10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2006
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Commission file 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
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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270 Park Avenue, New York, New York
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10017 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (212) 270-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes x No
Number
of shares of common stock outstanding as of April 30, 2006:
3,474,553,532
FORM 10Q
TABLE OF CONTENTS
2
JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
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(unaudited) |
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(in millions, except per share, headcount and ratio data) |
As of or for the period ended |
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1Q06 |
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4Q05 |
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3Q05 |
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2Q05 |
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1Q05 |
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Selected income statement data |
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Noninterest revenue |
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$ |
10,176 |
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$ |
8,925 |
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$ |
9,613 |
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$ |
7,742 |
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$ |
8,422 |
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Net interest income |
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5,060 |
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4,753 |
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4,852 |
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5,001 |
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5,225 |
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Total net revenue |
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15,236 |
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13,678 |
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14,465 |
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12,743 |
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13,647 |
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Provision for credit losses |
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831 |
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1,224 |
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1,245 |
(f) |
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587 |
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427 |
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Noninterest expense |
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9,752 |
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8,535 |
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9,464 |
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10,899 |
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9,937 |
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Income before income tax expense |
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4,653 |
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3,919 |
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3,756 |
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1,257 |
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3,283 |
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Income tax expense |
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1,572 |
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1,221 |
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1,229 |
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263 |
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1,019 |
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Net income |
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$ |
3,081 |
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$ |
2,698 |
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$ |
2,527 |
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$ |
994 |
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$ |
2,264 |
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Per common share |
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Net income per share: Basic |
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$ |
0.89 |
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$ |
0.78 |
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$ |
0.72 |
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$ |
0.28 |
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$ |
0.64 |
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Diluted |
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0.86 |
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0.76 |
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0.71 |
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0.28 |
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0.63 |
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Cash dividends declared per share |
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0.34 |
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0.34 |
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0.34 |
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0.34 |
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0.34 |
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Book value per share |
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31.19 |
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30.71 |
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30.26 |
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29.95 |
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29.78 |
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Common shares outstanding |
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Average: Basic |
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3,473 |
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3,472 |
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3,485 |
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3,493 |
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3,518 |
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Diluted |
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3,571 |
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3,564 |
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3,548 |
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3,548 |
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3,570 |
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Common shares at period-end |
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3,473 |
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3,487 |
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3,503 |
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3,514 |
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3,525 |
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Selected ratios |
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Return on common equity (ROE)(a) |
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12 |
% |
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10 |
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9 |
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4 |
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9 |
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Return on assets (ROA)(a)(b) |
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1.00 |
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0.89 |
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0.84 |
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0.34 |
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0.79 |
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Tier 1 capital ratio |
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8.5 |
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8.5 |
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8.2 |
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8.2 |
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8.6 |
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Total capital ratio |
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12.1 |
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12.0 |
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11.3 |
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11.3 |
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11.9 |
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Tier 1 leverage ratio |
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6.1 |
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6.3 |
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6.2 |
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6.2 |
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6.3 |
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Selected balance sheet data (period-end) |
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Total assets |
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$ |
1,273,282 |
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$ |
1,198,942 |
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$ |
1,203,033 |
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$ |
1,171,283 |
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$ |
1,178,305 |
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Securities |
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67,126 |
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47,600 |
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68,697 |
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58,573 |
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75,251 |
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Loans |
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432,081 |
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419,148 |
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420,504 |
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416,025 |
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402,669 |
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Deposits |
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584,465 |
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554,991 |
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535,123 |
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534,640 |
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531,379 |
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Long-term debt |
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112,133 |
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108,357 |
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101,853 |
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101,182 |
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99,329 |
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Common stockholders equity |
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108,337 |
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107,072 |
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105,996 |
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105,246 |
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105,001 |
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Total stockholders equity |
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108,337 |
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107,211 |
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106,135 |
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105,385 |
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105,340 |
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Credit quality metrics |
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Allowance for credit losses |
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$ |
7,659 |
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$ |
7,490 |
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$ |
7,615 |
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$ |
7,233 |
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$ |
7,423 |
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Nonperforming assets(c) |
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2,348 |
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2,590 |
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2,839 |
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2,832 |
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2,949 |
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Allowance for loan losses to total loans(d) |
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1.83 |
% |
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1.84 |
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1.86 |
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1.76 |
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1.82 |
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Net charge-offs |
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$ |
668 |
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$ |
1,360 |
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$ |
870 |
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$ |
773 |
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$ |
816 |
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Net charge-off rate(a)(d) |
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0.69 |
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1.39 |
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0.89 |
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0.82 |
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0.88 |
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Wholesale net charge-off (recovery)
rate(a)(d) |
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(0.06 |
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0.07 |
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(0.12 |
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(0.16 |
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(0.03 |
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Managed card net charge-off rate(a) |
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2.99 |
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6.39 |
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4.70 |
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4.87 |
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4.83 |
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Headcount |
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170,787 |
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168,847 |
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168,955 |
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168,708 |
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164,381 |
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Share price(e) |
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High |
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$ |
42.43 |
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$ |
40.56 |
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$ |
35.95 |
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$ |
36.50 |
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$ |
39.69 |
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Low |
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37.88 |
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32.92 |
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33.31 |
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33.35 |
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34.32 |
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Close |
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41.64 |
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39.69 |
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33.93 |
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35.32 |
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34.60 |
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(a) |
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Based upon annualized amounts. |
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(b) |
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Represents Net income divided by Total average assets. |
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(c) |
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Excludes wholesale held-for-sale (HFS) loans purchased as part of the Investment Banks
proprietary activities. |
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(d) |
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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. |
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(e) |
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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. |
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(f) |
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Third-quarter 2005 includes a $400 million special provision related to Hurricane Katrina. |
3
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10Q provides managements discussion and analysis (MD&A) of the financial condition
and results of operations for JPMorgan Chase & Co. See the Glossary of terms on pages 8889 for
definitions of terms used throughout this Form 10Q. The MD&A included in this Form 10Q 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. See Forward-looking statements on page 92 of this Form 10Q.
INTRODUCTION
JPMorgan Chase & Co. (JPMorgan Chase or the Firm), a financial holding company incorporated
under Delaware law in 1968, is a leading global financial services firm and one of the largest
banking institutions in the United States, with $1.3 trillion in assets, $108 billion in
stockholders equity and operations worldwide. The Firm is a leader in investment banking,
financial services for consumers and businesses, financial transaction processing, asset and wealth
management and private equity. Under the JPMorgan and Chase brands, the Firm serves millions of
customers in the United States and many of the 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 segments. The
Firms consumer businesses comprise the Retail Financial Services and Card Services segments. A
description of the Firms business segments, and the products and services they provide to their
respective client bases, follows.
Investment Bank
JPMorgan 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 IB also commits the Firms own capital to proprietary investing and
trading activities.
Retail Financial Services
Retail Financial Services (RFS) realigned its business reporting segments on January 1, 2006,
into Regional Banking, Mortgage Banking and Auto Finance. Regional Banking offers one of the
largest branch networks in the United States, covering 17 states with 2,638 branches and 7,400
automated teller machines (ATMs). Regional Banking distributes, through its network, a variety of
products including checking, savings and time deposit accounts; home equity, residential mortgage,
small business banking, and education loans; mutual fund and annuity investments; and on-line
banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of
the largest originators and servicers of home mortgages. Auto Finance is the largest noncaptive
originator of automobile loans, primarily through a network of automotive dealers across the United
States. The Firm has announced an agreement to acquire the consumer, small-business and
middle-market banking businesses of The Bank of New York Company (The Bank of New York) in
exchange for certain portions of the Firms corporate trust business.
Card Services
Card Services (CS) is one of the largest issuers of credit cards in the United States, with more
than 112 million cards in circulation. CS offers a wide variety of cards to satisfy the needs of
individual consumers, small businesses and partner organizations. The Chase Paymentech Solutions,
LLC joint venture is the largest processor of MasterCard® and Visa® payments in the world.
Commercial Banking
Commercial Banking (CB) serves more than 25,000 clients, including corporations, municipalities,
financial institutions and not-for-profit entities, with annual revenues generally ranging from $10
million to $2 billion. While most Middle Market clients are located within the RFS footprint, CB
also serves larger corporations, as well as local governments and financial institutions on a
national basis. CB is a market leader with superior client penetration across the businesses it
serves. Local market presence, coupled with industry expertise and excellent client service and
risk management, enables CB to offer superior financial advice. Partnership with other JPMorgan
Chase businesses positions CB to deliver broad product capabilities including lending, treasury
services, investment banking, and asset and wealth management in order to meet its clients
financial needs.
4
Treasury & Securities Services
Treasury & Securities Services (TSS) is a global leader in providing transaction,
investment and information services to support the needs of corporations, issuers and institutional
investors worldwide. TSS is one of the largest cash management providers in the world and a leading
global custodian. The Treasury Services (TS) business provides a variety of cash management
products, trade finance and logistics solutions, wholesale card products, and short-term liquidity
management tools. TS partners with the CB, Regional Banking and Asset & Wealth Management
businesses to serve clients firmwide. As a result, certain TS revenues are included in other
segments results. As previously announced, TSS reorganized the Investor Services and Institutional
Trust Services businesses into a single business called Worldwide Securities Services (WSS). The
WSS business provides: safekeeping, valuing, clearing and servicing of securities and portfolios
for investors and broker-dealers; trustee and agent services; and management of American Depositary
Receipt programs. The Firm has announced an agreement to acquire the consumer, small-business and
middle-market banking businesses of The Bank of New York in exchange for certain portions of the
Firms corporate trust business. For a description of the transaction, see Other Business Events
below.
Asset & Wealth Management
Asset & Wealth Management (AWM) provides investment advice and management for institutions and
individuals. With $1.2 trillion of Assets under supervision, AWM is one of the largest asset and
wealth managers in the world. AWM serves four distinct client groups through three businesses:
institutions through JPMorgan Asset Management; ultra-high-net-worth clients through the Private
Bank; high-net-worth clients through Private Client Services; and retail clients through JPMorgan
Asset Management. The majority of 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.
OTHER BUSINESS EVENTS
IPO allocation litigation
On April 19, 2006, JPMorgan Securities Inc. (JPMSI) entered into a Memorandum of Understanding
(the MOU) with plaintiffs executive committees in the consolidated IPO securities cases and the
consolidated IPO antitrust cases. The MOU is an agreement in principle to settle these class action
lawsuits for $425 million. The MOU is subject to approval by the plaintiffs in each of the cases
and by the district court judges presiding over the respective lawsuits. The settlement would not
have a material adverse impact on the Firms financial results. See Part II Other Information, Item
1 Legal Proceedings on page 93 of this Form 10Q for additional information.
Acquisition of the consumer, small-business and middle-market banking businesses of The Bank of New
York in exchange for certain portions of the corporate trust business
On April 8, 2006, JPMorgan Chase announced an agreement to acquire The Bank of New Yorks consumer,
small-business and middle-market banking businesses in exchange for certain portions of the Firms
corporate trust business plus a cash payment of $150 million. The Bank of New York businesses being
acquired are valued at a premium of $2.30 billion; certain portions of the Firms corporate trust
business being sold are valued at a premium of $2.15 billion. The Firm may also make a future
payment to The Bank of New York of up to $50 million depending on the number of new account
openings at the Firms retail branches. The transaction has been approved by both companies boards
of directors and is subject to regulatory approvals. It is expected to close in late third quarter
or the fourth quarter of 2006.
Acquisition of Kohls private label credit card portfolio
On March 5, 2006, JPMorgan Chase entered into an agreement with Kohls Corporation (Kohls) to
acquire $1.6 billion of Kohls private label credit card receivables and 13 million accounts. The
transaction was completed on April 21, 2006. JPMorgan Chase and Kohls have also entered into an
agreement under which JPMorgan Chase will offer private-label credit cards to both new and existing
Kohls customers.
Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately $663 million, Collegiate Funding
Services, a leader in education loan servicing and consolidation. This acquisition included $6
billion of education loans and enables the Firm to create a comprehensive education finance
business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office operations of Paloma Partners
Management Company (Paloma), which is part of a privately-owned investment fund management group
based in Greenwich, CT. The parties have also entered into a multi-year contract pursuant to which
JPMorgan Chase will provide daily operational services to Paloma. The acquired operations will be
combined with JPMorgan Chases current hedge fund administration unit, JPMorgan Tranaut.
5
JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity Brokerage to become the
exclusive provider of new issue equity securities and the primary provider of fixed income products
to Fidelitys brokerage clients and retail customers, effectively expanding the Firms existing
distribution platform.
Sale of insurance underwriting business
On February 7, 2006, JPMorgan Chase announced that it had agreed to sell its life insurance and
annuity underwriting businesses to Protective Life Corporation for a cash purchase price of
approximately $1.2 billion. The sale, which includes both the heritage Chase insurance business and
the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal
regulatory approvals and is expected to close in the third quarter of 2006. JPMorgan Chase
anticipates the transaction will have no material impact on earnings.
EXECUTIVE OVERVIEW
This overview of managements discussion and analysis highlights selected information and may
not contain all of the information that is important to readers of this Form 10Q. For a more
complete understanding of events, trends and uncertainties, as well as the liquidity, capital,
credit and market risks, and the critical accounting estimates, affecting the Firm and its various
lines of business, this Form 10Q should be read in its entirety.
Business overview
The Firm reported 2006 first-quarter net income of $3.1 billion, or $0.86 per share, compared with
net income of $2.3 billion, or $0.63 per share, for the first quarter of 2005. Return on common
equity for the quarter was 12% compared with 9% in the prior year. The comparison with the prior
year benefited from the absence of a charge of $558 million after-tax, or $0.15 per share, related
to settlement of the Firms WorldCom litigation, which occurred in the first quarter of 2005.
Results for the current quarter included $44 million of after-tax merger charges, or $0.01 per
share, compared with $90 million, or $0.03 per share, in the first quarter of 2005.
Net income for the first quarter of 2006 also included incremental expense of $459 million
(pre-tax) related to the adoption of Statement of Financial Accounting Standards No. 123 (Revised
2004) (Share-Based Payment), as of January 1, 2006, under the modified prospective method. The
$459 million of incremental expense was allocated to the business segments as follows: Investment
Bank $256 million; Retail Financial Services $17 million; Card Services $4 million;
Commercial Banking $29 million; Treasury & Securities Services $25 million; Asset & Wealth
Management $71 million; and Corporate $57 million.
On April 8, 2006, the Firm announced an agreement to acquire The Bank of New Yorks consumer,
small-business and middle-market banking businesses in exchange for certain portions of the Firms
corporate trust business plus a cash payment of $150 million. The transaction will add 338
branches, 400 ATMs, and approximately 600,000 households, 100,000 businesses, $15 billion in
deposits and $8 billion of loans to the Firms New York City/Tri-State franchise. The transaction
is subject to regulatory approvals and is expected to close late in the third quarter or during the
fourth quarter of 2006.
Global economic and market conditions affected the performance of each of the Firms businesses. In
the first quarter of 2006, both the global and U.S. economies continued to grow steadily, and the
capital market environment remained favorable. First quarter growth in the U.S. economy was boosted
by recovery from last falls hurricane disruptions, although growth appeared to be moderating as
the quarter ended. The U.S. economy experienced a continued rise in interest rates driven by
improving global economic prospects, resulting in two quarter-point increases in the federal funds
rate, from 4.25% to 4.75%; at the same time the yield curve remained relatively flat. Equity
markets, both domestic and international, enjoyed positive returns versus the prior quarter and
prior year.
The discussion that follows highlights the performance of each business segment during the first
quarter of 2006 with the comparable period in the prior year, unless otherwise noted.
The Investment Bank achieved record quarterly revenues driven by record Equity Markets revenue and
strong investment banking fees and Fixed Income Markets revenue, which benefited from strength in
global capital markets activity and continuing investments in strategic initiatives. However, net
income declined due to an increase in the provision for credit losses and higher compensation
expense. Record Equity Markets revenue was driven by record trading and strong commissions across
all regions. Fixed Income Markets revenue, although strong, was lower than the prior year due to
weaker results in commodities and rates markets, partially offset by stronger results in emerging
markets, currencies and credit markets. Investment banking fees were higher than the prior year due
to strong growth in advisory fees and record loan syndication revenue. The higher level of
provision for credit losses reflected increased loan balances; credit quality remained stable.
Expense increased due primarily to higher incentive compensation, reflecting improved performance,
and the incremental expense related to the adoption of SFAS 123R.
Retail Financial Services net income declined due to lower Mortgage Banking performance and
continued spread compression on deposits and home equity loans in Regional Banking. Partially
offsetting these lower results were growth in deposit and loan balances. Credit quality remained
favorable in all loan portfolios, which led to a decline in the provision for credit losses.
Expense increased due to the ongoing investment in retail distribution, partially offset by
merger-related expense savings and
6
other efficiencies. The underlying business drivers benefited from the continuing investment in the
retail distribution network and the overall strength of the U.S. economy, both of which contributed
to increases in checking accounts, deposits, loans, and improved cross-selling of credit cards,
mortgages and investment products. During the quarter the acquisition of Collegiate Funding
Services was completed, adding $6 billion of education finance loans and providing a loan servicing
capability.
Card Services net income increased, primarily due to lower bankruptcy-related losses following the
new bankruptcy legislation that became effective in the fourth quarter of 2005. Net income also
benefited from lower credit losses (excluding the impact of the bankruptcy legislation), merger
savings and higher managed loan balances, including the acquisition of the Sears Canada credit card
business. These benefits were offset partially by narrower loan spreads and higher marketing
expense. Both Total net revenue and Noninterest expense were lower due to the restructuring and
related deconsolidation of Paymentech in the fourth quarter of 2005.
Commercial Banking net income benefited from higher revenues, primarily offset by higher expense
and an increased provision for credit losses, while credit quality remained stable. Revenues
increased due to wider spreads and higher volume related to liability balances and increased loan
balances, partially offset by narrower loan spreads reflecting continued competitive pressure.
Expense increased primarily due to the incremental expense related to the adoption of SFAS 123R.
Treasury & Securities Services net income increased significantly benefiting from higher revenue,
partially offset by increased expense. Revenue growth reflected business growth and wider spreads
on liability balances, which both benefited from global economic strength and stronger capital
market activity. The increase in expense was due to higher compensation expense related to business
growth and the incremental expense due to the adoption of SFAS 123R.
Asset & Wealth Management net income benefited from increased revenue, partially offset by higher
expense. Revenue growth was driven by net asset inflows, mainly in equity-related and liquidity
products, and by asset appreciation, benefiting from strength in global equity markets and improved
investment performance. These factors also lead to increased levels of assets under supervision and
assets under management. The increase in expense was due to the incremental expense related to the
adoption of SFAS 123R and higher performance-based compensation.
Corporate segment net loss improved due to higher revenue and lower expense. The increase in
revenue was driven primarily by lower Treasury securities portfolio losses and improved Treasury
net interest spread. These benefits were offset partially by lower private equity gains. Expense
benefited from the absence of the WorldCom litigation settlement in the first quarter of 2005,
lower merger-related costs and increased merger-related savings and other efficiencies. These
benefits were partially offset by the incremental expense related to the adoption of SFAS 123R.
During the quarter ended March 31, 2006, approximately $580 million (pre-tax) of merger savings
were realized, which is an annualized rate of approximately $2.3 billion. Management estimates that
annualized savings will be approximately $2.8 billion by the end of 2006. Merger costs of $71
million were expensed during the first quarter of 2006, bringing the total amount expensed, since
the merger announcement, to $2.2 billion. Management continues to estimate remaining merger costs
of $800 million to $1.3 billion, which are expected to be expensed during the remainder of 2006 and
2007.
The Firm had, at March 31, 2006, total stockholders equity of $108 billion and a Tier 1 capital
ratio of 8.5%. The Firm purchased $1.3 billion, or 31.8 million shares, of common stock during the
quarter.
Business outlook
The following forward-looking statements are based upon the current beliefs and expectations of
JPMorgan 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.
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 the second quarter of 2006 with a strong fee pipeline. Market conditions can impact trading
results, which are difficult to predict. The Investment Bank remains focused on new product
expansion initiatives, which are intended to promote growth and reduce volatility in trading
results over time.
In the consumer businesses, the relatively flat yield curve and continuing increase in interest
rates has put pressure on deposit and loan spreads. During the first quarter of 2006 the deposit
spread compression began to abate.
The Corporate segment includes Private Equity, Treasury and Corporate Other support units. The
revenue outlook for the Private Equity business is directly related to the strength of the equity
markets and the performance of the underlying portfolio investments. If current market conditions
persist, the Firm anticipates continued realization of private equity gains in 2006, but results
can be volatile from quarter to quarter. The Firm remains on target for achieving improvement in
Treasury net interest income and reduction of the net loss in Corporate Other.
Credit quality overall remains stable across the wholesale and consumer portfolios. However,
management continues to anticipate higher credit losses over time. The managed provision for credit
losses for Card Services is anticipated to increase in the second quarter of 2006 as compared with
the first quarter of 2006, as the benefit of lower bankruptcy-related losses decreases. Excluding
the bankruptcy-related impact, the underlying credit quality of the managed credit card portfolio
was strong. During the second half of 2006, it is anticipated that the recently implemented FFIEC
minimum payment rules will
7
negatively affect both revenues and net charge-offs in Card Services, estimated by management to be
approximately $500 million (split evenly between revenue and charge-offs).
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chases consolidated results of
operations on a reported basis. Factors that relate primarily to a single business segment are
discussed in more detail within that business segment than they are in this consolidated section.
For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated
results of operations, see page 58 of this Form 10Q and pages 8183 of the JPMorgan Chase Annual
Report on Form 10K for the year ended December 31, 2005 (2005 Annual Report).
The following table presents the components of Total net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
Three months ended March 31, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Investment banking fees |
|
$ |
1,169 |
|
|
$ |
993 |
|
|
|
18 |
% |
Principal transactions |
|
|
2,602 |
|
|
|
2,636 |
|
|
|
(1 |
) |
Lending & deposit related fees |
|
|
841 |
|
|
|
820 |
|
|
|
3 |
|
Asset management, administration and
commissions |
|
|
2,973 |
|
|
|
2,498 |
|
|
|
19 |
|
Securities gains (losses) |
|
|
(116 |
) |
|
|
(822 |
) |
|
|
86 |
|
Mortgage fees and related income |
|
|
241 |
|
|
|
362 |
|
|
|
(33 |
) |
Credit card income |
|
|
1,910 |
|
|
|
1,734 |
|
|
|
10 |
|
Other income |
|
|
556 |
|
|
|
201 |
|
|
|
177 |
|
|
|
|
|
|
Noninterest revenue |
|
|
10,176 |
|
|
|
8,422 |
|
|
|
21 |
|
Net interest income |
|
|
5,060 |
|
|
|
5,225 |
|
|
|
(3 |
) |
|
|
|
|
|
Total net revenue |
|
$ |
15,236 |
|
|
$ |
13,647 |
|
|
|
12 |
% |
|
Total net revenue for the first quarter of 2006 was up by $1.6 billion, or 12%, from the
prior year. The increase was due primarily to lower Treasury security portfolio losses; increased
trading revenue (within Principal transactions); higher Asset management, administration, and
commissions revenues; and increased Other income, Credit card income, and Investment banking fees.
Partially offsetting this growth were lower Private equity gains (within Principal transactions), a
decline in Net interest income, and lower Mortgage Banking production and servicing income.
Investment banking fees of $1.2 billion were the highest since 2000, up 18% from the first quarter
of 2005. Advisory fees were also the highest since 2000. Underwriting fees were up from the prior
year driven by record loan syndication fees offset partially by lower bond underwriting fees. For a
further discussion of Investment banking fees, which are primarily recorded in the IB, see the IB
segment results on pages 1416 of this Form 10Q.
Effective January 1, 2006, Principal transactions is a new caption in the Consolidated income
statements that combines Trading revenue (which includes physical commodities carried at the lower
of cost or market), primarily in the Investment Bank, and Private equity gains (losses), primarily
in the Private Equity business of Corporate. The prior periods presentation of Trading revenue and
Private equity gains (losses) have been reclassified to this new caption. The decline from last
year in Principal transactions primarily reflected two large private equity gains that were
realized in the prior years first quarter. The decline was partially offset by higher trading
revenue as a result of record revenues in equity markets, along with strong fixed income markets
results in emerging markets, currencies and credit markets. Fixed income trading results from
commodities and rate markets were weaker than last year. For a further discussion of Principal
transactions, see the IB and Corporate segment results on pages 1416 and 3334, respectively, of
this Form 10Q.
Lending & deposit related fees rose as a result of increased fee income on deposit-related products
from growth in business volume. For a further discussion of deposit fees, which are partly recorded
at RFS, see the RFS segment results on pages 1722 of this Form 10Q.
The increases in Asset management, administration and commissions revenue were due to growth in
assets under management and custody, reflecting net asset inflows, mainly in equity-related and
liquidity products, as well as global market value appreciation, new business, the acquisition of
Vastera in the second quarter of 2005 and higher placement and performance fees. Commissions were
higher due to increases in brokerage transaction volume across regions, partly offset by the sale
of BrownCo. For additional information on these fees and commissions, see the segment discussions
for the IB on pages 1416, TSS on pages 2829 and AWM on pages 3032 of this Form 10Q.
Securities gains (losses) significantly improved, primarily as a result of lower Treasury portfolio
losses of $158 million in the first quarter of 2006, compared with losses of $902 million in the
prior year period. For a further discussion of Securities gains (losses), which are primarily
recorded in the Firms Treasury business, see the Corporate segment discussion on pages 3334 of
this Form 10Q.
8
Mortgage fees and related income declined, primarily due to lower mortgage servicing and production
income. Servicing income results were driven primarily by lower MSR risk management results,
partially offset by increased revenue stemming from higher third-party loan servicing volume.
Production income decreased, reflecting lower net gains on the sale of mortgages. For a discussion
of Mortgage fees and related income, which is recorded primarily in RFSs Mortgage Banking
business, see the Mortgage Banking discussion on page 21 of this Form 10Q.
Credit card income rose as a result of higher customer charge volume, which favorably affected
interchange income, and servicing fees associated with growth in volume of securitized credit card
receivables. These were partially offset by an increase in volume-driven payments to partners and
higher expenses related to reward programs, as well as the impact of the deconsolidation of
Paymentech. For a further discussion of Credit card income, see CSs segment results on pages
2325 of this Form 10Q.
The increase in Other income reflected higher gains from loan workouts and loan sales, increased
revenues from automobile operating leases, higher dividend and equity investment income and lower
write-downs for loans transferred to held-for-sale. These increases were offset partly by
a decrease in the net results of corporate and bank-owned life insurance policies.
Net interest income declined due to narrower spreads on trading assets, wholesale and consumer
loans, as well as on consumer deposits. These decreases were offset partially by improvement in
Treasurys net interest spread and in the spreads on wholesale liability balances. In addition,
higher balances related to wholesale and consumer loans and higher level of consumer deposits also
contributed positively to Net interest income. The Firms total average interest-earning assets for
the three months ended March 31, 2006, were $957 billion, up 7% from the first quarter of 2005, as
a result of an increase in loans and other liquid earning assets, partially offset by a decline
resulting from the repositioning of Treasurys investment portfolio during 2005. The net interest
yield on these assets, on a fully taxable-equivalent basis, was 2.17%, a decrease of 22 basis
points from the prior year.
Provision for credit losses
The Provision for credit losses was $831 million, $404 million higher than the first quarter of
2005. The higher Provision for credit losses was primarily the result of a wholesale provision of
$179 million compared with a benefit of $386 million in the prior year, reflecting loan growth in
the Investment Bank. The wholesale loan net recovery rate was 0.06% for the quarter, an improvement
from a net recovery rate of 0.03% in the prior year. The total consumer provision was $652 million,
$161 million lower than the prior year, primarily due to lower bankruptcy-related net charge-offs
in Card Services. For further information regarding the Provision for credit losses, see Credit
Risk Management on page 54 of this Form 10Q.
Noninterest expense
The following table presents the components of Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Compensation expense |
|
$ |
5,600 |
|
|
$ |
4,702 |
|
|
|
19 |
% |
Occupancy expense |
|
|
602 |
|
|
|
525 |
|
|
|
15 |
|
Technology and communications
expense |
|
|
874 |
|
|
|
920 |
|
|
|
(5 |
) |
Professional & outside services |
|
|
888 |
|
|
|
1,074 |
|
|
|
(17 |
) |
Marketing |
|
|
519 |
|
|
|
483 |
|
|
|
7 |
|
Other expense(a) |
|
|
834 |
|
|
|
1,705 |
|
|
|
(51 |
) |
Amortization of intangibles |
|
|
364 |
|
|
|
383 |
|
|
|
(5 |
) |
Merger costs |
|
|
71 |
|
|
|
145 |
|
|
|
(51 |
) |
|
Total Noninterest expense |
|
$ |
9,752 |
|
|
$ |
9,937 |
|
|
|
(2 |
)% |
|
|
|
|
(a) |
|
Includes insurance recovery relating to certain material litigation of $98 million
recorded in the first quarter of 2006. In the first quarter of 2005, a litigation reserve
charge of $900 million, relating to the settlement of WorldCom class action, was recorded. |
Total Noninterest expense was $9.8 billion, down by $185 million, or 2%, from the prior year.
The decrease was due primarily to lower Other expense and Professional & outside services,
partially offset by an increase in Compensation expense. Excluding in the first quarter of this
year both the incremental expense of $459 million from the adoption of SFAS 123R and $71 million of
Merger costs, and excluding in the first quarter of last year both the material litigation charge
of $900 million primarily related to WorldCom and $145 million of Merger costs, Noninterest expense
would have been up by $330 million. The increase was driven by higher performance-based
compensation, partially offset by merger
savings.
9
Compensation expense rose as a result of $459 million of incremental expense related to the
adoption of SFAS 123R, higher performance-based incentives and additional headcount in connection
with investments in businesses. The increase was offset partially by ongoing efficiency
improvements and merger-related savings throughout the Firm. For a detailed discussion of the
adoption of SFAS 123R and employee stock-based incentives, see Note 6 on pages 6871 of this Form
10Q.
Higher Occupancy expense reflected investments in the retail distribution network, partly offset by
operating efficiencies.
Professional & outside services were lower due to expense management initiatives, the settlement of
several legal matters in 2005 and the Paymentech deconsolidation.
Marketing expense was higher, stemming from an increase in advertising for credit card and retail
products.
Other expense was lower due to insurance recoveries relating to certain material litigation and
expense management initiatives in 2006 and a material litigation charge of $900 million, primarily
related to settlement costs of the WorldCom class action litigation, and a $40 million charge taken
by RFS related to the dissolution of an education finance joint venture, both of which occurred in
2005. These items were partially offset by increased expense as a result of growth in business
volume, including higher minority interest expense related to Cazenove and Highbridge.
For discussion of Amortization of intangibles and Merger costs, refer to Note 14 and Note 7 on
pages 7981 and 71, respectively, of this Form 10Q.
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:
|
|
|
|
|
|
|
|
|
Three months ended March 31,(in millions, except rate) |
|
2006 |
|
|
2005 |
|
|
Income before income tax expense |
|
$ |
4,653 |
|
|
$ |
3,283 |
|
Income tax expense |
|
|
1,572 |
|
|
|
1,019 |
|
Effective tax rate |
|
|
33.8 |
% |
|
|
31.0 |
% |
|
The increase in the effective tax rate was related to higher reported pre-tax income combined
with changes in the proportion of income subject to federal, state and local taxes. Also
contributing to the increase were the Merger costs and Litigation reserve charge in the first
quarter of 2005, which reflected tax benefits at a 38% marginal tax rate.
10
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
6063 of this Form 10Q. 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 a managed basis, which is a non-GAAP financial measure. The
Firms definition of managed basis starts with the reported U.S. GAAP results and includes certain
reclassifications that are adjusted to exclude credit card securitizations and present revenue on a
fully taxable equivalent (FTE) basis. These adjustments do not have any impact on Net income as
reported by the lines of business or by the Firm as a whole. Effective January 1, 2006, JPMorgan
Chases presentation of operating earnings that excluded merger costs and material litigation
reserve charges and recoveries from reported results has been eliminated. These items had been
previously excluded from operating results because they were deemed non-recurring; they are now
included in the Corporate business segments results. In addition, Trading-related net interest
income is no longer reclassified from net interest income to trading revenue.
Card Services managed results excludes the impact of credit card securitizations on Total net
revenue, the provision for credit losses, net charge-offs and loan receivables. This presentation
is provided to facilitate the comparability to competitors. Through securitization, the Firm
transforms a portion of its credit card receivables into securities, which are sold to investors.
The credit card receivables are removed from the consolidated balance sheets through the transfer
of the receivables to a trust, and the sale of undivided interests to investors that entitle the
investors to specific cash flows generated from the credit card receivables. The Firm retains the
remaining undivided interests as 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 the aggregate amount of interest income, certain fee revenue and recoveries that is in excess of
the aggregate amount of interest paid to investors, gross credit losses and other trust expenses
related to the securitized receivables are reclassified into credit card income. For a reconciliation
of reported to managed basis of Card Services results, see page 25 of this Form 10Q. For
information regarding loans and residual interests sold and securitized, see Note 12 on pages
7477 of this Form 10Q. 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, managed results are evaluated, and decisions are
made about allocating resources such as employees and capital based upon managed financial
information.
Total net revenue for each of the business segments and the Firm is presented on a tax-equivalent
basis. Accordingly, revenue from tax exempt securities and investments that receive tax credits is
presented in the managed results on a basis comparable to taxable securities and investments. This
non-GAAP financial measure allows management to assess the comparability of revenues arising from
both taxable and tax-exempt sources. The corresponding income tax impact related to these items is
recorded within income tax expense.
Management uses certain non-GAAP financial measures at the segment level because it believes these
non-GAAP financial measures provide information to investors in understanding the underlying
operational performance and trends of the particular business segment and facilitate a comparison
of the business segment with the performance of competitors.
11
The following summary table provides a reconciliation from the Firms reported U.S. GAAP results to
managed basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2006 |
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(a) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,169 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,169 |
|
Principal transactions |
|
|
2,602 |
|
|
|
|
|
|
|
|
|
|
|
2,602 |
|
Lending & deposit related fees |
|
|
841 |
|
|
|
|
|
|
|
|
|
|
|
841 |
|
Asset management, administration and
commissions |
|
|
2,973 |
|
|
|
|
|
|
|
|
|
|
|
2,973 |
|
Securities gains (losses) |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
(116 |
) |
Mortgage fees and related income |
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
241 |
|
Credit card income |
|
|
1,910 |
|
|
|
(1,125 |
) |
|
|
|
|
|
|
785 |
|
Other income |
|
|
556 |
|
|
|
|
|
|
|
146 |
|
|
|
702 |
|
|
Noninterest revenue |
|
|
10,176 |
|
|
|
(1,125 |
) |
|
|
146 |
|
|
|
9,197 |
|
Net interest income |
|
|
5,060 |
|
|
|
1,574 |
|
|
|
71 |
|
|
|
6,705 |
|
|
Total net revenue |
|
|
15,236 |
|
|
|
449 |
|
|
|
217 |
|
|
|
15,902 |
|
Provision for credit losses |
|
|
831 |
|
|
|
449 |
|
|
|
|
|
|
|
1,280 |
|
Noninterest expense |
|
|
9,752 |
|
|
|
|
|
|
|
|
|
|
|
9,752 |
|
|
Income before income tax expense |
|
|
4,653 |
|
|
|
|
|
|
|
217 |
|
|
|
4,870 |
|
Income tax expense |
|
|
1,572 |
|
|
|
|
|
|
|
217 |
|
|
|
1,789 |
|
|
Net income |
|
$ |
3,081 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,081 |
|
|
Earnings per share diluted |
|
$ |
0.86 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.86 |
|
|
Return on common equity |
|
|
12 |
% |
|
|
|
% |
|
|
|
% |
|
|
12 |
% |
Return on equity less goodwill |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
Return on assets |
|
|
1.00 |
|
|
NM |
|
|
NM |
|
|
|
0.95 |
|
|
Overhead ratio |
|
|
64 |
|
|
NM |
|
|
NM |
|
|
|
61 |
|
|
Effective income tax rate |
|
|
34 |
|
|
NM |
|
|
|
100 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2005 |
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(a) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
993 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
993 |
|
Principal transactions |
|
|
2,636 |
|
|
|
|
|
|
|
|
|
|
|
2,636 |
|
Lending & deposit related fees |
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
820 |
|
Asset management, administration and
commissions |
|
|
2,498 |
|
|
|
|
|
|
|
|
|
|
|
2,498 |
|
Securities gains (losses) |
|
|
(822 |
) |
|
|
|
|
|
|
|
|
|
|
(822 |
) |
Mortgage fees and related income |
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
362 |
|
Credit card income |
|
|
1,734 |
|
|
|
(815 |
) |
|
|
|
|
|
|
919 |
|
Other income |
|
|
201 |
|
|
|
|
|
|
|
115 |
|
|
|
316 |
|
|
Noninterest revenue |
|
|
8,422 |
|
|
|
(815 |
) |
|
|
115 |
|
|
|
7,722 |
|
Net interest income |
|
|
5,225 |
|
|
|
1,732 |
|
|
|
61 |
|
|
|
7,018 |
|
|
Total net revenue |
|
|
13,647 |
|
|
|
917 |
|
|
|
176 |
|
|
|
14,740 |
|
Provision for credit losses |
|
|
427 |
|
|
|
917 |
|
|
|
|
|
|
|
1,344 |
|
Noninterest expense |
|
|
9,937 |
|
|
|
|
|
|
|
|
|
|
|
9,937 |
|
|
Income before income tax expense |
|
|
3,283 |
|
|
|
|
|
|
|
176 |
|
|
|
3,459 |
|
Income tax expense |
|
|
1,019 |
|
|
|
|
|
|
|
176 |
|
|
|
1,195 |
|
|
Net income |
|
$ |
2,264 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,264 |
|
|
Earnings per share diluted |
|
$ |
0.63 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.63 |
|
|
Return on common equity |
|
|
9 |
% |
|
|
|
% |
|
|
|
% |
|
|
9 |
% |
Return on equity less goodwill |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
Return on assets |
|
|
0.79 |
|
|
NM |
|
|
NM |
|
|
|
0.75 |
|
|
Overhead ratio |
|
|
73 |
|
|
NM |
|
|
NM |
|
|
|
67 |
|
|
Effective income tax rate |
|
|
31 |
|
|
NM |
|
|
|
100 |
|
|
|
35 |
|
|
|
|
|
(a) |
|
The impact of credit card securitizations affects Card Services. See pages 2325 of
this Form 10Q for further information. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2006 |
|
|
2005 |
|
(in millions) |
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Loans Period-end |
|
$ |
432,081 |
|
|
$ |
69,580 |
|
|
$ |
501,661 |
|
|
$ |
402,669 |
|
|
$ |
67,328 |
|
|
$ |
469,997 |
|
Total assets average |
|
|
1,248,357 |
|
|
|
67,557 |
|
|
|
1,315,914 |
|
|
|
1,162,818 |
|
|
|
67,509 |
|
|
|
1,230,327 |
|
|
12
BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business basis. The business segment financial results
presented reflect the organization of JPMorgan Chase. Currently, there are six major reportable
business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial
Banking, Treasury & Securities Services and Asset & Wealth Management, as well as a Corporate
segment. The segments are based upon the products and services provided, or the type of customer
served, and they reflect the manner in which financial information is currently evaluated by
management. Results of these lines of business are presented on a managed basis. For a further
discussion of Business segment results, see pages 3435 of JPMorgan Chases 2005 Annual Report.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a
stand-alone business. The management reporting process that derives these results generally
allocates income and expense using market-based methodologies. For a further discussion of those
methodologies, see page 35 of JPMorgan Chases 2005 Annual Report. The Firm continues to assess the
assumptions, methodologies and reporting reclassifications used for segment reporting, and further
refinements may be implemented in future periods.
Business segment financial disclosures
Effective January 1, 2006, JPMorgan Chase modified certain of its financial disclosures to reflect
more closely the manner in which the Firms business segments are managed and to provide improved
comparability with competitors. These financial disclosure revisions are reflected in this Form
10Q, and the financial information for prior periods has been revised to reflect the disclosure
changes as if they had been in effect throughout 2005. A summary of the changes are described
below.
Reported versus Operating Basis Changes
The presentation of operating earnings that excluded merger costs and material litigation reserve
charges and recoveries from reported results
has been eliminated. These items had been excluded previously from operating
results because they were deemed nonrecurring; they are now included in the Corporate business
segments results. In addition, trading-related net interest income is no longer reclassified from
Net interest income to trading revenue. As a result of these changes, effective January 1, 2006,
management has discontinued reporting on an operating basis.
Business Segment Disclosures
RFS has been reorganized into the following business segments: Regional Banking, Mortgage Banking
and Auto Finance. For more detailed information on the RFS reorganization, see the RFS business
segment discussion on page 17 of this Form 10Q.
TSS, as previously announced, has been reorganized by combining the Investor Services and
Institutional Trust Services businesses into a single business called Worldwide Securities
Services. Also, TSS firmwide disclosures have been adjusted to reflect a refined set of TSS
products and a revised allocation of liability balances and lending-related revenue related to
certain client transfers.
Effective January 1, 2006, various wholesale banking clients, together with the related revenue and
expense, are being transferred among CB, the IB and TSS. In the first quarter of 2006, the primary
client transfer was corporate mortgage finance from CB to the IB.
CBs business metrics now include gross investment banking revenue, which reflects revenue recorded
in both CB and the IB.
Corporates disclosure has been expanded to include Total net revenue and Net income for Treasury
and Other Corporate segments.
Certain expenses that are managed by the business segments, but that had been previously recorded
in Corporate and allocated to the businesses, are now recorded as direct expenses within the
businesses.
Capital allocation changes
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the business
segments. As prior periods have not been revised to reflect the new capital allocations, certain
business metrics, such as ROE, are not comparable to the current presentation. For a further
discussion of the changes, see Capital Management Line of business equity on page 37 of this
Form 10Q.
Segment results Managed basis(a)
The following table summarizes the business segment results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Total net revenue |
|
Noninterest expense |
|
Net income |
|
Return on equity |
(in millions, except ratios) |
|
2006 |
|
2005 |
|
Change |
|
2006 |
|
2005 |
|
Change |
|
2006 |
|
2005 |
|
Change |
|
2006 |
|
2005 |
|
Investment Bank |
|
$ |
4,699 |
|
|
$ |
4,187 |
|
|
|
12 |
% |
|
$ |
3,191 |
|
|
$ |
2,527 |
|
|
|
26 |
% |
|
$ |
850 |
|
|
$ |
1,328 |
|
|
|
(36 |
)% |
|
|
17 |
% |
|
|
27 |
% |
Retail Financial Services |
|
|
3,763 |
|
|
|
3,847 |
|
|
|
(2 |
) |
|
|
2,238 |
|
|
|
2,162 |
|
|
|
4 |
|
|
|
881 |
|
|
|
988 |
|
|
|
(11 |
) |
|
|
26 |
|
|
|
31 |
|
Card Services |
|
|
3,685 |
|
|
|
3,779 |
|
|
|
(2 |
) |
|
|
1,243 |
|
|
|
1,313 |
|
|
|
(5 |
) |
|
|
901 |
|
|
|
522 |
|
|
|
73 |
|
|
|
26 |
|
|
|
18 |
|
Commercial Banking |
|
|
900 |
|
|
|
827 |
|
|
|
9 |
|
|
|
498 |
|
|
|
454 |
|
|
|
10 |
|
|
|
240 |
|
|
|
231 |
|
|
|
4 |
|
|
|
18 |
|
|
|
28 |
|
Treasury & Securities
Services |
|
|
1,677 |
|
|
|
1,498 |
|
|
|
12 |
|
|
|
1,158 |
|
|
|
1,067 |
|
|
|
9 |
|
|
|
312 |
|
|
|
254 |
|
|
|
23 |
|
|
|
44 |
|
|
|
54 |
|
Asset & Wealth Management |
|
|
1,584 |
|
|
|
1,361 |
|
|
|
16 |
|
|
|
1,098 |
|
|
|
934 |
|
|
|
18 |
|
|
|
313 |
|
|
|
276 |
|
|
|
13 |
|
|
|
36 |
|
|
|
47 |
|
Corporate |
|
|
(406 |
) |
|
|
(759 |
) |
|
|
47 |
|
|
|
326 |
|
|
|
1,480 |
|
|
|
(78 |
) |
|
|
(416 |
) |
|
|
(1,335 |
) |
|
|
69 |
|
|
NM |
|
|
NM |
|
|
Total |
|
$ |
15,902 |
|
|
$ |
14,740 |
|
|
|
8 |
% |
|
$ |
9,752 |
|
|
$ |
9,937 |
|
|
|
(2 |
)% |
|
$ |
3,081 |
|
|
$ |
2,264 |
|
|
|
36 |
% |
|
|
12 |
% |
|
|
9 |
% |
|
|
|
|
(a) |
|
Represents reported results on a tax-equivalent basis and excludes the impact of credit
card securitizations. |
13
INVESTMENT BANK
For a discussion of the business profile of the IB, see pages 3638 of JPMorgan Chases 2005
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,170 |
|
|
$ |
985 |
|
|
|
19 |
% |
Principal transactions |
|
|
2,375 |
|
|
|
1,875 |
|
|
|
27 |
|
Lending & deposit related fees |
|
|
137 |
|
|
|
157 |
|
|
|
(13 |
) |
Asset management, administration and commissions |
|
|
552 |
|
|
|
409 |
|
|
|
35 |
|
All other income |
|
|
275 |
|
|
|
127 |
|
|
|
117 |
|
|
|
|
|
|
Noninterest revenue |
|
|
4,509 |
|
|
|
3,553 |
|
|
|
27 |
|
Net interest income |
|
|
190 |
|
|
|
634 |
|
|
|
(70 |
) |
|
|
|
|
|
Total net revenue(a) |
|
|
4,699 |
|
|
|
4,187 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
183 |
|
|
|
(366 |
) |
|
NM |
|
Credit reimbursement from TSS(b) |
|
|
30 |
|
|
|
38 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
2,256 |
|
|
|
1,618 |
|
|
|
39 |
|
Noncompensation expense |
|
|
935 |
|
|
|
909 |
|
|
|
3 |
|
|
|
|
|
|
Total noninterest expense |
|
|
3,191 |
|
|
|
2,527 |
|
|
|
26 |
|
|
|
|
|
|
Income before income tax expense |
|
|
1,355 |
|
|
|
2,064 |
|
|
|
(34 |
) |
Income tax expense |
|
|
505 |
|
|
|
736 |
|
|
|
(31 |
) |
|
|
|
|
|
Net income |
|
$ |
850 |
|
|
$ |
1,328 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
17 |
% |
|
|
27 |
% |
|
|
|
|
ROA |
|
|
0.53 |
|
|
|
0.95 |
|
|
|
|
|
Overhead ratio |
|
|
68 |
|
|
|
60 |
|
|
|
|
|
Compensation expense as % of total net
revenue(c) |
|
|
43 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
Advisory |
|
$ |
389 |
|
|
$ |
263 |
|
|
|
48 |
|
Equity underwriting |
|
|
212 |
|
|
|
239 |
|
|
|
(11 |
) |
Debt underwriting |
|
|
569 |
|
|
|
483 |
|
|
|
18 |
|
|
|
|
|
|
Total investment banking fees |
|
|
1,170 |
|
|
|
985 |
|
|
|
19 |
|
Fixed income markets |
|
|
1,993 |
|
|
|
2,296 |
|
|
|
(13 |
) |
Equities markets |
|
|
1,215 |
|
|
|
556 |
|
|
|
119 |
|
Credit portfolio |
|
|
321 |
|
|
|
350 |
|
|
|
(8 |
) |
|
|
|
|
|
Total net revenue |
|
$ |
4,699 |
|
|
$ |
4,187 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by region |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
2,067 |
|
|
$ |
2,231 |
|
|
|
(7 |
) |
Europe/Middle East/Africa |
|
|
2,047 |
|
|
|
1,535 |
|
|
|
33 |
|
Asia/Pacific |
|
|
585 |
|
|
|
421 |
|
|
|
39 |
|
|
|
|
|
|
Total net revenue |
|
$ |
4,699 |
|
|
$ |
4,187 |
|
|
|
12 |
|
|
|
|
|
(a) |
|
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 $194 million and $155 million for the quarters ended March 31, 2006 and 2005,
respectively. |
|
(b) |
|
TSS is charged a credit reimbursement related to certain exposures managed within the IB
credit portfolio on behalf of clients shared with TSS. |
|
(c) |
|
For the three months ended March 31, 2006, Compensation expense to Total net revenue ratio is
adjusted to present this ratio as if SFAS 123R had always been in effect. IB management
believes that adjusting the Compensation expense to Total net revenue ratio in the first
quarter of 2006 for the incremental impact of adopting SFAS 123R provides a more meaningful
measure of IBs Compensation expense to Total net revenue ratio for the quarter. |
14
Quarterly results
Net income of $850 million was driven by record quarterly revenues of $4.7 billion. Net income
declined 36% compared with the prior year due to an increase in the provision for credit losses
related to higher loan balances, incremental expense from the adoption of SFAS 123R and higher
performance-based compensation.
Net revenue was a record $4.7 billion, up by $512 million, or 12%, compared with the prior year.
Investment banking fees of $1.2 billion were the highest since 2000, up 19% from the prior year.
Advisory fees of $389 million, up 48% from last year, were also the highest since 2000. Debt
underwriting fees of $569 million were up 18% from the prior year, driven by record loan
syndication fees offset partially by lower bond underwriting fees. Equity underwriting fees of $212
million were down 11% from the prior year, reflecting lower market share. Fixed Income Markets
revenue of $2.0 billion was down 13% from the prior year due to weaker performance in commodities
and rates markets, partially offset by stronger results in emerging markets, currencies and credit
markets. Equity Markets produced record revenues of $1.2 billion in the quarter driven by record
trading and strong commissions across all regions. Credit Portfolio revenues of $321 million were
down 8% from the prior year.
The provision for credit losses was $183 million, as compared with a benefit of $366 million in the
prior year. The current quarters provision reflects growth in loan balances and stable credit
quality.
Noninterest expense was $3.2 billion, up 26% from the prior year. Excluding incremental expense of
$256 million from the adoption of SFAS 123R, expenses were up by $408 million, or 16%, from the
prior year. The increase was primarily due to higher incentive compensation related to improved
performance, and an increase in the compensation expense to total net revenue ratio, as well as
continued investments in strategic initiatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount and ratio data) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
646,220 |
|
|
$ |
568,222 |
|
|
|
14 |
% |
Trading assetsdebt and equity instruments |
|
|
252,415 |
|
|
|
225,367 |
|
|
|
12 |
|
Trading assetsderivatives receivables |
|
|
49,388 |
|
|
|
63,574 |
|
|
|
(22 |
) |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained(a) |
|
|
53,678 |
|
|
|
41,233 |
|
|
|
30 |
|
Loans held-for-sale(b) |
|
|
19,212 |
|
|
|
7,674 |
|
|
|
150 |
|
|
|
|
|
|
Total loans |
|
|
72,890 |
|
|
|
48,907 |
|
|
|
49 |
|
Adjusted assets(c) |
|
|
492,304 |
|
|
|
445,840 |
|
|
|
10 |
|
Equity |
|
|
20,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
21,705 |
|
|
|
18,021 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(21 |
) |
|
$ |
(5 |
) |
|
|
(320 |
) |
Nonperforming assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(d) |
|
|
434 |
|
|
|
814 |
|
|
|
(47 |
) |
Other nonperforming assets |
|
|
50 |
|
|
|
242 |
|
|
|
(79 |
) |
Allowance for loan losses |
|
|
1,117 |
|
|
|
1,191 |
|
|
|
(6 |
) |
Allowance for lending related commitments |
|
|
220 |
|
|
|
296 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate(b) |
|
|
(0.16 |
)% |
|
|
(0.05 |
)% |
|
|
|
|
Allowance for loan losses to average loans(b) |
|
|
2.08 |
|
|
|
2.89 |
|
|
|
|
|
Allowance for loan losses to nonperforming
loans(d) |
|
|
305 |
|
|
|
147 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.60 |
|
|
|
1.66 |
|
|
|
|
|
Market riskaverage trading and credit portfolio VAR |
|
|
|
|
|
|
|
|
|
|
|
|
Trading activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
60 |
|
|
$ |
57 |
|
|
|
5 |
|
Foreign exchange |
|
|
20 |
|
|
|
23 |
|
|
|
(13 |
) |
Equities |
|
|
32 |
|
|
|
18 |
|
|
|
78 |
|
Commodities and other |
|
|
47 |
|
|
|
10 |
|
|
|
370 |
|
Diversification(e) |
|
|
(68 |
) |
|
|
(43 |
) |
|
|
(58 |
) |
|
|
|
|
|
Trading VAR(f) |
|
|
91 |
|
|
|
65 |
|
|
|
40 |
|
Credit portfolio VAR(g) |
|
|
14 |
|
|
|
13 |
|
|
|
8 |
|
Diversification(e) |
|
|
(11 |
) |
|
|
(8 |
) |
|
|
(38 |
) |
|
|
|
|
|
Total trading and credit portfolio VAR |
|
$ |
94 |
|
|
$ |
70 |
|
|
|
34 |
|
|
|
|
|
(a) |
|
Loans retained include Credit Portfolio, Conduit loans, leverage leases, bridge loans
for underwriting and other accrual loans. |
|
(b) |
|
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. |
15
|
|
|
(c) |
|
Adjusted assets, a non-GAAP financial measure, equals total 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. |
|
(d) |
|
Nonperforming loans include loans held-for-sale of $68 million and $2 million as of March
31, 2006 and 2005, respectively. These amounts are not included in the allowance coverage
ratios. |
|
(e) |
|
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 |
|
(f) |
|
Includes substantially all trading activities; however, particular risk parameters of
certain products are not fully captured, for example, correlation risk. |
|
(g) |
|
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 Principal
transactions. This VAR does not include the accrual loan portfolio, which is not marked to
market. |
According to Thomson Financial, the Firm was ranked #1 in Global Syndicated Loans, #3 in Global
Announced M&A and #2 in Global Long-Term Debt for the first three months of 2006.
According to Dealogic, the Firm was ranked #3 in Investment Banking fees generated during the first
three months of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
Full Year 2005 |
Market shares and rankings(a) |
|
Market Share |
|
Rankings |
|
Market Share |
|
Rankings |
|
Global debt, equity and equity-related |
|
|
7 |
% |
|
|
#2 |
|
|
|
6 |
% |
|
|
#4 |
|
Global syndicated loans |
|
|
13 |
|
|
|
#1 |
|
|
|
16 |
|
|
|
#1 |
|
Global long-term debt |
|
|
7 |
|
|
|
#2 |
|
|
|
6 |
|
|
|
#4 |
|
Global equity and equity-related |
|
|
5 |
|
|
|
#9 |
|
|
|
7 |
|
|
|
#6 |
|
Global announced M&A |
|
|
31 |
|
|
|
#3 |
|
|
|
24 |
|
|
|
#3 |
|
U.S. debt, equity and equity-related |
|
|
10 |
|
|
|
#2 |
|
|
|
8 |
|
|
|
#4 |
|
U.S. syndicated loans |
|
|
23 |
|
|
|
#1 |
|
|
|
28 |
|
|
|
#1 |
|
U.S. long-term debt |
|
|
14 |
|
|
|
#1 |
|
|
|
11 |
|
|
|
#2 |
|
U.S. equity and equity-related |
|
|
8 |
|
|
|
#5 |
|
|
|
9 |
|
|
|
#5 |
|
U.S. announced M&A |
|
|
19 |
|
|
|
#6 |
|
|
|
24 |
|
|
|
#3 |
|
|
|
|
|
(a) |
|
Source: Thomson Financial Securities data. Global announced M&A is based upon rank
value; all other rankings are based upon proceeds, with full credit to each book manager/equal
if joint. Because of joint assignments, market share of all participants will add up to more
than 100%. |
16
RETAIL FINANCIAL SERVICES
Retail Financial Services (RFS) realigned its business reporting segments on January 1, 2006,
into Regional Banking, Mortgage Banking and Auto Finance. Regional Banking offers one of the
largest branch networks in the United States, covering 17 states with 2,638 branches and 7,400
automated teller machines (ATMs). Regional Banking distributes, through its network, a variety of
products including checking, savings and time deposit accounts; home equity, residential mortgage,
small business banking, and education loans; mutual fund and annuity investments; and on-line
banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of
the largest originators and servicers of home mortgages. Auto Finance is the largest noncaptive
originator of automobile loans, primarily through a network of automotive dealers across the United
States.
During the quarter, RFS completed the purchase of Collegiate Funding Services, adding an education
loan servicing capability and entry into the Federal Family Education Loan Program consolidation
market. RFS also has agreed to sell its life insurance and annuity underwriting businesses to
Protective Life Corporation; the sale is expected to close in the third quarter of 2006. Finally,
on April 8, 2006, the Firm announced an agreement to acquire The Bank of New Yorks consumer and
small-business banking businesses; this acquisition will significantly strengthen RFSs
distribution network in the New York City/Tri-State area, adding 338 branches and 400 ATMs.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
371 |
|
|
$ |
340 |
|
|
|
9 |
% |
Asset management, administration and commissions |
|
|
437 |
|
|
|
394 |
|
|
|
11 |
|
Securities gains (losses) |
|
|
(6 |
) |
|
|
10 |
|
|
NM |
|
Mortgage fees and related income |
|
|
236 |
|
|
|
368 |
|
|
|
(36 |
) |
Credit card income |
|
|
115 |
|
|
|
94 |
|
|
|
22 |
|
Other income |
|
|
48 |
|
|
|
(12 |
) |
|
NM |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,201 |
|
|
|
1,194 |
|
|
|
1 |
|
Net interest income |
|
|
2,562 |
|
|
|
2,653 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
3,763 |
|
|
|
3,847 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
85 |
|
|
|
94 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
920 |
|
|
|
822 |
|
|
|
12 |
|
Noncompensation expense |
|
|
1,207 |
|
|
|
1,215 |
|
|
|
(1 |
) |
Amortization of intangibles |
|
|
111 |
|
|
|
125 |
|
|
|
(11 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
2,238 |
|
|
|
2,162 |
|
|
|
4 |
|
Income before income tax expense |
|
|
1,440 |
|
|
|
1,591 |
|
|
|
(9 |
) |
Income tax expense |
|
|
559 |
|
|
|
603 |
|
|
|
(7 |
) |
|
|
|
|
|
Net income |
|
$ |
881 |
|
|
$ |
988 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
26 |
% |
|
|
31 |
% |
|
|
|
|
ROA |
|
|
1.54 |
|
|
|
1.78 |
|
|
|
|
|
Overhead ratio |
|
|
59 |
|
|
|
56 |
|
|
|
|
|
Overhead ratio excluding core deposit
intangibles(a) |
|
|
57 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
(a) |
|
Retail Financial Services uses the overhead ratio (excluding the amortization of core
deposit intangibles (CDI)), a non-GAAP financial measure, to evaluate the underlying expense
trends of the business. Including CDI amortization expense in the overhead ratio calculation
results in a higher overhead ratio in the earlier years and a lower overhead ratio in later
years; this would result in an improving overhead ratio over time, all things remaining equal.
This non-GAAP ratio excludes Regional Bankings core deposit intangible amortization expense
related to the Bank One merger of $109 million and $124 million for the quarters ended March
31, 2006 and 2005, respectively. |
17
Quarterly results
Net income of $881 million was down by $107 million, or 11%, from the prior year. Current and prior
period results included charges to transfer automobile loans to held-for-sale and prior-year
results also included a charge for the termination of an Education Finance joint venture and a gain
on the sale of a recreational vehicle loan portfolio. Excluding all of these items, net income
declined by $131 million or 13%. The decrease reflected weakness in Mortgage Banking and continued
spread compression on deposits and loans in Regional Banking, as well as continued investment in
the retail distribution network. These declines were offset partially by deposit and loan balance
growth in Regional Banking and continued favorable credit quality in all loan portfolios.
Net revenue of $3.8 billion was down by $84 million, or 2%, from the prior year. Net interest
income of $2.6 billion declined by $91 million, or 3%, reflecting narrower spreads on deposits and
loans in Regional Banking as well as reduced balances in the auto loan and lease portfolios. These
decreases were offset partially by increased deposit balances and higher levels of home equity
loans. Noninterest revenue of $1.2 billion was up by $7 million, or 1%, driven by higher automobile
operating lease income and increased fee income on deposit-related products. These increases were
offset by lower Mortgage Banking production and servicing income. Current quarter results also
included a $50 million write-down on $1.3 billion of automobile loans transferred to held-for-sale,
compared with an $88 million write-down last year on $2.7 billon of auto loans transferred to
held-for-sale.
The provision for credit losses totaled $85 million, down by $9 million from the prior year. Credit
quality continued to be favorable across all businesses.
Noninterest expense of $2.2 billion was up by $76 million, or 4%, as a result of ongoing
investments in the retail distribution network, higher depreciation expense on owned automobiles
acquired under operating leases, and incremental expense of $17 million from the adoption of SFAS
123R. These increases were offset in part by operating and merger-related efficiencies and the
absence of a $40 million charge related to the dissolution of an Education Finance joint venture.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount and ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
235,127 |
|
|
$ |
224,562 |
|
|
|
5 |
% |
Loans(a) |
|
|
202,591 |
|
|
|
199,215 |
|
|
|
2 |
|
Deposits |
|
|
200,154 |
|
|
|
187,225 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
231,587 |
|
|
$ |
225,120 |
|
|
|
3 |
|
Loans(b) |
|
|
198,797 |
|
|
|
198,494 |
|
|
|
|
|
Deposits |
|
|
194,382 |
|
|
|
184,336 |
|
|
|
5 |
|
Equity |
|
|
13,896 |
|
|
|
13,100 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
62,472 |
|
|
|
59,322 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
121 |
|
|
$ |
152 |
|
|
|
(20 |
) |
Nonperforming loans(c) |
|
|
1,349 |
|
|
|
1,150 |
|
|
|
17 |
|
Nonperforming assets |
|
|
1,537 |
|
|
|
1,351 |
|
|
|
14 |
|
Allowance for loan losses |
|
|
1,333 |
|
|
|
1,168 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate(b) |
|
|
0.27 |
% |
|
|
0.34 |
% |
|
|
|
|
Allowance for loan losses to ending loans(a) |
|
|
0.71 |
|
|
|
0.64 |
|
|
|
|
|
Allowance for loan losses to nonperforming
loans(c) |
|
|
100 |
|
|
|
104 |
|
|
|
|
|
Nonperforming loans to total loans |
|
|
0.67 |
|
|
|
0.58 |
|
|
|
|
|
|
|
|
|
(a) |
|
Includes loans held-for-sale of $14,343 million and $16,532 million for the three
months ended March 31, 2006 and 2005, respectively. These amounts are not included in the
allowance coverage ratios. |
|
(b) |
|
Average loans include loans held-for-sale of $16,362 million and $15,861 million for the
three months ended March 31, 2006 and 2005, respectively. These amounts are not included in
the net charge-off rate. |
|
(c) |
|
Nonperforming loans include loans held-for-sale of $16 million and $31 million at March 31,
2006 and 2005, respectively. These amounts are not included in the allowance coverage ratios. |
18
REGIONAL BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
820 |
|
|
$ |
827 |
|
|
|
(1 |
)% |
Net interest income |
|
|
2,220 |
|
|
|
2,210 |
|
|
|
|
|
|
|
|
|
|
Total Net revenue |
|
|
3,040 |
|
|
|
3,037 |
|
|
|
|
|
Provision for credit losses |
|
|
66 |
|
|
|
65 |
|
|
|
2 |
|
Noninterest expense |
|
|
1,738 |
|
|
|
1,705 |
|
|
|
2 |
|
|
|
|
|
|
Income before income tax expense |
|
|
1,236 |
|
|
|
1,267 |
|
|
|
(2 |
) |
|
|
|
|
|
Net income |
|
|
757 |
|
|
|
786 |
|
|
|
(4 |
) |
ROE |
|
|
31 |
% |
|
|
36 |
% |
|
|
|
|
ROA |
|
|
1.95 |
|
|
|
2.17 |
|
|
|
|
|
Overhead ratio |
|
|
57 |
|
|
|
56 |
|
|
|
|
|
Overhead ratio excluding core deposit
intangibles(a) |
|
|
54 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
(a) |
|
Regional Banking uses the overhead ratio (excluding the amortization of core deposit
intangibles (CDI)), a non-GAAP financial measure, to evaluate the underlying expense trends
of the business. Including CDI amortization expense in the overhead ratio calculation results
in a higher overhead ratio in the earlier years and a lower overhead ratio in later years;
this would result in an improving overhead ratio over time, all things remaining equal. This
non-GAAP ratio excludes Regional Bankings core deposit intangible amortization expense
related to the Bank One merger of $109 million and $124 million for the quarters ended March
31, 2006 and 2005, respectively. |
Quarterly results
Regional Banking net income totaled $757 million, down by $29 million, or 4%, from the prior year.
Net revenue of $3.0 billion increased by $3 million, essentially flat from the prior year. Results
reflected higher deposit balances, growth in home equity and mortgage loan balances, and increased
deposit-related fees. These increases were offset by narrower spreads on deposits and loans, and
lower investment sales revenue. Credit quality remained favorable for all loan portfolios. Expenses
of $1.7 billion were up by $33 million, or 2%, from the prior year. Prior-year results included a
$40 million charge to terminate an education finance joint venture. Excluding this item, expenses
increased as investments in the retail distribution network and incremental expense from the
adoption of SFAS 123R offset merger savings and other operating efficiencies. Compared with the
prior quarter, net income increased 13%, in part due to the seasonal tax-refund anticipation
business.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
Three months ended March 31, |
(in billions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity origination volume |
|
$ |
11.7 |
|
|
$ |
11.9 |
|
|
|
(2 |
)% |
End of period loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
75.3 |
|
|
$ |
67.7 |
|
|
|
11 |
|
Mortgage |
|
|
47.0 |
|
|
|
46.6 |
|
|
|
1 |
|
Business banking |
|
|
12.8 |
|
|
|
12.7 |
|
|
|
1 |
|
Education |
|
|
9.5 |
|
|
|
4.3 |
|
|
|
121 |
|
Other loans(a) |
|
|
2.7 |
|
|
|
2.9 |
|
|
|
(7 |
) |
|
|
|
|
|
Total end of period loans |
|
|
147.3 |
|
|
|
134.2 |
|
|
|
10 |
|
End of period deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
|
64.9 |
|
|
|
62.6 |
|
|
|
4 |
|
Savings |
|
|
91.0 |
|
|
|
88.3 |
|
|
|
3 |
|
Time and other |
|
|
34.2 |
|
|
|
25.0 |
|
|
|
37 |
|
|
|
|
|
|
Total end of period deposits |
|
|
190.1 |
|
|
|
175.9 |
|
|
|
8 |
|
Average loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
74.1 |
|
|
$ |
66.2 |
|
|
|
12 |
|
Mortgage |
|
|
44.6 |
|
|
|
43.4 |
|
|
|
3 |
|
Business banking |
|
|
12.8 |
|
|
|
12.5 |
|
|
|
2 |
|
Education |
|
|
5.4 |
|
|
|
4.6 |
|
|
|
17 |
|
Other loans(a) |
|
|
3.0 |
|
|
|
3.4 |
|
|
|
(12 |
) |
|
|
|
|
|
Total average loans(b) |
|
|
139.9 |
|
|
|
130.1 |
|
|
|
8 |
|
Average deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
|
63.0 |
|
|
|
61.7 |
|
|
|
2 |
|
Savings |
|
|
89.3 |
|
|
|
87.8 |
|
|
|
2 |
|
Time and other |
|
|
32.4 |
|
|
|
24.6 |
|
|
|
32 |
|
|
|
|
|
|
Total average deposits |
|
|
184.7 |
|
|
|
174.1 |
|
|
|
6 |
|
Average assets |
|
|
157.1 |
|
|
|
146.9 |
|
|
|
7 |
|
Average equity |
|
|
9.8 |
|
|
|
8.8 |
|
|
|
11 |
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate(c)(d) |
|
|
1.36 |
% |
|
|
1.34 |
% |
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
33 |
|
|
$ |
35 |
|
|
|
(6 |
) |
Mortgage |
|
|
12 |
|
|
|
6 |
|
|
|
100 |
|
Business banking |
|
|
18 |
|
|
|
19 |
|
|
|
(5 |
) |
Other loans(e) |
|
|
7 |
|
|
|
9 |
|
|
|
(22 |
) |
|
|
|
|
|
Total net charge-offs |
|
|
70 |
|
|
|
69 |
|
|
|
1 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
0.18 |
% |
|
|
0.21 |
% |
|
|
|
|
Mortgage |
|
|
0.11 |
|
|
|
0.06 |
|
|
|
|
|
Business banking |
|
|
0.57 |
|
|
|
0.62 |
|
|
|
|
|
Other loans(b)(e) |
|
|
0.56 |
|
|
|
1.04 |
|
|
|
|
|
Total net charge-off rate(b)(e) |
|
|
0.21 |
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets(f)(g)(h) |
|
$ |
1,339 |
|
|
$ |
1,136 |
|
|
|
18 |
|
|
|
|
|
(a) |
|
Includes commercial loans derived from community development activities and insurance
policy loans. |
|
(b) |
|
Average loans include loans held-for-sale of $3.3 billion and $4.5 billion for the three
months ended March 31, 2006 and 2005, respectively. |
|
(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 and $0.7 billion at
March 31, 2006 and 2005, respectively. These amounts are excluded as reimbursement is
proceeding normally. |
|
(d) |
|
Excludes delinquencies that are insured by government agencies under the Federal Family
Education Loan Program of $0.4 billion at March 31, 2006. Delinquencies were insignificant at
March 31, 2005. These amounts are excluded as reimbursement is proceeding normally. |
|
(e) |
|
Includes insignificant amounts of Education net charge-offs. |
|
(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 at both
March 31, 2006 and 2005. These amounts are excluded as reimbursement is proceeding normally. |
|
(g) |
|
Excludes loans that are 90 days past due and still accruing, which are insured by government
agencies under the Federal Family Education Loan Program of $0.2 billion at March 31, 2006.
The Education loans past due 90 days were insignificant at March 31, 2005. These amounts are
excluded as reimbursement is proceeding normally. |
|
(h) |
|
Includes nonperforming loans held-for-sale related to mortgage banking activities of $16
million and $31 million at March 31, 2006 and 2005, respectively. |
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail branch business metrics |
|
Three months ended March 31, |
(in millions, except ratios and where otherwise noted) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment sales volume |
|
$ |
3,553 |
|
|
$ |
2,870 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
2,638 |
|
|
|
2,517 |
|
|
|
121 |
# |
ATMs |
|
|
7,400 |
|
|
|
6,687 |
|
|
|
713 |
|
Personal bankers |
|
|
7,019 |
|
|
|
5,798 |
|
|
|
1,221 |
|
Sales specialists |
|
|
3,318 |
|
|
|
2,846 |
|
|
|
472 |
|
Active online customers (in thousands) |
|
|
5,030 |
|
|
|
3,671 |
|
|
|
1,359 |
|
Checking accounts (in thousands) |
|
|
8,936 |
|
|
|
8,287 |
|
|
|
649 |
|
|
MORTGAGE BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios and where otherwise noted) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production income |
|
$ |
219 |
|
|
$ |
237 |
|
|
|
(8 |
)% |
Mortgage servicing income: |
|
|
|
|
|
|
|
|
|
|
|
|
Servicing revenue |
|
|
560 |
|
|
|
519 |
|
|
|
8 |
|
Changes in MSR asset fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Due to inputs or assumptions in model(a) |
|
|
711 |
|
|
|
548 |
|
|
|
30 |
|
Other changes in fair value(b) |
|
|
(349 |
) |
|
|
(339 |
) |
|
|
(3 |
) |
Derivative valuation adjustments and other |
|
|
(753 |
) |
|
|
(445 |
) |
|
|
(69 |
) |
|
|
|
|
|
Total mortgage servicing income |
|
|
169 |
|
|
|
283 |
|
|
|
(40 |
) |
|
|
|
|
|
Total net revenue |
|
|
388 |
|
|
|
520 |
|
|
|
(25 |
) |
Noninterest expense |
|
|
324 |
|
|
|
299 |
|
|
|
8 |
|
Income before income tax expense |
|
|
64 |
|
|
|
221 |
|
|
|
(71 |
) |
Net income |
|
|
39 |
|
|
|
139 |
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
9 |
% |
|
|
35 |
% |
|
|
|
|
ROA |
|
|
0.58 |
|
|
|
2.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Third party mortgage loans serviced (ending) |
|
$ |
484.1 |
|
|
$ |
435.5 |
|
|
|
11 |
|
MSR net carrying value (ending) |
|
|
7.5 |
|
|
|
5.7 |
|
|
|
32 |
|
Average mortgage loans held-for-sale |
|
|
13.0 |
|
|
|
11.4 |
|
|
|
14 |
|
Average assets |
|
|
27.1 |
|
|
|
20.8 |
|
|
|
30 |
|
Average equity |
|
|
1.7 |
|
|
|
1.6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage origination volume by channel (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
9.1 |
|
|
$ |
10.0 |
|
|
|
(9 |
) |
Wholesale |
|
|
7.4 |
|
|
|
7.2 |
|
|
|
3 |
|
Correspondent (including negotiated transactions) |
|
|
12.4 |
|
|
|
9.5 |
|
|
|
31 |
|
|
|
|
|
|
Total |
|
|
28.9 |
|
|
|
26.7 |
|
|
|
8 |
|
|
|
|
|
(a) |
|
Represents MSR asset fair value adjustments due to changes in inputs, such as interest
rates and volatility, as well as updates to assumptions used in the valuation model. |
|
(b) |
|
Includes changes in the MSR value due to servicing portfolio runoff (or time decay).
Effective January 1, 2006, the Firm implemented SFAS 156, adopting fair value accounting for
the MSR asset. For the period ending March 31, 2005, this amount represents MSR asset
amortization expense calculated in accordance with SFAS 140. |
Quarterly results
Mortgage Banking net income was $39 million, down from net income of $139 million in the prior
year. Production revenue decreased, reflecting lower gain-on-sale margins on higher mortgage
originations. Servicing income of $169 million was down from $283 million in the prior year. The
results were primarily driven by lower MSR risk management results, partially offset by increased
servicing revenue due to increased levels of third-party loans serviced. Noninterest expense was
$324 million, up by $25 million, reflecting increased mortgage originations.
21
AUTO FINANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios and where otherwise noted) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
44 |
|
|
$ |
(35 |
) |
|
NM |
|
Net interest income |
|
|
291 |
|
|
|
325 |
|
|
|
(10 |
)% |
|
|
|
|
|
Total net revenue |
|
|
335 |
|
|
|
290 |
|
|
|
16 |
|
Provision for credit losses |
|
|
19 |
|
|
|
29 |
|
|
|
(34 |
) |
Noninterest expense |
|
|
176 |
|
|
|
158 |
|
|
|
11 |
|
|
|
|
|
|
Income before income tax expense |
|
|
140 |
|
|
|
103 |
|
|
|
36 |
|
|
|
|
|
|
Net income |
|
|
85 |
|
|
|
63 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
14 |
% |
|
|
9 |
% |
|
|
|
|
ROA |
|
|
0.73 |
|
|
|
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Auto origination volume |
|
$ |
4.3 |
|
|
$ |
4.8 |
|
|
|
(10 |
) |
End-of-period loans and lease related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding |
|
$ |
41.0 |
|
|
$ |
48.4 |
|
|
|
(15 |
) |
Lease financing receivables |
|
|
3.6 |
|
|
|
7.0 |
|
|
|
(49 |
) |
Operating lease assets |
|
|
1.1 |
|
|
|
0.2 |
|
|
|
450 |
|
|
|
|
|
|
Total end-of-period loans and lease related assets |
|
|
45.7 |
|
|
|
55.6 |
|
|
|
(18 |
) |
Average loans and lease related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding(a) |
|
$ |
41.2 |
|
|
$ |
48.8 |
|
|
|
(16 |
) |
Lease financing receivables |
|
|
4.0 |
|
|
|
7.6 |
|
|
|
(47 |
) |
Operating lease assets |
|
|
1.0 |
|
|
|
0.1 |
|
|
NM |
|
|
|
|
|
|
Total average loans and lease related assets |
|
|
46.2 |
|
|
|
56.5 |
|
|
|
(18 |
) |
Average assets |
|
|
47.3 |
|
|
|
57.4 |
|
|
|
(18 |
) |
Average equity |
|
|
2.4 |
|
|
|
2.7 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate |
|
|
1.39 |
% |
|
|
1.37 |
% |
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
48 |
|
|
$ |
74 |
|
|
|
(35 |
) |
Lease receivables |
|
|
3 |
|
|
|
9 |
|
|
|
(67 |
) |
|
|
|
|
|
Total net charge-offs |
|
|
51 |
|
|
|
83 |
|
|
|
(39 |
) |
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Loans(a) |
|
|
0.47 |
% |
|
|
0.61 |
% |
|
|
|
|
Lease receivables |
|
|
0.30 |
|
|
|
0.48 |
|
|
|
|
|
Total net charge-off rate(a) |
|
|
0.46 |
|
|
|
0.60 |
|
|
|
|
|
Nonperforming assets |
|
$ |
198 |
|
|
$ |
215 |
|
|
|
(8 |
) |
|
|
|
|
(a) |
|
Average loans held-for-sale were insignificant for the quarters ended March 31, 2006 and
2005. |
Quarterly results
Auto Finance net income of $85 million was up by $22 million, or 35%, from the prior year.
Current-period results included a net $45 million loss related to auto loans transferred to
held-for-sale. Prior-year results included a net $78 million loss associated with auto loans
transferred to held-for-sale and a $34 million net benefit from the sale of a recreational vehicle
loan portfolio. Excluding these items, the benefit of wider loan spreads and lower credit costs
offset the decline in loan and lease balances. After adjusting for the impact of increased
depreciation expense on owned automobiles subject to operating leases, expenses declined reflecting
lower production volumes and operating efficiencies.
22
CARD SERVICES
For a discussion of the business profile of CS, see pages 4546 of JPMorgan Chases 2005 Annual
Report.
JPMorgan Chase uses the concept of managed receivables to evaluate the credit performance of
its credit card loans, both sold and not sold. For further information, see Explanation and
reconciliation of the Firms use of non-GAAP financial measures on pages 1112 of this Form 10Q.
Managed results exclude the impact of credit card securitizations on Total net revenue, the
Provision for credit losses, net charge-offs and loan receivables. Securitization does not change
reported Net income; however, it does affect the classification of items on the Consolidated
statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data-managed basis |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
$ |
601 |
|
|
$ |
761 |
|
|
|
(21 |
)% |
All other income |
|
|
71 |
|
|
|
11 |
|
|
NM |
|
|
|
|
|
|
Noninterest revenue |
|
|
672 |
|
|
|
772 |
|
|
|
(13 |
) |
Net interest income |
|
|
3,013 |
|
|
|
3,007 |
|
|
|
|
|
|
|
|
|
|
Total net revenue(a) |
|
|
3,685 |
|
|
|
3,779 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,016 |
|
|
|
1,636 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
259 |
|
|
|
285 |
|
|
|
(9 |
) |
Noncompensation expense |
|
|
796 |
|
|
|
839 |
|
|
|
(5 |
) |
Amortization of intangibles |
|
|
188 |
|
|
|
189 |
|
|
|
(1 |
) |
|
|
|
|
|
Total noninterest expense(a) |
|
|
1,243 |
|
|
|
1,313 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense(a) |
|
|
1,426 |
|
|
|
830 |
|
|
|
72 |
|
Income tax expense |
|
|
525 |
|
|
|
308 |
|
|
|
70 |
|
|
|
|
|
|
Net income |
|
$ |
901 |
|
|
$ |
522 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Net securitization gains (amortization) |
|
$ |
8 |
|
|
$ |
(12 |
) |
|
NM |
|
Financial metrics |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
26 |
% |
|
|
18 |
% |
|
|
|
|
Overhead ratio |
|
|
34 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
(a) |
|
As a result of the integration of Chase Merchant Services and Paymentech merchant
processing businesses into a joint venture, beginning in the fourth quarter of 2005, Total net
revenue, Total noninterest expense and Income before income tax expense have been reduced to
reflect the deconsolidation of Paymentech. There is no impact to Net income. |
Quarterly results
Net income of $901 million was up by $379 million, or 73%, from the prior year. The results for the
quarter reflected a pre-tax benefit of $550 million, which is
based on an estimate by management of the impact of lower bankruptcies following the new bankruptcy legislation that became effective in the
fourth-quarter of 2005. Results were also driven by lower credit losses (excluding the impact from
the bankruptcy legislation), merger savings and higher loan balances, including the acquisition of
the Sears Canada credit card business. These benefits were offset partially by narrower spreads on
loans and higher marketing expense.
Net revenue was $3.7 billion, down by $94 million, or 2%, from the prior year. After adjusting the
prior-year results for the impact of the deconsolidation of Paymentech, revenue was up 1%. Net
interest income was $3.0 billion, flat to the prior year. Higher loan balances, including the
acquisition of the Sears Canada credit card business, and increased revenues due to the decline in
bankruptcy-related revenue reversals, were offset by narrower loan spreads. Net interest income to
average managed receivables was 8.85% down from 9.13% in the prior year, but up from 8.14% in the
prior quarter. Noninterest revenue of $672 million was down by $100 million, or 13%. After
adjusting the prior-year results for the impact of the deconsolidation of Paymentech, noninterest
revenue was up 5% due to higher charge volume, resulting in increased interchange income, partially
offset by higher volume-driven payments to partners and higher expense related to reward programs.
Average managed loans of $138.0 billion increased by $4.4 billion, or 3%, from the prior year, but
decreased $0.9 billion from the prior quarter. The current quarter included an average of $2.2
billion, and the prior quarter included an average of $1.2 billion, of loans from the Sears Canada
acquisition. End-of-period managed loans of $134.3 billion increased by $0.9 billion, or 1%, from
the prior year (including $2.0 billion of loans from the Sears Canada acquisition) and decreased by
$8.0 billion from the prior quarter. The decline from the prior quarter was caused by
higher-than-normal customer payment rates, which management believes may be partially related to
the recently implemented new minimum payment rules.
23
The provision for credit losses was $1.0 billion, down by $620 million, or 38%, from the prior
year. This decrease was due primarily to lower bankruptcy-related net charge-offs, which based upon
an estimate by management, had an impact of $475 million. The managed net charge-off rate for the
quarter decreased to 2.99%, down from 4.83% in the prior year and 6.39% in the prior quarter. The
30-day managed delinquency rate was 3.10%, down from 3.54% in the prior year, and up from 2.79% in
the prior quarter. These credit statistics reflect the impact of the new bankruptcy legislation. In
addition, management believes the underlying credit quality of the managed loan portfolio remains
strong.
Noninterest expense of $1.2 billion decreased by $70 million, or 5%. After adjusting the prior
years results for the impact of the deconsolidation of Paymentech, expenses were up 5%. The
increase was due to increased marketing activity, higher fraud-related losses and the acquisition
of the Sears Canada credit card business, largely offset by merger savings.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount, ratios |
|
|
|
|
|
|
|
|
|
and where otherwise noted) |
|
2006 |
|
|
2005 |
|
|
Change |
|
% of average managed outstandings: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8.85 |
% |
|
|
9.13 |
% |
|
|
|
|
Provision for credit losses |
|
|
2.99 |
|
|
|
4.97 |
|
|
|
|
|
Noninterest revenue |
|
|
1.97 |
|
|
|
2.34 |
|
|
|
|
|
Risk adjusted margin(a) |
|
|
7.84 |
|
|
|
6.51 |
|
|
|
|
|
Noninterest expense |
|
|
3.65 |
|
|
|
3.99 |
|
|
|
|
|
Pre-tax income (ROO) |
|
|
4.19 |
|
|
|
2.52 |
|
|
|
|
|
Net income |
|
|
2.65 |
|
|
|
1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Charge volume (in billions) |
|
$ |
74.3 |
|
|
$ |
70.3 |
|
|
|
6 |
% |
Net accounts opened (in thousands) |
|
|
2,718 |
|
|
|
2,744 |
|
|
|
(1 |
) |
Credit cards issued (in thousands) |
|
|
112,446 |
|
|
|
94,367 |
|
|
|
19 |
|
Number of registered Internet customers (in
millions) |
|
|
15.9 |
|
|
|
10.9 |
|
|
|
46 |
|
Merchant acquiring business(b) |
|
|
|
|
|
|
|
|
|
|
|
|
Bank card volume (in billions) |
|
$ |
147.7 |
|
|
$ |
125.1 |
|
|
|
18 |
|
Total transactions (in millions)(c) |
|
|
4,130 |
|
|
|
3,459 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
64,691 |
|
|
$ |
66,053 |
|
|
|
(2 |
) |
Securitized loans |
|
|
69,580 |
|
|
|
67,328 |
|
|
|
3 |
|
|
|
|
|
|
Managed loans |
|
$ |
134,271 |
|
|
$ |
133,381 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Managed assets |
|
$ |
145,994 |
|
|
$ |
138,512 |
|
|
|
5 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
68,455 |
|
|
$ |
64,218 |
|
|
|
7 |
|
Securitized loans |
|
|
69,571 |
|
|
|
69,370 |
|
|
|
|
|
|
|
|
|
|
Managed loans |
|
$ |
138,026 |
|
|
$ |
133,588 |
|
|
|
3 |
|
|
|
|
|
|
Equity |
|
|
14,100 |
|
|
|
11,800 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
18,801 |
|
|
|
20,137 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
1,016 |
|
|
$ |
1,590 |
|
|
|
(36 |
) |
Managed net charge-off rate |
|
|
2.99 |
% |
|
|
4.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency ratios |
|
|
|
|
|
|
|
|
|
|
|
|
30+ days |
|
|
3.10 |
% |
|
|
3.54 |
% |
|
|
|
|
90+ days |
|
|
1.39 |
|
|
|
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
3,274 |
|
|
$ |
3,040 |
|
|
|
8 |
|
Allowance for loan losses to period-end loans |
|
|
5.06 |
% |
|
|
4.60 |
% |
|
|
|
|
|
|
|
|
(a) |
|
Represents Total net revenue less Provision for credit losses. |
|
(b) |
|
Represents 100% of the merchant acquiring business. |
|
(c) |
|
Periods prior to the fourth quarter of 2005 have been restated to conform methodologies
following the integration of Chase Merchant Services and Paymentech merchant processing
businesses. |
24
The financial information presented below reconciles reported basis and managed basis to
disclose the effect of securitizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Income statement data(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
1,726 |
|
|
$ |
1,576 |
|
|
|
10 |
% |
Securitization adjustments |
|
|
(1,125 |
) |
|
|
(815 |
) |
|
|
(38 |
) |
|
|
|
|
|
Managed credit card income |
|
$ |
601 |
|
|
$ |
761 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
1,439 |
|
|
$ |
1,275 |
|
|
|
13 |
|
Securitization adjustments |
|
|
1,574 |
|
|
|
1,732 |
|
|
|
(9 |
) |
|
|
|
|
|
Managed net interest income |
|
$ |
3,013 |
|
|
$ |
3,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
3,236 |
|
|
$ |
2,862 |
|
|
|
13 |
|
Securitization adjustments |
|
|
449 |
|
|
|
917 |
|
|
|
(51 |
) |
|
|
|
|
|
Managed total net revenue |
|
$ |
3,685 |
|
|
$ |
3,779 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
567 |
|
|
$ |
719 |
|
|
|
(21 |
) |
Securitization adjustments |
|
|
449 |
|
|
|
917 |
|
|
|
(51 |
) |
|
|
|
|
|
Managed provision for credit losses |
|
$ |
1,016 |
|
|
$ |
1,636 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet average
balances(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
78,437 |
|
|
$ |
71,003 |
|
|
|
10 |
|
Securitization adjustments |
|
|
67,557 |
|
|
|
67,509 |
|
|
|
|
|
|
|
|
|
|
Managed average assets |
|
$ |
145,994 |
|
|
$ |
138,512 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Reported net charge-offs data for the period |
|
$ |
567 |
|
|
$ |
673 |
|
|
|
(16 |
) |
Securitization adjustments |
|
|
449 |
|
|
|
917 |
|
|
|
(51 |
) |
|
|
|
|
|
Managed net charge-offs |
|
$ |
1,016 |
|
|
$ |
1,590 |
|
|
|
(36 |
) |
|
|
|
|
(a) |
|
JPMorgan Chase uses the concept of managed receivables to evaluate the credit
performance and overall 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.
Managed results exclude the impact of credit card securitizations on Total net revenue, the
Provision for credit losses, net charge-offs and loan receivables. Securitization does not
change reported net income versus managed earnings; however, it does affect the
classification of items on the Consolidated statements of income. |
25
COMMERCIAL BANKING
For a discussion of the business profile of CB, see page 4 of this Form 10Q. As previously
announced, various wholesale banking clients, and the related income and balance sheet items, have
been transferred between Commercial Banking, the Investment Bank and Treasury & Securities
Services. As a result, prior period amounts have been reclassified to conform to the current year
presentation. For additional information on these transfers, see page 13 of this Form 10Q.
The agreement to acquire The Bank of New Yorks middle-market banking business will add
approximately 2,000 clients, $2.9 billion of loans and $1.6 billion in deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
142 |
|
|
$ |
142 |
|
|
|
|
% |
Asset management, administration and
commissions |
|
|
15 |
|
|
|
14 |
|
|
|
7 |
|
All other income(a) |
|
|
76 |
|
|
|
71 |
|
|
|
7 |
|
|
|
|
|
|
Noninterest revenue |
|
|
233 |
|
|
|
227 |
|
|
|
3 |
|
Net interest income |
|
|
667 |
|
|
|
600 |
|
|
|
11 |
|
|
|
|
|
|
Total net revenue |
|
|
900 |
|
|
|
827 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
7 |
|
|
|
(6 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
197 |
|
|
|
161 |
|
|
|
22 |
|
Noncompensation expense |
|
|
285 |
|
|
|
276 |
|
|
|
3 |
|
Amortization of intangibles |
|
|
16 |
|
|
|
17 |
|
|
|
(6 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
498 |
|
|
|
454 |
|
|
|
10 |
|
|
|
|
|
|
Income before income tax expense |
|
|
395 |
|
|
|
379 |
|
|
|
4 |
|
Income tax expense |
|
|
155 |
|
|
|
148 |
|
|
|
5 |
|
|
|
|
|
|
Net income |
|
$ |
240 |
|
|
$ |
231 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
18 |
% |
|
|
28 |
% |
|
|
|
|
ROA |
|
|
1.78 |
|
|
|
1.83 |
|
|
|
|
|
Overhead ratio |
|
|
55 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
(a) |
|
IB-related and commercial card revenues are included in All other income. |
Quarterly results
Net income was $240 million, up by $9 million, or 4%, from
the prior year. The increase from the prior year was the
result of growth in net interest income offset partially by incremental expense from the adoption
of SFAS 123R and an increase in provision for credit losses.
Net revenue was $900 million, up by $73 million, or 9%, from the prior year. Net interest income
was $667 million, up by $67 million, or 11%, due to wider spreads and higher volumes related to
liability balances and increased loan balances, partially offset by narrower loan spreads
reflecting continuing competitive pressure. Noninterest revenue was $233 million, up by $6 million,
or 3%, from the prior year.
Each business within Commercial Banking grew revenue over the prior year. Middle Market Banking
revenue was $623 million, an increase of $53 million, or 9%, primarily due to higher treasury
services and investment banking revenue. Mid-Corporate Banking and Real Estate revenues increased
11% and 7%, respectively, due primarily to an increase in treasury services revenue.
Provision for credit losses was $7 million, compared with a net benefit of $6 million in the prior
year.
Noninterest expense was $498 million, up by $44 million, or 10%, from the prior year. The increase
was due primarily to incremental expense of $29 million from the adoption of SFAS 123R.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except ratio and headcount data) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenue by product: |
|
|
|
|
|
|
|
|
|
|
|
|
Lending |
|
$ |
319 |
|
|
$ |
292 |
|
|
|
9 |
% |
Treasury services |
|
|
550 |
|
|
|
497 |
|
|
|
11 |
|
Investment banking |
|
|
40 |
|
|
|
39 |
|
|
|
3 |
|
Other |
|
|
(9 |
) |
|
|
(1 |
) |
|
NM |
|
|
|
|
|
|
Total Commercial Banking revenue |
|
|
900 |
|
|
|
827 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IB revenues, gross |
|
$ |
114 |
|
|
$ |
107 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
623 |
|
|
$ |
570 |
|
|
|
9 |
|
Mid-Corporate Banking |
|
|
137 |
|
|
|
123 |
|
|
|
11 |
|
Real Estate |
|
|
105 |
|
|
|
98 |
|
|
|
7 |
|
Other |
|
|
35 |
|
|
|
36 |
|
|
|
(3 |
) |
|
|
|
|
|
Total Commercial Banking revenue |
|
|
900 |
|
|
|
827 |
|
|
|
9 |
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
54,771 |
|
|
$ |
51,135 |
|
|
|
7 |
|
Loans and leases |
|
|
50,836 |
|
|
|
46,599 |
|
|
|
9 |
|
Liability balances(a) |
|
|
70,763 |
|
|
|
65,380 |
|
|
|
8 |
|
Equity |
|
|
5,500 |
|
|
|
3,400 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle market banking |
|
$ |
31,861 |
|
|
$ |
30,243 |
|
|
|
5 |
|
Mid-corporate banking |
|
|
7,577 |
|
|
|
5,799 |
|
|
|
31 |
|
Real estate |
|
|
7,436 |
|
|
|
6,937 |
|
|
|
7 |
|
Other |
|
|
3,962 |
|
|
|
3,620 |
|
|
|
9 |
|
|
|
|
|
|
Total Commercial Banking loans |
|
|
50,836 |
|
|
|
46,599 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
4,310 |
|
|
|
4,464 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
(7 |
) |
|
$ |
2 |
|
|
NM |
|
Nonperforming loans |
|
|
202 |
|
|
|
433 |
|
|
|
(53 |
) |
Allowance for loan losses |
|
|
1,415 |
|
|
|
1,312 |
|
|
|
8 |
|
Allowance for lending-related commitments |
|
|
145 |
|
|
|
170 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate |
|
|
(0.06 |
)% |
|
|
0.02 |
% |
|
|
|
|
Allowance for loan losses to average loans |
|
|
2.78 |
|
|
|
2.82 |
|
|
|
|
|
Allowance for loan losses to nonperforming
loans |
|
|
700 |
|
|
|
303 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.40 |
|
|
|
0.93 |
|
|
|
|
|
|
|
|
|
(a) |
|
Liability balances include deposits and deposits swept to on-balance sheet
liabilities. |
27
TREASURY & SECURITIES SERVICES
For a discussion of the business profile of TSS, see page 5 of this Form 10Q. TSS, as previously
announced, reorganized by combining the Investor Services and Institutional Trust Services
businesses into a single business called WSS. In 2006, various wholesale banking clients, and the
related revenue and expense, have been transferred among CB, IB and TSS. As a result, prior period
amounts have been reclassified to conform to the current year presentation. TSS firmwide
disclosures have also been adjusted to reflect a refined set of TSS products and a revised split of
liability balances and lending-related revenue related to the client transfers described on page 13
of this Form 10Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
182 |
|
|
$ |
170 |
|
|
|
7 |
% |
Asset management, administration and
commissions |
|
|
774 |
|
|
|
692 |
|
|
|
12 |
|
All other income |
|
|
149 |
|
|
|
121 |
|
|
|
23 |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,105 |
|
|
|
983 |
|
|
|
12 |
|
Net interest income |
|
|
572 |
|
|
|
515 |
|
|
|
11 |
|
|
|
|
|
|
Total net revenue |
|
|
1,677 |
|
|
|
1,498 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(33 |
) |
Credit reimbursement to IB(a) |
|
|
(30 |
) |
|
|
(38 |
) |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
601 |
|
|
|
504 |
|
|
|
19 |
|
Noncompensation expense |
|
|
529 |
|
|
|
534 |
|
|
|
(1 |
) |
Amortization of intangibles |
|
|
28 |
|
|
|
29 |
|
|
|
(3 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
1,158 |
|
|
|
1,067 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
493 |
|
|
|
396 |
|
|
|
24 |
|
Income tax expense |
|
|
181 |
|
|
|
142 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
312 |
|
|
$ |
254 |
|
|
|
23 |
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
44 |
% |
|
|
54 |
% |
|
|
|
|
Overhead ratio |
|
|
69 |
|
|
|
71 |
|
|
|
|
|
Pre-tax margin ratio(b) |
|
|
29 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
(a) |
|
TSS is charged a credit reimbursement related to certain exposures managed within the IB
credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit
reimbursement on page 35 of JPMorgan Chases 2005 Annual Report. |
|
(b) |
|
Pre-tax margin represents Income 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. |
Quarterly results
Net income was a record $312 million, up by $58 million, or 23%. Earnings benefited from higher
revenues due to business growth and wider spreads on average liability balances, partially offset
by higher compensation expense resulting from business growth and incremental expense from the
adoption of SFAS 123R.
Net revenue of $1.7 billion was up by $179 million, or 12%. Noninterest revenue was $1.1 billion,
up by $122 million, or 12%. The improvement was due to an increase in assets under custody to $11.7
trillion, which was driven by market value appreciation and new business. Also contributing to the
improvement was the acquisition of Vastera and growth in Fund Services, foreign exchange and
wholesale card, all of which were driven by a combination of increased usage by existing clients
and new business. Net interest income was $572 million, up by $57 million, primarily resulting from
wider spreads on higher average liability balances, which increased 22% to $196 billion.
TS net revenue of $693 million grew by $59 million, or 9%. WSS net revenue of $984 million grew by
$120 million, or 14%. TSS firmwide net revenue, which includes Treasury Services net revenue
recorded in other lines of business, grew to $2.3 billion, up $237 million, or 12%. Treasury
Services firmwide net revenue grew to $1.3 billion, up $117 million, or 10%.
Credit reimbursement to the IB was $30 million, a decrease of $8 million. 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 was $1.2 billion, up by $91 million, or 9%. The increase was due to higher
compensation expense related to business growth, incremental expense of $25 million from the
adoption of SFAS 123R, and the acquisition of Vastera.
28
The Firm has announced the exchange of a portion of the corporate trust business for the consumer,
small-business and middle-market banking businesses of The Bank of New York. For a description of
the transaction, see Other Business Events on page 5 of this Form 10Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount, ratio data and where |
|
|
|
|
|
|
|
|
otherwise noted) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services |
|
$ |
693 |
|
|
$ |
634 |
|
|
|
9 |
% |
Worldwide Securities Services |
|
|
984 |
|
|
|
864 |
|
|
|
14 |
|
|
|
|
|
|
Total net revenue |
|
$ |
1,677 |
|
|
$ |
1,498 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Assets under custody (in billions)(a) |
|
$ |
11,737 |
|
|
$ |
10,154 |
|
|
|
16 |
|
Corporate trust securities under administration (in billions)(b) |
|
|
7,040 |
|
|
|
6,745 |
|
|
|
4 |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
US$ ACH transactions originated (in millions) |
|
|
838 |
|
|
|
699 |
|
|
|
20 |
|
Total US$ clearing volume (in thousands) |
|
|
25,182 |
|
|
|
21,705 |
|
|
|
16 |
|
International electronic funds transfer volume (in thousands)(c) |
|
|
33,741 |
|
|
|
17,159 |
|
|
|
97 |
|
Wholesale check volume (in millions) |
|
|
852 |
|
|
|
940 |
|
|
|
(9 |
) |
Wholesale cards issued (in thousands)(d) |
|
|
16,977 |
|
|
|
11,834 |
|
|
|
43 |
|
Selected balance sheets (average) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
30,131 |
|
|
$ |
29,534 |
|
|
|
2 |
|
Loans |
|
|
13,137 |
|
|
|
12,021 |
|
|
|
9 |
|
Liability balances(e) |
|
|
196,255 |
|
|
|
160,906 |
|
|
|
22 |
|
Equity |
|
|
2,900 |
|
|
|
1,900 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
25,924 |
|
|
|
23,076 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSS firmwide metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services firmwide revenue(f) |
|
$ |
1,291 |
|
|
$ |
1,174 |
|
|
|
10 |
|
Treasury & Securities Services firmwide revenue(f) |
|
|
2,275 |
|
|
|
2,038 |
|
|
|
12 |
|
Treasury Services firmwide overhead ratio(g) |
|
|
56 |
% |
|
|
59 |
% |
|
|
|
|
Treasury & Securities Services firmwide overhead ratio(g) |
|
|
62 |
|
|
|
64 |
|
|
|
|
|
Treasury Services firmwide liability balances (average)(h) |
|
$ |
155,422 |
|
|
$ |
133,770 |
|
|
|
16 |
|
Treasury & Securities Services firmwide
liability balances (average)(h) |
|
|
266,450 |
|
|
|
226,286 |
|
|
|
18 |
|
|
|
|
|
(a) |
|
At September 30, 2005, approximately $130 billion of Trust-related assets under custody
(AUC) were included in the total amount. Approximately 5% of total AUC are trust related. |
|
(b) |
|
Corporate trust securities under administration include debt held in trust on behalf of third
parties and debt serviced as agent. |
|
(c) |
|
International electronic funds transfer includes non-US$ ACH and clearing volume. |
|
(d) |
|
Wholesale cards issued include domestic commercial card, stored value card, prepaid card, and
government electronic benefit card products. |
|
(e) |
|
Liability balances include deposits and deposits swept to on-balance sheet liabilities. |
TSS firmwide metrics
TSS firmwide metrics include certain TSS product revenues and liability balances reported in other
lines of business for customers who are also customers of those lines of business. In order to
capture the firmwide impact of Treasury Services (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 order to understand the aggregate
TSS business. Prior periods have been restated to reflect the impact of the client transfers
described on page 13 of this Form 10Q.
|
(f) |
|
Firmwide revenue includes TS revenue recorded in the Commercial Banking (CB),
Regional Banking and Asset & Wealth Management lines of business (see below) and excludes
FX revenues recorded in the Investment Bank (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 $118 million for the three months
ended March 31, 2006. |
|
|
(g) |
|
Overhead ratios have been calculated based upon firmwide revenues and TSS and TS
expenses, respectively, including those allocated to certain other lines of business. FX
revenues and expenses recorded in the IB for TSS-related FX activity are not included in
this ratio. |
|
|
(h) |
|
Firmwide liability balances include TS liability balances recorded in certain other
lines of business. Liability balances associated with TS customers who are also customers
of the CB line of business are not included in TS liability balances. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Treasury Services revenue reported in CB |
|
$ |
550 |
|
|
$ |
497 |
|
|
|
11 |
% |
Treasury Services revenue reported in other lines of
business |
|
|
48 |
|
|
|
43 |
|
|
|
12 |
|
|
29
ASSET & WEALTH MANAGEMENT
For a discussion of the business profile of AWM, see pages 5152 of JPMorgan Chases 2005 Annual
Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management, administration and
commissions |
|
$ |
1,222 |
|
|
$ |
975 |
|
|
|
25 |
% |
All other income |
|
|
116 |
|
|
|
104 |
|
|
|
12 |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,338 |
|
|
|
1,079 |
|
|
|
24 |
|
Net interest income |
|
|
246 |
|
|
|
282 |
|
|
|
(13 |
) |
|
|
|
|
|
Total net revenue |
|
|
1,584 |
|
|
|
1,361 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
682 |
|
|
|
538 |
|
|
|
27 |
|
Noncompensation expense |
|
|
394 |
|
|
|
371 |
|
|
|
6 |
|
Amortization of intangibles |
|
|
22 |
|
|
|
25 |
|
|
|
(12 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
1,098 |
|
|
|
934 |
|
|
|
18 |
|
|
|
|
|
|
Income before income tax expense |
|
|
493 |
|
|
|
434 |
|
|
|
14 |
|
Income tax expense |
|
|
180 |
|
|
|
158 |
|
|
|
14 |
|
|
|
|
|
|
Net income |
|
$ |
313 |
|
|
$ |
276 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
36 |
% |
|
|
47 |
% |
|
|
|
|
Overhead ratio |
|
|
69 |
|
|
|
69 |
|
|
|
|
|
Pre-tax margin ratio(a) |
|
|
31 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
(a) |
|
Pre-tax margin represents Income 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. |
Quarterly results
Net income was $313 million, up by $37 million, or 13%, from the prior year. Performance was driven
by increased revenues offset partially by a higher compensation expense related to incremental
expense from the adoption of SFAS 123R and higher performance-based compensation.
Net revenue was $1.6 billion, up by $223 million, or 16%, from the prior year. Noninterest revenue,
principally fees and commissions, of $1.3 billion was up by $259 million, or 24%. This increase was
due primarily to net asset inflows, mainly in equity-related and liquidity products; global equity
market appreciation; and higher placement and performance fees. Net interest income was $246
million, down by $36 million, or 13%, from the prior year, primarily due to narrower deposit
spreads and the sale of BrownCo in the fourth-quarter of 2005, partially offset by higher deposit
balances.
Retail client segment revenue grew 28%, to $442 million, primarily due to net asset inflows,
partially offset by the sale of BrownCo. Private Bank client segment revenue grew 5% from the prior
year to $441 million, due to increased placement activity and management fees, and higher deposit
balances, partially offset by narrower deposit spreads. Institutional client segment revenue grew
35%, to $435 million, due to net asset inflows and higher performance fees. Private Client Services
client segment revenue decreased 2%, to $266 million, due to narrower deposit and loan spreads,
partially offset by higher deposit and loan balances.
Provision for credit losses was a $7 million benefit, flat from the prior year.
Noninterest expense of $1.1 billion was up by $164 million, or 18%, from the prior year. This
increase was due to incremental expense of $71 million from the adoption of SFAS 123R, and higher
performance-based compensation, partially offset by the sale of BrownCo.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount and ranking |
|
|
|
|
|
|
|
|
|
data, and where otherwise noted) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Revenue by client segment |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
442 |
|
|
$ |
346 |
|
|
|
28 |
% |
Private bank |
|
|
441 |
|
|
|
422 |
|
|
|
5 |
|
Institutional |
|
|
435 |
|
|
|
322 |
|
|
|
35 |
|
Private client services |
|
|
266 |
|
|
|
271 |
|
|
|
(2 |
) |
|
|
|
|
|
Total net revenue |
|
$ |
1,584 |
|
|
$ |
1,361 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Client advisors |
|
|
1,439 |
|
|
|
1,390 |
|
|
|
4 |
|
Retirement planning services participants |
|
|
1,327,000 |
|
|
|
1,181,000 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of customer assets in 4 & 5 Star
Funds(a) |
|
|
54 |
% |
|
|
48 |
% |
|
|
13 |
|
% of AUM in 1st and 2nd quartiles:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
|
72 |
% |
|
|
71 |
% |
|
|
1 |
|
3 years |
|
|
75 |
% |
|
|
73 |
% |
|
|
3 |
|
5 years |
|
|
75 |
% |
|
|
71 |
% |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected balance sheets data (average) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
41,012 |
|
|
$ |
39,716 |
|
|
|
3 |
|
Loans(c) |
|
|
24,482 |
|
|
|
26,357 |
|
|
|
(7 |
) |
Deposits(c)(d) |
|
|
48,066 |
|
|
|
42,043 |
|
|
|
14 |
|
Equity |
|
|
3,500 |
|
|
|
2,400 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
12,511 |
|
|
|
12,378 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
7 |
|
|
$ |
(6 |
) |
|
NM |
Nonperforming loans |
|
|
79 |
|
|
|
78 |
|
|
|
1 |
|
Allowance for loan losses |
|
|
119 |
|
|
|
214 |
|
|
|
(44 |
) |
Allowance for lending-related commitments |
|
|
3 |
|
|
|
5 |
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate |
|
|
0.12 |
% |
|
|
(0.09 |
)% |
|
|
|
|
Allowance for loan losses to average loans |
|
|
0.49 |
|
|
|
0.81 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans |
|
|
151 |
|
|
|
274 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.32 |
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
(a) |
|
Derived from Morningstar for the United States; Micropal for the United Kingdom,
Luxembourg, Hong Kong and Taiwan; and Nomura for Japan. |
|
(b) |
|
Quartile rankings sourced from Lipper for the United States and Taiwan; Micropal for the
United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan. |
|
(c) |
|
The sale of BrownCo, which occurred on November 30, 2005, included $3.0 billion in both
loans and deposits. |
|
(d) |
|
Reflects the transfer in 2005 of certain consumer deposits from Retail Financial Services to
Asset & Wealth Management. |
Assets under supervision
Assets under supervision were $1.2 trillion, up 10%, or $105 billion, from the prior year,
including a $33 billion reduction due to the sale of BrownCo. Assets under management were $873
billion, up 11%, or $83 billion, from the prior year. The increase was primarily the result of
market appreciation and net asset inflows driven by retail flows from third-party distribution,
primarily in equity-related products, and institutional flows in liquidity products. Custody,
brokerage, administration and deposit balances were $324 billion, up $22 billion, after reflecting
a $33 billion reduction from the sale of BrownCo.
31
|
|
|
|
|
|
|
|
|
ASSETS UNDER SUPERVISION (in billions) |
|
|
|
|
|
|
As of March 31, |
|
2006 |
|
|
2005 |
|
|
Assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
236 |
|
|
$ |
228 |
|
Fixed income |
|
|
166 |
|
|
|
171 |
|
Equities & balanced |
|
|
397 |
|
|
|
326 |
|
Alternatives |
|
|
74 |
|
|
|
65 |
|
|
Total Assets under management |
|
|
873 |
|
|
|
790 |
|
Custody/brokerage/administration/deposits |
|
|
324 |
|
|
|
302 |
|
|
Total Assets under supervision |
|
$ |
1,197 |
|
|
$ |
1,092 |
|
|
|
|
|
|
|
|
|
|
|
Assets by client segment |
|
|
|
|
|
|
|
|
Institutional(a) |
|
$ |
468 |
|
|
$ |
462 |
|
Private Bank |
|
|
137 |
|
|
|
138 |
|
Retail(a) |
|
|
214 |
|
|
|
138 |
|
Private Client Services |
|
|
54 |
|
|
|
52 |
|
|
Total Assets under management |
|
$ |
873 |
|
|
$ |
790 |
|
|
Institutional(a) |
|
$ |
471 |
|
|
$ |
467 |
|
Private Bank |
|
|
332 |
|
|
|
299 |
|
Retail(a) |
|
|
291 |
|
|
|
232 |
|
Private Client Services |
|
|
103 |
|
|
|
94 |
|
|
Total Assets under supervision |
|
$ |
1,197 |
|
|
$ |
1,092 |
|
|
|
|
|
|
|
|
|
|
|
Assets by geographic region |
|
|
|
|
|
|
|
|
U.S./Canada |
|
$ |
564 |
|
|
$ |
550 |
|
International |
|
|
309 |
|
|
|
240 |
|
|
Total Assets under management |
|
$ |
873 |
|
|
$ |
790 |
|
|
U.S./Canada |
|
$ |
822 |
|
|
$ |
792 |
|
International |
|
|
375 |
|
|
|
300 |
|
|
Total Assets under supervision |
|
$ |
1,197 |
|
|
$ |
1,092 |
|
|
|
|
|
|
|
|
|
|
|
Mutual fund assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
167 |
|
|
$ |
175 |
|
Fixed income |
|
|
48 |
|
|
|
45 |
|
Equity |
|
|
189 |
|
|
|
106 |
|
|
Total mutual fund assets |
|
$ |
404 |
|
|
$ |
326 |
|
|
|
|
|
|
|
|
|
|
|
Assets under management rollforward |
|
|
|
|
|
|
|
|
Beginning balance, January 1 |
|
$ |
847 |
|
|
$ |
791 |
|
Flows: |
|
|
|
|
|
|
|
|
Liquidity |
|
|
(5 |
) |
|
|
(6 |
) |
Fixed income |
|
|
|
|
|
|
4 |
|
Equities, balanced and alternatives |
|
|
13 |
|
|
|
1 |
|
Market/performance/other impacts |
|
|
18 |
|
|
|
|
|
|
Ending balance |
|
$ |
873 |
|
|
$ |
790 |
|
|
Assets under supervision rollforward |
|
|
|
|
|
|
|
|
Beginning balance, January 1 |
|
$ |
1,149 |
|
|
$ |
1,106 |
|
Net asset flows |
|
|
12 |
|
|
|
6 |
|
Market/performance/other impacts |
|
|
36 |
|
|
|
(20 |
) |
|
Ending balance |
|
$ |
1,197 |
|
|
$ |
1,092 |
|
|
|
|
|
(a) |
|
During the first quarter of 2006, assets under management of $22 billion from
Retirement planning services has been reclassified from the Institutional client segment to
the Retail client segment in order to be consistent with the revenue by client segment
reporting. |
32
CORPORATE
For a discussion of the business profile of Corporate, see pages 5354 of JPMorgan Chases 2005
Annual Report. For additional information regarding enhanced disclosures related to the Corporate
segment, refer to page 13 of this Form 10Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
196 |
|
|
$ |
743 |
|
|
|
(74 |
)% |
Securities (losses) |
|
|
(158 |
) |
|
|
(902 |
) |
|
|
82 |
|
All other income |
|
|
101 |
|
|
|
73 |
|
|
|
38 |
|
|
|
|
|
|
Noninterest revenue |
|
|
139 |
|
|
|
(86 |
) |
|
|
NM |
|
Net interest income |
|
|
(545 |
) |
|
|
(673 |
) |
|
|
19 |
|
|
|
|
|
|
Total net revenue |
|
|
(406 |
) |
|
|
(759 |
) |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
(4 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
685 |
|
|
|
774 |
|
|
|
(11 |
) |
Noncompensation expense(a) |
|
|
608 |
|
|
|
1,703 |
|
|
|
(64 |
) |
Merger costs |
|
|
71 |
|
|
|
145 |
|
|
|
(51 |
) |
|
|
|
|
|
Subtotal |
|
|
1,364 |
|
|
|
2,622 |
|
|
|
(48 |
) |
Net expenses allocated to other
businesses |
|
|
(1,038 |
) |
|
|
(1,142 |
) |
|
|
9 |
|
|
|
|
|
|
Total noninterest expense |
|
|
326 |
|
|
|
1,480 |
|
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
(732 |
) |
|
|
(2,235 |
) |
|
|
67 |
|
Income tax expense (benefit) |
|
|
(316 |
) |
|
|
(900 |
) |
|
|
65 |
|
|
|
|
|
|
Net income (loss) |
|
$ |
(416 |
) |
|
$ |
(1,335 |
) |
|
|
69 |
|
|
|
|
|
(a) |
|
Includes litigation reserve charges of $900 million in the first quarter of 2005
relating to the settlement of WorldCom class action litigation. In the first quarter of 2006,
insurance recoveries relating to certain material litigation of $98 million were recorded. |
Quarterly results
Net loss was $416 million compared with a net loss of $1.3 billion in the prior year. In comparison
to the prior year, Private Equity earnings were $103 million, down from $437 million; Treasury net
loss was $270 million compared with a net loss of $828 million; and the net loss in Other Corporate
was $249 million compared with a net loss of $944 million.
Net revenue was negative $406 million compared with negative $759 million in the prior year. Net
interest income was negative $545 million compared with negative $673 million in the prior year.
Treasury was the primary driver of the improvement, with net interest income of negative $278
million compared with negative $409 million in the prior year. The benefit was due primarily to
an improvement in Treasurys net interest spread, offset partially by a
reduction in the level of the available-for-sale securities portfolio. Noninterest revenue was $139
million compared with negative $86 million, reflecting lower Treasury securities portfolio losses
of $158 million compared with losses of $902 million in the prior year. This increase was offset
partially by lower Private Equity gains of $237 million compared with gains of $789 million in the
prior year.
Noninterest expense was $326 million, down $1.2 billion from $1.5 billion in the prior year.
Excluding in the current quarter, $71 million of merger costs and incremental expense of $57
million from the adoption of SFAS 123R, and excluding in the prior year a material litigation
charge of $900 million, primarily related to WorldCom, and $145 million of merger costs,
noninterest expense would have been down $237 million. The decrease in expense was due to
merger-related savings and other efficiencies.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
$ |
204 |
|
|
$ |
744 |
|
|
|
(73 |
)% |
Treasury |
|
|
(464 |
) |
|
|
(1,344 |
) |
|
|
65 |
|
Corporate other |
|
|
(146 |
) |
|
|
(159 |
) |
|
|
8 |
|
|
|
|
|
|
Total net revenue |
|
$ |
(406 |
) |
|
$ |
(759 |
) |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
$ |
103 |
|
|
$ |
437 |
|
|
|
(76 |
) |
Treasury |
|
|
(270 |
) |
|
|
(828 |
) |
|
|
67 |
|
Corporate
other(a) |
|
|
(205 |
) |
|
|
(854 |
) |
|
|
76 |
|
Merger costs |
|
|
(44 |
) |
|
|
(90 |
) |
|
|
51 |
|
|
|
|
|
|
Total net income (loss) |
|
$ |
(416 |
) |
|
$ |
(1,335 |
) |
|
|
69 |
|
|
|
|
|
(a) |
|
See Footnote (a) on page 33. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement and balance sheet data |
|
Three months ended March 31, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
Securities (losses)(a) |
|
$ |
(158 |
) |
|
$ |
(902 |
) |
|
|
82 |
% |
Investment portfolio (average) |
|
|
39,989 |
|
|
|
65,646 |
|
|
|
(39 |
) |
Investment portfolio (ending) |
|
|
46,093 |
|
|
|
46,943 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
$ |
207 |
|
|
$ |
633 |
|
|
|
(67 |
) |
Write-ups / (write-downs) |
|
|
10 |
|
|
|
206 |
|
|
|
(95 |
) |
Mark-to-market gains (losses) |
|
|
4 |
|
|
|
(89 |
) |
|
NM |
|
|
|
|
|
Total direct investments |
|
|
221 |
|
|
|
750 |
|
|
|
(71 |
) |
Third-party fund investments |
|
|
16 |
|
|
|
39 |
|
|
|
(59 |
) |
|
|
|
|
|
Total private equity gains(b) |
|
$ |
237 |
|
|
$ |
789 |
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity portfolio information |
|
|
|
|
|
|
|
|
|
Direct investments |
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
Change |
|
Publicly held securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
501 |
|
|
$ |
479 |
|
|
|
5 |
% |
Cost |
|
|
395 |
|
|
|
403 |
|
|
|
(2 |
) |
Quoted public value |
|
|
677 |
|
|
|
683 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately held direct securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
5,077 |
|
|
|
5,028 |
|
|
|
1 |
|
Cost |
|
|
6,501 |
|
|
|
6,463 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party fund investments |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
675 |
|
|
|
669 |
|
|
|
1 |
|
Cost |
|
|
1,000 |
|
|
|
1,003 |
|
|
|
|
|
|
|
|
|
|
Total private equity portfolio Carrying
value |
|
$ |
6,253 |
|
|
$ |
6,176 |
|
|
|
1 |
|
Total private equity portfolio Cost |
|
$ |
7,896 |
|
|
$ |
7,869 |
|
|
|
|
|
|
|
|
|
(a) |
|
Losses in the first quarters of 2006 and 2005 reflect repositioning of the Treasury
investment securities portfolio. Excludes gains/losses on securities used to manage risk
associated with MSRs. |
|
(b) |
|
Included in Principal transactions. |
The carrying value of the private equity portfolio at March 31, 2006, stands at $6.3 billion,
down $936 million from March 31, 2005. The portfolio decline was primarily due to sales activity.
34
BALANCE SHEET ANALYSIS
|
|
|
|
|
|
|
|
|
Selected balance sheet data (in millions) |
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
36,903 |
|
|
$ |
36,670 |
|
Deposits with banks |
|
|
10,545 |
|
|
|
21,661 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
153,755 |
|
|
|
133,981 |
|
Securities borrowed |
|
|
93,280 |
|
|
|
74,604 |
|
Trading assets: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
259,275 |
|
|
|
248,590 |
|
Derivative receivables |
|
|
52,750 |
|
|
|
49,787 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
67,054 |
|
|
|
47,523 |
|
Held-to-maturity |
|
|
72 |
|
|
|
77 |
|
Loans, net of allowance for loan losses |
|
|
424,806 |
|
|
|
412,058 |
|
Other receivables |
|
|
26,537 |
|
|
|
27,643 |
|
Goodwill and other intangible assets |
|
|
59,513 |
|
|
|
58,180 |
|
All other assets |
|
|
88,792 |
|
|
|
88,168 |
|
|
Total assets |
|
$ |
1,273,282 |
|
|
$ |
1,198,942 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
584,465 |
|
|
$ |
554,991 |
|
Federal funds purchased and securities sold
under repurchase agreements |
|
|
151,006 |
|
|
|
125,925 |
|
Commercial paper and other borrowed funds |
|
|
30,333 |
|
|
|
24,342 |
|
Trading liabilities: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
104,160 |
|
|
|
94,157 |
|
Derivative payables |
|
|
55,938 |
|
|
|
51,773 |
|
Long-term debt and capital debt securities |
|
|
123,113 |
|
|
|
119,886 |
|
Beneficial interests issued by consolidated VIEs |
|
|
42,237 |
|
|
|
42,197 |
|
All other liabilities |
|
|
73,693 |
|
|
|
78,460 |
|
|
Total liabilities |
|
|
1,164,945 |
|
|
|
1,091,731 |
|
Stockholders equity |
|
|
108,337 |
|
|
|
107,211 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,273,282 |
|
|
$ |
1,198,942 |
|
|
Balance sheet overview
At March 31, 2006, the Firms total assets were $1.3 trillion, an increase of $74.3 billion, or 6%, from December 31, 2005. Growth was primarily in Federal funds sold and securities purchased
under resale agreements, Securities borrowed, AFS securities, Trading assets debt and equity
instruments, and Loans.
At March 31, 2006, the Firms total liabilities were $1.2 trillion, an increase of $73.2 billion, or 7%, from December 31, 2005. Growth was primarily in Federal funds purchased and securities sold
under repurchase agreements, interest-bearing U.S. and Non-U.S. deposits, and debt and equity
trading liabilities.
35
Federal funds sold and securities purchased under resale agreements and Federal funds purchased and securities sold under repurchase agreements
During the first quarter of 2006, the Firms liability growth outpaced growth on the asset side of
the balance sheet resulting in an increase in short-term investments, specifically Federal funds
sold and securities purchased under resale agreements.
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, 2005, was due
primarily to growth in client-driven market-making activities across interest rate, credit and
equity markets. For additional information, refer to Note 3 on page 66 of this Form 10Q.
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 increase from December 31,
2005, was due primarily to increased interest rate, equity and commodity trading activity and rising commodity
prices. For additional information, refer to Credit risk management
and Note 3 on pages 4354 and
66, respectively, of this Form 10Q.
Securities
The AFS portfolio increased by $19.5 billion from 2005 year-end, primarily due to purchases in the Treasury investment securities portfolio. For additional information related to securities, refer
to the Corporate segment discussion and to Note 8 on pages 3334 and 72, respectively, of this
Form 10Q.
Loans
The $12.9 billion increase in gross loans was due primarily to an increase of $14.7 billion in the
wholesale portfolio, mainly in the IB, reflecting an increase in capital markets activity,
including leveraged financings and syndications and higher balances of loans held-for-sale. The
$1.8 billion decrease in consumer loans was primarily due to a decline of $7.0 billion in the
credit card portfolio, partially offset by an increase of $6.0 billion in education loans. The
decrease in the credit card portfolio was primarily due to the seasonal pattern and
higher-than-normal customer payment rates of credit card receivables. The increase in education
loans was the result of the purchase of Collegiate Funding Services. Management believes the
higher-than-normal customer payment rates in Card Services may partially be related to the recently
implemented new minimum payment rules. For a more detailed discussion of the loan portfolio and the
Allowance for loan losses, refer to Credit risk management on pages 4354 of this Form 10Q.
Goodwill and Other intangible assets
The $1.3 billion increase in Goodwill and Other intangible assets primarily resulted from higher
MSRs due to growth in the servicing portfolio and an overall increase in the MSR valuation from
improved market conditions, as well as the acquisition of Collegiate Funding Services. Partially
offsetting the increase were declines from the amortization of purchased credit card relationships
and core deposit intangibles. For additional information, see Note 14 on pages 7981 of this Form 10Q.
Deposits
Deposits increased by 5% from December 31, 2005. 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
1722 and 4243, respectively, of this Form 10Q. For more information on liability balances,
refer to the CB and TSS segment discussions on pages 2627 and 2829, respectively, of this Form 10Q.
Long-term debt and capital debt securities
Long-term debt and capital debt securities increased by $3.2 billion, or 3%, from December 31,
2005, primarily due to net new issuances of long-term debt offset partially by a redemption of
capital debt securities. The Firm took advantage of narrow credit spreads globally to satisfy
long-term debt and capital debt securities needs in the first quarter of 2006. 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.
Large investor cash positions and increased foreign investor participation in the corporate markets
allowed JPMorgan Chase to diversify further its funding sources across the global markets while
lengthening maturities at historically attractive costs. For additional information on the Firms
long-term debt activity, see the Liquidity risk management discussion on pages 4243 of this Form 10Q.
Stockholders equity
Total stockholders equity increased by $1.1 billion from year-end 2005 to $108.3 billion at March 31, 2006. The increase was the result of net income for the first three months of 2006, common
stock issued under employee plans and the beneficial effect of changes in accounting principles.
This increase was offset partially by payment of cash dividends, stock repurchases, the redemption
of $139 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.
36
CAPITAL MANAGEMENT
The following discussion of JPMorgan Chases Capital Management highlights developments since December 31, 2005, and should be read in conjunction with pages 5658 of JPMorgan Chases 2005
Annual Report.
The Firms capital management framework is intended to ensure that there is capital sufficient to
support the underlying risks of the Firms business activities, as measured by economic risk
capital and to maintain well-capitalized status under regulatory requirements. In addition, the
Firm holds capital above these requirements in amounts deemed appropriate to achieve managements
regulatory and debt-rating objectives. The process of assigning equity to the lines of business is
integrated into the Firms capital framework.
Line of business equity
Equity for a line of business represents the amount the Firm believes the business would require if
it were operating independently, incorporating sufficient capital to address economic risk
measures, regulatory capital requirements and capital levels for similarly rated peers. Return on
equity is measured and internal targets for expected returns are established as a key measure of a
business segments performance.
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the lines of business. As a result of this refinement, Retail Financial Services, Card Services, Commercial
Banking, Treasury & Securities Services and Asset & Wealth Management have higher amounts of
capital allocated to them, commencing in the first quarter of 2006, while the amount of capital
allocated to the Investment Bank has remained unchanged. The revised methodology considers for each
line of business, among other things, goodwill associated with such line of business acquisitions
since the Merger. In managements view, the revised methodology assigns responsibility to the lines
of business to generate returns on the amount of capital supporting acquisition-related goodwill.
As part of this refinement in the capital allocation methodology, the Firm assigned to the
Corporate segment an amount of equity capital equal to the then-current book value of goodwill from
and prior to the Merger. As prior periods have not been revised to reflect the new capital
allocations, capital allocated to the respective lines of business for 2006 is not comparable to
prior periods and certain business metrics, such as ROE, are not comparable to the current
presentation. The Firm may revise its equity capital allocation methodology again in the future. In
accordance with SFAS 142, the lines of business 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 JPMorgan Chases
2005 Annual Report.
|
|
|
|
|
|
|
|
|
(in billions) |
|
Quarterly Averages |
Line of business equity |
|
1Q06 |
|
|
1Q05 |
|
|
Investment Bank |
|
$ |
20.0 |
|
|
$ |
20.0 |
|
Retail Financial Services |
|
|
13.9 |
|
|
|
13.1 |
|
Card Services |
|
|
14.1 |
|
|
|
11.8 |
|
Commercial Banking |
|
|
5.5 |
|
|
|
3.4 |
|
Treasury & Securities Services |
|
|
2.9 |
|
|
|
1.9 |
|
Asset & Wealth Management |
|
|
3.5 |
|
|
|
2.4 |
|
Corporate |
|
|
47.3 |
|
|
|
52.7 |
|
|
Total common stockholders
equity |
|
$ |
107.2 |
|
|
$ |
105.3 |
|
|
37
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firms business
activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital
based primarily upon four risk factors: credit risk, market risk and operational risk for each
business; in addition, the Firm assigns capital based on private equity risk to the Corporate
segment in connection with the segments private equity business.
|
|
|
|
|
|
|
|
|
(in billions) |
|
Quarterly Averages |
Economic risk capital |
|
1Q06 |
|
|
1Q05 |
|
|
Credit risk |
|
$ |
21.7 |
|
|
$ |
23.1 |
|
Market risk |
|
|
10.0 |
|
|
|
8.7 |
|
Operational risk |
|
|
5.7 |
|
|
|
5.3 |
|
Private equity risk |
|
|
3.6 |
|
|
|
4.1 |
|
|
Economic risk capital |
|
|
41.0 |
|
|
|
41.2 |
|
Goodwill |
|
|
43.8 |
|
|
|
43.3 |
|
Other(a) |
|
|
22.4 |
|
|
|
20.8 |
|
|
Total common stockholders equity |
|
$ |
107.2 |
|
|
$ |
105.3 |
|
|
|
|
|
(a) |
|
Additional capital required to meet internal regulatory and debt rating objectives. |
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.
In the first quarter of 2006, 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. The final rule, which became effective
February 22, 2006, also broadens the types of transactions qualifying for regulatory capital relief
under the interim rule. Adoption of the rule did not have a material effect on the Firms capital
ratios.
On March 1, 2005, the 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 March 31, 2006, JPMorgan Chases
restricted core capital elements were 15.7% of total core capital elements. JPMorgan Chase expects
to be in compliance with the 15% limit by the March 31, 2009, implementation date.
38
The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at March 31, 2006, and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk- |
|
|
Adjusted |
|
|
Tier 1 |
|
|
Total |
|
|
Tier 1 |
|
|
|
Tier 1 |
|
|
Total |
|
|
weighted |
|
|
average |
|
|
capital |
|
|
capital |
|
|
leverage |
|
(in millions, except ratios) |
|
capital |
|
|
capital |
|
|
assets(c) |
|
|
assets(d) |
|
|
ratio |
|
|
ratio |
|
|
ratio |
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co.(a) |
|
$ |
73,085 |
|
|
$ |
103,800 |
|
|
$ |
858,080 |
|
|
$ |
1,195,231 |
|
|
|
8.5 |
% |
|
|
12.1 |
% |
|
|
6.1 |
% |
JPMorgan Chase Bank, N.A. |
|
|
62,001 |
|
|
|
85,228 |
|
|
|
769,012 |
|
|
|
1,046,442 |
|
|
|
8.1 |
|
|
|
11.1 |
|
|
|
5.9 |
|
Chase Bank USA, N.A. |
|
|
9,196 |
|
|
|
11,280 |
|
|
|
60,940 |
|
|
|
58,440 |
|
|
|
15.1 |
|
|
|
18.5 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 offbalance sheet risk-weighted assets in the amounts of $280.3 billion, $267.1
billion and $9.8 billion, respectively, at March 31, 2006, and $279.2 billion, $260.0 billion
and $15.5 billion, respectively, at December 31, 2005. |
|
(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. |
Tier 1 capital was $73.1 billion at March 31, 2006, compared with $72.5 billion at December 31,
2005, an increase of $611 million. The increase was due primarily to net income of $3.1 billion and
net issuances of common stock under employee plans of $903 million. Offsetting these increases were
changes in equity net of other comprehensive income due to dividends declared of $1.2 billion and
redemptions of preferred stock and common share repurchases totaling $1.4 billion, as well as the
redemption of qualifying trust preferred securities and an increase in the deduction for goodwill
and other nonqualifying intangibles. 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 JPMorgan Chases 2005 Annual Report.
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 the
first quarter of 2006, JPMorgan Chase declared a quarterly cash dividend on its common stock of
$0.34 per share, payable April 30, 2006, to stockholders of record at the close of business April
6, 2006. The Firm continues to target a dividend payout ratio of 30-40% of net income over time.
Stock repurchases
On March 21, 2006, the Board of Directors approved a stock repurchase program which authorizes the
repurchase of up to $8 billion of the Firms common shares. The new stock repurchase program
replaces the Firms previous repurchase authorization. The amount authorized includes shares to be
repurchased to offset issuances under the Firms employee stock-based plans. The actual amount of
shares repurchased will be subject to various factors, including market conditions; legal
considerations affecting the amount and timing of repurchase activity; the Firms capital position
(taking into account goodwill and intangibles); internal capital generation; and alternative
potential investment opportunities. The repurchase program does not include specific price targets
or time tables; may be executed through open market purchases or privately negotiated transactions
or utilizing Rule 10b5-1 programs; and may be suspended at any time.
During the first quarter of 2006, under the stock repurchase programs then in effect, the Firm
repurchased a total of 31.8 million shares for $1.3 billion at an average price per share of
$40.54. Of the $1.3 billion of shares repurchased in the first quarter of 2006, $1.1 billion was
repurchased under the original $6 billion stock repurchase program, and $143 million was
repurchased under the new $8 billion stock repurchase program. During the first quarter of 2005,
under the original $6 billion stock repurchase program, the Firm repurchased 36.0 million shares
for $1.3 billion at an average price per share of $36.57. As of March 31, 2006, $7.9 billion of
authorized repurchase capacity remained under the new stock repurchase program.
39
For additional information regarding repurchases of the Firms equity securities, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, on pages 9495 of this Form 10Q.
OFFBALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Special-purpose entities
JPMorgan Chase is involved with several types of offbalance sheet arrangements, including special
purpose entities (SPEs), lines of credit and loan commitments. The principal uses of SPEs are to
obtain sources of liquidity for JPMorgan Chase and its clients by securitizing financial assets,
and to create other investment products for clients. These arrangements are an important part of
the financial markets, providing market liquidity by facilitating investors access to specific
portfolios of assets and risks. For example, SPEs are integral to the markets for mortgage-backed
securities, commercial paper and other asset-backed securities.
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 JPMorgan Chases 2005
Annual Report.
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 $73.8 billion and $71.3 billion at March 31, 2006, and December 31, 2005,
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 $73.8 billion in liquidity commitments to SPEs at March 31, 2006, $42.6 billion was included
in the Firms other unfunded commitments to extend credit and asset purchase agreements, included
in the following table. Of the $71.3 billion of liquidity commitments to SPEs at December 31, 2005,
$38.9 billion was included in the Firms other unfunded commitments to extend credit and asset
purchase agreements. As a result of the Firms consolidation of multi-seller conduits in accordance
with FIN 46R, $31.2 billion of these commitments are excluded from the table at March 31, 2006,
compared with $32.4 billion at December 31, 2005, 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 consolidated and
nonconsolidated variable interest entities (VIEs) with which the Firm has significant
involvement, and to qualifying SPEs (QSPEs). The revenue reported in the table below primarily
represents servicing and credit 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 JPMorgan Chases 2005
Annual Report.
Revenue from VIEs and QSPEs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
VIEs |
|
|
QSPEs |
|
|
Total |
|
|
2006 |
|
$ |
54 |
|
|
$ |
793 |
|
|
$ |
847 |
|
2005(a) |
|
|
57 |
|
|
|
743 |
|
|
|
800 |
|
|
(a) Prior
period results have been restated to reflect current methodology.
40
Offbalance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to
meet the financing needs of its customers. The contractual amount of these financial instruments
represents the maximum possible credit risk should the counterparty draw down the commitment or the
Firm 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 JPMorgan Chases 2005 Annual Report.
The following table presents offbalance sheet lending-related financial instruments and guarantees for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
|
March 31, 2006 |
|
2005 |
By remaining maturity |
|
Under |
|
|
1-3 |
|
|
3-5 |
|
|
Over |
|
|
|
|
|
|
|
(in millions) |
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
Total |
|
|
Total |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a) |
|
$ |
608,498 |
|
|
$ |
4,012 |
|
|
$ |
3,776 |
|
|
$ |
53,116 |
|
|
$ |
669,402 |
|
|
$ |
655,596 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unfunded commitments to extend credit(b)(c) |
|
|
77,324 |
|
|
|
45,981 |
|
|
|
62,109 |
|
|
|
15,772 |
|
|
|
201,186 |
|
|
|
208,469 |
|
Asset purchase agreements(d) |
|
|
14,072 |
|
|
|
13,943 |
|
|
|
5,804 |
|
|
|
1,002 |
|
|
|
34,821 |
|
|
|
31,095 |
|
Standby letters of credit and guarantees(c)(e) |
|
|
27,176 |
|
|
|
18,992 |
|
|
|
31,028 |
|
|
|
5,417 |
|
|
|
82,613 |
|
|
|
77,199 |
|
Other letters of credit(c) |
|
|
3,288 |
|
|
|
368 |
|
|
|
294 |
|
|
|
5 |
|
|
|
3,955 |
|
|
|
4,346 |
|
|
Total wholesale |
|
|
121,860 |
|
|
|
79,284 |
|
|
|
99,235 |
|
|
|
22,196 |
|
|
|
322,575 |
|
|
|
321,109 |
|
|
Total lending-related |
|
$ |
730,358 |
|
|
$ |
83,296 |
|
|
$ |
103,011 |
|
|
$ |
75,312 |
|
|
$ |
991,977 |
|
|
$ |
976,705 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(f) |
|
$ |
283,111 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
283,111 |
|
|
$ |
244,316 |
|
Derivatives qualifying as guarantees(g) |
|
|
28,889 |
|
|
|
13,537 |
|
|
|
3,330 |
|
|
|
19,180 |
|
|
|
64,936 |
|
|
|
61,759 |
|
|
|
|
|
(a) |
|
Includes Credit card lending-related commitments of $589 billion at March 31, 2006, and
$579 billion at December 31, 2005, which 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 lines of credit at the same point in time.
The Firm can reduce or cancel a credit card commitment by providing the cardholder prior
notice or, in some cases, without notice as permitted by law. |
|
(b) |
|
Includes unused advised lines of credit totaling $28.4 billion at March 31, 2006, and $28.3
billion at December 31, 2005, which are not legally binding. In regulatory filings with the
FRB, unused advised lines are not reportable. |
|
(c) |
|
Represents contractual amount net of risk participations totaling $36.8 billion at March 31,
2006, and $29.3 billion at December 31, 2005. |
|
(d) |
|
The maturity is based upon the weighted average life of the underlying assets in the SPE,
primarily multi-seller asset-backed commercial paper conduits. |
|
(e) |
|
Includes unused commitments to issue standby letters of credit of $39.8 billion at March 31,
2006, and $37.5 billion at December 31, 2005. |
|
(f) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$283 billion at March 31, 2006, and $245 billion at December 31, 2005. |
|
(g) |
|
Represents notional amounts of derivative guarantees. For a further discussion of guarantees,
see Note 27 on pages 124125 of JPMorgan Chases 2005 Annual Report. |
RISK MANAGEMENT
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. In addition, this framework
recognizes the diversity among the Firms core businesses, which helps reduce the impact of
volatility in any particular area on the Firms operating results as a whole. 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.
For a further discussion of these risks see pages 6080 of JPMorgan Chases 2005 Annual Report.
41
LIQUIDITY RISK MANAGEMENT
The following discussion of JPMorgan Chases liquidity management framework highlights developments
since December 31, 2005, and should be read in conjunction with pages 6162 of JPMorgan Chases
2005 Annual Report.
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.
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 March 31, 2006, 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
March 31, 2006, total deposits for the Firm were $584 billion, which represented 66% 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 deposits include all U.S. deposits insured by the FDIC, up to the legal
limit of $100,000 per depositor. Throughout the first quarter of 2006, core bank deposits remained
at approximately the same level as at the 2005 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 13 and 3536, respectively, of this Form 10Q.
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 Offbalance
sheet arrangements and contractual cash obligations and Notes 12 and 19 on pages 4041, 7477 and
8384, respectively, of this Form 10Q.
42
Issuance
Corporate credit spreads tightened modestly in the first quarter of 2006 across most industries and
sectors. On an historical basis, credit spreads remain near historic tight levels as corporate
profits are generally healthy and investor demand remains strong. JPMorgan Chases credit spreads
performed in line with peer spreads.
During the first quarter of 2006, JPMorgan Chase issued approximately $12.4 billion of long-term
debt and capital debt securities. These issuances were offset partially by $9.3 billion of
long-term debt and capital debt securities that matured or were redeemed and by the Firms
redemption of $139 million of preferred stock. In addition, during the first quarter of 2006 the
Firm securitized approximately $3.2 billion of residential mortgage loans and approximately $4.5
billion of credit card loans, resulting in pre-tax gains on securitizations of $89 million and $30
million, respectively. The Firm did not securitize any automobile loans during the first quarter of
2006. For a further discussion of loan securitizations, see Note 12 on pages 7477 of this Form
10Q.
Credit ratings
The credit ratings of JPMorgan Chases parent holding company and each of its significant banking
subsidiaries were, as of March 31, 2006, 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 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 4041 and Ratings
profile of derivative receivables mark-to-market (MTM) on page 48, of this Form 10Q.
CREDIT RISK MANAGEMENT
The following discussion of JPMorgan Chases credit portfolio as of March 31, 2006, highlights
developments since December 31, 2005, and should be read in conjunction with pages 6374 and page
81, and Notes 11,12, 27, and 28 of JPMorgan Chases 2005 Annual Report.
The Firm assesses its consumer credit exposure on a managed basis, which includes credit card
securitizations. For a reconciliation of the Provision for credit losses on a reported basis to
managed basis, see pages 1112 of this Form 10Q.
43
CREDIT PORTFOLIO
The following table presents JPMorgan Chases credit portfolio as of March 31, 2006, and December
31, 2005. Total credit exposure at March 31, 2006, increased by $29.5 billion from December 31,
2005, reflecting an increase of $18.4 billion and $11.1 billion in the wholesale and consumer
credit portfolios, respectively. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
Nonperforming |
|
|
|
|
|
|
|
|
|
|
Average annual |
|
|
|
Credit exposure |
|
assets(h) |
|
Net charge-offs |
|
net charge-off rate(j) |
|
|
Mar. 31, |
|
Dec. 31, |
|
Mar. 31, |
|
Dec. 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans reported(a) |
|
$ |
432,081 |
|
|
$ |
419,148 |
|
|
$ |
2,098 |
(i) |
|
$ |
2,343 |
(i) |
|
$ |
668 |
|
|
$ |
816 |
|
|
|
0.69 |
% |
|
|
0.88 |
% |
Loans securitized(b) |
|
|
69,580 |
|
|
|
70,527 |
|
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
917 |
|
|
|
2.62 |
|
|
|
5.36 |
|
|
Total managed loans(c) |
|
|
501,661 |
|
|
|
489,675 |
|
|
|
2,098 |
|
|
|
2,343 |
|
|
|
1,117 |
|
|
|
1,733 |
|
|
|
0.98 |
|
|
|
1.58 |
|
Derivative
receivables(d) |
|
|
52,750 |
|
|
|
49,787 |
|
|
|
49 |
|
|
|
50 |
|
|
NA |
|
NA |
|
NA |
|
NA |
Interests in purchased
receivables |
|
|
29,029 |
|
|
|
29,740 |
|
|
|
|
|
|
|
|
|
|
NA |
|
NA |
|
NA |
|
NA |
|
Total managed credit-related
assets |
|
|
583,440 |
|
|
|
569,202 |
|
|
|
2,147 |
|
|
|
2,393 |
|
|
|
1,117 |
|
|
|
1,733 |
|
|
|
0.98 |
|
|
|
1.58 |
|
Lending-related
commitments(e) |
|
|
991,977 |
|
|
|
976,705 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
Assets acquired in loan
satisfactions |
|
NA |
|
NA |
|
|
201 |
|
|
|
197 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
Total credit portfolio |
|
$ |
1,575,417 |
|
|
$ |
1,545,907 |
|
|
$ |
2,348 |
|
|
$ |
2,590 |
|
|
$ |
1,117 |
|
|
$ |
1,733 |
|
|
|
0.98 |
% |
|
|
1.58 |
% |
|
Credit derivative hedges
notional(f) |
|
$ |
(29,286 |
) |
|
$ |
(29,882 |
) |
|
$ |
(18 |
) |
|
$ |
(17 |
) |
|
NA |
|
NA |
|
NA |
|
NA |
Collateral held against
derivatives |
|
|
(6,101 |
) |
|
|
(6,000 |
) |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
Held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average HFS loans |
|
|
35,842 |
|
|
|
32,086 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
Nonperforming
purchased(g) |
|
|
340 |
|
|
|
341 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
|
|
|
(a) |
|
Loans are presented net of unearned income of $2.7 billion and $3.0 billion at
March 31, 2006, and December 31, 2005, respectively. |
|
(b) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see Card Services on pages 2325 of this Form 10Q. |
|
(c) |
|
Past-due 90 days and over and accruing includes credit card receivables of $956 million and
$1.1 billion, and related credit card securitizations of $913 million and $730 million at
March 31, 2006, and December 31, 2005, respectively. |
|
(d) |
|
Reflects net cash received under credit support annexes to legally enforceable master netting
agreements of $23 billion and $27 billion as of March 31, 2006, and December 31, 2005,
respectively. |
|
(e) |
|
Includes wholesale unused advised lines of credit totaling $28.4 billion and $28.3 billion at
March 31, 2006, and December 31, 2005, 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 $589 billion and $579 billion at March 31, 2006,
and December 31, 2005, respectively, represent the total available credit to its cardholders.
The Firm has not experienced, and does not anticipate, that all of its cardholders will
exercise their entire available lines of credit at the same point in time. The Firm can reduce
or cancel a credit card commitment by providing the cardholder prior notice or, in some cases,
without notice as permitted by law. |
|
(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 nonperforming HFS loans of $84 million and $136 million as of March 31, 2006, and
December 31, 2005, respectively. |
|
(i) |
|
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by government agencies of $1.1 billion for both
March 31, 2006, and December 31, 2005, and (ii) education loans that are 90 days past due and
still accruing, which are insured by government agencies under the Federal Family Education
Loan Program of $0.2 billion at March 31, 2006. These amounts for GNMA and education loans are
excluded, as reimbursement is proceeding normally. |
|
(j) |
|
Net charge-off rates exclude average loans HFS of $36 billion and $24 billion for the quarter
ended March 31, 2006 and 2005, respectively. |
44
WHOLESALE CREDIT PORTFOLIO
As of March 31, 2006, wholesale exposure (IB, CB, TSS and AWM) increased by $18.4 billion from
December 31, 2005, due primarily to $14.7 billion in loan growth. As described on page 36 of this
Form 10Q, the increase in Loans was primarily in the IB, reflecting an increase in capital
markets activity, including leveraged financings and syndications and higher balances of loans
held-for-sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average annual net |
|
|
|
|
|
|
|
|
|
|
Nonperforming |
|
Net charge-offs/ |
|
charge-off/(recovery) |
|
|
Credit exposure |
|
assets(f) |
|
(recoveries) |
|
rate(h) |
|
|
Mar. 31, |
|
Dec. 31, |
|
Mar. 31, |
|
Dec. 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Loans reported(a) |
|
$ |
164,799 |
|
|
$ |
150,111 |
|
|
$ |
737 |
|
|
$ |
992 |
|
|
$ |
(20 |
) |
|
$ |
(9 |
) |
|
|
(0.06 |
)% |
|
|
(0.03 |
)% |
Derivative
receivables(b) |
|
|
52,750 |
|
|
|
49,787 |
|
|
|
49 |
|
|
|
50 |
|
|
NA |
|
NA |
|
NA |
|
NA |
Interests in purchased
receivables |
|
|
29,029 |
|
|
|
29,740 |
|
|
|
|
|
|
|
|
|
|
NA |
|
NA |
|
NA |
|
NA |
|
Total wholesale
credit-related assets |
|
|
246,578 |
|
|
|
229,638 |
|
|
|
786 |
|
|
|
1,042 |
|
|
|
(20 |
) |
|
|
(9 |
) |
|
|
(0.06 |
) |
|
|
(0.03 |
) |
Lending-related
commitments(c) |
|
|
322,575 |
|
|
|
321,109 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
Assets acquired in loan
satisfactions |
|
NA |
|
NA |
|
|
13 |
|
|
|
17 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
Total wholesale credit
exposure |
|
$ |
569,153 |
|
|
$ |
550,747 |
|
|
$ |
799 |
|
|
$ |
1,059 |
|
|
$ |
(20) |
(g) |
|
$ |
(9 |
)(g) |
|
|
(0.06 |
)% |
|
|
(0.03 |
)% |
|
Credit derivative hedges
notional(d) |
|
$ |
(29,286 |
) |
|
$ |
(29,882 |
) |
|
$ |
(18 |
) |
|
$ |
(17 |
) |
|
NA |
|
NA |
|
NA |
|
NA |
Collateral held against
derivatives |
|
|
(6,101 |
) |
|
|
(6,000 |
) |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
Held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average HFS loans |
|
|
19,480 |
|
|
|
15,581 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
Nonperforming
purchased(e) |
|
|
340 |
|
|
|
341 |
|
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
NA |
|
|
|
|
(a) |
|
Past-due 90 days and over and accruing include loans of $64 million and $50 million at
March 31, 2006, and December 31, 2005, respectively. |
|
(b) |
|
Reflects net cash received under credit support annexes to legally enforceable master netting
agreements of $23 billion and $27 billion as of March 31, 2006, and December 31, 2005,
respectively. |
|
(c) |
|
Includes unused advised lines of credit totaling $28.4 billion and $28.3 billion at March 31,
2006, and December 31, 2005, 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 nonperforming HFS loans of $68 million and $109 million as of March 31, 2006, and
December 31, 2005, respectively. |
|
(g) |
|
Excludes $20 million and $8 million in the first quarter of 2006 and the first quarter of
2005, respectively, in gains on sales of nonperforming loans. For a further discussion, see
the discussion below. |
|
(h) |
|
Net charge-off rates exclude average loans HFS of $20 billion and $8 billion for the quarter
ended March 31, 2006 and 2005, respectively. |
Net charge-offs/recoveries
Wholesale net recoveries were $20 million compared with net recoveries of $9 million in the prior
year, primarily due to lower gross charge-offs. The net recovery rate was 0.06% compared with a net
recovery rate of 0.03% for the prior year. These net recoveries do not include $20 million of gains
from sales of nonperforming loans that were sold from the credit portfolio during the first quarter
of 2006. This compares with $8 million of gains from nonperforming loans sold from the credit
portfolio in the same period in the prior year. When it is determined that a loan will be sold, it
is transferred into a held-for-sale account. HFS loans are accounted for at lower of cost or fair
value, with changes in value recorded in Other income.
45
Below are summaries of the maturity and ratings profiles of the wholesale portfolio as of March 31,
2006, and December 31, 2005. 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade ("IG")(d) |
|
grade(d) |
|
|
|
|
|
|
|
At March 31, 2006 |
|
|
|
|
|
1-5 |
|
>5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % |
(in billions, except ratios) |
|
<1 year(d) |
|
years(d) |
|
years(d) |
|
Total |
|
AAA to BBB- |
|
BB+ & below |
|
Total |
|
of IG(d) |
|
Loans |
|
|
44 |
% |
|
|
42 |
% |
|
|
14 |
% |
|
|
100 |
% |
|
$ |
95 |
|
|
$ |
50 |
|
|
$ |
145 |
|
|
|
66 |
% |
Derivative
receivables |
|
|
12 |
|
|
|
37 |
|
|
|
51 |
|
|
|
100 |
|
|
|
46 |
|
|
|
7 |
|
|
|
53 |
|
|
|
87 |
|
Interests in purchased
receivables |
|
|
48 |
|
|
|
50 |
|
|
|
2 |
|
|
|
100 |
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
|
100 |
|
Lending-related
commitments |
|
|
38 |
|
|
|
55 |
|
|
|
7 |
|
|
|
100 |
|
|
|
275 |
|
|
|
47 |
|
|
|
322 |
|
|
|
85 |
|
|
Total excluding HFS |
|
|
34 |
% |
|
|
54 |
% |
|
|
12 |
% |
|
|
100 |
% |
|
$ |
445 |
|
|
$ |
104 |
|
|
|
549 |
|
|
|
81 |
% |
Held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
569 |
|
|
|
|
|
|
Credit derivative
hedges notional(b) |
|
|
16 |
% |
|
|
72 |
% |
|
|
12 |
% |
|
|
100 |
% |
|
$ |
(26 |
) |
|
$ |
(3 |
) |
|
$ |
(29 |
) |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity profile(c) |
|
Ratings profile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade ("IG")(d) |
|
grade(d) |
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
|
|
|
1-5 |
|
>5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % |
(in billions, except ratios) |
|
<1 year(d) |
|
years(d) |
|
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 |
|
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
100 |
|
Lending-related
commitments |
|
|
36 |
|
|
|
57 |
|
|
|
7 |
|
|
|
100 |
|
|
|
273 |
|
|
|
48 |
|
|
|
321 |
|
|
|
85 |
|
|
Total excluding HFS |
|
|
35 |
% |
|
|
52 |
% |
|
|
13 |
% |
|
|
100 |
% |
|
$ |
432 |
|
|
$ |
101 |
|
|
|
533 |
|
|
|
81 |
% |
Held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
551 |
|
|
|
|
|
|
Credit derivative
hedges notional(b) |
|
|
15 |
% |
|
|
74 |
% |
|
|
11 |
% |
|
|
100 |
% |
|
$ |
(27 |
) |
|
$ |
(3 |
) |
|
$ |
(30 |
) |
|
|
90 |
% |
|
|
|
|
(a) |
|
HFS loans relate primarily 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 JPMorgan Chases 2005 Annual Report for a
further discussion of Average exposure. |
|
(d) |
|
Excludes HFS loans. |
46
Wholesale credit exposure selected industry concentration
The Firm continues to focus on the management and diversification of its industry concentrations,
with particular attention paid to industries with actual or potential credit concerns. As of March
31, 2006, the top 10 industry exposure remained predominantly unchanged compared with December 31,
2005, with the exception of exposures to Securities firms and exchanges, which increased primarily
as a result of changes in derivatives exposures. Below is a summary of the Top 10 industry
concentrations as of March 31, 2006, and December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
December 31, 2005 |
Top 10 industries(a) |
|
Credit |
|
|
% of |
|
Credit |
|
|
% of |
(in millions, except ratios) |
|
exposure(c) |
|
|
portfolio |
|
exposure(c) |
|
|
portfolio |
|
Banks and finance companies |
|
$ |
52,535 |
|
|
|
10 |
% |
|
$ |
50,924 |
|
|
|
10 |
% |
Real estate |
|
|
29,511 |
|
|
|
5 |
|
|
|
29,974 |
|
|
|
5 |
|
Consumer products |
|
|
26,635 |
|
|
|
5 |
|
|
|
25,678 |
|
|
|
5 |
|
State and municipal governments |
|
|
26,177 |
|
|
|
5 |
|
|
|
25,328 |
|
|
|
5 |
|
Healthcare |
|
|
24,871 |
|
|
|
5 |
|
|
|
25,435 |
|
|
|
5 |
|
Securities firms and exchanges |
|
|
24,176 |
|
|
|
4 |
|
|
|
17,094 |
|
|
|
3 |
|
Utilities |
|
|
22,513 |
|
|
|
4 |
|
|
|
20,482 |
|
|
|
4 |
|
Retail and consumer services |
|
|
20,090 |
|
|
|
4 |
|
|
|
19,920 |
|
|
|
4 |
|
Asset managers |
|
|
19,105 |
|
|
|
3 |
|
|
|
17,358 |
|
|
|
3 |
|
Oil and gas |
|
|
18,106 |
|
|
|
3 |
|
|
|
18,200 |
|
|
|
3 |
|
All other |
|
|
285,539 |
|
|
|
52 |
|
|
|
282,802 |
|
|
|
53 |
|
|
Total excluding HFS |
|
$ |
549,258 |
|
|
|
100 |
% |
|
$ |
533,195 |
|
|
|
100 |
% |
Held-for-sale(b) |
|
|
19,895 |
|
|
|
|
|
|
|
17,552 |
|
|
|
|
|
|
Total exposure |
|
$ |
569,153 |
|
|
|
|
|
|
$ |
550,747 |
|
|
|
|
|
|
|
|
|
(a) |
|
Based upon March 31, 2006, determination of Top 10 industries. |
|
(b) |
|
HFS loans primarily relate to securitization and syndication activities. |
|
(c) |
|
Credit exposure is net of risk participations and excludes the benefit of credit derivative
hedges and collateral held against derivative receivables or loans. At March 31, 2006, and
December 31, 2005, collateral held against derivative receivables excludes $23 billion and $27
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. |
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. At March 31, 2006, the top 10 criticized
industries exposure remained predominantly unchanged compared with December 31, 2005, with
Healthcare moving into the top 10, replacing Airlines.
The criticized component of the portfolio decreased to $5.1 billion (excluding HFS loans) at March
31, 2006, from $5.2 billion at year-end 2005, reflecting stable credit quality. Wholesale
nonperforming assets (excluding purchased held-for-sale wholesale loans) decreased by $260 million
to $799 million at March 31, 2006, from $1.1 billion at December 31, 2005, due primarily to loan
sales, repayments and gross charge-offs.
Wholesale criticized exposure industry concentrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
December 31, 2005 |
Top 10 industries(a) |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
(in millions, except ratios) |
|
Amount |
|
|
portfolio |
|
Amount |
|
|
portfolio |
|
Media |
|
$ |
679 |
|
|
|
13 |
% |
|
$ |
684 |
|
|
|
13 |
% |
Automotive |
|
|
560 |
|
|
|
11 |
|
|
|
643 |
|
|
|
12 |
|
Consumer products |
|
|
511 |
|
|
|
10 |
|
|
|
590 |
|
|
|
11 |
|
Telecom services |
|
|
419 |
|
|
|
8 |
|
|
|
430 |
|
|
|
8 |
|
Real estate |
|
|
392 |
|
|
|
8 |
|
|
|
276 |
|
|
|
5 |
|
Retail and consumer services |
|
|
273 |
|
|
|
5 |
|
|
|
288 |
|
|
|
6 |
|
Utilities |
|
|
257 |
|
|
|
5 |
|
|
|
295 |
|
|
|
6 |
|
Machinery and equipment manufacturing |
|
|
249 |
|
|
|
5 |
|
|
|
290 |
|
|
|
6 |
|
Healthcare |
|
|
235 |
|
|
|
5 |
|
|
|
243 |
|
|
|
5 |
|
Building materials/construction |
|
|
227 |
|
|
|
5 |
|
|
|
266 |
|
|
|
5 |
|
All other |
|
|
1,254 |
|
|
|
25 |
|
|
|
1,167 |
|
|
|
23 |
|
|
Total excluding HFS |
|
$ |
5,056 |
|
|
|
100 |
% |
|
$ |
5,172 |
|
|
|
100 |
% |
Held-for-sale(b) |
|
|
652 |
|
|
|
|
|
|
|
1,069 |
|
|
|
|
|
|
Total |
|
$ |
5,708 |
|
|
|
|
|
|
$ |
6,241 |
|
|
|
|
|
|
|
|
|
(a) |
|
Based upon March 31, 2006, determination of Top 10 industries. |
|
(b) |
|
HFS loans primarily relate to securitization and syndication activities; excludes purchased
nonperforming HFS loans. |
47
Derivative contracts
In the normal course of business, the Firm uses 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 the Firms credit exposure. For a
further discussion of derivative contracts, see Note 18 on page 83 of this Form 10Q, and pages
6770 of JPMorgan Chases 2005 Annual Report.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions) |
|
Notional amounts(a) |
|
Derivative receivables MTM |
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
Interest rate |
|
$ |
41,429 |
|
|
$ |
38,493 |
|
|
$ |
31 |
|
|
$ |
30 |
|
Foreign exchange |
|
|
2,334 |
|
|
|
2,136 |
|
|
|
2 |
|
|
|
3 |
|
Equity |
|
|
531 |
|
|
|
458 |
|
|
|
7 |
|
|
|
6 |
|
Credit derivatives |
|
|
2,848 |
|
|
|
2,241 |
|
|
|
4 |
|
|
|
4 |
|
Commodity |
|
|
331 |
|
|
|
265 |
|
|
|
9 |
|
|
|
7 |
|
|
Total |
|
$ |
47,473 |
|
|
$ |
43,593 |
|
|
|
53 |
|
|
|
50 |
|
Collateral held against
derivative receivables |
|
NA |
|
|
NA |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
Exposure net total of collateral |
|
NA |
|
|
NA |
|
|
$ |
47 |
(b) |
|
$ |
44 |
(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. |
|
(b) |
|
The Firm held $29 billion of collateral against derivative receivables as of March 31, 2006,
consisting of $23 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 $23 billion is reflected within the $53 billion of derivative receivables
MTM. Excluded from the $29 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 $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. |
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 counterparty, 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.
The following table summarizes the ratings profile of the Firms Derivative receivables MTM, net of
cash and other liquid securities collateral for the dates indicated:
Ratings profile of derivative receivables MTM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
December 31, 2005 |
Rating equivalent |
|
Exposure net |
|
% of exposure |
|
Exposure net |
|
% of exposure |
(in millions) |
|
of collateral(b) |
|
net of collateral |
|
of collateral(c) |
|
net of collateral |
|
AAA to AA- |
|
$ |
20,513 |
|
|
|
44 |
% |
|
$ |
20,735 |
|
|
|
48 |
% |
A+ to A-(a) |
|
|
12,454 |
|
|
|
27 |
|
|
|
8,074 |
|
|
|
18 |
|
BBB+ to BBB- |
|
|
8,557 |
|
|
|
18 |
|
|
|
8,243 |
|
|
|
19 |
|
BB+ to B- |
|
|
5,030 |
|
|
|
11 |
|
|
|
6,580 |
|
|
|
15 |
|
CCC+ and below |
|
|
95 |
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
Total |
|
$ |
46,649 |
|
|
|
100 |
% |
|
$ |
43,787 |
|
|
|
100 |
% |
|
|
|
|
(a) |
|
Increase from December 31, 2005, primarily related to customers in the Securities firms
and exchanges industry. |
|
(b) |
|
See footnote (b) above. |
|
(c) |
|
See footnote (c) above. |
48
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 decreased slightly, to 80% as of March 31, 2006, from 81% at December 31, 2005. The Firm
posted $26 billion and $27 billion of collateral as of March 31, 2006, and December 31, 2005,
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 March 31, 2006, 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 $1.2 billion of collateral posted by the Firm; the impact of a six-notch ratings
downgrade (from AA- to BBB-) would have been $3.5 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 March 31, 2006, and December 31, 2005:
Credit derivatives positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
Credit portfolio |
|
Dealer/client |
|
|
|
|
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
|
|
(in billions) |
|
purchased(a) |
|
sold |
|
|
purchased |
|
|
sold |
|
|
Total |
|
|
March 31, 2006 |
|
$ |
30 |
|
|
$ |
1 |
|
|
$ |
1,401 |
|
|
$ |
1,416 |
|
|
$ |
2,848 |
|
December 31, 2005 |
|
|
31 |
|
|
|
1 |
|
|
|
1,096 |
|
|
|
1,113 |
|
|
|
2,241 |
|
|
|
|
|
(a) |
|
Includes $790 million and $848 million of portfolio credit derivatives at March 31,
2006, and December 31, 2005, respectively. |
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 offbalance 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 has limited counterparty exposure as a result of credit derivatives transactions. Of
the $53 billion of total Derivative receivables MTM at March 31, 2006, approximately $4 billion, or
7%, was associated with credit derivatives, before the benefit of liquid securities collateral.
Dealer/client
As of March 31, 2006, the total notional amount of protection purchased and sold in the
dealer/client business increased by $607 billion from year-end 2005 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
|
|
|
|
|
|
|
|
|
|
|
Notional amount of protection purchased |
(in millions) |
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
Credit derivatives used to manage: |
|
|
|
|
|
|
|
|
Loans and lending-related commitments |
|
$ |
18,725 |
|
|
$ |
18,926 |
|
Derivative receivables |
|
|
11,783 |
|
|
|
12,088 |
|
|
Total |
|
$ |
30,508 |
|
|
$ |
31,014 |
|
|
49
Credit portfolio management activities
The credit derivatives used by JPMorgan Chase for credit 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 in
Principal transactions. 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 credit 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 quarter ended March 31, |
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
CVA and hedges of CVA(a) |
|
$ |
23 |
|
|
$ |
21 |
|
Hedges of lending-related
commitments(a) |
|
|
(82 |
) |
|
|
33 |
|
|
Net gains (losses)(b) |
|
$ |
(59 |
) |
|
$ |
54 |
|
|
|
|
|
(a) |
|
These hedges do not qualify for hedge accounting under SFAS 133. |
|
(b) |
|
Excludes $6 million and $22 million at March 31, 2006 and 2005, respectively, of other
Principal transaction revenues that are not associated with hedging activities. |
The Firm also actively manages wholesale credit exposure through loan and commitment sales.
During the first quarters of 2006 and 2005, the Firm sold $665 million and $944 million of loans
and commitments, respectively, recognizing gains of $20 million and $11 million, 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 12 on pages 7477 of this Form 10Q.
Lending-related commitments
The contractual amount of wholesale lending-related commitments was $323 billion at March 31, 2006,
compared with $321 billion at December 31, 2005. 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 was $178
billion as of both March 31, 2006, and December 31, 2005.
Country exposure
The Firm has a comprehensive process for measuring and managing exposures and risk in emerging
markets countries defined as those countries potentially vulnerable to sovereign events.
Exposures to a country include all credit-related lending, trading, and investment activities,
whether cross-border or locally funded. Exposure amounts are adjusted for credit enhancements
(e.g., guarantees and letters of credit) provided by third parties located outside the country, if
the enhancements fully cover the country risk as well as the business risk. As of March 31, 2006,
the Firms exposure to any individual emerging markets country was not material.
50
CONSUMER CREDIT PORTFOLIO
JPMorgan Chases consumer portfolio consists primarily of residential mortgages, home equity loans,
credit cards, auto loans and leases, education loans 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 creditrelated information for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
Nonperforming |
|
|
|
|
|
|
|
|
|
Average annual net |
|
|
Credit exposure |
|
assets(e) |
|
Net charge-offs |
|
charge-off rate(g) |
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Retail Financial Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity |
|
$ |
75,241 |
|
|
$ |
73,866 |
|
|
$ |
451 |
|
|
$ |
422 |
|
|
$ |
33 |
|
|
$ |
35 |
|
|
|
0.18 |
% |
|
|
0.21 |
% |
Mortgage |
|
|
57,690 |
|
|
|
58,959 |
|
|
|
451 |
|
|
|
442 |
|
|
|
12 |
|
|
|
6 |
|
|
|
0.11 |
|
|
|
0.06 |
|
Auto loans and leases(a) |
|
|
44,600 |
|
|
|
46,081 |
|
|
|
157 |
|
|
|
193 |
|
|
|
51 |
|
|
|
83 |
|
|
|
0.46 |
|
|
|
0.60 |
|
All other loans |
|
|
25,060 |
|
|
|
18,393 |
|
|
|
290 |
|
|
|
281 |
|
|
|
25 |
|
|
|
28 |
|
|
|
0.57 |
|
|
|
0.71 |
|
Card Services
reported(b) |
|
|
64,691 |
|
|
|
71,738 |
|
|
|
12 |
|
|
|
13 |
|
|
|
567 |
|
|
|
673 |
|
|
|
3.36 |
|
|
|
4.25 |
|
|
Total consumer loans
reported |
|
|
267,282 |
|
|
|
269,037 |
|
|
|
1,361 |
(f) |
|
|
1,351 |
(f) |
|
|
688 |
|
|
|
825 |
|
|
|
1.11 |
|
|
|
1.36 |
|
Card Services
securitizations(b)(c) |
|
|
69,580 |
|
|
|
70,527 |
|
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
917 |
|
|
|
2.62 |
|
|
|
5.36 |
|
|
Total consumer loans
managed(b) |
|
|
336,862 |
|
|
|
339,564 |
|
|
|
1,361 |
|
|
|
1,351 |
|
|
|
1,137 |
|
|
|
1,742 |
|
|
|
1.44 |
|
|
|
2.23 |
|
Assets acquired in loan
satisfactions |
|
NA |
|
|
NA |
|
|
|
188 |
|
|
|
180 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total consumer related assets
managed |
|
|
336,862 |
|
|
|
339,564 |
|
|
|
1,549 |
|
|
|
1,531 |
|
|
|
1,137 |
|
|
|
1,742 |
|
|
|
1.44 |
|
|
|
2.23 |
|
Consumer lendingrelated
commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
61,474 |
|
|
|
58,281 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Mortgage |
|
|
6,885 |
|
|
|
5,944 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Auto loans and leases |
|
|
6,060 |
|
|
|
5,665 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
All other loans |
|
|
6,222 |
|
|
|
6,385 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Card Services(d) |
|
|
588,761 |
|
|
|
579,321 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total lending-related
commitments |
|
|
669,402 |
|
|
|
655,596 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
Total consumer credit
portfolio |
|
$ |
1,006,264 |
|
|
$ |
995,160 |
|
|
$ |
1,549 |
|
|
$ |
1,531 |
|
|
$ |
1,137 |
|
|
$ |
1,742 |
|
|
|
1.44 |
% |
|
|
2.23 |
% |
|
Total end-of-period HFS loans |
|
$ |
14,343 |
|
|
$ |
16,598 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Total average HFS loans |
|
|
16,362 |
|
|
|
16,505 |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
Memo: Credit card managed |
|
|
134,271 |
|
|
|
142,265 |
|
|
$ |
12 |
|
|
$ |
13 |
|
|
$ |
1,016 |
|
|
$ |
1,590 |
|
|
|
2.99 |
% |
|
|
4.83 |
% |
|
|
|
|
(a) |
|
Excludes operating lease-related assets of $1.1 billion and $858 million for March 31,
2006, and December 31, 2005, respectively. |
|
(b) |
|
Past-due loans 90 days and over and accruing includes credit card receivables of $956 million
and $1.1 billion, and related credit card securitizations of $913 million and $730 million at
March 31, 2006, and December 31, 2005, respectively. |
|
(c) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see Card Services on pages 2325 of this Form 10Q. |
|
(d) |
|
The credit card lendingrelated 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 lines of credit at the same point in time.
The Firm can reduce or cancel a credit card commitment by providing the cardholder prior
notice or, in some cases, without notice as permitted by law. |
|
(e) |
|
Includes nonperforming HFS loans of $16 million and $27 million at March 31, 2006, and
December 31, 2005, respectively. |
|
(f) |
|
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by government agencies of $1.1 billion for each
of March 31, 2006, and December 31, 2005, and (ii) education loans that are 90 days past due
and still accruing, which are insured by government agencies under the Federal Family
Education Loan Program of $0.2 billion at March 31, 2006. These amounts for GNMA and education
loans are excluded, as reimbursement is proceeding normally. |
|
(g) |
|
Net charge-off rates exclude average loans HFS of $16 billion for both quarters ended March
31, 2006 and 2005. |
51
Consumer credit quality trends reflect continued underlying credit quality. Total managed
consumer loans as of March 31, 2006, were $337 billion, down from $340 billion at year-end 2005,
reflecting the seasonal pattern and higher-than-normal customer payment rates of credit card
receivables, partially offset by an increase in education loans as a result of the purchase of
Collegiate Funding Services. Consumer lending-related commitments increased by 2%, to $669 billion
at March 31, 2006, reflecting a general increase across most Retail Financial Services and Card
Services portfolios. The following discussion relates to the specific loan and lending-related
categories within the consumer portfolio:
Retail Financial Services
Loan balances for Retail Financial Services were $203 billion at March 31, 2006, an increase of $5
billion from December 31, 2005. The increase was driven primarily by the $6 billion increase in
education loans as a result of the acquisition of Collegiate Funding Services on March 1, 2006. The
net charge-off rate for the first quarter of 2006 was 0.27%, a decrease from 0.34% in the first
quarter of 2005. The decrease reflected the benefits of stable credit trends in most consumer
lending portfolios and the sale of the recreational vehicle loan portfolio in the first quarter of
2005.
The Firm proactively manages its retail credit operation. Ongoing efforts include continual review
and enhancement of credit underwriting criteria and refinement of pricing and risk management
models.
Home Equity: Home Equity loans on the balance sheet at March 31, 2006, were $75 billion, an
increase of $1 billion from year-end 2005. The portfolio reflects a high concentration of prime
quality credits. There are no products in the Home Equity portfolio that result in negative
amortization.
Mortgage: Mortgage loans on the balance sheet at March 31, 2006, were $58 billion, a decrease of $1
billion from year-end 2005. Credit metrics were affected by the decision in early 2005 to retain,
rather than securitize, subprime mortgage loans. Mortgage loans include some interest-only payment
options to predominantly prime borrowers. There are no products in the mortgage portfolio that
result in negative amortization.
Auto loans and leases: As of March 31, 2006, Auto loans and leases were $45 billion, a decrease of
$1 billion from year-end 2005. The decrease in outstanding loans was caused partially by the
de-emphasis of vehicle leasing, which comprised $4 billion of outstanding loans as of March 31,
2006. It is anticipated that over time vehicle leases will account for a smaller share of balance
sheet receivables and exposure. The Auto loans and leases portfolio reflects a high concentration
of prime quality credits.
All other loans: As of March 31, 2006, other consumer loans were $25 billion, an increase of $7
billion from year-end 2005, primarily due to an increase in Education loans as a result of the
acquisition of the Collegiate Funding Services education loan portfolio. Other loans also include small
business banking loans (which are highly collateralized loans, often with personal loan guarantees)
and community development loans.
Card Services
JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes credit card
receivables on the consolidated balance sheet and those receivables sold to investors through
securitization. Managed credit card receivables were $134 billion at March 31, 2006, a decrease of
$8 billion from year-end 2005, reflecting the normal seasonal pattern and higher-than-normal
customer payment rates, which management believes may partially be related to the recently
implemented new minimum payment rules.
The managed credit card net charge-off rate decreased to 2.99% in the first quarter of 2006 from
4.83% in the first quarter of 2005. This decrease was due primarily to lower bankruptcy-related net
charge-offs, which based upon an estimate by management, was lower by $475 million following the
accelerated bankruptcy filings in the fourth quarter of 2005. The 30-day delinquency rate increased
to 3.10% on March 31, 2006 from 2.79% on December 31, 2005, primarily driven by accelerated loss
recognition of delinquent accounts on December 31, 2005 following the significant 2005
fourth-quarter increase in bankruptcy filings. The managed credit card portfolio continues to
reflect a well-seasoned portfolio that has good U.S. geographic diversification.
52
ALLOWANCE FOR CREDIT LOSSES
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 JPMorgan Chases
2005 Annual Report. At March 31, 2006, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2006 |
|
2005 |
(in millions) |
|
Wholesale |
|
|
Consumer |
|
|
Total |
|
|
Wholesale |
|
|
Consumer |
|
|
Total |
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
2,453 |
|
|
$ |
4,637 |
|
|
$ |
7,090 |
|
|
$ |
3,098 |
|
|
$ |
4,222 |
|
|
$ |
7,320 |
|
Gross charge-offs |
|
|
(39 |
) |
|
|
(843 |
) |
|
|
(882 |
) |
|
|
(61 |
) |
|
|
(972 |
) |
|
|
(1,033 |
) |
Gross recoveries |
|
|
59 |
|
|
|
155 |
|
|
|
214 |
|
|
|
70 |
|
|
|
147 |
|
|
|
217 |
|
|
Net (charge-offs) recoveries |
|
|
20 |
|
|
|
(688 |
) |
|
|
(668 |
) |
|
|
9 |
|
|
|
(825 |
) |
|
|
(816 |
) |
Provision for loan losses |
|
|
195 |
|
|
|
652 |
|
|
|
847 |
|
|
|
(380 |
) |
|
|
811 |
|
|
|
431 |
|
Other |
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
2,668 |
(a) |
|
$ |
4,607 |
(b) |
|
$ |
7,275 |
|
|
$ |
2,727 |
(a) |
|
$ |
4,208 |
(b) |
|
$ |
6,935 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset specific |
|
$ |
118 |
|
|
$ |
|
|
|
$ |
118 |
|
|
$ |
385 |
|
|
$ |
|
|
|
$ |
385 |
|
Statistical component |
|
|
1,713 |
|
|
|
3,288 |
|
|
|
5,001 |
|
|
|
1,448 |
|
|
|
3,113 |
|
|
|
4,561 |
|
Adjustment to statistical component |
|
|
837 |
|
|
|
1,319 |
|
|
|
2,156 |
|
|
|
894 |
|
|
|
1,095 |
|
|
|
1,989 |
|
|
Total Allowance for loan losses |
|
$ |
2,668 |
|
|
$ |
4,607 |
|
|
$ |
7,275 |
|
|
$ |
2,727 |
|
|
$ |
4,208 |
|
|
$ |
6,935 |
|
|
Lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
385 |
|
|
$ |
15 |
|
|
$ |
400 |
|
|
$ |
480 |
|
|
$ |
12 |
|
|
$ |
492 |
|
Provision for lending-related
commitments |
|
|
(16 |
) |
|
|
|
|
|
|
(16 |
) |
|
|
(6 |
) |
|
|
2 |
|
|
|
(4 |
) |
|
Ending balance |
|
$ |
369 |
|
|
$ |
15 |
|
|
$ |
384 |
(c) |
|
$ |
474 |
|
|
$ |
14 |
|
|
$ |
488 |
(d) |
|
|
|
|
(a) |
|
The ratio of the wholesale allowance for loan losses to total wholesale loans was 1.84%
and 2.06%, excluding wholesale HFS loans of $19.9 billion and $5.3 billion at March 31, 2006
and 2005, respectively. |
|
(b) |
|
The ratio of the consumer allowance for loan losses to total consumer loans was 1.82% and
1.69%, excluding consumer HFS loans of $14.3 billion and $16.5 billion at March 31, 2006 and
2005, respectively. |
|
(c) |
|
Includes $49 million of asset-specific and $335 million of formula-based allowance at March
31, 2006. 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. |
|
(d) |
|
Includes $144 million of asset-specific and $344 million of formula-based allowance at March
31, 2005. 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. |
53
Excluding held-for-sale loans, the total allowance for loan losses represented 1.83% of total
loans at March 31, 2006, compared with 1.84% at December 31, 2005. The wholesale component of the
allowance increased to $2.7 billion as of March 31, 2006, from $2.5 billion at year-end 2005,
primarily due to loan growth in the Investment Bank. The consumer allowance remained relatively
unchanged from year-end 2005.
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 lendingrelated
commitments. These components are computed using a methodology similar to that used for the
wholesale loan portfolio, but modified for expected maturities and probabilities of drawdown. This
allowance, which is reported in Other liabilities, was $384 million and $400 million at March 31,
2006, and December 31, 2005, respectively.
Provision for credit losses
For a discussion of the reported Provision for credit losses, see page 9 of this Form 10Q. The
managed provision for credit losses includes credit card securitizations. For the three months
ended March 31, 2006, securitized credit card losses were lower compared with the prior year,
primarily as a result of lower bankruptcy-related charge-offs in Card Services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for |
|
|
|
|
|
|
|
|
|
|
|
|
lending-related |
|
Total provision for |
|
|
Provision for loan losses |
|
commitments |
|
credit losses |
Three months ended March 31, (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Investment Bank |
|
$ |
189 |
|
|
$ |
(356 |
) |
|
$ |
(6 |
) |
|
$ |
(10 |
) |
|
$ |
183 |
|
|
$ |
(366 |
) |
Commercial Banking |
|
|
16 |
|
|
|
(8 |
) |
|
|
(9 |
) |
|
|
2 |
|
|
|
7 |
|
|
|
(6 |
) |
Treasury & Securities Services |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
2 |
|
|
|
(4 |
) |
|
|
(3 |
) |
Asset & Wealth Management |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
(7 |
) |
Corporate |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
Total Wholesale |
|
|
195 |
|
|
|
(380 |
) |
|
|
(16 |
) |
|
|
(6 |
) |
|
|
179 |
|
|
|
(386 |
) |
Retail Financial Services |
|
|
85 |
|
|
|
92 |
|
|
|
|
|
|
|
2 |
|
|
|
85 |
|
|
|
94 |
|
Card Services |
|
|
567 |
|
|
|
719 |
|
|
|
|
|
|
|
|
|
|
|
567 |
|
|
|
719 |
|
|
Total Consumer |
|
|
652 |
|
|
|
811 |
|
|
|
|
|
|
|
2 |
|
|
|
652 |
|
|
|
813 |
|
|
Total provision for credit losses |
|
|
847 |
|
|
|
431 |
|
|
|
(16 |
) |
|
|
(4 |
) |
|
|
831 |
|
|
|
427 |
|
Credit card securitizations |
|
|
449 |
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
917 |
|
|
Total managed provision for credit losses |
|
$ |
1,296 |
|
|
$ |
1,348 |
|
|
$ |
(16 |
) |
|
$ |
(4 |
) |
|
$ |
1,280 |
|
|
$ |
1,344 |
|
|
54
MARKET RISK MANAGEMENT
For a discussion of the Firms market risk management organization, see pages 7578 of JPMorgan
Chases 2005 Annual Report.
Value-at-risk (VAR)
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 the fair values of the exposures
related to these activities; however, for such activities, VAR is not a measure of reported revenue
since nontrading activities are generally not marked to market through earnings. 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. For
a further discussion of the Firms VAR methodology, see pages 7577 of JPMorgan Chases Annual
Report.
Trading VAR
IB trading VAR by risk type and credit portfolio VAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Three months ended March 31, |
|
Average |
|
|
Minimum |
|
|
Maximum |
|
|
At |
|
|
Average |
|
|
Minimum |
|
|
Maximum |
|
|
At |
|
(in millions) |
|
VAR |
|
|
VAR |
|
|
VAR |
|
|
March 31, 2006 |
|
|
VAR |
|
|
VAR |
|
|
VAR |
|
|
March 31, 2005 |
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
60 |
|
|
$ |
47 |
|
|
$ |
94 |
|
|
$ |
47 |
|
|
$ |
57 |
|
|
$ |
46 |
|
|
$ |
72 |
|
|
$ |
72 |
|
Foreign exchange |
|
|
20 |
|
|
|
15 |
|
|
|
30 |
|
|
|
19 |
|
|
|
23 |
|
|
|
17 |
|
|
|
30 |
|
|
|
21 |
|
Equities |
|
|
32 |
|
|
|
22 |
|
|
|
39 |
|
|
|
23 |
|
|
|
18 |
|
|
|
15 |
|
|
|
21 |
|
|
|
18 |
|
Commodities and other |
|
|
47 |
|
|
|
22 |
|
|
|
68 |
|
|
|
52 |
|
|
|
10 |
|
|
|
7 |
|
|
|
17 |
|
|
|
10 |
|
Less: portfolio diversification |
|
|
(68) |
(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(61) |
(c) |
|
|
(43 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(48 |
)(c) |
|
Trading VAR(a) |
|
$ |
91 |
|
|
$ |
76 |
|
|
$ |
109 |
|
|
$ |
80 |
|
|
$ |
65 |
|
|
$ |
53 |
|
|
$ |
78 |
|
|
$ |
73 |
|
|
Credit portfolio VAR(b) |
|
|
14 |
|
|
|
13 |
|
|
|
16 |
|
|
|
14 |
|
|
|
13 |
|
|
|
12 |
|
|
|
16 |
|
|
|
13 |
|
Less: portfolio diversification |
|
|
(11) |
(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(10) |
(c) |
|
|
(8 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(6 |
)(c) |
|
Total trading and credit
portfolio VAR |
|
$ |
94 |
|
|
$ |
75 |
|
|
$ |
113 |
|
|
$ |
84 |
|
|
$ |
70 |
|
|
$ |
57 |
|
|
$ |
83 |
|
|
$ |
80 |
|
|
|
|
|
(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 57 and Note 14 on page 80 of this Form 10Q, respectively. Trading VAR includes
substantially all trading activities in the IB; 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 Principal
transactions. 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. |
IBs average total trading and credit portfolio VAR increased during the first quarter of
2006 to $94 million compared with $70 million for the same period in 2005. The increase was driven
by higher VAR for commodities and equities, which also contributed to increased portfolio
diversification. Total Trading VAR diversification increased to $68 million, or 43% of the sum of
the components, from $43 million, or 40% 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.
55
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 three months ended March 31, 2006. The chart shows that the IB posted market risk-related
gains on 57 out of 65 days in this period, with 4 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 8 days, with only one day with a
loss greater than $50 million, and with no loss exceeding the VAR measure.
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 $848 million to $1.3 billion, and from $469 million to $745 million, for the
three months ended March 31, 2006, and March 31, 2005, respectively.
56
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.
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 March 31, 2006, and December
31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate change in rates |
(in millions) |
|
+200bp |
|
|
+100bp |
|
|
-100bp |
|
|
March 31, 2006 |
|
$ |
(626 |
) |
|
$ |
(272 |
) |
|
$ |
152 |
|
December 31,
2005 |
|
|
265 |
|
|
|
172 |
|
|
|
(162 |
) |
|
The primary change in earnings-at-risk from December 31, 2005, reflects a higher level of AFS
securities and other Treasury repositioning. The Firms risk to rising and falling interest rates
is due primarily to corresponding increases and decreases in short-term funding costs.
OPERATIONAL RISK MANAGEMENT
For a discussion of JPMorgan Chases operational risk management, refer to page 79 of JPMorgan
Chases 2005 Annual Report.
REPUTATION AND FIDUCIARY RISK MANAGEMENT
For a discussion of the Firms Reputation and Fiduciary Risk Management, see page 80 of JPMorgan
Chases 2005 Annual Report.
PRIVATE EQUITY RISK MANAGEMENT
For a discussion of Private Equity Risk Management, see page 80 of JPMorgan Chases 2005 Annual
Report. At March 31, 2006, the carrying value of the private equity portfolios of the JPMorgan
Partners and ONE Equity Partners businesses was $6.3 billion, of which $501 million represented
positions traded in the public market.
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and Regulation section
on pages 1-4 of JPMorgan Chases 2005 Form 10K.
Dividends
At March 31, 2006, JPMorgan Chases bank subsidiaries could pay, in the aggregate, $9.1 billion in
dividends to their respective bank holding companies without prior approval of their relevant
banking regulators.
57
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 an appropriate manner. The Firm believes its estimates for
determining the valuation of its assets and liabilities are appropriate. For a further description
of the Firms critical accounting estimates involving significant management valuation judgments,
see pages 8183 and the Notes to consolidated financial statements in JPMorgan Chases 2005 Annual
Report.
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 JPMorgan Chases 2005 Annual
Report. The methodology for calculating the Allowance for loan losses and the Allowance for
lending-related commitments involves significant judgment. For a further description of these
judgments, see Allowance for credit losses on page 81 of JPMorgan Chases 2005 Annual Report; for
amounts recorded as of March 31, 2006 and 2005, see allowance for credit losses on page 53, and
Note 11 on page 74 of this Form 10Q.
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, private equity investments and mortgage servicing rights.
Held-for-sale loans and physical commodities are carried at the lower of cost or market. At March
31, 2006, approximately $427 billion of the Firms assets were recorded at fair value.
Trading and available-for-sale portfolios
The following table summarizes the Firms trading and available-for-sale portfolios by valuation
methodology at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
Trading liabilities |
|
|
|
|
|
Securities |
|
|
|
|
|
Securities |
|
|
|
|
|
AFS |
|
|
purchased(a) |
|
Derivatives(b) |
|
sold(a) |
|
Derivatives(b) |
|
securities |
|
Fair value based upon: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted market prices |
|
|
94 |
% |
|
|
1 |
% |
|
|
99 |
% |
|
|
2 |
% |
|
|
94 |
% |
Internal models with significant
observable market parameters |
|
|
4 |
|
|
|
96 |
|
|
|
1 |
|
|
|
96 |
|
|
|
4 |
|
Internal models with significant
unobservable market parameters |
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
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. |
58
ACCOUNTING AND REPORTING DEVELOPMENTS
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. The Firm adopted SFAS 123R on January 1, 2006, under the modified prospective method.
For additional information related to SFAS 123R, see Note 6 on pages 6871 of this Form 10Q.
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. It 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 Firm adopted this standard effective January 1, 2006.
For additional information related to SFAS 155, see Note 1 on page 64 of this Form 10Q.
Accounting for Servicing of Financial Assets
In the first quarter of 2006, the FASB issued SFAS 156, which is effective as of the beginning of
the first fiscal year beginning after September 15, 2006, with early adoption permitted. JPMorgan
Chase has elected to adopt the standard effective January 1, 2006. The standard permits an entity a
one-time irrevocable election to adopt fair value accounting for a class of servicing assets. The
Firm has defined MSRs as one class of servicing assets for this election. For additional
information related to the Firms adoption of SFAS 156 with respect to MSRs, see Note 14 on page 80
of this Form 10-Q.
Accounting for Variable Interest Entities
In April 2006, the FASB issued FSP FIN 46(R)-6, which requires an analysis of the design of a VIE
in determining the variability to be considered in the application of FIN 46(R). The guidance in
this FSP will be applied prospectively as of July 1, 2006 to all entities with which the Firm first
becomes involved after such date and to all entities previously required to be analyzed under FIN
46(R) when a reconsideration event occurs after such date. The Firm expects to arrive at similar
consolidation conclusions under the FSP as those reached currently under FIN 46(R).
59
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2006 |
|
|
2005 |
|
|
Revenue |
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,169 |
|
|
$ |
993 |
|
Principal transactions |
|
|
2,602 |
|
|
|
2,636 |
|
Lending & deposit related fees |
|
|
841 |
|
|
|
820 |
|
Asset management, administration and commissions |
|
|
2,973 |
|
|
|
2,498 |
|
Securities gains (losses) |
|
|
(116 |
) |
|
|
(822 |
) |
Mortgage fees and related income |
|
|
241 |
|
|
|
362 |
|
Credit card income |
|
|
1,910 |
|
|
|
1,734 |
|
Other income |
|
|
556 |
|
|
|
201 |
|
|
Noninterest revenue |
|
|
10,176 |
|
|
|
8,422 |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
13,301 |
|
|
|
10,632 |
|
Interest expense |
|
|
8,241 |
|
|
|
5,407 |
|
|
Net interest income |
|
|
5,060 |
|
|
|
5,225 |
|
|
Total net revenue |
|
|
15,236 |
|
|
|
13,647 |
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
831 |
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
Compensation expense |
|
|
5,600 |
|
|
|
4,702 |
|
Occupancy expense |
|
|
602 |
|
|
|
525 |
|
Technology and communications expense |
|
|
874 |
|
|
|
920 |
|
Professional & outside services |
|
|
888 |
|
|
|
1,074 |
|
Marketing |
|
|
519 |
|
|
|
483 |
|
Other expense |
|
|
834 |
|
|
|
1,705 |
|
Amortization of intangibles |
|
|
364 |
|
|
|
383 |
|
Merger costs |
|
|
71 |
|
|
|
145 |
|
|
Total noninterest expense |
|
|
9,752 |
|
|
|
9,937 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
4,653 |
|
|
|
3,283 |
|
Income tax expense |
|
|
1,572 |
|
|
|
1,019 |
|
|
Net income |
|
$ |
3,081 |
|
|
$ |
2,264 |
|
|
Net income applicable to common stock |
|
$ |
3,077 |
|
|
$ |
2,259 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.89 |
|
|
$ |
0.64 |
|
Diluted earnings per share |
|
|
0.86 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
Average basic shares |
|
|
3,472.7 |
|
|
|
3,517.5 |
|
Average diluted shares |
|
|
3,570.8 |
|
|
|
3,569.8 |
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
60
JPMORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
36,903 |
|
|
$ |
36,670 |
|
Deposits with banks |
|
|
10,545 |
|
|
|
21,661 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
153,755 |
|
|
|
133,981 |
|
Securities borrowed |
|
|
93,280 |
|
|
|
74,604 |
|
Trading assets (including assets pledged of $86,839 at March 31, 2006, and $79,657 at December 31, 2005) |
|
|
312,025 |
|
|
|
298,377 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale (including assets pledged of $40,445 at March 31, 2006, and $17,614 at December 31, 2005) |
|
|
67,054 |
|
|
|
47,523 |
|
Held-to-maturity (fair value: $74 at March 31, 2006, and $80 at December 31, 2005) |
|
|
72 |
|
|
|
77 |
|
Interests in purchased receivables |
|
|
29,029 |
|
|
|
29,740 |
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
432,081 |
|
|
|
419,148 |
|
Allowance for loan losses |
|
|
(7,275 |
) |
|
|
(7,090 |
) |
|
Loans, net of Allowance for loan losses |
|
|
424,806 |
|
|
|
412,058 |
|
|
|
|
|
|
|
|
|
|
Private equity investments |
|
|
6,499 |
|
|
|
6,374 |
|
Accrued interest and accounts receivable |
|
|
21,657 |
|
|
|
22,421 |
|
Premises and equipment |
|
|
8,985 |
|
|
|
9,081 |
|
Goodwill |
|
|
43,899 |
|
|
|
43,621 |
|
Other intangible assets: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
7,539 |
|
|
|
6,452 |
|
Purchased credit card relationships |
|
|
3,243 |
|
|
|
3,275 |
|
All other intangibles |
|
|
4,832 |
|
|
|
4,832 |
|
Other assets |
|
|
49,159 |
|
|
|
48,195 |
|
|
Total assets |
|
$ |
1,273,282 |
|
|
$ |
1,198,942 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
128,982 |
|
|
$ |
135,599 |
|
Interest-bearing |
|
|
309,779 |
|
|
|
287,774 |
|
Non-U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
6,591 |
|
|
|
7,476 |
|
Interest-bearing |
|
|
139,113 |
|
|
|
124,142 |
|
|
Total deposits |
|
|
584,465 |
|
|
|
554,991 |
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
151,006 |
|
|
|
125,925 |
|
Commercial paper |
|
|
15,933 |
|
|
|
13,863 |
|
Other borrowed funds |
|
|
14,400 |
|
|
|
10,479 |
|
Trading liabilities |
|
|
160,098 |
|
|
|
145,930 |
|
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related
commitments of $384 at March 31, 2006, and $400 at December 31, 2005) |
|
|
73,693 |
|
|
|
78,460 |
|
Beneficial interests issued by consolidated VIEs |
|
|
42,237 |
|
|
|
42,197 |
|
Long-term debt (including structured notes accounted for at fair value of $8.4 billion at March 31, 2006) |
|
|
112,133 |
|
|
|
108,357 |
|
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities |
|
|
10,980 |
|
|
|
11,529 |
|
|
Total liabilities |
|
|
1,164,945 |
|
|
|
1,091,731 |
|
|
Commitments and contingencies (see Note 17 of this Form 10Q) |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
139 |
|
Common stock ($1 par value; authorized 9,000,000,000 shares; issued 3,644,744,120 shares and
3,618,189,597 shares at March 31, 2006, and December 31, 2005, respectively) |
|
|
3,645 |
|
|
|
3,618 |
|
Capital surplus |
|
|
76,153 |
|
|
|
74,994 |
|
Retained earnings |
|
|
35,892 |
|
|
|
33,848 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,017 |
) |
|
|
(626 |
) |
Treasury stock, at cost (171,793,672 shares at March 31, 2006, and 131,500,350 shares at December 31, 2005) |
|
|
(6,336 |
) |
|
|
(4,762 |
) |
|
Total stockholders equity |
|
|
108,337 |
|
|
|
107,211 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,273,282 |
|
|
$ |
1,198,942 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
61
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Preferred stock |
|
|
|
|
|
|
|
|
Balance at beginning of the year |
|
$ |
139 |
|
|
$ |
339 |
|
Redemption of preferred stock |
|
|
(139 |
) |
|
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
3,618 |
|
|
|
3,585 |
|
Issuance of common stock |
|
|
27 |
|
|
|
13 |
|
|
Balance at end of period |
|
|
3,645 |
|
|
|
3,598 |
|
|
|
|
|
|
|
|
|
|
|
Capital surplus |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
74,994 |
|
|
|
72,801 |
|
Issuance of common stock and commitments to issue common stock for employee
stock-based awards and related tax effects |
|
|
1,159 |
|
|
|
593 |
|
|
Balance at end of period |
|
|
76,153 |
|
|
|
73,394 |
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
33,848 |
|
|
|
30,209 |
|
Cumulative effect of change in accounting principles |
|
|
172 |
|
|
|
|
|
|
Balance at beginning of year, adjusted |
|
|
34,020 |
|
|
|
30,209 |
|
Net income |
|
|
3,081 |
|
|
|
2,264 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
(4 |
) |
|
|
(5 |
) |
Common stock ($0.34 per share each period) |
|
|
(1,205 |
) |
|
|
(1,215 |
) |
|
Balance at end of period |
|
|
35,892 |
|
|
|
31,253 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(626 |
) |
|
|
(208 |
) |
Other comprehensive income (loss) |
|
|
(391 |
) |
|
|
(415 |
) |
|
Balance at end of period |
|
|
(1,017 |
) |
|
|
(623 |
) |
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(4,762 |
) |
|
|
(1,073 |
) |
Purchase of treasury stock |
|
|
(1,291 |
) |
|
|
(1,316 |
) |
Share repurchases related to employee stock-based awards |
|
|
(283 |
) |
|
|
(232 |
) |
|
Balance at end of period |
|
|
(6,336 |
) |
|
|
(2,621 |
) |
|
Total stockholders equity at end of period |
|
$ |
108,337 |
|
|
$ |
105,340 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,081 |
|
|
$ |
2,264 |
|
Other comprehensive income (loss) |
|
|
(391 |
) |
|
|
(415 |
) |
|
Comprehensive income |
|
$ |
2,690 |
|
|
$ |
1,849 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
62
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,081 |
|
|
$ |
2,264 |
|
Adjustments to reconcile net income to net cash (used in) operating
activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
831 |
|
|
|
427 |
|
Depreciation and amortization |
|
|
837 |
|
|
|
1,165 |
|
Deferred tax provision |
|
|
554 |
|
|
|
462 |
|
Investment securities (gains) losses |
|
|
116 |
|
|
|
822 |
|
Private equity unrealized (gains) losses |
|
|
(84 |
) |
|
|
(201 |
) |
Stock-based compensation |
|
|
839 |
|
|
|
381 |
|
Net change in: |
|
|
|
|
|
|
|
|
Trading assets |
|
|
(9,330 |
) |
|
|
545 |
|
Securities borrowed |
|
|
(18,676 |
) |
|
|
(5,746 |
) |
Accrued interest and accounts receivable |
|
|
848 |
|
|
|
338 |
|
Other assets |
|
|
(2,459 |
) |
|
|
(6,974 |
) |
Trading liabilities |
|
|
11,383 |
|
|
|
(472 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(6,330 |
) |
|
|
(4,730 |
) |
Other operating adjustments |
|
|
222 |
|
|
|
184 |
|
|
Net cash (used in) operating activities |
|
|
(18,168 |
) |
|
|
(11,535 |
) |
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits with banks |
|
|
11,405 |
|
|
|
7,465 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
(19,774 |
) |
|
|
(31,239 |
) |
Other change in loans |
|
|
(40,394 |
) |
|
|
(22,732 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
Proceeds |
|
|
5 |
|
|
|
9 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Proceeds from maturities |
|
|
6,456 |
|
|
|
8,703 |
|
Proceeds from sales |
|
|
30,369 |
|
|
|
28,232 |
|
Purchases |
|
|
(56,931 |
) |
|
|
(19,543 |
) |
Proceeds due to the sale and securitization of loans |
|
|
33,180 |
|
|
|
21,373 |
|
Net cash (used) received in business acquisitions |
|
|
(663 |
) |
|
|
(304 |
) |
All other investing activities, net |
|
|
873 |
|
|
|
1,374 |
|
|
Net cash (used in) investing activities |
|
|
(35,474 |
) |
|
|
(6,662 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
25,483 |
|
|
|
6,377 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
25,081 |
|
|
|
9,275 |
|
Commercial paper and other borrowed funds |
|
|
943 |
|
|
|
1,543 |
|
Proceeds from the issuance of long-term debt and capital debt securities |
|
|
12,354 |
|
|
|
15,796 |
|
Repayments of long-term debt and capital debt securities |
|
|
(9,316 |
) |
|
|
(9,903 |
) |
Net issuance of stock and stock-based awards |
|
|
393 |
|
|
|
190 |
|
Excess tax benefits related to stock-based compensation |
|
|
135 |
|
|
|
|
|
Redemption of preferred stock |
|
|
(139 |
) |
|
|
|
|
Treasury stock purchased |
|
|
(1,291 |
) |
|
|
(1,316 |
) |
Cash dividends paid |
|
|
(1,215 |
) |
|
|
(1,227 |
) |
All other financing activities, net |
|
|
1,393 |
|
|
|
8 |
|
|
Net cash provided by financing activities |
|
|
53,821 |
|
|
|
20,743 |
|
|
Effect of exchange rate changes on cash and due from banks |
|
|
54 |
|
|
|
(121 |
) |
Net increase in cash and due from banks |
|
|
233 |
|
|
|
2,425 |
|
Cash and due from banks at the beginning of the year |
|
|
36,670 |
|
|
|
35,168 |
|
|
Cash and due from banks at the end of the period |
|
$ |
36,903 |
|
|
$ |
37,593 |
|
|
Cash interest paid |
|
$ |
8,395 |
|
|
$ |
5,191 |
|
Cash income taxes paid |
|
|
234 |
|
|
|
1,187 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
63
See Glossary of Terms on pages 8889 of this Form 10Q for definitions of terms used
throughout the Notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 BASIS OF PRESENTATION
JPMorgan Chase & 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 20 on pages 8486 of this Form 10Q.
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. The unaudited
consolidated financial statements prepared in conformity with U.S. GAAP require management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue,
expenses, and disclosures of contingent assets and liabilities. Actual results could be different
from these estimates. In the opinion of management, all normal recurring adjustments have been
included for a fair statement of this interim financial information. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements included in JPMorgan Chases Annual Report on Form 10K for the year ended December 31,
2005 (2005 Annual Report).
Certain amounts in the prior periods have been reclassified to conform to the current presentation.
Accounting for certain hybrid financial instruments
SFAS 155 applies to certain hybrid financial instruments which are instruments that contain
embedded derivatives. The 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. SFAS 155
also permits an election for fair value measurement of any hybrid financial instrument containing
an embedded derivative that otherwise would require bifurcation under SFAS 133. The fair value
election can be applied to existing instruments on an instrument-by-instrument basis at the date of
adoption and can be applied to new instruments on a prospective basis.
The Firm adopted SFAS 155 effective January 1, 2006. The Firm has elected to fair value all
instruments issued, acquired or modified after December 31, 2005, that are required to be
bifurcated under SFAS 133/149 and SFAS 155. In addition, the Firm elected to fair value certain
structured notes existing as of December 31, 2005, resulting in a $22 million cumulative effect
increase to Retained earnings. The cumulative effect adjustment includes gross unrealized gains of
$29 million and gross unrealized losses of $7 million.
The substantial majority of the structured notes to which the fair value election has been applied
are classified in Long-term debt on the Consolidated balance sheets. The change in fair value
associated with structured notes is classified within Principal transactions on the Consolidated
statements of income.
NOTE 2 BUSINESS CHANGES AND DEVELOPMENTS
Acquisition of the consumer, small-business and middle-market banking businesses of The Bank of New
York in exchange for the corporate trust business
On April 8, 2006, JPMorgan Chase announced an agreement to acquire The Bank of New Yorks consumer,
small-business and middle-market banking businesses in exchange for the Firms corporate trust
business plus a cash payment of $150 million. The Bank of New York businesses being acquired are
valued at a premium of $2.30 billion; the Firms corporate trust business being sold is valued at a
premium of $2.15 billion. The Firm may also make a future payment to The Bank of New York of up to
$50 million depending on the number of new account openings at the Firms retail business. The
transaction has been approved by both companies boards of directors and is subject to regulatory
approvals. It is expected to close in late third quarter or the fourth quarter of 2006.
Acquisition of Kohls private label credit card portfolio
On March 5, 2006, JPMorgan Chase entered into an agreement with Kohls Corporation (Kohls) to
acquire $1.6 billion of Kohls private label credit card receivables and 13 million accounts. The
transaction was completed on April 21, 2006. JPMorgan Chase and Kohls have also entered into an
agreement under which JPMorgan Chase will offer private label credit cards to both new and existing
Kohls customers.
64
Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately $663 million, Collegiate Funding
Services, a leader in education loan servicing and consolidation. This acquisition included $6
billion of education loans and enables the Firm to create a comprehensive education finance
business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office operations of Paloma Partners
Management Company (Paloma), which is part of a privately-owned investment fund management group
based in Greenwich, CT. The parties have also entered into a multi-year contract pursuant to which
JPMorgan Chase will provide daily operational services to Paloma. The acquired operations will be
combined with JPMorgan Chases current hedge fund administration unit, JPMorgan Tranaut.
JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity Brokerage to become the
exclusive provider of new issue equity securities and the primary provider of fixed income products
to Fidelitys brokerage clients and retail customers, effectively expanding the Firms existing
distribution platform.
Sale of insurance underwriting business
On February 7, 2006, JPMorgan Chase announced that it had agreed to sell its life insurance and
annuity underwriting businesses to Protective Life Corporation for a cash purchase price of
approximately $1.2 billion. The sale, which includes both the heritage Chase insurance business and
the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal
regulatory approvals and is expected to close in the third quarter of 2006. JPMorgan Chase
anticipates the transaction will have no material impact on earnings.
NOTE 3PRINCIPAL TRANSACTIONS
Principal transactions is a new caption, effective January 1, 2006, in the Consolidated income
statements. Principal transactions revenue consists of realized and unrealized gains and losses
from trading activities including physical commodities inventories that are accounted for at the
lower of cost or market, primarily in the Investment Bank, and Private equity gains (losses),
primarily in the private equity business of Corporate. The prior period presentation of Trading
revenue and Private equity gains (losses) have been reclassified to this new caption. The following
table presents Principal transactions revenue:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
Trading revenue |
|
$ |
2,343 |
|
|
$ |
1,859 |
|
Private equity gains (losses) |
|
|
259 |
|
|
|
777 |
|
|
Principal transactions |
|
$ |
2,602 |
|
|
$ |
2,636 |
|
|
For a discussion of the accounting policies related to Trading assets and Trading liabilities
and Private equity investments, see Notes 3 and 9 on pages 94 and 103105, respectively, of
JPMorgan Chases 2005 Annual Report.
65
Trading assets and liabilities
The following table presents the fair value of Trading assets and Trading liabilities for the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
Trading assets |
|
|
|
|
|
|
|
|
Debt and equity instruments: |
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations |
|
$ |
16,018 |
|
|
$ |
16,283 |
|
U.S. government-sponsored enterprise obligations |
|
|
18,175 |
|
|
|
24,172 |
|
Obligations of state and political subdivisions |
|
|
7,650 |
|
|
|
9,887 |
|
Certificates of deposit, bankers acceptances and commercial paper |
|
|
9,169 |
|
|
|
5,652 |
|
Debt securities issued by non-U.S. governments |
|
|
53,049 |
|
|
|
48,671 |
|
Corporate securities and other |
|
|
155,214 |
|
|
|
143,925 |
|
|
Total debt and equity instruments |
|
|
259,275 |
|
|
|
248,590 |
|
|
Derivative receivables: (a) |
|
|
|
|
|
|
|
|
Interest rate |
|
|
31,328 |
|
|
|
30,416 |
|
Foreign exchange |
|
|
2,179 |
|
|
|
2,855 |
|
Equity |
|
|
6,813 |
|
|
|
5,575 |
|
Credit derivatives |
|
|
3,881 |
|
|
|
3,464 |
|
Commodity |
|
|
8,549 |
|
|
|
7,477 |
|
|
Total derivative receivables |
|
|
52,750 |
|
|
|
49,787 |
|
|
Total trading assets |
|
$ |
312,025 |
|
|
$ |
298,377 |
|
|
Trading liabilities |
|
|
|
|
|
|
|
|
Debt and equity instruments(b) |
|
$ |
104,160 |
|
|
$ |
94,157 |
|
|
Derivative payables:(a) |
|
|
|
|
|
|
|
|
Interest rate |
|
|
28,095 |
|
|
|
28,488 |
|
Foreign exchange |
|
|
3,265 |
|
|
|
3,453 |
|
Equity |
|
|
14,656 |
|
|
|
11,539 |
|
Credit derivatives |
|
|
2,904 |
|
|
|
2,445 |
|
Commodity |
|
|
7,018 |
|
|
|
5,848 |
|
|
Total derivative payables |
|
|
55,938 |
|
|
|
51,773 |
|
|
Total trading liabilities |
|
$ |
160,098 |
|
|
$ |
145,930 |
|
|
|
|
|
(a) |
|
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 of $22.7 billion
and $17.5 billion at March 31, 2006, and $26.7 billion and $18.9 billion at December 31,
2005, respectively, under legally enforceable master netting agreements. |
|
(b) |
|
Primarily represents securities sold, not yet purchased. |
The following table presents the carrying value and cost of the Private Equity investment
portfolio for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
(in millions) |
|
Carrying value |
|
|
Cost |
|
|
Carrying value |
|
|
Cost |
|
|
Total private equity investments |
|
$ |
6,499 |
|
|
$ |
8,104 |
|
|
$ |
6,374 |
|
|
$ |
8,036 |
|
|
66
NOTE 4 INTEREST INCOME AND INTEREST EXPENSE
Details of Interest income and Interest expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
Interest income |
|
|
|
|
|
|
|
|
Loans |
|
$ |
7,497 |
|
|
$ |
6,034 |
|
Securities |
|
|
748 |
|
|
|
1,078 |
|
Trading assets |
|
|
2,550 |
|
|
|
2,232 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
1,543 |
|
|
|
727 |
|
Securities borrowed |
|
|
385 |
|
|
|
221 |
|
Deposits with banks |
|
|
247 |
|
|
|
154 |
|
Interests in purchased receivables |
|
|
331 |
|
|
|
186 |
|
|
Total interest income |
|
|
13,301 |
|
|
|
10,632 |
|
Interest expense |
|