AMENDMENT NO. 2 TO FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
Annual report pursuant to section 13 or 15(d) of
The Securities Exchange Act of 1934
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For the fiscal year ended
December 31, 2005
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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
(State or other jurisdiction of
incorporation or organization)
270 Park Avenue, New York, NY
(Address of principal executive offices)
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13-2624428
(I.R.S. employer
identification no.)
10017
(Zip code) |
Registrants telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Common stock |
Depositary shares representing a one-tenth interest in
6 5/8%
cumulative preferred stock (stated value$500) |
6 1/8% subordinated notes due 2008 |
6.75% subordinated notes due 2008 |
6.50% subordinated notes due 2009 |
Guarantee of 7.50% Capital Securities, Series I, of J.P. Morgan Chase
Capital IX |
Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan
Chase Capital X |
Guarantee of 5 7/8% Capital Securities, Series K, of J.P. Morgan Chase
Capital XI |
Guarantee of 6.25% Capital Securities, Series L, of J.P. Morgan
Chase Capital XII |
Guarantee of 6.20% Capital Securities, Series N, of JPMorgan
Chase Capital XIV |
Guarantee of 6.35% Capital Securities, Series P, JPMorgan Chase Capital XVI |
Guarantee of 7.20% Preferred Securities of BANK ONE Capital VI |
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Indexed Linked Notes on the S&P 500® Index due November 26, 2007 |
JPMorgan Market Participation Notes on the S&P 500® Index due March 12, 2008 |
Capped Quarterly Observation Notes Linked to S&P 500® Index due September 22, 2008 |
Capped Quarterly Observation Notes Linked to S&P 500® Index due October 30, 2008 |
Capped Quarterly Observation Notes Linked to S&P 500® Index due January 21, 2009 |
JPMorgan Market Participation Notes on the S&P 500® Index due March 31, 2009 |
Capped Quarterly Observation Notes Linked to S&P 500® Index due July 7, 2009 |
Capped Quarterly Observation Notes Linked to S&P 500® Index due September 21, 2009 |
Consumer Price Indexed Securities due January 15, 2010 |
Principal Protected Notes Linked to S&P 500® Index due September 30, 2010 |
The Indexed Linked Notes, JPMorgan Market Participation Notes, Capped Quarterly Observation Notes, Consumer Price
Indexed Securities and Principal Protected Notes are listed on the American Stock Exchange;
all other securities named above are listed on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. þ Yes o No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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):
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þ Large accelerated filer
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o Accelerated filer
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o Non-accelerated filer |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o Yes þ No
The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates of
JPMorgan Chase & Co. on June 30, 2005 was approximately $123,459,434,538.
Number of shares of common stock outstanding on January 31, 2006: 3,485,553,836
Documents Incorporated by Reference: Portions of the Registrants proxy statement for the
annual meeting of stockholders to be held on May 16, 2006, are incorporated by reference in this
Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III.
Form 10-K/A Index
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Explanatory note
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Part II |
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Item 8
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Financial statements and supplementary data
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Item 9A
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Controls and procedures
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12 |
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Part IV |
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Item 15
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Exhibits, financial statement schedules
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EXPLANATORY NOTE
JPMorgan Chase & Co. (JPMorgan Chase or the Firm) is filing this Amendment No. 2 to its
Annual Report on Form 10-K for the year ended December 31, 2005, to reflect the restatement of the Firms Consolidated statements of cash
flows, as discussed in Note 1 of the Notes to the Consolidated financial statements contained in Part
II, Item 8: Financial statements and supplementary data. Except for Items 8 and 9A of Part II, no
other information in the Form 10-K is being
amended by this Amendment. This Amendment continues to speak as of
the date of the original filing of the Form 10-K and the Firm
has not updated the disclosure in this Amendment to speak as of any later date.
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Part II
Item 8: Financial statements
and supplementary data
The Consolidated financial statements,
together with the Notes thereto and the report of
PricewaterhouseCoopers LLP dated February 24, 2006
and August 3, 2006 thereon, appear on pages 86
through 132.
Supplementary financial data for each full quarter
within the two years ended December 31, 2005, are
included on page 133 in the table entitled
Supplementary information selected quarterly
financial data (unaudited). Also included is a
Glossary of terms on page 134.
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Parts II & IV
Item 9A: Controls and procedures
As of the end of the period covered by this
report, an evaluation was carried out under the
supervision and with the participation of the
Firms management, including its Chairman, Chief
Executive Officer and Chief Financial Officer, of
the effectiveness of its disclosure controls and
procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based upon that
evaluation, the Chairman, Chief Executive Officer
and Chief Financial Officer concluded
that these disclosure controls and procedures were
effective. See Exhibits 31.1, 31.2 and 31.3 for the
Certification statements issued by the Chairman,
Chief Executive Officer and Chief Financial
Officer. In light of the misclassification in the Firms
Consolidated statements of cash flows discussed below, the above-mentioned
officers reevaluated the Firms disclosure controls and
procedures and determined that their earlier conclusion regarding such
controls and procedures remains valid.
The Firm is committed to maintaining high standards
of internal control over financial reporting.
Nevertheless, because of its inherent limitations,
internal control over financial reporting may not
prevent or detect misstatements. In addition, in a
firm as large and complex as JPMorgan Chase, lapses
or defi -ciencies in internal controls are likely
to occur from time to time, and there can be no
assurance that any such deficiencies will not
result in significant deficiencies or even
material weaknesses in internal controls in the
future. See page 85 for Managements report on
internal control over financial reporting, and page
86 for the Report of independent registered
public accounting firm with respect to managements
assessment of internal control.
As reported in a Current Report on Form 8-K filed by the Firm on August 3, 2006, the Firm is filing
this amended Form 10-K for the year ended December 31, 2005 to restate the Consolidated statements
of cash flows for the annual periods of 2005, 2004 and 2003 and is filing an amended Form 10-Q for
the quarter ended March 31, 2006 to restate the Consolidated statements of cash flows for each of
the quarterly periods of 2005 and the first quarter of 2006. The
restatements will not affect the Firms Consolidated statements
of income, Consolidated balance sheets or Consolidated statements of
changes in stockholders equity for any of the affected periods.
Accordingly, the Firms historical revenues, net income,
earnings per share, total assets and regulatory capital remain
unchanged.
The restatements result solely from the misclassification of cash flows related to certain
residential mortgages and other loans that had been originated or purchased with the intent to
sell. The cash flows from these loans had been classified as investing activities. However, in
accordance with Statement of Financial Accounting Standards No. 102, Statement of Cash
Flows Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities
Acquired for Resale, cash flows from these loans should have been, and in the future will be,
classified as operating activities, rather than investing activities. Accordingly, the
restatements will solely affect the classification of these activities and the subtotals of cash
flows from operating and investing activities presented in the affected Consolidated statements of
cash flows, but they will have no impact on the net increase (decrease) in total Cash and due from
banks set forth in the Consolidated statements of cash flows for any of the previously reported
periods.
There was no change in the Firms internal control
over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of
1934) that occurred during the fourth quarter of
2005 that has materially affected, or is reasonably
likely to materially affect, the Firms internal
control over financial reporting.
Part IV
Item 15: Exhibits, financial statement
schedules
Exhibits, financial statement schedules
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Financial statements |
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The Consolidated financial statements, the
Notes thereto and the report thereon listed
in Item 8 are set forth commencing on page
87. |
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Financial statement schedules |
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Financial statement schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective
Consolidated financial statements or in the Notes thereto. |
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Part IV
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3. |
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Exhibits |
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3.1 |
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Restated Certificate of Incorporation of JPMorgan Chase & Co.
(incorporated by reference to Exhibit 3.1 to
the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year
ended December 31, 2004). |
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3.2 |
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By-laws of JPMorgan Chase & Co., effective
December 31, 2005. |
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4.1 |
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Deposit Agreement, dated as
of February 8, 1996, between J.P. Morgan & Co.
Incorporated (succeeded through merger by JPMorgan
Chase & Co.) and Morgan Guaranty Trust Company of
New York (succeeded through merger by JPMorgan
Chase Bank), as Depository (incorporated by
reference to Exhibit 4.7 to the Registration
Statement on Form 8A (File No. 1-5805) of The Chase
Manhattan Corporation (now known as JPMorgan Chase
& Co.) filed December 20, 2000). |
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4.2
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Indenture, dated as of December 1, 1989, between Chemical
Banking Corporation (now known as JPMorgan Chase & Co.) and
The Chase Manhattan Bank (National Association) (succeeded by
Deutsche Bank Trust Company Americas), as Trustee (incorporated
by reference to Exhibit 4.2 to the Annual Report on Form 10-K
of JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
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4.3(a)
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Indenture, dated as of April 1, 1987, as amended and restated
as of December 15, 1992, between Chemical Banking
Corporation (now known as JPMorgan Chase & Co.) and Morgan
Guaranty Trust Company of New York (succeeded by U.S. Bank
Trust National Association), as Trustee. |
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4.3(b)
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Second Supplemental Indenture, dated as of October 8, 1996,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Trustee, to the Indenture, dated as of April 1, 1987, as
amended and restated as of December 15, 1992. |
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4.3(c)
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Third Supplemental Indenture, dated as of December 29, 2000,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and U.S. Bank Trust National
Association, as Trustee, to the Indenture, dated as of April 1,
1987, as amended and restated as of December 15, 1992. |
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4.4(a)
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Amended and Restated Indenture, dated as of September 1,
1993, between The Chase Manhattan Corporation (succeeded
through merger by JPMorgan Chase & Co.) and Chemical Bank
(succeeded by U.S. Bank Trust National Association), as Trustee. |
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4.4(b)
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First Supplemental Indenture, dated as of March 29, 1996,
among Chemical Banking Corporation (now known as JPMorgan
Chase & Co.), The Chase Manhattan Corporation, (succeeded
through merger by JPMorgan Chase & Co.), Chemical Bank, as
Resigning Trustee, and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Successor Trustee, to the Amended and Restated Indenture,
dated as of September 1, 1993. |
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4.4(c)
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Second Supplemental Indenture, dated as of October 8, 1996,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Trustee, to the Amended and Restated Indenture, dated as of
September 1, 1993. |
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4.4(d)
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Third Supplemental Indenture, dated as of December 29, 2000,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and U.S. Bank Trust National
Association, as Trustee, to the Amended and Restated Indenture,
dated as of September 1, 1993. |
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4.5(a)
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Indenture, dated as of August 15, 1982, between J.P. Morgan & Co.
Incorporated (succeeded through merger by JPMorgan Chase & Co.)
and Manufacturers Hanover Trust Company (succeeded by U.S.
Bank Trust National Association), as Trustee. |
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4.5(b)
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First Supplemental Indenture, dated as of May 5, 1986, between
J.P. Morgan & Co. Incorporated (succeeded through merger by
JPMorgan Chase & Co.) and Manufacturers Hanover Trust
Company (succeeded by U.S. Bank Trust National Association),
as Trustee, to the Indenture, dated as of August 15, 1982. |
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4.5(c)
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Second Supplemental Indenture, dated as of February 27, 1996,
between J.P. Morgan & Co. Incorporated (succeeded through merger
by JPMorgan Chase & Co.) and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Trustee, to the Indenture, dated as of August 15, 1982. |
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4.5(d)
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Third Supplemental Indenture, dated as of January 30, 1997,
between J.P. Morgan & Co. Incorporated (succeeded through merger
by JPMorgan Chase & Co.) and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Trustee, to the Indenture, dated as of August 15, 1982. |
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4.5(e)
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Fourth Supplemental Indenture, dated as of December 29, 2000,
among J.P. Morgan & Co. Incorporated (succeeded through merger
by JPMorgan Chase & Co.), The Chase Manhattan Corporation
(now known as JPMorgan Chase & Co.) and U.S. Bank Trust
National Association, as Trustee, to the Indenture, dated as of
August 15, 1982. |
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4.6(a)
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Indenture, dated as of March 1, 1993, between J.P. Morgan & Co.
Incorporated (succeeded through merger by JPMorgan Chase & Co.)
and Citibank, N.A. (succeeded by U.S. Bank Trust National
Association), as Trustee. |
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4.6(b)
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First Supplemental Indenture, dated as of December 29, 2000,
among J.P. Morgan & Co. Incorporated (succeeded through merger
by JPMorgan Chase & Co.), The Chase Manhattan Corporation (now
known as JPMorgan Chase & Co.) and U.S. Bank Trust National
Association, as Trustee, to the Indenture, dated as of March 1, 1993. |
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4.7
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Indenture, dated as of May 25, 2001, between J.P. Morgan Chase &
Co. and Bankers Trust Company (succeeded by Deutsche Bank Trust
Company Americas), as Trustee (incorporated by reference to Exhibit
4(a)(1) to the amended Registration Statement on Form S-3 (File No.
333-52826) of J.P. Morgan Chase & Co. filed June 13, 2001). |
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4.8(a)
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Junior Subordinated Indenture, dated as of December 1, 1996,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.8(a) to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
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4.8(b)
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Guarantee Agreement, dated as of January 24, 1997, between
The Chase Manhattan Corporation (now known as JPMorgan
Chase & Co.) and The Bank of New York, as Trustee (incorporated
by reference to Exhibit 4.8(b) to the Annual Report on Form 10-K
of JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
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4.8(c)
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Amended and Restated Trust Agreement, dated as of January 24,
1997, among The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.), The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee,
and the Administrative Trustees named therein (incorporated by
reference to Exhibit 4.8(c) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
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Part IV
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4.9(a)
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Indenture, dated as of March 3, 1997, between Banc One
Corporation (succeeded through merger by JPMorgan Chase &
Co.) and The Chase Manhattan Bank (succeeded by Deutsche
Bank Trust Company Americas), as Trustee (incorporated by
reference to Exhibit 4.9(a) to the Annual Report on Form 10-K
of JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
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4.9(b)
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First Supplemental Indenture, dated as of October 2, 1998,
between Banc One Corporation (succeeded through merger by
JPMorgan Chase & Co.) and The Chase Manhattan Bank
(succeeded by Deutsche Bank Trust Company Americas), as
Trustee, to the Indenture, dated as of March 3, 1997 (incorporated
by reference to Exhibit 4.9(b) to the Annual Report on Form 10-K
of JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
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4.9(c)
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Form of Second Supplemental Indenture, dated as of July 1,
2004, among J.P. Morgan Chase & Co., Bank One Corporation
(succeeded through merger by JPMorgan Chase & Co.),
JPMorgan Chase Bank, as Resigning Trustee, and Deutsche Bank
Trust Company Americas, as Successor Trustee, to the Indenture,
dated as of March 3, 1997 (incorporated by reference to Exhibit
4.22 to the Registration Statement on Form S-3 (File No. 333-116822) of JPMorgan Chase & Co. filed June 24, 2004). |
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4.10(a)
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Indenture, dated as of March 3, 1997, between Banc One
Corporation (succeeded through merger by JPMorgan Chase & Co.)
and The Chase Manhattan Bank (succeeded by U.S. Bank Trust
National Association), as Trustee (incorporated by reference to
Exhibit 4.10(a) to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2004). |
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4.10(b)
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First Supplemental Indenture, dated as of October 2, 1998,
between Banc One Corporation (succeeded through merger by
JPMorgan Chase & Co.) and The Chase Manhattan Bank
(succeeded by U.S. Bank Trust National Association), as Trustee,
to the Indenture, dated as of March 3, 1997 (incorporated by
reference to Exhibit 4.10(b) to the Annual Report on Form 10-K
of JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
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4.10(c)
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Second Supplemental Indenture, dated as of July 1, 2004, among
J.P. Morgan Chase & Co., Bank One Corporation (succeeded
through merger by JPMorgan Chase & Co.), JPMorgan Chase
Bank, as Resigning Trustee, and U.S. Bank Trust National
Association, as Successor Trustee, to the Indenture, dated as of
March 3, 1997 (incorporated by reference to Exhibit 4.25 to the
Registration Statement on Form S-3 (File No. 333-116822) of
JPMorgan Chase & Co. filed June 24, 2004). |
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4.11(a)
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Form of Indenture, dated as of July 1, 1995, between Banc One
Corporation (succeeded through merger by JPMorgan Chase &
Co.) and Citibank N.A, as Trustee (incorporated by reference to
Exhibit 4.11(a) to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2004). |
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4.11(b)
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Form of Supplemental Indenture, dated as of July 1, 2004, among
J.P. Morgan Chase & Co., Bank One Corporation (succeeded
through merger by JPMorgan Chase & Co.) and Citibank N.A., as
Trustee, to the Indenture, dated as of July 1, 1995 (incorporated
by reference to Exhibit 4.31 to the amended Registration
Statement on Form S-3 (File No. 333-116822) of JPMorgan
Chase & Co. filed July 1, 2004). |
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4.12(a)
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Form of Indenture, dated as of December 1, 1995, between
First Chicago NBC Corporation (succeeded through merger by
JPMorgan Chase & Co.) and The Chase Manhattan Bank
(National Association) (succeeded by U.S. Bank Trust National
Association), as Trustee (incorporated by reference to Exhibit 4.12(a)
to the Annual Report on Form 10-K of JPMorgan Chase & Co.
(File No. 1-5805) for the year ended December 31, 2004). |
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4.12(b)
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Form of Supplemental Indenture, dated as of July 1, 2004, among
J.P. Morgan Chase & Co., Bank One Corporation (succeeded
through merger by JPMorgan Chase & Co.), JPMorgan Chase
Bank, as Resigning Trustee, and U.S. Bank Trust National
Association, as Successor Trustee, to the Indenture, dated as of
December 1, 1995 (incorporated by reference to Exhibit 4.29 to
the Registration Statement on Form S-3 (File No. 333-116822)
of JPMorgan Chase & Co. filed June 24, 2004). |
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10.1
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Deferred Compensation Plan for Non-Employee Directors of
The Chase Manhattan Corporation (now known as JPMorgan
Chase & Co.) and The Chase Manhattan Bank (now known as
JPMorgan Chase Bank, N.A.), as amended and restated effective
December, 1996 (incorporated by reference to Exhibit 10.1 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
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10.2
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Post-Retirement Compensation Plan for Non-Employee Directors
of The Chase Manhattan Corporation (now known as JPMorgan
Chase & Co.), as amended and restated effective May 21, 1996
(incorporated by reference to Exhibit 10.2 to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
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10.3
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Deferred Compensation Program of JPMorgan Chase & Co.
and Participating Companies, effective as of January 1, 1996
(incorporated by reference to Exhibit 10.3 to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for
the year ended December 31, 2004). |
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10.4
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2005 Deferred Compensation Program of JPMorgan Chase & Co.,
effective December 31, 2005. |
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10.5
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JPMorgan Chase & Co. 2005 Long-Term Incentive Plan
(incorporated by reference to Appendix C of Schedule 14A of
JPMorgan Chase & Co. (File No. 1-5805) filed April 4, 2005). |
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10.6
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The Chase Manhattan Corporation 1996 Long-Term Incentive
Plan. |
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10.7
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Key Executive Performance Plan of JPMorgan Chase & Co.,
as restated as of January 1, 2005. |
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10.8
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Excess Retirement Plan of The Chase Manhattan Bank and
Participating Companies, restated effective January 1, 2005. |
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10.9
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1984 J.P. Morgan & Co. Incorporated Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.11 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
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10.10
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1992 J.P. Morgan & Co. Incorporated and Affiliated Companies
Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 10.10 to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2004). |
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10.11
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1995 J.P. Morgan & Co. Incorporated Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.12 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
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10.12
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1998 J.P. Morgan & Co. Incorporated and Affiliated Companies
Performance Plan (incorporated by reference to Exhibit 10.13 to
the Annual Report on Form 10-K of JPMorgan Chase & Co. (File
No. 1-5805) for the year ended December 31, 2004). |
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10.13
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Executive Retirement Plan of The Chase Manhattan Corporation
and Certain Subsidiaries. |
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10.14
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Benefit Equalization Plan of The Chase Manhattan Corporation
and Certain Subsidiaries. |
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10.15
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Summary of Terms of JPMorgan Chase & Co. Severance Policy. |
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10.16
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Employment Agreement between J. P. Morgan Chase & Co. and
James Dimon dated January 14, 2004 (incorporated by reference
to Exhibit 10.1 of the Registration Statement on Form S-4 of
J.P. Morgan Chase & Co. (File No. 333-112967) filed February 20,
2004). |
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10.17
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Summary of Terms of Pension of William B. Harrison, Jr.
(incorporated by reference to Form 8-K Item 1.01 of JPMorgan
Chase & Co. filed February 28, 2005 (File No. 1-5805)). |
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10.18
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|
Bank One Corporation Director Stock Plan, as amended
(incorporated by reference to Exhibit 10(B) to the Form 10-K
of Bank One Corporation (File No. 1-15323) for the year ended
December 31, 2003). |
|
|
|
10.19
|
|
Summary of Bank One Corporation Director Deferred
Compensation Plan. |
|
|
|
10.20
|
|
Bank One Corporation Stock Performance Plan (incorporated
by reference to Exhibit 10(A) to the Form 10-K of Bank One
Corporation (File No. 1-15323) for the year ended December 31,
2002). |
|
|
|
10.21
|
|
Bank One Corporation Deferred Compensation Plan. |
|
|
|
10.22
|
|
Bank One Corporation Supplemental Savings and Investment
Plan, as amended (incorporated by reference to Exhibit 10(E)
to the Form 10-K of Bank One Corporation (File No. 1-15323)
for the year ended December 31, 2003). |
|
|
|
10.23
|
|
Bank One Corporation Supplemental Personal Pension Account
Plan, as amended (incorporated by reference to Exhibit 10(F) to
the Form 10-K of Bank One Corporation (File No. 1-15323) for
the year ended December 31, 2003). |
|
|
|
10.24
|
|
Bank One Corporation Key Executive Change of Control Plan, as
amended (incorporated by reference to Exhibit 10(G) to the Form 10-K of Bank One Corporation (File No. 1-15323) for the year
ended December 31, 2003). |
|
|
|
10.25
|
|
Bank One Corporation Planning Group Annual Incentive Plan, as
amended (incorporated by reference to Exhibit 10(H) to the Form 10-K of Bank One Corporation (File No. 1-15323) for the year
ended December 31, 2003). |
|
|
|
10.26
|
|
Bank One Corporation Investment Option Plan. |
|
|
|
10.27
|
|
First Chicago Corporation Stock Incentive Plan (incorporated by
reference to Exhibit 10.28 to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
|
|
|
10.28
|
|
NBD Bancorp, Inc. Performance Incentive Plan, as amended
(incorporated by reference to Exhibit 10.29 to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
|
|
|
10.29
|
|
Bank One Corporation Revised and Restated 1989 Stock
Incentive Plan (incorporated by reference to Exhibit 10.30 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
|
|
|
10.30
|
|
Bank One Corporation Revised and Restated 1995 Stock
Incentive Plan (incorporated by reference to Exhibit 10.31 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
|
|
|
10.31
|
|
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award
Agreement of January 2005 stock appreciation rights. |
|
|
|
10.32
|
|
JPMorgan Chase & Co. Long-Term Incentive Plan Award
Agreement of January 2005 restricted stock units (incorporated
by reference to Exhibit 10.1 to Form 8-K of JPMorgan Chase & Co.
(File No. 1-5805) filed April 11, 2005). |
|
|
|
10.33
|
|
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award
Agreement of October 2005 stock appreciation rights. |
|
|
|
10.34
|
|
Amendment and Restatement of Letter Agreement between
JPMorgan Chase & Co. and Charles W. Scharf, dated December 29,
2005. |
|
|
|
12.1
|
|
Computation of ratio of earnings to fixed charges. |
|
|
|
12.2
|
|
Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements. |
|
|
|
21.1
|
|
List of Subsidiaries of JPMorgan Chase & Co. |
|
|
|
22.1
|
|
Annual Report on Form 11-K of The JPMorgan Chase 401(k)
Savings Plan for the fiscal year ended December 31, 2005.
|
|
|
|
23.1
|
|
Consent of independent registered
public accounting firm.* |
|
|
|
24.1
|
|
Powers of Attorney.* |
|
|
|
31.1
|
|
Certification.* |
|
|
|
31.2
|
|
Certification.* |
|
|
|
31.3
|
|
Certification.* |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
*
|
|
Filed herewith |
JPMorgan Chase hereby agrees to furnish to the
Securities and Exchange Commission, upon request,
copies of instruments defining the rights of
holders for the outstanding nonregistered long-term
debt of JPMorgan Chase and its subsidiaries and
certain other long-term debt issued by predecessor
institutions of JPMorgan Chase and assumed by
virtue of the mergers with those respective
institutions. These instruments have not been filed
as exhibits hereto by reason that the total amount
of each issue of such securities does not exceed
10% of the total assets of JPMorgan Chase and its
subsidiaries on a consolidated basis. In addition,
JPMorgan Chase hereby agrees to file with the
Securities
and Exchange Commission, upon request, the Junior
Subordinated Indentures, the Guarantees and the
Amended and Restated Trust Agreements for each
Delaware business trust subsidiary that has issued
Capital Securities, the guarantees for which have
been assumed by JPMorgan Chase & Co. by virtue of
the mergers of the respective predecessor
institutions that originally issued such
securities. The provisions of such agreements
differ from the documents constituting Exhibits
4.8(a), (b) and (c) to this report only with
respect to the pricing terms of each series of
capital securities; these pricing terms are
disclosed in Note 17 on page 117.
15
Table of contents
ITEM 8: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
|
|
Audited financial statements: |
85
|
|
Managements report on internal control over financial reporting |
86
|
|
Report of independent registered public accounting firm |
87
|
|
Consolidated financial statements |
91
|
|
Notes to consolidated financial statements |
|
|
|
Supplementary information: |
133
|
|
Selected quarterly financial data |
134
|
|
Glossary of terms |
135
|
|
Forward-looking statements |
|
|
|
JPMorgan Chase & Co./ 2005 Annual Report
|
|
21 |
Managements report on internal control over financial reporting
JPMorgan Chase & Co.
Management of JPMorgan Chase & Co. is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the Firms principal executive, principal operating and
principal financial officers, or persons performing similar functions, and effected by JPMorgan
Chases board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States
of America.
JPMorgan Chases internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Firms assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
Firm are being made only in accordance with authorizations of JPMorgan Chases management and
directors; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Firms assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management has completed an assessment of the effectiveness of the Firms internal control over
financial reporting as of December 31, 2005. In making the assessment, management used the
framework in Internal Control Integrated Framework promulgated by the Committee of Sponsoring
Organizations of the Treadway Commission, commonly referred to as the COSO criteria.
Based upon the assessment performed, management concluded that as of December 31, 2005, JPMorgan
Chases internal control over financial reporting was effective based upon the COSO criteria.
Additionally, based upon managements assessment, the Firm
determined that there were no material weaknesses in its internal control over financial reporting
as of December 31, 2005.
Managements assessment of the effectiveness of the Firms internal control over financial
reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, JPMorgan Chases
independent registered public accounting firm, who also audited the Firms financial statements as
of and for the year ended December 31, 2005, as stated in their report which is included herein.
William B. Harrison, Jr.
Chairman of the Board
James Dimon
President and Chief Executive Officer
Michael J. Cavanagh
Executive Vice President and Chief Financial Officer
February 24, 2006
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
85 |
Report of independent registered public accounting firm
JPMorgan Chase & Co.
PRICEWATERHOUSE COOPERS LLP 300 MADISON AVENUE NEW YORK, NY 10017
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of JPMorgan Chase & Co.:
We have completed integrated audits of JPMorgan Chase & Co.s 2005 and 2004 consolidated financial
statements and of its internal control over financial reporting as of December 31, 2005, and an
audit of its 2003 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions on JPMorgan Chase & Co.s 2005,
2004, and 2003 consolidated financial statements and on its internal control over financial
reporting as of December 31, 2005, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, changes in stockholders equity and cash flows present fairly, in all
material respects, the financial position of the JPMorgan Chase & Co. and its subsidiaries (the
Company) at December 31, 2005 and 2004, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As described in the section entitled Restatement of the
consolidated statements of cash flows included in Note 1 to
the consolidated financial statements, the Company restated its 2005,
2004 and 2003 consolidated financial statements.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in the accompanying Managements report on
internal control over financial reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control Integrated Framework issued
by the COSO. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
February 24,
2006, except with respect to our opinion on the consolidated
financial statements insofar as it relates to the section entitled
Restatement of the consolidated statements of cash flows
included in Note 1, as to which the date is August 3, 2006
|
|
|
|
|
|
86
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Consolidated
statements of income
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions, except per share data)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
4,088 |
|
|
$ |
3,537 |
|
|
$ |
2,890 |
|
Trading revenue |
|
|
5,860 |
|
|
|
3,612 |
|
|
|
4,427 |
|
Lending & deposit related fees |
|
|
3,389 |
|
|
|
2,672 |
|
|
|
1,727 |
|
Asset management, administration and commissions |
|
|
10,390 |
|
|
|
8,165 |
|
|
|
6,039 |
|
Securities/private equity gains |
|
|
473 |
|
|
|
1,874 |
|
|
|
1,479 |
|
Mortgage fees and related income |
|
|
1,054 |
|
|
|
806 |
|
|
|
790 |
|
Credit card income |
|
|
6,754 |
|
|
|
4,840 |
|
|
|
2,466 |
|
Other income |
|
|
2,694 |
|
|
|
830 |
|
|
|
601 |
|
|
Noninterest revenue |
|
|
34,702 |
|
|
|
26,336 |
|
|
|
20,419 |
|
|
Interest income |
|
|
45,200 |
|
|
|
30,595 |
|
|
|
24,044 |
|
Interest expense |
|
|
25,369 |
|
|
|
13,834 |
|
|
|
11,079 |
|
|
Net interest income |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
|
Total net revenue |
|
|
54,533 |
|
|
|
43,097 |
|
|
|
33,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
18,255 |
|
|
|
14,506 |
|
|
|
11,387 |
|
Occupancy expense |
|
|
2,299 |
|
|
|
2,084 |
|
|
|
1,912 |
|
Technology and communications expense |
|
|
3,624 |
|
|
|
3,702 |
|
|
|
2,844 |
|
Professional & outside services |
|
|
4,224 |
|
|
|
3,862 |
|
|
|
2,875 |
|
Marketing |
|
|
1,917 |
|
|
|
1,335 |
|
|
|
710 |
|
Other expense |
|
|
3,705 |
|
|
|
2,859 |
|
|
|
1,694 |
|
Amortization of intangibles |
|
|
1,525 |
|
|
|
946 |
|
|
|
294 |
|
Merger costs |
|
|
722 |
|
|
|
1,365 |
|
|
|
|
|
Litigation reserve charge |
|
|
2,564 |
|
|
|
3,700 |
|
|
|
100 |
|
|
Total noninterest expense |
|
|
38,835 |
|
|
|
34,359 |
|
|
|
21,816 |
|
|
Income before income tax expense |
|
|
12,215 |
|
|
|
6,194 |
|
|
|
10,028 |
|
Income tax expense |
|
|
3,732 |
|
|
|
1,728 |
|
|
|
3,309 |
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
Net income applicable to common stock |
|
$ |
8,470 |
|
|
$ |
4,414 |
|
|
$ |
6,668 |
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
2.43 |
|
|
$ |
1.59 |
|
|
$ |
3.32 |
|
Diluted earnings per share |
|
|
2.38 |
|
|
|
1.55 |
|
|
|
3.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic shares |
|
|
3,492 |
|
|
|
2,780 |
|
|
|
2,009 |
|
Average diluted shares |
|
|
3,557 |
|
|
|
2,851 |
|
|
|
2,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
1.36 |
|
|
$ |
1.36 |
|
|
$ |
1.36 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
87 |
Consolidated
balance sheets
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
At December 31, (in millions, except share data) |
|
2005 |
|
|
2004 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
36,670 |
|
|
$ |
35,168 |
|
Deposits with banks |
|
|
21,661 |
|
|
|
21,680 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
133,981 |
|
|
|
101,354 |
|
Securities borrowed |
|
|
74,604 |
|
|
|
47,428 |
|
Trading assets (including assets pledged of $79,657 at December 31, 2005, and $77,266 at December 31, 2004) |
|
|
298,377 |
|
|
|
288,814 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale (including assets pledged of $17,614 at December 31, 2005, and $26,881 at
December 31, 2004) |
|
|
47,523 |
|
|
|
94,402 |
|
Held-to-maturity (fair value: $80 at December 31, 2005, and $117 at December 31, 2004) |
|
|
77 |
|
|
|
110 |
|
Interests in purchased receivables |
|
|
29,740 |
|
|
|
31,722 |
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
419,148 |
|
|
|
402,114 |
|
Allowance for loan losses |
|
|
(7,090 |
) |
|
|
(7,320 |
) |
|
Loans, net of Allowance for loan losses |
|
|
412,058 |
|
|
|
394,794 |
|
|
|
|
|
|
|
|
|
|
Private equity investments |
|
|
6,374 |
|
|
|
7,735 |
|
Accrued interest and accounts receivable |
|
|
22,421 |
|
|
|
21,409 |
|
Premises and equipment |
|
|
9,081 |
|
|
|
9,145 |
|
Goodwill |
|
|
43,621 |
|
|
|
43,203 |
|
Other intangible assets: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
6,452 |
|
|
|
5,080 |
|
Purchased credit card relationships |
|
|
3,275 |
|
|
|
3,878 |
|
All other intangibles |
|
|
4,832 |
|
|
|
5,726 |
|
Other assets |
|
|
48,195 |
|
|
|
45,600 |
|
|
Total assets |
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
135,599 |
|
|
$ |
129,257 |
|
Interest-bearing |
|
|
287,774 |
|
|
|
261,673 |
|
Non-U.S. offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
7,476 |
|
|
|
6,931 |
|
Interest-bearing |
|
|
124,142 |
|
|
|
123,595 |
|
|
Total deposits |
|
|
554,991 |
|
|
|
521,456 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
125,925 |
|
|
|
127,787 |
|
Commercial paper |
|
|
13,863 |
|
|
|
12,605 |
|
Other borrowed funds |
|
|
10,479 |
|
|
|
9,039 |
|
Trading liabilities |
|
|
145,930 |
|
|
|
151,207 |
|
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related
commitments of $400 at December 31, 2005, and $492 at December 31, 2004) |
|
|
78,460 |
|
|
|
75,722 |
|
Beneficial interests issued by consolidated VIEs |
|
|
42,197 |
|
|
|
48,061 |
|
Long-term debt |
|
|
108,357 |
|
|
|
95,422 |
|
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities |
|
|
11,529 |
|
|
|
10,296 |
|
|
Total liabilities |
|
|
1,091,731 |
|
|
|
1,051,595 |
|
|
Commitments and contingencies (see Note 25 of this Annual Report) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
139 |
|
|
|
339 |
|
Common stock (authorized 9,000,000,000 shares
at December 31, 2005 and 2004; issued 3,618,189,597 shares and
3,584,747,502 shares at December 31, 2005 and 2004, respectively) |
|
|
3,618 |
|
|
|
3,585 |
|
Capital surplus |
|
|
74,994 |
|
|
|
72,801 |
|
Retained earnings |
|
|
33,848 |
|
|
|
30,209 |
|
Accumulated other comprehensive income (loss) |
|
|
(626 |
) |
|
|
(208 |
) |
Treasury stock, at cost (131,500,350 shares at December 31, 2005, and 28,556,534 shares at December 31, 2004) |
|
|
(4,762 |
) |
|
|
(1,073 |
) |
|
Total stockholders equity |
|
|
107,211 |
|
|
|
105,653 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
88
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Consolidated statements of changes in stockholders equity
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions, except per share data)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
339 |
|
|
$ |
1,009 |
|
|
$ |
1,009 |
|
Redemption of preferred stock |
|
|
(200 |
) |
|
|
(670 |
) |
|
|
|
|
|
Balance at end of year |
|
|
139 |
|
|
|
339 |
|
|
|
1,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
3,585 |
|
|
|
2,044 |
|
|
|
2,024 |
|
Issuance of common stock |
|
|
33 |
|
|
|
72 |
|
|
|
20 |
|
Issuance of common stock for purchase accounting acquisitions |
|
|
|
|
|
|
1,469 |
|
|
|
|
|
|
Balance at end of year |
|
|
3,618 |
|
|
|
3,585 |
|
|
|
2,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital surplus |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
72,801 |
|
|
|
13,512 |
|
|
|
13,222 |
|
Issuance of common stock and options for purchase accounting acquisitions |
|
|
|
|
|
|
55,867 |
|
|
|
|
|
Shares
issued and commitments to issue common stock for employee
stock-based awards and related tax effects |
|
|
2,193 |
|
|
|
3,422 |
|
|
|
290 |
|
|
Balance at end of year |
|
|
74,994 |
|
|
|
72,801 |
|
|
|
13,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
30,209 |
|
|
|
29,681 |
|
|
|
25,851 |
|
Net income |
|
|
8,483 |
|
|
|
4,466 |
|
|
|
6,719 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
(13 |
) |
|
|
(52 |
) |
|
|
(51 |
) |
Common stock ($1.36 per share each year) |
|
|
(4,831 |
) |
|
|
(3,886 |
) |
|
|
(2,838 |
) |
|
Balance at end of year |
|
|
33,848 |
|
|
|
30,209 |
|
|
|
29,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(208 |
) |
|
|
(30 |
) |
|
|
1,227 |
|
Other comprehensive income (loss) |
|
|
(418 |
) |
|
|
(178 |
) |
|
|
(1,257 |
) |
|
Balance at end of year |
|
|
(626 |
) |
|
|
(208 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(1,073 |
) |
|
|
(62 |
) |
|
|
(1,027 |
) |
Purchase of treasury stock |
|
|
(3,412 |
) |
|
|
(738 |
) |
|
|
|
|
Reissuance from treasury stock |
|
|
|
|
|
|
|
|
|
|
1,082 |
|
Share repurchases related to employee stock-based awards |
|
|
(277 |
) |
|
|
(273 |
) |
|
|
(117 |
) |
|
Balance at end of year |
|
|
(4,762 |
) |
|
|
(1,073 |
) |
|
|
(62 |
) |
|
Total stockholders equity |
|
$ |
107,211 |
|
|
$ |
105,653 |
|
|
$ |
46,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Other comprehensive income (loss) |
|
|
(418 |
) |
|
|
(178 |
) |
|
|
(1,257 |
) |
|
Comprehensive income |
|
$ |
8,065 |
|
|
$ |
4,288 |
|
|
$ |
5,462 |
|
|
|
|
|
(a) |
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
89 |
Consolidated statements of cash flows
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Year ended December 31, (in millions)(a) |
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
Depreciation and amortization |
|
|
4,318 |
|
|
|
3,835 |
|
|
|
3,101 |
|
Deferred tax (benefit) provision |
|
|
(1,791 |
) |
|
|
(827 |
) |
|
|
1,428 |
|
Investment securities (gains) losses |
|
|
1,336 |
|
|
|
(338 |
) |
|
|
(1,446 |
) |
Private equity unrealized (gains) losses |
|
|
55 |
|
|
|
(766 |
) |
|
|
(77 |
) |
Gain on dispositions of businesses |
|
|
(1,254 |
) |
|
|
(17 |
) |
|
|
(68 |
) |
Originations and purchases of loans held-for-sale |
|
|
(108,611 |
) |
|
|
(89,315 |
) |
|
|
(163,025 |
) |
Proceeds from sales and securitizations of loans held-for-sale |
|
|
102,602 |
|
|
|
95,973 |
|
|
|
162,699 |
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
|
(3,845 |
) |
|
|
(48,703 |
) |
|
|
(2,671 |
) |
Securities borrowed |
|
|
(27,290 |
) |
|
|
(4,816 |
) |
|
|
(7,691 |
) |
Accrued interest and accounts receivable |
|
|
(1,934 |
) |
|
|
(2,391 |
) |
|
|
1,809 |
|
Other assets |
|
|
(9 |
) |
|
|
(17,588 |
) |
|
|
(9,848 |
) |
Trading liabilities |
|
|
(12,578 |
) |
|
|
29,764 |
|
|
|
15,769 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
5,532 |
|
|
|
13,277 |
|
|
|
5,973 |
|
Other operating adjustments |
|
|
1,267 |
|
|
|
(245 |
) |
|
|
63 |
|
|
Net cash (used in) provided by operating activities |
|
|
(30,236 |
) |
|
|
(15,147 |
) |
|
|
14,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks |
|
|
104 |
|
|
|
(4,196 |
) |
|
|
(1,233 |
) |
Federal funds sold and securities purchased under resale agreements |
|
|
(32,469 |
) |
|
|
(13,101 |
) |
|
|
(11,059 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds |
|
|
33 |
|
|
|
66 |
|
|
|
221 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities |
|
|
31,053 |
|
|
|
45,197 |
|
|
|
10,548 |
|
Proceeds from sales |
|
|
82,902 |
|
|
|
134,534 |
|
|
|
315,738 |
|
Purchases |
|
|
(81,749 |
) |
|
|
(173,745 |
) |
|
|
(301,854 |
) |
Proceeds from sales and securitizations of loans held-for-investment |
|
|
23,861 |
|
|
|
12,854 |
|
|
|
8,716 |
|
Originations and other changes in loans, net |
|
|
(40,436 |
) |
|
|
(47,726 |
) |
|
|
(9,299 |
) |
Net cash (used) received in business acquisitions or dispositions |
|
|
(1,039 |
) |
|
|
13,864 |
|
|
|
(575 |
) |
All other investing activities, net |
|
|
4,796 |
|
|
|
2,519 |
|
|
|
1,541 |
|
|
Net cash (used in) provided by investing activities |
|
|
(12,944 |
) |
|
|
(29,734 |
) |
|
|
12,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
31,415 |
|
|
|
52,082 |
|
|
|
21,851 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
(1,862 |
) |
|
|
7,065 |
|
|
|
(56,017 |
) |
Commercial paper and other borrowed funds |
|
|
2,618 |
|
|
|
(4,343 |
) |
|
|
555 |
|
Proceeds from the issuance of long-term debt and capital debt securities |
|
|
43,721 |
|
|
|
25,344 |
|
|
|
17,195 |
|
Repayments of long-term debt and capital debt securities |
|
|
(26,883 |
) |
|
|
(16,039 |
) |
|
|
(8,316 |
) |
Proceeds from the issuance of stock and stock-related awards |
|
|
682 |
|
|
|
848 |
|
|
|
1,213 |
|
Redemption of preferred stock |
|
|
(200 |
) |
|
|
(670 |
) |
|
|
|
|
Treasury stock purchased |
|
|
(3,412 |
) |
|
|
(738 |
) |
|
|
|
|
Cash dividends paid |
|
|
(4,878 |
) |
|
|
(3,927 |
) |
|
|
(2,865 |
) |
All other financing activities, net |
|
|
3,868 |
|
|
|
(26 |
) |
|
|
133 |
|
|
Net cash provided by (used in) financing activities |
|
|
45,069 |
|
|
|
59,596 |
|
|
|
(26,251 |
) |
|
Effect of exchange rate changes on cash and due from banks |
|
|
(387 |
) |
|
|
185 |
|
|
|
282 |
|
Net increase (decrease) in cash and due from banks |
|
|
1,502 |
|
|
|
14,900 |
|
|
|
1,050 |
|
Cash and due from banks at the beginning of the year |
|
|
35,168 |
|
|
|
20,268 |
|
|
|
19,218 |
|
|
Cash and due from banks at the end of the year |
|
$ |
36,670 |
|
|
$ |
35,168 |
|
|
$ |
20,268 |
|
|
Cash interest paid |
|
$ |
24,583 |
|
|
$ |
13,384 |
|
|
$ |
10,976 |
|
Cash income taxes paid |
|
$ |
4,758 |
|
|
$ |
1,477 |
|
|
$ |
1,337 |
|
|
|
|
|
Note: |
|
In 2004, the fair values of noncash assets acquired and liabilities assumed in the Merger
with Bank One were $320.9 billion and $277.0 billion, respectively, and approximately 1,469 million
shares of common stock, valued at approximately $57.3 billion, were issued in connection with the
merger with Bank One. |
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
|
|
|
90
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 1 Basis of presentation
JPMorgan Chase & Co. (JPMorgan Chase or the Firm), a financial holding company
incorporated under Delaware law in 1968, is a leading global financial services firm and one of the
largest banking institutions in the United States, with operations worldwide. The Firm is a leader
in investment banking, financial services for consumers and businesses, financial transaction
processing, investment management, private banking and private equity. For a discussion of the
Firms business segment information, see Note 31 on pages 130131 of this Annual Report.
The accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to
accounting principles generally accepted in the United States of America (U.S. GAAP) and
prevailing industry practices. Additionally, where applicable, the policies conform to the
accounting and reporting guidelines prescribed by bank regulatory authorities.
Certain amounts in the prior periods have been reclassified to conform to the current presentation.
Consolidation
The consolidated financial statements include accounts of JPMorgan Chase and other entities in
which the Firm has a controlling financial interest. All material intercompany balances and
transactions have been eliminated.
The usual condition for a controlling financial interest is ownership of a majority of the voting
interests of an entity. However, a controlling financial interest may also exist in entities, such
as special purpose entities (SPEs), through arrangements that do not involve controlling voting
interests.
SPEs are an important part of the financial markets, providing market liquidity by facilitating
investors access to specific portfolios of assets and risks. They are, for example, critical to
the functioning of the mortgage- and asset-backed securities and commercial paper markets. SPEs may
be organized as trusts, partnerships or corporations and are typically set up for a single,
discrete purpose. SPEs are not typically operating entities and usually have a limited life and no
employees. The basic SPE structure involves a company selling assets to the SPE. The SPE funds the
purchase of those assets by issuing securities to investors. The legal documents that govern the
transaction describe how the cash earned on the assets must be allocated to the SPEs investors and
other parties that have rights to those cash flows. SPEs can be structured to be bankruptcy-remote,
thereby insulating investors from the impact of the creditors of other entities, including the
seller of the assets.
There are two different accounting frameworks applicable to SPEs: the qualifying SPE (QSPE)
framework under SFAS 140; and the variable interest entity (VIE) framework under FIN 46R. The
applicable framework depends on the nature of the entity and the Firms relation to that entity.
The QSPE framework is applicable when an entity transfers (sells) financial assets to an SPE
meeting certain criteria defined in SFAS 140. These criteria are designed to ensure that the
activities of the entity are essentially predetermined at the inception of the vehicle and that the
transferor of the financial assets cannot exercise control over the entity and the assets therein.
Entities meeting these criteria are not consolidated by the transferor or other counterparties, as
long as they do not have the unilateral ability to liquidate or to cause the entity to no longer
meet the QSPE criteria. The Firm primarily follows the QSPE model for securitizations of its
residential and commercial mortgages, credit card loans and automobile loans. For further details,
see Note 13 on pages 108111 of this Annual Report.
When the SPE does not meet the QSPE criteria, consolidation is assessed pursuant to FIN 46R. Under
FIN 46R, a VIE is defined as an entity that: (1) lacks enough equity investment at risk to permit
the entity to finance its activities
without additional subordinated financial support from other
parties; (2) has equity owners that lack the right to make significant decisions affecting the
entitys operations; and/or (3) has equity owners that do not have an obligation to absorb or the
right to receive the entitys losses or returns.
FIN 46R requires a variable interest holder (i.e., a counterparty to a VIE) to consolidate the VIE
if that party will absorb a majority of the expected losses of the VIE, receive the majority of the
expected residual returns of the VIE, or both. This party is considered the primary beneficiary. In
making this determination, the Firm thoroughly evaluates the VIEs design, capital structure and
relationships among variable interest holders. When the primary beneficiary cannot be identified
through a qualitative analysis, the Firm performs a quantitative analysis, which computes and
allocates expected losses or residual returns to variable interest holders. The allocation of
expected cash flows in this analysis is based upon the relative contractual rights and preferences
of each interest holder in the VIEs capital structure. For further details, see Note 14 on pages
111113 of this Annual Report.
All retained interests and significant transactions between the Firm, QSPEs and nonconsolidated
VIEs are reflected on JPMorgan Chases Consolidated balance sheets or in the Notes to consolidated
financial statements.
Investments in companies that are considered to be voting-interest entities under FIN 46R in which
the Firm has significant influence over operating and financing decisions are accounted for in
accordance with the equity method of accounting. These investments are generally included in Other assets, and the Firms
share of income or loss is included in Other income. For a discussion of private equity
investments, see Note 9 on pages 103105 of this Annual Report.
Assets held for clients in an agency or fiduciary capacity by the Firm are not assets of JPMorgan
Chase and are not included in the Consolidated balance sheets.
Use of estimates in the preparation of consolidated financial statements
The preparation of consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and
disclosures of contingent assets and liabilities. Actual results could be different from these
estimates.
|
|
|
|
|
|
JPMorgan Chase & Co./ 2005 Annual Report
|
|
91 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Foreign currency translation
JPMorgan Chase revalues assets, liabilities, revenues and expenses denominated in foreign
currencies into U.S. dollars using applicable exchange rates.
Gains and losses relating to translating functional currency financial statements for U.S.
reporting are included in Other comprehensive income (loss) within Stockholders equity. Gains and
losses relating to nonfunctional currency transactions, including non-U.S. operations where the
functional currency is the U.S. dollar and operations in highly inflationary environments, are
reported in the Consolidated statements of income.
Statements of cash flows
For JPMorgan Chases Consolidated statements of cash flows, cash and cash equivalents are defined
as those amounts included in Cash and due from banks.
Significant accounting policies
The following table identifies JPMorgan Chases significant accounting policies and the Note and
page where a detailed description of each policy can be found:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading activities |
|
Note |
|
|
3 |
|
|
Page |
|
|
94 |
|
Other noninterest revenue |
|
Note |
|
|
4 |
|
|
Page |
|
|
95 |
|
Pension and other postretirement employee
benefit plans |
|
Note |
|
|
6 |
|
|
Page |
|
|
96 |
|
Employee stock-based incentives |
|
Note |
|
|
7 |
|
|
Page |
|
|
100 |
|
Securities and private equity investments |
|
Note |
|
|
9 |
|
|
Page |
|
|
103 |
|
Securities financing activities |
|
Note |
|
|
10 |
|
|
Page |
|
|
105 |
|
Loans |
|
Note |
|
|
11 |
|
|
Page |
|
|
106 |
|
Allowance for credit losses |
|
Note |
|
|
12 |
|
|
Page |
|
|
107 |
|
Loan securitizations |
|
Note |
|
|
13 |
|
|
Page |
|
|
108 |
|
Variable interest entities |
|
Note |
|
|
14 |
|
|
Page |
|
|
111 |
|
Goodwill and other intangible assets |
|
Note |
|
|
15 |
|
|
Page |
|
|
114 |
|
Premises and equipment |
|
Note |
|
|
16 |
|
|
Page |
|
|
116 |
|
Income taxes |
|
Note |
|
|
22 |
|
|
Page |
|
|
120 |
|
Accounting for derivative instruments
and hedging activities |
|
Note |
|
|
26 |
|
|
Page |
|
|
123 |
|
Offbalance sheet lending-related financial
instruments and guarantees |
|
Note |
|
|
27 |
|
|
Page |
|
|
124 |
|
Fair value of financial instruments |
|
Note |
|
|
29 |
|
|
Page |
|
|
126 |
|
Restatement of the Consolidated Statements of Cash Flows
As reported in a Current Report on Form 8-K filed by the Firm on August 3, 2006, the Firm is filing
an amended Form 10-K for the year ended December 31, 2005 to restate the Consolidated statements
of cash flows for the annual periods of 2005, 2004 and 2003 and is filing an amended Form 10-Q for
the quarter ended March 31, 2006 to restate the Consolidated statements of cash flows for each of
the quarterly periods of 2005 and the first quarter of 2006. The
restatements will not affect the Firms Consolidated statements
of income, Consolidated balance sheets or Consolidated statements of
changes in stockholders equity for any of the affected periods.
Accordingly, the Firms historical revenues, net income,
earnings per share, total assets and regulatory capital remain
unchanged.
The restatements result solely from the misclassification of cash flows related to certain
residential mortgages and other loans that had been originated or purchased with the intent to
sell. The cash flows from these loans had been classified as investing activities. However, in
accordance with Statement of Financial Accounting Standards No. 102, Statement of Cash
FlowsExemption of Certain Enterprises and Classification of Cash Flows from Certain Securities
Acquired for Resale, cash flows from these loans should have been, and in the future will be,
classified as operating activities, rather than investing activities. Accordingly, the
restatements will solely affect the classification of these activities and the subtotals of cash
flows from operating and investing activities presented in the affected Consolidated statements of
cash flows, but they will have no impact on the net increase (decrease) in total Cash and due from
banks set forth in the Consolidated statements of cash flows for any of the previously reported
periods.
The Consolidated statements of cash flows for the years ended December 31, 2005, 2004, and 2003, as
previously reported and as restated, are reflected on the following page.
|
|
|
|
|
|
91A
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Consolidated statements of cash flows
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
As previously |
|
|
|
|
|
As previously |
|
|
|
|
|
As previously |
|
|
Year ended December 31, (in millions)(a) |
|
reported |
|
Restated |
|
reported |
|
Restated |
|
reported |
|
Restated |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
$ |
6,719 |
|
Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,483 |
|
|
|
3,483 |
|
|
|
2,544 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
|
1,540 |
|
Depreciation and amortization |
|
|
4,318 |
|
|
|
4,318 |
|
|
|
3,835 |
|
|
|
3,835 |
|
|
|
3,101 |
|
|
|
3,101 |
|
Deferred tax (benefit) provision |
|
|
(1,791 |
) |
|
|
(1,791 |
) |
|
|
(827 |
) |
|
|
(827 |
) |
|
|
1,428 |
|
|
|
1,428 |
|
Investment securities (gains) losses |
|
|
1,336 |
|
|
|
1,336 |
|
|
|
(338 |
) |
|
|
(338 |
) |
|
|
(1,446 |
) |
|
|
(1,446 |
) |
Private equity unrealized (gains) losses |
|
|
55 |
|
|
|
55 |
|
|
|
(766 |
) |
|
|
(766 |
) |
|
|
(77 |
) |
|
|
(77 |
) |
Gain on dispositions of businesses |
|
|
(1,254 |
) |
|
|
(1,254 |
) |
|
|
(17 |
) |
|
|
(17 |
) |
|
|
(68 |
) |
|
|
(68 |
) |
Originations and purchases of loans held-for-sale |
|
|
|
|
|
|
(108,611 |
) |
|
|
|
|
|
|
(89,315 |
) |
|
|
|
|
|
|
(163,025 |
) |
Proceeds from sales and securitizations of loans held-for-sale |
|
|
|
|
|
|
102,602 |
|
|
|
|
|
|
|
95,973 |
|
|
|
|
|
|
|
162,699 |
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
|
(3,845 |
) |
|
|
(3,845 |
) |
|
|
(48,703 |
) |
|
|
(48,703 |
) |
|
|
(2,671 |
) |
|
|
(2,671 |
) |
Securities borrowed |
|
|
(27,290 |
) |
|
|
(27,290 |
) |
|
|
(4,816 |
) |
|
|
(4,816 |
) |
|
|
(7,691 |
) |
|
|
(7,691 |
) |
Accrued interest and accounts receivable |
|
|
(1,934 |
) |
|
|
(1,934 |
) |
|
|
(2,391 |
) |
|
|
(2,391 |
) |
|
|
1,809 |
|
|
|
1,809 |
|
Other assets |
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(17,588 |
) |
|
|
(17,588 |
) |
|
|
(9,848 |
) |
|
|
(9,848 |
) |
Trading liabilities |
|
|
(12,578 |
) |
|
|
(12,578 |
) |
|
|
29,764 |
|
|
|
29,764 |
|
|
|
15,769 |
|
|
|
15,769 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
5,532 |
|
|
|
5,532 |
|
|
|
13,277 |
|
|
|
13,277 |
|
|
|
5,973 |
|
|
|
5,973 |
|
Other operating adjustments |
|
|
1,267 |
|
|
|
1,267 |
|
|
|
(245 |
) |
|
|
(245 |
) |
|
|
63 |
|
|
|
63 |
|
|
Net cash (used in) provided by operating activities |
|
|
(24,227 |
) |
|
|
(30,236 |
) |
|
|
(21,805 |
) |
|
|
(15,147 |
) |
|
|
14,601 |
|
|
|
14,275 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banks |
|
|
104 |
|
|
|
104 |
|
|
|
(4,196 |
) |
|
|
(4,196 |
) |
|
|
(1,233 |
) |
|
|
(1,233 |
) |
Federal funds sold and securities purchased under resale agreements |
|
|
(32,469 |
) |
|
|
(32,469 |
) |
|
|
(13,101 |
) |
|
|
(13,101 |
) |
|
|
(11,059 |
) |
|
|
(11,059 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds |
|
|
33 |
|
|
|
33 |
|
|
|
66 |
|
|
|
66 |
|
|
|
221 |
|
|
|
221 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities |
|
|
31,053 |
|
|
|
31,053 |
|
|
|
45,197 |
|
|
|
45,197 |
|
|
|
10,548 |
|
|
|
10,548 |
|
Proceeds from sales |
|
|
82,902 |
|
|
|
82,902 |
|
|
|
134,534 |
|
|
|
134,534 |
|
|
|
315,738 |
|
|
|
315,738 |
|
Purchases |
|
|
(81,749 |
) |
|
|
(81,749 |
) |
|
|
(173,745 |
) |
|
|
(173,745 |
) |
|
|
(301,854 |
) |
|
|
(301,854 |
) |
Proceeds from sales and securitizations of loans held-for-investment |
|
|
126,310 |
|
|
|
23,861 |
|
|
|
108,637 |
|
|
|
12,854 |
|
|
|
170,870 |
|
|
|
8,716 |
|
Originations and other changes in loans, net |
|
|
(148,894 |
) |
|
|
(40,436 |
) |
|
|
(136,851 |
) |
|
|
(47,726 |
) |
|
|
(171,779 |
) |
|
|
(9,299 |
) |
Net cash (used) received in business acquisitions or dispositions |
|
|
(1,039 |
) |
|
|
(1,039 |
) |
|
|
13,864 |
|
|
|
13,864 |
|
|
|
(575 |
) |
|
|
(575 |
) |
All other investing activities, net |
|
|
4,796 |
|
|
|
4,796 |
|
|
|
2,519 |
|
|
|
2,519 |
|
|
|
1,541 |
|
|
|
1,541 |
|
|
Net cash (used in) provided by investing activities |
|
|
(18,953 |
) |
|
|
(12,944 |
) |
|
|
(23,076 |
) |
|
|
(29,734 |
) |
|
|
12,418 |
|
|
|
12,744 |
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
31,415 |
|
|
|
31,415 |
|
|
|
52,082 |
|
|
|
52,082 |
|
|
|
21,851 |
|
|
|
21,851 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
(1,862 |
) |
|
|
(1,862 |
) |
|
|
7,065 |
|
|
|
7,065 |
|
|
|
(56,017 |
) |
|
|
(56,017 |
) |
Commercial paper and other borrowed funds |
|
|
2,618 |
|
|
|
2,618 |
|
|
|
(4,343 |
) |
|
|
(4,343 |
) |
|
|
555 |
|
|
|
555 |
|
Proceeds from the issuance of long-term debt and capital debt securities |
|
|
43,721 |
|
|
|
43,721 |
|
|
|
25,344 |
|
|
|
25,344 |
|
|
|
17,195 |
|
|
|
17,195 |
|
Repayments of long-term debt and capital debt securities |
|
|
(26,883 |
) |
|
|
(26,883 |
) |
|
|
(16,039 |
) |
|
|
(16,039 |
) |
|
|
(8,316 |
) |
|
|
(8,316 |
) |
Proceeds from the issuance of stock and stock-related awards |
|
|
682 |
|
|
|
682 |
|
|
|
848 |
|
|
|
848 |
|
|
|
1,213 |
|
|
|
1,213 |
|
Redemption of preferred stock |
|
|
(200 |
) |
|
|
(200 |
) |
|
|
(670 |
) |
|
|
(670 |
) |
|
|
|
|
|
|
|
|
Treasury stock purchased |
|
|
(3,412 |
) |
|
|
(3,412 |
) |
|
|
(738 |
) |
|
|
(738 |
) |
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
(4,878 |
) |
|
|
(4,878 |
) |
|
|
(3,927 |
) |
|
|
(3,927 |
) |
|
|
(2,865 |
) |
|
|
(2,865 |
) |
All other financing activities, net |
|
|
3,868 |
|
|
|
3,868 |
|
|
|
(26 |
) |
|
|
(26 |
) |
|
|
133 |
|
|
|
133 |
|
|
Net cash provided by (used in) financing activities |
|
|
45,069 |
|
|
|
45,069 |
|
|
|
59,596 |
|
|
|
59,596 |
|
|
|
(26,251 |
) |
|
|
(26,251 |
) |
|
Effect of exchange rate changes on cash and due from banks |
|
|
(387 |
) |
|
|
(387 |
) |
|
|
185 |
|
|
|
185 |
|
|
|
282 |
|
|
|
282 |
|
Net increase (decrease) in cash and due from banks |
|
|
1,502 |
|
|
|
1,502 |
|
|
|
14,900 |
|
|
|
14,900 |
|
|
|
1,050 |
|
|
|
1,050 |
|
Cash and due from banks at the beginning of the year |
|
|
35,168 |
|
|
|
35,168 |
|
|
|
20,268 |
|
|
|
20,268 |
|
|
|
19,218 |
|
|
|
19,218 |
|
|
Cash and due from banks at the end of the year |
|
$ |
36,670 |
|
|
$ |
36,670 |
|
|
$ |
35,168 |
|
|
$ |
35,168 |
|
|
$ |
20,268 |
|
|
$ |
20,268 |
|
|
Cash interest paid |
|
$ |
24,583 |
|
|
$ |
24,583 |
|
|
$ |
13,384 |
|
|
$ |
13,384 |
|
|
$ |
10,976 |
|
|
$ |
10,976 |
|
Cash income taxes paid |
|
$ |
4,758 |
|
|
$ |
4,758 |
|
|
$ |
1,477 |
|
|
$ |
1,477 |
|
|
$ |
1,337 |
|
|
$ |
1,337 |
|
|
|
|
|
Note: |
|
In 2004, the fair values of noncash assets acquired and liabilities assumed in the Merger
with Bank One were $320.9 billion and $277.0 billion, respectively, and approximately 1,469 million
shares of common stock, valued at approximately $57.3 billion, were issued in connection with the
merger with Bank One. |
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The Notes to consolidated financial statements are an integral part of these statements.
|
|
|
JPMorgan Chase & Co./ 2005 Annual Report
|
|
91B |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 2 Business changes and developments
Merger with Bank One Corporation
Bank One Corporation merged with and into JPMorgan
Chase (the Merger) on July 1, 2004. As a result
of the Merger, each outstanding share of common
stock of Bank One was converted in a
stock-for-stock exchange into 1.32 shares of common
stock of JPMorgan Chase. JPMorgan Chase
stockholders kept their shares, which remained
outstanding and unchanged as shares of JPMorgan
Chase following the Merger. Key objectives of the
Merger were to provide the Firm with a more
balanced business mix and greater geographic
diversification. The Merger was accounted for using
the purchase method of accounting, which requires
that the assets and liabilities of Bank One be fair
valued as of July 1, 2004. The purchase price to
complete the Merger was $58.5 billion.
As part of the Merger, certain accounting policies
and practices were conformed, which resulted in
$976 million of charges in 2004. The significant
components of the conformity charges comprised a
$1.4 billion charge related to the decertification
of the sellers interest in credit card
securitizations, and the benefit of a $584 million
reduction in the allowance for credit losses as a
result of conforming the wholesale and consumer
credit provision methodologies.
The final purchase
price of the Merger has been allocated to the
assets acquired and liabilities assumed using their
fair values as of the merger date. The computation
of the purchase price and the allocation of the
purchase price to the net assets of Bank One
based on their respective fair values as of July 1,
2004 and the resulting goodwill are presented on
right.
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts) |
|
July 1, 2004 |
|
|
Purchase price
|
|
|
|
|
|
|
|
|
Bank One common stock exchanged |
|
|
1,113 |
|
|
|
|
|
Exchange ratio |
|
|
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase common stock issued |
|
|
1,469 |
|
|
|
|
|
Average purchase price per
JPMorgan Chase common
share (a) |
|
$ |
39.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57,336 |
|
Fair value of employee stock awards and
direct acquisition costs |
|
|
|
|
|
|
1,210 |
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
|
|
|
$ |
58,546 |
|
|
Net assets acquired: |
|
|
|
|
|
|
|
|
Bank One stockholders equity |
|
$ |
24,156 |
|
|
|
|
|
Bank One goodwill and other intangible assets |
|
|
(2,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
21,402 |
|
|
|
|
|
|
Adjustments to reflect assets
acquired at fair value: |
|
|
|
|
|
|
|
|
Loans and leases |
|
|
(2,261 |
) |
|
|
|
|
Private equity investments |
|
|
(72 |
) |
|
|
|
|
Identified intangibles |
|
|
8,665 |
|
|
|
|
|
Pension plan assets |
|
|
(778 |
) |
|
|
|
|
Premises and equipment |
|
|
(417 |
) |
|
|
|
|
Other assets |
|
|
(267 |
) |
|
|
|
|
|
Amounts to reflect liabilities
assumed at fair value: |
|
|
|
|
|
|
|
|
Deposits |
|
|
(373 |
) |
|
|
|
|
Deferred income taxes |
|
|
932 |
|
|
|
|
|
Other postretirement benefit plan liabilities |
|
|
(49 |
) |
|
|
|
|
Other liabilities |
|
|
(1,162 |
) |
|
|
|
|
Long-term debt |
|
|
(1,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,386 |
|
|
|
|
|
|
|
|
|
Goodwill resulting from Merger(b) |
|
|
|
|
|
$ |
34,160 |
|
|
|
|
|
(a) |
|
The value of the Firms common stock
exchanged with Bank One shareholders was based on
the average closing prices of the Firms common
stock for the two days prior to, and the two days
following, the announcement of the Merger on
January 14, 2004. |
|
(b) |
|
Goodwill resulting from the Merger reflects
adjustments of the allocation of the purchase
price to the net assets acquired through June 30,
2005. Minor adjustments subsequent to June 30,
2005, are reflected in the December 31, 2005
Goodwill balance in Note 15 on page 114 of this
Annual Report. |
|
|
|
92
|
|
JPMorgan Chase & Co./ 2005 Annual Report |
Condensed statement of net assets acquired
The following condensed statement of net assets acquired reflects the fair value of Bank One
net assets as of July 1, 2004.
|
|
|
|
|
(in millions) |
|
July 1, 2004 |
|
|
Assets |
|
|
|
|
Cash and cash equivalents |
|
$ |
14,669 |
|
Securities |
|
|
70,512 |
|
Interests in purchased receivables |
|
|
30,184 |
|
Loans, net of allowance for loan losses |
|
|
129,650 |
|
Goodwill and other intangible assets |
|
|
42,825 |
|
All other assets |
|
|
47,739 |
|
|
Total assets |
|
$ |
335,579 |
|
|
Liabilities |
|
|
|
|
Deposits |
|
$ |
164,848 |
|
Short-term borrowings |
|
|
9,811 |
|
All other liabilities |
|
|
61,494 |
|
Long-term debt |
|
|
40,880 |
|
|
Total liabilities |
|
|
277,033 |
|
|
Net assets acquired |
|
$ |
58,546 |
|
|
Acquired, identifiable intangible assets
Components of the fair value of acquired, identifiable intangible assets as of July 1, 2004,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
Weighted average |
|
|
Useful life |
|
|
|
(in millions) |
|
|
life (in years) |
|
|
(in years) |
|
|
Core deposit intangibles |
|
$ |
3,650 |
|
|
|
5.1 |
|
|
Up to 10 |
Purchased credit card relationships |
|
|
3,340 |
|
|
|
4.6 |
|
|
Up to 10 |
Other credit
card-related intangibles |
|
|
295 |
|
|
|
4.6 |
|
|
Up to 10 |
Other customer relationship intangibles |
|
|
870 |
|
|
|
4.610.5 |
|
|
Up to 20 |
|
Subtotal |
|
|
8,155 |
|
|
|
5.1 |
|
|
Up to 20 |
Indefinite-lived asset management
intangibles |
|
|
510 |
|
|
NA |
|
NA |
|
Total |
|
$ |
8,665 |
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma condensed combined financial information
The following unaudited pro forma condensed combined financial information presents the results
of operations of the Firm had the Merger taken place at January 1, 2003.
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions, except per share) |
|
2004 |
|
|
2003 |
|
|
Noninterest revenue |
|
$ |
31,175 |
|
|
$ |
28,966 |
|
Net interest income |
|
|
21,366 |
|
|
|
21,715 |
|
|
Total net revenue |
|
|
52,541 |
|
|
|
50,681 |
|
Provision for credit losses |
|
|
2,727 |
|
|
|
3,570 |
|
Noninterest expense |
|
|
40,504 |
|
|
|
33,136 |
|
|
Income before income tax expense |
|
|
9,310 |
|
|
|
13,975 |
|
Net income |
|
$ |
6,544 |
|
|
$ |
9,330 |
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.85 |
|
|
$ |
2.66 |
|
Diluted |
|
|
1.81 |
|
|
|
2.61 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
3,510 |
|
|
|
3,495 |
|
Diluted |
|
|
3,593 |
|
|
|
3,553 |
|
|
Other business events
Collegiate Funding Services
On March 1, 2006, JPMorgan
Chase acquired, for approximately
$663 million, Collegiate Funding Services, a leader in student
loan servicing and consolidation. This acquisition will enable the
Firm to
create a comprehensive education finance business.
BrownCo
On November 30, 2005, JPMorgan Chase sold BrownCo, an on-line deep-discount brokerage business, to
E*TRADE Financial for a cash purchase price of $1.6 billion. JPMorgan Chase recognized an after-tax
gain of $752 million. BrownCos results of operations are reported in the Asset & Wealth Management
business segment; however, the gain on the sale, which is recorded in Other income in the
Consolidated statements of income, is reported in the Corporate business segment.
Sears Canada credit card business
On November 15, 2005, JPMorgan Chase purchased Sears Canada Inc.s credit card operation, including
both the private-label card accounts and the co-branded Sears MasterCard® accounts. The
credit card operation includes approximately 10 million accounts with $2.2 billion (CAD$2.5
billion) in managed loans. Sears Canada and JPMorgan Chase entered into an ongoing arrangement
under which JPMorgan Chase will offer private-label and co-branded credit cards to both new and
existing customers of Sears Canada.
Chase Merchant Services, Paymentech integration
On October 5, 2005, JPMorgan Chase and First Data Corp. completed the integration of the companies
jointly owned Chase Merchant Services and Paymentech merchant businesses, to be operated under the
name of Chase Paymentech Solutions, LLC. The joint venture is the largest financial transaction
processor in the U.S. for businesses accepting credit card payments via traditional point of sale,
Internet, catalog and recurring billing. As a result of the integration into a joint venture,
Paymentech has been deconsolidated and JPMorgan Chases ownership interest in this joint venture is
accounted for in accordance with the equity method of accounting.
Neovest Holdings, Inc.
On September 1, 2005, JPMorgan Chase completed its acquisition of Neovest Holdings, Inc., a
provider of high-performance trading technology and direct market access. This transaction will
enable the Investment Bank to offer a leading, broker-neutral trading platform across asset classes
to institutional investors, asset managers and hedge funds.
Vastera
On April 1, 2005, JPMorgan Chase acquired Vastera, a provider of global trade management solutions,
for approximately $129 million. Vasteras business was combined with the Logistics and Trade
Services businesses of TSS Treasury Services unit. Vastera automates trade management processes
associated with the physical movement of goods internationally; the acquisition enables TS to offer
management of information and processes in support of physical goods movement, together with
financial settlement.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
93 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Partners
On March 1, 2005, the Firm announced that the management team of JPMorgan Partners, LLC, a private
equity unit of the Firm, will become independent when it completes the investment of the current
$6.5 billion Global Fund, which it advises. The buyout and growth equity professionals of JPMorgan
Partners will form a new independent firm, CCMP Capital, LLC, and the venture professionals will
separately form a new independent firm, Panorama Capital, LLC. JPMorgan Chase has committed to
invest the lesser of $875 million or 24.9% of the limited partnership interests in the fund to be
raised by CCMP Capital, and has committed to invest the lesser of $50 million or 24.9% of the
limited partnership interests in the fund to be raised by Panorama Capital. The investment
professionals of CCMP and Panorama will continue to manage the JPMP investments pursuant to a
management agreement with the Firm.
Cazenove
On February 28, 2005, JPMorgan Chase and Cazenove Group plc (Cazenove) formed a business
partnership which combined Cazenoves investment banking business and JPMorgan Chases U.K.-based
investment banking business in order to provide investment banking services in the United Kingdom
and Ireland. The new company is called JPMorgan Cazenove Holdings.
Other acquisitions
During 2004, JPMorgan Chase purchased the Electronic Financial Services (EFS) business from
Citigroup and acquired a majority interest in hedge fund manager Highbridge Capital Management
(Highbridge).
Note 3 Trading activities
Trading assets include debt and equity securities held for trading purposes that JPMorgan Chase
owns (long positions). Trading liabilities include debt and equity securities that the Firm has
sold to other parties but does not own (short positions). The Firm is obligated to purchase
securities at a future date to cover the short positions. Included in Trading assets and Trading
liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives.
These amounts include the derivative assets and liabilities net of cash received and paid,
respectively, under legally enforceable master netting agreements. At December 31, 2005, the amount
of cash received and paid was approximately $26.7 billion and $18.9 billion, respectively. At
December 31, 2004, the amount of cash received and paid was approximately $32.2 billion and $22.0
billion, respectively. Trading positions are carried at fair value on the Consolidated balance
sheets.
Trading revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Fixed income and other(b) |
|
$ |
4,554 |
|
|
$ |
2,976 |
|
|
$ |
4,046 |
|
Equities(c) |
|
|
1,271 |
|
|
|
797 |
|
|
|
764 |
|
Credit portfolio(d) |
|
|
35 |
|
|
|
(161 |
) |
|
|
(383 |
) |
|
Total |
|
$ |
5,860 |
|
|
$ |
3,612 |
|
|
$ |
4,427 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Includes bonds and commercial paper and various types of interest rate derivatives as well as foreign
exchange and commodities. |
|
(c) |
|
Includes equity securities and equity derivatives. |
|
(d) |
|
Includes credit derivatives. |
Trading assets and liabilities
The following table presents the fair value of Trading assets and Trading liabilities for the
dates indicated:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Trading assets |
|
|
|
|
|
|
|
|
Debt and equity instruments: |
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations |
|
$ |
16,283 |
|
|
$ |
16,867 |
|
U.S. government-sponsored enterprise obligations |
|
|
24,172 |
|
|
|
23,513 |
|
Obligations of state and political subdivisions |
|
|
9,887 |
|
|
|
3,486 |
|
Certificates of deposit, bankers acceptances
and commercial paper |
|
|
5,652 |
|
|
|
7,341 |
|
Debt securities issued by non-U.S. governments |
|
|
48,671 |
|
|
|
50,699 |
|
Corporate securities and other |
|
|
143,925 |
|
|
|
120,926 |
|
|
Total debt and equity instruments |
|
|
248,590 |
|
|
|
222,832 |
|
Derivative receivables: |
|
|
|
|
|
|
|
|
Interest rate |
|
|
30,416 |
|
|
|
45,892 |
|
Foreign exchange |
|
|
2,855 |
|
|
|
7,939 |
|
Equity |
|
|
5,575 |
|
|
|
6,120 |
|
Credit derivatives |
|
|
3,464 |
|
|
|
2,945 |
|
Commodity |
|
|
7,477 |
|
|
|
3,086 |
|
|
Total derivative receivables |
|
|
49,787 |
|
|
|
65,982 |
|
|
Total trading assets |
|
$ |
298,377 |
|
|
$ |
288,814 |
|
|
Trading liabilities |
|
|
|
|
|
|
|
|
Debt and equity instruments(a) |
|
$ |
94,157 |
|
|
$ |
87,942 |
|
|
Derivative payables: |
|
|
|
|
|
|
|
|
Interest rate |
|
|
28,488 |
|
|
|
41,075 |
|
Foreign exchange |
|
|
3,453 |
|
|
|
8,969 |
|
Equity |
|
|
11,539 |
|
|
|
9,096 |
|
Credit derivatives |
|
|
2,445 |
|
|
|
2,499 |
|
Commodity |
|
|
5,848 |
|
|
|
1,626 |
|
|
Total derivative payables |
|
|
51,773 |
|
|
|
63,265 |
|
|
Total trading liabilities |
|
$ |
145,930 |
|
|
$ |
151,207 |
|
|
|
|
|
(a) |
|
Primarily represents securities sold, not yet purchased. |
Average Trading assets and liabilities were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Trading assets debt and
equity instruments |
|
$ |
237,370 |
|
|
$ |
200,467 |
|
|
$ |
154,597 |
|
Trading assets derivative receivables |
|
|
57,365 |
|
|
|
59,521 |
|
|
|
85,628 |
|
|
|
|
|
|
|
|
|
|
Trading liabilities debt and
equity instruments(b) |
|
$ |
93,102 |
|
|
$ |
82,204 |
|
|
$ |
72,877 |
|
Trading liabilities derivative payables |
|
|
55,723 |
|
|
|
52,761 |
|
|
|
67,783 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Primarily represents securities sold, not yet purchased. |
|
|
|
|
|
|
94
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 4 Other noninterest revenue
Investment banking fees
This revenue category includes advisory and equity and debt underwriting fees. Advisory fees are
recognized as revenue when related services are performed. Underwriting fees are recognized as
revenue when the Firm has rendered all services to the issuer and is entitled to collect the fee
from the issuer, as long as there are no other contingencies associated with the fee (e.g., the fee
is not contingent upon the customer obtaining financing). Underwriting fees are net of syndicate
expenses. In addition, the Firm recognizes credit arrangement and syndication fees as revenue after
satisfying certain retention, timing and yield criteria.
The following table presents the components of Investment banking fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Underwriting: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
864 |
|
|
$ |
780 |
|
|
$ |
699 |
|
Debt |
|
|
1,969 |
|
|
|
1,859 |
|
|
|
1,549 |
|
|
Total Underwriting |
|
|
2,833 |
|
|
|
2,639 |
|
|
|
2,248 |
|
Advisory |
|
|
1,255 |
|
|
|
898 |
|
|
|
642 |
|
|
Total |
|
$ |
4,088 |
|
|
$ |
3,537 |
|
|
$ |
2,890 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
Lending & deposit related fees
This revenue category includes fees from loan commitments, standby letters of credit, financial
guarantees, deposit-related fees in lieu of compensating balances, cash management-related
activities or transactions, deposit accounts, and other loan servicing activities. These fees are
recognized over the period in which the related service is provided.
Asset management, administration and commissions
This revenue category includes fees from investment management and related services, custody and
institutional trust services, brokerage services, insurance premiums and commissions and other
products. These fees are recognized over the period in which the related service is provided.
Mortgage fees and related income
This revenue category includes fees and income derived from mortgage origination, sales and
servicing, and includes the effect of risk management activities associated with the mortgage
pipeline, warehouse and the mortgage servicing rights (MSRs) asset (excluding gains and losses on
the sale of Available-for-sale (AFS) securities). Origination fees and gains or losses on loan
sales are recognized in income upon sale. Mortgage servicing fees are recognized over the period
the related service is provided, net of amortization. Valuation changes in the mortgage pipeline,
warehouse, MSR asset and corresponding risk management instruments are generally adjusted through
earnings as these changes occur. Net interest income and securities gains and losses on AFS
securities used in mortgage-related risk management activities are not included in Mortgage fees
and related income. For a further discussion of MSRs, see Note 15 on pages 114116 of this Annual
Report.
Credit card income
This revenue category includes interchange income from credit and debit cards, annual fees, and
servicing fees earned in connection with securitization activities. Volume-related payments to
partners and expenses for rewards programs are also recorded within Credit card income. Fee
revenues are recognized as earned, except for annual fees, which are recognized over a 12-month
period. Expenses related to rewards programs are recorded when earned by the customer.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity organizations and co-brand partners,
which grant to the Firm exclusive rights to market to their members or customers. These
organizations and partners provide to the Firm their endorsement of the credit card programs,
mailing lists, and may also conduct marketing activities and provide awards under the various
credit card programs. The terms of these agreements generally range from 3 to 10 years. The
economic incentives the Firm pays to the endorsing organizations and partners typically include
payments based upon new accounts, activation, charge volumes, and the cost of their marketing
activities and awards.
The Firm recognizes the portion of payments based upon new accounts to the affinity organizations
and co-brand partners, as deferred loan origination costs. The Firm defers these costs and
amortizes them over 12 months. Payments based upon charge volumes and considered by the Firm as
revenue sharing with the affinity organizations and co-brand partners are deducted from Credit card
income as the related revenue is earned. The Firm expenses payments based upon marketing efforts
performed by the endorsing organization or partner to activate a new account as incurred. These
costs are recorded within Noninterest expense.
Note 5 Interest income and interest expense
Details of Interest income and Interest expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
26,062 |
|
|
$ |
16,771 |
|
|
$ |
11,812 |
|
Securities |
|
|
3,129 |
|
|
|
3,377 |
|
|
|
3,542 |
|
Trading assets |
|
|
9,117 |
|
|
|
7,527 |
|
|
|
6,592 |
|
Federal funds sold and securities
purchased under resale agreements |
|
|
4,125 |
|
|
|
1,627 |
|
|
|
1,497 |
|
Securities borrowed |
|
|
1,154 |
|
|
|
463 |
|
|
|
323 |
|
Deposits with banks |
|
|
680 |
|
|
|
539 |
|
|
|
214 |
|
Interests in purchased receivables |
|
|
933 |
|
|
|
291 |
|
|
|
64 |
|
|
Total interest income |
|
|
45,200 |
|
|
|
30,595 |
|
|
|
24,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
10,295 |
|
|
|
4,630 |
|
|
|
3,604 |
|
Short-term and other liabilities |
|
|
9,542 |
|
|
|
6,260 |
|
|
|
5,871 |
|
Long-term debt |
|
|
4,160 |
|
|
|
2,466 |
|
|
|
1,498 |
|
Beneficial interests issued by
consolidated VIEs |
|
|
1,372 |
|
|
|
478 |
|
|
|
106 |
|
|
Total interest expense |
|
|
25,369 |
|
|
|
13,834 |
|
|
|
11,079 |
|
|
Net interest income |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
Provision for credit losses |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
Net interest income after provision
for credit losses |
|
$ |
16,348 |
|
|
$ |
14,217 |
|
|
$ |
11,425 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
95 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 6 Pension and other postretirement employee benefit plans
New U.S.-based postretirement plans were introduced in 2005 after the Bank One plans were
merged into the heritage JPMorgan Chase plans as of December 31, 2004.
The Firms defined benefit pension plans are accounted for in accordance with SFAS 87 and SFAS 88.
The postretirement medical and life insurance plans are accounted for in accordance with SFAS 106.
The Firm uses a measurement date of December 31 for pension and other postretirement employee
benefit plans. In addition, as of August 1, 2005, the U.S. postretirement medical and life
insurance plan was remeasured to reflect a mid-year plan amendment and the final Medicare Part D
regulations that were issued on January 21, 2005. For the Firms defined benefit pension plan
assets, fair value is used to determine the expected return on pension plan assets. For the Firms
other postretirement employee benefit plan assets, a calculated value that recognizes changes in
fair value over a five-year period is used to determine the expected return on other postretirement
employee benefit plan assets. Unrecognized net actuarial gains and losses and prior service costs
associated with the U.S. defined benefit pension plan are amortized over the average future service
period of plan participants, which is currently 10 years. For other postretirement employee benefit
plans, unrecognized gains and losses are also amortized over the average future service period,
which is currently 8 years. However, prior service costs associated with other postretirement
employee benefit plans are recognized over the average years of service remaining to full
eligibility age, which is currently 6 years.
Defined Benefit Pension Plans
The Firm has a qualified noncontributory U.S. defined benefit pension plan that provides benefits
to substantially all U.S. employees. The U.S. plan employs a cash balance formula, in the form of
salary and interest credits, to determine the benefits to be provided at retirement, based upon
eligible compensation and years of service. Employees begin to accrue plan benefits after
completing one year of service, and benefits generally vest after five years of service. The Firm
also offers benefits through defined benefit pension plans to qualifying employees in certain
non-U.S. locations based upon eligible compensation and years of service.
It is the Firms policy to fund the pension plans in amounts sufficient to meet the requirements
under applicable employee benefit and local tax laws. The Firm did not make any U.S. pension plan
contributions in 2005 and based upon the current funded status of this plan, the Firm does not
expect to make significant contributions in 2006. In 2004, the Firm made a cash contribution to its
U.S. defined benefit pension plan of $1.1 billion, funding the plan to the maximum allowable amount
under applicable tax law. Additionally, the Firm made cash contributions totaling $78 million and
$40 million to fully fund the accumulated benefit obligations of certain non-U.S. defined benefit
pension plans as of December 31, 2005 and 2004, respectively.
Postretirement medical and life insurance
JPMorgan Chase offers postretirement medical and life insurance benefits to certain retirees and
qualifying U.S. employees. These benefits vary with length of service and date of hire and provide
for limits on the Firms share of covered medical benefits. The medical benefits are contributory,
while the life insurance benefits are noncontributory. As of August 1, 2005, the eligibility
requirements for U.S. employees to qualify for subsidized retiree medical coverage were revised and
life insurance coverage was eliminated for active employees retiring after 2005. Postretirement
medical benefits also are offered to qualifying U.K. employees.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) was enacted. The Act established a prescription drug benefit under Medicare (Medicare Part
D) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. The Firm has determined that benefits
provided to certain participants are at least actuarially equivalent to Medicare Part D and has
reflected the effects of the subsidy in the financial statements and disclosures retroactive to the
beginning of 2004 (July 1, 2004 for Bank One plans) in accordance with FSP SFAS 106-2.
JPMorgan Chases U.S. postretirement benefit obligation is partially funded with corporate-owned
life insurance (COLI) purchased on the lives of eligible employees and retirees. While the Firm
owns the COLI policies, COLI proceeds (death benefits, withdrawals and other distributions) may be
used only to reimburse the Firm for net postretirement benefit claim payments and related
administrative expenses. The U.K. postretirement benefit plan is unfunded.
The following tables present the funded status and amounts reported on the Consolidated balance
sheets, the accumulated benefit obligation and the components of net periodic benefit costs
reported in the Consolidated statements of income for the Firms U.S. and non-U.S. defined benefit
pension and postretirement benefit plans:
|
|
|
|
|
|
96
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
|
Other postretirement benefit plans (c)(d) |
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
(b) |
|
2005 |
|
|
2004 |
(b) |
|
2005 |
|
|
2004 |
(b) |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
(7,594 |
) |
|
$ |
(4,633 |
) |
|
$ |
(1,969 |
) |
|
$ |
(1,659 |
) |
|
$ |
(1,577 |
) |
|
$ |
(1,252 |
) |
Merger with Bank One |
|
|
|
|
|
|
(2,497 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(216 |
) |
Cazenove business partnership |
|
|
|
|
|
|
|
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Benefits earned during the year |
|
|
(280 |
) |
|
|
(251 |
) |
|
|
(25 |
) |
|
|
(17 |
) |
|
|
(13 |
) |
|
|
(15 |
) |
Interest cost on benefit obligations |
|
|
(431 |
) |
|
|
(348 |
) |
|
|
(104 |
) |
|
|
(87 |
) |
|
|
(81 |
) |
|
|
(81 |
) |
Plan amendments |
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
32 |
|
Employee contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
(36 |
) |
Actuarial gain (loss) |
|
|
(122 |
) |
|
|
(511 |
) |
|
|
(310 |
) |
|
|
(99 |
) |
|
|
21 |
|
|
|
(163 |
) |
Benefits paid |
|
|
723 |
|
|
|
555 |
|
|
|
66 |
|
|
|
64 |
|
|
|
187 |
|
|
|
167 |
|
Curtailments |
|
|
28 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(8 |
) |
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Foreign exchange impact and other |
|
|
|
|
|
|
|
|
|
|
255 |
|
|
|
(134 |
) |
|
|
5 |
|
|
|
(3 |
) |
|
Benefit obligation at end of year |
|
$ |
(7,676 |
) |
|
$ |
(7,594 |
) |
|
$ |
(2,378 |
) |
|
$ |
(1,969 |
) |
|
$ |
(1,395 |
) |
|
$ |
(1,577 |
) |
|
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
9,637 |
|
|
$ |
4,866 |
|
|
$ |
1,889 |
|
|
$ |
1,603 |
|
|
$ |
1,302 |
|
|
$ |
1,149 |
|
Merger with Bank One |
|
|
|
|
|
|
3,280 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
98 |
|
Cazenove business partnership |
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
703 |
|
|
|
946 |
|
|
|
308 |
|
|
|
164 |
|
|
|
43 |
|
|
|
84 |
|
Firm contributions |
|
|
|
|
|
|
1,100 |
|
|
|
78 |
|
|
|
40 |
|
|
|
3 |
|
|
|
2 |
|
Benefits paid |
|
|
(723 |
) |
|
|
(555 |
) |
|
|
(66 |
) |
|
|
(64 |
) |
|
|
(19 |
) |
|
|
(31 |
) |
Foreign exchange impact and other |
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
126 |
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
9,617 |
(e) |
|
$ |
9,637 |
(e) |
|
$ |
2,223 |
|
|
$ |
1,889 |
|
|
$ |
1,329 |
|
|
$ |
1,302 |
|
|
Reconciliation of funded status |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
1,941 |
|
|
$ |
2,043 |
|
|
$ |
(155 |
) |
|
$ |
(80 |
) |
|
$ |
(66 |
) |
|
$ |
(275 |
) |
Unrecognized amounts: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transition asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Prior service cost |
|
|
40 |
|
|
|
47 |
|
|
|
3 |
|
|
|
4 |
|
|
|
(105 |
) |
|
|
(23 |
) |
Net actuarial loss |
|
|
1,078 |
|
|
|
997 |
|
|
|
599 |
|
|
|
590 |
|
|
|
335 |
|
|
|
321 |
|
|
Prepaid benefit cost reported in Other assets |
|
$ |
3,059 |
|
|
$ |
3,087 |
|
|
$ |
447 |
(f) |
|
$ |
513 |
(f) |
|
$ |
164 |
|
|
$ |
23 |
|
|
Accumulated benefit obligation |
|
$ |
(7,274 |
) |
|
$ |
(7,167 |
) |
|
$ |
(2,303 |
) |
|
$ |
(1,931 |
) |
|
NA |
|
NA |
|
|
|
|
(a) |
|
For pension benefit plans, the unrecognized net loss is primarily the result of declines
in interest rates in recent years, as offset by recent asset gains and amounts recognized through
amortization in expense. Other factors that contribute to this unrecognized amount include
demographic experience, which differs from expected, and changes in other actuarial assumptions.
For other postretirement benefit plans, the primary drivers of the cumulative unrecognized loss was
the decline in the discount rate in recent years and the medical trend, which was higher than
expected. These losses have been offset somewhat by the recognition of future savings attributable
to Medicare Part D subsidy payments. |
|
(b) |
|
Effective July 1, 2004, the Firm assumed the obligations of heritage Bank Ones pension and
postretirement plans. These plans were similar to those of JPMorgan Chase and were merged into the
Firms plans effective December 31, 2004. |
|
(c) |
|
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in a $35
million reduction in the Accumulated other postretirement benefit obligation as of January 1, 2004.
During 2005, an additional $116 million reduction was reflected for recognition of the final
Medicare Part D regulations issued on January 21, 2005. |
|
(d) |
|
Includes postretirement benefit obligation of $44 million and $43 million and postretirement
benefit liability (included in Accrued expenses) of $50 million and $57 million at December 31,
2005 and 2004, respectively, for the U.K. plan, which is unfunded. |
|
(e) |
|
At December 31, 2005 and 2004, approximately $405 million and $358 million, respectively, of
U.S. plan assets relate to surplus assets of group annuity contracts. |
|
(f) |
|
At December 31, 2005 and 2004, Accrued expenses related to non-U.S. defined benefit pension
plans that JPMorgan Chase elected not to prefund fully totaled $164 million and $124 million,
respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
|
Other postretirement benefit plans |
|
For the year ended December 31, (in millions) |
|
2005 |
|
|
2004 |
(a) |
|
2003 |
(b) |
|
2005 |
|
|
2004 |
(a) |
|
2003 |
(b) |
|
2005 |
(c) |
|
2004 |
(a) (c) |
|
2003 |
(b) |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits earned during the period |
|
$ |
280 |
|
|
$ |
251 |
|
|
$ |
180 |
|
|
$ |
25 |
|
|
$ |
17 |
|
|
$ |
16 |
|
|
$ |
13 |
|
|
$ |
15 |
|
|
$ |
15 |
|
Interest cost on benefit
obligations |
|
|
431 |
|
|
|
348 |
|
|
|
262 |
|
|
|
104 |
|
|
|
87 |
|
|
|
74 |
|
|
|
81 |
|
|
|
81 |
|
|
|
73 |
|
Expected return on plan assets |
|
|
(694 |
) |
|
|
(556 |
) |
|
|
(322 |
) |
|
|
(109 |
) |
|
|
(90 |
) |
|
|
(83 |
) |
|
|
(90 |
) |
|
|
(86 |
) |
|
|
(92 |
) |
Amortization of unrecognized
amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
5 |
|
|
|
13 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
1 |
|
Net actuarial loss |
|
|
4 |
|
|
|
23 |
|
|
|
62 |
|
|
|
38 |
|
|
|
44 |
|
|
|
35 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
Curtailment (gain) loss |
|
|
2 |
|
|
|
7 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
(17 |
) |
|
|
8 |
|
|
|
2 |
|
Settlement (gain) loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
Reported net periodic benefit costs |
|
$ |
28 |
|
|
$ |
86 |
|
|
$ |
190 |
|
|
$ |
59 |
|
|
$ |
69 |
|
|
$ |
50 |
|
|
$ |
(10 |
) |
|
$ |
20 |
|
|
$ |
(1 |
) |
|
|
|
|
(a) |
|
Effective July 1, 2004, the Firm assumed the obligations of heritage Bank Ones pension
and postretirement plans. These plans were similar to those of JPMorgan Chase and were merged into
the Firms plans effective December 31, 2004. |
|
(b) |
|
Heritage JPMorgan Chase results only for 2003. |
|
(c) |
|
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in a $15
million and $5 million reduction in 2005 and 2004, respectively, in net periodic benefit cost. The
impact on 2005 cost was higher as a result of the final Medicare Part D regulations issued on
January 21, 2005. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
97 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Chase has a number of other defined benefit pension plans (i.e., U.S. plans not
subject to Title IV of the Employee Retirement Income Security Act). The most significant of these
plans is the Excess Retirement Plan, pursuant to which certain employees earn service credits on
compensation amounts above the maximum stipulated by law. This plan is a nonqualified, noncontributory U.S. pension plan with an unfunded liability at December 31, 2005 and 2004, in the amount
of $273 million and $292 million, respectively. Compensation expense related to this pension plan
totaled $21 million in 2005, $28 million in 2004 and $19 million in 2003.
Plan assumptions
JPMorgan Chases expected long-term rate of return for U.S. pension and other postretirement
employee benefit plan assets is a blended average of the investment advisors projected long-term
(10 years or more) returns for the various asset classes, weighted by the portfolio allocation.
Asset-class returns are developed using a forward-looking building-block approach and are not based
strictly upon historical returns. Equity returns are generally developed as the sum of inflation,
expected real earnings growth and expected long-term dividend yield. Bond returns are generally
developed as the sum of inflation, real bond yield and risk spread (as appropriate), adjusted for
the expected effect on returns from changing yields. Other asset-class returns are derived from
their relationship to the equity and bond markets.
In the U.K., which represents the most significant of the non-U.S. pension plans, procedures
similar to those in the U.S. are used to develop the expected long-term rate of return on pension
plan assets, taking into consideration local market conditions and the specific allocation of plan
assets. The expected
long-term rate of return on U.K. plan assets is an average of projected long-term returns for each
asset class, selected by reference to the yield on long-term U.K. government bonds and AA-rated
long-term corporate bonds, plus an equity risk premium above the risk-free rate.
In 2005, the discount rate used in determining the benefit obligation under the U.S. pension and
other postretirement employee benefit plans was selected by reference to the yield on a portfolio
of bonds whose redemptions and coupons closely match each of the plans projected cash flows; such
portfolio is derived from a broad-based universe of high quality corporate bonds as of the
measurement date. In years in which this hypothetical bond portfolio generates excess cash, such
excess is assumed to be reinvested at the one-year forward rates implied by the Citigroup Pension
Discount Curve published as of the measurement date. Prior to 2005, discount rates were selected by
reference to the year-end Moodys corporate AA rate, as well as other high-quality indices with a
duration that was similar to that of the respective plans benefit obligations. The discount rate
for the U.K. pension and other postretirement employee benefit plans was determined by matching the
duration of the Firms obligations with the corresponding duration from the yield curve of the
year-end iBoxx £ corporate AA 15-year-plus bond index.
The following tables present the weighted-average annualized actuarial assumptions for the
projected and accumulated benefit obligations, and the components of net periodic benefit costs for
the Firms U.S. and non-U.S. defined benefit pension and postretirement benefit plans, as of
year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
For the year ended December 31, |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Weighted-average assumptions used to determine benefit obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
5.70 |
% |
|
|
5.75 |
% |
|
|
2.00-4.70 |
% |
|
|
2.00-5.30 |
% |
Postretirement benefit |
|
|
5.65 |
|
|
|
5.75 |
|
|
|
4.7 |
|
|
|
5.3 |
|
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.50 |
|
|
|
3.00-3.75 |
|
|
|
1.75-3.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Non-U.S. |
|
For the year ended December 31, |
|
2005 |
|
|
2004 |
|
|
2003 |
(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
(b) |
|
Weighted-average assumptions used to determine net
periodic benefit costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75% |
(a) |
|
|
6.00 |
% |
|
|
6.50 |
% |
|
|
2.00-5.30 |
% |
|
|
2.00-5.75 |
% |
|
|
1.50-5.60 |
% |
Expected long-term rate of return on plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
7.50 |
|
|
|
7.50-7.75 |
|
|
|
8.00 |
|
|
|
3.25-5.75 |
|
|
|
3.00-6.50 |
|
|
|
2.70-6.50 |
|
Postretirement benefit |
|
|
4.75-7.00 |
|
|
|
4.75-7.00 |
|
|
|
8.00 |
|
|
NA |
|
|
NA |
|
|
NA |
|
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.25-4.50 |
|
|
|
4.50 |
|
|
|
1.75-3.75 |
|
|
|
1.75-3.75 |
|
|
|
1.25-3.00 |
|
|
|
|
|
(a) |
|
The postretirement plan was remeasured as of August 1, 2005, and a rate of 5.25% was used
from the period of August 1, 2005, through December 31, 2005. |
|
(b) |
|
Heritage JPMorgan Chase results only for 2003. |
|
|
|
|
|
|
98
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following tables present JPMorgan Chases assumed weighted-average medical benefits cost
trend rate, which is used to measure the expected cost of benefits at year-end, and the effect of a
one-percentage-point change in the assumed medical benefits cost trend rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2005 |
|
|
2004 |
(a) |
|
2003 |
(b) |
|
Health care cost trend rate assumed |
|
|
|
|
|
|
|
|
|
|
|
|
for next year |
|
|
10 |
% |
|
|
10 |
% |
|
|
10 |
% |
Rate to which cost trend rate is assumed
to decline (ultimate trend rate) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Year that rate reaches ultimate trend rate |
|
|
2012 |
|
|
|
2011 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
1-Percentage- |
|
1-Percentage- |
For the year ended December 31,2005 |
|
point increase |
|
point decrease |
|
Effect on total service and interest costs |
|
$ |
4 |
|
|
$ |
(3 |
) |
Effect on postretirement benefit obligation |
|
|
64 |
|
|
|
(55 |
) |
|
|
|
|
(a) |
|
Effective July 1, 2004, the Firm assumed the obligations of heritage Bank Ones pension
and postretirement plans. These plans were similar to those of JPMorgan Chase and were merged into
the Firms plans effective December 31, 2004. |
|
(b) |
|
2003 reflects the results of heritage JPMorgan Chase only. |
At December 31, 2005, the Firm reduced the discount rate used to determine its U.S. benefit
obligations to 5.70% for the pension plan and to 5.65% for the postretirement benefits plans from
the prior year rate of 5.75% for both plans. The Firm also changed the health care benefit
obligation trend assumption to 10% for 2006, grading down to an ultimate rate of 5% in 2013. The
2006 expected long-term rate of return on its U.S. pension plan assets remained at 7.50%. The 2006
expected long-term rate of return on the Firms COLI post-retirement plan assets remained at 7.00%;
however, with the merger of Bank Ones other postretirement plan assets, the Firms overall
expected long-term rate of return on U.S. postretirement employee benefit plan assets decreased to
6.84% and 6.80% in 2005 and 2004, respectively, to reflect a weighted average expected rate of
return for the merged plan. The interest crediting rate assumption used to determine pension
benefits changed to 5.00% from 4.75% in 2005, primarily due to changes in market interest rates
which will result in additional expense of $18 million. The changes as of December 31, 2005, to the
discount rates are expected to increase 2006 U.S. pension and other postretirement benefit expenses
by approximately $5 million and to the non-U.S. pension and other postretirement benefit expenses
by $23 million. The rate of compensation increase assumption of 4.00% at December 31, 2005,
reflects the consolidation of the prior JPMorgan Chase and Bank One age-weighted increase
assumptions; the impact to expense is not expected to be material.
JPMorgan Chases U.S. pension and other postretirement benefit expenses are most sensitive to the
expected long-term rate of return on plan assets. With all other assumptions held constant, a
25-basis point decline in the expected long-term rate of return on U.S. plan assets would result
in an increase of approximately $26 million in 2006 U.S. pension and other postretirement benefit
expenses. A 25-basis point decline in the discount rate for the U.S. plans would result in an
increase in 2006 U.S. pension and other postretirement benefit expenses of approximately $20
million and an increase in the related projected benefit obligations of approximately $233 million.
A 25-basis point decline in the discount rates for the non-U.S. plans would result in an increase
in the 2006 non-U.S. pension and other postretirement benefit expenses of $12 million. A 25-basis
point increase in the interest crediting rate would result in an increase in 2006 U.S. pension
expense of approximately $18 million.
Investment strategy and asset allocation
The investment policy for the Firms postretirement employee benefit plan assets is to optimize the
risk-return relationship as appropriate to the respective plans needs and goals, using a global
portfolio of various asset classes diversified by market segment, economic sector, and issuer.
Specifically, the goal is to optimize the asset mix for future benefit obligations, while managing
various risk factors and each plans investment return objectives. For example, long-duration fixed
income securities are included in the U.S. qualified pension plans asset allocation, in
recognition of its long-duration obligations. Plan assets are managed by a combination of internal
and external investment managers and, on a quarterly basis, are rebalanced to target, to the extent
economically practical.
The Firms U.S. pension plan assets are held in various trusts and are invested in well-diversified
portfolios of equities (including U.S. large and small capitalization and international equities),
fixed income (including corporate and government bonds), Treasury inflation-indexed and high-yield
securities, cash equivalents, and other securities. Non-U.S. pension plan assets are held in
various trusts and are similarly invested in well-diversified portfolios of equity, fixed income
and other securities. Assets of the Firms COLI policies, which are used to fund partially the U.S.
postretirement benefit plan, are held in separate accounts with an insurance company and are
invested in equity and fixed income index funds. In addition, tax-exempt municipal debt securities,
held in a trust, are used to fund the U.S. postretirement benefit plan. As of December 31, 2005, the assets used to
fund the Firms U.S. and non-U.S. defined benefit pension and postretirement benefit plans do not
include JPMorgan Chase common stock, except in connection with investments in third-party
stock-index funds.
The following table presents the weighted-average asset allocation at December 31 for the years
indicated, and the respective target allocation by asset category, for the Firms U.S. and non-U.S.
defined benefit pension and postretirement benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans |
|
|
|
|
|
|
U.S. |
|
|
Non-U.S.(a) |
|
|
Postretirement benefit plans(b) |
|
|
Target |
|
% of plan assets |
|
|
Target |
|
% of plan assets |
|
|
Target |
|
% of plan assets |
December 31, |
|
Allocation |
|
2005 |
|
|
2004 |
|
|
Allocation |
|
2005 |
|
|
2004 |
|
|
Allocation |
|
|
2005 |
|
|
2004 |
|
|
Asset category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
30 |
% |
|
|
33 |
% |
|
|
38 |
% |
|
|
74 |
% |
|
|
75 |
% |
|
|
76 |
% |
|
|
50 |
% |
|
|
54 |
% |
|
|
54 |
% |
Equity securities |
|
|
55 |
|
|
|
57 |
|
|
|
53 |
|
|
|
25 |
|
|
|
24 |
|
|
|
24 |
|
|
|
50 |
|
|
|
46 |
|
|
|
46 |
|
Real estate |
|
|
5 |
|
|
|
6 |
|
|
|
5 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
10 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
(a) |
|
Represents the U.K. defined benefit pension plan only, as plans outside the U.K. are not significant. |
|
(b) |
|
Represents the U.S. postretirement benefit plan only, as the U.K. plan is unfunded. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
99 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Estimated future benefit payments
The following table presents benefit payments expected to be paid, which include the effect of
expected future service, for the years indicated. The postretirement medical and life insurance
payments are net of expected retiree contributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Other postretirement |
|
|
|
|
Year ended December 31, |
|
U.S. pension |
|
|
U.S. pension |
|
|
benefits before |
|
|
|
|
(in millions) |
|
benefits |
|
|
benefits |
|
|
Medicare Part D subsidy |
|
|
Medicare Part D subsidy |
|
|
2006 |
|
$ |
558 |
|
|
$ |
67 |
|
|
$ |
124 |
|
|
$ |
14 |
|
2007 |
|
|
550 |
|
|
|
70 |
|
|
|
127 |
|
|
|
15 |
|
2008 |
|
|
565 |
|
|
|
74 |
|
|
|
127 |
|
|
|
16 |
|
2009 |
|
|
584 |
|
|
|
77 |
|
|
|
128 |
|
|
|
17 |
|
2010 |
|
|
600 |
|
|
|
81 |
|
|
|
129 |
|
|
|
19 |
|
Years 20112015 |
|
|
3,266 |
|
|
|
396 |
|
|
|
633 |
|
|
|
111 |
|
|
Defined contribution plans
JPMorgan Chase offers several defined contribution plans in the U.S. and certain non-U.S.
locations. The most significant of these plans is the 401(k) Savings Plan, which covers
substantially all U.S. employees. The 401(k) Savings Plan allows employees to make pre-tax
contributions to tax-deferred investment portfolios. The JPMorgan Chase Common Stock Fund within
the 401(k) Savings Plan is a nonleveraged employee stock ownership plan. The Firm matches eligible employee contributions
up to a certain percentage of benefits-eligible compensation per pay period, subject to plan and
legal limits. Employees begin to receive matching contributions after completing a specified
service requirement and are immediately vested in such company contributions. The Firms defined
contribution plans are administered in accordance with applicable local laws and regulations.
Compensation expense related to these plans totaled $392 million in 2005, $317 million in 2004 and
$240 million in 2003.
Note 7 Employee stock-based incentives
Effective January 1, 2003, JPMorgan Chase adopted SFAS 123 using the prospective transition
method. SFAS 123 requires all stock-based compensation awards, including stock options and
stock-settled stock appreciation rights (SARs), to be accounted for at fair value. The Firm
currently uses the Black-Scholes valuation model to estimate the fair value of stock options and
SARs. Stock options that were outstanding as of December 31, 2002, continue to be accounted for
under APB 25 using the intrinsic value method. Under this method, no expense is recognized for
stock options or SARs granted at the stock price on grant date, since such options have no
intrinsic value. Compensation expense for restricted stock and restricted stock units (RSUs) is
measured based upon the number of shares granted and the stock price at the grant date.
Compensation expense is recognized in earnings over the required service period.
In connection with the Merger in 2004, JPMorgan Chase converted all outstanding Bank One employee
stock-based awards at the merger date, and those awards became exercisable for or based upon
JPMorgan Chase common stock. The number of awards converted, and the exercise prices of those
awards, was adjusted to take into account the Merger exchange ratio of 1.32.
On December 16, 2004, the FASB issued SFAS 123R, which revises SFAS 123 and supersedes APB 25. In
March 2005, the SEC issued SAB 107, which provides interpretive guidance on SFAS 123R. Accounting
and reporting under SFAS 123R is generally similar to the SFAS 123 approach. However, SFAS 123R
requires all share-based payments to employees, including grants of employee stock options and
SARs, to be recognized in the income statement based upon their fair values. Pro forma disclosure
is no longer an alternative. SFAS 123R permits adoption using one of two methods modified
prospective or modified retrospective. In April 2005, the U.S. Securities and Exchange Commission
approved a new rule that, for public companies, delayed the effective date of SFAS 123R to no later
than January 1, 2006. The Firm adopted SFAS 123R on January 1, 2006, under the modified prospective
method.
Key employee stock-based awards
In 2005, JPMorgan Chase granted long-term stock-based awards under the 1996 Long-Term Incentive
Plan as amended (the 1996 Plan) until May 2005 and under the 2005 Long-Term Incentive Plan (the
2005 Plan) thereafter to certain key employees. These two plans, plus prior Firm plans and plans
assumed as the result of acquisitions, constitute the Firms plans (LTI Plans). The 2005 Plan was
adopted by the Board of Directors on March 15, 2005, and became effective on May 17, 2005, after
approval by shareholders at the annual meeting. The 2005 Plan replaces three existing stock
compensation plans the 1996 Plan and two non-shareholder
approved plans all of which expired in
May 2005. Under the terms of the 2005 Plan, 275 million shares of common stock are available for
issuance during its five-year term. The 2005 Plan is the only active plan under which the Firm is
currently granting stock-based incentive awards.
In 2005, 15.5 million SARs settled only in shares and 1.7 million nonqualified stock options were
granted. Under the LTI Plans, stock options and SARs are granted with an exercise price equal to
JPMorgan Chases common stock price on the grant date. Generally, options and SARs cannot be
exercised until at least one year after the grant date and become exercisable over various periods
as determined at the time of the grant. These awards generally expire 10 years after the grant
date.
In December 2005, the Firm accelerated the vesting of approximately 41 million unvested,
out-of-the-money employee stock options granted in 2001 under the Growth and Performance Incentive
Program (GPIP), which were scheduled to vest in January 2007. These options were not modified
other than to accelerate vesting. The related expense was approximately $145 million, and was
recognized as compensation expense in the fourth quarter of 2005. The Firm believes that at the
time the options were accelerated they had limited economic value since the exercise price of the
accelerated options was $51.22 and the closing price of the Firms common stock on the effective
date of the acceleration was $39.69.
|
|
|
|
|
|
100
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following table presents a summary of JPMorgan Chases option and SAR activity under the
LTI Plans during the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Year ended December 31,(a) |
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
(Options/SARs in thousands) |
|
options/SARs |
|
|
exercise price |
|
|
options/SARs |
|
|
exercise price |
|
|
options |
|
|
exercise price |
|
|
Outstanding, January 1 |
|
|
376,330 |
|
|
$ |
37.59 |
|
|
|
294,026 |
|
|
$ |
39.88 |
|
|
|
298,731 |
|
|
$ |
40.84 |
|
Granted |
|
|
17,248 |
|
|
|
35.55 |
|
|
|
16,667 |
|
|
|
39.79 |
|
|
|
26,751 |
|
|
|
22.15 |
|
Bank One
Conversion, July 1 |
|
NA |
|
|
NA |
|
|
|
111,287 |
|
|
|
29.63 |
|
|
NA |
|
|
NA |
|
Exercised |
|
|
(26,731 |
) |
|
|
24.28 |
|
|
|
(27,763 |
) |
|
|
25.33 |
|
|
|
(14,574 |
) |
|
|
17.47 |
|
Canceled |
|
|
(28,272 |
) |
|
|
44.77 |
|
|
|
(17,887 |
) |
|
|
46.68 |
|
|
|
(16,882 |
) |
|
|
47.57 |
|
|
Outstanding, December 31 |
|
|
338,575 |
|
|
$ |
37.93 |
|
|
|
376,330 |
|
|
$ |
37.59 |
|
|
|
294,026 |
|
|
$ |
39.88 |
|
Exercisable, December 31 |
|
|
286,017 |
|
|
$ |
38.89 |
|
|
|
246,945 |
|
|
$ |
36.82 |
|
|
|
176,163 |
|
|
$ |
37.88 |
|
|
|
|
|
(a) |
|
2004 includes six months of awards for the combined Firm and six months of awards for
heritage JPMorgan Chase. 2003 reflects the awards for heritage JPMorgan Chase only. |
The following table details the distribution of options and SARs outstanding under the LTI
Plans at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/SARs outstanding |
|
|
Options/SARs exercisable |
|
(Options/SARs in thousands) |
|
|
|
|
|
Weighted-average |
|
|
Weighted-average remaining |
|
|
|
|
|
|
Weighted-average |
|
Range of exercise prices |
|
Outstanding |
|
|
exercise price |
|
|
contractual life (in years) |
|
|
Exercisable |
|
|
exercise price |
|
|
$7.27$20.00 |
|
|
2,504 |
|
|
$ |
19.12 |
|
|
0.8 |
|
|
|
2,503 |
|
|
$ |
19.12 |
|
$20.01$35.00 |
|
|
125,422 |
|
|
|
28.02 |
|
|
5.8 |
|
|
|
88,418 |
|
|
|
27.22 |
|
$35.01$50.00 |
|
|
135,263 |
|
|
|
40.04 |
|
|
4.9 |
|
|
|
119,710 |
|
|
|
40.13 |
|
$50.01$63.48 |
|
|
75,386 |
|
|
|
51.27 |
|
|
4.8 |
|
|
|
75,386 |
|
|
|
51.27 |
|
|
Total |
|
|
338,575 |
|
|
$ |
37.93 |
|
|
5.2 |
|
|
|
286,017 |
|
|
$ |
38.89 |
|
|
The following table presents a summary of JPMorgan Chases restricted stock and RSU activity
under the LTI Plans during the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Number of restricted stock/RSUs |
|
Year ended December 31,(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Outstanding, January 1 |
|
|
85,099 |
|
|
|
85,527 |
|
|
|
55,886 |
|
Granted |
|
|
38,115 |
|
|
|
32,514 |
|
|
|
44,552 |
|
Bank One conversion |
|
NA |
|
|
|
15,116 |
|
|
NA |
Lapsed(b) |
|
|
(30,413 |
) |
|
|
(43,349 |
) |
|
|
(12,545 |
) |
Forfeited |
|
|
(8,197 |
) |
|
|
(4,709 |
) |
|
|
(2,366 |
) |
|
Outstanding, December 31 |
|
|
84,604 |
|
|
|
85,099 |
|
|
|
85,527 |
|
|
|
|
|
(a) |
|
2004 includes six months of awards for the combined Firm and six months of awards for
heritage JPMorgan Chase. 2003 reflects the awards for heritage JPMorgan Chase only. |
|
(b) |
|
Lapsed awards represent both restricted stock for which restrictions have lapsed and RSUs that have been
converted into common stock. |
Restricted stock and RSUs are granted by JPMorgan Chase at no cost to the recipient. These
awards are subject to forfeiture until certain restrictions have lapsed, including continued
employment for a specified period. The recipient of a share of restricted stock is entitled to
voting rights and dividends on the common stock. An RSU entitles the recipient to receive a share
of common stock after the applicable restrictions lapse; the recipient is entitled to receive cash
payments equivalent to any dividends paid on the underlying common stock during the period the RSU
is outstanding. Effective January 2005, the equity portion of the Firms annual incentive awards
were granted primarily in the form of RSUs.
The vesting of certain awards issued prior to 2002 is conditioned upon certain service requirements
being met and JPMorgan Chases common stock reaching and sustaining target prices within a
five-year performance period. During 2002, it was determined that it was no longer probable that
the target stock prices related to forfeitable awards granted in 1999, 2000, and 2001 would be
achieved within their respective performance periods, and accordingly, previously accrued expenses
were reversed. The target stock prices for these awards range from $73.33 to $85.00. These awards
were forfeited as follows: 1.2 million shares granted in 1999 were forfeited in January 2004; and
1.2 million shares granted in 2000 were forfeited in January 2005. Additionally, 1.2 million shares
granted in 2001 were forfeited in January 2006.
Broad-based employee stock options
No broad-based employee stock option grants were made in 2005. Prior awards were granted by
JPMorgan Chase under the Value Sharing Plan, a non-shareholder-approved plan. The exercise price is
equal to JPMorgan Chases common stock price on the grant date. The options become exercisable over
various periods and generally expire 10 years after the grant date.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
101 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents a summary of JPMorgan Chases broad-based employee stock option
plans and SAR activity during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
|
Number of |
|
|
Weighted-average |
|
(Options/SARs in thousands) |
|
options/SARs |
|
|
exercise price |
|
|
options/SARs |
|
|
exercise price |
|
|
options |
|
|
exercise price |
|
|
Outstanding, January 1 |
|
|
112,184 |
|
|
$ |
40.42 |
|
|
|
117,822 |
|
|
$ |
39.11 |
|
|
|
113,155 |
|
|
$ |
40.62 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
6,321 |
|
|
|
39.96 |
|
|
|
12,846 |
|
|
|
21.87 |
|
Exercised |
|
|
(2,000 |
) |
|
|
24.10 |
|
|
|
(5,960 |
) |
|
|
15.26 |
|
|
|
(2,007 |
) |
|
|
13.67 |
|
Canceled |
|
|
(4,602 |
) |
|
|
39.27 |
|
|
|
(5,999 |
) |
|
|
39.18 |
|
|
|
(6,172 |
) |
|
|
37.80 |
|
|
Outstanding, December 31 |
|
|
105,582 |
|
|
$ |
40.78 |
|
|
|
112,184 |
|
|
$ |
40.42 |
|
|
|
117,822 |
|
|
$ |
39.11 |
|
Exercisable, December 31 |
|
|
52,592 |
|
|
$ |
40.29 |
|
|
|
30,082 |
|
|
$ |
36.33 |
|
|
|
36,396 |
|
|
$ |
32.88 |
|
|
The following table details the distribution of broad-based employee stock options and SARs
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/SARs outstanding |
|
Options/SARs exercisable |
|
(Options/SARs in thousands) |
|
|
|
|
|
Weighted-average |
|
|
Weighted-average remaining |
|
|
|
|
|
Weighted-average |
|
Range of exercise prices |
|
Outstanding |
|
|
exercise price |
|
|
contractual life (in years) |
|
Exercisable |
|
|
exercise price |
|
|
$20.01$35.00 |
|
|
15,200 |
|
|
$ |
25.01 |
|
|
|
4.3 |
|
|
|
10,490 |
|
|
$ |
26.42 |
|
$35.01$50.00 |
|
|
70,088 |
|
|
|
41.18 |
|
|
|
4.5 |
|
|
|
41,990 |
|
|
|
43.72 |
|
$50.01$51.22 |
|
|
20,294 |
|
|
|
51.22 |
|
|
|
5.1 |
|
|
|
112 |
|
|
|
51.22 |
|
|
Total |
|
|
105,582 |
|
|
$ |
40.78 |
|
|
|
4.6 |
|
|
|
52,592 |
|
|
$ |
40.29 |
|
|
Comparison of the fair and intrinsic value measurement methods
Pre-tax employee stock-based compensation expense related to the LTI plans totaled $1.6 billion in
2005, $1.3 billion in 2004 and $919 million in 2003.
The following table presents net income (after-tax) and basic and diluted earnings per share as
reported, and as if all outstanding awards were accounted for at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (a) |
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income as reported |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Add: |
|
Employee stock-based compensation expense originally included in reported net income |
|
|
938 |
|
|
|
778 |
|
|
|
551 |
|
Deduct: |
|
Employee stock-based compensation expense determined under the fair value method for all awards |
|
|
(1,015 |
) |
|
|
(960 |
) |
|
|
(863 |
) |
|
Pro forma net income |
|
$ |
8,406 |
|
|
$ |
4,284 |
|
|
$ |
6,407 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
As reported |
|
$ |
2.43 |
|
|
$ |
1.59 |
|
|
$ |
3.32 |
|
|
|
Pro forma |
|
|
2.40 |
|
|
|
1.52 |
|
|
|
3.16 |
|
Diluted: |
|
As reported |
|
$ |
2.38 |
|
|
$ |
1.55 |
|
|
$ |
3.24 |
|
|
|
Pro forma |
|
|
2.36 |
|
|
|
1.48 |
|
|
|
3.09 |
|
|
|
|
|
(a) |
|
2004 results include six months of awards for the combined Firms results and six months
of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The following table presents JPMorgan Chases weighted-average, grant-date fair values for the
employee stock-based compensation awards granted, and the assumptions used to value stock options
and SARs under the Black-Scholes valuation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Weighted-average grant-date fair value |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
Key employee |
|
$ |
10.44 |
|
|
$ |
13.04 |
|
|
$ |
5.60 |
|
Broad-based employee |
|
NA |
|
|
|
10.71 |
|
|
|
4.98 |
|
Converted Bank One options |
|
NA |
|
|
|
14.05 |
|
|
NA |
|
Restricted stock and RSUs
(all payable solely in stock) |
|
|
37.35 |
|
|
|
39.58 |
|
|
|
22.03 |
|
Weighted-average annualized stock option valuation assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.25 |
% |
|
|
3.44 |
% |
|
|
3.19 |
% |
Expected dividend yield (b) |
|
|
3.79 |
|
|
|
3.59 |
|
|
|
5.99 |
|
Expected common stock price volatility |
|
|
37 |
|
|
|
41 |
|
|
|
44 |
|
Assumed weighted-average expected
life of stock options (in years) |
|
|
|
|
|
|
|
|
|
|
|
|
Key employee |
|
|
6.8 |
|
|
|
6.8 |
|
|
|
6.8 |
|
Broad-based employee |
|
NA |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Based primarily upon historical data at the grant dates. |
|
|
|
|
|
|
102
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 8 Noninterest expense
Merger costs
Costs associated with the Merger were reflected in the Merger costs caption of the Consolidated
statements of income. A summary of such costs, by expense category, is shown in the following table
for 2005 and 2004. There were no such costs in 2003.
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions) |
|
2005 |
|
|
2004 |
(a) |
|
Expense category |
|
|
|
|
|
|
|
|
Compensation |
|
$ |
238 |
|
|
$ |
467 |
|
Occupancy |
|
|
(77 |
) |
|
|
448 |
|
Technology and communications and other |
|
|
561 |
|
|
|
450 |
|
|
Total(b) |
|
$ |
722 |
|
|
$ |
1,365 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage JPMorgan Chase results. |
|
(b) |
|
With the exception of occupancy-related write-offs, all of the costs in the table require the expenditure of cash. |
The table below shows the change in the liability balance related to the costs associated with
the Merger.
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions) |
|
2005 |
|
|
2004 |
(a) |
|
Liability balance, beginning of period |
|
$ |
952 |
|
|
$ |
|
|
Recorded as merger costs |
|
|
722 |
|
|
|
1,365 |
|
Recorded as goodwill |
|
|
26 |
|
|
|
1,028 |
|
Liability utilized |
|
|
(903 |
) |
|
|
(1,441 |
) |
|
Total |
|
$ |
797 |
|
|
$ |
952 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
Note 9 Securities and
private equity investments
Securities are classified as AFS, Held-to-maturity (HTM) or Trading. Trading securities are
discussed in Note 3 on page 94 of this Annual Report. Securities are classified as AFS when, in
managements judgment, they may be sold in response to or in anticipation of changes in market
conditions, or as part of the Firms management of its structural interest rate risk. AFS
securities are carried at fair value on the Consolidated balance sheets. Unrealized gains and
losses after SFAS 133 valuation adjustments are reported as net increases or decreases to
Accumulated other comprehensive income (loss). The specific identification method is used to
determine realized gains and losses on AFS securities, which are included in Securities /private
equity gains on the Consolidated statements of income. Securities that the Firm has the positive
intent and ability to hold to maturity are classified as HTM and are carried at amortized cost on
the Consolidated balance sheets.
The following table presents realized gains and losses from AFS securities and private equity gains
(losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Realized gains |
|
$ |
302 |
|
|
$ |
576 |
|
|
$ |
2,123 |
|
Realized losses |
|
|
(1,638 |
) |
|
|
(238 |
) |
|
|
(677 |
) |
|
Net realized securities gains (losses) |
|
|
(1,336 |
) |
|
|
338 |
|
|
|
1,446 |
|
Private equity gains |
|
|
1,809 |
|
|
|
1,536 |
|
|
|
33 |
|
|
Total Securities/private
equity gains |
|
$ |
473 |
|
|
$ |
1,874 |
|
|
$ |
1,479 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The amortized cost and estimated fair value of AFS and held-to-maturity securities were as
follows for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Fair |
|
Amortized |
|
unrealized |
|
unrealized |
|
Fair |
December 31, (in millions) |
|
cost |
|
gains |
|
losses |
|
value |
|
cost |
|
gains |
|
losses |
|
value |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
$ |
4,245 |
|
|
$ |
24 |
|
|
$ |
2 |
|
|
$ |
4,267 |
|
|
$ |
13,621 |
|
|
$ |
7 |
|
|
$ |
222 |
|
|
$ |
13,406 |
|
Mortgage-backed securities |
|
|
80 |
|
|
|
3 |
|
|
|
|
|
|
|
83 |
|
|
|
2,405 |
|
|
|
41 |
|
|
|
17 |
|
|
|
2,429 |
|
Agency obligations |
|
|
165 |
|
|
|
16 |
|
|
|
|
|
|
|
181 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Collateralized mortgage obligations |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
71 |
|
|
|
4 |
|
|
|
4 |
|
|
|
71 |
|
U.S. government-sponsored enterprise obligations |
|
|
22,604 |
|
|
|
9 |
|
|
|
596 |
|
|
|
22,017 |
|
|
|
46,143 |
|
|
|
142 |
|
|
|
593 |
|
|
|
45,692 |
|
Obligations of state and political subdivisions |
|
|
712 |
|
|
|
21 |
|
|
|
7 |
|
|
|
726 |
|
|
|
2,748 |
|
|
|
126 |
|
|
|
8 |
|
|
|
2,866 |
|
Debt securities issued by non-U.S. governments |
|
|
5,512 |
|
|
|
12 |
|
|
|
18 |
|
|
|
5,506 |
|
|
|
7,901 |
|
|
|
59 |
|
|
|
38 |
|
|
|
7,922 |
|
Corporate debt securities |
|
|
5,754 |
|
|
|
39 |
|
|
|
74 |
|
|
|
5,719 |
|
|
|
7,007 |
|
|
|
127 |
|
|
|
18 |
|
|
|
7,116 |
|
Equity securities |
|
|
3,179 |
|
|
|
110 |
|
|
|
7 |
|
|
|
3,282 |
|
|
|
5,810 |
|
|
|
39 |
|
|
|
14 |
|
|
|
5,835 |
|
Other, primarily asset-backed securities(a) |
|
|
5,738 |
|
|
|
23 |
|
|
|
23 |
|
|
|
5,738 |
|
|
|
9,103 |
|
|
|
25 |
|
|
|
75 |
|
|
|
9,053 |
|
|
Total available-for-sale securities |
|
$ |
47,993 |
|
|
$ |
257 |
|
|
$ |
727 |
|
|
$ |
47,523 |
|
|
$ |
94,821 |
|
|
$ |
570 |
|
|
$ |
989 |
|
|
$ |
94,402 |
|
|
Held-to-maturity securities(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
77 |
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
80 |
|
|
$ |
110 |
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
117 |
|
|
|
|
|
(a) |
|
Includes collateralized mortgage obligations of private issuers, which generally have
underlying collateral consisting of obligations of the U.S. government and federal agencies and
corporations. |
|
(b) |
|
Consists primarily of mortgage-backed securities. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
103 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents the fair value and unrealized losses for AFS securities by aging
category at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized losses |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total |
|
|
Gross |
|
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
2005 (in millions) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
$ |
3,789 |
|
|
$ |
1 |
|
|
$ |
85 |
|
|
$ |
1 |
|
|
$ |
3,874 |
|
|
$ |
2 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
Agency obligations |
|
|
7 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
15 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
U.S. government-sponsored enterprise
obligations |
|
|
10,607 |
|
|
|
242 |
|
|
|
11,007 |
|
|
|
354 |
|
|
|
21,614 |
|
|
|
596 |
|
Obligations of state and political subdivisions |
|
|
237 |
|
|
|
3 |
|
|
|
107 |
|
|
|
4 |
|
|
|
344 |
|
|
|
7 |
|
Debt securities issued by non-U.S. governments |
|
|
2,380 |
|
|
|
17 |
|
|
|
71 |
|
|
|
1 |
|
|
|
2,451 |
|
|
|
18 |
|
Corporate debt securities |
|
|
3,076 |
|
|
|
52 |
|
|
|
678 |
|
|
|
22 |
|
|
|
3,754 |
|
|
|
74 |
|
Equity securities |
|
|
1,838 |
|
|
|
7 |
|
|
|
2 |
|
|
|
|
|
|
|
1,840 |
|
|
|
7 |
|
Other, primarily asset-backed securities |
|
|
778 |
|
|
|
14 |
|
|
|
370 |
|
|
|
9 |
|
|
|
1,148 |
|
|
|
23 |
|
|
Total securities with unrealized losses |
|
$ |
22,727 |
|
|
$ |
336 |
|
|
$ |
12,410 |
|
|
$ |
391 |
|
|
$ |
35,137 |
|
|
$ |
727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized losses |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total |
|
|
Gross |
|
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
2004 (in millions) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
$ |
10,186 |
|
|
$ |
154 |
|
|
$ |
940 |
|
|
$ |
68 |
|
|
$ |
11,126 |
|
|
$ |
222 |
|
Mortgage-backed securities |
|
|
344 |
|
|
|
1 |
|
|
|
1,359 |
|
|
|
16 |
|
|
|
1,703 |
|
|
|
17 |
|
Agency obligations |
|
|
5 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
278 |
|
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
280 |
|
|
|
4 |
|
U.S. government-sponsored enterprise
obligations |
|
|
34,760 |
|
|
|
282 |
|
|
|
10,525 |
|
|
|
311 |
|
|
|
45,285 |
|
|
|
593 |
|
Obligations of state and political
subdivisions |
|
|
678 |
|
|
|
6 |
|
|
|
96 |
|
|
|
2 |
|
|
|
774 |
|
|
|
8 |
|
Debt securities issued by non-U.S.
governments |
|
|
3,395 |
|
|
|
17 |
|
|
|
624 |
|
|
|
21 |
|
|
|
4,019 |
|
|
|
38 |
|
Corporate debt securities |
|
|
1,103 |
|
|
|
13 |
|
|
|
125 |
|
|
|
5 |
|
|
|
1,228 |
|
|
|
18 |
|
Equity securities |
|
|
1,804 |
|
|
|
14 |
|
|
|
23 |
|
|
|
|
|
|
|
1,827 |
|
|
|
14 |
|
Other, primarily asset-backed securities |
|
|
1,896 |
|
|
|
41 |
|
|
|
321 |
|
|
|
34 |
|
|
|
2,217 |
|
|
|
75 |
|
|
Total securities with unrealized losses |
|
$ |
54,449 |
|
|
$ |
532 |
|
|
$ |
14,018 |
|
|
$ |
457 |
|
|
$ |
68,467 |
|
|
$ |
989 |
|
|
Impairment is evaluated considering numerous factors, and their relative significance varies
case to case. Factors considered include the length of time and extent to which the market value
has been less than cost; the financial condition and near-term prospects of the issuer of the
securities; and the Firms intent and ability to retain the security in order to allow for an
anticipated recovery in market value. If, based upon the analysis, it is determined that the
impairment is other-than-temporary, the security is written down to fair value, and a loss is
recognized through earnings.
Included in the $727 million of gross unrealized losses on AFS securities at December 31, 2005, was
$391 million of unrealized losses that have existed for a period greater than 12 months. These securities are predominately rated AAA
and the unrealized losses are due to overall increases in market interest rates and not due to
underlying credit concerns of the issuers. Substantially all of the securities with unrealized
losses aged greater than 12 months have a market value at December 31, 2005, that is within 4% of
their amortized cost basis.
In calculating the effective yield for mortgage-backed securities (MBS) and collateralized
mortgage obligations (CMO), JPMorgan Chase includes the effect of principal prepayments.
Management regularly performs simulation testing to determine the impact that market conditions
would have on its MBS and CMO portfolios. MBSs and CMOs that management believes have prepayment
risk are included in the AFS portfolio and are reported at fair value.
|
|
|
|
|
|
104
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following table presents the amortized cost, estimated fair value and average yield at
December 31, 2005, of JPMorgan Chases AFS and HTM securities by contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
Held-to-maturity securities |
|
Maturity schedule of securities |
|
Amortized |
|
|
Fair |
|
|
Average |
|
|
Amortized |
|
|
Fair |
|
|
Average |
|
December 31, 2005 (in millions) |
|
cost |
|
|
value |
|
|
yield |
(a) |
|
cost |
|
|
value |
|
|
yield |
(a) |
|
Due in one year or less |
|
$ |
6,723 |
|
|
$ |
6,426 |
|
|
|
2.77 |
% |
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
Due after one year through five years |
|
|
7,740 |
|
|
|
8,009 |
|
|
|
3.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five years through 10 years |
|
|
5,346 |
|
|
|
5,366 |
|
|
|
4.70 |
|
|
|
30 |
|
|
|
31 |
|
|
|
6.96 |
|
Due after 10 years(b) |
|
|
28,184 |
|
|
|
27,722 |
|
|
|
4.69 |
|
|
|
47 |
|
|
|
49 |
|
|
|
6.73 |
|
|
Total securities |
|
$ |
47,993 |
|
|
$ |
47,523 |
|
|
|
4.27 |
% |
|
$ |
77 |
|
|
$ |
80 |
|
|
|
6.82 |
% |
|
|
|
|
(a) |
|
The average yield is based upon amortized cost balances at year-end. Yields are derived
by dividing interest income by total amortized cost. Taxable-equivalent yields are used where
applicable. |
|
(b) |
|
Includes securities with no stated maturity. Substantially all of JPMorgan Chases
MBSs and CMOs are due in 10 years or more based upon contractual maturity. The estimated duration,
which reflects anticipated future prepayments based upon a consensus of dealers in the market, is
approximately four years for MBSs and CMOs. |
Private equity investments are primarily held by the Private Equity business within Corporate
(which includes JPMorgan Partners and ONE Equity Partners businesses). The Private Equity business
invests in buyouts, growth equity and venture opportunities in the normal course of business. These
investments are accounted for under investment company guidelines. Accordingly, these investments,
irrespective of the percentage of equity ownership interest held by Private Equity, are carried on
the Consolidated balance sheets at fair value. Realized and unrealized gains and losses arising
from changes in value are reported in Securities/private equity gains in the Consolidated
statements of income in the period that the gains or losses occur.
Privately-held investments are initially valued based upon cost. The carrying values of
privately-held investments are adjusted from cost to reflect both positive and negative changes
evidenced by financing events with third-party capital providers. In addition, these investments
are subject to ongoing impairment reviews by Private Equitys senior investment professionals. A
variety of factors are reviewed and monitored to assess impairment including, but not limited to,
operating performance and future expectations of the particular portfolio investment, industry
valuations of comparable public companies, changes in market outlook and the third-party financing
environment
Note 10 Securities financing activities
JPMorgan Chase enters into resale agreements, repurchase agreements, securities borrowed
transactions and securities loaned transactions primarily to finance the Firms inventory
positions, acquire securities to cover short positions and settle other securities obligations. The
Firm also enters into these transactions to accommodate customers needs.
Securities purchased under resale agreements (resale agreements) and securities sold under
repurchase agreements (repurchase agreements) are generally treated as collateralized financing
transactions and are carried on the Consolidated balance sheets at the amounts the securities will
be subsequently sold or repurchased, plus accrued interest. Where appropriate, resale and
repurchase agreements with the same counterparty are reported on a net basis in accordance with FIN
41. JPMorgan Chase takes possession of securities purchased under resale agreements. On a daily
basis, JPMorgan Chase monitors the market value of the underlying collateral received from its
counterparties, consisting primarily of U.S. and non-U.S. government and agency securities, and
requests additional collateral from its counterparties when necessary.
over time. The Valuation Control Group within the Finance area is responsible for reviewing the
accuracy of the carrying values of private investments held by Private Equity.
Private Equity also holds publicly-held equity investments, generally obtained through the initial
public offering of privately-held equity investments. Publicly-held investments are marked to
market at the quoted public value. To determine the carrying values of these investments, Private
Equity incorporates the use of discounts to take into account the fact that it cannot immediately
realize or risk-manage the quoted public values as a result of regulatory and/or contractual sales
restrictions imposed on these holdings.
The following table presents the carrying value and cost of the Private Equity investment portfolio
for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
December 31, (in millions) |
|
value |
|
|
Cost |
|
|
value |
|
|
Cost |
|
|
Total private
equity investments |
|
$ |
6,374 |
|
|
$ |
8,036 |
|
|
$ |
7,735 |
|
|
$ |
9,103 |
|
|
Transactions similar to financing activities that do not meet the SFAS 140 definition of a
repurchase agreement are accounted for as buys and sells rather than financing transactions.
These transactions are accounted for as a purchase (sale) of the underlying securities with a
forward obligation to sell (purchase) the securities. The forward purchase (sale) obligation, a
derivative, is recorded on the Consolidated balance sheets at its fair value, with changes in fair
value recorded in Trading revenue.
Securities borrowed and securities lent are recorded at the amount of cash collateral advanced or
received. Securities borrowed consist primarily of government and equity securities. JPMorgan Chase
monitors the market value of the securities borrowed and lent on a daily basis and calls for
additional collateral when appropriate. Fees received or paid are recorded in Interest income or
Interest expense.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
105 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Securities purchased under resale agreements |
|
$ |
129,570 |
|
|
$ |
94,076 |
|
Securities borrowed |
|
|
74,604 |
|
|
|
47,428 |
|
|
Securities sold under repurchase agreements |
|
$ |
103,052 |
|
|
$ |
105,912 |
|
Securities loaned |
|
|
14,072 |
|
|
|
6,435 |
|
|
JPMorgan Chase pledges certain financial instruments the Firm owns to collateralize repurchase
agreements and other securities financings. Pledged securities that can be sold or repledged by the
secured party are identified as financial instruments owned (pledged to various parties) on the
Consolidated balance sheets.
At December 31, 2005, the Firm had received securities as collateral that can be repledged,
delivered or otherwise used with a fair value of approximately $331 billion. This collateral was
generally obtained under resale or securities borrowing agreements. Of these securities,
approximately $320 billion were repledged, delivered or otherwise used, generally as collateral
under repurchase agreements, securities lending agreements or to cover short sales.
Note 11 Loans
Loans are reported at the principal amount outstanding, net of the Allowance for loan losses,
unearned income and any net deferred loan fees. Loans held for sale are carried at the lower of
cost or fair value, with valuation changes recorded in noninterest revenue. Loans are classified as
trading where positions are bought and sold to make profits from short-term movements in price.
Loans held for trading purposes are included in Trading assets and are carried at fair value, with
gains and losses included in Trading revenue. Interest income is recognized using the interest
method, or on a basis approximating a level rate of return over the term of the loan.
Nonaccrual loans are those on which the accrual of interest is discontinued. Loans (other than
certain consumer loans discussed below) are placed on nonaccrual status immediately if, in the
opinion of management, full payment of principal or interest is in doubt, or when principal or
interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and
interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against Interest income. In addition, the amortization of net deferred loan fees is
suspended. Interest income on nonaccrual loans is recognized only to the extent it is received in
cash. However, where there is doubt regarding the ultimate collectibility of loan principal, all
cash thereafter received is applied to reduce the carrying value of such loans. Loans are restored
to accrual status only when interest and principal payments are brought current and future payments
are reasonably assured.
Consumer loans are generally charged to the Allowance for loan losses upon reaching specified
stages of delinquency, in accordance with the Federal Financial Institutions Examination Council
(FFIEC) policy. For example, credit card loans are charged off by the end of the month in which
the account becomes 180 days past due or within 60 days from receiving notification of the filing
of bankruptcy, whichever is earlier. Residential mortgage products are generally charged off to net
realizable value at 180 days past due. Other consumer products are generally charged off (to net
realizable value if collateralized) at 120 days past due. Accrued interest on residential mortgage
products, and automobile and education financings and certain other consumer loans are accounted
for in accordance with the nonaccrual loan policy discussed
in the preceding paragraph. Interest and fees related to credit card loans continue to accrue until
the loan is charged off or paid. Accrued interest on all other consumer loans is generally reversed
against interest income when the loan is charged off. A collateralized loan is considered an
in-substance foreclosure and is reclassified to assets acquired in loan satisfactions, within Other
assets, only when JPMorgan Chase has taken physical possession of the collateral, but regardless of
whether formal foreclosure proceedings have taken place.
The composition of the loan portfolio at each of the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
U.S. wholesale loans: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
70,233 |
|
|
$ |
61,033 |
|
Real estate |
|
|
13,612 |
|
|
|
13,038 |
|
Financial institutions |
|
|
11,100 |
|
|
|
14,195 |
|
Lease financing receivables |
|
|
2,621 |
|
|
|
3,098 |
|
Other |
|
|
14,499 |
|
|
|
8,504 |
|
|
Total U.S. wholesale loans |
|
|
112,065 |
|
|
|
99,868 |
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. wholesale loans: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
27,452 |
|
|
|
25,120 |
|
Real estate |
|
|
1,475 |
|
|
|
1,747 |
|
Financial institutions |
|
|
7,975 |
|
|
|
7,280 |
|
Lease financing receivables |
|
|
1,144 |
|
|
|
1,052 |
|
|
Total non-U.S. wholesale loans |
|
|
38,046 |
|
|
|
35,199 |
|
|
|
|
|
|
|
|
|
|
|
Total wholesale loans:(a) |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
97,685 |
|
|
|
86,153 |
|
Real estate(b) |
|
|
15,087 |
|
|
|
14,785 |
|
Financial institutions |
|
|
19,075 |
|
|
|
21,475 |
|
Lease financing receivables |
|
|
3,765 |
|
|
|
4,150 |
|
Other |
|
|
14,499 |
|
|
|
8,504 |
|
|
Total wholesale loans |
|
|
150,111 |
|
|
|
135,067 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans:(c) |
|
|
|
|
|
|
|
|
Consumer real estate |
|
|
|
|
|
|
|
|
Home finance home equity & other |
|
|
76,727 |
|
|
|
67,837 |
|
Home finance mortgage |
|
|
56,726 |
|
|
|
56,816 |
|
|
Total Home finance |
|
|
133,453 |
|
|
|
124,653 |
|
Auto & education finance |
|
|
49,047 |
|
|
|
62,712 |
|
Consumer & small business and other |
|
|
14,799 |
|
|
|
15,107 |
|
Credit card receivables(d) |
|
|
71,738 |
|
|
|
64,575 |
|
|
Total consumer loans |
|
|
269,037 |
|
|
|
267,047 |
|
|
Total loans(e)(f)(g) |
|
$ |
419,148 |
|
|
$ |
402,114 |
|
|
|
|
|
(a) |
|
Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset &
Wealth Management. |
|
(b) |
|
Represents credits extended for real estaterelated purposes to borrowers who are primarily in
the real estate development or investment businesses and for which the primary repayment is from
the sale, lease, management, operations or refinancing of the property. |
|
(c) |
|
Includes Retail Financial Services and Card Services. |
|
(d) |
|
Includes billed finance charges and fees net of an allowance for uncollectible amounts. |
|
(e) |
|
Loans are presented net of unearned income of $3.0 billion and $4.1 billion at December 31, 2005
and 2004, respectively. |
|
(f) |
|
Includes loans held for sale (primarily related to securitization and syndication activities)
of $34.2 billion and $24.5 billion at December 31, 2005 and 2004, respectively. |
|
(g) |
|
Amounts are presented gross of the Allowance for loan losses. |
|
|
|
|
|
|
106
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The following table reflects information about the Firms loans held for sale, principally
mortgage-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net gains on sales of loans held for sale |
|
$ |
596 |
|
|
$ |
368 |
|
|
$ |
933 |
|
Lower of cost or fair value adjustments |
|
|
(332 |
) |
|
|
39 |
|
|
|
26 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
Impaired loans
JPMorgan Chase accounts for and discloses nonaccrual loans as impaired loans and recognizes their
interest income as discussed previously for nonaccrual loans. The Firm excludes from impaired loans
its small-balance, homogeneous consumer loans; loans carried at fair value or the lower of cost or
fair value; debt securities; and leases.
The table below sets forth information about JPMorgan Chases impaired loans. The Firm primarily
uses the discounted cash flow method for valuing impaired loans:
|
|
|
|
|
|
|
|
|
December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
Impaired loans with an allowance |
|
$ |
1,095 |
|
|
$ |
1,496 |
|
Impaired loans without an allowance(b) |
|
|
80 |
|
|
|
284 |
|
|
Total impaired loans |
|
$ |
1,175 |
|
|
$ |
1,780 |
|
|
Allowance for impaired loans under SFAS 114(c) |
|
$ |
257 |
|
|
$ |
521 |
|
Average balance of impaired loans during the year |
|
|
1,478 |
|
|
|
1,883 |
|
Interest income recognized on impaired
loans during the year |
|
|
5 |
|
|
|
8 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
When the discounted cash flows, collateral value or market price equals or exceeds the carrying
value of the loan, then the loan does not require an allowance under SFAS 114. |
|
(c) |
|
The allowance for impaired loans under SFAS 114 is included in JPMorgan Chases Allowance for loan losses. |
Note 12 Allowance for credit losses
JPMorgan Chases Allowance for loan losses covers the wholesale (risk-rated) and consumer
(scored) loan portfolios and represents managements estimate of probable credit losses inherent in
the Firms loan portfolio. Management also computes an Allowance for wholesale lending-related
commitments using a methodology similar to that used for the wholesale loans.
The Allowance for loan losses includes an asset-specific component and a formula-based component.
Within the formula-based component is a statistical calculation and an adjustment to the
statistical calculation.
The asset-specific component relates to provisions for losses on loans considered impaired and
measured pursuant to SFAS 114. An allowance is established when the discounted cash flows (or
collateral value or observable market price) of the loan is lower than the carrying value of that
loan. To compute the asset-specific component of the allowance, larger impaired loans are evaluated
individually, and smaller impaired loans are evaluated as a pool using historical loss experience
for the respective class of assets.
The formula-based component covers performing wholesale and consumer loans and is the product of a
statistical calculation, as well as adjustments to such calculation. These adjustments take into
consideration model imprecision, external factors and economic events that have occurred but are
not yet reflected in the factors used to derive the statistical calculation.
The statistical calculation is the product of probability of default and loss given default. For
risk-rated loans (generally loans originated by the wholesale lines of business), these factors are
differentiated by risk rating and maturity. For scored loans (generally loans originated by the
consumer lines of business), loss is primarily determined by applying statistical loss factors and
other risk indicators to pools of loans by asset type. Adjustments to the statistical calculation
for the risk-rated portfolios are determined by creating estimated ranges using historical
experience of both loss given default and probability of default. Factors related to concentrated
and deteriorating industries are also incorporated into the calculation where relevant. Adjustments
to the statistical calculation for the scored loan portfolios are accomplished in part by analyzing
the historical loss experience for each major product segment. The estimated ranges and the
determination of the appropriate point within the range are based upon managements view of
uncertainties that relate to current macroeconomic and political conditions, quality of
underwriting standards, and other relevant internal and external factors affecting the credit
quality of the portfolio.
The Allowance for lending-related commitments represents managements estimate of probable credit
losses inherent in the Firms process of extending credit. Management establishes an asset-specific
allowance for lending-related commitments that are considered impaired and computes a formula-based
allowance for performing wholesale lending-related commitments. These are computed using a
methodology similar to that used for the wholesale loan portfolio, modified for expected maturities
and probabilities of drawdown.
The
allowance for credit losses is reviewed at least quarterly by the Chief Risk Officer of the
Firm, the Risk Policy Committee, a risk subgroup of the Operating Committee, and the Audit Committee of the Board of Directors of the Firm
relative to the risk profile of the Firms credit portfolio and current economic conditions. As of
December 31, 2005, JPMorgan Chase deemed the allowance for credit losses to be appropriate (i.e.,
sufficient to absorb losses that are inherent in the portfolio, including those not yet
identifiable).
As a result of the Merger, management modified its methodology for determining the Provision for
credit losses for the combined Firm. The effect of conforming methodologies in 2004 was a decrease
in the consumer allowance of $254 million and a decrease in the wholesale allowance (including both
funded loans and lending-related commitments) of $330 million. In addition, the Bank One sellers
interest in credit card securitizations was decertificated; this resulted in an increase to the
provision for loan losses of approximately $1.4 billion (pre-tax) in 2004.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
107 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Chase maintains an allowance for credit losses as follows:
|
|
|
|
|
|
|
|
|
|
|
Reported in: |
Allowance for |
|
|
|
|
|
|
credit losses on: |
|
Balance sheet |
|
Income statement |
|
Loans |
|
Allowance for loan losses |
|
Provision for credit losses |
Lending-related
commitments |
|
Other liabilities |
|
Provision for credit losses |
|
The table below summarizes the changes in the Allowance for loan losses:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
(c) |
|
Allowance for loan losses at January 1 |
|
$ |
7,320 |
|
|
$ |
4,523 |
|
Addition resulting from the Merger, July 1, 2004 |
|
|
|
|
|
|
3,123 |
|
Gross charge-offs |
|
|
(4,869 |
) |
|
|
(3,805 |
)(d) |
Gross recoveries |
|
|
1,050 |
|
|
|
706 |
|
|
Net charge-offs |
|
|
(3,819 |
) |
|
|
(3,099 |
) |
Provision for loan losses: |
|
|
|
|
|
|
|
|
Provision excluding
accounting policy conformity |
|
|
3,575 |
|
|
|
1,798 |
|
Accounting policy conformity(a) |
|
|
|
|
|
|
1,085 |
|
|
Total Provision for loan losses |
|
|
3,575 |
|
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
14 |
|
|
|
(110 |
)(e) |
|
Allowance for loan losses at December 31 |
|
$ |
7,090 |
(b) |
|
$ |
7,320 |
(f) |
|
|
|
|
(a) |
|
Represents an increase of approximately $1.4 billion as a result of the decertification
of heritage Bank One sellers interest in credit card securitizations, partially offset by a
reduction of $357 million to conform provision methodologies. |
|
(b) |
|
2005 includes $203 million of asset-specific and $6.9 billion of formula-based allowance.
Included within the formula-based allowance was $5.1 billion related to a statistical calculation
(including $400 million related to Hurricane Katrina), and an adjustment to the statistical
calculation of $1.8 billion. |
|
(c) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(d) |
|
Includes $406 million related to the Manufactured Home Loan portfolio in the fourth quarter of
2004. |
|
(e) |
|
Primarily represents the transfer of the allowance for accrued interest and fees on reported
and securitized credit card loans. |
|
(f) |
|
2004 includes $469 million of asset-specific loss and $6.8 billion of formula-based loss.
Included within the formula-based loss is $4.8 billion related to statistical calculation and an
adjustment to the statistical calculation of $2.0 billion. |
The table below summarizes the changes in the Allowance for lending-related commitments:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
(c) |
|
Allowance for lending-related commitments
at January 1 |
|
$ |
492 |
|
|
$ |
324 |
|
Addition resulting from the Merger, July 1, 2004 |
|
|
|
|
|
|
508 |
|
|
|
|
|
|
|
|
|
|
Provision for lending-related commitments: |
|
|
|
|
|
|
|
|
Provision excluding
accounting policy conformity |
|
|
(92 |
) |
|
|
(112 |
) |
Accounting policy conformity(a) |
|
|
|
|
|
|
(227 |
) |
|
Total Provision for lending-related commitments |
|
|
(92 |
) |
|
|
(339 |
) |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(1 |
) |
|
Allowance for lending-related commitments
at December 31(b) |
|
$ |
400 |
|
|
$ |
492 |
|
|
|
|
|
(a) |
|
Represents a reduction of $227 million to conform provision methodologies in the wholesale portfolio. |
|
(b) |
|
2005 includes $60 million of asset-specific and $340 million of formula-based allowance. 2004
includes $130 million of asset-specific and $362 million of formula-based allowance. The
formula-based allowance for lending-related commitments is based upon a statistical calculation.
There is no adjustment to the statistical calculation for lending-related commitments. |
|
(c) |
|
2004 results include six months of the combined Firms results and six months of heritage JPMorgan Chase results. |
Note 13 Loan securitizations
JPMorgan Chase securitizes, sells and services various consumer loans, such as consumer real
estate, credit card and automobile loans, as well as certain wholesale loans (primarily real
estate) originated by the Investment Bank. In addition, the Investment Bank purchases, packages and
securitizes commercial and consumer loans. All IB activity is collectively referred to below as
Wholesale activities. Interests in the sold and securitized loans may be retained.
The Firm records a loan securitization as a sale when the transferred loans are legally isolated
from the Firms creditors and the accounting criteria for a sale are met. Those criteria are (1)
the assets are legally isolated from the Firms creditors; (2) the entity can pledge or exchange
the financial assets or, if the entity is a QSPE, its investors can pledge or exchange their
interests; and (3) the Firm does not maintain effective control via an agreement to repurchase the
assets before their maturity or have the ability to unilaterally cause the holder to return the
assets.
Gains or losses recorded on loan securitizations depend, in part, on the carrying amount of the
loans sold and are allocated between the loans sold and the retained interests, based upon their
relative fair values at the date of sale. Gains on securitizations are reported in noninterest
revenue. Since quoted market prices are generally not available, the Firm usually estimates the
fair value of these retained interests by determining the present value of future expected cash
flows using modeling techniques. Such models incorporate managements best estimates of key
variables, such as expected credit losses, prepayment speeds and the discount rates appropriate for
the risks involved.
Retained interests that are subject to prepayment risk, such that JPMorgan Chase may not recover
substantially all of its investment, are recorded at fair value; subsequent adjustments are
reflected in Other comprehensive income or in earnings, if the fair value of the retained interest
has declined below its carrying amount and such decline has been determined to be
other-than-temporary.
Interests in the securitized loans are generally retained by the Firm in the form of senior or
subordinated interest-only strips, subordinated tranches, escrow accounts and servicing rights, and
they are generally recorded in Other assets. In addition, credit card securitization trusts require
the Firm to maintain a minimum undivided interest in the trusts, representing the Firms interests
in the receivables transferred to the trust that have not been securitized. These interests are not
represented by security certificates. The Firms undivided interests are carried at historical cost
and are classified in Loans. Retained interests from wholesale activities are reflected as trading
assets.
JPMorgan Chase retains servicing responsibilities for all residential mortgage, credit card and
automobile loan securitizations and for certain wholesale activity securitizations it sponsors, and
receives servicing fees based on the securitized loan balance plus certain ancillary fees. The Firm
also retains the right to service the residential mortgage loans it sells in connection with
mortgage-backed securities transactions with the Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (Freddie
Mac). For a discussion of mortgage servicing rights, see Note 15 on pages 114116 of this Annual
report.
JPMorgan Chase-sponsored securitizations utilize SPEs as part of the securitization process. These
SPEs are structured to meet the definition of a QSPE (as discussed in Note 1 on page 91 of this
Annual Report); accordingly, the assets and liabilities of securitization-related QSPEs are not
reflected in the Firms Consolidated balance sheets (except for retained interests, as described
below) but are included on the balance sheet of the QSPE purchasing the
|
|
|
|
|
|
108
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
assets. Assets held by securitization-related SPEs as of December 31, 2005 and 2004, were as
follows:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Credit card receivables |
|
$ |
96.0 |
|
|
$ |
106.3 |
|
Residential mortgage receivables |
|
|
29.8 |
|
|
|
19.1 |
|
Wholesale activities(a) |
|
|
72.9 |
|
|
|
44.8 |
|
Automobile loans |
|
|
5.5 |
|
|
|
4.9 |
|
|
Total |
|
$ |
204.2 |
|
|
$ |
175.1 |
|
|
|
|
|
(a) |
|
Co-sponsored securitizations include non-JPMorgan Chase originated assets. |
The following table summarizes new securitization transactions that were completed during 2005
and 2004, the resulting gains arising from such securitizations, certain cash flows received from
such securitizations, and the key economic assumptions used in measuring the retained interests, as
of the dates of such sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2005 |
|
|
2004(a) |
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
(in millions) |
|
mortgage |
|
|
Credit card |
|
|
Automobile |
|
|
activities |
(e) |
|
mortgage |
|
|
Credit card |
|
|
Automobile |
|
|
activities |
(e) |
|
Principal securitized |
|
$ |
18,125 |
|
|
$ |
15,145 |
|
|
$ |
3,762 |
|
|
$ |
22,691 |
|
|
$ |
6,529 |
|
|
$ |
8,850 |
|
|
$ |
1,600 |
|
|
$ |
8,756 |
|
Pre-tax gains (losses) |
|
|
21 |
|
|
|
101 |
|
|
|
9 |
(c) |
|
|
131 |
|
|
|
47 |
|
|
|
52 |
|
|
|
(3 |
) |
|
|
135 |
|
Cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from securitizations |
|
$ |
18,093 |
|
|
$ |
14,844 |
|
|
$ |
2,622 |
|
|
$ |
22,892 |
|
|
$ |
6,608 |
|
|
$ |
8,850 |
|
|
$ |
1,597 |
|
|
$ |
8,430 |
|
Servicing fees collected |
|
|
17 |
|
|
|
94 |
|
|
|
4 |
|
|
|
|
|
|
|
12 |
|
|
|
69 |
|
|
|
1 |
|
|
|
3 |
|
Other cash flows received |
|
|
|
|
|
|
298 |
|
|
|
|
|
|
|
3 |
|
|
|
25 |
|
|
|
225 |
|
|
|
|
|
|
|
16 |
|
Proceeds from collections reinvested
in revolving securitizations |
|
|
|
|
|
|
129,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,697 |
|
|
|
|
|
|
|
|
|
|
Key assumptions (rates per annum): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment rate(b) |
|
|
9.112.1 |
% |
|
|
16.720.0 |
% |
|
|
1.5 |
% |
|
|
050 |
% |
|
|
23.837.6 |
% |
|
|
15.516.7 |
% |
|
|
1.5 |
% |
|
|
17.050.0 |
% |
|
|
CPR |
|
|
PPR |
|
|
ABS |
|
|
|
|
|
|
CPR |
|
|
PPR |
|
|
ABS |
|
|
|
|
|
|
Weighted-average life (in
years) |
|
|
5.66.7 |
|
|
|
0.40.5 |
|
|
|
1.41.5 |
|
|
|
1.04.4 |
|
|
|
1.93.0 |
|
|
|
0.50.6 |
|
|
|
1.8 |
|
|
|
2.04.0 |
|
Expected credit losses |
|
|
|
(d) |
|
|
4.75.7 |
% |
|
|
0.60.7 |
% |
|
|
02.0 |
%(d) |
|
|
1.02.3 |
% |
|
|
5.55.8 |
% |
|
|
0.6 |
% |
|
|
0.03.0 |
%(d) |
Discount rate |
|
|
13.013.3 |
% |
|
|
12.0 |
% |
|
|
6.37.3 |
% |
|
|
0.618.5 |
% |
|
|
15.030.0 |
% |
|
|
12.0 |
% |
|
|
4.1 |
% |
|
|
0.65.0 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
CPR: constant prepayment rate; ABS: absolute prepayment speed; PPR: principal payment rate. |
|
(c) |
|
The auto securitization gain of $9 million does not include the write-down of loans transferred
to held-for-sale in 2005 and risk management activities intended to protect the economic value of
the loans while held-for-sale. |
|
(d) |
|
Expected credit losses for prime residential mortgage and certain wholesale securitizations are
minimal and are incorporated into other assumptions. |
|
(e) |
|
Wholesale activities consist of wholesale loans (primarily commercial real estate) originated
by the Investment Bank as well as $11.4 billion and $1.8 billion of consumer loans purchased from
the market in 2005 and 2004, respectively, and then packaged and securitized by the Investment
Bank. |
In addition to securitization transactions, the Firm sold residential mortgage loans totaling
$52.5 billion, $65.7 billion and $123.2 billion during 2005, 2004 and 2003, respectively, primarily
as GNMA, FNMA and Freddie Mac mortgage-backed securities; these sales resulted in pre-tax gains of
$293 million, $58.1 million and $564.3 million, respectively.
At both December 31, 2005 and 2004, the Firm had, with respect to its credit card master trusts,
$24.8 billion and $35.2 billion, respectively, related to undivided interests, and $2.2 billion and
$2.1 billion, respectively, related to subordinated interests in accrued interest and fees on the
securitized receivables, net of an allowance for uncollectible amounts. Credit card securitization
trusts require the Firm to maintain a minimum undivided interest of 4% to 12% of the principal
receivables in the trusts. The Firm maintained an average undivided interest in principal
receivables in the trusts of approximately 23% for both 2005 and 2004, respectively.
The Firm also maintains escrow accounts up to predetermined limits for some credit card and
automobile securitizations, in the unlikely event of deficiencies in cash flows owed to investors.
The amounts available in such escrow accounts are recorded in Other assets and, as of December 31,
2005, amounted to
$754 million and $76 million for credit card and automobile securitizations, respectively; as of
December 31, 2004, these amounts were $395 million and $132 million for credit card and automobile
securitizations, respectively.
The table below summarizes other retained securitization interests, which are primarily
subordinated or residual interests and are carried at fair value on the Firms Consolidated balance
sheets:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Residential mortgage(a) |
|
$ |
182 |
|
|
$ |
433 |
|
Credit card(a) |
|
|
808 |
|
|
|
494 |
|
Automobile(a)(b) |
|
|
150 |
|
|
|
85 |
|
Wholesale activities(c) |
|
|
265 |
|
|
|
23 |
|
|
Total |
|
$ |
1,405 |
|
|
$ |
1,035 |
|
|
|
|
|
(a) |
|
Pre-tax unrealized gains (losses) recorded in Stockholders equity that relate to
retained securitization interests totaled $60 million and $118 million for Residential mortgage; $6
million and $(3) million for Credit card; and $5 million and $11 million for Automobile at December
31, 2005 and 2004, respectively. |
|
(b) |
|
In addition to the automobile retained interest amounts noted above, the Firm also retained
senior securities totaling $490 million at December 31, 2005, from 2005 auto securitizations that
are classified as AFS securities. These securities are valued using quoted market prices and are
therefore not included in the key economic assumption and sensitivities table that follows. |
|
(c) |
|
In addition to the wholesale retained interest amounts noted above, the Firm also retained
subordinated securities totaling $51 million at December 31, 2005, from re-securitization
activities. These securities are valued using quoted market prices and are therefore not included
in the key assumptions and sensitivities table that follows. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
109 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The table below outlines the key economic assumptions used to determine the fair value of the
other retained interests at December 31, 2005 and 2004, respectively; and it outlines the
sensitivities of those fair values to immediate 10% and 20% adverse changes in those assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 (in millions) |
|
Residential mortgage |
|
Credit card |
|
Automobile |
|
Wholesale activities |
|
Weighted-average life (in years) |
|
|
0.53.5 |
|
|
|
0.40.7 |
|
|
|
1.2 |
|
|
|
0.24.1 |
|
|
Prepayment rate |
|
20.143.7 |
% CPR |
|
11.920.8 |
% PPR |
|
1.5 |
% ABS |
|
|
0.050.0 |
%(a) |
Impact of 10% adverse change |
|
$ |
(3 |
) |
|
$ |
(44 |
) |
|
$ |
|
|
|
$ |
(5 |
) |
Impact of 20% adverse change |
|
|
(5 |
) |
|
|
(88 |
) |
|
|
(2 |
) |
|
|
(6 |
) |
|
Loss assumption |
|
|
0.05.2 |
%(b) |
|
|
3.28.1 |
% |
|
|
0.7 |
% |
|
|
0.02.0 |
%(b) |
Impact of 10% adverse change |
|
$ |
(10 |
) |
|
$ |
(77 |
) |
|
$ |
(4 |
) |
|
$ |
(6 |
) |
Impact of 20% adverse change |
|
|
(19 |
) |
|
|
(153 |
) |
|
|
(9 |
) |
|
|
(11 |
) |
Discount rate |
|
|
12.730.0 |
%(c) |
|
|
6.912.0 |
% |
|
|
7.2 |
% |
|
|
0.218.5 |
% |
Impact of 10% adverse change |
|
$ |
(4 |
) |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
(6 |
) |
Impact of 20% adverse change |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 (in millions) |
|
Residential mortgage |
|
Credit card |
|
Automobile |
|
Wholesale activities |
|
Weighted-average life (in years) |
|
|
0.83.4 |
|
|
|
0.51.0 |
|
|
|
1.3 |
|
|
|
0.24.0 |
|
|
Prepayment rate |
|
15.137.1 |
% CPR |
|
8.316.7 |
% PPR |
|
1.4 |
% ABS |
|
|
0.050.0 |
% (a) |
Impact of 10% adverse change |
|
$ |
(5 |
) |
|
$ |
(34 |
) |
|
$ |
(6 |
) |
|
$ |
(1 |
) |
Impact of 20% adverse change |
|
|
(8 |
) |
|
|
(69 |
) |
|
|
(13 |
) |
|
|
(1 |
) |
|
Loss assumption |
|
|
0.05.0 |
% (b) |
|
|
5.78.4 |
% |
|
|
0.7 |
% |
|
|
0.03.0 |
% (b) |
Impact of 10% adverse change |
|
$ |
(17 |
) |
|
$ |
(144 |
) |
|
$ |
(4 |
) |
|
$ |
|
|
Impact of 20% adverse change |
|
|
(34 |
) |
|
|
(280 |
) |
|
|
(8 |
) |
|
|
|
|
Discount rate |
|
|
13.030.0 |
% (c) |
|
|
4.912.0 |
% |
|
|
5.5 |
% |
|
|
1.022.9 |
% |
Impact of 10% adverse change |
|
$ |
(9 |
) |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
Impact of 20% adverse change |
|
|
(18 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
(a) |
|
Prepayment risk on certain wholesale retained interests are minimal and are incorporated
into other assumptions. |
|
(b) |
|
Expected credit losses for prime residential mortgage and certain wholesale securitizations are
minimal and are incorporated into other assumptions. |
|
(c) |
|
The Firm sold certain residual interests from sub-prime mortgage securitizations via Net
Interest Margin (NIM) securitizations and retains residual interests in these NIM transactions,
which are valued using a 30% discount rate. |
The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based
upon a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the
relationship of the change in the assumptions to the change in fair value may not be linear. Also,
in this table, the effect that a change in a particular assumption may have on the fair value is
calculated without changing any other assumption. In reality, changes in one
factor may result in changes in another assumption, which might counteract or magnify the
sensitivities.
Expected static-pool net credit losses include actual incurred losses plus projected net credit
losses, divided by the original balance of the outstandings comprising the securitization pool.
The table below displays the expected static-pool net credit losses for 2005, 2004 and 2003, based
upon securitizations occurring in that year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans securitized in:(a) |
|
|
2005 |
|
2004(b) |
|
2003(b) |
|
|
Residential mortgage(c) |
|
Automobile |
|
Residential mortgage |
|
Automobile |
|
Residential mortgage |
|
Automobile |
|
December 31, 2005 |
|
|
0.0 |
% |
|
|
0.9 |
% |
|
|
0.02.4 |
% |
|
|
0.8 |
% |
|
|
0.02.0 |
% |
|
|
0.5 |
% |
December 31, 2004 |
|
NA |
|
|
NA |
|
|
|
0.03.3 |
|
|
|
1.1 |
|
|
|
0.02.1 |
|
|
|
0.9 |
|
December 31, 2003 |
|
NA |
|
|
NA |
|
|
NA |
|
|
NA |
|
|
|
0.03.6 |
|
|
|
0.9 |
|
|
|
|
|
(a) |
|
Static-pool losses are not applicable to credit card securitizations due to their
revolving structure. |
|
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(c) |
|
2005 securitizations consist of prime-mortgage securitizations only. Expected losses are minimal and
incorporated in other assumptions. |
|
|
|
|
|
|
110
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The table below presents information about delinquencies, net credit losses and components of
reported and securitized financial assets at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual and 90 days or |
|
|
Net loan charge-offs(a) |
|
|
|
Total Loans |
|
|
more past due |
|
|
Year ended |
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Home finance |
|
$ |
133,453 |
|
|
$ |
124,653 |
|
|
$ |
863 |
|
|
$ |
673 |
|
|
$ |
154 |
|
|
$ |
573 |
|
Auto & education finance |
|
|
49,047 |
|
|
|
62,712 |
|
|
|
195 |
|
|
|
193 |
|
|
|
277 |
|
|
|
263 |
|
Consumer & small business and other |
|
|
14,799 |
|
|
|
15,107 |
|
|
|
280 |
|
|
|
295 |
|
|
|
141 |
|
|
|
154 |
|
Credit card receivables |
|
|
71,738 |
|
|
|
64,575 |
|
|
|
1,091 |
|
|
|
1,006 |
|
|
|
3,324 |
|
|
|
1,923 |
|
|
Total consumer loans |
|
|
269,037 |
|
|
|
267,047 |
|
|
|
2,429 |
|
|
|
2,167 |
|
|
|
3,896 |
|
|
|
2,913 |
|
Total wholesale loans |
|
|
150,111 |
|
|
|
135,067 |
|
|
|
1,042 |
|
|
|
1,582 |
|
|
|
(77 |
) |
|
|
186 |
|
|
Total loans reported |
|
|
419,148 |
|
|
|
402,114 |
|
|
|
3,471 |
|
|
|
3,749 |
|
|
|
3,819 |
|
|
|
3,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage(b) |
|
|
8,061 |
|
|
|
11,533 |
|
|
|
370 |
|
|
|
460 |
|
|
|
105 |
|
|
|
150 |
|
Automobile |
|
|
5,439 |
|
|
|
4,763 |
|
|
|
11 |
|
|
|
12 |
|
|
|
15 |
|
|
|
24 |
|
Credit card |
|
|
70,527 |
|
|
|
70,795 |
|
|
|
730 |
|
|
|
1,337 |
|
|
|
3,776 |
|
|
|
2,898 |
|
|
Total consumer loans securitized |
|
|
84,027 |
|
|
|
87,091 |
|
|
|
1,111 |
|
|
|
1,809 |
|
|
|
3,896 |
|
|
|
3,072 |
|
Securitized wholesale activities |
|
|
9,049 |
|
|
|
1,401 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans securitized(c) |
|
|
93,076 |
|
|
|
88,492 |
|
|
|
1,115 |
|
|
|
1,809 |
|
|
|
3,896 |
|
|
|
3,072 |
|
|
Total loans reported and securitized(d) |
|
$ |
512,224 |
|
|
$ |
490,606 |
|
|
$ |
4,586 |
|
|
$ |
5,558 |
|
|
$ |
7,715 |
|
|
$ |
6,171 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
|
(b) |
|
Includes $5.9 billion and $10.3 billion of outstanding principal balances on securitized
sub-prime 14 family residential mortgage loans as of December 31, 2005 and 2004, respectively. |
|
(c) |
|
Total assets held in securitization-related SPEs were $204.2 billion and $175.1 billion at
December 31, 2005 and 2004, respectively. The $93.1 billion and $88.5 billion of loans securitized
at December 31, 2005 and 2004, respectively, excludes: $85.6 billion and $50.8 billion of
securitized loans, in which the Firms only continuing involvement is the servicing of the assets;
$24.8 billion and $35.2 billion of sellers interests in credit card master trusts; and $0.7
billion and $0.6 billion of escrow accounts and other assets, respectively. |
|
(d) |
|
Represents both loans on the Consolidated balance sheets and loans that have been securitized,
but excludes loans for which the Firms only continuing involvement is servicing of the assets. |
Note 14 Variable interest entities
Refer to Note 1 on page 91 of this Annual Report for a further description of JPMorgan Chases
policies regarding consolidation of variable interest entities.
JPMorgan Chases principal involvement with VIEs occurs in the following business segments:
|
|
Investment Bank: Utilizes VIEs to assist clients in accessing the financial markets in a
cost-efficient manner by providing the structural flexibility to meet their needs pertaining to
price, yield and desired risk. There are two broad categories of transactions involving VIEs in the
IB: (1) multi-seller conduits and (2) client intermediation; both are discussed below. The IB also
securitizes loans through QSPEs which are not considered VIEs, to create asset-backed securities,
as further discussed in Note 13 on pages 108111 of this Annual Report. |
|
|
|
Asset & Wealth Management: Provides investment management services to a limited number of the
Firms mutual funds deemed VIEs. AWM earns a fixed fee based upon assets managed; the fee varies
with each funds investment objective and is competitively priced. For the limited number of funds
that qualify as VIEs, AWMs relationships with such funds are not considered significant
interests under FIN 46R. |
|
|
|
Treasury & Securities Services: Provides trustee and custodial services to a number of VIEs.
These services are similar to those provided to non-VIEs. TSS earns market-based fees for services
provided. Such relationships are not considered significant interests under FIN 46R. |
|
|
|
Commercial Banking: Utilizes VIEs to assist clients in accessing the financial markets in a
cost-efficient manner. This is often accomplished through the use of products similar to those
offered in the Investment Bank. |
|
|
Commercial Banking may assist in the structuring and/or on-going administration of these VIEs and
may provide liquidity, letters of credit and/or derivative instruments in support of the VIE. |
|
|
The Firms Private Equity business, included in Corporate, is involved with entities that may be
deemed VIEs. Private equity activities are accounted for in accordance with the Investment Company
Audit Guide (Audit Guide). The FASB deferred adoption of FIN 46R for non-registered investment
companies that apply the Audit Guide until the proposed Statement of Position on the clarification
of the scope of the Audit Guide is finalized. The Firm continues to apply this deferral provision;
had FIN 46R been applied to VIEs subject to this deferral, the impact would have had an
insignificant impact on the Firms Consolidated financial statements as of December 31, 2005. |
As noted above, there are two broad categories of transactions involving VIEs with which the IB is
involved: multi-seller conduits and client intermediation. These categories are discussed more
fully below.
Multi-seller conduits
The Firm is an active participant in the asset-backed securities business, helping meet customers
financing needs by providing access to the commercial paper markets through VIEs known as
multi-seller conduits. These entities are separate bankruptcy-remote corporations in the business
of purchasing interests in, and making loans secured by, receivable pools and other financial
assets pursuant to agreements with customers. The entities fund their purchases and loans through
the issuance of highly-rated commercial paper. The primary source of repayment of the commercial
paper is the cash flow from the pools of assets.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
111 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
JPMorgan Chase serves as the administrator and provides contingent liquidity support and
limited credit enhancement for several multi-seller conduits. The commercial paper issued by the
conduits is backed by collateral, credit enhancements and commitments to provide liquidity
sufficient to support receiving at least a liquidity rating of A-1, P-1 and, in certain cases, F1.
As a means of ensuring timely repayment of the commercial paper, each asset pool financed by the
conduits has a minimum 100% deal-specific liquidity facility associated with it. In the unlikely
event an asset pool is removed from the conduit, the administrator can draw on the liquidity
facility to repay the maturing commercial paper. The liquidity facilities are typically in the form
of asset purchase agreements and are generally structured such that the bank liquidity is provided
by purchasing, or lending against, a pool of non-defaulted, performing assets. Deal-specific
liquidity is the primary source of liquidity support for the conduits.
Program-wide liquidity in the form of revolving and short-term lending commitments also is provided
by the Firm to these vehicles in the event of short-term disruptions in the commercial paper
market.
Deal-specific credit enhancement that supports the commercial paper issued by the conduits is
generally structured to cover a multiple of historical losses expected on the pool of assets and is
provided primarily by customers (i.e., sellers) or other third parties. The deal-specific credit
enhancement is typically in the form of over-collateralization provided by the seller but also may
include any combination of the following: recourse to the seller or originator, cash collateral
accounts, letters of credit, excess spread, retention of subordinated interests or third-party
guarantees. In certain instances, the Firm provides limited credit enhancement in the form of
standby letters of credit.
The following table summarizes the Firms involvement with Firm-administered
multi-seller conduits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Nonconsolidated |
|
|
Total |
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
(b) |
|
2005 |
|
|
2004 |
(b) |
|
Total commercial paper issued by conduits |
|
$ |
35.2 |
|
|
$ |
35.8 |
|
|
$ |
8.9 |
|
|
$ |
9.3 |
|
|
$ |
44.1 |
|
|
$ |
45.1 |
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-purchase agreements |
|
$ |
47.9 |
|
|
$ |
47.2 |
|
|
$ |
14.3 |
|
|
$ |
16.3 |
|
|
$ |
62.2 |
|
|
$ |
63.5 |
|
Program-wide liquidity commitments |
|
|
5.0 |
|
|
|
4.0 |
|
|
|
1.0 |
|
|
|
2.0 |
|
|
|
6.0 |
|
|
|
6.0 |
|
Program-wide limited credit enhancements |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
2.3 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss(a) |
|
|
48.4 |
|
|
|
48.2 |
|
|
|
14.8 |
|
|
|
16.9 |
|
|
|
63.2 |
|
|
|
65.1 |
|
|
|
|
|
(a) |
|
The Firms maximum exposure to loss is limited to the amount of drawn commitments (i.e.,
sellers assets held by the multi-seller conduits for which the Firm provides liquidity support) of
$41.6 billion and $42.2 billion at December 31, 2005 and 2004, respectively, plus contractual but
undrawn commitments of $21.6 billion and $22.9 billion at December 31, 2005 and 2004, respectively.
Since the Firm provides credit enhancement and liquidity to these multi-seller conduits, the
maximum exposure is not adjusted to exclude exposure absorbed by third-party liquidity providers. |
|
(b) |
|
In December 2003 and February 2004, two multi-seller conduits were restructured, with each
conduit issuing preferred securities acquired by an independent third-party investor; the investor
absorbs the majority of the expected losses of the conduit. In determining the primary beneficiary
of the restructured conduits, the Firm leveraged an existing rating agency model an independent
market standard to estimate the size of the expected losses, and the Firm considered the
relative rights and obligations of each of the variable interest holders. |
The Firm views its credit exposure to multi-seller conduit transactions as limited. This is
because, for the most part, the Firm is not required to fund under the liquidity facilities if the
assets in the VIE are in default. Additionally, the Firms obligations under the letters of credit
are secondary to the risk of first loss provided by the customer or other third parties for
example, by the overcollateralization of the VIE with the assets sold to it or notes subordinated
to the Firms liquidity facilities.
Client intermediation
As a financial intermediary, the Firm is involved in structuring VIE transactions to meet investor
and client needs. The Firm intermediates various types of risks (including fixed income, equity and
credit), typically using derivative instruments as further discussed below. In certain
circumstances, the Firm also provides liquidity and other support to the VIEs to facilitate the
transaction. The Firms current exposure to nonconsolidated VIEs is reflected in its Consolidated
balance sheets or in the Notes to consolidated financial statements. The risks inherent in
derivative instruments or liquidity commitments are managed similarly to other credit, market and
liquidity risks to which the Firm is exposed. The Firm intermediates principally with the following
types of VIEs: credit-linked note vehicles and municipal bond vehicles.
|
|
|
|
|
|
112
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The Firm structures credit-linked notes in which the VIE purchases highly-rated assets (such as
asset-backed securities) and enters into a credit derivative contract with the Firm to obtain
exposure to a referenced credit not held by the VIE. Credit-linked notes are issued by the VIE to
transfer the risk of the referenced credit to the investors in the VIE. Clients and investors often
prefer a VIE structure, since the credit-linked notes generally carry a higher credit rating than
they would if issued directly by JPMorgan Chase.
The Firm is involved with municipal bond vehicles for the purpose of creating a series of secondary
market trusts that allow tax-exempt investors to finance their investments at short-term tax-exempt
rates. The VIE purchases fixed-rate, longer-term highly-rated municipal bonds by issuing puttable
floating-rate certificates and inverse floating-rate certificates; the investors in the inverse
floating-rate certificates are exposed to the residual losses of the VIE (the residual
interests). For vehicles in which the Firm owns the residual interests, the Firm consolidates the
VIE. In vehicles where third-party investors own the residual interests, the Firms exposure is
limited because of the high credit quality of the underlying municipal bonds, the unwind triggers
based upon the market value of the underlying collateral and the residual interests held by third
parties. The Firm often serves as remarketing agent for the VIE and provides liquidity to support
the remarketing.
Assets held by credit-linked and municipal bond vehicles at December 31, 2005 and 2004, were as
follows:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Credit-linked note vehicles(a) |
|
$ |
13.5 |
|
|
$ |
17.8 |
|
Municipal bond vehicles(b) |
|
|
13.7 |
|
|
|
7.5 |
|
|
|
|
|
(a) |
|
Assets of $1.8 billion and $2.3 billion reported in the table above were recorded on the
Firms Consolidated balance sheets at December 31, 2005 and 2004, respectively, due to contractual
relationships held by the Firm that relate to collateral held by the VIE. |
|
(b) |
|
Total amounts consolidated due to the Firm owning residual interests were $4.9 billion and $2.6 billion at
December 31, 2005 and 2004, respectively, and are reported in the table.
Total liquidity commitments were $5.8 billion and $3.1 billion at December 31, 2005 and 2004,
respectively. The Firms maximum credit exposure to all municipal bond vehicles was $10.7 billion
and $5.7 billion at December 31, 2005 and 2004, respectively. |
Finally, the Firm may enter into transactions with VIEs structured by other parties. These
transactions can include, for example, acting
as a derivative counterparty, liquidity provider, investor, underwriter, placement agent, trustee
or custodian. These transactions are conducted at arms length, and individual credit decisions are
based upon the analysis of the specific VIE, taking into consideration the quality of the
underlying assets. JPMorgan Chase records and reports these positions similarly to any other
third-party transaction. These activities do not cause JPMorgan Chase to absorb a majority of the
expected losses of the VIEs or to receive a majority of the residual returns of the VIE, and they
are not considered significant for disclosure purposes.
Consolidated VIE assets
The following table summarizes the Firms total consolidated VIE assets, by classification on the
Consolidated balance sheets, as of December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Consolidated VIE assets(a) |
|
|
|
|
|
|
|
|
Investment securities(b) |
|
$ |
1.9 |
|
|
$ |
10.6 |
|
Trading assets(c) |
|
|
9.3 |
|
|
|
4.7 |
|
Loans |
|
|
8.1 |
|
|
|
3.4 |
|
Interests in purchased receivables |
|
|
29.6 |
|
|
|
31.6 |
|
Other assets |
|
|
3.0 |
|
|
|
0.4 |
|
|
Total consolidated assets |
|
$ |
51.9 |
|
|
$ |
50.7 |
|
|
|
|
|
(a) |
|
The Firm also holds $3.9 billion and $3.4 billion of assets, at December 31, 2005 and
December 31, 2004, respectively, primarily as a sellers interest, in certain consumer
securi-tizations in a segregated entity, as part of a two-step securitization transaction. This
interest is included in the securitization activities disclosed in Note 13 on pages 108111 of
this Annual Report. |
|
(b) |
|
The decline in balance is primarily attributable to the sale of the Firms interest in a
structured investment vehicles capital notes and resulting deconsolidation of this vehicle in
2005. |
|
(c) |
|
Includes the fair value of securities and derivatives. |
Interests in purchased receivables include interests in receivables purchased by
Firm-administered conduits, which have been consolidated in accordance with FIN 46R. Interests in
purchased receivables are carried at cost and are reviewed to determine whether an
other-than-temporary impairment exists. Based upon the current level of credit protection specified
in each transaction, primarily through overcollateralization, the Firm determined that no
other-than-temporary impairment existed at December 31, 2005.
The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in
the line item titled, Beneficial interests issued by consolidated variable interest entities on
the Consolidated balance sheets. The holders of these beneficial interests do not have recourse to
the general credit of JPMorgan Chase. See Note 17 on page 117 of this Annual Report for the
maturity profile of FIN 46 long-term beneficial interests.
FIN 46R transition
In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to address various technical
corrections and implementation issues that had arisen since the issuance of FIN 46. Effective March
31, 2004, JPMorgan Chase implemented FIN 46R for all VIEs, excluding certain investments made by
its private equity business, as previously discussed. Implementation of FIN 46R did not have a
significant effect on the Firms Consolidated financial statements.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
113 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 15 Goodwill and other intangible assets
Goodwill is not amortized but instead tested for impairment in accordance with SFAS 142 at the
reporting-unit segment, which is generally one level below the six major reportable business
segments (as described in Note 31 on pages 130131 of this Annual Report); plus Private Equity
(which is included in Corporate). Goodwill is tested annually (during the fourth quarter) or more
often if events or circumstances, such as adverse changes in the business climate, indicate there
may be impairment. Intangible assets determined to have indefinite lives are not amortized but
instead are tested for impairment at least annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test compares the fair
value of the indefinite-lived intangible asset to its carrying amount. Other acquired intangible assets
determined to have finite lives, such as core deposits and credit card relationships, are amortized
over their estimated useful lives in a manner that best reflects the economic benefits of the
intangible asset. In addition, impairment testing is performed periodically on these amortizing
intangible assets.
Goodwill and other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Goodwill |
|
$ |
43,621 |
|
|
$ |
43,203 |
|
Mortgage servicing rights |
|
|
6,452 |
|
|
|
5,080 |
|
Purchased credit card relationships |
|
|
3,275 |
|
|
|
3,878 |
|
|
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
All other intangibles: |
|
|
|
|
|
|
|
|
Other credit
card-related intangibles |
|
$ |
124 |
|
|
$ |
272 |
|
Core deposit intangibles |
|
|
2,705 |
|
|
|
3,328 |
|
All other intangibles |
|
|
2,003 |
|
|
|
2,126 |
|
|
Total All other intangible assets |
|
$ |
4,832 |
|
|
$ |
5,726 |
|
|
Goodwill
As of December 31, 2005, goodwill increased by $418 million compared with December 31, 2004,
principally in connection with the establishment of the business partnership with Cazenove, as well
as the acquisitions of Vastera, Neovest and the Sears Canada credit card business. These increases
to Goodwill were partially offset by the deconsolidation of Paymentech. Goodwill was not impaired
at December 31, 2005 or 2004, nor was any goodwill written off due to impairment during the years
ended December 31, 2005, 2004 or 2003.
Goodwill attributed to the business segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Goodwill resulting |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
from the Merger |
|
|
Investment Bank |
|
$ |
3,531 |
|
|
$ |
3,309 |
|
|
$ |
1,179 |
|
Retail Financial Services |
|
|
14,991 |
|
|
|
15,022 |
|
|
|
14,576 |
|
Card Services |
|
|
12,984 |
|
|
|
12,781 |
|
|
|
12,802 |
|
Commercial Banking |
|
|
2,651 |
|
|
|
2,650 |
|
|
|
2,599 |
|
Treasury & Securities Services |
|
|
2,062 |
|
|
|
2,044 |
|
|
|
465 |
|
Asset & Wealth Management |
|
|
7,025 |
|
|
|
7,020 |
|
|
|
2,539 |
|
Corporate (Private Equity) |
|
|
377 |
|
|
|
377 |
|
|
|
|
|
|
Total goodwill |
|
$ |
43,621 |
|
|
$ |
43,203 |
|
|
$ |
34,160 |
|
|
Mortgage servicing rights
JPMorgan Chase recognizes as intangible assets mortgage servicing rights, which represent the right
to perform specified residential mortgage servicing activities for others. MSRs are either
purchased from third parties or retained upon sale or securitization of mortgage loans. Servicing
activities include collecting principal, interest, and escrow payments from borrowers; making tax
and insurance payments on behalf of the borrowers; monitoring delinquencies and executing
foreclosure proceedings; and accounting for and remitting principal and interest payments to the
investors of the mortgage-backed securities.
The amount capitalized as MSRs represents the amount paid to third parties to acquire MSRs or is
based on fair value, if retained upon the sale or securitization of mortgage loans. The Firm
estimates the fair value of MSRs using a discounted future cash flow model. The model considers
portfolio characteristics, contractually specified servicing fees, prepayment assumptions,
delinquency rates, late charges, other ancillary revenues and costs to service, as well as other
economic factors.
During the fourth quarter of 2005, the Firm enhanced its valuation of MSRs by utilizing an
option-adjusted spread (OAS) valuation approach. An OAS approach projects MSR cash flows over
multiple interest rate scenarios in conjunction with the Firms proprietary
prepayment model, and then discounts these cash flows at risk-adjusted rates. Prior to the fourth
quarter of 2005, MSRs were valued using cash flows and discount rates determined by a static or
single interest rate path valuation model. The initial valuation of MSRs under OAS did not have a
material impact on the Firms financial statements.
The Firm compares fair value estimates and assumptions to observable market data where available
and to recent market activity and actual portfolio experience. Management believes that the
assumptions used to estimate fair values are supportable and reasonable.
The Firm accounts for its MSRs at the lower of cost or fair value, in accordance with SFAS 140.
MSRs are amortized as a reduction of the actual servicing income received in proportion to, and
over the period of, the estimated future net servicing income stream of the underlying mortgage
loans. For purposes of evaluating and measuring impairment of MSRs, the Firm stratifies the
portfolio on the basis of the predominant risk characteristics, which are loan type and interest
rate. Any indicated impairment is recognized as a reduction in revenue through a valuation
allowance, which represents the extent that the carrying value of an individual stratum exceeds its
estimated fair value.
|
|
|
|
|
|
114
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The Firm evaluates other-than-temporary impairment by reviewing changes in mortgage and other
market interest rates over historical periods and then determines an interest rate scenario to
estimate the amounts of the MSRs gross carrying value and the related valuation allowance that
could be expected to be recovered in the foreseeable future. Any gross carrying value and related
valuation allowance amounts that are not expected to be recovered in the foreseeable future, based
upon the interest rate scenario, are considered to be other-than-temporary.
The carrying value of MSRs is sensitive to changes in interest rates, including their effect on
prepayment speeds. JPMorgan Chase uses a combination of derivatives, AFS securities and trading
instruments to manage changes in the fair value of MSRs. The intent is to offset any changes in the
fair value of MSRs with changes in the fair value of the related risk management instrument. MSRs
decrease in value when interest rates decline. Conversely, securities (such as mortgage-backed
securities), principal-only certificates and derivatives (when the Firm receives fixed-rate
interest payments) decrease in value when interest rates increase. The Firm offsets the interest
rate risk of its MSRs by designating certain derivatives (e.g., a combination of swaps, swaptions
and floors that produces an interest rate profile opposite to the designated risk of the hedged
MSRs) as fair value hedges of specified MSRs under SFAS 133. SFAS 133 hedge accounting allows the
carrying value of the hedged MSRs to be adjusted through earnings in the same period that the
change in value of the hedging derivatives is recognized through earnings. Both of these valuation
adjustments are recorded in Mortgage fees and related income.
When applying SFAS 133, the loans underlying the MSRs being hedged are stratified into specific
SFAS 133 asset groupings that possess similar interest rate and prepayment risk exposures. The
documented hedge period for the Firm is daily. Daily adjustments are performed to incorporate new
or terminated derivative contracts and to modify the amount of the corresponding similar asset
grouping that is being hedged. The Firm has designated changes in the benchmark interest rate
(LIBOR) as the hedged risk. In designating the benchmark interest rate, the Firm considers the
impact that the change in the benchmark rate has on the prepayment speed estimates in determining
the fair value of the MSRs. The Firm performs both prospective and retrospective
hedge-effectiveness evaluations, using a regression analysis, to determine whether the hedge
relationship is expected to be highly effective. Hedge effectiveness is assessed by comparing the
change in value of the MSRs as a result of changes in benchmark interest rates to the change in the
value of the designated derivatives. For a further discussion on derivative instruments and hedging
activities, see Note 26 on page 123 of this Annual Report.
Securities (both AFS and Trading) also are used to manage the risk exposure of MSRs. Because these
securities do not qualify as hedges under SFAS 133, they are accounted for under SFAS 115. Realized
and unrealized gains and losses on trading securities are recognized in earnings in Mortgage fees
and related income; interest income on the AFS securities is recognized in earnings in Net interest
income; and unrealized gains and losses on AFS securities are reported in Other comprehensive
income. Finally, certain nonhedge derivatives, which have not been designated by management in SFAS
133 hedge relationships, are used to manage the economic risk exposure of MSRs and are recorded in
Mortgage fees and related income.
Certain AFS securities purchased by the Firm to manage structural interest rate risk were
designated in 2005 as risk management instruments of MSRs. At December 31, 2005 and 2004, the
unrealized loss on AFS securities used to manage the risk exposure of MSRs was $174 million and $3
million, respectively.
The following table summarizes MSR activity and related amortization for the dates indicated. It
also includes the key assumptions and the sensitivity of the fair value of MSRs at December 31,
2005, to immediate 10% and 20% adverse changes in each of those assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Balance at January 1 |
|
$ |
6,111 |
|
|
$ |
6,159 |
|
|
$ |
4,864 |
|
Additions |
|
|
1,897 |
|
|
|
1,757 |
|
|
|
3,201 |
|
Bank One merger |
|
NA |
|
|
|
90 |
|
|
NA |
|
Sales |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
Other-than-temporary impairment |
|
|
(1 |
) |
|
|
(149 |
) |
|
|
(283 |
) |
Amortization |
|
|
(1,295 |
) |
|
|
(1,297 |
) |
|
|
(1,397 |
) |
SFAS 133 hedge valuation adjustments |
|
|
90 |
|
|
|
(446 |
) |
|
|
(226 |
) |
|
Balance at December 31 |
|
|
6,802 |
|
|
|
6,111 |
|
|
|
6,159 |
|
Less: valuation allowance |
|
|
350 |
|
|
|
1,031 |
|
|
|
1,378 |
|
|
Balance at December 31, after
valuation allowance |
|
$ |
6,452 |
|
|
$ |
5,080 |
|
|
$ |
4,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value at December 31 |
|
$ |
6,668 |
|
|
$ |
5,124 |
|
|
$ |
4,781 |
|
Weighted-average prepayment
speed assumption (CPR) |
|
|
17.56 |
% |
|
|
17.29 |
% |
|
|
17.67 |
% |
Weighted-average discount rate |
|
|
9.68 |
% |
|
|
7.93 |
% |
|
|
7.31 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
CPR: Constant prepayment rate |
|
|
|
|
|
|
|
2005 |
|
|
Weighted-average prepayment speed assumption (CPR) |
|
|
17.56 |
% |
Impact on fair value with 10% adverse change |
|
$ |
(340 |
) |
Impact on fair value with 20% adverse change |
|
|
(654 |
) |
|
Weighted-average discount rate |
|
|
9.68 |
% |
Impact on fair value with 10% adverse change |
|
$ |
(231 |
) |
Impact on fair value with 20% adverse change |
|
|
(446 |
) |
|
CPR: Constant prepayment rate.
The sensitivity analysis in the preceding table is hypothetical and should be used with
caution. As the figures indicate, changes in fair value based upon a 10% and 20% variation in
assumptions generally cannot be easily extrapolated because the relationship of the change in the
assumptions to the change in fair value may not be linear. Also, in this table, the effect that a
change in a particular assumption may have on the fair value is calculated without changing any
other assumption. In reality, changes in one factor may result in changes in another, which might
magnify or counteract the sensitivities.
The valuation allowance represents the extent to which the carrying value of MSRs exceeds its
estimated fair value for its applicable SFAS 140 strata. Changes in the valuation allowance are the
result of the recognition of impairment or the recovery of previously recognized impairment charges
due to changes in market conditions during the period. The changes in the valuation allowance for
MSRs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Balance at January 1 |
|
$ |
1,031 |
|
|
$ |
1,378 |
|
|
$ |
1,634 |
|
Other-than-temporary impairment |
|
|
(1 |
) |
|
|
(149 |
) |
|
|
(283 |
) |
SFAS 140 impairment (recovery) adjustment |
|
|
(680 |
) |
|
|
(198 |
) |
|
|
27 |
|
|
Balance at December 31 |
|
$ |
350 |
|
|
$ |
1,031 |
|
|
$ |
1,378 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results, while 2003 results include heritage JPMorgan Chase only. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
115 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The Firm recorded an other-than-temporary impairment of its MSRs of $1 million, $149 million
and $283 million, in 2005, 2004 and 2003, respectively, which permanently reduced the gross
carrying value of the MSRs and the related valuation allowance. The
permanent reduction precludes subsequent reversals. This write-down had no impact on the results of
operations or financial condition of the Firm.
Purchased credit card relationships and All other intangible assets
During 2005, purchased credit card relationship intangibles decreased by $603 million as a result
of $703 million in amortization expense, partially offset by the purchase of the Sears Canada
credit card business. All other intangible assets decreased by $894 million in 2005 primarily as a
result of $836 million in amortization expense and the impact of the deconsolidation of Paymentech.
Except for $513 million of indefinite-lived intangibles related to asset management advisory
contracts which are not amortized but instead are tested for impairment at least annually, the
remainder of the Firms other acquired intangible assets are subject to amortization.
The components of credit card relationships, core deposits and other intangible assets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
Net |
|
|
Gross |
|
Accumulated |
|
carrying |
|
Gross |
|
Accumulated |
|
carrying |
December 31, (in millions) |
|
amount |
|
amortization |
|
value |
|
amount |
|
amortization |
|
value |
|
Purchased credit card relationships |
|
$ |
5,325 |
|
|
$ |
2,050 |
|
|
$ |
3,275 |
|
|
$ |
5,225 |
|
|
$ |
1,347 |
|
|
$ |
3,878 |
|
All other intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other credit cardrelated intangibles |
|
|
183 |
|
|
|
59 |
|
|
|
124 |
|
|
|
295 |
|
|
|
23 |
|
|
|
272 |
|
Core deposit intangibles |
|
|
3,797 |
|
|
|
1,092 |
|
|
|
2,705 |
|
|
|
3,797 |
|
|
|
469 |
|
|
|
3,328 |
|
Other intangibles |
|
|
2,582 |
|
|
|
579 |
(a) |
|
|
2,003 |
|
|
|
2,528 |
|
|
|
402 |
(a) |
|
|
2,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Purchased credit card relationships |
|
$ |
703 |
|
|
$ |
476 |
|
|
$ |
256 |
|
Other credit cardrelated intangibles |
|
|
36 |
|
|
|
23 |
|
|
|
|
|
Core deposit intangibles |
|
|
623 |
|
|
|
330 |
|
|
|
6 |
|
All other intangibles |
|
|
163 |
|
|
|
117 |
|
|
|
32 |
|
|
Total amortization expense |
|
$ |
1,525 |
|
|
$ |
946 |
|
|
$ |
294 |
|
|
|
|
|
(a) |
|
Includes $14 million and $16 million for 2005 and 2004, respectively, of amortization
expense related to servicing assets on securitized automobile loans, which is recorded in Asset
management, administration and commissions. |
|
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
Future amortization expense
The following table presents estimated amortization expenses related to credit card
relationships, core deposits and All other intangible assets at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other credit |
|
|
|
|
|
|
(in millions) |
|
Purchased credit |
|
card-related |
|
Core deposit |
|
All other |
|
|
Year ended December 31, |
|
card relationships |
|
intangibles |
|
intangibles |
|
intangible assets |
|
Total |
|
2006 |
|
$ |
688 |
|
|
$ |
16 |
|
|
$ |
547 |
|
|
$ |
163 |
|
|
$ |
1,414 |
|
2007 |
|
|
620 |
|
|
|
15 |
|
|
|
469 |
|
|
|
145 |
|
|
|
1,249 |
|
2008 |
|
|
515 |
|
|
|
15 |
|
|
|
402 |
|
|
|
132 |
|
|
|
1,064 |
|
2009 |
|
|
372 |
|
|
|
15 |
|
|
|
329 |
|
|
|
123 |
|
|
|
839 |
|
2010 |
|
|
312 |
|
|
|
13 |
|
|
|
276 |
|
|
|
110 |
|
|
|
711 |
|
|
Note 16 Premises and equipment
Premises and equipment, including leasehold improvements, are carried at cost less accumulated
depreciation and amortization. JPMorgan Chase computes depreciation using the straight-line method
over the estimated useful life of an asset. For leasehold improvements, the Firm uses the
straight-line method computed over the lesser of the remaining term of the leased facility or 10
years. JPMorgan Chase has recorded immaterial asset retirement obligations
related to asbestos remediation under SFAS 143 and FIN 47 in those cases where it has sufficient
information to estimate the obligations fair value.
JPMorgan Chase capitalizes certain costs associated with the acquisition or development of
internal-use software under SOP 98-1. Once the software is ready for its intended use, these costs
are amortized on a straight-line basis over the softwares expected useful life, and reviewed for
impairment on an ongoing basis.
|
|
|
|
|
|
116
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 17 Long-term debt
JPMorgan Chase issues long-term debt denominated in various currencies, although predominantly
U.S. dollars, with both fixed and variable interest rates. The following table is a summary of
long-term debt (including unamortized original issue debt discount and SFAS 133 valuation
adjustments):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By remaining contractual maturity at December 31, 2005 |
|
|
Under |
|
|
|
|
|
|
After |
|
|
2005 |
|
|
2004 |
|
(in millions) |
|
|
|
|
|
1 year |
|
|
15 years |
|
|
5 years |
|
|
total |
|
|
total |
|
|
Parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt:(a) |
|
Fixed rate |
|
$ |
5,991 |
|
|
$ |
14,705 |
|
|
$ |
4,224 |
|
|
$ |
24,920 |
|
|
$ |
25,563 |
|
|
|
Variable rate |
|
|
3,574 |
|
|
|
11,049 |
|
|
|
2,291 |
|
|
|
16,914 |
|
|
|
15,128 |
|
|
|
Interest rates(b) |
|
|
2.806.88 |
% |
|
|
0.226.63 |
% |
|
|
1.128.85 |
% |
|
|
0.228.85 |
% |
|
|
0.207.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt: |
|
Fixed rate |
|
$ |
758 |
|
|
$ |
8,241 |
|
|
$ |
15,818 |
|
|
$ |
24,817 |
|
|
$ |
22,055 |
|
|
|
Variable rate |
|
|
|
|
|
|
26 |
|
|
|
1,797 |
|
|
|
1,823 |
|
|
|
2,686 |
|
|
|
Interest rates(b) |
|
|
6.137.88 |
% |
|
|
4.8010.00 |
% |
|
|
1.929.88 |
% |
|
|
1.9210.00 |
% |
|
|
1.9210.00 |
% |
|
|
|
Subtotal |
|
$ |
10,323 |
|
|
$ |
34,021 |
|
|
$ |
24,130 |
|
|
$ |
68,474 |
|
|
$ |
65,432 |
|
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt:(a) |
|
Fixed rate |
|
$ |
636 |
|
|
$ |
3,746 |
|
|
$ |
2,362 |
|
|
$ |
6,744 |
|
|
$ |
6,249 |
|
|
|
Variable rate |
|
|
5,364 |
|
|
|
21,632 |
|
|
|
5,013 |
|
|
|
32,009 |
|
|
|
22,097 |
|
|
|
Interest rates(b) |
|
|
3.0010.95 |
% |
|
|
1.7117.00 |
% |
|
|
1.7613.00 |
% |
|
|
1.7117.00 |
% |
|
|
1.7113.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt: |
|
Fixed rate |
|
$ |
|
|
|
$ |
845 |
|
|
$ |
285 |
|
|
$ |
1,130 |
|
|
$ |
1,644 |
|
|
|
Variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates(b) |
|
|
|
|
|
|
6.136.70 |
% |
|
|
8.25 |
% |
|
|
6.138.25 |
% |
|
|
6.008.25 |
% |
|
|
|
Subtotal |
|
$ |
6,000 |
|
|
$ |
26,223 |
|
|
$ |
7,660 |
|
|
$ |
39,883 |
|
|
$ |
29,990 |
|
|
Total long-term debt |
|
$ |
16,323 |
|
|
$ |
60,244 |
|
|
$ |
31,790 |
|
|
$ |
108,357 |
(d)(e)(f) |
|
$ |
95,422 |
|
|
FIN 46R long-term beneficial interests:(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
80 |
|
|
$ |
9 |
|
|
$ |
376 |
|
|
$ |
465 |
|
|
$ |
775 |
|
|
|
Variable rate |
|
|
26 |
|
|
|
95 |
|
|
|
1,768 |
|
|
|
1,889 |
|
|
|
5,618 |
|
|
|
Interest rates(b) |
|
|
3.397.35 |
% |
|
|
0.517.00 |
% |
|
|
2.4212.79 |
% |
|
|
0.5112.79 |
% |
|
|
0.5412.79 |
% |
|
Total FIN 46R long-term beneficial interests |
|
$ |
106 |
|
|
$ |
104 |
|
|
$ |
2,144 |
|
|
$ |
2,354 |
|
|
$ |
6,393 |
|
|
|
|
|
(a) |
|
Included are various equity-linked or other indexed instruments. Embedded derivatives
separated from hybrid securities in accordance with SFAS 133 are reported at fair value and shown
net with the host contract on the balance sheet. Changes in fair value of separated derivatives are
recorded in Trading revenue. |
|
(b) |
|
The interest rates shown are the range of contractual rates in effect at year-end, including
non-U.S. dollar fixed and variable-rate issuances, which excludes the effects of related derivative
instruments. The use of these derivative instruments modifies the Firms exposure to the
contractual interest rates disclosed in the table above. Including the effects of derivatives, the
range of modified rates in effect at December 31, 2005, for total long-term debt was 0.49% to
17.00%, versus the contractual range of 0.22% to 17.00% presented in the table above. |
|
(c) |
|
Included on the Consolidated balance sheets in Beneficial interests issued by consolidated
variable interest entities. |
|
(d) |
|
At December 31, 2005, long-term debt aggregating $27.7 billion was redeemable at the option of
JPMorgan Chase, in whole or in part, prior to maturity, based upon the terms specified in the
respective notes. |
|
(e) |
|
The aggregate principal amount of debt that matures in each of the five years subsequent to
2005 is $16.3 billion in 2006, $17.8 billion in 2007, $23.4 billion in 2008, $11.1 billion in 2009,
and $8.0 billion in 2010. |
|
(f) |
|
Includes $2.3 billion of outstanding zero-coupon notes at December 31, 2005. The aggregate
principal amount of these notes at their respective maturities is $5.9 billion. |
The weighted-average contractual interest rate for total long-term debt was 4.62% and 4.50% as
of December 31, 2005 and 2004, respectively. In order to modify exposure to interest rate and
currency exchange rate movements, JPMorgan Chase utilizes derivative instruments, primarily
interest rate and cross-currency interest rate swaps, in conjunction with some of its debt issues.
The use of these instruments modifies the Firms interest expense on the associated debt. The
modified weighted-average interest rate for total long-term debt, including the effects of related
derivative instruments, was 4.65% and 3.97% as of December 31, 2005 and 2004, respectively.
JPMorgan Chase & Co. (Parent Company) has guaranteed certain debt of its subsidiaries, including
both long-term debt and structured notes sold as part of the Firms trading activities. These
guarantees rank on a parity with all of the Firms other unsecured and unsubordinated indebtedness.
Guaranteed liabilities totaled $170 million and $320 million at December 31, 2005 and 2004,
respectively.
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities
At December 31, 2005, the Firm had 22 wholly-owned Delaware statutory business trusts (issuer
trusts) that issued guaranteed preferred beneficial interests in the Firms junior subordinated
deferrable interest debentures.
The junior subordinated deferrable interest debentures issued by the Firm to the issuer trusts,
totaling $11.5 billion and $10.3 billion at December 31, 2005 and 2004, respectively, were
reflected in the Firms Consolidated balance sheets in the Liabilities section under the caption
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital
debt securities. The Firm also records the common capital securities issued by the issuer trusts
in Other assets in its Consolidated balance sheets at December 31, 2005 and 2004.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
117 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The debentures issued to the issuer trusts by the Firm, less the capital securities of the
issuer trusts, qualify as Tier 1 capital. The following is a summary of the outstanding capital
securities, net of discount, issued by each trust and the junior subordinated deferrable interest
debenture issued by JPMorgan Chase to each trust as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Principal |
|
|
|
|
|
Stated maturity |
|
|
|
|
|
|
|
|
of capital |
|
amount of |
|
|
|
|
|
of capital |
|
|
|
|
|
|
|
|
securities |
|
debenture |
|
|
|
|
|
securities |
|
Earliest |
|
Interest rate of |
|
Interest |
|
|
issued |
|
held |
|
Issue |
|
and |
|
redemption |
|
capital securities |
|
payment/ |
December 31, 2005 (in millions) |
|
by trust(a) |
|
by trust(b) |
|
date |
|
debentures |
|
date |
|
and debentures |
|
distribution dates |
|
Bank One Capital III |
|
$ |
474 |
|
|
$ |
616 |
|
|
|
2000 |
|
|
|
2030 |
|
|
Any time |
|
|
8.75 |
% |
|
Semiannually |
Bank One Capital V |
|
|
300 |
|
|
|
335 |
|
|
|
2001 |
|
|
|
2031 |
|
|
|
2006 |
|
|
|
8.00 |
% |
|
Quarterly |
Bank One Capital VI |
|
|
525 |
|
|
|
556 |
|
|
|
2001 |
|
|
|
2031 |
|
|
|
2006 |
|
|
|
7.20 |
% |
|
Quarterly |
Chase Capital I |
|
|
600 |
|
|
|
619 |
|
|
|
1996 |
|
|
|
2026 |
|
|
|
2006 |
|
|
|
7.67 |
% |
|
Semiannually |
Chase Capital II |
|
|
495 |
|
|
|
511 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
LIBOR + 0.50% |
|
Quarterly |
Chase Capital III |
|
|
296 |
|
|
|
306 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
LIBOR + 0.55% |
|
Quarterly |
Chase Capital VI |
|
|
249 |
|
|
|
256 |
|
|
|
1998 |
|
|
|
2028 |
|
|
Any time |
|
LIBOR + 0.625% |
|
Quarterly |
First Chicago NBD Capital I |
|
|
248 |
|
|
|
256 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
LIBOR + 0.55% |
|
Quarterly |
First Chicago NBD
Institutional Capital A |
|
|
499 |
|
|
|
551 |
|
|
|
1996 |
|
|
|
2026 |
|
|
|
2006 |
|
|
|
7.95 |
% |
|
Semiannually |
First Chicago NBD
Institutional Capital B |
|
|
250 |
|
|
|
273 |
|
|
|
1996 |
|
|
|
2026 |
|
|
|
2006 |
|
|
|
7.75 |
% |
|
Semiannually |
First USA Capital Trust I |
|
|
3 |
|
|
|
3 |
|
|
|
1996 |
|
|
|
2027 |
|
|
|
2007 |
|
|
|
9.33 |
% |
|
Semiannually |
JPM Capital Trust I |
|
|
750 |
|
|
|
773 |
|
|
|
1996 |
|
|
|
2027 |
|
|
|
2007 |
|
|
|
7.54 |
% |
|
Semiannually |
JPM Capital Trust II |
|
|
400 |
|
|
|
412 |
|
|
|
1997 |
|
|
|
2027 |
|
|
|
2007 |
|
|
|
7.95 |
% |
|
Semiannually |
J.P. Morgan Chase Capital IX |
|
|
500 |
|
|
|
509 |
|
|
|
2001 |
|
|
|
2031 |
|
|
|
2006 |
|
|
|
7.50 |
% |
|
Quarterly |
J.P. Morgan Chase Capital X |
|
|
1,000 |
|
|
|
1,022 |
|
|
|
2002 |
|
|
|
2032 |
|
|
|
2007 |
|
|
|
7.00 |
% |
|
Quarterly |
J.P. Morgan Chase Capital XI |
|
|
1,075 |
|
|
|
1,009 |
|
|
|
2003 |
|
|
|
2033 |
|
|
|
2008 |
|
|
|
5.88 |
% |
|
Quarterly |
J.P. Morgan Chase Capital XII |
|
|
400 |
|
|
|
393 |
|
|
|
2003 |
|
|
|
2033 |
|
|
|
2008 |
|
|
|
6.25 |
% |
|
Quarterly |
JPMorgan Chase Capital XIII |
|
|
472 |
|
|
|
487 |
|
|
|
2004 |
|
|
|
2034 |
|
|
|
2014 |
|
|
LIBOR + 0.95% |
|
Quarterly |
JPMorgan Chase Capital XIV |
|
|
600 |
|
|
|
593 |
|
|
|
2004 |
|
|
|
2034 |
|
|
|
2009 |
|
|
|
6.20 |
% |
|
Quarterly |
JPMorgan Chase Capital XV |
|
|
994 |
|
|
|
1,049 |
|
|
|
2005 |
|
|
|
2035 |
|
|
Any time |
|
|
5.88 |
% |
|
Semiannually |
JPMorgan Chase Capital XVI |
|
|
500 |
|
|
|
501 |
|
|
|
2005 |
|
|
|
2035 |
|
|
|
2010 |
|
|
|
6.35 |
% |
|
Quarterly |
JPMorgan Chase Capital XVII |
|
|
496 |
|
|
|
499 |
|
|
|
2005 |
|
|
|
2035 |
|
|
Any time |
|
|
5.85 |
% |
|
Semiannually |
|
Total |
|
$ |
11,126 |
|
|
$ |
11,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the amount of capital securities issued to the public by each trust, net of
unamortized discount. |
|
(b) |
|
Represents the principal amount of JPMorgan Chase debentures held as assets by each trust, net
of unamortized discount amounts. The principal amount of debentures held by the trusts includes the
impact of hedging and purchase accounting fair value adjustments that are recorded on the Firms
financial statements. |
Note 18 Preferred stock
JPMorgan Chase is authorized to issue 200 million shares of preferred stock, in one or more
series, with a par value of $1 per share. Outstanding preferred stock at December 31, 2005 and
2004, was 280,433 and 4.28 million shares, respectively. On May 6, 2005, JPMorgan Chase redeemed a
total of 4.0 million shares of its Fixed/adjustable rate, noncumulative preferred stock.
Dividends on shares of the outstanding series of preferred stock are payable quarterly. The
preferred stock outstanding takes precedence over JPMorgan Chases common stock for the payment of
dividends and the distribution of assets in the event of a liquidation or dissolution of the Firm.
The following is a summary of JPMorgan Chases preferred stock outstanding as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate in effect at |
|
(in millions, except |
|
redemption |
|
Shares |
|
|
Outstanding at December 31, |
|
Earliest |
|
December 31, |
|
per share amounts and rates) |
|
price per share(b) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
redemption date |
|
2005 |
|
|
6.63% Series H cumulative(a) |
|
$ |
500.00 |
|
|
|
0.28 |
|
|
|
0.28 |
|
|
$ |
139 |
|
|
$ |
139 |
|
|
|
3/31/2006 |
|
|
|
6.63 |
% |
Fixed/adjustable rate, noncumulative |
|
|
50.00 |
|
|
|
|
|
|
|
4.00 |
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
Total preferred stock |
|
|
|
|
|
|
0.28 |
|
|
|
4.28 |
|
|
$ |
139 |
|
|
$ |
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represented by depositary shares. |
|
(b) |
|
Redemption price includes amount shown in the table plus any accrued but unpaid dividends. |
|
|
|
|
|
|
118
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 19 Common stock
At December 31, 2005, JPMorgan Chase was authorized to issue 9.0 billion shares of common stock
with a $1 par value per share. In connection with the Merger, the shareholders approved an increase
in the amount of authorized shares of 4.5 billion from the 4.5 billion that had been authorized as
of December 31, 2003. Common shares issued (newly issued or distributed from treasury) by JPMorgan Chase during 2005, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,(a) (in millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Issued balance at January 1 |
|
|
3,584.8 |
|
|
|
2,044.4 |
|
|
|
2,023.6 |
|
Newly issued: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefits and
compensation plans |
|
|
34.0 |
|
|
|
69.0 |
|
|
|
20.9 |
|
Employee stock purchase plans |
|
|
1.4 |
|
|
|
3.1 |
|
|
|
0.7 |
|
Purchase accounting acquisitions
and other |
|
|
|
|
|
|
1,469.4 |
|
|
|
|
|
|
Total newly issued |
|
|
35.4 |
|
|
|
1,541.5 |
|
|
|
21.6 |
|
Cancelled shares |
|
|
(2.0 |
) |
|
|
(1.1 |
) |
|
|
(0.8 |
) |
|
Total issued balance at December 31 |
|
|
3,618.2 |
|
|
|
3,584.8 |
|
|
|
2,044.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury balance at January 1 |
|
|
(28.6 |
) |
|
|
(1.8 |
) |
|
|
(24.9 |
) |
Purchase of treasury stock |
|
|
(93.5 |
) |
|
|
(19.3 |
) |
|
|
|
|
Share repurchases related to employee
stock-based awards(b) |
|
|
(9.4 |
) |
|
|
(7.5 |
) |
|
|
(3.0 |
) |
Issued from treasury: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefits and
compensation plans |
|
|
|
|
|
|
|
|
|
|
25.8 |
|
Employee stock purchase plans |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
Total issued from treasury |
|
|
|
|
|
|
|
|
|
|
26.1 |
|
|
Total treasury balance at December 31 |
|
|
(131.5 |
) |
|
|
(28.6 |
) |
|
|
(1.8 |
) |
|
Outstanding |
|
|
3,486.7 |
|
|
|
3,556.2 |
|
|
|
2,042.6 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Participants in the Firms stock-based incentive plans may have shares withheld to cover income taxes. The
shares withheld amounted to 8.2 million, 5.7 million and 2.3 million for 2005, 2004 and 2003,
respectively. |
During 2005 and 2004, the Firm repurchased 93.5 million shares and 19.3 million shares,
respectively, of common stock under a stock repurchase program that was approved by the Board of
Directors on July 20, 2004. The Firm did not repurchase shares of its common stock during 2003
under a prior stock repurchase program.
As of December 31, 2005, approximately 507 million unissued shares of common stock were reserved
for issuance under various employee or director incentive, compensation, option and stock purchase
plans.
Note 20 Earnings per share
SFAS 128 requires the presentation of basic and diluted earnings per share (EPS) in the
income statement. Basic EPS is computed by dividing net income applicable to common stock by the
weighted-average number of common shares outstanding for the period. Diluted EPS is computed using
the same method as basic EPS but, in the denominator, the number of common shares reflect, in
addition to outstanding shares, the potential dilution that could occur if convertible securities
or other contracts to issue common stock were converted or exercised into common stock. Net income
available for common stock is the same for basic EPS and diluted EPS, as JPMorgan Chase had no
convertible securities, and therefore, no adjustments to net income available for common stock were
necessary. The following table presents the calculation of basic and diluted EPS for 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Less: preferred stock dividends |
|
|
13 |
|
|
|
52 |
|
|
|
51 |
|
|
Net income applicable to common stock |
|
$ |
8,470 |
|
|
$ |
4,414 |
|
|
$ |
6,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic
shares outstanding |
|
|
3,491.7 |
|
|
|
2,779.9 |
|
|
|
2,008.6 |
|
|
Net income per share |
|
$ |
2.43 |
|
|
$ |
1.59 |
|
|
$ |
3.32 |
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to
common stock |
|
$ |
8,470 |
|
|
$ |
4,414 |
|
|
$ |
6,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic
shares outstanding |
|
|
3,491.7 |
|
|
|
2,779.9 |
|
|
|
2,008.6 |
|
Add: Broad-based options |
|
|
3.6 |
|
|
|
5.4 |
|
|
|
4.1 |
|
Restricted stock, restricted stock
units and key employee options |
|
|
62.0 |
|
|
|
65.3 |
|
|
|
42.4 |
|
|
Weighted-average diluted
shares outstanding |
|
|
3,557.3 |
|
|
|
2,850.6 |
|
|
|
2,055.1 |
|
|
Net income per share(b) |
|
$ |
2.38 |
|
|
$ |
1.55 |
|
|
$ |
3.24 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Options issued under employee benefit plans to purchase 280 million, 300 million and 335 million shares of
common stock were outstanding for the years ended 2005, 2004 and 2003, respectively, but were not
included in the computation of diluted EPS because the options exercise prices were greater than
the average market price of the common shares. |
Note 21 Accumulated other
comprehensive income (loss)
Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains
and losses on AFS securities, cash flow hedging activities and foreign currency translation
adjustments (including the impact of related derivatives).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
Year ended |
|
Unrealized |
|
|
|
|
|
Cash |
|
other |
December 31,(a) |
|
gains (losses) |
|
Translation |
|
flow |
|
comprehensive |
(in millions) |
|
on AFS securities(b) |
|
adjustments |
|
hedges |
|
income (loss) |
|
Balance at
December 31, 2002 |
|
$ |
731 |
|
|
$ |
(6 |
) |
|
$ |
502 |
|
|
$ |
1,227 |
|
Net change |
|
|
(712 |
) |
|
|
|
|
|
|
(545 |
) |
|
|
(1,257 |
) |
|
Balance at
December 31, 2003 |
|
|
19 |
|
|
|
(6 |
) |
|
|
(43 |
) |
|
|
(30 |
) |
Net change |
|
|
(80 |
)(c) |
|
|
(2 |
)(d) |
|
|
(96 |
) |
|
|
(178 |
) |
|
Balance at
December 31, 2004 |
|
|
(61 |
) |
|
|
(8 |
) |
|
|
(139 |
) |
|
|
(208 |
) |
Net change |
|
|
(163 |
)(e) |
|
|
|
(f) |
|
|
(255 |
) |
|
|
(418 |
) |
|
Balance at
December 31, 2005 |
|
$ |
(224 |
) |
|
$ |
(8 |
) |
|
$ |
(394 |
) |
|
$ |
(626 |
) |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio
and retained interests in securitizations recorded in Other assets. |
|
(c) |
|
The net change during 2004 was due primarily to rising interest rates and recognition of unrealized gains through securities
sales. |
(d) |
|
Includes $280 million of after-tax gains (losses) on foreign currency translation from
operations for which the functional currency is other than the U.S. dollar offset by $(282) million
of after-tax gains (losses) on hedges. |
(e) |
|
The net change during 2005 was due primarily to higher interest rates, partially offset by the
reversal of unrealized losses through securities sales. |
(f) |
|
Includes $(351) million of after-tax gains (losses) on foreign currency translation from
operations for which the functional currency is other than the U.S. dollar offset by $351 million
of after-tax gains (losses) on hedges. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
119 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents the after-tax changes in net unrealized holdings gains (losses)
and the reclassification adjustments in unrealized gains and losses on AFS securities and cash flow
hedges. Reclassification adjustments include amounts recognized in net income during the current
year that had been previously recorded in Other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Unrealized gains (losses) on AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holdings gains (losses)
arising during the period, net of taxes(b) |
|
$ |
(1,058 |
) |
|
$ |
41 |
|
|
$ |
149 |
|
Reclassification adjustment for (gains) losses
included in income, net of taxes(c) |
|
|
895 |
|
|
|
(121 |
) |
|
|
(861 |
) |
|
Net change |
|
$ |
(163 |
) |
|
$ |
(80 |
) |
|
$ |
(712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holdings gains (losses)
arising during the period, net of taxes(d) |
|
$ |
(283 |
) |
|
$ |
34 |
|
|
$ |
86 |
|
Reclassification adjustment for (gains) losses
included in income, net of taxes(e) |
|
|
28 |
|
|
|
(130 |
) |
|
|
(631 |
) |
|
Net change |
|
$ |
(255 |
) |
|
$ |
(96 |
) |
|
$ |
(545 |
) |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
Net of income tax expense (benefit) of $(648) million for 2005, $27 million for 2004 and $92 million for 2003. |
|
(c) |
|
Net of income tax expense (benefit) of $(548) million for 2005, $79 million for 2004 and $528
million for 2003. |
|
(d) |
|
Net of income tax expense (benefit) of $(187) million for 2005, $23 million for 2004 and $60
million for 2003. |
|
(e) |
|
Net of income tax expense (benefit) of $(18) million for 2005 and $86 million for 2004 and $438
million for 2003. |
Note 22 Income taxes
JPMorgan Chase and eligible subsidiaries file a consolidated U.S. federal income tax return.
JPMorgan Chase uses the asset-and-liability method required by SFAS 109 to provide income taxes on
all transactions recorded in the Consolidated financial statements. This method requires that
income taxes reflect the expected future tax consequences of temporary differences between the
carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax
liability or asset for each temporary difference is determined based upon the tax rates that the
Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan
Chases expense for income taxes includes the current and deferred portions of that expense. A
valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to
realize.
Due to the inherent complexities arising from the nature of the Firms businesses, and from
conducting business and being taxed in a substantial number of jurisdictions, significant judgments
and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the
many tax jurisdictions in which the Firm files tax returns may not be finalized for several years.
Thus, the Firms final tax-related assets and liabilities may ultimately be different.
Deferred income tax expense (benefit) results from differences between assets and liabilities
measured for financial reporting and for income-tax return purposes. The significant components of
deferred tax assets and liabilities are reflected in the following table:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance for other than loan losses |
|
$ |
3,554 |
|
|
$ |
3,711 |
|
Employee benefits |
|
|
3,381 |
|
|
|
2,677 |
|
Allowance for loan losses |
|
|
2,745 |
|
|
|
2,739 |
|
Non-U.S. operations |
|
|
807 |
|
|
|
743 |
|
Fair value adjustments |
|
|
531 |
|
|
|
|
|
|
Gross deferred tax assets |
|
$ |
11,018 |
|
|
$ |
9,870 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
3,683 |
|
|
$ |
3,558 |
|
Leasing transactions |
|
|
3,158 |
|
|
|
4,266 |
|
Fee income |
|
|
1,396 |
|
|
|
1,162 |
|
Non-U.S. operations |
|
|
1,297 |
|
|
|
1,144 |
|
Fair value adjustments |
|
|
|
|
|
|
186 |
|
Other, net |
|
|
149 |
|
|
|
348 |
|
|
Gross deferred tax liabilities |
|
$ |
9,683 |
|
|
$ |
10,664 |
|
|
Valuation allowance |
|
$ |
110 |
|
|
$ |
150 |
|
|
Net deferred tax asset (liability) |
|
$ |
1,225 |
|
|
$ |
(944 |
) |
|
A valuation allowance has been recorded in accordance with SFAS 109, primarily relating to
deferred tax assets associated with certain portfolio investments.
The components of income tax expense included in the Consolidated statements of income were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Current income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
4,269 |
|
|
$ |
1,695 |
|
|
$ |
965 |
|
Non-U.S. |
|
|
917 |
|
|
|
679 |
|
|
|
741 |
|
U.S. state and local |
|
|
337 |
|
|
|
181 |
|
|
|
175 |
|
|
Total current expense |
|
|
5,523 |
|
|
|
2,555 |
|
|
|
1,881 |
|
|
Deferred income tax (benefit) expense |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(2,063 |
) |
|
|
(382 |
) |
|
|
1,341 |
|
Non-U.S. |
|
|
316 |
|
|
|
(322 |
) |
|
|
14 |
|
U.S. state and local |
|
|
(44 |
) |
|
|
(123 |
) |
|
|
73 |
|
|
Total deferred (benefit) expense |
|
|
(1,791 |
) |
|
|
(827 |
) |
|
|
1,428 |
|
|
Total income tax expense |
|
$ |
3,732 |
|
|
$ |
1,728 |
|
|
$ |
3,309 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
The preceding table does not reflect the tax effects of unrealized gains and losses on AFS
securities, SFAS 133 hedge transactions and certain tax benefits associated with the Firms
employee stock plans. The tax effect of these items is recorded directly in Stockholders equity.
Stockholders equity increased by $425 million, $431 million and $898 million in 2005, 2004 and
2003, respectively, as a result of these tax effects.
U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S.
subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period
of time. For 2005, such earnings approximated $333 million on a pre-tax basis. At December 31,
2005, the cumulative amount of undistributed pre-tax earnings in these subsidiaries approximated
$1.5 billion. It is not practicable at this time to determine the income tax liability that would
result upon repatriation of these earnings.
|
|
|
|
|
|
120
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law.
The Act creates a temporary incentive for U.S. companies to repatriate accumulated foreign earnings
at a substantially reduced U.S. effective tax rate by providing a dividends received deduction on
the repatriation of certain foreign earnings to the U.S. taxpayer (the repatriation provision).
The new deduction is subject to a number of limitations and requirements.
In the fourth quarter of 2005, the Firm applied the repatriation provision to $1.9 billion of cash
from foreign earnings, resulting in a net tax benefit of $55 million. The $1.9 billion of cash will
be used in accordance with the Firms domestic reinvestment plan pursuant to the guidelines set
forth in the Act.
The tax expense (benefit) applicable to securities gains and losses for the years 2005, 2004 and
2003 was $(536) million, $126 million and $477 million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for the
past three years is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Statutory U.S. federal tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) in tax rate resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state and local income taxes, net of
federal income tax benefit |
|
|
1.6 |
|
|
|
0.6 |
(b) |
|
|
2.1 |
|
Tax-exempt income |
|
|
(3.0 |
) |
|
|
(4.1 |
) |
|
|
(2.4 |
) |
Non-U.S. subsidiary earnings |
|
|
(1.4 |
) |
|
|
(1.3 |
) |
|
|
(0.7 |
) |
Business tax credits |
|
|
(3.6 |
) |
|
|
(4.1 |
) |
|
|
(0.9 |
) |
Other, net |
|
|
2.0 |
|
|
|
1.8 |
|
|
|
(0.1 |
) |
|
Effective tax rate |
|
|
30.6 |
% |
|
|
27.9 |
% |
|
|
33.0 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
The lower rate in 2004 was attributable to changes in the proportion of income subject to different state and
local taxes. |
The following table presents the U.S. and non-U.S. components of income before income tax
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
U.S. |
|
$ |
8,959 |
|
|
$ |
3,817 |
|
|
$ |
7,333 |
|
Non-U.S.(b) |
|
|
3,256 |
|
|
|
2,377 |
|
|
|
2,695 |
|
|
Income before income tax expense |
|
$ |
12,215 |
|
|
$ |
6,194 |
|
|
$ |
10,028 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
|
(b) |
|
For purposes of this table, non-U.S. income is defined as income generated from operations located outside the
United States of America. |
Note 23 Restrictions on cash and intercompany funds transfers
JPMorgan Chase Banks business is subject to examination and regulation by the Office of the
Comptroller of the Currency (OCC). The Bank is a member of the Federal Reserve System and its
deposits are insured by the Federal Deposit Insurance Corporation (FDIC).
The Federal Reserve Board requires depository institutions to maintain cash
reserves with a Federal Reserve Bank. The average amount of reserve balances
deposited by the Firms bank subsidiaries with various Federal Reserve Banks
was approximately $2.7 billion in 2005 and $3.8 billion in 2004.
Restrictions imposed by federal law prohibit JPMorgan Chase and certain other affiliates from
borrowing from banking subsidiaries unless the loans are secured in specified amounts. Such secured
loans to the Firm or to other affiliates are generally limited to 10% of the banking subsidiarys
total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such
loans is limited to 20% of the banking subsidiarys total capital.
The principal sources of JPMorgan Chases income (on a parent company-only basis) are dividends and
interest from JPMorgan Chase Bank and the other banking and nonbanking subsidiaries of JPMorgan Chase. In addition to
dividend restrictions set forth in statutes and regulations, the FRB, the OCC and the FDIC have
authority under the Financial Institutions Supervisory Act to prohibit or to limit the payment of
dividends by the banking organizations they supervise, including JPMorgan Chase and its
subsidiaries that are banks or bank holding companies, if, in the banking regulators opinion,
payment of a dividend would constitute an unsafe or unsound practice in light of the financial
condition of the banking organization.
At January 1, 2006 and 2005, JPMorgan Chases bank subsidiaries could pay, in the aggregate, $7.4
billion and $6.2 billion, respectively, in dividends to their respective bank holding companies
without prior approval of their relevant banking regulators. Dividend capacity in 2006 will be
supplemented by the banks earnings during the year.
In compliance with rules and regulations established by U.S. and non-U.S. regulators, as of
December 31, 2005 and 2004, cash in the amount of $6.4 billion and $4.3 billion, respectively, and
securities with a fair value of $2.1 billion and $2.7 billion, respectively, were segregated in
special bank accounts for the benefit of securities and futures brokerage customers.
Note 24 Capital
There are two categories of risk-based capital: Tier 1 capital and Tier 2 capital. Tier 1
capital includes common stockholders equity, qualifying preferred stock and minority interest less
goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier
1, subordinated long-term debt and other instruments qualifying as Tier 2, and the aggregate
allowance for credit losses up to a certain percentage of risk-weighted assets. Total regulatory
capital is subject to deductions for investments in certain subsidiaries. Under the risk-based
capital guidelines of the FRB, JPMorgan Chase is required to maintain minimum ratios of Tier 1 and
Total (Tier 1 plus Tier 2) capital to risk-weighted assets, as well as minimum leverage ratios
(which are defined as Tier 1 capital to average adjusted onbalance sheet assets). Failure to meet
these minimum requirements could cause the FRB to take action. Bank subsidiaries also are subject
to these capital requirements by their respective primary regulators. As of December 31, 2005 and
2004, JPMorgan Chase and all of its banking subsidiaries were well-capitalized and met all capital
requirements to which each was subject.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
121 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
The following table presents the risk-based capital ratios for JPMorgan Chase and the Firms
significant banking subsidiaries at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
Total |
|
|
Risk-weighted |
|
|
Adjusted |
|
|
Tier 1 |
|
|
Total |
|
|
Tier 1 |
|
(in millions, except ratios) |
|
capital |
|
|
capital |
|
|
assets(c) |
|
|
average assets(d) |
|
|
capital ratio |
|
|
capital ratio |
|
|
leverage ratio |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co.(a) |
|
$ |
72,474 |
|
|
$ |
102,437 |
|
|
$ |
850,643 |
|
|
$ |
1,152,546 |
|
|
|
8.5 |
% |
|
|
12.0 |
% |
|
|
6.3 |
% |
JPMorgan Chase Bank, N.A. |
|
|
61,050 |
|
|
|
84,227 |
|
|
|
750,397 |
|
|
|
995,095 |
|
|
|
8.1 |
|
|
|
11.2 |
|
|
|
6.1 |
|
Chase Bank USA, N.A. |
|
|
8,608 |
|
|
|
10,941 |
|
|
|
72,229 |
|
|
|
59,882 |
|
|
|
11.9 |
|
|
|
15.2 |
|
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
JPMorgan Chase & Co.(a) |
|
$ |
68,621 |
|
|
$ |
96,807 |
|
|
$ |
791,373 |
|
|
$ |
1,102,456 |
|
|
|
8.7 |
% |
|
|
12.2 |
% |
|
|
6.2 |
% |
JPMorgan Chase Bank, N.A. |
|
|
55,489 |
|
|
|
78,478 |
|
|
|
670,295 |
|
|
|
922,877 |
|
|
|
8.3 |
|
|
|
11.7 |
|
|
|
6.0 |
|
Chase Bank USA, N.A. |
|
|
8,726 |
|
|
|
11,186 |
|
|
|
86,955 |
|
|
|
71,797 |
|
|
|
10.0 |
|
|
|
12.9 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-capitalized ratios(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0 |
% |
|
|
10.0 |
% |
|
|
5.0 |
%(e) |
Minimum capital ratios(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0 |
|
|
|
8.0 |
|
|
|
3.0 |
(f) |
|
|
|
|
(a) |
|
Asset and capital amounts for JPMorgan Chases banking subsidiaries reflect intercompany
transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of
intercompany transactions. |
(b) |
|
As defined by the regulations issued by the FRB, FDIC and OCC. |
(c) |
|
Includes off-balance sheet risk-weighted assets in the amounts of $279.2 billion, $260.0
billion and $15.5 billion, respectively, at December 31, 2005, and $250.3 billion, $229.6 billion
and $15.5 billion, respectively, at December 31, 2004. |
(d) |
|
Average adjusted assets for purposes of calculating the leverage ratio include total average
assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill
and other intangible assets, investments in subsidiaries and the total adjusted carrying value of
nonfinancial equity investments that are subject to deductions from Tier 1 capital. |
(e) |
|
Represents requirements for bank subsidiaries pursuant to regulations issued under the Federal
Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the
definition of a well-capitalized bank holding company. |
(f) |
|
The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on
factors specified in regulations issued by the FRB and OCC. |
The following table shows the components of the Firms Tier 1 and Total capital:
|
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Tier 1 capital |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
107,211 |
|
|
$ |
105,653 |
|
Effect of net unrealized losses on AFS
securities and cash flow hedging activities |
|
|
618 |
|
|
|
200 |
|
|
Adjusted stockholders equity |
|
|
107,829 |
|
|
|
105,853 |
|
Minority interest(a) |
|
|
12,660 |
|
|
|
11,050 |
|
Less: Goodwill |
|
|
43,621 |
|
|
|
43,203 |
|
Investments in certain subsidiaries |
|
|
401 |
|
|
|
370 |
|
Nonqualifying intangible assets |
|
|
3,993 |
|
|
|
4,709 |
|
|
Tier 1 capital |
|
$ |
72,474 |
|
|
$ |
68,621 |
|
|
Tier 2 capital |
|
|
|
|
|
|
|
|
Long-term debt and other instruments
qualifying as Tier 2 |
|
$ |
22,733 |
|
|
$ |
20,690 |
|
Qualifying allowance for credit losses |
|
|
7,490 |
|
|
|
7,798 |
|
Less: Investments in certain subsidiaries
and other |
|
|
260 |
|
|
|
302 |
|
|
Tier 2 capital |
|
$ |
29,963 |
|
|
$ |
28,186 |
|
|
Total qualifying capital |
|
$ |
102,437 |
|
|
$ |
96,807 |
|
|
|
|
|
(a) |
|
Primarily includes trust preferred securities of certain business trusts. |
Note 25 Commitments and contingencies
At December 31, 2005, JPMorgan Chase and its subsidiaries were obligated under a number of
noncancelable operating leases for premises and equipment used primarily for banking purposes.
Certain leases contain renewal options or escalation clauses providing for increased rental
payments based upon maintenance, utility and tax increases or require the Firm to perform
restoration work on leased premises. No lease agreement imposes restrictions on the Firms ability
to pay dividends, engage in debt or equity financing transactions, or enter into further lease
agreements.
The following table shows required future minimum rental payments under operating leases with
noncancelable lease terms that expire after December 31, 2005:
|
|
|
|
|
Year ended December 31, (in millions) |
|
|
|
|
|
2006 |
|
$ |
993 |
|
2007 |
|
|
948 |
|
2008 |
|
|
901 |
|
2009 |
|
|
834 |
|
2010 |
|
|
724 |
|
After |
|
|
5,334 |
|
|
Total minimum payments required(a) |
|
|
9,734 |
|
Less: Sublease rentals under noncancelable subleases |
|
|
(1,323 |
) |
|
Net minimum payment required |
|
$ |
8,411 |
|
|
|
|
|
(a) |
|
Lease restoration obligations are accrued in accordance with SFAS 13, and are not
reported as a required minimum lease payment. |
Total rental expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Gross rental expense |
|
$ |
1,269 |
|
|
$ |
1,187 |
|
|
$ |
1,061 |
|
Sublease rental income |
|
|
(192 |
) |
|
|
(158 |
) |
|
|
(106 |
) |
|
Net rental expense |
|
$ |
1,077 |
|
|
$ |
1,029 |
|
|
$ |
955 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
At December 31, 2005, assets were pledged to secure public deposits and for other purposes. The
significant components of the assets pledged were as follows:
|
|
|
|
|
|
|
|
|
December 31, (in billions) |
|
2005 |
|
|
2004 |
|
|
Reverse repurchase/securities borrowing agreements |
|
$ |
320 |
|
|
$ |
238 |
|
Securities |
|
|
24 |
|
|
|
49 |
|
Loans |
|
|
74 |
|
|
|
75 |
|
Other(a) |
|
|
99 |
|
|
|
90 |
|
|
Total assets pledged |
|
$ |
517 |
|
|
$ |
452 |
|
|
|
|
|
(a) |
|
Primarily composed of trading assets. |
|
|
|
|
|
|
122
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Litigation reserve
The Firm maintains litigation reserves for certain of its litigations, including its material legal
proceedings. While the outcome of litigation is inherently uncertain, management believes, in light
of all information known to it at December 31, 2005, that the Firms litigation reserves were
adequate at such date. Management reviews litigation reserves
periodically, and the reserves may be
increased or decreased in the future to reflect further litigation developments. The Firm believes
it has meritorious defenses to claims asserted against it in its currently outstanding litigation
and, with respect to such litigation, intends to continue to defend itself vigorously, litigating
or settling cases according to managements judgment as to what is in the best interest of
stockholders.
Note 26 Accounting for derivative instruments and hedging activities
Derivative instruments enable end users to increase, reduce or alter exposure to credit or
market risks. The value of a derivative is derived from its reference to an underlying variable or
combination of variables such as equity, foreign exchange, credit, commodity or interest rate
prices or indices. JPMorgan Chase makes markets in derivatives for customers and also is an
end-user of derivatives in order to manage the Firms exposure to credit and market risks.
SFAS 133, as amended by SFAS 138 and SFAS 149, establishes accounting and reporting standards for
derivative instruments, including those used for trading and hedging activities, and derivative
instruments embedded in other contracts. All free-standing derivatives, whether designated for
hedging relationships or not, are required to be recorded on the balance sheet at fair value. The
accounting for changes in value of a derivative depends on whether the contract is for trading
purposes or has been designated and qualifies for hedge accounting. The majority of the Firms
derivatives are entered into for trading purposes. The Firm also uses derivatives as an end user to
hedge market exposures, modify the interest rate characteristics of related balance sheet
instruments or meet longer-term investment objectives. Both trading and end-user derivatives are
recorded at fair value in Trading assets and Trading liabilities as set forth in Note 3 on page 94
of this Annual Report.
In order to qualify for hedge accounting, a derivative must be considered highly effective at
reducing the risk associated with the exposure being hedged. Each derivative must be designated as
a hedge, with documentation of the risk management objective and strategy, including identification
of the hedging instrument, the hedged item and the risk exposure, and how effectiveness is to be
assessed prospectively and retrospectively. The extent to which a hedging instrument is effective
at achieving offsetting changes in fair value or cash flows must be assessed at least quarterly.
Any ineffectiveness must be reported in current-period earnings.
For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair
value of the item for the risk being hedged are recognized in earnings. If the hedge relationship
is terminated, then the fair value adjustment to the hedged item continues to be reported as part
of the basis of the item and is amortized to earnings as a yield adjustment. For qualifying cash
flow hedges, the effective portion of the change in the fair value of the derivative is recorded in
Other comprehensive income and recognized in the income statement when the hedged cash flows affect
earnings. The ineffective portions of cash flow hedges are immediately recognized in earnings. If
the hedge relationship is terminated, then the change in fair value of the derivative recorded in
Other comprehensive income is recognized when the cash flows that were hedged occur, consistent
with the original hedge strategy. For hedge relationships discontinued because the forecasted transaction is not expected to
occur according to
the original strategy, any related derivative amounts recorded in Other comprehensive income are
immediately recognized in earnings. For qualifying net investment hedges, changes in the fair value
of the derivative or the revaluation of the foreign currency-denominated debt instrument are
recorded in the translation adjustments account within Other comprehensive income. Any ineffective
portions of net investment hedges are immediately recognized in earnings.
JPMorgan Chases fair value hedges primarily include hedges of fixed-rate long-term debt, loans,
AFS securities and MSRs. Interest rate swaps are the most common type of derivative contract used
to modify exposure to interest rate risk, converting fixed-rate assets and liabilities to a
floating rate. Interest rate options, swaptions and forwards are also used in combination with
interest rate swaps to hedge the fair value of the Firms MSRs. For a further discussion of MSR
risk management activities, see Note 15 on pages 114116 of this Annual Report. All amounts have
been included in earnings consistent with the classification of the hedged item, primarily Net
interest income, Mortgage fees and related income, and Other income. The Firm did not recognize any
gains or losses during 2005 on firm commitments that no longer qualify as fair value hedges.
JPMorgan Chase also enters into derivative contracts to hedge exposure to variability in cash flows
from floating-rate financial instruments and forecasted transactions, primarily the rollover of
short-term assets and liabilities, and foreign currency-denominated revenues and expenses. Interest
rate swaps, futures and forward contracts are the most common instruments used to reduce the impact
of interest rate and foreign exchange rate changes on future earnings. All amounts affecting
earnings have been recognized consistent with the classification of the hedged item, primarily Net
interest income.
The Firm uses forward foreign exchange contracts and foreign currency-denominated debt instruments
to protect the value of net investments in foreign currencies in non-U.S. subsidiaries. The portion
of the hedging instruments excluded from the assessment of hedge effectiveness (forward points) is
recorded in Net interest income.
The following table presents derivative instrument hedging-related activities for the periods
indicated:
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
Fair value hedge ineffective net gains/(losses)(b) |
|
$ |
(58 |
) |
|
$ |
199 |
|
Cash flow hedge ineffective net gains/(losses)(b) |
|
|
(2 |
) |
|
|
|
|
Cash flow hedging gains on forecasted
transactions that failed to occur |
|
|
|
|
|
|
1 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
(b) |
|
Includes ineffectiveness and the components of hedging instruments that have been excluded from
the assessment of hedge effectiveness. |
Over the next 12 months, it is expected that $44 million (after-tax) of net gains recorded in
Other comprehensive income at December 31, 2005, will be recognized in earnings. The maximum length
of time over which forecasted transactions are hedged is 10 years, and such transactions primarily
relate to core lending and borrowing activities.
JPMorgan Chase does not seek to apply hedge accounting to all of the Firms economic hedges. For
example, the Firm does not apply hedge accounting to standard credit derivatives used to manage the
credit risk of loans and commitments because of the difficulties in qualifying such contracts as
hedges under SFAS 133. Similarly, the Firm does not apply hedge accounting to certain interest rate
derivatives used as economic hedges.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
123 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 27 Off-balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and
guarantees) to meet the financing needs of its customers. The contractual amount of these financial
instruments represents the maximum possible credit risk should the counterparty draw down the
commitment or the Firm fulfills its obligation under the guarantee, and the counterparty
subsequently fails to perform according to the terms of the contract. Most of these commitments and
guarantees expire without a default occurring or without being drawn. As a result, the total
contractual amount of these instruments is not, in the Firms view, representative of its actual
future credit exposure or funding requirements. Further, certain commitments, primarily related to
consumer financings, are cancelable, upon notice, at the option of the Firm.
To provide for the risk of loss inherent in wholesale-related contracts, an allowance for credit
losses on lending-related commitments is maintained. See Note 12 on pages 107108 of this Annual
Report for a further discussion on the allowance for credit losses on lending-related commitments.
The following table summarizes the contractual amounts of off-balance sheet lending-related
financial instruments and guarantees and the related allowance for credit losses on lending-related
commitments at December 31, 2005 and 2004:
Off-balance sheet lending-related financial instruments and guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for |
|
|
|
Contractual |
|
|
lending-related |
|
|
|
amount |
|
|
commitments |
|
|
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
$ |
655,596 |
|
|
$ |
601,196 |
|
|
$ |
15 |
|
|
$ |
12 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unfunded commitments
to extend credit(a)(b)(c) |
|
|
208,469 |
|
|
|
185,822 |
|
|
|
208 |
|
|
|
183 |
|
Asset purchase agreements(d) |
|
|
31,095 |
|
|
|
39,330 |
|
|
|
3 |
|
|
|
2 |
|
Standby letters of credit
and guarantees(a)(e) |
|
|
77,199 |
|
|
|
78,084 |
|
|
|
173 |
|
|
|
292 |
|
Other letters of credit(a) |
|
|
7,001 |
|
|
|
6,163 |
|
|
|
1 |
|
|
|
3 |
|
|
Total wholesale |
|
|
323,764 |
|
|
|
309,399 |
|
|
|
385 |
|
|
|
480 |
|
|
Total lending-related |
|
$ |
979,360 |
|
|
$ |
910,595 |
|
|
$ |
400 |
|
|
$ |
492 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(f) |
|
$ |
244,316 |
|
|
$ |
220,783 |
|
|
NA |
|
|
NA |
|
Derivatives qualifying as
guarantees |
|
|
61,759 |
|
|
|
53,312 |
|
|
NA |
|
|
NA |
|
|
|
|
|
(a) |
|
Represents contractual amount net of risk participations totaling $29.3 billion and $26.4
billion at December 31, 2005 and 2004, respectively. |
(b) |
|
Includes unused advised lines of credit totaling $28.3 billion and $22.8 billion at December
31, 2005 and 2004, respectively, which are not legally binding. In regulatory filings with the FRB,
unused advised lines are not reportable. |
(c) |
|
Excludes unfunded commitments to private third-party equity funds of $242 million and $563
million at December 31, 2005 and 2004, respectively. |
(d) |
|
Represents asset purchase agreements to the Firms administered multi-seller asset-backed
commercial paper conduits, which excludes $32.4 billion and $31.7 billion at December 31, 2005 and
2004, respectively, related to conduits that were consolidated in accordance with FIN 46R, as the
underlying assets of the conduits are reported in the Firms Consolidated balance sheets. It also
includes $1.3 billion of asset purchase agreements to other third-party entities at December 31,
2005 and $7.5 billion of asset purchase agreements to structured wholesale loan vehicles and other
third-party entities at December 31, 2004. |
(e) |
|
Includes unused commitments to issue standby letters of credit of $37.5 billion and $38.4 billion at December 31, 2005 and 2004, respectively. |
(f) |
|
Collateral held by the Firm in support of securities lending indemnification agreements was
$245.0 billion and $221.6 billion at December 31, 2005 and 2004, respectively. |
FIN 45 establishes accounting and disclosure requirements for guarantees, requiring that a
guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing
the guarantee. FIN 45 defines a guarantee as a contract that contingently requires the Firm to pay
a guaranteed party, based upon: (a) changes in an underlying asset, liability or equity security of
the guaranteed party; or (b) a third partys failure to perform under a specified agreement. The
Firm considers the following off-balance sheet lending arrangements to be guarantees under FIN 45:
certain asset purchase agreements, standby letters of credit and financial guarantees, securities
lending indemnifications, certain indemnification agreements included within third-party
contractual arrangements and certain derivative contracts. These guarantees are described in
further detail below.
The fair value at inception of the obligation undertaken when issuing the guarantees and
commitments that qualify under FIN 45 is typically equal to the net present value of the future
amount of premium receivable under the contract. The Firm has recorded this amount in Other
Liabilities with an offsetting entry recorded in Other Assets. As cash is received under the
contract, it is applied to the premium receivable recorded in Other Assets, and the fair value of
the liability recorded at inception is amortized into income as Lending & deposit related fees over
the life of the guarantee contract. The amount of the liability related to FIN 45 guarantees
recorded at December 31, 2005 and 2004, excluding the allowance for credit losses on
lending-related commitments and derivative contracts discussed below, was approximately $313
million and $341 million, respectively.
Unfunded commitments to extend credit are agreements to lend only when a customer has complied with
predetermined conditions, and they generally expire on fixed dates.
The majority of the Firms unfunded commitments are not guarantees as defined in FIN 45, except for
certain asset purchase agreements that are principally used as a mechanism to provide liquidity to
SPEs, primarily multi-seller conduits, as described in Note 14 on pages 111113 of this Annual
Report. Some of these asset purchase agreements can be exercised at any time by the SPEs
administrator, while others require a triggering event to occur. Triggering events include, but are
not limited to, a need for liquidity, a market value decline of the assets or a downgrade in the
rating of JPMorgan Chase Bank. These agreements may cause the Firm to purchase an asset from the
SPE at an amount above the assets fair value, in effect providing a guarantee of the initial value
of the reference asset as of the date of the agreement. In most instances, third-party credit
enhancements of the SPE mitigate the Firms potential losses on these agreements.
Standby letters of credit and financial guarantees are conditional lending commitments issued by
JPMorgan Chase to guarantee the performance of a customer to a third party under certain
arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade
and similar transactions. Approximately 58% of these arrangements mature within three years. The
Firm typically has recourse to recover from the customer any amounts paid under these guarantees;
in addition, the Firm may hold cash or other highly liquid collateral to support these guarantees.
At December 31, 2005 and 2004, the Firm held collateral relating to $9.0 billion and $7.4 billion,
respectively, of these arrangements.
|
|
|
|
|
|
124
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
The Firm holds customers securities under custodial arrangements. At times, these securities
are loaned to third parties, and the Firm issues securities lending indemnification agreements to
the customer that protect the customer against the risk of loss if the third party fails to return
the securities. To support these indemnification agreements, the Firm obtains from the third party
cash or other highly liquid collateral with a market value exceeding 100% of the value of the
loaned securities. If the third-party borrower fails to return the securities, the Firm would use
the collateral to purchase the securities in the market and would be exposed if the value of the
collateral fell below 100%. The Firm invests third-party cash collateral received in support of the
indemnification agreements. In a few cases where the cash collateral is invested in resale
agreements, the Firm indemnifies the third party against reinvestment risk. At December 31, 2005
and 2004, the Firm held $245.0 billion and $221.6 billion, respectively, in collateral in support
of securities lending indemnification arrangements. Based upon historical experience, management
expects the risk of loss to be remote.
In connection with issuing securities to investors, the Firm may enter into contractual
arrangements with third parties that may require the Firm to make a payment to them in the event of
a change in tax law or an adverse interpretation of tax law. In certain cases, the contract may
also include a termination clause, which would allow the Firm to settle the contract at its fair
value; thus, such a clause would not require the Firm to make a payment under the indemnification
agreement. Even without the termination clause, management does not expect such indemnification
agreements to have a material adverse effect on the consolidated financial condition of JPMorgan
Chase. The Firm may also enter into indemnification clauses when it sells a business or assets to a
third party, pursuant to which it indemnifies that third party for losses it may incur due to
actions taken by the Firm prior to the sale. See below for more information regarding the Firms
loan securitization activities. It is difficult to estimate the Firms maximum exposure under these
indemnification arrangements, since this would require an assessment of future changes in tax law
and future claims that may be made against the Firm that have not yet occurred. However, based upon
historical experience, management expects the risk of loss to be remote.
As part of the Firms loan securitization activities, as described in Note 13 on pages 108111 of
this Annual Report, the Firm provides representations and warranties that certain securitized loans
meet specific requirements. The Firm may be required to repurchase the loans and/or indemnify the
purchaser of the loans against losses due to any breaches of such representations or warranties.
Generally, the maximum amount of future payments the Firm would be required to make under such
repurchase and/or indemnification provisions would be equal to the current amount of assets held by
such securitization-related SPEs as of December 31, 2005, plus, in certain circumstances, accrued
and unpaid interest on such loans and certain expenses. The potential loss due to such repurchase
and/or indemnity is mitigated by the due diligence the Firm performs before the sale to ensure that
the assets comply with the requirements set forth in the representations and warranties. Historically, losses incurred on such
repurchases and/or indemnifications have been insignificant, and therefore management expects the
risk of material loss to be remote.
The Firm is a partner with one of the leading companies in electronic payment services in a joint
venture operating under the name of Chase Paymentech Solutions, LLC (the joint venture). The
joint venture was formed in October 2005 as a result of an agreement to integrate the Firms
jointly-owned Chase Merchant Services (CMS) and Paymentech merchant businesses, the latter of
which was acquired as a result of the Merger. The joint venture provides merchant processing
services in the United States and Canada. The joint venture is liable contingently for processed
credit card sales transactions in the event
of a dispute between the cardmember and a merchant. If a dispute is resolved in the cardmembers
favor, the joint venture will credit or refund the amount to the cardmember and charge back the
transaction to the merchant. If the joint venture is unable to collect the amount from the
merchant, the joint venture will bear the loss for the amount credited or refunded to the
cardmember. The joint venture mitigates this risk by withholding settlement, or by obtaining escrow
deposits or letters of credit from certain merchants. However, in the unlikely event that: 1) a
merchant ceases operations and is unable to deliver products, services or a refund; 2) the joint
venture does not have sufficient collateral from the merchants to provide customer refunds; and 3)
the joint venture does not have sufficient financial resources to provide customer refunds, the
Firm would be liable to refund the cardholder in proportion to its approximate equity interest in
the joint venture. For the year ended December 31, 2005, the joint venture, along with the
integrated businesses of CMS and Paymentech, incurred aggregate credit losses of $11 million on
$563 billion of aggregate volume processed, of which the Firm shared liability only on $200 billion
of aggregate volume processed. At December 31, 2005, the joint venture held $909 million of
collateral. In 2004, the CMS and Paymentech ventures incurred aggregate credit losses of $7.1
million on $396 billion of aggregate volume processed, of which the Firm shared liability only on
$205 billion of aggregate volume processed. At December 31, 2004, the CMS and Paymentech ventures
held $620 million of collateral. The Firm believes that, based upon historical experience and the
collateral held by the joint venture, the fair value of the guarantee would not be different
materially from the credit loss allowance recorded by the joint venture; therefore, the Firm has
not recorded any allowance for losses in excess of the allowance recorded by the joint venture.
The Firm is a member of several securities and futures exchanges and clearing-houses both in the
United States and overseas. Membership in some of these organizations requires the Firm to pay a
pro rata share of the losses incurred by the organization as a result of the default of another
member. Such obligation varies with different organizations. It may be limited to members who dealt
with the defaulting member or to the amount (or a multiple of the amount) of the Firms
contribution to a members guaranty fund, or, in a few cases, it may be unlimited. It is difficult
to estimate the Firms maximum exposure under these membership agreements, since this would require
an assessment of future claims that may be made against the Firm that have not yet occurred.
However, based upon historical experience, management expects the risk of loss to be remote.
In addition to the contracts described above, there are certain derivative contracts to which the
Firm is a counterparty that meet the characteristics of a guarantee under FIN 45. These derivatives
are recorded on the Consolidated balance sheets at fair value. These contracts include written put
options that require the Firm to purchase assets from the option holder at a specified price by a
specified date in the future, as well as derivatives that effectively guarantee the return on a
counterpartys reference portfolio of assets. The total notional value of the derivatives that the
Firm deems to be guarantees was $62 billion and $53 billion at December 31, 2005 and 2004,
respectively. The Firm reduces exposures to these contracts by entering into offsetting
transactions or by entering into contracts that hedge the market risk related to these contracts.
The fair value related to these contracts was a derivative receivable of $198 million and $180
million, and a derivative payable of $767 million and $622 million at December 31, 2005 and 2004,
respectively. Finally, certain written put options and credit derivatives permit cash settlement
and do not require the option holder or the buyer of credit protection to own the reference asset.
The Firm does not consider these contracts to be guarantees as described in FIN 45.
|
|
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|
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JPMorgan Chase & Co. / 2005 Annual Report
|
|
125 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 28 Credit risk concentrations
Concentrations of credit risk arise when a number of customers are engaged in similar business
activities or activities in the same geographic region, or when they have similar economic features
that would cause their ability to meet contractual obligations to be similarly affected by changes
in economic conditions.
JPMorgan Chase regularly monitors various segments of the credit risk portfolio to assess potential
concentration risks and to obtain collateral when deemed necessary. In the Firms wholesale
portfolio, risk concentrations are evaluated primarily by industry and by geographic region. In the
consumer portfolio, concentrations are evaluated primarily by product and by U.S. geographic
region.
The Firm does not believe exposure to any one loan product with varying terms (e.g., interest-only
payments for an introductory period) or exposure to loans with high loan-to-value ratios would
result in a significant concentration
of credit risk. Terms of loan products and collateral coverage are included in the Firms
assessment when extending credit and establishing its allowance for loan losses.
For further information regarding on-balance sheet credit concentrations by major product and
geography, see Note 11 on page 106 of this Annual Report. For information regarding concentrations
of off-balance sheet lending-related financial instruments by major product, see Note 27 on page
124 of this Annual Report. More information about concentrations can be found in the following
tables or discussion in the MD&A:
|
|
|
|
|
|
Wholesale exposure |
|
Page 65 |
Wholesale selected industry concentrations |
|
Page 66 |
Country exposure |
|
Page 70 |
Consumer real estate loan portfolio by geographic location |
|
Page 72 |
|
The table below presents both on-balance sheet and off-balance sheet wholesale- and
consumer-related credit exposure as of December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
Credit |
|
On-balance |
|
Off-balance |
|
Credit |
|
On-balance |
|
Off-balance |
December 31, (in billions) |
|
exposure(b) |
|
sheet(b)(c) |
|
sheet(d) |
|
exposure(b) |
|
sheet(b)(c) |
|
sheet(d) |
|
Wholesale-related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks and finance companies |
|
$ |
53.7 |
|
|
$ |
20.3 |
|
|
$ |
33.4 |
|
|
$ |
56.2 |
|
|
$ |
25.7 |
|
|
$ |
30.5 |
|
Real estate |
|
|
32.5 |
|
|
|
19.0 |
|
|
|
13.5 |
|
|
|
28.2 |
|
|
|
16.7 |
|
|
|
11.5 |
|
Consumer products |
|
|
26.7 |
|
|
|
10.0 |
|
|
|
16.7 |
|
|
|
21.4 |
|
|
|
7.1 |
|
|
|
14.3 |
|
Healthcare |
|
|
25.5 |
|
|
|
4.7 |
|
|
|
20.8 |
|
|
|
22.0 |
|
|
|
4.5 |
|
|
|
17.5 |
|
State and municipal governments |
|
|
25.3 |
|
|
|
6.1 |
|
|
|
19.2 |
|
|
|
19.8 |
|
|
|
4.1 |
|
|
|
15.7 |
|
All other wholesale |
|
|
389.7 |
|
|
|
169.5 |
|
|
|
220.2 |
|
|
|
394.6 |
|
|
|
174.7 |
|
|
|
219.9 |
|
|
Total wholesale-related |
|
|
553.4 |
|
|
|
229.6 |
|
|
|
323.8 |
|
|
|
542.2 |
|
|
|
232.8 |
|
|
|
309.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home finance |
|
|
198.6 |
|
|
|
133.5 |
|
|
|
65.1 |
|
|
|
177.9 |
|
|
|
124.7 |
|
|
|
53.2 |
|
Auto & education finance |
|
|
54.7 |
|
|
|
49.0 |
|
|
|
5.7 |
|
|
|
67.9 |
|
|
|
62.7 |
|
|
|
5.2 |
|
Consumer & small business and other |
|
|
20.3 |
|
|
|
14.8 |
|
|
|
5.5 |
|
|
|
25.4 |
|
|
|
15.1 |
|
|
|
10.3 |
|
Credit card receivables(a) |
|
|
651.0 |
|
|
|
71.7 |
|
|
|
579.3 |
|
|
|
597.0 |
|
|
|
64.5 |
|
|
|
532.5 |
|
|
Total consumer-related |
|
|
924.6 |
|
|
|
269.0 |
|
|
|
655.6 |
|
|
|
868.2 |
|
|
|
267.0 |
|
|
|
601.2 |
|
|
Total exposure |
|
$ |
1,478.0 |
|
|
$ |
498.6 |
|
|
$ |
979.4 |
|
|
$ |
1,410.4 |
|
|
$ |
499.8 |
|
|
$ |
910.6 |
|
|
|
|
|
(a) |
|
Excludes $70.5 billion and $70.8 billion of securitized credit card receivables at
December 31, 2005 and 2004, respectively. |
(b) |
|
Includes HFS loans. |
(c) |
|
Represents loans, derivative receivables and interests in purchased receivables. |
(d) |
|
Represents lending-related financial instruments. |
Note 29 Fair value of financial instruments
The fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a forced or liquidation
sale.
The accounting for an asset or liability may differ based upon the type of instrument and/or its
use in a trading or investing strategy. Generally, the measurement framework in the consolidated
financial statements is one of the following:
|
|
at fair value on the Consolidated balance sheets, with changes in fair value recorded each period
in the Consolidated statements of income; |
|
|
|
at fair value on the Consolidated balance sheets, with changes in fair value recorded each period
in a separate component of Stockholders equity and as part of Other comprehensive income; |
|
|
|
at cost (less other-than-temporary impairments), with changes in fair value not recorded in the
consolidated financial statements but disclosed in the notes thereto; or |
|
|
|
at the lower of cost or fair value. |
The Firm has an established and well-documented process for determining fair values. Fair value is
based upon quoted market prices, where available. If listed prices or quotes are not available,
fair value is based upon internally-developed models that primarily use market-based or independent
information as inputs to the valuation model. Valuation adjustments may be necessary to ensure that
financial instruments are recorded at fair value. These adjustments include amounts to reflect
counterparty credit quality, liquidity and concentration concerns and are based upon defined
methodologies that are applied consistently over time.
|
|
Credit valuation adjustments are necessary when the market price (or parameter) is not indicative
of the credit quality of the counterparty. As few derivative contracts are listed on an exchange,
the majority of derivative positions are valued using internally developed models that use as their
basis observable market parameters. Market practice is to quote parameters equivalent to a AA
credit rating; thus, all counterparties are assumed to have the same credit quality. An adjustment
is therefore necessary to reflect the credit quality of each derivative counterparty and to arrive
at fair value. Without this adjustment, derivative positions would not be appropriately valued. |
|
|
|
|
|
|
126
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
|
|
Liquidity adjustments are necessary when the Firm may not be able to observe a recent market
price for a financial instrument that trades in inactive (or less active) markets. Thus, valuation
adjustments for risk of loss due to a lack of liquidity are applied to those positions to arrive at
fair value. The Firm tries to ascertain the amount of uncertainty in the initial valuation based
upon the liquidity or illiquidity, as the case may be, of the market in which the instrument trades
and makes liquidity adjustments to the financial instruments. The Firm measures the liquidity
adjustment based upon the following factors: (1) the amount of time since the last relevant pricing
point; (2) whether there was an actual trade or relevant external quote; and (3) the volatility of
the principal component of the financial instrument. |
|
|
|
Concentration valuation adjustments are necessary to reflect the cost of unwinding
larger-than-normal market-size risk positions. The cost is determined based upon the size of the
adverse market move that is likely to occur during the extended period required to bring a position
down to a nonconcentrated level. An estimate of the period needed to reduce, without market
disruption, a position to a nonconcentrated level is generally based upon the relationship of the
position to the average daily trading volume of that position. Without these adjustments, larger
positions would be valued at a price greater than the price at which the Firm could exit the
positions. |
Valuation adjustments are determined based upon established policies and are controlled by a price
verification group independent of the risk-taking function. Economic substantiation of models,
prices, market inputs and revenue through price/input testing, as well as backtesting, is done to
validate the appropriateness of the valuation methodology. Any changes to the valuation methodology
are reviewed by management to ensure the changes are justified.
The methods described above may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, the use of different
methodologies to determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
Certain financial instruments and all nonfinancial instruments are excluded from the scope of SFAS
107. Accordingly, the fair value disclosures required by SFAS 107 provide only a partial estimate
of the fair value of JPMorgan Chase. For example, the Firm has developed long-term relationships
with its customers through its deposit base and credit card accounts, commonly referred to as core
deposit intangibles and credit card relationships. In the opinion of management, these items, in
the aggregate, add significant value to JPMorgan Chase, but their fair value is not disclosed in
this Note.
The following items describe the methodologies and assumptions used, by financial instrument, to
determine fair value.
Financial assets
Assets for which fair value approximates carrying value
The Firm considers fair values of certain financial assets carried at cost including cash and
due from banks, deposits with banks, securities borrowed, short-term receivables and accrued
interest receivable to approximate their respective carrying values, due to their short-term
nature and generally negligible credit risk.
Assets where fair value differs from cost
The Firms debt, equity and derivative trading instruments are carried at their estimated fair
value. Quoted market prices, when available, are used to determine the fair value of trading
instruments. If quoted market prices are not available, then fair values are estimated by using
pricing models, quoted prices of instruments with similar characteristics, or discounted cash
flows.
Federal funds sold and securities purchased under resale agreements
Federal funds sold and securities purchased under resale agreements are typically short-term in
nature and, as such, for a significant majority of the Firms transactions, cost approximates
carrying value. This balance sheet item also includes structured resale agreements and similar
products with long-dated maturities. To estimate the fair value of these instruments, cash flows
are discounted using the appropriate market rates for the applicable maturity.
Securities
Fair values of actively traded securities are determined by the secondary market, while the fair
values for nonactively traded securities are based upon independent broker quotations.
Derivatives
Fair value for derivatives is determined based upon the following:
|
|
position valuation, principally based upon liquid market pricing as evidenced by exchange-traded
prices, broker-dealer quotations or related input parameters, which assume all counterparties have
the same credit rating; |
|
|
|
credit valuation adjustments to the resulting portfolio valuation, to reflect the credit quality
of individual counterparties; and |
|
|
|
other fair value adjustments to take into consideration liquidity, concentration and other
factors. |
For those derivatives valued based upon models with significant unobservable market parameters, the
Firm defers the initial trading profit for these financial instruments. The deferred profit is
recognized in Trading revenue on a systematic basis (typically straight-line amortization over the
life of the instruments) and when observable market data becomes available.
The fair value of derivative payables does not incorporate a valuation adjustment to reflect
JPMorgan Chases credit quality.
Interests in purchased receivables
The fair value of variable-rate interests in purchased receivables approximate their respective
carrying amounts due to their variable interest terms and negligible credit risk. The estimated
fair values for fixed-rate interests in purchased receivables are determined using a discounted
cash flow analysis using appropriate market rates for similar instruments.
Loans
Fair value for loans is determined using methodologies suitable for each type of loan:
|
|
Fair value for the wholesale loan portfolio is estimated primarily, using the cost of credit
derivatives, which is adjusted to account for the differences in recovery rates between bonds, upon
which the cost of credit derivatives is based, and loans. |
|
|
|
Fair values for consumer installment loans (including automobile financings) and consumer real
estate, for which market rates for comparable loans are readily available, are based upon
discounted cash flows adjusted for prepayments. The discount rates used for consumer installment
loans are current rates offered by commercial banks. For consumer real estate, secondary market
yields for comparable mortgage-backed securities, adjusted for risk, are used. |
|
|
|
Fair value for credit card receivables is based upon discounted expected cash flows. The discount
rates used for credit card receivables incorporate only the effects of interest rate changes, since
the expected cash flows already reflect an adjustment for credit risk. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
127 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
|
|
The fair value of loans in the held-for-sale and trading portfolios is generally based upon
observable market prices and upon prices of similar instruments, including bonds, credit
derivatives and loans with similar characteristics. If market prices are not available, the
fair value is based upon the estimated cash flows adjusted for credit risk; that risk is
discounted, using a rate appropriate for each maturity that incorporates the effects of interest
rate changes. |
Other assets
Commodities inventory is carried at the lower of cost or fair value. For the majority of
commodities inventory, fair value is determined by reference to
prices in highly active and
liquid markets. The fair value for other commodities inventory is determined primarily using
pricing and other data derived from less liquid and developing markets where the underlying
commodities are traded. This caption also includes private equity investments and MSRs. For a
discussion of the fair value methodology for private equity investments, see Note 9 on page 105 of
this Annual Report.
For a discussion of the fair value methodology for MSRs, see Note 15 on pages 114116 of this
Annual Report.
Financial liabilities
Liabilities for which fair value approximates carrying value
SFAS 107 requires that the fair value for deposit liabilities with no stated maturity (i.e.,
demand, savings and certain money market deposits) be equal to their carrying value. SFAS 107 does
not allow for the recognition of the inherent funding value of these instruments.
Fair value of commercial paper, other borrowed funds, accounts payable and accrued liabilities is
considered to approximate their respective carrying values due to their short-term nature.
Interest-bearing deposits
Fair values of interest-bearing deposits are estimated by discounting cash flows based upon the
remaining contractual maturities of funds having similar interest rates and similar maturities.
Federal funds purchased and securities sold under repurchase agreements
Federal funds purchased and securities sold under repurchase agreements are typically short-term in
nature; as such, for a significant majority of these transactions, cost approximates carrying
value. This balance sheet item also includes structured repurchase agreements and similar products
with long-dated maturities. To estimate the fair value of these instruments, the cash flows are
discounted using the appropriate market rates for the applicable maturity.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs (beneficial interests) are generally short-term
in nature and, as such, for a significant majority of the Firms transactions, cost approximates
carrying value. The Consolidated balance sheets also include beneficial interests with long-dated
maturities. The fair value of these instruments is based upon current market rates.
Long-term debt-related instruments
Fair value for long-term debt, including the junior subordinated deferrable interest debentures
held by trusts that issued guaranteed capital debt securities, is based upon current market rates
and is adjusted for JPMorgan Chases credit quality.
Lending-related commitments
Although there is no liquid secondary market for wholesale commitments, the Firm estimates the fair
value of its wholesale lending-related commitments primarily using the cost of credit derivatives
(which is adjusted to account for the difference in recovery rates between bonds, upon which the
cost of credit derivatives is based, and loans) and loan equivalents (which represent the portion
of an unused commitment expected, based upon the Firms average portfolio historical experience, to
become outstanding in the event an obligor defaults). The Firm estimates the fair value of its
consumer commitments to extend credit based upon the primary market prices to originate new
commitments. It is the change in current primary market prices that provides the estimate of the
fair value of these commitments. On this basis, at December 31, 2005, the estimated fair value of
the Firms lending-related commitments was a liability of $0.5 billion, compared with $0.1 billion
at December 31, 2004.
The following table presents the carrying value and estimated fair value of financial assets and
liabilities valued under SFAS 107; accordingly, certain assets and liabilities that are not
considered financial instruments are excluded from the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
Carrying |
|
|
Estimated |
|
|
Appreciation/ |
|
|
Carrying |
|
|
Estimated |
|
|
Appreciation/ |
|
December 31, (in billions) |
|
|
value |
|
|
fair value |
|
|
(depreciation) |
|
|
value |
|
|
fair value |
|
|
(depreciation) |
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets for which fair value approximates carrying value |
|
$ |
155.4 |
|
|
$ |
155.4 |
|
|
$ |
|
|
|
$ |
125.7 |
|
|
$ |
125.7 |
|
|
$ |
|
|
Federal funds sold and securities purchased under resale
agreements |
|
|
134.0 |
|
|
|
134.3 |
|
|
|
0.3 |
|
|
|
101.4 |
|
|
|
101.3 |
|
|
|
(0.1 |
) |
Trading assets |
|
|
298.4 |
|
|
|
298.4 |
|
|
|
|
|
|
|
288.8 |
|
|
|
288.8 |
|
|
|
|
|
Securities |
|
|
47.6 |
|
|
|
47.6 |
|
|
|
|
|
|
|
94.5 |
|
|
|
94.5 |
|
|
|
|
|
Loans: |
|
Wholesale, net of allowance for loan losses |
|
|
147.7 |
|
|
|
150.2 |
|
|
|
2.5 |
|
|
|
132.0 |
|
|
|
134.6 |
|
|
|
2.6 |
|
|
|
Consumer, net of allowance for loan losses |
|
|
264.4 |
|
|
|
262.7 |
|
|
|
(1.7 |
) |
|
|
262.8 |
|
|
|
262.5 |
|
|
|
(0.3 |
) |
Interests in purchased receivables |
|
|
29.7 |
|
|
|
29.7 |
|
|
|
|
|
|
|
31.7 |
|
|
|
31.8 |
|
|
|
0.1 |
|
Other assets |
|
|
53.4 |
|
|
|
54.7 |
|
|
|
1.3 |
|
|
|
50.4 |
|
|
|
51.1 |
|
|
|
0.7 |
|
|
Total financial assets |
|
$ |
1,130.6 |
|
|
$ |
1,133.0 |
|
|
$ |
2.4 |
|
|
$ |
1,087.3 |
|
|
$ |
1,090.3 |
|
|
$ |
3.0 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for which fair value approximates carrying value |
|
$ |
241.0 |
|
|
$ |
241.0 |
|
|
$ |
|
|
|
$ |
228.8 |
|
|
$ |
228.8 |
|
|
$ |
|
|
Interest-bearing deposits |
|
|
411.9 |
|
|
|
411.7 |
|
|
|
0.2 |
|
|
|
385.3 |
|
|
|
385.5 |
|
|
|
(0.2 |
) |
Federal funds purchased and securities sold under repurchase
agreements |
|
|
125.9 |
|
|
|
125.9 |
|
|
|
|
|
|
|
127.8 |
|
|
|
127.8 |
|
|
|
|
|
Trading liabilities |
|
|
145.9 |
|
|
|
145.9 |
|
|
|
|
|
|
|
151.2 |
|
|
|
151.2 |
|
|
|
|
|
Beneficial interests issued by consolidated VIEs |
|
|
42.2 |
|
|
|
42.1 |
|
|
|
0.1 |
|
|
|
48.1 |
|
|
|
48.0 |
|
|
|
0.1 |
|
Long-term debt-related instruments |
|
|
119.9 |
|
|
|
120.6 |
|
|
|
(0.7 |
) |
|
|
105.7 |
|
|
|
107.7 |
|
|
|
(2.0 |
) |
|
Total financial liabilities |
|
$ |
1,086.8 |
|
|
$ |
1,087.2 |
|
|
$ |
(0.4 |
) |
|
$ |
1,046.9 |
|
|
$ |
1,049.0 |
|
|
$ |
(2.1 |
) |
|
Net appreciation |
|
|
|
|
|
|
|
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
$ |
0.9 |
|
|
|
|
|
|
|
|
128
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Note 30 International operations
The following table presents income statement information of JPMorgan Chase by major geographic
area. The Firm defines international activities as business transactions that involve customers
residing outside of the United States, and the information presented below is based primarily upon
the domicile of the customer. However, many of the Firms U.S. operations serve international
businesses.
As the Firms operations are highly integrated, estimates and subjective assumptions have been
made to apportion revenue and expense between U.S. and international operations. These estimates
and assumptions are consistent with the allocations used for the Firms segment reporting as set
forth in Note 31 on pages 130-131 of this Annual Report.
The Firms long-lived assets for the periods presented are not considered by management to be
significant in relation to total assets. The majority of the Firms long-lived assets are located
in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before |
|
|
|
|
For the year ended December 31, (in millions)(a) |
|
Revenue |
(b) |
|
Expense |
(c) |
|
income taxes |
|
|
Net income |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Middle East and Africa |
|
$ |
7,708 |
|
|
$ |
5,454 |
|
|
$ |
2,254 |
|
|
$ |
1,547 |
|
Asia and Pacific |
|
|
2,840 |
|
|
|
2,048 |
|
|
|
792 |
|
|
|
509 |
|
Latin America and the Caribbean |
|
|
969 |
|
|
|
497 |
|
|
|
472 |
|
|
|
285 |
|
Other |
|
|
165 |
|
|
|
89 |
|
|
|
76 |
|
|
|
44 |
|
|
Total international |
|
|
11,682 |
|
|
|
8,088 |
|
|
|
3,594 |
|
|
|
2,385 |
|
Total U.S. |
|
|
42,851 |
|
|
|
34,230 |
|
|
|
8,621 |
|
|
|
6,098 |
|
|
Total |
|
$ |
54,533 |
|
|
$ |
42,318 |
|
|
$ |
12,215 |
|
|
$ |
8,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Middle East and Africa |
|
$ |
6,566 |
|
|
$ |
4,635 |
|
|
$ |
1,931 |
|
|
$ |
1,305 |
|
Asia and Pacific |
|
|
2,631 |
|
|
|
1,766 |
|
|
|
865 |
|
|
|
547 |
|
Latin America and the Caribbean |
|
|
816 |
|
|
|
411 |
|
|
|
405 |
|
|
|
255 |
|
Other |
|
|
112 |
|
|
|
77 |
|
|
|
35 |
|
|
|
25 |
|
|
Total international |
|
|
10,125 |
|
|
|
6,889 |
|
|
|
3,236 |
|
|
|
2,132 |
|
Total U.S. |
|
|
32,972 |
|
|
|
30,014 |
|
|
|
2,958 |
|
|
|
2,334 |
|
|
Total |
|
$ |
43,097 |
|
|
$ |
36,903 |
|
|
$ |
6,194 |
|
|
$ |
4,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Middle East and Africa |
|
$ |
6,344 |
|
|
$ |
4,076 |
|
|
$ |
2,268 |
|
|
$ |
1,467 |
|
Asia and Pacific |
|
|
1,902 |
|
|
|
1,772 |
|
|
|
130 |
|
|
|
91 |
|
Latin America and the Caribbean |
|
|
1,000 |
|
|
|
531 |
|
|
|
469 |
|
|
|
287 |
|
Other |
|
|
50 |
|
|
|
17 |
|
|
|
33 |
|
|
|
34 |
|
|
Total international |
|
|
9,296 |
|
|
|
6,396 |
|
|
|
2,900 |
|
|
|
1,879 |
|
Total U.S. |
|
|
24,088 |
|
|
|
16,960 |
|
|
|
7,128 |
|
|
|
4,840 |
|
|
Total |
|
$ |
33,384 |
|
|
$ |
23,356 |
|
|
$ |
10,028 |
|
|
$ |
6,719 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(b) |
|
Revenue is composed of Net interest income and noninterest revenue. |
(c) |
|
Expense is composed of Noninterest expense and Provision for credit losses. |
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
129 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 31 Business segments
JPMorgan Chase is organized into six major reportable business segments (the Investment Bank,
Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and
Asset & Wealth Management), as well as a Corporate segment. The segments are based upon the
products and services provided or the type of customer served, and they reflect the manner in which
financial information is currently evaluated by management. Results of these lines of business are
presented on an operating basis. For a definition of operating basis, see the footnotes to the
table below. For a further discussion concerning JPMorgan Chases business segments, see Business
segment results on pages 34-35 of this Annual Report.
In the third quarter of 2004, in connection with the Merger, business segment reporting was
realigned to reflect the new business structure of the combined Firm. Treasury was transferred from
the Investment Bank into Corporate. The segment formerly known as Chase Financial Services had been
comprised of Chase Home Finance, Chase Cardmember Services, Chase Auto Finance, Chase Regional
Banking and Chase Middle Market; as a result of the Merger, this segment is now called Retail
Financial Services and is comprised of Home Finance, Auto & Education Finance, Consumer & Small
Business Banking and Insurance. Chase Cardmember Services is now its own segment called Card
Services, and Chase Middle Market moved into Commercial Banking.
Investment Management & Private Banking was renamed Asset & Wealth Management. JPMorgan Partners,
which formerly was a stand-alone business segment, was moved into Corporate. Corporate currently comprises Private
Equity (JPMorgan Partners and ONE Equity Partners) and Treasury, and the
Segment results and reconciliation(a) (table continued on next page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,(b) |
|
Investment Bank(d) |
|
|
Retail Financial Services |
|
|
Card Services(e) |
|
|
Commercial Banking |
(in millions, except ratios) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
13,168 |
|
|
$ |
11,280 |
|
|
$ |
11,017 |
|
|
$ |
4,625 |
|
|
$ |
3,077 |
|
|
$ |
2,208 |
|
|
$ |
3,563 |
|
|
$ |
2,371 |
|
|
$ |
1,092 |
|
|
$ |
986 |
|
|
$ |
682 |
|
|
$ |
393 |
|
Net interest income |
|
|
1,410 |
|
|
|
1,325 |
|
|
|
1,667 |
|
|
|
10,205 |
|
|
|
7,714 |
|
|
|
5,220 |
|
|
|
11,803 |
|
|
|
8,374 |
|
|
|
5,052 |
|
|
|
2,610 |
|
|
|
1,692 |
|
|
|
959 |
|
|
Total net revenue |
|
|
14,578 |
|
|
|
12,605 |
|
|
|
12,684 |
|
|
|
14,830 |
|
|
|
10,791 |
|
|
|
7,428 |
|
|
|
15,366 |
|
|
|
10,745 |
|
|
|
6,144 |
|
|
|
3,596 |
|
|
|
2,374 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(838 |
) |
|
|
(640 |
) |
|
|
(181 |
) |
|
|
724 |
|
|
|
449 |
|
|
|
521 |
|
|
|
7,346 |
|
|
|
4,851 |
|
|
|
2,904 |
|
|
|
73 |
|
|
|
41 |
|
|
|
6 |
|
Credit reimbursement
(to)/from TSS(c) |
|
|
154 |
|
|
|
90 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation reserve charge |
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noninterest expense |
|
|
9,739 |
|
|
|
8,696 |
|
|
|
8,202 |
|
|
|
8,585 |
|
|
|
6,825 |
|
|
|
4,471 |
|
|
|
4,999 |
|
|
|
3,883 |
|
|
|
2,178 |
|
|
|
1,872 |
|
|
|
1,343 |
|
|
|
822 |
|
|
Total noninterest expense |
|
|
9,739 |
|
|
|
8,696 |
|
|
|
8,302 |
|
|
|
8,585 |
|
|
|
6,825 |
|
|
|
4,471 |
|
|
|
4,999 |
|
|
|
3,883 |
|
|
|
2,178 |
|
|
|
1,872 |
|
|
|
1,343 |
|
|
|
822 |
|
|
Income (loss) before
income tax expense |
|
|
5,831 |
|
|
|
4,639 |
|
|
|
4,527 |
|
|
|
5,521 |
|
|
|
3,517 |
|
|
|
2,436 |
|
|
|
3,021 |
|
|
|
2,011 |
|
|
|
1,062 |
|
|
|
1,651 |
|
|
|
990 |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
2,173 |
|
|
|
1,691 |
|
|
|
1,722 |
|
|
|
2,094 |
|
|
|
1,318 |
|
|
|
889 |
|
|
|
1,114 |
|
|
|
737 |
|
|
|
379 |
|
|
|
644 |
|
|
|
382 |
|
|
|
217 |
|
|
Net income (loss) |
|
$ |
3,658 |
|
|
$ |
2,948 |
|
|
$ |
2,805 |
|
|
$ |
3,427 |
|
|
$ |
2,199 |
|
|
$ |
1,547 |
|
|
$ |
1,907 |
|
|
$ |
1,274 |
|
|
$ |
683 |
|
|
$ |
1,007 |
|
|
$ |
608 |
|
|
$ |
307 |
|
|
Average equity |
|
$ |
20,000 |
|
|
$ |
17,290 |
|
|
$ |
18,350 |
|
|
$ |
13,383 |
|
|
$ |
9,092 |
|
|
$ |
4,220 |
|
|
$ |
11,800 |
|
|
$ |
7,608 |
|
|
$ |
3,440 |
|
|
$ |
3,400 |
|
|
$ |
2,093 |
|
|
$ |
1,059 |
|
Average assets |
|
|
598,118 |
|
|
|
473,121 |
|
|
|
436,488 |
|
|
|
226,368 |
|
|
|
185,928 |
|
|
|
147,435 |
|
|
|
141,933 |
|
|
|
94,741 |
|
|
|
51,406 |
|
|
|
56,561 |
|
|
|
36,435 |
|
|
|
16,460 |
|
Return on average equity |
|
|
18 |
% |
|
|
17 |
% |
|
|
15 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
|
37 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
|
20 |
% |
|
|
30 |
% |
|
|
29 |
% |
|
|
29 |
% |
Overhead ratio |
|
|
67 |
|
|
|
69 |
|
|
|
65 |
|
|
|
58 |
|
|
|
63 |
|
|
|
60 |
|
|
|
33 |
|
|
|
36 |
|
|
|
35 |
|
|
|
52 |
|
|
|
57 |
|
|
|
61 |
|
|
|
|
|
(a) |
|
In addition to analyzing the Firms results on a reported basis, management reviews the
line of business results on an operating basis, which is a non-GAAP financial measure. The
definition of operating basis starts with the reported U.S. GAAP results. In the case of the
Investment Bank, operating basis noninterest revenue includes, in Trading revenue, Net interest
income (NII) related to trading activities. In the case of Card Services, refer to footnote (e).
These adjustments do not change JPMorgan Chases reported net income. Operating basis also excludes
Merger costs, nonoperating Litigation reserve charges and accounting policy conformity adjustments,
as management believes these items are not part of the Firms normal daily business operations
(and, therefore, not indicative of trends) and do not provide meaningful comparisons with other
periods. Finally, operating results reflect revenues (Noninterest revenue and NII) on a
tax-equivalent basis. Refer to footnote (f) for the impact of these adjustments. |
(b) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. |
(c) |
|
TSS reimburses the IB for credit portfolio exposures the IB manages on behalf of clients the
segments share. At the time of the Merger, the reimbursement methodology was revised to be based
upon pre-tax earnings, net of the cost of capital related to those exposures. Prior to the Merger,
the credit reimbursement was based upon pre-tax earnings, plus the allocated capital associated
with the shared clients. |
(d) |
|
Segment operating results include the reclassification of NII related
to trading activities to Trading revenue within Noninterest revenue, which impacts primarily the
Investment Bank. Trading-related NII reclassified to Trading revenue was $159 million, $2.0 billion
and $2.1 billion in 2005, 2004 and 2003, respectively. These amounts are eliminated in
Corporate/reconciling items to arrive at NII and Noninterest revenue on a reported GAAP basis for
JPMorgan Chase. |
(e) |
|
Operating results for Card Services exclude the impact of credit card securitizations on
revenue, provision for credit losses and average assets, as JPMorgan Chase treats the sold
receivables as if they were still on the balance sheet in evaluating the overall performance of the
credit card portfolio. These adjustments are eliminated in Corporate/reconciling items to arrive at
the Firms reported GAAP results. The related securitization adjustments were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net interest income |
|
|
$ 6,494 |
|
|
|
$ 5,251 |
|
|
|
$ 3,320 |
|
Noninterest revenue |
|
|
(2,718 |
) |
|
|
(2,353 |
) |
|
|
(1,450 |
) |
Provision for credit losses |
|
|
3,776 |
|
|
|
2,898 |
|
|
|
1,870 |
|
Average assets |
|
|
67,180 |
|
|
|
51,084 |
|
|
|
32,365 |
|
|
|
|
|
|
|
|
130
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
corporate support areas, which include Central Technology and Operations, Audit, Executive
Office, Finance, Human Resources, Marketing & Communications, Office of the General Counsel,
Corporate Real Estate and General Services, Risk Management, and Strategy and Development.
Beginning January 1, 2006, TSS will report results for two divisions: TS and WSS. WSS was formed by
consolidating IS and ITS.
The following table provides a summary of the Firms segment results for 2005, 2004 and 2003 on an
operating basis. The impact of credit card securitizations, Merger costs, nonoperating Litigation
reserve charges and accounting policy conformity adjustments have been included in
Corporate/reconciling items so that the total Firm results are on a reported basis. Finally,
commencing with the first quarter of 2005, operating revenue (noninterest revenue and net interest
income) for each of the segments and the Firm is presented on a tax-equivalent basis. Accordingly,
revenue from tax exempt securities and investments that receive tax credits are presented in the
operating results on a basis comparable to taxable securities and investments. This approach allows
management to assess the comparability of revenues arising from both taxable and tax-exempt
sources. The corresponding income tax impact related to these items is recorded within income tax
expense. The Corporate sectors and the Firms operating revenue and income tax expense for the
periods prior to the first quarter of 2005 have been restated to be presented similarly on a
tax-equivalent basis. This restatement had no impact on the Corporate sectors or the Firms
operating earnings. Segment results for periods prior to July 1, 2004, reflect heritage JPMorgan
Chase-only results and have been restated to reflect the current business segment organization and
reporting classifications.
(table continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/ |
|
|
|
|
Treasury & Securities Services |
|
|
Asset & Wealth Management |
|
|
reconciling items(d)(e)(f) |
|
|
Total |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
$ |
4,179 |
|
|
$ |
3,474 |
|
|
$ |
2,661 |
|
|
$ |
4,583 |
|
|
$ |
3,383 |
|
|
$ |
2,482 |
|
|
$ |
3,598 |
|
|
$ |
2,069 |
|
|
$ |
566 |
|
|
$ |
34,702 |
|
|
$ |
26,336 |
|
|
$ |
20,419 |
|
|
|
|
2,062 |
|
|
|
1,383 |
|
|
|
947 |
|
|
|
1,081 |
|
|
|
796 |
|
|
|
488 |
|
|
|
(9,340 |
) |
|
|
(4,523 |
) |
|
|
(1,368 |
) |
|
|
19,831 |
|
|
|
16,761 |
|
|
|
12,965 |
|
|
|
|
|
6,241 |
|
|
|
4,857 |
|
|
|
3,608 |
|
|
|
5,664 |
|
|
|
4,179 |
|
|
|
2,970 |
|
|
|
(5,742 |
) |
|
|
(2,454 |
) |
|
|
(802 |
) |
|
|
54,533 |
|
|
|
43,097 |
|
|
|
33,384 |
|
|
|
|
|
|
|
|
|
7 |
|
|
|
1 |
|
|
|
(56 |
) |
|
|
(14 |
) |
|
|
35 |
|
|
|
(3,766 |
) |
|
|
(2,150 |
)(g) |
|
|
(1,746 |
) |
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
|
|
(154 |
) |
|
|
(90 |
) |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722 |
(h) |
|
|
1,365 |
(h) |
|
|
|
|
|
|
722 |
|
|
|
1,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,564 |
|
|
|
3,700 |
|
|
|
|
|
|
|
2,564 |
|
|
|
3,700 |
|
|
|
100 |
|
|
|
|
4,470 |
|
|
|
4,113 |
|
|
|
3,028 |
|
|
|
3,860 |
|
|
|
3,133 |
|
|
|
2,486 |
|
|
|
2,024 |
|
|
|
1,301 |
|
|
|
529 |
|
|
|
35,549 |
|
|
|
29,294 |
|
|
|
21,716 |
|
|
|
|
|
4,470 |
|
|
|
4,113 |
|
|
|
3,028 |
|
|
|
3,860 |
|
|
|
3,133 |
|
|
|
2,486 |
|
|
|
5,310 |
|
|
|
6,366 |
|
|
|
529 |
|
|
|
38,835 |
|
|
|
34,359 |
|
|
|
21,816 |
|
|
|
|
|
1,617 |
|
|
|
647 |
|
|
|
615 |
|
|
|
1,860 |
|
|
|
1,060 |
|
|
|
449 |
|
|
|
(7,286 |
) |
|
|
(6,670 |
) |
|
|
415 |
|
|
|
12,215 |
|
|
|
6,194 |
|
|
|
10,028 |
|
|
|
|
580 |
|
|
|
207 |
|
|
|
193 |
|
|
|
644 |
|
|
|
379 |
|
|
|
162 |
|
|
|
(3,517 |
) |
|
|
(2,986 |
) |
|
|
(253 |
) |
|
|
3,732 |
|
|
|
1,728 |
|
|
|
3,309 |
|
|
|
|
$ |
1,037 |
|
|
$ |
440 |
|
|
$ |
422 |
|
|
$ |
1,216 |
|
|
$ |
681 |
|
|
$ |
287 |
|
|
$ |
(3,769 |
) |
|
$ |
(3,684 |
) |
|
$ |
668 |
|
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
|
|
$ |
1,900 |
|
|
$ |
2,544 |
|
|
$ |
2,738 |
|
|
$ |
2,400 |
|
|
$ |
3,902 |
|
|
|
$5,507 |
|
|
|
$52,624 |
|
|
$ |
33,112 |
|
|
$ |
7,674 |
|
|
|
$105,507 |
|
|
|
$75,641 |
|
|
|
$42,988 |
|
|
|
|
26,947 |
|
|
|
23,430 |
|
|
|
18,379 |
|
|
|
41,599 |
|
|
|
37,751 |
|
|
|
33,780 |
|
|
|
93,540 |
|
|
|
111,150 |
|
|
|
72,030 |
|
|
|
1,185,066 |
|
|
|
962,556 |
|
|
|
775,978 |
|
|
|
|
55 |
% |
|
|
17 |
% |
|
|
15 |
% |
|
|
51 |
% |
|
|
17 |
% |
|
|
5 |
% |
|
NM |
|
|
NM |
|
|
NM |
|
|
|
8 |
% |
|
|
6 |
% |
|
|
16 |
% |
|
|
|
72 |
|
|
|
85 |
|
|
|
84 |
|
|
|
68 |
|
|
|
75 |
|
|
|
84 |
|
|
NM |
|
|
NM |
|
|
NM |
|
|
|
71 |
|
|
|
80 |
|
|
|
65 |
|
|
|
|
|
(f) |
|
Segment operating results reflect revenues on a tax-equivalent basis with the corresponding income tax impact recorded within income tax expense. Tax-equivalent adjustments were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net interest income |
|
$ |
269 |
|
|
$ |
6 |
|
|
$ |
44 |
|
Noninterest revenue |
|
|
571 |
|
|
|
317 |
|
|
|
89 |
|
Income tax expense |
|
|
840 |
|
|
|
323 |
|
|
|
133 |
|
|
|
|
|
|
|
These adjustments are eliminated in Corporate/reconciling items to arrive at the Firms reported GAAP results.
|
|
(g) |
|
Includes $858 million of accounting policy conformity adjustments consisting of approximately
$1.4 billion related to the decertification of the sellers retained interest in credit card
securitizations, partially offset by a benefit of $584 million related to conforming wholesale and
consumer provision methodologies for the combined Firm. |
(h) |
|
Merger costs attributed to the lines of business for 2005 and 2004 were as follows (there were
no merger costs in 2003): |
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(b) |
|
2005 |
|
|
2004 |
|
|
Investment Bank |
|
$ |
32 |
|
|
$ |
74 |
|
Retail Financial Services |
|
|
133 |
|
|
|
201 |
|
Card Services |
|
|
222 |
|
|
|
79 |
|
Commercial Banking |
|
|
3 |
|
|
|
23 |
|
Treasury & Securities Services |
|
|
95 |
|
|
|
68 |
|
Asset & Wealth Management Services |
|
|
60 |
|
|
|
31 |
|
Corporate |
|
|
177 |
|
|
|
889 |
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
131 |
Notes to consolidated financial statements
JPMorgan Chase & Co.
Note 32 - Parent company
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company statements of income |
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from bank and bank
holding company subsidiaries |
|
$ |
2,361 |
|
|
$ |
1,208 |
|
|
$ |
2,436 |
|
Dividends from nonbank subsidiaries(b) |
|
|
791 |
|
|
|
773 |
|
|
|
2,688 |
|
Interest income from subsidiaries |
|
|
2,369 |
|
|
|
1,370 |
|
|
|
945 |
|
Other interest income |
|
|
209 |
|
|
|
137 |
|
|
|
130 |
|
Other income from subsidiaries, primarily fees: |
|
|
|
|
|
|
|
|
|
|
|
|
Bank and bank holding company |
|
|
246 |
|
|
|
833 |
|
|
|
632 |
|
Nonbank |
|
|
462 |
|
|
|
499 |
|
|
|
385 |
|
Other income |
|
|
13 |
|
|
|
204 |
|
|
|
(25 |
) |
|
Total income |
|
|
6,451 |
|
|
|
5,024 |
|
|
|
7,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense to subsidiaries(b) |
|
|
846 |
|
|
|
603 |
|
|
|
422 |
|
Other interest expense |
|
|
3,076 |
|
|
|
1,834 |
|
|
|
1,329 |
|
Compensation expense |
|
|
369 |
|
|
|
353 |
|
|
|
348 |
|
Other noninterest expense |
|
|
496 |
|
|
|
1,105 |
|
|
|
747 |
|
|
Total expense |
|
|
4,787 |
|
|
|
3,895 |
|
|
|
2,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit and
undistributed net income of subsidiaries |
|
|
1,664 |
|
|
|
1,129 |
|
|
|
4,345 |
|
Income tax benefit |
|
|
852 |
|
|
|
556 |
|
|
|
474 |
|
Equity in undistributed net income (loss)
of subsidiaries |
|
|
5,967 |
|
|
|
2,781 |
|
|
|
1,900 |
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
|
|
|
|
|
|
|
|
|
Parent company balance sheets |
|
|
|
|
|
|
December 31, (in millions) |
|
2005 |
|
|
2004 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash with banks, primarily with bank subsidiaries |
|
$ |
461 |
|
|
$ |
513 |
|
Deposits with banking subsidiaries |
|
|
9,452 |
|
|
|
10,703 |
|
Securities purchased under resale agreements,
primarily with nonbank subsidiaries |
|
|
24 |
|
|
|
|
|
Trading assets |
|
|
7,548 |
|
|
|
3,606 |
|
Available-for-sale securities |
|
|
285 |
|
|
|
2,376 |
|
Loans |
|
|
338 |
|
|
|
162 |
|
Advances to, and receivables from, subsidiaries: |
|
|
|
|
|
|
|
|
Bank and bank holding company |
|
|
22,673 |
|
|
|
19,076 |
|
Nonbank |
|
|
31,342 |
|
|
|
34,456 |
|
Investment (at equity) in subsidiaries: |
|
|
|
|
|
|
|
|
Bank and bank holding company |
|
|
110,745 |
|
|
|
105,599 |
|
Nonbank(b) |
|
|
21,367 |
|
|
|
17,701 |
|
Goodwill and other intangibles |
|
|
804 |
|
|
|
890 |
|
Other assets |
|
|
10,553 |
|
|
|
11,557 |
|
|
Total assets |
|
$ |
215,592 |
|
|
$ |
206,639 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
Borrowings from, and payables to, subsidiaries(b) |
|
$ |
16,511 |
|
|
$ |
14,195 |
|
Other borrowed funds, primarily commercial paper |
|
|
15,675 |
|
|
|
15,050 |
|
Other liabilities |
|
|
7,721 |
|
|
|
6,309 |
|
Long-term debt(c) |
|
|
68,474 |
|
|
|
65,432 |
|
|
Total liabilities |
|
|
108,381 |
|
|
|
100,986 |
|
Stockholders equity |
|
|
107,211 |
|
|
|
105,653 |
|
|
Total liabilities and stockholders equity |
|
$ |
215,592 |
|
|
$ |
206,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company - statements of cash flows |
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions)(a) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
Less: Net income of subsidiaries |
|
|
9,119 |
|
|
|
4,762 |
|
|
|
7,017 |
|
|
Parent company net loss |
|
|
(636 |
) |
|
|
(296 |
) |
|
|
(298 |
) |
Add: Cash dividends from subsidiaries(b) |
|
|
2,891 |
|
|
|
1,964 |
|
|
|
5,098 |
|
Other, net |
|
|
(130 |
) |
|
|
(81 |
) |
|
|
(272 |
) |
|
Net cash provided by operating activities |
|
|
2,125 |
|
|
|
1,587 |
|
|
|
4,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with banking subsidiaries |
|
|
1,251 |
|
|
|
1,851 |
|
|
|
(2,560 |
) |
Securities purchased under resale agreements,
primarily with nonbank subsidiaries |
|
|
(24 |
) |
|
|
355 |
|
|
|
99 |
|
Loans |
|
|
(176 |
) |
|
|
407 |
|
|
|
(490 |
) |
Advances to subsidiaries |
|
|
(483 |
) |
|
|
(5,772 |
) |
|
|
(3,165 |
) |
Investment (at equity) in subsidiaries |
|
|
(2,949 |
) |
|
|
(4,015 |
) |
|
|
(2,052 |
) |
Other, net |
|
|
34 |
|
|
|
11 |
|
|
|
12 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(215 |
) |
|
|
(392 |
) |
|
|
(607 |
) |
Proceeds from sales and maturities |
|
|
124 |
|
|
|
114 |
|
|
|
654 |
|
Cash received in business acquisitions |
|
|
|
|
|
|
4,608 |
|
|
|
|
|
|
Net cash (used in) provided by
investing activities |
|
|
(2,438 |
) |
|
|
(2,833 |
) |
|
|
(8,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash change in borrowings
from subsidiaries(b) |
|
|
2,316 |
|
|
|
941 |
|
|
|
2,005 |
|
Net cash change in other borrowed funds |
|
|
625 |
|
|
|
(1,510 |
) |
|
|
(2,104 |
) |
Proceeds from the issuance of
long-term debt |
|
|
15,992 |
|
|
|
12,816 |
|
|
|
12,105 |
|
Repayments of long-term debt |
|
|
(10,864 |
) |
|
|
(6,149 |
) |
|
|
(6,733 |
) |
Proceeds from the issuance of stock
and stock-related awards |
|
|
682 |
|
|
|
848 |
|
|
|
1,213 |
|
Redemption of preferred stock |
|
|
(200 |
) |
|
|
(670 |
) |
|
|
|
|
Treasury stock purchased |
|
|
(3,412 |
) |
|
|
(738 |
) |
|
|
|
|
Cash dividends paid |
|
|
(4,878 |
) |
|
|
(3,927 |
) |
|
|
(2,865 |
) |
|
Net cash provided by (used in)
financing activities |
|
|
261 |
|
|
|
1,611 |
|
|
|
3,621 |
|
|
Net increase (decrease) in cash with banks |
|
|
(52 |
) |
|
|
365 |
|
|
|
40 |
|
Cash with banks
at the beginning of the year |
|
|
513 |
|
|
|
148 |
|
|
|
108 |
|
|
Cash with banks at the end of
the year, primarily with bank subsidiaries |
|
$ |
461 |
|
|
$ |
513 |
|
|
$ |
148 |
|
|
Cash interest paid |
|
$ |
3,838 |
|
|
$ |
2,383 |
|
|
$ |
1,918 |
|
Cash income taxes paid |
|
$ |
3,426 |
|
|
$ |
701 |
|
|
$ |
754 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only. For a further
discussion of the Merger, see Note 2 on pages 9293 of this Annual Report. |
(b) |
|
Subsidiaries include trusts that issued guaranteed capital debt securities (issuer trusts).
As a result of FIN 46, the Parent deconsolidated these trusts in 2003. The Parent received
dividends of $21 million and $15 million from the issuer trusts in 2005 and 2004, respectively. For
a further discussion on these issuer trusts, see Note 17 on pages
117118 of this Annual Report. |
(c) |
|
At December 31, 2005, debt that contractually matures in 2006 through 2010 totaled $10.3
billion, $9.5 billion, $11.9 billion, $8.8 billion and $3.8 billion, respectively. |
|
|
|
|
|
|
132
|
|
JPMorgan Chase & Co. / 2005 Annual Report |
Supplementary information
Selected quarterly financial data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share, ratio and headcount data) |
|
|
2005(f) |
|
|
2004 |
As of or for the period ended |
|
|
|
|
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
4th(f) |
|
|
3rd(f) |
|
|
2nd(h) |
|
|
1st(h) |
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest revenue |
|
$ |
8,925 |
|
|
$ |
9,613 |
|
|
$ |
7,742 |
|
|
$ |
8,422 |
|
|
$ |
7,621 |
|
|
$ |
7,053 |
|
|
$ |
5,637 |
|
|
$ |
6,025 |
|
Net interest income |
|
|
4,753 |
|
|
|
4,852 |
|
|
|
5,001 |
|
|
|
5,225 |
|
|
|
5,329 |
|
|
|
5,452 |
|
|
|
2,994 |
|
|
|
2,986 |
|
|
Total net revenue |
|
|
13,678 |
|
|
|
14,465 |
|
|
|
12,743 |
|
|
|
13,647 |
|
|
|
12,950 |
|
|
|
12,505 |
|
|
|
8,631 |
|
|
|
9,011 |
|
Provision for credit losses |
|
|
1,224 |
|
|
|
1,245 |
(g) |
|
|
587 |
|
|
|
427 |
|
|
|
1,157 |
|
|
|
1,169 |
|
|
|
203 |
|
|
|
15 |
|
Noninterest expense before Merger costs
and Litigation reserve charge |
|
|
8,666 |
|
|
|
9,243 |
|
|
|
8,748 |
|
|
|
8,892 |
|
|
|
8,863 |
|
|
|
8,625 |
|
|
|
5,713 |
|
|
|
6,093 |
|
Merger costs |
|
|
77 |
|
|
|
221 |
|
|
|
279 |
|
|
|
145 |
|
|
|
523 |
|
|
|
752 |
|
|
|
90 |
|
|
|
|
|
Litigation reserve charge |
|
|
(208 |
) |
|
|
|
|
|
|
1,872 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
3,700 |
|
|
|
|
|
|
Total noninterest expense |
|
|
8,535 |
|
|
|
9,464 |
|
|
|
10,899 |
|
|
|
9,937 |
|
|
|
9,386 |
|
|
|
9,377 |
|
|
|
9,503 |
|
|
|
6,093 |
|
|
Income (loss) before income tax expense (benefit) |
|
|
3,919 |
|
|
|
3,756 |
|
|
|
1,257 |
|
|
|
3,283 |
|
|
|
2,407 |
|
|
|
1,959 |
|
|
|
(1,075 |
) |
|
|
2,903 |
|
Income tax expense (benefit) |
|
|
1,221 |
|
|
|
1,229 |
|
|
|
263 |
|
|
|
1,019 |
|
|
|
741 |
|
|
|
541 |
|
|
|
(527 |
) |
|
|
973 |
|
|
Net income (loss) |
|
|
$ |
2,698 |
|
|
$ |
2,527 |
|
|
$ |
994 |
|
|
$ |
2,264 |
|
|
$ |
1,666 |
|
|
$ |
1,418 |
|
|
$ |
(548 |
) |
|
$ |
1,930 |
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share: Basic |
|
|
|
|
|
$ |
0.78 |
|
|
$ |
0.72 |
|
|
$ |
0.28 |
|
|
$ |
0.64 |
|
|
$ |
0.47 |
|
|
$ |
0.40 |
|
|
$ |
(0.27 |
) |
|
$ |
0.94 |
|
Diluted |
|
|
|
|
|
|
0.76 |
|
|
|
0.71 |
|
|
|
0.28 |
|
|
|
0.63 |
|
|
|
0.46 |
|
|
|
0.39 |
|
|
|
(0.27 |
) |
|
|
0.92 |
|
Cash dividends declared per share |
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
Book value per share |
|
|
30.71 |
|
|
|
30.26 |
|
|
|
29.95 |
|
|
|
29.78 |
|
|
|
29.61 |
|
|
|
29.42 |
|
|
|
21.52 |
|
|
|
22.62 |
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average: Basic |
|
|
|
|
|
|
3,472 |
|
|
|
3,485 |
|
|
|
3,493 |
|
|
|
3,518 |
|
|
|
3,515 |
|
|
|
3,514 |
|
|
|
2,043 |
|
|
|
2,032 |
|
Diluted |
|
|
|
|
|
|
3,564 |
|
|
|
3,548 |
|
|
|
3,548 |
|
|
|
3,570 |
|
|
|
3,602 |
|
|
|
3,592 |
|
|
|
2,043 |
|
|
|
2,093 |
|
Common shares at period end |
|
|
3,487 |
|
|
|
3,503 |
|
|
|
3,514 |
|
|
|
3,525 |
|
|
|
3,556 |
|
|
|
3,564 |
|
|
|
2,088 |
|
|
|
2,082 |
|
Selected ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on common equity (ROE)(a) |
|
|
10 |
% |
|
|
9 |
% |
|
|
4 |
% |
|
|
9 |
% |
|
|
6 |
% |
|
|
5 |
% |
|
NM
|
|
|
17 |
% |
Return on assets (ROA)(a)(b) |
|
|
0.89 |
|
|
|
0.84 |
|
|
|
0.34 |
|
|
|
0.79 |
|
|
|
0.57 |
|
|
|
0.50 |
|
|
NM
|
|
|
1.01 |
|
Tier 1 capital ratio |
|
|
8.5 |
|
|
|
8.2 |
|
|
|
8.2 |
|
|
|
8.6 |
|
|
|
8.7 |
|
|
|
8.6 |
|
|
|
8.2 |
% |
|
|
8.4 |
|
Total capital ratio |
|
|
12.0 |
|
|
|
11.3 |
|
|
|
11.3 |
|
|
|
11.9 |
|
|
|
12.2 |
|
|
|
12.0 |
|
|
|
11.2 |
|
|
|
11.4 |
|
Tier 1 leverage ratio |
|
|
6.3 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
6.3 |
|
|
|
6.2 |
|
|
|
6.5 |
|
|
|
5.5 |
|
|
|
5.9 |
|
Selected balance sheet data (period-end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,198,942 |
|
|
$ |
1,203,033 |
|
|
$ |
1,171,283 |
|
|
$ |
1,178,305 |
|
|
$ |
1,157,248 |
|
|
$ |
1,138,469 |
|
|
$ |
817,763 |
|
|
$ |
801,078 |
|
Securities |
|
|
47,600 |
|
|
|
68,697 |
|
|
|
58,573 |
|
|
|
75,251 |
|
|
|
94,512 |
|
|
|
92,816 |
|
|
|
64,915 |
|
|
|
70,747 |
|
Total loans |
|
|
419,148 |
|
|
|
420,504 |
|
|
|
416,025 |
|
|
|
402,669 |
|
|
|
402,114 |
|
|
|
393,701 |
|
|
|
225,938 |
|
|
|
217,630 |
|
Deposits |
|
|
554,991 |
|
|
|
535,123 |
|
|
|
534,640 |
|
|
|
531,379 |
|
|
|
521,456 |
|
|
|
496,454 |
|
|
|
346,539 |
|
|
|
336,886 |
|
Long-term debt |
|
|
108,357 |
|
|
|
101,853 |
|
|
|
101,182 |
|
|
|
99,329 |
|
|
|
95,422 |
|
|
|
91,754 |
|
|
|
52,981 |
|
|
|
50,062 |
|
Common stockholders equity |
|
|
107,072 |
|
|
|
105,996 |
|
|
|
105,246 |
|
|
|
105,001 |
|
|
|
105,314 |
|
|
|
104,844 |
|
|
|
44,932 |
|
|
|
47,092 |
|
Total stockholders equity |
|
|
107,211 |
|
|
|
106,135 |
|
|
|
105,385 |
|
|
|
105,340 |
|
|
|
105,653 |
|
|
|
105,853 |
|
|
|
45,941 |
|
|
|
48,101 |
|
Credit quality metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
7,490 |
|
|
$ |
7,615 |
|
|
$ |
7,233 |
|
|
$ |
7,423 |
|
|
$ |
7,812 |
|
|
$ |
8,034 |
|
|
$ |
4,227 |
|
|
$ |
4,417 |
|
Nonperforming assets(c) |
|
|
2,590 |
|
|
|
2,839 |
|
|
|
2,832 |
|
|
|
2,949 |
|
|
|
3,231 |
|
|
|
3,637 |
|
|
|
2,482 |
|
|
|
2,882 |
|
Allowance for loan losses to total loans(d) |
|
|
1.84 |
% |
|
|
1.86 |
% |
|
|
1.76 |
% |
|
|
1.82 |
% |
|
|
1.94 |
% |
|
|
2.01 |
% |
|
|
1.92 |
% |
|
|
2.08 |
% |
Net charge-offs |
|
$ |
1,360 |
|
|
$ |
870 |
|
|
$ |
773 |
|
|
$ |
816 |
|
|
$ |
1,398 |
|
|
$ |
865 |
|
|
$ |
392 |
|
|
$ |
444 |
|
Net charge-off rate(a)(d) |
|
|
1.39 |
% |
|
|
0.89 |
% |
|
|
0.82 |
% |
|
|
0.88 |
% |
|
|
1.46 |
% |
|
|
0.93 |
% |
|
|
0.78 |
% |
|
|
0.92 |
% |
Wholesale net charge-off (recovery) rate(a)(d) |
|
|
0.07 |
|
|
|
(0.12 |
) |
|
|
(0.16 |
) |
|
|
(0.03 |
) |
|
|
0.21 |
|
|
|
(0.07 |
) |
|
|
0.29 |
|
|
|
0.50 |
|
Managed Card net charge-off rate(a) |
|
|
6.39 |
|
|
|
4.70 |
|
|
|
4.87 |
|
|
|
4.83 |
|
|
|
5.24 |
|
|
|
4.88 |
|
|
|
5.85 |
|
|
|
5.81 |
|
Headcount |
|
|
168,847 |
|
|
|
168,955 |
|
|
|
168,708 |
|
|
|
164,381 |
|
|
|
160,968 |
|
|
|
162,275 |
|
|
|
94,615 |
|
|
|
96,010 |
|
Share price(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
40.56 |
|
|
$ |
35.95 |
|
|
$ |
36.50 |
|
|
$ |
39.69 |
|
|
$ |
40.45 |
|
|
$ |
40.25 |
|
|
$ |
42.57 |
|
|
$ |
43.84 |
|
Low |
|
|
32.92 |
|
|
|
33.31 |
|
|
|
33.35 |
|
|
|
34.32 |
|
|
|
36.32 |
|
|
|
35.50 |
|
|
|
34.62 |
|
|
|
36.30 |
|
Close |
|
|
39.69 |
|
|
|
33.93 |
|
|
|
35.32 |
|
|
|
34.60 |
|
|
|
39.01 |
|
|
|
39.73 |
|
|
|
38.77 |
|
|
|
41.95 |
|
|
|
|
|
(a) |
|
Based upon annualized amounts. |
(b) |
|
Represents Net income divided by Total average assets. |
(c) |
|
Excludes wholesale purchased held-for-sale (HFS) loans purchased as part of the Investment
Banks proprietary activities. |
(d) |
|
Excluded from the allowance coverage ratios were end-of-period loans held-for-sale; and
excluded from the net charge-off rates were average loans held-for-sale. |
(e) |
|
JPMorgan Chases common stock is listed and traded on the New York Stock Exchange, the London
Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan
Chases common stock are from The New York Stock Exchange Composite Transaction Tape. |
(f) |
|
Quarterly results include three months of the combined Firms results. |
(g) |
|
Includes a $400 million special provision related to Hurricane Katrina allocated as follows:
Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35 million,
Asset & Wealth Management $3 million and Corporate $12 million. |
(h) |
|
Heritage JPMorgan Chase results only. |
NM - Not meaningful due to net loss.
|
|
|
|
|
|
JPMorgan Chase & Co. / 2005 Annual Report
|
|
133 |
Glossary of terms
JPMorgan Chase & Co.
ACH: Automated Clearing House.
APB: Accounting Principles Board Opinion.
APB 25: Accounting for Stock Issued to Employees.
Assets under management: Represent assets actively managed by Asset & Wealth Management on behalf
of institutional, private banking, private client services and retail clients. Excludes assets
managed by American Century Companies, Inc., in which the Firm has a 43% ownership interest.
Assets under supervision: Represent assets under management as well as custody, brokerage,
administration and deposit accounts.
Average managed assets: Refers to total assets on the Firms balance sheet plus credit card
receivables that have been securitized.
Contractual credit card charge-off: In accordance with the Federal Financial Institutions
Examination Council policy, credit card loans are charged off by the end of the month in which the
account becomes 180 days past due or within 60 days from receiving notification of the filing of
bankruptcy, whichever is earlier.
Core deposits: U.S. deposits insured by the Federal Deposit Insurance Corporation, up to the legal
limit of $100,000 per depositor.
Credit derivatives are contractual agreements that provide protection against a credit event of one
or more referenced credits. The nature of a credit event is established by the protection buyer and
protection seller at the inception of a transaction, and such events
include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the
credit derivative pays a periodic fee in return for a payment by the protection seller upon the
occurrence, if any, of a credit event.
Credit cycle: a period of time over which credit quality improves, deteriorates and then improves
again. While portfolios may differ in terms of risk, the credit cycle is typically driven by many
factors, including market events and the economy. The duration of a credit cycle can vary from a
couple of years to several years.
FASB: Financial Accounting Standards Board.
FIN 39: FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.
FIN 41: FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements.
FIN 45: FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirement for
Guarantees, including Indirect Guarantees of Indebtedness of Others.
FIN 46R: FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No.
51.
FIN 47: FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations - an
interpretation of FASB Statement No. 143.
FSP SFAS 106-2: Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003.
Interests in Purchased Receivables: Represent an ownership interest in a percentage of cash flows
of an underlying pool of receivables transferred by a third-party seller into a bankruptcy remote
entity, generally a trust, and then financed through a commercial paper conduit.
Investment-grade: An indication of credit quality based upon JPMorgan Chases internal risk
assessment system. Investment-grade generally represents a risk profile similar to a rating of a
BBB-/Baa3 or better, as defined by independent rating agencies.
Mark-to-market exposure: A measure, at a point in time, of the value of a derivative or foreign
exchange contract in the open market. When the mark-to-market value is positive, it indicates the
counterparty owes JPMorgan Chase and, therefore, creates a repayment risk for the Firm. When the
mark-to-market value is negative, JPMorgan Chase owes the counterparty. In this situation, the Firm
does not have repayment risk.
Master netting agreement: An agreement between two counterparties that have multiple derivative
contracts with each other that provides for the net settlement of all contracts through a single
payment, in a single currency, in the event of default on or termination of any one contract. See
FIN 39.
NA: Data is not applicable or available for the period presented.
Net yield on interest-earning assets: The average rate for interest-earning assets less the average
rate paid for all sources of funds.
NM: Not meaningful.
Nonoperating litigation reserve charges and recoveries are the $208 million insurance recovery in
the fourth quarter of 2005; the $1.9 billion charge taken in the second quarter of 2005; the $900
million charge taken in the first quarter of 2005; and the $3.7 billion charge taken in the second
quarter of 2004; all of which relate to the legal cases named in the JPMorgan Chase Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004.
Overhead ratio: Noninterest expense as a percentage of total net revenue.
Return on common equity-goodwill: Represents net income applicable to common stock divided by total
average common equity (net of goodwill). The Firm uses return on equity less goodwill, a non-GAAP
financial measure, to evaluate the operating performance of the Firm. The Firm also utilizes this
measure to facilitate operating comparisons to other competitors.
SFAS: Statement of Financial Accounting Standards.
SFAS 13: Accounting for Leases.
SFAS 87: Employers Accounting for Pensions.
SFAS 88: Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits.
SFAS 106: Employers Accounting for Postretirement Benefits Other Than Pensions.
SFAS 107: Disclosures about Fair Value of Financial Instruments.
SFAS 109: Accounting for Income
Taxes.
SFAS 114: Accounting by Creditors for Impairment of a Loan.
SFAS 115: Accounting for Certain Investments in Debt and Equity Securities.
SFAS 123: Accounting for Stock-Based Compensation.
SFAS 123R: Share-Based Payment.
SFAS 128: Earnings per Share.
SFAS 133: Accounting for Derivative Instruments and Hedging Activities.
SFAS 138: Accounting for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133.
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JPMorgan Chase & Co. / 2005 Annual Report |
Glossary of terms
JPMorgan Chase & Co.
SFAS 140: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a replacement of FASB Statement No. 125.
SFAS 142: Goodwill and Other Intangible Assets.
SFAS 143: Accounting for Asset Retirement Obligations.
SFAS 149: Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.
SFAS 155: Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements
No. 133 and 140.
Staff Accounting Bulletin (SAB) 107: Application of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment.
Statement of Position (SOP) 98-1: Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
Stress testing: A scenario that measures market risk under unlikely but plausible events in
abnormal markets.
U.S. GAAP: Accounting principles generally accepted in the United States of America.
U.S. government and federal agency obligations: Obligations of the U.S. government or an
instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full
faith and credit of the U.S. government.
U.S. government-sponsored enterprise obligations: Obligations of agencies originally established or
chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these
obligations are not explicitly guaranteed as to the timely payment of principal and interest by the
full faith and credit of the U.S. government.
Value-at-Risk (VAR): A measure of the dollar amount of potential loss from adverse market moves
in an ordinary market environment.
Forward-looking statements
From time to time, the Firm has made and will make forward-looking statements. These statements can
be identified by the fact that they do not relate strictly to historical or current facts.
Forward-looking statements often use words such as anticipate, target, expect, estimate,
intend, plan, goal, believe, anticipate or other words of similar meaning.
Forward-looking statements provide JPMorgan Chases current expectations or forecasts of future
events, circumstances, results or aspirations. JPMorgan Chases disclosures in this report contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Firm also may make forward-looking statements in its other documents filed or furnished
with the Securities and Exchange Commission (SEC). In addition, the Firms senior management may
make forward-looking statements orally to analysts, investors, representatives of the media and
others.
All forward-looking statements, by their nature, are subject to risks and uncertainties. JPMorgan
Chases actual future results may differ materially from those set forth in its forward-looking
statements. Factors that could cause this differencemany of which are beyond the Firms
controlinclude the following: local, regional and international business, political or economic
conditions; changes in trade, monetary and fiscal policies and laws; technological changes
instituted by the Firm and by other entities which may affect
the Firms business; mergers and acquisitions, including the Firms ability to integrate
acquisitions; ability of the Firm to develop new products and services; acceptance of new products
and services and the ability of the Firm to increase market share; ability of the Firm to control
expenses; competitive pressures; changes in laws and regulatory requirements; changes in applicable
accounting policies; costs, outcomes and effects of litigation and regulatory investigations;
changes in the credit quality of the Firms customers; and adequacy of the Firms risk management
framework.
Additional factors that may cause future results to differ materially from forward-looking
statements are discussed in Part I, Item 1A: Risk Factors in the Firms Annual Report on Form 10-K
for the year ended December 31, 2005, to which reference is
hereby made. There is no
assurance that any list of risks and uncertainties or risk factors is complete.
Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are
made and JPMorgan Chase does not undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the date the forward-looking statement was made.
The reader should, however, consult any further disclosures of a forward-looking nature the Firm
may make in any subsequent Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its
Current Reports on Form 8-K.
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JPMorgan Chase & Co. / 2005 Annual Report
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135 |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf of the undersigned, thereunto
duly authorized.
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JPMorgan Chase & Co.
(Registrant) |
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By:
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/s/ WILLIAM B. HARRISON, JR. |
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(William B. Harrison, Jr.
Chairman of the Board) |
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By:
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/s/ JAMES DIMON |
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(James Dimon
President and Chief Executive Officer) |
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Date: August 3,
2006 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacity and on the
date indicated.
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Capacity |
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Date |
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/s/ WILLIAM B. HARRISON, JR.
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Director and Chairman of the Board |
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(William B. Harrison, Jr.) |
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/s/ JAMES DIMON |
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Director, President and Chief Executive Officer |
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(James Dimon) |
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(Principal Executive Officer) |
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/s/ JOHN H. BIGGS*
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Director |
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(John H. Biggs)
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August 3, 2006 |
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/s/ STEPHEN B. BURKE*
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Director |
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(Stephen B. Burke) |
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/s/ JAMES S. CROWN*
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Director |
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(James S. Crown) |
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/s/ ELLEN V. FUTTER*
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Director |
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(Ellen V. Futter) |
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148
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Capacity |
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Date |
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/s/ WILLIAM H. GRAY, III*
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Director |
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(William H. Gray, III) |
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/s/ LABAN P. JACKSON, JR.*
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Director |
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(Laban P. Jackson, Jr.) |
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/s/ JOHN W. KESSLER*
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Director |
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(John W. Kessler) |
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/s/
ROBERT I. LIPP*
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Director |
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(Robert I. Lipp) |
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/s/ RICHARD A. MANOOGIAN*
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Director |
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(Richard A. Manoogian)
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August 3, 2006 |
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/s/ DAVID C. NOVAK*
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Director |
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(David C. Novak) |
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/s/ LEE R. RAYMOND*
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Director |
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(Lee R. Raymond) |
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/s/ WILLIAM C. WELDON*
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Director |
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(William C. Weldon) |
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/s/ MICHAEL J. CAVANAGH |
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Executive Vice President |
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(Michael J. Cavanagh) |
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and Chief Financial Officer |
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(Principal Financial Officer) |
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/s/ JOSEPH L. SCLAFANI
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Executive Vice President and Controller |
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(Joseph L. Sclafani) |
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(Principal Accounting Officer) |
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* Signed by Anthony J.
Horan, attorney-in-fact
149
EX-23.1
Exhibit 23.1
Consent of independent registered public accounting firm
We hereby consent to the incorporation by
reference in the Registration Statements on Form S-3 (Nos. 33-49965, 33-64261, 333-14959, 333-14959-01,
333-14959-02, 333-14959-03, 333-15649, 333-16773,
333-16773-01, 333-16773-02, 333-16773-03,
333-19719, 333-19719-01, 333-19719-02, 333-22437,
333-37567, 333-37567-03, 333-42807, 333-52826,
333-52962, 333-52962-01, 333-52962-02, 333-56573,
333-56587, 333-56587-03, 333-68500, 333-68500-01,
333-68500-02, 333-68500-03, 333-68500-04,
333-70639, 333-71876, 333-94393, 333-107207,
333-116771, 333-116771-03, 333-116773,
333-116773-01, 333-116774, 333-116774-01,
333-116775, 333-116775-02, 333-116822, 333-117770,
333-117775, 333-117785, 333-117785-01,
333-117785-02,
333-117785-03,
333-117785-04, 333-117785-05,
333-126750, 333-128506 and 333-130051) and in the
Registration Statements on Form S-8 (Nos. 33-01776,
33-40272, 33-40675, 33-49909, 33-49911, 33-49913,
33-54547, 33-62453, 33-63833, 333-02073, 333-07941,
333-15281, 333-22451, 333-31634, 333-31656,
333-31666, 333-47350, 333-64476, 333-73119,
333-92217, 333-92737, 333-112967 and 333-125827) of
JPMorgan Chase & Co. or affiliates of our report
dated February 24, 2006 except with respect to our opinion on
the Consolidated financial statements insofar as it relates to the
section entitled Restatement of the Consolidated statements of
cash flows included in Note 1, as to which the date is August 3, 2006, relating to the financial
statements, managements assessment of the
effectiveness of internal control over financial
reporting and the effectiveness of internal control
over financial reporting, which appears in this Annual Report on Form
10-K/A.
/s/
PricewaterhouseCoopers LLP
New York,
New York
August 3, 2006
159
EX-24.1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ John H. Biggs
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ Stephen B. Burke
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ James S. Crown
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Director |
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159A
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ Ellen V. Futter
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ William H. Gray, III
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ Laban P. Jackson, Jr.
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Director |
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159B
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ John W. Kessler
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ Robert I. Lipp
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ Richard A. Manoogian
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Director |
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159C
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ David C. Novak
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ Lee R. Raymond
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Director |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes
and appoints James Dimon, Michael J. Cavanagh, Mark I. Kleinman and Anthony J. Horan, each as
his/her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in
his/her name, place and stead, in any and all capacities, and to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission (the Commission), in connection with the filing with the Commission of an
Annual Report on Form 10-K of JPMorgan Chase & Co. (the Registrant) for the fiscal year ended
December 31, 2005 (the Form 10-K); including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his/her name in his/her capacity as a member of the
Board of Directors of the Registrant to the Form 10-K and such other form or forms as may be
appropriate to be filed with the Commission as he may deem appropriate, together will all exhibits
thereto, and to any and all amendments thereto and to any other documents filed with the
Commission, as fully for all intents and purposes as he/she might or could do in person, and hereby
ratifies and confirms that said attorney-in-fact and agent, acting alone may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of August 2006.
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/s/ William C. Weldon
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Director |
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159D
EX-31.1
Exhibit 31.1
JPMorgan Chase & Co.
CERTIFICATION
I, William B. Harrison, Jr., certify that:
1. |
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I have reviewed this annual report on Form 10-K of JPMorgan Chase & Co.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the Consolidated financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; |
|
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b) |
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Designed such internal controls over financial reporting, or caused such internal controls
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles; |
|
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and |
|
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d) |
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Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and |
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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a) |
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All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and |
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b) |
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Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
Date:
August 3, 2006
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/s/ William B. Harrison, Jr. |
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William B. Harrison, Jr. |
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Chairman of the Board |
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160
EX-31.2
Exhibit 31.2
JPMorgan Chase & Co.
CERTIFICATION
I, James Dimon, certify that:
1. |
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I have reviewed this annual report on Form 10-K of JPMorgan Chase & Co.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the Consolidated financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
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4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; |
|
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b) |
|
Designed such internal controls over financial reporting, or caused such internal controls
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and |
|
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d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and |
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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a) |
|
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and |
|
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b) |
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Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
Date:
August 3, 2006
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/s/ James Dimon |
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James Dimon |
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President and Chief Executive Officer |
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161
EX-31.3
Exhibit 31.3
JPMorgan Chase & Co.
CERTIFICATION
I, Michael J. Cavanagh, certify that:
1. |
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I have reviewed this annual report on Form 10-K of JPMorgan Chase & Co.; |
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2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the Consolidated financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; |
|
|
b) |
|
Designed such internal controls over financial reporting, or caused such internal controls
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and |
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
|
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
Date:
August 3, 2006
|
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/s/ Michael J. Cavanagh |
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Michael J. Cavanagh |
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Executive Vice President and Chief Financial Officer |
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|
162
EX-32
Exhibit 32
JPMorgan Chase & Co.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of JPMorgan Chase & Co. on Form 10-K for the period
ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof
(the Report), each of the undersigned officers of JPMorgan Chase & Co., certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and |
|
2. |
|
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of JPMorgan Chase & Co. |
|
|
|
|
|
|
|
|
Date: August 3, 2006 |
By: |
/s/ William B. Harrison, Jr. |
|
|
|
William B. Harrison, Jr. |
|
|
|
Chairman of the Board |
|
|
|
|
|
Date: August 3, 2006 |
By: |
/s/ James Dimon |
|
|
|
James Dimon |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
Date: August 3, 2006 |
By: |
/s/ Michael J. Cavanagh |
|
|
|
Michael J. Cavanagh |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
This certification accompanies this Form 10-K and 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.
A signed original of this written statement required by Section 906 has been provided to, and will
be retained by, JPMorgan Chase & Co. and furnished to the Securities and Exchange Commission or its
staff upon request.
163