10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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, 2008
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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
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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270 Park Avenue, New York, 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.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o |
Non-accelerated filer (Do not check if a smaller reporting company) o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Number of shares of common stock outstanding as of April 30, 2008: 3,426,631,526
FORM 10-Q
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) |
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As of or for the period ended, |
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1Q08 |
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4Q07 |
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3Q07 |
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2Q07 |
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1Q07 |
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Selected income statement data |
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Noninterest revenue |
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$ |
9,231 |
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$ |
10,161 |
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$ |
9,199 |
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$ |
12,740 |
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$ |
12,866 |
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Net interest income |
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7,659 |
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7,223 |
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6,913 |
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6,168 |
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6,102 |
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Total net revenue |
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16,890 |
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17,384 |
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16,112 |
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18,908 |
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18,968 |
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Provision for credit losses |
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4,424 |
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2,542 |
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1,785 |
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1,529 |
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1,008 |
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Noninterest expense |
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8,931 |
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10,720 |
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9,327 |
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11,028 |
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10,628 |
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Income before income tax expense |
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3,535 |
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4,122 |
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5,000 |
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6,351 |
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7,332 |
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Income tax expense |
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1,162 |
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1,151 |
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1,627 |
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2,117 |
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2,545 |
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Net income |
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$ |
2,373 |
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$ |
2,971 |
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$ |
3,373 |
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$ |
4,234 |
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$ |
4,787 |
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Per common share |
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Net income per share: Basic |
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$ |
0.70 |
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$ |
0.88 |
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$ |
1.00 |
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$ |
1.24 |
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$ |
1.38 |
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Diluted |
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0.68 |
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0.86 |
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0.97 |
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1.20 |
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1.34 |
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Cash dividends declared per share |
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0.38 |
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0.38 |
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0.38 |
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0.38 |
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0.34 |
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Book value per share |
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36.94 |
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36.59 |
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35.72 |
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35.08 |
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34.45 |
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Common shares outstanding |
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Average: Basic |
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3,396 |
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3,367 |
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3,376 |
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3,415 |
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3,456 |
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Diluted |
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3,495 |
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3,472 |
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3,478 |
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3,522 |
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3,560 |
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Common shares at period end |
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3,401 |
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3,367 |
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3,359 |
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3,399 |
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3,416 |
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Share price(a) |
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High |
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$ |
49.29 |
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$ |
48.02 |
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$ |
50.48 |
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$ |
53.25 |
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$ |
51.95 |
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Low |
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36.01 |
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40.15 |
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42.16 |
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47.70 |
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45.91 |
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Close |
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42.95 |
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43.65 |
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45.82 |
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48.45 |
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48.38 |
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Market capitalization |
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146,066 |
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146,986 |
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153,901 |
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164,659 |
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165,280 |
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Financial ratios |
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Return on common equity (ROE) |
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8 |
% |
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10 |
% |
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11 |
% |
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14 |
% |
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17 |
% |
Return on assets (ROA) |
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0.61 |
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0.77 |
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0.91 |
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1.19 |
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1.41 |
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Overhead ratio |
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53 |
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62 |
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58 |
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58 |
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56 |
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Tier 1 capital ratio |
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8.3 |
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8.4 |
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8.4 |
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8.4 |
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8.5 |
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Total capital ratio |
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12.5 |
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12.6 |
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12.5 |
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12.0 |
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11.8 |
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Tier 1 leverage ratio |
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5.9 |
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6.0 |
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6.0 |
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6.2 |
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6.2 |
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Selected balance sheet data (period-end) |
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Total assets |
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$ |
1,642,862 |
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$ |
1,562,147 |
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$ |
1,479,575 |
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$ |
1,458,042 |
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$ |
1,408,918 |
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Securities |
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101,647 |
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85,450 |
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97,706 |
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95,984 |
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97,029 |
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Loans |
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537,056 |
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519,374 |
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486,320 |
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465,037 |
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449,765 |
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Deposits |
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761,626 |
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740,728 |
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678,091 |
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651,370 |
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626,428 |
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Long-term debt |
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189,995 |
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183,862 |
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173,696 |
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159,493 |
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143,274 |
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Total stockholders equity |
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125,627 |
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123,221 |
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119,978 |
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119,211 |
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117,704 |
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Headcount |
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182,166 |
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180,667 |
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179,847 |
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179,664 |
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176,314 |
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Credit quality metrics |
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Allowance for credit losses |
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$ |
12,601 |
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$ |
10,084 |
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$ |
8,971 |
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$ |
8,399 |
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$ |
7,853 |
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Nonperforming assets(b) |
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5,443 |
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4,237 |
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3,181 |
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2,586 |
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2,421 |
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Allowance for loan losses to total loans(c) |
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2.29 |
% |
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1.88 |
% |
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1.76 |
% |
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1.71 |
% |
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1.74 |
% |
Net charge-offs |
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$ |
1,906 |
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$ |
1,429 |
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$ |
1,221 |
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$ |
985 |
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$ |
903 |
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Net charge-off rate(c) |
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1.53 |
% |
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1.19 |
% |
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1.07 |
% |
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0.90 |
% |
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0.85 |
% |
Wholesale net charge-off (recovery) rate(c) |
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0.18 |
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0.05 |
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0.19 |
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(0.07 |
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(0.02 |
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Managed Card net charge-off rate |
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4.37 |
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3.89 |
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3.64 |
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3.62 |
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3.57 |
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(a) |
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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. |
(b) |
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Excludes purchased held-for-sale wholesale loans. |
(c) |
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End-of-period and average loans accounted for at fair value and loans held-for-sale were
excluded when calculating the allowance coverage ratios and net charge-off rates,
respectively. |
3
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q provides managements discussion and analysis (MD&A) of the
financial condition and results of operations for JPMorgan Chase. See the Glossary of Terms on
pages 109111 for definitions of terms used throughout this Form 10-Q. The MD&A included in this
Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations
of JPMorgan Chases management and are subject to significant risks and uncertainties. These risks
and uncertainties could cause JPMorgan Chases results to differ materially from those set forth in
such forward-looking statements. Certain of such risks and uncertainties are described herein,
including in Forward-looking Statements on page 114 and Item 1A: Risk Factors on page 117 of this
Form 10-Q, as well as in the JPMorgan Chase Annual Report on Form 10-K for the year ended December
31, 2007 (2007 Annual Report or 2007 Form 10-K), including Part I, Item 1A: Risk factors, to
which reference is hereby made.
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 of America (U.S.), with $1.6 trillion in assets, $125.6
billion in stockholders equity and operations in more than 60 countries. The Firm is a leader in
investment banking, financial services for consumers and businesses, financial transaction
processing and asset management. Under the JPMorgan and Chase brands, the Firm serves millions of
customers in the U.S. and many of the worlds most prominent corporate, institutional and
government clients.
JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank, National Association
(JPMorgan Chase Bank, N.A.), a national banking association with branches in 17 states; and Chase
Bank USA, National Association (Chase Bank USA, N.A.), a national bank that is the Firms credit
card issuing bank. JPMorgan Chases principal nonbank subsidiary is J.P. Morgan Securities Inc.,
the Firms U.S. investment banking firm.
JPMorgan Chases activities are organized, for management reporting purposes, into six business
segments, as well as Corporate/Private Equity. The Firms wholesale businesses comprise the
Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments.
The Firms consumer businesses comprise the Retail Financial Services and Card Services segments. A
description of the Firms business segments, and the products and services they provide to their
respective client bases, follows.
Investment Bank
JPMorgan is one of the worlds leading investment banks, with deep client relationships and broad
product capabilities. The Investment Banks clients are corporations, financial institutions,
governments and institutional investors. The Firm offers a full range of investment banking
products and services in all major capital markets, including advising on corporate strategy and
structure, capital raising in equity and debt markets, sophisticated risk management, market-making
in cash securities and derivative instruments and research. The Investment Bank (IB) also commits
the Firms own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (RFS), which includes the Regional Banking,
Mortgage Banking and Auto Finance reporting segments, serves consumers and businesses through bank
branches, ATMs, online banking and telephone banking. Customers can use more than 3,100 bank
branches (fourth-largest nationally), 9,200 ATMs (third-largest nationally) and 300 mortgage
offices. More than 13,900 branch salespeople assist customers with checking and savings accounts,
mortgages, home equity and business loans and investments across the 17-state footprint from New
York to Arizona. Consumers also can obtain loans through more than 14,300 auto dealerships and
5,200 schools and universities nationwide.
Card Services
With more than 156 million cards in circulation and more than $150 billion in managed
loans, Card Services (CS) is one of the nations largest credit card issuers. Customers used
Chase cards to meet more than $85 billion worth of their spending needs in the three months ended
March 31, 2008.
With hundreds of partnerships, Chase has a market leadership position in building loyalty programs
with many of the worlds most respected brands.
4
Chase Paymentech Solutions, LLC, a joint venture between JPMorgan Chase and First Data Corporation,
is a processor of MasterCard and Visa payments, which handled more than 5 billion transactions in
the three months ended March 31, 2008.
Commercial Banking
Commercial Banking (CB) serves more than 30,000 clients nationally, including
corporations, municipalities, financial institutions and not-for-profit entities with annual
revenue generally ranging from $10 million to $2 billion. Commercial Banking delivers extensive
industry knowledge, local expertise and a dedicated service model. In partnership with the Firms
other businesses, it provides comprehensive solutions including lending, treasury services,
investment banking and asset management to meet its clients domestic and international financial
needs.
Treasury & Securities Services
Treasury & Securities Services (TSS) is a global leader in
transaction, investment and information services. TSS is one of the worlds largest cash management
providers and a leading global custodian. Treasury Services (TS) provides cash management, trade,
wholesale card and liquidity products and services to small and mid-sized companies, multinational
corporations, financial institutions and government entities. TS partners with the Commercial
Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a
result, certain TS revenue is included in other segments results. Worldwide Securities Services
(WSS) holds, values, clears and services securities, cash and alternative investments for
investors and broker-dealers, and manages depositary receipt programs globally.
Asset Management
With assets under supervision of $1.6 trillion, Asset Management (AM) is a global
leader in investment and wealth management. AM clients include institutions, retail investors and
high-net-worth individuals in every major market throughout the world. AM offers global investment
management in equities, fixed income, real estate, hedge funds, private equity and liquidity,
including both money market instruments and bank deposits. AM also provides trust and estate and
banking services to high-net-worth clients, and retirement services for corporations and
individuals. The majority of AMs client assets are in actively managed portfolios.
OTHER BUSINESS EVENTS
Merger with The Bear Stearns Companies Inc.
On March 16, 2008, JPMorgan Chase and The Bear Stearns Companies Inc. (Bear Stearns) entered into
an agreement to merge; the agreement was amended on March 24, 2008. The merger agreement, as
amended, has been approved by the boards of directors of both companies. It provides for a
stock-for-stock exchange in which 0.21753 shares of JPMorgan Chase common stock will be exchanged
for each share of Bear Stearns common stock. The merger will be accounted for using the purchase
method of accounting. The purchase price is currently estimated to be $1.5 billion. The merger,
which is expected to be completed by May 30, 2008, is subject to the approval of the stockholders
of Bear Stearns.
Concurrent with the closing of the merger, the Federal Reserve Bank of New York (the FRBNY) will
take control, through a limited liability company (LLC) formed for this purpose, of a portfolio
of $30 billion in assets of Bear Stearns, based on the value of the portfolio as of March 14, 2008.
The assets of the LLC will be funded by a $29 billion, 10-year term loan from the FRBNY, and a $1
billion, 10-year note from JPMorgan Chase. The JPMorgan Chase note will be subordinated to the
FRBNY loan and will bear the first $1 billion of any losses of the portfolio. Any remaining assets
in the portfolio after repayment of the FRBNY loan, the JPMorgan Chase note and the expense of the
LLC, will be for the account of the FRBNY.
5
In connection with the amended agreement, JPMorgan Chase and Bear Stearns also entered into a share
exchange agreement under which, on April 8, 2008, JPMorgan Chase acquired 95,000,000 newly issued
shares of Bear Stearns common stock (or 39.5% of Bear Stearns common stock after giving effect to
the issuance) for 20,665,350 shares of JPMorgan Chase common stock at the same exchange ratio as
provided in the amended merger agreement. Further, between March 24, 2008, and May 12, 2008,
JPMorgan Chase acquired approximately 24 million shares of Bear Stearns common stock in the open
market at an average purchase price of $11.27 per share. As of May 12, 2008, JPMorgan Chase
beneficially owned approximately 119 million shares of common stock of Bear Stearns, or
approximately 49.4% of the outstanding shares of common stock based on approximately 241 million
shares of common stock issued and outstanding.
In connection with the amended agreement, JPMorgan Chase agreed to guarantee liabilities of
Bear Stearns and certain of its subsidiaries arising under revolving and term loans, contracts
associated with Bear Stearns trading business and obligations to deliver cash, securities or
property to customers pursuant to customary custody arrangements. Other than following a termination of the merger agreement due to a change in recommendation by the board
of directors of Bear Stearns prompted by a competing transaction proposal, JPMorgan Chase's guarantee of these obligations up to the date of such termination would remain in effect. Also on March 24, 2008, JPMorgan
Chase entered into a separate guarantee under which it guaranteed the borrowings of Bear Stearns
and its subsidiaries from the FRBNY in order to ensure continued access by Bear Stearns to the
borrowings at the facility established by the FRBNY for primary dealers. For additional information
regarding these guarantees, see Note 22 on pages 103105 of this Form 10-Q.
Currently, there is a case pending in New York that asserts various claims against Bear Stearns and JPMorgan Chase, including breach of Delaware law and fiduciary duty, and which
seeks, among other things, to enjoin the proposed merger and an unspecified amount of compensatory damages.
Purchase of additional interest in Highbridge Capital Management
In January 2008, JPMorgan Chase purchased an additional equity interest in Highbridge Capital
Management, LLC (Highbridge). As a result, the Firm owns 77.5% of Highbridge as of March 31, 2008. Highbridge is a manager of hedge funds with $25 billion of assets
under management at March 31, 2008. The Firm had acquired a majority interest in Highbridge in
2004.
6
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 10-Q. For a more complete
understanding of events, trends and uncertainties, as well as the capital, liquidity, credit and
market risks, and the critical accounting estimates, affecting the Firm and its various lines of
business, this Form 10-Q should be read in its entirety.
Financial performance of JPMorgan Chase
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|
Three months ended March 31, |
(in millions, except per share and ratio data) |
|
2008 |
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|
2007 |
|
|
Change |
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
16,890 |
|
|
$ |
18,968 |
|
|
|
(11 |
)% |
Provision for credit losses |
|
|
4,424 |
|
|
|
1,008 |
|
|
|
339 |
|
Total noninterest expense |
|
|
8,931 |
|
|
|
10,628 |
|
|
|
(16 |
) |
Net income |
|
|
2,373 |
|
|
|
4,787 |
|
|
|
(50 |
) |
|
Earnings per share diluted |
|
$ |
0.68 |
|
|
$ |
1.34 |
|
|
|
(49 |
)% |
Return on common equity |
|
|
8 |
% |
|
|
17 |
% |
|
|
|
|
|
Business overview
The Firm reported 2008 first-quarter net income of $2.4 billion, or $0.68 per share, compared with
record net income of $4.8 billion, or $1.34 per share, for the first quarter of 2007. Return on
common equity for the quarter was 8%, compared with 17% in the prior year. Results in the first
quarter of 2008 reflected a significant increase in the provision for credit losses and a decline
in total net revenue, partially offset by a decrease in total noninterest expense. Total net
revenue declined primarily due to markdowns of $2.6 billion taken in the Investment Bank on prime,
Alt-A and subprime mortgages, and on leveraged lending funded and unfunded commitments. A lower level
of Private Equity gains also contributed to the decline in total net revenue. Partially offsetting
the decline in total net revenue was $1.5 billion in proceeds from
the sale of Visa shares in its initial public offering and wider
spreads on higher loan and deposit balances. The provision for
credit losses included an increase of $2.5 billion to the allowance for credit losses; $1.8 billion
of the increase was related to the home equity and mortgage loan portfolios as performance
continued to deteriorate. Total noninterest expense declined, primarily due to a decrease in
compensation expense.
U.S. economic activity in the first quarter of 2008 continued to be affected by the credit market
turmoil that began during the second half of 2007. U.S. real gross
domestic product grew slightly; consumer spending was relatively flat; the unemployment
rate increased; and employment at businesses declined. In
addition, food and energy costs increased and housing prices continued to
decline with prices approximately 15% below the peak levels achieved
in 2006. Funding markets remained challenging, with the differential between LIBOR rates and the expected federal
funds rates widening significantly. These economic strains were seen in market trends as the S&P
500 index declined almost 10% during the first quarter of 2008; long-term U.S. Treasury rates
declined approximately 50 basis points; credit spreads widened; and the dollar declined against
most major currencies. In response, the Federal Reserve took a number of actions including reducing
the federal funds rate by 200 basis points and boosting liquidity in the term funding markets. Global economic trends were mixed in the
first quarter: among the industrial economies, the U.K.s and Japans
slowed significantly, while Europes continued to expand at a
steady but slow pace despite the strength of the Euro;
most developing economies, especially those in Asia, continued to grow rapidly.
During the first quarter of 2008, the performance of the Firm was negatively affected by the
overall global economic environment. The Investment Bank incurred a loss for the
quarter reflecting significant markdowns related to mortgage and leveraged lending exposures.
Retail Financial Services also recorded a loss driven by a significantly higher provision for
credit losses due to ongoing weakness in the home equity and mortgage loan portfolios. Card
Services earnings decreased due to a higher level of net
charge-offs; Commercial Bank's earnings declined slightly as a
higher provision for credit losses more than offset increased revenue; and Asset Management results
declined as revenue flattened and expense increased. The Firm continued to invest in building each of its businesses, which helped to drive
revenue and market share growth. Treasury & Securities Services net income increased significantly as higher
revenue was partially offset by increased expense. RFS, CS, CB, and TSS each reported organic revenue growth. In addition, CB, TSS and AM increased deposits, assets under custody and assets under management, respectively. The
IB continued to gain market share across products and ranked #1 for global investment
banking fees and ranked #1, based on volume, for global debt, equity and equity-related. On March
16, 2008, the Firm announced the planned acquisition of Bear Stearns, which will add new
capabilities in prime brokerage
and clearing and is expected to strengthen equities, mortgage trading, commodities and asset
management. The transaction is expected to close by
7
May 30,
2008. However, as with any acquisition, its success will depend on
the Firms ability to successfully combine the Firms businesses with those
of Bear Stearns. See Risk Factors on pages 117118 of this Form 10-Q.
The discussion that follows highlights the current-quarter performance of each business segment,
compared with the prior-year quarter, and discusses results on a managed basis unless otherwise
noted. For more information about managed basis, see Explanation and Reconciliation of the Firms
Use of Non-GAAP Financial Measures on pages 1314 of this Form 10-Q.
Investment Bank recorded a net loss for the quarter, compared with record net income in the prior
year. The net loss reflected a significant decline in total net revenue and a higher provision for
credit losses offset partially by lower noninterest expense. Markdowns in fixed income markets on
prime, Alt-A and subprime mortgages, leveraged lending funded and unfunded commitments, and
collateralized debt obligation (CDO) warehouses and unsold positions drove the decrease in
revenue. In addition, equity markets results declined due to weak trading results and investment
banking fees decreased due primarily to lower debt and equity underwriting fees. Partially
offsetting these lower results was record revenue in rates and currencies. The higher provision for
credit losses was driven by an increase in the allowance for credit losses, reflecting the impact
of the transfer of funded and unfunded leveraged lending commitments to retained loans from held-for-sale loans and
the effect of a weakening credit environment. The decrease in total noninterest expense was due
primarily to lower performance-based compensation expense.
Retail Financial Services reported a net loss for the quarter due to a significant increase in the
provision for credit losses. Total net revenue increased from the prior year, primarily driven by
increased loan and deposit balances; wider loan spreads; higher volume and improved margins on
mortgage loan originations; increased deposit-related fees; and the absence of a prior-year charge
resulting from accelerated surrenders of customer annuity contracts. These benefits were offset
partially by markdowns on the mortgage warehouse and pipeline, a
shift to narrowerspread deposit
products and a decline in net mortgage servicing revenue. The substantial increase in the provision
was due primarily to an increase in estimated losses for the home equity and mortgage portfolios,
driven by continued weakness in the housing market. Total noninterest expense rose from the prior
year, reflecting higher mortgage production and servicing expense, and investment in the retail
distribution network.
Card Services net income decreased, driven by a higher provision for credit losses, partially
offset by growth in total managed net revenue. Total managed net revenue growth resulted primarily
from wider loan spreads, an increased level of fees and higher average managed loan balances. These
benefits were offset partially by the effect of higher revenue reversals associated with increased
charge-offs and the discontinuation of certain billing practices (including the elimination of
certain over-limit fees and the two-cycle billing method for calculating finance charges beginning
in the second quarter of 2007). The managed provision for credit losses increased from the prior
year due to a higher level of charge-offs and a prior-year release of the allowance for loan
losses. Higher marketing expense drove the increase in total noninterest expense.
Commercial Banking net income declined slightly as an increase in the provision for credit losses
was largely offset by growth in total net revenue. The growth in total net revenue resulted from
double-digit growth in liability and loan balances and higher deposit-related, credit card and
lending fees. These benefits to revenue were offset primarily by spread compression in the
liability and loan portfolios, a continued shift to narrower-spread liability products, and lower
gains related to the sale of securities acquired in the satisfaction of debt. The increase in the
provision for credit losses largely reflected growth in loan balances and the effect of the
weakening credit environment. Total noninterest expense was flat compared with the prior year.
Treasury & Securities Services net income increased, driven by higher total net revenue, partially
offset by higher total noninterest expense. Both Worldwide Securities Services and Treasury
Services posted double-digit revenue growth. Worldwide Securities Services growth was driven by
increased product usage by new and existing clients and wider spreads in securities lending and
foreign exchange offset partially by spread compression on liability products. Treasury Services
net revenue reflected higher liability balances and wider market-driven spreads, as well as growth
in electronic and trade loan volumes. Total noninterest expense was up, reflecting higher expense
related to business and volume growth, as well as investment in new product platforms.
Asset Management net income decreased from the prior year due primarily to higher total noninterest
expense, lower performance fees and lower market valuations for seed capital investments in
JPMorgan funds. These results were offset partially by increased revenue from asset inflows, and
growth in deposit and loan balances. The provision for credit losses increased from a benefit in
the prior year, primarily driven by an increase in loan balances and a lower level of recoveries.
The increase in total noninterest expense was due primarily to higher compensation expense,
reflecting increased headcount.
8
Corporate/Private Equity net income included proceeds from the sale of Visa shares in its initial
public offering in the first quarter of 2008. Excluding the impact of the sale of Visa shares, net
income decreased, driven by lower results in Private Equity and by a narrower net interest spread,
trading losses and an increase in the provision for credit losses in Corporate. These lower results
were offset partially by lower total noninterest expense, primarily due to a net release of
litigation reserves.
The Firms managed provision for credit losses was $5.1 billion, up $3.5 billion from the prior
year. The wholesale provision for credit losses was $747 million, compared with $77 million in the
prior year, reflecting an increase in the allowance for credit losses, primarily related to the
transfer of funded and unfunded leveraged lending commitments to retained loans from held-for-sale.
In addition, the allowance reflected the effect of a weakening credit environment. Wholesale net
charge-offs were $92 million, compared with net recoveries of $6 million, resulting in net
charge-off and recovery rates of 0.18% and 0.02%, respectively. The total consumer managed
provision for credit losses was $4.4 billion, compared with $1.5 billion in the prior year,
reflecting increases in the allowance for credit losses largely related to home equity and subprime
mortgage loans and higher net charge-offs. Consumer managed net charge-offs were $2.5 billion,
compared with $1.5 billion, resulting in a managed net charge-off rate of 2.68% and 1.81%,
respectively. The Firm had total nonperforming assets of $5.4 billion at March 31, 2008, up from
the prior-year level of $2.4 billion.
Total stockholders equity at March 31, 2008, was $125.6 billion, and the Tier 1 capital ratio was
8.3%, compared with 8.5% at March 31, 2007.
Business outlook
The following forward-looking statements are based upon the current beliefs and expectations of
JPMorgan Chases management and are subject to significant risks and uncertainties. These risks and
uncertainties could cause JPMorgan Chases results to differ materially from those set forth in
such forward-looking statements.
JPMorgan Chases outlook for the second quarter of 2008 should be viewed against the backdrop of
the global and U.S. economies (which currently are extremely volatile), financial markets activity
(including interest rate movements), the geopolitical environment, the competitive environment and
client activity levels. Each of these linked factors will affect the performance of the Firm and
its lines of business. The Firms current expectations are for the global and U.S. economic
environments to continue to be weak, for capital markets to remain under stress and for a
continued decline in U.S. housing prices. These factors have affected, and are likely to continue
to negatively impact, the Firms credit losses, overall business volumes and earnings.
The consumer provision for credit losses could increase substantially as a result of a higher level
of losses in Retail Financial Services $95.0 billion home
equity loan portfolio and $15.8 billion
retained subprime mortgage loan portfolio; and in the $45.1 billion prime mortgage loan portfolio (mostly held in the Corporate
segment). Given the potential stress on the consumer from the
continued downward pressure on housing prices and the elevated inventory of unsold houses
nationally, management remains extremely cautious with respect to the
home equity, mortgage and credit card portfolios. Based on managements current economic outlook, home equity net
charge-offs could potentially double by the fourth quarter of 2008 from the level experienced in
the first quarter of 2008 and the net charge-off rate for Card Services could potentially increase
to approximately 5.00% during 2008. Net charge-offs for home equity,
mortgage and credit card portfolios could
be higher depending on factors such as changes in housing prices, unemployment levels and consumer
behavior. The wholesale provision for credit losses may also increase over time as a result of loan
growth, portfolio activity and changes in underlying credit conditions.
The
Investment Bank continues to be negatively affected by the disruption in the credit and mortgage markets,
as well as by overall lower levels of liquidity and wider credit
spreads. Continuation of these factors could
potentially lead to reduced levels of client activity, difficulty in syndicating leveraged loans,
lower investment banking fees and lower trading revenue. The Firms trading results could also be affected by the tightening of credit spreads. Assets
with currently impaired values could recover a portion of previous markdowns; however, if the Firms own credit
spreads tighten, the fair value of certain liabilities would be reduced, which would negatively affect
trading results. While some leveraged finance loans were
sold during the first quarter of 2008, the Firm held $22.5 billion of leveraged loans and unfunded
commitments as held-for-sale as of March 31, 2008. Markdowns in excess of 11% have been taken on
the leveraged lending positions as of March 31, 2008. These positions are difficult to hedge
effectively and if market conditions deteriorate further in the second quarter of 2008, further
markdowns may be necessary on this asset class. The Investment Bank also held, at March 31, 2008,
an aggregate $12.8 billion of prime and Alt-A mortgage exposure and $1.9 billion of subprime
mortgage exposures which could also be negatively affected by market
conditions. In addition, $3.1 billion
of auction-rate securities with low maximum reset rates were held on balance sheet due to a significant reduction in liquidity
as a result of credit concerns with monoline bond insurers. Other exposures as
of March 31, 2008 that have higher levels of risk given the current market environment include: CDO
warehouse and unsold positions of $4.4 billion (over 90% corporate loans and bonds) and Commercial
Mortgage-Backed
9
Securities (CMBS) exposure of
$13.5 billion. In addition, the Firms exposures to these asset
classes are likely
to increase upon completion of the Bear Stearns merger. See Risk
Factors on pages 117118 of this Form 10-Q.
A
weaker economy, lower equity markets, lower volatility in certain
products and narrow spreads (which had been driven wider by recent
market conditions) in the second quarter of 2008 could also adversely affect business
volumes, and levels of assets under custody and assets under management, which could result in lower earnings in
Treasury & Securities Services and Asset Management. Management continues to believe that the net
loss in Corporate will be approximately $50 million to $100 million per quarter. Private Equity
results, which are dependent upon the capital markets, could continue to be volatile and may be
significantly lower in 2008 than in 2007.
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chases Consolidated Results of
Operations on a reported basis. Factors that related primarily to a single business segment are
discussed in more detail within that business segment. For a discussion of the Critical Accounting
Estimates Used by the Firm that affect the Consolidated Results of
Operations, see pages 6567 of
this Form 10-Q and pages 9698 of JPMorgan Chases 2007 Annual Report.
Total net revenue
The following table presents the components of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Investment banking fees |
|
$ |
1,216 |
|
|
$ |
1,739 |
|
|
|
(30 |
)% |
Principal transactions |
|
|
(803 |
) |
|
|
4,487 |
|
|
NM |
|
Lending & deposit-related fees |
|
|
1,039 |
|
|
|
895 |
|
|
|
16 |
|
Asset management, administration and commissions |
|
|
3,596 |
|
|
|
3,186 |
|
|
|
13 |
|
Securities gains (losses) |
|
|
33 |
|
|
|
2 |
|
|
NM |
|
Mortgage fees and related income |
|
|
525 |
|
|
|
476 |
|
|
|
10 |
|
Credit card income |
|
|
1,796 |
|
|
|
1,563 |
|
|
|
15 |
|
Other income |
|
|
1,829 |
|
|
|
518 |
|
|
|
253 |
|
|
Noninterest revenue |
|
|
9,231 |
|
|
|
12,866 |
|
|
|
(28 |
) |
Net interest income |
|
|
7,659 |
|
|
|
6,102 |
|
|
|
26 |
|
|
Total net revenue |
|
$ |
16,890 |
|
|
$ |
18,968 |
|
|
|
(11 |
) |
|
Total net revenue for the first quarter of 2008 was $16.9 billion, down $2.1 billion, or 11%, from
the first quarter of 2007. The decline was due to losses on principal transactions activities
compared with the record level of gains achieved in the first quarter of 2007. The swing in the
results reflected markdowns taken in the Investment Bank on mortgage-related positions, leveraged
lending commitments, CDO warehouses and unsold positions, as well as lower levels of private equity
gains. Lower investment banking fees also contributed to the decline in net revenue. The decline
was offset partially by higher net interest income, proceeds from the sale of Visa shares in its
initial public offering and an increase in asset management, administration and commissions
revenue, which reflected higher brokerage commissions and growth in assets under custody and
management.
Investment banking fees in the first quarter of 2008 declined from the near-record level in the
first quarter of last year. Lower debt and equity underwriting fees more than offset the slight
rise in advisory fees. For a further discussion of investment banking fees, which are primarily
recorded in IB, see the IB segment results on pages 1619 of this Form 10-Q.
Principal transactions revenue consists of trading revenue and private equity gains. The Firms
trading activities in the first quarter of 2008 resulted in a net loss in contrast with the record
level of gains achieved in the first quarter of 2007. The net loss was due primarily to markdowns
of $1.2 billion on prime, Alt-A and subprime mortgages; markdowns of $1.1 billion on leveraged
lending funded and unfunded commitments; and markdowns of $266 million on CDO warehouses and unsold
positions. These markdowns were offset partially by record revenue in rates and currencies, and a
combined benefit of $949 million from the widening of the Firms credit spread on certain
structured liabilities. Private equity gains declined significantly driven by lower gains of $200
million, compared with gains of $1.3 billion in the prior year, which included a fair value
adjustment related to the adoption of SFAS 157 (Fair Value Measurements). For a further
discussion of principal transactions revenue, see the IB and Corporate/Private Equity segment
results on pages 1619 and 3637, respectively, and
Note 5 on pages 8183 of this Form 10-Q.
Lending & deposit-related fees rose from the first quarter of 2007, primarily as a result of higher
deposit-related fees. For a further discussion of lending & deposit-related fees, which are mostly
recorded in RFS, TSS and CB, see the RFS segment results on pages
2026, the TSS segment results
on pages 3132, and the CB segment results on pages 2930 of this Form 10-Q.
10
The increase in asset management, administration and commissions revenue compared with the first
quarter of 2007 was primarily due to increased commissions revenue due mainly to higher brokerage
transaction volume (primarily included within fixed income and equity markets revenue of IB) and
the absence of a charge in RFS in the first quarter of 2007 resulting from accelerated surrenders
of customer annuity contracts. TSS also contributed to the increase in asset management,
administration and commissions, driven by increased product usage by new and existing clients
(primarily in custody, fund and alternative investment services and depositary receipts). Finally,
asset management fees in AM were up slightly as growth in assets under management, due primarily to
liquidity product inflows across segments and alternative product inflows in Institutional and
Private Bank segments, were largely offset by lower performance fees. For additional information on
these fees and commissions, see the segment discussions for IB on pages 1619, RFS on pages
2026, TSS on pages 3132, and AM on pages 3335, of this Form 10-Q.
The increase in securities gains for the first quarter of 2008, compared with the same period in
2007, was primarily driven by repositioning of the Corporate investment securities portfolio. For a
further discussion of securities gains, which are mostly recorded in the Firms Corporate business,
see the Corporate/Private Equity segment discussion on pages 3637 of this Form 10-Q.
Mortgage fees and related income increased from the first quarter of 2007, due primarily to higher
production revenue, which benefited from higher volume and improved margins on mortgage loan
originations, partially offset by markdowns on the mortgage warehouse and pipeline. For a
discussion of mortgage fees and related income, which is recorded primarily in RFSs Mortgage
Banking business, see the Mortgage Banking discussion on pages 2425 of this Form 10-Q.
Credit card income increased from the first quarter of 2007, due primarily to higher servicing fees
earned in connection with securitization activities. The higher fees were primarily a result of
wider loan margins offset partially by higher net credit losses. For a further discussion of credit
card income, see CSs segment results on pages 2628 of this Form 10-Q.
The increase in other income from the first quarter of 2007 was due primarily to the proceeds from
the sale of Visa shares in its initial public offering ($1.5 billion pretax) and higher credit card
net securitization gains. These gains were offset partially by markdowns on certain investments,
higher losses on other real estate owned and lower gains related to the sale of securities acquired
in the satisfaction of debt.
Net interest income rose from the first quarter of 2007, primarily due to the following: higher
trading-related net interest income, wider spreads on higher balances of consumer loans, and growth
in liability and deposit balances in the wholesale and consumer businesses. These benefits were
offset partly by a narrower net interest spread in Corporate and spread compression on deposit and
liability products. The Firms total average interest-earning assets for the first quarter of 2008
were $1.2 trillion, up 15% from the first quarter of 2007. The increase was primarily driven by
higher trading assets debt instruments, loans, federal funds sold & securities purchased under
resale agreements, and deposits with banks, partially offset by a decline in available-for-sale
(AFS) securities. The net interest yield on these assets, on a fully taxable equivalent basis,
was 2.59%, an increase of 21 basis points from the first quarter of 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Provision for credit losses |
|
$ |
4,424 |
|
|
$ |
1,008 |
|
|
|
339 |
% |
|
The provision for credit losses increased significantly from the first quarter of 2007, due to
increases in both the consumer and wholesale provisions. The increase in the consumer provision
reflected increases in estimated losses for the home equity and mortgage loan portfolios and higher
net charge-offs. The increase in the wholesale provision reflected an increase in the allowance for
credit losses, primarily related to the transfer of funded and unfunded leveraged lending
commitments to retained loans from held-for-sale loans and the effect of a weakening credit
environment. For a more detailed discussion of the loan portfolio and the allowance for loan
losses, see the segment discussions for RFS on pages 2026, CS on pages 2628, IB on pages
1619, CB on pages 2930 and Credit Risk Management on pages 4861 of this Form 10-Q.
11
Noninterest expense
The following table presents the components of noninterest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Compensation expense |
|
$ |
4,951 |
|
|
$ |
6,234 |
|
|
|
(21 |
)% |
Occupancy expense |
|
|
648 |
|
|
|
640 |
|
|
|
1 |
|
Technology, communications and equipment expense |
|
|
968 |
|
|
|
922 |
|
|
|
5 |
|
Professional & outside services |
|
|
1,333 |
|
|
|
1,200 |
|
|
|
11 |
|
Marketing |
|
|
546 |
|
|
|
482 |
|
|
|
13 |
|
Other expense |
|
|
169 |
|
|
|
735 |
|
|
|
(77 |
) |
Amortization of intangibles |
|
|
316 |
|
|
|
353 |
|
|
|
(10 |
) |
Merger costs |
|
|
|
|
|
|
62 |
|
|
NM |
|
|
|
|
|
|
Total noninterest expense |
|
$ |
8,931 |
|
|
$ |
10,628 |
|
|
|
(16 |
) |
|
Total noninterest expense for the first quarter of 2008 was $8.9 billion, down $1.7 billion, or
16%, from the first quarter of 2007. The decline was driven by lower performance-based compensation
and a net reduction of litigation expense.
The decrease in compensation expense from the first quarter of 2007 was primarily the result of
lower performance-based incentives, partially offset by additional headcount due to investment in
the businesses.
Technology, communications and equipment expense increased moderately compared with the first
quarter of 2007, due primarily to higher depreciation expense on owned automobiles subject to
operating leases in the Auto Finance business in RFS and higher technology expense related to
business growth.
Professional & outside services rose from the prior year, primarily reflecting higher brokerage
expense in IB; investments in new product platforms in TSS; and higher expense related to business
and volume growth in TSS and other businesses. The increase was offset partially by lower outside
processing expense in CS.
Marketing expense increased, compared with the first quarter of 2007, due to higher credit card
marketing expense.
The significant decrease in other expense, compared with the first quarter of 2007, was due largely
to a net reduction of litigation expense.
For a discussion of amortization of intangibles, refer to Note 16 on pages 98101 of this Form
10-Q.
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) |
|
2008 |
|
|
2007 |
|
|
Income before income tax expense |
|
$ |
3,535 |
|
|
$ |
7,332 |
|
Income tax expense |
|
|
1,162 |
|
|
|
2,545 |
|
Effective tax rate |
|
|
32.9 |
% |
|
|
34.7 |
% |
|
The decrease in the effective tax rate compared with the prior year was primarily the result of
lower reported pretax income combined with changes in the proportion of income subject to federal,
state and local taxes.
12
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
6972 of this Form 10-Q. 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 assume credit card loans securitized by CS remain on the balance sheet and
presents revenue on a fully taxable-equivalent (FTE) basis. These adjustments do not have any
impact on net income as reported by the lines of business or by the Firm as a whole.
The presentation of CS results on a managed basis assumes that credit card loans that have been
securitized and sold in accordance with SFAS 140 still remain on the Consolidated Balance Sheets
and that the earnings on the securitized loans are classified in the same manner as the earnings on
retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase uses the concept of
managed basis to evaluate the credit performance and overall financial performance of the entire
managed credit card portfolio. Operations are funded and decisions are made about allocating
resources, such as employees and capital, based upon managed financial information. In addition,
the same underwriting standards and ongoing risk monitoring are used for both loans on the
Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale of
credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as
the customers may continue to use their credit cards; accordingly, the customers credit
performance will affect both the securitized loans and the loans retained on the Consolidated
Balance Sheets. JPMorgan Chase believes managed basis information is useful to investors, enabling
them to understand both the credit risks associated with the loans reported on the Consolidated
Balance Sheets and the Firms retained interests in securitized loans. For a reconciliation of
reported to managed basis results for CS, see CS segment results on pages 2628 of this Form 10-Q.
For information regarding the securitization process, and loans and residual interests sold and
securitized, see Note 14 on pages 8994 of this Form 10-Q.
Total net revenue for each of the business segments and the Firm is presented on an FTE basis.
Accordingly, revenue from tax-exempt securities and investments that receive tax credits is
presented in the managed results on a basis comparable to taxable securities and investments. This
non-GAAP financial measure allows management to assess the comparability of revenue arising from
both taxable and tax-exempt sources. The corresponding income tax impact related to these items is
recorded within income tax expense.
Management also uses certain non-GAAP financial measures at the business segment level because it
believes these other non-GAAP financial measures provide information to investors about the
underlying operational performance and trends of the particular business segment and therefore
facilitate a comparison of the business segment with the performance of its competitors.
13
The following summary table provides a reconciliation from the Firms reported U.S. GAAP results to
managed basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Fully |
|
|
|
|
Reported |
|
Credit |
|
tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(a) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,216 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,216 |
|
Principal transactions |
|
|
(803 |
) |
|
|
|
|
|
|
|
|
|
|
(803 |
) |
Lending & deposit-related fees |
|
|
1,039 |
|
|
|
|
|
|
|
|
|
|
|
1,039 |
|
Asset management, administration and commissions |
|
|
3,596 |
|
|
|
|
|
|
|
|
|
|
|
3,596 |
|
Securities gains |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
Mortgage fees and related income |
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
525 |
|
Credit card income |
|
|
1,796 |
|
|
|
(937 |
) |
|
|
|
|
|
|
859 |
|
Other income |
|
|
1,829 |
|
|
|
|
|
|
|
203 |
|
|
|
2,032 |
|
|
Noninterest revenue |
|
|
9,231 |
|
|
|
(937 |
) |
|
|
203 |
|
|
|
8,497 |
|
Net interest income |
|
|
7,659 |
|
|
|
1,618 |
|
|
|
124 |
|
|
|
9,401 |
|
|
Total net revenue |
|
|
16,890 |
|
|
|
681 |
|
|
|
327 |
|
|
|
17,898 |
|
Provision for credit losses |
|
|
4,424 |
|
|
|
681 |
|
|
|
|
|
|
|
5,105 |
|
Noninterest expense |
|
|
8,931 |
|
|
|
|
|
|
|
|
|
|
|
8,931 |
|
|
Income before income tax expense |
|
|
3,535 |
|
|
|
|
|
|
|
327 |
|
|
|
3,862 |
|
Income tax expense |
|
|
1,162 |
|
|
|
|
|
|
|
327 |
|
|
|
1,489 |
|
|
Net income |
|
$ |
2,373 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,373 |
|
|
Diluted earnings per share |
|
$ |
0.68 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.68 |
|
|
Return on common equity |
|
|
8 |
% |
|
|
|
% |
|
|
|
% |
|
|
8 |
% |
Return on equity less goodwill |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Return on assets |
|
|
0.61 |
|
|
NM |
|
|
NM |
|
|
|
0.58 |
|
Overhead ratio |
|
|
53 |
|
|
NM |
|
|
NM |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Fully |
|
|
|
|
Reported |
|
Credit |
|
tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(a) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,739 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,739 |
|
Principal transactions |
|
|
4,487 |
|
|
|
|
|
|
|
|
|
|
|
4,487 |
|
Lending & deposit-related fees |
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
895 |
|
Asset management, administration and commissions |
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
|
3,186 |
|
Securities gains |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Mortgage fees and related income |
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
476 |
|
Credit card income |
|
|
1,563 |
|
|
|
(746 |
) |
|
|
|
|
|
|
817 |
|
Other income |
|
|
518 |
|
|
|
|
|
|
|
110 |
|
|
|
628 |
|
|
Noninterest revenue |
|
|
12,866 |
|
|
|
(746 |
) |
|
|
110 |
|
|
|
12,230 |
|
Net interest income |
|
|
6,102 |
|
|
|
1,339 |
|
|
|
70 |
|
|
|
7,511 |
|
|
Total net revenue |
|
|
18,968 |
|
|
|
593 |
|
|
|
180 |
|
|
|
19,741 |
|
Provision for credit losses |
|
|
1,008 |
|
|
|
593 |
|
|
|
|
|
|
|
1,601 |
|
Noninterest expense |
|
|
10,628 |
|
|
|
|
|
|
|
|
|
|
|
10,628 |
|
|
Income before income tax expense |
|
|
7,332 |
|
|
|
|
|
|
|
180 |
|
|
|
7,512 |
|
Income tax expense |
|
|
2,545 |
|
|
|
|
|
|
|
180 |
|
|
|
2,725 |
|
|
Net income |
|
$ |
4,787 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,787 |
|
|
Diluted earnings per share |
|
$ |
1.34 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.34 |
|
|
Return on common equity |
|
|
17 |
% |
|
|
|
% |
|
|
|
% |
|
|
17 |
% |
Return on equity less goodwill |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Return on assets |
|
|
1.41 |
|
|
NM |
|
|
NM |
|
|
|
1.34 |
|
Overhead ratio |
|
|
56 |
|
|
NM |
|
|
NM |
|
|
|
54 |
|
|
|
|
|
(a) |
|
Credit card securitizations affect CS. See pages 2628 of this Form 10-Q for further
information. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2008 |
|
2007 |
(in millions) |
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Loans Period-end |
|
$ |
537,056 |
|
|
$ |
75,062 |
|
|
$ |
612,118 |
|
|
$ |
449,765 |
|
|
$ |
68,403 |
|
|
$ |
518,168 |
|
Total assets
average |
|
|
1,569,797 |
|
|
|
71,589 |
|
|
|
1,641,386 |
|
|
|
1,378,915 |
|
|
|
65,114 |
|
|
|
1,444,029 |
|
|
14
BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business basis. The business segment financial results presented
reflect the current organization of JPMorgan Chase. There are six major reportable business
segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking,
Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment.
The business segments are determined 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 further
discussion of Business Segment Results, see pages 3839 of JPMorgan Chases 2007 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 business segment results
allocates income and expense using market-based methodologies. For a further discussion of those
methodologies, see Business Segment Results Description of business segment reporting
methodology on page 38 of JPMorgan Chases 2007 Annual Report. The Firm continues to assess the
assumptions, methodologies and reporting classifications used for segment reporting, and further
refinements may be implemented in future periods.
Segment Results Managed Basis(a)
The following table summarizes the business segment results for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return |
|
March 31, |
|
Total net revenue |
|
|
Noninterest expense |
|
|
Net income (loss) |
|
|
on equity |
|
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Investment Bank |
|
$ |
3,011 |
|
|
$ |
6,254 |
|
|
|
(52 |
)% |
|
$ |
2,553 |
|
|
$ |
3,831 |
|
|
|
(33 |
)% |
|
$ |
(87 |
) |
|
$ |
1,540 |
|
|
NM |
|
|
|
(2 |
)% |
|
|
30 |
% |
Retail Financial Services |
|
|
4,702 |
|
|
|
4,106 |
|
|
|
15 |
|
|
|
2,570 |
|
|
|
2,407 |
|
|
|
7 |
|
|
|
(227 |
) |
|
|
859 |
|
|
NM |
|
|
|
(5 |
) |
|
|
22 |
|
Card Services |
|
|
3,904 |
|
|
|
3,680 |
|
|
|
6 |
|
|
|
1,272 |
|
|
|
1,241 |
|
|
|
2 |
|
|
|
609 |
|
|
|
765 |
|
|
|
(20 |
)% |
|
|
17 |
|
|
|
22 |
|
Commercial Banking |
|
|
1,067 |
|
|
|
1,003 |
|
|
|
6 |
|
|
|
485 |
|
|
|
485 |
|
|
|
|
|
|
|
292 |
|
|
|
304 |
|
|
|
(4 |
) |
|
|
17 |
|
|
|
20 |
|
Treasury & Securities Services |
|
|
1,913 |
|
|
|
1,526 |
|
|
|
25 |
|
|
|
1,228 |
|
|
|
1,075 |
|
|
|
14 |
|
|
|
403 |
|
|
|
263 |
|
|
|
53 |
|
|
|
46 |
|
|
|
36 |
|
Asset Management |
|
|
1,901 |
|
|
|
1,904 |
|
|
|
|
|
|
|
1,323 |
|
|
|
1,235 |
|
|
|
7 |
|
|
|
356 |
|
|
|
425 |
|
|
|
(16 |
) |
|
|
29 |
|
|
|
46 |
|
Corporate/Private Equity |
|
|
1,400 |
|
|
|
1,268 |
|
|
|
10 |
|
|
|
(500 |
) |
|
|
354 |
|
|
NM |
|
|
|
1,027 |
|
|
|
631 |
|
|
|
63 |
|
|
NM |
|
|
NM |
|
|
Total |
|
$ |
17,898 |
|
|
$ |
19,741 |
|
|
|
(9 |
)% |
|
$ |
8,931 |
|
|
$ |
10,628 |
|
|
|
(16 |
)% |
|
$ |
2,373 |
|
|
$ |
4,787 |
|
|
|
(50 |
)% |
|
|
8 |
% |
|
|
17 |
% |
|
|
|
|
(a) |
|
Represents reported results on a tax-equivalent basis and excludes the impact of credit card
securitizations. |
15
INVESTMENT BANK
For a discussion of the business profile of the IB, see pages 4042 of JPMorgan Chases 2007
Annual Report and page 4 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,206 |
|
|
$ |
1,729 |
|
|
|
(30 |
)% |
Principal transactions |
|
|
(798 |
) |
|
|
3,142 |
|
|
NM |
|
Lending & deposit-related fees |
|
|
102 |
|
|
|
93 |
|
|
|
10 |
|
Asset management, administration and commissions |
|
|
744 |
|
|
|
641 |
|
|
|
16 |
|
All other income |
|
|
(66 |
) |
|
|
42 |
|
|
NM |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,188 |
|
|
|
5,647 |
|
|
|
(79 |
) |
Net interest income |
|
|
1,823 |
|
|
|
607 |
|
|
|
200 |
|
|
|
|
|
|
|
Total net revenue(a) |
|
|
3,011 |
|
|
|
6,254 |
|
|
|
(52 |
) |
Provision for credit losses |
|
|
618 |
|
|
|
63 |
|
|
NM |
|
Credit reimbursement from TSS(b) |
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
1,241 |
|
|
|
2,637 |
|
|
|
(53 |
) |
Noncompensation expense |
|
|
1,312 |
|
|
|
1,194 |
|
|
|
10 |
|
|
|
|
|
|
Total noninterest expense |
|
|
2,553 |
|
|
|
3,831 |
|
|
|
(33 |
) |
|
|
|
|
|
Income (loss) before income tax expense |
|
|
(130 |
) |
|
|
2,390 |
|
|
NM |
|
Income tax expense (benefit) |
|
|
(43 |
) |
|
|
850 |
|
|
NM |
|
|
|
|
|
|
Net income (loss) |
|
$ |
(87 |
) |
|
$ |
1,540 |
|
|
NM |
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
(2 |
)% |
|
|
30 |
% |
|
|
|
|
ROA |
|
|
(0.05 |
) |
|
|
0.95 |
|
|
|
|
|
Overhead ratio |
|
|
85 |
|
|
|
61 |
|
|
|
|
|
Compensation expense as a % of total net revenue |
|
|
41 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
Advisory |
|
$ |
483 |
|
|
$ |
472 |
|
|
|
2 |
|
Equity underwriting |
|
|
359 |
|
|
|
393 |
|
|
|
(9 |
) |
Debt underwriting |
|
|
364 |
|
|
|
864 |
|
|
|
(58 |
) |
|
|
|
|
|
Total investment banking fees |
|
|
1,206 |
|
|
|
1,729 |
|
|
|
(30 |
) |
Fixed income markets |
|
|
466 |
|
|
|
2,592 |
|
|
|
(82 |
) |
Equity markets |
|
|
976 |
|
|
|
1,539 |
|
|
|
(37 |
) |
Credit portfolio |
|
|
363 |
|
|
|
394 |
|
|
|
(8 |
) |
|
|
|
|
|
Total net revenue |
|
$ |
3,011 |
|
|
$ |
6,254 |
|
|
|
(52 |
) |
|
|
|
|
|
|
Revenue by region |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
536 |
|
|
$ |
3,366 |
|
|
|
(84 |
) |
Europe/Middle East/Africa |
|
|
1,641 |
|
|
|
2,251 |
|
|
|
(27 |
) |
Asia/Pacific |
|
|
834 |
|
|
|
637 |
|
|
|
31 |
|
|
|
|
|
|
Total net revenue |
|
$ |
3,011 |
|
|
$ |
6,254 |
|
|
|
(52 |
) |
|
|
|
|
(a) |
|
Total net revenue included tax-equivalent adjustments, primarily due to tax-exempt income
from municipal bond investments and income tax credits related to affordable housing
investments, of $289 million and $152 million for the quarters ended March 31, 2008 and
2007, 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. |
16
Quarterly results
Net loss was $87 million, a decline from record net income of $1.5 billion in the prior year. The
lower results reflected a decline in total net revenue and a higher provision for credit losses
offset partially by lower noninterest expense.
Total net revenue was $3.0 billion, a decline of $3.2 billion, or 52%, from the prior year.
Investment banking fees were $1.2 billion, down 30% from the prior year, reflecting lower debt and
equity underwriting fees. Debt underwriting fees of $364 million declined 58%, reflecting lower
bond underwriting and loan syndication fees, which were negatively affected by market conditions.
Equity underwriting fees were $359 million, down 9% from the prior year. Advisory fees of $483
million were up slightly from the prior year. Fixed income markets revenue was $466 million, down
$2.1 billion, or 82%, from the prior year. The decline was due primarily to markdowns of $1.2
billion on prime, Alt-A and subprime mortgages; markdowns of $1.1 billion on leveraged lending
funded and unfunded commitments; and markdowns of $266 million on CDO warehouses and unsold
positions. These markdowns were offset partially by record revenue in rates and currencies. Equity
markets revenue was $1.0 billion, down 37% from the prior year, as weak trading results were offset
partially by strong client revenue across businesses. Fixed income markets and equity markets
results included a combined benefit of $949 million from the widening of the Firms credit spread
on certain structured liabilities, with an impact of $662 million and $287 million, respectively.
Credit portfolio revenue was $363 million, down $31 million, or 8%, from the prior year.
The provision for credit losses was $618 million, compared with $63 million in the prior year. The
current-quarter provision reflects an increase of $605 million in the allowance for credit losses,
reflecting the impact of the transfer of $4.9 billion of funded and unfunded leveraged lending commitments to retained
loans from held-for-sale loans and the effect of a weakening credit environment. Net charge-offs
were $13 million, compared with net recoveries of $6 million in the prior year. The allowance for
loan losses to total loans retained was 2.55% for the current quarter, an increase from 1.76% in
the prior year.
Average loans retained were $74.1 billion, an increase of $15.1 billion, or 26%, from the prior
year, principally driven by growth in acquisition finance activity, including leveraged lending.
Average fair value and held-for-sale loans were $19.6 billion, up $5.9 billion, or 43%, from the
prior year.
Noninterest expense was $2.6 billion, a decrease of $1.3 billion, or 33%, from the prior year. The
decline was due to lower performance-based compensation expense.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount and ratio data) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
755,828 |
|
|
$ |
658,724 |
|
|
|
15 |
% |
Trading assetsdebt and equity instruments |
|
|
369,456 |
|
|
|
335,118 |
|
|
|
10 |
|
Trading assetsderivatives receivables |
|
|
90,234 |
|
|
|
56,398 |
|
|
|
60 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained(a) |
|
|
74,106 |
|
|
|
58,973 |
|
|
|
26 |
|
Loans held-for-sale and loans at fair value |
|
|
19,612 |
|
|
|
13,684 |
|
|
|
43 |
|
|
|
|
|
|
Total loans |
|
|
93,718 |
|
|
|
72,657 |
|
|
|
29 |
|
Adjusted assets(b) |
|
|
662,419 |
|
|
|
572,017 |
|
|
|
16 |
|
Equity |
|
|
22,000 |
|
|
|
21,000 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
25,780 |
|
|
|
23,892 |
|
|
|
8 |
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
13 |
|
|
$ |
(6 |
) |
|
NM |
Nonperforming assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(c) |
|
|
321 |
|
|
|
92 |
|
|
|
249 |
|
Other nonperforming assets |
|
|
118 |
|
|
|
36 |
|
|
|
228 |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
1,891 |
|
|
|
1,037 |
|
|
|
82 |
|
Allowance for lending-related commitments |
|
|
607 |
|
|
|
310 |
|
|
|
96 |
|
|
|
|
|
|
Total allowance for credit losses |
|
|
2,498 |
|
|
|
1,347 |
|
|
|
85 |
|
|
Net charge-off (recovery) rate(c)(d) |
|
|
0.07 |
% |
|
|
(0.04 |
)% |
|
|
|
|
Allowance for loan losses to average loans(c)(d) |
|
|
2.55 |
(i) |
|
|
1.76 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans(c) |
|
|
683 |
|
|
|
1,178 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.34 |
|
|
|
0.13 |
|
|
|
|
|
Market riskaverage trading
and credit portfolio VAR(e) |
|
|
|
|
|
|
|
|
|
|
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
120 |
|
|
$ |
45 |
|
|
|
167 |
|
Foreign exchange |
|
|
35 |
|
|
|
19 |
|
|
|
84 |
|
Equities |
|
|
31 |
|
|
|
42 |
|
|
|
(26 |
) |
Commodities and other |
|
|
28 |
|
|
|
34 |
|
|
|
(18 |
) |
Diversification(f) |
|
|
(92 |
) |
|
|
(58 |
) |
|
|
(59 |
) |
|
|
|
|
|
Total trading VAR(g) |
|
|
122 |
|
|
|
82 |
|
|
|
49 |
|
Credit portfolio VAR(h) |
|
|
30 |
|
|
|
13 |
|
|
|
131 |
|
Diversification(f) |
|
|
(30 |
) |
|
|
(12 |
) |
|
|
(150 |
) |
|
|
|
|
|
Total trading and credit portfolio VAR |
|
$ |
122 |
|
|
$ |
83 |
|
|
|
47 |
|
|
|
|
|
(a) |
|
Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and
excluded loans at fair value. |
(b) |
|
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 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. IB believes an adjusted asset amount that excludes the assets discussed above, which
were considered to have a low risk profile, provides a more meaningful measure of balance
sheet leverage in the securities industry. |
(c) |
|
Nonperforming loans include loans held-for-sale and loans at fair value of $44 million and $4
million at March 31, 2008 and March 31, 2007, respectively, which were excluded from the
allowance coverage ratios. Nonperforming loans excluded distressed loans held-for-sale that
were purchased as part of IBs proprietary activities. |
(d) |
|
Loans held-for-sale and loans accounted for at fair value were excluded when calculating the
allowance coverage ratio and net charge-off (recovery) rate. |
(e) |
|
For a more complete description of value-at-risk (VAR), see pages 6162 of this Form 10-Q. |
(f) |
|
Average VARs were less than the sum of the VARs of their market risk components, which was
due to risk offsets resulting from portfolio diversification. The diversification effect
reflected the fact that the risks were not perfectly correlated. The risk of a portfolio of
positions is usually less than the sum of the risks of the positions themselves. |
(g) |
|
Trading VAR includes substantially all trading activities in IB; however, particular risk
parameters of certain products are not fully captured, for example, correlation risk or the
credit spread sensitivity of certain mortgage products. Trading VAR does not include VAR
related to held-for-sale funded loans and unfunded commitments, nor the debit valuation
adjustments (DVA) taken on derivative and structured liabilities to reflect the credit
quality of the Firm. See the DVA Sensitivity table on page 63 of this Form 10-Q for further
details. Trading VAR also does not include the MSR portfolio or VAR related to other corporate
functions, such as Corporate and Private Equity. |
18
|
|
|
(h) |
|
Included VAR on derivative credit valuation adjustments, hedges of the credit valuation
adjustment and mark-to-market hedges of the retained loan portfolio, which were all reported
in principal transactions revenue. The VAR does not include the retained loan portfolio. |
(i) |
|
The allowance for loan losses to period-end loans was 2.46% at March 31, 2008. |
According to Thomson Financial, in the first quarter of 2008, the Firm was ranked #1 in Global
Debt, Equity and Equity-Related; #4 in Global Equity and Equity-Related; #1 in Global Syndicated
Loans; #1 in Global Long-term Debt and #4 in Global Announced M&A based upon volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
Full Year 2007 |
Market shares and rankings(a) |
|
Market Share |
|
Rankings |
|
Market Share |
|
Rankings |
|
Global debt, equity and equity-related |
|
|
10 |
% |
|
|
#1 |
|
|
|
8 |
% |
|
|
#2 |
|
Global syndicated loans |
|
|
11 |
|
|
|
#1 |
|
|
|
13 |
|
|
|
#1 |
|
Global long-term debt |
|
|
10 |
|
|
|
#1 |
|
|
|
7 |
|
|
|
#3 |
|
Global equity and equity-related(b) |
|
|
7 |
|
|
|
#4 |
|
|
|
9 |
|
|
|
#2 |
|
Global announced M&A |
|
|
27 |
|
|
|
#4 |
|
|
|
27 |
|
|
|
#4 |
|
U.S. debt, equity and equity-related |
|
|
15 |
|
|
|
#1 |
|
|
|
10 |
|
|
|
#2 |
|
U.S. syndicated loans |
|
|
27 |
|
|
|
#1 |
|
|
|
24 |
|
|
|
#1 |
|
U.S. long-term debt |
|
|
15 |
|
|
|
#1 |
|
|
|
12 |
|
|
|
#2 |
|
U.S. equity and equity-related(b) |
|
|
9 |
|
|
|
#4 |
|
|
|
11 |
|
|
|
#5 |
|
U.S. announced M&A |
|
|
40 |
|
|
|
#3 |
|
|
|
28 |
|
|
|
#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%.
Global and U.S. announced M&A market share and rankings for 2007 included transactions
withdrawn since December 31, 2007. |
(b) |
|
Includes rights
offerings; U.S. domiciled equity and equity-related transactions, per Thomson
Financial. |
19
RETAIL FINANCIAL SERVICES
For a
discussion of the business profile of RFS, see pages 4348 of JPMorgan Chases 2007 Annual
Report and page 4 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit-related fees |
|
$ |
461 |
|
|
$ |
423 |
|
|
|
9 |
% |
Asset management, administration and commissions |
|
|
377 |
|
|
|
263 |
|
|
|
43 |
|
Mortgage fees and related income |
|
|
525 |
|
|
|
482 |
|
|
|
9 |
|
Credit card income |
|
|
174 |
|
|
|
142 |
|
|
|
23 |
|
Other income |
|
|
154 |
|
|
|
179 |
|
|
|
(14 |
) |
|
|
|
|
|
Noninterest revenue |
|
|
1,691 |
|
|
|
1,489 |
|
|
|
14 |
|
Net interest income |
|
|
3,011 |
|
|
|
2,617 |
|
|
|
15 |
|
|
|
|
|
|
Total net revenue |
|
|
4,702 |
|
|
|
4,106 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
2,492 |
|
|
|
292 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
1,160 |
|
|
|
1,065 |
|
|
|
9 |
|
Noncompensation expense |
|
|
1,310 |
|
|
|
1,224 |
|
|
|
7 |
|
Amortization of intangibles |
|
|
100 |
|
|
|
118 |
|
|
|
(15 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
2,570 |
|
|
|
2,407 |
|
|
|
7 |
|
|
|
|
|
|
Income (loss) before income tax expense |
|
|
(360 |
) |
|
|
1,407 |
|
|
NM |
|
Income tax expense (benefit) |
|
|
(133 |
) |
|
|
548 |
|
|
NM |
|
|
|
|
|
|
Net income (loss) |
|
$ |
(227 |
) |
|
$ |
859 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
(5 |
)% |
|
|
22 |
% |
|
|
|
|
Overhead ratio |
|
|
55 |
|
|
|
59 |
|
|
|
|
|
Overhead ratio excluding core deposit intangibles(a) |
|
|
53 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
(a) |
|
Retail Financial Services uses the overhead ratio (excluding the amortization of core deposit
intangibles (CDI)), a non-GAAP financial measure, to evaluate the underlying expense trends
of the business. Including CDI amortization expense in the overhead ratio calculation results
in a higher overhead ratio in the earlier years and a lower overhead ratio in later years;
this method would result in an improving overhead ratio over time, all things remaining equal.
This non-GAAP ratio excludes Regional Bankings core deposit intangible amortization expense
related to The Bank of New York transaction and the Bank One merger of $99 million and $116
million for the quarters ended March 31, 2008 and 2007, respectively. |
Quarterly results
Net loss was $227 million, compared with net income of $859 million in the prior year, as a
significant increase in the provision for credit losses resulted in a net loss in Regional Banking.
Total net revenue was $4.7 billion, an increase of $596 million, or 15%, from the prior year.
Net interest income was $3.0 billion, up $394 million, or 15%, due to increased loan balances,
wider loan spreads, and higher deposit balances. These benefits were offset partially by a shift to
narrowerspread deposit products. Noninterest revenue was $1.7 billion, up $202 million, or 14%,
driven by higher volume and improved margins on mortgage loan originations, increased
deposit-related fees and the absence of a prior-year charge resulting from accelerated surrenders
of customer annuity contracts. These benefits were offset partially by markdowns on the mortgage
warehouse and pipeline and a decrease in net mortgage servicing revenue.
20
The provision for credit losses was $2.5 billion, compared with $292 million in the prior year. The
current-quarter provision includes an increase of $1.1 billion in the allowance for loan losses
related to home equity loans. Housing price declines have continued to exceed expectations
resulting in a significant increase in estimated losses, particularly for high loan-to-value
second-lien loans. Home equity net charge-offs were $447 million (1.89% net charge-off rate),
compared with $68 million (0.32% net charge-off rate) in the prior year. The current-quarter
provision also includes a $417 million increase in the allowance for loan losses related to
subprime mortgage loans, reflecting an increase in estimated losses for this portfolio. Subprime
mortgage net charge-offs were $149 million (3.82% net charge-off rate), compared with $20 million
(0.92% net charge-off rate) in the prior year. The provision was also affected by an increase in
the allowance for credit losses for prime mortgage and auto loans.
Noninterest expense was $2.6 billion, an increase of $163 million, or 7%, from the prior year,
reflecting higher mortgage production and servicing expense, and investment in the retail
distribution network.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount and ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
227,916 |
|
|
$ |
212,997 |
|
|
|
7 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained |
|
|
184,211 |
|
|
|
163,462 |
|
|
|
13 |
|
Loans held-for-sale and loans at fair value(a) |
|
|
18,000 |
|
|
|
25,006 |
|
|
|
(28 |
) |
|
|
|
|
|
Total loans |
|
|
202,211 |
|
|
|
188,468 |
|
|
|
7 |
|
Deposits |
|
|
230,854 |
|
|
|
221,840 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
227,560 |
|
|
$ |
217,135 |
|
|
|
5 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained |
|
|
182,220 |
|
|
|
162,744 |
|
|
|
12 |
|
Loans held-for-sale and loans at fair value(a) |
|
|
17,841 |
|
|
|
28,235 |
|
|
|
(37 |
) |
|
|
|
|
|
Total loans |
|
|
200,061 |
|
|
|
190,979 |
|
|
|
5 |
|
Deposits |
|
|
225,555 |
|
|
|
216,933 |
|
|
|
4 |
|
Equity |
|
|
17,000 |
|
|
|
16,000 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
70,095 |
|
|
|
67,247 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
789 |
|
|
$ |
185 |
|
|
|
326 |
|
Nonperforming loans(b)(c) |
|
|
3,292 |
|
|
|
1,655 |
|
|
|
99 |
|
Nonperforming assets(b)(c) |
|
|
3,824 |
|
|
|
1,910 |
|
|
|
100 |
|
Allowance for loan losses |
|
|
4,208 |
|
|
|
1,453 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate(d)(e) |
|
|
1.71 |
% |
|
|
0.46 |
% |
|
|
|
|
Allowance for loan losses to ending loans(d) |
|
|
2.28 |
|
|
|
0.89 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans(d) |
|
|
133 |
|
|
|
94 |
|
|
|
|
|
Nonperforming loans to total loans |
|
|
1.63 |
|
|
|
0.88 |
|
|
|
|
|
|
|
|
|
(a) |
|
Loans included prime mortgage loans originated with the intent to sell, which were
accounted for at fair value. These loans, classified as trading assets on the Consolidated
Balance Sheets, totaled $13.5 billion and $11.6 billion at March 31, 2008 and 2007,
respectively. Average loans included prime mortgage loans, classified as trading assets on
the Consolidated Balance Sheets, of $13.4 billion and $6.5 billion for the quarters ended
March 31, 2008 and 2007, respectively. |
(b) |
|
Nonperforming loans included loans held-for-sale and loans accounted for at fair value of
$129 million and $112 million at March 31, 2008 and 2007, respectively. Certain of these
loans are classified as trading assets on the Consolidated Balance Sheets. |
(c) |
|
Nonperforming loans and assets excluded (1) loans eligible for repurchase as well as loans
repurchased from Governmental National Mortgage Association (GNMA) pools that are insured
by U.S. government agencies of $1.8 billion and $1.3 billion at March 31, 2008 and 2007,
respectively, and (2) education loans that are 90 days past due and still accruing, which
are insured by U.S. government agencies under the Federal Family Education Loan Program of
$252 million and $178 million at March 31, 2008 and 2007, respectively. These amounts for
GNMA and education loans were excluded, as reimbursement is proceeding normally. |
(d) |
|
Loans held-for-sale and loans accounted for at fair value were excluded when calculating
the allowance coverage ratio and net charge-off rate. |
(e) |
|
The net charge-off rate for the first quarter of 2008 excluded $14 million of charge-offs
related to prime mortgage loans held by Corporate in the Corporate/Private Equity sector. |
21
REGIONAL BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
878 |
|
|
$ |
793 |
|
|
|
11 |
% |
Net interest income |
|
|
2,543 |
|
|
|
2,299 |
|
|
|
11 |
|
|
|
|
|
|
Total net revenue |
|
|
3,421 |
|
|
|
3,092 |
|
|
|
11 |
|
Provision for credit losses |
|
|
2,324 |
|
|
|
233 |
|
|
NM |
|
Noninterest expense |
|
|
1,794 |
|
|
|
1,729 |
|
|
|
4 |
|
|
|
|
|
|
Income (loss) before income tax expense |
|
|
(697 |
) |
|
|
1,130 |
|
|
NM |
|
Net income (loss) |
|
$ |
(433 |
) |
|
$ |
690 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
(14 |
)% |
|
|
24 |
% |
|
|
|
|
Overhead ratio |
|
|
52 |
|
|
|
56 |
|
|
|
|
|
Overhead ratio excluding core deposit intangibles(a) |
|
|
50 |
|
|
|
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 inclusion would result in an improving overhead ratio over time, all things remaining
equal. This non-GAAP ratio excludes Regional Bankings core deposit intangible amortization
expense related to The Bank of New York transaction and the Bank One merger of $99 million and
$116 million for the quarters ended March 31, 2008 and 2007, respectively. |
Quarterly results
Regional Banking net loss was $433 million, compared with net income of $690 million in the prior
year, reflecting a significant increase in the provision for credit losses. Total net revenue was
$3.4 billion, up $329 million, or 11%, benefiting from higher loan balances, wider loan spreads,
increased deposit-related fees and higher deposit balances. Total net revenue also benefited from
the absence of a prior-year charge related to accelerated surrenders of customer annuity contracts.
These benefits were offset partially by a shift to narrowerspread deposit products. The provision
for credit losses was $2.3 billion, compared with $233 million in the prior year. The increase in
the provision was due to weakness in the home equity and subprime mortgage portfolios (see Retail
Financial Services discussion of the provision for credit losses for further detail). Noninterest
expense was $1.8 billion, up $65 million, or 4%, from the prior year due to investment in the
retail distribution network.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in billions, except ratios and where otherwise noted) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity origination volume |
|
$ |
6.7 |
|
|
$ |
12.7 |
|
|
|
(47 |
)% |
End-of-period loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
95.0 |
|
|
$ |
87.7 |
|
|
|
8 |
|
Mortgage(a) |
|
|
15.9 |
|
|
|
9.2 |
|
|
|
73 |
|
Business banking |
|
|
15.8 |
|
|
|
14.3 |
|
|
|
10 |
|
Education |
|
|
12.4 |
|
|
|
11.1 |
|
|
|
12 |
|
Other loans(b) |
|
|
1.1 |
|
|
|
2.7 |
|
|
|
(59 |
) |
|
|
|
|
|
Total end of period loans |
|
|
140.2 |
|
|
|
125.0 |
|
|
|
12 |
|
End-of-period deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
$ |
69.1 |
|
|
$ |
69.3 |
|
|
|
|
|
Savings |
|
|
105.4 |
|
|
|
100.1 |
|
|
|
5 |
|
Time and other |
|
|
44.6 |
|
|
|
42.2 |
|
|
|
6 |
|
|
|
|
|
|
Total end of period deposits |
|
|
219.1 |
|
|
|
211.6 |
|
|
|
4 |
|
Average loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
95.0 |
|
|
$ |
86.3 |
|
|
|
10 |
|
Mortgage(a) |
|
|
15.8 |
|
|
|
8.9 |
|
|
|
78 |
|
Business banking |
|
|
15.6 |
|
|
|
14.3 |
|
|
|
9 |
|
Education |
|
|
12.0 |
|
|
|
11.0 |
|
|
|
9 |
|
Other loans(b) |
|
|
1.5 |
|
|
|
3.0 |
|
|
|
(50 |
) |
|
|
|
|
|
Total average loans(c) |
|
|
139.9 |
|
|
|
123.5 |
|
|
|
13 |
|
Average deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
$ |
66.3 |
|
|
$ |
67.3 |
|
|
|
(1 |
) |
Savings |
|
|
100.3 |
|
|
|
96.7 |
|
|
|
4 |
|
Time and other |
|
|
47.7 |
|
|
|
42.5 |
|
|
|
12 |
|
|
|
|
|
|
Total average deposits |
|
|
214.3 |
|
|
|
206.5 |
|
|
|
4 |
|
Average assets |
|
|
149.9 |
|
|
|
135.9 |
|
|
|
10 |
|
Average equity |
|
|
12.4 |
|
|
|
11.8 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate(d)(e) |
|
|
3.23 |
% |
|
|
1.84 |
% |
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
447 |
|
|
$ |
68 |
|
|
NM |
|
Mortgage |
|
|
163 |
|
|
|
20 |
|
|
NM |
|
Business banking |
|
|
40 |
|
|
|
25 |
|
|
|
60 |
|
Other loans |
|
|
21 |
|
|
|
13 |
|
|
|
62 |
|
|
|
|
|
|
Total net charge-offs |
|
|
671 |
|
|
|
126 |
|
|
|
433 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
1.89 |
% |
|
|
0.32 |
% |
|
|
|
|
Mortgage(f) |
|
|
3.79 |
|
|
|
0.91 |
|
|
|
|
|
Business banking |
|
|
1.03 |
|
|
|
0.71 |
|
|
|
|
|
Other loans |
|
|
0.89 |
|
|
|
0.55 |
|
|
|
|
|
Total net charge-off rate(c)(f) |
|
|
1.94 |
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets(g) |
|
$ |
3,348 |
|
|
$ |
1,688 |
|
|
|
98 |
|
|
|
|
|
(a) |
|
The balance reported reflected primarily subprime mortgage loans owned. |
(b) |
|
Included commercial loans derived from community development activities for the quarter ended
March 31, 2007. Beginning with the quarter ended March 31, 2008, these loans are reported
primarily in CB. |
(c) |
|
Average loans include loans held-for-sale of $4.0 billion and $4.4 billion for the quarters
ended March 31, 2008 and 2007, respectively. These amounts were excluded when calculating the
net charge-off rate. |
(d) |
|
Excluded loans eligible for repurchase as well as loans repurchased from GNMA pools that are
insured by U.S. government agencies of $1.5 billion and $975 million at March 31, 2008 and
2007, respectively. These amounts are excluded as reimbursement is proceeding normally. |
(e) |
|
Excluded loans that are 30 days past due and still accruing, which are insured by U.S.
government agencies under the Federal Family Education Loan Program of $534 million and $519
million at March 31, 2008 and 2007, respectively. These amounts are excluded as reimbursement
is proceeding normally. |
(f) |
|
The mortgage and total net charge-off rate for the first quarter of 2008 excluded $14 million
of charge-offs related to prime mortgage loans held by Corporate in the Corporate/Private
Equity sector. |
(g) |
|
Excluded nonperforming assets related to education loans that are 90 days past due and still
accruing, which were insured by U.S. government agencies under the Federal Family Education
Loan Program of $252 million and $178 million at March 31, 2008 and 2007, respectively. These
amounts were excluded as reimbursement is proceeding normally. |
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail branch business metrics |
|
Three months ended March 31, |
(in millions, except where otherwise noted) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Investment sales volume |
|
$ |
4,084 |
|
|
$ |
4,783 |
|
|
|
(15 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
3,146 |
|
|
|
3,071 |
|
|
|
75 |
# |
ATMs |
|
|
9,237 |
|
|
|
8,560 |
|
|
|
677 |
|
Personal bankers(a) |
|
|
9,826 |
|
|
|
7,846 |
|
|
|
1,980 |
|
Sales specialists(a) |
|
|
4,133 |
|
|
|
3,712 |
|
|
|
421 |
|
Active online customers (in thousands)(b) |
|
|
6,454 |
|
|
|
5,295 |
|
|
|
1,159 |
|
Checking accounts (in thousands) |
|
|
11,068 |
|
|
|
10,158 |
|
|
|
910 |
|
|
|
|
|
(a) |
|
Employees acquired as part of the Bank of New York transaction are included beginning June
30, 2007. This transaction was completed on October 1, 2006. |
(b) |
|
During the quarter ended June 30, 2007, RFS changed the methodology for determining active
online customers to include all individual RFS customers with one or more online accounts
that have been active within 90 days of period end, including customers who also have online
accounts with Card Services. Prior periods have been restated to conform to this new
methodology. |
MORTGAGE BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios and where otherwise noted) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue |
|
$ |
576 |
|
|
$ |
400 |
|
|
|
44 |
% |
Net mortgage servicing revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Servicing revenue |
|
|
634 |
|
|
|
601 |
|
|
|
5 |
|
Changes in MSR asset fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Due to inputs or assumptions in model |
|
|
(632 |
) |
|
|
108 |
|
|
NM |
Other changes in fair value |
|
|
(425 |
) |
|
|
(378 |
) |
|
|
(12 |
) |
|
|
|
|
|
Total changes in MSR asset fair value |
|
|
(1,057 |
) |
|
|
(270 |
) |
|
|
(291 |
) |
Derivative valuation adjustments and other |
|
|
598 |
|
|
|
(127 |
) |
|
NM |
|
|
|
|
|
Total net mortgage servicing revenue |
|
|
175 |
|
|
|
204 |
|
|
|
(14 |
) |
|
|
|
|
|
Total net revenue |
|
|
751 |
|
|
|
604 |
|
|
|
24 |
|
Noninterest expense |
|
|
536 |
|
|
|
468 |
|
|
|
15 |
|
|
|
|
|
|
Income before income tax expense |
|
|
215 |
|
|
|
136 |
|
|
|
58 |
|
Net income |
|
$ |
132 |
|
|
$ |
84 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
22 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Third-party mortgage loans serviced (ending) |
|
$ |
627.1 |
|
|
$ |
546.1 |
|
|
|
15 |
|
MSR net carrying value (ending) |
|
|
8.4 |
|
|
|
7.9 |
|
|
|
6 |
|
Average mortgage loans held-for-sale(a) |
|
|
13.8 |
|
|
|
23.8 |
|
|
|
(42 |
) |
Average assets |
|
|
32.2 |
|
|
|
38.0 |
|
|
|
(15 |
) |
Average equity |
|
|
2.4 |
|
|
|
2.0 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage origination volume by channel (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
12.6 |
|
|
$ |
10.9 |
|
|
|
16 |
|
Wholesale |
|
|
10.6 |
|
|
|
9.9 |
|
|
|
7 |
|
Correspondent |
|
|
12.0 |
|
|
|
4.8 |
|
|
|
150 |
|
CNT (Negotiated transactions) |
|
|
11.9 |
|
|
|
10.5 |
|
|
|
13 |
|
|
|
|
|
|
Total |
|
$ |
47.1 |
|
|
$ |
36.1 |
|
|
|
30 |
|
|
|
|
|
(a) |
|
Included $13.4 billion and $6.5 billion of prime mortgage loans at fair value for the three
months ended March 31, 2008 and 2007, respectively. These loans are classified as trading
assets on the Consolidated Balance Sheets. |
24
Quarterly results
Mortgage Banking net income was $132 million, compared with $84 million in the prior year. Total
net revenue was $751 million, up $147 million, or 24%. Total net revenue comprises production
revenue and net mortgage servicing revenue. Production revenue was $576 million, up $176 million,
primarily benefiting from higher volume and improved margins on mortgage loan originations,
partially offset by markdowns on the mortgage warehouse and pipeline. In addition, the benefit of
the one-time impact from the adoption of SAB 109 in the current quarter was offset by the absence
of the prior-year impact of the adoption of SFAS 159. Net mortgage servicing revenue, which
includes loan servicing revenue, MSR risk management results and other changes in fair value, was
$175 million, compared with $204 million in the prior year. Loan servicing revenue of $634 million
increased $33 million on growth of 15% in third-party loans serviced. MSR risk management results
were negative $34 million compared with negative $19 million in the prior year. Other changes in
fair value of the MSR asset were negative $425 million compared with negative $378 million in the
prior year. Noninterest expense was $536 million, an increase of $68 million, or 15%. The increase
reflected higher production expense due primarily to growth in originations and higher servicing
costs due to increased delinquencies and defaults.
AUTO FINANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios and where otherwise noted) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Noninterest revenue |
|
$ |
151 |
|
|
$ |
131 |
|
|
|
15 |
% |
Net interest income |
|
|
379 |
|
|
|
279 |
|
|
|
36 |
|
|
|
|
|
|
Total net revenue |
|
|
530 |
|
|
|
410 |
|
|
|
29 |
|
Provision for credit losses |
|
|
168 |
|
|
|
59 |
|
|
|
185 |
|
Noninterest expense |
|
|
240 |
|
|
|
210 |
|
|
|
14 |
|
|
|
|
|
|
Income before income tax expense |
|
|
122 |
|
|
|
141 |
|
|
|
(13 |
) |
Net income |
|
$ |
74 |
|
|
$ |
85 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
13 |
% |
|
|
16 |
% |
|
|
|
|
ROA |
|
|
0.65 |
|
|
|
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Auto origination volume |
|
$ |
7.2 |
|
|
$ |
5.2 |
|
|
|
38 |
|
End-of-period loans and lease-related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding |
|
$ |
44.4 |
|
|
$ |
39.7 |
|
|
|
12 |
|
Lease financing receivables |
|
|
0.3 |
|
|
|
1.2 |
|
|
|
(75 |
) |
Operating lease assets |
|
|
2.0 |
|
|
|
1.7 |
|
|
|
18 |
|
|
|
|
|
|
Total end-of-period loans and lease-related assets |
|
|
46.7 |
|
|
|
42.6 |
|
|
|
10 |
|
Average loans and lease-related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding |
|
$ |
42.9 |
|
|
$ |
39.4 |
|
|
|
9 |
|
Lease financing receivables |
|
|
0.3 |
|
|
|
1.5 |
|
|
|
(80 |
) |
Operating lease assets |
|
|
1.9 |
|
|
|
1.6 |
|
|
|
19 |
|
|
|
|
|
|
Total average loans and lease-related assets |
|
|
45.1 |
|
|
|
42.5 |
|
|
|
6 |
|
Average assets |
|
|
45.5 |
|
|
|
43.2 |
|
|
|
5 |
|
Average equity |
|
|
2.3 |
|
|
|
2.2 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate |
|
|
1.44 |
% |
|
|
1.33 |
% |
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
117 |
|
|
$ |
58 |
|
|
|
102 |
|
Lease receivables |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total net charge-offs |
|
|
118 |
|
|
|
59 |
|
|
|
100 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
1.10 |
% |
|
|
0.60 |
% |
|
|
|
|
Lease receivables |
|
|
1.34 |
|
|
|
0.27 |
|
|
|
|
|
Total net charge-off rate |
|
|
1.10 |
|
|
|
0.59 |
|
|
|
|
|
Nonperforming assets |
|
$ |
160 |
|
|
$ |
140 |
|
|
|
14 |
|
|
25
Quarterly results
Auto Finance net income was $74 million, a decrease of $11 million, or 13%, from the prior year.
Total net revenue was $530 million, up $120 million, or 29%, reflecting a reduction in residual
value reserves for direct finance leases, higher automobile operating lease revenue, higher loan
balances and wider loan spreads. The provision for credit losses was $168 million, up $109 million.
The current-quarter provision included an increase in the allowance for credit losses, reflecting
higher estimated losses. The net charge-off rate was 1.10%, compared with 0.59% in the prior year.
Noninterest expense of $240 million grew $30 million, or 14%, driven by increased depreciation
expense on owned automobiles subject to operating leases.
CARD SERVICES
For a
discussion of the business profile of CS, see pages 4951 of JPMorgan Chases 2007 Annual
Report and pages 45 of this Form 10-Q.
JPMorgan Chase uses the concept of managed basis to evaluate the credit performance of its credit
card loans, both loans on the balance sheet and loans that have been securitized. For further
information, see Explanation and Reconciliation of the Firms Use of Non-GAAP Financial Measures on
pages 1314 of this Form 10-Q. Managed results exclude the impact of credit card securitizations
on total net revenue, the provision for credit losses, net charge-offs and loan receivables.
Securitization does not change reported net income; however, it does affect the classification of
items on the Consolidated Statements of Income and Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data-managed basis |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
$ |
600 |
|
|
$ |
599 |
|
|
|
|
% |
All other income |
|
|
119 |
|
|
|
92 |
|
|
|
29 |
|
|
|
|
|
|
Noninterest revenue |
|
|
719 |
|
|
|
691 |
|
|
|
4 |
|
Net interest income |
|
|
3,185 |
|
|
|
2,989 |
|
|
|
7 |
|
|
|
|
|
|
Total net revenue |
|
|
3,904 |
|
|
|
3,680 |
|
|
|
6 |
|
|
Provision for credit losses |
|
|
1,670 |
|
|
|
1,229 |
|
|
|
36 |
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
267 |
|
|
|
254 |
|
|
|
5 |
|
Noncompensation expense |
|
|
841 |
|
|
|
803 |
|
|
|
5 |
|
Amortization of intangibles |
|
|
164 |
|
|
|
184 |
|
|
|
(11 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
1,272 |
|
|
|
1,241 |
|
|
|
2 |
|
|
|
|
|
|
|
Income before income tax expense |
|
|
962 |
|
|
|
1,210 |
|
|
|
(20 |
) |
Income tax expense |
|
|
353 |
|
|
|
445 |
|
|
|
(21 |
) |
|
|
|
|
|
Net income |
|
$ |
609 |
|
|
$ |
765 |
|
|
|
(20 |
) |
|
|
|
|
|
|
Memo: Net securitization gains |
|
$ |
70 |
|
|
$ |
23 |
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
17 |
% |
|
|
22 |
% |
|
|
|
|
Overhead ratio |
|
|
33 |
|
|
|
34 |
|
|
|
|
|
|
Quarterly results
Net income was $609 million, a decline of $156 million, or 20%, from the prior year. The decrease
was driven by a higher managed provision for credit losses, partially offset by growth in managed
net revenue.
End-of-period managed loans of $150.9 billion grew $4.4 billion, or 3%, from the prior year.
Average managed loans of $153.6 billion increased $4.1 billion, or 3%, from the prior year. The
increases from the prior year in both end-of-period and average managed loans reflects organic
portfolio growth.
Managed net revenue was $3.9 billion, an increase of $224 million, or 6%, from the prior year. Net
interest income was $3.2 billion, up $196 million, or 7%, from the prior year. The increase in net
interest income was driven by wider loan spreads, an increased level of fees and higher average
managed loan balances. These benefits were offset partially by the effect of higher revenue
reversals associated with increased charge-offs and the discontinuation of certain billing
practices (including the elimination of certain over-limit fees and the two-cycle billing method
for calculating finance charges beginning in the second quarter of 2007). Noninterest revenue was
$719 million, an increase of $28 million, or 4%, from the prior year. The increase is primarily
related to higher net securitization gains. Charge volume growth of 5%
26
reflected a 10% increase in sales volume, partially offset by a lower level of balance transfers,
the result of more targeted marketing efforts.
The managed provision for credit losses was $1.7 billion, an increase of $441 million, or 36%, from
the prior year, due to a higher level of charge-offs and an $85 million prior-year release of the
allowance for loan losses. The managed net charge-off rate for the quarter was 4.37%, up from 3.57%
in the prior year. The 30-day managed delinquency rate was 3.66%, up from 3.07% in the prior year.
Noninterest expense was $1.3 billion, an increase of $31 million, or 2%, compared with the prior
year, due to higher marketing expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount, ratios and where otherwise noted) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Financial metrics |
|
|
|
|
|
|
|
|
|
|
|
|
% of average managed outstandings: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8.34 |
% |
|
|
8.11 |
% |
|
|
|
|
Provision for credit losses |
|
|
4.37 |
|
|
|
3.34 |
|
|
|
|
|
Noninterest revenue |
|
|
1.88 |
|
|
|
1.88 |
|
|
|
|
|
Risk adjusted margin(a) |
|
|
5.85 |
|
|
|
6.65 |
|
|
|
|
|
Noninterest expense |
|
|
3.33 |
|
|
|
3.37 |
|
|
|
|
|
Pretax income (ROO)(b) |
|
|
2.52 |
|
|
|
3.28 |
|
|
|
|
|
Net income |
|
|
1.60 |
|
|
|
2.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Charge volume (in billions) |
|
$ |
85.4 |
|
|
$ |
81.3 |
|
|
|
5 |
% |
Net accounts opened (in millions) |
|
|
3.4 |
|
|
|
3.4 |
|
|
|
|
|
Credit cards issued (in millions) |
|
|
156.4 |
|
|
|
152.1 |
|
|
|
3 |
|
Number of registered internet customers (in millions) |
|
|
26.7 |
|
|
|
24.3 |
|
|
|
10 |
|
Merchant acquiring business(c) |
|
|
|
|
|
|
|
|
|
|
|
|
Bank card volume (in billions) |
|
$ |
182.4 |
|
|
$ |
163.6 |
|
|
|
11 |
|
Total transactions (in billions) |
|
|
5.2 |
|
|
|
4.5 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
75,888 |
|
|
$ |
78,173 |
|
|
|
(3 |
) |
Securitized loans |
|
|
75,062 |
|
|
|
68,403 |
|
|
|
10 |
|
|
|
|
|
|
Managed loans |
|
$ |
150,950 |
|
|
$ |
146,576 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Managed assets |
|
$ |
159,602 |
|
|
$ |
156,271 |
|
|
|
2 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
79,445 |
|
|
$ |
81,932 |
|
|
|
(3 |
) |
Securitized loans |
|
|
74,108 |
|
|
|
67,485 |
|
|
|
10 |
|
|
|
|
|
|
Managed average loans |
|
$ |
153,553 |
|
|
$ |
149,417 |
|
|
|
3 |
|
|
|
|
|
|
Equity |
|
$ |
14,100 |
|
|
$ |
14,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
18,931 |
|
|
|
18,749 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
1,670 |
|
|
$ |
1,314 |
|
|
|
27 |
|
Net charge-off rate |
|
|
4.37 |
% |
|
|
3.57 |
% |
|
|
|
|
Managed delinquency ratios |
|
|
|
|
|
|
|
|
|
|
|
|
30+ days |
|
|
3.66 |
% |
|
|
3.07 |
% |
|
|
|
|
90+ days |
|
|
1.84 |
|
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses(d) |
|
$ |
3,404 |
|
|
$ |
3,092 |
|
|
|
10 |
|
Allowance for loan losses to period-end loans(d) |
|
|
4.49 |
% |
|
|
3.96 |
% |
|
|
|
|
|
|
|
|
(a) |
|
Represents total net revenue less provision for credit losses. |
(b) |
|
Pretax return on average managed outstandings. |
(c) |
|
Represents 100% of the merchant acquiring business. |
(d) |
|
Loans on a reported basis. |
27
Reconciliation from reported basis to managed basis
The financial information presented below reconciles reported basis and managed basis to
disclose the effect of securitizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Income statement data(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
1,537 |
|
|
$ |
1,345 |
|
|
|
14 |
% |
Securitization adjustments |
|
|
(937 |
) |
|
|
(746 |
) |
|
|
(26 |
) |
|
|
|
|
|
Managed credit card income |
|
$ |
600 |
|
|
$ |
599 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
1,567 |
|
|
$ |
1,650 |
|
|
|
(5 |
) |
Securitization adjustments |
|
|
1,618 |
|
|
|
1,339 |
|
|
|
21 |
|
|
|
|
|
|
Managed net interest income |
|
$ |
3,185 |
|
|
$ |
2,989 |
|
|
|
7 |
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
3,223 |
|
|
$ |
3,087 |
|
|
|
4 |
|
Securitization adjustments |
|
|
681 |
|
|
|
593 |
|
|
|
15 |
|
|
|
|
|
|
Managed total net revenue |
|
$ |
3,904 |
|
|
$ |
3,680 |
|
|
|
6 |
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
989 |
|
|
$ |
636 |
|
|
|
56 |
|
Securitization adjustments |
|
|
681 |
|
|
|
593 |
|
|
|
15 |
|
|
|
|
|
|
Managed provision for credit losses |
|
$ |
1,670 |
|
|
$ |
1,229 |
|
|
|
36 |
|
|
|
|
|
|
Balance sheet average balances(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
88,013 |
|
|
$ |
91,157 |
|
|
|
(3 |
) |
Securitization adjustments |
|
|
71,589 |
|
|
|
65,114 |
|
|
|
10 |
|
|
|
|
|
|
Managed average assets |
|
$ |
159,602 |
|
|
$ |
156,271 |
|
|
|
2 |
|
|
|
|
|
|
Credit quality statistics(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
989 |
|
|
$ |
721 |
|
|
|
37 |
|
Securitization adjustments |
|
|
681 |
|
|
|
593 |
|
|
|
15 |
|
|
|
|
|
|
Managed net charge-offs |
|
$ |
1,670 |
|
|
$ |
1,314 |
|
|
|
27 |
|
|
|
|
|
(a) |
|
JPMorgan Chase uses the concept of managed basis 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 and
Consolidated Balance Sheets. For further information, see Explanation and Reconciliation
of the Firms Use of Non-GAAP Financial Measures on pages 1314 of this Form 10-Q. |
28
COMMERCIAL BANKING
For a discussion of the business profile of CB, see pages 5253 of JPMorgan Chases 2007 Annual
Report and page 5 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit-related fees |
|
$ |
193 |
|
|
$ |
158 |
|
|
|
22 |
% |
Asset management, administration and commissions |
|
|
26 |
|
|
|
23 |
|
|
|
13 |
|
All other income(a) |
|
|
115 |
|
|
|
154 |
|
|
|
(25 |
) |
|
|
|
|
|
Noninterest revenue |
|
|
334 |
|
|
|
335 |
|
|
|
|
|
Net interest income |
|
|
733 |
|
|
|
668 |
|
|
|
10 |
|
|
|
|
|
|
Total net revenue |
|
|
1,067 |
|
|
|
1,003 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
101 |
|
|
|
17 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
178 |
|
|
|
180 |
|
|
|
(1 |
) |
Noncompensation expense |
|
|
294 |
|
|
|
290 |
|
|
|
1 |
|
Amortization of intangibles |
|
|
13 |
|
|
|
15 |
|
|
|
(13 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
485 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
481 |
|
|
|
501 |
|
|
|
(4 |
) |
Income tax expense |
|
|
189 |
|
|
|
197 |
|
|
|
(4 |
) |
|
|
|
|
|
Net income |
|
$ |
292 |
|
|
$ |
304 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
17 |
% |
|
|
20 |
% |
|
|
|
|
Overhead ratio |
|
|
45 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
(a) |
|
IB-related and commercial card revenue is included in all other income. |
Quarterly results
Net income was $292 million, a decrease of $12 million, or 4%, from the prior year driven by an
increase in the provision for credit losses, largely offset by growth in total net revenue.
Total net revenue was $1.1 billion, an increase of $64 million, or 6%, from the prior year. Net
interest income was $733 million, up $65 million, or 10%. The increase was driven by double-digit
growth in liability and loan balances, primarily offset by spread compression in the liability and
loan portfolios and a continued shift to narrowerspread liability products. Noninterest revenue
was $334 million, flat compared with the prior year, reflecting lower gains related to the sale of
securities acquired in the satisfaction of debt and lower investment banking fees, offset by higher
deposit-related, credit card and lending fees.
Middle Market Banking revenue was $706 million, an increase of $45 million, or 7%, from the prior
year. Mid-Corporate Banking revenue was $207 million, a decrease of $5 million, or 2%. Real Estate
Banking revenue was $97 million, a decline of $5 million, or 5%.
The provision for credit losses was $101 million, compared with $17 million in the prior year. The
current-quarter provision largely reflects growth in loan balances and the effect of the weakening
credit environment. The allowance for loan losses to total loans retained was 2.65% for the current
quarter, down from 2.68% in the prior year. Nonperforming loans were $446 million, up $305 million
from the prior year, reflecting increases in nonperforming loans in each business segment. Net
charge-offs (primarily related to residential real estate clients) were $81 million (0.48% net
charge-off rate), compared with recoveries of $1 million (0.01% net recovery rate) in the prior
year.
Noninterest expense was $485 million, flat compared with the prior year.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except ratio and headcount data) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue by product: |
|
|
|
|
|
|
|
|
|
|
|
|
Lending |
|
$ |
379 |
|
|
$ |
348 |
|
|
|
9 |
% |
Treasury services |
|
|
616 |
|
|
|
556 |
|
|
|
11 |
|
Investment banking |
|
|
68 |
|
|
|
76 |
|
|
|
(11 |
) |
Other |
|
|
4 |
|
|
|
23 |
|
|
|
(83 |
) |
|
|
|
|
|
Total Commercial Banking revenue |
|
$ |
1,067 |
|
|
$ |
1,003 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IB revenue, gross(a) |
|
$ |
203 |
|
|
$ |
231 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
706 |
|
|
$ |
661 |
|
|
|
7 |
|
Mid-Corporate Banking |
|
|
207 |
|
|
|
212 |
|
|
|
(2 |
) |
Real Estate Banking |
|
|
97 |
|
|
|
102 |
|
|
|
(5 |
) |
Other |
|
|
57 |
|
|
|
28 |
|
|
|
104 |
|
|
|
|
|
|
Total Commercial Banking revenue |
|
$ |
1,067 |
|
|
$ |
1,003 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances: |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
101,979 |
|
|
$ |
82,545 |
|
|
|
24 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained |
|
|
67,510 |
|
|
|
57,185 |
|
|
|
18 |
|
Loans held-for-sale and loans at fair value |
|
|
521 |
|
|
|
475 |
|
|
|
10 |
|
|
|
|
|
|
Total loans(b) |
|
|
68,031 |
|
|
|
57,660 |
|
|
|
18 |
|
Liability balances(c) |
|
|
99,477 |
|
|
|
81,752 |
|
|
|
22 |
|
Equity |
|
|
7,000 |
|
|
|
6,300 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
40,111 |
|
|
$ |
36,317 |
|
|
|
10 |
|
Mid-Corporate Banking |
|
|
15,150 |
|
|
|
10,669 |
|
|
|
42 |
|
Real Estate Banking |
|
|
7,457 |
|
|
|
7,074 |
|
|
|
5 |
|
Other |
|
|
5,313 |
|
|
|
3,600 |
|
|
|
48 |
|
|
|
|
|
|
Total Commercial Banking loans |
|
$ |
68,031 |
|
|
$ |
57,660 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
4,075 |
|
|
|
4,281 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
81 |
|
|
$ |
(1 |
) |
|
NM |
|
Nonperforming loans(d) |
|
|
446 |
|
|
|
141 |
|
|
|
216 |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
1,790 |
|
|
|
1,531 |
|
|
|
17 |
|
Allowance for lending-related commitments |
|
|
200 |
|
|
|
187 |
|
|
|
7 |
|
|
|
|
|
|
Total allowance for credit losses |
|
|
1,990 |
|
|
|
1,718 |
|
|
|
16 |
|
Net charge-off (recovery) rate(b) |
|
|
0.48 |
% |
|
|
(0.01 |
)% |
|
|
|
|
Allowance for loan losses to average loans(b) |
|
|
2.65 |
|
|
|
2.68 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans(d) |
|
|
426 |
|
|
|
1,086 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.66 |
|
|
|
0.24 |
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the total revenue related to investment banking products sold to CB clients. |
(b) |
|
Loans held-for-sale and loans accounted for at fair value were excluded when calculating the
allowance coverage ratios and net charge-off rates. |
(c) |
|
Liability balances include deposits and deposits swept to on-balance sheet liabilities, such
as commercial paper, federal funds purchased and repurchase agreements. |
(d) |
|
Nonperforming loans held-for-sale were $26 million at March 31, 2008. This amount was
excluded when calculating the allowance coverage ratios. There were no nonperforming loans
held-for-sale at March 31, 2007. |
30
TREASURY & SECURITIES SERVICES
For a discussion of the business profile of TSS, see pages 5455 of JPMorgan Chases 2007 Annual
Report and page 5 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit-related fees |
|
$ |
269 |
|
|
$ |
213 |
|
|
|
26 |
% |
Asset management, administration and commissions |
|
|
820 |
|
|
|
686 |
|
|
|
20 |
|
All other income |
|
|
200 |
|
|
|
125 |
|
|
|
60 |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,289 |
|
|
|
1,024 |
|
|
|
26 |
|
Net interest income |
|
|
624 |
|
|
|
502 |
|
|
|
24 |
|
|
|
|
|
|
Total net revenue |
|
|
1,913 |
|
|
|
1,526 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
12 |
|
|
|
6 |
|
|
|
100 |
|
Credit reimbursement to IB(a) |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
641 |
|
|
|
558 |
|
|
|
15 |
|
Noncompensation expense |
|
|
571 |
|
|
|
502 |
|
|
|
14 |
|
Amortization of intangibles |
|
|
16 |
|
|
|
15 |
|
|
|
7 |
|
|
|
|
|
|
Total noninterest expense |
|
|
1,228 |
|
|
|
1,075 |
|
|
|
14 |
|
|
|
|
|
|
Income before income tax expense |
|
|
643 |
|
|
|
415 |
|
|
|
55 |
|
Income tax expense |
|
|
240 |
|
|
|
152 |
|
|
|
58 |
|
|
|
|
|
|
Net income |
|
$ |
403 |
|
|
$ |
263 |
|
|
|
53 |
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
46 |
% |
|
|
36 |
% |
|
|
|
|
Overhead ratio |
|
|
64 |
|
|
|
70 |
|
|
|
|
|
Pretax margin ratio(b) |
|
|
34 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
(a) |
|
TSS is charged a credit reimbursement related to certain exposures managed within the IB
credit portfolio on behalf of clients shared with TSS. |
(b) |
|
Pretax margin represents income before income tax expense divided by total net revenue, which
is a measure of pretax performance and another basis by which management evaluates its
performance and that of its competitors. |
Quarterly results
Net income was $403 million, an increase of $140 million, or 53%, from the prior year, driven by
higher total net revenue, partially offset by higher noninterest expense.
Total net revenue was $1.9 billion, an increase of $387 million, or 25%, from the prior year.
Worldwide Securities Services total net revenue of $1.1 billion was up $263 million, or 31%. The
growth was driven by increased product usage by new and existing clients (primarily in custody,
fund and alternative investments services and depositary receipts) and wider spreads in securities
lending and foreign exchange driven by recent market conditions. These benefits were offset
partially by spread compression on liability products. Treasury Services total net revenue was $813
million, an increase of $124 million, or 18%, from the prior year. This increase reflected higher
liability balances and wider market-driven spreads, as well as growth in electronic and trade loan
volumes. TSS firmwide total net revenue, which includes Treasury Services total net revenue
recorded in other lines of business, grew to $2.6 billion, up $456 million, or 21%. Treasury
Services firmwide total net revenue grew to $1.5 billion, up $193 million, or 15%.
The provision for credit losses was $12 million, an increase of $6 million from the prior year.
Noninterest expense was $1.2 billion, an increase of $153 million, or 14%, from the prior year,
reflecting higher expense related to business and volume growth, as well as investment in new
product platforms.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended March 31, |
(in millions, except headcount, ratio data and where otherwise noted) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services |
|
$ |
813 |
|
|
$ |
689 |
|
|
|
18 |
% |
Worldwide Securities Services |
|
|
1,100 |
|
|
|
837 |
|
|
|
31 |
|
|
|
|
|
|
Total net revenue |
|
$ |
1,913 |
|
|
$ |
1,526 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Assets under custody (in billions) |
|
$ |
15,690 |
|
|
$ |
14,661 |
|
|
|
7 |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
US$ ACH transactions originated (in millions) |
|
|
1,004 |
|
|
|
971 |
|
|
|
3 |
|
Total US$ clearing volume (in thousands) |
|
|
28,056 |
|
|
|
26,840 |
|
|
|
5 |
|
International electronic funds transfer volume (in thousands)(a) |
|
|
40,039 |
|
|
|
42,399 |
|
|
|
(6 |
) |
Wholesale check volume (in millions) |
|
|
623 |
|
|
|
771 |
|
|
|
(19 |
) |
Wholesale cards issued (in thousands)(b) |
|
|
19,122 |
|
|
|
17,146 |
|
|
|
12 |
|
Selected balance sheets (average) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
57,204 |
|
|
$ |
46,005 |
|
|
|
24 |
|
Loans(c) |
|
|
23,086 |
|
|
|
18,948 |
|
|
|
22 |
|
Liability balances(d) |
|
|
254,369 |
|
|
|
210,639 |
|
|
|
21 |
|
Equity |
|
|
3,500 |
|
|
|
3,000 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
26,561 |
|
|
|
24,875 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSS firmwide metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services firmwide revenue(e) |
|
$ |
1,498 |
|
|
$ |
1,305 |
|
|
|
15 |
|
Treasury & Securities Services firmwide revenue(e) |
|
|
2,598 |
|
|
|
2,142 |
|
|
|
21 |
|
Treasury Services firmwide overhead ratio(f) |
|
|
55 |
% |
|
|
59 |
% |
|
|
|
|
Treasury & Securities Services firmwide overhead ratio(f) |
|
|
58 |
|
|
|
63 |
|
|
|
|
|
Treasury Services firmwide liability balances (average)(g) |
|
$ |
221,716 |
|
|
$ |
186,631 |
|
|
|
19 |
|
Treasury & Securities Services firmwide liability balances (average)(g) |
|
|
353,845 |
|
|
|
292,391 |
|
|
|
21 |
|
|
|
|
|
(a) |
|
International electronic funds transfer includes non-US$ ACH and clearing volume. |
(b) |
|
Wholesale cards issued include domestic commercial card, stored value card, prepaid card, and
government electronic benefit card products. |
(c) |
|
Loan balances include wholesale overdrafts, commercial cards and trade finance loans. |
(d) |
|
Liability balances include deposits and deposits swept to onbalance sheet liabilities such
as commercial paper, federal funds purchased and securities sold under repurchase agreements. |
TSS firmwide metrics
TSS firmwide metrics include certain TSS product revenue 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 TS and TSS products and revenue, management reviews firmwide
metrics such as liability balances, revenue and overhead ratios in assessing financial
performance for TSS. Firmwide metrics are necessary in order to understand the aggregate TSS
business.
|
|
|
(e) |
|
Firmwide revenue includes TS revenue recorded in the CB, Regional Banking and AM lines of
business (see below) and excludes FX revenue recorded in the IB for TSS-related FX activity. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Treasury Services revenue reported in CB |
|
$ |
616 |
|
|
$ |
556 |
|
|
|
11 |
% |
Treasury Services revenue reported in other lines of business |
|
|
69 |
|
|
|
60 |
|
|
|
15 |
|
|
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 $191 million and $112 million for the
quarters ended March 31, 2008 and 2007, respectively.
|
|
|
(f) |
|
Overhead ratios have been calculated based upon firmwide revenue and TSS and TS expense,
respectively, including those allocated to certain other lines of business. FX revenue and
expense recorded in the IB for TSS-related FX activity are not included in this ratio. |
(g) |
|
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. |
32
ASSET MANAGEMENT
For a discussion of the business profile of AM, see pages 5658 of JPMorgan Chases 2007 Annual
Report and on page 5 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management, administration and commissions |
|
$ |
1,531 |
|
|
$ |
1,489 |
|
|
|
3 |
% |
All other income |
|
|
59 |
|
|
|
170 |
|
|
|
(65 |
) |
|
|
|
|
|
Noninterest revenue |
|
|
1,590 |
|
|
|
1,659 |
|
|
|
(4 |
) |
Net interest income |
|
|
311 |
|
|
|
245 |
|
|
|
27 |
|
|
|
|
|
|
Total net revenue |
|
|
1,901 |
|
|
|
1,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
16 |
|
|
|
(9 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
825 |
|
|
|
764 |
|
|
|
8 |
|
Noncompensation expense |
|
|
477 |
|
|
|
451 |
|
|
|
6 |
|
Amortization of intangibles |
|
|
21 |
|
|
|
20 |
|
|
|
5 |
|
|
|
|
|
|
Total noninterest expense |
|
|
1,323 |
|
|
|
1,235 |
|
|
|
7 |
|
|
|
|
|
|
Income before income tax expense |
|
|
562 |
|
|
|
678 |
|
|
|
(17 |
) |
Income tax expense |
|
|
206 |
|
|
|
253 |
|
|
|
(19 |
) |
|
|
|
|
|
Net income |
|
$ |
356 |
|
|
$ |
425 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
29 |
% |
|
|
46 |
% |
|
|
|
|
Overhead ratio |
|
|
70 |
|
|
|
65 |
|
|
|
|
|
Pretax margin ratio(a) |
|
|
30 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by client segment |
|
|
|
|
|
|
|
|
|
|
|
|
Private bank |
|
$ |
655 |
|
|
$ |
560 |
|
|
|
17 |
% |
Institutional |
|
|
490 |
|
|
|
551 |
|
|
|
(11 |
) |
Retail |
|
|
466 |
|
|
|
527 |
|
|
|
(12 |
) |
Private client services |
|
|
290 |
|
|
|
266 |
|
|
|
9 |
|
|
|
|
|
|
Total net revenue |
|
$ |
1,901 |
|
|
$ |
1,904 |
|
|
|
|
|
|
|
|
|
(a) |
|
Pretax margin represents income before income tax expense divided by total net revenue, which
is a measure of pretax performance and another basis by which management evaluates its
performance and that of its competitors. |
Quarterly results
Net income was $356 million, a decline of $69 million, or 16%, from the prior year driven primarily
by higher noninterest expense, lower performance fees and lower market valuations for seed capital
investments in JPMorgan funds. These results were offset partially by increased total net revenue
from asset inflows, and growth in deposit and loan balances.
Total net revenue of $1.9 billion was flat compared with the prior year. Noninterest revenue was
$1.6 billion, a decline of $69 million, or 4%, largely due to lower performance fees and lower
market valuations for seed capital investments, partially offset by growth in assets under
management. Net interest income was $311 million, up $66 million, or 27%, from the prior year,
primarily due to higher deposit and loan balances.
Private Bank revenue grew 17% to $655 million due to higher assets under management and increased
deposit and loan balances, partially offset by lower performance and placement fees. Institutional
revenue declined 11% to $490 million due to lower performance fees, partially offset by growth in
assets under management. Retail revenue declined 12% to $466 million, largely due to net equity
outflows and lower market valuations for seed capital investments. Private Client Services revenue
grew 9% to $290 million due to higher deposit and loan balances and growth in assets under
management.
33
The provision for credit losses was $16 million, compared with a benefit of $9 million in the prior
year, primarily driven by an increase in loan balances and a lower level of recoveries.
Noninterest expense was $1.3 billion, an increase of $88 million, or 7%, from the prior year. The
increase was due primarily to higher compensation expense, reflecting increased headcount.
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
Three months ended March 31, |
(in millions, except headcount, ratios and ranking data, and where otherwise noted) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Client advisors |
|
|
1,744 |
|
|
|
1,533 |
|
|
|
14 |
% |
Retirement planning services participants |
|
|
1,519,000 |
|
|
|
1,423,000 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of customer assets in 4 & 5 Star Funds(a) |
|
|
49 |
% |
|
|
61 |
% |
|
|
(20 |
) |
% of AUM in 1st and 2nd quartiles:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
|
52 |
% |
|
|
76 |
% |
|
|
(32 |
) |
3 years |
|
|
73 |
% |
|
|
76 |
% |
|
|
(4 |
) |
5 years |
|
|
75 |
% |
|
|
81 |
% |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected balance sheets data (average) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
60,286 |
|
|
$ |
45,816 |
|
|
|
32 |
|
Loans(c) |
|
|
36,628 |
|
|
|
25,640 |
|
|
|
43 |
|
Deposits |
|
|
68,184 |
|
|
|
54,816 |
|
|
|
24 |
|
Equity |
|
|
5,000 |
|
|
|
3,750 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
14,955 |
|
|
|
13,568 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality
statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(2 |
) |
|
$ |
|
|
|
NM |
|
Nonperforming loans |
|
|
11 |
|
|
|
34 |
|
|
|
(68 |
) |
Allowance for loan losses |
|
|
130 |
|
|
|
114 |
|
|
|
14 |
|
Allowance for lending-related commitments |
|
|
6 |
|
|
|
5 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate |
|
|
(0.02 |
)% |
|
|
|
% |
|
|
|
|
Allowance for loan losses to average loans |
|
|
0.35 |
|
|
|
0.44 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans |
|
|
1,182 |
|
|
|
335 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.03 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
(a) |
|
Derived from following rating services: Morningstar for the United States; Micropal for the
United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan. |
(b) |
|
Derived from following rating services: Lipper for the United States and Taiwan; Micropal
for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan. |
(c) |
|
Reflects the transfer in 2007 of held-for-investment prime mortgage loans transferred from
AM to Corporate within the Corporate/Private Equity segment. |
Assets under supervision
Assets under supervision were $1.6 trillion, an increase of $174 billion, or 12%, from the prior
year. Assets under management were $1.2 trillion, up 13%, or $134 billion, from the prior year. The
increase was due primarily to liquidity product inflows across all segments, and alternative
product inflows in Institutional and Private Bank segments. Custody, brokerage, administration and
deposit balances were $382 billion, up $40 billion.
34
|
|
|
|
|
|
|
|
|
ASSETS UNDER SUPERVISION(a) (in billions) |
|
|
|
|
|
|
As of March 31, |
|
2008 |
|
|
2007 |
|
|
Assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
471 |
|
|
$ |
318 |
|
Fixed income |
|
|
200 |
|
|
|
180 |
|
Equities & balanced |
|
|
390 |
|
|
|
446 |
|
Alternatives |
|
|
126 |
|
|
|
109 |
|
|
Total assets under management |
|
|
1,187 |
|
|
|
1,053 |
|
Custody/brokerage/administration/deposits |
|
|
382 |
|
|
|
342 |
|
|
Total assets under supervision |
|
$ |
1,569 |
|
|
$ |
1,395 |
|
|
|
|
|
|
|
|
|
|
|
Assets by client segment |
|
|
|
|
|
|
|
|
Institutional |
|
$ |
652 |
|
|
$ |
550 |
|
Private Bank |
|
|
196 |
|
|
|
170 |
|
Retail |
|
|
279 |
|
|
|
274 |
|
Private Client Services |
|
|
60 |
|
|
|
59 |
|
|
Total assets under management |
|
$ |
1,187 |
|
|
$ |
1,053 |
|
|
Institutional |
|
$ |
652 |
|
|
$ |
551 |
|
Private Bank |
|
|
441 |
|
|
|
374 |
|
Retail |
|
|
366 |
|
|
|
361 |
|
Private Client Services |
|
|
110 |
|
|
|
109 |
|
|
Total assets under supervision |
|
$ |
1,569 |
|
|
$ |
1,395 |
|
|
|
|
|
|
|
|
|
|
|
Assets by geographic region |
|
|
|
|
|
|
|
|
U.S./Canada |
|
$ |
773 |
|
|
$ |
664 |
|
International |
|
|
414 |
|
|
|
389 |
|
|
Total assets under management |
|
$ |
1,187 |
|
|
$ |
1,053 |
|
|
U.S./Canada |
|
$ |
1,063 |
|
|
$ |
929 |
|
International |
|
|
506 |
|
|
|
466 |
|
|
Total assets under supervision |
|
$ |
1,569 |
|
|
$ |
1,395 |
|
|
|
|
|
|
|
|
|
|
|
Mutual fund assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
405 |
|
|
$ |
257 |
|
Fixed income |
|
|
45 |
|
|
|
48 |
|
Equity |
|
|
186 |
|
|
|
219 |
|
|
Total mutual fund assets |
|
$ |
636 |
|
|
$ |
524 |
|
|
|
|
|
(a) |
|
Excludes assets under management of American Century Companies, Inc, in which the Firm has
44% ownership. |
|
|
|
|
|
|
|
|
|
Assets under management rollforward |
|
Three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
Beginning balance at January 1 |
|
$ |
1,193 |
|
|
$ |
1,013 |
|
Net asset flows: |
|
|
|
|
|
|
|
|
Liquidity |
|
|
68 |
|
|
|
7 |
|
Fixed income |
|
|
|
|
|
|
2 |
|
Equities, balanced and alternative |
|
|
(21 |
) |
|
|
10 |
|
Market/performance/other impacts |
|
|
(53 |
) |
|
|
21 |
|
|
Ending balance |
|
$ |
1,187 |
|
|
$ |
1,053 |
|
|
|
|
|
|
|
|
|
|
|
Assets under supervision rollforward |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,572 |
|
|
$ |
1,347 |
|
Net asset flows |
|
|
52 |
|
|
|
27 |
|
Market/performance/other impacts |
|
|
(55 |
) |
|
|
21 |
|
|
Ending balance |
|
$ |
1,569 |
|
|
$ |
1,395 |
|
|
35
CORPORATE / PRIVATE EQUITY
For a discussion of the business profile of Corporate/Private Equity, see pages 5960 of JPMorgan
Chases 2007 Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended March 31, |
(in millions, except headcount) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
5 |
|
|
$ |
1,325 |
|
|
|
(100 |
)% |
Securities gains (losses) |
|
|
42 |
|
|
|
(8 |
) |
|
NM |
|
All other income(a) |
|
|
1,639 |
|
|
|
68 |
|
|
NM |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,686 |
|
|
|
1,385 |
|
|
|
22 |
|
Net interest income (expense) |
|
|
(286 |
) |
|
|
(117 |
) |
|
|
(144 |
) |
|
|
|
|
|
Total net revenue |
|
|
1,400 |
|
|
|
1,268 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
196 |
|
|
|
3 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
639 |
|
|
|
776 |
|
|
|
(18 |
) |
Noncompensation expense(b) |
|
|
(82 |
) |
|
|
556 |
|
|
NM |
|
Merger costs |
|
|
|
|
|
|
62 |
|
|
NM |
|
|
|
|
|
|
Subtotal |
|
|
557 |
|
|
|
1,394 |
|
|
|
(60 |
) |
Net expense allocated to other businesses |
|
|
(1,057 |
) |
|
|
(1,040 |
) |
|
|
(2 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
(500 |
) |
|
|
354 |
|
|
NM |
|
|
|
|
|
|
Income before income tax expense |
|
|
1,704 |
|
|
|
911 |
|
|
|
87 |
|
Income tax expense |
|
|
677 |
|
|
|
280 |
|
|
|
142 |
|
|
|
|
|
|
Net income |
|
$ |
1,027 |
|
|
$ |
631 |
|
|
|
63 |
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
$ |
163 |
|
|
$ |
1,253 |
|
|
|
(87 |
) |
Corporate |
|
|
1,237 |
|
|
|
15 |
|
|
NM |
|
|
|
|
|
|
Total net revenue |
|
$ |
1,400 |
|
|
$ |
1,268 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
$ |
57 |
|
|
$ |
698 |
|
|
|
(92 |
) |
Corporate |
|
|
970 |
|
|
|
(29 |
) |
|
NM |
|
Merger costs |
|
|
|
|
|
|
(38 |
) |
|
NM |
|
|
|
|
|
|
Total net income |
|
$ |
1,027 |
|
|
$ |
631 |
|
|
|
63 |
|
|
|
|
|
|
Headcount |
|
|
21,769 |
|
|
|
23,702 |
|
|
|
(8 |
) |
|
|
|
|
(a) |
|
Included proceeds from the sale of Visa shares in its initial public offering in the first
quarter of 2008. |
(b) |
|
Included a release of credit card litigation reserves in the first quarter of 2008. |
Quarterly results
Net income for Corporate / Private Equity was $1.0 billion (net income was $72 million, excluding
$955 million in after-tax proceeds from the sale of Visa shares in its initial public offering),
compared with $631 million in the prior year. Excluding the impact of the sale of Visa shares, the
decrease in net income was driven by lower results in Private Equity, lower total net revenue and
an increase in the provision for credit losses both in Corporate. These lower results were offset
partially by a net release of litigation reserves.
Net income for Private Equity was $57 million, compared with $698 million in the prior year. Total
net revenue was $163 million, a decrease of $1.1 billion. The decline was driven by lower Private
Equity gains of $189 million, compared with gains of $1.3 billion in the prior year, which included
a fair value adjustment related to the adoption of SFAS 157 (Fair Value Measurements).
Noninterest expense was $76 million, a decline of $88 million from the prior year, reflecting lower
compensation expense.
36
Excluding the proceeds from the sale of Visa shares in its initial public offering ($1.5 billion
pretax and $955 million after-tax), net income for Corporate was $15 million, compared with a net
loss of $67 million in the prior year. Total net revenue (excluding the effect of Visa sales
proceeds) was negative $303 million, compared with $15 million in the prior year. The decrease was
due to a narrower net interest spread and trading losses. The provision for credit losses was $196
million, compared with $3 million in the prior year, largely reflecting an increase in the
allowance for loan losses for prime mortgages. For a discussion of consumer credit risk, see
Consumer Credit Portfolio on pages 5759 of this Form 10-Q. Noninterest expense was negative $576
million, compared with $190 million in the prior year,
reflecting a reduction of credit card-related
litigation expense and the absence of prior-year merger expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement and balance sheet data |
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses)(a) |
|
$ |
42 |
|
|
$ |
(8 |
) |
|
NM |
% |
Investment securities portfolio (average) |
|
|
80,443 |
|
|
|
86,436 |
|
|
|
(7 |
) |
Investment securities portfolio (ending) |
|
|
91,323 |
|
|
|
88,681 |
|
|
|
3 |
|
Mortgage loans (average)(b) |
|
|
39,096 |
|
|
|
25,244 |
|
|
|
55 |
|
Mortgage loans (ending)(b) |
|
|
41,125 |
|
|
|
26,499 |
|
|
|
55 |
|
|
Private equity |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
$ |
1,113 |
|
|
$ |
723 |
|
|
|
54 |
|
Unrealized gains (losses)(c) |
|
|
(881 |
) |
|
|
521 |
|
|
NM |
|
|
|
|
|
|
Total direct investments |
|
|
232 |
|
|
|
1,244 |
|
|
|
(81 |
) |
Third-party fund investments |
|
|
(43 |
) |
|
|
34 |
|
|
NM |
|
|
|
|
|
|
Total private equity gains(d) |
|
$ |
189 |
|
|
$ |
1,278 |
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity portfolio information(e) |
|
|
|
|
|
|
|
|
|
Direct investments |
|
March 31, 2008 |
|
December 31, 2007 |
|
Change |
|
Publicly held securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
603 |
|
|
$ |
390 |
|
|
|
55 |
% |
Cost |
|
|
499 |
|
|
|
288 |
|
|
|
73 |
|
Quoted public value |
|
|
720 |
|
|
|
536 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately held direct securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
5,191 |
|
|
|
5,914 |
|
|
|
(12 |
) |
Cost |
|
|
4,973 |
|
|
|
4,867 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party fund investments(f) |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
811 |
|
|
|
849 |
|
|
|
(4 |
) |
Cost |
|
|
1,064 |
|
|
|
1,076 |
|
|
|
(1 |
) |
|
|
|
|
|
Total private equity portfolio Carrying value |
|
$ |
6,605 |
|
|
$ |
7,153 |
|
|
|
(8 |
) |
Total private equity portfolio Cost |
|
$ |
6,536 |
|
|
$ |
6,231 |
|
|
|
5 |
|
|
|
|
|
(a) |
|
Reflects repositioning of the Corporate investment securities portfolio. Excludes
gains/losses on securities used to manage risk associated with MSRs. |
(b) |
|
Held-for-investment prime mortgage loans were transferred from RFS and AM to the Corporate
segment for risk management and reporting purposes. The initial transfers had no material
impact on the financial results of Corporate. |
(c) |
|
Unrealized gains (losses) contains reversals of unrealized gains and losses that were
recognized in prior periods and have now been realized. |
(d) |
|
Included in principal transactions revenue in the Consolidated Statements of Income. |
(e) |
|
For more information on the Firms policies regarding the valuation of the private equity
portfolio, see Note 3 on pages 7479 of this Form 10-Q. |
(f) |
|
Unfunded commitments to third-party private equity funds were $869 million and $881 million
at March 31, 2008, and December 31, 2007, respectively. |
The carrying value of the private equity portfolio at March 31, 2008, was $6.6 billion, down $548
million from December 31, 2007. The portfolio decline was primarily due to sales activity. The
portfolio represented 8.3% of the Firms stockholders equity less goodwill at March 31, 2008, down
from 9.2% at December 31, 2007.
37
BALANCE SHEET ANALYSIS
|
|
|
|
|
|
|
|
|
Selected balance sheet data (in millions) |
|
March 31, 2008 |
|
December 31, 2007 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
46,888 |
|
|
$ |
40,144 |
|
Deposits with banks |
|
|
12,414 |
|
|
|
11,466 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
203,176 |
|
|
|
170,897 |
|
Securities borrowed |
|
|
81,014 |
|
|
|
84,184 |
|
Trading assets: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
386,170 |
|
|
|
414,273 |
|
Derivative receivables |
|
|
99,110 |
|
|
|
77,136 |
|
Securities |
|
|
101,647 |
|
|
|
85,450 |
|
Loans |
|
|
537,056 |
|
|
|
519,374 |
|
Allowance for loan losses |
|
|
(11,746 |
) |
|
|
(9,234 |
) |
|
Loans, net of allowance for loan losses |
|
|
525,310 |
|
|
|
510,140 |
|
Accrued interest and accounts receivable |
|
|
50,989 |
|
|
|
24,823 |
|
Goodwill |
|
|
45,695 |
|
|
|
45,270 |
|
Other intangible assets |
|
|
14,374 |
|
|
|
14,731 |
|
Other assets |
|
|
76,075 |
|
|
|
83,633 |
|
|
Total assets |
|
$ |
1,642,862 |
|
|
$ |
1,562,147 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
761,626 |
|
|
$ |
740,728 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
192,633 |
|
|
|
154,398 |
|
Commercial paper and other borrowed funds |
|
|
79,032 |
|
|
|
78,431 |
|
Trading liabilities: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
78,982 |
|
|
|
89,162 |
|
Derivative payables |
|
|
78,983 |
|
|
|
68,705 |
|
Accounts payable, accrued expense and other liabilities |
|
|
106,088 |
|
|
|
94,476 |
|
Beneficial interests issued by consolidated VIEs |
|
|
14,524 |
|
|
|
14,016 |
|
Long-term debt and trust preferred capital debt securities |
|
|
205,367 |
|
|
|
199,010 |
|
|
Total liabilities |
|
|
1,517,235 |
|
|
|
1,438,926 |
|
Stockholders equity |
|
|
125,627 |
|
|
|
123,221 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,642,862 |
|
|
$ |
1,562,147 |
|
|
Note - Rating agencies allow capital to be adjusted upward for deferred tax
liabilities which have resulted from nontaxable business combinations. The Firm had deferred tax liabilities of this
type totaling $1.9 billion at March 31, 2008, and $2.0 billion at December 31, 2007.
Consolidated Balance Sheets overview
The following is a discussion of the significant changes in the Consolidated Balance Sheet items
from December 31, 2007.
Deposits with banks; federal funds sold and securities purchased under resale agreements;
securities borrowed; federal funds purchased and securities sold under repurchase agreements
The Firm utilizes deposits with banks, federal funds sold and securities purchased under resale
agreements, securities borrowed, and federal funds purchased and securities sold under repurchase
agreements as part of its liquidity management activities to manage the Firms cash positions and
risk-based capital requirements, and to support the Firms trading and risk management activities.
Securities purchased under resale agreements, in particular, also facilitate providing of funding
or liquidity to clients through the Firms purchasing of clients securities for the short term.
Federal funds purchased and securities sold under repurchase agreements are used as short-term
funding sources for the Firm. The increase from December 31, 2007, in securities purchased under
resale agreements reflected a higher level of funds that were available for short-term investment
opportunities, as well as growth in demand from clients for liquidity. The increase in federal
funds purchased and securities sold under repurchase agreements was due primarily to higher
short-term requirements to fulfill clients demand for liquidity and fund the Firms AFS securities
inventory levels. For additional information on the Firms Liquidity Risk Management, see pages
4648 of this Form 10-Q.
38
Trading assets and liabilities debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary
risk-taking activities. These instruments consist primarily of fixed income securities, including
government and corporate debt; equity, including convertible securities; loans (including certain
prime mortgage and other loans warehoused by RFS and IB for sale or securitization purposes and
accounted for at fair value under SFAS 159); and physical commodities inventories. The
decreases in trading assets and liabilities from December 31, 2007, were due primarily to the more
challenging capital markets environment, particularly for debt securities. For additional information, refer to Note 4 and
Note 5 on pages 8081 and 8183, respectively, of this Form 10-Q.
Trading assets and liabilities derivative receivables and payables
The Firm utilizes various interest rate, foreign exchange, equity, credit and commodity derivatives
for market-making, proprietary risk-taking and risk-management purposes. Both derivative
receivables and derivative payables increased from December 31, 2007, primarily driven by increases
in foreign exchange and credit derivatives due to the decline in the U.S. dollar and increased
credit spreads, respectively, as well as a decline in interest rates. For additional information,
refer to derivative contracts and Note 5 on pages 5355 and 8183, respectively, of this Form
10-Q.
Securities
Almost all of the Firms securities portfolio is classified as AFS and is used primarily to manage
the Firms exposure to interest rate movements. The AFS portfolio increased from December 31, 2007,
primarily due to net purchases, partially offset by maturities of securities in Corporate. For
additional information related to securities, refer to the Corporate/Private Equity segment
discussion and to Note 10 on pages 3637 and 8586, respectively, of this Form 10-Q.
Loans and allowance for loan losses
The Firm provides loans to customers of all sizes, from large corporate and institutional clients
to individual consumers. The Firm manages the risk/reward relationship of each portfolio and
discourages the retention of loan assets that do not generate a positive return above the cost of
risk-adjusted capital. Loans increased from December 31, 2007, primarily due to business
growth in wholesale lending across all the wholesale businesses, as well as growth in the prime
mortgage portfolio driven by the decision to retain, rather than sell, nonconforming mortgage
loans. These increases were partly offset by seasonal declines in credit card receivables. The
allowance for loan losses increased from December 31, 2007. Both the consumer and wholesale
components of the allowance were higher, with the rise in the consumer portion driven by an
increase in estimated losses for home equity, mortgage and auto loans. The increase in the
wholesale portion was primarily due to the impact of the transfer of leveraged lending loans to
retained loans from held-for-sale loans in IB and the effect of a weakening credit environment. For
a more detailed discussion of the loan portfolio and the allowance for loan losses, refer to Credit
Risk Management on pages 4861 of this Form 10-Q.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired
entity over the net fair value amounts assigned to assets acquired and liabilities assumed. The
increase in goodwill largely resulted from the purchase of an additional equity interest in
Highbridge. For additional information, see Note 16 on pages 98101 of this Form 10-Q.
Other intangible assets
The Firms other intangible assets consist of MSRs, purchased credit card relationships, other
credit card-related intangibles, core deposit intangibles, and all other intangibles. The decrease
in other intangible assets reflects the amortization expense associated with credit card-related
and core deposit intangibles. Also contributing to the decrease was a net decline in the fair value
of MSRs, reflecting negative fair value adjustments and modeled servicing portfolio runoff,
partially offset by additions from sales of originated loans and purchases of MSRs. These factors
were partially offset by an increase in intangibles as a result of the purchase of an additional
equity interest in Highbridge. For additional information on MSRs and other intangible assets, see
Note 16 on pages 98101 of this Form 10-Q.
39
Deposits
The Firms deposits represent a liability to customers, both retail and wholesale, for funds held
on their behalf. Deposits are generally classified by location (U.S. and non-U.S.), whether they
are interest or noninterest-bearing, and by type (i.e., demand, money market deposit accounts,
savings, time or negotiable order of withdrawal accounts). Deposits help provide a stable and
consistent source of funding for the Firm. Deposits rose from December 31, 2007, due to increases
in wholesale interest- and noninterest-bearing U.S. deposits in TSS, and in consumer deposits (in
particular, interest-bearing deposits in RFS); both increases were driven by growth in business volumes. For
more information on deposits, refer to the TSS and RFS segment discussions and the Liquidity Risk
Management discussion on pages 3132, 2026, and 4648, respectively, of this Form 10-Q. For
more information on wholesale liability balances, including deposits, refer to the CB and TSS
segment discussions on pages 2930 and 3132, respectively, of this Form 10-Q.
Long-term debt and trust preferred capital debt securities
The Firm utilizes long-term debt and trust preferred capital debt securities to preserve stable,
reliable and cost-effective sources of funding as part of its longer-term liquidity and capital
management activities. Long-term debt and trust preferred capital debt securities increased from
December 31, 2007, primarily reflecting net new issuances. For additional information on the Firms
long-term debt activities, see the Liquidity Risk Management discussion on pages 4648 of this
Form 10-Q.
Stockholders equity
The increase in total stockholders equity from year-end 2007 was primarily the result of net
income for the first three months of 2008 and net shares issued under the Firms employee
stock-based compensation plans; partially offset by the declaration of cash dividends. For a
further discussion of capital, see the Capital Management section that follows.
40
CAPITAL MANAGEMENT
The following discussion of JPMorgan Chases capital management highlights developments since
December 31, 2007, and should be read in conjunction with Capital Management on pages 6365 of
JPMorgan Chases 2007 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 and to maintain well-capitalized
status under regulatory requirements. In addition, the Firm holds capital above these requirements
in amounts deemed appropriate to achieve managements regulatory and debt rating objectives. The
process of assigning equity to the lines of business is integrated into the Firms capital
framework and is overseen by the Asset-Liability Committee (ALCO).
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. Line of business equity increased during the first quarter of 2008
primarily due to business growth, and for AM, the purchase of the additional equity interest in
Highbridge. The Firm may revise its equity capital-allocation methodology in the future.
In accordance with SFAS 142, the lines of business perform the required goodwill impairment
testing. For a further discussion of goodwill and impairment testing, see Critical Accounting
Estimates Used by the Firm and Note 18 on pages 98 and 154, respectively, of JPMorgan Chases 2007
Annual Report, and Note 16 on pages 9899 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of business equity |
|
Quarterly Averages |
(in billions) |
|
1Q08 |
|
|
4Q07 |
|
|
1Q07 |
|
|
Investment Bank |
|
$ |
22.0 |
|
|
$ |
21.0 |
|
|
$ |
21.0 |
|
Retail Financial Services |
|
|
17.0 |
|
|
|
16.0 |
|
|
|
16.0 |
|
Card Services |
|
|
14.1 |
|
|
|
14.1 |
|
|
|
14.1 |
|
Commercial Banking |
|
|
7.0 |
|
|
|
6.7 |
|
|
|
6.3 |
|
Treasury & Securities Services |
|
|
3.5 |
|
|
|
3.0 |
|
|
|
3.0 |
|
Asset Management |
|
|
5.0 |
|
|
|
4.0 |
|
|
|
3.8 |
|
Corporate/Private Equity |
|
|
56.0 |
|
|
|
56.8 |
|
|
|
52.0 |
|
|
Total common stockholders equity |
|
$ |
124.6 |
|
|
$ |
121.6 |
|
|
$ |
116.2 |
|
|
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firms business
activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital
primarily based upon four risk factors: credit risk, market risk, operational risk and private
equity risk, principally for the Firms private equity business.
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic risk capital |
|
Quarterly Averages |
(in billions) |
|
1Q08 |
|
|
4Q07 |
|
|
1Q07 |
|
|
Credit risk(a) |
|
$ |
32.9 |
|
|
$ |
33.0 |
|
|
$ |
27.7 |
|
Market risk |
|
|
8.7 |
|
|
|
8.9 |
|
|
|
9.4 |
|
Operational risk |
|
|
5.6 |
|
|
|
5.6 |
|
|
|
5.6 |
|
Private equity risk |
|
|
4.3 |
|
|
|
3.9 |
|
|
|
3.6 |
|
|
Economic risk capital |
|
|
51.5 |
|
|
|
51.4 |
|
|
|
46.3 |
|
Goodwill |
|
|
45.7 |
|
|
|
45.3 |
|
|
|
45.1 |
|
Other(b) |
|
|
27.4 |
|
|
|
24.9 |
|
|
|
24.8 |
|
|
Total common stockholders equity |
|
$ |
124.6 |
|
|
$ |
121.6 |
|
|
$ |
116.2 |
|
|
|
|
|
(a) |
|
Incorporates a change to the wholesale credit risk methodology, which has been modified to
include a through-the-cycle adjustment. The prior period has been revised to reflect this
methodology change. For further discussion of this change, see Credit risk capital on page 63
of JPMorgan Chases 2007 Annual Report. |
(b) |
|
Reflects additional capital required, in managements view, to meet its regulatory and debt
rating objectives. |
41
Regulatory capital
The Board of Governors of the Federal Reserve System (the Federal Reserve Board) establishes
capital requirements, including well-capitalized standards for the consolidated financial holding
company. The Office of the Comptroller of the Currency (OCC) establishes similar capital
requirements and standards for the Firms national banks, including JPMorgan Chase Bank, N.A. and
Chase Bank USA, N.A.
Tier 1 capital was $89.6 billion at March 31, 2008, compared with $88.7 billion at December 31,
2007, an increase of $900 million. The increase was due primarily to net income of $2.4 billion
and net issuances of common stock under the Firms employee stock-based compensation plans of $954
million. These increases were offset partially by decreases in stockholders equity net of
accumulated other comprehensive income (loss) due to dividends declared of $1.3 billion, a $453
million increase in the deduction for goodwill and other nonqualifying intangibles and an $887
million (after-tax) increase in the valuation adjustment to certain liabilities to reflect the
credit quality of the Firm. Additional information regarding the Firms capital ratios and the
federal regulatory capital standards to which it is subject is presented in Note 28 on pages
166167 of JPMorgan Chases 2007 Annual Report.
The
Federal Reserve has granted the Firm, for a period of 18 months
following the acquisition of Bear Sterns, relief up to a certain
specified amount and subject to certain conditions from the Federal
Reserves risk-based and leverage capital guidelines in respect to the
Bear Stearns risk-weighted assets and other exposures to be acquired.
The amount of such relief is subject to reduction by one-sixth each
quarter subsequent to the acquisition and expires on October 1,
2009.
The following table presents the risk-based capital ratios for JPMorgan Chase and its significant
banking subsidiaries at March 31, 2008, and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk- |
|
|
Adjusted |
|
|
Tier 1 |
|
|
Total |
|
|
Tier 1 |
|
|
|
Tier 1 |
|
|
|
|
|
|
weighted |
|
|
average |
|
|
capital |
|
|
capital |
|
|
leverage |
|
(in millions, except ratios) |
|
capital |
|
|
Total capital |
|
|
assets(c) |
|
|
assets(d) |
|
|
ratio |
|
|
ratio |
|
|
ratio |
|
|
March 31, 2008(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. |
|
$ |
89,646 |
|
|
$ |
134,948 |
|
|
$ |
1,075,697 |
|
|
$ |
1,507,724 |
|
|
|
8.3 |
% |
|
|
12.5 |
% |
|
|
5.9 |
% |
JPMorgan Chase Bank, N.A. |
|
|
80,059 |
|
|
|
116,734 |
|
|
|
974,918 |
|
|
|
1,315,137 |
|
|
|
8.2 |
|
|
|
12.0 |
|
|
|
6.1 |
|
Chase Bank USA, N.A. |
|
|
11,234 |
|
|
|
12,534 |
|
|
|
68,688 |
|
|
|
60,903 |
|
|
|
16.4 |
|
|
|
18.2 |
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. |
|
$ |
88,746 |
|
|
$ |
132,242 |
|
|
$ |
1,051,879 |
|
|
$ |
1,473,541 |
|
|
|
8.4 |
% |
|
|
12.6 |
% |
|
|
6.0 |
% |
JPMorgan Chase Bank, N.A. |
|
|
78,453 |
|
|
|
112,253 |
|
|
|
950,001 |
|
|
|
1,268,304 |
|
|
|
8.3 |
|
|
|
11.8 |
|
|
|
6.2 |
|
Chase Bank USA, N.A. |
|
|
9,407 |
|
|
|
10,720 |
|
|
|
73,169 |
|
|
|
60,905 |
|
|
|
12.9 |
|
|
|
14.7 |
|
|
|
15.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Federal Reserve Board, OCC and Federal Deposit
Insurance Corporation (FDIC). |
(c) |
|
Includes off-balance sheet risk-weighted assets in the amounts of $350.5 billion, $334.5
billion and $11.3 billion, respectively, at March 31, 2008, and of $352.7 billion, $336.8
billion and $13.4 billion, respectively, at December 31, 2007, for JPMorgan Chase and its
significant banking subsidiaries. |
(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 certain subsidiaries and the total
adjusted carrying value of nonfinancial equity investments that are subject to deductions from
Tier 1 capital. |
(e) |
|
Represents requirements for banking 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 Federal Reserve Board and OCC. |
42
Basel II
The minimum risk-based capital requirements adopted by the federal banking agencies follow the
Capital Accord of the Basel Committee on Banking Supervision. In 2004, the Basel Committee
published a revision to the Accord (Basel II), and in December 2007, U.S. banking regulators
published a final Basel II rule. The final U.S. rule will require JPMorgan Chase to implement Basel
II at the holding company level, as well as at certain key U.S. bank subsidiaries. The U.S.
implementation timetable consists of the qualification period, starting any time between April 1,
2008, and April 1, 2010, followed by a minimum transition period of three years. During the
transition period, Basel II risk-based capital requirements cannot fall below certain floors based
on current (Basel I) regulations. JPMorgan Chase expects to be in compliance with all relevant
Basel II rules within the established timelines. In addition, the Firm will continue to adopt Basel
II rules in certain non-U.S. jurisdictions, as required. For additional information, see Basel II,
on page 65 of JPMorgan Chases 2007 Annual Report.
Dividends
The Firms common stock dividend policy reflects JPMorgan Chases earnings outlook, desired
dividend payout ratios, need to maintain an adequate capital level and alternative investment
opportunities. The Firm continues to target a dividend payout ratio of approximately 3040% of net
income over time. On March 18, 2008, the Firm declared a quarterly common stock dividend of $0.38
per share, payable on April 30, 2008, to shareholders of record at the close of business on April
4, 2008.
Issuance
On April 23, 2008, the Firm issued $6.0 billion of noncumulative, perpetual preferred stock. The
proceeds will be used for general corporate purposes.
Stock repurchases
For a discussion of the Firms current stock repurchase program, see Stock repurchases on page 65
of JPMorgan Chases 2007 Annual Report. During the first quarter of 2008, under the current $10.0
billion stock repurchase program, the Firm did not repurchase any shares. During the first quarter
of 2007, under the then effective stock repurchase program, the Firm repurchased 81 million shares
for $4.0 billion at an average price per share of $49.45. As of March 31, 2008, $6.2 billion of
authorized repurchase capacity remained under the current stock repurchase program.
The current $10.0 billion authorization to repurchase stock will be utilized at managements
discretion, and the timing of purchases and the exact number of shares purchased will depend on
market conditions and alternative investment opportunities. The repurchase program does not include
specific price targets or timetables; may be executed through open market purchases, privately
negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time. 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 page 119 of this Form 10-Q.
43
OFFBALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
JPMorgan Chase is involved with several types of off-balance sheet arrangements, including special
purpose entities (SPEs) and lending-related financial instruments (e.g., commitments and
guarantees). For further discussion of contractual cash obligations, see Off-Balance Sheet
Arrangements and Contractual Cash Obligations on page 67 of JPMorgan Chases 2007 Annual Report.
Special-purpose entities
The basic SPE structure involves a company selling assets to the SPE. The
SPE funds the purchase of those assets by issuing securities to investors in the form of commercial
paper, short-term asset-backed notes, medium-term notes and other forms of interest. SPEs are
generally structured to insulate investors from claims on the SPEs assets by creditors of other
entities, including the creditors of the seller of the assets.
JPMorgan Chase uses SPEs as a source of liquidity for itself and its clients by securitizing
financial assets, and by creating investment products for clients. The Firm is involved with SPEs
through multi-seller conduits and investor intermediation activities, and as a result of its loan
securitizations, through qualifying special purpose entities (QSPEs). This discussion focuses
mostly on multi-seller conduits and investor intermediation. For a detailed discussion of all SPEs
with which the Firm is involved, and the related accounting, see Note 1 on page 108, Note 16 on
pages 139145 and Note 17 on pages 146154 of JPMorgan Chases 2007 Annual Report.
The Firm holds capital, as deemed appropriate, against all SPE-related transactions and related
exposures, such as derivative transactions and lending-related commitments and guarantees.
Implications of a credit rating downgrade to JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating
of JPMorgan Chase Bank, N.A., was 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 $87.8 billion and $94.0 billion at March 31, 2008, and December 31, 2007, respectively. Of
these commitments, $54.2 billion and $61.2 billion had been funded at March 31, 2008, and December
31, 2007, respectively. Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the Firm
could be replaced by another liquidity provider in lieu of providing funding under the liquidity
commitment, or in certain circumstances, the Firm could facilitate the sale or refinancing of the
assets in the SPE in order to provide liquidity. These commitments are included in other unfunded
commitments to extend credit and asset purchase agreements, as shown in the Off-balance sheet
lending-related financial instruments and guarantees table on page 45 of this Form 10-Q.
Special-purpose
entities revenue
The following table summarizes certain revenue information related
to consolidated and nonconsolidated VIEs and QSPEs with which the Firm has significant involvement.
The revenue reported in the table below primarily represents contractual servicing and credit fee
income (i.e., income from acting as administrator, structurer, or liquidity provider). It does not
include mark-to-market gains and losses from changes in the fair value of trading positions (such
as derivative transactions) entered into with VIEs. Those gains and losses are recorded in
principal transactions revenue.
|
|
|
|
|
|
|
|
|
Revenue from VIEs and QSPEs |
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
VIEs:(a) |
|
|
|
|
|
|
|
|
Multi-seller conduits |
|
$ |
57 |
|
|
$ |
38 |
|
Investor intermediation |
|
|
(3) |
|
|
|
9 |
|
|
Total VIEs |
|
|
54 |
|
|
|
47 |
|
QSPEs |
|
|
898 |
|
|
|
846 |
|
|
Total |
|
$ |
952 |
|
|
$ |
893 |
|
|
|
|
|
(a) |
|
Includes revenue associated with consolidated VIEs and significant nonconsolidated VIEs. |
American
Securitization Forum subprime adjustable rate mortgage loans modifications
In December 2007, the American Securitization Forum (ASF) issued the Streamlined Foreclosure and Loss
Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans (the Framework). The
Framework provides guidance for servicers to streamline evaluation procedures of borrowers with
certain subprime adjustable rate mortgage (ARM) loans in
order to more quickly and efficiently provide
modification of such loans with terms that are more appropriate for the individual needs of such
borrowers. The Framework applies to all first-lien subprime ARM loans that have a fixed rate of
interest for an initial period of 36 months or less; are
included in securitized pools; were
originated between January 1, 2005, and July 31, 2007; and have an initial interest rate reset date
between January 1, 2008, and July 31, 2010.
44
JPMorgan Chase
has adopted the Framework, and during the 2008 first quarter has modified $187 million of Segment 2 subprime mortgage
loans. In addition, $41 million of Segment 3 loans were modified
through the Firms normal loss mitigation activities, and
$33 million of Segment 3 loans were prepaid by the borrower.
For additional discussion of the Framework, see Note 14 on pages 9394 of this Form 10-Q and Note
16 on page 145 of JPMorgan Chases 2007 Annual Report.
Off-balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to
meet the financing needs of its customers. The contractual amount of these financial instruments
represents the maximum possible credit risk should the counterparty draw down the commitment or the
Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently
fail to perform according to the terms of the contract. Most of these commitments and guarantees
expire without a default occurring or without being drawn. As a result, the total contractual
amount of these instruments is not, in the Firms view, representative of its actual future credit
exposure or funding requirements. Further, certain commitments, primarily related to consumer
financings, are cancelable, upon notice, at the option of the Firm. For further discussion of
lending-related commitments and guarantees and the Firms accounting for them, see Credit Risk
Management on pages 7389 and Note 31 on pages 170173 of JPMorgan Chases 2007 Annual Report.
The
following table presents off-balance sheet lending-related financial instruments and
guarantees (excluding those related to Bear Stearns) for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
|
March 31, 2008 |
|
|
2007 |
|
By remaining maturity |
|
|
|
|
|
1-<3 |
|
|
3-5 |
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
< 1 year |
|
|
years |
|
|
years |
|
|
> 5 years |
|
|
Total |
|
|
Total |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a) |
|
$ |
754,907 |
|
|
$ |
1,953 |
|
|
$ |
3,016 |
|
|
$ |
69,313 |
|
|
$ |
829,189 |
|
|
$ |
815,936 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded commitments to extend credit(b)(c)(d)(e) |
|
|
99,686 |
|
|
|
65,087 |
|
|
|
74,178 |
|
|
|
17,457 |
|
|
|
256,408 |
|
|
|
250,954 |
|
Asset purchase agreements(f) |
|
|
29,693 |
|
|
|
40,135 |
|
|
|
10,946 |
|
|
|
1,254 |
|
|
|
82,028 |
|
|
|
90,105 |
|
Standby letters of credit and guarantees(c)(g)(h) |
|
|
26,724 |
|
|
|
25,844 |
|
|
|
34,908 |
|
|
|
7,038 |
|
|
|
94,514 |
|
|
|
100,222 |
|
Other letters of credit(c) |
|
|
4,547 |
|
|
|
756 |
|
|
|
94 |
|
|
|
45 |
|
|
|
5,442 |
|
|
|
5,371 |
|
|
Total wholesale |
|
|
160,650 |
|
|
|
131,822 |
|
|
|
120,126 |
|
|
|
25,794 |
|
|
|
438,392 |
|
|
|
446,652 |
|
|
Total lending-related |
|
$ |
915,557 |
|
|
$ |
133,775 |
|
|
$ |
123,142 |
|
|
$ |
95,107 |
|
|
$ |
1,267,581 |
|
|
$ |
1,262,588 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(i) |
|
$ |
410,565 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
410,565 |
|
|
$ |
385,758 |
|
Derivatives qualifying as guarantees(j) |
|
|
23,492 |
|
|
|
10,879 |
|
|
|
25,187 |
|
|
|
36,578 |
|
|
|
96,136 |
|
|
|
85,262 |
|
|
|
|
|
(a) |
|
Included credit card and home equity lending-related commitments of $730.5 billion and $73.0
billion, respectively, at March 31, 2008, and $714.8 billion and $74.2 billion, respectively,
at December 31, 2007. These amounts for credit card and home equity lending-related
commitments represent the total available credit for these products. The Firm has not
experienced, and does not anticipate, that all available lines of credit for these products
will be utilized at the same time. For credit card commitments and if certain conditions are
met for home equity commitments, the Firm can reduce or cancel these lines of credit by
providing the borrower prior notice or, in some cases, without notice as permitted by law. |
(b) |
|
Includes unused advised lines of credit totaling $37.7 billion at March 31, 2008, and $38.4
billion at December 31, 2007, which are not legally binding. In regulatory filings with the
Federal Reserve Board, unused advised lines are not reportable. See
the Glossary of Terms on
pages 109111 of this Form 10-Q for the Firms definition of advised lines of credit. |
(c) |
|
Represents contractual amount net of risk participations totaling $28.8 billion and $28.3
billion at March 31, 2008, and December 31, 2007, respectively. |
(d) |
|
Excludes unfunded commitments to third-party private equity funds of $869 million and $881
million at March 31, 2008, and December 31, 2007, respectively. Also excludes unfunded
commitments for other equity investments of $815 million and $903 million at March 31, 2008,
and December 31, 2007, respectively. |
(e) |
|
Included in other unfunded commitments to extend credit are commitments to investment and
noninvestment grade counterparties in connection with leveraged acquisitions of $8.3 billion
and $8.2 billion at March 31, 2008, and December 31, 2007, respectively. |
(f) |
|
Largely represents asset purchase agreements to the Firms administered multi-seller,
asset-backed commercial paper conduits. The maturity is based upon the weighted-average life
of the underlying assets in the SPE, which are primarily asset purchase agreements to the
Firms administered multi-seller asset-backed commercial paper conduits. It also includes $860
million and $1.1 billion of asset purchase agreements to other third-party entities at March
31, 2008, and December 31, 2007, respectively. |
(g) |
|
JPMorgan Chase held collateral relating to $17.1 billion and $15.8 billion of these
arrangements at March 31, 2008, and December 31, 2007, respectively. |
(h) |
|
Included unused commitments to issue standby letters of credit of $44.4 billion and $50.7
billion at March 31, 2008, and December 31, 2007, respectively. |
(i) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$415.0 billion at March 31, 2008, and $390.5 billion at December 31, 2007, respectively. |
(j) |
|
Represents notional amounts of derivatives qualifying as guarantees. For further discussion
of guarantees, see Note 31 on pages 170173 of JPMorgan Chases 2007 Annual Report. |
45
JPMorgan
Chase agreed to guarantee certain obligations of Bear Stearns and its subsidiaries. The
guarantees of Bear Stearns obligations are secured by liens on assets of Bear Stearns that are not
otherwise pledged. These assets are comprised mainly of fixed assets and other nonfinancial assets.
The carrying amount of the liability to stand ready to perform under the Bear Stearns guarantees
was $669 million at March 31, 2008. These amounts are not included in the amounts disclosed above.
It is not possible to calculate the maximum potential amount of future payments under the
guarantees, or the extent to which proceeds from the liquidation of the assets pledged to JPMorgan
Chase would be expected to cover the maximum potential amount of future payments under the
guarantees since the underlying contract amounts that are guaranteed change on a daily basis.
However, the Firm believes the risk of loss to be remote.
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chases business activities. The Firms risk management
framework and governance structure are intended to provide comprehensive controls and ongoing
management of the major risks inherent in its business activities. 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 further discussion of these risks, see pages 6995 of JPMorgan Chases 2007 Annual Report.
LIQUIDITY RISK MANAGEMENT
The following discussion of JPMorgan Chases liquidity management framework highlights developments
since December 31, 2007, and should be read in conjunction with pages 7073 of JPMorgan Chases
2007 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 to meet actual and
contingent liquidity needs over time. This access enables the Firm to replace maturing obligations
when due and fund assets at appropriate maturities and rates. To accomplish this, management uses a
variety of methods to mitigate liquidity and related risks, taking into consideration market
conditions, prevailing interest rates, liquidity needs and the desired maturity profile of
liabilities, among other factors.
Funding
Sources of funds
As of March 31, 2008, the Firms liquidity position remained strong based upon its liquidity
metrics. JPMorgan Chases long-dated funding, including core liabilities, exceeded illiquid assets,
and the Firm believes its obligations can be met even if access to funding is impaired.
Consistent with its liquidity management policy, the Firm has raised funds at the parent holding
company level sufficient to cover its obligations and those of its nonbank subsidiaries that mature
over the next 12 months.
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, TSS and AM
lines of business are generally a consistent source of funding for JPMorgan Chase Bank, N.A. As of
March 31, 2008, total deposits for the Firm were $761.6 billion. A significant portion of the
Firms deposits are retail deposits, which are less sensitive to interest rate changes and
therefore are considered more stable than market-based (i.e., wholesale) liability balances. The
Firm also benefits from substantial liability balances originated by RFS, CB, TSS and AM through
the normal course of business. Liability balances include deposits and deposits that are swept to
onbalance sheet liabilities (e.g., commercial paper, federal funds purchased and securities sold
under repurchase agreements). These franchise-generated liability balances are also a stable and
consistent source of funding due to the nature of the businesses from which they are generated. For
further discussions of deposit and liability balance trends, see the discussion of the results for
the Firms business segments and the Balance Sheet Analysis on pages 1535 and 3840,
respectively, of this Form 10-Q.
Additional sources of funds include a variety of both short- and long-term instruments, including
federal funds purchased, commercial paper, bank notes, long-term debt, and trust preferred capital
debt securities. This funding is managed centrally, using regional expertise and local market
access, to ensure active participation by the Firm in the global financial markets while
46
maintaining consistent global pricing. These markets serve as cost-effective and diversified
sources of funds and are critical components 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 repurchase 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 and notes to the consolidated financial statements; these
relationships include retained interests in securitization trusts, liquidity facilities and
derivative transactions. For further details, see Off-Balance Sheet Arrangements and Contractual
Cash Obligations and Notes 14 and 22 on pages 4446, 8994
and 103105, respectively, of this
Form 10-Q.
Issuance
During the first quarter of 2008, JPMorgan Chase issued approximately $19.5 billion of long-term
debt and trust preferred capital debt securities. These issuances included $9.0 billion of IB
structured notes, the issuances of which are generally client-driven and not for funding or capital
management purposes as the proceeds from such transactions are generally used to purchase
securities to mitigate the risk associated with structured note exposure. The issuances of
long-term debt and trust preferred capital debt securities were offset partially by $17.5
billion of such securities that matured or were redeemed, including IB structured notes. In addition, during the first
quarter of 2008, the Firm securitized $4.5 billion of credit card loans. The Firm did not
securitize any other consumer or wholesale loans during the first quarter of 2008. For further
discussion of loan securitizations, see Note 14 on pages 8994 of this Form 10-Q.
In connection with the issuance of certain of its trust preferred capital debt securities as well
as the preferred stock issued on April 23, 2008, the Firm has entered into Replacement Capital
Covenants (RCCs) granting certain rights to the holder of covered debt, as defined in the RCCs,
that prohibit the repayment, redemption or purchase of the trust preferred capital debt securities
except, with limited exceptions, to the extent that JPMorgan Chase has received specified amounts
of proceeds from the sale of certain qualifying securities. Currently the Firms covered debt is
its 5.875% Junior Subordinated Deferrable Interest Debentures, Series O, due in 2035. For more
information regarding these covenants, reference is made to the respective RCCs entered into by the
Firm in connection with the issuances of such trust preferred capital debt securities, which are
filed with the U.S. Securities and Exchange Commission under cover of Forms 8-K.
Cash Flows
Cash and due from banks increased $6.7 billion during the first quarter of 2008, compared with a
decrease of $8.6 billion during the first quarter of 2007. The following discussion highlights the
major activities and transactions that affected JPMorgan Chases cash flows during the first
quarter of 2008 and 2007.
Cash Flows from Operating Activities
For the quarters ended March 31, 2008 and 2007, net cash used in operating activities was $2.4
billion and $51.5 billion, respectively. JPMorgan Chases operating assets and liabilities vary
significantly in the normal course of business due to the amount and timing of cash flows. In the
first quarter of 2008 and 2007, net cash was used in operating activities to support the Firms
capital markets and lending activities, as well as to support loans originated or purchased with an
initial intent to sell; however these activities were at a lower level in the first quarter of 2008
as a result of the turmoil in the markets that has continued since the last half of 2007.
Management believes cash flows from operations, available cash balances and the Firms ability to
generate cash through short- and long-term borrowings will be sufficient to fund the Firms
operating liquidity needs.
Cash Flows from Investing Activities
The Firms investing activities primarily include originating loans to be held to maturity, other
receivables, and the available-for-sale investment portfolio. For the quarter ended March 31, 2008,
net cash of $68.5 billion was used in investing activities, primarily for purchases of investment
securities in Corporates AFS portfolio to manage the Firms exposure to interest rates; net
additions to the wholesale loan portfolio, primarily from increased lending activities across all
the wholesale businesses; additions to the mortgage portfolio as a result of the decision to retain
rather than sell new originations of prime mortgage loans; and an increase in securities purchased
under resale agreements reflecting a higher level of available funds for short-term investment
opportunities, as well as growth in demand from clients for liquidity. Partially offsetting these
uses of cash were proceeds from sales and maturities of AFS securities, credit card securitization
activities, the seasonal decline in consumer credit card receivables and cash received from the
sale of an investment net of acquisitions.
47
For the quarter ended March 31, 2007, net cash of $11.8 billion was used in investing activities.
Net cash was invested primarily to fund purchases of Corporates AFS securities in connection with
repositioning the portfolio in response to changes in interest rates; and to increase deposits with
banks as a result of the availability of excess funds for short-term investment opportunities. These uses of cash were partially offset by cash proceeds provided from sales and
maturities of AFS securities, credit card and residential mortgage sales and securitization
activities, and the seasonal decline in credit card loans.
Cash Flows from Financing Activities
The Firms financing activities primarily include the issuance of debt and receipt of customer
deposits. JPMorgan Chase pays quarterly dividends on its common stock and has an ongoing stock
repurchase program. In the first quarter of 2008, net cash provided by financing activities was
$77.3 billion due to increases in wholesale interest and noninterest-bearing deposits, largely in
TSS, and in consumer deposits, in particular interest-bearing deposits in RFS; increases in federal
funds purchased and securities sold under repurchase agreements in connection with higher
short-term requirements to fulfill clients demand for liquidity
and fund the Firms AFS securities
inventory levels; and net new issuances of long-term debt. Cash was used for the payment of cash
dividends, but there were no stock repurchases.
In the first quarter of 2007, net cash provided by financing activities was $54.7 billion due to
increases in securities sold under repurchase agreements in connection with the funding of trading
and AFS securities positions; net new issuances of long-term debt and trust preferred capital debt
securities; and growth in retail deposits, reflecting new account acquisitions, the ongoing
expansion of the retail branch distribution network and seasonal tax-related increases. Cash was
used to meet seasonally higher withdrawals by wholesale demand deposit customers, repurchases of
common stock and the payment of cash dividends.
Credit ratings
The credit ratings of JPMorgan Chases parent holding company and each of its significant banking
subsidiaries as of March 31, 2008, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
Senior long-term debt |
|
|
Moody's |
|
S&P |
|
Fitch |
|
Moody's |
|
S&P |
|
Fitch |
|
JPMorgan Chase & Co.
|
|
P-1
|
|
A-1+
|
|
F1+
|
|
Aa2
|
|
AA-
|
|
AA- |
JPMorgan Chase Bank, N.A.
|
|
P-1
|
|
A-1+
|
|
F1+
|
|
Aaa
|
|
AA
|
|
AA- |
Chase Bank USA, N.A.
|
|
P-1
|
|
A-1+
|
|
F1+
|
|
Aaa
|
|
AA
|
|
AA- |
|
The cost and availability of unsecured financing are influenced by credit ratings. A reduction in
these ratings could have an adverse effect on 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 disciplined 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.
Currently, 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 page 44 and Ratings profile of derivative receivables
marked-to-market (MTM) on page 54 of this Form 10-Q.
CREDIT RISK MANAGEMENT
The following discussion of JPMorgan Chases credit portfolio as of March 31, 2008, highlights
developments since December 31, 2007. This section should be read in conjunction with pages 7389
and pages 9697 and Notes 14, 15, 31, and 32 of JPMorgan Chases 2007 Annual Report.
The Firm assesses its consumer credit exposure on a managed basis, which includes credit card
receivables that have been securitized. For a reconciliation of the provision for credit losses on
a reported basis to managed basis, see pages 1314 of this Form 10-Q.
48
CREDIT PORTFOLIO
The following table presents JPMorgan Chases credit portfolio as of March 31, 2008, and December
31, 2007. Total credit exposure at March 31, 2008, increased $47.0 billion from December 31, 2007,
reflecting increases of $31.9 billion and $15.1 billion in the wholesale and consumer portfolios,
respectively. During the first quarter of 2008, derivative receivables increased $22.0 billion,
managed loans increased $20.0 billion ($18.2 billion and $1.8 billion in the wholesale and consumer
portfolios, respectively) and lending-related commitments increased $5.0 billion ($13.3 billion in
the consumer portfolio offset by a decrease of $8.3 billion in the wholesale portfolio).
In the table below, reported loans include loans accounted for at fair value and loans
held-for-sale, which are carried at the lower of cost or fair value with changes in value recorded
in noninterest revenue. However, these held-for-sale loans and loans accounted for at fair value
are excluded from the average loan balances used for the net charge-off rate calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
|
Nonperforming assets(h) |
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained(a) |
|
$ |
512,245 |
|
|
$ |
491,736 |
|
|
$ |
4,631 |
(h) |
|
$ |
3,536 |
(h) |
Loans held-for-sale |
|
|
15,034 |
|
|
|
18,899 |
|
|
|
62 |
|
|
|
45 |
|
Loans at fair value |
|
|
9,777 |
|
|
|
8,739 |
|
|
|
8 |
|
|
|
5 |
|
|
Loans reported(a) |
|
$ |
537,056 |
|
|
$ |
519,374 |
|
|
$ |
4,701 |
|
|
$ |
3,586 |
|
Loans securitized(b) |
|
|
75,062 |
|
|
|
72,701 |
|
|
|
|
|
|
|
|
|
|
Total managed loans(c) |
|
|
612,118 |
|
|
|
592,075 |
|
|
|
4,701 |
|
|
|
3,586 |
|
Derivative receivables |
|
|
99,110 |
|
|
|
77,136 |
|
|
|
31 |
|
|
|
29 |
|
|
Total managed credit-related assets |
|
|
711,228 |
|
|
|
669,211 |
|
|
|
4,732 |
|
|
|
3,615 |
|
Lending-related commitments(d)(e) |
|
|
1,267,581 |
|
|
|
1,262,588 |
|
|
NA |
|
|
NA |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
711 |
|
|
|
622 |
|
|
Total credit portfolio |
|
$ |
1,978,809 |
|
|
$ |
1,931,799 |
|
|
$ |
5,443 |
|
|
$ |
4,237 |
|
|
Net credit derivative hedges notional(f) |
|
$ |
(78,867 |
) |
|
$ |
(67,999 |
) |
|
$ |
|
|
|
$ |
(3 |
) |
Collateral held against derivatives(g) |
|
|
(13,950 |
) |
|
|
(9,824 |
) |
|
NA |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
Average annual net |
|
(in millions, except ratios) |
|
Net charge-offs |
|
|
charge-off rate |
|
|
|
|
|
2008 |
|
|
|
2007 |
|
|
|
2008 |
|
|
|
2007 |
|
|
|
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans reported |
|
$ |
1,906 |
|
|
$ |
903 |
|
|
|
1.53 |
% |
|
|
0.85 |
% |
Loans securitized(b) |
|
|
681 |
|
|
|
593 |
|
|
|
3.70 |
|
|
|
3.56 |
|
|
Total managed loans |
|
$ |
2,587 |
|
|
$ |
1,496 |
|
|
|
1.81 |
% |
|
|
1.22 |
% |
|
|
|
|
(a) |
|
Loans (other than those for which the SFAS 159 fair value option has been elected) are
presented net of unearned income and net deferred loan fees of $811 million and $1.0 billion
at March 31, 2008, and December 31, 2007, respectively. |
(b) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see Card Services on pages 2628 of this Form 10-Q. |
(c) |
|
Loans past due 90 days and over and accruing includes credit card receivables-reported of
$1.6 billion and $1.5 billion at March 31, 2008, and December 31, 2007, respectively, and
related credit card securitizations of $1.2 billion and $1.1 billion at March 31, 2008, and
December 31, 2007, respectively. |
(d) |
|
Included credit card and home equity lending-related commitments of $730.5 billion and $73.0
billion, respectively, at March 31, 2008; and $714.8 billion and $74.2 billion, respectively,
at December 31, 2007. These amounts for credit card and home equity lending-related
commitments represent the total available credit for these products. The Firm has not
experienced, and does not anticipate, that all available lines of
credit for these products will be utilized at the same
time. For credit card commitments and if certain conditions are met
for home equity commitments, the Firm can reduce or cancel these lines of credit by providing the borrower prior
notice or, in some cases, without notice as permitted by law. |
(e) |
|
Includes wholesale unused advised lines of credit totaling $37.7 billion and $38.4 billion at
March 31, 2008, and December 31, 2007, respectively, which are not legally binding. In
regulatory filings with the Federal Reserve Board, unused advised lines are not reportable. |
(f) |
|
Represents the net notional amount of protection purchased and sold of single-name and
portfolio credit derivatives used to manage the credit exposures; these derivatives do not
qualify for hedge accounting under SFAS 133. Includes $33.9 billion and $31.1 billion at March
31, 2008, and December 31, 2007, respectively, which represents the notional amount of
structured portfolio protection; the Firm retains a minimal first risk of loss on this
portfolio. |
(g) |
|
Represents other liquid securities collateral held by the Firm as of March 31, 2008, and
December 31, 2007, respectively. |
49
|
|
|
(h) |
|
Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by U.S. government agencies of $1.8 billion and
$1.5 billion at March 31, 2008, and December 31, 2007, respectively, and (2) education loans
that are 90 days past due and still accruing, which are insured by U.S. government agencies
under the Federal Family Education Loan Program, of $252 million and $279 million at March 31,
2008, and December 31, 2007, respectively. These amounts for GNMA and education loans are
excluded, as reimbursement is proceeding normally. |
WHOLESALE CREDIT PORTFOLIO
As of March 31, 2008, wholesale exposure (IB, CB, TSS and AM) increased $31.9 billion from December
31, 2007, due to increases in derivative receivables of $22.0 billion and loans of $18.2 billion.
These increases were partially offset by a decrease in lending-related commitments of $8.3 billion.
The increase in derivative receivables was primarily driven by increases in foreign exchange and
credit derivatives due to the decline in the U.S. dollar and increased credit spreads,
respectively, as well as a decline in interest rates. The increase in loans was primarily due to
lending activity across all wholesale businesses and other portfolio growth. The decrease in
lending-related commitments is mainly due to the cancellation of primarily investment-grade
commitments as well as other portfolio activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
|
Nonperforming assets |
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Loans retained(a) |
|
$ |
211,020 |
|
|
$ |
189,427 |
|
|
$ |
711 |
|
|
$ |
464 |
|
Loans held-for-sale |
|
|
10,500 |
|
|
|
14,910 |
|
|
|
62 |
|
|
|
45 |
|
Loans at fair value |
|
|
9,777 |
|
|
|
8,739 |
|
|
|
8 |
|
|
|
5 |
|
|
Loans reported(a) |
|
$ |
231,297 |
|
|
$ |
213,076 |
|
|
$ |
781 |
|
|
$ |
514 |
|
Derivative receivables |
|
|
99,110 |
|
|
|
77,136 |
|
|
|
31 |
|
|
|
29 |
|
|
Total wholesale credit-related assets |
|
|
330,407 |
|
|
|
290,212 |
|
|
|
812 |
|
|
|
543 |
|
Lending-related commitments(b) |
|
|
438,392 |
|
|
|
446,652 |
|
|
NA |
|
|
NA |
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
94 |
|
|
|
73 |
|
|
Total wholesale credit exposure |
|
$ |
768,799 |
|
|
$ |
736,864 |
|
|
$ |
906 |
|
|
$ |
616 |
|
|
Net credit derivative hedges notional(c) |
|
$ |
(78,867 |
) |
|
$ |
(67,999 |
) |
|
$ |
|
|
|
$ |
(3 |
) |
Collateral held against derivatives(d) |
|
|
(13,950 |
) |
|
|
(9,824 |
) |
|
NA |
|
|
NA |
|
|
|
|
(a) |
|
Includes loans greater or equal to 90 days past due that continue to accrue interest. The
principal balance of these loans totaled $78 million and $75 million at March 31, 2008, and
December 31, 2007, respectively. Also, see Note 4 on pages 8081 and Note 12 on pages 8688
respectively, of this Form 10-Q. |
(b) |
|
Includes unused advised lines of credit totaling $37.7 billion and $38.4 billion at March 31,
2008, and December 31, 2007, respectively, which are not legally binding. In regulatory
filings with the Federal Reserve Board, unused advised lines are not reportable. |
(c) |
|
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. Includes $33.9 billion and
$31.1 billion at March 31, 2008, and December 31, 2007, respectively, which represents the
notional amount of structured portfolio protection; the Firm retains a minimal first risk of
loss on this portfolio. |
(d) |
|
Represents other liquid securities collateral held by the Firm as of March 31, 2008, and
December 31, 2007, respectively. |
Net charge-offs/(recoveries)
Wholesale
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
Loans reported |
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
92 |
|
|
$ |
(6 |
) |
Average annual net charge-off (recovery) rate(a) |
|
|
0.18 |
% |
|
|
(0.02 |
)% |
|
|
|
|
(a) |
|
Excludes average wholesale loans held-for-sale and loans at fair value of $20.1 billion and
$14.2 billion for the quarters ended March 31, 2008 and 2007, respectively. |
Net charge-offs (recoveries) do not include gains and losses from sales of nonperforming loans that
were sold as shown in the following table. There were no gains or losses during the first quarters
of 2008 and 2007, respectively.
50
|
|
|
|
|
|
|
|
|
Nonperforming loan activity |
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Beginning balance at January 1 |
|
$ |
514 |
|
|
$ |
391 |
|
|
|
Additions |
|
|
590 |
|
|
|
134 |
|
|
Reductions |
|
|
|
|
|
|
|
|
Paydowns and other |
|
|
(177 |
) |
|
|
(225 |
) |
Charge-offs |
|
|
(130 |
) |
|
|
(17 |
) |
Returned to performing |
|
|
(9 |
) |
|
|
(16 |
) |
Sales |
|
|
(7 |
) |
|
|
|
|
|
Total reductions |
|
|
(323 |
) |
|
|
(258 |
) |
|
Net additions (reductions) |
|
|
267 |
|
|
|
(124 |
) |
|
|
Ending balance |
|
$ |
781 |
|
|
$ |
267 |
|
|
The following table presents summaries of the maturity and ratings profiles of the wholesale
portfolio as of March 31, 2008, and December 31, 2007. The ratings scale is based upon the Firms
internal risk ratings and generally correspond to the ratings as defined by S&P and Moodys.
Wholesale credit exposure maturity and ratings profile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity profile(c) |
|
|
Ratings profile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade (IG) |
|
|
grade |
|
|
|
|
|
|
|
|
At March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/Aaa to |
|
|
BB+/Ba1 |
|
|
|
|
|
|
Total % |
|
(in billions, except ratios) |
|
<1 year |
|
|
1 - 5 years |
|
|
> 5 years |
|
|
Total |
|
|
BBB-/Baa3 |
|
|
& below |
|
|
Total |
|
|
of IG |
|
|
|
|
Loans |
|
|
42 |
% |
|
|
43 |
% |
|
|
15 |
% |
|
|
100 |
% |
|
$ |
139 |
|
|
$ |
73 |
|
|
$ |
212 |
|
|
|
66 |
% |
Derivative receivables |
|
|
20 |
|
|
|
41 |
|
|
|
39 |
|
|
|
100 |
|
|
|
80 |
|
|
|
19 |
|
|
|
99 |
|
|
|
81 |
|
Lending-related
commitments |
|
|
37 |
|
|
|
57 |
|
|
|
6 |
|
|
|
100 |
|
|
|
371 |
|
|
|
67 |
|
|
|
438 |
|
|
|
85 |
|
|
|
|
Total
excluding loans held-for-sale and loans at fair value |
|
|
36 |
% |
|
|
52 |
% |
|
|
12 |
% |
|
|
100 |
% |
|
$ |
590 |
|
|
$ |
159 |
|
|
$ |
749 |
|
|
|
79 |
% |
Loans held-for-sale and
loans at fair value(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
Total
exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
769 |
|
|
|
|
|
|
|
|
Net credit derivative
hedges notional(b) |
|
|
22 |
% |
|
|
73 |
% |
|
|
5 |
% |
|
|
100 |
% |
|
$ |
(79 |
) |
|
$ |
|
|
|
$ |
(79 |
) |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity profile(c) |
|
|
Ratings profile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade (IG) |
|
|
grade |
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/Aaa to |
|
|
BB+/Ba1 |
|
|
|
|
|
|
Total % |
|
(in billions, except ratios) |
|
<1 year |
|
|
1 - 5 years |
|
|
> 5 years |
|
|
Total |
|
|
BBB-/Baa3 |
|
|
& below |
|
|
Total |
|
|
of IG |
|
|
|
|
Loans |
|
|
44 |
% |
|
|
45 |
% |
|
|
11 |
% |
|
|
100 |
% |
|
$ |
127 |
|
|
$ |
62 |
|
|
$ |
189 |
|
|
|
67 |
% |
Derivative receivables |
|
|
17 |
|
|
|
39 |
|
|
|
44 |
|
|
|
100 |
|
|
|
64 |
|
|
|
13 |
|
|
|
77 |
|
|
|
83 |
|
Lending-related
commitments |
|
|
35 |
|
|
|
59 |
|
|
|
6 |
|
|
|
100 |
|
|
|
380 |
|
|
|
67 |
|
|
|
447 |
|
|
|
85 |
|
|
|
|
Total
excluding loans held-for-sale and loans at fair value |
|
|
36 |
% |
|
|
53 |
% |
|
|
11 |
% |
|
|
100 |
% |
|
$ |
571 |
|
|
$ |
142 |
|
|
$ |
713 |
|
|
|
80 |
% |
Loans held-for-sale and
loans at fair value(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
Total
exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
737 |
|
|
|
|
|
|
|
|
Net credit derivative
hedges notional(b) |
|
|
39 |
% |
|
|
56 |
% |
|
|
5 |
% |
|
|
100 |
% |
|
$ |
(68 |
) |
|
$ |
|
|
|
$ |
(68 |
) |
|
|
100 |
% |
|
|
|
|
|
|
(a) |
|
Loans held-for-sale relate primarily to syndication loans and loans transferred from the
retained portfolio. |
(b) |
|
Represents the net notional amounts of protection purchased and sold of single-name and
portfolio credit derivatives used to manage the credit exposures; these derivatives do not
qualify for hedge accounting under SFAS 133. Includes $33.9 billion and $31.1 billion at March
31, 2008, and December 31, 2007, respectively, which represents the notional amount of
structured portfolio protection; the Firm retains a minimal first risk of loss on this
portfolio. Prior periods have been revised to reflect the current presentation. |
51
|
|
|
(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 80 of JPMorgan Chases 2007 Annual Report for
further discussion of average exposure. |
Wholesale
credit exposure selected industry concentration
The Firm focuses on the management and diversification of its industry concentrations, with
particular attention paid to industries with actual or potential credit concerns. At March 31,
2008, the top 10 industries were the same as those at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
December 31, 2007 |
Top 10 industries(a) |
|
Credit |
|
|
% of |
|
|
Credit |
|
|
% of |
|
(in millions, except ratios) |
|
exposure(d) |
|
|
portfolio |
|
|
exposure(d) |
|
|
portfolio |
|
|
Banks and finance companies |
|
$ |
72,487 |
|
|
|
10 |
% |
|
$ |
65,288 |
|
|
|
9 |
% |
Asset managers |
|
|
44,291 |
|
|
|
6 |
|
|
|
38,554 |
|
|
|
6 |
|
Real estate |
|
|
39,500 |
|
|
|
5 |
|
|
|
38,295 |
|
|
|
5 |
|
Consumer products |
|
|
35,685 |
|
|
|
5 |
|
|
|
29,941 |
|
|
|
4 |
|
Healthcare |
|
|
34,303 |
|
|
|
4 |
|
|
|
30,746 |
|
|
|
4 |
|
State and municipal governments |
|
|
31,910 |
|
|
|
4 |
|
|
|
31,425 |
|
|
|
5 |
|
Utilities |
|
|
30,862 |
|
|
|
4 |
|
|
|
28,679 |
|
|
|
4 |
|
Securities firms and exchanges |
|
|
30,789 |
|
|
|
4 |
|
|
|
23,274 |
|
|
|
3 |
|
Retail and consumer services |
|
|
27,563 |
|
|
|
4 |
|
|
|
23,969 |
|
|
|
3 |
|
Oil and gas |
|
|
26,634 |
|
|
|
4 |
|
|
|
26,082 |
|
|
|
4 |
|
All other(b) |
|
|
374,498 |
|
|
|
50 |
|
|
|
376,962 |
|
|
|
53 |
|
|
Total excluding loans held-for-sale and loans at fair value |
|
$ |
748,522 |
|
|
|
100 |
% |
|
$ |
713,215 |
|
|
|
100 |
% |
|
Loans held-for-sale and loans at fair value(c) |
|
|
20,277 |
|
|
|
|
|
|
|
23,649 |
|
|
|
|
|
|
Total |
|
$ |
768,799 |
|
|
|
|
|
|
$ |
736,864 |
|
|
|
|
|
|
|
|
|
(a) |
|
Rankings are based upon exposure at March 31, 2008. |
(b) |
|
For more information on
exposures to SPEs included in all other, see Note 15 on pages
9498 of this Form 10-Q. |
(c) |
|
Loans held-for-sale relate primarily to syndication loans and loans transferred from the
retained portfolio. |
(d) |
|
Credit exposure is net of risk participations and excludes the benefit of credit derivative
hedges and collateral held against derivative receivables or loans. |
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of
CCC+/Caa1 and lower, as defined by S&P and Moodys. The total criticized component of the
portfolio, excluding loans held-for-sale and loans at fair value, increased to $10.3 billion, at
March 31, 2008, from $6.8 billion at year-end 2007. The increase was primarily related to
downgrades to select names within the portfolio, mainly in the IB.
Wholesale
criticized exposure industry concentrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
December 31, 2007 |
Top 10 industries(a) |
|
Credit |
|
|
% of |
|
|
Credit |
|
|
% of |
|
(in millions, except ratios) |
|
exposure |
|
|
portfolio |
|
|
exposure |
|
|
portfolio |
|
|
Real estate |
|
$ |
1,811 |
|
|
|
18 |
% |
|
$ |
1,070 |
|
|
|
16 |
% |
Automotive |
|
|
1,437 |
|
|
|
14 |
|
|
|
1,338 |
|
|
|
20 |
|
Banks and finance companies |
|
|
1,139 |
|
|
|
11 |
|
|
|
498 |
|
|
|
7 |
|
Building materials/construction |
|
|
765 |
|
|
|
7 |
|
|
|
345 |
|
|
|
5 |
|
Asset managers |
|
|
681 |
|
|
|
7 |
|
|
|
212 |
|
|
|
3 |
|
Retail and consumer services |
|
|
562 |
|
|
|
5 |
|
|
|
550 |
|
|
|
8 |
|
State and municipal government |
|
|
461 |
|
|
|
4 |
|
|
|
12 |
|
|
|
|
|
Media |
|
|
393 |
|
|
|
4 |
|
|
|
303 |
|
|
|
4 |
|
Utilities |
|
|
303 |
|
|
|
3 |
|
|
|
212 |
|
|
|
3 |
|
Consumer products |
|
|
300 |
|
|
|
3 |
|
|
|
239 |
|
|
|
4 |
|
All other |
|
|
2,460 |
|
|
|
24 |
|
|
|
2,059 |
|
|
|
30 |
|
|
Total excluding loans held-for-sale and loans at fair
value |
|
$ |
10,312 |
|
|
|
100 |
% |
|
$ |
6,838 |
|
|
|
100 |
% |
|
Loans held-for-sale and loans at fair value(b) |
|
|
1,615 |
|
|
|
|
|
|
|
205 |
|
|
|
|
|
|
Total |
|
$ |
11,927 |
|
|
|
|
|
|
$ |
7,043 |
|
|
|
|
|
|
|
|
|
(a) |
|
Rankings are based upon exposure at March 31, 2008. |
(b) |
|
Loans held-for-sale relate primarily to syndication loans and loans transferred from the
retained portfolio. |
52
Derivative contracts
In the normal course of business, the Firm uses derivative instruments to meet the needs of
customers; to generate revenue through trading activities; to manage exposure to fluctuations in
interest rates, currencies and other markets; and to manage the Firms credit exposure. For further
discussion of these contracts, see Note 21 on page 103 of this Form 10-Q, and derivative contracts
on pages 7982 and Note 30 on pages 168169 of JPMorgan Chases 2007 Annual Report.
The following table summarizes the aggregate notional amounts and the net derivative receivables
MTM for the periods presented.
Notional amounts of derivative contracts
|
|
|
|
|
|
|
|
|
|
|
Notional amounts(a) |
(in billions) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
Interest rate and currency swaps(b) |
|
$ |
56,730 |
|
|
$ |
53,458 |
|
Futures and forwards |
|
|
5,311 |
|
|
|
4,548 |
|
Purchased options |
|
|
5,076 |
|
|
|
5,349 |
|
|
Total interest rate contracts |
|
|
67,117 |
|
|
|
63,355 |
|
|
Credit derivatives |
|
$ |
8,225 |
|
|
$ |
7,967 |
|
|
Commodity contracts |
|
|
|
|
|
|
|
|
Swaps |
|
$ |
286 |
|
|
$ |
275 |
|
Futures and forwards |
|
|
130 |
|
|
|
91 |
|
Purchased options |
|
|
225 |
|
|
|
233 |
|
|
Total commodity contracts |
|
|
641 |
|
|
|
599 |
|
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
Futures and forwards |
|
$ |
3,794 |
|
|
$ |
3,424 |
|
Purchased options |
|
|
1,231 |
|
|
|
906 |
|
|
Total foreign exchange contracts |
|
|
5,025 |
|
|
|
4,330 |
|
|
Equity contracts |
|
|
|
|
|
|
|
|
Swaps |
|
$ |
102 |
|
|
$ |
105 |
|
Futures and forwards |
|
|
80 |
|
|
|
72 |
|
Purchased options |
|
|
764 |
|
|
|
821 |
|
|
Total equity contracts |
|
|
946 |
|
|
|
998 |
|
|
Total derivative notional amounts |
|
$ |
81,954 |
|
|
$ |
77,249 |
|
|
|
|
|
(a) |
|
Represents the sum of gross long and gross short third-party notional derivative contracts,
excluding written options and foreign exchange spot contracts. |
(b) |
|
Includes cross currency swap contract notional amounts of $1.5 trillion and $1.4 trillion at
March 31, 2008, and December 31, 2007, respectively. |
Derivative receivables marked-to-market
|
|
|
|
|
|
|
|
|
|
|
Derivative receivables MTM |
(in millions) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
Interest rate contracts |
|
$ |
40,371 |
|
|
$ |
36,020 |
|
Credit derivatives |
|
|
27,551 |
|
|
|
22,083 |
|
Commodity contracts |
|
|
12,395 |
|
|
|
9,419 |
|
Foreign exchange |
|
|
12,280 |
|
|
|
5,616 |
|
Equity contracts |
|
|
6,513 |
|
|
|
3,998 |
|
|
Total, net of cash collateral |
|
$ |
99,110 |
|
|
$ |
77,136 |
|
Liquid securities collateral held against derivative receivables |
|
|
(13,950 |
) |
|
|
(9,824 |
) |
|
Total, net of all collateral |
|
$ |
85,160 |
|
|
$ |
67,312 |
|
|
The amount of derivative receivables reported on the Consolidated Balance Sheets of $99.1 billion
and $77.1 billion at March 31, 2008, and December 31, 2007, respectively, is the amount of the
mark-to-market (MTM) or fair value of the derivative contracts after giving effect to legally
enforceable master netting agreements and cash collateral held by the Firm. These amounts represent
the cost to the Firm to replace the contracts at current market rates should the counterparty
default. However, in managements view, the appropriate measure of current credit risk should also
reflect additional liquid securities held as collateral by the Firm of $14.0 billion and $9.8
billion at March 31, 2008, and December 31, 2007, respectively, resulting in total exposure, net of
all collateral, of $85.2 billion and $67.3 billion at March 31, 2008, and December 31, 2007, respectively. Derivative receivables increased $17.8 billion
from
53
December 31, 2007, primarily driven by increases in foreign exchange and credit derivatives
due to the decline in the U.S. dollar and increased credit spreads, respectively, as well as a
decline in interest rates.
The Firm also holds additional collateral delivered by clients at the initiation of transactions,
but this collateral does not reduce the credit risk of the derivative receivables in the table
above. This additional collateral secures potential exposure that could arise in the derivatives
portfolio should the MTM of the clients transactions move in the Firms favor. As of March 31,
2008, and December 31, 2007, the Firm held $19.7 billion and $17.4 billion of this additional
collateral, respectively. The derivative receivables MTM, net of all collateral, also does not
include other credit enhancements in the forms of letters of credit.
The following table summarizes the ratings profile of the Firms derivative receivables MTM, net of
other liquid securities collateral, for the dates indicated.
Ratings profile of derivative receivables MTM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
December 31, 2007 |
Rating equivalent |
|
Exposure net of |
|
|
% of exposure |
|
|
Exposure net of |
|
|
% of exposure |
|
(in millions, except ratios) |
|
all collateral |
|
|
net of all collateral |
|
|
all collateral |
|
|
net of all collateral |
|
|
AAA/Aaa to AA-/Aa3 |
|
$ |
42,113 |
|
|
|
50 |
% |
|
$ |
38,314 |
|
|
|
57 |
% |
A+/A1 to A-/A3 |
|
|
15,124 |
|
|
|
18 |
|
|
|
9,855 |
|
|
|
15 |
|
BBB+/Baa1 to BBB-/Baa3 |
|
|
13,066 |
|
|
|
15 |
|
|
|
9,335 |
|
|
|
14 |
|
BB+/Ba1 to B-/B3 |
|
|
13,682 |
|
|
|
16 |
|
|
|
9,451 |
|
|
|
14 |
|
CCC+/Caa1 and below |
|
|
1,175 |
|
|
|
1 |
|
|
|
357 |
|
|
|
|
|
|
Total |
|
$ |
85,160 |
|
|
|
100 |
% |
|
$ |
67,312 |
|
|
|
100 |
% |
|
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, 2008, from 82% at December 31, 2007.
The Firm posted $48.5 billion and $33.5 billion of collateral at March 31, 2008, and December 31,
2007, 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. The impact of a single-notch ratings downgrade
to JPMorgan Chase Bank, N.A., from its rating of AA to
AA- at March 31, 2008, would have
required $274 million of additional collateral to be posted by the Firm. The impact of a six-notch
ratings downgrade (from AA to BBB) would have required $3.4 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 as of March 31, 2008, and December 31, 2007.
Credit derivatives positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
|
Credit portfolio |
|
|
Dealer/client |
|
|
|
|
|
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
|
|
(in billions) |
|
purchased(a) |
|
|
sold |
|
|
purchased |
|
|
sold |
|
|
Total |
|
|
March 31, 2008
|
|
$ |
80 |
|
|
$ |
1 |
|
|
$ |
4,118 |
|
|
$ |
4,026 |
|
|
$ |
8,225 |
|
December 31, 2007
|
|
|
70 |
|
|
|
2 |
|
|
|
3,999 |
|
|
|
3,896 |
|
|
|
7,967 |
|
|
|
|
|
(a) |
|
Included $33.9 billion and $31.1 billion at March 31, 2008, and December 31, 2007,
respectively, that represented the notional amount for structured portfolio protection; the
Firm retains a minimal first risk of loss on this portfolio. |
JPMorgan Chase has counterparty exposure as a result of credit derivatives transactions. Of the
$99.1 billion of total derivative receivables MTM at March 31, 2008, $27.6 billion, or 28%, was
associated with credit derivatives, before the benefit of liquid securities collateral.
Dealer/client
At March 31, 2008, the total notional amount of protection purchased and sold in the dealer/client
business increased $249 billion from year-end 2007 as a result of increased trade volume in the
market. The risk positions are largely matched with residual default exposure and spread risk
actively managed by the Firms various trading desks.
54
Credit portfolio management activities
Use of single-name and portfolio credit derivatives
|
|
|
|
|
|
|
|
|
|
|
Notional amount of protection purchased |
|
(in millions) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
Credit derivatives used to manage |
|
|
|
|
|
|
|
|
Loans and lending-related commitments |
|
$ |
73,131 |
|
|
$ |
63,645 |
|
Derivative receivables |
|
|
6,566 |
|
|
|
6,462 |
|
|
Total(a) |
|
$ |
79,697 |
|
|
$ |
70,107 |
|
|
|
|
|
(a) |
|
Included $33.9 billion and $31.1 billion at March 31, 2008, and December 31, 2007,
respectively, that represented the notional amount for structured portfolio protection; the
Firm retains a minimal first risk of loss on this portfolio. |
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 revenue. The MTM value incorporates both the cost of credit derivative
premiums and changes in value due to movement in spreads and credit events; in contrast, the loans
and lending-related commitments being risk-managed are accounted for on an accrual basis. Loan
interest and fees are generally recognized in net interest income, and impairment is recognized in
the provision for credit losses. This asymmetry in accounting treatment, between loans and
lending-related commitments and the credit derivatives utilized in 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 MTM related to the credit valuation
adjustment (CVA), which reflects the credit quality of derivatives counterparty exposure, are
included in the table below. These results can vary from year to year due to market conditions that
impact specific positions in the portfolio. For a discussion of CVA related to derivative
contracts, see Derivative receivables marked to market
(MTM) on pages 8081 of JPMorgan Chases 2007 Annual Report.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Hedges of lending-related commitments(a) |
|
$ |
387 |
|
|
$ |
(9 |
) |
CVA and hedges of CVA(a) |
|
|
(734 |
) |
|
|
7 |
|
|
Net gains (losses)(b) |
|
$ |
(347 |
) |
|
$ |
(2 |
) |
|
|
|
|
(a) |
|
These hedges do not qualify for hedge accounting under SFAS 133. |
(b) |
|
Excludes gains of $1.3 billion and gains of $146 million for the quarters ended March 31,
2008 and 2007, respectively, of other principal transaction revenue that are not associated
with hedging activities. The amounts incorporate an adjustment to the valuation of the Firms
derivative liabilities as a result of the adoption of SFAS 157 on January 1, 2007. |
The Firm also actively manages wholesale credit exposure through IB and CB loan and commitment
sales. During the first quarter of 2008 and 2007, the Firm sold $1.1 billion and $1.6 billion of
loans and commitments, respectively, recognizing losses of $5 million and $6 million, respectively.
These results include any gains or losses on sales of nonperforming loans as discussed on page 50
of this Form 10-Q. These activities are not related to the Firms securitization activities, which
are undertaken for liquidity and balance sheet management purposes. For further discussion of
securitization activity, see Liquidity Risk Management and Note 14 on
pages 4648, and 8994,
respectively, of this Form 10-Q.
Lending-related commitments
Wholesale lending-related commitments were $438.4 billion at March 31, 2008, compared with $446.7
billion at December 31, 2007. See page 50 of this Form 10-Q for an explanation of the decrease in
exposure. 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 $233.9 billion and $238.7 billion as of March
31, 2008, and December 31, 2007, respectively.
55
Emerging markets country exposure
The Firm has a comprehensive internal process for measuring and
managing exposures to emerging markets countries. There is no common definition of emerging markets
but the Firm generally, though not exclusively, includes in its definition those countries whose
sovereign debt ratings are equivalent to A+ or lower. Exposures to a country include all
credit-related lending, trading and investment activities, whether cross-border or locally funded.
In addition to monitoring country exposures, the Firm uses stress tests to measure and manage the
risk of extreme loss associated with sovereign crises.
The table below presents the Firms exposure to the top five emerging markets countries. The
selection of countries is based solely on the Firms largest total exposures by country and not the
Firms view of any actual or potentially adverse credit conditions. Exposure is reported based on
the country where the assets of the obligor, counterparty or guarantor are located. Exposure
amounts are adjusted for collateral and for credit enhancements (e.g., guarantees and letters of
credit) provided by third parties; outstandings supported by a guarantor outside the country or
backed by collateral held outside the country are assigned to the country of the enhancement
provider. In addition, the effect of credit derivative hedges and other short credit or equity
trading positions are reflected in the table below. Total exposure includes exposure to both
government and private sector entities in a country.
Top 5 emerging markets country exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008 |
|
Cross-border |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
(in billions) |
|
Lending(a) |
|
|
Trading(b) |
|
|
Other(c) |
|
|
Total |
|
|
Local(d) |
|
|
exposure |
|
|
South Korea |
|
$ |
3.0 |
|
|
$ |
3.2 |
|
|
$ |
0.8 |
|
|
$ |
7.0 |
|
|
$ |
2.8 |
|
|
$ |
9.8 |
|
India |
|
|
2.7 |
|
|
|
1.5 |
|
|
|
0.9 |
|
|
|
5.1 |
|
|
|
1.1 |
|
|
|
6.2 |
|
Brazil |
|
|
1.5 |
|
|
|
(0.4 |
) |
|
|
0.4 |
|
|
|
1.5 |
|
|
|
4.6 |
|
|
|
6.1 |
|
Russia |
|
|
2.9 |
|
|
|
1.9 |
|
|
|
0.2 |
|
|
|
5.0 |
|
|
|
0.2 |
|
|
|
5.2 |
|
China |
|
|
2.7 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
3.6 |
|
|
|
1.2 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
Cross-border |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
(in billions) |
|
Lending(a) |
|
|
Trading(b) |
|
|
Other(c) |
|
|
Total |
|
|
Local(d) |
|
|
exposure |
|
|
South Korea |
|
$ |
3.2 |
|
|
$ |
2.6 |
|
|
$ |
0.7 |
|
|
$ |
6.5 |
|
|
$ |
3.4 |
|
|
$ |
9.9 |
|
India |
|
|
1.9 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
3.5 |
|
|
|
0.6 |
|
|
|
4.1 |
|
Brazil |
|
|
1.1 |
|
|
|
(0.7 |
) |
|
|
1.2 |
|
|
|
1.6 |
|
|
|
5.0 |
|
|
|
6.6 |
|
Russia |
|
|
2.9 |
|
|
|
1.0 |
|
|
|
0.2 |
|
|
|
4.1 |
|
|
|
0.4 |
|
|
|
4.5 |
|
China |
|
|
2.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
2.9 |
|
|
|
0.3 |
|
|
|
3.2 |
|
|
|
|
|
(a) |
|
Lending includes loans and accrued interest receivable, interest-bearing deposits with banks,
acceptances, other monetary assets, issued letters of credit net of participations, and
undrawn commitments to extend credit. |
(b) |
|
Trading includes (1) issuer exposure on cross-border debt and equity instruments, held both
in trading and investment accounts, adjusted for the impact of issuer hedges, including credit
derivatives; and (2) counterparty exposure on derivative and foreign exchange contracts as
well as security financing trades (resale agreements and securities borrowed). |
(c) |
|
Other represents mainly local exposure funded cross-border. |
(d) |
|
Local exposure is defined as exposure to a country denominated in local currency, booked and
funded locally. Any exposure not meeting these criteria is defined as cross-border exposure. |
56
CONSUMER CREDIT PORTFOLIO
JPMorgan Chases consumer portfolio consists primarily of residential mortgages, home equity loans,
credit cards, auto loans and leases, education loans and business banking loans, and reflects the
benefit of diversification from both a product and a geographic perspective. The primary focus is
serving the prime consumer credit market. RFS offers home equity lines of credit and mortgage loans
with interest-only payment options to predominantly prime borrowers; there are no products in the
real estate portfolios that result in negative amortization.
The continued deterioration in residential real estate values has negatively impacted all consumer
credit asset classes. Geographic areas that have experienced the most significant declines in
home prices have exhibited higher delinquency and losses across the consumer credit product
spectrum.
Actions continue to be taken to tighten credit underwriting and loan qualification standards. These
actions have resulted in significant reductions in new loan originations of risk layered loans, and
improved alignment of loan pricing with the embedded risk.
The
following table presents managed consumer creditrelated information for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
|
Nonperforming assets(f) |
(in millions, except ratios) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
Consumer
loans reported(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
94,968 |
|
|
$ |
94,832 |
|
|
$ |
948 |
|
|
$ |
810 |
|
Mortgage |
|
|
60,480 |
|
|
|
55,461 |
|
|
|
2,537 |
|
|
|
1,798 |
|
Auto loans and leases(b) |
|
|
44,714 |
|
|
|
42,350 |
|
|
|
94 |
|
|
|
116 |
|
Credit card
reported(c) |
|
|
75,888 |
|
|
|
84,352 |
|
|
|
6 |
|
|
|
7 |
|
All other loans |
|
|
25,175 |
|
|
|
25,314 |
|
|
|
335 |
|
|
|
341 |
|
Loans held-for-sale |
|
|
4,534 |
|
|
|
3,989 |
|
|
|
|
|
|
|
|
|
|
Total
consumer loans reported |
|
|
305,759 |
|
|
|
306,298 |
|
|
|
3,920 |
|
|
|
3,072 |
|
Credit card
securitized(c)(d) |
|
|
75,062 |
|
|
|
72,701 |
|
|
|
|
|
|
|
|
|
|
Total
consumer loans managed(c) |
|
|
380,821 |
|
|
|
378,999 |
|
|
|
3,920 |
|
|
|
3,072 |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
617 |
|
|
|
549 |
|
|
Total
consumer-related assets managed |
|
|
380,821 |
|
|
|
378,999 |
|
|
|
4,537 |
|
|
|
3,621 |
|
Consumer lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity(e) |
|
|
73,049 |
|
|
|
74,191 |
|
|
NA |
|
|
NA |
Mortgage |
|
|
8,193 |
|
|
|
7,410 |
|
|
NA |
|
|
NA |
Auto loans and leases |
|
|
7,220 |
|
|
|
8,058 |
|
|
NA |
|
|
NA |
Credit card(e) |
|
|
730,458 |
|
|
|
714,848 |
|
|
NA |
|
|
NA |
All other loans |
|
|
10,269 |
|
|
|
11,429 |
|
|
NA |
|
|
NA |
|
Total lending-related commitments |
|
|
829,189 |
|
|
|
815,936 |
|
|
NA |
|
|
NA |
|
Total consumer credit portfolio |
|
$ |
1,210,010 |
|
|
$ |
1,194,935 |
|
|
$ |
4,537 |
|
|
$ |
3,621 |
|
|
Memo: Credit
card managed |
|
$ |
150,950 |
|
|
$ |
157,053 |
|
|
$ |
6 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
Average annual net |
|
|
|
Net charge-offs |
|
|
charge-off rate(g) |
(in millions, except ratios) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Home equity |
|
$ |
447 |
|
|
$ |
68 |
|
|
|
1.89 |
% |
|
|
0.32 |
% |
Mortgage |
|
|
199 |
|
|
|
23 |
|
|
|
1.38 |
|
|
|
0.25 |
|
Auto loans and leases(b) |
|
|
118 |
|
|
|
59 |
|
|
|
1.10 |
|
|
|
0.59 |
|
Credit card
reported |
|
|
989 |
|
|
|
721 |
|
|
|
5.01 |
|
|
|
3.57 |
|
All other loans |
|
|
61 |
|
|
|
38 |
|
|
|
0.98 |
|
|
|
0.64 |
|
|
Total
consumer loans reported |
|
|
1,814 |
|
|
|
909 |
|
|
|
2.43 |
|
|
|
1.37 |
|
Credit card
securitized(d) |
|
|
681 |
|
|
|
593 |
|
|
|
3.70 |
|
|
|
3.56 |
|
|
Total
consumer loans managed |
|
$ |
2,495 |
|
|
$ |
1,502 |
|
|
|
2.68 |
% |
|
|
1.81 |
% |
|
Memo: Credit
card managed |
|
$ |
1,670 |
|
|
$ |
1,314 |
|
|
|
4.37 |
% |
|
|
3.57 |
% |
|
|
|
|
(a) |
|
Includes RFS, CS and residential mortgage loans reported in the Corporate/Private Equity
segment. |
(b) |
|
Excludes operating lease-related assets of $2.0 billion and $1.9 billion for March 31, 2008,
and December 31, 2007, respectively. |
(c) |
|
Loans past due 90 days and over and accruing includes credit card receivables-reported of
$1.6 billion and $1.5 billion for March 31, 2008, and December 31, 2007, respectively, and
related credit card securitizations of $1.2 billion and $1.1 billion for March 31, 2008, and
December 31, 2007, respectively. |
(d) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see CS on pages 2628 of this Form 10-Q. |
57
|
|
|
(e) |
|
The credit card and home equity lending-related commitments represent the total available
lines of credit for these products. The Firm has not experienced, and does not anticipate,
that all available lines of credit will be utilized at the same time.
For credit card commitments and if certain conditions are met for
home equity commitments, the Firm can reduce or
cancel these lines of credit by providing the borrower prior notice or, in some cases, without
notice as permitted by law. |
(f) |
|
Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by U.S. government agencies of $1.8 billion and
$1.5 billion for March 31, 2008, and December 31, 2007, respectively, and (2) education loans
that are 90 days past due and still accruing, which are insured by U.S. government agencies
under the Federal Family Education Loan Program of $252 million and $279 million as of March
31, 2008, and December 31, 2007, respectively. These amounts for GNMA and education loans are
excluded, as reimbursement is proceeding normally . |
(g) |
|
Net charge-off rates exclude average loans held-for-sale of $4.4 billion and $21.7 billion
for the quarters ended March 31, 2008 and 2007, respectively. |
The Firm regularly evaluates market conditions and overall economic returns and makes an initial
determination of whether new originations will be held-for-investment or sold within the
foreseeable future. The Firm also periodically evaluates the expected economic returns of
previously originated loans under prevailing market conditions to determine whether their
designation as held-for-sale or held-for-investment continues to be appropriate. When the Firm
determines that a change in this designation is appropriate, the loans are transferred to the
appropriate classification. In response to changes in market conditions in the second half of 2007,
the Firm has designated as held-for-investment all new originations of subprime mortgage loans, as
well as subprime mortgage loans that were previously designated held-for-sale. In addition, all new
nonconforming prime mortgage loan originations have been designated as held-for-investment. Prime
mortgage loans originated with the intent to sell are accounted for at fair value under SFAS 159
and are classified as trading assets in the Consolidated Balance Sheets.
The following discussion relates to the specific loan and lending-related categories within the
consumer portfolio.
Home equity: Home equity loans at March 31, 2008 were $95.0 billion, relatively unchanged from
year-end 2007. The provision for credit losses for the Home equity portfolio includes a net
increase of $1.1 billion to the allowance for loan losses for the quarter ended March 31, 2008, as
risk layered loans, continued weak housing prices and slowing economic growth continue to result in
higher nonperforming assets and estimated losses for this product segment. Losses are particularly
concentrated in loans with high combined effective loan-to-value ratios in specific geographic
regions that have experienced significant declines in housing prices. The decline in housing prices
and the second lien position for these types of loans results in minimal proceeds upon foreclosure,
increasing the severity of losses. In response to continued weakness in housing markets, loan
underwriting and account management criteria have been tightened, with a particular focus on
metropolitan statistical areas (MSAs) with the most significant housing price declines.
Mortgage: Prior to the third quarter of 2007, subprime mortgage loans and substantially all of the
Firms prime mortgages, both fixed-rate and adjustable-rate, were originated with the intent to
sell. Prime mortgage loans originated into the held-for-investment portfolio consisted primarily of
adjustable-rate products. As a result of the decision to retain rather than sell subprime mortgage
loans and new originations of nonconforming prime mortgage loans, both fixed-rate and
adjustable-rate products are now being originated into the held-for-investment portfolio.
Mortgages, irrespective of whether they are originated with the intent to sell or
hold-for-investment, are underwritten to the same standards applicable to the respective type of
mortgage. In response to continued weakness in housing markets, loan underwriting and account
management criteria have been tightened at the MSA level.
Mortgage loans including loans that are held-for-sale at March 31, 2008 were $60.9 billion,
reflecting a $4.8 billion increase from year-end 2007; the increase was primarily due to the
decision to retain rather than sell new originations of nonconforming prime mortgage loans. As of
March 31, 2008, mortgage loans on the Consolidated Balance Sheets included $15.8 billion of subprime
mortgage loans, representing 26% of the total mortgage loan balance, and $45.1 billion of prime
mortgage loans. The provision for credit losses includes a net increase to the allowance for loan
losses of $417 million for subprime mortgages and $256 million for prime mortgages, as housing
price declines in specific geographic regions and slowing economic
growth continue to increase estimated losses for all mortgage
segments and to have a
negative impact on nonperforming assets.
Subprime mortgage net charge-offs were $149 million (3.82% net charge-off rate), compared with $20
million (0.92% net charge-off rate) in the prior year. Prime mortgage net charge-offs were $50
million (0.48% net charge-off rate), compared with $3 million (0.04% net charge-off rate) in the
prior year.
Auto loans and leases: As of March 31, 2008, auto loans and leases of $44.7 billion increased $2.4
billion from year-end 2007. The auto loan portfolio reflects a high concentration of prime and
near-prime quality credits. The allowance for loan losses for the auto loan portfolio was increased
$50 million for the quarter ending March 31, 2008, reflecting an increase in estimated losses due
to deterioration in recently-originated loans as a result of the worsening credit environment. In response to
recent increases in loan delinquencies and credit losses, particularly in geographic areas
experiencing significant housing price declines, credit underwriting criteria has been tightened,
which has resulted in the reduction of both extended-term and high loan-to-value financing.
58
Credit card: JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes
credit card receivables on the Consolidated Balance Sheets and those receivables sold to investors
through securitization. Managed credit card receivables were $150.9 billion at March 31, 2008, a
decrease of $6.1 billion from year-end 2007, reflecting the typical seasonal decrease of
outstanding loans.
The managed credit card net charge-off rate increased to 4.37% for the first quarter of 2008, from
3.57% in the first quarter of 2007. The 30-day managed delinquency rate increased to 3.66% at March
31, 2008, from 3.48% at December 31, 2007, and 3.07% at March 31, 2007. The increase in net
charge-off and delinquency rate reflects a slight deterioration in underlying credit quality,
partially a result of weakness in the current economic environment including continued weakness
in housing markets. The managed credit card portfolio continues to reflect a well-seasoned, largely
rewards-based portfolio that has good U.S. geographic diversification.
All other loans: All other loans primarily include business banking loans (which are highly
collateralized loans, often with personal loan guarantees), and education loans. As of March 31,
2008, other loans, including loans held-for-sale, were $29.3 billion, compared with $28.7 billion
at year-end 2007.
The following tables present the geographic distribution of consumer credit outstandings by product
as of March 31, 2008, and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Card |
|
All |
|
Total consumer |
|
Card |
|
Total consumer |
(in billions) |
|
Home equity |
|
Mortgage |
|
Auto |
|
reported |
|
other loans |
|
loans reported |
|
securitized |
|
loans managed |
|
Top 12 states |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
$ |
15.2 |
|
|
$ |
15.0 |
|
|
$ |
5.2 |
|
|
$ |
10.0 |
|
|
$ |
1.2 |
|
|
$ |
46.6 |
|
|
$ |
10.0 |
|
|
$ |
56.6 |
|
New York |
|
|
14.5 |
|
|
|
8.6 |
|
|
|
3.7 |
|
|
|
5.9 |
|
|
|
3.7 |
|
|
|
36.4 |
|
|
|
5.9 |
|
|
|
42.3 |
|
Texas |
|
|
6.0 |
|
|
|
2.2 |
|
|
|
4.0 |
|
|
|
5.2 |
|
|
|
3.3 |
|
|
|
20.7 |
|
|
|
5.5 |
|
|
|
26.2 |
|
Florida |
|
|
5.3 |
|
|
|
6.7 |
|
|
|
1.6 |
|
|
|
4.3 |
|
|
|
0.7 |
|
|
|
18.6 |
|
|
|
4.4 |
|
|
|
23.0 |
|
Illinois |
|
|
6.7 |
|
|
|
3.2 |
|
|
|
2.4 |
|
|
|
4.0 |
|
|
|
1.8 |
|
|
|
18.1 |
|
|
|
4.0 |
|
|
|
22.1 |
|
Ohio |
|
|
4.9 |
|
|
|
1.0 |
|
|
|
3.1 |
|
|
|
3.0 |
|
|
|
2.6 |
|
|
|
14.6 |
|
|
|
3.2 |
|
|
|
17.8 |
|
New Jersey |
|
|
4.5 |
|
|
|
2.4 |
|
|
|
1.8 |
|
|
|
2.9 |
|
|
|
0.8 |
|
|
|
12.4 |
|
|
|
3.2 |
|
|
|
15.6 |
|
Michigan |
|
|
3.7 |
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
2.6 |
|
|
|
2.3 |
|
|
|
11.6 |
|
|
|
2.6 |
|
|
|
14.2 |
|
Arizona |
|
|
5.8 |
|
|
|
1.6 |
|
|
|
1.8 |
|
|
|
1.6 |
|
|
|
1.6 |
|
|
|
12.4 |
|
|
|
1.5 |
|
|
|
13.9 |
|
Pennsylvania |
|
|
1.6 |
|
|
|
0.9 |
|
|
|
1.8 |
|
|
|
2.9 |
|
|
|
0.6 |
|
|
|
7.8 |
|
|
|
3.0 |
|
|
|
10.8 |
|
Colorado |
|
|
2.3 |
|
|
|
1.4 |
|
|
|
1.0 |
|
|
|
1.8 |
|
|
|
0.8 |
|
|
|
7.3 |
|
|
|
1.7 |
|
|
|
9.0 |
|
Indiana |
|
|
2.4 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
|
1.6 |
|
|
|
1.1 |
|
|
|
6.9 |
|
|
|
1.6 |
|
|
|
8.5 |
|
All other |
|
|
22.1 |
|
|
|
15.7 |
|
|
|
15.7 |
|
|
|
30.1 |
|
|
|
8.8 |
|
|
|
92.4 |
|
|
|
28.4 |
|
|
|
120.8 |
|
|
Total |
|
$ |
95.0 |
|
|
$ |
60.9 |
|
|
$ |
44.7 |
|
|
$ |
75.9 |
|
|
$ |
29.3 |
|
|
$ |
305.8 |
|
|
$ |
75.0 |
|
|
$ |
380.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Card |
|
All |
|
Total consumer |
|
Card |
|
Total consumer |
(in billions) |
|
Home equity |
|
Mortgage |
|
Auto |
|
reported |
|
other loans |
|
loans reported |
|
securitized |
|
loans managed |
|
Top 12 states |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
$ |
14.9 |
|
|
$ |
13.4 |
|
|
$ |
5.0 |
|
|
$ |
11.0 |
|
|
$ |
1.0 |
|
|
$ |
45.3 |
|
|
$ |
9.6 |
|
|
$ |
54.9 |
|
New York |
|
|
14.4 |
|
|
|
8.0 |
|
|
|
3.6 |
|
|
|
6.6 |
|
|
|
4.2 |
|
|
|
36.8 |
|
|
|
5.6 |
|
|
|
42.4 |
|
Texas |
|
|
6.1 |
|
|
|
2.0 |
|
|
|
3.7 |
|
|
|
5.8 |
|
|
|
3.5 |
|
|
|
21.1 |
|
|
|
5.4 |
|
|
|
26.5 |
|
Florida |
|
|
5.3 |
|
|
|
6.4 |
|
|
|
1.6 |
|
|
|
4.7 |
|
|
|
0.5 |
|
|
|
18.5 |
|
|
|
4.2 |
|
|
|
22.7 |
|
Illinois |
|
|
6.7 |
|
|
|
3.0 |
|
|
|
2.2 |
|
|
|
4.5 |
|
|
|
1.9 |
|
|
|
18.3 |
|
|
|
3.9 |
|
|
|
22.2 |
|
Ohio |
|
|
4.9 |
|
|
|
1.0 |
|
|
|
2.9 |
|
|
|
3.3 |
|
|
|
2.6 |
|
|
|
14.7 |
|
|
|
3.1 |
|
|
|
17.8 |
|
New Jersey |
|
|
4.4 |
|
|
|
2.2 |
|
|
|
1.7 |
|
|
|
3.3 |
|
|
|
0.5 |
|
|
|
12.1 |
|
|
|
3.1 |
|
|
|
15.2 |
|
Michigan |
|
|
3.7 |
|
|
|
1.6 |
|
|
|
1.3 |
|
|
|
2.9 |
|
|
|
2.3 |
|
|
|
11.8 |
|
|
|
2.5 |
|
|
|
14.3 |
|
Arizona |
|
|
5.7 |
|
|
|
1.5 |
|
|
|
1.8 |
|
|
|
1.7 |
|
|
|
1.8 |
|
|
|
12.5 |
|
|
|
1.4 |
|
|
|
13.9 |
|
Pennsylvania |
|
|
1.6 |
|
|
|
0.9 |
|
|
|
1.7 |
|
|
|
3.2 |
|
|
|
0.5 |
|
|
|
7.9 |
|
|
|
2.9 |
|
|
|
10.8 |
|
Colorado |
|
|
2.3 |
|
|
|
1.3 |
|
|
|
1.0 |
|
|
|
2.0 |
|
|
|
0.8 |
|
|
|
7.4 |
|
|
|
1.7 |
|
|
|
9.1 |
|
Indiana |
|
|
2.4 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
|
1.8 |
|
|
|
1.1 |
|
|
|
7.1 |
|
|
|
1.5 |
|
|
|
8.6 |
|
All other |
|
|
22.4 |
|
|
|
14.1 |
|
|
|
14.7 |
|
|
|
33.6 |
|
|
|
8.0 |
|
|
|
92.8 |
|
|
|
27.8 |
|
|
|
120.6 |
|
|
Total |
|
$ |
94.8 |
|
|
$ |
56.0 |
|
|
$ |
42.4 |
|
|
$ |
84.4 |
|
|
$ |
28.7 |
|
|
$ |
306.3 |
|
|
$ |
72.7 |
|
|
$ |
379.0 |
|
|
59
ALLOWANCE FOR CREDIT LOSSES
For a further discussion of the components of the allowance for credit losses, see Critical
Accounting Estimates Used by the Firm on pages 6567 and Note 13 on pages 8889 of this Form
10-Q, and page 96 and Note 15 on pages 138139 of JPMorgan Chases 2007 Annual Report. At March
31, 2008, management deemed the allowance for credit losses to be appropriate (i.e., 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, |
|
2008 |
|
|
2007 |
|
(in millions) |
|
Wholesale |
|
|
Consumer |
|
|
Total |
|
|
Wholesale |
|
|
Consumer |
|
|
Total |
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
3,154 |
|
|
$ |
6,080 |
|
|
$ |
9,234 |
|
|
$ |
2,711 |
|
|
$ |
4,568 |
|
|
$ |
7,279 |
|
Cumulative effect of changes in accounting
principles(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
(56 |
) |
|
Beginning balance at January 1, adjusted |
|
|
3,154 |
|
|
|
6,080 |
|
|
|
9,234 |
|
|
|
2,655 |
|
|
|
4,568 |
|
|
|
7,223 |
|
Gross charge-offs |
|
|
(130 |
) |
|
|
(2,024 |
) |
|
|
(2,154 |
) |
|
|
(17 |
) |
|
|
(1,088 |
) |
|
|
(1,105 |
) |
Gross recoveries |
|
|
38 |
|
|
|
210 |
|
|
|
248 |
|
|
|
23 |
|
|
|
179 |
|
|
|
202 |
|
|
Net (charge-offs) recoveries |
|
|
(92 |
) |
|
|
(1,814 |
) |
|
|
(1,906 |
) |
|
|
6 |
|
|
|
(909 |
) |
|
|
(903 |
) |
Provision for loan losses |
|
|
742 |
|
|
|
3,677 |
|
|
|
4,419 |
|
|
|
48 |
|
|
|
931 |
|
|
|
979 |
|
Other |
|
|
33 |
(b) |
|
|
(34) |
(b) |
|
|
(1 |
) |
|
|
(16 |
)(c) |
|
|
17 |
(c) |
|
|
1 |
|
|
Ending balance at March 31 |
|
$ |
3,837 |
(d) |
|
$ |
7,909 |
(e) |
|
$ |
11,746 |
|
|
$ |
2,693 |
(d) |
|
$ |
4,607 |
(e) |
|
$ |
7,300 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset specific(f) |
|
$ |
146 |
|
|
$ |
75 |
|
|
$ |
221 |
|
|
$ |
54 |
|
|
$ |
70 |
|
|
$ |
124 |
|
Formula-based(f) |
|
|
3,691 |
|
|
|
7,834 |
|
|
|
11,525 |
|
|
|
2,639 |
|
|
|
4,537 |
|
|
|
7,176 |
|
|
Total allowance for loan losses |
|
$ |
3,837 |
|
|
$ |
7,909 |
|
|
$ |
11,746 |
|
|
$ |
2,693 |
|
|
$ |
4,607 |
|
|
$ |
7,300 |
|
|
Lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
835 |
|
|
$ |
15 |
|
|
$ |
850 |
|
|
$ |
499 |
|
|
$ |
25 |
|
|
$ |
524 |
|
Provision for lending-related commitments |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
Other |
|
|
6 |
(b) |
|
|
(6) |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31 |
|
$ |
846 |
|
|
$ |
9 |
|
|
$ |
855 |
|
|
$ |
528 |
|
|
$ |
25 |
|
|
$ |
553 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset specific |
|
$ |
23 |
|
|
$ |
|
|
|
$ |
23 |
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
40 |
|
Formula-based |
|
|
823 |
|
|
|
9 |
|
|
|
832 |
|
|
|
488 |
|
|
|
25 |
|
|
|
513 |
|
|
Total allowance for lending-related
commitments |
|
$ |
846 |
|
|
$ |
9 |
|
|
$ |
855 |
|
|
$ |
528 |
|
|
$ |
25 |
|
|
$ |
553 |
|
|
Total allowance for credit losses |
|
$ |
4,683 |
|
|
$ |
7,918 |
|
|
$ |
12,601 |
|
|
$ |
3,221 |
|
|
$ |
4,632 |
|
|
$ |
7,853 |
|
|
|
|
|
(a) |
|
Reflects the effect of the adoption of SFAS 159 at January 1, 2007. For a further discussion
of SFAS 159, see Note 4 on pages 8081 of this Form 10-Q. |
(b) |
|
Primarily related to the transfer of loans from RFS to CB during the first quarter of 2008. |
(c) |
|
Partially related to the transfer of allowance between wholesale and consumer in conjunction
with prime mortgages transferred to the Corporate/Private Equity sector. |
(d) |
|
The ratio of the wholesale allowance for loan losses to total wholesale loans was 1.82% and
1.76%, excluding wholesale held-for-sale loans and loans accounted for at fair value at March
31, 2008 and 2007, respectively. |
(e) |
|
The ratio of the consumer allowance for loan losses to total consumer loans was 2.63% and
1.72%, excluding consumer held-for-sale loans and loans accounted for at fair value at March
31, 2008 and 2007, respectively. |
(f) |
|
Prior periods have been revised to reflect the current presentation. |
The allowance for credit losses increased $2.5 billion from December 31, 2007. Excluding
held-for-sale loans and loans carried at fair value, the allowance for loan losses represented
2.29% of loans at March 31, 2008, compared with 1.88% at December 31, 2007. Consumer allowance for
loan losses increased $1.8 billion from 4Q07, primarily as a result of increased allowance for loan
loss in residential real estate. The increase in consumer allowance for loan losses for the quarter
ended March 31, 2008, included $1.1 billion for home equity loans, as risk layered loans, continued
weak housing prices and slowing economic growth continue to result in
increased estimated losses for this product segment and higher
nonperforming assets. The allowance for loan loss increased $417 million
for subprime mortgages and $256 million for prime mortgages, as housing price declines in specific
geographic regions and slowing economic growth continue to increase
estimated losses for all mortgage product segments and to have a negative impact on nonperforming
assets. The increase in wholesale allowance
reflected the transfer of funded and unfunded leverage lending commitments to retained loans from
held-for-sale, other volume and other portfolio activity related to the effect of a weakening
credit environment.
60
To provide for the risk of loss inherent in the Firms process of extending credit, management
computes an asset-specific component and a formula-based component for wholesale lending-related
commitments. These components are computed using a methodology similar to that used for the
wholesale loan portfolio, modified for expected maturities and probabilities of drawdown. This
allowance, which is reported in other liabilities, was $855 million and $850 million at March 31,
2008, and December 31, 2007, respectively.
Provision for credit losses
For a discussion of the reported provision for credit losses, see page 11 of this Form 10-Q. The
managed provision for credit losses was $5.1 billion, up $3.5 billion, or 219%, from the prior
year. The total consumer managed provision for credit losses was $4.4 billion in the current
quarter compared with $1.5 billion in the prior year. The wholesale provision for credit losses was
$747 million compared with a provision of $77 million in the prior year, reflecting an increase in
the allowance for credit losses, primarily related to the transfer of funded and unfunded leverage
lending commitments to retained loans from held-for-sale as well as the effect of a weakening
credit environment. The credit performance of residential real estate loans continues to be
negatively impacted by deterioration in housing values across many geographic markets. Management
has taken significant actions to reduce risk exposure by tightening underwriting and account
management criteria for real estate lending as well as consumer lending for non-real estate
products in those markets most impacted by the recent housing downturn. Tighter income
verification, more conservative collateral valuation, reduced loan-to-value maximums, higher FICO
and custom risk score requirements are just some of the actions taken to date to mitigate risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lending-related |
|
Total provision |
|
|
Provision for loan losses |
|
commitments |
|
for credit losses |
Three months ended March 31, (in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Investment Bank |
|
$ |
571 |
|
|
$ |
35 |
|
|
$ |
47 |
|
|
$ |
28 |
|
|
$ |
618 |
|
|
$ |
63 |
|
Commercial Banking |
|
|
143 |
|
|
|
17 |
|
|
|
(42 |
) |
|
|
|
|
|
|
101 |
|
|
|
17 |
|
Treasury & Securities Services |
|
|
11 |
|
|
|
4 |
|
|
|
1 |
|
|
|
2 |
|
|
|
12 |
|
|
|
6 |
|
Asset Management |
|
|
17 |
|
|
|
(8 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
16 |
|
|
|
(9 |
) |
|
Total wholesale |
|
|
742 |
|
|
|
48 |
|
|
|
5 |
|
|
|
29 |
|
|
|
747 |
|
|
|
77 |
|
Retail Financial Services |
|
|
2,492 |
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
2,492 |
|
|
|
292 |
|
Card Services reported |
|
|
989 |
|
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
989 |
|
|
|
636 |
|
Corporate/Private Equity |
|
|
196 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
3 |
|
|
Total consumer |
|
|
3,677 |
|
|
|
931 |
|
|
|
|
|
|
|
|
|
|
|
3,677 |
|
|
|
931 |
|
|
Total provision for credit losses reported |
|
|
4,419 |
|
|
|
979 |
|
|
|
5 |
|
|
|
29 |
|
|
|
4,424 |
|
|
|
1,008 |
|
Card Services securitized |
|
|
681 |
|
|
|
593 |
|
|
|
|
|
|
|
|
|
|
|
681 |
|
|
|
593 |
|
|
Total
provision for credit losses managed |
|
$ |
5,100 |
|
|
$ |
1,572 |
|
|
$ |
5 |
|
|
$ |
29 |
|
|
$ |
5,105 |
|
|
$ |
1,601 |
|
|
MARKET RISK MANAGEMENT
For discussion of the Firms market risk management organization, see pages 9094 of JPMorgan
Chases 2007 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 risks. VAR for
nontrading risk measures the amount of potential change in the fair values of the exposures related
to these risks; however, for such risks, VAR is not a measure of reported revenue since nontrading
activities are generally not marked to market through net income.
To calculate VAR, the Firm uses historical simulation, which measures risk across instruments and
portfolios in a consistent and comparable way. This approach assumes that historical changes in
market values are representative of future changes. The simulation is based upon data for the
previous 12 months. The Firm calculates VAR using a one-day time horizon and an expected tail-loss
methodology, which approximates a 99% confidence level. This means the Firm would expect to incur
losses greater than that predicted by VAR estimates only once in every 100 trading days, or about
61
two to three times a year. For a further discussion of the Firms VAR methodology, see Market Risk
Management Value-at-risk, on pages 9192 of JPMorgan Chases 2007 Annual Report.
IB trading and credit portfolio VAR
IB trading VAR by risk type and credit portfolio VAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
2008 |
|
2007 |
|
At March 31, |
(in millions) |
|
Avg |
|
|
Min |
|
|
Max |
|
|
Avg |
|
|
Min |
|
|
Max |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
120 |
|
|
$ |
99 |
|
|
$ |
149 |
|
|
$ |
45 |
|
|
$ |
25 |
|
|
$ |
68 |
|
|
$ |
138 |
|
|
$ |
65 |
|
Foreign exchange |
|
|
35 |
|
|
|
17 |
|
|
|
78 |
|
|
|
19 |
|
|
|
9 |
|
|
|
38 |
|
|
|
37 |
|
|
|
19 |
|
Equities |
|
|
31 |
|
|
|
22 |
|
|
|
58 |
|
|
|
42 |
|
|
|
31 |
|
|
|
58 |
|
|
|
25 |
|
|
|
43 |
|
Commodities and other |
|
|
28 |
|
|
|
24 |
|
|
|
34 |
|
|
|
34 |
|
|
|
25 |
|
|
|
47 |
|
|
|
33 |
|
|
|
36 |
|
Diversification |
|
|
(92) |
(a) |
|
|
NM |
(b) |
|
|
NM |
(b) |
|
|
(58 |
)(a) |
|
|
NM |
(b) |
|
|
NM |
(b) |
|
|
(80) |
(a) |
|
|
(64 |
)(a) |
|
|
|
|
|
Trading VAR |
|
$ |
122 |
|
|
$ |
96 |
|
|
$ |
163 |
|
|
$ |
82 |
|
|
$ |
50 |
|
|
$ |
111 |
|
|
$ |
153 |
|
|
$ |
99 |
|
Credit portfolio VAR |
|
|
30 |
|
|
|
20 |
|
|
|
45 |
|
|
|
13 |
|
|
|
12 |
|
|
|
15 |
|
|
|
38 |
|
|
|
14 |
|
Diversification |
|
|
(30) |
(a) |
|
|
NM |
(b) |
|
|
NM |
(b) |
|
|
(12 |
)(a) |
|
|
NM |
(b) |
|
|
NM |
(b) |
|
|
(45) |
(a) |
|
|
(16 |
)(a) |
|
|
|
|
|
Total trading and credit portfolio VAR |
|
$ |
122 |
|
|
$ |
96 |
|
|
$ |
149 |
|
|
$ |
83 |
|
|
$ |
50 |
|
|
$ |
113 |
|
|
$ |
146 |
|
|
$ |
97 |
|
|
|
|
|
|
|
|
|
(a) |
|
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. |
(b) |
|
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. |
Trading VAR includes substantially all trading activities in IB; however, particular risk
parameters of certain products are not fully captured, for example, correlation risk or the credit
spread sensitivity of certain mortgage products. Trading VAR does not include VAR related to
held-for-sale funded loans and unfunded commitments, nor the debit valuation adjustments (DVA)
taken on derivative and structured liabilities to reflect the credit quality of the Firm. See the
DVA Sensitivity table on page 63 of this Form 10-Q for further details. Trading VAR also does not
include the MSR portfolio or VAR related to other corporate functions, such as Corporate and
Private Equity. For a discussion of MSRs and the corporate functions, see Note 3 on pages 7479,
Note 16 on pages 99100 and Corporate/Private Equity on pages 3637 of this Form 10-Q, and Note
18 on pages 154156, Note 4 on page 113 and Corporate/Private Equity on pages 5960 of JPMorgan
Chases 2007 Annual Report.
Credit portfolio VAR includes VAR on derivative credit valuation adjustments, hedges of the
credit valuation adjustment and mark-to-market hedges of the retained loan portfolio, which are all
reported in principal transactions revenue. For a discussion of credit valuation adjustments, see
Note 4 on pages 111118 of JPMorgan Chases 2007 Annual Report. This VAR does not include the
retained loan portfolio, which is not marked-to-market.
The IBs average total trading and credit portfolio VAR for the first quarter of 2008 was $122
million compared with $83 million in the first quarter of 2007. The increase in VAR was due to
increases in the fixed income and foreign exchange VAR components as a result of positions changes
and increased market volatility, which also led to an increase in portfolio diversification for
trading VAR. Average trading VAR diversification increased to $92 million, or 43% of the sum of the
components, from $58 million, or 41% of the sum of the components. In general, over the course of
the year VAR exposures can vary significantly as positions change, market volatility fluctuates and
diversification benefits change.
VAR backtesting
To evaluate the soundness of its VAR model, the Firm conducts daily back-testing of VAR against
daily IB market risk-related revenue, which is defined as the change in value of principal
transactions revenue less Private Equity gains/losses plus any trading-related net interest income,
brokerage commissions, underwriting fees or other revenue. The daily IB market risk-related revenue
excludes gains and losses on held-for-sale funded loans and unfunded commitments and from DVA. The
following histogram illustrates the daily market risk-related gains and losses for IB trading
businesses for the quarter ended March 31, 2008. The chart shows that IB posted market
risk-related gains on 42 out of 65 days in this period, with 10 days exceeding $100 million. The
inset graph looks at those days on which IB experienced losses and depicts the amount by which VAR
exceeded the actual loss on each of those days. Losses were sustained on 23 days during the three
months ended March 31, 2008. For the first quarter of 2008, losses exceed the VAR measure on two
62
days due to the high market volatility experienced during the period. No losses exceeded the VAR
measure during the first quarter of 2007.
The Firm does not include the impact of DVA taken on derivative and structured liabilities to
reflect the credit quality of the Firm in its trading VAR. The following table provides information
about the sensitivity of DVA to a one basis point increase in JPMorgan Chase credit spreads.
Debit Valuation Adjustment Sensitivity
|
|
|
|
|
|
|
1 Basis Point Increase in |
(in millions) |
|
JPMorgan Chase Credit Spread |
|
March 31, 2008 |
|
$ |
36 |
|
December 31, 2007 |
|
|
38 |
|
|
Economic value stress testing
While VAR reflects the risk of loss due to adverse changes 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 at least
once a month using multiple scenarios that assume credit spreads widen significantly, equity prices
decline and interest rates rise in the major currencies. Additional scenarios focus on the risks
predominant in individual business segments and include scenarios that focus on the potential for
adverse moves in complex portfolios. Periodically, scenarios are reviewed and updated to reflect
changes in the Firms risk profile and economic events. Along with VAR, stress testing is important
in measuring and controlling risk. Stress testing enhances the understanding of the Firms risk
profile and loss potential, and stress losses are monitored against limits. Stress testing is also
utilized in one-off approvals and cross-business risk measurement, as well as an input to economic
capital allocation. Stress-test results, trends and explanations are provided each month to the
Firms senior management and to the lines of business to help them better measure and manage risks
and to understand event risk-sensitive positions.
63
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 important. Interest rate risk exposure in the Firms core nontrading
business activities (i.e., asset/liability management positions)
results from on- and off-balance
sheet positions. The Firm conducts simulations of changes in net
interest income from its nontrading activities
under a variety of interest rate scenarios. 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 pretax earnings sensitivity profiles as of March 31, 2008, and December
31, 2007, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate change in rates |
(in millions) |
|
+200bp |
|
|
+100bp |
|
|
-100bp |
|
|
-200bp |
|
|
March 31, 2008
|
|
$ |
(525 |
) |
|
$ |
(131 |
) |
|
$ |
(481 |
) |
|
$ |
(1,455 |
) |
December 31, 2007
|
|
|
(26 |
) |
|
|
55 |
|
|
|
(308 |
) |
|
|
(664 |
) |
|
The change in earnings-at-risk from December 31, 2007 results from a higher level of AFS securities
and lower market interest rates. The Firm is exposed to both rising and falling rates. The Firms
risk to rising rates is largely the result of increased funding costs. In contrast, the exposure to
falling rates is the result of higher anticipated levels of loan and securities prepayments, as
well as spread compression on deposit products.
PRIVATE EQUITY RISK MANAGEMENT
For a discussion of Private Equity Risk Management, see page 94 of JPMorgan Chases 2007 Annual
Report. At March 31, 2008, and December 31, 2007, the carrying value of the Private Equity
portfolio was $6.6 billion and $7.2 billion, respectively, of which $603 million and $390 million,
respectively, represented positions traded in the public markets.
OPERATIONAL RISK MANAGEMENT
For a discussion of JPMorgan Chases Operational Risk Management, refer to pages 9495 of JPMorgan
Chases 2007 Annual Report.
REPUTATION AND FIDUCIARY RISK MANAGEMENT
For a discussion of the Firms Reputation and Fiduciary Risk Management, see page 95 of JPMorgan
Chases 2007 Annual Report.
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and Regulation section
on pages 13 of JPMorgan Chases 2007 Form 10-K.
Dividends
At March 31, 2008, JPMorgan Chases bank subsidiaries could pay, in the aggregate, $19.8 billion in
dividends to their respective bank holding companies without prior approval of their relevant
banking regulators.
64
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 is managed in an appropriate manner. The Firm believes its estimates for
determining the valuation of its assets and liabilities are appropriate. The following is a brief
description of the Firms critical accounting estimates involving significant valuation judgments.
Allowance for credit losses
JPMorgan Chases allowance for credit losses covers the retained wholesale and consumer loan
portfolios as well as the Firms portfolio of wholesale and consumer 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 15 on pages 138139 of
JPMorgan Chases 2007 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 pages 9697 of JPMorgan Chases
2007 Annual Report; for amounts recorded as of March 31, 2008 and 2007, see Allowance for Credit
Losses on page 60 and Note 13 on pages 8889 of this Form 10-Q.
As noted on page 96 of JPMorgan Chases 2007 Annual Report, the Firms wholesale allowance is
sensitive to the risk rating assigned to a loan. Assuming a one-notch downgrade in the Firms
internal risk ratings for its entire Wholesale portfolio, the allowance for loan losses for the
Wholesale portfolio would increase by approximately $1.8 billion as of March 31, 2008. This
sensitivity analysis is hypothetical. In the Firms view, the likelihood of a one-notch downgrade
for all wholesale loans within a short timeframe is remote. The purpose of this analysis is to
provide an indication of the impact of risk ratings on the estimate of the allowance for loan
losses for wholesale loans. It is not intended to imply managements expectation of future
deterioration in risk ratings. Given the process the Firm follows in determining the risk ratings
of its loans, management believes the risk ratings currently assigned to wholesale loans are
appropriate.
For consumer loans, the allowance for loan losses is sensitive to changes in the economic
environment, delinquency status, credit bureau scores, the realizable value of collateral, borrower
behavior and other risk factors. Significant differences in managements expectations for these
factors could have significant impact on the estimation of the allowance for loan losses.
Fair value of financial instruments, MSRs and commodities inventory
A portion of JPMorgan Chases assets and liabilities are carried at fair value, including trading
assets and liabilities, AFS securities, certain loans, MSRs, private equity investments, structured
notes, and certain repurchase and resale agreements. Physical commodities are carried at the lower
of cost or fair value and reported within the recurring fair value
disclosures. Held-for-sale loans are carried
at the lower of cost or fair value on a nonrecurring basis. At March 31, 2008, and December 31,
2007, $646.0 billion and $635.5 billion, respectively, of the Firms assets, and $253.4 billion and
$254.3 billion, respectively, of the Firms liabilities were recorded at fair value on a recurring
basis.
Fair value is based upon quoted market prices, where available. If listed prices or quotes are not
available, fair value is based upon internally developed models that primarily use as inputs
market-based or independently sourced market parameters. The Firm ensures that all applicable
inputs are appropriately calibrated to market data, including but not limited to yield curves,
interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves. In
addition to market information, models also incorporate transaction details, such as maturity. Fair
value adjustments, including credit (counterparties and the Firms), liquidity, and input
parameter uncertainty are included, as appropriate, to the model value to arrive at a fair value
measurement. During the first quarter of 2008, no material changes were made to the Firms
valuation models. For a further description of assets and liabilities carried at fair value, see
Note 4 and Note 5 on pages 111118, and 119121, respectively, of JPMorgan Chases 2007 Annual
Report. In addition, for a further discussion of the significant judgments and estimates involved
in the determination of the fair value of the above instruments, as well as the process to validate
valuation models, see Fair value of financial instruments, MSRs and commodities inventory on pages
9798, and Model review on page 94 of JPMorgan Chases 2007 Annual Report.
65
The following tables summarize the Firms assets accounted for at fair value on a recurring basis
by level within the valuation hierarchy at March 31, 2008, and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
Debt and |
|
Derivative |
|
AFS |
|
Mortgage |
|
Private |
|
|
|
|
(in billions) |
|
equity securities |
|
receivables |
|
securities |
|
servicing rights |
|
equity |
|
Other(b) |
|
Total |
|
Level 1 |
|
|
43 |
% |
|
|
|
%(a) |
|
|
79 |
% |
|
|
|
% |
|
|
4 |
% |
|
|
23 |
% |
|
|
13% |
(a) |
Level 2 |
|
|
46 |
|
|
|
98 |
(a) |
|
|
21 |
|
|
|
|
|
|
|
5 |
|
|
|
51 |
|
|
|
82 |
(a) |
Level 3 |
|
|
11 |
|
|
|
2 |
(a) |
|
|
|
|
|
|
100 |
|
|
|
91 |
|
|
|
26 |
|
|
|
5 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held at fair value |
|
$ |
386.2 |
|
|
$ |
99.1 |
|
|
$ |
101.6 |
|
|
$ |
8.4 |
|
|
$ |
6.6 |
|
|
$ |
44.1 |
|
|
$ |
646.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
assets(c) as a percentage of total Firm: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at fair value |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
Debt and |
|
Derivative |
|
AFS |
|
Mortgage |
|
Private |
|
|
|
|
(in billions) |
|
equity securities |
|
receivables |
|
securities |
|
servicing rights |
|
equity |
|
Other(b) |
|
Total |
|
Level 1 |
|
|
49 |
% |
|
|
2 |
%(a) |
|
|
84 |
% |
|
|
|
% |
|
|
1 |
% |
|
|
25 |
% |
|
|
21 |
%(a) |
Level 2 |
|
|
45 |
|
|
|
96 |
(a) |
|
|
16 |
|
|
|
|
|
|
|
5 |
|
|
|
48 |
|
|
|
74 |
(a) |
Level 3 |
|
|
6 |
|
|
|
2 |
(a) |
|
|
|
|
|
|
100 |
|
|
|
94 |
|
|
|
27 |
|
|
|
5 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held at fair value |
|
$ |
414.3 |
|
|
$ |
77.1 |
|
|
$ |
85.4 |
|
|
$ |
8.6 |
|
|
$ |
7.2 |
|
|
$ |
42.9 |
|
|
$ |
635.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
assets(c) as a percentage of total Firm: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at fair value |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Based upon the fair value of the Firms derivatives portfolio prior to FIN 39 netting to
reflect the legally enforceable master netting agreements and cash collateral held by the
Firm, as cross-product netting is not relevant to an analysis based upon valuation
methodologies. |
(b) |
|
Includes certain securities purchased under resale agreements, certain loans (excluding loans
classified within trading assets debt and equity instruments), and certain retained
interests in securitizations. For further information, see Note 3 on pages 7479 of this Form
10-Q. |
(c) |
|
Includes level 3 assets accounted for at fair value on a recurring basis and at the lower of
cost or fair value. |
Level 3
assets (including assets measured at the lower of cost or fair value)
were 15% of total
Firm assets measured at fair value and 6% of total Firm assets at
March 31, 2008, compared with 13%
and 5%, respectively, at December 31, 2007. Level 3 liabilities (including liabilities measured at
the lower of cost or fair value) were 17% of total Firm liabilities measured at fair value at both
March 31, 2008, and December 31, 2007.
Level 3 assets increased during the first quarter of 2008, principally due to transfers of
mortgage-related and certain auction rate securities with low maximum
reset rates. Continued deterioration in market conditions
during the first quarter of 2008 resulted in a significant reduction in new deal issuance and
limited the Firms ability to obtain independent quotes for certain mortgage instruments. Liquidity
in certain auction rate securities markets was significantly reduced in the first quarter of 2008
due to credit concerns with monoline bond insurers. In addition to transfers, the level 3 balance
increased as a result of the Firms purchase of reverse mortgages for which there is a lack of
market liquidity and limited availability of external pricing data. These increases in level
3 assets were partially offset by the transfer of certain leveraged
loans from the loans held-for-sale
portfolio to the loans held-for-investment portfolio and sales of
investments within the private equity portfolio. For a further
discussion of changes in level 3 instruments, see Note 3 on pages 7479 of
this Form 10-Q.
Imprecision in estimating unobservable market inputs can impact the amount of revenue or loss
recorded for a particular position. Furthermore, while the Firm believes its valuation methods are
appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date. For a detailed discussion of the
determination of fair value for individual financial instruments, see Note 4 on pages 111118 of
JPMorgan Chases 2007 Annual Report.
66
Goodwill impairment
For a description of the significant valuation judgments associated with goodwill impairment, see
Goodwill impairment on page 98 of JPMorgan Chases 2007 Annual Report.
Income taxes
JPMorgan Chase is subject to the income tax laws of the various jurisdictions in which it operates,
including U.S. federal, state and non-U.S. jurisdictions. These laws are often complex and may be
subject to different interpretations. To determine the financial statement impact of its accounting
for income taxes, including the provision for income tax expense and its unrecognized tax benefits,
JPMorgan Chase must make assumptions and judgments about how to interpret and apply these complex
tax laws to numerous transactions and business events. For a further description of accounting
estimates related to income taxes, see Income taxes on page 98 of JPMorgan Chases 2007 Annual
Report.
ACCOUNTING AND REPORTING DEVELOPMENTS
Derivatives netting amendment of FASB Interpretation No. 39
In April 2007, the FASB issued FSP
FIN 39-1, which permits offsetting of cash collateral receivables or payables with net derivative
positions under certain circumstances. The Firm adopted FSP FIN 39-1 effective January 1, 2008. The
FSP did not have a material impact on the Firms Consolidated Balance Sheets.
Accounting for income tax benefits of dividends on share-based payment awards
In June 2007, the FASB
ratified EITF 06-11, which must be applied prospectively for dividends declared in fiscal years
beginning after December 15, 2007. EITF 06-11 requires that realized tax benefits from dividends or
dividend equivalents paid on equity-classified share-based payment awards that are charged to
retained earnings should be recorded as an increase to additional paid-in capital and included in
the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards.
Prior to the issuance of EITF 06-11, the Firm did not include these tax benefits as part of this
pool of excess tax benefits. The Firm adopted EITF 06-11 on January 1, 2008. The adoption of this
consensus did not have an impact on the Firms Consolidated Balance Sheets or results of
operations.
Fair value measurements written loan commitments
On November 5, 2007, the Securities and Exchange
Commission (SEC) issued SAB 109, which revises and rescinds portions of SAB 105, Application of
Accounting Principles to Loan Commitments. Specifically, SAB 109 states that the expected net
future cash flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value through earnings.
The provisions of SAB 109 are applicable to written loan commitments issued or modified beginning
on January 1, 2008. The Firm adopted SAB 109 on January 1, 2008. The adoption of this pronouncement
did not have a material impact on the Firms Consolidated Balance Sheets or results of operations.
Business combinations / Noncontrolling interests in consolidated financial statements
On December 4,
2007, the FASB issued SFAS 141R and SFAS 160, which amend the accounting and reporting of business
combinations, as well as noncontrolling (i.e., minority) interests. JPMorgan Chase is currently
evaluating the impact that SFAS 141R and SFAS 160 will have on its consolidated financial
statements. For JPMorgan Chase, SFAS 141R is effective for business combinations that close on or
after January 1, 2009. SFAS 160 is effective for JPMorgan Chase for fiscal years beginning on or
after December 15, 2008.
67
Accounting for transfers of financial assets and repurchase financing transactions
In February 2008,
the FASB issued FSP FAS 140-3, which requires an initial transfer of a financial asset and a
repurchase financing that was entered into contemporaneously or in contemplation of the initial
transfer to be evaluated together as a linked transaction under SFAS 140 unless certain criteria
are met. FSP FAS 140-3 is effective for fiscal years beginning after November 15, 2008, and will be
applied to new transactions entered into after the date of adoption. The Firm is currently
evaluating the impact, if any, the adoption of FSP FAS 140-3 will have on the Firms consolidated
financial statements.
Disclosures about derivative instruments and hedging activities FASB Statement No. 161
On March
19, 2008, the FASB issued SFAS 161, which amends the disclosure requirements of SFAS 133. SFAS 161
requires increased disclosures about derivative instruments and hedging activities and their
effects on an entitys financial position, financial performance, and cash flows. SFAS 161 is
effective for fiscal years beginning after November 15, 2008, with early adoption permitted. SFAS
161 will only affect JPMorgan Chases disclosures of derivative instruments and related hedging
activities, and not its consolidated financial position, financial performance or cash flows.
Investment companies
In June 2007, the AICPA issued SOP 07-1. SOP 07-1 provides guidance for
determining whether an entity is within the scope of the AICPA Audit and Accounting Guide
Investment Companies (the Guide), and therefore qualifies to use the Guides specialized
accounting principles (referred to as investment company accounting). Additionally, SOP 07-1
provides guidelines for determining whether investment company accounting should be retained by a
parent company in consolidation or by an equity method investor in an investment. In May 2007, the
FASB issued FSP FIN 46(R)-7, which amends FIN 46R to permanently exempt entities within the scope
of the Guide from applying the provisions of FIN 46R to their investments. In February 2008, the
FASB agreed to an indefinite delay of the effective date of SOP 07-1 in order to address
implementation issues, which effectively delays FSP FIN 46(R)-7 as well for those companies, such
as the Firm, that have not adopted SOP 07-1.
68
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions, except per share data) |
|
2008 |
|
|
2007 |
|
|
Revenue |
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,216 |
|
|
$ |
1,739 |
|
Principal transactions |
|
|
(803 |
) |
|
|
4,487 |
|
Lending & deposit-related fees |
|
|
1,039 |
|
|
|
895 |
|
Asset management, administration and commissions |
|
|
3,596 |
|
|
|
3,186 |
|
Securities gains (losses) |
|
|
33 |
|
|
|
2 |
|
Mortgage fees and related income |
|
|
525 |
|
|
|
476 |
|
Credit card income |
|
|
1,796 |
|
|
|
1,563 |
|
Other income |
|
|
1,829 |
|
|
|
518 |
|
|
Noninterest revenue |
|
|
9,231 |
|
|
|
12,866 |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
17,532 |
|
|
|
16,620 |
|
Interest expense |
|
|
9,873 |
|
|
|
10,518 |
|
|
Net interest income |
|
|
7,659 |
|
|
|
6,102 |
|
|
Total net revenue |
|
|
16,890 |
|
|
|
18,968 |
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
4,424 |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
Compensation expense |
|
|
4,951 |
|
|
|
6,234 |
|
Occupancy expense |
|
|
648 |
|
|
|
640 |
|
Technology, communications and equipment expense |
|
|
968 |
|
|
|
922 |
|
Professional & outside services |
|
|
1,333 |
|
|
|
1,200 |
|
Marketing |
|
|
546 |
|
|
|
482 |
|
Other expense |
|
|
169 |
|
|
|
735 |
|
Amortization of intangibles |
|
|
316 |
|
|
|
353 |
|
Merger costs |
|
|
|
|
|
|
62 |
|
|
Total noninterest expense |
|
|
8,931 |
|
|
|
10,628 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
3,535 |
|
|
|
7,332 |
|
Income tax expense |
|
|
1,162 |
|
|
|
2,545 |
|
|
Net income |
|
$ |
2,373 |
|
|
$ |
4,787 |
|
|
Net income applicable to common stock |
|
$ |
2,373 |
|
|
$ |
4,787 |
|
|
|
|
|
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