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
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For the Quarterly Period Ended September 30, 2007
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Commission file number 1-5805 |
JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
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Delaware
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13-2624428 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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270 Park Avenue, New York, New York
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10017 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (212) 270-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
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 þ 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 þ No
Number
of shares of common stock outstanding as of October 31, 2007:
3,359,043,795
FORM 10-Q
TABLE OF CONTENTS
2
JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
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(unaudited) |
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Nine months ended |
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(in millions, except per share, headcount and ratio data) |
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September 30, |
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As of or for the period ended, |
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3Q07 |
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2Q07 |
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1Q07 |
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4Q06 |
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3Q06 |
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2007 |
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2006 |
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Selected income statement data |
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Noninterest revenue(a) |
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$ |
8,786 |
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$ |
12,593 |
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$ |
12,850 |
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$ |
10,501 |
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$ |
10,166 |
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$ |
34,229 |
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$ |
30,256 |
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Net interest income |
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7,326 |
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6,315 |
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6,118 |
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5,692 |
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5,379 |
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19,759 |
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15,550 |
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Total net revenue |
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16,112 |
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18,908 |
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18,968 |
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16,193 |
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15,545 |
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53,988 |
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45,806 |
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Provision for credit losses |
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1,785 |
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1,529 |
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1,008 |
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1,134 |
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812 |
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4,322 |
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2,136 |
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Noninterest expense |
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9,327 |
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11,028 |
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10,628 |
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9,885 |
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9,796 |
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30,983 |
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28,958 |
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Income tax expense |
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1,627 |
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2,117 |
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2,545 |
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1,268 |
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1,705 |
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6,289 |
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4,969 |
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Income from continuing operations |
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3,373 |
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4,234 |
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4,787 |
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3,906 |
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3,232 |
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12,394 |
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9,743 |
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Income from discontinued operations(b) |
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620 |
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65 |
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175 |
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Net income |
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$ |
3,373 |
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$ |
4,234 |
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$ |
4,787 |
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$ |
4,526 |
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$ |
3,297 |
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$ |
12,394 |
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$ |
9,918 |
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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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$ |
1.00 |
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$ |
1.24 |
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$ |
1.38 |
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$ |
1.13 |
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$ |
0.93 |
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$ |
3.63 |
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$ |
2.81 |
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Net income |
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1.00 |
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1.24 |
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1.38 |
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1.31 |
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0.95 |
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3.63 |
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2.86 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
0.97 |
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$ |
1.20 |
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$ |
1.34 |
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$ |
1.09 |
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$ |
0.90 |
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$ |
3.52 |
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$ |
2.73 |
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Net income |
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0.97 |
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1.20 |
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1.34 |
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1.26 |
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0.92 |
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3.52 |
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2.78 |
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Cash dividends declared per share |
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0.38 |
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0.38 |
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0.34 |
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0.34 |
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0.34 |
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1.10 |
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1.02 |
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Book value per share |
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35.72 |
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35.08 |
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34.45 |
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33.45 |
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32.75 |
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Common shares outstanding |
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Average: Basic |
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3,376 |
# |
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3,415 |
# |
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3,456 |
# |
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3,465 |
# |
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3,469 |
# |
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3,416 |
# |
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3,472 |
# |
Diluted |
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3,478 |
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3,522 |
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3,560 |
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3,579 |
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3,574 |
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3,520 |
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3,572 |
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Common shares at period end |
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3,359 |
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3,399 |
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3,416 |
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3,462 |
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3,468 |
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Share price(c) |
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High |
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$ |
50.48 |
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$ |
53.25 |
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$ |
51.95 |
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$ |
49.00 |
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$ |
47.49 |
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$ |
53.25 |
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$ |
47.49 |
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Low |
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42.16 |
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47.70 |
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45.91 |
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45.51 |
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40.40 |
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42.16 |
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37.88 |
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Close |
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45.82 |
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48.45 |
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48.38 |
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48.30 |
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46.96 |
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Market capitalization |
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153,901 |
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164,659 |
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165,280 |
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167,199 |
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162,835 |
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Financial ratios |
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Return on common equity (ROE):(d) |
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Income from continuing operations |
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11 |
% |
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14 |
% |
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17 |
% |
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14 |
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11 |
% |
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14 |
% |
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12 |
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Net income |
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11 |
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14 |
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17 |
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16 |
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12 |
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14 |
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12 |
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Return on assets (ROA):(d) |
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Income from continuing operations |
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0.91 |
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1.19 |
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1.41 |
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1.14 |
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0.98 |
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1.16 |
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1.02 |
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Net income |
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0.91 |
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1.19 |
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1.41 |
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1.32 |
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1.00 |
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1.16 |
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1.02 |
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Overhead ratio |
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58 |
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58 |
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56 |
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61 |
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63 |
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57 |
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63 |
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Tier 1 capital ratio |
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8.4 |
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8.4 |
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8.5 |
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8.7 |
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8.6 |
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Total capital ratio |
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12.5 |
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12.0 |
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11.8 |
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12.3 |
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12.1 |
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Selected balance sheet data (period-end) |
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Total assets |
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$ |
1,479,575 |
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$ |
1,458,042 |
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$ |
1,408,918 |
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$ |
1,351,520 |
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$ |
1,338,029 |
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Loans |
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486,320 |
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465,037 |
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449,765 |
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483,127 |
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463,544 |
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Deposits |
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678,091 |
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651,370 |
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626,428 |
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638,788 |
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582,115 |
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Long-term debt |
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173,696 |
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159,493 |
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143,274 |
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133,421 |
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126,619 |
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Total stockholders equity |
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119,978 |
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119,211 |
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117,704 |
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115,790 |
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113,561 |
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Headcount |
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179,847 |
# |
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179,664 |
# |
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176,314 |
# |
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174,360 |
# |
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171,589 |
# |
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Credit quality metrics |
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Allowance for credit losses |
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$ |
8,971 |
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$ |
8,399 |
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$ |
7,853 |
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$ |
7,803 |
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$ |
7,524 |
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Nonperforming assets(e) |
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3,181 |
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2,586 |
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2,421 |
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2,341 |
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2,300 |
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Allowance for loan losses to total loans(f) |
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1.76 |
% |
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1.71 |
% |
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1.74 |
% |
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1.70 |
% |
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1.65 |
% |
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Net charge-offs |
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$ |
1,221 |
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$ |
985 |
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$ |
903 |
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$ |
930 |
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$ |
790 |
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$ |
3,109 |
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$ |
2,112 |
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Net charge-off rate(d)(f) |
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1.07 |
% |
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0.90 |
% |
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0.85 |
% |
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0.84 |
% |
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0.74 |
% |
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0.94 |
% |
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|
0.69 |
% |
Wholesale net charge-off (recovery) rate(d)(f) |
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0.19 |
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(0.07 |
) |
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(0.02 |
) |
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0.07 |
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(0.03 |
) |
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0.04 |
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(0.04 |
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Managed card net charge-off rate(d) |
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3.64 |
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3.62 |
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3.57 |
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3.45 |
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3.58 |
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3.61 |
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3.29 |
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(a) |
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The Firm adopted SFAS 157
in the first quarter of 2007. See Note 3 on page 73 of this Form 10-Q
for additional information. |
(b) |
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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) |
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JPMorgan Chases common stock is listed and traded on the New York Stock Exchange, the London
Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of
JPMorgan Chases common stock are from The New York Stock Exchange Composite Transaction Tape. |
(d) |
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Ratios are based upon annualized amounts.
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(e) |
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Excludes purchased wholesale loans held-for-sale. |
(f) |
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End-of-period and average Loans at fair value and loans held-for-sale were excluded when
calculating the allowance coverage ratios and net charge-off rates, respectively. |
3
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q provides managements discussion and analysis (MD&A) of the
financial condition and results of operations for JPMorgan Chase. See the Glossary of terms on
pages 114116 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 119 of this Form 10-Q and the JPMorgan Chase Annual Report
on Form 10-K for the year ended December 31, 2006, as amended (2006 Annual Report or 2006 Form
10-K), Part I, Item 1A: Risk factors to which
reference is hereby made).
INTRODUCTION
JPMorgan Chase & Co. (JPMorgan Chase or the Firm), a financial holding company incorporated
under Delaware law in 1968, is a leading global financial services firm and one of the largest
banking institutions in the United States of America (U.S.), with $1.5 trillion in assets, $120.0
billion in stockholders equity and operations worldwide. The Firm is a leader in investment
banking, financial services for consumers and businesses, financial transaction processing and
asset management. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the
U.S. and many of the worlds most prominent corporate, institutional and government clients.
JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank, National Association
(JPMorgan Chase Bank, N.A.), a national banking association with branches in 17 states; and Chase
Bank USA, National Association (Chase Bank USA, N.A.), a national bank that is the Firms credit
card issuing bank. JPMorgan Chases principal nonbank subsidiary is J.P. Morgan Securities Inc.,
the Firms U.S. investment banking firm.
JPMorgan Chases activities are organized, for management reporting purposes, into six business
segments, as well as Corporate. 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 3,096 bank branches, 8,943 ATMs and 280 mortgage offices, and through
relationships with more than 15,000 auto dealerships and 4,300 schools and universities. Over
13,000 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. More than 1,200 additional mortgage officers provide home loans throughout the country.
Card Services
With 154 million cards in circulation and $149.1 billion in managed loans, Chase Card Services
(CS) is one of the nations largest credit card issuers. Customers used Chase cards for $259.1
billion worth of transactions in the nine months ended September 30, 2007.
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, the 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.
4
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 14.3 billion
transactions in the nine months ended September 30, 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 revenue
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 $1.5 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, comprised of JPMorgan Chase Bank, N.A. and three other
firms (the investor group), announced an Agreement and Plan of Merger (the merger agreement) to
acquire SLM Corporation (Sallie Mae) for $60 per share in
cash. On September 26, 2007, the investor
group advised Sallie Mae that if the conditions to the closing of the merger agreement were
required to be measured at that time, the conditions to closing would not be satisfied because
Sallie Mae had suffered a Material Adverse Effect as defined in the merger agreement. On October 2,
2007, the investor group advised Sallie Mae that it would be willing to revise its offer, and
proposed a revised purchase price for Sallie Mae, composed of $50 in cash and warrants with a
payout of up to an additional $10 per share. That offer was rejected by Sallie Mae and, on October
8, 2007, Sallie Mae filed a lawsuit in Delaware Chancery Court against the investor group. The
lawsuit seeks a declaration that, among other things, the investor group repudiated the merger
agreement, that no Material Adverse Effect has occurred and that Sallie Mae may terminate the
Agreement and collect a $900 million termination fee (the reverse termination fee), of which
JPMorgan Chases portion would be approximately $224 million. On October 15, 2007, the investor
group filed an Answer and Counterclaims to Sallie Maes lawsuit. In addition, the investor group
has waived Sallie Maes obligations to comply with certain of its agreements and covenants under
the merger agreement, including Sallie Maes agreements to refrain from negotiating with other
possible buyers, and has waived its right to receive the reverse termination fee from Sallie Mae in
the event that another buyer acquires Sallie Mae. A trial date has not yet been set.
Headquarters for the Investment Bank in London and New York
On May 3, 2007, JPMorgan Chase announced plans to build a new investment banking headquarters in
London. The building will have more than one million square feet with at least five trading floors
of approximately 70,000 useable square feet each. The Firm is expecting the building to open late
2012. On June 14, 2007, JPMorgan Chase announced it will build a new 1.3 million square-foot global
investment banking headquarters in the World Trade Center complex in New York City. The Firm
expects the building to open by late 2012.
Master Liquidity Enhancement Conduit
On October 15, 2007, JPMorgan Chase and several other financial institutions announced an agreement
in principle to create a master liquidity enhancement conduit (M-LEC) and provide
liquidity support for it in order to enhance liquidity in the market for asset-backed commercial
paper and medium-term notes issued by structured investment vehicles. The financial institutions
are working toward the finalization of the various terms.
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
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except per share and ratio data) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Selected income statement data |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
16,112 |
|
|
$ |
15,545 |
|
|
|
4 |
% |
|
$ |
53,988 |
|
|
$ |
45,806 |
|
|
|
18 |
% |
Provision for credit losses |
|
|
1,785 |
|
|
|
812 |
|
|
|
120 |
|
|
|
4,322 |
|
|
|
2,136 |
|
|
|
102 |
|
Total noninterest expense |
|
|
9,327 |
|
|
|
9,796 |
|
|
|
(5 |
) |
|
|
30,983 |
|
|
|
28,958 |
|
|
|
7 |
|
Income from continuing operations |
|
|
3,373 |
|
|
|
3,232 |
|
|
|
4 |
|
|
|
12,394 |
|
|
|
9,743 |
|
|
|
27 |
|
Income from discontinued operations |
|
|
|
|
|
|
65 |
|
|
NM |
|
|
|
|
|
|
|
175 |
|
|
NM |
|
Net income |
|
|
3,373 |
|
|
|
3,297 |
|
|
|
2 |
|
|
|
12,394 |
|
|
|
9,918 |
|
|
|
25 |
|
|
|
|
|
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|
Diluted earnings per share |
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.97 |
|
|
$ |
0.90 |
|
|
|
8 |
% |
|
$ |
3.52 |
|
|
$ |
2.73 |
|
|
|
29 |
% |
Net income |
|
|
0.97 |
|
|
|
0.92 |
|
|
|
5 |
|
|
|
3.52 |
|
|
|
2.78 |
|
|
|
27 |
|
Return on common equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
11 |
% |
|
|
11 |
% |
|
|
|
|
|
|
14 |
% |
|
|
12 |
% |
|
|
|
|
Net income |
|
|
11 |
|
|
|
12 |
|
|
|
|
|
|
|
14 |
|
|
|
12 |
|
|
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|
Business overview
The Firm reported 2007 third-quarter Net income of $3.4 billion, or $0.97 per share, compared with
Net income of $3.3 billion, or $0.92 per share, for the third quarter of 2006. Return on common
equity for the quarter was 11% compared with 12% in the prior year.
Net income for the first nine months of 2007 was $12.4 billion, or $3.52 per share, compared with
$9.9 billion, or $2.78 per share, in the prior year. Return on common equity was 14% for the first
nine months of 2007, compared with 12% for the prior-year period.
In the first quarter of 2007, the Firm adopted SFAS 157 (Fair Value Measurements) and SFAS 159
(Fair Value Option). For a discussion of SFAS 157 and SFAS 159, see Note 3 on pages 7380 and
Note 4 on pages 8083 of this Form 10-Q.
The rate of growth in the global economy slowed in the third quarter, but still expanded by
approximately 4% annually, while inflation broadly remained well-contained. The industrial
economies continued to grow by approximately 2% annually (with the U.S. economy growing at 3.9%).
The developing economies continued to grow, although at a slightly
slower rate than their recent level of 8%
annual growth. Global financial markets were mixed during the quarter, and capital markets
activity declined from the historically high levels of the first six
months of 2007, as concerns
about losses on U.S. subprime mortgage investments triggered a flight to quality in the capital
markets and credit markets experienced spread widening and lower
levels of liquidity. In spite of these challenges, both U.S. and
international equity markets posted gains during the quarter: the S&P 500 and international indices
were up, on average, approximately 1% and 5%, respectively. The U.S.
Treasury market rallied, with rates dropping approximately 100 basis
points during the quarter. In September of 2007, the Federal Reserve Board
lowered the federal funds rate from 5.25%
to 4.75% in an effort to help offset the adverse effects of the market
disruption.
The
Firms performance benefited from investments in all of its
businesses, which has driven organic revenue growth and improved operating margins over time. These
benefits were tempered by the capital markets environment, which experienced significantly wider
spreads and reduced levels of liquidity in the mortgage and corporate credit markets, resulting in
lower earnings in the Investment Bank. In addition, continued weakness in the housing markets led
to an increased Provision for credit losses and, as a result, lower earnings in Retail Financial
Services. The Firms other businesses each posted improved
results versus the prior year with Asset Management and Treasury
& Securities Services reporting record earnings; Card Services
and Commercial Banking growing earnings at a double-digit pace; and
Private Equity realizing strong results.
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 1316 of this Form 10-Q .
Investment Bank net income decreased from the prior year, driven by lower net revenue as well as a
higher Provision for credit losses, partially offset by lower noninterest expense. Investment
banking fees decreased, reflecting lower debt underwriting fees offset partially by record advisory
fees. Fixed Income Markets revenue declined due to markdowns on leveraged lending funded loans and
unfunded commitments and markdowns on collateralized debt obligation (CDO)
6
warehouses and unsold positions. In addition, Fixed Income Markets declined due to weak
credit-trading performance and significantly lower commodities results, compared with a strong
prior-year quarter. These lower results in Fixed Income Markets were offset partially by record
revenue in both rates and currencies. Equity Markets revenue decreased from the prior year, as
weaker trading results were offset partially by strong client revenue across businesses. The
Provision for credit losses was up, driven by an increase in the allowance for credit losses,
primarily related to portfolio growth. The decrease in noninterest expense was due primarily to
lower performance-based compensation expense.
Retail Financial Services net income decreased from the prior year due to lower results in Regional
Banking, primarily related to an increase in the Provision for credit losses. Total net revenue
increased due primarily to the absence of a prior-year negative valuation adjustment to the
mortgage servicing right (MSR) asset, the Bank of New York transaction and higher deposit-related
fees. Total net revenue also benefited from the classification of certain mortgage loan origination
costs as expense, due to the adoption of SFAS 159, and wider spreads on loans. These benefits were
offset partially by markdowns on the mortgage warehouse and pipeline and a continued shift to
narrowerspread deposit products. The increase in the Provision for credit losses was due
primarily to an increase in the allowance for credit losses related to the home equity portfolio.
Total noninterest expense increased due to the Bank of New York transaction; the classification of
certain loan origination costs as expense, due to the adoption of SFAS 159; and investments in the
retail distribution network.
Card Services net income increased from the prior year, benefiting from higher revenue, partially
offset by an increase in the Provision for credit losses. Total net revenue increased, reflecting a
higher level of fees, higher average loan balances and increased net interchange income. These
benefits were offset partially by the discontinuation of certain billing practices (including the
elimination of certain over-limit fees and the two-cycle billing method for calculating finance
charges) and a narrower loan spread. The Managed provision for credit losses increased, reflecting
a higher level of net charge-offs. Credit quality was stable in the quarter. Total noninterest
expense was up slightly, primarily due to higher volume-related expense.
Commercial Banking grew net income over the prior-year period, as an increase in Total net revenue
and a decrease in Total noninterest expense were offset partially by a higher Provision for credit
losses. Total net revenue increased due to double-digit growth in liability and loan balances,
reflecting organic growth and the Bank of New York transaction. These increases were offset
partially by a continued shift to narrower-spread liability products and spread compression in the
loan and liability portfolios. The increase in Provision for credit losses largely reflected
portfolio activity and growth in loan balances. Total noninterest expense decreased, as lower
performance-based compensation expense was offset partially by higher volume-related expense.
Treasury & Securities Services achieved record net income, driven by record Total net revenue,
partially offset by higher noninterest expense. Total net revenue growth was driven by increased
product usage by new and existing clients, market appreciation, growth in electronic volumes and
higher liability balances. These benefits were offset partially by spread compression and a
continued shift to narrower-spread liability products. Total noninterest expense increased, due
primarily to higher expense related to business and volume growth, as well as investment in new
product platforms.
Asset Management generated record net income, reflecting record Total net revenue, partially offset
by higher noninterest expense. Total net revenue benefited largely from increased assets under
management, higher performance and placement fees, increases in deposit and loan balances and wider
deposit spreads. The Provision for credit losses increased, reflecting a higher level of recoveries
in the prior year. Total noninterest expense increased, due largely to higher compensation,
primarily performance-based, and investments in all business segments.
Corporate segment net income increased from the prior year, benefiting from higher Total net
revenue and lower noninterest expense. The increase in Total net revenue was driven primarily by
higher private equity gains, higher trading-related gains and a gain from the sale of MasterCard
shares. Partially offsetting the increased revenue was a narrower net interest spread. Total
noninterest expense decreased due to lower compensation expense and continuing business
efficiencies.
Income from discontinued operations was $65 million in the third quarter of 2006. Discontinued
operations (included in the Corporate segment results) include the income statement activity of
selected corporate trust businesses sold to The Bank of New York.
JPMorgan Chase realized approximately $740 million (pretax) of merger savings during the quarter
ended September 30, 2007, which is an annualized rate of approximately $2.96 billion. Merger costs
of $61 million were expensed during the third quarter of 2007, bringing the total amount expensed
since the merger announcement to $3.7 billion (including capitalized costs). In the third quarter
of 2007, the Firm successfully completed the in-sourcing of its credit card processing platform and
the conversion of the wholesale deposit system. The wholesale deposit conversion was the largest in
the Firms history, involving approximately $180 billion in customer balances, and was the last
significant merger integration event.
7
The Managed provision for credit losses was $2.4 billion, up by $944 million, or 67%, from the
prior year. The wholesale Provision for credit losses was $351 million, compared with $35 million
in the prior year, reflecting an increase in the allowance for credit losses, primarily related to
portfolio growth. Wholesale net charge-offs were $82 million, compared with net recoveries of $11
million, resulting in net charge-off rates of 0.19% and recoveries of 0.03%, respectively. The
total consumer Managed provision for credit losses was $2.0 billion, compared with $1.4 billion in
the prior year, primarily reflecting an increase in the allowance for credit losses related to the
home equity portfolio and growth in the subprime mortgage portfolio. Consumer managed net
charge-offs were $1.7 billion, compared with $1.4 billion, resulting in managed net charge-off
rates of 1.96% and 1.69%, respectively. The Firm had total nonperforming assets of $3.2 billion at
September 30, 2007, up by $881 million, or 38%, from the prior-year level of $2.3 billion.
The Firm had, at September 30, 2007, Total stockholders equity of $120.0 billion and a Tier 1
capital ratio of 8.4%. The Firm purchased $2.1 billion, or 47.0 million shares, of common stock
during the quarter.
Business outlook
The following forward-looking statements are based upon the current beliefs and expectations of
JPMorgan Chases management and are subject to significant risks and uncertainties. These risks and
uncertainties could cause JPMorgan Chases results to differ materially from those set forth in
such forward-looking statements.
JPMorgan Chases outlook for the fourth quarter of 2007 should be viewed against the backdrop of
the global economy, financial markets activity (including interest rate movements), the
geopolitical environment, the competitive environment and client activity levels. Each of these
interlinked factors will affect the performance of the Firms lines of business.
The Investment banking fee pipeline was lower at September 30, 2007, than it was at June 30, 2007,
due largely to a lower level of debt underwriting activity. In light
of current capital
market and economic conditions, management remains cautious with regard to the realization of this
pipeline. Capital market conditions are still being affected by the
disruption in the mortgage market, as well as by overall lower levels
of liquidity and wider credit spreads, all of which could potentially
lead to reduced levels of client activity, difficulty in syndicating
leveraged loans, lower investment banking fees and lower trading revenue.
While there have been some successfully completed leveraged finance
transactions during the fourth quarter of 2007, the Firm continues to
hold a substantial amount of leveraged loans and unfunded commitments
as held-for-sale ($40.6 billion as of September 30, 2007). These
positions are difficult to hedge effectively and further markdowns
could result if market conditions worsen for this asset class. The
Firms CDO and subprime mortgage warehouse and trading positions
could also be negatively affected by market conditions during the
fourth quarter of 2007.
Future economic conditions may also cause the Provision for credit losses to increase over time.
The consumer Provision for credit losses could increase
as a result of a higher level of losses in
Retail Financial Services home equity loan portfolio and growth in the retained subprime mortgage
loan portfolio. Given the potential stress on the consumer from continued downward pressure on
housing prices and the elevated inventory of unsold houses nationally, management remains cautious
with respect to the home equity portfolio. Management currently expects that quarterly losses
related to the home equity portfolio to increase over the next few
quarters, to a range of $250
million to $270 million per quarter, or a net charge-off rate of
1.05% to 1.10%. In addition, the consumer provision could increase
due to a higher level of net charge-offs in Card Services, as losses
continue to return to a more normal level, which could be in the
range of 4.00% to 4.50% of managed loans by the end of 2008.
The wholesale Provision for credit losses may also increase over time
as a result of loan growth, customer activity and changes in
underlying credit conditions. In addition, a weaker overall economy may lead to an increase in both the wholesale and consumer provision for credit losses.
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 over time; and that private equity results,
which are dependent upon the capital markets, could continue to be
volatile. Firmwide, Total noninterest expense is anticipated to reflect investments in each business, recent
acquisitions and divestitures and other operating efficiencies. Management continues to believe
that annual merger savings will reach approximately $3.0 billion by the end of 2007. Management
currently expects total merger costs (including costs associated with the Bank of New York
transaction) will be approximately $3.8 billion, and that all remaining costs will be incurred by
the end of 2007.
8
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chases consolidated results of
operations on a reported basis. Factors that relate primarily to a single business segment are
discussed in more detail within that business segment than they are in this consolidated section.
For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated
results of operations, see page 66 of this Form 10-Q and pages 8385 of the JPMorgan Chase 2006
Form 10-K.
Total net revenue
The following table presents the components of Total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Investment banking fees |
|
$ |
1,336 |
|
|
$ |
1,416 |
|
|
|
(6 |
)% |
|
$ |
4,973 |
|
|
$ |
3,955 |
|
|
|
26 |
% |
Principal transactions |
|
|
237 |
|
|
|
2,737 |
|
|
|
(91 |
) |
|
|
8,274 |
|
|
|
8,187 |
|
|
|
1 |
|
Lending & deposit-related fees |
|
|
1,026 |
|
|
|
867 |
|
|
|
18 |
|
|
|
2,872 |
|
|
|
2,573 |
|
|
|
12 |
|
Asset management, administration and commissions |
|
|
3,663 |
|
|
|
2,842 |
|
|
|
29 |
|
|
|
10,460 |
|
|
|
8,682 |
|
|
|
20 |
|
Securities gains (losses) |
|
|
237 |
|
|
|
40 |
|
|
|
493 |
|
|
|
16 |
|
|
|
(578 |
) |
|
NM |
|
Mortgage fees and related income |
|
|
221 |
|
|
|
62 |
|
|
|
256 |
|
|
|
1,220 |
|
|
|
516 |
|
|
|
136 |
|
Credit card income |
|
|
1,777 |
|
|
|
1,567 |
|
|
|
13 |
|
|
|
5,054 |
|
|
|
5,268 |
|
|
|
(4 |
) |
Other income |
|
|
289 |
|
|
|
635 |
|
|
|
(54 |
) |
|
|
1,360 |
|
|
|
1,653 |
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
8,786 |
|
|
|
10,166 |
|
|
|
(14 |
) |
|
|
34,229 |
|
|
|
30,256 |
|
|
|
13 |
|
Net interest income |
|
|
7,326 |
|
|
|
5,379 |
|
|
|
36 |
|
|
|
19,759 |
|
|
|
15,550 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
16,112 |
|
|
$ |
15,545 |
|
|
|
4 |
|
|
$ |
53,988 |
|
|
$ |
45,806 |
|
|
|
18 |
|
|
Total net revenue for the third quarter of 2007 was $16.1 billion, up by $567 million, or 4%,
from the prior year. This increase was the result of higher Net interest income; record Asset
management, administration and commissions revenue; strong private equity gains (included in
Principal transactions revenue); and higher Credit card income. These improvements were partly
offset by a significant decline in trading revenue within Principal transactions revenue,
reflecting markdowns on leveraged lending funded loans and unfunded commitments and lower fixed
income trading results. For the first nine months of 2007, Total net revenue was $54.0 billion, up
by $8.2 billion, or 18%, from the prior year. The increase was driven by higher Net interest
income; very strong private equity gains; record Asset management, administration and commissions
revenue; and record Investment banking fees. Lower trading revenue in the 2007 third quarter
partially offset these increases.
Investment banking fees in the third quarter of 2007 declined slightly from the comparable period
last year, reflecting lower debt underwriting fees offset partially by record advisory fees. In the
first nine months of 2007, Investment banking fees were a record for the Firm, reflecting record
fees for advisory and debt and equity underwriting. For a further discussion of Investment banking
fees, which are primarily recorded in IB, see the IB segment results on pages 1720 of this Form
10-Q.
Principal transactions revenue consists of trading revenue and private equity gains. In the third
quarter of 2007, the Firm recognized a net loss of $548 million from trading activities primarily
reflecting markdowns of $1.3 billion (net of fees) on $40.6 billion of leveraged lending funded
loans and unfunded commitments, as well as markdowns of $339 million (net of risk management
results) on $6.8 billion of CDO warehouses and unsold positions. For the first nine months of 2007,
trading revenue was lower by $2.4 billion compared with the same period last year, primarily
reflecting markdowns of $1.4 billion (net of fees) on leveraged lending funded loans and unfunded
commitments, as well as markdowns of $358 million (net of risk management results) on CDO
warehouses and unsold positions. In addition, trading revenue was also impacted by weak credit
trading and significantly lower commodities results, compared with a strong prior year, partially
offset by record revenue in rates and currencies, and strong equity trading results across all
products. IBs Credit Portfolio results increased from the third quarter of 2006 due to higher
trading revenue from risk management activities; in addition, for the first nine months of 2007,
IBs Credit Portfolio benefited from an adjustment to the valuation of the Firms derivative
liabilities measured at fair value, to reflect the credit quality of the Firm as part of the
adoption of SFAS 157. Private equity gains in the third quarter and first nine months of 2007
increased compared with the same periods in 2006, reflecting a higher level of gains and the
classification of certain private equity carried interest as Compensation expense. Also favorably
affecting the first nine months of 2007 was a fair value adjustment in the first quarter of 2007 on
nonpublic private equity investments resulting from the adoption of SFAS 157. For a further
discussion of Principal transactions revenue, see the IB and Corporate segment results on pages
1720 and 4041, respectively, and Note 5 on pages 8385 of this Form 10-Q.
9
Lending & deposit-related fees rose from the third quarter and first nine months of 2006 as a
result of higher deposit-related fees and the Bank of New York transaction. For a further
discussion of Lending & deposit-related fees, which are partly recorded in RFS and CB, see the RFS
segment results on pages 2128 and the CB segment results on pages 3334 of this Form 10-Q.
Asset management, administration and commissions revenue reached record levels in the third quarter
and first nine months of 2007, primarily due to an increase in assets under management and higher
performance and placement fees in AM. The growth in assets under management, which reached $1.2
trillion at the end of the third quarter of 2007, up 24% from the prior year, was the result of net
asset inflows into the Institutional, Retail and Private Bank segments and market appreciation.
Also contributing to the rise in Asset management, administration and commissions revenue were
higher assets under custody in TSS, driven by new business and market appreciation. In addition,
other service fees were higher due to a combination of new clients and increased product usage by
existing clients. In addition, commissions revenue increased due to higher brokerage transaction
volume (primarily included within Fixed Income and Equity Markets revenue of IB) and higher
investment sales volume in RFS; these were partly offset by the sale of the insurance business in
the third quarter of 2006, and a charge in the first quarter of 2007 resulting from accelerated
surrenders of customer annuities. For additional information on these fees and commissions, see the
segment discussions for IB on pages 1720, RFS on pages 2128, TSS on pages 3536, and AM on
pages 3739, of this Form 10-Q.
The favorable variances in Securities gains (losses) for the third quarter and first nine months of
2007 when compared with the same periods in 2006 were primarily the result of a $115 million gain
from the sale of MasterCard shares; higher gains from marketable securities received from loan
workouts in IB; and improvements in the results of Treasurys portfolio-repositioning activities.
For a further discussion of Securities gains (losses), which are mostly recorded in the Firms
Treasury business, see the Corporate segment discussion on pages 4041 of this Form 10-Q.
Mortgage fees and related income increased from the third quarter and first nine months of 2006.
Net mortgage servicing improved due primarily to the absence of a prior-year negative valuation
adjustment of $235 million to the MSR asset and growth in third-party loans serviced. In the quarter-to-quarter
comparison, production revenue declined as markdowns of $186 million on the mortgage warehouse and
pipeline were offset partially by an increase in mortgage loan originations and the classification
of certain loan origination costs as expense (loan origination costs previously netted against
revenue commenced being recorded as an expense in the first quarter of 2007 due to the adoption of
SFAS 159). For the first nine months of 2007, production revenue was up from the same period in
2006 as a result of increased mortgage loan originations, and the classification of certain loan
origination costs as expense (loan origination costs previously netted against revenue are
currently recorded as expense due to the adoption of SFAS 159). These increases were offset
partially by markdowns of $186 million on the mortgage warehouse and pipeline. Mortgage fees and
related income exclude the impact of NII and AFS securities gains and losses related to mortgage
activities. For a discussion of Mortgage fees and related income, which is recorded primarily in
RFSs Mortgage Banking business, see the Mortgage Banking discussion on pages 2627 of this Form
10-Q.
Credit card income rose from the third quarter of 2006 due primarily to an increase in net
interchange income, which benefited from higher charge volume; and an increase in servicing fees
earned in connection with securitization activities, which were favorably affected by higher net
interest income earned on the securitized credit card loans. For the first nine months of 2007,
Credit card income decreased due primarily to lower servicing fees earned in connection with
securitization activities, which were affected unfavorably by lower net interest income earned and
higher net credit losses incurred on the securitized credit card loans. These were partially offset
by an increase in net interchange income and a higher level of fee-based revenue. For further
discussion of Credit card income, see CSs segment results on pages 2932 of this Form 10-Q.
Other
income declined from the third quarter and first nine months of 2006.
The decrease from the first nine months of 2006 was driven by the
absence of a $103 million gain in the second quarter of 2006,
related to the sale of MasterCard shares in its initial public
offering; and lower net gains on credit card securitizations. These
were offset partially by higher gains on the sale of leveraged leases
and education loans, increased income from automobile operating leases, and
the absence of a loss related to auto loans transferred to the
held-for-sale portfolio in the first quarter of 2006.
Net
interest income rose from the third quarter of 2006, primarily from
the following: higher trading-related Net interest income, due to a
shift of Interest expense to Principal transactions revenue (related
to certain IB structured notes to which fair value accounting was
elected in connection with the adoption of SFAS 159); a higher level
of credit card loans and fees; growth in liability and deposit
balances, primarily in the wholesale businesses; and the impact of
the Bank of New York transaction. These increases were offset
partially by compression in Treasurys net interest spread and a
shift to narrower spread liability and deposit products. Net interest
income in the first nine months of 2007 rose from the same period of
last year, driven by the aforementioned items, with the exception of
an improvement in Treasurys net interest spread. These were
offset partially by narrower spreads on credit card loans. The
Firms total average interest-earning assets for the third
quarter of 2007 were $1.1 trillion, up 15% from the third
quarter of 2006. The increase was primarily a result of higher
Trading assets debt instruments, Available for sale
securities, and Loans. The net interest yield on these
10
assets,
on a fully-taxable equivalent basis, was 2.57%, an increase of
40 basis points from the prior year, partly reflecting the
adoption of SFAS 159. The Firms total average interest earning
assets for the first nine months of 2007 were $1.1 trillion, up
12% from the first nine months of 2006. The increase was also driven
by the aforementioned items, 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
2.44%, an increase of 30 basis points from the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Provision for credit losses |
|
$ |
1,785 |
|
|
$ |
812 |
|
|
|
120 |
% |
|
$ |
4,322 |
|
|
$ |
2,136 |
|
|
|
102 |
% |
|
The Provision for credit losses in the third quarter and first nine months of 2007 rose from
the comparable prior-year periods. The increase from the third quarter of 2006 in the consumer
Provision for credit losses was due to a net $306 million increase in the Allowance for loan losses
due to higher estimated losses for home equity loans. The increase from the first nine months of
2006 in the consumer provision was due to: a net increase of $635 million in the Allowance for loan
losses resulting from higher estimated losses for home equity loans; an increase in subprime
mortgage loan balances; and an increase in credit card net charge-offs. Credit card net charge-offs
for the nine months ended September 30, 2006 benefited following the change in bankruptcy
legislation in the fourth quarter of 2005. The increase in the wholesale provision from the third
quarter of 2006 reflected an increase in the Allowance for credit losses, primarily related to
portfolio growth. The increase in the wholesale provision from the
first nine months of 2006 primarily
reflected an increase in the allowance due to portfolio activity and growth. For a
more detailed discussion of the loan portfolio and the Allowance for loan losses, see the segment
discussions for RFS on pages 2128, CS on pages 2932, and IB on pages 1720, and Credit risk
management on pages 5162 of this Form 10-Q.
Noninterest expense
The following table presents the components of Noninterest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Compensation expense |
|
$ |
4,677 |
|
|
$ |
5,390 |
|
|
|
(13 |
)% |
|
$ |
17,220 |
|
|
$ |
16,206 |
|
|
|
6 |
% |
Occupancy expense |
|
|
657 |
|
|
|
563 |
|
|
|
17 |
|
|
|
1,949 |
|
|
|
1,710 |
|
|
|
14 |
|
Technology, communications and equipment expense |
|
|
950 |
|
|
|
911 |
|
|
|
4 |
|
|
|
2,793 |
|
|
|
2,656 |
|
|
|
5 |
|
Professional & outside services |
|
|
1,260 |
|
|
|
1,111 |
|
|
|
13 |
|
|
|
3,719 |
|
|
|
3,204 |
|
|
|
16 |
|
Marketing |
|
|
561 |
|
|
|
550 |
|
|
|
2 |
|
|
|
1,500 |
|
|
|
1,595 |
|
|
|
(6 |
) |
Other expense |
|
|
812 |
|
|
|
877 |
|
|
|
(7 |
) |
|
|
2,560 |
|
|
|
2,324 |
|
|
|
10 |
|
Amortization of intangibles |
|
|
349 |
|
|
|
346 |
|
|
|
1 |
|
|
|
1,055 |
|
|
|
1,058 |
|
|
|
|
|
Merger costs |
|
|
61 |
|
|
|
48 |
|
|
|
27 |
|
|
|
187 |
|
|
|
205 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
9,327 |
|
|
$ |
9,796 |
|
|
|
(5 |
) |
|
$ |
30,983 |
|
|
$ |
28,958 |
|
|
|
7 |
|
|
Total noninterest expense for the third quarter of 2007 was $9.3 billion, down by $469
million, or 5%, from the prior year. Expense decreased due to lower Compensation expense, primarily
incentive-based, partially offset by investments across the business segments and acquisitions. For
the first nine months of 2007, Total noninterest expense was $31.0 billion, up by $2.0 billion, or
7%, from the prior year, driven by higher Compensation expense, primarily incentive-based, as well
as investments across the business segments and acquisitions.
The decrease in Compensation expense from the third quarter of 2006 was primarily the result of
lower performance-based incentives, business divestitures and continuing business efficiencies.
These declines were offset partially by additional headcount from the Bank of New York transaction,
acquisitions and investments in the businesses; the classification of certain private equity
carried interest from Principal transactions revenue; and the classification of certain loan
origination costs (previously netted against revenue) due to the adoption of SFAS 159. Compensation
expense for the first nine months of 2007 increased from the prior-year period, reflecting the
aforementioned items, with the exception of performance-based incentives, which were higher in the
current year period. These increases were offset partially by the absence of a prior-year expense
of $459 million from the adoption of SFAS 123R. For a detailed discussion of the adoption of SFAS
123R see Note 9 on page 88 of this Form 10-Q.
The increases in Occupancy expense from the third quarter and first nine months of 2006 were driven
by ongoing investments in the businesses; in particular, the retail distribution network, which
includes the incremental expense from The Bank of New York branches. Partially offsetting the
increase in Occupancy expense was continuing business efficiencies.
11
The increases in Technology, communications and equipment expense, when compared with the third
quarter and first nine months of 2006, were due primarily to higher depreciation expense on owned
automobiles subject to operating leases, and technology investments to support business growth.
These increases were offset partially by continuing business efficiencies.
Professional & outside services rose from the third quarter and first nine months of 2006,
reflecting higher brokerage expense and credit card processing costs resulting from growth in
transaction volume. Also contributing to the increases were acquisitions and investments in the
businesses.
Marketing expense was relatively flat compared with the third quarter of 2006. The decrease from
the first nine months of 2006 was due to a reduction in credit card marketing expense.
Other expense decreased from the third quarter of 2006 due to a higher level of legal-related
recoveries and lower legal expense, offset partially by business growth and investments in the
businesses. For the nine-month period comparison, Other expense was higher due to increased net
legal-related costs reflecting a lower level of recoveries and higher expense. Also contributing to
the increase were business growth and investments in the businesses offset partially by the sale of
the insurance business at the beginning of the third quarter of 2006, lower credit card
fraud-related losses and continuing business efficiencies.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 17 and Note 10 on
pages 101103 and 89, respectively, of this Form 10-Q.
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 September 30, |
|
|
Nine months ended September 30, |
|
(in millions, except rate) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Income from continuing operations before income tax expense |
|
$ |
5,000 |
|
|
$ |
4,937 |
|
|
$ |
18,683 |
|
|
$ |
14,712 |
|
Income tax expense |
|
|
1,627 |
|
|
|
1,705 |
|
|
|
6,289 |
|
|
|
4,969 |
|
Effective tax rate |
|
|
32.5 |
% |
|
|
34.5 |
% |
|
|
33.7 |
% |
|
|
33.8 |
% |
|
The effective tax rate decrease for the third quarter of 2007 compared with the prior year
third quarter was primarily attributable to a favorable resolution of a tax audit.
Income from discontinued operations
Income from discontinued operations was zero in all periods of 2007 compared with $65 million and
$175 million in the third quarter and first nine months of 2006, respectively. Discontinued
operations (included in the Corporate segment results) include the income statement activity of
selected corporate trust businesses that were sold to The Bank of New York on October 1, 2006.
12
EXPLANATION AND RECONCILIATION OF THE FIRMS USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its Consolidated financial statements using accounting principles generally
accepted in the United States of America (U.S. GAAP); these financial statements appear on pages
6871 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 line-of-business results on a managed basis, which is a non-GAAP financial measure. The
Firms definition of managed basis starts with the reported U.S. GAAP results and includes certain
reclassifications that assume credit card loans securitized by CS remain on the balance sheet and
present revenue on a fully taxable-equivalent (FTE) basis. These adjustments do not have any
impact on Net income as reported by the lines of business or by the Firm as a whole.
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 2932 of this Form 10-Q. For information regarding the securitization process, and loans and
residual interests sold and securitized, see Note 15 on pages 9499 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.
13
The following summary table provides a reconciliation from the Firms reported U.S. GAAP results to
managed basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2007 |
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(b) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,336 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,336 |
|
Principal transactions |
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
237 |
|
Lending & deposit-related fees |
|
|
1,026 |
|
|
|
|
|
|
|
|
|
|
|
1,026 |
|
Asset management, administration and commissions |
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
3,663 |
|
Securities gains |
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
237 |
|
Mortgage fees and related income |
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
221 |
|
Credit card income |
|
|
1,777 |
|
|
|
(836 |
) |
|
|
|
|
|
|
941 |
|
Other income |
|
|
289 |
|
|
|
|
|
|
|
192 |
|
|
|
481 |
|
|
Noninterest revenue |
|
|
8,786 |
|
|
|
(836 |
) |
|
|
192 |
|
|
|
8,142 |
|
Net interest income |
|
|
7,326 |
|
|
|
1,414 |
|
|
|
95 |
|
|
|
8,835 |
|
|
Total net revenue |
|
|
16,112 |
|
|
|
578 |
|
|
|
287 |
|
|
|
16,977 |
|
Provision for credit losses |
|
|
1,785 |
|
|
|
578 |
|
|
|
|
|
|
|
2,363 |
|
Noninterest expense |
|
|
9,327 |
|
|
|
|
|
|
|
|
|
|
|
9,327 |
|
|
Income from continuing operations before income tax expense |
|
|
5,000 |
|
|
|
|
|
|
|
287 |
|
|
|
5,287 |
|
Income tax expense |
|
|
1,627 |
|
|
|
|
|
|
|
287 |
|
|
|
1,914 |
|
|
Income from continuing operations |
|
|
3,373 |
|
|
|
|
|
|
|
|
|
|
|
3,373 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,373 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,373 |
|
|
Net income diluted earnings per share |
|
$ |
0.97 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.97 |
|
|
Return on common equity(a) |
|
|
11 |
% |
|
|
|
% |
|
|
|
% |
|
|
11 |
% |
Return on equity less goodwill(a) |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
18 |
|
Return on assets(a) |
|
|
0.91 |
|
|
NM |
|
|
NM |
|
|
|
0.87 |
|
Overhead ratio |
|
|
58 |
|
|
NM |
|
|
NM |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2006 |
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(b) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,416 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,416 |
|
Principal transactions |
|
|
2,737 |
|
|
|
|
|
|
|
|
|
|
|
2,737 |
|
Lending & deposit-related fees |
|
|
867 |
|
|
|
|
|
|
|
|
|
|
|
867 |
|
Asset management, administration and commissions |
|
|
2,842 |
|
|
|
|
|
|
|
|
|
|
|
2,842 |
|
Securities gains |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Mortgage fees and related income |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
Credit card income |
|
|
1,567 |
|
|
|
(721 |
) |
|
|
|
|
|
|
846 |
|
Other income |
|
|
635 |
|
|
|
|
|
|
|
165 |
|
|
|
800 |
|
|
Noninterest revenue |
|
|
10,166 |
|
|
|
(721 |
) |
|
|
165 |
|
|
|
9,610 |
|
Net interest income |
|
|
5,379 |
|
|
|
1,328 |
|
|
|
57 |
|
|
|
6,764 |
|
|
Total net revenue |
|
|
15,545 |
|
|
|
607 |
|
|
|
222 |
|
|
|
16,374 |
|
Provision for credit losses |
|
|
812 |
|
|
|
607 |
|
|
|
|
|
|
|
1,419 |
|
Noninterest expense |
|
|
9,796 |
|
|
|
|
|
|
|
|
|
|
|
9,796 |
|
|
Income from continuing operations before income tax expense |
|
|
4,937 |
|
|
|
|
|
|
|
222 |
|
|
|
5,159 |
|
Income tax expense |
|
|
1,705 |
|
|
|
|
|
|
|
222 |
|
|
|
1,927 |
|
|
Income from continuing operations |
|
|
3,232 |
|
|
|
|
|
|
|
|
|
|
|
3,232 |
|
Income from discontinued operations |
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
Net income |
|
$ |
3,297 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,297 |
|
|
Net income diluted earnings per share |
|
$ |
0.92 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.92 |
|
|
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 |
|
|
63 |
|
|
NM |
|
|
NM |
|
|
|
60 |
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2007 |
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(b) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
4,973 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,973 |
|
Principal transactions |
|
|
8,274 |
|
|
|
|
|
|
|
|
|
|
|
8,274 |
|
Lending & deposit-related fees |
|
|
2,872 |
|
|
|
|
|
|
|
|
|
|
|
2,872 |
|
Asset management, administration and commissions |
|
|
10,460 |
|
|
|
|
|
|
|
|
|
|
|
10,460 |
|
Securities gains |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Mortgage fees and related income |
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
1,220 |
|
Credit card income |
|
|
5,054 |
|
|
|
(2,370 |
) |
|
|
|
|
|
|
2,684 |
|
Other income |
|
|
1,360 |
|
|
|
|
|
|
|
501 |
|
|
|
1,861 |
|
|
Noninterest revenue |
|
|
34,229 |
|
|
|
(2,370 |
) |
|
|
501 |
|
|
|
32,360 |
|
Net interest income |
|
|
19,759 |
|
|
|
4,131 |
|
|
|
287 |
|
|
|
24,177 |
|
|
Total net revenue |
|
|
53,988 |
|
|
|
1,761 |
|
|
|
788 |
|
|
|
56,537 |
|
Provision for credit losses |
|
|
4,322 |
|
|
|
1,761 |
|
|
|
|
|
|
|
6,083 |
|
Noninterest expense |
|
|
30,983 |
|
|
|
|
|
|
|
|
|
|
|
30,983 |
|
|
Income from continuing operations before income tax expense |
|
|
18,683 |
|
|
|
|
|
|
|
788 |
|
|
|
19,471 |
|
Income tax expense |
|
|
6,289 |
|
|
|
|
|
|
|
788 |
|
|
|
7,077 |
|
|
Income from continuing operations |
|
|
12,394 |
|
|
|
|
|
|
|
|
|
|
|
12,394 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,394 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,394 |
|
|
Net income
diluted earnings per share |
|
$ |
3.52 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.52 |
|
|
Return on common equity(a) |
|
|
14 |
% |
|
|
|
% |
|
|
|
% |
|
|
14 |
% |
Return on equity less goodwill(a) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Return on assets(a) |
|
|
1.16 |
|
|
NM |
|
|
NM |
|
|
|
1.11 |
|
Overhead ratio |
|
|
57 |
|
|
NM |
|
|
NM |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2006 |
|
|
Reported |
|
Credit |
|
Tax-equivalent |
|
Managed |
(in millions, except per share and ratio data) |
|
results |
|
card(b) |
|
adjustments |
|
basis |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
3,955 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,955 |
|
Principal transactions |
|
|
8,187 |
|
|
|
|
|
|
|
|
|
|
|
8,187 |
|
Lending & deposit-related fees |
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
2,573 |
|
Asset management, administration and commissions |
|
|
8,682 |
|
|
|
|
|
|
|
|
|
|
|
8,682 |
|
Securities (losses) |
|
|
(578 |
) |
|
|
|
|
|
|
|
|
|
|
(578 |
) |
Mortgage fees and related income |
|
|
516 |
|
|
|
|
|
|
|
|
|
|
|
516 |
|
Credit card income |
|
|
5,268 |
|
|
|
(2,783 |
) |
|
|
|
|
|
|
2,485 |
|
Other income |
|
|
1,653 |
|
|
|
|
|
|
|
481 |
|
|
|
2,134 |
|
|
Noninterest revenue |
|
|
30,256 |
|
|
|
(2,783 |
) |
|
|
481 |
|
|
|
27,954 |
|
Net interest income |
|
|
15,550 |
|
|
|
4,400 |
|
|
|
175 |
|
|
|
20,125 |
|
|
Total net revenue |
|
|
45,806 |
|
|
|
1,617 |
|
|
|
656 |
|
|
|
48,079 |
|
Provision for credit losses |
|
|
2,136 |
|
|
|
1,617 |
|
|
|
|
|
|
|
3,753 |
|
Noninterest expense |
|
|
28,958 |
|
|
|
|
|
|
|
|
|
|
|
28,958 |
|
|
Income from continuing operations before income tax expense |
|
|
14,712 |
|
|
|
|
|
|
|
656 |
|
|
|
15,368 |
|
Income tax expense |
|
|
4,969 |
|
|
|
|
|
|
|
656 |
|
|
|
5,625 |
|
|
Income from continuing operations |
|
|
9,743 |
|
|
|
|
|
|
|
|
|
|
|
9,743 |
|
Income from discontinued operations |
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
175 |
|
|
Net income |
|
$ |
9,918 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,918 |
|
|
Net income
diluted earnings per share |
|
$ |
2.78 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2.78 |
|
|
Return on common equity(a) |
|
|
12 |
% |
|
|
|
% |
|
|
|
% |
|
|
12 |
% |
Return on equity less goodwill(a) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
Return on assets(a) |
|
|
1.02 |
|
|
NM |
|
|
NM |
|
|
|
0.97 |
|
Overhead ratio |
|
|
63 |
|
|
NM |
|
|
NM |
|
|
|
60 |
|
|
|
|
|
(a) |
|
Based upon Income from continuing operations. |
(b) |
|
Credit card
securitizations affect CS. See pages 2932 of this Form 10-Q for further
information. |
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2007 |
|
|
2006 |
|
(in millions) |
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Loans period-end |
|
$ |
486,320 |
|
|
$ |
69,643 |
|
|
$ |
555,963 |
|
|
$ |
463,544 |
|
|
$ |
65,245 |
|
|
$ |
528,789 |
|
Total assets
average |
|
|
1,477,334 |
|
|
|
66,100 |
|
|
|
1,543,434 |
|
|
|
1,309,139 |
|
|
|
62,971 |
|
|
|
1,372,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2007 |
|
|
2006 |
|
(in millions) |
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Reported |
|
|
Securitized |
|
|
Managed |
|
|
Loans period-end |
|
$ |
486,320 |
|
|
$ |
69,643 |
|
|
$ |
555,963 |
|
|
$ |
463,544 |
|
|
$ |
65,245 |
|
|
$ |
528,789 |
|
Total assets
average |
|
|
1,429,772 |
|
|
|
65,715 |
|
|
|
1,495,487 |
|
|
|
1,297,344 |
|
|
|
65,797 |
|
|
|
1,363,141 |
|
|
BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business basis. The business-segment financial results
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return |
|
September 30, |
|
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 |
|
$ |
2,946 |
|
|
$ |
4,816 |
|
|
|
(39 |
)% |
|
$ |
2,378 |
|
|
$ |
3,244 |
|
|
|
(27 |
)% |
|
$ |
296 |
|
|
$ |
976 |
|
|
|
(70 |
)% |
|
|
6 |
% |
|
|
18 |
% |
Retail Financial Services |
|
|
4,201 |
|
|
|
3,555 |
|
|
|
18 |
|
|
|
2,469 |
|
|
|
2,139 |
|
|
|
15 |
|
|
|
639 |
|
|
|
746 |
|
|
|
(14 |
) |
|
|
16 |
|
|
|
21 |
|
Card Services |
|
|
3,867 |
|
|
|
3,646 |
|
|
|
6 |
|
|
|
1,262 |
|
|
|
1,253 |
|
|
|
1 |
|
|
|
786 |
|
|
|
711 |
|
|
|
11 |
|
|
|
22 |
|
|
|
20 |
|
Commercial Banking |
|
|
1,009 |
|
|
|
933 |
|
|
|
8 |
|
|
|
473 |
|
|
|
500 |
|
|
|
(5 |
) |
|
|
258 |
|
|
|
231 |
|
|
|
12 |
|
|
|
15 |
|
|
|
17 |
|
Treasury & Securities Services |
|
|
1,748 |
|
|
|
1,499 |
|
|
|
17 |
|
|
|
1,134 |
|
|
|
1,064 |
|
|
|
7 |
|
|
|
360 |
|
|
|
256 |
|
|
|
41 |
|
|
|
48 |
|
|
|
46 |
|
Asset Management |
|
|
2,205 |
|
|
|
1,636 |
|
|
|
35 |
|
|
|
1,366 |
|
|
|
1,115 |
|
|
|
23 |
|
|
|
521 |
|
|
|
346 |
|
|
|
51 |
|
|
|
52 |
|
|
|
39 |
|
Corporate(b) |
|
|
1,001 |
|
|
|
289 |
|
|
|
246 |
|
|
|
245 |
|
|
|
481 |
|
|
|
(49 |
) |
|
|
513 |
|
|
|
31 |
|
|
NM |
|
|
NM |
|
|
NM |
|
|
Total |
|
$ |
16,977 |
|
|
$ |
16,374 |
|
|
|
4 |
% |
|
$ |
9,327 |
|
|
$ |
9,796 |
|
|
|
(5 |
)% |
|
$ |
3,373 |
|
|
$ |
3,297 |
|
|
|
2 |
% |
|
|
11 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return |
|
September 30, |
|
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 |
|
$ |
14,998 |
|
|
$ |
13,973 |
|
|
|
7 |
% |
|
$ |
10,063 |
|
|
$ |
9,655 |
|
|
|
4 |
% |
|
$ |
3,015 |
|
|
$ |
2,665 |
|
|
|
13 |
% |
|
|
19 |
% |
|
|
17 |
% |
Retail Financial Services |
|
|
12,664 |
|
|
|
11,097 |
|
|
|
14 |
|
|
|
7,360 |
|
|
|
6,636 |
|
|
|
11 |
|
|
|
2,283 |
|
|
|
2,495 |
|
|
|
(8 |
) |
|
|
19 |
|
|
|
24 |
|
Card Services |
|
|
11,264 |
|
|
|
10,995 |
|
|
|
2 |
|
|
|
3,691 |
|
|
|
3,745 |
|
|
|
(1 |
) |
|
|
2,310 |
|
|
|
2,487 |
|
|
|
(7 |
) |
|
|
22 |
|
|
|
24 |
|
Commercial Banking |
|
|
3,019 |
|
|
|
2,782 |
|
|
|
9 |
|
|
|
1,454 |
|
|
|
1,494 |
|
|
|
(3 |
) |
|
|
846 |
|
|
|
754 |
|
|
|
12 |
|
|
|
18 |
|
|
|
18 |
|
Treasury & Securities Services |
|
|
5,015 |
|
|
|
4,572 |
|
|
|
10 |
|
|
|
3,358 |
|
|
|
3,162 |
|
|
|
6 |
|
|
|
975 |
|
|
|
834 |
|
|
|
17 |
|
|
|
43 |
|
|
|
48 |
|
Asset Management |
|
|
6,246 |
|
|
|
4,840 |
|
|
|
29 |
|
|
|
3,956 |
|
|
|
3,294 |
|
|
|
20 |
|
|
|
1,439 |
|
|
|
1,002 |
|
|
|
44 |
|
|
|
50 |
|
|
|
38 |
|
Corporate(b) |
|
|
3,331 |
|
|
|
(180 |
) |
|
NM |
|
|
|
1,101 |
|
|
|
972 |
|
|
|
13 |
|
|
|
1,526 |
|
|
|
(319 |
) |
|
NM |
|
|
NM |
|
NM |
|
|
Total |
|
$ |
56,537 |
|
|
$ |
48,079 |
|
|
|
18 |
% |
|
$ |
30,983 |
|
|
$ |
28,958 |
|
|
|
7 |
% |
|
$ |
12,394 |
|
|
$ |
9,918 |
|
|
|
25 |
% |
|
|
14 |
% |
|
|
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 $65 million and
$175 million for the three and nine months ended September 30, 2006, respectively. There was
no income from discontinued operations during the first nine months of 2007. |
16
INVESTMENT BANK
For a
discussion of the business profile of IB, see pages 3637 of JPMorgan Chases 2006
Annual Report and page 4 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,330 |
|
|
$ |
1,419 |
|
|
|
(6 |
)% |
|
$ |
4,959 |
|
|
$ |
3,957 |
|
|
|
25 |
% |
Principal transactions(a) |
|
|
(848 |
) |
|
|
2,548 |
|
|
NM |
|
|
|
4,456 |
|
|
|
7,185 |
|
|
|
(38 |
) |
Lending & deposit-related fees |
|
|
118 |
|
|
|
127 |
|
|
|
(7 |
) |
|
|
304 |
|
|
|
398 |
|
|
|
(24 |
) |
Asset management, administration and commissions |
|
|
712 |
|
|
|
512 |
|
|
|
39 |
|
|
|
1,996 |
|
|
|
1,671 |
|
|
|
19 |
|
All other income |
|
|
(76 |
) |
|
|
159 |
|
|
NM |
|
|
|
88 |
|
|
|
437 |
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
1,236 |
|
|
|
4,765 |
|
|
|
(74 |
) |
|
|
11,803 |
|
|
|
13,648 |
|
|
|
(14 |
) |
Net interest income |
|
|
1,710 |
(e) |
|
|
51 |
|
|
NM |
|
|
|
3,195 |
(e) |
|
|
325 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue(b) |
|
|
2,946 |
|
|
|
4,816 |
|
|
|
(39 |
) |
|
|
14,998 |
|
|
|
13,973 |
|
|
|
7 |
|
Provision for credit losses |
|
|
227 |
|
|
|
7 |
|
|
NM |
|
|
|
454 |
|
|
|
128 |
|
|
|
255 |
|
Credit reimbursement from TSS(c) |
|
|
31 |
|
|
|
30 |
|
|
|
3 |
|
|
|
91 |
|
|
|
90 |
|
|
|
1 |
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
1,178 |
|
|
|
2,093 |
|
|
|
(44 |
) |
|
|
6,404 |
|
|
|
6,310 |
|
|
|
1 |
|
Noncompensation expense |
|
|
1,200 |
|
|
|
1,151 |
|
|
|
4 |
|
|
|
3,659 |
|
|
|
3,345 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
2,378 |
|
|
|
3,244 |
|
|
|
(27 |
) |
|
|
10,063 |
|
|
|
9,655 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
372 |
|
|
|
1,595 |
|
|
|
(77 |
) |
|
|
4,572 |
|
|
|
4,280 |
|
|
|
7 |
|
Income tax expense |
|
|
76 |
|
|
|
619 |
|
|
|
(88 |
) |
|
|
1,557 |
|
|
|
1,615 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
296 |
|
|
$ |
976 |
|
|
|
(70 |
) |
|
$ |
3,015 |
|
|
$ |
2,665 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
6 |
% |
|
|
18 |
% |
|
|
|
|
|
|
19 |
% |
|
|
17 |
% |
|
|
|
|
ROA |
|
|
0.17 |
|
|
|
0.62 |
|
|
|
|
|
|
|
0.59 |
|
|
|
0.55 |
|
|
|
|
|
Overhead ratio |
|
|
81 |
|
|
|
67 |
|
|
|
|
|
|
|
67 |
|
|
|
69 |
|
|
|
|
|
Compensation expense as a % of total net revenue(d) |
|
|
40 |
|
|
|
42 |
|
|
|
|
|
|
|
43 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory |
|
$ |
595 |
|
|
$ |
436 |
|
|
|
36 |
|
|
$ |
1,627 |
|
|
$ |
1,177 |
|
|
|
38 |
|
Equity underwriting |
|
|
267 |
|
|
|
275 |
|
|
|
(3 |
) |
|
|
1,169 |
|
|
|
851 |
|
|
|
37 |
|
Debt underwriting |
|
|
468 |
|
|
|
708 |
|
|
|
(34 |
) |
|
|
2,163 |
|
|
|
1,929 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Total investment banking fees |
|
|
1,330 |
|
|
|
1,419 |
|
|
|
(6 |
) |
|
|
4,959 |
|
|
|
3,957 |
|
|
|
25 |
|
Fixed income markets(a) |
|
|
687 |
|
|
|
2,468 |
|
|
|
(72 |
) |
|
|
5,724 |
|
|
|
6,675 |
|
|
|
(14 |
) |
Equity markets(a) |
|
|
537 |
|
|
|
658 |
|
|
|
(18 |
) |
|
|
3,325 |
|
|
|
2,500 |
|
|
|
33 |
|
Credit portfolio(a) |
|
|
392 |
|
|
|
271 |
|
|
|
45 |
|
|
|
990 |
|
|
|
841 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
2,946 |
|
|
$ |
4,816 |
|
|
|
(39 |
) |
|
$ |
14,998 |
|
|
$ |
13,973 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
1,016 |
|
|
$ |
2,803 |
|
|
|
(64 |
) |
|
$ |
7,037 |
|
|
$ |
7,066 |
|
|
|
|
|
Europe/Middle East/Africa |
|
|
1,389 |
|
|
|
1,714 |
|
|
|
(19 |
) |
|
|
5,967 |
|
|
|
5,535 |
|
|
|
8 |
|
Asia/Pacific |
|
|
541 |
|
|
|
299 |
|
|
|
81 |
|
|
|
1,994 |
|
|
|
1,372 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
2,946 |
|
|
$ |
4,816 |
|
|
|
(39 |
) |
|
$ |
14,998 |
|
|
$ |
13,973 |
|
|
|
7 |
|
|
|
|
|
(a) |
|
As a result of the adoption on January 1, 2007,
of SFAS 157, IB recognized a benefit, in
the first quarter of 2007, 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) |
|
Total net revenue
included tax-equivalent adjustments due primarily to tax-exempt income
from municipal bond investments and income tax credits related to affordable housing
investments of $255 million and $197 million for the quarters ended September 30, 2007 and
2006, respectively, and $697 million and $584 million for year-to-date 2007 and 2006,
respectively. |
(c) |
|
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. |
(d) |
|
For 2006, the Compensation expense to Total net revenue ratio was 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. |
(e) |
|
Net Interest Income for 2007 increased from the prior year due primarily to the adoption of
SFAS 159. For certain IB structured notes, all components of earnings are reported in
Principal transactions, causing a shift between Principal transactions revenue and Net
interest income in 2007. |
17
Quarterly results
Net income was $296 million, down by $680 million, or 70%, compared with the prior year. The
decrease in earnings reflected lower net revenue as well as a higher Provision for credit losses,
partially offset by lower noninterest expense.
Net revenue was $2.9 billion, down by $1.9 billion, or 39%, from the prior year. Investment banking
fees were $1.3 billion, down by 6% from the prior year, reflecting lower debt underwriting fees
offset partially by record advisory fees. Debt underwriting fees were $468 million, down 34%,
reflecting lower bond underwriting and loan syndication fees, which were negatively affected by
market conditions. Advisory fees were $595 million, up 36%, driven by a strong performance across
all regions. Equity underwriting fees were $267 million, down 3%, driven by lower revenue in Europe
and Asia, partially offset by strong performance in the Americas in common stock and convertible
offerings. Fixed Income Markets revenue was $687 million, down by $1.8 billion, or 72%, from the
prior year. The decrease was primarily due to markdowns of $1.3 billion (net of fees) on leveraged
lending funded loans and unfunded commitments and markdowns of $339 million (net of risk
management results) on CDO warehouses and unsold positions. Fixed Income Markets revenue also
decreased due to weak credit trading performance and significantly lower commodities results,
compared with a strong prior-year quarter. These lower results were offset partially by record
revenue in both rates and currencies. Equity Markets revenue was $537 million, down 18% from the
prior year, as weaker trading results were offset partially by strong client revenue across
businesses. Fixed Income Markets and Equity Markets had a combined benefit of $454 million from the
widening of the Firms credit spread on certain structured liabilities, with an impact of $304
million and $150 million, respectively. Credit Portfolio revenue was $392 million, up 45% from the
prior year, primarily due to higher trading revenue from risk
management activities and gains from loan
workouts.
The Provision for credit losses was $227 million, compared with $7 million in the prior year. The
provision was up due to an increase in the Allowance for credit losses, primarily related to
portfolio growth. Net charge-offs were $67 million, compared with net recoveries of $8 million in
the prior year. The Allowance for loan losses to average loans retained was 1.80% for the current
quarter, an increase from 1.64% in the prior year. Nonperforming assets were $325 million, compared
with $456 million from the prior year.
Noninterest expense was $2.4 billion, down by $866 million, or 27%, from the prior year. The
decrease was due primarily to lower performance-based compensation.
Year-to-date results
Net income was $3.0 billion, driven by record year-to-date revenues of $15.0 billion. Compared with
the prior year, net income increased by $350 million, or 13%, reflecting record investment banking
fees and equity markets revenue, partially offset by weaker fixed income results and increases in
noninterest expense and the Provision for credit losses.
Net revenue was $15.0 billion, up by $1.0 billion, or 7%, from the prior year, driven by record
investment banking fees and record equity market results. Investment banking fees were $5.0
billion, up 25% from the prior year, driven by record fees across advisory, debt underwriting and
equity underwriting. Advisory fees were $1.6 billion, up 38%, benefiting from strong performance
across all regions. Debt underwriting fees were $2.2 billion, up 12%, driven by record loan
syndication fees and record bond underwriting. Equity underwriting fees were $1.2 billion, up 37%,
reflecting strong performance across all regions. Fixed Income Markets revenue decreased by 14%
from the prior year, primarily due to markdowns of $1.4 billion (net of fees) on leverage lending
funded loans and unfunded commitments and markdowns of $358 million (net of risk management
results) on CDO warehouses and unsold positions. Fixed Income Markets revenue also decreased due to
weak credit trading and significantly lower commodities results, compared with a strong prior year.
These lower results were offset partially by record revenue in rates and currencies. Equity Markets
revenue was $3.3 billion, up 33%, benefiting from strong trading results across all products and
strong client revenue. Credit Portfolio revenue was $990 million, up 18%, primarily due to higher
trading revenue from risk management activities, partially offset by lower gains from loan sales and
workouts.
The Provision for credit losses was $454 million, an increase of $326 million from the prior year.
The change was due to a net increase of $240 million in the Allowance for credit losses, primarily
due to portfolio activity and growth. In addition, there were $45 million of net charge-offs in the
current year, compared with $41 million of net recoveries in the prior period. The Allowance for
loan losses to average loans was 1.85% for 2007, compared with a ratio of 1.74% in the prior year.
Noninterest
expense was $10.1 billion, up by $408 million, or 4%, from
the prior year.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except headcount and ratio data) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
710,665 |
|
|
$ |
626,245 |
|
|
|
13 |
% |
|
$ |
688,730 |
|
|
$ |
648,101 |
|
|
|
6 |
% |
Trading
assets debt and equity instruments(a) |
|
|
372,212 |
|
|
|
283,915 |
|
|
|
31 |
|
|
|
355,708 |
|
|
|
268,256 |
|
|
|
33 |
|
Trading
assets derivatives receivables |
|
|
63,017 |
|
|
|
53,184 |
|
|
|
18 |
|
|
|
59,336 |
|
|
|
52,769 |
|
|
|
12 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained(b) |
|
|
61,919 |
|
|
|
61,623 |
|
|
|
|
|
|
|
59,996 |
|
|
|
58,137 |
|
|
|
3 |
|
Loans at fair value and loans held-for-sale(a) |
|
|
17,315 |
|
|
|
24,030 |
|
|
|
(28 |
) |
|
|
15,278 |
|
|
|
21,072 |
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
79,234 |
|
|
|
85,653 |
|
|
|
(7 |
) |
|
|
75,274 |
|
|
|
79,209 |
|
|
|
(5 |
) |
Adjusted assets(c) |
|
|
625,619 |
|
|
|
539,278 |
|
|
|
16 |
|
|
|
600,688 |
|
|
|
520,718 |
|
|
|
15 |
|
Equity |
|
|
21,000 |
|
|
|
21,000 |
|
|
|
|
|
|
|
21,000 |
|
|
|
20,670 |
|
|
|
2 |
|
|
Headcount |
|
|
25,691 |
# |
|
|
23,447 |
# |
|
|
10 |
|
|
|
25,691 |
# |
|
|
23,447 |
# |
|
|
10 |
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
67 |
|
|
$ |
(8 |
) |
|
NM |
|
|
$ |
45 |
|
|
$ |
(41 |
) |
|
NM |
|
Nonperforming
assets:(d)
Nonperforming loans |
|
|
265 |
|
|
|
420 |
|
|
|
(37 |
) |
|
|
265 |
|
|
|
420 |
|
|
|
(37 |
) |
Other nonperforming assets |
|
|
60 |
|
|
|
36 |
|
|
|
67 |
|
|
|
60 |
|
|
|
36 |
|
|
|
67 |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
1,112 |
|
|
|
1,010 |
|
|
|
10 |
|
|
|
1,112 |
|
|
|
1,010 |
|
|
|
10 |
|
Allowance for lending-related commitments |
|
|
568 |
|
|
|
292 |
|
|
|
95 |
|
|
|
568 |
|
|
|
292 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for credit losses |
|
|
1,680 |
|
|
|
1,302 |
|
|
|
29 |
|
|
|
1,680 |
|
|
|
1,302 |
|
|
|
29 |
|
|
Net charge-off (recovery) rate(a)(b) |
|
|
0.43 |
% |
|
|
(0.05 |
)% |
|
|
|
|
|
|
0.10 |
% |
|
|
(0.09 |
)% |
|
|
|
|
Allowance for loan losses to average loans(a)(b) |
|
|
1.80 |
|
|
|
1.64 |
|
|
|
|
|
|
|
1.85 |
|
|
|
1.74 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans(d) |
|
|
585 |
|
|
|
253 |
|
|
|
|
|
|
|
585 |
|
|
|
253 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.33 |
|
|
|
0.49 |
|
|
|
|
|
|
|
0.35 |
|
|
|
0.53 |
|
|
|
|
|
Market
risk average trading
and credit portfolio VAR(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
98 |
|
|
$ |
63 |
|
|
|
56 |
|
|
$ |
72 |
|
|
$ |
58 |
|
|
|
24 |
|
Foreign exchange |
|
|
23 |
|
|
|
24 |
|
|
|
(4 |
) |
|
|
21 |
|
|
|
23 |
|
|
|
(9 |
) |
Equities |
|
|
35 |
|
|
|
32 |
|
|
|
9 |
|
|
|
43 |
|
|
|
29 |
|
|
|
48 |
|
Commodities and other |
|
|
28 |
|
|
|
46 |
|
|
|
(39 |
) |
|
|
34 |
|
|
|
48 |
|
|
|
(29 |
) |
Less: portfolio diversification(f) |
|
|
(72 |
) |
|
|
(82 |
) |
|
|
12 |
|
|
|
(68 |
) |
|
|
(74 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total trading VAR(g) |
|
|
112 |
|
|
|
83 |
|
|
|
35 |
|
|
|
102 |
|
|
|
84 |
|
|
|
21 |
|
Credit portfolio VAR(h) |
|
|
17 |
|
|
|
14 |
|
|
|
21 |
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
Less: portfolio diversification(f) |
|
|
(22 |
) |
|
|
(8 |
) |
|
|
(175 |
) |
|
|
(16 |
) |
|
|
(9 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total trading and credit portfolio VAR |
|
$ |
107 |
|
|
$ |
89 |
|
|
|
20 |
|
|
$ |
100 |
|
|
$ |
89 |
|
|
|
12 |
|
|
|
|
|
(a) |
|
As a result of the adoption of SFAS 159 in the first quarter of 2007, $11.7 billion of
loans were reclassified to trading assets. Loans at fair value and loans held-for-sale were
excluded when calculating the allowance coverage ratio and Net charge-off rate. |
(b) |
|
Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and
excluded loans at fair value. |
(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 consolidated under FIN 46R; (3) cash and
securities segregated and on deposit for regulatory and other purposes; and (4) goodwill and
intangibles. The amount of adjusted assets is presented to assist the reader in comparing IBs
asset and capital levels to other investment banks in the securities industry. Asset-to-equity
leverage ratios are commonly used as one measure to assess a companys capital adequacy. IB
believed an adjusted asset amount that excluded the assets discussed above, which were
considered to have a low risk profile, provided a more meaningful measure of balance sheet
leverage in the securities industry. |
(d) |
|
Nonperforming loans included Loans held-for-sale of $75 million and $21 million at September
30, 2007 and 2006, respectively, which were excluded from the allowance coverage ratios.
Nonperforming loans excluded distressed loans held-for-sale purchased as part of IBs
proprietary activities and assets classified as trading assets. Loans elected under the fair
value option and classified within trading assets are also excluded from Nonperforming loans. |
(e) |
|
For a more complete
description of VAR, see pages 6265 of this Form 10-Q. |
(f) |
|
Average VARs were less than the sum of the VARs of their market risk components, which was
due to risk offsets resulting from portfolio diversification. The diversification effect
reflected the fact that the risks were not perfectly correlated. The risk of a portfolio of
positions is usually less than the sum of the risks of the positions themselves. |
(g) |
|
Trading VAR includes substantially all trading activities in IB. Trading VAR does not
include VAR related to the debit valuation adjustments (DVA) taken on derivative and
structured liabilities to reflect the credit quality of the Firm. See the DVA Sensitivity
table on page 64 of this Form 10-Q for further details. |
(h) |
|
Included VAR on derivative credit valuation adjustments, hedges of the credit valuation
adjustment and mark-to-market hedges of the retained loan portfolio, which were all reported
in Principal Transactions revenue. The VAR did not include the retained loan portfolio. |
19
According to Thomson Financial, for the first nine months of 2007, the Firm was ranked #1 in
Global Equity and Equity-Related; #1 in Global Syndicated Loans; #4 in Global Announced M&A; #2 in
Global Debt, Equity and Equity-Related; and #2 in Global Long-term Debt based upon volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
Full Year 2006 |
Market shares and rankings(a) |
|
Market Share |
|
Rankings |
|
Market Share |
|
Rankings |
|
Global debt, equity and equity-related |
|
|
7 |
% |
|
|
#2 |
|
|
|
7 |
% |
|
|
#2 |
|
Global syndicated loans |
|
|
14 |
|
|
|
#1 |
|
|
|
14 |
|
|
|
#1 |
|
Global long-term debt |
|
|
7 |
|
|
|
#2 |
|
|
|
6 |
|
|
|
#3 |
|
Global equity and equity-related |
|
|
9 |
|
|
|
#1 |
|
|
|
7 |
|
|
|
#6 |
|
Global announced M&A |
|
|
23 |
|
|
|
#4 |
|
|
|
23 |
|
|
|
#4 |
|
U.S. debt, equity and equity-related |
|
|
10 |
|
|
|
#2 |
|
|
|
9 |
|
|
|
#2 |
|
U.S. syndicated loans |
|
|
26 |
|
|
|
#1 |
|
|
|
26 |
|
|
|
#1 |
|
U.S. long-term debt |
|
|
11 |
|
|
|
#2 |
|
|
|
12 |
|
|
|
#2 |
|
U.S. equity and equity-related(b) |
|
|
11 |
|
|
|
#2 |
|
|
|
8 |
|
|
|
#6 |
|
U.S. announced M&A |
|
|
26 |
|
|
|
#5 |
|
|
|
28 |
|
|
|
#3 |
|
|
|
|
|
(a) |
|
Source: Thomson Financial Securities data. Global announced M&A was based upon rank
value; all other rankings were 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 and page 4 of this Form 10-Q.
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. See Note 2 on page 73 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit-related fees |
|
$ |
492 |
|
|
$ |
406 |
|
|
|
21 |
% |
|
$ |
1,385 |
|
|
$ |
1,167 |
|
|
|
19 |
% |
Asset management, administration and commissions |
|
|
336 |
|
|
|
326 |
|
|
|
3 |
|
|
|
943 |
|
|
|
1,129 |
|
|
|
(16 |
) |
Securities (losses) |
|
|
|
|
|
|
(7 |
) |
|
NM |
|
|
|
|
|
|
|
(52 |
) |
|
NM |
|
Mortgage fees and related income(a) |
|
|
229 |
|
|
|
67 |
|
|
|
242 |
|
|
|
1,206 |
|
|
|
507 |
|
|
|
138 |
|
Credit card income |
|
|
167 |
|
|
|
136 |
|
|
|
23 |
|
|
|
472 |
|
|
|
380 |
|
|
|
24 |
|
Other income |
|
|
296 |
|
|
|
170 |
|
|
|
74 |
|
|
|
687 |
|
|
|
381 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
1,520 |
|
|
|
1,098 |
|
|
|
38 |
|
|
|
4,693 |
|
|
|
3,512 |
|
|
|
34 |
|
Net interest income |
|
|
2,681 |
|
|
|
2,457 |
|
|
|
9 |
|
|
|
7,971 |
|
|
|
7,585 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
4,201 |
|
|
|
3,555 |
|
|
|
18 |
|
|
|
12,664 |
|
|
|
11,097 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
680 |
|
|
|
114 |
|
|
|
496 |
|
|
|
1,559 |
|
|
|
299 |
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense(a) |
|
|
1,087 |
|
|
|
886 |
|
|
|
23 |
|
|
|
3,256 |
|
|
|
2,707 |
|
|
|
20 |
|
Noncompensation expense(a) |
|
|
1,265 |
|
|
|
1,142 |
|
|
|
11 |
|
|
|
3,753 |
|
|
|
3,595 |
|
|
|
4 |
|
Amortization of intangibles |
|
|
117 |
|
|
|
111 |
|
|
|
5 |
|
|
|
351 |
|
|
|
334 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
2,469 |
|
|
|
2,139 |
|
|
|
15 |
|
|
|
7,360 |
|
|
|
6,636 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
1,052 |
|
|
|
1,302 |
|
|
|
(19 |
) |
|
|
3,745 |
|
|
|
4,162 |
|
|
|
(10 |
) |
Income tax expense |
|
|
413 |
|
|
|
556 |
|
|
|
(26 |
) |
|
|
1,462 |
|
|
|
1,667 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
639 |
|
|
$ |
746 |
|
|
|
(14 |
) |
|
$ |
2,283 |
|
|
$ |
2,495 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
16 |
% |
|
|
21 |
% |
|
|
|
|
|
|
19 |
% |
|
|
24 |
% |
|
|
|
|
Overhead ratio(a) |
|
|
59 |
|
|
|
60 |
|
|
|
|
|
|
|
58 |
|
|
|
60 |
|
|
|
|
|
Overhead ratio excluding core deposit intangibles(a)(b) |
|
|
56 |
|
|
|
57 |
|
|
|
|
|
|
|
55 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
(a)
|
|
The Firm adopted SFAS 159 in the first quarter of 2007. As a result, certain
loan-origination costs have been classified as expense (previously netted against revenue) for
the three and nine months ended September 30, 2007. |
(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 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 excluded 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 three months ended September 30, 2007 and 2006, respectively, and $347 million
and $328 million for the nine months ended September 30, 2007 and 2006, respectively. |
21
Quarterly results
Net income was $639 million, down by $107 million, or 14%, from the prior year, due to lower
results in Regional Banking, primarily due to an increase in the Provision for credit losses.
Net revenue was $4.2 billion, up by $646 million, or 18%, from the prior year. Net interest income
was $2.7 billion, up by $224 million, or 9%, due to the Bank of New York transaction, wider spreads
on loans and higher deposit balances. These benefits were offset partially by a shift to
narrowerspread deposit products. Noninterest revenue was $1.5 billion, up by $422 million, or
38%, benefiting from the absence of a prior-year negative valuation adjustment to the MSR asset;
increases in deposit-related fees; an increase in mortgage loan originations; a higher level of
education loan sales; and increased mortgage loan servicing revenue. Noninterest revenue also
benefited from the Bank of New York transaction and the classification of certain mortgage loan
origination costs as expense (loan origination costs previously netted against revenue commenced
being recorded as an expense in the first quarter of 2007 due to the adoption of SFAS 159). These
benefits were offset partially by markdowns on the mortgage warehouse and pipeline.
The Provision for credit losses was $680 million, compared with $114 million in the prior year. The
current-quarter provision includes a net increase of $306 million in the Allowance for loan losses
related to home equity loans as continued weak housing prices have resulted in an increase in
estimated losses for high loan-to-value loans. Home equity net charge-offs were $150 million (0.65%
net charge-off rate), compared with $29 million (0.15% net charge-off rate) in the prior year. In
addition, the current-quarter provision includes an increase in the Allowance for loan losses,
reflecting increased loan balances resulting from the decision to retain rather than sell subprime
mortgage loans. Subprime mortgage net charge-offs were $40 million (1.62% net charge-off rate),
compared with $13 million (0.36% net charge-off rate) in the prior year.
Noninterest expense was $2.5 billion, up by $330 million, or 15%, due to the Bank of New York
transaction, the classification of certain loan origination costs as expense due to the adoption of
SFAS 159, investments in the retail distribution network and an increase in loan originations in
Mortgage Banking.
Year-to-date results
Net income was $2.3 billion, down by $212 million, or 8%, from the prior year, as lower results in
Regional Banking and Auto Finance, primarily due to an increase in the Provision for credit losses,
were offset partially by improved results in Mortgage Banking.
Net revenue was $12.7 billion, up by $1.6 billion, or 14%, from the prior year. Net interest income
was $8.0 billion, up by $386 million, or 5%, due to the Bank of New York transaction, wider spreads
on loans and higher deposit balances. These benefits were offset partially by the sale of the
insurance business, a shift to narrowerspread deposit products and a decrease in loan balances.
Noninterest revenue was $4.7 billion, up by $1.2 billion, or 34%, benefiting from increases in
deposit-related fees; the absence of a prior-year negative valuation adjustment to the MSR asset;
an increase in mortgage originations; increased mortgage loan servicing revenue; higher operating
lease revenue; and a higher level of education loan sales. Noninterest revenue also benefited from
the Bank of New York transaction and the classification of certain mortgage loan origination costs
as expense (loan origination costs previously netted against revenue commenced being recorded as an
expense in the first quarter of 2007 due to the adoption of SFAS 159). These benefits were offset
partially by markdowns on the mortgage warehouse and pipeline and the sale of the insurance
business.
The Provision for credit losses was $1.6 billion, compared with $299 million in the prior year. The
year-to-date provision includes a net increase of $635 million in the Allowance for loan losses
related to home equity loans, as continued weak housing prices have resulted in an increase in
estimated losses for high loan-to-value loans. Home equity net charge-offs were $316 million (0.47%
net charge-off rate), compared with $92 million (0.16% net charge-off rate) in the prior year. In
addition, the year-to-date provision reflects an increase in estimated losses in the subprime
mortgage portfolio, as well as increased loan balances resulting from the decision to retain rather
than sell subprime mortgage loans. Subprime mortgage net charge-offs were $86 million (1.28% net
charge-off rate), compared with $30 million (0.27% net charge-off rate) in the prior year. Home
equity and subprime mortgage underwriting standards were tightened during the year-to-date period,
and pricing actions were implemented to reflect elevated risks in these segments.
Noninterest expense was $7.4 billion, up by $724 million, or 11%, due to the Bank of New York
transaction, the classification of certain loan origination costs as expense due to the adoption of
SFAS 159, investments in the retail distribution network and an increase in loan originations in
Mortgage Banking. These increases were offset partially by the sale of the insurance business.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except headcount and ratio data) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
216,754 |
|
|
$ |
227,056 |
|
|
|
(5 |
)% |
|
$ |
216,754 |
|
|
$ |
227,056 |
|
|
|
(5 |
)% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained |
|
|
172,498 |
|
|
|
188,549 |
|
|
|
(9 |
) |
|
|
172,498 |
|
|
|
188,549 |
|
|
|
(9 |
) |
Loans at fair value and loans held-for-sale(a) |
|
|
18,274 |
|
|
|
17,005 |
|
|
|
7 |
|
|
|
18,274 |
|
|
|
17,005 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
190,772 |
|
|
|
205,554 |
|
|
|
(7 |
) |
|
|
190,772 |
|
|
|
205,554 |
|
|
|
(7 |
) |
Deposits |
|
|
216,135 |
|
|
|
198,260 |
|
|
|
9 |
|
|
|
216,135 |
|
|
|
198,260 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
214,852 |
|
|
$ |
225,307 |
|
|
|
(5 |
) |
|
$ |
216,218 |
|
|
$ |
230,307 |
|
|
|
(6 |
) |
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained |
|
|
168,495 |
|
|
|
189,313 |
|
|
|
(11 |
) |
|
|
165,479 |
|
|
|
186,852 |
|
|
|
(11 |
) |
Loans at fair value and loans held-for-sale(a) |
|
|
19,560 |
|
|
|
13,994 |
|
|
|
40 |
|
|
|
24,289 |
|
|
|
14,411 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
188,055 |
|
|
|
203,307 |
|
|
|
(8 |
) |
|
|
189,768 |
|
|
|
201,263 |
|
|
|
(6 |
) |
Deposits |
|
|
216,904 |
|
|
|
198,967 |
|
|
|
9 |
|
|
|
217,669 |
|
|
|
197,491 |
|
|
|
10 |
|
Equity |
|
|
16,000 |
|
|
|
14,300 |
|
|
|
12 |
|
|
|
16,000 |
|
|
|
14,167 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
68,528 |
# |
|
|
61,915 |
# |
|
|
11 |
|
|
|
68,528 |
# |
|
|
61,915 |
# |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
350 |
|
|
$ |
128 |
|
|
|
173 |
|
|
$ |
805 |
|
|
$ |
362 |
|
|
|
122 |
|
Nonperforming loans(b)(d) |
|
|
1,991 |
|
|
|
1,404 |
|
|
|
42 |
|
|
|
1,991 |
|
|
|
1,404 |
|
|
|
42 |
|
Nonperforming assets |
|
|
2,404 |
|
|
|
1,595 |
|
|
|
51 |
|
|
|
2,404 |
|
|
|
1,595 |
|
|
|
51 |
|
Allowance for loan losses |
|
|
2,105 |
|
|
|
1,306 |
|
|
|
61 |
|
|
|
2,105 |
|
|
|
1,306 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate(c) |
|
|
0.82 |
% |
|
|
0.27 |
% |
|
|
|
|
|
|
0.65 |
% |
|
|
0.26 |
% |
|
|
|
|
Allowance for loan losses to ending loans(c) |
|
|
1.22 |
|
|
|
0.69 |
|
|
|
|
|
|
|
1.22 |
|
|
|
0.69 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans(c) |
|
|
107 |
|
|
|
95 |
|
|
|
|
|
|
|
107 |
|
|
|
95 |
|
|
|
|
|
Nonperforming loans to total loans |
|
|
1.04 |
|
|
|
0.68 |
|
|
|
|
|
|
|
1.04 |
|
|
|
0.68 |
|
|
|
|
|
|
|
|
|
(a) |
|
Loans included prime mortgage loans originated with the intent to sell, which, for new
originations on or after January 1, 2007, were accounted for at fair value under SFAS 159.
These loans, classified as Trading assets on the Consolidated balance sheets, totaled $14.4
billion at September 30, 2007. Average Loans included $14.1 billion and $11.4 billion of these
loans for the three and nine months ended September 30, 2007,
respectively. |
(b) |
|
Nonperforming loans included Loans held-for-sale and Loans accounted for at fair value under
SFAS 159 of $17 million and $24 million at September 30, 2007 and 2006, respectively. Certain
of these loans are classified as Trading assets on the Consolidated balance sheet. |
(c) |
|
Loans held-for-sale and Loans accounted for at fair value under SFAS 159 were excluded when
calculating the allowance coverage ratio and the Net charge-off rate. |
(d) |
|
Excluded Nonperforming assets related to (1) loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by U.S. government agencies of $1.3 billion and
$1.1 billion at September 30, 2007 and 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 $241 million and $189 million at September 30, 2007
and 2006, respectively. These amounts for GNMA and education loans are excluded, as
reimbursement is proceeding normally. |
REGIONAL BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
1,013 |
|
|
$ |
855 |
|
|
|
18 |
% |
|
$ |
2,783 |
|
|
$ |
2,526 |
|
|
|
10 |
% |
Net interest income |
|
|
2,325 |
|
|
|
2,107 |
|
|
|
10 |
|
|
|
6,920 |
|
|
|
6,539 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net revenue |
|
|
3,338 |
|
|
|
2,962 |
|
|
|
13 |
|
|
|
9,703 |
|
|
|
9,065 |
|
|
|
7 |
|
Provision for credit losses |
|
|
574 |
|
|
|
53 |
|
|
NM |
|
|
|
1,301 |
|
|
|
189 |
|
|
NM |
|
Noninterest expense |
|
|
1,760 |
|
|
|
1,611 |
|
|
|
9 |
|
|
|
5,238 |
|
|
|
5,095 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
1,004 |
|
|
|
1,298 |
|
|
|
(23 |
) |
|
|
3,164 |
|
|
|
3,781 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
611 |
|
|
$ |
744 |
|
|
|
(18 |
) |
|
$ |
1,930 |
|
|
$ |
2,265 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
21 |
% |
|
|
29 |
% |
|
|
|
|
|
|
22 |
% |
|
|
30 |
% |
|
|
|
|
Overhead ratio |
|
|
53 |
|
|
|
54 |
|
|
|
|
|
|
|
54 |
|
|
|
56 |
|
|
|
|
|
Overhead ratio excluding core deposit intangibles(a) |
|
|
49 |
|
|
|
51 |
|
|
|
|
|
|
|
50 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
(a) |
|
Regional Banking uses the overhead ratio excluding the amortization of 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
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 excluded
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 three months
ended September 30, 2007 and 2006, respectively, and $347 million and $328 million for the
nine months ended September 30, 2007 and 2006, respectively. |
23
Quarterly results
Regional Banking net income was $611 million, down by $133 million, or 18%, from the prior year.
Net revenue was $3.3 billion, up by $376 million, or 13%, benefiting from the following: the Bank
of New York transaction; increases in deposit-related fees; a higher level of education loan sales;
growth in deposits and wider loan spreads. These benefits were offset partially by a shift to
narrowerspread deposit products. The Provision for credit losses was $574 million, compared with
$53 million in the prior year. The increase in provision was due to the home equity and subprime
mortgage portfolios (see Retail Financial Services discussion of Provision for credit losses for
further detail). Noninterest expense was $1.8 billion, up by $149 million, or 9%, from the prior
year due to the Bank of New York transaction and investments in the retail distribution network.
Year-to-date results
Regional Banking net income was $1.9 billion, down by $335 million, or 15%, from the prior
year. Net revenue was $9.7 billion, up by $638 million, or 7%, benefiting from the following: the
Bank of New York transaction; increases in deposit-related fees; growth in deposits; wider loan
spreads; and a higher level of education loan sales. These benefits were offset partially by the
sale of the insurance business and a shift to narrowerspread deposit products. The Provision for
credit losses was $1.3 billion, compared with $189 million in the prior year. The increase in
provision was due to the home equity and subprime mortgage portfolios (see Retail Financial
Services discussion of Provision for credit losses for further detail). Noninterest expense was
$5.2 billion, up by $143 million, or 3%, from the prior year as the Bank of New York transaction
and investments in the retail distribution network were offset partially by the sale of the
insurance business.
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in billions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity origination volume |
|
$ |
11.2 |
|
|
$ |
13.3 |
|
|
|
(16 |
)% |
|
$ |
38.5 |
|
|
$ |
39.0 |
|
|
|
(1 |
)% |
End-of-period loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
93.0 |
|
|
$ |
80.4 |
|
|
|
16 |
|
|
$ |
93.0 |
|
|
$ |
80.4 |
|
|
|
16 |
|
Mortgage(a) |
|
|
12.3 |
|
|
|
46.6 |
|
|
|
(74 |
) |
|
|
12.3 |
|
|
|
46.6 |
|
|
|
(74 |
) |
Business banking |
|
|
14.9 |
|
|
|
13.1 |
|
|
|
14 |
|
|
|
14.9 |
|
|
|
13.1 |
|
|
|
14 |
|
Education |
|
|
10.2 |
|
|
|
9.4 |
|
|
|
9 |
|
|
|
10.2 |
|
|
|
9.4 |
|
|
|
9 |
|
Other loans(b) |
|
|
2.4 |
|
|
|
2.2 |
|
|
|
9 |
|
|
|
2.4 |
|
|
|
2.2 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total end-of-period loans |
|
|
132.8 |
|
|
|
151.7 |
|
|
|
(12 |
) |
|
|
132.8 |
|
|
|
151.7 |
|
|
|
(12 |
) |
End-of-period deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
$ |
64.5 |
|
|
$ |
59.8 |
|
|
|
8 |
|
|
$ |
64.5 |
|
|
$ |
59.8 |
|
|
|
8 |
|
Savings |
|
|
95.7 |
|
|
|
86.9 |
|
|
|
10 |
|
|
|
95.7 |
|
|
|
86.9 |
|
|
|
10 |
|
Time and other |
|
|
46.5 |
|
|
|
41.5 |
|
|
|
12 |
|
|
|
46.5 |
|
|
|
41.5 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Total end-of-period deposits |
|
|
206.7 |
|
|
|
188.2 |
|
|
|
10 |
|
|
|
206.7 |
|
|
|
188.2 |
|
|
|
10 |
|
Average loans owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
91.8 |
|
|
$ |
78.8 |
|
|
|
16 |
|
|
$ |
89.1 |
|
|
$ |
76.4 |
|
|
|
17 |
|
Mortgage(a) |
|
|
9.9 |
|
|
|
47.8 |
|
|
|
(79 |
) |
|
|
9.2 |
|
|
|
46.5 |
|
|
|
(80 |
) |
Business banking |
|
|
14.8 |
|
|
|
13.0 |
|
|
|
14 |
|
|
|
14.5 |
|
|
|
12.9 |
|
|
|
12 |
|
Education |
|
|
9.8 |
|
|
|
8.9 |
|
|
|
10 |
|
|
|
10.4 |
|
|
|
7.7 |
|
|
|
35 |
|
Other loans(b) |
|
|
2.4 |
|
|
|
2.2 |
|
|
|
9 |
|
|
|
2.6 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average loans(c) |
|
|
128.7 |
|
|
|
150.7 |
|
|
|
(15 |
) |
|
|
125.8 |
|
|
|
146.1 |
|
|
|
(14 |
) |
Average deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
$ |
64.9 |
|
|
$ |
60.3 |
|
|
|
8 |
|
|
$ |
66.5 |
|
|
$ |
61.9 |
|
|
|
7 |
|
Savings |
|
|
97.1 |
|
|
|
88.1 |
|
|
|
10 |
|
|
|
97.4 |
|
|
|
89.1 |
|
|
|
9 |
|
Time and other |
|
|
43.3 |
|
|
|
39.0 |
|
|
|
11 |
|
|
|
42.5 |
|
|
|
35.6 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
Total average deposits |
|
|
205.3 |
|
|
|
187.4 |
|
|
|
10 |
|
|
|
206.4 |
|
|
|
186.6 |
|
|
|
11 |
|
Average assets |
|
|
140.6 |
|
|
|
159.1 |
|
|
|
(12 |
) |
|
|
138.1 |
|
|
|
160.3 |
|
|
|
(14 |
) |
Average equity |
|
|
11.8 |
|
|
|
10.2 |
|
|
|
16 |
|
|
|
11.8 |
|
|
|
10.1 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate(d) |
|
|
2.39 |
% |
|
|
1.57 |
% |
|
|
|
|
|
|
2.39 |
% |
|
|
1.57 |
% |
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
150 |
|
|
$ |
29 |
|
|
|
417 |
|
|
$ |
316 |
|
|
$ |
92 |
|
|
|
243 |
|
Mortgage |
|
|
40 |
|
|
|
14 |
|
|
|
186 |
|
|
|
86 |
|
|
|
35 |
|
|
|
146 |
|
Business banking |
|
|
33 |
|
|
|
19 |
|
|
|
74 |
|
|
|
88 |
|
|
|
53 |
|
|
|
66 |
|
Other loans |
|
|
23 |
|
|
|
1 |
|
|
|
NM |
|
|
|
88 |
|
|
|
21 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs |
|
|
246 |
|
|
|
63 |
|
|
|
290 |
|
|
|
578 |
|
|
|
201 |
|
|
|
188 |
|
Net charge-off rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
0.65 |
% |
|
|
0.15 |
% |
|
|
|
|
|
|
0.47 |
% |
|
|
0.16 |
% |
|
|
|
|
Mortgage |
|
|
1.60 |
|
|
|
0.12 |
|
|
|
|
|
|
|
1.25 |
|
|
|
0.10 |
|
|
|
|
|
Business banking |
|
|
0.88 |
|
|
|
0.58 |
|
|
|
|
|
|
|
0.81 |
|
|
|
0.55 |
|
|
|
|
|
Other loans |
|
|
1.01 |
|
|
|
0.05 |
|
|
|
|
|
|
|
1.28 |
|
|
|
0.36 |
|
|
|
|
|
Total net charge-off rate(c) |
|
|
0.78 |
|
|
|
0.17 |
|
|
|
|
|
|
|
0.63 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets(e) |
|
$ |
2,206 |
|
|
$ |
1,417 |
|
|
|
56 |
|
|
$ |
2,206 |
|
|
$ |
1,417 |
|
|
|
56 |
|
|
|
|
|
(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. The transfer had no impact on the financial results of Regional Banking.
Balances reported at and for the three and nine months ended September 30, 2007, primarily
reflected subprime mortgage loans owned. |
(b) |
|
Included commercial loans derived from community development activities and, prior to July 1,
2006, insurance policy loans. |
(c) |
|
Average loans included Loans held-for-sale of $3.2 billion and $2.5 billion for the three
months ended September 30, 2007 and 2006, respectively and $3.8 billion and $2.6 billion for
the nine months ended September 30, 2007 and 2006, respectively. These amounts were excluded
when calculating the Net charge-off rate. |
(d) |
|
Excluded loans that are 30 days past due and still accruing, which are insured by U.S.
government agencies under the Federal Family Education Loan Program of $590 million and $462
million at September 30, 2007 and 2006, respectively. These amounts are excluded as
reimbursement is proceeding normally. |
(e) |
|
Excluded Nonperforming assets related to 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 $241 million and $189 million at September 30, 2007 and 2006, respectively.
These amounts are excluded as reimbursement is proceeding normally. |
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail branch business metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Investment sales volume (in millions) |
|
$ |
4,346 |
|
|
$ |
3,536 |
|
|
|
23 |
% |
|
$ |
14,246 |
|
|
$ |
10,781 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
3,096 |
# |
|
|
2,677 |
# |
|
|
419 |
# |
|
|
3,096 |
# |
|
|
2,677 |
# |
|
|
419 |
# |
ATMs |
|
|
8,943 |
|
|
|
7,825 |
|
|
|
1,118 |
|
|
|
8,943 |
|
|
|
7,825 |
|
|
|
1,118 |
|
Personal bankers(a) |
|
|
9,503 |
|
|
|
7,484 |
|
|
|
2,019 |
|
|
|
9,503 |
|
|
|
7,484 |
|
|
|
2,019 |
|
Sales specialists(a) |
|
|
4,025 |
|
|
|
3,471 |
|
|
|
554 |
|
|
|
4,025 |
|
|
|
3,471 |
|
|
|
554 |
|
Active online customers (in thousands)(b) |
|
|
5,706 |
|
|
|
4,717 |
|
|
|
989 |
|
|
|
5,706 |
|
|
|
4,717 |
|
|
|
989 |
|
Checking accounts (in thousands) |
|
|
10,644 |
|
|
|
9,270 |
|
|
|
1,374 |
|
|
|
10,644 |
|
|
|
9,270 |
|
|
|
1,374 |
|
|
|
|
|
(a) |
|
Employees acquired as part of the Bank of New York transaction are included beginning
June 30, 2007. This transaction was completed on October 1, 2006. |
(b) |
|
During the quarter ended June 30, 2007, RFS changed the methodology for determining active
online customers to include all individual RFS customers with one or more online accounts that
have been active within 90 days of period end, including customers who also have online
accounts with Card Services. Prior periods have been restated to conform to this new
methodology. |
MORTGAGE BANKING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios and where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue(a) |
|
$ |
176 |
|
|
$ |
197 |
|
|
|
(11 |
)% |
|
$ |
1,039 |
|
|
$ |
618 |
|
|
|
68 |
% |
Net mortgage servicing revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing revenue |
|
|
629 |
|
|
|
579 |
|
|
|
9 |
|
|
|
1,845 |
|
|
|
1,702 |
|
|
|
8 |
|
Changes in MSR asset fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to inputs or assumptions in model |
|
|
(810 |
) |
|
|
(1,075 |
) |
|
|
25 |
|
|
|
250 |
|
|
|
127 |
|
|
|
97 |
|
Other changes in fair value |
|
|
(377 |
) |
|
|
(327 |
) |
|
|
(15 |
) |
|
|
(1,138 |
) |
|
|
(1,068 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total changes in MSR asset fair value |
|
|
(1,187 |
) |
|
|
(1,402 |
) |
|
|
15 |
|
|
|
(888 |
) |
|
|
(941 |
) |
|
|
6 |
|
Derivative valuation adjustments and other |
|
|
788 |
|
|
|
824 |
|
|
|
(4 |
) |
|
|
(353 |
) |
|
|
(475 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net mortgage servicing revenue |
|
|
230 |
|
|
|
1 |
|
|
|
NM |
|
|
|
604 |
|
|
|
286 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
406 |
|
|
|
198 |
|
|
|
105 |
|
|
|
1,643 |
|
|
|
904 |
|
|
|
82 |
|
Noninterest expense(a) |
|
|
485 |
|
|
|
334 |
|
|
|
45 |
|
|
|
1,469 |
|
|
|
987 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
(79 |
) |
|
|
(136 |
) |
|
|
42 |
|
|
|
174 |
|
|
|
(83 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(48 |
) |
|
$ |
(83 |
) |
|
|
42 |
|
|
$ |
107 |
|
|
$ |
(51 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
NM |
|
|
|
NM |
|
|
|
|
|
|
|
7 |
% |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions)
Third-party mortgage loans serviced (ending) |
|
$ |
600.0 |
|
|
$ |
510.7 |
|
|
|
17 |
|
|
$ |
600.0 |
|
|
$ |
510.7 |
|
|
|
17 |
|
MSR net carrying value (ending) |
|
|
9.1 |
|
|
|
7.4 |
|
|
|
23 |
|
|
|
9.1 |
|
|
|
7.4 |
|
|
|
23 |
|
Average mortgage loans held-for-sale(b) |
|
|
16.4 |
|
|
|
10.5 |
|
|
|
56 |
|
|
|
20.4 |
|
|
|
11.1 |
|
|
|
84 |
|
Average assets |
|
|
31.4 |
|
|
|
22.4 |
|
|
|
40 |
|
|
|
35.0 |
|
|
|
24.5 |
|
|
|
43 |
|
Average equity |
|
|
2.0 |
|
|
|
1.7 |
|
|
|
18 |
|
|
|
2.0 |
|
|
|
1.7 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage origination volume by channel
(in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
11.1 |
|
|
$ |
10.1 |
|
|
|
10 |
|
|
$ |
35.6 |
|
|
$ |
30.0 |
|
|
|
19 |
|
Wholesale |
|
|
9.8 |
|
|
|
7.7 |
|
|
|
27 |
|
|
|
32.5 |
|
|
|
23.8 |
|
|
|
37 |
|
Correspondent |
|
|
7.2 |
|
|
|
2.7 |
|
|
|
167 |
|
|
|
18.4 |
|
|
|
9.8 |
|
|
|
88 |
|
CNT (Negotiated transactions) |
|
|
11.1 |
|
|
|
8.5 |
|
|
|
31 |
|
|
|
32.9 |
|
|
|
25.8 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
Total(c) |
|
$ |
39.2 |
|
|
$ |
29.0 |
|
|
|
35 |
|
|
$ |
119.4 |
|
|
$ |
89.4 |
|
|
|
34 |
|
|
|
|
|
(a) |
|
The Firm adopted SFAS 159 in the first quarter of 2007. As a result, certain loan
origination costs have been classified as expense (previously netted against revenue) for the
three and nine months ended September 30, 2007. |
(b) |
|
Included $14.1 billion and $11.4 billion of prime mortgage loans at fair value for the three
and nine months ended September 30, 2007, respectively. These loans are classified as Trading
assets on the Consolidated balance sheets for 2007. |
(c) |
|
During the second quarter of 2007, RFS changed its definition of mortgage originations to
include all newly originated mortgage loans sourced through RFS channels, and to exclude all
mortgage loan originations sourced through IB channels. Prior periods have been restated to
conform to this new definition. |
26
Quarterly results
Mortgage Banking net loss was $48 million, compared with a net loss of $83 million in the prior
year. Net revenue was $406 million, up by $208 million. Net revenue comprises production revenue
and net mortgage servicing revenue. Production revenue was $176 million, down by $21 million, as
markdowns of $186 million on the mortgage warehouse and pipeline were offset partially by an
increase in mortgage loan originations and the classification of certain loan origination costs as
expense (loan origination costs previously netted against revenue commenced being recorded as an
expense in the first quarter of 2007 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 $230 million, compared with $1 million in the prior year. Loan servicing revenue of
$629 million increased by $50 million on growth of 17% in third-party loans serviced. MSR risk
management revenue of negative $22 million improved by $229 million, due primarily to the absence
of a prior-year negative valuation adjustment of $235 million to the MSR asset. Other changes in
fair value of the MSR asset, representing run-off of the asset against the realization of servicing
cash flows, were negative $377 million, compared with negative $327 million in the prior year.
Noninterest expense was $485 million, up by $151 million, or 45%. The increase reflected the
classification of certain loan origination costs due to the adoption of SFAS 159, and higher
compensation expense, the result of higher loan originations and a greater number of loan officers.
Year-to-date results
Mortgage Banking net income was $107 million, compared with a net loss of $51 million in the prior
year. Net revenue was $1.6 billion, up by $739 million. Net revenue comprises production revenue
and net mortgage servicing revenue. Production revenue was $1.0 billion, up by $421 million, due to
an increase in mortgage loan originations and the classification of certain loan origination costs
as expense (loan origination costs previously netted against revenue commenced being recorded as an
expense in the first quarter of 2007 due to the adoption of SFAS 159). These increases were offset
partially by markdowns of $186 million on the mortgage warehouse and pipeline, in the third quarter
of 2007. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management
results and other changes in fair value, was $604 million, compared with $286 million in the prior
year. Loan servicing revenue of $1.8 billion increased by $143 million on growth of 17% in
third-party loans serviced. MSR risk management revenue of negative $103 million improved by $245
million, due primarily to the absence of a prior-year negative valuation adjustment of $235 million
to the MSR asset. Other changes in fair value of the MSR asset, representing run-off of the asset
against the realization of servicing cash flows, were negative $1.1 billion. Noninterest expense
was $1.5 billion, up by $482 million, or 49%. The increase reflected the classification of certain
loan origination costs due to the adoption of SFAS 159, and higher compensation expense, the result
of higher loan originations and a greater number of loan officers.
27
AUTO FINANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios and where |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Noninterest revenue |
|
$ |
140 |
|
|
$ |
110 |
|
|
|
27 |
% |
|
$ |
409 |
|
|
$ |
244 |
|
|
|
68 |
% |
Net interest income |
|
|
307 |
|
|
|
285 |
|
|
|
8 |
|
|
|
898 |
|
|
|
884 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
447 |
|
|
|
395 |
|
|
|
13 |
|
|
|
1,307 |
|
|
|
1,128 |
|
|
|
16 |
|
Provision for credit losses |
|
|
96 |
|
|
|
61 |
|
|
|
57 |
|
|
|
247 |
|
|
|
110 |
|
|
|
125 |
|
Noninterest expense |
|
|
224 |
|
|
|
194 |
|
|
|
15 |
|
|
|
653 |
|
|
|
554 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
127 |
|
|
|
140 |
|
|
|
(9 |
) |
|
|
407 |
|
|
|
464 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
76 |
|
|
$ |
85 |
|
|
|
(11 |
) |
|
$ |
246 |
|
|
$ |
281 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
14 |
% |
|
|
14 |
% |
|
|
|
|
|
|
15 |
% |
|
|
16 |
% |
|
|
|
|
ROA |
|
|
0.70 |
|
|
|
0.77 |
|
|
|
|
|
|
|
0.76 |
|
|
|
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto origination volume |
|
$ |
5.2 |
|
|
$ |
5.5 |
|
|
|
(5 |
) |
|
$ |
15.7 |
|
|
$ |
14.3 |
|
|
|
10 |
|
End-of-period loans and lease related assets |
Loans outstanding |
|
$ |
40.3 |
|
|
$ |
38.1 |
|
|
|
6 |
|
|
$ |
40.3 |
|
|
$ |
38.1 |
|
|
|
6 |
|
Lease financing receivables |
|
|
0.6 |
|
|
|
2.2 |
|
|
|
(73 |
) |
|
|
0.6 |
|
|
|
2.2 |
|
|
|
(73 |
) |
Operating lease assets |
|
|
1.8 |
|
|
|
1.5 |
|
|
|
20 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
Total end-of-period loans and lease
related assets |
|
|
42.7 |
|
|
|
41.8 |
|
|
|
2 |
|
|
|
42.7 |
|
|
|
41.8 |
|
|
|
2 |
|
Average loans and lease related assets |
Loans outstanding(a) |
|
$ |
39.9 |
|
|
$ |
38.9 |
|
|
|
3 |
|
|
$ |
39.8 |
|
|
$ |
40.1 |
|
|
|
(1 |
) |
Lease financing receivables |
|
|
0.7 |
|
|
|
2.5 |
|
|
|
(72 |
) |
|
|
1.1 |
|
|
|
3.2 |
|
|
|
(66 |
) |
Operating lease assets |
|
|
1.8 |
|
|
|
1.4 |
|
|
|
29 |
|
|
|
1.7 |
|
|
|
1.2 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
Total average loans and lease
related assets |
|
|
42.4 |
|
|
|
42.8 |
|
|
|
(1 |
) |
|
|
42.6 |
|
|
|
44.5 |
|
|
|
(4 |
) |
Average assets |
|
|
42.9 |
|
|
|
43.8 |
|
|
|
(2 |
) |
|
|
43.1 |
|
|
|
45.6 |
|
|
|
(5 |
) |
Average equity |
|
|
2.2 |
|
|
|
2.4 |
|
|
|
(8 |
) |
|
|
2.2 |
|
|
|
2.4 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate |
|
|
1.65 |
% |
|
|
1.61 |
% |
|
|
|
|
|
|
1.65 |
% |
|
|
1.61 |
% |
|
|
|
|
Net charge-offs |
Loans |
|
$ |
98 |
|
|
$ |
63 |
|
|
|
56 |
|
|
$ |
218 |
|
|
$ |
155 |
|
|
|
41 |
|
Lease receivables |
|
|
1 |
|
|
|
2 |
|
|
|
(50 |
) |
|
|
3 |
|
|
|
6 |
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs |
|
|
99 |
|
|
|
65 |
|
|
|
52 |
|
|
|
221 |
|
|
|
161 |
|
|
|
37 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(a) |
|
|
0.97 |
% |
|
|
0.66 |
% |
|
|
|
|
|
|
0.73 |
% |
|
|
0.53 |
% |
|
|
|
|
Lease receivables |
|
|
0.57 |
|
|
|
0.32 |
|
|
|
|
|
|
|
0.36 |
|
|
|
0.25 |
|
|
|
|
|
Total net charge-off rate(a) |
|
|
0.97 |
|
|
|
0.64 |
|
|
|
|
|
|
|
0.72 |
|
|
|
0.51 |
|
|
|
|
|
Nonperforming assets |
|
$ |
156 |
|
|
$ |
174 |
|
|
|
(10 |
) |
|
$ |
156 |
|
|
$ |
174 |
|
|
|
(10 |
) |
|
|
|
|
(a) |
|
For the three and nine month periods ended September 30, 2006, Average loans included
Loans held-for-sale of $943 million and $709 million, respectively. These amounts are excluded
when calculating the Net charge-off rate. For the three and nine month periods ended September
30, 2007, Auto loans classified as held-for-sale were insignificant. |
Quarterly results
Auto Finance net income was $76 million, down by $9 million, or 11%, from the prior year. Net
revenue was $447 million, up by $52 million, or 13%, reflecting higher automobile operating lease
revenue and wider loan spreads. The Provision for credit losses was $96 million, an increase of $35
million, reflecting an increase in estimated losses from low prior-year levels. Noninterest expense
of $224 million increased by $30 million, or 15%, driven by increased depreciation expense on owned
automobiles subject to operating leases.
Year-to-date results
Auto Finance net income was $246 million, down by $35 million, or 12%, from the prior year. Net
revenue was $1.3 billion, up by $179 million, or 16%, reflecting higher automobile operating lease
revenue, wider loan spreads and the absence of a prior-year $50 million pretax loss related to auto
loans transferred to held-for-sale. The Provision for credit losses was $247 million, an increase
of $137 million, reflecting an increase in estimated losses from low prior-year levels. Noninterest
expense of $653 million increased by $99 million, or 18%, driven by increased depreciation expense
on owned automobiles subject to operating leases.
28
CARD SERVICES
For a
discussion of the business profile of CS, see pages 4345 of JPMorgan Chases 2006
Annual Report and pages 45 of this Form 10-Q.
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 1316 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement datamanaged basis |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
$ |
692 |
|
|
$ |
636 |
|
|
|
9 |
% |
|
$ |
1,973 |
|
|
$ |
1,890 |
|
|
|
4 |
% |
All other income |
|
|
67 |
|
|
|
126 |
|
|
|
(47 |
) |
|
|
239 |
|
|
|
246 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
759 |
|
|
|
762 |
|
|
|
|
|
|
|
2,212 |
|
|
|
2,136 |
|
|
|
4 |
|
Net interest income |
|
|
3,108 |
|
|
|
2,884 |
|
|
|
8 |
|
|
|
9,052 |
|
|
|
8,859 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
3,867 |
|
|
|
3,646 |
|
|
|
6 |
|
|
|
11,264 |
|
|
|
10,995 |
|
|
|
2 |
|
|
Provision for credit losses |
|
|
1,363 |
|
|
|
1,270 |
|
|
|
7 |
|
|
|
3,923 |
|
|
|
3,317 |
|
|
|
18 |
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
256 |
|
|
|
251 |
|
|
|
2 |
|
|
|
761 |
|
|
|
761 |
|
|
|
|
|
Noncompensation expense |
|
|
827 |
|
|
|
823 |
|
|
|
|
|
|
|
2,383 |
|
|
|
2,429 |
|
|
|
(2 |
) |
Amortization of intangibles |
|
|
179 |
|
|
|
179 |
|
|
|
|
|
|
|
547 |
|
|
|
555 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
1,262 |
|
|
|
1,253 |
|
|
|
1 |
|
|
|
3,691 |
|
|
|
3,745 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
1,242 |
|
|
|
1,123 |
|
|
|
11 |
|
|
|
3,650 |
|
|
|
3,933 |
|
|
|
(7 |
) |
Income tax expense |
|
|
456 |
|
|
|
412 |
|
|
|
11 |
|
|
|
1,340 |
|
|
|
1,446 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
786 |
|
|
$ |
711 |
|
|
|
11 |
|
|
$ |
2,310 |
|
|
$ |
2,487 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Net securitization gains (amortization) |
|
$ |
|
|
|
$ |
48 |
|
|
|
NM |
|
|
$ |
39 |
|
|
$ |
50 |
|
|
|
(22 |
) |
|
Financial metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
22 |
% |
|
|
20 |
% |
|
|
|
|
|
|
22 |
% |
|
|
24 |
% |
|
|
|
|
Overhead ratio |
|
|
33 |
|
|
|
34 |
|
|
|
|
|
|
|
33 |
|
|
|
34 |
|
|
|
|
|
|
Quarterly results
Net income was $786 million, up by $75 million, or 11%, from the prior year. Earnings benefited
from higher revenue offset partially by an increase in the Provision for credit losses.
End-of-period managed loans of $149.1 billion increased by $5.2 billion, or 4%, from the prior
year. Average managed loans of $148.7 billion increased by $7.0 billion, or 5%, from the prior
year. Both end-of-period and average managed loans benefited from organic growth.
Net managed revenue was $3.9 billion, up by $221 million, or 6%, from the prior year. Net interest
income was $3.1 billion, up by $224 million, or 8%, from the prior year. The increase in net
interest income was driven by an increased level of fees and higher average loan balances. These
benefits were offset partially by the discontinuation of certain billing practices (including the
elimination of certain over-limit fees and the two-cycle billing method for calculating finance
charges) and a narrower loan spread. Noninterest revenue was $759 million, flat compared with the
prior year. Increased net interchange income, which benefited from higher charge volume, was offset
by lower net securitization gains. Charge volume growth of 3% reflects an approximate 10% growth
rate in sales volume, offset primarily by a lower level of balance transfers, the result of a more
targeted marketing effort.
The Managed provision for credit losses was $1.4 billion, up by $93 million, or 7%, from the prior
year due to a higher level of net charge-offs. Credit quality was stable in the quarter, with a
managed net charge-off rate for the quarter of 3.64%, up from 3.58% in the prior year. The 30-day
managed delinquency rate was 3.25%, up from 3.17% in the prior year.
Noninterest expense was $1.3 billion, up by $9 million, or 1%, compared with the prior year,
primarily due to higher volume-related expense.
29
Year-to-date results
Net income was $2.3 billion, down by $177 million, or 7%, 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 $149.1 billion increased by $5.2 billion, or 4%, from the prior
year. Average managed loans of $148.5 billion increased by $9.5 billion, or 7%, from the prior
year. Both end-of-period and average managed loans benefited from organic growth.
Net managed revenue was $11.3 billion, up by $269 million, or 2%, from the prior year. Net interest
income was $9.1 billion, up by $193 million, or 2%, compared with the prior year. The increase in
net interest income was driven by higher average loan balances and an increased level of fees.
These benefits were offset partially by a narrower loan spread, the discontinuation of certain
billing practices (including the elimination of over-limit fees and the two-cycle method for
calculating finance charges) and increased revenue reversals, resulting from a higher level of
charge-offs. Noninterest revenue was $2.2 billion, up by $76 million, or 4%, from the prior year.
The increase reflects a higher level of fee-based revenue and increased net interchange income,
benefiting from 5% higher charge volume. Charge volume reflects an approximate 10% growth rate in
sales volume, offset partially by a lower level of balance transfers, the result of a more targeted
marketing effort.
The Managed provision for credit losses was $3.9 billion, up by $606 million, or 18%, from the
prior year. The prior year benefited from lower net charge-offs, following the change in bankruptcy
legislation in the fourth quarter of 2005. The managed net charge-off rate increased to 3.61%, up
from 3.29% in the prior year. The 30-day managed delinquency rate was 3.25%, up from 3.17% in the
prior year.
Noninterest expense was $3.7 billion, down by $54 million, or 1%, compared with the prior year,
primarily due to lower marketing expense and lower fraud-related expense, offset partially by
higher volume-related expense.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except headcount, ratios and where |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
% of average managed outstandings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8.29 |
% |
|
|
8.07 |
% |
|
|
|
|
|
|
8.15 |
% |
|
|
8.52 |
% |
|
|
|
|
Provision for credit losses |
|
|
3.64 |
|
|
|
3.56 |
|
|
|
|
|
|
|
3.53 |
|
|
|
3.19 |
|
|
|
|
|
Noninterest revenue |
|
|
2.03 |
|
|
|
2.13 |
|
|
|
|
|
|
|
1.99 |
|
|
|
2.05 |
|
|
|
|
|
Risk adjusted margin(a) |
|
|
6.68 |
|
|
|
6.65 |
|
|
|
|
|
|
|
6.61 |
|
|
|
7.39 |
|
|
|
|
|
Noninterest expense |
|
|
3.37 |
|
|
|
3.51 |
|
|
|
|
|
|
|
3.32 |
|
|
|
3.60 |
|
|
|
|
|
Pretax income (ROO) |
|
|
3.31 |
|
|
|
3.14 |
|
|
|
|
|
|
|
3.29 |
|
|
|
3.78 |
|
|
|
|
|
Net income |
|
|
2.10 |
|
|
|
1.99 |
|
|
|
|
|
|
|
2.08 |
|
|
|
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge volume (in billions) |
|
$ |
89.8 |
|
|
$ |
87.5 |
|
|
|
3 |
% |
|
$ |
259.1 |
|
|
$ |
246.2 |
|
|
|
5 |
% |
Net accounts opened (in thousands)(b) |
|
|
3,957 |
# |
|
|
4,186 |
# |
|
|
(5 |
) |
|
|
11,102 |
# |
|
|
31,477 |
# |
|
|
(65 |
) |
Credit cards issued (in thousands) |
|
|
153,637 |
|
|
|
139,513 |
|
|
|
10 |
|
|
|
153,637 |
|
|
|
139,513 |
|
|
|
10 |
|
Number of registered Internet customers (in
millions) |
|
|
26.4 |
|
|
|
20.4 |
|
|
|
29 |
|
|
|
26.4 |
|
|
|
20.4 |
|
|
|
29 |
|
Merchant acquiring business(c) |
Bank card volume (in billions) |
|
$ |
181.4 |
|
|
$ |
168.7 |
|
|
|
8 |
|
|
$ |
524.7 |
|
|
$ |
482.7 |
|
|
|
9 |
|
Total transactions (in millions) |
|
|
4,990 |
# |
|
|
4,597 |
# |
|
|
9 |
|
|
|
14,266 |
# |
|
|
13,203 |
# |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
79,409 |
|
|
$ |
78,587 |
|
|
|
1 |
|
|
$ |
79,409 |
|
|
$ |
78,587 |
|
|
|
1 |
|
Securitized loans |
|
|
69,643 |
|
|
|
65,245 |
|
|
|
7 |
|
|
|
69,643 |
|
|
|
65,245 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
Managed loans |
|
$ |
149,052 |
|
|
$ |
143,832 |
|
|
|
4 |
|
|
$ |
149,052 |
|
|
$ |
143,832 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed assets |
|
$ |
154,956 |
|
|
$ |
148,272 |
|
|
|
5 |
|
|
$ |
155,206 |
|
|
$ |
146,192 |
|
|
|
6 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
79,993 |
|
|
$ |
76,655 |
|
|
|
4 |
|
|
$ |
80,301 |
|
|
$ |
71,129 |
|
|
|
13 |
|
Securitized loans |
|
|
68,673 |
|
|
|
65,061 |
|
|
|
6 |
|
|
|
68,200 |
|
|
|
67,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed loans |
|
$ |
148,666 |
|
|
$ |
141,716 |
|
|
|
5 |
|
|
$ |
148,501 |
|
|
$ |
138,991 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
14,100 |
|
|
$ |
14,100 |
|
|
|
|
|
|
$ |
14,100 |
|
|
$ |
14,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
18,887 |
# |
|
|
18,696 |
# |
|
|
1 |
|
|
|
18,887 |
# |
|
|
18,696 |
# |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
1,363 |
|
|
$ |
1,280 |
|
|
|
6 |
|
|
$ |
4,008 |
|
|
$ |
3,417 |
|
|
|
17 |
|
Net charge-off rate |
|
|
3.64 |
% |
|
|
3.58 |
% |
|
|
|
|
|
|
3.61 |
% |
|
|
3.29 |
% |
|
|
|
|
Managed delinquency ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30+ days |
|
|
3.25 |
% |
|
|
3.17 |
% |
|
|
|
|
|
|
3.25 |
% |
|
|
3.17 |
% |
|
|
|
|
90+ days |
|
|
1.50 |
|
|
|
1.48 |
|
|
|
|
|
|
|
1.50 |
|
|
|
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
3,107 |
|
|
$ |
3,176 |
|
|
|
(2 |
) |
|
$ |
3,107 |
|
|
$ |
3,176 |
|
|
|
(2 |
) |
Allowance for loan losses to period-end loans |
|
|
3.91 |
% |
|
|
4.04 |
% |
|
|
|
|
|
|
3.91 |
% |
|
|
4.04 |
% |
|
|
|
|
|
|
|
|
(a) |
|
Represents Total net revenue less Provision for credit losses. |
(b) |
|
Year-to-date 2006 included approximately 21 million accounts from the acquisition of the
Kohls private-label portfolio in the second quarter of 2006. |
(c) |
|
Represents 100% of the merchant acquiring business. |
31
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 September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Income statement data(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
Reported basis for the period |
|
$ |
1,528 |
|
|
$ |
1,357 |
|
|
|
13 |
% |
|
$ |
4,343 |
|
|
$ |
4,673 |
|
|
|
(7 |
)% |
Securitization adjustments |
|
|
(836 |
) |
|
|
(721 |
) |
|
|
(16 |
) |
|
|
(2,370 |
) |
|
|
(2,783 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
Managed credit card income |
|
$ |
692 |
|
|
$ |
636 |
|
|
|
9 |
|
|
$ |
1,973 |
|
|
$ |
1,890 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
1,694 |
|
|
$ |
1,556 |
|
|
|
9 |
|
|
$ |
4,921 |
|
|
$ |
4,459 |
|
|
|
10 |
|
Securitization adjustments |
|
|
1,414 |
|
|
|
1,328 |
|
|
|
6 |
|
|
|
4,131 |
|
|
|
4,400 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Managed net interest income |
|
$ |
3,108 |
|
|
$ |
2,884 |
|
|
|
8 |
|
|
$ |
9,052 |
|
|
$ |
8,859 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
3,289 |
|
|
$ |
3,039 |
|
|
|
8 |
|
|
$ |
9,503 |
|
|
$ |
9,378 |
|
|
|
1 |
|
Securitization adjustments |
|
|
578 |
|
|
|
607 |
|
|
|
(5 |
) |
|
|
1,761 |
|
|
|
1,617 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Managed total net revenue |
|
$ |
3,867 |
|
|
$ |
3,646 |
|
|
|
6 |
|
|
$ |
11,264 |
|
|
$ |
10,995 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
785 |
|
|
$ |
663 |
|
|
|
18 |
|
|
$ |
2,162 |
|
|
$ |
1,700 |
|
|
|
27 |
|
Securitization adjustments |
|
|
578 |
|
|
|
607 |
|
|
|
(5 |
) |
|
|
1,761 |
|
|
|
1,617 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Managed provision for credit losses |
|
$ |
1,363 |
|
|
$ |
1,270 |
|
|
|
7 |
|
|
$ |
3,923 |
|
|
$ |
3,317 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet average balances(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
88,856 |
|
|
$ |
85,301 |
|
|
|
4 |
|
|
$ |
89,491 |
|
|
$ |
80,395 |
|
|
|
11 |
|
Securitization adjustments |
|
|
66,100 |
|
|
|
62,971 |
|
|
|
5 |
|
|
|
65,715 |
|
|
|
65,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed average assets |
|
$ |
154,956 |
|
|
$ |
148,272 |
|
|
|
5 |
|
|
$ |
155,206 |
|
|
$ |
146,192 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality statistics(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net charge-offs data for the period |
|
$ |
785 |
|
|
$ |
673 |
|
|
|
17 |
|
|
$ |
2,247 |
|
|
$ |
1,800 |
|
|
|
25 |
|
Securitization adjustments |
|
|
578 |
|
|
|
607 |
|
|
|
(5 |
) |
|
|
1,761 |
|
|
|
1,617 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Managed net charge-offs |
|
$ |
1,363 |
|
|
$ |
1,280 |
|
|
|
6 |
|
|
$ |
4,008 |
|
|
$ |
3,417 |
|
|
|
17 |
|
|
|
|
|
(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 Financial
Measures on pages 1316 of this Form 10-Q. |
32
COMMERCIAL BANKING
For a
discussion of the business profile of CB, see pages 4647 of JPMorgan Chases 2006 Annual
Report and page 5 of this Form 10-Q.
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 to CB.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit-related fees |
|
$ |
159 |
|
|
$ |
145 |
|
|
|
10 |
% |
|
$ |
475 |
|
|
$ |
434 |
|
|
|
9 |
% |
Asset management, administration and commissions |
|
|
24 |
|
|
|
16 |
|
|
|
50 |
|
|
|
68 |
|
|
|
47 |
|
|
|
45 |
|
All other income(a) |
|
|
107 |
|
|
|
95 |
|
|
|
13 |
|
|
|
394 |
|
|
|
282 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
290 |
|
|
|
256 |
|
|
|
13 |
|
|
|
937 |
|
|
|
763 |
|
|
|
23 |
|
Net interest income |
|
|
719 |
|
|
|
677 |
|
|
|
6 |
|
|
|
2,082 |
|
|
|
2,019 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,009 |
|
|
|
933 |
|
|
|
8 |
|
|
|
3,019 |
|
|
|
2,782 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
112 |
|
|
|
54 |
|
|
|
107 |
|
|
|
174 |
|
|
|
49 |
|
|
|
255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
160 |
|
|
|
190 |
|
|
|
(16 |
) |
|
|
522 |
|
|
|
566 |
|
|
|
(8 |
) |
Noncompensation expense |
|
|
300 |
|
|
|
296 |
|
|
|
1 |
|
|
|
890 |
|
|
|
883 |
|
|
|
1 |
|
Amortization of intangibles |
|
|
13 |
|
|
|
14 |
|
|
|
(7 |
) |
|
|
42 |
|
|
|
45 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
473 |
|
|
|
500 |
|
|
|
(5 |
) |
|
|
1,454 |
|
|
|
1,494 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
424 |
|
|
|
379 |
|
|
|
12 |
|
|
|
1,391 |
|
|
|
1,239 |
|
|
|
12 |
|
Income tax expense |
|
|
166 |
|
|
|
148 |
|
|
|
12 |
|
|
|
545 |
|
|
|
485 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
258 |
|
|
$ |
231 |
|
|
|
12 |
|
|
$ |
846 |
|
|
$ |
754 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
15 |
% |
|
|
17 |
% |
|
|
|
|
|
|
18 |
% |
|
|
18 |
% |
|
|
|
|
Overhead ratio |
|
|
47 |
|
|
|
54 |
|
|
|
|
|
|
|
48 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
(a) |
|
IB-related and commercial card revenues are included in All other income. |
Quarterly results
Net income was $258 million, up by $27 million, or 12%, from the prior year. The increase was
driven by growth in net revenue and lower noninterest expense, offset primarily by a higher
Provision for credit losses.
Net revenue was $1.0 billion, up by $76 million, or 8%, from the prior year. Net interest income
was $719 million, up by $42 million, or 6%. The increase was driven by double-digit growth in
liability and loan balances, reflecting organic growth and the Bank of New York transaction,
partially offset by a continued shift to narrowerspread liability products and spread compression
in the loan and liability portfolios. Noninterest revenue was $290 million, up by $34 million, or
13%, primarily due to higher deposit-related fees and other income.
Middle Market Banking revenue was $680 million, an increase of $63 million, or 10%, from the prior
year, due to the Bank of New York transaction, higher deposit-related fees, and growth in
investment banking revenue. Mid-Corporate Banking revenue was $167 million, an increase of $7
million, or 4%. Real Estate Banking revenue was $108 million, a decrease of $11 million, or 9%.
The Provision for credit losses was $112 million, compared with $54 million in the prior year. The
current-quarter provision largely reflected portfolio activity and growth in loan balances. The
Allowance for loan losses to average loans retained was 2.67% for the current quarter, which
decreased from 2.70% in the prior year. Nonperforming loans were $134 million, down 15% from the
prior year. The net charge-off rate was 0.13% in the current quarter compared with 0.16% in the
prior year.
Noninterest expense was $473 million, down by $27 million, or 5%, from the prior year, as lower
performance-based compensation expense was offset partially by higher volume-related expense.
Year-to-date results
Net income was $846 million, an increase of $92 million, or 12%, from the prior year due primarily
to growth in net revenue, partially offset by higher Provision for credit losses.
Net revenue of $3.0 billion increased by $237 million, or 9%. Net interest income of $2.1 billion
increased by $63 million, or 3%, driven by double-digit growth in liability balances and loans,
which reflected organic growth and the Bank of New York transaction, largely offset by the
continued shift to narrowerspread liability products and spread compression in the loan and
33
liability portfolios. Noninterest revenue was $937 million, up by $174 million, or 23%, due to
higher investment banking-related revenues, increased deposit-related fees and gains related to the
sale of securities acquired in the satisfaction of debt.
On a segment basis, Middle Market Banking revenue was $2.0 billion, an increase of $120 million, or
6%, primarily due to the Bank of New York transaction, growth in investment banking revenue and
higher deposit-related fees. Mid-Corporate Banking revenue was $576 million, an increase of $118
million, or 26%, reflecting higher lending revenue, investment banking revenue, and gains on sales
of securities acquired in the satisfaction of debt. Real Estate Banking revenue of $319 million
decreased by $19 million, or 6%.
Provision for credit losses was $174 million, compared with $49 million in the prior year. The
increase in the Allowance for credit losses reflected portfolio activity and growth in loan
balances. The Allowance for loan losses to average loans was 2.75%, compared with 2.76% in the
prior year.
Noninterest expense was $1.5 billion, a decrease of $40 million, or 3%, largely due to lower
compensation expense driven by the absence of prior-year expense from the adoption of SFAS 123R,
partially offset by expense related to the Bank of New York transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratio and headcount data) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue by product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending |
|
$ |
343 |
|
|
$ |
335 |
|
|
|
2 |
% |
|
$ |
1,039 |
|
|
$ |
985 |
|
|
|
5 |
% |
Treasury services |
|
|
594 |
|
|
|
551 |
|
|
|
8 |
|
|
|
1,719 |
|
|
|
1,667 |
|
|
|
3 |
|
Investment banking |
|
|
64 |
|
|
|
60 |
|
|
|
7 |
|
|
|
222 |
|
|
|
166 |
|
|
|
34 |
|
Other |
|
|
8 |
|
|
|
(13 |
) |
|
NM |
|
|
|
39 |
|
|
|
(36 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Banking revenue |
|
$ |
1,009 |
|
|
$ |
933 |
|
|
|
8 |
|
|
$ |
3,019 |
|
|
$ |
2,782 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
IB revenues, gross(a) |
|
$ |
194 |
|
|
$ |
170 |
|
|
|
14 |
|
|
$ |
661 |
|
|
$ |
470 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
680 |
|
|
$ |
617 |
|
|
|
10 |
|
|
$ |
1,994 |
|
|
$ |
1,874 |
|
|
|
6 |
|
Mid-Corporate Banking |
|
|
167 |
|
|
|
160 |
|
|
|
4 |
|
|
|
576 |
|
|
|
458 |
|
|
|
26 |
|
Real Estate Banking |
|
|
108 |
|
|
|
119 |
|
|
|
(9 |
) |
|
|
319 |
|
|
|
338 |
|
|
|
(6 |
) |
Other |
|
|
54 |
|
|
|
37 |
|
|
|
46 |
|
|
|
130 |
|
|
|
112 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Banking revenue |
|
$ |
1,009 |
|
|
$ |
933 |
|
|
|
8 |
|
|
$ |
3,019 |
|
|
$ |
2,782 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
86,652 |
|
|
$ |
57,378 |
|
|
|
51 |
|
|
$ |
84,643 |
|
|
$ |
56,246 |
|
|
|
50 |
|
Loans and leases(b) |
|
|
61,272 |
|
|
|
53,404 |
|
|
|
15 |
|
|
|
59,595 |
|
|
|
52,227 |
|
|
|
14 |
|
Liability balances(c) |
|
|
88,081 |
|
|
|
72,009 |
|
|
|
22 |
|
|
|
84,697 |
|
|
|
71,781 |
|
|
|
18 |
|
Equity |
|
|
6,700 |
|
|
|
5,500 |
|
|
|
22 |
|
|
|
6,435 |
|
|
|
5,500 |
|
|
|
17 |
|
|
Average loans by business: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
37,617 |
|
|
$ |
32,890 |
|
|
|
14 |
|
|
$ |
37,016 |
|
|
$ |
32,418 |
|
|
|
14 |
|
Mid-Corporate Banking |
|
|
12,076 |
|
|
|
8,756 |
|
|
|
38 |
|
|
|
11,484 |
|
|
|
8,205 |
|
|
|
40 |
|
Real Estate Banking |
|
|
7,144 |
|
|
|
7,564 |
|
|
|
(6 |
) |
|
|
7,038 |
|
|
|
7,505 |
|
|
|
(6 |
) |
Other |
|
|
4,435 |
|
|
|
4,194 |
|
|
|
6 |
|
|
|
4,057 |
|
|
|
4,099 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Banking loans |
|
$ |
61,272 |
|
|
$ |
53,404 |
|
|
|
15 |
|
|
$ |
59,595 |
|
|
$ |
52,227 |
|
|
|
14 |
|
|
Headcount |
|
|
4,158 |
# |
|
|
4,447 |
# |
|
|
(6 |
) |
|
|
4,158 |
# |
|
|
4,447 |
# |
|
|
(6 |
) |
|
Credit data and quality statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
20 |
|
|
$ |
21 |
|
|
|
(5 |
) |
|
$ |
11 |
|
|
$ |
11 |
|
|
|
|
|
Nonperforming loans |
|
|
134 |
|
|
|
157 |
|
|
|
(15 |
) |
|
|
134 |
|
|
|
157 |
|
|
|
(15 |
) |
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
1,623 |
|
|
|
1,431 |
|
|
|
13 |
|
|
|
1,623 |
|
|
|
1,431 |
|
|
|
13 |
|
Allowance for lending-related commitments |
|
|
236 |
|
|
|
156 |
|
|
|
51 |
|
|
|
236 |
|
|
|
156 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for credit losses |
|
|
1,859 |
|
|
|
1,587 |
|
|
|
17 |
|
|
|
1,859 |
|
|
|
1,587 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate(b) |
|
|
0.13 |
% |
|
|
0.16 |
% |
|
|
|
|
|
|
0.02 |
% |
|
|
0.03 |
% |
|
|
|
|
Allowance for loan losses to average loans(b) |
|
|
2.67 |
|
|
|
2.70 |
|
|
|
|
|
|
|
2.75 |
|
|
|
2.76 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans |
|
|
1,211 |
|
|
|
911 |
|
|
|
|
|
|
|
1,211 |
|
|
|
911 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.22 |
|
|
|
0.29 |
|
|
|
|
|
|
|
0.22 |
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the total revenue related to investment banking products sold to CB clients. |
(b) |
|
Average loans include Loans held-for-sale of $433 million and $359 million for the quarters
ended September 30, 2007 and 2006, respectively, and $550 million and $321 million for
year-to-date 2007 and 2006, respectively. These amounts are excluded when calculating the Net
charge-off rate and the allowance coverage ratio. |
(c) |
|
Liability balances included deposits and deposits swept to on-balance sheet
liabilities. |
34
TREASURY & SECURITIES SERVICES
For a
discussion of the business profile of TSS, see pages 4849 of JPMorgan Chases 2006
Annual Report and page 5 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit-related fees |
|
$ |
244 |
|
|
$ |
183 |
|
|
|
33 |
% |
|
$ |
676 |
|
|
$ |
549 |
|
|
|
23 |
% |
Asset management, administration and commissions |
|
|
730 |
|
|
|
642 |
|
|
|
14 |
|
|
|
2,244 |
|
|
|
1,975 |
|
|
|
14 |
|
All other income |
|
|
171 |
|
|
|
155 |
|
|
|
10 |
|
|
|
480 |
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
1,145 |
|
|
|
980 |
|
|
|
17 |
|
|
|
3,400 |
|
|
|
3,003 |
|
|
|
13 |
|
Net interest income |
|
|
603 |
|
|
|
519 |
|
|
|
16 |
|
|
|
1,615 |
|
|
|
1,569 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,748 |
|
|
|
1,499 |
|
|
|
17 |
|
|
|
5,015 |
|
|
|
4,572 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
9 |
|
|
|
1 |
|
|
|
NM |
|
|
|
15 |
|
|
|
1 |
|
|
|
NM |
|
Credit reimbursement to IB(a) |
|
|
(31 |
) |
|
|
(30 |
) |
|
|
(3 |
) |
|
|
(91 |
) |
|
|
(90 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
579 |
|
|
|
557 |
|
|
|
4 |
|
|
|
1,746 |
|
|
|
1,643 |
|
|
|
6 |
|
Noncompensation expense |
|
|
538 |
|
|
|
489 |
|
|
|
10 |
|
|
|
1,563 |
|
|
|
1,462 |
|
|
|
7 |
|
Amortization of intangibles |
|
|
17 |
|
|
|
18 |
|
|
|
(6 |
) |
|
|
49 |
|
|
|
57 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
1,134 |
|
|
|
1,064 |
|
|
|
7 |
|
|
|
3,358 |
|
|
|
3,162 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
574 |
|
|
|
404 |
|
|
|
42 |
|
|
|
1,551 |
|
|
|
1,319 |
|
|
|
18 |
|
Income tax expense |
|
|
214 |
|
|
|
148 |
|
|
|
45 |
|
|
|
576 |
|
|
|
485 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
360 |
|
|
$ |
256 |
|
|
|
41 |
|
|
$ |
975 |
|
|
$ |
834 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
48 |
% |
|
|
46 |
% |
|
|
|
|
|
|
43 |
% |
|
|
48 |
% |
|
|
|
|
Overhead ratio |
|
|
65 |
|
|
|
71 |
|
|
|
|
|
|
|
67 |
|
|
|
69 |
|
|
|
|
|
Pretax margin ratio(b) |
|
|
33 |
|
|
|
27 |
|
|
|
|
|
|
|
31 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
(a) |
|
TSS was 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 a record $360 million, up by $104 million, or 41%, from the prior year, driven by
record revenue offset partially by higher noninterest expense.
Net revenue was $1.7 billion, up by $249 million, or 17%, from the prior year. Worldwide Securities
Services net revenue of $968 million was up by $166 million, or 21%. The growth was driven by
increased product usage by new and existing clients and market appreciation, partially offset by
spread compression and a shift to narrower-spread liability products. Treasury Services net revenue
of $780 million was up by $83 million, or 12%, driven by growth in electronic volumes and higher
liability balances. These benefits were offset partially by a continued shift to narrower-spread
liability products. TSS firmwide net revenue, which includes Treasury Services net revenue recorded
in other lines of business, grew to $2.4 billion, up by $308 million, or 15%. Treasury Services
firmwide net revenue grew to $1.4 billion, up by $142 million, or 11%.
Noninterest expense was $1.1 billion, up by $70 million, or 7%, from the prior year. The increase
was due to higher expense related to business and volume growth, as well as investment in new
product platforms.
Year-to-date results
Net income was $975 million, up by $141 million, or 17%, from the prior year. The increase was
driven by record revenue, partially offset by higher noninterest expense.
Net revenue was $5.0 billion, up by $443 million, or 10%, from the prior year. Worldwide Securities
Services net revenue was $2.8 billion, up by $346 million, or 14%, driven by increased product
usage by new and existing clients and market appreciation, partially offset by spread compression
and a shift to narrower-spread liability products. Treasury Services net revenue was $2.2 billion,
up by $97 million, or 5%, driven by growth in electronic volumes and higher liability balances.
These benefits were offset partially by a continued shift to narrower-spread liability products.
TSS firmwide net revenues, which includes Treasury Services net revenue recorded in other lines of
business, grew to $6.9 billion, up by $538 million, or 8%. Treasury Services firmwide net revenue
grew to $4.1 billion, up by $192 million, or 5%.
35
Noninterest expense was $3.4 billion, up by $196 million, or 6%. The increase was due to higher
expense related to business and volume growth as well as investment in new product platforms.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except headcount, ratio data and where |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services |
|
$ |
780 |
|
|
$ |
697 |
|
|
|
12 |
% |
|
$ |
2,189 |
|
|
$ |
2,092 |
|
|
|
5 |
% |
Worldwide Securities Services |
|
|
968 |
|
|
|
802 |
|
|
|
21 |
|
|
|
2,826 |
|
|
|
2,480 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,748 |
|
|
$ |
1,499 |
|
|
|
17 |
|
|
$ |
5,015 |
|
|
$ |
4,572 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under custody (in billions) |
|
$ |
15,614 |
|
|
$ |
12,873 |
|
|
|
21 |
|
|
$ |
15,614 |
|
|
$ |
12,873 |
|
|
|
21 |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ ACH transactions originated (in millions) |
|
|
943 |
# |
|
|
886 |
# |
|
|
6 |
|
|
|
2,886 |
# |
|
|
2,572 |
# |
|
|
12 |
|
Total US$ clearing volume (in thousands) |
|
|
28,031 |
|
|
|
26,252 |
|
|
|
7 |
|
|
|
82,650 |
|
|
|
77,940 |
|
|
|
6 |
|
International electronic funds transfer volume
(in thousands)(a) |
|
|
41,415 |
|
|
|
35,322 |
|
|
|
17 |
|
|
|
125,882 |
|
|
|
104,318 |
|
|
|
21 |
|
Wholesale check volume (in millions) |
|
|
731 |
|
|
|
860 |
|
|
|
(15 |
) |
|
|
2,269 |
|
|
|
2,616 |
|
|
|
(13 |
) |
Wholesale cards issued (in thousands)(b) |
|
|
18,108 |
|
|
|
16,662 |
|
|
|
9 |
|
|
|
18,108 |
|
|
|
16,662 |
|
|
|
9 |
|
Selected balance sheets (average) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
55,688 |
|
|
$ |
30,558 |
|
|
|
82 |
|
|
$ |
50,829 |
|
|
$ |
30,526 |
|
|
|
67 |
|
Loans |
|
|
20,602 |
|
|
|
15,231 |
|
|
|
35 |
|
|
|
19,921 |
|
|
|
14,396 |
|
|
|
38 |
|
Liability balances(c) |
|
|
236,381 |
|
|
|
192,518 |
|
|
|
23 |
|
|
|
221,606 |
|
|
|
188,330 |
|
|
|
18 |
|
Equity |
|
|
3,000 |
|
|
|
2,200 |
|
|
|
36 |
|
|
|
3,000 |
|
|
|
2,314 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
25,209 |
# |
|
|
24,575 |
# |
|
|
3 |
|
|
|
25,209 |
# |
|
|
24,575 |
# |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSS firmwide metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services firmwide revenue(d) |
|
$ |
1,442 |
|
|
$ |
1,300 |
|
|
|
11 |
|
|
$ |
4,101 |
|
|
$ |
3,909 |
|
|
|
5 |
|
Treasury & Securities Services firmwide
revenue(d) |
|
|
2,410 |
|
|
|
2,102 |
|
|
|
15 |
|
|
|
6,927 |
|
|
|
6,389 |
|
|
|
8 |
|
Treasury Services firmwide overhead ratio(e) |
|
|
54 |
% |
|
|
57 |
% |
|
|
|
|
|
|
57 |
% |
|
|
56 |
% |
|
|
|
|
Treasury & Securities Services firmwide
overhead ratio(e) |
|
|
59 |
|
|
|
63 |
|
|
|
|
|
|
|
60 |
|
|
|
61 |
|
|
|
|
|
Treasury Services firmwide liability balances
(average)(f) |
|
$ |
201,671 |
|
|
$ |
162,326 |
|
|
|
24 |
|
|
$ |
192,560 |
|
|
$ |
159,897 |
|
|
|
20 |
|
Treasury & Securities Services firmwide
liability balances (average)(f) |
|
|
324,462 |
|
|
|
264,527 |
|
|
|
23 |
|
|
|
306,302 |
|
|
|
259,477 |
|
|
|
18 |
|
|
|
|
|
(a) |
|
International electronic funds transfer includes non-US$ ACH and clearing volume. |
(b) |
|
Wholesale cards issued included domestic commercial card, stored value card, prepaid card,
and government electronic benefit card products. |
(c) |
|
Liability balances
included deposits and deposits swept to onbalance 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 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 included TS revenue recorded in the CB, Regional Banking and AM lines of
business (see below) and excluded FX revenues recorded in IB for TSS-related FX activity. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Treasury Services revenue reported in CB |
|
$ |
592 |
|
|
$ |
551 |
|
|
|
7 |
% |
|
$ |
1,717 |
|
|
$ |
1,667 |
|
|
|
3 |
% |
Treasury Services revenue reported in other lines
of business |
|
|
70 |
|
|
|
52 |
|
|
|
35 |
|
|
|
195 |
|
|
|
150 |
|
|
|
30 |
|
|
TSS firmwide FX revenue, which includes FX revenue recorded in TSS and FX revenue
associated with TSS customers who are FX customers of IB, was $144 million and $85 million for
the quarters ended September 30, 2007 and 2006, respectively, and $395 million and $349 million
year-to-date 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 IB for TSS-related FX activity were not included in this ratio. |
(f) |
|
Firmwide liability balances included TSs liability balances recorded in certain other lines
of business. Liability balances associated with TS customers who were also customers of the CB
line of business were not included in TS liability balances. |
36
ASSET MANAGEMENT
For a
discussion of the business profile of AM, see pages 5052 of JPMorgan Chases 2006
Annual Report and page 5 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management, administration and commissions |
|
$ |
1,760 |
|
|
$ |
1,285 |
|
|
|
37 |
% |
|
$ |
4,920 |
|
|
$ |
3,786 |
|
|
|
30 |
% |
All other income |
|
|
152 |
|
|
|
120 |
|
|
|
27 |
|
|
|
495 |
|
|
|
329 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
1,912 |
|
|
|
1,405 |
|
|
|
36 |
|
|
|
5,415 |
|
|
|
4,115 |
|
|
|
32 |
|
Net interest income |
|
|
293 |
|
|
|
231 |
|
|
|
27 |
|
|
|
831 |
|
|
|
725 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
2,205 |
|
|
|
1,636 |
|
|
|
35 |
|
|
|
6,246 |
|
|
|
4,840 |
|
|
|
29 |
|
|
Provision for credit losses |
|
|
3 |
|
|
|
(28 |
) |
|
NM |
|
|
|
(17 |
) |
|
|
(42 |
) |
|
|
60 |
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
848 |
|
|
|
676 |
|
|
|
25 |
|
|
|
2,491 |
|
|
|
2,027 |
|
|
|
23 |
|
Noncompensation expense |
|
|
498 |
|
|
|
417 |
|
|
|
19 |
|
|
|
1,405 |
|
|
|
1,201 |
|
|
|
17 |
|
Amortization of intangibles |
|
|
20 |
|
|
|
22 |
|
|
|
(9 |
) |
|
|
60 |
|
|
|
66 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
1,366 |
|
|
|
1,115 |
|
|
|
23 |
|
|
|
3,956 |
|
|
|
3,294 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
836 |
|
|
|
549 |
|
|
|
52 |
|
|
|
2,307 |
|
|
|
1,588 |
|
|
|
45 |
|
Income tax expense |
|
|
315 |
|
|
|
203 |
|
|
|
55 |
|
|
|
868 |
|
|
|
586 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
521 |
|
|
$ |
346 |
|
|
|
51 |
|
|
$ |
1,439 |
|
|
$ |
1,002 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
52 |
% |
|
|
39 |
% |
|
|
|
|
|
|
50 |
% |
|
|
38 |
% |
|
|
|
|
Overhead ratio |
|
|
62 |
|
|
|
68 |
|
|
|
|
|
|
|
63 |
|
|
|
68 |
|
|
|
|
|
Pretax margin ratio(a) |
|
|
38 |
|
|
|
34 |
|
|
|
|
|
|
|
37 |
|
|
|
33 |
|
|
|
|
|
|
Selected
metrics |
Revenue by client segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private bank |
|
$ |
686 |
|
|
$ |
469 |
|
|
|
46 |
% |
|
$ |
1,892 |
|
|
$ |
1,379 |
|
|
|
37 |
% |
Retail |
|
|
639 |
|
|
|
456 |
|
|
|
40 |
|
|
|
1,768 |
|
|
|
1,344 |
|
|
|
32 |
|
Institutional |
|
|
603 |
|
|
|
464 |
|
|
|
30 |
|
|
|
1,771 |
|
|
|
1,348 |
|
|
|
31 |
|
Private client services |
|
|
277 |
|
|
|
247 |
|
|
|
12 |
|
|
|
815 |
|
|
|
769 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
2,205 |
|
|
$ |
1,636 |
|
|
|
35 |
|
|
$ |
6,246 |
|
|
$ |
4,840 |
|
|
|
29 |
|
|
|
|
|
(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 $521 million, up by $175 million, or 51%, from the prior year. Results
benefited from record net revenue offset partially by higher noninterest expense.
Net revenue was $2.2 billion, up by $569 million, or 35%, from the prior year. Noninterest revenue,
primarily fees and commissions, was $1.9 billion, up by $507 million, or 36%. This result was due
largely to increased assets under management and higher performance and placement fees. Net
interest income was $293 million, up by $62 million, or 27%, from the prior year, largely due to
higher deposit and loan balances and wider deposit spreads.
Private Bank revenue grew 46%, to $686 million, due to higher asset management and placement fees,
increased loan and deposit balances, and wider deposit spreads. Retail revenue grew 40%, to $639
million, primarily due to market appreciation and net asset inflows. Institutional revenue grew
30%, to $603 million, due to net asset inflows and performance fees. Private Client Services
revenue grew 12%, to $277 million, due to increased revenue from higher assets under management and
higher deposit balances.
The Provision for credit losses was $3 million, compared with a benefit of $28 million in the prior
year, reflecting a higher level of recoveries in the prior year.
Noninterest expense was $1.4 billion, up by $251 million, or 23%, from the prior year. The increase
was due largely to higher compensation, primarily performance-based, and investments in all
business segments.
37
Year-to-date results
Net income was a record $1.4 billion, up by $437 million, or 44%, from the prior year.
Results benefited from record net revenue, partially offset by higher noninterest expense.
Net revenue was $6.2 billion, up by $1.4 billion, or 29%, from the prior year. Noninterest revenue,
primarily fees and commissions, was $5.4 billion, up by $1.3 billion, or 32%. This result was due
largely to increased assets under management and higher performance and placement fees. Net
interest income was $831 million, up by $106 million, or 15%, largely due to higher deposit and
loan balances and slightly wider deposit spreads.
Private Bank revenue grew 37%, to $1.9 billion, due to higher asset management and placement fees,
increased loan and deposit balances, and wider deposit spreads. Retail revenue grew 32%, to $1.8
billion, primarily due to market appreciation and net asset inflows. Institutional revenue grew
31%, to $1.8 billion, due to net asset inflows and performance fees. Private Client Services
revenue grew 6%, to $815 million, due to increased revenue from higher assets under management and
higher deposit balances, partially offset by a shift to narrower-spread deposit products.
The Provision for credit losses was a benefit of $17 million, compared with a benefit of $42
million in the prior year.
Noninterest expense was $4.0 billion, up by $662 million, or 20%, from the prior year. The increase
was due largely to higher compensation expense, primarily performance-based, investments in all
business segments, and increased minority-interest expense related to Highbridge Capital
Management. These factors were partially offset by the absence of prior-year expense from the
adoption of SFAS 123R.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except headcount, ratios and ranking |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
data, and where otherwise noted) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client advisors |
|
|
1,680 |
# |
|
|
1,489 |
# |
|
|
13 |
% |
|
|
1,680 |
# |
|
|
1,489 |
# |
|
|
13 |
% |
Retirement planning services participants |
|
|
1,495,000 |
|
|
|
1,372,000 |
|
|
|
9 |
|
|
|
1,495,000 |
|
|
|
1,372,000 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of customer assets in 4 & 5 Star Funds(a) |
|
|
55 |
% |
|
|
58 |
% |
|
|
(5 |
) |
|
|
55 |
% |
|
|
58 |
% |
|
|
(5 |
) |
% of AUM in 1st and 2nd quartiles:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
|
47 |
% |
|
|
79 |
% |
|
|
(41 |
) |
|
|
47 |
% |
|
|
79 |
% |
|
|
(41 |
) |
3 years |
|
|
73 |
% |
|
|
75 |
% |
|
|
(3 |
) |
|
|
73 |
% |
|
|
75 |
% |
|
|
(3 |
) |
5 years |
|
|
76 |
% |
|
|
80 |
% |
|
|
(5 |
) |
|
|
76 |
% |
|
|
80 |
% |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected balance sheets data (average) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
53,879 |
|
|
$ |
43,524 |
|
|
|
24 |
|
|
$ |
50,498 |
|
|
$ |
42,597 |
|
|
|
19 |
|
Loans(c) |
|
|
30,928 |
|
|
|
26,770 |
|
|
|
16 |
|
|
|
28,440 |
|
|
|
25,695 |
|
|
|
11 |
|
Deposits |
|
|
59,907 |
|
|
|
51,395 |
|
|
|
17 |
|
|
|
56,920 |
|
|
|
50,360 |
|
|
|
13 |
|
Equity |
|
|
4,000 |
|
|
|
3,500 |
|
|
|
14 |
|
|
|
3,834 |
|
|
|
3,500 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
14,510 |
# |
|
|
12,761 |
# |
|
|
14 |
|
|
|
14,510 |
# |
|
|
12,761 |
# |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(5 |
) |
|
$ |
(24 |
) |
|
|
79 |
|
|
$ |
(10 |
) |
|
$ |
(21 |
) |
|
|
52 |
|
Nonperforming loans |
|
|
28 |
|
|
|
57 |
|
|
|
(51 |
) |
|
|
28 |
|
|
|
57 |
|
|
|
(51 |
) |
Allowance for loan losses |
|
|
115 |
|
|
|
112 |
|
|
|
3 |
|
|
|
115 |
|
|
|
112 |
|
|
|
3 |
|
Allowance for lending-related commitments |
|
|
6 |
|
|
|
4 |
|
|
|
50 |
|
|
|
6 |
|
|
|
4 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate |
|
|
(0.06 |
)% |
|
|
(0.36 |
)% |
|
|
|
|
|
|
(0.05 |
)% |
|
|
(0.11 |
)% |
|
|
|
|
Allowance for loan losses to average loans |
|
|
0.37 |
|
|
|
0.42 |
|
|
|
|
|
|
|
0.40 |
|
|
|
0.44 |
|
|
|
|
|
Allowance for loan losses to nonperforming loans |
|
|
411 |
|
|
|
196 |
|
|
|
|
|
|
|
411 |
|
|
|
196 |
|
|
|
|
|
Nonperforming loans to average loans |
|
|
0.09 |
|
|
|
0.21 |
|
|
|
|
|
|
|
0.10 |
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
(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) |
|
Held-for-investment prime mortgage loans transferred from AM to Treasury within the Corporate
segment during the three and nine months ended September 30, 2007, were $1.2 billion and $6.5
billion, respectively. There were no loans transferred during 2006. Although the loans,
together with the responsibility for the investment management of the portfolio, were
transferred to Treasury, the transfer has no material impact on the financial results of AM. |
38
Assets under supervision
Assets under supervision were $1.5 trillion, up 22%, or $274 billion, from the prior year. Assets
under management were $1.2 trillion, up 24%, or $228 billion, from the prior year. The increase was
the result of net asset inflows into the Institutional segment, primarily in liquidity and
alternative products; the Retail segment, primarily fixed income, equity and alternative products;
the Private Bank segment, primarily in liquidity and alternative products; and from market
appreciation. Custody, brokerage, administration and deposit balances were $376 billion, up by $46
billion.
|
|
|
|
|
|
|
|
|
ASSETS UNDER SUPERVISION(a) (in billions) |
|
|
|
|
|
|
As of September 30, |
|
2007 |
|
|
2006 |
|
|
Assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
368 |
|
|
$ |
281 |
|
Fixed income |
|
|
195 |
|
|
|
171 |
|
Equities & balanced |
|
|
481 |
|
|
|
392 |
|
Alternatives |
|
|
119 |
|
|
|
91 |
|
|
Total Assets under management |
|
|
1,163 |
|
|
|
935 |
|
Custody/brokerage/administration/deposits |
|
|
376 |
|
|
|
330 |
|
|
Total Assets under supervision |
|
$ |
1,539 |
|
|
$ |
1,265 |
|
|
|
|
|
|
|
|
|
|
|
Assets by client segment |
|
|
|
|
|
|
|
|
Institutional |
|
$ |
603 |
|
|
$ |
503 |
|
Private Bank |
|
|
196 |
|
|
|
150 |
|
Retail |
|
|
304 |
|
|
|
228 |
|
Private Client Services |
|
|
60 |
|
|
|
54 |
|
|
Total Assets under management |
|
$ |
1,163 |
|
|
$ |
935 |
|
|
Institutional |
|
$ |
604 |
|
|
$ |
505 |
|
Private Bank |
|
|
423 |
|
|
|
347 |
|
Retail |
|
|
399 |
|
|
|
309 |
|
Private Client Services |
|
|
113 |
|
|
|
104 |
|
|
Total Assets under supervision |
|
$ |
1,539 |
|
|
$ |
1,265 |
|
|
|
|
|
|
|
|
|
|
|
Assets by geographic region |
|
|
|
|
|
|
|
|
U.S./Canada |
|
$ |
745 |
|
|
$ |
596 |
|
International |
|
|
418 |
|
|
|
339 |
|
|
Total Assets under management |
|
$ |
1,163 |
|
|
$ |
935 |
|
|
U.S./Canada |
|
$ |
1,022 |
|
|
$ |
855 |
|
International |
|
|
517 |
|
|
|
410 |
|
|
Total Assets under supervision |
|
$ |
1,539 |
|
|
$ |
1,265 |
|
|
|
|
|
|
|
|
|
|
|
Mutual fund assets by asset class |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
308 |
|
|
$ |
221 |
|
Fixed income |
|
|
46 |
|
|
|
45 |
|
Equity |
|
|
235 |
|
|
|
184 |
|
|
Total mutual fund assets |
|
$ |
589 |
|
|
$ |
450 |
|
|
|
|
|
(a) |
|
Excludes Assets under management of American Century Companies, Inc, in which the Firm
has 44% ownership. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management rollforward |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in billions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Beginning balance |
|
$ |
1,109 |
|
|
$ |
898 |
|
|
$ |
1,013 |
|
|
$ |
847 |
|
Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity |
|
|
33 |
|
|
|
15 |
|
|
|
52 |
|
|
|
20 |
|
Fixed income |
|
|
(2 |
) |
|
|
4 |
|
|
|
6 |
|
|
|
10 |
|
Equities, balanced and alternatives |
|
|
2 |
|
|
|
3 |
|
|
|
24 |
|
|
|
29 |
|
Market/performance/other impacts |
|
|
21 |
|
|
|
15 |
|
|
|
68 |
|
|
|
29 |
|
|
Ending balance |
|
$ |
1,163 |
|
|
$ |
935 |
|
|
$ |
1,163 |
|
|
$ |
935 |
|
|
Assets under supervision rollforward |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,472 |
|
|
$ |
1,213 |
|
|
$ |
1,347 |
|
|
$ |
1,149 |
|
Net asset flows |
|
|
41 |
|
|
|
26 |
|
|
|
106 |
|
|
|
71 |
|
Market/performance/other impacts |
|
|
26 |
|
|
|
26 |
|
|
|
86 |
|
|
|
45 |
|
|
Ending balance |
|
$ |
1,539 |
|
|
$ |
1,265 |
|
|
$ |
1,539 |
|
|
$ |
1,265 |
|
|
39
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. See Note 2 on
page 73 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except headcount) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions(a)(b) |
|
$ |
1,082 |
|
|
$ |
195 |
|
|
|
455 |
% |
|
$ |
3,779 |
|
|
$ |
945 |
|
|
|
300 |
% |
Securities gains (losses)(c) |
|
|
128 |
|
|
|
24 |
|
|
|
433 |
|
|
|
(107 |
) |
|
|
(626 |
) |
|
|
83 |
|
All other income(d) |
|
|
70 |
|
|
|
125 |
|
|
|
(44 |
) |
|
|
228 |
|
|
|
458 |
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
|
1,280 |
|
|
|
344 |
|
|
|
272 |
|
|
|
3,900 |
|
|
|
777 |
|
|
|
402 |
|
Net interest income (expense) |
|
|
(279 |
) |
|
|
(55 |
) |
|
|
(407 |
) |
|
|
(569 |
) |
|
|
(957 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,001 |
|
|
|
289 |
|
|
|
246 |
|
|
|
3,331 |
|
|
|
(180 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(31 |
) |
|
|
1 |
|
|
|
NM |
|
|
|
(25 |
) |
|
|
1 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense(b) |
|
|
569 |
|
|
|
737 |
|
|
|
(23 |
) |
|
|
2,040 |
|
|
|
2,192 |
|
|
|
(7 |
) |
Noncompensation expense(e) |
|
|
674 |
|
|
|
731 |
|
|
|
(8 |
) |
|
|
2,048 |
|
|
|
1,679 |
|
|
|
22 |
|
Merger costs |
|
|
61 |
|
|
|
48 |
|
|
|
27 |
|
|
|
187 |
|
|
|
205 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
1,304 |
|
|
|
1,516 |
|
|
|
(14 |
) |
|
|
4,275 |
|
|
|
4,076 |
|
|
|
5 |
|
Net expenses allocated to other businesses |
|
|
(1,059 |
) |
|
|
(1,035 |
) |
|
|
(2 |
) |
|
|
(3,174 |
) |
|
|
(3,104 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
245 |
|
|
|
481 |
|
|
|
(49 |
) |
|
|
1,101 |
|
|
|
972 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
income tax expense |
|
|
787 |
|
|
|
(193 |
) |
|
|
NM |
|
|
|
2,255 |
|
|
|
(1,153 |
) |
|
|
NM |
|
|
Income tax expense (benefit) |
|
|
274 |
|
|
|
(159 |
) |
|
|
NM |
|
|
|
729 |
|
|
|
(659 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
513 |
|
|
|
(34 |
) |
|
NM |
|
|
|
1,526 |
|
|
|
(494 |
) |
|
NM |
|
Income from discontinued operations(f) |
|
|
|
|
|
|
65 |
|
|
|
NM |
|
|
|
|
|
|
|
175 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
513 |
|
|
$ |
31 |
|
|
|
NM |
|
|
$ |
1,526 |
|
|
$ |
(319 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity(a)(b) |
|
$ |
733 |
|
|
$ |
188 |
|
|
|
290 |
|
|
$ |
3,279 |
|
|
$ |
892 |
|
|
|
268 |
|
Treasury and Corporate other(c) |
|
|
268 |
|
|
|
101 |
|
|
|
165 |
|
|
|
52 |
|
|
|
(1,072 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,001 |
|
|
$ |
289 |
|
|
|
246 |
|
|
$ |
3,331 |
|
|
$ |
(180 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity(a) |
|
$ |
409 |
|
|
$ |
95 |
|
|
|
331 |
|
|
$ |
1,809 |
|
|
$ |
491 |
|
|
|
268 |
|
Treasury and Corporate other(c) |
|
|
142 |
|
|
|
(99 |
) |
|
NM |
|
|
|
(167 |
) |
|
|
(858 |
) |
|
|
81 |
|
Merger costs |
|
|
(38 |
) |
|
|
(30 |
) |
|
|
(27 |
) |
|
|
(116 |
) |
|
|
(127 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
513 |
|
|
|
(34 |
) |
|
NM |
|
|
|
1,526 |
|
|
|
(494 |
) |
|
NM |
|
Income from discontinued operations(f) |
|
|
|
|
|
|
65 |
|
|
|
NM |
|
|
|
|
|
|
|
175 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Total net income (loss) |
|
$ |
513 |
|
|
$ |
31 |
|
|
|
NM |
|
|
$ |
1,526 |
|
|
$ |
(319 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
22,864 |
# |
|
|
25,748 |
# |
|
|
(11 |
) |
|
|
22,864 |
# |
|
|
25,748 |
# |
|
|
(11 |
) |
|
|
|
|
(a) |
|
The Firm adopted SFAS 157
in the first quarter of 2007. See Note 3 on pages 7380 of
this Form 10-Q for additional information. |
(b) |
|
2007 included the classification of certain private equity carried interest from Net revenue
to Compensation expense. |
(c) |
|
Included a gain of $115 million in the third quarter of 2007 related to the sale of
MasterCard shares. |
(d) |
|
The nine months ended September 30, 2006, included a gain of $103 million related to the sale
of Mastercard shares in its initial public offering, which occurred during the second quarter
of 2006. |
(e) |
|
Included insurance recoveries related to settlement of the Enron and WorldCom class action
litigations and for certain other material proceedings of $17 million and $375 million for the
quarter and nine months ended September 30, 2006, respectively. |
(f) |
|
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 were reported as discontinued
operations for 2006. |
Quarterly results
Net income was $513 million, compared with $31 million in the prior year, benefiting from increased
net revenue and lower noninterest expense. Prior-year results also included net income from
discontinued operations of $65 million.
Net revenue was $1.0 billion, compared with $289 million in the prior year. The increase was driven
by Private Equity gains of $766 million, compared with $226 million, reflecting a higher level of
gains and the classification of certain private equity carried interest as compensation expense.
Net revenue also increased due to higher trading-related gains and a $115 million gain from the
sale of MasterCard shares. The increase in revenue was offset partially by a narrower net interest
spread.
40
Noninterest expense was $245 million, down by $236 million from the prior year. The decrease was
driven by lower compensation expense and continuing business efficiencies. Partially offsetting the
benefit of lower expense was the impact of the classification of certain private equity carried
interest as compensation expense.
Year-to-date results
Net income was $1.5 billion, compared with net loss of $319 million in the prior year, benefiting
from increased net revenue, partially offset by higher expense. Prior-year results also included
net income from discontinued operations of $175 million.
Net revenue was $3.3 billion, compared with a negative $180 million in the prior year. The increase
was driven by Private Equity gains of $3.4 billion, compared with $1.0 billion, reflecting a higher
level of gains, the classification of certain private equity carried interest as compensation
expense and a fair value adjustment on nonpublic investments resulting from the adoption of SFAS
157. Net revenue also increased due to a $115 million gain from the sale of MasterCard shares,
lower securities losses and improved net interest income. Prior-year results included a $103
million gain related to the MasterCard initial public offering.
Noninterest expense was $1.1 billion, compared with $972 million in the prior year. The increase
was driven by higher net legal costs, reflecting a lower level of recoveries and higher expense. In
addition, expense increased due to the classification of certain private equity carried interest as
compensation expense offset partially by business efficiencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement and balance sheet data |
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
2007 |
|
|
2006 |
|
|
Change |
|
Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses)(a) |
|
$ |
126 |
|
|
$ |
24 |
|
|
|
425 |
% |
|
$ |
(109 |
) |
|
$ |
(626 |
) |
|
|
83 |
% |
Investment securities portfolio (average) |
|
|
85,470 |
|
|
|
68,619 |
|
|
|
25 |
|
|
|
86,552 |
|
|
|
57,545 |
|
|
|
50 |
|
Investment securities portfolio (ending) |
|
|
86,495 |
|
|
|
77,116 |
|
|
|
12 |
|
|
|
86,495 |
|
|
|
77,116 |
|
|
|
12 |
|
Mortgage loans (average)(b) |
|
|
29,854 |
|
|
|
|
|
|
|
NM |
|
|
|
27,326 |
|
|
|
|
|
|
|
NM |
|
Mortgage loans (ending)(b) |
|
|
32,804 |
|
|
|
|
|
|
|
NM |
|
|
|
32,804 |
|
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
$ |
504 |
|
|
$ |
194 |
|
|
|
160 |
|
|
$ |
2,212 |
|
|
$ |
969 |
|
|
|
128 |
|
Unrealized gains (losses) |
|
|
227 |
|
|
|
4 |
|
|
|
NM |
|
|
|
1,038 |
|
|
|
(7 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Total direct investments(c) |
|
|
731 |
|
|
|
198 |
|
|
|
269 |
|
|
|
3,250 |
|
|
|
962 |
|
|
|
238 |
|
Third-party fund investments |
|
|
35 |
|
|
|
28 |
|
|
|
25 |
|
|
|
122 |
|
|
|
50 |
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
Total private equity gains(d) |
|
$ |
766 |
|
|
$ |
226 |
|
|
|
239 |
|
|
$ |
3,372 |
|
|
$ |
1,012 |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity portfolio information(e) |
|
|
|
|
|
|
|
|
|
Direct investments |
|
September 30, 2007 |
|
December 31, 2006 |
|
Change |
|
Publicly-held securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
409 |
|
|
$ |
587 |
|
|
|
(30 |
)% |
Cost |
|
|
291 |
|
|
|
451 |
|
|
|
(35 |
) |
Quoted public value |
|
|
560 |
|
|
|
831 |
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately-held direct securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
5,336 |
|
|
|
4,692 |
|
|
|
14 |
|
Cost |
|
|
5,003 |
|
|
|
5,795 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party fund investments(f) |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
839 |
|
|
|
802 |
|
|
|
5 |
|
Cost |
|
|
1,078 |
|
|
|
1,080 |
|
|
|
|
|
|
|
|
|
|
Total
private equity portfolio Carrying value |
|
$ |
6,584 |
|
|
$ |
6,081 |
|
|
|
8 |
|
Total
private equity portfolio Cost |
|
$ |
6,372 |
|
|
$ |
7,326 |
|
|
|
(13 |
) |
|
|
|
|
(a) |
|
Losses reflected repositioning of the Treasury investment securities portfolio. |
(b) |
|
Held-for-investment prime mortgage loans were transferred from RFS and AM. The transfer has
no material impact on the financial results of Corporate. |
(c) |
|
Private equity gains include a fair value adjustment related to the adoption of SFAS 157 in
the first quarter of 2007. In addition, 2007 includes the reclassification of certain private
equity carried interest from Net revenue to Compensation expense. |
(d) |
|
Included in Principal transactions revenue. |
(e) |
|
For more information on the Firms policies regarding the valuation of the private equity
portfolio, see Note 5 on pages 8385 of this Form 10-Q. |
(f) |
|
Unfunded commitments to third-party equity funds were $883 million and $589 million at
September 30, 2007 and December 31, 2006, respectively. |
The carrying value of the private equity portfolio at September 30, 2007, was $6.6 billion,
up $503 million from December 31, 2006. The portfolio increase was due primarily to favorable
valuation adjustments on nonpublic investments and new investments, partially offset by sales
activity. The portfolio represented 8.8% of the Firms stockholders equity less goodwill at
September 30, 2007, up from 8.6% at December 31, 2006.
41
BALANCE SHEET ANALYSIS
|
|
|
|
|
|
|
|
|
Selected balance sheet data (in millions) |
|
September 30, 2007 |
|
December 31, 2006 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
32,766 |
|
|
$ |
40,412 |
|
Deposits with banks |
|
|
26,714 |
|
|
|
13,547 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
135,589 |
|
|
|
140,524 |
|
Securities borrowed |
|
|
84,697 |
|
|
|
73,688 |
|
Trading assets: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
389,119 |
|
|
|
310,137 |
|
Derivative receivables |
|
|
64,592 |
|
|
|
55,601 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
97,659 |
|
|
|
91,917 |
|
Held-to-maturity |
|
|
47 |
|
|
|
58 |
|
Loans, net of Allowance for loan losses |
|
|
478,207 |
|
|
|
475,848 |
|
Other receivables |
|
|
36,411 |
|
|
|
27,585 |
|
Goodwill |
|
|
45,335 |
|
|
|
45,186 |
|
Other intangible assets |
|
|
15,500 |
|
|
|
14,852 |
|
All other assets |
|
|
72,939 |
|
|
|
62,165 |
|
|
Total assets |
|
$ |
1,479,575 |
|
|
$ |
1,351,520 |
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
678,091 |
|
|
$ |
638,788 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
178,767 |
|
|
|
162,173 |
|
Commercial paper and other borrowed funds |
|
|
65,132 |
|
|
|
36,902 |
|
Trading liabilities: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
80,748 |
|
|
|
90,488 |
|
Derivative payables |
|
|
68,426 |
|
|
|
57,469 |
|
Long-term debt and trust preferred capital debt securities |
|
|
188,626 |
|
|
|
145,630 |
|
Beneficial interests issued by consolidated variable interest entities |
|
|
13,283 |
|
|
|
16,184 |
|
All other liabilities |
|
|
86,524 |
|
|
|
88,096 |
|
|
Total liabilities |
|
|
1,359,597 |
|
|
|
1,235,730 |
|
Stockholders equity |
|
|
119,978 |
|
|
|
115,790 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,479,575 |
|
|
$ |
1,351,520 |
|
|
Consolidated balance sheets overview
At September 30, 2007, the Firms total assets were $1.5 trillion, an increase of $128.1 billion,
or 9%, from December 31, 2006. Total liabilities were $1.4 trillion, an increase of $123.9 billion,
or 10%, from December 31, 2006. Stockholders equity was $120.0 billion, an increase of $4.2
billion, or 4%, from December 31, 2006. The following is a discussion of the significant changes in
balance sheet items from December 31, 2006.
Deposits with banks; Federal funds sold and securities purchased under resale agreements;
Securities borrowed; Federal funds purchased and securities sold under repurchase agreements
The Firm utilizes Deposits with banks, Federal funds sold and securities purchased under resale
agreements, Securities borrowed, and Federal funds purchased and securities sold under repurchase
agreements as part of its liquidity management activities to manage the Firms cash positions and
risk-based capital requirements, and to support the Firms trading activities, including its risk
management activities. In particular, Federal funds purchased and securities sold under repurchase
agreements are used to maximize liquidity access and minimize funding costs. The increases from
December 31, 2006, in Deposits with banks and Securities borrowed reflected higher levels of funds
that were available for short-term investment opportunities and a higher volume of securities
needed for trading purposes, respectively. Securities sold under repurchase agreements increased
primarily due to higher short-term requirements to fund trading positions. For additional
information on the Firms Liquidity risk management, see pages
4951 of this Form 10-Q.
Trading
assets and liabilities debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary
risk-taking activities. These instruments consist primarily of fixed income securities, including
government and corporate debt; equity, including convertible securities; loans; and physical
commodities. The increase in trading assets from December 31, 2006, was due primarily to
the more active capital markets environment, with growth in client-driven market-making activities,
particularly for debt securities. In addition, a total of $31.0 billion of loans are now
accounted for at fair value under SFAS 159 and classified as trading assets in the Consolidated
balance sheet at September 30, 2007. The trading assets accounted for under SFAS 159 are
primarily certain prime mortgage loans warehoused by RFS for sale or securitization purposes, and
loans warehoused by IB. The decrease in trading liabilities reflects a lower volume of
short positions on debt instruments, due to
42
the difficult fixed income market environment that occurred during the third quarter of 2007.
For additional information, refer to Note 4 and Note 5 on pages
8083 and 8385, respectively, of this Form 10-Q.
Trading assets and liabilities derivative receivables and payables
The Firm utilizes various interest rate, foreign exchange, equity, credit and commodity derivatives
for market-making, proprietary risk-taking and risk-management purposes. Derivative
receivables increased $9.0 billion from December 31, 2006, primarily due to higher equity, credit
derivative and foreign exchange receivables as a result of higher equity market levels, widening
credit spreads and the decline in the U.S. dollar, respectively. The increase in derivative
payables from December 31, 2006, was due primarily to higher payables on equity-related and foreign
exchange derivatives due to the strength of the equities markets and the decline in the value of
the U.S. Dollar, respectively. For additional information, refer to Derivative
contracts and Note 5 on pages 5658 and 8385, respectively, of this Form 10-Q.
Securities
Almost all of the Firms securities portfolios are classified as AFS and are used primarily to
manage the Firms exposure to interest rate movements. The AFS portfolio increased from December
31, 2006, primarily due to net purchases of securities by Treasury associated with 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 4041 and 8990, respectively, of this Form
10-Q.
Loans
The Firm provides loans to customers of all sizes, from large corporate and institutional clients
to individual consumers. The Firm manages the risk/reward relationship of each portfolio and
discourages the retention of loan assets that do not generate a positive return above the cost of
risk-adjusted capital. Loans, net of the Allowance for loan losses, rose slightly from
December 31, 2006, primarily due to: business growth in wholesale lending activity, mainly in IB
and CB; organic growth in the Home Equity portfolio; and the decision during the current quarter to
retain rather than sell subprime mortgage loans. These increases were partly offset by a
decline in consumer loans as certain prime mortgage loans originated after January 1, 2007, are
classified as Trading assets and accounted for at fair value under SFAS 159. In
addition, certain loans warehoused in IB were transferred to Trading assets on January 1, 2007, as
part of the adoption of SFAS 159. Also contributing to the decrease were typical
seasonal declines in credit card receivables, partially offset by organic growth. For a
more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit
risk management on pages 5162 of this Form 10-Q.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired
entity over the net fair value amounts assigned to assets acquired and liabilities assumed. The
increase in Goodwill primarily resulted from certain acquisitions by TSS and CS, and
currency-translation adjustments on the Sears Canada credit card acquisition. These
factors were partially offset by a reduction in Goodwill from the adoption of FIN 48, as well as
adjustments for tax-related purchase accounting adjustments associated with the Bank One merger.
For additional information see Notes 17 and 20 on pages 101 and 105, respectively, of this Form
10-Q.
Other intangible assets
The Firms other intangible assets consist of MSRs, purchased credit card relationships, other
credit cardrelated intangibles, core deposit intangibles, and all other intangibles. The increase
in Other intangible assets reflects higher MSRs of $1.6 billion primarily due to MSR additions from
loan sales and MSR purchases. Partially offsetting these increases were other changes in the fair
value of MSRs, related primarily to modeled mortgage servicing portfolio runoff (or time decay),
and the amortization of intangibles, in particular, credit card business-related intangibles and
core deposit intangibles. For additional information on MSRs and other intangible assets, see Note
17 on pages 101103 of this Form 10-Q.
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, negotiable order of withdrawal (NOW) accounts). Deposits help provide a
stable and consistent source of funding for the Firm. Deposits increased from December 31, 2006,
primarily reflecting wholesale deposits driven by net growth in business volumes, particularly,
interest-bearing deposits within TSS and AM. For more information on deposits, refer to
the RFS, TSS, and AM segment discussions and the Liquidity risk management discussion on pages
2128, 3536, 3739, and 4951, 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 3334 and 3536, respectively, of this Form 10-Q.
43
Commercial paper and other borrowed funds
The Firm utilizes Commercial paper and other borrowed funds as part of its liquidity management
activities to cover short-term funding needs, as well as in connection with TSSs cash management
product in which clients excess funds, primarily in TSS, CB and RFS, are transferred into
commercial paper overnight sweep accounts. The increases in Commercial paper and other
borrowed funds were due primarily to growth in the volume of liability balances in sweep accounts,
higher short-term requirements to fund trading positions and AFS securities inventory levels, and
the Firms ongoing efforts to further build liquidity by increasing the amounts held of liquid
securities and overnight investments that may be readily converted to cash. For
additional information on the Firms Liquidity risk management, see pages 4951 of this Form 10-Q.
Beneficial interests issued by consolidated variable interest entities (VIEs)
Beneficial interests issued by consolidated VIEs declined from December 31, 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
Off-balance sheet arrangements and contractual cash obligations on pages 4748 and Note 16 on
pages 100101 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
longer-term liquidity and capital management activities. Long-term debt and trust preferred capital
debt securities increased from December 31, 2006, reflecting net new issuances, including
client-driven structured notes in IB. For additional information on the Firms long-term debt
activities, see the Liquidity risk management discussion on pages 4951 of this Form 10-Q.
Stockholders equity
Total stockholders equity increased from year-end 2006 to $120.0 billion at September 30,
2007. The increase was primarily the result of Net income for the first nine 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. These were 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 in
the first quarter of 2007. 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 pages 6667, Note 3 on pages 7380, Note 4 on pages 8083 and Note 20 on page
105 of this Form 10-Q.
44
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 of capital 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 101 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
Line of business equity |
|
Quarterly Averages |
|
(in billions) |
|
3Q07 |
|
|
3Q06 |
|
|
Investment Bank |
|
$ |
21.0 |
|
|
$ |
21.0 |
|
Retail Financial Services |
|
|
16.0 |
|
|
|
14.3 |
|
Card Services |
|
|
14.1 |
|
|
|
14.1 |
|
Commercial Banking |
|
|
6.7 |
|
|
|
5.5 |
|
Treasury & Securities Services |
|
|
3.0 |
|
|
|
2.2 |
|
Asset Management |
|
|
4.0 |
|
|
|
3.5 |
|
Corporate |
|
|
54.2 |
|
|
|
51.2 |
|
|
Total common stockholders equity |
|
$ |
119.0 |
|
|
$ |
111.8 |
|
|
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, principally
for the Firms Private Equity business, private equity risk.
|
|
|
|
|
|
|
|
|
Economic risk capital |
|
Quarterly Averages |
|
(in billions) |
|
3Q07 |
|
|
3Q06 |
|
|
Credit risk |
|
$ |
24.8 |
|
|
$ |
22.3 |
|
Market risk |
|
|
9.7 |
|
|
|
9.6 |
|
Operational risk |
|
|
5.6 |
|
|
|
5.7 |
|
Private equity risk |
|
|
3.7 |
|
|
|
3.3 |
|
|
Economic risk capital |
|
|
43.8 |
|
|
|
40.9 |
|
Goodwill |
|
|
45.3 |
|
|
|
43.4 |
|
Other(a) |
|
|
29.9 |
|
|
|
27.5 |
|
|
Total common stockholders equity |
|
$ |
119.0 |
|
|
$ |
111.8 |
|
|
|
|
|
(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.
45
Tier 1 capital was $86.1 billion at September 30, 2007, compared with $81.1 billion at December 31,
2006, an increase of $5.0 billion. The increase was due primarily to net income of $12.4 billion;
net issuances of common stock under the Firms employee stock-based compensation plans of $3.0
billion; net issuances of $1.6 billion of qualifying trust preferred capital debt securities; 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. These increases were partially
offset by decreases in Stockholders equity net of Accumulated other comprehensive income (loss)
due to common stock repurchases of $8.0 billion and dividends declared of $3.8 billion. In
addition, the change in capital reflects the exclusion of a $651 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.
The following table presents the risk-based capital ratios for JPMorgan Chase and its significant
banking subsidiaries at September 30, 2007, and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk- |
|
|
Adjusted |
|
|
Tier 1 |
|
|
Total |
|
|
Tier 1 |
|
|
|
Tier 1 |
|
|
|
|
|
|
weighted |
|
|
average |
|
|
capital |
|
|
capital |
|
|
leverage |
|
(in millions, except ratios) |
|
capital |
|
|
Total capital |
|
|
assets(c) |
|
|
assets(d) |
|
|
ratio |
|
|
ratio |
|
|
ratio |
|
|
September 30, 2007(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. |
|
$ |
86,096 |
|
|
$ |
128,543 |
|
|
$ |
1,028,551 |
|
|
$ |
1,423,171 |
|
|
|
8.4 |
% |
|
|
12.5 |
% |
|
|
6.0 |
% |
JPMorgan Chase Bank, N.A. |
|
|
75,539 |
|
|
|
108,306 |
|
|
|
920,447 |
|
|
|
1,211,591 |
|
|
|
8.2 |
|
|
|
11.8 |
|
|
|
6.2 |
|
Chase Bank USA, N.A. |
|
|
9,499 |
|
|
|
10,807 |
|
|
|
71,484 |
|
|
|
61,285 |
|
|
|
13.3 |
|
|
|
15.1 |
|
|
|
15.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 offbalance sheet risk-weighted assets in the amounts of $345.4 billion, $329.3
billion and $14.2 billion, respectively, at September 30, 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 September 18, 2007, the Board of Directors declared a quarterly dividend of
$0.38 per share on the outstanding shares of the corporations common stock, payable on October 31,
2007, to stockholders of record at the close of business on October 5, 2007. On April 17, 2007, the
Board of Directors increased the quarterly dividend $0.04 per share, or 12%, to $0.38 per share
effective with the dividend that was paid on July 31, 2007.
46
Stock repurchases
During the quarter and nine months ended September 30, 2007, under the respective stock repurchase
programs then in effect, the Firm repurchased a total of 47.0 million and 164.6 million shares for
$2.1 billion and $8.0 billion at an average price per share of $45.42 and $48.67, respectively.
During the quarter and nine months ended September 30, 2006, under the respective stock repurchase
programs then in effect, the Firm repurchased a total of 20.0 million and 69.5 million shares for
$900 million and $2.9 billion at an average price per share of $44.88 and $42.22, respectively.
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. 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 121122 of this Form 10-Q.
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 7273 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 $96.9 billion and $74.4 billion at September 30, 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 revenue. 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 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 September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
VIEs |
|
|
QSPEs |
|
|
Total |
|
|
VIEs |
|
|
QSPEs |
|
|
Total |
|
|
2007 |
|
$ |
56 |
|
|
$ |
865 |
|
|
$ |
921 |
|
|
$ |
158 |
|
|
$ |
2,552 |
|
|
$ |
2,710 |
|
2006 |
|
$ |
55 |
|
|
$ |
788 |
|
|
$ |
843 |
|
|
$ |
162 |
|
|
$ |
2,366 |
|
|
$ |
2,528 |
|
|
47
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.
The following table presents offbalance sheet lending-related financial instruments and
guarantees for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
|
September 30, 2007 |
|
|
2006 |
|
By remaining maturity |
|
|
|
|
|
1-<3 |
|
|
3-5 |
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
< 1 year |
|
|
years |
|
|
years |
|
|
> 5 years |
|
|
Total |
|
|
Total |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a) |
|
$ |
726,405 |
|
|
$ |
3,272 |
|
|
$ |
3,344 |
|
|
$ |
68,667 |
|
|
$ |
801,688 |
|
|
$ |
747,535 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded commitments to extend credit(b)(c)(d) |
|
|
109,348 |
|
|
|
67,478 |
|
|
|
66,535 |
|
|
|
18,514 |
|
|
|
261,875 |
|
|
|
229,204 |
|
Asset purchase agreements(e) |
|
|
30,301 |
|
|
|
44,765 |
|
|
|
14,466 |
|
|
|
3,868 |
|
|
|
93,400 |
|
|
|
67,529 |
|
Standby letters of credit and guarantees(c)(f)(g) |
|
|
27,071 |
|
|
|
23,770 |
|
|
|
47,496 |
|
|
|
8,466 |
|
|
|
106,803 |
|
|
|
89,132 |
|
Other letters of credit(c) |
|
|
4,828 |
|
|
|
1,099 |
|
|
|
126 |
|
|
|
14 |
|
|
|
6,067 |
|
|
|
5,559 |
|
|
Total wholesale |
|
|
171,548 |
|
|
|
137,112 |
|
|
|
128,623 |
|
|
|
30,862 |
|
|
|
468,145 |
|
|
|
391,424 |
|
|
Total lending-related |
|
$ |
897,953 |
|
|
$ |
140,384 |
|
|
$ |
131,967 |
|
|
$ |
99,529 |
|
|
$ |
1,269,833 |
|
|
$ |
1,138,959 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(h) |
|
$ |
384,462 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
384,462 |
|
|
$ |
318,095 |
|
Derivatives qualifying as guarantees(i) |
|
|
25,802 |
|
|
|
10,472 |
|
|
|
27,553 |
|
|
|
24,608 |
|
|
|
88,435 |
|
|
|
71,531 |
|
|
|
|
|
(a) |
|
Includes Credit card lending-related commitments of $700.2 billion at September 30, 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 $39.2 billion at September 30, 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 $25.6 billion at September
30, 2007, and $32.8 billion at December 31, 2006. |
(d) |
|
Excludes firmwide unfunded commitments to private third-party equity funds of $936 million
and $686 million at September 30, 2007, and December 31, 2006, respectively. |
(e) |
|
The maturity is based upon the underlying assets in the SPE, which are primarily asset
purchase agreements to the Firms administered multi-seller asset-backed commercial paper
conduits. It also includes $1.4 billion of asset purchase agreements to other third-party
entities at September 30, 2007, and December 31, 2006. |
(f) |
|
JPMorgan Chase held collateral relating to $15.4 billion and $13.5 billion of these
arrangements at September 30, 2007, and December 31, 2006, respectively. |
(g) |
|
Includes unused commitments to issue standby letters of credit of $59.1 billion and $45.7
billion at September 30, 2007, and December 31, 2006, respectively. |
(h) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$387.4 billion at September 30, 2007, and $317.9 billion at December 31, 2006. |
(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.
48
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 methods to mitigate liquidity and related risks,
taking into consideration market conditions, prevailing interest rates, liquidity needs and the
desired maturity profile of liabilities, among other factors.
Funding
Sources of funds
As of September 30, 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 company
level in excess of 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
September 30, 2007, total deposits for the Firm were $678.1 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 wholesale deposits. The Firm also benefits
from stable wholesale liability balances originated by RFS, CB, TSS and AM through the normal
course of business. Such liability balances include deposits that are swept to onbalance sheet
liabilities (e.g., commercial paper, Federal funds purchased and securities sold under repurchase
agreements). These liability balances are also a stable and consistent source of funding due to the
nature of the businesses from which they are generated. For further discussions of deposit and
liability balance trends, see the discussion of the results for the Firms business segments and
the Balance Sheet Analysis on pages 1739 and 4244, respectively, of this Form 10-Q.
Additional sources of unsecured funds include a variety of 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.
Funding flexibility is also provided by the Firms ability to access secured funding from 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, Note 15 and Note 23 on pages 4748, 9499 and
106107, respectively, of this Form 10-Q.
Issuance
During the third quarter and first nine months of 2007, JPMorgan Chase issued $24.2 billion and
$77.1 billion, respectively, of long-term debt and trust preferred capital debt securities. These
issuances included IB structured notes, the issuances of which are generally client-driven and not
for funding or capital management purposes as the proceeds are generally used to fund securities
which mitigate risk associated with structured note exposures. The issuances of long-term debt and
trust preferred capital debt securities were offset partially by $10.0 billion and $40.4 billion,
respectively, of debt and trust preferred securities that matured or were redeemed during the third
quarter and first nine months of 2007, including IB structured notes. The increase in long-term
debt and trust preferred capital securities was used primarily to fund certain illiquid assets held
by the Parent company and to build liquidity. During the third quarter and first nine months of
2007, Commercial paper increased $8.9 billion and $15.1 billion, respectively, and Other borrowed
funds increased $1.9 billion and $13.1 billion, respectively.
49
The growth in both Commercial paper and Other borrowed funds was used to further build liquidity by
increasing the amounts held of liquid securities and overnight investments that may be readily
converted to cash. In addition, during the third quarter and first nine months of 2007, the Firm
securitized $3.8 billion and $27.7 billion, respectively, of residential mortgage loans; $3.5
billion and $14.2 billion, respectively, of credit card loans; and $1.2 billion of education loans
in the third quarter of 2007. The Firm did not securitize any auto loans during the nine months
ended September 30, 2007. For further discussion of loan securitizations, see Note 15 on pages
9499 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 holders of
covered debt, as defined in the RCCs, that prohibit the repayment, redemption or purchase of the
trust preferred capital debt securities except, with limited exceptions, to the extent that
JPMorgan Chase has received specified amounts of proceeds from the sale of certain qualifying
securities. Currently the Firms covered debt is its 5.875% Junior Subordinated Deferrable Interest
Debentures, Series O, due in 2035. For more information regarding these covenants, reference is
made to the respective RCCs entered into by the Firm in connection with the issuances of such trust
preferred capital debt securities, which are filed with the Securities and Exchange Commission
under cover of Forms 8-K.
Cash Flows
Cash and due from banks decreased $7.6 billion in the first nine months of 2007 compared with a
decrease of $391 million in the first nine months of 2006. A discussion of the significant changes
in Cash and due from banks during the nine months ended September 30, 2007 and 2006, follows:
Cash Flows from Operating Activities
For the nine months ended September 30, 2007 and 2006, net cash used in operating activities was
$81.3 billion and $35.1 billion, respectively. JPMorgan Chases operating assets and liabilities
support the Firms capital markets and lending activities,
including the origination or purchase of loans held-for-sale. The
amount and timing of cash flows related to the Firms operating
activities may vary significantly in the normal course of business as
a result of the level of client-driven activities, market conditions
and trading strategies. 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 are primarily transactions involving loans initially designated as
held-for-investment, other receivables, and AFS investment securities. For the nine months ended
September 30, 2007, net cash of $41.3 billion was used in investing activities, primarily for
purchases of investment securities in Treasurys AFS portfolio to manage the Firms exposure to
interest rates; net additions to the wholesale and consumer (primarily home equity) loans
held-for-investment; and to increase Deposits with banks as a result of the availability of cash
for short-term investment opportunities. These uses of cash were partially offset by cash proceeds
received from: sales and maturities of AFS securities; credit card, residential mortgage, education
and wholesale loan sales and securitization activities; and the typical seasonal decline in
consumer credit card receivables as customer payments exceeded new loans generated from customer
charges.
For the nine months ended September 30, 2006, net cash of $105.6 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; net additions to the
retained wholesale loan portfolio, mainly resulting from capital markets activity in IB (including
leveraged financings associated with mergers and acquisitions and syndications activities); net
additions in retail home equity loans; the acquisition in the second quarter of a private-label
credit card portfolio; and the acquisition of Collegiate Funding Services, a leader in education
loan servicing and consolidation, on March 1, 2006. These uses of cash were partially offset by
cash proceeds provided from: sales and maturities of AFS securities; credit card, residential
mortgage, auto and wholesale loan sales and securitization activities; the net decline in auto
loans and leases, which was caused partially by the de-emphasis of vehicle leasing and the sale of
the insurance business on July 1, 2006.
Cash Flows from Financing Activities
The Firms financing activities are primarily transactions involving customer deposits and its
debt, common stock and preferred stock. In the first nine months of 2007, net cash provided by
financing activities was $114.7 billion due to: a net increase in wholesale deposits from growth in
business volumes, in particular, interest-bearing deposits at TSS and AM; net issuances of
Long-term debt and trust preferred capital debt securities to fund certain liquid assets held by
the Parent company and to build liquidity; growth in Commercial paper
issuances and Other borrowed funds to
further build liquidity; and an increase in securities sold under repurchase agreements in
connection with the funding of trading and AFS securities positions. Cash was used to repurchase
common stock and to pay dividends.
50
In the first nine months of 2006, net cash provided by financing activities was $140.1 billion due
to: net cash received from growth in deposits reflecting, on the retail side, new account
acquisitions and the ongoing expansion of the retail branch distribution network, and on the
wholesale side, higher business volumes; increases in securities sold under repurchase agreements
to fund trading positions and higher levels of AFS securities positions; and net issuances of
Long-term debt and trust preferred capital debt securities. The net cash provided was partially
offset by cash used for common stock repurchases and the payment of cash dividends on common and
preferred stock.
Credit ratings
The credit ratings of JPMorgan Chases parent holding company and each of its significant banking
subsidiaries as of September 30, 2007, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
Senior long-term debt |
|
|
Moodys |
|
S&P |
|
Fitch |
|
Moodys |
|
S&P |
|
Fitch |
|
JPMorgan Chase & Co. |
|
P-1 |
|
A-1+ |
|
F1+ |
|
Aa2 |
|
AA- |
|
AA- |
JPMorgan Chase Bank, N.A. |
|
P-1 |
|
A-1+ |
|
F1+ |
|
Aaa |
|
AA |
|
AA- |
Chase Bank USA, N.A. |
|
P-1 |
|
A-1+ |
|
F1+ |
|
Aaa |
|
AA |
|
AA- |
|
On March 2, 2007, Moodys raised 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 associated with a one
notch downgrade would not be material. 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 47 and Ratings profile of derivative receivables MTM on pages
5657 of this Form 10-Q.
CREDIT RISK MANAGEMENT
The following discussion of JPMorgan Chases credit portfolio as of September 30, 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, and
Notes 13, 14, and 23 on pages 9194 and 106107, respectively, of this Form 10-Q.
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 1316 of this Form 10-Q.
CREDIT PORTFOLIO
The following table presents JPMorgan Chases credit portfolio as of September 30, 2007, and
December 31, 2006. Total credit exposure at September 30, 2007, increased by $145.8 billion from
December 31, 2006, reflecting an increase of $99.7 billion and $46.1 billion in the wholesale and
consumer credit portfolios, respectively. During the first nine months of 2007 lending-related
commitments increased $130.9 billion ($76.7 billion and $54.2 billion in the wholesale and consumer
portfolios, respectively), derivatives increased $9.0 billion and managed loans increased $5.9
billion ($14.0 billion increase in wholesale partially offset by an $8.1 billion decrease in
consumer). RFS loans accounted for at lower of cost or fair value declined, as prime mortgage loans
originated with the intent to sell after January 1, 2007, are classified as Trading assets and
accounted for at fair value under SFAS 159. In addition, certain loans warehoused in IB were
transferred to Trading assets on January 1, 2007, as part of the adoption of SFAS 159. Also
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.
51
In the table below, reported loans include loans accounted for at fair value and loans
held-for-sale, which are carried at the lower of cost or fair value with changes in
value recorded in Noninterest revenue. However, these loans accounted for at fair value and loans
held-for-sale are excluded from the average loan balances used for the net charge-off
rate calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
|
Nonperforming assets(i) |
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans reported(a)(b) |
|
$ |
486,320 |
|
|
$ |
483,127 |
|
|
$ |
2,662 |
(j) |
|
$ |
2,077 |
(j) |
Loans securitized(c) |
|
|
69,643 |
|
|
|
66,950 |
|
|
|
|
|
|
|
|
|
|
Total managed loans(d) |
|
|
555,963 |
|
|
|
550,077 |
|
|
|
2,662 |
|
|
|
2,077 |
|
Derivative receivables |
|
|
64,592 |
|
|
|
55,601 |
|
|
|
34 |
|
|
|
36 |
|
|
Total managed credit-related assets |
|
|
620,555 |
|
|
|
605,678 |
|
|
|
2,696 |
|
|
|
2,113 |
|
Lending-related commitments(e) |
|
|
1,269,833 |
|
|
|
1,138,959 |
|
|
NA |
|
|
NA |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
485 |
|
|
|
228 |
|
|
Total credit portfolio |
|
$ |
1,890,388 |
|
|
$ |
1,744,637 |
|
|
$ |
3,181 |
|
|
$ |
2,341 |
|
|
Net credit derivative hedges notional(f) |
|
$ |
(62,075 |
) |
|
$ |
(50,733 |
) |
|
$ |
|
|
|
$ |
(16 |
) |
Collateral held against derivatives(g) |
|
|
(7,423 |
) |
|
|
(6,591 |
) |
|
NA |
|
|
NA |
|
Memo: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at fair value and loans held-for-sale |
|
|
24,491 |
|
|
|
55,251 |
|
|
|
75 |
|
|
|
120 |
|
Nonperforming purchased(h) |
|
|
|
|
|
|
251 |
|
|
NA |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
Average annual net |
|
|
|
|
|
|
|
|
|
|
Average annual net |
|
(in millions, except ratios) |
|
Net charge-offs |
|
|
charge-off rate |
|
|
Net charge-offs |
|
|
charge-off rate |
|
|
|
|
|
2007 |
|
|
|
2006 |
|
|
|
2007 |
|
|
|
2006 |
|
|
|
2007 |
|
|
|
2006 |
|
|
|
2007 |
|
|
|
2006 |
|
|
|
|
Total credit portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans reported |
|
$ |
1,221 |
|
|
$ |
790 |
|
|
|
1.07 |
% |
|
|
0.74 |
% |
|
$ |
3,109 |
|
|
$ |
2,112 |
|
|
|
0.94 |
% |
|
|
0.69 |
% |
Loans securitized(c) |
|
|
578 |
|
|
|
607 |
|
|
|
3.34 |
|
|
|
3.70 |
|
|
|
1,761 |
|
|
|
1,617 |
|
|
|
3.45 |
|
|
|
3.19 |
|
|
Total managed loans |
|
$ |
1,799 |
|
|
$ |
1,397 |
|
|
|
1.37 |
% |
|
|
1.13 |
% |
|
$ |
4,870 |
|
|
$ |
3,729 |
|
|
|
1.28 |
% |
|
|
1.05 |
% |
|
|
|
|
(a) |
|
Loans (other than those for which the SFAS 159 fair value option has been elected)
are presented net of unearned income and net deferred loan fees of $1.0 billion and $1.3
billion at September 30, 2007, and December 31, 2006, respectively. |
(b) |
|
Includes loans at fair value and loans held-for-sale of $6.1 billion and $18.4 billion,
respectively, at September 30, 2007 and loans held-for-sale of $55.2 billion at December 31,
2006. |
(c) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see Card Services on pages 2932 of this Form 10-Q. |
(d) |
|
Loans past due
90 days and over and accruing includes credit card receivables reported of
$1.3 billion at both September 30, 2007, and December 31, 2006, and related credit card
securitizations of $935 million and $962 million at September 30, 2007, and December 31, 2006,
respectively. |
(e) |
|
Includes wholesale unused advised lines of credit totaling $39.2 billion and $39.0 billion at
September 30, 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 $700.2 billion and $657.1 billion at September 30,
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. Includes $22.7 billion at both September 30,
2007, and December 31, 2006, which represents the notional amount of structured portfolio
protection; the Firm retains a minimal first risk of loss on this portfolio. |
(g) |
|
Represents other liquid securities collateral held by the Firm. |
(h) |
|
Represents distressed held-for-sale wholesale 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 September 30, 2007. |
(i) |
|
Includes nonperforming loans held-for-sale of $75 million and $120 million as of September
30, 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 of $1.3 billion and
$1.2 billion September 30, 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 $241 million and $219 million as of
September 30, 2007, and December 31, 2006, respectively. These amounts for GNMA and education
loans are excluded, as reimbursement is proceeding normally. |
52
WHOLESALE CREDIT PORTFOLIO
As of September 30, 2007, wholesale exposure (IB, CB, TSS and AM) had increased by $99.7 billion,
or 16%, from December 31, 2006, primarily due to a $76.7 billion increase in lending-related
commitments and a $14.0 billion increase in loans. The increase in overall lending activity was
partly due to growth in leveraged lending funded and unfunded exposures, mainly in IB. Partly
offsetting these increases was the first quarter transfer of $11.7 billion of loans warehoused in
IB to Trading assets upon the adoption of SFAS 159. Derivative receivables increased $9.0 billion
primarily due to higher receivables on equity-related and credit derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
|
Nonperforming assets(g) |
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Loans reported(a)(b) |
|
$ |
197,728 |
|
|
$ |
183,742 |
|
|
$ |
427 |
|
|
$ |
391 |
|
Derivative receivables |
|
|
64,592 |
|
|
|
55,601 |
|
|
|
34 |
|
|
|
36 |
|
|
Total wholesale credit-related assets |
|
|
262,320 |
|
|
|
239,343 |
|
|
|
461 |
|
|
|
427 |
|
Lending-related commitments(c) |
|
|
468,145 |
|
|
|
391,424 |
|
|
NA |
|
|
NA |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
28 |
|
|
|
3 |
|
|
Total wholesale credit exposure |
|
$ |
730,465 |
|
|
$ |
630,767 |
|
|
$ |
489 |
|
|
$ |
430 |
|
|
Net credit derivative hedges notional(d) |
|
$ |
(62,075 |
) |
|
$ |
(50,733 |
) |
|
$ |
|
|
|
$ |
(16 |
) |
Collateral held against derivatives(e) |
|
|
(7,423 |
) |
|
|
(6,591 |
) |
|
NA |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at fair value and loans held-for-sale |
|
|
20,611 |
|
|
|
22,507 |
|
|
|
75 |
|
|
|
4 |
|
Nonperforming purchased(f) |
|
|
|
|
|
|
251 |
|
|
NA |
|
|
NA |
|
|
|
|
|
(a) |
|
As a result of the adoption of SFAS 159 in the first quarter of 2007, certain loans of
$11.7 billion were reclassified to trading assets and were excluded from wholesale loans
reported. Includes loans greater than or equal to 90 days past due that continue to accrue
interest. The principal balance of these loans totaled $37 million and $29 million at
September 30, 2007, and December 31, 2006, respectively.
Also, see Note 4 on pages 8083 and
Note 13 on pages 9193, respectively, of this Form 10-Q. |
(b) |
|
Includes loans at fair value and loans held-for-sale of $6.1 billion and $14.5 billion,
respectively, at September 30, 2007, and loans held-for-sale of $22.5 billion at December 31,
2006. |
(c) |
|
Includes unused advised lines of credit totaling $39.2 billion and $39.0 billion at September
30, 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. |
(d) |
|
Represents the net notional amount of protection purchased and sold of single-name and
portfolio credit derivatives used to manage the credit exposures; these derivatives do not
qualify for hedge accounting under SFAS 133. Includes $22.7 billion at both September 30,
2007, and December 31, 2006, which represents the notional amount of structured portfolio
protection; the Firm retains a minimal first risk of loss on this portfolio. |
(e) |
|
Represents other liquid securities collateral held by the Firm. |
(f) |
|
Represents distressed loans held-for-sale 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 September 30, 2007. |
(g) |
|
Includes nonperforming loans held-for-sale of $75 million and $4 million at September 30,
2007, and December 31, 2006, respectively. |
Net
charge-offs/recoveries
Wholesale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Loans reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs/(recoveries) |
|
$ |
82 |
|
|
$ |
(11 |
) |
|
$ |
47 |
|
|
$ |
(50 |
) |
Average annual net charge-off/(recovery) rate(a) |
|
|
0.19 |
% |
|
|
(0.03 |
)% |
|
|
0.04 |
% |
|
|
(0.04 |
)% |
|
|
|
|
(a) |
|
Excludes average wholesale loans at fair value and loans held-for-sale of $17.8 billion
and $24.4 billion for the quarters ended September 30, 2007 and 2006, respectively; and $15.8
billion and $21.4 billion for year-to-date 2007 and 2006, respectively. |
Net charge-offs of $82 million in the third quarter of 2007 and $47 million in the first nine
months of 2007 do not include gains from sales of nonperforming loans that were sold from the
credit portfolio (as shown in the following table). There were gains of $2 million in the third
quarter and $1 million in the first nine months of 2007, compared with gains of $31 million in the
third quarter of 2006 and $71 million for the first nine months of 2006. Gains are reflected in
Noninterest revenue.
53
|
|
|
|
|
|
|
|
|
Nonperforming loan activity |
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Beginning balance, January 1 |
|
$ |
391 |
|
|
$ |
992 |
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
740 |
|
|
|
352 |
|
|
Reductions: |
|
|
|
|
|
|
|
|
Paydowns and other |
|
|
(420 |
) |
|
|
(337 |
) |
Charge-offs |
|
|
(131 |
) |
|
|
(110 |
) |
Returned to performing |
|
|
(98 |
) |
|
|
(101 |
) |
Sales |
|
|
(55 |
) |
|
|
(140 |
) |
|
Total (reductions) |
|
|
(704 |
) |
|
|
(688 |
) |
|
Net increases (reductions) |
|
|
36 |
|
|
|
(336 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30 |
|
$ |
427 |
|
|
$ |
656 |
|
|
The following table presents summaries of the maturity and ratings profiles of the wholesale
portfolio as of September 30, 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.
Wholesale exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity profile(c) |
|
|
Ratings profile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade (IG) |
|
|
grade |
|
|
|
|
|
|
|
|
At September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % |
|
(in billions, except ratios) |
|
<1 year |
|
|
1-5 years |
|
|
> 5 years |
|
|
Total |
|
|
AAA to BBB- |
|
|
BB+ & below |
|
|
Total |
|
|
of IG |
|
|
|
|
Loans |
|
|
46 |
% |
|
|
43 |
% |
|
|
11 |
% |
|
|
100 |
% |
|
$ |
115 |
|
|
$ |
61 |
|
|
$ |
176 |
|
|
|
65 |
% |
Derivative receivables |
|
|
21 |
|
|
|
30 |
|
|
|
49 |
|
|
|
100 |
|
|
|
54 |
|
|
|
11 |
|
|
|
65 |
|
|
|
84 |
|
Lending-related commitments |
|
|
37 |
|
|
|
57 |
|
|
|
6 |
|
|
|
100 |
|
|
|
379 |
|
|
|
89 |
|
|
|
468 |
|
|
|
81 |
|
|
|
|
Total excluding loans at
fair value and loans
held-for-sale |
|
|
38 |
% |
|
|
51 |
% |
|
|
11 |
% |
|
|
100 |
% |
|
$ |
548 |
|
|
$ |
161 |
|
|
|
709 |
|
|
|
77 |
% |
Loans at fair value and
loans held-for-sale (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
730 |
|
|
|
|
|
|
|
|
Net credit derivative
hedges notional(b) |
|
|
44 |
% |
|
|
49 |
% |
|
|
7 |
% |
|
|
100 |
% |
|
$ |
(53 |
) |
|
$ |
(9 |
) |
|
$ |
(62 |
) |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity profile(c) |
|
|
Ratings profile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment- |
|
|
Noninvestment- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grade (IG) |
|
|
grade |
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % |
|
(in billions, except ratios) |
|
<1 year |
|
|
1-5 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 loans at
fair value and loans
held-for-sale |
|
|
37 |
% |
|
|
51 |
% |
|
|
12 |
% |
|
|
100 |
% |
|
$ |
491 |
|
|
$ |
117 |
|
|
|
608 |
|
|
|
81 |
% |
Loans at fair value and
loans held-for-sale (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
Total exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
631 |
|
|
|
|
|
|
|
|
Net credit derivative
hedges notional(b) |
|
|
16 |
% |
|
|
75 |
% |
|
|
9 |
% |
|
|
100 |
% |
|
$ |
(45 |
) |
|
$ |
(6 |
) |
|
$ |
(51 |
) |
|
|
88 |
% |
|
|
|
|
|
|
(a) |
|
Loans held-for-sale 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. |
54
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 September
30, 2007, the top 10 industries were the same as those at
December 31, 2006. The increases in Asset
managers, Utilities, Oil and gas, and Retail and consumer services were primarily due to portfolio
growth. In addition, Asset managers also increased by $4.3 billon during the third quarter of 2007
as the Firm revised its industry classification to better reflect risk correlations and enhance the
Firms management of industry risk. Below is a summary of the Top 10 industry concentrations as of
September 30, 2007, and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
December 31, 2006 |
Top 10 industries(a) |
|
Credit |
|
|
% of |
|
|
Credit |
|
|
% of |
|
(in millions, except ratios) |
|
exposure(d) |
|
|
portfolio |
|
|
exposure(d) |
|
|
portfolio |
|
|
Banks and finance companies |
|
$ |
61,851 |
|
|
|
9 |
% |
|
$ |
61,792 |
|
|
|
10 |
% |
Asset managers |
|
|
40,138 |
|
|
|
6 |
|
|
|
24,570 |
|
|
|
4 |
|
Real estate |
|
|
38,191 |
|
|
|
5 |
|
|
|
32,102 |
|
|
|
5 |
|
Healthcare |
|
|
33,664 |
|
|
|
5 |
|
|
|
28,998 |
|
|
|
5 |
|
Utilities |
|
|
33,544 |
|
|
|
5 |
|
|
|
24,938 |
|
|
|
4 |
|
Consumer products |
|
|
30,332 |
|
|
|
4 |
|
|
|
27,114 |
|
|
|
4 |
|
State and municipal governments |
|
|
29,276 |
|
|
|
4 |
|
|
|
27,485 |
|
|
|
5 |
|
Retail and consumer services |
|
|
26,621 |
|
|
|
4 |
|
|
|
22,122 |
|
|
|
4 |
|
Securities firms and exchanges |
|
|
23,807 |
|
|
|
3 |
|
|
|
23,127 |
|
|
|
4 |
|
Oil and gas |
|
|
23,246 |
|
|
|
3 |
|
|
|
18,544 |
|
|
|
3 |
|
All other(b) |
|
|
369,184 |
|
|
|
52 |
|
|
|
317,468 |
|
|
|
52 |
|
|
Subtotal |
|
|
709,854 |
|
|
|
100 |
% |
|
|
608,260 |
|
|
|
100 |
% |
Loans at fair value and loans held-for-sale(c) |
|
|
20,611 |
|
|
|
|
|
|
|
22,507 |
|
|
|
|
|
|
Total |
|
$ |
730,465 |
|
|
|
|
|
|
$ |
630,767 |
|
|
|
|
|
|
|
|
|
(a) |
|
Rankings are based upon exposure at September 30, 2007. |
(b) |
|
For more information on
exposures to SPEs, see Note 16 on pages 100101 of this Form 10-Q. |
(c) |
|
Loans held-for-sale 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 September 30, 2007. |
(d) |
|
Credit exposure is net of risk participations and excludes the benefit of credit derivative
hedges and collateral held against Derivative receivables or Loans. |
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1
and lower, as defined by Standard & Poors/Moodys. The total criticized component of the
portfolio, excluding Loans at fair value and loans held-for-sale, increased by $993 million, or
20%, when compared with year-end 2006.
Wholesale
criticized exposure industry concentrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
December 31, 2006 |
Top 10 industries(a) |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
(in millions, except ratios) |
|
Amount |
|
|
portfolio |
|
|
Amount |
|
|
portfolio |
|
|
Automotive |
|
$ |
1,825 |
|
|
|
30 |
% |
|
$ |
1,442 |
|
|
|
29 |
% |
Real estate |
|
|
628 |
|
|
|
11 |
|
|
|
243 |
|
|
|
5 |
|
Retail and consumer services |
|
|
475 |
|
|
|
8 |
|
|
|
278 |
|
|
|
5 |
|
Banks and finance companies |
|
|
301 |
|
|
|
5 |
|
|
|
74 |
|
|
|
1 |
|
Consumer products |
|
|
295 |
|
|
|
5 |
|
|
|
383 |
|
|
|
7 |
|
Media |
|
|
258 |
|
|
|
4 |
|
|
|
392 |
|
|
|
8 |
|
Healthcare |
|
|
243 |
|
|
|
4 |
|
|
|
284 |
|
|
|
6 |
|
Business services |
|
|
231 |
|
|
|
4 |
|
|
|
222 |
|
|
|
4 |
|
Utilities |
|
|
205 |
|
|
|
3 |
|
|
|
183 |
|
|
|
4 |
|
Building materials/construction |
|
|
189 |
|
|
|
3 |
|
|
|
113 |
|
|
|
2 |
|
All other(b) |
|
|
1,369 |
|
|
|
23 |
|
|
|
1,412 |
|
|
|
29 |
|
|
Subtotal |
|
|
6,019 |
|
|
|
100 |
% |
|
|
5,026 |
|
|
|
100 |
% |
Loans at fair value and loans held-for-sale(b) |
|
|
276 |
|
|
|
|
|
|
|
624 |
|
|
|
|
|
|
Total |
|
$ |
6,295 |
|
|
|
|
|
|
$ |
5,650 |
|
|
|
|
|
|
|
|
|
(a) |
|
Rankings are based upon exposure at September 30, 2007. |
(b) |
|
Loans held-for-sale 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 September 30, 2007. Loans held-for-sale exclude purchased nonperforming
loans held-for-sale. |
55
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 106 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)(c) |
|
|
Derivative receivables MTM |
|
(in billions) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Interest rate |
|
$ |
70,846 |
|
|
$ |
50,201 |
|
|
$ |
29 |
|
|
$ |
29 |
|
Foreign exchange |
|
|
3,886 |
|
|
|
2,520 |
|
|
|
6 |
|
|
|
4 |
|
Equity |
|
|
1,010 |
|
|
|
809 |
|
|
|
11 |
|
|
|
6 |
|
Credit derivatives |
|
|
7,775 |
|
|
|
4,619 |
|
|
|
11 |
|
|
|
6 |
|
Commodity |
|
|
544 |
|
|
|
507 |
|
|
|
8 |
|
|
|
11 |
|
|
Total, net of cash collateral(a) |
|
$ |
84,061 |
|
|
$ |
58,656 |
|
|
|
65 |
|
|
|
56 |
|
Liquid securities collateral held against
derivative receivables |
|
NA |
|
|
NA |
|
|
|
(8 |
) |
|
|
(7 |
) |
|
Total, net of all collateral |
|
NA |
|
|
NA |
|
|
$ |
57 |
|
|
$ |
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. |
(c) |
|
The notional amount of the Firms derivative contracts outstanding significantly exceeded, in
the Firms view, the possible credit losses that could arise from such transactions. For most
derivative transactions, the notional amount does not change hands: it is used simply as a
reference to calculate payments. The appropriate measure of current credit risk is, in the
Firms view, the mark-to-market value of the contract. |
The amount of Derivative receivables reported on the Consolidated balance sheets of $64.6
billion and $55.6 billion at September 30, 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 $7.4 billion and $6.6
billion at September 30, 2007, and December 31, 2006, respectively, resulting in total exposure,
net of all collateral, of $57.2 billion and $49.0 billion at September 30, 2007, and December 31,
2006, respectively. Derivative receivables increased $9.0 billion from December 31, 2006, primarily
due to higher equity, credit derivative and foreign exchange receivables as a result of higher
equity market levels, widening credit spreads and the decline in the U.S. dollar, 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 September 30,
2007, and December 31, 2006, the Firm held $14.5 billion and $12.3 billion of this additional
collateral, respectively. The derivative receivables MTM, net of all collateral, also does not
include other credit enhancements in the forms of letters of credit 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
December 31, 2006 |
Rating equivalent |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
Net MTM |
|
|
% of Net MTM |
|
|
Net MTM |
|
|
% of Net MTM |
|
|
AAA to AA- |
|
$ |
31,648 |
|
|
|
55 |
% |
|
$ |
28,150 |
|
|
|
58 |
% |
A+ to A- |
|
|
7,708 |
|
|
|
14 |
|
|
|
7,588 |
|
|
|
15 |
|
BBB+ to BBB- |
|
|
9,208 |
|
|
|
16 |
|
|
|
8,044 |
|
|
|
16 |
|
BB+ to B- |
|
|
8,496 |
|
|
|
15 |
|
|
|
5,150 |
|
|
|
11 |
|
CCC+ and below |
|
|
109 |
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
Total |
|
$ |
57,169 |
|
|
|
100 |
% |
|
$ |
49,010 |
|
|
|
100 |
% |
|
56
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 79%, as of September 30, 2007, from 80% at December 31, 2006.
The Firm posted $32.8 billion and $26.6 billion of collateral at September 30, 2007, and December
31, 2006, respectively. Certain derivative and collateral agreements include provisions that
require the counterparty and/or the Firm, upon specified downgrades in their respective credit
ratings, to post collateral for the benefit of the other party. The impact of a single-notch
ratings downgrade to JPMorgan Chase Bank, N.A., from its rating of AA to AA- at September 30, 2007,
would have required $308 million of additional collateral to be posted by the Firm. The impact of a
six-notch ratings downgrade (from AA to BBB) would have required $3.2 billion of additional
collateral. Certain derivative contracts also provide for termination of the contract, generally
upon a downgrade of either the Firm or the counterparty, at the then-existing MTM value of the
derivative contracts.
Credit derivatives
The following table presents the Firms notional amounts of credit derivatives protection purchased
and sold as of September 30, 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 |
|
|
September 30, 2007 |
|
$ |
63 |
|
|
$ |
1 |
|
|
$ |
3,889 |
|
|
$ |
3,822 |
|
|
$ |
7,775 |
|
December 31, 2006 |
|
|
52 |
|
|
|
1 |
|
|
|
2,277 |
|
|
|
2,289 |
|
|
|
4,619 |
|
|
|
|
|
(a) |
|
Included $22.7 billion at both September 30, 2007, and December 31, 2006, that
represented the notional amount for structured portfolio protection; the Firm retains a
minimal 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 counterparty exposure as a result of credit derivatives transactions. Of the
$64.6 billion of total Derivative receivables MTM at September 30, 2007, $10.7 billion, or 17%, was
associated with credit derivatives, before the benefit of liquid securities collateral.
Dealer/client
At September 30, 2007, the total notional amount of protection purchased and sold in the
dealer/client business increased $3.1 trillion from year-end 2006 as a result of increased trade
volume in the market. 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 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) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Credit derivatives used to manage: |
|
|
|
|
|
|
|
|
Loans and lending-related commitments |
|
$ |
54,474 |
|
|
$ |
40,755 |
|
Derivative receivables |
|
|
8,073 |
|
|
|
11,229 |
|
|
Total(a) |
|
$ |
62,547 |
|
|
$ |
51,984 |
|
|
|
|
|
(a) |
|
Included $22.7 billion at both September 30, 2007, and December 31, 2006, that
represented the notional amount of structured portfolio protection; the Firm retains a minimal
first risk of loss on this portfolio. |
The credit derivatives used by JPMorgan Chase for credit portfolio management activities do
not qualify for hedge accounting under SFAS 133, and therefore, effectiveness testing under SFAS
133 is not performed. These derivatives are reported at fair value, with gains and losses
recognized in Principal transactions revenue. The MTM value incorporates both the cost of credit
derivative premiums and changes in value due to movement in spreads and credit events; in contrast,
the loans and lending-related commitments being risk-managed are accounted for on an accrual basis.
Loan interest and fees are generally recognized in Net interest income, and impairment is
recognized in the Provision for credit losses. This asymmetry in accounting treatment, between
loans and lending-related commitments and the credit derivatives utilized in credit portfolio
management activities, causes earnings volatility that is not representative, in the Firms view,
of the true changes in value of
57
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 period to period due to market conditions that impact specific
positions in the portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Hedges of lending-related commitments(a) |
|
$ |
135 |
|
|
$ |
(52 |
) |
|
$ |
112 |
|
|
$ |
(175 |
) |
CVA and hedges of CVA(a) |
|
|
(138 |
) |
|
|
52 |
|
|
|
(186 |
) |
|
|
87 |
|
|
Net gains (losses)(b) |
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
(74 |
) |
|
$ |
(88 |
) |
|
|
|
|
(a) |
|
These hedges do not qualify for hedge accounting under SFAS 133. |
(b) |
|
Excludes gains of $101 million and $16 million for the quarters ended September 30, 2007, and
2006, respectively, and $312 million and $19 million of gains year-to-date 2007 and 2006,
respectively, of other Principal transaction revenue that are not associated with hedging
activities. The Firm adopted SFAS 157 on January 1, 2007, which incorporated adjusting the
valuation of the Firms derivative liabilities. |
The Firm also actively manages wholesale credit exposure primarily through IB loan and
commitment sales. During the third quarter of 2007 and 2006, these sales of $727 million and $805
million of loans and commitments, respectively, resulted in losses of $2 million and gains of $27
million, respectively. During the first nine months of 2007 and 2006, these sales of $3.8 billion
and $2.4 billion of loans and commitments, respectively, resulted in losses of $14 million and
gains of $67 million, respectively. These results include gains on sales of nonperforming loans, as
discussed on page 53 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 4951, and 9499, respectively, of this Form 10-Q.
Lending-related commitments
Wholesale lending-related commitments were $468.1 billion at September 30, 2007, compared with
$391.4 billion at December 31, 2006. The increase reflected greater overall lending activity
including growth in unfunded leveraged lending exposures. In the Firms view, the total 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 $256.6
billion and $212.3 billion as of September 30, 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 September 30, 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.
58
The following table presents managed consumer creditrelated information for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
|
Nonperforming assets(f)(h) |
|
(in millions, except ratios) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Consumer loans reported(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
93,026 |
|
|
$ |
85,730 |
|
|
$ |
576 |
|
|
$ |
454 |
|
Mortgage |
|
|
47,730 |
|
|
|
59,668 |
|
|
|
1,224 |
|
|
|
769 |
|
Auto loans and leases(b) |
|
|
40,871 |
|
|
|
41,009 |
|
|
|
92 |
|
|
|
132 |
|
Credit card reported(c) |
|
|
79,409 |
|
|
|
85,881 |
|
|
|
7 |
|
|
|
9 |
|
All other loans |
|
|
27,556 |
|
|
|
27,097 |
|
|
|
336 |
|
|
|
322 |
|
|
Total consumer loans reported |
|
|
288,592 |
|
|
|
299,385 |
|
|
|
2,235 |
|
|
|
1,686 |
|
Credit card securitizations(c)(d) |
|
|
69,643 |
|
|
|
66,950 |
|
|
|
|
|
|
|
|
|
|
Total consumer loans managed(c) |
|
|
358,235 |
|
|
|
366,335 |
|
|
|
2,235 |
|
|
|
1,686 |
|
Assets acquired in loan satisfactions |
|
NA |
|
|
NA |
|
|
|
457 |
|
|
|
225 |
|
|
Total consumer related assets managed |
|
|
358,235 |
|
|
|
366,335 |
|
|
|
2,692 |
|
|
|
1,911 |
|
Consumer lendingrelated commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity(e) |
|
|
74,212 |
|
|
|
69,559 |
|
|
NA |
|
|
NA |
|
Mortgage |
|
|
7,883 |
|
|
|
6,618 |
|
|
NA |
|
|
NA |
|
Auto loans and leases |
|
|
8,327 |
|
|
|
7,874 |
|
|
NA |
|
|
NA |
|
Credit card(e) |
|
|
700,232 |
|
|
|
657,109 |
|
|
NA |
|
|
NA |
|
All other loans |
|
|
11,034 |
|
|
|
6,375 |
|
|
NA |
|
|
NA |
|
|
Total lending-related commitments |
|
|
801,688 |
|
|
|
747,535 |
|
|
NA |
|
|
NA |
|
|
Total consumer credit portfolio |
|
$ |
1,159,923 |
|
|
$ |
1,113,870 |
|
|
$ |
2,692 |
|
|
$ |
1,911 |
|
|
Total loans held-for-sale |
|
$ |
3,880 |
|
|
$ |
32,744 |
|
|
$ |
|
|
|
$ |
116 |
|
Memo: Credit card managed |
|
|
149,052 |
|
|
|
152,831 |
|
|
|
7 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
Average annual net |
|
|
|
|
|
|
|
|
|
|
Average annual net |
|
|
|
Net charge-offs |
|
|
charge-off rate(g) |
|
|
Net charge-offs |
|
|
charge-off rate(g) |
|
(in millions, except ratios) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Consumer loans reported(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
150 |
|
|
$ |
29 |
|
|
|
0.65 |
% |
|
|
0.15 |
% |
|
$ |
316 |
|
|
$ |
92 |
|
|
|
0.47 |
% |
|
|
0.16 |
% |
Mortgage |
|
|
49 |
|
|
|
14 |
|
|
|
0.46 |
|
|
|
0.12 |
|
|
|
102 |
|
|
|
35 |
|
|
|
0.35 |
|
|
|
0.10 |
|
Auto loans and leases |
|
|
99 |
|
|
|
65 |
|
|
|
0.97 |
|
|
|
0.64 |
|
|
|
221 |
|
|
|
161 |
|
|
|
0.72 |
|
|
|
0.51 |
|
Credit card reported |
|
|
785 |
|
|
|
673 |
|
|
|
3.89 |
|
|
|
3.48 |
|
|
|
2,247 |
|
|
|
1,800 |
|
|
|
3.74 |
|
|
|
3.38 |
|
All other loans |
|
|
56 |
|
|
|
20 |
|
|
|
0.93 |
|
|
|
0.37 |
|
|
|
176 |
|
|
|
74 |
|
|
|
0.99 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans reported |
|
|
1,139 |
|
|
|
801 |
|
|
|
1.62 |
|
|
|
1.19 |
|
|
|
3,062 |
|
|
|
2,162 |
|
|
|
1.50 |
|
|
|
1.12 |
|
Credit card securitizations(d) |
|
|
578 |
|
|
|
607 |
|
|
|
3.34 |
|
|
|
3.70 |
|
|
|
1,761 |
|
|
|
1,617 |
|
|
|
3.45 |
|
|
|
3.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans managed |
|
$ |
1,717 |
|
|
$ |
1,408 |
|
|
|
1.96 |
% |
|
|
1.69 |
% |
|
$ |
4,823 |
|
|
$ |
3,779 |
|
|
|
1.89 |
% |
|
|
1.55 |
% |
|
Memo: Credit card managed |
|
$ |
1,363 |
|
|
$ |
1,280 |
|
|
|
3.64 |
% |
|
|
3.58 |
% |
|
$ |
4,008 |
|
|
$ |
3,417 |
|
|
|
3.61 |
% |
|
|
3.29 |
% |
|
|
|
|
(a) |
|
Includes RFS, CS and residential mortgage loans reported in the Corporate segment. |
(b) |
|
Excludes operating leaserelated assets of $1.8 billion and $1.6 billion for September 30,
2007, and December 31, 2006, respectively. |
(c) |
|
Loans past-due 90 days and over and accruing includes credit card receivables reported of
$1.3 billion for both September 30, 2007, and December 31, 2006, and related credit card
securitizations of $935 million and $962 million for September 30, 2007, and December 31,
2006, respectively. |
(d) |
|
Represents securitized credit card receivables. For a further discussion of credit card
securitizations, see CS on pages 2932 of this Form 10-Q. |
(e) |
|
The credit card and home equity lendingrelated commitments represent the total available
lines of credit for these products. The Firm has not experienced, and does not anticipate,
that all available lines of credit will be utilized at the same time. The Firm can reduce or
cancel these lines of credit by providing the borrower prior notice or, in some cases, without
notice as permitted by law. |
(f) |
|
Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by U.S. government agencies of $1.3 billion for
September 30, 2007, and $1.2 billion for December 31, 2006, 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 $241 million and $219 million as of September 30,
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 held-for-sale of $5.4 billion and $14.0 billion
for the quarters ended September 30, 2007, and 2006, respectively, and $12.9 billion and $14.4
billion year-to-date 2007 and 2006, respectively. |
(h) |
|
Includes nonperforming loans held-for-sale of $116 million at December 31, 2006. |
Total managed consumer loans as of September 30, 2007, were $358.2 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. These
decreases were offset partially by organic growth in the home equity loan portfolio and the
decision to retain rather than sell subprime mortgage loans and new originations of prime mortgage
loans that cannot be sold to
59
U.S. government agencies and U.S. government-sponsored enterprises. Consumer lendingrelated
commitments increased 7%, to $801.7 billion at September 30, 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. During the
current quarter, due to changes in market conditions and the economic returns of certain mortgage
loans, the Firm designated as held-for-investment new originations of subprime mortgage loans and
previously designated held-for-sale subprime mortgage loans. In addition, all new prime mortgage
originations that cannot be sold to U.S. government agencies and U.S. government-sponsored
enterprises have been designated as held-for-investment. Prime mortgage loans originated with the
intent to sell are accounted for at fair value under SFAS 159 and are classified as Trading assets
in the Consolidated Balance Sheets.
The following discussion relates to the specific loan and lending-related categories within the
consumer portfolio.
Home equity: Home equity loans at September 30, 2007, were $93.0 billion, an increase of $7.3
billion from year-end 2006. The change in the portfolio from December 31, 2006, reflected organic
growth. The Allowance for loan losses for the Home equity portfolio was increased during the three
and nine months ended September 30, 2007, as continued weak housing prices have resulted in an
increase in estimated losses for high loan-to-value loans. During the third quarter, the
origination of subprime home equity loans was discontinued and loss mitigation activities continued
to be intensified to actively manage risks in this portfolio. In addition, underwriting standards
have been tightened and pricing actions have been implemented to reflect elevated risks related to
new originations in the prime home equity portfolio.
Mortgage: Prior to the third quarter, subprime mortgage loans and substantially all of the Firms
prime and low documentation mortgages, both fixed-rate and adjustable-rate, were originated with
the intent to sell. Prime mortgage loans originated into the held-for-investment portfolio
consisted primarily of adjustable rate products. As a result of the decision to retain rather than
sell subprime mortgage loans and new originations of prime mortgage loans that cannot be sold to
U.S. government agencies and U.S. government-sponsored enterprises, both fixed-rate and
adjustable-rate products are now being originated into the held-for-investment portfolio. Subprime
mortgages have been designated as held-for-investment. 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 at September 30, 2007, were $47.7 billion, reflecting an $11.9 billion decrease from
year-end 2006, 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 September
30, 2007, approximately 75% 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. During the first quarter of 2007, the Provision for credit losses was increased and
underwriting standards were tightened to reflect managements expectation of elevated credit losses
in the subprime market segment. The subprime mortgage portfolios credit performance during the
second and third quarters was consistent with the first-quarter expectations. However, during the
third quarter of 2007, the provision for subprime mortgage loans was increased as a result of the
decision to retain rather than sell subprime mortgage loans.
Auto loans and leases: As of September 30, 2007, Auto loans and leases of $40.9 billion were down
slightly from year-end 2006. The Allowance for loan losses for the Auto loan portfolio was
increased during the nine months ended September 30, 2007, reflecting an increase in estimated
losses from low prior-year levels. During the three months ended September 30, 2007, the Allowance
for loan losses for this loan portfolio did not change significantly.
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 $149.1 billion at September 30, 2007,
a decrease of $3.8 billion from year-end 2006, reflecting the typical seasonal pattern of
outstanding loans, partially offset by organic growth.
The managed credit card net charge-off rate increased to 3.64% and 3.61% in the third quarter of
2007 and first nine months of 2007, respectively, from 3.58% and 3.29% in the comparable prior
periods. This increase was due primarily to lower bankruptcy-related
net charge-offs in 2006. The
30-day delinquency rate increased slightly to 3.25% at September 30, 2007, from 3.17% at September
30, 2006. During the first nine months of 2007, the delinquency rate was lower than the rate prior to bankruptcy reform. The managed credit card portfolio
continues to reflect a well-seasoned portfolio that has good U.S. geographic diversification.
60
All other loans: All other loans primarily include Business Banking loans (which are highly
collateralized loans, often with personal loan guarantees), Education loans, Community Development
loans and other secured and unsecured consumer loans. As of September 30, 2007, Other loans of
$27.6 billion were up slightly from year-end 2006.
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 September 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
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 |
|
|
(131 |
) |
|
|
(3,600 |
) |
|
|
(3,731 |
) |
|
|
(110 |
) |
|
|
(2,631 |
) |
|
|
(2,741 |
) |
Gross recoveries |
|
|
84 |
|
|
|
538 |
|
|
|
622 |
|
|
|
160 |
|
|
|
469 |
|
|
|
629 |
|
|
Net (charge-offs) recoveries |
|
|
(47 |
) |
|
|
(3,062 |
) |
|
|
(3,109 |
) |
|
|
50 |
|
|
|
(2,162 |
) |
|
|
(2,112 |
) |
Provision for loan losses |
|
|
282 |
|
|
|
3,706 |
|
|
|
3,988 |
|
|
|
69 |
|
|
|
1,999 |
|
|
|
2,068 |
|
Other |
|
|
(27) |
(b) |
|
|
38 |
(b) |
|
|
11 |
|
|
|
2 |
|
|
|
8 |
|
|
|
10 |
|
|
Ending balance at September 30 |
|
$ |
2,863 |
(c) |
|
$ |
5,250 |
(d) |
|
$ |
8,113 |
|
|
$ |
2,574 |
(c) |
|
$ |
4,482 |
(d) |
|
$ |
7,056 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-specific |
|
$ |
53 |
|
|
$ |
70 |
|
|
$ |
123 |
|
|
$ |
101 |
|
|
$ |
61 |
(e) |
|
$ |
162 |
|
Formula-based |
|
|
2,810 |
|
|
|
5,180 |
|
|
|
7,990 |
|
|
|
2,473 |
|
|
|
4,421 |
(e) |
|
|
6,894 |
|
|
Total Allowance for loan losses |
|
$ |
2,863 |
|
|
$ |
5,250 |
|
|
$ |
8,113 |
|
|
$ |
2,574 |
|
|
$ |
4,482 |
|
|
$ |
7,056 |
|
|
Lending-related commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1 |
|
$ |
499 |
|
|
$ |
25 |
|
|
$ |
524 |
|
|
$ |
385 |
|
|
$ |
15 |
|
|
$ |
400 |
|
Provision for lending-related commitments |
|
|
344 |
|
|
|
(10 |
) |
|
|
334 |
|
|
|
68 |
|
|
|
|
|
|
|
68 |
|
|
Ending balance at September 30 |
|
$ |
843 |
|
|
$ |
15 |
|
|
$ |
858 |
|
|
$ |
453 |
|
|
$ |
15 |
|
|
$ |
468 |
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-specific |
|
$ |
27 |
|
|
$ |
|
|
|
$ |
27 |
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
40 |
|
Formula-based |
|
|
816 |
|
|
|
15 |
|
|
|
831 |
|
|
|
413 |
|
|
|
15 |
|
|
|
428 |
|
|
Total Allowance for lending-related
commitments |
|
$ |
843 |
|
|
$ |
15 |
|
|
$ |
858 |
|
|
$ |
453 |
|
|
$ |
15 |
|
|
$ |
468 |
|
|
Total Allowance for credit losses |
|
$ |
3,706 |
|
|
$ |
5,265 |
|
|
$ |
8,971 |
|
|
$ |
3,027 |
|
|
$ |
4,497 |
|
|
$ |
7,524 |
|
|
|
|
|
(a) |
|
Reflects the effect of the adoption of SFAS 159 at January 1, 2007. For a further
discussion of SFAS 159, see Note 4 on pages 8083 of this Form 10-Q. |
(b) |
|
Partially 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 1.62% and
1.61%, excluding wholesale loans held-for-sale and loans accounted for at fair value at
September 30, 2007 and 2006, respectively. |
(d) |
|
The ratio of the consumer allowance for loan losses to total consumer loans was 1.84% and
1.68%, excluding consumer loans held-for-sale and loans accounted for at fair value at
September 30, 2007 and 2006, respectively. |
(e) |
|
Prior periods have been revised to reflect the current presentation. |
The Firms overall Allowance for credit losses of $9.0 billion, increased by $1.2 billion,
when compared with December 31, 2006.
The Allowance for loan losses at September 30, 2007, increased $834 million, or 11%, when compared
with December 31, 2006, largely due to higher estimated losses relating to home equity and subprime
mortgage loans. Excluding Loans held-for-sale and loans carried at fair value, the Allowance for
loan losses represented 1.76% of loans at September 30, 2007, compared with 1.70% at December 31,
2006.
The Allowance for lending-related commitments of $858 million, increased by $334 million, when
compared with December 31, 2006, largely due to portfolio activities and growth, mainly in IB.
61
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 includes credit card securitizations. The increase in the
Provision for credit losses was due to an increase in the Allowance for credit losses largely
related to home equity loans, higher net charge-offs in the consumer businesses and portfolio
growth in the wholesale businesses. The prior-year quarter and year-to-date periods benefited from
a lower level of credit card net charge-offs, which reflected a lower level of losses following the
change in bankruptcy legislation in the fourth quarter of 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for |
|
|
|
|
|
|
|
|
|
|
|
|
|
ending-related |
|
Total provision |
|
|
Provision for loan losses |
|
commitments |
|
for credit losses |
Three months ended September 30, (in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Investment Bank |
|
$ |
146 |
|
|
$ |
(36 |
) |
|
$ |
81 |
|
|
$ |
43 |
|
|
$ |
227 |
|
|
$ |
7 |
|
Commercial Banking |
|
|
98 |
|
|
|
55 |
|
|
|
14 |
|
|
|
(1 |
) |
|
|
112 |
|
|
|
54 |
|
Treasury & Securities Services |
|
|
3 |
|
|
|
1 |
|
|
|
6 |
|
|
|
|
|
|
|
9 |
|
|
|
1 |
|
Asset Management |
|
|
4 |
|
|
|
(29 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
3 |
|
|
|
(28 |
) |
Corporate |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Total Wholesale |
|
|
251 |
|
|
|
(8 |
) |
|
|
100 |
|
|
|
43 |
|
|
|
351 |
|
|
|
35 |
|
Retail Financial Services |
|
|
688 |
|
|
|
113 |
|
|
|
(8 |
) |
|
|
1 |
|
|
|
680 |
|
|
|
114 |
|
Card Services |
|
|
785 |
|
|
|
663 |
|
|
|
|
|
|
|
|
|
|
|
785 |
|
|
|
663 |
|
Corporate(a) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
Total Consumer |
|
|
1,442 |
|
|
|
776 |
|
|
|
(8 |
) |
|
|
1 |
|
|
|
1,434 |
|
|
|
777 |
|
|
Total provision for credit losses |
|
|
1,693 |
|
|
|
768 |
|
|
|
92 |
|
|
|
44 |
|
|
|
1,785 |
|
|
|
812 |
|
Credit card securitizations |
|
|
578 |
|
|
|
607 |
|
|
|
|
|
|
|
|
|
|
|
578 |
|
|
|
607 |
|
|
Total managed provision for credit losses |
|
$ |
2,271 |
|
|
$ |
1,375 |
|
|
$ |
92 |
|
|
$ |
44 |
|
|
$ |
2,363 |
|
|
$ |
1,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for |
|
|
|
|
|
|
|
|
|
|
|
|
|
lending-related |
|
Total provision |
|
|
Provision for loan losses |
|
commitments |
|
for credit losses |
Nine months ended September 30, (in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Investment Bank |
|
$ |
168 |
|
|
$ |
62 |
|
|
$ |
286 |
|
|
$ |
66 |
|
|
$ |
454 |
|
|
$ |
128 |
|
Commercial Banking |
|
|
125 |
|
|
|
47 |
|
|
|
49 |
|
|
|
2 |
|
|
|
174 |
|
|
|
49 |
|
Treasury & Securities Services |
|
|
6 |
|
|
|
1 |
|
|
|
9 |
|
|
|
|
|
|
|
15 |
|
|
|
1 |
|
Asset Management |
|
|
(17 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
(42 |
) |
Corporate |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Total Wholesale |
|
|
282 |
|
|
|
69 |
|
|
|
344 |
|
|
|
68 |
|
|
|
626 |
|
|
|
137 |
|
Retail Financial Services |
|
|
1,569 |
|
|
|
299 |
|
|
|
(10 |
) |
|
|
|
|
|
|
1,559 |
|
|
|
299 |
|
Card Services |
|
|
2,162 |
|
|
|
1,700 |
|
|
|
|
|
|
|
|
|
|
|
2,162 |
|
|
|
1,700 |
|
Corporate(a) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
Total Consumer |
|
|
3,706 |
|
|
|
1,999 |
|
|
|
(10 |
) |
|
|
|
|
|
|
3,696 |
|
|
|
1,999 |
|
|
Total provision for credit losses |
|
|
3,988 |
|
|
|
2,068 |
|
|
|
334 |
|
|
|
68 |
|
|
|
4,322 |
|
|
|
2,136 |
|
Credit card securitizations |
|
|
1,761 |
|
|
|
1,617 |
|
|
|
|
|
|
|
|
|
|
|
1,761 |
|
|
|
1,617 |
|
|
Total managed provision for credit losses |
|
$ |
5,749 |
|
|
$ |
3,685 |
|
|
$ |
334 |
|
|
$ |
68 |
|
|
$ |
6,083 |
|
|
$ |
3,753 |
|
|
|
|
|
(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.
62
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.
IB trading VAR by risk type and credit portfolio VAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Three months ended September 30, |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2007 |
|
2006 |
|
At September 30, |
|
Avg |
(in millions) |
|
Avg |
|
|
Min |
|
|
Max |
|
|
Avg |
|
|
Min |
|
|
Max |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
By risk type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
98 |
|
|
$ |
55 |
|
|
$ |
135 |
|
|
$ |
63 |
|
|
$ |
35 |
|
|
$ |
90 |
|
|
$ |
104 |
|
|
$ |
65 |
|
|
$ |
72 |
|
|
$ |
58 |
|
Foreign exchange |
|
|
23 |
|
|
|
17 |
|
|
|
36 |
|
|
|
24 |
|
|
|
14 |
|
|
|
42 |
|
|
|
36 |
|
|
|
22 |
|
|
|
21 |
|
|
|
23 |
|
Equities |
|
|
35 |
|
|
|
22 |
|
|
|
56 |
|
|
|
32 |
|
|
|
21 |
|
|
|
45 |
|
|
|
27 |
|
|
|
37 |
|
|
|
43 |
|
|
|
29 |
|
Commodities and other |
|
|
28 |
|
|
|
21 |
|
|
|
38 |
|
|
|
46 |
|
|
|
27 |
|
|
|
128 |
|
|
|
35 |
|
|
|
39 |
|
|
|
34 |
|
|
|
48 |
|
Less: portfolio diversification |
|
|
(72 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(82 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(111 |
)(c) |
|
|
(76 |
)(c) |
|
|
(68 |
)(c) |
|
|
(74 |
)(c) |
|
|
|
|
|
|
|
Trading VAR(a) |
|
$ |
112 |
|
|
$ |
85 |
|
|
$ |
149 |
|
|
$ |
83 |
|
|
$ |
55 |
|
|
$ |
137 |
|
|
$ |
91 |
|
|
$ |
87 |
|
|
$ |
102 |
|
|
$ |
84 |
|
Credit portfolio VAR(b) |
|
|
17 |
|
|
|
8 |
|
|
|
25 |
|
|
|
14 |
|
|
|
14 |
|
|
|
15 |
|
|
|
23 |
|
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
Less: portfolio diversification |
|
|
(22 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(8 |
)(c) |
|
NM |
(d) |
|
NM |
(d) |
|
|
(16 |
)(c) |
|
|
(8 |
)(c) |
|
|
(16 |
)(c) |
|
|
(9 |
)(c) |
|
|
|
|
|
|
|
Total trading and credit
portfolio VAR |
|
$ |
107 |
|
|
$ |
76 |
|
|
$ |
149 |
|
|
$ |
89 |
|
|
$ |
61 |
|
|
$ |
138 |
|
|
$ |
98 |
|
|
$ |
94 |
|
|
$ |
100 |
|
|
$ |
89 |
|
|
|
|
|
(a) |
|
Trading VAR includes substantially all trading activities in IB. Trading VAR does not
include VAR related to the DVA taken on derivative and structured liabilities to reflect the
credit quality of the Firm. See the DVA Sensitivity table on page 64 of this Form 10-Q for
further details. Trading VAR also does not include the MSR portfolio or VAR related to other
corporate functions, such as Treasury and Private Equity. For a discussion of MSRs and the
corporate functions, see Note 17 on pages 101102, Note 3 on page 76 and Corporate on pages
4041 of this Form 10-Q. |
(b) |
|
Includes VAR on derivative credit valuation adjustments, hedges of the credit valuation
adjustment and mark-to-market hedges of the retained loan portfolio, which are all reported in
Principal transactions revenue. For a discussion of credit valuation adjustments, see Note 3
on pages 7380 of this Form 10-Q. This VAR does not include the retained loan portfolio. |
(c) |
|
Average and period-end VARs were less than the sum of the VARs of their market risk
components, which was due to risk offsets resulting from portfolio diversification. The
diversification effect reflected the fact that the risks were not perfectly correlated. The
risk of a portfolio of positions is therefore usually less than the sum of the risks of the
positions themselves. |
(d) |
|
Designated as not meaningful (NM) because the minimum and maximum may occur on different
days for different risk components, and hence it is not meaningful to compute a portfolio
diversification effect. |
IBs average Total trading and credit portfolio VAR for the third quarter and nine months
ended September 30, 2007 was $107 million and $100 million, respectively, compared with $89 million
for both the three and nine months ended September 30, 2006. Average VAR was higher for the third
quarter and nine months ended September 30, 2007 than the same periods of the prior year reflecting
an increase in market volatility, most notably in fixed income and equity markets. The reduction in
Commodities and other risks reflects reduced positions and was a key driver of the changes in
portfolio diversification. 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 Principal transactions revenue less
private equity gains/losses plus any trading-related net interest income, brokerage commissions,
underwriting fees or other revenue. The daily IB market risk-related revenue excludes gains and
losses on held-for-sale funded loans and unfunded commitments and from debit valuation adjustments
(DVA). The following histogram illustrates the daily market riskrelated gains and losses for IB
trading businesses for the nine months ended September 30, 2007. The chart shows that IB posted
market riskrelated gains on 168 out of 195 days in this period. 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 27 days during the nine months ended September 30,
2007. For the third quarter of 2007, losses exceed the VAR measure on 5 days due to the high market
volatility experienced during the period. No losses exceeded the VAR measure during the first or
second quarters of 2007.
63
The Firm does not include the impact of DVA taken on derivative and structured liabilities to
reflect the credit quality of the Firm in its Trading VAR. The following table provides information
about the sensitivity of DVA to a one basis point increase in JPMorgan Chase credit spreads.
Debit Valuation Adjustment Sensitivity
|
|
|
|
|
|
|
1 Basis Point Increase in |
(in millions) |
|
JPMorgan Chase Credit Spread |
|
September 30, 2007 |
|
$ |
37 |
|
|
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 positions sensitive to event risk.
Earnings-at-risk stress testing
The VAR and stress-test measures described above illustrate the total economic sensitivity of the
Firms balance sheet to changes in market variables. The effect of interest rate exposure on
reported Net income also is important. Interest rate risk exposure in the Firms core nontrading
business activities (i.e., asset/liability management positions) results from on and 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.
64
Earnings-at-risk also can result from changes in the slope of the yield curve, because the Firm has
the ability to lend at fixed rates and borrow at variable or short-term fixed rates. Based upon
these scenarios, the Firms earnings would be affected negatively by a sudden and unanticipated
increase in short-term rates without a corresponding increase in long-term rates. Conversely,
higher long-term rates generally are beneficial to earnings, particularly when the increase is not
accompanied by rising short-term rates.
Immediate changes in interest rates present a limited view of risk, and so a number of alternative
scenarios also are reviewed. These scenarios include the implied forward curve, nonparallel rate
shifts and severe interest rate shocks on selected key rates. These scenarios are intended to
provide a comprehensive view of JPMorgan Chases earnings-at-risk over a wide range of outcomes.
JPMorgan Chases 12-month pretax earnings sensitivity profiles as of September 30, 2007, and
December 31, 2006, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate change in rates |
(in millions) |
|
+200bp |
|
|
+100bp |
|
|
-100bp |
|
|
-200bp |
|
|
September 30, 2007 |
|
$ |
(290 |
) |
|
$ |
(176 |
) |
|
$ |
(108 |
) |
|
$ |
(432 |
) |
December 31, 2006 |
|
|
(101 |
) |
|
|
28 |
|
|
|
(21 |
) |
|
|
(182 |
) |
|
The primary change in earnings-at-risk from December 31, 2006, reflects a change in market
interest rates. The Firm is exposed to both rising and falling rates. The Firms risk to rising
rates is largely the result of increased funding costs. In contrast, the exposure to falling rates
is the result of higher anticipated levels of loan and securities prepayments.
PRIVATE EQUITY RISK MANAGEMENT
For a discussion of Private Equity Risk Management, see page 81 of JPMorgan Chases 2006
Annual Report. At September 30, 2007, the carrying value of the Private Equity portfolio was $6.6
billion, of which $409 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 1 4 of JPMorgan Chases 2006 Annual Report.
Dividends
At September 30, 2007, JPMorgan Chases bank subsidiaries could pay, in the aggregate, $18.7
billion in dividends to their respective bank holding companies without prior approval of their
relevant banking regulators.
65
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 held-for-investment 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 September 30, 2007 and 2006, see Allowance for credit losses on
page 61 and Note 14 on pages 9394 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 $1.4 billion as of September 30, 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 Loans held-for-sale and physical commodities are carried at the lower of
cost or fair value. At September 30, 2007, $605.2 billion of the Firms assets and $244.9 billion
of its 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 67, Note 3 on pages 7380 and Note
4 on pages 8083 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.
ACCOUNTING AND REPORTING DEVELOPMENTS
Accounting for uncertainty in income taxes
In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty regarding
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 105 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 Consolidated balance sheet 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
66
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. As a result of the adoption of SFAS
157, JPMorgan Chase also 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 IB
and the Private Equity business within Corporate. For additional information related to the Firms
adoption of SFAS 157, see Note 3 on pages 7380 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, it 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 8083 of this Form 10-Q.
Derivatives netting amendment of FASB Interpretation No. 39
In April 2007, the FASB issued FSP FIN 39-1, which permits offsetting of cash collateral
receivables or payables with net derivative positions under certain circumstances. FSP FIN 39-1 is
effective for fiscal years beginning after November 15, 2007. The FSP will not have a material
impact on the Firms Consolidated balance sheet.
Investment companies
In June 2007, the AICPA issued SOP 07-1. SOP 07-1 provides guidance for determining whether an
entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the
Guide), and therefore qualifies to use the Guides specialized accounting principles (referred to
as investment company accounting). Additionally, SOP 07-1 provides guidelines for determining
whether investment company accounting should be retained by a parent company in consolidation or by
an equity method investor in an investment. In May 2007, the FASB issued FSP FIN 46(R)-7, which
amends FIN 46R to permanently exempt entities within the scope of the Guide from applying the
provisions of FIN 46R to their investments. In October 2007, the FASB agreed to propose an
indefinite delay of the effective dates of SOP 07-1 and FSP FIN 46(R)-7 in order to address
implementation issues.
Accounting for income tax benefits of dividends on share-based payment awards
In June 2007, the FASB ratified EITF 06-11, which must be applied prospectively for dividends
declared in fiscal years beginning after December 15, 2007. EITF 06-11 requires that realized tax
benefits from dividends or dividend equivalents paid on equity-classified share-based payment
awards that are charged to retained earnings should be recorded as an increase to additional
paid-in capital and included in the pool of excess tax benefits available to absorb tax
deficiencies on share-based payment awards. Prior to the issuance of EITF 06-11, the Firm did not
include these tax benefits as part of this pool of excess tax benefits. It will begin to do so
effective January 1, 2008, when it implements EITF 06-11. The adoption of this consensus will not
have an impact on the Firms Consolidated balance sheet or results of operations.
Fair value measurements written loan commitments
On November 5, 2007, the SEC issued SAB 109, which revises and rescinds portions of SAB 105, Application of
Accounting Principles to Loan Commitments. Specifically, SAB 109 states that the expected net future cash flows related
to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted
for at fair value through earnings. The provisions of SAB 109 are applicable to written loan commitments issued or modified
beginning on January 1, 2008. JPMorgan Chase is currently evaluating the impact that SAB 109 will have on its consolidated financial statements.
67
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions, except per share data) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
1,336 |
|
|
$ |
1,416 |
|
|
$ |
4,973 |
|
|
$ |
3,955 |
|
Principal transactions |
|
|
237 |
|
|
|
2,737 |
|
|
|
8,274 |
|
|
|
8,187 |
|
Lending & deposit-related fees |
|
|
1,026 |
|
|
|
867 |
|
|
|
2,872 |
|
|
|
2,573 |
|
Asset management, administration and commissions |
|
|
3,663 |
|
|
|
2,842 |
|
|
|
10,460 |
|
|
|
8,682 |
|
Securities gains (losses) |
|
|
237 |
|
|
|
40 |
|
|
|
16 |
|
|
|
(578 |
) |
Mortgage fees and related income |
|
|
221 |
|
|
|
62 |
|
|
|
1,220 |
|
|
|
516 |
|
Credit card income |
|
|
1,777 |
|
|
|
1,567 |
|
|
|
5,054 |
|
|
|
5,268 |
|
Other income |
|
|
289 |
|
|
|
635 |
|
|
|
1,360 |
|
|
|
1,653 |
|
|
Noninterest revenue |
|
|
8,786 |
|
|
|
10,166 |
|
|
|
34,229 |
|
|
|
30,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
19,219 |
|
|
|
15,157 |
|
|
|
53,344 |
|
|
|
43,010 |
|
Interest expense |
|
|
11,893 |
|
|
|
9,778 |
|
|
|
33,585 |
|
|
|
27,460 |
|
|
Net interest income |
|
|
7,326 |
|
|
|
5,379 |
|
|
|
19,759 |
|
|
|
15,550 |
|
|
Total net revenue |
|
|
16,112 |
|
|
|
15,545 |
|
|
|
53,988 |
|
|
|
45,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,785 |
|
|
|
812 |
|
|
|
4,322 |
|
|
|
2,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
4,677 |
|
|
|
5,390 |
|
|
|
17,220 |
|
|
|
16,206 |
|
Occupancy expense |
|
|
657 |
|
|
|
563 |
|
|
|
1,949 |
|
|
|
1,710 |
|
Technology, communications and equipment expense |
|
|
950 |
|
|
|
911 |
|
|
|
2,793 |
|
|
|
2,656 |
|
Professional & outside services |
|
|
1,260 |
|
|
|
1,111 |
|
|
|
3,719 |
|
|
|
3,204 |
|
Marketing |
|
|
561 |
|
|
|
550 |
|
|
|
1,500 |
|
|
|
1,595 |
|
Other expense |
|
|
812 |
|
|
|
877 |
|
|
|
2,560 |
|
|
|
2,324 |
|
Amortization of intangibles |
|
|
349 |
|
|
|
346 |
|
|
|
1,055 |
|
|
|
1,058 |
|
Merger costs |
|
|
61 |
|
|
|
48 |
|
|
|
187 |
|
|
|
205 |
|
|
Total noninterest expense |
|
|
9,327 |
|
|
|
9,796 |
|
|
|
30,983 |
|
|
|
28,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
tax expense |
|
|
5,000 |
|
|
|
4,937 |
|
|
|
18,683 |
|
|
|
14,712 |
|
Income tax expense |
|
|
1,627 |
|
|
|
1,705 |
|
|
|
6,289 |
|
|
|
4,969 |
|
|
Income from continuing operations |
|
|
3,373 |
|
|
|
3,232 |
|
|
|
12,394 |
|
|
|
9,743 |
|
Income from discontinued operations |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
175 |
|
|
Net income |
|
$ |
3,373 |
|
|
$ |
3,297 |
|
|
$ |
12,394 |
|
|
$ |
9,918 |
|
|
Net income applicable to common stock |
|
$ |
3,373 |
|
|
$ |
3,297 |
|
|
$ |
12,394 |
|
|
$ |
9,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.00 |
|
|
$ |
0.93 |
|
|
$ |
3.63 |
|
|
$ |
2.81 |
|
Net income |
|
|
1.00 |
|
|
|
0.95 |
|
|
|
3.63 |
|
|
|
2.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.97 |
|
|
$ |
0.90 |
|
|
$ |
3.52 |
|
|
$ |
2.73 |
|
Net income |
|
|
0.97 |
|
|
|
0.92 |
|
|
|
3.52 |
|
|
|
2.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic shares |
|
|
3,375.9 |
# |
|
|
3,468.6 |
# |
|
|
3,415.8 |
# |
|
|
3,471.7 |
# |
Average diluted shares |
|
|
3,477.7 |
|
|
|
3,574.0 |
|
|
|
3,519.6 |
|
|
|
3,572.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.38 |
|
|
$ |
0.34 |
|
|
$ |
1.10 |
|
|
$ |
1.02 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
68
JPMORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in millions, except share data) |
|
2007 |
|
|
2006 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
32,766 |
|
|
$ |
40,412 |
|
Deposits with banks |
|
|
26,714 |
|
|
|
13,547 |
|
Federal funds sold and securities purchased under resale agreements (included $17,591 at fair value at
September 30, 2007) |
|
|
135,589 |
|
|
|
140,524 |
|
Securities borrowed |
|
|
84,697 |
|
|
|
73,688 |
|
Trading assets (included assets pledged of $83,618 at September 30, 2007, and $82,474 at December 31, 2006) |
|
|
453,711 |
|
|
|
365,738 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale (included assets pledged of $11,342 at September 30, 2007, and $39,571 at December 31, 2006) |
|
|
97,659 |
|
|
|
91,917 |
|
Held-to-maturity (fair value: $48 at September 30, 2007, and $60 at December 31, 2006) |
|
|
47 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
Loans (included $6,128 at fair value at September 30, 2007) |
|
|
486,320 |
|
|
|
483,127 |
|
Allowance for loan losses |
|
|
(8,113 |
) |
|
|
(7,279 |
) |
|
Loans, net of Allowance for loan losses |
|
|
478,207 |
|
|
|
475,848 |
|
|
|
|
|
|
|
|
|
|
Private equity investments (included $6,834 at fair value at September 30, 2007) |
|
|
6,929 |
|
|
|
6,359 |
|
Accrued interest and accounts receivable |
|
|
26,401 |
|
|
|
22,891 |
|
Premises and equipment |
|
|
8,892 |
|
|
|
8,735 |
|
Goodwill |
|
|
45,335 |
|
|
|
45,186 |
|
Other intangible assets: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
9,114 |
|
|
|
7,546 |
|
Purchased credit card relationships |
|
|
2,427 |
|
|
|
2,935 |
|
All other intangibles |
|
|
3,959 |
|
|
|
4,371 |
|
Other assets (included $14,158 at fair value at September 30, 2007) |
|
|
67,128 |
|
|
|
51,765 |
|
|
Total assets |
|
$ |
1,479,575 |
|
|
$ |
1,351,520 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
115,036 |
|
|
$ |
132,781 |
|
Interest-bearing (included $1,903 at fair value at September 30, 2007) |
|
|
354,459 |
|
|
|
337,812 |
|
Non-U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
6,559 |
|
|
|
7,662 |
|
Interest-bearing (included $4,200 at fair value at September 30, 2007) |
|
|
202,037 |
|
|
|
160,533 |
|
|
Total deposits |
|
|
678,091 |
|
|
|
638,788 |
|
Federal funds purchased and securities sold under repurchase agreements (included $6,421 at fair value
at September 30, 2007) |
|
|
178,767 |
|
|
|
162,173 |
|
Commercial paper |
|
|
33,978 |
|
|
|
18,849 |
|
Other borrowed funds (included $12,111 at fair value at September 30, 2007) |
|
|
31,154 |
|
|
|
18,053 |
|
Trading liabilities |
|
|
149,174 |
|
|
|
147,957 |
|
Accounts payable, accrued expenses and other liabilities (included the Allowance for lending-related commitments
of $858 at September 30, 2007, and $524 at December 31, 2006; and $449 at fair value at September 30, 2007) |
|
|
86,524 |
|
|
|
88,096 |
|
Beneficial interests issued by consolidated variable interest entities (included $2,927 at fair value at September
30, 2007) |
|
|
13,283 |
|
|
|
16,184 |
|
Long-term debt (included $67,761 at fair value at September 30, 2007, and $25,370 at December 31, 2006) |
|
|
173,696 |
|
|
|
133,421 |
|
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities |
|
|
14,930 |
|
|
|
12,209 |
|
|
Total liabilities |
|
|
1,359,597 |
|
|
|
1,235,730 |
|
|
Commitments and contingencies (see Note 21 of this Form 10-Q) |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock ($1 par value; authorized 200,000,000 shares; no shares issued) |
|
|
|
|
|
|
|
|
Common stock ($1 par value; authorized 9,000,000,000 shares at September 30, 2007, and December 31, 2006;
issued 3,657,730,356 shares and 3,657,786,282 shares at September 30, 2007, and December 31, 2006, respectively) |
|
|
3,658 |
|
|
|
3,658 |
|
Capital surplus |
|
|
78,295 |
|
|
|
77,807 |
|
Retained earnings |
|
|
53,064 |
|
|
|
43,600 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,830 |
) |
|
|
(1,557 |
) |
Treasury stock, at cost (298,919,756 shares at September 30, 2007, and 196,102,381 shares at December 31, 2006) |
|
|
(13,209 |
) |
|
|
(7,718 |
) |
|
Total stockholders equity |
|
|
119,978 |
|
|
|
115,790 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,479,575 |
|
|
$ |
1,351,520 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
69
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
|
(in millions, except per share data) |
|
2007 |
|
|
2006 |
|
|
Preferred stock |
|
|
|
|
|
|
|
|
Balance at January 1 |
|
$ |
|
|
|
$ |
139 |
|
Redemption of preferred stock |
|
|
|
|
|
|
(139 |
) |
|
Balance at September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance at January 1 |
|
|
3,658 |
|
|
|
3,618 |
|
Issuance of common stock |
|
|
|
|
|
|
40 |
|
|
Balance at September 30 |
|
|
3,658 |
|
|
|
3,658 |
|
|
|
|
|
|
|
|
|
|
|
Capital surplus |
|
|
|
|
|
|
|
|
Balance at January 1 |
|
|
77,807 |
|
|
|
74,994 |
|
Shares issued and commitments to issue common stock for employee
stock-based compensation awards and related tax effects |
|
|
488 |
|
|
|
2,463 |
|
|
Balance at September 30 |
|
|
78,295 |
|
|
|
77,457 |
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at January 1 |
|
|
43,600 |
|
|
|
33,848 |
|
Cumulative effect of change in accounting principles |
|
|
915 |
|
|
|
172 |
|
|
Balance at January 1, adjusted |
|
|
44,515 |
|
|
|
34,020 |
|
Net income |
|
|
12,394 |
|
|
|
9,918 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
(4 |
) |
Common stock ($1.10 and $1.02 per share for the nine months ended
September 30, 2007 and 2006, respectively) |
|
|
(3,845 |
) |
|
|
(3,651 |
) |
|
Balance at September 30 |
|
|
53,064 |
|
|
|
40,283 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Balance at January 1 |
|
|
(1,557 |
) |
|
|
(626 |
) |
Cumulative effect of change in accounting principles |
|
|
(1 |
) |
|
|
|
|
|
Balance at January 1, adjusted |
|
|
(1,558 |
) |
|
|
(626 |
) |
Other comprehensive income (loss) |
|
|
(272 |
) |
|
|
100 |
|
|
Balance at September 30 |
|
|
(1,830 |
) |
|
|
(526 |
) |
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance at January 1 |
|
|
(7,718 |
) |
|
|
(4,762 |
) |
Purchase of treasury stock |
|
|
(8,015 |
) |
|
|
(2,937 |
) |
Reissuance from treasury stock |
|
|
2,659 |
|
|
|
741 |
|
Share repurchases related to employee stock-based compensation awards |
|
|
(135 |
) |
|
|
(353 |
) |
|
Balance at September 30 |
|
|
(13,209 |
) |
|
|
(7,311 |
) |
|
Total stockholders equity |
|
$ |
119,978 |
|
|
$ |
113,561 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,394 |
|
|
$ |
9,918 |
|
Other comprehensive income (loss) |
|
|
(272 |
) |
|
|
100 |
|
|
Comprehensive income |
|
$ |
12,122 |
|
|
$ |
10,018 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
70
JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,394 |
|
|
$ |
9,918 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
4,322 |
|
|
|
2,136 |
|
Depreciation and amortization |
|
|
1,705 |
|
|
|
1,522 |
|
Amortization of intangibles |
|
|
1,055 |
|
|
|
1,058 |
|
Deferred tax (benefit) expense |
|
|
(518 |
) |
|
|
1,803 |
|
Investment securities (gains) losses |
|
|
(16 |
) |
|
|
578 |
|
Stock-based compensation |
|
|
1,509 |
|
|
|
1,923 |
|
Originations and purchases of loans held-for-sale |
|
|
(87,446 |
) |
|
|
(116,925 |
) |
Proceeds from sales and securitizations of loans held-for-sale |
|
|
87,279 |
|
|
|
117,931 |
|
Net change in: |
|
|
|
|
|
|
|
|
Trading assets |
|
|
(74,405 |
) |
|
|
(45,866 |
) |
Securities borrowed |
|
|
(11,009 |
) |
|
|
(14,618 |
) |
Private equity investments |
|
|
(570 |
) |
|
|
469 |
|
Accrued interest and accounts receivable |
|
|
(3,510 |
) |
|
|
175 |
|
Other assets |
|
|
(21,022 |
) |
|
|
(7,933 |
) |
Trading liabilities |
|
|
5,785 |
|
|
|
11,086 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
(2,732 |
) |
|
|
246 |
|
Other operating adjustments |
|
|
5,866 |
|
|
|
1,434 |
|
|
Net cash used in operating activities |
|
|
(81,313 |
) |
|
|
(35,063 |
) |
|
Investing activities |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits with banks |
|
|
(13,167 |
) |
|
|
4,585 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
4,914 |
|
|
|
(22,760 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
Proceeds |
|
|
11 |
|
|
|
14 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Proceeds from maturities |
|
|
20,515 |
|
|
|
18,370 |
|
Proceeds from sales |
|
|
54,288 |
|
|
|
92,281 |
|
Purchases |
|
|
(81,131 |
) |
|
|
(157,725 |
) |
Proceeds from sales and securitization of loans held-for-investment |
|
|
26,582 |
|
|
|
11,998 |
|
Other changes in loans, net |
|
|
(49,979 |
) |
|
|
(56,515 |
) |
Net cash (used) received in business acquisitions |
|
|
(70 |
) |
|
|
652 |
|
All other investing activities, net |
|
|
(3,284 |
) |
|
|
3,478 |
|
|
Net cash used in investing activities |
|
|
(41,321 |
) |
|
|
(105,622 |
) |
|
Financing activities |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
42,245 |
|
|
|
48,409 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
16,614 |
|
|
|
63,017 |
|
Commercial paper and other borrowed funds |
|
|
28,226 |
|
|
|
9,746 |
|
Proceeds from the issuance of long-term debt and trust preferred capital debt securities |
|
|
77,120 |
|
|
|
43,360 |
|
Repayments of long-term debt and trust preferred capital debt securities |
|
|
(40,442 |
) |
|
|
(25,163 |
) |
Net proceeds from the issuance of stock and stock-related awards |
|
|
1,523 |
|
|
|
1,195 |
|
Excess tax benefits related to stock-based compensation |
|
|
327 |
|
|
|
232 |
|
Redemption of preferred stock |
|
|
|
|
|
|
(139 |
) |
Treasury stock purchased |
|
|
(8,015 |
) |
|
|
(2,937 |
) |
Cash dividends paid |
|
|
(3,735 |
) |
|
|
(3,637 |
) |
All other financing activities, net |
|
|
818 |
|
|
|
6,043 |
|
|
Net cash provided by financing activities |
|
|
114,681 |
|
|
|
140,126 |
|
|
Effect of exchange rate changes on cash and due from banks |
|
|
307 |
|
|
|
168 |
|
|
Net (decrease) increase in cash and due from banks |
|
|
(7,646 |
) |
|
|
(391 |
) |
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 |
|
$ |
32,766 |
|
|
$ |
36,279 |
|
|
Cash interest paid |
|
$ |
33,781 |
|
|
$ |
26,499 |
|
Cash income taxes paid |
|
|
4,202 |
|
|
|
1,949 |
|
|
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.
71
See Glossary of Terms on pages 114116 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 and asset management. For a discussion of the Firms business segment information, see
Note 24 on pages 108111 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
(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 established for a single,
discrete purpose. SPEs are not typically operating entities and usually have a limited life and no
employees. The basic SPE structure involves a company selling assets to the SPE. The SPE funds the
purchase of those assets by issuing securities to investors. The legal documents that govern the
transaction describe how the cash earned on the assets must be allocated to the SPEs investors and
other parties that have rights to those cash flows. SPEs can be structured to be bankruptcy-remote,
thereby insulating investors from the impact of the creditors of other entities, including the
seller of the assets.
There are two different accounting frameworks applicable to SPEs: the qualifying SPE (QSPE)
framework under SFAS 140; and the variable interest entity (VIE) framework under FIN 46R. The
applicable framework depends on the nature of the entity and the Firms relation to that entity.
The QSPE framework is applicable when an entity transfers (sells) financial assets to an SPE
meeting certain criteria defined in SFAS 140. These criteria are designed to ensure that the
activities of the entity are essentially predetermined at the inception of the vehicle and that the
transferor of the financial assets cannot exercise control over the entity and the assets therein.
Entities meeting these criteria are not consolidated by the transferor or other counterparties as
long as they do not have the unilateral ability to liquidate or to cause the entity to no longer
meet the QSPE criteria. The Firm primarily follows the QSPE model for securitizations of its
residential and commercial mortgages, credit card loans and automobile loans. For further details,
see Note 15 on pages 9499 of this Form 10-Q.
72
When the SPE does not meet the QSPE criteria, consolidation is assessed pursuant to FIN 46R. Under
FIN 46R, a VIE is defined as an entity that: (1) lacks enough equity investment at risk to permit
the entity to finance its activities without additional subordinated financial support from other
parties; (2) has equity owners that lack the right to make significant decisions affecting the
entitys operations; and/or (3) has equity owners that do not have an obligation to absorb the
entitys losses or the right to receive the entitys returns.
FIN 46R requires a variable interest holder (i.e., a counterparty to a VIE) to consolidate the VIE
if that party will absorb a majority of the expected losses of the VIE, receive the majority of the
expected residual returns of the VIE, or both. This party is considered the primary beneficiary. In
making this determination, the Firm thoroughly evaluates the VIEs design, capital structure and
relationships among variable interest holders. When the primary beneficiary cannot be identified
through a qualitative analysis, the Firm performs a quantitative analysis, which computes and
allocates expected losses or residual returns to variable interest holders. The allocation of
expected cash flows in this analysis is based upon the relative contractual rights and preferences
of each variable interest holder in the VIEs capital structure. For further details, see Note 16
on pages 100101 of this Form 10-Q.
Investments in companies that are considered to be voting-interest entities under FIN 46R in which
the Firm has significant influence over operating and financing decisions are either accounted for
in accordance with the equity method of accounting or at fair value if elected under SFAS 159
(Fair Value Option). These investments are generally included in Other assets with income or loss
included in Other income.
All retained interests and significant transactions between the Firm, QSPEs and nonconsolidated
VIEs are reflected on JPMorgan Chases Consolidated balance sheets and in the Notes to consolidated
financial statements.
For a discussion of the accounting for Private equity investments, see Note 5 on pages 8385 of
this Form 10-Q.
Assets held for clients in an agency or fiduciary capacity by the Firm are not assets of JPMorgan
Chase and are not included in the Consolidated balance sheets.
NOTE
2 DISCONTINUED OPERATIONS
On October 1, 2006, JPMorgan Chase completed the acquisition of The Bank of New Yorks consumer,
small-business and middle-market banking businesses in exchange for selected corporate trust
businesses plus a cash payment of $150 million. The Firm may also make a future payment to The Bank
of New York of up to $50 million depending on certain new account openings. There was no income
from discontinued operations during the first nine months of 2007. During the quarter and nine
months ended September 30, 2006, Income from discontinued operations was $65 million and $175
million, respectively.
JPMorgan Chase provides certain transitional services to The Bank of New York for a defined period
of time after the closing date. The Bank of New York compensates JPMorgan Chase for these
transitional services.
The Bank of New York Mellon Corporation (BNYM) has informed the Firm of difficulties in locating
certain documentation, including IRS Forms W-8 and W-9, related to certain accounts transferred to
BNYM in connection with the Firms sale of its corporate trust business. The Firm could have
liability to the IRS if it is determined that there was noncompliance with IRS tax reporting and
withholding requirements, and to BNYM if it is determined that there was noncompliance with the
sales agreements. The Firm is working with BNYM to locate and verify documents, and to obtain
replacement documentation where necessary. The Firm and BNYM have jointly notified the IRS of the
matter and are working cooperatively to address the issues and resolve any outstanding reporting
and withholding issues with the IRS. Although the Firm currently does not expect that any amounts
payable would be material, it is too early to precisely determine the extent of any potential
liability relating to this matter.
NOTE 3 FAIR VALUE MEASUREMENT
In September 2006, the FASB issued SFAS 157 (Fair Value Measurements), which is effective for
fiscal years beginning after November 15, 2007, with early adoption permitted. SFAS 157:
|
|
Defines fair value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date, and
establishes a framework for measuring fair value; |
|
|
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; |
|
|
Nullifies the guidance in EITF 02-3, which required the deferral of profit at inception of
a transaction involving a derivative financial instrument in the absence of observable data
supporting the valuation technique; |
|
|
Eliminates large position discounts for financial instruments quoted in active markets and
requires consideration of the Firms creditworthiness when valuing liabilities; and |
|
|
Expands disclosures about instruments measured at fair value. |
The Firm chose early adoption for SFAS 157 effective January 1, 2007.
73
The Firm also chose early adoption for SFAS 159 effective January 1, 2007. SFAS 159 provides an
option to elect fair value as an alternative measurement for selected financial assets, financial
liabilities, unrecognized firm commitments and written loan commitments not previously recorded at
fair value. As a result of adopting SFAS 159, the Firm elected fair value accounting for certain
assets and liabilities not previously carried at fair value. For more information, see Note 4 on
pages 8083 of this Form 10-Q
Determination of fair value
Following is a description of the Firms valuation methodologies for assets and liabilities
measured at fair value. Such valuation methodologies were applied to all of the assets and
liabilities carried at fair value, whether as a result of the adoption of SFAS 159 or previously
carried at fair value.
The Firm has an established and well-documented process for determining fair values. Fair value is
based upon quoted market prices, where available. If listed prices or quotes are not available,
fair value is based upon internally developed models that use primarily market-based or
independently-sourced market parameters, including interest rate yield curves, option volatilities
and currency rates. Valuation adjustments may be made to ensure that financial instruments are
recorded at fair value. These adjustments include amounts to reflect counterparty credit quality,
the Firms creditworthiness, liquidity and unobservable parameters that are applied consistently
over time.
|
|
Credit valuation adjustments (CVA) are necessary when the market price (or parameter) is
not indicative of the credit quality of the counterparty. As few classes of derivative
contracts are listed on an exchange, the majority of derivative positions are valued using
internally developed models that use as their basis observable market parameters. Market
practice is to quote parameters equivalent to an AA credit rating; thus, all counterparties
are assumed to have the same credit quality. Therefore, an adjustment is necessary to reflect
the credit quality of each derivative counterparty to arrive at fair value. |
|
|
|
Debit valuation adjustments (DVA) are necessary to reflect the credit quality of the Firm
in the valuation of liabilities measured at fair value. This adjustment was incorporated into
the Firms valuations commencing January 1, 2007, in accordance with SFAS 157. The methodology
to determine the adjustment is consistent with CVA and incorporates JPMorgan Chases credit
spread as observed through the credit default swap market. |
|
|
|
Liquidity valuation adjustments are necessary when the Firm may not be able to observe a
recent market price for a financial instrument that trades in inactive (or less active)
markets or to reflect the cost of exiting larger-than-normal market-size risk positions. The
Firm tries to ascertain the amount of uncertainty in the initial valuation based upon the
degree of liquidity of the market in which the financial instrument trades and makes liquidity
adjustments to the financial instrument. The Firm measures the liquidity adjustment based upon
the following factors: (1) the amount of time since the last relevant pricing point; (2)
whether there was an actual trade or relevant external quote; and (3) the volatility of the
principal component of the financial instrument. Costs to exit larger-than-normal market-size
risk positions are determined based upon the size of the adverse market move that is likely to
occur during the extended period required to bring a position down to a nonconcentrated level. |
|
|
|
Unobservable parameter valuation adjustments are necessary when positions are valued using
internally developed models that use as their basis unobservable parameters that is,
parameters that must be estimated and are, therefore, subject to management judgment to
substantiate the model valuation. These financial instruments are normally traded less
actively. Examples include certain credit products where parameters such as correlation and
recovery rates are unobservable. Parameter valuation adjustments are applied to mitigate the
possibility of error and revision in the model-based estimate of market price provided by the
model. |
To ensure that the valuations are appropriate, the Firm has various controls in place. These
include: an independent review and approval of valuation models; detailed review and explanation
for profit and loss analyzed daily and over time; deconstruction of the model valuations for
certain structured instruments into their components and benchmarking valuations, where possible,
to similar products; and validating valuation estimates through actual cash settlement. Valuation
adjustments are determined based upon established policies and are controlled by a price
verification group, which is independent of the risk-taking function. Any changes to the valuation
methodology are reviewed by management to ensure the changes are justified. As markets and products
develop and the pricing for certain products becomes more transparent, the Firm continues to refine
its valuation methodologies.
The methods described above may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, while the Firm believes its
valuation methods are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
74
Valuation Hierarchy
SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as follows.
|
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets. |
|
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument. |
|
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair
value measurement. |
A financial instruments categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the valuation
hierarchy.
Assets
Securities purchased under resale agreements (resale agreements)
To estimate the fair value of resale agreements, cash flows are evaluated taking into consideration
any derivative features of the resale agreement and are then discounted using the appropriate
market rates for the applicable maturity. As the inputs into the valuation are primarily based upon
readily observable pricing information, such resale agreements are generally classified within
level 2 of the valuation hierarchy.
Loans and unfunded lending-related commitments
Where quoted market prices are not available, the fair value of loans and unfunded lending-related
commitments is generally based upon observable market prices of similar instruments, including
bonds, credit derivatives and loans with similar characteristics. If observable market prices are
not available, fair value is based upon estimated cash flows adjusted for credit risk which are
discounted using an interest rate appropriate for the maturity of the applicable loans or the
unfunded commitments.
For loans that are expected to be securitized, fair value is estimated based upon observable
pricing of asset-backed securities with similar collateral and incorporates adjustments (i.e.,
reductions) to these prices to account for securitization uncertainties including portfolio
composition, market conditions and liquidity.
The Firms loans carried at fair value and included in Loans and Trading assets on the balance
sheet are generally classified within level 2 of the valuation hierarchy; however, certain of the
Firms loans, including purchased nonperforming loans, leveraged lending funded loans and unfunded
commitments, and subprime loans are classified within level 3 due to the lack of observable pricing
data.
Securities
Where quoted prices are available in an active market, securities are classified within level 1 of
the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain
mortgage products and exchange-traded equities. If quoted market prices are not available, then
fair values are estimated by using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flows. Examples of such instruments, which would generally be
classified within level 2 of the valuation hierarchy, include certain collateralized mortgage and
debt obligations and certain high-yield debt securities. In certain cases where there is limited
activity or less transparency around inputs to the valuation, securities are classified within
level 3 of the valuation hierarchy. Securities classified within level 3 include certain residual
interests in securitizations and other less liquid securities.
Commodities
Commodities inventory is carried at the lower of cost or fair value. The fair value for commodities
inventory is determined primarily using pricing and data derived from the markets on which the
underlying commodities are traded. Market prices may be adjusted for liquidity. The majority of
commodities contracts are classified within level 2 of the valuation hierarchy.
75
Derivatives
Exchange-traded derivatives valued using quoted prices are classified within level 1 of the
valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus,
the majority of the Firms derivative positions are valued using internally developed models that
use as their basis readily observable market parameters and are classified within level 2 of the
valuation hierarchy. Such derivatives include basic interest rate swaps and options and credit
default swaps. Derivatives that are valued based upon models with significant unobservable market
parameters and that are normally traded less actively or have trade activity that is one way are
classified within level 3 of the valuation hierarchy. Examples include long-dated interest rate or
currency swaps, where swap rates may be unobservable for longer maturities; and certain credit
products, where correlation and recovery rates are unobservable.
Mortgage servicing rights and certain other retained interests in securitizations
Mortgage servicing rights (MSRs) and certain other retained interests from securitization
activities do not trade in an active, open market with readily observable prices. While sales of
MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly,
the Firm estimates the fair value of MSRs and certain other retained interests in securitizations
using discounted cash flow (DCF) models.
|
|
For MSRs, the Firm uses an option adjusted spread (OAS) valuation model in conjunction
with the Firms proprietary prepayment model to project MSR cash flows over multiple interest
rate scenarios, which are then discounted at risk-adjusted rates to estimate an expected fair
value of the MSRs. The OAS model considers portfolio characteristics, contractually specified
servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary
revenues, costs to service and other economic factors. Due to the nature of the valuation
inputs, MSRs are classified within level 3 of the valuation hierarchy. |
|
|
For certain other retained interests in securitizations (such as interest-only strips), a
single interest rate path DCF model is used and generally includes assumptions based upon
projected finance charges related to the securitized assets, estimated net credit losses,
prepayment assumptions and contractual interest paid to third-party investors. Changes in the
assumptions used may have a significant impact on the Firms valuation of retained interests
and such interests are therefore typically classified within level 3 of the valuation
hierarchy. |
For both MSRs and certain other retained interests in securitizations, the Firm compares its fair
value estimates and assumptions to observable market data where available and to recent market
activity and actual portfolio experience. For further discussion of the most significant
assumptions used to value retained interests in securitizations and MSRs, as well as the applicable
stress tests for those assumptions, see Note 15 on pages 9499 and Note 17 on pages 101103 of
this Form 10-Q.
Private equity investments
The valuation of nonpublic Private equity investments, held primarily by the Private Equity
business within Corporate, requires significant management judgment due to the absence of quoted
market prices, inherent lack of liquidity and the long-term nature of such assets. Private equity
investments are valued initially based upon transaction price. The carrying values of private
equity investments are adjusted either upwards or downwards from the transaction price to reflect
expected exit values as evidenced by financing and sale transactions with third parties, or when
determination of a valuation adjustment is confirmed through ongoing reviews by senior investment
managers. A variety of factors are reviewed and monitored to assess positive and negative changes
in valuation including, but not limited to, current operating performance and future expectations
of the particular investment, industry valuations of comparable public companies, changes in market
outlook and the third-party financing environment. In determining valuation adjustments resulting
from the investment review process, emphasis is placed on current company performance and market
conditions. Nonpublic Private equity investments are included in level 3 of the valuation
hierarchy.
Private equity investments also include publicly held equity investments, generally obtained
through the initial public offering of privately held equity investments. Publicly held investments
are marked-to-market at the quoted public value less adjustments for regulatory or contractual
sales restrictions. Discounts for restrictions are quantified by analyzing the length of the
restriction period and the volatility of the equity security. Publicly held investments are
primarily classified in level 2 of the valuation hierarchy.
Liabilities
Deposits and Securities sold under repurchase agreements (repurchase agreements)
To estimate the fair value of term deposits and repurchase agreements, cash flows are evaluated
taking into consideration any derivative features in the deposits or repurchase agreements and are
then discounted using the appropriate market rates for the applicable maturity. As the inputs into
the valuation are primarily based upon readily observable pricing information, such deposits and
repurchase agreements are classified within level 2 of the valuation hierarchy.
76
Beneficial interests issued by consolidated VIEs
The fair value of beneficial interests issued by consolidated VIEs (beneficial interests) is
estimated based upon the fair value of the underlying assets held by the VIEs. The valuation of
beneficial interests does not include an adjustment to reflect the credit quality of the Firm as
the holders of these beneficial interests do not have recourse to the general credit of JPMorgan
Chase. As the inputs into the valuation are generally based upon readily observable pricing
information, the majority of beneficial interests issued by consolidated VIEs are classified within
level 2 of the valuation hierarchy.
Deposits,
Other borrowed funds and Long-term debt
Included within Deposits, Other borrowed funds and Long-term debt are structured notes issued by the Firm
that are financial instruments containing embedded derivatives. To estimate the fair value of
structured notes, cash flows are evaluated taking into consideration any derivative features and
are then discounted using the appropriate market rates for the applicable maturities. In addition,
the valuation of structured notes includes an adjustment to reflect the credit quality of the Firm
(i.e., the DVA). Where the inputs into the valuation are primarily based upon readily observable
pricing information, the structured notes are classified within level 2 of the valuation hierarchy.
Where significant inputs are unobservable, structured notes are classified within level 3 of the
valuation hierarchy.
The following table presents the financial instruments carried at fair value as of September 30,
2007, by caption on the Consolidated balance sheet and by SFAS 157 valuation hierarchy (as
described above).
Assets and liabilities measured at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal models |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal models |
|
|
with significant |
|
|
|
|
|
|
|
|
|
|
Quoted market |
|
|
with significant |
|
|
unobservable |
|
|
|
|
|
|
Total carrying |
|
|
|
prices in active |
|
|
observable market |
|
|
market |
|
|
|
|
|
|
value in the |
|
|
|
markets |
|
|
parameters |
|
|
parameters |
|
|
FIN 39 |
|
|
Consolidated |
|
September 30, 2007 (in millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
netting(e) |
|
|
balance sheet |
|
|
Federal funds sold and securities purchased
under resale agreements |
|
$ |
|
|
|
$ |
17,591 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,591 |
|
|
Trading assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and
equity
instruments(a)(b) |
|
|
200,136 |
|
|
|
173,753 |
|
|
|
15,230 |
|
|
|
|
|
|
|
389,119 |
|
Derivative receivables |
|
|
10,074 |
|
|
|
722,294 |
|
|
|
14,519 |
|
|
|
(682,295 |
) |
|
|
64,592 |
|
|
Total trading assets |
|
|
210,210 |
|
|
|
896,047 |
|
|
|
29,749 |
|
|
|
(682,295 |
) |
|
|
453,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
85,850 |
|
|
|
11,712 |
|
|
|
97 |
|
|
|
|
|
|
|
97,659 |
|
Loans |
|
|
|
|
|
|
9 |
|
|
|
6,119 |
|
|
|
|
|
|
|
6,128 |
|
Private
equity investments(c) |
|
|
94 |
|
|
|
486 |
|
|
|
6,254 |
|
|
|
|
|
|
|
6,834 |
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
9,114 |
|
|
|
|
|
|
|
9,114 |
|
Other assets |
|
|
10,812 |
|
|
|
804 |
|
|
|
2,542 |
|
|
|
|
|
|
|
14,158 |
|
|
Total assets at fair value |
|
$ |
306,966 |
|
|
$ |
926,649 |
|
|
$ |
53,875 |
|
|
$ |
(682,295 |
) |
|
$ |
605,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
|
|
|
$ |
5,008 |
|
|
$ |
1,095 |
|
|
$ |
|
|
|
$ |
6,103 |
|
Federal funds purchased and securities sold
under repurchase agreements |
|
|
|
|
|
|
6,421 |
|
|
|
|
|
|
|
|
|
|
|
6,421 |
|
Other borrowed funds |
|
|
|
|
|
|
12,002 |
|
|
|
109 |
|
|
|
|
|
|
|
12,111 |
|
Trading liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
64,097 |
|
|
|
16,175 |
|
|
|
476 |
|
|
|
|
|
|
|
80,748 |
|
Derivative payables |
|
|
14,227 |
|
|
|
719,131 |
|
|
|
15,889 |
|
|
|
(680,821 |
) |
|
|
68,426 |
|
|
Total trading liabilities |
|
|
78,324 |
|
|
|
735,306 |
|
|
|
16,365 |
|
|
|
(680,821 |
) |
|
|
149,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other
liabilities(d) |
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
|
|
|
|
449 |
|
Beneficial interests issued by consolidated VIEs |
|
|
|
|
|
|
2,903 |
|
|
|
24 |
|
|
|
|
|
|
|
2,927 |
|
Long-term debt |
|
|
160 |
|
|
|
45,818 |
|
|
|
21,783 |
|
|
|
|
|
|
|
67,761 |
|
|
Total liabilities at fair value |
|
$ |
78,484 |
|
|
$ |
807,458 |
|
|
$ |
39,825 |
|
|
$ |
(680,821 |
) |
|
$ |
244,946 |
|
|
|
|
|
(a) |
|
Included loans classified as Trading assets. For additional detail, see Note 6 on pages
8586. |
(b) |
|
Included physical
commodities inventories that are accounted for at the lower of cost or
fair value. |
(c) |
|
Included within Private equity investments are public equity securities held within the
Private Equity business. |
(d) |
|
Included within Accounts
payable, accrued expenses and other liabilities is the fair value
adjustment for unfunded lending-related commitments. |
(e) |
|
FIN 39 permits the netting of Derivative receivables and Derivative payables when a legally
enforceable master netting agreement exists between the Firm and a derivative counterparty. A
master netting agreement is an agreement between two counterparties who have multiple
derivative contracts with each other that provide for the net settlement of all contracts, as
well as cash collateral, through a single payment, in a single currency, in the event of
default on or termination of any one contract. |
77
Changes in level three (3) fair value measurements
The tables below include a rollforward of the balance sheet amounts for the three and nine months
ended September 30, 2007, (including the change in fair value), for financial instruments
classified by the Firm within level 3 of the valuation hierarchy. When a determination is made to
classify a financial instrument within level 3 of the valuation hierarchy, the determination is
based upon the significance of the unobservable factors to the overall fair value measurement.
However, level 3 financial instruments typically include, in addition to the unobservable or level
3 components, observable components (that is, components that are actively quoted and can be
validated to external sources); accordingly, the gains and losses in the table below include
changes in fair value due in part to observable factors that are part of the valuation methodology.
Also, the Firm risk manages the observable components of level 3 financial instruments using
securities and derivative positions that are classified within level 1 or 2 of the valuation
hierarchy; as these level 1 and level 2 risk management instruments are not included below, the
gains or losses in the tables do not reflect the effect of the Firms risk management activities
related to such level 3 instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using significant unobservable inputs(a) |
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Change in unrealized |
|
|
|
|
|
|
|
|
|
|
issuances |
|
|
|
|
|
|
|
|
|
gains and (losses) |
Three months ended |
|
Fair value, |
|
Total |
|
and |
|
Transfers in |
|
Fair value, |
|
related to financial |
September 30, 2007 |
|
June 30, |
|
realized/unrealized |
|
settlements, |
|
and/or out of |
|
September 30, |
|
instruments held at |
(in millions) |
|
2007 |
|
gains/(losses) |
|
net |
|
Level 3 |
|
2007 |
|
September 30, 2007 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
$ |
10,951 |
|
|
$ |
(60 |
)(b)(c) |
|
$ |
2,020 |
|
|
$ |
2,319 |
|
|
$ |
15,230 |
|
|
$ |
(89 |
)(b)(c) |
|
Available-for-sale securities |
|
|
107 |
|
|
|
(5 |
)(d) |
|
|
(5 |
) |
|
|
|
|
|
|
97 |
|
|
|
(5 |
)(d) |
Loans |
|
|
1,544 |
|
|
|
(81 |
)(b) |
|
|
4,368 |
|
|
|
288 |
|
|
|
6,119 |
|
|
|
(88 |
)(b) |
|
Private equity investments |
|
|
6,143 |
|
|
|
876 |
(b) |
|
|
(765 |
) |
|
|
|
|
|
|
6,254 |
|
|
|
294 |
(b) |
Other assets |
|
|
2,057 |
|
|
|
(12 |
)(e) |
|
|
357 |
|
|
|
140 |
|
|
|
2,542 |
|
|
|
(6 |
)(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
(926 |
) |
|
$ |
(31 |
)(b) |
|
$ |
(138 |
) |
|
$ |
|
|
|
$ |
(1,095 |
) |
|
$ |
(38 |
)(b) |
Other borrowed funds |
|
|
|
|
|
|
(76 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
(109 |
) |
|
|
(128 |
) |
Trading liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
(243 |
) |
|
|
148 |
(b) |
|
|
13 |
|
|
|
(394 |
)(f) |
|
|
(476 |
) |
|
|
120 |
(b) |
Net derivative payables |
|
|
(1,677 |
) |
|
|
(729 |
)(b) |
|
|
161 |
|
|
|
875 |
|
|
|
(1,370 |
) |
|
|
(166 |
)(b) |
|
Accounts payable, accrued
expenses and other
liabilities |
|
|
|
|
|
|
(449 |
)(b) |
|
|
|
|
|
|
|
|
|
|
(449 |
) |
|
|
(449 |
)(b) |
Beneficial interests issued
by
consolidated VIEs |
|
|
(25 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
Long-term debt |
|
|
(20,307 |
) |
|
|
(512 |
)(b) |
|
|
(955 |
) |
|
|
(9 |
)(f) |
|
|
(21,783 |
) |
|
|
(735 |
)(b) |
|
|
|
|
(a) |
|
MSRs are classified within level 3 of the valuation hierarchy. For a rollforward of
balance sheet amounts related to MSRs, see Note 17 on pages 101103 of this Form 10-Q. |
(b) |
|
Reported in Principal transactions revenue. |
(c) |
|
Changes in fair value for Retail Financial Services mortgage loans originated with the intent
to sell are measured at fair value under SFAS 159 and reported in Mortgage fees and related
income. |
(d) |
|
Realized gains (losses) are reported in Securities gains (losses). Unrealized gains (losses)
are reported in Accumulated other comprehensive income (loss). |
(e) |
|
Reported in Other income. |
(f) |
|
Represents a net transfer in of a liability balance. |
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using significant unobservable inputs(a) |
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Change in unrealized |
|
|
|
|
|
|
|
|
|
|
issuances |
|
|
|
|
|
|
|
|
|
gains and (losses) |
Nine months ended |
|
Fair value, |
|
Total |
|
and |
|
Transfers in |
|
Fair value, |
|
related to financial |
September 30, 2007 |
|
January 1, |
|
realized/unrealized |
|
settlements, |
|
and/or out of |
|
September 30, |
|
instruments held at |
(in millions) |
|
2007 |
|
gains/(losses) |
|
net |
|
Level 3 |
|
2007 |
|
September 30, 2007 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
$ |
9,320 |
|
|
$ |
(233 |
)(b)(c) |
|
$ |
3,280 |
|
|
$ |
2,863 |
|
|
$ |
15,230 |
|
|
$ |
(420 |
)(b)(c) |
|
Available-for-sale securities |
|
|
177 |
|
|
|
35 |
(d) |
|
|
(22 |
) |
|
|
(93 |
) |
|
|
97 |
|
|
|
(8 |
)(d) |
Loans |
|
|
643 |
|
|
|
(55 |
)(b) |
|
|
5,243 |
|
|
|
288 |
|
|
|
6,119 |
|
|
|
(68 |
)(b) |
|
Private equity investments |
|
|
5,536 |
|
|
|
3,312 |
(b) |
|
|
(2,601 |
) |
|
|
7 |
|
|
|
6,254 |
|
|
|
1,118 |
(b) |
Other assets |
|
|
1,548 |
|
|
|
57 |
(e) |
|
|
490 |
|
|
|
447 |
|
|
|
2,542 |
|
|
|
(4 |
)(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
(385 |
) |
|
$ |
(12 |
)(b) |
|
$ |
(551 |
) |
|
$ |
(147 |
)(f) |
|
$ |
(1,095 |
) |
|
$ |
(10 |
)(b) |
Other borrowed funds |
|
|
|
|
|
|
(76 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
(109 |
) |
|
|
(128 |
) |
Trading liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
(32 |
) |
|
|
96 |
(b) |
|
|
43 |
|
|
|
(583 |
)(f) |
|
|
(476 |
) |
|
|
121 |
(b) |
Net derivative payables |
|
|
(2,800 |
) |
|
|
51 |
(b) |
|
|
(371 |
) |
|
|
1,750 |
|
|
|
(1,370 |
) |
|
|
614 |
(b) |
|
Accounts payable, accrued
expenses and other
liabilities |
|
|
|
|
|
|
(449 |
)(b) |
|
|
|
|
|
|
|
|
|
|
(449 |
) |
|
|
(449 |
)(b) |
Beneficial interests issued
by
consolidated VIEs |
|
|
(8 |
) |
|
|
6 |
|
|
|
1 |
|
|
|
(23 |
)(f) |
|
|
(24 |
) |
|
|
|
|
|
Long-term debt |
|
|
(11,386 |
) |
|
|
(1,205 |
)(b) |
|
|
(6,441 |
) |
|
|
(2,751 |
)(f) |
|
|
(21,783 |
) |
|
|
(667 |
)(b) |
|
|
|
|
(a) |
|
MSRs are classified within level 3 of the valuation hierarchy. For a rollforward of
balance sheet amounts related to MSRs, see Note 17 on pages 101103 of this Form 10-Q. |
(b) |
|
Reported in Principal transactions revenue. |
(c) |
|
Changes in fair value for Retail Financial Services mortgage loans originated with the intent
to sell are measured at fair value under SFAS 159 and reported in Mortgage fees and related
income. |
(d) |
|
Realized gains (losses) are reported in Securities gains (losses). Unrealized gains (losses)
are reported in Accumulated other comprehensive income (loss). |
(e) |
|
Reported in Other income. |
(f) |
|
Represents a net transfer in of a liability balance. |
Assets and liabilities measured at fair value on a nonrecurring basis
Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, the
instruments are not measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances (for example, when there is evidence of impairment). The
following table presents the financial instruments carried on the
Consolidated balance sheet by caption and by level within
the SFAS 157 valuation hierarchy (as described above) as of
September 30, 2007, for which a nonrecurring change in fair
value has been recorded during the nine months ended September 30,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal models |
|
|
|
|
|
|
|
|
|
|
Internal models |
|
|
with significant |
|
|
|
|
|
|
Quoted market |
|
|
with significant |
|
|
unobservable |
|
|
Total carrying |
|
|
|
prices in active |
|
|
observable market |
|
|
market |
|
|
value in the |
|
September 30, 2007 |
|
markets |
|
|
parameters |
|
|
parameters |
|
|
Consolidated |
|
(in millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
balance sheet |
|
|
Loans(a) |
|
$ |
|
|
|
$ |
2,445 |
|
|
$ |
15,142 |
|
|
$ |
17,587 |
|
Other assets |
|
|
|
|
|
|
230 |
|
|
|
114 |
|
|
|
344 |
|
|
Total assets at fair value on a nonrecurring basis |
|
$ |
|
|
|
$ |
2,675 |
|
|
$ |
15,256 |
|
|
$ |
17,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
462 |
|
|
$ |
462 |
(b) |
|
Total liabilities at fair value on a nonrecurring basis |
|
$ |
|
|
|
$ |
|
|
|
$ |
462 |
|
|
$ |
462 |
|
|
|
|
|
(a) |
|
Includes debt financing
and other loan warehouses held-for-sale. |
(b) |
|
Represents the fair value
adjustment associated with $15.0 billion of unfunded held-for-sale lending-related commitments. |
79
Nonrecurring
fair value changes
The following table presents the total change in value of financial
instruments for which a fair value adjustment has been included in the Consolidated
statements of income for the three and nine months ended September 30, 2007, related to financial
instruments held at September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 (in millions) |
|
Three months ended |
|
|
Nine months ended |
|
|
Loans |
|
$ |
(508 |
) |
|
$ |
(565 |
) |
Other assets |
|
|
(37 |
) |
|
|
(135 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(462 |
) |
|
|
(462 |
) |
|
Total
nonrecurring fair value gains (losses) |
|
$ |
(1,007 |
) |
|
$ |
(1,162 |
) |
|
Transition
In connection with the Firms adoption of SFAS 157, the Firm recorded the following:
|
|
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; |
|
|
An increase to revenue of $166 million ($103 million after-tax) related to the
incorporation of the Firms creditworthiness in the valuation of liabilities recorded at fair
value; and |
|
|
An increase to revenue of $464 million ($288 million after-tax) related to nonpublic
private equity investments. |
Prior to the adoption of SFAS 157, the Firm applied the provisions of EITF 02-3 to its derivative
portfolio. EITF 02-3 precluded the recognition of initial trading profit in the absence of: (a)
quoted market prices, (b) observable prices of other current market transactions or (c) other
observable data supporting a valuation technique. The Firm recognized the deferred profit in
Principal transactions revenue on a systematic basis (typically straight-line amortization over the
life of the instruments) and when observable market data became available.
Prior to the adoption of SFAS 157, privately held investments were initially valued based upon
cost. The carrying values of privately held investments were adjusted from cost to reflect both
positive and negative changes evidenced by financing events with third-party capital providers. The
investments were also subject to ongoing impairment reviews by private equity senior investment
professionals. The increase in revenue related to nonpublic Private equity investments in
connection with the adoption of SFAS 157 was due to there being sufficient market evidence to
support an increase in fair values using the SFAS 157 methodology, although there had not been an
actual third party market transaction related to such investments.
NOTE
4 FAIR VALUE OPTION
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 an option to elect fair value
as an alternative measurement for selected financial assets, financial liabilities, unrecognized
firm commitments, and written loan commitments not previously carried at fair value. The Firm chose
early adoption for SFAS 159 effective January 1, 2007.
The Firms fair value elections were intended to eliminate volatility in Net income that had been
caused by measuring assets and liabilities on a different basis and to align the accounting with
the Firms risk management practices for those financial instruments managed on a fair value basis.
The following table provides detail regarding the Firms elections by balance sheet line as of
January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
Carrying value |
|
|
|
|
|
carrying value |
|
|
of financial |
|
Transition gain/(loss) |
|
of financial |
|
|
instruments as of |
|
recorded in |
|
instruments as of |
(in millions) |
|
January 1, 2007(c) |
|
Retained earnings(d) |
|
January 1, 2007 |
|
Federal funds sold and securities purchased under resale agreements |
|
$ |
12,970 |
|
|
$ |
(21 |
) |
|
$ |
12,949 |
|
Trading
assets Debt and equity instruments |
|
|
28,841 |
|
|
|
32 |
|
|
|
28,873 |
|
Loans |
|
|
759 |
|
|
|
55 |
|
|
|
814 |
|
Other assets(a) |
|
|
1,176 |
|
|
|
14 |
|
|
|
1,190 |
|
|
Deposits(b) |
|
|
(4,427 |
) |
|
|
21 |
|
|
|
(4,406 |
) |
Federal funds purchased and securities sold under repurchase
agreements |
|
|
(6,325 |
) |
|
|
20 |
|
|
|
(6,305 |
) |
Other borrowed funds |
|
|
(5,502 |
) |
|
|
(4 |
) |
|
|
(5,506 |
) |
Beneficial interests issued by consolidated VIEs |
|
|
(2,339 |
) |
|
|
5 |
|
|
|
(2,334 |
) |
Long-term debt |
|
|
(39,025 |
) |
|
|
198 |
|
|
|
(38,827 |
) |
|
Pretax
cumulative effect of adoption of SFAS 159 |
|
|
|
|
|
|
320 |
|
|
|
|
|
Deferred taxes |
|
|
|
|
|
|
(122 |
) |
|
|
|
|
Reclassification from Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
Cumulative
effect of adoption of SFAS 159 |
|
|
|
|
|
$ |
199 |
|
|
|
|
|
|
80
|
|
|
(a) |
|
Included in Other assets are items, such as receivables, that are eligible for the fair
value option election but were not elected by the Firm as these assets are not managed on a
fair value basis. |
|
(b) |
|
Included within Deposits are structured deposits that are carried at fair value pursuant to
the fair value option. Other time deposits which are eligible for election, but are not
managed on a fair value basis, continue to be carried on an accrual basis. Demand deposits are
not eligible for election under the fair value option. |
|
(c) |
|
Included in the January 1, 2007, carrying values are certain financial instruments previously
carried at fair value by the Firm such as structured liabilities elected pursuant to SFAS 155
and loans purchased as part of the Investment Bank trading activities. |
|
(d) |
|
When fair value elections were made, certain financial instruments were reclassified on the
Consolidated balance sheet (for example, warehouse loans were moved from Loans to Trading
assets). The transition adjustment for these financial instruments has been included in the
line item in which they were classified subsequent to the fair value election. |
Elections
The following is a discussion of the primary financial instruments for which fair value elections
were made and the basis for those elections:
Loans and unfunded lending-related commitments
The Firm elected to record, at fair value, certain loans and unfunded lending-related commitments
that are extended as part of its principal investing activities. The transition amount related to
the election to fair value these loans included a reversal of the Allowance for loan losses of $56
million. During the third quarter of 2007, the Firm elected the fair value option for newly
originated bridge loans and bridge financing commitments and plans to make an
election for such instruments going forward. These elections are being made to further align the
accounting basis of the funded bridge loans and unfunded bridge financing commitments with the
related risk management practices. These loans continue to be classified within Loans on the
Consolidated balance sheet. The fair value of unfunded commitments is
classified within Accounts
payable, accrued expenses and other liabilities.
The Firm also elected to record certain Loans held-for-sale at fair value. These loans were
reclassified to Trading assets Debt and equity instruments. This election enabled the Firm to
record loans purchased as part of the Investment Banks proprietary activities at fair value and
discontinue SFAS 133 fair value hedge relationships for certain originated loans.
In addition, the Investment Bank (IB) elected to record loan originations and purchases entered
into after January 1, 2007, as part of its securitization warehousing activities at fair value.
Similarly, Retail Financial Services (RFS) elected to record prime mortgage loans originated with
the intent to sell after January 1, 2007, at fair value. These elections were not made for loans
existing on January 1, 2007, based upon the short holding period of the loans and/or the negligible
impact of the elections. Warehouse loans elected to be reported at fair value are classified as
Trading assets Debt and equity instruments. For additional information regarding warehouse
loans, see Note 15 on pages 9499 of this Form 10-Q.
Resale and Repurchase Agreements
The Firm elected to record at fair value resale and repurchase agreements with an embedded
derivative or a maturity greater than one year. The intent of this election was to mitigate
volatility due to the differences in the measurement basis for the agreements (which were
previously accounted for on an accrual basis) and the associated risk management arrangements
(which are accounted for on a fair value basis). An election was not made for short-term agreements
as the carrying value for such agreements generally approximates fair value. For additional
information regarding these agreements, see Note 12 on page 91 of this Form 10-Q.
Structured Notes
IB issues structured notes as part of its client-driven activities. Structured notes are financial
instruments that contain embedded derivatives and are included in Long-term debt. On January 1,
2007, the Firm elected to record at fair value all structured notes not previously elected or
eligible for election under SFAS 155. As a result, all structured notes will be carried
consistently on a fair-value basis. The election was made to mitigate the volatility due to the
differences in the measurement basis for structured notes and the associated risk management
arrangements and to eliminate the operational burdens of having different accounting models for the
same type of financial instrument.
81
Changes in Fair Value under the Fair Value option election
The following tables present the changes in fair value included in the Consolidated statements of
income for the three and nine months ended September 30, 2007, for items for which the fair value
election was made.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fees and |
|
|
|
|
|
Total changes |
|
|
|
|
Three months ended September 30,
2007 |
|
Principal |
|
related |
|
|
|
|
|
in fair value |
|
|
|
|
(in millions) |
|
transactions(d) |
|
income |
|
Other income |
|
recorded |
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased under resale agreements |
|
$ |
240 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
240 |
|
|
|
|
|
Trading
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and
equity instruments, excluding loans |
|
|
191 |
|
|
|
(11 |
) |
|
|
|
|
|
|
180 |
|
|
|
|
|
Loans
reported as trading assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
instrument specific credit risk(a) |
|
|
(724 |
) |
|
|
(103 |
) |
|
|
|
|
|
|
(827 |
) |
|
|
|
|
Other
changes in fair value |
|
|
131 |
|
|
|
418 |
|
|
|
|
|
|
|
549 |
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in instrument-specific credit risk(a) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
(100 |
) |
|
|
|
|
Other changes in fair value |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(522 |
) |
|
|
|
|
|
|
|
|
|
|
(522 |
) |
|
|
|
|
Federal funds purchased and securities sold under repurchase
agreements |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
(48 |
) |
|
|
|
|
Other borrowed funds |
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
(159 |
) |
|
|
|
|
Trading liabilities |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
|
(449 |
) |
|
|
|
|
|
|
|
|
|
|
(449 |
) |
|
|
|
|
Beneficial interests issued by consolidated VIEs |
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
|
(115 |
) |
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
instrument-specific credit
risk(b)(c) |
|
|
429 |
|
|
|
|
|
|
|
|
|
|
|
429 |
|
|
|
|
|
Other changes in fair value |
|
|
(1,065 |
) |
|
|
|
|
|
|
|
|
|
|
(1,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fees and |
|
|
|
|
|
Total changes |
|
|
|
|
Nine months ended September 30,
2007 |
|
Principal |
|
related |
|
|
|
|
|
in fair value |
|
|
|
|
(in millions) |
|
transactions(d) |
|
income |
|
Other income |
|
recorded |
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased under resale agreements |
|
$ |
240 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
240 |
|
|
|
|
|
Trading
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and
equity instruments, excluding loans |
|
|
467 |
|
|
|
4 |
|
|
|
|
|
|
|
471 |
|
|
|
|
|
Loans
reported as trading assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
instrument specific credit
risk(a) |
|
|
(150 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
(254 |
) |
|
|
|
|
Other
changes in fair value |
|
|
147 |
|
|
|
601 |
|
|
|
|
|
|
|
748 |
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in instrument-specific credit risk(a) |
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
|
|
Other changes in fair value |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(562 |
) |
|
|
|
|
|
|
|
|
|
|
(562 |
) |
|
|
|
|
Federal funds purchased and securities sold under repurchase
agreements |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
Other borrowed funds |
|
|
(317 |
) |
|
|
|
|
|
|
|
|
|
|
(317 |
) |
|
|
|
|
Trading liabilities |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
|
(449 |
) |
|
|
|
|
|
|
|
|
|
|
(449 |
) |
|
|
|
|
Beneficial interests issued by consolidated VIEs |
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
(184 |
) |
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
instrument-specific credit
risk(b)(c) |
|
|
562 |
|
|
|
|
|
|
|
|
|
|
|
562 |
|
|
|
|
|
Other changes in fair value |
|
|
(2,313 |
) |
|
|
|
|
|
|
|
|
|
|
(2,313 |
) |
|
|
|
|
|
|
|
|
(a) |
|
For floating-rate instruments, changes in value are attributed to instrumentspecific
credit risk. For fixed-rate instruments, an allocation of the changes in value for the period
is made between those changes in value that are interest raterelated and changes in value
that are credit-related. Allocations are based upon an analysis of borrowerspecific credit
spread and recovery information, where available, or benchmarking to similar entities or
industries. |
(b) |
|
For Long-term debt, changes in value attributable to instrumentspecific credit risk were
derived principally from observable changes in the Firms credit
spread. The gain for the three and nine months ended September 30,
2007, was attributable to the widening of the Firm's credit spread. |
(c) |
|
Total changes in
instrument-specific credit risk related to structured notes was
$454 million and $589 million for the three and nine months
ended September 30, 2007, which includes adjustments for
structured notes classified within Deposits and Other borrowed funds
as well as Long-term debt. |
(d) |
|
Included in the amounts are gains and losses related to certain financial instruments
previously carried at fair value by the Firm such as structured liabilities elected pursuant
to SFAS 155 and loans purchased as part of IB trading activities. |
82
The Firms fair value elections were intended to mitigate the volatility in earnings that had
been created by recording financial instruments and the related risk management instruments on a
different basis of accounting or to eliminate the operational complexities of applying hedge
accounting. However, the profit and loss information presented above only includes the financial
instruments that were elected to be measured at fair value; related risk management instruments,
which are required to be measured at fair value, are not included in the table.
Difference between aggregate fair value and aggregate remaining contractual principal balance
outstanding
The following tables reflects the difference between the aggregate fair value and the aggregate
remaining contractual principal balance outstanding as of September 30, 2007, for Loans and
Long-term debt for which the SFAS 159 fair value option has been elected. The loans were classified
in Loans or Trading assets debt and equity instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value over |
|
|
|
|
|
|
|
|
|
|
(under) remaining |
|
|
Remaining aggregate |
|
|
|
|
|
aggregate contractual |
September 30, 2007 |
|
|
contractual principal |
|
|
|
|
|
|
principal amount |
(in millions) |
|
amount outstanding |
|
Fair value |
|
outstanding |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans 90 days or more past due |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Loans reported as Trading assets |
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
15 |
|
|
|
5 |
|
|
|
(10 |
) |
Loans reported as Trading assets |
|
|
2,922 |
|
|
|
987 |
|
|
|
(1,935 |
) |
|
Subtotal |
|
|
2,937 |
|
|
|
992 |
|
|
|
(1,945 |
) |
All other performing loans |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
6,234 |
|
|
|
6,123 |
|
|
|
(111 |
) |
Loans reported as Trading assets |
|
|
53,224 |
|
|
|
54,789 |
|
|
|
1,565 |
|
|
Total loans |
|
$ |
62,395 |
|
|
$ |
61,904 |
|
|
$ |
(491 |
) |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
Principal protected debt |
|
$ |
(20,772 |
) |
|
$ |
(22,052 |
) |
|
$ |
1,280 |
|
Nonprincipal protected debt(a) |
|
NA |
|
|
|
(45,709 |
) |
|
NA |
|
|
Total Long-term debt |
|
NA |
|
|
$ |
(67,761 |
) |
|
NA |
|
|
FIN 46R long-term beneficial interests |
|
|
|
|
|
|
|
|
|
|
|
|
Principal protected debt |
|
$ |
(10 |
) |
|
$ |
(7 |
) |
|
$ |
(3 |
) |
Nonprincipal protected debt(a) |
|
NA |
|
|
|
(2,826 |
) |
|
NA |
|
|
Total FIN 46R long-term beneficial interests |
|
NA |
|
|
$ |
(2,833 |
) |
|
NA |
|
|
|
|
|
(a) |
|
Balance not applicable as the return of principal is based upon performance of an
underlying variable, and therefore may not occur in full. |
At September 30, 2007, the fair value of unfunded lending-related commitments for which the
fair value option was elected was a $449 million liability, which
is included in Accounts payable, accrued expenses and other
liabilities. The contractual amount of such
commitments was $10.8 billion.
NOTE 5 PRINCIPAL TRANSACTIONS
Principal transactions revenue consists of realized and unrealized gains and losses from
trading activities (including physical commodities inventories that are accounted for at the lower
of cost or fair value), changes in fair value associated with financial instruments held by the
Investment Bank for which the SFAS 159 fair value option was elected, and loans held-for-sale
within the wholesale lines of business. Principal transactions revenue also includes private
equity gains and losses.
The following table presents Principal transactions revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Trading revenue |
|
$ |
(548 |
) |
|
$ |
2,514 |
|
|
$ |
4,705 |
|
|
$ |
7,148 |
|
Private equity gains |
|
|
785 |
|
|
|
223 |
|
|
|
3,569 |
|
|
|
1,039 |
|
|
Total Principal transactions revenue |
|
$ |
237 |
|
|
$ |
2,737 |
|
|
$ |
8,274 |
|
|
$ |
8,187 |
|
|
83
Trading assets and liabilities
Trading assets include debt and equity instruments held for trading purposes that JPMorgan Chase
owns (long positions) and certain loans for which the Firm manages on a fair value basis and has
elected the SFAS 159 fair value option. Trading liabilities include debt and equity instruments
that the Firm has sold to other parties but does not own (short positions). The Firm is obligated
to purchase instruments at a future date to cover the short positions. Included in Trading assets
and Trading liabilities are the reported receivables (unrealized gains) and payables (unrealized
losses) related to derivatives. Trading positions are carried at fair value on the Consolidated
balance sheets. For a discussion of the valuation of Trading assets and Trading liabilities, see
Note 3 on pages 7380 of this Form 10-Q.
The following table presents the fair value of Trading assets and Trading liabilities for the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Trading assets |
|
|
|
|
|
|
|
|
Debt and equity instruments: |
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations |
|
$ |
25,175 |
|
|
$ |
17,358 |
|
U.S. government-sponsored enterprise obligations |
|
|
29,537 |
|
|
|
28,544 |
|
Obligations of state and political subdivisions |
|
|
12,392 |
|
|
|
9,569 |
|
Certificates of deposit, bankers acceptances and commercial paper |
|
|
7,934 |
|
|
|
8,204 |
|
Debt securities issued by non-U.S. governments |
|
|
70,713 |
|
|
|
58,387 |
|
Corporate debt securities |
|
|
48,995 |
|
|
|
62,064 |
|
Equity securities |
|
|
95,366 |
|
|
|
86,862 |
|
Loans(a) |
|
|
55,776 |
|
|
|
16,595 |
|
Other |
|
|
43,231 |
|
|
|
22,554 |
|
|
Total debt and equity instruments |
|
|
389,119 |
|
|
|
310,137 |
|
|
Derivative receivables(b) |
|
|
|
|
|
|
|
|
Interest rate |
|
|
28,714 |
|
|
|
28,932 |
|
Foreign exchange |
|
|
6,052 |
|
|
|
4,260 |
|
Equity |
|
|
10,752 |
|
|
|
6,246 |
|
Credit derivatives |
|
|
10,664 |
|
|
|
5,732 |
|
Commodity |
|
|
8,410 |
|
|
|
10,431 |
|
|
Total derivative receivables |
|
|
64,592 |
|
|
|
55,601 |
|
|
Total trading assets |
|
$ |
453,711 |
|
|
$ |
365,738 |
|
|
Trading liabilities |
|
|
|
|
|
|
|
|
Debt and equity instruments(c) |
|
$ |
80,748 |
|
|
$ |
90,488 |
|
|
Derivative payables(b) |
|
|
|
|
|
|
|
|
Interest rate |
|
|
20,792 |
|
|
|
22,738 |
|
Foreign exchange |
|
|
8,956 |
|
|
|
4,820 |
|
Equity |
|
|
23,168 |
|
|
|
16,579 |
|
Credit derivatives |
|
|
9,538 |
|
|
|
6,003 |
|
Commodity |
|
|
5,972 |
|
|
|
7,329 |
|
|
Total derivative payables |
|
|
68,426 |
|
|
|
57,469 |
|
|
Total trading liabilities |
|
$ |
149,174 |
|
|
$ |
147,957 |
|
|
|
|
|
(a) |
|
The increase from December 31, 2006, is primarily related to loans for which the SFAS 159
fair value option has been elected. |
|
(b) |
|
Included in Trading assets and Trading liabilities are the reported receivables (unrealized
gains) and payables (unrealized losses) related to derivatives. These amounts are reported net
of cash received and paid of $25.9 billion and $24.4 billion, respectively, at September 30,
2007, and $23.0 billion and $18.8 billion, respectively, at December 31, 2006, under legally
enforceable master netting agreements. |
|
(c) |
|
Primarily represents securities sold, not yet purchased. |
84
Average Trading assets and liabilities were as follows for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Trading assets debt and equity instruments |
|
$ |
396,622 |
|
|
$ |
288,530 |
|
|
$ |
374,603 |
|
|
$ |
273,307 |
|
Trading assets derivative receivables |
|
|
64,821 |
|
|
|
55,419 |
|
|
|
61,801 |
|
|
|
55,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities debt and equity instruments(a) |
|
$ |
96,439 |
|
|
$ |
103,303 |
|
|
$ |
96,806 |
|
|
$ |
104,877 |
|
Trading liabilities derivative payables |
|
|
65,467 |
|
|
|
54,928 |
|
|
|
61,742 |
|
|
|
57,052 |
|
|
|
|
|
(a) |
|
Primarily represents securities sold, not yet purchased. |
Private equity
The following table presents the carrying value and cost of the Private equity investment portfolio
for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
(in millions) |
|
Carrying value |
|
|
Cost |
|
|
Carrying value |
|
|
Cost |
|
|
Total private equity investments |
|
$ |
6,929 |
|
|
$ |
6,594 |
|
|
$ |
6,359 |
|
|
$ |
7,560 |
|
|
Private equity investments are held primarily by the Private Equity business within Corporate.
Private Equity includes investments in buyouts, growth equity and venture opportunities. These
investments are accounted for under investment company guidelines. Accordingly, these investments,
irrespective of the percentage of equity ownership interest held, are carried on the Consolidated
balance sheets at fair value. Realized and unrealized gains and losses arising from changes in
value are reported in Principal transactions revenue in the Consolidated statements of income in
the period that the gains or losses occur. For a discussion of the valuation of Private equity
investments, see Note 3 on pages 7380 of this Form 10-Q.
NOTE 6 OTHER NONINTEREST REVENUE
Investment banking fees
This revenue category includes advisory and equity and debt underwriting
fees. Advisory fees are recognized as revenue when the related services have been performed.
Underwriting fees are recognized as revenue when the Firm has rendered all services to the issuer
and is entitled to collect the fee from the issuer, as long as there are no other contingencies
associated with the fee (e.g., the fee is not contingent upon the customer obtaining financing).
Underwriting fees are net of syndicate expenses. The Firm recognizes credit arrangement and
syndication fees as revenue after satisfying certain retention, timing and yield criteria.
The following table presents the components of Investment banking fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Underwriting: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
267 |
|
|
$ |
274 |
|
|
$ |
1,169 |
|
|
$ |
851 |
|
Debt |
|
|
475 |
|
|
|
712 |
|
|
|
2,178 |
|
|
|
1,928 |
|
|
Total underwriting |
|
|
742 |
|
|
|
986 |
|
|
|
3,347 |
|
|
|
2,779 |
|
Advisory |
|
|
594 |
|
|
|
430 |
|
|
|
1,626 |
|
|
|
1,176 |
|
|
Total |
|
$ |
1,336 |
|
|
$ |
1,416 |
|
|
$ |
4,973 |
|
|
$ |
3,955 |
|
|
Lending & deposit-related fees
This revenue category includes fees from loan commitments,
standby letters of credit, financial guarantees, deposit-related fees in lieu of compensating
balances, cash management-related activities or transactions, deposit accounts, and other loan
servicing activities. These fees are recognized over the period in which the related service is
provided.
85
Asset management, administration and commissions
This revenue category includes fees from
investment management and related services, custody, brokerage services, insurance premiums and
commissions and other products. These fees are recognized over the period in which the related
service is provided. Performance-based fees, which are earned based upon exceeding certain
benchmarks or other performance targets, are accrued and recognized at the end of the performance
period in which the target is met.
Mortgage fees and related income
This revenue category primarily reflects Retail Financial Services mortgage banking revenue,
including fees and income derived from mortgages originated with the intent to sell, mortgage sales
and servicing; the impact of risk management activities associated with the mortgage pipeline,
warehouse and MSRs; and revenues related to any residual interests held from mortgage
securitizations. This revenue category also includes gains and losses on sales and lower of cost or
fair value adjustments for mortgage loans held-for-sale, as well as changes in fair value for
mortgage loans originated with the intent to sell and measured at fair value under SFAS 159. For
loans measured at fair value under SFAS 159, origination costs are recognized in the associated
expense category as incurred. Costs to originate Loans held-for-sale and accounted for at the lower
of cost or fair value are deferred and recognized as a component of the gain or loss on sale. Net
interest income from mortgage loans and securities gains and losses on AFS securities used in
mortgage-related risk management activities are not included in Mortgage fees and related income.
For a further discussion of MSRs, see Note 16 on pages 121122 of the 2006 Annual Report and Note
17 on page 102 of this Form 10-Q.
Credit card income
This revenue category includes interchange income from credit and debit cards and
servicing fees earned in connection with securitization activities. Volume-related payments to
partners and expenses for rewards programs are netted against interchange income. Expenses related
to rewards programs are recorded when the rewards are earned by the customer. Other Fee revenues
are recognized as earned, except for annual fees, which are deferred with direct loan origination
costs and recognized on a straight-line basis over the 12-month period to which they pertain.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity
organizations and co-brand partners, which grant to the Firm exclusive rights to market to their
members or customers. These organizations and partners endorse the credit card programs and provide
their mailing lists to the Firm, and they may also conduct marketing activities and provide awards
under the various credit card programs. The terms of these agreements generally range from 3 to 10
years. The economic incentives the Firm pays to the endorsing organizations and partners typically
include payments based upon new account originations, charge volumes, and the cost of the endorsing
organizations or partners marketing activities and awards.
The Firm recognizes the payments made to the affinity organizations and co-brand partners based
upon new account originations as direct loan origination costs. Payments based upon charge volumes
are considered by the Firm as revenue sharing with the affinity organizations and co-brand
partners, which are deducted from Credit card income as the related revenue is earned. Payments
based upon marketing efforts undertaken by the endorsing organization or partner are expensed by
the Firm as incurred. These costs are recorded within Noninterest expense.
86
NOTE 7 INTEREST INCOME AND INTEREST EXPENSE
Details of Interest income and Interest expense were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006(b) |
|
|
2007 |
|
|
2006(b) |
|
|
Interest income(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
9,375 |
|
|
$ |
8,604 |
|
|
$ |
26,911 |
|
|
$ |
24,132 |
|
Securities |
|
|
1,332 |
|
|
|
1,084 |
|
|
|
3,965 |
|
|
|
2,919 |
|
Trading assets |
|
|
5,133 |
|
|
|
2,788 |
|
|
|
13,133 |
|
|
|
7,985 |
|
Federal funds sold and securities purchased under
resale agreements |
|
|
1,629 |
|
|
|
1,442 |
|
|
|
4,936 |
|
|
|
3,859 |
|
Securities borrowed |
|
|
1,242 |
|
|
|
887 |
|
|
|
3,498 |
|
|
|
2,457 |
|
Deposits with banks |
|
|
508 |
|
|
|
352 |
|
|
|
901 |
|
|
|
1,006 |
|
Interests in purchased receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
652 |
|
|
Total interest income |
|
|
19,219 |
|
|
|
15,157 |
|
|
|
53,344 |
|
|
|
43,010 |
|
Interest expense(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
5,638 |
|
|
|
4,471 |
|
|
|
15,975 |
|
|
|
12,140 |
|
Short-term and other liabilities |
|
|
4,301 |
|
|
|
3,794 |
|
|
|
12,463 |
|
|
|
10,279 |
|
Long-term debt |
|
|
1,789 |
|
|
|
1,370 |
|
|
|
4,722 |
|
|
|
3,964 |
|
Beneficial interests issued by consolidated VIEs |
|
|
165 |
|
|
|
143 |
|
|
|
425 |
|
|
|
1,077 |
|
|
Total interest expense |
|
|
11,893 |
|
|
|
9,778 |
|
|
|
33,585 |
|
|
|
27,460 |
|
|
Net interest income |
|
|
7,326 |
|
|
|
5,379 |
|
|
|
19,759 |
|
|
|
15,550 |
|
Provision for credit losses |
|
|
1,785 |
|
|
|
812 |
|
|
|
4,322 |
|
|
|
2,136 |
|
|
Net interest income after provision for credit losses |
|
$ |
5,541 |
|
|
$ |
4,567 |
|
|
$ |
15,437 |
|
|
$ |
13,414 |
|
|
|
|
|
(a) |
|
Interest income and Interest expense include the current period interest accruals for
financial instruments measured at fair value except for financial instruments containing
embedded derivatives that would be separately accounted for in accordance with SFAS 133 absent
the fair value election; for those instruments, all changes in value, including any interest
elements, are reported in Principal transactions revenue. |
|
(b) |
|
Prior periods have been adjusted to reflect the reclassification of certain amounts to more
appropriate interest income and interest expense lines. |
NOTE 8 PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFIT PLANS
For a discussion of JPMorgan Chases pension and other postretirement employee benefit (OPEB)
plans, see Note 7 on pages 100105 of JPMorgan Chases 2006 Annual Report. The Firm prospectively
adopted SFAS 158 as required on December 31, 2006.
The following table presents the components of net periodic benefit cost reported in the
Consolidated statements of income for the Firms U.S. and non-U.S. defined benefit pension and OPEB
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
|
OPEB plans |
|
Three months ended September 30, (in millions) |
|
2007 |
|
|
2006(b) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits earned during the period |
|
$ |
68 |
|
|
$ |
70 |
|
|
$ |
9 |
|
|
$ |
7 |
|
|
$ |
4 |
|
|
$ |
2 |
|
Interest cost on benefit obligations |
|
|
117 |
|
|
|
113 |
|
|
|
35 |
|
|
|
29 |
|
|
|
16 |
|
|
|
21 |
|
Expected return on plan assets |
|
|
(178 |
) |
|
|
(173 |
) |
|
|
(37 |
) |
|
|
(30 |
) |
|
|
(23 |
) |
|
|
(23 |
) |
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
|
|
|
|
3 |
|
|
|
14 |
|
|
|
11 |
|
|
|
|
|
|
|
9 |
|
Prior service cost (credit) |
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(5 |
) |
Curtailment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
8 |
|
|
|
15 |
|
|
|
21 |
|
|
|
17 |
|
|
|
(7 |
) |
|
|
4 |
|
Other defined benefit pension plans(a) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
15 |
|
|
NA |
|
|
NA |
|
|
Total defined benefit pension and OPEB plans |
|
|
8 |
|
|
|
15 |
|
|
|
15 |
|
|
|
32 |
|
|
|
(7 |
) |
|
|
4 |
|
Total defined contribution plans |
|
|
63 |
|
|
|
60 |
|
|
|
47 |
|
|
|
48 |
|
|
NA |
|
|
NA |
|
|
Total pension and OPEB cost included in Compensation expense |
|
$ |
71 |
|
|
$ |
75 |
|
|
$ |
62 |
|
|
$ |
80 |
|
|
$ |
(7 |
) |
|
$ |
4 |
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
|
OPEB plans |
|
Nine months ended September 30, (in millions) |
|
2007 |
|
|
2006(b) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits earned during the period |
|
$ |
198 |
|
|
$ |
211 |
|
|
$ |
27 |
|
|
$ |
21 |
|
|
$ |
7 |
|
|
$ |
6 |
|
Interest cost on benefit obligations |
|
|
351 |
|
|
|
338 |
|
|
|
106 |
|
|
|
85 |
|
|
|
56 |
|
|
|
59 |
|
Expected return on plan assets |
|
|
(534 |
) |
|
|
(519 |
) |
|
|
(112 |
) |
|
|
(89 |
) |
|
|
(69 |
) |
|
|
(70 |
) |
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
|
|
|
|
9 |
|
|
|
41 |
|
|
|
32 |
|
|
|
14 |
|
|
|
20 |
|
Prior service cost (credit) |
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(14 |
) |
Curtailment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Settlement loss |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
18 |
|
|
|
43 |
|
|
|
63 |
|
|
|
53 |
|
|
|
(4 |
) |
|
|
1 |
|
Other defined benefit pension plans(a) |
|
|
1 |
|
|
|
2 |
|
|
|
25 |
|
|
|
42 |
|
|
NA |
|
|
NA |
|
|
Total defined benefit pension and OPEB plans |
|
|
19 |
|
|
|
45 |
|
|
|
88 |
|
|
|
95 |
|
|
|
(4 |
) |
|
|
1 |
|
Total defined contribution plans |
|
|
190 |
|
|
|
180 |
|
|
|
158 |
|
|
|
137 |
|
|
NA |
|
|
NA |
|
|
Total pension and OPEB cost included in Compensation expense |
|
$ |
209 |
|
|
$ |
225 |
|
|
$ |
246 |
|
|
$ |
232 |
|
|
$ |
(4 |
) |
|
$ |
1 |
|
|
|
|
|
(a) |
|
Includes various defined benefit pension plans, which are individually immaterial. |
|
(b) |
|
Revised primarily to incorporate amounts related to the U.S. defined benefit pension plans
not subject to Title IV of the Employee Retirement Income Security Act of 1974 (e.g., Excess
Retirement Plan). |
The fair value of plan assets for the U.S. defined benefit pension and OPEB plans and material
non-U.S. defined benefit pension plans was $11.6 billion and $2.9 billion, respectively, as of
September 30, 2007, and $11.3 billion and $2.8 billion, respectively, as of December 31, 2006.
There will be no contributions in 2007 for the U.S. qualified defined benefit pension plan. The
amount of 2007 potential contributions for U.S. non-qualified defined benefit pension plans is $36
million. The amount of 2007 potential contributions for non-U.S. defined benefit pension plans is
$115 million and for OPEB plans is $3 million.
NOTE 9 EMPLOYEE STOCK-BASED INCENTIVES
For a discussion of the accounting policies and other information relating to employee stock-based
compensation, see Note 8 on pages 105107 of JPMorgan Chases 2006 Annual Report.
Effective January 1, 2006, the Firm adopted SFAS 123R and all related interpretations using the
modified prospective transition method. SFAS 123R requires that all share-based payments to
employees, including employee stock options and stock-settled stock appreciation rights (SARs),
be measured at their grant date fair values.
Upon adopting SFAS 123R, the Firm revised its accounting policies for share-based payments granted
to retirement-eligible employees. Prior to the adoption, the Firms accounting policy for
share-based payment awards granted to retirement-eligible employees was to recognize compensation
cost over the awards stated service period. Beginning with awards granted to retirement-eligible
employees in 2006, JPMorgan Chase recognized compensation expense on the grant date without giving
consideration to the impact of the postemployment restrictions. In the first quarter of 2006, the
Firm also began to accrue the estimated cost of stock awards to be granted to retirement-eligible
employees in the following year.
The Firm recognized noncash compensation expense related to its various employee stock-based
incentives of $490 million and $545 million (including the total incremental impact of adopting
SFAS 123R of $105 million) for the quarters ended September 30, 2007 and 2006, respectively, and
$1.5 billion and $1.9 billion (including the total incremental impact of adopting SFAS 123R of $670
million) in the first nine months of 2007 and 2006, respectively, in its Consolidated statements of
income. These amounts included an accrual for the estimated cost of stock awards to be granted to
retirement-eligible employees of $123 million and $137 million for the quarters ended September 30,
2007 and 2006, respectively, and $380 million and $418 million in the first nine months of 2007 and
2006, respectively.
In the first quarter 2007, the Firm granted 44 million restricted stock units (RSUs) with a grant
date fair value of $48.25 per RSU in connection with its annual incentive grant.
88
NOTE 10 NONINTEREST EXPENSE
Merger costs
Costs associated with the Bank One Merger and the transaction with The Bank of New York Company,
Inc. (The Bank of New York) are reflected in the merger costs caption of the Consolidated
statements of income. For a further discussion of the transaction with The Bank of New York, see
Note 2 on page 73 of this Form 10-Q. A summary of such costs is shown
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Expense category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
6 |
|
Occupancy |
|
|
8 |
|
|
|
5 |
|
|
|
18 |
|
|
|
19 |
|
Technology and communications and other |
|
|
51 |
|
|
|
40 |
|
|
|
149 |
|
|
|
177 |
|
Bank of New York transaction(a) |
|
|
2 |
|
|
|
3 |
|
|
|
19 |
|
|
|
3 |
|
|
Total(b) |
|
$ |
61 |
|
|
$ |
48 |
|
|
$ |
187 |
|
|
$ |
205 |
|
|
|
|
|
(a) |
|
Represents Compensation and Technology and communications and other.
|
(b) |
|
With the exception of occupancy-related write-offs, all of the costs in the table require the
expenditure of cash. |
The table below shows the change in the liability balance related to the costs associated
with the Bank One Merger.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006(b) |
|
|
Liability balance, beginning of period |
|
$ |
155 |
|
|
$ |
311 |
|
Recorded as merger costs |
|
|
168 |
|
|
|
202 |
|
Liability utilized |
|
|
(196 |
) |
|
|
(338 |
) |
|
Liability balance, end of period |
|
$ |
127 |
(a) |
|
$ |
175 |
|
|
|
|
|
(a) |
|
Excludes $23 million related to the Bank of New York transaction.
|
(b) |
|
Prior periods have been revised to reflect the current presentation. |
NOTE 11 SECURITIES
For a discussion of accounting policies relating to Securities, see Note 10 on pages 108-111 of
JPMorgan Chases 2006 Annual Report. The following table presents realized gains and losses from
AFS securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Realized gains |
|
$ |
252 |
|
|
$ |
93 |
|
|
$ |
322 |
|
|
$ |
243 |
|
Realized losses |
|
|
(15 |
) |
|
|
(53 |
) |
|
|
(306 |
) |
|
|
(821 |
) |
|
Net realized Securities gains (losses)(a) |
|
$ |
237 |
|
|
$ |
40 |
|
|
$ |
16 |
|
|
$ |
(578 |
) |
|
|
|
|
(a) |
|
Proceeds from securities
sold were within approximately 2% of amortized cost for the three and
nine months ended September 30, 2007 and 2006. |
89
The amortized cost and estimated fair value of AFS and held-to-maturity securities were as
follows for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
Fair |
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
Fair |
|
(in millions) |
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
$ |
1,350 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
1,345 |
|
|
$ |
2,398 |
|
|
$ |
|
|
|
$ |
23 |
|
|
$ |
2,375 |
|
Mortgage-backed securities |
|
|
9 |
|
|
|
1 |
|
|
|
|
|
|
|
10 |
|
|
|
32 |
|
|
|
2 |
|
|
|
1 |
|
|
|
33 |
|
Agency obligations |
|
|
75 |
|
|
|
7 |
|
|
|
|
|
|
|
82 |
|
|
|
78 |
|
|
|
8 |
|
|
|
|
|
|
|
86 |
|
U.S. government-sponsored enterprise
obligations |
|
|
75,016 |
|
|
|
133 |
|
|
|
580 |
|
|
|
74,569 |
|
|
|
75,434 |
|
|
|
334 |
|
|
|
460 |
|
|
|
75,308 |
|
Obligations of state and political
subdivisions |
|
|
508 |
|
|
|
2 |
|
|
|
4 |
|
|
|
506 |
|
|
|
637 |
|
|
|
17 |
|
|
|
4 |
|
|
|
650 |
|
Debt securities issued by non-U.S.
governments |
|
|
8,359 |
|
|
|
10 |
|
|
|
38 |
|
|
|
8,331 |
|
|
|
6,150 |
|
|
|
7 |
|
|
|
52 |
|
|
|
6,105 |
|
Corporate debt securities |
|
|
3,254 |
|
|
|
1 |
|
|
|
5 |
|
|
|
3,250 |
|
|
|
611 |
|
|
|
1 |
|
|
|
3 |
|
|
|
609 |
|
Equity securities |
|
|
4,188 |
|
|
|
56 |
|
|
|
3 |
|
|
|
4,241 |
|
|
|
3,689 |
|
|
|
125 |
|
|
|
1 |
|
|
|
3,813 |
|
Other(a) |
|
|
5,297 |
|
|
|
42 |
|
|
|
14 |
|
|
|
5,325 |
|
|
|
2,890 |
|
|
|
50 |
|
|
|
2 |
|
|
|
2,938 |
|
|
Total available-for-sale securities |
|
$ |
98,056 |
|
|
$ |
252 |
|
|
$ |
649 |
|
|
$ |
97,659 |
|
|
$ |
91,919 |
|
|
$ |
544 |
|
|
$ |
546 |
|
|
$ |
91,917 |
|
|
Held-to-maturity securities(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
47 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
48 |
|
|
$ |
58 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
60 |
|
|
|
|
|
(a) |
|
Primarily includes negotiable certificates of deposit. |
(b) |
|
Consists primarily of mortgage-backed securities issued by U.S. government-sponsored
entities. |
Included in the $649 million of gross unrealized losses on AFS securities at September 30,
2007, was $303 million of unrealized losses that have existed for a period greater than 12 months.
These securities are predominately rated AAA and the unrealized losses are primarily due to overall
increases in market interest rates and not concerns regarding the underlying credit of the issuers.
The majority of the securities with unrealized losses aged greater than 12 months are obligations
of U.S. government-sponsored enterprises and have a fair value at September 30, 2007, that is
within 4% of their amortized cost basis.
90
NOTE 12 SECURITIES FINANCING ACTIVITIES
For a discussion of accounting policies relating to securities financing activities, see Note 11 on
page 111 of JPMorgan Chases 2006 Annual Report.
Resale agreements and repurchase agreements are generally treated as collateralized financing
transactions carried on the Consolidated balance sheets at the amounts the securities will be
subsequently sold or repurchased, plus accrued interest. On January 1, 2007, pursuant to the
adoption of SFAS 159, the Firm elected fair value measurement for certain resale and repurchase
agreements. For a further discussion of SFAS 159, see Note 4 on pages 8083 of this Form 10-Q.
These agreements continue to be reported within Securities purchased under resale agreements and
Securities sold under repurchase agreements on the Consolidated balance sheets. Generally for
agreements carried at fair value, current period interest accruals are recorded within Interest
income and Interest expense with changes in fair value reported in Principal transactions revenue.
However, for financial instruments containing embedded derivatives that would be separately
accounted for in accordance with SFAS 133, all changes in fair value, including any interest
elements, are reported in Principal transactions revenue. Where appropriate, resale and repurchase
agreements with the same counterparty are reported on a net basis in accordance with FIN 41.
The following table details the components of securities financing activities at each of the dates
indicated.
|
|
|
|
|
|
|
|
|
(in millions) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Securities purchased under resale agreements(a) |
|
$ |
133,237 |
|
|
$ |
122,479 |
|
Securities borrowed |
|
|
84,697 |
|
|
|
73,688 |
|
|
Securities sold under repurchase agreements(b) |
|
$ |
153,665 |
|
|
$ |
143,253 |
|
Securities loaned |
|
|
11,760 |
|
|
|
8,637 |
|
|
|
|
|
(a) |
|
Includes resale agreements of $17.6 billion accounted for at fair value at September 30,
2007. |
(b) |
|
Includes repurchase agreements of $6.4 billion accounted for at fair value at September 30,
2007. |
JPMorgan Chase pledges certain financial instruments it owns to collateralize repurchase
agreements and other securities financings. Pledged securities that can be sold or repledged by the
secured party are identified as financial instruments owned (pledged to various parties) on the
Consolidated balance sheets.
At September 30, 2007, the Firm had received securities as collateral that could be repledged,
delivered or otherwise used with a fair value of approximately $342.0 billion. This collateral was
generally obtained under resale or securities borrowing agreements. Of these securities,
approximately $321.4 billion were repledged, delivered or otherwise used, generally as collateral
under repurchase agreements, securities lending agreements or to cover short sales.
NOTE 13 LOANS
The accounting for a loan may differ based upon the type of loan and/or its use in an investing or
trading strategy. The measurement framework for Loans in the consolidated financial statements is
one of the following:
|
|
At the principal amount outstanding, net of the Allowance for loan losses, unearned income
and any net deferred loan fees; |
|
|
|
At the lower of cost or fair value, with valuation changes recorded in Noninterest revenue;
or |
|
|
|
At fair value, with changes in fair value recorded in Noninterest revenue. |
For a detailed discussion of accounting policies relating to Loans, see Note 12 on pages 112113
of JPMorgan Chases 2006 Annual Report. See Note 4 on pages 8083 of this Form 10-Q for further
information on the Firms elections of fair value accounting under SFAS 159. See Note 5 on pages
8385 of this Form 10-Q for further information on loans carried at fair value and classified as
trading assets.
Interest income is recognized using the interest method, or on a basis approximating a level rate
or return over the term of the loan.
Loans within the held-for-investment portfolio that management decides to sell are transferred to
the held-for-sale portfolio. Transfers to held-for-sale are recorded at the lower of cost or fair
value on the date of transfer. Losses attributed to credit losses are charged off to the Allowance
for loan losses and losses due to interest rates, or exchange rates, are recognized in Noninterest
revenue.
91
The composition of the loan portfolio at each of the dates indicated was as follows.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
U.S. wholesale loans: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
89,608 |
|
|
$ |
77,788 |
|
Real estate |
|
|
13,964 |
|
|
|
14,237 |
|
Financial institutions |
|
|
16,310 |
|
|
|
14,103 |
|
Lease financing receivables |
|
|
2,379 |
|
|
|
2,608 |
|
Other |
|
|
4,082 |
|
|
|
9,950 |
|
|
Total U.S. wholesale loans |
|
|
126,343 |
|
|
|
118,686 |
|
|
Non-U.S. wholesale loans: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
52,224 |
|
|
|
43,428 |
|
Real estate |
|
|
2,679 |
|
|
|
1,146 |
|
Financial institutions |
|
|
15,109 |
|
|
|
19,163 |
|
Lease financing receivables |
|
|
1,248 |
|
|
|
1,174 |
|
Other |
|
|
125 |
|
|
|
145 |
|
|
Total non-U.S. wholesale loans |
|
|
71,385 |
|
|
|
65,056 |
|
|
Total wholesale loans:(a) |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
141,832 |
|
|
|
121,216 |
|
Real estate(b) |
|
|
16,643 |
|
|
|
15,383 |
|
Financial institutions |
|
|
31,419 |
|
|
|
33,266 |
|
Lease financing receivables |
|
|
3,627 |
|
|
|
3,782 |
|
Other |
|
|
4,207 |
|
|
|
10,095 |
|
|
Total wholesale loans |
|
|
197,728 |
|
|
|
183,742 |
|
|
Total consumer loans:(c) |
|
|
|
|
|
|
|
|
Home equity |
|
|
93,026 |
|
|
|
85,730 |
|
Mortgage |
|
|
47,730 |
|
|
|
59,668 |
|
Auto loans and leases |
|
|
40,871 |
|
|
|
41,009 |
|
Credit card receivables(d) |
|
|
79,409 |
|
|
|
85,881 |
|
All other loans |
|
|
27,556 |
|
|
|
27,097 |
|
|
Total consumer loans |
|
|
288,592 |
|
|
|
299,385 |
|
|
Total loans(e)(f) |
|
$ |
486,320 |
|
|
$ |
483,127 |
|
|
Memo: |
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
$ |
18,363 |
|
|
$ |
55,251 |
|
Loans at fair value |
|
|
6,128 |
|
|
NA |
|
|
Total loans at fair value and loans held-for-sale |
|
$ |
24,491 |
|
|
$ |
55,251 |
|
|
|
|
|
(a) |
|
Includes the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset
Management. |
(b) |
|
Represents credits extended for real estaterelated purposes to borrowers who are primarily
in the real estate development or investment businesses and for which the primary repayment is
from the sale, lease, management, operations or refinancing of the property. |
(c) |
|
Includes Retail Financial Services, Card Services and the Corporate segment.
|
(d) |
|
Includes billed finance charges and fees net of an allowance for uncollectible amounts. |
(e) |
|
Loans (other than those for which the SFAS 159 fair value option has been elected) are
presented net of unearned income and net deferred loan fees of $1.0 billion and $1.3
billion at September 30, 2007, and December 31, 2006, respectively. |
(f) |
|
As a result of the adoption of SFAS 159, $23.3 billion of loans were transferred from loans
held-for-sale to Trading assets and therefore, such loans are no longer included in loans at
September 30, 2007. |
The following table reflects information about the Firms loan sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006(b) |
|
|
2007 |
|
|
2006(b) |
|
|
Net (losses) gains on sales of
loans (including lower of cost
or fair
value adjustments)(a) |
|
$ |
(403 |
) |
|
$ |
275 |
|
|
$ |
(40 |
) |
|
$ |
504 |
|
|
|
|
|
(a) |
|
Excludes sales related to loans accounted for at fair value. |
|
(b) |
|
Prior periods have been revised to reflect the current presentation. |
92
Impaired loans
JPMorgan Chase accounts for and discloses nonaccrual loans as impaired loans. The following are
excluded from impaired loans: small-balance, homogeneous consumer loans; loans carried at fair
value or the lower of cost or fair value; and leases.
The table below sets forth information about JPMorgan Chases impaired loans (other than those
included in Trading assets). The Firm primarily uses the discounted cash flow method for valuing
impaired loans.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Impaired loans with an allowance |
|
$ |
650 |
|
|
$ |
623 |
|
Impaired loans without an allowance(a) |
|
|
16 |
|
|
|
66 |
|
|
Total impaired loans |
|
$ |
666 |
|
|
$ |
689 |
|
Allowance for impaired loans under SFAS 114(b) |
|
|
160 |
|
|
|
153 |
|
|
|
|
|
(a) |
|
When the discounted cash flows, collateral value or market price equals or exceeds the
carrying value of the loan, then the loan does not require an allowance under SFAS 114. |
(b) |
|
The allowance for impaired loans under SFAS 114 is included in JPMorgan Chases Allowance for
loan losses. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Average balance of impaired loans during the period |
|
$ |
674 |
|
|
$ |
1,008 |
|
|
$ |
622 |
|
|
$ |
1,036 |
|
Interest income recognized on impaired loans during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14 ALLOWANCE FOR CREDIT LOSSES
For a further discussion of the Allowance for credit losses and the related accounting policies,
see Note 13 on pages 113114 of JPMorgan Chases 2006 Annual Report. The table below summarizes
the changes in the Allowance for loan losses.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Allowance for loan losses at January 1 |
|
$ |
7,279 |
|
|
$ |
7,090 |
|
Cumulative effect of change in accounting principles(a) |
|
|
(56 |
) |
|
|
|
|
|
Allowance for loan losses at January 1, adjusted |
|
|
7,223 |
|
|
|
7,090 |
|
Gross charge-offs |
|
|
(3,731 |
) |
|
|
(2,741 |
) |
Gross recoveries |
|
|
622 |
|
|
|
629 |
|
|
Net charge-offs |
|
|
(3,109 |
) |
|
|
(2,112 |
) |
Provision for loan losses |
|
|
3,988 |
|
|
|
2,068 |
|
Other |
|
|
11 |
|
|
|
10 |
|
|
Allowance for loan losses at September 30 |
|
$ |
8,113 |
|
|
$ |
7,056 |
|
|
Components: |
|
|
|
|
|
|
|
|
Asset specific(b) |
|
$ |
123 |
|
|
$ |
162 |
|
Formula-based(b) |
|
|
7,990 |
|
|
|
6,894 |
|
|
Total Allowance for loan losses |
|
$ |
8,113 |
|
|
$ |
7,056 |
|
|
|
|
|
(a) |
|
Reflects the effect of the adoption of SFAS 159 at January 1, 2007. For a further
discussion of SFAS 159, see Note 4 on pages 8083 of this Form 10-Q. |
(b) |
|
Prior periods have been revised to reflect the current presentation. |
93
The table below summarizes the changes in the Allowance for lending-related commitments.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Allowance for lending-related commitments at January 1 |
|
$ |
524 |
|
|
$ |
400 |
|
Provision for lending-related commitments |
|
|
334 |
|
|
|
68 |
|
|
Allowance for lending-related commitments at September 30(a) |
|
$ |
858 |
|
|
$ |
468 |
|
|
|
|
|
(a) |
|
At September 30, 2007, includes $27 million of asset-specific and $831 million of
formula-based allowance. At September 30, 2006, includes $40 million of asset-specific and
$428 million of formula-based allowance. |
NOTE 15 LOAN SECURITIZATIONS
For a discussion of the accounting policies relating to loan securitizations, see Note 14 on pages
114118 of JPMorgan Chases 2006 Annual Report. JPMorgan Chase securitizes and sells a variety of
its consumer and wholesale loans, including warehouse loans that are classified in Trading assets.
Consumer activities include securitizations of residential real estate, credit card, automobile and
education loans that are originated or purchased by RFS and Card Services (CS). Wholesale
activities include securitizations of purchased residential real estate loans and commercial loans
(primarily real estaterelated) originated by IB.
JPMorgan Chasesponsored securitizations utilize SPEs as part of the securitization process. These
SPEs are structured to meet the definition of a QSPE (as discussed in Note 1 on pages 7273 of
this Form 10-Q); accordingly, the assets and liabilities of securitization-related QSPEs are not
reflected in the Firms Consolidated balance sheets (except for retained interests, as described
below) but are included on the balance sheet of the QSPE purchasing the assets. Assets held by
JPMorgan Chase-sponsored securitization-related QSPEs as of September 30, 2007, and December 31,
2006, were as follows:
|
|
|
|
|
|
|
|
|
(in billions) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Consumer activities |
|
|
|
|
|
|
|
|
Credit card |
|
$ |
90.3 |
|
|
$ |
86.4 |
|
Auto |
|
|
2.7 |
|
|
|
4.9 |
|
Residential mortgage |
|
|
62.0 |
|
|
|
40.7 |
|
Other loans(a) |
|
|
1.2 |
|
|
|
|
|
Wholesale activities |
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
35.1 |
|
|
|
43.8 |
|
Commercial and other(b)(c) |
|
|
104.6 |
|
|
|
87.1 |
|
|
Total |
|
$ |
295.9 |
|
|
$ |
262.9 |
|
|
|
|
|
(a) |
|
Includes education loans securitized in the third quarter of 2007.
|
(b) |
|
Cosponsored securitizations include non-JPMorgan Chase originated assets. |
(c) |
|
Commercial and other consists of commercial loans (primarily real estate) and non-mortgage
consumer receivables purchased from third parties. |
94
The following table summarizes new securitization transactions that were completed during the
three and nine months ended September 30, 2007 and 2006; the resulting gains or losses arising from
such securitizations; certain cash flows received from such securitizations; and the key economic
assumptions used in measuring the retained interests (if any) other than residential MSRs (for a
discussion of residential MSRs, see Note 17 on page 102 of this Form 10-Q) as of the dates of such
sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Consumer activities |
|
|
Wholesale activities |
|
|
Consumer activities |
|
|
Wholesale activities |
|
(in millions, except |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rates and where |
|
Credit |
|
|
|
|
|
|
Residential |
|
|
Other |
|
|
Residential |
|
|
Commercial |
|
|
Credit |
|
|
|
|
|
|
Residential |
|
|
Residential |
|
|
Commercial |
|
otherwise noted) |
|
card |
|
|
Auto |
|
|
mortgage |
|
|
loans |
|
|
mortgage |
|
|
and other |
|
|
card |
|
|
Auto |
|
|
mortgage |
|
|
mortgage |
|
|
and other |
|
|
Principal securitized |
|
$ |
3,455 |
|
|
$ |
|
|
|
$ |
3,787 |
|
|
$ |
1,168 |
|
|
$ |
2,850 |
|
|
$ |
3,868 |
|
|
$ |
1,100 |
|
|
$ |
1,182 |
|
|
$ |
4,212 |
|
|
$ |
8,352 |
|
|
$ |
3,147 |
|
Pretax gains
(losses) |
|
|
29 |
|
|
|
|
|
|
|
2 |
(a) |
|
|
51 |
|
|
|
(5 |
)(a) |
|
|
|
(a) |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
33 |
|
|
|
24 |
|
Cash flow
information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
securitizations |
|
$ |
3,455 |
|
|
$ |
|
|
|
$ |
3,762 |
|
|
$ |
1,168 |
|
|
$ |
2,775 |
|
|
$ |
3,987 |
|
|
$ |
1,100 |
|
|
$ |
912 |
|
|
$ |
4,206 |
|
|
$ |
8,424 |
|
|
$ |
3,253 |
|
Servicing fees
collected |
|
|
49 |
|
|
|
|
|
|
|
16 |
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
24 |
|
|
|
2 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Other cash flows
received |
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
collections
reinvested in
revolving
securitizations |
|
|
37,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key assumptions
(rates per annum): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment rate(b) |
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
1.0-8.0 |
% |
|
|
24.5-30.5 |
% |
|
|
|
|
|
|
22.2 |
% |
|
|
1.4 |
% |
|
|
23.8-24.6 |
% |
|
|
27.0-45.0 |
% |
|
|
1.8-8.3 |
% |
|
|
PPR |
|
|
|
|
|
|
|
|
|
|
CPR |
|
|
CPR |
|
|
|
|
|
|
PPR |
|
|
ABS |
|
|
CPR |
|
|
CPR |
|
|
CPR |
|
|
Weighted-average
life (in years) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
9.1 |
|
|
|
1.3-5.2 |
|
|
|
|
|
|
|
0.4 |
|
|
|
1.9 |
|
|
|
3.6 |
|
|
|
1.5-2.8 |
|
|
|
1.5-2.2 |
|
Expected credit
losses(c) |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8-2.0 |
% |
|
|
|
|
|
|
4.1 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
0.5-2.1 |
% |
|
|
0.1-9.0 |
% |
Discount rate |
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
9.0 |
% |
|
|
6.3-26.7 |
% |
|
|
|
|
|
|
12.0 |
% |
|
|
7.6 |
% |
|
|
8.4-11.2 |
% |
|
|
15.1-20.0 |
% |
|
|
1.3-5.2 |
% |
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Consumer activities |
|
|
Wholesale activities |
|
|
Consumer activities |
|
|
Wholesale activities |
|
(in millions, except |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rates and where |
|
Credit |
|
|
|
|
|
|
Residential |
|
|
Other |
|
|
Residential |
|
|
Commercial |
|
|
Credit |
|
|
|
|
|
|
Residential |
|
|
Residential |
|
|
Commercial |
|
otherwise noted) |
|
card |
|
|
Auto |
|
|
mortgage |
|
|
loans |
|
|
mortgage |
|
|
and other |
|
|
card |
|
|
Auto |
|
|
mortgage |
|
|
mortgage |
|
|
and other |
|
|
Principal securitized |
|
$ |
14,160 |
|
|
$ |
|
|
|
$ |
27,712 |
|
|
$ |
1,168 |
|
|
$ |
8,754 |
|
|
$ |
11,735 |
|
|
$ |
6,800 |
|
|
$ |
2,405 |
|
|
$ |
11,305 |
|
|
$ |
24,061 |
|
|
$ |
8,435 |
|
Pretax gains
(losses) |
|
|
116 |
|
|
|
|
|
|
|
71 |
(a) |
|
|
51 |
|
|
|
2 |
(a) |
|
|
|
(a) |
|
|
45 |
|
|
|
|
|
|
|
8 |
|
|
|
54 |
|
|
|
87 |
|
Cash flow
information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
securitizations |
|
$ |
14,160 |
|
|
$ |
|
|
|
$ |
27,604 |
|
|
$ |
1,168 |
|
|
$ |
8,621 |
|
|
$ |
11,958 |
|
|
$ |
6,800 |
|
|
$ |
1,745 |
|
|
$ |
11,225 |
|
|
$ |
24,236 |
|
|
$ |
8,591 |
|
Servicing fees
collected |
|
|
100 |
|
|
|
|
|
|
|
34 |
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
|
|
56 |
|
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
Other cash flows
received |
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
collections
reinvested in
revolving
securitizations |
|
|
109,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key assumptions
(rates per annum): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment rate(b) |
|
|
20.4 |
% |
|
|
|
|
|
|
14.8-24.2 |
% |
|
|
1.0-8.0 |
% |
|
|
13.7-48.0 |
% |
|
|
0.0-8.0 |
% |
|
|
22.2 |
% |
|
|
1.4 |
% |
|
|
23.8-24.6 |
% |
|
|
27.0-45.0 |
% |
|
|
1.8-8.3 |
% |
|
|
PPR |
|
|
|
|
|
|
CPR |
|
|
CPR |
|
|
CPR |
|
|
CPR |
|
|
PPR |
|
|
ABS |
|
|
CPR |
|
|
CPR |
|
|
CPR |
|
|
Weighted-average
life (in years) |
|
|
0.4 |
|
|
|
|
|
|
|
3.2-4.0 |
|
|
|
9.1 |
|
|
|
1.3-5.4 |
|
|
|
1.3-10.2 |
|
|
|
0.4 |
|
|
|
1.7 |
|
|
|
3.6 |
|
|
|
1.5-4.0 |
|
|
|
1.5-2.2 |
|
Expected credit
losses(c) |
|
|
3.5-3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6-2.2 |
% |
|
|
0.0-1.0 |
% |
|
|
3.3-4.2 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
0.5-3.3 |
% |
|
|
0.1-9.0 |
% |
Discount rate |
|
|
12.0 |
% |
|
|
|
|
|
|
5.8-13.8 |
% |
|
|
9.0 |
% |
|
|
6.3-26.7 |
% |
|
|
10.0-14.0 |
% |
|
|
12.0 |
% |
|
|
7.7 |
% |
|
|
8.4-11.2 |
% |
|
|
14.5-26.2 |
% |
|
|
1.3-5.2 |
% |
|
|
|
|
(a) |
|
As of January 1, 2007, the Firm adopted the fair value election for the IB warehouse and
a portion of the RFS mortgage warehouse. The carrying value of these loans accounted for at
fair value approximates the proceeds received from securitization. |
(b) |
|
PPR: principal payment rate; CPR: constant prepayment rate; ABS: absolute prepayment speed. |
(c) |
|
Expected credit losses for prime residential mortgage, other consumer and certain wholesale
securitizations are minimal and are incorporated into other assumptions. |
In addition to the amounts reported for securitization activity on the previous page, the Firm
sold residential mortgage loans totaling $21.5 billion and $13.3 billion during the three months
ended September 30, 2007 and 2006, respectively, primarily for securitization by GNMA, FNMA and
Freddie Mac. These sales resulted in pretax (losses) gains of $(20) million and $53 million,
respectively. During the first nine months of 2007 and 2006, JPMorgan Chase sold residential
mortgage loans totaling $57.3 billion and $40.4 billion, respectively, primarily for securitization
by GNMA, FNMA and Freddie Mac. These sales resulted in pretax gains of $67 million and $223
million, respectively.
Retained securitization interests
At both September 30, 2007, and December 31, 2006, the Firm had, with respect to its credit card
master trusts, $17.7 billion and $19.3 billion, respectively, related to undivided interests, and
$3.0 billion and $2.5 billion, respectively, related to subordinated interests in accrued interest
and fees on the securitized receivables, net of an allowance for uncollectible amounts. Credit card
securitization trusts require the Firm to maintain a minimum undivided interest of 4% to 12% of the
principal receivables in the trusts. The Firm maintained an average undivided interest in principal
receivables in the trusts of approximately 18% for the nine months ended September 30, 2007, and
21% for the year ended December 31, 2006.
The Firm also maintains escrow accounts up to predetermined limits for some credit card, automobile
and education securitizations to cover the unlikely event of deficiencies in cash flows owed to
investors. The amounts available in such escrow accounts are recorded in Other assets and, as of
September 30, 2007, amounted to $108 million, $29 million and $3 million for credit card,
automobile and education securitizations, respectively; as of December 31, 2006, these amounts were
$153 million and $56 million for credit card and automobile securitizations, respectively.
96
The following table summarizes other retained securitization interests, which are primarily
subordinated or residual interests, and are carried at fair value on the Firms Consolidated
balance sheets.
|
|
|
|
|
|
|
|
|
(in millions) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Consumer activities |
|
|
|
|
|
|
|
|
Credit card(a)(b) |
|
$ |
867 |
|
|
$ |
833 |
|
Auto(a)(c) |
|
|
100 |
|
|
|
168 |
|
Residential mortgage(a) |
|
|
155 |
|
|
|
155 |
|
Other loans |
|
|
54 |
|
|
|
|
|
Wholesale activities(d)(e) |
|
|
|
|
|
|
|
|
Residential mortgages |
|
|
724 |
|
|
|
1,032 |
|
Commercial and other |
|
|
46 |
|
|
|
117 |
|
|
Total(f) |
|
$ |
1,946 |
|
|
$ |
2,305 |
|
|
|
|
|
(a) |
|
Pretax unrealized gains/(losses) recorded in Stockholders equity that relate to retained
securitization interests on consumer activities totaled $(7) million and $3 million for credit
card; $3 million and $4 million for automobile and $41 million and $51 million for residential
mortgage at September 30, 2007, and December 31, 2006, respectively. |
(b) |
|
The credit card retained interest amount noted above includes subordinated securities
retained by the Firm totaling $291 million and $301 million at September 30, 2007, and
December 31, 2006, respectively that are classified as AFS securities. The securities are
valued using quoted market prices and therefore are not included in the key economic
assumptions and sensitivities table that follows. |
(c) |
|
In addition to the automobile retained interest amounts noted above, the Firm did not have
any retained senior securities at September 30, 2007, but did have $188 million at December
31, 2006, that are classified as AFS securities. These securities are valued using quoted
market prices and therefore are not included in the key economic assumption and sensitivities
table that follows. |
(d) |
|
In addition to the wholesale retained interest amounts noted above, the Firm also retained
subordinated securities totaling $25 million at September 30, 2007, and $23 million at
December 31, 2006, respectively, predominately from resecuritizations activities that are
classified as Trading assets. These securities are valued using quoted market prices and
therefore are not included in the key assumptions and sensitivities table that follows. |
(e) |
|
Some consumer activities securitization interests are retained by the Investment Bank and
reported under Wholesale activities. |
(f) |
|
In addition to the retained interests described above, the Firm also held investment-grade
interests of $9.9 billion and $3.1 billion at September 30, 2007, and December 31, 2006,
respectively, that the Firm expected to sell to investors in the normal course of its
underwriting activity or that were purchased in connection with secondary market-making
activities. |
97
The table below outlines the key economic assumptions used to determine the fair value of the
Firms retained interests other than residential MSRs (for a discussion of residential MSRs, see
Note 17 on page 102 of this Form 10-Q) in its securitizations at September 30, 2007, and December
31, 2006, respectively; and it outlines the sensitivities of those fair values to immediate 10% and
20% adverse changes in those assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer activities |
|
|
Wholesale activities |
|
September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except rates and |
|
|
|
|
|
|
|
|
|
Residential |
|
|
Other |
|
|
Residential |
|
|
Commercial |
|
where otherwise noted) |
|
Credit card |
|
|
Auto |
|
|
mortgage |
|
|
loans |
|
|
mortgage |
|
|
and other |
|
|
Weighted-average life (in years) |
|
|
0.4-0.5 |
|
|
|
0.9 |
|
|
|
1.2-3.6 |
|
|
|
9.1 |
|
|
|
2.9-28.4 |
|
|
|
0.4-5.3 |
|
|
Prepayment rate(a) |
|
|
16.4-20.4 |
% |
|
|
1.3 |
% |
|
|
19.4-38.8 |
% |
|
|
1.0-8.0 |
% |
|
|
22.0-30.2 |
% |
|
|
10.5-50.0 |
%(d) |
|
|
PPR |
|
|
ABS |
|
|
CPR |
|
|
CPR |
|
|
CPR |
|
|
CPR |
|
Impact of 10% adverse change |
|
$ |
(56 |
) |
|
$ |
(1 |
) |
|
$ |
(5 |
) |
|
$ |
(1 |
) |
|
$ |
(75 |
) |
|
$ |
(1 |
) |
Impact of 20% adverse change |
|
|
(113 |
) |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
(2 |
) |
|
|
(137 |
) |
|
|
(2 |
) |
|
Loss assumption(b) |
|
|
3.3-4.2 |
% |
|
|
0.6 |
% |
|
|
0.0-1.2 |
% |
|
|
|
|
|
|
0.6-7.1 |
% |
|
|
0.8 |
% |
Impact of 10% adverse change |
|
$ |
(96 |
) |
|
$ |
(2 |
) |
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
(92 |
) |
|
$ |
(1 |
) |
Impact of 20% adverse change |
|
|
(191 |
) |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(169 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
12.0 |
% |
|
|
7.3 |
% |
|
|
13.4-30.0 |
%(c) |
|
|
9.0 |
% |
|
|
15.5-21.0 |
% |
|
|
1.0-15.7 |
% |
Impact of 10% adverse change |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
(4 |
) |
|
$ |
(2 |
) |
|
$ |
(39 |
) |
|
$ |
|
|
Impact of 20% adverse change |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(75 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer activities |
|
|
Wholesale activities |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except rates and |
|
|
|
|
|
|
|
|
|
Residential |
|
|
Residential |
|
|
Commercial |
|
where otherwise noted) |
|
Credit card |
|
|
Auto |
|
|
mortgage |
|
|
mortgage |
|
|
and other |
|
|
Weighted-average life (in years) |
|
|
0.4-0.5 |
|
|
|
1.1 |
|
|
|
0.2-3.4 |
|
|
|
1.9-2.5 |
|
|
|
0.2-5.9 |
|
|
Prepayment rate(a) |
|
|
17.5-20.4 |
% |
|
|
1.4 |
% |
|
|
19.3-41.8 |
% |
|
|
10.0-42.9 |
% |
|
|
0.0-50.0 |
%(d) |
|
|
PPR |
|
|
ABS |
|
|
CPR |
|
|
CPR |
|
|
CPR |
|
Impact of 10% adverse change |
|
$ |
(52 |
) |
|
$ |
(1 |
) |
|
$ |
(4 |
) |
|
$ |
(44 |
) |
|
$ |
(1 |
) |
Impact of 20% adverse change |
|
|
(104 |
) |
|
|
(3 |
) |
|
|
(7 |
) |
|
|
(62 |
) |
|
|
(2 |
) |
|
Loss assumption |
|
|
3.5-4.1 |
% |
|
|
0.7 |
% |
|
|
0.0-5.1 |
%(b) |
|
|
0.1-2.2 |
% |
|
|
0.0-1.3 |
% |
Impact of 10% adverse change |
|
$ |
(87 |
) |
|
$ |
(4 |
) |
|
$ |
(4 |
) |
|
$ |
(45 |
) |
|
$ |
(1 |
) |
Impact of 20% adverse change |
|
|
(175 |
) |
|
|
(7 |
) |
|
|
(8 |
) |
|
|
(89 |
) |
|
|
(1 |
) |
Discount rate |
|
|
12.0 |
% |
|
|
7.6 |
% |
|
|
8.4-30.0 |
%(c) |
|
|
16.0-20.0 |
% |
|
|
0.5-14.0 |
% |
Impact of 10% adverse change |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
(25 |
) |
|
$ |
(1 |
) |
Impact of 20% adverse change |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(7 |
) |
|
|
(48 |
) |
|
|
(2 |
) |
|
|
|
|
(a) |
|
PPR: principal payment rate; ABS: absolute prepayment speed; CPR: Constant prepayment rate. |
(b) |
|
Expected credit losses for prime residential mortgage and other consumer are minimal and are
incorporated into other assumptions. |
(c) |
|
Residual interests retained from subprime mortgage Net Interest Margin (NIM)
securitizations are valued using a 30% discount rate. |
(d) |
|
Prepayment risk on certain wholesale retained interests for commercial and other are
minimal and are incorporated into other assumptions. |
The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based
upon a 10% or 20% variation in assumptions generally cannot be extrapolated easily because the
relationship of the change in the assumptions to the change in fair value may not be linear. Also,
in the table, the effect that a change in a particular assumption may have on the fair value is
calculated without changing any other assumption. In reality, changes in one factor may result in
changes in another, which might counteract or magnify the sensitivities.
98
The table below presents information about delinquencies, net charge-offs (recoveries) and
components of reported and securitized financial assets at September 30, 2007, and December 31,
2006 (see footnote (c) below).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual and 90 days |
|
|
|
|
|
|
Total Loans |
|
or more past due(d) |
|
Net loan charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended Sept. 30, |
|
Nine months ended Sept. 30, |
(in millions) |
|
Sept. 30, 2007 |
|
Dec. 31, 2006 |
|
Sept. 30, 2007 |
|
Dec. 31, 2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Home equity |
|
$ |
93,026 |
|
|
$ |
85,730 |
|
|
$ |
576 |
|
|
$ |
454 |
|
|
$ |
150 |
|
|
$ |
29 |
|
|
$ |
316 |
|
|
$ |
92 |
|
Mortgage |
|
|
47,730 |
|
|
|
59,668 |
|
|
|
1,224 |
|
|
|
769 |
|
|
|
49 |
|
|
|
14 |
|
|
|
102 |
|
|
|
35 |
|
Auto loans and leases |
|
|
40,871 |
|
|
|
41,009 |
|
|
|
92 |
|
|
|
132 |
|
|
|
99 |
|
|
|
65 |
|
|
|
221 |
|
|
|
161 |
|
Credit card receivables |
|
|
79,409 |
|
|
|
85,881 |
|
|
|
1,305 |
|
|
|
1,344 |
|
|
|
785 |
|
|
|
673 |
|
|
|
2,247 |
|
|
|
1,800 |
|
All other loans |
|
|
27,556 |
|
|
|
27,097 |
|
|
|
336 |
|
|
|
322 |
|
|
|
56 |
|
|
|
20 |
|
|
|
176 |
|
|
|
74 |
|
|
Total consumer loans |
|
|
288,592 |
|
|
|
299,385 |
|
|
|
3,533 |
(e) |
|
|
3,021 |
(e) |
|
|
1,139 |
|
|
|
801 |
|
|
|
3,062 |
|
|
|
2,162 |
|
Total wholesale loans |
|
|
197,728 |
|
|
|
183,742 |
|
|
|
464 |
|
|
|
420 |
|
|
|
82 |
|
|
|
(11 |
) |
|
|
47 |
|
|
|
(50 |
) |
|
Total loans reported |
|
|
486,320 |
|
|
|
483,127 |
|
|
|
3,997 |
|
|
|
3,441 |
|
|
|
1,221 |
|
|
|
790 |
|
|
|
3,109 |
|
|
|
2,112 |
|
|
Securitized consumer loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage(a) |
|
|
10,599 |
|
|
|
7,995 |
|
|
|
193 |
|
|
|
191 |
|
|
|
10 |
|
|
|
12 |
|
|
|
35 |
|
|
|
43 |
|
Auto |
|
|
2,688 |
|
|
|
4,878 |
|
|
|
6 |
|
|
|
10 |
|
|
|
3 |
|
|
|
4 |
|
|
|
10 |
|
|
|
11 |
|
Credit card |
|
|
69,643 |
|
|
|
66,950 |
|
|
|
935 |
|
|
|
962 |
|
|
|
578 |
|
|
|
607 |
|
|
|
1,761 |
|
|
|
1,617 |
|
Other loans |
|
|
1,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
loans securitized |
|
|
84,088 |
|
|
|
79,823 |
|
|
|
1,134 |
|
|
|
1,163 |
|
|
|
591 |
|
|
|
623 |
|
|
|
1,806 |
|
|
|
1,671 |
|
Securitized wholesale
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage(a) |
|
|
22,000 |
|
|
|
27,275 |
|
|
|
2,303 |
|
|
|
544 |
|
|
|
117 |
|
|
|
3 |
|
|
|
228 |
|
|
|
3 |
|
Commercial and other |
|
|
3,468 |
|
|
|
13,756 |
|
|
|
49 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
Total securitized
wholesale activities |
|
|
25,468 |
|
|
|
41,031 |
|
|
|
2,352 |
|
|
|
550 |
|
|
|
119 |
|
|
|
3 |
|
|
|
237 |
|
|
|
3 |
|
|
Total loans
securitized(b) |
|
|
109,556 |
|
|
|
120,854 |
|
|
|
3,486 |
|
|
|
1,713 |
|
|
|
710 |
|
|
|
626 |
|
|
|
2,043 |
|
|
|
1,674 |
|
|
Total loans reported
and securitized(c) |
|
$ |
595,876 |
|
|
$ |
603,981 |
|
|
$ |
7,483 |
|
|
$ |
5,154 |
|
|
$ |
1,931 |
|
|
$ |
1,416 |
|
|
$ |
5,152 |
|
|
$ |
3,786 |
|
|
|
|
|
(a) |
|
Includes $15.8 billion and $18.6 billion of outstanding principal balances on securitized
subprime 14 family residential mortgage loans as of September 30, 2007, and December 31,
2006, respectively. |
(b) |
|
Total assets held in securitization-related SPEs were $295.9 billion and $262.9 billion at
September 30, 2007, and December 31, 2006, respectively. The $109.6 billion and $120.9 billion
of loans securitized at September 30, 2007, and December 31, 2006, respectively, excludes
$165.5 billion and $122.5 billion of securitized loans, respectively, in which the Firms only
continuing involvement is the servicing of the assets; $17.7 billion and $19.3 billion of
sellers interests in credit card master trusts, respectively;
and $3.1 billion and $256
million of escrow accounts and other assets, respectively. |
(c) |
|
Represents both loans on the Consolidated balance sheets and loans that have been
securitized, but excludes loans for which the Firms only continuing involvement is servicing
of the assets. |
(d) |
|
Includes nonperforming loans held-for-sale of $75 million and $120 million at September 30,
2007, and December 31, 2006, respectively. |
(e) |
|
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by U.S. government agencies of $1.3 billion at
September 30, 2007, and $1.2 billion at December 31, 2006; and (ii) 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 $241 million and $219 million at September 30, 2007,
and December 31, 2006, respectively. These amounts for GNMA and education loans are excluded,
as reimbursement is proceeding normally. |
99
NOTE 16 VARIABLE INTEREST ENTITIES
Refer to Note 1 on page 94 and Note 15 on pages 118120 of JPMorgan Chases 2006 Annual Report for
a further description of JPMorgan Chases policies regarding consolidation of VIEs as well as the
utilization of VIEs by the Firm.
Multi-seller conduits
The following table summarizes the Firms involvement with Firm-administered multi-seller conduits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Nonconsolidated |
|
|
Total |
|
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
Dec. 31, |
|
(in billions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total commercial paper issued by conduits |
|
$ |
|
|
|
$ |
3.4 |
|
|
$ |
65.9 |
|
|
$ |
44.1 |
|
|
$ |
65.9 |
|
|
$ |
47.5 |
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-purchase agreements |
|
$ |
|
|
|
$ |
0.5 |
|
|
$ |
90.9 |
|
|
$ |
66.0 |
|
|
$ |
90.9 |
|
|
$ |
66.5 |
|
Program-wide liquidity commitments |
|
|
|
|
|
|
1.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
5.0 |
|
Program-wide limited credit enhancements |
|
|
|
|
|
|
|
|
|
|
2.6 |
|
|
|
1.6 |
|
|
|
2.6 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss(a) |
|
$ |
|
|
|
$ |
1.0 |
|
|
$ |
96.1 |
|
|
$ |
67.0 |
|
|
$ |
96.1 |
|
|
$ |
68.0 |
|
|
|
|
|
(a) |
|
The Firms maximum exposure to loss is limited to the amount of drawn commitments (i.e.,
sellers assets held by the multi-seller conduits for which the Firm provides liquidity
support) of $65.0 billion and $43.9 billion at September 30, 2007, and December 31, 2006,
respectively, plus contractual but undrawn commitments of $31.1 billion and $24.1 billion at
September 30, 2007, and December 31, 2006, respectively. Since the Firm provides credit
enhancement and liquidity to Firm-administered multi-seller conduits, the maximum exposure is
not adjusted to exclude exposure that would be absorbed by third-party liquidity providers. |
The Firm views its credit exposure to multi-seller conduit transactions as limited. This is
because, for the most part, the Firm is not required to fund under the liquidity facilities if the
assets in the VIE are in default. Additionally, the Firms obligations under the letters of credit
are secondary to the risk of first loss provided by the customer or other third parties for
example, by the overcollateralization of the VIE with the assets sold to it or notes subordinated
to the Firms liquidity facilities.
Client intermediation
Assets held by credit-linked and municipal bond vehicles at September 30, 2007, and December 31,
2006, were as follows.
|
|
|
|
|
|
|
|
|
(in billions) |
|
September 30, 2007 |
|
December 31, 2006 |
|
Credit-linked note vehicles(a)
|
|
$ |
22.9 |
|
|
$ |
20.2 |
|
Municipal bond vehicles(b)
|
|
|
25.1 |
|
|
|
16.9 |
|
|
|
|
|
(a) |
|
Assets of $2.1 billion and $1.8 billion reported in the table above were recorded on the
Firms Consolidated balance sheets at September 30, 2007, and December 31, 2006, respectively,
due to contractual relationships held by the Firm that relate to collateral held by the VIE. |
(b) |
|
Total amounts consolidated due to the Firm owning residual interests were $6.8 billion and
$4.7 billion at September 30, 2007, and December 31, 2006, respectively, and are reported in
the table. Total liquidity commitments were $17.5 billion and $10.2 billion at September 30,
2007, and December 31, 2006, respectively. The Firms maximum credit exposure to all municipal
bond vehicles was $24.3 billion and $14.9 billion at September 30, 2007, and December 31,
2006, respectively. |
The Firm may enter into transactions with VIEs structured by other parties. These
transactions can include, for example, acting as a derivative counterparty, liquidity provider,
investor, underwriter, placement agent, trustee or custodian. These transactions are conducted at
arms length, and individual credit decisions are based upon the analysis of the specific VIE,
taking into consideration the quality of the underlying assets. Where these activities do not cause
JPMorgan Chase to absorb a majority of the expected losses of the VIEs or to receive a majority of
the residual returns of the VIE, JPMorgan Chase records and reports these positions similarly to
any other third-party transaction. These transactions are not considered significant for disclosure
purposes.
100
Consolidated VIE assets
The following table summarizes the Firms total consolidated VIE assets, by classification, on the
Consolidated balance sheets, as of September 30, 2007, and December 31, 2006.
|
|
|
|
|
|
|
|
|
(in billions) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Consolidated VIE assets(a) |
|
|
|
|
|
|
|
|
Securities purchased under resale agreements(b) |
|
$ |
0.1 |
|
|
$ |
8.0 |
|
Trading assets(c) |
|
|
14.8 |
|
|
|
9.8 |
|
Investment securities |
|
|
|
|
|
|
0.2 |
|
Loans |
|
|
7.3 |
|
|
|
15.9 |
|
Other assets |
|
|
3.3 |
|
|
|
2.9 |
|
|
Total consolidated assets |
|
$ |
25.5 |
|
|
$ |
36.8 |
|
|
|
|
|
(a) |
|
The Firm held $3.5 billion of assets at December 31, 2006, primarily as a sellers
interest, in certain consumer securitizations in a segregated entity, as part of a two-step
securitization transaction. The segregated entity was terminated in the beginning of 2007.
This interest is included in the securitization activities disclosed in Note 15 on pages
9499 of this Form 10-Q. |
(b) |
|
Includes activity conducted by the Firm in a principal capacity, primarily in IB.
|
(c) |
|
Includes the fair value of securities and derivative receivables. |
The interest-bearing beneficial interest liabilities issued by consolidated VIEs are
classified in the line item titled, Beneficial interests issued by consolidated variable interest
entities on the Consolidated balance sheets. The holders of these beneficial interests do not have
recourse to the general credit of JPMorgan Chase. See Note 19 on page 124 of JPMorgan Chases 2006
Annual Report for the maturity profile of FIN 46R long-term beneficial interests.
NOTE 17 GOODWILL AND OTHER INTANGIBLE ASSETS
For a discussion of accounting policies related to Goodwill and Other intangible assets, see Note
16 on pages 121123 of JPMorgan Chases 2006 Annual Report.
Goodwill and other intangible assets consist of the following.
|
|
|
|
|
|
|
|
|
(in millions) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Goodwill |
|
$ |
45,335 |
|
|
$ |
45,186 |
|
Mortgage servicing rights |
|
|
9,114 |
|
|
|
7,546 |
|
Purchased credit card relationships |
|
|
2,427 |
|
|
|
2,935 |
|
|
All other intangibles: |
|
|
|
|
|
|
|
|
Other credit cardrelated intangibles |
|
$ |
349 |
|
|
$ |
302 |
|
Core deposit intangibles |
|
|
2,202 |
|
|
|
2,623 |
|
Other intangibles |
|
|
1,408 |
|
|
|
1,446 |
|
|
Total All other intangible assets |
|
$ |
3,959 |
|
|
$ |
4,371 |
|
|
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired
entity over the net fair value amounts assigned to assets acquired and liabilities assumed. The
increase in Goodwill primarily resulted from certain acquisitions by Treasury & Securities Services
(TSS) and CS, and currency-translation adjustments on the Sears Canada credit card
acquisition. These factors were partially offset by a reduction in Goodwill from the
adoption of FIN 48, as well as adjustments for tax-related purchase accounting adjustments
associated with the Bank One merger. For a discussion of the impact from adopting FIN 48, see Note
20 on page 105 of this Form 10-Q.
Goodwill was not impaired at September 30, 2007, or December 31, 2006, nor was any goodwill written
off due to impairment during the nine months ended September 30, 2007 and 2006.
Goodwill attributed to the business segments was as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Investment Bank |
|
$ |
3,585 |
|
|
$ |
3,526 |
|
Retail Financial Services |
|
|
16,878 |
|
|
|
16,955 |
|
Card Services |
|
|
12,819 |
|
|
|
12,712 |
|
Commercial Banking |
|
|
2,880 |
|
|
|
2,901 |
|
Treasury & Securities Services |
|
|
1,674 |
|
|
|
1,605 |
|
Asset Management |
|
|
7,122 |
|
|
|
7,110 |
|
Corporate (Private Equity) |
|
|
377 |
|
|
|
377 |
|
|
Total Goodwill |
|
$ |
45,335 |
|
|
$ |
45,186 |
|
|
101
Mortgage servicing rights
For a further description of the MSR asset, interest rate risk management, and valuation
methodology of MSRs, see Note 16 on pages 121122 of JPMorgan Chases 2006 Annual Report. For a
discussion of the valuation of MSRs, see Note 3 on page 76 of this Form 10-Q. The fair value of
MSRs is sensitive to changes in interest rates, including their effect on prepayment speeds.
JPMorgan Chase uses a combination of derivatives and trading instruments to manage changes in the
fair value of MSRs. The intent is to offset any changes in the fair value of MSRs with changes in
the fair value of the related risk management instruments. MSRs decrease in value when interest
rates decline. Conversely, securities (such as mortgagebacked securities), principal-only
certificates and certain derivatives (when the Firm receives fixed-rate interest payments) increase
in value when interest rates decline.
The following table summarizes MSR activity, for the three and nine months ended September 30, 2007
and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Balance at beginning of period after valuation allowance |
|
$ |
9,499 |
|
|
$ |
8,247 |
|
|
$ |
7,546 |
|
|
$ |
6,452 |
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230 |
|
|
Fair value at beginning of period |
|
|
9,499 |
|
|
|
8,247 |
|
|
|
7,546 |
|
|
|
6,682 |
|
|
|
|
512 |
|
|
|
359 |
|
|
|
1,780 |
|
|
|
1,113 |
|
Purchase of MSRs |
|
|
290 |
|
|
|
174 |
|
|
|
676 |
|
|
|
524 |
|
|
Total additions |
|
|
802 |
|
|
|
533 |
|
|
|
2,456 |
|
|
|
1,637 |
|
Change in valuation due to inputs and assumptions(a) |
|
|
(810 |
) |
|
|
(1,075 |
) |
|
|
250 |
|
|
|
127 |
|
Other changes in fair value(b) |
|
|
(377 |
) |
|
|
(327 |
) |
|
|
(1,138 |
) |
|
|
(1,068 |
) |
|
Total change in fair value |
|
|
(1,187 |
) |
|
|
(1,402 |
) |
|
|
(888 |
) |
|
|
(941 |
) |
|
Fair value at September 30 |
|
$ |
9,114 |
|
|
$ |
7,378 |
|
|
$ |
9,114 |
|
|
$ |
7,378 |
|
|
Change in unrealized (losses) gains included in income related
to MSRs held at September 30, 2007 |
|
$ |
(810 |
) |
|
|
NA |
|
|
$ |
250 |
|
|
|
NA |
|
|
Contractual service fees, late fees and other ancillary fees
included in Mortgage fees and related income |
|
$ |
579 |
|
|
$ |
513 |
|
|
$ |
1,694 |
|
|
$ |
1,497 |
|
|
|
|
|
(a) |
|
Represents MSR asset fair value adjustments due to changes in inputs, such as interest
rates and volatility, as well as updates to assumptions used in the valuation model. This
caption also represents total realized and unrealized gains (losses) included in Net income
per the SFAS 157 disclosure for fair value measurement using significant unobservable inputs
(level 3). These changes in fair value are recorded in Mortgage fees and related income. |
(b) |
|
Includes changes in the MSR value due to modeled servicing portfolio runoff (or time decay).
This caption represents the impact of cash settlements per the SFAS 157 disclosure for fair
value measurement using significant unobservable inputs (level 3). These changes in fair value
are recorded in Mortgage fees and related income. |
The table below outlines the key economic assumptions used to determine the fair value of the
Firms MSRs at September 30, 2007 and December 31, 2006, respectively; and it outlines the
sensitivities of those fair values to immediate 10% and 20% adverse changes in those assumptions.
|
|
|
|
|
|
|
|
|
(in millions, except rates and where otherwise noted) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
Weighted-average prepayment speed assumption (CPR) |
|
|
12.18 |
% |
|
|
17.02 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(460 |
) |
|
$ |
(381 |
) |
Impact on fair value of 20% adverse change |
|
|
(882 |
) |
|
|
(726 |
) |
|
Weighted-average discount rate |
|
|
9.85 |
% |
|
|
9.32 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(342 |
) |
|
$ |
(254 |
) |
Impact on fair value of 20% adverse change |
|
|
(660 |
) |
|
|
(491 |
) |
|
Third-party Mortgage loans serviced (in billions) |
|
$ |
600.0 |
|
|
$ |
526.7 |
|
|
CPR: Constant prepayment rate
The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based
upon a 10% and 20% variation in assumptions generally cannot be easily extrapolated because the
relationship of the change in the assumptions to the change in fair value may not be linear. Also,
in this table, the effect that a change in a particular assumption may have on the fair value is
calculated without changing any other assumption. In reality, changes in one factor may result in
changes in another, which might magnify or counteract the sensitivities.
102
Purchased credit card relationships and All other intangible assets
For the nine months ended September 30, 2007, Purchased credit card relationships and All other
intangibles decreased by $508 million and $412 million, respectively, primarily as a result of
amortization expense.
Except for $513 million of indefinite-lived intangibles related to asset management advisory
contracts which are not amortized, but instead are tested for impairment at least annually, the
remainder of the Firms other acquired intangible assets are subject to amortization.
The components of credit card relationships, core deposits and other intangible assets were as
follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Gross |
|
|
Accumulated |
|
|
carrying |
|
|
Gross |
|
|
Accumulated |
|
|
carrying |
|
(in millions) |
|
amount |
|
|
amortization |
|
|
value |
|
|
amount |
|
|
amortization |
|
|
value |
|
|
Purchased credit card relationships |
|
$ |
5,749 |
|
|
$ |
3,322 |
|
|
$ |
2,427 |
|
|
$ |
5,716 |
|
|
$ |
2,781 |
|
|
$ |
2,935 |
|
All other intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other credit cardrelated intangibles |
|
$ |
421 |
|
|
$ |
72 |
|
|
$ |
349 |
|
|
$ |
367 |
|
|
$ |
65 |
|
|
$ |
302 |
|
Core deposit intangibles |
|
|
4,280 |
|
|
|
2,078 |
|
|
|
2,202 |
|
|
|
4,283 |
|
|
|
1,660 |
|
|
|
2,623 |
|
Other intangibles |
|
|
2,019 |
|
|
|
611 |
(a) |
|
|
1,408 |
|
|
|
1,961 |
|
|
|
515 |
(a) |
|
|
1,446 |
|
|
|
|
|
(a) |
|
Includes amortization expense related to servicing assets on securitized automobile
loans, which is recorded in Lending & deposit-related fees, of $2 million and $3 million for
the three months ended September 30, 2007 and 2006, respectively, and $7 million and $8
million for the nine months ended September 30, 2007 and 2006, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Purchased credit card relationships |
|
$ |
177 |
|
|
$ |
178 |
|
|
$ |
541 |
|
|
$ |
549 |
|
All other intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other credit cardrelated intangibles |
|
|
2 |
|
|
|
2 |
|
|
|
7 |
|
|
|
4 |
|
Core deposit intangibles |
|
|
138 |
|
|
|
136 |
|
|
|
418 |
|
|
|
411 |
|
Other intangibles |
|
|
32 |
|
|
|
30 |
|
|
|
89 |
|
|
|
94 |
|
|
Total amortization expense |
|
$ |
349 |
|
|
$ |
346 |
|
|
$ |
1,055 |
|
|
$ |
1,058 |
|
|
Future amortization expense
The following table presents estimated amortization expenses related to credit card relationships,
core deposits and All other intangible assets at September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased |
|
|
Other credit |
|
|
Core |
|
|
|
|
|
|
|
|
|
credit card |
|
|
cardrelated |
|
|
deposit |
|
|
Other |
|
|
|
|
For the year: (in millions) |
|
relationships |
|
|
intangibles |
|
|
intangibles |
|
|
intangibles |
|
|
Total |
|
|
2007(a) |
|
$ |
709 |
|
|
$ |
11 |
|
|
$ |
555 |
|
|
$ |
116 |
|
|
$ |
1,391 |
|
2008 |
|
|
597 |
|
|
|
22 |
|
|
|
479 |
|
|
|
109 |
|
|
|
1,207 |
|
2009 |
|
|
427 |
|
|
|
27 |
|
|
|
397 |
|
|
|
101 |
|
|
|
952 |
|
2010 |
|
|
347 |
|
|
|
34 |
|
|
|
336 |
|
|
|
86 |
|
|
|
803 |
|
2011 |
|
|
287 |
|
|
|
38 |
|
|
|
293 |
|
|
|
76 |
|
|
|
694 |
|
|
|
|
|
(a) |
|
Includes $541 million, $7 million, $418 million and $89 million of amortization expense
related to purchased credit card relationships, other credit card-related intangibles, core
deposit intangibles and other intangibles, respectively, recognized during the first nine
months of 2007. |
103
NOTE 18 EARNINGS PER SHARE
For a
discussion of the computation of basic and diluted earnings per share (EPS), see Note 22 on
page 126 of JPMorgan Chases 2006 Annual Report. The following table presents the calculation of
basic and diluted EPS for the three and nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions, except per share amounts) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3,373 |
|
|
$ |
3,232 |
|
|
$ |
12,394 |
|
|
$ |
9,743 |
|
Discontinued operations |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
175 |
|
|
Net income |
|
$ |
3,373 |
|
|
|
3,297 |
|
|
$ |
12,394 |
|
|
|
9,918 |
|
Less: preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
Net income applicable to common stock |
|
$ |
3,373 |
|
|
$ |
3,297 |
|
|
$ |
12,394 |
|
|
$ |
9,914 |
|
Weighted-average basic shares outstanding |
|
|
3,376 |
# |
|
|
3,469 |
# |
|
|
3,416 |
# |
|
|
3,472 |
# |
|
Income from continuing operations per share |
|
$ |
1.00 |
|
|
$ |
0.93 |
|
|
$ |
3.63 |
|
|
$ |
2.81 |
|
Discontinued operations per share |
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
0.05 |
|
|
Net income per share |
|
$ |
1.00 |
|
|
$ |
0.95 |
|
|
$ |
3.63 |
|
|
$ |
2.86 |
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
3,373 |
|
|
$ |
3,297 |
|
|
$ |
12,394 |
|
|
$ |
9,914 |
|
|
Weighted-average basic shares outstanding |
|
|
3,376 |
# |
|
|
3,469 |
# |
|
|
3,416 |
# |
|
|
3,472 |
# |
Add: Employee restricted stock, RSUs, stock
options and SARs |
|
|
102 |
|
|
|
105 |
|
|
|
104 |
|
|
|
100 |
|
|
Weighted-average diluted shares outstanding(a) |
|
|
3,478 |
|
|
|
3,574 |
|
|
|
3,520 |
|
|
|
3,572 |
|
|
Income from continuing operations per share |
|
$ |
0.97 |
|
|
$ |
0.90 |
|
|
$ |
3.52 |
|
|
$ |
2.73 |
|
Discontinued operations per share |
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
0.05 |
|
|
Net income per share |
|
$ |
0.97 |
|
|
$ |
0.92 |
|
|
$ |
3.52 |
|
|
$ |
2.78 |
|
|
|
|
|
(a) |
|
Options issued under employee benefit plans to purchase 147 million and 143 million
shares of common stock were outstanding for the three months ended September 30, 2007 and
2006, respectively, and 119 million and 151 million year-to-date 2007 and 2006, respectively,
but were not included in the computation of diluted EPS because the options were antidilutive. |
NOTE 19 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains and
losses on AFS securities, foreign currency translation adjustments (including the impact of related
derivatives), cash flow hedging activities and for 2007, the net actuarial loss and prior service
cost related to the Firms defined benefit pension and OPEB plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and prior service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs (credit) of |
|
|
|
|
Nine months ended |
|
Unrealized |
|
|
Translation |
|
|
Cash |
|
|
defined benefit |
|
|
Accumulated other |
|
September 30, 2007 |
|
gains (losses) |
|
|
adjustments, |
|
|
flow |
|
|
pension and |
|
|
comprehensive |
|
(in millions) |
|
on AFS securities(a) |
|
|
net of hedges |
|
|
hedges |
|
|
OPEB plans(e) |
|
|
income (loss) |
|
|
Balance at January 1, 2007 |
|
$ |
29 |
|
|
$ |
5 |
|
|
$ |
(489 |
) |
|
$ |
(1,102 |
) |
|
$ |
(1,557 |
) |
Cumulative effect of changes
in accounting principles
(SFAS 159) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Balance at January 1, 2007,
adjusted |
|
|
28 |
|
|
|
5 |
|
|
|
(489 |
) |
|
|
(1,102 |
) |
|
|
(1,558 |
) |
Net change |
|
|
(246 |
)(b) |
|
|
25 |
(c) |
|
|
(173 |
)(d) |
|
|
122 |
(f) |
|
|
(272 |
) |
|
Balance at September 30, 2007 |
|
$ |
(218 |
) |
|
$ |
30 |
|
|
$ |
(662 |
) |
|
$ |
(980 |
) |
|
$ |
(1,830 |
) |
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and prior service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs (credit) of |
|
|
|
|
|
|
Unrealized |
|
|
Translation |
|
|
Cash |
|
|
defined benefit |
|
|
Accumulated other |
|
Nine months ended |
|
gains (losses) |
|
|
adjustments, |
|
|
flow |
|
|
pension and |
|
|
comprehensive |
|
September 30, 2006 (in millions) |
|
on AFS securities(a) |
|
|
net of hedges |
|
|
hedges |
|
|
OPEB plans(e) |
|
|
income (loss) |
|
|
Balance at January 1, 2006 |
|
$ |
(224 |
) |
|
$ |
(8 |
) |
|
$ |
(394 |
) |
|
$ |
NA |
|
|
$ |
(626 |
) |
Net change |
|
|
166 |
(b) |
|
|
(2 |
)(c) |
|
|
(64 |
)(d) |
|
|
NA |
|
|
|
100 |
|
|
Balance at September 30, 2006 |
|
$ |
(58 |
) |
|
$ |
(10 |
) |
|
$ |
(458 |
) |
|
$ |
NA |
|
|
$ |
(526 |
) |
|
|
|
|
(a) |
|
Represents the after-tax difference between the fair value and amortized cost of the AFS
securities portfolio and retained interests in securitizations recorded in Other assets. |
(b) |
|
The net change, for the nine months ended September 30, 2007, was due primarily to higher
interest rates. The net change, for the nine months ended September 30, 2006, was due
primarily to sales of investment securities, partially offset by higher interest rates. |
(c) |
|
September 30, 2007 and 2006, included $402 million and $190 million, respectively, of
after-tax gains (losses) on foreign currency translation from operations for which the
functional currency is other than the U.S. dollar, partially offset by $(377) million and
$(192) million, respectively, of after-tax gains (losses) on hedges. |
(d) |
|
The net change, for the nine months ended September 30, 2007, included $147 million of
after-tax losses recognized in income and $320 million of after-tax losses representing the
net change in derivative fair value that was reported in Comprehensive income. The net change
for the nine months ended September 30, 2006, included $26 million of after-tax losses
recognized in income and $90 million of after-tax losses representing the net change in
derivative fair value that was reported in Comprehensive income. |
(e) |
|
For further discussion of SFAS 158, see Note 7 on pages 100105 of JPMorgan Chases 2006
Annual Report. |
(f) |
|
The net change for the nine months ended September 30, 2007, represents the true-up
adjustments, net of tax, based upon the final 2006 actuarial valuation for the U.S. defined
benefit pension plan, the January 1, 2007, actuarial valuation for the U.S. OPEB plan, and the
amortization of net actuarial loss and prior service cost (credit), net of tax, into net
periodic benefit cost. |
NOTE 20 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.
At January 1, 2007, JPMorgan Chases liability for unrecognized tax benefits, excluding related
interest expense and penalties, was $4.7 billion of which $1.0 billion, if recognized, would reduce
the effective tax rate. As JPMorgan Chase is presently under audit by a number of tax authorities,
it is reasonably possible that unrecognized tax benefits could change significantly over the next
twelve months. JPMorgan Chase does not expect that any such changes would have a material impact on
its effective tax rate over the next twelve months.
The Firm recognizes interest expense and penalties related to income tax liabilities in Income tax
expense. Included in Accounts payable, accrued expenses and other liabilities at January 1, 2007,
in addition to the Firms liability for unrecognized tax benefits, was $1.3 billion for income
tax-related interest and penalties, of which the penalty component was not material. Accrued income
tax-related interest and penalties increased to $1.6 billion at September 30, 2007, due to the
continuing outstanding status of the unrecognized tax benefit liability, the penalty component of
which remains immaterial.
JPMorgan Chase is subject to ongoing tax examinations by the tax authorities of the various
jurisdictions in which it operates, including U.S. federal, state and non-U.S. jurisdictions. The
Firms consolidated federal income tax returns are presently under examination by the Internal
Revenue Service (IRS) for the years 2003, 2004 and 2005. In addition, the consolidated federal
income tax returns of heritage Bank One Corporation, which merged with and into JPMorgan Chase on
July 1, 2004, are under examination for the years 2000 through 2003, and for the period January 1,
2004, through July 1, 2004. Both examinations are expected to conclude in 2008. Certain
administrative appeals are pending with the IRS relating to prior examination periods, for JPMorgan
Chase for the years 2001 and 2002, and for Bank One and its predecessor entities for various
periods from 1996 through 1999. For years prior to 2001, refund claims relating to income and
credit adjustments, and to tax attribute carrybacks, for JPMorgan Chase and its predecessor
entities, including Bank One, either have been or will be filed. Also, interest rate swap
valuations by a Bank One predecessor entity for the years 1990 through 1993 are, and have been, the
subject of litigation in both the Tax Court and the U.S. Court of Appeals.
105
NOTE 21 COMMITMENTS AND CONTINGENCIES
Litigation reserve
The Firm maintains litigation reserves for certain of its outstanding litigation. In accordance
with the provisions of SFAS 5, JPMorgan Chase accrues for a litigation-related liability when it is
probable that such a liability has been incurred and the amount of the loss can be reasonably
estimated. While the outcome of litigation is inherently uncertain, management believes, in light
of all information known to it at September 30, 2007, the Firms litigation reserves were adequate
at such date. Management reviews litigation reserves periodically, and the reserves may be
increased or decreased in the future to reflect further litigation developments. The Firm believes
it has meritorious defenses to claims asserted against it in its currently outstanding litigation
and, with respect to such litigation, intends to continue to defend itself vigorously, litigating
or settling cases according to managements judgment as to what is in the best interests of
stockholders.
NOTE 22 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The majority of JPMorgan Chases derivatives are entered into for trading purposes. Derivatives are
also utilized by the Firm as an end-user to hedge market exposures, to modify the interest rate
characteristics of related balance sheet instruments or to meet longer-term investment objectives.
Both trading and end-user derivatives are recorded in Trading assets and Trading liabilities. For a
further discussion of the Firms use of and accounting policies regarding derivative instruments,
see Note 28 on pages 131-132 of JPMorgan Chases 2006 Annual Report. The following table presents
derivative instrument hedging-related activities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Fair value hedge ineffective net gains(a) |
|
$ |
5 |
|
|
$ |
91 |
|
|
$ |
49 |
|
|
$ |
32 |
|
Cash flow hedge ineffective net gains(a) |
|
|
7 |
|
|
|
|
|
|
|
12 |
|
|
|
4 |
|
Cash flow hedging net gains on forecasted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transactions that failed to occur(b) |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
(a) |
|
Includes ineffectiveness and the components of hedging instruments that have been
excluded from the assessment of hedge effectiveness. |
(b) |
|
In the third quarter of 2007, the Firm did not issue short-term fixed rate Canadian Dollar
denominated notes due to the weak credit market for Canadian short-term debt. |
Over the next 12 months, it is expected that $147 million (after-tax) of net losses recorded
in Accumulated other comprehensive income (loss) at September 30, 2007, will be recognized in
earnings. The maximum length of time over which forecasted transactions are hedged is 10 years, and
such transactions primarily relate to core lending and borrowing activities.
NOTE 23 OFFBALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS AND GUARANTEES
For a discussion of offbalance sheet lending-related financial instruments and guarantees, and
the Firms related accounting policies, see Note 29 on pages 132134 of JPMorgan Chases 2006
Annual Report. To provide for the risk of loss inherent in wholesale-related contracts, an
allowance for credit losses on lending-related commitments is maintained. See Note 14 on pages
9394 of this Form 10-Q for a further discussion regarding the Allowance for credit losses on
lending-related commitments.
106
The following table summarizes the contractual amounts of offbalance sheet lending-related
financial instruments and guarantees and the related Allowance for credit losses on lending-related
commitments at September 30, 2007, and December 31, 2006.
Offbalance sheet lending-related financial instruments and guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for |
|
|
|
Contractual amount |
|
lending-related commitments |
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a) |
|
$ |
801,688 |
|
|
$ |
747,535 |
|
|
$ |
15 |
|
|
$ |
25 |
|
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unfunded commitments to extend credit (b)(c)(d) |
|
|
261,875 |
|
|
|
229,204 |
|
|
|
568 |
|
|
|
305 |
|
Asset purchase agreements(e) |
|
|
93,400 |
|
|
|
67,529 |
|
|
|
12 |
|
|
|
6 |
|
Standby letters of credit and guarantees(c)(f)(g) |
|
|
106,803 |
|
|
|
89,132 |
|
|
|
262 |
|
|
|
187 |
|
Other letters of credit(c) |
|
|
6,067 |
|
|
|
5,559 |
|
|
|
1 |
|
|
|
1 |
|
|
Total wholesale |
|
|
468,145 |
|
|
|
391,424 |
|
|
|
843 |
|
|
|
499 |
|
|
Total lending-related |
|
$ |
1,269,833 |
|
|
$ |
1,138,959 |
|
|
$ |
858 |
|
|
$ |
524 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(h) |
|
$ |
384,462 |
|
|
$ |
318,095 |
|
|
|
NA |
|
|
|
NA |
|
Derivatives qualifying as guarantees(i) |
|
|
88,435 |
|
|
|
71,531 |
|
|
|
NA |
|
|
|
NA |
|
|
|
|
|
(a) |
|
Includes credit card and home equity lending-related commitments of $700.2 billion and
$74.2 billion, respectively, at September 30, 2007; and $657.1 billion and $69.6 billion,
respectively, at December 31, 2006. The credit card and home equity lendingrelated
commitments represent the total available credit for credit cards and home equity lines of
credit. The Firm has not experienced, and does not anticipate, that all available lines of
credit will be utilized at the same time. The Firm can reduce or cancel credit cards and home
equity lines of credit by providing the borrower prior notice or, in some cases, without
notice as permitted by law. |
(b) |
|
Includes unused advised lines of credit totaling $39.2 billion at September 30, 2007, and
$39.0 billion at December 31, 2006, which are not legally binding. In regulatory filings with
the Federal Reserve Board, unused advised lines are not reportable. |
(c) |
|
Represents contractual amount net of risk participations totaling $25.6 billion at September
30, 2007, and $32.8 billion at December 31, 2006. |
(d) |
|
Excludes firmwide unfunded commitments to private third-party equity funds of $936 million
and $686 million at September 30, 2007, and December 31, 2006, respectively. |
(e) |
|
Largely represents asset purchase agreements to the Firms administered multi-seller
asset-backed commercial paper conduits. It also includes $1.4 billion of asset purchase
agreements to other third party entities at September 30, 2007 and December 31, 2006. |
(f) |
|
JPMorgan Chase held collateral relating to $15.4 billion and $13.5 billion of these
arrangements at September 30, 2007, and December 31, 2006, respectively. |
(g) |
|
Includes unused commitments to issue standby letters of credit of $59.1 billion and $45.7
billion at September 30, 2007, and December 31, 2006, respectively. |
(h) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$387.4 billion at September 30, 2007, and $317.9 billion at December 31, 2006. |
(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. |
Included
in Other unfunded commitments to extend credit are commitments to investment and non-investment grade counterparties in
connection with leveraged acquisitions. These commitments are dependent on whether the acquisition
by the borrower is successful, tend to be short-term in nature and, in most cases, are subject to
certain conditions based on the borrowers financial condition or other factors. Additionally, the
Firm often syndicates portions of the initial position to other investors, depending on market
conditions. These commitments generally contain flexible pricing features to adjust for changing
market conditions prior to closing. Alternatively, the borrower may turn to the capital markets for
required funding instead of drawing on the commitment provided by the Firm, and the commitment may
expire unused. As such, these commitments are not necessarily indicative of the Firms actual risk
and the total commitment amount may not reflect actual future cash
flow requirements. The amount of these commitments at September 30,
2007, was $27.5 billion.
For a discussion of the offbalance sheet lending-related arrangements the Firm considers to be
guarantees under FIN 45, and the related accounting policies, see Note 29 on pages 132134 of
JPMorgan Chases 2006 Annual Report. The amount of the liability related to FIN 45 guarantees
recorded at September 30, 2007, and December 31, 2006, excluding the Allowance for credit losses on
lending-related commitments and derivative contracts discussed above,
was $324 million and $297
million, respectively.
In addition to the contracts described above, there are certain derivative contracts to which the
Firm is a counterparty that meet the characteristics of a guarantee under FIN 45. For a discussion
of the derivatives the Firm considers to be guarantees, and the related accounting policies, see
Note 29 on pages 132134 of JPMorgan Chases 2006 Annual Report. The total notional value of the
derivatives that the Firm deems to be guarantees was $88 billion and $72 billion at September 30,
2007, and December 31, 2006, respectively. The fair value of these contracts was a derivative
receivable of $228 million and $230 million, and a derivative payable of $1.8 billion and $987
million at September 30, 2007, and December 31, 2006, respectively.
107
NOTE
24 BUSINESS SEGMENTS
JPMorgan Chase is organized into six major reportable business segments: IB, RFS, CS, Commercial
Banking (CB), TSS and Asset Management (AM), as well as a Corporate segment. The segments are
based upon the products and services provided or the type of customer served, and they reflect the
manner in which financial information is currently evaluated by management. Results of these lines
of business are presented on a managed basis. For a definition of managed basis, see the footnotes
to the tables below. For a further discussion concerning JPMorgan Chases business segments, see
Business segment results on page 16 of this Form 10-Q, and pages 3435 and Note 33 on pages
139141 of JPMorgan Chases 2006 Annual Report.
Business segment financial disclosures
During the year, $19.4 billion and $6.5 billion held-for-investment residential mortgage loans were
transferred to the Corporate segment from RFS and AM, respectively. 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 RFS, AM or Corporate.
Segment results
The following tables provide a summary of the Firms segment results for the three and nine months
ended September 30, 2007 and 2006, on a managed basis. The impact of credit card securitization
adjustments have been included in Reconciling items so that the total Firm results are on a
reported basis. Finally, Total net revenue (Noninterest revenue and Net interest income) for each
of the segments is presented on a tax-equivalent basis. Accordingly, revenue from tax-exempt
securities and investments that receive tax credits are presented in the managed results on a basis
comparable to taxable securities and investments. This approach allows management to assess the
comparability of revenues arising from both taxable and tax-exempt sources. The corresponding
income tax impact related to these items is recorded within Income tax expense (benefit). The
following tables summarize the business segment results and reconciliation to reported U.S. GAAP
results.
Segment results and reconciliation(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007 |
Investment |
|
Retail Financial |
|
Card |
|
Commercial |
(in millions, except ratios) |
|
Bank |
|
Services |
|
Services(d) |
|
Banking |
|
Noninterest revenue |
|
$ |
1,236 |
|
|
$ |
1,520 |
|
|
$ |
759 |
|
|
$ |
290 |
|
Net interest income |
|
|
1,710 |
|
|
|
2,681 |
|
|
|
3,108 |
|
|
|
719 |
|
|
Total net revenue |
|
|
2,946 |
|
|
|
4,201 |
|
|
|
3,867 |
|
|
|
1,009 |
|
|
Provision for credit losses |
|
|
227 |
|
|
|
680 |
|
|
|
1,363 |
|
|
|
112 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense(c) |
|
|
2,378 |
|
|
|
2,469 |
|
|
|
1,262 |
|
|
|
473 |
|
|
Income from continuing operations before income tax expense |
|
|
372 |
|
|
|
1,052 |
|
|
|
1,242 |
|
|
|
424 |
|
Income tax expense |
|
|
76 |
|
|
|
413 |
|
|
|
456 |
|
|
|
166 |
|
|
Income from continuing operations |
|
|
296 |
|
|
|
639 |
|
|
|
786 |
|
|
|
258 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
296 |
|
|
$ |
639 |
|
|
$ |
786 |
|
|
$ |
258 |
|
|
Average equity |
|
$ |
21,000 |
|
|
$ |
16,000 |
|
|
$ |
14,100 |
|
|
$ |
6,700 |
|
Average assets |
|
|
710,665 |
|
|
|
214,852 |
|
|
|
154,956 |
|
|
|
86,652 |
|
Return on average equity |
|
|
6 |
% |
|
|
16 |
% |
|
|
22 |
% |
|
|
15 |
% |
Overhead ratio |
|
|
81 |
|
|
|
59 |
|
|
|
33 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007 |
|
Treasury & |
|
Asset |
|
|
|
|
|
Reconciling |
|
|
(in millions, except ratios) |
|
Securities Services |
|
Management |
|
Corporate |
|
Items(d)(e) |
|
Total |
|
Noninterest revenue |
|
$ |
1,145 |
|
|
$ |
1,912 |
|
|
$ |
1,280 |
|
|
$ |
644 |
|
|
$ |
8,786 |
|
Net interest income |
|
|
603 |
|
|
|
293 |
|
|
|
(279 |
) |
|
|
(1,509 |
) |
|
|
7,326 |
|
|
Total net revenue |
|
|
1,748 |
|
|
|
2,205 |
|
|
|
1,001 |
|
|
|
(865 |
) |
|
|
16,112 |
|
|
Provision for credit losses |
|
|
9 |
|
|
|
3 |
|
|
|
(31 |
) |
|
|
(578 |
) |
|
|
1,785 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense(c) |
|
|
1,134 |
|
|
|
1,366 |
|
|
|
245 |
|
|
|
|
|
|
|
9,327 |
|
|
Income (loss) from continuing operations before
income
tax expense |
|
|
574 |
|
|
|
836 |
|
|
|
787 |
|
|
|
(287 |
) |
|
|
5,000 |
|
Income tax expense (benefit) |
|
|
214 |
|
|
|
315 |
|
|
|
274 |
|
|
|
(287 |
) |
|
|
1,627 |
|
|
Income from continuing operations |
|
|
360 |
|
|
|
521 |
|
|
|
513 |
|
|
|
|
|
|
|
3,373 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
360 |
|
|
$ |
521 |
|
|
$ |
513 |
|
|
$ |
|
|
|
$ |
3,373 |
|
|
Average equity |
|
$ |
3,000 |
|
|
$ |
4,000 |
|
|
$ |
54,176 |
|
|
$ |
|
|
|
$ |
118,976 |
|
Average assets |
|
|
55,688 |
|
|
|
53,879 |
|
|
|
266,742 |
|
|
|
(66,100 |
) |
|
|
1,477,334 |
|
Return on average equity |
|
|
48 |
% |
|
|
52 |
% |
|
NM |
|
|
NM |
|
|
|
11 |
% |
Overhead ratio |
|
|
65 |
|
|
|
62 |
|
|
NM |
|
|
NM |
|
|
|
58 |
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
Investment |
|
Retail Financial |
|
Card |
|
Commercial |
(in millions, except ratios) |
|
Bank |
|
Services |
|
Services(d) |
|
Banking |
|
Noninterest revenue |
|
$ |
4,765 |
|
|
$ |
1,098 |
|
|
$ |
762 |
|
|
$ |
256 |
|
Net interest income |
|
|
51 |
|
|
|
2,457 |
|
|
|
2,884 |
|
|
|
677 |
|
|
Total net revenue |
|
|
4,816 |
|
|
|
3,555 |
|
|
|
3,646 |
|
|
|
933 |
|
|
Provision for credit losses |
|
|
7 |
|
|
|
114 |
|
|
|
1,270 |
|
|
|
54 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense(c) |
|
|
3,244 |
|
|
|
2,139 |
|
|
|
1,253 |
|
|
|
500 |
|
|
Income from continuing operations before income
tax expense |
|
|
1,595 |
|
|
|
1,302 |
|
|
|
1,123 |
|
|
|
379 |
|
Income tax expense |
|
|
619 |
|
|
|
556 |
|
|
|
412 |
|
|
|
148 |
|
|
Income from continuing operations |
|
|
976 |
|
|
|
746 |
|
|
|
711 |
|
|
|
231 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
976 |
|
|
$ |
746 |
|
|
$ |
711 |
|
|
$ |
231 |
|
|
Average equity |
|
$ |
21,000 |
|
|
$ |
14,300 |
|
|
$ |
14,100 |
|
|
$ |
5,500 |
|
Average assets |
|
|
626,245 |
|
|
|
225,307 |
|
|
|
148,272 |
|
|
|
57,378 |
|
Return on average equity |
|
|
18 |
% |
|
|
21 |
% |
|
|
20 |
% |
|
|
17 |
% |
Overhead ratio |
|
|
67 |
|
|
|
60 |
|
|
|
34 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
Treasury & |
|
Asset |
|
|
|
|
|
Reconciling |
|
|
(in millions, except ratios) |
|
Securities Services |
|
Management |
|
Corporate |
|
Items(d)(e) |
|
Total |
|
Noninterest revenue |
|
$ |
980 |
|
|
$ |
1,405 |
|
|
$ |
344 |
|
|
$ |
556 |
|
|
$ |
10,166 |
|
Net interest income |
|
|
519 |
|
|
|
231 |
|
|
|
(55 |
) |
|
|
(1,385 |
) |
|
|
5,379 |
|
|
Total net revenue |
|
|
1,499 |
|
|
|
1,636 |
|
|
|
289 |
|
|
|
(829 |
) |
|
|
15,545 |
|
|
Provision for credit losses |
|
|
1 |
|
|
|
(28 |
) |
|
|
1 |
|
|
|
(607 |
) |
|
|
812 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense(c) |
|
|
1,064 |
|
|
|
1,115 |
|
|
|
481 |
|
|
|
|
|
|
|
9,796 |
|
|
Income (loss) from continuing operations before
income tax expense |
|
|
404 |
|
|
|
549 |
|
|
|
(193 |
) |
|
|
(222 |
) |
|
|
4,937 |
|
Income tax expense (benefit) |
|
|
148 |
|
|
|
203 |
|
|
|
(159 |
) |
|
|
(222 |
) |
|
|
1,705 |
|
|
Income (loss) from continuing operations |
|
|
256 |
|
|
|
346 |
|
|
|
(34 |
) |
|
|
|
|
|
|
3,232 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
65 |
|
|
Net income |
|
$ |
256 |
|
|
$ |
346 |
|
|
$ |
31 |
|
|
$ |
|
|
|
$ |
3,297 |
|
|
Average equity |
|
$ |
2,200 |
|
|
$ |
3,500 |
|
|
$ |
51,206 |
|
|
$ |
|
|
|
$ |
111,806 |
|
Average assets |
|
|
30,558 |
|
|
|
43,524 |
|
|
|
240,826 |
|
|
|
(62,971 |
) |
|
|
1,309,139 |
|
Return on average equity |
|
|
46 |
% |
|
|
39 |
% |
|
NM |
|
|
NM |
|
|
|
12 |
% |
Overhead ratio |
|
|
71 |
|
|
|
68 |
|
|
NM |
|
|
NM |
|
|
|
63 |
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
Investment |
|
Retail Financial |
|
Card |
|
Commercial |
(in millions, except ratios) |
|
Bank |
|
Services |
|
Services(d) |
|
Banking |
|
Noninterest revenue |
|
$ |
11,803 |
|
|
$ |
4,693 |
|
|
$ |
2,212 |
|
|
$ |
937 |
|
Net interest income |
|
|
3,195 |
|
|
|
7,971 |
|
|
|
9,052 |
|
|
|
2,082 |
|
|
Total net revenue |
|
|
14,998 |
|
|
|
12,664 |
|
|
|
11,264 |
|
|
|
3,019 |
|
|
Provision for credit losses |
|
|
454 |
|
|
|
1,559 |
|
|
|
3,923 |
|
|
|
174 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense(c) |
|
|
10,063 |
|
|
|
7,360 |
|
|
|
3,691 |
|
|
|
1,454 |
|
|
Income from continuing operations before
income tax expense |
|
|
4,572 |
|
|
|
3,745 |
|
|
|
3,650 |
|
|
|
1,391 |
|
Income tax expense |
|
|
1,557 |
|
|
|
1,462 |
|
|
|
1,340 |
|
|
|
545 |
|
|
Income from continuing operations |
|
|
3,015 |
|
|
|
2,283 |
|
|
|
2,310 |
|
|
|
846 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,015 |
|
|
$ |
2,283 |
|
|
$ |
2,310 |
|
|
$ |
846 |
|
|
Average equity |
|
$ |
21,000 |
|
|
$ |
16,000 |
|
|
$ |
14,100 |
|
|
$ |
6,435 |
|
Average assets |
|
|
688,730 |
|
|
|
216,218 |
|
|
|
155,206 |
|
|
|
84,643 |
|
Return on average equity |
|
|
19 |
% |
|
|
19 |
% |
|
|
22 |
% |
|
|
18 |
% |
Overhead ratio |
|
|
67 |
|
|
|
58 |
|
|
|
33 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
Treasury & |
|
Asset |
|
|
|
|
|
Reconciling |
|
|
(in millions, except ratios) |
|
Securities Services |
|
Management |
|
Corporate |
|
Items(d)(e) |
|
Total |
|
Noninterest revenue |
|
$ |
3,400 |
|
|
$ |
5,415 |
|
|
$ |
3,900 |
|
|
$ |
1,869 |
|
|
$ |
34,229 |
|
Net interest income |
|
|
1,615 |
|
|
|
831 |
|
|
|
(569 |
) |
|
|
(4,418 |
) |
|
|
19,759 |
|
|
Total net revenue |
|
|
5,015 |
|
|
|
6,246 |
|
|
|
3,331 |
|
|
|
(2,549 |
) |
|
|
53,988 |
|
|
Provision for credit losses |
|
|
15 |
|
|
|
(17 |
) |
|
|
(25 |
) |
|
|
(1,761 |
) |
|
|
4,322 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense(c) |
|
|
3,358 |
|
|
|
3,956 |
|
|
|
1,101 |
|
|
|
|
|
|
|
30,983 |
|
|
Income (loss) from continuing operations before
income tax expense |
|
|
1,551 |
|
|
|
2,307 |
|
|
|
2,255 |
|
|
|
(788 |
) |
|
|
18,683 |
|
Income tax expense (benefit) |
|
|
576 |
|
|
|
868 |
|
|
|
729 |
|
|
|
(788 |
) |
|
|
6,289 |
|
|
Income from continuing operations |
|
|
975 |
|
|
|
1,439 |
|
|
|
1,526 |
|
|
|
|
|
|
|
12,394 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
975 |
|
|
$ |
1,439 |
|
|
$ |
1,526 |
|
|
$ |
|
|
|
$ |
12,394 |
|
|
Average equity |
|
$ |
3,000 |
|
|
$ |
3,834 |
|
|
$ |
53,398 |
|
|
$ |
|
|
|
$ |
117,767 |
|
Average assets |
|
|
50,829 |
|
|
|
50,498 |
|
|
|
249,363 |
|
|
|
(65,715 |
) |
|
|
1,429,772 |
|
Return on average equity |
|
|
43 |
% |
|
|
50 |
% |
|
NM |
|
|
NM |
|
|
|
14 |
% |
Overhead ratio |
|
|
67 |
|
|
|
63 |
|
|
NM |
|
|
NM |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
Investment |
|
Retail Financial |
|
Card |
|
Commercial |
(in millions, except ratios) |
|
Bank |
|
Services |
|
Services(d) |
|
Banking |
|
Noninterest revenue |
|
$ |
13,648 |
|
|
$ |
3,512 |
|
|
$ |
2,136 |
|
|
$ |
763 |
|
Net interest income |
|
|
325 |
|
|
|
7,585 |
|
|
|
8,859 |
|
|
|
2,019 |
|
|
Total net revenue |
|
|
13,973 |
|
|
|
11,097 |
|
|
|
10,995 |
|
|
|
2,782 |
|
|
Provision for credit losses |
|
|
128 |
|
|
|
299 |
|
|
|
3,317 |
|
|
|
49 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense(c) |
|
|
9,655 |
|
|
|
6,636 |
|
|
|
3,745 |
|
|
|
1,494 |
|
|
Income from continuing operations before income
tax expense |
|
|
4,280 |
|
|
|
4,162 |
|
|
|
3,933 |
|
|
|
1,239 |
|
Income tax expense |
|
|
1,615 |
|
|
|
1,667 |
|
|
|
1,446 |
|
|
|
485 |
|
|
Income from continuing operations |
|
|
2,665 |
|
|
|
2,495 |
|
|
|
2,487 |
|
|
|
754 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,665 |
|
|
$ |
2,495 |
|
|
$ |
2,487 |
|
|
$ |
754 |
|
|
Average equity |
|
$ |
20,670 |
|
|
$ |
14,167 |
|
|
$ |
14,100 |
|
|
$ |
5,500 |
|
Average assets |
|
|
648,101 |
|
|
|
230,307 |
|
|
|
146,192 |
|
|
|
56,246 |
|
Return on average equity |
|
|
17 |
% |
|
|
24 |
% |
|
|
24 |
% |
|
|
18 |
% |
Overhead ratio |
|
|
69 |
|
|
|
60 |
|
|
|
34 |
|
|
|
54 |
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
Treasury & |
|
Asset |
|
|
|
|
|
Reconciling |
|
|
(in millions, except ratios) |
|
Securities Services |
|
Management |
|
Corporate |
|
Items(d)(e) |
|
Total |
|
Noninterest revenue |
|
$ |
3,003 |
|
|
$ |
4,115 |
|
|
$ |
777 |
|
|
$ |
2,302 |
|
|
$ |
30,256 |
|
Net interest income |
|
|
1,569 |
|
|
|
725 |
|
|
|
(957 |
) |
|
|
(4,575 |
) |
|
|
15,550 |
|
|
Total net revenue |
|
|
4,572 |
|
|
|
4,840 |
|
|
|
(180 |
) |
|
|
(2,273 |
) |
|
|
45,806 |
|
|
Provision for credit losses |
|
|
1 |
|
|
|
(42 |
) |
|
|
1 |
|
|
|
(1,617 |
) |
|
|
2,136 |
|
Credit reimbursement (to)/from TSS(b) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense(c) |
|
|
3,162 |
|
|
|
3,294 |
|
|
|
972 |
|
|
|
|
|
|
|
28,958 |
|
|
Income (loss) from continuing operations before
income tax expense |
|
|
1,319 |
|
|
|
1,588 |
|
|
|
(1,153 |
) |
|
|
(656 |
) |
|
|
14,712 |
|
Income tax expense (benefit) |
|
|
485 |
|
|
|
586 |
|
|
|
(659 |
) |
|
|
(656 |
) |
|
|
4,969 |
|
|
Income (loss) from continuing operations |
|
|
834 |
|
|
|
1,002 |
|
|
|
(494 |
) |
|
|
|
|
|
|
9,743 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
175 |
|
|
|
|
|
|
|
175 |
|
|
Net income (loss) |
|
$ |
834 |
|
|
$ |
1,002 |
|
|
$ |
(319 |
) |
|
$ |
|
|
|
$ |
9,918 |
|
|
Average equity |
|
$ |
2,314 |
|
|
$ |
3,500 |
|
|
$ |
49,076 |
|
|
$ |
|
|
|
$ |
109,327 |
|
Average assets |
|
|
30,526 |
|
|
|
42,597 |
|
|
|
209,172 |
|
|
|
(65,797 |
) |
|
|
1,297,344 |
|
Return on average equity |
|
|
48 |
% |
|
|
38 |
% |
|
NM |
|
|
NM |
|
|
|
12 |
% |
Overhead ratio |
|
|
69 |
|
|
|
68 |
|
|
NM |
|
|
NM |
|
|
|
63 |
|
|
|
|
|
(a) |
|
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 do not have any impact on Net income as reported by
the lines of business or by the Firm as a whole. |
(b) |
|
TSS reimburses IB for credit portfolio exposures IB manages on behalf of clients the segments
share. |
(c) |
|
Includes Merger costs which are reported in the Corporate segment. Merger costs attributed to
the business segments for the three and nine months ended September 30, 2007 and 2006 were as
follows. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Investment Bank |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
Retail Financial Services |
|
|
2 |
|
|
|
7 |
|
|
|
13 |
|
|
|
17 |
|
Card Services |
|
|
|
|
|
|
5 |
|
|
|
1 |
|
|
|
21 |
|
Commercial Banking |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Treasury & Securities Services |
|
|
32 |
|
|
|
30 |
|
|
|
95 |
|
|
|
85 |
|
Asset Management |
|
|
6 |
|
|
|
4 |
|
|
|
13 |
|
|
|
18 |
|
Corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
21 |
|
|
|
2 |
|
|
|
65 |
|
|
|
62 |
|
|
Total Merger costs |
|
$ |
61 |
|
|
$ |
48 |
|
|
$ |
187 |
|
|
$ |
205 |
|
|
(d) |
|
Managed results for CS exclude the impact of credit card securitizations on Total net
revenue, Provision for credit losses and Average assets, as JPMorgan Chase treats the sold
receivables as if they were still on the balance sheet in evaluating the overall performance
of CS as operations are funded, and decisions are made about allocating resources such as
employees and capital, based upon managed information. These adjustments are eliminated in
Reconciling items to arrive at the Firms reported U.S. GAAP results. The related
securitization adjustments were as follows. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Noninterest revenue |
|
$ |
(836 |
) |
|
$ |
(721 |
) |
|
$ |
(2,370 |
) |
|
$ |
(2,783 |
) |
Net interest income |
|
|
1,414 |
|
|
|
1,328 |
|
|
|
4,131 |
|
|
|
4,400 |
|
Provision for credit losses |
|
|
578 |
|
|
|
607 |
|
|
|
1,761 |
|
|
|
1,617 |
|
Average assets |
|
|
66,100 |
|
|
|
62,971 |
|
|
|
65,715 |
|
|
|
65,797 |
|
|
|
|
|
(e) |
|
Segment managed results reflect revenues on a tax-equivalent basis with the corresponding
income tax impact recorded within Income tax expense. These adjustments are eliminated in
Reconciling items to arrive at the Firms reported U.S. GAAP results. Tax-equivalent
adjustments for the three and nine months ended September 30, 2007 and 2006 were as follows. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Noninterest revenue |
|
$ |
192 |
|
|
$ |
165 |
|
|
$ |
501 |
|
|
$ |
481 |
|
Net interest income |
|
|
95 |
|
|
|
57 |
|
|
|
287 |
|
|
|
175 |
|
Income tax expense |
|
|
287 |
|
|
|
222 |
|
|
|
788 |
|
|
|
656 |
|
|
111
JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007 |
|
Three months ended September 30, 2006 |
|
|
Average |
|
|
|
|
|
Rate |
|
Average |
|
|
|
|
|
Rate |
|
|
Balance |
|
Interest |
|
(Annualized) |
|
Balance |
|
Interest |
|
(Annualized) |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks |
|
$ |
39,906 |
|
|
$ |
508 |
|
|
|
5.06 |
% |
|
$ |
31,291 |
|
|
$ |
352 |
|
|
|
4.46 |
% |
Federal funds sold and securities purchased
under resale agreements |
|
|
133,780 |
|
|
|
1,629 |
|
|
|
4.83 |
|
|
|
125,618 |
|
|
|
1,442 |
|
|
|
4.55 |
|
Securities borrowed |
|
|
87,955 |
|
|
|
1,242 |
|
|
|
5.60 |
|
|
|
82,216 |
|
|
|
887 |
|
|
|
4.28 |
|
Trading assets debt instruments |
|
|
310,445 |
|
|
|
5,182 |
|
|
|
6.62 |
|
|
|
213,164 |
|
|
|
2,834 |
|
|
|
5.28 |
|
Securities: Available-for-sale |
|
|
95,646 |
|
|
|
1,370 |
|
|
|
5.68 |
(c) |
|
|
77,962 |
|
|
|
1,119 |
|
|
|
5.70 |
(c) |
Held-to-maturity |
|
|
48 |
|
|
|
1 |
|
|
|
6.71 |
|
|
|
67 |
|
|
|
2 |
|
|
|
6.50 |
|
Interests in purchased receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
476,912 |
|
|
|
9,382 |
|
|
|
7.80 |
|
|
|
461,673 |
|
|
|
8,578 |
|
|
|
7.37 |
|
|
Total interest-earning assets |
|
|
1,144,692 |
|
|
|
19,314 |
|
|
|
6.69 |
|
|
|
991,991 |
|
|
|
15,214 |
|
|
|
6.08 |
|
Allowance for loan losses |
|
|
(7,691 |
) |
|
|
|
|
|
|
|
|
|
|
(7,076 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
33,489 |
|
|
|
|
|
|
|
|
|
|
|
29,554 |
|
|
|
|
|
|
|
|
|
Trading assets equity instruments |
|
|
86,177 |
|
|
|
|
|
|
|
|
|
|
|
75,366 |
|
|
|
|
|
|
|
|
|
Trading assets derivative receivables |
|
|
64,821 |
|
|
|
|
|
|
|
|
|
|
|
55,419 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
45,276 |
|
|
|
|
|
|
|
|
|
|
|
43,386 |
|
|
|
|
|
|
|
|
|
Other intangible assets
Mortgage servicing rights |
|
|
9,290 |
|
|
|
|
|
|
|
|
|
|
|
8,048 |
|
|
|
|
|
|
|
|
|
Purchased credit card relationships |
|
|
2,505 |
|
|
|
|
|
|
|
|
|
|
|
3,055 |
|
|
|
|
|
|
|
|
|
All other intangibles |
|
|
4,027 |
|
|
|
|
|
|
|
|
|
|
|
4,147 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
94,748 |
|
|
|
|
|
|
|
|
|
|
|
81,585 |
|
|
|
|
|
|
|
|
|
Assets of discontinued operations held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,664 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,477,334 |
|
|
|
|
|
|
|
|
|
|
$ |
1,309,139 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
$ |
540,937 |
|
|
$ |
5,638 |
|
|
|
4.13 |
% |
|
$ |
451,509 |
|
|
$ |
4,471 |
|
|
|
3.93 |
% |
Federal funds purchased and securities sold
under repurchase agreements |
|
|
206,174 |
|
|
|
2,693 |
|
|
|
5.18 |
|
|
|
192,674 |
|
|
|
2,251 |
|
|
|
4.63 |
|
Commercial paper |
|
|
26,511 |
|
|
|
312 |
|
|
|
4.68 |
|
|
|
19,207 |
|
|
|
231 |
|
|
|
4.78 |
|
Other borrowings(b) |
|
|
104,995 |
|
|
|
1,296 |
|
|
|
4.90 |
|
|
|
101,366 |
|
|
|
1,312 |
|
|
|
5.13 |
|
Beneficial interests issued by consolidated VIEs |
|
|
14,454 |
|
|
|
165 |
|
|
|
4.52 |
|
|
|
13,630 |
|
|
|
143 |
|
|
|
4.16 |
|
Long-term debt |
|
|
177,851 |
|
|
|
1,789 |
|
|
|
3.99 |
|
|
|
133,279 |
|
|
|
1,370 |
|
|
|
4.08 |
|
|
Total interest-bearing liabilities |
|
|
1,070,922 |
|
|
|
11,893 |
|
|
|
4.41 |
|
|
|
911,665 |
|
|
|
9,778 |
|
|
|
4.26 |
|
Noninterest-bearing deposits |
|
|
121,512 |
|
|
|
|
|
|
|
|
|
|
|
122,944 |
|
|
|
|
|
|
|
|
|
Trading liabilities derivative payables |
|
|
65,467 |
|
|
|
|
|
|
|
|
|
|
|
54,928 |
|
|
|
|
|
|
|
|
|
All other liabilities, including the allowance for
lending-related commitments |
|
|
100,457 |
|
|
|
|
|
|
|
|
|
|
|
84,971 |
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,825 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,358,358 |
|
|
|
|
|
|
|
|
|
|
|
1,197,333 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders equity |
|
|
118,976 |
|
|
|
|
|
|
|
|
|
|
|
111,806 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
118,976 |
|
|
|
|
|
|
|
|
|
|
|
111,806 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,477,334 |
|
|
|
|
|
|
|
|
|
|
$ |
1,309,139 |
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
2.28 |
% |
|
|
|
|
|
|
|
|
|
|
1.82 |
% |
Net interest income and net yield on
interest-earning assets |
|
|
|
|
|
$ |
7,421 |
|
|
|
2.57 |
% |
|
|
|
|
|
$ |
5,436 |
|
|
|
2.17 |
% |
|
|
|
|
(a) |
|
For purposes of the consolidated average balance sheet for assets and liabilities
transferred to discontinued operations, JPMorgan Chase used Federal funds sold interest income
as a reasonable estimate of the earnings on corporate trust deposits; therefore, JPMorgan
Chase transferred to Assets of discontinued operations held-for-sale average Federal funds
sold, along with the related interest income earned, and transferred to Liabilities of
discontinued operations held-for-sale average corporate trust deposits. |
(b) |
|
Includes securities sold but not yet purchased. |
(c) |
|
For the quarters ended September 30, 2007 and 2006, the annualized rate for
available-for-sale securities based upon amortized cost was 5.64% and 5.65%, respectively. |
112
JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
Nine months ended September 30, 2006 |
|
|
Average |
|
|
|
|
|
Rate |
|
Average |
|
|
|
|
|
Rate |
|
|
Balance |
|
Interest |
|
(Annualized) |
|
Balance |
|
Interest |
|
(Annualized) |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks |
|
$ |
24,848 |
|
|
$ |
901 |
|
|
|
4.85 |
% |
|
$ |
30,424 |
|
|
$ |
1,006 |
|
|
|
4.42 |
% |
Federal funds sold and securities purchased
under resale agreements |
|
|
134,009 |
|
|
|
4,936 |
|
|
|
4.92 |
|
|
|
127,863 |
|
|
|
3,859 |
|
|
|
4.03 |
|
Securities borrowed |
|
|
85,878 |
|
|
|
3,498 |
|
|
|
5.45 |
|
|
|
84,385 |
|
|
|
2,457 |
|
|
|
3.89 |
|
Trading assets debt instruments |
|
|
287,680 |
|
|
|
13,277 |
|
|
|
6.17 |
|
|
|
201,232 |
|
|
|
8,123 |
|
|
|
5.40 |
|
Securities: Available-for-sale |
|
|
95,924 |
|
|
|
4,074 |
|
|
|
5.68 |
(c) |
|
|
73,690 |
|
|
|
3,036 |
|
|
|
5.51 |
(c) |
Held-to-maturity |
|
|
58 |
|
|
|
3 |
|
|
|
6.10 |
|
|
|
72 |
|
|
|
4 |
|
|
|
6.53 |
|
Interests in purchased receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,640 |
|
|
|
652 |
|
|
|
4.68 |
|
Loans |
|
|
470,078 |
|
|
|
26,942 |
|
|
|
7.66 |
|
|
|
444,558 |
|
|
|
24,048 |
|
|
|
7.23 |
|
|
Total interest-earning assets |
|
|
1,098,475 |
|
|
|
53,631 |
|
|
|
6.53 |
|
|
|
980,864 |
|
|
|
43,185 |
|
|
|
5.89 |
|
Allowance for loan losses |
|
|
(7,417 |
) |
|
|
|
|
|
|
|
|
|
|
(7,140 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
32,167 |
|
|
|
|
|
|
|
|
|
|
|
31,391 |
|
|
|
|
|
|
|
|
|
Trading assets equity instruments |
|
|
86,923 |
|
|
|
|
|
|
|
|
|
|
|
72,075 |
|
|
|
|
|
|
|
|
|
Trading assets derivative receivables |
|
|
61,801 |
|
|
|
|
|
|
|
|
|
|
|
55,942 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
45,194 |
|
|
|
|
|
|
|
|
|
|
|
43,437 |
|
|
|
|
|
|
|
|
|
Other intangible assets
Mortgage servicing rights |
|
|
8,487 |
|
|
|
|
|
|
|
|
|
|
|
7,548 |
|
|
|
|
|
|
|
|
|
Purchased credit card relationships |
|
|
2,674 |
|
|
|
|
|
|
|
|
|
|
|
3,160 |
|
|
|
|
|
|
|
|
|
All other intangibles |
|
|
4,166 |
|
|
|
|
|
|
|
|
|
|
|
4,240 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
97,302 |
|
|
|
|
|
|
|
|
|
|
|
83,771 |
|
|
|
|
|
|
|
|
|
Assets of discontinued operations held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,056 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,429,772 |
|
|
|
|
|
|
|
|
|
|
$ |
1,297,344 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
$ |
517,856 |
|
|
$ |
15,975 |
|
|
|
4.12 |
% |
|
$ |
440,514 |
|
|
$ |
12,140 |
|
|
|
3.68 |
% |
Federal funds purchased and securities sold under
repurchase agreements |
|
|
204,942 |
|
|
|
7,903 |
|
|
|
5.16 |
|
|
|
178,936 |
|
|
|
5,760 |
|
|
|
4.30 |
|
Commercial paper |
|
|
24,726 |
|
|
|
892 |
|
|
|
4.82 |
|
|
|
17,348 |
|
|
|
569 |
|
|
|
4.39 |
|
Other borrowings(b) |
|
|
100,492 |
|
|
|
3,668 |
|
|
|
4.88 |
|
|
|
104,049 |
|
|
|
3,950 |
|
|
|
5.08 |
|
Beneficial interests issued by consolidated VIEs |
|
|
14,691 |
|
|
|
425 |
|
|
|
3.86 |
|
|
|
32,993 |
|
|
|
1,077 |
|
|
|
4.37 |
|
Long-term debt |
|
|
162,929 |
|
|
|
4,722 |
|
|
|
3.87 |
|
|
|
126,011 |
|
|
|
3,964 |
|
|
|
4.21 |
|
|
Total interest-bearing liabilities |
|
|
1,025,636 |
|
|
|
33,585 |
|
|
|
4.38 |
|
|
|
899,851 |
|
|
|
27,460 |
|
|
|
4.08 |
|
Noninterest-bearing deposits |
|
|
122,904 |
|
|
|
|
|
|
|
|
|
|
|
124,517 |
|
|
|
|
|
|
|
|
|
Trading liabilities derivative payables |
|
|
61,742 |
|
|
|
|
|
|
|
|
|
|
|
57,052 |
|
|
|
|
|
|
|
|
|
All other liabilities, including the allowance for
lending-related commitments |
|
|
101,723 |
|
|
|
|
|
|
|
|
|
|
|
85,445 |
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations held-for-sale(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,107 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,312,005 |
|
|
|
|
|
|
|
|
|
|
|
1,187,972 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
Common stockholders equity |
|
|
117,767 |
|
|
|
|
|
|
|
|
|
|
|
109,327 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
117,767 |
|
|
|
|
|
|
|
|
|
|
|
109,372 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,429,772 |
|
|
|
|
|
|
|
|
|
|
$ |
1,297,344 |
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
2.15 |
% |
|
|
|
|
|
|
|
|
|
|
1.81 |
% |
Net interest income and net yield on
interest-earning assets |
|
|
|
|
|
$ |
20,046 |
|
|
|
2.44 |
% |
|
|
|
|
|
$ |
15,725 |
|
|
|
2.14 |
% |
|
|
|
|
(a) |
|
For purposes of the consolidated average balance sheet for assets and liabilities
transferred to discontinued operations, JPMorgan Chase used Federal funds sold interest income
as a reasonable estimate of the earnings on corporate trust deposits; therefore, JPMorgan
Chase transferred to Assets of discontinued operations held-for-sale average Federal funds
sold, along with the related interest income earned, and transferred to Liabilities of
discontinued operations held-for-sale average corporate trust deposits. |
(b) |
|
Includes securities sold but not yet purchased. |
(c) |
|
For the nine months ended September 30, 2007 and 2006, the annualized rate for
available-for-sale securities based upon amortized cost was 5.66% and 5.45%, respectively. |
113
GLOSSARY OF TERMS
ACH: Automated Clearing House.
AICPA: American Institute of Certified Public Accountants.
AICPA Statement of Position (SOP) 07-1: Clarification of the Scope of the Audit and Accounting
Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for
Investments in Investment Companies.
Assets under management: Represent assets actively managed by Asset Management on behalf of
institutional, private banking, private client services and retail clients. Excludes assets managed
by American Century Companies, Inc., in which the Firm has a 44% ownership interest.
Assets under supervision: Represent assets under management as well as custody, brokerage,
administration and deposit accounts.
Beneficial interest issued by consolidated VIEs: Represents the interest of third-party holders of
debt/equity securities, or other obligations, issued by VIEs that JPMorgan Chase consolidates under
FIN 46R. The underlying obligations of the VIEs consist of short-term borrowings, commercial paper
and long-term debt. The related assets consist of trading assets, available-for-sale securities,
loans and other assets.
Benefit obligation: Refers to the projected benefit obligation for pension plans and the
accumulated postretirement benefit obligation for OPEB plans.
Credit derivatives: Contractual agreements that provide protection against a credit event of one or
more referenced credits. The nature of a credit event is established by the protection buyer and
protection seller at the inception of a transaction, and such events include bankruptcy, insolvency
or failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic
fee in return for a payment by the protection seller upon the occurrence, if any, of a credit
event.
Discontinued operations: A component of an entity that is classified as held-for-sale or that has
been disposed of from ongoing operations in its entirety or piecemeal, and for which the entity
will not have any significant, continuing involvement. A discontinued operation may be a separate
major business segment, a component of a major business segment or a geographical area of
operations of the entity that can be separately distinguished operationally and for financial
reporting purposes.
EITF: Emerging Issues Task Force.
EITF Issue 02-3: Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management Activities.
EITF Issue 06-11: Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.
FASB: Financial Accounting Standards Board.
FIN 39: FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts an
interpretation of APB Opinion No. 10 and FASB Statement No. 105.
FIN 41: FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements an interpretation of APB Opinion No. 10 and a Modification of FASB
Interpretation No. 39.
FIN 45: FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.
FIN 46R: FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities an interpretation of ARB No. 51.
FIN 48: FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109.
FSP: FASB Staff Position.
FSP FAS 13-2: Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to
Income Taxes Generated by a Leveraged Lease Transaction.
114
FSP FIN 39-1: Amendment of FASB Interpretation No. 39.
FSP FIN 46(R)-7: Application of FASB Interpretation No. 46(R) to Investment Companies.
Interchange income: A fee that is paid to a credit card issuer in the clearing and settlement of a
sales or cash advance transaction.
Interests in purchased receivables: Represent an ownership interest in cash flows of an underlying
pool of receivables transferred by a third-party seller into a bankruptcy-remote entity, generally
a trust.
Investment-grade: An indication of credit quality based upon JPMorgan Chases internal risk
assessment system. Investment-grade generally represents a risk profile similar to a rating of a
BBB-/Baa3 or better, as defined by independent rating agencies.
Managed average assets: Refers to total assets on the Firms balance sheet plus credit card
receivables that have been securitized.
Managed basis: A non-GAAP presentation of financial results that includes reclassifications related
to credit card securitizations and taxable equivalents. Management uses this non-GAAP financial
measure at the segment level because it believes this provides information to investors in
understanding the underlying operational performance and trends of the particular business segment
and facilitates a comparison of the business segment with the performance of competitors.
Managed credit card receivables: Refers to credit card receivables on the Firms balance sheet plus
credit card receivables that have been securitized.
Mark-to-market exposure: A measure, at a point in time, of the value of a derivative or foreign
exchange contract in the open market. When the mark-to-market value is positive, it indicates the
counterparty owes JPMorgan Chase and, therefore, creates a repayment risk for the Firm. When the
mark-to-market value is negative, JPMorgan Chase owes the counterparty. In this situation, the Firm
does not have repayment risk.
Master netting agreement: An agreement between two counterparties that have multiple derivative
contracts with each other that provides for the net settlement of all contracts through a single
payment, in a single currency, in the event of default on or termination of any one contract.
NA: Data is not applicable or available for the period presented.
Net yield on interest-earning assets: The average rate for interest-earning assets less the average
rate paid for all sources of funds.
NM: Not meaningful.
OPEB: Other postretirement employee benefits.
Overhead ratio: Noninterest expense as a percentage of Total net revenue.
Principal transactions (revenue): Realized and unrealized gains and losses from trading activities
(including physical commodities inventories that are accounted for at the lower of cost or fair
value) and changes in fair value associated with instruments held by the Investment Bank for which
the SFAS 159 fair value option was elected. Principal transactions revenue also include private
equity gains and losses.
Reported basis: Financial statements prepared under accounting principles generally accepted in the
United States of America (U.S. GAAP). The reported basis includes the impact of credit card
securitizations, but excludes the impact of taxable-equivalent adjustments.
Return on common equity less goodwill: Represents net income applicable to common stock divided by
total average common equity (net of goodwill). The Firm uses return on equity less goodwill, a
non-GAAP financial measure, to evaluate the operating performance of the Firm. The Firm also
utilizes this measure to facilitate operating comparisons to other competitors.
115
SFAS: Statement of Financial Accounting Standards.
SFAS 5: Accounting for Contingencies.
SFAS 109: Accounting for Income Taxes.
SFAS 114: Accounting by Creditors for Impairment of a Loan an amendment of FASB Statements No.
5 and 15.
SFAS 123R: Share-Based Payment.
SFAS 133: Accounting for Derivative Instruments and Hedging Activities.
SFAS 140: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities a replacement of FASB Statement No. 125.
SFAS 142: Goodwill and Other Intangible Assets.
SFAS 155: Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements
No. 133 and 140.
SFAS 157: Fair Value Measurements.
SFAS 158: Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an
amendment of FASB Statements No. 87, 88, 106, and 132(R).
SFAS 159: The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115.
Staff Accounting Bulletin (SAB) 109: Written Loan Commitments Recorded at Fair Value
Through Earnings.
Stress testing: A scenario that measures market risk under unlikely but plausible events in
abnormal markets.
Unaudited: Financial statements and information included throughout this document that have not
been subjected to auditing procedures sufficient to permit an independent certified public
accountant to express an opinion.
U.S. GAAP: Accounting principles generally accepted in the United States of America.
U.S. government and federal agency obligations: Obligations of the U.S. government or an
instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to
the timely payment of principal and interest by the full faith and credit of the U.S. government.
U.S. government-sponsored enterprise obligations: Obligations of agencies originally established or
chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these
obligations are not explicitly guaranteed as to the timely payment of principal and interest by the
full faith and credit of the U.S. government.
Value-at-risk (VAR): A measure of the dollar amount of potential loss from adverse market moves
in an ordinary market environment.
116
LINE OF BUSINESS METRICS
Investment Banking
IBs revenues comprise the following:
Investment banking fees includes advisory, equity underwriting, bond underwriting and loan
syndication fees.
Fixed income markets includes client and portfolio management revenue related to both market-making
and proprietary risk-taking across global fixed income markets, including government and corporate
debt, foreign exchange, interest rate and commodities markets.
Equity markets includes client and portfolio management revenue related to market-making and
proprietary risk-taking across global equity products, including cash instruments, derivatives and
convertibles.
Credit portfolio revenue includes Net interest income, fees and loan sale activity for IBs credit
portfolio. Credit portfolio revenue also includes gains or losses on securities received as part of
a loan restructuring, and changes in the CVA, which is the component of the fair value of a
derivative that reflects the credit quality of the counterparty. Credit portfolio revenue also
includes the results of risk management related to the Firms lending and derivative activities. In
addition, Credit portfolio revenue includes 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.
Retail Financial Services
Description of selected business metrics within Regional Banking:
Personal bankers Retail branch office personnel who acquire, retain and expand new and existing
customer relationships by assessing customer needs and recommending and selling appropriate banking
products and services.
Sales specialists Retail branch office personnel who specialize in the marketing of a single
product, including mortgages, investments and business banking, by partnering with the personal
bankers.
Mortgage banking revenues comprise the following:
Production revenue includes Mortgage Servicing Rights created from the sales of loans, net gains or
losses on the sales of loans, and other production-related fees. Also includes revenue associated
with originations of subprime mortgage loans.
Net mortgage servicing revenue includes the following components:
(a) |
|
Servicing revenue represents all gross income earned from servicing third-party mortgage
loans including stated service fees, excess service fees, late fees, and other ancillary fees. |
|
(b) |
|
Changes in MSR asset fair value due to: |
|
|
|
market-based inputs such as interest rates and volatility, as well as updates to
valuation assumptions used in the MSR valuation model. |
|
|
|
servicing portfolio runoff (or time decay). |
(c) |
|
Derivative valuation adjustments and other, which represents changes in the fair value of
derivative instruments used to offset the impact of changes in the market-based inputs to the
MSR valuation model. |
MSR risk management results include changes in the MSR asset fair value due to inputs or
assumptions and derivative valuation adjustments and other.
117
Mortgage Bankings origination channels comprise the following:
Retail Borrowers who are buying or refinancing a home are directly contacted by a mortgage
banker employed by the Firm using a branch office, the Internet or by phone. Borrowers are
frequently referred to a mortgage banker by real estate brokers, home builders or other third
parties.
Wholesale A third-party mortgage broker refers loan applications to a mortgage banker at the
Firm. Brokers are independent loan originators that specialize in finding and counseling borrowers
but do not provide funding for loans.
Correspondent Correspondents are banks, thrifts, other mortgage banks and other financial
institutions that sell closed loans to the Firm.
Correspondent negotiated transactions (CNT) Correspondent negotiated transactions exclude
purchased bulk servicing transactions and occur when mid- to large-sized mortgage lenders, banks
and bank-owned mortgage companies sell servicing to the Firm on an as-originated basis. These
transactions supplement traditional production channels and provide growth opportunities in the
servicing portfolio in stable and rising-rate periods.
Card Services
Description of selected business metrics within CS:
Charge volume Represents the dollar amount of cardmember purchases, balance transfers and cash
advance activity.
Net accounts opened Includes originations, purchases and sales.
Merchant acquiring business Represents an entity that processes payments for merchants. JPMorgan
Chase is a partner in Chase Paymentech Solutions, LLC.
Bank card volume Represents the dollar amount of transactions processed for the merchants.
Total transactions Represents the number of transactions and authorizations processed for the
merchants.
Commercial Banking
Commercial Banking revenues comprise the following:
Lending includes a variety of financing alternatives, which are often provided on a basis secured
by receivables, inventory, equipment, real estate or other assets. Products include term loans,
revolving lines of credit, bridge financing, asset-backed structures, and leases.
Treasury services includes a broad range of products and services enabling clients to transfer,
invest and manage the receipt and disbursement of funds, while providing the related information
reporting. These products and services include U.S. dollar and multi-currency clearing, ACH,
lockbox, disbursement and reconciliation services, check deposits, other check and currency-related
services, trade finance and logistics solutions, commercial card, and deposit products, sweeps and
money market mutual funds.
Investment banking products provide clients with sophisticated capital-raising alternatives, as
well as balance sheet and risk management tools through advisory, equity underwriting, loan
syndications, investment-grade debt, asset-backed securities, private placements, high-yield bonds,
interest rate derivatives, foreign exchange hedges, and securities sales.
Description of selected business metrics within CB:
Liability balances include deposits and deposits that are swept to onbalance sheet liabilities
(e.g., commercial paper, Fed funds purchased, and repurchase agreements).
IB revenues, gross Represents total revenue related to investment banking products sold to CB
clients.
Treasury & Securities Services
Treasury & Securities Services firmwide metrics include certain TSS product revenues and liability
balances reported in other lines of business related to customers who are also customers of those
other lines of business. In order to capture the firmwide impact of 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
managements view, in order to understand the aggregate TSS business.
Description of selected business metrics within TSS:
Liability balances include deposits and deposits that are swept to onbalance sheet
liabilities (e.g., commercial paper, Fed funds purchased, and repurchase agreements).
118
Asset Management
Assets under management: Represent assets actively managed by Asset Management on behalf of
institutional, private banking, private client services and retail clients. Excludes assets managed
by American Century Companies, Inc., in which the Firm has a 44% ownership interest.
Assets under supervision: Represent assets under management as well as custody, brokerage,
administration and deposit accounts.
Alternative Assets: The following types of assets constitute alternative investments hedge
funds, currency, real estate and private equity.
AMs client segments comprise the following:
Institutional brings comprehensive global investment services including asset management,
pension analytics, asset-liability management and active risk budgeting strategies to corporate
and public institutions, endowments, foundations, not-for-profit organizations and governments
worldwide.
Retail provides worldwide investment management services and retirement planning and administration
through third-party and direct distribution of a full range of investment vehicles.
The Private Bank addresses every facet of wealth management for ultra-high-net-worth individuals
and families worldwide, including investment management, capital markets and risk management, tax
and estate planning, banking, capital raising and specialty-wealth advisory services.
Private Client Services offers high-net-worth individuals, families and business owners in the
United States comprehensive wealth management solutions, including investment management, capital
markets and risk management, tax and estate planning, banking, and specialty-wealth advisory
services.
FORWARD-LOOKING STATEMENTS
From time to time, the Firm has made and will make forward-looking statements. These
statements can be identified by the fact that they do not relate strictly to historical or current
facts. Forward-looking statements often use words such as anticipate, target, expect,
estimate, intend, plan, goal, believe, or other words of similar meaning. Forward-looking
statements provide JPMorgan Chases current expectations or forecasts of future events,
circumstances, results or aspirations. JPMorgan Chases disclosures in this report contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Firm also may make forward-looking statements in its other documents filed or furnished
with the Securities and Exchange Commission (SEC). In addition, the Firms senior management may
make forward-looking statements orally to analysts, investors, representatives of the media and
others.
All forward-looking statements are, by their nature, subject to risks and uncertainties. JPMorgan
Chases actual future results may differ materially from those set forth in its forward-looking
statements. Factors that could cause this difference many of which are beyond the Firms control
include the following: local, regional and international business, political or economic
conditions; changes in trade, monetary and fiscal policies and laws;
volatility in the credit, rates, debt and equity markets; technological changes
instituted by the Firm and by other entities which may affect the Firms business; mergers and
acquisitions, including the Firms ability to integrate acquisitions; ability of the Firm to
develop new products and services; acceptance of new products and services and the ability of the
Firm to increase market share; the ability of the Firm to control expenses; competitive pressures;
changes in laws and regulatory requirements; changes in applicable accounting policies; costs,
outcomes and effects of litigation and regulatory investigations; changes in the credit quality of
the Firms customers; and adequacy of the Firms risk management framework.
Additional factors that may cause future results to differ materially from forward-looking
statements are discussed in Part I, Item 1A: Risk Factors in the Firms 2006 Annual Report to which
reference is hereby made. There is no assurance that any list of risks and uncertainties or risk
factors is complete.
Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are
made and JPMorgan Chase does not undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the date the forward-looking statement was made.
The reader should, however, consult any further disclosures of a forward-looking nature the Firm
may make in any subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, or Current
Reports on Form 8-K.
119
Item 3 Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see the Market
Risk Management section of the managements discussion and analysis (MD&A) on pages 6265 of
this Form 10-Q.
Item 4 Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Firms management, including its Chairman and Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon
that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded
that these disclosure controls and procedures were effective. See Exhibits 31.1 and 31.2 for the
Certification statements issued by the Chairman and Chief Executive Officer, and Chief Financial
Officer.
The Firm is committed to maintaining high standards of internal control over financial reporting.
Nevertheless, because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements.
There was no change in the Firms internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) that occurred during the third quarter of 2007
that has materially affected, or is reasonably likely to materially affect, the Firms internal
control over financial reporting.
Part II Other Information
Item 1 Legal proceedings
The following information supplements and amends the disclosure set forth under Part I, Item 3
Legal proceedings in the Firms 2006 Annual Report, Part II, Item 1 Legal Proceedings in the
Firms Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2007 and Part II,
Item 1 Legal proceedings in the Firms Quarterly Report on Form 10-Q for the quarterly period
ending June 30, 2007 (the Firms SEC filings).
Enron litigation. In the purported consolidated class action lawsuit by JPMorgan Chase
stockholders, briefing on the plaintiffs appeal of the dismissal of their complaint to the United
States Court of Appeals for the Second Circuit is complete. In the shareholder derivative action
against current and former directors of JPMorgan Chase, briefing on the plaintiffs appeal to the
United States Court of Appeals for the Second Circuit of the decision granting the Firms motion to
dismiss is also complete.
In the action pending in New York Supreme Court, New York County, alleging claims relating to the
Firms role as Indenture Trustee, defendant JPMorgan Chase Bank, N.A. filed a motion to dismiss the
Amended Complaint on May 24, 2007. The parties await the Courts decision.
IPO allocation litigation. With respect to the IPO securities cases, on August 14, 2007,
plaintiffs filed second amended class action complaints in each of the six class certification
focus cases. JPMSI is a named defendant in two of these cases. Underwriter defendants time to
answer, move or otherwise respond to the amended complaints has been extended until November 9,
2007.
On September 27, 2007, plaintiffs filed a written motion seeking class certification in the six
class certification focus cases. Under the briefing schedule currently in place, the underwriter
defendants opposition papers are due by December 21, 2007, and plaintiffs reply papers are due by
February 15, 2008. In addition, the parties are engaged in class certification discovery.
In re JPMorgan Chase Cash Balance Litigation. On July 31, 2007, the United States District Court
for the Southern District of New York denied plaintiffs motions for reconsideration and
certification of the May 30, 2007 Order granting in part and denying in part plaintiffs motion for
class certification.
On
August 17, 2007, a Class Action Complaint was filed in the United States District Court for the
Southern District of New York, Bilello v. JPMorgan Chase Retirement Plan, JPMorgan Chase Director
of Human Resources, as administrator of the JPMorgan Chase Retirement
Plan. The complaint asserts
claims on behalf of participants in the Chemical Bank Plan and
certain other predecessor plans to the JPMorgan Chase
Retirement Plan, including notice claims that were
excluded from the class in In re JPMorgan Chase Cash Balance
Litigation. More specifically, the
Bilello complaint alleges that (1) defendants failed to comply with the notice and disclosure
requirements of ERISA in connection with the conversion of the Chemical Bank Plan to a cash balance
plan and subsequent mergers of the Chemical Bank Plan with other predecessor plans resulting in
cash balance plans, and (2) the Chemical Bank Plan, following its conversion to a cash balance
plan, was impermissibly backloaded in violation of 29 U.S.C. § 1054(b)(1)(B), ERISA § 204(b)(1)(B).
Defendants anticipate filing a motion to dismiss in November 2007.
American
Express Litigation. VISA and American Express reached an agreement in
principle to settle the litigation on November 1, 2007, including a
settlement related to the banks membership in MasterCard. VISA will pay American Express approximately $2
billion over 4 years. The first payment of $1.13 billion is to be
paid by no later than
120
March 31, 2008. It is anticipated that the VISA settlement will be
funded from a portion of the proceeds
generated from VISAs currently
planned IPO. As a result of the settlement, the defendant banks,
including JPMorgan Chase, will be released and dismissed from the
action. The defendant banks separate payment obligation with
respect to the American Express settlement is $185 million. JPMorgan Chases
contribution to the proposed settlement will have no material adverse
effect on the Firm.
Interchange Litigation. The Magistrate Judge has recommended to the District Court that it grant
defendants motion to dismiss all claims that predate January 1, 2004. Plaintiffs time to file
objections to this recommendation has been extended pending a motion to clarify the effect, if any,
of the Magistrates report and recommendation as to certain unnamed putative class members.
JPMorgan Chase is a signatory to a judgment sharing agreement that Visa U.S.A. previously entered
into with certain of its members.
In addition to the various cases, proceedings and investigations discussed above, JPMorgan Chase
and its subsidiaries are named as defendants or otherwise involved in a number of other legal
actions and governmental proceedings arising in connection with their businesses. Additional
actions, investigations or proceedings may be initiated from time to time in the future. In view of
the inherent difficulty of predicting the outcome of legal matters, particularly where the
claimants seek very large or indeterminate damages, or where the cases present novel legal
theories, involve a large number of parties or are in early stages of discovery, the Firm cannot
state with confidence what the eventual outcome of these pending matters will be, what the timing
of the ultimate resolution of these matters will be or what the eventual loss, fines, penalties or
impact related to each pending matter may be. JPMorgan Chase believes, based upon its current
knowledge, after consultation with counsel and after taking into account its current litigation
reserves, that the outcome of the legal actions, proceedings and investigations currently pending
against it should not have a material, adverse effect on the consolidated financial condition of
the Firm. However, in light of the uncertainties involved in such proceedings, actions and
investigations, there is no assurance that the ultimate resolution of these matters will not
significantly exceed the reserves currently accrued by the Firm; as a result, the outcome of a
particular matter may be material to JPMorgan Chases operating results for a particular period,
depending upon, among other factors, the size of the loss or liability imposed and the level of
JPMorgan Chases income for that period.
Item 1A Risk Factors
For a discussion of risk factors affecting the Firm, see Part 1, Item 1A, Risk Factors, on pages
46 and Forward-Looking Statements on page 147 of JPMorgan Chases 2006 Annual Report.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
During the third quarter of 2007, shares of common stock of JPMorgan Chase & Co. were issued in
transactions exempt from registration under the Securities Act of 1933, pursuant to Section 4(2)
thereof, as follows: on July 27, 2007, 39,339 shares were issued to retired employees who had
deferred receipt of such common shares pursuant to the Corporate Performance Incentive Plan.
The actual amount of shares repurchased under the Firms repurchase program is subject to various
factors, including market conditions; legal considerations affecting the amount and timing of
repurchase activity; the Firms capital position (taking into account goodwill and intangibles);
internal capital generation; and alternative potential investment opportunities. The repurchase
program does not include specific price targets or time tables; may be executed through open market
purchases or privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be
suspended at any time.
For the three and nine months ended September 30, 2007, under the respective stock repurchase
programs then in effect, the Firm repurchased a total of 47.0 million shares and 164.6 million
shares for $2.1 billion and $8.0 billion at an average price per share of $45.42 and $48.67,
respectively. For the three and nine months ended September 30, 2006, under the respective stock
repurchase programs then in effect, the Firm repurchased a total of 20.0 million shares and 69.5
million shares for $900 million and $2.9 billion at an average price per share of $44.88 and
$42.22, respectively. As of September 30, 2007, $6.4 billion of authorized repurchase capacity
remained under the new stock repurchase program.
The Firm has determined that it may, from time to time, enter into written trading plans under Rule
10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of common stock in
accordance with the repurchase program. A Rule 10b5-1 repurchase plan would allow the Firm to
repurchase shares during periods when it would not otherwise be repurchasing common stock for
example, during internal trading black-out periods. All purchases under a Rule 10b5-1 plan must
be made according to a predefined plan that is established when the Firm is not aware of material
nonpublic information.
121
The Firms repurchases of equity securities during the third quarter and first nine months of 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar value of remaining |
For the nine months ended |
|
Total open market |
|
Average price |
|
authorized repurchase(b) |
September 30, 2007 |
|
shares repurchased |
|
paid per share(a) |
|
(in millions) |
|
First quarter |
|
|
80,906,259 |
|
|
$ |
49.45 |
|
|
$ |
1,212 |
|
|
Repurchases under the $8.0 billion program |
|
|
8,043,500 |
|
|
|
49.06 |
|
|
|
|
(c) |
Repurchases under the $10.0 billion program |
|
|
28,633,286 |
|
|
|
51.71 |
|
|
|
8,519 |
(d) |
|
Second quarter |
|
|
36,676,786 |
|
|
|
51.13 |
|
|
|
8,519 |
|
|
July |
|
|
17,691,700 |
|
|
|
47.09 |
|
|
|
7,686 |
|
August |
|
|
28,313,500 |
|
|
|
44.37 |
|
|
|
6,430 |
|
September |
|
|
1,015,000 |
|
|
|
45.22 |
|
|
|
6,384 |
|
|
Third quarter |
|
|
47,020,200 |
|
|
|
45.42 |
|
|
|
|
|
|
Year-to-date |
|
|
164,603,245 |
|
|
$ |
48.67 |
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes commission costs. |
(b) |
|
The amount authorized by the Board of Directors excludes commissions cost. |
(c) |
|
The unused portion of this program was cancelled when the replacement program was authorized. |
(d) |
|
Dollar value under new program of $10.0 billion. |
In addition to the repurchases disclosed above, participants in the Firms stock-based
incentive plans may have shares withheld to cover income taxes. Shares withheld to pay income taxes
are repurchased pursuant to the terms of the applicable plan and not under the Firms share
repurchase program. Shares repurchased pursuant to these plans during the third quarter and first
nine months of 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
For the nine months ended |
|
Total shares |
|
|
price paid |
|
September 30, 2007 |
|
repurchased |
|
|
per share |
|
|
First quarter |
|
|
2,591,697 |
|
|
$ |
49.99 |
|
|
Second quarter |
|
|
84,218 |
|
|
|
48.70 |
|
|
July |
|
|
28,764 |
|
|
|
49.73 |
|
August |
|
|
|
|
|
|
|
|
September |
|
|
|
|
|
|
|
|
|
Third quarter |
|
|
28,764 |
|
|
|
49.73 |
|
|
Year-to-date |
|
|
2,704,679 |
|
|
$ |
49.94 |
|
|
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits
|
|
|
|
|
4.1 |
|
|
|
First Supplemental Indenture,
dated as of November 1, 2007, between JPMorgan Chase & Co. and
Deutsche Bank Trust Company Americas, as Trustee, to the Indenture, dated
as of December 1, 1989 (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K of JPMorgan Chase & Co. (File No.
1-5805) filed on November 7, 2007) |
31.1 |
|
|
|
Certification |
31.2 |
|
|
|
Certification |
32 |
|
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
122
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
JPMORGAN CHASE & CO. |
|
|
|
|
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
|
Date: November 9, 2007 |
|
|
|
|
|
|
By
|
|
/s/ Louis Rauchenberger |
|
|
|
|
|
|
|
|
|
Louis Rauchenberger |
|
|
|
|
|
|
|
|
|
Managing Director and Controller |
|
|
|
|
[Principal Accounting Officer] |
123
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
|
|
|
|
|
EXHIBIT NO. |
|
EXHIBITS |
|
PAGE AT WHICH LOCATED |
|
|
|
|
|
4.1
|
|
First Supplemental Indenture,
dated as of November 1, 2007, between JPMorgan Chase & Co. and
Deutsche Bank Trust Company Americas, as Trustee, to the Indenture,
dated as of December 1, 1989 (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed on November 7, 2007)
|
|
NA |
|
|
|
|
|
31.1
|
|
Certification
|
|
125 |
|
|
|
|
|
31.2
|
|
Certification
|
|
126 |
|
|
|
|
|
The following exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. In addition, Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
|
|
|
|
|
32
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
127 |
124