VIEs and QSPEs, see Note 1, Note 13 and Note 14, on pages 91, 108111 and
111113, respectively, of this Annual Report.
|
|
|
|
|
|
58
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Revenue from VIEs and QSPEs
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
VIEs |
(b) |
|
QSPEs |
|
|
Total |
|
|
2005 |
|
$ |
222 |
|
|
$ |
1,645 |
|
|
$ |
1,867 |
|
2004 |
|
|
154 |
|
|
|
1,438 |
|
|
|
1,592 |
|
2003 |
|
|
79 |
|
|
|
979 |
|
|
|
1,058 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Includes
VIE-related revenue (i.e., revenue associated with consolidated and significant nonconsolidated
VIEs). |
Off-balance 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 fulfill its obligation under the guarantee, and the counterparty
subsequently fails 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 a further
discussion of lending-related commitments and guarantees and the Firms accounting for them, see
Credit risk management on pages 6372 and Note 27 on pages 124125 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 estate-related obligations
and equipment.
The accompanying table summarizes, by remaining maturity, JPMorgan Chases off-balance sheet
lending-related financial instruments and significant contractual cash obligations at December 31,
2005. Contractual purchases and capital expenditures in the table below reflect the minimum
contractual obligation under legally enforceable contracts with contract terms that are both fixed
and determinable. Excluded from the following table are a number of obligations to be settled in
cash, primarily in under one year. These obligations are reflected on the 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 a discussion regarding Long-term
debt and trust preferred capital securities, see Note 17 on pages 117118 of this Annual Report.
For a discussion regarding operating leases, see Note 25 on page 122 of this Annual Report.
Offbalance sheet lending-related financial instruments and guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
By remaining maturity at December 31, |
|
Under |
|
|
13 |
|
|
35 |
|
|
Over |
|
|
|
|
|
|
2004 |
|
(in millions) |
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
Total |
|
|
Total |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
$ |
597,047 |
|
|
$ |
4,177 |
|
|
$ |
3,971 |
|
|
$ |
50,401 |
|
|
$ |
655,596 |
|
|
$ |
601,196 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unfunded commitments to extend
credit(a)(b) |
|
|
78,912 |
|
|
|
47,930 |
|
|
|
64,244 |
|
|
|
17,383 |
|
|
|
208,469 |
|
|
|
185,822 |
|
Asset purchase agreements(c) |
|
|
9,501 |
|
|
|
17,785 |
|
|
|
2,947 |
|
|
|
862 |
|
|
|
31,095 |
|
|
|
39,330 |
|
Standby letters of credit and
guarantees(a)(d) |
|
|
24,836 |
|
|
|
19,588 |
|
|
|
27,935 |
|
|
|
4,840 |
|
|
|
77,199 |
|
|
|
78,084 |
|
Other letters of credit(a) |
|
|
6,128 |
|
|
|
586 |
|
|
|
247 |
|
|
|
40 |
|
|
|
7,001 |
|
|
|
6,163 |
|
|
Total wholesale |
|
|
119,377 |
|
|
|
85,889 |
|
|
|
95,373 |
|
|
|
23,125 |
|
|
|
323,764 |
|
|
|
309,399 |
|
|
Total lending-related |
|
$ |
716,424 |
|
|
$ |
90,066 |
|
|
$ |
99,344 |
|
|
$ |
73,526 |
|
|
$ |
979,360 |
|
|
$ |
910,595 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(e) |
|
$ |
244,316 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
244,316 |
|
|
$ |
220,783 |
|
Derivatives qualifying as guarantees(f) |
|
|
25,158 |
|
|
|
14,153 |
|
|
|
2,264 |
|
|
|
20,184 |
|
|
|
61,759 |
|
|
|
53,312 |
|
|
Contractual cash obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By remaining maturity at December 31, (in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits of $100,000 and over |
|
$ |
111,359 |
|
|
$ |
2,917 |
|
|
$ |
805 |
|
|
$ |
692 |
|
|
$ |
115,773 |
|
|
$ |
115,343 |
|
Long-term debt |
|
|
16,323 |
|
|
|
41,137 |
|
|
|
19,107 |
|
|
|
31,790 |
|
|
|
108,357 |
|
|
|
95,422 |
|
Trust preferred capital debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,529 |
|
|
|
11,529 |
|
|
|
10,296 |
|
FIN 46R long-term beneficial interests(g) |
|
|
106 |
|
|
|
80 |
|
|
|
24 |
|
|
|
2,144 |
|
|
|
2,354 |
|
|
|
6,393 |
|
Operating leases(h) |
|
|
993 |
|
|
|
1,849 |
|
|
|
1,558 |
|
|
|
5,334 |
|
|
|
9,734 |
|
|
|
9,853 |
|
Contractual purchases and capital expenditures |
|
|
1,145 |
|
|
|
777 |
|
|
|
255 |
|
|
|
147 |
|
|
|
2,324 |
|
|
|
2,742 |
|
Obligations under affinity and co-brand programs |
|
|
1,164 |
|
|
|
2,032 |
|
|
|
1,891 |
|
|
|
1,790 |
|
|
|
6,877 |
|
|
|
4,402 |
|
Other liabilities(i) |
|
|
762 |
|
|
|
1,636 |
|
|
|
1,172 |
|
|
|
8,076 |
|
|
|
11,646 |
|
|
|
10,966 |
|
|
Total |
|
$ |
131,852 |
|
|
$ |
50,428 |
|
|
$ |
24,812 |
|
|
$ |
61,502 |
|
|
$ |
268,594 |
|
|
$ |
255,417 |
|
|
|
|
|
(a) |
|
Represents contractual amount net of risk participations totaling $29.3 billion and $26.4
billion at December 31, 2005 and 2004, respectively. |
|
(b) |
|
Includes unused advised lines of credit totaling $28.3 billion and $22.8 billion at December
31, 2005 and 2004, respectively, which are not legally binding. In regulatory filings with the FRB,
unused advised lines are not reportable. |
|
(c) |
|
The maturity is based upon the weighted average life of the underlying assets in the SPE,
primarily multi-seller asset-backed commercial paper conduits. |
|
(d) |
|
Includes unused commitments to issue standby letters of credit of $37.5 billion and $38.4 billion at December 31, 2005 and 2004,
respectively. |
|
(e) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$245.0 billion and $221.6 billion at December 31, 2005 and 2004, respectively. |
|
(f) |
|
Represents
notional amounts of derivative guarantees. For a further discussion of guarantees, see Note 27 on
pages 124125 of this Annual Report. |
|
(g) |
|
Included on the Consolidated balance sheets in Beneficial interests issued by consolidated
VIEs. |
|
(h) |
|
Excludes benefit of noncancelable sublease rentals of $1.3 billion and $689 million at December
31, 2005 and 2004, respectively. |
|
(i) |
|
Includes deferred annuity contracts and expected funding for pension and other postretirement
benefits for 2006. Funding requirements for pension and postretirement benefits after 2006 are
excluded due to the significant variability in the assumptions required to project the timing of
future cash payments. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
59 |
Managements discussion and analysis
JPMorgan Chase & Co.
Risk is an inherent part of JPMorgan Chases business activities. The Firms risk management
framework and governance structure is 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
soundness and profitability.
|
|
Risk identification: The Firm identifies risk by dynamically assessing the potential impact of
internal and external factors on transactions and positions. Business and risk professionals
develop appropriate mitigation strategies for the identified risks. |
|
|
|
Risk measurement: The Firm measures risk using a variety of 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 reflective of
underlying positions. |
|
|
|
Risk monitoring/Control: The Firm establishes risk management policies and procedures. These
policies contain approved limits by customer, product and business that are monitored on a daily,
weekly and monthly basis as appropriate. |
|
|
|
Risk reporting: Risk reporting covers all lines of business and is provided to management on a
daily, weekly and monthly basis as appropriate. |
Risk governance
The Firms risk governance structure is built upon the premise that each line of business is
responsible for managing the risks inherent in its business activity. There are eight major risk
types identified in the business activities
of the Firm: liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal
and reputation risk, fiduciary risk and private equity risk. As part of the risk management
structure, each line of business has a Risk Committee responsible for decisions relating to risk
strategy, policies and control. Where appropriate, the Risk Committees escalate risk issues to the
Firms Operating Committee, comprised of senior officers of the Firm, or to the Risk Working Group,
a subgroup of the Operating Committee.
Overlaying risk management within the lines of business are three corporate functions: Treasury,
Risk Management and Office of the General Counsel. Treasury is responsible for measuring,
monitoring, reporting and managing the interest rate and liquidity risk profile of the Firm. Risk
Management, under the direction of the Chief Risk Officer reporting to the Chief Executive Officer,
provides an independent firmwide function of control and management of risk. Within Risk Management
are those units responsible for credit risk, market risk, operational risk, private equity risk and
risk technology and operations, as well as Risk Management Services, which is responsible for risk
policy and methodology, risk reporting and risk education. The Office of the General Counsel has
oversight function for legal, reputation and fiduciary risk.
In addition to the six lines of business risk committees and these corporate functions, the Firm
maintains an Asset & Liability Committee (ALCO), which oversees interest rate and liquidity risk,
and capital management, as well as the Firms funds transfer pricing policy, through which lines of
business transfer interest rate risk to Treasury. Treasury has responsibility for
ALCO policies and control and transfers aggregate risk positions to the Chief Investment Office, which has responsibility for managing the risk. There is also an Investment Committee, which reviews key aspects of the Firms global M&A
activities that are undertaken for its own investment account and that fall outside the scope of
the Firms private equity and other principal finance activities.
The Board of Directors exercises its oversight of risk management as a whole and
through the Boards Risk Policy Committee and Audit Committee.
The Risk Policy Committee is responsible for oversight of managements
responsibilities to assess and manage the Firms risks as described above.
|
|
|
|
|
|
60
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
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. Both committees are responsible for oversight of reputation risk. The Chief Risk
Officer and other management report on the risks of the Firm to the Board of Directors,
particularly through the Boards Risk Policy Committee and Audit Committee. The major risk types
identified by the Firm are discussed in the following sections.
Liquidity risk management
Liquidity risk arises from the general funding needs of the 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 enables the Firm to
replace maturing obligations when due and fund assets at appropriate maturities and rates. To
accomplish this task, management uses a variety of liquidity risk measures that take into
consideration market conditions, prevailing interest rates, liquidity needs and the desired
maturity profile of liabilities.
Governance
The Asset & Liability Committee (ALCO) reviews the Firms overall liquidity policy and oversees
the contingency funding plan. The ALCO also provides oversight of the Firms exposure to SPEs, with
particular focus on the potential liquidity support requirements that the Firm may have to those
SPEs.
Treasury is responsible for formulating the Firms liquidity strategy and targets, understanding
the Firms on- and off-balance sheet liquidity obligations, providing policy guidance, overseeing
policy adherence, and maintaining contingency planning and stress testing. In addition, it
identifies and measures internal and external liquidity warning signals to permit early detection
of liquidity issues.
An extension of the Firms ongoing liquidity management is its contingency funding plan. The goals
of the plan are to ensure maintenance of appropriate liquidity during normal and stress periods,
measure and project funding requirements during periods of stress, and manage access to funding
sources. The plan considers temporary and long-term stress scenarios where access to unsecured
funding is severely limited or nonexistent. The plan forecasts potential funding needs, taking into
account both on- and off-balance sheet exposures, separately evaluating access to funds by the
parent holding company and JPMorgan Chase Bank.
The Firms liquidity risk framework also incorporates tools to monitor three primary measures of
liquidity:
|
|
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. Holding company short-term
position is managed to a positive position over time. |
|
|
|
Cash capital surplus: Measures the Firms ability to fund assets on a fully collateralized basis,
assuming access to unsecured funding is lost. This measurement is intended to ensure that the
illiquid portion of the balance sheet can be funded by equity, long-term debt, trust preferred
securities and deposits the Firm believes to be core. |
|
|
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. |
Each liquidity position is managed to provide sufficient surplus.
Risk monitoring and reporting
Treasury is responsible for measuring, monitoring, reporting and managing the liquidity profile of
the Firm through both normal and stress periods. Treasury analyzes the diversity and maturity
structure of the Firms sources of funding; and assesses downgrade impact scenarios, contingent
funding needs, and overall collateral availability and pledging status. A downgrade analysis
considers the impact of both parent and bank level downgrades (one- and two-notch) and calculates
the loss of funding and increase in annual funding costs for both scenarios. A trigger-risk funding
analysis considers the impact of a bank level downgrade through A-1/P-1 as well as the increased
contingent funding requirements that would be triggered. These liquidity analytics rely on
managements judgment about JPMorgan Chases ability to liquidate assets or use them as collateral
for borrowings and take into account credit risk managements historical data on the funding of
loan commitments (e.g., commercial paper back-up facilities), liquidity commitments to SPEs,
commitments with rating triggers and collateral posting requirements. For a further discussion of
SPEs and other off-balance sheet arrangements, see Off-balance sheet arrangements and contractual
cash obligations on pages 5859, as well as Note 1, Note 13, Note 14 and Note 27 on pages 91,
108111, 111113, and 124125, respectively, of this Annual Report.
Funding
Sources of funds
Consistent with its liquidity management policy, the Firm has raised funds at the parent holding
company sufficient to cover its obligations and those of its nonbank subsidiaries that mature over
the next 12 months. Long-term funding needs for the parent holding company over the next several
quarters are expected to be consistent with prior periods.
As of December 31, 2005, the Firms liquidity position remained strong based upon its liquidity
metrics. JPMorgan Chases long-dated funding, including core deposits, exceeds illiquid assets, and the Firm believes its
obligations can be met even if access to funding is impaired.
The diversity of the Firms funding sources enhances financial flexibility and limits dependence on
any one source, thereby minimizing the cost of funds. The deposits held by the RFS, CB and TSS
lines of business are a stable and consistent source of funding for JPMorgan Chase Bank. As of
December 31, 2005, total deposits for the Firm were $555 billion, which represented 67% of the
Firms funding liabilities. A significant portion of the Firms retail deposits are core
deposits, which are less sensitive to interest rate changes and therefore are considered more
stable than market-based deposits. Core
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
61 |
Managements discussion and analysis
JPMorgan Chase & Co.
deposits include all U.S. deposits insured by the FDIC, up to the legal limit of $100,000 per
depositor. In 2005, core bank deposits increased approximately 8% from 2004 year-end. In addition
to core retail deposits, the Firm benefits from substantial, geographically diverse corporate
liability balances originated by TSS and CB through the normal course of business. These
franchise-generated core liability balances are also a stable and consistent source of funding due
to the nature of the businesses from which they are generated. For a further discussion of deposit
and liability balance trends, see Business Segment Results and Balance Sheet Analysis on pages
3435 and 55, respectively, of this Annual Report.
Additional sources of funds include a variety of both short- and long-term instruments, including
federal funds purchased, commercial paper, bank notes, medium- and long-term debt, and capital debt
securities. This funding is managed centrally, using regional expertise and local market access, to
ensure active participation in the global financial markets while maintaining consistent global
pricing. These markets serve as a cost-effective and diversified source of funds and are a critical
component of the Firms liquidity management. Decisions concerning the timing and tenor of
accessing these markets are based upon relative costs, general market conditions, prospective views
of balance sheet growth and a targeted liquidity profile.
Finally, funding flexibility is provided by the Firms ability to access the repo and asset
securitization markets. These markets are evaluated on an ongoing basis to achieve an appropriate
balance of secured and unsecured funding. The ability to securitize loans, and the associated gains
on those securitizations, are principally dependent upon the credit quality and yields of the
assets securitized and are generally not dependent upon the credit ratings of the
issuing entity. Transactions between the Firm and its securitization structures are reflected in
JPMorgan Chases consolidated financial statements; these relationships include retained interests
in securitization trusts, liquidity facilities and derivative transactions. For further details,
see Off-balance sheet arrangements and contractual cash obligations and Notes 13 and 27 on pages
5859, 108111 and 124125, respectively, of this Annual Report.
Issuance
Corporate credit spreads widened modestly in 2005 across most industries and sectors. On an
historical basis, credit spreads remain near historic tight levels as corporate balance sheet cash
positions are strong and corporate profits generally healthy. JPMorgan Chases credit spreads
performed in line with peer spreads in 2005.
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
while lengthening maturities. During 2005, JPMorgan Chase issued approximately $43.7 billion of
long-term debt and capital debt securities. These issuances were offset partially by $26.9 billion
of long-term debt and capital debt securities that matured or were redeemed and the Firms
redemption of $200 million of preferred stock. In addition, in 2005 the Firm securitized
approximately $18.1 billion of residential mortgage loans, $15.1 billion of credit card loans and
$3.8 billion of automobile loans, resulting in pre-tax gains on securitizations of $21 million,
$101 million and $9 million, respectively. For a further discussion of loan securitizations, see
Note 13 on pages 108111 of this Annual Report.
Credit ratings
The credit ratings of JPMorgan Chases parent holding company and each of its significant
banking subsidiaries, as of December 31, 2005 and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
Senior long-term debt |
|
|
Moody's |
|
S&P |
|
Fitch |
|
Moody's |
|
S&P |
|
Fitch |
|
JPMorgan Chase & Co.
|
|
P-1
|
|
A-1
|
|
F1
|
|
Aa3
|
|
A+
|
|
A+ |
JPMorgan Chase Bank, N.A.
|
|
P-1
|
|
A-1+
|
|
F1+
|
|
Aa2
|
|
AA-
|
|
A+ |
Chase Bank USA, N.A.
|
|
P-1
|
|
A-1+
|
|
F1+
|
|
Aa2
|
|
AA-
|
|
A+ |
|
The Firms principal insurance subsidiaries had the following financial strength ratings as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
Moody's |
|
S&P |
|
A.M. Best |
|
Chase Insurance Life and Annuity Company
|
|
A2
|
|
A+
|
|
A |
Chase Insurance Life Company
|
|
A2
|
|
A+
|
|
A |
|
The cost and availability of unsecured financing are influenced by credit ratings. A reduction
in these ratings could adversely affect the Firms access to liquidity sources, increase the cost
of funds, trigger additional collateral requirements and decrease the number of investors and
counterparties willing to lend. Critical factors in maintaining high credit ratings include a
stable and diverse
earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse
funding sources and strong liquidity monitoring procedures.
If the Firms ratings were downgraded by one notch, the Firm estimates the incremental cost of
funds and the potential loss of funding to be negligible. Additionally, the Firm estimates the
additional funding requirements for VIEs and other third-party commitments would not be material.
In the current environment, the Firm believes a downgrade is unlikely. For additional information
on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on
derivatives and collateral agreements, see Special-purpose entities on pages 5859 and Ratings
profile of derivative receivables mark-to-market (MTM) on page 69, of this Annual Report.
|
|
|
|
|
|
62
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Credit risk is the risk of loss from obligor or counterparty default. The Firm provides credit
to customers of all sizes, from large corporate clients to loans for the individual consumer. 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 majority
of the Firms wholesale loan originations (primarily to IB clients) continues to be distributed
into the marketplace, with residual holds by the Firm averaging less than 10%. Wholesale loans
generated by CB and AWM are generally retained on the balance sheet. With regard to the prime
consumer credit market, the Firm focuses on creating a portfolio that is diversified from both a
product and a geographical perspective. Within the prime mortgage business, originated loans are
retained on the balance sheet as well as selectively sold to government agencies; the latter
category is routinely classified as held-for-sale.
Credit risk organization
Credit risk management is overseen by the Chief Risk Officer, a member of the Firms Operating
Committee. The Firms credit risk management governance structure consists of the following primary
functions:
|
|
establishes a comprehensive credit risk policy framework |
|
|
|
calculates Allowance for credit losses and ensures appropriate credit risk-based capital
management |
|
|
|
assigns and manages credit authorities to approve all credit exposure |
|
|
|
monitors and
manages credit risk across all portfolio segments |
|
|
|
manages criticized exposures |
Risk identification
The Firm is exposed to credit risk through lending (e.g., loans and lending-related commitments),
derivatives trading and capital markets activities. The credit risk function works in partnership
with the business segments in identifying and aggregating exposure across all lines of business.
Risk measurement
To measure credit risk, the Firm employs several methodologies for estimating the likelihood of
obligor or counterparty default. Losses generated by consumer loans are more predictable than
wholesale losses, but are subject to cyclical and seasonal factors. Although the frequency of loss
is higher on consumer loans than on wholesale loans, the severity of loss is typically lower and
more manageable. As a result of these differences, methodologies vary depending on certain factors,
including type of asset (e.g., consumer installment versus wholesale loan), risk measurement
parameters (e.g., delinquency status and credit bureau score versus wholesale risk rating) and risk
management and collection processes (e.g., retail collection center versus centrally managed
workout groups). Credit risk measurement is based upon the amount of exposure should the obligor or
the counterparty default, the probability of
default and the loss severity given a default event. Based upon these factors and related
market-based inputs, the Firm estimates both probable and unexpected losses for the wholesale and
consumer portfolios. Probable losses, reflected in the Provision for credit losses, are generally
statistically-based estimates of credit losses over time, anticipated as a result of obligor or
counterparty default. However, probable losses are not the sole indicators of risk. If losses were
entirely predictable, the probable loss rate could be factored into pricing and covered as a normal
and recurring cost of doing business. Unexpected losses, reflected in the allocation of credit risk
capital, represent the potential volatility of actual losses relative to the probable level of
losses. (Refer to Capital management on pages 5658 of this Annual Report for a further discussion
of the credit risk capital methodology.) Risk measurement for the wholesale portfolio is assessed
primarily on a risk-rated basis; for the consumer portfolio, it is assessed primarily on a
credit-scored basis.
Risk-rated exposure
For portfolios that are risk-rated, probable and unexpected loss calculations are based upon
estimates of probability of default and loss given default. Probability of default is expected
default calculated on an obligor basis. Loss given default is an estimate of losses that are based
upon collateral and structural support for each credit facility. Calculations and assumptions are
based upon management information systems and methodologies which are under continual review. Risk
ratings are assigned and reviewed on an ongoing basis by Credit Risk Management and revised, if
needed, to reflect the borrowers current risk profiles and the related collateral and structural
positions.
Credit-scored exposure
For credit-scored portfolios (generally held in RFS and CS), probable loss is based upon a
statistical analysis of inherent losses over discrete periods of time. Probable losses are
estimated using sophisticated portfolio modeling, credit scoring and decision-support tools to
project credit risks and establish underwriting standards. In addition, common measures of credit
quality derived from historical loss experience are used to predict consumer losses. Other risk
characteristics evaluated include recent loss experience in the portfolios, changes in origination
sources, portfolio seasoning, loss severity and underlying credit practices, including charge-off
policies. These analyses are applied to the Firms current portfolios in order to forecast
delinquencies and severity of losses, which determine the amount of probable losses. These factors
and analyses are updated on a quarterly basis.
Risk monitoring
The Firm has developed policies and practices that are designed to preserve the independence and
integrity of decision-making and ensure credit risks are accurately assessed, properly approved,
continually monitored and actively managed at both the transaction and portfolio levels. The policy
framework establishes credit approval authorities, concentration limits, risk-rating methodologies,
portfolio-review parameters and problem-loan management. Wholesale credit risk is continually
monitored on both an aggregate portfolio level and on an individual customer basis. For consumer
credit risk, the key focus items are trends and concentrations at the portfolio level, where
potential problems can be remedied through changes in underwriting policies and portfolio
guidelines. Consumer Credit Risk Management monitors trends against business expectations and
industry benchmarks. In order to meet credit risk management objectives, the Firm seeks to maintain
a risk profile that is diverse in terms of borrower, product type, industry and geographic
concentration. Additional diversification of the Firms exposure is accomplished through loan
syndication and participations, loan sales, securitizations, credit derivatives and other
risk-reduction techniques.
Risk reporting
To enable monitoring of credit risk and decision-making, aggregate credit exposure, credit metric
forecasts, hold-limit exceptions and risk profile changes are reported regularly to senior credit
risk management. Detailed portfolio reporting of industry, customer and geographic concentrations
occurs monthly, and the appropriateness of the allowance for credit losses is reviewed by senior
management at least on a quarterly basis. Through the risk reporting and governance structure,
credit risk trends and limit exceptions are provided regularly to, and discussed with, the
Operating Committee.
2005 Credit risk overview
The wholesale portfolio experienced continued credit strength during 2005. Wholesale
nonperforming loans were down by $582 million, or 37%, from 2004; net recoveries were $77 million
compared with net charge-offs of
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
63 |
Managements discussion and analysis
JPMorgan Chase & Co.
$186 million in 2004; and the allowance for credit losses decreased by $740 million, or 21%,
reflecting the quality of the portfolio at
this time. The Firm anticipates a return to more normal provisioning
for credit losses for the wholesale portfolio in 2006.
In 2005, the Firm also made significant strides in the multi-year initiative to reengineer specific
components of the wholesale credit risk infrastructure. The Firm is on target to meet the goals of
enhancing the timeliness and accuracy of risk and exposure information and reporting; management of
credit risk in the retained portfolio; support of client relationships; allocation of economic
capital and compliance with Basel II initiatives.
Consumer credit was impacted in 2005 by two significant events, Hurricane Katrina and federal
bankruptcy reform legislation. Hurricane Katrina impacted customers across all consumer businesses
(and to a lesser extent CB and AWM). As a result, the consumer Allowance for loan losses was
increased by $350 million ($250 million in RFS, and $100 million in CS). It is anticipated that the
majority of charge-offs associated with the hurricane will be taken against the allowance in 2006.
Bankruptcy reform legislation became effective on October 17, 2005. This legislation prompted a
rush to file effect that resulted in a spike in bankruptcy filings and increased credit losses,
predominantly in CS, where it is believed that $575 million
in estimated bankruptcy legislation-related credit losses occurred in the fourth quarter of
2005. It is anticipated that the first half of 2006 will experience lower credit card net
charge-offs, as the record levels of bankruptcy filings in the 2005 fourth quarter are believed to
have included bankruptcy filings that would have occurred in 2006. With the exception of the events
noted above, the 2005 underlying credit performance, which was driven by favorable loss severity
performance in residential real estate, continued to be strong. CS continues to quantify and refine
the impact associated with changes in the FFIEC minimum-payment requirements. Actual implementation
of the new payment requirements began in late 2005 and will run through early 2006; CS anticipates
higher net charge-offs during the second half of 2006 as a result.
In 2005, the Firm continued to grow the consumer loan portfolio, focusing on businesses providing
the most appropriate risk/reward relationship while keeping within the Firms desired risk
tolerance. During the past year, the Firm continued a de-emphasis of vehicle leasing and sold its
$2 billion recreational vehicle portfolio. Continued growth in most core consumer lending products
(residential real estate, credit cards and small business) reflected a focus on the prime credit
quality segment of the market.
The following table presents JPMorgan Chases credit portfolio as of December 31, 2005 and 2004.
Total credit exposure at December 31, 2005, increased by $67 billion from December 31, 2004,
reflecting an increase of $11 billion in the wholesale credit portfolio and $56 billion in the
consumer credit portfolio. The significant majority of the consumer portfolio increase,
or $54 billion, was primarily from growth in lending-related commitments. In the table below,
reported loans include all HFS loans, which are carried at the lower of cost or fair value with
changes in value recorded in Other income. However, these HFS loans are excluded from the average
loan balances used for the net charge-off rate calculations.
Total credit portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming |
|
|
|
|
|
|
|
|
|
|
Average annual |
|
As of or for the year ended December 31, |
|
Credit exposure |
|
|
assets(i) |
|
|
Net charge-offs |
|
|
net charge-off rate(k) |
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
(h) |
|
2005 |
|
|
2004 |
(h) |
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans reported(a) |
|
$ |
419,148 |
|
|
$ |
402,114 |
|
|
$ |
2,343 |
(j) |
|
$ |
2,743 |
(j) |
|
$ |
3,819 |
|
|
$ |
3,099 |
|
|
|
1.00 |
% |
|
|
1.08 |
% |
Loans securitized(b) |
|
|
70,527 |
|
|
|
70,795 |
|
|
|
|
|
|
|
|
|
|
|
3,776 |
|
|
|
2,898 |
|
|
|
5.47 |
|
|
|
5.51 |
|
|
Total managed loans(c) |
|
|
489,675 |
|
|
|
472,909 |
|
|
|
2,343 |
|
|
|
2,743 |
|
|
|
7,595 |
|
|
|
5,997 |
|
|
|
1.68 |
|
|
|
1.76 |
|
Derivative receivables(d) |
|
|
49,787 |
|
|
|
65,982 |
|
|
|
50 |
|
|
|
241 |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
Interests in purchased receivables |
|
|
29,740 |
|
|
|
31,722 |
|
|
|
|
|
|
|
|
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
Total managed credit-related assets |
|
|
569,202 |
|
|
|
570,613 |
|
|
|
2,393 |
|
|
|
2,984 |
|
|
|
7,595 |
|
|
|
5,997 |
|
|
|
1.68 |
|
|
|
1.76 |
|
Lending-related commitments(e) |
|
|
979,360 |
|
|
|
910,595 |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
Assets acquired in loan satisfactions |
|
|
NA |
|
|
|
NA |
|
|
|
197 |
|
|
|
247 |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
Total credit portfolio |
|
$ |
1,548,562 |
|
|
$ |
1,481,208 |
|
|
$ |
2,590 |
|
|
$ |
3,231 |
|
|
$ |
7,595 |
|
|
$ |
5,997 |
|
|
|
1.68 |
% |
|
|
1.76 |
% |
|
Credit derivative hedges notional(f) |
|
$ |
(29,882 |
) |
|
$ |
(37,200 |
) |
|
$ |
(17 |
) |
|
$ |
(15 |
) |
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
Collateral held against derivatives |
|
|
(6,000 |
) |
|
|
(9,301 |
) |
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average HFS loans |
|
$ |
27,689 |
|
|
$ |
20,860 |
(h) |
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
Nonperforming purchased(g) |
|
|
341 |
|
|
|
351 |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
|
|
(a) |
|
Loans are presented net of unearned income of $3.0 billion and $4.1 billion at December
31, 2005 and 2004, respectively. |
(b) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see Card Services on pages 4546 of this Annual Report. |
(c) |
|
Past-due 90 days and over and accruing include loans of $1.1 billion and $998 million, and
related credit card securitizations of $730 million and $1.3 billion at December 31, 2005 and 2004,
respectively. |
(d) |
|
Reflects net cash received under credit support annexes to legally enforceable master netting
agreements of $27 billion and $32 billion as of December 31, 2005 and 2004, respectively. |
(e) |
|
Includes wholesale unused advised lines of credit totaling $28.3 billion and $22.8 billion at
December 31, 2005 and 2004, respectively, which are not legally binding. In regulatory filings with
the Federal Reserve Board, unused advised lines are not reportable. Credit card lending-related
commitments of $579 billion and $532 billion at December 31, 2005 and 2004, respectively,
represents the total available credit to its cardholders; however, the Firm can reduce or cancel
these commitments at any time as permitted by law. |
(f) |
|
Represents the net notional amount of protection purchased and sold of single-name and
portfolio credit derivatives used to manage the credit risk of credit exposures; these derivatives
do not qualify for hedge accounting under SFAS 133. |
(g) |
|
Represents distressed HFS wholesale loans purchased as part of IBs proprietary activities,
which are excluded from nonperforming assets. |
(h) |
|
Includes six months of the combined Firms
results and six months of heritage JPMorgan Chase results. |
(i) |
|
Includes nonperforming HFS loans of $136 million and $15 million as of December 31, 2005 and
2004, respectively. |
(j) |
|
Excludes nonperforming assets related to loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by government agencies of $1.1 billion and $1.5
billion for December 31, 2005 and 2004, respectively. These amounts are excluded, as reimbursement
is proceeding normally. |
(k) |
|
Net charge-off rates exclude average loans HFS. |
|
|
|
|
|
|
64
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Wholesale credit portfolio
As of December 31, 2005, wholesale exposure (IB, CB, TSS and AWM) increased by $11 billion from
December 31, 2004. Increases in Loans and lending-related commitments were offset partially by
reductions in Derivative receivables and Interests in purchased receivables. As described on pages
3637 of this Annual Report, the increase in Loans was primarily in the IB,
reflecting an increase in loans held-for-sale related to securitization and syndication activities
and growth in the IB credit portfolio. The increase in lending-related commitments was mostly due
to CB activity. The decrease in Derivative receivables was due primarily to the appreciation of the
U.S. dollar and higher interest rates, partially offset by rising commodity prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
|
|
|
Nonperforming |
|
|
|
|
|
|
|
|
|
|
Average annual |
|
As of or for the year ended December 31, |
|
Credit exposure |
|
|
assets(g) |
|
|
Net charge-offs |
|
|
net charge-off rate(i) |
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
(f) |
|
2005 |
|
|
2004 |
(f) |
|
Loans reported(a) |
|
$ |
150,111 |
|
|
$ |
135,067 |
|
|
$ |
992 |
|
|
$ |
1,574 |
|
|
$ |
(77 |
) |
|
$ |
186 |
|
|
|
(0.06 |
)% |
|
|
0.18 |
% |
Derivative receivables(b) |
|
|
49,787 |
|
|
|
65,982 |
|
|
|
50 |
|
|
|
241 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Interests in purchased receivables |
|
|
29,740 |
|
|
|
31,722 |
|
|
|
|
|
|
|
|
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total wholesale credit-related assets |
|
|
229,638 |
|
|
|
232,771 |
|
|
|
1,042 |
|
|
|
1,815 |
|
|
|
(77 |
) |
|
|
186 |
|
|
|
(0.06 |
) |
|
|
0.18 |
|
Lending-related commitments(c) |
|
|
323,764 |
|
|
|
309,399 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
17 |
|
|
|
23 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total wholesale credit exposure |
|
$ |
553,402 |
|
|
$ |
542,170 |
|
|
$ |
1,059 |
|
|
$ |
1,838 |
|
|
$ |
(77 |
)(h) |
|
$ |
186 |
|
|
|
(0.06 |
)% |
|
|
0.18 |
% |
|
Credit derivative hedges notional(d) |
|
$ |
(29,882 |
) |
|
$ |
(37,200 |
) |
|
$ |
(17 |
) |
|
$ |
(15 |
) |
|
NA |
| |
NA |
| |
NA |
| |
NA |
|
Collateral held against derivatives |
|
|
(6,000 |
) |
|
|
(9,301 |
) |
|
NA |
| |
NA |
| |
NA |
| |
NA |
| |
NA |
| |
NA |
|
Held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average HFS loans |
|
$ |
12,014 |
|
|
$ |
6,124 |
(f) |
|
NA |
| |
NA |
| |
NA |
| |
NA |
| |
NA |
| |
NA |
|
Nonperforming purchased(e) |
|
|
341 |
|
|
|
351 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
|
|
|
(a) |
|
Past-due 90 days and over and accruing include loans of $50 million and $8 million at
December 31, 2005 and 2004, respectively. |
(b) |
|
Reflects net cash received under credit support annexes to legally enforceable master netting
agreements of $27 billion and $32 billion as of December 31, 2005 and 2004, respectively. |
(c) |
|
Includes unused advised lines of credit totaling $28.3 billion and $22.8 billion at December 31,
2005 and 2004, respectively, which are not legally binding. In regulatory filings with the Federal
Reserve Board, unused advised lines are not reportable. |
(d) |
|
Represents the net notional amount of protection purchased and sold of single-name and
portfolio credit derivatives used to manage the credit risk of credit exposures; these derivatives
do not qualify for hedge accounting under SFAS 133. |
(e) |
|
Represents distressed HFS loans purchased as part of IBs proprietary activities, which are
excluded from nonperforming assets. |
(f) |
|
Includes six months of the combined Firms results and six
months of heritage JPMorgan Chase results. |
(g) |
|
Includes nonperforming HFS loans of $109 million and $2 million as of December 31, 2005 and
2004, respectively. |
(h) |
|
Excludes $67 million in gains on sales of nonperforming loans in 2005; for additional
information, see page 67 of this Annual Report. |
(i) |
|
Net charge-off rates exclude average loans HFS. |
Below are summaries of the maturity and ratings profiles of the wholesale portfolio as of
December 31, 2005 and 2004. The ratings scale is based upon the Firms internal risk ratings and is
presented on an S&P-equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale exposure |
|
Maturity profile(c) |
|
Ratings profile |
At December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade ("IG")(d) |
|
Noninvestment-grade(d) |
|
|
|
|
|
Total % |
(in billions, except ratios) |
|
<1 year(d) |
|
15 years(d) |
|
> 5 years(d) |
|
Total |
|
|
AAA to BBB- |
|
BB+ & below |
|
Total |
|
|
of IG(d) |
|
Loans |
|
|
43 |
% |
|
|
44 |
% |
|
|
13 |
% |
|
|
100 |
% |
|
$ |
87 |
|
|
$ |
45 |
|
|
$ |
132 |
|
|
|
66 |
% |
Derivative receivables |
|
|
2 |
|
|
|
42 |
|
|
|
56 |
|
|
|
100 |
|
|
|
42 |
|
|
|
8 |
|
|
|
50 |
|
|
|
84 |
|
Interests in purchased
receivables |
|
|
41 |
|
|
|
57 |
|
|
|
2 |
|
|
|
100 |
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
|
100 |
|
Lending-related commitments |
|
|
37 |
|
|
|
56 |
|
|
|
7 |
|
|
|
100 |
|
|
|
276 |
|
|
|
48 |
|
|
|
324 |
|
|
|
85 |
|
|
Total excluding HFS |
|
|
36 |
% |
|
|
52 |
% |
|
|
12 |
% |
|
|
100 |
% |
|
$ |
434 |
|
|
$ |
101 |
|
|
|
535 |
|
|
|
81 |
% |
Held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
553 |
|
|
|
|
|
|
Credit derivative hedges
notional(b) |
|
|
15 |
% |
|
|
74 |
% |
|
|
11 |
% |
|
|
100 |
% |
|
$ |
(27 |
) |
|
$ |
(3 |
) |
|
$ |
(30 |
) |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity profile(c) |
|
Ratings profile |
At December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade ("IG")(d) |
|
Noninvestment-grade(d) |
|
|
|
|
|
Total % |
(in billions, except ratios) |
|
<1 year(d) |
|
15 years(d) |
|
> 5 years(d) |
|
Total |
|
|
AAA to BBB- |
|
BB+ & below |
|
Total |
|
|
of IG(d) |
|
Loans |
|
|
44 |
% |
|
|
43 |
% |
|
|
13 |
% |
|
|
100 |
% |
|
$ |
83 |
|
|
$ |
46 |
|
|
$ |
129 |
|
|
|
64 |
% |
Derivative receivables |
|
|
19 |
|
|
|
39 |
|
|
|
42 |
|
|
|
100 |
|
|
|
57 |
|
|
|
9 |
|
|
|
66 |
|
|
|
86 |
|
Interests in purchased
receivables |
|
|
37 |
|
|
|
61 |
|
|
|
2 |
|
|
|
100 |
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
|
100 |
|
Lending-related commitments |
|
|
46 |
|
|
|
52 |
|
|
|
2 |
|
|
|
100 |
|
|
|
266 |
|
|
|
43 |
|
|
|
309 |
|
|
|
86 |
|
|
Total excluding HFS |
|
|
42 |
% |
|
|
49 |
% |
|
|
9 |
% |
|
|
100 |
% |
|
$ |
438 |
|
|
$ |
98 |
|
|
|
536 |
|
|
|
82 |
% |
Held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
542 |
|
|
|
|
|
|
Credit derivative hedges
notional(b) |
|
|
18 |
% |
|
|
77 |
% |
|
|
5 |
% |
|
|
100 |
% |
|
$ |
(35 |
) |
|
$ |
(2 |
) |
|
$ |
(37 |
) |
|
|
95 |
% |
|
|
|
|
(a) |
|
HFS loans primarily relate to securitization and syndication activities. |
(b) |
|
Ratings are based upon the underlying referenced assets. |
(c) |
|
The maturity profile of Loans and lending-related commitments is based upon the remaining
contractual maturity. The maturity profile of Derivative receivables is based upon the maturity
profile of Average exposure. See page 68 of this Annual Report for a further discussion of Average
exposure. |
(d) |
|
Excludes HFS loans. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
65 |
Managements discussion and analysis
JPMorgan Chase & Co.
At December 31, 2005, the percentage of the investment-grade wholesale exposure, excluding HFS,
remained relatively unchanged from December 31, 2004. Derivative receivables of less than one year
decreased as a result of the appreciation of the U.S. dollar on short-dated foreign exchange (FX) contracts. The percentage of
derivative exposure greater than 5 years increased from 42% to 56% at year-end 2005, primarily as a
result of the reduction in shorter-dated exposure.
Wholesale credit exposure selected industry concentration
The Firm continues to focus on the management and diversification of industry concentrations,
with particular attention paid to industries with actual or potential credit concerns. As of
December 31, 2005, the top 10 industries remained predominantly unchanged from year-end 2004, with
the exception of Oil and gas, which replaced Media. Below are summaries of the top 10 industry
concentrations as of December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral |
|
|
|
|
|
|
|
|
|
|
|
Noninvestment-grade |
|
|
|
|
|
|
|
|
|
|
held against |
|
As of December 31, 2005 |
|
Credit |
|
|
Investment |
|
|
|
|
|
|
|
|
|
Net charge-offs/ |
|
Credit |
|
derivative |
|
(in millions, except ratios) |
|
exposure |
(d) |
|
grade |
|
Noncriticized |
|
|
Criticized |
|
|
(recoveries) |
|
derivative hedges(e) |
|
receivables |
(d) |
|
Top 10 industries(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks and finance companies |
|
$ |
53,579 |
|
|
|
88 |
% |
|
$ |
6,462 |
|
|
$ |
232 |
|
|
$ |
(16 |
) |
|
$ |
(9,490 |
) |
|
$ |
(1,482 |
) |
Real estate |
|
|
29,974 |
|
|
|
55 |
|
|
|
13,226 |
|
|
|
276 |
|
|
|
|
|
|
|
(560 |
) |
|
|
(2 |
) |
Consumer products |
|
|
25,678 |
|
|
|
71 |
|
|
|
6,791 |
|
|
|
590 |
|
|
|
2 |
|
|
|
(927 |
) |
|
|
(28 |
) |
Healthcare |
|
|
25,435 |
|
|
|
79 |
|
|
|
4,977 |
|
|
|
243 |
|
|
|
12 |
|
|
|
(581 |
) |
|
|
(7 |
) |
State and municipal governments(b) |
|
|
25,328 |
|
|
|
98 |
|
|
|
409 |
|
|
|
40 |
|
|
|
|
|
|
|
(597 |
) |
|
|
(1 |
) |
Utilities |
|
|
20,482 |
|
|
|
90 |
|
|
|
1,841 |
|
|
|
295 |
|
|
|
(4 |
) |
|
|
(1,624 |
) |
|
|
|
|
Retail and consumer services(b) |
|
|
19,920 |
|
|
|
75 |
|
|
|
4,654 |
|
|
|
288 |
|
|
|
12 |
|
|
|
(989 |
) |
|
|
(5 |
) |
Oil and gas |
|
|
18,200 |
|
|
|
77 |
|
|
|
4,267 |
|
|
|
9 |
|
|
|
|
|
|
|
(1,007 |
) |
|
|
|
|
Asset managers |
|
|
17,358 |
|
|
|
82 |
|
|
|
2,949 |
|
|
|
103 |
|
|
|
(1 |
) |
|
|
(25 |
) |
|
|
(954 |
) |
Securities firms and exchanges |
|
|
17,094 |
|
|
|
89 |
|
|
|
1,833 |
|
|
|
15 |
|
|
|
|
|
|
|
(2,009 |
) |
|
|
(1,525 |
) |
All other |
|
|
282,802 |
|
|
|
82 |
|
|
|
47,966 |
|
|
|
3,081 |
|
|
|
(82 |
) |
|
|
(12,073 |
) |
|
|
(1,996 |
) |
|
Total excluding HFS |
|
$ |
535,850 |
|
|
|
81 |
% |
|
$ |
95,375 |
|
|
$ |
5,172 |
|
|
$ |
(77 |
) |
|
$ |
(29,882 |
) |
|
$ |
(6,000 |
) |
|
Held-for-sale(c) |
|
|
17,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exposure |
|
$ |
553,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral |
|
|
|
|
|
|
|
|
|
|
|
Noninvestment-grade |
|
|
|
|
|
|
|
|
|
|
held against |
|
As of December 31, 2004 |
|
Credit |
|
|
Investment |
|
|
|
|
|
|
|
|
|
Net charge-offs/ |
|
Credit |
|
derivative |
|
(in millions, except ratios) |
|
exposure |
(d) |
|
grade |
|
Noncriticized |
|
|
Criticized |
|
(recoveries) |
|
derivative hedges(e) |
|
receivables |
(d) |
|
Top 10 industries(a) Banks and finance companies |
|
$ |
55,840 |
|
|
|
90 |
% |
|
$ |
5,348 |
|
|
$ |
187 |
|
|
$ |
6 |
|
|
$ |
(11,695 |
) |
|
$ |
(3,464 |
) |
Real estate |
|
|
25,761 |
|
|
|
62 |
|
|
|
9,036 |
|
|
|
765 |
|
|
|
9 |
|
|
|
(800 |
) |
|
|
(45 |
) |
Consumer products |
|
|
21,251 |
|
|
|
68 |
|
|
|
6,267 |
|
|
|
479 |
|
|
|
85 |
|
|
|
(1,189 |
) |
|
|
(50 |
) |
Healthcare |
|
|
21,890 |
|
|
|
79 |
|
|
|
4,321 |
|
|
|
249 |
|
|
|
1 |
|
|
|
(741 |
) |
|
|
(13 |
) |
State and municipal governments |
|
|
19,728 |
|
|
|
97 |
|
|
|
592 |
|
|
|
14 |
|
|
|
|
|
|
|
(394 |
) |
|
|
(18 |
) |
Utilities |
|
|
21,132 |
|
|
|
85 |
|
|
|
2,316 |
|
|
|
890 |
|
|
|
63 |
|
|
|
(2,247 |
) |
|
|
(27 |
) |
Retail and consumer services |
|
|
21,573 |
|
|
|
76 |
|
|
|
4,815 |
|
|
|
393 |
|
|
|
|
|
|
|
(1,767 |
) |
|
|
(42 |
) |
Oil and gas |
|
|
14,420 |
|
|
|
81 |
|
|
|
2,713 |
|
|
|
51 |
|
|
|
9 |
|
|
|
(1,282 |
) |
|
|
(26 |
) |
Asset managers |
|
|
20,199 |
|
|
|
79 |
|
|
|
4,192 |
|
|
|
115 |
|
|
|
(15 |
) |
|
|
(80 |
) |
|
|
(655 |
) |
Securities firms and exchanges |
|
|
18,034 |
|
|
|
88 |
|
|
|
2,218 |
|
|
|
17 |
|
|
|
1 |
|
|
|
(1,398 |
) |
|
|
(2,068 |
) |
All other |
|
|
295,902 |
|
|
|
82 |
|
|
|
48,150 |
|
|
|
5,122 |
|
|
|
27 |
|
|
|
(15,607 |
) |
|
|
(2,893 |
) |
|
Total excluding HFS |
|
$ |
535,730 |
|
|
|
82 |
% |
|
$ |
89,968 |
|
|
$ |
8,282 |
|
|
$ |
186 |
|
|
$ |
(37,200 |
) |
|
$ |
(9,301 |
) |
|
Held-for-sale(c) |
|
|
6,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exposure |
|
$ |
542,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Based upon December 31, 2005, determination of Top 10 industries. |
(b) |
|
During the second quarter of 2005, the Firm revised its industry classification for educational
institutions to better reflect risk correlations and enhance the Firms management of industry
risk, resulting in an increase to State and municipal governments and a decrease to Retail and
consumer services. |
(c) |
|
HFS loans primarily relate to securitization and syndication activities. |
(d) |
|
Credit exposure is net of risk participations and excludes the benefit of credit derivative
hedges and collateral held against derivative receivables or loans. At December 31, 2005 and 2004,
collateral held against derivative receivables excludes $27 billion and $32 billion, respectively,
of cash collateral as a result of the Firm electing to report the fair value of derivative assets
and liabilities net of cash received and paid, respectively, under legally enforceable master
netting agreements. |
(e) |
|
Represents notional amounts only; these credit derivatives do not qualify for hedge accounting
under SFAS 133. |
|
|
|
|
|
|
66
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1
and lower, as defined by Standard & Poors/Moodys. The criticized component of the portfolio
decreased to $5.2 billion (excluding HFS) at December 31, 2005, from $8.3 billion at year-end 2004,
reflecting strong credit quality, refinancings and gross charge-offs. Also contributing to the
decline was a refinement in methodology in the first quarter of 2005 to align the ratings
methodologies of the heritage firms.
At December 31, 2005, Automotive, Telecom services and Retail and consumer services moved into the
top 10 of wholesale criticized exposure, replacing Chemicals/plastics, Business services and
Metals/mining industries.
Wholesale nonperforming assets
Wholesale nonperforming assets (excluding purchased held-for-sale wholesale loans) decreased by
$779 million from $1.8 billion at
December 31, 2004, as a result of loan sales, repayments and gross charge-offs. For full year 2005,
wholesale net recoveries were $77 million compared with net charge-offs of $186 million in 2004,
primarily due to lower gross charge-offs. The net recovery rate for full year 2005 was 0.06%
compared with a net charge-off rate of 0.18% for the prior year. Net charge-offs do not include $67
million of gains from sales of nonperforming loans that were sold during 2005 to a counter-party
other than the original borrower. When it is determined that a loan will be sold it is transferred
into a held-for-sale account. Held-for-sale loans are accounted for at lower of cost or fair value,
with changes in value recorded in other revenue.
Wholesale criticized exposure industry concentrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
As of December 31, |
|
Credit |
|
|
% of |
|
|
Credit |
|
|
% of |
|
(in millions) |
|
exposure |
|
|
portfolio |
|
|
exposure |
|
|
portfolio |
|
|
Media |
|
$ |
684 |
|
|
|
13.2 |
% |
|
$ |
509 |
|
|
|
6.1 |
% |
Automotive |
|
|
643 |
|
|
|
12.4 |
|
|
|
359 |
|
|
|
4.4 |
|
Consumer products |
|
|
590 |
|
|
|
11.4 |
|
|
|
479 |
|
|
|
5.8 |
|
Telecom services |
|
|
430 |
|
|
|
8.3 |
|
|
|
275 |
|
|
|
3.3 |
|
Airlines |
|
|
333 |
|
|
|
6.5 |
|
|
|
450 |
|
|
|
5.4 |
|
Utilities |
|
|
295 |
|
|
|
5.7 |
|
|
|
890 |
|
|
|
10.7 |
|
Machinery and equipment
manufacturing |
|
|
290 |
|
|
|
5.6 |
|
|
|
459 |
|
|
|
5.6 |
|
Retail and consumer services |
|
|
288 |
|
|
|
5.6 |
|
|
|
393 |
|
|
|
4.8 |
|
Real estate |
|
|
276 |
|
|
|
5.4 |
|
|
|
765 |
|
|
|
9.2 |
|
Building materials/construction |
|
|
266 |
|
|
|
5.1 |
|
|
|
430 |
|
|
|
5.2 |
|
All other |
|
|
1,077 |
|
|
|
20.8 |
|
|
|
3,273 |
|
|
|
39.5 |
|
|
Total excluding HFS |
|
$ |
5,172 |
|
|
|
100.0 |
% |
|
$ |
8,282 |
|
|
|
100.0 |
% |
|
Held-for-sale(a) |
|
|
1,069 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
Total |
|
$ |
6,241 |
|
|
|
|
|
|
$ |
8,284 |
|
|
|
|
|
|
|
|
|
(a) |
|
HFS loans primarily relate to securitization and syndication activities; excludes
purchased nonperforming HFS loans. |
Wholesale selected industry discussion
Presented below is a discussion of several industries to which the Firm has significant exposure
and which it continues to monitor because of actual or potential credit concerns. For additional
information, refer to the tables above and on the preceding page.
|
|
Banks and finance companies: This industry group, primarily consisting of exposure to commercial
banks, is the largest segment of the Firms wholesale credit portfolio. Credit quality is high, as
88% of the exposure in this category is rated investment-grade. |
|
|
|
Real estate: This industry, the second largest segment of the Firms wholesale credit
portfolio, grew modestly in 2005, as the portfolio continued to benefit from relatively low
interest rates, high liquidity and increased capital demand. The exposure is well-diversified by
client, transaction type, geography and property type. |
|
|
|
Oil and gas: During 2005, exposure to this industry group increased as a result of the rise in
oil and gas prices; derivative receivables MTM increased on contracts that were executed at lower
price levels. In addition, the Firm extended shorter term loans that were expected to be refinanced
through capital market transactions and further syndications. |
|
|
|
Media: Criticized exposures within Media increased in 2005, and this industry now represents the
largest percentage of the total criticized portfolio. The increase was attributable primarily to
the extension of short-term financings to select borrowers. The remaining Media portfolio is
stable, with the majority of the exposure rated investment-grade. |
|
|
|
Automotive: In 2005, Automotive original equipment manufacturers (OEMs) and suppliers based in
North America were negatively affected by a challenging operating environment. As a result,
criticized exposures to the Automotive industry grew, primarily as a result of downgrades to select
names within the portfolio. However, though larger in the aggregate, most of the criticized
exposure remains undrawn and performing. |
|
|
|
All other: All other in the wholesale credit exposure concentration table at December 31, 2005,
excluding HFS, included $283 billion of credit exposure to 21 industry segments. Exposures related
to SPEs and high-net-worth individuals totaled 45% of this category. SPEs provide secured financing
(generally backed by receivables, loans or bonds on a bankruptcy-remote, non-recourse or
limited-recourse basis) originated by companies in a diverse group of industries that are not
highly correlated. The remaining All other exposure is well diversified across other industries;
none comprise more than 3% of total exposure. |
Derivative contracts
In the normal course of business, the Firm utilizes derivative instruments to meet the needs of
customers, to generate revenues through trading activities, to manage exposure to fluctuations in
interest rates, currencies and other markets and to manage its own credit risk. The Firm uses the
same credit risk management procedures as those used for its traditional lending activities to
assess and approve potential credit exposures when entering into derivative transactions.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
67 |
Managements discussion and analysis
JPMorgan Chase & Co.
The following table summarizes the aggregate notional amounts and the reported derivative
receivables (i.e., the MTM or fair value of the derivative contracts after taking into account the
effects of legally enforceable master netting agreements) at each of the dates indicated:
Notional amounts and derivative receivables marked to market (MTM)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
Notional amounts(a) |
|
|
Derivative receivables MTM |
(in billions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Interest rate |
|
$ |
38,493 |
|
|
$ |
37,022 |
|
|
$ |
30 |
|
|
$ |
46 |
|
Foreign exchange |
|
|
2,136 |
|
|
|
1,886 |
|
|
|
3 |
|
|
|
8 |
|
Equity |
|
|
458 |
|
|
|
434 |
|
|
|
6 |
|
|
|
6 |
|
Credit derivatives |
|
|
2,241 |
|
|
|
1,071 |
|
|
|
4 |
|
|
|
3 |
|
Commodity |
|
|
265 |
|
|
|
101 |
|
|
|
7 |
|
|
|
3 |
|
|
Total |
|
$ |
43,593 |
|
|
$ |
40,514 |
|
|
|
50 |
|
|
|
66 |
|
Collateral held against
derivative receivables |
|
NA |
|
|
NA |
|
|
|
(6 |
) |
|
|
(9 |
) |
|
Exposure net of collateral |
|
NA |
| |
NA |
| |
$ |
44 |
(b) |
|
$ |
57 |
(c) |
|
|
|
|
(a) |
|
The notional amounts represent the gross sum of long and short third-party notional
derivative contracts, excluding written options and foreign exchange spot contracts, which
significantly exceed the possible credit losses that could arise from such transactions. For most
derivative transactions, the notional principal amount does not change hands; it is used simply as
a reference to calculate payments. |
(b) |
|
The Firm held $33 billion of collateral against derivative receivables as of December 31, 2005,
consisting of $27 billion in net cash received under credit support annexes to legally enforceable
master netting agreements, and $6 billion of other liquid securities collateral. The benefit of the
$27 billion is reflected within the $50 billion of derivative receivables MTM. Excluded from the
$33 billion of collateral is $10 billion of collateral delivered by clients at the initiation of
transactions; this collateral secures exposure that could arise in the derivatives portfolio should
the MTM of the clients transactions move in the Firms favor. Also excluded are credit
enhancements in the form of letters of credit and surety receivables. |
(c) |
|
The Firm held $41 billion of collateral against derivative receivables as of December 31, 2004,
consisting of $32 billion in net cash received under credit support annexes to legally enforceable
master netting agreements, and $9 billion of other liquid securities collateral. The benefit of the
$32 billion is reflected within the $66 billion of derivative receivables MTM. Excluded from the
$41 billion of collateral is $10 billion of collateral delivered by clients at the initiation of
transactions; this collateral secures exposure that could arise in the derivatives portfolio should
the MTM of the clients transactions move in the Firms favor. Also excluded are credit
enhancements in the form of letters of credit and surety receivables. |
The MTM of derivative receivables contracts represents the cost to replace the contracts at
current market rates should the counterparty default. When JPMorgan Chase has more than one
transaction outstanding with a counter-party, and a legally enforceable master netting agreement
exists with that counterparty, the netted MTM exposure, less collateral held, represents, in the
Firms view, the appropriate measure of current credit risk.
While useful as a current view of credit exposure, the net MTM value of the derivative receivables
does not capture the potential future variability of that credit exposure. To capture the potential
future variability of credit exposure, the Firm calculates, on a client-by-client basis, three
measures of potential derivatives-related credit loss: Peak, Derivative Risk Equivalent (DRE) and
Average exposure (AVG). These measures all incorporate netting and collateral benefits, where applicable.
Peak exposure to a counterparty is an extreme measure of exposure calculated at a 97.5% confidence
level. However, the total potential future credit risk embedded in the Firms derivatives portfolio
is not the simple sum of all Peak client credit risks. This is because, at the portfolio level,
credit risk is reduced by the fact that when offsetting transactions are done with separate
counterparties, only one of the two trades can generate a credit loss, even if both counterparties
were to default simultaneously. The Firm refers to this effect as market diversification, and the
Market-Diversified Peak (MDP) measure is a portfolio aggregation of counterparty Peak measures,
representing the maximum losses at the 97.5% confidence level that would occur if all
counterparties defaulted under any one given market scenario and time frame.
Derivative Risk Equivalent (DRE) exposure is a measure that expresses the riskiness of derivative
exposure on a basis intended to be equivalent to the riskiness of loan exposures. The measurement
is done by equating the unexpected loss in a derivative counterparty exposure (which takes into
consideration both the loss volatility and the credit rating of the counterparty) with the
unexpected loss in a loan exposure (which takes into consideration only the credit rating of the
counterparty). DRE is a less extreme measure of
potential credit loss than Peak and is the primary measure used by the Firm for credit approval of
derivative transactions.
Finally, Average exposure (AVG) is a measure of the expected MTM value of the Firms derivative
receivables at future time periods, including the benefit of collateral. AVG exposure over the
total life of the derivative contract is used as the primary metric for pricing purposes and is
used to calculate credit capital and the Credit Valuation Adjustment
(CVA), as further described
below. Average exposure was $36 billion and $38 billion at December 31, 2005 and 2004,
respectively, compared with derivative receivables MTM net of other highly liquid collateral of $44
billion and $57 billion at December 31, 2005 and 2004, respectively.
The graph below shows exposure profiles to derivatives over the next 10 years as calculated by the
MDP, DRE and AVG metrics. All three measures generally show declining exposure after the first
year, if no new trades were added to the portfolio.
Exposure profile of derivatives measures
December 31, 2005
(in billions)
|
|
|
|
|
|
68
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The MTM value of the Firms derivative receivables incorporates an adjustment, the CVA, to
reflect the credit quality of counterparties. The CVA is based upon the Firms AVG exposure to a
counterparty and the counterpartys credit spread in the credit derivatives market. The primary
components of changes in CVA are credit spreads, new deal activity or unwinds, and changes in the
underlying market environment. The Firm believes that active risk management
is essential to controlling the dynamic credit risk in the derivatives portfolio. The Firm risk
manages exposure to changes in CVA by entering into credit derivative transactions, as well as
interest rate, foreign exchange, equity and commodity derivative transactions. The MTM value of the
Firms derivative payables does not incorporate a valuation adjustment to reflect JPMorgan Chases
credit quality.
The following table summarizes the ratings profile of the Firms Consolidated balance sheets
Derivative receivables MTM, net of cash and other liquid securities collateral, for the dates
indicated:
Ratings profile of derivative receivables MTM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating equivalent |
|
2005 |
|
|
2004 |
|
December 31, |
|
Exposure net |
|
|
% of exposure |
|
|
Exposure net |
|
|
% of exposure |
|
(in millions) |
|
of collateral |
(a) |
|
net of collateral |
|
|
of collateral |
(b) |
|
net of collateral |
|
|
AAA to AA- |
|
$ |
20,735 |
|
|
|
48 |
% |
|
$ |
30,384 |
|
|
|
53 |
% |
A+ to A- |
|
|
8,074 |
|
|
|
18 |
|
|
|
9,109 |
|
|
|
16 |
|
BBB+ to BBB- |
|
|
8,243 |
|
|
|
19 |
|
|
|
9,522 |
|
|
|
17 |
|
BB+ to B- |
|
|
6,580 |
|
|
|
15 |
|
|
|
7,271 |
|
|
|
13 |
|
CCC+ and below |
|
|
155 |
|
|
|
|
|
|
|
395 |
|
|
|
1 |
|
|
Total |
|
$ |
43,787 |
|
|
|
100 |
% |
|
$ |
56,681 |
|
|
|
100 |
% |
|
|
|
|
(a) |
|
The Firm held $33 billion of collateral against derivative receivables as of December 31,
2005, consisting of $27 billion in net cash received under credit support annexes to legally
enforceable master netting agreements, and $6 billion of other liquid securities collateral. The
benefit of the $27 billion is reflected within the $50 billion of derivative receivables MTM.
Excluded from the $33 billion of collateral is $10 billion of collateral delivered by clients at
the initiation of transactions; this collateral secures exposure that could arise in the
derivatives portfolio should the MTM of the clients transactions move in the Firms favor. Also
excluded are credit enhancements in the form of letters of credit and surety receivables. |
(b) |
|
The Firm held $41 billion of collateral against derivative receivables as of December 31, 2004,
consisting of $32 billion in net cash received under credit support annexes to legally enforceable
master netting agreements, and $9 billion of other liquid securities collateral. The benefit of the
$32 billion is reflected within the $66 billion of derivative receivables MTM. Excluded from the
$41 billion of collateral is $10 billion of collateral delivered by clients at the initiation of
transactions; this collateral secures exposure that could arise in the derivatives portfolio should
the MTM of the clients transactions move in the Firms favor. Also excluded are credit
enhancements in the form of letters of credit and surety receivables. |
The Firm actively pursues the use of collateral agreements to mitigate counterparty credit risk
in derivatives. The percentage of the Firms derivatives transactions subject to collateral
agreements increased slightly, to 81% as of December 31, 2005, from 79% at December 31, 2004. The
Firm posted $27 billion and $31 billion of collateral as of December 31, 2005 and 2004,
respectively.
Certain derivative and collateral agreements include provisions that require the counterparty
and/or the Firm, upon specified downgrades in their respective credit ratings, to post collateral
for the benefit of the other party. As of December 31, 2005, the impact of a single-notch ratings
downgrade to JPMorgan Chase Bank, from its current rating of AA- to A+, would have been an
additional $1.4 billion of collateral posted by the Firm; the impact of a six-notch ratings
downgrade (from AA- to BBB-) would have been $3.8 billion of additional collateral. Certain
derivative contracts also provide for termination of the contract, generally upon a downgrade of
either the Firm or the counterparty, at the then-existing MTM value of the derivative contracts.
Credit derivatives
The following table presents the Firms notional amounts of credit derivatives protection
purchased and sold by the respective businesses as of December 31, 2005 and 2004:
Credit derivatives positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
|
Portfolio management |
|
|
Dealer/client |
|
|
|
|
December 31, |
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
|
|
(in billions) |
|
purchased |
(a) |
|
sold |
|
|
purchased |
|
|
sold |
|
|
Total |
|
|
2005 |
|
$ |
31 |
|
|
$ |
1 |
|
|
$ |
1,096 |
|
|
$ |
1,113 |
|
|
$ |
2,241 |
|
2004 |
|
|
37 |
|
|
|
|
|
|
|
501 |
|
|
|
533 |
|
|
|
1,071 |
|
|
|
|
|
(a) |
|
Includes $848 million and $2 billion at December 31, 2005 and 2004, respectively, of
portfolio credit derivatives. |
In managing wholesale credit exposure, the Firm purchases single-name and portfolio credit
derivatives; this activity does not reduce the reported level of assets on the balance sheet or the
level of reported off-balance sheet commitments. The Firm also diversifies exposures by providing
(i.e., selling) credit protection, which increases exposure to industries or clients where the Firm
has little or no client-related exposure. This activity is not material to the Firms overall
credit exposure.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
69 |
Managements discussion and analysis
JPMorgan Chase & Co.
JPMorgan Chase has limited counterparty exposure as a result of credit derivatives
transactions. Of the $50 billion of total Derivative receivables at December 31, 2005,
approximately $4 billion, or 8%, was associated with credit derivatives, before the benefit of
liquid securities collateral.
Dealer/client
At December 31, 2005, the total notional amount of protection purchased and sold in the
dealer/client business increased $1.2 trillion from year-end 2004 as a result of increased trade
volume in the market. This business has a mismatch between the total notional amounts of protection
purchased and sold. However, in the Firms view, the risk positions are largely matched when
securities used to risk manage certain derivative positions are taken into consideration and the
notional amounts are adjusted to a duration-based equivalent basis or to reflect different degrees
of subordination in tranched structures.
Use of single-name and portfolio credit derivatives
|
|
|
|
|
|
|
|
|
December 31, |
Notional amount of protection purchased |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
Credit derivatives used to manage: |
|
|
|
|
|
|
|
|
Loans and lending-related commitments |
|
$ |
18,926 |
|
|
$ |
25,002 |
|
Derivative receivables |
|
|
12,088 |
|
|
|
12,235 |
|
|
Total |
|
$ |
31,014 |
|
|
$ |
37,237 |
|
|
Credit portfolio management activities
The credit derivatives used by JPMorgan Chase for portfolio management activities do not
qualify for hedge accounting under SFAS 133, and therefore, effectiveness testing under SFAS 133 is
not performed. These derivatives are reported at fair value, with gains and losses recognized as
Trading revenue. The MTM value incorporates both the cost of credit derivative premiums and changes
in value due to movement in spreads and credit events; in contrast, the loans and lending-related
commitments being risk-managed are accounted for on an accrual basis. Loan interest and fees are
generally recognized in Net interest income, and impairment is recognized in the Provision for
credit losses. This asymmetry in accounting treatment, between loans and lending-related
commitments and the credit derivatives utilized in portfolio management activities, causes earnings
volatility that is not representative, in the Firms view, of the true changes in value of the
Firms overall credit exposure. The MTM related to the Firms credit derivatives used for managing
credit exposure, as well as the mark related to the CVA, which reflects the credit quality of
derivatives counterparty exposure, are included in the table below:
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
(c) |
|
Hedges of lending-related commitments(a) |
|
$ |
24 |
|
|
$ |
(234 |
) |
CVA and hedges of CVA(a) |
|
|
84 |
|
|
|
188 |
|
|
Net gains (losses)(b) |
|
$ |
108 |
|
|
$ |
(46 |
) |
|
|
|
|
(a) |
|
These hedges do not qualify for hedge accounting under SFAS 133. |
(b) |
|
Excludes $8 million and $52 million in 2005 and 2004, respectively, of other credit portfolio
trading results that are not associated with hedging activities. |
(c) |
|
Includes six months of the combined Firms results and six months of heritage JPMorgan Chase
results. |
|
The Firm also actively manages wholesale credit exposure through loan and commitment sales.
During 2005 and 2004, the Firm sold $4.0 billion and $5.9 billion of loans and commitments,
respectively, recognizing gains of $76 million and losses of $8 million in 2005 and 2004,
respectively. These activities are not related to the Firms securitization activities, which are
undertaken for liquidity and balance sheet management purposes. For a further discussion of
securitization activity, see Note 13 on pages 108111 of this Annual Report.
Lending-related commitments
The contractual amount of wholesale lending-related commitments was $324 billion at December 31,
2005, compared with $309 billion at December 31, 2004. In the Firms view, the total contractual
amount of these instruments is not representative of the Firms
actual credit risk exposure or funding requirements. In determining the amount of credit risk
exposure the Firm has to wholesale lending-related commitments, which is used as the basis for
allocating credit risk capital to these instruments, the Firm has established a loan-equivalent
amount for each commitment; this amount 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. The loan equivalent amount of the Firms
lending-related commitments as of December 31, 2005 and 2004, was $178 billion and $162 billion,
respectively.
Country exposure
The Firm has a comprehensive process for measuring and managing exposures and risk in emerging
markets countriesdefined as those countries potentially vulnerable to sovereign events.
Exposures to a country include all credit-related lending, trading, and investment activities,
whether cross-border or locally funded. Exposure amounts are adjusted for credit enhancements
(e.g., guarantees and letters of credit) provided by third parties located outside the country, if
the enhancements fully cover the country risk as well as the business risk. As of December 31,
2005, the Firms exposure to any individual emerging markets country was not material.
|
|
|
|
|
|
70
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Consumer credit portfolio
JPMorgan Chases consumer portfolio consists primarily of residential mortgages and home equity
loans, credit cards, auto and education financings and loans to small businesses. The domestic
consumer portfolio reflects the
benefit of diversification from both a product and a geographical perspective. The primary focus is
on serving the prime consumer credit market.
The
following table presents managed consumer credit-related information for the dates indicated:
Consumer portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
|
Nonperforming |
|
|
|
|
|
|
|
|
|
|
Average annual |
|
As of or for the year ended December 31, |
|
exposure |
|
|
assets(g) |
|
|
Net charge-offs |
|
|
net charge-off rate(i) |
|
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004(f) |
|
|
2005 |
|
|
2004(f) |
|
|
Consumer real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home finance Home equity and other(a) |
|
$ |
76,727 |
|
|
$ |
67,837 |
|
|
$ |
422 |
|
|
$ |
416 |
|
|
$ |
129 |
|
|
$ |
554 |
|
|
|
0.18 |
% |
|
|
1.18 |
% |
Home finance Mortgage |
|
|
56,726 |
|
|
|
56,816 |
|
|
|
441 |
|
|
|
257 |
|
|
|
25 |
|
|
|
19 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
Total Home finance(a) |
|
|
133,453 |
|
|
|
124,653 |
|
|
|
863 |
(h) |
|
|
673 |
(h) |
|
|
154 |
|
|
|
573 |
|
|
|
0.13 |
|
|
|
0.65 |
|
Auto & education finance(b) |
|
|
49,047 |
|
|
|
62,712 |
|
|
|
195 |
|
|
|
193 |
|
|
|
277 |
|
|
|
263 |
|
|
|
0.54 |
|
|
|
0.52 |
|
Consumer & small business and other |
|
|
14,799 |
|
|
|
15,107 |
|
|
|
280 |
|
|
|
295 |
|
|
|
141 |
|
|
|
154 |
|
|
|
0.98 |
|
|
|
1.64 |
|
Credit card receivables reported(c) |
|
|
71,738 |
|
|
|
64,575 |
|
|
|
13 |
|
|
|
8 |
|
|
|
3,324 |
|
|
|
1,923 |
|
|
|
4.94 |
|
|
|
4.95 |
|
|
Total consumer loans reported |
|
|
269,037 |
|
|
|
267,047 |
|
|
|
1,351 |
|
|
|
1,169 |
|
|
|
3,896 |
|
|
|
2,913 |
|
|
|
1.56 |
|
|
|
1.56 |
|
Credit card securitizations(c)(d) |
|
|
70,527 |
|
|
|
70,795 |
|
|
|
|
|
|
|
|
|
|
|
3,776 |
|
|
|
2,898 |
|
|
|
5.47 |
|
|
|
5.51 |
|
|
Total consumer loans managed(c) |
|
|
339,564 |
|
|
|
337,842 |
|
|
|
1,351 |
|
|
|
1,169 |
|
|
|
7,672 |
|
|
|
5,811 |
|
|
|
2.41 |
|
|
|
2.43 |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
180 |
|
|
|
224 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total consumer related assets managed |
|
|
339,564 |
|
|
|
337,842 |
|
|
|
1,531 |
|
|
|
1,393 |
|
|
|
7,672 |
|
|
|
5,811 |
|
|
|
2.41 |
|
|
|
2.43 |
|
Consumer lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home finance |
|
|
65,106 |
|
|
|
53,223 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Auto & education finance |
|
|
5,732 |
|
|
|
5,193 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Consumer & small business and other |
|
|
5,437 |
|
|
|
10,312 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Credit card(e) |
|
|
579,321 |
|
|
|
532,468 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total lending-related commitments |
|
|
655,596 |
|
|
|
601,196 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total consumer credit portfolio |
|
$ |
995,160 |
|
|
$ |
939,038 |
|
|
$ |
1,531 |
|
|
$ |
1,393 |
|
|
$ |
7,672 |
|
|
$ |
5,811 |
|
|
|
2.41 |
% |
|
|
2.43 |
% |
|
Total average HFS loans |
|
$ |
15,675 |
|
|
$ |
14,736 |
(f) |
|
NA |
| |
NA |
| |
NA |
| |
NA |
| |
NA |
| |
NA |
|
Memo: Credit card managed |
|
|
142,265 |
|
|
|
135,370 |
|
|
$ |
13 |
|
|
$ |
8 |
|
|
$ |
7,100 |
|
|
$ |
4,821 |
|
|
|
5.21 |
% |
|
|
5.27 |
% |
|
|
|
|
(a) |
|
Includes $406 million of charge-offs related to the manufactured home loan portfolio in
the fourth quarter of 2004. |
(b) |
|
Excludes operating lease-related assets of $858 million for December 31, 2005. Balances at
December 31, 2004, were insignificant. |
(c) |
|
Past-due loans 90 days and over and accruing includes credit card receivables of $1.1 billion
and $998 million, and related credit card securitizations of $730 million and $1.3 billion at
December 31, 2005 and 2004, respectively. |
(d) |
|
Represents securitized credit cards. For a further discussion of credit card securitizations,
see Card Services on pages 4546 of this Annual Report. |
(e) |
|
The credit card lending-related commitments represent the total available credit to the Firms
cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders
will exercise their entire available line of credit at any given point in time. The Firm can reduce
or cancel a credit card commitment by providing the cardholder prior notice or without notice as
permitted by law. |
(f) |
|
Includes six months of the combined Firms results and six months of heritage JPMorgan Chase
results. |
(g) |
|
Includes nonperforming HFS loans of $27 million and $13 million at December 31, 2005 and 2004,
respectively. |
(h) |
|
Excludes nonperforming assets related to loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by government agencies of $1.1 billion and $1.5
billion for December 31, 2005, and December 31, 2004, respectively. These amounts are excluded, as
reimbursement is proceeding normally. |
(i) |
|
Net charge-off rates exclude average loans HFS. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
71 |
Managements discussion and analysis
JPMorgan Chase & Co.
Total managed consumer loans at December 31, 2005, were $340 billion, up from $338 billion at
year-end 2004. Consumer lending-related commitments increased by 9% to $656 billion at December
31, 2005, reflecting growth in credit cards and home equity lines of credit. The following
discussion relates to the specific loan and lending-related categories within the consumer
portfolio.
Retail Financial Services
Average RFS loan balances for 2005 were $198 billion. New loans originated in 2005 reflect high
credit quality consistent with managements focus on the prime credit market segment. The net
charge-off rate for retail loans in 2005 was 0.31%, a decrease of 36 basis points from 2004. This
decrease was attributable primarily to $406 million of charge-offs in the fourth quarter of 2004
associated with the sale of the $4.0 billion manufactured home loan portfolio. Excluding these
charge-offs, the net charge-off rate would have improved eight basis points.
Home Finance: Home finance loans on the balance sheet at December 31, 2005, were $133 billion. This
amount consisted of $77 billion of home equity and other loans and $56 billion of mortgages,
including mortgage loans held-for-sale. Home finance receivables as of December 31, 2005, reflect
an increase of $9 billion from year-end 2004 driven by growth in the home equity portfolio. Home
Finance provides consumer real estate lending to the full spectrum of credit borrowers, including
$15 billion in sub-prime credits at December 31, 2005. Home Finance does not offer mortgage
products that result in negative amortization but does offer mortgages with interest-only payment
options to predominantly prime borrowers.
The geographic distribution of outstanding consumer real estate loans is well diversified as shown
in the table below.
Consumer real estate loan portfolio by geographic location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2005 |
|
|
2004 |
|
(in billions) |
|
Outstanding |
|
|
% |
|
|
Outstanding |
|
|
% |
|
|
Top 10 U.S. States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
$ |
24.4 |
|
|
|
18 |
% |
|
$ |
22.8 |
|
|
|
18 |
% |
New York |
|
|
19.5 |
|
|
|
15 |
|
|
|
18.4 |
|
|
|
15 |
|
Florida |
|
|
10.3 |
|
|
|
8 |
|
|
|
7.1 |
|
|
|
6 |
|
Illinois |
|
|
7.7 |
|
|
|
6 |
|
|
|
8.0 |
|
|
|
6 |
|
Texas |
|
|
7.6 |
|
|
|
6 |
|
|
|
7.9 |
|
|
|
6 |
|
Ohio |
|
|
6.1 |
|
|
|
5 |
|
|
|
6.1 |
|
|
|
5 |
|
Arizona |
|
|
5.8 |
|
|
|
4 |
|
|
|
5.2 |
|
|
|
4 |
|
New Jersey |
|
|
5.3 |
|
|
|
4 |
|
|
|
4.5 |
|
|
|
4 |
|
Michigan |
|
|
5.2 |
|
|
|
4 |
|
|
|
5.2 |
|
|
|
4 |
|
Colorado |
|
|
3.2 |
|
|
|
2 |
|
|
|
3.2 |
|
|
|
3 |
|
|
Total Top 10 |
|
|
95.1 |
|
|
|
72 |
|
|
|
88.4 |
|
|
|
71 |
|
Other |
|
|
38.4 |
|
|
|
28 |
|
|
|
36.3 |
|
|
|
29 |
|
|
Total |
|
$ |
133.5 |
|
|
|
100 |
% |
|
$ |
124.7 |
|
|
|
100 |
% |
|
Auto & Education Finance: As of December 31, 2005, Auto & education finance loans decreased to
$49 billion from $63 billion at year-end 2004. The decrease in outstanding loans was caused
primarily by a difficult auto lending market in 2005, $3.8 billion in securitizations, the sale of
the $2.0 billion recreational vehicle portfolio and the de-emphasis of vehicle leasing, which
comprised $4.4 billion of outstanding loans as of December 31, 2005. It is anticipated that over
time vehicle leases will account for a smaller share of balance sheet receivables and exposure. The
Auto & Education loan portfolio reflects a high concentration of prime quality credits.
Consumer & Small Business and other: As of December 31, 2005, Small business & other consumer loans
remained relatively stable at $14.8 billion compared with 2004 year-end levels of $15.1 billion.
The portfolio reflects highly collateralized loans, often with personal loan guarantees.
Card Services
JPMorgan Chase analyzes the credit card portfolio on a managed basis, which includes credit card
receivables on the consolidated balance sheet and those receivables sold to investors through
securitization. Managed credit card receivables were $142 billion at December 31, 2005, an increase
of $7 billion from year-end 2004, reflecting solid growth in the business as well as the addition
of $2.2 billion of receivables as a result of the acquisition of the Sears Canada credit card
business.
Consumer credit quality trends remained stable despite the effects of increased losses due to
bankruptcy legislation, which became effective October 17, 2005. The managed credit card net
charge-off rate decreased to 5.21% in 2005 from 5.27% in 2004. The 30-day delinquency rates
declined significantly to 2.79% in 2005 from 3.70% in 2004, primarily driven by accelerated loss
recognition of delinquent accounts as a result of the bankruptcy reform legislation and strong
underlying credit quality. The managed credit card portfolio continues to reflect a well-seasoned
portfolio that has good U.S. geographic diversification.
|
|
|
|
|
|
72
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Allowance for credit losses
JPMorgan Chases allowance for credit losses is intended to cover probable credit losses,
including losses where the asset is not specifically identified or the size of the loss has not
been fully determined. At least quarterly, the allowance for credit losses is reviewed by the Chief
Risk Officer of the Firm, the Risk Policy Committee, a subgroup of the Operating Committee, and the
Audit Committee of the Board of Directors of the Firm. The allowance is reviewed relative to the
risk profile of the Firms credit portfolio and current economic conditions and is adjusted if, in
managements judgment, changes
are warranted. The allowance includes an asset-specific component and a formula-based component,
the latter of which consists of a statistical calculation and adjustments to the statistical
calculation. For further discussion of the components of the Allowance for credit losses, see
Critical accounting estimates used by the Firm on page 81 and Note 12 on pages 107108 of this
Annual Report. At December 31, 2005, management deemed the allowance for credit losses to be
sufficient to absorb losses that are inherent in the portfolio, including losses that are not
specifically identified or for which the size of the loss has not yet been fully determined.
Summary of changes in the allowance for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
2005 |
|
|
2004(e) |
|
(in millions) |
|
Wholesale |
|
|
Consumer |
|
|
Total |
|
|
Wholesale |
|
|
Consumer |
|
|
Total |
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
3,098 |
|
|
$ |
4,222 |
|
|
$ |
7,320 |
|
|
$ |
2,204 |
|
|
$ |
2,319 |
|
|
$ |
4,523 |
|
Addition resulting
from the Merger, July 1, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,788 |
|
|
|
1,335 |
|
|
|
3,123 |
|
Gross charge-offs |
|
|
(255 |
) |
|
|
(4,614 |
) |
|
|
(4,869 |
) |
|
|
(543 |
) |
|
|
(3,262 |
) |
|
|
(3,805 |
) |
Gross recoveries |
|
|
332 |
|
|
|
718 |
|
|
|
1,050 |
|
|
|
357 |
|
|
|
349 |
|
|
|
706 |
|
|
Net (charge-offs) recoveries |
|
|
77 |
|
|
|
(3,896 |
) |
|
|
(3,819 |
) |
|
|
(186 |
) |
|
|
(2,913 |
) |
|
|
(3,099 |
) |
Provision for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision excluding accounting
policy conformity |
|
|
(716 |
) |
|
|
4,291 |
|
|
|
3,575 |
(c) |
|
|
(605 |
) |
|
|
2,403 |
|
|
|
1,798 |
|
Accounting policy conformity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103 |
) |
|
|
1,188 |
(f) |
|
|
1,085 |
|
|
Total Provision for loan losses |
|
|
(716 |
) |
|
|
4,291 |
|
|
|
3,575 |
|
|
|
(708 |
) |
|
|
3,591 |
|
|
|
2,883 |
|
Other |
|
|
(6 |
) |
|
|
20 |
|
|
|
14 |
|
|
|
|
|
|
|
(110 |
) |
|
|
(110 |
)(g) |
|
Ending balance |
|
$ |
2,453 |
(a) |
|
$ |
4,637 |
(b) |
|
$ |
7,090 |
|
|
$ |
3,098 |
(a) |
|
$ |
4,222 |
(b) |
|
$ |
7,320 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset specific |
|
$ |
203 |
|
|
$ |
|
|
|
$ |
203 |
|
|
$ |
469 |
|
|
$ |
|
|
|
$ |
469 |
|
Statistical component |
|
|
1,629 |
|
|
|
3,422 |
|
|
|
5,051 |
|
|
|
1,639 |
|
|
|
3,169 |
|
|
|
4,808 |
|
Adjustment to statistical component |
|
|
621 |
|
|
|
1,215 |
|
|
|
1,836 |
|
|
|
990 |
|
|
|
1,053 |
|
|
|
2,043 |
|
|
Total Allowance for loan losses |
|
$ |
2,453 |
|
|
$ |
4,637 |
|
|
$ |
7,090 |
|
|
$ |
3,098 |
|
|
$ |
4,222 |
|
|
$ |
7,320 |
|
|
Lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
480 |
|
|
$ |
12 |
|
|
$ |
492 |
|
|
$ |
320 |
|
|
$ |
4 |
|
|
$ |
324 |
|
Addition resulting
from the Merger, July 1, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499 |
|
|
|
9 |
|
|
|
508 |
|
Provision for lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision excluding accounting
policy conformity |
|
|
(95 |
) |
|
|
3 |
|
|
|
(92 |
) |
|
|
(111 |
) |
|
|
(1 |
) |
|
|
(112 |
) |
Accounting policy conformity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227 |
) |
|
|
|
|
|
|
(227 |
) |
|
Total Provision for lending-related commitments |
|
|
(95 |
) |
|
|
3 |
|
|
|
(92 |
) |
|
|
(338 |
) |
|
|
(1 |
) |
|
|
(339 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
Ending balance |
|
$ |
385 |
|
|
$ |
15 |
|
|
$ |
400 |
(d) |
|
$ |
480 |
|
|
$ |
12 |
|
|
$ |
492 |
(h) |
|
|
|
|
(a) |
|
The wholesale allowance for loan losses to total wholesale loans was 1.85% and 2.41%,
excluding wholesale HFS loans of $17.6 billion and $6.4 billion at December 31, 2005 and 2004,
respectively. |
(b) |
|
The consumer allowance for loan losses to total consumer loans was 1.84% and
1.70%, excluding consumer HFS loans of $16.6 billion and $18.0 billion at December 31, 2005 and
2004, respectively. |
(c) |
|
2005 includes a special provision related to Hurricane Katrina allocated as
follows: Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35
million, Asset & Wealth Management $3 million and Corporate $12 million. |
(d) |
|
Includes $60 million of asset-specific and $340 million of formula-based allowance at December
31, 2005. The formula-based allowance for lending-related commitments is based upon statistical
calculation. There is no adjustment to the statistical calculation for lending-related commitments. |
(e) |
|
Includes six months of the combined Firms results and six months of heritage JPMorgan Chase
results. |
(f) |
|
Reflects an increase of $1.4 billion as a result of the decertification of heritage Bank One
sellers interest in credit card securitizations, partially offset by a $254 million decrease in
the allowance to conform methodologies in 2004. |
(g) |
|
Primarily represents the transfer of the allowance for accrued interest and fees on reported
and securitized credit card loans. |
(h) |
|
Includes $130 million of asset-specific and $362 million of formula-based allowance at December
31, 2004. The formula-based allowance for lending-related commitments is based upon a statistical
calculation. There is no adjustment to the statistical calculation for lending-related commitments. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
73 |
Managements discussion and analysis
JPMorgan Chase & Co.
The reduction in the allowance for credit losses of $322 million from December 31, 2004, was
driven primarily by continued credit strength in the wholesale businesses, partially offset by an
increase in the consumer allowance as a result of the special provision taken in the third quarter
of 2005 due to Hurricane Katrina.
Excluding held-for-sale loans, the allowance for loan losses represented 1.84% of loans at December
31, 2005, compared with 1.94% at December 31, 2004. The wholesale component of the allowance
decreased to $2.5 billion as of December 31, 2005, from $3.1 billion at year-end 2004, due to
strong credit quality across all wholesale businesses. Excluding the special provision
for Hurricane Katrina, the consumer component of the allowance would have been $4.3 billion as of
December 31, 2005, a slight increase from December 31, 2004.
To provide for the risk of loss inherent in the Firms process of extending credit, management also
computes an asset-specific component and a formula-based component
for wholesale lending-related
commitments. These are computed using a methodology similar to that used for the wholesale loan
portfolio, modified for expected maturities and probabilities of drawdown. This allowance, which is
reported in Other liabilities, was $400 million and $492 million at December 31, 2005 and 2004,
respectively.
Provision for credit losses
For a discussion of the reported Provision for credit losses, see page 29 of this Annual
Report. The managed provision for credit losses reflects credit card securitizations. At December
31, 2005, securitized credit card outstandings were relatively flat compared with the prior
year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for |
|
|
|
|
For the year ended December 31,(a) |
|
Provision for loan losses |
|
|
lending-related commitments |
|
|
Total provision for credit losses |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
(c) |
|
2004 |
|
|
Investment Bank |
|
$ |
(757 |
) |
|
$ |
(525 |
) |
|
$ |
(81 |
) |
|
$ |
(115 |
) |
|
$ |
(838 |
) |
|
$ |
(640 |
) |
Commercial Banking |
|
|
87 |
|
|
|
35 |
|
|
|
(14 |
) |
|
|
6 |
|
|
|
73 |
|
|
|
41 |
|
Treasury & Securities Services |
|
|
(1 |
) |
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Asset & Wealth Management |
|
|
(55 |
) |
|
|
(12 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(56 |
) |
|
|
(14 |
) |
Corporate |
|
|
10 |
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
(110 |
) |
|
Total Wholesale |
|
|
(716 |
) |
|
|
(605 |
) |
|
|
(95 |
) |
|
|
(111 |
) |
|
|
(811 |
) |
|
|
(716 |
) |
Retail Financial Services |
|
|
721 |
|
|
|
450 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
724 |
|
|
|
449 |
|
Card Services |
|
|
3,570 |
|
|
|
1,953 |
|
|
|
|
|
|
|
|
|
|
|
3,570 |
|
|
|
1,953 |
|
|
Total Consumer |
|
|
4,291 |
|
|
|
2,403 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
4,294 |
|
|
|
2,402 |
|
Accounting policy conformity(b) |
|
|
|
|
|
|
1,085 |
|
|
|
|
|
|
|
(227 |
) |
|
|
|
|
|
|
858 |
|
|
Total provision for credit losses |
|
|
3,575 |
|
|
|
2,883 |
|
|
|
(92 |
) |
|
|
(339 |
) |
|
|
3,483 |
|
|
|
2,544 |
|
Credit card securitization |
|
|
3,776 |
|
|
|
2,898 |
|
|
|
|
|
|
|
|
|
|
|
3,776 |
|
|
|
2,898 |
|
Accounting policy conformity |
|
|
|
|
|
|
(1,085 |
) |
|
|
|
|
|
|
227 |
|
|
|
|
|
|
|
(858 |
) |
|
Total managed provision for credit losses |
|
$ |
7,351 |
|
|
$ |
4,696 |
|
|
$ |
(92 |
) |
|
$ |
(112 |
) |
|
$ |
7,259 |
|
|
$ |
4,584 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
(b) |
|
The 2004 provision for loan losses includes an increase of approximately $1.4 billion as a
result of the decertification of heritage Bank One sellers interest in credit card
securitizations, partially offset by a reduction of $357 million to conform provision
methodologies. The 2004 provision for lending-related commitments reflects a reduction of $227
million to conform provision methodologies in the wholesale portfolio. |
(c) |
|
2005 includes a $400 million special provision related to Hurricane Katrina allocated as
follows: Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35
million, Asset & Wealth Management $3 million and Corporate $12 million. |
|
|
|
|
|
|
74
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Market risk management
Market risk is the exposure to an adverse change in the market value of portfolios and
financial instruments caused by a change in market prices or rates.
Market risk management
Market Risk Management (MRM) is an independent corporate risk governance function that
identifies, measures, monitors, and controls market risk. It seeks to facilitate efficient
risk/return decisions and to reduce volatility in operating performance. It strives to make the
Firms market risk profile transparent to senior management, the Board of Directors and regulators.
Market Risk Management is overseen by the Chief Risk Officer, a member of the Firms Operating
Committee. MRMs governance structure consists of the following primary functions:
|
|
Establishment of a comprehensive market risk policy framework |
|
|
|
Independent measurement,
monitoring and control of business segment market risk |
|
|
|
Definition, approval and monitoring of
limits |
|
|
|
Performance of stress testing and qualitative risk assessments |
In addition, the Firms business segments have valuation control functions that are responsible for
ensuring the accuracy of the valuations of positions that expose the Firm to market risk. These
groups report primarily into Finance.
Risk identification and classification
MRM works in partnership with the business segments to identify market risks throughout the
Firm and to refine and monitor market risk policies and procedures. All business segments are
responsible for comprehensive identification and verification of market risks within their units.
Risk-taking businesses have functions that act independently from trading personnel and are
responsible for verifying risk exposures that the business takes. In addition to providing
independent oversight for market risk arising from the business segments, MRM also is responsible
for identifying exposures which may not be large within individual business segments, but which may
be large for the Firm in aggregate. Regular meetings are held between MRM and the heads of
risk-taking businesses to discuss and decide on risk exposures in the context of the market
environment and client flows.
Positions that expose the Firm to market risk can be classified into two categories: trading and
nontrading risk. Trading risk includes positions that are held by the Firm as part of a business
segment or unit whose main business strategy is to trade or make markets. Unrealized gains and
losses in these positions are generally reported in trading revenue. Nontrading risk includes
securities held for longer term investment, mortgage servicing rights, and securities and
derivatives used to manage the Firms asset/liability exposures. Unrealized gains and losses in
these positions are generally not reported in Trading revenue.
Trading risk
Fixed income risk (which includes interest rate risk and credit spread risk) involves the potential
decline in net income or financial condition due to adverse changes in market rates, whether
arising from client activities or proprietary positions taken by the Firm.
Foreign exchange, equities and commodities risks involve the potential decline in net income to the
Firm due to adverse changes in foreign exchange, equities or commodities markets, whether arising
from client activities or proprietary positions taken by the Firm.
Nontrading risk
Nontrading risk arises from execution of the Firms core business strategies, the delivery of
products and services to its customers, and the discretionary positions the Firm undertakes to
risk-manage exposures.
These exposures can result from a variety of factors, including differences in the timing among the
maturity or repricing of assets, liabilities and offbalance sheet instruments. Changes in the
level and shape of market interest rate curves also may create interest rate risk, since the
repricing characteristics of the Firms assets do not necessarily match those of its liabilities.
The Firm also is exposed to basis risk, which is the difference in re-pricing characteristics of
two floating rate indices, such as the prime rate and 3-month LIBOR. In addition, some of the
Firms products have embedded optionality that impact pricing and balances.
The Firms mortgage banking activities also give rise to complex interest rate risks. The interest
rate exposure from the Firms mortgage banking activities is a result of changes in the level of
interest rates, option and basis risk. Option risk arises primarily from prepayment options
embedded in mortgages and changes in the probability of newly-originated mortgage commitments
actually closing. Basis risk results from different relative movements between mortgage rates and
other interest rates.
Risk measurement
Tools used to measure risk
Because no single measure can reflect all aspects of market risk, the Firm uses various metrics,
both statistical and nonstatistical, including:
|
|
Nonstatistical risk measures |
|
|
|
Value-at-Risk (VAR) |
|
|
|
Loss advisories |
|
|
|
Economic value stress testing |
|
|
|
Earnings-at-risk stress testing |
|
|
|
Risk identification for large exposures (RIFLE) |
Nonstatistical risk measures
Nonstatistical risk measures other than stress testing include net open positions, basis point
values, option sensitivities, market values, position concentrations and position turnover. These
measures provide granular information on the Firms market risk exposure. They are aggregated by
line of business and by risk type, and are used for monitoring limits, one-off approvals and
tactical control.
Value-at-risk
JPMorgan Chases primary statistical risk measure, VAR, estimates the potential loss from adverse
market moves in an ordinary market environment and provides a consistent cross-business measure of
risk profiles and levels of diversification. VAR is used for comparing risks across businesses,
monitoring limits, one-off approvals, and as an input to economic capital calculations. VAR
provides risk transparency in a normal trading environment.
Each business day the Firm undertakes a comprehensive VAR calculation that includes both its
trading and its nontrading activities. VAR for nontrading activities measures the amount of
potential change in fair value of the exposures related to these activities; however, VAR for such
activities is not a measure of reported revenue since nontrading activities are generally not
marked to market through earnings.
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JPMorgan Chase & Co. / 2005 Annual Report
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|
75 |
Managements discussion and analysis
JPMorgan Chase & Co.
To calculate VAR, the Firm uses historical simulation, which measures risk across instruments
and portfolios in a consistent and comparable way. This approach assumes that historical changes in
market values are representative of future changes. The simulation is based upon data for the
previous twelve
months. The Firm calculates VAR using a one-day time horizon and an expected tail loss
methodology, which approximates a 99% confidence level. This means the Firm would expect to incur
losses greater than that predicted by VAR estimates only once in every 100 trading days, or about
2.5 times a year.
Trading VAR
IB trading VAR by risk type and credit portfolio VAR(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004(e) |
|
As of or for the year ended |
|
Average |
|
|
Minimum |
|
|
Maximum |
|
|
At |
|
|
Average |
|
|
Minimum |
|
|
Maximum |
|
|
At |
|
December 31, (in millions) |
|
VAR |
|
|
VAR |
|
|
VAR |
|
|
December 31, |
|
|
VAR |
|
|
VAR |
|
|
VAR |
|
|
December 31, |
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
67 |
|
|
$ |
37 |
|
|
$ |
110 |
|
|
$ |
89 |
|
|
$ |
74 |
|
|
$ |
45 |
|
|
$ |
118 |
|
|
$ |
57 |
|
Foreign exchange |
|
|
23 |
|
|
|
16 |
|
|
|
32 |
|
|
|
19 |
|
|
|
17 |
|
|
|
10 |
|
|
|
33 |
|
|
|
28 |
|
Equities |
|
|
34 |
|
|
|
15 |
|
|
|
65 |
|
|
|
24 |
|
|
|
28 |
|
|
|
15 |
|
|
|
58 |
|
|
|
20 |
|
Commodities and other |
|
|
21 |
|
|
|
7 |
|
|
|
50 |
|
|
|
34 |
|
|
|
9 |
|
|
|
7 |
|
|
|
18 |
|
|
|
8 |
|
Less: portfolio diversification |
|
|
(59 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(63 |
)(c) |
|
|
(43 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(41 |
)(c) |
|
Total trading VAR |
|
$ |
86 |
|
|
$ |
53 |
|
|
$ |
130 |
|
|
$ |
103 |
|
|
$ |
85 |
|
|
$ |
52 |
|
|
$ |
125 |
|
|
$ |
72 |
|
|
Credit portfolio VAR(b) |
|
|
14 |
|
|
|
11 |
|
|
|
17 |
|
|
|
15 |
|
|
|
14 |
|
|
|
11 |
|
|
|
17 |
|
|
|
15 |
|
Less: portfolio diversification |
|
|
(12 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(10 |
)(c) |
|
|
(9 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(9 |
)(c) |
|
Total trading and credit
portfolio VAR |
|
$ |
88 |
|
|
$ |
57 |
|
|
$ |
130 |
|
|
$ |
108 |
|
|
$ |
90 |
|
|
$ |
55 |
|
|
$ |
132 |
|
|
$ |
78 |
|
|
|
|
|
(a) |
|
Trading VAR excludes VAR related to the Firms private equity business and certain
exposures used to manage MSRs. For a discussion of Private equity risk management and MSRs, see
page 80 and Note 15 on pages 114116 of this Annual Report, respectively. Trading VAR includes
substantially all mark-to-market trading activities in the IB, plus
available-for-sale securities
held for the IBs proprietary purposes (included within Fixed Income); however, particular risk
parameters of certain products are not fully captured, for example, correlation risk. |
(b) |
|
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and
mark-to-market hedges of the accrual loan portfolio, which are all reported in Trading revenue.
This VAR does not include the accrual loan portfolio, which is not marked to market. |
(c) |
|
Average and period-end VARs are less than the sum of the VARs of its market risk components,
which is due to risk offsets resulting from portfolio diversification. The diversification effect
reflects the fact that the risks are not perfectly correlated. The risk of a portfolio of positions
is therefore usually less than the sum of the risks of the positions themselves. |
(d) |
|
Designated as not meaningful (NM) because the minimum and maximum may occur on different days
for different risk components, and hence it is not meaningful to compute a portfolio
diversification effect. |
(e) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
IBs
Average Total Trading and Credit Portfolio VAR decreased to $88 million during 2005 compared with
$90 million for the same period in 2004. Period-end VAR increased over the same period to $108
million from $78 million. Commodities and other VAR increased due to the expansion of the energy
trading business. The decrease in average Total Trading and Credit Portfolio VAR was driven by
increased portfolio diversification as fixed income risk decreased and foreign exchange, equities
and commodities risk increased. Trading VAR diversification increased to $59 million, or 41% of the
sum of the components, from $43 million, or 34% of the sum of the components. The diversification
effect between the trading portfolio and the credit portfolio also increased to $12 million, or 12%
of the sum of the components, from $9 million, or 9% of the sum of the components. In general, over
the course of the year, VAR exposures can vary significantly as trading positions change, market
volatility fluctuates and diversification benefits change.
VAR backtesting
To evaluate the soundness of its VAR model, the Firm conducts daily backtesting of VAR against
daily financial results, based upon market risk-related revenue. Market risk-related revenue is
defined as the change in value of the mark-to-market trading portfolios plus any trading-related
net interest income, brokerage commissions, underwriting fees or other revenue. The following
histogram illustrates the daily market risk-related gains and losses for the IB trading businesses
for the year ended December 31, 2005. The chart shows that the IB posted market risk-related gains
on 208 out of 260 days in this period, with 20 days exceeding $100 million. The inset graph looks
at those days on which the IB experienced losses and depicts the amount by which VAR exceeded the
actual loss on each of those days. Losses were sustained on 52 days, with no loss greater than $90
million, and with no loss exceeding the VAR measure.
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|
76
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|
JPMorgan Chase & Co. / 2005 Annual Report |
Daily IB market risk-related gains and losses year ended December 31, 2005
Daily IB VAR less market risk-related losses. $ in millions number of trading days
average daily revenue: 37.3 million |
Loss advisories
Loss advisories are tools used to highlight to senior management trading losses above certain
levels and are used to initiate discussion of remedies.
Economic value stress testing
While VAR reflects the risk of loss due to unlikely events in normal markets, stress testing
captures the Firms exposure to unlikely but plausible events in abnormal markets. The Firm
conducts economic-value stress tests for both its trading and its nontrading activities using
multiple scenarios for both types of activities. Periodically, scenarios are reviewed and updated
to reflect changes in the Firms risk profile and economic events. Stress testing is as important
as VAR in measuring and controlling risk. Stress testing enhances the understanding of the Firms
risk profile and loss potential, and is used for monitoring limits, one-off approvals and
cross-business risk measurement, as well as an input to economic capital allocation.
Based upon the Firms stress scenarios, the stress test loss (pre-tax) in the IBs trading
portfolio ranged from $469 million to $1.4 billion, and $202 million to $1.2 billion, for the years
ended December 31, 2005 and 2004, respectively. The 2004 results include six months of the combined
Firms results and six months of heritage JPMorgan Chase results.
Earnings-at-risk stress testing
The VAR and stress-test measures described above illustrate the total economic sensitivity of the
Firms balance sheet to changes in market variables. The effect of interest rate exposure on
reported Net income also is critical. Interest rate risk exposure in the Firms core nontrading
business activities (i.e., asset/liability management positions) results from on and offbalance
sheet positions. The Firm conducts simulations of changes in NII from its nontrading activities
under a variety of interest rate scenarios, which are consistent with the scenarios used for
economic-value stress testing. Earnings-at-risk tests measure the potential change in the Firms
Net interest income over the next 12 months and highlight exposures to various rate-sensitive
factors, such as the rates themselves (e.g., the prime lending rate), pricing strategies on
deposits, optionality and changes in product mix. The tests include forecasted balance sheet
changes, such as asset sales and securitizations, as well as prepayment and reinvestment behavior.
Earnings-at-risk also can result from changes in the slope of the yield curve, because the Firm has
the ability to lend at fixed rates and borrow at variable or short-term fixed rates. Based upon
these scenarios, the Firms earnings would be affected negatively by a sudden and unanticipated
increase in short-term rates without a corresponding increase in long-term rates. Conversely,
higher long-term rates generally are beneficial to earnings, particularly when the increase is not
accompanied by rising short-term rates.
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JPMorgan Chase & Co. / 2005 Annual Report
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|
77 |
Managements discussion and analysis
JPMorgan Chase & Co.
Immediate changes in interest rates present a limited view of risk, and so a number of
alternative scenarios also are reviewed. These scenarios include the implied forward curve,
nonparallel rate shifts and severe interest rate shocks on selected key rates. These scenarios are
intended to provide a comprehensive view of JPMorgan Chases earnings-at-risk over a wide range of
outcomes.
JPMorgan Chases 12-month pre-tax earnings sensitivity profile as of December 31, 2005 and 2004,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate change in rates |
|
(in millions) |
|
+200bp |
|
|
+100bp |
|
|
-100bp |
|
|
December 31, 2005 |
|
$ |
265 |
|
|
$ |
172 |
|
|
$ |
(162 |
) |
December 31, 2004 |
|
|
(557 |
) |
|
|
(164 |
) |
|
|
(180 |
) |
|
The Firms risk to rising and falling interest rates is due primarily to corresponding
increases and decreases in short-term funding costs.
RIFLE
Individuals who manage risk positions, particularly those that are complex, are responsible for
identifying potential losses that could arise from specific unusual events, such as a potential tax
change, and estimating the probabilities of losses arising from such events. This information is
entered into the Firms RIFLE system and directed to the appropriate level of management, thereby
permitting the Firm to identify further earnings vulnerability not adequately covered by standard
risk measures.
Risk monitoring and control
Limits
Market risk is controlled primarily through a series of limits. Limits reflect the Firms risk
appetite in the context of the market environment and business strategy. In setting limits, the
Firm takes into consideration factors such as market volatility, product liquidity, business track
record and management experience.
MRM regularly reviews and updates risk limits, and senior management reviews and approves risk
limits at least once a year. MRM further controls the Firms exposure by specifically designating
approved financial instruments and tenors, known as instrument authorities, for each business
segment.
The Firm maintains different levels of limits. Corporate-level limits include VAR, stress and loss
advisories. Similarly, line of business limits include VAR, stress and loss advisories, and are
supplemented by nonstatistical measure-
ments and instrument authorities. Businesses are responsible for adhering to established limits,
against which exposures are monitored and reported. Limit breaches are reported in a timely manner
to senior management, and the affected business segment is required to take appropriate action to
reduce trading positions. If the business cannot do this within an acceptable timeframe, senior
management is consulted on the appropriate action.
Qualitative review
MRM also performs periodic reviews as necessary of both businesses and products with exposure to
market risk in order to assess the ability of the businesses to control their market risk.
Strategies, market conditions, product details and risk controls are reviewed, and specific
recommendations for improvements are made to management.
Model review
Some of the Firms financial instruments cannot be valued based upon quoted market prices but are
instead valued using pricing models. Such models are used for management of risk positions, such as
reporting against limits, as well as for valuation. The Model Risk Group, independent of the
businesses and MRM, reviews the models the Firm uses and assesses model appropriateness and
consistency. The model reviews consider a number of factors about the models suitability for
valuation and risk management of a particular product, including whether it accurately reflects the
characteristics of the transaction and its significant risks, the suitability
and convergence properties of numerical algorithms, reliability of data sources, consistency of the
treatment with models for similar products, and sensitivity to input parameters and assumptions
that cannot be priced from the market.
Reviews are conducted for new or changed models, as well as previously accepted models, to assess
whether there have been any changes in the product or market that may impact the models validity
and whether there are theoretical or competitive developments that may require reassessment of the
models adequacy. For a summary of valuations based upon models, see Critical Accounting Estimates
used by the Firm on pages 8183 of this Annual Report.
Risk reporting
Nonstatistical exposures, value-at-risk, loss advisories and limit excesses are reported daily
for each trading and nontrading business. Market risk exposure trends, value-at-risk trends, profit
and loss changes, and portfolio concentrations are reported weekly. Stress test results are
reported monthly to business and senior management.
|
|
|
|
|
|
78
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Operational risk management
Operational risk is the risk of loss resulting from inadequate or failed processes or systems,
human factors or external events.
Overview
Operational risk is inherent in each of the Firms businesses and support activities. Operational
risk can manifest itself in various ways, including errors, business interruptions, inappropriate
behavior of employees and vendors that do not perform in accordance with outsourcing arrangements.
These events can potentially result in financial losses and other damage to the Firm, including
reputational harm.
To monitor and control operational risk, the Firm maintains a system of comprehensive policies and
a control framework designed to provide a sound and well-controlled operational environment. The
goal is to keep operational risk at appropriate levels, in light of the Firms financial strength,
the characteristics of its businesses, the markets in which it operates, and the competitive and
regulatory environment to which it is subject. Notwithstanding these control measures, the Firm
incurs operational losses.
The Firms approach to operational risk management is intended to mitigate such losses by
supplementing traditional control-based approaches to operational risk with risk measures, tools
and disciplines that are risk-specific, consistently applied and utilized firmwide. Key themes are
transparency of information, escalation of key issues and accountability for issue resolution.
During 2005, the Firm substantially completed the implementation of Phoenix, a new
internally-designed operational risk software tool. Phoenix integrates the individual components of
the operational risk management framework into a unified, web-based tool. Phoenix is intended to
enable the Firm to enhance its reporting and analysis of operational risk data by enabling risk
identification, measurement, monitoring, reporting and analysis to be done in an integrated manner,
thereby enabling efficiencies in the Firms management of its operational risk.
For purposes of identification, monitoring, reporting and analysis, the Firm categorizes
operational risk events as follows:
|
|
Client service and selection |
|
|
|
Business practices |
|
|
|
Fraud, theft and malice |
|
|
|
Execution, delivery and process management |
|
|
|
Employee disputes |
|
|
|
Disasters and public safety |
|
|
|
Technology and infrastructure failures |
Risk identification and measurement
Risk identification is the recognition of the operational risk events that management believes may
give rise to operational losses.
In 2005, JPMorgan Chase substantially completed a multi-year effort to redesign the underlying
architecture of its firmwide self-assessment process. The goal of the self-assessment process is
for each business to identify the key operational risks specific to its environment and assess the
degree to which it maintains appropriate controls. Action plans are developed for control issues
identified, and businesses are held accountable for tracking and resolving these issues on a timely
basis.
All businesses were required to perform self-assessments in 2005. Going forward, the Firm will
utilize the self-assessment process as a dynamic risk management tool.
Risk monitoring
The Firm has a process for monitoring operational risk-event data, permitting analysis of errors
and losses as well as trends. Such analysis, performed both at a line of business level and by
risk-event type, enables identification of the causes associated with risk events faced by the
businesses. Where available, the internal data can be supplemented with external data for
comparative analysis with industry patterns. The data reported will enable the Firm to back-test
against self-assessment results.
Risk reporting and analysis
Operational risk management reports provide timely and accurate information, including information
about actual operational loss levels and self-assessment results, to the lines of business and
senior management. The purpose of these reports is to enable management to maintain operational
risk at appropriate levels within each line of business, to escalate issues and to provide
consistent data aggregation across the Firms businesses and support areas.
Audit alignment
Internal Audit utilizes a risk-based program of audit coverage to provide an independent assessment
of the design and effectiveness of key controls over the Firms operations, regulatory compliance
and reporting. Audit partners with business management and members of the control community in
providing guidance on the operational risk framework and reviewing the effectiveness and accuracy
of the business self-assessment process as part of its business unit audits.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
79 |
Managements discussion and analysis
JPMorgan Chase & Co.
Reputation and fiduciary risk management
A firms success depends not only on its prudent management of liquidity, credit, market and
operational risks that are part of its business risks, but equally on the maintenance among many
constituents clients, investors, regulators, as well as the general public of a reputation
for business practices of the highest quality. Attention to reputation has always been a key aspect
of the Firms practices, and maintenance of reputation is the responsibility of everyone at the
Firm. JPMorgan Chase bolsters this individual responsibility in many ways, including through the
Firms Code of Conduct, training, maintaining adherence to policies and procedures and
oversight functions that approve transactions. These oversight functions include a Conflicts
Office, which examines wholesale transactions with the potential to create conflicts of interest
for the Firm.
Policy review office
The Firm also has a specific structure to address certain transactions with clients, especially
complex derivatives and structured finance transactions, that have the potential to adversely
affect its reputation. This structure reinforces the Firms procedures for examining transactions
in terms of appropriateness, ethical issues and reputational risk, and it intensifies the Firms
scrutiny of the purpose and effect of its transactions from the clients point of view, with the
goal that these transactions are not used to mislead investors or others. The structure operates at
three levels: as part of every business transaction approval process; through review by regional
Reputation Risk Committees; and through oversight by the Policy Review Office.
Primary responsibility for adherence to the policies and procedures designed to address reputation
risk lies with the business units conducting the transactions in question. The Firms transaction
approval process requires review from, among others, internal legal/compliance, conflicts, tax and
accounting groups. Transactions involving an SPE established by the Firm receive particular
scrutiny intended to ensure that every such entity is properly approved, documented, monitored and
controlled.
Business units are also required to submit to regional Reputation Risk
Committees proposed transactions that may give rise to heightened reputation risk particularly a
clients motivation and its intended financial disclosure of the transaction. The committees may
approve, reject or require further clarification on or changes to the transactions. The members of
these committees are senior representatives of the business and support units in the region. The
committees may escalate transaction review to the Policy Review Office.
The Policy Review Office is the most senior approval level for client transactions involving
reputation risk issues. The mandate of the Office is to opine on specific transactions brought by
the Regional Committees and consider changes in policies or practices relating to reputation risk.
The head of the Office consults with the Firms most senior executives on specific topics and
provides regular updates. Aside from governance and guidance on specific transactions, the
objective of the policy review process is to reinforce a culture, through a case study approach,
that ensures that all employees, regardless of seniority, understand the basic principles of
reputation risk control and can recognize and address issues as they arise.
In 2006, this structure, which until now has been focused primarily on Investment Bank activities,
will be expanded to include the activities of Commercial Banking and the Private Bank. These lines
of business will implement training and review procedures similar to those in the Investment Bank
and their activities also will be subject to the oversight of the Policy Review Office.
Fiduciary risk management
The risk management committees within each line of business include in their mandate the oversight
of the legal, reputational and, where appropriate, fiduciary risks in their businesses that may
produce significant losses or reputational damage. The Fiduciary Risk Management function works
with the relevant line of business risk committees to ensure that businesses providing investment
or risk management products or services that give rise to fiduciary duties to clients perform at
the appropriate standard relative to their fiduciary relationship with a client. Of particular
focus are the policies and practices that address a business responsibilities to a client,
including client suitability determination, disclosure obligations, disclosure communications and
performance expectations with respect to such of the investment and risk management products or
services being provided by the Firm that give rise to such fiduciary duties. In this way, the
relevant line-of-business risk committees, together with the Fiduciary Risk Management function,
provide oversight of the Firms efforts to monitor, measure and control the risks that may arise in
the delivery of the products or services to clients that give rise to such duties, as well as
those stemming from any of the Firms fiduciary responsibilities to employees under the Firms
various employee benefit plans.
Private equity risk management
Risk management
The Firm makes direct principal investments in private equity. The illiquid nature and long-term
holding period associated with these investments differentiates private equity risk from the risk
of positions held in the trading portfolios. The Firms approach to managing private equity risk is
consistent with the Firms general risk governance structure. Controls are in place establishing
target levels for total and annual investment in order to control the overall size of the
portfolio. Industry and geographic concentration limits are in place
intended to ensure diversification of the portfolio, and periodic reviews are performed on the
portfolio to substantiate the valuations of the investments. The Valuation Control Group within the
Finance area is responsible for reviewing the accuracy of the carrying values of private equity
investments held by Private Equity. At December 31, 2005, the carrying value of the private equity
portfolios of JPMorgan Partners and ONE Equity Partners businesses was $6.2 billion, of which $479
million represented positions traded in the public market.
|
|
|
|
|
|
80
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Critical accounting estimates used by the Firm
JPMorgan Chases accounting policies and use of estimates are integral to understanding its
reported results. The Firms most complex accounting estimates require managements judgment to
ascertain the valuation of assets and liabilities. The Firm has established detailed policies and
control procedures intended to ensure that valuation methods, including any judgments made as part
of such methods, are well controlled, independently reviewed and applied consistently from period
to period. In addition, the policies and procedures are intended to ensure that the process for
changing methodologies occurs in a controlled and appropriate manner. The Firm believes its
estimates for determining the valuation of its assets and liabilities are appropriate. The
following is a brief description of the Firms critical accounting estimates involving significant
valuation judgments.
Allowance for credit losses
JPMorgan Chases allowance for credit losses covers the wholesale and consumer loan portfolios as
well as the Firms portfolio of wholesale lending-related commitments. The Allowance for loan
losses is intended to adjust the value of the Firms loan assets for probable credit losses as of
the balance sheet date. For a further discussion of the methodologies used in establishing the
Firms Allowance for credit losses, see Note 12 on pages 107108 of this Annual Report.
Wholesale loans and lending-related commitments
The methodology for calculating both the Allowance for loan losses and the Allowance for
lending-related commitments involves significant judgment. First and foremost, it involves the
early identification of credits that are deteriorating. Second, it involves management judgment to
derive loss factors. Third, it involves management judgment to evaluate certain macroeconomic
factors, underwriting standards, and other relevant internal and external factors affecting the
credit quality of the current portfolio and to refine loss factors to better reflect these
conditions.
The Firm uses a risk rating system to determine the credit quality of its wholesale loans.
Wholesale loans are reviewed for information affecting the obligors ability to fulfill its
obligations. In assessing the risk rating of a particular loan, among the factors considered
include the obligors debt capacity and financial flexibility, the level of the obligors earnings,
the amount and sources for repayment, the level and nature of contingencies, management strength,
and the industry and geography in which the obligor operates. These factors are based upon an
evaluation of historical and current information, and involve subjective assessment and
interpretation. Emphasizing one factor over another, or considering additional factors that may be
relevant in determining the risk rating of a particular loan but which are not currently an
explicit part of the Firms methodology, could impact the risk rating assigned by the Firm to that
loan.
Management applies its judgment to derive loss factors associated with each credit facility. These
loss factors are determined by facility structure, collateral and type of obligor. Wherever
possible, the Firm uses independent, verifiable data or the Firms own historical loss experience
in its models for estimating these loss factors. Many factors can affect managements estimates of
loss, including volatility of loss given default, probability of default and rating migrations.
Judgment is applied to determine whether the loss given default should be calculated as an average
over the entire credit cycle or at a particular point in the credit cycle. The application of
different loss given default factors would change the amount of the Allowance for credit losses
determined appropriate by the Firm. Similarly, there are judgments as to which external
data on probability of default should be used and when they should be used. Choosing data that are
not reflective of the Firms specific loan portfolio characteristics could also affect loss
estimates.
Management
also applies its judgment to adjust the loss factors derived, taking into consideration
model imprecision, external factors and economic events that have occurred but are not yet
reflected in the loss factors. The resultant adjustments to the statistical calculation on the
performing portfolio are determined by creating estimated ranges using historical experience of
both loss given default and probability of default. Factors related to concentrated and
deteriorating industries are also incorporated where relevant. The estimated ranges and the
determination of the appropriate point within the range are based upon managements view of
uncertainties that relate to current macroeconomic and political conditions, quality of
underwriting standards and other relevant internal and external factors affecting the credit
quality of the current portfolio. The adjustment to the statistical calculation for the wholesale
loan portfolio for the period ended December 31, 2005, was $621 million, the higher-end within the
range, based upon managements assessment of current economic conditions.
Consumer loans
For scored loans in the consumer lines of business, loss is primarily determined by applying
statistical loss factors and other risk indicators to pools of loans by asset type. These loss
estimates are sensitive to changes in delinquency status, credit bureau scores, the realizable
value of collateral and other risk factors.
Adjustments to the statistical calculation are accomplished in part by analyzing the historical
loss experience for each major product segment. Management analyzes the range of credit loss
experienced for each major portfolio segment, taking into account economic cycles, portfolio
seasoning and underwriting criteria, and then formulates a range that incorporates relevant risk
factors that impact overall credit performance. The recorded adjustment to the statistical
calculation for the period ended December 31, 2005, was $1.2 billion, based upon managements
assessment of current economic conditions.
Fair value of financial instruments
A portion of JPMorgan Chases assets and liabilities are carried at fair value, including trading
assets and liabilities, AFS securities and private equity investments. Held-for-sale loans,
mortgage servicing rights (MSRs) and commodities inventory are carried at the lower of fair value
or cost. At December 31, 2005, approximately $386 billion of the Firms assets were recorded at
fair value.
The fair value of a financial instrument is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a forced or liquidation
sale. The majority of the Firms assets reported at fair value are based upon quoted market prices
or on internally developed models that utilize independently sourced market parameters, including
interest rate yield curves, option volatilities and currency rates.
The degree of management judgment involved in determining the fair value of a financial instrument
is dependent upon the availability of quoted market prices or observable market parameters. For
financial instruments that are actively traded and have quoted market prices or parameters readily
available, there is little-to-no subjectivity in determining fair value. When observable market
prices and parameters do not exist, management judgment is necessary to estimate fair value. The
valuation process takes into consideration
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JPMorgan Chase & Co. / 2005 Annual Report
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81 |
Managements discussion and analysis
JPMorgan Chase & Co.
factors such as liquidity and concentration concerns and, for the derivatives portfolio,
counterparty credit risk (see the discussion of CVA on page 70 of this Annual Report). For example,
there is often limited market data to rely on when estimating the fair value of a large or aged
position. Similarly, judgment must be applied in estimating prices for less readily observable
external parameters. Finally, other factors such as model assumptions, market dislocations and
unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors
can impact the amount of revenue or loss recorded for a particular position.
Trading and available-for-sale portfolios
Substantially all of the Firms securities held for trading and investment purposes (long
positions) and securities that the Firm has sold to other parties but does not own (short
positions) are valued based upon quoted market prices. However, certain securities are less actively
traded and, therefore, are not always able to be valued based upon quoted market prices. The
determination of their fair value requires management judgment, as this determination may require
benchmarking to similar instruments or analyzing default and recovery rates. Examples include
certain collateralized mortgage and debt obligations and high-yield debt securities.
As few derivative contracts are listed on an exchange, the majority of the Firms derivative
positions are valued using internally developed models that use as their basis readily observable
market parameters that is, parameters that are actively quoted and can be validated to external
sources, including industry-pricing services. Certain derivatives, however, are valued based upon
models with significant unobservable market parameters that is, parameters that must be
estimated and are, therefore, subject to management judgment to substantiate the model valuation.
These instruments are normally either less actively traded or trade activity is one-way. Examples
include long-dated interest rate or currency swaps, where swap rates may be unobservable for longer
maturities, and certain credit products, where correlation and recovery rates are unobservable. Due
to the lack of observable market data, the Firm defers the initial trading profit for these
financial instruments. The deferred profit is recognized in Trading revenue on a systematic basis
and when observable market data becomes available. Managements judgment also includes recording
fair value adjustments (i.e., reductions) to model valuations to account for parameter uncertainty
when valuing complex or less actively traded derivative transactions. The following table
summarizes the Firms trading and available-for-sale portfolios by valuation methodology at
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
Trading liabilities |
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
AFS |
|
|
|
purchased (a) |
|
|
Derivatives (b) |
|
sold (a) |
|
|
Derivatives (b) |
|
|
securities |
|
|
Fair value based upon: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted market prices |
|
|
86 |
% |
|
|
2 |
% |
|
|
97 |
% |
|
|
2 |
% |
|
|
91 |
% |
Internal models with significant
observable market parameters |
|
|
12 |
|
|
|
96 |
|
|
|
2 |
|
|
|
97 |
|
|
|
6 |
|
Internal models with significant
unobservable market parameters |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
(a) |
|
Reflected as debt and equity instruments on the Firms Consolidated balance sheets. |
(b) |
|
Based upon gross mark-to-market valuations of the Firms derivatives portfolio prior to netting
positions pursuant to FIN 39, as cross-product netting is not relevant to an analysis based upon
valuation methodologies. |
To ensure that the valuations are appropriate, the Firm has various controls in place. These
include: an independent review and approval of valuation models; detailed review and explanation
for profit and loss analyzed daily and over time; decomposing the model valuations for certain
structured derivative instruments into their components and benchmarking valuations, where
possible, to similar products; and validating valuation estimates through actual cash settlement.
As markets and products develop and the pricing
for certain derivative products becomes more transparent, the Firm refines its valuation
methodologies. The Valuation Control Group within the Finance area, a group independent of the
risk-taking function, is responsible for reviewing the accuracy of the valuations of positions
taken within the Investment Bank.
For a discussion of market risk management, including the model review process, see Market risk
management on pages 7578 of this Annual Report. For further details regarding the Firms
valuation methodologies, see Note 29 on pages 126128 of this Annual Report.
Loans held-for-sale
The fair value of loans in the held-for-sale portfolio is generally based upon observable market
prices of similar instruments, including bonds, credit derivatives and loans with similar
characteristics. If market prices are not available, fair value is based upon the estimated cash
flows adjusted for credit risk that is discounted using a rate appropriate for each maturity that
incorporates the effects of interest rate changes.
Commodities inventory
The majority of commodities inventory includes bullion and base metals where fair value is
determined by reference to prices in highly active and liquid markets. The fair value of other
commodities inventory is determined primarily using prices and data derived from less liquid and
developing markets where the underlying commodities are traded.
Private equity investments
Valuation of private investments held primarily by the Private Equity business within Corporate
requires significant management judgment due to the absence of quoted market prices, inherent lack
of liquidity and the long-term nature of such assets. Private investments are initially valued
based upon cost. The carrying values of private investments are adjusted from cost to reflect both
positive and negative changes evidenced by financing events with third-party capital providers. In
addition, these investments are subject to ongoing impairment reviews by Private Equitys senior
investment professionals. A variety of factors are reviewed and monitored to assess impairment
including, but not limited to, operating performance and future expectations of the particular
portfolio investment, industry valuations of comparable public companies, changes in market outlook
and the third-party financing environment over time. The Valuation Control Group within the Finance
area is responsible for reviewing the accuracy of the carrying values of private investments held
by Private Equity. For additional information about private equity investments,
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82
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JPMorgan Chase & Co. / 2005 Annual Report |
see the Private equity risk management discussion on page 80 and Note 9 on pages 103105 of
this Annual Report.
MSRs and certain other retained interests in securitizations
MSRs and certain other retained interests from securitization activities do not trade in an active,
open market with readily observable prices. For example, sales of MSRs do occur, but the precise
terms and conditions are typically not readily available. Accordingly, the Firm estimates the fair
value of MSRs and certain other retained interests in securitizations using discounted future cash
flow (DCF) models.
For MSRs, the model considers portfolio characteristics, contractually specified servicing fees and
prepayment assumptions, delinquency rates, late charges, other ancillary revenues, costs to service
and other economic factors. During the fourth quarter of 2005, the Company began utilizing an
option adjusted spread (OAS) valuation approach when determining the fair value of MSRs. This
approach, when used in conjunction with the Firms proprietary prepayment model, projects MSR cash
flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates, to
estimate an expected fair value of the MSRs. The OAS valuation approach is expected to provide
improved estimates of fair value. The initial valuation of MSRs under OAS did not have a material
impact to the Firms financial statements.
For certain other retained interests in securitizations (such as interest only strips), a single
interest rate path DCF model is used and generally includes assumptions based upon projected
finance charges related to the securitized assets, estimated net credit losses, prepayment
assumptions, and contractual interest paid to the third-party investors. Changes in the assumptions
used may have a significant impact on the Firms valuation of retained interests.
For both MSRs and certain other retained interests in securitizations, the Firm compares its fair
value estimates and assumptions to observable market data where available and to recent market
activity and actual portfolio experience. Management believes that the assumptions used to estimate
fair values are supportable and reasonable.
For a further discussion of the most significant assumptions used to value retained interests in
securitizations and MSRs, as well as the applicable stress tests for those assumptions, see Notes
13 and 15 on pages 108111 and 114116, respectively, of this Annual Report.
Goodwill impairment
Under SFAS 142, goodwill must be allocated to reporting units and tested for impairment. The Firm
tests goodwill for impairment at least annually or more frequently if events or circumstances, such
as adverse changes in the business climate, indicate that there may be justification for conducting
an interim test. Impairment testing is performed at the reporting-unit level (which is generally
one level below the six major business segments identified in Note 31 on pages 130131 of this
Annual Report, plus Private Equity which is included in Corporate). The first part of the test is a
comparison, at the reporting unit level, of the fair value of each reporting unit to its carrying
amount, including goodwill. If the fair value is less than the carrying value, then the second part
of the test is needed to measure the amount of potential goodwill impairment. The implied fair
value of the reporting unit goodwill is calculated and compared to the carrying amount of goodwill
recorded in the Firms financial records. If the carrying value of reporting unit goodwill exceeds
the implied fair value of that goodwill, then the Firm would recognize an impairment loss in the
amount of the difference, which would be recorded as a charge against Net income.
The fair values of the reporting units are determined using discounted cash flow models based upon
each reporting units internal forecasts. In addition, analysis using market-based trading and
transaction multiples, where available, are used to assess the reasonableness of the valuations
derived from the discounted cash flow models.
Goodwill was not impaired as of December 31, 2005 or 2004, nor was any goodwill written off due to
impairment during the years ended December 31, 2005, 2004 and 2003. See Note 15 on page 114 of this
Annual Report for additional information related to the nature and accounting for goodwill and the
carrying values of goodwill by major business segment.
Accounting and reporting developments
Accounting for income taxes repatriation of foreign earnings under the American Jobs
Creation Act of 2004
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law. The
Act creates a temporary incentive for U.S. companies to repatriate accumulated foreign earnings at
a substantially reduced U.S. effective tax rate by providing a dividends received deduction on the
repatriation of certain foreign earnings to the U.S. taxpayer (the repatriation provision). The
new deduction is subject to a number of limitations and requirements.
In the fourth quarter of 2005, the Firm applied the repatriation provision to $1.9 billion of cash
from foreign earnings, resulting in a net tax benefit of $55 million. The $1.9 billion of cash will
be used in accordance with the Firms domestic reinvestment plan pursuant to the guidelines set
forth in the Act.
Accounting for share-based payments
In December 2004, the FASB issued SFAS 123R, which revises SFAS 123 and supersedes APB 25. In March
2005, the Securities and Exchange Commission (SEC) issued SAB 107 which provides interpretive
guidance on SFAS 123R. Accounting and reporting under SFAS 123R is generally similar to the SFAS
123 approach. However, SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement
based upon their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R permits
adoption using one of two methods modified prospective or modified retrospective. In April 2005, the SEC approved a new rule that,
for public companies, delays the effective date of SFAS 123R to no later than January 1, 2006. The
Firm adopted SFAS 123R on January 1, 2006, under the modified prospective method.
The Firm continued to account for certain stock options that were outstanding as of December 31,
2002, under APB 25 using the intrinsic value method. Therefore, compensation expense for some
previously granted awards that was not recognized under SFAS 123 will be recognized commencing
January 1, 2006, under SFAS 123R. Had the Firm adopted SFAS 123R in prior periods, the impact would
have approximated that shown in the SFAS 123 pro forma disclosures in Note 7 on pages 100102 of
this Annual Report, which presents net income and earnings per share as if all outstanding awards
were accounted for at fair value.
Prior to adopting SFAS 123R, the Firms accounting policy for share-based payment awards
granted to retirement-eligible employees was to recognize
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JPMorgan Chase & Co. / 2005 Annual Report
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|
83 |
Managements discussion and analysis
JPMorgan Chase & Co.
compensation cost over the awards stated service period. For awards granted to
retirement-eligible employees in January 2006, which are subject to SFAS 123R, the Firm will
recognize compensation expense on the grant date without giving consideration to the impact of post-employment
restrictions. This will result in
an increase in compensation expense for the fiscal quarter ended
March 31, 2006 of approximately $300 million, as compared
with the expense that would have been recognized under the
Firms prior accounting policy. The Firm will also accrue in 2006 the estimated cost of stock awards to be granted to retirement-eligible employees in January 2007.
Accounting for conditional asset retirement obligations
In March 2005, FASB issued FIN 47 to clarify the term conditional asset retirement obligation as
used in SFAS 143. Conditional asset retirement obligations are legal obligations to perform an
asset retirement activity in which the timing and/or method of settlement are conditional based
upon a future event that may or may not be within the control of the company. The obligation to
perform the asset retirement activity is unconditional even though uncertainty exists about the
timing and/or method of settlement. FIN 47 clarifies that a company is required to recognize a
liability for the fair value of the conditional asset retirement obligation if the fair value of
the liability can be reasonably estimated and provides guidance for determining when a company
would have sufficient information to reasonably estimate the fair value of the obligation. The Firm adopted FIN 47 on December 31, 2005. The implementation
did not have a material impact on its financial position or results of operations.
Accounting for Certain Hybrid Financial Instruments
an Amendment of FASB Statements No. 133 and 140
In February 2006, the FASB issued SFAS 155, which applies to certain hybrid financial
instruments, which are instruments that contain embedded derivatives. The new standard establishes
a requirement to evaluate beneficial interests in securitized financial assets to determine if the
interests represent freestanding derivatives or are hybrid financial instruments containing
embedded derivatives requiring bifurcation.
This new standard also permits an election for fair value remeasurement of any hybrid financial
instrument containing an embedded derivative that otherwise would require bifurcation under SFAS
133. The fair value election can be applied on an instrument-by-instrument basis to existing
instruments at the date of adoption and can be applied to new instruments on a prospective basis.
Currently, the Firm is planning to adopt this standard effective January 1, 2006. In addition, the
Firm is assessing to which qualifying existing and newly issued instruments it will apply the fair
value election. Implementation of this standard is not expected to have a material impact on the
Firms financial position or results of operations.
Nonexchange-traded commodity derivative contracts at fair value
In the normal course of business, JPMorgan Chase trades nonexchange-traded commodity derivative
contracts. To determine the fair value of these contracts, the Firm uses various fair value
estimation techniques, which are primarily based upon internal models with significant observable
market parameters. The Firms nonexchange-traded commodity derivative contracts are primarily
energy-related contracts. The following table summarizes the changes in fair value for
nonexchange-traded commodity derivative contracts for the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
For the year ended |
|
|
|
|
|
|
December 31, 2005 (in millions) |
|
Asset position |
|
|
Liability position |
|
|
Net fair value of contracts
outstanding at January 1, 2005 |
|
$ |
1,449 |
|
|
$ |
999 |
|
Effect of legally enforceable master
netting agreements |
|
|
2,304 |
|
|
|
2,233 |
|
|
Gross fair value of contracts
outstanding at January 1, 2005 |
|
|
3,753 |
|
|
|
3,232 |
|
Contracts realized or otherwise settled
during the period |
|
|
(12,589 |
) |
|
|
(10,886 |
) |
Fair value of new contracts |
|
|
37,518 |
|
|
|
30,691 |
|
Changes in fair values attributable to
changes in valuation techniques
and assumptions |
|
|
|
|
|
|
|
|
Other changes in fair value |
|
|
(11,717 |
) |
|
|
(7,635 |
) |
|
Gross fair value of contracts
outstanding at December 31, 2005 |
|
|
16,965 |
|
|
|
15,402 |
|
Effect of legally enforceable master |
|
|
|
|
|
|
|
|
netting agreements |
|
|
(10,014 |
) |
|
|
(10,078 |
) |
|
Net fair value of contracts
outstanding at December 31, 2005 |
|
$ |
6,951 |
|
|
$ |
5,324 |
|
|
The following table indicates the schedule of maturities of nonexchange-traded commodity derivative
contracts at December 31, 2005:
|
|
|
|
|
|
|
|
|
At December 31, 2005 (in millions) |
|
Asset position |
|
|
Liability position |
|
|
Maturity less than 1 year |
|
$ |
6,682 |
|
|
$ |
6,254 |
|
Maturity 13 years |
|
|
8,231 |
|
|
|
7,590 |
|
Maturity 45 years |
|
|
1,616 |
|
|
|
1,246 |
|
Maturity in excess of 5 years |
|
|
436 |
|
|
|
312 |
|
|
Gross fair value of contracts
outstanding at December 31, 2005 |
|
|
16,965 |
|
|
|
15,402 |
|
Effects of legally enforceable master
netting agreements |
|
|
(10,014 |
) |
|
|
(10,078 |
) |
|
Net fair value of contracts
outstanding at December 31, 2005 |
|
$ |
6,951 |
|
|
$ |
5,324 |
|
|
|
|
|
|
|
|
84
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|
JPMorgan Chase & Co. / 2005 Annual Report |
Managements report on internal control over financial reporting
JPMorgan Chase & Co.
Management of JPMorgan Chase & Co. is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the Firms principal executive, principal operating and
principal financial officers, or persons performing similar functions, and effected by JPMorgan
Chases board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States
of America.
JPMorgan Chases internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Firms assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
Firm are being made only in accordance with authorizations of JPMorgan Chases management and
directors; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Firms assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management has completed an assessment of the effectiveness of the Firms internal control over
financial reporting as of December 31, 2005. In making the assessment, management used the
framework in Internal Control Integrated Framework promulgated by the Committee of Sponsoring
Organizations of the Treadway Commission, commonly referred to as the COSO criteria.
Based upon the assessment performed, management concluded that as of December 31, 2005, JPMorgan
Chases internal control over financial reporting was effective based upon the COSO criteria.
Additionally, based upon managements assessment, the Firm
determined that there were no material weaknesses in its internal control over financial reporting
as of December 31, 2005.
Managements assessment of the effectiveness of the Firms internal control over financial
reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, JPMorgan Chases
independent registered public accounting firm, who also audited the Firms financial statements as
of and for the year ended December 31, 2005, as stated in their report which is included herein.
William B. Harrison, Jr.
Chairman of the Board
James Dimon
President and Chief Executive Officer
Michael J. Cavanagh
Executive Vice President and Chief Financial Officer
February 24, 2006
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|
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JPMorgan Chase & Co. / 2005 Annual Report
|
|
85 |
Report of independent registered public accounting firm
JPMorgan Chase & Co.
PRICEWATERHOUSE COOPERS LLP 300 MADISON AVENUE NEW YORK, NY 10017
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of JPMorgan Chase & Co.:
We have completed integrated audits of JPMorgan Chase & Co.s 2005 and 2004 consolidated financial
statements and of its internal control over financial reporting as of December 31, 2005, and an
audit of its 2003 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions on JPMorgan Chase & Co.s 2005,
2004, and 2003 consolidated financial statements and on its internal control over financial
reporting as of December 31, 2005, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, changes in stockholders equity and cash flows present fairly, in all
material respects, the financial position of the JPMorgan Chase & Co. and its subsidiaries (the
Company) at December 31, 2005 and 2004, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in the accompanying Managements report on
internal control over financial reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2005 based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control Integrated Framework issued
by the COSO. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
February 24, 2006
|
|
|
|
|
|
86
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|
JPMorgan Chase & Co. / 2005 Annual Report |
Consolidated
statements of income
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions, except per share data)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
4,088 |
|
|
$ |
3,537 |
|
|
$ |
2,890 |
|
Trading revenue |
|
|
5,860 |
|
|
|
3,612 |
|
|
|
4,427 |
|
Lending & deposit related fees |
|
|
3,389 |
|
|
|
2,672 |
|
|
|
1,727 |
|
Asset management, administration and commissions |
|
|
10,390 |
|
|
|
8,165 |
|
|
|
6,039 |
|
Securities/private equity gains |
|
|
473 |
|
|
|
1,874 |
|
|
|
1,479 |
|
Mortgage fees and related income |
|
|
1,054 |
|
|
|
806 |
|
|
|
790 |
|
Credit card income |
|
|
6,754 |
|
|
|
4,840 |
|
|
|
2,466 |
|
Other income |
|
|
2,694 |
|
|
|
830 |
|
|
|
601 |
|
|
Noninterest revenue |
|
|
34,702 |
|
|
|
26,336 |
|
|
|
20,419 |
|
|
Interest income |
|
|
45,200 |
|
|
|
30,595 |
|
|
|
24,044 |
|
Interest expense |
|
|
25,369 |
|
|
|
13,834 |
|
|
|
11,079 |
|
|
Net interest income |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
|
Total net revenue |
|
|
54,533 |
|
|
|
43,097 |
|
|
|
33,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
18,255 |
|
|
|
14,506 |
|
|
|
11,387 |
|
Occupancy expense |
|
|
2,299 |
|
|
|
2,084 |
|
|
|
1,912 |
|
Technology and communications expense |
|
|
3,624 |
|
|
|
3,702 |
|
|
|
2,844 |
|
Professional & outside services |
|
|
4,224 |
|
|
|
3,862 |
|
|
|
2,875 |
|
Marketing |
|
|
1,917 |
|
|
|
1,335 |
|
|
|
710 |
|
Other expense |
|
|
3,705 |
|
|
|
2,859 |
|
|
|
1,694 |
|
Amortization of intangibles |
|
|
1,525 |
|
|
|
946 |
|
|
|
294 |
|
Merger costs |
|
|
722 |
|
|
|
1,365 |
|
|
|
|
|
Litigation reserve charge |
|
|
2,564 |
|
|
|
3,700 |
|
|
|
100 |
|
|
Total noninterest expense |
|
|
38,835 |
|
|
|
34,359 |
|
|
|
21,816 |
|
|
Income before income tax expense |
|
|
12,215 |
|
|
|
6,194 |
|
|
|
10,028 |
|
Income tax expense |
|
|
3,732 |
|
|
|
1,728 |
|
|
|
3,309 |
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
Net income applicable to common stock |
|
$ |
8,470 |
|
|
$ |
4,414 |
|
|
$ |
6,668 |
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
2.43 |
|
|
$ |
1.59 |
|
|
$ |
3.32 |
|
Diluted earnings per share |
|
|
2.38 |
|
|
|
1.55 |
|
|
|
3.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic shares |
|
|
3,492 |
|
|
|
2,780 |
|
|
|
2,009 |
|
Average diluted shares |
|
|
3,557 |
|
|
|
2,851 |
|
|
|
2,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
1.36 |
|
|
$ |
1.36 |
|
|
$ |
1.36 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
87 |
Consolidated
balance sheets
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
At December 31, (in millions, except share data) |
|
2005 |
|
|
2004 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
36,670 |
|
|
$ |
35,168 |
|
Deposits with banks |
|
|
21,661 |
|
|
|
21,680 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
133,981 |
|
|
|
101,354 |
|
Securities borrowed |
|
|
74,604 |
|
|
|
47,428 |
|
Trading assets (including assets pledged of $79,657 at December 31, 2005, and $77,266 at December 31, 2004) |
|
|
298,377 |
|
|
|
288,814 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale (including assets pledged of $17,614 at December 31, 2005, and $26,881 at
December 31, 2004) |
|
|
47,523 |
|
|
|
94,402 |
|
Held-to-maturity (fair value: $80 at December 31, 2005, and $117 at December 31, 2004) |
|
|
77 |
|
|
|
110 |
|
Interests in purchased receivables |
|
|
29,740 |
|
|
|
31,722 |
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
419,148 |
|
|
|
402,114 |
|
Allowance for loan losses |
|
|
(7,090 |
) |
|
|
(7,320 |
) |
|
Loans, net of Allowance for loan losses |
|
|
412,058 |
|
|
|
394,794 |
|
|
|
|
|
|
|
|
|
|
Private equity investments |
|
|
6,374 |
|
|
|
7,735 |
|
Accrued interest and accounts receivable |
|
|
22,421 |
|
|
|
21,409 |
|
Premises and equipment |
|
|
9,081 |
|
|
|
9,145 |
|
Goodwill |
|
|
43,621 |
|
|
|
43,203 |
|
Other intangible assets: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
6,452 |
|
|
|
5,080 |
|
Purchased credit card relationships |
|
|
3,275 |
|
|
|
3,878 |
|
All other intangibles |
|
|
4,832 |
|
|
|
5,726 |
|
Other assets |
|
|
48,195 |
|
|
|
45,600 |
|
|
Total assets |
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
135,599 |
|
|
$ |
129,257 |
|
Interest-bearing |
|
|
287,774 |
|
|
|
261,673 |
|
Non-U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
7,476 |
|
|
|
6,931 |
|
Interest-bearing |
|
|
124,142 |
|
|
|
123,595 |
|
|
Total deposits |
|
|
554,991 |
|
|
|
521,456 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
125,925 |
|
|
|
127,787 |
|
Commercial paper |
|
|
13,863 |
|
|
|
12,605 |
|
Other borrowed funds |
|
|
10,479 |
|
|
|
9,039 |
|
Trading liabilities |
|
|
145,930 |
|
|
|
151,207 |
|
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related
commitments of $400 at December 31, 2005, and $492 at December 31, 2004) |
|
|
78,460 |
|
|
|
75,722 |
|
Beneficial interests issued by consolidated VIEs |
|
|
42,197 |
|
|
|
48,061 |
|
Long-term debt |
|
|
108,357 |
|
|
|
95,422 |
|
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities |
|
|
11,529 |
|
|
|
10,296 |
|
|
Total liabilities |
|
|
1,091,731 |
|
|
|
1,051,595 |
|
|
Commitments and contingencies (see Note 25 of this Annual Report) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
139 |
|
|
|
339 |
|
Common stock (authorized 9,000,000,000 shares
at December 31, 2005 and 2004; issued 3,618,189,597 shares and
3,584,747,502 shares at December 31, 2005 and 2004, respectively) |
|
|
3,618 |
|
|
|
3,585 |
|
Capital surplus |
|
|
74,994 |
|
|
|
72,801 |
|
Retained earnings |
|
|
33,848 |
|
|
|
30,209 |
|
Accumulated other comprehensive income (loss) |
|
|
(626 |
) |
|
|
(208 |
) |
Treasury stock, at cost (131,500,350 shares at December 31, 2005, and 28,556,534 shares at December 31, 2004) |
|
|
(4,762 |
) |
|
|
(1,073 |
) |
|
Total stockholders equity |
|
|
107,211 |
|
|
|
105,653 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
88
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Consolidated statements of changes in stockholders equity
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions, except per share data)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
339 |
|
|
$ |
1,009 |
|
|
$ |
1,009 |
|
Redemption of preferred stock |
|
|
(200 |
) |
|
|
(670 |
) |
|
|
|
|
|
Balance at end of year |
|
|
139 |
|
|
|
339 |
|
|
|
1,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
3,585 |
|
|
|
2,044 |
|
|
|
2,024 |
|
Issuance of common stock |
|
|
33 |
|
|
|
72 |
|
|
|
20 |
|
Issuance of common stock for purchase accounting acquisitions |
|
|
|
|
|
|
1,469 |
|
|
|
|
|
|
Balance at end of year |
|
|
3,618 |
|
|
|
3,585 |
|
|
|
2,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital surplus |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
72,801 |
|
|
|
13,512 |
|
|
|
13,222 |
|
Issuance of common stock and options for purchase accounting acquisitions |
|
|
|
|
|
|
55,867 |
|
|
|
|
|
Shares
issued and commitments to issue common stock for employee
stock-based awards and related tax effects |
|
|
2,193 |
|
|
|
3,422 |
|
|
|
290 |
|
|
Balance at end of year |
|
|
74,994 |
|
|
|
72,801 |
|
|
|
13,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
30,209 |
|
|
|
29,681 |
|
|
|
25,851 |
|
Net income |
|
|
8,483 |
|
|
|
4,466 |
|
|
|
6,719 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
(13 |
) |
|
|
(52 |
) |
|
|
(51 |
) |
Common stock ($1.36 per share each year) |
|
|
(4,831 |
) |
|
|
(3,886 |
) |
|
|
(2,838 |
) |
|
Balance at end of year |
|
|
33,848 |
|
|
|
30,209 |
|
|
|
29,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(208 |
) |
|
|
(30 |
) |
|
|
1,227 |
|
Other comprehensive income (loss) |
|
|
(418 |
) |
|
|
(178 |
) |
|
|
(1,257 |
) |
|
Balance at end of year |
|
|
(626 |
) |
|
|
(208 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(1,073 |
) |
|
|
(62 |
) |
|
|
(1,027 |
) |
Purchase of treasury stock |
|
|
(3,412 |
) |
|
|
(738 |
) |
|
|
|
|
Reissuance from treasury stock |
|
|
|
|
|
|
|
|
|
|
1,082 |
|
Share repurchases related to employee stock-based awards |
|
|
(277 |
) |
|
|
(273 |
) |
|
|
(117 |
) |
|
Balance at end of year |
|
|
(4,762 |
) |
|
|
(1,073 |
) |
|
|
(62 |
) |
|
Total stockholders equity |
|
$ |
107,211 |
|
|
$ |
105,653 |
|
|
$ |
46,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Other comprehensive income (loss) |
|
|
(418 |
) |
|
|
(178 |
) |
|
|
(1,257 |
) |
|
Comprehensive income |
|
$ |
8,065 |
|
|
$ |
4,288 |
|
|
$ |
5,462 |
|
|
|
|
|
(a) |
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
89 |
Consolidated statements of cash flows
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
Depreciation and amortization |
|
|
4,318 |
|
|
|
3,835 |
|
|
|
3,101 |
|
Deferred tax (benefit) provision |
|
|
(1,791 |
) |
|
|
(827 |
) |
|
|
1,428 |
|
Investment securities (gains) losses |
|
|
1,336 |
|
|
|
(338 |
) |
|
|
(1,446 |
) |
Private equity unrealized (gains) losses |
|
|
55 |
|
|
|
(766 |
) |
|
|
(77 |
) |
Gain on dispositions of businesses |
|
|
(1,254 |
) |
|
|
(17 |
) |
|
|
(68 |
) |
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
|
(3,845 |
) |
|
|
(48,703 |
) |
|
|
(2,671 |
) |
Securities borrowed |
|
|
(27,290 |
) |
|
|
(4,816 |
) |
|
|
(7,691 |
) |
Accrued interest and accounts receivable |
|
|
(1,934 |
) |
|
|
(2,391 |
) |
|
|
1,809 |
|
Other assets |
|
|
(9 |
) |
|
|
(17,588 |
) |
|
|
(9,848 |
) |
Trading liabilities |
|
|
(12,578 |
) |
|
|
29,764 |
|
|
|
15,769 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
5,532 |
|
|
|
13,277 |
|
|
|
5,973 |
|
Other operating adjustments |
|
|
1,267 |
|
|
|
(245 |
) |
|
|
63 |
|
|
Net cash (used in) provided by operating activities |
|
|
(24,227 |
) |
|
|
(21,805 |
) |
|
|
14,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks |
|
|
104 |
|
|
|
(4,196 |
) |
|
|
(1,233 |
) |
Federal funds sold and securities purchased under resale agreements |
|
|
(32,469 |
) |
|
|
(13,101 |
) |
|
|
(11,059 |
) |
Other change in loans |
|
|
(148,894 |
) |
|
|
(136,851 |
) |
|
|
(171,779 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds |
|
|
33 |
|
|
|
66 |
|
|
|
221 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities |
|
|
31,053 |
|
|
|
45,197 |
|
|
|
10,548 |
|
Proceeds from sales |
|
|
82,902 |
|
|
|
134,534 |
|
|
|
315,738 |
|
Purchases |
|
|
(81,749 |
) |
|
|
(173,745 |
) |
|
|
(301,854 |
) |
Proceeds due to the sale and securitization of loans |
|
|
126,310 |
|
|
|
108,637 |
|
|
|
170,870 |
|
Net cash (used) received in business acquisitions or dispositions |
|
|
(1,039 |
) |
|
|
13,864 |
|
|
|
(575 |
) |
All other investing activities, net |
|
|
4,796 |
|
|
|
2,519 |
|
|
|
1,541 |
|
|
Net cash (used in) provided by investing activities |
|
|
(18,953 |
) |
|
|
(23,076 |
) |
|
|
12,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
31,415 |
|
|
|
52,082 |
|
|
|
21,851 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
(1,862 |
) |
|
|
7,065 |
|
|
|
(56,017 |
) |
Commercial paper and other borrowed funds |
|
|
2,618 |
|
|
|
(4,343 |
) |
|
|
555 |
|
Proceeds from the issuance of long-term debt and capital debt securities |
|
|
43,721 |
|
|
|
25,344 |
|
|
|
17,195 |
|
Repayments of long-term debt and capital debt securities |
|
|
(26,883 |
) |
|
|
(16,039 |
) |
|
|
(8,316 |
) |
Proceeds from the issuance of stock and stock-related awards |
|
|
682 |
|
|
|
848 |
|
|
|
1,213 |
|
Redemption of preferred stock |
|
|
(200 |
) |
|
|
(670 |
) |
|
|
|
|
Treasury stock purchased |
|
|
(3,412 |
) |
|
|
(738 |
) |
|
|
|
|
Cash dividends paid |
|
|
(4,878 |
) |
|
|
(3,927 |
) |
|
|
(2,865 |
) |
All other financing activities, net |
|
|
3,868 |
|
|
|
(26 |
) |
|
|
133 |
|
|
Net cash provided by (used in) financing activities |
|
|
45,069 |
|
|
|
59,596 |
|
|
|
(26,251 |
) |
|
Effect of exchange rate changes on cash and due from banks |
|
|
(387 |
) |
|
|
185 |
|
|
|
282 |
|
Net increase (decrease) in cash and due from banks |
|
|
1,502 |
|
|
|
14,900 |
|
|
|
1,050 |
|
Cash and due from banks at the beginning of the year |
|
|
35,168 |
|
|
|
20,268 |
|
|
|
19,218 |
|
|
Cash and due from banks at the end of the year |
|
$ |
36,670 |
|
|
$ |
35,168 |
|
|
$ |
20,268 |
|
|
Cash interest paid |
|
$ |
24,583 |
|
|
$ |
13,384 |
|
|
$ |
10,976 |
|
Cash income taxes paid |
|
$ |
4,758 |
|
|
$ |
1,477 |
|
|
$ |
1,337 |
|
|
|
|
|
Note: |
|
In 2004, the fair values of noncash assets acquired and liabilities assumed in the
Merger with Bank One were $320.9 billion and $277.0 billion, respectively, and approximately 1,469
million shares of common stock, valued at approximately $57.3 billion, were issued in connection
with the merger with Bank One. |
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
90
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 1 Basis of presentation
JPMorgan Chase & Co. (JPMorgan Chase or the Firm), a financial holding company incorporated
under Delaware law in 1968, is a leading global financial services firm and one of the largest
banking institutions in the United States, with operations worldwide. The Firm is a leader in
investment banking, financial services for consumers and businesses, financial transaction
processing, investment management, private banking and private equity. For a discussion of the
Firms business segment information, see Note 31 on pages 130131 of this Annual Report.
The accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to
accounting principles generally accepted in the United States of America (U.S. GAAP) and
prevailing industry practices. Additionally, where applicable, the policies conform to the
accounting and reporting guidelines prescribed by bank regulatory authorities.
Certain amounts in the prior periods have been reclassified to conform to the current presentation.
Consolidation
The consolidated financial statements include accounts of JPMorgan Chase and other entities in
which the Firm has a controlling financial interest. All material intercompany balances and
transactions have been eliminated.
The usual condition for a controlling financial interest is ownership of a majority of the voting
interests of an entity. However, a controlling financial interest may also exist in entities, such
as special purpose entities (SPEs), through arrangements that do not involve controlling voting
interests.
SPEs are an important part of the financial markets, providing market liquidity by facilitating
investors access to specific portfolios of assets and risks. They are, for example, critical to
the functioning of the mortgage- and asset-backed securities and commercial paper markets. SPEs may
be organized as trusts, partnerships or corporations and are typically set up for a single,
discrete purpose. SPEs are not typically operating entities and usually have a limited life and no
employees. The basic SPE structure involves a company selling assets to the SPE. The SPE funds the
purchase of those assets by issuing securities to investors. The legal documents that govern the
transaction describe how the cash earned on the assets must be allocated to the SPEs investors and
other parties that have rights to those cash flows. SPEs can be structured to be bankruptcy-remote,
thereby insulating investors from the impact of the creditors of other entities, including the
seller of the assets.
There are two different accounting frameworks applicable to SPEs: the qualifying SPE (QSPE)
framework under SFAS 140; and the variable interest entity (VIE) framework under FIN 46R. The
applicable framework depends on the nature of the entity and the Firms relation to that entity.
The QSPE framework is applicable when an entity transfers (sells) financial assets to an SPE
meeting certain criteria defined in SFAS 140. These criteria are designed to ensure that the
activities of the entity are essentially predetermined
at the inception of the vehicle and that the transferor of the financial assets cannot exercise
control over the entity and the assets therein. Entities meeting these criteria are not
consolidated by the transferor or other counterparties, as long as they do not have the unilateral
ability to liquidate or to cause the entity to no longer meet the QSPE criteria. The Firm primarily
follows the QSPE model for securitizations of its residential and commercial mortgages, credit card
loans and automobile loans. For further details, see Note 13 on pages 108111 of this Annual
Report.
When the SPE does not meet the QSPE criteria, consolidation is assessed pursuant to FIN 46R. Under
FIN 46R, a VIE is defined as an entity that: (1) lacks enough equity investment at risk to permit
the entity to finance its activities without additional subordinated financial support from other
parties; (2) has equity owners that lack the right to make significant decisions affecting the
entitys operations; and/or (3) has equity owners that do not have an obligation to absorb or the
right to receive the entitys losses or returns.
FIN 46R requires a variable interest holder (i.e., a counterparty to a VIE) to consolidate the VIE
if that party will absorb a majority of the expected losses of the VIE, receive the majority of the
expected residual returns of the VIE, or both. This party is considered the primary beneficiary. In
making this determination, the Firm thoroughly evaluates the VIEs design, capital structure and
relationships among variable interest holders. When the primary beneficiary cannot be identified
through a qualitative analysis, the Firm performs a quantitative analysis, which computes and
allocates expected losses or residual returns to variable interest holders. The allocation of
expected cash flows in this analysis is based upon the relative contractual rights and preferences
of each interest holder in the VIEs capital structure. For further details, see Note 14 on pages
111113 of this Annual Report.
All retained interests and significant transactions between the Firm, QSPEs and nonconsolidated
VIEs are reflected on JPMorgan Chases Consolidated balance sheets or in the Notes to consolidated
financial statements.
Investments in companies that are considered to be voting-interest entities under FIN 46R in which
the Firm has significant influence over operating and financing decisions are accounted for in
accordance with the equity method of accounting. These investments are generally included in Other
assets, and the Firms share of income or loss is included in Other income. For a discussion of
private equity investments, see Note 9 on pages 103105 of this Annual Report.
Assets held for clients in an agency or fiduciary capacity by the Firm are not assets of JPMorgan
Chase and are not included in the Consolidated balance sheets.
Use of estimates in the preparation of consolidated
financial statements
The preparation of consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and
disclosures of contingent assets and liabilities. Actual results could be different from these
estimates.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
91 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Foreign currency translation
JPMorgan Chase revalues assets, liabilities, revenues and expenses denominated in foreign
currencies into U.S. dollars using applicable exchange rates.
Gains and losses relating to translating functional currency financial statements for U.S.
reporting are included in Other comprehensive income (loss) within Stockholders equity. Gains and
losses relating to nonfunctional currency transactions, including non-U.S. operations where the
functional currency is the U.S. dollar and operations in highly inflationary environments, are
reported in the Consolidated statements of income.
Statements of cash flows
For JPMorgan Chases Consolidated statements of cash flows, cash and cash equivalents are defined
as those amounts included in Cash and due from banks.
Significant accounting policies
The following table identifies JPMorgan Chases significant accounting policies and the Note and
page where a detailed description of each policy can be found:
|
|
|
|
|
|
|
|
|
|
Trading activities |
|
Note 3 |
|
Page 94 |
Other noninterest revenue |
|
Note 4 |
|
Page 95 |
Pension and other postretirement employee
benefit plans |
|
Note 6 |
|
Page 96 |
Employee stock-based incentives |
|
Note 7 |
|
Page 100 |
Securities and private equity investments |
|
Note 9 |
|
Page 103 |
Securities financing activities |
|
Note 10 |
|
Page 105 |
Loans |
|
Note 11 |
|
Page 106 |
Allowance for credit losses |
|
Note 12 |
|
Page 107 |
Loan securitizations |
|
Note 13 |
|
Page 108 |
Variable interest entities |
|
Note 14 |
|
Page 111 |
Goodwill and other intangible assets |
|
Note 15 |
|
Page 114 |
Premises and equipment |
|
Note 16 |
|
Page 116 |
Income taxes |
|
Note 22 |
|
Page 120 |
Accounting for derivative instruments
and hedging activities |
|
Note 26 |
|
Page 123 |
Off-balance sheet lending-related financial
instruments and guarantees |
|
Note 27 |
|
Page 124 |
Fair value of financial instruments |
|
Note 29 |
|
Page 126 |
|
Note 2 Business changes and developments
Merger with Bank One Corporation
Bank One Corporation merged with and into JPMorgan Chase (the
Merger) on July 1, 2004. As a result of the Merger, each outstanding share of common stock of
Bank One was converted in a stock-for-stock exchange into 1.32 shares of common stock of JPMorgan
Chase. JPMorgan Chase stockholders kept their shares, which remained outstanding and unchanged as
shares of JPMorgan Chase following the Merger. Key objectives of the Merger were to provide the
Firm with a more balanced business mix and greater geographic diversification. The Merger was
accounted for using the purchase method of accounting, which requires that the assets and
liabilities of Bank One be fair valued as of July 1, 2004. The purchase price to complete the
Merger was $58.5 billion.
As part of the Merger, certain accounting policies and practices were conformed, which resulted in
$976 million of charges in 2004. The significant components of the conformity charges comprised a
$1.4 billion charge related to the decertification of the sellers interest in credit card
securitizations, and the benefit of a $584 million reduction in the allowance for credit losses as
a result of conforming the wholesale and consumer credit provision methodologies.
The final purchase price of the Merger has been allocated to the assets acquired and liabilities
assumed using their fair values as of the merger date. The computation of the purchase price and
the allocation of the purchase price to the net assets of Bank One based on their respective
fair values as of July 1, 2004 and the resulting goodwill are presented below.
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts) |
|
July 1, 2004 |
|
|
Purchase
price |
|
|
|
|
|
|
|
|
Bank One common stock exchanged |
|
|
1,113 |
|
|
|
|
|
Exchange ratio |
|
|
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase common stock issued |
|
|
1,469 |
|
|
|
|
|
Average
purchase price per
JPMorgan Chase common share(a) |
|
$ |
39.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57,336 |
|
Fair value of employee stock awards and direct acquisition costs |
|
|
|
|
|
|
1,210 |
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
|
|
|
$ |
58,546 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired: |
|
|
|
|
|
|
|
|
Bank One stockholders equity |
|
$ |
24,156 |
|
|
|
|
|
Bank One goodwill and other intangible assets |
|
|
(2,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
21,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reflect assets
acquired at fair value: |
|
|
|
|
|
|
|
|
Loans and leases |
|
|
(2,261 |
) |
|
|
|
|
Private equity investments |
|
|
(72 |
) |
|
|
|
|
Identified intangibles |
|
|
8,665 |
|
|
|
|
|
Pension plan assets |
|
|
(778 |
) |
|
|
|
|
Premises and equipment |
|
|
(417 |
) |
|
|
|
|
Other assets |
|
|
(267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
to reflect liabilities assumed at fair value: |
|
|
|
|
|
|
|
|
Deposits |
|
|
(373 |
) |
|
|
|
|
Deferred income taxes |
|
|
932 |
|
|
|
|
|
Other postretirement benefit plan liabilities |
|
|
(49 |
) |
|
|
|
|
Other liabilities |
|
|
(1,162 |
) |
|
|
|
|
Long-term debt |
|
|
(1,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,386 |
|
|
|
|
|
|
|
|
|
Goodwill resulting from Merger(b) |
|
|
|
|
|
$ |
34,160 |
|
|
|
|
|
(a) |
|
The value of the Firms common stock exchanged with Bank One shareholders was based on
the average closing prices of the Firms common stock for the two days prior to, and the two days
following, the announcement of the Merger on January 14, 2004. |
|
(b) |
|
Goodwill resulting from the Merger reflects adjustments of the allocation of the purchase price
to the net assets acquired through June 30, 2005. Minor adjustments subsequent to June 30, 2005,
are reflected in the December 31, 2005 Goodwill balance in Note 15 on page 114 of this Annual
Report. |
|
|
|
|
|
|
92
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Condensed statement of net assets acquired
The following condensed statement of net assets acquired reflects the fair value of Bank One
net assets as of July 1, 2004.
|
|
|
|
|
(in millions) |
|
July 1, 2004 |
|
|
Assets |
|
|
|
|
Cash and cash equivalents |
|
$ |
14,669 |
|
Securities |
|
|
70,512 |
|
Interests in purchased receivables |
|
|
30,184 |
|
Loans, net of allowance for loan losses |
|
|
129,650 |
|
Goodwill and other intangible assets |
|
|
42,825 |
|
All other assets |
|
|
47,739 |
|
|
Total assets |
|
$ |
335,579 |
|
|
Liabilities |
|
|
|
|
Deposits |
|
$ |
164,848 |
|
Short-term borrowings |
|
|
9,811 |
|
All other liabilities |
|
|
61,494 |
|
Long-term debt |
|
|
40,880 |
|
|
Total liabilities |
|
|
277,033 |
|
|
Net assets acquired |
|
$ |
58,546 |
|
|
Acquired, identifiable intangible assets
Components of the fair value of acquired, identifiable intangible assets as of July 1, 2004,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
Weighted average |
|
|
Useful life |
|
|
|
(in millions) |
|
|
life (in years) |
|
|
(in years) |
|
|
Core deposit intangibles |
|
$ |
3,650 |
|
|
|
5.1 |
|
|
Up to 10 |
Purchased credit card relationships |
|
|
3,340 |
|
|
|
4.6 |
|
|
Up to 10 |
Other credit
card-related intangibles |
|
|
295 |
|
|
|
4.6 |
|
|
Up to 10 |
Other customer relationship intangibles |
|
|
870 |
|
|
|
4.610.5 |
|
|
Up to 20 |
|
Subtotal |
|
|
8,155 |
|
|
|
5.1 |
|
|
Up to 20 |
Indefinite-lived asset management
intangibles |
|
|
510 |
|
|
NA |
|
NA |
|
Total |
|
$ |
8,665 |
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma condensed combined financial information
The following unaudited pro forma condensed combined financial information presents the results
of operations of the Firm had the Merger taken place at January 1, 2003.
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions, except per share) |
|
2004 |
|
|
2003 |
|
|
Noninterest revenue |
|
$ |
31,175 |
|
|
$ |
28,966 |
|
Net interest income |
|
|
21,366 |
|
|
|
21,715 |
|
|
Total net revenue |
|
|
52,541 |
|
|
|
50,681 |
|
Provision for credit losses |
|
|
2,727 |
|
|
|
3,570 |
|
Noninterest expense |
|
|
40,504 |
|
|
|
33,136 |
|
|
Income before income tax expense |
|
|
9,310 |
|
|
|
13,975 |
|
Net income |
|
$ |
6,544 |
|
|
$ |
9,330 |
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.85 |
|
|
$ |
2.66 |
|
Diluted |
|
|
1.81 |
|
|
|
2.61 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
3,510 |
|
|
|
3,495 |
|
Diluted |
|
|
3,593 |
|
|
|
3,553 |
|
|
Other business events
Collegiate Funding Services
On March 1, 2006, JPMorgan
Chase acquired, for approximately
$663 million, Collegiate Funding Services, a leader in student
loan servicing and consolidation. This acquisition will enable the
Firm to
create a comprehensive education finance business.
BrownCo
On November 30, 2005, JPMorgan Chase sold BrownCo, an on-line deep-discount brokerage business, to
E*TRADE Financial for a cash purchase price of $1.6 billion. JPMorgan Chase recognized an after-tax
gain of $752 million. BrownCos results of operations are reported in the Asset & Wealth Management
business segment; however, the gain on the sale, which is recorded in Other income in the
Consolidated statements of income, is reported in the Corporate business segment.
Sears Canada credit card business
On November 15, 2005, JPMorgan Chase purchased Sears Canada Inc.s credit card operation, including
both the private-label card accounts and the co-branded Sears MasterCard® accounts. The
credit card operation includes approximately 10 million accounts with $2.2 billion (CAD$2.5
billion) in managed loans. Sears Canada and JPMorgan Chase entered into an ongoing arrangement
under which JPMorgan Chase will offer private-label and co-branded credit cards to both new and
existing customers of Sears Canada.
Chase Merchant Services, Paymentech integration
On October 5, 2005, JPMorgan Chase and First Data Corp. completed the integration of the companies
jointly owned Chase Merchant Services and Paymentech merchant businesses, to be operated under the
name of Chase Paymentech Solutions, LLC. The joint venture is the largest financial transaction
processor in the U.S. for businesses accepting credit card payments via traditional point of sale,
Internet, catalog and recurring billing. As a result of the integration into a joint venture,
Paymentech has been deconsolidated and JPMorgan Chases ownership interest in this joint venture is
accounted for in accordance with the equity method of accounting.
Neovest Holdings, Inc.
On September 1, 2005, JPMorgan Chase completed its acquisition of Neovest Holdings, Inc., a
provider of high-performance trading technology and direct market access. This transaction will
enable the Investment Bank to offer a leading, broker-neutral trading platform across asset classes
to institutional investors, asset managers and hedge funds.
Vastera
On April 1, 2005, JPMorgan Chase acquired Vastera, a provider of global trade management solutions,
for approximately $129 million. Vasteras business was combined with the Logistics and Trade
Services businesses of TSS Treasury Services unit. Vastera automates trade management processes
associated with the physical movement of goods internationally; the acquisition enables TS to offer
management of information and processes in support of physical goods movement, together with
financial settlement.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
93 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Partners
On March 1, 2005, the Firm announced that the management team of JPMorgan Partners, LLC, a private
equity unit of the Firm, will become independent when it completes the investment of the current
$6.5 billion Global Fund, which it advises. The buyout and growth equity professionals of JPMorgan
Partners will form a new independent firm, CCMP Capital, LLC, and the venture professionals will
separately form a new independent firm, Panorama Capital, LLC. JPMorgan Chase has committed to
invest the lesser of $875 million or 24.9% of the limited partnership interests in the fund to be
raised by CCMP Capital, and has committed to invest the lesser of $50 million or 24.9% of the
limited partnership interests in the fund to be raised by Panorama Capital. The investment
professionals of CCMP and Panorama will continue to manage the JPMP investments pursuant to a
management agreement with the Firm.
Cazenove
On February 28, 2005, JPMorgan Chase and Cazenove Group plc (Cazenove) formed a business
partnership which combined Cazenoves investment banking business and JPMorgan Chases U.K.-based
investment banking business in order to provide investment banking services in the United Kingdom
and Ireland. The new company is called JPMorgan Cazenove Holdings.
Other acquisitions
During 2004, JPMorgan Chase purchased the Electronic Financial Services (EFS) business from
Citigroup and acquired a majority interest in hedge fund manager Highbridge Capital Management
(Highbridge).
Note 3 Trading activities
Trading assets include debt and equity securities held for trading purposes that JPMorgan Chase
owns (long positions). Trading liabilities include debt and equity securities that the Firm has
sold to other parties but does not own (short positions). The Firm is obligated to purchase
securities at a future date to cover the short positions. Included in Trading assets and Trading
liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives.
These amounts include the derivative assets and liabilities net of cash received and paid,
respectively, under legally enforceable master netting agreements. At December 31, 2005, the amount
of cash received and paid was approximately $26.7 billion and $18.9 billion, respectively. At
December 31, 2004, the amount of cash received and paid was approximately $32.2 billion and $22.0
billion, respectively. Trading positions are carried at fair value on the Consolidated balance
sheets.
Trading revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Fixed income and other(b) |
|
$ |
4,554 |
|
|
$ |
2,976 |
|
|
$ |
4,046 |
|
Equities(c) |
|
|
1,271 |
|
|
|
797 |
|
|
|
764 |
|
Credit portfolio(d) |
|
|
35 |
|
|
|
(161 |
) |
|
|
(383 |
) |
|
Total |
|
$ |
5,860 |
|
|
$ |
3,612 |
|
|
$ |
4,427 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Includes bonds and commercial paper and various types of interest rate derivatives as well as foreign
exchange and commodities. |
|
(c) |
|
Includes equity securities and equity derivatives. |
|
(d) |
|
Includes credit derivatives. |
Trading assets and liabilities
The following table presents the fair value of Trading assets and Trading liabilities for the
dates indicated:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Trading assets |
|
|
|
|
|
|
|
|
Debt and equity instruments: |
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations |
|
$ |
16,283 |
|
|
$ |
16,867 |
|
U.S. government-sponsored enterprise obligations |
|
|
24,172 |
|
|
|
23,513 |
|
Obligations of state and political subdivisions |
|
|
9,887 |
|
|
|
3,486 |
|
Certificates of deposit, bankers acceptances
and commercial paper |
|
|
5,652 |
|
|
|
7,341 |
|
Debt securities issued by non-U.S. governments |
|
|
48,671 |
|
|
|
50,699 |
|
Corporate securities and other |
|
|
143,925 |
|
|
|
120,926 |
|
|
Total debt and equity instruments |
|
|
248,590 |
|
|
|
222,832 |
|
Derivative receivables: |
|
|
|
|
|
|
|
|
Interest rate |
|
|
30,416 |
|
|
|
45,892 |
|
Foreign exchange |
|
|
2,855 |
|
|
|
7,939 |
|
Equity |
|
|
5,575 |
|
|
|
6,120 |
|
Credit derivatives |
|
|
3,464 |
|
|
|
2,945 |
|
Commodity |
|
|
7,477 |
|
|
|
3,086 |
|
|
Total derivative receivables |
|
|
49,787 |
|
|
|
65,982 |
|
|
Total trading assets |
|
$ |
298,377 |
|
|
$ |
288,814 |
|
|
Trading liabilities |
|
|
|
|
|
|
|
|
Debt and equity instruments(a) |
|
$ |
94,157 |
|
|
$ |
87,942 |
|
|
Derivative payables: |
|
|
|
|
|
|
|
|
Interest rate |
|
|
28,488 |
|
|
|
41,075 |
|
Foreign exchange |
|
|
3,453 |
|
|
|
8,969 |
|
Equity |
|
|
11,539 |
|
|
|
9,096 |
|
Credit derivatives |
|
|
2,445 |
|
|
|
2,499 |
|
Commodity |
|
|
5,848 |
|
|
|
1,626 |
|
|
Total derivative payables |
|
|
51,773 |
|
|
|
63,265 |
|
|
Total trading liabilities |
|
$ |
145,930 |
|
|
$ |
151,207 |
|
|
|
|
|
(a) |
|
Primarily represents securities sold, not yet purchased. |
Average Trading assets and liabilities were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Trading assets debt and
equity instruments |
|
$ |
237,370 |
|
|
$ |
200,467 |
|
|
$ |
154,597 |
|
Trading assets derivative receivables |
|
|
57,365 |
|
|
|
59,521 |
|
|
|
85,628 |
|
|
|
|
|
|
|
|
|
|
Trading liabilities debt and
equity instruments(b) |
|
$ |
93,102 |
|
|
$ |
82,204 |
|
|
$ |
72,877 |
|
Trading liabilities derivative payables |
|
|
55,723 |
|
|
|
52,761 |
|
|
|
67,783 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Primarily represents securities sold, not yet purchased. |
|
|
|
|
|
|
94
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 4 Other noninterest revenue
Investment banking fees
This revenue category includes advisory and equity and debt underwriting fees. Advisory fees are
recognized as revenue when related services are performed. Underwriting fees are recognized as
revenue when the Firm has rendered all services to the issuer and is entitled to collect the fee
from the issuer, as long as there are no other contingencies associated with the fee (e.g., the fee
is not contingent upon the customer obtaining financing). Underwriting fees are net of syndicate
expenses. In addition, the Firm recognizes credit arrangement and syndication fees as revenue after
satisfying certain retention, timing and yield criteria.
The following table presents the components of Investment banking fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Underwriting: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
864 |
|
|
$ |
780 |
|
|
$ |
699 |
|
Debt |
|
|
1,969 |
|
|
|
1,859 |
|
|
|
1,549 |
|
|
Total Underwriting |
|
|
2,833 |
|
|
|
2,639 |
|
|
|
2,248 |
|
Advisory |
|
|
1,255 |
|
|
|
898 |
|
|
|
642 |
|
|
Total |
|
$ |
4,088 |
|
|
$ |
3,537 |
|
|
$ |
2,890 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
Lending & deposit related fees
This revenue category includes fees from loan commitments, standby letters of credit, financial
guarantees, deposit-related fees in lieu of compensating balances, cash management-related
activities or transactions, deposit accounts, and other loan servicing activities. These fees are
recognized over the period in which the related service is provided.
Asset management, administration and commissions
This revenue category includes fees from investment management and related services, custody and
institutional trust services, brokerage services, insurance premiums and commissions and other
products. These fees are recognized over the period in which the related service is provided.
Mortgage fees and related income
This revenue category includes fees and income derived from mortgage origination, sales and
servicing, and includes the effect of risk management activities associated with the mortgage
pipeline, warehouse and the mortgage servicing rights (MSRs) asset (excluding gains and losses on
the sale of Available-for-sale (AFS) securities). Origination fees and gains or losses on loan
sales are recognized in income upon sale. Mortgage servicing fees are recognized over the period
the related service is provided, net of amortization. Valuation changes in the mortgage pipeline,
warehouse, MSR asset and corresponding risk management instruments are generally adjusted through
earnings as these changes occur. Net interest income and securities gains and losses on AFS
securities used in mortgage-related risk management activities are not included in Mortgage fees
and related income. For a further discussion of MSRs, see Note 15 on pages 114116 of this Annual
Report.
Credit card income
This revenue category includes interchange income from credit and debit cards, annual fees, and
servicing fees earned in connection with securitization activities. Volume-related payments to
partners and expenses for rewards programs are also recorded within Credit card income. Fee
revenues are recognized as earned, except for annual fees, which are recognized over a 12-month
period. Expenses related to rewards programs are recorded when earned by the customer.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity organizations and co-brand partners,
which grant to the Firm exclusive rights to market to their members or customers. These
organizations and partners provide to the Firm their endorsement of the credit card programs,
mailing lists, and may also conduct marketing activities and provide awards under the various
credit card programs. The terms of these agreements generally range from 3 to 10 years. The
economic incentives the Firm pays to the endorsing organizations and partners typically include
payments based upon new accounts, activation, charge volumes, and the cost of their marketing
activities and awards.
The Firm recognizes the portion of payments based upon new accounts to the affinity organizations
and co-brand partners, as deferred loan origination costs. The Firm defers these costs and
amortizes them over 12 months. Payments based upon charge volumes and considered by the Firm as
revenue sharing with the affinity organizations and co-brand partners are deducted from Credit card
income as the related revenue is earned. The Firm expenses payments based upon marketing efforts
performed by the endorsing organization or partner to activate a new account as incurred. These
costs are recorded within Noninterest expense.
Note 5 Interest income and interest expense
Details of Interest income and Interest expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
26,062 |
|
|
$ |
16,771 |
|
|
$ |
11,812 |
|
Securities |
|
|
3,129 |
|
|
|
3,377 |
|
|
|
3,542 |
|
Trading assets |
|
|
9,117 |
|
|
|
7,527 |
|
|
|
6,592 |
|
Federal funds sold and securities
purchased under resale agreements |
|
|
4,125 |
|
|
|
1,627 |
|
|
|
1,497 |
|
Securities borrowed |
|
|
1,154 |
|
|
|
463 |
|
|
|
323 |
|
Deposits with banks |
|
|
680 |
|
|
|
539 |
|
|
|
214 |
|
Interests in purchased receivables |
|
|
933 |
|
|
|
291 |
|
|
|
64 |
|
|
Total interest income |
|
|
45,200 |
|
|
|
30,595 |
|
|
|
24,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
10,295 |
|
|
|
4,630 |
|
|
|
3,604 |
|
Short-term and other liabilities |
|
|
9,542 |
|
|
|
6,260 |
|
|
|
5,871 |
|
Long-term debt |
|
|
4,160 |
|
|
|
2,466 |
|
|
|
1,498 |
|
Beneficial interests issued by
consolidated VIEs |
|
|
1,372 |
|
|
|
478 |
|
|
|
106 |
|
|
Total interest expense |
|
|
25,369 |
|
|
|
13,834 |
|
|
|
11,079 |
|
|
Net interest income |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
Net interest income after provision
for credit losses |
|
$ |
16,348 |
|
|
$ |
14,217 |
|
|
$ |
11,425 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
95 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 6 Pension and other postretirement employee benefit plans
New U.S.-based postretirement plans were introduced in 2005 after the Bank One plans were
merged into the heritage JPMorgan Chase plans as of December 31, 2004.
The Firms defined benefit pension plans are accounted for in accordance with SFAS 87 and SFAS 88.
The postretirement medical and life insurance plans are accounted for in accordance with SFAS 106.
The Firm uses a measurement date of December 31 for pension and other postretirement employee
benefit plans. In addition, as of August 1, 2005, the U.S. postretirement medical and life
insurance plan was remeasured to reflect a mid-year plan amendment and the final Medicare Part D
regulations that were issued on January 21, 2005. For the Firms defined benefit pension plan
assets, fair value is used to determine the expected return on pension plan assets. For the Firms
other postretirement employee benefit plan assets, a calculated value that recognizes changes in
fair value over a five-year period is used to determine the expected return on other postretirement
employee benefit plan assets. Unrecognized net actuarial gains and losses and prior service costs
associated with the U.S. defined benefit pension plan are amortized over the average future service
period of plan participants, which is currently 10 years. For other postretirement employee benefit
plans, unrecognized gains and losses are also amortized over the average future service period,
which is currently 8 years. However, prior service costs associated with other postretirement
employee benefit plans are recognized over the average years of service remaining to full
eligibility age, which is currently 6 years.
Defined Benefit Pension Plans
The Firm has a qualified noncontributory U.S. defined benefit pension plan that provides benefits
to substantially all U.S. employees. The U.S. plan employs a cash balance formula, in the form of
salary and interest credits, to determine the benefits to be provided at retirement, based upon
eligible compensation and years of service. Employees begin to accrue plan benefits after
completing one year of service, and benefits generally vest after five years of service. The Firm
also offers benefits through defined benefit pension plans to qualifying employees in certain
non-U.S. locations based upon eligible compensation and years of service.
It is the Firms policy to fund the pension plans in amounts sufficient to meet the requirements
under applicable employee benefit and local tax laws. The Firm did not make any U.S. pension plan
contributions in 2005 and based upon the current funded status of this plan, the Firm does not
expect to make significant contributions in 2006. In 2004, the Firm made a cash contribution to its
U.S. defined benefit pension plan of $1.1 billion, funding the plan to the maximum allowable amount
under applicable tax law. Additionally, the Firm made cash contributions totaling $78 million and
$40 million to fully fund the accumulated benefit obligations of certain non-U.S. defined benefit
pension plans as of December 31, 2005 and 2004, respectively.
Postretirement medical and life insurance
JPMorgan Chase offers postretirement medical and life insurance benefits to certain retirees and
qualifying U.S. employees. These benefits vary with length of service and date of hire and provide
for limits on the Firms share of covered medical benefits. The medical benefits are contributory,
while the life insurance benefits are noncontributory. As of August 1, 2005, the eligibility
requirements for U.S. employees to qualify for subsidized retiree medical coverage were revised and
life insurance coverage was eliminated for active employees retiring after 2005. Postretirement
medical benefits also are offered to qualifying U.K. employees.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) was enacted. The Act established a prescription drug benefit under Medicare (Medicare Part
D) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. The Firm has determined that benefits
provided to certain participants are at least actuarially equivalent to Medicare Part D and has
reflected the effects of the subsidy in the financial statements and disclosures retroactive to the
beginning of 2004 (July 1, 2004 for Bank One plans) in accordance with FSP SFAS 106-2.
JPMorgan Chases U.S. postretirement benefit obligation is partially funded with corporate-owned
life insurance (COLI) purchased on the lives of eligible employees and retirees. While the Firm
owns the COLI policies, COLI proceeds (death benefits, withdrawals and other distributions) may be
used only to reimburse the Firm for net postretirement benefit claim payments and related
administrative expenses. The U.K. postretirement benefit plan is unfunded.
The following tables present the funded status and amounts reported on the Consolidated balance
sheets, the accumulated benefit obligation and the components of net periodic benefit costs
reported in the Consolidated statements of income for the Firms U.S. and non-U.S. defined benefit
pension and postretirement benefit plans:
|
|
|
|
|
|
96
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
|
Other postretirement benefit plans (c)(d) |
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
(b) |
|
2005 |
|
|
2004 |
(b) |
|
2005 |
|
|
2004 |
(b) |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
(7,594 |
) |
|
$ |
(4,633 |
) |
|
$ |
(1,969 |
) |
|
$ |
(1,659 |
) |
|
$ |
(1,577 |
) |
|
$ |
(1,252 |
) |
Merger with Bank One |
|
|
|
|
|
|
(2,497 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(216 |
) |
Cazenove business partnership |
|
|
|
|
|
|
|
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Benefits earned during the year |
|
|
(280 |
) |
|
|
(251 |
) |
|
|
(25 |
) |
|
|
(17 |
) |
|
|
(13 |
) |
|
|
(15 |
) |
Interest cost on benefit obligations |
|
|
(431 |
) |
|
|
(348 |
) |
|
|
(104 |
) |
|
|
(87 |
) |
|
|
(81 |
) |
|
|
(81 |
) |
Plan amendments |
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
32 |
|
Employee contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
(36 |
) |
Actuarial gain (loss) |
|
|
(122 |
) |
|
|
(511 |
) |
|
|
(310 |
) |
|
|
(99 |
) |
|
|
21 |
|
|
|
(163 |
) |
Benefits paid |
|
|
723 |
|
|
|
555 |
|
|
|
66 |
|
|
|
64 |
|
|
|
187 |
|
|
|
167 |
|
Curtailments |
|
|
28 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(8 |
) |
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Foreign exchange impact and other |
|
|
|
|
|
|
|
|
|
|
255 |
|
|
|
(134 |
) |
|
|
5 |
|
|
|
(3 |
) |
|
Benefit obligation at end of year |
|
$ |
(7,676 |
) |
|
$ |
(7,594 |
) |
|
$ |
(2,378 |
) |
|
$ |
(1,969 |
) |
|
$ |
(1,395 |
) |
|
$ |
(1,577 |
) |
|
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
9,637 |
|
|
$ |
4,866 |
|
|
$ |
1,889 |
|
|
$ |
1,603 |
|
|
$ |
1,302 |
|
|
$ |
1,149 |
|
Merger with Bank One |
|
|
|
|
|
|
3,280 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
98 |
|
Cazenove business partnership |
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
703 |
|
|
|
946 |
|
|
|
308 |
|
|
|
164 |
|
|
|
43 |
|
|
|
84 |
|
Firm contributions |
|
|
|
|
|
|
1,100 |
|
|
|
78 |
|
|
|
40 |
|
|
|
3 |
|
|
|
2 |
|
Benefits paid |
|
|
(723 |
) |
|
|
(555 |
) |
|
|
(66 |
) |
|
|
(64 |
) |
|
|
(19 |
) |
|
|
(31 |
) |
Foreign exchange impact and other |
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
126 |
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
9,617 |
(e) |
|
$ |
9,637 |
(e) |
|
$ |
2,223 |
|
|
$ |
1,889 |
|
|
$ |
1,329 |
|
|
$ |
1,302 |
|
|
Reconciliation of funded status |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
1,941 |
|
|
$ |
2,043 |
|
|
$ |
(155 |
) |
|
$ |
(80 |
) |
|
$ |
(66 |
) |
|
$ |
(275 |
) |
Unrecognized amounts: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transition asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Prior service cost |
|
|
40 |
|
|
|
47 |
|
|
|
3 |
|
|
|
4 |
|
|
|
(105 |
) |
|
|
(23 |
) |
Net actuarial loss |
|
|
1,078 |
|
|
|
997 |
|
|
|
599 |
|
|
|
590 |
|
|
|
335 |
|
|
|
321 |
|
|
Prepaid benefit cost reported in Other assets |
|
$ |
3,059 |
|
|
$ |
3,087 |
|
|
$ |
447 |
(f) |
|
$ |
513 |
(f) |
|
$ |
164 |
|
|
$ |
23 |
|
|
Accumulated benefit obligation |
|
$ |
(7,274 |
) |
|
$ |
(7,167 |
) |
|
$ |
(2,303 |
) |
|
$ |
(1,931 |
) |
|
NA |
|
NA |
|
|
|
|
(a) |
|
For pension benefit plans, the unrecognized net loss is primarily the result of declines
in interest rates in recent years, as offset by recent asset gains and amounts recognized through
amortization in expense. Other factors that contribute to this unrecognized amount include
demographic experience, which differs from expected, and changes in other actuarial assumptions.
For other postretirement benefit plans, the primary drivers of the cumulative unrecognized loss was
the decline in the discount rate in recent years and the medical trend, which was higher than
expected. These losses have been offset somewhat by the recognition of future savings attributable
to Medicare Part D subsidy payments. |
|
(b) |
|
Effective July 1, 2004, the Firm assumed the obligations of heritage Bank Ones pension and
postretirement plans. These plans were similar to those of JPMorgan Chase and were merged into the
Firms plans effective December 31, 2004. |
|
(c) |
|
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in a $35
million reduction in the Accumulated other postretirement benefit obligation as of January 1, 2004.
During 2005, an additional $116 million reduction was reflected for recognition of the final
Medicare Part D regulations issued on January 21, 2005. |
|
(d) |
|
Includes postretirement benefit obligation of $44 million and $43 million and postretirement
benefit liability (included in Accrued expenses) of $50 million and $57 million at December 31,
2005 and 2004, respectively, for the U.K. plan, which is unfunded. |
|
(e) |
|
At December 31, 2005 and 2004, approximately $405 million and $358 million, respectively, of
U.S. plan assets relate to surplus assets of group annuity contracts. |
|
(f) |
|
At December 31, 2005 and 2004, Accrued expenses related to non-U.S. defined benefit pension
plans that JPMorgan Chase elected not to prefund fully totaled $164 million and $124 million,
respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
|
Other postretirement benefit plans |
|
For the year ended December 31, (in millions) |
|
2005 |
|
|
2004 |
(a) |
|
2003 |
(b) |
|
2005 |
|
|
2004 |
(a) |
|
2003 |
(b) |
|
2005 |
(c) |
|
2004 |
(a) (c) |
|
2003 |
(b) |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits earned during the period |
|
$ |
280 |
|
|
$ |
251 |
|
|
$ |
180 |
|
|
$ |
25 |
|
|
$ |
17 |
|
|
$ |
16 |
|
|
$ |
13 |
|
|
$ |
15 |
|
|
$ |
15 |
|
Interest cost on benefit
obligations |
|
|
431 |
|
|
|
348 |
|
|
|
262 |
|
|
|
104 |
|
|
|
87 |
|
|
|
74 |
|
|
|
81 |
|
|
|
81 |
|
|
|
73 |
|
Expected return on plan assets |
|
|
(694 |
) |
|
|
(556 |
) |
|
|
(322 |
) |
|
|
(109 |
) |
|
|
(90 |
) |
|
|
(83 |
) |
|
|
(90 |
) |
|
|
(86 |
) |
|
|
(92 |
) |
Amortization of unrecognized
amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
5 |
|
|
|
13 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
1 |
|
Net actuarial loss |
|
|
4 |
|
|
|
23 |
|
|
|
62 |
|
|
|
38 |
|
|
|
44 |
|
|
|
35 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
Curtailment (gain) loss |
|
|
2 |
|
|
|
7 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
(17 |
) |
|
|
8 |
|
|
|
2 |
|
Settlement (gain) loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
Reported net periodic benefit costs |
|
$ |
28 |
|
|
$ |
86 |
|
|
$ |
190 |
|
|
$ |
59 |
|
|
$ |
69 |
|
|
$ |
50 |
|
|
$ |
(10 |
) |
|
$ |
20 |
|
|
$ |
(1 |
) |
|
|
|
|
(a) |
|
Effective July 1, 2004, the Firm assumed the obligations of heritage Bank Ones pension
and postretirement plans. These plans were similar to those of JPMorgan Chase and were merged into
the Firms plans effective December 31, 2004. |
|
(b) |
|
Heritage JPMorgan Chase results only for 2003. |
|
(c) |
|
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in a $15
million and $5 million reduction in 2005 and 2004, respectively, in net periodic benefit cost. The
impact on 2005 cost was higher as a result of the final Medicare Part D regulations issued on
January 21, 2005. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
97 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Chase has a number of other defined benefit pension plans (i.e., U.S. plans not
subject to Title IV of the Employee Retirement Income Security Act). The most significant of these
plans is the Excess Retirement Plan, pursuant to which certain employees earn service credits on
compensation amounts above the maximum stipulated by law. This plan is a nonqualified, noncontributory U.S. pension plan with an unfunded liability at December 31, 2005 and 2004, in the amount
of $273 million and $292 million, respectively. Compensation expense related to this pension plan
totaled $21 million in 2005, $28 million in 2004 and $19 million in 2003.
Plan assumptions
JPMorgan Chases expected long-term rate of return for U.S. pension and other postretirement
employee benefit plan assets is a blended average of the investment advisors projected long-term
(10 years or more) returns for the various asset classes, weighted by the portfolio allocation.
Asset-class returns are developed using a forward-looking building-block approach and are not based
strictly upon historical returns. Equity returns are generally developed as the sum of inflation,
expected real earnings growth and expected long-term dividend yield. Bond returns are generally
developed as the sum of inflation, real bond yield and risk spread (as appropriate), adjusted for
the expected effect on returns from changing yields. Other asset-class returns are derived from
their relationship to the equity and bond markets.
In the U.K., which represents the most significant of the non-U.S. pension plans, procedures
similar to those in the U.S. are used to develop the expected long-term rate of return on pension
plan assets, taking into consideration local market conditions and the specific allocation of plan
assets. The expected
long-term rate of return on U.K. plan assets is an average of projected long-term returns for each
asset class, selected by reference to the yield on long-term U.K. government bonds and AA-rated
long-term corporate bonds, plus an equity risk premium above the risk-free rate.
In 2005, the discount rate used in determining the benefit obligation under the U.S. pension and
other postretirement employee benefit plans was selected by reference to the yield on a portfolio
of bonds whose redemptions and coupons closely match each of the plans projected cash flows; such
portfolio is derived from a broad-based universe of high quality corporate bonds as of the
measurement date. In years in which this hypothetical bond portfolio generates excess cash, such
excess is assumed to be reinvested at the one-year forward rates implied by the Citigroup Pension
Discount Curve published as of the measurement date. Prior to 2005, discount rates were selected by
reference to the year-end Moodys corporate AA rate, as well as other high-quality indices with a
duration that was similar to that of the respective plans benefit obligations. The discount rate
for the U.K. pension and other postretirement employee benefit plans was determined by matching the
duration of the Firms obligations with the corresponding duration from the yield curve of the
year-end iBoxx £ corporate AA 15-year-plus bond index.
The following tables present the weighted-average annualized actuarial assumptions for the
projected and accumulated benefit obligations, and the components of net periodic benefit costs for
the Firms U.S. and non-U.S. defined benefit pension and postretirement benefit plans, as of
year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
For the year ended December 31, |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Weighted-average assumptions used to determine benefit obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
5.70 |
% |
|
|
5.75 |
% |
|
|
2.00-4.70 |
% |
|
|
2.00-5.30 |
% |
Postretirement benefit |
|
|
5.65 |
|
|
|
5.75 |
|
|
|
4.7 |
|
|
|
5.3 |
|
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.50 |
|
|
|
3.00-3.75 |
|
|
|
1.75-3.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
For the year ended December 31, |
|
2005 |
|
|
2004 |
|
|
2003 |
(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
(b) |
|
Weighted-average assumptions used to determine net
periodic benefit costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75% |
(a) |
|
|
6.00 |
% |
|
|
6.50 |
% |
|
|
2.00-5.30 |
% |
|
|
2.00-5.75 |
% |
|
|
1.50-5.60 |
% |
Expected long-term rate of return on plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
7.50 |
|
|
|
7.50-7.75 |
|
|
|
8.00 |
|
|
|
3.25-5.75 |
|
|
|
3.00-6.50 |
|
|
|
2.70-6.50 |
|
Postretirement benefit |
|
|
4.75-7.00 |
|
|
|
4.75-7.00 |
|
|
|
8.00 |
|
|
NA |
|
|
NA |
|
|
NA |
|
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.25-4.50 |
|
|
|
4.50 |
|
|
|
1.75-3.75 |
|
|
|
1.75-3.75 |
|
|
|
1.25-3.00 |
|
|
|
|
|
(a) |
|
The postretirement plan was remeasured as of August 1, 2005, and a rate of 5.25% was used
from the period of August 1, 2005, through December 31, 2005. |
|
(b) |
|
Heritage JPMorgan Chase results only for 2003. |
|
|
|
|
|
|
98
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following tables present JPMorgan Chases assumed weighted-average medical benefits cost
trend rate, which is used to measure the expected cost of benefits at year-end, and the effect of a
one-percentage-point change in the assumed medical benefits cost trend rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2005 |
|
|
2004 |
(a) |
|
2003 |
(b) |
|
Health care cost trend rate assumed |
|
|
|
|
|
|
|
|
|
|
|
|
for next year |
|
|
10 |
% |
|
|
10 |
% |
|
|
10 |
% |
Rate to which cost trend rate is assumed
to decline (ultimate trend rate) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Year that rate reaches ultimate trend rate |
|
|
2012 |
|
|
|
2011 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
1-Percentage- |
|
1-Percentage- |
For the year ended December 31,2005 |
|
point increase |
|
point decrease |
|
Effect on total service and interest costs |
|
$ |
4 |
|
|
$ |
(3 |
) |
Effect on postretirement benefit obligation |
|
|
64 |
|
|
|
(55 |
) |
|
|
|
|
(a) |
|
Effective July 1, 2004, the Firm assumed the obligations of heritage Bank Ones pension
and postretirement plans. These plans were similar to those of JPMorgan Chase and were merged into
the Firms plans effective December 31, 2004. |
|
(b) |
|
2003 reflects the results of heritage JPMorgan Chase only. |
At December 31, 2005, the Firm reduced the discount rate used to determine its U.S. benefit
obligations to 5.70% for the pension plan and to 5.65% for the postretirement benefits plans from
the prior year rate of 5.75% for both plans. The Firm also changed the health care benefit
obligation trend assumption to 10% for 2006, grading down to an ultimate rate of 5% in 2013. The
2006 expected long-term rate of return on its U.S. pension plan assets remained at 7.50%. The 2006
expected long-term rate of return on the Firms COLI post-retirement plan assets remained at 7.00%;
however, with the merger of Bank Ones other postretirement plan assets, the Firms overall
expected long-term rate of return on U.S. postretirement employee benefit plan assets decreased to
6.84% and 6.80% in 2005 and 2004, respectively, to reflect a weighted average expected rate of
return for the merged plan. The interest crediting rate assumption used to determine pension
benefits changed to 5.00% from 4.75% in 2005, primarily due to changes in market interest rates
which will result in additional expense of $18 million. The changes as of December 31, 2005, to the
discount rates are expected to increase 2006 U.S. pension and other postretirement benefit expenses
by approximately $5 million and to the non-U.S. pension and other postretirement benefit expenses
by $23 million. The rate of compensation increase assumption of 4.00% at December 31, 2005,
reflects the consolidation of the prior JPMorgan Chase and Bank One age-weighted increase
assumptions; the impact to expense is not expected to be material.
JPMorgan Chases U.S. pension and other postretirement benefit expenses are most sensitive to the
expected long-term rate of return on plan assets. With all other assumptions held constant, a
25-basis point decline in the expected long-term rate of return on U.S. plan assets would result
in an increase of approximately $26 million in 2006 U.S. pension and other postretirement benefit
expenses. A 25-basis point decline in the discount rate for the U.S. plans would result in an
increase in 2006 U.S. pension and other postretirement benefit expenses of approximately $20
million and an increase in the related projected benefit obligations of approximately $233 million.
A 25-basis point decline in the discount rates for the non-U.S. plans would result in an increase
in the 2006 non-U.S. pension and other postretirement benefit expenses of $12 million. A 25-basis
point increase in the interest crediting rate would result in an increase in 2006 U.S. pension
expense of approximately $18 million.
Investment strategy and asset allocation
The investment policy for the Firms postretirement employee benefit plan assets is to optimize the
risk-return relationship as appropriate to the respective plans needs and goals, using a global
portfolio of various asset classes diversified by market segment, economic sector, and issuer.
Specifically, the goal is to optimize the asset mix for future benefit obligations, while managing
various risk factors and each plans investment return objectives. For example, long-duration fixed
income securities are included in the U.S. qualified pension plans asset allocation, in
recognition of its long-duration obligations. Plan assets are managed by a combination of internal
and external investment managers and, on a quarterly basis, are rebalanced to target, to the extent
economically practical.
The Firms U.S. pension plan assets are held in various trusts and are invested in well-diversified
portfolios of equities (including U.S. large and small capitalization and international equities),
fixed income (including corporate and government bonds), Treasury inflation-indexed and high-yield
securities, cash equivalents, and other securities. Non-U.S. pension plan assets are held in
various trusts and are similarly invested in well-diversified portfolios of equity, fixed income
and other securities. Assets of the Firms COLI policies, which are used to fund partially the U.S.
postretirement benefit plan, are held in separate accounts with an insurance company and are
invested in equity and fixed income index funds. In addition, tax-exempt municipal debt securities,
held in a trust, are used to fund the U.S. postretirement benefit plan. As of December 31, 2005, the assets used to
fund the Firms U.S. and non-U.S. defined benefit pension and postretirement benefit plans do not
include JPMorgan Chase common stock, except in connection with investments in third-party
stock-index funds.
The following table presents the weighted-average asset allocation at December 31 for the years
indicated, and the respective target allocation by asset category, for the Firms U.S. and non-U.S.
defined benefit pension and postretirement benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S.(a) |
|
|
Postretirement benefit plans(b) |
|
|
Target |
|
% of plan assets |
|
|
Target |
|
% of plan assets |
|
|
Target |
|
% of plan assets |
December 31, |
|
Allocation |
|
2005 |
|
|
2004 |
|
|
Allocation |
|
2005 |
|
|
2004 |
|
|
Allocation |
|
|
2005 |
|
|
2004 |
|
|
Asset category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
30 |
% |
|
|
33 |
% |
|
|
38 |
% |
|
|
74 |
% |
|
|
75 |
% |
|
|
76 |
% |
|
|
50 |
% |
|
|
54 |
% |
|
|
54 |
% |
Equity securities |
|
|
55 |
|
|
|
57 |
|
|
|
53 |
|
|
|
25 |
|
|
|
24 |
|
|
|
24 |
|
|
|
50 |
|
|
|
46 |
|
|
|
46 |
|
Real estate |
|
|
5 |
|
|
|
6 |
|
|
|
5 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
10 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
(a) |
|
Represents the U.K. defined benefit pension plan only, as plans outside the U.K. are not significant. |
|
(b) |
|
Represents the U.S. postretirement benefit plan only, as the U.K. plan is unfunded. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
99 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Estimated future benefit payments
The following table presents benefit payments expected to be paid, which include the effect of
expected future service, for the years indicated. The postretirement medical and life insurance
payments are net of expected retiree contributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Other postretirement |
|
|
|
|
Year ended December 31, |
|
U.S. pension |
|
|
U.S. pension |
|
|
benefits before |
|
|
|
|
(in millions) |
|
benefits |
|
|
benefits |
|
|
Medicare Part D subsidy |
|
|
Medicare Part D subsidy |
|
|
2006 |
|
$ |
558 |
|
|
$ |
67 |
|
|
$ |
124 |
|
|
$ |
14 |
|
2007 |
|
|
550 |
|
|
|
70 |
|
|
|
127 |
|
|
|
15 |
|
2008 |
|
|
565 |
|
|
|
74 |
|
|
|
127 |
|
|
|
16 |
|
2009 |
|
|
584 |
|
|
|
77 |
|
|
|
128 |
|
|
|
17 |
|
2010 |
|
|
600 |
|
|
|
81 |
|
|
|
129 |
|
|
|
19 |
|
Years 20112015 |
|
|
3,266 |
|
|
|
396 |
|
|
|
633 |
|
|
|
111 |
|
|
Defined contribution plans
JPMorgan Chase offers several defined contribution plans in the U.S. and certain non-U.S.
locations. The most significant of these plans is the 401(k) Savings Plan, which covers
substantially all U.S. employees. The 401(k) Savings Plan allows employees to make pre-tax
contributions to tax-deferred investment portfolios. The JPMorgan Chase Common Stock Fund within
the 401(k) Savings Plan is a nonleveraged employee stock ownership plan. The Firm matches eligible employee contributions
up to a certain percentage of benefits-eligible compensation per pay period, subject to plan and
legal limits. Employees begin to receive matching contributions after completing a specified
service requirement and are immediately vested in such company contributions. The Firms defined
contribution plans are administered in accordance with applicable local laws and regulations.
Compensation expense related to these plans totaled $392 million in 2005, $317 million in 2004 and
$240 million in 2003.
Note 7 Employee stock-based incentives
Effective January 1, 2003, JPMorgan Chase adopted SFAS 123 using the prospective transition
method. SFAS 123 requires all stock-based compensation awards, including stock options and
stock-settled stock appreciation rights (SARs), to be accounted for at fair value. The Firm
currently uses the Black-Scholes valuation model to estimate the fair value of stock options and
SARs. Stock options that were outstanding as of December 31, 2002, continue to be accounted for
under APB 25 using the intrinsic value method. Under this method, no expense is recognized for
stock options or SARs granted at the stock price on grant date, since such options have no
intrinsic value. Compensation expense for restricted stock and restricted stock units (RSUs) is
measured based upon the number of shares granted and the stock price at the grant date.
Compensation expense is recognized in earnings over the required service period.
In connection with the Merger in 2004, JPMorgan Chase converted all outstanding Bank One employee
stock-based awards at the merger date, and those awards became exercisable for or based upon
JPMorgan Chase common stock. The number of awards converted, and the exercise prices of those
awards, was adjusted to take into account the Merger exchange ratio of 1.32.
On December 16, 2004, the FASB issued SFAS 123R, which revises SFAS 123 and supersedes APB 25. In
March 2005, the SEC issued SAB 107, which provides interpretive guidance on SFAS 123R. Accounting
and reporting under SFAS 123R is generally similar to the SFAS 123 approach. However, SFAS 123R
requires all share-based payments to employees, including grants of employee stock options and
SARs, to be recognized in the income statement based upon their fair values. Pro forma disclosure
is no longer an alternative. SFAS 123R permits adoption using one of two methods modified
prospective or modified retrospective. In April 2005, the U.S. Securities and Exchange Commission
approved a new rule that, for public companies, delayed the effective date of SFAS 123R to no later
than January 1, 2006. The Firm adopted SFAS 123R on January 1, 2006, under the modified prospective
method.
Key employee stock-based awards
In 2005, JPMorgan Chase granted long-term stock-based awards under the 1996 Long-Term Incentive
Plan as amended (the 1996 Plan) until May 2005 and under the 2005 Long-Term Incentive Plan (the
2005 Plan) thereafter to certain key employees. These two plans, plus prior Firm plans and plans
assumed as the result of acquisitions, constitute the Firms plans (LTI Plans). The 2005 Plan was
adopted by the Board of Directors on March 15, 2005, and became effective on May 17, 2005, after
approval by shareholders at the annual meeting. The 2005 Plan replaces three existing stock
compensation plans the 1996 Plan and two non-shareholder
approved plans all of which expired in
May 2005. Under the terms of the 2005 Plan, 275 million shares of common stock are available for
issuance during its five-year term. The 2005 Plan is the only active plan under which the Firm is
currently granting stock-based incentive awards.
In 2005, 15.5 million SARs settled only in shares and 1.7 million nonqualified stock options were
granted. Under the LTI Plans, stock options and SARs are granted with an exercise price equal to
JPMorgan Chases common stock price on the grant date. Generally, options and SARs cannot be
exercised until at least one year after the grant date and become exercisable over various periods
as determined at the time of the grant. These awards generally expire 10 years after the grant
date.
In December 2005, the Firm accelerated the vesting of approximately 41 million unvested,
out-of-the-money employee stock options granted in 2001 under the Growth and Performance Incentive
Program (GPIP), which were scheduled to vest in January 2007. These options were not modified
other than to accelerate vesting. The related expense was approximately $145 million, and was
recognized as compensation expense in the fourth quarter of 2005. The Firm believes that at the
time the options were accelerated they had limited economic value since the exercise price of the
accelerated options was $51.22 and the closing price of the Firms common stock on the effective
date of the acceleration was $39.69.
|
|
|
|
|
|
100
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following table presents a summary of JPMorgan Chases option and SAR activity under the
LTI Plans during the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Year ended December 31,(a) |
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
(Options/SARs in thousands) |
|
options/SARs |
|
|
exercise price |
|
|
options/SARs |
|
|
exercise price |
|
|
options |
|
|
exercise price |
|
|
Outstanding, January 1 |
|
|
376,330 |
|
|
$ |
37.59 |
|
|
|
294,026 |
|
|
$ |
39.88 |
|
|
|
298,731 |
|
|
$ |
40.84 |
|
Granted |
|
|
17,248 |
|
|
|
35.55 |
|
|
|
16,667 |
|
|
|
39.79 |
|
|
|
26,751 |
|
|
|
22.15 |
|
Bank One
Conversion, July 1 |
|
NA |
|
|
NA |
|
|
|
111,287 |
|
|
|
29.63 |
|
|
NA |
|
|
NA |
|
Exercised |
|
|
(26,731 |
) |
|
|
24.28 |
|
|
|
(27,763 |
) |
|
|
25.33 |
|
|
|
(14,574 |
) |
|
|
17.47 |
|
Canceled |
|
|
(28,272 |
) |
|
|
44.77 |
|
|
|
(17,887 |
) |
|
|
46.68 |
|
|
|
(16,882 |
) |
|
|
47.57 |
|
|
Outstanding, December 31 |
|
|
338,575 |
|
|
$ |
37.93 |
|
|
|
376,330 |
|
|
$ |
37.59 |
|
|
|
294,026 |
|
|
$ |
39.88 |
|
Exercisable, December 31 |
|
|
286,017 |
|
|
$ |
38.89 |
|
|
|
246,945 |
|
|
$ |
36.82 |
|
|
|
176,163 |
|
|
$ |
37.88 |
|
|
|
|
|
(a) |
|
2004 includes six months of awards for the combined Firm and six months of awards for
heritage JPMorgan Chase. 2003 reflects the awards for heritage JPMorgan Chase only. |
The following table details the distribution of options and SARs outstanding under the LTI
Plans at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/SARs outstanding |
|
|
Options/SARs exercisable |
|
(Options/SARs in thousands) |
|
|
|
|
|
Weighted-average |
|
|
Weighted-average remaining |
|
|
|
|
|
|
Weighted-average |
|
Range of exercise prices |
|
Outstanding |
|
|
exercise price |
|
|
contractual life (in years) |
|
|
Exercisable |
|
|
exercise price |
|
|
$7.27$20.00 |
|
|
2,504 |
|
|
$ |
19.12 |
|
|
0.8 |
|
|
|
2,503 |
|
|
$ |
19.12 |
|
$20.01$35.00 |
|
|
125,422 |
|
|
|
28.02 |
|
|
5.8 |
|
|
|
88,418 |
|
|
|
27.22 |
|
$35.01$50.00 |
|
|
135,263 |
|
|
|
40.04 |
|
|
4.9 |
|
|
|
119,710 |
|
|
|
40.13 |
|
$50.01$63.48 |
|
|
75,386 |
|
|
|
51.27 |
|
|
4.8 |
|
|
|
75,386 |
|
|
|
51.27 |
|
|
Total |
|
|
338,575 |
|
|
$ |
37.93 |
|
|
5.2 |
|
|
|
286,017 |
|
|
$ |
38.89 |
|
|
The following table presents a summary of JPMorgan Chases restricted stock and RSU activity
under the LTI Plans during the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Number of restricted stock/RSUs |
|
Year ended December 31,(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Outstanding, January 1 |
|
|
85,099 |
|
|
|
85,527 |
|
|
|
55,886 |
|
Granted |
|
|
38,115 |
|
|
|
32,514 |
|
|
|
44,552 |
|
Bank One conversion |
|
NA |
|
|
|
15,116 |
|
|
NA |
Lapsed(b) |
|
|
(30,413 |
) |
|
|
(43,349 |
) |
|
|
(12,545 |
) |
Forfeited |
|
|
(8,197 |
) |
|
|
(4,709 |
) |
|
|
(2,366 |
) |
|
Outstanding, December 31 |
|
|
84,604 |
|
|
|
85,099 |
|
|
|
85,527 |
|
|
|
|
|
(a) |
|
2004 includes six months of awards for the combined Firm and six months of awards for
heritage JPMorgan Chase. 2003 reflects the awards for heritage JPMorgan Chase only. |
|
(b) |
|
Lapsed awards represent both restricted stock for which restrictions have lapsed and RSUs that have been
converted into common stock. |
Restricted stock and RSUs are granted by JPMorgan Chase at no cost to the recipient. These
awards are subject to forfeiture until certain restrictions have lapsed, including continued
employment for a specified period. The recipient of a share of restricted stock is entitled to
voting rights and dividends on the common stock. An RSU entitles the recipient to receive a share
of common stock after the applicable restrictions lapse; the recipient is entitled to receive cash
payments equivalent to any dividends paid on the underlying common stock during the period the RSU
is outstanding. Effective January 2005, the equity portion of the Firms annual incentive awards
were granted primarily in the form of RSUs.
The vesting of certain awards issued prior to 2002 is conditioned upon certain service requirements
being met and JPMorgan Chases common stock reaching and sustaining target prices within a
five-year performance period. During 2002, it was determined that it was no longer probable that
the target stock prices related to forfeitable awards granted in 1999, 2000, and 2001 would be
achieved within their respective performance periods, and accordingly, previously accrued expenses
were reversed. The target stock prices for these awards range from $73.33 to $85.00. These awards
were forfeited as follows: 1.2 million shares granted in 1999 were forfeited in January 2004; and
1.2 million shares granted in 2000 were forfeited in January 2005. Additionally, 1.2 million shares
granted in 2001 were forfeited in January 2006.
Broad-based employee stock options
No broad-based employee stock option grants were made in 2005. Prior awards were granted by
JPMorgan Chase under the Value Sharing Plan, a non-shareholder-approved plan. The exercise price is
equal to JPMorgan Chases common stock price on the grant date. The options become exercisable over
various periods and generally expire 10 years after the grant date.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
101 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents a summary of JPMorgan Chases broad-based employee stock option
plans and SAR activity during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
(Options/SARs in thousands) |
|
options/SARs |
|
|
exercise price |
|
|
options/SARs |
|
|
exercise price |
|
|
options |
|
|
exercise price |
|
|
Outstanding, January 1 |
|
|
112,184 |
|
|
$ |
40.42 |
|
|
|
117,822 |
|
|
$ |
39.11 |
|
|
|
113,155 |
|
|
$ |
40.62 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
6,321 |
|
|
|
39.96 |
|
|
|
12,846 |
|
|
|
21.87 |
|
Exercised |
|
|
(2,000 |
) |
|
|
24.10 |
|
|
|
(5,960 |
) |
|
|
15.26 |
|
|
|
(2,007 |
) |
|
|
13.67 |
|
Canceled |
|
|
(4,602 |
) |
|
|
39.27 |
|
|
|
(5,999 |
) |
|
|
39.18 |
|
|
|
(6,172 |
) |
|
|
37.80 |
|
|
Outstanding, December 31 |
|
|
105,582 |
|
|
$ |
40.78 |
|
|
|
112,184 |
|
|
$ |
40.42 |
|
|
|
117,822 |
|
|
$ |
39.11 |
|
Exercisable, December 31 |
|
|
52,592 |
|
|
$ |
40.29 |
|
|
|
30,082 |
|
|
$ |
36.33 |
|
|
|
36,396 |
|
|
$ |
32.88 |
|
|
The following table details the distribution of broad-based employee stock options and SARs
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/SARs outstanding |
|
Options/SARs exercisable |
|
(Options/SARs in thousands) |
|
|
|
|
|
Weighted-average |
|
|
Weighted-average remaining |
|
|
|
|
|
Weighted-average |
|
Range of exercise prices |
|
Outstanding |
|
|
exercise price |
|
|
contractual life (in years) |
|
Exercisable |
|
|
exercise price |
|
|
$20.01$35.00 |
|
|
15,200 |
|
|
$ |
25.01 |
|
|
|
4.3 |
|
|
|
10,490 |
|
|
$ |
26.42 |
|
$35.01$50.00 |
|
|
70,088 |
|
|
|
41.18 |
|
|
|
4.5 |
|
|
|
41,990 |
|
|
|
43.72 |
|
$50.01$51.22 |
|
|
20,294 |
|
|
|
51.22 |
|
|
|
5.1 |
|
|
|
112 |
|
|
|
51.22 |
|
|
Total |
|
|
105,582 |
|
|
$ |
40.78 |
|
|
|
4.6 |
|
|
|
52,592 |
|
|
$ |
40.29 |
|
|
Comparison of the fair and intrinsic value measurement methods
Pre-tax employee stock-based compensation expense related to the LTI plans totaled $1.6 billion in
2005, $1.3 billion in 2004 and $919 million in 2003.
The following table presents net income (after-tax) and basic and diluted earnings per share as
reported, and as if all outstanding awards were accounted for at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (a) |
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income as reported |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Add: |
|
Employee stock-based compensation expense originally included in reported net income |
|
|
938 |
|
|
|
778 |
|
|
|
551 |
|
Deduct: |
|
Employee stock-based compensation expense determined under the fair value method for all awards |
|
|
(1,015 |
) |
|
|
(960 |
) |
|
|
(863 |
) |
|
Pro forma net income |
|
$ |
8,406 |
|
|
$ |
4,284 |
|
|
$ |
6,407 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
As reported |
|
$ |
2.43 |
|
|
$ |
1.59 |
|
|
$ |
3.32 |
|
|
|
Pro forma |
|
|
2.40 |
|
|
|
1.52 |
|
|
|
3.16 |
|
Diluted: |
|
As reported |
|
$ |
2.38 |
|
|
$ |
1.55 |
|
|
$ |
3.24 |
|
|
|
Pro forma |
|
|
2.36 |
|
|
|
1.48 |
|
|
|
3.09 |
|
|
|
|
|
(a) |
|
2004 results include six months of awards for the combined Firms results and six months
of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The following table presents JPMorgan Chases weighted-average, grant-date fair values for the
employee stock-based compensation awards granted, and the assumptions used to value stock options
and SARs under the Black-Scholes valuation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Weighted-average grant-date fair value |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
Key employee |
|
$ |
10.44 |
|
|
$ |
13.04 |
|
|
$ |
5.60 |
|
Broad-based employee |
|
NA |
|
|
|
10.71 |
|
|
|
4.98 |
|
Converted Bank One options |
|
NA |
|
|
|
14.05 |
|
|
NA |
|
Restricted stock and RSUs
(all payable solely in stock) |
|
|
37.35 |
|
|
|
39.58 |
|
|
|
22.03 |
|
Weighted-average annualized stock option valuation assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.25 |
% |
|
|
3.44 |
% |
|
|
3.19 |
% |
Expected dividend yield (b) |
|
|
3.79 |
|
|
|
3.59 |
|
|
|
5.99 |
|
Expected common stock price volatility |
|
|
37 |
|
|
|
41 |
|
|
|
44 |
|
Assumed weighted-average expected
life of stock options (in years) |
|
|
|
|
|
|
|
|
|
|
|
|
Key employee |
|
|
6.8 |
|
|
|
6.8 |
|
|
|
6.8 |
|
Broad-based employee |
|
NA |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Based primarily upon historical data at the grant dates. |
|
|
|
|
|
|
102
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 8 Noninterest expense
Merger costs
Costs associated with the Merger were reflected in the Merger costs caption of the Consolidated
statements of income. A summary of such costs, by expense category, is shown in the following table
for 2005 and 2004. There were no such costs in 2003.
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions) |
|
2005 |
|
|
2004 |
(a) |
|
Expense category |
|
|
|
|
|
|
|
|
Compensation |
|
$ |
238 |
|
|
$ |
467 |
|
Occupancy |
|
|
(77 |
) |
|
|
448 |
|
Technology and communications and other |
|
|
561 |
|
|
|
450 |
|
|
Total(b) |
|
$ |
722 |
|
|
$ |
1,365 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage JPMorgan Chase results. |
|
(b) |
|
With the exception of occupancy-related write-offs, all of the costs in the table require the expenditure of cash. |
The table below shows the change in the liability balance related to the costs associated with
the Merger.
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions) |
|
2005 |
|
|
2004 |
(a) |
|
Liability balance, beginning of period |
|
$ |
952 |
|
|
$ |
|
|
Recorded as merger costs |
|
|
722 |
|
|
|
1,365 |
|
Recorded as goodwill |
|
|
26 |
|
|
|
1,028 |
|
Liability utilized |
|
|
(903 |
) |
|
|
(1,441 |
) |
|
Total |
|
$ |
797 |
|
|
$ |
952 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
Note 9 Securities and
private equity investments
Securities are classified as AFS, Held-to-maturity (HTM) or Trading. Trading securities are
discussed in Note 3 on page 94 of this Annual Report. Securities are classified as AFS when, in
managements judgment, they may be sold in response to or in anticipation of changes in market
conditions, or as part of the Firms management of its structural interest rate risk. AFS
securities are carried at fair value on the Consolidated balance sheets. Unrealized gains and
losses after SFAS 133 valuation adjustments are reported as net increases or decreases to
Accumulated other comprehensive income (loss). The specific identification method is used to
determine realized gains and losses on AFS securities, which are included in Securities /private
equity gains on the Consolidated statements of income. Securities that the Firm has the positive
intent and ability to hold to maturity are classified as HTM and are carried at amortized cost on
the Consolidated balance sheets.
The following table presents realized gains and losses from AFS securities and private equity gains
(losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Realized gains |
|
$ |
302 |
|
|
$ |
576 |
|
|
$ |
2,123 |
|
Realized losses |
|
|
(1,638 |
) |
|
|
(238 |
) |
|
|
(677 |
) |
|
Net realized securities gains (losses) |
|
|
(1,336 |
) |
|
|
338 |
|
|
|
1,446 |
|
Private equity gains |
|
|
1,809 |
|
|
|
1,536 |
|
|
|
33 |
|
|
Total Securities/private
equity gains |
|
$ |
473 |
|
|
$ |
1,874 |
|
|
$ |
1,479 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The amortized cost and estimated fair value of AFS and held-to-maturity securities were as
follows for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Fair |
|
Amortized |
|
unrealized |
|
unrealized |
|
Fair |
December 31, (in millions) |
|
cost |
|
gains |
|
losses |
|
value |
|
cost |
|
gains |
|
losses |
|
value |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
$ |
4,245 |
|
|
$ |
24 |
|
|
$ |
2 |
|
|
$ |
4,267 |
|
|
$ |
13,621 |
|
|
$ |
7 |
|
|
$ |
222 |
|
|
$ |
13,406 |
|
Mortgage-backed securities |
|
|
80 |
|
|
|
3 |
|
|
|
|
|
|
|
83 |
|
|
|
2,405 |
|
|
|
41 |
|
|
|
17 |
|
|
|
2,429 |
|
Agency obligations |
|
|
165 |
|
|
|
16 |
|
|
|
|
|
|
|
181 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Collateralized mortgage obligations |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
71 |
|
|
|
4 |
|
|
|
4 |
|
|
|
71 |
|
U.S. government-sponsored enterprise obligations |
|
|
22,604 |
|
|
|
9 |
|
|
|
596 |
|
|
|
22,017 |
|
|
|
46,143 |
|
|
|
142 |
|
|
|
593 |
|
|
|
45,692 |
|
Obligations of state and political subdivisions |
|
|
712 |
|
|
|
21 |
|
|
|
7 |
|
|
|
726 |
|
|
|
2,748 |
|
|
|
126 |
|
|
|
8 |
|
|
|
2,866 |
|
Debt securities issued by non-U.S. governments |
|
|
5,512 |
|
|
|
12 |
|
|
|
18 |
|
|
|
5,506 |
|
|
|
7,901 |
|
|
|
59 |
|
|
|
38 |
|
|
|
7,922 |
|
Corporate debt securities |
|
|
5,754 |
|
|
|
39 |
|
|
|
74 |
|
|
|
5,719 |
|
|
|
7,007 |
|
|
|
127 |
|
|
|
18 |
|
|
|
7,116 |
|
Equity securities |
|
|
3,179 |
|
|
|
110 |
|
|
|
7 |
|
|
|
3,282 |
|
|
|
5,810 |
|
|
|
39 |
|
|
|
14 |
|
|
|
5,835 |
|
Other, primarily asset-backed securities(a) |
|
|
5,738 |
|
|
|
23 |
|
|
|
23 |
|
|
|
5,738 |
|
|
|
9,103 |
|
|
|
25 |
|
|
|
75 |
|
|
|
9,053 |
|
|
Total available-for-sale securities |
|
$ |
47,993 |
|
|
$ |
257 |
|
|
$ |
727 |
|
|
$ |
47,523 |
|
|
$ |
94,821 |
|
|
$ |
570 |
|
|
$ |
989 |
|
|
$ |
94,402 |
|
|
Held-to-maturity securities(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
77 |
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
80 |
|
|
$ |
110 |
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
117 |
|
|
|
|
|
(a) |
|
Includes collateralized mortgage obligations of private issuers, which generally have
underlying collateral consisting of obligations of the U.S. government and federal agencies and
corporations. |
|
(b) |
|
Consists primarily of mortgage-backed securities. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
103 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents the fair value and unrealized losses for AFS securities by aging
category at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized losses |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total |
|
|
Gross |
|
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
2005 (in millions) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
$ |
3,789 |
|
|
$ |
1 |
|
|
$ |
85 |
|
|
$ |
1 |
|
|
$ |
3,874 |
|
|
$ |
2 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
Agency obligations |
|
|
7 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
15 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
U.S. government-sponsored enterprise
obligations |
|
|
10,607 |
|
|
|
242 |
|
|
|
11,007 |
|
|
|
354 |
|
|
|
21,614 |
|
|
|
596 |
|
Obligations of state and political subdivisions |
|
|
237 |
|
|
|
3 |
|
|
|
107 |
|
|
|
4 |
|
|
|
344 |
|
|
|
7 |
|
Debt securities issued by non-U.S. governments |
|
|
2,380 |
|
|
|
17 |
|
|
|
71 |
|
|
|
1 |
|
|
|
2,451 |
|
|
|
18 |
|
Corporate debt securities |
|
|
3,076 |
|
|
|
52 |
|
|
|
678 |
|
|
|
22 |
|
|
|
3,754 |
|
|
|
74 |
|
Equity securities |
|
|
1,838 |
|
|
|
7 |
|
|
|
2 |
|
|
|
|
|
|
|
1,840 |
|
|
|
7 |
|
Other, primarily asset-backed securities |
|
|
778 |
|
|
|
14 |
|
|
|
370 |
|
|
|
9 |
|
|
|
1,148 |
|
|
|
23 |
|
|
Total securities with unrealized losses |
|
$ |
22,727 |
|
|
$ |
336 |
|
|
$ |
12,410 |
|
|
$ |
391 |
|
|
$ |
35,137 |
|
|
$ |
727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized losses |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total |
|
|
Gross |
|
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
2004 (in millions) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
$ |
10,186 |
|
|
$ |
154 |
|
|
$ |
940 |
|
|
$ |
68 |
|
|
$ |
11,126 |
|
|
$ |
222 |
|
Mortgage-backed securities |
|
|
344 |
|
|
|
1 |
|
|
|
1,359 |
|
|
|
16 |
|
|
|
1,703 |
|
|
|
17 |
|
Agency obligations |
|
|
5 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
278 |
|
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
280 |
|
|
|
4 |
|
U.S. government-sponsored enterprise
obligations |
|
|
34,760 |
|
|
|
282 |
|
|
|
10,525 |
|
|
|
311 |
|
|
|
45,285 |
|
|
|
593 |
|
Obligations of state and political
subdivisions |
|
|
678 |
|
|
|
6 |
|
|
|
96 |
|
|
|
2 |
|
|
|
774 |
|
|
|
8 |
|
Debt securities issued by non-U.S.
governments |
|
|
3,395 |
|
|
|
17 |
|
|
|
624 |
|
|
|
21 |
|
|
|
4,019 |
|
|
|
38 |
|
Corporate debt securities |
|
|
1,103 |
|
|
|
13 |
|
|
|
125 |
|
|
|
5 |
|
|
|
1,228 |
|
|
|
18 |
|
Equity securities |
|
|
1,804 |
|
|
|
14 |
|
|
|
23 |
|
|
|
|
|
|
|
1,827 |
|
|
|
14 |
|
Other, primarily asset-backed securities |
|
|
1,896 |
|
|
|
41 |
|
|
|
321 |
|
|
|
34 |
|
|
|
2,217 |
|
|
|
75 |
|
|
Total securities with unrealized losses |
|
$ |
54,449 |
|
|
$ |
532 |
|
|
$ |
14,018 |
|
|
$ |
457 |
|
|
$ |
68,467 |
|
|
$ |
989 |
|
|
Impairment is evaluated considering numerous factors, and their relative significance varies
case to case. Factors considered include the length of time and extent to which the market value
has been less than cost; the financial condition and near-term prospects of the issuer of the
securities; and the Firms intent and ability to retain the security in order to allow for an
anticipated recovery in market value. If, based upon the analysis, it is determined that the
impairment is other-than-temporary, the security is written down to fair value, and a loss is
recognized through earnings.
Included in the $727 million of gross unrealized losses on AFS securities at December 31, 2005, was
$391 million of unrealized losses that have existed for a period greater than 12 months. These securities are predominately rated AAA
and the unrealized losses are due to overall increases in market interest rates and not due to
underlying credit concerns of the issuers. Substantially all of the securities with unrealized
losses aged greater than 12 months have a market value at December 31, 2005, that is within 4% of
their amortized cost basis.
In calculating the effective yield for mortgage-backed securities (MBS) and collateralized
mortgage obligations (CMO), JPMorgan Chase includes the effect of principal prepayments.
Management regularly performs simulation testing to determine the impact that market conditions
would have on its MBS and CMO portfolios. MBSs and CMOs that management believes have prepayment
risk are included in the AFS portfolio and are reported at fair value.
|
|
|
|
|
|
104
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following table presents the amortized cost, estimated fair value and average yield at
December 31, 2005, of JPMorgan Chases AFS and HTM securities by contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
Held-to-maturity securities |
|
Maturity schedule of securities |
|
Amortized |
|
|
Fair |
|
|
Average |
|
|
Amortized |
|
|
Fair |
|
|
Average |
|
December 31, 2005 (in millions) |
|
cost |
|
|
value |
|
|
yield |
(a) |
|
cost |
|
|
value |
|
|
yield |
(a) |
|
Due in one year or less |
|
$ |
6,723 |
|
|
$ |
6,426 |
|
|
|
2.77 |
% |
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
Due after one year through five years |
|
|
7,740 |
|
|
|
8,009 |
|
|
|
3.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five years through 10 years |
|
|
5,346 |
|
|
|
5,366 |
|
|
|
4.70 |
|
|
|
30 |
|
|
|
31 |
|
|
|
6.96 |
|
Due after 10 years(b) |
|
|
28,184 |
|
|
|
27,722 |
|
|
|
4.69 |
|
|
|
47 |
|
|
|
49 |
|
|
|
6.73 |
|
|
Total securities |
|
$ |
47,993 |
|
|
$ |
47,523 |
|
|
|
4.27 |
% |
|
$ |
77 |
|
|
$ |
80 |
|
|
|
6.82 |
% |
|
|
|
|
(a) |
|
The average yield is based upon amortized cost balances at year-end. Yields are derived
by dividing interest income by total amortized cost. Taxable-equivalent yields are used where
applicable. |
|
(b) |
|
Includes securities with no stated maturity. Substantially all of JPMorgan Chases
MBSs and CMOs are due in 10 years or more based upon contractual maturity. The estimated duration,
which reflects anticipated future prepayments based upon a consensus of dealers in the market, is
approximately four years for MBSs and CMOs. |
Private equity investments are primarily held by the Private Equity business within Corporate
(which includes JPMorgan Partners and ONE Equity Partners businesses). The Private Equity business
invests in buyouts, growth equity and venture opportunities in the normal course of business. These
investments are accounted for under investment company guidelines. Accordingly, these investments,
irrespective of the percentage of equity ownership interest held by Private Equity, are carried on
the Consolidated balance sheets at fair value. Realized and unrealized gains and losses arising
from changes in value are reported in Securities/private equity gains in the Consolidated
statements of income in the period that the gains or losses occur.
Privately-held investments are initially valued based upon cost. The carrying values of
privately-held investments are adjusted from cost to reflect both positive and negative changes
evidenced by financing events with third-party capital providers. In addition, these investments
are subject to ongoing impairment reviews by Private Equitys senior investment professionals. A
variety of factors are reviewed and monitored to assess impairment including, but not limited to,
operating performance and future expectations of the particular portfolio investment, industry
valuations of comparable public companies, changes in market outlook and the third-party financing
environment
Note 10 Securities financing activities
JPMorgan Chase enters into resale agreements, repurchase agreements, securities borrowed
transactions and securities loaned transactions primarily to finance the Firms inventory
positions, acquire securities to cover short positions and settle other securities obligations. The
Firm also enters into these transactions to accommodate customers needs.
Securities purchased under resale agreements (resale agreements) and securities sold under
repurchase agreements (repurchase agreements) are generally treated as collateralized financing
transactions and are carried on the Consolidated balance sheets at the amounts the securities will
be subsequently sold or repurchased, plus accrued interest. Where appropriate, resale and
repurchase agreements with the same counterparty are reported on a net basis in accordance with FIN
41. JPMorgan Chase takes possession of securities purchased under resale agreements. On a daily
basis, JPMorgan Chase monitors the market value of the underlying collateral received from its
counterparties, consisting primarily of U.S. and non-U.S. government and agency securities, and
requests additional collateral from its counterparties when necessary.
over time. The Valuation Control Group within the Finance area is responsible for reviewing the
accuracy of the carrying values of private investments held by Private Equity.
Private Equity also holds publicly-held equity investments, generally obtained through the initial
public offering of privately-held equity investments. Publicly-held investments are marked to
market at the quoted public value. To determine the carrying values of these investments, Private
Equity incorporates the use of discounts to take into account the fact that it cannot immediately
realize or risk-manage the quoted public values as a result of regulatory and/or contractual sales
restrictions imposed on these holdings.
The following table presents the carrying value and cost of the Private Equity investment portfolio
for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
December 31, (in millions) |
|
value |
|
|
Cost |
|
|
value |
|
|
Cost |
|
|
Total private
equity investments |
|
$ |
6,374 |
|
|
$ |
8,036 |
|
|
$ |
7,735 |
|
|
$ |
9,103 |
|
|
Transactions similar to financing activities that do not meet the SFAS 140 definition of a
repurchase agreement are accounted for as buys and sells rather than financing transactions.
These transactions are accounted for as a purchase (sale) of the underlying securities with a
forward obligation to sell (purchase) the securities. The forward purchase (sale) obligation, a
derivative, is recorded on the Consolidated balance sheets at its fair value, with changes in fair
value recorded in Trading revenue.
Securities borrowed and securities lent are recorded at the amount of cash collateral advanced or
received. Securities borrowed consist primarily of government and equity securities. JPMorgan Chase
monitors the market value of the securities borrowed and lent on a daily basis and calls for
additional collateral when appropriate. Fees received or paid are recorded in Interest income or
Interest expense.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
105 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Securities purchased under resale agreements |
|
$ |
129,570 |
|
|
$ |
94,076 |
|
Securities borrowed |
|
|
74,604 |
|
|
|
47,428 |
|
|
Securities sold under repurchase agreements |
|
$ |
103,052 |
|
|
$ |
105,912 |
|
Securities loaned |
|
|
14,072 |
|
|
|
6,435 |
|
|
JPMorgan Chase pledges certain financial instruments the Firm owns to collateralize repurchase
agreements and other securities financings. Pledged securities that can be sold or repledged by the
secured party are identified as financial instruments owned (pledged to various parties) on the
Consolidated balance sheets.
At December 31, 2005, the Firm had received securities as collateral that can be repledged,
delivered or otherwise used with a fair value of approximately $331 billion. This collateral was
generally obtained under resale or securities borrowing agreements. Of these securities,
approximately $320 billion were repledged, delivered or otherwise used, generally as collateral
under repurchase agreements, securities lending agreements or to cover short sales.
Note 11 Loans
Loans are reported at the principal amount outstanding, net of the Allowance for loan losses,
unearned income and any net deferred loan fees. Loans held for sale are carried at the lower of
cost or fair value, with valuation changes recorded in noninterest revenue. Loans are classified as
trading where positions are bought and sold to make profits from short-term movements in price.
Loans held for trading purposes are included in Trading assets and are carried at fair value, with
gains and losses included in Trading revenue. Interest income is recognized using the interest
method, or on a basis approximating a level rate of return over the term of the loan.
Nonaccrual loans are those on which the accrual of interest is discontinued. Loans (other than
certain consumer loans discussed below) are placed on nonaccrual status immediately if, in the
opinion of management, full payment of principal or interest is in doubt, or when principal or
interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and
interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against Interest income. In addition, the amortization of net deferred loan fees is
suspended. Interest income on nonaccrual loans is recognized only to the extent it is received in
cash. However, where there is doubt regarding the ultimate collectibility of loan principal, all
cash thereafter received is applied to reduce the carrying value of such loans. Loans are restored
to accrual status only when interest and principal payments are brought current and future payments
are reasonably assured.
Consumer loans are generally charged to the Allowance for loan losses upon reaching specified
stages of delinquency, in accordance with the Federal Financial Institutions Examination Council
(FFIEC) policy. For example, credit card loans are charged off by the end of the month in which
the account becomes 180 days past due or within 60 days from receiving notification of the filing
of bankruptcy, whichever is earlier. Residential mortgage products are generally charged off to net
realizable value at 180 days past due. Other consumer products are generally charged off (to net
realizable value if collateralized) at 120 days past due. Accrued interest on residential mortgage
products, and automobile and education financings and certain other consumer loans are accounted
for in accordance with the nonaccrual loan policy discussed
in the preceding paragraph. Interest and fees related to credit card loans continue to accrue until
the loan is charged off or paid. Accrued interest on all other consumer loans is generally reversed
against interest income when the loan is charged off. A collateralized loan is considered an
in-substance foreclosure and is reclassified to assets acquired in loan satisfactions, within Other
assets, only when JPMorgan Chase has taken physical possession of the collateral, but regardless of
whether formal foreclosure proceedings have taken place.
The composition of the loan portfolio at each of the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
U.S. wholesale loans: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
70,233 |
|
|
$ |
61,033 |
|
Real estate |
|
|
13,612 |
|
|
|
13,038 |
|
Financial institutions |
|
|
11,100 |
|
|
|
14,195 |
|
Lease financing receivables |
|
|
2,621 |
|
|
|
3,098 |
|
Other |
|
|
14,499 |
|
|
|
8,504 |
|
|
Total U.S. wholesale loans |
|
|
112,065 |
|
|
|
99,868 |
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. wholesale loans: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
27,452 |
|
|
|
25,120 |
|
Real estate |
|
|
1,475 |
|
|
|
1,747 |
|
Financial institutions |
|
|
7,975 |
|
|
|
7,280 |
|
Lease financing receivables |
|
|
1,144 |
|
|
|
1,052 |
|
|
Total non-U.S. wholesale loans |
|
|
38,046 |
|
|
|
35,199 |
|
|
|
|
|
|
|
|
|
|
|
Total wholesale loans:(a) |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
97,685 |
|
|
|
86,153 |
|
Real estate(b) |
|
|
15,087 |
|
|
|
14,785 |
|
Financial institutions |
|
|
19,075 |
|
|
|
21,475 |
|
Lease financing receivables |
|
|
3,765 |
|
|
|
4,150 |
|
Other |
|
|
14,499 |
|
|
|
8,504 |
|
|
Total wholesale loans |
|
|
150,111 |
|
|
|
135,067 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans:(c) |
|
|
|
|
|
|
|
|
Consumer real estate |
|
|
|
|
|
|
|
|
Home finance home equity & other |
|
|
76,727 |
|
|
|
67,837 |
|
Home finance mortgage |
|
|
56,726 |
|
|
|
56,816 |
|
|
Total Home finance |
|
|
133,453 |
|
|
|
124,653 |
|
Auto & education finance |
|
|
49,047 |
|
|
|
62,712 |
|
Consumer & small business and other |
|
|
14,799 |
|
|
|
15,107 |
|
Credit card receivables(d) |
|
|
71,738 |
|
|
|
64,575 |
|
|
Total consumer loans |
|
|
269,037 |
|
|
|
267,047 |
|
|
Total loans(e)(f)(g) |
|
$ |
419,148 |
|
|
$ |
402,114 |
|
|
|
|
|
(a) |
|
Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset &
Wealth Management. |
|
(b) |
|
Represents credits extended for real estaterelated purposes to borrowers who are primarily in
the real estate development or investment businesses and for which the primary repayment is from
the sale, lease, management, operations or refinancing of the property. |
|
(c) |
|
Includes Retail Financial Services and Card Services. |
|
(d) |
|
Includes billed finance charges and fees net of an allowance for uncollectible amounts. |
|
(e) |
|
Loans are presented net of unearned income of $3.0 billion and $4.1 billion at December 31, 2005
and 2004, respectively. |
|
(f) |
|
Includes loans held for sale (primarily related to securitization and syndication activities)
of $34.2 billion and $24.5 billion at December 31, 2005 and 2004, respectively. |
|
(g) |
|
Amounts are presented gross of the Allowance for loan losses. |
|
|
|
|
|
|
106
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following table reflects information about the Firms loans held for sale, principally
mortgage-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net gains on sales of loans held for sale |
|
$ |
596 |
|
|
$ |
368 |
|
|
$ |
933 |
|
Lower of cost or fair value adjustments |
|
|
(332 |
) |
|
|
39 |
|
|
|
26 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
Impaired loans
JPMorgan Chase accounts for and discloses nonaccrual loans as impaired loans and recognizes their
interest income as discussed previously for nonaccrual loans. The Firm excludes from impaired loans
its small-balance, homogeneous consumer loans; loans carried at fair value or the lower of cost or
fair value; debt securities; and leases.
The table below sets forth information about JPMorgan Chases impaired loans. The Firm primarily
uses the discounted cash flow method for valuing impaired loans:
|
|
|
|
|
|
|
|
|
December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
Impaired loans with an allowance |
|
$ |
1,095 |
|
|
$ |
1,496 |
|
Impaired loans without an allowance(b) |
|
|
80 |
|
|
|
284 |
|
|
Total impaired loans |
|
$ |
1,175 |
|
|
$ |
1,780 |
|
|
Allowance for impaired loans under SFAS 114(c) |
|
$ |
257 |
|
|
$ |
521 |
|
Average balance of impaired loans during the year |
|
|
1,478 |
|
|
|
1,883 |
|
Interest income recognized on impaired
loans during the year |
|
|
5 |
|
|
|
8 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
When the discounted cash flows, collateral value or market price equals or exceeds the carrying
value of the loan, then the loan does not require an allowance under SFAS 114. |
|
(c) |
|
The allowance for impaired loans under SFAS 114 is included in JPMorgan Chases Allowance for loan losses. |
Note 12 Allowance for credit losses
JPMorgan Chases Allowance for loan losses covers the wholesale (risk-rated) and consumer
(scored) loan portfolios and represents managements estimate of probable credit losses inherent in
the Firms loan portfolio. Management also computes an Allowance for wholesale lending-related
commitments using a methodology similar to that used for the wholesale loans.
The Allowance for loan losses includes an asset-specific component and a formula-based component.
Within the formula-based component is a statistical calculation and an adjustment to the
statistical calculation.
The asset-specific component relates to provisions for losses on loans considered impaired and
measured pursuant to SFAS 114. An allowance is established when the discounted cash flows (or
collateral value or observable market price) of the loan is lower than the carrying value of that
loan. To compute the asset-specific component of the allowance, larger impaired loans are evaluated
individually, and smaller impaired loans are evaluated as a pool using historical loss experience
for the respective class of assets.
The formula-based component covers performing wholesale and consumer loans and is the product of a
statistical calculation, as well as adjustments to such calculation. These adjustments take into
consideration model imprecision, external factors and economic events that have occurred but are
not yet reflected in the factors used to derive the statistical calculation.
The statistical calculation is the product of probability of default and loss given default. For
risk-rated loans (generally loans originated by the wholesale lines of business), these factors are
differentiated by risk rating and maturity. For scored loans (generally loans originated by the
consumer lines of business), loss is primarily determined by applying statistical loss factors and
other risk indicators to pools of loans by asset type. Adjustments to the statistical calculation
for the risk-rated portfolios are determined by creating estimated ranges using historical
experience of both loss given default and probability of default. Factors related to concentrated
and deteriorating industries are also incorporated into the calculation where relevant. Adjustments
to the statistical calculation for the scored loan portfolios are accomplished in part by analyzing
the historical loss experience for each major product segment. The estimated ranges and the
determination of the appropriate point within the range are based upon managements view of
uncertainties that relate to current macroeconomic and political conditions, quality of
underwriting standards, and other relevant internal and external factors affecting the credit
quality of the portfolio.
The Allowance for lending-related commitments represents managements estimate of probable credit
losses inherent in the Firms process of extending credit. Management establishes an asset-specific
allowance for lending-related commitments that are considered impaired and computes a formula-based
allowance for performing wholesale lending-related commitments. These are computed using a
methodology similar to that used for the wholesale loan portfolio, modified for expected maturities
and probabilities of drawdown.
The
allowance for credit losses is reviewed at least quarterly by the Chief Risk Officer of the
Firm, the Risk Policy Committee, a risk subgroup of the Operating Committee, and the Audit Committee of the Board of Directors of the Firm
relative to the risk profile of the Firms credit portfolio and current economic conditions. As of
December 31, 2005, JPMorgan Chase deemed the allowance for credit losses to be appropriate (i.e.,
sufficient to absorb losses that are inherent in the portfolio, including those not yet
identifiable).
As a result of the Merger, management modified its methodology for determining the Provision for
credit losses for the combined Firm. The effect of conforming methodologies in 2004 was a decrease
in the consumer allowance of $254 million and a decrease in the wholesale allowance (including both
funded loans and lending-related commitments) of $330 million. In addition, the Bank One sellers
interest in credit card securitizations was decertificated; this resulted in an increase to the
provision for loan losses of approximately $1.4 billion (pre-tax) in 2004.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
107 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Chase maintains an allowance for credit losses as follows:
|
|
|
|
|
|
|
|
|
|
|
Reported in: |
Allowance for |
|
|
|
|
|
|
credit losses on: |
|
Balance sheet |
|
Income statement |
|
Loans |
|
Allowance for loan losses |
|
Provision for credit losses |
Lending-related
commitments |
|
Other liabilities |
|
Provision for credit losses |
|
The table below summarizes the changes in the Allowance for loan losses:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
(c) |
|
Allowance for loan losses at January 1 |
|
$ |
7,320 |
|
|
$ |
4,523 |
|
Addition resulting from the Merger, July 1, 2004 |
|
|
|
|
|
|
3,123 |
|
Gross charge-offs |
|
|
(4,869 |
) |
|
|
(3,805 |
)(d) |
Gross recoveries |
|
|
1,050 |
|
|
|
706 |
|
|
Net charge-offs |
|
|
(3,819 |
) |
|
|
(3,099 |
) |
Provision for loan losses: |
|
|
|
|
|
|
|
|
Provision excluding
accounting policy conformity |
|
|
3,575 |
|
|
|
1,798 |
|
Accounting policy conformity(a) |
|
|
|
|
|
|
1,085 |
|
|
Total Provision for loan losses |
|
|
3,575 |
|
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
14 |
|
|
|
(110 |
)(e) |
|
Allowance for loan losses at December 31 |
|
$ |
7,090 |
(b) |
|
$ |
7,320 |
(f) |
|
|
|
|
(a) |
|
Represents an increase of approximately $1.4 billion as a result of the decertification
of heritage Bank One sellers interest in credit card securitizations, partially offset by a
reduction of $357 million to conform provision methodologies. |
|
(b) |
|
2005 includes $203 million of asset-specific and $6.9 billion of formula-based allowance.
Included within the formula-based allowance was $5.1 billion related to a statistical calculation
(including $400 million related to Hurricane Katrina), and an adjustment to the statistical
calculation of $1.8 billion. |
|
(c) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(d) |
|
Includes $406 million related to the Manufactured Home Loan portfolio in the fourth quarter of
2004. |
|
(e) |
|
Primarily represents the transfer of the allowance for accrued interest and fees on reported
and securitized credit card loans. |
|
(f) |
|
2004 includes $469 million of asset-specific loss and $6.8 billion of formula-based loss.
Included within the formula-based loss is $4.8 billion related to statistical calculation and an
adjustment to the statistical calculation of $2.0 billion. |
The table below summarizes the changes in the Allowance for lending-related commitments:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
(c) |
|
Allowance for lending-related commitments
at January 1 |
|
$ |
492 |
|
|
$ |
324 |
|
Addition resulting from the Merger, July 1, 2004 |
|
|
|
|
|
|
508 |
|
|
|
|
|
|
|
|
|
|
Provision for lending-related commitments: |
|
|
|
|
|
|
|
|
Provision excluding
accounting policy conformity |
|
|
(92 |
) |
|
|
(112 |
) |
Accounting policy conformity(a) |
|
|
|
|
|
|
(227 |
) |
|
Total Provision for lending-related commitments |
|
|
(92 |
) |
|
|
(339 |
) |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(1 |
) |
|
Allowance for lending-related commitments
at December 31(b) |
|
$ |
400 |
|
|
$ |
492 |
|
|
|
|
|
(a) |
|
Represents a reduction of $227 million to conform provision methodologies in the wholesale portfolio. |
|
(b) |
|
2005 includes $60 million of asset-specific and $340 million of formula-based allowance. 2004
includes $130 million of asset-specific and $362 million of formula-based allowance. The
formula-based allowance for lending-related commitments is based upon a statistical calculation.
There is no adjustment to the statistical calculation for lending-related commitments. |
|
(c) |
|
2004 results include six months of the combined Firms results and six months of heritage JPMorgan Chase results. |
Note 13 Loan securitizations
JPMorgan Chase securitizes, sells and services various consumer loans, such as consumer real
estate, credit card and automobile loans, as well as certain wholesale loans (primarily real
estate) originated by the Investment Bank. In addition, the Investment Bank purchases, packages and
securitizes commercial and consumer loans. All IB activity is collectively referred to below as
Wholesale activities. Interests in the sold and securitized loans may be retained.
The Firm records a loan securitization as a sale when the transferred loans are legally isolated
from the Firms creditors and the accounting criteria for a sale are met. Those criteria are (1)
the assets are legally isolated from the Firms creditors; (2) the entity can pledge or exchange
the financial assets or, if the entity is a QSPE, its investors can pledge or exchange their
interests; and (3) the Firm does not maintain effective control via an agreement to repurchase the
assets before their maturity or have the ability to unilaterally cause the holder to return the
assets.
Gains or losses recorded on loan securitizations depend, in part, on the carrying amount of the
loans sold and are allocated between the loans sold and the retained interests, based upon their
relative fair values at the date of sale. Gains on securitizations are reported in noninterest
revenue. Since quoted market prices are generally not available, the Firm usually estimates the
fair value of these retained interests by determining the present value of future expected cash
flows using modeling techniques. Such models incorporate managements best estimates of key
variables, such as expected credit losses, prepayment speeds and the discount rates appropriate for
the risks involved.
Retained interests that are subject to prepayment risk, such that JPMorgan Chase may not recover
substantially all of its investment, are recorded at fair value; subsequent adjustments are
reflected in Other comprehensive income or in earnings, if the fair value of the retained interest
has declined below its carrying amount and such decline has been determined to be
other-than-temporary.
Interests in the securitized loans are generally retained by the Firm in the form of senior or
subordinated interest-only strips, subordinated tranches, escrow accounts and servicing rights, and
they are generally recorded in Other assets. In addition, credit card securitization trusts require
the Firm to maintain a minimum undivided interest in the trusts, representing the Firms interests
in the receivables transferred to the trust that have not been securitized. These interests are not
represented by security certificates. The Firms undivided interests are carried at historical cost
and are classified in Loans. Retained interests from wholesale activities are reflected as trading
assets.
JPMorgan Chase retains servicing responsibilities for all residential mortgage, credit card and
automobile loan securitizations and for certain wholesale activity securitizations it sponsors, and
receives servicing fees based on the securitized loan balance plus certain ancillary fees. The Firm
also retains the right to service the residential mortgage loans it sells in connection with
mortgage-backed securities transactions with the Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (Freddie
Mac). For a discussion of mortgage servicing rights, see Note 15 on pages 114116 of this Annual
report.
JPMorgan Chase-sponsored securitizations utilize SPEs as part of the securitization process. These
SPEs are structured to meet the definition of a QSPE (as discussed in Note 1 on page 91 of this
Annual Report); accordingly, the assets and liabilities of securitization-related QSPEs are not
reflected in the Firms Consolidated balance sheets (except for retained interests, as described
below) but are included on the balance sheet of the QSPE purchasing the
|
|
|
|
|
|
108
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
assets. Assets held by securitization-related SPEs as of December 31, 2005 and 2004, were as
follows:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Credit card receivables |
|
$ |
96.0 |
|
|
$ |
106.3 |
|
Residential mortgage receivables |
|
|
29.8 |
|
|
|
19.1 |
|
Wholesale activities(a) |
|
|
72.9 |
|
|
|
44.8 |
|
Automobile loans |
|
|
5.5 |
|
|
|
4.9 |
|
|
Total |
|
$ |
204.2 |
|
|
$ |
175.1 |
|
|
|
|
|
(a) |
|
Co-sponsored securitizations include non-JPMorgan Chase originated assets. |
The following table summarizes new securitization transactions that were completed during 2005
and 2004, the resulting gains arising from such securitizations, certain cash flows received from
such securitizations, and the key economic assumptions used in measuring the retained interests, as
of the dates of such sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2005 |
|
|
2004(a) |
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
(in millions) |
|
mortgage |
|
|
Credit card |
|
|
Automobile |
|
|
activities |
(e) |
|
mortgage |
|
|
Credit card |
|
|
Automobile |
|
|
activities |
(e) |
|
Principal securitized |
|
$ |
18,125 |
|
|
$ |
15,145 |
|
|
$ |
3,762 |
|
|
$ |
22,691 |
|
|
$ |
6,529 |
|
|
$ |
8,850 |
|
|
$ |
1,600 |
|
|
$ |
8,756 |
|
Pre-tax gains (losses) |
|
|
21 |
|
|
|
101 |
|
|
|
9 |
(c) |
|
|
131 |
|
|
|
47 |
|
|
|
52 |
|
|
|
(3 |
) |
|
|
135 |
|
Cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from securitizations |
|
$ |
18,093 |
|
|
$ |
14,844 |
|
|
$ |
2,622 |
|
|
$ |
22,892 |
|
|
$ |
6,608 |
|
|
$ |
8,850 |
|
|
$ |
1,597 |
|
|
$ |
8,430 |
|
Servicing fees collected |
|
|
17 |
|
|
|
94 |
|
|
|
4 |
|
|
|
|
|
|
|
12 |
|
|
|
69 |
|
|
|
1 |
|
|
|
3 |
|
Other cash flows received |
|
|
|
|
|
|
298 |
|
|
|
|
|
|
|
3 |
|
|
|
25 |
|
|
|
225 |
|
|
|
|
|
|
|
16 |
|
Proceeds from collections reinvested
in revolving securitizations |
|
|
|
|
|
|
129,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,697 |
|
|
|
|
|
|
|
|
|
|
Key assumptions (rates per annum): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment rate(b) |
|
|
9.112.1 |
% |
|
|
16.720.0 |
% |
|
|
1.5 |
% |
|
|
050 |
% |
|
|
23.837.6 |
% |
|
|
15.516.7 |
% |
|
|
1.5 |
% |
|
|
17.050.0 |
% |
|
|
CPR |
|
|
PPR |
|
|
ABS |
|
|
|
|
|
|
CPR |
|
|
PPR |
|
|
ABS |
|
|
|
|
|
|
Weighted-average life (in
years) |
|
|
5.66.7 |
|
|
|
0.40.5 |
|
|
|
1.41.5 |
|
|
|
1.04.4 |
|
|
|
1.93.0 |
|
|
|
0.50.6 |
|
|
|
1.8 |
|
|
|
2.04.0 |
|
Expected credit losses |
|
|
|
(d) |
|
|
4.75.7 |
% |
|
|
0.60.7 |
% |
|
|
02.0 |
%(d) |
|
|
1.02.3 |
% |
|
|
5.55.8 |
% |
|
|
0.6 |
% |
|
|
0.03.0 |
%(d) |
Discount rate |
|
|
13.013.3 |
% |
|
|
12.0 |
% |
|
|
6.37.3 |
% |
|
|
0.618.5 |
% |
|
|
15.030.0 |
% |
|
|
12.0 |
% |
|
|
4.1 |
% |
|
|
0.65.0 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
CPR: constant prepayment rate; ABS: absolute prepayment speed; PPR: principal payment rate. |
|
(c) |
|
The auto securitization gain of $9 million does not include the write-down of loans transferred
to held-for-sale in 2005 and risk management activities intended to protect the economic value of
the loans while held-for-sale. |
|
(d) |
|
Expected credit losses for prime residential mortgage and certain wholesale securitizations are
minimal and are incorporated into other assumptions. |
|
(e) |
|
Wholesale activities consist of wholesale loans (primarily commercial real estate) originated
by the Investment Bank as well as $11.4 billion and $1.8 billion of consumer loans purchased from
the market in 2005 and 2004, respectively, and then packaged and securitized by the Investment
Bank. |
In addition to securitization transactions, the Firm sold residential mortgage loans totaling
$52.5 billion, $65.7 billion and $123.2 billion during 2005, 2004 and 2003, respectively, primarily
as GNMA, FNMA and Freddie Mac mortgage-backed securities; these sales resulted in pre-tax gains of
$293 million, $58.1 million and $564.3 million, respectively.
At both December 31, 2005 and 2004, the Firm had, with respect to its credit card master trusts,
$24.8 billion and $35.2 billion, respectively, related to undivided interests, and $2.2 billion and
$2.1 billion, respectively, related to subordinated interests in accrued interest and fees on the
securitized receivables, net of an allowance for uncollectible amounts. Credit card securitization
trusts require the Firm to maintain a minimum undivided interest of 4% to 12% of the principal
receivables in the trusts. The Firm maintained an average undivided interest in principal
receivables in the trusts of approximately 23% for both 2005 and 2004, respectively.
The Firm also maintains escrow accounts up to predetermined limits for some credit card and
automobile securitizations, in the unlikely event of deficiencies in cash flows owed to investors.
The amounts available in such escrow accounts are recorded in Other assets and, as of December 31,
2005, amounted to
$754 million and $76 million for credit card and automobile securitizations, respectively; as of
December 31, 2004, these amounts were $395 million and $132 million for credit card and automobile
securitizations, respectively.
The table below summarizes other retained securitization interests, which are primarily
subordinated or residual interests and are carried at fair value on the Firms Consolidated balance
sheets:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Residential mortgage(a) |
|
$ |
182 |
|
|
$ |
433 |
|
Credit card(a) |
|
|
808 |
|
|
|
494 |
|
Automobile(a)(b) |
|
|
150 |
|
|
|
85 |
|
Wholesale activities(c) |
|
|
265 |
|
|
|
23 |
|
|
Total |
|
$ |
1,405 |
|
|
$ |
1,035 |
|
|
|
|
|
(a) |
|
Pre-tax unrealized gains (losses) recorded in Stockholders equity that relate to
retained securitization interests totaled $60 million and $118 million for Residential mortgage; $6
million and $(3) million for Credit card; and $5 million and $11 million for Automobile at December
31, 2005 and 2004, respectively. |
|
(b) |
|
In addition to the automobile retained interest amounts noted above, the Firm also retained
senior securities totaling $490 million at December 31, 2005, from 2005 auto securitizations that
are classified as AFS securities. These securities are valued using quoted market prices and are
therefore not included in the key economic assumption and sensitivities table that follows. |
|
(c) |
|
In addition to the wholesale retained interest amounts noted above, the Firm also retained
subordinated securities totaling $51 million at December 31, 2005, from re-securitization
activities. These securities are valued using quoted market prices and are therefore not included
in the key assumptions and sensitivities table that follows. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
109 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The table below outlines the key economic assumptions used to determine the fair value of the
other retained interests at December 31, 2005 and 2004, respectively; and it outlines the
sensitivities of those fair values to immediate 10% and 20% adverse changes in those assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 (in millions) |
|
Residential mortgage |
|
Credit card |
|
Automobile |
|
Wholesale activities |
|
Weighted-average life (in years) |
|
|
0.53.5 |
|
|
|
0.40.7 |
|
|
|
1.2 |
|
|
|
0.24.1 |
|
|
Prepayment rate |
|
20.143.7 |
% CPR |
|
11.920.8 |
% PPR |
|
1.5 |
% ABS |
|
|
0.050.0 |
%(a) |
Impact of 10% adverse change |
|
$ |
(3 |
) |
|
$ |
(44 |
) |
|
$ |
|
|
|
$ |
(5 |
) |
Impact of 20% adverse change |
|
|
(5 |
) |
|
|
(88 |
) |
|
|
(2 |
) |
|
|
(6 |
) |
|
Loss assumption |
|
|
0.05.2 |
%(b) |
|
|
3.28.1 |
% |
|
|
0.7 |
% |
|
|
0.02.0 |
%(b) |
Impact of 10% adverse change |
|
$ |
(10 |
) |
|
$ |
(77 |
) |
|
$ |
(4 |
) |
|
$ |
(6 |
) |
Impact of 20% adverse change |
|
|
(19 |
) |
|
|
(153 |
) |
|
|
(9 |
) |
|
|
(11 |
) |
Discount rate |
|
|
12.730.0 |
%(c) |
|
|
6.912.0 |
% |
|
|
7.2 |
% |
|
|
0.218.5 |
% |
Impact of 10% adverse change |
|
$ |
(4 |
) |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
(6 |
) |
Impact of 20% adverse change |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 (in millions) |
|
Residential mortgage |
|
Credit card |
|
Automobile |
|
Wholesale activities |
|
Weighted-average life (in years) |
|
|
0.83.4 |
|
|
|
0.51.0 |
|
|
|
1.3 |
|
|
|
0.24.0 |
|
|
Prepayment rate |
|
15.137.1 |
% CPR |
|
8.316.7 |
% PPR |
|
1.4 |
% ABS |
|
|
0.050.0 |
% (a) |
Impact of 10% adverse change |
|
$ |
(5 |
) |
|
$ |
(34 |
) |
|
$ |
(6 |
) |
|
$ |
(1 |
) |
Impact of 20% adverse change |
|
|
(8 |
) |
|
|
(69 |
) |
|
|
(13 |
) |
|
|
(1 |
) |
|
Loss assumption |
|
|
0.05.0 |
% (b) |
|
|
5.78.4 |
% |
|
|
0.7 |
% |
|
|
0.03.0 |
% (b) |
Impact of 10% adverse change |
|
$ |
(17 |
) |
|
$ |
(144 |
) |
|
$ |
(4 |
) |
|
$ |
|
|
Impact of 20% adverse change |
|
|
(34 |
) |
|
|
(280 |
) |
|
|
(8 |
) |
|
|
|
|
Discount rate |
|
|
13.030.0 |
% (c) |
|
|
4.912.0 |
% |
|
|
5.5 |
% |
|
|
1.022.9 |
% |
Impact of 10% adverse change |
|
$ |
(9 |
) |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
Impact of 20% adverse change |
|
|
(18 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
(a) |
|
Prepayment risk on certain wholesale retained interests are minimal and are incorporated
into other assumptions. |
|
(b) |
|
Expected credit losses for prime residential mortgage and certain wholesale securitizations are
minimal and are incorporated into other assumptions. |
|
(c) |
|
The Firm sold certain residual interests from sub-prime mortgage securitizations via Net
Interest Margin (NIM) securitizations and retains residual interests in these NIM transactions,
which are valued using a 30% discount rate. |
The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based
upon a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the
relationship of the change in the assumptions to the change in fair value may not be linear. Also,
in this table, the effect that a change in a particular assumption may have on the fair value is
calculated without changing any other assumption. In reality, changes in one
factor may result in changes in another assumption, which might counteract or magnify the
sensitivities.
Expected static-pool net credit losses include actual incurred losses plus projected net credit
losses, divided by the original balance of the outstandings comprising the securitization pool.
The table below displays the expected static-pool net credit losses for 2005, 2004 and 2003, based
upon securitizations occurring in that year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans securitized in:(a) |
|
|
2005 |
|
2004(b) |
|
2003(b) |
|
|
Residential mortgage(c) |
|
Automobile |
|
Residential mortgage |
|
Automobile |
|
Residential mortgage |
|
Automobile |
|
December 31, 2005 |
|
|
0.0 |
% |
|
|
0.9 |
% |
|
|
0.02.4 |
% |
|
|
0.8 |
% |
|
|
0.02.0 |
% |
|
|
0.5 |
% |
December 31, 2004 |
|
NA |
|
|
NA |
|
|
|
0.03.3 |
|
|
|
1.1 |
|
|
|
0.02.1 |
|
|
|
0.9 |
|
December 31, 2003 |
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
|
0.03.6 |
|
|
|
0.9 |
|
|
|
|
|
(a) |
|
Static-pool losses are not applicable to credit card securitizations due to their
revolving structure. |
|
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(c) |
|
2005 securitizations consist of prime-mortgage securitizations only. Expected losses are minimal and
incorporated in other assumptions. |
|
|
|
|
|
|
110
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The table below presents information about delinquencies, net credit losses and components of
reported and securitized financial assets at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual and 90 days or |
|
|
Net loan charge-offs(a) |
|
|
|
Total Loans |
|
|
more past due |
|
|
Year ended |
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Home finance |
|
$ |
133,453 |
|
|
$ |
124,653 |
|
|
$ |
863 |
|
|
$ |
673 |
|
|
$ |
154 |
|
|
$ |
573 |
|
Auto & education finance |
|
|
49,047 |
|
|
|
62,712 |
|
|
|
195 |
|
|
|
193 |
|
|
|
277 |
|
|
|
263 |
|
Consumer & small business and other |
|
|
14,799 |
|
|
|
15,107 |
|
|
|
280 |
|
|
|
295 |
|
|
|
141 |
|
|
|
154 |
|
Credit card receivables |
|
|
71,738 |
|
|
|
64,575 |
|
|
|
1,091 |
|
|
|
1,006 |
|
|
|
3,324 |
|
|
|
1,923 |
|
|
Total consumer loans |
|
|
269,037 |
|
|
|
267,047 |
|
|
|
2,429 |
|
|
|
2,167 |
|
|
|
3,896 |
|
|
|
2,913 |
|
Total wholesale loans |
|
|
150,111 |
|
|
|
135,067 |
|
|
|
1,042 |
|
|
|
1,582 |
|
|
|
(77 |
) |
|
|
186 |
|
|
Total loans reported |
|
|
419,148 |
|
|
|
402,114 |
|
|
|
3,471 |
|
|
|
3,749 |
|
|
|
3,819 |
|
|
|
3,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage(b) |
|
|
8,061 |
|
|
|
11,533 |
|
|
|
370 |
|
|
|
460 |
|
|
|
105 |
|
|
|
150 |
|
Automobile |
|
|
5,439 |
|
|
|
4,763 |
|
|
|
11 |
|
|
|
12 |
|
|
|
15 |
|
|
|
24 |
|
Credit card |
|
|
70,527 |
|
|
|
70,795 |
|
|
|
730 |
|
|
|
1,337 |
|
|
|
3,776 |
|
|
|
2,898 |
|
|
Total consumer loans securitized |
|
|
84,027 |
|
|
|
87,091 |
|
|
|
1,111 |
|
|
|
1,809 |
|
|
|
3,896 |
|
|
|
3,072 |
|
Securitized wholesale activities |
|
|
9,049 |
|
|
|
1,401 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans securitized(c) |
|
|
93,076 |
|
|
|
88,492 |
|
|
|
1,115 |
|
|
|
1,809 |
|
|
|
3,896 |
|
|
|
3,072 |
|
|
Total loans reported and securitized(d) |
|
$ |
512,224 |
|
|
$ |
490,606 |
|
|
$ |
4,586 |
|
|
$ |
5,558 |
|
|
$ |
7,715 |
|
|
$ |
6,171 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
Includes $5.9 billion and $10.3 billion of outstanding principal balances on securitized
sub-prime 14 family residential mortgage loans as of December 31, 2005 and 2004, respectively. |
|
(c) |
|
Total assets held in securitization-related SPEs were $204.2 billion and $175.1 billion at
December 31, 2005 and 2004, respectively. The $93.1 billion and $88.5 billion of loans securitized
at December 31, 2005 and 2004, respectively, excludes: $85.6 billion and $50.8 billion of
securitized loans, in which the Firms only continuing involvement is the servicing of the assets;
$24.8 billion and $35.2 billion of sellers interests in credit card master trusts; and $0.7
billion and $0.6 billion of escrow accounts and other assets, respectively. |
|
(d) |
|
Represents both loans on the Consolidated balance sheets and loans that have been securitized,
but excludes loans for which the Firms only continuing involvement is servicing of the assets. |
Note 14 Variable interest entities
Refer to Note 1 on page 91 of this Annual Report for a further description of JPMorgan Chases
policies regarding consolidation of variable interest entities.
JPMorgan Chases principal involvement with VIEs occurs in the following business segments:
|
|
Investment Bank: Utilizes VIEs to assist clients in accessing the financial markets in a
cost-efficient manner by providing the structural flexibility to meet their needs pertaining to
price, yield and desired risk. There are two broad categories of transactions involving VIEs in the
IB: (1) multi-seller conduits and (2) client intermediation; both are discussed below. The IB also
securitizes loans through QSPEs which are not considered VIEs, to create asset-backed securities,
as further discussed in Note 13 on pages 108111 of this Annual Report. |
|
|
|
Asset & Wealth Management: Provides investment management services to a limited number of the
Firms mutual funds deemed VIEs. AWM earns a fixed fee based upon assets managed; the fee varies
with each funds investment objective and is competitively priced. For the limited number of funds
that qualify as VIEs, AWMs relationships with such funds are not considered significant
interests under FIN 46R. |
|
|
|
Treasury & Securities Services: Provides trustee and custodial services to a number of VIEs.
These services are similar to those provided to non-VIEs. TSS earns market-based fees for services
provided. Such relationships are not considered significant interests under FIN 46R. |
|
|
|
Commercial Banking: Utilizes VIEs to assist clients in accessing the financial markets in a
cost-efficient manner. This is often accomplished through the use of products similar to those
offered in the Investment Bank. |
|
|
Commercial Banking may assist in the structuring and/or on-going administration of these VIEs and
may provide liquidity, letters of credit and/or derivative instruments in support of the VIE. |
|
|
The Firms Private Equity business, included in Corporate, is involved with entities that may be
deemed VIEs. Private equity activities are accounted for in accordance with the Investment Company
Audit Guide (Audit Guide). The FASB deferred adoption of FIN 46R for non-registered investment
companies that apply the Audit Guide until the proposed Statement of Position on the clarification
of the scope of the Audit Guide is finalized. The Firm continues to apply this deferral provision;
had FIN 46R been applied to VIEs subject to this deferral, the impact would have had an
insignificant impact on the Firms Consolidated financial statements as of December 31, 2005. |
As noted above, there are two broad categories of transactions involving VIEs with which the IB is
involved: multi-seller conduits and client intermediation. These categories are discussed more
fully below.
Multi-seller conduits
The Firm is an active participant in the asset-backed securities business, helping meet customers
financing needs by providing access to the commercial paper markets through VIEs known as
multi-seller conduits. These entities are separate bankruptcy-remote corporations in the business
of purchasing interests in, and making loans secured by, receivable pools and other financial
assets pursuant to agreements with customers. The entities fund their purchases and loans through
the issuance of highly-rated commercial paper. The primary source of repayment of the commercial
paper is the cash flow from the pools of assets.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
111 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Chase serves as the administrator and provides contingent liquidity support and
limited credit enhancement for several multi-seller conduits. The commercial paper issued by the
conduits is backed by collateral, credit enhancements and commitments to provide liquidity
sufficient to support receiving at least a liquidity rating of A-1, P-1 and, in certain cases, F1.
As a means of ensuring timely repayment of the commercial paper, each asset pool financed by the
conduits has a minimum 100% deal-specific liquidity facility associated with it. In the unlikely
event an asset pool is removed from the conduit, the administrator can draw on the liquidity
facility to repay the maturing commercial paper. The liquidity facilities are typically in the form
of asset purchase agreements and are generally structured such that the bank liquidity is provided
by purchasing, or lending against, a pool of non-defaulted, performing assets. Deal-specific
liquidity is the primary source of liquidity support for the conduits.
Program-wide liquidity in the form of revolving and short-term lending commitments also is provided
by the Firm to these vehicles in the event of short-term disruptions in the commercial paper
market.
Deal-specific credit enhancement that supports the commercial paper issued by the conduits is
generally structured to cover a multiple of historical losses expected on the pool of assets and is
provided primarily by customers (i.e., sellers) or other third parties. The deal-specific credit
enhancement is typically in the form of over-collateralization provided by the seller but also may
include any combination of the following: recourse to the seller or originator, cash collateral
accounts, letters of credit, excess spread, retention of subordinated interests or third-party
guarantees. In certain instances, the Firm provides limited credit enhancement in the form of
standby letters of credit.
The following table summarizes the Firms involvement with Firm-administered
multi-seller conduits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Nonconsolidated |
|
|
Total |
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
(b) |
|
2005 |
|
|
2004 |
(b) |
|
Total commercial paper issued by conduits |
|
$ |
35.2 |
|
|
$ |
35.8 |
|
|
$ |
8.9 |
|
|
$ |
9.3 |
|
|
$ |
44.1 |
|
|
$ |
45.1 |
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-purchase agreements |
|
$ |
47.9 |
|
|
$ |
47.2 |
|
|
$ |
14.3 |
|
|
$ |
16.3 |
|
|
$ |
62.2 |
|
|
$ |
63.5 |
|
Program-wide liquidity commitments |
|
|
5.0 |
|
|
|
4.0 |
|
|
|
1.0 |
|
|
|
2.0 |
|
|
|
6.0 |
|
|
|
6.0 |
|
Program-wide limited credit enhancements |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
2.3 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss(a) |
|
|
48.4 |
|
|
|
48.2 |
|
|
|
14.8 |
|
|
|
16.9 |
|
|
|
63.2 |
|
|
|
65.1 |
|
|
|
|
|
(a) |
|
The Firms maximum exposure to loss is limited to the amount of drawn commitments (i.e.,
sellers assets held by the multi-seller conduits for which the Firm provides liquidity support) of
$41.6 billion and $42.2 billion at December 31, 2005 and 2004, respectively, plus contractual but
undrawn commitments of $21.6 billion and $22.9 billion at December 31, 2005 and 2004, respectively.
Since the Firm provides credit enhancement and liquidity to these multi-seller conduits, the
maximum exposure is not adjusted to exclude exposure absorbed by third-party liquidity providers. |
|
(b) |
|
In December 2003 and February 2004, two multi-seller conduits were restructured, with each
conduit issuing preferred securities acquired by an independent third-party investor; the investor
absorbs the majority of the expected losses of the conduit. In determining the primary beneficiary
of the restructured conduits, the Firm leveraged an existing rating agency model an independent
market standard to estimate the size of the expected losses, and the Firm considered the
relative rights and obligations of each of the variable interest holders. |
The Firm views its credit exposure to multi-seller conduit transactions as limited. This is
because, for the most part, the Firm is not required to fund under the liquidity facilities if the
assets in the VIE are in default. Additionally, the Firms obligations under the letters of credit
are secondary to the risk of first loss provided by the customer or other third parties for
example, by the overcollateralization of the VIE with the assets sold to it or notes subordinated
to the Firms liquidity facilities.
Client intermediation
As a financial intermediary, the Firm is involved in structuring VIE transactions to meet investor
and client needs. The Firm intermediates various types of risks (including fixed income, equity and
credit), typically using derivative instruments as further discussed below. In certain
circumstances, the Firm also provides liquidity and other support to the VIEs to facilitate the
transaction. The Firms current exposure to nonconsolidated VIEs is reflected in its Consolidated
balance sheets or in the Notes to consolidated financial statements. The risks inherent in
derivative instruments or liquidity commitments are managed similarly to other credit, market and
liquidity risks to which the Firm is exposed. The Firm intermediates principally with the following
types of VIEs: credit-linked note vehicles and municipal bond vehicles.
|
|
|
|
|
|
112
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The Firm structures credit-linked notes in which the VIE purchases highly-rated assets (such as
asset-backed securities) and enters into a credit derivative contract with the Firm to obtain
exposure to a referenced credit not held by the VIE. Credit-linked notes are issued by the VIE to
transfer the risk of the referenced credit to the investors in the VIE. Clients and investors often
prefer a VIE structure, since the credit-linked notes generally carry a higher credit rating than
they would if issued directly by JPMorgan Chase.
The Firm is involved with municipal bond vehicles for the purpose of creating a series of secondary
market trusts that allow tax-exempt investors to finance their investments at short-term tax-exempt
rates. The VIE purchases fixed-rate, longer-term highly-rated municipal bonds by issuing puttable
floating-rate certificates and inverse floating-rate certificates; the investors in the inverse
floating-rate certificates are exposed to the residual losses of the VIE (the residual
interests). For vehicles in which the Firm owns the residual interests, the Firm consolidates the
VIE. In vehicles where third-party investors own the residual interests, the Firms exposure is
limited because of the high credit quality of the underlying municipal bonds, the unwind triggers
based upon the market value of the underlying collateral and the residual interests held by third
parties. The Firm often serves as remarketing agent for the VIE and provides liquidity to support
the remarketing.
Assets held by credit-linked and municipal bond vehicles at December 31, 2005 and 2004, were as
follows:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Credit-linked note vehicles(a) |
|
$ |
13.5 |
|
|
$ |
17.8 |
|
Municipal bond vehicles(b) |
|
|
13.7 |
|
|
|
7.5 |
|
|
|
|
|
(a) |
|
Assets of $1.8 billion and $2.3 billion reported in the table above were recorded on the
Firms Consolidated balance sheets at December 31, 2005 and 2004, respectively, due to contractual
relationships held by the Firm that relate to collateral held by the VIE. |
|
(b) |
|
Total amounts consolidated due to the Firm owning residual interests were $4.9 billion and $2.6 billion at
December 31, 2005 and 2004, respectively, and are reported in the table.
Total liquidity commitments were $5.8 billion and $3.1 billion at December 31, 2005 and 2004,
respectively. The Firms maximum credit exposure to all municipal bond vehicles was $10.7 billion
and $5.7 billion at December 31, 2005 and 2004, respectively. |
Finally, the Firm may enter into transactions with VIEs structured by other parties. These
transactions can include, for example, acting
as a derivative counterparty, liquidity provider, investor, underwriter, placement agent, trustee
or custodian. These transactions are conducted at arms length, and individual credit decisions are
based upon the analysis of the specific VIE, taking into consideration the quality of the
underlying assets. JPMorgan Chase records and reports these positions similarly to any other
third-party transaction. These activities do not cause JPMorgan Chase to absorb a majority of the
expected losses of the VIEs or to receive a majority of the residual returns of the VIE, and they
are not considered significant for disclosure purposes.
Consolidated VIE assets
The following table summarizes the Firms total consolidated VIE assets, by classification on the
Consolidated balance sheets, as of December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Consolidated VIE assets(a) |
|
|
|
|
|
|
|
|
Investment securities(b) |
|
$ |
1.9 |
|
|
$ |
10.6 |
|
Trading assets(c) |
|
|
9.3 |
|
|
|
4.7 |
|
Loans |
|
|
8.1 |
|
|
|
3.4 |
|
Interests in purchased receivables |
|
|
29.6 |
|
|
|
31.6 |
|
Other assets |
|
|
3.0 |
|
|
|
0.4 |
|
|
Total consolidated assets |
|
$ |
51.9 |
|
|
$ |
50.7 |
|
|
|
|
|
(a) |
|
The Firm also holds $3.9 billion and $3.4 billion of assets, at December 31, 2005 and
December 31, 2004, respectively, primarily as a sellers interest, in certain consumer
securi-tizations in a segregated entity, as part of a two-step securitization transaction. This
interest is included in the securitization activities disclosed in Note 13 on pages 108111 of
this Annual Report. |
|
(b) |
|
The decline in balance is primarily attributable to the sale of the Firms interest in a
structured investment vehicles capital notes and resulting deconsolidation of this vehicle in
2005. |
|
(c) |
|
Includes the fair value of securities and derivatives. |
Interests in purchased receivables include interests in receivables purchased by
Firm-administered conduits, which have been consolidated in accordance with FIN 46R. Interests in
purchased receivables are carried at cost and are reviewed to determine whether an
other-than-temporary impairment exists. Based upon the current level of credit protection specified
in each transaction, primarily through overcollateralization, the Firm determined that no
other-than-temporary impairment existed at December 31, 2005.
The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in
the line item titled, Beneficial interests issued by consolidated variable interest entities on
the Consolidated balance sheets. The holders of these beneficial interests do not have recourse to
the general credit of JPMorgan Chase. See Note 17 on page 117 of this Annual Report for the
maturity profile of FIN 46 long-term beneficial interests.
FIN 46R transition
In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to address various technical
corrections and implementation issues that had arisen since the issuance of FIN 46. Effective March
31, 2004, JPMorgan Chase implemented FIN 46R for all VIEs, excluding certain investments made by
its private equity business, as previously discussed. Implementation of FIN 46R did not have a
significant effect on the Firms Consolidated financial statements.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
113 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 15 Goodwill and other intangible assets
Goodwill is not amortized but instead tested for impairment in accordance with SFAS 142 at the
reporting-unit segment, which is generally one level below the six major reportable business
segments (as described in Note 31 on pages 130131 of this Annual Report); plus Private Equity
(which is included in Corporate). Goodwill is tested annually (during the fourth quarter) or more
often if events or circumstances, such as adverse changes in the business climate, indicate there
may be impairment. Intangible assets determined to have indefinite lives are not amortized but
instead are tested for impairment at least annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test compares the fair
value of the indefinite-lived intangible asset to its carrying amount. Other acquired intangible assets
determined to have finite lives, such as core deposits and credit card relationships, are amortized
over their estimated useful lives in a manner that best reflects the economic benefits of the
intangible asset. In addition, impairment testing is performed periodically on these amortizing
intangible assets.
Goodwill and other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Goodwill |
|
$ |
43,621 |
|
|
$ |
43,203 |
|
Mortgage servicing rights |
|
|
6,452 |
|
|
|
5,080 |
|
Purchased credit card relationships |
|
|
3,275 |
|
|
|
3,878 |
|
|
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
All other intangibles: |
|
|
|
|
|
|
|
|
Other credit
card-related intangibles |
|
$ |
124 |
|
|
$ |
272 |
|
Core deposit intangibles |
|
|
2,705 |
|
|
|
3,328 |
|
All other intangibles |
|
|
2,003 |
|
|
|
2,126 |
|
|
Total All other intangible assets |
|
$ |
4,832 |
|
|
$ |
5,726 |
|
|
Goodwill
As of December 31, 2005, goodwill increased by $418 million compared with December 31, 2004,
principally in connection with the establishment of the business partnership with Cazenove, as well
as the acquisitions of Vastera, Neovest and the Sears Canada credit card business. These increases
to Goodwill were partially offset by the deconsolidation of Paymentech. Goodwill was not impaired
at December 31, 2005 or 2004, nor was any goodwill written off due to impairment during the years
ended December 31, 2005, 2004 or 2003.
Goodwill attributed to the business segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Goodwill resulting |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
from the Merger |
|
|
Investment Bank |
|
$ |
3,531 |
|
|
$ |
3,309 |
|
|
$ |
1,179 |
|
Retail Financial Services |
|
|
14,991 |
|
|
|
15,022 |
|
|
|
14,576 |
|
Card Services |
|
|
12,984 |
|
|
|
12,781 |
|
|
|
12,802 |
|
Commercial Banking |
|
|
2,651 |
|
|
|
2,650 |
|
|
|
2,599 |
|
Treasury & Securities Services |
|
|
2,062 |
|
|
|
2,044 |
|
|
|
465 |
|
Asset & Wealth Management |
|
|
7,025 |
|
|
|
7,020 |
|
|
|
2,539 |
|
Corporate (Private Equity) |
|
|
377 |
|
|
|
377 |
|
|
|
|
|
|
Total goodwill |
|
$ |
43,621 |
|
|
$ |
43,203 |
|
|
$ |
34,160 |
|
|
Mortgage servicing rights
JPMorgan Chase recognizes as intangible assets mortgage servicing rights, which represent the right
to perform specified residential mortgage servicing activities for others. MSRs are either
purchased from third parties or retained upon sale or securitization of mortgage loans. Servicing
activities include collecting principal, interest, and escrow payments from borrowers; making tax
and insurance payments on behalf of the borrowers; monitoring delinquencies and executing
foreclosure proceedings; and accounting for and remitting principal and interest payments to the
investors of the mortgage-backed securities.
The amount capitalized as MSRs represents the amount paid to third parties to acquire MSRs or is
based on fair value, if retained upon the sale or securitization of mortgage loans. The Firm
estimates the fair value of MSRs using a discounted future cash flow model. The model considers
portfolio characteristics, contractually specified servicing fees, prepayment assumptions,
delinquency rates, late charges, other ancillary revenues and costs to service, as well as other
economic factors.
During the fourth quarter of 2005, the Firm enhanced its valuation of MSRs by utilizing an
option-adjusted spread (OAS) valuation approach. An OAS approach projects MSR cash flows over
multiple interest rate scenarios in conjunction with the Firms proprietary
prepayment model, and then discounts these cash flows at risk-adjusted rates. Prior to the fourth
quarter of 2005, MSRs were valued using cash flows and discount rates determined by a static or
single interest rate path valuation model. The initial valuation of MSRs under OAS did not have a
material impact on the Firms financial statements.
The Firm compares fair value estimates and assumptions to observable market data where available
and to recent market activity and actual portfolio experience. Management believes that the
assumptions used to estimate fair values are supportable and reasonable.
The Firm accounts for its MSRs at the lower of cost or fair value, in accordance with SFAS 140.
MSRs are amortized as a reduction of the actual servicing income received in proportion to, and
over the period of, the estimated future net servicing income stream of the underlying mortgage
loans. For purposes of evaluating and measuring impairment of MSRs, the Firm stratifies the
portfolio on the basis of the predominant risk characteristics, which are loan type and interest
rate. Any indicated impairment is recognized as a reduction in revenue through a valuation
allowance, which represents the extent that the carrying value of an individual stratum exceeds its
estimated fair value.
|
|
|
|
|
|
114
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The Firm evaluates other-than-temporary impairment by reviewing changes in mortgage and other
market interest rates over historical periods and then determines an interest rate scenario to
estimate the amounts of the MSRs gross carrying value and the related valuation allowance that
could be expected to be recovered in the foreseeable future. Any gross carrying value and related
valuation allowance amounts that are not expected to be recovered in the foreseeable future, based
upon the interest rate scenario, are considered to be other-than-temporary.
The carrying value of MSRs is sensitive to changes in interest rates, including their effect on
prepayment speeds. JPMorgan Chase uses a combination of derivatives, AFS securities and trading
instruments to manage changes in the fair value of MSRs. The intent is to offset any changes in the
fair value of MSRs with changes in the fair value of the related risk management instrument. MSRs
decrease in value when interest rates decline. Conversely, securities (such as mortgage-backed
securities), principal-only certificates and derivatives (when the Firm receives fixed-rate
interest payments) decrease in value when interest rates increase. The Firm offsets the interest
rate risk of its MSRs by designating certain derivatives (e.g., a combination of swaps, swaptions
and floors that produces an interest rate profile opposite to the designated risk of the hedged
MSRs) as fair value hedges of specified MSRs under SFAS 133. SFAS 133 hedge accounting allows the
carrying value of the hedged MSRs to be adjusted through earnings in the same period that the
change in value of the hedging derivatives is recognized through earnings. Both of these valuation
adjustments are recorded in Mortgage fees and related income.
When applying SFAS 133, the loans underlying the MSRs being hedged are stratified into specific
SFAS 133 asset groupings that possess similar interest rate and prepayment risk exposures. The
documented hedge period for the Firm is daily. Daily adjustments are performed to incorporate new
or terminated derivative contracts and to modify the amount of the corresponding similar asset
grouping that is being hedged. The Firm has designated changes in the benchmark interest rate
(LIBOR) as the hedged risk. In designating the benchmark interest rate, the Firm considers the
impact that the change in the benchmark rate has on the prepayment speed estimates in determining
the fair value of the MSRs. The Firm performs both prospective and retrospective
hedge-effectiveness evaluations, using a regression analysis, to determine whether the hedge
relationship is expected to be highly effective. Hedge effectiveness is assessed by comparing the
change in value of the MSRs as a result of changes in benchmark interest rates to the change in the
value of the designated derivatives. For a further discussion on derivative instruments and hedging
activities, see Note 26 on page 123 of this Annual Report.
Securities (both AFS and Trading) also are used to manage the risk exposure of MSRs. Because these
securities do not qualify as hedges under SFAS 133, they are accounted for under SFAS 115. Realized
and unrealized gains and losses on trading securities are recognized in earnings in Mortgage fees
and related income; interest income on the AFS securities is recognized in earnings in Net interest
income; and unrealized gains and losses on AFS securities are reported in Other comprehensive
income. Finally, certain nonhedge derivatives, which have not been designated by management in SFAS
133 hedge relationships, are used to manage the economic risk exposure of MSRs and are recorded in
Mortgage fees and related income.
Certain AFS securities purchased by the Firm to manage structural interest rate risk were
designated in 2005 as risk management instruments of MSRs. At December 31, 2005 and 2004, the
unrealized loss on AFS securities used to manage the risk exposure of MSRs was $174 million and $3
million, respectively.
The following table summarizes MSR activity and related amortization for the dates indicated. It
also includes the key assumptions and the sensitivity of the fair value of MSRs at December 31,
2005, to immediate 10% and 20% adverse changes in each of those assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Balance at January 1 |
|
$ |
6,111 |
|
|
$ |
6,159 |
|
|
$ |
4,864 |
|
Additions |
|
|
1,897 |
|
|
|
1,757 |
|
|
|
3,201 |
|
Bank One merger |
|
NA |
|
|
|
90 |
|
|
NA |
|
Sales |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
Other-than-temporary impairment |
|
|
(1 |
) |
|
|
(149 |
) |
|
|
(283 |
) |
Amortization |
|
|
(1,295 |
) |
|
|
(1,297 |
) |
|
|
(1,397 |
) |
SFAS 133 hedge valuation adjustments |
|
|
90 |
|
|
|
(446 |
) |
|
|
(226 |
) |
|
Balance at December 31 |
|
|
6,802 |
|
|
|
6,111 |
|
|
|
6,159 |
|
Less: valuation allowance |
|
|
350 |
|
|
|
1,031 |
|
|
|
1,378 |
|
|
Balance at December 31, after
valuation allowance |
|
$ |
6,452 |
|
|
$ |
5,080 |
|
|
$ |
4,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value at December 31 |
|
$ |
6,668 |
|
|
$ |
5,124 |
|
|
$ |
4,781 |
|
Weighted-average prepayment
speed assumption (CPR) |
|
|
17.56 |
% |
|
|
17.29 |
% |
|
|
17.67 |
% |
Weighted-average discount rate |
|
|
9.68 |
% |
|
|
7.93 |
% |
|
|
7.31 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
CPR: Constant prepayment rate |
|
|
|
|
|
|
|
2005 |
|
|
Weighted-average prepayment speed assumption (CPR) |
|
|
17.56 |
% |
Impact on fair value with 10% adverse change |
|
$ |
(340 |
) |
Impact on fair value with 20% adverse change |
|
|
(654 |
) |
|
Weighted-average discount rate |
|
|
9.68 |
% |
Impact on fair value with 10% adverse change |
|
$ |
(231 |
) |
Impact on fair value with 20% adverse change |
|
|
(446 |
) |
|
CPR: Constant prepayment rate.
The sensitivity analysis in the preceding table is hypothetical and should be used with
caution. As the figures indicate, changes in fair value based upon a 10% and 20% variation in
assumptions generally cannot be easily extrapolated because the relationship of the change in the
assumptions to the change in fair value may not be linear. Also, in this table, the effect that a
change in a particular assumption may have on the fair value is calculated without changing any
other assumption. In reality, changes in one factor may result in changes in another, which might
magnify or counteract the sensitivities.
The valuation allowance represents the extent to which the carrying value of MSRs exceeds its
estimated fair value for its applicable SFAS 140 strata. Changes in the valuation allowance are the
result of the recognition of impairment or the recovery of previously recognized impairment charges
due to changes in market conditions during the period. The changes in the valuation allowance for
MSRs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Balance at January 1 |
|
$ |
1,031 |
|
|
$ |
1,378 |
|
|
$ |
1,634 |
|
Other-than-temporary impairment |
|
|
(1 |
) |
|
|
(149 |
) |
|
|
(283 |
) |
SFAS 140 impairment (recovery) adjustment |
|
|
(680 |
) |
|
|
(198 |
) |
|
|
27 |
|
|
Balance at December 31 |
|
$ |
350 |
|
|
$ |
1,031 |
|
|
$ |
1,378 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results, while 2003 results include heritage JPMorgan Chase only. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
115 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The Firm recorded an other-than-temporary impairment of its MSRs of $1 million, $149 million
and $283 million, in 2005, 2004 and 2003, respectively, which permanently reduced the gross
carrying value of the MSRs and the related valuation allowance. The
permanent reduction precludes subsequent reversals. This write-down had no impact on the results of
operations or financial condition of the Firm.
Purchased credit card relationships and All other intangible assets
During 2005, purchased credit card relationship intangibles decreased by $603 million as a result
of $703 million in amortization expense, partially offset by the purchase of the Sears Canada
credit card business. All other intangible assets decreased by $894 million in 2005 primarily as a
result of $836 million in amortization expense and the impact of the deconsolidation of Paymentech.
Except for $513 million of indefinite-lived intangibles related to asset management advisory
contracts which are not amortized but instead are tested for impairment at least annually, the
remainder of the Firms other acquired intangible assets are subject to amortization.
The components of credit card relationships, core deposits and other intangible assets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
Net |
|
|
Gross |
|
Accumulated |
|
carrying |
|
Gross |
|
Accumulated |
|
carrying |
December 31, (in millions) |
|
amount |
|
amortization |
|
value |
|
amount |
|
amortization |
|
value |
|
Purchased credit card relationships |
|
$ |
5,325 |
|
|
$ |
2,050 |
|
|
$ |
3,275 |
|
|
$ |
5,225 |
|
|
$ |
1,347 |
|
|
$ |
3,878 |
|
All other intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other credit cardrelated intangibles |
|
|
183 |
|
|
|
59 |
|
|
|
124 |
|
|
|
295 |
|
|
|
23 |
|
|
|
272 |
|
Core deposit intangibles |
|
|
3,797 |
|
|
|
1,092 |
|
|
|
2,705 |
|
|
|
3,797 |
|
|
|
469 |
|
|
|
3,328 |
|
Other intangibles |
|
|
2,582 |
|
|
|
579 |
(a) |
|
|
2,003 |
|
|
|
2,528 |
|
|
|
402 |
(a) |
|
|
2,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Purchased credit card relationships |
|
$ |
703 |
|
|
$ |
476 |
|
|
$ |
256 |
|
Other credit cardrelated intangibles |
|
|
36 |
|
|
|
23 |
|
|
|
|
|
Core deposit intangibles |
|
|
623 |
|
|
|
330 |
|
|
|
6 |
|
All other intangibles |
|
|
163 |
|
|
|
117 |
|
|
|
32 |
|
|
Total amortization expense |
|
$ |
1,525 |
|
|
$ |
946 |
|
|
$ |
294 |
|
|
|
|
|
(a) |
|
Includes $14 million and $16 million for 2005 and 2004, respectively, of amortization
expense related to servicing assets on securitized automobile loans, which is recorded in Asset
management, administration and commissions. |
|
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
Future amortization expense
The following table presents estimated amortization expenses related to credit card
relationships, core deposits and All other intangible assets at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other credit |
|
|
|
|
|
|
(in millions) |
|
Purchased credit |
|
card-related |
|
Core deposit |
|
All other |
|
|
Year ended December 31, |
|
card relationships |
|
intangibles |
|
intangibles |
|
intangible assets |
|
Total |
|
2006 |
|
$ |
688 |
|
|
$ |
16 |
|
|
$ |
547 |
|
|
$ |
163 |
|
|
$ |
1,414 |
|
2007 |
|
|
620 |
|
|
|
15 |
|
|
|
469 |
|
|
|
145 |
|
|
|
1,249 |
|
2008 |
|
|
515 |
|
|
|
15 |
|
|
|
402 |
|
|
|
132 |
|
|
|
1,064 |
|
2009 |
|
|
372 |
|
|
|
15 |
|
|
|
329 |
|
|
|
123 |
|
|
|
839 |
|
2010 |
|
|
312 |
|
|
|
13 |
|
|
|
276 |
|
|
|
110 |
|
|
|
711 |
|
|
Note 16 Premises and equipment
Premises and equipment, including leasehold improvements, are carried at cost less accumulated
depreciation and amortization. JPMorgan Chase computes depreciation using the straight-line method
over the estimated useful life of an asset. For leasehold improvements, the Firm uses the
straight-line method computed over the lesser of the remaining term of the leased facility or 10
years. JPMorgan Chase has recorded immaterial asset retirement obligations
related to asbestos remediation under SFAS 143 and FIN 47 in those cases where it has sufficient
information to estimate the obligations fair value.
JPMorgan Chase capitalizes certain costs associated with the acquisition or development of
internal-use software under SOP 98-1. Once the software is ready for its intended use, these costs
are amortized on a straight-line basis over the softwares expected useful life, and reviewed for
impairment on an ongoing basis.
|
|
|
|
|
|
116
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 17 Long-term debt
JPMorgan Chase issues long-term debt denominated in various currencies, although predominantly
U.S. dollars, with both fixed and variable interest rates. The following table is a summary of
long-term debt (including unamortized original issue debt discount and SFAS 133 valuation
adjustments):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By remaining contractual maturity at December 31, 2005 |
|
|
Under |
|
|
|
|
|
|
After |
|
|
2005 |
|
|
2004 |
|
(in millions) |
|
|
|
|
|
1 year |
|
|
15 years |
|
|
5 years |
|
|
total |
|
|
total |
|
|
Parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt:(a) |
|
Fixed rate |
|
$ |
5,991 |
|
|
$ |
14,705 |
|
|
$ |
4,224 |
|
|
$ |
24,920 |
|
|
$ |
25,563 |
|
|
|
Variable rate |
|
|
3,574 |
|
|
|
11,049 |
|
|
|
2,291 |
|
|
|
16,914 |
|
|
|
15,128 |
|
|
|
Interest rates(b) |
|
|
2.806.88 |
% |
|
|
0.226.63 |
% |
|
|
1.128.85 |
% |
|
|
0.228.85 |
% |
|
|
0.207.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt: |
|
Fixed rate |
|
$ |
758 |
|
|
$ |
8,241 |
|
|
$ |
15,818 |
|
|
$ |
24,817 |
|
|
$ |
22,055 |
|
|
|
Variable rate |
|
|
|
|
|
|
26 |
|
|
|
1,797 |
|
|
|
1,823 |
|
|
|
2,686 |
|
|
|
Interest rates(b) |
|
|
6.137.88 |
% |
|
|
4.8010.00 |
% |
|
|
1.929.88 |
% |
|
|
1.9210.00 |
% |
|
|
1.9210.00 |
% |
|
|
|
Subtotal |
|
$ |
10,323 |
|
|
$ |
34,021 |
|
|
$ |
24,130 |
|
|
$ |
68,474 |
|
|
$ |
65,432 |
|
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt:(a) |
|
Fixed rate |
|
$ |
636 |
|
|
$ |
3,746 |
|
|
$ |
2,362 |
|
|
$ |
6,744 |
|
|
$ |
6,249 |
|
|
|
Variable rate |
|
|
5,364 |
|
|
|
21,632 |
|
|
|
5,013 |
|
|
|
32,009 |
|
|
|
22,097 |
|
|
|
Interest rates(b) |
|
|
3.0010.95 |
% |
|
|
1.7117.00 |
% |
|
|
1.7613.00 |
% |
|
|
1.7117.00 |
% |
|
|
1.7113.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt: |
|
Fixed rate |
|
$ |
|
|
|
$ |
845 |
|
|
$ |
285 |
|
|
$ |
1,130 |
|
|
$ |
1,644 |
|
|
|
Variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates(b) |
|
|
|
|
|
|
6.136.70 |
% |
|
|
8.25 |
% |
|
|
6.138.25 |
% |
|
|
6.008.25 |
% |
|
|
|
Subtotal |
|
$ |
6,000 |
|
|
$ |
26,223 |
|
|
$ |
7,660 |
|
|
$ |
39,883 |
|
|
$ |
29,990 |
|
|
Total long-term debt |
|
$ |
16,323 |
|
|
$ |
60,244 |
|
|
$ |
31,790 |
|
|
$ |
108,357 |
(d)(e)(f) |
|
$ |
95,422 |
|
|
FIN 46R long-term beneficial interests:(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
80 |
|
|
$ |
9 |
|
|
$ |
376 |
|
|
$ |
465 |
|
|
$ |
775 |
|
|
|
Variable rate |
|
|
26 |
|
|
|
95 |
|
|
|
1,768 |
|
|
|
1,889 |
|
|
|
5,618 |
|
|
|
Interest rates(b) |
|
|
3.397.35 |
% |
|
|
0.517.00 |
% |
|
|
2.4212.79 |
% |
|
|
0.5112.79 |
% |
|
|
0.5412.79 |
% |
|
Total FIN 46R long-term beneficial interests |
|
$ |
106 |
|
|
$ |
104 |
|
|
$ |
2,144 |
|
|
$ |
2,354 |
|
|
$ |
6,393 |
|
|
|
|
|
(a) |
|
Included are various equity-linked or other indexed instruments. Embedded derivatives
separated from hybrid securities in accordance with SFAS 133 are reported at fair value and shown
net with the host contract on the balance sheet. Changes in fair value of separated derivatives are
recorded in Trading revenue. |
|
(b) |
|
The interest rates shown are the range of contractual rates in effect at year-end, including
non-U.S. dollar fixed and variable-rate issuances, which excludes the effects of related derivative
instruments. The use of these derivative instruments modifies the Firms exposure to the
contractual interest rates disclosed in the table above. Including the effects of derivatives, the
range of modified rates in effect at December 31, 2005, for total long-term debt was 0.49% to
17.00%, versus the contractual range of 0.22% to 17.00% presented in the table above. |
|
(c) |
|
Included on the Consolidated balance sheets in Beneficial interests issued by consolidated
variable interest entities. |
|
(d) |
|
At December 31, 2005, long-term debt aggregating $27.7 billion was redeemable at the option of
JPMorgan Chase, in whole or in part, prior to maturity, based upon the terms specified in the
respective notes. |
|
(e) |
|
The aggregate principal amount of debt that matures in each of the five years subsequent to
2005 is $16.3 billion in 2006, $17.8 billion in 2007, $23.4 billion in 2008, $11.1 billion in 2009,
and $8.0 billion in 2010. |
|
(f) |
|
Includes $2.3 billion of outstanding zero-coupon notes at December 31, 2005. The aggregate
principal amount of these notes at their respective maturities is $5.9 billion. |
The weighted-average contractual interest rate for total long-term debt was 4.62% and 4.50% as
of December 31, 2005 and 2004, respectively. In order to modify exposure to interest rate and
currency exchange rate movements, JPMorgan Chase utilizes derivative instruments, primarily
interest rate and cross-currency interest rate swaps, in conjunction with some of its debt issues.
The use of these instruments modifies the Firms interest expense on the associated debt. The
modified weighted-average interest rate for total long-term debt, including the effects of related
derivative instruments, was 4.65% and 3.97% as of December 31, 2005 and 2004, respectively.
JPMorgan Chase & Co. (Parent Company) has guaranteed certain debt of its subsidiaries, including
both long-term debt and structured notes sold as part of the Firms trading activities. These
guarantees rank on a parity with all of the Firms other unsecured and unsubordinated indebtedness.
Guaranteed liabilities totaled $170 million and $320 million at December 31, 2005 and 2004,
respectively.
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities
At December 31, 2005, the Firm had 22 wholly-owned Delaware statutory business trusts (issuer
trusts) that issued guaranteed preferred beneficial interests in the Firms junior subordinated
deferrable interest debentures.
The junior subordinated deferrable interest debentures issued by the Firm to the issuer trusts,
totaling $11.5 billion and $10.3 billion at December 31, 2005 and 2004, respectively, were
reflected in the Firms Consolidated balance sheets in the Liabilities section under the caption
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital
debt securities. The Firm also records the common capital securities issued by the issuer trusts
in Other assets in its Consolidated balance sheets at December 31, 2005 and 2004.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
117 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The debentures issued to the issuer trusts by the Firm, less the capital securities of the
issuer trusts, qualify as Tier 1 capital. The following is a summary of the outstanding capital
securities, net of discount, issued by each trust and the junior subordinated deferrable interest
debenture issued by JPMorgan Chase to each trust as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Principal |
|
|
|
|
|
Stated maturity |
|
|
|
|
|
|
|
|
of capital |
|
amount of |
|
|
|
|
|
of capital |
|
|
|
|
|
|
|
|
securities |
|
debenture |
|
|
|
|
|
securities |
|
Earliest |
|
Interest rate of |
|
Interest |
|
|
issued |
|
held |
|
Issue |
|
and |
|
redemption |
|
capital securities |
|
payment/ |
December 31, 2005 (in millions) |
|
by trust(a) |
|
by trust(b) |
|
date |
|
debentures |
|
date |
|
and debentures |
|
distribution dates |
|
Bank One Capital III |
|
$ |
474 |
|
|
$ |
616 |
|
|
|
2000 |
|
|
|
2030 |
|
|
Any time |
|
|
8.75 |
% |
|
Semiannually |
Bank One Capital V |
|
|
300 |
|
|
|
335 |
|
|
|
2001 |
|
|
|
2031 |
|
|
|
2006 |
|
|
|
8.00 |
% |
|
Quarterly |
Bank One Capital VI |
|
|
525 |
|
|
|
556 |
|
|
|
2001 |
|
|
|
2031 |
|
|
|
2006 |
|
|
|
7.20 |
% |
|
Quarterly |
Chase Capital I |
|
|
600 |
|
|
|
619 |
|
|
|
1996 |
|
|
|
2026 |
|
|
|
2006 |
|
|
|
7.67 |
% |
|
Semiannually |
Chase Capital II |
|
|
495 |
|
|
|
511 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
LIBOR + 0.50% |
|
Quarterly |
Chase Capital III |
|
|
296 |
|
|
|
306 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
LIBOR + 0.55% |
|
Quarterly |
Chase Capital VI |
|
|
249 |
|
|
|
256 |
|
|
|
1998 |
|
|
|
2028 |
|
|
Any time |
|
LIBOR + 0.625% |
|
Quarterly |
First Chicago NBD Capital I |
|
|
248 |
|
|
|
256 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
LIBOR + 0.55% |
|
Quarterly |
First Chicago NBD
Institutional Capital A |
|
|
499 |
|
|
|
551 |
|
|
|
1996 |
|
|
|
2026 |
|
|
|
2006 |
|
|
|
7.95 |
% |
|
Semiannually |
First Chicago NBD
Institutional Capital B |
|
|
250 |
|
|
|
273 |
|
|
|
1996 |
|
|
|
2026 |
|
|
|
2006 |
|
|
|
7.75 |
% |
|
Semiannually |
First USA Capital Trust I |
|
|
3 |
|
|
|
3 |
|
|
|
1996 |
|
|
|
2027 |
|
|
|
2007 |
|
|
|
9.33 |
% |
|
Semiannually |
JPM Capital Trust I |
|
|
750 |
|
|
|
773 |
|
|
|
1996 |
|
|
|
2027 |
|
|
|
2007 |
|
|
|
7.54 |
% |
|
Semiannually |
JPM Capital Trust II |
|
|
400 |
|
|
|
412 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
|
7.95 |
% |
|
Semiannually |
J.P. Morgan Chase Capital IX |
|
|
500 |
|
|
|
509 |
|
|
|
2001 |
|
|
|
2031 |
|
|
|
2006 |
|
|
|
7.50 |
% |
|
Quarterly |
J.P. Morgan Chase Capital X |
|
|
1,000 |
|
|
|
1,022 |
|
|
|
2002 |
|
|
|
2032 |
|
|
|
2007 |
|
|
|
7.00 |
% |
|
Quarterly |
J.P. Morgan Chase Capital XI |
|
|
1,075 |
|
|
|
1,009 |
|
|
|
2003 |
|
|
|
2033 |
|
|
|
2008 |
|
|
|
5.88 |
% |
|
Quarterly |
J.P. Morgan Chase Capital XII |
|
|
400 |
|
|
|
393 |
|
|
|
2003 |
|
|
|
2033 |
|
|
|
2008 |
|
|
|
6.25 |
% |
|
Quarterly |
JPMorgan Chase Capital XIII |
|
|
472 |
|
|
|
487 |
|
|
|
2004 |
|
|
|
2034 |
|
|
|
2014 |
|
|
LIBOR + 0.95% |
|
Quarterly |
JPMorgan Chase Capital XIV |
|
|
600 |
|
|
|
593 |
|
|
|
2004 |
|
|
|
2034 |
|
|
|
2009 |
|
|
|
6.20 |
% |
|
Quarterly |
JPMorgan Chase Capital XV |
|
|
994 |
|
|
|
1,049 |
|
|
|
2005 |
|
|
|
2035 |
|
|
Any time |
|
|
5.88 |
% |
|
Semiannually |
JPMorgan Chase Capital XVI |
|
|
500 |
|
|
|
501 |
|
|
|
2005 |
|
|
|
2035 |
|
|
|
2010 |
|
|
|
6.35 |
% |
|
Quarterly |
JPMorgan Chase Capital XVII |
|
|
496 |
|
|
|
499 |
|
|
|
2005 |
|
|
|
2035 |
|
|
Any time |
|
|
5.85 |
% |
|
Semiannually |
|
Total |
|
$ |
11,126 |
|
|
$ |
11,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the amount of capital securities issued to the public by each trust, net of
unamortized discount. |
|
(b) |
|
Represents the principal amount of JPMorgan Chase debentures held as assets by each trust, net
of unamortized discount amounts. The principal amount of debentures held by the trusts includes the
impact of hedging and purchase accounting fair value adjustments that are recorded on the Firms
financial statements. |
Note 18 Preferred stock
JPMorgan Chase is authorized to issue 200 million shares of preferred stock, in one or more
series, with a par value of $1 per share. Outstanding preferred stock at December 31, 2005 and
2004, was 280,433 and 4.28 million shares, respectively. On May 6, 2005, JPMorgan Chase redeemed a
total of 4.0 million shares of its Fixed/adjustable rate, noncumulative preferred stock.
Dividends on shares of the outstanding series of preferred stock are payable quarterly. The
preferred stock outstanding takes precedence over JPMorgan Chases common stock for the payment of
dividends and the distribution of assets in the event of a liquidation or dissolution of the Firm.
The following is a summary of JPMorgan Chases preferred stock outstanding as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate in effect at |
|
(in millions, except |
|
redemption |
|
Shares |
|
|
Outstanding at December 31, |
|
Earliest |
|
December 31, |
|
per share amounts and rates) |
|
price per share(b) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
redemption date |
|
2005 |
|
|
6.63% Series H cumulative(a) |
|
$ |
500.00 |
|
|
|
0.28 |
|
|
|
0.28 |
|
|
$ |
139 |
|
|
$ |
139 |
|
|
|
3/31/2006 |
|
|
|
6.63 |
% |
Fixed/adjustable rate, noncumulative |
|
|
50.00 |
|
|
|
|
|
|
|
4.00 |
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
Total preferred stock |
|
|
|
|
|
|
0.28 |
|
|
|
4.28 |
|
|
$ |
139 |
|
|
$ |
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represented by depositary shares. |
|
(b) |
|
Redemption price includes amount shown in the table plus any accrued but unpaid dividends. |
|
|
|
|
|
|
118
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 19 Common stock
At December 31, 2005, JPMorgan Chase was authorized to issue 9.0 billion shares of common stock
with a $1 par value per share. In connection with the Merger, the shareholders approved an increase
in the amount of authorized shares of 4.5 billion from the 4.5 billion that had been authorized as
of December 31, 2003. Common shares issued (newly issued or distributed from treasury) by JPMorgan Chase during 2005, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,(a) (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Issued balance at January 1 |
|
|
3,584.8 |
|
|
|
2,044.4 |
|
|
|
2,023.6 |
|
Newly issued: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefits and
compensation plans |
|
|
34.0 |
|
|
|
69.0 |
|
|
|
20.9 |
|
Employee stock purchase plans |
|
|
1.4 |
|
|
|
3.1 |
|
|
|
0.7 |
|
Purchase accounting acquisitions
and other |
|
|
|
|
|
|
1,469.4 |
|
|
|
|
|
|
Total newly issued |
|
|
35.4 |
|
|
|
1,541.5 |
|
|
|
21.6 |
|
Cancelled shares |
|
|
(2.0 |
) |
|
|
(1.1 |
) |
|
|
(0.8 |
) |
|
Total issued balance at December 31 |
|
|
3,618.2 |
|
|
|
3,584.8 |
|
|
|
2,044.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury balance at January 1 |
|
|
(28.6 |
) |
|
|
(1.8 |
) |
|
|
(24.9 |
) |
Purchase of treasury stock |
|
|
(93.5 |
) |
|
|
(19.3 |
) |
|
|
|
|
Share repurchases related to employee
stock-based awards(b) |
|
|
(9.4 |
) |
|
|
(7.5 |
) |
|
|
(3.0 |
) |
Issued from treasury: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefits and
compensation plans |
|
|
|
|
|
|
|
|
|
|
25.8 |
|
Employee stock purchase plans |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
Total issued from treasury |
|
|
|
|
|
|
|
|
|
|
26.1 |
|
|
Total treasury balance at December 31 |
|
|
(131.5 |
) |
|
|
(28.6 |
) |
|
|
(1.8 |
) |
|
Outstanding |
|
|
3,486.7 |
|
|
|
3,556.2 |
|
|
|
2,042.6 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Participants in the Firms stock-based incentive plans may have shares withheld to cover income taxes. The
shares withheld amounted to 8.2 million, 5.7 million and 2.3 million for 2005, 2004 and 2003,
respectively. |
During 2005 and 2004, the Firm repurchased 93.5 million shares and 19.3 million shares,
respectively, of common stock under a stock repurchase program that was approved by the Board of
Directors on July 20, 2004. The Firm did not repurchase shares of its common stock during 2003
under a prior stock repurchase program.
As of December 31, 2005, approximately 507 million unissued shares of common stock were reserved
for issuance under various employee or director incentive, compensation, option and stock purchase
plans.
Note 20 Earnings per share
SFAS 128 requires the presentation of basic and diluted earnings per share (EPS) in the
income statement. Basic EPS is computed by dividing net income applicable to common stock by the
weighted-average number of common shares outstanding for the period. Diluted EPS is computed using
the same method as basic EPS but, in the denominator, the number of common shares reflect, in
addition to outstanding shares, the potential dilution that could occur if convertible securities
or other contracts to issue common stock were converted or exercised into common stock. Net income
available for common stock is the same for basic EPS and diluted EPS, as JPMorgan Chase had no
convertible securities, and therefore, no adjustments to net income available for common stock were
necessary. The following table presents the calculation of basic and diluted EPS for 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Less: preferred stock dividends |
|
|
13 |
|
|
|
52 |
|
|
|
51 |
|
|
Net income applicable to common stock |
|
$ |
8,470 |
|
|
$ |
4,414 |
|
|
$ |
6,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic
shares outstanding |
|
|
3,491.7 |
|
|
|
2,779.9 |
|
|
|
2,008.6 |
|
|
Net income per share |
|
$ |
2.43 |
|
|
$ |
1.59 |
|
|
$ |
3.32 |
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to
common stock |
|
$ |
8,470 |
|
|
$ |
4,414 |
|
|
$ |
6,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic
shares outstanding |
|
|
3,491.7 |
|
|
|
2,779.9 |
|
|
|
2,008.6 |
|
Add: Broad-based options |
|
|
3.6 |
|
|
|
5.4 |
|
|
|
4.1 |
|
Restricted stock, restricted stock
units and key employee options |
|
|
62.0 |
|
|
|
65.3 |
|
|
|
42.4 |
|
|
Weighted-average diluted
shares outstanding |
|
|
3,557.3 |
|
|
|
2,850.6 |
|
|
|
2,055.1 |
|
|
Net income per share(b) |
|
$ |
2.38 |
|
|
$ |
1.55 |
|
|
$ |
3.24 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Options issued under employee benefit plans to purchase 280 million, 300 million and 335 million shares of
common stock were outstanding for the years ended 2005, 2004 and 2003, respectively, but were not
included in the computation of diluted EPS because the options exercise prices were greater than
the average market price of the common shares. |
Note 21 Accumulated other
comprehensive income (loss)
Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains
and losses on AFS securities, cash flow hedging activities and foreign currency translation
adjustments (including the impact of related derivatives).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
Year ended |
|
Unrealized |
|
|
|
|
|
Cash |
|
other |
December 31,(a) |
|
gains (losses) |
|
Translation |
|
flow |
|
comprehensive |
(in millions) |
|
on AFS securities(b) |
|
adjustments |
|
hedges |
|
income (loss) |
|
Balance at
December 31, 2002 |
|
$ |
731 |
|
|
$ |
(6 |
) |
|
$ |
502 |
|
|
$ |
1,227 |
|
Net change |
|
|
(712 |
) |
|
|
|
|
|
|
(545 |
) |
|
|
(1,257 |
) |
|
Balance at
December 31, 2003 |
|
|
19 |
|
|
|
(6 |
) |
|
|
(43 |
) |
|
|
(30 |
) |
Net change |
|
|
(80 |
)(c) |
|
|
(2 |
)(d) |
|
|
(96 |
) |
|
|
(178 |
) |
|
Balance at
December 31, 2004 |
|
|
(61 |
) |
|
|
(8 |
) |
|
|
(139 |
) |
|
|
(208 |
) |
Net change |
|
|
(163 |
)(e) |
|
|
|
(f) |
|
|
(255 |
) |
|
|
(418 |
) |
|
Balance at
December 31, 2005 |
|
$ |
(224 |
) |
|
$ |
(8 |
) |
|
$ |
(394 |
) |
|
$ |
(626 |
) |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio
and retained interests in securitizations recorded in Other assets. |
|
(c) |
|
The net change during 2004 was due primarily to rising interest rates and recognition of unrealized gains through securities
sales. |
(d) |
|
Includes $280 million of after-tax gains (losses) on foreign currency translation from
operations for which the functional currency is other than the U.S. dollar offset by $(282) million
of after-tax gains (losses) on hedges. |
(e) |
|
The net change during 2005 was due primarily to higher interest rates, partially offset by the
reversal of unrealized losses through securities sales. |
(f) |
|
Includes $(351) million of after-tax gains (losses) on foreign currency translation from
operations for which the functional currency is other than the U.S. dollar offset by $351 million
of after-tax gains (losses) on hedges. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
119 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents the after-tax changes in net unrealized holdings gains (losses)
and the reclassification adjustments in unrealized gains and losses on AFS securities and cash flow
hedges. Reclassification adjustments include amounts recognized in net income during the current
year that had been previously recorded in Other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Unrealized gains (losses) on AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holdings gains (losses)
arising during the period, net of taxes(b) |
|
$ |
(1,058 |
) |
|
$ |
41 |
|
|
$ |
149 |
|
Reclassification adjustment for (gains) losses
included in income, net of taxes(c) |
|
|
895 |
|
|
|
(121 |
) |
|
|
(861 |
) |
|
Net change |
|
$ |
(163 |
) |
|
$ |
(80 |
) |
|
$ |
(712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holdings gains (losses)
arising during the period, net of taxes(d) |
|
$ |
(283 |
) |
|
$ |
34 |
|
|
$ |
86 |
|
Reclassification adjustment for (gains) losses
included in income, net of taxes(e) |
|
|
28 |
|
|
|
(130 |
) |
|
|
(631 |
) |
|
Net change |
|
$ |
(255 |
) |
|
$ |
(96 |
) |
|
$ |
(545 |
) |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Net of income tax expense (benefit) of $(648) million for 2005, $27 million for 2004 and $92 million for 2003. |
|
(c) |
|
Net of income tax expense (benefit) of $(548) million for 2005, $79 million for 2004 and $528
million for 2003. |
|
(d) |
|
Net of income tax expense (benefit) of $(187) million for 2005, $23 million for 2004 and $60
million for 2003. |
|
(e) |
|
Net of income tax expense (benefit) of $(18) million for 2005 and $86 million for 2004 and $438
million for 2003. |
Note 22 Income taxes
JPMorgan Chase and eligible subsidiaries file a consolidated U.S. federal income tax return.
JPMorgan Chase uses the asset-and-liability method required by SFAS 109 to provide income taxes on
all transactions recorded in the Consolidated financial statements. This method requires that
income taxes reflect the expected future tax consequences of temporary differences between the
carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax
liability or asset for each temporary difference is determined based upon the tax rates that the
Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan
Chases expense for income taxes includes the current and deferred portions of that expense. A
valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to
realize.
Due to the inherent complexities arising from the nature of the Firms businesses, and from
conducting business and being taxed in a substantial number of jurisdictions, significant judgments
and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the
many tax jurisdictions in which the Firm files tax returns may not be finalized for several years.
Thus, the Firms final tax-related assets and liabilities may ultimately be different.
Deferred income tax expense (benefit) results from differences between assets and liabilities
measured for financial reporting and for income-tax return purposes. The significant components of
deferred tax assets and liabilities are reflected in the following table:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance for other than loan losses |
|
$ |
3,554 |
|
|
$ |
3,711 |
|
Employee benefits |
|
|
3,381 |
|
|
|
2,677 |
|
Allowance for loan losses |
|
|
2,745 |
|
|
|
2,739 |
|
Non-U.S. operations |
|
|
807 |
|
|
|
743 |
|
Fair value adjustments |
|
|
531 |
|
|
|
|
|
|
Gross deferred tax assets |
|
$ |
11,018 |
|
|
$ |
9,870 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
3,683 |
|
|
$ |
3,558 |
|
Leasing transactions |
|
|
3,158 |
|
|
|
4,266 |
|
Fee income |
|
|
1,396 |
|
|
|
1,162 |
|
Non-U.S. operations |
|
|
1,297 |
|
|
|
1,144 |
|
Fair value adjustments |
|
|
|
|
|
|
186 |
|
Other, net |
|
|
149 |
|
|
|
348 |
|
|
Gross deferred tax liabilities |
|
$ |
9,683 |
|
|
$ |
10,664 |
|
|
Valuation allowance |
|
$ |
110 |
|
|
$ |
150 |
|
|
Net deferred tax asset (liability) |
|
$ |
1,225 |
|
|
$ |
(944 |
) |
|
A valuation allowance has been recorded in accordance with SFAS 109, primarily relating to
deferred tax assets associated with certain portfolio investments.
The components of income tax expense included in the Consolidated statements of income were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Current income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
4,269 |
|
|
$ |
1,695 |
|
|
$ |
965 |
|
Non-U.S. |
|
|
917 |
|
|
|
679 |
|
|
|
741 |
|
U.S. state and local |
|
|
337 |
|
|
|
181 |
|
|
|
175 |
|
|
Total current expense |
|
|
5,523 |
|
|
|
2,555 |
|
|
|
1,881 |
|
|
Deferred income tax (benefit) expense |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(2,063 |
) |
|
|
(382 |
) |
|
|
1,341 |
|
Non-U.S. |
|
|
316 |
|
|
|
(322 |
) |
|
|
14 |
|
U.S. state and local |
|
|
(44 |
) |
|
|
(123 |
) |
|
|
73 |
|
|
Total deferred (benefit) expense |
|
|
(1,791 |
) |
|
|
(827 |
) |
|
|
1,428 |
|
|
Total income tax expense |
|
$ |
3,732 |
|
|
$ |
1,728 |
|
|
$ |
3,309 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The preceding table does not reflect the tax effects of unrealized gains and losses on AFS
securities, SFAS 133 hedge transactions and certain tax benefits associated with the Firms
employee stock plans. The tax effect of these items is recorded directly in Stockholders equity.
Stockholders equity increased by $425 million, $431 million and $898 million in 2005, 2004 and
2003, respectively, as a result of these tax effects.
U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S.
subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period
of time. For 2005, such earnings approximated $333 million on a pre-tax basis. At December 31,
2005, the cumulative amount of undistributed pre-tax earnings in these subsidiaries approximated
$1.5 billion. It is not practicable at this time to determine the income tax liability that would
result upon repatriation of these earnings.
|
|
|
|
|
|
120
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law.
The Act creates a temporary incentive for U.S. companies to repatriate accumulated foreign earnings
at a substantially reduced U.S. effective tax rate by providing a dividends received deduction on
the repatriation of certain foreign earnings to the U.S. taxpayer (the repatriation provision).
The new deduction is subject to a number of limitations and requirements.
In the fourth quarter of 2005, the Firm applied the repatriation provision to $1.9 billion of cash
from foreign earnings, resulting in a net tax benefit of $55 million. The $1.9 billion of cash will
be used in accordance with the Firms domestic reinvestment plan pursuant to the guidelines set
forth in the Act.
The tax expense (benefit) applicable to securities gains and losses for the years 2005, 2004 and
2003 was $(536) million, $126 million and $477 million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for the
past three years is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Statutory U.S. federal tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) in tax rate resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state and local income taxes, net of
federal income tax benefit |
|
|
1.6 |
|
|
|
0.6 |
(b) |
|
|
2.1 |
|
Tax-exempt income |
|
|
(3.0 |
) |
|
|
(4.1 |
) |
|
|
(2.4 |
) |
Non-U.S. subsidiary earnings |
|
|
(1.4 |
) |
|
|
(1.3 |
) |
|
|
(0.7 |
) |
Business tax credits |
|
|
(3.6 |
) |
|
|
(4.1 |
) |
|
|
(0.9 |
) |
Other, net |
|
|
2.0 |
|
|
|
1.8 |
|
|
|
(0.1 |
) |
|
Effective tax rate |
|
|
30.6 |
% |
|
|
27.9 |
% |
|
|
33.0 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
The lower rate in 2004 was attributable to changes in the proportion of income subject to different state and
local taxes. |
The following table presents the U.S. and non-U.S. components of income before income tax
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
U.S. |
|
$ |
8,959 |
|
|
$ |
3,817 |
|
|
$ |
7,333 |
|
Non-U.S.(b) |
|
|
3,256 |
|
|
|
2,377 |
|
|
|
2,695 |
|
|
Income before income tax expense |
|
$ |
12,215 |
|
|
$ |
6,194 |
|
|
$ |
10,028 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
For purposes of this table, non-U.S. income is defined as income generated from operations located outside the
United States of America. |
Note 23 Restrictions on cash and intercompany funds transfers
JPMorgan Chase Banks business is subject to examination and regulation by the Office of the
Comptroller of the Currency (OCC). The Bank is a member of the Federal Reserve System and its
deposits are insured by the Federal Deposit Insurance Corporation (FDIC).
The Federal Reserve Board requires depository institutions to maintain cash
reserves with a Federal Reserve Bank. The average amount of reserve balances
deposited by the Firms bank subsidiaries with various Federal Reserve Banks
was approximately $2.7 billion in 2005 and $3.8 billion in 2004.
Restrictions imposed by federal law prohibit JPMorgan Chase and certain other affiliates from
borrowing from banking subsidiaries unless the loans are secured in specified amounts. Such secured
loans to the Firm or to other affiliates are generally limited to 10% of the banking subsidiarys
total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such
loans is limited to 20% of the banking subsidiarys total capital.
The principal sources of JPMorgan Chases income (on a parent company-only basis) are dividends and
interest from JPMorgan Chase Bank and the other banking and nonbanking subsidiaries of JPMorgan Chase. In addition to
dividend restrictions set forth in statutes and regulations, the FRB, the OCC and the FDIC have
authority under the Financial Institutions Supervisory Act to prohibit or to limit the payment of
dividends by the banking organizations they supervise, including JPMorgan Chase and its
subsidiaries that are banks or bank holding companies, if, in the banking regulators opinion,
payment of a dividend would constitute an unsafe or unsound practice in light of the financial
condition of the banking organization.
At January 1, 2006 and 2005, JPMorgan Chases bank subsidiaries could pay, in the aggregate, $7.4
billion and $6.2 billion, respectively, in dividends to their respective bank holding companies
without prior approval of their relevant banking regulators. Dividend capacity in 2006 will be
supplemented by the banks earnings during the year.
In compliance with rules and regulations established by U.S. and non-U.S. regulators, as of
December 31, 2005 and 2004, cash in the amount of $6.4 billion and $4.3 billion, respectively, and
securities with a fair value of $2.1 billion and $2.7 billion, respectively, were segregated in
special bank accounts for the benefit of securities and futures brokerage customers.
Note 24 Capital
There are two categories of risk-based capital: Tier 1 capital and Tier 2 capital. Tier 1
capital includes common stockholders equity, qualifying preferred stock and minority interest less
goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier
1, subordinated long-term debt and other instruments qualifying as Tier 2, and the aggregate
allowance for credit losses up to a certain percentage of risk-weighted assets. Total regulatory
capital is subject to deductions for investments in certain subsidiaries. Under the risk-based
capital guidelines of the FRB, JPMorgan Chase is required to maintain minimum ratios of Tier 1 and
Total (Tier 1 plus Tier 2) capital to risk-weighted assets, as well as minimum leverage ratios
(which are defined as Tier 1 capital to average adjusted onbalance sheet assets). Failure to meet
these minimum requirements could cause the FRB to take action. Bank subsidiaries also are subject
to these capital requirements by their respective primary regulators. As of December 31, 2005 and
2004, JPMorgan Chase and all of its banking subsidiaries were well-capitalized and met all capital
requirements to which each was subject.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
121 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents the risk-based capital ratios for JPMorgan Chase and the Firms
significant banking subsidiaries at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
Total |
|
|
Risk-weighted |
|
|
Adjusted |
|
|
Tier 1 |
|
|
Total |
|
|
Tier 1 |
|
(in millions, except ratios) |
|
capital |
|
|
capital |
|
|
assets(c) |
|
|
average assets(d) |
|
|
capital ratio |
|
|
capital ratio |
|
|
leverage ratio |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co.(a) |
|
$ |
72,474 |
|
|
$ |
102,437 |
|
|
$ |
850,643 |
|
|
$ |
1,152,546 |
|
|
|
8.5 |
% |
|
|
12.0 |
% |
|
|
6.3 |
% |
JPMorgan Chase Bank, N.A. |
|
|
61,050 |
|
|
|
84,227 |
|
|
|
750,397 |
|
|
|
995,095 |
|
|
|
8.1 |
|
|
|
11.2 |
|
|
|
6.1 |
|
Chase Bank USA, N.A. |
|
|
8,608 |
|
|
|
10,941 |
|
|
|
72,229 |
|
|
|
59,882 |
|
|
|
11.9 |
|
|
|
15.2 |
|
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
JPMorgan Chase & Co.(a) |
|
$ |
68,621 |
|
|
$ |
96,807 |
|
|
$ |
791,373 |
|
|
$ |
1,102,456 |
|
|
|
8.7 |
% |
|
|
12.2 |
% |
|
|
6.2 |
% |
JPMorgan Chase Bank, N.A. |
|
|
55,489 |
|
|
|
78,478 |
|
|
|
670,295 |
|
|
|
922,877 |
|
|
|
8.3 |
|
|
|
11.7 |
|
|
|
6.0 |
|
Chase Bank USA, N.A. |
|
|
8,726 |
|
|
|
11,186 |
|
|
|
86,955 |
|
|
|
71,797 |
|
|
|
10.0 |
|
|
|
12.9 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-capitalized ratios(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0 |
% |
|
|
10.0 |
% |
|
|
5.0 |
%(e) |
Minimum capital ratios(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0 |
|
|
|
8.0 |
|
|
|
3.0 |
(f) |
|
|
|
|
(a) |
|
Asset and capital amounts for JPMorgan Chases banking subsidiaries reflect intercompany
transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of
intercompany transactions. |
(b) |
|
As defined by the regulations issued by the FRB, FDIC and OCC. |
(c) |
|
Includes off-balance sheet risk-weighted assets in the amounts of $279.2 billion, $260.0
billion and $15.5 billion, respectively, at December 31, 2005, and $250.3 billion, $229.6 billion
and $15.5 billion, respectively, at December 31, 2004. |
(d) |
|
Average adjusted assets for purposes of calculating the leverage ratio include total average
assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill
and other intangible assets, investments in subsidiaries and the total adjusted carrying value of
nonfinancial equity investments that are subject to deductions from Tier 1 capital. |
(e) |
|
Represents requirements for bank subsidiaries pursuant to regulations issued under the Federal
Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the
definition of a well-capitalized bank holding company. |
(f) |
|
The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on
factors specified in regulations issued by the FRB and OCC. |
The following table shows the components of the Firms Tier 1 and Total capital:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Tier 1 capital |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
107,211 |
|
|
$ |
105,653 |
|
Effect of net unrealized losses on AFS
securities and cash flow hedging activities |
|
|
618 |
|
|
|
200 |
|
|
Adjusted stockholders equity |
|
|
107,829 |
|
|
|
105,853 |
|
Minority interest(a) |
|
|
12,660 |
|
|
|
11,050 |
|
Less: Goodwill |
|
|
43,621 |
|
|
|
43,203 |
|
Investments in certain subsidiaries |
|
|
401 |
|
|
|
370 |
|
Nonqualifying intangible assets |
|
|
3,993 |
|
|
|
4,709 |
|
|
Tier 1 capital |
|
$ |
72,474 |
|
|
$ |
68,621 |
|
|
Tier 2 capital |
|
|
|
|
|
|
|
|
Long-term debt and other instruments
qualifying as Tier 2 |
|
$ |
22,733 |
|
|
$ |
20,690 |
|
Qualifying allowance for credit losses |
|
|
7,490 |
|
|
|
7,798 |
|
Less: Investments in certain subsidiaries
and other |
|
|
260 |
|
|
|
302 |
|
|
Tier 2 capital |
|
$ |
29,963 |
|
|
$ |
28,186 |
|
|
Total qualifying capital |
|
$ |
102,437 |
|
|
$ |
96,807 |
|
|
|
|
|
(a) |
|
Primarily includes trust preferred securities of certain business trusts. |
Note 25 Commitments and contingencies
At December 31, 2005, JPMorgan Chase and its subsidiaries were obligated under a number of
noncancelable operating leases for premises and equipment used primarily for banking purposes.
Certain leases contain renewal options or escalation clauses providing for increased rental
payments based upon maintenance, utility and tax increases or require the Firm to perform
restoration work on leased premises. No lease agreement imposes restrictions on the Firms ability
to pay dividends, engage in debt or equity financing transactions, or enter into further lease
agreements.
The following table shows required future minimum rental payments under operating leases with
noncancelable lease terms that expire after December 31, 2005:
|
|
|
|
|
Year ended December 31, (in millions) |
|
|
|
|
|
2006 |
|
$ |
993 |
|
2007 |
|
|
948 |
|
2008 |
|
|
901 |
|
2009 |
|
|
834 |
|
2010 |
|
|
724 |
|
After |
|
|
5,334 |
|
|
Total minimum payments required(a) |
|
|
9,734 |
|
Less: Sublease rentals under noncancelable subleases |
|
|
(1,323 |
) |
|
Net minimum payment required |
|
$ |
8,411 |
|
|
|
|
|
(a) |
|
Lease restoration obligations are accrued in accordance with SFAS 13, and are not
reported as a required minimum lease payment. |
Total rental expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Gross rental expense |
|
$ |
1,269 |
|
|
$ |
1,187 |
|
|
$ |
1,061 |
|
Sublease rental income |
|
|
(192 |
) |
|
|
(158 |
) |
|
|
(106 |
) |
|
Net rental expense |
|
$ |
1,077 |
|
|
$ |
1,029 |
|
|
$ |
955 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
At December 31, 2005, assets were pledged to secure public deposits and for other purposes. The
significant components of the assets pledged were as follows:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Reverse repurchase/securities borrowing agreements |
|
$ |
320 |
|
|
$ |
238 |
|
Securities |
|
|
24 |
|
|
|
49 |
|
Loans |
|
|
74 |
|
|
|
75 |
|
Other(a) |
|
|
99 |
|
|
|
90 |
|
|
Total assets pledged |
|
$ |
517 |
|
|
$ |
452 |
|
|
|
|
|
(a) |
|
Primarily composed of trading assets. |
|
|
|
|
|
|
122
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Litigation reserve
The Firm maintains litigation reserves for certain of its litigations, including its material legal
proceedings. While the outcome of litigation is inherently uncertain, management believes, in light
of all information known to it at December 31, 2005, that the Firms litigation reserves were
adequate at such date. Management reviews litigation reserves
periodically, and the reserves may be
increased or decreased in the future to reflect further litigation developments. The Firm believes
it has meritorious defenses to claims asserted against it in its currently outstanding litigation
and, with respect to such litigation, intends to continue to defend itself vigorously, litigating
or settling cases according to managements judgment as to what is in the best interest of
stockholders.
Note 26 Accounting for derivative instruments and hedging activities
Derivative instruments enable end users to increase, reduce or alter exposure to credit or
market risks. The value of a derivative is derived from its reference to an underlying variable or
combination of variables such as equity, foreign exchange, credit, commodity or interest rate
prices or indices. JPMorgan Chase makes markets in derivatives for customers and also is an
end-user of derivatives in order to manage the Firms exposure to credit and market risks.
SFAS 133, as amended by SFAS 138 and SFAS 149, establishes accounting and reporting standards for
derivative instruments, including those used for trading and hedging activities, and derivative
instruments embedded in other contracts. All free-standing derivatives, whether designated for
hedging relationships or not, are required to be recorded on the balance sheet at fair value. The
accounting for changes in value of a derivative depends on whether the contract is for trading
purposes or has been designated and qualifies for hedge accounting. The majority of the Firms
derivatives are entered into for trading purposes. The Firm also uses derivatives as an end user to
hedge market exposures, modify the interest rate characteristics of related balance sheet
instruments or meet longer-term investment objectives. Both trading and end-user derivatives are
recorded at fair value in Trading assets and Trading liabilities as set forth in Note 3 on page 94
of this Annual Report.
In order to qualify for hedge accounting, a derivative must be considered highly effective at
reducing the risk associated with the exposure being hedged. Each derivative must be designated as
a hedge, with documentation of the risk management objective and strategy, including identification
of the hedging instrument, the hedged item and the risk exposure, and how effectiveness is to be
assessed prospectively and retrospectively. The extent to which a hedging instrument is effective
at achieving offsetting changes in fair value or cash flows must be assessed at least quarterly.
Any ineffectiveness must be reported in current-period earnings.
For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair
value of the item for the risk being hedged are recognized in earnings. If the hedge relationship
is terminated, then the fair value adjustment to the hedged item continues to be reported as part
of the basis of the item and is amortized to earnings as a yield adjustment. For qualifying cash
flow hedges, the effective portion of the change in the fair value of the derivative is recorded in
Other comprehensive income and recognized in the income statement when the hedged cash flows affect
earnings. The ineffective portions of cash flow hedges are immediately recognized in earnings. If
the hedge relationship is terminated, then the change in fair value of the derivative recorded in
Other comprehensive income is recognized when the cash flows that were hedged occur, consistent
with the original hedge strategy. For hedge
relationships discontinued because the forecasted transaction is not expected to occur according to
the original strategy, any related derivative amounts recorded in Other comprehensive income are
immediately recognized in earnings. For qualifying net investment hedges, changes in the fair value
of the derivative or the revaluation of the foreign currency-denominated debt instrument are
recorded in the translation adjustments account within Other comprehensive income. Any ineffective
portions of net investment hedges are immediately recognized in earnings.
JPMorgan Chases fair value hedges primarily include hedges of fixed-rate long-term debt, loans,
AFS securities and MSRs. Interest rate swaps are the most common type of derivative contract used
to modify exposure to interest rate risk, converting fixed-rate assets and liabilities to a
floating rate. Interest rate options, swaptions and forwards are also used in combination with
interest rate swaps to hedge the fair value of the Firms MSRs. For a further discussion of MSR
risk management activities, see Note 15 on pages 114116 of this Annual Report. All amounts have
been included in earnings consistent with the classification of the hedged item, primarily Net
interest income, Mortgage fees and related income, and Other income. The Firm did not recognize any
gains or losses during 2005 on firm commitments that no longer qualify as fair value hedges.
JPMorgan Chase also enters into derivative contracts to hedge exposure to variability in cash flows
from floating-rate financial instruments and forecasted transactions, primarily the rollover of
short-term assets and liabilities, and foreign currency-denominated revenues and expenses. Interest
rate swaps, futures and forward contracts are the most common instruments used to reduce the impact
of interest rate and foreign exchange rate changes on future earnings. All amounts affecting
earnings have been recognized consistent with the classification of the hedged item, primarily Net
interest income.
The Firm uses forward foreign exchange contracts and foreign currency-denominated debt instruments
to protect the value of net investments in foreign currencies in non-U.S. subsidiaries. The portion
of the hedging instruments excluded from the assessment of hedge effectiveness (forward points) is
recorded in Net interest income.
The following table presents derivative instrument hedging-related activities for the periods
indicated:
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
Fair value hedge ineffective net gains/(losses)(b) |
|
$ |
(58 |
) |
|
$ |
199 |
|
Cash flow hedge ineffective net gains/(losses)(b) |
|
|
(2 |
) |
|
|
|
|
Cash flow hedging gains on forecasted
transactions that failed to occur |
|
|
|
|
|
|
1 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
(b) |
|
Includes ineffectiveness and the components of hedging instruments that have been excluded from
the assessment of hedge effectiveness. |
Over the next 12 months, it is expected that $44 million (after-tax) of net gains recorded in
Other comprehensive income at December 31, 2005, will be recognized in earnings. The maximum length
of time over which forecasted transactions are hedged is 10 years, and such transactions primarily
relate to core lending and borrowing activities.
JPMorgan Chase does not seek to apply hedge accounting to all of the Firms economic hedges. For
example, the Firm does not apply hedge accounting to standard credit derivatives used to manage the
credit risk of loans and commitments because of the difficulties in qualifying such contracts as
hedges under SFAS 133. Similarly, the Firm does not apply hedge accounting to certain interest rate
derivatives used as economic hedges.
|
|
|
|
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|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
123 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 27 Off-balance 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 fulfills its obligation under the guarantee, and the counterparty
subsequently fails 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.
To provide for the risk of loss inherent in wholesale-related contracts, an allowance for credit
losses on lending-related commitments is maintained. See Note 12 on pages 107108 of this Annual
Report for a further discussion on the allowance for credit losses on lending-related commitments.
The following table summarizes the contractual amounts of off-balance sheet lending-related
financial instruments and guarantees and the related allowance for credit losses on lending-related
commitments at December 31, 2005 and 2004:
Off-balance sheet lending-related financial instruments and guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for |
|
|
|
Contractual |
|
|
lending-related |
|
|
|
amount |
|
|
commitments |
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
$ |
655,596 |
|
|
$ |
601,196 |
|
|
$ |
15 |
|
|
$ |
12 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unfunded commitments
to extend credit(a)(b)(c) |
|
|
208,469 |
|
|
|
185,822 |
|
|
|
208 |
|
|
|
183 |
|
Asset purchase agreements(d) |
|
|
31,095 |
|
|
|
39,330 |
|
|
|
3 |
|
|
|
2 |
|
Standby letters of credit
and guarantees(a)(e) |
|
|
77,199 |
|
|
|
78,084 |
|
|
|
173 |
|
|
|
292 |
|
Other letters of credit(a) |
|
|
7,001 |
|
|
|
6,163 |
|
|
|
1 |
|
|
|
3 |
|
|
Total wholesale |
|
|
323,764 |
|
|
|
309,399 |
|
|
|
385 |
|
|
|
480 |
|
|
Total lending-related |
|
$ |
979,360 |
|
|
$ |
910,595 |
|
|
$ |
400 |
|
|
$ |
492 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(f) |
|
$ |
244,316 |
|
|
$ |
220,783 |
|
|
NA |
|
|
NA |
|
Derivatives qualifying as
guarantees |
|
|
61,759 |
|
|
|
53,312 |
|
|
NA |
|
|
NA |
|
|
|
|
|
(a) |
|
Represents contractual amount net of risk participations totaling $29.3 billion and $26.4
billion at December 31, 2005 and 2004, respectively. |
(b) |
|
Includes unused advised lines of credit totaling $28.3 billion and $22.8 billion at December
31, 2005 and 2004, respectively, which are not legally binding. In regulatory filings with the FRB,
unused advised lines are not reportable. |
(c) |
|
Excludes unfunded commitments to private third-party equity funds of $242 million and $563
million at December 31, 2005 and 2004, respectively. |
(d) |
|
Represents asset purchase agreements to the Firms administered multi-seller asset-backed
commercial paper conduits, which excludes $32.4 billion and $31.7 billion at December 31, 2005 and
2004, 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 $1.3 billion of asset purchase agreements to other third-party entities at December 31,
2005 and $7.5 billion of asset purchase agreements to structured wholesale loan vehicles and other
third-party entities at December 31, 2004. |
(e) |
|
Includes unused commitments to issue standby letters of credit of $37.5 billion and $38.4 billion at December 31, 2005 and 2004, respectively. |
(f) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$245.0 billion and $221.6 billion at December 31, 2005 and 2004, respectively. |
FIN 45 establishes accounting and disclosure requirements for guarantees, requiring that a
guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing
the guarantee. FIN 45 defines a guarantee as a contract that contingently requires the Firm to pay
a guaranteed party, based upon: (a) changes in an underlying asset, liability or equity security of
the guaranteed party; or (b) a third partys failure to perform under a specified agreement. The
Firm considers the following off-balance sheet lending arrangements to be guarantees under FIN 45:
certain asset purchase agreements, standby letters of credit and financial guarantees, securities
lending indemnifications, certain indemnification agreements included within third-party
contractual arrangements and certain derivative contracts. These guarantees are described in
further detail below.
The fair value at inception of the obligation undertaken when issuing the guarantees and
commitments that qualify under FIN 45 is typically equal to the net present value of the future
amount of premium receivable under the contract. The Firm has recorded this amount in Other
Liabilities with an offsetting entry recorded in Other Assets. As cash is received under the
contract, it is applied to the premium receivable recorded in Other Assets, and the fair value of
the liability recorded at inception is amortized into income as Lending & deposit related fees over
the life of the guarantee contract. The amount of the liability related to FIN 45 guarantees
recorded at December 31, 2005 and 2004, excluding the allowance for credit losses on
lending-related commitments and derivative contracts discussed below, was approximately $313
million and $341 million, respectively.
Unfunded commitments to extend credit are agreements to lend only when a customer has complied with
predetermined conditions, and they generally expire on fixed dates.
The majority of the Firms unfunded commitments are not guarantees as defined in FIN 45, except for
certain asset purchase agreements that are principally used as a mechanism to provide liquidity to
SPEs, primarily multi-seller conduits, as described in Note 14 on pages 111113 of this Annual
Report. Some of these asset purchase agreements can be exercised at any time by the SPEs
administrator, while others require a triggering event to occur. Triggering events include, but are
not limited to, a need for liquidity, a market value decline of the assets or a downgrade in the
rating of JPMorgan Chase Bank. These agreements may cause the Firm to purchase an asset from the
SPE at an amount above the assets fair value, in effect providing a guarantee of the initial value
of the reference asset as of the date of the agreement. In most instances, third-party credit
enhancements of the SPE mitigate the Firms potential losses on these agreements.
Standby letters of credit and financial guarantees are conditional lending commitments issued by
JPMorgan Chase to guarantee the performance of a customer to a third party under certain
arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade
and similar transactions. Approximately 58% of these arrangements mature within three years. The
Firm typically has recourse to recover from the customer any amounts paid under these guarantees;
in addition, the Firm may hold cash or other highly liquid collateral to support these guarantees.
At December 31, 2005 and 2004, the Firm held collateral relating to $9.0 billion and $7.4 billion,
respectively, of these arrangements.
|
|
|
|
|
|
124
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The Firm holds customers securities under custodial arrangements. At times, these securities
are loaned to third parties, and the Firm issues securities lending indemnification agreements to
the customer that protect the customer against the risk of loss if the third party fails to return
the securities. To support these indemnification agreements, the Firm obtains from the third party
cash or other highly liquid collateral with a market value exceeding 100% of the value of the
loaned securities. If the third-party borrower fails to return the securities, the Firm would use
the collateral to purchase the securities in the market and would be exposed if the value of the
collateral fell below 100%. The Firm invests third-party cash collateral received in support of the
indemnification agreements. In a few cases where the cash collateral is invested in resale
agreements, the Firm indemnifies the third party against reinvestment risk. At December 31, 2005
and 2004, the Firm held $245.0 billion and $221.6 billion, respectively, in collateral in support
of securities lending indemnification arrangements. Based upon historical experience, management
expects the risk of loss to be remote.
In connection with issuing securities to investors, the Firm may enter into contractual
arrangements with third parties that may require the Firm to make a payment to them in the event of
a change in tax law or an adverse interpretation of tax law. In certain cases, the contract may
also include a termination clause, which would allow the Firm to settle the contract at its fair
value; thus, such a clause would not require the Firm to make a payment under the indemnification
agreement. Even without the termination clause, management does not expect such indemnification
agreements to have a material adverse effect on the consolidated financial condition of JPMorgan
Chase. The Firm may also enter into indemnification clauses when it sells a business or assets to a
third party, pursuant to which it indemnifies that third party for losses it may incur due to
actions taken by the Firm prior to the sale. See below for more information regarding the Firms
loan securitization activities. It is difficult to estimate the Firms maximum exposure under these
indemnification arrangements, since this would require an assessment of future changes in tax law
and future claims that may be made against the Firm that have not yet occurred. However, based upon
historical experience, management expects the risk of loss to be remote.
As part of the Firms loan securitization activities, as described in Note 13 on pages 108111 of
this Annual Report, the Firm provides representations and warranties that certain securitized loans
meet specific requirements. The Firm may be required to repurchase the loans and/or indemnify the
purchaser of the loans against losses due to any breaches of such representations or warranties.
Generally, the maximum amount of future payments the Firm would be required to make under such
repurchase and/or indemnification provisions would be equal to the current amount of assets held by
such securitization-related SPEs as of December 31, 2005, plus, in certain circumstances, accrued
and unpaid interest on such loans and certain expenses. The potential loss due to such repurchase
and/or indemnity is mitigated by the due diligence the Firm performs before the sale to ensure that
the assets comply with the requirements set forth in the representations and warranties. Historically, losses incurred on such
repurchases and/or indemnifications have been insignificant, and therefore management expects the
risk of material loss to be remote.
The Firm is a partner with one of the leading companies in electronic payment services in a joint
venture operating under the name of Chase Paymentech Solutions, LLC (the joint venture). The
joint venture was formed in October 2005 as a result of an agreement to integrate the Firms
jointly-owned Chase Merchant Services (CMS) and Paymentech merchant businesses, the latter of
which was acquired as a result of the Merger. The joint venture provides merchant processing
services in the United States and Canada. The joint venture is liable contingently for processed
credit card sales transactions in the event
of a dispute between the cardmember and a merchant. If a dispute is resolved in the cardmembers
favor, the joint venture will credit or refund the amount to the cardmember and charge back the
transaction to the merchant. If the joint venture is unable to collect the amount from the
merchant, the joint venture will bear the loss for the amount credited or refunded to the
cardmember. The joint venture mitigates this risk by withholding settlement, or by obtaining escrow
deposits or letters of credit from certain merchants. However, in the unlikely event that: 1) a
merchant ceases operations and is unable to deliver products, services or a refund; 2) the joint
venture does not have sufficient collateral from the merchants to provide customer refunds; and 3)
the joint venture does not have sufficient financial resources to provide customer refunds, the
Firm would be liable to refund the cardholder in proportion to its approximate equity interest in
the joint venture. For the year ended December 31, 2005, the joint venture, along with the
integrated businesses of CMS and Paymentech, incurred aggregate credit losses of $11 million on
$563 billion of aggregate volume processed, of which the Firm shared liability only on $200 billion
of aggregate volume processed. At December 31, 2005, the joint venture held $909 million of
collateral. In 2004, the CMS and Paymentech ventures incurred aggregate credit losses of $7.1
million on $396 billion of aggregate volume processed, of which the Firm shared liability only on
$205 billion of aggregate volume processed. At December 31, 2004, the CMS and Paymentech ventures
held $620 million of collateral. The Firm believes that, based upon historical experience and the
collateral held by the joint venture, the fair value of the guarantee would not be different
materially from the credit loss allowance recorded by the joint venture; therefore, the Firm has
not recorded any allowance for losses in excess of the allowance recorded by the joint venture.
The Firm is a member of several securities and futures exchanges and clearing-houses both in the
United States and overseas. Membership in some of these organizations requires the Firm to pay a
pro rata share of the losses incurred by the organization as a result of the default of another
member. Such obligation varies with different organizations. It may be limited to members who dealt
with the defaulting member or to the amount (or a multiple of the amount) of the Firms
contribution to a members guaranty fund, or, in a few cases, it may be unlimited. It is difficult
to estimate the Firms maximum exposure under these membership agreements, since this would require
an assessment of future claims that may be made against the Firm that have not yet occurred.
However, based upon historical experience, management expects the risk of loss to be remote.
In addition to the contracts described above, there are certain derivative contracts to which the
Firm is a counterparty that meet the characteristics of a guarantee under FIN 45. These derivatives
are recorded on the Consolidated balance sheets at fair value. These contracts include written put
options that require the Firm to purchase assets from the option holder at a specified price by a
specified date in the future, as well as derivatives that effectively guarantee the return on a
counterpartys reference portfolio of assets. The total notional value of the derivatives that the
Firm deems to be guarantees was $62 billion and $53 billion at December 31, 2005 and 2004,
respectively. The Firm reduces exposures to these contracts by entering into offsetting
transactions or by entering into contracts that hedge the market risk related to these contracts.
The fair value related to these contracts was a derivative receivable of $198 million and $180
million, and a derivative payable of $767 million and $622 million at December 31, 2005 and 2004,
respectively. Finally, certain written put options and credit derivatives permit cash settlement
and do not require the option holder or the buyer of credit protection to own the reference asset.
The Firm does not consider these contracts to be guarantees as described in FIN 45.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
125 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 28 Credit risk concentrations
Concentrations of credit risk arise when a number of customers are engaged in similar business
activities or activities in the same geographic region, or when they have similar economic features
that would cause their ability to meet contractual obligations to be similarly affected by changes
in economic conditions.
JPMorgan Chase regularly monitors various segments of the credit risk portfolio to assess potential
concentration risks and to obtain collateral when deemed necessary. In the Firms wholesale
portfolio, risk concentrations are evaluated primarily by industry and by geographic region. In the
consumer portfolio, concentrations are evaluated primarily by product and by U.S. geographic
region.
The Firm does not believe exposure to any one loan product with varying terms (e.g., interest-only
payments for an introductory period) or exposure to loans with high loan-to-value ratios would
result in a significant concentration
of credit risk. Terms of loan products and collateral coverage are included in the Firms
assessment when extending credit and establishing its allowance for loan losses.
For further information regarding on-balance sheet credit concentrations by major product and
geography, see Note 11 on page 106 of this Annual Report. For information regarding concentrations
of off-balance sheet lending-related financial instruments by major product, see Note 27 on page
124 of this Annual Report. More information about concentrations can be found in the following
tables or discussion in the MD&A:
|
|
|
|
|
|
Wholesale exposure |
|
Page 65 |
Wholesale selected industry concentrations |
|
Page 66 |
Country exposure |
|
Page 70 |
Consumer real estate loan portfolio by geographic location |
|
Page 72 |
|
The table below presents both on-balance sheet and off-balance sheet wholesale- and
consumer-related credit exposure as of December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
Credit |
|
On-balance |
|
Off-balance |
|
Credit |
|
On-balance |
|
Off-balance |
December 31, (in billions) |
|
exposure(b) |
|
sheet(b)(c) |
|
sheet(d) |
|
exposure(b) |
|
sheet(b)(c) |
|
sheet(d) |
|
Wholesale-related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks and finance companies |
|
$ |
53.7 |
|
|
$ |
20.3 |
|
|
$ |
33.4 |
|
|
$ |
56.2 |
|
|
$ |
25.7 |
|
|
$ |
30.5 |
|
Real estate |
|
|
32.5 |
|
|
|
19.0 |
|
|
|
13.5 |
|
|
|
28.2 |
|
|
|
16.7 |
|
|
|
11.5 |
|
Consumer products |
|
|
26.7 |
|
|
|
10.0 |
|
|
|
16.7 |
|
|
|
21.4 |
|
|
|
7.1 |
|
|
|
14.3 |
|
Healthcare |
|
|
25.5 |
|
|
|
4.7 |
|
|
|
20.8 |
|
|
|
22.0 |
|
|
|
4.5 |
|
|
|
17.5 |
|
State and municipal governments |
|
|
25.3 |
|
|
|
6.1 |
|
|
|
19.2 |
|
|
|
19.8 |
|
|
|
4.1 |
|
|
|
15.7 |
|
All other wholesale |
|
|
389.7 |
|
|
|
169.5 |
|
|
|
220.2 |
|
|
|
394.6 |
|
|
|
174.7 |
|
|
|
219.9 |
|
|
Total wholesale-related |
|
|
553.4 |
|
|
|
229.6 |
|
|
|
323.8 |
|
|
|
542.2 |
|
|
|
232.8 |
|
|
|
309.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home finance |
|
|
198.6 |
|
|
|
133.5 |
|
|
|
65.1 |
|
|
|
177.9 |
|
|
|
124.7 |
|
|
|
53.2 |
|
Auto & education finance |
|
|
54.7 |
|
|
|
49.0 |
|
|
|
5.7 |
|
|
|
67.9 |
|
|
|
62.7 |
|
|
|
5.2 |
|
Consumer & small business and other |
|
|
20.3 |
|
|
|
14.8 |
|
|
|
5.5 |
|
|
|
25.4 |
|
|
|
15.1 |
|
|
|
10.3 |
|
Credit card receivables(a) |
|
|
651.0 |
|
|
|
71.7 |
|
|
|
579.3 |
|
|
|
597.0 |
|
|
|
64.5 |
|
|
|
532.5 |
|
|
Total consumer-related |
|
|
924.6 |
|
|
|
269.0 |
|
|
|
655.6 |
|
|
|
868.2 |
|
|
|
267.0 |
|
|
|
601.2 |
|
|
Total exposure |
|
$ |
1,478.0 |
|
|
$ |
498.6 |
|
|
$ |
979.4 |
|
|
$ |
1,410.4 |
|
|
$ |
499.8 |
|
|
$ |
910.6 |
|
|
|
|
|
(a) |
|
Excludes $70.5 billion and $70.8 billion of securitized credit card receivables at
December 31, 2005 and 2004, respectively. |
(b) |
|
Includes HFS loans. |
(c) |
|
Represents loans, derivative receivables and interests in purchased receivables. |
(d) |
|
Represents lending-related financial instruments. |
Note 29 Fair value of financial instruments
The fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a forced or liquidation
sale.
The accounting for an asset or liability may differ based upon the type of instrument and/or its
use in a trading or investing strategy. Generally, the measurement framework in the consolidated
financial statements is one of the following:
|
|
at fair value on the Consolidated balance sheets, with changes in fair value recorded each period
in the Consolidated statements of income; |
|
|
|
at fair value on the Consolidated balance sheets, with changes in fair value recorded each period
in a separate component of Stockholders equity and as part of Other comprehensive income; |
|
|
|
at cost (less other-than-temporary impairments), with changes in fair value not recorded in the
consolidated financial statements but disclosed in the notes thereto; or |
|
|
|
at the lower of cost or fair value. |
The Firm has an established and well-documented process for determining fair values. Fair value is
based upon quoted market prices, where available. If listed prices or quotes are not available,
fair value is based upon internally-developed models that primarily use market-based or independent
information as inputs to the valuation model. Valuation adjustments may be necessary to ensure that
financial instruments are recorded at fair value. These adjustments include amounts to reflect
counterparty credit quality, liquidity and concentration concerns and are based upon defined
methodologies that are applied consistently over time.
|
|
Credit valuation adjustments are necessary when the market price (or parameter) is not indicative
of the credit quality of the counterparty. As few derivative contracts are listed on an exchange,
the majority of derivative positions are valued using internally developed models that use as their
basis observable market parameters. Market practice is to quote parameters equivalent to a AA
credit rating; thus, all counterparties are assumed to have the same credit quality. An adjustment
is therefore necessary to reflect the credit quality of each derivative counterparty and to arrive
at fair value. Without this adjustment, derivative positions would not be appropriately valued. |
|
|
|
|
|
|
126
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
|
|
Liquidity adjustments are necessary when the Firm may not be able to observe a recent market
price for a financial instrument that trades in inactive (or less active) markets. Thus, valuation
adjustments for risk of loss due to a lack of liquidity are applied to those positions to arrive at
fair value. The Firm tries to ascertain the amount of uncertainty in the initial valuation based
upon the liquidity or illiquidity, as the case may be, of the market in which the instrument trades
and makes liquidity adjustments to the financial instruments. The Firm measures the liquidity
adjustment based upon the following factors: (1) the amount of time since the last relevant pricing
point; (2) whether there was an actual trade or relevant external quote; and (3) the volatility of
the principal component of the financial instrument. |
|
|
|
Concentration valuation adjustments are necessary to reflect the cost of unwinding
larger-than-normal market-size risk positions. The cost is determined based upon the size of the
adverse market move that is likely to occur during the extended period required to bring a position
down to a nonconcentrated level. An estimate of the period needed to reduce, without market
disruption, a position to a nonconcentrated level is generally based upon the relationship of the
position to the average daily trading volume of that position. Without these adjustments, larger
positions would be valued at a price greater than the price at which the Firm could exit the
positions. |
Valuation adjustments are determined based upon established policies and are controlled by a price
verification group independent of the risk-taking function. Economic substantiation of models,
prices, market inputs and revenue through price/input testing, as well as backtesting, is done to
validate the appropriateness of the valuation methodology. Any changes to the valuation methodology
are reviewed by management to ensure the changes are justified.
The methods described above may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, the use of different
methodologies to determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
Certain financial instruments and all nonfinancial instruments are excluded from the scope of SFAS
107. Accordingly, the fair value disclosures required by SFAS 107 provide only a partial estimate
of the fair value of JPMorgan Chase. For example, the Firm has developed long-term relationships
with its customers through its deposit base and credit card accounts, commonly referred to as core
deposit intangibles and credit card relationships. In the opinion of management, these items, in
the aggregate, add significant value to JPMorgan Chase, but their fair value is not disclosed in
this Note.
The following items describe the methodologies and assumptions used, by financial instrument, to
determine fair value.
Financial assets
Assets for which fair value approximates carrying value
The Firm considers fair values of certain financial assets carried at cost including cash and
due from banks, deposits with banks, securities borrowed, short-term receivables and accrued
interest receivable to approximate their respective carrying values, due to their short-term
nature and generally negligible credit risk.
Assets where fair value differs from cost
The Firms debt, equity and derivative trading instruments are carried at their estimated fair
value. Quoted market prices, when available, are used to determine the fair value of trading
instruments. If quoted market prices are not available, then fair values are estimated by using
pricing models, quoted prices of instruments with similar characteristics, or discounted cash
flows.
Federal funds sold and securities purchased under resale agreements
Federal funds sold and securities purchased under resale agreements are typically short-term in
nature and, as such, for a significant majority of the Firms transactions, cost approximates
carrying value. This balance sheet item also includes structured resale agreements and similar
products with long-dated maturities. To estimate the fair value of these instruments, cash flows
are discounted using the appropriate market rates for the applicable maturity.
Securities
Fair values of actively traded securities are determined by the secondary market, while the fair
values for nonactively traded securities are based upon independent broker quotations.
Derivatives
Fair value for derivatives is determined based upon the following:
|
|
position valuation, principally based upon liquid market pricing as evidenced by exchange-traded
prices, broker-dealer quotations or related input parameters, which assume all counterparties have
the same credit rating; |
|
|
|
credit valuation adjustments to the resulting portfolio valuation, to reflect the credit quality
of individual counterparties; and |
|
|
|
other fair value adjustments to take into consideration liquidity, concentration and other
factors. |
For those derivatives valued based upon models with significant unobservable market parameters, the
Firm defers the initial trading profit for these financial instruments. The deferred profit is
recognized in Trading revenue on a systematic basis (typically straight-line amortization over the
life of the instruments) and when observable market data becomes available.
The fair value of derivative payables does not incorporate a valuation adjustment to reflect
JPMorgan Chases credit quality.
Interests in purchased receivables
The fair value of variable-rate interests in purchased receivables approximate their respective
carrying amounts due to their variable interest terms and negligible credit risk. The estimated
fair values for fixed-rate interests in purchased receivables are determined using a discounted
cash flow analysis using appropriate market rates for similar instruments.
Loans
Fair value for loans is determined using methodologies suitable for each type of loan:
|
|
Fair value for the wholesale loan portfolio is estimated primarily, using the cost of credit
derivatives, which is adjusted to account for the differences in recovery rates between bonds, upon
which the cost of credit derivatives is based, and loans. |
|
|
|
Fair values for consumer installment loans (including automobile financings) and consumer real
estate, for which market rates for comparable loans are readily available, are based upon
discounted cash flows adjusted for prepayments. The discount rates used for consumer installment
loans are current rates offered by commercial banks. For consumer real estate, secondary market
yields for comparable mortgage-backed securities, adjusted for risk, are used. |
|
|
|
Fair value for credit card receivables is based upon discounted expected cash flows. The discount
rates used for credit card receivables incorporate only the effects of interest rate changes, since
the expected cash flows already reflect an adjustment for credit risk. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
127 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
|
|
The fair value of loans in the held-for-sale and trading portfolios is generally based upon
observable market prices and upon prices of similar instruments, including bonds, credit
derivatives and loans with similar characteristics. If market prices are not available, the
fair value is based upon the estimated cash flows adjusted for credit risk; that risk is
discounted, using a rate appropriate for each maturity that incorporates the effects of interest
rate changes. |
Other assets
Commodities inventory is carried at the lower of cost or fair value. For the majority of
commodities inventory, fair value is determined by reference to
prices in highly active and
liquid markets. The fair value for other commodities inventory is determined primarily using
pricing and other data derived from less liquid and developing markets where the underlying
commodities are traded. This caption also includes private equity investments and MSRs. For a
discussion of the fair value methodology for private equity investments, see Note 9 on page 105 of
this Annual Report.
For a discussion of the fair value methodology for MSRs, see Note 15 on pages 114116 of this
Annual Report.
Financial liabilities
Liabilities for which fair value approximates carrying value
SFAS 107 requires that the fair value for deposit liabilities with no stated maturity (i.e.,
demand, savings and certain money market deposits) be equal to their carrying value. SFAS 107 does
not allow for the recognition of the inherent funding value of these instruments.
Fair value of commercial paper, other borrowed funds, accounts payable and accrued liabilities is
considered to approximate their respective carrying values due to their short-term nature.
Interest-bearing deposits
Fair values of interest-bearing deposits are estimated by discounting cash flows based upon the
remaining contractual maturities of funds having similar interest rates and similar maturities.
Federal funds purchased and securities sold under repurchase agreements
Federal funds purchased and securities sold under repurchase agreements are typically short-term in
nature; as such, for a significant majority of these transactions, cost approximates carrying
value. This balance sheet item also includes structured repurchase agreements and similar products
with long-dated maturities. To estimate the fair value of these instruments, the cash flows are
discounted using the appropriate market rates for the applicable maturity.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs (beneficial interests) are generally short-term
in nature and, as such, for a significant majority of the Firms transactions, cost approximates
carrying value. The Consolidated balance sheets also include beneficial interests with long-dated
maturities. The fair value of these instruments is based upon current market rates.
Long-term debt-related instruments
Fair value for long-term debt, including the junior subordinated deferrable interest debentures
held by trusts that issued guaranteed capital debt securities, is based upon current market rates
and is adjusted for JPMorgan Chases credit quality.
Lending-related commitments
Although there is no liquid secondary market for wholesale commitments, the Firm estimates the fair
value of its wholesale lending-related commitments primarily using the cost of credit derivatives
(which is adjusted to account for the difference in recovery rates between bonds, upon which the
cost of credit derivatives is based, and loans) and loan equivalents (which represent the portion
of an unused commitment expected, based upon the Firms average portfolio historical experience, to
become outstanding in the event an obligor defaults). The Firm estimates the fair value of its
consumer commitments to extend credit based upon the primary market prices to originate new
commitments. It is the change in current primary market prices that provides the estimate of the
fair value of these commitments. On this basis, at December 31, 2005, the estimated fair value of
the Firms lending-related commitments was a liability of $0.5 billion, compared with $0.1 billion
at December 31, 2004.
The following table presents the carrying value and estimated fair value of financial assets and
liabilities valued under SFAS 107; accordingly, certain assets and liabilities that are not
considered financial instruments are excluded from the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
Carrying |
|
|
Estimated |
|
|
Appreciation/ |
|
|
Carrying |
|
|
Estimated |
|
|
Appreciation/ |
|
December 31, (in billions) |
|
|
value |
|
|
fair value |
|
|
(depreciation) |
|
|
value |
|
|
fair value |
|
|
(depreciation) |
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets for which fair value approximates carrying value |
|
$ |
155.4 |
|
|
$ |
155.4 |
|
|
$ |
|
|
|
$ |
125.7 |
|
|
$ |
125.7 |
|
|
$ |
|
|
Federal funds sold and securities purchased under resale
agreements |
|
|
134.0 |
|
|
|
134.3 |
|
|
|
0.3 |
|
|
|
101.4 |
|
|
|
101.3 |
|
|
|
(0.1 |
) |
Trading assets |
|
|
298.4 |
|
|
|
298.4 |
|
|
|
|
|
|
|
288.8 |
|
|
|
288.8 |
|
|
|
|
|
Securities |
|
|
47.6 |
|
|
|
47.6 |
|
|
|
|
|
|
|
94.5 |
|
|
|
94.5 |
|
|
|
|
|
Loans: |
|
Wholesale, net of allowance for loan losses |
|
|
147.7 |
|
|
|
150.2 |
|
|
|
2.5 |
|
|
|
132.0 |
|
|
|
134.6 |
|
|
|
2.6 |
|
|
|
Consumer, net of allowance for loan losses |
|
|
264.4 |
|
|
|
262.7 |
|
|
|
(1.7 |
) |
|
|
262.8 |
|
|
|
262.5 |
|
|
|
(0.3 |
) |
Interests in purchased receivables |
|
|
29.7 |
|
|
|
29.7 |
|
|
|
|
|
|
|
31.7 |
|
|
|
31.8 |
|
|
|
0.1 |
|
Other assets |
|
|
53.4 |
|
|
|
54.7 |
|
|
|
1.3 |
|
|
|
50.4 |
|
|
|
51.1 |
|
|
|
0.7 |
|
|
Total financial assets |
|
$ |
1,130.6 |
|
|
$ |
1,133.0 |
|
|
$ |
2.4 |
|
|
$ |
1,087.3 |
|
|
$ |
1,090.3 |
|
|
$ |
3.0 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for which fair value approximates carrying value |
|
$ |
241.0 |
|
|
$ |
241.0 |
|
|
$ |
|
|
|
$ |
228.8 |
|
|
$ |
228.8 |
|
|
$ |
|
|
Interest-bearing deposits |
|
|
411.9 |
|
|
|
411.7 |
|
|
|
0.2 |
|
|
|
385.3 |
|
|
|
385.5 |
|
|
|
(0.2 |
) |
Federal funds purchased and securities sold under repurchase
agreements |
|
|
125.9 |
|
|
|
125.9 |
|
|
|
|
|
|
|
127.8 |
|
|
|
127.8 |
|
|
|
|
|
Trading liabilities |
|
|
145.9 |
|
|
|
145.9 |
|
|
|
|
|
|
|
151.2 |
|
|
|
151.2 |
|
|
|
|
|
Beneficial interests issued by consolidated VIEs |
|
|
42.2 |
|
|
|
42.1 |
|
|
|
0.1 |
|
|
|
48.1 |
|
|
|
48.0 |
|
|
|
0.1 |
|
Long-term debt-related instruments |
|
|
119.9 |
|
|
|
120.6 |
|
|
|
(0.7 |
) |
|
|
105.7 |
|
|
|
107.7 |
|
|
|
(2.0 |
) |
|
Total financial liabilities |
|
$ |
1,086.8 |
|
|
$ |
1,087.2 |
|
|
$ |
(0.4 |
) |
|
$ |
1,046.9 |
|
|
$ |
1,049.0 |
|
|
$ |
(2.1 |
) |
|
Net appreciation |
|
|
|
|
|
|
|
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
$ |
0.9 |
|
|
|
|
|
|
|
|
128
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 30 International operations
The following table presents income statement information of JPMorgan Chase by major geographic
area. The Firm defines international activities as business transactions that involve customers
residing outside of the United States, and the information presented below is based primarily upon
the domicile of the customer. However, many of the Firms U.S. operations serve international
businesses.
As the Firms operations are highly integrated, estimates and subjective assumptions have been
made to apportion revenue and expense between U.S. and international operations. These estimates
and assumptions are consistent with the allocations used for the Firms segment reporting as set
forth in Note 31 on pages 130-131 of this Annual Report.
The Firms long-lived assets for the periods presented are not considered by management to be
significant in relation to total assets. The majority of the Firms long-lived assets are located
in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before |
|
|
|
|
For the year ended December 31, (in millions)(a) |
|
Revenue |
(b) |
|
Expense |
(c) |
|
income taxes |
|
|
Net income |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Middle East and Africa |
|
$ |
7,708 |
|
|
$ |
5,454 |
|
|
$ |
2,254 |
|
|
$ |
1,547 |
|
Asia and Pacific |
|
|
2,840 |
|
|
|
2,048 |
|
|
|
792 |
|
|
|
509 |
|
Latin America and the Caribbean |
|
|
969 |
|
|
|
497 |
|
|
|
472 |
|
|
|
285 |
|
Other |
|
|
165 |
|
|
|
89 |
|
|
|
76 |
|
|
|
44 |
|
|
Total international |
|
|
11,682 |
|
|
|
8,088 |
|
|
|
3,594 |
|
|
|
2,385 |
|
Total U.S. |
|
|
42,851 |
|
|
|
34,230 |
|
|
|
8,621 |
|
|
|
6,098 |
|
|
Total |
|
$ |
54,533 |
|
|
$ |
42,318 |
|
|
$ |
12,215 |
|
|
$ |
8,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Middle East and Africa |
|
$ |
6,566 |
|
|
$ |
4,635 |
|
|
$ |
1,931 |
|
|
$ |
1,305 |
|
Asia and Pacific |
|
|
2,631 |
|
|
|
1,766 |
|
|
|
865 |
|
|
|
547 |
|
Latin America and the Caribbean |
|
|
816 |
|
|
|
411 |
|
|
|
405 |
|
|
|
255 |
|
Other |
|
|
112 |
|
|
|
77 |
|
|
|
35 |
|
|
|
25 |
|
|
Total international |
|
|
10,125 |
|
|
|
6,889 |
|
|
|
3,236 |
|
|
|
2,132 |
|
Total U.S. |
|
|
32,972 |
|
|
|
30,014 |
|
|
|
2,958 |
|
|
|
2,334 |
|
|
Total |
|
$ |
43,097 |
|
|
$ |
36,903 |
|
|
$ |
6,194 |
|
|
$ |
4,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Middle East and Africa |
|
$ |
6,344 |
|
|
$ |
4,076 |
|
|
$ |
2,268 |
|
|
$ |
1,467 |
|
Asia and Pacific |
|
|
1,902 |
|
|
|
1,772 |
|
|
|
130 |
|
|
|
91 |
|
Latin America and the Caribbean |
|
|
1,000 |
|
|
|
531 |
|
|
|
469 |
|
|
|
287 |
|
Other |
|
|
50 |
|
|
|
17 |
|
|
|
33 |
|
|
|
34 |
|
|
Total international |
|
|
9,296 |
|
|
|
6,396 |
|
|
|
2,900 |
|
|
|
1,879 |
|
Total U.S. |
|
|
24,088 |
|
|
|
16,960 |
|
|
|
7,128 |
|
|
|
4,840 |
|
|
Total |
|
$ |
33,384 |
|
|
$ |
23,356 |
|
|
$ |
10,028 |
|
|
$ |
6,719 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Revenue is composed of Net interest income and noninterest revenue. |
(c) |
|
Expense is composed of Noninterest expense and Provision for credit losses. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
129 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 31 Business segments
JPMorgan Chase is organized into six major reportable business segments (the Investment Bank,
Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and
Asset & Wealth Management), as well as a Corporate segment. The segments are based 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 an operating basis. For a definition of operating basis, see the footnotes to the
table below. For a further discussion concerning JPMorgan Chases business segments, see Business
segment results on pages 34-35 of this Annual Report.
In the third quarter of 2004, in connection with the Merger, business segment reporting was
realigned to reflect the new business structure of the combined Firm. Treasury was transferred from
the Investment Bank into Corporate. The segment formerly known as Chase Financial Services had been
comprised of Chase Home Finance, Chase Cardmember Services, Chase Auto Finance, Chase Regional
Banking and Chase Middle Market; as a result of the Merger, this segment is now called Retail
Financial Services and is comprised of Home Finance, Auto & Education Finance, Consumer & Small
Business Banking and Insurance. Chase Cardmember Services is now its own segment called Card
Services, and Chase Middle Market moved into Commercial Banking.
Investment Management & Private Banking was renamed Asset & Wealth Management. JPMorgan Partners,
which formerly was a stand-alone business segment, was moved into Corporate. Corporate currently comprises Private
Equity (JPMorgan Partners and ONE Equity Partners) and Treasury, and the
Segment results and reconciliation(a) (table continued on next page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(b) |
|
Investment Bank(d) |
|
|
Retail Financial Services |
|
|
Card Services(e) |
|
|
Commercial Banking |
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
13,168 |
|
|
$ |
11,280 |
|
|
$ |
11,017 |
|
|
$ |
4,625 |
|
|
$ |
3,077 |
|
|
$ |
2,208 |
|
|
$ |
3,563 |
|
|
$ |
2,371 |
|
|
$ |
1,092 |
|
|
$ |
986 |
|
|
$ |
682 |
|
|
$ |
393 |
|
Net interest income |
|
|
1,410 |
|
|
|
1,325 |
|
|
|
1,667 |
|
|
|
10,205 |
|
|
|
7,714 |
|
|
|
5,220 |
|
|
|
11,803 |
|
|
|
8,374 |
|
|
|
5,052 |
|
|
|
2,610 |
|
|
|
1,692 |
|
|
|
959 |
|
|
Total net revenue |
|
|
14,578 |
|
|
|
12,605 |
|
|
|
12,684 |
|
|
|
14,830 |
|
|
|
10,791 |
|
|
|
7,428 |
|
|
|
15,366 |
|
|
|
10,745 |
|
|
|
6,144 |
|
|
|
3,596 |
|
|
|
2,374 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(838 |
) |
|
|
(640 |
) |
|
|
(181 |
) |
|
|
724 |
|
|
|
449 |
|
|
|
521 |
|
|
|
7,346 |
|
|
|
4,851 |
|
|
|
2,904 |
|
|
|
73 |
|
|
|
41 |
|
|
|
6 |
|
Credit reimbursement
(to)/from TSS(c) |
|
|
154 |
|
|
|
90 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation reserve charge |
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noninterest expense |
|
|
9,739 |
|
|
|
8,696 |
|
|
|
8,202 |
|
|
|
8,585 |
|
|
|
6,825 |
|
|
|
4,471 |
|
|
|
4,999 |
|
|
|
3,883 |
|
|
|
2,178 |
|
|
|
1,872 |
|
|
|
1,343 |
|
|
|
822 |
|
|
Total noninterest expense |
|
|
9,739 |
|
|
|
8,696 |
|
|
|
8,302 |
|
|
|
8,585 |
|
|
|
6,825 |
|
|
|
4,471 |
|
|
|
4,999 |
|
|
|
3,883 |
|
|
|
2,178 |
|
|
|
1,872 |
|
|
|
1,343 |
|
|
|
822 |
|
|
Income (loss) before
income tax expense |
|
|
5,831 |
|
|
|
4,639 |
|
|
|
4,527 |
|
|
|
5,521 |
|
|
|
3,517 |
|
|
|
2,436 |
|
|
|
3,021 |
|
|
|
2,011 |
|
|
|
1,062 |
|
|
|
1,651 |
|
|
|
990 |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
2,173 |
|
|
|
1,691 |
|
|
|
1,722 |
|
|
|
2,094 |
|
|
|
1,318 |
|
|
|
889 |
|
|
|
1,114 |
|
|
|
737 |
|
|
|
379 |
|
|
|
644 |
|
|
|
382 |
|
|
|
217 |
|
|
Net income (loss) |
|
$ |
3,658 |
|
|
$ |
2,948 |
|
|
$ |
2,805 |
|
|
$ |
3,427 |
|
|
$ |
2,199 |
|
|
$ |
1,547 |
|
|
$ |
1,907 |
|
|
$ |
1,274 |
|
|
$ |
683 |
|
|
$ |
1,007 |
|
|
$ |
608 |
|
|
$ |
307 |
|
|
Average equity |
|
$ |
20,000 |
|
|
$ |
17,290 |
|
|
$ |
18,350 |
|
|
$ |
13,383 |
|
|
$ |
9,092 |
|
|
$ |
4,220 |
|
|
$ |
11,800 |
|
|
$ |
7,608 |
|
|
$ |
3,440 |
|
|
$ |
3,400 |
|
|
$ |
2,093 |
|
|
$ |
1,059 |
|
Average assets |
|
|
598,118 |
|
|
|
473,121 |
|
|
|
436,488 |
|
|
|
226,368 |
|
|
|
185,928 |
|
|
|
147,435 |
|
|
|
141,933 |
|
|
|
94,741 |
|
|
|
51,406 |
|
|
|
56,561 |
|
|
|
36,435 |
|
|
|
16,460 |
|
Return on average equity |
|
|
18 |
% |
|
|
17 |
% |
|
|
15 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
|
37 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
|
20 |
% |
|
|
30 |
% |
|
|
29 |
% |
|
|
29 |
% |
Overhead ratio |
|
|
67 |
|
|
|
69 |
|
|
|
65 |
|
|
|
58 |
|
|
|
63 |
|
|
|
60 |
|
|
|
33 |
|
|
|
36 |
|
|
|
35 |
|
|
|
52 |
|
|
|
57 |
|
|
|
61 |
|
|
|
|
|
(a) |
|
In addition to analyzing the Firms results on a reported basis, management reviews the
line of business results on an operating basis, which is a non-GAAP financial measure. The
definition of operating basis starts with the reported U.S. GAAP results. In the case of the
Investment Bank, operating basis noninterest revenue includes, in Trading revenue, Net interest
income (NII) related to trading activities. In the case of Card Services, refer to footnote (e).
These adjustments do not change JPMorgan Chases reported net income. Operating basis also excludes
Merger costs, nonoperating Litigation reserve charges and accounting policy conformity adjustments,
as management believes these items are not part of the Firms normal daily business operations
(and, therefore, not indicative of trends) and do not provide meaningful comparisons with other
periods. Finally, operating results reflect revenues (Noninterest revenue and NII) on a
tax-equivalent basis. Refer to footnote (f) for the impact of these adjustments. |
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(c) |
|
TSS reimburses the IB for credit portfolio exposures the IB manages on behalf of clients the
segments share. At the time of the Merger, the reimbursement methodology was revised to be based
upon pre-tax earnings, net of the cost of capital related to those exposures. Prior to the Merger,
the credit reimbursement was based upon pre-tax earnings, plus the allocated capital associated
with the shared clients. |
(d) |
|
Segment operating results include the reclassification of NII related
to trading activities to Trading revenue within Noninterest revenue, which impacts primarily the
Investment Bank. Trading-related NII reclassified to Trading revenue was $159 million, $2.0 billion
and $2.1 billion in 2005, 2004 and 2003, respectively. These amounts are eliminated in
Corporate/reconciling items to arrive at NII and Noninterest revenue on a reported GAAP basis for
JPMorgan Chase. |
(e) |
|
Operating results for Card Services exclude the impact of credit card securitizations on
revenue, provision for credit losses and average assets, as JPMorgan Chase treats the sold
receivables as if they were still on the balance sheet in evaluating the overall performance of the
credit card portfolio. These adjustments are eliminated in Corporate/reconciling items to arrive at
the Firms reported GAAP results. The related securitization adjustments were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net interest income |
|
|
$ 6,494 |
|
|
|
$ 5,251 |
|
|
|
$ 3,320 |
|
Noninterest revenue |
|
|
(2,718 |
) |
|
|
(2,353 |
) |
|
|
(1,450 |
) |
Provision for credit losses |
|
|
3,776 |
|
|
|
2,898 |
|
|
|
1,870 |
|
Average assets |
|
|
67,180 |
|
|
|
51,084 |
|
|
|
32,365 |
|
|
|
|
|
|
|
|
130
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
corporate support areas, which include Central Technology and Operations, 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.
Beginning January 1, 2006, TSS will report results for two divisions: TS and WSS. WSS was formed by
consolidating IS and ITS.
The following table provides a summary of the Firms segment results for 2005, 2004 and 2003 on an
operating basis. The impact of credit card securitizations, Merger costs, nonoperating Litigation
reserve charges and accounting policy conformity adjustments have been included in
Corporate/reconciling items so that the total Firm results are on a reported basis. Finally,
commencing with the first quarter of 2005, operating revenue (noninterest revenue and net interest
income) for each of the segments and the Firm is presented on a tax-equivalent basis. Accordingly,
revenue from tax exempt securities and investments that receive tax credits are presented in the
operating results on a basis comparable to taxable securities and investments. This approach 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. The Corporate sectors and the Firms operating revenue and income tax expense for the
periods prior to the first quarter of 2005 have been restated to be presented similarly on a
tax-equivalent basis. This restatement had no impact on the Corporate sectors or the Firms
operating earnings. Segment results for periods prior to July 1, 2004, reflect heritage JPMorgan
Chase-only results and have been restated to reflect the current business segment organization and
reporting classifications.
(table continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/ |
|
|
|
|
Treasury & Securities Services |
|
|
Asset & Wealth Management |
|
|
reconciling items(d)(e)(f) |
|
|
Total |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
$ |
4,179 |
|
|
$ |
3,474 |
|
|
$ |
2,661 |
|
|
$ |
4,583 |
|
|
$ |
3,383 |
|
|
$ |
2,482 |
|
|
$ |
3,598 |
|
|
$ |
2,069 |
|
|
$ |
566 |
|
|
$ |
34,702 |
|
|
$ |
26,336 |
|
|
$ |
20,419 |
|
|
|
|
2,062 |
|
|
|
1,383 |
|
|
|
947 |
|
|
|
1,081 |
|
|
|
796 |
|
|
|
488 |
|
|
|
(9,340 |
) |
|
|
(4,523 |
) |
|
|
(1,368 |
) |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
|
|
|
|
6,241 |
|
|
|
4,857 |
|
|
|
3,608 |
|
|
|
5,664 |
|
|
|
4,179 |
|
|
|
2,970 |
|
|
|
(5,742 |
) |
|
|
(2,454 |
) |
|
|
(802 |
) |
|
|
54,533 |
|
|
|
43,097 |
|
|
|
33,384 |
|
|
|
|
|
|
|
|
|
7 |
|
|
|
1 |
|
|
|
(56 |
) |
|
|
(14 |
) |
|
|
35 |
|
|
|
(3,766 |
) |
|
|
(2,150 |
)(g) |
|
|
(1,746 |
) |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
|
|
(154 |
) |
|
|
(90 |
) |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722 |
(h) |
|
|
1,365 |
(h) |
|
|
|
|
|
|
722 |
|
|
|
1,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,564 |
|
|
|
3,700 |
|
|
|
|
|
|
|
2,564 |
|
|
|
3,700 |
|
|
|
100 |
|
|
|
|
4,470 |
|
|
|
4,113 |
|
|
|
3,028 |
|
|
|
3,860 |
|
|
|
3,133 |
|
|
|
2,486 |
|
|
|
2,024 |
|
|
|
1,301 |
|
|
|
529 |
|
|
|
35,549 |
|
|
|
29,294 |
|
|
|
21,716 |
|
|
|
|
|
4,470 |
|
|
|
4,113 |
|
|
|
3,028 |
|
|
|
3,860 |
|
|
|
3,133 |
|
|
|
2,486 |
|
|
|
5,310 |
|
|
|
6,366 |
|
|
|
529 |
|
|
|
38,835 |
|
|
|
34,359 |
|
|
|
21,816 |
|
|
|
|
|
1,617 |
|
|
|
647 |
|
|
|
615 |
|
|
|
1,860 |
|
|
|
1,060 |
|
|
|
449 |
|
|
|
(7,286 |
) |
|
|
(6,670 |
) |
|
|
415 |
|
|
|
12,215 |
|
|
|
6,194 |
|
|
|
10,028 |
|
|
|
|
580 |
|
|
|
207 |
|
|
|
193 |
|
|
|
644 |
|
|
|
379 |
|
|
|
162 |
|
|
|
(3,517 |
) |
|
|
(2,986 |
) |
|
|
(253 |
) |
|
|
3,732 |
|
|
|
1,728 |
|
|
|
3,309 |
|
|
|
|
$ |
1,037 |
|
|
$ |
440 |
|
|
$ |
422 |
|
|
$ |
1,216 |
|
|
$ |
681 |
|
|
$ |
287 |
|
|
$ |
(3,769 |
) |
|
$ |
(3,684 |
) |
|
$ |
668 |
|
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
|
|
$ |
1,900 |
|
|
$ |
2,544 |
|
|
$ |
2,738 |
|
|
$ |
2,400 |
|
|
$ |
3,902 |
|
|
|
$5,507 |
|
|
|
$52,624 |
|
|
$ |
33,112 |
|
|
$ |
7,674 |
|
|
|
$105,507 |
|
|
|
$75,641 |
|
|
|
$42,988 |
|
|
|
|
26,947 |
|
|
|
23,430 |
|
|
|
18,379 |
|
|
|
41,599 |
|
|
|
37,751 |
|
|
|
33,780 |
|
|
|
93,540 |
|
|
|
111,150 |
|
|
|
72,030 |
|
|
|
1,185,066 |
|
|
|
962,556 |
|
|
|
775,978 |
|
|
|
|
55 |
% |
|
|
17 |
% |
|
|
15 |
% |
|
|
51 |
% |
|
|
17 |
% |
|
|
5 |
% |
|
NM |
|
|
NM |
|
|
NM |
|
|
|
8 |
% |
|
|
6 |
% |
|
|
16 |
% |
|
|
|
72 |
|
|
|
85 |
|
|
|
84 |
|
|
|
68 |
|
|
|
75 |
|
|
|
84 |
|
|
NM |
|
|
NM |
|
|
NM |
|
|
|
71 |
|
|
|
80 |
|
|
|
65 |
|
|
|
|
|
(f) |
|
Segment operating results reflect revenues on a tax-equivalent basis with the corresponding income tax impact recorded within income tax expense. Tax-equivalent adjustments were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net interest income |
|
$ |
269 |
|
|
$ |
6 |
|
|
$ |
44 |
|
Noninterest revenue |
|
|
571 |
|
|
|
317 |
|
|
|
89 |
|
Income tax expense |
|
|
840 |
|
|
|
323 |
|
|
|
133 |
|
|
|
|
|
|
|
These adjustments are eliminated in Corporate/reconciling items to arrive at the Firms reported GAAP results.
|
|
(g) |
|
Includes $858 million of accounting policy conformity adjustments consisting of approximately
$1.4 billion related to the decertification of the sellers retained interest in credit card
securitizations, partially offset by a benefit of $584 million related to conforming wholesale and
consumer provision methodologies for the combined Firm. |
(h) |
|
Merger costs attributed to the lines of business for 2005 and 2004 were as follows (there were
no merger costs in 2003): |
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
Investment Bank |
|
$ |
32 |
|
|
$ |
74 |
|
Retail Financial Services |
|
|
133 |
|
|
|
201 |
|
Card Services |
|
|
222 |
|
|
|
79 |
|
Commercial Banking |
|
|
3 |
|
|
|
23 |
|
Treasury & Securities Services |
|
|
95 |
|
|
|
68 |
|
Asset & Wealth Management Services |
|
|
60 |
|
|
|
31 |
|
Corporate |
|
|
177 |
|
|
|
889 |
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
131 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 32 - Parent company
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company statements of income |
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from bank and bank
holding company subsidiaries |
|
$ |
2,361 |
|
|
$ |
1,208 |
|
|
$ |
2,436 |
|
Dividends from nonbank subsidiaries(b) |
|
|
791 |
|
|
|
773 |
|
|
|
2,688 |
|
Interest income from subsidiaries |
|
|
2,369 |
|
|
|
1,370 |
|
|
|
945 |
|
Other interest income |
|
|
209 |
|
|
|
137 |
|
|
|
130 |
|
Other income from subsidiaries, primarily fees: |
|
|
|
|
|
|
|
|
|
|
|
|
Bank and bank holding company |
|
|
246 |
|
|
|
833 |
|
|
|
632 |
|
Nonbank |
|
|
462 |
|
|
|
499 |
|
|
|
385 |
|
Other income |
|
|
13 |
|
|
|
204 |
|
|
|
(25 |
) |
|
Total income |
|
|
6,451 |
|
|
|
5,024 |
|
|
|
7,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense to subsidiaries(b) |
|
|
846 |
|
|
|
603 |
|
|
|
422 |
|
Other interest expense |
|
|
3,076 |
|
|
|
1,834 |
|
|
|
1,329 |
|
Compensation expense |
|
|
369 |
|
|
|
353 |
|
|
|
348 |
|
Other noninterest expense |
|
|
496 |
|
|
|
1,105 |
|
|
|
747 |
|
|
Total expense |
|
|
4,787 |
|
|
|
3,895 |
|
|
|
2,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit and
undistributed net income of subsidiaries |
|
|
1,664 |
|
|
|
1,129 |
|
|
|
4,345 |
|
Income tax benefit |
|
|
852 |
|
|
|
556 |
|
|
|
474 |
|
Equity in undistributed net income (loss)
of subsidiaries |
|
|
5,967 |
|
|
|
2,781 |
|
|
|
1,900 |
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
|
|
|
|
|
|
|
|
|
Parent company balance sheets |
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash with banks, primarily with bank subsidiaries |
|
$ |
461 |
|
|
$ |
513 |
|
Deposits with banking subsidiaries |
|
|
9,452 |
|
|
|
10,703 |
|
Securities purchased under resale agreements,
primarily with nonbank subsidiaries |
|
|
24 |
|
|
|
|
|
Trading assets |
|
|
7,548 |
|
|
|
3,606 |
|
Available-for-sale securities |
|
|
285 |
|
|
|
2,376 |
|
Loans |
|
|
338 |
|
|
|
162 |
|
Advances to, and receivables from, subsidiaries: |
|
|
|
|
|
|
|
|
Bank and bank holding company |
|
|
22,673 |
|
|
|
19,076 |
|
Nonbank |
|
|
31,342 |
|
|
|
34,456 |
|
Investment (at equity) in subsidiaries: |
|
|
|
|
|
|
|
|
Bank and bank holding company |
|
|
110,745 |
|
|
|
105,599 |
|
Nonbank(b) |
|
|
21,367 |
|
|
|
17,701 |
|
Goodwill and other intangibles |
|
|
804 |
|
|
|
890 |
|
Other assets |
|
|
10,553 |
|
|
|
11,557 |
|
|
Total assets |
|
$ |
215,592 |
|
|
$ |
206,639 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
Borrowings from, and payables to, subsidiaries(b) |
|
$ |
16,511 |
|
|
$ |
14,195 |
|
Other borrowed funds, primarily commercial paper |
|
|
15,675 |
|
|
|
15,050 |
|
Other liabilities |
|
|
7,721 |
|
|
|
6,309 |
|
Long-term debt(c) |
|
|
68,474 |
|
|
|
65,432 |
|
|
Total liabilities |
|
|
108,381 |
|
|
|
100,986 |
|
Stockholders equity |
|
|
107,211 |
|
|
|
105,653 |
|
|
Total liabilities and stockholders equity |
|
$ |
215,592 |
|
|
$ |
206,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company - statements of cash flows |
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Less: Net income of subsidiaries |
|
|
9,119 |
|
|
|
4,762 |
|
|
|
7,017 |
|
|
Parent company net loss |
|
|
(636 |
) |
|
|
(296 |
) |
|
|
(298 |
) |
Add: Cash dividends from subsidiaries(b) |
|
|
2,891 |
|
|
|
1,964 |
|
|
|
5,098 |
|
Other, net |
|
|
(130 |
) |
|
|
(81 |
) |
|
|
(272 |
) |
|
Net cash provided by operating activities |
|
|
2,125 |
|
|
|
1,587 |
|
|
|
4,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banking subsidiaries |
|
|
1,251 |
|
|
|
1,851 |
|
|
|
(2,560 |
) |
Securities purchased under resale agreements,
primarily with nonbank subsidiaries |
|
|
(24 |
) |
|
|
355 |
|
|
|
99 |
|
Loans |
|
|
(176 |
) |
|
|
407 |
|
|
|
(490 |
) |
Advances to subsidiaries |
|
|
(483 |
) |
|
|
(5,772 |
) |
|
|
(3,165 |
) |
Investment (at equity) in subsidiaries |
|
|
(2,949 |
) |
|
|
(4,015 |
) |
|
|
(2,052 |
) |
Other, net |
|
|
34 |
|
|
|
11 |
|
|
|
12 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(215 |
) |
|
|
(392 |
) |
|
|
(607 |
) |
Proceeds from sales and maturities |
|
|
124 |
|
|
|
114 |
|
|
|
654 |
|
Cash received in business acquisitions |
|
|
|
|
|
|
4,608 |
|
|
|
|
|
|
Net cash (used in) provided by
investing activities |
|
|
(2,438 |
) |
|
|
(2,833 |
) |
|
|
(8,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash change in borrowings
from subsidiaries(b) |
|
|
2,316 |
|
|
|
941 |
|
|
|
2,005 |
|
Net cash change in other borrowed funds |
|
|
625 |
|
|
|
(1,510 |
) |
|
|
(2,104 |
) |
Proceeds from the issuance of
long-term debt |
|
|
15,992 |
|
|
|
12,816 |
|
|
|
12,105 |
|
Repayments of long-term debt |
|
|
(10,864 |
) |
|
|
(6,149 |
) |
|
|
(6,733 |
) |
Proceeds from the issuance of stock
and stock-related awards |
|
|
682 |
|
|
|
848 |
|
|
|
1,213 |
|
Redemption of preferred stock |
|
|
(200 |
) |
|
|
(670 |
) |
|
|
|
|
Treasury stock purchased |
|
|
(3,412 |
) |
|
|
(738 |
) |
|
|
|
|
Cash dividends paid |
|
|
(4,878 |
) |
|
|
(3,927 |
) |
|
|
(2,865 |
) |
|
Net cash provided by (used in)
financing activities |
|
|
261 |
|
|
|
1,611 |
|
|
|
3,621 |
|
|
Net increase (decrease) in cash with banks |
|
|
(52 |
) |
|
|
365 |
|
|
|
40 |
|
Cash with banks
at the beginning of the year |
|
|
513 |
|
|
|
148 |
|
|
|
108 |
|
|
Cash with banks at the end of
the year, primarily with bank subsidiaries |
|
$ |
461 |
|
|
$ |
513 |
|
|
$ |
148 |
|
|
Cash interest paid |
|
$ |
3,838 |
|
|
$ |
2,383 |
|
|
$ |
1,918 |
|
Cash income taxes paid |
|
$ |
3,426 |
|
|
$ |
701 |
|
|
$ |
754 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. For a further
discussion of the Merger, see Note 2 on pages 9293 of this Annual Report. |
(b) |
|
Subsidiaries include trusts that issued guaranteed capital debt securities (issuer trusts).
As a result of FIN 46, the Parent deconsolidated these trusts in 2003. The Parent received
dividends of $21 million and $15 million from the issuer trusts in 2005 and 2004, respectively. For
a further discussion on these issuer trusts, see Note 17 on pages
117118 of this Annual Report. |
(c) |
|
At December 31, 2005, debt that contractually matures in 2006 through 2010 totaled $10.3
billion, $9.5 billion, $11.9 billion, $8.8 billion and $3.8 billion, respectively. |
|
|
|
|
|
|
132
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Supplementary information
Selected quarterly financial data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share, ratio and headcount data) |
|
|
2005(f) |
|
|
2004 |
As of or for the period ended |
|
|
|
|
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
4th(f) |
|
|
3rd(f) |
|
|
2nd(h) |
|
|
1st(h) |
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
8,925 |
|
|
$ |
9,613 |
|
|
$ |
7,742 |
|
|
$ |
8,422 |
|
|
$ |
7,621 |
|
|
$ |
7,053 |
|
|
$ |
5,637 |
|
|
$ |
6,025 |
|
Net interest income |
|
|
4,753 |
|
|
|
4,852 |
|
|
|
5,001 |
|
|
|
5,225 |
|
|
|
5,329 |
|
|
|
5,452 |
|
|
|
2,994 |
|
|
|
2,986 |
|
|
Total net revenue |
|
|
13,678 |
|
|
|
14,465 |
|
|
|
12,743 |
|
|
|
13,647 |
|
|
|
12,950 |
|
|
|
12,505 |
|
|
|
8,631 |
|
|
|
9,011 |
|
Provision for credit losses |
|
|
1,224 |
|
|
|
1,245 |
(g) |
|
|
587 |
|
|
|
427 |
|
|
|
1,157 |
|
|
|
1,169 |
|
|
|
203 |
|
|
|
15 |
|
Noninterest expense before Merger costs
and Litigation reserve charge |
|
|
8,666 |
|
|
|
9,243 |
|
|
|
8,748 |
|
|
|
8,892 |
|
|
|
8,863 |
|
|
|
8,625 |
|
|
|
5,713 |
|
|
|
6,093 |
|
Merger costs |
|
|
77 |
|
|
|
221 |
|
|
|
279 |
|
|
|
145 |
|
|
|
523 |
|
|
|
752 |
|
|
|
90 |
|
|
|
|
|
Litigation reserve charge |
|
|
(208 |
) |
|
|
|
|
|
|
1,872 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
3,700 |
|
|
|
|
|
|
Total noninterest expense |
|
|
8,535 |
|
|
|
9,464 |
|
|
|
10,899 |
|
|
|
9,937 |
|
|
|
9,386 |
|
|
|
9,377 |
|
|
|
9,503 |
|
|
|
6,093 |
|
|
Income (loss) before income tax expense (benefit) |
|
|
3,919 |
|
|
|
3,756 |
|
|
|
1,257 |
|
|
|
3,283 |
|
|
|
2,407 |
|
|
|
1,959 |
|
|
|
(1,075 |
) |
|
|
2,903 |
|
Income tax expense (benefit) |
|
|
1,221 |
|
|
|
1,229 |
|
|
|
263 |
|
|
|
1,019 |
|
|
|
741 |
|
|
|
541 |
|
|
|
(527 |
) |
|
|
973 |
|
|
Net income (loss) |
|
|
$ |
2,698 |
|
|
$ |
2,527 |
|
|
$ |
994 |
|
|
$ |
2,264 |
|
|
$ |
1,666 |
|
|
$ |
1,418 |
|
|
$ |
(548 |
) |
|
$ |
1,930 |
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share: Basic |
|
|
|
|
|
$ |
0.78 |
|
|
$ |
0.72 |
|
|
$ |
0.28 |
|
|
$ |
0.64 |
|
|
$ |
0.47 |
|
|
$ |
0.40 |
|
|
$ |
(0.27 |
) |
|
$ |
0.94 |
|
Diluted |
|
|
|
|
|
|
0.76 |
|
|
|
0.71 |
|
|
|
0.28 |
|
|
|
0.63 |
|
|
|
0.46 |
|
|
|
0.39 |
|
|
|
(0.27 |
) |
|
|
0.92 |
|
Cash dividends declared per share |
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
Book value per share |
|
|
30.71 |
|
|
|
30.26 |
|
|
|
29.95 |
|
|
|
29.78 |
|
|
|
29.61 |
|
|
|
29.42 |
|
|
|
21.52 |
|
|
|
22.62 |
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average: Basic |
|
|
|
|
|
|
3,472 |
|
|
|
3,485 |
|
|
|
3,493 |
|
|
|
3,518 |
|
|
|
3,515 |
|
|
|
3,514 |
|
|
|
2,043 |
|
|
|
2,032 |
|
Diluted |
|
|
|
|
|
|
3,564 |
|
|
|
3,548 |
|
|
|
3,548 |
|
|
|
3,570 |
|
|
|
3,602 |
|
|
|
3,592 |
|
|
|
2,043 |
|
|
|
2,093 |
|
Common shares at period end |
|
|
3,487 |
|
|
|
3,503 |
|
|
|
3,514 |
|
|
|
3,525 |
|
|
|
3,556 |
|
|
|
3,564 |
|
|
|
2,088 |
|
|
|
2,082 |
|
Selected ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on common equity (ROE)(a) |
|
|
10 |
% |
|
|
9 |
% |
|
|
4 |
% |
|
|
9 |
% |
|
|
6 |
% |
|
|
5 |
% |
|
NM
|
|
|
17 |
% |
Return on assets (ROA)(a)(b) |
|
|
0.89 |
|
|
|
0.84 |
|
|
|
0.34 |
|
|
|
0.79 |
|
|
|
0.57 |
|
|
|
0.50 |
|
|
NM
|
|
|
1.01 |
|
Tier 1 capital ratio |
|
|
8.5 |
|
|
|
8.2 |
|
|
|
8.2 |
|
|
|
8.6 |
|
|
|
8.7 |
|
|
|
8.6 |
|
|
|
8.2 |
% |
|
|
8.4 |
|
Total capital ratio |
|
|
12.0 |
|
|
|
11.3 |
|
|
|
11.3 |
|
|
|
11.9 |
|
|
|
12.2 |
|
|
|
12.0 |
|
|
|
11.2 |
|
|
|
11.4 |
|
Tier 1 leverage ratio |
|
|
6.3 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
6.3 |
|
|
|
6.2 |
|
|
|
6.5 |
|
|
|
5.5 |
|
|
|
5.9 |
|
Selected balance sheet data (period-end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,198,942 |
|
|
$ |
1,203,033 |
|
|
$ |
1,171,283 |
|
|
$ |
1,178,305 |
|
|
$ |
1,157,248 |
|
|
$ |
1,138,469 |
|
|
$ |
817,763 |
|
|
$ |
801,078 |
|
Securities |
|
|
47,600 |
|
|
|
68,697 |
|
|
|
58,573 |
|
|
|
75,251 |
|
|
|
94,512 |
|
|
|
92,816 |
|
|
|
64,915 |
|
|
|
70,747 |
|
Total loans |
|
|
419,148 |
|
|
|
420,504 |
|
|
|
416,025 |
|
|
|
402,669 |
|
|
|
402,114 |
|
|
|
393,701 |
|
|
|
225,938 |
|
|
|
217,630 |
|
Deposits |
|
|
554,991 |
|
|
|
535,123 |
|
|
|
534,640 |
|
|
|
531,379 |
|
|
|
521,456 |
|
|
|
496,454 |
|
|
|
346,539 |
|
|
|
336,886 |
|
Long-term debt |
|
|
108,357 |
|
|
|
101,853 |
|
|
|
101,182 |
|
|
|
99,329 |
|
|
|
95,422 |
|
|
|
91,754 |
|
|
|
52,981 |
|
|
|
50,062 |
|
Common stockholders equity |
|
|
107,072 |
|
|
|
105,996 |
|
|
|
105,246 |
|
|
|
105,001 |
|
|
|
105,314 |
|
|
|
104,844 |
|
|
|
44,932 |
|
|
|
47,092 |
|
Total stockholders equity |
|
|
107,211 |
|
|
|
106,135 |
|
|
|
105,385 |
|
|
|
105,340 |
|
|
|
105,653 |
|
|
|
105,853 |
|
|
|
45,941 |
|
|
|
48,101 |
|
Credit quality metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
7,490 |
|
|
$ |
7,615 |
|
|
$ |
7,233 |
|
|
$ |
7,423 |
|
|
$ |
7,812 |
|
|
$ |
8,034 |
|
|
$ |
4,227 |
|
|
$ |
4,417 |
|
Nonperforming assets(c) |
|
|
2,590 |
|
|
|
2,839 |
|
|
|
2,832 |
|
|
|
2,949 |
|
|
|
3,231 |
|
|
|
3,637 |
|
|
|
2,482 |
|
|
|
2,882 |
|
Allowance for loan losses to total loans(d) |
|
|
1.84 |
% |
|
|
1.86 |
% |
|
|
1.76 |
% |
|
|
1.82 |
% |
|
|
1.94 |
% |
|
|
2.01 |
% |
|
|
1.92 |
% |
|
|
2.08 |
% |
Net charge-offs |
|
$ |
1,360 |
|
|
$ |
870 |
|
|
$ |
773 |
|
|
$ |
816 |
|
|
$ |
1,398 |
|
|
$ |
865 |
|
|
$ |
392 |
|
|
$ |
444 |
|
Net charge-off rate(a)(d) |
|
|
1.39 |
% |
|
|
0.89 |
% |
|
|
0.82 |
% |
|
|
0.88 |
% |
|
|
1.46 |
% |
|
|
0.93 |
% |
|
|
0.78 |
% |
|
|
0.92 |
% |
Wholesale net charge-off (recovery) rate(a)(d) |
|
|
0.07 |
|
|
|
(0.12 |
) |
|
|
(0.16 |
) |
|
|
(0.03 |
) |
|
|
0.21 |
|
|
|
(0.07 |
) |
|
|
0.29 |
|
|
|
0.50 |
|
Managed Card net charge-off rate(a) |
|
|
6.39 |
|
|
|
4.70 |
|
|
|
4.87 |
|
|
|
4.83 |
|
|
|
5.24 |
|
|
|
4.88 |
|
|
|
5.85 |
|
|
|
5.81 |
|
Headcount |
|
|
168,847 |
|
|
|
168,955 |
|
|
|
168,708 |
|
|
|
164,381 |
|
|
|
160,968 |
|
|
|
162,275 |
|
|
|
94,615 |
|
|
|
96,010 |
|
Share price(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
40.56 |
|
|
$ |
35.95 |
|
|
$ |
36.50 |
|
|
$ |
39.69 |
|
|
$ |
40.45 |
|
|
$ |
40.25 |
|
|
$ |
42.57 |
|
|
$ |
43.84 |
|
Low |
|
|
32.92 |
|
|
|
33.31 |
|
|
|
33.35 |
|
|
|
34.32 |
|
|
|
36.32 |
|
|
|
35.50 |
|
|
|
34.62 |
|
|
|
36.30 |
|
Close |
|
|
39.69 |
|
|
|
33.93 |
|
|
|
35.32 |
|
|
|
34.60 |
|
|
|
39.01 |
|
|
|
39.73 |
|
|
|
38.77 |
|
|
|
41.95 |
|
|
|
|
|
(a) |
|
Based upon annualized amounts. |
(b) |
|
Represents Net income divided by Total average assets. |
(c) |
|
Excludes wholesale purchased held-for-sale (HFS) loans purchased as part of the Investment
Banks proprietary activities. |
(d) |
|
Excluded from the allowance coverage ratios were end-of-period loans held-for-sale; and
excluded from the net charge-off rates were average loans held-for-sale. |
(e) |
|
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. |
(f) |
|
Quarterly results include three months of the combined Firms results. |
(g) |
|
Includes a $400 million special provision related to Hurricane Katrina allocated as follows:
Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35 million,
Asset & Wealth Management $3 million and Corporate $12 million. |
(h) |
|
Heritage JPMorgan Chase results only. |
NM - Not meaningful due to net loss.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
133 |
Glossary of terms
JPMorgan Chase & Co.
ACH: Automated Clearing House.
APB: Accounting Principles Board Opinion.
APB 25: Accounting for Stock Issued to Employees.
Assets under management: Represent assets actively managed by Asset & Wealth Management on behalf
of institutional, private banking, private client services and retail clients. Excludes assets
managed by American Century Companies, Inc., in which the Firm has a 43% ownership interest.
Assets under supervision: Represent assets under management as well as custody, brokerage,
administration and deposit accounts.
Average managed assets: Refers to total assets on the Firms balance sheet plus credit card
receivables that have been securitized.
Contractual credit card charge-off: In accordance with the Federal Financial Institutions
Examination Council policy, credit card loans are charged off by the end of the month in which the
account becomes 180 days past due or within 60 days from receiving notification of the filing of
bankruptcy, whichever is earlier.
Core deposits: U.S. deposits insured by the Federal Deposit Insurance Corporation, up to the legal
limit of $100,000 per depositor.
Credit derivatives are contractual agreements that provide protection against a credit event of one
or more referenced credits. The nature of a credit event is established by the protection buyer and
protection seller at the inception of a transaction, and such events
include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the
credit derivative pays a periodic fee in return for a payment by the protection seller upon the
occurrence, if any, of a credit event.
Credit cycle: a period of time over which credit quality improves, deteriorates and then improves
again. While portfolios may differ in terms of risk, the credit cycle is typically driven by many
factors, including market events and the economy. The duration of a credit cycle can vary from a
couple of years to several years.
FASB: Financial Accounting Standards Board.
FIN 39: FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.
FIN 41: FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements.
FIN 45: FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirement for
Guarantees, including Indirect Guarantees of Indebtedness of Others.
FIN 46R: FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No.
51.
FIN 47: FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations - an
interpretation of FASB Statement No. 143.
FSP SFAS 106-2: Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003.
Interests in Purchased Receivables: Represent an ownership interest in a percentage of cash flows
of an underlying pool of receivables transferred by a third-party seller into a bankruptcy remote
entity, generally a trust, and then financed through a commercial paper conduit.
Investment-grade: An indication of credit quality based upon JPMorgan Chases internal risk
assessment system. Investment-grade generally represents a risk profile similar to a rating of a
BBB-/Baa3 or better, as defined by independent rating agencies.
Mark-to-market exposure: A measure, at a point in time, of the value of a derivative or foreign
exchange contract in the open market. When the mark-to-market value is positive, it indicates the
counterparty owes JPMorgan Chase and, therefore, creates a repayment risk for the Firm. When the
mark-to-market value is negative, JPMorgan Chase owes the counterparty. In this situation, the Firm
does not have repayment risk.
Master netting agreement: An agreement between two counterparties that have multiple derivative
contracts with each other that provides for the net settlement of all contracts through a single
payment, in a single currency, in the event of default on or termination of any one contract. See
FIN 39.
NA: Data is not applicable or available for the period presented.
Net yield on interest-earning assets: The average rate for interest-earning assets less the average
rate paid for all sources of funds.
NM: Not meaningful.
Nonoperating litigation reserve charges and recoveries are the $208 million insurance recovery in
the fourth quarter of 2005; the $1.9 billion charge taken in the second quarter of 2005; the $900
million charge taken in the first quarter of 2005; and the $3.7 billion charge taken in the second
quarter of 2004; all of which relate to the legal cases named in the JPMorgan Chase Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004.
Overhead ratio: Noninterest expense as a percentage of total net revenue.
Return on common equity-goodwill: Represents net income applicable to common stock divided by total
average common equity (net of goodwill). The Firm uses return on equity less goodwill, a non-GAAP
financial measure, to evaluate the operating performance of the Firm. The Firm also utilizes this
measure to facilitate operating comparisons to other competitors.
SFAS: Statement of Financial Accounting Standards.
SFAS 13: Accounting for Leases.
SFAS 87: Employers Accounting for Pensions.
SFAS 88: Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits.
SFAS 106: Employers Accounting for Postretirement Benefits Other Than Pensions.
SFAS 107: Disclosures about Fair Value of Financial Instruments.
SFAS 109: Accounting for Income
Taxes.
SFAS 114: Accounting by Creditors for Impairment of a Loan.
SFAS 115: Accounting for Certain Investments in Debt and Equity Securities.
SFAS 123: Accounting for Stock-Based Compensation.
SFAS 123R: Share-Based Payment.
SFAS 128: Earnings per Share.
SFAS 133: Accounting for Derivative Instruments and Hedging Activities.
SFAS 138: Accounting for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133.
|
|
|
|
|
|
134
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Glossary of terms
JPMorgan Chase & Co.
SFAS 140: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a replacement of FASB Statement No. 125.
SFAS 142: Goodwill and Other Intangible Assets.
SFAS 143: Accounting for Asset Retirement Obligations.
SFAS 149: Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.
SFAS 155: Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements
No. 133 and 140.
Staff Accounting Bulletin (SAB) 107: Application of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment.
Statement of Position (SOP) 98-1: Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
Stress testing: A scenario that measures market risk under unlikely but plausible events in
abnormal markets.
U.S. GAAP: Accounting principles generally accepted in the United States of America.
U.S. government and federal agency obligations: Obligations of the U.S. government or an
instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full
faith and credit of the U.S. government.
U.S. government-sponsored enterprise obligations: Obligations of agencies originally established or
chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these
obligations are not explicitly guaranteed as to the timely payment of principal and interest by the
full faith and credit of the U.S. government.
Value-at-Risk (VAR): A measure of the dollar amount of potential loss from adverse market moves
in an ordinary market environment.
Forward-looking statements
From time to time, the Firm has made and will make forward-looking statements. These statements can
be identified by the fact that they do not relate strictly to historical or current facts.
Forward-looking statements often use words such as anticipate, target, expect, estimate,
intend, plan, goal, believe, anticipate or other words of similar meaning.
Forward-looking statements provide JPMorgan Chases current expectations or forecasts of future
events, circumstances, results or aspirations. JPMorgan Chases disclosures in this report contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Firm also may make forward-looking statements in its other documents filed or furnished
with the Securities and Exchange Commission (SEC). In addition, the Firms senior management may
make forward-looking statements orally to analysts, investors, representatives of the media and
others.
All forward-looking statements, by their nature, are subject to risks and uncertainties. JPMorgan
Chases actual future results may differ materially from those set forth in its forward-looking
statements. Factors that could cause this differencemany of which are beyond the Firms
controlinclude the following: local, regional and international business, political or economic
conditions; changes in trade, monetary and fiscal policies and laws; technological changes
instituted by the Firm and by other entities which may affect
the Firms business; mergers and acquisitions, including the Firms ability to integrate
acquisitions; ability of the Firm to develop new products and services; acceptance of new products
and services and the ability of the Firm to increase market share; ability of the Firm to control
expenses; competitive pressures; changes in laws and regulatory requirements; changes in applicable
accounting policies; costs, outcomes and effects of litigation and regulatory investigations;
changes in the credit quality of the Firms customers; and adequacy of the Firms risk management
framework.
Additional factors that may cause future results to differ materially from forward-looking
statements are discussed in Part I, Item 1A: Risk Factors in the Firms Annual Report on Form 10-K
for the year ended December 31, 2005, to which reference is
hereby made. There is no
assurance that any list of risks and uncertainties or risk factors is complete.
Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are
made and JPMorgan Chase does not undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the date the forward-looking statement was made.
The reader should, however, consult any further disclosures of a forward-looking nature the Firm
may make in any subsequent Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its
Current Reports on Form 8-K.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
135 |
Distribution of assets, liabilities and stockholders equity;
interest rates and interest differentials
Consolidated average balance sheet, interest and rates
Provided below is a summary of JPMorgan Chases consolidated average balances, interest rates and
interest differentials on a taxable-equivalent basis for the years 2003 through 2005. Income
computed on a taxable-equivalent basis is the income reported in the Consolidated statements of
income,
adjusted to make income and earnings yields on assets exempt from income taxes (primarily federal
taxes) comparable with other taxable income. The incremental tax rate used for calculating the
taxable-equivalent adjustment was approximately 40% in 2005, 40% in 2004 and 41% in 2003. A
substantial portion of JPMorgan Chases securities are taxable.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Table continued on next page) |
|
2005 |
Year ended December 31,(a) |
|
Average |
|
|
|
|
|
|
Average |
|
(Taxable-equivalent interest and rates; in millions, except rates) |
|
balance |
|
|
Interest |
|
|
rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks |
|
$ |
15,203 |
|
|
$ |
680 |
|
|
|
4.48 |
% |
Federal funds sold and securities purchased under resale
agreements |
|
|
139,957 |
|
|
|
4,125 |
|
|
|
2.95 |
|
Securities borrowed |
|
|
63,023 |
|
|
|
1,154 |
|
|
|
1.83 |
|
Trading assets - debt instruments |
|
|
187,912 |
|
|
|
9,312 |
|
|
|
4.96 |
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
71,549 |
|
|
|
3,276 |
|
|
|
4.58 |
(b) |
Held-to-maturity |
|
|
95 |
|
|
|
10 |
|
|
|
10.42 |
|
Interests in purchased receivables |
|
|
28,397 |
|
|
|
933 |
|
|
|
3.29 |
|
Loans |
|
|
410,114 |
|
|
|
25,979 |
(c) |
|
|
6.33 |
|
|
Total interest-earning assets |
|
|
916,250 |
|
|
|
45,469 |
|
|
|
4.96 |
|
|
Allowance for loan losses |
|
|
(7,074 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
30,880 |
|
|
|
|
|
|
|
|
|
Trading assets - equity instruments |
|
|
49,458 |
|
|
|
|
|
|
|
|
|
Trading assets - derivative receivables |
|
|
57,365 |
|
|
|
|
|
|
|
|
|
All other assets |
|
|
138,187 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,185,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
395,643 |
|
|
$ |
10,295 |
|
|
|
2.60 |
% |
Federal funds purchased and securities sold under
repurchase agreements |
|
|
155,010 |
|
|
|
4,268 |
|
|
|
2.75 |
|
Commercial paper |
|
|
14,450 |
|
|
|
407 |
|
|
|
2.81 |
|
Other borrowings(d) |
|
|
106,186 |
|
|
|
4,867 |
|
|
|
4.58 |
|
Beneficial interests issued by consolidated VIEs |
|
|
44,675 |
|
|
|
1,372 |
|
|
|
3.07 |
|
Long-term debt |
|
|
112,370 |
|
|
|
4,160 |
|
|
|
3.70 |
|
|
Total interest-bearing liabilities |
|
|
828,334 |
|
|
|
25,369 |
|
|
|
3.06 |
|
|
Noninterest-bearing deposits |
|
|
129,343 |
|
|
|
|
|
|
|
|
|
Trading liabilities - derivative payables |
|
|
55,723 |
|
|
|
|
|
|
|
|
|
All other liabilities, including the allowance for
lending-related commitments |
|
|
65,952 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,079,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
207 |
|
|
|
|
|
|
|
|
|
Common stockholders equity |
|
|
105,507 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
105,714 |
(e) |
|
|
|
|
|
|
|
|
|
Total liabilities, preferred stock of subsidiary and
stockholders equity |
|
$ |
1,185,066 |
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
1.90 |
% |
Net interest income and net yield on interest-earning assets |
|
|
|
|
|
$ |
20,100 |
|
|
|
2.19 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
The annualized rate for available-for-sale securities based on amortized cost was 4.56% in 2005, 4.38%
in 2004 and 4.61% in 2003, and does not give effect to changes in fair value that are reflected in
Accumulated other comprehensive income. |
(c) |
|
Fees and commissions on loans included in loan interest amounted to $1,151 million
in 2005, $1,374 million for 2004 and $876 million in 2003. |
(d) |
|
Includes securities sold but not yet purchased. |
(e) |
|
The ratio of average stockholders equity to average assets was 8.9% for 2005, 8.0% for 2004
and 5.7% for 2003. The return on average stockholders equity was 8.0% for 2005, 5.8% for 2004 and
15.3% for 2003. |
136
Within the Consolidated average balance sheets, interest and rates summary, the principal
amounts of nonaccrual loans have been included in the average loan balances used to determine the
average interest rate
earned on loans. For additional information on nonaccrual loans, including interest accrued, see
Note 11 on pages 106 and 107.
(Continuation of table)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
balance |
|
|
Interest |
|
|
rate |
|
|
balance |
|
|
Interest |
|
|
rate |
|
|
|
|
$ |
28,625 |
|
|
$ |
539 |
|
|
|
1.88 |
% |
|
$ |
9,742 |
|
|
$ |
214 |
|
|
|
2.20 |
% |
|
|
|
93,979 |
|
|
|
1,627 |
|
|
|
1.73 |
|
|
|
87,273 |
|
|
|
1,497 |
|
|
|
1.72 |
|
|
|
|
49,387 |
|
|
|
463 |
|
|
|
0.94 |
|
|
|
40,305 |
|
|
|
323 |
|
|
|
0.80 |
|
|
|
|
169,203 |
|
|
|
7,535 |
|
|
|
4.45 |
|
|
|
148,970 |
|
|
|
6,608 |
|
|
|
4.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,697 |
|
|
|
3,471 |
|
|
|
4.41 |
(b) |
|
|
77,156 |
|
|
|
3,537 |
|
|
|
4.58 |
(b) |
|
|
|
172 |
|
|
|
11 |
|
|
|
6.50 |
|
|
|
286 |
|
|
|
21 |
|
|
|
7.19 |
|
|
|
|
15,564 |
|
|
|
291 |
|
|
|
1.87 |
|
|
|
5,414 |
|
|
|
64 |
|
|
|
1.18 |
|
|
|
|
308,450 |
|
|
|
16,664 |
(c) |
|
|
5.40 |
|
|
|
220,692 |
|
|
|
11,824 |
(c) |
|
|
5.36 |
|
|
|
|
|
744,077 |
|
|
|
30,601 |
|
|
|
4.11 |
|
|
|
589,838 |
|
|
|
24,088 |
|
|
|
4.09 |
|
|
|
|
|
(5,951 |
) |
|
|
|
|
|
|
|
|
|
|
(5,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
25,390 |
|
|
|
|
|
|
|
|
|
|
|
17,951 |
|
|
|
|
|
|
|
|
|
|
|
|
31,264 |
|
|
|
|
|
|
|
|
|
|
|
5,627 |
|
|
|
|
|
|
|
|
|
|
|
|
59,521 |
|
|
|
|
|
|
|
|
|
|
|
85,628 |
|
|
|
|
|
|
|
|
|
|
|
|
108,255 |
|
|
|
|
|
|
|
|
|
|
|
82,095 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
962,556 |
|
|
|
|
|
|
|
|
|
|
$ |
775,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
309,020 |
|
|
$ |
4,630 |
|
|
|
1.50 |
% |
|
$ |
227,645 |
|
|
$ |
3,604 |
|
|
|
1.58 |
% |
|
|
|
155,665 |
|
|
|
2,312 |
|
|
|
1.49 |
|
|
|
161,020 |
|
|
|
2,199 |
|
|
|
1.37 |
|
|
|
|
12,699 |
|
|
|
131 |
|
|
|
1.03 |
|
|
|
13,387 |
|
|
|
151 |
|
|
|
1.13 |
|
|
|
|
83,721 |
|
|
|
3,817 |
|
|
|
4.56 |
|
|
|
69,703 |
|
|
|
3,521 |
|
|
|
5.05 |
|
|
|
|
26,817 |
|
|
|
478 |
|
|
|
1.78 |
|
|
|
9,421 |
|
|
|
106 |
|
|
|
1.13 |
|
|
|
|
79,193 |
|
|
|
2,466 |
|
|
|
3.11 |
|
|
|
49,095 |
|
|
|
1,498 |
|
|
|
3.05 |
|
|
|
|
|
667,115 |
|
|
|
13,834 |
|
|
|
2.07 |
|
|
|
530,271 |
|
|
|
11,079 |
|
|
|
2.09 |
|
|
|
|
|
101,994 |
|
|
|
|
|
|
|
|
|
|
|
77,640 |
|
|
|
|
|
|
|
|
|
|
|
|
52,761 |
|
|
|
|
|
|
|
|
|
|
|
67,783 |
|
|
|
|
|
|
|
|
|
|
|
|
64,038 |
|
|
|
|
|
|
|
|
|
|
|
56,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
885,908 |
|
|
|
|
|
|
|
|
|
|
|
731,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,007 |
|
|
|
|
|
|
|
|
|
|
|
1,009 |
|
|
|
|
|
|
|
|
|
|
|
|
75,641 |
|
|
|
|
|
|
|
|
|
|
|
42,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
76,648 |
(e) |
|
|
|
|
|
|
|
|
|
|
43,997 |
(e) |
|
|
|
|
|
|
|
|
|
|
|
$ |
962,556 |
|
|
|
|
|
|
|
|
|
|
$ |
775,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.04 |
% |
|
|
|
|
|
|
|
|
|
|
2.00 |
% |
|
|
|
|
|
|
$ |
16,767 |
|
|
|
2.25 |
|
|
|
|
|
|
$ |
13,009 |
|
|
|
2.21 |
|
|
137
Interest rates and interest differential analysis of net interest income
U.S. and non-U.S.
Presented below is a summary of interest rates and interest differentials segregated between
U.S. and non-U.S. operations for the years 2003 through 2005. The segregation of U.S. and non-U.S.
components is based on the location of the office recording the transaction. Intracompany funding generally
comprises dollar-denominated deposits originated in various locations that are centrally
managed by JPMorgan Chases Treasury unit. U.S. net interest income was $18.4 billion in 2005, an
increase of $3.2 billion from the prior year. The increase primarily was attributable to the
Merger. Net interest
(Table continued on next
page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
Year ended December 31,(a) |
|
Average |
|
|
|
|
|
|
Average |
|
(Taxable-equivalent interest and rates; in millions, except rates) |
|
balance |
|
|
Interest |
|
|
rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks, primarily non-U.S. |
|
$ |
15,203 |
|
|
$ |
680 |
|
|
|
4.48 |
% |
Federal funds sold and securities purchased under resale agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
94,419 |
|
|
|
3,375 |
|
|
|
3.57 |
|
Non-U.S. |
|
|
45,538 |
|
|
|
750 |
|
|
|
1.65 |
|
Securities borrowed, primarily U.S. |
|
|
63,023 |
|
|
|
1,154 |
|
|
|
1.83 |
|
Trading assets - debt instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
97,943 |
|
|
|
4,861 |
|
|
|
4.96 |
|
Non-U.S. |
|
|
89,969 |
|
|
|
4,451 |
|
|
|
4.95 |
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
54,441 |
|
|
|
2,705 |
|
|
|
4.97 |
|
Non-U.S. |
|
|
17,203 |
|
|
|
581 |
|
|
|
3.38 |
|
Interests in purchased receivables, primarily U.S. |
|
|
28,397 |
|
|
|
933 |
|
|
|
3.29 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
373,038 |
|
|
|
24,934 |
|
|
|
6.68 |
|
Non-U.S. |
|
|
37,076 |
|
|
|
1,045 |
|
|
|
2.82 |
|
|
Total interest-earning assets |
|
|
916,250 |
|
|
|
45,469 |
|
|
|
4.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
272,064 |
|
|
|
6,682 |
|
|
|
2.46 |
|
Non-U.S. |
|
|
123,579 |
|
|
|
3,613 |
|
|
|
2.92 |
|
Federal funds purchased and securities sold under repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
113,540 |
|
|
|
3,685 |
|
|
|
3.25 |
|
Non-U.S. |
|
|
41,470 |
|
|
|
583 |
|
|
|
1.41 |
|
Other borrowed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
64,765 |
|
|
|
2,837 |
|
|
|
4.38 |
|
Non-U.S. |
|
|
55,871 |
|
|
|
2,437 |
|
|
|
4.36 |
|
Beneficial interests issued by consolidated VIEs, primarily U.S. |
|
|
44,675 |
|
|
|
1,372 |
|
|
|
3.07 |
|
Long-term debt, primarily U.S. |
|
|
112,370 |
|
|
|
4,160 |
|
|
|
3.70 |
|
Intracompany funding: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
28,800 |
|
|
|
789 |
|
|
|
|
|
Non-U.S. |
|
|
(28,800 |
) |
|
|
(789 |
) |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
828,334 |
|
|
|
25,369 |
|
|
|
3.06 |
|
|
Noninterest-bearing liabilities(b) |
|
|
87,916 |
|
|
|
|
|
|
|
|
|
|
Total investable funds |
|
$ |
916,250 |
|
|
$ |
25,369 |
|
|
|
2.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and net yield: |
|
|
|
|
|
$ |
20,100 |
|
|
|
2.19 |
% |
U.S. |
|
|
|
|
|
|
18,366 |
|
|
|
2.70 |
|
Non-U.S. |
|
|
|
|
|
|
1,734 |
|
|
|
0.73 |
|
Percentage of total assets and liabilities attributable
to non-U.S. operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
29.4 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
29.3 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Represents the amount of noninterest-bearing liabilities funding interest-earning assets. |
138
income from non-U.S. operations was $1.7 billion for 2005, relatively stable when compared
with $1.6 billion in 2004.
For further information, see the Net interest income discussion in Consolidated
results of operations on page 28.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continuation of table) |
|
|
2004 |
|
|
2003 |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
balance |
|
|
Interest |
|
|
rate |
|
|
balance |
|
|
Interest |
|
|
rate |
|
|
|
|
$ |
28,625 |
|
|
$ |
539 |
|
|
|
1.88 |
% |
|
$ |
9,742 |
|
|
$ |
214 |
|
|
|
2.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,673 |
|
|
|
1,182 |
|
|
|
1.83 |
|
|
|
61,925 |
|
|
|
988 |
|
|
|
1.59 |
|
|
|
|
29,306 |
|
|
|
445 |
|
|
|
1.52 |
|
|
|
25,348 |
|
|
|
509 |
|
|
|
2.01 |
|
|
|
|
49,387 |
|
|
|
463 |
|
|
|
0.94 |
|
|
|
40,305 |
|
|
|
323 |
|
|
|
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,658 |
|
|
|
4,361 |
|
|
|
4.33 |
|
|
|
86,234 |
|
|
|
4,013 |
|
|
|
4.65 |
|
|
|
|
68,545 |
|
|
|
3,174 |
|
|
|
4.63 |
|
|
|
62,736 |
|
|
|
2,595 |
|
|
|
4.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,853 |
|
|
|
3,053 |
|
|
|
4.63 |
|
|
|
67,024 |
|
|
|
3,168 |
|
|
|
4.71 |
|
|
|
|
13,016 |
|
|
|
429 |
|
|
|
3.29 |
|
|
|
10,418 |
|
|
|
390 |
|
|
|
3.75 |
|
|
|
|
15,564 |
|
|
|
291 |
|
|
|
1.87 |
|
|
|
5,414 |
|
|
|
64 |
|
|
|
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,914 |
|
|
|
15,675 |
|
|
|
5.68 |
|
|
|
188,637 |
|
|
|
10,973 |
|
|
|
5.82 |
|
|
|
|
32,536 |
|
|
|
989 |
|
|
|
3.04 |
|
|
|
32,055 |
|
|
|
851 |
|
|
|
2.66 |
|
|
|
|
|
744,077 |
|
|
|
30,601 |
|
|
|
4.11 |
|
|
|
589,838 |
|
|
|
24,088 |
|
|
|
4.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,075 |
|
|
|
2,701 |
|
|
|
1.36 |
|
|
|
117,035 |
|
|
|
1,688 |
|
|
|
1.44 |
|
|
|
|
110,945 |
|
|
|
1,929 |
|
|
|
1.74 |
|
|
|
110,610 |
|
|
|
1,916 |
|
|
|
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,760 |
|
|
|
1,830 |
|
|
|
1.49 |
|
|
|
129,715 |
|
|
|
1,599 |
|
|
|
1.23 |
|
|
|
|
32,905 |
|
|
|
482 |
|
|
|
1.47 |
|
|
|
31,305 |
|
|
|
600 |
|
|
|
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,687 |
|
|
|
2,138 |
|
|
|
3.47 |
|
|
|
59,249 |
|
|
|
2,323 |
|
|
|
3.92 |
|
|
|
|
34,733 |
|
|
|
1,810 |
|
|
|
5.21 |
|
|
|
23,841 |
|
|
|
1,349 |
|
|
|
5.66 |
|
|
|
|
26,817 |
|
|
|
478 |
|
|
|
1.78 |
|
|
|
9,421 |
|
|
|
106 |
|
|
|
1.13 |
|
|
|
|
79,193 |
|
|
|
2,466 |
|
|
|
3.11 |
|
|
|
49,095 |
|
|
|
1,498 |
|
|
|
3.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,687 |
|
|
|
207 |
|
|
|
|
|
|
|
44,856 |
|
|
|
946 |
|
|
|
|
|
|
|
|
(26,687 |
) |
|
|
(207 |
) |
|
|
|
|
|
|
(44,856 |
) |
|
|
(946 |
) |
|
|
|
|
|
|
|
|
667,115 |
|
|
|
13,834 |
|
|
|
2.07 |
|
|
|
530,271 |
|
|
|
11,079 |
|
|
|
2.09 |
|
|
|
|
|
76,962 |
|
|
|
|
|
|
|
|
|
|
|
59,567 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
744,077 |
|
|
$ |
13,834 |
|
|
|
1.86 |
% |
|
$ |
589,838 |
|
|
$ |
11,079 |
|
|
|
1.88 |
% |
|
|
|
|
|
|
|
$ |
16,767 |
|
|
|
2.25 |
% |
|
|
|
|
|
$ |
13,009 |
|
|
|
2.21 |
% |
|
|
|
|
|
|
|
15,125 |
|
|
|
2.74 |
|
|
|
|
|
|
|
11,124 |
|
|
|
2.54 |
|
|
|
|
|
|
|
|
1,642 |
|
|
|
0.86 |
|
|
|
|
|
|
|
1,885 |
|
|
|
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.7 |
|
|
|
|
|
|
|
|
|
|
|
30.7 |
|
|
|
|
|
|
|
|
|
|
|
|
30.6 |
|
|
|
|
|
|
|
|
|
|
|
35.5 |
|
|
139
Changes in net interest income, volume and rate analysis
The table below presents an analysis of the effect on net interest income of volume and rate
changes for the periods 2005 versus 2004 and 2004 versus 2003. In this analysis, the change due to
the volume/rate variance has been allocated to volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 versus 2004(a) |
|
|
2004 versus 2003(a) |
|
(On a taxable-equivalent basis; |
|
Increase (decrease) due to change in: |
|
Net |
|
|
Increase (decrease) due to change in: |
|
Net |
|
in millions) |
|
Volume |
|
|
Rate |
|
|
change |
|
|
Volume |
|
|
Rate |
|
|
change |
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks, primarily non-U.S. |
|
$ |
(603 |
) |
|
$ |
744 |
|
|
$ |
141 |
|
|
$ |
356 |
|
|
$ |
(31 |
) |
|
$ |
325 |
|
Federal funds sold and securities
purchased under resale agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
1,068 |
|
|
|
1,125 |
|
|
|
2,193 |
|
|
|
45 |
|
|
|
149 |
|
|
|
194 |
|
Non-U.S. |
|
|
267 |
|
|
|
38 |
|
|
|
305 |
|
|
|
60 |
|
|
|
(124 |
) |
|
|
(64 |
) |
Securities borrowed, primarily U.S. |
|
|
251 |
|
|
|
440 |
|
|
|
691 |
|
|
|
84 |
|
|
|
56 |
|
|
|
140 |
|
Trading
assets debt instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
(134 |
) |
|
|
634 |
|
|
|
500 |
|
|
|
624 |
|
|
|
(276 |
) |
|
|
348 |
|
Non-U.S. |
|
|
1,058 |
|
|
|
219 |
|
|
|
1,277 |
|
|
|
272 |
|
|
|
307 |
|
|
|
579 |
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
(572 |
) |
|
|
224 |
|
|
|
(348 |
) |
|
|
(61 |
) |
|
|
(54 |
) |
|
|
(115 |
) |
Non-U.S. |
|
|
140 |
|
|
|
12 |
|
|
|
152 |
|
|
|
87 |
|
|
|
(48 |
) |
|
|
39 |
|
Interests in purchased receivables, primarily U.S. |
|
421 |
|
|
|
221 |
|
|
|
642 |
|
|
|
190 |
|
|
|
37 |
|
|
|
227 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
6,500 |
|
|
|
2,759 |
|
|
|
9,259 |
|
|
|
4,966 |
|
|
|
(264 |
) |
|
|
4,702 |
|
Non-U.S. |
|
|
128 |
|
|
|
(72 |
) |
|
|
56 |
|
|
|
16 |
|
|
|
122 |
|
|
|
138 |
|
|
|
Change in interest income |
|
|
8,524 |
|
|
|
6,344 |
|
|
|
14,868 |
|
|
|
6,639 |
|
|
|
(126 |
) |
|
|
6,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
1,802 |
|
|
|
2,179 |
|
|
|
3,981 |
|
|
|
1,107 |
|
|
|
(94 |
) |
|
|
1,013 |
|
Non-U.S. |
|
|
375 |
|
|
|
1,309 |
|
|
|
1,684 |
|
|
|
2 |
|
|
|
11 |
|
|
|
13 |
|
Federal funds purchased and securities
sold under repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
(306 |
) |
|
|
2,161 |
|
|
|
1,855 |
|
|
|
(106 |
) |
|
|
337 |
|
|
|
231 |
|
Non-U.S. |
|
|
121 |
|
|
|
(20 |
) |
|
|
101 |
|
|
|
23 |
|
|
|
(141 |
) |
|
|
(118 |
) |
Other borrowed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
138 |
|
|
|
561 |
|
|
|
699 |
|
|
|
82 |
|
|
|
(267 |
) |
|
|
(185 |
) |
Non-U.S. |
|
|
922 |
|
|
|
(295 |
) |
|
|
627 |
|
|
|
568 |
|
|
|
(107 |
) |
|
|
461 |
|
Beneficial interests issued by consolidated VIEs,
primarily U.S.(b) |
|
|
548 |
|
|
|
346 |
|
|
|
894 |
|
|
|
311 |
|
|
|
61 |
|
|
|
372 |
|
Long-term debt, primarily U.S. |
|
|
1,227 |
|
|
|
467 |
|
|
|
1,694 |
|
|
|
939 |
|
|
|
29 |
|
|
|
968 |
|
Intracompany funding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
59 |
|
|
|
523 |
|
|
|
582 |
|
|
|
(142 |
) |
|
|
(597 |
) |
|
|
(739 |
) |
Non-U.S. |
|
|
(59 |
) |
|
|
(523 |
) |
|
|
(582 |
) |
|
|
142 |
|
|
|
597 |
|
|
|
739 |
|
|
|
Change in interest expense |
|
|
4,827 |
|
|
|
6,708 |
|
|
|
11,535 |
|
|
|
2,926 |
|
|
|
(171 |
) |
|
|
2,755 |
|
|
|
Change in net interest income |
|
$ |
3,697 |
|
|
$ |
(364 |
) |
|
$ |
3,333 |
|
|
$ |
3,713 |
|
|
$ |
45 |
|
|
$ |
3,758 |
|
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
140
Securities portfolio
The table below presents the amortized cost, estimated fair value and average yield (including
the impact of related derivatives) of JPMorgan Chases securities by contractual maturity range and
type of security.
Maturity schedule of available-for-sale and held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 |
|
|
Due after 1 |
|
|
Due after 5 |
|
|
Due after |
|
|
|
|
December 31, 2005 (in millions, rates on a taxable-equivalent basis) |
|
year or less |
|
|
through 5 years |
|
|
through 10 years |
|
|
10 years |
(a) |
|
Total |
|
|
U.S. government and federal agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
537 |
|
|
$ |
1,525 |
|
|
$ |
1,090 |
|
|
$ |
1,342 |
|
|
$ |
4,494 |
|
Fair value |
|
|
537 |
|
|
|
1,525 |
|
|
|
1,096 |
|
|
|
1,377 |
|
|
|
4,535 |
|
Average yield(b) |
|
|
0.67 |
% |
|
|
4.38 |
% |
|
|
4.56 |
% |
|
|
5.73 |
% |
|
|
4.38 |
% |
|
U.S. government-sponsored enterprise obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
13 |
|
|
$ |
31 |
|
|
$ |
192 |
|
|
$ |
22,368 |
|
|
$ |
22,604 |
|
Fair value |
|
|
13 |
|
|
|
31 |
|
|
|
190 |
|
|
|
21,783 |
|
|
|
22,017 |
|
Average yield(b) |
|
|
5.46 |
% |
|
|
4.36 |
% |
|
|
4.26 |
% |
|
|
5.16 |
% |
|
|
5.15 |
% |
|
Other:(c)
Amortized cost |
|
$ |
6,173 |
|
|
$ |
6,184 |
|
|
$ |
4,064 |
|
|
$ |
4,474 |
|
|
$ |
20,895 |
|
Fair value |
|
|
5,876 |
|
|
|
6,453 |
|
|
|
4,080 |
|
|
|
4,562 |
|
|
|
20,971 |
|
Average yield(b) |
|
|
2.94 |
% |
|
|
3.55 |
% |
|
|
4.76 |
% |
|
|
2.06 |
% |
|
|
3.29 |
% |
|
Total available-for-sale securities:(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
6,723 |
|
|
$ |
7,740 |
|
|
$ |
5,346 |
|
|
$ |
28,184 |
|
|
$ |
47,993 |
|
Fair value |
|
|
6,426 |
|
|
|
8,009 |
|
|
|
5,366 |
|
|
|
27,722 |
|
|
|
47,523 |
|
Average yield(b) |
|
|
2.77 |
% |
|
|
3.72 |
% |
|
|
4.70 |
% |
|
|
4.69 |
% |
|
|
4.27 |
% |
|
|
Total held-to-maturity securities:(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
30 |
|
|
$ |
47 |
|
|
$ |
77 |
|
Fair value |
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
49 |
|
|
|
80 |
|
Average yield(b) |
|
|
|
|
|
|
|
|
|
|
6.96 |
% |
|
|
6.73 |
% |
|
|
6.82 |
% |
|
|
|
|
(a) |
|
Securities with no stated maturity are included with securities with a contractual maturity
of 10 years or more. Substantially all of JPMorgan Chases mortgaged-backed securities (MBSs) and
collateralized mortgage obligations (CMOs) are due in 10 years or more based on contractual
maturity. The estimated duration, which reflects anticipated future prepayments based on a
consensus of dealers in the market, is approximately four years for MBSs and CMOs. |
(b) |
|
The average yield was based on amortized cost balances at the end of the year, and does not
give effect to changes in fair value that are reflected in Accumulated other comprehensive income.
Yields are derived by dividing interest income (including the effect of related derivatives on
available-for-sale securities and the amortization of premiums and accretion of discounts) by total
amortized cost. Taxable-equivalent yields are used where applicable. |
(c) |
|
Includes obligations of state and political subdivisions, debt securities issued by non-U.S.
governments, corporate debt securities, CMOs of private issuers and other debt and equity
securities. |
(d) |
|
For the amortized cost of the above categories of securities at December 31, 2004, see Note 9
on page 103. At December 31, 2003, the amortized cost of U.S. government and federal agency
obligations and U.S. government-sponsored enterprise obligations was $45,690 million, and other
available-for-securities was $14,732 million. At December 31, 2003, the amortized cost of U.S.
government and federal agency obligations and U.S. government-sponsored enterprise obligations
held-to-maturity securities was $176 million. There were no other held-to-maturity securities at
December 31, 2003. |
U.S. government-sponsored enterprises were the only issuers whose securities
exceeded 10% of JPMorgan Chases total stockholders equity at December
31, 2005.
For a further discussion of JPMorgan Chases securities portfolios, see Note 9
on pages 103105.
141
Loan portfolio
The table below presents loans based on customer and collateral type compared with the line
of business approach that is presented in Credit risk management on pages 64, 65 and 71, and in Note
11 on page 106:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
(a) |
|
2002 |
(a) |
|
2001 |
(a) |
|
U.S. loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
84,597 |
|
|
$ |
76,890 |
|
|
$ |
38,879 |
|
|
$ |
49,205 |
|
|
$ |
56,680 |
|
Commercial
real estate commercial mortgage(b) |
|
|
16,074 |
|
|
|
15,323 |
|
|
|
3,182 |
|
|
|
3,176 |
|
|
|
3,533 |
|
Commercial
real estate construction(b) |
|
|
4,143 |
|
|
|
4,612 |
|
|
|
589 |
|
|
|
516 |
|
|
|
615 |
|
Financial institutions |
|
|
13,259 |
|
|
|
12,664 |
|
|
|
4,622 |
|
|
|
3,770 |
|
|
|
5,608 |
|
Consumer |
|
|
261,361 |
|
|
|
255,073 |
|
|
|
136,393 |
|
|
|
124,687 |
|
|
|
111,850 |
|
|
Total U.S. loans |
|
|
379,434 |
|
|
|
364,562 |
|
|
|
183,665 |
|
|
|
181,354 |
|
|
|
178,286 |
|
|
Non-U.S. loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
28,969 |
|
|
|
27,293 |
|
|
|
24,618 |
|
|
|
31,446 |
|
|
|
33,530 |
|
Commercial real estate(b) |
|
|
311 |
|
|
|
929 |
|
|
|
79 |
|
|
|
381 |
|
|
|
167 |
|
Financial institutions |
|
|
7,468 |
|
|
|
6,494 |
|
|
|
5,671 |
|
|
|
2,438 |
|
|
|
3,570 |
|
Non-U.S. governments |
|
|
1,295 |
|
|
|
2,778 |
|
|
|
705 |
|
|
|
616 |
|
|
|
1,161 |
|
Consumer |
|
|
1,671 |
|
|
|
58 |
|
|
|
28 |
|
|
|
129 |
|
|
|
730 |
|
|
Total non-U.S. loans |
|
|
39,714 |
|
|
|
37,552 |
|
|
|
31,101 |
|
|
|
35,010 |
|
|
|
39,158 |
|
|
Total loans(c) |
|
$ |
419,148 |
|
|
$ |
402,114 |
|
|
$ |
214,766 |
|
|
$ |
216,364 |
|
|
$ |
217,444 |
|
|
|
|
|
(a) |
|
Heritage JPMorgan Chase only. |
(b) |
|
Represents loans secured by commercial real estate. |
(c) |
|
Loans are presented net of unearned income of $3.0 billion, $4.1 billion, $1.3 billion, $1.9
billion and $1.8 billion at December 31, 2005, 2004, 2003, 2002 and 2001, respectively. |
Maturities and sensitivity to changes in interest rates
The table below shows, at December 31, 2005, commercial loan maturity and distribution between
fixed and floating interest rates based upon the stated terms of the commercial loan agreements.
The table does not include the impact of derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
1-5 |
|
|
After 5 |
|
|
|
|
December 31, 2005 (in millions) |
|
1 year |
(a) |
|
years |
|
|
years |
|
|
Total |
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
36,898 |
|
|
$ |
37,741 |
|
|
$ |
9,958 |
|
|
$ |
84,597 |
|
Commercial real estate |
|
|
4,259 |
|
|
|
10,719 |
|
|
|
5,239 |
|
|
|
20,217 |
|
Financial institutions |
|
|
8,578 |
|
|
|
2,989 |
|
|
|
1,692 |
|
|
|
13,259 |
|
Non-U.S. |
|
|
19,469 |
|
|
|
11,084 |
|
|
|
7,490 |
|
|
|
38,043 |
|
|
Total commercial loans |
|
$ |
69,204 |
|
|
$ |
62,533 |
|
|
$ |
24,379 |
|
|
$ |
156,116 |
|
|
Loans at fixed interest rates |
|
|
|
|
|
$ |
29,409 |
|
|
$ |
11,955 |
|
|
|
|
|
Loans at variable interest rates |
|
|
|
|
|
|
33,124 |
|
|
|
12,424 |
|
|
|
|
|
|
Total commercial loans |
|
|
|
|
|
$ |
62,533 |
|
|
$ |
24,379 |
|
|
|
|
|
|
|
|
|
(a) |
|
Includes demand loans and overdrafts. |
142
Cross-border outstandings
Cross-border disclosure is based upon the Federal Financial Institutions Examination
Councils (FFIEC) guidelines governing the determination of cross-border risk.
The following table lists all countries in which JPMorgan Chases cross-border outstandings exceed
0.75% of consolidated assets as of any of the dates
specified. The disclosure includes certain exposures that are not required under the
disclosure requirements of the SEC. The most significant differences between the FFIEC and SEC
methodologies relate to the treatments of local country exposure and to foreign exchange and
derivatives.
For a further discussion of JPMorgan Chases cross-border exposure based on managements view
of this exposure, see Country exposure on page 70.
Cross-border outstandings exceeding 0.75% of total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net local |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
country |
|
|
direct |
|
|
|
|
|
|
cross-border |
|
(in millions) |
|
At December 31, |
|
|
Governments |
|
|
Banks |
|
|
Other |
(b) |
|
assets |
|
|
exposure |
(c) |
|
Commitments |
(d) |
|
exposure |
|
|
U.K. |
|
|
2005 |
|
|
$ |
1,108 |
|
|
$ |
16,782 |
|
|
$ |
9,893 |
|
|
$ |
|
|
|
$ |
27,783 |
|
|
$ |
146,854 |
|
|
$ |
174,637 |
|
|
|
|
2004 |
|
|
|
1,531 |
|
|
|
23,421 |
|
|
|
24,357 |
|
|
|
|
|
|
|
49,309 |
|
|
|
102,770 |
|
|
|
152,079 |
|
|
|
|
2003 |
(a) |
|
|
1,111 |
|
|
|
3,758 |
|
|
|
11,839 |
|
|
|
|
|
|
|
16,708 |
|
|
|
35,983 |
|
|
|
52,691 |
|
|
Germany |
|
|
2005 |
|
|
$ |
26,959 |
|
|
$ |
8,462 |
|
|
$ |
10,579 |
|
|
$ |
|
|
|
$ |
46,000 |
|
|
$ |
89,112 |
|
|
$ |
135,112 |
|
|
|
|
2004 |
|
|
|
28,114 |
|
|
|
10,547 |
|
|
|
9,759 |
|
|
|
509 |
|
|
|
48,929 |
|
|
|
47,268 |
|
|
|
96,197 |
|
|
|
|
2003 |
(a) |
|
|
14,741 |
|
|
|
12,353 |
|
|
|
4,383 |
|
|
|
|
|
|
|
31,477 |
|
|
|
31,332 |
|
|
|
62,809 |
|
|
France |
|
|
2005 |
|
|
$ |
8,346 |
|
|
$ |
7,890 |
|
|
$ |
7,717 |
|
|
$ |
305 |
|
|
$ |
24,258 |
|
|
$ |
75,577 |
|
|
$ |
99,835 |
|
|
|
|
2004 |
|
|
|
3,315 |
|
|
|
15,178 |
|
|
|
11,790 |
|
|
|
2,082 |
|
|
|
32,365 |
|
|
|
33,724 |
|
|
|
66,089 |
|
|
|
|
2003 |
(a) |
|
|
2,311 |
|
|
|
3,788 |
|
|
|
6,070 |
|
|
|
599 |
|
|
|
12,768 |
|
|
|
22,385 |
|
|
|
35,153 |
|
|
Italy |
|
|
2005 |
|
|
$ |
14,193 |
|
|
$ |
4,053 |
|
|
$ |
5,264 |
|
|
$ |
308 |
|
|
$ |
23,818 |
|
|
$ |
36,688 |
|
|
$ |
60,506 |
|
|
|
|
2004 |
|
|
|
12,431 |
|
|
|
5,589 |
|
|
|
6,911 |
|
|
|
180 |
|
|
|
25,111 |
|
|
|
14,895 |
|
|
|
40,006 |
|
|
|
|
2003 |
(a) |
|
|
9,336 |
|
|
|
3,743 |
|
|
|
2,570 |
|
|
|
818 |
|
|
|
16,467 |
|
|
|
10,738 |
|
|
|
27,205 |
|
|
Netherlands |
|
|
2005 |
|
|
$ |
2,918 |
|
|
$ |
2,330 |
|
|
$ |
11,410 |
|
|
$ |
|
|
|
$ |
16,658 |
|
|
$ |
36,584 |
|
|
$ |
53,242 |
|
|
|
|
2004 |
|
|
|
1,563 |
|
|
|
4,656 |
|
|
|
13,302 |
|
|
|
|
|
|
|
19,521 |
|
|
|
16,985 |
|
|
|
36,506 |
|
|
|
|
2003 |
(a) |
|
|
4,571 |
|
|
|
3,997 |
|
|
|
11,152 |
|
|
|
|
|
|
|
19,720 |
|
|
|
11,689 |
|
|
|
31,409 |
|
|
Spain |
|
|
2005 |
|
|
$ |
2,876 |
|
|
$ |
3,108 |
|
|
$ |
2,455 |
|
|
$ |
733 |
|
|
$ |
9,172 |
|
|
$ |
24,000 |
|
|
$ |
33,172 |
|
|
|
|
2004 |
|
|
|
4,224 |
|
|
|
3,781 |
|
|
|
5,276 |
|
|
|
659 |
|
|
|
13,940 |
|
|
|
11,087 |
|
|
|
25,027 |
|
|
|
|
2003 |
(a) |
|
|
1,365 |
|
|
|
1,909 |
|
|
|
2,964 |
|
|
|
|
|
|
|
6,238 |
|
|
|
7,301 |
|
|
|
13,539 |
|
|
Japan |
|
|
2005 |
|
|
$ |
2,474 |
|
|
$ |
3,008 |
|
|
$ |
1,167 |
|
|
$ |
|
|
|
$ |
6,649 |
|
|
$ |
20,801 |
|
|
$ |
27,450 |
|
|
|
|
2004 |
|
|
|
25,349 |
|
|
|
3,869 |
|
|
|
5,765 |
|
|
|
|
|
|
|
34,983 |
|
|
|
23,582 |
|
|
|
58,565 |
|
|
|
|
2003 |
(a) |
|
|
8,902 |
|
|
|
510 |
|
|
|
2,358 |
|
|
|
|
|
|
|
11,770 |
|
|
|
13,474 |
|
|
|
25,244 |
|
|
Switzerland |
|
|
2005 |
|
|
$ |
207 |
|
|
$ |
2,873 |
|
|
$ |
3,471 |
|
|
$ |
|
|
|
$ |
6,551 |
|
|
$ |
18,794 |
|
|
$ |
25,345 |
|
|
|
|
2004 |
|
|
|
327 |
|
|
|
4,131 |
|
|
|
5,184 |
|
|
|
311 |
|
|
|
9,953 |
|
|
|
7,807 |
|
|
|
17,760 |
|
|
|
|
2003 |
(a) |
|
|
370 |
|
|
|
4,630 |
|
|
|
2,201 |
|
|
|
320 |
|
|
|
7,521 |
|
|
|
4,993 |
|
|
|
12,514 |
|
|
Luxembourg |
|
|
2005 |
|
|
$ |
1,326 |
|
|
$ |
2,484 |
|
|
$ |
9,082 |
|
|
$ |
|
|
|
$ |
12,892 |
|
|
$ |
7,625 |
|
|
$ |
20,517 |
|
|
|
|
2004 |
|
|
|
397 |
|
|
|
5,000 |
|
|
|
9,690 |
|
|
|
|
|
|
|
15,087 |
|
|
|
1,721 |
|
|
|
16,808 |
|
|
|
|
2003 |
(a) |
|
|
774 |
|
|
|
718 |
|
|
|
8,336 |
|
|
|
|
|
|
|
9,828 |
|
|
|
1,007 |
|
|
|
10,835 |
|
|
Belgium |
|
|
2005 |
|
|
$ |
2,350 |
|
|
$ |
1,268 |
|
|
$ |
1,893 |
|
|
$ |
|
|
|
$ |
5,511 |
|
|
$ |
1,481 |
|
|
$ |
6,992 |
|
|
|
|
2004 |
|
|
|
2,899 |
|
|
|
3,177 |
|
|
|
3,075 |
|
|
|
|
|
|
|
9,151 |
|
|
|
1,254 |
|
|
|
10,405 |
|
|
|
|
2003 |
(a) |
|
|
1,426 |
|
|
|
474 |
|
|
|
1,096 |
|
|
|
|
|
|
|
2,996 |
|
|
|
1,072 |
|
|
|
4,068 |
|
|
|
|
|
(a) |
|
Heritage JPMorgan Chase only. |
(b) |
|
Consists primarily of commercial and industrial. |
(c) |
|
Exposure includes loans and accrued interest receivable, interest-bearing deposits with banks,
acceptances, resale agreements, other monetary assets, cross-border trading debt and equity
instruments, mark-to-market exposure of foreign exchange and derivative contracts and local country
assets, net of local country liabilities. The amounts associated with foreign exchange and
derivative contracts are presented after taking into account the impact of legally enforceable
master netting agreements. |
(d) |
|
Commitments include outstanding letters of credit, undrawn commitments to extend credit and
credit derivatives. |
JPMorgan Chases total cross-border exposure tends to fluctuate greatly, and the amount of
exposure at year-end tends to be a function of timing rather than representing a consistent trend.
143
Risk elements
The following table sets forth nonperforming assets and contractually past-due assets at the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
(d) |
|
2002 |
(d) |
|
2001 |
(d) |
|
Nonperforming assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. nonperforming loans:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
818 |
|
|
$ |
1,175 |
|
|
$ |
1,060 |
|
|
$ |
1,769 |
|
|
$ |
1,186 |
|
Commercial real estate |
|
|
234 |
|
|
|
326 |
|
|
|
31 |
|
|
|
48 |
|
|
|
131 |
|
Financial institutions |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
258 |
|
|
|
33 |
|
Consumer |
|
|
1,117 |
|
|
|
895 |
|
|
|
542 |
|
|
|
544 |
|
|
|
537 |
|
|
Total U.S. nonperforming loans |
|
|
2,170 |
|
|
|
2,397 |
|
|
|
1,634 |
|
|
|
2,619 |
|
|
|
1,887 |
|
Non-U.S. nonperforming loans:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
135 |
|
|
|
288 |
|
|
|
909 |
|
|
|
1,566 |
|
|
|
679 |
|
Commercial real estate |
|
|
12 |
|
|
|
13 |
|
|
|
13 |
|
|
|
11 |
|
|
|
9 |
|
Financial institutions |
|
|
25 |
|
|
|
43 |
|
|
|
25 |
|
|
|
36 |
|
|
|
23 |
|
Non-U.S. governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Consumer |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
2 |
|
|
|
4 |
|
|
Total non-U.S. nonperforming loans |
|
|
173 |
|
|
|
346 |
|
|
|
950 |
|
|
|
1,615 |
|
|
|
726 |
|
|
Total nonperforming loans |
|
|
2,343 |
|
|
|
2,743 |
|
|
|
2,584 |
|
|
|
4,234 |
|
|
|
2,613 |
|
|
Derivative receivables |
|
|
50 |
|
|
|
241 |
|
|
|
253 |
|
|
|
289 |
|
|
|
1,300 |
|
Other receivables |
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
108 |
|
|
|
|
|
Assets acquired in loan satisfactions |
|
|
197 |
|
|
|
247 |
|
|
|
216 |
|
|
|
190 |
|
|
|
124 |
|
|
Total nonperforming assets(b) |
|
$ |
2,590 |
|
|
$ |
3,231 |
|
|
$ |
3,161 |
|
|
$ |
4,821 |
|
|
$ |
4,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractually past-due assets(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
75 |
|
|
$ |
34 |
|
|
$ |
41 |
|
|
$ |
57 |
|
|
$ |
11 |
|
Commercial real estate |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Consumer |
|
|
1,046 |
|
|
|
970 |
|
|
|
269 |
|
|
|
473 |
|
|
|
484 |
|
|
Total U.S. loans |
|
|
1,128 |
|
|
|
1,004 |
|
|
|
310 |
|
|
|
530 |
|
|
|
514 |
|
Non-U.S. loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
Total non-U.S. loans |
|
|
|
|
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
7 |
|
|
Total |
|
$ |
1,128 |
|
|
$ |
1,006 |
|
|
$ |
315 |
|
|
$ |
530 |
|
|
$ |
521 |
|
|
|
|
|
(a) |
|
All nonperforming loans are accounted for on a nonaccrual basis. There were no nonperforming
renegotiated loans. Renegotiated loans are those for which concessions, such as the reduction of
interest rates or the deferral of interest or principal payments, have been granted as a result of
a deterioration in the borrowers financial condition. |
(b) |
|
Excludes wholesale purchased held-for-sale (HFS) loans purchased as
part of the Investment Banks proprietary activities. |
(c) |
|
Represents accruing loans past-due 90 days or more as to principal and interest, which are not
characterized as nonperforming loans. |
(d) |
|
Heritage JPMorgan Chase only. |
For a discussion of nonperforming loans and past-due loan accounting policies, see Credit risk
management on pages 6374, and Note 11 on pages 106107.
Impact of nonperforming loans on interest income
The negative impact on interest income from nonperforming loans represents the difference
between the amount of interest income that would have been recorded on nonperforming loans
according to contractual terms and the amount of interest that actually was recognized on a cash
basis. The following table sets forth this data for the years specified.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount of interest that would have been
recorded at the original rate |
|
$ |
170 |
|
|
$ |
124 |
|
|
$ |
86 |
|
Interest that was recognized in income |
|
|
(30 |
) |
|
|
(8 |
) |
|
|
(5 |
) |
|
Negative
impact U.S. |
|
|
140 |
|
|
|
116 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount of interest that would have been recorded at the original rate |
|
|
11 |
|
|
|
36 |
|
|
|
58 |
|
Interest that was recognized in income |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Negative
impact non-U.S. |
|
|
7 |
|
|
|
36 |
|
|
|
58 |
|
|
Total negative impact on interest income |
|
$ |
147 |
|
|
$ |
152 |
|
|
$ |
139 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase
only. |
144
Summary of loan and lending-related commitments loss experience
The tables below summarize the changes in the Allowance for loan losses and the Allowance for
lending-related commitments, respectively, during the periods indicated. For a further discussion,
see Allowance for credit losses on pages 7374, and Note 12 on
pages 107108.
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
Balance at beginning of year |
|
$ |
7,320 |
|
|
$ |
4,523 |
|
|
$ |
5,350 |
|
|
$ |
4,524 |
|
|
$ |
3,665 |
|
Addition resulting from the Merger, July 1, 2004 |
|
|
|
|
|
|
3,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
3,575 |
|
|
|
2,883 |
|
|
|
1,579 |
|
|
|
4,039 |
|
|
|
3,185 |
|
U.S. charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
(456 |
) |
|
|
(483 |
) |
|
|
(668 |
) |
|
|
(967 |
) |
|
|
(852 |
) |
Commercial real estate |
|
|
(36 |
) |
|
|
(17 |
) |
|
|
(2 |
) |
|
|
(5 |
) |
|
|
(7 |
) |
Financial institutions |
|
|
|
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(19 |
) |
|
|
(35 |
) |
Consumer |
|
|
(4,334 |
) |
|
|
(3,079 |
) |
|
|
(1,646 |
) |
|
|
(2,070 |
) |
|
|
(1,485 |
) |
|
Total U.S. charge-offs |
|
|
(4,826 |
) |
|
|
(3,587 |
) |
|
|
(2,321 |
) |
|
|
(3,061 |
) |
|
|
(2,379 |
) |
|
Non-U.S. charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
(33 |
) |
|
|
(211 |
) |
|
|
(470 |
) |
|
|
(955 |
) |
|
|
(192 |
) |
Financial institutions |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(26 |
) |
|
|
(43 |
) |
|
|
(1 |
) |
Non-U.S. governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
Consumer |
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
Total non-U.S. charge-offs |
|
|
(43 |
) |
|
|
(218 |
) |
|
|
(497 |
) |
|
|
(999 |
) |
|
|
(203 |
) |
|
Total charge-offs |
|
|
(4,869 |
) |
|
|
(3,805 |
) |
|
|
(2,818 |
) |
|
|
(4,060 |
) |
|
|
(2,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
202 |
|
|
|
202 |
|
|
|
167 |
|
|
|
45 |
|
|
|
56 |
|
Commercial real estate |
|
|
10 |
|
|
|
20 |
|
|
|
5 |
|
|
|
24 |
|
|
|
9 |
|
Financial institutions |
|
|
3 |
|
|
|
8 |
|
|
|
5 |
|
|
|
1 |
|
|
|
12 |
|
Consumer |
|
|
668 |
|
|
|
319 |
|
|
|
191 |
|
|
|
276 |
|
|
|
132 |
|
|
Total U.S. recoveries |
|
|
883 |
|
|
|
549 |
|
|
|
368 |
|
|
|
346 |
|
|
|
209 |
|
|
Non-U.S. recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
144 |
|
|
|
124 |
|
|
|
155 |
|
|
|
36 |
|
|
|
30 |
|
Financial institutions |
|
|
20 |
|
|
|
32 |
|
|
|
23 |
|
|
|
1 |
|
|
|
7 |
|
Non-U.S. governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Consumer |
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Total non-U.S. recoveries |
|
|
167 |
|
|
|
157 |
|
|
|
178 |
|
|
|
38 |
|
|
|
38 |
|
|
Total recoveries |
|
|
1,050 |
|
|
|
706 |
|
|
|
546 |
|
|
|
384 |
|
|
|
247 |
|
|
Net charge-offs |
|
|
(3,819 |
) |
|
|
(3,099 |
) |
|
|
(2,272 |
) |
|
|
(3,676 |
) |
|
|
(2,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance related to purchased portfolios |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
460 |
|
|
|
|
|
Other(b) |
|
|
(3 |
) |
|
|
(110 |
) |
|
|
(134 |
) |
|
|
3 |
|
|
|
9 |
|
|
Balance at year-end |
|
$ |
7,090 |
|
|
$ |
7,320 |
|
|
$ |
4,523 |
|
|
$ |
5,350 |
|
|
$ |
4,524 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. All periods prior to 2004 reflect the results of heritage JPMorgan Chase
only. |
(b) |
|
Primarily relates to the transfer of the allowance for accrued interest and fees on
reported and securitized credit card loans in 2004 and 2003. |
Allowance
for lending-related commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
Balance at beginning of year |
|
$ |
492 |
|
|
$ |
324 |
|
|
$ |
363 |
|
|
$ |
282 |
|
|
$ |
283 |
|
Addition resulting from the Merger, July 1, 2004 |
|
|
|
|
|
|
508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for lending-related commitments |
|
|
(92 |
) |
|
|
(339 |
) |
|
|
(39 |
) |
|
|
292 |
|
|
|
(3 |
) |
U.S.
charge-offs commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212 |
) |
|
|
|
|
|
Total charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
recoveries commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
Total recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
Balance at year-end |
|
$ |
400 |
|
|
$ |
492 |
|
|
$ |
324 |
|
|
$ |
363 |
|
|
$ |
282 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. All periods prior to 2004 reflect the results of heritage JPMorgan Chase
only. |
145
Loan loss analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions,
except
ratios)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans average |
|
$ |
410,114 |
|
|
$ |
308,450 |
|
|
$ |
220,692 |
|
|
$ |
211,432 |
|
|
$ |
219,843 |
|
Loans year-end |
|
|
419,148 |
|
|
|
402,114 |
|
|
|
214,766 |
|
|
|
216,364 |
|
|
|
217,444 |
|
Net
charge-offs(b) |
|
|
3,819 |
|
|
|
3,099 |
|
|
|
2,272 |
|
|
|
3,676 |
|
|
|
2,335 |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
6,642 |
|
|
|
6,617 |
|
|
|
3,677 |
|
|
|
4,122 |
|
|
|
3,743 |
|
Non-U.S. |
|
|
448 |
|
|
|
703 |
|
|
|
846 |
|
|
|
1,228 |
|
|
|
781 |
|
|
Total allowance for loan losses |
|
|
7,090 |
|
|
|
7,320 |
|
|
|
4,523 |
|
|
|
5,350 |
|
|
|
4,524 |
|
|
Nonperforming loans |
|
|
2,343 |
|
|
|
2,743 |
|
|
|
2,584 |
|
|
|
4,234 |
|
|
|
2,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
average(c) |
|
|
1.00 |
% |
|
|
1.08 |
% |
|
|
1.19 |
% |
|
|
1.90 |
% |
|
|
1.13 |
% |
Allowance for loan losses |
|
|
53.86 |
|
|
|
42.34 |
|
|
|
50.23 |
|
|
|
68.71 |
|
|
|
51.61 |
|
Allowance for loan losses to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
year-end (c) |
|
|
1.84 |
|
|
|
1.94 |
|
|
|
2.33 |
|
|
|
2.80 |
|
|
|
2.25 |
|
Nonperforming loans(c) |
|
|
321 |
|
|
|
268 |
|
|
|
180 |
|
|
|
128 |
|
|
|
181 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. All periods prior to 2004 reflect the results of heritage JPMorgan Chase only. |
(b) |
|
Excludes net charge-offs (recoveries) on lending-related commitments of $212
million and $(3) million in 2002 and 2001, respectively. There were no net charge-offs (recoveries)
on lending-related commitments in 2005, 2004 or 2003. |
(c) |
|
Excludes loans held for sale. |
Deposits
The following table provides a summary of the average balances and average interest rates of
JPMorgan Chases various deposits for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balances(a) |
|
|
Average interest rates(a) |
|
(in millions, except interest rates) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
43,692 |
|
|
$ |
31,733 |
|
|
$ |
22,289 |
|
|
|
|
% |
|
|
|
% |
|
|
|
% |
Interest-bearing demand |
|
|
13,620 |
|
|
|
11,040 |
|
|
|
4,859 |
|
|
|
2.69 |
|
|
|
1.31 |
|
|
|
1.22 |
|
Savings |
|
|
239,772 |
|
|
|
176,850 |
|
|
|
104,863 |
|
|
|
1.57 |
|
|
|
0.80 |
|
|
|
0.75 |
|
Time |
|
|
98,063 |
|
|
|
73,757 |
|
|
|
55,911 |
|
|
|
2.61 |
|
|
|
1.54 |
|
|
|
1.51 |
|
|
Total U.S. deposits |
|
|
395,147 |
|
|
|
293,380 |
|
|
|
187,922 |
|
|
|
1.69 |
|
|
|
0.92 |
|
|
|
0.90 |
|
|
Non-U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
|
6,237 |
|
|
|
6,479 |
|
|
|
6,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
|
70,403 |
|
|
|
56,870 |
|
|
|
66,460 |
|
|
|
2.94 |
|
|
|
1.62 |
|
|
|
1.63 |
|
Savings |
|
|
549 |
|
|
|
746 |
|
|
|
607 |
|
|
|
0.36 |
|
|
|
0.11 |
|
|
|
0.15 |
|
Time |
|
|
52,650 |
|
|
|
53,539 |
|
|
|
43,735 |
|
|
|
2.93 |
|
|
|
1.88 |
|
|
|
1.90 |
|
|
Total non-U.S. deposits(b) |
|
|
129,839 |
|
|
|
117,634 |
|
|
|
117,363 |
|
|
|
2.78 |
|
|
|
1.64 |
|
|
|
1.63 |
|
|
Total deposits |
|
$ |
524,986 |
|
|
$ |
411,014 |
|
|
$ |
305,285 |
|
|
|
1.96 |
% |
|
|
1.13 |
% |
|
|
1.18 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
The majority of non-U.S. deposits were in denominations of $100,000 or more. |
At December 31, 2005, other U.S. time deposits in denominations of $100,000 or more totaled $63
billion, substantially all of which mature in three months or less. In addition, the table below
presents the maturities for U.S. time certificates of deposit in denominations of $100,000 or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 months |
|
|
Over 3 months |
|
|
Over 6 months |
|
|
Over |
|
|
|
|
By remaining maturity at December 31, 2005 (in millions) |
|
or less |
|
|
but within 6 months |
|
|
but within 12 months |
|
|
12 months |
|
|
Total |
|
|
U.S. time certificates of deposit ($100,000 or more) |
|
|
$ 8,980 |
|
|
|
$ 2,200 |
|
|
|
$ 3,474 |
|
|
|
$ 3,008 |
|
|
|
$ 17,662 |
|
|
146
Short-term and other borrowed funds
The following table provides a summary of JPMorgan Chases short-term and other borrowed funds
for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except rates) |
|
2005 |
|
|
2004 |
(a) |
|
2003 |
(a) |
|
Federal funds purchased and securities
sold under repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end |
|
|
$ 125,925 |
|
|
|
$ 127,787 |
|
|
|
$ 113,466 |
|
Average daily balance during the year |
|
|
155,010 |
|
|
|
155,665 |
|
|
|
161,020 |
|
Maximum month-end balance |
|
|
177,144 |
|
|
|
168,257 |
|
|
|
205,955 |
|
Weighted-average rate at December 31 |
|
|
3.26 |
% |
|
|
2.15 |
% |
|
|
1.17 |
% |
Weighted-average rate during the year |
|
|
2.75 |
|
|
|
1.49 |
|
|
|
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end |
|
|
$ 13,863 |
|
|
|
$ 12,605 |
|
|
|
$ 14,284 |
|
Average daily balance during the year |
|
|
14,450 |
|
|
|
12,699 |
|
|
|
13,387 |
|
Maximum month-end balance |
|
|
18,077 |
|
|
|
15,300 |
|
|
|
15,769 |
|
Weighted-average rate at December 31 |
|
|
3.62 |
% |
|
|
1.98 |
% |
|
|
0.98 |
% |
Weighted-average rate during the year |
|
|
2.81 |
|
|
|
1.03 |
|
|
|
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end |
|
|
$ 104,636 |
|
|
|
$ 96,981 |
|
|
|
$ 87,147 |
|
Average daily balance during the year |
|
|
106,186 |
|
|
|
83,721 |
|
|
|
69,703 |
|
Maximum month-end balance |
|
|
120,051 |
|
|
|
99,689 |
|
|
|
95,690 |
|
Weighted-average rate at December 31 |
|
|
4.51 |
% |
|
|
3.81 |
% |
|
|
4.47 |
% |
Weighted-average rate during the year |
|
|
4.58 |
|
|
|
4.56 |
|
|
|
5.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 46 short-term beneficial interests:(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end |
|
|
$ 35,161 |
|
|
|
$ 38,519 |
|
|
|
$ 6,321 |
|
Average daily balance during the year |
|
|
34,439 |
|
|
|
19,472 |
|
|
|
6,185 |
|
Maximum month-end balance |
|
|
35,676 |
|
|
|
38,519 |
|
|
|
12,007 |
|
Weighted-average rate at December 31 |
|
|
2.69 |
% |
|
|
2.23 |
% |
|
|
0.88 |
% |
Weighted-average rate during the year |
|
|
3.07 |
|
|
|
1.80 |
|
|
|
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end |
|
|
$ 4,682 |
|
|
|
$ 3,149 |
|
|
|
$ 3,545 |
|
Average daily balance during the year |
|
|
3,569 |
|
|
|
3,219 |
|
|
|
2,048 |
|
Maximum month-end balance |
|
|
5,568 |
|
|
|
3,447 |
|
|
|
3,545 |
|
Weighted-average rate at December 31 |
|
|
1.92 |
% |
|
|
1.93 |
% |
|
|
2.26 |
% |
Weighted-average rate during the year |
|
|
2.13 |
|
|
|
1.10 |
|
|
|
0.83 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Includes securities sold but not yet purchased. |
(c) |
|
Included on the Consolidated balance sheets in Beneficial interests issued by consolidated
variable interest entities. VIEs had unused commitments to borrow an additional $4.1 billion and
$4.2 billion at December 31, 2005 and 2004, respectively, for general liquidity purposes. |
Federal funds purchased represents overnight funds. Securities sold under repurchase agreements
generally mature between one day and three months. Commercial paper generally is issued in amounts not
less than $100,000 and with maturities of 270 days or less. Other borrowed funds consist of demand
notes, term federal funds purchased and various other borrowings that generally have
maturities of one year or less. At December 31, 2005, JPMorgan Chase had no lines of
credit for general corporate purposes.
147
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf of the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co.
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ WILLIAM B. HARRISON, JR. |
|
|
|
|
|
|
|
|
|
|
|
|
|
(William B. Harrison, Jr.
Chairman of the Board) |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ JAMES DIMON |
|
|
|
|
|
|
|
|
|
|
|
|
|
(James Dimon
President and Chief Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
Date: March 8, 2006 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacity and on the
date indicated. JPMorgan Chase does not exercise the power of attorney to sign on behalf of any
Director.
|
|
|
|
|
|
|
|
Capacity |
|
|
Date |
|
|
|
|
|
|
/s/ WILLIAM B. HARRISON, JR.
|
|
Director and Chairman of the Board |
|
|
|
|
|
|
|
|
|
(William B. Harrison, Jr.) |
|
|
|
|
|
|
|
|
|
|
|
/s/ JAMES DIMON |
|
Director, President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
(James Dimon) |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
/s/ HANS W. BECHERER
|
|
Director |
|
|
|
|
|
|
|
|
|
(Hans W. Becherer) |
|
|
|
|
|
|
|
|
|
|
|
/s/ JOHN H. BIGGS
|
|
Director |
|
|
|
|
|
|
|
|
|
(John H. Biggs)
|
|
|
|
|
March 8, 2006 |
|
|
|
|
|
|
/s/ LAWRENCE A. BOSSIDY
|
|
Director |
|
|
|
|
|
|
|
|
|
(Lawrence A. Bossidy) |
|
|
|
|
|
|
|
|
|
|
|
/s/ STEPHEN B. BURKE
|
|
Director |
|
|
|
|
|
|
|
|
|
(Stephen B. Burke) |
|
|
|
|
|
|
|
|
|
|
|
/s/ JAMES S. CROWN
|
|
Director |
|
|
|
|
|
|
|
|
|
(James S. Crown) |
|
|
|
|
|
|
|
|
|
|
|
/s/ ELLEN V. FUTTER
|
|
Director |
|
|
|
|
|
|
|
|
|
(Ellen V. Futter) |
|
|
|
|
|
148
|
|
|
|
|
|
|
|
Capacity |
|
|
Date |
|
|
|
|
|
|
/s/ WILLIAM H. GRAY, III
|
|
Director |
|
|
|
|
|
|
|
|
|
(William H. Gray, III) |
|
|
|
|
|
|
|
|
|
|
|
/s/ LABAN P. JACKSON, JR.
|
|
Director |
|
|
|
|
|
|
|
|
|
(Laban P. Jackson, Jr.) |
|
|
|
|
|
|
|
|
|
|
|
/s/ JOHN W. KESSLER
|
|
Director |
|
|
|
|
|
|
|
|
|
(John W. Kessler) |
|
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT I. LIPP
|
|
Director |
|
|
|
|
|
|
|
|
|
(Robert I. Lipp) |
|
|
|
|
|
|
|
|
|
|
|
/s/ RICHARD A. MANOOGIAN
|
|
Director |
|
|
|
|
|
|
|
|
|
(Richard A. Manoogian)
|
|
|
|
|
March 8, 2006 |
|
|
|
|
|
|
/s/ DAVID C. NOVAK
|
|
Director |
|
|
|
|
|
|
|
|
|
(David C. Novak) |
|
|
|
|
|
|
|
|
|
|
|
/s/ LEE R. RAYMOND
|
|
Director |
|
|
|
|
|
|
|
|
|
(Lee R. Raymond) |
|
|
|
|
|
|
|
|
|
|
|
/s/ WILLIAM C. WELDON
|
|
Director |
|
|
|
|
|
|
|
|
|
(William C. Weldon) |
|
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL J. CAVANAGH |
|
Executive Vice President |
|
|
|
|
|
|
|
|
|
(Michael J. Cavanagh) |
|
and Chief Financial Officer |
|
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
/s/ JOSEPH L. SCLAFANI
|
|
Executive Vice President and Controller |
|
|
|
|
|
|
|
|
|
(Joseph L. Sclafani) |
|
(Principal Accounting Officer) |
|
|
|
149