FORM 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
For the Quarterly Period Ended March 31, 2007
Commission file number 1-5805
JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
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Delaware
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13-2624428 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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270 Park Avenue, New York, New York
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10017 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (212) 270-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes x No
Number
of shares of common stock outstanding as of April 30, 2007:
3,416,114,978
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 three months ended, |
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1Q07 |
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4Q06 |
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3Q06 |
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2Q06 |
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1Q06 |
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Selected income statement data |
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Noninterest revenue(a) |
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$ |
12,850 |
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$ |
10,501 |
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$ |
10,166 |
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$ |
9,908 |
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$ |
10,182 |
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Net interest income |
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6,118 |
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5,692 |
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5,379 |
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5,178 |
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4,993 |
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Total net revenue |
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18,968 |
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16,193 |
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15,545 |
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15,086 |
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15,175 |
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Provision for credit losses |
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1,008 |
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1,134 |
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812 |
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493 |
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831 |
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Noninterest expense |
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10,628 |
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9,885 |
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9,796 |
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9,382 |
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9,780 |
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Income tax expense |
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2,545 |
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1,268 |
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1,705 |
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1,727 |
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1,537 |
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Income from continuing operations |
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4,787 |
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3,906 |
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3,232 |
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3,484 |
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3,027 |
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Income from discontinued operations(b) |
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620 |
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65 |
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56 |
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54 |
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Net income |
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$ |
4,787 |
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$ |
4,526 |
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$ |
3,297 |
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$ |
3,540 |
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$ |
3,081 |
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Per common share |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
1.38 |
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$ |
1.13 |
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$ |
0.93 |
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$ |
1.00 |
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$ |
0.87 |
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Net income |
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1.38 |
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1.31 |
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0.95 |
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1.02 |
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0.89 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
1.34 |
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$ |
1.09 |
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$ |
0.90 |
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$ |
0.98 |
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$ |
0.85 |
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Net income |
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1.34 |
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1.26 |
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0.92 |
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0.99 |
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0.86 |
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Cash dividends declared per share |
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0.34 |
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0.34 |
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0.34 |
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0.34 |
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0.34 |
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Book value per share |
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34.45 |
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33.45 |
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32.75 |
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31.89 |
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31.19 |
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Common shares outstanding |
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Average: Basic |
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3,456 |
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3,465 |
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3,469 |
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3,474 |
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3,473 |
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Diluted |
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3,560 |
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3,579 |
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3,574 |
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3,572 |
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3,571 |
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Common shares at period-end |
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3,416 |
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3,462 |
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3,468 |
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3,471 |
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3,473 |
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Share price(c) |
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High |
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$ |
51.95 |
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$ |
49.00 |
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$ |
47.49 |
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$ |
46.80 |
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$ |
42.43 |
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Low |
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45.91 |
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45.51 |
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40.40 |
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39.33 |
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37.88 |
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Close |
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48.38 |
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48.30 |
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46.96 |
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42.00 |
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41.64 |
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Market capitalization |
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165,280 |
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167,199 |
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162,835 |
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145,764 |
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144,614 |
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Financial ratios(d) |
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Return on common equity (ROE): |
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Income from continuing operations |
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17 |
% |
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14 |
% |
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11 |
% |
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13 |
% |
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11 |
% |
Net income |
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17 |
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16 |
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12 |
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13 |
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12 |
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Return on assets (ROA): |
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Income from continuing operations |
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1.41 |
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1.14 |
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0.98 |
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1.05 |
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0.98 |
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Net income |
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1.41 |
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1.32 |
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1.00 |
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1.06 |
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1.00 |
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Tier 1 capital ratio |
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8.5 |
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8.7 |
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8.6 |
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8.5 |
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8.5 |
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Total capital ratio |
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11.8 |
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12.3 |
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12.1 |
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12.0 |
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12.1 |
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Overhead ratio |
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56 |
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61 |
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63 |
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62 |
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64 |
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Selected balance sheet data (period-end) |
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Total assets |
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$ |
1,408,918 |
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$ |
1,351,520 |
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$ |
1,338,029 |
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$ |
1,328,001 |
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$ |
1,273,282 |
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Loans |
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449,765 |
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483,127 |
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463,544 |
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455,104 |
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432,081 |
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Deposits |
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626,428 |
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638,788 |
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582,115 |
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593,716 |
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584,465 |
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Long-term debt |
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143,274 |
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133,421 |
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126,619 |
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125,280 |
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112,133 |
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Total stockholders equity |
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117,704 |
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115,790 |
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113,561 |
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110,684 |
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108,337 |
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Headcount |
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176,314 |
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174,360 |
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171,589 |
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172,423 |
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170,787 |
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Credit quality metrics |
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Allowance for credit losses |
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$ |
7,853 |
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$ |
7,803 |
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$ |
7,524 |
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$ |
7,500 |
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$ |
7,659 |
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Nonperforming assets(e) |
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|
2,421 |
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|
2,341 |
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|
2,300 |
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|
2,384 |
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|
2,348 |
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Allowance for loan losses to total loans(f) |
|
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1.74 |
% |
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|
1.70 |
% |
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|
1.65 |
% |
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|
1.69 |
% |
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|
1.83 |
% |
Net charge-offs |
|
$ |
903 |
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$ |
930 |
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$ |
790 |
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$ |
654 |
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$ |
668 |
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Net charge-off rate(d)(f) |
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0.85 |
% |
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|
0.84 |
% |
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|
0.74 |
% |
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|
0.64 |
% |
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|
0.69 |
% |
Wholesale net charge-off (recovery) rate(d)(f) |
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(0.02 |
) |
|
|
0.07 |
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(0.03 |
) |
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(0.05 |
) |
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(0.06 |
) |
Managed card net charge-off rate(d) |
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3.57 |
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|
3.45 |
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3.58 |
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|
3.28 |
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|
2.99 |
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(a) |
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On January 1, 2007, the Firm adopted SFAS 157 and recognized a benefit of $166 million, in
the current quarter, as a result of incorporating an adjustment to the Firms valuation of
derivative liabilities and other liabilities measured at fair value to reflect the credit
quality of the Firm. The adoption also resulted in a benefit of $464 million related to
valuation adjustments to nonpublic private equity investments. |
(b) |
|
On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust
businesses for the consumer, business banking and middle-market banking businesses of The Bank
of New York Company Inc. The results of operations of these corporate trust businesses are
reported as discontinued operations for each 2006 period. |
(c) |
|
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. |
(d) |
|
Quarterly ratios are based upon annualized amounts. |
(e) |
|
Excludes nonperforming wholesale held-for-sale (HFS) loans purchased as part of the
Investment Banks proprietary activities. |
(f) |
|
Excluded from the allowance coverage ratios were end-of-period loans held-for-sale and loans
accounted for at fair value; and excluded from the net charge-off rates were average loans
held-for-sale and loans accounted for at fair value. |
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 107109 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 (see
Forward-looking Statements on page 112 of this Form 10-Q) and in the JPMorgan Chase Annual Report
on Form 10-K for the year ended December 31, 2006
as amended by the Form 8-K filed on May 10, 2007 (2006 Annual Report or 2006 Form 10-K), in
Part I, Item 1A: Risk factors and in Forward-looking Statements in the MD&A of the 2006 Form 10-K, to
which reference is hereby made.
INTRODUCTION
JPMorgan Chase &
Co. (the Firm), a financial holding company incorporated under Delaware law in 1968, is a
leading global financial services firm and one of the largest banking institutions in the United
States, with $1.4 trillion in assets, $117.7 billion in stockholders equity and operations
worldwide. The Firm is a leader in investment banking, financial services for consumers and
businesses, financial transaction processing, asset management and private equity. Under the
JPMorgan and Chase brands, the Firm serves millions of customers in the United States and many of
the worlds most prominent corporate, institutional and government clients.
JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank, National Association
(JPMorgan Chase Bank, N.A.), a national banking association with branches in 17 states; and Chase
Bank USA, National Association (Chase Bank USA, N.A.), a national bank that is the Firms credit
card issuing bank. JPMorgan Chases principal nonbank subsidiary is J.P. Morgan Securities Inc.,
the Firms U.S. investment banking firm.
JPMorgan Chases activities are organized, for management reporting purposes, into six business
segments, as well as Corporate. The Firms wholesale businesses comprise the Investment Bank,
Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firms
consumer businesses comprise the Retail Financial Services and Card Services segments. A
description of the Firms business segments, and the products and services they provide to their
respective client bases, follows:
Investment Bank
JPMorgan is one of the worlds leading investment banks, with deep client relationships and broad
product capabilities. The Investment Banks clients are corporations, financial institutions,
governments and institutional investors. The Firm offers a full range of investment banking
products and services in all major capital markets, including advising on corporate strategy and
structure, capital raising in equity and debt markets, sophisticated risk management, market-making
in cash securities and derivative instruments, and research. The Investment Bank (IB) also
commits the Firms own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (RFS), which includes the Regional Banking, Mortgage Banking and Auto
Finance reporting segments, helps meet the financial needs of consumers and businesses. RFS
provides convenient consumer banking through the nations fourth-largest branch network and
third-largest ATM network. RFS is a top-five mortgage originator and servicer, the second-largest
home equity originator, the largest noncaptive originator of automobile loans and one of the
largest student loan originators.
RFS serves customers through more than 3,000 bank branches, 8,500 ATMs and 270 mortgage offices,
and through relationships with more than 15,000 auto dealerships and 4,300 schools and
universities. More than 11,000 branch salespeople assist customers, across a 17-state footprint
from New York to Arizona, with checking and savings accounts, mortgage, home equity and business
loans, investments and insurance. Over 1,200 additional mortgage officers provide home loans
throughout the country.
Card Services
With more than 152 million cards in circulation and $146.6 billion in managed loans, Chase Card
Services (CS) is one of the nations largest credit card issuers. Customers used Chase cards for
more than $81.3 billion worth of transactions in the three months ended March 31, 2007.
4
Chase offers a wide variety of general-purpose cards to satisfy the needs of individual consumers,
small businesses and partner organizations, including cards issued with AARP, Amazon, Continental
Airlines, Marriott, Southwest Airlines, Sony, United Airlines, Walt Disney Company and many other
well-known brands and organizations. Chase also issues private-label cards with Circuit City,
Kohls, Sears Canada and BP.
Chase Paymentech Solutions, LLC, a joint venture with JPMorgan Chase and First Data Corporation, is
the largest processor of MasterCard and Visa payments in the world, having handled 4.5 billion
transactions in the three months ended March 31, 2007.
Commercial Banking
Commercial Banking (CB) serves more than 30,000 clients, including corporations, municipalities,
financial institutions and not-for-profit entities. These clients generally have annual revenues
ranging from $10 million to $2 billion. Commercial bankers serve clients nationally throughout the
RFS footprint and in offices located in other major markets.
Commercial Banking offers its clients industry knowledge, experience, a dedicated service model,
comprehensive solutions and local expertise. The Firms broad platform positions CB to deliver
extensive product capabilities including lending, treasury services, investment banking and
asset management to meet its clients U.S. and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (TSS) is a global leader in providing transaction, investment and
information services to support the needs of institutional clients worldwide. TSS is one of the
largest cash management providers in the world and a leading global custodian. Treasury Services
(TS) provides a variety of cash management products, trade finance and logistics solutions,
wholesale card products, and liquidity management capabilities to small and midsized companies,
multinational corporations, financial institutions and government entities. TS partners with the
Commercial Banking, Retail Financial Services and Asset Management business segments to serve
clients firmwide. As a result, certain TS revenues are included in other segments results.
Worldwide Securities Services (WSS) stores, values, clears and services securities and
alternative investments for investors and broker-dealers; and manages Depositary Receipt programs
globally.
Asset Management
With assets under supervision of $1.4 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
Investment in SLM Corporation
On April 16, 2007, an investor group, comprising JPMorgan Chase and three other firms, announced
that they had signed a definitive agreement to purchase SLM Corporation (Sallie Mae) for
approximately $25 billion. JPMorgan Chase will invest $2.2 billion and will own 24.9% of the
company. The transaction requires the approval of Sallie Maes stockholders and is subject to
regulatory approvals. It is expected to close in late 2007.
5
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 liquidity, capital, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except per share and ratio data) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Selected income statement data
Net revenue |
|
$ |
18,968 |
|
|
$ |
15,175 |
|
|
|
25 |
% |
Provision for credit losses |
|
|
1,008 |
|
|
|
831 |
|
|
|
21 |
|
Noninterest expense |
|
|
10,628 |
|
|
|
9,780 |
|
|
|
9 |
|
Income from continuing operations |
|
|
4,787 |
|
|
|
3,027 |
|
|
|
58 |
|
Income from discontinued operations |
|
|
|
|
|
|
54 |
|
|
NM |
|
Net income |
|
|
4,787 |
|
|
|
3,081 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.34 |
|
|
$ |
0.85 |
|
|
|
58 |
% |
Net income |
|
|
1.34 |
|
|
|
0.86 |
|
|
|
56 |
|
Return on common equity (ROE) |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
17 |
% |
|
|
11 |
% |
|
|
|
|
Net income |
|
|
17 |
|
|
|
12 |
|
|
|
|
|
|
Business overview
The Firm reported 2007 first-quarter net income of $4.8 billion, or $1.34 per share, compared with
net income of $3.1 billion, or $0.86 per share, for the first quarter of 2006. Return on common
equity for the quarter was 17% compared with 12% in the prior year. Income from continuing
operations was $4.8 billion, or $1.34 per share, in the current quarter compared with $3.0 billion,
or $0.85 per share, for the first quarter of 2006. The Firms adoption of SFAS 157 (Fair Value
Measurements) resulted in a benefit to the current quarters earnings of $391 million (after-tax),
or $0.11 per share; this benefit consisted of $103 million (after-tax) related to adjustments to
the valuation of liabilities to incorporate the impact of the Firms credit quality (recorded in
the Investment Bank) and $288 million (after-tax) related to the valuation of nonpublic private
equity investments (recorded in the Corporate segment). For a discussion of SFAS 157 and SFAS 159,
see Note 3 and Note 4 on pages 7180 of this Form 10-Q.
In the first quarter of 2007, the Firm successfully completed the systems conversion and rebranding
for 339 former Bank of New York branches. The Firms customers throughout the U.S. now have access
to over 3,000 branches and 8,500 ATMs in 17 states, all of which are on common computer systems.
In the first quarter of 2007, the global economy continued to expand at a rate of approximately 5%,
which supported continued strong growth in the emerging market economies. During the first quarter,
the European economy slowed slightly with an estimated growth rate of 2.8%, Japan experienced
steady growth of 2.8% and emerging Asian economies expanded at a rate of approximately 8.6%. U.S.
economic growth slowed to a rate of approximately 1.3%, reflecting a solid gain in consumer
spending, which was supported by equity market appreciation, low unemployment and wage growth.
These benefits were offset partially by a continued slower pace of new home construction, weakness
in government spending and a slower rate of capital spending by businesses. The Federal Reserve
Board held the federal funds rate steady at 5.25% and the yield curve remained moderately inverted.
Equity markets, both domestic and international, reflected positive performance, with the S&P 500
up 3% on average and international indices increasing 5% on average during the first quarter of
2007. Global capital markets activity was strong during the first quarter of 2007, with debt and
equity underwriting and merger and acquisition activity surpassing levels from the first quarter of
2006. Demand for wholesale loans in the U.S. was up approximately 6%, while U.S. consumer loans
grew an estimated 7% during the first quarter of 2007.
The first quarter of 2007 economic environment was a contributing factor to the performance of the
Firm and each of its businesses. The overall economic expansion, strong level of capital markets
activity and positive performance in equity markets helped to drive new business volume and organic
growth within each of the Firms businesses while also contributing to the generally favorable
credit environment. However, the interest rate and competitive environments negatively affected
both wholesale and consumer loan and deposit spreads.
6
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 1415 of this Form 10-Q.
Investment Bank achieved record net income driven by record revenue and a lower provision for
credit losses, partially offset by higher noninterest expense. Investment banking fees were at a
record level, benefiting from record debt and record equity underwriting fees as well as strong
advisory fees. Record Fixed Income Markets revenue benefited from improved results in commodities
(compared with a weak prior-year quarter), and strength in credit and rate markets, partially
offset by lower results in currencies. Record Equity Markets revenue benefited from particularly
strong performance in Europe and strong derivatives performance across regions. The Provision for
credit losses decreased compared with the prior year as the prior-year provision reflected growth
in the loan portfolio. The increase in expense was due primarily to higher performance-based
compensation, partially offset by the absence of prior-year expense from the adoption of SFAS 123R.
Retail Financial Services net income decreased from the prior year due to a decline in Regional
Banking results, largely offset by improved performance in Mortgage Banking. Revenue was up from
the prior year driven by higher gain-on-sale income and the reclassification of certain loan
origination costs to expense (previously netted against revenue) due to the adoption of SFAS 159 in
Mortgage Banking, The Bank of New York transaction, higher home equity loans and deposit balances,
increases in deposit-related fees and the absence of a prior-year loss related to auto loans
transferred to held-for-sale. These benefits were offset partially by the sale of the insurance
business, lower prime and subprime mortgage balances, and a charge resulting from accelerated
surrenders of customer annuity contracts. The provision for credit losses was up from the prior
year due primarily to higher losses in the subprime mortgages portfolio and, to a lesser extent,
increased provision in the home equity portfolio related to weaker housing prices. These increases
were offset partially by the reversal of a portion of the reserves related to Hurricane Katrina.
Noninterest expense was up from the prior year primarily due to The Bank of New York transaction,
the reclassification of certain loan origination costs due to the adoption of SFAS 159, investments
in the retail distribution network and higher depreciation expense on owned automobiles subject to
operating leases. These increases were offset partially by the sale of the insurance business.
Card Services net income decreased when compared with the prior year, primarily due to prior-year
results benefiting from significantly lower net charge-offs related to decreased bankruptcy losses.
Net managed revenue was flat compared with the prior year benefiting from higher average managed
loan balances, increased fees and increased interchange income from higher charge volume. These
benefits were largely offset by higher charge-offs, which resulted in increased revenue reversals;
higher cost of funds on balance growth in promotional, introductory and transactor loan balances;
and higher volume-driven payments to partners and increased rewards expense. The managed provision
for credit losses was up due to the prior year benefiting from a lower level of net charge-offs,
reflecting a reduction in bankruptcy losses following the change in bankruptcy legislation in the
fourth quarter of 2005. This was partially offset by a reduction in the allowance for credit losses
primarily relating to the strength in the underlying credit quality of the loan portfolio.
Noninterest expense was flat due primarily to lower marketing expense and fraud-related losses,
offset by higher expense related to recent acquisitions and increased customer activity.
Commercial Banking net income was a record, up from the prior year driven by higher net revenue.
Revenue increased due to higher liability balances and loan volumes, which reflected organic growth
and The Bank of New York transaction, as well as higher investment banking revenue and gains
related to the sale of securities acquired in the satisfaction of debt. These benefits were offset
partially by the continued shift to narrower-spread liability products and loan spread compression.
Expense decreased due to the absence of prior-year expense from the adoption of SFAS 123R, largely
offset by expense related to The Bank of New York transaction.
Treasury & Securities Services net income was flat compared with the prior year as higher revenue
was offset by increased expense. Revenue benefited from increased product usage by existing
clients, new business growth, higher liability balances and market appreciation, all of which was
offset largely by price compression across Treasury Services products, a continued shift to
narrower-spread liability products and lower foreign exchange revenue. The increase in expense was
due to higher compensation expense related to growth in headcount supporting increased client
volume and investment in new product platforms, partially offset by the absence of prior-year
expense related to the adoption of SFAS 123R.
7
Asset Management achieved record net income driven by increased revenue and the absence of
prior-year expense related to the adoption of SFAS 123R, offset primarily by higher compensation
expense. Revenue benefited from increased fees and commissions largely due to increased assets
under management and higher performance fees. Expense increased due to higher compensation and
increased minority interest expense related to Highbridge Capital Management, partially offset by
the absence of prior-year expense related to the adoption of SFAS 123R.
Corporate segment net income increased primarily from higher private equity gains and improved net
interest income. Private equity gains benefited from a higher level of realized gains and a fair
value adjustment on nonpublic investments resulting from the adoption of SFAS 157 as well as the
reclassification of certain private equity carried interest from revenue to compensation expense.
Treasury benefited from an increase in net interest income driven by improved net interest spread
and the absence of securities losses in the prior year. Expense increased compared with the prior
year driven by the reclassification of certain private equity carried interest to compensation
expense and lower recoveries related to certain material litigation, offset primarily by business
efficiencies and the absence of prior-year expense from the adoption of SFAS 123R.
Net income from discontinued operations was zero in the current quarter compared with $54 million
in the prior year. Discontinued operations (included in the Corporate segment results) include the
related balance sheet and income statement activity of selected corporate trust businesses that
were sold to The Bank of New York on October 1, 2006.
During the quarter ended March 31, 2007, approximately $720 million (pretax) of merger savings was
realized, which is an annualized rate of approximately $2.9 billion. Merger costs of $62 million
were expensed during the first quarter of 2007 bringing the total amount expensed since the merger
announcement to $3.5 billion (including capitalized costs).
The managed provision for credit losses was $1.6 billion, up by $321 million, or 25%, from the
prior year. The wholesale provision for credit losses was $77 million for the quarter compared with
a provision of $179 million in the prior year. The prior-year provision reflected growth in the
loan portfolio. Wholesale net recoveries were $6 million in the current quarter compared with net
recoveries of $20 million in the prior year, resulting in net recovery rates of 0.02% and 0.06%,
respectively. The total consumer managed provision for credit losses was $1.5 billion compared with
$1.1 billion in the prior year. The prior year benefited from a lower level of credit card net
charge-offs, which reflected a low level of bankruptcy losses following the change in bankruptcy
legislation in the fourth quarter of 2005. The increase from last year also reflects higher
charge-offs and additions to the allowance for credit losses related to the subprime mortgage and
home equity loan portfolios, partially offset by a reduction in the allowance for credit losses in
Card Services. The Firm had total nonperforming assets of $2.4 billion at March 31, 2007, up by $73
million, or 3%, from the prior-year level of $2.3 billion.
The Firm had, at March 31, 2007, total stockholders equity of $117.7 billion and a Tier 1 capital
ratio of 8.5%. The Firm purchased $4.0 billion, or 80.9 million shares, of common stock during the
quarter. On April 17, 2007, the Board of Directors declared a quarterly dividend of $0.38 per share
on the outstanding shares of the Firms common stock, an increase of $0.04 per share, or 12%. The
dividend is payable on July 31, 2007, to stockholders of record at the close of business on July 6,
2007. On April 17, 2007, the Board of Directors also authorized a new $10.0 billion common stock
repurchase program, which replaces the Firms previous $8.0 billion repurchase program authorized
on March 21, 2006. There was $816 million of remaining authorization under the $8.0 billion
repurchase program.
8
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 2007 should be viewed against the backdrop of
the global economy, financial markets activity and the geopolitical environment, all of which are
integrally linked. While the Firm considers outcomes for, and has contingency plans to respond to,
stress environments, the current basic outlook is predicated on the interest rate movements implied
in the forward rate curve for U.S. Treasury securities, the continuation of favorable U.S. and
international equity markets and continued expansion of the global economy.
The Investment Bank enters the
second quarter of 2007 with a strong investment bank fee pipeline. In the Corporate segment, the
revenue outlook for the Private Equity business is directly related to the strength of the equity
markets and the performance of the underlying portfolio investments. If current market conditions
persist, the Firm anticipates continued realization of private equity gains, but results can be
volatile from quarter to quarter. Management continues to believe that the net loss in Treasury and
Other Corporate, on a combined basis, will be approximately $50 million to $100 million per
quarter. The performance of each of the Firms lines of business will be affected by overall global economic
growth, by financial market movements, including interest rates movements, by the competitive
environment and by client activity levels in any given time period.
The Provision for credit losses is anticipated to be higher, primarily driven by a trend toward a
more normal level of provisioning for credit losses in both the wholesale and consumer businesses.
The consumer Provision for credit losses is anticipated to increase
as the Firm experiences a higher level of net charge-offs in Card
Services as
bankruptcy filings continue to increase from the significantly lower than normal levels experienced
in 2006 related to the change in bankruptcy law in 2005. The provision for credit losses was increased
for both the subprime mortgage portfolio and, to a lesser extent, the
home equity portfolio during the first quarter of 2007, and management
remains cautious with respect to the real estate lending portfolio given continued downward
pressure on housing prices and the elevated level of unsold homes nationally.
Firmwide expense is anticipated to reflect investments in each business, recent acquisitions,
continued merger savings and other operating efficiencies. Annual Merger savings are expected to
reach approximately $3.0 billion by the end of 2007, upon the completion of the last significant
conversion activity, which is the wholesale deposit conversion scheduled for the second half of
2007. Merger costs of approximately $400 million are expected to be incurred during 2007 (including
a modest amount related to The Bank of New York transaction). These additions are expected to bring
total cumulative merger costs to $3.8 billion by the end of 2007.
9
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chases consolidated results of
operations on a reported basis. Factors that relate primarily to a single business segment are
discussed in more detail within that business segment than they are in this consolidated section.
Total net revenue, Noninterest expense and Income tax expense reflect the impact of discontinued
operations. For a discussion of the Critical accounting estimates used by the Firm that affect the
Consolidated results of operations, see page 64 of this Form 10-Q and pages 8385 of the JPMorgan
Chase Annual Report on Form 10-K for the year ended December 31,
2006. Effective January 1, 2007, certain transaction costs
previously reported within Principal transactions and Asset
management, administration and commission revenues have now been
classified and are reported in Professional and outside services
expense. Reclassified amounts for 2006, 2005 and 2004 are set forth
in the Firms Annual Report on Form 10-K for the year ended
December 31, 2006, as amended by the Firms Form 8-K filed
May 10, 2007 (2006 Annual Report).
The
following table presents the components of Total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Investment banking fees |
|
$ |
1,739 |
|
|
$ |
1,169 |
|
|
|
49 |
% |
Principal transactions(a) |
|
|
4,471 |
|
|
|
2,709 |
|
|
|
65 |
|
Lending & deposit related fees |
|
|
895 |
|
|
|
841 |
|
|
|
6 |
|
Asset management, administration and
commissions(a) |
|
|
3,186 |
|
|
|
2,874 |
|
|
|
11 |
|
Securities gains (losses) |
|
|
2 |
|
|
|
(116 |
) |
|
NM |
|
Mortgage fees and related income |
|
|
476 |
|
|
|
241 |
|
|
|
98 |
|
Credit card income |
|
|
1,563 |
|
|
|
1,910 |
|
|
|
(18 |
) |
Other income |
|
|
518 |
|
|
|
554 |
|
|
|
(6 |
) |
|
|
|
|
|
Noninterest revenue |
|
|
12,850 |
|
|
|
10,182 |
|
|
|
26 |
|
Net interest income |
|
|
6,118 |
|
|
|
4,993 |
|
|
|
23 |
|
|
|
|
|
|
Total net revenue |
|
$ |
18,968 |
|
|
$ |
15,175 |
|
|
|
25 |
% |
|
|
|
|
(a) |
|
Certain transaction costs, previously reported within Revenue, have been reclassified to
Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods
presented. The reclassification did not affect Income from continuing operations or Net
income. |
Total Net revenue
Total net revenue for the first quarter of 2007 was $19.0 billion, up by $3.8 billion, or 25%, from
the prior year. The increase was due to higher Principal transactions revenue, reflecting very
strong private equity gains (including the impact of the adoption of SFAS 157) and record Fixed
Income and record Equity markets revenue, higher Net interest income, record Investment banking
fees, increased Asset management, administration and commissions revenue, and higher Mortgage fees
and related income (including the impact of the adoption of SFAS 159). These improvements were
partially offset by lower Credit card income.
Investment banking fees of $1.7 billion in the first quarter 2007 was a record for the Firm. This
result was driven by record debt and record equity underwriting as well as strong advisory fees.
For a further discussion of Investment banking fees, which are primarily recorded in the IB, see
the IB segment results on pages 1720 of this Form 10-Q.
Principal transactions revenue consists of trading revenue, changes in fair value associated with
financial instruments held by the IB for which the SFAS 159 fair value option was elected and
private equity gains. Trading revenue of $3.1 billion in the first quarter of 2007 was a record for
the Firm, driven primarily by strong fixed income and equities performance. Credit Portfolio
revenue was up, driven largely by an adjustment to the valuation of the Firms derivative
liabilities and other liabilities measured at fair value to reflect the credit quality of the Firm,
as a part of the adoption of SFAS 157, and higher trading revenue from credit portfolio management
activities. Private equity gains were very strong, benefiting from a higher level of realized
gains, a fair value adjustment to nonpublic investments of $464 million resulting from the adoption
of SFAS 157, and the reclassification of certain private equity carried interest to Compensation
expense. For a further discussion of Principal transactions revenue, see the IB and Corporate
segment results on pages 1720 and 3739, respectively, and Note 5 on pages 8082 of this Form
10-Q.
Lending & deposit related fees rose from the first quarter of 2006 as a result of higher
deposit-related fees, which in part, resulted from The Bank of New York transaction. For a further
discussion of Lending & deposit related fees, which are primarily recorded in RFS see the RFS
segment results on pages 2127 of this Form 10-Q.
The increase in Asset management, administration and commissions revenue compared with the first
quarter of 2006 was primarily due to increased assets under management and higher performance fees.
Assets under management in AM was $1.1 trillion at the end of the first quarter of 2007, up 21%, or
$180 billion, from the prior year; this growth was primarily
10
the result of net asset inflows in the
institutional and retail segments, and market appreciation. Also contributing to the increase was
higher assets under custody in TSS driven by market value appreciation and new business, as well as
growth in other fees due to a combination of increased product usage by existing clients and new
business growth. In addition, commissions increased due to higher brokerage transaction volume,
partly offset by the sale of the insurance business in the third quarter of 2006, and a charge resulting from accelerated surrenders of customer annuity
contracts. For additional information on these fees and commissions, see the segment discussions
for AM on pages 3436, TSS on pages 3233, and RFS on pages 2127, of this Form 10-Q.
The favorable variance in Securities gains (losses) when compared with the first quarter of 2006
primarily reflects the absence of $158 million of securities losses in the prior year from
repositioning of the Treasury investment securities portfolio. For a further discussion of
Securities gains (losses), which are mostly recorded in the Firms Treasury business, see the
Corporate segment discussion on pages 3739 of this Form 10-Q.
Mortgage fees and related income increased in comparison with the first quarter of 2006 due to
increased production revenue reflecting higher gain-on-sale income and the reclassification of
certain loan origination costs to expense (previously netted against revenue) due to the adoption
of SFAS 159. Net mortgage servicing revenue improved reflecting an increase in third-party loans
serviced. 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 2526 and Note 6 on
page 83 of this Form 10-Q.
Credit card income decreased $347 million, or 18%, from the prior year primarily from lower
servicing fees earned in connection with securitization activities, which were unfavorably affected
by higher net credit losses incurred on securitized credit card loans, an increase in interest paid
to investors in securitized loans, and a decrease in average securitized loans from the prior year.
Also, contributing to the decrease were increases in volume-driven payments to partners and
increased expenses related to rewards programs. These were offset partially by higher customer
charge volume that favorably impacted interchange income and an increase in fee-based product
revenue.
The decrease in Other income from the first quarter of 2006 reflected lower gains from loan
workouts, partially offset by higher results on corporate and bank-owned life insurance policies
and the absence of a prior-year $50 million loss related to auto loans transferred to
held-for-sale.
Net interest income rose from the first quarter of last year as a result of improved
trading-related Net interest income, primarily from the impact of a shift of Interest expense to
Principal transactions revenue related to certain IB structured notes to which the fair value
option was elected in connection with the adoption of SFAS 159; an improvement in Treasurys net
interest spread; higher average credit card balances, which included a private-label credit card
portfolio acquisition by CS; higher home equity loans; the impact of The Bank of New York
transaction; and higher wholesale liability balances and consumer deposits. These increases were
offset partially by narrower spreads on consumer and wholesale loans; increased credit card-related
interest reversals in the current quarter associated with higher charge-offs; a shift to narrower
spread deposit products; and the impact of RFSs sale of the insurance business. The Firms total
average interest-earning assets for the first quarter of 2007 were $1.1 trillion, up 12% from the
first quarter of 2006, primarily as a result of an increase in Trading assets debt instruments,
Loans, and Available-for-sale securities, partially offset by a decline in Interests in purchased
receivables as a result of the restructuring and deconsolidation during the second quarter of 2006
of certain multi-seller conduits that the Firm administered. The net interest yield on these
assets, on a fully taxable-equivalent basis, was 2.39%, an increase of 20 basis points from the
prior year, partly reflecting the shift of Interest expense to Principal transactions revenue
related to certain IB structured notes to which the fair value option was elected in connection
with the adoption of SFAS 159.
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Provision for credit losses |
|
$ |
1,008 |
|
|
$ |
831 |
|
|
|
21 |
% |
|
Provision for credit losses
The Provision for credit losses in the first quarter of 2007 increased by $177 million from 2006
due to a $279 million increase in the consumer Provision for credit losses, partly offset by a $102
million decrease in the wholesale Provision for credit losses. The increase in the consumer
provision was driven by the following: in RFS, higher losses in the subprime mortgage portfolio
and, to a lesser extent, a provision increase against the home equity portfolio related to weaker
housing prices; and in CS, the prior-year quarter benefited from lower net charge-offs, which
reflected a reduction in bankruptcy-related losses following the change in bankruptcy legislation
in the fourth quarter of 2005. The current quarter benefited from an $85 million reduction in the
allowance for credit losses, primarily related to strength in the underlying credit quality of the
credit card portfolio, and by the reversal of a portion of the reserves in RFS related to
11
Hurricane
Katrina. The decrease in the wholesale provision was largely the result of a higher provision in
the prior year due to growth in the loan portfolio. For a more detailed discussion of the loan
portfolio and the Allowance for loan losses, refer to Credit risk management on pages 4860 of
this Form 10-Q.
Noninterest expense
The following table presents the components of Noninterest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Compensation expense |
|
$ |
6,234 |
|
|
$ |
5,548 |
|
|
|
12 |
% |
Occupancy expense |
|
|
640 |
|
|
|
594 |
|
|
|
8 |
|
Technology, communications and equipment
expense |
|
|
922 |
|
|
|
869 |
|
|
|
6 |
|
Professional & outside services(a) |
|
|
1,200 |
|
|
|
1,008 |
|
|
|
19 |
|
Marketing |
|
|
482 |
|
|
|
519 |
|
|
|
(7 |
) |
Other expense |
|
|
735 |
|
|
|
816 |
|
|
|
(10 |
) |
Amortization of intangibles |
|
|
353 |
|
|
|
355 |
|
|
|
(1 |
) |
Merger costs |
|
|
62 |
|
|
|
71 |
|
|
|
(13 |
) |
|
|
|
|
|
Total Noninterest expense |
|
$ |
10,628 |
|
|
$ |
9,780 |
|
|
|
9 |
|
|
|
|
|
(a) |
|
Certain transaction costs, previously reported within Revenue, have been reclassified to
Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods
presented. The reclassification did not affect Income from continuing operations or Net
income. |
Noninterest expense
Total Noninterest expense for the first quarter of 2007 was $10.6 billion, up by $848 million, or
9%, from the prior year. The increase was driven by higher Compensation expense, primarily from
performance-based incentives. In addition, expense growth was also driven by acquisitions and
investments in businesses, as well as lower insurance recoveries related to certain material
litigation. The increase in expense was offset partially by the absence of a prior-year expense
from the adoption of SFAS 123R, as well as business divestitures and operating expense
efficiencies.
The increase in Compensation expense from the first quarter of 2006 was primarily the result of
higher performance-based incentives, additional headcount in connection with acquisitions and
investments in businesses, the reclassification of certain private equity carried interest from
Principal transactions revenue, as well as the reclassification of certain loan origination costs
(previously netted against revenue) due to the adoption of SFAS 159. These increases were partially
offset by the absence of a prior-year expense of $459 million from the adoption of SFAS 123R,
business divestitures and expense efficiencies throughout the Firm. For a detailed discussion of
the adoption of SFAS 159 and SFAS 123R see Note 4 on pages 7780 and Note 9 on page 85,
respectively, of this Form 10-Q.
The increase in Occupancy expense from the first quarter of 2006 was driven by ongoing investments
in the retail distribution network, which included incremental expense from The Bank of New York
transaction.
The increase in Technology, communications and equipment expense, when compared with the first
quarter of 2006, was due primarily to higher depreciation expense on owned automobiles subject to
operating leases and technology investments to support business growth, partially offset by
operating expense efficiencies.
Professional & outside services expense increased from the first quarter of 2006 due primarily to
higher brokerage expense and credit card processing costs as a result of growth in transaction
volume. Also contributing to the increase was acquisitions and investments in businesses.
Marketing expense was lower when compared with the first quarter of 2006, reflecting lower
expenditures for credit card campaigns.
Other expense declined compared with the first quarter of 2006 due to the sale of the insurance
business in the third quarter of 2006, lower charges related to litigation, and lower credit card
fraud-related losses. These items were partially offset by lower insurance recoveries pertaining
to certain litigation matters, and growth in business volume, acquisitions and investments in
businesses.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 17 and Note 10 on
pages 9698 and 85, respectively, of the Form 10-Q.
12
Income tax expense
The Firms Income from continuing operations before income tax expense, Income tax expense and
Effective tax rate were as follows for each of the periods indicated.
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
(in millions, except rate) |
|
2007 |
|
|
2006 |
|
|
Income from continuing operations before income tax
expense |
|
$ |
7,332 |
|
|
$ |
4,564 |
|
Income tax expense |
|
|
2,545 |
|
|
|
1,537 |
|
Effective tax rate |
|
|
34.7 |
% |
|
|
33.7 |
% |
|
The increase in the effective tax rate was related to higher reported pre-tax income combined
with changes in the proportion of income subject to federal, state and local taxes.
Income from discontinued operations
Net income from discontinued operations was zero in the current quarter compared with $54 million
in the prior year. Discontinued operations (included in the Corporate segment results) include the
related balance sheet and income statement activity of selected corporate trust businesses that
were sold to The Bank of New York on October 1, 2006.
13
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
6669 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 assumes credit card loans securitized by CS remain on the balance sheet and
presents revenue on a fully taxable-equivalent (FTE) basis. These adjustments do not have any
impact on Net income as reported by the lines of business or by the Firm as a whole.
The presentation of CS results on a managed basis assumes that credit card loans that have been
securitized and sold in accordance with SFAS 140 still remain on the balance sheet and that the
earnings on the securitized loans are classified in the same manner as the earnings on retained
loans recorded on the balance sheet. JPMorgan Chase uses the concept of managed basis to evaluate
the credit performance and overall financial performance of the entire managed credit card
portfolio. Operations are funded and decisions are made about allocating resources, such as
employees and capital, based upon managed financial information. In addition, the same underwriting
standards and ongoing risk monitoring are used for both loans on the balance sheet and securitized
loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan
Chase retains the ongoing customer relationships, as the customers may continue to use their credit
cards; accordingly, the customers credit performance will affect both the securitized loans and
the loans retained on the balance sheet. JPMorgan Chase believes managed basis information is
useful to investors, enabling them to understand both the credit risks associated with the loans
reported on the balance sheet and the Firms retained interests in securitized loans. For a
reconciliation of reported to managed basis of CS results, see Card Services segment results on
pages 2729 of this Form 10-Q. For information regarding the securitization process, and loans and
residual interests sold and securitized, see Note 15 on pages 9094 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 revenues arising from
both taxable and tax-exempt sources. The corresponding income tax impact related to these items is
recorded within Income tax expense.
Management also uses certain non-GAAP financial measures at the segment level because it believes
these non-GAAP financial measures provide information to investors about the underlying operational
performance and trends of the particular business segment and therefore facilitate a comparison of
the business segment with the performance of its competitors.
14
The following summary table provides a reconciliation from the Firms reported U.S. GAAP
results to managed basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2007 |
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(b) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,739 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,739 |
|
Principal transactions |
|
|
4,471 |
|
|
|
|
|
|
|
|
|
|
|
4,471 |
|
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 |
|
|
12,850 |
|
|
|
(746 |
) |
|
|
110 |
|
|
|
12,214 |
|
Net interest income |
|
|
6,118 |
|
|
|
1,339 |
|
|
|
70 |
|
|
|
7,527 |
|
|
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 from
continuing operations before income tax expense |
|
|
7,332 |
|
|
|
|
|
|
|
180 |
|
|
|
7,512 |
|
Income tax expense |
|
|
2,545 |
|
|
|
|
|
|
|
180 |
|
|
|
2,725 |
|
|
Income
from continuing operations |
|
|
4,787 |
|
|
|
|
|
|
|
|
|
|
|
4,787 |
|
Income
from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,787 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,787 |
|
|
Net income
diluted earnings per share |
|
$ |
1.34 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.34 |
|
|
Return on common equity(a) |
|
|
17 |
% |
|
|
|
% |
|
|
|
% |
|
|
17 |
% |
Return on equity less goodwill(a) |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Return on assets(a) |
|
|
1.41 |
|
|
NM |
|
|
NM |
|
|
|
1.34 |
|
Overhead ratio |
|
|
56 |
|
|
NM |
|
|
NM |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2006 |
|
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(b) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,169 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,169 |
|
Principal transactions |
|
|
2,709 |
|
|
|
|
|
|
|
|
|
|
|
2,709 |
|
Lending & deposit related fees |
|
|
841 |
|
|
|
|
|
|
|
|
|
|
|
841 |
|
Asset management, administration and commissions |
|
|
2,874 |
|
|
|
|
|
|
|
|
|
|
|
2,874 |
|
Securities (losses) |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
(116 |
) |
Mortgage fees and related income |
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
241 |
|
Credit card income |
|
|
1,910 |
|
|
|
(1,125 |
) |
|
|
|
|
|
|
785 |
|
Other income |
|
|
554 |
|
|
|
|
|
|
|
146 |
|
|
|
700 |
|
|
Noninterest revenue |
|
|
10,182 |
|
|
|
(1,125 |
) |
|
|
146 |
|
|
|
9,203 |
|
Net interest income |
|
|
4,993 |
|
|
|
1,574 |
|
|
|
71 |
|
|
|
6,638 |
|
|
Total net revenue |
|
|
15,175 |
|
|
|
449 |
|
|
|
217 |
|
|
|
15,841 |
|
Provision for credit losses |
|
|
831 |
|
|
|
449 |
|
|
|
|
|
|
|
1,280 |
|
Noninterest expense |
|
|
9,780 |
|
|
|
|
|
|
|
|
|
|
|
9,780 |
|
|
Income from continuing operations before income tax
expense |
|
|
4,564 |
|
|
|
|
|
|
|
217 |
|
|
|
4,781 |
|
Income tax expense |
|
|
1,537 |
|
|
|
|
|
|
|
217 |
|
|
|
1,754 |
|
|
Income from continuing operations |
|
|
3,027 |
|
|
|
|
|
|
|
|
|
|
|
3,027 |
|
Income from discontinued operations |
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
Net income |
|
$ |
3,081 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,081 |
|
|
Net income
diluted earnings per share |
|
$ |
0.86 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.86 |
|
|
Return on common equity(a) |
|
|
11 |
% |
|
|
|
% |
|
|
|
% |
|
|
11 |
% |
Return on equity less goodwill(a) |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Return on assets(a) |
|
|
0.98 |
|
|
NM |
|
|
NM |
|
|
|
0.95 |
|
Overhead ratio |
|
|
64 |
|
|
NM |
|
|
NM |
|
|
|
62 |
|
|
|
|
|
(a) |
|
Based upon Income from continuing operations. |
(b) |
|
Credit card
securitizations affect CS. See pages 2729 of this Form 10-Q for
further information. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2007 |
|
|
2006 |
|
(in millions) |
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Loans Period-end |
|
$ |
449,765 |
|
|
$ |
68,403 |
|
|
$ |
518,168 |
|
|
$ |
432,081 |
|
|
$ |
69,580 |
|
|
$ |
501,661 |
|
Total assets
average |
|
|
1,378,915 |
|
|
|
65,114 |
|
|
|
1,444,029 |
|
|
|
1,248,357 |
|
|
|
67,557 |
|
|
|
1,315,914 |
|
|
15
BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business basis. The business segment financial results
presented reflect the current organization of JPMorgan Chase. There are six major reportable
business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial
Banking, Treasury & Securities Services and Asset Management, as well as a Corporate segment. The
segments are based upon the products and services provided, or the type of customer served, and
they reflect the manner in which financial information is currently evaluated by management.
Results of these lines of business are presented on a managed basis. For further discussion of
Business segment results, see pages 3435 of JPMorgan Chases 2006 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 34 of JPMorgan Chases 2006 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return |
|
Three months ended March 31, |
|
Total net revenue |
|
|
Noninterest expense |
|
|
Net income (loss) |
|
|
on equity |
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Investment Bank |
|
$ |
6,254 |
|
|
$ |
4,828 |
|
|
|
30 |
% |
|
$ |
3,831 |
|
|
$ |
3,320 |
|
|
|
15 |
% |
|
$ |
1,540 |
|
|
$ |
850 |
|
|
|
81 |
% |
|
|
30 |
% |
|
|
17 |
% |
Retail Financial Services |
|
|
4,106 |
|
|
|
3,763 |
|
|
|
9 |
|
|
|
2,407 |
|
|
|
2,238 |
|
|
|
8 |
|
|
|
859 |
|
|
|
881 |
|
|
|
(2 |
) |
|
|
22 |
|
|
|
26 |
|
Card Services |
|
|
3,680 |
|
|
|
3,685 |
|
|
|
|
|
|
|
1,241 |
|
|
|
1,243 |
|
|
|
|
|
|
|
765 |
|
|
|
901 |
|
|
|
(15 |
) |
|
|
22 |
|
|
|
26 |
|
Commercial Banking |
|
|
1,003 |
|
|
|
900 |
|
|
|
11 |
|
|
|
485 |
|
|
|
498 |
|
|
|
(3 |
) |
|
|
304 |
|
|
|
240 |
|
|
|
27 |
|
|
|
20 |
|
|
|
18 |
|
Treasury & Securities Services |
|
|
1,526 |
|
|
|
1,485 |
|
|
|
3 |
|
|
|
1,075 |
|
|
|
1,048 |
|
|
|
3 |
|
|
|
263 |
|
|
|
262 |
|
|
|
|
|
|
|
36 |
|
|
|
42 |
|
Asset Management |
|
|
1,904 |
|
|
|
1,584 |
|
|
|
20 |
|
|
|
1,235 |
|
|
|
1,098 |
|
|
|
12 |
|
|
|
425 |
|
|
|
313 |
|
|
|
36 |
|
|
|
46 |
|
|
|
36 |
|
Corporate(b) |
|
|
1,268 |
|
|
|
(404 |
) |
|
NM |
|
|
|
354 |
|
|
|
335 |
|
|
|
6 |
|
|
|
631 |
|
|
|
(366 |
) |
|
NM |
|
|
NM |
|
NM |
|
|
Total |
|
$ |
19,741 |
|
|
$ |
15,841 |
|
|
|
25 |
% |
|
$ |
10,628 |
|
|
$ |
9,780 |
|
|
|
9 |
% |
|
$ |
4,787 |
|
|
$ |
3,081 |
|
|
|
55 |
% |
|
|
17 |
% |
|
|
12 |
% |
|
|
|
|
(a) |
|
Represents reported results on a tax-equivalent basis and excludes the impact of credit
card securitizations. |
(b) |
|
Net income (loss) includes Income from discontinued operations (after-tax) of $54 million for
the quarter ended March 31, 2006. |
16
INVESTMENT BANK
For a
discussion of the business profile of the IB, see pages 3637 of JPMorgan Chases 2006
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,729 |
|
|
$ |
1,170 |
|
|
|
48 |
% |
Principal transactions(a)(b) |
|
|
3,126 |
|
|
|
2,480 |
|
|
|
26 |
|
Lending & deposit related fees |
|
|
93 |
|
|
|
137 |
|
|
|
(32 |
) |
Asset management, administration and
commissions(b) |
|
|
641 |
|
|
|
576 |
|
|
|
11 |
|
All other income |
|
|
42 |
|
|
|
275 |
|
|
|
(85 |
) |
|
|
|
|
|
Noninterest revenue |
|
|
5,631 |
|
|
|
4,638 |
|
|
|
21 |
|
Net interest income |
|
|
623 |
(f) |
|
|
190 |
|
|
|
228 |
|
|
|
|
|
|
Total net revenue(c) |
|
|
6,254 |
|
|
|
4,828 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
63 |
|
|
|
183 |
|
|
|
(66 |
) |
Credit reimbursement from TSS(d) |
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
2,637 |
|
|
|
2,256 |
|
|
|
17 |
|
Noncompensation expense(b) |
|
|
1,194 |
|
|
|
1,064 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
3,831 |
|
|
|
3,320 |
|
|
|
15 |
|
|
|
|
|
|
Income before income tax expense |
|
|
2,390 |
|
|
|
1,355 |
|
|
|
76 |
|
Income tax expense |
|
|
850 |
|
|
|
505 |
|
|
|
68 |
|
|
|
|
|
|
Net income |
|
$ |
1,540 |
|
|
$ |
850 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
30 |
% |
|
|
17 |
% |
|
|
|
|
ROA |
|
|
0.95 |
|
|
|
0.53 |
|
|
|
|
|
Overhead ratio |
|
|
61 |
|
|
|
69 |
|
|
|
|
|
Compensation expense as a % of total net
revenue(e) |
|
|
42 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
Advisory |
|
$ |
472 |
|
|
$ |
389 |
|
|
|
21 |
|
Equity underwriting |
|
|
393 |
|
|
|
212 |
|
|
|
85 |
|
Debt underwriting |
|
|
864 |
|
|
|
569 |
|
|
|
52 |
|
|
|
|
|
|
Total investment banking fees |
|
|
1,729 |
|
|
|
1,170 |
|
|
|
48 |
|
Fixed income markets(a)(b) |
|
|
2,592 |
|
|
|
2,076 |
|
|
|
25 |
|
Equity markets(a)(b) |
|
|
1,539 |
|
|
|
1,262 |
|
|
|
22 |
|
Credit portfolio(a) |
|
|
394 |
|
|
|
320 |
|
|
|
23 |
|
|
|
|
|
|
Total net revenue |
|
$ |
6,254 |
|
|
$ |
4,828 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by region |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
3,366 |
|
|
$ |
2,153 |
|
|
|
56 |
|
Europe/Middle East/Africa |
|
|
2,251 |
|
|
|
2,025 |
|
|
|
11 |
|
Asia/Pacific |
|
|
637 |
|
|
|
650 |
|
|
|
(2 |
) |
|
|
|
|
|
Total net revenue |
|
$ |
6,254 |
|
|
$ |
4,828 |
|
|
|
30 |
|
|
|
|
|
(a) |
|
As a result of the adoption on January 1, 2007, of SFAS 157, the IB recognized a
benefit, in the current quarter, of $166 million in Total net revenue (primarily in Credit
Portfolio, but with smaller impacts to Equity Markets and Fixed Income Markets) relating to
the incorporation of an adjustment to the valuation of the Firms derivative liabilities and
other liabilities measured at fair value that reflects the credit quality of the Firm. |
(b) |
|
Certain transaction costs, previously reported within Revenue, have been reclassified to
Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods
presented. |
(c) |
|
Total net revenue includes tax-equivalent adjustments, primarily due to tax-exempt income
from municipal bond investments and income tax credits related to affordable housing
investments, of $152 million and $194 million for the quarters ended March 31, 2007 and
2006, respectively. |
(d) |
|
Treasury & Securities Services is charged a credit reimbursement related to certain
exposures managed within the Investment Bank credit portfolio on behalf of clients shared
with TSS. |
17
|
|
|
(e) |
|
For the quarter ended March 31, 2006, the Compensation expense to Total net revenue ratio is
adjusted to present this ratio as if SFAS 123R had always been in effect. IB management
believes that adjusting the Compensation expense to Total net revenue ratio for the
incremental impact of adopting SFAS 123R provides a more meaningful measure of IBs
Compensation expense to Total net revenue ratio for 2006. |
(f) |
|
Net Interest Income for
the quarter ended March 31, 2007, increased from the prior year
due primarily to the adoption of SFAS 159. For certain IB structured notes elected, all
components of earnings are reported in Principal transaction; causing a shift between
Principal transactions and Net interest income in the first quarter of 2007. |
Quarterly results
Net income was a record $1.5 billion, up by $690 million, or 81%, compared with the prior year.
Earnings growth reflected record revenue and a lower provision for credit losses, partially offset
by higher noninterest expense.
Net revenue was a record $6.3 billion, up 30% from the prior year, driven by record investment
banking fees and record markets results. Investment banking fees of $1.7 billion were up 48% from
the prior year driven by record debt and record equity underwriting as well as strong advisory
fees. Debt underwriting fees of $864 million were up 52% driven by record bond underwriting fees
and strong loan syndication fees, which benefited from both leveraged and high grade issuance.
Advisory fees of $472 million were up 21%, with particular strength in the Americas. Equity
underwriting fees of $393 million were up 85%, reflecting strength in common stock and convertible
offerings in the Americas and Europe. Record Fixed Income Markets revenue of $2.6 billion was up
25% from the prior year, benefiting from improved results in commodities (compared with a weak
prior-year quarter) as well as strength in credit and rate markets, partially offset by lower
results in currencies. Record Equity Markets revenue of $1.5 billion increased 22%, benefiting
from particularly strong performance in Europe as well as strong derivatives performance across
regions. Credit Portfolio revenue of $394 million was up 23%, due to the incorporation of an
adjustment to the valuation of the firms derivative liabilities measured at fair value that
reflects the credit quality of the firm, in conjunction with SFAS 157 (Fair Value Measurements),
and higher trading revenue from credit portfolio management activities, partially offset by lower
gains from loan workouts.
Provision for credit losses was $63 million compared with $183 million in the prior year. The
prior-year provision reflected growth in the loan portfolio.
Noninterest expense was $3.8 billion, up by $511 million, or 15%, from the prior year. This
increase was due to higher compensation expense, primarily performance-based, partially offset by
the absence of expense from the adoption of SFAS 123R in the prior-year quarter.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratio data) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
658,724 |
|
|
$ |
646,220 |
|
|
|
2 |
% |
Trading assetsdebt and equity instruments(a) |
|
|
335,118 |
|
|
|
252,415 |
|
|
|
33 |
|
Trading
assetsderivatives receivables |
|
|
56,398 |
|
|
|
49,388 |
|
|
|
14 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained(b) |
|
|
59,873 |
|
|
|
53,678 |
|
|
|
12 |
|
Loans held-for-sale(a) |
|
|
12,784 |
|
|
|
19,212 |
|
|
|
(33 |
) |
|
|
|
|
|
Total loans |
|
|
72,657 |
|
|
|
72,890 |
|
|
|
|
|
Adjusted assets(c) |
|
|
572,017 |
|
|
|
492,304 |
|
|
|
16 |
|
Equity |
|
|
21,000 |
|
|
|
20,000 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
23,892 |
|
|
|
21,705 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(6 |
) |
|
$ |
(21 |
) |
|
|
71 |
|
Nonperforming assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(d) |
|
|
92 |
|
|
|
434 |
|
|
|
(79 |
) |
Other nonperforming assets |
|
|
36 |
|
|
|
50 |
|
|
|
(28 |
) |
Allowance for loan losses |
|
|
1,037 |
|
|
|
1,117 |
|
|
|
(7 |
) |
Allowance for lending related commitments |
|
|
310 |
|
|
|
220 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate(a)(b) |
|
|
(0.04 |
)% |
|
|
(0.16 |
)% |
|
|
|
|
Allowance for loan losses to average loans(a)(b) |
|
|
1.76 |
|
|
|
2.08 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans(d) |
|
|
1,178 |
|
|
|
305 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.13 |
|
|
|
0.60 |
|
|
|
|
|
Market
riskaverage trading
and credit portfolio VAR(e) |
|
|
|
|
|
|
|
|
|
|
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
45 |
|
|
$ |
60 |
|
|
|
(25 |
) |
Foreign exchange |
|
|
19 |
|
|
|
20 |
|
|
|
(5 |
) |
Equities |
|
|
42 |
|
|
|
32 |
|
|
|
31 |
|
Commodities and other |
|
|
34 |
|
|
|
47 |
|
|
|
(28 |
) |
Less: portfolio diversification(f) |
|
|
(58 |
) |
|
|
(68 |
) |
|
|
15 |
|
|
|
|
|
|
Total trading VAR |
|
|
82 |
|
|
|
91 |
|
|
|
(10 |
) |
Credit portfolio VAR(g) |
|
|
13 |
|
|
|
14 |
|
|
|
(7 |
) |
Less: portfolio diversification(f) |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(9 |
) |
|
|
|
|
|
Total trading and credit portfolio VAR |
|
$ |
83 |
|
|
$ |
94 |
|
|
|
(12 |
) |
|
|
|
|
(a) |
|
Loans held-for-sale are excluded from the allowance coverage ratio and Net charge-off
rate. Loans held-for-sale for the quarter ended March 31, 2007, reflect the impact of
reclassifying $11.7 billion of Loans held-for-sale to Trading assets as a result of the
adoption of SFAS 159 effective January 1, 2007. |
(b) |
|
Loans retained include credit portfolio loans, leveraged leases, bridge loans for
underwriting, other accrual loans and certain loans carried at fair value. Average loans
carried at fair value were $900 million for the quarter ended March 31, 2007. This amount is
excluded from Total loans for the allowance coverage ratio and Net charge-off rate. |
(c) |
|
Adjusted assets, a non-GAAP financial measure, equals Total assets minus (1) Securities
purchased under resale agreements and Securities borrowed less securities sold, not yet
purchased; (2) assets of variable interest entities (VIEs) consolidated under FIN 46R; (3)
cash and securities segregated and on deposit for regulatory and other purposes; and (4)
goodwill and intangibles. The amount of adjusted assets is presented to assist the reader in
comparing the IBs asset and capital levels to other investment banks in the securities
industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a
companys capital adequacy. The IB believes an adjusted asset amount that excludes the assets
discussed above, which are considered to have a low risk profile, provides a more meaningful
measure of balance sheet leverage in the securities industry. |
(d) |
|
Nonperforming loans include Loans held-for-sale of $4 million and $68 million at March 31,
2007, and March 31, 2006, respectively, which are excluded from the allowance coverage ratios.
Nonperforming loans exclude distressed HFS loans purchased as part of IBs proprietary
activities. During the first quarter of 2007, the Firm elected the fair value option of
accounting for this portfolio of nonperforming loans. These loans are classified as Trading
assets at March 31, 2007. |
(e) |
|
Average 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. |
(f) |
|
For a more complete description of VAR, see page 60 of this Form 10-Q. |
(g) |
|
Includes VAR on derivative credit and debit 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. The VAR does not include the retained loan portfolio. |
19
According to Thomson Financial, in the first quarter of 2007, the Firm was ranked #1 in Global
Equity and Equity-Related; #1 in Global Syndicated Loans; #2 in Global Announced M&A; #2 in Global
Debt, Equity and Equity-Related; and #2 in Global Long-term Debt based upon volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
Full Year 2006 |
Market shares and rankings(a) |
|
Market Share |
|
Rankings |
|
Market Share |
|
Rankings |
|
Global debt, equity and equity-related |
|
|
8 |
% |
|
|
#2 |
|
|
|
7 |
% |
|
|
#2 |
|
Global syndicated loans |
|
|
15 |
|
|
|
#1 |
|
|
|
14 |
|
|
|
#1 |
|
Global long-term debt |
|
|
8 |
|
|
|
#2 |
|
|
|
6 |
|
|
|
#3 |
|
Global equity and equity-related |
|
|
13 |
|
|
|
#1 |
|
|
|
7 |
|
|
|
#6 |
|
Global announced M&A |
|
|
23 |
|
|
|
#2 |
|
|
|
22 |
|
|
|
#4 |
|
U.S. debt, equity and equity-related |
|
|
11 |
|
|
|
#2 |
|
|
|
9 |
|
|
|
#3 |
|
U.S. syndicated loans |
|
|
27 |
|
|
|
#1 |
|
|
|
26 |
|
|
|
#1 |
|
U.S. long-term debt |
|
|
12 |
|
|
|
#2 |
|
|
|
12 |
|
|
|
#2 |
|
U.S. equity and
equity-related(b) |
|
|
19 |
|
|
|
#1 |
|
|
|
8 |
|
|
|
#6 |
|
U.S. announced M&A |
|
|
39 |
|
|
|
#2 |
|
|
|
28 |
|
|
|
#4 |
|
|
|
|
|
(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%. |
(b) |
|
References U.S domiciled equity and equity-related transactions, per Thomson Financial. |
20
RETAIL FINANCIAL SERVICES
For a
discussion of the business profile of RFS, see pages 3842 of JPMorgan Chases 2006
Annual Report.
During the first quarter of 2006, RFS completed the purchase of Collegiate Funding Services, which
contributed an education loan servicing capability and provided an entry into the Federal Family
Education Loan Program consolidation market. On July 1, 2006, RFS sold its life insurance and
annuity underwriting businesses to Protective Life Corporation. On October 1, 2006, JPMorgan Chase
completed The Bank of New York transaction, significantly strengthening RFSs distribution network
in the New York Tri-state area.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
423 |
|
|
$ |
371 |
|
|
|
14 |
% |
Asset management, administration and commissions |
|
|
263 |
|
|
|
437 |
|
|
|
(40 |
) |
Securities gains (losses) |
|
|
|
|
|
|
(6 |
) |
|
NM |
|
Mortgage fees and related income(a) |
|
|
482 |
|
|
|
236 |
|
|
|
104 |
|
Credit card income |
|
|
142 |
|
|
|
115 |
|
|
|
23 |
|
Other income |
|
|
179 |
|
|
|
48 |
|
|
|
273 |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,489 |
|
|
|
1,201 |
|
|
|
24 |
|
Net interest income |
|
|
2,617 |
|
|
|
2,562 |
|
|
|
2 |
|
|
|
|
|
|
Total net revenue |
|
|
4,106 |
|
|
|
3,763 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
292 |
|
|
|
85 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense(a) |
|
|
1,065 |
|
|
|
920 |
|
|
|
16 |
|
Noncompensation expense(a) |
|
|
1,224 |
|
|
|
1,207 |
|
|
|
1 |
|
Amortization of intangibles |
|
|
118 |
|
|
|
111 |
|
|
|
6 |
|
|
|
|
|
|
Total noninterest expense |
|
|
2,407 |
|
|
|
2,238 |
|
|
|
8 |
|
|
|
|
|
|
Income before income tax expense |
|
|
1,407 |
|
|
|
1,440 |
|
|
|
(2 |
) |
Income tax expense |
|
|
548 |
|
|
|
559 |
|
|
|
(2 |
) |
|
|
|
|
|
Net income |
|
$ |
859 |
|
|
$ |
881 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
22 |
% |
|
|
26 |
% |
|
|
|
|
Overhead ratio(a) |
|
|
59 |
|
|
|
59 |
|
|
|
|
|
Overhead ratio excluding core deposit
intangibles(a)(b) |
|
|
56 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
(a) |
|
As a result of the adoption of SFAS 159, certain loan origination costs have been
reclassified to expense (previously netted against revenue) in the quarter ended March 31,
2007, resulting in increases in Mortgage fees and related income, Noninterest expense and the
Overhead ratios. |
(b) |
|
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 $116 million and $109
million for the quarters ended March 31, 2007 and 2006, respectively. |
21
Quarterly results
Net income of $859 million was down by $22 million, or 2%, from the prior year.
Net revenue of $4.1 billion was up by $343 million, or 9%, from the prior year. Net interest income
of $2.6 billion was up 2% due to The Bank of New York transaction, higher home equity loans and
deposit balances in Regional Banking, and wider loan spreads in Auto Finance. These benefits were
offset partially by lower prime and subprime mortgage balances, the sale of the insurance business,
lower auto loan and lease balances, and narrower spreads on deposits. Noninterest revenue of $1.5
billion was up by $288 million, or 24%. Results benefited from higher gain-on-sale income and the
reclassification of certain loan origination costs to expense (previously netted against revenue)
due to the adoption of SFAS 159 in Mortgage Banking; increases in depositrelated fee revenue; the
absence of a prior-year loss related to auto loans transferred to held-for-sale; The Bank of New
York transaction; and higher automobile operating lease revenue. These benefits were offset
partially by the sale of the insurance business, and a charge resulting from accelerated surrenders
of customer annuity contracts.
The provision for credit losses of $292 million was up by $207 million from the prior year. This
increase was due to higher losses in the subprime mortgage portfolio and, to a lesser extent,
increased provision in the home equity portfolio related to weaker housing prices. These increases
were offset partially by the reversal of a portion of the reserves related to Hurricane Katrina.
The Firms exposure to subprime mortgages is deemed manageable, with current quarter outstandings
of $9.0 billion and net charge-offs of $20 million (0.92% net charge-off rate), compared with $15.1
billion of loans and net charge-offs of $9 million (0.26% net charge-off rate) in the prior-year
quarter. Since the Firms current expectations are for continued poor loss experience in subprime
mortgages and that weaker home prices are expected to continue to affect
losses in the home equity portfolio, underwriting standards were tightened during the quarter.
Noninterest expense of $2.4 billion was up by $169 million, or 8%, primarily due to The Bank of New
York transaction, the reclassification of certain loan origination costs due to the adoption of
SFAS 159, investments in the retail distribution network and higher depreciation expense on owned
automobiles subject to operating leases. These increases were offset partially by the sale of the
insurance business.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
212,997 |
|
|
$ |
235,127 |
|
|
|
(9 |
)% |
Loans(a)(b) |
|
|
188,468 |
|
|
|
202,591 |
|
|
|
(7 |
) |
Deposits |
|
|
221,840 |
|
|
|
200,154 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
217,135 |
|
|
$ |
231,587 |
|
|
|
(6 |
) |
Loans(a)(b) |
|
|
190,979 |
|
|
|
198,797 |
|
|
|
(4 |
) |
Deposits |
|
|
216,933 |
|
|
|
194,382 |
|
|
|
12 |
|
Equity |
|
|
16,000 |
|
|
|
13,896 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
67,247 |
|
|
|
62,472 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
185 |
|
|
$ |
121 |
|
|
|
53 |
|
Nonperforming loans(c) |
|
|
1,655 |
|
|
|
1,349 |
|
|
|
23 |
|
Nonperforming assets |
|
|
1,910 |
|
|
|
1,537 |
|
|
|
24 |
|
Allowance for loan losses |
|
|
1,453 |
|
|
|
1,333 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate(d) |
|
|
0.46 |
% |
|
|
0.27 |
% |
|
|
|
|
Allowance for loan losses to ending loans(d) |
|
|
0.89 |
|
|
|
0.71 |
|
|
|
|
|
Allowance for loan losses to nonperforming
loans(d) |
|
|
94 |
|
|
|
100 |
|
|
|
|
|
Nonperforming loans to total loans |
|
|
0.88 |
|
|
|
0.67 |
|
|
|
|
|
|
|
|
|
(a) |
|
For the quarter ended March 31, 2007, end-of-period and average loans include $11.6
billion and $6.5 billion, respectively, of prime mortgage loans originated with the intent
to sell, which are accounted for at fair value under SFAS 159 and classified as Trading
assets in the Consolidated balance sheets. |
(b) |
|
End-of-period Loans include Loans held-for-sale of $13.4 billion and $14.3 billion at March
31, 2007 and 2006, respectively. Average loans include Loans held-for-sale of $21.7 billion
and $16.4 billion for the quarters ended March 31, 2007 and 2006, respectively. |
(c) |
|
Nonperforming loans include Loans held-for-sale of $112 million and $16 million at March
31, 2007 and 2006, respectively. |
(d) |
|
The net charge-off rate and the allowance coverage ratios do not include amounts related to
Loans held-for-sale or Loans accounted for at fair value under SFAS 159. |
22
REGIONAL BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
793 |
|
|
$ |
820 |
|
|
|
(3 |
)% |
Net interest income |
|
|
2,299 |
|
|
|
2,220 |
|
|
|
4 |
|
|
|
|
|
|
Total Net revenue |
|
|
3,092 |
|
|
|
3,040 |
|
|
|
2 |
|
Provision for credit losses |
|
|
233 |
|
|
|
66 |
|
|
|
253 |
|
Noninterest expense |
|
|
1,729 |
|
|
|
1,738 |
|
|
|
(1 |
) |
|
|
|
|
|
Income before income tax expense |
|
|
1,130 |
|
|
|
1,236 |
|
|
|
(9 |
) |
|
|
|
|
|
Net income |
|
$ |
690 |
|
|
$ |
757 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
24 |
% |
|
|
31 |
% |
|
|
|
|
Overhead ratio |
|
|
56 |
|
|
|
57 |
|
|
|
|
|
Overhead ratio excluding core deposit
intangibles(a) |
|
|
52 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
(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 $116 million
and $109 million for the quarters ended March 31, 2007 and 2006, respectively. |
Quarterly results
Regional Banking net income of $690 million was down by $67 million, or 9%, from the prior year.
Net revenue of $3.1 billion was up by $52 million, or 2%. Results benefited from The Bank of New
York transaction; growth in home equity loans and deposits; and increases in deposit-related fees.
These revenue benefits were offset partially by the sale of the insurance business, a continued
shift to narrower-spread deposit products, and a charge resulting from accelerated surrenders of
customer annuity contracts. The provision for credit losses was $233 million, up by $167 million,
primarily related to higher losses in the subprime mortgage portfolio and to a lesser extent
increased provision in the home equity portfolio related to weaker housing prices. These increases
were offset partially by the reversal of a portion of the reserves related to Hurricane Katrina.
Noninterest expense of $1.7 billion was flat, as increases due to The Bank of New York transaction
and investments in the retail distribution network were offset by the sale of the insurance
business.
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in billions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity origination volume |
|
$ |
12.7 |
|
|
$ |
11.7 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
End-of-period loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
87.7 |
|
|
$ |
75.3 |
|
|
|
16 |
|
Mortgage(a) |
|
|
9.2 |
|
|
|
47.0 |
|
|
|
(80 |
) |
Business banking |
|
|
14.3 |
|
|
|
12.8 |
|
|
|
12 |
|
Education |
|
|
11.1 |
|
|
|
9.5 |
|
|
|
17 |
|
Other loans(b) |
|
|
2.7 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
Total end of period loans |
|
|
125.0 |
|
|
|
147.3 |
|
|
|
(15 |
) |
End-of-period deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
$ |
69.3 |
|
|
$ |
64.9 |
|
|
|
7 |
|
Savings |
|
|
100.1 |
|
|
|
91.0 |
|
|
|
10 |
|
Time and other |
|
|
42.2 |
|
|
|
34.2 |
|
|
|
23 |
|
|
|
|
|
|
Total end of period deposits |
|
|
211.6 |
|
|
|
190.1 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
86.3 |
|
|
$ |
74.1 |
|
|
|
16 |
|
Mortgage(a) |
|
|
8.9 |
|
|
|
44.6 |
|
|
|
(80 |
) |
Business banking |
|
|
14.3 |
|
|
|
12.8 |
|
|
|
12 |
|
Education |
|
|
11.0 |
|
|
|
5.4 |
|
|
|
104 |
|
Other loans(b) |
|
|
3.0 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
Total average loans(c) |
|
|
123.5 |
|
|
|
139.9 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
$ |
67.3 |
|
|
$ |
63.0 |
|
|
|
7 |
|
Savings |
|
|
96.7 |
|
|
|
89.3 |
|
|
|
8 |
|
Time and other |
|
|
42.5 |
|
|
|
32.4 |
|
|
|
31 |
|
|
|
|
|
|
Total average deposits |
|
|
206.5 |
|
|
|
184.7 |
|
|
|
12 |
|
Average assets |
|
|
135.9 |
|
|
|
157.1 |
|
|
|
(13 |
) |
Average equity |
|
|
11.8 |
|
|
|
9.8 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate(d)(e) |
|
|
1.93 |
% |
|
|
1.36 |
% |
|
|
|
|
Net
charge-offs
Home equity |
|
$ |
68 |
|
|
$ |
33 |
|
|
|
106 |
|
Mortgage |
|
|
20 |
|
|
|
12 |
|
|
|
67 |
|
Business banking |
|
|
25 |
|
|
|
18 |
|
|
|
39 |
|
Other loans |
|
|
13 |
|
|
|
7 |
|
|
|
86 |
|
|
|
|
|
|
Total net charge-offs |
|
|
126 |
|
|
|
70 |
|
|
|
80 |
|
Net charge-off rate
Home equity |
|
|
0.32 |
% |
|
|
0.18 |
% |
|
|
|
|
Mortgage |
|
|
0.91 |
|
|
|
0.11 |
|
|
|
|
|
Business banking |
|
|
0.71 |
|
|
|
0.57 |
|
|
|
|
|
Other loans |
|
|
0.55 |
|
|
|
0.56 |
|
|
|
|
|
Total net charge-off rate(c) |
|
|
0.43 |
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets(f)(g)(h) |
|
$ |
1,770 |
|
|
$ |
1,339 |
|
|
|
32 |
|
|
|
|
|
(a) |
|
As of January 1, 2007, $19.4 billion of held-for-investment prime mortgage loans were
transferred from RFS to Treasury within the Corporate segment for risk management and
reporting purposes. Although the loans, together with the responsibility for the investment
management of the portfolio, were transferred to Treasury, the transfer has no impact on the
financial results of Regional Banking. The balance reported at and for the quarter ended March
31, 2007, reflect primarily subprime mortgage loans owned. |
(b) |
|
Includes commercial loans derived from community development activities and, prior to July 1,
2006, insurance policy loans. |
(c) |
|
Average loans include loans held-for-sale of $4.4 billion and $3.3 billion for the quarters
ended March 31, 2007 and 2006, respectively. These amounts are not included in the Net
charge-off rate. |
(d) |
|
Excludes delinquencies related to loans eligible for repurchase as well as loans repurchased
from Governmental National Mortgage Association (GNMA) pools that are insured by government
agencies and government-sponsored enterprises of $975 million and $942 million at March 31,
2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding
normally. |
(e) |
|
Excludes loans that are 30 days past due and still accruing, which are insured by government
agencies under the Federal Family Education Loan Program of $519 million and $370 million at
March 31, 2007 and 2006, respectively. These amounts are excluded as reimbursement is
proceeding normally. |
24
|
|
|
(f) |
|
Excludes loans that are 90 days past due and still accruing, which are insured by government
agencies under the Federal Family Education Loan Program of $178 million and $156 million for
the quarters ended March 31, 2007 and 2006, respectively. These amounts are excluded as
reimbursement is proceeding normally. |
(g) |
|
Excludes Nonperforming assets related to loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by government agencies
and government-sponsored
enterprises of $1.3 billion and $1.1 billion at March 31, 2007 and 2006, respectively. These
amounts are excluded as reimbursement is proceeding normally. |
(h) |
|
Includes Nonperforming loans held-for-sale related to mortgage banking activities of $79
million and $16 million at March 31, 2007 and 2006, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail branch business metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment sales volume |
|
$ |
4,783 |
|
|
$ |
3,553 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
3,071 |
|
|
|
2,638 |
|
|
|
433 |
# |
ATMs |
|
|
8,560 |
|
|
|
7,400 |
|
|
|
1,160 |
|
Personal bankers(a) |
|
|
7,846 |
|
|
|
7,019 |
|
|
|
827 |
|
Sales specialists(a) |
|
|
3,712 |
|
|
|
3,318 |
|
|
|
394 |
|
Active online customers (in thousands)(b) |
|
|
6,172 |
|
|
|
5,030 |
|
|
|
1,142 |
|
Checking accounts (in thousands) |
|
|
10,136 |
|
|
|
8,936 |
|
|
|
1,200 |
|
|
|
|
|
(a) |
|
Excludes employees acquired as part of The Bank of New York transaction. Mapping of the
existing Bank of New York acquired employee base into Chase employment categories is
expected to be completed during 2007. |
(b) |
|
Includes Mortgage Banking and Auto Finance online customers. |
MORTGAGE BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios and where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue(a) |
|
$ |
400 |
|
|
$ |
219 |
|
|
|
83 |
% |
Net mortgage servicing revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Servicing revenue |
|
|
601 |
|
|
|
560 |
|
|
|
7 |
|
Changes in MSR asset fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Due to inputs or assumptions in model(b) |
|
|
108 |
|
|
|
711 |
|
|
|
(85 |
) |
Other changes in fair value(c) |
|
|
(378 |
) |
|
|
(349 |
) |
|
|
(8 |
) |
Derivative valuation adjustments and other |
|
|
(127 |
) |
|
|
(753 |
) |
|
|
83 |
|
|
|
|
|
|
Total net mortgage servicing revenue |
|
|
204 |
|
|
|
169 |
|
|
|
21 |
|
|
|
|
|
|
Total net revenue |
|
|
604 |
|
|
|
388 |
|
|
|
56 |
|
Noninterest expense(a) |
|
|
468 |
|
|
|
324 |
|
|
|
44 |
|
|
|
|
|
|
Income before income tax expense |
|
|
136 |
|
|
|
64 |
|
|
|
113 |
|
|
|
|
|
|
Net income |
|
$ |
84 |
|
|
$ |
39 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
17 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Third-party mortgage loans serviced (ending) |
|
$ |
546.1 |
|
|
$ |
484.1 |
|
|
|
13 |
|
MSR net carrying value (ending) |
|
|
7.9 |
|
|
|
7.5 |
|
|
|
5 |
|
Average mortgage loans held-for-sale(d) |
|
|
23.8 |
|
|
|
13.0 |
|
|
|
83 |
|
Average assets |
|
|
38.0 |
|
|
|
27.1 |
|
|
|
40 |
|
Average equity |
|
|
2.0 |
|
|
|
1.7 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage origination volume by channel (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
10.9 |
|
|
$ |
9.1 |
|
|
|
20 |
|
Wholesale |
|
|
10.0 |
|
|
|
7.4 |
|
|
|
35 |
|
Correspondent (including negotiated transactions) |
|
|
13.2 |
|
|
|
11.7 |
|
|
|
13 |
|
|
|
|
|
|
Total |
|
$ |
34.1 |
|
|
$ |
28.2 |
|
|
|
21 |
|
|
|
|
|
(a) |
|
As a result of the adoption of SFAS 159, certain loan origination costs have been
reclassified to expense (previously netted against revenue) in the quarter ended March 31,
2007. |
(b) |
|
Represents MSR asset fair value adjustments due to changes in inputs, such as interest
rates and volatility, as well as updates to assumptions used in the valuation model. |
(c) |
|
Includes changes in the MSR value due to servicing portfolio runoff (or time decay). |
(d) |
|
Includes $6.5 billion of prime mortgage loans for which the fair value option was elected
under SFAS 159. These loans are classified as Trading assets on the Consolidated balance
sheets for the quarter ended March 31, 2007. |
25
Quarterly results
Mortgage Banking net income was $84 million compared with $39 million in the prior year. Net
revenue of $604 million was up by $216 million, or 56%, from the prior year. Revenue comprises
production revenue and net mortgage servicing revenue. Production revenue was $400 million, up by
$181 million, reflecting higher gain-on-sale income and the reclassification of certain loan
origination costs to expense (previously netted against revenue) due to 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 $204 million compared with $169 million in the prior year.
Loan servicing revenue of $601 million increased by $41 million on a 13% increase in third-party
loans serviced. MSR risk management revenue of negative $19 million improved by $23 million from
the prior year. Other changes in fair value of the MSR asset, representing run-off of the asset
against the realization of servicing cash flows, were negative $378 million. Noninterest expense
was $468 million, up by $144 million, or 44%, reflecting the reclassification of certain loan
origination costs due to the adoption SFAS 159 and higher compensation expense reflecting higher
loan originations and a greater number of loan officers.
AUTO FINANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios and where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Noninterest revenue |
|
$ |
131 |
|
|
$ |
44 |
|
|
|
198 |
% |
Net interest income |
|
|
279 |
|
|
|
291 |
|
|
|
(4 |
) |
|
|
|
|
|
Total net revenue |
|
|
410 |
|
|
|
335 |
|
|
|
22 |
|
Provision for credit losses |
|
|
59 |
|
|
|
19 |
|
|
|
211 |
|
Noninterest expense |
|
|
210 |
|
|
|
176 |
|
|
|
19 |
|
|
|
|
|
|
Income before income tax expense |
|
|
141 |
|
|
|
140 |
|
|
|
1 |
|
|
|
|
|
|
Net income |
|
$ |
85 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
16 |
% |
|
|
14 |
% |
|
|
|
|
ROA |
|
|
0.80 |
|
|
|
0.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Auto origination volume |
|
$ |
5.2 |
|
|
$ |
4.3 |
|
|
|
21 |
|
End-of-period loans and lease related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding |
|
$ |
39.7 |
|
|
$ |
41.0 |
|
|
|
(3 |
) |
Lease financing receivables |
|
|
1.2 |
|
|
|
3.6 |
|
|
|
(67 |
) |
Operating lease assets |
|
|
1.7 |
|
|
|
1.1 |
|
|
|
55 |
|
|
|
|
|
|
Total end-of-period loans and lease related assets |
|
|
42.6 |
|
|
|
45.7 |
|
|
|
(7 |
) |
Average loans and lease related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding |
|
$ |
39.4 |
|
|
$ |
41.2 |
|
|
|
(4 |
) |
Lease financing receivables |
|
|
1.5 |
|
|
|
4.0 |
|
|
|
(63 |
) |
Operating lease assets |
|
|
1.6 |
|
|
|
1.0 |
|
|
|
60 |
|
|
|
|
|
|
Total average loans and lease related assets |
|
|
42.5 |
|
|
|
46.2 |
|
|
|
(8 |
) |
Average assets |
|
|
43.2 |
|
|
|
47.3 |
|
|
|
(9 |
) |
Average equity |
|
|
2.2 |
|
|
|
2.4 |
|
|
|
(8 |
) |
|
|
|
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate |
|
|
1.33 |
% |
|
|
1.39 |
% |
|
|
|
|
Net
charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
58 |
|
|
$ |
48 |
|
|
|
21 |
|
Lease receivables |
|
|
1 |
|
|
|
3 |
|
|
|
(67 |
) |
|
|
|
|
|
Total net charge-offs |
|
|
59 |
|
|
|
51 |
|
|
|
16 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
0.60 |
% |
|
|
0.47 |
% |
|
|
|
|
Lease receivables |
|
|
0.27 |
|
|
|
0.30 |
|
|
|
|
|
Total net charge-off rate |
|
|
0.59 |
|
|
|
0.46 |
|
|
|
|
|
Nonperforming assets |
|
$ |
140 |
|
|
$ |
198 |
|
|
|
(29 |
) |
|
26
Quarterly results
Auto Finance net income of $85 million was flat compared with the prior year. Net revenue of $410
million was up by $75 million, or 22%, reflecting the absence of a prior-year $50 million pretax
loss related to auto loans transferred to held-for-sale, higher automobile operating lease revenue,
and wider loan spreads on lower loan and direct finance lease balances. The provision for credit
losses was $59 million, an increase of $40 million from the prior year, primarily reflecting a
reduction of the allowance for credit losses in the prior year. Noninterest expense of $210 million
increased by $34 million, or 19%, 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 4345 of JPMorgan Chases 2006
Annual Report.
JPMorgan Chase uses the concept of managed receivables to evaluate the credit performance of its
credit card loans, both loans on the balance sheet and loans that have been securitized. 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. For further information, see Explanation and reconciliation
of the Firms use of non-GAAP financial measures on pages 1415 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data managed basis |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
$ |
599 |
|
|
$ |
601 |
|
|
|
|
% |
All other income |
|
|
92 |
|
|
|
71 |
|
|
|
30 |
|
|
|
|
|
|
Noninterest revenue |
|
|
691 |
|
|
|
672 |
|
|
|
3 |
|
Net interest income |
|
|
2,989 |
|
|
|
3,013 |
|
|
|
(1 |
) |
|
|
|
|
|
Total net revenue |
|
|
3,680 |
|
|
|
3,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,229 |
|
|
|
1,016 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
254 |
|
|
|
259 |
|
|
|
(2 |
) |
Noncompensation expense |
|
|
803 |
|
|
|
796 |
|
|
|
1 |
|
Amortization of intangibles |
|
|
184 |
|
|
|
188 |
|
|
|
(2 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
1,241 |
|
|
|
1,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
1,210 |
|
|
|
1,426 |
|
|
|
(15 |
) |
Income tax expense |
|
|
445 |
|
|
|
525 |
|
|
|
(15 |
) |
|
|
|
|
|
Net income |
|
$ |
765 |
|
|
$ |
901 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Net securitization gains |
|
$ |
23 |
|
|
$ |
8 |
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial metrics |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
22 |
% |
|
|
26 |
% |
|
|
|
|
Overhead ratio |
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
Quarterly results
Net income of $765 million was down by $136 million, or 15%, from the prior year. Prior-year
results benefited from significantly lower net charge-offs following the change in bankruptcy
legislation in the fourth quarter of 2005.
End-of-period managed loans of $146.6 billion increased by $12.3 billion, or 9%, from the prior
year. Average managed loans of $149.4 billion increased by $11.4 billion, or 8%, from the prior
year. The current quarter included $2.0 billion of average and $1.9 billion of end-of-period
managed loans acquired with the Kohls private-label portfolio in the second quarter of 2006.
Net managed revenue was $3.7 billion, flat as compared with the prior year. Net interest income
of $3.0 billion was down by $24 million, or 1%, from the prior year. The decrease was driven by
higher charge-offs, which resulted in increased revenue reversals in the current quarter and
higher cost of funds on balance growth in promotional, introductory and transactor loan balances.
These declines were partially offset by higher average managed loan balances and increased fees.
Noninterest revenue of $691 million was up by $19 million, or 3%, from the prior year.
27
Interchange income increased, benefiting from 9% higher charge volume, but was more than offset
by higher volume-driven payments to partners and increased rewards expense (both of which are
netted against interchange income). An additional factor impacting noninterest revenue was an
increase in fee-based product revenue.
The managed provision for credit losses was $1.2 billion, up by $213 million, or 21%, from the
prior year. The prior-year quarter benefited from lower net charge-offs, which reflected a
reduction in bankruptcy-related losses following the change in bankruptcy legislation in the
fourth quarter of 2005. The current quarter benefited from an $85 million reduction in the
allowance for credit losses, primarily related to strength in the underlying credit quality of
the loan portfolio. The managed net charge-off rate for the quarter was 3.57%, up from 2.99% in
the prior year. The 30-day managed delinquency rate was 3.07%, down from 3.10% in the prior year.
Noninterest expense of $1.2 billion was flat compared with the prior year, primarily due to lower
marketing expense and lower fraud-related losses, offset by higher expense related to recent
acquisitions and increased customer activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except headcount, ratios |
|
|
|
|
|
|
|
|
|
and where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
% of average managed outstandings: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8.11 |
% |
|
|
8.85 |
% |
|
|
|
|
Provision for credit losses |
|
|
3.34 |
|
|
|
2.99 |
|
|
|
|
|
Noninterest revenue |
|
|
1.88 |
|
|
|
1.97 |
|
|
|
|
|
Risk adjusted margin(a) |
|
|
6.65 |
|
|
|
7.84 |
|
|
|
|
|
Noninterest expense |
|
|
3.37 |
|
|
|
3.65 |
|
|
|
|
|
Pretax income (ROO) |
|
|
3.28 |
|
|
|
4.19 |
|
|
|
|
|
Net income |
|
|
2.08 |
|
|
|
2.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Charge volume (in billions) |
|
$ |
81.3 |
|
|
$ |
74.3 |
|
|
|
9 |
% |
Net accounts opened (in thousands) |
|
|
3,439 |
|
|
|
2,718 |
|
|
|
27 |
|
Credit cards issued (in thousands) |
|
|
152,097 |
|
|
|
112,446 |
|
|
|
35 |
|
Number of registered Internet customers (in
millions) |
|
|
24.3 |
|
|
|
15.9 |
|
|
|
53 |
|
Merchant acquiring business(b) |
|
|
|
|
|
|
|
|
|
|
|
|
Bank card volume (in billions) |
|
$ |
163.6 |
|
|
$ |
147.7 |
|
|
|
11 |
|
Total transactions (in millions) |
|
|
4,465 |
|
|
|
4,130 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
78,173 |
|
|
$ |
64,691 |
|
|
|
21 |
|
Securitized loans |
|
|
68,403 |
|
|
|
69,580 |
|
|
|
(2 |
) |
|
|
|
|
|
Managed loans |
|
$ |
146,576 |
|
|
$ |
134,271 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Managed assets |
|
$ |
156,271 |
|
|
$ |
145,994 |
|
|
|
7 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
81,932 |
|
|
$ |
68,455 |
|
|
|
20 |
|
Securitized loans |
|
|
67,485 |
|
|
|
69,571 |
|
|
|
(3 |
) |
|
|
|
|
|
Managed loans |
|
$ |
149,417 |
|
|
$ |
138,026 |
|
|
|
8 |
|
|
|
|
|
|
Equity |
|
|
14,100 |
|
|
|
14,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
18,749 |
|
|
|
18,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
1,314 |
|
|
$ |
1,016 |
|
|
|
29 |
|
Net charge-off rate |
|
|
3.57 |
% |
|
|
2.99 |
% |
|
|
|
|
Managed delinquency ratios |
|
|
|
|
|
|
|
|
|
|
|
|
30+ days |
|
|
3.07 |
% |
|
|
3.10 |
% |
|
|
|
|
90+ days |
|
|
1.52 |
|
|
|
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
3,092 |
|
|
$ |
3,274 |
|
|
|
(6 |
) |
Allowance for loan losses to period-end loans |
|
|
3.96 |
% |
|
|
5.06 |
% |
|
|
|
|
|
|
|
|
(a) |
|
Represents Total net revenue less Provision for credit losses. |
(b) |
|
Represents 100% of the merchant acquiring business. |
28
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) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Income statement data(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
1,345 |
|
|
$ |
1,726 |
|
|
|
(22 |
)% |
Securitization adjustments |
|
|
(746 |
) |
|
|
(1,125 |
) |
|
|
34 |
|
|
|
|
|
|
Managed credit card income |
|
$ |
599 |
|
|
$ |
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
1,650 |
|
|
$ |
1,439 |
|
|
|
15 |
|
Securitization adjustments |
|
|
1,339 |
|
|
|
1,574 |
|
|
|
(15 |
) |
|
|
|
|
|
Managed net interest income |
|
$ |
2,989 |
|
|
$ |
3,013 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
3,087 |
|
|
$ |
3,236 |
|
|
|
(5 |
) |
Securitization adjustments |
|
|
593 |
|
|
|
449 |
|
|
|
32 |
|
|
|
|
|
|
Managed total net revenue |
|
$ |
3,680 |
|
|
$ |
3,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
636 |
|
|
$ |
567 |
|
|
|
12 |
|
Securitization adjustments |
|
|
593 |
|
|
|
449 |
|
|
|
32 |
|
|
|
|
|
|
Managed provision for credit losses |
|
$ |
1,229 |
|
|
$ |
1,016 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet average balances(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
91,157 |
|
|
$ |
78,437 |
|
|
|
16 |
|
Securitization adjustments |
|
|
65,114 |
|
|
|
67,557 |
|
|
|
(4 |
) |
|
|
|
|
|
Managed average assets |
|
$ |
156,271 |
|
|
$ |
145,994 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Reported net charge-offs data for the period |
|
$ |
721 |
|
|
$ |
567 |
|
|
|
27 |
|
Securitization adjustments |
|
|
593 |
|
|
|
449 |
|
|
|
32 |
|
|
|
|
|
|
Managed net charge-offs |
|
$ |
1,314 |
|
|
$ |
1,016 |
|
|
|
29 |
|
|
|
|
|
(a) |
|
JPMorgan Chase uses the concept of managed receivables to evaluate the credit
performance and overall performance of the underlying credit card loans, both sold and not
sold; as the same borrower is continuing to use the credit card for ongoing charges, a
borrowers credit performance will affect both the receivables sold under SFAS 140 and
those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase
treats the sold receivables as if they were still on the balance sheet in order to
disclose the credit performance (such as net charge-off rates) of the entire managed
credit card portfolio. Managed results exclude the impact of credit card securitizations
on Total net revenue, the Provision for credit losses, net charge-offs and loan
receivables. Securitization does not change reported net income versus managed earnings;
however, it does affect the classification of items on the Consolidated statements of
income and Consolidated balance sheets. For further information, see Explanation and
reconciliation of the Firms use of non-GAAP measures on pages
1415 of this Form 10-Q. |
29
COMMERCIAL BANKING
For a
discussion of the business profile of CB, see pages 4647 of JPMorgan Chases 2006
Annual Report.
On October 1, 2006, JPMorgan Chase completed the acquisition of The Bank of New Yorks consumer,
business banking and middle-market banking businesses adding approximately $2.3 billion in loans
and $1.2 billion in deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
158 |
|
|
$ |
142 |
|
|
|
11 |
% |
Asset management, administration and
commissions |
|
|
23 |
|
|
|
15 |
|
|
|
53 |
|
All other income(a) |
|
|
154 |
|
|
|
76 |
|
|
|
103 |
|
|
|
|
|
|
Noninterest revenue |
|
|
335 |
|
|
|
233 |
|
|
|
44 |
|
Net interest income |
|
|
668 |
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,003 |
|
|
|
900 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
17 |
|
|
|
7 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
180 |
|
|
|
197 |
|
|
|
(9 |
) |
Noncompensation expense |
|
|
290 |
|
|
|
285 |
|
|
|
2 |
|
Amortization of intangibles |
|
|
15 |
|
|
|
16 |
|
|
|
(6 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
485 |
|
|
|
498 |
|
|
|
(3 |
) |
|
|
|
|
|
Income before income tax expense |
|
|
501 |
|
|
|
395 |
|
|
|
27 |
|
Income tax expense |
|
|
197 |
|
|
|
155 |
|
|
|
27 |
|
|
|
|
|
|
Net income |
|
$ |
304 |
|
|
$ |
240 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
20 |
% |
|
|
18 |
% |
|
|
|
|
Overhead ratio |
|
|
48 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
(a) |
|
IB-related and commercial card revenues are included in All other income. |
Quarterly results
Net income was a record $304 million, up by $64 million, or 27%, from the prior year, driven by
higher net revenue.
Net revenue was $1.0 billion, up by $103 million, or 11%, from the prior year. Net interest income
of $668 million was flat. The benefit of higher liability balances and loan volumes, which
reflected organic growth and The Bank of New York transaction, were offset largely by the continued
shift to narrowerspread liability products and loan-spread compression. Noninterest revenue of
$335 million was up by $102 million, or 44%, primarily due to higher investment banking revenue as
well as gains related to the sale of securities acquired in the satisfaction of debt.
On a segment basis, Middle Market Banking revenue of $661 million increased by $38 million, or 6%,
from the prior year due to growth across all product areas and The Bank of New York transaction.
Mid-Corporate Banking revenue of $212 million increased by $75 million, or 55%, reflecting higher
investment banking revenue and a gain on the sale of securities acquired in the satisfaction of
debt. Real Estate revenue of $102 million decreased by $3 million, or 3%.
Provision for credit losses was $17 million compared with $7 million in the prior year.
Noninterest expense was $485 million, down by $13 million, or 3%, from the prior year due to the
absence of prior-year expense from the adoption of SFAS 123R primarily offset by expense related to
The Bank of New York transaction.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratio and headcount data) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue by product: |
|
|
|
|
|
|
|
|
|
|
|
|
Lending |
|
$ |
348 |
|
|
$ |
319 |
|
|
|
9 |
% |
Treasury services |
|
|
556 |
|
|
|
550 |
|
|
|
1 |
|
Investment banking |
|
|
76 |
|
|
|
40 |
|
|
|
90 |
|
Other |
|
|
23 |
|
|
|
(9 |
) |
|
NM |
|
|
|
|
|
|
Total Commercial Banking revenue |
|
$ |
1,003 |
|
|
$ |
900 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IB revenues, gross(a) |
|
$ |
231 |
|
|
$ |
114 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
661 |
|
|
$ |
623 |
|
|
|
6 |
|
Mid-Corporate Banking |
|
|
212 |
|
|
|
137 |
|
|
|
55 |
|
Real Estate Banking |
|
|
102 |
|
|
|
105 |
|
|
|
(3 |
) |
Other |
|
|
28 |
|
|
|
35 |
|
|
|
(20 |
) |
|
|
|
|
|
Total Commercial Banking revenue |
|
$ |
1,003 |
|
|
$ |
900 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
82,545 |
|
|
$ |
54,771 |
|
|
|
51 |
|
Loans and leases(b) |
|
|
57,660 |
|
|
|
50,836 |
|
|
|
13 |
|
Liability balances(c) |
|
|
81,752 |
|
|
|
70,763 |
|
|
|
16 |
|
Equity |
|
|
6,300 |
|
|
|
5,500 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
36,317 |
|
|
$ |
31,861 |
|
|
|
14 |
|
Mid-Corporate Banking |
|
|
10,669 |
|
|
|
7,577 |
|
|
|
41 |
|
Real Estate Banking |
|
|
7,074 |
|
|
|
7,436 |
|
|
|
(5 |
) |
Other |
|
|
3,600 |
|
|
|
3,962 |
|
|
|
(9 |
) |
|
|
|
|
|
Total Commercial Banking loans |
|
$ |
57,660 |
|
|
$ |
50,836 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
4,281 |
|
|
|
4,310 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(1 |
) |
|
$ |
(7 |
) |
|
|
86 |
|
Nonperforming loans |
|
|
141 |
|
|
|
202 |
|
|
|
(30 |
) |
Allowance for loan losses |
|
|
1,531 |
|
|
|
1,415 |
|
|
|
8 |
|
Allowance for lending-related commitments |
|
|
187 |
|
|
|
145 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate(b) |
|
|
(0.01 |
)% |
|
|
(0.06 |
)% |
|
|
|
|
Allowance for loan losses to average
loans(b) |
|
|
2.68 |
|
|
|
2.80 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans |
|
|
1,086 |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.24 |
|
|
|
0.40 |
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the total revenue related to investment banking products sold to CB clients. |
(b) |
|
Average loans include Loans held-for-sale of $475 million and $268 million for the quarters
ended March 31, 2007 and 2006, respectively. These amounts are not included in the net
charge-off (recovery) rate or allowance coverage ratios. |
(c) |
|
Liability balances include deposits and deposits swept to on-balance sheet liabilities. |
31
TREASURY & SECURITIES SERVICES
For a
discussion of the business profile of TSS, see pages 4849 of JPMorgan Chases 2006
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
213 |
|
|
$ |
182 |
|
|
|
17 |
% |
Asset management, administration and
commissions |
|
|
686 |
|
|
|
650 |
|
|
|
6 |
|
All other income |
|
|
125 |
|
|
|
146 |
|
|
|
(14 |
) |
|
|
|
|
|
Noninterest revenue |
|
|
1,024 |
|
|
|
978 |
|
|
|
5 |
|
Net interest income |
|
|
502 |
|
|
|
507 |
|
|
|
(1 |
) |
|
|
|
|
|
Total net revenue |
|
|
1,526 |
|
|
|
1,485 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
6 |
|
|
|
(4 |
) |
|
NM |
|
Credit reimbursement to IB(a) |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
558 |
|
|
|
549 |
|
|
|
2 |
|
Noncompensation expense |
|
|
502 |
|
|
|
480 |
|
|
|
5 |
|
Amortization of intangibles |
|
|
15 |
|
|
|
19 |
|
|
|
(21 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
1,075 |
|
|
|
1,048 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
415 |
|
|
|
411 |
|
|
|
1 |
|
Income tax expense |
|
|
152 |
|
|
|
149 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
263 |
|
|
$ |
262 |
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
36 |
% |
|
|
42 |
% |
|
|
|
|
Overhead ratio |
|
|
70 |
|
|
|
71 |
|
|
|
|
|
Pretax margin ratio(b) |
|
|
27 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
(a) |
|
TSS is charged a credit reimbursement related to certain exposures managed within the IB
credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit
reimbursement on page 35 of JPMorgan Chases 2006 Annual Report. |
(b) |
|
Pretax margin represents Income before income tax expense divided by Total net revenue, which
is a measure of pretax performance and another basis by which management evaluates its
performance and that of its competitors. |
Quarterly results
Net income was $263 million, flat compared with the prior year. Earnings benefited from increased
revenue and the absence of prior-year expense from the adoption of SFAS 123R, but these items were
offset by higher compensation expense and investment in new product platforms.
Net revenue was $1.5 billion, up by $41 million, or 3%, from the prior year. Worldwide Securities
Services net revenue of $837 million was up by $45 million, or 6%, driven by increased product
usage by existing clients and new business growth, as well as market appreciation. These benefits
were partially offset by lower foreign exchange revenue as a result of narrower market spreads.
Treasury Services net revenue of $689 million was down by $4 million, or 1%, driven by a continued
shift to narrowerspread liability products and price compression across all products, primarily
offset by an increase in average liability balances from new and existing clients. TSS firmwide net
revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to
$2.1 billion, up by $59 million, or 3%. Treasury Services firmwide net revenue grew to $1.3
billion, up by $14 million, or 1%.
Provision for credit losses was $6 million compared with a benefit of $4 million in the prior year.
Noninterest expense was $1.1 billion, up by $27 million, or 3%. The increase was due largely to
higher compensation expense related to growth in headcount supporting increased client volume and
investment in new product platforms, partially offset by the absence of prior-year expense from the
adoption of SFAS 123R.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except headcount, ratio data and where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services |
|
$ |
689 |
|
|
$ |
693 |
|
|
|
(1 |
)% |
Worldwide Securities Services |
|
|
837 |
|
|
|
792 |
|
|
|
6 |
|
|
|
|
|
|
Total net revenue |
|
$ |
1,526 |
|
|
$ |
1,485 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Assets under custody (in billions) |
|
$ |
14,661 |
|
|
$ |
11,179 |
|
|
|
31 |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
US$ ACH transactions originated (in millions) |
|
|
971 |
|
|
|
838 |
|
|
|
16 |
|
Total US$ clearing volume (in thousands) |
|
|
26,840 |
|
|
|
25,182 |
|
|
|
7 |
|
International electronic funds transfer volume (in thousands)(a) |
|
|
42,399 |
|
|
|
33,741 |
|
|
|
26 |
|
Wholesale check volume (in millions) |
|
|
771 |
|
|
|
852 |
|
|
|
(10 |
) |
Wholesale cards issued (in thousands)(b) |
|
|
17,146 |
|
|
|
16,977 |
|
|
|
1 |
|
Selected balance sheets (average) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
46,005 |
|
|
$ |
29,230 |
|
|
|
57 |
|
Loans |
|
|
18,948 |
|
|
|
12,940 |
|
|
|
46 |
|
Liability balances(c) |
|
|
210,639 |
|
|
|
178,133 |
|
|
|
18 |
|
Equity |
|
|
3,000 |
|
|
|
2,545 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
24,875 |
|
|
|
23,598 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSS firmwide metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services firmwide revenue(d) |
|
$ |
1,305 |
|
|
$ |
1,291 |
|
|
|
1 |
|
Treasury & Securities Services firmwide revenue(d) |
|
|
2,142 |
|
|
|
2,083 |
|
|
|
3 |
|
Treasury Services firmwide overhead ratio(e) |
|
|
59 |
% |
|
|
56 |
% |
|
|
|
|
Treasury & Securities Services firmwide overhead ratio(e) |
|
|
63 |
|
|
|
62 |
|
|
|
|
|
Treasury Services firmwide liability balances (average)(f) |
|
$ |
186,631 |
|
|
$ |
155,422 |
|
|
|
20 |
|
Treasury & Securities Services firmwide liability balances
(average)(f) |
|
|
292,391 |
|
|
|
248,328 |
|
|
|
18 |
|
|
|
|
|
(a) |
|
International electronic funds transfer includes non-US$ ACH and clearing volume. |
(b) |
|
Wholesale cards issued include domestic commercial card, stored value card, prepaid card, and
government electronic benefit card products. |
(c) |
|
Liability balances include deposits and deposits swept to on-balance sheet liabilities. |
TSS firmwide metrics
TSS firmwide metrics include certain TSS product revenues and liability balances reported in
other lines of business for customers who are also customers of those lines of business. In order
to capture the firmwide impact of Treasury Services (TS) and TSS products and revenues,
management reviews firmwide metrics such as liability balances, revenues and overhead ratios in
assessing financial performance for TSS. Firmwide metrics are necessary in order to understand
the aggregate TSS business.
(d) |
|
Firmwide revenue includes TS revenue recorded in the CB, Regional Banking and AM lines of
business (see below) and excludes FX revenues recorded in the IB for TSS-related FX
activity. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Treasury Services revenue reported in CB |
|
$ |
556 |
|
|
$ |
550 |
|
|
|
1 |
% |
Treasury Services revenue reported in other lines of
business |
|
|
60 |
|
|
|
48 |
|
|
|
25 |
|
|
TSS firmwide FX revenue, which include FX revenue recorded in TSS and FX revenue
associated with TSS customers who are FX customers of the IB, was $112 million and $118
million for the quarters ended March 31, 2007 and 2006, respectively.
|
|
|
(e) |
|
Overhead ratios have been calculated based upon firmwide revenues and TSS and TS expenses,
respectively, including those allocated to certain other lines of business. FX revenues and
expenses recorded in the IB for TSS-related FX activity are not included in this ratio. |
(f) |
|
Firmwide liability balances include TS liability balances recorded in certain other lines
of business. Liability balances associated with TS customers who are also customers of the
CB line of business are not included in TS liability balances. |
33
ASSET MANAGEMENT
For a
discussion of the business profile of AM, see pages 5052 of JPMorgan Chases 2006
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management, administration and
commissions |
|
$ |
1,489 |
|
|
$ |
1,222 |
|
|
|
22 |
% |
All other income |
|
|
170 |
|
|
|
116 |
|
|
|
47 |
|
|
|
|
|
|
Noninterest revenue |
|
|
1,659 |
|
|
|
1,338 |
|
|
|
24 |
|
Net interest income |
|
|
245 |
|
|
|
246 |
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,904 |
|
|
|
1,584 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
764 |
|
|
|
682 |
|
|
|
12 |
|
Noncompensation expense |
|
|
451 |
|
|
|
394 |
|
|
|
14 |
|
Amortization of intangibles |
|
|
20 |
|
|
|
22 |
|
|
|
(9 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
1,235 |
|
|
|
1,098 |
|
|
|
12 |
|
|
|
|
|
|
Income before income tax expense |
|
|
678 |
|
|
|
493 |
|
|
|
38 |
|
Income tax expense |
|
|
253 |
|
|
|
180 |
|
|
|
41 |
|
|
|
|
|
|
Net income |
|
$ |
425 |
|
|
$ |
313 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
46 |
% |
|
|
36 |
% |
|
|
|
|
Overhead ratio |
|
|
65 |
|
|
|
69 |
|
|
|
|
|
Pretax margin ratio(a) |
|
|
36 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by client segment |
|
|
|
|
|
|
|
|
|
|
|
|
Private bank |
|
$ |
560 |
|
|
$ |
441 |
|
|
|
27 |
% |
Institutional |
|
|
551 |
|
|
|
435 |
|
|
|
27 |
|
Retail |
|
|
527 |
|
|
|
442 |
|
|
|
19 |
|
Private client services |
|
|
266 |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,904 |
|
|
$ |
1,584 |
|
|
|
20 |
|
|
|
|
|
(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 a record $425 million, up by $112 million, or 36%, from the prior year. Improved
results were due to increased revenue and the absence of prior-year expense from the adoption of
SFAS 123R, partially offset by higher compensation expense.
Net revenue of $1.9 billion was up by $320 million, or 20%, from the prior year. Noninterest
revenue, principally fees and commissions, of $1.7 billion was up by $321 million, or 24%. This
increase was due largely to increased assets under management and higher performance fees. Net
interest income of $245 million was flat from the prior year, primarily due to a shift to
narrowerspread deposit products offset by higher deposit and loan balances.
Private Bank revenue grew 27%, to $560 million, due to higher asset management and placement fees
and higher deposit balances, partially offset by narrower spreads on deposits. Institutional
revenue grew 27%, to $551 million, due to net asset inflows and performance fees. Retail revenue
grew 19%, to $527 million, primarily due to net asset inflows and market appreciation. Private
Client Services revenue of $266 million was flat compared with the prior year, as increased revenue
from higher assets under management was offset by narrower spreads on deposits and loans.
34
Provision for credit losses was a benefit of $9 million compared with a benefit of $7 million in
the prior year.
Noninterest expense of $1.2 billion was up by $137 million, or 12%, from the prior year. The
increase was due to higher compensation and increased minority interest expense related to
Highbridge Capital Management, partially offset by the absence of prior-year expense from the
adoption of SFAS 123R.
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except headcount, ratios
and ranking data, and where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Client advisors |
|
|
1,533 |
|
|
|
1,499 |
|
|
|
2 |
% |
Retirement planning services participants |
|
|
1,423,000 |
|
|
|
1,327,000 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of customer assets in 4 & 5 Star Funds(a) |
|
|
61 |
% |
|
|
54 |
% |
|
|
13 |
|
% of AUM in 1st and 2nd quartiles:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
|
76 |
% |
|
|
72 |
% |
|
|
6 |
|
3 years |
|
|
76 |
% |
|
|
75 |
% |
|
|
1 |
|
5 years |
|
|
81 |
% |
|
|
75 |
% |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected balance sheets data (average) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
45,816 |
|
|
$ |
41,012 |
|
|
|
12 |
|
Loans(c) |
|
|
25,640 |
|
|
|
24,482 |
|
|
|
5 |
|
Deposits |
|
|
54,816 |
|
|
|
48,066 |
|
|
|
14 |
|
Equity |
|
|
3,750 |
|
|
|
3,500 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
13,568 |
|
|
|
12,511 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality |
|
|
|
|
|
|
|
|
|
|
|
|
statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
|
|
|
$ |
7 |
|
|
NM |
Nonperforming loans |
|
|
34 |
|
|
|
79 |
|
|
|
(57 |
) |
Allowance for loan losses |
|
|
114 |
|
|
|
119 |
|
|
|
(4 |
) |
Allowance for lending-related commitments |
|
|
5 |
|
|
|
3 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate |
|
|
|
% |
|
|
0.12 |
% |
|
|
|
|
Allowance for loan losses to average loans |
|
|
0.44 |
|
|
|
0.49 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans |
|
|
335 |
|
|
|
151 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.13 |
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
(a) |
|
Derived from Morningstar for the United States; Micropal for the United Kingdom,
Luxembourg, Hong Kong and Taiwan; and Nomura for Japan. |
(b) |
|
Quartile rankings sourced from Lipper for the United States and Taiwan; Micropal for the
United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan. |
(c) |
|
As of January 1, 2007, $5.3 billion of held-for-investment prime mortgage loans were
transferred from AM to Treasury within the Corporate segment. Although the loans, together
with the responsibility for the investment management of the portfolio, were transferred to
Treasury, the transfer has no impact on the financial results of AM. |
Assets under supervision
Assets under supervision were $1.4 trillion, up 17%, or $198 billion, from the prior year. Assets
under management were $1.1 trillion, up 21%, or $180 billion, from the prior year. The increase was
the result of net asset inflows in the institutional segment, primarily in liquidity and
alternative products; retail flows, primarily in equity-related products; and market appreciation.
Custody, brokerage, administration and deposit balances were $342 billion, up by $18 billion.
35
|
|
|
|
|
|
|
|
|
ASSETS UNDER SUPERVISION(a) (in billions) |
|
|
|
|
|
|
As of March 31, |
|
2007 |
|
|
2006 |
|
|
Assets by asset class |
|
|
|
|
|
|
|
|
Liquidity(b) |
|
$ |
318 |
|
|
$ |
236 |
|
Fixed income |
|
|
180 |
|
|
|
166 |
|
Equities & balanced |
|
|
446 |
|
|
|
397 |
|
Alternatives |
|
|
109 |
|
|
|
74 |
|
|
Total Assets under management |
|
|
1,053 |
|
|
|
873 |
|
Custody/brokerage/administration/deposits |
|
|
342 |
|
|
|
324 |
|
|
Total Assets under supervision |
|
$ |
1,395 |
|
|
$ |
1,197 |
|
|
|
|
|
|
|
|
|
|
|
Assets by client segment |
|
|
|
|
|
|
|
|
Institutional(c) |
|
$ |
550 |
|
|
$ |
468 |
|
Private Bank |
|
|
170 |
|
|
|
137 |
|
Retail(c) |
|
|
274 |
|
|
|
214 |
|
Private Client Services |
|
|
59 |
|
|
|
54 |
|
|
Total Assets under management |
|
$ |
1,053 |
|
|
$ |
873 |
|
|
Institutional(c) |
|
$ |
551 |
|
|
$ |
471 |
|
Private Bank |
|
|
374 |
|
|
|
332 |
|
Retail(c) |
|
|
361 |
|
|
|
291 |
|
Private Client Services |
|
|
109 |
|
|
|
103 |
|
|
Total Assets under supervision |
|
$ |
1,395 |
|
|
$ |
1,197 |
|
|
|
|
|
|
|
|
|
|
|
Assets by geographic region |
|
|
|
|
|
|
|
|
U.S./Canada |
|
$ |
664 |
|
|
$ |
564 |
|
International |
|
|
389 |
|
|
|
309 |
|
|
Total Assets under management |
|
$ |
1,053 |
|
|
$ |
873 |
|
|
U.S./Canada |
|
$ |
929 |
|
|
$ |
822 |
|
International |
|
|
466 |
|
|
|
375 |
|
|
Total Assets under supervision |
|
$ |
1,395 |
|
|
$ |
1,197 |
|
|
|
|
|
|
|
|
|
|
|
Mutual fund assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
257 |
|
|
$ |
167 |
|
Fixed income |
|
|
48 |
|
|
|
48 |
|
Equity |
|
|
219 |
|
|
|
189 |
|
|
Total mutual fund assets |
|
$ |
524 |
|
|
$ |
404 |
|
|
|
|
|
(a) |
|
Excludes Assets under management of American Century Companies, Inc, in which the Firm
has 44% ownership. |
(b) |
|
Third quarter of 2006 data reflects the reclassification of $19 billion of assets under
management into liquidity from other asset classes. Prior-period data was not reclassified. |
(c) |
|
During the first quarter of 2006, assets under management of $22 billion from Retirement
planning services has been reclassified from the Institutional client segment to the Retail
client segment to be consistent with the revenue by client segment reporting. |
|
|
|
|
|
|
|
|
|
Assets under management rollforward |
|
|
|
|
|
|
Three months ended March 31, |
|
2007 |
|
|
2006 |
|
|
Beginning balance |
|
$ |
1,013 |
|
|
$ |
847 |
|
Flows: |
|
|
|
|
|
|
|
|
Liquidity |
|
|
7 |
|
|
|
(5 |
) |
Fixed income |
|
|
2 |
|
|
|
|
|
Equities, balanced and alternatives |
|
|
10 |
|
|
|
13 |
|
Market/performance/other impacts |
|
|
21 |
|
|
|
18 |
|
|
Ending balance |
|
$ |
1,053 |
|
|
$ |
873 |
|
|
|
|
|
|
|
|
|
|
|
Assets under supervision rollforward |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,347 |
|
|
$ |
1,149 |
|
Net asset flows |
|
|
27 |
|
|
|
12 |
|
Market/performance/other impacts |
|
|
21 |
|
|
|
36 |
|
|
Ending balance |
|
$ |
1,395 |
|
|
$ |
1,197 |
|
|
36
CORPORATE
For a
discussion of the business profile of Corporate, see pages 5354 of JPMorgan Chases
2006 Annual Report.
The transaction with The Bank of New York closed on October 1, 2006. As a result of this
transaction, select corporate trust businesses were transferred from TSS to the Corporate segment
and are reported in discontinued operations for 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions, except headcount) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions(a)(b)(c) |
|
$ |
1,325 |
|
|
$ |
199 |
|
|
NM |
|
Securities gains (losses) |
|
|
(8 |
) |
|
|
(158 |
) |
|
|
95 |
% |
All other income |
|
|
68 |
|
|
|
102 |
|
|
|
(33 |
) |
|
|
|
|
|
Noninterest revenue |
|
|
1,385 |
|
|
|
143 |
|
|
NM |
|
Net interest income |
|
|
(117 |
) |
|
|
(547 |
) |
|
|
79 |
|
|
|
|
|
|
Total net revenue |
|
|
1,268 |
|
|
|
(404 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3 |
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense(b) |
|
|
776 |
|
|
|
685 |
|
|
|
13 |
|
Noncompensation expense(c)(d) |
|
|
556 |
|
|
|
612 |
|
|
|
(9 |
) |
Merger costs |
|
|
62 |
|
|
|
71 |
|
|
|
(13 |
) |
|
|
|
|
|
Subtotal |
|
|
1,394 |
|
|
|
1,368 |
|
|
|
2 |
|
Net expenses allocated to other businesses |
|
|
(1,040 |
) |
|
|
(1,033 |
) |
|
|
(1 |
) |
|
|
|
|
|
Total noninterest expense |
|
|
354 |
|
|
|
335 |
|
|
|
6 |
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
expense |
|
|
911 |
|
|
|
(739 |
) |
|
NM |
|
Income tax expense (benefit) |
|
|
280 |
|
|
|
(319 |
) |
|
NM |
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
631 |
|
|
|
(420 |
) |
|
NM |
|
Income from discontinued operations(e) |
|
|
|
|
|
|
54 |
|
|
NM |
|
|
|
|
|
|
Net income (loss) |
|
$ |
631 |
|
|
$ |
(366 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity(a) (b) |
|
$ |
1,253 |
|
|
$ |
204 |
|
|
NM |
|
Treasury and Corporate other(c) |
|
|
15 |
|
|
|
(608 |
) |
|
NM |
|
|
|
|
|
|
Total net revenue |
|
$ |
1,268 |
|
|
$ |
(404 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity(a) |
|
$ |
698 |
|
|
$ |
103 |
|
|
NM |
|
Treasury and Corporate other |
|
|
(29 |
) |
|
|
(479 |
) |
|
|
94 |
|
Merger costs |
|
|
(38 |
) |
|
|
(44 |
) |
|
|
14 |
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
631 |
|
|
|
(420 |
) |
|
NM |
|
Income from discontinued operations(e) |
|
|
|
|
|
|
54 |
|
|
NM |
|
|
|
|
|
|
Total net income (loss) |
|
$ |
631 |
|
|
$ |
(366 |
) |
|
NM |
|
|
|
|
|
|
Headcount |
|
|
23,702 |
|
|
|
27,390 |
|
|
|
(13 |
) |
|
|
|
|
(a) |
|
As a result of the adoption on January 1, 2007, of SFAS 157, Corporate recognized a
benefit of $464 million in Net revenue, in the current quarter, relating to valuation
adjustments on nonpublic private equity investments. |
(b) |
|
The first quarter of 2007 includes the reclassification of certain private equity carried
interest from Net revenue to Compensation expense. |
(c) |
|
Certain transaction costs that were previously reported in Net revenue have been reclassified
to Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods
presented. |
(d) |
|
Includes insurance recoveries related to settlement of the Enron and WorldCom class action
litigations and for certain other material proceedings of $98 million for the quarter ended
March 31, 2006. |
(e) |
|
On October 1, 2006, the Firm completed the exchange of selected corporate trust businesses,
including trustee, paying agent, loan agency and document management services, for the
consumer, business banking and middle-market banking businesses of The Bank of New York. The
results of operations of these corporate trust businesses are reported as discontinued
operations for 2006. |
37
Quarterly results
Net income was $631 million compared with a net loss of $366 million in the prior year. Results
benefited from higher private equity gains and improved Net interest income.
Net revenue was $1.3 billion compared with negative $404 million in the prior year. The improvement
was driven by the Private Equity and Treasury segments. Private equity gains were $1.3 billion
compared with $237 million, benefiting from a higher level of realized gains, a fair value
adjustment on nonpublic investments of $464 million resulting from the adoption of SFAS 157, and
the reclassification of certain private equity carried interest to compensation expense. Treasurys
results benefited from a $380 million increase in Net interest income due to improved net interest
spread, as well as the absence of $158 million of securities losses in the prior year.
Noninterest expense was $354 million, up from $335 million in the prior year, reflecting the
reclassification of certain private equity carried interest to Compensation expense and lower
recoveries related to certain material litigation, primarily offset by business efficiencies and
the absence of prior-year expense from the adoption of SFAS 123R.
Discontinued operations include the related balance sheet and income statement activity of selected
corporate trust businesses sold to The Bank of New York on October 1, 2006. Prior to the second
quarter of 2006, these corporate trust businesses were reported in Treasury & Securities Services.
Net income from discontinued operations was $54 million in the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement and balance sheet data |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses)(a) |
|
$ |
(8 |
) |
|
$ |
(158 |
) |
|
|
95 |
% |
Investment securities portfolio (average) |
|
|
86,436 |
|
|
|
39,989 |
|
|
|
116 |
|
Investment securities portfolio (ending) |
|
|
88,681 |
|
|
|
46,093 |
|
|
|
92 |
|
Mortgage loans (average)(b) |
|
|
25,244 |
|
|
|
|
|
|
NM |
Mortgage loans (ending)(b) |
|
|
26,499 |
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
$ |
723 |
|
|
$ |
207 |
|
|
|
249 |
|
Write-ups / (write-downs)(c) |
|
|
648 |
|
|
|
10 |
|
|
NM |
Mark-to-market gains (losses) |
|
|
(127 |
) |
|
|
4 |
|
|
NM |
|
|
|
|
|
Total direct investments |
|
|
1,244 |
|
|
|
221 |
|
|
|
463 |
|
Third-party fund investments |
|
|
34 |
|
|
|
16 |
|
|
|
113 |
|
|
|
|
|
|
Total private equity gains(d) |
|
$ |
1,278 |
|
|
$ |
237 |
|
|
|
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity portfolio information(e) |
|
|
|
|
|
|
Direct investments |
|
March 31, 2007 |
|
December 31, 2006 |
|
Change |
|
Publicly-held securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
389 |
|
|
$ |
587 |
|
|
|
(34 |
)% |
Cost |
|
|
366 |
|
|
|
451 |
|
|
|
(19 |
) |
Quoted public value |
|
|
493 |
|
|
|
831 |
|
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately-held direct securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
5,294 |
|
|
|
4,692 |
|
|
|
13 |
|
Cost |
|
|
5,574 |
|
|
|
5,795 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party fund investments |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
744 |
|
|
|
802 |
|
|
|
(7 |
) |
Cost |
|
|
1,026 |
|
|
|
1,080 |
|
|
|
(5 |
) |
|
|
|
|
|
Total
private equity portfolio Carrying value |
|
$ |
6,427 |
|
|
$ |
6,081 |
|
|
|
6 |
|
Total
private equity portfolio Cost |
|
$ |
6,966 |
|
|
$ |
7,326 |
|
|
|
(5 |
) |
|
|
|
|
(a) |
|
Losses in the first quarter of 2006 reflect repositioning of the Treasury investment
securities portfolio. First quarter and second quarter 2006 exclude gains/losses on
securities used to manage risk associated with mortgage servicing rights. |
(b) |
|
As of January 1, 2007, $19.4 billion and $5.3 billion of held-for-investment residential
mortgage loans were transferred from RFS and AM, respectively, to the Corporate segment for
risk management and reporting purposes. Although the loans, together with the responsibility
for the investment management of the portfolio, were transferred to Treasury, the transfer
has no impact on the financial results of Corporate. |
(c) |
|
Private equity gains in the first quarter of 2007 include a fair value adjustment of $464
million related to the adoption of SFAS 157. In addition, the first quarter of 2007 includes
the reclassification of certain private equity carried interest from net revenue to
compensation expense. |
(d) |
|
Included in Principal transactions. |
(e) |
|
For more information on the Firms policies regarding the valuation of the private equity
portfolio, see Note 5 on pages 8082 of this Form 10-Q. |
38
The carrying value of the private equity portfolio at March 31, 2007, was $6.4 billion, up
$346 million from December 31, 2006. The portfolio increase was primarily due to a favorable
adjustment on nonpublic investments and new investments, partially offset by sales activity. The
portfolio represented 8.8% of the Firms stockholders equity less goodwill at March 31, 2007, up
from 8.6% at December 31, 2006.
BALANCE SHEET ANALYSIS
|
|
|
|
|
|
|
|
|
Selected balance sheet data (in millions) |
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
31,836 |
|
|
$ |
40,412 |
|
Deposits with banks |
|
|
30,973 |
|
|
|
13,547 |
|
Federal funds sold and securities purchased under resale
agreements |
|
|
144,306 |
|
|
|
140,524 |
|
Securities borrowed |
|
|
84,800 |
|
|
|
73,688 |
|
Trading assets: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
373,684 |
|
|
|
310,137 |
|
Derivative receivables |
|
|
49,647 |
|
|
|
55,601 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
96,975 |
|
|
|
91,917 |
|
Held-to-maturity |
|
|
54 |
|
|
|
58 |
|
Loans, net of Allowance for loan losses |
|
|
442,465 |
|
|
|
475,848 |
|
Other receivables |
|
|
28,149 |
|
|
|
27,585 |
|
Goodwill |
|
|
45,063 |
|
|
|
45,186 |
|
Other intangible assets |
|
|
14,900 |
|
|
|
14,852 |
|
All other assets |
|
|
66,066 |
|
|
|
62,165 |
|
|
Total assets |
|
$ |
1,408,918 |
|
|
$ |
1,351,520 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
626,428 |
|
|
$ |
638,788 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
218,917 |
|
|
|
162,173 |
|
Commercial paper and other borrowed funds |
|
|
45,225 |
|
|
|
36,902 |
|
Trading liabilities: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
94,309 |
|
|
|
90,488 |
|
Derivative payables |
|
|
50,316 |
|
|
|
57,469 |
|
Long-term debt and trust preferred capital debt securities |
|
|
155,307 |
|
|
|
145,630 |
|
Beneficial interests issued by consolidated VIEs |
|
|
13,109 |
|
|
|
16,184 |
|
All other liabilities |
|
|
87,603 |
|
|
|
88,096 |
|
|
Total liabilities |
|
|
1,291,214 |
|
|
|
1,235,730 |
|
Stockholders equity |
|
|
117,704 |
|
|
|
115,790 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,408,918 |
|
|
$ |
1,351,520 |
|
|
Consolidated balance sheets overview
At March 31, 2007, the Firms total assets were $1.4 trillion, an increase of $57.4 billion, or 4%,
from December 31, 2006. Total liabilities were $1.3 trillion, an increase of $55.5 billion, or 4%,
from December 31, 2006. Stockholders equity was $117.7 billion, an increase of $1.9 billion, or
2%, from December 31, 2006. The following is a discussion of the significant changes in balance
sheet items during the first quarter of 2007.
Deposits with banks; Federal funds sold and securities purchased under resale agreements;
Securities borrowed; Federal funds purchased and securities sold under repurchase agreements; and
Commercial paper and other borrowed funds
The Firm utilizes Deposits with banks, Federal funds sold and securities purchased under resale
agreements, Securities borrowed, Federal funds purchased and securities sold under repurchase
agreements and Commercial paper and other borrowed funds as part of its liquidity management
activities, in order to manage the Firms cash positions and risk-based capital requirements, to
maximize liquidity access and to minimize funding costs. In the first quarter of 2007, Deposits
with banks, Securities purchased under resale agreements and Securities borrowed increased in
connection with higher levels of funds that were available for short-term investment opportunities.
Securities sold under repurchase agreements and Commercial paper increased primarily due to
short-term requirements to fund trading positions and AFS securities inventory levels, as well as a
result of growth in the demand for Commercial paper. For additional information on the Firms
Liquidity risk management, see pages 4648 of this Form 10-Q.
39
Trading assets and liabilities debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary
risk-taking activities. These instruments consist primarily of fixed income securities (including
government and corporate debt), equity securities, convertible cash instruments, loans and physical
commodities. The increase in trading assets over December 31, 2006, was due primarily to the more
favorable capital markets environment, with growth in client-driven market-making activities. In
addition, an aggregate $23.3 billion of loans warehoused by the IB and prime mortgage loans warehoused by RFS
are now accounted for at fair value under SFAS 159 and classified as trading assets in the
consolidated balance sheets. For additional information, refer to Note 5 on pages 8082 and Note 4
on pages 7780 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. The changes in derivative
receivables and payables from December 31, 2006 were primarily due to the decline in the U.S.
Dollar and rising interest rates. For additional information, refer to Derivative contracts and
Note 5 on pages 5456 and 8082, respectively, of this Form 10-Q.
Securities
The Firms securities portfolio, almost all of which is classified as AFS, is used primarily to
manage the Firms exposure to interest rate movements. The AFS portfolio increased by $5.1 billion
from December 31, 2006, primarily due to net purchases in the Treasury investment securities
portfolio related to managing the Firms exposure to interest rates. For additional information
related to securities, refer to the Corporate segment discussion and to Note 11 on pages 3739 and
86, respectively, of this Form 10-Q.
Loans
The Firm provides loans to customers of all sizes, from large corporate clients to individual
consumers. The Firm manages the risk/reward relationship of each portfolio and discourages the
retention of loan assets that do not generate a positive return above the cost of risk-adjusted
capital. Loans, net of the Allowance for loan losses, declined $33.4 billion, or 7%, from December
31, 2006, as an aggregate $23.3 billion of loans warehoused by the IB and prime mortgage loans warehoused by RFS
are now accounted for at fair value under SFAS 159 and classified as trading assets in the
consolidated balance sheets. Also contributing to the decrease was the seasonal pattern of higher
customer payments on credit card receivables and the restructuring during the first quarter of 2007
of a Firm-administered multi-seller conduit, which resulted in the deconsolidation of $3.2 billion
of Loans. For a more detailed discussion of the loan portfolio and the Allowance for loan losses,
refer to Credit risk management on pages 4860 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
$123 million decline in Goodwill was primarily due to the adoption of FIN 48, which resulted in a
$113 million reduction. For additional information, see Note 17 on pages 9698 and Note 20 on page
100 of this Form 10-Q.
Other intangible assets
The Firms other intangible assets consist of mortgage servicing rights (MSRs), purchased credit
card relationships, other credit cardrelated intangibles, core deposit intangibles and all other
intangibles. The $48 million increase in Other intangible assets partly reflects higher MSRs of
$391 million, primarily due to additional MSRs generated from loan sales and securitizations.
Partially offsetting the increase in MSRs was the amortization of intangibles, in particular,
credit card-related and core deposit intangibles. For additional information on MSRs and other
intangible assets, see Note 17 on pages 9698 of this Form 10-Q.
40
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
(MMDAs), savings, time and negotiable order of withdrawal (NOW) accounts). Deposits help
provide a stable and consistent source of funding to the Firm. Deposits declined by $12.4 billion,
or 2%, from December 31, 2006. Wholesale deposits were lower partly reflecting a seasonal decline
in demand deposit balances relative to the end of 2006. This decline was partly offset by growth in
retail deposits as a result of new account acquisitions, the ongoing expansion of the retail branch
distribution network, and seasonal tax-related increases in client balances. For more
information on deposits, refer to the RFS and AM segment discussions and the Liquidity risk
management discussion on pages 2127, 3436 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 3031 and 3233, respectively, of this Form 10-Q.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs declined $3.1 billion, or 19%, from December 2006,
primarily as a result of the restructuring during the first quarter of 2007 of a Firm-administered
multi-seller conduit. For additional information related to multi-seller conduits, refer to
Offbalance sheet arrangements and contractual cash obligations on pages 4445 and Note 16 on
pages 9596 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 as part of its
liquidity and capital management activities. Long-term debt and trust preferred capital debt
securities increased by $9.7 billion, or 7%, from
December 31, 2006, reflecting net new issuances, including
client-driven structured notes. 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
Total stockholders equity increased by $1.9 billion, or 2%, from year-end 2006 to $117.7 billion
at March 31, 2007. The increase was primarily the result of Net income for the first three months
of 2007, net shares issued under the Firms employee stock-based compensation plans, and the
cumulative effect on Retained earnings of changes in accounting principles of $915 million, offset
partially by stock repurchases and the declaration of cash dividends. The $915 million increase in
Retained earnings resulting from the adoption of new accounting
principles primarily reflected $287 million
related to SFAS 157, $199 million related to SFAS 159 and $436 million related to FIN 48. For a
further discussion of capital, see the Capital management section that follows; for a further
discussion of the accounting changes see Accounting and Reporting Developments on page 65, Note 3
on pages 7177, Note 4 on pages 7780 and Note 20 on
page 100 of this Form 10-Q.
CAPITAL MANAGEMENT
The
following discussion of JPMorgan Chases capital management highlights developments since
December 31, 2006, and should be read in conjunction with Capital Management, on pages 5759 of
JPMorgan Chases 2006 Annual Report.
The Firms capital management framework is intended to ensure that there is capital sufficient to
support the underlying risks of the Firms business activities, as measured by economic risk
capital, and to maintain well-capitalized status under regulatory requirements. In addition, the
Firm holds capital above these requirements in amounts deemed appropriate to achieve managements
regulatory and debt rating objectives. The process of assigning equity to the lines of business is
integrated into the Firms capital framework 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. 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 and Note 16 on pages 85 and 121, respectively, of JPMorgan Chases 2006 Annual
Report, and Note 17 on page 96 of this Form 10-Q.
41
|
|
|
|
|
|
|
|
|
Line of business equity |
|
Quarterly Averages |
(in billions) |
|
1Q07 |
|
|
1Q06 |
|
|
Investment Bank |
|
$ |
21.0 |
|
|
$ |
20.0 |
|
Retail Financial Services |
|
|
16.0 |
|
|
|
13.9 |
|
Card Services |
|
|
14.1 |
|
|
|
14.1 |
|
Commercial Banking |
|
|
6.3 |
|
|
|
5.5 |
|
Treasury & Securities Services |
|
|
3.0 |
|
|
|
2.5 |
|
Asset Management |
|
|
3.8 |
|
|
|
3.5 |
|
Corporate |
|
|
52.0 |
|
|
|
47.7 |
|
|
Total common stockholders
equity |
|
$ |
116.2 |
|
|
$ |
107.2 |
|
|
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) |
|
1Q07 |
|
|
1Q06 |
|
|
Credit risk |
|
$ |
23.0 |
|
|
$ |
21.7 |
|
Market risk |
|
|
9.4 |
|
|
|
10.0 |
|
Operational risk |
|
|
5.6 |
|
|
|
5.7 |
|
Private equity risk |
|
|
3.6 |
|
|
|
3.6 |
|
|
Economic risk capital |
|
|
41.6 |
|
|
|
41.0 |
|
Goodwill |
|
|
45.1 |
|
|
|
43.4 |
|
Other(a) |
|
|
29.5 |
|
|
|
22.8 |
|
|
Total common stockholders equity |
|
$ |
116.2 |
|
|
$ |
107.2 |
|
|
|
|
|
(a) |
|
Reflects additional capital required, in managements view, to meet its regulatory and
debt rating objectives. |
Regulatory capital
The Firms banking regulator, the Federal Reserve Board (FRB), establishes capital requirements,
including well-capitalized standards for the consolidated financial holding company. The Office of
the Comptroller of the Currency (OCC) establishes similar capital requirements and standards for
the Firms national banks, including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
In 2005, the FRB issued a final rule, which became effective April 11, 2005, that continues the
inclusion of trust preferred capital debt securities in Tier 1 capital, subject to stricter
quantitative limits and revised qualitative standards, and broadens the definition of restricted
core capital elements. The rule provides for a five-year transition period. As an internationally
active bank holding company, JPMorgan Chase is subject to the rules limitation on restricted core
capital elements, including trust preferred capital debt securities, to 15% of total core capital
elements, net of goodwill less any associated deferred tax liability. At March 31, 2007, JPMorgan
Chases restricted core capital elements were 14.5% of total core capital elements.
Tier 1 capital was $82.5 billion at March 31, 2007, compared with $81.1 billion at December 31,
2006, an increase of $1.5 billion. The increase was due primarily to net income of $4.8 billion,
net issuances of common stock under the Firms employee stock-based compensation plans of $1.3
billion and the effects of the adoption of new accounting principles reflecting increases of $287 million for
SFAS 157, $199 million for SFAS 159 and $436 million for FIN 48. Partially offsetting these
increases were changes in stockholders equity net of Accumulated other comprehensive income
(loss) due to common share repurchases of $4.0 billion and dividends declared of $1.2 billion. In
addition, the change in capital reflects the exclusion of a $258 million valuation adjustment
to certain liabilities pursuant to SFAS 157 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 26 on pages 129130 of JPMorgan Chases 2006 Annual
Report.
42
The following table presents the risk-based capital ratios for JPMorgan Chase and its significant
banking subsidiaries at March 31, 2007, and December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk- |
|
|
Adjusted |
|
|
|
Tier 1 |
|
|
Total |
|
|
Tier 1 |
|
|
Tier 1 |
|
|
Total |
|
|
weighted |
|
|
average |
|
|
|
capital |
|
|
capital |
|
|
leverage |
(in millions, except ratios) |
|
capital |
|
|
capital |
|
|
assets(c) |
|
|
assets(d) |
|
|
|
ratio |
|
|
ratio |
|
|
ratio |
|
March 31, 2007(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. |
|
$ |
82,538 |
|
|
$ |
115,142 |
|
|
$ |
972,813 |
|
|
$ |
1,324,145 |
|
|
|
8.5% |
|
|
|
11.8% |
|
|
|
6.2% |
|
JPMorgan Chase Bank, N.A. |
|
|
70,474 |
|
|
|
97,826 |
|
|
|
877,312 |
|
|
|
1,166,785 |
|
|
|
8.0 |
|
|
|
11.2 |
|
|
|
6.0 |
|
Chase Bank USA, N.A. |
|
|
9,342 |
|
|
|
11,275 |
|
|
|
69,508 |
|
|
|
63,966 |
|
|
|
13.4 |
|
|
|
16.2 |
|
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. |
|
$ |
81,055 |
|
|
$ |
115,265 |
|
|
$ |
935,909 |
|
|
$ |
1,308,699 |
|
|
|
8.7% |
|
|
|
12.3% |
|
|
|
6.2% |
|
JPMorgan Chase Bank, N.A. |
|
|
68,726 |
|
|
|
96,103 |
|
|
|
840,057 |
|
|
|
1,157,449 |
|
|
|
8.2 |
|
|
|
11.4 |
|
|
|
5.9 |
|
Chase Bank USA, N.A. |
|
|
9,242 |
|
|
|
11,506 |
|
|
|
77,638 |
|
|
|
66,202 |
|
|
|
11.9 |
|
|
|
14.8 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-capitalized
ratios(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0% |
|
|
|
10.0% |
|
|
|
5.0% |
(e) |
Minimum capital ratios(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0 |
|
|
|
8.0 |
|
|
|
3.0(f) |
|
|
|
|
|
(a) |
|
Asset and capital amounts for JPMorgan Chases banking subsidiaries reflect intercompany
transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of
intercompany transactions. |
(b) |
|
As defined by the regulations issued by the FRB, OCC and FDIC. |
(c) |
|
Includes off-balance sheet risk-weighted assets in the amounts of $324.3 billion, $311.0
billion and $12.2 billion, respectively, at March 31, 2007, and $305.3 billion, $290.1 billion
and $12.7 billion, respectively, at December 31, 2006, 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 FRB and OCC. |
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 20, 2007, the Firm declared a quarterly common stock dividend of $0.34
per share, payable on April, 30, 2007, to shareholders of record at the close of business on April
5, 2007. On April 17, 2007, the Board of Directors declared a quarterly dividend of $0.38 per share
on the outstanding shares of the corporations common stock, an increase of $0.04 per share, or
12%; that dividend is payable on July 31, 2007, to stockholders of record at the close of business
on July 6, 2007.
Stock repurchases
During the quarter ended March 31, 2007, the Firm repurchased a total of 80.9 million shares for
$4.0 billion at an average price per share of $49.45 under the
March 21, 2006, $8.0 billion stock
repurchase program. During the first quarter of 2006, under the respective stock repurchase
programs then in effect, the Firm repurchased 31.8 million shares for $1.3 billion at an average
price per share of $40.54.
On April 17, 2007, the Board of Directors authorized the repurchase of up to $10.0 billion of the
Firms common shares. The new authorization commenced April 19, 2007, and replaced the Firms
previous $8.0 billion repurchase program. Repurchase authorization under the prior $8.0 billion
program that remained unused as of April 19, 2007 was $816 million. This amount will not carry over
to the new $10.0 billion program. The new $10.0 billion authorization 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 new 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
pages 114115 of this Form 10-Q.
43
OFFBALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Special-purpose entities
JPMorgan Chase is involved with several types of offbalance sheet arrangements, including special
purpose entities (SPEs), lines of credit and loan commitments. The principal uses of SPEs are to
obtain sources of liquidity for JPMorgan Chase and its clients by securitizing financial assets,
and to create other investment products for clients. These arrangements are an important part of
the financial markets, providing market liquidity by facilitating investors access to specific
portfolios of assets and risks. For example, SPEs are integral to the markets for mortgage-backed
securities, commercial paper and other asset-backed securities.
JPMorgan Chase is involved with SPEs in three broad categories: loan securitizations, multi-seller
conduits and client intermediation. Capital is held, as deemed appropriate, against all SPE-related
transactions and related exposures, such as derivative transactions and lending-related
commitments. For further discussion of SPEs and the Firms accounting for these types of exposures,
see Note 1 on pages 70-71 of this Form 10-Q, and Note 14 on pages 114118 and Note 15 on pages 118120 of JPMorgan Chases
2006 Annual Report.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the
short-term credit rating of JPMorgan Chase Bank, N.A. were downgraded below specific levels,
primarily P-1, A-1 and F1 for Moodys, Standard & Poors and Fitch, respectively. The amounts of
these liquidity commitments were $79.8 billion and $74.4 billion at March 31, 2007 and December 31,
2006, respectively. These liquidity commitments are generally included in the Firms other unfunded
commitments to extend credit and asset purchase agreements, as shown in the table on the following
page. Alternatively, if JPMorgan Chase Bank, N.A. were downgraded, the Firm could be replaced by
another liquidity provider in lieu of providing funding under the liquidity commitment, or, in
certain circumstances, could facilitate the sale or refinancing of the assets in the SPE in order
to provide liquidity. For further information, refer to Note 15 on pages 118120 of JPMorgan
Chases 2006 Annual Report.
The Firm also has exposure to certain SPEs arising from derivative transactions; these transactions
are recorded at fair value on the Firms Consolidated balance sheets with changes in fair value
(i.e., mark-to-market (MTM) gains and losses) recorded in Principal transactions. Such MTM gains
and losses are not included in the revenue amounts reported in the following table.
The following table summarizes certain revenue information related to consolidated and
nonconsolidated variable interest entities (VIEs) with which the Firm has significant
involvement, and qualifying SPEs (QSPEs). The revenue reported in the table below primarily
represents servicing and credit fee income.
Revenue from VIEs and QSPEs
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
VIEs |
|
|
QSPEs |
|
|
Total |
|
|
2007 |
|
$ |
47 |
|
|
$ |
846 |
|
|
$ |
893 |
|
2006 |
|
|
54 |
|
|
|
793 |
|
|
|
847 |
|
|
Offbalance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to
meet the financing needs of its customers. The contractual amount of these financial instruments
represents the maximum possible credit risk should the counterparty draw down the commitment or the
Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently
fail to perform according to the terms of the contract. Most of these commitments and guarantees
expire without a default occurring or without being drawn. As a result, the total contractual
amount of these instruments is not, in the Firms view, representative of its actual future credit
exposure or funding requirements. Further, certain commitments, primarily related to consumer
financings, are cancelable, upon notice, at the option of the Firm. For further discussion of
lending-related commitments and guarantees and the Firms accounting for them, see Credit risk
management on pages 6476 and Note 29 on pages 132134 of JPMorgan Chases 2006 Annual Report.
44
The following table presents offbalance sheet lending-related financial instruments and
guarantees for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
March 31, 2007 |
|
|
2006 |
By remaining maturity |
|
|
|
|
|
1-<3 |
|
|
3-5 |
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
< 1 year |
|
|
years |
|
|
years |
|
|
> 5 years |
|
|
Total |
|
|
Total |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a) |
|
$ |
696,994 |
|
|
$ |
3,833 |
|
|
$ |
3,525 |
|
|
$ |
65,023 |
|
|
$ |
769,375 |
|
|
$ |
747,535 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded commitments to extend credit(b)(c)(d) |
|
|
96,874 |
|
|
|
56,340 |
|
|
|
69,552 |
|
|
|
18,466 |
|
|
|
241,232 |
|
|
|
229,204 |
|
Asset purchase agreements(e) |
|
|
22,485 |
|
|
|
38,540 |
|
|
|
9,777 |
|
|
|
2,503 |
|
|
|
73,305 |
|
|
|
67,529 |
|
Standby letters of credit and guarantees(c)(f)(g) |
|
|
27,739 |
|
|
|
21,560 |
|
|
|
37,245 |
|
|
|
6,345 |
|
|
|
92,889 |
|
|
|
89,132 |
|
Other letters of credit(c) |
|
|
4,206 |
|
|
|
588 |
|
|
|
157 |
|
|
|
5 |
|
|
|
4,956 |
|
|
|
5,559 |
|
|
Total wholesale |
|
|
151,304 |
|
|
|
117,028 |
|
|
|
116,731 |
|
|
|
27,319 |
|
|
|
412,382 |
|
|
|
391,424 |
|
|
Total lending-related |
|
$ |
848,298 |
|
|
$ |
120,861 |
|
|
$ |
120,256 |
|
|
$ |
92,342 |
|
|
$ |
1,181,757 |
|
|
$ |
1,138,959 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(h) |
|
$ |
378,833 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
378,833 |
|
|
$ |
318,095 |
|
Derivatives qualifying as guarantees(i) |
|
|
16,020 |
|
|
|
15,639 |
|
|
|
18,638 |
|
|
|
22,294 |
|
|
|
72,591 |
|
|
|
71,531 |
|
|
|
|
|
(a) |
|
Includes Credit card
lending-related commitments of $673.9 billion at March 31, 2007, and
$657.1 billion at December 31, 2006, that represent the total available credit to the Firms
cardholders. The Firm has not experienced, and does not anticipate, that all of its
cardholders will utilize their entire available lines of credit at the same time. The Firm can
reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some
cases, without notice as permitted by law. |
(b) |
|
Includes unused advised lines of credit totaling $40.3 billion at March 31, 2007, and $39.0
billion at December 31, 2006, which are not legally binding. In regulatory filings with the
FRB, unused advised lines are not reportable. |
(c) |
|
Represents contractual amount net of risk participations totaling $32.5 billion at March 31,
2007, and $32.8 billion at December 31, 2006. |
(d) |
|
Excludes Firmwide unfunded commitments to private third-party equity funds of $712 million
and $686 million at March 31, 2007, and December 31, 2006, respectively. |
(e) |
|
The maturity is based upon the underlying assets in the SPE, which are primarily multi-seller
asset-backed commercial paper conduits. It includes $1.4 billion of asset purchase agreements
to other third-party entities at both March 31, 2007, and December 31, 2006. |
(f) |
|
JPMorgan Chase held collateral relating to $13.9 billion and $13.5 billion of these
arrangements at March 31, 2007, and December 31, 2006, respectively. |
(g) |
|
Includes unused commitments to issue standby letters of credit of $48.6 billion and $45.7
billion at March 31, 2007, and December 31, 2006, respectively. |
(h) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$381.0 billion at March 31, 2007, and $317.9 billion at December 31, 2006, respectively. |
(i) |
|
Represents notional amounts of derivatives qualifying as guarantees. For further discussion
of guarantees, see Note 29 on pages 132134 of JPMorgan Chases 2006 Annual Report. |
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chases business activities. The Firms risk management
framework and governance structure are intended to provide comprehensive controls and ongoing
management of the major risks inherent in its business activities. 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 6182 of JPMorgan Chases 2006 Annual Report.
45
LIQUIDITY RISK MANAGEMENT
The following discussion of JPMorgan Chases liquidity management framework highlights
developments since December 31, 2006, and should be read in conjunction with pages 6263 of
JPMorgan Chases 2006 Annual Report.
Liquidity risk arises from the general funding needs of the Firms activities and in the management
of its assets and liabilities. JPMorgan Chases liquidity management framework is intended to
maximize liquidity access and minimize funding costs. Through active liquidity management the Firm
seeks to preserve stable, reliable and cost-effective sources of funding. This access enables the
Firm to replace maturing obligations when due and fund assets at appropriate maturities and rates.
To accomplish this, management uses a variety of measures to mitigate liquidity and related risks,
taking into consideration market conditions, prevailing interest rates, liquidity needs and the
desired maturity profile of liabilities, among other factors.
Funding
Sources of funds
As of March 31, 2007, 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, 2007, total deposits for the Firm were $626.4 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 results for the
Firms business segments and
the Balance Sheet Analysis on pages 17-36 and 3941, 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
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 Offbalance sheet arrangements and contractual
cash obligations and Notes 15 and 23 on pages 4445, 9094 and 101102, respectively, of this
Form 10-Q.
46
Issuance
During
the first quarter of 2007, JPMorgan Chase issued approximately $23.2 billion of
long-term debt and trust preferred capital debt securities. These
issuances included structured notes, the issuances of which are generally
client-driven and not issued for
funding or capital management purposes. Long-term debt and trust preferred capital debt
securities issuances were partially offset by $14.9 billion that matured or were redeemed,
including structured notes. In addition, during
the first quarter of 2007, the Firm securitized $13.0 billion of residential mortgage
loans and $5.8 billion of credit card loans. The Firm did not
securitize any RFS auto loans during the first quarter of 2007. For further discussion of
loan securitizations, see Note 15 on pages 9094 of this Form 10-Q.
In connection with the issuance of certain of its trust preferred capital debt securities, 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, see the Forms 8-K
filed by the Firm on August 17, 2006, September 28, 2006, and February 2, 2007.
Cash Flows
Cash and due from banks decreased $8.6 billion during the first
quarter of 2007, compared with an increase of $233 million
during the first quarter of 2006. A discussion of the significant
changes in Cash and due from banks during the first quarters of 2007
and 2006 follows.
Cash Flows from Operating Activities
For the quarters ended March 31, 2007 and 2006, net cash used in
operating activities was $51.5
billion and $19.1 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 both
2007 and 2006, 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. Management believes cash flows from operations, available cash balances and 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, 2007,
net cash of $11.8 billion was used in investing activities,
primarily for purchases of
investment securities in Treasurys AFS portfolio to manage the
Firms exposure to interest rates; and to increase Deposits with banks as a result of the availability of
excess funds for short-term investment opportunities. Partially
offsetting these uses of cash
were proceeds from sales and maturities of AFS securities, credit card and residential mortgage
sales and securitization activities, and the seasonal decline in consumer credit card receivables.
For the quarter ended March 31, 2006, net cash of $34.5 billion was used in investing activities.
Net cash was invested to fund purchases of Treasurys AFS securities in connection with
repositioning the portfolio in response to changes in interest rates, and net additions to the
retained wholesale loan portfolio, mainly resulting from capital markets activity in the IB. 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 decline in
credit card loans, reflecting the seasonal pattern and higher-than-normal customer payment rates.
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 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.
In the first quarter 2006, net cash provided by financing activities was $53.8 billion due to:
growth in deposits reflecting, on the retail side, new account acquisitions and the ongoing
expansion of the branch distribution network, and on the wholesale side, higher business volumes;
increases in securities sold under repurchase agreements in connection with short-term investment
opportunities; and net new issuances of Long-term debt and trust preferred capital debt securities.
The net cash provided was partially offset by common stock repurchases and the payment of cash
dividends.
47
Credit ratings
The credit ratings of JPMorgan Chases parent holding company and each of its significant banking
subsidiaries as of March 31, 2007, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
Senior long-term debt |
|
|
Moodys |
|
S&P |
|
Fitch |
|
Moodys |
|
S&P |
|
Fitch |
|
JPMorgan Chase & Co.
JPMorgan Chase Bank, N.A.
Chase Bank USA, N.A.
|
|
P-1
P-1
P-1
|
|
A-1+
A-1+
A-1+
|
|
F1+
F1+
F1+
|
|
Aa2
Aaa
Aaa
|
|
AA-
AA
AA
|
|
AA-
AA-
AA- |
|
On
February 14, 2007, S&P raised the senior long-term debt
ratings on JPMorgan Chase & Co. and the operating bank
subsidiaries to AA and AA, respectively, from A+ and AA,
respectively. S&P
also raised the short-term debt rating of JPMorgan Chase & Co. to
A-1+ from A-1. Similarly, on February 16, 2007, Fitch raised the senior
long-term debt rating on JPMorgan Chase & Co. and the operating bank
subsidiaries to AA from A+. Fitch also raised the short-term debt
rating of JPMorgan Chase & Co. to F1+ from F1. Finally, on
March 2, 2007, Moodys raised the senior long-term debt
ratings on JPMorgan Chase & Co. and the operating bank
subsidiaries to Aa2 and Aaa, respectively, from Aa3 and Aa2,
respectively. 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.
In the current environment, the Firm believes a downgrade is unlikely. For additional information
on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on
derivatives and collateral agreements, see Special-purpose entities on page 44 and Ratings profile
of derivative receivables MTM on pages 54-55, of this Form 10-Q.
CREDIT RISK MANAGEMENT
The following discussion of JPMorgan Chases credit portfolio as of March 31, 2007, highlights
developments since December 31, 2006. This section should be read in conjunction with pages 6476
and page 83, and Notes 12, 13, 29, and 30 of JPMorgan Chases 2006 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 1415 of this Form 10-Q.
CREDIT PORTFOLIO
The following table presents JPMorgan Chases credit portfolio as of March 31, 2007, and
December 31, 2006. Total credit exposure at March 31, 2007, increased by $4.9 billion from
December
31, 2006, reflecting an increase of $5.5 billion in the consumer credit portfolios, partially
offset by a decrease of $544 million in the wholesale credit portfolio. During the first quarter of
2007, Loans were affected by two events. First, as a result of the adoption of SFAS 159, $23.3
billion of loans that would have previously been classified as Loans held-for-sale are now
classified as Trading assets ($11.7 billion in the wholesale portfolio and $11.6 billion in the
consumer portfolio) and, as a result, such loans are no longer included in Loans at March 31, 2007.
Second, effective January 1, 2007, $24.7 billion of prime mortgages held for investment purposes
were transferred from RFS ($19.4 billion) and AM ($5.3 billion) to the Corporate sector for risk
management purposes. While this transfer had no impact on the RFS, AM or Corporate financial
results, the AM prime mortgages that were transferred are now reported in consumer mortgage loans.
48
In the table below, reported loans include all HFS loans, which are carried at the lower of cost or
fair value with changes in value recorded in Noninterest revenue. However, these HFS loans are
excluded from the average loan balances used for the net charge-off rate calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
|
Nonperforming assets(i) |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans reported(a)(b) |
|
$ |
449,765 |
|
|
$ |
483,127 |
|
|
$ |
2,116 |
(j) |
|
$ |
2,077 |
(j) |
Loans securitized(c) |
|
|
68,403 |
|
|
|
66,950 |
|
|
|
|
|
|
|
|
|
|
Total managed loans(d) |
|
|
518,168 |
|
|
|
550,077 |
|
|
|
2,116 |
|
|
|
2,077 |
|
Derivative receivables |
|
|
49,647 |
|
|
|
55,601 |
|
|
|
36 |
|
|
|
36 |
|
|
Total managed credit-related assets |
|
|
567,815 |
|
|
|
605,678 |
|
|
|
2,152 |
|
|
|
2,113 |
|
Lending-related commitments(e) |
|
|
1,181,757 |
|
|
|
1,138,959 |
|
|
NA |
|
|
NA |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
269 |
|
|
|
228 |
|
|
Total credit portfolio |
|
$ |
1,749,572 |
|
|
$ |
1,744,637 |
|
|
$ |
2,421 |
|
|
$ |
2,341 |
|
|
Net credit derivative hedges
notional(f) |
|
$ |
(51,443 |
) |
|
$ |
(50,733 |
) |
|
$ |
(16 |
) |
|
$ |
(16 |
) |
Collateral held against derivatives(g) |
|
|
(5,713 |
) |
|
|
(6,591 |
) |
|
NA |
|
|
NA |
|
Held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average HFS loans (three months ended) |
|
|
34,984 |
|
|
|
45,775 |
|
|
|
120 |
|
|
|
64 |
|
Nonperforming purchased(h) |
|
|
|
|
|
|
251 |
|
|
NA |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average annual |
|
Three months ended March 31, |
|
Net charge-offs |
|
|
net charge-off rate |
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans reported |
|
$ |
903 |
|
|
$ |
668 |
|
|
|
0.85 |
% |
|
|
0.69 |
% |
Loans
securitized(c) |
|
|
593 |
|
|
|
449 |
|
|
|
3.56 |
|
|
|
2.62 |
|
|
Total managed loans |
|
$ |
1,496 |
|
|
$ |
1,117 |
|
|
|
1.22 |
% |
|
|
0.98 |
% |
|
|
|
|
(a) |
|
Loans are presented net of unearned income and net deferred loan fees of $2.0 billion and
$2.3 billion at March 31, 2007, and December 31, 2006, respectively. |
(b) |
|
Includes
$900 million of loans for which the Firm has elected the fair value option of
accounting during the first quarter of 2007. |
(c) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see Card Services on pages 2729 of this Form 10-Q. |
(d) |
|
Past-due 90 days and over and accruing includes credit card receivables of $1.3 billion at
both March 31, 2007, and December 31, 2006, and related credit card securitizations of $958
million and $962 million at March 31, 2007, and December 31, 2006, respectively. |
(e) |
|
Includes wholesale unused advised lines of credit totaling $40.3 billion and $39.0 billion at
March 31, 2007, and December 31, 2006, respectively, which are not legally binding. In
regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.
Credit card lending-related commitments of $673.9 billion and
$657.1 billion at March 31, 2007,
and December 31, 2006, respectively, represent the total available credit to its cardholders.
The Firm has not experienced, and does not anticipate, that all of its cardholders will
utilize their entire available lines of credit at the same time. The Firm can reduce or cancel
a credit card commitment by providing the cardholder prior notice or, in some cases, without
notice as permitted by law. |
(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. March 31, 2007, and
December 31, 2006, both include $23 billion, which represents the
notional amount for structured portfolio protection; the Firm retains the first risk of loss
on this portfolio. |
(g) |
|
Represents other liquid securities collateral held by the Firm as of March 31, 2007, and
December 31, 2006, respectively. |
(h) |
|
Represents distressed HFS loans purchased as part of the IBs proprietary activities,
which are excluded from nonperforming assets. During the first quarter of 2007, the Firm
elected the fair value option of accounting for this portfolio of nonperforming loans. These
loans are classified as Trading assets at March 31, 2007. |
(i) |
|
Includes nonperforming HFS loans of $116 million and $120 million as of March 31, 2007, and
December 31, 2006, respectively. |
(j) |
|
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 and U.S.
government-sponsored enterprises of $1.3 billion and $1.2 billion at March 31, 2007, and
December 31, 2006, respectively, and (2) education loans that are 90 days past due and still
accruing, which are insured by government agencies under the Federal Family Education Loan
Program, of $178 million and $219 million as of
March 31, 2007, and December 31, 2006,
respectively. These amounts for GNMA and education loans are excluded, as reimbursement is
proceeding normally. |
49
WHOLESALE CREDIT PORTFOLIO
As of March 31, 2007, wholesale exposure (IB, CB, TSS and AM) decreased by $544 million from
December 31, 2006, due to a decrease in loans of
$15.5 billion, reflecting $11.7 billion of loans
reclassified to Trading assets as a result of the adoption of SFAS
159 and $5.3 billion of prime mortgage loans transferred from AM to the Corporate sector for risk management purposes.
Derivative receivables decreased by $6.0 billion primarily as a result of the decline in the U.S.
Dollar and rising interest rates. These decreases were almost completely offset by an increase in
lending-related commitments of $21.0 billion mainly due to lending activity in the IB.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
Nonperforming assets(f) |
|
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
(in millions, except ratios) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Loans reported(a) |
|
$ |
168,194 |
|
|
$ |
183,742 |
|
|
$ |
267 |
|
|
$ |
391 |
|
Derivative receivables |
|
|
49,647 |
|
|
|
55,601 |
|
|
|
36 |
|
|
|
36 |
|
|
Total wholesale credit-related assets |
|
|
217,841 |
|
|
|
239,343 |
|
|
|
303 |
|
|
|
427 |
|
Lending-related commitments(b) |
|
|
412,382 |
|
|
|
391,424 |
|
|
NA |
|
|
NA |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
2 |
|
|
|
3 |
|
|
Total wholesale credit exposure |
|
$ |
630,223 |
|
|
$ |
630,767 |
|
|
$ |
305 |
|
|
$ |
430 |
|
|
Net credit derivative hedges
notional(c) |
|
$ |
(51,443 |
) |
|
$ |
(50,733 |
) |
|
$ |
(16 |
) |
|
$ |
(16 |
) |
Collateral held against derivatives(d) |
|
|
(5,713 |
) |
|
|
(6,591 |
) |
|
NA |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average HFS loans (three months ended) |
|
|
13,259 |
|
|
|
24,547 |
|
|
|
5 |
|
|
|
11 |
|
Nonperforming purchased(e) |
|
|
|
|
|
|
251 |
|
|
NA |
|
|
NA |
|
|
|
|
|
(a) |
|
Excludes $11.7 billion of wholesale loans reclassified to Trading assets as a result of
the adoption of SFAS 159 effective January 1, 2007. Includes loans greater or equal to 90 days
past due that continue to accrue interest. The principal balance of these loans totaled $30
million and $29 million at March 31, 2007, and December 31, 2006, respectively. Also, see Note
4 on pages 7780 and Note 13 on pages 8789, respectively, of this Form 10-Q. |
(b) |
|
Includes unused advised lines of credit totaling $40.3 billion and $39.0 billion at March 31,
2007, and December 31, 2006, 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 $23 billion, which
represents the notional amount for structured portfolio protection; the Firm retains the first
risk of loss on this portfolio. |
(d) |
|
Represents other liquid securities collateral held by the Firm as of March 31, 2007, and
December 31, 2006, respectively. |
(e) |
|
Represents distressed HFS loans purchased as part of IBs proprietary activities, which are
excluded from nonperforming assets. During the first quarter of 2007, the Firm elected the
fair value option of accounting for this portfolio of nonperforming loans. These loans are
classified as Trading assets at March 31, 2007. |
(f) |
|
Includes nonperforming
HFS loans of $4 million at March 31, 2007, and December 31, 2006. |
50
|
|
|
|
|
|
|
|
|
Net charge-offs/recoveries |
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Loans
reported
Net recoveries |
|
$ |
6 |
|
|
$ |
20 |
|
Average annual net recovery
rate(a) |
|
|
0.02 |
% |
|
|
0.06 |
% |
|
|
|
|
(a) |
|
Excludes average loans HFS of $13.3 billion and $19.5 billion for the quarters ended
March 31, 2007 and 2006, respectively. |
Net recoveries do not include gains from sales of nonperforming loans that were sold from
the credit portfolio (as shown in the following table). There were no gains from these sales
during the first quarter of 2007, compared with gains of $20 million in the first quarter of
2006. Gains would be reflected in Noninterest revenue.
|
|
|
|
|
|
|
|
|
Nonperforming loan activity |
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Beginning balance |
|
$ |
391 |
|
|
$ |
992 |
|
Additions |
|
|
134 |
|
|
|
57 |
|
|
Reductions: |
|
|
|
|
|
|
|
|
Paydowns and other |
|
|
(225 |
) |
|
|
(152 |
) |
Charge-offs |
|
|
(17 |
) |
|
|
(39 |
) |
Returned to performing |
|
|
(16 |
) |
|
|
(69 |
) |
Sales |
|
|
|
|
|
|
(52 |
) |
|
Total reductions |
|
|
(258 |
) |
|
|
(312 |
) |
|
Net additions (reductions) |
|
|
(124 |
) |
|
|
(255 |
) |
Ending balance |
|
$ |
267 |
|
|
$ |
737 |
|
|
The following table presents summaries of the maturity and ratings profiles of the wholesale
portfolio as of March 31, 2007, and December 31, 2006. The ratings scale is based upon the Firms
internal risk ratings and is presented on an S&P-equivalent basis. The primary driver of the
decrease in the investment-grade loans was due to the transfer of $5.3 billion of prime mortgages
from AM to the Corporate sector. These loans are now part of the consumer portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale exposure |
|
|
|
|
|
|
Maturity profile(c) |
|
Ratings profile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade
(IG) |
|
grade |
|
|
At March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions, except |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % |
ratios) |
|
<1 year |
|
15 years |
|
> 5 years |
|
Total |
|
AAA to BBB- |
|
BB+ & below |
|
Total |
|
of IG |
|
|
|
Loans |
|
|
45 |
% |
|
|
42 |
% |
|
|
13 |
% |
|
|
100 |
% |
|
$ |
95 |
|
|
$ |
58 |
|
|
$ |
153 |
|
|
|
62 |
% |
Derivative receivables |
|
|
12 |
|
|
|
35 |
|
|
|
53 |
|
|
|
100 |
|
|
|
42 |
|
|
|
8 |
|
|
|
50 |
|
|
|
84 |
|
Lending-related
commitments |
|
|
37 |
|
|
|
57 |
|
|
|
6 |
|
|
|
100 |
|
|
|
350 |
|
|
|
62 |
|
|
|
412 |
|
|
|
85 |
|
|
|
|
Total excluding HFS |
|
|
37 |
% |
|
|
51 |
% |
|
|
12 |
% |
|
|
100 |
% |
|
$ |
487 |
|
|
$ |
128 |
|
|
$ |
615 |
|
|
|
79 |
% |
Loans
held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
630 |
|
|
|
|
|
|
|
|
Net credit derivative
hedges notional(b) |
|
|
39 |
% |
|
|
50 |
% |
|
|
11 |
% |
|
|
100 |
% |
|
$ |
(45 |
) |
|
$ |
(6 |
) |
|
$ |
(51 |
) |
|
|
88 |
% |
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity profile(c) |
|
Ratings profile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade
(IG) |
|
grade |
|
|
|
|
|
|
At December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions, except |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % |
ratios) |
|
<1 year |
|
15 years |
|
> 5 years |
|
Total |
|
AAA to BBB- |
|
BB+ & below |
|
Total |
|
of IG |
|
|
|
Loans |
|
|
44 |
% |
|
|
41 |
% |
|
|
15 |
% |
|
|
100 |
% |
|
$ |
104 |
|
|
$ |
57 |
|
|
$ |
161 |
|
|
|
65 |
% |
Derivative receivables |
|
|
16 |
|
|
|
34 |
|
|
|
50 |
|
|
|
100 |
|
|
|
49 |
|
|
|
7 |
|
|
|
56 |
|
|
|
88 |
|
Lending-related
commitments |
|
|
36 |
|
|
|
58 |
|
|
|
6 |
|
|
|
100 |
|
|
|
338 |
|
|
|
53 |
|
|
|
391 |
|
|
|
86 |
|
|
|
|
Total excluding HFS |
|
|
37 |
% |
|
|
51 |
% |
|
|
12 |
% |
|
|
100 |
% |
|
$ |
491 |
|
|
$ |
117 |
|
|
$ |
608 |
|
|
|
81 |
% |
Loans
held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
631 |
|
|
|
|
|
|
|
|
Net credit derivative
hedges notional(b) |
|
|
16 |
% |
|
|
75 |
% |
|
|
9 |
% |
|
|
100 |
% |
|
$ |
(45 |
) |
|
$ |
(6 |
) |
|
$ |
(51 |
) |
|
|
88 |
% |
|
|
|
|
|
|
(a) |
|
HFS loans relate primarily to syndication loans and loans transferred from the retained
portfolio. During the first quarter of 2007 the Firm elected the fair value option of
accounting for loans related to securitization activities, and these loans are classified as
Trading assets. |
(b) |
|
Ratings are based upon the underlying referenced assets. |
(c) |
|
The maturity profile of Loans and lending-related commitments is based upon the remaining
contractual maturity. The maturity profile of Derivative receivables is based upon the
maturity profile of Average exposure. See page 70 of JPMorgan Chases 2006 Annual Report for further discussion of Average exposure. |
Wholesale credit exposure selected industry concentration
The Firm continues to focus on the management and diversification of its industry concentrations,
with particular attention paid to industries with actual or potential credit concerns. At March 31,
2007, the top 10 industries were the same as those at December 31, 2006. The increases in Asset
managers and Oil and gas were due to lending-related activities. Below is a summary of the Top 10
industry concentrations as of March 31, 2007, and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
Top 10 industries(a) |
|
Credit |
|
% of |
|
Credit |
|
% of |
(in millions, except ratios) |
|
exposure(c) |
|
portfolio |
|
exposure(c) |
|
portfolio |
|
Banks and finance companies |
|
$ |
59,836 |
|
|
|
10 |
% |
|
$ |
61,792 |
|
|
|
10 |
% |
Real estate |
|
|
31,503 |
|
|
|
5 |
|
|
|
32,102 |
|
|
|
5 |
|
Healthcare |
|
|
29,219 |
|
|
|
5 |
|
|
|
28,998 |
|
|
|
5 |
|
Asset managers |
|
|
28,872 |
|
|
|
5 |
|
|
|
24,570 |
|
|
|
4 |
|
Consumer products |
|
|
27,362 |
|
|
|
4 |
|
|
|
27,114 |
|
|
|
4 |
|
Utilities |
|
|
27,329 |
|
|
|
4 |
|
|
|
24,938 |
|
|
|
4 |
|
State and municipal
governments |
|
|
26,840 |
|
|
|
4 |
|
|
|
27,485 |
|
|
|
5 |
|
Retail and consumer services |
|
|
23,632 |
|
|
|
4 |
|
|
|
22,122 |
|
|
|
4 |
|
Securities firms and exchanges |
|
|
22,445 |
|
|
|
4 |
|
|
|
23,127 |
|
|
|
4 |
|
Oil and gas |
|
|
22,234 |
|
|
|
4 |
|
|
|
18,544 |
|
|
|
3 |
|
All other |
|
|
316,271 |
|
|
|
51 |
|
|
|
317,468 |
|
|
|
52 |
|
|
Total excluding HFS |
|
$ |
615,543 |
|
|
|
100 |
% |
|
$ |
608,260 |
|
|
|
100 |
% |
Held-for-sale(b) |
|
|
14,680 |
|
|
|
|
|
|
|
22,507 |
|
|
|
|
|
|
Total exposure |
|
$ |
630,223 |
|
|
|
|
|
|
$ |
630,767 |
|
|
|
|
|
|
|
|
|
(a) |
|
Rankings are based upon exposure at March 31, 2007. |
(b) |
|
HFS loans relate primarily to syndication loans and loans transferred from the retained
portfolio. During the first quarter of 2007 the Firm elected the fair value option of
accounting for loans related to securitization activities; these loans are classified as
Trading assets at March 31, 2007. |
(c) |
|
Credit exposure is net of risk participations and excludes the benefit of credit derivative
hedges and collateral held against Derivative receivables or Loans. |
52
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1
and lower, as defined by Standard & Poors/Moodys. The total criticized component of the portfolio
remained flat at $5.7 billion when compared with year-end 2006.
Wholesale criticized exposure industry concentrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
Top 10 industries(a) |
|
|
|
% of |
|
|
|
% of |
(in millions, except ratios) |
|
Amount |
|
portfolio |
|
Amount |
|
portfolio |
|
Automotive
Media
|
|
$
|
1,372
720 |
|
|
|
26
13 |
%
|
|
$ |
1,442
392 |
|
|
|
29
8 |
% |
Consumer products
|
|
|
456 |
|
|
|
8 |
|
|
|
383 |
|
|
|
7 |
|
Real estate
|
|
|
334 |
|
|
|
6 |
|
|
|
243 |
|
|
|
5 |
|
Agriculture/paper manufacturing
|
|
|
255 |
|
|
|
5 |
|
|
|
239 |
|
|
|
5 |
|
Business services
|
|
|
247 |
|
|
|
5 |
|
|
|
222 |
|
|
|
4 |
|
Retail and consumer services
|
|
|
168 |
|
|
|
3 |
|
|
|
278 |
|
|
|
5 |
|
Machinery & equipment manufacturing
|
|
|
166 |
|
|
|
3 |
|
|
|
106 |
|
|
|
2 |
|
Building materials/construction
|
|
|
145 |
|
|
|
3 |
|
|
|
113 |
|
|
|
2 |
|
Airlines
|
|
|
130 |
|
|
|
2 |
|
|
|
131 |
|
|
|
3 |
|
All other
|
|
|
1,387 |
|
|
|
26 |
|
|
|
1,477 |
|
|
|
30 |
|
|
Total excluding HFS
|
|
$ |
5,380 |
|
|
|
100 |
% |
|
$ |
5,026 |
|
|
|
100 |
% |
Held-for-sale(b)
|
|
|
323 |
|
|
|
|
|
|
|
624 |
|
|
|
|
|
|
Total
|
|
$ |
5,703 |
|
|
|
|
|
|
$ |
5,650 |
|
|
|
|
|
|
|
|
|
(a) |
|
Rankings are based upon exposure at March 31, 2007. |
(b) |
|
HFS loans relate primarily to syndication loans and loans transferred from the retained
portfolio. During the first quarter of 2007 the Firm elected the fair value option of
accounting for loans related to securitization activities; these loans are classified as
Trading assets at March 31, 2007. HFS loans exclude purchased nonperforming HFS loans. |
53
Derivative contracts
In the normal course of business, the Firm uses derivative instruments to meet the needs of
customers; to generate revenues through trading activities; to manage exposure to fluctuations in
interest rates, currencies and other markets; and to manage the Firms credit exposure. For
further discussion of these contracts, see Note 22 on page 101 of this Form 10-Q, and Derivative contracts on pages
6972 of JPMorgan Chases 2006 Annual Report.
The following table summarizes the aggregate notional amounts and the net derivative receivables MTM for the periods presented.
Notional amounts and derivative receivables marked-to-market (MTM)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts(b) |
|
Derivative receivables MTM |
(in billions) |
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
March 31, 2007 |
|
December 31, 2006 |
|
Interest rate |
|
$ |
54,177 |
|
|
$ |
50,201 |
|
|
$ |
24 |
|
|
$ |
29 |
|
Foreign exchange |
|
|
2,714 |
|
|
|
2,520 |
|
|
|
3 |
|
|
|
4 |
|
Equity |
|
|
801 |
|
|
|
809 |
|
|
|
7 |
|
|
|
6 |
|
Credit derivatives |
|
|
5,618 |
|
|
|
4,619 |
|
|
|
7 |
|
|
|
6 |
|
Commodity |
|
|
449 |
|
|
|
507 |
|
|
|
9 |
|
|
|
11 |
|
|
Total, net of cash collateral(a) |
|
$ |
63,759 |
|
|
$ |
58,656 |
|
|
|
50 |
|
|
|
56 |
|
Liquid securities collateral held against
derivative receivables |
|
NA |
|
|
NA |
|
|
|
(6 |
) |
|
|
(7 |
) |
|
Total, net of all collateral |
|
NA |
|
|
NA |
|
|
$ |
44 |
|
|
$ |
49 |
|
|
|
|
|
(a) |
|
Collateral is only applicable to Derivative receivables MTM amounts. |
(b) |
|
Represents the gross sum of long and short third-party notional derivative contracts,
excluding written options and foreign exchange spot contracts. |
The amount of Derivative receivables reported on the Consolidated balance sheets of $50
billion and $56 billion at March 31, 2007, and December 31, 2006, 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 and represents 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
$5.7 billion and $6.6 billion at March 31, 2007, and December 31, 2006, respectively, resulting in total exposure, net of all collateral,
of $44 billion and $49 billion at March 31, 2007, and December 31, 2006, respectively.
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,
2007, and December 31, 2006, the Firm held $12 billion of this additional collateral. The
derivative receivables MTM, net of all collateral, also does not include other credit enhancements
in the forms of letters of credit and surety receivables.
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, 2007 |
|
December 31, 2006 |
Rating equivalent |
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
Net MTM |
|
|
% of Net MTM |
|
Net MTM |
|
|
% of Net MTM |
|
AAA to AA- |
|
$ |
25,095 |
|
|
|
57 |
% |
|
$ |
28,150 |
|
|
|
58 |
% |
A+ to A- |
|
|
5,807 |
|
|
|
13 |
|
|
|
7,588 |
|
|
|
15 |
|
BBB+ to BBB- |
|
|
7,102 |
|
|
|
16 |
|
|
|
8,044 |
|
|
|
16 |
|
BB+ to B- |
|
|
5,801 |
|
|
|
13 |
|
|
|
5,150 |
|
|
|
11 |
|
CCC+ and below |
|
|
129 |
|
|
|
1 |
|
|
|
78 |
|
|
|
|
|
|
Total |
|
$ |
43,934 |
|
|
|
100 |
% |
|
$ |
49,010 |
|
|
|
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 78% as of March 31, 2007, from 80% at December 31, 2006.
54
The Firm posted $27 billion of collateral at both March 31, 2007, and December 31, 2006. Certain
derivative and collateral agreements include provisions that require the counterparty and/or the
Firm, upon specified downgrades in their respective credit ratings, to post collateral for the
benefit of the other party. As of March 31, 2007, the impact of a single-notch ratings downgrade to
JPMorgan Chase Bank, N.A., from its rating of AA to AA- at March 31, 2007, would have required $143
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 $2.6 billion of additional collateral. Certain
derivative contracts also provide for termination of the contract, generally upon a downgrade of
either the Firm or the counterparty, at the then-existing MTM value of the derivative contracts.
Credit derivatives
The following table presents the Firms notional amounts of credit derivatives protection purchased
and sold by the respective businesses as of March 31, 2007, and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives positions |
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
|
Credit portfolio |
|
|
Dealer/client |
|
|
|
|
|
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
Protection |
|
|
|
|
(in billions) |
|
purchased(a) |
|
|
sold |
|
|
purchased |
|
|
sold |
|
|
Total |
|
|
March 31, 2007 |
|
$ |
52 |
|
|
$ |
1 |
|
|
$ |
2,757 |
|
|
$ |
2,808 |
|
|
$ |
5,618 |
|
December 31, 2006 |
|
|
52 |
|
|
|
1 |
|
|
|
2,277 |
|
|
|
2,289 |
|
|
|
4,619 |
|
|
|
|
|
(a) |
|
Included $23 billion at both March 31, 2007,
and December 31, 2006, that
represented the notional amount for structured portfolio protection; the Firm retains the
first risk of loss on this portfolio. |
In managing wholesale credit exposure, the Firm purchases single-name and portfolio credit
derivatives; this activity does not reduce the reported level of assets on the balance sheet or the
level of reported offbalance sheet commitments. The Firm also diversifies exposures by providing
(i.e., selling) credit protection, which increases exposure to industries or clients where the Firm
has little or no client-related exposure. This activity is not material to the Firms overall
credit exposure.
JPMorgan Chase has limited counterparty exposure as a result of credit derivatives transactions. Of
the $49.6 billion of total Derivative receivables MTM at March 31, 2007, $6.5 billion, or 13%, was
associated with credit derivatives, before the benefit of liquid securities collateral.
Dealer/client
At March 31, 2007, the total notional amount of protection purchased and sold in the dealer/client
business increased $1 trillion from year-end 2006 as a result of increased trade volume in the
market. This business has a mismatch between the total notional amounts of protection purchased and
sold. However, in the Firms view, the risk positions are largely matched when securities used to
risk-manage certain derivative positions are taken into consideration and the notional amounts are
adjusted to a duration-based equivalent basis or to reflect different degrees of subordination in
tranched structures.
Credit portfolio management activities
|
|
|
|
|
|
|
|
|
Use of single-name and portfolio credit derivatives |
|
|
|
|
|
Notional amount of protection purchased |
|
(in millions) |
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
Credit derivatives used to manage: |
|
|
|
|
|
|
|
|
Loans and lending-related commitments |
|
$ |
41,540 |
|
|
$ |
40,755 |
|
Derivative receivables |
|
|
10,487 |
|
|
|
11,229 |
|
|
Total(a) |
|
$ |
52,027 |
|
|
$ |
51,984 |
|
|
|
|
|
(a) |
|
Included $23 billion at both March 31, 2007, and December 31, 2006,
that represented the notional amount for structured portfolio protection; the Firm retains the
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
55
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.
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Hedges of lending-related
commitments(a) |
|
$ |
(9 |
) |
|
$ |
(82 |
) |
CVA and hedges of CVA(a) |
|
|
7 |
|
|
|
23 |
|
|
Net gains (losses)(b) |
|
$ |
(2 |
) |
|
$ |
(59 |
) |
|
|
|
|
(a) |
|
These hedges do not qualify for hedge accounting under SFAS 133. |
(b) |
|
Excludes gains of $146 million (primarily related to the adoption on January 1, 2007, of SFAS
157, which incorporated an adjustment to the valuation of the Firms derivative liabilities)
and losses of $6 million for the quarters ended March 31, 2007 and 2006, respectively, of
other Principal transaction revenues that are not associated with hedging activities. |
The Firm also actively manages wholesale credit exposure through loan and commitment sales.
During the first quarter of 2007 and 2006, the Firm sold $1.6 billion and $665 million of loans and
commitments, respectively, recognizing losses of $6 million and gains of $20 million, respectively.
The gains (losses) reflect sales of nonperforming loans as discussed on page 51 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 15 on pages 4648, and 9094, respectively, of
this Form 10-Q.
Lending-related commitments
The contractual amount of wholesale lending-related commitments was $412.4 billion at March 31,
2007, compared with $391.4 billion at December 31, 2006. See page 50 of this Form 10-Q for an
explanation of the increase 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 $223.1
billion and $212.3 billion as of March 31, 2007, and December 31, 2006, respectively.
Emerging markets country exposure
The Firm has a comprehensive internal process for measuring and
managing exposures and risk in emerging markets countries defined as those countries potentially
vulnerable to sovereign events. As of March 31, 2007, based upon its internal methodology, the
Firms exposure to any individual emerging-markets country was not significant, in that total
exposure to any such country did not exceed 0.75% of the Firms total assets. In evaluating and
managing its exposures to emerging markets countries, the Firm takes into consideration all
credit-related lending, trading, and investment activities, whether cross-border or locally funded.
Exposure amounts are then adjusted for credit enhancements (e.g., guarantees and letters of credit)
provided by third parties located outside the country, if the enhancements fully cover the country
risk as well as the credit risk. For information regarding the Firms cross-border exposure based
upon guidelines of the Federal Financial Institutions Examination Council (FFIEC), see Part 1,
Item 1, Loan portfolio, Cross-border outstandings,
on page 155, of the Firms 2006 Annual Report.
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 Firm actively manages its
consumer credit operation. Ongoing efforts include continual review and enhancement of credit
underwriting criteria and refinement of pricing and risk management models.
56
The
following table presents managed consumer creditrelated information for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
Nonperforming assets(e) |
(in millions, except ratios) |
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2007 |
|
December 31, 2006 |
|
Home equity |
|
$ |
87,741 |
|
|
$ |
85,730 |
|
|
$ |
459 |
|
|
$ |
454 |
|
Mortgage |
|
|
46,574 |
|
|
|
59,668 |
|
|
|
960 |
|
|
|
769 |
|
Auto loans and leases(a) |
|
|
40,937 |
|
|
|
41,009 |
|
|
|
95 |
|
|
|
132 |
|
Credit card reported(b) |
|
|
78,173 |
|
|
|
85,881 |
|
|
|
9 |
|
|
|
9 |
|
All other loans |
|
|
28,146 |
|
|
|
27,097 |
|
|
|
326 |
|
|
|
322 |
|
|
Total consumer loans reported |
|
|
281,571 |
|
|
|
299,385 |
|
|
|
1,849 |
(f) |
|
|
1,686 |
(f) |
Credit card
securitizations(b)(c) |
|
|
68,403 |
|
|
|
66,950 |
|
|
|
|
|
|
|
|
|
|
Total consumer loans managed(b) |
|
|
349,974 |
|
|
|
366,335 |
|
|
|
1,849 |
|
|
|
1,686 |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
255 |
|
|
|
225 |
|
|
Total consumer related assets managed |
|
|
349,974 |
|
|
|
366,335 |
|
|
|
2,104 |
|
|
|
1,911 |
|
Consumer lendingrelated commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
73,393 |
|
|
|
69,559 |
|
|
NA |
|
|
NA |
|
Mortgage |
|
|
7,322 |
|
|
|
6,618 |
|
|
NA |
|
|
NA |
|
Auto loans and leases |
|
|
8,285 |
|
|
|
7,874 |
|
|
NA |
|
|
NA |
|
Credit card(d) |
|
|
673,896 |
|
|
|
657,109 |
|
|
NA |
|
|
NA |
|
All other loans |
|
|
6,479 |
|
|
|
6,375 |
|
|
NA |
|
|
NA |
|
|
Total lending-related commitments |
|
|
769,375 |
|
|
|
747,535 |
|
|
NA |
|
|
NA |
|
|
Total consumer credit portfolio |
|
$ |
1,119,349 |
|
|
$ |
1,113,870 |
|
|
$ |
2,104 |
|
|
$ |
1,911 |
|
|
Total average HFS loans (three months ended) |
|
$ |
21,725 |
|
|
$ |
21,228 |
|
|
$ |
115 |
|
|
$ |
53 |
|
Memo: Credit card managed |
|
|
146,576 |
|
|
|
152,831 |
|
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
Three months ended March 31, |
|
Net charge-offs |
|
Average annual net charge-off rate(g) |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Home equity |
|
$ |
68 |
|
|
$ |
33 |
|
|
|
0.32 |
% |
|
|
0.18 |
% |
Mortgage |
|
|
23 |
|
|
|
12 |
|
|
|
0.25 |
|
|
|
0.11 |
|
Auto loans and leases(a) |
|
|
59 |
|
|
|
51 |
|
|
|
0.59 |
|
|
|
0.46 |
|
Credit card reported |
|
|
721 |
|
|
|
567 |
|
|
|
3.57 |
|
|
|
3.36 |
|
All other loans |
|
|
38 |
|
|
|
25 |
|
|
|
0.64 |
|
|
|
0.57 |
|
|
Total consumer loans reported |
|
|
909 |
|
|
|
688 |
|
|
|
1.37 |
|
|
|
1.11 |
|
Credit card
securitizations(c) |
|
|
593 |
|
|
|
449 |
|
|
|
3.56 |
|
|
|
2.62 |
|
|
Total consumer loans managed |
|
$ |
1,502 |
|
|
$ |
1,137 |
|
|
|
1.81 |
% |
|
|
1.44 |
% |
|
Memo: Credit card managed |
|
$ |
1,314 |
|
|
$ |
1,016 |
|
|
|
3.57 |
% |
|
|
2.99 |
% |
|
|
|
|
(a) |
|
Excludes operating lease-related assets of $1.7 billion and $1.6 billion for March 31,
2007, and December 31, 2006, respectively. |
(b) |
|
Past-due loans 90 days and over and accruing includes credit card receivables of $1.3 billion
at both March 31, 2007, and December 31, 2006, and related credit card securitizations of $958
million and $962 million for March 31, 2007, and December 31, 2006, respectively. |
(c) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see CS on pages 2729 of this Form 10-Q. |
(d) |
|
The credit card lendingrelated commitments represent the total available credit to the
Firms cardholders. The Firm has not experienced, and does not anticipate, that all of its
cardholders will utilize their entire available lines of credit at the same time. The Firm can
reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some
cases, without notice as permitted by law. |
(e) |
|
Includes nonperforming HFS loans of $112 million and $116 million at March 31, 2007, and
December 31, 2006, respectively. |
(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 and U.S.
government-sponsored enterprises of $1.3 billion and $1.2 billion for March 31, 2007, and
December 31, 2006, 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 $178 million and $219 million as of March 31, 2007 and December 31, 2006,
respectively. These amounts for GNMA and education loans are excluded, as reimbursement is
proceeding normally . |
(g) |
|
Net charge-off rates exclude average loans HFS of $21.7 billion and $16.4 billion for the
quarters ended March 31, 2007 and 2006, respectively. |
57
Total managed consumer loans as of March 31, 2007, were $350.0 billion, down from $366.3
billion at year-end 2006, reflecting the classification of a portion of mortgage loans as Trading
Assets as a result of adopting SFAS 159, and the seasonal decrease of credit card loans,
partially offset by organic growth in home equity loans. Consumer lending-related commitments
increased by 3%, to $769.4 billion at March 31, 2007, primarily reflecting growth in credit cards
and home equity lines of credit.
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 overall economic returns of its
held-for-investment loan portfolio under prevailing market conditions to determine whether to
retain or sell loans in the portfolio. When it is determined that a loan that was previously
classified as held-for-investment will be sold it is transferred to held-for-sale.
The following
discussion relates to the specific loan and lending-related categories within the consumer
portfolio.
Home equity: Home equity loans at March 31, 2007, were $87.7 billion, an increase of $2.0 billion
from year-end 2006. Change in the portfolio from December 31, 2006, reflected organic growth. The
Provision for credit losses increased as weaker housing prices caused an increase in the estimate
of loss severities in the portfolio.
Mortgage: Substantially all of the Firms prime and low documentation mortgages, both fixed-rate
and adjustable-rate, are originated with the intent to sell, although some of the prime adjustable
rate products are originated into the held-for-investment portfolio. As a result, products in the
portfolio consist primarily of adjustable rate products. Subprime mortgages are either originated
with the intent to sell or hold-for-investment, depending upon market conditions. All 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.
Mortgage loans that are held-for-investment or held-for-sale at March 31, 2007 were $46.6 billion,
reflecting a $13.1 billion decrease from the prior year end, primarily due to the change in
classification to Trading assets for prime mortgages originated with the intent to sell and elected
to be fair valued under SFAS 159. As of March 31, 2007, over 70% of the outstanding mortgage loans
on the Consolidated balance sheet related to the prime market segment. As a result, the Firm deems its exposure
to subprime mortgages manageable. The provision for credit losses related to subprime
mortgages was increased this quarter and underwriting standards were tightened.
Auto loans and leases: As of March 31, 2007, Auto loans and leases of $40.9 billion were flat to
year-end 2006. Vehicle finance leasing, which comprised $1.2 billion of outstanding loans as of
March 31, 2007, was down from $1.7 billion at year-end 2006. The Auto loan portfolio reflects a
high concentration of prime and near-prime quality credits.
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 $146.6 billion at March 31, 2007, a
decrease of $6.3 billion from year-end 2006, reflecting the typical seasonal decrease of
outstanding loans.
The managed credit card net charge-off rate increased to 3.57% for the first quarter of 2007, from
2.99% in the first quarter of 2006. This increase was due primarily to lower bankruptcy-related net
charge-offs in 2006. The 30-day delinquency rates decreased slightly to 3.07% at March 31, 2007,
from 3.10% at March 31, 2006, reflecting continued strength in underlying credit quality. The
managed credit card portfolio continues to reflect a well-seasoned 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), Education loans and Community
Development loans. As of March 31, 2007, Other loans increased to $28.1 billion compared with $27.1
billion at year-end 2006. This increase is due primarily to organic
growth in Education and
Business banking loans.
58
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 page 83 and Note 13 on pages 113114 of JPMorgan Chases
2006 Annual Report. At March 31, 2007, 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, |
|
2007 |
|
2006 |
(in millions) |
|
Wholesale |
|
Consumer |
|
Total |
|
Wholesale |
|
Consumer |
|
Total |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
2,711 |
|
|
$ |
4,568 |
|
|
$ |
7,279 |
|
|
$ |
2,453 |
|
|
$ |
4,637 |
|
|
$ |
7,090 |
|
Cumulative effect of changes in
accounting
principles(a) |
|
|
(56 |
) |
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, adjusted |
|
|
2,655 |
|
|
|
4,568 |
|
|
|
7,223 |
|
|
|
2,453 |
|
|
|
4,637 |
|
|
|
7,090 |
|
Gross charge-offs |
|
|
(17 |
) |
|
|
(1,088 |
) |
|
|
(1,105 |
) |
|
|
(39 |
) |
|
|
(843 |
) |
|
|
(882 |
) |
Gross recoveries |
|
|
23 |
|
|
|
179 |
|
|
|
202 |
|
|
|
59 |
|
|
|
155 |
|
|
|
214 |
|
|
Net (charge-offs) recoveries |
|
|
6 |
|
|
|
(909 |
) |
|
|
(903 |
) |
|
|
20 |
|
|
|
(688 |
) |
|
|
(668 |
) |
Provision for loan losses |
|
|
48 |
|
|
|
931 |
|
|
|
979 |
|
|
|
195 |
|
|
|
652 |
|
|
|
847 |
|
Other |
|
|
(16) |
(b) |
|
|
17 |
(b) |
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
Ending balance at March 31 |
|
$ |
2,693 |
(c) |
|
$ |
4,607 |
(d) |
|
$ |
7,300 |
|
|
$ |
2,668 |
(c) |
|
$ |
4,607 |
(d) |
|
$ |
7,275 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset specific |
|
$ |
54 |
|
|
$ |
|
|
|
$ |
54 |
|
|
$ |
118 |
|
|
$ |
|
|
|
$ |
118 |
|
Formula-based |
|
|
2,639 |
|
|
|
4,607 |
|
|
|
7,246 |
|
|
|
2,550 |
|
|
|
4,607 |
|
|
|
7,157 |
|
|
Total Allowance for loan losses |
|
$ |
2,693 |
|
|
$ |
4,607 |
|
|
$ |
7,300 |
|
|
$ |
2,668 |
|
|
$ |
4,607 |
|
|
$ |
7,275 |
|
|
Lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, |
|
$ |
499 |
|
|
$ |
25 |
|
|
$ |
524 |
|
|
$ |
385 |
|
|
$ |
15 |
|
|
$ |
400 |
|
Provision for lending-related commitments |
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
|
(16 |
) |
|
|
|
|
|
|
(16 |
) |
|
Ending balance at March 31 |
|
$ |
528 |
|
|
$ |
25 |
|
|
$ |
553 |
|
|
$ |
369 |
|
|
$ |
15 |
|
|
$ |
384 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset specific |
|
$ |
40 |
|
|
$ |
|
|
|
$ |
40 |
|
|
$ |
49 |
|
|
$ |
|
|
|
$ |
49 |
|
Formula-based |
|
|
488 |
|
|
|
25 |
|
|
|
513 |
|
|
|
320 |
|
|
|
15 |
|
|
|
335 |
|
|
Total allowance for lending-related
commitments |
|
$ |
528 |
|
|
$ |
25 |
|
|
$ |
553 |
|
|
$ |
369 |
|
|
$ |
15 |
|
|
$ |
384 |
|
|
|
|
|
(a) |
|
Reflects the affect of the adoption of SFAS 159 at January 1, 2007. For a further
discussion of SFAS 159, see Note 4 on pages 7780 of this Form 10-Q. |
(b) |
|
Primarily related to the transfer of allowance between wholesale and consumer in conjunction
with prime mortgages transferred to the Corporate sector. |
(c) |
|
The ratio of the wholesale allowance for loan losses to total wholesale loans was 1.76% and
1.84%, excluding wholesale HFS loans and loans accounted for at fair value at March 31, 2007
and 2006, respectively. |
(d) |
|
The ratio of the consumer allowance for loan losses to total consumer loans was 1.72% and
1.82%, excluding consumer HFS loans and loans accounted for at fair value at March 31, 2007
and 2006, respectively. |
The
allowance for credit losses at March 31, 2007, was relatively unchanged compared with
December 31, 2006. Excluding held-for-sale loans and loans carried at fair value, the Allowance for
loan losses represented 1.74% of loans at March 31, 2007, compared with 1.70% at December 31, 2006.
The increase in coverage was due to a lower loan balance.
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 Accounts payable, accrued expenses
and other liabilities, was $553 million and $524 million at March 31,
2007, and December 31, 2006, respectively. The increase reflected increased lending-related
commitments, primarily due to IB activity.
59
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 $1.6 billion, up by $321 million, or 25%, from the prior
year. The wholesale provision for credit losses was $77 million for the quarter compared with a
provision of $179 million in the prior year. The prior-year provision reflected growth in the loan
portfolio. The total consumer managed provision for credit losses was
$1.5 billion in the current quarter compared with
$1.1 billion in the prior year. The prior year benefited from a lower level of credit card net
charge-offs, which reflected a low level of bankruptcy losses following the change in bankruptcy
legislation in the fourth quarter of 2005. The increase from the
prior year also reflects higher charge-offs and
additions to the allowance for credit losses related to the subprime mortgage and home equity loan
portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for |
|
|
|
|
|
|
|
|
|
|
|
|
lending-related |
|
Total provision for |
|
|
Provision for loan losses |
|
commitments |
|
credit losses |
Three months ended March 31, (in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Investment Bank |
|
$ |
35 |
|
|
$ |
189 |
|
|
$ |
28 |
|
|
$ |
(6 |
) |
|
$ |
63 |
|
|
$ |
183 |
|
Commercial Banking |
|
|
17 |
|
|
|
16 |
|
|
|
|
|
|
|
(9 |
) |
|
|
17 |
|
|
|
7 |
|
Treasury & Securities Services |
|
|
4 |
|
|
|
(4 |
) |
|
|
2 |
|
|
|
|
|
|
|
6 |
|
|
|
(4 |
) |
Asset Management |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(9 |
) |
|
|
(7 |
) |
|
Total Wholesale |
|
|
48 |
|
|
|
195 |
|
|
|
29 |
|
|
|
(16 |
) |
|
|
77 |
|
|
|
179 |
|
Retail Financial Services |
|
|
292 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
85 |
|
Card Services |
|
|
636 |
|
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
636 |
|
|
|
567 |
|
Corporate(a) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
Total Consumer |
|
|
931 |
|
|
|
652 |
|
|
|
|
|
|
|
|
|
|
|
931 |
|
|
|
652 |
|
|
Total provision for credit losses |
|
|
979 |
|
|
|
847 |
|
|
|
29 |
|
|
|
(16 |
) |
|
|
1,008 |
|
|
|
831 |
|
Credit card securitizations |
|
|
593 |
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
593 |
|
|
|
449 |
|
|
Total managed provision for credit losses |
|
$ |
1,572 |
|
|
$ |
1,296 |
|
|
$ |
29 |
|
|
$ |
(16 |
) |
|
$ |
1,601 |
|
|
$ |
1,280 |
|
|
|
|
|
(a) |
|
Includes amounts related to held-for-investment prime mortgages transferred from RFS and
AM to the Corporate segment. |
MARKET RISK MANAGEMENT
For discussion of the Firms market risk management organization, see pages 7780 of JPMorgan
Chases 2006 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 twelve months. The Firm calculates VAR using a one-day time horizon and an expected
tail-loss methodology, which approximates a 99% confidence level. This means the Firm would expect
to incur losses greater than that predicted by VAR estimates only once in every 100 trading days,
or about two to three times a year. For a further discussion of the Firms VAR methodology, see
Market Risk management Value-at-risk, on pages 7780 of JPMorgan Chases 2006 Annual Report.
60
IB trading and credit portfolio VAR
IB trading VAR by risk type and credit portfolio VAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
2007 |
|
2006 |
|
At March 31, |
(in millions) |
|
Avg |
|
Min |
|
Max |
|
Avg |
|
Min |
|
Max |
|
2007 |
|
2006 |
|
|
|
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
45 |
|
|
$ |
25 |
|
|
$ |
68 |
|
|
$ |
60 |
|
|
$ |
47 |
|
|
$ |
94 |
|
|
$ |
65 |
|
|
$ |
47 |
|
Foreign exchange |
|
|
19 |
|
|
|
9 |
|
|
|
38 |
|
|
|
20 |
|
|
|
15 |
|
|
|
30 |
|
|
|
19 |
|
|
|
19 |
|
Equities |
|
|
42 |
|
|
|
31 |
|
|
|
58 |
|
|
|
32 |
|
|
|
22 |
|
|
|
39 |
|
|
|
43 |
|
|
|
23 |
|
Commodities and other |
|
|
34 |
|
|
|
25 |
|
|
|
47 |
|
|
|
47 |
|
|
|
22 |
|
|
|
68 |
|
|
|
36 |
|
|
|
52 |
|
Less: portfolio diversification |
|
|
(58 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(68 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(64 |
)(c) |
|
|
(61 |
)(c) |
|
|
|
Trading VAR(a) |
|
$ |
82 |
|
|
$ |
50 |
|
|
$ |
111 |
|
|
$ |
91 |
|
|
$ |
76 |
|
|
$ |
109 |
|
|
$ |
99 |
|
|
$ |
80 |
|
Credit portfolio VAR(b) |
|
|
13 |
|
|
|
12 |
|
|
|
15 |
|
|
|
14 |
|
|
|
13 |
|
|
|
16 |
|
|
|
14 |
|
|
|
14 |
|
Less: portfolio diversification |
|
|
(12 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(11 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(16 |
)(c) |
|
|
(10 |
)(c) |
|
|
|
Total trading and credit portfolio VAR |
|
$ |
83 |
|
|
$ |
50 |
|
|
$ |
113 |
|
|
$ |
94 |
|
|
$ |
75 |
|
|
$ |
113 |
|
|
$ |
97 |
|
|
$ |
84 |
|
|
|
|
|
(a) |
|
Trading VAR includes
substantially all trading activities in the IB. Trading VAR does not include VAR related to the MSR portfolio or VAR related to other
corporate functions, such as Treasury and Private Equity. For a discussion of MSRs and the
corporate functions, see Note 17 on pages 9697, Note 3 on
page 74 and Corporate on pages 3739 of this Form
10-Q. |
(b) |
|
Includes VAR on derivative credit and debit 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 and debit valuation adjustments, see Note 3 on
pages 71-77 of this Form 10-Q. This VAR does not include the retained loan
portfolio. |
(c) |
|
Average and period-end VARs are less than the sum of the VARs of its market risk components,
which is due to risk offsets resulting from portfolio diversification. The diversification
effect reflects the fact that the risks are not perfectly correlated. The risk of a portfolio
of positions is therefore usually less than the sum of the risks of the positions themselves. |
(d) |
|
Designated as not meaningful (NM) because the minimum and maximum may occur on different
days for different risk components, and hence it is not meaningful to compute a portfolio
diversification effect. |
The
IBs average Total trading and credit portfolio VAR for the first quarter of 2007
was $83 million compared with $94 million in the first quarter of 2006. The change in fixed
income, equities and commodities VAR components resulted from changes in positions which also led
to a decrease in portfolio diversification for trading VAR. Average trading VAR diversification
decreased to $58 million, or 41% of the sum of the components, from $68 million, or 43% 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 following histogram illustrates the
daily market risk-related gains and losses for IB trading businesses for the quarter ended March
31, 2007. The chart shows that IB posted market risk-related gains on 61 out of 65 days in this
period, with 11 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 4 days, with no loss greater than $50 million, and with no loss
exceeding the VAR measure.
61
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.
Earnings-at-risk stress testing
The VAR and stress-test measures described above illustrate the total economic sensitivity of the
Firms balance sheet to changes in market variables. The effect of interest rate exposure on
reported Net income also is critical. Interest rate risk exposure in the Firms core nontrading
business activities (i.e., asset/liability management positions) results from on and offbalance
sheet positions. The Firm conducts simulations of changes in NII from its nontrading activities
under a variety of interest rate scenarios. 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.
62
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, 2007, and December
31, 2006, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate change in rates |
|
(in millions) |
|
+200bp |
|
|
+100bp |
|
|
-100bp |
|
|
-200bp |
|
|
March 31, 2007 |
|
$ |
(294 |
) |
|
$ |
(87 |
) |
|
$ |
(58 |
) |
|
$ |
(227 |
) |
December 31,
2006 |
|
|
(101 |
) |
|
|
28 |
|
|
|
(21 |
) |
|
|
(182 |
) |
|
The primary change in earnings-at-risk from December 31, 2006, reflects a higher level of AFS
securities and other positioning. 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.
PRIVATE EQUITY RISK MANAGEMENT
For a discussion of Private Equity Risk Management, see page 81 of JPMorgan Chases 2006
Annual Report. At March 31, 2007, the carrying value of the
Private Equity portfolio was $6.4
billion, of which $389 million represented positions traded in the public markets.
OPERATIONAL RISK MANAGEMENT
For a discussion of JPMorgan Chases operational risk management, refer to page 81 of JPMorgan
Chases 2006 Annual Report.
REPUTATION AND FIDUCIARY RISK MANAGEMENT
For a discussion of the Firms Reputation and Fiduciary Risk Management, see page 82 of
JPMorgan Chases 2006 Annual Report.
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and Regulation
section on pages 14 of JPMorgan Chases 2006 Annual Report.
Dividends
At March 31, 2007, JPMorgan Chases bank subsidiaries could pay, in the aggregate, $15.3 billion in
dividends to their respective bank holding companies without prior approval of their relevant
banking regulators.
63
CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM
JPMorgan Chases accounting policies and use of estimates are integral to understanding its
reported results. The Firms most complex accounting estimates require managements judgment to
ascertain the valuation of assets and liabilities. The Firm has established detailed policies and
control procedures intended to ensure that valuation methods, including any judgments made as part
of such methods, are well controlled, independently reviewed and applied consistently from period
to period. In addition, the policies and procedures are intended to ensure that the process for
changing methodologies occurs in an appropriate manner. The Firm believes its estimates for
determining the valuation of its assets and liabilities are appropriate.
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 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 13 on pages 113114 of JPMorgan
Chases 2006 Annual Report. The methodology for calculating the Allowance for loan losses and the
Allowance for lending-related commitments involves significant judgment. For a further description
of these judgments, see Allowance for credit losses on page 83 of JPMorgan Chases 2006 Annual
Report; for amounts recorded as of March 31, 2007 and 2006, see allowance for credit losses on page
59 and Note 14 on page 90 of this Form 10-Q.
As noted on page 83 of the JPMorgan Chases 2006 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 $1.2 billion as of March 31, 2007. 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.
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, Private equity investments,
MSRs,
structured liabilities and certain loans. Certain held-for-sale loans and physical commodities are
carried at the lower of cost or fair value. At March 31, 2007,
$564.4 billion of the Firms assets and
$219.4 billion of liabilities were recorded at fair value.
On
January 1, 2007, the Firm chose early adoption of SFAS 157 and SFAS 159. For further information,
see Accounting and Reporting Developments on page 65, and Notes 3 and 4 on pages 7180 of this
Form 10-Q.
Goodwill impairment
For a description of the significant valuation judgments associated with goodwill impairment, see
Goodwill impairment on page 85 of JPMorgan Chases 2006 Annual Report .
64
ACCOUNTING AND REPORTING DEVELOPMENTS
Accounting for uncertainty in income taxes
In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income
taxes recognized under SFAS 109. FIN 48 addresses the recognition and measurement of tax positions
taken or expected to be taken, and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, and disclosure. The Firm adopted and applied
FIN 48 under the transition provisions to all of its income tax positions at the required effective
date of January 1, 2007, resulting in a $436 million cumulative effect increase to Retained
earnings, a reduction in Goodwill of $113 million and a $549 million decrease in the liability for
income taxes. For additional information related to the Firms adoption of FIN 48, see Note 20 on
page 100 of this Form 10-Q.
Changes in timing of cash flows related to income taxes generated by a leveraged lease
In July 2006, the FASB issued FSP FAS 13-2. FSP FAS 13-2 requires the recalculation of returns on
leveraged leases if there is a change or projected change in the timing of cash flows relating to
income taxes generated by a leveraged lease. The Firm adopted FSP FAS 13-2 at the required
effective date of January 1, 2007. Implementation of FSP FAS
13-2 did not have a significant impact on
the Firms financial position and results of operations.
Fair value measurements adoption of SFAS 157
In September 2006, the FASB issued SFAS 157, which is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted. SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about assets and liabilities measured
at fair value. The new standard provides a consistent definition of fair value which focuses on
exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over
entity-specific inputs. The standard also establishes a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an asset or liability as of
the measurement date. SFAS 157 nullifies the guidance in EITF 02-3 which required deferral of
profit at inception of a derivative transaction in the absence of observable data supporting the
valuation technique. The standard also eliminates large position discounts for financial
instruments quoted in active markets and requires consideration of JPMorgan Chases own credit
quality when valuing liabilities.
JPMorgan Chase chose early adoption for SFAS 157 effective January 1, 2007, and recorded a
cumulative effect increase to Retained earnings of $287 million primarily related to the release of
profit previously deferred in accordance with EITF 02-3. In order to determine the amount of this
transition adjustment and to confirm that JPMorgan Chases valuation policies are consistent with
exit price as prescribed by SFAS 157, JPMorgan Chase reviewed its derivative valuations using all
available evidence including recent transactions in the marketplace, indicative pricing services
and the results of back-testing similar types of transactions. In addition, as a result of the adoption
of SFAS 157, JPMorgan Chase recognized $391 million of additional Net income in the 2007 first
quarter, comprised of a $103 million benefit relating to the incorporation of an
adjustment to the valuation of JPMorgan Chases derivative liabilities and other liabilities
measured at fair value that reflects the credit quality of JPMorgan Chase, and a $288 million
benefit relating to the valuation of nonpublic private equity investments. The adoption of SFAS 157
primarily affected the IB and the Private Equity business within Corporate. For additional
information related to the Firms adoption of SFAS 157, see Note 3 on page 7177 of this Form
10-Q.
Fair value option for financial assets and financial liabilities adoption of SFAS 159
In February 2007, the FASB issued SFAS 159, which is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted. SFAS 159 provides the option to elect fair value
as an alternative measurement for selected financial assets, financial liabilities, unrecognized
firm commitments, and written loan commitments. Under SFAS 159, fair value is used for both the
initial and subsequent measurement of the designated assets, liabilities and commitments, with the
changes in fair value recognized in Net income. JPMorgan Chase chose early adoption for SFAS 159
effective January 1, 2007, and as a result, recorded a cumulative effect increase to Retained earnings of
$199 million. For additional information related to the Firms adoption of SFAS 159, see Note 4
on page 7780 of this Form 10-Q.
65
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
(in millions, except per share data) |
|
2007 |
|
|
2006 |
|
|
Revenue |
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,739 |
|
|
$ |
1,169 |
|
Principal transactions |
|
|
4,471 |
|
|
|
2,709 |
|
Lending & deposit related fees |
|
|
895 |
|
|
|
841 |
|
Asset management, administration and commissions |
|
|
3,186 |
|
|
|
2,874 |
|
Securities gains (losses) |
|
|
2 |
|
|
|
(116 |
) |
Mortgage fees and related income |
|
|
476 |
|
|
|
241 |
|
Credit card income |
|
|
1,563 |
|
|
|
1,910 |
|
Other income |
|
|
518 |
|
|
|
554 |
|
|
Noninterest revenue |
|
|
12,850 |
|
|
|
10,182 |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
16,636 |
|
|
|
13,236 |
|
Interest expense |
|
|
10,518 |
|
|
|
8,243 |
|
|
Net interest income |
|
|
6,118 |
|
|
|
4,993 |
|
|
Total net revenue |
|
|
18,968 |
|
|
|
15,175 |
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,008 |
|
|
|
831 |
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
Compensation expense |
|
|
6,234 |
|
|
|
5,548 |
|
Occupancy expense |
|
|
640 |
|
|
|
594 |
|
Technology, communications and equipment expense |
|
|
922 |
|
|
|
869 |
|
Professional & outside services |
|
|
1,200 |
|
|
|
1,008 |
|
Marketing |
|
|
482 |
|
|
|
519 |
|
Other expense |
|
|
735 |
|
|
|
816 |
|
Amortization of intangibles |
|
|
353 |
|
|
|
355 |
|
Merger costs |
|
|
62 |
|
|
|
71 |
|
|
Total noninterest expense |
|
|
10,628 |
|
|
|
9,780 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense |
|
|
7,332 |
|
|
|
4,564 |
|
Income tax expense |
|
|
2,545 |
|
|
|
1,537 |
|
|
Income from continuing operations |
|
|
4,787 |
|
|
|
3,027 |
|
Income from discontinued operations |
|
|
|
|
|
|
54 |
|
|
Net income |
|
$ |
4,787 |
|
|
$ |
3,081 |
|
|
Net income applicable to common stock |
|
$ |
4,787 |
|
|
$ |
3,077 |
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.38 |
|
|
$ |
0.87 |
|
Net income |
|
|
1.38 |
|
|
|
0.89 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.34 |
|
|
$ |
0.85 |
|
Net income |
|
|
1.34 |
|
|
|
0.86 |
|
|
|
|
|
|
|
|
|
|
Average basic shares |
|
|
3,456.4 |
|
|
|
3,472.7 |
|
Average diluted shares |
|
|
3,559.5 |
|
|
|
3,570.8 |
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
66
JPMORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in millions, except share data) |
|
2007 |
|
|
2006 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
31,836 |
|
|
$ |
40,412 |
|
Deposits with banks |
|
|
30,973 |
|
|
|
13,547 |
|
Federal
funds sold and securities purchased under resale agreements
(included $15,836 at fair value
at March 31, 2007) |
|
|
144,306 |
|
|
|
140,524 |
|
Securities borrowed |
|
|
84,800 |
|
|
|
73,688 |
|
Trading
assets (included assets pledged of $93,180 at March 31, 2007, and $82,474 at December 31, 2006) |
|
|
423,331 |
|
|
|
365,738 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale
(included assets pledged of $58,269 at March 31, 2007, and $39,571 at December 31, 2006) |
|
|
96,975 |
|
|
|
91,917 |
|
Held-to-maturity
(fair value: $56 at March 31, 2007, and $60 at December 31, 2006) |
|
|
54 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
Loans
(included $965 accounted for at fair value at March 31, 2007) |
|
|
449,765 |
|
|
|
483,127 |
|
Allowance for loan losses |
|
|
(7,300 |
) |
|
|
(7,279 |
) |
|
Loans, net of Allowance for loan losses |
|
|
442,465 |
|
|
|
475,848 |
|
|
|
|
|
|
|
|
|
|
Private
equity investments (included $6,701 at fair value at March 31,
2007) |
|
|
6,788 |
|
|
|
6,359 |
|
Accrued interest and accounts receivable |
|
|
23,663 |
|
|
|
22,891 |
|
Premises and equipment |
|
|
8,728 |
|
|
|
8,735 |
|
Goodwill |
|
|
45,063 |
|
|
|
45,186 |
|
Other intangible assets: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
7,937 |
|
|
|
7,546 |
|
Purchased credit card relationships |
|
|
2,758 |
|
|
|
2,935 |
|
All other intangibles |
|
|
4,205 |
|
|
|
4,371 |
|
Other assets
(included $12,675 at fair value at March 31, 2007) |
|
|
55,036 |
|
|
|
51,765 |
|
|
Total assets |
|
$ |
1,408,918 |
|
|
$ |
1,351,520 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
123,942 |
|
|
$ |
132,781 |
|
Interest-bearing
(included $1,402 at fair value at March 31, 2007) |
|
|
342,368 |
|
|
|
337,812 |
|
Non-U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
8,104 |
|
|
|
7,662 |
|
Interest-bearing
(included $3,981 at fair value at March 31, 2007) |
|
|
152,014 |
|
|
|
160,533 |
|
|
Total deposits |
|
|
626,428 |
|
|
|
638,788 |
|
Federal
funds purchased and securities sold under repurchase agreements
(included $6,537
at fair value at March 31, 2007) |
|
|
218,917 |
|
|
|
162,173 |
|
Commercial paper |
|
|
25,354 |
|
|
|
18,849 |
|
Other
borrowed funds (included $7,445 at fair value at March 31, 2007) |
|
|
19,871 |
|
|
|
18,053 |
|
Trading liabilities |
|
|
144,625 |
|
|
|
147,957 |
|
Accounts
payable, accrued expenses and other liabilities (included the
Allowance for lending-related
commitments of $553 at March 31, 2007, and $524 at December 31, 2006) |
|
|
87,603 |
|
|
|
88,096 |
|
Beneficial
interests issued by consolidated VIEs (included $2,354 at fair value at March 31, 2007) |
|
|
13,109 |
|
|
|
16,184 |
|
Long-term
debt (included $53,012 at fair
value at March 31, 2007, and $25,370 at December 31, 2006) |
|
|
143,274 |
|
|
|
133,421 |
|
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities |
|
|
12,033 |
|
|
|
12,209 |
|
|
Total liabilities |
|
|
1,291,214 |
|
|
|
1,235,730 |
|
|
Commitments and contingencies (see Note 21 of this Form 10-Q) |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Common stock ($1 par value; authorized 9,000,000,000 shares at March 31, 2007 and December 31, 2006; issued
3,657,776,566 shares and 3,657,786,282 shares at March 31, 2007, and December 31, 2006, respectively) |
|
|
3,658 |
|
|
|
3,658 |
|
Capital surplus |
|
|
77,760 |
|
|
|
77,807 |
|
Retained earnings |
|
|
48,105 |
|
|
|
43,600 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,482 |
) |
|
|
(1,557 |
) |
Treasury stock, at cost (241,485,038 shares at March 31, 2007, and 196,102,381 shares at December 31, 2006) |
|
|
(10,337 |
) |
|
|
(7,718 |
) |
|
Total stockholders equity |
|
|
117,704 |
|
|
|
115,790 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,408,918 |
|
|
$ |
1,351,520 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
67
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
(in millions, except per share data) |
|
2007 |
|
|
2006 |
|
|
Preferred stock |
|
|
|
|
|
|
|
|
Balance at beginning of the year |
|
$ |
|
|
|
$ |
139 |
|
Redemption of preferred stock |
|
|
|
|
|
|
(139 |
) |
|
Balance at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
3,658 |
|
|
|
3,618 |
|
Issuance of common stock |
|
|
|
|
|
|
27 |
|
|
Balance at end of period |
|
|
3,658 |
|
|
|
3,645 |
|
|
|
|
|
|
|
|
|
|
|
Capital surplus |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
77,807 |
|
|
|
74,994 |
|
Shares
issued and commitments to issue common stock for employee
stock-based compensation awards and related tax effects |
|
|
(47 |
) |
|
|
1,159 |
|
|
Balance at end of period |
|
|
77,760 |
|
|
|
76,153 |
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
43,600 |
|
|
|
33,848 |
|
Cumulative effect of change in accounting principles |
|
|
915 |
|
|
|
172 |
|
|
Balance at beginning of year, adjusted |
|
|
44,515 |
|
|
|
34,020 |
|
Net income |
|
|
4,787 |
|
|
|
3,081 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
(4 |
) |
Common stock ($0.34 per share each period) |
|
|
(1,197 |
) |
|
|
(1,205 |
) |
|
Balance at end of period |
|
|
48,105 |
|
|
|
35,892 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(1,557 |
) |
|
|
(626 |
) |
Cumulative effect of change in accounting principles |
|
|
(1 |
) |
|
|
|
|
|
Balance at beginning of year, adjusted |
|
|
(1,558 |
) |
|
|
(626 |
) |
Other comprehensive income (loss) |
|
|
76 |
|
|
|
(391 |
) |
|
Balance at end of period |
|
|
(1,482 |
) |
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(7,718 |
) |
|
|
(4,762 |
) |
Purchase of treasury stock |
|
|
(4,002 |
) |
|
|
(1,291 |
) |
Reissuance from treasury stock |
|
|
1,512 |
|
|
|
|
|
Share repurchases related to employee stock-based compensation awards |
|
|
(129 |
) |
|
|
(283 |
) |
|
Balance at end of period |
|
|
(10,337 |
) |
|
|
(6,336 |
) |
|
Total stockholders equity |
|
$ |
117,704 |
|
|
$ |
108,337 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,787 |
|
|
$ |
3,081 |
|
Other comprehensive income (loss) |
|
|
76 |
|
|
|
(391 |
) |
|
Comprehensive income |
|
$ |
4,863 |
|
|
$ |
2,690 |
|
|
The
Notes to consolidated financial statements (unaudited) are an
integral part of these statements.
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,787 |
|
|
$ |
3,081 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating
activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,008 |
|
|
|
831 |
|
Depreciation and amortization |
|
|
523 |
|
|
|
482 |
|
Amortization of intangibles |
|
|
353 |
|
|
|
355 |
|
Deferred tax expense |
|
|
1,054 |
|
|
|
554 |
|
Investment securities (gains) losses |
|
|
(2 |
) |
|
|
116 |
|
Private equity unrealized gains |
|
|
(650 |
) |
|
|
(84 |
) |
Stock-based compensation |
|
|
511 |
|
|
|
839 |
|
Originations and purchases of loans held-for-sale |
|
|
(29,250 |
) |
|
|
(26,733 |
) |
Proceeds from sales and securitizations of loans held-for-sale |
|
|
31,090 |
|
|
|
25,760 |
|
Net change in: |
|
|
|
|
|
|
|
|
Trading assets |
|
|
(42,056 |
) |
|
|
(9,330 |
) |
Securities borrowed |
|
|
(11,112 |
) |
|
|
(18,676 |
) |
Accrued interest and accounts receivable |
|
|
(772 |
) |
|
|
848 |
|
Other assets |
|
|
(3,912 |
) |
|
|
(2,459 |
) |
Trading liabilities |
|
|
(3,070 |
) |
|
|
11,383 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
(181 |
) |
|
|
(6,330 |
) |
Other operating adjustments |
|
|
161 |
|
|
|
222 |
|
|
Net cash used in operating activities |
|
|
(51,518 |
) |
|
|
(19,141 |
) |
|
Investing activities |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits with banks |
|
|
(17,426 |
) |
|
|
11,405 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
(3,803 |
) |
|
|
(19,774 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
Proceeds |
|
|
4 |
|
|
|
5 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Proceeds from maturities |
|
|
7,791 |
|
|
|
6,456 |
|
Proceeds from sales |
|
|
14,829 |
|
|
|
30,369 |
|
Purchases |
|
|
(28,038 |
) |
|
|
(56,931 |
) |
Proceeds from sales and securitization of loans held-for-investment |
|
|
14,195 |
|
|
|
7,537 |
|
Other changes in loans, net |
|
|
1,649 |
|
|
|
(13,778 |
) |
Net cash
used in business acquisitions |
|
|
|
|
|
|
(663 |
) |
All other investing activities, net |
|
|
(1,047 |
) |
|
|
873 |
|
|
Net cash used in investing activities |
|
|
(11,846 |
) |
|
|
(34,501 |
) |
|
Financing activities |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
(14,612 |
) |
|
|
25,483 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
56,764 |
|
|
|
25,081 |
|
Commercial paper and other borrowed funds |
|
|
8,319 |
|
|
|
943 |
|
Proceeds
from the issuance of long-term debt and trust preferred capital debt securities |
|
|
23,231 |
|
|
|
12,354 |
|
Repayments
of long-term debt and trust preferred capital debt securities |
|
|
(14,880 |
) |
|
|
(9,316 |
) |
Net proceeds from the issuance of stock and stock-related awards |
|
|
658 |
|
|
|
393 |
|
Excess tax benefits related to stock-based compensation |
|
|
216 |
|
|
|
135 |
|
Redemption of preferred stock |
|
|
|
|
|
|
(139 |
) |
Treasury stock purchased |
|
|
(4,002 |
) |
|
|
(1,291 |
) |
Cash dividends paid |
|
|
(1,207 |
) |
|
|
(1,215 |
) |
All other financing activities, net |
|
|
256 |
|
|
|
1,393 |
|
|
Net cash provided by financing activities |
|
|
54,743 |
|
|
|
53,821 |
|
|
Effect of exchange rate changes on cash and due from banks |
|
|
45 |
|
|
|
54 |
|
Net
(decrease) increase in cash and due from banks |
|
|
(8,576 |
) |
|
|
233 |
|
Cash and due from banks at the beginning of the year |
|
|
40,412 |
|
|
|
36,670 |
|
|
Cash and due from banks at the end of the period |
|
$ |
31,836 |
|
|
$ |
36,903 |
|
|
Cash interest paid |
|
$ |
10,699 |
|
|
$ |
8,395 |
|
Cash income taxes paid |
|
|
1,596 |
|
|
|
234 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
69
See Glossary of Terms on pages 107109 of this Form 10-Q for definitions of terms used
throughout the Notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 BASIS OF PRESENTATION
JPMorgan Chase & Co. (JPMorgan Chase or the Firm), a financial holding company incorporated
under Delaware law in 1968, is a leading global financial services firm and one of the largest
banking institutions in the United States, with operations worldwide. The Firm is a leader in
investment banking, financial services for consumers and businesses, financial transaction
processing, asset management and private equity. For a discussion of the Firms business segment
information, see Note 25 on pages 103105 of this Form 10-Q.
The accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to
accounting principles generally accepted in the United States of America (U.S. GAAP).
Additionally, where applicable, the policies conform to the accounting and reporting guidelines
prescribed by bank regulatory authorities. The unaudited consolidated financial statements prepared
in conformity with U.S. GAAP require management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expenses, and disclosures of contingent assets
and liabilities. Actual results could be different from these estimates. In the opinion of
management, all normal recurring adjustments have been included for a fair statement of this
interim financial information. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes thereto included
in JPMorgan Chases Annual Report on Form 10-K for the year
ended December 31, 2006, as amended by the Form 8-K filed on
May 10, 2007 (the 2006
Annual Report).
Certain amounts in the prior periods have been reclassified to conform to the current presentation.
Consolidation
The consolidated financial statements include the accounts of JPMorgan Chase and other entities in
which the Firm has a controlling financial interest. All material intercompany balances and
transactions have been eliminated.
The most usual condition for a controlling financial interest is the ownership of a majority of the
voting interests of the entity. However, a controlling financial interest also may be deemed to
exist with respect to entities, such as special purpose entities (SPEs), through arrangements
that do not involve controlling voting interests.
SPEs are an important part of the financial markets, providing market liquidity by facilitating
investors access to specific portfolios of assets and risks. For example, they are critical to the
functioning of the mortgage- and asset-backed securities and commercial paper markets. SPEs may be
organized as trusts, partnerships or corporations and are typically set up for a single, discrete
purpose. SPEs are not typically operating entities and usually have a limited life and no
employees. The basic SPE structure involves a company selling assets to the SPE. The SPE funds the
purchase of those assets by issuing securities to investors. The legal documents that govern the
transaction describe how the cash earned on the assets must be allocated to the SPEs investors and
other parties that have rights to those cash flows. SPEs can be structured to be bankruptcy-remote,
thereby insulating investors from the impact of the creditors of other entities, including the
seller of the assets.
There are two different accounting frameworks applicable to SPEs: the qualifying SPE (QSPE)
framework under SFAS 140; and the variable interest entity (VIE) framework under FIN 46R. The
applicable framework depends on the nature of the entity and the Firms relation to that entity.
The QSPE framework is applicable when an entity transfers (sells) financial assets to an SPE
meeting certain criteria defined in SFAS 140. These criteria are designed to ensure that the
activities of the entity are essentially predetermined at the inception of the vehicle and that the
transferor of the financial assets cannot exercise control over the entity and the assets therein.
Entities meeting these criteria are not consolidated by the transferor or other counterparties as
long as they do not have the unilateral ability to liquidate or to cause the entity no longer to
meet the QSPE criteria. The Firm primarily follows the QSPE model for securitizations of its
residential and commercial mortgages, credit card loans and automobile loans. For further details,
se