JPMORGAN CHASE & CO
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934
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For the fiscal year ended
December 31, 2009 |
Commission file | |
| number 1-5805 |
JPMorgan Chase & Co.
(Exact name of registrant as specified in its charter)
| Delaware | 13-2624428 | |
| (State or other jurisdiction of | (I.R.S. employer | |
| incorporation or organization) | identification no.) |
| 270 Park Avenue, New York, NY | 10017 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
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Common stock
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The New York Stock Exchange
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The London Stock Exchange
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The Tokyo Stock Exchange
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Warrants, each to purchase one share of Common Stock
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The New York Stock Exchange
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Depositary Shares each representing a one-fourth interest in a share of 6.15% Cumulative Preferred Stock, Series E
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The New York Stock Exchange
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Depositary Shares each representing a one-fourth interest in a share of 5.72% Cumulative Preferred Stock, Series F
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The New York Stock Exchange
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Depositary Shares each representing a one-fourth interest in a share of 5.49% Cumulative Preferred Stock, Series G
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The New York Stock Exchange
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Depositary Shares each representing a one-four hundredth interest in a share of 8.625% Non-Cumulative Preferred Stock, Series J
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The New York Stock Exchange
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Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan Chase Capital X
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The New York Stock Exchange
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Guarantee of 5 7/8% Capital Securities, Series K, of J.P. Morgan Chase Capital XI
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The New York Stock Exchange
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Guarantee of 6.25% Capital Securities, Series L, of J.P. Morgan Chase Capital XII
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The New York Stock Exchange
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Guarantee of 6.20% Capital Securities, Series N, of J.P. Morgan Chase Capital XIV
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The New York Stock Exchange
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Guarantee of 6.35% Capital Securities, Series P, of J.P. Morgan Chase Capital XVI
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The New York Stock Exchange
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Guarantee of 6.625% Capital Securities, Series S, of J.P. Morgan Chase Capital XIX
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The New York Stock Exchange
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Guarantee of 6.875% Capital Securities, Series X, of J.P. Morgan Chase Capital XXIV
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The New York Stock Exchange
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Guarantee of Fixed-to-Floating Rate Capital Securities, Series Z, of JPMorgan Chase Capital XXVI
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The New York Stock Exchange
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Guarantee of Fixed-to-Floating Rate Capital Securities, Series BB, of JPMorgan Chase Capital XXVIII
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The New York Stock Exchange
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Guarantee of 7.20% Preferred Securities of BANK ONE Capital VI
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The New York Stock Exchange
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KEYnotes Exchange Traded Notes Linked to the First Trust Enhanced 130/30 Large Cap Index
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NYSE Arca, Inc.
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Alerian MLP Index ETNs due May 24, 2024
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NYSE Arca, Inc.
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Buffer Notes Based Upon S&P 500
®
Index due November 24, 2010
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NYSE Arca, Inc.
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Euro Floating Rate Global Notes due July 27, 2012
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The NYSE Alternext U.S. LLC
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Principal Protected Notes Linked to S&P 500
®
Index due September 30, 2010
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The NYSE Alternext U.S. LLC
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Principal Protected Notes Linked to the Dow Jones Industrial Average
SM
due March 23, 2011
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The NYSE Alternext U.S. LLC
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Medium Term Notes, Linked to a Basket of Three International Equity Indices due August 2, 2010
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The NYSE Alternext U.S. LLC
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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.
x
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
x
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.
x
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
x
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
Registrant’s 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
.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| x Large accelerated filer | o Accelerated filer |
o Non-accelerated filer (Do not check if a smaller reporting company) |
o Smaller reporting company |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
x
No
The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates of
JPMorgan Chase & Co. on June 30, 2009 was approximately $133,193,936,622.
Number of shares of common stock outstanding on January 31, 2010: 3,973,010,673
Documents incorporated by Reference: Portions of the Registrant’s Proxy Statement for the
annual meeting of stockholders to be held on May 18, 2010, 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 Index
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| Part I |
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| Item 1 | 1 | |||||||
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| 1–4 | ||||||||
| 246–250 | ||||||||
| 38, 241–242, 246 | ||||||||
| 187–191, 251 | ||||||||
| 95–115, 192–196, 252–256 | ||||||||
| 115–117, 196–198, 257–258 | ||||||||
| 218, 258 | ||||||||
| 219, 259 | ||||||||
| Item 1A | 4–10 | |||||||
| Item 1B | 10 | |||||||
| Item 2 | 10–11 | |||||||
| Item 3 | 11–16 | |||||||
| Item 4 | 17 | |||||||
| 17 | ||||||||
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| Part II |
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| Item 5 | 18 | |||||||
| Item 6 | 19 | |||||||
| Item 7 | 19 | |||||||
| Item 7A | 19 | |||||||
| Item 8 | 19 | |||||||
| Item 9 | 19 | |||||||
| Item 9A | 19 | |||||||
| Item 9B | 19 | |||||||
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| Part III |
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| Item 10 | 19 | |||||||
| Item 11 | 19 | |||||||
| Item 12 | 20 | |||||||
| Item 13 | 20 | |||||||
| Item 14 | 20 | |||||||
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| Part IV |
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| Item 15 | 20–23 | |||||||
| EX-10.7 | ||||||||
| EX-10.23 | ||||||||
| EX-10.24 | ||||||||
| EX-10.27 | ||||||||
| EX-12.1 | ||||||||
| EX-12.2 | ||||||||
| EX-21.1 | ||||||||
| EX-23.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
Table of Contents
Part I
ITEM 1: BUSINESS
Overview
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is a financial holding company incorporated
under Delaware law in 1968. JPMorgan Chase is one of the largest banking institutions in the United
States of America (“U.S.”), with $2.0 trillion in assets, $165.4 billion in stockholders’ equity
and operations in more than 60 countries.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association
(“JPMorgan Chase Bank, N.A.”), a national banking association with U.S. branches in 23 states, and
Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national banking association that
is the Firm’s credit card–issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P.
Morgan Securities Inc. (“JPMorgan Securities”), the Firm’s U.S. investment banking firm. The bank
and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches
and subsidiaries, representative offices and subsidiary foreign banks.
The Firm’s website is www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through
its website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the U.S. Securities and
Exchange Commission (the “SEC”). The Firm has adopted, and posted on its website, a Code of Ethics
for its Chairman and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and
other senior financial officers.
Business segments
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business
segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the
Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments.
The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments.
A description of the Firm’s business segments and the products and services they provide to their
respective client bases is provided in the “Business segment results” section of Management’s
discussion and analysis of financial condition and results of operations (“MD&A”), beginning on
page 53 and in Note 34 on page 237.
Competition
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment.
Competitors include other banks, brokerage firms, investment banking companies, merchant banks,
hedge funds, insurance companies, mutual fund companies, credit card companies, mortgage banking
companies, trust companies, securities processing companies, automobile financing companies,
leasing companies, e-commerce and other Internet-based companies, and a variety of other financial
services and advisory
companies. JPMorgan Chase’s businesses generally compete on the basis of the
quality and range of their products and services, transaction execution, innovation and price.
Competition also varies based on the types of clients, customers, industries and geographies
served. With respect to some of its geographies and products, JPMorgan Chase competes globally;
with respect to others, the Firm competes on a regional basis. The Firm’s ability to compete also
depends on its ability to attract and retain its professional and other personnel, and on its
reputation.
The financial services industry has experienced consolidation and convergence in recent years, as
financial institutions involved in a broad range of financial products and services have merged
and, in some cases, failed. This convergence trend is expected to continue. Consolidation could
result in competitors of JPMorgan Chase gaining greater capital and other resources, such as a
broader range of products and services and geographic diversity. It is likely that competition will
become even more intense as the Firm’s businesses continue to compete with other financial
institutions that are or may become larger or better capitalized, or that may have a stronger local
presence in certain geographies.
Supervision and regulation
The Firm is subject to regulation under state and federal laws in the U.S., as well as the
applicable laws of each of the various jurisdictions outside the U.S. in which the Firm does
business.
Recent Events affecting the Firm:
Events since early 2008 affecting the financial services industry
and, more generally, the financial markets and the economy as a whole, have led to various
proposals for changes in the regulation of the financial services industry. In 2009, the House of
Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, which, among
other things, calls for the establishment of a Consumer Financial Protection Agency having broad
authority to regulate providers of credit, savings, payment and other consumer financial products
and services; creates a new structure for resolving troubled or failed financial institutions;
requires certain over-the-counter derivative transactions to be cleared in a central clearinghouse
and/or effected on the exchange; revises the assessment base for the calculation of the Federal
Deposit Insurance Corporation (“FDIC”) assessments; and creates a structure to regulate
systemically important financial companies, including providing regulators with the power to
require such companies to sell or transfer assets and terminate activities if they determine that
the size or scope of activities of the company pose a threat to the safety and soundness of the
company or the financial stability of the United States. Other proposals have been made both
domestically and internationally, including additional capital and liquidity requirements and
limitations on size or types of activity in which banks may engage. It is not clear at this time
which of these proposals will be finally enacted into law, or what form they will take, or what new
proposals may be made, as the debate over financial reform continues in 2010. The description below
summarizes the current regulatory structure in which the Firm operates, could change significantly
and, accordingly, the structure of the Firm and the products and services it offers could also
change significantly as a result.
1
Table of Contents
Part I
Permissible business activities:
JPMorgan Chase elected to become a financial holding company as of
March 13, 2000, pursuant to the provisions of the Gramm-Leach-Bliley Act (“GLBA”). Under
regulations implemented by the Board of Governors of the Federal Reserve System (the “Federal
Reserve Board”), if any depository institution controlled by a financial holding company ceases to
meet certain capital or management standards, the Federal Reserve Board may impose corrective
capital and/or managerial requirements on the financial holding company and place limitations on
its ability to conduct the broader financial activities permissible for financial holding
companies. In addition, the Federal Reserve Board may require divestiture of the holding company’s
depository institutions if the deficiencies persist. The regulations also provide that if any
depository institution controlled by a financial holding company fails to maintain a satisfactory
rating under the Community Reinvestment Act (“CRA”), the Federal Reserve Board must prohibit the
financial holding company and its subsidiaries from engaging in any additional activities other
than those permissible for bank holding companies that are not financial holding companies. At
December 31, 2009, the depository-institution subsidiaries of JPMorgan Chase met the capital,
management and CRA requirements necessary to permit the Firm to conduct the broader activities
permitted under GLBA.
Financial holding companies and bank holding companies are required to obtain the approval of the
Federal Reserve Board before they may acquire more than five percent of the voting shares of an
unaffiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the “Riegle-Neal Act”), the Federal Reserve Board may approve an application for such an
acquisition without regard to whether the transaction is prohibited under the law of any state,
provided that the acquiring bank holding company, before or after the acquisition, does not control
more than 10% of the total amount of deposits of insured depository institutions in the U.S. or
more than 30% (or such greater or lesser amounts as permitted under state law) of the total
deposits of insured depository institutions in the state in which the acquired bank has its home
office or a branch.
Regulation by Federal Reserve Board under GLBA:
Under GLBA’s system of “functional regulation,” the
Federal Reserve Board acts as an “umbrella regulator,” and certain of JPMorgan Chase’s subsidiaries
are regulated directly by additional authorities based on the particular activities of those
subsidiaries. JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are regulated by the Office of
the Comptroller of the Currency (“OCC”). See “Other supervision and regulation” below for a further
description of the regulatory supervision to which the Firm’s subsidiaries are subject.
Dividend restrictions:
Federal law imposes limitations on the payment of dividends by national
banks. Dividends payable by JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., as national bank
subsidiaries of JPMorgan Chase, are limited to the lesser of the amounts calculated under a “recent
earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not
be paid if the total of all dividends declared by a bank in any calendar year is in excess of the
current year’s net income combined with the retained net income of the two preceding years, unless
the national bank obtains the approval of the OCC. Under the undivided
profits test, a dividend may
not be paid in excess of a bank’s “undivided profits.” See Note 28 on page 228 for the amount of
dividends that the Firm’s principal bank subsidiaries could pay, at January 1, 2010 and 2009, to
their respective bank holding companies without the approval of their banking regulators.
In addition to the dividend restrictions described above, the OCC, the Federal Reserve Board and
the FDIC have authority to prohibit or limit the payment of dividends by the banking organizations
they supervise, including JPMorgan Chase and its bank and bank holding company subsidiaries, if, in
the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound
practice in light of the financial condition of the banking organization.
For a discussion of additional dividend restrictions relating to the Capital Purchase Program, see
Note 23 on pages 222-223.
Capital requirements:
Federal banking regulators have adopted risk-based capital and leverage
guidelines that require the Firm’s capital-to-assets ratios to meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and specified off–balance sheet
financial instruments into risk weighted categories, with higher levels of capital being required
for the categories perceived as representing greater risk. Under the guidelines, capital is divided
into two tiers: Tier 1 capital and Tier 2 capital. The amount of Tier 2 capital may not exceed the
amount of Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital. Under the
guidelines, banking organizations are required to maintain a total capital ratio (total capital to
risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%. For a further description of these
guidelines, see Note 29 on pages 228–229.
The federal banking regulators also have established minimum leverage ratio guidelines. The
leverage ratio is defined as Tier 1 capital divided by adjusted average total assets. The minimum
leverage ratio is 3% for bank holding companies that are considered “strong” under Federal Reserve
Board guidelines or which have implemented the Federal Reserve Board’s risk-based capital measure
for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. Bank
holding companies may be expected to maintain ratios well above the minimum levels, depending upon
their particular condition, risk profile and growth plans.
The minimum risk-based capital requirements adopted by the federal banking agencies follow the
Capital Accord of the Basel Committee on Banking Supervision. In 2004, the Basel Committee
published a revision to the Accord (“Basel II”). U.S. banking regulators published a final Basel II
rule in December 2007 which requires JPMorgan Chase to implement Basel II at the holding company
level, as well as at certain of its key U.S. bank subsidiaries. For additional information
regarding Basel II, see Regulatory capital on
page 83.
Effective January 1, 2008, the SEC authorized JPMorgan Securities to use the alternative method of
computing net capital for broker/dealers that are part of Consolidated Supervised Entities as
defined by SEC rules. Accordingly, JPMorgan Securities may
2
Table of Contents
calculate deductions for market risk using its internal market risk models. For additional
information regarding the Firm’s regulatory capital, see Regulatory capital on pages 83–84.
Federal Deposit Insurance Corporation Improvement Act:
The Federal Deposit Insurance Corporation
Improvement Act of 1991 (“FDICIA”) provides a framework for regulation of depository institutions
and their affiliates, including parent holding companies, by their federal banking regulators. As
part of that Framework, the FDICIA requires the relevant federal banking regulator to take “prompt
corrective action” with respect to a depository institution if that institution does not meet
certain capital adequacy standards.
Supervisory actions by the appropriate federal banking regulator under the “prompt corrective
action” rules generally depend upon an institution’s classification within five capital categories.
The regulations apply only to banks and not to bank holding companies such as JPMorgan Chase;
however, subject to limitations that may be imposed pursuant to GLBA, the Federal Reserve Board is
authorized to take appropriate action at the holding company level, based on the undercapitalized
status of the holding company’s subsidiary banking institutions. In certain instances relating to
an undercapitalized banking institution, the bank holding company would be required to guarantee
the performance of the undercapitalized subsidiary’s capital restoration plan and might be liable
for civil money damages for failure to fulfill its commitments on that guarantee.
Deposit Insurance:
Under current FDIC regulations, each depository institution is assigned to a
risk category based on capital and supervisory measures. In 2009, the FDIC revised the method for
calculating the assessment rate for depository institutions by introducing several adjustments to
an institution’s initial base assessment rate. A depository institution is assessed premiums by the
FDIC based on its risk category as adjusted and the amount of deposits held. Higher levels of banks
failures over the past two years have dramatically increased resolution costs of the FDIC and
depleted the deposit insurance fund. In addition, the amount of FDIC insurance coverage for insured
deposits has been increased generally from $100,000 per depositor to $250,000 per depositor. In
light of the increased stress on the deposit insurance fund caused by these developments, and in
order to maintain a strong funding position and restore the reserve ratios of the deposit insurance
fund, the FDIC imposed a special assessment in June, 2009, has increased assessment rates of
insured institutions generally, and required them to prepay on December 30, 2009 the premiums that
are expected to become due over the next three years.
Powers of the FDIC upon insolvency of an insured depository institution:
If the FDIC is appointed
the conservator or receiver of an insured depository institution upon its insolvency or in certain
other events, the FDIC has the power: (1) to transfer any of the depository institution’s assets
and liabilities to a new obligor without the approval of the depository institution’s creditors;
(2) to enforce the terms of the depository institution’s contracts pursuant to their terms; or (3)
to repudiate or disaffirm any contract or lease to which the depository institution is a party, the
performance of which
is determined by the FDIC to be burdensome and the disaffirmation or
repudiation of which is determined by the FDIC to promote the orderly administration of the
depository institution. The above provisions would be applicable to obligations and liabilities of
JPMorgan Chase’s subsidiaries that are insured depository institutions, such as JPMorgan Chase
Bank, N.A., and Chase Bank USA, N.A., including, without limitation, obligations under senior or
subordinated debt issued by those banks to investors (referred to below as “public noteholders”) in
the public markets.
Under federal law, the claims of a receiver of an insured depository institution for administrative
expense and the claims of holders of U.S. deposit liabilities (including the FDIC, as subrogee of
the depositors) have priority over the claims of other unsecured creditors of the institution,
including public noteholders and depositors in non-U.S. offices, in the event of the liquidation or
other resolution of the institution. As a result, whether or not the FDIC would ever seek to
repudiate any obligations held by public noteholders or depositors in non-U.S. offices of any
subsidiary of the Firm that is an insured depository institution, such as JPMorgan Chase Bank,
N.A., or Chase Bank USA, N.A., such persons would be treated differently from, and could receive,
if anything, substantially less than the depositors in U.S. offices of the depository.
An FDIC-insured depository institution can be held liable for any loss incurred or expected to be
incurred by the FDIC in connection with another FDIC-insured institution under common control with
such institution being “in default” or “in danger of default” (commonly referred to as
“cross-guarantee” liability). An FDIC cross-guarantee claim against a depository institution is
generally superior in right of payment to claims of the holding company and its affiliates against
such depository institution.
The Bank Secrecy Act:
The Bank Secrecy Act (“BSA”) requires all financial institutions, including
banks and securities broker-dealers, to, among other things, establish a risk-based system of
internal controls reasonably designed to prevent money laundering and the financing of terrorism.
The BSA includes a variety of recordkeeping and reporting requirements (such as cash and suspicious
activity reporting), as well as due diligence/know-your-customer documentation requirements. The
Firm has established a global anti-money laundering program in order to comply with BSA
requirements.
Other supervision and regulation:
Under current Federal Reserve Board policy, JPMorgan Chase is
expected to act as a source of financial strength to its bank subsidiaries and to commit resources
to support these subsidiaries in circumstances where it might not do so absent such policy.
However, because GLBA provides for functional regulation of financial holding company activities by
various regulators, GLBA prohibits the Federal Reserve Board from requiring payment by a holding
company or subsidiary to a depository institution if the functional regulator of the payor objects
to such payment. In such a case, the Federal Reserve Board could instead require the divestiture of
the depository institution and impose operating restrictions pending the divestiture.
The bank subsidiaries of JPMorgan Chase are subject to certain restrictions imposed by federal law
on extensions of credit to, and certain other transactions with, the Firm and certain other
affiliates,
3
Table of Contents
Part I
and on investments in stock or securities of JPMorgan Chase and those affiliates. These
restrictions prevent JPMorgan Chase and other affiliates from borrowing from a bank subsidiary
unless the loans are secured in specified amounts and are subject to certain other limits. For more
information, see Note 28 on page 230.
The Firm’s banks and certain of its nonbank subsidiaries are subject to direct supervision and
regulation by various other federal and state authorities (some of which are considered “functional
regulators” under GLBA). JPMorgan Chase’s national bank subsidiaries, such as JPMorgan Chase Bank,
N.A., and Chase Bank USA, N.A., are subject to supervision and regulation by the OCC and, in
certain matters, by the Federal Reserve Board and the FDIC. Supervision and regulation by the
responsible regulatory agency generally includes comprehensive annual reviews of all major aspects
of the relevant bank’s business and condition, and imposition of periodic reporting requirements
and limitations on investments, among other powers.
The Firm conducts securities underwriting, dealing and brokerage activities in the U.S. through
JPMorgan Securities and other broker-dealer subsidiaries, all of which are subject to regulations
of the SEC, the Financial Industry Regulatory Authority and the New York Stock Exchange, among
others. The Firm conducts similar securities activities outside the U.S. subject to local
regulatory requirements. In the United Kingdom (“U.K.”), those activities are conducted by J.P.
Morgan Securities Ltd., which is regulated by the Financial Services Authority of the U.K. The
operations of JPMorgan Chase mutual funds also are subject to regulation by the SEC.
The Firm has subsidiaries that are members of futures exchanges in the U.S. and abroad and are
registered accordingly. In the U.S., three subsidiaries are registered as futures commission
merchants, with other subsidiaries registered with the Commodity Futures Trading Commission (the
“CFTC”) as commodity pool operators and commodity trading advisors. These CFTC-registered
subsidiaries are also members of the National Futures Association. The Firm’s U.S. energy business
is subject to regulation by the Federal Energy Regulatory Commission. It is also subject to other
extensive and evolving energy, commodities, environmental and other governmental regulation both in
the U.S. and other jurisdictions globally.
The types of activities in which the non-U.S. branches of JPMorgan Chase Bank, N.A., and the
international subsidiaries of JPMorgan Chase may engage are subject to various restrictions imposed
by the Federal Reserve Board. Those non-U.S. branches and international subsidiaries also are
subject to the laws and regulatory authorities of the countries in which they operate.
The activities of JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. as consumer lenders also are
subject to regulation under various U.S. federal laws, including the Truth-in-Lending, Equal Credit
Opportunity, Fair Credit Reporting, Fair Debt Collection Practice and Electronic Funds Transfer
acts, as well as various state laws. These statutes impose requirements on consumer loan
origination and collection practices.
Under the requirements imposed by GLBA, JPMorgan Chase and its subsidiaries are required
periodically to disclose to their retail customers the Firm’s policies and practices with
respect
to the sharing of nonpublic customer information with JPMorgan Chase affiliates and others, and the
confidentiality and security of that information. Under GLBA, retail customers also must be given
the opportunity to “opt out” of information-sharing arrangements with nonaffiliates, subject to
certain exceptions set forth in GLBA.
ITEM 1A: RISK FACTORS
The following discussion sets forth some of the more important risk factors that could
materially affect our financial condition and operations. Other factors that could affect our
financial condition and operations are discussed in the “Forward-looking statements” section on
page 135. However, factors besides those discussed below, in MD&A or elsewhere in this or other
reports that we filed or furnished with the SEC, also could adversely affect us. You should not
consider any descriptions of such factors to be a complete set of all potential risks that could
affect us.
Our results of operations have been, and may continue to be, adversely affected by U.S. and
international financial market and economic conditions.
Our businesses have been, and in the future will continue to be, materially affected by economic
and market conditions, including factors such as the liquidity of the global financial markets; the
level and volatility of debt and equity prices, interest rates and currency and commodities prices;
investor sentiment; corporate or other scandals that reduce confidence in the financial markets;
inflation; the availability and cost of capital and credit; the occurrence of natural disasters,
acts of war or terrorism; and the degree to which U.S. or international economies are expanding or
experiencing recessionary pressures. These factors can affect, among other things, the activity
levels of clients with respect to the size, number and timing of transactions involving our
investment and commercial banking businesses, including our underwriting and advisory businesses;
the realization of cash returns from our private equity and principal investments businesses; the
volume of transactions that we execute for our customers and, therefore, the revenue we receive
from commissions and spreads; the number and size of underwritings we manage on behalf of clients;
and the willingness of financial sponsors or other investors to participate in loan syndications or
underwritings managed by us.
We generally maintain large trading portfolios in the fixed income, currency, commodity and equity
markets and we may have from time to time significant positions, including positions in securities
in markets that lack pricing transparency or liquidity. The revenue derived from mark-to-market
values of our businesses are affected by many factors, including our credit standing; our success
in effectively hedging our market and other risks; volatility in interest rates and equity, debt
and commodities markets; credit spreads and availability of liquidity in the capital markets; and
other economic and business factors. We anticipate that revenue relating to our trading and
principal investment businesses will continue to experience volatility and there can be no
assurance that such volatility relating to the above factors or other conditions that may affect
pricing or our ability to realize returns from such investments could not materially adversely
affect our earnings.
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The fees we earn for managing third-party assets are also dependent upon general economic
conditions. For example, a higher level of U.S. or non-U.S. interest rates or a downturn in trading
markets could affect the valuations of the third-party assets we manage or hold in custody, which,
in turn, could affect our revenue. Moreover, even in the absence of a market downturn, below-market
or sub-par performance by our investment management businesses could result in outflows of assets
under management and supervision and, therefore, reduce the fees that we receive.
During 2008, U.S. and global financial markets were extremely volatile and were materially and
adversely affected by a significant lack of liquidity, loss of confidence in the financial sector,
disruptions in the credit markets, reduced business activity, rising unemployment, declining home
prices, and erosion of consumer confidence. These factors contributed to adversely affecting our
business, financial condition and results of operations in 2008 and into early 2009. While the
business environment stabilized during the latter half of 2009, the current economic environment
remains weak, which affects our businesses’ profitability.
Our consumer businesses are particularly affected by domestic economic conditions. Such conditions
include U.S. interest rates; the rate of unemployment; housing prices; the level of consumer
confidence; changes in consumer spending; and the number of personal bankruptcies, among others.
The deterioration of these conditions can diminish demand for the consumer businesses’ products and
services, or increase the cost to provide such products and services. In addition, adverse economic
conditions, such as declines in home prices, could lead to an increase in mortgage and other loan
delinquencies and higher net charge-offs, which can adversely affect our earnings.
During 2008 and continuing in 2009, higher levels of bank failures have dramatically increased
resolution costs of the Federal Deposit Insurance Corporation and depleted the deposit insurance
fund. In order to maintain a strong funding position and restore reserve ratios of the deposit
insurance fund, the FDIC has increased assessment rates of insured institutions and adopted a rule
in November 2009 requiring banks to prepay three years’ worth of premiums to replenish the depleted
insurance fund. If there are additional bank or financial institutions failures, we may be required
to pay even higher FDIC premiums than the recently increased levels. Any future increases of FDIC
insurance premiums may adversely impact our earnings.
In connection with the sale and securitization of loans (whether with or without recourse), the
originator is generally required to make a variety of customary
representations and warranties
regarding both the originator and the loans being sold or securitized. We and certain of our
subsidiaries, as well as entities acquired by us as part of the Bear Stearns merger, and the
Washington Mutual and other transactions, have made such representations and warranties in
connection with the sale and securitization of loans, and we will continue to do so in the ordinary
course of our lending business.
If a loan does not comply with such representations or warranties
is sold or securitized, we may be obligated to repurchase the loan and bear any associated loss
directly, or we may be obligated to indemnify the purchaser against any such losses. In 2009, the
costs of repurchasing mortgage loans that had been sold to government agencies such as Freddie Mac
and Fannie Mae increased substantially, and could continue to
increase substantially further. Accordingly, repurchase and/or indemnity obligations to government-sponsored enterprises or to private third-party purchasers could
materially and adversely affect our results of operations and earnings in the future.
We cannot provide assurance that any of the above-mentioned conditions, or further continued
deterioration in economic, market or business conditions, will not have a material negative effect
on the Firm in the future.
If we do not effectively manage our liquidity, our business could be negatively affected.
Our liquidity is critical to our ability to operate our businesses, grow and be profitable. Some
potential conditions that could negatively affect our liquidity include illiquid or volatile
markets, diminished access to capital markets, unforeseen cash or capital requirements (including,
among others, commitments that may be triggered to special purpose entities (“SPEs”) or other
entities), difficulty or inability to sell assets, unforeseen outflows of cash or collateral, and
lack of market or customer confidence in us or our prospects. These conditions may be caused by
events over which we have little or no control. For example, the liquidity crisis experienced in
2008 and into early 2009 increased our cost of funding and limited our access to some of our
traditional sources of liquidity such as securitized debt offerings backed by mortgages, loans,
credit card receivables and other assets. These or other conditions detrimental to our liquidity
may occur in the future.
The credit ratings of JPMorgan Chase & Co., JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. are
important in order to maintain our liquidity. A reduction in their credit ratings could have an
adverse effect on our access to liquidity sources, increase our cost of funds, trigger additional
collateral or funding requirements, and decrease the number of investors and counterparties willing
to lend to us, thereby curtailing our business operations and reducing our profitability. Reduction
in the ratings of certain SPEs or other entities to which we have a funding or other commitment
could also negatively affect our liquidity where such ratings changes lead, directly or indirectly,
to us being required to purchase assets or otherwise provide funding. Critical factors in
maintaining high credit ratings include a stable and diverse earnings stream, strong capital
ratios, strong credit quality and risk management controls, diverse funding sources, and
disciplined liquidity monitoring procedures.
Our cost of obtaining long-term unsecured funding is directly related to our credit spreads (the
amount in excess of the interest rate of U.S. Treasury securities (or other benchmark securities)
of the same maturity that we need to pay to our debt investors). Increases in our credit spreads
can significantly increase the cost of this funding. Changes in credit spreads are continuous and
market-driven, and influenced by market perceptions of our creditworthiness. As such, our credit
spreads may be unpredictable and highly volatile.
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As a holding company, we rely on the earnings of our subsidiaries for our cash flow and consequent
ability to pay dividends and satisfy our obligations. These payments by subsidiaries may take the
form of dividends, loans or other payments. Several of our principal subsidiaries are subject to
capital adequacy requirements or other regulatory or contractual restrictions on their ability to
provide such payments. Limitations in the payments we receive from our subsidiaries could
negatively affect our liquidity position.
The financial condition of our customers, clients and counterparties, including other financial
institutions, could adversely affect us
.
A number of our products expose us to credit risk, including loans, leases and lending commitments,
derivatives, trading account assets and assets held-for-sale. As one of the nation’s largest
lenders, we have exposures to many different products and counterparties, and the credit quality of
our exposures can have a significant impact on our earnings. We estimate and establish reserves for
credit risks and potential credit losses inherent in our credit exposure (including unfunded
lending commitments). This process, which is critical to our financial results and condition,
requires difficult, subjective and complex judgments, including forecasts of how economic
conditions might impair the ability of our borrowers to repay their loans. As is the case with any
such assessments, there is always the chance that we will fail to identify the proper factors or
that we will fail to accurately estimate the impact of factors that we identify. Any such failure
could result in increases in delinquencies and default rates.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. We routinely execute transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, investment banks, mutual and
hedge funds, and other institutional clients. Many of these transactions expose us to credit risk
in the event of default by the counterparty or client, which can be exacerbated during periods of
market illiquidity, such as experienced in 2008 and early 2009. During such periods, our credit
risk also may be further increased when the collateral held by us cannot be realized upon or is
liquidated at prices that are not sufficient to recover the full amount of the loan or derivative
exposure due us. In addition, disputes with counterparties as to the valuation of collateral
significantly increases in times of market stress and illiquidity. We cannot provide assurance that
any such losses would not materially and adversely affect our results of operations or earnings.
An example of the risks associated with our relationships with other financial institutions is
the collapse of Lehman Brothers Holdings Inc. (“LBHI”). On September 15, 2008, LBHI filed a
voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York, and
thereafter several of its subsidiaries also filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code (LBHI and such subsidiaries collectively, “Lehman”). On September 19, 2008,
a liquidation case under the Securities Investor Protection Act
(“SIPA”) was commenced in the United States
District Court for the Southern District of New York for Lehman Brothers Inc. (“LBI”), LBHI’s U.S.
broker-dealer subsidiary, and that court now presides over the LBI
SIPA liquidation case. We were LBI’s clearing bank and,
among other actions, made collateral calls totaling approximately $8
billion in September 2008 and liquidated approximately $18 billion of securities subsequent to
Lehman’s bankruptcy filing. We are the largest secured creditor in the Lehman and LBI cases,
according to Lehman’s schedules. It is possible that claims may be asserted against us and/or our
security interests, including by the LBHI Creditors Committee, the SIPA Trustee appointed in the
LBI liquidation case, the principal acquirer of LBI’s assets, and others in connection with Lehman
and LBI cases. We intend to defend ourself against any such claims. The LBHI examiner has filed a
report with the Bankruptcy Court regarding his investigation into the
collapse of Lehman. The
report remains under seal.
If the current weak economic environment continues for an extended period of time, or deteriorates
further, there is a greater likelihood that more of our customers or counterparties could become
delinquent on their loans or other obligations to us which, in turn, could result in a higher level
of charge-offs and provision for credit losses, or requirements that we purchase assets or provide
other funding, any of which could adversely affect our financial condition. Moreover, a significant
deterioration in the credit quality of one of our counterparties could lead to concerns about the
credit quality of other counterparties in the same industry, thereby exacerbating our credit risk
exposure, and increasing the losses, including mark-to-market losses, we could incur in our
trading and clearing businesses.
Concentration of credit and market risk could increase the potential for significant losses.
We have exposure to increased levels of risk 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. We regularly monitor various segments of our portfolio exposures to
assess potential concentration risks. Our efforts to diversify or hedge our credit portfolio
against concentration risks may not be successful and any concentration of credit risk could
increase the potential for significant losses in our credit portfolio. In addition, disruptions in
the liquidity or transparency of the financial markets may result in our inability to sell,
syndicate or realize upon securities, loans or other instruments or positions held by us, thereby
leading to increased concentrations of such positions. These concentrations could expose us to
losses if the mark-to-market value of the securities, loans or other instruments or positions
decline causing us to take write downs. Moreover, the inability to reduce our positions not only
increases the market and credit risks associated with such positions, but also increases the level
of risk-weighted assets on our balance sheet, thereby increasing our capital requirements and
funding costs, all of which could adversely affect our businesses’ operations and profitability.
Our framework for managing risks may not be effective in mitigating risk and loss to us.
Our risk management framework seeks to mitigate risk and loss to us. We have established processes
and procedures intended to identify, measure, monitor, report and analyze the types of risk to
which we are subject, including liquidity risk, credit risk, market
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risk, interest rate risk, operational risk, legal and fiduciary risk, reputational risks and
private equity risk, among others. However, as with any risk management framework, there are
inherent limitations to our risk management strategies as there may exist, or develop in the
future, risks that we have not appropriately anticipated or identified. If our risk management
framework proves ineffective, we could suffer unexpected losses and could be materially adversely
affected.
Our risk management strategies may not be effective because in a difficult or less liquid market
environment other market participants may be attempting to use the same or similar strategies to
deal with the difficult market conditions. In such circumstances, it may be difficult for us to
reduce our risk positions due to the activity of such other market participants.
Our derivatives businesses may expose us to unexpected market, credit and operational risks that
could cause us to suffer unexpected losses. Severe declines in asset values, unanticipated credit
events, or unforeseen circumstances that may cause previously uncorrelated factors to become
correlated (and vice versa) may create losses resulting from risks not appropriately taken into
account in the development, structuring or pricing of a derivative instrument. In addition, certain
of our derivative transactions require the physical settlement by delivery of securities,
commodities or obligations that we do not own; if we are not able to obtain such securities,
commodities or obligations within the required timeframe for delivery, this could cause us to
forfeit payments otherwise due to us and could result in settlement delays, which could damage our
reputation and ability to transact future business. In addition, in situations where derivatives
transactions are not settled or confirmed on a timely basis, we may be subject to heightened credit
and operational risk, and in the event of a default, we may find the contract more difficult to
enforce. Further, as new and more complex derivative products are created, disputes regarding the
terms or the settlement procedures of the contracts could arise, which could force us to incur
unexpected costs, including transaction and legal costs, and impair our ability to manage
effectively our risk exposure from these products.
Many of our hedging strategies and other risk management techniques have a basis in historic market
behavior, and all such strategies and techniques are based to some degree on management’s
subjective judgment. For example, many models used by us are based on assumptions regarding
correlations among prices of various asset classes or other market indicators. In times of market
stress, such as occurred during 2008, or in the event of other unforeseen circumstances, previously
uncorrelated indicators may become correlated, or conversely, previously correlated indicators may
make unrelated movements. These sudden market movements or unanticipated or unidentified market or
economic movements have in some circumstances limited the effectiveness of our risk management
strategies, causing us to incur losses. In addition, as our businesses change and grow and the
markets in which they operate continue to evolve, our risk management framework may not always keep
sufficient pace with those changes. For example, there is the risk that the credit and market risks
associated with new products or new business strategies may not be appropriately identified,
monitored or managed. We cannot provide
assurance that our risk management framework, including our
underlying assumptions or strategies, will at all times be accurate and effective.
Our operations are subject to risk of loss from unfavorable economic, monetary, political, legal
and other developments in the United States and around the world.
Our businesses and earnings are affected by the fiscal and other policies that are adopted by
various regulatory authorities of the United States, non-U.S. governments and international
agencies.
The Board of Governors of the Federal Reserve System regulates the supply of money and credit in
the United States. Its policies determine in large part the cost of funds for lending and investing
and the return earned on those loans and investments. The market impact from such policies can also
materially decrease the value of financial assets that we hold, such as debt securities and
mortgage servicing rights (“MSRs”). Its policies also can adversely affect borrowers, potentially
increasing the risk that they may fail to repay their loans or satisfy their obligations to us.
Changes in Federal Reserve Board policies are beyond our control and, consequently, the impact of
these changes on our activities and results of operations is difficult to predict.
Our businesses and revenue are also subject to the risks inherent in maintaining international
operations and in investing and trading in securities of companies worldwide. These risks include,
among others, risk of loss from the outbreak of hostilities or acts of terrorism and various
unfavorable political, economic, legal or other developments, including social or political
instability, changes in governmental policies or policies of central banks, expropriation,
nationalization, confiscation of assets, price controls, capital controls, exchange controls, and
changes in laws and regulations. Further, various countries in which we operate or invest, or in
which we may do so in the future, have in the past experienced severe economic disruptions
particular to that country or region, including extreme currency fluctuations, high inflation, or
low or negative growth, among other negative conditions. Crime, corruption, war or military
actions, acts of terrorism and a lack of an established legal and regulatory framework are
additional challenges in some of these countries, particularly in certain emerging markets. Revenue
from international operations and trading in non-U.S. securities may be subject to negative
fluctuations as a result of the above considerations. The impact of these fluctuations could be
accentuated as some trading markets are smaller, less liquid and more volatile than larger markets.
Also, any of the above-mentioned events or circumstances in one country can, and has in the past,
affected our operations and investments in another country or countries, including our operations
in the U.S. Any such unfavorable conditions or developments could have an adverse impact on our
business and results of operations.
Our power generation and commodities activities are subject to extensive regulation, potential
catastrophic events and environmental risks and regulation that may expose us to significant cost
and liability.
We engage in power generation, and in connection with the commodities activities of our Investment
Bank, we engage in the storage, transportation, marketing or trading of several
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commodities, including metals, agricultural products, crude oil, oil products, natural gas,
electric power, emission credits, coal, freight, and related products and indices. We have also invested in companies engaged in wind energy and in sourcing, developing and trading emission reduction credits. As a result of
these activities, we are subject to extensive and evolving energy, commodities, environmental, and
other governmental laws and regulations. We expect laws and regulations affecting our power
generation and commodities activities to expand in scope and complexity. We may incur substantial
costs in complying with current or future laws and regulations and the failure to comply with these
laws and regulations may result in substantial civil and criminal fines and penalties. In addition,
liability may be incurred without regard to fault under certain environmental laws and regulations
for remediation of contaminations. Our power generation and commodities activities also further
exposes us to the risk of unforeseen and catastrophic events, including natural disasters, leaks,
spills, explosions, release of toxic substances, fires, accidents on land and at sea, wars, and
terrorist attacks that could result in personal injuries, loss of life, property damage, damage to
our reputation and suspension of operations. In addition, our power generation activities are
subject to disruptions, many of which are outside of our control, from the breakdown or failure of
power generation equipment, transmission lines or other equipment or processes, and the contractual
failure of performance by third-party suppliers or service providers, including the failure to
obtain and deliver raw materials necessary for the operation of power generation facilities. Our
actions to mitigate our risks related to the abovementioned considerations may not prove adequate
to address every contingency. In addition, insurance covering some of these risks may not be
available, and the proceeds, if any, from insurance recovery may not be adequate to cover
liabilities with respect to particular incidents. As a result, our financial condition and results
of operations may be adversely affected by such events.
We rely on our systems, employees and certain counterparties, and certain failures could materially
adversely affect our operations.
Our businesses are dependent on our ability to process, record and monitor a large number of
increasingly complex transactions. If any of our financial, accounting, or other data processing
systems fail or have other significant shortcomings, we could be materially adversely affected. We
are similarly dependent on our employees. We could be materially adversely affected if one of our
employees causes a significant operational break-down or failure, either as a result of human error
or where an individual purposefully sabotages or fraudulently manipulates our operations or
systems. Third parties with which we do business could also be sources of operational risk to us,
including relating to breakdowns or failures of such parties’ own systems or employees. Any of
these occurrences could diminish our ability to operate one or more of our businesses, or result in
potential liability to clients, reputational damage and regulatory intervention, any of which could
materially adversely affect us.
If personal, confidential or proprietary information of customers or clients in our possession were
to be mishandled or misused, we could suffer significant regulatory consequences, reputational
damage and financial loss. Such mishandling or misuse could include circumstances where, for
example, such information was erroneously provided to
parties who are not permitted to have the
information, either by fault of our systems, employees, or counterparties, or such information was
intercepted or otherwise inappropriately taken by third parties.
We may be subject to disruptions of our operating systems arising from events that are wholly or
partially beyond our control, which may include, for example, computer viruses, electrical or
telecommunications outages, or other damage to our property or assets; natural disasters; health
emergencies or pandemics; or events arising from local or larger scale political events, including
terrorist acts. Such disruptions may give rise to losses in service to customers and loss or
liability to us.
In a firm as large and complex as ours, lapses or deficiencies in internal control over financial
reporting may occur from time to time, and there is no assurance that significant deficiencies or
material weaknesses in internal controls may not occur in the future. In addition, there is the
risk that our controls and procedures as well as business continuity and data security systems
could prove to be inadequate. Any such failure could adversely affect our operations and results of
operations by requiring us to expend significant resources to correct the defect, as well as by
exposing us to litigation, regulatory fines or penalties or losses not covered by insurance.
We operate within a highly regulated industry and our business and results are significantly
affected by the laws and regulations to which we are subject.
We are subject to regulation under state and federal laws in the U.S., as well as the applicable
laws of each of the various other jurisdictions outside the U.S. in which we do business. These
laws and regulations affect the type and manner in which we do business and may limit our ability
to expand our product offerings, pursue acquisitions, or restrict the scope of operations and
services provided.
Recent market and economic conditions have led to new legislation and numerous proposals for
changes in the regulation of the financial services industry, including significant additional
legislation and regulation in the United States. For example, new legislation and regulation
affecting the credit card industry is expected to adversely affect our Card Services business by
reducing revenue and increasing compliance costs.
Recent proposals for further regulation of financial institutions, both domestically and
internationally, include calls to increase their capital and liquidity requirements; limit the size
and types of the activities permitted; and increase taxes on some institutions. For example, the
“Wall Street Reform and Consumer Protection Act of 2009” recently passed by the U.S. House of
Representatives would, among other things, establish a Consumer Financial Protection Agency having
broad authority to regulate providers of credit, savings, payment and other consumer financial
products and services, as well as create a structure to regulate systemically important financial
companies, and provide regulators with the power to require such companies to sell or transfer
assets and terminate activities if the regulators determine that the size or scope of activities of
the company pose a threat to the safety and soundness of the company or the financial stability of
the United States. Also proposed is more comprehensive regulation of the over-the-counter
derivatives market, including providing for
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more strict capital and margin requirements, the central clearing of standardized over-the-counter
derivatives, and heightened supervision of all over-the-counter derivatives dealers and major
market participants, including the Firm.
These new (and other) legislative and regulatory changes could result in significant loss of
revenue, limit our ability to pursue business opportunities we might otherwise consider engaging
in, impact the value of assets that we hold, require us to change certain of our business
practices, impose additional costs on us, or otherwise adversely affect our businesses.
Accordingly, we cannot provide assurance that any such new legislation or regulation would not have
an adverse effect on our business, results of operations or financial condition.
If we do not comply with current or future legislation and regulations that apply to our
operations, we may be subject to fines, penalties or material restrictions on our businesses in the
jurisdiction where the violation occurred. In recent years, regulatory oversight and enforcement
have increased substantially, imposing additional costs and increasing the potential risks
associated with our operations. As this regulatory trend continues, it could adversely affect our
operations and, in turn, our financial results.
We face significant legal risks, both from regulatory investigations and proceedings and from
private actions brought against us.
We are named as a defendant or are otherwise involved in various legal proceedings, including class
actions and other litigation or disputes with third parties, as well as investigations or
proceedings brought by regulatory agencies. Actions brought against us may result in judgments,
settlements, fines, penalties or other results adverse to us, which could materially adversely
affect our business, financial condition or results of operation, or cause us serious reputational
harm. As a participant in the financial services industry, it is likely we will continue to
experience a high level of litigation and regulatory scrutiny and investigations related to our
businesses and operations.
There is increasing competition in the financial services industry which may adversely affect our
results of operations.
We operate in a highly competitive environment and we expect competitive conditions to continue to
intensify as continued merger activity in the financial services industry produces larger,
better-capitalized and more geographically diverse companies that are capable of offering a wider
array of financial products and services at more competitive prices.
We also face an increasing array of competitors. Competitors include other banks, brokerage firms,
investment banking companies, merchant banks, hedge funds, private equity firms, insurance
companies, mutual fund companies, credit card companies, mortgage banking companies, trust
companies, securities processing companies, automobile financing companies, leasing companies,
e-commerce and other Internet-based companies, and a variety of other financial services and
advisory companies. Technological advances and the growth of e-commerce have made it possible for
non-depository institutions to offer products and services that traditionally were banking
products, and for financial institutions and other companies to provide electronic
and
Internet-based financial solutions, including electronic securities trading. Our businesses
generally compete on the basis of the quality and variety of our products and services, transaction
execution, innovation, reputation and price. Ongoing or increased competition in any one or all of
these areas may put downward pressure on prices for our products and services or may cause us to
lose market share. Increased competition also may require us to make additional capital investment
in our businesses in order to remain competitive. These investments may increase expense or may
require us to extend more of our capital on behalf of clients in order to execute larger, more
competitive transactions. We cannot provide assurance that the significant and increasing
competition in the financial services industry will not materially adversely affect our future
results of operations.
Our acquisitions and the integration of acquired businesses may not result in all of the benefits
anticipated.
We have in the past and may in the future seek to grow our business by acquiring other businesses.
There can be no assurance that our acquisitions will have the anticipated positive results,
including results relating to: the total cost of integration; the time required to complete the
integration; the amount of longer-term cost savings; the overall performance of the combined
entity; or an improved price for our common stock. Integration of an acquired business can be
complex and costly, sometimes including combining relevant accounting and data processing systems
and management controls, as well as managing relevant relationships with employees, clients,
suppliers and other business partners. Integration efforts could divert management attention and
resources, which could adversely affect our operations or results. We cannot provide assurance that
any integration efforts of acquisitions already consummated or any new acquisitions would not
result in the occurrence of unanticipated costs or losses.
We may continue to experience increased credit costs or need to take additional markdowns and
allowances for loan losses on the assets and loans acquired in the merger (the “Bear Stearns
merger”) by JPMorgan Chase and The Bear Stearns Companies Inc. (“Bear Stearns”) and in connection
with the acquisition of Washington Mutual Bank’s (“Washington Mutual”) banking operations (the
“Washington Mutual transaction”). We cannot assure you that as our integration efforts continue in
connection with these transactions, other unanticipated costs or losses will not be incurred.
Acquisitions may also result in business disruptions that cause us to lose customers or cause
customers to remove their accounts from us and move their business to competing financial
institutions. It is possible that the integration process related to acquisitions could result in
the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and
policies that could adversely affect our ability to maintain relationships with clients, customers,
depositors and employees. The loss of key employees in connection with an acquisition could
adversely affect our ability to successfully conduct our business.
Damage to our reputation could damage our businesses.
Maintaining a positive reputation is critical to our attracting and maintaining customers,
investors and employees. Damage to our
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reputation can therefore cause significant harm to our business and prospects. Harm to our
reputation can arise from numerous sources, including, among others, employee misconduct,
litigation or regulatory outcomes, failing to deliver minimum standards of service and quality,
compliance failures, unethical behavior, and the activities of customers and counterparties.
Further, negative publicity regarding us, whether or not true, may result in harm to our prospects.
Actions by the financial services industry generally or by certain members of or individuals in the
industry can also affect our reputation. For example, the role played by financial services firms
in the financial crisis has damaged the reputation of the industry as a whole.
We could suffer significant reputational harm if we fail to properly identify and manage potential
conflicts of interest. Management of potential conflicts of interests has become increasingly
complex as we expand our business activities through more numerous transactions, obligations and
interests with and among our clients. The failure to adequately address, or the perceived failure
to adequately address, conflicts of interest could affect the willingness of clients to deal with
us, or give rise to litigation or enforcement actions. Therefore, there can be no assurance that
conflicts of interest will not arise in the future that could cause material harm to us.
Our ability to attract and retain qualified employees is critical to the success of our business
and failure to do so may materially adversely affect our performance.
Our employees are our most important resource and, in many areas of the financial services
industry, competition for qualified personnel is intense. The imposition on us or on our employees
of certain of the currently proposed restrictions or taxes on executive compensation may adversely
affect our ability to attract and retain qualified senior management and employees. If we are
unable to continue to retain and attract qualified employees, our performance, including our
competitive position, could be materially adversely affected.
Our financial statements are based in part on assumptions and estimates which, if wrong, could
cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the United States of America, we are
required to use certain assumptions and estimates in preparing our financial statements, including
in determining credit loss reserves, reserves related to litigations and the fair value of certain
assets and liabilities, among other items. If assumptions or estimates underlying our financial
statements are incorrect, we may experience material losses.
Certain of our financial instruments, including trading assets and liabilities, available-for-sale
securities, certain loans, MSRs, private equity investments, structured notes and certain
repurchase and resale agreements, among other items, require a determination of their fair value in
order to prepare our financial statements. Where quoted market prices are not available, we may
make fair value determinations based on internally developed models or other means which ultimately
rely to some degree on management judgment. Some of these and other assets and liabilities may have
no direct observable price levels, making their valuation
particularly subjective, being based on
significant estimation
and judgment. In addition, sudden illiquidity in markets or declines in
prices of certain loans and securities may make it more difficult to value certain balance sheet
items, which may lead to the possibility that such valuations will be subject to further change or
adjustment and could lead to declines in our earnings.
ITEM 1B: UNRESOLVED SEC STAFF COMMENTS
None.
ITEM 2: PROPERTIES
JPMorgan Chase’s headquarters is located in New York City at 270 Park Avenue, which is a
50-story office building owned by JPMorgan Chase. This location contains approximately 1.3 million
square feet of space. The building is currently undergoing a major renovation in five stages. The
design seeks to attain the highest sustainability rating for renovations of existing buildings
under the Leadership in Energy and Environmental Design (“LEED”) Green Building Rating System. The
renovations of floors 15 – 50 are complete. The renovation of the exterior Plaza and the lobby
began in the fourth quarter 2009. The total renovation is expected to be substantially completed by
mid-year 2011.
In connection with the Bear Stearns merger in 2008, JPMorgan Chase acquired 383 Madison Avenue in
New York City, a 45-story, 1.1 million square-foot office building on land which is subject to a
ground lease through 2096. This building serves as the U.S. headquarters of JPMorgan Chase’s
Investment Bank.
In total, JPMorgan Chase owned or leased approximately 12.9 million square feet of commercial
office and retail space in New York City at December 31, 2009. JPMorgan Chase and its subsidiaries
also own or lease significant administrative and operational facilities in Houston and Dallas,
Texas (4.4 million square feet); Chicago, Illinois (3.9 million square feet); Columbus, Ohio
(2.7 million square feet); Phoenix, Arizona (1.4 million square feet); Jersey City, New Jersey
(1.2 million square feet); San Francisco, California (1.0 million square feet); Seattle, Washington
(1.0 million square feet); Wilmington, Delaware (1.0 million square feet); and 5,154 retail
branches in 23 states. At December 31, 2009, the Firm occupied approximately 72.5 million total
square feet of space in the United States.
At December 31, 2009, the Firm managed and occupied approximately 3.7 million total square feet of
space in Europe, Middle East and Africa.
In the United Kingdom, JPMorgan Chase leased approximately 2.6 million square feet of office space
and owned a 360,000 square-foot operations center at December 31, 2009. In 2008, JPMorgan Chase
acquired a 999-year leasehold interest in land at Canary Wharf, London, as the possible future site
for construction of a new European headquarters building. Initially, the design was for a building
area of 1.9 million square feet and up to five trading floors; it is now modified to 1.7 million
square feet and up to four trading floors. JPMorgan Chase is currently in the design development
stage and continues to identify and evaluate further opportunities to modify the design. JPMorgan
Chase, by agreement with the developer (as renegotiated in 2009), has the ability to defer
commencement of the main construction through at least October 2011. JPMorgan Chase
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is reconsidering its occupancy options in London during this deferral period. The building design will
strive to achieve the highest possible environmental efficiency rating.
In addition, JPMorgan Chase and its subsidiaries occupy offices and other administrative and
operational facilities in the Asia Pacific region, Latin America and Canada under various types of
ownership and leasehold agreements, aggregating approximately 4.4 million total square feet of
space at December 31, 2009.
The properties occupied by JPMorgan Chase are used across all of the Firm’s business segments and
for corporate purposes. JPMorgan Chase continues to evaluate its current and projected space
requirements and may determine from time to time that certain of its premises and facilities are no
longer necessary for its operations. There is no assurance that the Firm will be able to dispose of
any such excess premises or that it will not incur charges in connection with such dispositions.
Such disposition costs may be material to the Firm’s results of operations in a given period.
ITEM 3: LEGAL PROCEEDINGS
Bear Stearns Shareholder Litigation and Related Matters.
Various shareholders of Bear Stearns
have commenced purported class actions against Bear Stearns and certain of its former officers
and/or directors on behalf of all persons who purchased or otherwise acquired common stock of Bear
Stearns between December 14, 2006 and March 14, 2008 (the “Class Period”). The actions, originally
commenced in several federal courts, allege that the defendants issued materially false and
misleading statements regarding Bear Stearns’ business and financial results and that, as a result
of those false statements, Bear Stearns’ common stock traded at artificially inflated prices during
the Class Period. In connection with these allegations, the complaints assert claims for violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Separately, several individual
shareholders of Bear Stearns have commenced or threatened to commence arbitration proceedings and
lawsuits asserting claims similar to those in the putative class actions.
In addition, Bear Stearns and certain of its former officers and/or directors have also been named
as defendants in a number of purported class actions commenced in the United States District Court
for the Southern District of New York seeking to represent the interests of participants in the
Bear Stearns Employee Stock Ownership Plan (“ESOP”) during the time period of December 2006 to
March 2008. These actions allege that defendants breached their fiduciary duties to plaintiffs and
to the other participants and beneficiaries of the ESOP by (a) failing to manage prudently the
ESOP’s investment in Bear Stearns securities; (b) failing to communicate fully and accurately about
the risks of the ESOP’s investment in Bear Stearns stock; (c) failing to avoid or address alleged
conflicts of interest; and (d) failing to monitor those who managed and administered the ESOP. In
connection with these allegations, each plaintiff asserts claims for violations under various
sections of the Employee Retirement Income Security Act (“ERISA”) and seeks reimbursement to the
ESOP for all losses, an unspecified amount of monetary damages and imposition of a constructive
trust.
Bear Stearns, former members of Bear Stearns’ Board of Directors and certain of Bear Stearns’
former executive officers have also been named as defendants in two purported shareholder
derivative suits, subsequently consolidated into one action, pending in the United States District
Court for the Southern District of New York. Plaintiffs are asserting claims for breach of
fiduciary duty, violations of federal securities laws, waste of corporate assets and gross
mismanagement, unjust enrichment, abuse of control and indemnification and contribution in
connection with the losses sustained by Bear Stearns as a result of its purchases of subprime loans
and certain repurchases of its own common stock. Certain individual defendants are also alleged to
have sold their holdings of Bear Stearns common stock while in possession of material nonpublic
information. Plaintiffs seek compensatory damages in an unspecified amount and an order directing
Bear Stearns to improve its corporate governance procedures. Plaintiffs later filed a second
amended complaint asserting, for the first time, purported class action claims for violation of
Section 10(b) of the Securities Exchange Act of 1934, as well as new allegations concerning events
that took place in March 2008.
All of the above-described actions filed in federal courts were ordered transferred and joined for
pre-trial purposes before the United States District Court for the Southern District of New York.
Motions to dismiss have been filed in the purported securities class action, the shareholders’
derivative action and the ERISA action.
Bear Stearns Merger Litigation.
Seven putative class actions (five that were commenced in New York
and two that were commenced in Delaware) were consolidated in New York State Court in Manhattan
under the caption
In re Bear Stearns Litigation
. Bear Stearns, as well as its former directors and
certain of its former executive officers, were named as defendants. JPMorgan Chase was also named
as a defendant. The actions allege, among other things, that the individual defendants breached
their fiduciary duties and obligations to Bear Stearns’ shareholders by agreeing to the proposed
merger. The Firm was alleged to have aided and abetted the alleged breaches of fiduciary duty;
breached its fiduciary duty as controlling shareholder/controlling entity; tortiously interfered
with the Bear Stearns shareholders’ voting rights; and to have been unjustly enriched. Plaintiffs
initially sought to enjoin the proposed merger and enjoin the Firm from voting certain shares
acquired by the Firm in connection with the proposed merger. The plaintiffs subsequently informed
the Court that they were withdrawing that motion, but amended the consolidated complaint to pursue
claims, which included a claim for an unspecified amount of compensatory damages. In December 2008,
the court granted summary judgment in favor of all the defendants. Plaintiffs have filed a notice
of appeal.
Bear Stearns Hedge Fund Matters
. Bear Stearns, certain current or former subsidiaries of Bear
Stearns, including Bear Stearns Asset Management, Inc. (“BSAM”) and Bear Stearns & Co. Inc., and
certain current or former Bear Stearns employees are named defendants (collectively the “Bear
Stearns defendants”) in multiple civil actions and arbitrations relating to the failure of the Bear
Stearns High Grade Structured Credit Strategies Master Fund, Ltd. (the “High Grade Fund”) and the
Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd.
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Part I
(the “Enhanced Leverage Fund”) (collectively, the “Funds”). BSAM served as investment manager for
both of the Funds, which were organized such that there were U.S. and Cayman Islands “feeder funds”
that invested substantially all their assets, directly or indirectly, in the Funds. The Funds are
in liquidation.
There are five civil actions pending in the United States District Court for the Southern District
of New York relating to the Funds. Three of these actions involve derivative lawsuits brought on
behalf of purchasers of partnership interests in the two U.S. feeder funds. Plaintiffs in these
actions allege that the Bear Stearns defendants mismanaged the Funds and made material
misrepresentations to and/or withheld information from investors in the funds. These actions seek,
among other things, unspecified compensatory damages based on alleged investor losses. A fourth
action, brought by the Joint Voluntary Liquidators of the Cayman Islands feeder funds, makes
allegations similar to those asserted in the derivative lawsuits related to the U.S. feeder funds,
and seeks compensatory and punitive damages. A motion to dismiss or alternatively to stay is
pending in one of the derivative suits relating to one of the U.S. feeder funds. In the remaining
three cases, motions to dismiss have been granted in part and denied in part, and discovery is
ongoing The fifth action was brought by Bank of America and Banc of America Securities LLC
(together “BofA”) alleging breach of contract and fraud in connection with a May 2007 $4 billion
securitization, known as a “CDO-squared,” for which BSAM served as collateral manager. This
securitization was composed of certain collateralized debt obligation (“CDO”) holdings that were
purchased by BofA from the High Grade Fund and the Enhanced Leverage Fund. Defendants’ motion to
dismiss in this action was largely denied; an amended complaint was filed; and discovery is ongoing
in this case as well.
Ralph Cioffi and Matthew Tannin, the portfolio managers for the Funds, were tried on criminal
charges of securities fraud and conspiracy to commit securities and wire fraud brought by the
United States Attorney’s Office for the Eastern District of New York. The U.S. Attorney’s Office
contended, among other things, that Cioffi and Tannin made misrepresentations concerning the Funds’
performance, prospects and liquidity, as well as their personal investments in the Funds. On
November 10, 2009, after a five-week trial, the jury found Cioffi and Tannin not guilty of all
charges submitted to the jury. The United States Securities and Exchange Commission is proceeding
with its action against Cioffi and Tannin.
Municipal Derivatives Investigations and Antitrust Litigation.
The Department of Justice’s
Antitrust Division and the Securities and Exchange Commission have been investigating JPMorgan
Chase and Bear Stearns for possible antitrust and securities violations in connection with the
bidding or sale of guaranteed investment contracts and derivatives to municipal issuers. Although
the principal focus of the investigations to date has been the period 2001 to 2005, the
investigations may also include transactions beyond that period. A group of state attorneys
general and the Office of the Comptroller of the Currency (“OCC”) have opened investigations into
the same underlying conduct. JPMorgan Chase has been cooperating with all of these investigations.
The Philadelphia Office of the SEC provided notice to JPMorgan Securities Inc. (“JPMSI”)
that it
intends to recommend that the SEC bring civil charges in connection with its investigations. JPMSI
has responded to that notice, as well as to a separate notice that that Philadephia Office provided
to Bear, Stearns & Co. Inc.
Purported class action lawsuits and individual actions (the “Municipal Derivatives Actions”) have
been filed against JPMorgan Chase and Bear Stearns, as well as numerous other providers and
brokers, alleging antitrust violations in the markets for financial instruments related to
municipal bond offerings referred to collectively as “municipal derivatives.” The Municipal
Derivatives Actions have been consolidated in the United States District Court for the Southern
District of New York, and defendants have moved to dismiss the consolidated class action complaint.
The court has stayed discovery pending disposition of the motion to dismiss Certain plaintiffs
asserting class and individual claims under federal and California state law declined to join in
the consolidated class action complaints and have filed separate complaints, which defendants have
also moved to dismiss.
On November 4, 2009, JPMSI consented to the entry of an SEC administrative order finding that JPMSI
violated Sections 17(a)(2) and (3) of the Securities Act of 1933, Section 15B(c)(1) of the
Securities Exchange Act of 1934, and Municipal Securities Rulemaking Board Rule G-17 in connection
with certain Jefferson County, Alabama (the “County”) bond underwritings and related swap
transactions in 2002 and 2003 by failing to disclose in confirmations and official deal documents
descriptions of payments that had been made to mostly local Alabama businesses at the direction of
representatives of the Jefferson County Commission. JPMSI entered into the settlement with the SEC
without admitting or denying the SEC’s findings Shortly thereafter, the County filed a complaint
against the Firm and several other defendants in the Circuit Court of Jefferson County, Alabama.
The suit alleges that the Firm made payments to certain third parties in exchange for which it was
chosen to underwrite warrants issued by the County and chosen as the counterparty for certain swaps
executed by the County. In its complaint, Jefferson County alleges that JPMSI concealed these third
party payments and that, but for this concealment, the County would not have entered into the
transactions. The County further alleges that the transactions increased the risks of its capital
structure and that, following the downgrade of certain insurers that insured the warrants, the
County’s interest obligations increased and the principal due on a portion of its outstanding
warrants was accelerated. The Firm has moved to dismiss the County’s complaint.
A putative class action was filed on behalf of sewer ratepayers against the Firm and numerous other
defendants, based on substantially the same conduct described above (the “Wilson Action”). The Firm
moved to dismiss the claims for lack of standing. The plaintiff in the Wilson Action recently filed
a fifth amended complaint, which the Firm also moved to dismiss for lack of standing. Both motions
remain pending.
The Alabama Public Schools and College Authority (“APSCA”) brought a declaratory judgment action in
the United States District Court for the Northern District of Alabama claiming that certain
interest rate swaption transactions entered into with JPMorgan
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Chase Bank, N.A. (“Chase”) are void on the grounds that the APSCA purportedly did not have the
authority to enter into transactions or, alternatively, are voidable at the APSCA’s option because
of its alleged inability to issue refunding bonds in relation to the swaption. Following the denial
of its motion to dismiss the action, Chase answered the complaint and filed a counterclaim seeking
the amounts due under the swaption transactions. Discovery is under way.
Interchange Litigation.
A group of merchants have filed a series of putativie class action
complaints in several federal courts. The complaints allege that VISA and MasterCard, as well as
certain other banks and their respective bank holding companies, including Chase Bank USA, N.A.,
and JPMorgan Chase, conspired to set the price of credit card interchange fees and enacted
respective association rules in violation of Section 1 of the Sherman Act, and engaged in
tying/bundling and exclusive dealing. All cases have been consolidated in the United States
District Court for the Eastern District of New York for pretrial proceedings. The amended
consolidated class action complaint extended the claims beyond credit to debit cards. Defendants
filed a motion to dismiss all claims that predated January 1, 2004. The Court granted the motion to
dismiss these claims. Plaintiffs then filed a second amended consolidated class action complaint.
The basic theories of the complaint remain the same, and defendants again filed motions to dismiss.
The Court has not yet ruled on the motions. Fact discovery has closed, and expert discovery in the
case is ongoing. The plaintiffs have filed a motion seeking class certification, and the defendants
have opposed that motion. The Court has not yet ruled on the class certification motion.
In addition to the consolidated class action complaint, plaintiffs filed supplemental complaints
challenging the MasterCard and Visa IPOs (the “IPO Complaints”). With respect to MasterCard,
plaintiffs allege that the offering violated Section 7 of the Clayton Act and Section 1 of the
Sherman Act and that the offering was a fraudulent conveyance. With respect to the Visa IPO,
plaintiffs are challenging the Visa IPO on antitrust theories parallel to those articulated in the
MasterCard IPO pleading. Defendants have filed motions to dismiss the IPO Complaints. The Court has
not yet ruled on the motions.
Mortgage-Backed Securities Litigation.
JPMC and affiliates, heritage-Bear and affiliates and
heritage WaMu affiliates have been named as defendants in a number of cases relating to various
roles they played in mortgage-backed securities (“MBS”) offerings. These cases are generally
purported class action suits, actions by individual purchasers of securities, or actions by
insurance companies that guaranteed payments of principal and interest for particular tranches.
Although the allegations vary by lawsuit, these cases generally allege that the offering documents
for the securitization trusts contained material misrepresentations and omissions, including
statements regarding the underwriting standards pursuant to which the underlying mortgage loans
were issued, the ratings given to the tranches by rating agencies, and the appraisal standards that
were used.
Purported class actions are pending against JPMorgan Chase, heritage Bear Stearns, and certain of
their current and former employees in the United States District Courts for the
Eastern and
Southern Districts of New York. Heritage Washington Mutual affiliates, WaMu Asset Acceptance Corp.
and WaMu Capital Corp.; are defendants in two purported class action cases, pending in the Western
District of Washington. In addition to allegations as to mortgage underwriting standards and
ratings, plaintiffs in these cases also allege that defendants failed to disclose Washington Mutual
Bank’s alleged coercion of or collusion with appraisal vendors to inflate appraisal valuations of
the loans in the pools. Motions to dismiss have been filed in one of the cases.
In addition to the purported class actions, JPMC affiliates and several heritage Bear Stearns
entities are defendants in actions in state court in Pennsylvania and in state court in Washington
brought by the Federal Home Loan Banks of Pittsburgh and Seattle, respectively. These actions
relate to each Federal Home Loan Bank’s purchases of certificates in MBS offerings. Defendants’
responses to the complaint brought by the FHLB of Pittsburgh are due on February 26, 2010.
Defendants have removed the action brought by the FHLB of Seattle to federal court.
EMC Mortgage Corporation (“EMC”), a subsidiary of JPMC, is a defendant in four pending actions
commenced by bond insurers that guaranteed payment on certain classes of MBS offerings sponsored by
EMC. Two of the actions, commenced respectively by Ambac Assurance Corporation and Syncora
Guarantee, Inc., (“Syncora”) are pending in the United States District Court for the Southern
District of New York and involve five securitizations sponsored by EMC. The third action was
commenced by Syncora, seeking access to certain loan files. The fourth was filed by CIFG Assurance
North America, Inc. in state court in Texas, and involves one securitization sponsored by EMC. In
each action, Plaintiffs claim the underlying mortgage loans had origination defects that
purportedly violate certain representations and warranties given by EMC to plaintiffs and that EMC
has breached the relevant agreements between the parties by failing to repurchase allegedly
defective mortgage loans. Each action seeks unspecified damages and an order compelling EMC to
repurchase those loans.
An action is pending in the United States District Court for the Southern District of New York
brought on behalf of purchasers of certificates issued by various MBS securitizations sponsored by
affiliates of IndyMac Bancorp (“IndyMac Trusts”). JPMSI, along with numerous other underwriters and
individuals, is named as a defendant, both in its own capacity and as successor to Bear Stearns &
Co. The defendants have moved to dismiss. JPMC and JPMSI are defendants in an action pending in
state court in Pennsylvania brought by FHLB-Pittsburgh, relating to its purchase of a certificate
issued by one IndyMac Trust. Defendants’ responses to the complaint are due on February 26, 2010.
JPMC, as successor to Bear Stearns, and other underwriters, along with certain individuals, are
defendants in an action pending in state court in California brought by MBIA Insurance Corp.
(“MBIA”) relating to certain certificates issued by three IndyMac trusts, as to two of which Bear
Stearns was an underwriter, and as to which MBIA provided guaranty insurance policies. MBIA
purports to be subrogated to the rights of the certificate holders, and seeks recovery of sums it
has paid and will pay pursuant to those policies.
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Part I
A heritage Bear Stearns subsidiary is a defendant in a purported class action that is pending in
federal court in New Mexico against a number of financial institutions that served as depositors
and/or underwriters for 10 MBS offerings issued by Thornburg Mortgage, a bankrupt mortgage
originator.
The Firm and certain other heritage entities have been sued in other purported class actions for
their roles an underwriter or depositor of third party MBS offerings but, other than the matters
described in the above two paragraphs, the Firm is indemnified in these other litigations.
Auction-Rate Securities Investigations and Litigation.
Beginning in March 2008, several regulatory
authorities initiated investigations of a number of industry participants, including the Firm,
concerning possible state and federal securities law violations in connection with the sale of
auction-rate securities. The market for many such securities had frozen and a significant number of
auctions for those securities began to fail in February 2008.
The Firm, on behalf of itself and affiliates, agreed to a settlement in principle with the New York
Attorney General’s Office which provided, among other things, that the Firm would offer to purchase
at par certain auction-rate securities purchased from J.P. Morgan Securities Inc., Chase Investment
Services Corp. and Bear, Stearns & Co. Inc. by individual investors, charities, and small- to
medium-sized businesses. The Firm also agreed to a substantively similar settlement in principle
with the Office of Financial Regulation for the State of Florida and the North American Securities
Administrator Association (“NASAA”) Task Force, which agreed to recommend approval of the
settlement to all remaining states, Puerto Rico and the U.S. Virgin Islands. The Firm finalized the
settlement agreements with the New York Attorney General’s Office and the Office of Financial
Regulation for the State of Florida. The settlement agreements provide for the payment of penalties
totaling $25 million to all states. The Firm is currently in the process of finalizing consent
agreements with NASAA’s member states. Approximately half of these consent agreements have been
finalized to date.
The Firm is also the subject of a putative securities class action in the United States District
Court for the Southern District of New York and a number of individual arbitrations and lawsuits in
various forums, brought by institutional and individual investors, relating to the Firm’s sales of
auction-rate securities. One action is brought by an issuer of auction-rate securities. The actions
generally allege that the Firm and other firms manipulated the market for auction-rate securities
by placing bids at auctions that affected these securities’ clearing rates or otherwise supported
the auctions without properly disclosing these activities. Some actions also allege that the Firm
misrepresented that auction-rate securities were short-term instruments. Plaintiffs filed an
amended consolidated complaint, and defendants’ responses to the complaint are due on March 3,
2010.
Additionally, the Firm was named in two putative antitrust class actions in the United States
District Court for the Southern District of New York, which actions allege that the Firm, in
collusion with numerous other financial institution defendants, entered into an unlawful conspiracy
in violation of Section 1 of the Sherman Act.
Specifically, the complaints allege that defendants
acted collusively to maintain and stabilize the auction-rate securities market and similarly acted
collusively in withdrawing their support for the auction-rate securities market in February 2008.
On January 26, 2010, the District Court dismissed both actions. The time to file an appeal has not
yet expired.
City of Milan Litigation and Criminal Investigation.
In January 2009, the City of Milan, Italy (the
“City”) issued civil proceedings against (among others) JPMorgan Chase Bank, National Association
(“JPMCB”) and J.P. Morgan Securities Ltd. (“JPMSL”) (together, “JPM”) in the District Court of
Milan. The proceedings relate to a (a) a bond issue by the City in June 2005 (the “Bond”) and (b)
an associated swap transaction, which was subsequently restructured on a number of occasions
between 2005 and 2007 (the “Swap”). The City seeks damages and/or other remedies against JPM (among
others) on the grounds of alleged “fraudulent and deceitful acts” and alleged breach of advisory
obligations by JPM (among others) in connection with the Swap and the Bond, together with related
swap transactions with other counterparties. The civil proceedings continue. No trial date has been
set. In January 2009, JPMCB also received a notice from the Prosecutor at the Court of Milan
placing it and certain current and former JPM personnel under investigation in connection with the
above transactions. Since April 2009, JPMCB has been contesting an attachment order obtained by the
Prosecutor, purportedly to freeze assets potentially subject to confiscation in the event of a
conviction. The original Euro 92 million attachment has been reduced to Euro 44.9 million, and
JMPCB’s application for a further reduction remains pending. In November 2009, the Prosecutor filed
a request to proceed to trial in respect of the above transactions against (a) four current and
former JPM personnel and (b) JPMCB for administrative liability under Italian Law 231/2001 in
respect of alleged crimes committed by those personnel. The preliminary hearing at which these
requests will be determined began in January 2010 and continues, with further hearing dates
scheduled. The sanctions that potentially could be imposed under Italian law 231/2001 include
monetary penalties and restrictions on conduct of JPMCB’s business in the jurisdiction.
Washington Mutual Litigations.
Subsequent to JPMorgan Chase’s acquisition from the Federal Deposit
Insurance Corporation (“FDIC”) of substantially all of the assets and certain specified liabilities
of Washington Mutual Bank, Henderson Nevada (“Washington Mutual Bank”), on September 26, 2008,
Washington Mutual Bank’s parent holding company, Washington Mutual, Inc. (“WMI”) and its
wholly-owned subsidiary, WMI Investment Corp. (together, the “Debtors”) both commenced voluntary
cases under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court
for the District of Delaware (the “Bankruptcy Case”). In the Bankruptcy Case, the Debtors have
asserted rights and interests in certain assets. The assets in dispute include principally the
following: (a) approximately $4 billion in securities contributed by WMI to Washington Mutual Bank;
(b) the right to tax refunds arising from overpayments attributable to operations of Washington
Mutual Bank and its subsidiaries; (c) ownership of and other rights in approximately $4 billion
that WMI contends are deposit accounts at Washington
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Mutual Bank and one of its subsidiaries; and (d) ownership of and rights in various other contracts
and other assets (collectively, the “Disputed Assets”).
JPMorgan Chase commenced an adversary proceeding in the Bankruptcy Case against the Debtors and
(for interpleader purposes only) the FDIC seeking a declaratory judgment and other relief
determining JPMorgan Chase’s legal title to and beneficial interest in the Disputed Assets.
Discovery is underway in the JPMorgan Chase adversary proceeding.
The Debtors commenced a separate adversary proceeding in the Bankruptcy Case against JPMorgan
Chase, seeking turnover of the same $4 billion in purported deposit funds and recovery for alleged
unjust enrichment for failure to turn over the funds. The Debtors have moved for summary judgment
in the turnover proceeding. Discovery is under way in the turnover proceeding.
In both JPMorgan Chase’s adversary proceeding and the Debtors’ turnover proceeding, JPMorgan Chase
and the FDIC have argued that the Bankruptcy Court lacks jurisdiction to adjudicate certain claims.
JPMorgan Chase moved to have the adversary proceedings transferred to United States District Court
for the District of Columbia and to withdraw jurisdiction from the Bankruptcy Court to the District
Court. That motion is fully briefed. In addition, JPMorgan Chase and the FDIC filed papers with the
United States District Court for the District of Delaware appealing the Bankruptcy Court’s rulings
rejecting the jurisdictional arguments, and that appeal is fully briefed. JPMorgan Chase is also
appealing a separate Bankruptcy Court decision holding, in part, that the Bankruptcy Court could
proceed with certain matters while the first appeal is pending. Briefing on that appeal is under
way.
The Debtors submitted claims substantially similar to those submitted in the Bankruptcy Court in
the FDIC receivership for, among other things, ownership of certain Disputed Assets, as well as
claims challenging the terms of the agreement pursuant to which substantially all of the assets of
Washington Mutual Bank were sold by the FDIC to JPMorgan Chase. The FDIC, as receiver, disallowed
the Debtors’ claims and the Debtors filed an action against the FDIC in the United States District
Court for the District of Columbia challenging the FDIC’s disallowance of the Debtors’ claims,
claiming ownership of the Disputed Assets, and seeking money damages from the FDIC. JPMorgan Chase
has intervened in the action. On January 7, 2010, the District Court stayed the action pending
developments in the Bankruptcy Court and ordered the parties to submit a joint status report every
120 days. In connection with the stay, the District Court denied WMI’s and the FDIC’s motions to
dismiss without prejudice.
In addition, the Debtors moved in the Bankruptcy Court to take discovery from JPMorgan Chase
purportedly related to a litigation originally filed in the 122nd State District Court of Galveston
County, Texas (the “Texas Action”). JPMorgan Chase opposed the motion, but the Bankruptcy Court
ordered that the discovery proceed. Debtors are also seeking related discovery from various third
parties, including several government agencies. Plaintiffs in the Texas Action are certain holders
of WMI common stock and the debt of WMI and Washington Mutual Bank who have sued JPMorgan Chase for
unspecified damages alleging that JPMorgan
Chase acquired substantially all of the assets of
Washington Mutual Bank from the FDIC at an allegedly too low price. The FDIC intervened in the
Texas Action, had it removed to the United States District Court for the Southern District of
Texas, and then the FDIC and JPMorgan Chase moved to have the Texas Action dismissed or
transferred. The Court transferred the Texas Action to the District of Columbia. Plaintiffs have
moved to have the FDIC dismissed as a party and to remand the action to the state court, or, in the
alternative, dismissed for lack of subject matter jurisdiction. JPMorgan Chase and the FDIC have
moved to have the entire action dismissed. The motions to dismiss are fully briefed.
Other proceedings related to Washington Mutual’s failure also pending before the United States
District Court for the District of Columbia include a lawsuit brought by Deutsche Bank National
Trust Company against the FDIC alleging breach of various mortgage securitization agreements and
alleged violation of certain representations and warranties given by certain WMI subsidiaries in
connection with those securitization agreements. JPMorgan Chase has not been named a party to the
Deutsche Bank litigation, but the complaint includes assertions that JPMorgan Chase may have
assumed certain liabilities.
Securities Lending Litigation.
JPMorgan Chase Bank N.A. (“JPMorgan”) has been named as a defendant
in four putative class actions asserting ERISA and non-ERISA claims pending in the United States
District Court for the Southern District of New York related to the Firm’s securities lending
business. Three of the pending actions relate to losses of plaintiffs’ money (i.e., cash collateral
for securities loan transactions) in medium-term notes of a structured investment vehicle known as
Sigma Finance Inc. (“Sigma”). The fourth action concerns losses of money invested in Lehman
Brothers medium-term notes, as well as asset-backed securities offered by nine other issuers.
Investment Management Litigation.
Four cases have been filed claiming that investment portfolios
managed by JPMorgan Investment Management Inc. (“JPMIM”) were inappropriately invested in
securities backed by subprime residential real estate collateral. Plaintiffs claim that JPMIM and
related defendants are liable for the loss in market value of these securities. The first case was
filed by NM Homes One, Inc. in federal court in New York. The second case, filed by Assured
Guaranty (U.K.) in New York state court, was dismissed and Assured has appealed the court’s
decision. The third case was filed by Ambac Assurance UK Limited in New York state court and
JPMIM’s motion to dismiss the complaint is pending. The fourth case was filed by CMMF LLP in New
York state court in December 2009; the Court granted JPMIM’s motion to dismiss the claims, other
than claims for breach of contract and misrepresentation. Both CMMF and JPMIM have filed notices of
appeal.
Enron Litigation.
JPMorgan Chase and certain of its officers and directors are involved in several
lawsuits arising out of its banking relationships with Enron Corp. and its subsidiaries (“Enron”).
A number of actions and other proceedings against the Firm have been resolved, including a class
action lawsuit captioned
Newby v. Enron Corp.
and adversary proceedings brought by Enron’s
bankruptcy estate. The remaining Enron-related actions include individual actions by Enron
investors, creditors and counterparties.
15
Table of Contents
The remaining litigation also includes a suit against JPMorgan Chase alleging, in relevant part,
breach of contract and breach of fiduciary duty based upon the Firm’s role as Indenture Trustee in
connection with an indenture agreement between JPMorgan Chase and Enron. The case has been
dismissed, but plaintiffs have appealed the dismissal and their appeal is pending before the New
York State Court of Appeals.
A putative class action on behalf of JPMorgan Chase employees who participated in the Firm’s 401(k)
plan asserted claims under the Employee Retirement Income Security Act (“ERISA”) for alleged
breaches of fiduciary duties and negligence by JPMorgan Chase, its directors and named officers.
Plaintiffs’ motion for class certification and the Firm’s motion for judgment on the pleadings are
both fully briefed.
IPO Allocation Litigation.
JPMorgan Chase and certain of its securities subsidiaries were named,
along with numerous other firms in the securities industry, as defendants in a large number of
putative class action lawsuits filed in the United States District Court for the Southern District
of New York alleging improprieties in connection with the allocation of securities in various
public offerings, including some offerings for which a JPMorgan Chase entity served as an
underwriter. They also claim violations of securities laws arising from alleged material
misstatements and omissions in registration statements and prospectuses for the initial public
offerings (“IPOs”) and alleged market manipulation with respect to aftermarket transactions in the
offered securities. Bear, Stearns & Co., Inc. is named as a defendant in a little less than a third
of the pending IPO securities cases. Antitrust lawsuits based on similar allegations have been
dismissed with prejudice. A settlement was reached in the securities cases, which the District
Court approved; the Firm’s share of the settlement is
approximately $62 million. Appeals and a
petition for leave to appeal have been filed in the United States Court of Appeals for the Second
Circuit seeking reversal of the decision approving the settlement.
In addition to the various cases, proceedings and investigations discussed above, JPMorgan Chase
and its subsidiaries are named as defendants or otherwise involved in a number of other legal
actions and governmental proceedings arising in connection with their businesses. Additional
actions, investigations or proceedings may be initiated from time to time in the future. In view of
the inherent difficulty of predicting the outcome of legal matters, particularly where the
claimants seek very large or indeterminate damages, or where the cases present novel legal
theories, involve a large number of parties or are in early stages of discovery, the Firm cannot
state with confidence what the eventual outcome of these pending matters will be, what the timing
of the ultimate resolution of these matters will be or what the eventual loss, fines, penalties or
impact related to each pending matter may be. JPMorgan Chase believes, based upon its current
knowledge, after consultation with counsel and after taking into account its current litigation
reserves, that the outcome of the legal actions, proceedings and investigations currently pending
against it should not have a material adverse effect on the Firm’s consolidated financial
condition. However, in light of the uncertainties involved in such proceedings, actions and
investigations, there is no assurance that the ultimate resolution of these matters will not
significantly exceed the reserves currently accrued by the Firm; as a result, the outcome of a
particular matter may be material to JPMorgan Chase’s operating results for a particular period,
depending on, among other factors, the size of the loss or liability imposed and the level of
JPMorgan Chase’s income for that period.
16
Table of Contents
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive officers of the registrant
| Name | Age | Positions and offices | ||||
| (at December 31, 2009) | ||||||
|
|
||||||
|
James Dimon
|
53 | Chairman of the Board since December 31, 2006, and President and Chief Executive Officer since December 31, 2005. He had been President and Chief Operating Officer from July 1, 2004, until December 31, 2005. | ||||
|
|
||||||
|
Frank J. Bisignano
|
50 | Chief Administrative Officer since December 2005. Prior to joining JPMorgan Chase, he had been Chief Executive Officer of Citigroup Inc.’s Global Transaction Services. | ||||
|
|
||||||
|
Steven D. Black
|
57 | Vice Chairman since January 2010. He had been Executive Chairman of the Investment Bank since September 2009, prior to which he had been Co-Chief Executive Officer of the Investment Bank from March 2004 until September 2009. | ||||
|
|
||||||
|
Michael J. Cavanagh
|
43 | Chief Financial Officer. | ||||
|
|
||||||
|
Stephen M. Cutler
|
48 | General Counsel since February 2007. Prior to joining JPMorgan Chase, he was a partner and co-chair of the Securities Department at the law firm of WilmerHale since October 2005. Prior to joining WilmerHale, he had been Director of the Division of Enforcement at the U.S. Securities and Exchange Commission since October 2001. | ||||
|
|
||||||
|
William M. Daley
|
61 | Head of Corporate Responsibility since June 2007, and Chairman of the Midwest Region since May 2004. | ||||
|
|
||||||
|
John L. Donnelly
|
53 | Director of Human Resources since January 2009. Prior to joining JPMorgan Chase, he had been Global Head of Human Resources at Citigroup, Inc. since July 2007 and Head of Human Resources and Corporate Affairs for Citi Markets and Banking business from 1998 until 2007. | ||||
|
|
||||||
|
Ina R. Drew
|
53 | Chief Investment Officer since February 2005. | ||||
|
|
||||||
|
Mary Callahan Erdoes
|
42 | Chief Executive Officer of Asset Management since September 2009. From March 2005 to September 2009, she was Chief Executive Officer of Private Banking. Prior to 2005, she was responsible for investment solutions and strategy for private banking clients worldwide. | ||||
|
|
||||||
|
Samuel Todd Maclin
|
53 | Chief Executive Officer of Commercial Banking. | ||||
|
|
||||||
|
Jay Mandelbaum
|
47 | Head of Strategy and Business Development. | ||||
|
|
||||||
|
Heidi Miller
|
56 | Chief Executive Officer of Treasury & Securities Services. | ||||
|
|
||||||
|
Charles W. Scharf
|
44 | Chief Executive Officer of Retail Financial Services. | ||||
|
|
||||||
|
Gordon A. Smith
|
51 | Chief Executive Officer of Card Services since June 2007. Prior to joining JPMorgan Chase, he was with American Express Company for more than 25 years. From August 2005 until June 2007, he was president of American Express’ global commercial card business. Prior to that, he was president of the consumer card services group and was responsible for all consumer card products in the U.S. | ||||
|
|
||||||
|
James E. Staley
|
53 | Chief Executive Officer of the Investment Bank since September 2009, prior to which he had been Chief Executive Officer of Asset Management. | ||||
|
|
||||||
|
Barry L. Zubrow
|
56 | Chief Risk Officer since November 2007. Prior to joining JPMorgan Chase, he was a private investor and has been Chairman of the New Jersey Schools Development Authority since March 2006. | ||||
Unless otherwise noted, during the five fiscal years ended December 31, 2009, all of JPMorgan
Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan
Chase. There are no family relationships among the foregoing executive officers.
17
Table of Contents
ITEM 5: MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The outstanding shares of JPMorgan Chase common stock are listed and traded on the New York
Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange. For the quarterly high and
low prices of JPMorgan Chase’s common stock for the last two years, see the section entitled
“Supplementary information – Selected quarterly financial data (unaudited)” on page 241. For a
comparison of the cumulative total return for JPMorgan Chase common stock with the comparable total
return of the S&P 500 Index and the S&P Financial Index over the five-year period ended December
31, 2009, see “Five-year stock performance,” on page 39.
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend
from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders
of record on April 6, 2009. The action enabled the Firm to retain approximately $5 billion in
common equity during 2009, and was taken to ensure the Firm had sufficient capital strength in the
event the very weak economic conditions that existed at the beginning of the year further
deteriorated. JPMorgan Chase declared quarterly cash dividends on its common stock in the amount of
$0.05 per share for each quarter of 2009 and $0.38 per share for each quarter of 2008.
The common dividend payout ratio, based on reported net income, was 9% for 2009, 114% for 2008, and
34% for 2007. For a discussion of restrictions on dividend payments, see Note 23 on pages 222–223.
At January 31, 2010, there were
231,559 holders of record of JPMorgan Chase common stock.
For information regarding securities authorized for issuance under the Firm’s employee stock-based
compensation plans, see Item 12 on page 20.
In April 2007, the Board of Directors approved a stock repurchase program that authorizes the
repurchase of up to $10.0 billion of the Firm’s common shares. In connection with the U.S.
Treasury’s sale of the warrants it received as part of the Capital Purchase Progam, the
Board of Directors amended the Firm’s securities repurchase program to authorize the repurchase of
warrants for its stock. During the years ended December 31, 2009 and 2008, the Firm did not
repurchase any shares of its common stock. As of December 31, 2009, $6.2 billion of authorized
repurchase capacity remained under the repurchase program with
respect to repurchases of common
stock, and all the authorized repurchase capacity remained with respect to the warrants. For
further information regarding the Capital Purchase Program, see Capital Management – Capital
Purchase Program on page 83.
The authorization to repurchase common stock and warrants will be utilized at management’s
discretion, and the timing of purchases and the exact number of shares and warrants purchased is
subject to various factors, including market conditions; legal considerations affecting the amount
and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and
intangibles); internal capital generation; and alternative potential investment opportunities. The
repurchase program does not include specific price targets or timetables, may be executed through
open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and
may be suspended at any time. A Rule 10b5-1 repurchase plan allows the Firm to repurchase its
equity during periods when it would not otherwise be repurchasing common stock – for example,
during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be made
according to a predefined plan that is established when the Firm is not aware of material nonpublic
information.
For a discussion of restrictions on stock repurchases, see Note 23 on pages 222–223.
Stock repurchases under the stock-based incentive plans
Participants in the Firm’s stock-based incentive plans may have shares withheld to cover income
taxes. Shares withheld to pay income taxes are repurchased pursuant to the terms of the applicable
plan and not under the Firm’s share repurchase program. Shares repurchased between October 28,
2008, and June 17, 2009, (the date the Series K Preferred Stock issued to the U.S. Treasury was
redeemed) were repurchased in accordance with an exemption from the Capital Purchase Program’s
stock repurchase restrictions. Shares repurchased pursuant to these plans during 2009 were as
follows:
| Year ended | Total shares | Average price | ||||||
| December 31, 2009 | repurchased | paid per share | ||||||
|
First quarter
|
986,407 | $ | 19.53 | |||||
|
Second quarter
|
659 | 32.43 | ||||||
|
Third quarter
|
253 | 38.44 | ||||||
|
October
|
13 | 45.42 | ||||||
|
November
|
— | — | ||||||
|
December
|
155,290 | 41.96 | ||||||
|
Fourth quarter
|
155,303 | 41.96 | ||||||
|
Total for 2009
|
1,142,622 | $ | 22.59 | |||||
18
Table of Contents
Parts II and III
ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see “Five-year summary of consolidated financial
highlights (unaudited)” on page 38 and “Selected annual financial data (unaudited)” on page 242.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations, entitled
“Management’s discussion and analysis,” appears on pages 39–134. Such information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto, which appear on
pages 138–240.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to market risk, see the “Market Risk Management” section on pages
118–124.
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, 2010, thereon, appear on pages 137–240.
Supplementary financial data for each full quarter within the two years ended December 31, 2009,
are included on page 241 in the table entitled “Supplementary information – Selected quarterly
financial data (unaudited).” Also included is a “Glossary of terms’’ on pages 243–245.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 Firm’s management, including its Chairman and Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on
that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded
that these disclosure controls and procedures were effective. See Exhibits 31.1 and 31.2 for the
Certification statements issued by the Chairman and Chief Executive Officer and Chief Financial
Officer.
The Firm is committed to maintaining high standards of internal control over financial reporting.
Nevertheless, because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. In addition, in a firm as large and complex as JPMorgan Chase,
lapses or deficiencies in internal controls may 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 136 for “Management’s report on internal
control over financial reporting.” There was no change in the Firm’s 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 2009 that has materially affected, or is reasonably likely to
materially affect, the Firm’s internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See Item 13 below.
ITEM 11: EXECUTIVE COMPENSATION
See Item 13 below.
19
Table of Contents
Parts III and IV
ITEM 12: SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
For security ownership of certain beneficial owners and
management, see Item 13 below.
management, see Item 13 below.
The following table details the total number of shares available for issuance under JPMorgan
Chase’s employee stock-based incentive plans (including shares available for issuance to
nonemployee directors). The Firm is not authorized to grant stock-based incentive awards to
nonemployees, other than to nonemployee directors.
| Number of shares to be | Weighted-average | Number of shares remaining | ||||||||||
| December 31, 2009 | issued upon exercise of | exercise price of | available for future issuance under | |||||||||
| (Shares in thousands) | outstanding options/SARs | outstanding options/SARs | stock compensation plans | |||||||||
|
Plan category
|
||||||||||||
|
Employee stock-based
incentive plans
approved
by shareholders |
179,160 | $ | 45.81 | 199,194 | (a) | |||||||
|
Employee
stock-based
incentive plans not
approved
by shareholders |
86,475 | 45.83 | — | |||||||||
|
Total
|
265,635 | $ | 45.82 | 199,194 | ||||||||
| (a) | Represents future shares available under the shareholder-approved 2005 Long-Term Incentive Plan, as amended and restated effective May 20, 2008. |
All future shares will be issued under the shareholder-approved 2005 Long-Term Incentive Plan,
as amended and restated effective May 20, 2008. For further information, see Note 9 on pages
184–186.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information to be provided in Items 10, 11, 12, 13 and 14 of Form 10-K and not otherwise
included herein is incorporated by reference to the Firm’s definitive proxy statement for its 2010
Annual Meeting of Stockholders to be held on May 18, 2010, which will be filed with the SEC within
120 days of the end of the Firm’s fiscal year ended December 31, 2009.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 13.
Part IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| Exhibits, financial statement schedules | ||
| 1. | Financial statements | |
| The Consolidated Financial Statements, the Notes thereto and the report thereon listed in Item 8 are set forth commencing on page 137. | ||
| 2. | Financial statement schedules |
| 3. | Exhibits | |
| 3.1 | Restated Certificate of Incorporation of JPMorgan Chase & Co., effective April 5, 2006 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 7, 2006). | |
| 3.2 | Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008). | |
| 3.3 | Certificate of Designations of 6.15% Cumulative Preferred Stock, Series E (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed July 16, 2008). | |
| 3.4 | Certificate of Designations of 5.72% Cumulative Preferred Stock, Series F (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed July 16, 2008). | |
| 3.5 | Certificate of Designations of 5.49% Cumulative Preferred Stock, Series G (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed July 16, 2008). | |
| 3.6 | Certificate of Designations of 8.625% Non-Cumulative Preferred Stock, Series J (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K/A of JPMorgan Chase & Co. (File No. 1-5805) filed September 17, 2008). |
20
Table of Contents
| 3.7 | By-laws of JPMorgan Chase & Co., effective January 19, 2010 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed January 25, 2010). | |
| 4.1(a) | 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 4.1(a) to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008). | |
| 4.1(b) | First Supplemental Indenture, dated as of November 1, 2007, between JPMorgan Chase & Co. and Deutsche Bank Trust Company Americas, as Trustee, to the Indenture, dated as of December 1, 1989 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed November 7, 2007). | |
| 4.1(c) | Fifth Supplemental Indenture, dated as of December 22, 2008, between JPMorgan Chase & Co. and Deutsche Bank Trust Company Americas, as Trustee, to the Indenture, dated as of December 1, 1989 (incorporated by reference to Exhibit 4.1(c) to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008). | |
| 4.2(a) | 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 (incorporated by reference to Exhibit 4.3(a) to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005). | |
| 4.2(b) | 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 (incorporated by reference to Exhibit 4.3(c) to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005). | |
| 4.3(a) | Indenture, dated as of May 25, 2001, between JPMorgan 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 Registration Statement on Form S-3 of JPMorgan Chase & Co. (File No. 333-52826) filed June 13, 2001). |
| 4.3(b) | First Supplemental Indenture, dated as of April 9, 2008, between JPMorgan Chase & Co. and Deutsche Bank Trust Company Americas, as Trustee to the Indenture, dated as of May 25, 2001 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File no. 1-5805) filed October 31, 2008). | |
| 4.4(a) | 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 (succeeded by The Bank of New York Mellon), as Trustee (incorporated by reference to Exhibit 4.4(a) to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008). | |
| 4.4(b) | Supplemental Indenture (First), dated as of September 23, 2004, between JPMorgan Chase & Co. and The Bank of New York (succeeded by The Bank of New York Mellon), as Debenture Trustee, to the Junior Subordinated Indenture, dated as of December 1, 1996 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-3 of JPMorgan Chase & Co. (File No. 333-126750) filed September 23, 2004). | |
| 4.4(c) | Supplemental Indenture (Second), dated as of May 19, 2005, between JPMorgan Chase & Co. and The Bank of New York (succeeded by The Bank of New York Mellon), as Debenture Trustee, to the Junior Subordinated Indenture, dated as of December 1, 1996 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-3 of JPMorgan Chase & Co. (File No. 333-126750) filed July 21, 2005. | |
| 4.5 | Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008). | |
| 4.6 | Form of Deposit Agreement (incorporated by reference to Exhibit 4(d) to the Registration Statement on Form S-4 of JPMorgan Chase & Co. (File No. 333-152214) filed July 9, 2007). | |
| 4.7 | Form of Deposit Agreement (incorporated by reference to Exhibit 4(e) to the Registration Statement on Form S-4 of JPMorgan Chase & Co. (File No. 333-152214) filed July 9, 2007). | |
| 4.8 | Form of Deposit Agreement (incorporated by reference to Exhibit 4(f) to the Registration Statement on Form S-4 of JPMorgan Chase & Co. (File No. 333-152214) filed July 9, 2007). | |
| 4.9 | Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 21, 2008). |
21
Table of Contents
Other instruments defining the rights of holders of long-term debt securities of JPMorgan Chase &
Co. and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation
S-K. JPMorgan Chase & Co. agrees to furnish copies of these instruments to the SEC upon request.
| 10.1 | Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., as amended and restated July 2001 and as of December 31, 2004 (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, 2007).* | |
| 10.2 | 2005 Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., effective as of January 1, 2005 (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, 2007).* | |
| 10.3 | Post-Retirement Compensation Plan for Non-Employee Directors of The Chase Manhattan Corporation, as amended and restated, effective May 21, 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, 2008).* | |
| 10.4 | 2005 Deferred Compensation Program of JPMorgan Chase & Co., restated effective as of December 31, 2008 (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.5 | JPMorgan Chase & Co. 2005 Long-Term Incentive Plan as amended and restated effective May 20, 2008 (incorporated by reference to Appendix B of Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed March 31, 2008).* | |
| 10.6 | Key Executive Performance Plan of JPMorgan Chase & Co., restated as of January 1, 2005 (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).* | |
| 10.7 | Excess Retirement Plan of JPMorgan Chase & Co., restated and amended as of December 31, 2008, as amended.* | |
| 10.8 | 1995 Stock Incentive Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies, as amended, dated December 11, 1996 (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.9 | Executive Retirement Plan of JPMorgan Chase & Co., as amended and restated December 31, 2008 (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* |
| 10.10 | Amendment to Bank One Corporation Director Stock Plan, as amended and restated effective February 1, 2003 (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, 2008).* | |
| 10.11 | Summary of Bank One Corporation Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).* | |
| 10.12 | Bank One Corporation Stock Performance Plan, as amended and restated effective February 20, 2001 (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, 2008).* | |
| 10.13 | Bank One Corporation Supplemental Savings and Investment Plan, as amended and restated effective December 31, 2008 (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, 2008).* | |
| 10.14 | Revised and Restated Banc One Corporation 1989 Stock Incentive Plan, effective January 18, 1989 (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.15 | Banc One Corporation Revised and Restated 1995 Stock Incentive Plan, effective April 17, 1995 (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.16 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 2005 stock appreciation rights (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, 2005).* | |
| 10.17 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of October 2005 stock appreciation rights (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).* | |
| 10.18 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* |
22
Table of Contents
| 10.19 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 restricted stock units (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* | |
| 10.20 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.21 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.22 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for restricted stock units, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.23 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of February 3, 2010.* | |
| 10.24 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member restricted stock units, dated as of February 3, 2010.* | |
| 10.25 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member restricted stock units, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.26 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights for James Dimon (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* |
| 10.27 | Form of JPMorgan Chase & Co. Performance-Based Incentive Compensation Plan, effective as of January 1, 2006, as amended.* | |
| 10.28 | Form of Warrant to purchase common stock (incorporated by reference to Exhibit 4.2 to the Form 8-A of JPMorgan Chase & Co. (File No. 1-5805) filed December 11, 2009). | |
| 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 year ended December 31, 2009 (to be filed pursuant to Rule 15d-21 under the Securities Exchange Act of 1934). | |
| 23.1 | Consent of independent registered public accounting firm. | |
| 31.1 | Certification. | |
| 31.2 | Certification. | |
| 32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| 101.INS | XBRL Instance Document.*** |
| 101.SCH | XBRL Taxonomy Extension Schema Document.*** |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.*** |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document.*** |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.*** |
| * | This exhibit is a management contract or compensatory plan or arrangement. | |
| ** | This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. | |
| *** | As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections. |
23
Table of Contents
Pages 24–36 not used
24
Table of Contents
Table of contents
| JPMorgan Chase & Co. / 2009 Annual Report | 37 |
Table of Contents
Five-year summary of consolidated financial highlights
| (unaudited) | ||||||||||||||||||||
| (in millions, except per share, headcount and ratio data) | ||||||||||||||||||||
| As of or for the year ended December 31, | 2009 | 2008 (d) | 2007 | 2006 | 2005 | |||||||||||||||
|
Selected income statement data
|
||||||||||||||||||||
|
Total net revenue
|
$ | 100,434 | $ | 67,252 | $ | 71,372 | $ | 61,999 | $ | 54,248 | ||||||||||
|
Total noninterest expense
|
52,352 | 43,500 | 41,703 | 38,843 | 38,926 | |||||||||||||||
|
Pre-provision profit
(a)
|
48,082 | 23,752 | 29,669 | 23,156 | 15,322 | |||||||||||||||
|
Provision for credit losses
|
32,015 | 19,445 | 6,864 | 3,270 | 3,483 | |||||||||||||||
|
Provision
for credit losses –
accounting conformity
(b)
|
— | 1,534 | — | — | — | |||||||||||||||
|
Income from continuing operations before income tax
expense/(benefit)
|
16,067 | 2,773 | 22,805 | 19,886 | 11,839 | |||||||||||||||
|
Income tax expense/(benefit)
|
4,415 | (926 | ) | 7,440 | 6,237 | 3,585 | ||||||||||||||
|
Income from continuing operations
|
11,652 | 3,699 | 15,365 | 13,649 | 8,254 | |||||||||||||||
|
Income from discontinued operations
(c)
|
— | — | — | 795 | 229 | |||||||||||||||
|
Income before extraordinary gain
|
11,652 | 3,699 | 15,365 | 14,444 | 8,483 | |||||||||||||||
|
Extraordinary gain
(d)
|
76 | 1,906 | — | — | — | |||||||||||||||
|
Net income
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | $ | 14,444 | $ | 8,483 | ||||||||||
|
Per common share data
|
||||||||||||||||||||
|
Basic earnings
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 2.25 | $ | 0.81 | $ | 4.38 | $ | 3.83 | $ | 2.30 | ||||||||||
|
Net income
|
2.27 | 1.35 | 4.38 | 4.05 | 2.37 | |||||||||||||||
|
Diluted earnings
(e)(f)
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 2.24 | $ | 0.81 | $ | 4.33 | $ | 3.78 | $ | 2.29 | ||||||||||
|
Net income
|
2.26 | 1.35 | 4.33 | 4.00 | 2.35 | |||||||||||||||
|
Cash dividends declared per share
|
0.20 | 1.52 | 1.48 | 1.36 | 1.36 | |||||||||||||||
|
Book value per share
|
39.88 | 36.15 | 36.59 | 33.45 | 30.71 | |||||||||||||||
|
Common shares outstanding
|
||||||||||||||||||||
|
Average: Basic
(e)
|
3,862.8 | 3,501.1 | 3,403.6 | 3,470.1 | 3,491.7 | |||||||||||||||
|
Diluted
(e)
|
3,879.7 | 3,521.8 | 3,445.3 | 3,516.1 | 3,511.9 | |||||||||||||||
|
Common shares at period-end
|
3,942.0 | 3,732.8 | 3,367.4 | 3,461.7 | 3,486.7 | |||||||||||||||
|
Share price
|
||||||||||||||||||||
|
High
|
$ | 47.47 | $ | 50.63 | $ | 53.25 | $ | 49.00 | $ | 40.56 | ||||||||||
|
Low
|
14.96 | 19.69 | 40.15 | 37.88 | 32.92 | |||||||||||||||
|
Close
|
41.67 | 31.53 | 43.65 | 48.30 | 39.69 | |||||||||||||||
|
Market capitalization
|
164,261 | 117,695 | 146,986 | 167,199 | 138,387 | |||||||||||||||
|
Selected ratios
|
||||||||||||||||||||
|
Return on common equity (“ROE”)
(f)
|
||||||||||||||||||||
|
Income from continuing operations
|
6 | % | 2 | % | 13 | % | 12 | % | 8 | % | ||||||||||
|
Net income
|
6 | 4 | 13 | 13 | 8 | |||||||||||||||
|
Return on tangible common equity (“ROTCE”)
(f)(g)
|
||||||||||||||||||||
|
Income from continuing operations
|
10 | 4 | 22 | 24 | 15 | |||||||||||||||
|
Net income
|
10 | 6 | 22 | 24 | 15 | |||||||||||||||
|
Return on assets (“ROA”):
|
||||||||||||||||||||
|
Income from continuing operations
|
0.58 | 0.21 | 1.06 | 1.04 | 0.70 | |||||||||||||||
|
Net income
|
0.58 | 0.31 | 1.06 | 1.10 | 0.72 | |||||||||||||||
|
Overhead ratio
|
52 | 65 | 58 | 63 | 72 | |||||||||||||||
|
Tier 1 capital ratio
|
11.1 | 10.9 | 8.4 | 8.7 | 8.5 | |||||||||||||||
|
Total capital ratio
|
14.8 | 14.8 | 12.6 | 12.3 | 12.0 | |||||||||||||||
|
Tier 1 leverage ratio
|
6.9 | 6.9 | 6.0 | 6.2 | 6.3 | |||||||||||||||
|
Tier 1 common capital ratio
(h)
|
8.8 | 7.0 | 7.0 | 7.3 | 7.0 | |||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||
|
Trading assets
|
$ | 411,128 | $ | 509,983 | $ | 491,409 | $ | 365,738 | $ | 298,377 | ||||||||||
|
Securities
|
360,390 | 205,943 | 85,450 | 91,975 | 47,600 | |||||||||||||||
|
Loans
|
633,458 | 744,898 | 519,374 | 483,127 | 419,148 | |||||||||||||||
|
Total assets
|
2,031,989 | 2,175,052 | 1,562,147 | 1,351,520 | 1,198,942 | |||||||||||||||
|
Deposits
|
938,367 | 1,009,277 | 740,728 | 638,788 | 554,991 | |||||||||||||||
|
Long-term debt
|
266,318 | 270,683 | 199,010 | 145,630 | 119,886 | |||||||||||||||
|
Common stockholders’ equity
|
157,213 | 134,945 | 123,221 | 115,790 | 107,072 | |||||||||||||||
|
Total stockholders’ equity
|
165,365 | 166,884 | 123,221 | 115,790 | 107,211 | |||||||||||||||
|
Headcount
|
222,316 | 224,961 | 180,667 | 174,360 | 168,847 | |||||||||||||||
| (a) | Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses. | |
| (b) | Results for 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations. | |
| (c) | On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses are being reported as discontinued operations for each of the periods presented. | |
| (d) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, a wholly-owned subsidiary of JPMorgan Chase merged with and into The Bear Stearns Companies Inc. (“Bear Stearns”), and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. The Washington Mutual acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. For additional information on these transactions, see Note 2 on pages 143–148 of this Annual Report. | |
| (e) | Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities. Accordingly, prior-period amounts have been revised as required. For further discussion of the guidance, see Note 25 on page 224 of this Annual Report. | |
| (f) | The calculation of 2009 earnings per share and net income applicable to common equity include a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital in the second quarter of 2009. Excluding this reduction, the adjusted ROE and ROTCE were 7% and 11% for 2009. For further discussion, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 50–52 of this Annual Report. | |
| (g) | For further discussion of ROTCE, a non-GAAP financial measure, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 50–52 of this Annual Report. | |
| (h) | Tier 1 common is calculated as Tier 1 capital less qualifying perpetual preferred stock, qualifying trust preferred securities and qualifying minority interest in subsidiaries. The Firm uses the Tier 1 common capital ratio, a non-GAAP financial measure, to assess and compare the quality and composition of the Firm’s capital with the capital of other financial services companies. For further discussion, see Regulatory capital on pages 82–84 of this Annual Report. |
| 38 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Management’s discussion and analysis
FIVE-YEAR STOCK PERFORMANCE
The following table and graph compare the five-year cumulative total return for JPMorgan Chase
& Co. (“JPMorgan Chase” or the “Firm”) common stock with the cumulative return of the S&P 500 Stock
Index and the S&P Financial Index. The S&P 500 Index is a commonly referenced U.S. equity benchmark
consisting of leading companies from different economic sectors. The S&P Financial Index is an
index of 78 financial companies, all of which are within the S&P 500. The Firm is a component of
both industry indices.
The following table and graph assume simultaneous investments of $100 on December 31, 2004, in
JPMorgan Chase common stock and in each of the above S&P indices. The comparison assumes that all
dividends are reinvested.
| December 31, | |||||||||||||||||||
| (in dollars) | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||
|
JPMorgan Chase
|
$ | 100.00 | $ | 105.68 | $ | 132.54 | $ | 123.12 | $ | 91.84 | $ | 123.15 | |||||||
|
S&P Financial Index
|
100.00 | 106.48 | 126.91 | 103.27 | 46.14 | 54.09 | |||||||||||||
|
S&P 500 Index
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | |||||||||||||
This section of the JPMorgan Chase’s Annual Report for the year ended December 31, 2009
(“Annual Report”) provides management’s discussion and analysis (“MD&A”) of the financial condition
and results of operations of JPMorgan Chase. See the Glossary of
terms on pages 243–245 for
definitions of terms used throughout this Annual Report. The MD&A included in this Annual Report
contains statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of
JPMorgan
Chase’s management and are subject to significant risks and uncertainties. These risks and
uncertainties could cause the Firm’s results to differ materially from those set forth in such
forward-looking statements. Certain of such risks and uncertainties are described herein (see
Forward-looking statements on page 135 of this Annual Report) and in the JPMorgan Chase Annual
Report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”), in Part I, Item 1A:
Risk factors, to which reference is hereby made.
INTRODUCTION
JPMorgan Chase
& Co., a financial holding company incorporated under Delaware law in 1968, is a leading global
financial services firm and one of the largest banking institutions in the United States of America
(“U.S.”), with $2.0 trillion in assets, $165.4 billion in stockholders’ equity and operations in
more than 60 countries as of December 31, 2009. The Firm is a leader in investment banking,
financial services for consumers and businesses, financial transaction processing and asset
management. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the
U.S. and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association
(“JPMorgan Chase Bank, N.A.”), a national bank with branches in 23 states in the U.S.; and Chase
Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s
credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities
Inc., the
Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business
segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the
Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments.
The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments.
A description of the Firm’s business segments, and the products and services they provide to their
respective client bases, follows.
Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and
broad product capabilities. The clients of the Investment Bank (“IB”) are corporations, financial
institutions, governments and institutional investors. The Firm offers a full range of investment
banking products and services in all major capital markets, including advising on corporate
strategy and structure, capital-raising in equity and debt markets, sophisticated risk management,
market-making in cash securities and derivative instruments, prime brokerage, and research. IB also
commits the Firm’s own capital to principal investing and trading activities on a limited basis.
Retail Financial Services
Retail Financial Services (“RFS”), which includes the Retail Banking and Consumer Lending
businesses, serves consumers and businesses through personal service at bank branches and through
ATMs, online banking and telephone banking, as well as through auto dealerships and school
financial-aid offices. Customers can use more than 5,100 bank branches (third-largest nationally)
and 15,400 ATMs (second-largest nationally), as well as online and mobile banking around the clock.
More than 23,900 branch salespeople assist customers with checking and savings accounts, mortgages,
home equity and business loans, and investments across the 23-state footprint from New York and
Florida to California. Consumers also can obtain loans through more than 15,700 auto dealerships
and nearly 2,100 schools and universities nationwide.
| JPMorgan Chase & Co. / 2009 Annual Report | 39 |
Table of Contents
Management’s discussion and analysis
Card Services
Card Services (“CS”) is one of the nation’s largest credit card issuers, with more than 145 million
credit cards in circulation and over $163 billion in managed loans. Customers used Chase cards to
meet more than $328 billion of their spending needs in 2009.
Chase continues to innovate, despite a very difficult business
environment, launching new products and services such as Blueprint, Ultimate Rewards, Chase
Sapphire and Ink from Chase, and earning a market leadership position in building loyalty and
rewards programs. Through its merchant acquiring business, Chase Paymentech Solutions, Chase is one
of the leading processors of credit-card payments.
Commercial Banking
Commercial Banking (“CB”) serves nearly 25,000 clients nationally, including corporations,
municipalities, financial institutions and not-for-profit entities with annual revenue generally
ranging from
$10 million to $2 billion, and more than 30,000 real estate
investors/owners. Delivering extensive industry knowledge, local expertise and dedicated service, CB partners
with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury
services, investment banking and asset management to meet its clients’
domestic and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in transaction, investment and
information services. TSS is one of the world’s largest cash management providers and a leading
global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and
liquidity products and services to small and mid-sized companies, multinational corporations,
financial institutions and government entities. TS partners with the Commercial Banking, Retail
Financial Services and Asset Management businesses to serve clients firmwide. As a result, certain
TS revenue is included in other segments’ results. Worldwide Securities Services holds, values,
clears and services securities, cash and alternative investments for investors and broker-dealers,
and it manages depositary receipt programs globally.
Asset Management
Asset Management (“AM”), with assets under supervision of $1.7 trillion, is a global leader in
investment and wealth management. AM clients include institutions, retail investors and
high-net-worth individuals in every major market throughout the world. AM offers global investment
management in equities, fixed income, real estate, hedge funds, private equity and liquidity
products, including money-market instruments and bank deposits. AM also provides trust and estate,
banking and brokerage services to high-net-worth clients, and retirement services for corporations
and individuals. The majority of AM’s client assets are in actively managed portfolios.
| 40 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
EXECUTIVE OVERVIEW
This executive overview of management’s discussion and analysis
highlights selected information and may not contain all of the information that is important to
readers of this Annual Report. For a complete description of events, trends and uncertainties, as
well as the capital, liquidity, credit, operational and market risks and the critical accounting
estimates affecting the Firm and its various lines of business, this Annual Report should be read
in its entirety.
Financial performance of JPMorgan Chase
| Year ended December 31, | ||||||||||||
| (in millions, except per share data and ratios) | 2009 | 2008 | Change | |||||||||
|
Selected income statement data
|
||||||||||||
|
Total net revenue
|
$ | 100,434 | $ | 67,252 | 49 | % | ||||||
|
Total noninterest expense
|
52,352 | 43,500 | 20 | |||||||||
|
Pre-provision profit
|
48,082 | 23,752 | 102 | |||||||||
|
Provision for credit losses
|
32,015 | 20,979 | 53 | |||||||||
|
Income before extraordinary gain
|
11,652 | 3,699 | 215 | |||||||||
|
Extraordinary gain
|
76 | 1,906 | (96 | ) | ||||||||
|
Net income
|
11,728 | 5,605 | 109 | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 2.24 | $ | 0.81 | 177 | |||||||
|
Net income
|
2.26 | 1.35 | 67 | |||||||||
|
Return on common equity
|
||||||||||||
|
Income before extraordinary gain
|
6 | % | 2 | % | ||||||||
|
Net income
|
6 | 4 | ||||||||||
|
Capital ratios
|
||||||||||||
|
Tier 1 capital
|
11.1 | 10.9 | ||||||||||
|
Tier 1 common capital
|
8.8 | 7.0 | ||||||||||
Business overview
JPMorgan Chase reported 2009 net income of $11.7 billion, or $2.26 per share, compared with net
income of $5.6 billion, or $1.35 per share, in 2008. Total net revenue in 2009 was $100.4 billion,
compared with $67.3 billion in 2008. Return on common equity was 6% in 2009 and 4% in 2008. Results
benefited from the impact of the acquisition of the banking operations of Washington Mutual Bank
(“Washington Mutual”) on September 25, 2008, and the impact of the merger with The Bear Stearns
Companies Inc. (“Bear Stearns”) on May 30, 2008.
The increase in net income for the year was driven by record net revenue, including record revenue
in the Investment Bank reflecting modest net gains on legacy leveraged-lending and mortgage-related
positions compared with net markdowns in the prior year. Partially offsetting the growth in the
Firm’s revenue was an increase in the provision for credit losses, driven by an increase in the
consumer provision, and higher noninterest expense reflecting the impact of the Washington Mutual
transaction.
The business environment in
2009 gradually improved throughout the year. The year began with a continuation
of the weak conditions experienced in 2008 - the global economy contracted sharply
in the first quarter, labor markets deteriorated rapidly and unemployment rose, credit
was tight, liquidity was diminished, and businesses continued to downsize and cut
inventory levels rapidly. Throughout the year, the Board of
Governors of the Federal Reserve System (“Federal Reserve”) took actions
to stabilize the financial markets and promote an economic revival. It held its
policy rate close to zero and indicated that this policy was likely to remain in
place for some time, given economic conditions. In addition, it greatly expanded
a program it launched at the end of 2008, with a plan to buy up to $1.7 trillion
of securities, including Treasury securities, mortgage-backed securities and
obligations of government-sponsored agencies. The U.S. government and various
regulators continued their efforts to stabilize the U.S. economy, putting in place
a financial rescue plan that supplemented the interest rate and other actions that
had been taken by the Federal Reserve and the U.S. Department of the Treasury (the “U.S. Treasury”)
in the second half of 2008. These efforts began to take effect during 2009. Developing
economies rebounded significantly and contraction in developed economies slowed. Credit
conditions improved in the summer, with most credit spreads narrowing dramatically.
By the third quarter of the year, many spreads had returned to pre-crisis levels. By
the fourth quarter, economic activity was expanding and signs emerged that the deterioration in the labor market was abating, although by the end of the year unemployment reached 10%, its highest level since 1983. The housing sector showed some signs of improvement and household spending appeared to be expanding at a moderate rate, though it remained constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses were continuing to reduce capital investment, though at a slower pace, and remained reluctant to add to payrolls. Financial market conditions in the fourth quarter became more supportive of economic growth.
Amidst this difficult
operating environment, JPMorgan Chase benefited from the diversity of its leading
franchises, as demonstrated by the continued earnings strength of its Investment
Bank, Commercial Banking, Asset Management, and Retail Banking franchises. Significant
market share and efficiency gains helped all of the Firm’s businesses maintain leadership
positions: the Investment Bank ranked #1 for Global Investment Banking fees for 2009;
in Commercial Banking, at year-end 2009, the total revenue related to investment
banking products sold to CB clients doubled from its level at the time of the JPMorgan Chase-Bank One merger. In addition, the Firm completed the integration of Washington Mutual and continued to invest in its businesses,
demonstrated by growth in checking and credit card accounts.
Throughout 2009, the Firm remained focused on maintaining a strong balance sheet. In addition to
the capital generated from earnings, the Firm issued $5.8 billion of common stock and reduced its
quarterly dividend. The Firm also increased its consumer allowance for credit losses by $7.8
billion, bringing the total allowance for credit losses to $32.5 billion, or 5.5% of total loans.
The Firm recorded a $1.1 billion one-time noncash adjustment to common stockholders’ equity related
| JPMorgan Chase & Co. / 2009 Annual Report | 41 |
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Management’s discussion and analysis
to the redemption of the $25.0 billion of Series K Preferred Stock issued to the U.S. Treasury
under the Capital Purchase Program. Even with this adjustment, the Firm ended 2009 with a very
strong Tier 1 Capital ratio of 11.1% and a Tier 1 Common ratio of 8.8%.
Throughout this turbulent financial period, JPMorgan Chase supported and served its 90 million
customers and the communities in which it operates; delivered consumer-friendly products and
policies; and continued to lend. The Firm extended nearly $250 billion in new credit to consumers
during the year and for its corporate and municipal clients, either lent or assisted them in
raising approximately $1 trillion in loans, stocks or bonds. The Firm also remained committed to
helping homeowners meet the challenges of declining home prices and rising unemployment. Since
2007, the Firm has initiated over 900,000 actions to prevent foreclosures through its own programs
and through government mortgage-modification programs. During 2009 alone, JPMorgan Chase offered
approximately 600,000 loan modifications to struggling homeowners. Of these, 89,000 loans have
achieved permanent modification. By March 31, 2010, the Firm will have opened 51 Chase
Homeownership Centers across the country and already has over 14,000 employees dedicated to
mortgage loss mitigation.
Management remains confident that JPMorgan Chase’s capital and reserve strength, combined with its
significant earnings power, will allow the Firm to meet the uncertainties that lie ahead and still
continue investing in its businesses and serving its clients and shareholders over the long term.
The discussion that follows highlights the performance of each business segment compared with the
prior year and presents results on a managed basis unless otherwise noted. For more information
about managed basis, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial
Measures on pages 50–52 of this Annual Report.
Investment Bank
reported record net income in 2009 compared with a net loss in
2008. The significant rebound in earnings was driven by record net revenue, partially offset by
increases in both noninterest expense and the provision for credit losses. The increase in net
revenue was driven by record Fixed Income Markets revenue, reflecting strong results across most
products, as well as modest net gains on legacy leveraged lending and mortgage-related positions,
compared with over $10 billion of net markdowns in the prior year. Investment banking fees rose to
record levels, as higher equity and debt underwriting fees were partially offset by lower advisory
fees. Record Equity Markets revenue was driven by solid client revenue, particularly in prime
services, and strong trading results. The net revenue results for IB in 2009 included losses from
the tightening of the Firm’s credit spread on certain structured liabilities and derivatives,
compared with gains in 2008 from the widening of the spread on those liabilities. The provision for
credit losses increased, driven by continued weakness in the credit environment. IB ended the year
with a ratio of allowance for loan losses to end-of-period loans retained of 8.25%. Noninterest
expense increased, reflecting higher performance-based compensation offset partially by lower
headcount-related expense.
Retail Financial Services
net income decreased from the prior year, as an increase in the provision
for credit losses and higher noninterest expense were predominantly offset by double-digit growth
in net revenue. Higher net revenue reflected the impact of the Washington Mutual transaction, wider
loan and deposit spreads, and higher net mortgage servicing revenue. The provision for credit
losses increased from the prior year as weak economic conditions and housing price declines
continued to drive higher estimated losses for the home equity and mortgage loan portfolios. RFS
ended the year with a ratio of allowance for loan losses to ending loans, excluding purchased
credit-impaired loans of 5.09%. Noninterest expense was higher, reflecting the impact of the
Washington Mutual transaction and higher servicing and default-related expense.
Card Services
reported a net loss for the year, compared with net income in 2008. The decline was
driven by a significantly higher provision for credit losses, partially offset by higher net
revenue. The double-digit growth in managed net revenue was driven by the impact of the Washington
Mutual transaction, wider loan spreads and higher merchant servicing revenue related to the
dissolution of the Chase Paymentech Solutions joint venture; these were partially offset by higher
revenue reversals associated with higher charge-offs, a decreased level of fees and lower average
loan balances. The provision for credit losses increased, reflecting continued weakness in the
credit environment. CS ended the year with a ratio of allowance for loan losses to end-of-period
loans of 12.28%. Noninterest expense increased due to the dissolution of the Chase Paymentech
Solutions joint venture and the impact of the Washington Mutual transaction, partially offset by
lower marketing expense.
Commercial Banking
net income decreased from 2008, as an increase in provision for credit losses and
higher noninterest expense were predominantly offset by higher net revenue. Double-digit growth in
net revenue reflected the impact of the Washington Mutual transaction and record levels of lending-
and deposit-related and investment banking fees. Revenue rose in all business segments: Middle
Market Banking, Commercial Term Lending, Mid-Corporate Banking and Real Estate Banking. The
provision for credit losses increased, reflecting continued weakness throughout the year in the
credit environment across all business segments, predominantly in
real estate–related segments. CB
ended the year with a ratio of allowance for loan losses to end-of-period loans retained of 3.12%.
Noninterest expense increased due to the impact of the Washington Mutual transaction and higher
Federal Deposit Insurance Corporation (“FDIC”) insurance premiums.
Treasury & Securities Services
net income declined from the prior year, driven by
lower net revenue. The decrease in net revenue reflected lower Worldwide Securities Services net
revenue, driven by lower balances and spreads on liability products; lower securities lending
balances, primarily as a result of declines in asset valuations and demand; and the effect of
market depreciation on certain custody assets. Treasury Services net revenue also declined,
reflecting lower deposit balances and spreads, offset by higher trade revenue driven by wider
spreads and growth across cash management and card product volumes. Noninterest expense rose
slightly compared
| 42 | JPMorgan Chase & Co. / 2009 Annual Report |
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with the prior year, reflecting higher FDIC insurance premiums offset by lower
headcount-related expense.
Asset Management
net income increased from the prior year, due to higher net revenue, offset
largely by higher noninterest expense and a higher provision for credit losses. The increase in net
revenue reflected higher valuations of the Firm’s seed capital investments, net inflows, wider loan
spreads and higher deposit balances, offset partially by the effect of lower market levels and
narrower deposit spreads. Asset Management’s businesses reported mixed revenue results:
Institutional and Private Bank revenue were up while Retail and Private Wealth Management revenue
were down. Assets under supervision increased for the year, due to the effect of higher market
valuations and inflows in fixed income and equity products offset partially by outflows in cash
products. The provision for credit losses increased compared with the prior year, reflecting
continued weakness in the credit environment. Noninterest expense was higher, reflecting the effect
of the Bear Stearns merger, higher performance-based compensation and higher FDIC insurance
premiums, offset largely by lower headcount-related expense.
Corporate/Private Equity
net income increased in 2009, reflecting elevated levels of trading gains
and net interest income, securities gains, an after-tax gain from the sale of MasterCard shares and
reduced losses from Private Equity compared with 2008. Trading gains and net interest income
increased due to the Firm’s significant purchases of mortgage-backed securities guaranteed by U.S.
government agencies, corporate debt securities, U.S. Treasury and government agency securities and
other asset-backed securities. These investments were generally associated with the Chief Investment Office’s management of
interest rate risk and investment of cash resulting from the excess funding the Firm continued to
experience during 2009. The increase in securities was partially offset by sales of higher-coupon
instruments (part of repositioning the investment portfolio) as well as prepayments and maturities.
Firmwide
, the managed provision for credit losses was $38.5 billion, up by $13.9 billion, or 56%,
from the prior year. The prior year included a $1.5 billion charge to conform Washington Mutual’s
allowance for loan losses, which affected both the consumer and wholesale portfolios. For the
purposes of the following analysis, this charge is excluded. The consumer-managed provision for
credit losses was $34.5 billion, compared with $20.4 billion in the prior year, reflecting an
increase in the allowance for credit losses in the home lending and credit card loan portfolios.
Consumer-managed net charge-offs were $26.3 billion, compared with $13.0 billion in the prior year,
resulting in managed net charge-off rates of 5.85% and 3.22%, respectively. The wholesale provision
for credit losses was $4.0 billion, compared with $2.7 billion in the prior year, reflecting
continued weakness in the credit environment throughout 2009. Wholesale net charge-offs were $3.1
billion, compared with $402 million in the prior year, resulting in net charge-off rates of 1.40%
and 0.18%, respectively. The Firm’s nonperforming assets totaled $19.7 billion at December 31,
2009, up from $12.7 billion. The total allowance for credit losses increased by $8.7 billion from
the prior year-end,
resulting in a loan loss coverage ratio at December 31, 2009, of 5.51%,
compared with 3.62% at December 31, 2008.
Total stockholders’ equity at December 31, 2009, was $165.4 billion.
2010 Business outlook
The following forward-looking statements are based on the current beliefs and expectations of
JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and
uncertainties could cause the Firm’s actual results to differ materially from those set forth in such
forward-looking statements.
JPMorgan Chase’s outlook for 2010 should be viewed against the backdrop of the global and U.S.
economies, financial markets activity, the geopolitical environment, the competitive environment
and client activity levels. Each of these linked factors will affect the performance of the Firm
and its lines of business. The Firm continues to monitor the U.S. and international economies and
political environments. The outlook for capital markets remains uncertain, and further declines in
U.S. housing prices in certain markets and increases in the unemployment rate, either of which
could adversely affect the Firm’s financial results, are possible. In addition, as a result of
recent market conditions, the U.S. Congress and regulators have increased their focus on the
regulation of financial institutions; any legislation or regulations that may be adopted as a
result could limit or restrict the Firm’s operations, and could impose additional costs on the Firm
in order to comply with such new laws or rules.
Given the potential stress on consumers from rising unemployment and continued downward pressure on
housing prices, management remains cautious with respect to the credit outlook for the consumer
loan portfolios. Possible continued weakness in credit trends could result in higher credit costs
and require additions to the consumer allowance for credit losses. Based on management’s current
economic outlook, quarterly net charge-offs could reach $1.4 billion for the home equity portfolio,
$600 million for the prime mortgage portfolio and $500 million for the subprime mortgage portfolio
over the next several quarters. The managed net charge-off rate for Card Services (excluding the
Washington Mutual credit card portfolio) could approach 11% by the first quarter of 2010, including
the adverse timing effect of a payment holiday program of approximately 60 basis points. The
managed net charge-off rate for the Washington Mutual credit card portfolio could approach 24% over
the next several quarters. These charge-off rates are likely to move even higher if the economic
environment deteriorates beyond management’s current expectations. Similarly, wholesale credit
costs and net charge-offs could increase in the next several quarters if the credit environment
deteriorates.
The Investment Bank continues to operate in an uncertain environment, and as noted above, results
could be adversely affected if the credit environment were to deteriorate further. Trading results
can be volatile and 2009 included elevated client volumes and spread levels. As such, management
expects Fixed Income and Equity Markets revenue to normalize over time as conditions stabilize.
| JPMorgan Chase & Co. / 2009 Annual Report | 43 |
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Management’s discussion and analysis
In the Retail Banking segment within Retail Financial Services, although management expects
underlying growth, results will be under pressure from the credit environment and ongoing lower
consumer spending levels. In addition, the Firm has made changes, consistent
with (and in certain respects, beyond) the requirements of
newly-enacted legislation, in its policies relating to
non-sufficient funds and overdraft fees. Although management estimates are, at this point in time,
preliminary and subject to change, such changes are expected to result in an annualized reduction
in net income of approximately $500 million, beginning in the first quarter of 2010.
In the Consumer Lending segment within Retail Financial Services, at current production and
estimated run-off levels, the Home Lending portfolio of $263 billion at December 31, 2009, is
expected to decline by approximately 10–15% and could possibly average approximately $240 billion
in 2010 and approximately $200 billion in 2011. Based on management’s preliminary estimate, which
is subject to change, the effect of such a reduction in the Home Lending portfolio is expected to
reduce 2010 net interest income in the portfolio by approximately $1 billion from the 2009 level.
Additionally, revenue could be negatively affected by
elevated levels of repurchases of mortgages previously sold to, for
example, government-sponsored enterprises.
Management expects noninterest expense in Retail Financial Services to remain at or above 2009
levels, reflecting investments in new branch builds and sales force hires as well as continued
elevated servicing, default and foreclosed asset related costs.
Card Services faces rising credit costs in 2010, as well as continued pressure on both charge
volumes and credit card receivables growth, reflecting continued lower levels of consumer spending.
In addition, as a result of the recently-enacted credit card legislation, management estimates,
which are preliminary and subject to change, are that CS’s annual net income may be adversely
affected by approximately $500 million to $750 million. Further, management expects average Card
outstandings to decline by approximately 10-15% in 2010 due to
the run-off of the Washington Mutual portfolio and lower balance transfer levels. As a result
of all
these factors, management currently expects CS to report net losses in each of the first two quarters of 2010 (of approximately
$1 billion in the first quarter and somewhat less than that in
the second quarter) before the effect of any potential reserve actions. Results in the second half of 2010 will
likely be dependent on the economic environment and potential reserve actions.
Commercial Banking results could be negatively affected by rising credit costs, a decline in loan
demand and reduced liability balances.
Earnings in Treasury & Securities Services and Asset Management will be affected by the impact of
market levels on assets under management, supervision and custody. Additionally, earnings in
Treasury & Securities Services could be affected by liability balance flows.
Earnings in Private Equity (within the Corporate/Private Equity segment) will likely be volatile
and continue to be influenced by capital markets activity, market levels, the performance of the
broader economy and investment-specific issues. Corporate’s net interest income levels and
securities gains will generally trend with the size of the investment portfolio in Corporate;
however, the high level of trading gains in Corporate in the second half of 2009 is not likely to
continue. In the near-term, Corporate quarterly net income (excluding Private Equity,
merger-related items and any significant nonrecurring items) is expected to decline to
approximately $300 million, subject to the size and duration of the investment securities
portfolio.
Lastly, with regard to any decision by the Firm’s Board of
Directors concerning any increase in the level of the common stock
dividend, their determination will be subject to their judgment that
the likelihood of another severe economic downturn has sufficiently
diminished, that overall business performance has stabilized, and that
such action is warranted taking into consideration the Firm’s earnings outlook, need to
maintain adequate capital levels, alternative investment
opportunities, and appropriate dividend payout ratios. When in the
Board’s judgment, based on the foregoing, the Board believes it appropriate to increase the dividend to an annual payout level in the range of $0.75 to $1.00 per share, the Board would likely move forward with such an increase, and follow at some later time with an additional increase or additional increases sufficient to return to the Firm’s historical dividend ratio of approximately 30% to 40% of
normalized earnings over time.
| 44 | JPMorgan Chase & Co. / 2009 Annual Report |
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CONSOLIDATED RESULTS OF OPERATIONS
This following section provides a comparative discussion of JPMorgan Chase’s
Consolidated Results of Operations on a reported basis for the three-year period ended December 31,
2009. Factors that related primarily to a single business segment are discussed in more detail
within that business segment. For a discussion of the Critical Accounting Estimates Used by the
Firm that affect the Consolidated Results of Operations, see pages
127–131 of this Annual Report.
Revenue
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Investment banking fees
|
$ | 7,087 | $ | 5,526 | $ | 6,635 | ||||||
|
Principal transactions
|
9,796 | (10,699 | ) | 9,015 | ||||||||
|
Lending- and deposit-related fees
|
7,045 | 5,088 | 3,938 | |||||||||
|
Asset management, administration
and commissions
|
12,540 | 13,943 | 14,356 | |||||||||
|
Securities gains
|
1,110 | 1,560 | 164 | |||||||||
|
Mortgage fees and related income
|
3,678 | 3,467 | 2,118 | |||||||||
|
Credit card income
|
7,110 | 7,419 | 6,911 | |||||||||
|
Other income
|
916 | 2,169 | 1,829 | |||||||||
|
Noninterest revenue
|
49,282 | 28,473 | 44,966 | |||||||||
|
Net interest income
|
51,152 | 38,779 | 26,406 | |||||||||
|
Total net revenue
|
$ | 100,434 | $ | 67,252 | $ | 71,372 | ||||||
2009 compared with 2008
Total net revenue was $100.4 billion, up by $33.2 billion, or 49%, from the prior year. The
increase was driven by higher principal transactions revenue, primarily related to improved
performance across most fixed income and equity products, and the absence of net markdowns on
legacy leveraged lending and mortgage positions in IB, as well as higher levels of trading gains
and investment securities income in Corporate/Private Equity. Results also benefited from the
impact of the Washington Mutual transaction, which contributed to increases in net interest income,
lending- and deposit-related fees, and mortgage fees and related income. Lastly, higher investment
banking fees also contributed to revenue growth. These increases in revenue were offset partially
by reduced fees and commissions from the effect of lower market levels on assets under management
and custody, and the absence of proceeds from the sale of Visa shares in its initial public
offering in the first quarter of 2008.
Investment banking fees increased from the prior year, due to higher equity and debt underwriting
fees. For a further discussion of investment banking fees, which are primarily recorded in IB, see
IB segment results on pages 55–57 of this Annual Report.
Principal transactions revenue, which consists of revenue from trading and private equity investing
activities, was significantly higher compared with the prior year. Trading revenue increased,
driven by
improved performance across most fixed income and equity products; modest net gains on legacy
leveraged lending and mortgage-related positions, compared with net markdowns of $10.6 billion in
the prior year; and gains on trading positions in Corporate/Private Equity, compared with losses in
the prior year of $1.1 billion on markdowns of Federal National Mortgage Association (“Fannie Mae”)
and Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred securities. These increases in
revenue were offset partially by an aggregate
loss of $2.3 billion from the tightening of the
Firm’s credit spread on certain structured liabilities and derivatives, compared with gains of $2.0
billion in the prior year from widening spreads on these liabilities and derivatives. The Firm’s
private equity investments produced a slight net loss in 2009, a significant improvement from a
larger net loss in 2008. For a further discussion of principal transactions revenue, see IB and
Corporate/Private Equity segment results on pages 55–57 and
74–75, respectively, and Note 3 on
pages 148–165 of this Annual Report.
Lending- and deposit-related fees rose from the prior year, predominantly reflecting the impact of
the Washington Mutual transaction and organic growth in both lending- and deposit-related fees in
RFS, CB, IB and TSS. For a further discussion of lending- and deposit-related fees, which are
mostly recorded in RFS, TSS and CB, see the RFS segment results on
pages 58–63, the TSS segment
results on pages 69–70, and the CB segment results on pages
67–68 of this Annual Report.
The decline in asset management, administration and commissions revenue compared with the prior
year was largely due to lower asset management fees in AM from the effect of lower market levels.
Also contributing to the decrease were lower administration fees in TSS, driven by the effect of
market depreciation on certain custody assets and lower securities lending balances; and lower
brokerage commissions revenue in IB, predominantly related to lower transaction volume. For
additional information on these fees and commissions, see the segment discussions for TSS on pages
69–70, and AM on pages 71–73 of this Annual Report.
Securities gains were lower in 2009 and included credit losses related to other-than-temporary
impairment and lower gains on the sale of MasterCard shares of $241 million in 2009, compared with
$668 million in 2008. These decreases were offset partially by higher gains from repositioning the
Corporate investment securities portfolio in connection with managing the Firm’s structural
interest rate risk. For a further discussion of securities gains, which are mostly recorded in
Corporate/Private Equity, see the Corporate/Private Equity segment
discussion on pages 74–75 of
this Annual Report.
Mortgage fees and related income increased slightly from the prior year, as higher net mortgage
servicing revenue was largely offset by lower production revenue. The increase in net mortgage
servicing revenue was driven by growth in average third-party loans serviced as a result of the
Washington Mutual transaction. Mortgage production revenue declined from the prior year, reflecting
an increase in
estimated
losses from the repurchase of previously-sold loans, offset partially by wider
margins on new originations. For a discussion of mortgage fees and related income, which is
recorded primarily in RFS’s Consumer Lending business, see the Consumer Lending discussion on pages
60–63 of this Annual Report.
Credit card income, which includes the impact of the Washington Mutual transaction, decreased
slightly compared with the prior year,
| JPMorgan Chase & Co. / 2009 Annual Report | 45 |
Table of Contents
Management’s discussion and analysis
due to lower servicing fees earned in connection with CS
securitization activities, largely as a result of higher credit losses. The decrease was partially
offset by wider loan margins on securitized credit card loans; higher merchant servicing revenue
related to the dissolution of the Chase Paymentech Solutions joint venture; and higher interchange
income. For a further discussion of credit card income, see the CS
segment results on pages 64–66
of this Annual Report.
Other income decreased from the prior year, due predominantly to the absence of $1.5 billion in
proceeds from the sale of Visa shares during its initial public offering in the first quarter of
2008, and a $1.0 billion gain on the dissolution of the Chase Paymentech Solutions joint venture in
the fourth quarter of 2008; and lower net securitization income in CS. These items were partially
offset by a $464 million charge recognized in 2008 related to the repurchase of auction-rate
securities at par; the absence of a $423 million loss incurred in the second quarter of 2008,
reflecting the Firm’s 49.4% share of Bear Stearns’ losses from April 8 to May 30, 2008; and higher
valuations on certain investments, including seed capital in AM.
Net interest income increased from the prior year, driven by the Washington Mutual transaction,
which contributed to higher average loans and deposits. The Firm’s interest-earning assets were
$1.7 trillion, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was
3.12%, an increase of 25 basis points from 2008. Excluding the impact of the Washington Mutual
transaction, the increase in net interest income in 2009 was driven by a higher level of investment
securities, as well as a wider net interest margin, which reflected the overall decline in market
interest rates during the year. Declining interest rates had a positive effect on the net interest
margin, as rates paid on the Firm’s interest-bearing liabilities decreased faster relative to the decline in rates earned on
interest-earning assets. These increases in net interest income were offset partially by lower loan
balances, which included the effect of lower customer demand, repayments and charge-offs.
2008 compared with 2007
Total net revenue of $67.3 billion was down $4.1 billion, or 6%, from the prior year. The decline
resulted from the extremely challenging business environment for financial services firms in 2008.
Principal transactions revenue decreased significantly and included net markdowns on
mortgage-related positions and leveraged lending funded and unfunded commitments, losses on
preferred securities of Fannie Mae and Freddie Mac, and losses on private equity investments. Also
contributing to the decline in total net revenue were losses and markdowns recorded in other
income, including the Firm’s share of Bear Stearns’ losses from April 8 to May 30, 2008. These
declines were largely offset by higher net interest income, proceeds from the sale of Visa shares
in its initial public offering, and the gain on the dissolution of the Chase Paymentech joint
venture.
Investment banking fees were down from the record level of the prior year due to lower debt
underwriting fees, as well as lower advisory and equity underwriting fees, both of which were at
record levels in 2007. These declines were attributable to reduced
market activity. For a further
discussion
of investment banking fees, which are primarily recorded in IB, see IB segment results
on pages 55–57 of this Annual Report.
In 2008, principal transactions revenue declined by $19.7 billion from the prior year. Trading
revenue decreased by $14.5 billion to a negative $9.8 billion, compared with positive $4.7 billion
in 2007. The decline in trading revenue was largely driven by net markdowns of $5.9 billion on
mortgage-related exposures, compared with $1.4 billion in net markdowns in the prior year; net
markdowns of $4.7 billion on leveraged lending funded and unfunded commitments, compared with $1.3
billion in net markdowns in the prior year; losses of $1.1 billion on preferred securities of
Fannie Mae and Freddie Mac; and weaker equity trading results, compared with a record level in
2007. In addition, trading revenue was adversely affected by additional losses and costs to reduce
risk related to Bear Stearns positions. Partially offsetting the decline in trading revenue were
record results in rates and currencies, credit trading, commodities and emerging markets, as well
as strong Equity Markets client revenue; and total gains of $2.0 billion from the widening of the
Firm’s credit spread on certain structured liabilities and derivatives, compared with $1.3 billion
in 2007. Private equity results also declined substantially from the prior year, recording losses
of $908 million in 2008, compared with gains of $4.3 billion in 2007. In addition, the first
quarter of 2007 included a fair value adjustment related to the adoption of new FASB guidance on
fair value measurement. For a further discussion of principal transactions revenue, see IB and
Corporate/Private Equity segment results on pages 55–57 and
74–75, respectively, and Note 3 on
pages 148–165 of this Annual Report.
Lending- and deposit-related fees rose from 2007, predominantly resulting from higher
deposit-related fees and the impact of the Washington Mutual transaction. For a further discussion
of Lending- and deposit-related fees, which are mostly recorded in RFS, TSS and CB, see the RFS
segment results on pages 58–63, the TSS segment results on pages
69–70 and the CB segment results
on pages 67–68 of this Annual Report.
The decline in asset management, administration and commissions revenue compared with 2007 was
driven by lower asset management fees in AM, due to lower performance fees and the effect of lower
market levels. This decline was partially offset by an increase in commissions revenue, related
predominantly to higher brokerage transaction volume within IB’s Equity Markets revenue, which
included additions from Bear Stearns’ Prime Services business; and higher administration fees in TSS, driven by wider spreads in securities lending and
increased product usage by new and existing clients. For additional information on these fees and
commissions, see the segment discussions for IB on pages 55–57,
RFS on pages 58–63, TSS on pages
69–70 and AM on pages 71–73 of this Annual Report.
The increase in securities gains compared with the prior year was due to the repositioning of the
Corporate investment securities portfolio, as part of managing the structural interest rate risk of
the
| 46 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Firm; and higher gains from the sale of MasterCard shares. For a further discussion of
securities gains, which are mostly recorded in the Firm’s Corporate/Private Equity business, see
the Corporate/Private Equity segment discussion on pages 74–75 of this Annual Report.
Mortgage fees and related income increased from the prior year, driven by higher net mortgage
servicing revenue, which benefited from an improvement in mortgage servicing rights (“MSR”) risk
management results and increased loan servicing revenue. Mortgage production revenue increased
slightly, as growth in originations was predominantly offset by markdowns on the mortgage warehouse
and increased losses related to the repurchase of previously sold loans. For a discussion of
mortgage fees and related income, which is recorded primarily in RFS’s Consumer Lending business,
see the Consumer Lending discussion on pages 60–63 of this Annual Report.
Credit card income rose compared with the prior year, driven by increased interchange income, due
to higher customer charge volume in CS and higher debit card transaction volume in RFS; the impact
of the Washington Mutual transaction; and increased servicing fees resulting from a higher level of
securitized receivables. These results were partially offset by increases in volume-driven payments
to partners and expense related to rewards programs. For a further discussion of credit card
income, see CS’s segment results on pages 64–66 of this Annual Report.
Other income increased compared with the prior year, due predominantly to the proceeds from the
sale of Visa shares in its initial public offering of $1.5 billion, the gain on the dissolution of
the Chase Paymentech joint venture of $1.0 billion, and gains on sales of certain other assets.
These proceeds and gains were partially offset by lower valuations on certain investments,
including seed capital in AM; a $464 million charge related to the offer to repurchase auction-rate
securities at par; losses of $423 million reflecting the Firm’s 49.4% ownership in Bear Stearns’
losses from April 8 to May 30, 2008; and lower net securitization income in CS.
Net interest income increased from the prior year driven, in part, by the Washington Mutual
transaction, which contributed to higher average loans and deposits, and, to a lesser extent, by
the Bear Stearns merger. The Bear Stearns Prime Services business contributed to higher net
interest income, as this business increased average balances in other interest-earning assets
(primarily customer receivables) and other interest-bearing liabilities (primarily customer
payables). The Firm’s interest-earning assets were $1.4 trillion, and the net yield on those
assets, on an FTE basis, was 2.87%, an increase of 48 basis points from 2007. Excluding the impact
of the Washington Mutual transaction and the Bear Stearns merger, the increase in net interest
income in 2008 was driven by a wider net interest margin, which reflected the overall decline in
market interest rates during the year. The decline in rates had a positive effect on the net
interest margin, as rates paid on the Firm’s interest-bearing liabilities decreased faster relative
to the decrease in rates earned on interest-earning
assets. Growth in consumer and wholesale loan
balances also contributed to the increase in net interest income.
Provision for credit losses
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Wholesale
|
$ | 3,974 | $ | 3,327 | $ | 934 | ||||||
|
Consumer
|
28,041 | 17,652 | 5,930 | |||||||||
|
Total provision for credit losses
|
$ | 32,015 | $ | 20,979 | $ | 6,864 | ||||||
2009 compared with 2008
The provision for credit losses in 2009 rose by $11.0 billion compared with the prior year,
predominantly due to a significant increase in the consumer provision. The prior year included a
$1.5 billion charge to conform Washington Mutual’s allowance for loan losses, which affected both
the consumer and wholesale portfolios. For the purpose of the following analysis, this charge is
excluded. The consumer provision reflected additions to the allowance for loan losses for the home
equity, mortgage and credit card portfolios, as weak economic conditions, housing price declines
and higher unemployment rates continued to drive higher estimated losses for these portfolios.
Included in the 2009 addition to the allowance for loan losses was a $1.6 billion provision related
to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. The
wholesale provision increased from the prior year, reflecting continued weakness in the credit
environment in 2009 compared with the prior year. For a more detailed discussion of the loan
portfolio and the allowance for loan losses, see the segment
discussions for RFS on pages 58–63,
CS on pages 64–66, IB on pages 55–57 and CB on pages 67–68, and the Allowance for Credit Losses
section on pages 115–117 of this Annual Report.
2008 compared with 2007
The provision for credit losses in 2008 rose by $14.1 billion compared with the prior year, due to
increases in both the consumer and wholesale provisions. The increase in the consumer provision
reflected higher estimated losses for home equity and mortgages resulting from declining housing
prices; an increase in estimated losses for the auto, student and business banking loan portfolios;
and an increase in the allowance for loan losses and higher charge-offs of credit card loans. The
increase in the wholesale provision was driven by a higher allowance resulting from a weakening
credit environment and growth in retained loans. The wholesale provision in the first quarter of
2008 also included the effect of the transfer of $4.9 billion of funded and unfunded leveraged
lending commitments to retained loans from the held-for-sale portfolio. In addition, in 2008 both
the consumer and wholesale provisions were affected by a $1.5 billion charge to conform assets
acquired from Washington Mutual to the Firm’s loan loss methodologies. For a more detailed
discussion of the loan portfolio and the allowance for loan losses, see the segment discussions for
RFS on pages 58–63, CS on pages 64–66, IB on pages
55–57 and CB on pages 67–68, and the Credit
Risk Management section on pages 93–117 of this Annual Report.
| JPMorgan Chase & Co. / 2009 Annual Report | 47 |
Table of Contents
Management’s discussion and analysis
Noninterest expense
The following table presents the components of noninterest
expense.
expense.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Compensation expense
|
$ | 26,928 | $ | 22,746 | $ | 22,689 | ||||||
|
Noncompensation expense:
|
||||||||||||
|
Occupancy expense
|
3,666 | 3,038 | 2,608 | |||||||||
|
Technology, communications
and equipment expense
|
4,624 | 4,315 | 3,779 | |||||||||
|
Professional & outside services
|
6,232 | 6,053 | 5,140 | |||||||||
|
Marketing
|
1,777 | 1,913 | 2,070 | |||||||||
|
Other expense
(a)(b)
|
7,594 | 3,740 | 3,814 | |||||||||
|
Amortization of intangibles
|
1,050 | 1,263 | 1,394 | |||||||||
|
Total noncompensation expense
|
24,943 | 20,322 | 18,805 | |||||||||
|
Merger costs
|
481 | 432 | 209 | |||||||||
|
Total noninterest expense
|
$ | 52,352 | $ | 43,500 | $ | 41,703 | ||||||
| (a) | Includes a $675 million FDIC special assessment in 2009. | |
| (b) | Includes foreclosed property expense of $1.4 billion, $213 million and $56 million for 2009, 2008 and 2007, respectively. For additional information regarding foreclosed property, see Note 13 on pages 192–196 of this Annual Report. |
2009 compared with 2008
Total noninterest expense was $52.4 billion, up $8.9 billion, or 20%, from the prior year. The
increase was driven by the impact of the Washington Mutual transaction, higher performance-based
compensation expense, higher FDIC-related costs and increased mortgage servicing and
default-related expense. These items were offset partially by lower headcount-related expense,
including salary and benefits but excluding performance-based incentives, and other noncompensation
costs related to employees.
Compensation expense increased in 2009 compared with the prior year, reflecting higher
performance-based incentives, as well as the impact of the Washington Mutual transaction. Excluding
these two items, compensation expense decreased as a result of a reduction in headcount,
particularly in the wholesale businesses and in Corporate.
Noncompensation expense increased from the prior year, due predominantly to the following: the
impact of the Washington Mutual transaction; higher ongoing FDIC insurance premiums and an FDIC
special assessment of $675 million recognized in the second quarter of 2009; higher mortgage
servicing and default-related expense, which included an increase in foreclosed property expense of
$1.2 billion; higher litigation costs; and the effect of the dissolution of the Chase Paymentech
Solutions joint venture. The increase was partially offset by lower headcount-related expense,
particularly in IB, TSS and AM; a decrease in amortization of intangibles, predominantly related to
purchased credit card relationships; lower mortgage reinsurance losses; and a decrease in credit
card marketing expense. For a discussion of amortization of intangibles, refer to Note 17 on pages
214–217 of this Annual Report.
For information on merger costs, refer to Note 10 on page 186 of this Annual Report.
2008 compared with 2007
Total noninterest expense for 2008 was $43.5 billion, up $1.8 billion, or 4%, from the prior year.
The increase was driven by the additional operating costs related to the Washington Mutual
transaction and Bear Stearns merger and investments in the businesses, partially offset by lower
performance-based incentives.
Compensation expense increased slightly from the prior year, predominantly driven by investments in
the businesses, including headcount additions associated with the Bear Stearns merger and
Washington Mutual transaction, largely offset by lower performance-based incentives.
Noncompensation expense increased from the prior year as a result of the Bear Stearns merger and
Washington Mutual transaction. Excluding the effect of these transactions, noncompensation expense
decreased due to a net reduction in other expense related to litigation; lower credit card and
consumer lending marketing expense; and a decrease in the amortization of intangibles, as certain
purchased credit card relationships were fully amortized in 2007, and the amortization rate for
core deposit intangibles declined in accordance with the amortization schedule. These decreases
were offset partially by increases in professional & outside services, driven by investments in new
product platforms in TSS, and business and volume growth in CS credit card processing and IB
brokerage, clearing and exchange transaction processing. Also contributing to the increases were
the following: an increase in other expense due to higher mortgage reinsurance losses and mortgage
servicing expense due to increased delinquencies and defaults in RFS; an increase in technology,
communications and equipment expense, reflecting higher depreciation expense on owned automobiles
subject to operating leases in RFS, and other technology-related investments across the businesses;
and an increase in occupancy expense, partly related to the expansion of RFS’s retail distribution
network. For a further discussion of amortization of intangibles, refer to Note 17 on pages
214–217 of this Annual Report.
For information on merger costs, refer to Note 10 on page 186 of this Annual Report.
| 48 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Income tax expense
The following table presents the Firm’s income before income tax expense/(benefit) and
extraordinary gain, income tax expense/(benefit) and effective tax rate.
| Year ended December 31, | ||||||||||||
| (in millions, except rate) | 2009 | 2008 | 2007 | |||||||||
|
Income before income tax
expense/ (benefit) and
extraordinary gain
|
$ | 16,067 | $ | 2,773 | $ | 22,805 | ||||||
|
Income tax expense/(benefit)
|
4,415 | (926 | ) | 7,440 | ||||||||
|
Effective tax rate
|
27.5 | % | (33.4 | )% | 32.6 | % | ||||||
2009 compared with 2008
The change in the effective tax rate compared with the prior year was primarily the result of
higher reported pretax income and changes in the proportion of income subject to U.S. federal and
state and local taxes. Benefits related to tax-exempt income, business tax credits and tax audit
settlements increased in 2009 relative to 2008; however, the impact of these items on the effective
tax rate was reduced by the significantly higher level of pretax income in 2009. In addition, 2008
reflected the realization of benefits of $1.1 billion from the release of deferred tax liabilities
associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be
reinvested indefinitely. For a further discussion of income taxes, see Critical Accounting
Estimates Used by the Firm on pages 127–131 and Note 27 on pages
226–228 of this Annual Report.
2008 compared with 2007
The decrease in the effective tax rate in 2008 compared with the prior year was the result of
significantly lower reported pretax income, combined with changes in the proportion of income
subject to U.S. federal taxes. Also contributing to the decrease in the effective tax rate was
increased business tax credits and the realization of a $1.1 billion benefit from the release of
deferred tax liabilities. These deferred tax liabilities were associated with the undistributed
earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely. These
decreases were partially offset by changes in state and local taxes, and equity losses representing
the Firm’s 49.4% ownership interest in Bear Stearns’ losses from April 8 to May 30, 2008, for which
no income tax benefit was recorded.
Extraordinary gain
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual.
This transaction was accounted for under the purchase method of accounting for business
combinations. The adjusted net asset value of the banking operations after purchase accounting
adjustments was higher than the consideration paid by JPMorgan Chase, resulting in an extraordinary
gain. The preliminary gain recognized in 2008 was $1.9 billion. In the third quarter of 2009, the
Firm recognized a $76 million increase in the extraordinary gain associated with the final purchase
accounting adjustments for the acquisition. For a further discussion of the Washington Mutual
transaction, see Note 2 on pages 143–148 of this Annual Report.
| JPMorgan Chase & Co. / 2009 Annual Report | 49 |
Table of Contents
Management’s discussion and analysis
EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its consolidated financial statements using accounting principals
generally accepted in the United States of America (“U.S. GAAP”); these financial statements appear
on pages 138–141 of this Annual Report. That presentation, which is referred to as “reported
basis,” provides the reader with an understanding of the Firm’s results that can be tracked
consistently from year to year and enables a comparison of the Firm’s performance with other
companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s
results and the results of the lines of business on a “managed” basis, which is a non-GAAP
financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP
results and includes certain reclassifications that assume credit card loans securitized by CS
remain on the balance sheets, and presents revenue on a FTE basis. These adjustments do not have
any impact on net income as reported by the lines of business or by the Firm as a whole.
The presentation of CS results on a managed basis assumes that credit card loans that have been
securitized and sold in accordance with U.S. GAAP remain on the Consolidated Balance Sheets, and
that the earnings on the securitized loans are classified in the same
manner as the earnings on retained loans recorded on the Consolidated
Balance Sheets. JPMorgan
Chase uses the concept of managed basis to evaluate the credit performance and overall financial
performance of the entire managed credit card portfolio. Operations are funded and decisions are
made about allocating resources, such as employees and capital, based on managed financial
information. In addition, the same underwriting standards and ongoing risk monitoring are used for
both loans on the Consolidated Balance Sheets and securitized loans. Although securitizations
result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing
customer relationships, as the customers may continue to use their credit cards; accordingly, the
customer’s credit performance will affect both the securitized loans and the loans retained on the
Consolidated Balance Sheets. JPMorgan Chase believes managed basis information is useful to
investors, enabling them to understand both the credit risks associated with the loans reported on
the Consolidated Balance Sheets and the Firm’s retained interests in securitized loans. For a
reconciliation of reported to managed basis results for CS, see CS
segment results on pages 64–66
of this Annual Report. For information regarding the securitization process, and loans and residual
interests sold and securitized, see Note 15 on pages 198–205 of this Annual Report.
The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
(Table continues on next page)
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Fully | Fully | |||||||||||||||||||||||||||||||
| Year ended December 31, | tax- | tax- | ||||||||||||||||||||||||||||||
|
(in millions, except
per share and ratio data) |
Reported
results |
Credit card (d) |
equivalent
adjustments |
Managed
basis |
Reported
results |
Credit card (d) |
equivalent
adjustments |
Managed
basis |
||||||||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||||||||||
|
Investment banking fees
|
$ | 7,087 | $ | — | $ | — | $ | 7,087 | $ | 5,526 | $ | — | $ | — | $ | 5,526 | ||||||||||||||||
|
Principal transactions
|
9,796 | — | — | 9,796 | (10,699 | ) | — | — | (10,699 | ) | ||||||||||||||||||||||
|
Lending- and deposit-related fees
|
7,045 | — | — | 7,045 | 5,088 | — | — | 5,088 | ||||||||||||||||||||||||
|
Asset management,
administration and commissions |
12,540 | — | — | 12,540 | 13,943 | — | — | 13,943 | ||||||||||||||||||||||||
|
Securities gains
|
1,110 | — | — | 1,110 | 1,560 | — | — | 1,560 | ||||||||||||||||||||||||
|
Mortgage fees and related income
|
3,678 | — | — | 3,678 | 3,467 | — | — | 3,467 | ||||||||||||||||||||||||
|
Credit card income
|
7,110 | (1,494 | ) | — | 5,616 | 7,419 | (3,333 | ) | — | 4,086 | ||||||||||||||||||||||
|
Other income
|
916 | — | 1,440 | 2,356 | 2,169 | — | 1,329 | 3,498 | ||||||||||||||||||||||||
|
Noninterest revenue
|
49,282 | (1,494 | ) | 1,440 | 49,228 | 28,473 | (3,333 | ) | 1,329 | 26,469 | ||||||||||||||||||||||
|
Net interest income
|
51,152 | 7,937 | 330 | 59,419 | 38,779 | 6,945 | 579 | 46,303 | ||||||||||||||||||||||||
|
Total net revenue
|
100,434 | 6,443 | 1,770 | 108,647 | 67,252 | 3,612 | 1,908 | 72,772 | ||||||||||||||||||||||||
|
Noninterest expense
|
52,352 | — | — | 52,352 | 43,500 | — | — | 43,500 | ||||||||||||||||||||||||
|
Pre-provision profit
|
48,082 | 6,443 | 1,770 | 56,295 | 23,752 | 3,612 | 1,908 | 29,272 | ||||||||||||||||||||||||
|
Provision for credit losses
|
32,015 | 6,443 | — | 38,458 | 19,445 | 3,612 | — | 23,057 | ||||||||||||||||||||||||
|
Provision
for credit losses – accounting
conformity
(a)
|
— | — | — | — | 1,534 | — | — | 1,534 | ||||||||||||||||||||||||
|
Income before income tax expense/
(benefit) and extraordinary gain
|
16,067 | — | 1,770 | 17,837 | 2,773 | — | 1,908 | 4,681 | ||||||||||||||||||||||||
|
Income tax expense/(benefit)
|
4,415 | — | 1,770 | 6,185 | (926 | ) | — | 1,908 | 982 | |||||||||||||||||||||||
|
Income before extraordinary gain
|
11,652 | — | — | 11,652 | 3,699 | — | — | 3,699 | ||||||||||||||||||||||||
|
Extraordinary gain
|
76 | — | — | 76 | 1,906 | — | — | 1,906 | ||||||||||||||||||||||||
|
Net income
|
$ | 11,728 | $ | — | $ | — | $ | 11,728 | $ | 5,605 | $ | — | $ | — | $ | 5,605 | ||||||||||||||||
|
Diluted earnings per share
(b)(c)
|
$ | 2.24 | $ | — | $ | — | $ | 2.24 | $ | 0.81 | $ | — | $ | — | $ | 0.81 | ||||||||||||||||
|
Return on assets
(c)
|
0.58 | % | NM | NM | 0.55 | % | 0.21 | % | NM | NM | 0.20 | % | ||||||||||||||||||||
|
Overhead ratio
|
52 | NM | NM | 48 | 65 | NM | NM | 60 | ||||||||||||||||||||||||
|
Loans – period-end
|
$ | 633,458 | $ | 84,626 | $ | — | $ | 718,084 | $ | 744,898 | $ | 85,571 | $ | — | $ | 830,469 | ||||||||||||||||
|
Total assets
– average
|
2,024,201 | 82,233 | — | 2,106,434 | 1,791,617 | 76,904 | — | 1,868,521 | ||||||||||||||||||||||||
| (a) | 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations. | |
| (b) | Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities. Accordingly, prior-period amounts have been revised. For further discussion of the guidance, see Note 25 on page 224 of this Annual Report. | |
| (c) | Based on income before extraordinary gain. | |
| (d) | See pages 64–66 of this Annual Report for a discussion of the effect of credit card securitizations on CS. |
| 50 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
On January 1, 2010, the Firm adopted the new consolidation accounting guidance for
VIE’s. As the Firm will be deemed to be the primary beneficiary of its credit card securitization
trusts as a result of this guidance, the Firm will consolidate the assets and liabilities of these
credit card securitization trusts at their carrying values on January 1, 2010, and credit
card–related income and credit costs associated with these securitization activities will be
prospectively recorded on the 2010 Consolidated Statements of Income in the same classifications
that are currently used to report such items on a managed basis. For additional information on the
new accounting guidance, see “Accounting and reporting
developments” on pages 132–134 of this
Annual Report.
Total net revenue for each of the business segments and the Firm is presented on a FTE basis.
Accordingly, investments that receive tax credits and revenue from tax-exempt securities are
presented in the managed results on a basis comparable to taxable investments and securities. This
non-GAAP financial measure allows management to assess
(Table continued from previous page)
| 2007 | ||||||||||||||
| Fully | ||||||||||||||
| Reported | tax-equivalent | Managed | ||||||||||||
| results | Credit card (d) | adjustments | basis | |||||||||||
|
|
||||||||||||||
| $ | 6,635 | $ | — | $ | — | $ | 6,635 | |||||||
| 9,015 | — | — | 9,015 | |||||||||||
| 3,938 | — | — | 3,938 | |||||||||||
|
|
14,356 | — | — | 14,356 | ||||||||||
|
|
164 | — | — | 164 | ||||||||||
|
|
2,118 | — | — | 2,118 | ||||||||||
|
|
6,911 | (3,255 | ) | — | 3,656 | |||||||||
|
|
1,829 | — | 683 | 2,512 | ||||||||||
|
|
44,966 | (3,255 | ) | 683 | 42,394 | |||||||||
| 26,406 | 5,635 | 377 | 32,418 | |||||||||||
|
|
71,372 | 2,380 | 1,060 | 74,812 | ||||||||||
|
|
41,703 | — | — | 41,703 | ||||||||||
|
|
29,669 | 2,380 | 1,060 | 33,109 | ||||||||||
|
|
6,864 | 2,380 | — | 9,244 | ||||||||||
|
|
||||||||||||||
|
|
— | — | — | — | ||||||||||
|
|
||||||||||||||
|
|
22,805 | — | 1,060 | 23,865 | ||||||||||
|
|
7,440 | — | 1,060 | 8,500 | ||||||||||
| 15,365 | — | — | 15,365 | |||||||||||
| — | — | — | — | |||||||||||
| $ | 15,365 | $ | — | $ | — | $ | 15,365 | |||||||
| $ | 4.33 | $ | — | $ | — | $ | 4.33 | |||||||
| 1.06 | % | NM | NM | 1.01 | % | |||||||||
| 58 | NM | NM | 56 | |||||||||||
| $ | 519,374 | $ | 72,701 | $ | — | $ | 592,075 | |||||||
| 1,455,044 | 66,780 | — | 1,521,824 | |||||||||||
the comparability of revenue arising from both taxable and tax-exempt sources.
The corresponding income tax impact related to these items is recorded within income tax expense.
Tangible common equity (“TCE”) represents common stockholders’ equity (i.e., total stockholders’
equity less preferred stock) less identifiable intangible assets (other than MSRs) and goodwill,
net of related deferred tax liabilities. ROTCE, a non-GAAP financial ratio, measures the Firm’s
earnings as a percentage of TCE and is, in management’s view, another meaningful measure to assess
the Firm’s use of equity.
Management also uses certain non-GAAP financial measures at the business-segment level, because it
believes these other non-GAAP financial measures provide information to investors about the
underlying operational performance and trends of the particular business segment and therefore
facilitate a comparison of the business segment with the performance of its competitors.
Calculation of certain U.S. GAAP and non-GAAP metrics
The table below reflects the formulas used to calculate both the
following U.S. GAAP and non-GAAP measures.
Return on common equity
Net income* / Average common stockholders’ equity
Return on tangible common equity
(e)
Net income* / Average tangible common equity
Return on assets
Reported net income / Total average assets
Managed net income / Total average managed assets (f)
(including average securitized credit card receivables)
Managed net income / Total average managed assets (f)
(including average securitized credit card receivables)
Overhead ratio
Total noninterest expense / Total net revenue
| * | Represents net income applicable to common equity | |
| (e) | The Firm uses ROTCE, a non-GAAP financial measure, to evaluate the Firm’s use of equity and to facilitate comparisons with competitors. Refer to the following page for the calculation of average tangible common equity. | |
| (f) | The Firm uses return on managed assets, a non-GAAP financial measure, to evaluate the overall performance of the managed credit card portfolio, including securitized credit card loans. |
| JPMorgan Chase & Co. / 2009 Annual Report | 51 |
Table of Contents
Management’s discussion and analysis
Average tangible common equity
| Year ended December 31, (in millions) | 2009 | 2008 | ||||||
|
Common stockholders’ equity
|
$ | 145,903 | $ | 129,116 | ||||
|
Less: Goodwill
|
48,254 | 46,068 | ||||||
|
Less: Certain identifiable intangible assets
|
5,095 | 5,779 | ||||||
|
Add: Deferred tax liabilities
(a)
|
2,547 | 2,369 | ||||||
|
TCE
|
$ | 95,101 | $ | 79,638 | ||||
| (a) | Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in non-taxable transactions, which are netted against goodwill and other intangibles when calculating TCE. |
Impact on ROE of redemption of TARP preferred stock
issued to the U.S. Treasury
The calculation of 2009 net income applicable to common equity includes a one-time, noncash
reduction of $1.1 billion resulting from the repayment of TARP preferred capital. Excluding this
reduction, ROE would have been 7% for 2009. The Firm views adjusted ROE, a non-GAAP financial
measure, as meaningful because it enables the comparability to prior periods.
| Year ended December 31, 2009 | Excluding the | |||||||
| (in millions, except ratios) | As reported | TARP redemption | ||||||
|
Return on equity
|
||||||||
|
Net income
|
$ | 11,728 | $ | 11,728 | ||||
|
Less: Preferred stock dividends
|
1,327 | 1,327 | ||||||
|
Less: Accelerated amortization from
redemption of preferred stock issued
to the U.S. Treasury
|
1,112 | — | ||||||
|
Net income applicable to common equity
|
$ | 9,289 | $ | 10,401 | ||||
|
Average common stockholders’ equity
|
$ | 145,903 | $ | 145,903 | ||||
|
ROE
|
6 | % | 7 | % | ||||
Impact on diluted earnings per share of redemption of TARP preferred stock issued to the U.S.
Treasury
Net income applicable to common equity for the year ended December 31, 2009, included a one-time,
noncash reduction of approximately $1.1 billion resulting from the repayment of TARP preferred
capital. The following table presents the effect on net income applicable to common stockholders
and the $0.27 reduction to diluted earnings per share for the year ended December 31, 2009.
| Year ended December 31, 2009 | Effect of | |||||||
| (in millions, except per share) | As reported | TARP redemption | ||||||
|
Diluted earnings per share
|
||||||||
|
Net income
|
$ | 11,728 | $ | — | ||||
|
Less: Preferred stock dividends
|
1,327 | — | ||||||
|
Less: Accelerated amortization from redemption
of preferred stock issued to the U.S. Treasury
|
1,112 | 1,112 | ||||||
|
Net income applicable to common equity
|
$ | 9,289 | $ | (1,112 | ) | |||
|
Less: Dividends and undistributed earnings
allocated to participating securities
|
515 | (62 | ) | |||||
|
Net income applicable to common stockholders
|
$ | 8,774 | $ | (1,050 | ) | |||
|
Total weighted average diluted shares outstanding
|
3,879.7 | 3,879.7 | ||||||
|
Net income per share
|
$ | 2.26 | $ | (0.27 | ) | |||
Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding home
lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust. For a
further discussion of this credit metric, see Allowance for Credit
Losses on pages 115–117 of this
Annual Report.
| 52 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business basis. The business segment financial results
presented reflect the current organization of JPMorgan Chase. There are six major reportable
business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial
Banking, Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity
segment.
The business segments are determined based on the products and services provided, or the type of
customer served, and they reflect the manner in which financial information is currently evaluated
by management. Results of these lines of business are presented on a managed basis.
(a) Bear
Stearns Private Client Services was renamed to JPMorgan Securities at
the beginning of 2010.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. Business segment reporting methodologies used by the Firm are discussed below. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. Business segment reporting methodologies used by the Firm are discussed below. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Revenue sharing
When business segments join efforts to sell products and services to the Firm’s clients, the participating business segments agree to share revenue from those transactions. The segment results reflect these revenue-sharing agreements.
When business segments join efforts to sell products and services to the Firm’s clients, the participating business segments agree to share revenue from those transactions. The segment results reflect these revenue-sharing agreements.
Funds transfer pricing
Funds transfer pricing is used to allocate interest income and expense to each business and transfer the primary interest rate risk exposures to the Treasury group within the Corporate/Private Equity
Funds transfer pricing is used to allocate interest income and expense to each business and transfer the primary interest rate risk exposures to the Treasury group within the Corporate/Private Equity
business segment. The allocation process is unique to each business
segment and considers the interest rate risk, liquidity risk and regulatory requirements of that segment’s stand-alone peers. This process is overseen
by senior management and reviewed by the Firm’s Asset-Liability Committee (“ALCO”). Business
segments may retain certain interest rate exposures, subject to management approval, that would be
expected in the normal operation of a similar peer business.
Capital allocation
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, economic risk measures and regulatory capital requirements. The amount of capital assigned to each business is referred to as equity. For a further discussion, see Capital management–Line of business equity on pages 84-85 of this Annual Report.
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, economic risk measures and regulatory capital requirements. The amount of capital assigned to each business is referred to as equity. For a further discussion, see Capital management–Line of business equity on pages 84-85 of this Annual Report.
Expense allocation
Where business segments use services provided by support units within the Firm, the costs of those support units are allocated to the business segments. The expense is allocated based on their
Where business segments use services provided by support units within the Firm, the costs of those support units are allocated to the business segments. The expense is allocated based on their
| JPMorgan Chase & Co. / 2009 Annual Report | 53 |
Table of Contents
Management’s discussion and analysis
actual cost or the lower of actual cost or market, as well as upon usage of the services provided.
In contrast, certain other expense related to certain corporate functions, or to certain technology
and operations, are not allocated to the business segments and are retained in Corporate. Retained
expense includes: parent company costs that would not be incurred if the segments were stand-alone
businesses; adjustments to align certain corporate staff, technology and operations allocations
with market prices; and other one-time items not aligned with the business segments.
Segment
results – Managed basis
(a)
The following table summarizes the business segment results for the periods indicated.
The following table summarizes the business segment results for the periods indicated.
| Year ended December 31, | Total net revenue | Noninterest expense | ||||||||||||||||||||||
| (in millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Investment
Bank
(b)
|
$ | 28,109 | $ | 12,335 | $ | 18,291 | $ | 15,401 | $ | 13,844 | $ | 13,074 | ||||||||||||
|
Retail Financial Services
|
32,692 | 23,520 | 17,305 | 16,748 | 12,077 | 9,905 | ||||||||||||||||||
|
Card Services
|
20,304 | 16,474 | 15,235 | 5,381 | 5,140 | 4,914 | ||||||||||||||||||
|
Commercial Banking
|
5,720 | 4,777 | 4,103 | 2,176 | 1,946 | 1,958 | ||||||||||||||||||
|
Treasury & Securities Services
|
7,344 | 8,134 | 6,945 | 5,278 | 5,223 | 4,580 | ||||||||||||||||||
|
Asset Management
|
7,965 | 7,584 | 8,635 | 5,473 | 5,298 | 5,515 | ||||||||||||||||||
|
Corporate/Private Equity
(b)
|
6,513 | (52 | ) | 4,298 | 1,895 | (28 | ) | 1,757 | ||||||||||||||||
|
Total
|
$ | 108,647 | $ | 72,772 | $ | 74,812 | $ | 52,352 | $ | 43,500 | $ | 41,703 | ||||||||||||
| Year ended December 31, | Net income/(loss) | Return on equity | ||||||||||||||||||||||
| (in millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Investment Bank
(b)
|
$ | 6,899 | $ | (1,175 | ) | $ | 3,139 | 21 | % | (5 | )% | 15 | % | |||||||||||
|
Retail Financial Services
|
97 | 880 | 2,925 | — | 5 | 18 | ||||||||||||||||||
|
Card Services
|
(2,225 | ) | 780 | 2,919 | (15 | ) | 5 | 21 | ||||||||||||||||
|
Commercial Banking
|
1,271 | 1,439 | 1,134 | 16 | 20 | 17 | ||||||||||||||||||
|
Treasury & Securities Services
|
1,226 | 1,767 | 1,397 | 25 | 47 | 47 | ||||||||||||||||||
|
Asset Management
|
1,430 | 1,357 | 1,966 | 20 | 24 | 51 | ||||||||||||||||||
|
Corporate/Private
Equity
(b)(c)
|
3,030 | 557 | 1,885 | NM | NM | NM | ||||||||||||||||||
|
Total
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | 6 | % | 4 | % | 13 | % | ||||||||||||
| (a) | Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations. | |
| (b) | In the second quarter of 2009, IB began reporting its credit reimbursement from TSS as a component of its total net revenue, whereas TSS continues to report its credit reimbursement to IB as a separate line item on its income statement (not part of total net revenue). Corporate/Private Equity includes an adjustment to offset IB’s inclusion of the credit reimbursement in total net revenue. Prior periods have been revised for IB and Corporate/Private Equity to reflect this presentation. | |
| (c) | Net income included an extraordinary gain of $76 million and $1.9 billion related to the Washington Mutual transaction for 2009 and 2008, respectively. |
| 54 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
INVESTMENT BANK
J.P. Morgan is one of the world’s leading investment banks, with
deep client relationships and broad product capabilities. The Investment
Bank’s clients are corporations, financial institutions, governments and
institutional investors. The Firm offers a full range of investment banking
products and services in all major capital markets, including advising on
corporate strategy and structure, capital raising in equity and debt markets,
sophisticated risk management, market-making in cash securities and derivative
instruments, prime brokerage, research and thought leadership. IB also
commits the Firm’s own capital to principal investing and trading
activities on a limited basis.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 (e) | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Investment banking fees
|
$ | 7,169 | $ | 5,907 | $ | 6,616 | ||||||
|
Principal transactions
(a)
|
8,154 | (7,042 | ) | 4,409 | ||||||||
|
Lending- and deposit-related fees
|
664 | 463 | 446 | |||||||||
|
Asset management, administration
and commissions
|
2,650 | 3,064 | 2,701 | |||||||||
|
All other income
(b)
|
(115 | ) | (341 | ) | 43 | |||||||
|
Noninterest revenue
|
18,522 | 2,051 | 14,215 | |||||||||
|
Net interest income
|
9,587 | 10,284 | 4,076 | |||||||||
|
Total net revenue
(c)
|
28,109 | 12,335 | 18,291 | |||||||||
|
Provision for credit losses
|
2,279 | 2,015 | 654 | |||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
9,334 | 7,701 | 7,965 | |||||||||
|
Noncompensation expense
|
6,067 | 6,143 | 5,109 | |||||||||
|
Total noninterest expense
|
15,401 | 13,844 | 13,074 | |||||||||
|
Income/(loss) before income tax
expense/(benefit)
|
10,429 | (3,524 | ) | 4,563 | ||||||||
|
Income tax expense/(benefit)
(d)
|
3,530 | (2,349 | ) | 1,424 | ||||||||
|
Net income/(loss)
|
$ | 6,899 | $ | (1,175 | ) | $ | 3,139 | |||||
|
Financial ratios
|
||||||||||||
|
ROE
|
21 | % | (5 | )% | 15 | % | ||||||
|
ROA
|
0.99 | (0.14 | ) | 0.45 | ||||||||
|
Overhead ratio
|
55 | 112 | 71 | |||||||||
|
Compensation expense as % of total
net revenue
|
33 | 62 | 44 | |||||||||
| (a) | The 2009 results reflect modest net gains on legacy leveraged lending and mortgage-related positions, compared with net markdowns of $10.6 billion and $2.7 billion in 2008 and 2007, respectively. | |
| (b) | TSS was charged a credit reimbursement related to certain exposures managed within IB credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in all other income. Prior periods have been revised to conform to the current presentation. | |
| (c) | Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing and alternative energy investments as well as tax-exempt income from municipal bond investments of $1.4 billion, $1.7 billion and $927 million for 2009, 2008 and 2007, respectively. | |
| (d) | The income tax benefit in 2008 includes the result of reduced deferred tax liabilities on overseas earnings. | |
| (e) | Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase results. 2007 reflects heritage JPMorgan Chase & Co. results only. |
The following table provides IB’s total net revenue by business segment.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 (d) | 2007 | |||||||||
|
Revenue by business
|
||||||||||||
|
Investment banking fees:
|
||||||||||||
|
Advisory
|
$ | 1,867 | $ | 2,008 | $ | 2,273 | ||||||
|
Equity underwriting
|
2,641 | 1,749 | 1,713 | |||||||||
|
Debt underwriting
|
2,661 | 2,150 | 2,630 | |||||||||
|
Total investment banking fees
|
7,169 | 5,907 | 6,616 | |||||||||
|
Fixed income markets
(a)
|
17,564 | 1,957 | 6,339 | |||||||||
|
Equity markets
(b)
|
4,393 | 3,611 | 3,903 | |||||||||
|
Credit portfolio
(c)
|
(1,017 | ) | 860 | 1,433 | ||||||||
|
Total net revenue
|
$ | 28,109 | $ | 12,335 | $ | 18,291 | ||||||
|
Revenue by region
|
||||||||||||
|
Americas
|
$ | 15,156 | $ | 2,610 | $ | 8,245 | ||||||
|
Europe/Middle East/Africa
|
9,790 | 7,710 | 7,330 | |||||||||
|
Asia/Pacific
|
3,163 | 2,015 | 2,716 | |||||||||
|
Total net revenue
|
$ | 28,109 | $ | 12,335 | $ | 18,291 | ||||||
| (a) | Fixed income markets primarily include client and portfolio management revenue related to market-making across global fixed income markets, including foreign exchange, interest rate, credit and commodities markets. | |
| (b) | Equities markets primarily include client and portfolio management revenue related to market-making across global equity products, including cash instruments, derivatives and convertibles. | |
| (c) | Credit portfolio revenue includes net interest income, fees and the impact of loan sales activity, as well as gains or losses on securities received as part of a loan restructuring, for IB’s credit portfolio. Credit portfolio revenue also includes the results of risk management related to the Firm’s lending and derivative activities, and changes in the credit valuation adjustment, which is the component of the fair value of a derivative that reflects the credit quality of the counterparty. Additionally, credit portfolio revenue incorporates an adjustment to the valuation of the Firm’s derivative liabilities. See pages 93–117 of the Credit Risk Management section of this Annual Report for further discussion. | |
| (d) | Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase & Co. results. 2007 reflects heritage JPMorgan Chase & Co.’s results only. |
2009 compared with 2008
Net income was $6.9 billion, compared with a net loss of $1.2 billion in the prior year. These results reflected significantly higher total net revenue, partially offset by higher noninterest expense and a higher provision for credit losses.
Net income was $6.9 billion, compared with a net loss of $1.2 billion in the prior year. These results reflected significantly higher total net revenue, partially offset by higher noninterest expense and a higher provision for credit losses.
Total net revenue was $28.1 billion, compared with $12.3 billion in the prior year. Investment
banking fees were up 21% to $7.2 billion, consisting of debt underwriting fees of $2.7 billion (up
24%), equity underwriting fees of $2.6 billion (up 51%), and advisory fees of $1.9 billion (down
7%). Fixed Income Markets revenue was $17.6 billion, compared with $2.0 billion in the prior year,
reflecting improved performance across most products and modest net gains on legacy leveraged
lending and mortgage-related positions, compared with net markdowns of $10.6 billion in the prior
year. These results also included losses of $1.0 billion from the tightening of the Firm’s credit
spread on certain structured liabilities, compared with gains
| JPMorgan Chase & Co. / 2009 Annual Report | 55 |
Table of Contents
Management’s discussion and analysis
of $814 million in the prior year.
Equity Markets revenue was $4.4 billion, up 22% from the prior year, driven by strong client
revenue across products, particularly prime services, and improved trading results. These results
also included losses of $536 million from the tightening of the Firm’s credit spread on certain
structured liabilities, compared with gains of $510 million in the prior year. Credit Portfolio
revenue was a loss of $1.0 billion versus a gain of $860 million in the prior year, driven by
mark-to-market losses on hedges of retained loans compared with gains in the prior year, partially
offset by the positive net impact of credit spreads on derivative assets and liabilities.
The provision for credit losses was $2.3 billion, compared with $2.0 billion in the prior year,
reflecting continued weakness in the credit environment. The allowance for loan losses to
end-of-period loans retained was 8.25%, compared with 4.83% in the prior year. Net charge-offs were
$1.9 billion, compared with $105 million in the prior year. Total nonperforming assets were $4.2
billion, compared with $2.5 billion in the prior year.
Noninterest expense was $15.4 billion, up $1.6 billion, or 11%, from the prior
year, driven by higher performance-based compensation expense, partially offset by lower
headcount-related expense.
Return on Equity was 21% on $33.0 billion of average allocated capital, compared with negative 5%
on $26.1 billion of average allocated capital in the prior year.
2008 compared with 2007
Net loss was $1.2 billion, a decrease of $4.3 billion from the prior year, driven by lower total net revenue, a higher provision for credit losses and higher noninterest expense, partially offset by a reduction in deferred tax liabilities on overseas earnings.
Net loss was $1.2 billion, a decrease of $4.3 billion from the prior year, driven by lower total net revenue, a higher provision for credit losses and higher noninterest expense, partially offset by a reduction in deferred tax liabilities on overseas earnings.
Total net revenue was $12.3 billion, down $6.0 billion, or 33%, from the prior year. Investment
banking fees were $5.9 billion, down 11% from the prior year, driven by lower debt underwriting and
advisory fees reflecting reduced market activity. Debt underwriting fees were $2.2 billion, down
18% from the prior year, driven by lower loan syndication and bond underwriting fees. Advisory fees
of $2.0 billion declined 12% from the prior year. Equity underwriting fees were $1.7 billion, up 2%
from the prior year driven by improved market share. Fixed Income Markets revenue was $2.0 billion,
compared with $6.3 billion in the prior year. The decrease was driven by $5.9 billion of net
markdowns on mortgage-related exposures and $4.7 billion of net markdowns on leveraged lending
funded and unfunded commitments. Revenue was also adversely impacted by additional losses and costs
to reduce risk related to Bear Stearns’ positions. These results were offset by record performance
in rates and currencies, credit trading, commodities and emerging markets as well as $814 million
of gains from the widening of the Firm’s credit spread on certain structured liabilities and
derivatives. Equity Markets revenue was $3.6 billion, down 7% from the prior year, reflecting weak
trading results, partially offset by strong client revenue across products including prime
services, as well as $510 million of gains from the widening of the Firm’s credit spread on certain
structured liabilities and derivatives. Credit portfolio revenue was $860 million, down 40%, driven
by losses from widening counterparty credit spreads.
The provision for credit losses was $2.0 billion, an increase of $1.4 billion from the prior year,
predominantly reflecting a higher allowance for credit losses, driven by a weakening credit
environment, as well as the effect of the transfer of $4.9 billion of funded and unfunded leveraged
lending commitments to retained loans from held-for-sale in the first quarter of 2008. Net
charge-offs for the year were $105 million, compared with $36 million in the prior year. Total
nonperforming assets were $2.5 billion, an increase of $2.0 billion compared with the prior year,
reflecting a weakening credit environment. The allowance for loan losses to average loans was 4.71%
for 2008, compared with a ratio of 2.14% in the prior year.
Noninterest expense was $13.8 billion, up $770 million, or 6%, from the prior year, reflecting
higher noncompensation expense driven primarily by additional expense relating to the Bear Stearns
merger, offset partially by lower performance-based compensation expense.
Return on equity was negative 5% on $26.1 billion of average allocated capital, compared with 15%
on $21.0 billion in the prior year.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except headcount) | 2009 | 2008 | 2007 | |||||||||
|
Selected balance sheet data
(period-end)
|
||||||||||||
|
Loans:
|
||||||||||||
|
Loans retained
(a)
|
$ | 45,544 | $ | 71,357 | $ | 67,528 | ||||||
|
Loans held-for-sale and
loans at
fair value
|
3,567 | 13,660 | 22,283 | |||||||||
|
Total loans
|
49,111 | 85,017 | 89,811 | |||||||||
|
Equity
|
$ | 33,000 | $ | 33,000 | $ | 21,000 | ||||||
|
|
||||||||||||
|
Selected balance sheet data
(average)
|
||||||||||||
|
Total assets
|
$ | 699,039 | $ | 832,729 | $ | 700,565 | ||||||
|
Trading
assets – debt and equity
instruments
|
273,624 | 350,812 | 359,775 | |||||||||
|
Trading
assets – derivative
receivables
|
96,042 | 112,337 | 63,198 | |||||||||
|
Loans:
|
||||||||||||
|
Loans retained
(a)
|
62,722 | 73,108 | 62,247 | |||||||||
|
Loans held-for-sale and
loans at
fair value
|
7,589 | 18,502 | 17,723 | |||||||||
|
Total loans
|
70,311 | 91,610 | 79,970 | |||||||||
|
|
||||||||||||
|
Adjusted assets
(b)
|
538,724 | 679,780 | 611,749 | |||||||||
|
Equity
|
33,000 | 26,098 | 21,000 | |||||||||
|
|
||||||||||||
|
Headcount
|
24,654 | 27,938 | 25,543 | |||||||||
| (a) | Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans at fair value. | |
| (b) | Adjusted assets, a non-GAAP financial measure, equals total assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities (“VIEs”); (3) cash and securities segregated and on deposit for regulatory and other purposes; (4) goodwill and intangibles; (5) securities received as collateral; and (6) investments purchased under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML Facility”). The amount of adjusted assets is presented to assist the reader in comparing IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. IB believes an adjusted asset amount that excludes the assets discussed above, which were considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry. |
| 56 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
Credit data and quality statistics
|
||||||||||||
|
Net charge-offs
|
$ | 1,904 | $ | 105 | $ | 36 | ||||||
|
Nonperforming assets:
|
||||||||||||
|
Nonperforming loans:
|
||||||||||||
|
Nonperforming loans retained
(a)(b)
|
3,196 | 1,143 | 303 | |||||||||
|
Nonperforming loans held-for-sale
and
loans at fair value
|
308 | 32 | 50 | |||||||||
|
Total nonperforming loans
|
3,504 | 1,175 | 353 | |||||||||
|
Derivative receivables
|
529 | 1,079 | 29 | |||||||||
|
Assets acquired in loan
satisfactions
|
203 | 247 | 71 | |||||||||
|
Total nonperforming assets
|
4,236 | 2,501 | 453 | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
|
3,756 | 3,444 | 1,329 | |||||||||
|
Allowance for lending-related
commitments
|
485 | 360 | 560 | |||||||||
|
Total allowance for credit losses
|
4,241 | 3,804 | 1,889 | |||||||||
|
Net charge-off rate
(a)(c)
|
3.04 | % | 0.14 | % | 0.06 | % | ||||||
|
Allowance for loan losses to
period-end
loans retained
(a)(d)
|
8.25 | 4.83 | 1.97 | |||||||||
|
Allowance for loan losses to average
loans retained
(a)(c)
|
5.99 | 4.71 | (h) | 2.14 | ||||||||
|
Allowance for loan losses to
nonperforming loans retained
(a)(b)
|
118 | 301 | 439 | |||||||||
|
Nonperforming loans to total
period-end loans
|
7.13 | 1.38 | 0.39 | |||||||||
|
Nonperforming loans to average loans
|
4.98 | 1.28 | 0.44 | |||||||||
|
Market risk-average trading and
credit portfolio VaR – 99%
confidence level
(d)
|
||||||||||||
|
Trading activities:
|
||||||||||||
|
Fixed income
|
$ | 221 | $ | 181 | $ | 80 | ||||||
|
Foreign exchange
|
30 | 34 | 23 | |||||||||
|
Equities
|
75 | 57 | 48 | |||||||||
|
Commodities and other
|
32 | 32 | 33 | |||||||||
|
Diversification
(e)
|
(131 | ) | (108 | ) | (77 | ) | ||||||
|
Total trading VaR
(f)
|
227 | 196 | 107 | |||||||||
|
Credit portfolio VaR
(g)
|
101 | 69 | 17 | |||||||||
|
Diversification
(e)
|
(80 | ) | (63 | ) | (18 | ) | ||||||
|
Total trading and credit portfolio VaR
|
$ | 248 | $ | 202 | $ | 106 | ||||||
| (a) | Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans accounted for at fair value. | |
| (b) | Allowance for loan losses of $1.3 billion and $430 million were held against these nonperforming loans at December 31, 2009 and 2008, respectively. | |
| (c) | Loans held-for-sale and loans at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate. | |
| (d) | Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase & Co.’s results only. 2007 reflects heritage JPMorgan Chase & Co. results. For a more complete description of value-at-risk (“VaR”), see pages 118–122 of this Annual Report. | |
| (e) | Average VaRs were less than the sum of the VaRs of their market risk components, due to risk offsets resulting from portfolio diversification. The diversification effect reflected the fact that the risks were not perfectly correlated. For further discussion of VaR, see pages 118–122 of this Annual Report. The risk of a portfolio of positions is usually less than the sum of the risks of the positions themselves. | |
| (f) | Trading VaR includes predominantly all trading activities in IB; however, particular risk parameters of certain products are not fully captured, for example, correlation risk. Trading VaR does not include VaR related to held-for-sale funded loans and unfunded commitments, nor the debit valuation adjustments |
| (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of the Firm. See VaR discussion on pages 118–122 and the DVA Sensitivity table on page 122 of this Annual Report for further details. Trading VaR also does not include the MSR portfolio or VaR related to other corporate functions, such as Corporate/Private Equity. Beginning in the fourth quarter of 2008, trading VaR includes the estimated credit spread sensitivity of certain mortgage products. | ||
| (g) | Included VaR on derivative credit valuation adjustments (“CVA”), hedges of the CVA and mark-to-market hedges of the retained loan portfolio, which were all reported in principal transactions revenue. This VaR does not include the retained loan portfolio. | |
| (h) | Excluding the impact of a loan originated in March 2008 to Bear Stearns, the adjusted ratio would be 4.84% for 2008. The average balance of the loan extended to Bear Stearns was $1.9 billion for 2008. |
Market shares and rankings
(a)
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Market | Market | Market | ||||||||||||||||||||||
| December 31, | share | Rankings | share | Rankings | share | Rankings | ||||||||||||||||||
|
Global debt,
equity and
equity-related
|
10 | % | #1 | 9 | % | #1 | 8 | % | #2 | |||||||||||||||
|
Global syndicated
loans
|
10 | 1 | 11 | 1 | 13 | 1 | ||||||||||||||||||
|
Global long-term
debt(b)
|
9 | 1 | 9 | 3 | 7 | 3 | ||||||||||||||||||
|
Global equity and
equity-related(c)
|
13 | 1 | 10 | 1 | 9 | 2 | ||||||||||||||||||
|
Global announced
M&A(d)
|
24 | 3 | 28 | 2 | 27 | 4 | ||||||||||||||||||
|
U.S. debt, equity
and equity-
related
|
14 | 1 | 15 | 2 | 10 | 2 | ||||||||||||||||||
|
U.S. syndicated
loans
|
23 | 1 | 24 | 1 | 24 | 1 | ||||||||||||||||||
|
U.S. long-term
debt(b)
|
14 | 1 | 15 | 2 | 10 | 2 | ||||||||||||||||||
|
U.S. equity and
equity-related(c)
|
13 | 1 | 11 | 1 | 11 | 5 | ||||||||||||||||||
|
U.S. announced
M&A(d)
|
35 | 3 | 35 | 2 | 28 | 3 | ||||||||||||||||||
| (a) | Source: Thomson Reuters. Results for 2008 are pro forma for the Bear Stearns merger. Results for 2007 represent heritage JPMorgan Chase & Co. only. | |
| (b) | Includes asset-backed securities, mortgage-backed securities and municipal securities. | |
| (c) | Includes rights offerings; U.S.- domiciled equity and equity-related transactions. | |
| (d) | Global announced M&A is based on rank value; all other rankings are based on proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%. Global and U.S. announced M&A market share and rankings for 2008 and 2007 include transactions withdrawn since December 31, 2008 and 2007. U.S. announced M&A represents any U.S. involvement ranking. |
According to Thomson Reuters, in 2009, the Firm was ranked #1 in Global Debt, Equity and Equity-related; #1 in
Global Equity and Equity-related; #1 in Global Long-Term Debt: #1 in Global Syndicated Loans and #3 in Global
Announced M&A, based on volume.
According to Dealogic, the Firm was ranked #1 in Global
Investment Banking Fees generated during 2009, based on revenue.
| JPMorgan Chase & Co. / 2009 Annual Report | 57 |
Table of Contents
Management’s discussion and analysis
RETAIL FINANCIAL SERVICES
Retail Financial Services, which includes the Retail Banking and
Consumer Lending businesses, serves consumers and businesses through personal
service at bank branches and through ATMs, online banking and telephone
banking, as well as through auto dealerships and school financial-aid offices.
Customers can use more than 5,100 bank branches (third-largest nationally) and
15,400 ATMs (second-largest nationally), as well as online and mobile banking
around the clock. More than 23,900 branch salespeople assist customers with
checking and savings accounts, mortgages, home equity and business loans, and
investments across the 23-state footprint from New York and Florida to
California. Consumers also can obtain loans through more than 15,700 auto
dealerships and nearly 2,100 schools and universities nationwide.
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual from the
FDIC for $1.9 billion through a purchase of substantially all of the assets and assumption of
specified liabilities of Washington Mutual. Washington Mutual’s banking operations consisted of a
retail bank network of 2,244 branches, a nationwide credit card lending business, a multi-family
and commercial real estate lending business, and nationwide mortgage banking activities. The
transaction expanded the Firm’s U.S. consumer branch network in California, Florida, Washington,
Georgia, Idaho, Nevada and Oregon and created the nation’s third-largest branch network.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Lending- and
deposit-related fees
|
$ | 3,969 | $ | 2,546 | $ | 1,881 | ||||||
|
Asset management,
administration
and commissions
|
1,674 | 1,510 | 1,275 | |||||||||
|
Mortgage fees and related
income
|
3,794 | 3,621 | 2,094 | |||||||||
|
Credit card income
|
1,635 | 939 | 646 | |||||||||
|
Other income
|
1,128 | 739 | 883 | |||||||||
|
Noninterest revenue
|
12,200 | 9,355 | 6,779 | |||||||||
|
Net interest income
|
20,492 | 14,165 | 10,526 | |||||||||
|
Total net revenue
|
32,692 | 23,520 | 17,305 | |||||||||
|
Provision for credit losses
|
15,940 | 9,905 | 2,610 | |||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
6,712 | 5,068 | 4,369 | |||||||||
|
Noncompensation expense
|
9,706 | 6,612 | 5,071 | |||||||||
|
Amortization of intangibles
|
330 | 397 | 465 | |||||||||
|
Total noninterest expense
|
16,748 | 12,077 | 9,905 | |||||||||
|
Income before income tax expense/(benefit)
|
4 | 1,538 | 4,790 | |||||||||
|
Income tax expense/(benefit)
|
(93 | ) | 658 | 1,865 | ||||||||
|
Net income
|
$ | 97 | $ | 880 | $ | 2,925 | ||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
— | % | 5 | % | 18 | % | ||||||
|
Overhead ratio
|
51 | 51 | 57 | |||||||||
|
Overhead ratio excluding
core deposit intangibles (a) |
50 | 50 | 55 | |||||||||
| (a) | Retail Financial Services uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial |
| measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would therefore result in an improving overhead ratio over time, all things remaining equal. The non-GAAP ratio excludes Retail Banking’s core deposit intangible amortization expense related to the Bank of New York transaction and the Bank One merger of $328 million, $394 million and $460 million for the years ended December 31, 2009, 2008 and 2007, respectively. |
2009 compared with 2008
Net income was $97 million, a decrease of $783 million from the prior year, as the increase in provision for credit losses more than offset the positive impact of the Washington Mutual transaction.
Net income was $97 million, a decrease of $783 million from the prior year, as the increase in provision for credit losses more than offset the positive impact of the Washington Mutual transaction.
Net revenue was $32.7 billion, an increase of $9.2 billion, or 39%, from the prior year. Net
interest income was $20.5 billion, up by $6.3 billion, or 45%, reflecting the impact of the
Washington Mutual transaction, and wider loan and deposit spreads. Noninterest revenue was $12.2
billion, up by $2.8 billion, or 30%, driven by the impact of the Washington Mutual transaction,
wider margins on mortgage originations and higher net mortgage servicing revenue, partially offset by
$1.6 billion in estimated losses related to the repurchase of previously sold loans.
The provision for credit losses was $15.9 billion, an increase of $6.0 billion from the prior year.
Weak economic conditions and housing price declines continued to drive higher estimated losses for
the home equity and mortgage loan portfolios. The provision included an addition of $5.8 billion to
the allowance for loan losses, compared with an addition of $5.0 billion in the prior year.
Included in the 2009 addition to the allowance for loan losses was a $1.6 billion increase related
to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. To date,
no charge-offs have been recorded on purchased credit-impaired loans; see page 62 of this Annual
Report for the net charge-off rates, as reported. Home equity net charge-offs were $4.7 billion
(4.32% excluding purchased credit-impaired loans), compared with $2.4 billion (2.39% excluding
purchased credit-impaired loans) in the prior year. Subprime mortgage net charge-offs were $1.6
billion (11.86% excluding purchased credit-impaired loans), compared with $933 million (6.10%
excluding purchased credit-impaired loans) in the prior year. Prime mortgage net charge-offs were
$1.9 billion (3.05% excluding purchased credit-impaired loans), compared with $526 million (1.18%
excluding purchased credit-impaired loans) in the prior year.
Noninterest expense was $16.7 billion, an increase of $4.7 billion, or 39%. The increase reflected
the impact of the Washington Mutual transaction and higher servicing and default-related
expense.
| 58 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
2008 compared with 2007
Net income was $880 million, a decrease of $2.0 billion, or 70%, from the prior year, as a significant increase in the provision for credit losses was partially offset by positive MSR risk management results and the positive impact of the Washington Mutual transaction.
Net income was $880 million, a decrease of $2.0 billion, or 70%, from the prior year, as a significant increase in the provision for credit losses was partially offset by positive MSR risk management results and the positive impact of the Washington Mutual transaction.
Total net revenue was $23.5 billion, an increase of $6.2 billion, or 36%, from the prior year. Net
interest income was $14.2 billion, up $3.6 billion, or 35%, benefiting from the Washington Mutual
transaction, wider loan and deposit spreads, and higher loan and deposit balances. Noninterest
revenue was $9.4 billion, up $2.6 billion, or 38%, as positive MSR risk management results, the
impact of the Washington Mutual transaction, higher mortgage origination volume and higher
deposit-related fees were partially offset by an increase in losses related to the repurchase of
previously sold loans and markdowns on the mortgage warehouse.
The provision for credit losses was $9.9 billion, an increase of $7.3 billion from the prior year.
Delinquency rates have increased due to overall weak economic conditions, while housing price
declines have continued to drive increased loss severities, particularly for high loan-to-value
home equity and mortgage loans. The provision includes $4.7 billion in additions to the allowance
for loan losses for the heritage Chase home equity and mortgage portfolios. Home equity net
charge-offs were $2.4 billion (2.23% net charge-off rate; 2.39% excluding purchased credit-impaired
loans), compared with $564 million (0.62% net charge-off rate) in the prior year. Subprime mortgage
net charge-offs were $933 million (5.49% net charge-off rate; 6.10% excluding purchased
credit-impaired loans), compared with $157 million (1.55% net charge-off rate) in the prior year.
Prime mortgage net charge-offs were $526 million (1.05% net charge-off rate; 1.18% excluding
purchased credit-impaired loans), compared with $33 million (0.13% net charge-off rate) in the
prior year. The provision for credit losses was also
affected by an increase in estimated losses for the auto, student and business banking loan
portfolios.
Total noninterest expense was $12.1 billion, an increase of $2.2 billion, or 22%, from the prior
year, reflecting the impact of the Washington Mutual transaction, higher mortgage reinsurance
losses, higher mortgage servicing expense and investments in the retail distribution network.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except headcount and | ||||||||||||
| ratios) | 2009 | 2008 | 2007 | |||||||||
|
Selected
balance sheet data
(period-end) |
||||||||||||
|
Assets
|
$ | 387,269 | $ | 419,831 | $ | 256,351 | ||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
340,332 | 368,786 | 211,324 | |||||||||
|
Loans held-for-sale and
loans
at fair value
(a)
|
14,612 | 9,996 | 16,541 | |||||||||
|
Total loans
|
354,944 | 378,782 | 227,865 | |||||||||
|
Deposits
|
357,463 | 360,451 | 221,129 | |||||||||
|
Equity
|
25,000 | 25,000 | 16,000 | |||||||||
|
Selected balance sheet data
(average)
|
||||||||||||
|
Assets
|
$ | 407,497 | $ | 304,442 | $ | 241,112 | ||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
354,789 | 257,083 | 191,645 | |||||||||
|
Loans held-for-sale and
loans
at fair value
(a)
|
18,072 | 17,056 | 22,587 | |||||||||
|
Total loans
|
372,861 | 274,139 | 214,232 | |||||||||
|
Deposits
|
367,696 | 258,362 | 218,062 | |||||||||
|
Equity
|
25,000 | 19,011 | 16,000 | |||||||||
|
Headcount
|
108,971 | 102,007 | 69,465 | |||||||||
|
Credit data and quality
statistics
|
||||||||||||
|
Net charge-offs
|
$ | 10,113 | $ | 4,877 | $ | 1,350 | ||||||
|
Nonperforming loans:
|
||||||||||||
|
Nonperforming loans retained
|
10,611 | 6,548 | 2,760 | |||||||||
|
Nonperforming loans
held-for-
sale and loans at fair
value
|
234 | 236 | 68 | |||||||||
|
Total nonperforming
loans
(b)(c)(d)
|
10,845 | 6,784 | 2,828 | |||||||||
|
Nonperforming
assets
(b)(c)(d)
|
12,098 | 9,077 | 3,378 | |||||||||
|
Allowance for loan losses
|
14,776 | 8,918 | 2,668 | |||||||||
|
Net charge-off rate
(f)
|
2.85 | % | 1.90 | % | 0.70 | % | ||||||
|
Net charge-off rate excluding
purchased credit-impaired
loans
(e)(f)
|
3.75 | 2.08 | 0.70 | |||||||||
|
Allowance for loan losses to
ending loans
retained
(f)
|
4.34 | 2.42 | 1.26 | |||||||||
|
Allowance for loan losses to
ending loans excluding
purchased credit-impaired
loans
(e)(f)
|
5.09 | 3.19 | 1.26 | |||||||||
|
Allowance for loan losses to
nonperforming loans
retained
(b)(e)(f)
|
124 | 136 | 97 | |||||||||
|
Nonperforming loans to total
loans
|
3.06 | 1.79 | 1.24 | |||||||||
|
Nonperforming loans to total
loans excluding purchased
credit-impaired loans
|
3.96 | 2.34 | 1.24 | |||||||||
| (a) | Loans at fair value consist of prime mortgage loans originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loans totaled $12.5 billion, $8.0 billion and $12.6 billion at December 31, 2009, 2008 and 2007, respectively. Average balances of these loans totaled $15.8 billion, $14.2 billion and $11.9 billion for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (b) | Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for on a pool basis, and the pools are considered to be performing. | |
| (c) | Certain of these loans are classified as trading assets on the Consolidated Balance Sheets. | |
| (d) | At December 31, 2009, 2008 and 2007, nonperforming loans and assets excluded: (1) mortgage loans insured by U.S. government agencies of $9.0 billion, $3.0 billion and $1.1 billion, respectively; (2) real estate owned insured |
| JPMorgan Chase & Co. / 2009 Annual Report | 59 |
Table of Contents
Management’s
discussion and analysis
| by U.S. government agencies of $579 million, $364 million and $452 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $542 million, $437 million and $417 million, respectively. These amounts are excluded, as reimbursement is proceeding normally. | ||
| (e) | Excludes the impact of purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. During 2009, an allowance for loan losses of $1.6 billion was recorded for these loans, which has also been excluded from applicable ratios. To date, no charge-offs have been recorded for these loans. | |
| (f) | Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate. |
Retail Banking
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
Noninterest revenue
|
$ | 7,169 | $ | 4,951 | $ | 3,763 | ||||||
|
Net interest income
|
10,781 | 7,659 | 6,193 | |||||||||
|
Total net revenue
|
17,950 | 12,610 | 9,956 | |||||||||
|
Provision for credit losses
|
1,142 | 449 | 79 | |||||||||
|
Noninterest expense
|
10,357 | 7,232 | 6,166 | |||||||||
|
Income before income tax
expense
|
6,451 | 4,929 | 3,711 | |||||||||
|
Net income
|
$ | 3,903 | $ | 2,982 | $ | 2,245 | ||||||
|
Overhead ratio
|
58 | % | 57 | % | 62 | % | ||||||
|
Overhead ratio excluding
core deposit
intangibles
(a)
|
56 | 54 | 57 | |||||||||
| (a) | Retail Banking uses the overhead ratio (excluding the amortization of CDI), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would therefore result in an improving overhead ratio over time, all things remaining equal. The non-GAAP ratio excludes Retail Banking’s core deposit intangible amortization expense related to the Bank of New York transaction and the Bank One merger of $328 million, $394 million and $460 million for the years ended December 31, 2009, 2008 and 2007, respectively. |
2009 compared with 2008
Retail Banking reported net income of $3.9 billion, up by $921 million, or 31%, from the prior year. Total net revenue was $18.0 billion, up by $5.3 billion, or 42%, from the prior year. The increase reflected the impact of the Washington Mutual transaction, wider deposit spreads, higher average deposit balances and higher debit card income. The provision for credit losses was $1.1 billion, compared with $449 million in the prior year, reflecting higher estimated losses in the Business Banking portfolio. Noninterest expense was $10.4 billion, up by $3.1 billion, or 43%. The increase reflected the impact of the Washington Mutual transaction, higher FDIC insurance premiums and higher headcount-related expense.
Retail Banking reported net income of $3.9 billion, up by $921 million, or 31%, from the prior year. Total net revenue was $18.0 billion, up by $5.3 billion, or 42%, from the prior year. The increase reflected the impact of the Washington Mutual transaction, wider deposit spreads, higher average deposit balances and higher debit card income. The provision for credit losses was $1.1 billion, compared with $449 million in the prior year, reflecting higher estimated losses in the Business Banking portfolio. Noninterest expense was $10.4 billion, up by $3.1 billion, or 43%. The increase reflected the impact of the Washington Mutual transaction, higher FDIC insurance premiums and higher headcount-related expense.
2008 compared with 2007
Retail Banking net income was $3.0 billion, up $737 million, or 33%, from the prior year. Total net revenue was $12.6 billion, up $2.7 billion, or 27%, reflecting the impact of the Washington Mutual transaction, wider deposit spreads, higher deposit-related fees, and higher deposit balances. The provision for credit losses was $449 million, compared with $79 million in the prior year, reflecting an increase in the allowance for loan losses for Business Banking loans due to higher estimated losses on the portfolio. Noninterest expense was $7.2 billion, up $1.1 billion, or 17%, from the prior year, due to the Washington Mutual transaction and investments in the retail distribution network.
Retail Banking net income was $3.0 billion, up $737 million, or 33%, from the prior year. Total net revenue was $12.6 billion, up $2.7 billion, or 27%, reflecting the impact of the Washington Mutual transaction, wider deposit spreads, higher deposit-related fees, and higher deposit balances. The provision for credit losses was $449 million, compared with $79 million in the prior year, reflecting an increase in the allowance for loan losses for Business Banking loans due to higher estimated losses on the portfolio. Noninterest expense was $7.2 billion, up $1.1 billion, or 17%, from the prior year, due to the Washington Mutual transaction and investments in the retail distribution network.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in billions, except ratios and | ||||||||||||
| where otherwise noted) | 2009 | 2008 | 2007 | |||||||||
|
Business metrics
|
||||||||||||
|
Business banking origination volume
|
$ | 2.3 | $ | 5.5 | $ | 6.9 | ||||||
|
End-of-period loans owned
|
17.0 | 18.4 | 15.6 | |||||||||
|
End-of-period deposits
|
||||||||||||
|
Checking
|
$ | 121.9 | $ | 109.2 | $ | 66.9 | ||||||
|
Savings
|
153.4 | 144.0 | 96.0 | |||||||||
|
Time and other
|
58.0 | 89.1 | 48.6 | |||||||||
|
Total end-of-period deposits
|
333.3 | 342.3 | 211.5 | |||||||||
|
Average loans owned
|
$ | 17.8 | $ | 16.7 | $ | 14.9 | ||||||
|
Average deposits
|
||||||||||||
|
Checking
|
$ | 113.5 | $ | 77.1 | $ | 65.8 | ||||||
|
Savings
|
150.9 | 114.3 | 97.1 | |||||||||
|
Time and other
|
76.4 | 53.2 | 43.8 | |||||||||
|
Total average deposits
|
340.8 | 244.6 | 206.7 | |||||||||
|
Deposit margin
|
2.96 | % | 2.89 | % | 2.72 | % | ||||||
|
Average assets
|
$ | 28.9 | $ | 26.3 | $ | 25.0 | ||||||
|
Credit data and quality
statistics
|
||||||||||||
|
(in millions, except ratio)
|
||||||||||||
|
Net charge-offs
|
$ | 842 | $ | 346 | $ | 163 | ||||||
|
Net charge-off rate
|
4.73 | % | 2.07 | % | 1.09 | % | ||||||
|
Nonperforming assets
|
$ | 839 | $ | 424 | $ | 294 | ||||||
Retail branch business metrics
| Year ended December 31, | 2009 | 2008 | 2007 | |||||||||
|
Investment sales volume (in millions)
|
$ | 21,784 | $ | 17,640 | $ | 18,360 | ||||||
|
Number of:
|
||||||||||||
|
Branches
|
5,154 | 5,474 | 3,152 | |||||||||
|
ATMs
|
15,406 | 14,568 | 9,186 | |||||||||
|
Personal bankers
|
17,991 | 15,825 | 9,650 | |||||||||
|
Sales specialists
|
5,912 | 5,661 | 4,105 | |||||||||
|
Active online customers
(in thousands) |
15,424 | 11,710 | 5,918 | |||||||||
|
Checking accounts
(in thousands) |
25,712 | 24,499 | 10,839 | |||||||||
Consumer Lending
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
Noninterest revenue
|
$ | 5,031 | $ | 4,404 | $ | 3,016 | ||||||
|
Net interest income
|
9,711 | 6,506 | 4,333 | |||||||||
|
Total net revenue
|
14,742 | 10,910 | 7,349 | |||||||||
|
Provision for credit losses
|
14,798 | 9,456 | 2,531 | |||||||||
|
Noninterest expense
|
6,391 | 4,845 | 3,739 | |||||||||
|
Income/(loss) before income
tax expense/(benefit)
|
(6,447 | ) | (3,391 | ) | 1,079 | |||||||
|
Net income/(loss)
|
$ | (3,806 | ) | $ | (2,102 | ) | $ | 680 | ||||
|
Overhead ratio
|
43 | % | 44 | % | 51 | % | ||||||
2009 compared with 2008
Consumer Lending
reported a net loss of $3.8 billion, compared with a net loss of $2.1 billion in
the prior year.
Net revenue was $14.7 billion, up by $3.8 billion, or 35%, from the prior year. The increase was
driven by the impact of the Washington Mutual transaction, wider loan spreads and higher mortgage
fees and related income, partially offset by lower heritage Chase loan balances. Mortgage
production revenue was $503 million,
| 60 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
down $395 million from the prior year, as an increase in
losses from the repurchase of previously-sold loans was predominantly offset by wider margins on
new originations. Operating revenue, which represents loan servicing revenue net of other changes
in fair value of the MSR asset, was $1.7 billion, compared with $1.2 billion in the prior year,
reflecting growth in average third-party loans serviced as a result of the Washington Mutual
transaction. MSR risk management results were $1.6 billion, compared with $1.5 billion in the prior
year, reflecting the positive impact of a decrease in estimated future mortgage prepayments during
2009.
The provision for credit losses was $14.8 billion, compared with $9.5 billion in the prior year,
reflecting continued weakness in the home equity and mortgage loan portfolios (see Retail Financial
Services discussion of the provision for credit losses, above on page 58 and Allowance for Credit
Losses on pages 115–117 of this Annual Report, for further detail).
Noninterest expense was $6.4 billion, up by $1.5 billion, or 32%, from the prior year, reflecting
higher servicing and default-related expense and the impact of the Washington Mutual transaction.
2008 compared with 2007
Consumer Lending net loss was $2.1 billion, compared with net income of $680 million in the prior year. Total net revenue was $10.9 billion, up $3.6 billion, or 48%, driven by higher mortgage fees and related income, the impact of the Washington Mutual transaction, higher loan balances and wider loan spreads.
Consumer Lending net loss was $2.1 billion, compared with net income of $680 million in the prior year. Total net revenue was $10.9 billion, up $3.6 billion, or 48%, driven by higher mortgage fees and related income, the impact of the Washington Mutual transaction, higher loan balances and wider loan spreads.
The increase in mortgage fees and related income was primarily driven by higher net mortgage
servicing revenue. Mortgage production revenue of $898 million was up $18 million, as higher
mortgage origination volume was predominantly offset by an increase in losses related to the
repurchase of previously sold loans and markdowns of the mortgage warehouse. Operating revenue,
which represents loan servicing revenue net of other changes in fair value of the MSR asset was
$1.2 billion, an increase of $403 million, or 50%, from the prior year reflecting growth in average
third-party loans serviced which increased 42%, primarily due to the Washington Mutual transaction.
MSR risk management results were $1.5 billion, compared with $411 million in the prior year.
The provision for credit losses was $9.5 billion, compared with $2.5 billion in the prior year. The
provision reflected weakness in the home equity and mortgage portfolios (see Retail Financial
Services discussion of the provision for credit losses for further detail).
Noninterest expense was $4.8 billion, up $1.1 billion, or 30%, from the prior year, reflecting
higher mortgage reinsurance losses, the impact of the Washington Mutual transaction and higher
servicing expense due to increased delinquencies and defaults.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in billions) | 2009 | 2008 | 2007 | |||||||||
|
Business metrics
|
||||||||||||
|
Loans excluding purchased credit-impaired loans
(a)
|
||||||||||||
|
End-of-period loans owned
|
||||||||||||
|
Home equity
|
$ | 101.4 | $ | 114.3 | $ | 94.8 | ||||||
|
Prime mortgage
|
59.4 | 65.2 | 34.0 | |||||||||
|
Subprime mortgage
|
12.5 | 15.3 | 15.5 | |||||||||
|
Option ARMs
|
8.5 | 9.0 | — | |||||||||
|
Student loans
|
15.8 | 15.9 | 11.0 | |||||||||
|
Auto loans
|
46.0 | 42.6 | 42.3 | |||||||||
|
Other
|
0.7 | 1.3 | 2.1 | |||||||||
|
Total end-of-period loans owned
|
$ | 244.3 | $ | 263.6 | $ | 199.7 | ||||||
|
Average loans owned
|
||||||||||||
|
Home equity
|
$ | 108.3 | $ | 99.9 | $ | 90.4 | ||||||
|
Prime mortgage
|
62.2 | 45.0 | 30.4 | |||||||||
|
Subprime mortgage
|
13.9 | 15.3 | 12.7 | |||||||||
|
Option ARMs
|
8.9 | 2.3 | — | |||||||||
|
Student loans
|
16.1 | 13.6 | 10.5 | |||||||||
|
Auto loans
|
43.6 | 43.8 | 41.1 | |||||||||
|
Other
|
1.0 | 1.1 | 2.3 | |||||||||
|
Total average loans owned
|
$ | 254.0 | $ | 221.0 | $ | 187.4 | ||||||
Purchased credit-impaired loans
(a)
|
End-of-period loans owned
|
||||||||||||
|
Home equity
|
$ | 26.5 | $ | 28.6 | $ | — | ||||||
|
Prime mortgage
|
19.7 | 21.8 | — | |||||||||
|
Subprime mortgage
|
6.0 | 6.8 | — | |||||||||
|
Option ARMs
|
29.0 | 31.6 | — | |||||||||
|
Total end-of-period loans owned
|
$ | 81.2 | $ | 88.8 | $ | — | ||||||
|
Average loans owned
|
||||||||||||
|
Home equity
|
$ | 27.6 | $ | 7.1 | $ | — | ||||||
|
Prime mortgage
|
20.8 | 5.4 | — | |||||||||
|
Subprime mortgage
|
6.3 | 1.7 | — | |||||||||
|
Option ARMs
|
30.5 | 8.0 | — | |||||||||
|
Total average loans owned
|
$ | 85.2 | $ | 22.2 | $ | — | ||||||
Total consumer lending portfolio
|
End-of-period loans owned
|
||||||||||||
|
Home equity
|
$ | 127.9 | $ | 142.9 | $ | 94.8 | ||||||
|
Prime mortgage
|
79.1 | 87.0 | 34.0 | |||||||||
|
Subprime mortgage
|
18.5 | 22.1 | 15.5 | |||||||||
|
Option ARMs
|
37.5 | 40.6 | — | |||||||||
|
Student loans
|
15.8 | 15.9 | 11.0 | |||||||||
|
Auto loans
|
46.0 | 42.6 | 42.3 | |||||||||
|
Other
|
0.7 | 1.3 | 2.1 | |||||||||
|
Total end-of-period loans owned
|
$ | 325.5 | $ | 352.4 | $ | 199.7 | ||||||
|
Average loans owned
|
||||||||||||
|
Home equity
|
$ | 135.9 | $ | 107.0 | $ | 90.4 | ||||||
|
Prime mortgage
|
83.0 | 50.4 | 30.4 | |||||||||
|
Subprime mortgage
|
20.2 | 17.0 | 12.7 | |||||||||
|
Option ARMs
|
39.4 | 10.3 | — | |||||||||
|
Student loans
|
16.1 | 13.6 | 10.5 | |||||||||
|
Auto loans
|
43.6 | 43.8 | 41.1 | |||||||||
|
Other
|
1.0 | 1.1 | 2.3 | |||||||||
|
Total average loans owned
(b)
|
$ | 339.2 | $ | 243.2 | $ | 187.4 | ||||||
| (a) | Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase acquisition date. | |
| (b) | Total average loans owned includes loans held-for-sale of $2.2 billion, $2.8 billion and $10.6 billion for the years ended December 31, 2009, 2008 and 2007, respectively. |
| JPMorgan Chase & Co. / 2009 Annual Report | 61 |
Table of Contents
Management’s
discussion and analysis
Consumer Lending (continued)
Credit data and quality statistics
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Net charge-offs excluding
purchased credit-impaired
loans
(a)
|
||||||||||||
|
Home equity
|
$ | 4,682 | $ | 2,391 | $ | 564 | ||||||
|
Prime mortgage
|
1,886 | 526 | 33 | |||||||||
|
Subprime mortgage
|
1,648 | 933 | 157 | |||||||||
|
Option ARMs
|
63 | — | — | |||||||||
|
Auto loans
|
627 | 568 | 354 | |||||||||
|
Other
|
365 | 113 | 79 | |||||||||
|
Total net charge-offs
|
$ | 9,271 | $ | 4,531 | $ | 1,187 | ||||||
|
|
||||||||||||
|
Net charge-off rate excluding
purchased credit-impaired
loans
(a)
|
||||||||||||
|
Home equity
|
4.32 | % | 2.39 | % | 0.62 | % | ||||||
|
Prime mortgage
|
3.05 | 1.18 | 0.13 | |||||||||
|
Subprime mortgage
|
11.86 | 6.10 | 1.55 | |||||||||
|
Option ARMs
|
0.71 | — | — | |||||||||
|
Auto loans
|
1.44 | 1.30 | 0.86 | |||||||||
|
Other
|
2.39 | 0.93 | 0.88 | |||||||||
|
Total net charge-off rate
excluding purchased
credit-impaired loans
(b)
|
3.68 | 2.08 | 0.67 | |||||||||
|
Net charge-off rate – reported
|
||||||||||||
|
Home equity
|
3.45 | % | 2.23 | % | 0.62 | % | ||||||
|
Prime mortgage
|
2.28 | 1.05 | 0.13 | |||||||||
|
Subprime mortgage
|
8.16 | 5.49 | 1.55 | |||||||||
|
Option ARMs
|
0.16 | — | — | |||||||||
|
Auto loans
|
1.44 | 1.30 | 0.86 | |||||||||
|
Other
|
2.39 | 0.93 | 0.88 | |||||||||
|
Total net charge-off rate
(b)
|
2.75 | 1.89 | 0.67 | |||||||||
|
|
||||||||||||
|
30+ day delinquency rate excluding
purchased credit-impaired
loans
(c)(d)(e)
|
5.93 | % | 4.21 | % | 3.10 | % | ||||||
|
Allowance for loan losses
|
$ | 13,798 | $ | 8,254 | $ | 2,418 | ||||||
|
Nonperforming assets
(f)(g)
|
11,259 | 8,653 | 3,084 | |||||||||
|
Allowance for loan losses to
ending loans
|
4.27 | % | 2.36 | % | 1.24 | % | ||||||
|
Allowance for loan losses to
ending
loans excluding purchased
credit-impaired loans
(a)
|
5.04 | 3.16 | 1.24 | |||||||||
| (a) | Excludes the impact of purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of the credit losses over the remaining life of the portfolio. During 2009, an allowance for loan losses of $1.6 billion was recorded for these loans, which has also been excluded from applicable ratios. To date, no charge-offs have been recorded for these loans. | |
| (b) | Average loans included loans held-for-sale of $2.2 billion, $2.8 billion and $10.6 billion for the years ended December 31, 2009, 2008 and 2007, respectively, which were excluded when calculating the net charge-off rate. | |
| (c) | Excluded mortgage loans that are insured by U.S. government agencies of $9.7 billion, $3.5 billion and $1.4 billion at December 31, 2009, 2008 and 2007, respectively. These amounts were excluded, as reimbursement is proceeding normally. | |
| (d) | Excluded loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $942 million, $824 million and $663 million at December 31, 2009, 2008 and 2007, respectively. These amounts are excluded, as reimbursement is proceeding normally. | |
| (e) | The delinquency rate for purchased credit-impaired loans was 27.79% and 17.89% at December 31, 2009 and 2008, respectively. | |
| (f) | At December 31, 2009, 2008 and 2007, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $9.0 billion, $3.0 billion and $1.1 billion, respectively; (2) real estate owned insured by U.S. government agencies of $579 million, $364 million and $452 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $542 million, $437 million and $417 million, respectively. These amounts are excluded, as reimbursement is proceeding normally. | |
| (g) | Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing. |
| (in billions, except ratios and where | ||||||||||||
| otherwise noted) | 2009 | 2008 | 2007 | |||||||||
|
Origination volume
|
||||||||||||
|
Mortgage origination volume by
channel
|
||||||||||||
|
Retail
|
$ | 53.9 | $ | 41.1 | $ | 45.5 | ||||||
|
Wholesale
(a)
|
11.8 | 29.4 | 42.7 | |||||||||
|
Correspondent
|
72.8 | 55.5 | 27.9 | |||||||||
|
CNT (negotiated transactions)
|
12.2 | 43.0 | 43.3 | |||||||||
|
Total mortgage
origination volume
|
150.7 | 169.0 | 159.4 | |||||||||
|
Home equity
|
2.4 | 16.3 | 48.3 | |||||||||
|
Student loans
|
4.2 | 6.9 | 7.0 | |||||||||
|
Auto
|
23.7 | 19.4 | 21.3 | |||||||||
|
Application volume
|
||||||||||||
|
Mortgage application volume
by channel
|
||||||||||||
|
Retail
|
90.9 | 89.1 | 80.7 | |||||||||
|
Wholesale
(a)
|
16.4 | 63.0 | 86.7 | |||||||||
|
Correspondent
|
99.3 | 82.5 | 41.5 | |||||||||
|
Total mortgage
application volume
|
206.6 | 234.6 | 208.9 | |||||||||
|
Average mortgage loans
held-for-sale and loans at fair
value
(b)
|
16.2 | 14.6 | 18.8 | |||||||||
|
Average assets
|
378.6 | 278.1 | 216.1 | |||||||||
|
Third-party mortgage loans
serviced (ending)
|
1,082.1 | 1,172.6 | 614.7 | |||||||||
|
Third-party mortgage loans
serviced (average)
|
1,119.1 | 810.9 | 571.5 | |||||||||
|
MSR net carrying value (ending)
|
15.5 | 9.3 | 8.6 | |||||||||
|
Ratio of MSR net carrying value
(ending) to third-party mortgage
loans serviced (ending)
|
1.43 | % | 0.79 | % | 1.40 | % | ||||||
|
Supplemental mortgage fees
and related income details
(in millions)
|
||||||||||||
|
Production revenue
|
$ | 503 | $ | 898 | $ | 880 | ||||||
|
Net mortgage servicing revenue:
|
||||||||||||
|
Operating revenue:
|
||||||||||||
|
Loan servicing revenue
|
4,942 | 3,258 | 2,334 | |||||||||
|
Other changes in MSR
asset fair value
|
(3,279 | ) | (2,052 | ) | (1,531 | ) | ||||||
|
Total operating revenue
|
1,663 | 1,206 | 803 | |||||||||
|
Risk management:
|
||||||||||||
|
Changes in MSR asset fair
value due to inputs or
assumptions in model
|
5,804 | (6,849 | ) | (516 | ) | |||||||
|
Derivative valuation
adjustments and other
|
(4,176 | ) | 8,366 | 927 | ||||||||
|
Total risk management
|
1,628 | 1,517 | 411 | |||||||||
|
Total net mortgage servicing
revenue
|
3,291 | 2,723 | 1,214 | |||||||||
|
Mortgage fees and related income
|
3,794 | 3,621 | 2,094 | |||||||||
|
Ratio of annualized loan servicing
revenue to third-party mortgage
loans serviced (average)
|
0.44 | % | 0.40 | % | 0.41 | % | ||||||
|
MSR revenue multiple
(c)
|
3.25 | x | 1.98 | x | 3.41 | x | ||||||
| (a) | Includes rural housing loans sourced through brokers and underwritten under U.S. Department of Agriculture guidelines. | |
| (b) | Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. Average balances of these loans totaled $15.8 billion, $14.2 billion and $11.9 billion for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (c) | Represents the ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending) divided by the ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average). |
| 62 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Mortgage origination channels comprise the following:
Retail
– Borrowers who are buying or refinancing a home through direct contact
with a mortgage banker employed by the Firm using a branch office, the
Internet or by phone. Borrowers are frequently referred to a mortgage banker
by a banker in a Chase branch, real estate brokers, home builders or other
third parties.
Wholesale
– A third-party mortgage broker refers loan applications to a
mortgage banker at the Firm. Brokers are independent loan originators that
specialize in finding and counseling borrowers but do not provide funding for
loans. The Firm exited the broker channel during 2008.
Correspondent
– Banks, thrifts, other mortgage banks and other financial
institutions that sell closed loans to the Firm.
Correspondent negotiated transactions (“CNTs”)
– These transactions occur when
mid- to large-sized mortgage lenders, banks and bank-owned mortgage companies
sell servicing to the Firm on an as-originated basis, and exclude purchased
bulk servicing transactions. These transactions supplement traditional
production channels and provide growth opportunities in the servicing
portfolio in stable and rising-rate periods.
Production revenue
– Includes net gains or losses on originations and sales of
prime and subprime mortgage loans, other production-related fees and losses
related to the repurchase of previously sold loans.
Net mortgage servicing revenue
includes the following
components:
| (a) | Operating revenue comprises: | |
| – all gross income earned from servicing third-party mortgage loans including stated service fees, excess service fees, late fees and other ancillary fees. | ||
| – modeled servicing portfolio runoff (or time decay). | ||
| (b) | Risk management comprises: | |
| – changes in MSR asset fair value due to market-based inputs such as interest rates and volatility, as well as updates to assumptions used in the MSR valuation model. | ||
| – derivative valuation adjustments and other, which represents changes in the fair value of derivative instruments used to offset the impact of changes in the market-based inputs to the MSR valuation model. |
| JPMorgan Chase & Co. / 2009 Annual Report | 63 |
Table of Contents
Management’s discussion and analysis
CARD SERVICES
Card Services is one of the nation’s largest credit
card issuers, with more than 145 million credit cards in circulation and over
$163 billion in managed loans. Customers used Chase cards to meet more than
$328 billion of their spending needs in 2009.
Chase continues to innovate, despite a very difficult business environment,
launching new products and services such as Blueprint, Ultimate Rewards, Chase
Sapphire and Ink from Chase, and earning a market leadership position in
building loyalty and rewards programs. Through its merchant acquiring business,
Chase Paymentech Solutions, Chase is one of the leading processors of
credit-card payments.
JPMorgan Chase uses the concept of “managed basis” to evaluate the credit performance of its credit
card loans, both loans on the balance sheet and loans that have been securitized. For further
information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on
pages 50–52 of this Annual Report. Managed results exclude the impact of credit card
securitizations on total net revenue, the provision for credit losses, net charge-offs and loan
receivables. Securitization does not change reported net income; however, it does affect the
classification of items on the Consolidated Statements of Income and Consolidated Balance Sheets.
The following discussion of CS’s financial results reflects the acquisition of Washington Mutual’s
credit cards operations, as a result of the Washington Mutual transaction on September 25, 2008,
and the dissolution of the Chase Paymentech Solutions joint venture on November 1, 2008. See Note 2
on pages 143–148 of this Annual Report for more information concerning these transactions.
Selected income statement data – managed basis
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Credit card income
|
$ | 3,612 | $ | 2,768 | $ | 2,685 | ||||||
|
All other income
|
(692 | ) | (49 | ) | 361 | |||||||
|
Noninterest revenue
|
2,920 | 2,719 | 3,046 | |||||||||
|
Net interest income
|
17,384 | 13,755 | 12,189 | |||||||||
|
Total net revenue
|
20,304 | 16,474 | 15,235 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
18,462 | 10,059 | 5,711 | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
1,376 | 1,127 | 1,021 | |||||||||
|
Noncompensation expense
|
3,490 | 3,356 | 3,173 | |||||||||
|
Amortization of intangibles
|
515 | 657 | 720 | |||||||||
|
Total noninterest expense
|
5,381 | 5,140 | 4,914 | |||||||||
|
Income/(loss) before income tax expense/(benefit)
|
(3,539 | ) | 1,275 | 4,610 | ||||||||
|
Income tax expense/(benefit)
|
(1,314 | ) | 495 | 1,691 | ||||||||
|
Net income/(loss)
|
$ | (2,225 | ) | $ | 780 | $ | 2,919 | |||||
|
Memo: Net securitization income/(loss)
|
$ | (474 | ) | $ | (183 | ) | $ | 67 | ||||
|
Financial ratios
|
||||||||||||
|
ROE
|
(15 | )% | 5 | % | 21 | % | ||||||
|
Overhead ratio
|
27 | 31 | 32 | |||||||||
2009 compared with 2008
Card Services reported a net loss of $2.2 billion, compared with net income of $780 million in the
prior year. The decrease was driven by a higher provision for credit losses, partially offset by
higher total net revenue.
End-of-period managed loans were $163.4 billion, a decrease of $26.9 billion, or 14%, from the
prior year, reflecting lower charge volume and a higher level of charge-offs. Average managed loans
were $172.4 billion, an increase of $9.5 billion, or 6%, from the prior year, primarily due to the
impact of the Washington Mutual transaction. Excluding the impact of the Washington Mutual
transaction, end-of-period and average managed loans for 2009 were $143.8 billion and $148.8
billion, respectively.
Managed total net revenue was $20.3 billion, an increase of $3.8 billion, or 23%, from the prior
year. Net interest income was $17.4 billion, up by $3.6 billion, or 26%, from the prior year,
driven by wider loan spreads and the impact of the Washington Mutual transaction. These benefits
were offset partially by higher revenue reversals associated with higher charge-offs, a decreased
level of fees, lower average managed loan balances, and the impact of legislative changes.
Noninterest revenue was $2.9 billion, an increase of $201 million, or 7%, from the prior year. The
increase was driven by higher merchant servicing revenue related to the dissolution of the Chase
Paymentech Solutions joint venture and the impact of the Washington Mutual transaction, partially
offset by lower securitization income.
The managed provision for credit losses was $18.5 billion, an increase of $8.4 billion from the
prior year, reflecting a higher level of charge-offs and an addition of $2.4 billion to the
allowance for loan losses, reflecting continued weakness in the credit environment. The managed net
charge-off rate was 9.33%, up from 5.01% in the prior year. The 30-day managed delinquency rate was
6.28%, up from 4.97% in the prior year. Excluding the impact of the Washington Mutual transaction,
the managed net charge-off rate was 8.45%, and the 30-day managed delinquency rate was 5.52%.
Noninterest expense was $5.4 billion, an increase of $241 million, or 5%, from the prior year, due
to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington
Mutual transaction, partially offset by lower marketing expense.
2008 compared with 2007
Net income was $780 million, a decline of $2.1 billion, or 73%, from the prior year. The decrease
was driven by a higher provision for credit losses, partially offset by higher total net revenue.
Average managed loans were $162.9 billion, an increase of $13.5 billion, or 9%, from the prior
year. End-of-period managed loans were $190.3 billion, an increase of $33.3 billion, or 21%, from
the prior year. Excluding Washington Mutual, average managed loans were $155.9 billion and
end-of-period managed loans were $162.1
| 64 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
billion. The increases in both average managed loans and end-of-period managed loans were
predominantly due to the impact of the Washington Mutual transaction and organic portfolio growth.
Managed total net revenue was $16.5 billion, an increase of $1.2 billion, or 8%, from the prior
year. Net interest income was $13.8 billion, up $1.6 billion, or 13%, from the prior year, driven
by the Washington Mutual transaction, higher average managed loan balances, and wider loan spreads.
These benefits were offset partially by the effect of higher revenue reversals associated with
higher charge-offs. Noninterest revenue was $2.7 billion, a decrease of $327 million, or 11%, from
the prior year, driven by increased rewards expense, lower securitization income driven by higher
credit losses, and higher volume-driven payments to partners; these were largely offset by
increased interchange income, benefiting from a 4% increase in charge volume, as well as the impact
of the Washington Mutual transaction.
The managed provision for credit losses was $10.1 billion, an increase of $4.3 billion, or 76%,
from the prior year, due to an increase of $1.7 billion in the allowance for loan losses and a
higher level of charge-offs. The managed net charge-off rate increased to 5.01%, up from 3.68% in
the prior year. The 30-day managed delinquency rate was 4.97%, up from 3.48% in the prior year.
Excluding Washington Mutual, the managed net charge-off rate was 4.92% and the 30-day delinquency
rate was 4.36%.
Noninterest expense was $5.1 billion, an increase of $226 million, or 5%, from the prior year,
predominantly due to the impact of the Washington Mutual transaction.
The following are brief descriptions of selected business metrics within Card Services.
| • | Charge volume – Dollar amount of cardmember purchases, balance transfers and cash advance activity. | |
| • | Net accounts opened – Includes originations, purchases and sales. | |
| • | Merchant acquiring business – A business that processes bank card transactions for merchants. |
| • | Bank card volume – Dollar amount of transactions processed for merchants. | |
| • | Total transactions – Number of transactions and authorizations processed for merchants. |
| JPMorgan Chase & Co. / 2009 Annual Report | 65 |
Table of Contents
Management’s discussion and analysis
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except headcount, ratios | ||||||||||||
| and where otherwise noted) | 2009 | 2008 | 2007 | |||||||||
|
Financial metrics
|
||||||||||||
|
Percentage of average managed
outstandings:
|
||||||||||||
|
Net interest income
|
10.08 | % | 8.45 | % | 8.16 | % | ||||||
|
Provision for credit losses
|
10.71 | 6.18 | 3.82 | |||||||||
|
Noninterest revenue
|
1.69 | 1.67 | 2.04 | |||||||||
|
|
||||||||||||
|
Risk adjusted margin
(a)
|
1.07 | 3.94 | 6.38 | |||||||||
|
Noninterest expense
|
3.12 | 3.16 | 3.29 | |||||||||
|
|
||||||||||||
|
Pretax income/(loss) (ROO)
(b)
|
(2.05 | ) | 0.78 | 3.09 | ||||||||
|
Net income/(loss)
|
(1.29 | ) | 0.48 | 1.95 | ||||||||
|
|
||||||||||||
|
Business metrics
|
||||||||||||
|
Charge volume (in billions)
|
$ | 328.3 | $ | 368.9 | $ | 354.6 | ||||||
|
|
||||||||||||
|
Net accounts opened (in millions)
(c)
|
10.2 | 27.9 | 16.4 | |||||||||
|
Credit cards issued (in millions)
|
145.3 | 168.7 | 155.0 | |||||||||
|
Number of registered internet
customers (in millions)
|
32.3 | 35.6 | 28.3 | |||||||||
|
|
||||||||||||
|
Merchant acquiring business
(d)
|
||||||||||||
|
Bank card volume (in billions)
|
$ | 409.7 | $ | 713.9 | $ | 719.1 | ||||||
|
Total transactions (in billions)
|
18.0 | 21.4 | 19.7 | |||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||
|
Loans:
|
||||||||||||
|
Loans on balance sheets
|
$ | 78,786 | $ | 104,746 | $ | 84,352 | ||||||
|
Securitized loans
|
84,626 | 85,571 | 72,701 | |||||||||
|
Managed loans
|
$ | 163,412 | $ | 190,317 | $ | 157,053 | ||||||
|
Equity
|
$ | 15,000 | $ | 15,000 | $ | 14,100 | ||||||
|
Selected balance sheet data (average)
|
||||||||||||
|
Managed assets
|
$ | 192,749 | $ | 173,711 | $ | 155,957 | ||||||
|
Loans:
|
||||||||||||
|
Loans on balance sheets
|
$ | 87,029 | $ | 83,293 | $ | 79,980 | ||||||
|
Securitized loans
|
85,378 | 79,566 | 69,338 | |||||||||
|
Managed average loans
|
$ | 172,407 | $ | 162,859 | $ | 149,318 | ||||||
|
Equity
|
$ | 15,000 | $ | 14,326 | $ | 14,100 | ||||||
|
Headcount
|
22,676 | 24,025 | 18,554 | |||||||||
|
|
||||||||||||
|
Managed credit quality statistics
|
||||||||||||
|
Net charge-offs
|
$ | 16,077 | $ | 8,159 | $ | 5,496 | ||||||
|
|
||||||||||||
|
Net charge-off rate
(e)
|
9.33 | % | 5.01 | % | 3.68 | % | ||||||
|
Managed delinquency rates
|
||||||||||||
|
|
||||||||||||
|
30+ day
(e)
|
6.28 | % | 4.97 | % | 3.48 | % | ||||||
|
|
||||||||||||
|
90+ day
(e)
|
3.59 | 2.34 | 1.65 | |||||||||
|
|
||||||||||||
|
Allowance for loan losses
(f)(g)
|
$ | 9,672 | $ | 7,692 | $ | 3,407 | ||||||
|
|
||||||||||||
|
Allowance for loan losses to period-end loans
(f)(h)
|
12.28 | % | 7.34 | % | 4.04 | % | ||||||
|
|
||||||||||||
|
Key stats – Washington Mutual only
(i)
|
||||||||||||
|
Managed loans
|
$ | 19,653 | $ | 28,250 | ||||||||
|
Managed average loans
|
23,642 | 6,964 | ||||||||||
|
|
||||||||||||
|
Net interest income
(j)
|
17.11 | % | 14.87 | % | ||||||||
|
|
||||||||||||
|
Risk
adjusted
margin
(a)
(j)
|
(0.93 | ) | 4.18 | |||||||||
|
|
||||||||||||
|
Net charge-off rate
(k)
|
18.79 | 12.09 | ||||||||||
|
|
||||||||||||
|
30+ day delinquency rate
(k)
|
12.72 | 9.14 | ||||||||||
|
|
||||||||||||
|
90+ day delinquency rate
(k)
|
7.76 | 4.39 | ||||||||||
|
Key stats – excluding Washington Mutual
|
||||||||||||
|
Managed loans
|
$ | 143,759 | $ | 162,067 | $ | 157,053 | ||||||
|
Managed average loans
|
148,765 | 155,895 | 149,318 | |||||||||
|
|
||||||||||||
|
Net interest income
(j)
|
8.97 | % | 8.16 | % | 8.16 | % | ||||||
|
|
||||||||||||
|
Risk
adjusted
margin
(a)
(j)
|
1.39 | 3.93 | 6.38 | |||||||||
|
Net charge-off rate
|
8.45 | 4.92 | 3.68 | |||||||||
|
30+ day delinquency rate
|
5.52 | 4.36 | 3.48 | |||||||||
|
90+ day delinquency rate
|
3.13 | 2.09 | 1.65 | |||||||||
| (a) | Represents total net revenue less provision for credit losses. |
| (b) | Pretax return on average managed outstandings. | |
| (c) | Results for 2008 included approximately 13 million credit card accounts acquired by JPMorgan Chase in the Washington Mutual transaction. | |
| (d) | The Chase Paymentech Solutions joint venture was dissolved effective November 1, 2008. JPMorgan Chase retained approximately 51% of the business and operates the business under the name Chase Paymentech Solutions. For the period January 1 through October 31, 2008, the data presented represents activity for the Chase Paymentech Solutions joint venture, and for the period November 1, 2008, through December 31, 2009, the data presented represents activity for Chase Paymentech Solutions. | |
| (e) | Results for 2009 and 2008 reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the Washington Mutual Master Trust. | |
| (f) | Based on loans on balance sheets (“reported basis”). | |
| (g) | The 2008 allowance for loan losses included an amount related to loans acquired in the Washington Mutual transaction. | |
| (h) | Includes $1.0 billion of loans at December 31, 2009, held by the Washington Mutual Master Trust, which were consolidated onto the Card Services balance sheet at fair value during the second quarter of 2009. No allowance for loan losses was recorded for these loans as of December 31, 2009. Excluding these loans, the allowance for loan losses to period-end loans was 12.43%. | |
| (i) | Statistics are only presented for periods after September 25, 2008, the date of the Washington Mutual transaction. | |
| (j) | As a percentage of average managed outstandings. | |
| (k) | Excludes the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the Washington Mutual Master Trust. |
The financial information presented below reconciles reported basis and managed basis to disclose
the effect of securitizations.
|
Year ended December 31,
(in millions) |
2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Income statement data
(a)
|
||||||||||||
|
Credit card income
|
||||||||||||
|
Reported
|
$ | 5,106 | $ | 6,082 | $ | 5,940 | ||||||
|
Securitization adjustments
|
(1,494 | ) | (3,314 | ) | (3,255 | ) | ||||||
|
Managed credit card income
|
$ | 3,612 | $ | 2,768 | $ | 2,685 | ||||||
|
Net interest income
|
||||||||||||
|
Reported
|
$ | 9,447 | $ | 6,838 | $ | 6,554 | ||||||
|
Securitization adjustments
|
7,937 | 6,917 | 5,635 | |||||||||
|
Managed net interest income
|
$ | 17,384 | $ | 13,755 | $ | 12,189 | ||||||
|
Total net revenue
|
||||||||||||
|
Reported
|
$ | 13,861 | $ | 12,871 | $ | 12,855 | ||||||
|
Securitization adjustments
|
6,443 | 3,603 | 2,380 | |||||||||
|
Managed total net revenue
|
$ | 20,304 | $ | 16,474 | $ | 15,235 | ||||||
|
Provision for credit losses
|
||||||||||||
|
Reported
|
$ | 12,019 | $ | 6,456 | $ | 3,331 | ||||||
|
Securitization adjustments
|
6,443 | 3,603 | 2,380 | |||||||||
|
Managed provision for
credit losses
|
$ | 18,462 | $ | 10,059 | $ | 5,711 | ||||||
|
|
||||||||||||
|
Balance sheet – average balances
(a)
|
||||||||||||
|
Total average assets
|
||||||||||||
|
Reported
|
$ | 110,516 | $ | 96,807 | $ | 89,177 | ||||||
|
Securitization adjustments
|
82,233 | 76,904 | 66,780 | |||||||||
|
Managed average assets
|
$ | 192,749 | $ | 173,711 | $ | 155,957 | ||||||
|
|
||||||||||||
|
Credit quality statistics
(a)
|
||||||||||||
|
Net charge-offs
|
||||||||||||
|
Reported
|
$ | 9,634 | $ | 4,556 | $ | 3,116 | ||||||
|
Securitization adjustments
|
6,443 | 3,603 | 2,380 | |||||||||
|
Managed net charge-offs
|
$ | 16,077 | $ | 8,159 | $ | 5,496 | ||||||
|
|
||||||||||||
|
Net charge-off rates
|
||||||||||||
|
Reported
|
11.07 | % | 5.47 | % | 3.90 | % | ||||||
|
Securitized
|
7.55 | 4.53 | 3.43 | |||||||||
|
Managed net charge-off rate
|
9.33 | 5.01 | 3.68 | |||||||||
| (a) | For a discussion of managed basis, see the non-GAAP financial measures discussion on pages 50–52 of this Annual Report. |
| 66 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
COMMERCIAL BANKING
Commercial Banking serves nearly 25,000 clients
nationally, including corporations, municipalities,
financial institutions and not-for-profit entities with annual revenue
generally ranging from $10 million to $2 billion, and more than 30,000 real
estate investors/
owners. Delivering extensive industry knowledge, local expertise and dedicated
service, CB partners with the Firm’s other businesses to provide comprehensive
solutions, including lending, treasury services, investment banking and asset
management to meet its
clients’ domestic and international financial needs.
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual from
the FDIC, adding approximately $44.5 billion in loans to the Commercial Term Lending, Real
Estate Banking and Other businesses in Commercial Banking.
Commercial Banking is divided into four primary client segments: Middle Market Banking, Commercial
Term Lending, Mid-Corporate Banking, and Real Estate Banking. Middle Market Banking covers
corporate, municipal, financial institution and not-for-profit clients, with annual revenue
generally ranging between $10 million and $500 million. Mid-Corporate Banking covers clients with
annual revenue generally ranging between $500 million and $2 billion and focuses on clients that
have broader investment banking needs. Commercial Term Lending primarily provides term financing to
real estate investors/owners for multi-family properties as well as financing office, retail and
industrial properties. Real Estate Banking provides full-service banking to investors and
developers of institutional-grade real estate properties.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Lending- and deposit-related fees
|
$ | 1,081 | $ | 854 | $ | 647 | ||||||
|
Asset management, administration
and commissions
|
140 | 113 | 92 | |||||||||
|
All other income
(a)
|
596 | 514 | 524 | |||||||||
|
Noninterest revenue
|
1,817 | 1,481 | 1,263 | |||||||||
|
Net interest income
|
3,903 | 3,296 | 2,840 | |||||||||
|
Total net revenue
|
5,720 | 4,777 | 4,103 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
1,454 | 464 | 279 | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
776 | 692 | 706 | |||||||||
|
Noncompensation expense
|
1,359 | 1,206 | 1,197 | |||||||||
|
Amortization of intangibles
|
41 | 48 | 55 | |||||||||
|
Total noninterest expense
|
2,176 | 1,946 | 1,958 | |||||||||
|
Income before income
tax expense
|
2,090 | 2,367 | 1,866 | |||||||||
|
Income tax expense
|
819 | 928 | 732 | |||||||||
|
Net income
|
$ | 1,271 | $ | 1,439 | $ | 1,134 | ||||||
|
Revenue by product:
|
||||||||||||
|
Lending
|
$ | 2,663 | $ | 1,743 | $ | 1,419 | ||||||
|
Treasury services
|
2,642 | 2,648 | 2,350 | |||||||||
|
Investment banking
|
394 | 334 | 292 | |||||||||
|
Other
|
21 | 52 | 42 | |||||||||
|
Total Commercial Banking revenue
|
$ | 5,720 | $ | 4,777 | $ | 4,103 | ||||||
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
IB revenue, gross
(b)
|
$ | 1,163 | $ | 966 | $ | 888 | ||||||
|
Revenue by business:
|
||||||||||||
|
Middle Market Banking
|
$ | 3,055 | $ | 2,939 | $ | 2,689 | ||||||
|
Commercial Term Lending
(c)
|
875 | 243 | — | |||||||||
|
Mid-Corporate Banking
|
1,102 | 921 | 815 | |||||||||
|
Real Estate Banking
(c)
|
461 | 413 | 421 | |||||||||
|
Other
(c)
|
227 | 261 | 178 | |||||||||
|
Total Commercial Banking revenue
|
$ | 5,720 | $ | 4,777 | $ | 4,103 | ||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
16 | % | 20 | % | 17 | % | ||||||
|
Overhead ratio
|
38 | 41 | 48 | |||||||||
| (a) | Revenue from investment banking products sold to CB clients and commercial card revenue is included in all other income. | |
| (b) | Represents the total revenue related to investment banking products sold to CB clients. | |
| (c) | Results for 2009 and 2008 include total net revenue on net assets acquired in the Washington Mutual transaction. |
2009 compared with 2008
Net income was $1.3 billion, a decrease of $168 million, or 12%, from the prior year, as higher
provision for credit losses and noninterest expense was partially offset by higher net revenue,
reflecting the impact of the Washington Mutual transaction.
Record net revenue of $5.7 billion increased $943 million, or 20%, from the prior year. Net
interest income of $3.9 billion increased $607 million, or 18%, driven by the impact of the
Washington Mutual transaction. Noninterest revenue was $1.8 billion, an increase of $336 million,
or 23%, from the prior year, reflecting higher lending- and deposit-related fees and higher
investment banking fees and other income.
On a client-segment basis, revenue from Middle Market Banking was $3.1 billion, an increase of $116
million, or 4%, from the prior year due to higher liability balances, a shift to higher-spread
liability products, wider loan spreads, higher lending- and deposit-related fees, and higher other
income, partially offset by a narrowing of spreads on liability products and reduced loan balances.
Revenue from Commercial Term Lending (a new client segment acquired in the Washington Mutual
transaction encompassing multi-family and commercial mortgage loans) was $875 million, an increase
of $632 million. Mid-Corporate Banking revenue was $1.1 billion, an increase of $181 million, or
20%, driven by higher investment banking fees, increased loan spreads, and higher lending- and
deposit-related fees. Real Estate Banking revenue was $461 million, an increase of $48 million, or
12%, due to the impact of the Washington Mutual transaction.
The provision for credit losses was $1.5 billion, compared with
$464 million in the prior year, reflecting continued weakness in the credit environment,
predominantly in real estate-related segments. Net charge-offs were $1.1 billion (1.02% net
charge-off rate), compared with $288 million (0.35% net charge-off rate) in the prior year. The
allowance for loan losses to end-of-period loans retained was 3.12%, up from 2.45% in the prior
year. Nonperforming loans were $2.8 billion, an increase of $1.8 billion from the prior year.
| JPMorgan Chase & Co. / 2009 Annual Report | 67 |
Table of Contents
Management’s discussion and analysis
Noninterest expense was $2.2 billion, an increase of $230 million, or 12%, from the prior year, due
to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
2008 compared with 2007
Net income was $1.4 billion, an increase of $305 million, or 27%, from the prior year, due to
growth in total net revenue including the impact of the Washington Mutual transaction, partially
offset by a higher provision for credit losses.
Record total net revenue of $4.8 billion increased $674 million, or 16%. Net interest income of
$3.3 billion increased $456 million, or 16%, driven by double-digit growth in liability and loan
balances and the impact of the Washington Mutual transaction, partially offset by spread
compression in the liability and loan portfolios. Noninterest revenue was $1.5 billion, up $218
million, or 17%, due to higher deposit- and lending-related fees.
On a client-segment basis, Middle Market Banking revenue was
$2.9 billion, an increase of $250 million, or 9%, from the prior year due
predominantly to higher deposit-related fees and growth in liability and loan balances. Revenue
from Commercial Term Lending, a new client segment acquired in the Washington Mutual transaction,
was $243 million. Mid-Corporate Banking revenue was $921 million, an increase of $106 million, or
13%, reflecting higher loan balances, investment banking revenue and deposit-related fees. Real
Estate Banking revenue of $413 million decreased $8 million, or 2%.
Provision for credit losses was $464 million, an increase of $185 million, or 66%, compared with
the prior year, reflecting a weakening credit environment and loan growth. Net charge-offs were
$288 million (0.35% net charge-off rate), compared with $44 million (0.07% net charge-off rate) in
the prior year, predominantly related to an increase in real estate charge-offs. The allowance for
loan losses increased by $1.1 billion, which primarily reflected the impact of the Washington
Mutual transaction. Nonperforming assets were $1.1 billion, an increase of $1.0 billion compared
with the prior year, predominantly reflecting the Washington Mutual transaction and higher real
estate–related balances.
Noninterest expense was $1.9 billion, a decrease of $12 million, or 1%, from the prior year, due to
lower performance-based incentive compensation and volume-based charges from service providers,
predominantly offset by the impact of the Washington Mutual transaction.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Selected balance sheet data (period-end):
|
||||||||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
$ | 97,108 | $ | 115,130 | $ | 64,835 | ||||||
|
Loans held-for-sale and
loans at fair value
|
324 | 295 | 1,366 | |||||||||
|
Total loans
|
$ | 97,432 | $ | 115,425 | $ | 66,201 | ||||||
|
Equity
|
8,000 | 8,000 | 6,700 | |||||||||
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except headcount and | ||||||||||||
| ratio data) | 2009 | 2008 | 2007 | |||||||||
|
Selected balance sheet data (average):
|
||||||||||||
|
Total assets
|
$ | 135,408 | $ | 114,299 | $ | 87,140 | ||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
106,421 | 81,931 | 60,231 | |||||||||
|
Loans held-for-sale and
loans at fair value
|
317 | 406 | 863 | |||||||||
|
Total loans
|
$ | 106,738 | $ | 82,337 | $ | 61,094 | ||||||
|
Liability balances
(a)
|
113,152 | 103,121 | 87,726 | |||||||||
|
Equity
|
$ | 8,000 | $ | 7,251 | $ | 6,502 | ||||||
|
|
||||||||||||
|
Average loans by business:
|
||||||||||||
|
Middle Market Banking
|
$ | 37,459 | $ | 42,193 | $ | 37,333 | ||||||
|
Commercial Term Lending
(b)
|
36,806 | 9,310 | — | |||||||||
|
Mid-Corporate Banking
|
15,951 | 16,297 | 12,481 | |||||||||
|
Real Estate Banking
(b)
|
12,066 | 9,008 | 7,116 | |||||||||
|
Other
(b)
|
4,456 | 5,529 | 4,164 | |||||||||
|
Total Commercial Banking loans
|
$ | 106,738 | $ | 82,337 | $ | 61,094 | ||||||
|
|
||||||||||||
|
Headcount
|
4,151 | 5,206 | 4,125 | |||||||||
|
|
||||||||||||
|
Credit data and quality statistics:
|
||||||||||||
|
Net charge-offs
|
$ | 1,089 | $ | 288 | $ | 44 | ||||||
|
Nonperforming loans:
|
||||||||||||
|
Nonperforming loans retained
(c)
|
2,764 | 1,026 | 146 | |||||||||
|
Nonperforming loans held-for-
sale and loans held at fair value
|
37 | — | — | |||||||||
|
Total nonperforming loans
|
2,801 | 1,026 | 146 | |||||||||
|
Nonperforming assets
|
2,989 | 1,142 | 148 | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
(d)
|
3,025 | 2,826 | 1,695 | |||||||||
|
Allowance for lending-related
commitments
|
349 | 206 | 236 | |||||||||
|
Total allowance for credit losses
|
3,374 | 3,032 | 1,931 | |||||||||
|
Net charge-off rate
|
1.02 | % | 0.35 | % | 0.07 | % | ||||||
|
Allowance for loan losses to period-end loans
retained
|
3.12 | 2.45 | 2.61 | |||||||||
|
Allowance for loan losses to average loans retained
|
2.84 | 3.04 | (e) | 2.81 | ||||||||
|
Allowance for loan losses
to nonperforming loans retained
|
109 | 275 | 1,161 | |||||||||
|
Nonperforming loans to total period-end loans
|
2.87 | 0.89 | 0.22 | |||||||||
|
Nonperforming loans to total average loans
|
2.62 | 1.10 | (e) | 0.24 | ||||||||
| (a) | Liability balances include deposits and deposits swept to on–balance sheet liabilities such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements. | |
| (b) | Results for 2009 and 2008 include loans acquired in the Washington Mutual transaction. | |
| (c) | Allowance for loan losses of $581 million, $208 million and $32 million were held against nonperforming loans retained for the periods ended December 31, 2009, 2008, and 2007, respectively. | |
| (d) | Beginning in 2008, the allowance for loan losses included an amount related to loans acquired in the Washington Mutual transaction and the Bear Stearns merger. | |
| (e) | Average loans in the calculation of this ratio were adjusted to include $44.5 billion of loans acquired in the Washington Mutual transaction as if the transaction occurred on July 1, 2008. Excluding this adjustment, the unadjusted allowance for loan losses to average loans retained and nonperforming loans to total average loans ratios would have been 3.45% and 1.25%, respectively, for the period ended December 31, 2008. |
| 68 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
TREASURY & SECURITIES SERVICES
Treasury & Securities Services is a global leader in transaction,
investment and information services. TSS is one of the world’s largest cash
management providers and a leading global custodian. Treasury Services
provides cash management, trade, wholesale card and liquidity products and
services to small and mid-sized companies, multinational corporations,
financial institutions and government entities. TS partners with the
Commercial Banking, Retail Financial Services and Asset Management businesses
to serve clients firmwide. As a result, certain TS revenue is included in
other segments’ results. Worldwide Securities Services holds, values, clears
and services securities, cash and alternative investments for investors and
broker-dealers, and it manages depositary receipt programs globally.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratio data) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Lending- and deposit-related fees
|
$ | 1,285 | $ | 1,146 | $ | 923 | ||||||
|
Asset management, administration
and commissions
|
2,631 | 3,133 | 3,050 | |||||||||
|
All other income
|
831 | 917 | 708 | |||||||||
|
Noninterest revenue
|
4,747 | 5,196 | 4,681 | |||||||||
|
Net interest income
|
2,597 | 2,938 | 2,264 | |||||||||
|
Total net revenue
|
7,344 | 8,134 | 6,945 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
55 | 82 | 19 | |||||||||
|
Credit reimbursement to IB
(a)
|
(121 | ) | (121 | ) | (121 | ) | ||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
2,544 | 2,602 | 2,353 | |||||||||
|
Noncompensation expense
|
2,658 | 2,556 | 2,161 | |||||||||
|
Amortization of intangibles
|
76 | 65 | 66 | |||||||||
|
Total noninterest expense
|
5,278 | 5,223 | 4,580 | |||||||||
|
Income before income tax expense
|
1,890 | 2,708 | 2,225 | |||||||||
|
Income tax expense
|
664 | 941 | 828 | |||||||||
|
Net income
|
$ | 1,226 | $ | 1,767 | $ | 1,397 | ||||||
|
Revenue by business
|
||||||||||||
|
Treasury Services
(b)
|
$ | 3,702 | $ | 3,779 | $ | 3,190 | ||||||
|
Worldwide Securities Services
(b)
|
3,642 | 4,355 | 3,755 | |||||||||
|
Total net revenue
|
$ | 7,344 | $ | 8,134 | $ | 6,945 | ||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
25 | % | 47 | % | 47 | % | ||||||
|
Overhead ratio
|
72 | 64 | 66 | |||||||||
|
Pretax margin ratio
(c)
|
26 | 33 | 32 | |||||||||
| Year ended December 31, | ||||||||||||
| (in millions, except headcount) | 2009 | 2008 | 2007 | |||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||
|
Loans
(d)
|
$ | 18,972 | $ | 24,508 | $ | 18,562 | ||||||
|
Equity
|
5,000 | 4,500 | 3,000 | |||||||||
|
|
||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||
|
Total assets
|
$ | 35,963 | $ | 54,563 | $ | 53,350 | ||||||
|
Loans
(d)
|
18,397 | 26,226 | 20,821 | |||||||||
|
Liability balances
(e)
|
248,095 | 279,833 | 228,925 | |||||||||
|
Equity
|
5,000 | 3,751 | 3,000 | |||||||||
|
|
||||||||||||
|
Headcount
|
26,609 | 27,070 | 25,669 | |||||||||
| (a) | IB credit portfolio group manages certain exposures on behalf of clients shared with TSS. TSS reimburses IB for a portion of the total cost of managing the credit portfolio. IB recognizes this credit reimbursement as a component of noninterest revenue. | |
| (b) | Reflects an internal reorganization for escrow products from Worldwide Securities Services to Treasury Services revenue of $168 million, $224 million and $177 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (c) | Pretax margin represents income before income tax expense divided by total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors. | |
| (d) | Loan balances include wholesale overdrafts, commercial card and trade finance loans. | |
| (e) | Liability balances include deposits and deposits swept to on–balance sheet liabilities, such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements. |
2009 compared with 2008
Net income was $1.2 billion, a decrease of $541 million, or 31%, from the prior year, driven by
lower net revenue.
Net revenue was $7.3 billion, a decrease of $790 million, or 10%, from the prior year. Worldwide
Securities Services net revenue was $3.6 billion, a decrease of $713 million, or 16%. The decrease
was driven by lower securities lending balances, primarily as a result of declines in asset
valuations and demand, lower balances and spreads on liability products, and the effect of market
depreciation on certain custody assets. Treasury Services net revenue was $3.7 billion, a decrease
of $77 million, or 2%, reflecting spread compression on deposit products, offset by higher trade
revenue driven by wider spreads and growth across cash management and card product volumes.
TSS generated firmwide net revenue of $10.2 billion, including $6.6 billion of net revenue in
Treasury Services; of that amount, $3.7 billion was recorded in the Treasury Services business,
$2.6 billion was recorded in the Commercial Banking business, and $245 million was recorded in
other lines of business. The remaining $3.6 billion of net revenue was recorded in Worldwide
Securities Services.
The provision for credit losses was $55 million, a decrease of $27 million from the prior year.
Noninterest expense was $5.3 billion, an increase of $55 million from the prior year. The increase
was driven by higher FDIC insurance premiums, predominantly offset by lower headcount-related
expense.
| JPMorgan Chase & Co. / 2009 Annual Report | 69 |
Table of Contents
Management’s discussion and analysis
2008 compared with 2007
Net income was a record $1.8 billion, an increase of $370 million, or 26%, from the prior year,
driven by higher total net revenue. This increase was largely offset by higher noninterest expense.
Total net revenue was a record $8.1 billion, an increase of $1.2 billion, or 17%, from the prior
year. Worldwide Securities Services posted record net revenue of $4.4 billion, an increase of $600
million, or 16%, from the prior year. The growth was driven by wider spreads in securities lending,
foreign exchange and liability products, increased product usage by new and existing clients
(largely in custody, fund services, alternative investment services and depositary receipts) and
higher liability balances, reflecting increased client deposit activity resulting from recent
market conditions. These benefits were offset partially by market depreciation. Treasury Services
posted record net revenue of $3.8 billion, an increase of $589 million, or 18%, reflecting higher
liability balances and volume growth in electronic funds transfer products and trade loans. Revenue
growth from higher liability balances reflects increased client deposit activity resulting from
recent market conditions as well as organic growth. TSS firmwide net revenue, which includes
Treasury Services net revenue recorded in other lines of business, grew to $11.1 billion, an
increase of $1.5 billion, or 16%. Treasury Services firmwide net revenue grew to $6.7 billion, an
increase of $916 million, or 16%.
Noninterest expense was $5.2 billion, an increase of $643 million, or 14%, from the prior year,
reflecting higher expense related to business and volume growth as well as continued investment in
new product platforms.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except ratio data) | 2009 | 2008 | 2007 | |||||||||
|
TSS firmwide disclosures
|
||||||||||||
|
Treasury Services revenue – reported
(a)
|
$ | 3,702 | $ | 3,779 | $ | 3,190 | ||||||
|
Treasury Services revenue
reported in CB
|
2,642 | 2,648 | 2,350 | |||||||||
|
Treasury Services revenue
reported in other lines of
business
|
245 | 299 | 270 | |||||||||
|
Treasury Services firmwide
revenue (a)(b) |
6,589 | 6,726 | 5,810 | |||||||||
|
Worldwide Securities Services revenue
(a)
|
3,642 | 4,355 | 3,755 | |||||||||
|
Treasury & Securities Services firmwide revenue
(b)
|
$ | 10,231 | $ | 11,081 | $ | 9,565 | ||||||
|
Treasury Services firmwide liability balances
(average)
(c)(d)
|
$ | 274,472 | $ | 264,195 | $ | 217,142 | ||||||
|
Treasury & Securities Services firmwide liability
balances
(average)
(c)
|
361,247 | 382,947 | 316,651 | |||||||||
|
TSS firmwide financial ratios
|
||||||||||||
|
Treasury Services firmwide overhead ratio
(e)
|
53 | % | 50 | % | 55 | % | ||||||
|
Treasury & Securities Services firmwide overhead
ratio
(e)
|
62 | 57 | 60 | |||||||||
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except ratio data | ||||||||||||
| and where otherwise noted) | 2009 | 2008 | 2007 | |||||||||
|
Firmwide business metrics
|
||||||||||||
|
Assets under custody (in billions)
|
$ | 14,885 | $ | 13,205 | $ | 15,946 | ||||||
|
|
||||||||||||
|
Number of:
|
||||||||||||
|
U.S.$ ACH transactions
originated (in millions)
|
3,896 | 4,000 | 3,870 | |||||||||
|
Total U.S.$ clearing volume
(in thousands)
|
113,476 | 115,742 | 111,036 | |||||||||
|
International electronic funds transfer
volume (in thousands)
(f)
|
193,348 | 171,036 | 168,605 | |||||||||
|
Wholesale check volume
(in millions)
|
2,184 | 2,408 | 2,925 | |||||||||
|
Wholesale cards issued
(in thousands)
(g)
|
27,138 | 22,784 | 18,722 | |||||||||
|
|
||||||||||||
|
Credit data and quality statistics
|
||||||||||||
|
Net charge-offs/(recoveries)
|
$ | 19 | $ | (2 | ) | $ | — | |||||
|
Nonperforming loans
|
14 | 30 | — | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
|
88 | 74 | 18 | |||||||||
|
Allowance for lending-related
commitments
|
84 | 63 | 32 | |||||||||
|
|
||||||||||||
|
Total allowance for credit losses
|
172 | 137 | 50 | |||||||||
|
|
||||||||||||
|
Net charge-off/(recovery) rate
|
0.10 | % | (0.01 | )% | — | % | ||||||
|
Allowance for loan losses to period-end
loans
|
0.46 | 0.30 | 0.10 | |||||||||
|
Allowance for loan losses to average loans
|
0.48 | 0.28 | 0.09 | |||||||||
|
Allowance for loan losses to
nonperforming loans
|
NM | 247 | NM | |||||||||
|
Nonperforming loans to period-end loans
|
0.07 | 0.12 | — | |||||||||
|
Nonperforming loans to average loans
|
0.08 | 0.11 | — | |||||||||
| (a) | Reflects an internal reorganization for escrow products from Worldwide Securities Services to Treasury Services revenue of $168 million, $224 million and $177 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (b) | TSS firmwide revenue includes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of IB. However, some of the FX revenue associated with TSS customers who are FX customers of IB is not included in TS and TSS firmwide revenue. These amounts were $661 million, $880 million and $552 million, for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (c) | Firmwide liability balances include liability balances recorded in CB. | |
| (d) | Reflects an internal reorganization for escrow products, from Worldwide Securities Services to TS liability balances, of $15.6 billion, $21.5 billion and $18.1 billion for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (e) | Overhead ratios have been calculated based on firmwide revenue and TSS and TS expense, respectively, including those allocated to certain other lines of business. FX revenue and expense recorded in IB for TSS-related FX activity are not included in this ratio. | |
| (f) | International electronic funds transfer includes non-U.S. dollar ACH and clearing volume. | |
| (g) | Wholesale cards issued include domestic commercial, stored value, prepaid and government electronic benefit card products. |
| 70 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
ASSET MANAGEMENT
Asset Management, with assets under supervision of $1.7 trillion, is a
global leader in investment and wealth management. AM clients include
institutions, retail investors and high-net-worth individuals in every major
market throughout the world. AM offers global investment management in
equities, fixed income, real estate, hedge funds, private equity and
liquidity, including money market instruments and bank deposits. AM also
provides trust and estate, banking and brokerage services to high-net-worth
clients, and retirement services for corporations and individuals. The
majority of AM’s client assets are in actively managed portfolios.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Asset management,
administration and commissions
|
$ | 5,621 | $ | 6,004 | $ | 6,821 | ||||||
|
All other income
|
751 | 62 | 654 | |||||||||
|
Noninterest revenue
|
6,372 | 6,066 | 7,475 | |||||||||
|
Net interest income
|
1,593 | 1,518 | 1,160 | |||||||||
|
Total net revenue
|
7,965 | 7,584 | 8,635 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
188 | 85 | (18 | ) | ||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
3,375 | 3,216 | 3,521 | |||||||||
|
Noncompensation expense
|
2,021 | 2,000 | 1,915 | |||||||||
|
Amortization of intangibles
|
77 | 82 | 79 | |||||||||
|
Total noninterest expense
|
5,473 | 5,298 | 5,515 | |||||||||
|
Income before income tax expense
|
2,304 | 2,201 | 3,138 | |||||||||
|
Income tax expense
|
874 | 844 | 1,172 | |||||||||
|
Net income
|
$ | 1,430 | $ | 1,357 | $ | 1,966 | ||||||
|
|
||||||||||||
|
Revenue by client segment
|
||||||||||||
|
Private Bank
(a)
|
$ | 2,585 | $ | 2,565 | $ | 2,362 | ||||||
|
Institutional
|
2,065 | 1,775 | 2,525 | |||||||||
|
Retail
|
1,580 | 1,620 | 2,408 | |||||||||
|
Private Wealth Management
(a)
|
1,316 | 1,387 | 1,340 | |||||||||
|
Bear Stearns Private Client
Services
(b)
|
419 | 237 | — | |||||||||
|
Total net revenue
|
$ | 7,965 | $ | 7,584 | $ | 8,635 | ||||||
|
|
||||||||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
20 | % | 24 | % | 51 | % | ||||||
|
Overhead ratio
|
69 | 70 | 64 | |||||||||
|
Pretax margin ratio
(c)
|
29 | 29 | 36 | |||||||||
| (a) | In 2008, certain clients were transferred from Private Bank to Private Wealth Management. Prior periods have been revised to conform to this change. | |
| (b) | Bear Stearns Private Client Services was renamed to JPMorgan Securities at the beginning of 2010. | |
| (c) | Pretax margin represents income before income tax expense divided by total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors. |
2009 compared with 2008
Net income was $1.4 billion, an increase of $73 million, or 5%, from the prior year, due to higher
total net revenue, offset largely by higher noninterest expense and provision for credit losses.
Total net revenue was $8.0 billion, an increase of $381 million, or 5%, from the prior year.
Noninterest revenue was $6.4 billion, an increase of $306 million, or 5%, due to higher valuations
of seed capital investments and net inflows, offset largely by lower market levels. Net interest
income was $1.6 billion, up by $75 million, or 5%, from the prior year, due to wider loan spreads
and higher deposit balances, offset partially by narrower deposit spreads.
Revenue from the Private Bank was $2.6 billion, up 1% from the prior year due to wider loan spreads
and higher deposit balances, offset partially by the effect of lower market levels. Revenue from
Institutional was $2.1 billion, up 16% due to higher valuations of seed capital investments and net
inflows, offset partially by the effect of lower market levels. Revenue from Retail was $1.6
billion, down 2% due to the effect of lower market levels, offset largely by higher valuations of
seed capital investments. Revenue from Private Wealth Management was $1.3 billion, down 5% due to
narrower deposit spreads and the effect of lower market levels, offset partially by higher deposit
balances and wider loan spreads. Bear Stearns Private Client Services contributed $419 million to
revenue.
The provision for credit losses was $188 million, an increase of $103 million from the prior year,
reflecting continued weakness in the credit environment.
Noninterest expense was $5.5 billion, an increase of $175 million, or 3%, from the prior year due
to the effect of the Bear Stearns merger, higher performance-based compensation and higher FDIC
insurance premiums, offset largely by lower headcount-related expense.
2008 compared with 2007
Net income was $1.4 billion, a decline of $609 million, or 31%, from the prior year, driven by
lower total net revenue offset partially by lower noninterest expense.
Total net revenue was $7.6 billion, a decrease of $1.1 billion, or 12%, from the prior year.
Noninterest revenue was $6.1 billion, a decline of $1.4 billion, or 19%, due to lower performance
fees and the effect of market levels, including the impact of lower market valuations of seed
capital investments. The lower results were offset partially by the benefit of the Bear Stearns
merger and increased revenue from net asset inflows. Net interest income was $1.5 billion, up $358
million, or 31%, from the prior year, due to higher deposit and loan balances and wider deposit
spreads.
Private Bank revenue grew 9% to $2.6 billion, due to increased deposit and loan balances and net
asset inflows, partially offset by the effect of lower markets and lower performance fees.
Institutional revenue declined 30% to $1.8 billion due to lower performance fees, partially offset
by net liquidity inflows. Retail revenue declined 33% to $1.6 billion due to the effect of lower
markets, including the impact of lower market valuations of seed capital investments and net equity
outflows. Private Wealth Management revenue grew 4% to $1.4 billion due to higher deposit and loan
balances. Bear Stearns Brokerage contributed $237 million to revenue.
| JPMorgan Chase & Co. / 2009 Annual Report | 71 |
Table of Contents
Management’s discussion and analysis
The provision for credit losses was $85 million, compared with a benefit of $18 million in the
prior year, reflecting a weakening credit environment.
Noninterest expense was $5.3 billion, down $217 million, or 4%, compared with the prior year due to
lower performance-based compensation, largely offset by the effect of the Bear Stearns merger and
higher compensation expense resulting from increased average headcount.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except headcount, ranking | ||||||||||||
| data, and where | ||||||||||||
| otherwise noted) | 2009 | 2008 | 2007 | |||||||||
|
Business metrics
|
||||||||||||
|
Number of:
|
||||||||||||
|
Client advisors
(a)
|
1,934 | 1,840 | 1,868 | |||||||||
|
Retirement planning
services participants
(in thousands)
|
1,628 | 1,531 | 1,501 | |||||||||
|
Bear Stearns brokers
(b)
|
376 | 324 | — | |||||||||
|
|
||||||||||||
|
% of customer assets in 4 &
5 Star Funds
(c)
|
42 | % | 42 | % | 55 | % | ||||||
|
|
||||||||||||
|
% of AUM in 1
st
and 2
nd
quartiles:
(d)
|
||||||||||||
|
1 year
|
57 | % | 54 | % | 57 | % | ||||||
|
3 years
|
62 | % | 65 | % | 75 | % | ||||||
|
5 years
|
74 | % | 76 | % | 76 | % | ||||||
|
|
||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||
|
Loans
|
$ | 37,755 | $ | 36,188 | $ | 36,089 | ||||||
|
Equity
|
7,000 | 7,000 | 4,000 | |||||||||
|
|
||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||
|
Total assets
|
$ | 60,249 | $ | 65,550 | $ | 51,882 | ||||||
|
Loans
|
34,963 | 38,124 | 29,496 | |||||||||
|
Deposits
|
77,005 | 70,179 | 58,863 | |||||||||
|
Equity
|
7,000 | 5,645 | 3,876 | |||||||||
|
|
||||||||||||
|
Headcount
|
15,136 | 15,339 | 14,799 | |||||||||
|
|
||||||||||||
|
Credit data and quality statistics
|
||||||||||||
|
Net charge-offs/(recoveries)
|
$ | 117 | $ | 11 | $ | (8 | ) | |||||
|
Nonperforming loans
|
580 | 147 | 12 | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
|
269 | 191 | 112 | |||||||||
|
Allowance for lending-
related commitments
|
9 | 5 | 7 | |||||||||
|
Total allowance for credit losses
|
$ | 278 | $ | 196 | $ | 119 | ||||||
|
|
||||||||||||
|
Net charge-off/(recovery) rate
|
0.33 | % | 0.03 | % | (0.03 | )% | ||||||
|
Allowance for loan losses to period-end loans
|
0.71 | 0.53 | 0.31 | |||||||||
|
Allowance for loan losses to average loans
|
0.77 | 0.50 | 0.38 | |||||||||
|
Allowance for loan losses to nonperforming
loans
|
46 | 130 | 933 | |||||||||
|
Nonperforming loans to period-end loans
|
1.54 | 0.41 | 0.03 | |||||||||
|
Nonperforming loans to average loans
|
1.66 | 0.39 | 0.04 | |||||||||
| (a) | Prior periods have been restated to conform to current methodologies. | |
| (b) | Bear Stearns Private Client Services was renamed to JPMorgan Securities at the beginning of 2010. | |
| (c) | Derived from following rating services: Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan. | |
| (d) | Derived from following rating services: Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan. |
AM’s client segments comprise the following:
Institutional
brings comprehensive global investment services – including
asset management, pension analytics, asset-liability management and active
risk-budgeting strategies – to corporate and public institutions, endowments,
foundations, not-for-profit organizations and governments worldwide.
Retail
provides worldwide investment management services and retirement
planning and administration, through third-party and direct distribution of a
full range of investment vehicles.
The
Private Bank
addresses every facet of wealth management for
ultra-high-net-worth individuals and families worldwide, including investment
management, capital markets and risk management, tax and estate planning,
banking, capital raising and specialty-wealth advisory services.
Private Wealth Management
offers high-net-worth individuals, families and
business owners in the United States comprehensive wealth management
solutions, including investment management, capital markets and risk
management, tax and estate planning, banking and specialty-wealth advisory
services.
Bear Stearns Private Client Services
(renamed to JPMorgan Securities at the
beginning of 2010) provides investment advice and wealth management services
to high-net-worth individuals, money managers, and small corporations.
J.P. Morgan Asset Management has established two high-level measures of its overall performance.
| • | Percentage of assets under management in funds rated 4 and 5 stars (3 year). Mutual fund rating services rank funds based on their risk-adjusted performance over various periods. A 5 star rating is the best and represents the top 10% of industry wide ranked funds. A 4 star rating represents the next 22% of industry wide ranked funds. The worst rating is a 1 star rating. | |
| • | Percentage of assets under management in first- or second- quartile funds (one, three and five years). Mutual fund rating services rank funds according to a peer-based performance system, which measures returns according to specific time and fund classification (small, mid, multi and large cap). |
| 72 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Assets under supervision
2009 compared with 2008
Assets under supervision were $1.7 trillion, an increase of $205 billion, or 14%, from the prior
year. Assets under management were $1.2 trillion, an increase of $116 billion, or 10%, from the
prior year. The increases were due to the effect of higher market valuations and inflows in fixed
income and equity products offset partially by outflows in cash products. Custody, brokerage,
administration and deposit balances were $452 billion, up by $89 billion, due to the effect of
higher market levels on custody and brokerage balances, and brokerage inflows in the Private Bank.
The Firm also has a 42% interest in American Century Companies, Inc., whose AUM totaled $86 billion
and $70 billion at December 31, 2009 and 2008, respectively, which are excluded from the AUM above.
2008 compared with 2007
Assets under supervision were $1.5 trillion, a decrease of $76 billion, or 5%, from the prior year.
Assets under management were $1.1 trillion, down $60 billion, or 5%, from the prior year. The
decrease was due to the effect of lower market valuations and non-liquidity outflows, predominantly
offset by liquidity product inflows across all segments and the addition of Bear Stearns assets
under management. Custody, brokerage, administration and deposit balances were $363 billion, down
$16 billion due to the effect of lower markets on brokerage and custody balances, offset by the
addition of Bear Stearns Brokerage. The Firm also has a 43% interest in American Century Companies,
Inc., whose AUM totaled $70 billion and $102 billion at December 31, 2008 and 2007, respectively,
which are excluded from the AUM above.
| Assets under supervision (a) | ||||||||||||
| As of or for the year | ||||||||||||
| ended December 31, (in billions) | 2009 | 2008 | 2007 | |||||||||
|
Assets by asset class
|
||||||||||||
|
Liquidity
|
$ | 591 | $ | 613 | $ | 400 | ||||||
|
Fixed income
|
226 | 180 | 200 | |||||||||
|
Equities & multi-asset
|
339 | 240 | 472 | |||||||||
|
Alternatives
|
93 | 100 | 121 | |||||||||
|
Total assets under management
|
1,249 | 1,133 | 1,193 | |||||||||
|
Custody/brokerage/administration/deposits
|
452 | 363 | 379 | |||||||||
|
Total assets under supervision
|
$ | 1,701 | $ | 1,496 | $ | 1,572 | ||||||
|
|
||||||||||||
|
Assets by client segment
|
||||||||||||
|
Institutional
|
$ | 709 | $ | 681 | $ | 632 | ||||||
|
Private Bank
(b)
|
187 | 181 | 183 | |||||||||
|
Retail
|
270 | 194 | 300 | |||||||||
|
Private Wealth Management
(b)
|
69 | 71 | 78 | |||||||||
|
Bear Stearns Private Client Services
(c)
|
14 | 6 | — | |||||||||
|
Total assets under management
|
$ | 1,249 | $ | 1,133 | $ | 1,193 | ||||||
|
Institutional
|
$ | 710 | $ | 682 | $ | 633 | ||||||
|
Private Bank
(b)
|
452 | 378 | 403 | |||||||||
|
Retail
|
355 | 262 | 394 | |||||||||
|
Private Wealth Management
(b)
|
129 | 124 | 142 | |||||||||
|
Bear Stearns Private Client Services
(c)
|
55 | 50 | — | |||||||||
|
Total assets under supervision
|
$ | 1,701 | $ | 1,496 | $ | 1,572 | ||||||
| Assets by geographic region | ||||||||||||
| As of or for the year | ||||||||||||
| ended December 31, (in billions) | 2009 | 2008 | 2007 | |||||||||
|
U.S./Canada
|
$ | 837 | $ | 798 | $ | 760 | ||||||
|
International
|
412 | 335 | 433 | |||||||||
|
Total assets under management
|
$ | 1,249 | $ | 1,133 | $ | 1,193 | ||||||
|
U.S./Canada
|
$ | 1,182 | $ | 1,084 | $ | 1,032 | ||||||
|
International
|
519 | 412 | 540 | |||||||||
|
Total assets under supervision
|
$ | 1,701 | $ | 1,496 | $ | 1,572 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mutual fund assets by asset class
|
||||||||||||
|
Liquidity
|
$ | 539 | $ | 553 | $ | 339 | ||||||
|
Fixed income
|
67 | 41 | 46 | |||||||||
|
Equities
|
143 | 92 | 218 | |||||||||
|
Alternatives
|
9 | 7 | 6 | |||||||||
|
Total mutual fund assets
|
$ | 758 | $ | 693 | $ | 609 | ||||||
|
|
||||||||||||
|
Assets under management
rollforward
|
||||||||||||
|
Beginning balance, January 1
|
$ | 1,133 | $ | 1,193 | $ | 1,013 | ||||||
|
Net asset flows:
|
||||||||||||
|
Liquidity
|
(23 | ) | 210 | 78 | ||||||||
|
Fixed income
|
34 | (12 | ) | 9 | ||||||||
|
Equities, multi-asset and
alternative
|
17 | (47 | ) | 28 | ||||||||
|
Market/performance/other impacts
(d)
|
88 | (211 | ) | 65 | ||||||||
|
Ending balance, December 31
|
$ | 1,249 | $ | 1,133 | $ | 1,193 | ||||||
|
|
||||||||||||
|
Assets under supervision
rollforward
|
||||||||||||
|
Beginning balance, January 1
|
$ | 1,496 | $ | 1,572 | $ | 1,347 | ||||||
|
Net asset flows
|
50 | 181 | 143 | |||||||||
|
Market/performance/other impacts
(d)
|
155 | (257 | ) | 82 | ||||||||
|
Ending balance, December 31
|
$ | 1,701 | $ | 1,496 | $ | 1,572 | ||||||
| (a) | Excludes assets under management of American Century Companies, Inc., in which the Firm had a 42%, 43% and 44% ownership at December 31, 2009, 2008 and 2007, respectively. | |
| (b) | In 2008, certain clients were transferred from Private Bank to Private Wealth Management. Prior periods have been revised to conform to this change. | |
| (c) | Bear Stearns Private Client Services was renamed to JPMorgan Securities at the beginning of 2010. | |
| (d) | Includes $15 billion for assets under management and $68 billion for assets under supervision from the Bear Stearns merger in the second quarter of 2008. |
| JPMorgan Chase & Co. / 2009 Annual Report | 73 |
Table of Contents
Management’s discussion and analysis
CORPORATE/PRIVATE EQUITY
The Corporate/Private Equity sector comprises
Private Equity, Treasury, the Chief Investment Office, corporate staff units
and expense that is centrally managed. Treasury and the Chief Investment
Office manage capital, liquidity, interest rate and foreign exchange risk and
the investment portfolio for the Firm. The corporate staff units include
Central Technology and Operations, Internal Audit, Executive Office, Finance,
Human Resources, Marketing & Communications, Legal & Compliance, Corporate
Real Estate and General Services, Risk Management, Corporate Responsibility
and Strategy & Development. Other centrally managed expense includes the
Firm’s occupancy and pension-related expense, net of allocations to the
business.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Principal transactions
(a)(b)
|
$ | 1,574 | $ | (3,588 | ) | $ | 4,552 | |||||
|
Securities gains/(losses)
(c)
|
1,139 | 1,637 | 39 | |||||||||
|
All other income
(d)
|
58 | 1,673 | 465 | |||||||||
|
Noninterest revenue
|
2,771 | (278 | ) | 5,056 | ||||||||
|
Net interest income/(expense)
|
3,863 | 347 | (637 | ) | ||||||||
|
Total net revenue
|
6,634 | 69 | 4,419 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
80 | 447 | (i)(j) | (11 | ) | |||||||
|
|
||||||||||||
|
Provision for credit losses –
accounting conformity
(e)
|
— | 1,534 | — | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
2,811 | 2,340 | 2,754 | |||||||||
|
Noncompensation expense
(f)
|
3,597 | 1,841 | 3,025 | |||||||||
|
Merger costs
|
481 | 432 | 209 | |||||||||
|
Subtotal
|
6,889 | 4,613 | 5,988 | |||||||||
|
Net expense allocated to other businesses
|
(4,994 | ) | (4,641 | ) | (4,231 | ) | ||||||
|
Total noninterest expense
|
1,895 | (28 | ) | 1,757 | ||||||||
|
Income/(loss) before income
tax expense/(benefit) and extraordinary gain
|
4,659 | (1,884 | ) | 2,673 | ||||||||
|
Income tax expense/(benefit)
(g)
|
1,705 | (535 | ) | 788 | ||||||||
|
Income/(loss) before
extraordinary gain
|
2,954 | (1,349 | ) | 1,885 | ||||||||
|
Extraordinary gain
(h)
|
76 | 1,906 | — | |||||||||
|
Net income
|
$ | 3,030 | $ | 557 | $ | 1,885 | ||||||
| (a) | Included losses on preferred equity interests in Fannie Mae and Freddie Mac in 2008. | |
| (b) | The Firm adopted the new guidance for fair value in the first quarter of 2007. See Note 3 on pages 148–165 of this Annual Report for additional information. | |
| (c) | Included gain on sale of MasterCard shares in 2008. | |
| (d) | Included a gain from the dissolution of the Chase Paymentech Solutions joint venture and proceeds from the sale of Visa shares in its initial public offering in 2008. | |
| (e) | Represents an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations. | |
| (f) | Included $675 million FDIC special assessment during second quarter of 2009 and a release of credit card litigation reserves in 2008 and insurance recoveries related to settlement of the Enron and WorldCom class action litigations. | |
| (g) | Includes tax benefits recognized upon resolution of tax audits. | |
| (h) | Effective September 25, 2008, JPMorgan Chase acquired Washington Mutual’s banking operations from the FDIC for $1.9 billion. The fair value of the Washington Mutual net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain in 2008. As a result of the final refinement of the purchase price allocation during the third quarter of 2009, the Firm recognized a $76 million increase in the extraordinary gain | |
| (i) | In November 2008, the Firm transferred $5.8 billion of higher quality credit card loans from the legacy Chase portfolio to a securitization trust previously established by Washington Mutual (“the Trust”). As a result of converting higher credit quality Chase-originated on-book receivables to the Trust’s seller’s interest which has a higher overall loss rate reflective of the total assets within the Trust, approximately $400 million of incremental provision expense was recorded during the fourth quarter. |
| This incremental provision expense was recorded in the Corporate segment as the action related to the acquisition of Washington Mutual’s banking operations. For further discussion of credit card securitizations, see Note 15 on pages 198–205 of this Annual Report. | ||
| (j) | Includes $9 million of credit card securitizations related to the Washington Mutual transaction. |
2009 compared with 2008
Net income was $3.0 billion compared with $557 million in the prior year.
Net loss for Private Equity was $78 million compared with a net loss of $690 million in the prior
year. Net revenue was $18 million, an increase of $981 million, reflecting Private Equity losses of
$54 million compared with losses of $894 million. Noninterest expense was $141 million, an increase
of $21 million.
Net income for Corporate was $3.7 billion, compared with $1.5 billion in the prior year. Current
year results reflect higher levels of trading gains and net interest income, securities gains, an
after-tax gain of $150 million from the sale of MasterCard shares, partially offset by a $419
million FDIC special assessment. Trading gains and net interest income increased due to the Chief Investment Office’s (“CIO”)
significant purchases of mortgage-backed securities guaranteed by U.S. government agencies,
corporate debt securities, U.S. Treasury and government agency securities and other asset-backed
securities. These investments were generally associated with the management of interest rate risk
and investment of cash resulting from the excess funding the Firm continued to experience during
2009. The increase in securities was partially offset by sales of higher-coupon instruments (part
of repositioning the investment portfolio) as well as prepayments and maturities.
Selected income statement and balance sheet data for Treasury/CIO
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Treasury
|
||||||||||||
|
Securities gains
(a)
|
$ | 1,147 | $ | 1,652 | $ | 37 | ||||||
|
Investment securities portfolio (average)
(b)
|
324,037 | 113,010 | 88,037 | |||||||||
|
Investment securities portfolio (ending)
(b)
|
340,163 | 192,564 | 76,480 | |||||||||
|
Mortgage loans (average)
|
7,427 | 7,059 | 5,639 | |||||||||
|
Mortgage loans (ending)
|
8,023 | 7,292 | 6,635 | |||||||||
| (a) | Results for 2008 included a gain on the sale of MasterCard shares. All periods reflect repositioning of the Corporate investment securities portfolio and exclude gains/losses on securities used to manage risk associated with MSRs. | |
| (b) | Beginning in second quarter 2009, balances reflect Treasury and Chief Investment Office securities. Prior periods have been revised to conform with this change. |
For further information on the
investment portfolio, see Note 3 and Note 11 on pages 148–165 and 187–191, respectively.
For further information on CIO VaR and the Firm’s Earnings-at-risk, see the Market Risk Management section on pages 118–124 of this Annual Report.
Prior year results included $955 million proceeds from the sale of Visa shares in its initial
public offering, $627 million from the dissolution of the Chase Payment Solutions joint venture,
partially offset by losses of $642 million on preferred securities of Fannie Mae and Freddie Mac
and a $248 million charge related to the offer to repurchases auction-rate securities.
Merger-related items were a net loss of $635 million compared with a loss of $211 million in the
prior year. Bear Stearns net merger-related costs were $425 million compared with $836 million. The
prior year included a net loss of $423 million, which represented JPMorgan Chase’s 49.4% ownership
in Bear Stearn’s losses from April 8 to May 30, 2008. Washington Mutual net merger-related costs
were $210 million, which included an extraordinary gain of $76 million, compared with a net gain of
$625 million. The prior year included an extraordinary gain of $1.9 billion, conforming loan loss
reserves of $911 million, credit card related loan loss reserves of $250 million and net
merger-related costs of $120 million.
| 74 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
2008 compared with 2007
Net income for Corporate/Private Equity was $557 million, compared with net income of $1.9 billion
in the prior year.
Net loss for Private Equity was $690 million, compared with net income of $2.2 billion in the prior
year. Net revenue was a loss of $963 million, a decrease of $4.9 billion, reflecting Private Equity
losses of $894 million, compared with gains of $4.1 billion in the prior year. Noninterest expense
was $120 million, a decrease of $469 million from the prior year, reflecting lower compensation
expense.
Net income for Corporate was $1.5 billion, compared with a net loss of $150 million in the prior
year. 2008 included a gain of $955 million on the proceeds from the sale of Visa shares in its
initial public offering, $627 million on the dissolution of the Chase Paymentech Solutions joint
venture, and $414 million from the sale of MasterCard shares, partially offset by losses of $642
million on preferred securities of Fannie Mae and Freddie Mac and $303 million related to the offer
to repurchase auction-rate securities. 2007 included a gain of $145 million on the sale of
MasterCard shares.
Merger-related
items were a net loss of $211 million, compared with a net loss of $130 million in
the prior year. Items related to the Washington Mutual transaction included a $1.9 billion
extraordinary gain, conforming loan loss reserves of $911 million, credit card related loan loss
reserves of $250 million and net merger-related costs of $120 million. Bear Stearns merger-related
items included a net loss of $423 million, which represented JPMorgan Chase’s 49.4% ownership in
Bear Stearn’s losses from April 8 to May 30, 2008 and net merger-related costs of $413 million.
Results for 2007 include merger costs of $130 million related to the Bank One and Bank of New York
Transactions.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except headcount) | 2009 | 2008 | 2007 | |||||||||
|
Total net revenue
|
||||||||||||
|
|
||||||||||||
|
Private equity
(a)
|
$ | 18 | $ | (963 | ) | $ | 3,967 | |||||
|
Corporate
|
6,616 | 1,032 | 452 | |||||||||
|
Total net revenue
|
$ | 6,634 | $ | 69 | $ | 4,419 | ||||||
|
|
||||||||||||
|
Net income/(loss)
|
||||||||||||
|
Private equity
(a)
|
$ | (78 | ) | $ | (690 | ) | $ | 2,165 | ||||
|
Corporate
(b)(c)
|
3,743 | 1,458 | (150 | ) | ||||||||
|
Merger – related items
(d)
|
(635 | ) | (211 | ) | (130 | ) | ||||||
|
Total net income
|
$ | 3,030 | $ | 557 | $ | 1,885 | ||||||
|
Headcount
|
20,199 | 23,376 | 22,512 | |||||||||
| (a) | The Firm adopted the new guidance for fair value in the first quarter of 2007. See Note 3 on pages 148–165 of this Annual Report for additional information. | |
| (b) | Included $675 million FDIC special assessment during second quarter of 2009 and a release of credit card litigation reserves in 2008 and insurance recoveries related to settlement of the Enron and WorldCom class action litigations. | |
| (c) | Includes tax benefits recognized upon resolution of tax audits. | |
| (d) | Includes an accounting conformity loan loss reserve provision and an extraordinary gain related to the Washington Mutual transaction in 2008. 2008 also reflects items related to the Bear Stearns merger, which included Bear Stearns’ equity earnings, merger costs, Bear Stearns asset management liquidation costs and Bear Stearns private client services broker retention expense. 2007 represent costs related to the Bank One transaction in 2004 and the Bank of New York transaction in 2006. |
Private equity portfolio
2009 compared with 2008
The carrying value of the private equity portfolio at December 31, 2009, was $7.3 billion, up from
$6.9 billion at December 31, 2008. The portfolio increase was primarily driven by additional
follow-on investments and net unrealized gains on the existing portfolio, partially offset by sales
during 2009. The portfolio represented 6.3% of the Firm’s stockholders’ equity less goodwill at
December 31, 2009, up from 5.8% at December 31, 2008.
2008 compared with 2007
The carrying value of the private equity portfolio at December 31, 2008, was $6.9 billion, down
from $7.2 billion at December 31, 2007. The portfolio decrease was primarily driven by unfavorable
valuation adjustments on existing investments, partially offset by new investments, and the
addition of the Bear Stearns portfolios. The portfolio represented 5.8% of the Firm’s stockholders’
equity less goodwill at December 31, 2008, down from 9.2% at December 31, 2007.
Selected income statement and balance sheet data
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Private equity
|
||||||||||||
|
Realized gains
|
$ | 109 | $ | 1,717 | $ | 2,312 | ||||||
|
Unrealized gains/(losses)
(a)(b)
|
(81 | ) | (2,480 | ) | 1,607 | |||||||
|
Total direct investments
|
28 | (763 | ) | 3,919 | ||||||||
|
Third-party fund investments
|
(82 | ) | (131 | ) | 165 | |||||||
|
Total private equity gains/ (losses)
(c)
|
$ | (54 | ) | $ | (894 | ) | $ | 4,084 | ||||
|
|
||||||||||||
|
Private equity portfolio
information
(d)
|
||||||||||||
|
Direct investments
|
||||||||||||
|
Publicly held securities
|
||||||||||||
|
Carrying value
|
$ | 762 | $ | 483 | $ | 390 | ||||||
|
Cost
|
743 | 792 | 288 | |||||||||
|
Quoted public value
|
791 | 543 | 536 | |||||||||
|
Privately held direct securities
|
||||||||||||
|
Carrying value
|
5,104 | 5,564 | 5,914 | |||||||||
|
Cost
|
5,959 | 6,296 | 4,867 | |||||||||
|
Third-party fund investments
(e)
|
||||||||||||
|
Carrying value
|
1,459 | 805 | 849 | |||||||||
|
Cost
|
2,079 | 1,169 | 1,076 | |||||||||
|
Total private equity portfolio – Carrying value
|
$ | 7,325 | $ | 6,852 | $ | 7,153 | ||||||
|
Total private equity portfolio – Cost
|
$ | 8,781 | $ | 8,257 | $ | 6,231 | ||||||
| (a) | Unrealized gains/(losses) contain reversals of unrealized gains and losses that were recognized in prior periods and have now been realized. | |
| (b) | The Firm adopted the new guidance for fair value in the first quarter of 2007. For additional information, see Note 3 on pages 148–165 of this Annual Report. | |
| (c) | Included in principal transactions revenue in the Consolidated Statements of Income. | |
| (d) | For more information on the Firm’s policies regarding the valuation of the private equity portfolio, see Note 3 on pages 148–165 of this Annual Report. | |
| (e) | Unfunded commitments to third-party equity funds were $1.5 billion, $1.4 billion and $881 million at December 31, 2009, 2008 and 2007, respectively. |
| JPMorgan Chase & Co. / 2009 Annual Report | 75 |
Table of Contents
Management’s discussion and analysis
BALANCE SHEET ANALYSIS
Selected Consolidated Balance Sheets data
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 26,206 | $ | 26,895 | ||||
|
Deposits with banks
|
63,230 | 138,139 | ||||||
|
Federal funds sold and securities purchased
under resale agreements
|
195,404 | 203,115 | ||||||
|
Securities borrowed
|
119,630 | 124,000 | ||||||
|
Trading assets:
|
||||||||
|
Debt and equity instruments
|
330,918 | 347,357 | ||||||
|
Derivative receivables
|
80,210 | 162,626 | ||||||
|
Securities
|
360,390 | 205,943 | ||||||
|
Loans
|
633,458 | 744,898 | ||||||
|
Allowance for loan losses
|
(31,602 | ) | (23,164 | ) | ||||
|
Loans, net of allowance for loan losses
|
601,856 | 721,734 | ||||||
|
Accrued interest and accounts receivable
|
67,427 | 60,987 | ||||||
|
Premises and equipment
|
11,118 | 10,045 | ||||||
|
Goodwill
|
48,357 | 48,027 | ||||||
|
Mortgage servicing rights
|
15,531 | 9,403 | ||||||
|
Other intangible assets
|
4,621 | 5,581 | ||||||
|
Other assets
|
107,091 | 111,200 | ||||||
|
Total assets
|
$ | 2,031,989 | $ | 2,175,052 | ||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits
|
$ | 938,367 | $ | 1,009,277 | ||||
|
Federal funds purchased and securities loaned
or sold under repurchase agreements
|
261,413 | 192,546 | ||||||
|
Commercial paper
|
41,794 | 37,845 | ||||||
|
Other borrowed funds
|
55,740 | 132,400 | ||||||
|
Trading liabilities:
|
||||||||
|
Debt and equity instruments
|
64,946 | 45,274 | ||||||
|
Derivative payables
|
60,125 | 121,604 | ||||||
|
Accounts payable and other liabilities
|
162,696 | 187,978 | ||||||
|
Beneficial interests issued by consolidated VIEs
|
15,225 | 10,561 | ||||||
|
Long-term debt
|
266,318 | 270,683 | ||||||
|
Total liabilities
|
1,866,624 | 2,008,168 | ||||||
|
Stockholders’ equity
|
165,365 | 166,884 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,031,989 | $ | 2,175,052 | ||||
Consolidated Balance Sheets overview
The following is a discussion of the significant changes in the Consolidated Balance Sheets from December 31, 2008.
The following is a discussion of the significant changes in the Consolidated Balance Sheets from December 31, 2008.
Deposits with banks; federal funds sold and securities purchased under resale agreements; and
securities borrowed
The Firm uses these instruments as part of its liquidity management activities, to manage the Firm’s cash positions and risk-based capital requirements, and to support the Firm’s trading and risk management activities. In particular, the Firm uses securities purchased under resale agreements and securities borrowed to provide funding or liquidity to clients by purchasing and borrowing their securities for the short-term. The decrease in deposits with banks primarily reflected lower demand for interbank lending and lower deposits with the Federal Reserve Bank relative to the elevated levels at the end of 2008. The decrease in securities purchased under resale agreements was largely due to a shift by the Firm of its excess cash to the available-for-sale (“AFS”) securities portfolio, offset partially by higher securities purchased under resale agreements in IB due to improved and more liquid market conditions.
The Firm uses these instruments as part of its liquidity management activities, to manage the Firm’s cash positions and risk-based capital requirements, and to support the Firm’s trading and risk management activities. In particular, the Firm uses securities purchased under resale agreements and securities borrowed to provide funding or liquidity to clients by purchasing and borrowing their securities for the short-term. The decrease in deposits with banks primarily reflected lower demand for interbank lending and lower deposits with the Federal Reserve Bank relative to the elevated levels at the end of 2008. The decrease in securities purchased under resale agreements was largely due to a shift by the Firm of its excess cash to the available-for-sale (“AFS”) securities portfolio, offset partially by higher securities purchased under resale agreements in IB due to improved and more liquid market conditions.
For additional
information on the Firm’s Liquidity Risk Management, see pages 88–92 of this Annual Report.
Trading assets and liabilities – debt and equity
instruments
Debt and equity trading instruments are used for both market-making and, to a limited extent, proprietary risk-taking activities. These instruments consist predominantly of fixed-income securities, including government and corporate debt; equity securities, including convertible securities; loans, including prime mortgage and other loans warehoused by RFS and IB for sale or securitization purposes and accounted for at fair value; and physical commodities inventories carried at the lower of cost or fair value. The decrease in trading assets – debt and equity instruments reflected the effect of balance sheet management activities and the impact of the challenging capital markets environment that existed during the latter part of 2008, which continued into the first half of 2009, partially offset by stabilization in the capital markets during the second half of 2009. Trading liabilities – debt and equity instruments increased as market conditions improved and capital markets stabilized from the prior year. For additional information, refer to Note 3 on pages 148–165 of this Annual Report.
Debt and equity trading instruments are used for both market-making and, to a limited extent, proprietary risk-taking activities. These instruments consist predominantly of fixed-income securities, including government and corporate debt; equity securities, including convertible securities; loans, including prime mortgage and other loans warehoused by RFS and IB for sale or securitization purposes and accounted for at fair value; and physical commodities inventories carried at the lower of cost or fair value. The decrease in trading assets – debt and equity instruments reflected the effect of balance sheet management activities and the impact of the challenging capital markets environment that existed during the latter part of 2008, which continued into the first half of 2009, partially offset by stabilization in the capital markets during the second half of 2009. Trading liabilities – debt and equity instruments increased as market conditions improved and capital markets stabilized from the prior year. For additional information, refer to Note 3 on pages 148–165 of this Annual Report.
Trading assets and liabilities – derivative receivables and payables
Derivative instruments enable end-users to transform or mitigate 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 interest rate, credit, foreign exchange, equity or commodity prices or indices. JPMorgan Chase makes markets in derivatives for customers and also uses derivatives to hedge or manage risks of market exposures and to make investments. The majority of the Firm’s derivatives are entered into for market-making purposes. The decrease in derivative receivables and payables was primarily related to tightening credit spreads, volatile foreign exchange rates and rising rates on interest rate swaps. For additional information, refer to Derivative contracts on pages 102–104, and Note 3 and Note 5 on pages 148–165 and 167–175, respectively, of this Annual Report.
Derivative instruments enable end-users to transform or mitigate 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 interest rate, credit, foreign exchange, equity or commodity prices or indices. JPMorgan Chase makes markets in derivatives for customers and also uses derivatives to hedge or manage risks of market exposures and to make investments. The majority of the Firm’s derivatives are entered into for market-making purposes. The decrease in derivative receivables and payables was primarily related to tightening credit spreads, volatile foreign exchange rates and rising rates on interest rate swaps. For additional information, refer to Derivative contracts on pages 102–104, and Note 3 and Note 5 on pages 148–165 and 167–175, respectively, of this Annual Report.
Securities
Substantially all of the securities portfolio is classified as AFS and is used primarily to manage the Firm’s exposure to interest rate movements and to invest cash resulting from excess funding positions. The increase in the securities portfolio was due to elevated levels of excess cash, which was used to purchase mortgage-backed securities guaranteed by U.S. government agencies, corporate debt securities, U.S. Treasury and government agency securities and other asset-backed securities. The increase in securities was partially offset by sales of higher-coupon instruments, as part of positioning of the portfolio, as well as prepayments and maturities. For additional information related to securities, refer to the Corporate/Private Equity segment on pages 74–75, and Note 3 and Note 11 on pages 148–165 and 187–191, respectively, of this Annual Report.
Substantially all of the securities portfolio is classified as AFS and is used primarily to manage the Firm’s exposure to interest rate movements and to invest cash resulting from excess funding positions. The increase in the securities portfolio was due to elevated levels of excess cash, which was used to purchase mortgage-backed securities guaranteed by U.S. government agencies, corporate debt securities, U.S. Treasury and government agency securities and other asset-backed securities. The increase in securities was partially offset by sales of higher-coupon instruments, as part of positioning of the portfolio, as well as prepayments and maturities. For additional information related to securities, refer to the Corporate/Private Equity segment on pages 74–75, and Note 3 and Note 11 on pages 148–165 and 187–191, respectively, of this Annual Report.
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Loans and allowance for loan losses
The Firm provides loans to a variety of customers, from large corporate and institutional clients to individual consumers. Loans decreased across most lines of business. Although gross new lending volumes remained at levels consistent with 2008, continued lower customer demand, repayments and charge-offs in the wholesale and consumer businesses resulted in lower balances. Lower charge volume on credit cards and the effect of tighter underwriting and loan qualification standards, also contributed to the decrease in loans.
The Firm provides loans to a variety of customers, from large corporate and institutional clients to individual consumers. Loans decreased across most lines of business. Although gross new lending volumes remained at levels consistent with 2008, continued lower customer demand, repayments and charge-offs in the wholesale and consumer businesses resulted in lower balances. Lower charge volume on credit cards and the effect of tighter underwriting and loan qualification standards, also contributed to the decrease in loans.
The allowance for loan losses increased in both the consumer and wholesale businesses, as weak
economic conditions, housing price declines and higher unemployment rates continued to drive higher
estimated losses for most of the Firm’s loan portfolios. For a more detailed discussion of the loan
portfolio and the allowance for loan losses, refer to Credit
Risk Management on pages 93–117, and Notes
3, 4, 13 and 14 on pages 148–165, 165–167, 192–196 and 196–198, respectively, of this Annual
Report.
Accrued interest and accounts receivable
Accrued interest and accounts receivable consist of accrued interest receivables from interest-earning assets; receivables from customers (primarily from activities related to IB’s Prime Services business); receivables from brokers, dealers and clearing organizations; and receivables from failed securities sales. The increase in accrued interest and accounts receivable primarily reflected higher accounts receivable associated with maturities of credit card securitizations, as well as slightly higher failed securities sales.
Accrued interest and accounts receivable consist of accrued interest receivables from interest-earning assets; receivables from customers (primarily from activities related to IB’s Prime Services business); receivables from brokers, dealers and clearing organizations; and receivables from failed securities sales. The increase in accrued interest and accounts receivable primarily reflected higher accounts receivable associated with maturities of credit card securitizations, as well as slightly higher failed securities sales.
Other assets
Other assets consist of private equity and other investments, collateral received, corporate and bank-owned life insurance policies, assets acquired in loan satisfactions (including real estate owned) and all other assets, including receivables for securities provided as collateral. The decrease in other assets was primarily due to a decline to zero in the balance related to the Federal Reserve Bank of Boston AML Facility. This Facility was ended by the Federal Reserve Bank of Boston on February 1, 2010.
Other assets consist of private equity and other investments, collateral received, corporate and bank-owned life insurance policies, assets acquired in loan satisfactions (including real estate owned) and all other assets, including receivables for securities provided as collateral. The decrease in other assets was primarily due to a decline to zero in the balance related to the Federal Reserve Bank of Boston AML Facility. This Facility was ended by the Federal Reserve Bank of Boston on February 1, 2010.
Goodwill
Goodwill arises from business combinations and represents the excess of the purchase price of an acquired entity over the fair value amounts assigned to assets acquired and liabilities assumed. The increase in goodwill was largely due to final purchase accounting adjustments related to the Bear Stearns merger, foreign currency translation adjustments related to the Firm’s Canadian credit card operations, and IB’s acquisition of a commodities business. For additional information on goodwill, see Note 17 on pages 214–217 of this Annual Report.
Goodwill arises from business combinations and represents the excess of the purchase price of an acquired entity over the fair value amounts assigned to assets acquired and liabilities assumed. The increase in goodwill was largely due to final purchase accounting adjustments related to the Bear Stearns merger, foreign currency translation adjustments related to the Firm’s Canadian credit card operations, and IB’s acquisition of a commodities business. For additional information on goodwill, see Note 17 on pages 214–217 of this Annual Report.
Mortgage servicing rights
MSRs represent the fair value of future cash flows for performing specified mortgage servicing activities (predominantly with respect to residential mortgages) 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 borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to the investors of the mortgage-backed securities. MSRs increased due to increases in the fair
MSRs represent the fair value of future cash flows for performing specified mortgage servicing activities (predominantly with respect to residential mortgages) 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 borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to the investors of the mortgage-backed securities. MSRs increased due to increases in the fair
value of the MSR asset,
related primarily to market interest rate and other changes affecting the Firm’s estimate of future
prepayments, as well as sales in RFS of originated loans for which servicing rights were retained.
These increases were offset partially by servicing portfolio run-off. For additional information on
MSRs, see Note 17 on pages 214–217 of this Annual Report.
Other intangible assets
Other intangible assets consist of purchased credit card relationships, other credit card-related intangibles, core deposit intangibles and other intangibles. The decrease in other intangible assets primarily reflected amortization expense, partially offset by foreign currency translation adjustments related to the Firm’s Canadian credit card operations. For additional information on other intangible assets, see Note 17 on pages 214–217 of this Annual Report.
Other intangible assets consist of purchased credit card relationships, other credit card-related intangibles, core deposit intangibles and other intangibles. The decrease in other intangible assets primarily reflected amortization expense, partially offset by foreign currency translation adjustments related to the Firm’s Canadian credit card operations. For additional information on other intangible assets, see Note 17 on pages 214–217 of this Annual Report.
Deposits
Deposits represent a liability to customers, both retail and wholesale, related to non-brokerage funds held on their behalf. Deposits are classified by location (U.S. and non-U.S.), whether they are interest- or noninterest-bearing, and by type (i.e., demand, money market, savings, time or negotiable order of withdrawal accounts). Deposits help provide a stable and consistent source of funding for the Firm. Wholesale deposits in TSS declined from the elevated levels at December 31, 2008, reflecting the continued normalization of deposit levels following the strong inflows resulting from the heightened volatility and credit concerns affecting the markets during the latter part of 2008. Organic growth in deposits in CB and RFS was offset partially by the maturity of high rate interest-bearing CDs that were acquired as part of the Washington Mutual transaction. For more information on deposits, refer to the RFS and AM segment discussions on pages 58–63 and 71–73, respectively; the Liquidity Risk Management discussion on pages 88–92; and Note 19 on page 218 of this Annual Report. For more information on wholesale liability balances, including deposits, refer to the CB and TSS segment discussions on pages 67–68 and 69–70, respectively, of this Annual Report.
Deposits represent a liability to customers, both retail and wholesale, related to non-brokerage funds held on their behalf. Deposits are classified by location (U.S. and non-U.S.), whether they are interest- or noninterest-bearing, and by type (i.e., demand, money market, savings, time or negotiable order of withdrawal accounts). Deposits help provide a stable and consistent source of funding for the Firm. Wholesale deposits in TSS declined from the elevated levels at December 31, 2008, reflecting the continued normalization of deposit levels following the strong inflows resulting from the heightened volatility and credit concerns affecting the markets during the latter part of 2008. Organic growth in deposits in CB and RFS was offset partially by the maturity of high rate interest-bearing CDs that were acquired as part of the Washington Mutual transaction. For more information on deposits, refer to the RFS and AM segment discussions on pages 58–63 and 71–73, respectively; the Liquidity Risk Management discussion on pages 88–92; and Note 19 on page 218 of this Annual Report. For more information on wholesale liability balances, including deposits, refer to the CB and TSS segment discussions on pages 67–68 and 69–70, respectively, of this Annual Report.
Federal funds purchased and securities loaned or sold under repurchase agreements
The Firm uses these instruments as part of its liquidity management activities and to support the Firm’s trading and risk management activities. In particular, the Firm uses federal funds purchased and securities loaned or sold under repurchase agreements as short-term funding sources and to make securities available to clients for their short-term liquidity purposes. The increase in securities sold under repurchase agreements was primarily attributable to favorable pricing and the financing of the increase in the AFS securities portfolio. For additional information on the Firm’s Liquidity Risk Management, see pages 88–92 of this Annual Report.
The Firm uses these instruments as part of its liquidity management activities and to support the Firm’s trading and risk management activities. In particular, the Firm uses federal funds purchased and securities loaned or sold under repurchase agreements as short-term funding sources and to make securities available to clients for their short-term liquidity purposes. The increase in securities sold under repurchase agreements was primarily attributable to favorable pricing and the financing of the increase in the AFS securities portfolio. For additional information on the Firm’s Liquidity Risk Management, see pages 88–92 of this Annual Report.
Commercial paper and other borrowed funds
The Firm uses commercial paper and other borrowed funds as part of its liquidity management activities to meet short-term funding needs, and in connection with a TSS liquidity management product, whereby excess client funds are transferred into commercial paper overnight sweep accounts. The decrease in other borrowed funds was predominantly due to lower advances from Federal Home Loan Banks; the absence of borrowings from the Federal Reserve under the Term
The Firm uses commercial paper and other borrowed funds as part of its liquidity management activities to meet short-term funding needs, and in connection with a TSS liquidity management product, whereby excess client funds are transferred into commercial paper overnight sweep accounts. The decrease in other borrowed funds was predominantly due to lower advances from Federal Home Loan Banks; the absence of borrowings from the Federal Reserve under the Term
| JPMorgan Chase & Co. / 2009 Annual Report | 77 |
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Management’s discussion and analysis
Auction Facility
program and a decline to zero in the balance related to the Federal Reserve Bank of Boston AML
Facility, which was ended on February 1, 2010. For additional information on the Firm’s Liquidity
Risk Management and other borrowed funds, see pages 88–92, and Note 20 on page 219 of this Annual
Report.
Accounts payable and other liabilities
Accounts payable and other liabilities consist of accounts payable to customers (primarily from activities related to IB’s Prime Services business); payables to brokers, dealers and clearing organizations; payables from failed securities purchases; accrued expense, including interest-bearing liabilities; and all other liabilities, including obligations to return securities received as collateral. The decrease in accounts payable and other liabilities primarily reflected lower customer payables due predominantly to lower balances in the brokerage accounts of IB’s Prime Services customers.
Accounts payable and other liabilities consist of accounts payable to customers (primarily from activities related to IB’s Prime Services business); payables to brokers, dealers and clearing organizations; payables from failed securities purchases; accrued expense, including interest-bearing liabilities; and all other liabilities, including obligations to return securities received as collateral. The decrease in accounts payable and other liabilities primarily reflected lower customer payables due predominantly to lower balances in the brokerage accounts of IB’s Prime Services customers.
Beneficial interests issued by consolidated VIEs
JPMorgan Chase uses VIEs to assist clients in accessing the financial markets in a cost-efficient manner. A VIE is consolidated if the Firm will absorb a majority of a VIE’s expected losses, receive a majority of a VIE’s expected residual returns, or both. Included in the caption “beneficial interests issued by consolidated VIEs” are interest-bearing beneficial-interest liabilities issued by the consolidated VIEs, which increased as a result of the consolidation during the second quarter of 2009 of a multi-seller conduit and a credit card loan securitization trust (Washington Mutual Master Trust). For additional information on Firm-sponsored VIEs and loan securitization trusts, see Off-Balance Sheet Arrangements and Contractual Cash Obligations below, and Note 16 on pages 206–214 of this Annual Report.
JPMorgan Chase uses VIEs to assist clients in accessing the financial markets in a cost-efficient manner. A VIE is consolidated if the Firm will absorb a majority of a VIE’s expected losses, receive a majority of a VIE’s expected residual returns, or both. Included in the caption “beneficial interests issued by consolidated VIEs” are interest-bearing beneficial-interest liabilities issued by the consolidated VIEs, which increased as a result of the consolidation during the second quarter of 2009 of a multi-seller conduit and a credit card loan securitization trust (Washington Mutual Master Trust). For additional information on Firm-sponsored VIEs and loan securitization trusts, see Off-Balance Sheet Arrangements and Contractual Cash Obligations below, and Note 16 on pages 206–214 of this Annual Report.
The Firm uses long-term debt (including trust preferred capital debt securities) to provide cost-effective and diversified sources of funds and as critical components of the Firm’s liquidity and capital management activities. Long-term debt decreased slightly, predominantly due to net redemptions and maturities. The Firm also issued $11.0 billion and $2.6 billion of non-FDIC guaranteed debt in the U.S. and European markets, respectively, and $2.5 billion of trust preferred capital debt securities. For additional information on the Firm’s long-term debt activities, see the Liquidity Risk Management discussion on pages 88–92 of this Annual Report.
Stockholders’ equity
The decrease in total stockholders’ equity was largely due to the redemption in the second quarter of 2009 of the $25.0 billion Series K Preferred Stock issued to the U.S. Treasury pursuant to TARP, and the declaration of cash dividends on preferred and common stock. The decrease was almost entirely offset by net income for 2009; the issuance of $5.8 billion of common equity in the public markets; a net increase in accumulated other comprehensive income, due primarily to net unrealized gains from overall market spread and market liquidity improvement, as well as changes in the composition of investments in the AFS securities portfolio; and net issuances under the Firm’s employee stock-based compensation plans. For a further discussion, see the Capital Management section on pages 82–85, Note 23 on pages 222–223 and Note 26 on page 225 of this Annual Report.
The decrease in total stockholders’ equity was largely due to the redemption in the second quarter of 2009 of the $25.0 billion Series K Preferred Stock issued to the U.S. Treasury pursuant to TARP, and the declaration of cash dividends on preferred and common stock. The decrease was almost entirely offset by net income for 2009; the issuance of $5.8 billion of common equity in the public markets; a net increase in accumulated other comprehensive income, due primarily to net unrealized gains from overall market spread and market liquidity improvement, as well as changes in the composition of investments in the AFS securities portfolio; and net issuances under the Firm’s employee stock-based compensation plans. For a further discussion, see the Capital Management section on pages 82–85, Note 23 on pages 222–223 and Note 26 on page 225 of this Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
JPMorgan Chase is
involved with several types of off-balance sheet arrangements, including special purpose entities
(“SPEs”) and lending-related financial instruments (e.g., commitments and guarantees).
Special-purpose entities
The basic SPE structure involves a company selling assets to the SPE. The SPE funds the purchase of
those assets by issuing securities to investors in the form of commercial paper, short-term
asset-backed notes, medium-term notes and other forms of interest. SPEs are generally structured to
insulate investors from claims on the SPE’s assets by creditors of other entities, including the
creditors of the seller of the assets.
SPEs are an important part of the financial markets, providing market liquidity by facilitating
investors’ access to specific portfolios of assets and risks. These arrangements are integral to
the markets for mortgage-backed securities, commercial paper and other asset-backed securities.
JPMorgan Chase uses SPEs as a source of liquidity for itself and its clients by securitizing
financial assets, and by creating investment products for clients. The Firm is involved with SPEs
through multi-seller conduits and investor intermediation activities, and as a result
of its loan
securitizations, through qualifying special purpose entities (“QSPEs”). This discussion focuses
mostly on multi-seller conduits and investor intermediation. For a detailed discussion of all SPEs
with which the Firm is involved, and the related accounting, see Note 1, Note 15 and Note 16 on
pages 142–143, 198–205 and 206–214, respectively, of this Annual Report.
During the quarter ended June 30, 2009, the Firm took certain actions related to both the Chase
Issuance Trust (the “Trust”) and the Washington Mutual Master Trust (the “WMM Trust”). These
actions and their impact on the Firm’s Consolidated Balance Sheets and results of operations are
further discussed in Note 15 on pages 198–205 of this Annual Report.
The Firm holds capital, as deemed appropriate, against all SPE-related transactions and related
exposures, such as derivative transactions and lending-related commitments and guarantees.
The Firm modifies loans that it services, and that were sold to off-balance sheet SPEs, pursuant to
the U.S. Treasury’s Making Home Affordable (“MHA”) programs and the Firm’s other loss mitigation
programs. For both the Firm’s on-balance sheet loans and loans serviced for others, approximately
600,000 mortgage modifications had been offered to borrowers in 2009. Of these, 89,000 have
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achieved permanent modification. Substantially all of the loans contractually modified to date were
modified under the Firm’s other loss mitigation programs. See Consumer Credit Portfolio on pages
106–115 of this Annual Report for more details on these loan modifications.
The Firm has no commitments to issue its own stock to support any SPE transaction, and its policies
require that transactions with SPEs be conducted at arm’s length and reflect market pricing.
Consistent with this policy, no JPMorgan Chase employee is permitted to invest in SPEs with which
the Firm is involved where such investment would violate the Firm’s Code of Conduct. These rules
prohibit employees from self-dealing and acting on behalf of the Firm in transactions with which
they or their family have any significant financial interest.
Implications of a credit rating downgrade to JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A., was downgraded below specific levels, primarily “P-1”, “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $34.2 billion and $61.0 billion at December 31, 2009 and 2008, respectively. Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitment or, in certain circumstances, the Firm could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity. The Firm’s liquidity commitments to SPEs are included in other unfunded commitments to extend credit and asset purchase agreements, as shown in the Off-balance sheet lending-related financial instruments and guarantees table on page 81 of this Annual Report.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A., was downgraded below specific levels, primarily “P-1”, “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $34.2 billion and $61.0 billion at December 31, 2009 and 2008, respectively. Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitment or, in certain circumstances, the Firm could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity. The Firm’s liquidity commitments to SPEs are included in other unfunded commitments to extend credit and asset purchase agreements, as shown in the Off-balance sheet lending-related financial instruments and guarantees table on page 81 of this Annual Report.
As noted above, the Firm is involved with three types of SPEs: multi-seller conduits, investor
intermediation, and its own loan securitization activities. A summary of each type of SPE follows.
Multi-seller conduits
The Firm helps customers meet their financing needs by providing access to the commercial paper markets through VIEs known as multi-seller conduits. Multi-seller conduit entities are separate bankruptcy-remote entities that purchase interests in, and make loans secured by, pools of receivables and other financial assets pursuant to agreements with customers of the Firm. The conduits fund their purchases and loans through the issuance of highly-rated commercial paper to third-party investors. The primary source of repayment of the commercial paper is the cash flow from the pools of assets. JPMorgan Chase receives fees related to the structuring of multi-seller conduit transactions and receives compensation from the multi-seller conduits for its role as administrative agent, liquidity provider, and provider of program-wide credit enhancement.
The Firm helps customers meet their financing needs by providing access to the commercial paper markets through VIEs known as multi-seller conduits. Multi-seller conduit entities are separate bankruptcy-remote entities that purchase interests in, and make loans secured by, pools of receivables and other financial assets pursuant to agreements with customers of the Firm. The conduits fund their purchases and loans through the issuance of highly-rated commercial paper to third-party investors. The primary source of repayment of the commercial paper is the cash flow from the pools of assets. JPMorgan Chase receives fees related to the structuring of multi-seller conduit transactions and receives compensation from the multi-seller conduits for its role as administrative agent, liquidity provider, and provider of program-wide credit enhancement.
Investor intermediation
As a financial intermediary, the Firm creates certain types of VIEs and also structures transactions, typically derivative structures, with these VIEs to meet investor needs. The Firm may also provide liquidity and other support. 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 principal types of VIEs the Firm uses in these structuring activities are municipal bond vehicles, credit-linked note vehicles, asset swap vehicles and collateralized debt obligation vehicles.
As a financial intermediary, the Firm creates certain types of VIEs and also structures transactions, typically derivative structures, with these VIEs to meet investor needs. The Firm may also provide liquidity and other support. 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 principal types of VIEs the Firm uses in these structuring activities are municipal bond vehicles, credit-linked note vehicles, asset swap vehicles and collateralized debt obligation vehicles.
Loan securitizations
JPMorgan Chase securitizes and sells a variety of loans, including residential mortgages, credit cards, automobile, student, and commercial loans (primarily related to real estate). JPMorgan Chase-sponsored securitizations utilize SPEs as part of the securitization process. These SPEs were structured to meet the definition of a QSPE (as discussed in Note 1 on pages 142–143 of this Annual Report); accordingly, the assets and liabilities of securitization-related QSPEs were not reflected on the Firm’s Consolidated Balance Sheets (except for retained interests, as described below) as of December 31, 2009. The primary purpose of these vehicles is to meet investor needs and generate liquidity for the Firm through the sale of loans to the QSPEs. These QSPEs are financed through the issuance of fixed- or floating-rate asset-backed securities that are sold to third-party investors or held by the Firm. For a discussion regarding the new consolidation guidance for VIEs including securitization entities, see “Accounting for transfers of financial assets and consolidation of variable interest entities” on page 133 of this Annual Report.
JPMorgan Chase securitizes and sells a variety of loans, including residential mortgages, credit cards, automobile, student, and commercial loans (primarily related to real estate). JPMorgan Chase-sponsored securitizations utilize SPEs as part of the securitization process. These SPEs were structured to meet the definition of a QSPE (as discussed in Note 1 on pages 142–143 of this Annual Report); accordingly, the assets and liabilities of securitization-related QSPEs were not reflected on the Firm’s Consolidated Balance Sheets (except for retained interests, as described below) as of December 31, 2009. The primary purpose of these vehicles is to meet investor needs and generate liquidity for the Firm through the sale of loans to the QSPEs. These QSPEs are financed through the issuance of fixed- or floating-rate asset-backed securities that are sold to third-party investors or held by the Firm. For a discussion regarding the new consolidation guidance for VIEs including securitization entities, see “Accounting for transfers of financial assets and consolidation of variable interest entities” on page 133 of this Annual Report.
Special-purpose entities revenue
The following table summarizes certain revenue information related to consolidated and nonconsolidated VIEs and QSPEs with which the Firm has significant involvement. The revenue reported in the table below primarily represents contractual servicing and credit fee income (i.e., for income from acting as administrator, structurer, liquidity provider). It does not include mark-to-market gains and losses from changes in the fair value of trading positions (such as derivative transactions) entered into with VIEs. Those gains and losses are recorded in principal transactions revenue.
The following table summarizes certain revenue information related to consolidated and nonconsolidated VIEs and QSPEs with which the Firm has significant involvement. The revenue reported in the table below primarily represents contractual servicing and credit fee income (i.e., for income from acting as administrator, structurer, liquidity provider). It does not include mark-to-market gains and losses from changes in the fair value of trading positions (such as derivative transactions) entered into with VIEs. Those gains and losses are recorded in principal transactions revenue.
Revenue from VIEs and Securitization Entities
(a)
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Multi-seller conduits
|
$ | 460 | $ | 314 | $ | 187 | (c) | |||||
|
Investor intermediation
|
34 | 22 | 33 | |||||||||
|
QSPEs and other securitization entities
(b)
|
2,510 | 1,742 | 1,420 | |||||||||
|
Total
|
$ | 3,004 | $ | 2,078 | $ | 1,640 | ||||||
| (a) | Includes revenue associated with both consolidated VIEs and significant nonconsolidated VIEs. | |
| (b) | Excludes servicing revenue from loans sold to and securitized by third parties. | |
| (c) | Excludes the markdown on subprime CDO assets that was recorded in principal transactions revenue in 2007. |
| JPMorgan Chase & Co. / 2009 Annual Report | 79 |
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Management’s discussion and analysis
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 upon the commitment or the
Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently
fail to perform according to the terms of the contract. These commitments and guarantees often
expire without being drawn and even higher proportions expire without a default. As a result, the
total contractual amount of these instruments is not, in the Firm’s view, representative of its
actual future credit exposure or funding requirements. For further discussion of lending-related
commitments and guarantees and the Firm’s accounting for them, see page 105 and Note 31 on pages
230–234 of this Annual Report.
The accompanying table on the next page presents, as of December 31, 2009, the contractual maturity
amounts of off-balance sheet lending-related financial instruments and guarantees. The amounts in
the table for credit card and home equity lending-related commitments represent the total available
credit for these products. The Firm has not experienced, and does not anticipate, that all
available lines of credit for these products would be utilized at the same time. The Firm can
reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases,
without notice as permitted by law. The accompanying table excludes certain commitments and
guarantees that do not have a contractual maturity date (e.g., loan sale and securitization-related
indemnifications). For further discussion, see Note 31 on pages 230–234 of this Annual Report.
Asset purchase agreements are agreements with the Firm’s administered multi-seller, asset-backed
commercial paper conduits, and other third-party entities. In 2009, the Firm consolidated a
multi-seller conduit due to the redemption of the
expected loss note. As a result, asset purchase
agreements, in the following table, exclude $7.9 billion at December 31, 2009, related to this
consolidated multi-seller conduit. The maturities, in the accompanying table, are based on the
weighted-average life of the underlying assets in the SPE, which are based on the remainder of each
conduit transaction’s committed liquidity facility plus either the expected weighted average life
of the assets should the committed liquidity facility expire without renewal, or the expected time
to sell the underlying assets in the securitization market.
Contractual cash obligations
In the normal course of business, the Firm enters into various contractual obligations that may
require future cash payments. Commitments for future cash expenditures primarily include contracts
to purchase future services and capital expenditures related to real estate-related obligations and
equipment.
The accompanying table on the next page summarizes, by remaining maturity, JPMorgan Chase’s
off-balance sheet lending-related financial instruments and significant contractual cash
obligations at December 31, 2009. Contractual purchases and capital expenditures in the table below
reflect the minimum contractual obligation under legally enforceable contracts with terms that are
both fixed and determinable. Excluded from the following table are a number of obligations to be
settled in cash, primarily in under one year. These obligations are reflected on the Firm’s
Consolidated Balance Sheets and include federal funds purchased and securities loaned or sold under
repurchase agreements; commercial paper; other borrowed funds; purchases of debt and equity
instruments; derivative payables; and certain purchases of instruments that resulted in settlement
failures. Also excluded are contingent payments associated with certain acquisitions that could not
be estimated. For discussion regarding long-term debt (including trust preferred capital debt
securities), see Note 22 on pages 220–221 of this Annual Report. For discussion regarding operating
leases, see Note 30 on page 230 of this Annual Report.
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The following table presents maturity information for off-balance sheet lending-related financial
instruments, guarantees and other commitments.
Off-balance sheet lending-related financial instruments, guarantees and other commitments
| By remaining maturity at December 31, | 2009 | 2008 | ||||||||||||||||||||||
| (in millions) | 2010 | 2011-2012 | 2013-2014 | After 2014 | Total | Total | ||||||||||||||||||
|
Lending-related
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
Home equity – senior lien
|
$ | 293 | $ | 1,650 | $ | 5,603 | $ | 11,700 | $ | 19,246 | $ | 27,998 | ||||||||||||
|
Home equity – junior lien
|
647 | 3,998 | 12,050 | 20,536 | 37,231 | 67,745 | ||||||||||||||||||
|
Prime mortgage
|
1,654 | — | — | — | 1,654 | 5,079 | ||||||||||||||||||
|
Subprime mortgage
|
— | — | — | — | — | — | ||||||||||||||||||
|
Option ARMs
|
— | — | — | — | — | — | ||||||||||||||||||
|
Auto loans
|
5,380 | 84 | 3 | — | 5,467 | 4,726 | ||||||||||||||||||
|
Credit card
|
569,113 | — | — | — | 569,113 | 623,702 | ||||||||||||||||||
|
All other loans
|
9,907 | 207 | 109 | 1,006 | 11,229 | 12,257 | ||||||||||||||||||
|
Total consumer
|
586,994 | 5,939 | 17,765 | 33,242 | 643,940 | 741,507 | ||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||||||
|
Other unfunded commitments to extend credit
(a)
|
71,855 | 94,977 | 20,728 | 4,585 | 192,145 | 189,563 | ||||||||||||||||||
|
Asset purchase agreements
|
8,659 | 11,134 | 2,755 | 137 | 22,685 | 53,729 | ||||||||||||||||||
|
Standby letters of credit and financial guarantees
(a)(b)(c)
|
25,568 | 47,203 | 16,349 | 2,365 | 91,485 | 95,352 | ||||||||||||||||||
|
Unused advised lines of credit
|
31,826 | 3,569 | 62 | 216 | 35,673 | 36,300 | ||||||||||||||||||
|
Other letters of credit
(a)(b)
|
3,713 | 1,183 | 255 | 16 | 5,167 | 4,927 | ||||||||||||||||||
|
Total wholesale
|
141,621 | 158,066 | 40,149 | 7,319 | 347,155 | 379,871 | ||||||||||||||||||
|
Total lending-related
|
$ | 728,615 | $ | 164,005 | $ | 57,914 | $ | 40,561 | $ | 991,095 | $ | 1,121,378 | ||||||||||||
|
Other guarantees
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Securities lending guarantees
(d)
|
$ | 170,777 | $ | — | $ | — | $ | — | $ | 170,777 | $ | 169,281 | ||||||||||||
|
Residual value guarantees
|
670 | 1 | 1 | — | 672 | 670 | ||||||||||||||||||
|
Derivatives qualifying as guarantees
(e)
|
20,310 | 18,608 | 8,759 | 39,514 | 87,191 | 83,835 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Contractual cash obligations
|
||||||||||||||||||||||||
|
By remaining maturity at December 31,
|
||||||||||||||||||||||||
|
(in millions)
|
||||||||||||||||||||||||
|
Time deposits
|
$ | 211,377 | $ | 14,479 | $ | 4,865 | $ | 938 | $ | 231,659 | $ | 299,101 | ||||||||||||
|
Advances from the Federal Home Loan Banks
|
23,597 | 2,583 | 741 | 926 | 27,847 | 70,187 | ||||||||||||||||||
|
Long-term debt
|
37,075 | 95,915 | 42,805 | 90,523 | 266,318 | 270,683 | ||||||||||||||||||
|
Long-term beneficial interests
(f)
|
3,957 | 2,515 | 407 | 3,559 | 10,438 | 10,561 | ||||||||||||||||||
|
Operating leases
(g)
|
1,652 | 3,179 | 2,857 | 8,264 | 15,952 | 16,868 | ||||||||||||||||||
|
Equity investment commitments
(h)
|
1,477 | 2 | — | 895 | 2,374 | 2,424 | ||||||||||||||||||
|
Contractual purchases and capital expenditures
|
2,005 | 862 | 419 | 488 | 3,774 | 2,687 | ||||||||||||||||||
|
Obligations under affinity and co-brand programs
|
1,091 | 2,144 | 1,604 | 2,059 | 6,898 | 8,138 | ||||||||||||||||||
|
Other liabilities
(i)
|
906 | 891 | 873 | 2,690 | 5,360 | 5,005 | ||||||||||||||||||
|
Total
|
$ | 283,137 | $ | 122,570 | $ | 54,571 | $ | 110,342 | $ | 570,620 | $ | 685,654 | ||||||||||||
| (a) | Represents the contractual amount net of risk participations totaling $24.6 billion and $26.4 billion for standby letters of credit and other financial guarantees at December 31, 2009 and 2008, respectively, $690 million and $1.1 billion for other letters of credit at December 31, 2009 and 2008, respectively, and $643 million and $789 million for other unfunded commitments to extend credit at December 31, 2009 and 2008, respectively. In regulatory filings with the Federal Reserve Board these commitments are shown gross of risk participations. | |
| (b) | JPMorgan Chase held collateral relating to $31.5 billion and $31.0 billion of standby letters of credit, respectively, and $1.3 billion and $1.0 billion of other letters of credit at December 31, 2009 and 2008, respectively. | |
| (c) | Includes unissued standby letters-of-credit commitments of $38.4 billion and $39.5 billion at December 31, 2009 and 2008, respectively. | |
| (d) | Collateral held by the Firm in support of securities lending indemnification agreements was $173.2 billion and $170.1 billion at December 31, 2009 and 2008, respectively. Securities lending collateral comprises primarily cash, and securities issued by governments that are members of the Organisation for Economic Co-operation and Development (“OECD”) and U.S. government agencies. | |
| (e) | Represents notional amounts of derivatives qualifying as guarantees. For further discussion of guarantees, see Note 5 on pages 167–175 and Note 31 on pages 230–234 of this Annual Report. | |
| (f) | Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated variable interest entities. | |
| (g) | Includes noncancelable operating leases for premises and equipment used primarily for banking purposes and for energy-related tolling service agreements. Excludes the benefit of noncancelable sublease rentals of $1.8 billion and $2.3 billion at December 31, 2009 and 2008, respectively. | |
| (h) | Includes unfunded commitments to third-party private equity funds of $1.5 billion and $1.4 billion at December 31, 2009 and 2008, respectively. Also includes unfunded commitments for other equity investments of $897 million and $1.0 billion at December 31, 2009 and 2008, respectively. These commitments include $1.5 billion at December 31, 2009, related to investments that are generally fair valued at net asset value as discussed in Note 3 on pages 148–165 of this Annual Report. | |
| (i) | Includes deferred annuity contracts. Excluded contributions to the U.S. pension and other postretirement benefits plans, as these contributions are not reasonably estimable at this time. Also excluded are unrecognized tax benefits of $6.6 billion and $5.9 billion at December 31, 2009 and 2008, respectively, as the timing and amount of future cash payments are not determinable at this time. |
| JPMorgan Chase & Co. / 2009 Annual Report | 81 |
Table of Contents
Management’s discussion and analysis
CAPITAL MANAGEMENT
A strong capital position is essential to the Firm’s business strategy and competitive
position. The Firm’s capital strategy focuses on long-term stability, which enables it to build and
invest in market-leading businesses, even in a highly stressed environment. Senior management
considers the implications on the Firm’s capital strength prior to making any decision on future
business activities. In addition to considering the Firm’s earnings outlook, senior management
evaluates all sources and uses of capital and makes decisions to vary any source or use to preserve
the Firm’s capital strength.
The Firm’s capital management objectives are to hold capital sufficient to:
| • | Cover all material risks underlying the Firm’s business activities; | |
| • | Maintain “well-capitalized” status under regulatory requirements; | |
| • | Achieve debt rating targets; | |
| • | Remain flexible to take advantage of future opportunities; and | |
| • | Build and invest in businesses, even in a highly stressed environment. |
The quality and composition of capital are key factors in senior management’s evaluation of the
Firm’s capital adequacy. The Firm strongly emphasizes the quality of its capital and, accordingly,
holds a significant amount of its capital in the form of common equity. The Firm uses the following
three capital disciplines:
| • | Regulatory capital – The capital required according to standards stipulated by U.S. bank regulatory agencies. | |
| • | Economic risk capital – A bottoms-up assessment of the underlying risks of the Firm’s business activities, utilizing internal risk-assessment methodologies. | |
| • | Line of business equity – The amount the Firm believes each business segment would require if it were operating independently, which incorporates sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. |
Regulatory capital
The Federal Reserve establishes capital requirements, including well-capitalized standards for the
consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”)
establishes similar capital requirements and standards for the Firm’s national banks, including
JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
In connection with the U.S. Government’s Supervisory Capital Assessment Program in 2009, U.S.
banking regulators developed a new measure of capital, Tier 1 common capital, which is defined as
Tier 1 capital less elements of Tier 1 capital not in the form of common equity – such as perpetual
preferred stock, noncontrolling interests in subsidiaries and trust preferred capital debt
securities. Tier 1 common capital, a non-GAAP financial measure, is used by banking regulators,
investors and analysts to assess and compare the quality and composition of the Firm’s capital with
the capital of other financial services companies. The Firm uses Tier 1 common capital along with
the other capital measures presented below to assess and monitor its capital position.
The Federal Reserve granted the Firm, for a period of 18 months following the Bear Stearns merger,
relief up to a certain specified amount and subject to certain conditions from the Federal
Reserve’s risk-based capital and leverage requirements with respect to Bear Stearns’ risk-weighted
assets and other exposures acquired. The OCC granted JPMorgan Chase Bank, N.A. similar relief from
its risk-based capital and leverage requirements. The relief would have ended, by its terms, on September 30,
2009. Commencing in the second quarter of 2009, the Firm no longer adjusted its risk-based capital
ratios to take into account the relief in the calculation of its risk-based capital ratios as of
June 30, 2009.
JPMorgan Chase maintained Tier 1 and Total capital ratios at December 31, 2009 and 2008, in excess
of the well-capitalized standards established by the Federal Reserve, as indicated in the tables
below. In addition, the Firm’s Tier 1 common ratio was significantly above the 4% well-capitalized
standard that was established at the time of the Supervisory Capital Assessment Program. For more
information, see Note 29 on pages 228–229 of this Annual Report.
| Risk-based capital ratios | ||||||||
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Tier 1 capital
(a)
|
11.1 | % | 10.9 | % | ||||
|
Total capital
|
14.8 | 14.8 | ||||||
|
Tier 1 leverage
|
6.9 | 6.9 | ||||||
|
Tier 1 common
|
8.8 | 7.0 | ||||||
| (a) | On January 1, 2010, the Firm adopted new accounting standards which required the consolidation of the Firm’s credit card securitization trusts, bank-administered asset-backed commercial paper conduits, and certain mortgage and other consumer securitization entities. Refer to Note 16 on pages 206–214 of this Annual Report for additional information about the impact to the Firm of the new guidance. |
| 82 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
A reconciliation of Total stockholders’ equity to Tier 1 common capital, Tier 1 capital and Total
qualifying capital is presented in the table below:
Risk-based capital components and assets
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Tier 1 capital
|
||||||||
|
Tier 1 common capital:
|
||||||||
|
Total stockholders’ equity
|
$ | 165,365 | $ | 166,884 | ||||
|
Less: Preferred stock
|
8,152 | 31,939 | ||||||
|
Common stockholders’ equity
|
157,213 | 134,945 | ||||||
|
Effect of certain items in accumulated other comprehensive
income/(loss)
excluded from Tier 1 common equity
|
75 | 5,084 | ||||||
|
Less: Goodwill
(a)
|
46,630 | 46,417 | ||||||
|
Fair value DVA on derivative and
structured note liabilities related
to the Firm’s credit quality
|
912 | 2,358 | ||||||
|
Investments in certain subsidiaries
|
802 | 679 | ||||||
|
Other intangible assets
|
3,660 | 3,667 | ||||||
|
Tier 1 common capital
|
105,284 | 86,908 | ||||||
|
Preferred stock
|
8,152 | 31,939 | ||||||
|
Qualifying hybrid securities and noncontrolling interests
(b)
|
19,535 | 17,257 | ||||||
|
Total Tier 1 capital
|
132,971 | 136,104 | ||||||
|
Tier 2 capital
|
||||||||
|
Long-term debt and other instruments qualifying as Tier 2
capital
|
28,977 | 31,659 | ||||||
|
Qualifying allowance for credit losses
|
15,296 | 17,187 | ||||||
|
Adjustment for investments in certain subsidiaries and other
|
(171 | ) | (230 | ) | ||||
|
Total Tier 2 capital
|
44,102 | 48,616 | ||||||
|
Total qualifying capital
|
$ | 177,073 | $ | 184,720 | ||||
|
Risk-weighted assets
(c)
|
$ | 1,198,006 | $ | 1,244,659 | ||||
|
Total adjusted average assets
(d)
|
$ | 1,933,767 | $ | 1,966,895 | ||||
| (a) | Goodwill is net of any associated deferred tax liabilities. | |
| (b) | Primarily includes trust preferred capital debt securities of certain business trusts. | |
| (c) | Includes off-balance sheet risk-weighted assets at December 31, 2009 and 2008, of $367.4 billion and $357.5 billion, respectively. Risk-weighted assets are calculated in accordance with U.S. federal regulatory capital standards. | |
| (d) | Adjusted average assets, for purposes of calculating the leverage ratio, include total average assets adjusted for unrealized gains/(losses) on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital. |
The Firm’s Tier 1 common capital was $105.3 billion at December 31, 2009, compared with $86.9
billion at December 31, 2008, an increase of $18.4 billion. The increase was due to net income
(adjusted for DVA) of $13.2 billion, a $5.8 billion issuance of common stock in June 2009, and net
issuances of common stock under the Firm’s employee stock-based compensation plans of $2.7 billion.
The increase was partially offset by $2.1 billion of dividends on preferred and common stock and
the $1.1 billion one-time noncash adjustment to common stockholders’ equity related to the
redemption of the $25.0 billion Series K Preferred Stock issued to the U.S. Treasury under the
Capital Purchase Program. On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of
common stock to satisfy a regulatory condition requiring the Firm to demonstrate it could access
the equity capital markets in order to be eligible to redeem the Series K Preferred Stock issued to
the U.S. Treasury. The proceeds from this issuance were used for general corporate purposes.
The Firm’s Tier 1 capital was $133.0 billion at December 31, 2009, compared with $136.1 billion at
December 31, 2008, a decrease of $3.1 billion. The decrease in Tier 1 capital reflects the
redemption of the Series K Preferred Stock, partially offset by the increase in Tier 1 common
capital and $2.3 billion net issuances of qualifying trust preferred capital debt securities.
Additional information regarding the Firm’s regulatory capital ratios and the related federal
regulatory capital requirements and the capital ratios of the Firm’s significant banking
subsidiaries at December 31, 2009 and 2008, are presented in Note 29 on pages 228–229 of this
Annual Report.
Capital Purchase Program
Pursuant to the Capital Purchase Program, on October 28, 2008, the Firm issued to the U.S. Treasury, for total proceeds of $25.0 billion, (i) 2.5 million shares of Series K Preferred Stock, and (ii) a Warrant to purchase up to 88,401,697 shares of the Firm’s common stock, at an exercise price of $42.42 per share, subject to certain antidilution and other adjustments. On June 17, 2009, the Firm redeemed all of the outstanding shares of Series K Preferred Stock, and repaid the full $25.0 billion principal amount together with accrued dividends. The U.S. Treasury exchanged the Warrant for 88,401,697 warrants, each of which is a warrant to purchase a share of the Firm’s common stock at an exercise price of $42.42 per share and, on December 11, 2009, sold the warrants in a secondary public offering for $950 million. The Firm did not purchase any of the warrants sold by the U.S. Treasury.
Pursuant to the Capital Purchase Program, on October 28, 2008, the Firm issued to the U.S. Treasury, for total proceeds of $25.0 billion, (i) 2.5 million shares of Series K Preferred Stock, and (ii) a Warrant to purchase up to 88,401,697 shares of the Firm’s common stock, at an exercise price of $42.42 per share, subject to certain antidilution and other adjustments. On June 17, 2009, the Firm redeemed all of the outstanding shares of Series K Preferred Stock, and repaid the full $25.0 billion principal amount together with accrued dividends. The U.S. Treasury exchanged the Warrant for 88,401,697 warrants, each of which is a warrant to purchase a share of the Firm’s common stock at an exercise price of $42.42 per share and, on December 11, 2009, sold the warrants in a secondary public offering for $950 million. The Firm did not purchase any of the warrants sold by the U.S. Treasury.
Basel II
The minimum risk-based capital requirements adopted by the U.S. federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. In 2004, the Basel Committee published a revision to the Accord (“Basel II”). The goal of the new Basel II Framework is to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. U.S. banking regulators published a final Basel II rule in December 2007, which will require JPMorgan Chase to implement Basel II at the holding company level, as well as at certain of its key U.S. bank subsidiaries.
The minimum risk-based capital requirements adopted by the U.S. federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. In 2004, the Basel Committee published a revision to the Accord (“Basel II”). The goal of the new Basel II Framework is to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. U.S. banking regulators published a final Basel II rule in December 2007, which will require JPMorgan Chase to implement Basel II at the holding company level, as well as at certain of its key U.S. bank subsidiaries.
Prior to full implementation of the new Basel II Framework, JPMorgan Chase will be required to
complete a qualification period of four consecutive quarters during which it will need to
demonstrate that it meets the requirements of the new rule to the satisfaction of its primary U.S.
banking regulators. The U.S. implementation timetable consists of the qualification period,
starting no later than April 1, 2010, followed by a minimum transition period of three years.
During the transition period, Basel II risk-based capital requirements cannot fall below certain
floors based on current (“Basel l”) regulations. JPMorgan Chase expects to be in compliance with
all relevant Basel II rules within the established timelines. In addition, the Firm has adopted,
and will continue to adopt, based on various established timelines, Basel II rules in certain
non-U.S. jurisdictions, as required.
| JPMorgan Chase & Co. / 2009 Annual Report | 83 |
Table of Contents
Management’s discussion and analysis
Broker-dealer regulatory capital
JPMorgan Chase’s principal U.S. broker-dealer subsidiaries are J.P. Morgan Securities Inc. (“JPMorgan Securities”) and J.P. Morgan Clearing Corp. JPMorgan Securities and J.P. Morgan Clearing Corp. are each subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (“Net Capital Rule”). JPMorgan Securities and J.P. Morgan Clearing Corp. are also registered as futures commission merchants and subject to Rule 1.17 under the Commodity Futures Trading Commission (“CFTC”). J.P. Morgan Clearing Corp., a subsidiary of JPMorgan Securities, provides clearing and settlement services.
JPMorgan Chase’s principal U.S. broker-dealer subsidiaries are J.P. Morgan Securities Inc. (“JPMorgan Securities”) and J.P. Morgan Clearing Corp. JPMorgan Securities and J.P. Morgan Clearing Corp. are each subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (“Net Capital Rule”). JPMorgan Securities and J.P. Morgan Clearing Corp. are also registered as futures commission merchants and subject to Rule 1.17 under the Commodity Futures Trading Commission (“CFTC”). J.P. Morgan Clearing Corp., a subsidiary of JPMorgan Securities, provides clearing and settlement services.
JPMorgan Securities and J.P. Morgan Clearing Corp. have elected to compute their minimum net
capital requirements in accordance with the “Alternative Net Capital Requirements” of the Net
Capital Rule. At December 31, 2009, JPMorgan Securities’ net capital, as defined by the Net Capital
Rule, of
$7.4 billion exceeded the minimum requirement by $6.9 billion. J.P. Morgan Clearing Corp.’s net
capital of $5.2 billion exceeded the minimum requirement by $3.6 billion.
In addition to its minimum net capital requirement, JPMorgan Securities is required to hold
tentative net capital in excess of $1.0 billion and is also required to notify the Securities and
Exchange Commission (“SEC”) in the event that tentative net capital is less than $5.0 billion, in
accordance with the market and credit risk standards of Appendix E of the Net Capital Rule. As of
December 31, 2009, JPMorgan Securities had tentative net capital in excess of the minimum and
notification requirements.
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying its business
activities, using internal risk-assessment methodologies. The Firm measures economic capital
primarily based on four risk factors: credit, market, operational and private equity risk. The
growth in economic risk capital from 2008 was primarily driven by higher credit risk capital within
the consumer businesses, due to the full year effect of the Washington Mutual transaction and
revised performance data in light of the recent weak economic environment.
| Economic risk capital | Yearly Average | |||||||
| (in billions) | 2009 | 2008 | ||||||
|
Credit risk
|
$ | 51.3 | $ | 37.8 | ||||
|
Market risk
|
15.4 | 10.5 | ||||||
|
Operational risk
|
8.5 | 6.3 | ||||||
|
Private equity risk
|
4.7 | 5.3 | ||||||
|
Economic risk capital
|
79.9 | 59.9 | ||||||
|
Goodwill
|
48.3 | 46.1 | ||||||
|
Other
(a)
|
17.7 | 23.1 | ||||||
|
Total common stockholders’ equity
|
$ | 145.9 | $ | 129.1 | ||||
| (a) | Reflects additional capital required, in the Firm’s view, to meet its regulatory and debt rating objectives. |
Credit risk capital
Credit risk capital is estimated separately for the wholesale businesses (IB, CB, TSS and AM) and consumer businesses (RFS and CS).
Credit risk capital is estimated separately for the wholesale businesses (IB, CB, TSS and AM) and consumer businesses (RFS and CS).
Credit risk capital for the overall wholesale credit portfolio is defined in terms of unexpected
credit losses, both from defaults and
declines in the portfolio value due to credit deterioration,
measured over a one-year period at a confidence level consistent with an “AA” credit rating
standard. Unexpected losses are losses in excess of those for which allowance for credit losses are
maintained. The capital methodology is based on several principal drivers of credit risk: exposure
at default (or loan-equivalent amount), default likelihood, credit spreads, loss severity and
portfolio correlation.
Credit risk capital for the consumer portfolio is based on product and other relevant risk
segmentation. Actual segment level default and severity experience are used to estimate unexpected
losses for a one-year horizon at a confidence level consistent with an “AA” credit rating standard.
Results for certain segments or portfolios are derived from available benchmarks and are not
model-driven.
Market risk capital
The Firm calculates market risk capital guided by the principle that capital should reflect the risk of loss in the value of portfolios and financial instruments caused by adverse movements in market variables, such as interest and foreign exchange rates, credit spreads, securities prices and commodities prices, taking into account the liquidity of the financial instruments. Results from daily VaR, biweekly stress-test, issuer credit spread and default risk calculations as well as other factors are used to determine appropriate capital levels. Market risk capital is allocated to each business segment based on its risk contribution. See Market Risk Management on pages 118–124 of this Annual Report for more information about these market risk measures.
The Firm calculates market risk capital guided by the principle that capital should reflect the risk of loss in the value of portfolios and financial instruments caused by adverse movements in market variables, such as interest and foreign exchange rates, credit spreads, securities prices and commodities prices, taking into account the liquidity of the financial instruments. Results from daily VaR, biweekly stress-test, issuer credit spread and default risk calculations as well as other factors are used to determine appropriate capital levels. Market risk capital is allocated to each business segment based on its risk contribution. See Market Risk Management on pages 118–124 of this Annual Report for more information about these market risk measures.
Operational risk capital
Capital is allocated to the lines of business for operational risk using a risk-based capital allocation methodology which estimates operational risk on a bottoms-up basis. The operational risk capital model is based on actual losses and potential scenario-based stress losses, with adjustments to the capital calculation to reflect changes in the quality of the control environment or the use of risk-transfer products. The Firm believes its model is consistent with the new Basel II Framework. See Operational Risk Management on page 125 of this Annual Report for more information about operational risk.
Capital is allocated to the lines of business for operational risk using a risk-based capital allocation methodology which estimates operational risk on a bottoms-up basis. The operational risk capital model is based on actual losses and potential scenario-based stress losses, with adjustments to the capital calculation to reflect changes in the quality of the control environment or the use of risk-transfer products. The Firm believes its model is consistent with the new Basel II Framework. See Operational Risk Management on page 125 of this Annual Report for more information about operational risk.
Private equity risk capital
Capital is allocated to privately- and publicly- held securities, third-party fund investments, and commitments in the private equity portfolio to cover the potential loss associated with a decline in equity markets and related asset devaluations. In addition to negative market fluctuations, potential losses in private equity investment portfolios can be magnified by liquidity risk. The capital allocation for the private equity portfolio is based on measurement of the loss experience suffered by the Firm and other market participants over a prolonged period of adverse equity market conditions.
Capital is allocated to privately- and publicly- held securities, third-party fund investments, and commitments in the private equity portfolio to cover the potential loss associated with a decline in equity markets and related asset devaluations. In addition to negative market fluctuations, potential losses in private equity investment portfolios can be magnified by liquidity risk. The capital allocation for the private equity portfolio is based on measurement of the loss experience suffered by the Firm and other market participants over a prolonged period of adverse equity market conditions.
Line of business equity
The Firm’s framework for allocating capital is based on the following objectives:
| • | Integrate firmwide capital management activities with capital management activities within each of the lines of business |
| 84 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| • | Measure performance consistently across all lines of business | |
| • | Provide comparability with peer firms for each of the lines of business |
Equity for a line of business represents the amount the Firm believes the business would require if
it were operating independently, incorporating sufficient capital to address economic risk
measures, regulatory capital requirements and capital levels for similarly rated peers. Capital is
also allocated to each line of business for, among other things, goodwill and other intangibles
associated with acquisitions effected by the line of business. Return on common equity is measured
and internal targets for expected returns are established as a key measure of a business segment’s
performance.
Relative to 2008, line of business equity remained largely unchanged during 2009.
| Line of business equity | ||||||||
| December 31, (in billions) | 2009 | 2008 | ||||||
|
Investment Bank
|
$ | 33.0 | $ | 33.0 | ||||
|
Retail Financial Services
|
25.0 | 25.0 | ||||||
|
Card Services
|
15.0 | 15.0 | ||||||
|
Commercial Banking
|
8.0 | 8.0 | ||||||
|
Treasury & Securities Services
|
5.0 | 4.5 | ||||||
|
Asset Management
|
7.0 | 7.0 | ||||||
|
Corporate/Private Equity
|
64.2 | 42.4 | ||||||
|
Total common stockholders’ equity
|
$ | 157.2 | $ | 134.9 | ||||
| Line of business equity | Yearly Average | |||||||
| (in billions) | 2009 | 2008 | ||||||
|
Investment Bank
|
$ | 33.0 | $ | 26.1 | ||||
|
Retail Financial Services
|
25.0 | 19.0 | ||||||
|
Card Services
|
15.0 | 14.3 | ||||||
|
Commercial Banking
|
8.0 | 7.3 | ||||||
|
Treasury & Securities Services
|
5.0 | 3.8 | ||||||
|
Asset Management
|
7.0 | 5.6 | ||||||
|
Corporate/Private Equity
|
52.9 | 53.0 | ||||||
|
Total common stockholders’ equity
|
$ | 145.9 | $ | 129.1 | ||||
In 2010, the Firm will enhance its line of business equity framework to better align equity
assigned to each line of business with the anticipated changes in the business, as well as changes
in the competitive and regulatory landscape. The lines of business will be capitalized based on the
Tier 1 common standard, rather than the Tier 1 Capital standard.
Capital actions
Dividends
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009. The action enabled the Firm to retain approximately $5 billion in common equity during 2009, and was taken to ensure the Firm had sufficient capital strength in the event the very weak economic conditions that existed at the beginning of the year further deteriorated.
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009. The action enabled the Firm to retain approximately $5 billion in common equity during 2009, and was taken to ensure the Firm had sufficient capital strength in the event the very weak economic conditions that existed at the beginning of the year further deteriorated.
For information regarding dividend restrictions, see Note 23 and Note 28 on pages 222–223 and 228,
respectively, of this Annual Report.
The following table shows the common dividend payout ratio based on reported net income.
| Common dividend payout ratio | ||||||||||||
| Year ended December 31, | 2009 | 2008 | 2007 | |||||||||
|
Common dividend payout ratio
|
9 | % | 114 | % | 34 | % | ||||||
Issuance
On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of common stock at $35.25 per share. On September 30, 2008, the Firm issued $11.5 billion, or 284 million shares, of common stock at $40.50 per share. The proceeds from these issuances were used for general corporate purposes. For additional information regarding common stock, see Note 24 on pages 223–224 of this Annual Report.
On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of common stock at $35.25 per share. On September 30, 2008, the Firm issued $11.5 billion, or 284 million shares, of common stock at $40.50 per share. The proceeds from these issuances were used for general corporate purposes. For additional information regarding common stock, see Note 24 on pages 223–224 of this Annual Report.
Stock repurchases
In April 2007, the Board of Directors approved a stock repurchase program that authorizes the repurchase of up to $10.0 billion of the Firm’s common shares. In connection with the U.S. Treasury’s sale of the warrants it received as part of the Capital Purchase Program, the Board of Directors amended the Firm’s securities repurchase program to authorize the repurchase of warrants for its stock. During the years ended December 31, 2009 and 2008, the Firm did not repurchase any shares of its common stock. As of December 31, 2009, $6.2 billion of authorized repurchase capacity remained under the repurchase program with respect to repurchases of common stock, and all the authorized repurchase capacity remained with respect to the warrants.
In April 2007, the Board of Directors approved a stock repurchase program that authorizes the repurchase of up to $10.0 billion of the Firm’s common shares. In connection with the U.S. Treasury’s sale of the warrants it received as part of the Capital Purchase Program, the Board of Directors amended the Firm’s securities repurchase program to authorize the repurchase of warrants for its stock. During the years ended December 31, 2009 and 2008, the Firm did not repurchase any shares of its common stock. As of December 31, 2009, $6.2 billion of authorized repurchase capacity remained under the repurchase program with respect to repurchases of common stock, and all the authorized repurchase capacity remained with respect to the warrants.
The authorization to repurchase common stock and warrants will be utilized at management’s
discretion, and the timing of purchases and the exact number of shares and warrants purchased is
subject to various factors, including market conditions; legal considerations affecting the amount
and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and
intangibles); internal capital generation; and alternative potential investment opportunities. The
repurchase program does not include specific price targets or timetables, may be executed through
open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and
may be suspended at any time. A Rule 10b5-1 repurchase plan allows the Firm to repurchase its
equity during periods when it would not otherwise be repurchasing common stock – for example,
during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be made
according to a predefined plan that is established when the Firm is not aware of material nonpublic
information.
For additional information regarding repurchases of the Firm’s equity securities, see Part II,
Item 5, Market for registrant’s common equity, related stockholder matters and issuer
purchases of equity securities, on page 18 of JPMorgan Chase’s 2009 Form 10-K.
| JPMorgan Chase & Co. / 2009 Annual Report | 85 |
Table of Contents
Management’s discussion and analysis
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chase’s business activities and the Firm’s overall
risk tolerance is established in the context of the Firm’s earnings power, capital, and diversified
business model. The Firm’s risk management framework and governance structure are intended to
provide comprehensive controls and ongoing management of the major risks inherent in its business
activities. It is also intended to create a culture of risk awareness and personal responsibility
throughout the Firm. The Firm’s ability to properly identify, measure, monitor and report risk is
critical to both its soundness and profitability.
| • | Risk identification: The Firm’s exposure to risk through its daily business dealings, including lending, trading and capital markets activities, is identified and aggregated through the Firm’s risk management infrastructure. In addition, individuals who manage risk positions, particularly those that are complex, are responsible for identifying and estimating potential losses that could arise from specific or unusual events that may not be captured in other models, and those risks are communicated to senior management. | |
| • | Risk measurement: The Firm measures risk using a variety of methodologies, including calculating probable loss, unexpected loss and value-at-risk, and by conducting stress tests and making comparisons to external benchmarks. Measurement models and related assumptions are routinely reviewed with the goal of ensuring that the Firm’s risk estimates are reasonable and reflect underlying positions. | |
| • | Risk monitoring/control: The Firm’s risk management policies and procedures incorporate risk mitigation strategies and include approval limits by customer, product, industry, country and business. These limits are monitored on a daily, weekly and monthly basis, as appropriate. | |
| • | Risk reporting: Executed on both a line of business and a consolidated basis. This information is reported to management on a daily, weekly and monthly basis, as appropriate. There are eight major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, private equity risk, operational risk, legal and fiduciary risk, and reputation risk. |
Risk governance
The Firm’s risk governance structure starts with each line of business being responsible for
managing its own risks. Each line of business works closely with Risk Management through its own
risk committee and its own chief risk officer to manage its risk. Each line of business risk
committee is responsible for decisions regarding the business’ risk strategy, policies and
controls. The Firm’s Chief Risk Officer is a member of the line of business risk committees.
Overlaying the line of business risk management are four corporate functions with risk
management–related responsibilities, including the Chief Investment Office, Corporate Treasury,
Legal and Compliance and Risk Management.
Risk Management is headed by the Firm’s Chief Risk Officer, who is a member of the Firm’s Operating
Committee and who reports to the Chief Executive Officer and the Board of Directors, primarily
through the Board’s Risk Policy Committee. Risk Management is responsible for providing an
independent firmwide function of risk management and controls. Within the Firm’s Risk Management
function are units responsible for credit risk, market risk, operational risk and private equity
risk, as well as risk reporting, risk policy and risk technology and operations. Risk technology
and operations is responsible for building the information technology infrastructure used to
monitor and manage risk.
The Chief Investment Office and Corporate Treasury are responsible for measuring, monitoring,
reporting and managing the Firm’s liquidity, interest rate and foreign exchange risk.
Legal and Compliance has oversight for legal and fiduciary risk.
In addition to the risk committees of the lines of business and the above-referenced risk
management functions, the Firm also has an Investment Committee, an Asset-Liability Committee and
three other risk-related committees – the Risk Working Group, the Global Counterparty Committee and
the Markets Committee. All of these committees are accountable to the Operating Committee which is involved in
setting the Firm’s overall risk appetite. The membership of these committees are composed of senior
management of the Firm, including representatives of lines of business, Risk Management, Finance
and other senior executives. The committees meet frequently to discuss a broad range of topics
including, for example, current market conditions and other external events, risk exposures, and
risk concentrations to ensure that the impact of risk factors are considered broadly across the
Firm’s businesses.
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| Operating Committee Asset-Liability Investment Risk Working Markets Global Counterparty Committee (ALCO) Committee Group (RWG) Committee Committee Card Commercial Asset Investment RFS Services Banking TSS Management CIO Bank Risk Risk Risk Risk Risk Risk Risk Committee Committee Committee Committ ee Committee Committee Committee Corporate Treasury and Chief Investment Office (Liquidity, Interest Rate and Foreign Exchange Risk) Risk Management (Market, Credit, Operational and Private Equity Risk) Legal and Compliance (Legal and Fiduciary Risk) |
The Asset-Liability Committee monitors the Firm’s overall interest rate risk and liquidity
risk. ALCO is responsible for reviewing and approving the Firm’s liquidity policy and contingency
funding plan. ALCO also reviews the Firm’s funds transfer pricing policy (through which lines of
business “transfer” interest rate and foreign exchange risk to Corporate Treasury in the
Corporate/Private Equity segment), earnings at risk, overall interest rate position, funding
requirements and strategy, and the Firm’s securitization programs (and any required liquidity
support by the Firm of such programs).
The Investment Committee, chaired by the Firm’s Chief Financial Officer, oversees global merger
and acquisition activities undertaken by JPMorgan Chase for its own account that fall outside the
scope of the Firm’s private equity and other principal finance activities.
The Risk Working Group is chaired by the Firm’s Chief Risk Officer and meets monthly to review
issues that cross lines of business such as risk policy, risk methodology, Basel II and other
regulatory issues, and such other topics referred to it by line-of-business risk committees or the
Firm’s Chief Risk Officer.
The Markets Committee, chaired by the Chief Risk Officer, meets weekly to review, monitor and
discuss significant risk matters, which may include credit, market and operational risk issues;
market moving events; large transactions; hedging strategies; reputation risk; conflicts of
interest; and other issues.
The Global Counterparty Committee designates to the Chief Risk Officer of the Firm certain
counterparties with which the Firm may trade at exposure levels above portfolio-established
thresholds when deemed appropriate to support the Firm’s trading activities. The Committee meets
quarterly to review total exposures with these counterparties, with particular focus on
counterparty trading exposures, and to direct changes in exposure levels as needed.
The Board of Directors exercises its oversight of risk management, principally through the Board’s
Risk Policy Committee and Audit Committee. The Risk Policy Committee oversees senior management
risk-related responsibilities, including reviewing management policies and performance against
these policies and related benchmarks. The Audit Committee is responsible for oversight of
guidelines and policies that govern the process by which risk assessment and management is
undertaken. In addition, the Audit Committee reviews with management the system of internal
controls and financial reporting that is relied upon to provide reasonable assurance of compliance
with the Firm’s operational risk management processes.
| JPMorgan Chase & Co. / 2009 Annual Report | 87 |
Table of Contents
Management’s discussion and analysis
LIQUIDITY RISK MANAGEMENT
The ability to maintain a sufficient level of liquidity is crucial to financial services
companies, particularly their ability to maintain appropriate levels of liquidity during periods of
adverse conditions. JPMorgan Chase’s primary sources of liquidity include a diversified deposit
base and access to the long-term debt (including trust preferred capital debt securities) and
equity capital markets. The Firm’s funding strategy is intended to ensure liquidity and diversity
of funding sources to meet actual and contingent liabilities during both normal and stress periods.
Consistent with this strategy, JPMorgan Chase maintains large pools of highly liquid unencumbered
assets and significant sources of secured funding, and monitors its capacity in the wholesale
funding markets across various geographic regions and in various currencies. The Firm also
maintains access to secured funding capacity through overnight borrowings from various central
banks. Throughout the recent financial crisis, the Firm successfully raised both secured and
unsecured funding.
Governance
The Firm’s governance process is designed to ensure that its liquidity position remains strong. The
Asset-Liability Committee reviews and approves the Firm’s liquidity policy and contingency funding
plan. Corporate Treasury formulates and is responsible for executing the Firm’s liquidity policy
and contingency funding plan as well as measuring, monitoring, reporting and managing the Firm’s
liquidity risk profile. JPMorgan Chase uses a centralized approach for liquidity risk management to
maximize liquidity access, minimize funding costs and permit identification and coordination of
global liquidity risk. This approach involves frequent communication with the business segments,
disciplined management of liquidity at the parent holding company, comprehensive market-based
pricing of all assets and liabilities, continuous balance sheet management, frequent stress testing
of liquidity sources, and frequent reporting to and communication with senior management and the
Board of Directors regarding the Firm’s liquidity position.
Liquidity monitoring
The Firm monitors liquidity trends, tracks historical and prospective on- and off-balance sheet
liquidity obligations, identifies and measures internal and external liquidity warning signals to
permit early detection of liquidity issues, and manages contingency planning (including
identification and testing of various company-specific and market-driven stress scenarios). Various
tools, which together contribute to an overall firmwide liquidity perspective, are used to monitor
and manage liquidity. Among others, these include: (i) analysis of the timing of liquidity sources
versus liquidity uses (i.e., funding gaps) over periods ranging from overnight to one year; (ii)
management of debt and capital issuances to ensure that the illiquid portion of the balance sheet
can be funded by equity, long-term debt (including trust preferred capital debt securities) and
deposits the Firm believes to be stable; and (iii) assessment of the Firm’s capacity to raise
incremental unsecured and secured funding.
Liquidity of the parent holding company and its nonbank subsidiaries is monitored independently as
well as in conjunction with the liquidity of the Firm’s bank subsidiaries. At the parent holding
company level, long-term funding is managed to ensure that the parent holding company has, at a
minimum, sufficient liquidity to cover its obligations and those of its nonbank subsidiaries within
the next 12 months. For bank subsidiaries, the focus of liquidity risk management is on maintenance
of unsecured and secured funding capacity sufficient to meet on- and off-balance sheet obligations.
A component of liquidity management is the Firm’s contingency funding plan. The goal of the plan is
to ensure appropriate liquidity during normal and stress periods. The plan considers various
temporary and long-term stress scenarios where access to wholesale unsecured funding is severely
limited or nonexistent, taking into account both on- and off-balance sheet exposures, and
separately evaluates access to funding sources by the parent holding company and the Firm’s bank subsidiaries.
Recent events
The extraordinary levels of volatility exhibited in global markets during the second half of 2008
began to subside in 2009. Market participants were able to regain access to the debt, equity and
consumer loan securitization markets as spreads tightened and liquidity returned to the markets.
The Firm believes its liquidity position is strong, based on its liquidity metrics as of December
31, 2009. The Firm believes that its unsecured and secured funding capacity is sufficient to meet
its on- and off-balance sheet obligations. JPMorgan Chase’s long-dated funding, including core
liabilities, exceeded illiquid assets.
On March 30, 2009, the Federal Reserve announced that, effective April 27, 2009, it would reduce
the amount it lent against certain loans pledged as collateral to the Federal Reserve Banks for
discount window or payment-system risk purposes, in order to reflect recent trends in the values of
those types of collateral. On October 19, 2009, the Federal Reserve further reduced the amount it
lent against such collateral. These changes by the Federal Reserve did not have a material impact
on the Firm’s aggregate funding capacity.
The Firm participated in the FDIC’s Temporary Liquidity Guarantee Program (the “TLG Program”),
which was implemented in late 2008 as a temporary measure to help restore confidence in the
financial system. This program is comprised of two components: the Debt Guarantee Program that
provided an FDIC guarantee for certain senior unsecured debt issued through October 31, 2009, and
the Transaction Account Guarantee Program (the “TAG Program”) that provides unlimited insurance on
certain noninterest-bearing transaction accounts. The expiration date of the TAG Program was
extended by six months, from December 31, 2009, to June 30, 2010, to provide continued support to
those institutions most affected by the recent financial crisis and to phase out
| 88 | JPMorgan Chase & Co. / 2009 Annual Report |
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the program in an
orderly manner. On October 22, 2009, the Firm notified the FDIC that, as of January 1, 2010, it
would no longer participate in the TAG Program. As a result of the Firm’s decision to opt out of
the program, after December 31, 2009, funds held in noninterest-bearing transaction accounts will
no longer be guaranteed in full, but will be insured up to $250,000 under the FDIC’s general
deposit rules. The insurance amount of $250,000 per depositor is in effect through December 31,
2013. On January 1, 2014, the insurance amount will return to $100,000 per depositor for all
account categories except Individual Retirement Accounts (“IRAs”) and certain other retirement
accounts, which will remain at $250,000 per depositor.
Funding
Sources of funds
The deposits held by the RFS, CB, TSS and AM lines of business are generally stable sources of
funding for JPMorgan Chase Bank, N.A. As of December 31, 2009, total deposits for the Firm were
$938.4 billion, compared with $1.0 trillion at December 31, 2008. A significant portion of the
Firm’s deposits are retail deposits (38% at December 31, 2009), which are less sensitive to
interest rate changes or market volatility and therefore are considered more stable than
market-based (i.e., wholesale) liability balances. In addition, through the normal course of
business, the Firm benefits from substantial liability balances originated by RFS, CB, TSS and AM.
These franchise-generated liability balances include deposits, as well as deposits that are swept
to on–balance sheet liabilities (e.g., commercial paper, federal funds purchased, and securities
loaned or sold under repurchase agreements), a significant portion of which are considered to be
stable and consistent sources of funding due to the nature of the businesses from which they are
generated. For further discussions of deposit and
liability balance trends, see the discussion of the results for the Firm’s business segments and
the Balance sheet analysis on pages 55–73 and 76–78, respectively, of this Annual Report.
Additional sources of funding include a variety of unsecured short- and long-term instruments,
including federal funds purchased, certificates of deposit, time deposits, bank notes, commercial
paper, long-term debt, trust preferred capital debt securities, preferred stock and common stock.
Secured sources of funding include securities loaned or sold under repurchase agreements,
asset-backed securitizations, and borrowings from the Chicago, Pittsburgh and San Francisco Federal
Home Loan Banks. The Firm also borrows from the Federal Reserve (including discount-window
borrowings, the Primary Dealer Credit Facility and the Term Auction Facility); however, the Firm
does not view such borrowings from the Federal Reserve as a primary means of funding.
Issuance
Funding markets are evaluated on an ongoing basis to achieve an appropriate global balance of
unsecured and secured funding at favorable rates. Generating funding from a broad range of sources
in a variety of geographic locations enhances financial flexibility and limits dependence on any
one source.
During 2009 and 2008, the Firm issued $19.7 billion and $20.8 billion, respectively, of
FDIC-guaranteed long-term debt under the TLG Program, which became effective in October 2008. In
2009 the Firm also issued non-FDIC guaranteed debt of $16.1 billion, including $11.0 billion of
senior notes and $2.5 billion of trust preferred capital debt securities, in the U.S. market, and
$2.6 billion of senior notes in the European markets. In 2008 the Firm issued non-FDIC guaranteed
debt of $23.6 billion, including $12.2 billion of senior notes and $1.8 billion of trust preferred
capital debt securities in the U.S. market and $9.6 billion of senior notes in non-U.S. markets.
Issuing non-FDIC guaranteed debt in the capital markets in 2009 was a prerequisite to redeeming the
$25.0 billion of Series K Preferred Stock. In addition, during 2009 and 2008, JPMorgan Chase issued
$15.5 billion and $28.0 billion, respectively, of IB structured notes that are included within
long-term debt. During 2009 and 2008, $55.7 billion and $62.7 billion, respectively, of long-term
debt (including trust preferred capital debt securities) matured or was redeemed, including $27.2
billion and $35.8 billion, respectively, of IB structured notes; the maturities or redemptions in
2009 offset the issuances during the period. During 2009 and 2008, the Firm also securitized $26.5
billion and $21.4 billion, respectively, of credit card loans.
Replacement capital covenants
In connection with the issuance of certain of its trust preferred capital debt securities and its
noncumulative perpetual preferred stock, the Firm has entered into Replacement Capital Covenants
(“RCCs”). These RCCs grant certain rights to the holders of “covered debt,” as defined in the RCCs,
that prohibit the repayment, redemption or purchase of such trust preferred capital debt securities
and noncumulative perpetual preferred stock except, with limited exceptions, to the extent that
JPMorgan Chase has received, in each such case, specified amounts of proceeds from the sale of
certain qualifying securities. Currently, the Firm’s covered debt is its 5.875% Junior Subordinated
Deferrable Interest Debentures, Series O, due in 2035. For more information regarding these
covenants, reference is made to the respective RCCs (including any supplements thereto) entered
into by the Firm in relation to such trust preferred capital debt securities and noncumulative
perpetual preferred stock, which are available in filings made by the Firm with the U.S. Securities
and Exchange Commission.
Cash flows
For the years ended December 31, 2009, 2008 and 2007, cash and due from banks decreased $689
million, $13.2 billion and $268 million, respectively. The following discussion highlights the
major activities and transactions that affected JPMorgan Chase’s cash flows during 2009, 2008 and
2007.
Cash flows from operating activities
JPMorgan Chase’s operating assets and liabilities support the Firm’s capital markets and lending
activities, including the origination or purchase of loans initially designated as held-for-sale.
Operating assets and liabilities can vary significantly in the normal course of business due to the
amount and timing of cash flows, which are affected by client-driven activities, market conditions
| JPMorgan Chase & Co. / 2009 Annual Report | 89 |
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Management’s discussion and analysis
and trading strategies. Management believes cash flows from operations, available cash balances and
the Firm’s ability to generate cash through short- and long-term borrowings are sufficient to fund
the Firm’s operating liquidity needs.
For the years ended December 31, 2009 and 2008, net cash provided by operating activities was
$121.9 billion and $23.1 billion, respectively, while for the year ended December 31, 2007, net
cash used in operating activities was $110.6 billion. In 2009, the net decline in trading assets
and liabilities was affected by balance sheet management activities and the impact of the
challenging capital markets environment that existed at December 31, 2008, and continued into the
first half of 2009. In 2009 and 2008, net cash generated from operating activities was higher than
net income, largely as a result of adjustments for non-cash items such as the provision for credit
losses. In addition, for 2009 and 2008 proceeds from sales, securitizations and paydowns of loans
originated or purchased with an initial intent to sell were higher than cash used to acquire such
loans, but the cash flows from these loan activities remained at reduced levels as a result of the
lower activity in these markets since the second half of 2007.
For the year ended December 31, 2007, the net cash used in trading activities reflected a more
active capital markets environment, largely from client-driven market-making activities. Also
during 2007, cash used to originate or purchase loans held-for-sale was higher than proceeds from
sales, securitizations and paydowns of such loans, although these activities were affected by a
significant deterioration in liquidity in the second half of 2007.
Cash flows from investing activities
The Firm’s investing activities predominantly include originating loans to be held for investment,
the AFS securities portfolio and other short-term interest-earning assets. For the year ended
December 31, 2009, net cash of $29.4 billion was provided by investing activities, primarily from:
a decrease in deposits with banks reflecting lower demand for inter-bank lending and lower deposits
with the Federal Reserve Bank relative to the elevated levels at the end of 2008; a net decrease in
the loan portfolio across most businesses, driven by continued lower customer demand and loan sales
in the wholesale businesses, lower charge volume on credit cards, slightly higher credit card
securitizations, and paydowns; and the maturity of all asset-backed commercial paper issued by
money market mutual funds in connection with the AML facility of the Federal Reserve Bank of
Boston. Largely offsetting these cash proceeds were net purchases of AFS securities associated with
the Firm’s management of interest rate risk and investment of cash resulting from an excess funding
position.
For the year ended December 31, 2008, net cash of $283.7 billion was used in investing activities,
primarily for: increased deposits with banks as the result of the availability of excess cash for
short-term investment opportunities through interbank lending, and reserve balances held by the
Federal Reserve (which became an investing activity in 2008, reflecting a policy change of the
Federal Reserve to pay interest to depository institutions on reserve balances);
net purchases of
investment securities in the AFS portfolio to manage the Firm’s exposure to interest rate
movements; net additions
to the wholesale loan portfolio from organic growth in CB; additions to the consumer prime mortgage
portfolio as a result of the decision to retain, rather than sell, new originations of
nonconforming prime mortgage loans; an increase in securities purchased under resale agreements
reflecting growth in demand from clients for liquidity; and net purchases of asset-backed
commercial paper from money market mutual funds in connection with the AML facility of the Federal
Reserve Bank of Boston. Partially offsetting these uses of cash were proceeds from loan sales and
securitization activities as well as net cash received from acquisitions and the sale of an
investment. Additionally, in June 2008, in connection with the Bear Stearns merger, the Firm sold
assets acquired from Bear Stearns to the FRBNY and received cash proceeds of $28.85 billion.
For the year ended December 31,2007, net cash of $74.2 billion was used in investing activities,
primarily for: funding purchases in the AFS securities portfolio to manage the Firm’s exposure to
interest rate movements; net additions to the wholesale retained loan portfolios in IB, CB and AM,
mainly as a result of business growth; a net increase in the consumer retained loan portfolio,
primarily reflecting growth in RFS in home equity loans and net additions to the RFS’s subprime
mortgage loans portfolio (which was affected by management’s decision in the third quarter to
retain (rather than sell) new subprime mortgages); growth in prime mortgage loans originated by RFS
and AM that were not eligible to be sold to U.S. government agencies or U.S. government-sponsored
enterprises; and increases in securities purchased under resale agreements as a result of a higher
level of cash that was available for short-term investment opportunities in connection with the
Firm’s efforts to build liquidity. These net uses of cash were partially offset by cash proceeds
received from sales and maturities of AFS securities and from credit card, residential mortgage,
student and wholesale loan sales and securitization activities.
Cash flows from financing activities
The Firm’s financing activities primarily reflect cash flows related to raising customer deposits,
and issuing long-term debt (including trust preferred capital debt securities) as well as preferred
and common stock. In 2009, net cash used in financing activities was $152.2 billion; this reflected
a decline in wholesale deposits, predominantly in TSS, driven by the continued normalization of
wholesale deposit levels resulting from the mitigation of credit concerns, compared with the
heightened market volatility and credit concerns in the latter part of 2008; a decline in other
borrowings, due to the absence of borrowings from the Federal Reserve under the Term Auction
Facility program; net repayments of advances from Federal Home Loan Banks and the maturity of the
nonrecourse advances under the Federal Reserve Bank of Boston AML Facility; the June 17, 2009,
repayment in full of the $25.0 billion principal amount of Series K Preferred Stock issued to the
U.S. Treasury; and the payment of cash dividends on common and preferred stock. Cash was also used
for the net
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repayment of long-term debt and trust preferred capital debt securities, as issuances
of FDIC-guaranteed debt and non-FDIC guaranteed debt in both the U.S. and European markets were
more than offset by redemptions. Cash proceeds resulted from an increase in securities loaned or
sold under repurchase agreements, partly attributable to favorable pricing and to financing the
increased size of the Firm’s AFS securities portfolio; and the issuance of $5.8 billion of common
stock. There were no repurchases in the open market of common stock or the warrants during 2009.
In 2008, net cash provided by financing activities was $247.8 billion due to: growth in wholesale
deposits, in particular, interest- and noninterest-bearing deposits in TSS (driven by both new and
existing clients, and due to
the deposit inflows related to the heightened volatility and credit concerns affecting the global
markets that began in the third quarter of 2008), as well as increases in AM and CB (due to organic
growth); proceeds of $25.0 billion from the issuance of preferred stock and the Warrant to the U.S.
Treasury under the Capital Purchase Program; additional issuances of common stock and preferred
stock used for general corporate purposes; an increase in other borrowings due to nonrecourse
secured advances under the Federal Reserve Bank of Boston AML Facility to fund the purchase of
asset-backed commercial paper from money market mutual funds; increases in federal funds purchased
and securities loaned or sold under repurchase agreements in connection with higher client demand
for liquidity and to finance growth in the Firm’s AFS securities portfolio; and a net increase in
long-term debt due to a combination of non-FDIC guaranteed debt and trust preferred capital debt
securities issued prior to December 4, 2008, and the issuance of $20.8 billion of FDIC-guaranteed
long-term debt issued during the fourth quarter of 2008. The fourth-quarter FDIC-guaranteed debt
issuance was offset partially by maturities of non-FDIC guaranteed long-term debt during the same
period. The increase in long-term debt (including trust preferred capital debt securities)
was used
primarily to fund certain illiquid assets held by the parent holding company and to build
liquidity. Cash was also used to pay dividends on common and preferred stock. The Firm did not
repurchase any shares of its common stock during 2008.
In 2007, net cash provided by financing activities was $184.1 billion due to a net increase in
wholesale deposits from growth in business volumes, in particular, interest-bearing deposits at
TSS, AM and CB; net issuances of long-term debt (including trust preferred capital debt securities)
primarily to fund certain illiquid assets held by the parent holding company and build liquidity,
and by IB from client-driven structured notes transactions; and growth in commercial paper
issuances and other borrowed funds due to growth in the volume of liability balances in sweep
accounts in TSS and CB, and to fund trading positions and to further build liquidity. Cash was used
to repurchase common stock and pay dividends on common stock.
Credit ratings
The cost and availability of financing are influenced by credit ratings. Reductions in these
ratings could have an adverse effect on the Firm’s access to liquidity sources, increase the cost
of funds, trigger additional collateral or funding requirements and decrease the number of
investors and counterparties willing to lend to the Firm. Additionally, the Firm’s funding
requirements for VIEs and other third-party commitments may be adversely affected. For additional
information on the impact of a credit ratings downgrade on the funding requirements for VIEs, and
on derivatives and collateral agreements, see Special-purpose entities on pages 78–79 and Ratings
profile of derivative receivables marked to market (“MTM”),
and Note 5 on page 103 and pages 167–175, respectively, of this Annual Report.
Critical factors in maintaining high credit ratings include a stable and diverse earnings stream,
strong capital ratios, strong credit quality and risk management controls, diverse funding sources,
and disciplined liquidity monitoring procedures.
The credit ratings of the parent holding company and each of the Firm’s significant banking
subsidiaries as of January 15, 2010, were as follows.
| Short-term debt | Senior long-term debt | |||||||||||
| Moody’s | S&P | Fitch | Moody’s | S&P | Fitch | |||||||
|
JPMorgan Chase & Co.
|
P-1 | A-1 | F1+ | Aa3 | A+ | AA- | ||||||
|
JPMorgan Chase Bank, N.A.
|
P-1 | A-1+ | F1+ | Aa1 | AA- | AA- | ||||||
|
Chase Bank USA, N.A.
|
P-1 | A-1+ | F1+ | Aa1 | AA- | AA- | ||||||
Ratings actions affecting the Firm
On March 4, 2009, Moody’s revised the outlook on the Firm to negative from stable. This action was
the result of Moody’s view that the Firm’s ability to generate capital would be adversely affected
by higher credit costs due to the global recession. The rating action by Moody’s in the first
quarter of 2009 did not have a material impact on the cost or availability of the Firm’s funding.
At December 31, 2009, Moody’s outlook remained negative.
Ratings from S&P and Fitch on JPMorgan Chase and its principal bank subsidiaries remained unchanged
at December 31, 2009, from December 31, 2008. At December 31, 2009, S&P’s outlook remained
negative, while Fitch’s outlook remained stable.
Following the Firm’s earnings release on January 15, 2010, S&P and Moody’s announced that their
ratings on the Firm remained unchanged.
If the Firm’s senior long-term debt ratings were downgraded by one additional notch, the Firm
believes the incremental cost of funds or loss of funding would be manageable, within the context
of current market conditions and the Firm’s liquidity resources. JPMorgan Chase’s unsecured debt
does not contain requirements that would call for an acceleration of payments, maturities or
changes in the structure of the existing debt, provide any limitations on future borrowings or
require additional collateral, based on unfavorable
| JPMorgan Chase & Co. / 2009 Annual Report | 91 |
Table of Contents
Management’s discussion and analysis
changes in the Firm’s credit ratings, financial
ratios, earnings, or stock price.
On February 24, 2009, S&P lowered the ratings on the trust preferred capital debt securities and
other hybrid securities of 45 U.S. financial institutions, including those of JPMorgan Chase & Co.
The Firm’s ratings on trust preferred capital debt and noncumulative perpetual preferred securities
were lowered from A- to BBB+. This action was the result of S&P’s general view that there is an
increased likelihood of issuers suspending interest and dividend payments in the current
environment. This action by S&P did not have a material impact on the cost or availability of the
Firm’s funding.
On December 22, 2009, Moody’s lowered the ratings on certain of the Firm’s hybrid securities. The
downgrades were consistent with Moody’s revised guidelines for rating hybrid securities and
subordinated debt. The ratings of junior subordinated debt securities with cumulative deferral
features were lowered to A2 from A1, while those of cumulative preferred securities were downgraded
to A3 from A2, and ratings for non-cumulative preferred securities were lowered to Baa1 from A2.
On January 29, 2010, Fitch downgraded 592 hybrid capital instruments issued by banks and other
non-bank financial institutions, including those issued by the Firm. This action was in line with
Fitch’s revised hybrid ratings methodology. The Firm’s trust preferred debt and hybrid preferred
securities were downgraded by one notch to A.
Ratings actions affecting Firm-sponsored securitization trusts
In 2009, in light of increasing levels of losses in the Firm-sponsored securitization trusts due to
the then worsening economic environment, S&P, Moody’s and Fitch took various ratings actions with
respect to the securities issued by the Firm’s credit card securitization trusts, including the
Chase Issuance Trust, Chase Credit Card Master Trust, Washington Mutual Master Note Trust and SCORE
Credit Card Trust, including placing the ratings of certain securities of such Trusts on negative
credit watch or review for possible downgrade, and, in a few circumstances, downgrading the ratings
of some of the securities.
On May 12, 2009, the Firm took certain actions to increase the credit enhancement underlying the
credit card asset-backed securities of the Chase Issuance Trust. As a result of these actions, the
ratings of all asset-backed credit card securities of the Chase Issuance Trust were affirmed by the
credit rating agencies, except for a negative rating outlook by Fitch which remains, as of
December 31, 2009, on the subordinated securities of the Chase Issuance Trust.
On May 19, 2009, the Firm removed from the Washington Mutual Master Note Trust all remaining credit
card receivables that had been originated by Washington Mutual. As a result of this action, the
ratings of all asset-backed credit card securities of the Washington Mutual Master Note Trust were
raised or affirmed by the credit rating agencies, with the exception that the senior securities of
the Washington Mutual Master Note Trust were downgraded by S&P on December 23, 2009. S&P’s action
was the result of their consideration of a linkage between the ratings of the securities of
Washington Mutual Master Note Trust and the Firm’s own ratings as a result of the consolidation
onto the Firm’s Consolidated Balance Sheet of the assets and liabilities of the Washington Mutual
Master Note Trust following the Firm’s actions on May 19, 2009 (please refer to page 200 under Note
15 of this Annual Report).
The Firm did not take any actions to increase the credit enhancement underlying securitizations
issued by the Chase Credit Card Master Trust and the SCORE Credit Card Trust during 2009. Certain
mezzanine securities and subordinated securities of the Chase Credit Card Master Trust were
downgraded by S&P and Moody’s on August 6, 2009, and July 10, 2009, respectively. The senior and
subordinated securities of the SCORE Credit Card Trust were placed on review for possible downgrade
by Moody’s on January 20, 2010.
The Firm believes the ratings actions described above did not have a material impact on the Firm’s
liquidity and ability to access the asset-backed securitization market.
With the exception of the Washington Mutual Master Note Trust as described above, the ratings on
the Firm’s asset-backed securities programs are currently independent of the Firm’s own ratings.
However, no assurance can be given that the credit rating agencies will not in the future consider
there being a linkage between the ratings of the Firm’s asset-backed securities programs and the
Firm’s own ratings as a result of accounting guidance for QSPEs and VIEs that became effective
January 1, 2010. For a further discussion of the new FASB guidance, see “Accounting and reporting
developments” and Note 16 on pages 132–134 and
206–214, respectively, of this Annual Report.
| 92 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
CREDIT RISK MANAGEMENT
Credit risk is the risk of loss from obligor or counterparty default. The Firm provides
credit (for example, through loans, lending-related commitments, guarantees and derivatives) to a
variety of customers, from large corporate and institutional clients to the individual consumer.
For the wholesale business, credit risk management includes the distribution of the Firm’s
syndicated loan originations into the marketplace with exposure held in the retained portfolio
averaging less than 10%. Wholesale loans generated by CB and AM are generally retained on the
balance sheet. With regard to the consumer credit market, the Firm focuses on creating a portfolio
that is diversified from both a product and a geographic perspective. Loss mitigation strategies
are being employed for all home lending portfolios. These strategies include rate reductions,
forbearance and other actions intended to minimize economic loss and avoid foreclosure. In the
mortgage business, originated loans are either retained in the mortgage portfolio or securitized
and sold to U.S. government agencies and U.S. government-sponsored enterprises.
Credit risk organization
Credit risk management is overseen by the Chief Risk Officer and implemented within the lines of
business. The Firm’s credit risk management governance consists of the following functions:
| • | establishing a comprehensive credit risk policy framework | |
| • | monitoring and managing credit risk across all portfolio segments, including transaction and line approval | |
| • | assigning and managing credit authorities in connection with the approval of all credit exposure | |
| • | managing criticized exposures and delinquent loans | |
| • | calculating the allowance for credit losses and ensuring appropriate credit risk-based capital management |
Risk identification
The Firm is exposed to credit risk through lending and capital markets activities. Credit risk
management works in partnership with the business segments in identifying and aggregating exposures
across all lines of business.
Risk measurement
To measure credit risk, the Firm employs several methodologies for estimating the likelihood of
obligor or counterparty default. Methodologies for measuring credit risk vary depending on several
factors, including type of asset (e.g., consumer installment versus wholesale loan), risk
measurement parameters (e.g., delinquency status and credit bureau
score versus wholesale risk-rating) and risk management and collection processes (e.g., retail collection center versus
centrally managed workout groups). Credit risk measurement is based on the amount of exposure
should the obligor or the counterparty default, the probability of default and the loss severity
given a default event. Based on these factors and related market-based inputs, the Firm estimates
both probable and unexpected losses for the wholesale and consumer portfolios. Probable losses,
reflected in the provision for credit losses, are based primarily upon
statistical estimates of
credit losses as a result of obligor or counterparty default. However, probable losses are not the
sole indicators of risk. If losses were entirely predictable, the probable loss rate could be
factored into pricing and covered as a normal and recurring cost of doing business. Unexpected
losses, reflected in the allocation of credit risk capital, represent the potential volatility of
actual losses relative to the probable level of losses. Risk measurement for the wholesale
portfolio is assessed primarily on a risk-rated basis; for the consumer portfolio, it is assessed
primarily on a credit-scored basis.
Risk-rated exposure
For portfolios that are risk-rated (generally held in IB, CB, TSS and AM), probable and unexpected loss calculations are based on estimates of probability of default and loss
given default. Probability of default is the expected default calculated on an obligor basis. Loss
given default is an estimate of losses given a default event and takes into consideration
collateral and structural support for each credit facility. Calculations and assumptions are based
on management information systems and methodologies which are under continual review. Risk ratings
are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis by
Credit Risk Management and revised, if needed, to reflect the borrowers’ current financial
position, risk profiles and the related collateral and structural positions.
Credit-scored exposure
For credit-scored portfolios (generally held in RFS and CS), probable loss is based on a
statistical analysis of inherent losses over discrete periods of time. Probable losses are
estimated using sophisticated portfolio modeling, credit scoring and decision-support tools to
project credit risks and establish underwriting standards. In addition, common measures of credit
quality derived from historical loss experience are used to predict consumer losses. Other risk
characteristics evaluated include recent loss experience in the portfolios, changes in origination
sources, portfolio seasoning, loss severity and underlying credit practices, including charge-off
policies. These analyses are applied to the Firm’s current portfolios in order to estimate
delinquencies and severity of losses, which determine the amount of probable losses. These factors
and analyses are updated at least on a quarterly basis or more frequently as market conditions
dictate.
Risk monitoring
The Firm has developed policies and practices that are designed to preserve the independence and
integrity of the approval and decision-making process of extending credit, and to ensure credit risks are
assessed accurately, approved properly, monitored regularly and managed actively at both the
transaction and portfolio levels. The policy framework establishes credit approval authorities,
concentration limits, risk-rating methodologies, portfolio review parameters and guidelines for
management of distressed exposure. Wholesale credit risk is monitored regularly on both an
aggregate portfolio level and on an individual customer basis. Management of the Firm’s wholesale
exposure is accomplished through a number of
| JPMorgan Chase & Co. / 2009 Annual Report | 93 |
Table of Contents
Management’s discussion and analysis
means including loan syndication and participations,
loan sales, securitizations, credit derivatives, use of master netting agreements and collateral
and other risk-reduction techniques, which are further discussed in the following risk sections.
For consumer credit risk, the key focus items are trends and concentrations at the portfolio level,
where potential problems can be remedied through changes in underwriting policies and portfolio
guidelines. Consumer Credit Risk Management monitors trends against business expectations and
industry benchmarks.
Risk reporting
To enable monitoring of credit risk and decision-making, aggregate credit exposure, credit quality
forecasts, concentrations levels and risk profile changes are reported regularly to senior credit
risk management. Detailed portfolio reporting of industry, customer, product and geographic
concentrations occurs monthly, and the appropriateness of the allowance for credit losses is
reviewed by senior management at least on a quarterly basis. Through the risk reporting and
governance structure, credit risk trends and limit exceptions are provided regularly to, and
discussed with, senior management, as mentioned on page 86 of this Annual Report.
2009 Credit risk overview
During 2009, the credit environment experienced further deterioration compared with 2008, resulting
in increased defaults, downgrades and reduced liquidity. In the first part of the year, the pace
of deterioration increased, adversely affecting many financial institutions and impacting the functioning of credit markets, which remained weak. The pace of
deterioration also gave rise to a high level of uncertainty regarding the ultimate extent of
the downturn. The Firm’s credit portfolio was affected by these market conditions and experienced
continued deteriorating credit quality, especially in the first part of the year, generally
consistent with the market.
For the wholesale portfolio, criticized assets, nonperforming assets and charge-offs increased
significantly from 2008, reflecting continued weakness in the portfolio, particularly in commercial
real estate. In the latter part of the year, there were some positive indicators, for example, loan
origination activity and market liquidity improved and credit spreads tightened. The wholesale
businesses have remained focused on actively managing the portfolio, including ongoing, in-depth
reviews of credit quality and industry, product and client concentrations. Underwriting standards
across all areas of lending have remained under review and strengthened where appropriate,
consistent with evolving market conditions and the Firm’s risk management activities. In light of
the current market conditions, the wholesale allowance for loan loss coverage ratio has been
strengthened to 3.57% from 2.64% at the end of 2008.
The consumer portfolio credit performance continued to be negatively affected by the economic
environment of 2009. Higher unemployment and weaker overall economic conditions have led to a
significant increase in the number of loans charged off, while continued weak housing prices have
driven a significant increase in the severity of loss recognized on real estate loans that
defaulted. During 2009, the Firm took proactive action to assist homeowners most in need of
financial assistance, including participation in the U.S. Treasury Making Home Affordable (“MHA”)
programs, which are designed to assist eligible homeowners in a number of ways, one of which is by
modifying the terms of their mortgages. The MHA programs and the Firm’s other loss-mitigation
programs for financially troubled borrowers generally represent various concessions, such as term
extensions, rate reductions and deferral of principal payments that would have been required under
the terms of the original agreement. The Firm’s loss-mitigation programs are intended to minimize
economic loss to the Firm, while providing alternatives to foreclosure.
More detailed discussion of the
domestic consumer credit environment
can be found in Consumer Credit Portfolio on pages 106–115
of this Annual Report.
| 94 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
CREDIT PORTFOLIO
The following table presents JPMorgan Chase’s credit portfolio as of December 31, 2009
and 2008. Total credit exposure at December 31, 2009, decreased by $322.6 billion from December 31,
2008, reflecting decreases of $170.5 billion in the wholesale portfolio and $152.1 billion in the
consumer portfolio. During 2009, lending-related commitments decreased by $130.3 billion, managed
loans decreased by $112.4 billion and derivative receivables decreased by $82.4 billion.
While overall portfolio exposure declined, the Firm provided more than $600 billion in new loans
and lines of credit to consumer and wholesale clients in 2009, including individuals, small
businesses, large corporations, not-for-profit organizations, U.S. states and municipalities, and
other financial institutions.
In the table below, reported loans include loans retained; loans held-for-sale (which are
carried at the lower of cost or fair value, with changes in value recorded in noninterest revenue);
and loans accounted for at fair value. Loans retained are presented net of unearned income,
unamortized discounts and premiums, and net deferred loan costs; for additional information, see
Note 13 on pages 192–196 of this Annual Report. Nonperforming assets include nonaccrual loans and
assets acquired in satisfaction of debt (primarily real estate owned). Nonaccrual loans are those
for which the accrual of interest has been suspended in accordance with the Firm’s accounting
policies, which are described in Note 13 on pages 192–196 of this Annual Report. Average retained
loan balances are used for the net charge-off rate calculations.
Total credit portfolio
| Nonperforming | 90 days or more past | Average annual net | ||||||||||||||||||||||||||||||||||||||
| As of or for the year ended December 31, | Credit exposure | assets (c)(d) | due and still accruing (d) | Net charge-offs | charge-off rate (e)(f) | |||||||||||||||||||||||||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||||||||
|
Total credit portfolio
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Loans retained
|
$ | 627,218 | $ | 728,915 | $ | 17,219 | $ | 8,921 | $ | 4,355 | $ | 3,275 | $ | 22,965 | $ | 9,835 | 3.42 | % | 1.73 | % | ||||||||||||||||||||
|
Loans held-for-sale
|
4,876 | 8,287 | 234 | 12 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Loans at fair value
|
1,364 | 7,696 | 111 | 20 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Loans – reported
|
633,458 | 744,898 | 17,564 | 8,953 | 4,355 | 3,275 | 22,965 | 9,835 | 3.42 | 1.73 | ||||||||||||||||||||||||||||||
|
Loans – securitized
(a)
|
84,626 | 85,571 | — | — | 2,385 | 1,802 | 6,443 | 3,612 | 7.55 | 4.53 | ||||||||||||||||||||||||||||||
|
Total managed loans
|
718,084 | 830,469 | 17,564 | 8,953 | 6,740 | 5,077 | 29,408 | 13,447 | 3.88 | 2.08 | ||||||||||||||||||||||||||||||
|
Derivative receivables
|
80,210 | 162,626 | 529 | 1,079 | — | — | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Receivables from customers
|
15,745 | 16,141 | — | — | — | — | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Interests in purchased receivables
|
2,927 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Total managed
credit-related assets
|
816,966 | 1,009,236 | 18,093 | 10,032 | 6,740 | 5,077 | 29,408 | 13,447 | 3.88 | 2.08 | ||||||||||||||||||||||||||||||
|
Lending-related
commitments
|
991,095 | 1,121,378 | NA | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Assets acquired in
loan satisfactions
|
||||||||||||||||||||||||||||||||||||||||
|
Real estate owned
|
NA | NA | 1,548 | 2,533 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Other
|
NA | NA | 100 | 149 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Total assets acquired
in loan satisfactions
|
NA | NA | 1,648 | 2,682 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Total credit portfolio
|
$ | 1,808,061 | $ | 2,130,614 | $ | 19,741 | $ | 12,714 | $ | 6,740 | $ | 5,077 | $ | 29,408 | $ | 13,447 | 3.88 | % | 2.08 | % | ||||||||||||||||||||
|
Net credit derivative
hedges notional
(b)
|
$ | (48,376 | ) | $ | (91,451 | ) | $ | (139 | ) | $ | — | NA | NA | NA | NA | NA | NA | |||||||||||||||||||||||
|
Liquid securities collateral held
against derivatives
|
(15,519 | ) | (19,816 | ) | NA | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||
| (a) | Represents securitized credit card receivables. For further discussion of credit card securitizations, see Note 15 on pages 198–205 of this Annual Report. | |
| (b) | Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and nonperforming credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives pages 103–104 and Note 5 on pages 167–175 of this Annual Report. | |
| (c) | At December 31, 2009 and 2008, nonperforming loans and assets excluded: (1) mortgage loans insured by U.S. government agencies of $9.0 billion and $3.0 billion, respectively; (2) real estate owned insured by U.S. government agencies of $579 million and $364 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $542 million and $437 million, respectively. These amounts are excluded, as reimbursement is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under guidance issued by the Federal Financial Institutions Examination Council, 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 about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. | |
| (d) | Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. | |
| (e) | Net charge-off ratios were calculated using: (1) average retained loans of $672.3 billion and $567.0 billion for the years ended December 31, 2009 and 2008, respectively; (2) average securitized loans of $85.4 billion and $79.6 billion for the years ended December 31, 2009 and 2008, respectively; and (3) average managed loans of $757.7 billion and $646.6 billion for the years ended December 31, 2009 and 2008, respectively. | |
| (f) | Firmwide net charge-off ratios were calculated including average purchased credit-impaired loans of $85.4 billion and $22.3 billion at December 31, 2009 and 2008, respectively. Excluding the impact of purchased credit-impaired loans, the total Firm’s managed net charge-off rate would have been 4.37% and 2.15% respectively. |
| JPMorgan Chase & Co. / 2009 Annual Report | 95 |
Table of Contents
Management’s discussion and analysis
WHOLESALE CREDIT PORTFOLIO
As of December 31, 2009, wholesale exposure (IB, CB, TSS and AM) decreased by $170.5
billion from December 31, 2008. The $170.5 billion decrease was primarily driven by decreases of
$82.4 billion of derivative receivables, $57.9 billion of loans and $32.7 billion of
lending-related commitments. The decrease in derivative receivables
was primarily related to
tightening credit spreads, volatile foreign exchange rates and rising rates on interest rate swaps.
Loans and lending-related commitments decreased across most wholesale lines of business, as lower
customer demand continued to affect the level of lending activity.
Wholesale
| 90 days past due | ||||||||||||||||||||||||
| As of or for the year ended December 31, | Credit exposure | Nonperforming loans (b) | and still accruing | |||||||||||||||||||||
| (in millions) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
|
Loans retained
|
$ | 200,077 | $ | 248,089 | $ | 6,559 | $ | 2,350 | $ | 332 | $ | 163 | ||||||||||||
|
Loans held-for-sale
|
2,734 | 6,259 | 234 | 12 | — | — | ||||||||||||||||||
|
Loans at fair value
|
1,364 | 7,696 | 111 | 20 | — | — | ||||||||||||||||||
|
Loans – reported
|
$ | 204,175 | $ | 262,044 | $ | 6,904 | $ | 2,382 | $ | 332 | $ | 163 | ||||||||||||
|
Derivative receivables
|
80,210 | 162,626 | 529 | 1,079 | — | — | ||||||||||||||||||
|
Receivables from customers
|
15,745 | 16,141 | — | — | — | — | ||||||||||||||||||
|
Interests in purchased receivables
|
2,927 | — | — | — | — | — | ||||||||||||||||||
|
Total wholesale credit-related assets
|
303,057 | 440,811 | 7,433 | 3,461 | 332 | 163 | ||||||||||||||||||
|
Lending-related commitments
|
347,155 | 379,871 | NA | NA | NA | NA | ||||||||||||||||||
|
Total wholesale credit exposure
|
$ | 650,212 | $ | 820,682 | $ | 7,433 | $ | 3,461 | $ | 332 | $ | 163 | ||||||||||||
|
Net credit derivative hedges notional
(a)
|
$ | (48,376 | ) | $ | (91,451 | ) | $ | (139 | ) | $ | — | NA | NA | |||||||||||
|
Liquid securities collateral held against derivatives
|
(15,519 | ) | (19,816 | ) | NA | NA | NA | NA | ||||||||||||||||
| (a) | Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and nonperforming credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives on pages 103–104, and Note 5 on pages 167–175 of this Annual Report. | |
| (b) | Excludes assets acquired in loan satisfactions. For additional information, see the wholesale nonperforming assets by line of business segment table on pages 100–101 of this Annual Report. |
| 96 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The following table presents summaries of the maturity and ratings profiles of the wholesale
portfolio as of December 31, 2009 and 2008. The ratings scale is based on the Firm’s internal risk
ratings, which generally correspond to the ratings as defined by S&P and Moody’s.
Wholesale credit exposure – maturity and ratings profile
| Maturity profile (c) | Ratings profile | |||||||||||||||||||||||||||||||
| December 31, 2009 | Due in 1 | Due after 1 year | Due after | Investment-grade ("IG") | Noninvestment-grade | Total % | ||||||||||||||||||||||||||
| (in billions, except ratios) | year or less | through 5 years | 5 years | Total | AAA/Aaa to BBB-/Baa3 | BB+/Ba1 & below | Total | of IG | ||||||||||||||||||||||||
|
Loans
|
29 | % | 40 | % | 31 | % | 100 | % | $ | 118 | $ | 82 | $ | 200 | 59 | % | ||||||||||||||||
|
Derivative receivables
|
12 | 42 | 46 | 100 | 61 | 19 | 80 | 76 | ||||||||||||||||||||||||
|
Lending-related commitments
|
41 | 57 | 2 | 100 | 281 | 66 | 347 | 81 | ||||||||||||||||||||||||
|
Total excluding loans held-for-sale and loans at fair value
|
34 | % | 50 | % | 16 | % | 100 | % | $ | 460 | $ | 167 | 627 | 73 | % | |||||||||||||||||
|
Loans held-for-sale and loans at fair value
(a)
|
4 | |||||||||||||||||||||||||||||||
|
Receivables from customers
|
16 | |||||||||||||||||||||||||||||||
|
Interests in purchased
receivables
|
3 | |||||||||||||||||||||||||||||||
|
Total exposure
|
$ | 650 | ||||||||||||||||||||||||||||||
|
Net credit derivative hedges notional
(b)
|
49 | % | 42 | % | 9 | % | 100 | % | $ | (48 | ) | $ | — | $ | (48 | ) | 100 | % | ||||||||||||||
| Maturity profile (c) | Ratings profile | |||||||||||||||||||||||||||||||
| December 31, 2008 | Due in 1 | Due after 1 year | Due after | Investment-grade ("IG") | Noninvestment-grade | Total % | ||||||||||||||||||||||||||
| (in billions, except ratios) | year or less | through 5 years | 5 years | Total | AAA/Aaa to BBB-/Baa3 | BB+/Ba1 & below | Total | of IG | ||||||||||||||||||||||||
|
Loans
|
32 | % | 43 | % | 25 | % | 100 | % | $ | 161 | $ | 87 | $ | 248 | 65 | % | ||||||||||||||||
|
Derivative receivables
|
31 | 36 | 33 | 100 | 127 | 36 | 163 | 78 | ||||||||||||||||||||||||
|
Lending-related commitments
|
37 | 59 | 4 | 100 | 317 | 63 | 380 | 83 | ||||||||||||||||||||||||
|
Total excluding loans held-for-sale and loans at fair value
|
34 | % | 50 | % | 16 | % | 100 | % | $ | 605 | $ | 186 | 791 | 77 | % | |||||||||||||||||
|
Loans held-for-sale and loans at fair value
(a)
|
14 | |||||||||||||||||||||||||||||||
|
Receivables from customers
|
16 | |||||||||||||||||||||||||||||||
|
Total exposure
|
$ | 821 | ||||||||||||||||||||||||||||||
|
Net credit derivative hedges notional
(b)
|
47 | % | 47 | % | 6 | % | 100 | % | $ | (82 | ) | $ | (9 | ) | $ | (91 | ) | 90 | % | |||||||||||||
| (a) | Loans held-for-sale and loans at fair value relate primarily to syndicated loans and loans transferred from the retained portfolio. | |
| (b) | Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. | |
| (c) | The maturity profile of loans and lending-related commitments is based on the remaining contractual maturity. The maturity profile of derivative receivables is based on the maturity profile of average exposure. See Derivative contracts on pages 102–104 of this Annual Report for further discussion of average exposure. |
Wholesale credit exposure – selected industry exposures
The Firm focuses on the management and diversification of its industry exposures, with particular
attention paid to industries with actual or potential credit concerns. Customer receivables
representing primarily margin loans to prime and retail brokerage clients of $15.7 billion are
included in the table. These margin loans are generally fully collateralized by cash or highly
liquid securities to satisfy daily minimum collateral requirements. Exposures deemed criticized
generally represent a ratings profile similar to a rating of “CCC+”/”Caa1” and lower, as defined by
S&P and Moody’s. The total criticized component of the portfolio, excluding loans held-for-sale and
loans at fair value, increased to $33.2 billion at
December 31, 2009, from $26.0 billion at
year-end 2008. The increase was primarily related to downgrades within the portfolio.
During the fourth quarter of 2009, the Firm revised certain industry classifications to better
reflect risk correlations and enhance the Firm’s management of industry risk. Below are summaries
of the top 25 industry exposures as of December 31, 2009 and 2008. For additional information on
industry concentrations, see Note 32 on pages 234–235 of this Annual Report.
| JPMorgan Chase & Co. / 2009 Annual Report | 97 |
Table of Contents
Wholesale credit exposure – selected industry exposures
| Collateral | ||||||||||||||||||||||||||||||||||||
| % of | Net | Credit | held against | |||||||||||||||||||||||||||||||||
| December 31, 2009 | Credit | % of | Investment | Noninvestment-grade | criticized | charge-offs/ | derivative | derivative | ||||||||||||||||||||||||||||
| (in millions, except ratios) | exposure (d) | portfolio | grade | Noncriticized | Criticized | portfolio | (recoveries) | hedges (e) | receivables (f) | |||||||||||||||||||||||||||
|
Top 25 industries
(a)
|
||||||||||||||||||||||||||||||||||||
|
Real estate
|
$ | 68,509 | 11 | % | 55 | % | $ | 18,810 | $ | 11,975 | 36 | % | $ | 688 | $ | (1,168 | ) | $ | (35 | ) | ||||||||||||||||
|
Banks and finance companies
|
54,053 | 9 | 81 | 8,424 | 2,053 | 6 | 719 | (3,718 | ) | (8,353 | ) | |||||||||||||||||||||||||
|
Healthcare
|
35,605 | 6 | 83 | 5,700 | 329 | 1 | 10 | (2,545 | ) | (125 | ) | |||||||||||||||||||||||||
|
State and municipal governments
|
34,726 | 5 | 93 | 1,850 | 466 | 1 | — | (204 | ) | (193 | ) | |||||||||||||||||||||||||
|
Utilities
|
27,178 | 4 | 81 | 3,877 | 1,238 | 4 | 182 | (3,486 | ) | (360 | ) | |||||||||||||||||||||||||
|
Consumer products
|
27,004 | 4 | 64 | 9,105 | 515 | 2 | 35 | (3,638 | ) | (4 | ) | |||||||||||||||||||||||||
|
Asset managers
|
24,920 | 4 | 82 | 3,742 | 680 | 2 | 7 | (40 | ) | (2,105 | ) | |||||||||||||||||||||||||
|
Oil and gas
|
23,322 | 4 | 73 | 5,854 | 386 | 1 | 16 | (2,567 | ) | (6 | ) | |||||||||||||||||||||||||
|
Retail and consumer services
|
20,673 | 3 | 58 | 7,867 | 782 | 2 | 35 | (3,073 | ) | — | ||||||||||||||||||||||||||
|
Holding companies
|
16,018 | 3 | 86 | 2,107 | 110 | — | 275 | (421 | ) | (320 | ) | |||||||||||||||||||||||||
|
Technology
|
14,169 | 2 | 63 | 4,004 | 1,288 | 4 | 28 | (1,730 | ) | (130 | ) | |||||||||||||||||||||||||
|
Insurance
|
13,421 | 2 | 69 | 3,601 | 599 | 2 | 7 | (2,735 | ) | (793 | ) | |||||||||||||||||||||||||
|
Machinery and equipment
manufacturing
|
12,759 | 2 | 57 | 5,122 | 350 | 1 | 12 | (1,327 | ) | (1 | ) | |||||||||||||||||||||||||
|
Metals/mining
|
12,547 | 2 | 56 | 4,906 | 639 | 2 | 24 | (1,963 | ) | — | ||||||||||||||||||||||||||
|
Media
|
12,379 | 2 | 55 | 3,898 | 1,692 | 5 | 464 | (1,606 | ) | — | ||||||||||||||||||||||||||
|
Telecom services
|
11,265 | 2 | 69 | 3,273 | 251 | 1 | 31 | (3,455 | ) | (62 | ) | |||||||||||||||||||||||||
|
Securities firms and exchanges
|
10,832 | 2 | 76 | 2,467 | 145 | — | — | (289 | ) | (2,139 | ) | |||||||||||||||||||||||||
|
Business services
|
10,667 | 2 | 61 | 3,859 | 344 | 1 | 8 | (107 | ) | — | ||||||||||||||||||||||||||
|
Building materials/construction
|
10,448 | 2 | 43 | 4,537 | 1,399 | 4 | 98 | (1,141 | ) | — | ||||||||||||||||||||||||||
|
Chemicals/plastics
|
9,870 | 2 | 67 | 2,626 | 611 | 2 | 22 | (1,357 | ) | — | ||||||||||||||||||||||||||
|
Transportation
|
9,749 | 1 | 66 | 2,745 | 588 | 2 | 61 | (870 | ) | (242 | ) | |||||||||||||||||||||||||
|
Central government
|
9,557 | 1 | 99 | 77 | — | — | — | (4,814 | ) | (30 | ) | |||||||||||||||||||||||||
|
Automotive
|
9,357 | 1 | 41 | 4,252 | 1,240 | 4 | 52 | (1,541 | ) | — | ||||||||||||||||||||||||||
|
Leisure
|
6,822 | 1 | 40 | 2,274 | 1,798 | 5 | 151 | (301 | ) | — | ||||||||||||||||||||||||||
|
Agriculture/paper manufacturing
|
5,801 | 1 | 37 | 3,132 | 500 | 2 | 10 | (897 | ) | — | ||||||||||||||||||||||||||
|
All other
(b)
|
135,791 | 22 | 86 | 15,448 | 3,205 | 10 | 197 | (3,383 | ) | (621 | ) | |||||||||||||||||||||||||
|
Subtotal
|
$ | 627,442 | 100 | % | 73 | % | $ | 133,557 | $ | 33,183 | 100 | % | $ | 3,132 | $ | (48,376 | ) | $ | (15,519 | ) | ||||||||||||||||
|
Loans held-for-sale and loans at
fair value
|
4,098 | 1,545 | ||||||||||||||||||||||||||||||||||
|
Receivables from customers
|
15,745 | |||||||||||||||||||||||||||||||||||
|
Interest in purchased receivables
(c)
|
2,927 | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 650,212 | $ | 133,557 | $ | 34,728 | $ | 3,132 | $ | (48,376 | ) | $ | (15,519 | ) | ||||||||||||||||||||||
| 98 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| Collateral | ||||||||||||||||||||||||||||||||||||
| % of | Net | Credit | held against | |||||||||||||||||||||||||||||||||
| December 31, 2008 | Credit | % of | Investment | Noninvestment-grade | criticized | charge-offs/ | derivative | derivative | ||||||||||||||||||||||||||||
| (in millions, except ratios) | exposure (d) | portfolio | grade | Noncriticized | Criticized | portfolio | (recoveries) | hedges (e) | receivables (f) | |||||||||||||||||||||||||||
|
Top 25 industries
(a)
|
||||||||||||||||||||||||||||||||||||
|
Real estate
|
$ | 80,284 | 10 | % | 70 | % | $ | 17,849 | $ | 5,961 | 23 | % | $ | 212 | $ | (2,141 | ) | $ | (48 | ) | ||||||||||||||||
|
Banks and finance companies
|
75,577 | 10 | 79 | 12,953 | 2,849 | 11 | 28 | (5,016 | ) | (9,457 | ) | |||||||||||||||||||||||||
|
Healthcare
|
38,032 | 5 | 83 | 6,092 | 436 | 2 | 2 | (5,338 | ) | (199 | ) | |||||||||||||||||||||||||
|
State and municipal governments
|
36,772 | 5 | 94 | 1,278 | 847 | 3 | — | (677 | ) | (134 | ) | |||||||||||||||||||||||||
|
Utilities
|
34,246 | 4 | 83 | 5,844 | 114 | — | 3 | (9,007 | ) | (65 | ) | |||||||||||||||||||||||||
|
Consumer products
|
29,766 | 4 | 65 | 9,504 | 792 | 3 | 32 | (8,114 | ) | (54 | ) | |||||||||||||||||||||||||
|
Asset managers
|
49,256 | 6 | 85 | 6,418 | 819 | 3 | 15 | (115 | ) | (5,303 | ) | |||||||||||||||||||||||||
|
Oil and gas
|
24,746 | 3 | 75 | 5,940 | 231 | 1 | 15 | (6,627 | ) | (7 | ) | |||||||||||||||||||||||||
|
Retail and consumer services
|
23,223 | 3 | 54 | 9,357 | 1,311 | 5 | (6 | ) | (6,120 | ) | (55 | ) | ||||||||||||||||||||||||
|
Holding companies
|
14,466 | 2 | 70 | 4,182 | 116 | 1 | (1 | ) | (689 | ) | (309 | ) | ||||||||||||||||||||||||
|
Technology
|
17,025 | 2 | 67 | 5,391 | 230 | 1 | — | (3,922 | ) | (3 | ) | |||||||||||||||||||||||||
|
Insurance
|
17,744 | 2 | 78 | 3,138 | 712 | 3 | — | (5,016 | ) | (846 | ) | |||||||||||||||||||||||||
|
Machinery and equipment
manufacturing
|
14,501 | 2 | 64 | 5,095 | 100 | — | 22 | (3,743 | ) | (6 | ) | |||||||||||||||||||||||||
|
Metals/mining
|
14,980 | 2 | 61 | 5,579 | 262 | 1 | (7 | ) | (3,149 | ) | (3 | ) | ||||||||||||||||||||||||
|
Media
|
13,177 | 2 | 61 | 3,779 | 1,305 | 5 | 26 | (3,435 | ) | — | ||||||||||||||||||||||||||
|
Telecom services
|
13,237 | 2 | 63 | 4,368 | 499 | 2 | (5 | ) | (7,073 | ) | (92 | ) | ||||||||||||||||||||||||
|
Securities firms and exchanges
|
25,590 | 3 | 81 | 4,744 | 138 | 1 | — | (151 | ) | (898 | ) | |||||||||||||||||||||||||
|
Business services
|
11,247 | 1 | 64 | 3,885 | 145 | 1 | 46 | (357 | ) | — | ||||||||||||||||||||||||||
|
Building materials/construction
|
12,065 | 2 | 49 | 4,925 | 1,342 | 5 | 22 | (2,601 | ) | — | ||||||||||||||||||||||||||
|
Chemicals/plastics
|
11,719 | 1 | 66 | 3,357 | 591 | 2 | 5 | (2,709 | ) | — | ||||||||||||||||||||||||||
|
Transportation
|
10,253 | 1 | 64 | 3,364 | 319 | 1 | — | (1,567 | ) | — | ||||||||||||||||||||||||||
|
Central government
|
14,441 | 2 | 98 | 276 | — | — | — | (4,548 | ) | (35 | ) | |||||||||||||||||||||||||
|
Automotive
|
11,448 | 1 | 52 | 3,687 | 1,775 | 7 | (1 | ) | (2,975 | ) | (1 | ) | ||||||||||||||||||||||||
|
Leisure
|
8,158 | 1 | 42 | 2,827 | 1,928 | 7 | (1 | ) | (721 | ) | — | |||||||||||||||||||||||||
|
Agriculture/paper manufacturing
|
6,920 | 1 | 43 | 3,226 | 726 | 3 | 1 | (835 | ) | — | ||||||||||||||||||||||||||
|
All other
(b)
|
181,713 | 23 | 86 | 22,321 | 2,449 | 9 | (6 | ) | (4,805 | ) | (2,301 | ) | ||||||||||||||||||||||||
|
Subtotal
|
$ | 790,586 | 100 | % | 77 | % | $ | 159,379 | $ | 25,997 | 100 | % | $ | 402 | $ | (91,451 | ) | $ | (19,816 | ) | ||||||||||||||||
|
Loans held-for-sale and loans
at fair value
|
13,955 | 2,258 | ||||||||||||||||||||||||||||||||||
|
Receivables from customers
|
16,141 | |||||||||||||||||||||||||||||||||||
|
Interest in purchased receivables
(c)
|
— | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 820,682 | $ | 159,379 | $ | 28,255 | $ | 402 | $ | (91,451 | ) | $ | (19,816 | ) | ||||||||||||||||||||||
| (a) | Rankings are based on exposure at December 31, 2009. The rankings of the industries presented in the 2008 table are based on the rankings of such industries at year-end 2009, not actual rankings in 2008. | |
| (b) | For more information on exposures to SPEs included in all other, see Note 16 on pages 206–214 of this Annual Report. | |
| (c) | Represents undivided interests in pools of receivables and similar types of assets due to the consolidation during 2009 of one of the Firm-administered multi-seller conduits. | |
| (d) | Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans. | |
| (e) | Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting. | |
| (f) | Represents other liquid securities collateral held by the Firm as of December 31, 2009 and 2008, respectively. |
Presented below is a discussion of several industries to which the Firm has significant
exposure, as well as industries the Firm continues to monitor because of actual or potential credit
concerns. For additional information, refer to the tables above and on the preceding page.
| • | Real estate: Exposure to this industry decreased by 15% or $11.8 billion from 2008 as loans and commitments were managed down, predominantly through repayments and loans sales. This sector continues to be challenging as property values in the U.S. remain under pressure, particularly in certain regions. The ratios of nonperforming loans and net charge-offs to loans have increased from 2008 due to deterioration in the commercial real estate portfolio, particularly in the latter half of 2009. The multi-family portfolio, which represents almost half of the commercial real estate exposure, accounts for the |
| smallest proportion of nonperforming loans and net charge-offs. The commercial lessors portfolio involves real estate leased to retail, industrial and office space tenants, while the commercial construction and development portfolio includes financing for the construction of office and professional buildings and malls. Commercial real estate exposure in CB is predominantly secured; CB’s exposure represents the majority of the Firm’s commercial real estate exposure. IB manages less than one fifth of the total Firm’s commercial real estate exposure; IB’s exposure represents primarily unsecured lending to Real Estate Investment Trust (“REITs”), lodging, and homebuilding clients. The increase in criticized real estate exposure was largely a result of downgrades within the overall portfolio reflecting the continued weakening credit environment. |
| JPMorgan Chase & Co./2009 Annual Report | 99 |
Table of Contents
Management’s discussion and analysis
The following table presents additional information on the wholesale real estate industry for the
periods ended December 31, 2009 and 2008.
| % of net | ||||||||||||||||||||||||||||
| December 31, 2009 | Credit | % of credit | Criticized | Nonperforming | % of nonperforming | Net charge-offs/ | charge-offs | |||||||||||||||||||||
| (in millions, except ratios) | exposure | portfolio | exposure | loans | loans to total loans (b) | (recoveries) | to total loans (b) | |||||||||||||||||||||
|
Commercial real estate subcategories
|
||||||||||||||||||||||||||||
|
Multi-family
|
$ | 32,073 | 47 | % | $ | 3,986 | $ | 1,109 | 3.57 | % | $ | 199 | 0.64 | % | ||||||||||||||
|
Commercial lessors
|
18,512 | 27 | 4,017 | 1,057 | 6.97 | 232 | 1.53 | |||||||||||||||||||||
|
Commercial construction and development
|
6,593 | 10 | 1,518 | 313 | 6.81 | 105 | 2.28 | |||||||||||||||||||||
|
Other
(a)
|
11,331 | 16 | 2,454 | 409 | 6.44 | 152 | 2.39 | |||||||||||||||||||||
|
Total commercial real estate
|
$ | 68,509 | 100 | % | $ | 11,975 | $ | 2,888 | 5.05 | % | $ | 688 | 1.20 | % | ||||||||||||||
| % of net | ||||||||||||||||||||||||||||
| December 31, 2008 | Credit | % of credit | Criticized | Nonperforming | % of nonperforming | Net charge-offs/ | charge-offs | |||||||||||||||||||||
| (in millions, except ratios) | exposure | portfolio | exposure | loans | loans to total loans (b) | (recoveries) | to total loans (b) | |||||||||||||||||||||
|
Commercial real estate subcategories
|
||||||||||||||||||||||||||||
|
Multi-family
|
$ | 36,188 | 45 | % | $ | 1,191 | $ | 293 | 0.87 | % | $ | (1 | ) | — | % | |||||||||||||
|
Commercial lessors
|
21,037 | 26 | 1,649 | 74 | 0.43 | 4 | 0.02 | |||||||||||||||||||||
|
Commercial construction and development
|
6,688 | 8 | 706 | 82 | 1.95 | 4 | 0.10 | |||||||||||||||||||||
|
Other
(a)
|
16,371 | 21 | 2,415 | 357 | 3.89 | 205 | 2.23 | |||||||||||||||||||||
|
Total commercial real estate
|
$ | 80,284 | 100 | % | $ | 5,961 | $ | 806 | 1.25 | % | $ | 212 | 0.33 | % | ||||||||||||||
| (a) | Other includes lodging, REITs, single family, homebuilders and other real estate. | |
| (b) | Ratios were calculated using end-of-period retained loans of $57.2 billion and $64.5 billion for the years ended December 31, 2009 and 2008, respectively. |
| • | Banks and finance companies: Exposure to this industry decreased by 28% or $21.5 billion from 2008, primarily as a result of lower derivative exposure to commercial banks. | |
| • | Automotive: Conditions in the U.S. had improved by the end of 2009, largely as a result of the government supported restructuring of General Motors and Chrysler in the first half of 2009 and the related effects on automotive suppliers. Exposure to this industry decreased by 18% or $2.1 billion and criticized exposure decreased 30% or $535 million from 2008, largely due to loan repayments and sales. Most of the Firm’s remaining criticized exposure in this segment remains performing and is substantially secured. | |
| • | Leisure: Exposure to this industry decreased by 16% or $1.3 billion from 2008 due to loan repayments and sales, primarily in gaming. While exposure to this industry declined, the criticized component remained elevated |
| due to the continued weakness in the industry, particularly in gaming. The gaming portfolio continues to be managed actively. | ||
| • | All other: All other in the wholesale credit exposure concentration table on pages 98–99 of this Annual Report at December 31, 2009 (excluding loans held-for-sale and loans at fair value) included $135.8 billion of credit exposure to seven industry segments. Exposures related to SPEs and to Individuals, Private Education & Civic Organizations were 44% and 47%, respectively, of this category. SPEs provide secured financing (generally backed by receivables, loans or bonds) originated by a diverse group of companies in industries that are not highly correlated. For further discussion of SPEs, see Note 16 on pages 206–214 of this Annual Report. The remaining all other exposure is well-diversified across industries and none comprise more than 1.0% of total exposure. |
Loans
The following table presents wholesale loans and nonperforming assets by business segment as of
December 31, 2009 and 2008.
| December 31, 2009 | ||||||||||||||||||||||||||||||||
| Assets acquired in loan | ||||||||||||||||||||||||||||||||
| Loans | Nonperforming | satisfactions | ||||||||||||||||||||||||||||||
| Held-for-sale | Real estate | Nonperforming | ||||||||||||||||||||||||||||||
| (in millions) | Retained | and fair value | Total | Loans | Derivatives | owned | Other | assets | ||||||||||||||||||||||||
|
Investment Bank
|
$ | 45,544 | $ | 3,567 | $ | 49,111 | $ | 3,504 | $ | 529 | (b) | $ | 203 | $ | — | $ | 4,236 | |||||||||||||||
|
Commercial Banking
|
97,108 | 324 | 97,432 | 2,801 | — | 187 | 1 | 2,989 | ||||||||||||||||||||||||
|
Treasury & Securities Services
|
18,972 | — | 18,972 | 14 | — | — | — | 14 | ||||||||||||||||||||||||
|
Asset Management
|
37,755 | — | 37,755 | 580 | — | 2 | — | 582 | ||||||||||||||||||||||||
|
Corporate/Private Equity
|
698 | 207 | 905 | 5 | — | — | — | 5 | ||||||||||||||||||||||||
|
Total
|
$ | 200,077 | $ | 4,098 | $ | 204,175 | $ | 6,904 | (a) | $ | 529 | $ | 392 | $ | 1 | $ | 7,826 | |||||||||||||||
| 100 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| December 31, 2008 | ||||||||||||||||||||||||||||||||
| Assets acquired in loan | ||||||||||||||||||||||||||||||||
| Loans | Nonperforming | satisfactions | ||||||||||||||||||||||||||||||
| Held-for-sale | Real estate | Nonperforming | ||||||||||||||||||||||||||||||
| (in millions) | Retained | and fair value | Total | Loans | Derivatives | owned | Other | assets | ||||||||||||||||||||||||
|
Investment Bank
|
$ | 71,357 | $ | 13,660 | $ | 85,017 | $ | 1,175 | $ | 1,079 | (b) | $ | 247 | $ | — | $ | 2,501 | |||||||||||||||
|
Commercial Banking
|
115,130 | 295 | 115,425 | 1,026 | — | 102 | 14 | 1,142 | ||||||||||||||||||||||||
|
Treasury & Securities Services
|
24,508 | — | 24,508 | 30 | — | — | — | 30 | ||||||||||||||||||||||||
|
Asset Management
|
36,188 | — | 36,188 | 147 | — | — | 25 | 172 | ||||||||||||||||||||||||
|
Corporate/Private Equity
|
906 | — | 906 | 4 | — | — | — | 4 | ||||||||||||||||||||||||
|
Total
|
$ | 248,089 | $ | 13,955 | $ | 262,044 | $ | 2,382 | (a) | $ | 1,079 | $ | 349 | $ | 39 | $ | 3,849 | |||||||||||||||
| (a) | The Firm held allowance for loan losses of $2.0 billion and $712 million related to nonperforming retained loans resulting in allowance coverage ratios of 31% and 30%, at December 31, 2009 and 2008, respectively. Wholesale nonperforming loans represent 3.38% and 0.91% of total wholesale loans at December 31, 2009 and 2008, respectively. | |
| (b) | Nonperforming derivatives represent less than 1.0% of the total derivative receivables net of cash collateral at both December 31, 2009 and 2008. |
In the normal course of business, the Firm provides loans to a variety of customers,
from large corporate and institutional clients to high-net-worth individuals.
Retained wholesale loans were $200.1 billion at December 31, 2009, compared with $248.1 billion at
December 31, 2008. The $48.0 billion decrease, across most wholesale lines of business, reflected
lower customer demand. Loans held-for-sale and loans at fair value relate primarily to syndicated
loans and loans transferred from the retained portfolio. Held-for-sale loans and loans carried at
fair value were $4.1 billion and $14.0 billion at December 31, 2009 and 2008, respectively. The
decreases in both held-for-sale loans and loans at fair value reflected sales, reduced carrying
values and lower volumes in the syndication market.
The Firm actively manages wholesale credit exposure through loan and commitment sales. During 2009
and 2008, the Firm sold $3.9 billion of loans and commitments in each year, recognizing losses of
$38 million and $41 million in each period, respectively. These results include gains or losses on
sales of nonperforming loans, if any, as discussed on page 102 of this Annual Report. These
activities are not related to the Firm’s securitization activities, which are undertaken for
liquidity and balance sheet–management purposes. For further discussion of securitization activity,
see Liquidity Risk Management and Note 15 on pages 88–92 and 198–205, respectively, of this Annual
Report.
Nonperforming wholesale loans were $6.9 billion at December 31, 2009, an increase of $4.5 billion
from December 31, 2008, reflecting continued deterioration in the credit environment, predominantly
related to loans in the real estate, leisure and banks and finance companies industries. As of
December 31, 2009, wholesale loans restructured as part of a troubled debt restructuring were
approximately $1.1 billion.
The following table presents the geographic distribution of wholesale loans and
nonperforming loans as of December 31, 2009 and 2008. The
geographic distribution of the wholesale portfolio is determined based predominantly on the
domicile of the borrower.
Loans and nonperforming loans, U.S. and Non-U.S.
Wholesale
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Nonperforming | Nonperforming | |||||||||||||||
| (in millions) | Loans | loans | Loans | loans | ||||||||||||
|
U.S.
|
$ | 149,085 | $ | 5,844 | $ | 186,776 | $ | 2,123 | ||||||||
|
Non-U.S.
|
55,090 | 1,060 | 75,268 | 259 | ||||||||||||
|
Ending balance
|
$ | 204,175 | $ | 6,904 | $ | 262,044 | $ | 2,382 | ||||||||
| JPMorgan Chase & Co./2009 Annual Report | 101 |
Table of Contents
Management’s discussion and analysis
The following table presents the change in the nonperforming loan portfolio for the years ended
December 31, 2009 and 2008.
Nonperforming loan activity
Wholesale
| Year ended December 31, (in millions) | 2009 | 2008 | ||||||
|
Beginning balance
|
$ | 2,382 | $ | 514 | ||||
|
Additions
|
13,591 | 3,381 | ||||||
|
Reductions:
|
||||||||
|
Paydowns and other
|
4,964 | 859 | ||||||
|
Gross charge-offs
|
2,974 | 521 | ||||||
|
Returned to performing
|
341 | 93 | ||||||
|
Sales
|
790 | 40 | ||||||
|
Total reductions
|
9,069 | 1,513 | ||||||
|
Net additions
|
4,522 | 1,868 | ||||||
|
Ending balance
|
$ | 6,904 | $ | 2,382 | ||||
The following table presents net charge-offs, which are defined as gross charge-offs less
recoveries, for the years ended December 31, 2009 and 2008. The amounts in the table below do not
include gains from sales of nonperforming loans.
Net charge-offs
Wholesale
| Year ended December 31, | ||||||||
| (in millions, except ratios) | 2009 | 2008 | ||||||
|
Loans – reported
|
||||||||
|
Average loans retained
|
$ | 223,047 | $ | 219,612 | ||||
|
Net charge-offs
|
3,132 | 402 | ||||||
|
Average annual net charge-off rate
|
1.40 | % | 0.18 | % | ||||
Derivative contracts
In the normal course of business, the Firm uses derivative instruments to meet the needs of
customers; to generate revenue through trading activities; to manage exposure to fluctuations in
interest rates, currencies and other markets; and to manage the Firm’s credit exposure. For further
discussion of these contracts, see Note 5 and Note 32 on pages 167–175 and 234–235 of this Annual
Report.
The following tables summarize the net derivative receivables MTM for the periods presented.
Derivative receivables marked to market
| December 31, | Derivative receivables MTM | |||||||
| (in millions) | 2009 | 2008 | ||||||
|
Interest rate
(a)
|
$ | 26,777 | $ | 49,996 | ||||
|
Credit derivatives
|
18,815 | 44,695 | ||||||
|
Foreign exchange
(a)
|
21,984 | 38,820 | ||||||
|
Equity
|
6,635 | 14,285 | ||||||
|
Commodity
|
5,999 | 14,830 | ||||||
|
Total, net of cash collateral
|
80,210 | 162,626 | ||||||
|
Liquid securities collateral held
against derivative receivables
|
(15,519 | ) | (19,816 | ) | ||||
|
Total, net of all collateral
|
$ | 64,691 | $ | 142,810 | ||||
| (a) | In 2009, cross-currency interest rate swaps previously reported in interest rate contracts were reclassified to foreign exchange contracts to be more consistent with industry practice. The effect of this change resulted in a reclassification of $14.1 billion of cross-currency interest rate swaps to foreign exchange contracts as of December 31, 2008. |
The amount of derivative receivables reported on the Consolidated Balance Sheets of $80.2
billion and $162.6 billion at December 31, 2009 and 2008, respectively, are the amount of the MTM
or fair value of the derivative
contracts after giving effect to legally enforceable master netting
agreements, cash collateral held by the Firm and CVA. These amounts on the Consolidated Balance
Sheets represent the cost to the Firm to replace the contracts at current market rates should the
counterparty default. However, in management’s view, the appropriate measure of current credit risk
should also reflect additional liquid securities held as collateral by the Firm of $15.5 billion
and $19.8 billion at December 31, 2009 and 2008, respectively, resulting in total exposure, net of
all collateral, of $64.7 billion and $142.8 billion at December 31, 2009 and 2008, respectively.
The decrease of $78.1 billion in derivative receivables MTM, net of the above mentioned collateral,
from December 31, 2008, was primarily related to tightening credit spreads, volatile foreign
exchange rates and rising rates on interest rate swaps.
The Firm also holds additional collateral delivered by clients at the initiation of transactions,
as well as collateral related to contracts that have a non-daily call frequency and collateral that
the Firm has agreed to return but has not yet settled as of the reporting date. Though this
collateral does not reduce the balances noted in the table above, it is available as security
against potential exposure that could arise should the MTM of the client’s derivative transactions
move in the Firm’s favor. As of December 31, 2009 and 2008, the Firm held $16.9 billion and $22.2
billion of this additional collateral, respectively. The derivative receivables MTM, net of all collateral, also do not include other credit enhancements,
such as letters of credit.
While useful as a current view of credit exposure, the net MTM value of the derivative receivables
does not capture the potential future variability of that credit exposure. To capture the potential
future variability of credit exposure, the Firm calculates, on a client-by-client basis, three
measures of potential derivatives-related credit loss: Peak, Derivative Risk Equivalent (“DRE”),
and Average exposure (“AVG”). These measures all incorporate netting and collateral benefits, where
applicable.
Peak exposure to a counterparty is an extreme measure of exposure calculated at a 97.5% confidence
level. DRE exposure is a measure that expresses the risk of derivative exposure on a basis intended
to be equivalent to the risk of loan exposures. The measurement is done by equating the unexpected
loss in a derivative counterparty exposure (which takes into consideration both the loss volatility
and the credit rating of the counterparty) with the unexpected loss in a loan exposure (which takes
into consideration only the credit rating of the counterparty). DRE is a less extreme measure of
potential credit loss than Peak and is the primary measure used by the Firm for credit approval of
derivative transactions.
Finally, AVG is a measure of the expected MTM value of the Firm’s derivative receivables at future
time periods, including the benefit of collateral. AVG exposure over the total life of the
derivative contract is used as the primary metric for pricing purposes and is used to calculate
credit capital and the CVA, as further described below. AVG exposure was $49.0 billion and $83.7
billion at December 31, 2009 and 2008, respectively, compared with derivative receivables MTM, net
of all collateral, of $64.7 billion and $142.8 billion at December 31, 2009 and 2008, respectively.
The MTM value of the Firm’s derivative receivables incorporates an adjustment, the CVA, to reflect
the credit quality of counterparties.
| 102 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The CVA is based on the Firm’s AVG to a counterparty and the
counterparty’s credit spread in the credit derivatives market. The
primary components of changes in CVA are credit spreads, new deal activity or unwinds, and changes
in the underlying market environment. The Firm believes that active risk management is essential to
controlling the dynamic credit risk in the derivatives portfolio. In addition, the Firm takes into
consideration the potential for correlation between the Firm’s AVG to a counterparty and the
counterparty’s credit quality within the credit approval process. The Firm risk manages exposure to
changes in CVA by entering into credit derivative transactions, as well as interest rate, foreign
exchange, equity and commodity derivative transactions.
The accompanying graph shows exposure profiles to derivatives over the next ten years as calculated by the
DRE and AVG metrics.
The two measures generally show declining exposure after the first year, if no
new trades were added to the portfolio.
Exposure profile of derivatives measures
The following table summarizes the ratings profile of the Firm’s derivative receivables MTM,
net of other liquid securities collateral, for the dates indicated.
Ratings profile of derivative receivables MTM
| Rating equivalent | 2009 | 2008 | ||||||||||||||
| December 31, | Exposure net of | % of exposure net | Exposure net of | % of exposure net | ||||||||||||
| (in millions, except ratios) | of all collateral | of all collateral | of all collateral | of all collateral | ||||||||||||
|
AAA/Aaa to AA-/Aa3
|
$ | 25,530 | 40 | % | $ | 68,708 | 48 | % | ||||||||
|
A+/A1 to A-/A3
|
12,432 | 19 | 24,748 | 17 | ||||||||||||
|
BBB+/Baa1 to BBB-/Baa3
|
9,343 | 14 | 15,747 | 11 | ||||||||||||
|
BB+/Ba1 to B-/B3
|
14,571 | 23 | 28,186 | 20 | ||||||||||||
|
CCC+/Caa1 and below
|
2,815 | 4 | 5,421 | 4 | ||||||||||||
|
Total
|
$ | 64,691 | 100 | % | $ | 142,810 | 100 | % | ||||||||
The Firm actively pursues the use of collateral agreements to mitigate
counterparty credit risk in derivatives. The percentage of the Firm’s derivatives transactions
subject to collateral agreements – excluding foreign exchange spot trades, which are not typically
covered by collateral agreements due to their short maturity – was 89% as of December 31, 2009,
largely unchanged from 88% at December 31, 2008.
The Firm posted $56.7 billion and $99.1 billion of collateral at
December 31, 2009 and 2008, respectively.
Certain derivative and collateral agreements include provisions that require the counterparty
and/or the Firm, upon specified downgrades in the respective credit ratings of their legal
entities, to post collateral for the benefit of the other party. At December 31, 2009, the impact
of a single-notch and six-notch ratings downgrade to JPMorgan Chase & Co., and its subsidiaries,
primarily JPMorgan Chase Bank, N.A., would have required $1.2 billion and $3.6 billion,
respectively, of additional collateral to be posted by the Firm. Certain derivative contracts also
provide for termination of the contract, generally upon a downgrade to a specified rating of either
the Firm or the counterparty, at the then-existing MTM value of the derivative contracts.
Credit derivatives
Credit derivatives are financial contracts that isolate credit risk from an underlying instrument (such as a loan or security) and transfers that risk from one party (the buyer of credit protection) to another (the seller of credit protection). The Firm is both a purchaser and seller of credit protection. As a purchaser of credit protection, the Firm has risk that the counterparty providing the credit protection
Credit derivatives are financial contracts that isolate credit risk from an underlying instrument (such as a loan or security) and transfers that risk from one party (the buyer of credit protection) to another (the seller of credit protection). The Firm is both a purchaser and seller of credit protection. As a purchaser of credit protection, the Firm has risk that the counterparty providing the credit protection
will default. As a seller of credit protection, the
Firm has risk that the underlying instrument referenced in the contract will be subject to a credit
event. Of the Firm’s $80.2 billion of total derivative receivables MTM at December 31, 2009, $18.8
billion, or 23%, was associated with credit derivatives, before the benefit of liquid securities
collateral.
One type of credit derivatives the Firm enters into with counterparties are credit default swaps
(“CDS”). For further detailed discussion of these and other types of credit derivatives, see Note 5
on pages 167–175 of this Annual Report. The large majority of CDS are subject to collateral
arrangements to protect the Firm from counterparty credit risk. In 2009, the frequency and size of
defaults for both trading counterparties and the underlying debt referenced in credit derivatives
were well above historical norms. The use of collateral to settle against defaulting counterparties
generally performed as designed in significantly mitigating the Firm’s exposure to these
counterparties.
The Firm uses credit derivatives for two primary purposes: first, in its capacity as a market-maker
in the dealer/client business to meet the needs of customers; and second, in order to mitigate the
Firm’s own credit risk associated with its overall derivative receivables and traditional
commercial credit lending exposures (loans and unfunded commitments).
| JPMorgan Chase & Co./2009 Annual Report | 103 |
Table of Contents
Management’s discussion and analysis
The following table presents the Firm’s notional amounts of credit derivatives protection purchased
and sold as of December 31, 2009 and 2008, distinguishing between dealer/client activity and credit
portfolio activity.
| Notional amount | ||||||||||||||||||||
| Dealer/client | Credit portfolio | |||||||||||||||||||
| December 31, | Protection | Protection | Protection | Protection | ||||||||||||||||
| (in billions) | purchased (a) | sold | purchased (a)(b) | sold | Total | |||||||||||||||
|
2009
|
$ | 2,997 | $ | 2,947 | $ | 49 | $ | 1 | $ | 5,994 | ||||||||||
|
2008
|
$ | 4,193 | $ | 4,102 | $ | 92 | $ | 1 | $ | 8,388 | ||||||||||
| (a) | Included $3.0 trillion and $4.0 trillion at December 31, 2009 and 2008, respectively, of notional exposure within protection purchased where the Firm has protection sold with identical underlying reference instruments. For a further discussion on credit derivatives, see Note 5 on pages 167–175 of this Annual Report. | |
| (b) | Included $19.7 billion and $34.9 billion at December 31, 2009 and 2008, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio. |
Dealer/client business
Within the dealer/client business, the Firm actively manages credit derivatives by buying and
selling credit protection, predominantly on corporate debt obligations, according to client demand
for credit risk protection on the underlying reference instruments. Protection may be bought or
sold by the Firm on single reference debt instruments (“single-name” credit derivatives),
portfolios of referenced instruments (“portfolio” credit derivatives) or quoted indices (“indexed”
credit derivatives). The risk positions are largely matched as the Firm’s exposure to a given
reference entity under a contract to sell protection to a counterparty may be offset partially, or
entirely, with a contract to purchase protection from another counterparty on the same underlying
instrument. Any residual default exposure and spread risk is actively managed by the Firm’s various
trading desks.
At December 31, 2009, the total notional amount of protection purchased and sold decreased by $2.4
trillion from year-end 2008. The decrease was primarily due to the impact of industry efforts to
reduce offsetting trade activity.
Credit portfolio activities
Management of the Firm’s wholesale exposure is accomplished through a number of means including
loan syndication and participations, loan sales, securitizations, credit derivatives, use of master
netting agreements, and collateral and other risk-reduction techniques. The Firm also manages its
wholesale credit exposure by purchasing protection through single-name and portfolio credit
derivatives to manage the credit risk associated with loans, lending-related commitments and
derivative receivables. Gains or losses on the credit derivatives are expected to offset the
unrealized increase or decrease in credit risk on the loans, lending-related commitments or
derivative receivables. This activity does not reduce the reported level of assets on the balance
sheet or the level of reported off–balance sheet commitments, although it does provide the Firm
with credit risk protection. The Firm also diversifies its exposures by selling credit protection,
which increases exposure to industries or clients where the Firm has little or no client-related
exposure; however, this activity is not material to the Firm’s overall credit exposure.
Use of single-name and portfolio credit derivatives
| December 31, | Notional amount of protection purchased and sold | |||||||
| (in millions) | 2009 | 2008 | ||||||
|
Credit derivatives used to manage:
|
||||||||
|
Loans and lending-related commitments
|
$ | 36,873 | $ | 81,227 | ||||
|
Derivative receivables
|
11,958 | 10,861 | ||||||
|
Total protection
purchased (a) |
$ | 48,831 | $ | 92,088 | ||||
|
Total protection sold
|
455 | 637 | ||||||
|
|
||||||||
|
Credit derivatives hedges notional
|
$ | 48,376 | $ | 91,451 | ||||
| (a) | Included $19.7 billion and $34.9 billion at December 31, 2009 and 2008, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio. |
The credit derivatives used by JPMorgan Chase for credit portfolio management activities do not
qualify for hedge accounting under U.S. GAAP; these derivatives are reported at fair value, with
gains and losses recognized in principal transactions revenue. In contrast, the loans and
lending-related commitments being risk-managed are accounted for on an accrual basis. This
asymmetry in accounting treatment, between loans and lending-related commitments and the credit
derivatives used in credit portfolio management activities, causes earnings volatility that is not
representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit
exposure. The MTM related to the Firm’s credit derivatives used for managing credit exposure, as
well as the MTM related to the CVA (which reflects the credit quality of derivatives counterparty
exposure) are included in the gains and losses realized on credit derivatives disclosed in the
table below. These results can vary from period to period due to market conditions that affect
specific positions in the portfolio.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Hedges of lending-related commitments
(a)
|
$ | (3,258 | ) | $ | 2,216 | $ | 350 | |||||
|
CVA and hedges of CVA
(a)
|
1,920 | (2,359 | ) | (363 | ) | |||||||
|
|
||||||||||||
|
Net gains/(losses)
(b)
|
$ | (1,338 | ) | $ | (143 | ) | $ | (13 | ) | |||
| (a) | These hedges do not qualify for hedge accounting under U.S. GAAP. | |
| (b) | Excludes losses of $2.7 billion and gains of $530 million and $373 million for the years ended December 31, 2009, 2008 and 2007, respectively, of other principal transactions revenue that are not associated with hedging activities. |
| 104 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Lending-related commitments
JPMorgan Chase uses lending-related financial instruments, such as 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 counterparties draw down on these
commitments or the Firm fulfills its obligation under these guarantees, and the counterparties
subsequently fail to perform according to the terms of these contracts.
Wholesale lending-related commitments were $347.2 billion at December 31, 2009, compared with
$379.9 billion at December 31, 2008, reflecting lower customer demand. In the Firm’s view, the
total contractual amount of these wholesale lending-related commitments is not representative of
the Firm’s actual credit risk exposure or funding requirements. In determining the amount of credit
risk exposure the Firm has to wholesale lending-related commitments, which is used as the basis for
allocating credit risk capital to these commitments, the Firm has established a “loan-equivalent”
amount for each commitment; this amount represents the portion of the unused commitment or other
contingent exposure that is expected, based on average portfolio historical experience, to become
drawn upon in an event of a default by an obligor. The loan-equivalent amounts of the Firm’s
lending-related commitments were $179.8 billion and $204.3 billion as of December 31, 2009 and
2008, respectively.
Emerging markets country exposure
The Firm has a comprehensive internal process for measuring and managing exposures to emerging
markets countries. There is no common definition of emerging markets, but the Firm generally
includes in its definition those countries whose sovereign debt ratings are equivalent to “A+” or
lower. Exposures to a country include all credit-related lending, trading and investment
activities, whether cross-border or locally funded. In addition to monitoring country exposures,
the Firm uses stress tests to measure and manage the risk of extreme loss associated with sovereign
crises.
The table below presents the Firm’s exposure, by country, to the top ten emerging markets. The
selection of countries is based solely on the Firm’s largest total exposures by country and not the
Firm’s view of any actual or potentially adverse credit conditions. Exposure is reported based on
the country where the assets of the obligor, counterparty or guarantor are located. Exposure
amounts are adjusted for collateral and for credit enhancements (e.g., guarantees and letters of
credit) provided by third parties; outstandings supported by a guarantor located outside the
country or backed by collateral held outside the country are assigned to the country of the
enhancement provider. In addition, the effect of credit derivative hedges and other short credit or
equity trading positions are reflected in the table below. Total exposure includes exposure to both
government and private-sector entities in a country.
Top 10 emerging markets country exposure
| At December 31, 2009 | Cross-border | Total | |||||||||||||||||||||
| (in billions) | Lending (a) | Trading (b) | Other (c) | Total | Local (d) | exposure | |||||||||||||||||
|
South Korea
|
$ | 2.7 | $ | 1.7 | $ | 1.3 | $ | 5.7 | $ | 3.3 | $ | 9.0 | |||||||||||
|
India
|
1.5 | 2.7 | 1.1 | 5.3 | 0.3 | 5.6 | |||||||||||||||||
|
Brazil
|
1.8 | (0.5 | ) | 1.0 | 2.3 | 2.2 | 4.5 | ||||||||||||||||
|
China
|
1.8 | 0.4 | 0.8 | 3.0 | — | 3.0 | |||||||||||||||||
|
Taiwan
|
0.1 | 0.8 | 0.3 | 1.2 | 1.8 | 3.0 | |||||||||||||||||
|
Hong Kong
|
1.1 | 0.2 | 1.3 | 2.6 | — | 2.6 | |||||||||||||||||
|
Mexico
|
1.2 | 0.8 | 0.4 | 2.4 | — | 2.4 | |||||||||||||||||
|
Chile
|
0.8 | 0.6 | 0.5 | 1.9 | — | 1.9 | |||||||||||||||||
|
Malaysia
|
0.1 | 1.3 | 0.3 | 1.7 | 0.2 | 1.9 | |||||||||||||||||
|
South Africa
|
0.4 | 0.8 | 0.5 | 1.7 | — | 1.7 | |||||||||||||||||
| At December 31, 2008 | Cross-border | Total | |||||||||||||||||||||
| (in billions) | Lending (a) | Trading (b) | Other (c) | Total | Local (d) | exposure | |||||||||||||||||
|
South Korea
|
$ | 2.9 | $ | 1.6 | $ | 0.9 | $ | 5.4 | $ | 2.3 | $ | 7.7 | |||||||||||
|
India
|
2.2 | 2.8 | 0.9 | 5.9 | 0.6 | 6.5 | |||||||||||||||||
|
China
|
1.8 | 1.6 | 0.3 | 3.7 | 0.8 | 4.5 | |||||||||||||||||
|
Brazil
|
1.8 | — | 0.5 | 2.3 | 1.3 | 3.6 | |||||||||||||||||
|
Taiwan
|
0.1 | 0.2 | 0.3 | 0.6 | 2.5 | 3.1 | |||||||||||||||||
|
Hong Kong
|
1.3 | 0.3 | 1.2 | 2.8 | — | 2.8 | |||||||||||||||||
|
United Arab Emirates
|
1.8 | 0.7 | — | 2.5 | — | 2.5 | |||||||||||||||||
|
Mexico
|
1.9 | 0.3 | 0.3 | 2.5 | — | 2.5 | |||||||||||||||||
|
South Africa
|
0.9 | 0.5 | 0.4 | 1.8 | — | 1.8 | |||||||||||||||||
|
Russia
|
1.3 | 0.2 | 0.3 | 1.8 | — | 1.8 | |||||||||||||||||
| (a) | Lending includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, other monetary assets, issued letters of credit net of participations, and undrawn commitments to extend credit. | |
| (b) | Trading includes: (1) issuer exposure on cross-border debt and equity instruments, held both in trading and investment accounts and adjusted for the impact of issuer hedges, including credit derivatives; and (2) counterparty exposure on derivative and foreign exchange contracts as well as securities financing trades (resale agreements and securities borrowed). | |
| (c) | Other represents mainly local exposure funded cross-border, including capital investments in local entities. | |
| (d) | Local exposure is defined as exposure to a country denominated in local currency and booked locally. Any exposure not meeting these criteria is defined as cross-border exposure. |
| JPMorgan Chase & Co./2009 Annual Report | 105 |
Table of Contents
Management’s discussion and analysis
CONSUMER CREDIT PORTFOLIO
JPMorgan Chase’s consumer portfolio consists primarily of residential mortgages, home
equity loans, credit cards, auto loans, student loans and business banking loans, with a primary
focus on serving the prime consumer credit market. The portfolio also includes home equity loans
and lines of credit secured by junior liens, mortgage loans with interest-only payment options to
predominantly prime borrowers, as well as certain payment-option loans acquired from Washington
Mutual that may result in negative amortization.
A substantial portion of the consumer loans acquired in the Washington Mutual transaction were
identified as credit-impaired based on an analysis of high-risk characteristics, including product
type, loan-to-value ratios, FICO scores and delinquency status. These purchased credit-impaired
loans are accounted for on a pool basis, and the pools are considered to be performing. At the time
of the acquisition, these loans were recorded at fair value, including an estimate of losses that
were expected to be incurred over the estimated remaining lives of the loan pools. Therefore, no
allowance for loan losses was recorded for these loans as of the transaction date. In 2009,
management concluded that it was probable that higher expected future credit losses for certain
pools of the purchased credit-impaired portfolio would result in a decrease in expected future cash
flows for these pools. As a result, an allowance for loan losses of $1.6 billion was established.
The credit performance of the consumer portfolio across the entire product spectrum continues to be
negatively affected by the economic environment. Higher unemployment and weaker overall economic
conditions have led to a significant increase in the number of loans charged off, while continued
weak housing prices have driven a significant increase in the severity of loss recognized on real
estate loans that default. Delinquencies and nonperforming loans continued to increase in 2009. The
increases in these credit quality metrics were due, in part, to foreclosure moratorium programs,
which ended in early 2009. These moratoriums halted stages of the foreclosure process while the
U.S. Treasury developed its homeowner assistance program (i.e., MHA) and the Firm
enhanced its
foreclosure-prevention programs. Due to a high volume of foreclosures after the moratoriums,
processing timelines for foreclosures were elongated by approximately 100 days. Losses related to
these loans continued to be recognized in accordance with the Firm’s normal charge-off practices,
but some delinquent loans that would have otherwise been foreclosed upon remain in the mortgage and
home equity loan portfolios. Additional deterioration in the overall economic environment,
including continued deterioration in the labor and residential real estate markets, could cause
delinquencies and losses to increase beyond the Firm’s current expectations.
Since mid-2007, the Firm has taken actions to reduce risk exposure to consumer loans by tightening
both underwriting and loan qualification standards for both real estate and non-real estate lending
products. For residential real estate lending, tighter income verification, more conservative
collateral valuation, reduced loan-to-value maximums, and higher FICO and custom risk score
requirements are just some of the actions taken to date to mitigate risk related to new
originations. The Firm believes that these actions have better aligned loan pricing with the
underlying credit risk of the loans. In addition, originations of subprime mortgage loans, stated
income and broker-originated mortgage and home equity loans have been eliminated entirely to
further reduce originations with high-risk characteristics. The Firm has never originated option
adjustable-rate mortgages. The tightening of underwriting criteria for auto loans has resulted in
the reduction of both extended-term and high loan-to-value financing.
As a further action to reduce risk associated with lending-related commitments,
the Firm has reduced or canceled certain lines of credit as permitted by law. For example, the Firm
may reduce or close home equity lines of credit when there are significant decreases in the value
of the underlying property or when there has been a demonstrable decline in the creditworthiness of
the borrower. Similarly, certain inactive credit card lines have been closed and a number of active
credit card lines have been reduced.
| 106 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The following table presents managed consumer credit–related information (including RFS, CS and
residential real estate loans reported in the Corporate/Private Equity segment) for the dates
indicated. For further information about the Firm’s nonaccrual and charge-off accounting policies,
see Note 13 on pages 192–196 of this Annual Report.
Consumer portfolio
| Credit | Nonperforming | 90 days or more past | Average annual net | |||||||||||||||||||||||||||||||||||||
| As of or for the year ended December 31, | exposure | loans (i)(j) | due and still accruing (j) | Net charge-offs | charge-off rate (k) | |||||||||||||||||||||||||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Consumer loans – excluding
purchased credit-impaired loans and loans held-for-sale
|
||||||||||||||||||||||||||||||||||||||||
|
Home equity – senior lien
(a)
|
$ | 27,376 | $ | 29,793 | $ | 477 | $ | 291 | $ | — | $ | — | $ | 234 | $ | 86 | 0.80 | % | 0.33 | % | ||||||||||||||||||||
|
Home equity – junior lien
(b)
|
74,049 | 84,542 | 1,188 | 1,103 | — | — | 4,448 | 2,305 | 5.62 | 3.12 | ||||||||||||||||||||||||||||||
|
Prime mortgage
|
66,892 | 72,266 | 4,355 | 1,895 | — | — | 1,894 | 526 | 2.74 | 1.02 | ||||||||||||||||||||||||||||||
|
Subprime mortgage
|
12,526 | 15,330 | 3,248 | 2,690 | — | — | 1,648 | 933 | 11.86 | 6.10 | ||||||||||||||||||||||||||||||
|
Option ARMs
|
8,536 | 9,018 | 312 | 10 | — | — | 63 | — | 0.71 | — | ||||||||||||||||||||||||||||||
|
Auto loans
(c)
|
46,031 | 42,603 | 177 | 148 | — | — | 627 | 568 | 1.44 | 1.30 | ||||||||||||||||||||||||||||||
|
Credit card – reported
(d)(e)
|
78,786 | 104,746 | 3 | 4 | 3,481 | 2,649 | 9,634 | 4,556 | 11.07 | 5.47 | ||||||||||||||||||||||||||||||
|
All other loans
|
31,700 | 33,715 | 900 | 430 | 542 | 463 | 1,285 | 459 | 3.88 | 1.58 | ||||||||||||||||||||||||||||||
|
Total consumer loans
|
345,896 | 392,013 | 10,660 | 6,571 | 4,023 | 3,112 | 19,833 | 9,433 | 5.45 | 2.90 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Consumer loans – purchased credit-impaired
(f)
|
||||||||||||||||||||||||||||||||||||||||
|
Home equity
|
26,520 | 28,555 | NA | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Prime mortgage
|
19,693 | 21,855 | NA | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Subprime mortgage
|
5,993 | 6,760 | NA | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Option ARMs
|
29,039 | 31,643 | NA | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Total consumer loans – purchased credit-impaired
|
81,245 | 88,813 | NA | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||||||||
|
Total consumer loans –
retained
|
427,141 | 480,826 | 10,660 | 6,571 | 4,023 | 3,112 | 19,833 | 9,433 | 4.41 | 2.71 | ||||||||||||||||||||||||||||||
|
Loans held-for-sale
|
2,142 | 2,028 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Total consumer loans –
reported
|
429,283 | 482,854 | 10,660 | 6,571 | 4,023 | 3,112 | 19,833 | 9,433 | 4.41 | 2.71 | ||||||||||||||||||||||||||||||
|
Credit card – securitized
(g)
|
84,626 | 85,571 | — | — | 2,385 | 1,802 | 6,443 | 3,612 | 7.55 | 4.53 | ||||||||||||||||||||||||||||||
|
Total consumer loans –
managed
|
513,909 | 568,425 | 10,660 | 6,571 | 6,408 | 4,914 | 26,276 | 13,045 | 4.91 | 3.06 | ||||||||||||||||||||||||||||||
|
Total consumer loans –
managed – excluding
purchased credit-impaired
loans
(f)
|
432,664 | 479,612 | 10,660 | 6,571 | 6,408 | 4,914 | 26,276 | 13,045 | 5.85 | 3.22 | ||||||||||||||||||||||||||||||
|
Consumer lending-related
commitments:
|
||||||||||||||||||||||||||||||||||||||||
|
Home equity – senior lien
(a)(h)
|
19,246 | 27,998 | ||||||||||||||||||||||||||||||||||||||
|
Home equity – junior lien
(b)(h)
|
37,231 | 67,745 | ||||||||||||||||||||||||||||||||||||||
|
Prime mortgage
|
1,654 | 5,079 | ||||||||||||||||||||||||||||||||||||||
|
Subprime mortgage
|
— | — | ||||||||||||||||||||||||||||||||||||||
|
Option ARMs
|
— | — | ||||||||||||||||||||||||||||||||||||||
|
Auto loans
|
5,467 | 4,726 | ||||||||||||||||||||||||||||||||||||||
|
Credit card
(h)
|
569,113 | 623,702 | ||||||||||||||||||||||||||||||||||||||
|
All other loans
|
11,229 | 12,257 | ||||||||||||||||||||||||||||||||||||||
|
Total lending-related
commitments
|
643,940 | 741,507 | ||||||||||||||||||||||||||||||||||||||
|
Total consumer credit
portfolio
|
$ | 1,157,849 | $ | 1,309,932 | ||||||||||||||||||||||||||||||||||||
|
Memo: Credit card – managed
|
$ | 163,412 | $ | 190,317 | $ | 3 | $ | 4 | $ | 5,866 | $ | 4,451 | $ | 16,077 | $ | 8,168 | 9.33 | % | 5.01 | % | ||||||||||||||||||||
| (a) | Represents loans where JPMorgan Chase holds the first security interest on the property. | |
| (b) | Represents loans where JPMorgan Chase holds a security interest that is subordinate in rank to other liens. | |
| (c) | Excludes operating lease-related assets of $2.9 billion and $2.2 billion for December 31, 2009 and 2008, respectively. | |
| (d) | Includes $1.0 billion of loans at December 31, 2009, held by the Washington Mutual Master Trust, which were consolidated onto the Firm’s Consolidated Balance Sheets at fair value during the second quarter of 2009. | |
| (e) | Includes billed finance charges and fees net of an allowance for uncollectible amounts. | |
| (f) | Charge-offs are not recorded on purchased credit-impaired loans until actual losses exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. To date, no charge-offs have been recorded for these loans. If charge-offs were reported comparable to the non-credit impaired portfolio, life-to-date principal charge-offs would have been $16.7 billion. | |
| (g) | Represents securitized credit card receivables. For a further discussion of credit card securitizations, see CS on pages 64–66 of this Annual Report. | |
| (h) | The credit card and home equity lending-related commitments represent the total available lines of credit for these products. The Firm has not experienced, and does not |
| JPMorgan Chase & Co./2009 Annual Report | 107 |
Table of Contents
Management’s discussion and analysis
| anticipate, that all available lines of credit would be utilized at the same time. For credit card commitments and home equity commitments (if certain conditions are met), the Firm can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law. | ||
| (i) | At December 31, 2009 and 2008, nonperforming loans excluded: (1) mortgage loans insured by U.S. government agencies of $9.0 billion and $3.0 billion, respectively; and (2) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $542 million and $437 million, respectively. These amounts are excluded, as reimbursement is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under guidance issued by the Federal Financial Institutions Examination Council, 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 about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. | |
| (j) | Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. | |
| (k) | Average consumer loans held-for-sale and loans at fair value were $2.2 billion and $2.8 billion for the years ended December 31, 2009 and 2008, respectively. These amounts were excluded when calculating the net charge-off rates. |
The following table presents consumer nonperforming assets by business segment as of
December 31, 2009 and 2008.
Consumer nonperforming assets
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Assets acquired | Assets acquired | |||||||||||||||||||||||||||||||
| in loan satisfactions | in loan satisfactions | |||||||||||||||||||||||||||||||
|
As of December 31,
(in millions) |
Nonperforming
loans |
Real estate
owned |
Other |
Nonperforming
assets |
Nonperforming
loans |
Real estate
owned |
Other |
Nonperforming
assets |
||||||||||||||||||||||||
|
Retail Financial Services
(a)
|
$ | 10,611 | $ | 1,154 | $ | 99 | $ | 11,864 | $ | 6,548 | $ | 2,183 | $ | 110 | $ | 8,841 | ||||||||||||||||
|
Card Services
(a)
|
3 | — | — | 3 | 4 | — | — | 4 | ||||||||||||||||||||||||
|
Corporate/Private Equity
|
46 | 2 | — | 48 | 19 | 1 | — | 20 | ||||||||||||||||||||||||
|
Total
|
$ | 10,660 | $ | 1,156 | $ | 99 | $ | 11,915 | $ | 6,571 | $ | 2,184 | $ | 110 | $ | 8,865 | ||||||||||||||||
| (a) | At December 31, 2009 and 2008, nonperforming loans and assets excluded: (1) mortgage loans insured by U.S. government agencies of $9.0 billion and $3.0 billion, respectively; (2) real estate owned insured by U.S. government agencies of $579 million and $364 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $542 million and $437 million, respectively. These amounts are excluded, as reimbursement is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under guidance issued by the Federal Financial Institutions Examination Council, 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 about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. |
The following discussion relates to the specific loan product and lending-related
categories within the consumer portfolio. Purchased credit-impaired loans are excluded from
individual loan product discussions and addressed separately below.
Home equity:
Home equity loans at December 31, 2009 were $101.4 billion, a decrease of $12.9
billion from year-end 2008. The decrease primarily reflected lower loan originations, coupled with
loan paydowns and charge-offs. The 2009 provision for credit losses for the home equity portfolio
included net increases of $2.1 billion to the allowance for loan losses, reflecting the impact of
the weak housing prices and higher unemployment. Senior lien nonperforming loans increased from the
prior year due to the weak economic environment, while junior lien nonperforming loans were
relatively unchanged. Net charge-offs have increased from the prior year due to higher frequency
and severity of losses.
Mortgage:
Mortgage loans at December 31, 2009, which include prime mortgages, subprime mortgages,
adjustable-rate mortgages (“option ARMs”) acquired in the Washington Mutual transaction and
mortgage loans held-for-sale, were $88.3 billion, representing an $8.5 billion decrease from
year-end 2008. The decrease is due to lower prime mortgage loans retained in the portfolio and
higher loan charge-offs, as well as the run-off of the subprime and option ARM portfolios. Net
charge-offs have increased from the prior year across all segments of the mortgage portfolio due to
both higher frequency and a significant increase in the severity of losses.
Prime mortgages of $67.3 billion decreased $5.2 billion from December 31, 2008. The 2009
provision for credit losses included a net increase of $1.0 billion to the allowance for loan
losses reflecting the impact of the weak economic environment. Early-stage delinquencies improved
in the latter part of the year, while late-stage delinquencies have increased as a result of prior
foreclosure moratoriums and ongoing trial modification activity, driving an increase in
nonperforming loans.
Subprime mortgages of $12.5 billion decreased $2.8 billion from December 31, 2008, as a result of
paydowns, discontinuation of new originations and charge-offs on delinquent loans. The 2009
provision for credit losses included a net increase of $625 million to the allowance for loan
losses, reflecting the impact of high loss severities driven by declining home prices.
Option ARMs of $8.5 billion represent less than 5% of non-purchased credit-impaired real estate
loans and were $482 million lower than December 31, 2008, due to run-off of the portfolio. This
portfolio is primarily comprised of loans with low loan-to-value ratios and high borrower FICOs.
Accordingly, the Firm currently expects substantially lower losses on this portfolio when compared
with the purchased credit-impaired option ARM portfolio. The cumulative amount of unpaid interest
added to the unpaid principal balance due to negative amortization of option ARMs was $78 million
at December 31, 2009. New originations of option ARMs were discontinued by Washington Mutual prior to the date of JPMorgan Chase’s
acquisition of Washington Mutual. The Firm has not originated, and does not originate, option ARMs.
| 108 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Auto loans:
As of December 31, 2009, auto loans were $46.0 billion, an increase of $3.4 billion
from year-end 2008, partially as a result of new originations in connection with the U.S.
government’s “cash for clunkers” program in the third quarter. Delinquent loans were slightly lower
than the prior year. Loss severities also decreased as a result of higher used-car prices
nationwide. The auto loan portfolio reflects a high concentration of prime quality credits.
Credit card:
JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes
credit card receivables on the Consolidated Balance Sheets and those receivables sold to investors
through securitizations. Managed credit card receivables were $163.4 billion at December 31, 2009,
a decrease of $26.9 billion from year-end 2008, reflecting lower charge volume and a higher level
of charge-offs.
The 30-day managed delinquency rate increased to 6.28% at December 31, 2009, from 4.97% at December
31, 2008, and the managed credit card net charge-off rate increased to 9.33% in 2009, from 5.01% in
2008. These increases reflect the current weak economic environment, especially in metropolitan
statistical areas (“MSAs”) experiencing the greatest housing price depreciation and highest
unemployment and to the credit performance of loans acquired in the Washington Mutual transaction.
The allowance for loan losses was increased by $2.0 billion for 2009, reflecting a provision for
loan losses of $2.4 billion, partially offset by the reclassification of $298 million related to an
issuance and retention of securities from the Chase Issuance Trust. The managed credit card
portfolio continues to reflect a well-seasoned, largely rewards-based portfolio that has good U.S.
geographic diversification.
Managed credit card receivables, excluding the Washington Mutual portfolio, were $143.8 billion at
December 31, 2009, compared with $162.1 billion at December 31, 2008. The 30-day managed
delinquency rate was 5.52% at December 31, 2009, up from 4.36% at December 31, 2008; the managed
credit card net charge-off rate, excluding the Washington Mutual portfolio increased to 8.45% in
2009 from 4.92% in 2008.
Managed credit card receivables of the Washington Mutual portfolio were $19.7 billion at December
31, 2009, compared with $28.3 billion at December 31, 2008. Excluding the impact of the purchase
accounting adjustments related to the Washington Mutual transaction and the consolidation of the
Washington Mutual Master Trust, the Washington Mutual portfolio’s 30-day managed delinquency rate
was 12.72% at December 31, 2009, compared with 9.14% at December 31, 2008, and the 2009 net
charge-off rate was 18.79%.
All other:
All other loans primarily include business banking loans (which are highly
collateralized loans, often with personal loan guarantees), student loans, and other secured and
unsecured consumer loans. As of December 31, 2009, other loans, including loans held-for-sale, were
$33.6 billion, down $2.0 billion from year-end 2008, primarily as a result of lower business
banking loans. The 2009 provision for credit losses reflected a net increase of $580 million to the
allowance for loan losses and an increase in net charge-offs of $826 million related to the
business banking and student loan portfolios, reflecting the impact of the weak economic
environment.
Purchased credit-impaired:
Purchased credit-impaired loans were $81.2 billion at December 31, 2009,
compared with $88.8 billion at December 31, 2008. This portfolio represents loans acquired in the
Washington Mutual transaction that were recorded at fair value at the time of acquisition. The fair
value of these loans included an estimate of credit losses expected to be realized over the
remaining lives of the loans, and therefore no allowance for loan losses was recorded for these
loans as of the acquisition date.
The Firm regularly updates the amount of expected loan principal and interest cash flows to be
collected for these loans. Probable decreases in expected loan principal cash flows trigger the
recognition of impairment through the provision for loan losses. Probable and significant increases
in expected loan principal cash flows would first result in the reversal of any allowance for loan
losses. Any remaining increase in the expected principal cash flows would be recognized
prospectively in interest income over the remaining lives of the underlying loans.
During 2009, management concluded that it was probable that higher expected principal credit losses
for the purchased credit-impaired prime mortgage and option ARM pools would result in a decrease in
expected cash flows for these pools. As a result, an allowance for loan losses of $1.1 billion and
$491 million, respectively, was established for these pools. The credit performance of the other
pools has generally been consistent with the estimate of losses at the acquisition date.
Accordingly, no impairment for these other pools has been recognized.
| JPMorgan Chase & Co./2009 Annual Report | 109 |
Table of Contents
Management’s discussion and analysis
Concentrations of credit risk – consumer loans other than purchased credit-impaired loans
Following is tabular information and, where appropriate, supplemental discussions about certain
concentrations of credit risk for the Firm’s consumer loans, other than purchased credit-impaired
loans, including:
| • | Geographic distribution of loans, including certain residential real estate loans with high loan-to-value ratios; and | |
| • | Loans that are 30+ days past due. |
The following tables present the geographic distribution of managed consumer credit outstandings by
product as of December 31, 2009 and 2008, excluding purchased credit-impaired loans.
Consumer loans by geographic region – excluding purchased credit-impaired loans
| Total | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Home | Home | Total | consumer | consumer | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2009 | equity – | equity – | Prime | Subprime | Option | home loan | Card | All | loans– | Card | loans– | |||||||||||||||||||||||||||||||||||||
| (in billions) | senior lien | junior lien | mortgage | mortgage | ARMs | portfolio | Auto | reported | other loans | reported | securitized | managed | ||||||||||||||||||||||||||||||||||||
|
California
|
$ | 3.6 | $ | 16.9 | $ | 19.1 | $ | 1.7 | $ | 3.8 | $ | 45.1 | $ | 4.4 | $ | 11.0 | $ | 1.8 | $ | 62.3 | $ | 11.4 | $ | 73.7 | ||||||||||||||||||||||||
|
New York
|
3.4 | 12.4 | 9.2 | 1.5 | 0.9 | 27.4 | 3.8 | 6.0 | 4.2 | 41.4 | 6.7 | 48.1 | ||||||||||||||||||||||||||||||||||||
|
Texas
|
4.2 | 2.7 | 2.5 | 0.4 | 0.2 | 10.0 | 4.3 | 5.6 | 3.8 | 23.7 | 6.5 | 30.2 | ||||||||||||||||||||||||||||||||||||
|
Florida
|
1.2 | 4.1 | 6.0 | 1.9 | 0.7 | 13.9 | 1.8 | 5.2 | 0.9 | 21.8 | 4.8 | 26.6 | ||||||||||||||||||||||||||||||||||||
|
Illinois
|
1.8 | 4.8 | 3.4 | 0.6 | 0.4 | 11.0 | 2.4 | 3.9 | 2.4 | 19.7 | 4.9 | 24.6 | ||||||||||||||||||||||||||||||||||||
|
Ohio
|
2.3 | 1.9 | 0.8 | 0.3 | — | 5.3 | 3.2 | 3.1 | 2.9 | 14.5 | 3.4 | 17.9 | ||||||||||||||||||||||||||||||||||||
|
New Jersey
|
0.8 | 3.8 | 2.3 | 0.6 | 0.3 | 7.8 | 1.8 | 3.0 | 0.9 | 13.5 | 3.6 | 17.1 | ||||||||||||||||||||||||||||||||||||
|
Michigan
|
1.3 | 1.9 | 1.4 | 0.3 | — | 4.9 | 2.1 | 2.4 | 2.5 | 11.9 | 2.9 | 14.8 | ||||||||||||||||||||||||||||||||||||
|
Arizona
|
1.6 | 3.6 | 1.6 | 0.3 | 0.1 | 7.2 | 1.5 | 1.7 | 1.6 | 12.0 | 2.1 | 14.1 | ||||||||||||||||||||||||||||||||||||
|
Pennsylvania
|
0.2 | 1.2 | 0.7 | 0.4 | 0.1 | 2.6 | 2.0 | 2.8 | 0.8 | 8.2 | 3.2 | 11.4 | ||||||||||||||||||||||||||||||||||||
|
Washington
|
0.9 | 2.4 | 1.9 | 0.3 | 0.4 | 5.9 | 0.6 | 1.5 | 0.4 | 8.4 | 1.5 | 9.9 | ||||||||||||||||||||||||||||||||||||
|
Colorado
|
0.4 | 1.7 | 1.8 | 0.2 | 0.2 | 4.3 | 1.0 | 1.6 | 0.8 | 7.7 | 2.1 | 9.8 | ||||||||||||||||||||||||||||||||||||
|
All other
|
5.7 | 16.6 | 16.6 | 4.0 | 1.4 | 44.3 | 17.1 | 31.0 | 10.6 | 103.0 | 31.5 | 134.5 | ||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 27.4 | $ | 74.0 | $ | 67.3 | $ | 12.5 | $ | 8.5 | $ | 189.7 | $ | 46.0 | $ | 78.8 | $ | 33.6 | $ | 348.1 | $ | 84.6 | $ | 432.7 | ||||||||||||||||||||||||
| Total | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Home | Home | Total | consumer | consumer | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2008 | equity – | equity – | Prime | Subprime | Option | home loan | Card | All | loans – | Card | loans – | |||||||||||||||||||||||||||||||||||||
| (in billions) | senior lien | junior lien | mortgage | mortgage | ARMs | portfolio | Auto | reported | other loans | reported | securitized | managed | ||||||||||||||||||||||||||||||||||||
|
California
|
$ | 3.9 | $ | 19.3 | $ | 22.8 | $ | 2.2 | $ | 3.8 | $ | 52.0 | $ | 4.7 | $ | 14.8 | $ | 2.0 | $ | 73.5 | $ | 12.5 | $ | 86.0 | ||||||||||||||||||||||||
|
New York
|
3.3 | 13.0 | 10.4 | 1.7 | 0.9 | 29.3 | 3.7 | 8.3 | 4.7 | 46.0 | 6.6 | 52.6 | ||||||||||||||||||||||||||||||||||||
|
Texas
|
5.0 | 3.1 | 2.7 | 0.4 | 0.2 | 11.4 | 3.8 | 7.4 | 4.1 | 26.7 | 6.1 | 32.8 | ||||||||||||||||||||||||||||||||||||
|
Florida
|
1.3 | 5.0 | 6.0 | 2.3 | 0.9 | 15.5 | 1.5 | 6.8 | 0.9 | 24.7 | 5.2 | 29.9 | ||||||||||||||||||||||||||||||||||||
|
Illinois
|
1.9 | 5.3 | 3.3 | 0.7 | 0.3 | 11.5 | 2.2 | 5.3 | 2.5 | 21.5 | 4.6 | 26.1 | ||||||||||||||||||||||||||||||||||||
|
Ohio
|
2.6 | 2.0 | 0.7 | 0.4 | — | 5.7 | 3.3 | 4.1 | 3.3 | 16.4 | 3.4 | 19.8 | ||||||||||||||||||||||||||||||||||||
|
New Jersey
|
0.8 | 4.2 | 2.5 | 0.8 | 0.3 | 8.6 | 1.6 | 4.2 | 0.9 | 15.3 | 3.6 | 18.9 | ||||||||||||||||||||||||||||||||||||
|
Michigan
|
1.4 | 2.2 | 1.3 | 0.4 | — | 5.3 | 1.5 | 3.4 | 2.8 | 13.0 | 2.8 | 15.8 | ||||||||||||||||||||||||||||||||||||
|
Arizona
|
1.7 | 4.2 | 1.6 | 0.4 | 0.2 | 8.1 | 1.6 | 2.3 | 1.9 | 13.9 | 1.8 | 15.7 | ||||||||||||||||||||||||||||||||||||
|
Pennsylvania
|
0.2 | 1.4 | 0.7 | 0.5 | 0.1 | 2.9 | 1.7 | 3.9 | 0.7 | 9.2 | 3.2 | 12.4 | ||||||||||||||||||||||||||||||||||||
|
Washington
|
1.0 | 2.8 | 2.3 | 0.3 | 0.5 | 6.9 | 0.6 | 2.0 | 0.4 | 9.9 | 1.6 | 11.5 | ||||||||||||||||||||||||||||||||||||
|
Colorado
|
0.5 | 1.9 | 1.9 | 0.3 | 0.3 | 4.9 | 0.9 | 2.1 | 0.9 | 8.8 | 2.1 | 10.9 | ||||||||||||||||||||||||||||||||||||
|
All other
|
6.2 | 20.1 | 16.3 | 4.9 | 1.5 | 49.0 | 15.5 | 40.1 | 10.5 | 115.1 | 32.1 | 147.2 | ||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 29.8 | $ | 84.5 | $ | 72.5 | $ | 15.3 | $ | 9.0 | $ | 211.1 | $ | 42.6 | $ | 104.7 | $ | 35.6 | $ | 394.0 | $ | 85.6 | $ | 479.6 | ||||||||||||||||||||||||
| 110 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
|
|
| (a) | Excluding the purchased credit-impaired loans acquired in the Washington Mutual transaction. |
The following table presents the geographic distribution of certain residential real
estate loans with current estimated combined loan-to-value ratios (“LTVs”) in excess of 100% as of December
31, 2009 and 2008, excluding purchased credit-impaired loans acquired in the Washington Mutual
transaction. The estimated collateral values used to calculate the current
estimated combined LTV ratios in the
following table were derived from a nationally recognized home price index measured at the MSAs
level. Because home price indices can have wide variability and such derived real estate values do
not represent actual appraised loan-level collateral values, the resulting ratios are necessarily
imprecise and should therefore be viewed as estimates.
Geographic
distribution of residential real estate loans with current estimated
combined LTVs > 100%
(a)
| December 31, 2009 | Home equity – | Prime | Subprime | % of | ||||||||||||||||
| (in billions, except ratios) | junior lien (c) | mortgage (c)(d) | mortgage (c) | Total | total loans (e) | |||||||||||||||
|
California
|
$ | 8.3 | $ | 9.4 | $ | 1.1 | $ | 18.8 | 50 | % | ||||||||||
|
New York
|
2.3 | 1.3 | 0.3 | 3.9 | 17 | |||||||||||||||
|
Arizona
|
2.8 | 1.1 | 0.2 | 4.1 | 75 | |||||||||||||||
|
Florida
|
2.8 | 3.9 | 1.3 | 8.0 | 67 | |||||||||||||||
|
Michigan
|
1.3 | 0.9 | 0.2 | 2.4 | 67 | |||||||||||||||
|
All other
|
8.1 | 6.1 | 1.8 | 16.0 | 22 | |||||||||||||||
|
Total combined LTV >100%
|
$ | 25.6 | $ | 22.7 | $ | 4.9 | $ | 53.2 | 35 | % | ||||||||||
|
|
||||||||||||||||||||
|
As a percentage of total loans
|
35 | % | 34 | % | 39 | % | 35 | % | ||||||||||||
|
Total
portfolio average combined LTV at origination
|
74 | 74 | 79 | |||||||||||||||||
|
Total
portfolio average current estimated combined LTV
(b)
|
97 | 93 | 101 | |||||||||||||||||
| December 31, 2008 (f) | Home equity – | Prime | Subprime | % of | ||||||||||||||||
| (in billions, except ratios) | junior lien (c) | mortgage (c)(d) | mortgage (c) | Total | total loans (e) | |||||||||||||||
|
California
|
$ | 8.4 | $ | 7.9 | $ | 1.3 | $ | 17.6 | 40 | % | ||||||||||
|
New York
|
1.8 | 0.6 | 0.3 | 2.7 | 11 | |||||||||||||||
|
Arizona
|
2.9 | 0.9 | 0.2 | 4.0 | 65 | |||||||||||||||
|
Florida
|
2.9 | 2.9 | 1.5 | 7.3 | 55 | |||||||||||||||
|
Michigan
|
1.3 | 0.6 | 0.3 | 2.2 | 56 | |||||||||||||||
|
All other
|
7.5 | 3.3 | 1.6 | 12.4 | 16 | |||||||||||||||
|
Total combined LTV >100%
|
$ | 24.8 | $ | 16.2 | $ | 5.2 | $ | 46.2 | 27 | % | ||||||||||
|
|
||||||||||||||||||||
|
As a percentage of total loans
|
29 | % | 22 | % | 34 | % | 27 | % | ||||||||||||
|
Total
portfolio average combined LTV at origination
|
75 | 72 | 79 | |||||||||||||||||
|
Total
portfolio average current estimated combined LTV
(b)
|
91 | 83 | 91 | |||||||||||||||||
| (a) | Home equity – junior lien, prime mortgage and subprime mortgage loans with current estimated combined LTVs greater than 80% up to and including 100% were $17.9 billion, $17.6 billion and $3.5 billion, respectively, at December 31, 2009. | |
| (b) | The average current estimated combined LTV ratio reflects the outstanding balance at the balance sheet date, divided by the estimated current property value. Current property values are estimated based on home valuation models utilizing nationally recognized home price index valuation estimates. | |
| (c) | Represents combined loan-to-value, which considers all available lien positions related to the property. | |
| (d) | Includes mortgage loans insured by the U.S. government agencies of $5.3 billion and $1.8 billion at December 31, 2009 and 2008, respectively. | |
| (e) | Represents total loans of the product types noted in this table by geographic location. | |
| (f) | December 2008 estimated collateral values for the heritage Washington Mutual portfolio have been changed to conform to values derived from the home price index used for the JPMorgan Chase portfolio. Home price indices generally have different valuation methods and assumptions and therefore can yield a wide range of estimates. |
| JPMorgan Chase & Co. / 2009 Annual Report | 111 |
Table of Contents
Management’s discussion and analysis
The consumer credit portfolio is geographically diverse. The greatest concentration of loans
is in California, which represents 18% of total on-balance sheet consumer loans and 24% of total
residential real estate loans at December 2009, compared to 19% and 25%, respectively, at December
2008. Of the total on-balance sheet consumer loan portfolio, $149.4 billion, or 43%, are
concentrated in California, New York, Arizona, Florida and Michigan at December 2009 compared to
$171.1 billion, or 43%, at December 2008.
Declining
home prices have had a significant impact on the estimated collateral value underlying the Firm’s
residential real estate loan portfolio. In general, the delinquency rate for loans with high
current estimated combined
LTV
ratios is greater than the delinquency rate for loans in which the borrower has equity in the
collateral. While a large portion of the loans with current estimated
combined LTV ratios greater
than 100%
continue to pay and are current, the continued willingness and ability of these borrowers to pay is
currently uncertain. Nonperforming loans in the residential real estate portfolio totaled $9.6
billion, of which 64% was greater than 150 days past due at December 31, 2009. Of the
nonperforming loans that were greater than 150 days past due at December 31, 2009, approximately
36% of the unpaid principal balance of these loans has been charged-down to estimated collateral
value.
Consumer 30+ day delinquency information
| 30+ day delinquent loans | 30+ day delinquency rate | |||||||||||||||
| December 31, (in millions, except ratios) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Consumer loans – excluding purchased credit-impaired loans
(a)
|
||||||||||||||||
|
Home equity – senior lien
|
$ | 833 | $ | 585 | 3.04 | % | 1.96 | % | ||||||||
|
Home equity – junior lien
|
2,515 | 2,563 | 3.40 | 3.03 | ||||||||||||
|
Prime mortgage
|
5,532 | (b) | 3,180 | (b) | 8.21 | (d) | 4.39 | (d) | ||||||||
|
Subprime mortgage
|
4,232 | 3,760 | 33.79 | 24.53 | ||||||||||||
|
Option ARMs
|
438 | 68 | 5.13 | 0.75 | ||||||||||||
|
Auto loans
|
750 | 963 | 1.63 | 2.26 | ||||||||||||
|
Credit card – reported
|
6,093 | 5,653 | 7.73 | 5.40 | ||||||||||||
|
All other loans
|
1,306 | (c) | 708 | (c) | 3.91 | 1.99 | ||||||||||
|
Total consumer loans – excluding purchased credit-impaired loans – reported
|
$ | 21,699 | $ | 17,480 | 6.23 | % | 4.44 | % | ||||||||
|
Credit card – securitized
|
4,174 | 3,811 | 4.93 | 4.45 | ||||||||||||
|
Total consumer loans – excluding purchased credit-impaired loans – managed
|
$ | 25,873 | $ | 21,291 | 5.98 | % | 4.44 | % | ||||||||
|
Memo: Credit card – managed
|
$ | 10,267 | $ | 9,464 | 6.28 | % | 4.97 | % | ||||||||
| (a) | The delinquency rate for purchased credit-impaired loans, which is based on the unpaid principal balance, was 27.79% and 17.89% at December 31, 2009 and 2008, respectively. | |
| (b) | Excludes 30+ day delinquent mortgage loans that are insured by U.S. government agencies of $9.7 billion and $3.5 billion at December 31, 2009 and 2008, respectively. These amounts are excluded, as reimbursement is proceeding normally. | |
| (c) | Excludes 30+ day delinquent loans that are 30 days or more past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $942 million and $824 million at December 31, 2009 and 2008, respectively. These amounts are excluded as reimbursement is proceeding normally. | |
| (d) | The denominator for the calculation of the 30+ day delinquency rate includes: (1) residential real estate loans reported in the Corporate/Private Equity segment; and (2) mortgage loans insured by U.S. government agencies. The 30+ day delinquency rate excluding these loan balances was 11.24% and 5.14% at December 31, 2009 and 2008, respectively. |
Consumer 30+ day delinquencies have increased to 6.23% of the consumer loan portfolio at December
31, 2009, in comparison to 4.44% at December 31, 2008, driven predominately by an increase in
residential real estate delinquencies which increased $3.4 billion. Late stage delinquencies (150+
days delinquent) increased significantly reflecting the impacts of trial loan modifications and
foreclosure moratorium backlogs. Losses related to these loans continue to be recognized in
accordance with the Firm’s normal charge-off practices; as such, these loans are reflected at their
estimated collateral value. Early stage delinquencies (30 – 89 days delinquent) in the residential
real estate portfolios have remained relatively flat year over year.
| 112 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Concentrations of credit risk – purchased credit-impaired loans
The following table
presents the current estimated combined LTV ratio, as well as the ratio of the carrying
value of the underlying loans to the current estimated collateral value, for purchased credit-impaired loans.
Because such loans were initially measured at fair value, the ratio of the carrying value to the
current estimated collateral value will be lower than the current estimated
combined LTV ratio, which is based on the
unpaid principal balance. The estimated collateral values used to calculate these ratios were derived from a
nationally recognized home price index measured at the MSA level. Because home price indices can
have wide variability, and such derived real estate values do not represent actual appraised
loan-level collateral values, the resulting ratios are necessarily imprecise and should therefore
be viewed as estimates.
Combined
LTV ratios and ratios of carrying values to current estimated collateral values – purchased credit-impaired
| Ratio of carrying | ||||||||||||||||
| December 31, 2009 | Current estimated combined LTV | Carrying | value to current estimated | |||||||||||||
| (in billions, except ratios) | Unpaid principal balance (b) | ratio (c)(d) | value (e) | collateral value | ||||||||||||
|
Option
ARMs
(a)
|
$ | 37.4 | 128 | % | $ | 29.0 | 98 | % (f) | ||||||||
|
Home equity
|
32.9 | 127 | 26.5 | 102 | ||||||||||||
|
Prime mortgage
|
22.0 | 121 | 19.7 | 102 | (f) | |||||||||||
|
Subprime mortgage
|
9.0 | 122 | 6.0 | 81 | ||||||||||||
| Ratio of carrying | ||||||||||||||||
| December 31, 2008 (g) | Current estimated combined LTV | Carrying | value to current estimated | |||||||||||||
| (in billions, except ratios) | Unpaid principal balance (b) | ratio (c)(d) | value (e) | collateral value | ||||||||||||
|
Option ARMs
|
$ | 41.6 | 113 | % | $ | 31.6 | 86 | % | ||||||||
|
Home equity
|
39.8 | 115 | 28.6 | 82 | ||||||||||||
|
Prime mortgage
|
25.0 | 107 | 21.8 | 94 | ||||||||||||
|
Subprime mortgage
|
10.3 | 112 | 6.8 | 73 | ||||||||||||
| (a) | The cumulative amount of unpaid interest that has been added to the unpaid principal balance of option ARMs was $1.9 billion at December 31, 2009. Assuming market interest rates, the Firm would expect the following balance of current loans to experience a payment recast: $6.3 billion in 2010 and $3.9 billion in 2011, of which $4.8 billion and $3.7 billion relate to the purchased credit-impaired portfolio. | |
| (b) | Represents the contractual amount of principal owed. | |
| (c) | Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated based on home valuation models utilizing nationally recognized home price index valuation estimates. | |
| (d) | Represents current estimated combined loan-to-value, which considers all available lien positions related to the property. | |
| (e) | Carrying values include the effect of fair value adjustments that were applied to the consumer purchased credit-impaired portfolio at the date of acquisition. | |
| (f) | Ratios of carrying value to current estimated collateral value for the prime mortgage and option ARM portfolios are net of the allowance for loan losses of $1.1 billion and $491 million, respectively, as of December 31, 2009. | |
| (g) | December 2008 estimated collateral values for the heritage Washington Mutual portfolio have been changed to conform to values derived from home price index used for the JPMorgan Chase portfolio. Home price indices generally have different valuation methods and assumptions and therefore can yield a wide range of estimates. |
Purchased credit-impaired loans in the states of California and Florida represented
54% and 11%, respectively, of total purchased credit-impaired loans at December 31, 2009, compared
with 53% and 11%, respectively, at December 31, 2008. The
current estimated combined LTV ratios were 137%
and 149% for California and Florida loans, respectively, at December 31, 2009, compared with 121%
and 125%, respectively, at December 31, 2008. Loan concentrations in California and Florida, as
well as the continuing decline in housing prices in those states, have contributed negatively to
both the current estimated combined LTV ratio and the ratio of carrying value to current collateral value
for loans in the purchased credit-impaired portfolio.
While the carrying value of the purchased credit-impaired loans is marginally below the current
collateral value of the loans, the ultimate performance of this portfolio is highly dependent on
the
borrowers’ behavior and ongoing ability and willingness to continue to make payments on homes
with negative equity as well as the cost of alternative housing. The purchased credit-impaired
portfolio was recorded at fair value at the time of acquisition which included an estimate of
losses expected to be incurred over the estimated remaining lives of the loan pools. During 2009,
management concluded that it was probable that higher than expected future principal credit losses
would result in a decrease in the expected future cash
flows of the prime and option ARM pools.
As a result an allowance for loan losses of $1.6 billion was
established.
| JPMorgan Chase & Co. / 2009 Annual Report | 113 |
Table of Contents
Management’s discussion and analysis
Residential real estate loan modification activities:
During 2009, the Firm reviewed its
residential real estate portfolio to identify homeowners most in need of assistance, opened new
regional counseling centers, hired additional loan counselors, introduced new financing
alternatives, proactively reached out to borrowers to offer pre-qualified modifications, and
commenced a new process to independently review each loan before moving it into the foreclosure
process. In addition, during the first quarter of 2009, the U.S. Treasury introduced the MHA
programs, which are designed to assist eligible homeowners in a number of ways, one of which is by
modifying the terms of their mortgages. The Firm is participating in the MHA programs while
continuing to expand its other loss-mitigation efforts for financially distressed borrowers who do
not qualify for the MHA programs. The MHA programs and the Firm’s other loss-mitigation programs
for financially troubled borrowers generally represent various concessions such as term extensions,
rate reductions and deferral of principal payments that would have otherwise been required under
the terms of the original agreement. When the Firm modifies home equity lines of credit in troubled
debt
restructurings, future lending commitments related to the modified loans are canceled as part
of the terms of the modification. Under all of these programs, borrowers must make at least three
payments under the revised contractual terms during a trial modification period and be successfully
re-underwritten with income verification before their loans can be permanently modified. The Firm’s
loss-mitigation programs are intended to minimize economic loss to the Firm, while providing
alternatives to foreclosure. The success of these programs is highly dependent on borrowers’
ongoing ability and willingness to repay in accordance with the modified terms and could be
adversely affected by additional deterioration in the economic environment or shifts in borrower
behavior. For both the Firm’s on-balance sheet loans and loans serviced for others, approximately
600,000 mortgage modifications had been offered to borrowers in 2009. Of these, 89,000 have
achieved permanent modification. Substantially all of the loans contractually modified to date were
modified under the Firm’s other loss mitigation programs.
The following table presents
information relating to restructured on-balance sheet residential real estate loans for which
concessions have been granted to borrowers experiencing financial difficulty as of December 31,
2009. Modifications of purchased credit-impaired loans continue to be accounted for and reported as
purchased credit-impaired loans, and the impact of the modification is incorporated into the Firm’s
quarterly assessment of whether a probable and/or significant change in estimated future principal
cash flows has occurred. Modifications of loans other than purchased credit-impaired are generally
accounted for and reported as troubled debt restructurings.
Restructured residential real estate loans
(a)
| Nonperforming | ||||||||
| December 31, 2009 | On-balance | on-balance | ||||||
| (in millions) | sheet loans | sheet loans (d) | ||||||
|
Restructured residential real estate loans – excluding
purchased credit-impaired loans
(b)
|
||||||||
|
Home equity – senior lien
|
$ | 168 | $ | 30 | ||||
|
Home equity – junior lien
|
222 | 43 | ||||||
|
Prime mortgage
|
634 | 243 | ||||||
|
Subprime mortgage
|
1,998 | 598 | ||||||
|
Option ARMs
|
8 | 6 | ||||||
|
Total restructured residential real estate loans – excluding purchased credit-impaired loans
|
$ | 3,030 | $ | 920 | ||||
|
|
||||||||
|
Restructured purchased credit-impaired loans
(c)
|
||||||||
|
Home equity
|
$ | 453 | NA | |||||
|
Prime mortgage
|
1,526 | NA | ||||||
|
Subprime mortgage
|
1,954 | NA | ||||||
|
Option ARMs
|
2,972 | NA | ||||||
|
Total restructured purchased credit-impaired loans
|
$ | 6,905 | NA | |||||
| (a) | Restructured residential real estate loans were immaterial at December 31, 2008. | |
| (b) | Amounts represent the carrying value of restructured residential real estate loans. | |
| (c) | Amounts represent the unpaid principal balance of restructured purchased credit-impaired loans. | |
| (d) | Nonperforming loans modified in a troubled debt restructuring may be returned to accrual status when repayment is reasonably assured and the borrower has made a minimum of six payments under the new terms. |
Real estate owned (“REO”):
As part of the residential real estate foreclosure process, loans
are written down to the fair value of the underlying real estate asset, less costs to sell. In
those instances where the Firm gains title, ownership and possession of individual properties at
the completion of the foreclosure process, these REO assets are managed for prompt sale and
disposition at the best possible economic value. Any further gains or losses on REO assets are
recorded as part of other income. Operating expense, such
as real estate taxes and maintenance, are
charged to other expense. REO assets declined from year-end 2008 as a result of the foreclosure
moratorium in early 2009 and the subsequent increase in loss mitigation activities. It is
anticipated that REO assets will increase over the next several quarters, as loans moving through
the foreclosure process are expected to increase.
| 114 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Portfolio transfers:
The Firm regularly evaluates market conditions and overall economic returns
and makes an initial determination as to whether new originations will be held-for-investment or
sold within the foreseeable future. The Firm also periodically evaluates the expected economic
returns of previously originated loans under prevailing market conditions to determine whether
their designation as held-for-sale or held-for-investment continues to be appropriate. When the
Firm determines that a change in this designation is
appropriate, the loans are transferred to the
appropriate classification. Since the second half of 2007, all new prime mortgage originations that
cannot be sold to U.S. government agencies and U.S. government-sponsored enterprises have been
designated as held-for-investment. Prime mortgage loans originated with the intent to sell are
accounted for at fair value and classified as trading assets in the Consolidated Balance Sheets.
ALLOWANCE FOR CREDIT LOSSES
JPMorgan Chase’s allowance for loan losses covers the wholesale (risk-rated) and consumer
(primarily scored) loan portfolios and represents management’s estimate of probable credit losses
inherent in the Firm’s loan portfolio. Management also computes an allowance for wholesale
lending-related commitments using a methodology similar to that used for the wholesale
loans. During 2009, the Firm did not make any significant changes to the methodologies or policies
described in the following paragraphs.
Wholesale loans are charged off to the allowance for loan losses when it is highly certain that a
loss has been realized; this determination considers many factors, including the prioritization of
the Firm’s claim in bankruptcy, expectations of the workout/restructuring of the loan, and
valuation of the borrower’s equity. Consumer loans, other than purchased credit-impaired loans, are
generally charged off to the allowance for loan losses upon reaching specified stages of
delinquency, in accordance with the Federal Financial Institutions Examination Council 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 of receiving notification about a specified event (e.g., bankruptcy
of the borrower), whichever is earlier. Residential mortgage products are generally charged off to
an amount equal to the net realizable value of the underlying collateral, no later than the date
the loan becomes 180 days past due. Other consumer products, if collateralized, are generally
charged off to the net realizable value of the underlying collateral at 120 days past due.
Determining the appropriateness of the allowance is complex and requires judgment about the effect
of matters that are inherently uncertain. Assumptions about unemployment rates, housing prices and
overall economic conditions could have a significant impact on the Firm’s determination of loan
quality. Subsequent evaluations of the loan portfolio, in light of then-prevailing factors, may
result in significant changes in the allowances for loan losses and lending-related commitments in
future periods. At least quarterly, the allowance for credit losses is reviewed by the Chief Risk
Officer, the Chief Financial Officer and the Controller of the Firm and discussed with the Risk
Policy and Audit Committees of the Board of Directors of the Firm. As of December 31, 2009,
JPMorgan Chase deemed the allowance for credit losses to be appropriate (i.e., sufficient to absorb
losses inherent in the portfolio, including those not yet identifiable).
For a further discussion of the components of the allowance for credit losses, see Critical
Accounting Estimates Used by the Firm on pages 127–131 and Note 14 on pages 196–198 of this Annual
Report.
The allowance for credit losses increased by $8.7 billion from the prior year to $32.5 billion.
Excluding held-for-sale loans,
loans carried at fair value, and purchased credit-impaired consumer
loans, the allowance for loan losses represented 5.51% of loans at December 31, 2009, compared with
3.62% at December 31, 2008.
The consumer allowance for loan losses increased by $7.8 billion from the prior year, primarily as
a result of an increased allowance for loan losses in residential real estate and credit card. The
increase included additions to the allowance for loan losses of $5.2 billion, driven by higher
estimated losses for residential mortgage and home equity loans as the weak labor market and weak
overall economic conditions have resulted in increased delinquencies, and continued weak housing
prices have driven a significant increase in loss severity. The allowance for loan losses related
to credit card increased $2.0 billion from the prior year, reflecting continued weakness in the
credit environment. The increase reflects an addition of $2.4 billion through the provision for
loan losses, partially offset by the reclassification of $298 million related to the issuance and
retention of securities from the Chase Issuance Trust.
The wholesale allowance for loan losses increased by $600 million from December 31, 2008,
reflecting the effect of a continued weakening credit environment.
To provide for the risk of loss inherent in the Firm’s process of extending credit an allowance for
lending-related commitments is held for the Firm, which is reported in other liabilities. The
allowance is computed using a methodology similar to that used for the wholesale loan portfolio,
modified for expected maturities and probabilities of drawdown. For a further discussion on the
allowance for lending-related commitments, see Note 14 on page 196–198 of this Annual Report.
The allowance for lending-related commitments for both wholesale and consumer, which is reported in
other liabilities, was $939 million and $659 million at December 31, 2009 and 2008, respectively.
The increase reflects downgrades within the wholesale portfolio due to the continued weakening
credit environment during 2009.
The credit ratios in the table below are based on retained loan balances, which exclude loans
held-for-sale and loans accounted for at fair value. As of December 31, 2009 and 2008, wholesale
retained loans were $200.1 billion and $248.1 billion, respectively; and consumer retained loans
were $427.1 billion and $480.8 billion, respectively. For the years ended December 31, 2009 and
2008, average wholesale retained loans were $223.0 billion and $219.6 billion, respectively; and
average consumer retained loans were $449.2 billion and $347.4 billion, respectively.
| JPMorgan Chase & Co. / 2009 Annual Report | 115 |
Table of Contents
Management’s discussion and analysis
Summary of changes in the allowance for credit losses
| Year ended December 31, | 2009 | 2008 | ||||||||||||||||||||||
| (in millions) | Wholesale | Consumer | Total | Wholesale | Consumer | Total | ||||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||||||
|
Beginning balance at January 1,
|
$ | 6,545 | $ | 16,619 | $ | 23,164 | $ | 3,154 | $ | 6,080 | $ | 9,234 | ||||||||||||
|
Gross charge-offs
|
3,226 | 20,792 | 24,018 | 521 | 10,243 | 10,764 | ||||||||||||||||||
|
Gross (recoveries)
|
(94 | ) | (959 | ) | (1,053 | ) | (119 | ) | (810 | ) | (929 | ) | ||||||||||||
|
Net charge-offs
|
3,132 | 19,833 | 22,965 | 402 | 9,433 | 9,835 | ||||||||||||||||||
|
Provision for loan losses:
|
||||||||||||||||||||||||
|
Provision excluding accounting conformity
|
3,684 | 28,051 | 31,735 | 2,895 | 16,765 | 19,660 | ||||||||||||||||||
|
Accounting conformity
(a)
|
— | — | — | 641 | 936 | 1,577 | ||||||||||||||||||
|
Total provision for loan losses
|
3,684 | 28,051 | 31,735 | 3,536 | 17,701 | 21,237 | ||||||||||||||||||
|
Acquired allowance resulting from Washington Mutual transaction
|
— | — | — | 229 | 2,306 | 2,535 | ||||||||||||||||||
|
Other
(b)
|
48 | (380 | ) | (332 | ) | 28 | (35 | ) | (7 | ) | ||||||||||||||
|
Ending balance at December 31
|
$ | 7,145 | $ | 24,457 | $ | 31,602 | $ | 6,545 | $ | 16,619 | $ | 23,164 | ||||||||||||
|
Components:
|
||||||||||||||||||||||||
|
Asset-specific
(c)(d)
|
$ | 2,046 | $ | 996 | $ | 3,042 | $ | 712 | $ | 379 | $ | 1,091 | ||||||||||||
|
Formula-based
|
5,099 | 21,880 | 26,979 | 5,833 | 16,240 | 22,073 | ||||||||||||||||||
|
Purchased credit-impaired
|
— | 1,581 | 1,581 | — | — | — | ||||||||||||||||||
|
Total allowance for loan losses
|
$ | 7,145 | $ | 24,457 | $ | 31,602 | $ | 6,545 | $ | 16,619 | $ | 23,164 | ||||||||||||
|
Allowance for lending-related commitments:
|
||||||||||||||||||||||||
|
Beginning balance at January 1,
|
$ | 634 | $ | 25 | $ | 659 | $ | 835 | $ | 15 | $ | 850 | ||||||||||||
|
Provision for lending-related commitments
|
||||||||||||||||||||||||
|
Provision excluding accounting conformity
|
290 | (10 | ) | 280 | (214 | ) | (1 | ) | (215 | ) | ||||||||||||||
|
Accounting conformity
(a)
|
— | — | — | 5 | (48 | ) | (43 | ) | ||||||||||||||||
|
Total provision for lending-related commitments
|
290 | (10 | ) | 280 | (209 | ) | (49 | ) | (258 | ) | ||||||||||||||
|
Acquired allowance resulting from Washington Mutual transaction
|
— | — | — | — | 66 | 66 | ||||||||||||||||||
|
Other
(b)
|
3 | (3 | ) | — | 8 | (7 | ) | 1 | ||||||||||||||||
|
Ending balance at December 31
|
$ | 927 | $ | 12 | $ | 939 | $ | 634 | $ | 25 | $ | 659 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Components:
|
||||||||||||||||||||||||
|
Asset-specific
|
$ | 297 | $ | — | $ | 297 | $ | 29 | $ | — | $ | 29 | ||||||||||||
|
Formula-based
|
630 | 12 | 642 | 605 | 25 | 630 | ||||||||||||||||||
|
Total allowance for lending-related commitments
|
$ | 927 | $ | 12 | $ | 939 | $ | 634 | $ | 25 | $ | 659 | ||||||||||||
|
Total allowance for credit losses
|
$ | 8,072 | $ | 24,469 | $ | 32,541 | $ | 7,179 | $ | 16,644 | $ | 23,823 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Credit ratios:
|
||||||||||||||||||||||||
|
Allowance for loan losses to retained loans
|
3.57 | % | 5.73 | % | 5.04 | % | 2.64 | % | 3.46 | % | 3.18 | % | ||||||||||||
|
Net charge-off rates
(e)
|
1.40 | 4.41 | 3.42 | 0.18 | 2.71 | 1.73 | ||||||||||||||||||
|
Credit ratios excluding home lending purchased credit-impaired
loans and loans held by the Washington Mutual Master Trust
|
||||||||||||||||||||||||
|
Allowance for loan losses to retained loans
(f)
|
3.57 | 6.63 | 5.51 | 2.64 | 4.24 | 3.62 | ||||||||||||||||||
| (a) | Related to the Washington Mutual transaction in 2008. | |
| (b) | Predominantly includes a reclassification in 2009 related to the issuance and retention of securities from the Chase Issuance Trust, as well as reclassifications of allowance balances related to business transfers between wholesale and consumer businesses in the first quarter of 2008. | |
| (c) | Relates to risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a troubled debt restructuring. | |
| (d) | The asset-specific consumer allowance for loan losses includes troubled debt restructuring reserves of $754 million and $258 million at December 31, 2009 and 2008, respectively. Prior period amounts have been reclassified to conform to the current presentation. | |
| (e) | Charge-offs are not recorded on purchased credit-impaired loans until actual losses exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. | |
| (f) | Excludes the impact of purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction and loans held by the Washington Mutual Master Trust, which were consolidated onto the Firm’s balance sheet at fair value during the second quarter of 2009. As of December 31, 2009, an allowance for loan losses of $1.6 billion was recorded for the purchased credit-impaired loans, which has also been excluded from applicable ratios. No allowance was recorded for the loans that were consolidated from the Washington Mutual Master Trust as of December 31, 2009. To date, no charge-offs have been recorded for any of these loans. |
The following table includes a credit ratio excluding the following items: home lending
purchased credit-impaired loans acquired in the Washington Mutual transaction; and credit card
loans held by the Washington Mutual Master Trust, which were consolidated onto the Firm’s balance
sheet at fair value during the second quarter of 2009. The purchased credit-impaired loans were
accounted for at fair value on the acquisition date, which incorporated management’s estimate, as
of that date, of credit losses over the remaining life of the
portfolio. Accordingly, no allowance
for loan losses was recorded for these loans as of the acquisition date. Subsequent evaluations of
estimated credit deterioration in this portfolio resulted in the recording of an allowance for loan
losses of $1.6 billion at December 31, 2009. For more information on home lending purchased
credit-impaired loans, see pages 109 and 113 of this Annual Report. For more information on the
consolidation of assets from the Washington Mutual Master Trust, see Note 15 on pages 198–205 of
this Annual Report.
| 116 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The calculation of the allowance for loan losses to total retained loans, excluding both home
lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust, is
presented below.
| December 31, (in millions, except ratios) | 2009 | 2008 | ||||||
|
Allowance for loan losses
|
$ | 31,602 | $ | 23,164 | ||||
|
Less: Allowance for purchased credit-impaired loans
|
1,581 | — | ||||||
|
Adjusted allowance for loan losses
|
$ | 30,021 | $ | 23,164 | ||||
|
|
||||||||
|
Total loans retained
|
$ | 627,218 | $ | 728,915 | ||||
|
Less: Firmwide purchased credit-impaired loans
|
81,380 | 89,088 | ||||||
|
Loans held by the Washington Mutual Master Trust
|
1,002 | — | ||||||
|
Adjusted loans
|
$ | 544,836 | $ | 639,827 | ||||
|
Allowance for loan losses to ending loans excluding purchased credit-impaired loans and loans held by the Washington Mutual Master Trust
|
5.51 | % | 3.62 | % | ||||
The following table presents the allowance for credit losses by business segment at December
31, 2009 and 2008.
| Allowance for credit losses | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
| December 31, | Lending-related | Lending-related | ||||||||||||||||||||||
| (in millions) | Loan losses | commitments | Total | Loan losses | commitments | Total | ||||||||||||||||||
|
Investment Bank
|
$ | 3,756 | $ | 485 | $ | 4,241 | $ | 3,444 | $ | 360 | $ | 3,804 | ||||||||||||
|
Commercial Banking
|
3,025 | 349 | 3,374 | 2,826 | 206 | 3,032 | ||||||||||||||||||
|
Treasury & Securities Services
|
88 | 84 | 172 | 74 | 63 | 137 | ||||||||||||||||||
|
Asset Management
|
269 | 9 | 278 | 191 | 5 | 196 | ||||||||||||||||||
|
Corporate/Private Equity
|
7 | — | 7 | 10 | — | 10 | ||||||||||||||||||
|
Total Wholesale
|
7,145 | 927 | 8,072 | 6,545 | 634 | 7,179 | ||||||||||||||||||
|
Retail Financial Services
|
14,776 | 12 | 14,788 | 8,918 | 25 | 8,943 | ||||||||||||||||||
|
Card Services
|
9,672 | — | 9,672 | 7,692 | — | 7,692 | ||||||||||||||||||
|
Corporate/Private Equity
|
9 | — | 9 | 9 | — | 9 | ||||||||||||||||||
|
Total Consumer
|
24,457 | 12 | 24,469 | 16,619 | 25 | 16,644 | ||||||||||||||||||
|
Total
|
$ | 31,602 | $ | 939 | $ | 32,541 | $ | 23,164 | $ | 659 | $ | 23,823 | ||||||||||||
Provision for credit losses
The managed provision for credit losses was $38.5 billion for the year ended December 31, 2009, up
by $13.9 billion from the prior year. The prior-year included a $1.5 billion charge to conform
Washington Mutual’s allowance for loan losses, which affected both the consumer and wholesale
portfolios. For the purpose of the following analysis, this charge is excluded. The
consumer-managed provision for credit losses was $34.5 billion for the year ended December 31,
2009, compared with $20.4 billion in the prior year, reflecting an increase in the allowance for
credit losses in the home lending and credit card loan portfolios. Included in the 2009 addition to
the allowance for loan losses was a $1.6 billion increase related to estimated deterioration in the
Washington Mutual purchased credit-impaired portfolio. The wholesale provision for credit losses
was $4.0 billion for the year ended December 31, 2009, compared with $2.7 billion in the prior
year, reflecting continued weakness in the credit environment.
| Year ended December 31, | Provision for credit losses | |||||||||||||||||||||||||||||||||||
| (in millions) | Loan losses | Lending-related commitments | Total | |||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
|
Investment Bank
|
$ | 2,154 | $ | 2,216 | $ | 376 | $ | 125 | $ | (201 | ) | $ | 278 | $ | 2,279 | $ | 2,015 | $ | 654 | |||||||||||||||||
|
Commercial Banking
|
1,314 | 505 | 230 | 140 | (41 | ) | 49 | 1,454 | 464 | 279 | ||||||||||||||||||||||||||
|
Treasury & Securities Services
|
34 | 52 | 11 | 21 | 30 | 8 | 55 | 82 | 19 | |||||||||||||||||||||||||||
|
Asset Management
|
183 | 87 | (19 | ) | 5 | (2 | ) | 1 | 188 | 85 | (18 | ) | ||||||||||||||||||||||||
|
Corporate/Private Equity
(a)(b)
|
(1 | ) | 676 | — | (1 | ) | 5 | — | (2 | ) | 681 | — | ||||||||||||||||||||||||
|
Total Wholesale
|
3,684 | 3,536 | 598 | 290 | (209 | ) | 336 | 3,974 | 3,327 | 934 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Retail Financial Services
|
15,950 | 9,906 | 2,620 | (10 | ) | (1 | ) | (10 | ) | 15,940 | 9,905 | 2,610 | ||||||||||||||||||||||||
|
Card
Services – reported
|
12,019 | 6,456 | 3,331 | — | — | — | 12,019 | 6,456 | 3,331 | |||||||||||||||||||||||||||
|
Corporate/Private Equity
(a)(c)(d)
|
82 | 1,339 | (11 | ) | — | (48 | ) | — | 82 | 1,291 | (11 | ) | ||||||||||||||||||||||||
|
Total Consumer
|
28,051 | 17,701 | 5,940 | (10 | ) | (49 | ) | (10 | ) | 28,041 | 17,652 | 5,930 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total provision for credit
losses – reported
|
31,735 | 21,237 | 6,538 | 280 | (258 | ) | 326 | 32,015 | 20,979 | 6,864 | ||||||||||||||||||||||||||
|
Credit card
– securitized
|
6,443 | 3,612 | 2,380 | — | — | — | 6,443 | 3,612 | 2,380 | |||||||||||||||||||||||||||
|
Total provision for credit
losses – managed
|
$ | 38,178 | $ | 24,849 | $ | 8,918 | $ | 280 | $ | (258 | ) | $ | 326 | $ | 38,458 | $ | 24,591 | $ | 9,244 | |||||||||||||||||
| (a) | Includes accounting conformity provisions related to the Washington Mutual transaction in 2008. | |
| (b) | Includes provision expense related to loans acquired in the Bear Stearns merger in the second quarter of 2008. | |
| (c) | Includes amounts related to held-for-investment prime mortgages transferred from AM to the Corporate/Private Equity segment. | |
| (d) | In November 2008, the Firm transferred $5.8 billion of higher quality credit card loans from the legacy Chase portfolio to a securitization trust previously established by Washington Mutual (“the Trust”). As a result of converting higher credit quality Chase-originated on-book receivables to the Trust’s seller’s interest which has a higher overall loss rate reflective of the total assets within the Trust, approximately $400 million of incremental provision expense was recorded during the fourth quarter. This incremental provision expense was recorded in the Corporate segment as the action related to the acquisition of Washington Mutual’s banking operations. For further discussion of credit card securitizations, see Note 15 on pages 198–205 of this Annual Report. |
| JPMorgan Chase & Co. / 2009 Annual Report | 117 |
Table of Contents
Management’s discussion and analysis
MARKET RISK MANAGEMENT
Market risk is the exposure to an adverse change in the market value of portfolios and
financial instruments caused by a change in market prices or rates.
Market risk management
Market Risk is an independent risk management function, aligned primarily with each of the Firm’s
business segments. Market Risk works in partnership with the business segments to identify and
monitor market risks throughout the Firm as well as to define market risk policies and procedures.
The risk management function is headed by the Firm’s Chief Risk Officer.
Market Risk seeks to facilitate efficient risk/return decisions, reduce volatility in operating
performance and make the Firm’s market risk profile transparent to senior management, the Board of
Directors and regulators. Market Risk is responsible for the following functions:
| • | Establishing a comprehensive market risk policy framework | |
| • | Independent measurement, monitoring and control of business segment market risk | |
| • | Definition, approval and monitoring of limits | |
| • | Performance of stress testing and qualitative risk assessments |
Risk identification and classification
Each business segment is responsible for the comprehensive identification and verification of
market risks within its units. The highest concentrations of market risk are found in IB, Consumer
Lending, and the Firm’s Chief Investment Office in the Corporate/Private Equity Segment.
IB makes markets and trades its products across several different asset classes. These asset
classes primarily include fixed income risk (both interest rate risk and credit spread risk),
foreign exchange, equities and commodities risk. These trading risks may lead to the potential
decline in net income due to adverse changes in market rates. In addition to these trading risks,
there are risks in IB’s credit portfolio from retained loans and commitments, derivative credit
valuation adjustments, hedges of the credit valuation adjustments and mark-to-market hedges of the
retained loan portfolio. Additional risk positions result from the debit valuation adjustments
taken on certain structured liabilities and derivatives to reflect the credit quality of the Firm.
The Firm’s Consumer Lending business unit includes the Firm’s mortgage pipeline and warehouse
loans, MSRs and all related hedges. These activities give rise to complex interest rate risks, as
well as option and basis risk. Option risk arises primarily from prepayment options embedded in
mortgages and changes in the probability of newly originated mortgage commitments actually
closing. Basis risk results from differences in the relative movements of the rate indices
underlying mortgage exposure and other interest rates.
The Chief Investment Office is primarily concerned with managing structural market risks which
arise out of the various business activities of the Firm. These include structural interest rate
risk, and foreign exchange risk. Market Risk measures and monitors the gross structural exposures
as well as the net exposures related to these activities.
Risk measurement
Tools used to measure risk
Because no single measure can reflect all aspects of market risk, the Firm uses various
metrics, both statistical and nonstatistical, including:
| • | Nonstatistical risk measures | |
| • | Value-at-risk | |
| • | Loss advisories | |
| • | Drawdowns | |
| • | Economic value stress testing | |
| • | Earnings-at-risk stress testing | |
| • | Risk identification for large exposures (“RIFLE”) |
Nonstatistical risk measures
Nonstatistical risk measures other than stress testing include net open positions, basis point
values, option sensitivities, market values, position concentrations and position turnover. These
measures provide granular information on the Firm’s market risk exposure. They are aggregated by
line of business and by risk type, and are used for monitoring limits, one-off approvals and
tactical control.
Value-at-risk
JPMorgan Chase’s primary statistical risk measure, VaR, estimates the potential loss from adverse
market moves in a normal market environment and provides a consistent cross-business measure of
risk profiles and levels of diversification. VaR is used for comparing risks across businesses,
monitoring limits, and as an input to economic capital calculations. Each business day, as part of
its risk management activities, the Firm undertakes a comprehensive VaR calculation that includes
the majority of its market risks. These VaR results are reported to senior management.
| 118 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
To calculate VaR, the Firm uses historical simulation, based on a one-day time horizon and an
expected tail-loss methodology, which measures risk across instruments and portfolios in a
consistent and comparable way. The simulation is based on data for the previous 12 months. This
approach assumes that historical changes in market values are representative of future changes;
this assumption may not always be accurate, particularly when there is volatility in the market
environment. For certain products, such as lending facilities and some mortgage-related securities
for which price-based time series are not readily available, market-based data are used in
conjunction with sensitivity factors to estimate the risk. It is likely that using an actual
price-based time series for these products, if available, would impact the VaR results presented.
In addition, certain
risk parameters, such as correlation risk among certain instruments, are not
fully captured in VaR.
In the third quarter of 2008, the Firm revised its reported IB Trading and credit portfolio VaR
measure to include additional risk positions previously excluded from VaR, thus creating a more
comprehensive view of the Firm’s market risks. In addition, the Firm moved to calculating VaR using
a 95% confidence level to provide a more stable measure of the VaR for day-to-day risk management.
The following sections describe JPMorgan Chase’s VaR measures under both the legacy 99% confidence
level as well as the new 95% confidence level. The Firm intends to present VaR solely at the 95%
confidence level commencing in the first quarter of 2010, as information for two complete
year-to-date periods will then be available.
The table below shows the results of the Firm’s VaR measure using the legacy 99%
confidence level.
99% Confidence-Level VaR
IB trading VaR by risk type and credit portfolio VaR
| As of or for the year ended | 2009 | 2008 | At December 31, | |||||||||||||||||||||||||||||
| December 31, (a) (in millions) | Average | Minimum | Maximum | Average | Minimum | Maximum | 2009 | 2008 | ||||||||||||||||||||||||
|
By risk type:
|
||||||||||||||||||||||||||||||||
|
Fixed income
|
$ | 221 | $ | 112 | $ | 289 | $ | 181 | $ | 99 | $ | 409 | $ | 123 | $ | 253 | ||||||||||||||||
|
Foreign exchange
|
30 | 10 | 67 | 34 | 13 | 90 | 18 | 70 | ||||||||||||||||||||||||
|
Equities
|
75 | 13 | 248 | 57 | 19 | 187 | 64 | 69 | ||||||||||||||||||||||||
|
Commodities and other
|
32 | 16 | 58 | 32 | 24 | 53 | 23 | 26 | ||||||||||||||||||||||||
|
Diversification
|
(131 | ) (b) | NM (c) | NM (c) | (108 | ) (b) | NM (c) | NM (c) | (99 | ) (b) | (152 | ) (b) | ||||||||||||||||||||
|
Trading VaR
|
$ | 227 | $ | 103 | $ | 357 | $ | 196 | $ | 96 | $ | 420 | $ | 129 | $ | 266 | ||||||||||||||||
|
Credit portfolio VaR
|
101 | 30 | 221 | 69 | 20 | 218 | 37 | 171 | ||||||||||||||||||||||||
|
Diversification
|
(80 | ) (b) | NM (c) | NM (c) | (63 | ) (b) | NM (c) | NM (c) | (20 | ) (b) | (120 | ) (b) | ||||||||||||||||||||
|
Total trading and credit
portfolio VaR
|
$ | 248 | $ | 132 | $ | 397 | $ | 202 | $ | 96 | $ | 449 | $ | 146 | $ | 317 | ||||||||||||||||
| (a) | The results for the year ended December 31, 2008, include five months of heritage JPMorgan Chase & Co. only results and seven months of combined JPMorgan Chase & Co. and Bear Stearns results. | |
| (b) | Average and period-end VaRs were less than the sum of the VaRs of its market risk components, which is due to risk offsets resulting from portfolio diversification. The diversification effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves. | |
| (c) | Designated as not meaningful (“NM”) because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful to compute a portfolio diversification effect. |
| JPMorgan Chase & Co. / 2009 Annual Report | 119 |
Table of Contents
Management’s discussion and analysis
The 99% confidence level trading VaR includes substantially all trading activities in IB. Beginning
in the fourth quarter of 2008, the credit spread sensitivities of certain mortgage products were
included in trading VaR. This change had an insignificant impact on the average fourth quarter VaR.
For certain other products included in the trading VaR, particular risk parameters are not fully
captured – for example, correlation risk. Trading VaR does not include: held-for-sale funded loan
and unfunded commitments positions (however, it does include hedges of those positions); the DVA
taken on derivative and structured liabilities to reflect the credit quality of the Firm; the MSR
portfolio; and securities and instruments held by other corporate functions, such as Private
Equity. See the DVA Sensitivity table on page 122 of this Annual Report for further details. For a
discussion of MSRs and the corporate functions, see Note 3 on pages 148–165, Note 17 on pages
214–217 and Corporate/ Private Equity on pages 74–75 of this Annual Report.
2009 VaR results (99% confidence level VaR)
IB’s average total trading and credit portfolio VaR was $248 million for 2009, compared with $202
million for 2008, primarily driven by market volatility. Volatility began to significantly increase
across all asset classes from late 2008 and persisted through the first quarter of 2009. From the
second quarter of 2009 onwards, volatility in the markets gradually declined; however, the impact
of the volatile periods was still reflected in the 2009 VaR numbers.
Spot total trading and credit portfolio VaR as of December 31, 2009, was $146 million, compared
with $317 million as of December 31, 2008. The decrease in the spot VaR in 2009 reflects the
reduction in overall risk levels as well as the aforementioned decline in market volatility by the
end of 2009 when compared to the end of 2008.
For 2009, compared with the prior year, average trading VaR diversification increased to $131
million, or 37% of the sum of the components, from $108 million, or 36% of the sum of the
components in the prior year. In general, over the course of the year, VaR exposures can vary
significantly as positions change, market volatility fluctuates and diversification benefits
change.
VaR backtesting (99% confidence level VaR)
To evaluate the soundness of its VaR model, the Firm conducts daily back-testing of VaR against
daily IB market risk-related revenue, which is defined as the change in value of principal
transactions revenue (excluding private equity gains/(losses)) plus any trading-related net
interest income, brokerage commissions, underwriting fees or other revenue. The daily IB market
risk-related revenue excludes gains and losses on held-for-sale funded loans and unfunded
commitments and from DVA. The following histogram illustrates the daily market risk-related gains
and losses for IB trading businesses for the year ended 2009. The chart shows that IB posted market
risk-related gains on 219 out of 261 days in this period, with 54 days exceeding $160 million. The
inset graph looks at those days on which IB experienced losses and depicts the amount by which 99%
confidence level VaR exceeded the actual loss on each of those days. Losses were sustained on 42
days during the year ended December 31, 2009, with no loss exceeding the VaR measure. The Firm
would expect to incur losses greater than that predicted by VaR estimates once in every 100 trading
days, or about two to three times a year.
| 120 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The table below shows the results of the Firm’s VaR measure using a 95% confidence
level.
95% Confidence Level VaR
Total IB trading VaR by risk type, credit portfolio VaR and other VaR
| Year ended | ||||||||||||
| December 31, | ||||||||||||
| At December 31, | Average (a) | |||||||||||
| (in millions) | 2009 | 2008 | 2009 | |||||||||
|
IB VaR by risk type:
|
||||||||||||
|
Fixed income
|
$ | 80 | $ | 180 | $ | 160 | ||||||
|
Foreign exchange
|
10 | 38 | 18 | |||||||||
|
Equities
|
43 | 39 | 47 | |||||||||
|
Commodities and other
|
14 | 25 | 20 | |||||||||
|
Diversification benefit to IB trading VaR
|
(54 | ) | (108 | ) | (91 | ) | ||||||
|
IB Trading VaR
|
$ | 93 | $ | 174 | $ | 154 | ||||||
|
Credit portfolio VaR
|
21 | 77 | 52 | |||||||||
|
Diversification benefit to IB trading and credit portfolio VaR
|
(9 | ) | (57 | ) | (42 | ) | ||||||
|
Total IB trading and credit portfolio VaR
|
$ | 105 | $ | 194 | $ | 164 | ||||||
|
Consumer Lending VaR
|
28 | 112 | 57 | |||||||||
|
Chief Investment Office (CIO) VaR
|
76 | 114 | 103 | |||||||||
|
Diversification benefit to total other VaR
|
(13 | ) | (48 | ) | (36 | ) | ||||||
|
Total other VaR
|
$ | 91 | $ | 178 | $ | 124 | ||||||
|
Diversification benefit to total IB and other VaR
|
(73 | ) | (86 | ) | (82 | ) | ||||||
|
Total IB and other VaR
|
$ | 123 | $ | 286 | $ | 206 | ||||||
| (a) | Results for the year ended December 31, 2008, are not available. |
VaR measurement
The Firm’s 95% VaR measure above includes all the risk positions taken into account under the 99%
confidence level VaR measure, as well as syndicated lending facilities that the Firm intends to
distribute. The Firm utilizes proxies to estimate the VaR for these products since daily time
series are largely not available. In addition, the 95% VaR measure also includes certain positions
utilized as part of the Firm’s risk management function within the Chief Investment Office (“CIO”)
and in the Consumer Lending businesses to provide a Total IB and other VaR measure. The CIO VaR
includes positions, primarily in debt securities and credit products, used to manage structural
risk and other risks, including interest rate, credit and mortgage risks arising from the Firm’s
ongoing business activities. The Consumer Lending VaR includes the Firm’s mortgage pipeline and
warehouse loans, MSRs and all related hedges. In the Firm’s view, including these items in VaR
produces a more complete perspective of the Firm’s market risk profile.
The 95% VaR measure continues to exclude the DVA taken on certain structured liabilities and
derivatives to reflect the credit quality of the Firm. It also excludes certain activities such as
Private Equity, principal investing (e.g., mezzanine financing, tax-oriented investments, etc.) and
balance sheet, capital management positions and longer-term investments managed by the CIO. These
longer-term positions are managed through the Firm’s earnings-at-risk and other cash
flow-monitoring processes rather than by using a VaR measure. Principal investing activities and
Private Equity positions are managed using stress and scenario analysis.
2009 VaR results (95% confidence level VaR)
Spot IB and other VaR as of December 31, 2009, was $123 million, compared with $286 million as of
December 31, 2008. The decrease in spot VaR in 2009 is a consequence of reductions in overall risk
as well as declining market volatility. In general, over the course of the year, VaR exposures can
vary significantly as positions change, market volatility fluctuates and diversification benefits
change.
VaR backtesting (95% confidence level VaR)
To evaluate the soundness of its VaR model, the Firm conducts daily back-testing of VaR against the
Firm’s market risk-related revenue, which is defined as follows: the change in value of principal
transactions revenue for IB and CIO (excluding private equity gains/(losses) and revenue from
longer-term CIO investments); trading-related net interest income for IB, RFS and CIO (excluding
longer-term CIO investments); IB brokerage commissions, underwriting fees or other revenue; revenue
from syndicated lending facilities that the Firm intends to distribute; and mortgage fees and
related income for the Firm’s mortgage pipeline and warehouse loans, MSRs and all related hedges.
The daily firmwide market risk-related revenue excludes gains and losses from DVA.
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Management’s discussion and analysis
The following histogram illustrates the daily market risk-related gains and losses for IB
and Consumer/CIO positions for 2009. The chart shows that the Firm posted market risk-related gains
on 227 out of 261 days in this period, with 69 days exceeding $160 million. The inset graph looks
at those days on which the Firm experienced losses and depicts the amount by which the 95%
confidence level VaR exceeded the actual loss on each of those days. Losses were sustained on 34
days during 2009 and exceeded the VaR measure on one day due to high market volatility in the first
quarter of 2009. Under the 95% confidence interval, the Firm would expect to incur daily losses
greater than that predicted by VaR estimates about twelve times a year.
The following table provides information about the gross sensitivity of DVA to a
one-basis-point increase in JPMorgan Chase’s credit spreads. This sensitivity represents the impact
from a one-basis-point parallel shift in JPMorgan Chase’s entire credit curve. As credit curves do
not typically move in a parallel fashion, the sensitivity multiplied by the change in spreads at a
single maturity point may not be representative of the actual revenue recognized.
Debit valuation adjustment sensitivity
| 1 Basis Point Increase in | ||||
| (in millions) | JPMorgan Chase Credit Spread | |||
|
December 31, 2009
|
$ | 39 | ||
|
December 31, 2008
|
$ | 37 | ||
Loss advisories and drawdowns
Loss advisories and drawdowns are tools used to highlight to senior management trading losses above
certain levels and initiate discussion of remedies.
Economic value stress testing
While VaR reflects the risk of loss due to adverse changes in normal markets, stress testing captures the Firm’s exposure to unlikely but plausible events in abnormal markets. The Firm conducts economic-value stress tests using multiple scenarios that assume credit spreads widen significantly, equity prices decline and significant changes in interest rates across the major currencies. Other scenarios focus on the risks predominant in individual business segments and include scenarios that focus on the potential for adverse movements in complex portfolios. Scenarios were updated more frequently in 2009 and, in some cases, redefined to reflect the significant market volatility which began in late 2008. Along with VaR, stress testing is important in measuring and controlling risk. Stress testing enhances the understanding of the Firm’s risk profile and loss potential, and stress losses are monitored against limits. Stress testing is also utilized in one-off approvals and cross-business risk measurement, as well as an input to economic capital allocation. Stress-test results, trends and explanations based on current market risk positions are reported to the Firm’s senior management and to the lines of business to help them better measure and manage risks and to understand event risk-sensitive positions.
While VaR reflects the risk of loss due to adverse changes in normal markets, stress testing captures the Firm’s exposure to unlikely but plausible events in abnormal markets. The Firm conducts economic-value stress tests using multiple scenarios that assume credit spreads widen significantly, equity prices decline and significant changes in interest rates across the major currencies. Other scenarios focus on the risks predominant in individual business segments and include scenarios that focus on the potential for adverse movements in complex portfolios. Scenarios were updated more frequently in 2009 and, in some cases, redefined to reflect the significant market volatility which began in late 2008. Along with VaR, stress testing is important in measuring and controlling risk. Stress testing enhances the understanding of the Firm’s risk profile and loss potential, and stress losses are monitored against limits. Stress testing is also utilized in one-off approvals and cross-business risk measurement, as well as an input to economic capital allocation. Stress-test results, trends and explanations based on current market risk positions are reported to the Firm’s senior management and to the lines of business to help them better measure and manage risks and to understand event risk-sensitive positions.
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Earnings-at-risk stress testing
The VaR and stress-test measures described above illustrate the total economic sensitivity of the Firm’s Consolidated Balance Sheets to changes in market variables. The effect of interest rate exposure on reported net income is also important. Interest rate risk exposure in the Firm’s core nontrading business activities (i.e., asset/ liability management positions) results from on-and off-balance sheet positions and can occur due to a variety of factors, including:
The VaR and stress-test measures described above illustrate the total economic sensitivity of the Firm’s Consolidated Balance Sheets to changes in market variables. The effect of interest rate exposure on reported net income is also important. Interest rate risk exposure in the Firm’s core nontrading business activities (i.e., asset/ liability management positions) results from on-and off-balance sheet positions and can occur due to a variety of factors, including:
| • | Differences in the timing among the maturity or repricing of assets, liabilities and off-balance sheet instruments. For example, if liabilities reprice quicker than assets and funding interest rates are declining, earnings will increase initially. |
| • | Differences in the amounts of assets, liabilities and off-balance sheet instruments that are repricing at the same time. For example, if more deposit liabilities are repricing than assets when general interest rates are declining, earnings will increase initially. |
| • | Differences in the amounts by which short-term and long-term market interest rates change (for example, changes in the slope of the yield curve, because the Firm has the ability to lend at long-term fixed rates and borrow at variable or short-term fixed rates). Based on these scenarios, the Firm’s earnings would be affected negatively by a sudden and unanticipated increase in short-term rates paid on its liabilities (e.g., deposits) without a corresponding increase in long-term rates received on its assets (e.g., loans). Conversely, higher long-term rates received on assets generally are beneficial to earnings, particularly when the increase is not accompanied by rising short-term rates paid on liabilities. |
| • | The impact of changes in the maturity of various assets, liabilities or off-balance sheet instruments as interest rates change. For example, if more borrowers than forecasted pay down higher-rate loan balances when general interest rates are declining, earnings may decrease initially. |
The Firm manages interest rate exposure related to its assets and liabilities on a consolidated,
corporate-wide basis. Business units transfer their interest rate risk to Treasury through a
transfer-pricing system, which takes into account the elements of interest rate exposure that can
be risk-managed in financial markets. These elements include asset and liability balances and
contractual rates of interest, contractual principal payment schedules, expected prepayment
experience, interest rate reset dates and maturities, rate indices used for repricing, and any
interest rate ceilings or floors for adjustable rate products. All transfer-pricing assumptions are
dynamically reviewed.
The Firm conducts simulations of changes in net interest income from its nontrading activities
under a variety of interest rate scenarios. Earnings-at-risk tests measure the potential change in
the Firm’s net interest income, and the corresponding impact to the Firm’s pretax earnings, over
the following 12 months. These tests highlight exposures to various rate-sensitive factors, such as
the rates themselves (e.g., the prime lending rate), pricing strategies on deposits, optionality
and changes in product mix. The tests include
forecasted balance sheet changes, such as asset sales
and securitizations, as well as prepayment and reinvestment behavior.
Immediate changes in interest rates present a limited view of risk, and so a number of alternative
scenarios are also reviewed. These scenarios include the implied forward curve, nonparallel rate
shifts and severe interest rate shocks on selected key rates. These scenarios are intended to
provide a comprehensive view of JPMorgan Chase’s earnings at risk over a wide range of outcomes.
JPMorgan Chase’s 12-month pretax earnings sensitivity profile as of December 31, 2009 and 2008, is
as follows.
| Immediate change in rates | ||||||||||||||||
| (in millions) | +200bp | +100bp | -100bp | -200bp | ||||||||||||
|
December 31, 2009
|
$ | (1,594 | ) | $ | (554 | ) | NM (a) | NM (a) | ||||||||
|
December 31, 2008
|
$ | 336 | $ | 672 | NM (a) | NM (a) | ||||||||||
| (a) | Down 100- and 200-basis-point parallel shocks result in a Fed Funds target rate of zero, and negative three- and six-month Treasury rates. The earnings-at-risk results of such a low-probability scenario are not meaningful. |
The change in earnings at risk from December 31, 2008, results from a higher level of AFS
securities and an updated baseline scenario that uses higher short-term interest rates. The Firm’s
risk to rising rates is largely the result of increased funding costs on assets, partially offset
by widening deposit margins, which are currently compressed due to very low short-term interest
rates.
Additionally, another interest rate scenario, involving a steeper yield curve with long-term rates
rising 100 basis points and short-term rates staying at current levels, results in a 12-month
pretax earnings benefit of $449 million. The increase in earnings is due to reinvestment of
maturing assets at the higher long-term rates, with funding costs remaining unchanged.
Risk identification for large exposures
Individuals who manage risk positions, particularly those that are complex, are responsible for identifying potential losses that could arise from specific, unusual events, such as a potential tax change, and estimating the probabilities of losses arising from such events. This information is entered into the Firm’s RIFLE database. Management of trading businesses control RIFLE entries, thereby permitting the Firm to monitor further earnings vulnerability not adequately covered by standard risk measures.
Individuals who manage risk positions, particularly those that are complex, are responsible for identifying potential losses that could arise from specific, unusual events, such as a potential tax change, and estimating the probabilities of losses arising from such events. This information is entered into the Firm’s RIFLE database. Management of trading businesses control RIFLE entries, thereby permitting the Firm to monitor further earnings vulnerability not adequately covered by standard risk measures.
Risk monitoring and control
Limits
Market risk is controlled primarily through a series of limits. Limits reflect the Firm’s risk appetite in the context of the market environment and business strategy. In setting limits, the Firm takes into consideration factors such as market volatility, product liquidity, business trends and management experience.
Market risk is controlled primarily through a series of limits. Limits reflect the Firm’s risk appetite in the context of the market environment and business strategy. In setting limits, the Firm takes into consideration factors such as market volatility, product liquidity, business trends and management experience.
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Management’s discussion and analysis
Market risk management regularly reviews and updates risk limits. Senior management, including the
Firm’s Chief Executive Officer and Chief Risk Officer, is responsible for reviewing and approving
risk limits on an ongoing basis.
The Firm maintains different levels of limits. Corporate-level limits include VaR and stress
limits. Similarly, line-of-business limits include VaR and stress limits and may be supplemented by
loss advisories, nonstatistical measurements and instrument authorities. Businesses are responsible
for adhering to established limits, against which exposures are monitored and reported. Limit
breaches are reported in a timely manner to senior management, and the affected business segment is
required to reduce trading positions or consult with senior management on the appropriate action.
Qualitative review
The Market Risk Management group also performs periodic reviews as necessary of both businesses and products with exposure to market risk to assess the ability of the businesses to control their market risk. Strategies, market conditions, product details and risk controls are reviewed and specific recommendations for improvements are made to management.
The Market Risk Management group also performs periodic reviews as necessary of both businesses and products with exposure to market risk to assess the ability of the businesses to control their market risk. Strategies, market conditions, product details and risk controls are reviewed and specific recommendations for improvements are made to management.
Model review
Some of the Firm’s financial instruments cannot be valued based on quoted market prices but are instead valued using pricing models. Such models are used for management of risk positions, such as reporting against limits, as well as for valuation. The Model Risk
Some of the Firm’s financial instruments cannot be valued based on quoted market prices but are instead valued using pricing models. Such models are used for management of risk positions, such as reporting against limits, as well as for valuation. The Model Risk
Group, which is independent of
the businesses and market risk management, reviews the models the Firm uses and assesses model
appropriateness and consistency. The model reviews consider a number of factors about the model’s
suitability for valuation and risk management of a particular product, including whether it
accurately reflects the characteristics of the transaction and its significant risks, the
suitability and convergence properties of numerical algorithms, reliability of data sources,
consistency of the treatment with models for similar products, and sensitivity to input parameters
and assumptions that cannot be priced from the market.
Reviews are conducted of new or changed models, as well as previously accepted models, to assess
whether there have been any changes in the product or market that may impact the model’s validity
and whether there are theoretical or competitive developments that may require reassessment of the
model’s adequacy. For a summary of valuations based on models, see Critical Accounting Estimates
Used by the Firm on pages 127–131 of this Annual Report.
Risk reporting
Nonstatistical exposures, value-at-risk, loss advisories and limit excesses are reported daily to
senior management. Market risk exposure trends, value-at-risk trends, profit-and-loss changes and
portfolio concentrations are reported weekly. Stress-test results are reported at least every two
weeks to the businesses and senior management.
PRIVATE EQUITY RISK MANAGEMENT
Risk management
The Firm makes principal investments in private equity. The illiquid nature and long-term holding period associated with these investments differentiates private equity risk from the risk of positions held in the trading portfolios. The Firm’s approach to managing private equity risk is consistent with the Firm’s general risk governance structure. Controls are in place establishing expected levels for total and annual investment in order to control the overall size of the portfolio. Industry and geographic concentration limits are in place and intended to ensure diversification of the portfolio. All
The Firm makes principal investments in private equity. The illiquid nature and long-term holding period associated with these investments differentiates private equity risk from the risk of positions held in the trading portfolios. The Firm’s approach to managing private equity risk is consistent with the Firm’s general risk governance structure. Controls are in place establishing expected levels for total and annual investment in order to control the overall size of the portfolio. Industry and geographic concentration limits are in place and intended to ensure diversification of the portfolio. All
investments are approved by an investment committee that
includes executives who are not part of the investing businesses. An independent valuation function
is responsible for reviewing the appropriateness of the carrying values of private equity
investments in accordance with relevant accounting policies. At December 31, 2009 and 2008, the
carrying value of the Private Equity portfolio was $7.3 billion and $6.9 billion, respectively, of
which $762 million and $483 million, respectively, represented publicly-traded positions. For
further information on the Private Equity portfolio, see page 75 of this Annual Report.
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OPERATIONAL RISK MANAGEMENT
Operational risk is the risk of loss resulting from inadequate or failed processes or
systems, human factors or external events.
Overview
Operational risk is inherent in each of the Firm’s businesses and support activities. Operational risk can manifest itself in various ways, including errors, fraudulent acts, business interruptions, inappropriate behavior of employees, or vendors that do not perform in accordance with their arrangements. These events could result in financial losses and other damage to the Firm, including reputational harm.
Operational risk is inherent in each of the Firm’s businesses and support activities. Operational risk can manifest itself in various ways, including errors, fraudulent acts, business interruptions, inappropriate behavior of employees, or vendors that do not perform in accordance with their arrangements. These events could result in financial losses and other damage to the Firm, including reputational harm.
To monitor and control operational risk, the Firm maintains a system of comprehensive policies and
a control framework designed to provide a sound and well-controlled operational environment. The
goal is to keep operational risk at appropriate levels, in light of the Firm’s financial strength,
the characteristics of its businesses, the markets in which it operates, and the competitive and
regulatory environment to which it is subject. Notwithstanding these control measures, the Firm
incurs operational losses.
The Firm’s approach to operational risk management is intended to mitigate such losses by
supplementing traditional control-based approaches to operational risk with risk measures, tools
and disciplines that are risk-specific, consistently applied and utilized firmwide. Key themes are
transparency of information, escalation of key issues and accountability for issue resolution.
One of the ways operational risk is mitigated is through insurance maintained by the Firm. The
Firm purchases insurance to be in compliance with local laws and regulations, as well as to serve
other needs of the Firm. Insurance may also be required by third parties with whom the Firm does
business. The insurance purchased is reviewed and approved by senior management.
The Firm’s operational risk framework is supported by Phoenix, an internally designed operational
risk software tool. Phoenix integrates the individual components of the operational risk management
framework into a unified, web-based tool. Phoenix enhances the capture, reporting and analysis of
operational risk data by enabling risk identification, measurement, monitoring, reporting and
analysis to be done in an integrated manner, thereby enabling efficiencies in the Firm’s monitoring
and management of its operational risk.
For purposes of identification, monitoring, reporting and analysis, the Firm categorizes
operational risk events as follows:
| • | Client service and selection | |
| • | Business practices | |
| • | Fraud, theft and malice | |
| • | Execution, delivery and process management | |
| • | Employee disputes | |
| • | Disasters and public safety | |
| • | Technology and infrastructure failures |
Risk identification
Risk identification is the recognition of the operational risk events that management believes may give rise to operational losses. All businesses utilize the Firm’s standard self-assessment process and supporting architecture as a dynamic risk management tool. The goal of the self-assessment process is for each business to identify the key operational risks specific to its environment and assess the degree to which it maintains appropriate controls. Action plans are developed for control issues identified, and businesses are held accountable for tracking and resolving these issues on a timely basis.
Risk identification is the recognition of the operational risk events that management believes may give rise to operational losses. All businesses utilize the Firm’s standard self-assessment process and supporting architecture as a dynamic risk management tool. The goal of the self-assessment process is for each business to identify the key operational risks specific to its environment and assess the degree to which it maintains appropriate controls. Action plans are developed for control issues identified, and businesses are held accountable for tracking and resolving these issues on a timely basis.
Risk measurement
Operational risk is measured for each business on the basis of historical loss experience using a statistically based loss-distribution approach. The current business environment, potential stress scenarios and measures of the control environment are then factored into the statistical measure in determining the Firmwide operational risk capital. This methodology is designed to comply with the advanced measurement rules under the new Basel II Framework.
Operational risk is measured for each business on the basis of historical loss experience using a statistically based loss-distribution approach. The current business environment, potential stress scenarios and measures of the control environment are then factored into the statistical measure in determining the Firmwide operational risk capital. This methodology is designed to comply with the advanced measurement rules under the new Basel II Framework.
Risk monitoring
The Firm has a process for monitoring operational risk-event data, permitting analysis of errors and losses as well as trends. Such analysis, performed both at a line-of-business level and by risk-event type, enables identification of the causes associated with risk events faced by the businesses. Where available, the internal data can be supplemented with external data for comparative analysis with industry patterns. The data reported enables the Firm to back-test against self-assessment results. The Firm is a founding member of the Operational Riskdata eXchange Association, a not-for-profit industry association formed for the purpose of collecting operational loss data, sharing data in an anonymous form and benchmarking results back to members. Such information supplements the Firm’s ongoing operational risk measurement and analysis.
The Firm has a process for monitoring operational risk-event data, permitting analysis of errors and losses as well as trends. Such analysis, performed both at a line-of-business level and by risk-event type, enables identification of the causes associated with risk events faced by the businesses. Where available, the internal data can be supplemented with external data for comparative analysis with industry patterns. The data reported enables the Firm to back-test against self-assessment results. The Firm is a founding member of the Operational Riskdata eXchange Association, a not-for-profit industry association formed for the purpose of collecting operational loss data, sharing data in an anonymous form and benchmarking results back to members. Such information supplements the Firm’s ongoing operational risk measurement and analysis.
Risk reporting and analysis
Operational risk management reports provide timely and accurate information, including information about actual operational loss levels and self-assessment results, to the lines of business and senior management. The purpose of these reports is to enable management to maintain operational risk at appropriate levels within each line of business, to escalate issues and to provide consistent data aggregation across the Firm’s businesses and support areas.
Operational risk management reports provide timely and accurate information, including information about actual operational loss levels and self-assessment results, to the lines of business and senior management. The purpose of these reports is to enable management to maintain operational risk at appropriate levels within each line of business, to escalate issues and to provide consistent data aggregation across the Firm’s businesses and support areas.
Audit alignment
Internal Audit utilizes a risk-based program of audit coverage to provide an independent assessment of the design and effectiveness of key controls over the Firm’s operations, regulatory compliance and reporting. This includes reviewing the operational risk framework, the effectiveness and accuracy of the business self-assessment process and the loss data-collection and reporting activities.
Internal Audit utilizes a risk-based program of audit coverage to provide an independent assessment of the design and effectiveness of key controls over the Firm’s operations, regulatory compliance and reporting. This includes reviewing the operational risk framework, the effectiveness and accuracy of the business self-assessment process and the loss data-collection and reporting activities.
| JPMorgan Chase & Co. / 2009 Annual Report | 125 |
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Management’s discussion and analysis
REPUTATION AND FIDUCIARY RISK MANAGEMENT
A firm’s success depends not only on its prudent management of the liquidity, credit, market
and operational risks that are part of its business risks, but equally on the maintenance among
many constituents – clients, investors, regulators, as well as
the general public – of a reputation
for business practices of the highest quality. Attention to reputation always has been a key aspect
of the Firm’s practices, and maintenance of the Firm’s reputation is the responsibility of everyone
at the Firm. JPMorgan Chase bolsters this individual responsibility in many ways, including through
the Firm’s Code of Conduct, training, maintaining adherence to policies and procedures, and
oversight functions that approve transactions. These oversight functions include line-of-businesses
risk committees, a Conflicts Office, which examines wholesale transactions with the potential to
create conflicts of interest for the Firm; and a Reputation Risk Office and regional Reputation
Risk Committees, which review certain transactions that have the potential to affect adversely the
Firm’s reputation. These regional committees, whose members are senior representatives of
businesses and control functions in the region, focus among other things on complex derivatives and
structured finance transactions with clients with the goal that these transactions not be used to
mislead the client’s investors or others.
Fiduciary risk management
The risk management committees within each line of business include in their mandate oversight of the legal, reputational and, where appropriate, fiduciary risks in their businesses that may produce significant losses or reputational damage. The Fiduciary Risk Management function works with the relevant line-of-business risk committees, with the goal of ensuring that businesses providing investment or risk management products or services that give rise to fiduciary duties to clients perform at the appropriate standard relative to their fiduciary relationship with a client. Of particular focus are the policies and practices that address a business’ responsibilities to a client, including client suitability determination; disclosure obligations and communications; and performance expectations with respect to risk management products or services being provided. In this way, the relevant line-of-business risk committees, together with the Fiduciary Risk Management function, provide oversight of the Firm’s efforts to monitor, measure and control the risks that may arise in the delivery of products or services to clients that give rise to such fiduciary duties, as well as those stemming from any of the Firm’s fiduciary responsibilities to employees under the Firm’s various employee benefit plans.
The risk management committees within each line of business include in their mandate oversight of the legal, reputational and, where appropriate, fiduciary risks in their businesses that may produce significant losses or reputational damage. The Fiduciary Risk Management function works with the relevant line-of-business risk committees, with the goal of ensuring that businesses providing investment or risk management products or services that give rise to fiduciary duties to clients perform at the appropriate standard relative to their fiduciary relationship with a client. Of particular focus are the policies and practices that address a business’ responsibilities to a client, including client suitability determination; disclosure obligations and communications; and performance expectations with respect to risk management products or services being provided. In this way, the relevant line-of-business risk committees, together with the Fiduciary Risk Management function, provide oversight of the Firm’s efforts to monitor, measure and control the risks that may arise in the delivery of products or services to clients that give rise to such fiduciary duties, as well as those stemming from any of the Firm’s fiduciary responsibilities to employees under the Firm’s various employee benefit plans.
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CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM
JPMorgan Chase’s accounting policies and use of estimates are integral to understanding its
reported results. The Firm’s most complex accounting estimates require management’s judgment to
ascertain the value of assets and liabilities. The Firm has established detailed policies and
control procedures intended to ensure that valuation methods, including any judgments made as part
of such methods, are well-controlled, independently reviewed and applied consistently from period
to period. In addition, the policies and procedures are intended to ensure that the process for
changing methodologies occurs in an appropriate manner. The Firm believes its estimates for
determining the value of its assets and liabilities are appropriate. The following is a brief
description of the Firm’s critical accounting estimates involving significant valuation judgments.
Allowance for credit losses
JPMorgan Chase’s allowance for credit losses covers the retained wholesale and consumer loan portfolios, as well as the Firm’s portfolio of wholesale and consumer lending-related commitments. The allowance for loan losses is intended to adjust the value of the Firm’s loan assets to reflect probable credit losses as of the balance sheet date. For a further discussion of the methodologies used in establishing the Firm’s allowance for credit losses, see Note 14 on pages 196–198 of this Annual Report.
JPMorgan Chase’s allowance for credit losses covers the retained wholesale and consumer loan portfolios, as well as the Firm’s portfolio of wholesale and consumer lending-related commitments. The allowance for loan losses is intended to adjust the value of the Firm’s loan assets to reflect probable credit losses as of the balance sheet date. For a further discussion of the methodologies used in establishing the Firm’s allowance for credit losses, see Note 14 on pages 196–198 of this Annual Report.
Wholesale loans and lending-related commitments
The methodology for calculating the allowance for loan losses and the allowance for lending-related
commitments involves significant judgment. First and foremost, it involves the early identification
of credits that are deteriorating. Second, it involves judgment in establishing the inputs used to
estimate the allowances. Third, it involves management judgment to evaluate certain macroeconomic
factors, underwriting standards, and other relevant internal and external factors affecting the
credit quality of the current portfolio, and to refine loss factors to better reflect these
conditions.
The Firm uses a risk-rating system to determine the credit quality of its wholesale loans.
Wholesale loans are reviewed for information affecting the obligor’s ability to fulfill its
obligations. In assessing the risk rating of a particular loan, among the factors considered are
the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the
amount and sources for repayment, the level and nature of contingencies, management strength, and
the industry and geography in which the obligor operates. These factors are based on an evaluation
of historical and current information and involve subjective assessment and interpretation.
Emphasizing one factor over another or considering additional factors could affect the risk rating
assigned by the Firm to that loan.
The Firm applies its judgment to establish loss factors used in calculating the allowances.
Wherever possible, the Firm uses independent, verifiable data or the Firm’s own historical loss
experience in its models for estimating the allowances. Many factors can affect estimates of loss,
including volatility of loss given default, probability of
default and rating migrations.
Consideration is given as to whether the loss estimates should be calculated as an average over the
entire credit cycle or at a particular point in the credit cycle, as well as to which external data
should be used and when they should be used. Choosing data that are not reflective of the Firm’s
specific loan portfolio characteristics could also affect loss estimates. The application of
different inputs would change the amount of the allowance for credit losses determined appropriate
by the Firm.
Management also applies its judgment to adjust the loss factors derived, taking into consideration
model imprecision, external factors and economic events that have occurred but are not yet
reflected in the loss factors. Historical experience of both loss given default and probability of
default are considered when estimating these adjustments. Factors related to concentrated and
deteriorating industries also are incorporated where relevant. These estimates are based on
management’s 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 current portfolio.
As noted above, the Firm’s wholesale allowance is sensitive to the risk rating assigned to a loan.
As of December 31, 2009, assuming a one-notch downgrade in the Firm’s internal risk ratings for its
entire wholesale portfolio, the allowance for loan losses for the wholesale portfolio would
increase by approximately $1.8 billion. This sensitivity analysis is hypothetical. In the Firm’s
view, the likelihood of a one-notch downgrade for all wholesale loans within a short timeframe is
remote. The purpose of this analysis is to provide an indication of the impact of risk ratings on
the estimate of the allowance for loan losses for wholesale loans. It is not intended to imply
management’s expectation of future deterioration in risk ratings. Given the process the Firm
follows in determining the risk ratings of its loans, management believes the risk ratings
currently assigned to wholesale loans are appropriate.
Consumer loans and lending-related commitments
The allowance for credit losses for the consumer portfolio is sensitive to changes in the economic
environment, delinquency status, FICO scores, the realizable value of collateral, borrower behavior
and other risk factors, and it is intended to represent management’s best estimate of incurred
losses as of the balance sheet date. The credit performance of the consumer portfolio across the
entire consumer credit product spectrum continues to be negatively affected by the economic
environment, as the weak labor market and overall economic conditions have resulted in increased
delinquencies, while continued weak housing prices have driven a significant increase in loss
severity. Significant judgment is required to estimate the duration and severity of the current
economic downturn, as well as its potential impact on housing prices and the labor market. While
the allowance for credit losses is highly sensitive to both home prices and unemployment rates, in
the current market it is difficult to estimate how potential changes in one or both of these
factors might affect
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Management’s discussion and analysis
the allowance for credit losses. For example, while both factors are important
determinants of overall allowance levels, changes in one factor or the other may not occur at the
same rate, or changes may be directionally inconsistent such that improvement in one factor may
offset deterioration in the other. In addition, changes in these factors would not necessarily be
consistent across geographies or product types. Finally, it is difficult to predict the extent to
which changes in
both or either of these factors would ultimately affect the frequency of losses, the severity of
losses or both; and overall loss rates are a function of both the frequency and severity of
individual loan losses.
The allowance is calculated by applying statistical loss factors and other risk indicators to pools
of loans with similar risk characteristics to arrive at an estimate of incurred losses in the
portfolio. Management applies judgment to the statistical loss estimates for each loan portfolio
category using delinquency trends and other risk characteristics to estimate charge-offs.
Management uses additional statistical methods and considers portfolio and collateral valuation
trends to review the appropriateness of the primary statistical loss estimate. The statistical
calculation is adjusted to take into consideration model imprecision, external factors and
current economic events that have occurred but are not yet reflected in the factors used to derive
the statistical calculation, and is accomplished in part by analyzing the historical loss
experience for each major product segment. In the current economic environment, it is difficult to
predict whether historical loss experience is indicative of future loss levels. Management applies
judgment in determining this adjustment, taking into account
the uncertainties associated with current macroeconomic and political
conditions, quality of underwriting standards, and other relevant internal and external factors
affecting the credit quality of the portfolio.
Fair value of financial instruments, MSRs and commodities inventory
JPMorgan Chase carries a portion of its assets and liabilities at fair value. The majority of such assets and liabilities are carried at fair value on a recurring basis. Certain assets and liabilities are carried at fair value on a nonrecurring basis, including loans accounted for at the lower of cost or fair value that are only subject to fair value adjustments under certain circumstances.
JPMorgan Chase carries a portion of its assets and liabilities at fair value. The majority of such assets and liabilities are carried at fair value on a recurring basis. Certain assets and liabilities are carried at fair value on a nonrecurring basis, including loans accounted for at the lower of cost or fair value that are only subject to fair value adjustments under certain circumstances.
Under U.S. GAAP there is a three-level valuation hierarchy for disclosure of fair value
measurements. An instrument’s categorization within the hierarchy is based on the lowest level of
input that is significant to the fair value measurement. Therefore, for instruments classified in
levels 1 and 2 of the hierarchy, where inputs are principally based on observable market data,
there is less judgment applied in arriving at a fair value measurement. For instruments classified
within level 3 of the hierarchy, judgments are more significant. The Firm reviews and updates the
fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next
related to the observability of inputs to a fair value measurement may result in a reclassification
between hierarchy levels.
Assets carried at fair value
The following table includes the Firm’s assets measured at fair
value and the portion of such assets that are classified within
level 3 of the valuation hierarchy.
| December 31, | 2009 | 2008 | ||||||||||||||
| (in billions, except ratio data) | Total at fair value | Level 3 total | Total at fair value | Level 3 total | ||||||||||||
|
Trading debt and equity securities
(a)
|
$ | 330.9 | $ | 35.2 | $ | 347.4 | $ | 41.4 | ||||||||
|
Derivative
receivables – gross
|
1,565.5 | 46.7 | 2,741.7 | 53.0 | ||||||||||||
|
Netting adjustment
|
(1,485.3 | ) | — | (2,579.1 | ) | — | ||||||||||
|
Derivative receivables – net
|
80.2 | 46.7 | (d) | 162.6 | 53.0 | (d) | ||||||||||
|
Available-for-sale securities
|
360.4 | 13.2 | 205.9 | 12.4 | ||||||||||||
|
Loans
|
1.4 | 1.0 | 7.7 | 2.7 | ||||||||||||
|
MSRs
|
15.5 | 15.5 | 9.4 | 9.4 | ||||||||||||
|
Private equity investments
|
7.3 | 6.6 | 6.9 | 6.4 | ||||||||||||
|
Other
(b)
|
44.4 | 9.5 | 49.6 | 8.1 | ||||||||||||
|
Total assets measured at fair value on a recurring basis
|
840.1 | 127.7 | 789.5 | 133.4 | ||||||||||||
|
Total assets measured at fair value on a nonrecurring basis
(c)
|
8.2 | 2.7 | 11.0 | 4.3 | ||||||||||||
|
Total assets measured at fair value
|
$ | 848.3 | $ | 130.4 | (e) | $ | 800.5 | $ | 137.7 | (e) | ||||||
|
Less: level 3 assets for which the Firm does not bear
economic exposure
|
2.1 | 21.2 | ||||||||||||||
|
|
||||||||||||||||
|
Total level 3 assets for which the Firm bears economic exposure
|
$ | 128.3 | $ | 116.5 | ||||||||||||
|
Total Firm assets
|
$ | 2,032.0 | $ | 2,175.1 | ||||||||||||
|
Level 3 assets as a percentage of total Firm assets
|
6 | % | 6 | % | ||||||||||||
|
Level 3 assets for which the Firm bears economic exposure as a
percentage of total Firm assets
|
6 | 5 | ||||||||||||||
|
Level 3 assets as a percentage of total Firm assets at fair value
|
15 | 17 | ||||||||||||||
|
Level 3 assets for which the Firm bears economic exposure as a
percentage of total assets at fair value
|
15 | 15 | ||||||||||||||
| (a) | Includes physical commodities carried at the lower of cost or fair value. | |
| (b) | Includes certain securities purchased under resale agreements, securities borrowed, accrued interest receivable and other investments. |
| 128 | JPMorgan Chase & Co. / 2009 Annual Report |
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| (c) | Predominantly includes delinquent mortgage and home equity loans, where impairment is based on the fair value of the underlying collateral, and leveraged lending loans carried on the Consolidated Balance Sheets at the lower of cost or fair value. | |
| (d) | Derivative receivable and derivative payable balances are presented net on the Consolidated Balance Sheets where there is a legally enforceable master netting agreement in place with counterparties. For purposes of the table above, the Firm does not reduce derivative receivable and derivative payable balances for netting adjustments, either within or across the levels of the fair value hierarchy, as such an adjustment is not relevant to a presentation that is based on the transparency of inputs to the valuation of an asset or liability. Therefore, the derivative balances reported in the fair value hierarchy levels are gross of any netting adjustments. However, if the Firm were to net such balances, the reduction in the level 3 derivative receivable and derivative payable balances would be $16.0 billion at December 31, 2009. | |
| (e) | Included in the table above are, at December 31, 2009 and 2008, $80.0 billion and $95.1 billion, respectively, of level 3 assets, consisting of recurring and nonrecurring assets carried by IB. This includes $2.1 billion and $21.2 billion, respectively, of assets for which the Firm serves as an intermediary between two parties and does not bear economic exposure. |
Valuation
The Firm has an established and well-documented process for determining fair value. Fair value is
based on quoted market prices, where available. If listed prices or quotes are not available, fair
value is based on internally developed models that primarily use as inputs market-based or
independently sourced market parameters. The Firm’s process is intended to ensure that all
applicable inputs are appropriately calibrated to market data, including but not limited to yield
curves, interest rates,
volatilities, equity or debt prices, foreign exchange rates and credit curves. In addition to
market information, models also incorporate transaction details, such as maturity. Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value. These
adjustments include amounts to reflect counterparty credit quality, the Firm’s creditworthiness,
constraints on liquidity and unobservable parameters that are applied consistently over time.
For instruments classified within level 3 of the hierarchy, judgments used to estimate fair value
may be significant. In arriving at an estimate of fair value for an instrument within level 3,
management must first determine the appropriate model to use. Second, due to the lack of
observability of significant inputs, management must assess all relevant empirical data in deriving
valuation inputs – including, but not limited to, yield curves, interest rates, volatilities,
equity or debt prices, foreign exchange rates and credit curves. In addition to market information,
models also incorporate transaction details, such as maturity. Finally, management judgment must be
applied to assess the appropriate level of valuation adjustments to reflect counterparty credit
quality, the Firm’s creditworthiness, constraints on liquidity and unobservable parameters, where
relevant. The judgments made are typically affected by the type of product and its specific
contractual terms, and the level of liquidity for the product or within the market as a whole. The
Firm has numerous controls in place to ensure that its valuations are appropriate. An independent
model review group reviews the Firm’s valuation models and approves them for use for specific
products. All valuation models of the Firm are subject to this review process. A price verification
group, independent from the risk-taking functions, ensures observable market prices and
market-based parameters are used for valuation whenever possible. For those products with material
parameter risk for which observable market levels do not exist, an independent review of the
assumptions made on pricing is performed. Additional review includes deconstruction of the model
valuations for certain structured instruments into their components; benchmarking valuations, where
possible, to similar products; validating valuation estimates through actual cash settlement; and
detailed review and explanation of recorded gains and losses, which are analyzed daily and over
time. Valuation adjustments, which are also determined by the
independent price verification group,
are based on
established policies and applied consistently over time. Any changes to the valuation
methodology are reviewed by management to confirm the changes are justified. As markets and
products develop and the pricing for certain products becomes more transparent, the Firm continues
to refine its valuation methodologies. During 2009, no changes were made to the Firm’s valuation
models that had, or are expected to have, a material impact on the Firm’s Consolidated Balance
Sheets or results of operations.
Imprecision in estimating unobservable market inputs can affect the amount of revenue or loss
recorded for a particular position. Furthermore, while the Firm believes its valuation methods are
appropriate and consistent with those of other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date. For a detailed discussion of
the determination of fair value for individual financial instruments, see Note 3 on pages 148–165
of this Annual Report. In addition, for a further discussion of the significant judgments and
estimates involved in the determination of the Firm’s mortgage-related exposures, see
“Mortgage-related exposures carried at fair value” in Note 3 on pages 161–162 of this Annual
Report.
Purchased credit-impaired loans
In connection with the Washington Mutual transaction, JPMorgan Chase acquired certain loans with evidence of deterioration of credit quality since the origination and for which it was probable, at acquisition, that the Firm would be unable to collect all contractually required payments receivable. These purchased credit-impaired loans are accounted for on a pool basis, and the pools are considered to be performing. At the time of the acquisition, these loans were recorded at fair value, including an estimate of losses that are expected to be incurred over the estimated remaining lives of the loan pools. Many of the assumptions and estimates underlying the estimation of the initial fair value and the ongoing updates to management’s expectation of future cash flows are both significant and subjective, particularly considering the current economic environment. The level of future home price declines, the duration and severity of the current economic downturn, and the lack of market liquidity and transparency are factors that have influenced, and may continue to affect, these assumptions and estimates.
In connection with the Washington Mutual transaction, JPMorgan Chase acquired certain loans with evidence of deterioration of credit quality since the origination and for which it was probable, at acquisition, that the Firm would be unable to collect all contractually required payments receivable. These purchased credit-impaired loans are accounted for on a pool basis, and the pools are considered to be performing. At the time of the acquisition, these loans were recorded at fair value, including an estimate of losses that are expected to be incurred over the estimated remaining lives of the loan pools. Many of the assumptions and estimates underlying the estimation of the initial fair value and the ongoing updates to management’s expectation of future cash flows are both significant and subjective, particularly considering the current economic environment. The level of future home price declines, the duration and severity of the current economic downturn, and the lack of market liquidity and transparency are factors that have influenced, and may continue to affect, these assumptions and estimates.
Determining which loans are included in the scope is highly subjective and requires significant
judgment. In the Washington Mutual transaction, consumer loans with certain attributes (e.g.,
higher loan-to-value ratios, borrowers with lower FICO scores, delinquencies) were determined to be
credit-impaired, provided that those attributes arose subsequent to the loans’ origination dates. A
wholesale loan was determined to be credit-impaired if it was risk-
| JPMorgan Chase & Co. / 2009 Annual Report | 129 |
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Management’s discussion and analysis
rated such that it would
otherwise have required an asset-specific allowance for loan losses.
Loans determined to be purchased credit-impaired were initially recorded at fair value, which
included estimated future credit losses. If such loans had not been within the scope of the
accounting guidance for purchased credit-impaired loans, they would have been recorded at the
present values of amounts to be received determined at appropriate current interest rates, less an
allowance for loan losses (i.e., the Washington Mutual allowance for loan losses would have been
carried over at the acquisition date).
The Firm estimated the fair value of its purchased credit-impaired loans at the acquisition date by
discounting the cash flows expected to be collected at a market-observable discount rate, when
available, adjusted for factors that a market participant would consider in determining fair value.
The initial estimate of cash flows to be collected was derived from assumptions such as default
rates, loss severities and the amount and timing of prepayments.
The accounting guidance for these loans provides that the excess of the cash flows initially
expected to be collected over the fair value of the loans at the acquisition date (i.e., the
accretable yield) should be accreted into interest income at a level rate of return over the term
of the loan, provided that the timing and amount of future cash flows is reasonably estimable. The
initial estimate of cash flows expected to be collected must be updated each subsequent reporting
period based on updated assumptions regarding default rates, loss severities, the amounts and
timing of prepayments and other factors that are reflective of current market conditions. Probable
decreases in expected loan principal cash flows after acquisition trigger the recognition of
impairment, through the provision and allowance for loan losses, which is then measured based on
the present value of the expected principal loss, plus any related foregone interest cash flows
discounted at the pool’s effective interest rate. Probable and significant increases in expected principal cash flows would first
reverse any related allowance for loan losses; any remaining increases must be recognized
prospectively as interest income over the remaining lives of the loans. The impacts of (i)
prepayments, (ii) changes in variable interest rates and (iii) other changes in timing of expected
cash flows are recognized prospectively as adjustments to interest income. As described above, the
process of estimating cash flows expected to be collected has a significant impact on the initial
recorded amount of the purchased credit-impaired loans and on subsequent recognition of impairment
losses and/or interest income. Estimating these cash flows requires a significant level of
management judgment. In addition, certain of the underlying assumptions are highly subjective. As
of December 31, 2009, a 1% decrease in expected future principal cash payments for the entire
portfolio of purchased credit-impaired loans would result in the recognition of an allowance for
loan losses for these loans of approximately $800 million.
Finally, the accounting guidance states that investors may aggregate loans into pools that have
common risk characteristics and thereby use a composite interest rate and estimate of cash flows
expected to be collected for the pools. The Firm has aggregated substantially all of the purchased
credit-impaired loans identified in the Washington Mutual transaction (i.e., the residential real
estate loans) into pools
with common risk characteristics. The pools then become the unit of
accounting and are considered one loan for purposes of accounting for these loans at and subsequent
to acquisition. Once a pool is assembled, the integrity of the pool must be maintained. Significant
judgment is required in evaluating whether individual loans have common risk characteristics for
purposes of establishing pools of loans.
Goodwill impairment
Under U.S. GAAP, goodwill must be allocated to reporting units and tested for impairment at least annually. The Firm’s process and methodology used to conduct goodwill impairment testing is described in Note 17 on pages 214–217 of this Annual Report.
Under U.S. GAAP, goodwill must be allocated to reporting units and tested for impairment at least annually. The Firm’s process and methodology used to conduct goodwill impairment testing is described in Note 17 on pages 214–217 of this Annual Report.
Management applies significant judgment when estimating the fair value of its reporting units.
Imprecision in estimating (a) the future earnings potential of the Firm’s reporting units and (b)
the relevant cost of equity or terminal value growth rates can affect the estimated fair value of
the reporting units. The fair values of a significant majority of the Firm’s reporting units
exceeded their carrying values by substantial amounts (fair value as a percent of carrying value
ranged from 140% to 500%) and thus, did not indicate a significant risk of goodwill impairment
based on current projections and valuations.
However, the goodwill associated with the Firm’s consumer lending businesses in RFS and CS have
elevated risk due to their exposure to U.S. consumer credit risk. The valuation of these businesses
and their assets are particularly dependent upon economic conditions (including unemployment rates
and home prices) that affect consumer credit risk and behavior, as well as potential legislative
and regulatory changes that could affect the Firm’s consumer lending businesses. The assumptions
used in the valuation of these businesses include portfolio outstanding balances, net interest
margin, operating expense and forecasted credit losses and were made using management’s best
projections. The cost of equity used in the discounted cash flow model reflected the estimated risk
and uncertainty for these businesses and was evaluated in comparison with relevant market peers.
The fair value of the credit card lending business within CS exceeded its carrying value by
approximately 8%. The fair value of a consumer lending business within RFS did not exceed its
carrying value; however, implied fair value of the goodwill allocated to this consumer lending
business within RFS significantly exceeded its carrying value.
The Firm
did not recognize goodwill impairment as of December 31, 2009, based
on management’s best estimates. However, prolonged weakness or
deterioration in economic market conditions, or additional regulatory
or legislative changes, may result in declines in projected business
performance beyond management’s expectations. This could cause the
estimated fair values of the Firm’s reporting units or their
associated goodwill to decline, which may result in a material
impairment charge to earnings in a future period related to some
portion of their associated goodwill.
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Income taxes
JPMorgan Chase is subject to the income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local and non-U.S. jurisdictions. These laws are often complex and may be subject to different interpretations. To determine the financial statement impact of accounting for income taxes, including the provision for income tax expense and unrecognized tax benefits, JPMorgan Chase must make assumptions and judgments about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as the timing of when certain items may affect taxable income in the U.S. and non-U.S. tax jurisdictions.
JPMorgan Chase is subject to the income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local and non-U.S. jurisdictions. These laws are often complex and may be subject to different interpretations. To determine the financial statement impact of accounting for income taxes, including the provision for income tax expense and unrecognized tax benefits, JPMorgan Chase must make assumptions and judgments about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as the timing of when certain items may affect taxable income in the U.S. and non-U.S. tax jurisdictions.
JPMorgan Chase’s interpretations of tax laws around the world are subject to review and examination
by the various taxing authorities in the jurisdictions where the Firm operates, and disputes may
occur regarding its view on a tax position. These disputes over interpretations with the various
taxing authorities may be settled by audit, administrative appeals or adjudication by the court
systems of the tax jurisdictions in which the Firm operates. JPMorgan Chase regularly reviews
whether it may be assessed additional income taxes as a result of the resolution of these matters,
and the Firm records additional reserves as appropriate. In addition, the Firm may revise its
estimate of income taxes due to changes in income tax laws, legal interpretations and tax planning
strategies. It is possible that revisions in the Firm’s estimate of income taxes may materially
affect the Firm’s results of operations in any reporting period.
The Firm’s provision for income taxes is composed of current and deferred taxes. Deferred taxes
arise from differences between assets and liabilities measured for financial reporting versus
income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their
realizability is determined to be more likely than not. The Firm has also recognized deferred tax
assets in connection with certain net operating losses. The Firm performs regular reviews to
ascertain the realizability of its deferred tax assets. These reviews include management’s
estimates and assumptions regarding future taxable income, which also incorporates various tax
planning strategies, including strategies that may be available to utilize net operating losses
before they expire. In connection with these reviews, if a deferred tax asset is determined to be
unrealizable, a valuation allowance is established. As of December 31, 2009, management has
determined it is more likely than not that the Firm will realize its deferred tax assets, net of
the existing valuation allowance.
The Firm adjusts its unrecognized tax benefits as necessary when additional information becomes
available. Uncertain tax positions that meet the more-likely-than-not recognition threshold are
measured to determine the amount of benefit to recognize. An uncertain tax position is measured at
the largest amount of benefit that management believes is more likely than not to be realized upon
settlement. It is possible that the reassessment of JPMorgan Chase’s unrecognized tax benefits may
have a material impact on its effective tax rate in the period in which the reassessment occurs.
| JPMorgan Chase & Co. / 2009 Annual Report | 131 |
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Management’s discussion and analysis
ACCOUNTING AND REPORTING DEVELOPMENTS
FASB Accounting Standards Codification
In July 2009, the FASB implemented the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative U.S. generally accepted accounting principles. The Codification simplifies the classification of accounting standards into one online database under a common referencing system, organized into eight areas, ranging from industry-specific to general financial statement matters. Use of the Codification is effective for interim and annual periods ending after September 15, 2009. The Firm began to use the Codification on the effective date, and it had no impact on the Firm’s Consolidated Financial Statements. However, throughout this Annual Report, all references to prior FASB, AICPA and EITF accounting pronouncements have been removed, and all non-SEC accounting guidance is referred to in terms of the applicable subject matter.
In July 2009, the FASB implemented the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative U.S. generally accepted accounting principles. The Codification simplifies the classification of accounting standards into one online database under a common referencing system, organized into eight areas, ranging from industry-specific to general financial statement matters. Use of the Codification is effective for interim and annual periods ending after September 15, 2009. The Firm began to use the Codification on the effective date, and it had no impact on the Firm’s Consolidated Financial Statements. However, throughout this Annual Report, all references to prior FASB, AICPA and EITF accounting pronouncements have been removed, and all non-SEC accounting guidance is referred to in terms of the applicable subject matter.
Business combinations/noncontrolling interests in consolidated financial statements
In December 2007, the FASB issued guidance which amended the accounting and reporting of business combinations, as well as noncontrolling (i.e., minority) interests. For JPMorgan Chase, the guidance became effective for business combinations that close on or after January 1, 2009. The guidance for noncontrolling interests, as amended, became effective for JPMorgan Chase for fiscal periods beginning January 1, 2009. In April 2009, the FASB issued additional guidance, which amends the accounting for contingencies acquired in a business combination.
In December 2007, the FASB issued guidance which amended the accounting and reporting of business combinations, as well as noncontrolling (i.e., minority) interests. For JPMorgan Chase, the guidance became effective for business combinations that close on or after January 1, 2009. The guidance for noncontrolling interests, as amended, became effective for JPMorgan Chase for fiscal periods beginning January 1, 2009. In April 2009, the FASB issued additional guidance, which amends the accounting for contingencies acquired in a business combination.
The amended guidance for business combinations generally only impacts the accounting for
transactions that closed after December 31, 2008, and generally only impacts certain aspects of
business
combination accounting, such as the accounting for transaction costs and certain merger-related
restructuring reserves, as well as the accounting for partial acquisitions where control is
obtained by JPMorgan Chase. One exception to the prospective application of the
business-combination guidance relates to accounting for income taxes associated with transactions
that closed prior to January 1, 2009. Once the purchase accounting measurement period closes for
these acquisitions, any further adjustments to income taxes recorded as part of these business
combinations will impact income tax expense. Previously, these adjustments were predominantly
recorded as adjustments to goodwill.
The guidance for noncontrolling interests, as amended, requires that they be accounted for and
presented as equity if material, rather than as a liability or mezzanine equity. The presentation
and disclosure requirements for noncontrolling interests are to be applied retrospectively. The
adoption of the reporting requirements for noncontrolling interests was not material to the Firm’s
Consolidated Balance Sheets or results of operations.
Accounting for transfers of financial assets and repurchase financing transactions
In February 2008, the FASB issued guidance which requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer to be evaluated together as a linked transaction, unless certain criteria are met. The Firm adopted the guidance on January 1, 2009, for transactions entered into after the date of adoption. The adoption of the guidance did not have a material impact on the Firm’s Consolidated Balance Sheets or results of operations.
In February 2008, the FASB issued guidance which requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer to be evaluated together as a linked transaction, unless certain criteria are met. The Firm adopted the guidance on January 1, 2009, for transactions entered into after the date of adoption. The adoption of the guidance did not have a material impact on the Firm’s Consolidated Balance Sheets or results of operations.
Disclosures about derivative instruments and hedging activities
In March 2008, the FASB issued guidance which amends the prior disclosure requirements for derivatives. The guidance, which is effective for fiscal years beginning after November 15, 2008, requires increased disclosures about derivative instruments and hedging activities and their effects on an entity’s financial position, financial performance and cash flows. The Firm adopted the guidance on January 1, 2009, and it only affected JPMorgan Chase’s disclosures of derivative instruments and related hedging activities, and not its Consolidated Balance Sheets or results of operations.
In March 2008, the FASB issued guidance which amends the prior disclosure requirements for derivatives. The guidance, which is effective for fiscal years beginning after November 15, 2008, requires increased disclosures about derivative instruments and hedging activities and their effects on an entity’s financial position, financial performance and cash flows. The Firm adopted the guidance on January 1, 2009, and it only affected JPMorgan Chase’s disclosures of derivative instruments and related hedging activities, and not its Consolidated Balance Sheets or results of operations.
Determining whether instruments granted in share-based payment transactions are participating
securities
In June 2008, the FASB issued guidance for participating securities, which clarifies that unvested stock-based compensation awards containing nonforfeitable rights to dividends or dividend equivalents (collectively, “dividends”), are considered participating securities and therefore included in the two-class method calculation of EPS. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Firm adopted the guidance retrospectively effective January 1, 2009, and EPS data for all prior periods have been revised. Adoption of the guidance did not affect the Firm’s results of operations, but basic and diluted EPS were reduced as disclosed in Note 25 on page 224 of this Annual Report.
In June 2008, the FASB issued guidance for participating securities, which clarifies that unvested stock-based compensation awards containing nonforfeitable rights to dividends or dividend equivalents (collectively, “dividends”), are considered participating securities and therefore included in the two-class method calculation of EPS. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Firm adopted the guidance retrospectively effective January 1, 2009, and EPS data for all prior periods have been revised. Adoption of the guidance did not affect the Firm’s results of operations, but basic and diluted EPS were reduced as disclosed in Note 25 on page 224 of this Annual Report.
Determining whether an instrument (or embedded
feature) is indexed to an entity’s own stock
In June 2008, the FASB issued guidance which establishes a two-step process for evaluating whether equity-linked financial instruments and embedded features are indexed to a company’s own stock for purposes of determining whether the derivative scope exception should be applied. The guidance is effective for fiscal years beginning after December 2008. The adoption of this guidance on January 1, 2009, did not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
In June 2008, the FASB issued guidance which establishes a two-step process for evaluating whether equity-linked financial instruments and embedded features are indexed to a company’s own stock for purposes of determining whether the derivative scope exception should be applied. The guidance is effective for fiscal years beginning after December 2008. The adoption of this guidance on January 1, 2009, did not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
| 132 | JPMorgan Chase & Co. / 2009 Annual Report |
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Employers’ disclosures about postretirement benefit plan assets
In December 2008, the FASB issued guidance requiring more detailed disclosures about employers’ plan assets, including investment strategies, classes of plan assets, concentrations of risk within plan assets and valuation techniques used to measure their fair value. This guidance is effective for fiscal years ending after December 15, 2009. The Firm adopted these additional disclosure requirements on December 31, 2009, and it only affected JPMorgan Chase’s disclosures and not its Consolidated Balance Sheets or results of operations. Refer to Note 8 on pages 176–183 of this Annual Report for additional information.
In December 2008, the FASB issued guidance requiring more detailed disclosures about employers’ plan assets, including investment strategies, classes of plan assets, concentrations of risk within plan assets and valuation techniques used to measure their fair value. This guidance is effective for fiscal years ending after December 15, 2009. The Firm adopted these additional disclosure requirements on December 31, 2009, and it only affected JPMorgan Chase’s disclosures and not its Consolidated Balance Sheets or results of operations. Refer to Note 8 on pages 176–183 of this Annual Report for additional information.
The recognition and presentation of other-than-temporary impairment
In April 2009, the FASB issued guidance which amends the other-than-temporary impairment model for debt securities. Under the guidance, an other-than-temporary-impairment must be recognized if an investor has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. In addition, the guidance changes the amount of impairment to be recognized in current-period earnings when an investor does not have the intent to sell, or if it is more likely than not that it will not be required to sell the debt security, as in these cases only the amount of the impairment associated with credit losses is recognized in income. The guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Firm elected to early adopt the guidance as of January 1, 2009. For additional information regarding the impact on the Firm of the adoption of the guidance, see Note 11 on pages 187–191 of this Annual Report.
In April 2009, the FASB issued guidance which amends the other-than-temporary impairment model for debt securities. Under the guidance, an other-than-temporary-impairment must be recognized if an investor has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. In addition, the guidance changes the amount of impairment to be recognized in current-period earnings when an investor does not have the intent to sell, or if it is more likely than not that it will not be required to sell the debt security, as in these cases only the amount of the impairment associated with credit losses is recognized in income. The guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Firm elected to early adopt the guidance as of January 1, 2009. For additional information regarding the impact on the Firm of the adoption of the guidance, see Note 11 on pages 187–191 of this Annual Report.
Determining fair value when the volume and level of activity for the asset or liability have
significantly
decreased, and identifying transactions that are not orderly
In April 2009, the FASB issued guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly declined. The guidance also includes identifying circumstances that indicate a transaction is not orderly. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. The Firm elected to early adopt the guidance in the first quarter of 2009. The application of the guidance did not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
In April 2009, the FASB issued guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly declined. The guidance also includes identifying circumstances that indicate a transaction is not orderly. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. The Firm elected to early adopt the guidance in the first quarter of 2009. The application of the guidance did not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
Interim disclosures about fair value of financial
instruments
In April 2009, the FASB issued guidance that requires disclosures about the fair value of certain financial instruments (including financial instruments not carried at fair value) to be presented in interim financial statements in addition to annual financial statements. The guidance is effective for interim reporting periods ending after June 15, 2009, with early
In April 2009, the FASB issued guidance that requires disclosures about the fair value of certain financial instruments (including financial instruments not carried at fair value) to be presented in interim financial statements in addition to annual financial statements. The guidance is effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted
for periods ending after March 15, 2009. The Firm adopted the additional disclosure requirements
for second-quarter 2009 reporting.
Subsequent events
In May 2009, the FASB issued guidance that established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance was effective for interim or annual financial periods ending after June 15, 2009. The Firm adopted the guidance in the second quarter of 2009. The application of the guidance did not have any impact on the Firm’s Consolidated Balance Sheets or results of operations.
In May 2009, the FASB issued guidance that established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance was effective for interim or annual financial periods ending after June 15, 2009. The Firm adopted the guidance in the second quarter of 2009. The application of the guidance did not have any impact on the Firm’s Consolidated Balance Sheets or results of operations.
Accounting for transfers of financial assets and
consolidation of variable interest entities
In June 2009, the FASB issued guidance which amends the accounting for the transfers of financial assets and the consolidation of VIEs. The guidance eliminates the concept of QSPEs and provides additional guidance with regard to accounting for transfers of financial assets. The guidance also changes the approach for determining the primary beneficiary of a VIE from a quantitative risk and rewards-based model to a qualitative model, based on control and economics. The guidance became effective for annual reporting periods beginning after November 15, 2009, including all interim periods within the first annual reporting period. The Firm adopted the new guidance for VIEs on January 1, 2010, which required the consolidation of the Firm’s credit card securitization trusts, bank-administered asset-backed commercial paper conduits, and certain mortgage and other consumer securitization entities. At adoption, the Firm added approximately $88 billion of U.S. GAAP assets, and stockholders’ equity decreased by approximately $4 billion.
In June 2009, the FASB issued guidance which amends the accounting for the transfers of financial assets and the consolidation of VIEs. The guidance eliminates the concept of QSPEs and provides additional guidance with regard to accounting for transfers of financial assets. The guidance also changes the approach for determining the primary beneficiary of a VIE from a quantitative risk and rewards-based model to a qualitative model, based on control and economics. The guidance became effective for annual reporting periods beginning after November 15, 2009, including all interim periods within the first annual reporting period. The Firm adopted the new guidance for VIEs on January 1, 2010, which required the consolidation of the Firm’s credit card securitization trusts, bank-administered asset-backed commercial paper conduits, and certain mortgage and other consumer securitization entities. At adoption, the Firm added approximately $88 billion of U.S. GAAP assets, and stockholders’ equity decreased by approximately $4 billion.
In February 2010, the FASB finalized an amendment that defers the requirements of the new
consolidation guidance for determining the primary beneficiary of a VIE for certain investment
funds, including mutual funds, private equity funds and hedge funds. For the funds included in the
deferral, the Firm will continue to apply other existing authoritative guidance to determine
whether such funds should be consolidated; as such, these funds are not included in the above
disclosure of the impact of adopting the new guidance for VIEs.
For additional information about the impact to the Firm of the adoption of the new guidance on
January 1, 2010, see Note 16 on pages 206–214 of this Annual Report.
Measuring liabilities at fair value
In August 2009, the FASB issued guidance clarifying how to develop fair value measurements for liabilities, particularly where there may be a lack of observable market information. This guidance is effective for interim or annual periods beginning after August 26, 2009. The Firm adopted the guidance in the third quarter of 2009, and it did not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
In August 2009, the FASB issued guidance clarifying how to develop fair value measurements for liabilities, particularly where there may be a lack of observable market information. This guidance is effective for interim or annual periods beginning after August 26, 2009. The Firm adopted the guidance in the third quarter of 2009, and it did not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
| JPMorgan Chase & Co. / 2009 Annual Report | 133 |
Table of Contents
Management’s discussion and analysis
Measuring fair value of certain alternative investments
In September 2009, the FASB issued guidance which amends the guidance on fair value measurements and offers a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value (“NAV”) per share when the fair value is not readily determinable. This guidance is effective for the first interim or annual reporting period ending after December 15, 2009. The Firm adopted the guidance in the fourth quarter of 2009, and it did not have a material impact on the Firm’s Consolidated Balance Sheets or results of operations.
In September 2009, the FASB issued guidance which amends the guidance on fair value measurements and offers a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value (“NAV”) per share when the fair value is not readily determinable. This guidance is effective for the first interim or annual reporting period ending after December 15, 2009. The Firm adopted the guidance in the fourth quarter of 2009, and it did not have a material impact on the Firm’s Consolidated Balance Sheets or results of operations.
Fair value measurements and disclosures
In January 2010, the FASB issued guidance that requires new disclosures, and clarifies existing disclosure requirements, about fair value measurements. The clarifications and the requirement to separately disclose transfers of instruments between level 1 and level 2 of the fair value hierarchy are effective for interim reporting periods beginning after December 15, 2009; however, the requirement to provide purchases, sales, issuances and settlements in the level 3 rollforward on a gross basis is effective for fiscal years beginning after December 15, 2010. Early adoption of the guidance is permitted.
In January 2010, the FASB issued guidance that requires new disclosures, and clarifies existing disclosure requirements, about fair value measurements. The clarifications and the requirement to separately disclose transfers of instruments between level 1 and level 2 of the fair value hierarchy are effective for interim reporting periods beginning after December 15, 2009; however, the requirement to provide purchases, sales, issuances and settlements in the level 3 rollforward on a gross basis is effective for fiscal years beginning after December 15, 2010. Early adoption of the guidance is permitted.
NONEXCHANGE-TRADED COMMODITY DERIVATIVE CONTRACTS AT FAIR VALUE
In the normal course of business, JPMorgan Chase trades nonexchange-traded commodity
derivative contracts. To determine the fair value of these contracts, the Firm uses various fair
value estimation techniques, primarily based on internal models with significant observable market
parameters. The Firm’s nonexchange-traded commodity derivative contracts are primarily
energy-related.
The following table summarizes the changes in fair value for nonexchange-traded commodity
derivative contracts for the year ended December 31, 2009.
| For the year ended | ||||||||
|
December 31, 2009
(in millions) |
Asset position | Liability position | ||||||
|
Net fair value of contracts
outstanding at January 1, 2009
|
$ | 7,432 | $ | 5,139 | ||||
|
Effect of legally enforceable
master netting agreements
|
48,091 | 48,726 | ||||||
|
Gross fair value of contracts
outstanding at January 1, 2009
|
55,523 | 53,865 | ||||||
|
Contracts realized or otherwise
settled
|
(31,444 | ) | (30,248 | ) | ||||
|
Fair value of new contracts
|
12,050 | 10,192 | ||||||
|
Changes in fair values attributable
to changes in valuation techniques
and assumptions
|
— | — | ||||||
|
Other changes in fair value
|
(5,820 | ) | (5,582 | ) | ||||
|
Gross fair value of contracts
outstanding at December 31, 2009
|
30,309 | 28,227 | ||||||
|
Effect of legally enforceable
master netting agreements
|
(25,282 | ) | (26,490 | ) | ||||
|
Net fair value of contracts
outstanding at December 31, 2009
|
$ | 5,027 | $ | 1,737 | ||||
The following table indicates the maturities of nonexchange-traded commodity derivative
contracts at December 31, 2009.
| December 31, 2009 (in millions) | Asset position | Liability position | ||||||
|
Maturity less than 1 year
|
$ | 14,130 | $ | 11,544 | ||||
|
Maturity 1–3 years
|
12,352 | 9,962 | ||||||
|
Maturity 4–5 years
|
2,787 | 1,960 | ||||||
|
Maturity in excess of 5 years
|
1,040 | 4,761 | ||||||
|
Gross fair value of contracts
outstanding at December 31, 2009
|
30,309 | 28,227 | ||||||
|
Effect of legally enforceable master
netting agreements
|
(25,282 | ) | (26,490 | ) | ||||
|
Net fair value of contracts
outstanding at December 31, 2009
|
$ | 5,027 | $ | 1,737 | ||||
| 134 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
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,” “assume” or other words of similar meaning.
Forward-looking statements provide JPMorgan Chase’s current expectations or forecasts of future
events, circumstances, results or aspirations. JPMorgan Chase’s disclosures in this Annual 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 SEC. In addition, the Firm’s senior management may make forward-looking
statements orally to analysts, investors, representatives of the media and others.
All forward-looking statements are, by their nature, subject to risks and uncertainties, many of
which are beyond the Firm’s control. JPMorgan Chase’s actual future results may differ materially
from those set forth in its forward-looking statements. While there is no assurance that any list
of risks and uncertainties or risk factors is complete, below are certain factors which could cause
actual results to differ from those in the forward-looking statements:
| • | local, regional and international business, economic and political conditions and geopolitical events; |
| • | changes in financial services regulation; |
| • | changes in trade, monetary and fiscal policies and laws; |
| • | securities and capital markets behavior, including changes in market liquidity and volatility; |
| • | changes in investor sentiment or consumer spending or savings behavior; |
| • | ability of the Firm to manage effectively its liquidity; |
| • | credit ratings assigned to the Firm or its subsidiaries; |
| • | the Firm’s reputation; |
| • | ability of the Firm to deal effectively with an economic slowdown or other economic or market difficulty; |
| • | technology changes instituted by the Firm, its counterparties or competitors; |
| • | mergers and acquisitions, including the Firm’s ability to integrate acquisitions; |
| • | ability of the Firm to develop new products and services; |
| • | acceptance of the Firm’s new and existing products and services by the marketplace and the ability of the Firm to increase market share; |
| • | ability of the Firm to attract and retain employees; |
| • | ability of the Firm to control expense; |
| • | competitive pressures; |
| • | changes in the credit quality of the Firm’s customers and counterparties; |
| • | adequacy of the Firm’s risk management framework; |
| • | changes in laws and regulatory requirements; |
| • | adverse judicial proceedings; |
| • | changes in applicable accounting policies; |
| • | ability of the Firm to determine accurate values of certain assets and liabilities; |
| • | occurrence of natural or man-made disasters or calamities or conflicts, including any effect of any such disasters, calamities or conflicts on the Firm’s power generation facilities and the Firm’s other commodity-related activities; |
| • | the other risks and uncertainties detailed in Part 1, Item 1A: Risk Factors in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2009. |
Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are
made, and JPMorgan Chase does not undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the date the forward-looking statement was made.
The reader should, however, consult any further disclosures of a forward-looking nature the Firm
may make in any subsequent Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, or Current Reports on Form 8-K.
| JPMorgan Chase & Co. / 2009 Annual Report | 135 |
Table of Contents
Management’s report on internal control over financial reporting
Management of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) 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 Firm’s
principal executive and principal financial officers, or persons performing similar functions, and
effected by JPMorgan Chase’s 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 Chase’s 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 Firm’s 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 Chase’s management and
directors; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Firm’s 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 Firm’s internal control over
financial reporting as of December 31, 2009. 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, 2009, JPMorgan
Chase’s internal control over financial reporting was effective based upon the COSO criteria.
Additionally, based upon management’s assessment, the Firm determined that there were no material
weaknesses in its internal control over financial reporting as of December 31, 2009.
The effectiveness of the Firm’s internal control over financial reporting as of December 31,
2009, has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
James Dimon
Chairman and Chief Executive Officer
Michael J. Cavanagh
Executive Vice President and Chief Financial Officer
February 24, 2010
| 136 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Report of independent registered public accounting firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of JPMorgan Chase & Co.:
To the Board of Directors and Stockholders of JPMorgan Chase & Co.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, changes in stockholders’ equity and comprehensive income and cash flows
present fairly, in all material respects, the financial position of JPMorgan Chase & Co. and its
subsidiaries (the “Firm”) at December 31, 2009 and 2008, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2009, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion,
the Firm maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2009, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Firm’s
management is responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying “Management’s report on internal control
over financial reporting.” Our responsibility is to express opinions on these financial statements
and on the Firm’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s 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
company’s 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 company’s 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, 2010
| JPMorgan Chase & Co. / 2009 Annual Report | 137 |
Table of Contents
| Year ended December 31, (in millions, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Investment banking fees
|
$ | 7,087 | $ | 5,526 | $ | 6,635 | ||||||
|
Principal transactions
|
9,796 | (10,699 | ) | 9,015 | ||||||||
|
Lending- and deposit-related fees
|
7,045 | 5,088 | 3,938 | |||||||||
|
Asset management, administration and commissions
|
12,540 | 13,943 | 14,356 | |||||||||
|
Securities
gains
(a)
|
1,110 | 1,560 | 164 | |||||||||
|
Mortgage fees and related income
|
3,678 | 3,467 | 2,118 | |||||||||
|
Credit card income
|
7,110 | 7,419 | 6,911 | |||||||||
|
Other income
|
916 | 2,169 | 1,829 | |||||||||
|
Noninterest revenue
|
49,282 | 28,473 | 44,966 | |||||||||
|
Interest income
|
66,350 | 73,018 | 71,387 | |||||||||
|
Interest expense
|
15,198 | 34,239 | 44,981 | |||||||||
|
Net interest income
|
51,152 | 38,779 | 26,406 | |||||||||
|
Total net revenue
|
100,434 | 67,252 | 71,372 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
32,015 | 20,979 | 6,864 | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
26,928 | 22,746 | 22,689 | |||||||||
|
Occupancy expense
|
3,666 | 3,038 | 2,608 | |||||||||
|
Technology, communications and equipment expense
|
4,624 | 4,315 | 3,779 | |||||||||
|
Professional and outside services
|
6,232 | 6,053 | 5,140 | |||||||||
|
Marketing
|
1,777 | 1,913 | 2,070 | |||||||||
|
Other expense
|
7,594 | 3,740 | 3,814 | |||||||||
|
Amortization of intangibles
|
1,050 | 1,263 | 1,394 | |||||||||
|
Merger costs
|
481 | 432 | 209 | |||||||||
|
Total noninterest expense
|
52,352 | 43,500 | 41,703 | |||||||||
|
Income before income tax expense/(benefit) and extraordinary gain
|
16,067 | 2,773 | 22,805 | |||||||||
|
Income tax expense/(benefit)
|
4,415 | (926 | ) | 7,440 | ||||||||
|
Income before extraordinary gain
|
11,652 | 3,699 | 15,365 | |||||||||
|
Extraordinary gain
|
76 | 1,906 | — | |||||||||
|
Net income
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | ||||||
|
Net income applicable to common stockholders
|
$ | 8,774 | $ | 4,742 | $ | 14,927 | ||||||
|
|
||||||||||||
|
Per common share data
|
||||||||||||
|
Basic earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 2.25 | $ | 0.81 | $ | 4.38 | ||||||
|
Net income
|
2.27 | 1.35 | 4.38 | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
2.24 | 0.81 | 4.33 | |||||||||
|
Net income
|
2.26 | 1.35 | 4.33 | |||||||||
|
|
||||||||||||
|
Weighted-average basic shares
|
3,863 | 3,501 | 3,404 | |||||||||
|
Weighted-average diluted shares
|
3,880 | 3,522 | 3,445 | |||||||||
|
|
||||||||||||
|
Cash dividends declared per common share
|
$ | 0.20 | $ | 1.52 | $ | 1.48 | ||||||
| (a) | Securities gains for the year ended December 31, 2009, included credit losses of $578 million, consisting of $946 million of total other-than-temporary impairment losses, net of $368 million of other-than-temporary impairment losses recorded in other comprehensive income. |
The Notes to Consolidated Financial Statements are an integral part of these statements.
| 138 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| December 31, (in millions, except share data) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 26,206 | $ | 26,895 | ||||
|
Deposits with banks
|
63,230 | 138,139 | ||||||
|
Federal funds sold and securities purchased under resale agreements (included $20,536 and
$20,843 at fair value at December 31, 2009 and 2008, respectively)
|
195,404 | 203,115 | ||||||
|
Securities borrowed (included $7,032 and $3,381 at fair value at December 31, 2009 and 2008,
respectively)
|
119,630 | 124,000 | ||||||
|
Trading assets (included assets pledged of $38,315 and $75,063 at December 31, 2009 and 2008,
respectively)
|
411,128 | 509,983 | ||||||
|
Securities (included $360,365 and $205,909 at fair value at December 31, 2009 and 2008,
respectively, and assets pledged of $100,931 and $25,942 at December 31, 2009 and 2008,
respectively)
|
360,390 | 205,943 | ||||||
|
Loans (included $1,364 and $7,696 at fair value at December 31, 2009 and 2008, respectively)
|
633,458 | 744,898 | ||||||
|
Allowance for loan losses
|
(31,602 | ) | (23,164 | ) | ||||
|
Loans, net of allowance for loan losses
|
601,856 | 721,734 | ||||||
|
Accrued interest and accounts receivable (included $5,012 and $3,099 at fair value at December
31, 2009 and 2008, respectively)
|
67,427 | 60,987 | ||||||
|
Premises and equipment
|
11,118 | 10,045 | ||||||
|
Goodwill
|
48,357 | 48,027 | ||||||
|
Mortgage servicing rights
|
15,531 | 9,403 | ||||||
|
Other intangible assets
|
4,621 | 5,581 | ||||||
|
Other assets (included $19,165 and $29,199 at fair value at December 31, 2009 and 2008,
respectively)
|
107,091 | 111,200 | ||||||
|
Total assets
|
$ | 2,031,989 | $ | 2,175,052 | ||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits (included $4,455 and $5,605 at fair value at December 31, 2009 and 2008, respectively)
|
$ | 938,367 | $ | 1,009,277 | ||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements (included
$3,396 and $2,993 at fair value at December 31, 2009 and 2008, respectively)
|
261,413 | 192,546 | ||||||
|
Commercial paper
|
41,794 | 37,845 | ||||||
|
Other borrowed funds (included $5,637 and $14,713 at fair value at December 31, 2009 and 2008,
respectively)
|
55,740 | 132,400 | ||||||
|
Trading liabilities
|
125,071 | 166,878 | ||||||
|
Accounts payable and other liabilities (included the allowance for lending-related commitments
of $939 and $659 at December 31, 2009 and 2008, respectively, and $357 and zero at fair value
at December 31, 2009 and 2008, respectively)
|
162,696 | 187,978 | ||||||
|
Beneficial interests issued by consolidated variable interest entities (included $1,410 and
$1,735 at fair value at
December 31, 2009 and 2008, respectively)
|
15,225 | 10,561 | ||||||
|
Long-term debt (included $48,972 and $58,214 at fair value at December 31, 2009 and 2008,
respectively)
|
266,318 | 270,683 | ||||||
|
Total liabilities
|
1,866,624 | 2,008,168 | ||||||
|
Commitments and contingencies (see Note 30 on page 230 of this Annual Report)
|
||||||||
|
|
||||||||
|
Stockholders’ equity
|
||||||||
|
Preferred stock ($1 par value; authorized 200,000,000 shares at December 31, 2009 and 2008;
issued 2,538,107 and 5,038,107 shares at December 31, 2009 and 2008, respectively)
|
8,152 | 31,939 | ||||||
|
Common stock ($1 par value; authorized 9,000,000,000 shares at December 31, 2009 and 2008;
issued 4,104,933,895 shares and 3,941,633,895 shares at December 31, 2009 and 2008,
respectively)
|
4,105 | 3,942 | ||||||
|
Capital surplus
|
97,982 | 92,143 | ||||||
|
Retained earnings
|
62,481 | 54,013 | ||||||
|
Accumulated other comprehensive income/(loss)
|
(91 | ) | (5,687 | ) | ||||
|
Shares held in RSU Trust, at cost (1,526,944 shares and 4,794,723 shares at December 31, 2009
and 2008, respectively)
|
(68 | ) | (217 | ) | ||||
|
Treasury stock, at cost (162,974,783 shares and 208,833,260 shares at December 31, 2009 and
2008, respectively)
|
(7,196 | ) | (9,249 | ) | ||||
|
Total stockholders’ equity
|
165,365 | 166,884 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,031,989 | $ | 2,175,052 | ||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
| JPMorgan Chase & Co. / 2009 Annual Report | 139 |
Table of Contents
Consolidated statements of changes in stockholders’ equity and comprehensive income
| Year ended December 31, (in millions, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
Preferred stock
|
||||||||||||
|
Balance at January 1
|
$ | 31,939 | $ | — | $ | — | ||||||
|
Issuance of preferred stock
|
— | 31,550 | — | |||||||||
|
Issuance of
preferred stock – conversion of the Bear Stearns preferred stock
|
— | 352 | — | |||||||||
|
Accretion of preferred stock discount on issuance to the U.S. Treasury
|
1,213 | 37 | — | |||||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
(25,000 | ) | — | — | ||||||||
|
Balance at December 31
|
8,152 | 31,939 | — | |||||||||
|
Common stock
|
||||||||||||
|
Balance at January 1
|
3,942 | 3,658 | 3,658 | |||||||||
|
Issuance of common stock
|
163 | 284 | — | |||||||||
|
Balance at December 31
|
4,105 | 3,942 | 3,658 | |||||||||
|
Capital surplus
|
||||||||||||
|
Balance at January 1
|
92,143 | 78,597 | 77,807 | |||||||||
|
Issuance of common stock
|
5,593 | 11,201 | — | |||||||||
|
Warrant issued to U.S. Treasury in connection with issuance of preferred stock
|
— | 1,250 | — | |||||||||
|
Preferred stock issue cost
|
— | (54 | ) | — | ||||||||
|
Shares issued and commitments to issue common stock for employee stock-based
compensation awards and related tax effects
|
474 | 859 | 790 | |||||||||
|
Net change from the Bear Stearns merger:
|
||||||||||||
|
Reissuance of treasury stock and the Share Exchange agreement
|
— | 48 | — | |||||||||
|
Employee stock awards
|
— | 242 | — | |||||||||
|
Other
|
(228 | ) | — | — | ||||||||
|
Balance at December 31
|
97,982 | 92,143 | 78,597 | |||||||||
|
Retained earnings
|
||||||||||||
|
Balance at January 1
|
54,013 | 54,715 | 43,600 | |||||||||
|
Cumulative effect of change in accounting principles
|
— | — | 915 | |||||||||
|
Balance at January 1, adjusted
|
54,013 | 54,715 | 44,515 | |||||||||
|
Net income
|
11,728 | 5,605 | 15,365 | |||||||||
|
Dividends declared:
|
||||||||||||
|
Preferred stock
|
(1,328 | ) | (674 | ) | — | |||||||
|
Accelerated amortization from redemption of preferred stock issued to the
U.S. Treasury
|
(1,112 | ) | — | — | ||||||||
|
Common stock ($0.20, $1.52 and $1.48 per share for 2009, 2008 and 2007,
respectively)
|
(820 | ) | (5,633 | ) | (5,165 | ) | ||||||
|
Balance at December 31
|
62,481 | 54,013 | 54,715 | |||||||||
|
Accumulated other comprehensive income/(loss)
|
||||||||||||
|
Balance at January 1
|
(5,687 | ) | (917 | ) | (1,557 | ) | ||||||
|
Cumulative effect of change in accounting principles
|
— | — | (1 | ) | ||||||||
|
Balance at January 1, adjusted
|
(5,687 | ) | (917 | ) | (1,558 | ) | ||||||
|
Other comprehensive income/(loss)
|
5,596 | (4,770 | ) | 641 | ||||||||
|
Balance at December 31
|
(91 | ) | (5,687 | ) | (917 | ) | ||||||
|
Shares held in RSU Trust
|
||||||||||||
|
Balance at January 1
|
(217 | ) | — | — | ||||||||
|
Resulting from the Bear Stearns merger
|
— | (269 | ) | — | ||||||||
|
Reissuance from RSU Trust
|
149 | 52 | — | |||||||||
|
Balance at December 31
|
(68 | ) | (217 | ) | — | |||||||
|
Treasury stock, at cost
|
||||||||||||
|
Balance at January 1
|
(9,249 | ) | (12,832 | ) | (7,718 | ) | ||||||
|
Purchase of treasury stock
|
— | — | (8,178 | ) | ||||||||
|
Reissuance from treasury stock
|
2,079 | 2,454 | 3,199 | |||||||||
|
Share repurchases related to employee stock-based compensation awards
|
(26 | ) | (21 | ) | (135 | ) | ||||||
|
Net change from the Bear Stearns merger as a result of the reissuance of
treasury stock and the Share Exchange agreement
|
— | 1,150 | — | |||||||||
|
Balance at December 31
|
(7,196 | ) | (9,249 | ) | (12,832 | ) | ||||||
|
Total stockholders’ equity
|
$ | 165,365 | $ | 166,884 | $ | 123,221 | ||||||
|
Comprehensive income
|
||||||||||||
|
Net income
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | ||||||
|
Other comprehensive income/(loss)
|
5,596 | (4,770 | ) | 641 | ||||||||
|
Comprehensive income
|
$ | 17,324 | $ | 835 | $ | 16,006 | ||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
| 140 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating activities
|
||||||||||||
|
Net income
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | ||||||
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||||||
|
Provision for credit losses
|
32,015 | 20,979 | 6,864 | |||||||||
|
Depreciation and amortization
|
2,783 | 3,143 | 2,427 | |||||||||
|
Amortization of intangibles
|
1,050 | 1,263 | 1,394 | |||||||||
|
Deferred tax (benefit) expense
|
(3,622 | ) | (2,637 | ) | 1,307 | |||||||
|
Investment securities gains
|
(1,110 | ) | (1,560 | ) | (164 | ) | ||||||
|
Proceeds on sale of investment
|
— | (1,540 | ) | — | ||||||||
|
Stock-based compensation
|
3,355 | 2,637 | 2,025 | |||||||||
|
Originations and purchases of loans held-for-sale
|
(22,417 | ) | (34,902 | ) | (116,471 | ) | ||||||
|
Proceeds from sales, securitizations and paydowns of loans held-for-sale
|
33,902 | 38,036 | 107,350 | |||||||||
|
Net change in:
|
||||||||||||
|
Trading assets
|
133,488 | (12,787 | ) | (121,240 | ) | |||||||
|
Securities borrowed
|
4,452 | 15,408 | (10,496 | ) | ||||||||
|
Accrued interest and accounts receivable
|
(6,312 | ) | 10,221 | (1,932 | ) | |||||||
|
Other assets
|
32,182 | (33,629 | ) | (21,628 | ) | |||||||
|
Trading liabilities
|
(79,314 | ) | 24,061 | 12,681 | ||||||||
|
Accounts payable and other liabilities
|
(26,450 | ) | 1,012 | 4,284 | ||||||||
|
Other operating adjustments
|
6,167 | (12,212 | ) | 7,674 | ||||||||
|
Net cash provided by (used in) operating activities
|
121,897 | 23,098 | (110,560 | ) | ||||||||
|
|
||||||||||||
|
Investing activities
|
||||||||||||
|
Net change in:
|
||||||||||||
|
Deposits with banks
|
74,829 | (118,929 | ) | 2,081 | ||||||||
|
Federal funds sold and securities purchased under resale agreements
|
7,082 | (44,597 | ) | (29,814 | ) | |||||||
|
Held-to-maturity securities:
|
||||||||||||
|
Proceeds
|
9 | 10 | 14 | |||||||||
|
Available-for-sale securities:
|
||||||||||||
|
Proceeds from maturities
|
87,712 | 44,414 | 31,143 | |||||||||
|
Proceeds from sales
|
114,041 | 96,806 | 98,450 | |||||||||
|
Purchases
|
(346,372 | ) | (248,599 | ) | (122,507 | ) | ||||||
|
Proceeds from sales and securitizations of loans held-for-investment
|
30,434 | 27,531 | 34,925 | |||||||||
|
Other changes in loans, net
|
51,251 | (59,123 | ) | (83,437 | ) | |||||||
|
Net cash received (used) in business acquisitions or dispositions
|
(97 | ) | 2,128 | (70 | ) | |||||||
|
Proceeds from assets sale to the FRBNY
|
— | 28,850 | — | |||||||||
|
Net maturities (purchases) of asset-backed commercial paper guaranteed by the FRBB
|
11,228 | (11,228 | ) | — | ||||||||
|
All other investing activities, net
|
(762 | ) | (934 | ) | (4,973 | ) | ||||||
|
Net cash provided by (used in) investing activities
|
29,355 | (283,671 | ) | (74,188 | ) | |||||||
|
Financing activities
|
||||||||||||
|
Net change in:
|
||||||||||||
|
Deposits
|
(107,700 | ) | 177,331 | 113,512 | ||||||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
67,785 | 15,250 | (7,833 | ) | ||||||||
|
Commercial paper and other borrowed funds
|
(76,727 | ) | 9,186 | 41,412 | ||||||||
|
Beneficial interests issued by consolidated variable interest entities
|
(7,275 | ) | (2,675 | ) | 1,070 | |||||||
|
Proceeds from issuance of long-term debt and trust preferred capital debt securities
|
51,324 | 72,407 | 95,141 | |||||||||
|
Repayments of long-term debt and trust preferred capital debt securities
|
(55,713 | ) | (62,691 | ) | (49,410 | ) | ||||||
|
Proceeds from issuance of common stock
|
5,756 | 11,500 | — | |||||||||
|
Excess tax benefits related to stock-based compensation
|
17 | 148 | 365 | |||||||||
|
Proceeds from issuance of preferred stock and Warrant to the U.S. Treasury
|
— | 25,000 | — | |||||||||
|
Proceeds from issuance of preferred stock
|
— | 7,746 | — | |||||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
(25,000 | ) | — | — | ||||||||
|
Repurchases of treasury stock
|
— | — | (8,178 | ) | ||||||||
|
Dividends paid
|
(3,422 | ) | (5,911 | ) | (5,051 | ) | ||||||
|
All other financing activities, net
|
(1,224 | ) | 540 | 3,028 | ||||||||
|
Net cash (used in) provided by financing activities
|
(152,179 | ) | 247,831 | 184,056 | ||||||||
|
Effect of exchange rate changes on cash and due from banks
|
238 | (507 | ) | 424 | ||||||||
|
Net decrease in cash and due from banks
|
(689 | ) | (13,249 | ) | (268 | ) | ||||||
|
Cash and due from banks at the beginning of the year
|
26,895 | 40,144 | 40,412 | |||||||||
|
Cash and due from banks at the end of the year
|
$ | 26,206 | $ | 26,895 | $ | 40,144 | ||||||
|
Cash interest paid
|
$ | 16,875 | $ | 37,267 | $ | 43,472 | ||||||
|
Cash income taxes paid
|
5,434 | 2,280 | 7,472 | |||||||||
| Note: | In 2008, the fair values of noncash assets acquired and liabilities assumed in: (1) the merger with Bear Stearns were $288.2 billion and $287.7 billion, respectively (approximately 26 million shares of common stock valued at approximately $1.2 billion were issued in connection with the Bear Stearns merger); and (2) the Washington Mutual transaction were $260.3 billion and $260.1 billion, respectively. |
The Notes to Consolidated Financial Statements are an integral part of these statements.
| JPMorgan Chase & Co. / 2009 Annual Report | 141 |
Table of Contents
Notes to consolidated financial statements
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated
under Delaware law in 1968, is a leading global financial services firm and one of the largest
banking institutions in the United States of America (“U.S.”), with operations worldwide. The Firm
is a leader in investment banking, financial services for consumers and businesses, financial
transaction processing and asset management. For a discussion of the Firm’s business segment
information, see Note 34 on pages 237–239 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”).
Additionally, where applicable, the policies conform to the accounting and reporting guidelines
prescribed by bank regulatory authorities.
Certain amounts in prior periods have been reclassified to conform to the current presentation.
Consolidation
The Consolidated Financial Statements include the accounts of JPMorgan Chase and other entities in
which the Firm has a controlling financial interest. All material intercompany balances and
transactions have been eliminated.
The usual condition for a controlling financial interest is ownership
of a majority of the voting interests of the entity. However, a
controlling financial interest also may be deemed to exist with
respect to entities, such as special purpose entities (“SPEs”), through arrangements that do not
involve controlling voting interests.
SPEs are an important part of the financial markets, providing market liquidity by facilitating
investors’ access to specific portfolios of assets and risks. For example, they are critical to the
functioning of the mortgage- and asset-backed securities and commercial paper markets. SPEs may be
organized as trusts, partnerships or corporations and are typically established for a single,
discrete purpose. SPEs are not typically operating entities and usually have a limited life and no
employees. The basic SPE structure involves a company selling assets to the SPE. The SPE funds the
purchase of those assets by issuing securities to investors. The legal documents that govern the
transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and
other parties that have rights to those cash flows. SPEs are generally structured to insulate
investors from claims on the SPE’s assets by creditors of other entities, including the creditors
of the seller of the assets.
There are two different accounting frameworks applicable to SPEs: the qualifying SPE (“QSPE”)
framework and the variable interest entity (“VIE”) framework. The applicable framework depends on
the nature of the entity and the Firm’s relation to that entity. The QSPE framework is applicable
when an entity transfers (sells) financial assets to an SPE meeting certain defined criteria. 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, and credit card, automobile
and student loans. For further details, see Note 15 on pages 198–205 of this Annual Report.
When an SPE does not meet the QSPE criteria, consolidation is assessed pursuant to the VIE
framework. 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
entity’s operations; and/or (3) has equity owners that do not have an obligation to absorb the
entity’s losses or the right to receive the entity’s returns.
U.S. GAAP 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 VIE’s design, capital
structure and relationships among the 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 on the relative rights and preferences
of each variable interest holder in the VIE’s capital structure. The Firm reconsiders whether it is
the primary beneficiary of a VIE when certain events occur. For further details, see Note 16 on
pages 206–214 of this Annual Report.
All retained interests and significant transactions between the Firm, QSPEs and nonconsolidated
VIEs are reflected on JPMorgan Chase’s Consolidated Balance Sheets and in the Notes to consolidated
financial statements.
Investments in companies that are considered to be voting-interest entities in which the Firm has
significant influence over operating and financing decisions are either accounted for in accordance
with the equity method of accounting or at fair value if elected under fair value option. These
investments are generally included in other assets, with income or loss included in other income.
Generally, Firm-sponsored asset management funds are considered voting entities as the funds do not
meet the conditions to be VIEs. In instances where the Firm is the general partner or managing
member of limited partnerships or limited liability companies, the non-affiliated partners or
members have the substantive ability to remove the Firm as the general partner or managing member
without cause (i.e., kick-out rights), based on a simple unaffiliated majority vote, or have
substantive participating rights. Accordingly, the Firm does not consolidate these funds. In
limited cases where the non-affiliated partners or members do not have substantive kick-outs or
participating right, the Firm consolidates the funds.
| 142 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Private equity investments, which are recorded in other assets on the Consolidated Balance Sheets,
include investments in buyouts, growth equity and venture opportunities. These investments are
accounted for under investment company guidelines. Accordingly, these investments, irrespective of
the percentage of equity ownership interest held, are carried on the Consolidated Balance Sheets at
fair value.
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 and liabilities, revenue and expense, and disclosures of contingent assets and liabilities. Actual results could be different from these estimates.
The preparation of Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense, and disclosures of contingent assets and liabilities. Actual results could be different from these estimates.
Foreign currency translation
JPMorgan Chase revalues assets, liabilities, revenue and expense denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates.
JPMorgan Chase revalues assets, liabilities, revenue and expense denominated in non-U.S. 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, are reported in the Consolidated Statements of Income.
Statements of cash flows
For JPMorgan Chase’s Consolidated Statements of Cash Flows, cash is defined as those amounts included in cash and due from banks.
For JPMorgan Chase’s Consolidated Statements of Cash Flows, cash is defined as those amounts included in cash and due from banks.
Significant accounting policies
The following table identifies JPMorgan Chase’s other significant accounting policies and the Note and page where a detailed description of each policy can be found.
The following table identifies JPMorgan Chase’s other significant accounting policies and the Note and page where a detailed description of each policy can be found.
|
Fair value measurement
|
Note 3 | Page 148 | ||||||
|
Fair value option
|
Note 4 | Page 165 | ||||||
|
Derivative instruments
|
Note 5 | Page 167 | ||||||
|
Noninterest revenue
|
Note 6 | Page 175 | ||||||
|
Pension and other postretirement employee
benefit plans
|
Note 8 | Page 176 | ||||||
|
Employee stock-based incentives
|
Note 9 | Page 184 | ||||||
|
Noninterest expense
|
Note 10 | Page 186 | ||||||
|
Securities
|
Note 11 | Page 187 | ||||||
|
Securities financing activities
|
Note 12 | Page 192 | ||||||
|
Loans
|
Note 13 | Page 192 | ||||||
|
Allowance for credit losses
|
Note 14 | Page 196 | ||||||
|
Loan securitizations
|
Note 15 | Page 198 | ||||||
|
Variable interest entities
|
Note 16 | Page 206 | ||||||
|
Goodwill and other intangible assets
|
Note 17 | Page 214 | ||||||
|
Premises and equipment
|
Note 18 | Page 218 | ||||||
|
Other borrowed funds
|
Note 20 | Page 219 | ||||||
|
Accounts payable and other liabilities
|
Note 21 | Page 219 | ||||||
|
Income taxes
|
Note 27 | Page 226 | ||||||
|
Commitments and contingencies
|
Note 30 | Page 230 | ||||||
|
Off–balance sheet lending-related financial
instruments and guarantees
|
Note 31 | Page 230 | ||||||
Decrease in Common Stock Dividend
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective for the dividend payable April 30, 2009, to shareholders of record on April 6, 2009.
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective for the dividend payable April 30, 2009, to shareholders of record on April 6, 2009.
Acquisition of the banking operations of Washington Mutual Bank
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”) from the Federal Deposit Insurance Corporation (“FDIC”) for $1.9 billion. The acquisition expanded JPMorgan Chase’s consumer branch network into several states, including California, Florida Washington, Georgia, Idaho, Nevada and Oregon and created the third largest branch network in the U.S. The acquisition also extends the reach of the Firm’s business banking, commercial banking, credit card, consumer lending and wealth management businesses. The acquisition was accounted for under the purchase method of accounting, which requires that the assets and liabilities of Washington Mutual be initially reported at fair value.
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”) from the Federal Deposit Insurance Corporation (“FDIC”) for $1.9 billion. The acquisition expanded JPMorgan Chase’s consumer branch network into several states, including California, Florida Washington, Georgia, Idaho, Nevada and Oregon and created the third largest branch network in the U.S. The acquisition also extends the reach of the Firm’s business banking, commercial banking, credit card, consumer lending and wealth management businesses. The acquisition was accounted for under the purchase method of accounting, which requires that the assets and liabilities of Washington Mutual be initially reported at fair value.
In 2008, the $1.9 billion purchase price was preliminarily allocated to the Washington Mutual assets acquired and liabilities assumed, which resulted in negative goodwill. In
accordance with U.S. GAAP for business combinations, that was in effect at the time of this
acquisition, noncurrent nonfinancial assets that were not held-for-sale, such as the premises and
equipment and other intangibles, acquired in the Washington Mutual transaction were written down
against the negative goodwill. The negative goodwill that remained after writing down the
nonfinancial assets was recognized as an extraordinary gain of $1.9 billion at December 31, 2008.
The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0
billion.
| JPMorgan Chase & Co. / 2009 Annual Report | 143 |
Table of Contents
Notes to consolidated financial statements
The final summary computation of the purchase price and the allocation of the final total
purchase price of $1.9 billion to the net assets acquired of
Washington Mutual – based on their
respective fair values as of September 25, 2008, and the resulting final negative goodwill of $2.0
billion are
presented below.
| (in millions) | ||||||||
|
Purchase price
|
||||||||
|
Purchase price
|
$ | 1,938 | ||||||
|
Direct acquisition costs
|
3 | |||||||
|
|
||||||||
|
Total purchase price
|
1,941 | |||||||
|
Net assets acquired
|
||||||||
|
Washington Mutual’s net assets before fair value adjustments
|
$ | 39,186 | ||||||
|
Washington Mutual’s goodwill and other intangible assets
|
(7,566 | ) | ||||||
|
|
||||||||
|
Subtotal
|
31,620 | |||||||
|
|
||||||||
|
Adjustments to reflect assets acquired at fair value:
|
||||||||
|
Securities
|
(16 | ) | ||||||
|
Trading assets
|
(591 | ) | ||||||
|
Loans
|
(30,998 | ) | ||||||
|
Allowance for loan losses
|
8,216 | |||||||
|
Premises and equipment
|
680 | |||||||
|
Accrued interest and accounts receivable
|
(243 | ) | ||||||
|
Other assets
|
4,010 | |||||||
|
|
||||||||
|
Adjustments to reflect liabilities assumed at fair value:
|
||||||||
|
Deposits
|
(686 | ) | ||||||
|
Other borrowed funds
|
68 | |||||||
|
Accounts payable, accrued expense and other liabilities
|
(1,124 | ) | ||||||
|
Long-term debt
|
1,063 | |||||||
|
|
||||||||
|
Fair value of net assets acquired
|
11,999 | |||||||
|
|
||||||||
|
Negative goodwill before allocation to nonfinancial assets
|
(10,058 | ) | ||||||
|
Negative goodwill allocated to nonfinancial assets
(a)
|
8,076 | |||||||
|
|
||||||||
|
Negative
goodwill resulting from the acquisition
(b)
|
$ | (1,982 | ) | |||||
| (a) | The acquisition was accounted for as a purchase business combination, which requires the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of an acquired business to be recorded at their respective fair values as of the effective date of the acquisition and consolidated with those of JPMorgan Chase. The fair value of the net assets of Washington Mutual’s banking operations exceeded the $1.9 billion purchase price, resulting in negative goodwill. Noncurrent, nonfinancial assets not held-for-sale, such as premises and equipment and other intangibles, were written down against the negative goodwill. The negative goodwill that remained after writing down transaction-related core deposit intangibles of approximately $4.9 billion and premises and equipment of approximately $3.2 billion was recognized as an extraordinary gain of $2.0 billion. | |
| (b) | The extraordinary gain was recorded net of tax expense in Corporate/Private Equity. |
Condensed statement of net assets acquired
The following condensed statement of net assets acquired reflects the final value assigned to the Washington Mutual net assets as of September 25, 2008.
The following condensed statement of net assets acquired reflects the final value assigned to the Washington Mutual net assets as of September 25, 2008.
| (in millions) | September 25, 2008 | |||
|
Assets
|
||||
|
Cash and due from banks
|
$ | 3,680 | ||
|
Deposits with banks
|
3,517 | |||
|
Federal funds sold and securities purchased under resale agreements
|
1,700 | |||
|
Trading assets
|
5,691 | |||
|
Securities
|
17,224 | |||
|
Loans (net of allowance for loan losses)
|
206,456 | |||
|
Accrued interest and accounts receivable
|
3,253 | |||
|
Mortgage servicing rights
|
5,874 | |||
|
All other assets
|
16,596 | |||
|
Total assets
|
$ | 263,991 | ||
|
Liabilities
|
||||
|
Deposits
|
$ | 159,872 | ||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
4,549 | |||
|
Other borrowed funds
|
81,636 | |||
|
Trading liabilities
|
585 | |||
|
Accounts payable, accrued expense and other liabilities
|
6,708 | |||
|
Long-term debt
|
6,718 | |||
|
Total liabilities
|
260,068 | |||
|
Washington Mutual net assets acquired
|
$ | 3,923 | ||
| 144 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Merger with The Bear Stearns Companies Inc.
Effective May 30, 2008, BSC Merger Corporation, a wholly owned subsidiary of JPMorgan Chase, merged with The Bear Stearns Companies Inc. (“Bear Stearns”) pursuant to the Agreement and Plan of Merger, dated as of March 16, 2008, as amended March 24, 2008, and Bear Stearns became a wholly owned subsidiary of JPMorgan Chase. The merger provided the Firm with a leading global prime brokerage platform; strengthened the Firm’s equities and asset management businesses; enhanced capabilities in mortgage origination, securitization and servicing; and expanded the platform of the Firm’s energy business. The merger was accounted for under the purchase method of accounting, which requires that the assets and liabilities of Bear Stearns be fair valued. The final total purchase price to complete the merger was $1.5 billion.
Effective May 30, 2008, BSC Merger Corporation, a wholly owned subsidiary of JPMorgan Chase, merged with The Bear Stearns Companies Inc. (“Bear Stearns”) pursuant to the Agreement and Plan of Merger, dated as of March 16, 2008, as amended March 24, 2008, and Bear Stearns became a wholly owned subsidiary of JPMorgan Chase. The merger provided the Firm with a leading global prime brokerage platform; strengthened the Firm’s equities and asset management businesses; enhanced capabilities in mortgage origination, securitization and servicing; and expanded the platform of the Firm’s energy business. The merger was accounted for under the purchase method of accounting, which requires that the assets and liabilities of Bear Stearns be fair valued. The final total purchase price to complete the merger was $1.5 billion.
The merger with Bear Stearns was accomplished through a series of transactions that were reflected
as step acquisitions. On April 8, 2008, pursuant to the share exchange agreement, JPMorgan Chase
acquired 95 million newly issued shares of Bear Stearns common stock (or 39.5% of Bear Stearns
common stock after giving effect to the issuance) for 21 million shares of JPMorgan Chase common
stock. Further, between March 24, 2008, and May 12, 2008, JPMorgan Chase acquired approximately 24
million shares of Bear Stearns common stock in the open market at an average purchase price of
$12.37 per share. The share exchange and cash purchase transactions resulted in JPMorgan Chase
owning approximately 49.4% of Bear Stearns common stock immediately prior to consummation of the
merger. Finally,
on May 30, 2008, JPMorgan Chase completed the merger. As a result of the merger,
each outstanding share of Bear Stearns common stock (other than shares then held by JPMorgan Chase)
was converted into the right to receive 0.21753 shares of common stock of JPMorgan Chase. Also, on
May 30, 2008, the shares of common stock that JPMorgan Chase and Bear Stearns acquired from each
other in the share exchange transaction were cancelled. From April 8, 2008, through May 30, 2008,
JPMorgan Chase accounted for the investment in Bear Stearns under the equity method of accounting.
During this period, JPMorgan Chase recorded reductions to its investment in Bear Stearns
representing its share of Bear Stearns net losses, which was recorded in other income and
accumulated other comprehensive income.
In conjunction with the Bear Stearns merger, in June 2008, the Federal Reserve Bank of New York
(the “FRBNY”) took control, through a limited liability company (“LLC”) formed for this purpose, of
a portfolio of $30 billion in assets acquired from Bear Stearns, based on the value of the
portfolio as of March 14, 2008. The assets of the LLC were funded by a $28.85 billion term loan
from the FRBNY, and a $1.15 billion subordinated loan from JPMorgan Chase. The JPMorgan Chase note
is subordinated to the FRBNY loan and will bear the first $1.15 billion of any losses of the
portfolio. Any remaining assets in the portfolio after repayment of the FRBNY loan, the JPMorgan
Chase note and the expense of the LLC will be for the account of the FRBNY.
| JPMorgan Chase & Co. / 2009 Annual Report | 145 |
Table of Contents
Notes to consolidated financial statements
As a result of step acquisition accounting, the final total purchase price of $1.5 billion was
allocated to the Bear Stearns assets acquired and liabilities assumed using their fair values as of
April 8, 2008, and May 30, 2008, respectively. The final summary computation of the purchase price
and the allocation of the final total purchase price of $1.5 billion to the net assets acquired of
Bear Stearns are presented below.
| (in millions, except for shares (in thousands), per share amounts and where otherwise noted) | ||||||||
|
Purchase price
|
||||||||
|
Shares exchanged in the Share Exchange transaction (April 8, 2008)
|
95,000 | |||||||
|
Other Bear Stearns shares outstanding
|
145,759 | |||||||
|
|
||||||||
|
Total Bear Stearns stock outstanding
|
240,759 | |||||||
|
Cancellation of shares issued in the Share Exchange transaction
|
(95,000 | ) | ||||||
|
Cancellation of shares acquired by JPMorgan Chase for cash in the
open market
|
(24,061 | ) | ||||||
|
|
||||||||
|
Bear Stearns common stock exchanged as of May 30, 2008
|
121,698 | |||||||
|
Exchange ratio
|
0.21753 | |||||||
|
|
||||||||
|
JPMorgan Chase common stock issued
|
26,473 | |||||||
|
Average purchase price per JPMorgan Chase common share
(a)
|
$ | 45.26 | ||||||
|
|
||||||||
|
|
||||||||
|
Total fair value of JPMorgan Chase common stock issued
|
$ | 1,198 | ||||||
|
Bear Stearns common stock acquired for cash in the open market (24
million shares at an average share price of $12.37 per share)
|
298 | |||||||
|
Fair value of employee stock awards (largely to be settled by shares
held in the RSU Trust
(b)
)
|
242 | |||||||
|
Direct acquisition costs
|
27 | |||||||
|
Less: Fair value of Bear Stearns common stock held in the RSU Trust
and included in the exchange of common stock
|
(269 | ) (b) | ||||||
|
|
||||||||
|
Total purchase price
|
1,496 | |||||||
|
Net assets acquired
|
||||||||
|
Bear Stearns common stockholders’ equity
|
$ | 6,052 | ||||||
|
Adjustments to reflect assets acquired at fair value:
|
||||||||
|
Trading assets
|
(3,877 | ) | ||||||
|
Premises and equipment
|
509 | |||||||
|
Other assets
|
(288 | ) | ||||||
|
Adjustments to reflect liabilities assumed at fair value:
|
||||||||
|
Long-term debt
|
504 | |||||||
|
Other liabilities
|
(2,289 | ) | ||||||
|
|
||||||||
|
Fair value of net assets acquired excluding goodwill
|
611 | |||||||
|
|
||||||||
|
Goodwill resulting from the merger
(c)
|
$ | 885 | ||||||
| (a) | The value of JPMorgan Chase common stock was determined by averaging the closing prices of JPMorgan Chase’s common stock for the four trading days during the period March 19 through 25, 2008. | |
| (b) | Represents shares of Bear Stearns common stock held in an irrevocable grantor trust (the “RSU Trust”), to be used to settle stock awards granted to selected employees and certain key executives under certain heritage Bear Stearns employee stock plans. Shares in the RSU Trust were exchanged for 6 million shares of JPMorgan Chase common stock at the merger exchange ratio of 0.21753. For further discussion of the RSU Trust, see Note 9 on pages 184–186 of this Annual Report. | |
| (c) | The goodwill was recorded in Investment Bank (“IB”) and is not tax-deductible. |
Condensed statement of net assets acquired
The following condensed statement of net assets acquired reflects the final values assigned to the Bear Stearns net assets as of May 30, 2008.
The following condensed statement of net assets acquired reflects the final values assigned to the Bear Stearns net assets as of May 30, 2008.
| (in millions) | May 30, 2008 | |||
|
Assets
|
||||
|
Cash and due from banks
|
$ | 534 | ||
|
Federal funds sold and securities purchased under resale agreements
|
21,204 | |||
|
Securities borrowed
|
55,195 | |||
|
Trading assets
|
136,489 | |||
|
Loans
|
4,407 | |||
|
Accrued interest and accounts receivable
|
34,677 | |||
|
Goodwill
|
885 | |||
|
All other assets
|
35,377 | |||
|
Total assets
|
$ | 288,768 | ||
|
Liabilities
|
||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
$ | 54,643 | ||
|
Other borrowings
|
16,166 | |||
|
Trading liabilities
|
24,267 | |||
|
Beneficial interests issued by consolidated VIEs
|
47,042 | |||
|
Long-term debt
|
67,015 | |||
|
Accounts payable and other liabilities
|
78,569 | |||
|
Total liabilities
|
287,702 | |||
|
Bear Stearns net assets
(a)
|
$ | 1,066 | ||
| 146 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| (a) | Reflects the fair value assigned to 49.4% of the Bear Stearns net assets acquired on April 8, 2008 (net of related amortization), and the fair value assigned to the remaining 50.6% of the Bear Stearns net assets acquired on May 30, 2008. The difference between the net assets acquired, as presented above, and the fair value of the net assets acquired (including goodwill), presented in the previous table, represents JPMorgan Chase’s net losses recorded under the equity method of accounting. |
Unaudited pro forma condensed combined financial information reflecting the Bear Stearns
merger and Washington Mutual transaction
The following unaudited pro forma condensed combined financial information presents the 2008 and
2007 results of operations of the Firm as they may have appeared, if the Bear Stearns merger and
the Washington Mutual transaction had been completed on January 1, 2008, and January 1, 2007.
| Year ended December 31, | ||||||||
| (in millions, except per share data) | 2008 | 2007 | ||||||
|
Total net revenue
|
$ | 68,149 | $ | 92,052 | ||||
|
Income/(loss) before extraordinary gain
|
(14,090 | ) | 17,733 | |||||
|
Net income/(loss)
|
(12,184 | ) | 17,733 | |||||
|
Net income per common share data:
|
||||||||
|
Basic
earnings per share
(a)
|
||||||||
|
Income/(loss) before extraordinary gain
|
$ | (4.26 | ) | $ | 5.02 | |||
|
Net income/(loss)
|
(3.72 | ) | 5.02 | |||||
|
Diluted earnings per share
(a)(b)
|
||||||||
|
Income/(loss) before extraordinary gain
|
(4.26 | ) | 4.96 | |||||
|
Net income/(loss)
|
(3.72 | ) | 4.96 | |||||
|
Average common shares issued and outstanding
|
||||||||
|
Basic
|
3,510.5 | 3,429.6 | ||||||
|
Diluted
|
3,510.5 | 3,471.3 | ||||||
| (a) | Effective January 1, 2009, the Firm implemented FASB guidance for participating securities. Accordingly, prior-period amounts have been revised. For further discussion of the guidance, see Note 25 on page 224 of this Annual Report. | |
| (b) | Common equivalent shares have been excluded from the pro forma computation of diluted loss per share for the year ended December 31, 2008, as the effect would be antidilutive. |
The unaudited pro forma combined financial information is presented for illustrative
purposes only and does not indicate the financial results of the combined company had the companies
actually been combined as of January 1, 2008, and as of January 1, 2007, nor is it indicative of
the results of operations in future periods. Included in the unaudited pro forma combined financial
information for the years ended December 31, 2008 and 2007, were pro forma adjustments to reflect
the results of operations of Bear Stearns and Washington Mutual’s banking operations, considering
the purchase accounting, valuation and accounting conformity adjustments related to each
transaction. For the Washington Mutual transaction, the amortization of purchase
accounting adjustments to report interest-earning assets acquired and interest-bearing liabilities
assumed at current interest rates is reflected for the years ended December 31, 2008 and 2007.
Valuation adjustments and the adjustment to conform allowance methodologies in the Washington
Mutual transaction, and valuation and accounting conformity adjustments related to the Bear Stearns
merger are reflected in the results for the years ended December 31, 2008 and 2007.
Internal reorganization related to the Bear Stearns merger
On June 30, 2008, JPMorgan Chase fully and unconditionally guaranteed each series of outstanding preferred stock of Bear Stearns, as well as all of Bear Stearns’ outstanding U.S. Securities and Exchange Commission (“SEC”) registered U.S. debt securities and obligations relating to trust preferred capital debt securities. Subsequently, on July 15, 2008, JPMorgan Chase completed an internal merger transaction, which resulted in each series of
On June 30, 2008, JPMorgan Chase fully and unconditionally guaranteed each series of outstanding preferred stock of Bear Stearns, as well as all of Bear Stearns’ outstanding U.S. Securities and Exchange Commission (“SEC”) registered U.S. debt securities and obligations relating to trust preferred capital debt securities. Subsequently, on July 15, 2008, JPMorgan Chase completed an internal merger transaction, which resulted in each series of
outstanding preferred stock of Bear
Stearns being automatically exchanged into newly-issued shares of JPMorgan Chase preferred stock
having substantially identical terms. Depositary shares, which formerly had represented a
one-fourth interest in a share of Bear Stearns preferred stock, continue to trade on the New York
Stock Exchange but following completion of this internal merger transaction, represent a one-fourth
interest in a share of JPMorgan Chase preferred stock. In addition, pursuant to internal
transactions in July 2008 and the first quarter 2009, JPMorgan Chase assumed or guaranteed the
remaining outstanding securities of Bear Stearns and its subsidiaries, in each case in accordance
with the indentures and other agreements governing those securities.
Other business events
Purchase of remaining interest in J.P. Morgan Cazenove
On January 4, 2010, JPMorgan Chase purchased the remaining interest in J.P. Morgan Cazenove, an investment banking business partnership formed in 2005, which will result in an adjustment to the Firm’s capital surplus.
On January 4, 2010, JPMorgan Chase purchased the remaining interest in J.P. Morgan Cazenove, an investment banking business partnership formed in 2005, which will result in an adjustment to the Firm’s capital surplus.
Termination of Chase Paymentech Solutions joint venture
The dissolution of Chase Paymentech Solutions joint venture, a global payments and merchant acquiring joint venture between JPMorgan Chase and First Data Corporation, was completed on November 1, 2008. JPMorgan Chase retained approximately 51% of the business, which it operates under the name Chase Paymentech Solutions. The dissolution of the Chase Paymentech Solutions joint venture was accounted for as a step acquisition in
The dissolution of Chase Paymentech Solutions joint venture, a global payments and merchant acquiring joint venture between JPMorgan Chase and First Data Corporation, was completed on November 1, 2008. JPMorgan Chase retained approximately 51% of the business, which it operates under the name Chase Paymentech Solutions. The dissolution of the Chase Paymentech Solutions joint venture was accounted for as a step acquisition in
| JPMorgan Chase & Co. / 2009 Annual Report | 147 |
Table of Contents
Notes to consolidated financial statements
accordance with U.S. GAAP for business
combinations, and the Firm recognized an after-tax gain of $627 million in the fourth quarter of
2008 as a result of the dissolution. The gain represents the amount by which the fair value of the
net assets acquired (predominantly intangible assets and goodwill) exceeded JPMorgan Chase’s
carrying value in the net assets transferred to First Data Corporation. Upon dissolution, the Firm
consolidated the retained Chase Paymentech Solutions business.
Proceeds from Visa Inc. shares
On March 19, 2008, Visa Inc. (“Visa”) completed its initial public offering (“IPO”). Prior to the IPO, JPMorgan Chase held approximately a 13% equity interest in Visa. On March 28, 2008, Visa used a portion of the proceeds from the offering to redeem a portion of the Firm’s equity interest, which resulted in the recognition of a pretax gain of $1.5 billion (recorded in other income). In conjunction with the IPO, Visa placed $3.0 billion in escrow to cover liabilities related to certain litigation matters. The escrow was increased by $1.1 billion in 2008 and by $700 million in 2009. JPMorgan Chase’s interest in the escrow was recorded as a reduction of other expense and reported net to the extent of established litigation reserves.
On March 19, 2008, Visa Inc. (“Visa”) completed its initial public offering (“IPO”). Prior to the IPO, JPMorgan Chase held approximately a 13% equity interest in Visa. On March 28, 2008, Visa used a portion of the proceeds from the offering to redeem a portion of the Firm’s equity interest, which resulted in the recognition of a pretax gain of $1.5 billion (recorded in other income). In conjunction with the IPO, Visa placed $3.0 billion in escrow to cover liabilities related to certain litigation matters. The escrow was increased by $1.1 billion in 2008 and by $700 million in 2009. JPMorgan Chase’s interest in the escrow was recorded as a reduction of other expense and reported net to the extent of established litigation reserves.
Purchase of remaining interest in Highbridge Capital
Management
In January 2008, JPMorgan Chase purchased an additional equity interest in Highbridge Capital Management, LLC (“Highbridge”), which resulted in the Firm owning 77.5% of Highbridge. In July 2009, JPMorgan Chase completed its purchase of the remaining interest in Highbridge, which resulted in a $228 million adjustment to capital surplus.
In January 2008, JPMorgan Chase purchased an additional equity interest in Highbridge Capital Management, LLC (“Highbridge”), which resulted in the Firm owning 77.5% of Highbridge. In July 2009, JPMorgan Chase completed its purchase of the remaining interest in Highbridge, which resulted in a $228 million adjustment to capital surplus.
Subsequent events
The Firm has performed an evaluation of events that have occurred subsequent to December 31, 2009, and through February 24, 2010 (the date of the filing of this Annual Report). There have been no material subsequent events that occurred during such period that would require disclosure in this Annual Report, or would be required to be recognized in the Consolidated Financial Statements, as of or for the year ended December 31, 2009.
The Firm has performed an evaluation of events that have occurred subsequent to December 31, 2009, and through February 24, 2010 (the date of the filing of this Annual Report). There have been no material subsequent events that occurred during such period that would require disclosure in this Annual Report, or would be required to be recognized in the Consolidated Financial Statements, as of or for the year ended December 31, 2009.
JPMorgan Chase carries a portion of its assets and liabilities at fair value. The majority of
such assets and liabilities are carried at fair value on a recurring basis. Certain assets and
liabilities are carried at fair value on a nonrecurring basis, including loans accounted for at the
lower of cost or fair value that are only subject to fair value adjustments under certain
circumstances.
The Firm has an established and well-documented process for determining fair values. Fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is based on
quoted market prices, where available. If listed prices or quotes are not available, fair value is
based on internally developed models that primarily use, as inputs, market-based or independently
sourced market parameters,
including but not limited to yield curves, interest rates, volatilities,
equity or debt prices, foreign exchange rates and credit curves. In addition to market information,
models also incorporate transaction details, such as maturity of the instrument. Valuation
adjustments may be made to ensure that financial instruments are
recorded at fair value. These adjustments include amounts to reflect counterparty credit quality,
the Firm’s creditworthiness, constraints on liquidity and unobservable parameters. Valuation
adjustments are applied consistently over time.
| • | Credit valuation adjustments (“CVA”) are necessary when the market price (or parameter) is not indicative of the credit quality of the counterparty. As few classes of derivative contracts are listed on an exchange, the majority of derivative positions are valued using internally developed models that use as their basis observable market parameters. Market practice is to quote parameters equivalent to an “AA” credit rating whereby all counterparties are assumed to have the same credit quality. Therefore, an adjustment is necessary to reflect the credit quality of each derivative counterparty to arrive at fair value. The adjustment also takes into account contractual factors designed to reduce the Firm’s credit exposure to each counterparty, such as collateral and legal rights of offset. | |
| • | Debit valuation adjustments (“DVA”) are necessary to reflect the credit quality of the Firm in the valuation of liabilities measured at fair value. The methodology to determine the adjustment is consistent with CVA and incorporates JPMorgan Chase’s credit spread as observed through the credit default swap market. | |
| • | Liquidity valuation adjustments are necessary when the Firm may not be able to observe a recent market price for a financial instrument that trades in inactive (or less active) markets or to reflect the cost of exiting larger-than-normal market-size risk positions (liquidity adjustments are not taken for positions classified within level 1 of the fair value hierarchy). The Firm tries to ascertain the amount of uncertainty in the initial valuation based on the degree of liquidity in the market in which the financial instrument trades and makes liquidity adjustments to the carrying value of the financial instrument. The Firm measures the liquidity adjustment based on 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 risk component of the financial instrument. Costs to exit larger-than-normal market-size risk positions are determined based on the size of the adverse market move that is likely to occur during the period required to bring a position down to a nonconcentrated level. | |
| • | Unobservable parameter valuation adjustments are necessary when positions are valued using internally developed models that use as their basis unobservable parameters – that is, parameters that must be estimated and are, therefore, subject to management judgment. These positions are normally traded less actively. Examples include certain credit products where parameters such as correlation and recovery rates are |
| 148 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| unobservable. Unobservable parameter valuation adjustments are applied to mitigate the possibility of error and revision in the estimate of the market price provided by the model. |
The Firm has numerous controls in place intended to ensure that its fair valuations are
appropriate. An independent model review group reviews the Firm’s valuation models and approves
them for use for specific products. All valuation models within the Firm are subject to this review
process. A price verification group, independent from the risk-taking function, ensures observable
market prices and market-based parameters are used for valuation wherever possible. For those
products with material parameter risk for which observable market levels do not exist, an
independent review of the assumptions made on pricing is performed. Additional review includes
deconstruction of the model valuations for certain structured instruments into their components,
and benchmarking valuations, where possible, to similar products; validating valuation estimates
through actual cash settlement; and detailed review and explanation of recorded gains and losses,
which are analyzed daily and over time. Valuation adjustments, which are also determined by the
independent price verification group, are based on established policies and are applied
consistently over time. Any changes to the valuation methodology are reviewed by management to
confirm that the changes are justified. As markets and products develop and the pricing for certain
products becomes more or less
transparent, the Firm continues to refine its valuation methodologies. During 2009, no changes were
made to the Firm’s valuation models that had, or are expected to have, a material impact on the
Firm’s Consolidated Balance Sheets or results of operations.
The methods described above to estimate fair value may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values. Furthermore, while
the Firm believes its valuation methods are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair value at the reporting
date.
Valuation Hierarchy
A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.
A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.
| • | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| • | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| • | Level 3 – one or more inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level
of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used by the Firm to measure instruments
at fair value, including the general classification of such instruments pursuant to the valuation
hierarchy.
Assets
Securities purchased under resale agreements (“resale agreements”) and securities borrowed
To estimate the fair value of resale agreements and securities borrowed transactions, cash flows are evaluated taking into consideration any derivative features of the resale agreement and are then discounted using the appropriate market rates for the applicable maturity. As the inputs into the valuation are primarily based on readily observable pricing information, such resale agreements are classified within level 2 of the valuation hierarchy.
To estimate the fair value of resale agreements and securities borrowed transactions, cash flows are evaluated taking into consideration any derivative features of the resale agreement and are then discounted using the appropriate market rates for the applicable maturity. As the inputs into the valuation are primarily based on readily observable pricing information, such resale agreements are classified within level 2 of the valuation hierarchy.
Loans and unfunded lending-related commitments
The majority of the Firm’s loans and lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded. The fair value of such loans and lending-related commitments is included in the additional disclosures of fair value of certain financial instruments required by U.S. GAAP on pages 163–164 of this Note. Loans carried at fair value on a recurring and nonrecurring basis are included in the applicable tables that follow.
The majority of the Firm’s loans and lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded. The fair value of such loans and lending-related commitments is included in the additional disclosures of fair value of certain financial instruments required by U.S. GAAP on pages 163–164 of this Note. Loans carried at fair value on a recurring and nonrecurring basis are included in the applicable tables that follow.
Wholesale
There is no liquid secondary market for most loans and lending-related commitments in the Firm’s wholesale portfolio. In the limited circumstances where direct secondary market information, including pricing of actual market transactions, broker quotations or quoted market prices for similar instruments, is available (principally for loans in the Firm’s secondary trading portfolio), such information is used in the determination of fair value. For the remainder of the portfolio, fair value is estimated using a discounted cash flow (“DCF”) model. In addition to the characteristics of the underlying loans (including principal, customer rate and contractual fees), key inputs to the model include interest rates, prepayment rates, and credit spreads. The credit spread input is derived from the cost of credit default swaps (“CDS”) and, as a result, also incorporates the effects of secondary market liquidity. As many of the Firm’s clients do not have bonds traded with sufficient liquidity in the public markets to have observable CDS spreads, the Firm principally develops benchmark credit curves by industry and credit rating to estimate fair value. Additional adjustments to account for the difference in recovery rates between bonds, on which the cost of credit derivatives is based, and loans as well as loan equivalents (which represent the portion of an unused commitment expected, based on the Firm’s average portfolio historical experience, to become outstanding prior to an obligor default) are also incorporated into the valuation process.
There is no liquid secondary market for most loans and lending-related commitments in the Firm’s wholesale portfolio. In the limited circumstances where direct secondary market information, including pricing of actual market transactions, broker quotations or quoted market prices for similar instruments, is available (principally for loans in the Firm’s secondary trading portfolio), such information is used in the determination of fair value. For the remainder of the portfolio, fair value is estimated using a discounted cash flow (“DCF”) model. In addition to the characteristics of the underlying loans (including principal, customer rate and contractual fees), key inputs to the model include interest rates, prepayment rates, and credit spreads. The credit spread input is derived from the cost of credit default swaps (“CDS”) and, as a result, also incorporates the effects of secondary market liquidity. As many of the Firm’s clients do not have bonds traded with sufficient liquidity in the public markets to have observable CDS spreads, the Firm principally develops benchmark credit curves by industry and credit rating to estimate fair value. Additional adjustments to account for the difference in recovery rates between bonds, on which the cost of credit derivatives is based, and loans as well as loan equivalents (which represent the portion of an unused commitment expected, based on the Firm’s average portfolio historical experience, to become outstanding prior to an obligor default) are also incorporated into the valuation process.
| JPMorgan Chase & Co. / 2009 Annual Report | 149 |
Table of Contents
Notes to consolidated financial statements
For a discussion of the valuation of mortgage loans carried at fair value, see the
“Mortgage-related exposures carried at fair value” section
of this Note on pages 161–162.
The Firm’s loans carried at fair value are classified within level 2 or 3 of the valuation
hierarchy depending on the level of liquidity and activity in the markets for a particular product.
Consumer
The only products in the Firm’s consumer loan portfolio with a meaningful level of secondary market activity in the current economic environment are certain conforming residential mortgages. These loans are classified as trading assets and carried at fair value on the Consolidated Balance Sheets. They are predominantly classified within level 2 of the valuation hierarchy based on the level of market liquidity and activity. For further discussion of the valuation of mortgage loans carried at fair value see the “Mortgage-related exposures carried at fair value” section on pages 161–162 of this Note.
The only products in the Firm’s consumer loan portfolio with a meaningful level of secondary market activity in the current economic environment are certain conforming residential mortgages. These loans are classified as trading assets and carried at fair value on the Consolidated Balance Sheets. They are predominantly classified within level 2 of the valuation hierarchy based on the level of market liquidity and activity. For further discussion of the valuation of mortgage loans carried at fair value see the “Mortgage-related exposures carried at fair value” section on pages 161–162 of this Note.
The fair value of the Firm’s other consumer loans (except for credit card receivables) is generally
determined by discounting the loan principal and interest cash flows expected to be collected at a
market observable discount rate, when available. Portfolio-specific factors that a market
participant would consider in determining fair value (e.g., expected lifetime credit losses,
estimated prepayments, servicing costs and market liquidity) are either modeled into the cash flow
projections or incorporated as an adjustment to the discount rate. For products that continue to be
offered in the market, discount rates are derived from market-observable primary origination
spreads. Where primary origination spreads are not available (i.e., subprime mortgages, subprime
home equity and option adjustable-rate mortgages (“option ARMs”), the valuation is based on the
Firm’s estimate of a market participant’s required return on equity for similar products (i.e., a
hypothetical origination spread). Estimated lifetime credit losses consider expected and current
default rates for existing portfolios, collateral prices (where applicable) and expectations about
changes in the economic environment (e.g., unemployment rates).
The fair value of credit card receivables is determined using a discounted expected cash flow
methodology. Key estimates and assumptions include: projected interest income and late fee revenue,
funding, servicing, credit costs, and loan payment rates. The projected loan payment rates are used
to determine the estimated life of the credit card loan receivables, which are then discounted
using a risk-appropriate discount rate. The discount rate is derived from the Firm’s estimate of a
market participant’s expected return on credit card receivables. As the credit card receivables
have a short-term life, an amount equal to the allowance for credit losses is considered to be a
reasonable proxy for the credit cost component.
Loans that are not carried on the Consolidated Balance Sheets at fair value are not classified
within the fair value hierarchy.
Securities
Where quoted prices for identical securities are available in an active market, securities are classified in level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products for which there are quoted prices in active markets such as U.S. government agency or U.S. government-sponsored enterprise (collectively, “U.S. government agencies”), pass-through mortgage-backed securities (“MBS”), and exchange-traded equities (e.g., common and preferred stocks).
Where quoted prices for identical securities are available in an active market, securities are classified in level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products for which there are quoted prices in active markets such as U.S. government agency or U.S. government-sponsored enterprise (collectively, “U.S. government agencies”), pass-through mortgage-backed securities (“MBS”), and exchange-traded equities (e.g., common and preferred stocks).
If quoted market prices are not available for the specific security, the Firm may estimate the
value of such instruments using a combination of observed transaction prices, independent pricing
services and relevant broker quotes. Consideration is given to the nature of the quotes (e.g.,
indicative or firm) and the relationship of recently evidenced market activity to the prices
provided from independent pricing services. The Firm may also use pricing models or discounted cash
flows. The majority of such instruments are classified within level 2 of the valuation hierarchy;
however, in cases where there is limited activity or less transparency around inputs to the
valuation, securities are classified within level 3 of the valuation hierarchy.
For certain collateralized mortgage and debt obligations, asset-backed securities (“ABS”) and
high-yield debt securities, the determination of fair value may require benchmarking to similar
instruments or analyzing default and recovery rates. For “cash” collateralized debt obligations
(“CDOs”), external price information is not available. Therefore, cash CDOs are valued using
market-standard models, such as Intex, to model the specific collateral composition and cash flow
structure of each deal; key inputs to the model are market spread data for each credit rating,
collateral type and other relevant contractual features. ABS are valued based on external prices or
market spread data, using current market assumptions on prepayments and defaults. For those ABS
where the external price data is not observable or the limited available data is opaque, the
collateral performance is monitored and the value of the security is assessed. To benchmark its
valuations, the Firm looks to transactions for similar instruments and utilizes independent prices
provided by third-party vendors, broker quotes and relevant market indices, such as the ABX index,
as applicable. While none of those sources are solely indicative of fair value, they serve as
directional indicators for the appropriateness of the Firm’s estimates. The majority of
collateralized mortgage and debt obligations, high-yield debt securities and ABS are currently
classified in level 3 of the valuation hierarchy. For further discussion of the valuation of
mortgage securities carried at fair value see the “Mortgage-related exposures carried at fair
value” section of this Note on pages 161–162.
Commodities
Commodities inventory are carried at the lower of cost or fair value. The fair value of commodities inventory is determined primarily using pricing and data derived from the markets on which the underlying commodities are traded. The majority of commodities inventory is classified within level 1 of the valuation hierarchy.
Commodities inventory are carried at the lower of cost or fair value. The fair value of commodities inventory is determined primarily using pricing and data derived from the markets on which the underlying commodities are traded. The majority of commodities inventory is classified within level 1 of the valuation hierarchy.
| 150 | JPMorgan Chase & Co. / 2009 Annual Report |
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The Firm also has positions in commodities-based derivatives that can be traded on an exchange or
over-the-counter (“OTC”) and carried at fair value. The pricing inputs to these derivatives include forward
curves of underlying commodities, basis curves, volatilities, correlations, and occasionally other
model parameters. The valuation of these derivatives is based on calibrating to market
transactions, as well as to independent pricing information from sources such as brokers and dealer
consensus pricing services. Where inputs are unobservable, they are benchmarked to observable
market data based on historic and implied correlations, then adjusted for uncertainty where
appropriate. The majority of commodities-based derivatives are classified within level 2 of the
valuation hierarchy.
Derivatives
Exchange-traded derivatives valued using quoted prices are classified within level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the majority of the Firm’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters – that is, parameters that are actively quoted and can be validated to external sources, including industry pricing services. Depending on the types and contractual terms of derivatives, fair value can be modeled using a series of techniques, such as the Black-Scholes option pricing model, simulation models or a combination of various models, which are consistently applied. Where derivative products have been established for some time, the Firm uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. Further, many of these models do not contain a high level of subjectivity, as the methodologies used in the models do not require significant judgment, and inputs to the models are readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate swaps, option contracts and CDS. Such instruments are generally classified within level 2 of the valuation hierarchy.
Exchange-traded derivatives valued using quoted prices are classified within level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the majority of the Firm’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters – that is, parameters that are actively quoted and can be validated to external sources, including industry pricing services. Depending on the types and contractual terms of derivatives, fair value can be modeled using a series of techniques, such as the Black-Scholes option pricing model, simulation models or a combination of various models, which are consistently applied. Where derivative products have been established for some time, the Firm uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. Further, many of these models do not contain a high level of subjectivity, as the methodologies used in the models do not require significant judgment, and inputs to the models are readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate swaps, option contracts and CDS. Such instruments are generally classified within level 2 of the valuation hierarchy.
Derivatives that are valued based on models with significant unobservable market parameters and
that are normally traded less actively, have trade activity that is one way, and/or are traded in
less-developed markets are classified within level 3 of the valuation hierarchy. Level 3
derivatives include, for example, CDS referenced to certain MBS, certain types of CDO transactions,
options on baskets of single-name stocks, and callable exotic interest rate options.
Other complex products, such as those sensitive to correlation between two or more underlying
parameters, also fall within level 3 of the valuation hierarchy. Such instruments include complex
credit derivative products which are illiquid and non-standard in nature, including CDOs and
CDO-squared. A CDO is a debt instrument collateralized by a variety of debt obligations, including
CDS, bonds and loans of different maturities and credit qualities. The repackaging of such
securities and loans within a CDO results in the creation of tranches, which are instruments with
different risk profiles. In a CDO-squared transaction, the instrument is a CDO where the underlying
debt instruments are also
CDOs. For most CDO and CDO-squared transactions, while inputs such as CDS
spreads and recovery rates may be observable, the correlation between the underlying debt
instruments is unobservable. The correlation levels are not only modeled on a portfolio basis but
are also calibrated at a transaction level to liquid benchmark tranches. For all complex credit
derivative products, actual transactions, where available, are used to regularly recalibrate all
unobservable parameters.
Correlation sensitivity is also material to the overall valuation of options on baskets of
single-name stocks; the valuation of these baskets is typically not observable due to their
non-standardized structuring. Correlation for products such as these is typically estimated based
on an observable basket of stocks and then adjusted to reflect the differences between the
underlying equities.
For callable exotic interest rate options, while most of the assumptions in the valuation can be
observed in active markets (e.g. interest rates and volatility), the callable option transaction
flow is essentially one-way, and as such, price observability is limited. As pricing information is
limited, assumptions are based on the dynamics of the underlying markets (e.g., the interest rate
markets) including the range and possible outcomes of the applicable inputs. In addition, the
models used are calibrated, as relevant, to liquid benchmarks, and valuation is tested against
monthly independent pricing services and actual transactions.
Mortgage servicing rights and certain retained interests in securitizations
Mortgage servicing rights (“MSRs”) and certain retained interests from securitization activities do not trade in an active, open market with readily observable prices. Accordingly, the Firm estimates the fair value of MSRs and certain other retained interests in securitizations using DCF models.
Mortgage servicing rights (“MSRs”) and certain retained interests from securitization activities do not trade in an active, open market with readily observable prices. Accordingly, the Firm estimates the fair value of MSRs and certain other retained interests in securitizations using DCF models.
| • | For MSRs, the Firm uses an option-adjusted spread (“OAS”) valuation model in conjunction with the Firm’s proprietary prepayment model to project MSR cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates to estimate the fair value of the MSRs. The OAS model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Firm reassesses and periodically adjusts the underlying inputs and assumptions used in the OAS model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. Due to the nature of the valuation inputs, MSRs are classified within level 3 of the valuation hierarchy. | |
| • | For certain retained interests in securitizations, the Firm estimates the fair value for those retained interests by calculating the present value of future expected cash flows using modeling techniques. Such models incorporate management’s best estimates of key variables, such as expected credit losses, prepayment speeds and the discount rates appropriate for the risks involved. Changes in the assumptions used may have a significant impact on the Firm’s valuation of retained interests, |
| JPMorgan Chase & Co. / 2009 Annual Report | 151 |
Table of Contents
Notes to consolidated financial statements
| and such interests are therefore typically classified within level 3 of the valuation hierarchy. |
For both MSRs and certain other retained interests in securitizations, the Firm compares its fair
value estimates and assumptions to observable market data where available and to recent market
activity and actual portfolio experience. For further discussion of the most significant
assumptions used to value retained interests and MSRs, as well as the applicable stress tests for
those assumptions, see Note 17 on pages 214–217 of this Annual Report.
Private equity investments
The valuation of nonpublic private equity investments, which are held primarily by the Private Equity business within the Corporate/Private Equity line of business, requires significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. As such, private equity investments are valued initially based on cost. Each quarter, valuations are reviewed utilizing available and relevant market data to determine if the carrying value of these investments should be adjusted. Such market data primarily include observations of the trading multiples of public companies considered comparable to the private companies being valued and the operating performance of the underlying portfolio company, including its historical and projected net income and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Valuations are adjusted to account for company-specific issues, the lack of liquidity inherent in a nonpublic investment and the fact that comparable public companies are not identical to the companies being valued. In addition, a variety of additional factors are reviewed by management, including, but not limited to, financing and sales transactions with third parties, future expectations of the particular investment, changes in market outlook and the third-party financing environment. Nonpublic private equity investments are included in level 3 of the valuation hierarchy.
The valuation of nonpublic private equity investments, which are held primarily by the Private Equity business within the Corporate/Private Equity line of business, requires significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. As such, private equity investments are valued initially based on cost. Each quarter, valuations are reviewed utilizing available and relevant market data to determine if the carrying value of these investments should be adjusted. Such market data primarily include observations of the trading multiples of public companies considered comparable to the private companies being valued and the operating performance of the underlying portfolio company, including its historical and projected net income and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Valuations are adjusted to account for company-specific issues, the lack of liquidity inherent in a nonpublic investment and the fact that comparable public companies are not identical to the companies being valued. In addition, a variety of additional factors are reviewed by management, including, but not limited to, financing and sales transactions with third parties, future expectations of the particular investment, changes in market outlook and the third-party financing environment. Nonpublic private equity investments are included in level 3 of the valuation hierarchy.
Private equity investments also include publicly held equity investments, generally obtained
through the initial public offering of privately held equity investments. Publicly held investments
in liquid markets are marked to market at the quoted public value less adjustments for regulatory
or contractual sales restrictions. Discounts for restrictions are quantified by analyzing the
length of the restriction period and the volatility of the equity security. Publicly held
investments are largely classified in level 2 of the valuation hierarchy.
Other fund investments
The Firm holds investments in mutual/collective investment funds, private equity funds, hedge funds and real estate funds. Where the funds produce a daily net asset value (“NAV”) that is validated by a sufficient level of observable activity (purchases and
The Firm holds investments in mutual/collective investment funds, private equity funds, hedge funds and real estate funds. Where the funds produce a daily net asset value (“NAV”) that is validated by a sufficient level of observable activity (purchases and
sales at NAV), the NAV is used to value
the fund investment and it is classified in level 1 of the valuation hierarchy. Where adjustments to the NAV are required, for
example, with respect to interests in funds subject to restrictions on redemption (such as lock-up
periods or withdrawal limitations) and/or observable activity for the fund investment is limited,
investments are classified within level 2 or 3 of the valuation hierarchy.
Liabilities
Securities sold under repurchase agreements (“repurchase agreements”)
To estimate the fair value of repurchase agreements, cash flows are evaluated taking into consideration any derivative features of the repurchase agreements and are then discounted using the appropriate market rates for the applicable maturity. Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to, or in excess of, the principal amount loaned; as a result, there would be no adjustment, or an immaterial adjustment, to reflect the credit quality of the Firm (i.e., DVA) related to these agreements. As the inputs into the valuation are primarily based on observable pricing information, repurchase agreements are classified within level 2 of the valuation hierarchy.
To estimate the fair value of repurchase agreements, cash flows are evaluated taking into consideration any derivative features of the repurchase agreements and are then discounted using the appropriate market rates for the applicable maturity. Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to, or in excess of, the principal amount loaned; as a result, there would be no adjustment, or an immaterial adjustment, to reflect the credit quality of the Firm (i.e., DVA) related to these agreements. As the inputs into the valuation are primarily based on observable pricing information, repurchase agreements are classified within level 2 of the valuation hierarchy.
Beneficial interests issued by consolidated VIEs
The fair value of beneficial interests issued by consolidated VIEs (“beneficial interests”) is estimated based on the fair value of the underlying assets held by the VIEs. The valuation of beneficial interests does not include an adjustment to reflect the credit quality of the Firm, as the holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase. Where the inputs into the valuation are based on observable market pricing information, the beneficial interests are classified within level 2 of the valuation hierarchy. Where significant inputs into the valuation are unobservable, the beneficial interests are classified within level 3 of the valuation hierarchy.
The fair value of beneficial interests issued by consolidated VIEs (“beneficial interests”) is estimated based on the fair value of the underlying assets held by the VIEs. The valuation of beneficial interests does not include an adjustment to reflect the credit quality of the Firm, as the holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase. Where the inputs into the valuation are based on observable market pricing information, the beneficial interests are classified within level 2 of the valuation hierarchy. Where significant inputs into the valuation are unobservable, the beneficial interests are classified within level 3 of the valuation hierarchy.
Deposits, other borrowed funds and long-term debt
Included within deposits, other borrowed funds and long-term debt are structured notes issued by the Firm that are financial instruments containing embedded derivatives. To estimate the fair value of structured notes, cash flows are evaluated taking into consideration any derivative features and are then discounted using the appropriate market rates for the applicable maturities. In addition, the valuation of structured notes includes an adjustment to reflect the credit quality of the Firm (i.e., the DVA). Where the inputs into the valuation are primarily based on observable market prices, the structured notes are classified within level 2 of the valuation hierarchy. Where significant inputs are unobservable, the structured notes are classified within level 3 of the valuation hierarchy.
Included within deposits, other borrowed funds and long-term debt are structured notes issued by the Firm that are financial instruments containing embedded derivatives. To estimate the fair value of structured notes, cash flows are evaluated taking into consideration any derivative features and are then discounted using the appropriate market rates for the applicable maturities. In addition, the valuation of structured notes includes an adjustment to reflect the credit quality of the Firm (i.e., the DVA). Where the inputs into the valuation are primarily based on observable market prices, the structured notes are classified within level 2 of the valuation hierarchy. Where significant inputs are unobservable, the structured notes are classified within level 3 of the valuation hierarchy.
| 152 | JPMorgan Chase & Co. / 2009 Annual Report |
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The following tables present financial instruments measured at fair value as of December 31, 2009
and 2008, by major product category on the Consolidated Balance Sheets and by the fair value
hierarchy (as described above).
Assets and liabilities measured at fair value on a recurring basis
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2009 (in millions) | Level 1 | Level 2 | Level 3 | adjustments | Fair value | |||||||||||||||
|
Federal funds sold and securities purchased under resale
agreements
|
$ | — | $ | 20,536 | $ | — | $ | — | $ | 20,536 | ||||||||||
|
Securities borrowed
|
— | 7,032 | — | — | 7,032 | |||||||||||||||
|
Trading assets:
|
||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
33,092 | 8,373 | 260 | — | 41,725 | |||||||||||||||
|
Residential – nonagency
(b)
|
— | 2,284 | 1,115 | — | 3,399 | |||||||||||||||
|
Commercial – nonagency
(b)
|
— | 537 | 1,770 | — | 2,307 | |||||||||||||||
|
Total mortgage-backed securities
|
33,092 | 11,194 | 3,145 | — | 47,431 | |||||||||||||||
|
U.S. Treasury and government agencies
(a)
|
23,033 | 227 | — | — | 23,260 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
— | 5,681 | 1,971 | — | 7,652 | |||||||||||||||
|
Certificates of deposit, bankers’ acceptances and
commercial paper
|
— | 5,419 | — | — | 5,419 | |||||||||||||||
|
Non-U.S. government debt securities
|
25,684 | 32,487 | 734 | — | 58,905 | |||||||||||||||
|
Corporate debt securities
|
— | 48,754 | 5,241 | — | 53,995 | |||||||||||||||
|
Loans
(c)
|
— | 18,330 | 13,218 | — | 31,548 | |||||||||||||||
|
Asset-backed securities
|
— | 1,428 | 7,975 | — | 9,403 | |||||||||||||||
|
Total debt instruments
|
81,809 | 123,520 | 32,284 | — | 237,613 | |||||||||||||||
|
Equity securities
|
75,053 | 3,450 | 1,956 | — | 80,459 | |||||||||||||||
|
Physical commodities
(d)
|
9,450 | 586 | — | — | 10,036 | |||||||||||||||
|
Other
|
— | 1,884 | 926 | — | 2,810 | |||||||||||||||
|
Total debt and equity instruments
|
166,312 | 129,440 | 35,166 | — | 330,918 | |||||||||||||||
|
Derivative receivables
(e)
|
2,344 | 1,516,490 | 46,684 | (1,485,308 | ) | 80,210 | ||||||||||||||
|
Total trading assets
|
168,656 | 1,645,930 | 81,850 | (1,485,308 | ) | 411,128 | ||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
158,957 | 8,941 | — | — | 167,898 | |||||||||||||||
|
Residential – nonagency
(b)
|
— | 14,773 | 25 | — | 14,798 | |||||||||||||||
|
Commercial – nonagency
(b)
|
— | 4,590 | — | — | 4,590 | |||||||||||||||
|
Total mortgage-backed securities
|
158,957 | 28,304 | 25 | — | 187,286 | |||||||||||||||
|
U.S. Treasury and government agencies
(a)
|
405 | 29,592 | — | — | 29,997 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
— | 6,188 | 349 | — | 6,537 | |||||||||||||||
|
Certificates of deposit
|
— | 2,650 | — | — | 2,650 | |||||||||||||||
|
Non-U.S. government debt securities
|
5,506 | 18,997 | — | — | 24,503 | |||||||||||||||
|
Corporate debt securities
|
1 | 62,007 | — | — | 62,008 | |||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||
|
Credit card receivables
|
— | 25,742 | — | — | 25,742 | |||||||||||||||
|
Collateralized debt and loan obligations
|
— | 5 | 12,144 | — | 12,149 | |||||||||||||||
|
Other
|
— | 6,206 | 588 | — | 6,794 | |||||||||||||||
|
Equity securities
|
2,466 | 146 | 87 | — | 2,699 | |||||||||||||||
|
Total available-for-sale securities
|
167,335 | 179,837 | 13,193 | — | 360,365 | |||||||||||||||
|
Loans
|
— | 374 | 990 | — | 1,364 | |||||||||||||||
|
Mortgage servicing rights
|
— | — | 15,531 | — | 15,531 | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Private equity investments
(f)
|
165 | 597 | 6,563 | — | 7,325 | |||||||||||||||
|
All other
(g)
|
7,241 | 90 | 9,521 | — | 16,852 | |||||||||||||||
|
Total other assets
|
7,406 | 687 | 16,084 | — | 24,177 | |||||||||||||||
|
Total assets measured at fair value on a recurring
|
||||||||||||||||||||
|
basis
(h)
|
$ | 343,397 | $ | 1,854,396 | $ | 127,648 | $ | (1,485,308 | ) | $ | 840,133 | |||||||||
|
Less: Level 3 assets for which the Firm does not bear
economic exposure
(i)
|
2,118 | |||||||||||||||||||
|
|
||||||||||||||||||||
|
Total recurring level 3 assets for which the
Firm bears economic exposure
|
$ | 125,530 | ||||||||||||||||||
| JPMorgan Chase & Co. / 2009 Annual Report | 153 |
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Notes to consolidated financial statements
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2009 (in millions) | Level 1 | Level 2 | Level 3 | adjustments | fair value | |||||||||||||||
|
Deposits
|
$ | — | $ | 3,979 | $ | 476 | $ | — | $ | 4,455 | ||||||||||
|
Federal funds purchased and securities
loaned or sold under repurchase
agreements
|
— | 3,396 | — | — | 3,396 | |||||||||||||||
|
Other borrowed funds
|
— | 5,095 | 542 | — | 5,637 | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||
|
Debt and equity instruments
|
54,077 | 10,859 | 10 | — | 64,946 | |||||||||||||||
|
Derivative payables
(e)
|
2,038 | 1,481,813 | 35,332 | (1,459,058 | ) | 60,125 | ||||||||||||||
|
Total trading liabilities
|
56,115 | 1,492,672 | 35,342 | (1,459,058 | ) | 125,071 | ||||||||||||||
|
Accounts payable and other liabilities
|
— | 2 | 355 | — | 357 | |||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
— | 785 | 625 | — | 1,410 | |||||||||||||||
|
Long-term debt
|
— | 30,685 | 18,287 | — | 48,972 | |||||||||||||||
|
Total liabilities measured at fair
value on a recurring basis
|
$ | 56,115 | $ | 1,536,614 | $ | 55,627 | $ | (1,459,058 | ) | $ | 189,298 | |||||||||
| 154 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2008 (in millions) | Level 1 | Level 2 | Level 3 | adjustments | fair value | |||||||||||||||
|
Federal funds sold and securities purchased under resale
agreements
|
$ | — | $ | 20,843 | $ | — | $ | — | $ | 20,843 | ||||||||||
|
Securities borrowed
|
— | 3,381 | — | — | 3,381 | |||||||||||||||
|
Trading assets:
|
||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
48,761 | 9,984 | 163 | — | 58,908 | |||||||||||||||
|
Residential
– nonagency
(b)
|
— | 658 | 3,339 | — | 3,997 | |||||||||||||||
|
Commercial
– nonagency
(b)
|
— | 329 | 2,487 | — | 2,816 | |||||||||||||||
|
Total mortgage-backed securities
|
48,761 | 10,971 | 5,989 | — | 65,721 | |||||||||||||||
|
U.S. Treasury and government agencies
(a)
|
29,646 | 1,659 | — | — | 31,305 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
— | 10,361 | 2,641 | — | 13,002 | |||||||||||||||
|
Certificates of deposit, bankers’ acceptances and
commercial paper
|
1,180 | 6,312 | — | — | 7,492 | |||||||||||||||
|
Non-U.S. government debt securities
|
19,986 | 17,954 | 707 | — | 38,647 | |||||||||||||||
|
Corporate debt securities
|
1 | 55,042 | 5,280 | — | 60,323 | |||||||||||||||
|
Loans
(c)
|
— | 14,711 | 17,091 | — | 31,802 | |||||||||||||||
|
Asset-backed securities
|
— | 2,414 | 7,106 | — | 9,520 | |||||||||||||||
|
Total debt instruments
|
99,574 | 119,424 | 38,814 | — | 257,812 | |||||||||||||||
|
Equity securities
|
73,174 | 3,992 | 1,380 | — | 78,546 | |||||||||||||||
|
Physical commodities
(d)
|
3,455 | 126 | — | — | 3,581 | |||||||||||||||
|
Other
|
4 | 6,188 | 1,226 | — | 7,418 | |||||||||||||||
|
Total
debt and equity instruments
|
176,207 | 129,730 | 41,420 | — | 347,357 | |||||||||||||||
|
Derivative receivables
(e)
|
3,630 | 2,685,101 | 52,991 | (2,579,096 | ) | 162,626 | ||||||||||||||
|
Total
trading assets
|
179,837 | 2,814,831 | 94,411 | (2,579,096 | ) | 509,983 | ||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
109,009 | 8,376 | — | — | 117,385 | |||||||||||||||
|
Residential
– nonagency
(b)
|
— | 9,115 | 49 | — | 9,164 | |||||||||||||||
|
Commercial
– nonagency
(b)
|
— | 3,939 | — | — | 3,939 | |||||||||||||||
|
Total mortgage-backed securities
|
109,009 | 21,430 | 49 | — | 130,488 | |||||||||||||||
|
U.S. Treasury and government agencies
(a)
|
615 | 9,742 | — | — | 10,357 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
34 | 2,463 | 838 | — | 3,335 | |||||||||||||||
|
Certificates of deposit
|
— | 17,282 | — | — | 17,282 | |||||||||||||||
|
Non-U.S. government debt securities
|
6,112 | 2,232 | — | — | 8,344 | |||||||||||||||
|
Corporate debt securities
|
— | 9,497 | 57 | — | 9,554 | |||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||
|
Credit card receivables
|
— | 11,391 | — | — | 11,391 | |||||||||||||||
|
Collateralized debt and loan obligations
|
— | — | 11,195 | — | 11,195 | |||||||||||||||
|
Other
|
— | 643 | 252 | — | 895 | |||||||||||||||
|
Equity securities
|
3,053 | 15 | — | — | 3,068 | |||||||||||||||
|
Total available-for-sale securities
|
118,823 | 74,695 | 12,391 | — | 205,909 | |||||||||||||||
|
Loans
|
— | 5,029 | 2,667 | — | 7,696 | |||||||||||||||
|
Mortgage servicing rights
|
— | — | 9,403 | — | 9,403 | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Private equity investments
(f)
|
151 | 332 | 6,369 | — | 6,852 | |||||||||||||||
|
All other
(g)
|
5,977 | 11,355 | 8,114 | — | 25,446 | |||||||||||||||
|
Total
other assets
|
6,128 | 11,687 | 14,483 | — | 32,298 | |||||||||||||||
|
Total assets measured at fair value on a recurring basis
|
$ | 304,788 | $ | 2,930,466 | $ | 133,355 | $ | (2,579,096 | ) | $ | 789,513 | |||||||||
|
Less: Level 3 assets for which the Firm does not bear
economic exposure
(i)
|
21,169 | |||||||||||||||||||
|
|
||||||||||||||||||||
|
Total recurring level 3 assets for which the
Firm bears economic exposure
|
$ | 112,186 | ||||||||||||||||||
| JPMorgan Chase & Co. / 2009 Annual Report | 155 |
Table of Contents
Notes to consolidated financial statements
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2008 (in millions) | Level 1 | Level 2 | Level 3 | adjustments | fair value | |||||||||||||||
|
Deposits
|
$ | — | $ | 4,370 | $ | 1,235 | $ | — | $ | 5,605 | ||||||||||
|
Federal funds purchased and securities
loaned or sold under repurchase
agreements
|
— | 2,993 | — | — | 2,993 | |||||||||||||||
|
Other borrowed funds
|
— | 14,612 | 101 | — | 14,713 | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||
|
Debt and equity instruments
|
34,568 | 10,418 | 288 | — | 45,274 | |||||||||||||||
|
Derivative payables
(e)
|
3,630 | 2,622,371 | 43,484 | (2,547,881 | ) | 121,604 | ||||||||||||||
|
Total
trading liabilities
|
38,198 | 2,632,789 | 43,772 | (2,547,881 | ) | 166,878 | ||||||||||||||
|
Accounts payable and other liabilities
|
— | — | — | — | — | |||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
— | 1,735 | — | — | 1,735 | |||||||||||||||
|
Long-term debt
|
— | 41,666 | 16,548 | — | 58,214 | |||||||||||||||
|
Total liabilities measured at fair
value on a recurring basis
|
$ | 38,198 | $ | 2,698,165 | $ | 61,656 | $ | (2,547,881 | ) | $ | 250,138 | |||||||||
| (a) | Includes total U.S. government-sponsored enterprise obligations of $195.8 billion and $182.1 billion at December 31, 2009 and 2008, respectively, which were predominantly mortgage-related. | |
| (b) | For further discussion of residential and commercial MBS, see the “Mortgage-related exposure carried at fair value” section of this Note on pages 161–162. | |
| (c) | Included within trading loans at December 31, 2009 and 2008, respectively, are $15.7 billion and $12.1 billion of residential first-lien mortgages and $2.7 billion and $4.3 billion of commercial first-lien mortgages. For further discussion of residential and commercial loans carried at fair value or the lower of cost or fair value, see the “Mortgage-related exposure carried at fair value” section of this Note on pages 161–162. | |
| (d) | Physical commodities inventories are accounted for at the lower of cost or fair value. | |
| (e) | As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of an asset or liability. Therefore, the balances reported in the fair value hierarchy table are gross of any counterparty netting adjustments. However, if the Firm were to net such balances, the reduction in the level 3 derivative receivable and derivative payable balances would be $16.0 billion at December 31, 2009. | |
| (f) | Private equity instruments represent investments within the Corporate/Private Equity line of business. The cost basis of the private equity investment portfolio was $8.8 billion and $8.3 billion at December 31, 2009 and 2008, respectively. | |
| (g) | Includes assets within accrued interest receivable and other assets at December 31, 2009 and 2008. | |
| (h) | Balances include investments valued at NAV at December 31, 2009, of $16.8 billion, of which $9.0 billion is classified in level 1, $3.2 billion in level 2 and $4.6 billion in level 3. | |
| (i) | Includes assets for which the Firm serves as an intermediary between two parties and does not bear market risk. The assets are predominantly reflected within derivative receivables. |
Changes in level 3 recurring fair value measurements
The following tables include a rollforward of the activity for financial instruments classified by
the Firm within level 3 of the fair value hierarchy for the years ended December 31, 2009, 2008 and
2007 (including changes in fair value). Level 3 financial instruments typically include, in
addition to the unobservable or level 3 components, observable components (that is, components that
are actively quoted and can be validated to external sources); accordingly, the gains and losses in
the table below include changes in fair
value due in part to observable factors that are part of
the valuation methodology. Also, the Firm risk manages the observable components of level 3
financial instruments using securities and derivative positions that are classified within level 1
or 2 of the fair value hierarchy; as these level 1 and level 2 risk
management instruments are not included below, the gains or losses in the following tables do not
reflect the effect of the Firm’s risk management activities related to such level 3 instruments.
| 156 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| Unrealized | ||||||||||||||||||||||||
| gains/ | ||||||||||||||||||||||||
| (losses) | ||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||
| Total | financial | |||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | Fair | instruments | |||||||||||||||||||
| Year ended | value, | unrealized | issuances | into and/or | value, | held at | ||||||||||||||||||
| December 31, 2009 | January 1, | gains/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2009 | (losses) | net | level 3 (g) | 2009 | 2009 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 163 | $ | (38 | ) | $ | 62 | $ | 73 | $ | 260 | $ | (38 | ) | ||||||||||
|
Residential
– nonagency
(a)
|
3,339 | (782 | ) | (245 | ) | (1,197 | ) | 1,115 | (871 | ) | ||||||||||||||
|
Commercial
– nonagency
(a)
|
2,487 | (242 | ) | (325 | ) | (150 | ) | 1,770 | (313 | ) | ||||||||||||||
|
Total mortgage-backed
securities
|
5,989 | (1,062 | ) | (508 | ) | (1,274 | ) | 3,145 | (1,222 | ) | ||||||||||||||
|
Obligations of U.S. states and
municipalities
|
2,641 | (22 | ) | (648 | ) | — | 1,971 | (123 | ) | |||||||||||||||
|
Non-U.S. government debt
securities
|
707 | 38 | (75 | ) | 64 | 734 | 34 | |||||||||||||||||
|
Corporate debt securities
|
5,280 | 38 | (3,416 | ) | 3,339 | 5,241 | (72 | ) | ||||||||||||||||
|
Loans
|
17,091 | (871 | ) | (3,497 | ) | 495 | 13,218 | (1,167 | ) | |||||||||||||||
|
Asset-backed securities
|
7,106 | 1,436 | (378 | ) | (189 | ) | 7,975 | 734 | ||||||||||||||||
|
Total
debt instruments
|
38,814 | (443 | ) | (8,522 | ) | 2,435 | 32,284 | (1,816 | ) | |||||||||||||||
|
Equity securities
|
1,380 | (149 | ) | (512 | ) | 1,237 | 1,956 | (51 | ) | |||||||||||||||
|
Other
|
1,226 | (79 | ) | (253 | ) | 32 | 926 | (119 | ) | |||||||||||||||
|
Total
debt and equity instruments
|
41,420 | (671) | (c) | (9,287 | ) | 3,704 | 35,166 | (1,986) | (c) | |||||||||||||||
|
Net derivative receivables
|
9,507 | (11,406) | (c) | (3,448 | ) | 16,699 | 11,352 | (10,835) | (c) | |||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||
|
Asset-backed securities
|
11,447 | (2 | ) | 1,112 | 175 | 12,732 | (48 | ) | ||||||||||||||||
|
Other
|
944 | (269 | ) | 302 | (516 | ) | 461 | 43 | ||||||||||||||||
|
Total
available-for-sale securities
|
12,391 | (271) | (d) | 1,414 | (341 | ) | 13,193 | (5) | (d) | |||||||||||||||
|
Loans
|
2,667 | (448) | (c) | (1,906 | ) | 677 | 990 | (488) | (c) | |||||||||||||||
|
Mortgage servicing rights
|
9,403 | 5,807 | (e) | 321 | — | 15,531 | 5,807 | (e) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,369 | (407) | (c) | 582 | 19 | 6,563 | (369) | (c) | ||||||||||||||||
|
All other
(b)
|
8,114 | (676) | (f) | 2,439 | (356 | ) | 9,521 | (612) | (f) | |||||||||||||||
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| Unrealized | ||||||||||||||||||||||||
| (gains)/ | ||||||||||||||||||||||||
| losses | ||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||
| Total | financial | |||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | Fair | instruments | |||||||||||||||||||
| Year ended | value, | unrealized | issuances | into and/or | value, | held at | ||||||||||||||||||
| December 31, 2009 | January 1, | (gains)/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2009 | losses | net | level 3 (g) | 2009 | 2009 | ||||||||||||||||||
|
Liabilities
(h)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 1,235 | $ | 47 | (c) | $ | (870 | ) | $ | 64 | $ | 476 | $ | (36) | (c) | |||||||||
|
Other borrowed funds
|
101 | (73) | (c) | 621 | (107 | ) | 542 | 9 | (c) | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
288 | 64 | (c) | (339 | ) | (3 | ) | 10 | 12 | (c) | ||||||||||||||
|
Accounts payable and other liabilities
|
— | (55) | (c) | 410 | — | 355 | (29) | (c) | ||||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
— | 344 | (c) | (598 | ) | 879 | 625 | 327 | (c) | |||||||||||||||
|
Long-term debt
|
16,548 | 1,367 | (c) | (2,738 | ) | 3,110 | 18,287 | 1,728 | (c) | |||||||||||||||
| JPMorgan Chase & Co. / 2009 Annual Report | 157 |
Table of Contents
Notes
to consolidated financial statements
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| gains/ | ||||||||||||||||||||||||
| (losses) | ||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||
| Total | financial | |||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | Fair | instruments | |||||||||||||||||||
| Year ended | value, | unrealized | issuances | into and/or | value, | held at | ||||||||||||||||||
| December 31, 2008 | January 1, | gains/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2008 | (losses) | net | level 3(g) | 2008 | 2008 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
$ | 24,066 | $ | (12,805 | ) (c) | $ | 6,201 | $ | 23,958 | $ | 41,420 | $ | (9,860 | ) (c) | ||||||||||
|
Net derivative receivables
|
633 | 4,556 | (c) | 2,290 | 2,028 | 9,507 | 1,814 | (c) | ||||||||||||||||
|
Available-for-sale securities
|
101 | (1,232 | ) (d) | 3,772 | 9,750 | 12,391 | (422 | ) (d) | ||||||||||||||||
|
Loans
|
8,380 | (1,547 | ) (c) | 12 | (4,178 | ) | 2,667 | (1,324 | ) (c) | |||||||||||||||
|
Mortgage servicing rights
|
8,632 | (6,933 | ) (e) | 7,704 | — | 9,403 | (6,933 | ) (e) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,763 | (638 | ) (c) | 320 | (76 | ) | 6,369 | (1,089 | ) (c) | |||||||||||||||
|
All other
(b)
|
5,978 | (940 | ) (f) | 2,787 | 289 | 8,114 | (753 | ) (f) | ||||||||||||||||
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| (gains)/ | ||||||||||||||||||||||||
| losses | ||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||
| Total | financial | |||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | Fair | instruments | |||||||||||||||||||
| Year ended | value, | unrealized | issuances | into and/or | value, | held at | ||||||||||||||||||
| December 31, 2008 | January 1, | (gains)/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2008 | losses | net | level 3(g) | 2008 | 2008 | ||||||||||||||||||
|
Liabilities
(h)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 1,161 | $ | (57 | ) (c) | $ | 79 | $ | 52 | $ | 1,235 | $ | (69 | ) (c) | ||||||||||
|
Other borrowed funds
|
105 | (7 | ) (c) | 53 | (50 | ) | 101 | (24 | ) (c) | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
480 | (73 | ) (c) | (33 | ) | (86 | ) | 288 | (125 | ) (c) | ||||||||||||||
|
Accounts payable and other liabilities
|
25 | (25 | ) (c) | — | — | — | — | |||||||||||||||||
|
Beneficial interests
issued by consolidated
VIEs
|
82 | (24 | ) (c) | (603 | ) | 545 | — | — | ||||||||||||||||
|
Long-term debt
|
21,938 | (4,502 | ) (c) | (1,717 | ) | 829 | 16,548 | (3,682 | ) (c) | |||||||||||||||
| 158 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| gains/ | ||||||||||||||||||||||||
| (losses) | ||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||
| Total | financial | |||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | Fair | instruments | |||||||||||||||||||
| Year ended | value, | unrealized | issuances | into and/or | value, | held at | ||||||||||||||||||
| December 31, 2007 | January 1, | gains/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2007 | (losses) | net | level 3 | 2007 | 2007 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
$ | 9,320 | $ | (916 | ) (c) | $ | 5,902 | $ | 9,760 | $ | 24,066 | $ | (912 | ) (c) | ||||||||||
|
Net derivative receivables
|
(2,800 | ) | 1,674 | (c) | 257 | 1,502 | 633 | 1,979 | (c) | |||||||||||||||
|
Available-for-sale securities
|
177 | 38 | (d) | (21 | ) | (93 | ) | 101 | (5 | ) (d) | ||||||||||||||
|
Loans
|
643 | (346 | ) (c) | 8,013 | 70 | 8,380 | (36 | ) (c) | ||||||||||||||||
|
Mortgage servicing rights
|
7,546 | (516 | ) (e) | 1,602 | — | 8,632 | (516 | ) (e) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
5,493 | 4,051 | (c) | (2,764 | ) | (17 | ) | 6,763 | 1,711 | (c) | ||||||||||||||
|
All other
(b)
|
4,274 | 35 | (f) | 1,196 | 473 | 5,978 | (21 | ) (f) | ||||||||||||||||
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| (gains)/ | ||||||||||||||||||||||||
| losses | ||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||
| Total | financial | |||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | Fair | instruments | |||||||||||||||||||
| Year ended | value, | unrealized | issuances | into and/or | value, | held at | ||||||||||||||||||
| December 31, 2007 | January 1, | (gains)/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2007 | losses | net | level 3 | 2007 | 2007 | ||||||||||||||||||
|
Liabilities
(h)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 385 | $ | 42 | (c) | $ | 667 | $ | 67 | $ | 1,161 | $ | 38 | (c) | ||||||||||
|
Other borrowed funds
|
— | 67 | (c) | 34 | 4 | 105 | 135 | (c) | ||||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
32 | (383 | ) (c) | 125 | 706 | 480 | 734 | (c) | ||||||||||||||||
|
Accounts payable and other liabilities
|
— | 460 | (c) | (435 | ) | — | 25 | 25 | (c) | |||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
8 | (6 | ) (c) | (1 | ) | 81 | 82 | — | ||||||||||||||||
|
Long-term debt
|
11,386 | 1,142 | (c) | 6,633 | 2,777 | 21,938 | 468 | (c) | ||||||||||||||||
| (a) | For further discussion of residential and commercial MBS, see the “Mortgage-related exposures carried at fair value” section of this Note on pages 161–162. | |
| (b) | Includes assets within accrued interest receivable and other assets at December 31, 2009, 2008 and 2007. | |
| (c) | Reported in principal transactions revenue, except for changes in fair value for Retail Financial Services (“RFS”) mortgage loans originated with the intent to sell, which are reported in mortgage fees and related income. | |
| (d) | Realized gains and losses on available-for-sale securities, as well as other-than-temporary impairment losses that are recorded in earnings, are reported in securities gains. Unrealized gains and losses are reported in other comprehensive income. | |
| (e) | Changes in fair value for RFS mortgage servicing rights are measured at fair value and reported in mortgage fees and related income. | |
| (f) | Predominantly reported in other income. | |
| (g) | Beginning January 1, 2008, all transfers into and/or out of level 3 are assumed to occur at the beginning of the reporting period. | |
| (h) | Level 3 liabilities as a percentage of total Firm liabilities accounted for at fair value (including liabilities carried at fair value on a nonrecurring basis) were 29%, 25% and 17% at December 31, 2009, 2008 and 2007, respectively. |
Assets and liabilities measured at fair value on a nonrecurring basis
Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on
a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis
but are subject to fair value adjustments only in certain circumstances
(for example, when there is evidence of impairment). The following tables present the financial instruments carried on
the Consolidated Balance Sheets by caption
and level within the valuation hierarchy (as described above) as of December 31, 2009 and 2008, for
which a nonrecurring change in fair value
has been recorded during the reporting period.
| Fair value hierarchy | ||||||||||||||||
| December 31, 2009 (in millions) | Level 1 | Level 2 | Level 3 | Total fair value | ||||||||||||
|
Loans retained
(a)
|
$ | — | $ | 4,544 | $ | 1,137 | $ | 5,681 | ||||||||
|
Loans held-for-sale
(b)
|
— | 601 | 1,029 | 1,630 | ||||||||||||
|
Total loans
|
— | 5,145 | 2,166 | 7,311 | ||||||||||||
|
Other real estate owned
|
— | 307 | 387 | 694 | ||||||||||||
|
Other assets
|
— | — | 184 | 184 | ||||||||||||
|
Total other assets
|
— | 307 | 571 | 878 | ||||||||||||
|
Total assets at fair value on a nonrecurring basis
|
$ | — | $ | 5,452 | $ | 2,737 | $ | 8,189 | ||||||||
|
Accounts payable and other liabilities
(c)
|
$ | — | $ | 87 | $ | 39 | $ | 126 | ||||||||
|
Total liabilities at fair value on a nonrecurring basis
|
$ | — | $ | 87 | $ | 39 | $ | 126 | ||||||||
| Fair value hierarchy | ||||||||||||||||
| December 31, 2008 (in millions) | Level 1 | Level 2 | Level 3 | Total fair value | ||||||||||||
|
Loans retained
(a)
|
$ | — | $ | 2,344 | $ | 345 | $ | 2,689 | ||||||||
|
Loans held-for-sale
(b)
|
— | 2,647 | 3,654 | 6,301 | ||||||||||||
|
Total loans
|
— | 4,991 | 3,999 | 8,990 | ||||||||||||
|
Other real estate owned
|
— | 706 | 103 | 809 | ||||||||||||
|
Other assets
|
— | 1,057 | 188 | 1,245 | ||||||||||||
|
Total other assets
|
— | 1,763 | 291 | 2,054 | ||||||||||||
|
Total assets at fair value on a nonrecurring basis
|
$ | — | $ | 6,754 | $ | 4,290 | $ | 11,044 | ||||||||
|
Accounts payable and other liabilities
(c)
|
$ | — | $ | 212 | $ | 98 | $ | 310 | ||||||||
|
Total liabilities at fair value on a nonrecurring basis
|
$ | — | $ | 212 | $ | 98 | $ | 310 | ||||||||
| (a) | Reflects delinquent mortgage and home equity loans where the carrying value is based on the fair value of the underlying collateral. | |
| (b) | Predominantly includes leveraged lending loans carried on the Consolidated Balance Sheets at the lower of cost or fair value. | |
| (c) | Represents, at December 31, 2009 and 2008, the fair value adjustment associated with $648 million and $1.5 billion, respectively, of unfunded held-for-sale lending-related commitments within the leveraged lending portfolio |
| JPMorgan Chase & Co. / 2009 Annual Report | 159 |
Table of Contents
Notes to consolidated financial statements
Nonrecurring fair value changes
The following table presents the total change in value of financial instruments for which a fair value adjustment has been included in the Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, related to financial instruments held at these dates.
The following table presents the total change in value of financial instruments for which a fair value adjustment has been included in the Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, related to financial instruments held at these dates.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Loans retained
|
$ | (3,550 | ) | $ | (1,159 | ) | $ | (218 | ) | |||
|
Loans held-for-sale
|
(389 | ) | (2,728 | ) | (502 | ) | ||||||
|
Total loans
|
(3,939 | ) | (3,887 | ) | (720 | ) | ||||||
|
Other assets
|
(104 | ) | (685 | ) | (161 | ) | ||||||
|
Accounts payable and
other liabilities
|
31 | (285 | ) | 2 | ||||||||
|
Total nonrecurring
fair
value gains/(losses)
|
$ | (4,012 | ) | $ | (4,857 | ) | $ | (879 | ) | |||
In the above table, loans predominantly include: (1) write-downs of delinquent mortgage and
home equity loans where impairment is based on the fair value of the underlying collateral; and (2)
the change in fair value for leveraged lending loans carried on the Consolidated Balance Sheets at
the lower of cost or fair value. Accounts payable and other liabilities predominantly include the
change in fair value for unfunded lending-related commitments within the leveraged lending
portfolio.
Level 3 analysis
Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 6% of total Firm assets at both December 31, 2009 and 2008. Level 3 assets were $130.4 billion at December 31, 2009, reflecting a decrease of $7.3 billion in 2009, due to the following:
Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 6% of total Firm assets at both December 31, 2009 and 2008. Level 3 assets were $130.4 billion at December 31, 2009, reflecting a decrease of $7.3 billion in 2009, due to the following:
| • | A net decrease of $6.3 billion in gross derivative receivables, predominantly driven by the tightening of credit spreads. Offsetting a portion of the decrease were net transfers into level 3 during the year, most notably a transfer into level 3 of $41.3 billion of structured credit derivative receivables, and a transfer out of level 3 of $17.7 billion of single-name CDS on ABS. The fair value of the receivables transferred into level 3 during the year was $22.1 billion at December 31, 2009. The fair value of structured credit derivative payables with a similar underlying risk profile to the previously noted receivables, that are also classified in level 3, was $12.5 billion at December 31, 2009. These derivatives payables offset the receivables, as they are modeled and valued the same way with the same parameters and inputs as the assets. | |
| • | A net decrease of $3.5 billion in loans, predominantly driven by sales of leveraged loans and transfers of similar loans to level 2, due to increased price transparency for such assets. Leveraged loans are typically classified as held-for-sale and measured at the lower of cost or fair value and, therefore, included in the nonrecurring fair value assets. |
| • | A net decrease of $6.3 billion in trading assets – debt and equity instruments, primarily in loans and residential- and commercial-MBS, principally driven by sales and markdowns, and by sales and unwinds of structured transactions with hedge funds. The declines were partially offset by a transfer from level 2 to level 3 of certain structured notes reflecting lower liquidity and less pricing observability, and also increases in the fair value of other ABS. | |
| • | A net increase of $6.1 billion in MSRs, due to increases in the fair value of the asset, related primarily to market interest rate and other changes affecting the Firm’s estimate of future prepayments, as well as sales in RFS of originated loans for which servicing rights were retained. These increases were offset partially by servicing portfolio runoff. | |
| • | A net increase of $1.9 billion in accrued interest and accounts receivable related to increases in subordinated retained interests from the Firm’s credit card securitization activities. |
Gains and Losses
Gains and losses included in the tables for 2009 and 2008 included:
Gains and losses included in the tables for 2009 and 2008 included:
2009
| • | $11.4 billion of net losses on derivatives, primarily related to the tightening of credit spreads. | |
| • | Net losses on trading–debt and equity instruments of $671 million, consisting of $2.1 billion of losses, primarily related to residential and commercial loans and MBS, principally driven by markdowns and sales, partially offset by gains of $1.4 billion, reflecting increases in the fair value of other ABS. (For a further discussion of the gains and losses on mortgage-related exposures, inclusive of risk management activities, see the “Mortgage-related exposures carried at fair value” discussion below.) | |
| • | $5.8 billion of gains on MSRs. | |
| • | $1.4 billion of losses related to structured note liabilities, predominantly due to volatility in the equity markets. |
2008
| • | Losses on trading-debt and equity instruments of approximately $12.8 billion, principally from mortgage-related transactions and auction-rate securities. | |
| • | Losses of $6.9 billion on MSRs. | |
| • | Losses of approximately $3.9 billion on leveraged loans. | |
| • | Net gains of $4.6 billion related to derivatives, principally due to changes in credit spreads and rate curves. | |
| • | Gains of $4.5 billion related to structured notes, principally due to significant volatility in the fixed income, commodities and equity markets. | |
| • | Private equity losses of $638 million. |
For further information on changes in the fair value of the MSRs, see Note 17 on pages 215–216 of
this Annual Report.
| 160 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Mortgage-related exposures carried at fair value
The following table provides a summary of the Firm’s mortgage-related exposures, including the impact of risk management activities.
The following table provides a summary of the Firm’s mortgage-related exposures, including the impact of risk management activities.
These exposures include all mortgage-related securities and loans carried at fair value regardless
of their classification within the fair value
hierarchy, and that are carried at fair value through earnings or at the lower of cost or fair
value. The table excludes securities held in the available-for-sale portfolio, which are reported
on page 162 of this Note.
| Exposure as of | Exposure as of | |||||||||||||||||||||||
| December 31, 2009 | December 31, 2008 | Net gains/(losses) (e) | ||||||||||||||||||||||
| Reported | Reported | |||||||||||||||||||||||
| in income – | in income – | |||||||||||||||||||||||
| Net of risk | Net of risk | year ended | year ended | |||||||||||||||||||||
| management | management | December 31, | December 31, | |||||||||||||||||||||
| (in millions) | Gross | activities (d) | Gross | activities (d) | 2009 | 2008 | ||||||||||||||||||
|
U.S.
Residential Mortgage:
(a)(b)(c)
|
||||||||||||||||||||||||
|
Prime
|
$ | 3,482 | $ | 3,482 | $ | 4,612 | $ | 4,612 | ||||||||||||||||
|
Alt-A
|
3,030 | 3,030 | 3,934 | 3,917 | ||||||||||||||||||||
|
|
6,512 | 6,512 | 8,546 | 8,529 | $ | 537 | $ | (4,093 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Subprime
|
569 | 137 | 941 | (28 | ) | (76 | ) | (369 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Non-U.S. Residential
(c)
|
1,702 | 1,321 | 1,591 | 951 | 86 | (292 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial Mortgage:
|
||||||||||||||||||||||||
|
Securities
|
2,337 | 1,898 | 2,836 | 1,438 | 257 | (792 | ) | |||||||||||||||||
|
Loans
|
2,699 | 2,035 | 4,338 | 2,179 | (333 | ) | (752 | ) | ||||||||||||||||
| (a) | Excluded at December 31, 2009 and 2008, are certain mortgages and mortgage-related assets that are carried at fair value and recorded in trading assets, such as: (i) U.S. government agency securities that are liquid and of high credit quality of $41.7 billion and $58.9 billion, respectively; (ii) conforming mortgage loans originated with the intent to sell to U.S. government agencies of $11.1 billion and $6.2 billion, respectively; and (iii) reverse mortgages of $4.5 billion and $4.3 billion, respectively, for which the principal risk is mortality risk. Also excluded are MSRs, which are reported in Note 17 on pages 214–217 of this Annual Report. | |
| (b) | Excluded certain mortgage-related financing transactions, which are collateralized by mortgage-related assets, of $4.1 billion and $5.7 billion at December 31, 2009 and 2008, respectively. These financing transactions are excluded from the table, as they are accounted for on an accrual basis of accounting. For certain financings deemed to be impaired, impairment is measured and recognized based on the fair value of the collateral. Of these financing transactions, $136 million and $1.2 billion were considered impaired at December 31, 2009 and 2008, respectively. | |
| (c) | Total residential mortgage exposures at December 31, 2009 and 2008, include: (i) securities of $3.4 billion and $4.0 billion, respectively; (ii) loans carried at fair value or the lower of cost or fair value of $5.0 billion and $5.9 billion, respectively; and (iii) forward purchase commitments included in derivative receivables of $358 million and $1.2 billion, respectively. | |
| (d) | Amounts reflect the effects of derivatives used to manage the credit risk of the gross exposures arising from cash-based instruments. The amounts are presented on a bond- or loan-equivalent (notional) basis. Derivatives are excluded from the gross exposure, as they are principally used for risk management purposes. | |
| (e) | Net gains and losses include all revenue related to the positions (i.e., interest income, changes in fair value of the assets, changes in fair value of the related risk management positions, and interest expense related to the liabilities funding those positions). |
Residential mortgages
Classification and Valuation
– Residential mortgage loans and MBS are classified within level 2 or
level 3 of the valuation hierarchy, depending on the level of liquidity and activity in the markets
for a particular product. Level 3 assets include nonagency residential whole loans and subordinated
nonagency residential MBS. Products that continue to have reliable price transparency as evidenced
by consistent market transactions, such as senior nonagency securities, as well as agency
securities, are classified in level 2.
For those products classified within level 2 of the valuation hierarchy, the Firm estimates the
value of such instruments using a combination of observed transaction prices, independent pricing
services and relevant broker quotes. Consideration is given to the nature of the quotes (e.g.,
indicative or firm) and the relationship of recently evidenced market activity to the prices
provided from independent pricing services.
When relevant market activity is not occurring or is limited, the fair value is estimated as
follows:
Residential mortgage loans
– Fair value of residential mortgage loans is estimated by projecting
the expected cash flows and discounting those cash flows at a rate reflective of current market
liquidity. To estimate the projected cash flows (inclusive of assumptions of prepayment, default
rates and loss severity), specific consideration is given to both borrower-specific and other
market factors, including, but not limited to: the borrower’s FICO score; the type of collateral
supporting the loan; an estimate of the current value of the collateral supporting the loan; the
level of documentation for the loan; and market-derived expectations for home price appreciation or
depreciation in the respective geography of the borrower.
Residential mortgage-backed securities
– Fair value of residential MBS is estimated considering the
value of the collateral and the specific attributes of the securities held by the Firm. The value
of the collateral pool supporting the securities is analyzed using the same techniques and factors
described above for residential mortgage loans, albeit in a more aggregated manner across the pool.
For example, average FICO scores, average delinquency rates, average loss severities and prepayment
rates, among other metrics, may be evaluated. In addition, as each securitization vehicle
distributes cash in a manner or order that is predetermined at the inception of the vehicle, the
priority in which each particular MBS is allocated cash flows, and the level of credit enhancement
that is in place to support those cash flows, are key considerations in
| JPMorgan Chase & Co. / 2009 Annual Report | 161 |
Table of Contents
Notes to consolidated financial statements
deriving the value of
residential MBS. Finally, the risk premium that investors demand for securitized products in the
current market is factored into the valuation. To benchmark its valuations, the Firm looks to
transactions for similar instruments and utilizes independent pricing provided by third-party
vendors, broker quotes and relevant market indices, such as the ABX index, as applicable. While
none of those sources are solely indicative of fair value, they serve as directional indicators for
the appropriateness of the Firm’s estimates.
Commercial mortgages
Commercial mortgages are loans to companies backed by commercial real estate. Commercial MBS are
securities collateralized by a pool of commercial mortgages. Typically, commercial mortgages have
lock-out periods where the borrower is restricted from prepaying the loan for a specified
timeframe, or periods where there are disincentives for the borrower to prepay the loan due to
prepayment penalties. These features reduce prepayment risk for commercial mortgages relative to
that of residential mortgages.
Classification and Valuation
While commercial mortgages and commercial MBS are classified within level 2 or level 3 of the valuation hierarchy, depending on the level of liquidity and activity in the markets, the majority of these mortgages, including both loans and lower-rated securities, are currently classified in level 3. Level 2 assets include fixed-rate commercial MBS.
While commercial mortgages and commercial MBS are classified within level 2 or level 3 of the valuation hierarchy, depending on the level of liquidity and activity in the markets, the majority of these mortgages, including both loans and lower-rated securities, are currently classified in level 3. Level 2 assets include fixed-rate commercial MBS.
Commercial mortgage loans
– Fair value of commercial mortgage loans is estimated by projecting the
expected cash flows and discounting those cash flows at a rate reflective of current market
liquidity. To estimate the projected cash flows, consideration is given to both borrower-specific
and other market factors, including, but not limited to: the borrower’s debt-to-service coverage
ratio; the type of commercial property (e.g., retail, office, lodging, multi-family, etc.); an
estimate of the current loan-to-value ratio; and market-derived expectations for property price
appreciation or depreciation in the respective geographic location.
Commercial mortgage-backed securities
– When relevant market activity is not present or is limited,
the value of commercial MBS is estimated considering the value of the collateral and the specific
attributes of the securities held by the Firm. The value of the collateral pool supporting the
securities is analyzed
using the same techniques and factors described above for the valuation of commercial mortgage
loans, albeit in a more aggregated manner across the pool. For example, average delinquencies, loan
or geographic concentrations, and average debt-service coverage ratios, among other metrics, may be
evaluated. In addition, as each securitization vehicle distributes cash in a manner or order that
is predetermined at the inception of the vehicle, the priority in which each particular MBS
security is allocated cash flows, and the level of credit enhancement that is in place to support
those cash flows, are key considerations in deriving the value of commercial MBS. Finally, the risk
premium that investors demand for securitized products in the current market is factored into the
valuation. To benchmark its valuations, the Firm utilizes independent pricing provided by
third-party vendors, and broker quotes, as applicable. While none of those sources are solely
indicative of fair value, they serve as directional indicators for the appropriateness of the
Firm’s estimates.
The following table presents mortgage-related activities within the available-for-sale
securities portfolio.
| Unrealized gains/(losses) included | ||||||||||||||||||||||||
| Net gains/(losses) reported | in other comprehensive | |||||||||||||||||||||||
| As of or for the year ended December 31, | Exposures | in income during the year (b) | income (pretax) during the year | |||||||||||||||||||||
| (in millions) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 167,898 | $ | 117,385 | $ | 1,232 | $ | 476 | $ | 849 | $ | 2,076 | ||||||||||||
|
Residential:
|
||||||||||||||||||||||||
|
Prime and Alt-A
|
4,523 | 6,895 | (364 | ) | (32 | ) | 856 | (1,965 | ) | |||||||||||||||
|
Subprime
|
17 | 194 | (49 | ) | (89 | ) | 19 | (32 | ) | |||||||||||||||
|
Non-U.S.
|
10,258 | 2,075 | (1 | ) | 2 | 412 | (156 | ) | ||||||||||||||||
|
Commercial
|
4,590 | 3,939 | (9 | ) | — | 744 | (684 | ) | ||||||||||||||||
|
Total mortgage-backed securities
|
$ | 187,286 | $ | 130,488 | $ | 809 | $ | 357 | $ | 2,880 | $ | (761 | ) | |||||||||||
|
U.S. government agencies
(a)
|
29,562 | 9,657 | 5 | 11 | (55 | ) | (54 | ) | ||||||||||||||||
| (a) | Represents direct mortgage-related obligations of government-sponsored enterprises. | |
| (b) | Excludes related net interest income. |
Exposures in the table above include $216.8
billion and $140.1 billion of MBS classified as available-for-sale in the Firm’s Consolidated
Balance Sheets at December 31, 2009 and 2008, respectively. These investments are primarily used as
part of the Firm’s centralized risk management of structural interest rate risk (the sensitivity of
the Firm’s Consolidated Balance Sheets to changes in interest rates). Changes in the Firm’s
structural interest rate position, as well as changes in the overall interest rate environment, are
continually monitored, resulting in periodic repositioning of securities classified as
available-for-sale. Given that this portfolio is
primarily used to manage the Firm’s structural
interest rate risk, nearly all of these securities are either backed by U.S. government agencies or
are rated “AAA.”
For additional information on investment securities in the available-for-sale portfolio, see Note
11 on pages 187–191 of this Annual Report.
| 162 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Credit adjustments
When determining the fair value of an instrument, it may be necessary to record a valuation adjustment to arrive at an exit price under U.S. GAAP. Valuation adjustments include, but are not limited to, amounts to reflect counterparty credit quality and the Firm’s own creditworthiness. The market’s view of the Firm’s credit quality is reflected in credit spreads observed in the CDS market. For a detailed discussion of the valuation adjustments the Firm considers, see the valuation discussion at the beginning of this Note.
When determining the fair value of an instrument, it may be necessary to record a valuation adjustment to arrive at an exit price under U.S. GAAP. Valuation adjustments include, but are not limited to, amounts to reflect counterparty credit quality and the Firm’s own creditworthiness. The market’s view of the Firm’s credit quality is reflected in credit spreads observed in the CDS market. For a detailed discussion of the valuation adjustments the Firm considers, see the valuation discussion at the beginning of this Note.
The following table provides the credit adjustments, excluding the effect of any hedging activity,
as reflected within the Consolidated Balance Sheets of the Firm as of the dates indicated.
| December 31, | ||||||||
| (in millions) | 2009 | 2008 | ||||||
|
Derivative receivables balance
|
$ | 80,210 | $ | 162,626 | ||||
|
Derivatives CVA
(a)
|
(3,697 | ) | (9,566 | ) | ||||
|
|
||||||||
|
Derivative payables balance
|
60,125 | 121,604 | ||||||
|
Derivatives DVA
|
(629 | ) | (1,389 | ) | ||||
|
|
||||||||
|
Structured
notes balance
(b)(c)
|
59,064 | 67,340 | ||||||
|
Structured notes DVA
|
(840 | ) | (2,413 | ) | ||||
| (a) | Derivatives CVA, gross of hedges, includes results managed by credit portfolio and other lines of business within IB. | |
| (b) | Structured notes are recorded within long-term debt, other borrowed funds, or deposits on the Consolidated Balance Sheets, based on the tenor and legal form of the note. | |
| (c) | Structured notes are carried at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 165–167 of this Annual Report |
The following table provides the impact of credit adjustments on earnings in the respective
periods, excluding the effect of any hedging activity.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Credit adjustments:
|
||||||||||||
|
Derivatives CVA
(a)
|
$ | 5,869 | $ | (7,561 | ) | $ | (803 | ) | ||||
|
Derivatives DVA
|
(760 | ) | 789 | 514 | ||||||||
|
Structured notes
DVA
(b)
|
(1,573 | ) | 1,211 | 806 | ||||||||
| (a) | Derivatives CVA, gross of hedges, includes results managed by credit portfolio and other lines of business within IB. | |
| (b) | Structured notes are carried at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 165–167 of this Annual Report. |
Fair value measurement transition
In connection with the initial adoption of FASB guidance on fair value measurement, the Firm recorded the following on January 1, 2007:
In connection with the initial adoption of FASB guidance on fair value measurement, the Firm recorded the following on January 1, 2007:
| • | a cumulative effect increase to retained earnings of $287 million, primarily related to the release of profit previously deferred in accordance with previous FASB guidance for certain derivative contracts; | |
| • | an increase to pretax income of $166 million ($103 million after-tax) related to the incorporation of the Firm’s creditworthiness in the valuation of liabilities recorded at fair value; and | |
| • | an increase to pretax income of $464 million ($288 million after-tax) related to valuations of nonpublic private equity investments. |
Additional disclosures about the fair value of financial instruments (including financial
instruments not carried at fair value)
U.S. GAAP requires disclosure of the estimated fair value of certain financial instruments, and the methods and significant assumptions used to estimate their fair value. Financial instruments within the scope of these disclosure requirements are included in the following table; other financial instruments and all nonfinancial instruments are excluded from the scope. Accordingly, the fair value disclosures required 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.
U.S. GAAP requires disclosure of the estimated fair value of certain financial instruments, and the methods and significant assumptions used to estimate their fair value. Financial instruments within the scope of these disclosure requirements are included in the following table; other financial instruments and all nonfinancial instruments are excluded from the scope. Accordingly, the fair value disclosures required 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.
Financial instruments for which carrying value approximates fair value
Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include: cash and due from banks; deposits with banks, federal funds sold, securities purchased under resale agreements and securities borrowed with short-dated maturities; short-term receivables and accrued interest receivable; commercial paper; federal funds purchased, and securities loaned or sold under repurchase agreements with short-dated maturities; other borrowed funds (excluding advances from Federal Home Loan Banks); accounts payable; and accrued liabilities. In addition, U.S. GAAP requires that the fair value of deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to their carrying value; recognition of the inherent funding value of these instruments is not allowed.
Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include: cash and due from banks; deposits with banks, federal funds sold, securities purchased under resale agreements and securities borrowed with short-dated maturities; short-term receivables and accrued interest receivable; commercial paper; federal funds purchased, and securities loaned or sold under repurchase agreements with short-dated maturities; other borrowed funds (excluding advances from Federal Home Loan Banks); accounts payable; and accrued liabilities. In addition, U.S. GAAP requires that the fair value of deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to their carrying value; recognition of the inherent funding value of these instruments is not allowed.
| JPMorgan Chase & Co. / 2009 Annual Report | 163 |
Table of Contents
Notes to consolidated financial statements
The following table presents the carrying value and estimated fair value of financial assets and
liabilities.
| 2009 | 2008 | |||||||||||||||||||||||
| 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
|
$ | 89.4 | $ | 89.4 | $ | — | $ | 165.0 | $ | 165.0 | $ | — | ||||||||||||
|
Accrued interest and accounts
receivable (included $5.0 and $3.1 at
fair value at December 31, 2009 and
2008, respectively)
|
67.4 | 67.4 | — | 61.0 | 61.0 | — | ||||||||||||||||||
|
Federal funds sold and securities
purchased under resale agreements
(included $20.5 and $20.8 at fair
value at December 31, 2009 and 2008,
respectively)
|
195.4 | 195.4 | — | 203.1 | 203.1 | — | ||||||||||||||||||
|
Securities borrowed (included $7.0 and
$3.4 at fair value at December 31,
2009 and 2008, respectively)
|
119.6 | 119.6 | — | 124.0 | 124.0 | — | ||||||||||||||||||
|
Trading assets
|
411.1 | 411.1 | — | 510.0 | 510.0 | — | ||||||||||||||||||
|
Securities (included $360.4 and $205.9
at fair value at December 31, 2009 and
2008, respectively)
|
360.4 | 360.4 | — | 205.9 | 205.9 | — | ||||||||||||||||||
|
Loans (included $1.4 and $7.7 at fair
value at December 31, 2009 and 2008,
respectively)
|
601.9 | 598.3 | (3.6 | ) | 721.7 | 700.0 | (21.7 | ) | ||||||||||||||||
|
Mortgage servicing rights at fair value
|
15.5 | 15.5 | — | 9.4 | 9.4 | — | ||||||||||||||||||
|
Other (included $19.2 and $29.2 at
fair value at December 31, 2009 and
2008, respectively)
|
73.4 | 73.2 | (0.2 | ) | 83.0 | 83.1 | 0.1 | |||||||||||||||||
|
Total financial assets
|
$ | 1,934.1 | $ | 1,930.3 | $ | (3.8 | ) | $ | 2,083.1 | $ | 2,061.5 | $ | (21.6 | ) | ||||||||||
|
Financial liabilities
|
||||||||||||||||||||||||
|
Deposits (included $4.5 and $5.6 at
fair value at December 31, 2009 and
2008, respectively)
|
$ | 938.4 | $ | 939.5 | $ | (1.1 | ) | $ | 1,009.3 | $ | 1,010.2 | $ | (0.9 | ) | ||||||||||
|
Federal funds purchased and securities
loaned or sold under repurchase
agreements (included $3.4 and
$3.0 at fair value at December 31,
2009 and 2008,
respectively)
|
261.4 | 261.4 | — | 192.5 | 192.5 | — | ||||||||||||||||||
|
Commercial paper
|
41.8 | 41.8 | — | 37.8 | 37.8 | — | ||||||||||||||||||
|
Other borrowed funds (included $5.6
and $14.7 at fair value at December
31, 2009 and 2008, respectively)
|
55.7 | 55.9 | (0.2 | ) | 132.4 | 134.1 | (1.7 | ) | ||||||||||||||||
|
Trading liabilities
|
125.1 | 125.1 | — | 166.9 | 166.9 | — | ||||||||||||||||||
|
Accounts payable and other liabilities
(included $0.4 and zero at fair value
at December 31, 2009 and 2008,
respectively)
|
136.8 | 136.8 | — | 167.2 | 167.2 | — | ||||||||||||||||||
|
Beneficial interests issued by
consolidated VIEs (included $1.4 and
$1.7 at fair value at December 31,
2009 and 2008, respectively)
|
15.2 | 15.2 | — | 10.6 | 10.5 | 0.1 | ||||||||||||||||||
|
Long-term debt and junior subordinated
deferrable interest debentures
(included $49.0 and $58.2 at fair
value at December 31, 2009 and 2008,
respectively)
|
266.3 | 268.4 | (2.1 | ) | 270.7 | 262.1 | 8.6 | |||||||||||||||||
|
Total financial liabilities
|
$ | 1,840.7 | $ | 1,844.1 | $ | (3.4 | ) | $ | 1,987.4 | $ | 1,981.3 | $ | 6.1 | |||||||||||
|
Net (depreciation)/appreciation
|
$ | (7.2 | ) | $ | (15.5 | ) | ||||||||||||||||||
The majority of the Firm’s unfunded lending-related commitments are not carried at fair
value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded. The
estimated fair values of the Firm’s wholesale lending-related commitments at December 31, 2009 and
2008, were liabilities of $1.3 billion and $7.5 billion, respectively. The Firm does not estimate
the fair value of consumer lending-related commitments. In many cases, the Firm can reduce or
cancel these commitments by providing the borrower prior notice or, in some cases, without notice
as permitted by law.
Trading assets and liabilities
Trading assets include debt and equity instruments held for trading purposes that JPMorgan Chase owns (“long” positions), certain loans for which the Firm manages on a fair value basis and has
Trading assets include debt and equity instruments held for trading purposes that JPMorgan Chase owns (“long” positions), certain loans for which the Firm manages on a fair value basis and has
elected the fair value option, and physical commodities inventories that are accounted for at the
lower of cost or fair value. Trading liabilities include debt and equity instruments that the Firm
has sold to other parties but does not own (“short” positions). The Firm is obligated to purchase
instruments at a future date to cover the short positions. Included in trading assets and trading
liabilities are the reported receivables (unrealized gains) and payables (unrealized losses)
related to derivatives. Trading assets and liabilities are carried at fair value on the
Consolidated Balance Sheets. For a discussion of the valuation and a summary of trading assets and
trading liabilities, including derivative receivables and payables, see Note 4 on pages 165–167 and
Note 5 on pages 167–175 of this Annual Report.
| 164 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Trading assets and liabilities average balances
Average trading assets and liabilities were as follows for the periods indicated.
Average trading assets and liabilities were as follows for the periods indicated.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Trading assets – debt and equity instruments
|
$ | 318,063 | $ | 384,102 | $ | 381,415 | ||||||
|
Trading assets – derivative receivables
|
110,457 | 121,417 | 65,439 | |||||||||
|
Trading liabilities – debt and equity
instruments
(a)
|
$ | 60,224 | $ | 78,841 | $ | 94,737 | ||||||
|
Trading liabilities – derivative payables
|
77,901 | 93,200 | 65,198 | |||||||||
| (a) | Primarily represent securities sold, not yet purchased. |
The fair value option provides an option to elect fair value as an alternative measurement for
selected financial assets, financial liabilities, unrecognized firm commitments, and written loan
commitments not previously carried at fair value.
Elections
Elections were made by the Firm to:
Elections were made by the Firm to:
| • | mitigate income statement volatility caused by the differences in the measurement basis of elected instruments (for example, certain instruments elected were previously accounted for on an accrual basis) while the associated risk management arrangements are accounted for on a fair value basis; | |
| • | eliminate the complexities of applying certain accounting models (e.g., hedge accounting or bifurcation accounting for hybrid instruments); and | |
| • | better reflect those instruments that are managed on a fair value basis. |
Elections include:
| • | Securities financing arrangements with an embedded derivative and/or a maturity of greater than one year. | |
| • | Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis. | |
| • | Structured notes issued as part of IB’s client-driven activities. (Structured notes are financial instruments that contain embedded derivatives.) | |
| • | Certain tax credits and other equity investments acquired as part of the Washington Mutual transaction. |
The cumulative effect on retained earnings of the adoption of the fair value option on January 1,
2007, was $199 million.
| JPMorgan Chase & Co. / 2009 Annual Report | 165 |
Table of Contents
Notes to consolidated financial statements
Changes in fair value under the fair value option election
The following table presents the
changes in fair value included in the
Consolidated Statements of Income for
the years ended December 31, 2009,
2008 and 2007, for items for which
the fair value option was elected.
Profit and loss information for
related risk management instruments,
which are required to be measured at
fair value, are not included in the
table.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Total changes | Total changes | Total changes | ||||||||||||||||||||||||||||||||||
| Principal | Other | in fair value | Principal | Other | in fair value | Principal | Other | in fair value | ||||||||||||||||||||||||||||
| December 31, (in millions) | transactions | income | recorded | transactions | income | recorded | transactions | income | recorded | |||||||||||||||||||||||||||
|
Federal funds sold and securities
purchased under resale agreements
|
$ | (553 | ) | $ | — | $ | (553 | ) | $ | 1,139 | $ | — | $ | 1,139 | $ | 580 | $ | — | $ | 580 | ||||||||||||||||
|
Securities borrowed
|
82 | — | 82 | 29 | — | 29 | — | — | — | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||||||||||||||
|
Debt and equity instruments,
excluding loans
|
619 | 25 | (c) | 644 | (870 | ) | (58 | ) (c) | (928 | ) | 421 | (1 | ) (c) | 420 | ||||||||||||||||||||||
|
Loans reported as trading assets:
|
||||||||||||||||||||||||||||||||||||
|
Changes in instrument-
specific credit risk
|
(300 | ) | (177) | (c) | (477 | ) | (9,802 | ) | (283 | ) (c) | (10,085 | ) | (517 | ) | (157 | ) (c) | (674 | ) | ||||||||||||||||||
|
Other changes in fair value
|
1,132 | 3,119 | (c) | 4,251 | 696 | 1,178 | (c) | 1,874 | 188 | 1,033 | (c) | 1,221 | ||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||||||
|
Changes in instrument-specific
credit risk
|
(78 | ) | — | (78 | ) | (1,991 | ) | — | (1,991 | ) | 102 | — | 102 | |||||||||||||||||||||||
|
Other changes in fair value
|
(343 | ) | — | (343 | ) | (42 | ) | — | (42 | ) | 40 | — | 40 | |||||||||||||||||||||||
|
Other assets
|
— | (731 | ) (d) | (731 | ) | — | (660 | ) (d) | (660 | ) | — | 30 | (d) | 30 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Deposits
(a)
|
(766 | ) | — | (766 | ) | (132 | ) | — | (132 | ) | (906 | ) | — | (906 | ) | |||||||||||||||||||||
|
Federal funds purchased and
securities loaned or sold under
repurchase agreements
|
116 | — | 116 | (127 | ) | — | (127 | ) | (78 | ) | (78 | ) | ||||||||||||||||||||||||
|
Other borrowed funds
(a)
|
(1,277 | ) | — | (1,277 | ) | 1,888 | — | 1,888 | (412 | ) | — | (412 | ) | |||||||||||||||||||||||
|
Trading liabilities
|
(3 | ) | — | (3 | ) | 35 | — | 35 | (17 | ) | — | (17 | ) | |||||||||||||||||||||||
|
Accounts payable and other liabilities
|
64 | — | 64 | — | — | — | (460 | ) | — | (460 | ) | |||||||||||||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
(351 | ) | — | (351 | ) | 355 | — | 355 | (228 | ) | — | (228 | ) | |||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||||||
|
Changes in instrument-specific
credit risk
(a)
|
(1,543 | ) | — | (1,543 | ) | 1,174 | — | 1,174 | 771 | — | 771 | |||||||||||||||||||||||||
|
Other changes in fair value
(b)
|
(2,393 | ) | — | (2,393 | ) | 16,202 | — | 16,202 | (2,985 | ) | — | (2,985 | ) | |||||||||||||||||||||||
| (a) | Total changes in instrument-specific credit risk related to structured notes were $(1.6) billion, $1.2 billion and $806 million for the years ended December 31, 2009, 2008 and 2007, respectively. These totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt. | |
| (b) | Structured notes are debt instruments with embedded derivatives that are tailored to meet a client’s need for derivative risk in funded form. The embedded derivative is the primary driver of risk. The 2008 gain included in “Other changes in fair value” results from a significant decline in the value of certain structured notes where the embedded derivative is principally linked to either equity indices or commodity prices, both of which declined sharply during the third quarter of 2008. Although the risk associated with the structured notes is actively managed, the gains reported in this table do not include the income statement impact of such risk management instruments. | |
| (c) | Reported in mortgage fees and related income. | |
| (d) | Reported in other income. |
Determination of instrument-specific credit risk for items for which a fair value
election was made
The following describes how the gains and losses included in earnings during 2009, 2008 and 2007,
which were attributable to changes in instrument-specific credit risk, were determined.
| • | Loans and lending-related commitments: For floating-rate instruments, all changes in value are attributed to instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate-related and changes in value that are credit-related. Allocations are generally based on an analysis of borrower-specific credit spread and recovery information, where available, or benchmarking to similar entities or industries. |
| • | Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in the Firm’s credit spread. |
| • | Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment or an immaterial adjustment for instrument-specific credit risk related to these agreements. |
| 166 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Difference between aggregate fair value and aggregate remaining contractual principal balance
outstanding
The following table reflects the difference between the aggregate fair value and the aggregate
remaining contractual principal balance outstanding as of December 31, 2009 and 2008, for loans and
long-term debt for which the fair value option has been elected. The loans were classified in
trading assets — loans or in loans.
| 2009 | 2008 | |||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||
| over/(under) | over/(under) | |||||||||||||||||||||||
| Contractual | contractual | Contractual | contractual | |||||||||||||||||||||
| principal | principal | principal | principal | |||||||||||||||||||||
| December 31, (in millions) | outstanding | Fair value | outstanding | outstanding | Fair value | outstanding | ||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||
|
Performing loans 90 days or more past due
|
||||||||||||||||||||||||
|
Loans reported as trading assets
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Loans
|
— | — | — | — | — | — | ||||||||||||||||||
|
Nonaccrual loans
|
||||||||||||||||||||||||
|
Loans reported as trading assets
|
7,264 | 2,207 | (5,057 | ) | 5,156 | 1,460 | (3,696 | ) | ||||||||||||||||
|
Loans
|
1,126 | 151 | (975 | ) | 189 | 51 | (138 | ) | ||||||||||||||||
|
Subtotal
|
8,390 | 2,358 | (6,032 | ) | 5,345 | 1,511 | (3,834 | ) | ||||||||||||||||
|
All other performing loans
|
||||||||||||||||||||||||
|
Loans reported as trading assets
|
35,095 | 29,341 | (5,754 | ) | 36,336 | 30,342 | (5,994 | ) | ||||||||||||||||
|
Loans
|
2,147 | 1,000 | (1,147 | ) | 10,206 | 7,441 | (2,765 | ) | ||||||||||||||||
|
Total loans
|
$ | 45,632 | $ | 32,699 | $ | (12,933 | ) | $ | 51,887 | $ | 39,294 | $ | (12,593 | ) | ||||||||||
|
Long-term debt
|
||||||||||||||||||||||||
|
Principal protected debt
|
$ | 26,765 | (b) | $ | 26,378 | $ | (387 | ) | $ | 27,043 | (b) | $ | 26,241 | $ | (802 | ) | ||||||||
|
Nonprincipal protected debt
(a)
|
NA | 22,594 | NA | NA | 31,973 | NA | ||||||||||||||||||
|
Total long-term debt
|
NA | 48,972 | NA | NA | 58,214 | NA | ||||||||||||||||||
|
Long-term beneficial interests
|
||||||||||||||||||||||||
|
Principal protected debt
|
$ | 90 | $ | 90 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Nonprincipal protected debt
(a)
|
NA | 1,320 | NA | NA | 1,735 | NA | ||||||||||||||||||
|
Total long-term beneficial interests
|
NA | $ | 1,410 | NA | NA | $ | 1,735 | NA | ||||||||||||||||
| (a) | Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected notes, for which the Firm is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected notes do not obligate the Firm to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying variable or derivative feature embedded in the note. | |
| (b) | Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflected as the remaining contractual principal is the final principal payment at maturity. |
Derivative instruments enable end-users to modify or mitigate exposure to credit or market
risks. Counterparties to a derivative contract seek to obtain risks and rewards similar to those
that could be obtained from purchasing or selling a related cash instrument without having to
exchange the full purchase or sales price upfront. JPMorgan Chase makes markets in derivatives for
customers and also uses derivatives to hedge or manage risks of market exposures. The majority of
the Firm’s derivatives are entered into for market-making purposes.
Trading derivatives
The Firm transacts in a variety of derivatives in its trading portfolios to meet the needs of
customers (both dealers and clients) and to generate revenue through this trading activity. The
Firm makes markets in derivatives for its customers (collectively, “client derivatives”), seeking
to mitigate or modify interest rate, credit, foreign exchange, equity and commodity risks. The Firm
actively manages the risks from its exposure to these derivatives by entering into other derivative
transactions or by purchasing or selling other financial instruments that partially or fully offset
the exposure from client derivatives. The Firm also seeks to earn a spread between the
client
derivatives and offsetting positions, and from the remaining open risk positions.
Risk management derivatives
The Firm manages its market exposures using various derivative instruments.
Interest rate contracts are used to minimize fluctuations in earnings that are caused by changes in
interest rates. Fixed-rate assets and liabilities appreciate or depreciate in market value as
interest rates change. Similarly, interest income and expense increase or decrease as a result of
variable-rate assets and liabilities resetting to current market rates, and as a result of the
repayment and subsequent origination or issuance of fixed-rate assets and liabilities at current
market rates. Gains or losses on the derivative instruments that are related to such assets and
liabilities are expected to substantially offset this variability in earnings. The Firm generally
uses interest rate swaps, forwards and futures to manage the impact of interest rate fluctuations
on earnings.
Foreign currency forward contracts are used to manage the foreign exchange risk associated with
certain foreign currency–denominated (i.e., non-U.S.) assets and liabilities and forecasted
transactions, as well as the Firm’s net investments in certain non-U.S. subsidiaries or branches
whose functional currencies are not
| JPMorgan Chase & Co. / 2009 Annual Report | 167 |
Table of Contents
Notes to consolidated financial statements
the U.S. dollar. As a result of fluctuations in foreign
currencies, the U.S. dollar–equivalent values of the foreign
currency–denominated assets and
liabilities or forecasted revenue or expense increase or decrease. Gains or losses on the
derivative instruments related to these foreign currency—denominated assets or liabilities, or
forecasted transactions, are expected to substantially offset this variability.
Commodities based forward and futures contracts are used to manage the price risk of certain
inventory, including gold and base metals, in the Firm’s commodities portfolio. Gains or losses on
the forwards and futures are expected to substantially offset the depreciation or appreciation of
the related inventory. Also in the commodities portfolio, electricity and natural gas futures and
forwards contracts are used to manage price risk associated with energy-related tolling and
load-serving contracts and investments.
The Firm uses credit derivatives to manage the counterparty credit risk associated with loans and
lending-related commitments. Credit derivatives compensate the purchaser when the entity referenced
in the contract experiences a credit event, such as bankruptcy or a failure to pay an obligation
when due. For a further discussion of credit derivatives, see the discussion in the Credit
derivatives section on pages 173–175 of this Annual Report.
For more information about risk management derivatives, see the risk management derivatives gains
and losses table on page 172 of this Annual Report.
Notional amount of derivative contracts
The following table summarizes the notional amount of derivative contracts outstanding as of
December 31, 2009 and 2008.
| Notional amounts (c) | ||||||||
| December 31, (in billions) | 2009 | 2008 | ||||||
|
Interest rate contracts
|
||||||||
|
Swaps
(a)
|
$ | 47,663 | $ | 54,524 | ||||
|
Futures and forwards
|
6,986 | 6,277 | ||||||
|
Written options
|
4,553 | 4,803 | ||||||
|
Purchased options
|
4,584 | 4,656 | ||||||
|
Total interest rate contracts
|
63,786 | 70,260 | ||||||
|
Credit derivatives
(b)
|
5,994 | 8,388 | ||||||
|
Foreign exchange contracts
|
||||||||
|
Cross-currency swaps
(a)
|
2,217 | 1,681 | ||||||
|
Spot, futures and forwards
|
3,578 | 3,744 | ||||||
|
Written options
|
685 | 972 | ||||||
|
Purchased options
|
699 | 959 | ||||||
|
Total foreign exchange contracts
|
7,179 | 7,356 | ||||||
|
Equity contracts
|
||||||||
|
Swaps
|
81 | 77 | ||||||
|
Futures and forwards
|
45 | 56 | ||||||
|
Written options
|
502 | 628 | ||||||
|
Purchased options
|
449 | 652 | ||||||
|
Total equity contracts
|
1,077 | 1,413 | ||||||
|
Commodity contracts
|
||||||||
|
Swaps
|
178 | 234 | ||||||
|
Spot, futures and forwards
|
113 | 115 | ||||||
|
Written options
|
201 | 206 | ||||||
|
Purchased options
|
205 | 198 | ||||||
|
Total commodity contracts
|
697 | 753 | ||||||
|
Total derivative notional amounts
|
$ | 78,733 | $ | 88,170 | ||||
| (a) | In 2009, cross-currency interest rate swaps previously reported in interest rate contracts were reclassified to foreign exchange contracts to be more consistent with industry practice. The effect of this change resulted in a reclassification of $1.7 trillion in notional amount of cross-currency swaps from interest rate contracts to foreign exchange contracts as of December 31, 2008. | |
| (b) | Primarily consists of credit default swaps. For more information on volumes and types of credit derivative contracts, see the Credit derivatives discussion on pages 173–175 of this Note. | |
| (c) | Represents the sum of gross long and gross short third-party notional derivative contracts. |
While the notional amounts disclosed above give an indication of the volume of the Firm’s
derivative activity, the notional amounts significantly exceed, in the Firm’s view, the possible
losses that could arise from such transactions. For most derivative transactions, the notional
amount does not change hands; it is used simply as a reference to calculate payments.
Accounting for derivatives
All free-standing derivatives are required to be recorded on the Consolidated Balance Sheets at
fair value. The accounting for changes in value of a derivative depends on whether or not the
contract has been designated and qualifies for hedge accounting. Derivatives that are not
designated as hedges are marked to market through earnings. The tabular disclosures on pages
169–175 of this Note provide additional information on the amount of, and reporting for,
derivative assets, liabilities, gains and losses. For further discussion of derivatives embedded in
structured notes, see Notes 3 and 4 on pages 148–165 and 165–167, respectively, of this Annual
Report.
Derivatives designated as hedges
The Firm applies hedge accounting to certain derivatives executed for risk management purposes —
typically interest rate, foreign exchange and gold and base metal derivatives, as described above.
JPMorgan Chase does not seek to apply hedge accounting to all of the derivatives involved in the
Firm’s risk management activities. For example, the Firm does not apply hedge accounting to
purchased credit default swaps used to manage the credit risk of loans and commitments, because of
the difficulties in qualifying such contracts as hedges. For the same reason, the Firm does not
apply hedge accounting to certain interest rate derivatives used for risk management purposes, or
to commodity derivatives used to manage the price risk of tolling and load-serving contracts.
To qualify for hedge accounting, a derivative must be highly effective at reducing the risk
associated with the exposure being hedged. In addition, for a derivative to be designated as a
hedge, the risk management objective and strategy must be documented. Hedge documentation must
identify the derivative hedging instrument, the asset or liability and type of risk to be hedged,
and how the effectiveness of the derivative is assessed prospectively and retrospectively. To
assess effectiveness, the Firm uses statistical methods such as regression analysis, as well as
nonstatistical methods including dollar-value comparisons of the change in the fair value of the
derivative to the change in the fair value or cash flows of the hedged item. The extent to which a
derivative has been, and is expected to continue to be, effective at offsetting changes in the fair
value or cash flows of the hedged item must be
| 168 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
assessed and documented at least quarterly. Any
hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative
instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged
risk) must be reported in current-period earnings. If it is determined that a derivative is not
highly effective at hedging the designated exposure, hedge accounting is discontinued.
There are three types of hedge accounting designations: fair value hedges, cash flow hedges and net
investment hedges. JPMorgan Chase uses fair value hedges primarily to hedge fixed-rate long-term
debt, available-for-sale (“AFS”) securities and gold and base metal inventory. For qualifying fair
value hedges, the changes in the fair value of the derivative, and in the value of the hedged 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
hedged item and for interest-bearing instruments is amortized to earnings as a yield adjustment.
Derivative amounts affecting earnings are recognized consistent with the classification of the
hedged item – primarily net interest income and principal transactions revenue.
JPMorgan Chase uses cash flow hedges to hedge the 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 revenue and expense. For
qualifying cash flow hedges, the effective portion of
the change in the fair value of the
derivative is recorded in other comprehensive income/(loss) (“OCI”) and recognized in the
Consolidated Statements of Income when the hedged cash flows affect earnings. Derivative amounts
affecting earnings are recognized consistent with the classification
of the hedged item –
primarily interest income, interest expense, noninterest revenue and compensation expense. The
ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge
relationship is terminated, then the value of the derivative recorded in accumulated other
comprehensive income/(loss) (“AOCI”) is recognized in earnings when the cash flows that were hedged
affect earnings. For hedge relationships that are discontinued because a forecasted transaction is
not expected to occur according to the original hedge forecast, any related derivative values
recorded in AOCI are immediately recognized in earnings.
JPMorgan Chase uses foreign currency hedges to protect the value of the Firm’s net investments in
certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. For
qualifying net investment hedges, changes in the fair value of the derivatives are recorded in the
translation adjustments account within AOCI.
Impact of derivatives on the Consolidated Balance Sheets
The following table summarizes information on derivative fair values that are reflected on the
Firm’s Consolidated Balance Sheets as of December 31, 2009, by accounting designation (e.g.,
whether the derivatives were designated as hedges or not) and contract type.
Free-standing derivatives
(a)
| Derivative receivables | Derivative payables | |||||||||||||||||||||||
| Not | ||||||||||||||||||||||||
| December 31, 2009 | Not designated | Designated | Total derivative | designated | Designated | Total derivative | ||||||||||||||||||
| (in millions) | as hedges | as hedges | receivables | as hedges | as hedges | payables | ||||||||||||||||||
|
Trading assets and liabilities
|
||||||||||||||||||||||||
|
Interest rate
|
$ | 1,148,901 | $ | 6,568 | $ | 1,155,469 | $ | 1,121,978 | $ | 427 | $ | 1,122,405 | ||||||||||||
|
Credit
|
170,864 | — | 170,864 | 164,790 | — | 164,790 | ||||||||||||||||||
|
Foreign exchange
|
141,790 | 2,497 | 144,287 | 137,865 | 353 | 138,218 | ||||||||||||||||||
|
Equity
|
57,871 | — | 57,871 | 58,494 | — | 58,494 | ||||||||||||||||||
|
Commodity
|
36,988 | 39 | 37,027 | 35,082 | 194 | (c) | 35,276 | |||||||||||||||||
|
Gross fair value of trading
assets and liabilities
|
$ | 1,556,414 | $ | 9,104 | $ | 1,565,518 | $ | 1,518,209 | $ | 974 | $ | 1,519,183 | ||||||||||||
|
Netting adjustment
(b)
|
(1,485,308 | ) | (1,459,058 | ) | ||||||||||||||||||||
|
Carrying value of derivative
trading assets and trading
liabilities on the
Consolidated Balance Sheets
|
$ | 80,210 | $ | 60,125 | ||||||||||||||||||||
| (a) | Excludes structured notes for which the fair value option has been elected. See Note 4 on pages 165—167 of this Annual Report for further information. | |
| (b) | U.S. GAAP permits the netting of derivative receivables and payables, and the related cash collateral received and paid when a legally enforceable master netting agreement exists between the Firm and a derivative counterparty. | |
| (c) | Excludes $1.3 billion related to separated commodity derivatives used as fair value hedging instruments that are recorded in the line item of the host contract (i.e., other borrowed funds). | |
| JPMorgan Chase & Co. / 2009 Annual Report | 169 |
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Notes to consolidated financial statements
Derivative receivables and payables mark-to-market
The following table summarizes the fair values of derivative receivables and payables by contract
type after netting adjustments as of December 31, 2009 and 2008.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Derivative receivables:
|
||||||||
|
Interest rate
(a)
|
$ | 26,777 | $ | 49,996 | ||||
|
Credit
|
18,815 | 44,695 | ||||||
|
Foreign exchange
(a)
|
21,984 | 38,820 | ||||||
|
Equity
|
6,635 | 14,285 | ||||||
|
Commodity
|
5,999 | 14,830 | ||||||
|
Total derivative receivables
|
$ | 80,210 | $ | 162,626 | ||||
|
Trading liabilities
|
||||||||
|
Derivative payables:
|
||||||||
|
Interest rate
(a)
|
$ | 15,220 | $ | 27,645 | ||||
|
Credit
|
10,504 | 23,566 | ||||||
|
Foreign exchange
(a)
|
19,818 | 41,156 | ||||||
|
Equity
|
11,554 | 17,316 | ||||||
|
Commodity
|
3,029 | 11,921 | ||||||
|
Total derivative payables
|
$ | 60,125 | $ | 121,604 | ||||
| (a) | In 2009, cross-currency interest rate swaps previously reported in interest rate contracts were reclassified to foreign exchange contracts to be more consistent with industry practice. The effect of this change resulted in reclassifications of $14.1 billion of derivative receivables and $20.8 billion of derivative payables, between cross-currency interest rate swaps and foreign exchange contracts, as of December 31, 2008. |
Impact of derivatives and hedged items on the income statement and on other comprehensive
income
The following table summarizes the total pretax impact of JPMorgan Chase’s derivative-related
activities on the Firm’s Consolidated Statements of Income and Other Comprehensive Income for the
year ended December 31, 2009, by accounting designation.
| Derivative-related gains/(losses) | ||||||||||||||||||||||||
| Consolidated Statements | Fair value | Cash flow | Net investment | Risk management | Trading | |||||||||||||||||||
| of Income (in millions) | hedges (a) | hedges | hedges | activities | activities (a) | Total | ||||||||||||||||||
|
Year ended December 31, 2009
|
$ | (801 | ) | $ | 62 | $ | (112 | ) | $ | (6,590 | ) | $ | 16,254 | $ | 10,415 | |||||||||
| Derivative-related net changes in other comprehensive income | ||||||||||||||||||||||||
| Fair value | Cash flow | Net investment | Risk management | Trading | ||||||||||||||||||||
| Other Comprehensive Income/(loss) | hedges | hedges | hedges | activities | activities | Total | ||||||||||||||||||
|
Year ended December 31, 2009
|
$ | — | $ | 643 | $ | (259 | ) | $ | — | $ | — | $ | 384 | |||||||||||
| (a) | Includes the hedge accounting impact of the hedged item for fair value hedges, and includes cash instruments within trading activities. |
The tables that follow reflect more detailed information regarding the derivative-related
income statement impact by accounting designation for the year ended December 31, 2009.
| 170 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Fair value hedge gains and losses
The following table presents derivative instruments, by contract type, used in fair value hedge
accounting relationships, as well as pretax gains/(losses) recorded on such derivatives and the
related hedged items for the year ended December 31, 2009. The Firm includes gains/(losses) on the
hedging derivative and the related hedged item in the same line item in the Consolidated Statements
of Income.
| Year ended | Gains/(losses) recorded in income | Income statement impact due to: | ||||||||||||||||||
| December 31, 2009 | Total income | Hedge | Excluded | |||||||||||||||||
| (in millions) | Derivatives | Hedged items | statement impact (d) | ineffectiveness (e) | components (f) | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (3,830 | ) | $ | 4,638 | $ | 808 | $ | (466 | ) | $ | 1,274 | ||||||||
|
Foreign exchange
(b)
|
(1,421 | ) | 1,445 | 24 | — | 24 | ||||||||||||||
|
Commodity
(c)
|
(430 | ) | 399 | (31 | ) | — | (31) | |||||||||||||
|
Total
|
$ | (5,681 | ) | $ | 6,482 | $ | 801 | $ | (466 | ) | $ | 1,267 | ||||||||
| (a) | Primarily consists of hedges of the benchmark (e.g., LIBOR) interest rate risk of fixed-rate long-term debt. Gains and losses were recorded in net interest income. | |
| (b) | Primarily consists of hedges of the foreign currency risk of long-term debt and AFS securities for changes in spot foreign currency rates. Gains and losses related to the derivatives and the hedged items, due to changes in spot foreign currency rates, were recorded in principal transactions revenue. | |
| (c) | Consists of overall fair value hedges of physical gold and base metal inventory. Gains and losses were recorded in principal transactions revenue. | |
| (d) | Total income statement impact for fair value hedges consists of hedge ineffectiveness and any components excluded from the assessment of hedge effectiveness. The related amounts for the years ended December 31, 2008 and 2007 were net gains of $434 million and $111 million, respectively. | |
| (e) | Hedge ineffectiveness is the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk. | |
| (f) | Certain components of hedging derivatives and hedged items are permitted to be excluded from the assessment of hedge effectiveness. Amounts related to excluded components are recorded in current-period income and primarily consist of the impact of the passage of time on the fair value of the hedging derivative and hedged item. |
Cash flow hedge gains and losses
The following table presents derivative instruments, by contract type, used in cash flow hedge
accounting relationships, and the pretax gains/(losses) recorded on such derivatives, for the year
ended December 31, 2009. The Firm includes the gain/(loss) on the hedging derivative in the same
line item as the offsetting change in cash flows on the hedged item in the Consolidated Statements
of Income.
| Gains/(losses) recorded in income and other comprehensive income/(loss) (c) | ||||||||||||||||||||
| Derivatives– | Hedge | |||||||||||||||||||
| effective portion | ineffectiveness | Derivatives– | Total change | |||||||||||||||||
| Year ended | reclassified from | recorded directly | Total income | effective portion | in OCI | |||||||||||||||
| December 31, 2009 (in millions) | AOCI to income | in income (d) | statement impact | recorded in OCI | for period | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (158 | ) | $ | (62 | ) | $ | (220 | ) | $ | 61 | $ | 219 | |||||||
|
Foreign exchange
(b)
|
282 | — | 282 | 706 | 424 | |||||||||||||||
|
Total
|
$ | 124 | $ | (62 | ) | $ | 62 | $ | 767 | $ | 643 | |||||||||
| (a) | Primarily consists of benchmark interest rate hedges of LIBOR-indexed floating-rate assets and floating-rate liabilities. Gains and losses were recorded in net interest income. | |
| (b) | Primarily consists of hedges of the foreign currency risk of non–U.S. dollar–denominated revenue and expense. The income statement classification of gains and losses follows the hedged item – primarily net interest income, compensation expense and other expense. | |
| (c) | The Firm incurred $15 million of cash flow hedging net gains/(losses) on forecasted transactions that failed to occur for the year-ended December 31, 2007. The Firm did not experience forecasted transactions that failed to occur for the years ended December 31, 2009 and 2008, respectively. | |
| (d) | Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk. Hedge ineffectiveness recorded directly in income for cash flow hedges were net gains of $18 million and $29 million for the years ended December 31, 2008 and 2007, respectively. |
Over the next 12 months, the Firm expects that $245 million (after-tax) of net losses recorded
in AOCI at December 31, 2009, related to cash flow hedges will be recognized in income. 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 & Co. / 2009 Annual Report | 171 |
Table of Contents
Notes to consolidated financial statements
Net investment hedge gains and losses
The following table presents hedging instruments, by contract type, that were used in net
investment hedge accounting relationships, and the pretax gains/(losses) recorded on such
derivatives for the year ended December 31, 2009.
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||
| Year ended | Derivatives–excluded components | Derivatives–effective portion | ||||||
| December 31, 2009 (in millions) | recorded directly in income (a) | recorded in OCI | ||||||
|
Contract type
|
||||||||
|
Foreign exchange
|
$ | (112 | ) | $ | (259 | ) | ||
|
Total
|
$ | (112 | ) | $ | (259 | ) | ||
| (a) | Certain components of derivatives used as hedging instruments are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on a futures or forwards contract. Amounts related to excluded components are recorded in current-period income. There was no ineffectiveness for net investment hedge accounting relationships during 2009. |
Risk management derivatives gains and losses (not designated as hedging instruments)
The following table presents nontrading derivatives, by contract type, that were not designated in
hedge relationships, and the pretax gains/(losses) recorded on such derivatives for the year ended
December 31, 2009. These derivatives are risk management instruments used to mitigate or transform
the risk of market exposures arising from banking activities other than trading activities, which
are discussed separately below.
| Year ended December 31, 2009 | Derivatives gains/(losses) | |||||||
| (in millions) | recorded in income | |||||||
|
Contract type
|
||||||||
|
Interest rate
(a)
|
$ | (3,113 | ) | |||||
|
Credit
(b)
|
(3,222 | ) | ||||||
|
Foreign exchange
(c)
|
(197 | ) | ||||||
|
Equity
(b)
|
(8 | ) | ||||||
|
Commodity
(b)
|
(50 | ) | ||||||
|
Total
|
$ | (6,590 | ) | |||||
| (a) | Gains and losses were recorded in principal transactions revenue, mortgage fees and related income, and net interest income. | |
| (b) | Gains and losses were recorded in principal transactions revenue. | |
| (c) | Gains and losses were recorded in principal transactions revenue and net interest income. |
Trading derivative gains and losses
The Firm has elected to present derivative gains and losses related to its trading activities
together with the cash instruments with which they are risk managed. All amounts are recorded in
principal transactions revenue in the Consolidated Statements of Income for the year ended December
31, 2009.
| Year ended December 31, 2009 | Gains/(losses) recorded in principal | |||
| (in millions) | transactions revenue | |||
|
Type of instrument
|
||||
|
Interest rate
|
$ | 4,375 | ||
|
Credit
|
5,022 | |||
|
Foreign exchange
|
4,053 | |||
|
Equity
|
1,475 | |||
|
Commodity
|
1,329 | |||
|
Total
|
$ | 16,254 | ||
Credit risk, liquidity risk and credit-related contingent features
In addition to the specific market risks introduced by each derivative contract type, derivatives
expose JPMorgan Chase to credit risk – the risk that derivative counterparties may fail to meet
their payment obligations under the derivative contracts and the collateral, if any, held by the
Firm proves to be of insufficient value to cover the payment obligation. It is the policy of
JPMorgan Chase to enter into legally enforceable master netting agreements as well as to actively
pursue the use of collateral agreements to mitigate derivative counterparty credit risk. The amount
of derivative receivables reported on the Consolidated Balance Sheets is the fair value of the
derivative contracts after giving effect to legally enforceable master netting agreements and cash
collateral held by the Firm. These amounts represent the cost to the Firm to replace the contracts
at then-current market rates should the counterparty default.
While derivative receivables expose the Firm to credit risk, derivative payables expose the Firm to
liquidity risk, as the derivative contracts typically require the Firm to post cash or securities
collateral with counterparties as the mark-to-market (“MTM”) moves in the counterparties’ favor, or
upon specified downgrades in the Firm’s and its subsidiaries’ respective credit ratings. At
December 31, 2009, the impact of a single-notch and six-notch ratings downgrade to JPMorgan Chase &
Co. and its subsidiaries, primarily JPMorgan Chase Bank, N.A., would have required $1.2
billion and $3.6 billion, respectively, of additional collateral to be posted by the Firm. Certain
derivative contracts also provide for termination of the contract, generally upon a downgrade of
either the Firm or the counterparty, at the fair value of the derivative contracts. At December 31,
2009, the impact of single-notch and six-notch ratings downgrades to JPMorgan Chase & Co. and its
subsidiaries, primarily JPMorgan Chase Bank, N.A., related to contracts with termination triggers
would have required the Firm to settle trades with a fair value of $260 million and $4.7 billion,
respectively. The aggregate fair value of net derivative payables that contain contingent
collateral or termination features triggered upon a downgrade was $22.6 billion at December 31,
2009, for which the Firm has posted collateral of $22.3 billion in the normal course of business.
| 172 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The following table shows the current credit risk of derivative receivables after netting
adjustments, and the current liquidity risk of derivative payables after netting adjustments, as of
December 31, 2009.
| December 31, 2009 (in millions) | Derivative receivables | Derivative payables | ||||||
|
Gross derivative fair value
|
$ | 1,565,518 | $ | 1,519,183 | ||||
|
Netting
adjustment – offsetting receivables/payables
|
(1,419,840 | ) | (1,419,840 | ) | ||||
|
Netting
adjustment – cash collateral received/paid
|
(65,468 | ) | (39,218 | ) | ||||
|
Carrying value on Consolidated Balance Sheets
|
$ | 80,210 | $ | 60,125 | ||||
In
addition to the collateral amounts reflected in the table above, at
December 31, 2009, the Firm had received and posted liquid securities collateral
in the amount of $15.5 billion and $11.7 billion, respectively. The Firm also receives and delivers collateral at the initiation
of derivative transactions, which is available as security against potential exposure that could
arise should the fair value of the transactions move in the Firm’s or client’s favor, respectively.
Furthermore, the Firm and its counterparties hold collateral related to contracts that have a
non-daily call frequency for collateral to be posted, and collateral that the Firm or a
counterparty has agreed to return but has not yet settled as of the reporting date. At December 31,
2009, the Firm had received $16.9 billion and delivered $5.8 billion of such additional collateral.
These amounts were not netted against the derivative receivables and payables in the table above,
because, at an individual counterparty level, the collateral exceeded the fair value exposure at
December 31, 2009.
Credit derivatives
Credit derivatives are financial instruments whose value is derived from the credit risk associated
with the debt of a third-party issuer (the reference entity) and which allow one party (the
protection purchaser) to transfer that risk to another party (the protection seller). Credit
derivatives expose the protection purchaser to the creditworthiness of the protection seller, as
the protection seller is required to make payments under the contract when the reference entity
experiences a credit event, such as a bankruptcy, a failure to pay its obligation or a
restructuring. The seller of credit protection receives a premium for providing protection but has
the risk that the underlying instrument referenced in the contract will be subject to a credit
event.
The Firm is both a purchaser and seller of protection in the credit derivatives market and uses
these derivatives for two primary purposes. First, in its capacity as a market-maker in the
dealer/client business, the Firm actively risk manages a portfolio of credit derivatives by
purchasing and selling credit protection, predominantly on corporate debt obligations, to meet the
needs of customers. As a seller of protection, the Firm’s exposure to a given reference entity may
be offset partially, or entirely, with a contract to purchase protection from another counterparty
on the same or similar reference entity. Second, the Firm uses credit derivatives to mitigate
credit risk associated with its overall derivative receivables and traditional commercial credit
lending exposures (loans and unfunded commitments) as well as to manage its exposure to residential
and commercial mortgages. See Note 3 on pages 148—165 of this Annual Report for further
information on the Firm’s mortgage-related exposures. In accomplishing the above, the Firm
uses
different types of credit derivatives. Following is a summary of various types of credit
derivatives.
Credit default swaps
Credit derivatives may reference the credit of either a single reference entity (“single-name”) or
a broad-based index, as described further below. The
Firm purchases and sells protection on both single- name and index-reference obligations.
Single-name CDS and index CDS contracts are both OTC derivative contracts. Single-name CDS are used
to manage the default risk of a single reference entity, while CDS index are used to manage credit
risk associated with the broader credit markets or credit market segments. Like the S&P 500 and
other market indices, a CDS index is comprised of a portfolio of CDS across many reference
entities. New series of CDS indices are established approximately every six months with a new
underlying portfolio of reference entities to reflect changes in the credit markets. If one of the
reference entities in the index experiences a credit event, then the reference entity that
defaulted is removed from the index. CDS can also be referenced against specific portfolios of
reference names or against customized exposure levels based on specific client demands: for
example, to provide protection against the first $1 million of realized credit losses in a $10
million portfolio of exposure. Such structures are commonly known as tranche CDS.
For both single-name CDS contracts and index CDS, upon the occurrence of a credit event, under the
terms of a CDS contract neither party to the CDS contract has recourse to the reference entity. The
protection purchaser has recourse to the protection seller for the difference between the face
value of the CDS contract and the fair value of the reference obligation at the time of settling
the credit derivative contract, also known as the recovery value. The protection purchaser does not
need to hold the debt instrument of the underlying reference entity in order to receive amounts due
under the CDS contract when a credit event occurs.
Credit-linked notes
A credit linked note (“CLN”) is a funded credit derivative where the issuer of the CLN purchases
credit protection on a referenced entity from the note investor. Under the contract, the investor
pays the issuer par value of the note at the inception of the transaction, and in return, the
issuer pays periodic payments to the investor, based on the credit risk of the referenced entity.
The issuer also repays the investor the par value of the note at maturity unless the reference
entity experiences a specified credit event. In that event, the issuer is not obligated to repay
the par value of the note, but rather, the issuer pays the investor the difference between the par
value of the
| JPMorgan Chase & Co. / 2009 Annual Report | 173 |
Table of Contents
Notes to consolidated financial statements
note and the fair value of the defaulted reference obligation at the time of
settlement. Neither party to the CLN has recourse to the defaulting reference entity. For a further
discussion of CLNs, see Note 16 on pages 206–214 of this Annual Report.
The following table presents a summary of the notional amounts of credit derivatives and
credit-linked notes the Firm sold and purchased as of December 31, 2009 and 2008. Upon a credit
event, the Firm as seller of protection would typically pay out only a percentage of the full
notional amount of net protection sold, as the amount actually required to be paid on the contracts
takes into account the recovery value of the reference obligation at the time
of settlement. The
Firm manages the credit risk on contracts to sell protection by purchasing protection with
identical or similar underlying reference entities. As such, other purchased protection referenced
in the following table includes credit derivatives bought on related, but not identical, reference
positions; these include indices, and portfolio coverage. The Firm does not use notional amounts as
the primary measure of risk management for credit derivatives, because notional amounts do not take
into account the probability of the occurrence of a credit event, recovery value of the reference
obligation, or related cash instruments and economic hedges.
Total credit derivatives and credit-linked notes
| Maximum payout/Notional amount | ||||||||||||||||
| December 31, 2009 | Protection purchased with | Other protection | ||||||||||||||
| (in millions) | Protection sold | identical underlyings (b) | Net protection (sold)/purchased (c) | purchased (d) | ||||||||||||
|
Credit derivatives
|
||||||||||||||||
|
Credit default swaps
|
$ | (2,937,442 | ) | $ | 2,978,044 | $ | 40,602 | $ | 28,064 | |||||||
|
Other credit derivatives
(a)
|
(10,575 | ) | 9,290 | (1,285 | ) | 30,473 | ||||||||||
|
Total credit derivatives
|
(2,948,017 | ) | 2,987,334 | 39,317 | 58,537 | |||||||||||
|
Credit-linked notes
|
(4,031 | ) | — | (4,031 | ) | 1,728 | ||||||||||
|
Total
|
$ | (2,952,048 | ) | $ | 2,987,334 | $ | 35,286 | $ | 60,265 | |||||||
| Maximum payout/Notional amount | ||||||||||||||||
| December 31, 2008 | Protection purchased with | Other protection | ||||||||||||||
| (in millions) | Protection sold | identical underlyings (b) | Net protection (sold)/purchased (c) | purchased (d) | ||||||||||||
|
Credit derivatives
|
||||||||||||||||
|
Credit default swaps
|
$ | (4,099,141 | ) | $ | 3,973,616 | $ | (125,525 | ) | $ | 288,751 | ||||||
|
Other credit derivatives
(a)
|
(4,026 | ) | — | (4,026 | ) | 22,344 | ||||||||||
|
Total credit derivatives
|
(4,103,167 | ) | 3,973,616 | (129,551 | ) | 311,095 | ||||||||||
|
Credit-linked notes
|
(4,080 | ) | — | (4,080 | ) | 2,373 | ||||||||||
|
Total
|
$ | (4,107,247 | ) | $ | 3,973,616 | $ | (133,631 | ) | $ | 313,468 | ||||||
| (a) | Primarily consists of total return swaps and credit default swap options. | |
| (b) | Represents the total notional amount of protection purchased where the underlying reference instrument is identical to the reference instrument on protection sold; the notional amount of protection purchased for each individual identical underlying reference instrument may be greater or lower than the notional amount of protection sold. | |
| (c) | Does not take into account the fair value of the reference obligation at the time of settlement, which would generally reduce the amount the seller of protection pays to the buyer of protection in determining settlement value. | |
| (d) | Represents single-name and index CDS protection the Firm purchased. |
The following table summarizes the notional and fair value amounts of credit derivatives and
credit-linked notes as of December 31, 2009, and 2008, where JPMorgan Chase is the seller of
protection. The maturity profile is based on the remaining contractual maturity of the credit
derivative contracts. The ratings profile is based on the rating of the reference entity on which
the credit derivative contract is based. The ratings and maturity profile of protection purchased
are comparable to the profile reflected below.
Protection
sold – credit derivatives and credit-linked notes ratings
(a)
/maturity profile
| Total | ||||||||||||||||||||
| December 31, 2009 (in millions) | <1 year | 1–5 years | >5 years | notional amount | Fair value (b) | |||||||||||||||
|
Risk rating of reference entity
|
||||||||||||||||||||
|
Investment-grade
(AAA/Aaa to BBB-/Baa3)
|
$ | (215,580 | ) | $ | (1,140,133 | ) | $ | (367,015 | ) | $ | (1,722,728 | ) | $ | (16,607 | ) | |||||
|
Noninvestment-grade
(BB+/Ba1 and below)
|
(150,122 | ) | (806,139 | ) | (273,059 | ) | (1,229,320 | ) | (90,410 | ) | ||||||||||
|
Total
|
$ | (365,702 | ) | $ | (1,946,272 | ) | $ | (640,074 | ) | $ | (2,952,048 | ) | $ | (107,017 | ) | |||||
| 174 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| Total | ||||||||||||||||||||
| December 31, 2008 (in millions) | <1 year | 1–5 years | >5 years | notional amount | Fair value (b) | |||||||||||||||
|
Risk rating of reference entity
|
||||||||||||||||||||
|
Investment-grade
(AAA/Aaa to
BBB-/Baa3)
|
$ | (179,379 | ) | $ | (1,743,283 | ) | $ | (701,775 | ) | $ | (2,624,437 | ) | $ | (222,318 | ) | |||||
|
Noninvestment-grade
(BB+/Ba1 and
below)
|
(118,734 | ) | (950,619 | ) | (413,457 | ) | (1,482,810 | ) | (253,326 | ) | ||||||||||
|
Total
|
$ | (298,113 | ) | $ | (2,693,902 | ) | $ | (1,115,232 | ) | $ | (4,107,247 | ) | $ | (475,644 | ) | |||||
| (a) | Ratings scale is based on the Firm’s internal ratings, which generally correspond to ratings defined by S&P and Moody’s. | |
| (b) | Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral held by the Firm. |
Investment banking fees
This revenue category includes advisory and equity and debt underwriting fees. Advisory fees are
recognized as revenue when the related services have been performed. Underwriting fees are
recognized as revenue when the Firm has rendered all services to the issuer and is entitled to
collect the fee from the issuer, as long as there are no other contingencies associated with the
fee (e.g., the fee is not contingent upon the customer obtaining financing). Underwriting fees are
net of syndicate expense; 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) | 2009 | 2008 | 2007 | |||||||||
|
Underwriting:
|
||||||||||||
|
Equity
|
$ | 2,487 | $ | 1,477 | $ | 1,713 | ||||||
|
Debt
|
2,739 | 2,094 | 2,650 | |||||||||
|
Total underwriting
|
5,226 | 3,571 | 4,363 | |||||||||
|
Advisory
|
1,861 | 1,955 | 2,272 | |||||||||
|
Total investment banking fees
|
$ | 7,087 | $ | 5,526 | $ | 6,635 | ||||||
Principal transactions
Principal transactions revenue consists of realized and unrealized gains and losses from trading
activities (including physical commodities inventories that are accounted for at the lower of cost
or fair value), changes in fair value associated with financial instruments held by IB for which
the fair value option was elected, and loans held-for-sale within the wholesale lines of business.
For loans measured at fair value under the fair value option, origination costs are recognized in
the associated expense category as incurred. Principal transactions revenue also includes private
equity gains and losses.
The following table presents principal transactions revenue.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Trading revenue
|
$ | 9,870 | $ | (9,791 | ) | $ | 4,736 | |||||
|
Private equity gains/(losses)
(a)
|
(74 | ) | (908 | ) | 4,279 | |||||||
|
Principal transactions
|
$ | 9,796 | $ | (10,699 | ) | $ | 9,015 | |||||
| (a) | Includes revenue on private equity investments held in the Private Equity business within Corporate/Private Equity, and those held in other business segments. |
Lending- and 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,
brokerage services, insurance premiums and commissions, and other products. These fees are
recognized over the period in which the related service is provided. Performance-based fees, which
are earned based on exceeding certain benchmarks or other performance targets, are accrued and
recognized at the end of the performance period in which the target is met.
The following table presents the components of asset management, administration and commissions.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Asset management:
|
||||||||||||
|
Investment management fees
|
$ | 4,997 | $ | 5,562 | $ | 6,364 | ||||||
|
All other asset management fees
|
356 | 432 | 639 | |||||||||
|
Total asset management fees
|
5,353 | 5,994 | 7,003 | |||||||||
|
Total administration fees
(a)
|
1,927 | 2,452 | 2,401 | |||||||||
|
Commission and other fees:
|
||||||||||||
|
Brokerage commissions
|
2,904 | 3,141 | 2,702 | |||||||||
|
All other commissions and fees
|
2,356 | 2,356 | 2,250 | |||||||||
|
Total commissions and fees
|
5,260 | 5,497 | 4,952 | |||||||||
|
Total asset management,
administration and
commissions
|
$ | 12,540 | $ | 13,943 | $ | 14,356 | ||||||
| (a) | Includes fees for custody, securities lending, funds services and securities clearance. |
Mortgage fees and related income
This revenue category primarily reflects RFS’s mortgage banking revenue, including: fees and income
derived from mortgages originated with the intent to sell; mortgage
sales and servicing including losses related to the repurchase of
previously sold loans; the impact
of risk management activities associated with the mortgage pipeline, warehouse loans and MSRs; and
revenue related to any residual interests held from mortgage securitizations. This revenue category
also includes gains and losses on sales and lower of cost or fair value adjustments for mortgage
loans held-for-sale, as well as changes in fair value for mortgage loans originated with the intent
to sell and measured at fair value under the fair value option. For loans measured at fair value
under the fair value option, origination costs are
| JPMorgan Chase & Co. / 2009 Annual Report | 175 |
Table of Contents
Notes to consolidated financial statements
recognized in the associated expense category as
incurred. Costs to originate loans held-for-sale and accounted for at the lower of cost or fair
value are deferred and recognized as a component of the gain or loss on sale. Net interest income
from mortgage loans, and securities gains and losses on AFS securities used in mortgage-related
risk management activities, are recorded in interest income and securities gains/(losses),
respectively. For a further discussion of MSRs, see Note 17 on pages 214-217 of this Annual Report.
Credit card income
This revenue category includes interchange income from credit and debit cards and servicing fees earned in connection with securitization activities. Volume-related payments to partners and expense for rewards programs are netted against interchange income; expense related to rewards programs are recorded when the rewards are earned by the customer. Other fee revenue is recognized as earned, except for annual fees, which are deferred and recognized on a straight-line basis over the 12-month period to which they pertain. Direct loan origination costs are also deferred and recognized over a 12-month period. In addition, due to the consolidation of Chase Paymentech Solutions in the fourth quarter of 2008, this category now includes net fees earned for processing card transactions for merchants.
This revenue category includes interchange income from credit and debit cards and servicing fees earned in connection with securitization activities. Volume-related payments to partners and expense for rewards programs are netted against interchange income; expense related to rewards programs are recorded when the rewards are earned by the customer. Other fee revenue is recognized as earned, except for annual fees, which are deferred and recognized on a straight-line basis over the 12-month period to which they pertain. Direct loan origination costs are also deferred and recognized over a 12-month period. In addition, due to the consolidation of Chase Paymentech Solutions in the fourth quarter of 2008, this category now includes net fees earned for processing card transactions for merchants.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity organizations and co-brand partners, which grant the Firm exclusive rights to market to the members or customers of such organizations and partners. These organizations and partners endorse the credit card programs and provide their mailing lists to the Firm, and they may also conduct marketing activities and provide awards under the various credit card programs. The terms of these agreements generally range from three to ten years. The economic incentives the Firm pays to the endorsing organizations and partners typically include payments based on new account originations, charge volumes, and the cost of the endorsing organizations’ or partners’ marketing activities and awards.
The Firm has contractual agreements with numerous affinity organizations and co-brand partners, which grant the Firm exclusive rights to market to the members or customers of such organizations and partners. These organizations and partners endorse the credit card programs and provide their mailing lists to the Firm, and they may also conduct marketing activities and provide awards under the various credit card programs. The terms of these agreements generally range from three to ten years. The economic incentives the Firm pays to the endorsing organizations and partners typically include payments based on new account originations, charge volumes, and the cost of the endorsing organizations’ or partners’ marketing activities and awards.
The Firm recognizes the payments made to the affinity organizations and co-brand partners based on
new account originations as direct loan origination costs. Payments based on charge volumes are
considered by the Firm as revenue sharing with the affinity organizations and co-brand partners,
which are deducted from interchange income as the related revenue is earned. Payments based on
marketing efforts undertaken by the endorsing organization or partner are expensed by the Firm as
incurred. These costs are recorded within noninterest expense.
Details of interest income and interest expense were as follows.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Interest income
(a)
|
||||||||||||
|
Loans
|
$ | 38,704 | $ | 38,347 | $ | 36,660 | ||||||
|
Securities
|
12,377 | 6,344 | 5,232 | |||||||||
|
Trading assets
|
12,098 | 17,236 | 17,041 | |||||||||
|
Federal funds sold and securities
purchased under resale agreements
|
1,750 | 5,983 | 6,497 | |||||||||
|
Securities borrowed
|
4 | 2,297 | 4,539 | |||||||||
|
Deposits with banks
|
938 | 1,916 | 1,418 | |||||||||
|
Other
assets
(b)
|
479 | 895 | — | |||||||||
|
Total interest income
|
66,350 | 73,018 | 71,387 | |||||||||
|
Interest expense
(a)
|
||||||||||||
|
Interest-bearing deposits
|
4,826 | 14,546 | 21,653 | |||||||||
|
Short-term
and other liabilities
(c)
|
3,845 | 10,933 | 16,142 | |||||||||
|
Long-term debt
|
6,309 | 8,355 | 6,606 | |||||||||
|
Beneficial interests issued by
consolidated VIEs
|
218 | 405 | 580 | |||||||||
|
Total interest expense
|
15,198 | 34,239 | 44,981 | |||||||||
|
Net interest income
|
$ | 51,152 | $ | 38,779 | $ | 26,406 | ||||||
|
Provision for credit losses
|
32,015 | 19,445 | 6,864 | |||||||||
|
Provision
for credit losses – accounting conformity
(d)
|
— | 1,534 | — | |||||||||
|
Total provision for credit losses
|
$ | 32,015 | $ | 20,979 | $ | 6,864 | ||||||
|
Net interest income after
provision for credit losses
|
$ | 19,137 | $ | 17,800 | $ | 19,542 | ||||||
| (a) | Interest income and interest expense include the current-period interest accruals for financial instruments measured at fair value, except for financial instruments containing embedded derivatives that would be separately accounted for in accordance with U.S. GAAP absent the fair value option election; for those instruments, all changes in fair value, including any interest elements, are reported in principal transactions revenue. | |
| (b) | Predominantly margin loans. | |
| (c) | Includes brokerage customer payables. | |
| (d) | 2008 includes an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations. |
The Firm’s defined benefit pension plans and its other postretirement employee benefit (“OPEB”)
plans are accounted for in accordance with U.S. GAAP for retirement benefits.
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 pay and interest credits to determine the benefits to be provided at retirement, based on eligible compensation and years of service. Employees begin to accrue plan benefits after completing one year of service, and benefits generally vest after three years of service. In November 2009, the Firm announced certain changes to the pay credit schedule and amount of eligible compensation recognized under the U.S. plan effective February 1, 2010. The Firm also offers benefits through defined benefit pension plans to qualifying employees in certain non-U.S. locations based on factors such as eligible compensation, age and/or years of service.
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 pay and interest credits to determine the benefits to be provided at retirement, based on eligible compensation and years of service. Employees begin to accrue plan benefits after completing one year of service, and benefits generally vest after three years of service. In November 2009, the Firm announced certain changes to the pay credit schedule and amount of eligible compensation recognized under the U.S. plan effective February 1, 2010. The Firm also offers benefits through defined benefit pension plans to qualifying employees in certain non-U.S. locations based on factors such as eligible compensation, age and/or years of service.
| 176 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
It is the Firm’s policy to fund the pension plans in amounts sufficient to meet the requirements
under applicable employee benefit and local tax laws. On January 15, 2009, and August 28, 2009, the
Firm made discretionary deductible cash contributions to its U.S. defined benefit pension plan of
$1.3 billion and $1.5 billion, respectively. The amount of potential 2010 contributions to the U.S.
defined benefit pension plans, if any, is not reasonably estimable at this time. The expected
amount of 2010 contributions to the non-U.S. defined benefit pension plans is $171 million of which
$148 million is contractually required.
JPMorgan Chase also has a number of defined benefit pension 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 pay and interest credits on compensation
amounts above the maximum stipulated by law under a qualified plan. The Firm announced that,
effective May 1, 2009, pay credits would no longer be provided on compensation amounts above the
maximum stipulated by law. The Excess Retirement Plan had an unfunded projected benefit obligation
in the amount of $267 million and $273 million, at December 31, 2009 and 2008, respectively.
Defined contribution plans
JPMorgan Chase offers several defined contribution plans in the U.S. and in certain non-U.S. locations, all of which are administered in accordance with applicable local laws and regulations. The most significant of these plans is The JPMorgan Chase 401(k) Savings Plan (the “401(k) Savings Plan”), which covers substantially all U.S. employees. The 401(k) Savings Plan allows employees to make pretax and Roth 401(k) contributions to tax-deferred investment portfolios. The JPMorgan Chase Common Stock Fund, which is an investment option under 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 one-year-of-service requirement and are immediately vested in the Firm’s contributions when made. Employees with total annual
JPMorgan Chase offers several defined contribution plans in the U.S. and in certain non-U.S. locations, all of which are administered in accordance with applicable local laws and regulations. The most significant of these plans is The JPMorgan Chase 401(k) Savings Plan (the “401(k) Savings Plan”), which covers substantially all U.S. employees. The 401(k) Savings Plan allows employees to make pretax and Roth 401(k) contributions to tax-deferred investment portfolios. The JPMorgan Chase Common Stock Fund, which is an investment option under 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 one-year-of-service requirement and are immediately vested in the Firm’s contributions when made. Employees with total annual
cash compensation of $250,000 or more are not eligible for matching contributions. The
401(k) Savings Plan also permits discretionary profit-sharing contributions by participating
companies for certain employees, subject to a specified vesting schedule.
The Firm announced that, effective May 1, 2009, for employees earning $50,000 or more per year,
matching contributions to the 401(k) Savings Plan will be made at the discretion of the Firm’s
management, depending on the Firm’s earnings for the year. Additionally, the Firm amended the
matching contribution feature to provide that: (i) matching contributions, if any, will be
calculated and credited on an annual basis following the end of the calendar year; and (ii)
matching contributions will vest after three years of service for employees hired on or after May
1, 2009. The Firm announced in November 2009 that, for 2009, it will contribute the full matching
contributions for all eligible employees earning less than $250,000 based on their contributions to the 401(k) Savings Plan, but not
to exceed 5% of their eligible compensation (e.g., base pay).
Effective August 10, 2009, JPMorgan Chase Bank, N.A. became the sponsor of the WaMu Savings Plan.
OPEB plans
JPMorgan Chase offers postretirement medical and life insurance benefits to certain retirees and postretirement medical benefits to qualifying U.S. employees. These benefits vary with length of service and date of hire and provide for limits on the Firm’s share of covered medical benefits. The medical and life insurance benefits are both contributory. Postretirement medical benefits also are offered to qualifying U.K. employees.
JPMorgan Chase offers postretirement medical and life insurance benefits to certain retirees and postretirement medical benefits to qualifying U.S. employees. These benefits vary with length of service and date of hire and provide for limits on the Firm’s share of covered medical benefits. The medical and life insurance benefits are both contributory. Postretirement medical benefits also are offered to qualifying U.K. employees.
JPMorgan Chase’s U.S. OPEB obligation is 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 its net postretirement benefit claim payments and related administrative expense. The
U.K. OPEB plan is unfunded.
| JPMorgan Chase & Co. / 2009 Annual Report | 177 |
Table of Contents
Notes to consolidated financial statements
The following table presents the changes in benefit obligations and plan assets and funded status
amounts reported on the Consolidated Balance Sheets for the Firm’s U.S. and non-U.S. defined
benefit pension and OPEB plans.
| Defined benefit pension plans | ||||||||||||||||||||||||
| As of or for the year ended December 31, | U.S. | Non-U.S. | OPEB plans (f) | |||||||||||||||||||||
| (in millions) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
|
Change in benefit obligation
|
||||||||||||||||||||||||
|
Benefit obligation, beginning of year
|
$ | (7,796 | ) | $ | (7,556 | ) | $ | (2,007 | ) | $ | (2,743 | ) | $ | (1,095 | ) | $ | (1,204 | ) | ||||||
|
Benefits earned during the year
|
(313 | ) | (278 | ) | (30 | ) | (29 | ) | (3 | ) | (5 | ) | ||||||||||||
|
Interest cost on benefit obligations
|
(514 | ) | (488 | ) | (122 | ) | (142 | ) | (64 | ) | (74 | ) | ||||||||||||
|
Plan amendments
|
384 | — | 1 | — | — | — | ||||||||||||||||||
|
Business combinations
|
(4) | (b) | — | — | — | (40) | (b) | (1) | (b) | |||||||||||||||
|
Employee contributions
|
NA | NA | (3 | ) | (3 | ) | (64 | ) | (61 | ) | ||||||||||||||
|
Net gain/(loss)
|
(408 | ) | (147 | ) | (287 | ) | 214 | 101 | 99 | |||||||||||||||
|
Benefits paid
|
674 | 673 | 95 | 105 | 160 | 154 | ||||||||||||||||||
|
Expected Medicare Part D subsidy receipts
|
NA | NA | NA | NA | (9 | ) | (10 | ) | ||||||||||||||||
|
Curtailments
|
— | — | 1 | — | (7 | ) | (6 | ) | ||||||||||||||||
|
Settlements
|
— | — | 4 | — | — | — | ||||||||||||||||||
|
Special termination benefits
|
— | — | (1 | ) | (3 | ) | — | — | ||||||||||||||||
|
Foreign exchange impact and other
|
— | — | (187 | ) | 594 | (4 | ) | 13 | ||||||||||||||||
|
Benefit obligation, end of year
|
$ | (7,977 | ) | $ | (7,796 | ) | $ | (2,536 | ) | $ | (2,007 | ) | $ | (1,025 | ) | $ | (1,095 | ) | ||||||
|
Change in plan assets
|
||||||||||||||||||||||||
|
Fair value of plan assets, beginning of year
|
$ | 6,948 | $ | 9,960 | $ | 2,008 | $ | 2,933 | $ | 1,126 | $ | 1,406 | ||||||||||||
|
Actual return on plan assets
|
1,145 | (2,377 | ) | 218 | (298 | ) | 172 | (246 | ) | |||||||||||||||
|
Firm contributions
|
2,799 | 38 | 115 | 88 | 2 | 3 | ||||||||||||||||||
|
Employee contributions
|
— | — | 3 | 3 | — | — | ||||||||||||||||||
|
Benefits paid
|
(674 | ) | (673 | ) | (95 | ) | (105 | ) | (31 | ) | (37 | ) | ||||||||||||
|
Settlements
|
— | — | (4 | ) | — | — | — | |||||||||||||||||
|
Foreign exchange impact and other
|
— | — | 187 | (613 | ) | — | — | |||||||||||||||||
|
Fair value of plan assets, end of year
|
$ | 10,218 | (c)(d) | $ | 6,948 | (c) | $ | 2,432 | (d) | $ | 2,008 | $ | 1,269 | $ | 1,126 | |||||||||
|
Funded/(unfunded) status
(a)
|
$ | 2,241 | (e) | $ | (848 | ) (e) | $ | (104 | ) | $ | 1 | $ | 244 | $ | 31 | (e) | ||||||||
|
Accumulated benefit obligation, end of year
|
$ | (7,964 | ) | $ | (7,413 | ) | $ | (2,510 | ) | $ | (1,977 | ) | NA | NA | ||||||||||
| (a) | Represents overfunded plans with an aggregate balance of $3.0 billion and $122 million at December 31, 2009 and 2008, respectively, and underfunded plans with an aggregate balance of $623 million and $938 million at December 31, 2009 and 2008, respectively. | |
| (b) | Represents change resulting from the Washington Mutual plan in 2009 and the Bear Stearns plan in 2008. | |
| (c) | At December 31, 2009 and 2008, approximately $332 million and $313 million, respectively, of U.S. plan assets included participation rights under participating annuity contracts. | |
| (d) | At December 31, 2009, includes accrued receivables of $82 million and $8 million for U.S. plans and non-U.S. plans, respectively, and accrued liabilities of $265 million and $30 million for U.S. plans and non-U.S. plans, respectively, which are not measured at fair value. | |
| (e) | Does not include any amounts attributable to the Washington Mutual Qualified Pension plan in 2009 and the Washington Mutual Pension and OPEB plans in 2008. The disposition of those plans was not determinable. | |
| (f) | Includes an unfunded accumulated postretirement benefit obligation of $29 million and $32 million at December 31, 2009 and 2008, respectively, for the U.K. plan. |
Gains and losses
For the Firm’s defined benefit pension plans, fair value is used to determine the expected return
on plan assets. For the Firm’s OPEB plans, a calculated value that recognizes changes in fair value
over a five-year period is used to determine the expected return on plan assets. Amortization of
net gains and losses is included in annual net periodic benefit cost if, as of the beginning of the
year, the net gain or loss exceeds 10% of the greater of the projected benefit
obligation or the
fair value of the plan assets. Any excess, as well as prior service costs, are amortized over the
average future service period of defined benefit pension plan participants, which for the U.S.
defined benefit pension plan is currently nine years. For OPEB plans, any excess net gains and
losses also are amortized over the average future service period, which is currently five years;
however, prior service costs are amortized over the
average years of service remaining to full eligibility age, which is currently four years.
The following table presents pretax pension and OPEB amounts recorded in AOCI.
| Defined benefit pension plans | ||||||||||||||||||||||||
| December 31, | U.S. | Non-U.S. | OPEB plans | |||||||||||||||||||||
| (in millions) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
|
Net gain/(loss)
|
$ | (3,039 | ) | $ | (3,493 | ) | $ | (666 | ) | $ | (492 | ) | $ | (171 | ) | $ | (349 | ) | ||||||
|
Prior service credit/(cost)
|
364 | (26 | ) | 3 | 2 | 22 | 40 | |||||||||||||||||
|
Accumulated other comprehensive income/
(loss), pretax, end of year
|
$ | (2,675 | ) | $ | (3,519 | ) | $ | (663 | ) | $ | (490 | ) | $ | (149 | ) | $ | (309 | ) | ||||||
| 178 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The following table presents the components of net periodic benefit costs reported in the
Consolidated Statements of Income and other comprehensive income for the Firm’s U.S. and non-U.S.
defined benefit pension and OPEB plans.
| Defined benefit pension plans | ||||||||||||||||||||||||||||||||||||
| U.S. | Non-U.S. | OPEB plans | ||||||||||||||||||||||||||||||||||
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||||||||||||||||||||||
|
Benefits earned during the year
|
$ | 313 | $ | 278 | $ | 270 | $ | 28 | $ | 29 | $ | 36 | $ | 3 | $ | 5 | $ | 7 | ||||||||||||||||||
|
Interest cost on benefit obligations
|
514 | 488 | 468 | 122 | 142 | 144 | 65 | 74 | 74 | |||||||||||||||||||||||||||
|
Expected return on plan assets
|
(585 | ) | (719 | ) | (714 | ) | (115 | ) | (152 | ) | (153 | ) | (97 | ) | (98 | ) | (93 | ) | ||||||||||||||||||
|
Amortization:
|
||||||||||||||||||||||||||||||||||||
|
Net loss
|
304 | — | — | 44 | 25 | 55 | — | — | 14 | |||||||||||||||||||||||||||
|
Prior service cost/(credit)
|
4 | 4 | 5 | — | — | — | (14 | ) | (16 | ) | (16 | ) | ||||||||||||||||||||||||
|
Curtailment (gain)/loss
|
1 | 1 | — | — | — | — | 5 | 4 | 2 | |||||||||||||||||||||||||||
|
Settlement (gain)/loss
|
— | — | — | 1 | — | (1 | ) | — | — | — | ||||||||||||||||||||||||||
|
Special termination benefits
|
— | — | — | 1 | 3 | 1 | — | — | 1 | |||||||||||||||||||||||||||
|
Net periodic benefit cost
|
551 | 52 | 29 | 81 | 47 | 82 | (38 | ) | (31 | ) | (11 | ) | ||||||||||||||||||||||||
|
Other
defined benefit pension
plans
(a)
|
15 | 11 | 4 | 12 | 14 | 27 | NA | NA | NA | |||||||||||||||||||||||||||
|
Total defined benefit plans
|
566 | 63 | 33 | 93 | 61 | 109 | (38 | ) | (31 | ) | (11 | ) | ||||||||||||||||||||||||
|
Total defined contribution plans
|
359 | 263 | 268 | 226 | 286 | 219 | NA | NA | NA | |||||||||||||||||||||||||||
|
Total pension and OPEB cost included in
compensation expense
|
$ | 925 | $ | 326 | $ | 301 | $ | 319 | $ | 347 | $ | 328 | $ | (38 | ) | $ | (31 | ) | $ | (11 | ) | |||||||||||||||
|
Changes in plan assets and benefit
obligations recognized in other
comprehensive income
|
||||||||||||||||||||||||||||||||||||
|
Net (gain)/loss arising during the year
|
$ | (168 | ) | $ | 3,243 | $ | (533 | ) | $ | 183 | $ | 235 | $ | (176 | ) | $ | (176 | ) | $ | 248 | $ | (223 | ) | |||||||||||||
|
Prior service credit arising during the year
|
(384 | ) | — | — | (1 | ) | — | (2 | ) | — | — | — | ||||||||||||||||||||||||
|
Amortization of net loss
|
(304 | ) | — | — | (44 | ) | (27 | ) | (55 | ) | — | — | (14 | ) | ||||||||||||||||||||||
|
Amortization of prior service (cost)/credit
|
(6 | ) | (5 | ) | (5 | ) | — | — | — | 15 | 15 | 16 | ||||||||||||||||||||||||
|
Curtailment (gain)/loss
|
— | — | — | — | — | (5 | ) | 2 | 3 | 3 | ||||||||||||||||||||||||||
|
Settlement loss/(gain)
|
— | — | — | (1 | ) | — | 1 | — | — | — | ||||||||||||||||||||||||||
|
Foreign exchange impact and other
|
18 | — | — | 36 | (150 | ) | — | (1 | ) | 3 | — | |||||||||||||||||||||||||
|
Total recognized in other comprehensive income
|
(844 | ) | 3,238 | (538 | ) | 173 | 58 | (237 | ) | (160 | ) | 269 | (218 | ) | ||||||||||||||||||||||
|
Total recognized in net periodic benefit
cost and other comprehensive income
|
$ | (293 | ) | $ | 3,290 | $ | (509 | ) | $ | 254 | $ | 105 | $ | (155 | ) | $ | (198 | ) | $ | 238 | $ | (229 | ) | |||||||||||||
| (a) | Includes various defined benefit pension plans, which are individually immaterial. |
The estimated pretax amounts that will be amortized from AOCI into net periodic benefit cost in
2010 are as follows.
| Defined benefit pension plans | OPEB plans | |||||||||||||||
| Year ended December 31, 2010 (in millions) | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
|
Net loss
|
$ | 226 | $ | 58 | $ | — | $ | (1 | ) | |||||||
|
Prior service cost/(credit)
|
(43 | ) | — | (13 | ) | — | ||||||||||
|
Total
|
$ | 183 | $ | 58 | $ | (13 | ) | $ | (1 | ) | ||||||
The following table presents the actual rate of return on plan assets for the U.S. and non-U.S.
defined benefit pension and OPEB plans.
| U.S. | Non-U.S. | |||||||||||||||||||||||
| December 31, | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Actual rate of return:
|
||||||||||||||||||||||||
|
Defined benefit pension plans
|
13.78 | % | (25.17 | )% | 7.96 | % | 3.17-22.43 | % | (21.58)-5.06 | % | 0.06-7.51 | % | ||||||||||||
|
OPEB plans
|
15.93 | (17.89 | ) | 6.51 | NA | NA | NA | |||||||||||||||||
Plan assumptions
JPMorgan Chase’s expected long-term rate of return for U.S. defined benefit pension and OPEB plan assets is a blended average of the investment advisor’s projected long-term (10 years or more) returns for the various asset classes, weighted by the asset allocation. Returns on asset classes are developed using a forward-looking building-block approach and are not strictly based on historical returns. Equity returns are generally developed as the
JPMorgan Chase’s expected long-term rate of return for U.S. defined benefit pension and OPEB plan assets is a blended average of the investment advisor’s projected long-term (10 years or more) returns for the various asset classes, weighted by the asset allocation. Returns on asset classes are developed using a forward-looking building-block approach and are not strictly based on 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. Consideration is also given to current market
conditions and the short-term portfolio mix of each plan; as a
| JPMorgan Chase & Co. / 2009 Annual Report | 179 |
Table of Contents
Notes to consolidated financial statements
result, in 2009 the Firm generally
maintained the same expected return on assets as in the prior year.
For the U.K. defined benefit pension plans, which represent the most significant of the non-U.S.
defined benefit pension plans, procedures similar to those in the U.S. are used to develop
the expected long-term rate of return on defined benefit 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. The return on equities has been selected by reference to the yield on long-term U.K.
government bonds plus an equity risk premium above the risk-free rate. The return on “AA”-rated
long-term corporate bonds has been taken as the average yield on such bonds.
The discount rate used in determining the benefit obligation under the U.S. defined benefit pension
and OPEB plans was selected by reference to the yields on portfolios of bonds with maturity dates
and coupons that closely match each of the plan’s projected cash flows; such portfolios are derived
from a broad-based universe of high-quality corporate bonds as of the measurement date. In years in
which these hypothetical bond portfolios generate 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. The discount rate for the U.K. defined benefit pension and OPEB plans
represents a rate implied 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 postretirement benefit obligations, and the components of net periodic
benefit costs, for the Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans, as of and
for the periods indicated.
Weighted-average assumptions used to determine benefit obligations
| U.S. | Non-U.S | |||||||||||||||
| December 31, | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Discount rate:
|
||||||||||||||||
|
Defined benefit pension plans
|
6.00 | % | 6.65 | % | 2.00-5.70 | % | 2.00-6.20 | % | ||||||||
|
OPEB plans
|
6.00 | 6.70 | 5.70 | 6.20 | ||||||||||||
|
Rate of compensation increase
|
4.00 | 4.00 | 3.00-4.50 | 3.00-4.00 | ||||||||||||
|
Health care cost trend rate:
|
||||||||||||||||
|
Assumed for next year
|
7.75 | 8.50 | 5.40 | 7.00 | ||||||||||||
|
Ultimate
|
5.00 | 5.00 | 4.50 | 5.50 | ||||||||||||
|
Year when rate will reach ultimate
|
2014 | 2014 | 2014 | 2012 | ||||||||||||
Weighted-average assumptions used to determine net periodic benefit costs
| U.S. | Non-U.S. | |||||||||||||||||||||||
| Year ended December 31, | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Discount rate:
|
||||||||||||||||||||||||
|
Defined benefit pension plans
|
6.65 | % | 6.60 | % | 5.95 | % | 2.00-6.20 | % | 2.25-5.80 | % | 2.25-5.10 | % | ||||||||||||
|
OPEB plans
|
6.70 | 6.60 | 5.90 | 6.20 | 5.80 | 5.10 | ||||||||||||||||||
|
Expected long-term rate of return on
plan assets:
|
||||||||||||||||||||||||
|
Defined benefit pension plans
|
7.50 | 7.50 | 7.50 | 2.50-6.90 | 3.25-5.75 | 3.25-5.60 | ||||||||||||||||||
|
OPEB plans
|
7.00 | 7.00 | 7.00 | NA | NA | NA | ||||||||||||||||||
|
Rate of compensation increase
|
4.00 | 4.00 | 4.00 | 3.00-4.00 | 3.00-4.25 | 3.00-4.00 | ||||||||||||||||||
|
Health care cost trend rate:
|
||||||||||||||||||||||||
|
Assumed for next year
|
8.50 | 9.25 | 10.00 | 7.00 | 5.75 | 6.63 | ||||||||||||||||||
|
Ultimate
|
5.00 | 5.00 | 5.00 | 5.50 | 4.00 | 4.00 | ||||||||||||||||||
|
Year when rate will reach ultimate
|
2014 | 2014 | 2014 | 2012 | 2010 | 2010 | ||||||||||||||||||
The following table presents the effect of a one-percentage-point change in the assumed health
care cost trend rate on JPMorgan Chase’s total service and interest cost and accumulated
postretirement benefit obligation.
| 1-Percentage- | 1-Percentage- | |||||||
| Year ended December 31, 2009 | point | point | ||||||
| (in millions) | increase | decrease | ||||||
|
Effect on total service and interest cost
|
$ 2 | $ (2 | ) | |||||
|
Effect on accumulated postretirement benefit obligation
|
36 | (31 | ) | |||||
At December 31, 2009, the Firm decreased the discount rates used to determine its benefit
obligations for the U.S. defined benefit pension and OPEB plans in light of current market interest
rates, which will result in an increase in expense of approximately $31
million for 2010. The 2010
expected long-term rate of return on U.S. pension plan assets and U.S. OPEB plan assets remained at
7.5% and 7.0%, respectively
.
The health care benefit obligation trend assumption declined from 8.5%
in 2009 to 7.75% in 2010, declining to a rate of 5% in 2014. As of December 31, 2009, the interest
crediting rate assumption and the assumed rate of compensation increase remained at 5.25% and 4.0%,
respectively.
JPMorgan Chase’s U.S. defined benefit pension and OPEB plan expense is sensitive to the expected
long-term rate of return on plan assets and the discount rate. 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 $28 million in 2010 U.S. defined benefit pension and
OPEB
| 180 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
plan expense. A 25-basis point decline in the discount rate for the U.S. plans would result in
an increase in 2010 U.S. defined benefit pension and OPEB plan expense of approximately $12 million
and an increase in the related benefit obligations of approximately $170 million. A 25-basis point
decline in the discount rates for the non-U.S. plans would result in an increase in the 2010
non-U.S. defined benefit pension and OPEB plan expense of approximately $10 million. A 25-basis
point increase in the interest crediting rate for the U.S. defined benefit pension plan would
result in an increase in 2010 U.S. defined benefit pension expense of approximately $16 million and
an increase in the related projected benefit obligations of approximately $67 million.
Investment strategy and asset allocation
The Firm’s U.S. defined benefit pension plan assets are held in trust and are invested in a well-diversified portfolio of equities (including U.S. large and small capitalization and international equities), fixed income (e.g., corporate and government bonds, including U.S. Treasury inflation-indexed and high-yield securities), real estate, cash and cash equivalents, and alternative investments (e.g., hedge funds, private equity funds, and real estate funds). Non-U.S. defined benefit pension plan assets are held in various trusts and are also invested in well-diversified portfolios of equity, fixed income and other securities. Assets of the Firm’s COLI policies, which are used to fund partially the U.S. OPEB plan, are held in separate accounts with an insurance company and are invested in equity and fixed income index funds. As of December 31, 2009, assets held by the Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans do not include JPMorgan Chase common stock, except in connection with investments in third-party stock-index funds. In addition, the plans hold investments in funds that are sponsored or managed by affiliates of JPMorgan Chase in the amount of $1.6 billion and $1.1 billion for U.S. plans and $474 million and $354 million for non-U.S. plans, as of December 31, 2009 and 2008, respectively.
The Firm’s U.S. defined benefit pension plan assets are held in trust and are invested in a well-diversified portfolio of equities (including U.S. large and small capitalization and international equities), fixed income (e.g., corporate and government bonds, including U.S. Treasury inflation-indexed and high-yield securities), real estate, cash and cash equivalents, and alternative investments (e.g., hedge funds, private equity funds, and real estate funds). Non-U.S. defined benefit pension plan assets are held in various trusts and are also invested in well-diversified portfolios of equity, fixed income and other securities. Assets of the Firm’s COLI policies, which are used to fund partially the U.S. OPEB plan, are held in separate accounts with an insurance company and are invested in equity and fixed income index funds. As of December 31, 2009, assets held by the Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans do not include JPMorgan Chase common stock, except in connection with investments in third-party stock-index funds. In addition, the plans hold investments in funds that are sponsored or managed by affiliates of JPMorgan Chase in the amount of $1.6 billion and $1.1 billion for U.S. plans and $474 million and $354 million for non-U.S. plans, as of December 31, 2009 and 2008, respectively.
The investment policy for the Firm’s U.S. postretirement employee benefit plan assets is to
optimize the risk-return relationship as appropriate to the plan’s needs and goals using a global
portfolio of various asset classes diversified by market segment, economic sector, and issuer.
Periodically the Firm performs a comprehensive
analysis on the plan’s asset allocations,
incorporating projected asset and liability data, which focuses on the short-and long-term impact
of the plan’s asset allocation on cumulative pension expense, economic cost, present value of
contributions and funded status. Currently, approved asset allocation ranges are: U.S. equity 15 –
35%, international equity 15 – 25%, debt securities 10 –
30%, hedge funds 10 – 30%, real estate 5 –
20%, and private equity 5 – 20%. The plan does not manage to a specific target asset allocation,
but seeks to shift asset class allocations within these stated ranges. Plan assets are managed by a
combination of internal and external investment managers. Asset allocation decisions also
incorporate the economic outlook and anticipated implications of the macroeconomic environment on
the plan’s various asset classes and managers. Maintaining an appropriate level of liquidity, which
takes into consideration forecasted requirements for cash is a major consideration in the asset
allocation process. The Firm regularly reviews the asset allocations and all factors that
continuously impact portfolio changes to ensure the plan stays within these asset allocation
ranges. The asset allocations are rebalanced when deemed necessary.
The plan’s investments include financial instruments which are exposed to various risks such as
interest rate, market and credit risks. The plan’s exposure to a concentration of credit risk is
mitigated by the broad diversification of both U.S. and non-U.S. investment instruments.
Additionally, the investments in each of the common/collective trust funds and registered
investment companies are further diversified into various financial instruments.
For the U.K. defined benefit pension plans, which represent the most significant of the non-U.S.
defined benefit pension plans, the assets are invested to maximize returns subject to an
appropriate level of risk relative to the plan’s liabilities. In order to reduce the volatility in
returns relative to the plan’s liability profiles, the U.K. defined benefit pension plan’s largest
asset allocations are to debt securities of appropriate durations. Other assets are then invested
for capital appreciation, mainly equity securities, to provide long-term investment growth. The
plan’s asset allocations are reviewed on a regular basis.
The following table presents the weighted-average asset allocation of the fair values of total plan
assets at December 31 for the years indicated, as well as the respective approved range/target
allocation by asset category, for the Firm’s U.S. and non-U.S. defined benefit pension and OPEB
plans.
| Defined benefit pension plans | ||||||||||||||||||||||||||||||||||||
| U.S. | Non-U.S. | OPEB plans (c) | ||||||||||||||||||||||||||||||||||
| Target | % of plan assets | Target | % of plan assets | Target | % of plan assets | |||||||||||||||||||||||||||||||
| December 31, | Allocation | 2009 | 2008 | Allocation | 2009 | 2008 | Allocation | 2009 | 2008 | |||||||||||||||||||||||||||
|
Asset category
|
||||||||||||||||||||||||||||||||||||
|
Debt
securities
(a)
|
10-30 | % | 29 | % | 25 | % | 72 | % | 75 | % | 73 | % | 50 | % | 50 | % | 50 | % | ||||||||||||||||||
|
Equity securities
|
25-60 | 40 | 36 | 26 | 23 | 21 | 50 | 50 | 50 | |||||||||||||||||||||||||||
|
Real estate
|
5-20 | 4 | 7 | 1 | 1 | 1 | — | — | — | |||||||||||||||||||||||||||
|
Alternatives
(b)
|
15-50 | 27 | 32 | 1 | 1 | 5 | — | — | — | |||||||||||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
| (a) | Debt securities primarily include corporate debt, U.S. federal, state, local and non-U.S. government, and mortgage-backed securities. | |
| (b) | Alternatives primarily include limited partnerships. | |
| (c) | Represents the U.S. OPEB plan only, as the U.K. OPEB plan is unfunded. |
| JPMorgan Chase & Co. / 2009 Annual Report | 181 |
Table of Contents
Notes to consolidated financial statements
Fair value measurement of the plans’ assets and liabilities
The following details the instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, as described in Note 3 on pages 148-165 of this Annual Report.
The following details the instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, as described in Note 3 on pages 148-165 of this Annual Report.
Cash and cash equivalents
Cash and cash equivalents includes currency on hand, demand deposits with banks or other financial institutions, and any short-term, highly liquid investments readily convertible into cash (i.e., investments with original maturities of three months or less). Due to the highly liquid nature of these assets they are classified within level 1 of the valuation hierarchy.
Cash and cash equivalents includes currency on hand, demand deposits with banks or other financial institutions, and any short-term, highly liquid investments readily convertible into cash (i.e., investments with original maturities of three months or less). Due to the highly liquid nature of these assets they are classified within level 1 of the valuation hierarchy.
Equity securities
Common and preferred stocks are valued at the closing price reported on the major stock exchange on which the individual securities are traded and are generally classified within level 1 of the valuation hierarchy.
Common and preferred stocks are valued at the closing price reported on the major stock exchange on which the individual securities are traded and are generally classified within level 1 of the valuation hierarchy.
Common/collective trust funds
These investments are public investment fund vehicles valued based on the quoted NAV, and they are generally classified within level 2 of the valuation hierarchy.
These investments are public investment fund vehicles valued based on the quoted NAV, and they are generally classified within level 2 of the valuation hierarchy.
Limited partnerships
Limited partnerships include investments in hedge funds, private equity funds and real estate funds. Hedge funds are valued based on quoted NAV and are classified within level 2 or 3 of the valuation hierarchy depending on the level of liquidity and activity in the markets for each investment. Certain of these investments are subject to restrictions on redemption (such as initial lock-up periods, withdrawal limitations and illiquid assets) and are therefore classified within level 3 of the valuation hierarchy. The valuation of private equity investments and real estate funds require significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets and therefore, they are generally classified within level 3 of the valuation hierarchy.
Limited partnerships include investments in hedge funds, private equity funds and real estate funds. Hedge funds are valued based on quoted NAV and are classified within level 2 or 3 of the valuation hierarchy depending on the level of liquidity and activity in the markets for each investment. Certain of these investments are subject to restrictions on redemption (such as initial lock-up periods, withdrawal limitations and illiquid assets) and are therefore classified within level 3 of the valuation hierarchy. The valuation of private equity investments and real estate funds require significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets and therefore, they are generally classified within level 3 of the valuation hierarchy.
Corporate debt securities and U.S. federal, state, local and non-government debt securities
A limited number of these investments are valued at the closing price reported on the major exchange on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified within level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or
A limited number of these investments are valued at the closing price reported on the major exchange on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified within level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or
discounted cash flows.
Such securities are generally classified within level 2 of the valuation hierarchy.
Mortgage-backed securities
Mortgage-backed securities include both U.S. government agency and nonagency securities. U.S. government agency securities are valued based on quoted prices in active markets and are therefore classified in level 1 of the valuation hierarchy. Nonagency securities are primarily “AAA” rated residential and commercial mortgage-based securities valued using a combination of observed transaction prices, independent pricing services and relevant broker quotes. Consideration is given to the nature of the quotes and the relationships of recently evidenced market activity to the prices provided from independent pricing services. Such securities are generally classified within level 2 of the valuation hierarchy.
Mortgage-backed securities include both U.S. government agency and nonagency securities. U.S. government agency securities are valued based on quoted prices in active markets and are therefore classified in level 1 of the valuation hierarchy. Nonagency securities are primarily “AAA” rated residential and commercial mortgage-based securities valued using a combination of observed transaction prices, independent pricing services and relevant broker quotes. Consideration is given to the nature of the quotes and the relationships of recently evidenced market activity to the prices provided from independent pricing services. Such securities are generally classified within level 2 of the valuation hierarchy.
Derivative receivables and derivative payables
In the normal course of business, foreign exchange, credit derivative, interest rate and equity derivative contracts are used by the plans to minimize fluctuations in the value of plan assets caused by foreign exchange, credit, interest rate, and equity risks. These instruments may also be used in lieu of investing in cash instruments. These derivative instruments are primarily valued using internally developed models that use as their basis readily observable market parameters and are therefore classified within level 2 of the valuation hierarchy.
In the normal course of business, foreign exchange, credit derivative, interest rate and equity derivative contracts are used by the plans to minimize fluctuations in the value of plan assets caused by foreign exchange, credit, interest rate, and equity risks. These instruments may also be used in lieu of investing in cash instruments. These derivative instruments are primarily valued using internally developed models that use as their basis readily observable market parameters and are therefore classified within level 2 of the valuation hierarchy.
Other
Other consists of exchange traded funds (“ETFs”), mutual fund investments, and participating and non-participating annuity contracts (the “Annuity Contracts”). ETFs and mutual fund investments are valued using NAV. Those fund investments with a daily NAV that are validated by a sufficient level of observable activity (purchases and sales at NAV) are classified in level 1 of the valuation hierarchy. Where adjustments to the NAV are required, for example, for fund investments subject to restrictions on redemption (such as lock-up periods or withdrawal limitations), and/or observable activity for the fund investment is limited, fund investments are classified in level 2 or 3 of the valuation hierarchy. Annuity Contracts are valued at the amount by which the fair value of the assets held in the separate account exceeds the actuarially determined guaranteed benefit obligation covered under the Annuity Contracts. Annuity Contracts lack market mechanisms for transferring each individual policy and generally include restrictions on the timing of surrender; therefore, these investments are classified within level 3 of the valuation hierarchy.
Other consists of exchange traded funds (“ETFs”), mutual fund investments, and participating and non-participating annuity contracts (the “Annuity Contracts”). ETFs and mutual fund investments are valued using NAV. Those fund investments with a daily NAV that are validated by a sufficient level of observable activity (purchases and sales at NAV) are classified in level 1 of the valuation hierarchy. Where adjustments to the NAV are required, for example, for fund investments subject to restrictions on redemption (such as lock-up periods or withdrawal limitations), and/or observable activity for the fund investment is limited, fund investments are classified in level 2 or 3 of the valuation hierarchy. Annuity Contracts are valued at the amount by which the fair value of the assets held in the separate account exceeds the actuarially determined guaranteed benefit obligation covered under the Annuity Contracts. Annuity Contracts lack market mechanisms for transferring each individual policy and generally include restrictions on the timing of surrender; therefore, these investments are classified within level 3 of the valuation hierarchy.
| 182 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Pension and OPEB plan assets and liabilities measured at fair value
| U.S. defined benefit pension plans | Non-U.S. defined benefit pension plans | |||||||||||||||||||||||||||||||
| Quoted prices | Quoted | |||||||||||||||||||||||||||||||
| in active | Significant | Significant | prices in active | Significant | Significant | |||||||||||||||||||||||||||
| markets for | observable | unobservable | markets for | observable | unobservable | |||||||||||||||||||||||||||
| December 31, 2009 | identical assets | inputs | inputs | identical assets | inputs | inputs | ||||||||||||||||||||||||||
| (in millions) | (Level 1) | (Level 2) | (Level 3) | Total | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 71 | $ | — | $ | — | $ | 71 | $ | 27 | $ | — | $ | — | $ | 27 | ||||||||||||||||
|
Equity
securities
(a)
|
2,772 | 14 | — | 2,786 | 493 | 75 | — | 568 | ||||||||||||||||||||||||
|
Common/collective trust funds
(b)
|
— | 2,478 | — | 2,478 | 23 | 185 | — | 208 | ||||||||||||||||||||||||
|
Limited
partnerships
(c)
|
— | 912 | 1,697 | 2,609 | — | — | — | — | ||||||||||||||||||||||||
|
Corporate
debt securities
(d)
|
— | 941 | — | 941 | — | 685 | — | 685 | ||||||||||||||||||||||||
|
U.S. federal, state, local and
non-U.S. government debt
securities
|
— | 406 | — | 406 | — | 841 | — | 841 | ||||||||||||||||||||||||
|
Mortgage-backed
securities (e) |
169 | 54 | — | 223 | — | — | — | — | ||||||||||||||||||||||||
|
Derivative
receivables
(f)
|
— | 90 | — | 90 | — | 5 | — | 5 | ||||||||||||||||||||||||
|
Other
|
348 | 115 | 334 | 797 | 18 | 89 | 13 | 120 | ||||||||||||||||||||||||
|
Total assets at fair value
|
$ | 3,360 | $ | 5,010 | $ | 2,031 | $ | 10,401 | (g) | $ | 561 | $ | 1,880 | $ | 13 | $ | 2,454 | (g) | ||||||||||||||
|
Derivative payables
|
— | (76 | ) | — | (76 | ) | — | (30 | ) | — | (30 | ) | ||||||||||||||||||||
|
Total liabilities at fair value
|
$ | — | $ | (76 | ) | $ | — | $ | (76 | ) (h) | $ | — | $ | (30 | ) | $ | — | $ | (30 | ) | ||||||||||||
| (a) | This class is generally invested in 84% large cap funds and 16% small/mid cap funds. | |
| (b) | This class generally includes commingled funds that are issued for investment by qualified pension plans. They primarily include 39% short-term investment funds, 24% equity (index) and 15% international investments. | |
| (c) | This class includes U.S. and non-U.S. assets, which are invested as follows: 59% in hedge funds, 34% in private equity funds, and 7% in real estate funds. | |
| (d) | This class includes debt securities of U.S. and non-U.S. corporations. | |
| (e) | This class is generally invested in 72% debt securities issued by U.S. government agencies. | |
| (f) | This class primarily includes 80% foreign exchange contracts and 16% equity warrants. | |
| (g) | Excludes receivables for investments sold and dividends and interest receivables of $82 million and $8 million for U.S. and non-U.S., respectively. | |
| (h) | Excludes payables for investments purchased of $177 million and other liabilities of $12 million. |
The Firm’s OPEB plan is funded with COLI policies of $1.3 billion, which are classified in
level 3 of the valuation hierarchy.
Changes in level 3 fair value measurements using significant unobservable inputs
| Total realized/ | Transfers into and/or | Fair value, | ||||||||||||||||||
| Fair value, | (unrealized) | Purchases, sales | out of | December 31, | ||||||||||||||||
| January 1, 2009 | gains/(losses)(a) | and settlements | level 3 | 2009 | ||||||||||||||||
|
U.S. defined benefit pension plans
|
||||||||||||||||||||
|
Limited partnerships
|
$ | 1,537 | $ | 4 | $ | 171 | $ | (15 | ) | $ | 1,697 | |||||||||
|
Other
|
315 | 19 | — | — | 334 | |||||||||||||||
|
Total U.S. plans
|
1,852 | 23 | 171 | (15 | ) | 2,031 | ||||||||||||||
|
Non-U.S. defined benefit pension plans
|
||||||||||||||||||||
|
Other
|
14 | (1 | ) | — | — | 13 | ||||||||||||||
|
Total non-U.S. plans
|
$ | 14 | $ | (1 | ) | $ | — | $ | — | $ | 13 | |||||||||
|
OPEB plans
|
||||||||||||||||||||
|
COLI
|
1,126 | 172 | (29 | ) | — | 1,269 | ||||||||||||||
|
Total OPEB plans
|
$ | 1,126 | $ | 172 | $ | (29 | ) | $ | — | $ | 1,269 | |||||||||
| (a) | Total realized (unrealized) gains/(losses) is the change in unrealized gains or losses relating to assets held at December 31, 2009. |
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 OPEB medical and life insurance payments are net of expected retiree contributions.
The following table presents benefit payments expected to be paid, which include the effect of expected future service, for the years indicated. The OPEB medical and life insurance payments are net of expected retiree contributions.
| U.S. | Non-U.S. | |||||||||||||||
| Year ended December 31, | defined benefit | defined benefit | OPEB before | Medicare | ||||||||||||
| (in millions) | pension plans | pension plans | Medicare Part D subsidy | Part D subsidy | ||||||||||||
|
2010
|
$ | 974 | $ | 90 | $ | 103 | $ | 10 | ||||||||
|
2011
|
979 | 83 | 103 | 11 | ||||||||||||
|
2012
|
576 | 93 | 101 | 12 | ||||||||||||
|
2013
|
579 | 100 | 99 | 13 | ||||||||||||
|
2014
|
584 | 103 | 97 | 14 | ||||||||||||
|
Years 2015–2019
|
2,939 | 627 | 443 | 66 | ||||||||||||
| JPMorgan Chase & Co. / 2009 Annual Report | 183 |
Table of Contents
Notes to consolidated financial statements
Employee stock-based awards
In 2009, 2008, and 2007, JPMorgan Chase granted long-term stock-based awards to certain key employees under the 2005 Long-Term Incentive Plan (the “2005 Plan”). The 2005 Plan, plus prior Firm plans and plans assumed as the result of acquisitions, constitute the Firm’s stock-based incentive plans (collectively,“LTI Plan”). The 2005 Plan became effective on May 17, 2005, and was amended in May 2008. Under the terms of the amended 2005 plan, as of December 31, 2009, 199 million shares of common stock are available for issuance through May 2013. The amended 2005 Plan is the only active plan under which the Firm is currently granting stock-based incentive awards.
In 2009, 2008, and 2007, JPMorgan Chase granted long-term stock-based awards to certain key employees under the 2005 Long-Term Incentive Plan (the “2005 Plan”). The 2005 Plan, plus prior Firm plans and plans assumed as the result of acquisitions, constitute the Firm’s stock-based incentive plans (collectively,“LTI Plan”). The 2005 Plan became effective on May 17, 2005, and was amended in May 2008. Under the terms of the amended 2005 plan, as of December 31, 2009, 199 million shares of common stock are available for issuance through May 2013. The amended 2005 Plan is the only active plan under which the Firm is currently granting stock-based incentive awards.
Restricted stock units (“RSUs”) are awarded at no cost to the recipient upon their grant. RSUs are
generally granted annually and generally vest at a rate of 50% after two years and 50% after three
years and convert into shares of common stock at the vesting date. In addition, RSUs typically
include full-career eligibility provisions, which allow employees to continue to vest upon
voluntary termination, subject to post-employment and other restrictions based on age or
service-related requirements. All of these awards are subject to forfeiture until the vesting date.
An RSU entitles the recipient to receive cash payments equivalent to any dividends paid on the
underlying common stock during the period the RSU is outstanding and, as such, are considered
participating securities as discussed in Note 25 on page 224 of this Annual Report.
Under the LTI Plan, stock options and stock appreciation rights (“SARs”) have been granted with an
exercise price equal to the fair value of JPMorgan Chase’s common stock on the grant date. The Firm
typically awards SARs to certain key employees once per year, and it also periodically grants
discretionary stock-based incentive awards to individual employees, primarily in the form of both
employee stock options and SARs. The 2009, 2008 and 2007 grants of SARs to key employees vest
ratably over 5 years (i.e., 20% per year) and do not include any full-career eligibility
provisions. These awards generally expire 10 years after the grant date.
The Firm separately recognizes compensation expense for each tranche of each award as if it were a
separate award with its own vesting date. Generally, for each tranche granted, compensation expense
is recognized on a straight-line basis from the grant date until the vesting date of the respective
tranche, provided that the employees will not become full-career eligible during the vesting
period. For awards with full-career eligibility provisions, the Firm accrues the estimated value of
awards expected to be awarded to employees who will be retirement-eligible as of the grant date without giving consideration to the impact of
post-employment restrictions. For each tranche granted to employees who will become full-career
eligible during the vesting period, compensation expense is recognized on a straight-line basis
from the grant date until the earlier of the employee’s full-career eligibility date or the vesting
date of the respective tranche.
The Firm’s policy for issuing shares upon settlement of employee stock-based incentive awards is to
issue either new shares of common stock or treasury shares. During 2009, 2008 and 2007, the Firm
settled all of its employee stock-based awards by issuing treasury shares.
In January 2008, the Firm awarded to its Chairman and Chief Executive Officer up to 2 million SARs.
The terms of this award are distinct from, and more restrictive than, other equity grants regularly
awarded by the Firm. The SARs, which have a 10-year term, will become exercisable no earlier than
January 22, 2013, and have an exercise price of $39.83. The number of SARs that will become
exercisable (ranging from none to the full 2 million) and their exercise date or dates may be
determined by the Board of Directors based on an annual assessment of the performance of both the
CEO and JPMorgan Chase. The Firm recognizes this award ratably over an assumed five-year service
period, subject to a requirement to recognize changes in the fair value of the award through the
grant date. The Firm recognized $9 million and $1 million in compensation expense in 2009 and 2008,
respectively, for this award.
In connection with the Bear Stearns merger, 46 million Bear Stearns employee stock awards,
principally RSUs, capital appreciation plan units and stock options, were exchanged for equivalent
JPMorgan Chase awards using the merger exchange ratio of 0.21753. The fair value of these employee
stock awards was included in the Bear Stearns purchase price, since substantially all of the awards
were fully vested immediately after the merger date under provisions that provided for accelerated
vesting upon a change of control of Bear Stearns. However, Bear Stearns vested employee stock
options had no impact on the purchase price; since the employee stock options were significantly
out of the money at the merger date, the fair value of these awards was equal to zero upon their
conversion into JPMorgan Chase options.
The Firm also exchanged 6 million shares of its common stock for
27 million shares of Bear Stearns common stock held in an irrevocable grantor trust (the “RSU
Trust”), using the merger exchange ratio of 0.21753. The RSU Trust was established to hold common
stock underlying awards granted to selected employees and key executives under certain Bear Stearns
employee stock plans. The RSU Trust was consolidated on JPMorgan Chase’s Consolidated Balance
Sheets as of June 30, 2008, and the shares held in the RSU Trust were recorded in “Shares held in
RSU Trust,” which reduced stockholders’ equity, similar to the treatment for treasury stock. A
related obligation to issue stock under these employee stock plans is reported in capital surplus.
The issuance of shares held in the RSU Trust to employees has no effect on the Firm’s total
stockholders’ equity, net income or earnings per share. Shares held in the RSU Trust were
distributed in 2008 and 2009, with a majority of the shares in the RSU Trust distributed through
December 2009. There were 2 million shares in the RSU Trust as of December 31, 2009. The remaining
shares are expected to be distributed over the next three years.
| 184 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
RSU activity
Compensation expense for RSUs is measured based on the number of shares granted multiplied by the stock price at the grant date and is recognized in income as previously described. The following table summarizes JPMorgan Chase’s RSU activity for 2009.
Compensation expense for RSUs is measured based on the number of shares granted multiplied by the stock price at the grant date and is recognized in income as previously described. The following table summarizes JPMorgan Chase’s RSU activity for 2009.
| Weighted- | ||||||||
| Year ended December 31, 2009 | Number of | average grant | ||||||
| (in thousands, except weighted average data) | shares | date fair value | ||||||
|
Outstanding, January 1
|
148,044 | $ | 42.53 | |||||
|
Granted
|
131,145 | 19.68 | ||||||
|
Vested
|
(49,822 | ) | 43.34 | |||||
|
Forfeited
|
(8,102 | ) | 29.58 | |||||
|
Outstanding, December 31
|
221,265 | $ | 29.32 | |||||
The total fair value of shares that vested during the years ended December 31, 2009, 2008 and
2007, was $1.3 billion, $1.6 billion and
$1.5 billion, respectively.
Employee stock option and SARs activity
Compensation expense, which is measured at the grant date as the fair value of employee stock options and SARs, is recognized in net income as described above.
Compensation expense, which is measured at the grant date as the fair value of employee stock options and SARs, is recognized in net income as described above.
The following table summarizes JPMorgan Chase’s employee stock option and SARs activity for the
year ended December 31, 2009, including awards granted to key employees and awards granted in prior
years under broad-based plans.
|
Year ended December 31, 2009
(in thousands, except |
Number of | Weighted-average | Weighted-average remaining | Aggregate | ||||||||||||
| weighted-average data) | options/SARs | exercise price | contractual life (in years) | intrinsic value | ||||||||||||
|
Outstanding, January 1
|
283,369 | $ | 47.21 | |||||||||||||
|
Granted
|
24,821 | 20.83 | ||||||||||||||
|
Exercised
|
(17,406 | ) | 30.81 | |||||||||||||
|
Forfeited
|
(1,913 | ) | 39.85 | |||||||||||||
|
Canceled
|
(22,303 | ) | 47.88 | |||||||||||||
|
Outstanding, December 31
|
266,568 | $ | 45.83 | 3.4 | $1,311,897 | |||||||||||
|
Exercisable,
December 31
|
214,443 | 48.94 | 2.2 | 765,276 | ||||||||||||
The weighted-average grant date per share fair value of stock options and SARs granted during
the years ended December 31, 2009, 2008 and 2007, was $8.24, $10.36 and $13.38, respectively. The
total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007,
was $154 million, $391 million and $937 million, respectively.
Compensation expense
The Firm recognized noncash compensation expense related to its various employee stock-based incentive awards of $3.4 billion, $2.6 billion and $2.0 billion for the years ended December 31, 2009, 2008 and 2007, respectively, in its Consolidated Statements of Income. These amounts included an accrual for the estimated cost of stock awards to be granted to full-career eligible employees of $845 million, $409 million and $500 million for the years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, approximately $1.6 billion (pretax) of compensation cost related to unvested awards had not yet been charged to net income. That cost is expected to be amortized into compensation expense over a weighted-average period of 1.2 years. The Firm does not capitalize any compensation cost related to share-based compensation awards to employees.
The Firm recognized noncash compensation expense related to its various employee stock-based incentive awards of $3.4 billion, $2.6 billion and $2.0 billion for the years ended December 31, 2009, 2008 and 2007, respectively, in its Consolidated Statements of Income. These amounts included an accrual for the estimated cost of stock awards to be granted to full-career eligible employees of $845 million, $409 million and $500 million for the years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, approximately $1.6 billion (pretax) of compensation cost related to unvested awards had not yet been charged to net income. That cost is expected to be amortized into compensation expense over a weighted-average period of 1.2 years. The Firm does not capitalize any compensation cost related to share-based compensation awards to employees.
Cash flows and tax benefits
Income tax benefits related to stock-based incentive arrangements recognized in the Firm’s Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, were $1.3 billion, $1.1 billion and $810 million, respectively.
Income tax benefits related to stock-based incentive arrangements recognized in the Firm’s Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, were $1.3 billion, $1.1 billion and $810 million, respectively.
The following table sets forth the cash received from the exercise of stock options under all
stock-based incentive arrangements, and the actual income tax benefit realized related to tax
deductions from the exercise of the stock options.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Cash received for options exercised
|
$ | 437 | $ | 1,026 | $ | 2,023 | ||||||
|
Tax benefit realized
|
11 | 72 | 238 | |||||||||
In June 2007, the FASB ratified guidance which requires that realized tax benefits from
dividends or dividend equivalents paid on equity-classified share-based payment awards that are
charged to retained earnings be recorded as an increase to additional paid-in capital and included
in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment
awards. Prior to the issuance of this guidance, the Firm did not include these tax benefits as part
of this pool of excess tax benefits. The Firm adopted this guidance on January 1, 2008, and it did
not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
| JPMorgan Chase & Co. / 2009 Annual Report | 185 |
Table of Contents
Notes to consolidated financial statements
The following table presents the assumptions used to value employee stock options and SARs granted
during the years ended December 31, 2009, 2008 and 2007, under the Black-Scholes valuation model.
|
Valuation assumptions
Year ended December 31, |
2009 | 2008 | 2007 | |||||||||
|
Weighted-average annualized
valuation assumptions
|
||||||||||||
|
Risk-free interest rate
|
2.33 | % | 3.90 | % | 4.78 | % | ||||||
|
Expected
dividend yield
(a)
|
3.40 | 3.57 | 3.18 | |||||||||
|
Expected common stock price volatility
|
56 | 34 | 33 | |||||||||
|
Expected life (in years)
|
6.6 | 6.8 | 6.8 | |||||||||
| (a) | In 2009, the expected dividend yield was determined using historical dividend yields. |
The expected volatility assumption is derived from the implied volatility of JPMorgan Chase’s
publicly traded stock options. The expected life assumption is an estimate of the length of time
that an employee might hold an option or SAR before it is exercised or canceled, and the assumption
is based on the Firm’s historic experience.
The following table presents the components of noninterest expense.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Compensation expense
|
$ | 26,928 | $ | 22,746 | $ | 22,689 | ||||||
|
Noncompensation expense:
|
||||||||||||
|
Occupancy expense
|
3,666 | 3,038 | 2,608 | |||||||||
|
Technology, communications and equipment expense
|
4,624 | 4,315 | 3,779 | |||||||||
|
Professional and outside services
|
6,232 | 6,053 | 5,140 | |||||||||
|
Marketing
|
1,777 | 1,913 | 2,070 | |||||||||
|
Other expense
(a)(b)
|
7,594 | 3,740 | 3,814 | |||||||||
|
Amortization of intangibles
|
1,050 | 1,263 | 1,394 | |||||||||
|
Total noncompensation expense
|
24,943 | 20,322 | 18,805 | |||||||||
|
Merger costs
|
481 | 432 | 209 | |||||||||
|
Total noninterest expense
|
$ | 52,352 | $ | 43,500 | $ | 41,703 | ||||||
| (a) | Includes a $675 million FDIC special assessment in 2009. | |
| (b) | Included foreclosed property expense of $1.4 billion, $213 million and $56 million for 2009, 2008 and 2007, respectively. For additional information regarding foreclosed property, see Note 13 on pages 192-196 of this Annual Report. |
Merger costs
Costs associated with the Bear Stearns merger and the Washington Mutual transaction in 2008, the 2004 merger with Bank One Corporation and The Bank of New York, Inc. (“The Bank of New York”) transaction in 2006 are reflected in the merger costs caption of the Consolidated Statements of Income. For a further discussion of the Bear Stearns merger and the Washington Mutual transaction, see Note 2 on pages 143-148 of this Annual Report. A summary of merger-related costs is shown in the following table.
Costs associated with the Bear Stearns merger and the Washington Mutual transaction in 2008, the 2004 merger with Bank One Corporation and The Bank of New York, Inc. (“The Bank of New York”) transaction in 2006 are reflected in the merger costs caption of the Consolidated Statements of Income. For a further discussion of the Bear Stearns merger and the Washington Mutual transaction, see Note 2 on pages 143-148 of this Annual Report. A summary of merger-related costs is shown in the following table.
| 2009 | 2008 | |||||||||||||||||||||||||||
| Year ended December 31, (in millions) |
Bear
Stearns |
Washington
Mutual |
Total |
Bear
Stearns |
Washington
Mutual |
Total | 2007 (b) | |||||||||||||||||||||
|
Expense category
|
||||||||||||||||||||||||||||
|
Compensation
|
$ | (9 | ) | $ | 256 | $ | 247 | $ | 181 | $ | 113 | $ | 294 | $ | (19 | ) | ||||||||||||
|
Occupancy
|
(3 | ) | 15 | 12 | 42 | — | 42 | 17 | ||||||||||||||||||||
|
Technology and communications
and other
|
38 | 184 | 222 | 85 | 11 | 96 | 188 | |||||||||||||||||||||
|
The Bank of New York transaction
|
— | — | — | — | — | — | 23 | |||||||||||||||||||||
|
Total
(a)
|
$ | 26 | $ | 455 | $ | 481 | $ | 308 | $ | 124 | $ | 432 | $ | 209 | ||||||||||||||
| (a) | With the exception of occupancy- and technology-related write-offs, all of the costs in the table required the expenditure of cash. | |
| (b) | The 2007 activity reflects the 2004 merger with Bank One Corporation and the transaction with The Bank of New York. |
The table below shows changes in the merger reserve balance related to costs associated with
the above transactions.
| 2009 | 2008 | |||||||||||||||||||||||||||
| Year ended December 31, (in millions) |
Bear
Stearns |
Washington
Mutual |
Total |
Bear
Stearns |
Washington
Mutual |
Total | 2007 (a) | |||||||||||||||||||||
|
Merger reserve balance,
beginning of period
|
$ | 327 | $ | 441 | $ | 768 | $ | — | $ | — | $ | — | $ | 155 | ||||||||||||||
|
Recorded as merger costs
|
26 | 455 | 481 | 308 | 124 | 432 | 186 | |||||||||||||||||||||
|
Recorded as goodwill
|
(5 | ) | — | (5 | ) | 1,112 | 435 | 1,547 | (60 | ) | ||||||||||||||||||
|
Utilization of merger reserve
|
(316 | ) | (839 | ) | (1,155 | ) | (1,093 | ) | (118 | ) | (1,211 | ) | (281 | ) | ||||||||||||||
|
Merger reserve balance, end of period
|
$ | 32 | $ | 57 | $ | 89 | $ | 327 | $ | 441 | $ | 768 | $ | — | (b) | |||||||||||||
| (a) | The 2007 activity reflects the 2004 merger with Bank One Corporation. | |
| (b) | Excludes $10 million at December 31, 2007, related to the Bank of New York transaction. |
| 186 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Securities are classified as AFS, held-to-maturity (“HTM”) or trading. Trading securities are
discussed in Note 3 on pages 148-165 of this Annual Report. Securities are classified primarily as
AFS when used to manage the Firm’s exposure to interest rate movements, as well as to make
strategic longer-term investments. AFS securities are carried at fair value on the Consolidated
Balance Sheets. Unrealized gains and losses, after any applicable hedge accounting 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 gains/(losses) 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 Firm has not
classified new purchases of securities as HTM for the past several years.
The following table presents realized gains and losses from AFS
securities.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Realized gains
|
$ | 2,268 | $ | 1,890 | $ | 667 | ||||||
|
Realized losses
|
(580 | ) | (254 | ) | (503 | ) | ||||||
|
Net realized gains
(a)
|
1,688 | 1,636 | 164 | |||||||||
|
Credit
losses included in securities gains
(b)
|
(578 | ) | (76 | ) | — | |||||||
|
Net securities gains
|
$ | 1,110 | $ | 1,560 | $ | 164 | ||||||
| (a) | Proceeds from securities sold were within approximately 3% of amortized cost in 2009 and approximately 2% of amortized cost in 2008 and 2007. | |
| (b) | Includes other-than-temporary impairment losses recognized in income on certain prime and subprime mortgage-backed securities and obligations of U.S. states and municipalities. |
The amortized costs and estimated fair values of AFS and HTM securities were as follows for the
dates indicated.
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Amortized | unrealized | unrealized | Amortized | unrealized | unrealized | Fair | ||||||||||||||||||||||||||
| December 31, (in millions) | cost | gains | losses | Fair value | cost | gains | losses | value | ||||||||||||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||||||||||||||
|
Mortgage-backed securities
(a)
:
|
||||||||||||||||||||||||||||||||
|
U.S.
government agencies
(b)
|
$ | 166,094 | $ | 2,412 | $ | 608 | $ | 167,898 | $ | 115,198 | $ | 2,414 | $ | 227 | $ | 117,385 | ||||||||||||||||
|
Residential:
|
||||||||||||||||||||||||||||||||
|
Prime and Alt-A
|
5,234 | 96 | 807 | (d) | 4,523 | 8,826 | 4 | 1,935 | 6,895 | |||||||||||||||||||||||
|
Subprime
|
17 | — | — | 17 | 213 | — | 19 | 194 | ||||||||||||||||||||||||
|
Non-U.S.
|
10,003 | 320 | 65 | 10,258 | 2,233 | 24 | 182 | 2,075 | ||||||||||||||||||||||||
|
Commercial
|
4,521 | 132 | 63 | 4,590 | 4,623 | — | 684 | 3,939 | ||||||||||||||||||||||||
|
Total mortgage-backed securities
|
$ | 185,869 | $ | 2,960 | $ | 1,543 | $ | 187,286 | $ | 131,093 | $ | 2,442 | $ | 3,047 | $ | 130,488 | ||||||||||||||||
|
U.S. Treasury and government agencies
(b)
|
30,044 | 88 | 135 | 29,997 | 10,402 | 52 | 97 | 10,357 | ||||||||||||||||||||||||
|
Obligations of U.S. states and municipalities
|
6,270 | 292 | 25 | 6,537 | 3,479 | 94 | 238 | 3,335 | ||||||||||||||||||||||||
|
Certificates of deposit
|
2,649 | 1 | — | 2,650 | 17,226 | 64 | 8 | 17,282 | ||||||||||||||||||||||||
|
Non-U.S. government debt securities
|
24,320 | 234 | 51 | 24,503 | 8,173 | 173 | 2 | 8,344 | ||||||||||||||||||||||||
|
Corporate debt securities
|
61,226 | 812 | 30 | 62,008 | 9,358 | 257 | 61 | 9,554 | ||||||||||||||||||||||||
|
Asset-backed securities
(a)
:
|
||||||||||||||||||||||||||||||||
|
Credit card receivables
|
25,266 | 502 | 26 | 25,742 | 13,651 | 8 | 2,268 | 11,391 | ||||||||||||||||||||||||
|
Collateralized debt and loan
obligations
|
12,172 | 413 | 436 | 12,149 | 11,847 | 168 | 820 | 11,195 | ||||||||||||||||||||||||
|
Other
|
6,719 | 129 | 54 | 6,794 | 1,026 | 4 | 135 | 895 | ||||||||||||||||||||||||
|
Total available-for-sale debt securities
|
$ | 354,535 | $ | 5,431 | $ | 2,300 | (d) | $ | 357,666 | $ | 206,255 | $ | 3,262 | $ | 6,676 | $ | 202,841 | |||||||||||||||
|
Available-for-sale equity securities
|
2,518 | 185 | 4 | 2,699 | 3,073 | 2 | 7 | 3,068 | ||||||||||||||||||||||||
|
Total available-for-sale securities
|
$ | 357,053 | $ | 5,616 | $ | 2,304 | (d) | $ | 360,365 | $ | 209,328 | $ | 3,264 | $ | 6,683 | $ | 205,909 | |||||||||||||||
|
Total
held-to-maturity securities
(c)
|
$ | 25 | $ | 2 | $ | — | $ | 27 | $ | 34 | $ | 1 | $ | — | $ | 35 | ||||||||||||||||
| (a) | Prior periods have been revised to conform to the current presentation. | |
| (b) | Includes total U.S. government-sponsored enterprise obligations with fair values of $153.0 billion and $120.1 billion at December 31, 2009 and 2008, respectively, which were predominantly mortgage-related. | |
| (c) | Consists primarily of mortgage-backed securities issued by U.S. government-sponsored enterprises. | |
| (d) | Includes a total of $368 million (before tax) of unrealized losses related to prime mortgage-backed securities reported in accumulated comprehensive income not related to credit on debt securities for which credit losses have been recognized in income. |
| JPMorgan Chase & Co. / 2009 Annual Report | 187 |
Table of Contents
Notes to consolidated financial statements
Securities impairment
The following table presents the fair value and gross unrealized losses for AFS securities by aging
category at December 31.
| Securities with gross unrealized losses | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | |||||||||||||||||||||||
| Gross | Gross | Total gross | ||||||||||||||||||||||
| unrealized | Fair | unrealized | Total fair | unrealized | ||||||||||||||||||||
| December 31, 2009 (in millions) | Fair value | losses | value | losses | value | losses | ||||||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 43,235 | $ | 603 | $ | 644 | $ | 5 | $ | 43,879 | $ | 608 | ||||||||||||
|
Residential:
|
||||||||||||||||||||||||
|
Prime and Alt-A
|
183 | 27 | 3,032 | 780 | 3,215 | 807 | ||||||||||||||||||
|
Subprime
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-U.S.
|
391 | 1 | 1,773 | 64 | 2,164 | 65 | ||||||||||||||||||
|
Commercial
|
679 | 34 | 229 | 29 | 908 | 63 | ||||||||||||||||||
|
Total mortgage-backed securities
|
44,488 | 665 | 5,678 | 878 | 50,166 | 1,543 | ||||||||||||||||||
|
U.S. Treasury and government agencies
|
8,433 | 135 | — | — | 8,433 | 135 | ||||||||||||||||||
|
Obligations of U.S. states and municipalities
|
472 | 11 | 389 | 14 | 861 | 25 | ||||||||||||||||||
|
Certificates of deposit
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-U.S. government debt securities
|
2,471 | 46 | 835 | 5 | 3,306 | 51 | ||||||||||||||||||
|
Corporate debt securities
|
1,831 | 12 | 4,634 | 18 | 6,465 | 30 | ||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||
|
Credit card receivables
|
— | — | 745 | 26 | 745 | 26 | ||||||||||||||||||
|
Collateralized debt and loan obligations
|
42 | 1 | 7,883 | 435 | 7,925 | 436 | ||||||||||||||||||
|
Other
|
767 | 8 | 1,767 | 46 | 2,534 | 54 | ||||||||||||||||||
|
Total available-for-sale debt securities
|
58,504 | 878 | 21,931 | 1,422 | 80,435 | 2,300 | ||||||||||||||||||
|
Available-for-sale equity securities
|
1 | 1 | 3 | 3 | 4 | 4 | ||||||||||||||||||
|
Total securities with gross unrealized losses
|
$ | 58,505 | $ | 879 | $ | 21,934 | $ | 1,425 | $ | 80,439 | $ | 2,304 | ||||||||||||
| Securities with gross unrealized losses | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | |||||||||||||||||||||||
| Gross | Gross | Total gross | ||||||||||||||||||||||
| unrealized | unrealized | Total fair | unrealized | |||||||||||||||||||||
| December 31, 2008 (in millions) | Fair value | losses | Fair value | losses | value | losses | ||||||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||||||
|
Mortgage-backed securities
(a)
:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 6,016 | $ | 224 | $ | 469 | $ | 3 | $ | 6,485 | $ | 227 | ||||||||||||
|
Residential:
|
||||||||||||||||||||||||
|
Prime and Alt-A
|
6,254 | 1,838 | 333 | 97 | 6,587 | 1,935 | ||||||||||||||||||
|
Subprime
|
— | — | 151 | 19 | 151 | 19 | ||||||||||||||||||
|
Non-U.S.
|
1,908 | 182 | — | — | 1,908 | 182 | ||||||||||||||||||
|
Commercial
|
3,939 | 684 | — | — | 3,939 | 684 | ||||||||||||||||||
|
Total mortgage-backed securities
|
18,117 | 2,928 | 953 | 119 | 19,070 | 3,047 | ||||||||||||||||||
|
U.S. Treasury and government agencies
(a)
|
7,659 | 97 | — | — | 7,659 | 97 | ||||||||||||||||||
|
Obligations of U.S. states and municipalities
|
1,129 | 232 | 16 | 6 | 1,145 | 238 | ||||||||||||||||||
|
Certificates of deposit
|
382 | 8 | — | — | 382 | 8 | ||||||||||||||||||
|
Non-U.S. government debt securities
|
308 | 1 | 74 | 1 | 382 | 2 | ||||||||||||||||||
|
Corporate debt securities
|
558 | 54 | 30 | 7 | 588 | 61 | ||||||||||||||||||
|
Asset-backed securities
(a)
:
|
||||||||||||||||||||||||
|
Credit card receivables
|
10,267 | 1,964 | 472 | 304 | 10,739 | 2,268 | ||||||||||||||||||
|
Collateralized debt and loan obligations
|
9,059 | 820 | — | — | 9,059 | 820 | ||||||||||||||||||
|
Other
|
813 | 134 | 17 | 1 | 830 | 135 | ||||||||||||||||||
|
Total available-for-sale debt securities
|
48,292 | 6,238 | 1,562 | 438 | 49,854 | 6,676 | ||||||||||||||||||
|
Available-for-sale equity securities
|
19 | 7 | — | — | 19 | 7 | ||||||||||||||||||
|
Total securities with gross unrealized losses
|
$ | 48,311 | $ | 6,245 | $ | 1,562 | $ | 438 | $ | 49,873 | $ | 6,683 | ||||||||||||
| (a) | Prior periods have been revised to conform to the current presentation. |
|
188
|
JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Other-than-temporary impairment
In April 2009, the FASB amended the other-than-temporary impairment (“OTTI”) model for debt
securities. The impairment model for equity securities was not affected. Under the new guidance,
OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security,
or if it is more likely than not that the investor will be required to sell the debt security
before recovery of its amortized cost basis. However, even if an investor does not expect to sell a
debt security, it must evaluate expected cash flows to be received and determine if a credit loss
exists. In the event of a credit loss, only the amount of impairment associated with the credit
loss is recognized in income. Amounts relating to factors other than credit losses are recorded in
OCI. The guidance also requires additional disclosures regarding the calculation of credit losses,
as well as factors considered in reaching a conclusion that an investment is not
other-than-temporarily impaired. JPMorgan Chase early adopted the new guidance effective for the
period ending March 31, 2009. The Firm did not record a transition adjustment for securities held
at March 31, 2009, which were previously considered other-than-temporarily impaired, as the Firm
intended to sell the securities for which it had previously recognized other-than-temporary
impairments.
AFS securities in unrealized loss positions are analyzed as part of the Firm’s ongoing assessment
of OTTI. When the Firm intends to sell AFS securities, it recognizes an impairment loss equal to
the full difference between the amortized cost basis and the fair value of those securities.
When the Firm does not intend to sell AFS equity or debt securities in an unrealized loss position,
potential OTTI is considered using a variety of factors, including the length of time and extent to
which the market value has been less than cost; adverse conditions specifically related to the
industry, geographic area or financial condition of the issuer or underlying collateral of a
security; payment structure of the security; changes to the rating of the security by a rating
agency; the volatility of the fair value changes; and changes in fair value of the security after
the balance sheet date. For debt securities, the Firm estimates cash flows over the remaining lives
of the underlying collateral to assess whether credit losses exist and, where applicable for
purchased or retained beneficial interests in securitized assets, to determine if any adverse
changes in cash flows have occurred. The Firm’s cash flow estimates take into account expectations
of relevant market and economic data as of the end of the reporting period – including, for
example, for securities issued in a securitization, underlying loan-level data, and structural
features of the securitization, such as subordination, excess spread, overcollateralization or
other forms of credit enhancement. The Firm compares the losses projected for the underlying
collateral (“pool losses”) against the level of credit enhancement in the securitization structure
to determine whether these features are sufficient to absorb the pool losses, or whether a credit
loss on the AFS debt security exists. The Firm also performs other analyses to support its cash
flow projections, such as first-loss analyses or stress scenarios. For debt securities, the Firm
considers a decline in fair value to be other-than-temporary when the Firm
does not expect to
recover the entire amortized cost basis of the security. The Firm also considers an OTTI to have
occurred when there is an adverse change in cash flows to beneficial interests in securitizations
that are rated below “AA” at acquisition, or that can be contractually prepaid or otherwise settled
in such a way that the Firm would not recover substantially all of its recorded investment. For
equity securities, the Firm considers the above factors, as well as the Firm’s intent and ability
to retain its investment for a period of time sufficient to allow for any anticipated recovery in
market value, and whether evidence exists to support a realizable value equal to or greater than
the carrying value. The Firm considers a decline in fair value of AFS equity securities to be
other-than-temporary if it is probable that the Firm will not recover its amortized cost basis.
The following table presents credit losses that are included in the securities gains and losses
table above.
| Year ended December 31, (in millions) | 2009 | |||
|
Debt securities the Firm does not intend to sell that have
credit losses
|
||||
|
Total losses
(a)
|
$ | (946 | ) | |
|
Losses recorded in/(reclassified from) other comprehensive
income
|
368 | |||
|
Credit losses recognized in income
(b)(c)
|
$ | (578 | ) | |
| (a) | For initial other-than-temporary impairments, represents the excess of the amortized cost over the fair value of AFS debt securities. For subsequent impairments of the same security, represents additional declines in fair value subsequent to the previously recorded other-than-temporary impairment(s), if applicable. | |
| (b) | Represents the credit loss component of certain prime and subprime mortgage-backed securities and obligations of U.S. states and municipalities that the Firm does not intend to sell. Subsequent credit losses may be recorded on securities without a corresponding further decline in fair value if there has been a decline in expected cash flows. | |
| (c) | Excluded from this table are OTTI losses of $7 million that were recognized in income in 2009, related to subprime mortgage-backed debt securities the Firm intended to sell. These securities were sold in 2009, resulting in the recognition of a recovery of $1 million. |
Changes in the credit loss component of credit-impaired debt securities
The following table presents a rollforward of the credit loss component of OTTI losses that were
recognized in income in 2009, related to debt securities that the Firm does not intend to sell.
| Year ended December 31, (in millions) | 2009 | |||
|
Balance, beginning of period
|
$ | — | ||
|
Additions:
|
||||
|
Newly credit-impaired securities
|
578 | |||
|
Increase in losses on previously credit-impaired
securities reclassified from other comprehensive income
|
— | |||
|
Balance, end of period
|
$ | 578 | ||
During 2009, the Firm continued to increase the size of its AFS securities portfolio.
Unrealized losses have decreased since December 31, 2008, due primarily to overall market spread
and market liquidity improvements, which resulted in increased pricing across asset classes. As of
December 31, 2009, the Firm does not intend to sell the securities with a loss position in AOCI,
and it is not likely that the Firm will be required to sell these securities before recovery of
their amortized cost basis. Except for the securities reported in the table above for which credit
losses have been recognized in
|
JPMorgan Chase & Co. / 2009 Annual Report
|
189 |
Table of Contents
Notes to consolidated financial statements
income, the Firm believes that the securities with an unrealized loss in AOCI are not
other-than-temporarily impaired as of December 31, 2009.
Following is a description of the Firm’s primary security investments and the key assumptions used
in its estimate of the present value of the cash flows most likely to be collected from these
investments.
Mortgage-backed securities – U.S. government agencies
As of December 31, 2009, gross unrealized losses on mortgage-backed securities related to U.S.
agencies were $608 million, of which $5 million related to securities that have been in an
unrealized loss position for longer than 12 months. These mortgage-backed securities do not have
any credit losses, given the explicit and implicit guarantees provided by the U.S. federal
government.
Mortgage-backed securities – Prime and Alt-A nonagency
As of December 31, 2009, gross unrealized losses related to prime and Alt-A residential
mortgage-backed securities issued by private issuers were $807 million, of which $780 million
related to securities that have been in an unrealized loss position for longer than 12 months.
Overall losses have decreased since December 31, 2008, due to increased market stabilization,
resulting from increased demand for higher-yielding asset classes and new U.S. government programs.
Approximately one-third of these positions (by amortized cost) are currently rated “AAA.” The
remaining two-thirds have experienced downgrades since purchase, and approximately half of the
positions are currently rated below investment-grade. In analyzing prime and Alt-A residential
mortgage-backed securities for potential credit losses, the Firm utilizes a methodology that
focuses on loan-level detail to estimate future cash flows, which are then applied to the various
tranches of issued securities based on their respective contractual provisions of the
securitization trust. The loan-level analysis considers prepayment, home price, default rate and
loss severity assumptions. Given this level of granularity, the underlying assumptions vary
significantly taking into consideration such factors as the financial condition of the borrower,
loan to value ratio, loan type and geographical location of the underlying property. The weighted
average underlying default rate on the positions was 19% and the related weighted average loss
severity was 51%. Based on this analysis, the Firm has recognized $138 million of OTTI losses in
earnings in 2009, related to securities that have experienced increased delinquency rates
associated to specific collateral types and origination dates. The unrealized loss of $807 million
on the remaining securities is considered temporary, based on management’s assessment that the
credit enhancement levels for those securities remain sufficient to support the Firm’s investment.
Mortgage-backed securities – Commercial
As of December 31, 2009, gross unrealized losses related to commercial mortgage-backed securities
were $63 million, of which $29 million related to securities that have been in an unrealized loss
position for longer than 12 months. The Firm’s commercial mortgage-backed securities are rated
“AAA,” “AA,” “A” and “BBB” and possess, on average, 29% subordination (a form of credit enhancement
for the benefit of senior securities, expressed here as the percentage of pool losses that can
occur before a senior asset-backed security will incur its first dollar of principal loss). In
considering whether potential credit-related losses exist, the Firm conducted a scenario analysis,
using high levels of delinquencies and losses over the near term, followed by lower levels over the
longer term. Specific assumptions included: (i) default of all loans more than 60 days delinquent;
(ii) additional default rates for the remaining portfolio forecasted to be up to 8% in the near
term and 2% in the longer term; and (iii) loss severity assumptions ranging from 45% in the near
term to 40% in later years.
Asset-backed securities – Credit card receivables
As of December 31, 2009, gross unrealized losses related to credit card receivables asset-backed
securities were $26 million, which relate to securities that were in an unrealized loss position
for longer than 12 months. One of the key metrics the Firm reviews for credit card–related
asset-backed securities is each trust’s excess spread, which is the credit enhancement resulting
from cash that remains each month after payments are made to investors for principal and interest
and to servicers for servicing fees, and after credit losses are allocated. The average excess
spread for the issuing trusts in which the Firm holds interests ranges from 3.8% to 13.8% with a
weighted average of 6.9%.
Asset-backed securities – Collateralized debt and loan obligations
As of December 31, 2009, gross unrealized losses related to collateralized debt and loan
obligations were $436 million, of which $435 million related to securities that were in an
unrealized loss position for longer than 12 months. Overall losses have decreased since December
31, 2008, mainly as a result of, lower default forecasts and
spread tightening across various asset classes. Substantially all of these securities are rated
“AAA” and “AA” and have an average credit enhancement of 29%. Credit enhancement in CLOs is
primarily in the form of overcollateralization, which is the excess of the par amount of collateral
over the par amount of securities. The key assumptions considered in analyzing potential credit
losses were underlying loan and debt security defaults and loss severity. Based on current default
trends, the Firm assumed collateral default rates of 5% for 2009 and thereafter. Further, loss
severities were assumed to be 50% for loans and 80% for debt securities. Losses on collateral were
estimated to occur approximately 18 months after default.
|
190
|
JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Contractual maturities and yields
The following table presents the amortized cost and estimated fair value at December 31, 2009, of
JPMorgan Chase’s AFS and HTM securities by contractual maturity.
| 2009 | ||||||||||||||||||||
| Due after one | Due after five | |||||||||||||||||||
| By remaining maturity | Due in one | year through | years through | Due after | ||||||||||||||||
| December 31, (in millions) | year or less | five years | 10 years | 10 ears (c) | Total | |||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||
|
Mortgage-backed securities
(b)
|
||||||||||||||||||||
|
Amortized cost
|
$ | 1 | $ | 321 | $ | 6,707 | $ | 178,840 | $ | 185,869 | ||||||||||
|
Fair value
|
1 | 335 | 6,804 | 180,146 | 187,286 | |||||||||||||||
|
Average yield
(a)
|
3.40 | % | 5.17 | % | 4.75 | % | 4.54 | % | 4.54 | % | ||||||||||
|
U.S. Treasury and government agencies
(b)
|
||||||||||||||||||||
|
Amortized cost
|
$ | 307 | $ | 23,985 | $ | 5,527 | $ | 225 | $ | 30,044 | ||||||||||
|
Fair value
|
307 | 24,044 | 5,423 | 223 | 29,997 | |||||||||||||||
|
Average yield
(a)
|
0.34 | % | 2.34 | % | 3.34 | % | 5.38 | % | 2.53 | % | ||||||||||
|
Obligations of U.S. states and municipalities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 14 | $ | 249 | $ | 353 | $ | 5,654 | $ | 6,270 | ||||||||||
|
Fair value
|
14 | 260 | 364 | 5,899 | 6,537 | |||||||||||||||
|
Average yield
(a)
|
0.25 | % | 4.80 | % | 5.13 | % | 4.75 | % | 4.75 | % | ||||||||||
|
Certificates of deposit
|
||||||||||||||||||||
|
Amortized cost
|
$ | 2.649 | — | — | — | $ | 2,649 | |||||||||||||
|
Fair value
|
2,650 | — | — | — | 2,650 | |||||||||||||||
|
Average yield
(a)
|
3.12 | % | — | — | — | 3.12 | % | |||||||||||||
|
Non-U.S. government debt securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 10,726 | $ | 12,830 | $ | 616 | $ | 148 | $ | 24,320 | ||||||||||
|
Fair value
|
10,732 | 12,994 | 627 | 150 | 24,503 | |||||||||||||||
|
Average yield
(a)
|
0.95 | % | 2.13 | % | 3.21 | % | 1.71 | % | 1.64 | % | ||||||||||
|
Corporate debt securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 6,694 | $ | 53,081 | $ | 1,253 | $ | 198 | $ | 61,226 | ||||||||||
|
Fair value
|
6,786 | 53,706 | 1,308 | 208 | 62,008 | |||||||||||||||
|
Average yield
(a)
|
1.78 | % | 2.15 | % | 5.88 | % | 6.15 | % | 2.19 | % | ||||||||||
|
Asset-backed securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 13,826 | $ | 8,365 | $ | 10,386 | $ | 11,580 | $ | 44,157 | ||||||||||
|
Fair value
|
13,902 | 8,646 | 10,507 | 11,630 | 44,685 | |||||||||||||||
|
Average yield
(a)
|
2.04 | % | 1.70 | % | 1.38 | % | 1.43 | % | 1.66 | % | ||||||||||
|
Total available-for-sale debt securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 34,217 | $ | 98,831 | $ | 24,842 | $ | 196,645 | $ | 354,535 | ||||||||||
|
Fair value
|
34,392 | 99,985 | 25,033 | 198,256 | 357,666 | |||||||||||||||
|
Average yield
(a)
|
1.72 | % | 2.17 | % | 3.05 | % | 4.36 | % | 3.40 | % | ||||||||||
|
Available-for-sale equity securities
|
||||||||||||||||||||
|
Amortized cost
|
— | — | — | $ | 2,518 | $ | 2,518 | |||||||||||||
|
Fair value
|
— | — | — | 2,699 | 2,699 | |||||||||||||||
|
Average yield
(a)
|
— | — | — | 0.42 | % | 0.42 | % | |||||||||||||
|
Total available-for-sale securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 34,217 | $ | 98,831 | $ | 24,842 | $ | 199,163 | $ | 357,053 | ||||||||||
|
Fair value
|
34,392 | 99,985 | 25,033 | 200,955 | 360,365 | |||||||||||||||
|
Average yield
(a)
|
1.72 | % | 2.17 | % | 3.05 | % | 4.31 | % | 3.38 | % | ||||||||||
|
|
||||||||||||||||||||
|
Total held-to-maturity securities
|
||||||||||||||||||||
|
Amortized cost
|
— | $ | 3 | $ | 20 | $ | 2 | $ | 25 | |||||||||||
|
Fair value
|
— | 3 | 22 | 2 | 27 | |||||||||||||||
|
Average yield
(a)
|
— | % | 6.96 | % | 6.87 | % | 6.49 | % | 6.85 | % | ||||||||||
| (a) | Average yield was based on amortized cost balances at the end of the period and did not give effect to changes in fair value reflected in accumulated other comprehensive income/(loss). Yields are derived by dividing interest/dividend income (including the effect of related derivatives on available-for-sale securities and the amortization of premiums and accretion of discounts) by total amortized cost. Taxable-equivalent yields are used where applicable. | |
| (b) | U.S. government agencies and U.S. government-sponsored enterprises were the only issuers whose securities exceeded 10% of JPMorgan Chase’s total stockholders’ equity at December 31, 2009. | |
| (c) | Includes securities with no stated maturity. Substantially all of the Firm’s mortgage-backed securities and collateralized mortgage obligations are due in 10 years or more, based on contractual maturity. The estimated duration, which reflects anticipated future prepayments based on a consensus of dealers in the market, is approximately five years for nonagency mortgage-backed securities and three years for collateralized mortgage obligations. |
|
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|
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Table of Contents
Notes to consolidated financial statements
JPMorgan Chase enters into resale agreements, repurchase agreements, securities borrowed
transactions and securities loaned transactions, primarily to finance the Firm’s inventory
positions, acquire securities to cover short positions, accommodate customers’ financing needs, and
settle other securities obligations.
Resale agreements and repurchase agreements are generally treated as collateralized financing
transactions carried on the Consolidated Balance Sheets at the amounts at which the securities will
be subsequently sold or repurchased, plus accrued interest. On January 1, 2007, pursuant to the
adoption of the fair value option, the Firm elected fair value measurement for certain resale and
repurchase agreements. In 2008, the Firm elected fair value measurement for certain newly
transacted securities borrowed and securities lending agreements. For a further discussion of the
fair value option, see Notes 4 and 20 on pages 165–167 and 219, respectively, of this Annual
Report. The securities financing agreements for which the fair value option was elected are
reported within securities purchased under resale agreements; securities loaned or sold under
repurchase agreements; securities borrowed; and other borrowed funds on the Consolidated Balance
Sheets. Generally, for agreements carried at fair value, current-period interest accruals are
recorded within interest income and interest expense, with changes in fair value reported in
principal transactions revenue. However, for financial instruments containing embedded derivatives
that would be separately accounted for in accordance with FASB guidance for hybrid instruments, all
changes in fair value, including any interest elements, are reported in principal transactions
revenue. Where appropriate, resale and repurchase agreements with the same counterparty are
reported on a net basis. JPMorgan Chase takes possession of securities purchased under resale
agreements. On a daily basis, JPMorgan Chase monitors the market value of the underlying
collateral, primarily U.S. and non-U.S. government and agency securities, that it has received from
its counterparties, and requests additional collateral when necessary.
Transactions similar to financing activities that do not meet the 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 is a
derivative that is recorded on the Consolidated Balance Sheets at fair value, with changes in fair
value recorded in principal transactions 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 in connection with securities
borrowed and lent are recorded in interest income or interest expense.
The following table details the components of collateralized financings.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Securities purchased under resale
agreements
(a)
|
$ | 195,328 | $ | 200,265 | ||||
|
Securities borrowed
(b)
|
119,630 | 124,000 | ||||||
|
Securities sold under repurchase
agreements
(c)
|
$ | 245,692 | $ | 174,456 | ||||
|
Securities loaned
|
7,835 | 6,077 | ||||||
| (a) | Includes resale agreements of $20.5 billion and $20.8 billion accounted for at fair value at December 31, 2009 and 2008, respectively. | |
| (b) | Includes securities borrowed of $7.0 billion and $3.4 billion accounted for at fair value at December 31, 2009 and 2008, respectively. | |
| (c) | Includes repurchase agreements of $3.4 billion and $3.0 billion accounted for at fair value at December 31, 2009 and 2008, respectively. |
JPMorgan Chase pledges certain financial instruments it owns to collateralize repurchase
agreements and other securities financings. Pledged securities that can be sold or repledged by the
secured party are identified as financial instruments owned (pledged to various parties) on the
Consolidated Balance Sheets.
At December 31, 2009, the Firm received securities as collateral that could be repledged, delivered
or otherwise used with a fair value of approximately $614.4 billion. This collateral was generally
obtained under resale agreements, securities borrowing agreements and customer margin loans. Of
these securities, approximately $392.9 billion were repledged, delivered or otherwise used,
generally as collateral under repurchase agreements, securities lending agreements or to cover
short sales.
The accounting for a loan may differ based on whether it is originated or purchased and whether
the loan is used in an investing or trading strategy. For purchased loans held-for-investment, the
accounting also differs depending on whether a loan is credit-impaired at the date of acquisition.
Purchased loans with evidence of credit deterioration since the origination date and for which it
is probable, at acquisition, that all contractually required payments receivable will not be
collected are considered to be credit-impaired. The measurement framework for loans in the
Consolidated Financial Statements is one of the following:
| • | At the principal amount outstanding, net of the allowance for loan losses, unearned income, unamortized discounts and premiums, and any net deferred loan fees or costs, for loans held for investment (other than purchased credit-impaired loans); |
| • | At the lower of cost or fair value, with valuation changes recorded in noninterest revenue, for loans that are classified as held-for-sale; |
| • | At fair value, with changes in fair value recorded in noninterest revenue, for loans classified as trading assets or risk managed on a fair value basis; or |
| • | Purchased credit-impaired loans held-for-investment are initially measured at fair value, which includes estimated future credit losses. Accordingly, an allowance for loan losses related to these loans is not recorded at the acquisition date. |
See Note 4 on pages 165–167 of this Annual Report for further information on the Firm’s elections
of fair value accounting under
|
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|
JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
the fair value option. See Note 3 and Note 4 on pages 148–165 and 165–167 of this Annual Report for
further information on loans carried at fair value and classified as trading assets.
For loans held-for-investment, other than purchased credit-impaired loans, 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 has been suspended. Loans (other than
credit card loans, certain consumer loans insured by U.S. government agencies and purchased
credit-impaired loans, which are discussed below) are placed on nonaccrual status and considered
nonperforming when full payment of principal and 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 may be recognized only to the extent it is received
in cash. However, where there is doubt regarding the ultimate collectibility of loan principal,
cash receipts are applied to reduce the carrying value of such loans (i.e., the cost recovery
method). Interest and fees related to credit card loans continue to accrue until the loan is
charged off or paid in full.
Loans may be returned to accrual status when repayment is reasonably assured and there has been
demonstrated performance under the terms of the loan or, if applicable, the terms of the
restructured loans.
Wholesale and business banking loans (which are risk-rated) are charged off to the allowance for
loan losses when it is highly certain that a loss has been realized. This determination includes
many factors, including the prioritization of the Firm’s claim in bankruptcy, expectations of the
workout/restructuring of the loan and valuation of the borrower’s equity.
Consumer loans, other than business banking and purchased credit-impaired loans, are generally
charged off to the allowance for loan losses upon reaching specified stages of delinquency, in
accordance with the Federal Financial Institutions Examination Council 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 about a specified event (e.g., bankruptcy of the
borrower), which ever is earlier. Residential mortgage products are generally charged off to net
realizable value no later than 180 days past due. Other consumer products, if collateralized, are
generally charged off to net realizable value at 120 days past due.
In addition, any impaired loan that is determined to be collateral-dependent is charged-off to an
amount equal to the fair value of the collateral less costs to sell. Loans are identified as
collateral-dependent when management believes that collateral is the sole source of repayment.
A collateralized loan is reclassified to assets acquired in loan satisfactions, within other
assets, at the lower of the recorded investment
in the loan or the fair value of the collateral
less estimated costs to sell, only when JPMorgan Chase has taken physical possession of the
collateral, regardless of whether formal foreclosure proceedings have taken place.
Loans within the held-for-investment portfolio that management decides to sell are transferred to
the held-for-sale portfolio. Transfers to held-for-sale are recorded at the lower of cost or fair
value on the date of transfer. Credit-related losses are charged off to the allowance for loan
losses and losses due to changes in interest rates or exchange rates are recognized in noninterest
revenue.
Loans within the held-for-sale portfolio that management decides to retain are transferred to the
held-for-investment portfolio at the lower of cost or fair value. These loans are subsequently
assessed for impairment based on the Firm’s allowance methodology. For a further discussion of the
methodologies used in establishing the Firm’s allowance for loan losses, see Note 14 on pages
196–198 of this Annual Report.
The composition of the Firm’s aggregate loan portfolio at each of the dates indicated was as
follows.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
U.S. wholesale loans:
|
||||||||
|
Commercial and industrial
|
$ | 49,103 | $ | 70,208 | ||||
|
Real estate
|
54,968 | 61,888 | ||||||
|
Financial institutions
|
13,372 | 20,615 | ||||||
|
Government agencies
|
5,634 | 5,918 | ||||||
|
Other
|
23,383 | 23,157 | ||||||
|
Loans held-for-sale and at fair value
|
2,625 | 4,990 | ||||||
|
Total
U.S. wholesale loans
|
149,085 | 186,776 | ||||||
|
Non-U.S. wholesale loans:
|
||||||||
|
Commercial and industrial
|
19,138 | 27,977 | ||||||
|
Real estate
|
2,227 | 2,623 | ||||||
|
Financial institutions
|
11,755 | 16,381 | ||||||
|
Government agencies
|
1,707 | 603 | ||||||
|
Other
|
18,790 | 18,719 | ||||||
|
Loans held-for-sale and at fair value
|
1,473 | 8,965 | ||||||
|
Total
non-U.S. wholesale loans
|
55,090 | 75,268 | ||||||
|
Total wholesale loans:
(a)(b)
|
||||||||
|
Commercial and industrial
|
68,241 | 98,185 | ||||||
|
Real estate
(c)
|
57,195 | 64,511 | ||||||
|
Financial institutions
|
25,127 | 36,996 | ||||||
|
Government agencies
|
7,341 | 6,521 | ||||||
|
Other
|
42,173 | 41,876 | ||||||
|
Loans held-for-sale and at fair
value
(d)
|
4,098 | 13,955 | ||||||
|
Total wholesale loans
|
204,175 | 262,044 | ||||||
|
Consumer loans:
(e)
|
||||||||
|
Home equity – senior lien
(f)
|
27,376 | 29,793 | ||||||
|
Home equity – junior lien
(g)
|
74,049 | 84,542 | ||||||
|
Prime mortgage
|
66,892 | 72,266 | ||||||
|
Subprime mortgage
|
12,526 | 15,330 | ||||||
|
Option ARMs
|
8,536 | 9,018 | ||||||
|
Auto loans
|
46,031 | 42,603 | ||||||
|
Credit card
(h)(i)
|
78,786 | 104,746 | ||||||
|
Other
|
31,700 | 33,715 | ||||||
|
Loans held-for-sale
(j)
|
2,142 | 2,028 | ||||||
|
Total consumer loans – excluding
purchased credit-impaired
|
348,038 | 394,041 | ||||||
|
Consumer loans – purchased
credit-impaired
|
81,245 | 88,813 | ||||||
|
Total
consumer loans
|
429,283 | 482,854 | ||||||
|
Total
loans
(k)
|
$ | 633,458 | $ | 744,898 | ||||
|
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|
193 |
Table of Contents
Notes to consolidated financial statements
| (a) | Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management. | |
| (b) | During the fourth quarter of 2009, certain industry classifications were modified to better reflect risk correlations and enhance the Firm’s management of industry risk. Prior periods have been revised to reflect the current presentation. | |
| (c) | Represents credit extended for real estate-related purposes to borrowers who are primarily in the real estate development or investment businesses, and for which the repayment is predominantly from the sale, lease, management, operations or refinancing of the property. | |
| (d) | Includes loans for commercial and industrial, real estate, financial institutions and other of $3.1 billion, $44 million, $278 million and $715 million, respectively, at December 31, 2009, and $11.0 billion, $428 million, $1.5 billion and $995 million, respectively, at December 31, 2008. | |
| (e) | Includes Retail Financial Services, Card Services and the Corporate/Private Equity segment. | |
| (f) | Represents loans where JPMorgan Chase holds the first security interest on the property. | |
| (g) | Represents loans where JPMorgan Chase holds a security interest that is subordinate in rank to other liens. | |
| (h) | Includes billed finance charges and fees net of an allowance for uncollectible amounts. | |
| (i) | Includes $1.0 billion of loans at December 31, 2009, held by the Washington Mutual Master Trust, which were consolidated onto the Firm’s balance sheet at fair value during the second quarter of 2009. See Note 15 on pages 198–205 of this Annual Report. | |
| (j) | Includes loans for prime mortgage and other (largely student loans) of $450 million and $1.7 billion at December 31, 2009, respectively, and $206 million and $1.8 billion at December 31, 2008, respectively. | |
| (k) | Loans (other than purchased credit-impaired loans and those for which the fair value option has been elected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $1.4 billion and $2.0 billion at December 31, 2009 and 2008, respectively. Prior periods have been revised to conform to the current presentation. |
The following table reflects information about the Firm’s loan sales.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Net gains/(losses) on sales of loans
(including lower of cost or fair
value
adjustments)
(a)
|
$ | 439 | $ | (2,508 | ) | $ | 99 | |||||
| (a) | Excludes sales related to loans accounted for at fair value. |
Impaired loans
Impaired loans include the following:
| • | Risk-rated loans that have been placed on nonaccrual status and/or that have been modified in a troubled debt restructuring. |
| • | Consumer loans that have been modified in a troubled debt restructuring. |
Loans with insignificant delays or insignificant short falls in the amount of payments expected to
be collected are not considered to be impaired.
All impaired loans are evaluated for an asset-specific allowance as described in Note 14 on pages
196–198 of this Annual Report. Both wholesale and consumer loans are deemed impaired upon being
contractually modified in a troubled debt restructuring. Troubled debt restructurings typically
result from the Firm’s loss mitigation activities and occur when JPMorgan Chase grants a concession
to a borrower who is experiencing financial difficulty in order to minimize the Firm’s economic
loss and to avoid foreclosure or repossession of collateral. Once restructured in a troubled debt
restructuring, a loan is generally considered impaired until its maturity, regardless of whether
the borrower performs under the modified terms. Although such a loan may be returned to accrual
status if the criteria set forth in the Firm’s accounting policy are met, the loan would continue
to be evaluated for an asset-specific
allowance for loan losses and the Firm would continue to
report the loan in the impaired loan table below.
The tables below set forth information about the Firm’s impaired loans, excluding both purchased
credit-impaired loans and modified credit card loans, which are separately discussed below.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Impaired loans with an allowance:
|
||||||||
|
Wholesale
|
$ | 6,216 | $ | 2,026 | ||||
|
Consumer
(a)
|
3,978 | 2,252 | ||||||
|
Total
impaired loans with an allowance
|
10,194 | 4,278 | ||||||
|
Impaired loans without an allowance:
(b)
|
||||||||
|
Wholesale
|
760 | 62 | ||||||
|
Consumer
(a)
|
— | — | ||||||
|
Total
impaired loans without an allowance
|
760 | 62 | ||||||
|
Total impaired loans
|
$ | 10,954 | $ | 4,340 | ||||
|
Allowance for impaired loans:
|
||||||||
|
Wholesale
|
$ | 2,046 | $ | 712 | ||||
|
Consumer
(a)
|
996 | 379 | ||||||
|
Total allowance for impaired loans
(c)
|
$ | 3,042 | $ | 1,091 | ||||
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Average balance of impaired loans :
|
||||||||||||
|
Wholesale
|
$ | 4,719 | $ | 896 | $ | 316 | ||||||
|
Consumer
(a)
|
3,518 | 1,211 | 317 | |||||||||
|
Total
average impaired loans
|
$ | 8,237 | $ | 2,107 | $ | 633 | ||||||
|
Interest income recognized on impaired loans:
|
||||||||||||
|
Wholesale
|
$ | 15 | $ | — | $ | — | ||||||
|
Consumer
(a)
|
138 | 57 | — | |||||||||
|
Total interest income recognized on
impaired loans
|
$ | 153 | $ | 57 | $ | — | ||||||
| (a) | Excludes credit card loans. | |
| (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. | |
| (c) | The allowance for impaired loans is included in JPMorgan Chase’s allowance for loan losses. |
As of December 31, 2009, wholesale loans restructured in troubled debt restructurings were
approximately $1.1 billion.
During 2009, the Firm reviewed its residential real estate portfolio to identify homeowners most in
need of assistance, opened new regional counseling centers, hired additional loan counselors,
introduced new financing alternatives, proactively reached out to borrowers to offer prequalified
modifications, and commenced a new process to independently review each loan before moving it into
the foreclosure process. In addition, during the first quarter of 2009, the U.S. Treasury
introduced the Making Home Affordable (“MHA”) programs, which are designed to assist eligible
homeowners in a number of ways, one of which is by modifying the terms of their mortgages. The Firm
is participating in the MHA programs while continuing to expand its other loss mitigation efforts
for financially distressed borrowers who do not qualify for the MHA programs. The MHA programs and
the Firm’s other loss-mitigation programs for financially troubled borrowers generally represent
various concessions, such as term extensions, rate reductions and deferral of principal payments,
that would have otherwise been required under the terms of the original agreement. When the Firm
modifies home equity lines of credit in troubled debt restructurings, future lending commitments
related to the modified loans
|
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Table of Contents
are canceled as part of the terms of the modification. Under all of these programs, borrowers must
make at least three payments under the revised contractual terms during a trial period and be
successfully re-underwritten with income verification before their loan can be permanently
modified. Upon contractual modification, retained residential real estate loans, other than
purchased credit-impaired loans, are accounted for as troubled debt restructurings.
Consumer loans with balances of approximately $3.1 billion and $1.8 billion have been permanently
modified and accounted for as troubled debt restructurings as of December 31, 2009 and 2008,
respectively. Of these loans, $966 million and $853 million were classified as nonperforming at
December 31, 2009 and 2008, respectively.
JPMorgan Chase has also modified the terms of credit card loan agreements with borrowers who have
experienced financial difficulty. Such modifications may include reducing the interest rate on the
card and/or placing the customer on a fixed payment plan not exceeding 60 months; in all cases, the
Firm cancels the customer’s available line of credit on the credit card. If the cardholder does not
comply with the modified payment terms, then the credit card loan agreement will revert back to its
original payment terms, with the amount of any loan outstanding reflected in the appropriate
delinquency “bucket.” The loan amount may then be charged-off in accordance with the Firm’s
standard charge-off policy. Under these modification programs, $5.1 billion and $2.4 billion of
on-balance sheet credit card loans outstandings have been modified at December 31, 2009 and 2008,
respectively. In accordance with the Firm’s methodology for determining its consumer allowance for
loan losses, the Firm had already recognized a provision for loan losses on these credit card
loans; accordingly the modifications to these credit card loans had no incremental impact on the
Firm’s allowance for loan losses.
Purchased credit-impaired loans
In connection with the Washington Mutual transaction, JPMorgan Chase acquired certain loans that it
deemed to be credit-impaired. Wholesale loans with a carrying amount of $135 million at December
31, 2009, down from $224 million at December 31, 2008, were determined to be credit-impaired at the
date of acquisition. These wholesale loans are being accounted for individually (not on a pooled
basis) and are reported as nonperforming loans since cash flows for each individual loan are not
reasonably estimable. Such loans are excluded from the remainder of the following discussion, which
relates solely to purchased credit-impaired consumer loans.
Purchased credit-impaired consumer loans were determined to be credit-impaired based on specific
risk characteristics of the loan, including product type, loan-to-value ratios, FICO scores, and
past due status. Purchasers are permitted to aggregate credit-impaired loans acquired in the same
fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A
pool is then accounted for as a single asset with a single composite interest rate and an aggregate
expectation of cash flows. With respect to the Washington Mutual transaction, all of the consumer
loans were aggregated into pools of loans with common risk characteristics.
The table below sets forth information about these purchased credit-impaired consumer loans at the
acquisition date.
| (in millions) | September 25, 2008 (d) | |||
|
Contractually required payments
receivable
|
||||
|
(including interest)
|
$ | 188,958 | ||
|
Less: Nonaccretable difference
|
(59,396 | ) | ||
|
Cash flows expected to be
collected
(a)(b)
|
129,562 | |||
|
Less: Accretable yield
(b)(c)
|
(39,454 | ) | ||
|
Fair value of loans acquired
|
$ | 90,108 | ||
| (a) | Represents undiscounted principal and interest cash flows expected at acquisition. | |
| (b) | During the first quarter of 2009, the Firm continued to refine its model to estimate future cash flows for its purchased credit-impaired consumer loans, which resulted in an adjustment of the initial estimate of cash flows expected to be collected. These refinements, which primarily affected the amount of the undiscounted interest cash flows expected to be received over the life of the loans, resulted in a $6.8 billion increase in the Firm’s initial estimates of cash flows expected to be collected and the accretable yield. | |
| (c) | This amount is recognized into interest income over the estimated lives of the underlying pools of loans. | |
| (d) | Date of the Washington Mutual transaction. |
The Firm determined the fair value of the purchased credit-impaired consumer loans at the
acquisition date by discounting the cash flows expected to be collected at a market observable
discount rate, when available, adjusted for factors that a market participant would consider in
determining fair value. In determining the cash flows expected to be collected, management
incorporated assumptions regarding default rates, loss severities and the amounts and timing of
prepayments. Contractually required payments receivable represent the total undiscounted amount of
all uncollected contractual principal and interest payments, both past due and due in the future,
adjusted for the effect of estimated prepayments.
The accretable yield represents the excess of cash flows expected to be collected over the carrying
value of the purchased credit-impaired loans. This amount is not reported on the Firm’s
Consolidated Balance Sheets but is accreted into interest income at a level rate of return over the
expected lives of the underlying pools of loans. For variable rate loans, expected future cash
flows were initially based on the rate in effect at acquisition; expected future cash flows are
recalculated as rates change over the lives of the loans.
The table below sets forth the accretable yield activity for these loans for the years ended
December 31, 2009 and 2008.
| Accretable Yield Activity | ||||||||
| (in millions) | 2009 | 2008 | ||||||
|
Balance, January 1
|
$ | 32,619 | $ | — | ||||
|
Washington Mutual acquisition
(a)
|
— | 39,454 | ||||||
|
Accretion into interest income
|
(4,363 | ) | (1,292 | ) | ||||
|
Changes in interest rates on
variable rate loans
|
(4,849 | ) | (5,543 | ) | ||||
|
Other changes in expected cash
flows
(b)
|
2,137 | — | ||||||
|
Balance, December 31,
|
$ | 25,544 | $ | 32,619 | ||||
|
Accretable yield percentage
|
5.14 | % | 5.81 | % | ||||
| (a) | During the first quarter of 2009, the Firm continued to refine its model to estimate future cash flows for its purchased credit-impaired consumer loans, which resulted in an adjustment of the initial estimate of cash flows expected to be collected. These refinements, which primarily affected the amount of undiscounted interest cash flows expected to be received over the life of the loans, resulted in a $6.8 billion increase in the Firm’s initial estimate of cash flows expected to be collected and the accretable yield. However, on a discounted basis, these refinements did not have a material impact on the fair value of the purchased credit-impaired loans as of the September 25, 2008, acquisition date; nor did they have a material impact |
|
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|
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Table of Contents
Notes to consolidated financial statements
| on the amount of interest income recognized in the Firm’s Consolidated Statements of Income since that date. | ||
| (b) | Other changes in expected cash flows include the net impact of changes in estimated prepayments and reclassifications to the nonaccretable difference. |
On a quarterly basis, the Firm updates the amount of loan principal and interest cash flows
expected to be collected, incorporating assumptions regarding default rates, loss severities, the
amounts and timing of prepayments and other factors that are reflective of current market
conditions. Probable decreases in expected loan principal cash flows trigger the recognition of
impairment, which is then measured as the present value of the expected principal loss plus any
related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments
that occur after the acquisition date are recognized through the provision and allowance for loan
losses. Probable and significant increases in expected principal cash flows would first reverse any
previously recorded allowance for loan losses; any remaining increases are recognized prospectively
as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and
(iii) any other changes in the timing of expected cash flows are recognized prospectively as
adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of
payments in full by the borrower, or foreclosure, result in removal of the loan from the purchased
credit-impaired portfolio.
If the timing and/or amounts of expected cash flows on these purchased credit-impaired loans were
determined not to be reasonably estimable, no interest would be accreted and the loans would be
reported as nonperforming loans; however, since the timing and amounts of expected cash flows for
these purchased credit-impaired loans are reasonably estimable, interest is being accreted and the
loans are being reported as performing loans.
Charge-offs are not recorded on purchased credit-impaired loans until actual losses exceed the
estimated losses that were recorded as purchase accounting adjustments at acquisition date. To
date, no charge-offs have been recorded for these loans.
Purchased credit-impaired loans acquired in the Washington Mutual transaction are reported in loans
on the Firm’s Consolidated Balance Sheets. In 2009, an allowance for loan losses of $1.6 billion
was recorded for the prime mortgage and option ARM pools of loans. The net aggregate carrying
amount of the pools that have an allowance for loan losses was $47.2 billion at December 31, 2009.
This allowance for loan losses is reported as a reduction of the carrying amount of the loans in
the table below.
The table below provides additional information about these purchased credit-impaired consumer
loans.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Outstanding balance
(a)
|
$ | 103,369 | $ | 118,180 | ||||
|
Carrying amount
|
79,664 | 88,813 | ||||||
| (a) | Represents the sum of contractual principal, interest and fees earned at the reporting date. |
Purchased credit-impaired loans are also being modified under the MHA programs and the Firm’s other
loss mitigation programs. For these loans, the impact of the modification is incorporated into the
Firm’s quarterly assessment of whether a probable and/or significant change in estimated future
cash flows has occurred, and the loans continue to be accounted for as and reported as purchased
credit-impaired loans.
Foreclosed property
The Firm acquires property from borrowers through loan restructurings, workouts, and foreclosures,
which is recorded in other assets on the Consolidated Balance Sheets. Property acquired may include
real property (e.g., land, buildings, and fixtures) and commercial and personal property (e.g.,
aircraft, railcars, and ships). Acquired property is valued at fair value less costs to sell at
acquisition. Each quarter the fair value of the acquired property is reviewed and adjusted, if
necessary. Any adjustments to fair value in the first 90 days are charged to the allowance for loan
losses and thereafter adjustments are charged/credited to noninterest revenue–other. Operating
expense, such as real estate taxes and maintenance, are charged to other expense.
The allowance for loan losses includes an asset-specific component, a formula-based component
and a component related to purchased credit-impaired loans.
The asset-specific component relates to loans considered to be impaired, which includes any loans
that have been modified in a troubled debt restructuring as well as risk-rated loans that have been
placed on nonaccrual status. An asset-specific allowance for impaired loans is established when the
loan’s discounted cash flows (or, when available, the loan’s observable market price) is lower than
the recorded investment in the loan. To compute the asset-specific component of the allowance,
larger loans are evaluated individually, while smaller loans are evaluated as pools using
historical loss experience for the respective class of assets. Risk-rated loans (primarily
wholesale loans) are pooled by risk rating, while scored loans (i.e., consumer loans) are pooled by
product type.
The Firm generally measures the asset-specific allowance as the difference between the recorded
investment in the loan and the present value of the cash flows expected to be collected, discounted
at the loan’s original effective interest rate. Subsequent changes in measured impairment due to
the impact of discounting are reported as an adjustment to the provision for loan losses, not as an
adjustment to interest income. An asset-specific allowance for an impaired loan with an observable
market price is measured as the difference between the recorded investment in the loan and the
loan’s fair value.
Certain impaired loans that are determined to be collateral-dependent are charged-off to the fair
value of the collateral less costs to sell. When collateral-dependent commercial real-estate loans
are determined to be impaired, updated appraisals are typically obtained and updated every six to
twelve months. The Firm also considers both borrower- and market-specific factors, which
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may result in obtaining appraisal updates at more frequent intervals or broker-price opinions in
the interim.
The formula-based component is based on a statistical calculation and covers performing risk-rated
loans and consumer loans, except for loans restructured in troubled debt restructurings and
purchased credit-impaired loans. See Note 13 on pages 195–196 of this Annual
Report for more information on purchased credit-impaired loans.
For risk-rated loans, the statistical calculation is the product of an estimated probability of
default (“PD”) and an estimated loss given default (“LGD”). These factors are differentiated by
risk rating and expected maturity. In assessing the risk rating of a particular loan, among the
factors considered are the obligor’s debt capacity and financial flexibility, the level of the
obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies,
management strength, and the industry and geography in which the obligor operates. These factors
are based on an evaluation of historical and current information, and involve subjective assessment
and interpretation. Emphasizing one factor over another or considering additional factors could
impact the risk rating assigned by the Firm to that loan. PD estimates are based on observable
external through-the-cycle data, using credit-rating agency default statistics. LGD estimates are
based on a study of actual credit losses over more than one credit cycle.
For scored loans, the statistical calculation is performed on pools of loans with similar risk
characteristics (e.g., product type) and generally computed as the product of actual outstandings,
an expected-loss factor and an estimated-loss coverage period. Expected-loss factors are
statistically derived and consider historical factors such as loss frequency and severity. In
developing loss frequency and severity assumptions, the Firm considers known and anticipated
changes in the economic environment, including changes in housing prices, unemployment rates and
other risk indicators. A nationally recognized home price index measure is used to develop loss
severity estimates on defaulted residential real estate loans at the metropolitan statistical areas
(“MSA”) level. These loss severity estimates are regularly validated by actual losses recognized on
defaulted loans, market-specific real estate appraisals and property sales activity. Real estate
appraisals are updated when the loan is charged-off, annually thereafter, and at the time of the
final foreclosure sale. Forecasting methods are used to estimate expected-loss factors, including
credit loss forecasting models and vintage-based loss forecasting.
The economic impact
of potential modifications of residential real estate loans is not
included in the formula-based allowance because of the uncertainty
regarding the level and results of such modifications. As discussed
in Note 13 on pages 192-196 of this Annual Report, modified
residential real estate loans are generally accounted for as troubled
debt restructurings upon contractual modification and are evaluated
for an asset-specific allowance at and subsequent to modification.
Assumptions regarding the loans’ expected re-default rates are
incorporated into the measurement of the asset-specific allowance.
Management applies judgment within an established framework to adjust the results of applying the
statistical calculation described above. For the risk-rated portfolios, any adjustments made to the
statistical calculation are based on management’s quantitative and qualitative assessment of the
quality of underwriting standards; relevant internal factors affecting the credit quality of the
current portfolio; and external factors, such as current macroeconomic and political conditions
that have occurred but are not yet reflected in the loss factors. Factors related to unemployment,
housing prices,
and both concentrated and deteriorating industries are also incorporated into the
calculation, where relevant. For the scored loan portfolios, adjustments to the statistical
calculation are accomplished in part by analyzing the historical loss experience for each major
product segment. The determination of the appropriate adjustment is based on management’s view of
uncertainties that relate to current macroeconomic and political conditions, the quality of
underwriting standards, and other relevant internal and external factors affecting the credit
quality of the portfolio.
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.
Determining the appropriateness of the allowance is complex and requires judgment by management
about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan
portfolio, in light of the factors then prevailing, may result in significant changes in the
allowances for loan losses and lending-related commitments in future periods.
At least quarterly, the allowance for credit losses is reviewed by the Chief Risk Officer, the
Chief Financial Officer and the Controller of the Firm and discussed with the Risk Policy and Audit
Committees of the Board of Directors of the Firm. As of December 31, 2009, 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).
The table below summarizes the changes in the allowance for
loan losses.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Allowance for loan losses at
January 1
|
$ | 23,164 | $ | 9,234 | $ | 7,279 | ||||||
|
Cumulative effect of change in
accounting principles
(a)
|
— | — | (56 | ) | ||||||||
|
Allowance for loan losses at
January 1, adjusted
|
23,164 | 9,234 | 7,223 | |||||||||
|
Gross charge-offs
|
24,018 | 10,764 | 5,367 | |||||||||
|
Gross/(recoveries)
|
(1,053 | ) | (929 | ) | (829 | ) | ||||||
|
Net charge-offs
|
22,965 | 9,835 | 4,538 | |||||||||
|
Provision for loan losses:
|
||||||||||||
|
Provision excluding accounting
conformity
|
31,735 | 19,660 | 6,538 | |||||||||
|
Provision for loan losses –
accounting conformity
(b)
|
— | 1,577 | — | |||||||||
|
Total provision for loan losses
|
31,735 | 21,237 | 6,538 | |||||||||
|
Addition resulting from
Washington Mutual transaction
|
— | 2,535 | — | |||||||||
|
Other
(c)
|
(332 | ) | (7 | ) | 11 | |||||||
|
Allowance for loan losses at
December 31
|
$ | 31,602 | $ | 23,164 | $ | 9,234 | ||||||
|
Components:
|
||||||||||||
|
Asset-specific
(d)(e)
|
$ | 3,042 | $ | 1,091 | $ | 188 | ||||||
|
Formula-based
|
26,979 | 22,073 | 9,046 | |||||||||
|
Purchased credit-impaired
|
1,581 | — | — | |||||||||
|
Total allowance for loan losses
|
$ | 31,602 | $ | 23,164 | $ | 9,234 | ||||||
|
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|
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Notes to consolidated financial statements
| (a) | Reflects the effect of the adoption of the fair value option at January 1, 2007. For a further discussion of the fair value option, see Note 4 on pages 165–167 of this Annual Report. | |
| (b) | Related to the Washington Mutual transaction in 2008. | |
| (c) | The 2009 amount predominantly represents a reclassification related to the issuance and retention of securities from the Chase Issuance Trust. See Note 15 on pages 198–205 of this Annual Report. The 2008 amount represents foreign exchange translation. The 2007 amount includes assets acquired of $5 million and $5 million of foreign exchange translation. | |
| (d) | Relates to risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a troubled debt restructuring. | |
| (e) | The asset-specific consumer allowance for loan losses includes troubled debt restructuring reserves of $754 million and $258 million at December 31, 2009 and 2008, respectively and none at December 31, 2007. Prior period amounts have been reclassified to conform to the current presentation. |
The table below summarizes the changes in the allowance for lending-related commitments.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Allowance for lending-related commitments
at January 1
|
$ | 659 | $ | 850 | $ | 524 | ||||||
|
Provision for lending-related commitments
|
||||||||||||
|
Provision excluding accounting conformity
|
280 | (215 | ) | 326 | ||||||||
|
Provision for lending-related commitments
accounting conformity
(a)
|
— | (43 | ) | — | ||||||||
|
Total provision for lending-related
commitments
|
280 | (258 | ) | 326 | ||||||||
|
Addition resulting from Washington Mutual
transaction
|
— | 66 | — | |||||||||
|
Other
|
— | 1 | — | |||||||||
|
Allowance for lending-related
commitments at December 31
|
$ | 939 | $ | 659 | $ | 850 | ||||||
|
Components:
|
||||||||||||
|
Asset-specific
|
$ | 297 | $ | 29 | $ | 28 | ||||||
|
Formula-based
|
642 | 630 | 822 | |||||||||
|
Total allowance for lending-related
commitments
|
$ | 939 | $ | 659 | $ | 850 | ||||||
| (a) | Related to the Washington Mutual transaction in 2008. |
JPMorgan Chase securitizes and sells a variety of loans, including residential mortgage, credit
card, automobile, student, and commercial loans (primarily related to real estate). 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 142 of this Annual
Report); accordingly, the assets and liabilities of securitization-related QSPEs are not reflected
on the Firm’s Consolidated Balance Sheets (except for retained interests, as described below). The
primary purpose of these securitization vehicles is to meet investor needs and to generate
liquidity for the Firm through the sale of loans to the QSPEs. These QSPEs are financed through the
issuance of fixed- or floating-rate asset-backed securities. See Note 16 on pages 213-214 for further
information on the new accounting guidance, effective January 1, 2010, which eliminates the concept
of QSPEs and revises the criteria for the consolidation of VIEs.
The Firm records a loan securitization as a sale when the accounting criteria for a sale are met.
Those criteria are: (1) the transferred assets are legally isolated from the Firm’s 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 to
repurchase the transferred assets before their maturity, or have the ability to unilaterally cause
the holder to return the transferred assets.
For loan securitizations that meet the accounting sales criteria, the gains or losses recorded
depend, in part, on the carrying amount of the loans sold except for servicing assets which are
initially recorded at fair value. At the time of sale, any retained servicing asset is initially
recognized at fair value. The remaining carrying amount of the loans sold is allocated between the
loans sold and the other interests retained, based on their relative fair values on the date of
sale. Gains on securitizations are reported in noninterest revenue.
When quoted market prices are not available, the Firm estimates the fair value for these retained
interests by calculating the present value of future expected cash flows using modeling techniques.
Such models incorporate management’s best estimates of key variables, such as expected credit
losses, prepayment speeds and the discount rates appropriate for the risks involved.
The Firm may retain interests in the securitized loans in the form of undivided seller’s interest,
senior or subordinated interest-only strips, debt and equity tranches, escrow accounts and
servicing rights. The classification of retained interests is dependent upon several factors,
including the type of interest, whether or not the retained interest is represented by a security
certificate and when it was retained. Interests retained by IB are classified as trading assets.
See credit card securitizations and mortgage securitizations sections of this Note for further
information on the classification of their related retained interests. Retained interests
classified as AFS that are rated below “AA” by an external rating agency are subject to impairment
evaluations, as discussed in Note 11 on page 189 of this Annual Report.
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The following table presents the total unpaid principal amount of assets held in JPMorgan
Chase-sponsored securitization entities, for which sale accounting was achieved and to which the
Firm has continuing involvement, at December 31, 2009 and 2008. Continuing involvement includes
servicing the loans, holding senior or subordinated interests acquired at the time of
securitization, recourse or guarantee arrangements and derivative transactions. In certain
instances, the Firm’s only continuing involvement is servicing the loans. In the table below, the
amount of beneficial interests held by third parties and the total retained interests held by
JPMorgan Chase will not equal the assets held in QSPEs because the beneficial interests held by
third party are reflected at their current outstanding par amounts and a portion of the Firm’s
retained interests (trading assets, AFS securities and other assets) are reflected at their fair
value.
| Principal amount outstanding | JPMorgan Chase interests in securitized assets (e)(f)(g)(h) | |||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||
| assets held | Assets held | Total retained | ||||||||||||||||||||||||||
| by Firm- | in QSPEs | interests held | ||||||||||||||||||||||||||
| December 31, 2009 | sponsored | with continuing | Trading | AFS | Other | by JPMorgan | ||||||||||||||||||||||
| (in billions) | QSPEs | involvement | assets | securities | Loans | assets (i) | Chase | |||||||||||||||||||||
|
Securitization related:
|
||||||||||||||||||||||||||||
|
Credit card
|
$ | 109.6 | $ | 109.6 | (d) | $ | 0.1 | $ | 15.5 | $ | 16.7 | $ | 11.6 | $ | 43.9 | |||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||
|
Prime
(a)
|
183.3 | 171.5 | 0.9 | 0.2 | — | — | 1.1 | |||||||||||||||||||||
|
Subprime
|
50.0 | 47.3 | — | — | — | — | — | |||||||||||||||||||||
|
Option ARMs
|
42.0 | 42.0 | — | 0.1 | — | — | 0.1 | |||||||||||||||||||||
|
Commercial and other
(b)
|
155.3 | 24.8 | 1.6 | 0.8 | — | — | 2.4 | |||||||||||||||||||||
|
Student loans
|
1.0 | 1.0 | — | — | — | 0.1 | 0.1 | |||||||||||||||||||||
|
Auto
|
0.2 | 0.2 | — | — | — | — | — | |||||||||||||||||||||
|
Total
(c)
|
$ | 541.4 | $ | 396.4 | $ | 2.6 | $ | 16.6 | $ | 16.7 | $ | 11.7 | $ | 47.6 | ||||||||||||||
| Principal amount outstanding | JPMorgan Chase interests in securitized assets (e)(f)(g)(h) | |||||||||||||||||||||||||||
| Total | Total retained | |||||||||||||||||||||||||||
| assets held | Assets held | interests | ||||||||||||||||||||||||||
| by Firm- | in QSPEs | held by | ||||||||||||||||||||||||||
| December 31, 2008 | sponsored | with continuing | Trading | AFS | Other | JPMorgan | ||||||||||||||||||||||
| (in billions) | QSPEs | involvement | assets | securities | Loans | assets (i) | Chase | |||||||||||||||||||||
|
Securitization related:
|
||||||||||||||||||||||||||||
|
Credit card
|
$ | 121.6 | $ | 121.6 | (d) | $ | 0.5 | $ | 5.6 | $ | 33.3 | $ | 5.6 | $ | 45.0 | |||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||
|
Prime
(a)
|
233.9 | 212.3 | 1.7 | 0.7 | — | — | 2.4 | |||||||||||||||||||||
|
Subprime
|
61.0 | 58.6 | — | 0.1 | — | — | 0.1 | |||||||||||||||||||||
|
Option ARMs
|
48.3 | 48.3 | 0.1 | 0.3 | — | — | 0.4 | |||||||||||||||||||||
|
Commercial and
other
(b)
|
174.1 | 45.7 | 2.0 | 0.5 | — | — | 2.5 | |||||||||||||||||||||
|
Student loans
|
1.1 | 1.1 | — | — | — | 0.1 | 0.1 | |||||||||||||||||||||
|
Auto
|
0.8 | 0.8 | — | — | — | — | — | |||||||||||||||||||||
|
Total
(c)
|
$ | 640.8 | $ | 488.4 | $ | 4.3 | $ | 7.2 | $ | 33.3 | $ | 5.7 | $ | 50.5 | ||||||||||||||
| (a) | Includes Alt-A loans. | |
| (b) | Consists of securities backed by commercial loans (predominantly real estate) and non-mortgage-related consumer receivables purchased from third parties. The Firm generally does not retain a residual interest in its sponsored commercial mortgage securitization transactions. Also, includes co-sponsored commercial securitizations and, therefore, includes non–JPMorgan Chase–originated commercial mortgage loans. | |
| (c) | Includes securitized loans where the Firm owns less than a majority of the subordinated or residual interests in the securitizations. | |
| (d) | Includes credit card loans, accrued interest and fees, and cash amounts on deposit. | |
| (e) | Excludes retained servicing (for a discussion of MSRs, see Note 17 on pages 214–217 of this Annual Report). | |
| (f) | Excludes senior and subordinated securities of $875 million and $974 million at December 31, 2009 and 2008, respectively, which the Firm purchased in connection with IB’s secondary market-making activities. | |
| (g) | Includes investments acquired in the secondary market, predominantly for held-for-investment purposes, of $2.0 billion and $1.8 billion as of December 31, 2009 and 2008, respectively. This is comprised of $1.8 billion and $1.4 billion of investments classified as available-for-sale, including $1.7 billion and $172 million in credit cards, zero and $693 million of residential mortgages, and $91 million and $495 million of commercial and other; and $152 million and $452 million of investments classified as trading, including $104 million and $112 million of credit cards, $47 million and $303 million of residential mortgages, and $1 million and $37 million of commercial and other, all at December 31, 2009 and 2008, respectively. | |
| (h) | Excludes interest rate and foreign exchange derivatives primarily used to manage the interest rate and foreign exchange risks of the securitization entities. See Note 5 on pages 167–175 of this Annual Report for further information on derivatives. | |
| (i) | Certain of the Firm’s retained interests are reflected at their fair values. |
|
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|
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Table of Contents
Notes to consolidated financial statements
Securitization activity by major product type
The following discussion describes the nature of the Firm’s securitization activities by major
product type.
Credit Card Securitizations
The Card Services (“CS”) business securitizes originated and purchased credit card loans, primarily
through the Chase Issuance Trust (the “Trust”). In connection with the Washington Mutual
transaction, the Firm acquired the seller’s interest in the Washington Mutual Master Trust (the
“WMM Trust”) and also became its sponsor. The Firm’s primary continuing involvement in credit card
securitizations includes servicing the receivables, retaining an undivided seller’s interest in the
receivables, retaining certain senior and subordinated securities and the maintenance of escrow
accounts. CS maintains servicing responsibilities for all credit card securitizations that it
sponsors. As servicer and transferor, the Firm receives contractual servicing fees based on the
securitized loan balance plus excess servicing fees, which are recorded in credit card income as
discussed in Note 6 on page 176 of this Annual Report.
Actions taken in the second quarter of 2009
During the quarter ended June 30, 2009, the overall performance of the Firm’s credit card
securitization trusts declined, primarily due to the increase in credit losses incurred on the
underlying credit card receivables.
Chase Issuance Trust: The Chase Issuance Trust (the Firm’s primary issuance trust), which holds
prime quality credit card receivables, maintained positive excess spread, a key metric for
evaluating the performance of a card trust, through the first six months of 2009. In spite of this
positive excess spread, the Firm took certain actions, as permitted by the Trust agreements, in the
second quarter of 2009 to enhance the performance of the Trust due to continuing market uncertainty
concerning projected credit costs in the credit card industry, and to mitigate any further
deterioration in the performance of the Trust. On May 12, 2009, the Firm increased the required
credit enhancement level for each tranche of outstanding notes issued by the Trust, by increasing
the minimum required amount of subordinated notes and the funding requirements for the Trust’s cash
escrow accounts. On June 1, 2009, the Firm began designating as “discount receivables” a percentage
of new credit card receivables for inclusion in the Trust, thereby requiring collections of such
discounted receivables to be applied as finance charge collections in the Trust, which increased
the excess spread for the Trust. The Firm expects to discontinue designating a percentage of new
receivables as discount receivables on July 1, 2010. Also, during the second quarter of 2009, the
Firm exchanged $3.5 billion of its undivided seller’s interest in the Trust for $3.5 billion par
value of zero-coupon subordinated securities issued by the Trust and retained by the Firm. The
issuance of the zero-coupon securities by the Trust also increased the excess spread for the Trust.
These actions resulted in the addition of approximately $40 billion of risk-weighted assets for
regulatory capital purposes, which decreased the Firm’s Tier 1 capital ratio by approximately 40
basis points, but did not have a material impact on the Firm’s Consolidated Balance Sheets or
results of operations.
WMM Trust: At the time of the acquisition of the Washington Mutual banking operations, the assets
of the WMM Trust were comprised of Washington Mutual subprime credit card receivables. The quality
of the assets in the WMM Trust was much lower than the quality of the credit card receivables that
JPMorgan Chase has historically securitized in the public markets.
In order to more closely conform the WMM Trust to the overall quality typical of a JPMorgan
Chase–sponsored credit card securitization master trust, during the fourth quarter of 2008 the Firm
randomly removed $6.2 billion of credit card loans held by the WMM Trust and replaced them with
$5.8 billion of higher-quality receivables from the Firm’s portfolio.
However, as a result of continued deterioration during 2009 in the credit quality of the remaining
Washington Mutual–originated assets in the WMM Trust, the performance of the portfolio indicated
that an early amortization event was likely to occur unless additional actions were taken. On May
15, 2009, JPMorgan Chase, as seller and servicer, and the Bank of New York Mellon, as trustee,
amended the pooling and servicing agreement to permit non-random removals of credit card accounts.
On May 19, 2009, the Firm removed all remaining credit card receivables originated by Washington
Mutual. Following this removal, the WMM Trust collateral was entirely composed of receivables
originated by JPMorgan Chase. As a result of the actions taken by the Firm, the assets and
liabilities of the WMM Trust were consolidated on the balance sheet of JPMorgan Chase;
as a result, during the second quarter of 2009, the Firm recorded additional assets with an initial fair value
of $6.0 billion, liabilities with an initial fair value of $6.1 billion, and a pretax loss of
approximately $64 million.
Retained interests in nonconsolidated credit card securitizations
The following is a description of the Firm’s retained interests in credit card securitizations that
were not consolidated at the dates presented. Accordingly, the Firm’s retained interests in the WMM
Trust are included in the amounts reported at December 31, 2008, but no longer included at December
31, 2009, due to the second quarter actions noted above. For further information regarding the WMM
Trust assets and liabilities, see Note 16 on pages 206–214 of this Annual Report.
The agreements with the credit card securitization trusts require the Firm to maintain a minimum
undivided interest in the trusts (which generally ranges from 4% to 12%). These undivided interests
in the trusts represent the Firm’s undivided interests in the receivables transferred to the trust
that have not been securitized; these undivided interests are not represented by security
certificates, are carried at historical cost, and are classified within loans. At December 31, 2009
and 2008, the Firm had $16.7 billion and $33.3 billion, respectively, related to its undivided
interests in the trusts. The Firm maintained an average undivided interest in principal receivables
in the trusts of approximately 16% and 22% for the years ended December 31, 2009 and 2008,
respectively.
|
200
|
JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The Firm retained a subordinated interest in accrued interest and fees on the securitized
receivables totaling $3.2 billion and $3.0 billion as of December 31, 2009 and 2008, respectively,
which is reported at fair value in other assets.
The Firm retained subordinated securities in its credit card securitization trusts with aggregate
fair values of $6.6 billion and $2.3 billion at December 31, 2009 and 2008, respectively, and
senior securities with aggregate fair values of $7.2 billion and $3.5 billion at December 31, 2009
and 2008, respectively. Of the securities retained, $13.8 billion and $5.4 billion were classified
as AFS securities at December 31, 2009 and 2008, respectively. The senior AFS securities were used
by the Firm as collateral for a secured financing transaction. The retained subordinated interests
that were acquired in the Washington Mutual transaction and classified as trading assets had a
carrying value of $389 million on December 31, 2008. These retained subordinated interests were
subsequently repaid or valued at zero before the Firm consolidated the WMM Trust in the second
quarter of 2009, as discussed above.
The Firm also maintains escrow accounts up to predetermined limits for some credit card
securitizations to cover deficiencies in cash flows owed to investors. The amounts available in
such escrow accounts related to credit cards are recorded in other assets and amounted to $1.0
billion and $74 million as of December 31, 2009 and 2008, respectively. The increase in the balance
of these escrow accounts primarily relates to the Trust actions described above that the Firm took
on May 12, 2009. JPMorgan Chase has also recorded $854 million representing receivables that have
been transferred to the Trust and designated as “discount receivables.” All of these residual
interests are reported at fair value in other assets.
Mortgage Securitizations
The Firm securitizes originated and purchased residential mortgages and originated commercial
mortgages.
RFS securitizes residential mortgage loans that it originates and purchases and it generally
retains servicing for all of its originated and purchased residential mortgage loans and certain
commercial mortgage loans. Additionally, RFS may retain servicing for certain mortgage loans
purchased by IB. As servicer, the Firm receives servicing fees based on the securitized loan
balance plus ancillary fees. In a limited number of securitizations, RFS may retain an interest in
addition to servicing rights. The amount of interest retained related to these securitizations
totaled $537 million and $939 million at December 31, 2009 and 2008, respectively. These retained
interests are accounted for as trading or AFS securities (if represented by a security certificate)
or other assets (if not represented by a security certificate).
IB securitizes residential mortgage loans (including those that it purchased and certain mortgage
loans originated by RFS), and commercial mortgage loans that it originated. Residential loans
securitized by IB are often serviced by RFS. Upon securitization, IB may engage in underwriting and
trading activities of the securities issued by the securitization trust. IB may retain unsold
senior and/or subordinated interests (including residual interests) in both residential and
commercial mortgage securitizations at the time of securitization. These retained interests are
accounted for at fair value and classified as trading assets. The amount of residual interests
retained was $24 million and $155 million at December 31, 2009 and 2008, respectively.
Additionally, IB retained $2.3 billion and $2.8 billion of senior and subordinated interests as of
December 31, 2009 and 2008, respectively.
In addition to the amounts reported in the securitization activity tables below, the Firm sold
residential mortgage loans totaling $147.9 billion, $122.0 billion and $81.8 billion during the
years ended December 31, 2009, 2008 and 2007, respectively. The majority of these loan sales were
for securitization by Government National Mortgage Association (“GNMA”), Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”). The Firm
retains the right to service these loans and they are serviced in accordance with the agency’s
servicing guidelines and standards. These sales resulted in pretax gains of $92 million, $32
million and $47 million, respectively.
For a limited number of loan sales, the Firm is obligated to share up to 100% of the credit risk
associated with the sold loans with the purchaser. See Note 31 on page 233 of this Annual Report
for additional information on loans sold with recourse and other securitization related
indemnifications.
Other Securitizations
The Firm also securitizes automobile and student loans originated by RFS and purchased consumer
loans (including automobile and student loans). The Firm retains servicing responsibilities for all
originated and certain purchased student and automobile loans. It may also hold a retained interest
in these securitizations; such residual interests are classified as other assets. At December 31,
2009 and 2008, the Firm held $9 million and $37 million, respectively, of retained interests in
securitized automobile loan securitizations and $49 million and $52 million, respectively, of
residual interests in securitized student loans.
|
JPMorgan Chase & Co. / 2009 Annual Report
|
201 |
Table of Contents
Notes to consolidated financial statements
Securitization activity
The following tables provide information related to the Firm’s securitization activities for the
years ended December 31, 2009, 2008 and 2007. For the periods presented, there were no cash flows
from the Firm to the QSPEs related to recourse or guarantee arrangements.
| Year ended December 31, 2009 | Residential mortgage (g) | |||||||||||||||||||||||||||
| (in millions, except for ratios and where | Option | Commercial | Student | |||||||||||||||||||||||||
| otherwise noted) | Credit card | Prime (h) | Subprime | ARMs | and other | loans | Auto | |||||||||||||||||||||
|
Principal securitized
|
$ | 26,538 | $ | — | $ | — | $ | — | $ | 500 | $ | — | $ | — | ||||||||||||||
|
Pretax gains
|
22 | — | — | — | — | (i) | — | — | ||||||||||||||||||||
|
All cash flows during the period:
|
||||||||||||||||||||||||||||
|
Proceeds from new securitizations
|
$ | 26,538 | (e)(f) | $ | — | $ | — | $ | — | $ | 542 | (e) | $ | — | $ | — | ||||||||||||
|
Servicing fees collected
|
1,251 | 432 | 185 | 494 | 11 | 3 | 4 | |||||||||||||||||||||
|
Other cash flows received
(a)
|
5,000 | 7 | 4 | — | — | — | — | |||||||||||||||||||||
|
Proceeds from collections reinvested in
revolving securitizations
|
161,428 | — | — | — | — | — | — | |||||||||||||||||||||
|
Purchases of previously transferred
financial assets (or the underlying
collateral)
(b)
|
— | 136 | — | 29 | — | — | 249 | |||||||||||||||||||||
|
Cash flows received on the interests
that continue to be held by the Firm
(c)
|
261 | 475 | 25 | 38 | 109 | 7 | 4 | |||||||||||||||||||||
| Key assumptions used to measure retained interests originated during the year (rates per annum): | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Prepayment rate
(d)
|
16.7 | % | 100 | % (j) | ||||||||||||||||||||||||
|
|
PPR | CPY | ||||||||||||||||||||||||||
|
Weighted-average life (in years)
|
0.5 | 9.0 | ||||||||||||||||||||||||||
|
Expected credit losses
|
8.9 | % | — | % (j) | ||||||||||||||||||||||||
|
Discount rate
|
16.0 | % | 10.7 | % | ||||||||||||||||||||||||
| Year ended December 31, 2008 | Residential mortgage (g) | |||||||||||||||||||||||||||
| (in millions, except for ratios and where | Option | Commercial | Student | |||||||||||||||||||||||||
| otherwise noted) | Credit card | Prime (h) | Subprime | ARMs | and other | loans | Auto | |||||||||||||||||||||
|
Principal securitized
|
$ | 21,390 | $ | — | $ | — | $ | — | $ | 1,023 | $ | — | $ | — | ||||||||||||||
|
Pretax gains
|
151 | — | — | — | — | — | — | |||||||||||||||||||||
|
All cash flows during the period:
|
||||||||||||||||||||||||||||
|
Proceeds from new securitizations
|
$ | 21,389 | (e) | $ | — | $ | — | $ | — | $ | 989 | (e) | $ | — | $ | — | ||||||||||||
|
Servicing fees collected
|
1,162 | 279 | 146 | 129 | 11 | 4 | 15 | |||||||||||||||||||||
|
Other cash flows received
(a)
|
4,985 | 23 | 16 | — | — | — | — | |||||||||||||||||||||
|
Proceeds from collections reinvested in
revolving securitizations
|
152,399 | — | — | — | — | — | — | |||||||||||||||||||||
|
Purchases of previously transferred
financial assets (or the underlying
collateral)
(b)
|
— | 217 | 13 | 6 | — | — | 359 | |||||||||||||||||||||
|
Cash flows received on the interests
that continue to be held by the Firm
(c)
|
117 | 267 | 23 | 53 | 455 | — | 43 | |||||||||||||||||||||
| Key assumptions used to measure retained interests originated during the year (rates per annum): | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Prepayment rate
(d)
|
19.1 | % | 1.5 | % | ||||||||||||||||||||||||
|
|
PPR | CPR | ||||||||||||||||||||||||||
|
Weighted-average life (in years)
|
0.4 | 2.1 | ||||||||||||||||||||||||||
|
Expected credit losses
|
4.6 | % | 1.5 | % (k) | ||||||||||||||||||||||||
|
Discount rate
|
12.5 | % | 25.0 | % | ||||||||||||||||||||||||
| 202 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
| Year ended December 31, 2007 | Residential mortgage | |||||||||||||||||||||||||||
| (in millions, except for ratios and where | Option | Commercial | Student | |||||||||||||||||||||||||
| otherwise noted) | Credit card | Prime (h) | Subprime | ARMs | and other | loans | Auto | |||||||||||||||||||||
|
Principal securitized
|
$ | 21,160 | $ | 32,084 | $ | 6,763 | $ | — | $ | 12,797 | $ | 1,168 | $ | — | ||||||||||||||
|
Pretax gains
|
177 | 28 | (i) | 43 | — | — | 51 | — | ||||||||||||||||||||
|
All cash flows during the period:
|
||||||||||||||||||||||||||||
|
Proceeds from new securitizations
|
$ | 21,160 | $ | 31,791 | $ | 6,844 | $ | — | $ | 13,038 | $ | 1,168 | $ | — | ||||||||||||||
|
Servicing fees collected
|
1,005 | 124 | 246 | — | 7 | 2 | 36 | |||||||||||||||||||||
|
Other cash flows received
(a)
|
4,963 | — | — | — | — | — | — | |||||||||||||||||||||
|
Proceeds from collections reinvested in
revolving securitizations
|
148,946 | — | — | — | — | — | — | |||||||||||||||||||||
|
Purchases of previously transferred
financial assets (or the underlying
collateral)
(b)
|
— | 58 | 598 | — | — | — | 431 | |||||||||||||||||||||
|
Cash flows received on the interests
that continue to be held by the
Firm (c) |
18 | 140 | 278 | — | 256 | — | 89 | |||||||||||||||||||||
| Key assumptions used to measure retained interests originated during the year (rates per annum): | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Prepayment rate
(d)
|
20.4 | % | 13.7-37.2 | % | 30.0-48.0 | % | 0.0-8.0 | % | 1.0-8.0 | % | ||||||||||||||||||
|
|
PPR | CPR | CPR | CPR | CPR | |||||||||||||||||||||||
|
Weighted-average life (in years)
|
0.4 | 1.3-5.4 | 2.3-2.8 | 1.3-10.2 | 9.3 | |||||||||||||||||||||||
|
Expected credit losses
|
3.7 | % | 0.0-1.6 | % (k) | 1.2-2.2 | % | 0.0-1.0 | % (k) | — | % (k) | ||||||||||||||||||
|
Discount rate
|
12.0 | % | 5.8-20.0 | % | 12.1-26.7 | % | 10.0-14.0 | % | 9.0 | % | ||||||||||||||||||
| (a) | Includes excess servicing fees and other ancillary fees received. | |
| (b) | Includes cash paid by the Firm to reacquire assets from the QSPEs – for example, servicer clean-up calls. | |
| (c) | Includes cash flows received on retained interests including – for example, principal repayments, and interest payments. | |
| (d) | PPR: principal payment rate; CPR: constant prepayment rate; CPY: constant prepayment yield. | |
| (e) | Includes $12.8 billion and $5.5 billion of securities in credit cards; and $47 million and zero of securities in commercial and other; retained by the Firm for the years ended December 31, 2009 and 2008, respectively. | |
| (f) | As required under the terms of the transaction documents, $1.6 billion of proceeds from new securitizations were deposited to cash escrow accounts during the year ended December 31, 2009. | |
| (g) | Includes securitizations sponsored by Bear Stearns and Washington Mutual as of their respective acquisition dates. | |
| (h) | Includes Alt-A loans. | |
| (i) | As of January 1, 2007, the Firm elected the fair value option for IB warehouse and the RFS prime mortgage warehouse. The carrying value of these loans accounted for at fair value approximates the proceeds received from securitization. | |
| (j) | Represents a senior interest-only security that is expected to prepay in full as soon as permitted, as such there is no expected credit loss on this security. Market convention is to utilize a 100% prepayment rate for this type of interest. | |
| (k) | Expected credit losses for consumer prime residential mortgage, and student and certain other securitizations are incorporated into other assumptions. |
JPMorgan Chase’s interest in securitized assets held at fair value
The following table summarizes the Firm’s retained securitization interests, which are carried at
fair value on the Firm’s Consolidated Balance Sheets. The risk ratings are periodically reassessed
as information becomes available. As of December 31, 2009 and 2008, 59% and 55%, respectively, of
the Firm’s retained securitization interests, which are carried at fair value, were risk rated “A”
or better.
| Ratings profile of interests held (c)(d)(e) | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
| December 31, | Investment | Noninvestment | Retained | Investment | Noninvestment | Retained | ||||||||||||||||||
| (in billions) | grade | grade | interests | grade | grade | interests | ||||||||||||||||||
|
Asset types:
|
||||||||||||||||||||||||
|
Credit card
(a)
|
$ | 15.6 | $ | 5.0 | $ | 20.6 | $ | 5.8 | $ | 3.8 | $ | 9.6 | ||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||
|
Prime
(b)
|
0.7 | 0.4 | 1.1 | 2.0 | 0.4 | 2.4 | ||||||||||||||||||
|
Subprime
|
— | — | — | — | 0.1 | 0.1 | ||||||||||||||||||
|
Option ARMs
|
0.1 | — | 0.1 | 0.4 | — | 0.4 | ||||||||||||||||||
|
Commercial and other
|
2.2 | 0.2 | 2.4 | 2.2 | 0.3 | 2.5 | ||||||||||||||||||
|
Student loans
|
— | 0.1 | 0.1 | — | 0.1 | 0.1 | ||||||||||||||||||
|
Auto
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | 18.6 | $ | 5.7 | $ | 24.3 | $ | 10.4 | $ | 4.7 | $ | 15.1 | ||||||||||||
| (a) | Includes retained subordinated interests carried at fair value, including CS’s accrued interests and fees, escrow accounts, and other residual interests. Excludes at December 31, 2009 and 2008, undivided seller interest in the trusts of $16.7 billion and $33.3 billion, respectively, and unencumbered cash amounts and deposits of $6.6 billion and $2.1 billion, respectively, which are carried at historical cost. | |
| (b) | Includes Alt-A loans. | |
| (c) | The ratings scale is presented on an S&P-equivalent basis. | |
| (d) | Includes $2.0 billion and $1.8 billion of investments acquired in the secondary market, but predominantly held for investment purposes, as of December 31, 2009 and 2008, respectively. Of these amounts, $2.0 billion and $1.7 billion were classified as investment-grade as of December 31, 2009 and 2008, respectively. | |
| (e) | Excludes senior and subordinated securities of $875 million and $1.0 billion at December 31, 2009 and 2008, respectively, which the Firm purchased in connection with IB’s secondary market-making activities. |
| JPMorgan Chase & Co. / 2009 Annual Report | 203 |
Table of Contents
Notes to consolidated financial statements
The table below outlines the key economic assumptions used to determine the fair value as of
December 31, 2009 and 2008, respectively, of the Firm’s retained interests, other than MSRs, that
are valued using modeling techniques. The table below also outlines the sensitivities of those fair
values to immediate 10% and 20% adverse changes in assumptions used to determine fair value. For a
discussion of MSRs, see Note 17 on pages 215–216 of this Annual Report.
| December 31, 2009 | Residential mortgage | |||||||||||||||||||||||||||
| (in millions, except rates, and where | Option | Commercial | ||||||||||||||||||||||||||
| otherwise noted) | Credit card | Prime (d) | Subprime | ARMs | and other | Student | Auto | |||||||||||||||||||||
|
JPMorgan Chase interests in securitized assets
(a)
|
$ | 4,016 | (c) | $ | 1,143 | $ | 27 | $ | 113 | $ | 2,361 | $ | 51 | $ | 9 | |||||||||||||
|
Weighted-average life (in years)
|
0.6 | 8.3 | 4.3 | 5.1 | 3.5 | 8.1 | 0.6 | |||||||||||||||||||||
|
Weighted-average prepayment
rate (b) |
14.3 | % | 4.9 | % | 21.8 | % | 15.7 | % | — | % | 5.0 | % | 1.4 | % | ||||||||||||||
|
|
PPR | CPR | CPR | CPR | CPR | CPR | ABS | |||||||||||||||||||||
|
Impact of 10% adverse change
|
$ | (1 | ) | $ | (15 | ) | $ | (2 | ) | $ | — | $ | — | $ | (1 | ) | $ | — | ||||||||||
|
Impact of 20% adverse change
|
(2 | ) | (31 | ) | (3 | ) | (1 | ) | — | (2 | ) | (1 | ) | |||||||||||||||
|
Weighted-average loss assumption
|
6.8 | % | 3.2 | % | 2.7 | % | 0.7 | % | 1.4 | % | — | % (e) | 0.8 | % | ||||||||||||||
|
Impact of 10% adverse change
|
$ | (1 | ) | $ | (15 | ) | $ | (4 | ) | $ | — | $ | (41 | ) | $ | — | $ | — | ||||||||||
|
Impact of 20% adverse change
|
(3 | ) | (29 | ) | (7 | ) | — | (100 | ) | — | — | |||||||||||||||||
|
Weighted-average discount rate
|
12.0 | % | 11.4 | % | 23.2 | % | 5.4 | % | 12.5 | % | 9.0 | % | 2.8 | % | ||||||||||||||
|
Impact of 10% adverse change
|
$ | (10 | ) | $ | (41 | ) | $ | (2 | ) | $ | (1 | ) | $ | (72 | ) | $ | (2 | ) | $ | — | ||||||||
|
Impact of 20% adverse change
|
(20 | ) | (82 | ) | (4 | ) | (3 | ) | (139 | ) | (4 | ) | — | |||||||||||||||
| December 31, 2008 | Residential mortgage | |||||||||||||||||||||||||||
| (in millions, except rates, and where | Option | Commercial | ||||||||||||||||||||||||||
| otherwise noted) | Credit card | Prime (d) | Subprime | ARMs | and other | Student | Auto | |||||||||||||||||||||
|
JPMorgan Chase interests in securitized assets
(a)
|
$ | 3,463 | (c) | $ | 1,420 | $ | 77 | $ | 436 | $ | 1,966 | $ | 55 | $ | 40 | |||||||||||||
|
Weighted-average life (in years)
|
0.5 | 5.3 | 1.5 | 7.3 | 3.5 | 8.2 | 0.7 | |||||||||||||||||||||
|
Weighted-average
prepayment
rate (b) |
16.6 | % | 17.7 | % | 25.1 | % | 7.6 | % | 0.7 | % | 5.0 | % | 1.3 | % | ||||||||||||||
|
|
PPR | CPR | CPR | CPR | CPR | CPR | ABS | |||||||||||||||||||||
|
Impact of 10% adverse change
|
$ | (42 | ) | $ | (31 | ) | $ | (9 | ) | $ | (4 | ) | $ | (1 | ) | $ | (1 | ) | $ | — | ||||||||
|
Impact of 20% adverse change
|
(85 | ) | (57 | ) | (10 | ) | (11 | ) | (1 | ) | (2 | ) | (1 | ) | ||||||||||||||
|
Weighted-average loss assumption
|
7.0 | % | 4.4 | % | 3.4 | % | 0.3 | % | 0.3 | % (e) | — | % (e) | 0.5 | % | ||||||||||||||
|
Impact of 10% adverse change
|
$ | (235 | ) | $ | (25 | ) | $ | (11 | ) | $ | — | $ | (12 | ) | $ | — | $ | — | ||||||||||
|
Impact of 20% adverse change
|
(426 | ) | (49 | ) | (17 | ) | (1 | ) | (24 | ) | — | (1 | ) | |||||||||||||||
|
Weighted-average discount rate
|
18.0 | % | 14.5 | % | 21.5 | % | 17.3 | % | 12.4 | % | 9.0 | % | 4.1 | % | ||||||||||||||
|
Impact of 10% adverse change
|
$ | (10 | ) | $ | (52 | ) | $ | (7 | ) | $ | (16 | ) | $ | (26 | ) | $ | (2 | ) | $ | — | ||||||||
|
Impact of 20% adverse change
|
(20 | ) | (102 | ) | (9 | ) | (28 | ) | (49 | ) | (4 | ) | — | |||||||||||||||
| (a) | As of December 31, 2008, certain investments acquired in the secondary market but predominantly held for investment purposes are included. | |
| (b) | PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate. | |
| (c) | Excludes the Firm’s retained senior and subordinated AFS securities in its credit card securitization trusts, which are discussed in Note 11 on pages 187–191 of this Annual Report. | |
| (d) | Includes Alt-A loans. | |
| (e) | Expected losses for student loans and certain wholesale securitizations are minimal and are incorporated into other assumptions. |
The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based on
a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the
relationship of the change in the assumptions to the change in fair value may not be linear. Also,
in the table, the effect that a change in a particular assumption may have on the fair value is
calculated without changing any other assumption. In reality, changes in one factor may result in
changes in another, which might counteract or magnify the sensitivities. The above sensitivities
also do not reflect the Firm’s risk management practices that may be undertaken to mitigate such
risks.
| 204 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Loan delinquencies and net charge-offs
The table below includes information about delinquencies, net charge-offs/(recoveries) and
components of reported and securitized financial assets at December 31, 2009 and 2008.
| 90 days or more past | ||||||||||||||||||||||||||||||||
| Credit exposure | Nonperforming loans (h)(i) | due and still accruing (i) | Net loan charge-offs | |||||||||||||||||||||||||||||
| Year ended December 31, (in millions) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||
|
Consumer loans – excluding purchased
credit-impaired loans and loans
held-for-sale:
|
||||||||||||||||||||||||||||||||
|
Home equity – senior lien
|
$ | 27,376 | $ | 29,793 | $ | 477 | $ | 291 | $ | — | $ | — | $ | 234 | $ | 86 | ||||||||||||||||
|
Home equity – junior lien
|
74,049 | 84,542 | 1,188 | 1,103 | — | — | 4,448 | 2,305 | ||||||||||||||||||||||||
|
Prime mortgage
(a)
|
66,892 | 72,266 | 4,355 | 1,895 | — | — | 1,894 | 526 | ||||||||||||||||||||||||
|
Subprime mortgage
|
12,526 | 15,330 | 3,248 | 2,690 | — | — | 1,648 | 933 | ||||||||||||||||||||||||
|
Option ARMs
|
8,536 | 9,018 | 312 | 10 | — | — | 63 | — | ||||||||||||||||||||||||
|
Auto loans
|
46,031 | 42,603 | 177 | 148 | — | — | 627 | 568 | ||||||||||||||||||||||||
|
Credit card
(b)
|
78,786 | 104,746 | 3 | 4 | 3,481 | 2,649 | 9,634 | 4,556 | ||||||||||||||||||||||||
|
All other loans
|
31,700 | 33,715 | 900 | 430 | 542 | 463 | 1,285 | 459 | ||||||||||||||||||||||||
|
Total consumer loans
|
345,896 | 392,013 | 10,660 | 6,571 | 4,023 | 3,112 | 19,833 | 9,433 | ||||||||||||||||||||||||
|
Consumer loans – purchased credit-impaired
(c)
|
||||||||||||||||||||||||||||||||
|
Home equity
|
26,520 | 28,555 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Prime mortgage
|
19,693 | 21,855 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Subprime mortgage
|
5,993 | 6,760 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Option ARMs
|
29,039 | 31,643 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Total consumer loans –
purchased
credit-impaired
(c)
|
81,245 | 88,813 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Total consumer loans – retained
|
427,141 | 480,826 | 10,660 | 6,571 | 4,023 | 3,112 | 19,833 | 9,433 | ||||||||||||||||||||||||
|
Loans held-for-sale
(d)
|
2,142 | 2,028 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total consumer loans – reported
|
429,283 | 482,854 | 10,660 | 6,571 | 4,023 | 3,112 | 19,833 | 9,433 | ||||||||||||||||||||||||
|
Total wholesale loans
|
204,175 | 262,044 | 6,904 | (j) | 2,382 | (j) | 332 | 163 | 3,132 | 402 | ||||||||||||||||||||||
|
Total loans reported
|
633,458 | 744,898 | 17,564 | 8,953 | 4,355 | 3,275 | 22,965 | 9,835 | ||||||||||||||||||||||||
|
Securitized loans:
|
||||||||||||||||||||||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||||||
|
Prime mortgage
(a)
|
171,547 | 212,274 | 33,838 | 21,130 | — | — | 9,333 | 5,645 | ||||||||||||||||||||||||
|
Subprime mortgage
|
47,261 | 58,607 | 19,505 | 13,301 | — | — | 7,123 | 4,797 | ||||||||||||||||||||||||
|
Option ARMs
|
41,983 | 48,328 | 10,973 | 6,440 | — | — | 2,287 | 270 | ||||||||||||||||||||||||
|
Automobile
|
218 | 791 | 1 | 2 | — | — | 4 | 15 | ||||||||||||||||||||||||
|
Credit card
|
84,626 | 85,571 | — | — | 2,385 | 1,802 | 6,443 | 3,612 | ||||||||||||||||||||||||
|
Student
|
1,008 | 1,074 | — | — | 64 | 66 | 1 | 1 | ||||||||||||||||||||||||
|
Commercial and other
|
24,799 | 45,677 | 1,244 | 166 | — | 28 | 15 | 8 | ||||||||||||||||||||||||
|
Total loans securitized
(e)
|
371,442 | 452,322 | 65,561 | 41,039 | 2,449 | 1,896 | 25,206 | 14,348 | ||||||||||||||||||||||||
|
Total loans reported and
securitized
(f)
|
$ | 1,004,900 | (g) | $ | 1,197,220 | (g) | $ | 83,125 | $ | 49,992 | $ | 6,804 | $ | 5,171 | $ | 48,171 | $ | 24,183 | ||||||||||||||
| (a) | Includes Alt-A loans. | |
| (b) | Includes billed finance charges and fees net of an allowance for uncollectible amounts, and $1.0 billion of loans at December 31, 2009, held by the Washington Mutual Master Trust, which were consolidated onto the Firm’s Consolidated Balance Sheets at fair value during the second quarter of 2009. | |
| (c) | Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase’s acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due. For additional information, see Note 13 on pages 192–196 of this Annual Report. | |
| (d) | Includes loans for prime mortgages and other (largely student loans) of $450 million and $1.7 billion at December 31, 2009, respectively, and $206 million and $1.8 billion at December 31, 2008, respectively. | |
| (e) | Total assets held in securitization-related SPEs were $541.4 billion and $640.8 billion at December 31, 2009 and 2008, respectively. The $371.4 billion and $452.3 billion of loans securitized at December 31, 2009 and 2008, respectively, excludes: $145.0 billion and $152.4 billion of securitized loans, in which the Firm has no continuing involvement; $16.7 billion and $33.3 billion of seller’s interests in credit card master trusts; and $8.3 billion and $2.8 billion of cash amounts on deposit and escrow accounts, all respectively. | |
| (f) | Represents both loans on the Consolidated Balance Sheets and loans that have been securitized. | |
| (g) | Includes securitized loans that were previously recorded at fair value and classified as trading assets. | |
| (h) | At December 31, 2009 and 2008, nonperforming loans excluded: (1) mortgage loans insured by U.S. government agencies of $9.0 billion and $3.0 billion, respectively; (2) student loans that were 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $542 million and $437 million, respectively. These amounts are excluded, as reimbursement is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under guidance issued by the Federal Financial Institutions Examination Council, 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 about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. | |
| (i) | Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. | |
| (j) | Includes nonperforming loans held-for-sale and loans at fair value of $345 million and $32 million at December 31, 2009 and 2008, respectively. |
| JPMorgan Chase & Co./2009 Annual Report | 205 |
Table of Contents
Notes to consolidated financial statements
Refer to Note 1 on page 142 of this Annual Report for a further description of JPMorgan Chase’s
policies regarding consolidation of variable interest entities.
JPMorgan Chase’s 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. IB is involved with VIEs through multi-seller conduits and for investor intermediation purposes, as discussed below. IB also securitizes loans through QSPEs, to create asset-backed securities, as further discussed in Note 15 on pages 198-205 of this Annual Report. |
| • | Asset Management (“AM”): The legal entity structures for a limited number of funds sponsored and managed by asset management include certain entities within the structure which are deemed VIEs. As asset manager of the funds, AM earns a fee based on assets managed; the fee varies with each fund’s investment objective and is competitively priced. For those limited number of funds that qualify as VIEs, AM’s relationship with such funds are not considered significant variable interests under U.S. GAAP. |
| • | Treasury & Securities Services: Provides services to a number of VIEs that are similar to those provided to non-VIEs. TSS earns market-based fees for the services it provides. The relationships resulting from TSS’ services are not considered to be significant variable interests. |
| • | Commercial Banking (“CB”): 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 IB. CB may assist in the structuring and/or ongoing administration of these VIEs and may provide liquidity, letters of credit and/or derivative instruments in support of the VIE. The relationships resulting from CB’s services are not considered to be significant variable interests. |
| • | Corporate/Private Equity: Corporate utilizes VIEs to issue guaranteed capital debt securities. See Note 22 on pages 220-221 for further information. The Private Equity business, within Corporate/Private Equity, may be involved with entities that could be deemed VIEs. Private equity entities are typically investment companies as defined in the investment company accounting guidance and, as such, are not required to utilize the accounting guidance for the consolidation of VIEs. Had the guidance for consolidation of VIEs been applied to these entities, the impact would have been immaterial to the Firm’s Consolidated Financial Statements as of December 31, 2009. |
As noted above, IB is predominantly involved with multi-seller conduits and VIEs associated with
investor intermediation activities. These nonconsolidated VIEs that are sponsored by JPMorgan Chase
are discussed below. The Firm considers a “sponsored” VIE to include any entity where: (1) JPMorgan
Chase is the principal
beneficiary of the structure; (2) the VIE is used by JPMorgan Chase to
securitize Firm assets; (3) the VIE issues financial instruments associated with the JPMorgan Chase
brand name; or (4) the entity is a JPMorgan Chase-administered asset-backed commercial paper
(“ABCP”) conduit.
Multi-seller conduits
Funding and liquidity
Funding and liquidity
The Firm is an active participant in the asset-backed securities business, and it helps customers
meet their financing needs by providing access to the commercial paper markets through VIEs known
as multi-seller conduits. Multi-seller conduit entities are separate bankruptcy remote entities
that purchase interests in, and make loans secured by, pools of receivables and other financial
assets pursuant to agreements with customers of the Firm. The conduits fund their purchases and
loans through the issuance of highly rated commercial paper to third-party investors. The primary
source of repayment of the commercial paper is the cash flow from the pools of assets. In most
instances, the assets are structured with deal-specific credit enhancements provided by the
customers (i.e., sellers) to the conduits or other third parties. Deal-specific credit enhancements
are generally structured to cover a multiple of historical losses expected on the pool of assets,
and are typically in the form of overcollateralization 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.
The deal-specific credit enhancements mitigate the Firm’s potential losses on its agreements with
the conduits.
JPMorgan Chase receives fees for structuring multi-seller conduit transactions and compensation
from the multi-seller conduits for its role as administrative agent, liquidity provider, and
provider of program-wide credit enhancement.
To ensure timely repayment of the commercial paper, each asset pool financed by the conduits has a
minimum 100% deal-specific liquidity facility associated with it. Deal-specific liquidity
facilities are the primary source of liquidity support for the conduits. The deal-specific
liquidity facilities are typically in the form of asset purchase agreements and generally
structured so the liquidity that will be provided by the Firm as liquidity provider will be
affected by the Firm purchasing, or lending against, a pool of nondefaulted, performing assets. In
limited circumstances, the Firm may provide unconditional liquidity.
The conduit’s administrative agent can require the liquidity provider to perform under its asset
purchase agreement with the conduit at any time. These agreements may cause the liquidity provider,
including the Firm, to purchase an asset from the conduit at an amount above the asset’s then
current fair value – in effect, providing a guarantee of the initial value of the reference asset
as of the date of the agreement.
| 206 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The Firm also provides the multi-seller conduit vehicles with program-wide liquidity facilities in
the form of uncommitted short-term revolving facilities that can be accessed by the conduits to
handle funding increments too small to be funded by commercial paper and in the form of uncommitted
liquidity facilities that can be accessed by the conduits only in the event of short-term
disruptions in the commercial paper market.
Because the majority of the deal-specific liquidity facilities will only fund nondefaulted assets,
program-wide credit enhancement is
required to absorb losses on defaulted receivables in excess of
losses absorbed by any deal-specific credit enhancement. Program-wide credit enhancement may be
provided by JPMorgan Chase in the form of standby letters of credit or by third-party surety bond
providers. The amount of program-wide credit enhancement required varies by conduit and ranges
between 5% and 10% of the applicable commercial paper that is outstanding.
The following table summarizes Firm-administered multi-seller conduits. On May 31, 2009,
the Firm consolidated one of these multi-seller conduits due to the redemption of the expected loss
note (“ELN”). There were no consolidated Firm-administered multi-seller conduits as of December 31,
2008.
| 2009 | 2008 | |||||||||||
| December 31, (in billions) | Consolidated | Nonconsolidated | Nonconsolidated | |||||||||
|
Total assets funded by conduits
|
$ | 5.1 | $ | 17.8 | $ | 42.9 | ||||||
|
|
||||||||||||
|
Total commercial paper issued by conduits
|
5.1 | 17.8 | 43.1 | |||||||||
|
|
||||||||||||
|
Liquidity and credit enhancements
|
||||||||||||
|
Deal-specific liquidity facilities
(primarily asset purchase agreements)
|
8.0 | 24.2 | (b) | 55.4 | (b) | |||||||
|
Program-wide liquidity facilities
|
4.0 | 13.0 | 17.0 | |||||||||
|
Program-wide credit enhancements
|
0.4 | 2.0 | 3.0 | |||||||||
|
Maximum exposure to loss
(a)
|
8.0 | 24.8 | 56.9 | |||||||||
| (a) | Maximum exposure to loss, calculated separately for each multi-seller conduit, includes the Firm’s exposure to both deal-specific liquidity facilities and program-wide credit enhancements. For purposes of calculating maximum exposure to loss, the Firm-provided, program-wide credit enhancement is limited to deal-specific liquidity facilities provided by third parties. | |
| (b) | The accounting for the guarantees reflected in these agreements is further discussed in Note 31 on pages 230-234 of this Annual Report. |
Assets funded by the multi-seller conduits
JPMorgan Chase’s administered multi-seller conduits fund a variety of asset types for the Firm’s
clients. Asset types primarily include credit card receivables, auto loans, trade receivables,
student loans, commercial loans, residential mortgages, capital commitments (e.g., loans to private
equity, mezzanine and real estate funds, secured by capital commitments of highly rated
institutional investors), and various other asset types. It is the Firm’s intention that the assets
funded by its administered multi-seller conduits be sourced only from the Firm’s clients and not
originated by, or transferred from, JPMorgan Chase.
The following table presents information on the commitments and assets held by JPMorgan
Chase’s administered nonconsolidated multi-seller conduits as of December 31, 2009 and 2008.
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Unfunded | Commercial | Liquidity | Liquidity | Unfunded | Commercial | Liquidity | Liquidity | |||||||||||||||||||||||||
| December 31, | commitments to | paper funded | provided by | provided | commitments to | paper funded | provided by | provided | ||||||||||||||||||||||||
| (in billions) | the Firm's clients | assets | third parties | by the Firm | the Firm's clients | assets | third parties | by the Firm | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Asset types:
|
||||||||||||||||||||||||||||||||
|
Credit card
|
$ | 1.1 | $ | 5.2 | $ | — | $ | 6.3 | $ | 3.0 | $ | 8.9 | $ | 0.1 | $ | 11.8 | ||||||||||||||||
|
Vehicle loans and
leases
|
1.8 | 5.0 | — | 6.8 | 1.4 | 10.0 | — | 11.4 | ||||||||||||||||||||||||
|
Trade receivables
|
2.8 | 1.8 | — | 4.6 | 3.8 | 5.5 | — | 9.3 | ||||||||||||||||||||||||
|
Student loans
|
0.3 | 1.3 | — | 1.6 | 0.7 | 4.6 | — | 5.3 | ||||||||||||||||||||||||
|
Commercial
|
0.2 | 1.2 | — | 1.4 | 1.5 | 4.0 | 0.4 | 5.1 | ||||||||||||||||||||||||
|
Residential mortgage
|
— | 0.6 | — | 0.6 | — | 0.7 | — | 0.7 | ||||||||||||||||||||||||
|
Capital commitments
|
0.2 | 1.7 | 0.6 | 1.3 | 1.3 | 3.9 | 0.6 | 4.6 | ||||||||||||||||||||||||
|
Rental car finance
|
0.4 | — | — | 0.4 | 0.2 | 0.4 | — | 0.6 | ||||||||||||||||||||||||
|
Equipment loans and
leases
|
0.2 | 0.4 | — | 0.6 | 0.7 | 1.6 | — | 2.3 | ||||||||||||||||||||||||
|
Floorplan – vehicle
|
— | — | — | — | 0.7 | 1.8 | — | 2.5 | ||||||||||||||||||||||||
|
Consumer
|
— | 0.2 | — | 0.2 | 0.1 | 0.7 | 0.1 | 0.7 | ||||||||||||||||||||||||
|
Other
|
— | 0.4 | — | 0.4 | 0.6 | 0.8 | 0.3 | 1.1 | ||||||||||||||||||||||||
|
Total
|
$ | 7.0 | $ | 17.8 | $ | 0.6 | $ | 24.2 | $ | 14.0 | $ | 42.9 | $ | 1.5 | $ | 55.4 | ||||||||||||||||
| JPMorgan Chase & Co. / 2009 Annual Report | 207 |
Table of Contents
Notes to consolidated financial statements
| Ratings profile of VIE assets of the nonconsolidated multi-seller conduits (a) | Commercial | Wt. avg. | ||||||||||||||||||||||||||
| December 31, 2009 | Investment-grade | Noninvestment-grade | paper funded | expected life | ||||||||||||||||||||||||
| (in billions) | AAA to AAA- | AA+ to AA- | A+ to A- | BBB to BBB- | BB+ and below | assets | (years) (b) | |||||||||||||||||||||
|
Asset types:
|
||||||||||||||||||||||||||||
|
Credit card
|
$ | 3.1 | $ | 2.0 | $ | 0.1 | $ | — | $ | — | $ | 5.2 | 1.6 | |||||||||||||||
|
Vehicle loans and leases
|
2.9 | 2.1 | — | — | — | 5.0 | 2.3 | |||||||||||||||||||||
|
Trade receivables
|
— | 1.6 | 0.1 | — | 0.1 | 1.8 | 0.8 | |||||||||||||||||||||
|
Student loans
|
1.3 | — | — | — | — | 1.3 | 0.8 | |||||||||||||||||||||
|
Commercial
|
0.6 | 0.2 | 0.1 | — | 0.3 | 1.2 | 2.2 | |||||||||||||||||||||
|
Residential mortgage
|
— | 0.5 | — | — | 0.1 | 0.6 | 3.3 | |||||||||||||||||||||
|
Capital commitments
|
— | — | 1.7 | — | — | 1.7 | 2.0 | |||||||||||||||||||||
|
Rental car finance
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Equipment loans and leases
|
0.2 | 0.2 | — | — | — | 0.4 | 2.0 | |||||||||||||||||||||
|
Floorplan — vehicle
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Consumer
|
0.2 | — | — | — | — | 0.2 | 2.3 | |||||||||||||||||||||
|
Other
|
— | 0.4 | — | — | — | 0.4 | 4.9 | |||||||||||||||||||||
|
Total
|
$ | 8.3 | $ | 7.0 | $ | 2.0 | $ | — | $ | 0.5 | $ | 17.8 | 1.9 | |||||||||||||||
| Ratings profile of VIE assets of the nonconsolidated multi-seller conduits (a) | Commercial | Wt. avg. | ||||||||||||||||||||||||||
| December 31, 2008 | Investment-grade | Noninvestment-grade | paper funded | Expected life | ||||||||||||||||||||||||
| (in billions) | AAA to AAA- | AA+ to AA- | A+ to A- | BBB to BBB- | BB+ and below | assets | (years) (b) | |||||||||||||||||||||
|
Asset types:
|
||||||||||||||||||||||||||||
|
Credit card
|
$ | 4.8 | $ | 3.9 | $ | 0.1 | $ | 0.1 | $ | — | $ | 8.9 | 1.5 | |||||||||||||||
|
Vehicle loans and leases
|
4.1 | 4.1 | 1.8 | — | — | 10.0 | 2.5 | |||||||||||||||||||||
|
Trade receivables
|
— | 4.0 | 1.5 | — | — | 5.5 | 1.0 | |||||||||||||||||||||
|
Student loans
|
3.6 | 0.9 | — | 0.1 | — | 4.6 | 1.8 | |||||||||||||||||||||
|
Commercial
|
1.1 | 2.0 | 0.6 | 0.3 | — | 4.0 | 2.7 | |||||||||||||||||||||
|
Residential mortgage
|
— | 0.6 | — | 0.1 | — | 0.7 | 4.0 | |||||||||||||||||||||
|
Capital commitments
|
— | 3.6 | 0.3 | — | — | 3.9 | 2.4 | |||||||||||||||||||||
|
Rental car finance
|
— | — | 0.4 | — | — | 0.4 | 1.5 | |||||||||||||||||||||
|
Equipment loans and leases
|
0.4 | 1.2 | — | — | — | 1.6 | 2.2 | |||||||||||||||||||||
|
Floorplan — vehicle
|
0.1 | 1.0 | 0.7 | — | — | 1.8 | 1.1 | |||||||||||||||||||||
|
Consumer
|
0.1 | 0.4 | 0.2 | — | — | 0.7 | 1.6 | |||||||||||||||||||||
|
Other
|
0.5 | 0.3 | — | — | — | 0.8 | 3.7 | |||||||||||||||||||||
|
Total
|
$ | 14.7 | $ | 22.0 | $ | 5.6 | $ | 0.6 | $ | — | $ | 42.9 | 2.0 | |||||||||||||||
| (a) | The ratings scale is presented on an S&P equivalent basis. | |
| (b) | Weighted average expected life for each asset type is based on the remaining term of each conduit transaction’s committed liquidity plus either the expected weighted average life of the assets should the committed liquidity expire without renewal or the expected time to sell the underlying assets. |
The assets held by the multi-seller conduits are structured so that if they were rated,
the Firm believes the majority of them would receive an “A” rating or better by external rating
agencies. However, it is unusual for the assets held by the conduits to be explicitly rated by an
external rating agency. Instead, the Firm’s Credit Risk group assigns each asset purchase liquidity
facility an internal risk rating based on its assessment of the probability of default for the
transaction. The ratings provided in the above table reflect the S&P-equivalent ratings of the
internal rating grades assigned by the Firm.
The risk ratings are periodically reassessed as information becomes available. As of December 31,
2009 and 2008, 95% and 90%, respectively, of the assets in the nonconsolidated conduits were
risk-rated “A” or better.
Commercial paper issued by multi-seller conduits
The weighted-average life of commercial paper issued by nonconsolidated multi-seller conduits at
December 31, 2009 and 2008, was 19 days and 27 days, respectively, and the average yield on the
commercial paper was 0.2% and 0.6%, respectively. In the normal course of business, JPMorgan Chase
trades and invests in commercial paper, including paper issued by the Firm-administered conduits.
The percentage of commercial paper purchased by the Firm from all Firm-administered conduits during
2009, ranged from less than 1% to approximately 5.8% on any given day. The largest daily amount of
commercial paper outstanding held by the Firm in any one multi-seller conduit during 2009 was
approximately $852 million, or 11.6%, of the conduit’s commercial paper outstanding. The Firm is
not obligated under any agreement (contractual or noncontractual) to purchase the commercial paper
issued by
nonconsolidated JPMorgan Chase-administered conduits.
| 208 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Consolidation analysis
Each nonconsolidated multi-seller conduit administered by the Firm at December 31, 2009 and 2008,
had issued ELNs, the holders of which are committed to absorbing the majority of the expected loss
of each respective conduit. The total amounts of ELNs outstanding for nonconsolidated conduits at
December 31, 2009 and 2008, were $96 million and $136 million, respectively.
The Firm could fund purchases of assets from nonconsolidated, Firm-administered multi-seller
conduits should it become necessary.
Implied support
The Firm did not have and continues not to have any intent to protect any ELN holders from
potential losses on any of the conduits’ holdings and has no plans to remove any assets from any
conduit unless required to do so in its role as administrator. Should such a transfer occur, the
Firm would allocate losses on such assets between itself and the ELN holders in accordance with the
terms of the applicable ELN.
Expected loss modeling
In determining the primary beneficiary of the conduits the Firm uses a Monte Carlo–based model
to estimate the expected losses of each of the conduits and considers the relative rights and
obligations of each of the variable interest holders. The Firm’s expected loss modeling treats
all variable interests, other than the ELNs, as its own to determine consolidation. The
variability to be considered in the modeling of expected losses is based on the design of the
entity. The Firm’s traditional multi-seller conduits are designed to pass credit risk, not
liquidity risk, to its variable interest holders, as the assets are intended to be held in the
conduit for the longer term.
The Firm is required to run the Monte Carlo-based expected loss model each time a
reconsideration event occurs. In applying this guidance to the conduits, the following events
are considered to be reconsideration events, as they could affect the determination of the
primary beneficiary of the conduits:
| • | New deals, including the issuance of new or additional variable interests (credit support, liquidity facilities, etc.); |
| • | Changes in usage, including the change in the level of outstanding variable interests (credit support, liquidity facilities, etc.); |
| • | Modifications of asset purchase agreements; and |
| • | Sales of interests held by the primary beneficiary. |
From an operational perspective, the Firm does not run its Monte Carlo–based expected loss model
every time there is a reconsideration event due to the frequency of their occurrence. Instead, the
Firm runs its expected loss model each quarter and includes a growth assumption for each conduit to
ensure that a sufficient amount of ELNs exists for each conduit at any point during the quarter.
As part of its normal quarterly modeling, the Firm updates, when applicable, the inputs and
assumptions used in the expected loss model. Specifically, risk ratings and loss given default
assumptions are continually updated. Management has concluded that the
model assumptions used were
reflective of market participants’ assumptions and appropriately considered the probability of
changes to risk ratings and loss given defaults.
Qualitative considerations
The multi-seller conduits are primarily designed to provide an efficient means for clients to
access the commercial paper market. The Firm believes the conduits effectively disperse risk among
all parties and that the preponderance of the economic risk in the Firm’s multi-seller conduits is
not held by JPMorgan Chase.
Investor intermediation
As a financial intermediary, the Firm creates certain types of VIEs and also structures
transactions, typically derivative structures, with these VIEs to meet investor needs. The Firm may
also provide liquidity and other support. The risks inherent in the derivative instruments or
liquidity commitments are managed similarly to other credit, market or liquidity risks to which the
Firm is exposed. The principal types of VIEs for which the Firm is engaged in these structuring
activities are municipal bond vehicles, credit-linked note vehicles, asset swap vehicles and
collateralized debt obligation vehicles.
Municipal bond vehicles
The Firm has created a series of secondary market trusts that provide short-term investors with
qualifying tax-exempt investments, and that allow investors in tax-exempt securities to finance
their investments at short-term tax-exempt rates. In a typical transaction, the vehicle purchases
fixed-rate longer-term highly rated municipal bonds and funds the purchase by issuing two types of
securities: (1) putable floating-rate certificates and (2) inverse floating-rate residual interests
(“residual interests”). The maturity of each of the putable floating-rate certificates and the
residual interests is equal to the life of the vehicle, while the maturity of the underlying
municipal bonds is longer. Holders of the putable floating-rate certificates may “put,” or tender,
the certificates if the remarketing agent cannot successfully remarket the floating-rate
certificates to another investor. A liquidity facility conditionally obligates the liquidity
provider to fund the purchase of the tendered floating-rate certificates. Upon termination of the
vehicle, if the proceeds from the sale of the underlying municipal bonds are not sufficient to
repay the liquidity facility, the liquidity provider has recourse either to excess
collateralization in the vehicle or the residual interest holders for reimbursement.
The third-party holders of the residual interests in these vehicles could experience losses if the
face amount of the putable floating-rate certificates exceeds the market value of the municipal
bonds upon termination of the vehicle. Certain vehicles require a smaller initial investment by the
residual interest holders and thus do not result in excess collateralization. For these vehicles
there exists a reimbursement obligation which requires the residual interest holders to post,
during the life of the vehicle, additional collateral to the vehicle on a daily basis as the market
value of the municipal bonds declines.
| JPMorgan Chase & Co. / 2009 Annual Report | 209 |
Table of Contents
Notes to consolidated financial statements
JPMorgan Chase often serves as the sole liquidity provider and remarketing agent of the putable
floating-rate certificates. The liquidity provider’s obligation to perform is conditional and is
limited by certain termination events; which include bankruptcy or failure to pay by the municipal
bond issuer or credit enhancement provider, and the immediate downgrade of the municipal bond to
below investment grade. A downgrade of JPMorgan Chase Bank, N.A.’s short-term rating does not
affect the Firm’s obligation under the liquidity facility. However, in the event of a downgrade in
the Firm’s credit ratings, holders of the putable floating-rate instruments supported by those
liquidity facility commitments might choose to sell their instruments, which could increase the
likelihood that the liquidity commitments could be drawn. In vehicles in which third-party
investors own the residual interests, in addition to the termination events, the Firm’s exposure as
liquidity provider is further limited by the high credit quality of the underlying municipal bonds,
the excess collateralization in the vehicle, or the reimbursement agreements with the residual
interest holders. In the fourth quarter of 2008, a drawdown occurred on one liquidity facility as a
result of a failure to remarket putable floating-rate certificates. The Firm was required to
purchase $19 million of putable floating-rate certificates. Subsequently, the municipal bond
vehicle was terminated and the proceeds from the sales of the municipal bonds, together with the
collateral posted by the residual interest holder, were sufficient to repay the putable
floating-rate certificates. In 2009, the Firm did not experience a drawdown on the liquidity
facilities.
As remarketing agent, the Firm may hold putable floating-rate certificates of the municipal bond
vehicles. At December 31, 2009
and 2008, respectively, the Firm held $72 million and $293 million
of these certificates on its Consolidated Balance Sheets. The largest amount held by the Firm at
any time during 2009 was $1.0 billion, or 6.7%, of the municipal bond vehicles’ outstanding putable
floating-rate certificates. The Firm did not have and continues not to have any intent to protect
any residual interest holder from potential losses on any of the municipal bond holdings.
The long-term credit ratings of the putable floating-rate certificates are directly related to the
credit ratings of the underlying municipal bonds, and to the credit rating of any insurer of the
underlying municipal bond. A downgrade of a bond insurer would result in a downgrade of the insured
municipal bonds, which would affect the rating of the putable floating-rate certificates. This
could cause demand for these certificates by investors to decline or disappear, as putable
floating-rate certificate holders typically require an “AA-” bond rating. At December 31, 2009 and
2008, 98% and 97%, respectively, of the municipal bonds held by vehicles to which the Firm served
as liquidity provider were rated “AA-” or better, based on either the rating of the underlying
municipal bond itself, or the rating including any credit enhancement. At December 31, 2009 and
2008, $2.3 billion and $2.6 billion, respectively, of the bonds were insured by monoline bond
insurers.
The Firm sometimes invests in the residual interests of municipal bond vehicles. For VIEs in which
the Firm owns the residual interests, the Firm consolidates the VIEs.
The likelihood is remote that the Firm would have to consolidate VIEs in which the Firm does not
own the residual interests and that are currently off-balance sheet.
Exposure to nonconsolidated municipal bond VIEs at December 31, 2009 and 2008, including the
ratings profile of the VIEs’ assets, were as follows.
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Fair value of | Fair value of | |||||||||||||||||||||||||||||||
| December 31, | assets held | Liquidity | Excess/ | Maximum | assets held | Liquidity | Excess/ | Maximum | ||||||||||||||||||||||||
| (in billions) | by VIEs | facilities (c) | (deficit) (d) | exposure | by VIEs | facilities (c) | (deficit) (d) | exposure | ||||||||||||||||||||||||
|
Nonconsolidated
municipal bond
vehicles
(a)(b)
|
$ 13.2 | $ 8.4 | $ 4.8 | $ 8.4 | $ 10.0 | $ 6.9 | $ 3.1 | $ 6.9 | ||||||||||||||||||||||||
| Wt. avg. | ||||||||||||||||||||||||||||
| Ratings profile of VIE assets (e) | Fair value of | expected | ||||||||||||||||||||||||||
| December 31, | Investment-grade | Noninvestment-grade | assets held by | life of assets | ||||||||||||||||||||||||
| (in billions) | AAA to AAA- | AA+ to AA- | A+ to A- | BBB to BBB- | BB+ and below | VIEs | (years) | |||||||||||||||||||||
|
Nonconsolidated
municipal bond
vehicles
(a)
|
||||||||||||||||||||||||||||
|
2009
|
$ 1.6 | $ 11.4 | $ 0.2 | $ — | $ — | $ 13.2 | $ 10.1 | |||||||||||||||||||||
|
2008
|
3.8 | 5.9 | 0.2 | 0.1 | — | 10.0 | 22.3 | |||||||||||||||||||||
| (a) | Excluded $2.8 billion and $6.0 billion at December 31, 2009 and 2008, respectively, which were consolidated due to the Firm owning the residual interests. | |
| (b) | Certain of the municipal bond vehicles are structured to meet the definition of a QSPE (as discussed in Note 1 on page 142 of this Annual Report); accordingly, the assets and liabilities of QSPEs are not reflected on the Firm’s Consolidated Balance Sheets (except for retained interests reported at fair value). At December 31, 2008, excluded collateral with a fair value of $603 million related to QSPE municipal bond vehicles in which the Firm owned the residual interests. The Firm did not own residual interests in QSPE municipal bond vehicles at December 31, 2009. | |
| (c) | The Firm may serve as credit enhancement provider for municipal bond vehicles for which it serves as liquidity provider. The Firm provided insurance on underlying municipal bonds, in the form of letters of credit, of $10 million at both December 31, 2009 and 2008, respectively. | |
| (d) | Represents the excess/(deficit) of the fair value of municipal bond assets available to repay the liquidity facilities, if drawn. | |
| (e) | The ratings scale is based on the Firm’s internal risk ratings and presented on an S&P-equivalent basis. |
| 210 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Credit-linked note vehicles
The Firm structures transactions with credit-linked note vehicles 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 which the VIE otherwise does not hold. The VIE
then issues CLNs with maturities predominantly ranging from one to ten years in order to transfer
the risk of the referenced credit to the VIE’s investors. Clients and investors often prefer using
a CLN vehicle since the CLNs issued by the VIE generally carry a higher credit rating than such
notes would if issued directly by JPMorgan Chase. The Firm’s exposure to the CLN vehicles is
generally limited to its rights and obligations under the credit derivative contract with the VIE,
as the Firm does not provide any additional contractual financial support to the VIE. In addition,
the Firm has not historically provided any financial support to the CLN vehicles over and above its
contractual obligations. Accordingly, the Firm typically does not consolidate the CLN vehicles. As
a derivative counterparty in a credit-linked note structure, the Firm has a senior claim on the
collateral of the VIE and reports such derivatives on its balance sheet at fair value. The
collateral purchased by such VIEs is largely investment-grade, with a significant amount being
rated “AAA.” The Firm divides its credit-linked note structures broadly into two types: static and
managed.
In a static credit-linked note structure, the CLNs and associated credit derivative contract either
reference a single credit (e.g., a multi-national corporation), or all or part of a fixed portfolio
of credits. The Firm generally buys protection from the VIE under the credit derivative. In a
managed credit-linked note structure, the CLNs and associated credit derivative generally reference
all or part of an actively managed portfolio of credits. An agreement exists between a portfolio
manager and the VIE that gives the portfolio manager the ability to substitute each referenced
credit in the portfolio for an alternative credit. By participating in a structure where a
portfolio manager has the ability to substitute credits within pre-agreed terms, the investors who
own the CLNs seek to reduce the risk that any single credit in the portfolio will default. The Firm
does not act as portfolio manager; its involvement with the VIE is generally limited to being a
derivative counterparty. As a net buyer of credit protection, in both static and managed
credit-linked note structures, the Firm pays a premium to the VIE in return for the receipt of a
payment (up to the notional of the derivative) if one or more of the credits within the portfolio
defaults, or if the losses resulting from the default of reference credits exceed specified levels.
Exposure to nonconsolidated credit-linked note VIEs at December 31, 2009 and 2008, was as
follows.
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Par value of | Par value of | |||||||||||||||||||||||||||||||
| December 31, | Derivative | Trading | Total | collateral held | Derivative | Trading | Total | collateral held | ||||||||||||||||||||||||
| (in billions) | receivables | assets (b) | exposure (c) | by VIEs (d) | receivables | assets (b) | exposure (c) | by VIEs (d) | ||||||||||||||||||||||||
|
Credit-linked notes
(a)
|
||||||||||||||||||||||||||||||||
|
Static structure
|
$ | 1.9 | $ | 0.7 | $ | 2.6 | $ | 10.8 | $ | 3.6 | $ | 0.7 | $ | 4.3 | $ | 14.5 | ||||||||||||||||
|
Managed structure
|
5.0 | 0.6 | 5.6 | 15.2 | 7.7 | 0.3 | 8.0 | 16.6 | ||||||||||||||||||||||||
|
Total
|
$ | 6.9 | $ | 1.3 | $ | 8.2 | $ | 26.0 | $ | 11.3 | $ | 1.0 | $ | 12.3 | $ | 31.1 | ||||||||||||||||
| (a) | Excluded collateral with a fair value of $1.5 billion and $2.1 billion at December 31, 2009 and 2008, respectively, which was consolidated as the Firm, in its role as secondary market maker, held a majority of the issued credit-linked notes of certain vehicles. | |
| (b) | Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making. | |
| (c) | On-balance sheet exposure that includes derivative receivables and trading assets. | |
| (d) | The Firm’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives. The Firm relies on the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collateral is expected to be sufficient to pay amounts due under the derivative contracts. |
Asset Swap Vehicles
The Firm also structures and executes transactions with asset swap vehicles on behalf of investors.
In such transactions, the VIE purchases a specific asset or assets and then enters into a
derivative with the Firm in order to tailor the interest rate or currency risk, or both, of the
assets according to investors’ requirements. Generally, the assets are held by the VIE to maturity,
and the tenor of the derivatives would match the maturity of the assets. Investors typically invest
in the notes issued by such VIEs in order to obtain exposure to the credit risk of the specific
assets, as well as exposure to foreign exchange and interest rate risk that is tailored to their
specific needs. The derivative transaction between the Firm and the VIE may include currency swaps
to hedge assets held by the VIE denominated in foreign currency into the investors’ home or
investment currency or interest rate swaps to hedge the interest rate
risk of assets held by the
VIE; to add additional interest rate exposure into the VIE in order to increase the return on the
issued notes; or to convert an interest-bearing asset into a zero-coupon bond.
The Firm’s exposure to the asset swap vehicles is generally limited to its rights and obligations
under the interest rate and/or foreign exchange derivative contracts, as the Firm does not provide
any contractual financial support to the VIE. In addition, the Firm historically has not provided
any financial support to the asset swap vehicles over and above its contractual obligations.
Accordingly, the Firm typically does not consolidate the asset swap vehicles. As a derivative
counterparty, the Firm has a senior claim on the collateral of the VIE and reports such derivatives
on its balance sheet at fair value. Substantially all of the assets purchased by such VIEs are
investment-grade.
| JPMorgan Chase & Co./2009 Annual Report | 211 |
Table of Contents
Notes to consolidated financial statements
Exposure to nonconsolidated asset swap VIEs at December 31, 2009 and 2008, was as follows.
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Derivative | Par value of | Derivative | Par value of | |||||||||||||||||||||||||||||
| December 31, | receivables/ | Trading | Total | collateral held | receivables/ | Trading | Total | collateral held | ||||||||||||||||||||||||
| (in billions) | (payables) | assets (b) | exposure (c) | by VIEs (d) | (payables) | assets (b) | exposure (c) | by VIEs (d) | ||||||||||||||||||||||||
|
Nonconsolidated
asset swap vehicles
(a)
|
$ | 0.1 | $ | — | $ | 0.1 | $ | 10.2 | $ | (0.2 | ) | $ | — | $ | (0.2 | ) | $ | 7.3 | ||||||||||||||
| (a) | Excluded fair value of collateral of $623 million and $1.0 billion at December 31, 2009 and 2008, respectively, which was consolidated as the Firm, in its role as secondary market maker, held a majority of the issued notes of certain vehicles. | |
| (b) | Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making. | |
| (c) | On-balance sheet exposure that includes derivative receivables and trading assets. | |
| (d) | The Firm’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives. The Firm relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collateral is expected to be sufficient to pay amounts due under the derivative contracts. |
Collateralized Debt Obligations vehicles
A CDO typically refers to a security that is collateralized by a pool of bonds, loans, equity,
derivatives or other assets. The Firm’s involvement with a particular CDO vehicle may take one or
more of the following forms: arranger, warehouse funding provider, placement agent or underwriter,
secondary market-maker for securities issued, or derivative counterparty.
As of December 31, 2009 and 2008, the Firm had funded noninvestment-grade loans of $156 million and
$405 million, respectively, to nonconsolidated CDO warehouse VIEs. The Firm’s maximum exposure to
loss related to the nonconsolidated CDO warehouse VIEs was $156 million and $1.1 billion as of
December 31, 2009 and 2008, respectively.
Once the CDO vehicle closes and issues securities, the Firm has no obligation to provide further
support to the vehicle. At the time of closing, the Firm may hold unsold securities that it was not
able to place with third-party investors. In addition, the Firm may on occasion hold some of the
CDO vehicles’ securities as a secondary market-maker or as a principal investor, or it may be a
derivative counterparty to the vehicles. At December 31, 2009 and 2008, these amounts were not
significant.
VIEs sponsored by third parties
Investment in a third-party credit card securitization trust
Investment in a third-party credit card securitization trust
The Firm holds a note in a third-party-sponsored VIE, which is a credit card securitization trust
that owns credit card receivables issued by a national retailer. The note is structured so that the
principal amount can float up to 47% of the principal amount of the receivables held by the trust,
not to exceed $4.2 billion.
The Firm is not the primary beneficiary of the trust and accounts for its investment at fair value
within AFS investment securities. At December 31, 2009 and 2008, the amortized cost of the note was
$3.5 billion and $3.6 billion, respectively, and the fair value was
$3.5 billion and $2.6 billion,
respectively. For more information on AFS securities, see Note 11 on pages 187-191 of this Annual
Report.
VIE used in FRBNY transaction
In conjunction with the Bear Stearns merger, in June 2008, the Federal Reserve Bank of New York
(“FRBNY”) took control, through an LLC formed for this purpose, of a portfolio of $30.0 billion in
assets, based on the value of the portfolio as of March 14, 2008. The assets of the LLC were funded
by a $28.85 billion term loan from the FRBNY and a $1.15 billion subordinated loan from JPMorgan
Chase. The JPMorgan Chase loan is subordinated to the FRBNY loan and will bear the first $1.15
billion of any losses of the portfolio. Any remaining assets in the portfolio after repayment of
the FRBNY loan, repayment of the JPMorgan Chase loan and the expense of the LLC will be for the
account of the FRBNY. The extent to which the FRBNY and JPMorgan Chase loans will be repaid will
depend on the value of the asset portfolio and the liquidation strategy directed by the FRBNY.
Other VIEs sponsored by third parties
The Firm enters into transactions with VIEs structured by other parties. These include, for
example, acting as a derivative counterparty, liquidity provider, investor, underwriter, placement
agent, trustee or custodian. These transactions are conducted at arm’s length, and individual
credit decisions are based on the analysis of the specific VIE, taking into consideration the
quality of the underlying assets. Where these activities do not cause JPMorgan Chase to absorb a
majority of the expected losses, or to receive a majority of the residual returns, the Firm records
and reports these positions on its Consolidated Balance Sheets, similarly to the way it would
record and report positions from any other third-party transaction. These transactions are not
considered significant.
| 212 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Consolidated VIE assets and liabilities
The following table presents information on assets, liabilities and commitments related to VIEs
that are consolidated by the Firm.
| Assets | ||||||||||||||||
| Trading | ||||||||||||||||
| assets–debt | ||||||||||||||||
| December 31, 2009 | and equity | Total | ||||||||||||||
| (in billions) | instruments | Loans | Other (b) | assets (c) | ||||||||||||
|
VIE program type
|
||||||||||||||||
|
Multi-seller conduits
|
$ | — | $ | 2.2 | $ | 2.9 | $ | 5.1 | ||||||||
|
Credit card loans
(a)
|
— | 6.1 | 0.8 | 6.9 | ||||||||||||
|
Municipal bond vehicles
|
2.8 | — | — | 2.8 | ||||||||||||
|
Credit-linked notes
|
1.3 | — | 0.2 | 1.5 | ||||||||||||
|
CDO warehouses
|
0.1 | — | — | 0.1 | ||||||||||||
|
Other
|
2.2 | 4.7 | 1.1 | 8.0 | ||||||||||||
|
Total
|
$ | 6.4 | $ | 13.0 | $ | 5.0 | $ | 24.4 | ||||||||
| Liabilities | ||||||||||||
| December 31, 2009 | Beneficial interests | Total | ||||||||||
| (in billions) | in VIE assets (d) | Other (e) | liabilities | |||||||||
|
VIE program type
|
||||||||||||
|
Multi-seller conduits
|
$ | 4.8 | $ | — | $ | 4.8 | ||||||
|
Credit card loans
(a)
|
3.9 | — | 3.9 | |||||||||
|
Municipal bond vehicles
|
2.7 | — | 2.7 | |||||||||
|
Credit-linked notes
|
0.3 | 0.1 | 0.4 | |||||||||
|
CDO warehouses
|
— | — | — | |||||||||
|
Other
|
3.5 | 2.1 | 5.6 | |||||||||
|
Total
|
$ | 15.2 | $ | 2.2 | $ | 17.4 | ||||||
| Assets | ||||||||||||||||
| Trading | ||||||||||||||||
| assets–debt | ||||||||||||||||
| December 31, 2008 | and equity | Total | ||||||||||||||
| (in billions) | instruments | Loans | Other (b) | assets (c) | ||||||||||||
|
VIE program type
|
||||||||||||||||
|
Multi-seller conduits
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Credit card loans
(a)
|
— | — | — | — | ||||||||||||
|
Municipal bond vehicles
|
5.9 | — | 0.1 | 6.0 | ||||||||||||
|
Credit-linked notes
|
1.9 | — | 0.5 | 2.4 | ||||||||||||
|
CDO warehouses
|
0.2 | — | 0.1 | 0.3 | ||||||||||||
|
Other
|
2.5 | 5.3 | 2.1 | 9.9 | ||||||||||||
|
Total
|
$ | 10.5 | $ | 5.3 | $ | 2.8 | $ | 18.6 | ||||||||
| Liabilities | ||||||||||||
| December 31, 2008 | Beneficial interests | Total | ||||||||||
| (in billions) | in VIE assets (d) | Other (e) | liabilities | |||||||||
|
VIE program type
|
||||||||||||
|
Multi-seller conduits
|
$ | — | $ | — | $ | — | ||||||
|
Credit card loans
(a)
|
— | — | — | |||||||||
|
Municipal bond vehicles
|
5.5 | 0.4 | 5.9 | |||||||||
|
Credit-linked notes
|
1.3 | 0.6 | 1.9 | |||||||||
|
CDO warehouses
|
— | — | — | |||||||||
|
Other
|
3.8 | 2.9 | 6.7 | |||||||||
|
Total
|
$ | 10.6 | $ | 3.9 | $ | 14.5 | ||||||
| (a) | Represents consolidated securitized credit card loans related to the WMM Trust, as well as loans that were represented by the Firm’s undivided interest and subordinated interest and fees, which were previously recorded on the Firm’s Consolidated Balance Sheets prior to consolidation. For further discussion, see Note 15 on pages 198-205 respectively, of this Annual Report. | |
| (b) | Included assets classified as resale agreements and other assets within the Consolidated Balance Sheets. | |
| (c) | Assets of each consolidated VIE are generally used to satisfy the liabilities to third parties. The difference between total assets and total liabilities recognized for consolidated VIEs represents the Firm’s interest in the consolidated VIEs for each program type. | |
| (d) | The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item on the Consolidated Balance Sheets titled, “Beneficial interests issued by consolidated variable interest entities.” The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase. Included in beneficial interests in VIE assets are long-term beneficial interests of $10.4 billion and $10.6 billion at December 31, 2009 and 2008, respectively. | |
| (e) | Included liabilities classified as other borrowed funds, long-term debt, and accounts payable and other liabilities in the Consolidated Balance Sheets. |
New accounting guidance for consolidation of variable interest entities
(including securitization entities)
In June 2009, the FASB issued guidance which amends the accounting for the transfers of financial
assets and the consolidation of VIEs. The guidance eliminates the concept of QSPEs and provides
additional guidance with regard to accounting for transfers of financial assets. The guidance also
changes the approach for determining the primary beneficiary of a VIE from a quantitative risk and
reward model to a qualitative model, based on control and economics.
The Firm adopted this guidance for VIEs on January 1, 2010, which required the consolidation of the
Firm’s credit card securitization trusts, bank-administered asset-backed commercial paper conduits,
and certain mortgage and other consumer securitization entities. The consolidation of these VIEs
added approximately $88 billion and $92 billion of assets and liabilities, respectively, which were
not previously consolidated on the Firm’s Consolidated Balance Sheets in accordance with prior
accounting guidance. The net impact of adopting this new accounting guidance was a reduction in
stockholders’ equity of approximately $4 billion and in Tier 1 capital ratio by approximately 30
basis points, driven predominantly
by the establishment of an allowance for loan losses of
approximately $7 billion (pre-tax) related to the receivables held in the credit card
securitization trusts that were consolidated at the adoption date.
The U.S. GAAP consolidation of these entities did not have a significant impact on risk-weighted
assets on the adoption date; this was due to the consolidation, for regulatory capital purposes, of
the Chase Issuance Trust (the Firm’s primary credit card securitization trust) in the second
quarter of 2009, which added approximately $40 billion of risk-weighted assets. For further
discussion, see Note 15 on pages 198-205 of this Annual Report.
In addition, the banking regulatory agencies issued regulatory capital rules relating to
the adoption of this guidance for VIEs that permitted an optional two-quarter implementation delay,
which defers the effect of this accounting guidance on risk-weighted assets and risk-based capital
requirements. The Firm elected this regulatory implementation delay, as permitted under these new regulatory capital rules, for its
bank-administered asset-backed
| JPMorgan Chase & Co. / 2009 Annual Report | 213 |
Table of Contents
Notes to consolidated financial statements
commercial paper conduits and
certain mortgage and other securitization entities.
In February 2010, the FASB finalized an amendment that defers the requirements of the consolidation
guidance for certain investment funds, including mutual funds, private equity funds, and hedge
funds. For the funds included in the deferral, the Firm will continue to analyze consolidation
under other existing authoritative guidance; these funds are not included in the impact noted
above.
Goodwill and other intangible assets consist of the following.
| December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Goodwill
|
$ | 48,357 | $ | 48,027 | $ | 45,270 | ||||||
|
Mortgage servicing rights
|
15,531 | 9,403 | 8,632 | |||||||||
|
Other intangible assets:
|
||||||||||||
|
Purchased credit card relationships
|
$ | 1,246 | $ | 1,649 | $ | 2,303 | ||||||
|
Other credit card–related intangibles
|
691 | 743 | 346 | |||||||||
|
Core deposit intangibles
|
1,207 | 1,597 | 2,067 | |||||||||
|
Other intangibles
|
1,477 | 1,592 | 1,383 | |||||||||
|
Total other intangible assets
|
$ | 4,621 | $ | 5,581 | $ | 6,099 | ||||||
Goodwill
Goodwill is recorded upon completion of a business combination as the difference between the
purchase price and the fair value of the net assets acquired. Other intangible assets are recorded
at their fair value upon completion of a business combination or certain other transactions, and
generally represent the value of customer relationships or arrangements.
The increase in goodwill during 2009 was primarily due to final purchase accounting adjustments
related to the Bear Stearns merger, and the acquisition of a commodities business, each primarily
allocated to IB, and foreign currency translation adjustments related to the Firm’s Canadian credit
card operations, which were allocated to Card Services. The increase in goodwill during 2008 was
primarily due to the dissolution of the Chase Paymentech Solutions joint venture
(allocated to Card Services), the merger with Bear Stearns, the purchase of an additional equity
interest in Highbridge and tax-related purchase accounting adjustments associated with the Bank One
merger (which were primarily attributed to IB).
The goodwill associated with each business combination is allocated to the related reporting units,
which are determined based on how the Firm’s businesses are managed and how they are reviewed by
the Firm’s Operating Committee. The following table presents goodwill attributed to the business
segments.
| December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Investment Bank
|
$ | 4,959 | $ | 4,765 | $ | 3,578 | ||||||
|
Retail Financial Services
|
16,831 | 16,840 | 16,848 | |||||||||
|
Card Services
|
14,134 | 13,977 | 12,810 | |||||||||
|
Commercial Banking
|
2,868 | 2,870 | 2,873 | |||||||||
|
Treasury & Securities Services
|
1,667 | 1,633 | 1,660 | |||||||||
|
Asset Management
|
7,521 | 7,565 | 7,124 | |||||||||
|
Corporate/Private Equity
|
377 | 377 | 377 | |||||||||
|
Total goodwill
|
$ | 48,357 | $ | 48,027 | $ | 45,270 | ||||||
The following table presents changes in the carrying amount of goodwill.
| (in millions) | Total | |||
|
Balance at December 31, 2007
(a)
:
|
$ | 45,270 | ||
|
Changes during 2008 from:
|
||||
|
Business combinations
|
2,481 | |||
|
Dispositions
|
(38 | ) | ||
|
Other
(b)
|
314 | |||
|
Balance at December 31, 2008
(a)
:
|
$ | 48,027 | ||
|
Changes during 2009 from:
|
||||
|
Business combinations
|
271 | |||
|
Dispositions
|
— | |||
|
Other
(b)
|
59 | |||
|
Balance at December 31, 2009
(a)
|
$ | 48,357 | ||
| (a) | Reflects gross goodwill balances as the Firm has not recognized any impairment losses to date. | |
| (b) | Includes foreign currency translation adjustments and other tax-related adjustments. |
Impairment Testing
Subsequent to initial recognition, goodwill is tested for impairment during the fourth quarter of
each fiscal year, or more often if events or circumstances, such as adverse changes in the business
climate, indicate there may be impairment. Goodwill was not impaired at December 31, 2009 or 2008,
nor was any goodwill written off due to impairment during 2009, 2008 or 2007.
The goodwill impairment test is performed in two steps. In the first step, the current fair value
of each reporting unit is compared with its carrying value, including goodwill. If the fair value
is in excess of the carrying value (including goodwill), then the reporting unit’s goodwill is
considered not to be impaired. If the fair value is less than the carrying value (including
goodwill), then a second step is performed. In the second step, the implied current fair value of
the reporting unit’s goodwill is determined by comparing the fair value of the reporting unit (as
determined in step one) to the fair value of the net assets
of the reporting unit, as if the reporting unit were being acquired in a business combination. The
resulting implied current fair value of goodwill is then compared with the carrying value of the
reporting unit’s goodwill. If the carrying value of the goodwill exceeds its implied current fair
value, then an impairment charge is recognized for the excess. If the carrying value of goodwill is
less than its implied current fair value, then no goodwill impairment is recognized.
The primary method the Firm uses to estimate the fair value of its reporting units is the income
approach. The models project levered cash flows for the forecast period and use the perpetuity
growth method to calculate terminal values. These cash flows and terminal values are then
discounted using an appropriate discount rate. Projections of cash flows are based on the reporting
units’ forecasts and reviewed with the Operating Committee of the Firm. The Firm’s cost of equity
is determined using the Capital Asset Pricing Model, which
| 214 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
is consistent with methodologies and
assumptions the Firm uses when advising clients. The discount rate used for each reporting unit
represents an estimate of the cost of equity capital for that reporting unit and is determined
based on the Firm’s overall cost of equity, as adjusted for the risk characteristics specific to
each reporting unit, for example, for higher levels of risk or uncertainty associated with the
business or management’s forecasts and assumptions. To assess the reasonableness of the discount
rates used for each reporting unit, management compares the discount rate to the estimated cost of
equity for publicly traded institutions with similar businesses and risk characteristics. In
addition, the weighted average cost of equity (aggregating the various reporting units) is compared
with the Firms’ overall cost of equity to ensure reasonableness.
The valuations derived from the discounted cash flow models are then compared with market-based
trading and transaction multiples for relevant competitors. Precise conclusions generally can not
be drawn from these comparisons due to the differences that naturally exist between the Firm’s
businesses and competitor institutions. However, trading and transaction comparables are used as
general indicators to assess the general reasonableness of the estimated fair values. Management
also takes into consideration a comparison between the aggregate fair value of the Firm’s reporting
units and JPMorgan Chase’s market capitalization. In evaluating this comparison, management
considers several factors, including (a) a control premium that would exist in a market
transaction, (b) factors related to the level of execution risk that would exist at the firm-wide
level that do not exist at the reporting unit level and (c) short-term market volatility and other
factors that do not directly affect the value of individual reporting units.
While no impairment of goodwill was recognized during 2009, the Firm’s consumer lending businesses
in RFS and Card Services have elevated risk of potential goodwill impairment due to their exposure
to U.S. consumer credit risk. The valuation of these businesses are particularly dependent upon
economic conditions (including unemployment rates, and home prices) and potential legislative and
regulatory changes that affect consumer credit risk and their business models. The assumptions used
in the discounted cash flow models for these businesses, and the values of the associated net
assets, were determined using management’s best estimates, and the cost of equity reflected the
risk and uncertainty for these businesses and was evaluated in comparison to relevant market peers.
Deterioration in these assumptions could cause the estimated fair values of these reporting units or their associated goodwill to
decline, which may result in a material impairment charge to earnings in a future period related to
some portion of their associated goodwill.
Mortgage servicing rights
Mortgage servicing rights represent the fair value of future cash flows for performing specified
mortgage servicing activities (predominantly with respect to residential mortgage) 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 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 Firm has one class of servicing assets. JPMorgan Chase made this determination based on the
availability of market inputs used to measure its MSR asset at fair value and its treatment of MSRs
as one aggregate pool for risk management purposes. As permitted by U.S. GAAP, the Firm elected to
account for this one class of servicing assets at fair value. The Firm estimates the fair value of
MSRs using an option-adjusted spread model (“OAS”), which projects MSR cash flows over multiple
interest rate scenarios in conjunction with the Firm’s prepayment model and then discounts these
cash flows at risk-adjusted rates. The model considers portfolio characteristics, contractually
specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary
revenue and costs to service, and other economic factors. The Firm reassesses and periodically
adjusts the underlying inputs and assumptions used in the OAS model to reflect market conditions
and assumptions that a market participant would consider in valuing the MSR asset. During 2009 and
2008, the Firm continued to refine its proprietary prepayment model based on a number of
market-related factors, including a downward trend in home prices, general tightening of credit
underwriting standards and the associated impact on refinancing activity. The Firm compares fair
value estimates and assumptions to observable market data where available, and to recent market
activity and actual portfolio experience.
The fair value of MSRs is sensitive to changes in interest rates, including their effect on
prepayment speeds. JPMorgan Chase uses or has used combinations of derivatives and securities to
manage changes in the fair value of MSRs. The intent is to offset any changes in the fair value of
MSRs with changes in the fair value of the related risk management instruments. MSRs decrease in
value when interest rates decline. Conversely, securities (such as mortgage-backed securities),
principal-only certificates and certain derivatives (when the Firm receives fixed-rate interest
payments) increase in value when interest rates decline.
| JPMorgan Chase & Co. / 2009 Annual Report | 215 |
Table of Contents
Notes to consolidated financial statements
The following table summarizes MSR activity for the years ended December 31, 2009, 2008 and 2007.
| Year ended December 31, | ||||||||||||
| (in millions, except where otherwise noted) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Fair value at beginning
of period
|
$ | 9,403 | $ | 8,632 | $ | 7,546 | ||||||
|
MSR activity
|
||||||||||||
|
Originations of MSRs
|
3,615 | 3,061 | 2,335 | |||||||||
|
Purchase of MSRs
|
2 | 6,755 | (d) | 798 | ||||||||
|
Disposition of MSRs
|
(10 | ) | — | — | ||||||||
|
Total net additions
|
3,607 | 9,816 | 3,133 | |||||||||
|
|
||||||||||||
|
Change in valuation due to inputs and assumptions
(a)
|
5,807 | (6,933 | ) | (516 | ) | |||||||
|
Other changes in fair value
(b)
|
(3,286 | ) | (2,112 | ) | (1,531 | ) | ||||||
|
Total change in fair value of MSRs
|
2,521 | (9,045 | ) | (2,047 | ) | |||||||
|
Fair value at December 31
|
$ | 15,531 | (c) | $ | 9,403 | (c) | $ | 8,632 | ||||
|
Change in unrealized gains/ (losses) included in
income related to MSRs held at
December 31
|
$ | 5,807 | $ | (6,933 | ) | $ | (516 | ) | ||||
|
Contractual service fees, late fees and other
ancillary fees included in income
|
$ | 4,818 | $ | 3,353 | $ | 2,429 | ||||||
|
Third-party mortgage loans serviced at December 31
(in billions)
|
$ | 1,091 | $ | 1,185 | $ | 615 | ||||||
| (a) | Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model. Also represents total realized and unrealized gains/(losses) included in net income using significant unobservable inputs (level 3). | |
| (b) | Includes changes in the MSR value due to modeled servicing portfolio runoff (or time decay). Represents the impact of cash settlements using significant unobservable inputs (level 3). | |
| (c) | Includes $41 million and $55 million related to commercial real estate at December 31, 2009 and 2008, respectively. | |
| (d) | Includes MSRs acquired as a result of the Washington Mutual transaction (of which $59 million related to commercial real estate) and the Bear Stearns merger. For further discussion, see Note 2 on pages 143—148 of this Annual Report. |
The following table presents the components of mortgage fees and related income (including the
impact of MSR risk management activities) for the years ended December 31, 2009, 2008 and 2007.
| Year ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
RFS net mortgage servicing revenue
|
||||||||||||
|
Production revenue
|
$ | 503 | $ | 898 | $ | 880 | ||||||
|
Net mortgage servicing revenue
|
||||||||||||
|
Operating revenue:
|
||||||||||||
|
Loan servicing revenue
|
4,942 | 3,258 | 2,334 | |||||||||
|
Other changes in MSR asset
fair value
(a)
|
(3,279 | ) | (2,052 | ) | (1,531 | ) | ||||||
|
Total operating revenue
|
1,663 | 1,206 | 803 | |||||||||
|
Risk management:
|
||||||||||||
|
Changes in MSR asset fair
value due to inputs or assumptions in model
(b)
|
5,804 | (6,849 | ) | (516 | ) | |||||||
|
Derivative valuation adjust-
ments and other
|
(4,176 | ) | 8,366 | 927 | ||||||||
|
Total risk management
|
1,628 | 1,517 | 411 | |||||||||
|
Total RFS net mortgage servicing revenue
|
3,291 | 2,723 | 1,214 | |||||||||
|
All other
(c)
|
(116 | ) | (154 | ) | 24 | |||||||
|
Mortgage fees and related income
|
$ | 3,678 | $ | 3,467 | $ | 2,118 | ||||||
| (a) | Includes changes in the MSR value due to modeled servicing portfolio runoff (or time decay). Represents the impact of cash settlements using significant unobservable inputs (level 3). | |
| (b) | Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model. Also represents total realized and unrealized gains/(losses) included in net income using significant unobservable inputs (level 3). | |
| (c) | Primarily represents risk management activities performed by the Chief Investment Office (“CIO”) in the Corporate sector. |
The table below outlines the key economic assumptions used to determine the fair value of the
Firm’s MSRs at December 31, 2009, and 2008, respectively; it also outlines the sensitivities of
those fair values to immediate 10% and 20% adverse changes in those assumptions.
| Year ended December 31, | ||||||||
| (in millions, except rates) | 2009 | 2008 | ||||||
|
Weighted-average prepayment speed
assumption (CPR)
|
11.37 | % | 35.21 | % | ||||
|
Impact on fair value of 10% adverse change
|
$ | (896 | ) | $ | (1,039 | ) | ||
|
Impact on fair value of 20% adverse change
|
(1,731 | ) | (1,970 | ) | ||||
|
Weighted-average option adjusted spread
|
4.63 | % | 3.80 | % | ||||
|
Impact on fair value of 100 basis points
adverse change
|
$ | (641 | ) | $ | (311 | ) | ||
|
Impact on fair value of 200 basis points
adverse change
|
(1,232 | ) | (606 | ) | ||||
CPR: Constant prepayment rate.
The sensitivity analysis in the preceding table is hypothetical and should be used with caution.
Changes in fair value based on 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.
| 216 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Other intangible assets
During 2009, purchased credit card relationships, other credit card-related intangibles, core
deposit intangibles and other intangibles
decreased $960 million, primarily reflecting amortization expense, partially offset by foreign
currency translation adjustments related to the Firm’s Canadian credit card operations.
The components of credit card relationships, core deposits and other intangible assets were as
follows.
| 2009 | 2008 | |||||||||||||||||||||||
| Net | Net | |||||||||||||||||||||||
| Gross | Accumulated | carrying | Gross | Accumulated | carrying | |||||||||||||||||||
| December 31, (in millions) | amount | amortization | value | amount | amortization | value | ||||||||||||||||||
|
Purchased credit card relationships
|
$ | 5,783 | $ | 4,537 | $ | 1,246 | $ | 5,765 | $ | 4,116 | $ | 1,649 | ||||||||||||
|
Other credit card–related intangibles
|
894 | 203 | 691 | 852 | 109 | 743 | ||||||||||||||||||
|
Core deposit intangibles
|
4,280 | 3,073 | 1,207 | 4,280 | 2,683 | 1,597 | ||||||||||||||||||
|
Other intangibles
(a)
|
2,200 | 723 | 1,477 | 2,376 | 784 | 1,592 | ||||||||||||||||||
| (a) | The decrease in other intangibles gross amount and accumulated amortization from December 2008 was primarily attributable to the removal of fully amortized assets. |
Amortization expense
The Firm’s intangible assets with finite lives are amortized over their useful lives in a manner
that best reflects the economic benefits of the intangible asset. $517 million of intangible assets
related to asset management advisory contracts were determined to have an indefinite life and are
not amortized.
The following table presents amortization expense related to credit card relationships, core
deposits and all other intangible assets.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Purchased credit card relationships
|
$ | 421 | $ | 625 | $ | 710 | ||||||
|
Other credit card–related intangibles
|
94 | 33 | 11 | |||||||||
|
Core deposit intangibles
|
390 | 469 | 554 | |||||||||
|
Other intangibles
(a)
|
145 | 136 | 119 | |||||||||
|
Total amortization expense
|
$ | 1,050 | $ | 1,263 | $ | 1,394 | ||||||
| (a) | Excludes amortization expense related to servicing assets on securitized automobile loans, which is recorded in lending and deposit-related fees, of $2 million, $5 million and $9 million, for the years ended 2009, 2008, and 2007, respectively. |
Future amortization expense
The following table presents estimated future amortization expense related to credit card
relationships, core deposits and all other intangible assets at December 31, 2009.
| Purchased credit |
Other credit
card-related |
Core deposit | All other | |||||||||||||||||
| Year ended December 31, (in millions) | card relationships | intangibles | intangibles | Intangible assets | Total | |||||||||||||||
|
2010
|
$ | 354 | $ | 103 | $ | 329 | $ | 127 | $ | 913 | ||||||||||
|
2011
|
290 | 102 | 284 | 117 | 793 | |||||||||||||||
|
2012
|
252 | 105 | 240 | 113 | 710 | |||||||||||||||
|
2013
|
213 | 104 | 195 | 109 | 621 | |||||||||||||||
|
2014
|
109 | 100 | 106 | 105 | 420 | |||||||||||||||
Impairment
The Firm’s intangible assets with indefinite lives are tested for impairment on an annual basis, or
more frequently if events or changes in circumstances indicate that the asset might be impaired.
The impairment test for indefinite-lived intangible assets compares the fair value of the
intangible asset to its carrying amount. If the carrying value exceeds the
fair value, then an impairment charge is recognized for the difference. Core deposits and credit
card relationships as well as other acquired intangible assets determined to have finite lives, are
amortized over their estimated useful lives in a
manner that best reflects the economic benefits of
the intangible asset. The impairment test for a finite-lived intangible asset compares the
undiscounted cash flows associated with the use or disposition of the intangible asset to its
carrying value. If the sum of the undiscounted cash flows exceeds its carrying value, then no
impairment charge is recorded. If the sum of the undiscounted cash flows is less than its carrying
value, then an impairment charge is recognized to the extent the carrying amount of the asset
exceeds its fair value.
| JPMorgan Chase & Co. / 2009 Annual Report | 217 |
Table of Contents
Notes to consolidated financial statements
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 the
estimated useful life of the leased asset. JPMorgan Chase has recorded immaterial asset retirement
obligations related to asbestos remediation 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. Once the software is ready for its intended use, these costs are amortized
on a straight-line basis over the software’s expected useful life and reviewed for impairment on an
ongoing basis.
At December 31, 2009 and 2008, noninterest-bearing and interest-bearing deposits were as follows.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
U.S. offices:
|
||||||||
|
Noninterest-bearing
|
$ | 204,003 | $ | 210,899 | ||||
|
Interest-bearing (included $1,463 and $1,849 at fair value at
December 31, 2009 and 2008, respectively)
|
439,104 | 511,077 | ||||||
|
Non-U.S. offices:
|
||||||||
|
Noninterest-bearing
|
8,082 | 7,697 | ||||||
|
Interest-bearing (included $2,992 and $3,756 at fair value at
December 31, 2009 and 2008, respectively)
|
287,178 | 279,604 | ||||||
|
Total
|
$ | 938,367 | $ | 1,009,277 | ||||
At December 31, 2009 and 2008, time deposits in denominations of $100,000 or more were as follows.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
U.S.
|
$ | 90,552 | $ | 147,493 | ||||
|
Non-U.S.
|
77,887 | 58,247 | ||||||
|
Total
|
$ | 168,439 | $ | 205,740 | ||||
At December 31, 2009, the maturities of time deposits were as follows.
| December 31, 2009 | ||||||||||||
| (in millions) | U.S. | Non-U.S. | Total | |||||||||
|
2010
|
$ | 113,912 | $ | 97,465 | $ | 211,377 | ||||||
|
2011
|
9,489 | 654 | 10,143 | |||||||||
|
2012
|
3,851 | 485 | 4,336 | |||||||||
|
2013
|
2,783 | 634 | 3,417 | |||||||||
|
2014
|
1,321 | 127 | 1,448 | |||||||||
|
After 5 years
|
671 | 267 | 938 | |||||||||
|
Total
|
$ | 132,027 | $ | 99,632 | $ | 231,659 | ||||||
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “2008 Act”) was signed
into law. The 2008 Act temporarily increased the standard maximum FDIC deposit insurance from
$100,000 to $250,000 per depositor per institution through December 31, 2009. On May 20, 2009, the
Helping Families Save Their Homes Act of 2009 (the “2009 Act”) was signed into law. The 2009 Act
extends through December 31, 2013, the FDIC’s temporary standard maximum deposit insurance amount
of $250,000 per depositor. On January 1, 2014, the standard maximum deposit insurance amount will
return to $100,000 per depositor for all deposit accounts except Individual Retirement Accounts
(“IRAs”) and certain other retirement accounts, which will remain at $250,000 per depositor.
In addition, on November 21, 2008, the FDIC released a final rule on the FDIC Temporary Liquidity
Guarantee Program (the “TLG Program”). Under one component of this program, the Transaction Account
Guarantee Program (the “TAG Program”) provides unlimited deposit insurance through December 31,
2009, on certain noninterest-bearing transaction accounts at FDIC-insured participating
institutions. On December 4, 2008, the Firm elected to participate in the TLG Program and, as a
result, was required to pay additional insurance premiums to the FDIC in an amount equal to an
annualized 10 basis points on balances in noninterest-bearing transaction accounts that exceeded
the $250,000 FDIC deposit insurance limits, as determined on a quarterly basis. The expiration date
of the program was extended by six months, from December 31, 2009, to June 30, 2010, to provide
continued support to those institutions most affected by the recent financial crisis and phase out
the program in an orderly manner. On October 22, 2009, the Firm notified the FDIC that, as of
January 1, 2010, it would no longer participate in the TAG Program. As a result of the Firm’s
decision to opt out of the program, after December 31, 2009, funds held in noninterest-bearing
transaction accounts will no longer be guaranteed in full, but will be insured up to $250,000 under
the FDIC’s general deposit rules.
| 218 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The following table details the components of other borrowed funds.
| At December 31, (in millions) | 2009 | 2008 | ||||||
|
Advances from Federal Home Loan Banks
(a)
|
$ | 27,847 | $ | 70,187 | ||||
|
Nonrecourse advances — FRBB
(b)
|
— | 11,192 | ||||||
|
Other
(c)
|
27,893 | 51,021 | ||||||
|
Total
(d)
|
$ | 55,740 | $ | 132,400 | ||||
| (a) | Maturities of advances from the FHLBs are $23.6 billion, $2.6 billion, and $716 million in each of the 12-month periods ending December 31, 2010, 2011, and 2013, respectively, and $926 million maturing after December 31, 2014. Maturities for the 12-month period ending December 31, 2012 and 2014 were not material. | |
| (b) | On September 19, 2008, the Federal Reserve Board established a special lending facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML Facility”), to provide liquidity to eligible U.S. money market mutual funds. Under the AML Facility, banking organizations must use the loan proceeds to finance their purchases of eligible high-quality ABCP investments from money market mutual funds, which are pledged to secure nonrecourse advances from the Federal Reserve Bank of Boston (“FRBB”). Participating banking organizations do not bear any credit or market risk related to the ABCP investments they hold under this facility; therefore, the ABCP investments held are not assessed any regulatory capital. The AML Facility ended on February 1, 2010. The nonrecourse advances from the FRBB were elected under the fair value option and recorded in other borrowed funds; the corresponding ABCP investments were also elected under the fair value option and recorded in other assets. The fair value of ABCP investments purchased under the AML Facility for U.S. money market mutual funds is determined based on observable market information and is classified in level 2 of the valuation hierarchy. | |
| (c) | Includes zero and $30 billion of advances from the Federal Reserve under the Federal Reserve’s Term Auction Facility (“TAF”) at December 31, 2009 and 2008, respectively, pursuant to which the Federal Reserve auctions term funds to depository institutions that are eligible to borrow under the primary credit program. The TAF allows all eligible depository institutions to place a bid for an advance from its local Federal Reserve Bank at an interest rate set by an auction. All advances are required to be fully collateralized. The TAF is designed to improve liquidity by making it easier for sound institutions to borrow when the markets are not operating efficiently. | |
| (d) | Includes other borrowed funds of $5.6 billion and $14.7 billion accounted for at fair value at December 31, 2009 and 2008, respectively. |
The following table details the components of accounts payable and other liabilities at each of the
dates indicated.
| At December 31, (in millions) | 2009 | 2008 | ||||||
|
Brokerage payables
(a)
|
$ | 92,848 | $ | 115,483 | ||||
|
Accounts payable and other
liabilities
(b)
|
69,848 | 72,495 | ||||||
|
Total
|
$ | 162,696 | $ | 187,978 | ||||
| (a) | Includes payables to customers, brokers, dealers and clearing organizations, and securities fails. | |
| (b) | Includes $357 million and zero accounted for at fair value at December 31, 2009 and 2008, respectively. |
| JPMorgan Chase & Co. / 2009 Annual Report | 219 |
Table of Contents
Notes to consolidated financial statements
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 carrying values (including unamortized original issue discount, valuation adjustments and fair
value adjustments, where applicable) by contractual maturity as of December 31, 2009.
| By remaining maturity at | 2009 | |||||||||||||||||||||
| December 31, 2009 | Under | After | 2008 | |||||||||||||||||||
| (in millions, except rates) | 1 year | 1–5 years | 5 years | Total | Total | |||||||||||||||||
| Parent company |
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||
| Senior debt: (a) |
Fixed rate
|
(b) | $ | 11,645 | $ | 57,292 | $ | 24,792 | $ | 93,729 | $ | 79,908 | ||||||||||
|
Variable rate
|
(c) | 16,892 | 47,308 | 9,135 | 73,335 | 65,234 | ||||||||||||||||
|
Interest rates
|
(d) | 0.28–6.00 | % | 0.35–7.00 | % | 0.22–7.50 | % | 0.22–7.50 | % | 0.20–7.63 | % | |||||||||||
|
|
||||||||||||||||||||||
| Subordinated debt: |
Fixed rate
|
$ | 1,713 | $ | 9,625 | $ | 13,513 | $ | 24,851 | $ | 28,966 | |||||||||||
|
Variable rate
|
— | 41 | 1,797 | 1,838 | 1,786 | |||||||||||||||||
|
Interest rates
|
(d) | 7.88–10.00 | % | 1.92–6.75 | % | 1.14–8.53 | % | 1.14–10.00 | % | 1.92–10.00 | % | |||||||||||
|
Subtotal
|
$ | 30,250 | $ | 114,266 | $ | 49,237 | $ | 193,753 | $ | 175,894 | ||||||||||||
| Subsidiaries |
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||
| Senior debt: (a) |
Fixed rate
|
$ | 96 | $ | 1,695 | $ | 1,519 | $ | 3,310 | $ | 8,370 | |||||||||||
|
Variable rate
|
(e) | 6,729 | 22,759 | 10,347 | 39,835 | 57,980 | ||||||||||||||||
|
Interest rates
|
(d) | 0.22–0.23 | % | 0.16–2.10 | % | 0.18–14.21 | % | 0.16–14.21 | % | 0.03–14.21 | % | |||||||||||
|
|
||||||||||||||||||||||
| Subordinated debt: |
Fixed rate
|
$ | — | $ | — | $ | 8,655 | $ | 8,655 | $ | 8,700 | |||||||||||
|
Variable rate
|
— | — | 1,150 | 1,150 | 1,150 | |||||||||||||||||
|
Interest rates
|
(d) | — | — | 0.58–8.25 | % | 0.58–8.25 | % | 2.33–8.25 | % | |||||||||||||
|
Subtotal
|
$ | 6,825 | $ | 24,454 | $ | 21,671 | $ | 52,950 | $ | 76,200 | ||||||||||||
|
|
||||||||||||||||||||||
| Junior subordinated debt: |
Fixed rate
|
$ | — | $ | — | $ | 16,349 | $ | 16,349 | $ | 15,180 | |||||||||||
|
Variable rate
|
— | — | 3,266 | 3,266 | 3,409 | |||||||||||||||||
|
Interest rates
|
(d) | — | — | 0.78–8.75 | % | 0.78–8.75 | % | 2.42–8.75 | % | |||||||||||||
|
Subtotal
|
$ | — | $ | — | $ | 19,615 | $ | 19,615 | $ | 18,589 | ||||||||||||
| Total long-term debt (f) |
|
$ | 37,075 | $ | 138,720 | $ | 90,523 | $ | 266,318 | (h)(i)(j) | $ | 270,683 | (j) | |||||||||
| Long-term beneficial interests: | ||||||||||||||||||||||
|
Fixed rate
|
$ | 596 | $ | 373 | $ | 65 | $ | 1,034 | $ | 571 | ||||||||||||
|
Variable rate
|
3,361 | 2,549 | 3,494 | 9,404 | 9,990 | |||||||||||||||||
|
Interest rates
|
0.26–5.20 | % | 0.25–7.13 | % | 0.25–5.50 | % | 0.25–7.13 | % | 0.80–9.16 | % | ||||||||||||
|
|
||||||||||||||||||||||
| Total long-term beneficial interests (g) | $ | 3,957 | $ | 2,922 | $ | 3,559 | $ | 10,438 | $ | 10,561 | ||||||||||||
| (a) | Included are various equity-linked or other indexed instruments. Embedded derivatives, separated from hybrid securities in accordance with U.S.GAAP, are reported at fair value and shown net with the host contract on the Consolidated Balance Sheets. Changes in fair value of separated derivatives are recorded in principal transactions revenue. Hybrid securities which the Firm has elected to measure at fair value are classified in the line item of the host contract on the Consolidated Balance Sheets; changes in fair value are recorded in principal transactions revenue in the Consolidated Statements of Income. | |
| (b) | Included $21.6 billion and $14.1 billion as of December 31, 2009 and 2008, respectively, guaranteed by the FDIC under the TLG Program. | |
| (c) | Included $19.3 billion and $6.9 billion as of December 31, 2009 and 2008, respectively, guaranteed by the FDIC under the TLG Program. | |
| (d) | 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 the associated derivative instruments used in hedge accounting relationships, if applicable. The use of these derivative instruments modifies the Firm’s exposure to the contractual interest rates disclosed in the table above. Including the effects of the hedge accounting derivatives, the range of modified rates in effect at December 31, 2009, for total long-term debt was (0.17)% to 14.21%, versus the contractual range of 0.16% to 14.21% presented in the table above. The interest rate ranges shown exclude structured notes accounted for at fair value. | |
| (e) | Included $7.8 billion principal amount of U.S. dollar-denominated floating-rate mortgage bonds issued to an unaffiliated statutory trust, which in turn issued € 6.0 billion in covered bonds secured by mortgage loans. | |
| (f) | Included $49.0 billion and $58.2 billion of outstanding structured notes accounted for at fair value at December 31, 2009 and 2008, respectively. | |
| (g) | Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated VIEs. Also included $1.4 billion and $1.7 billion of outstanding structured notes accounted for at fair value at December 31, 2009 and 2008, respectively. Excluded short-term commercial paper beneficial interests of $4.8 billion at December 31, 2009. | |
| (h) | At December 31, 2009, long-term debt aggregating $33.2 billion was redeemable at the option of JPMorgan Chase, in whole or in part, prior to maturity, based on the terms specified in the respective notes. | |
| (i) | The aggregate principal amount of debt that matures in each of the five years subsequent to 2009 is $37.1 billion in 2010, $49.1 billion in 2011, $46.8 billion in 2012, $18.4 billion in 2013 and $24.4 billion in 2014. | |
| (j) | Included $3.4 billion and $3.4 billion of outstanding zero-coupon notes at December 31, 2009 and 2008, respectively. The aggregate principal amount of these notes at their respective maturities was $6.6 billion and $7.1 billion, respectively. |
| 220 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The weighted-average contractual interest rates for total long-term debt were 3.52% and 4.25% as of
December 31, 2009 and 2008, 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 Firm’s interest expense on the associated debt. The modified
weighted-average interest rates for total long-term debt, including the effects of related
derivative instruments, were 1.86% and 3.70% as of December 31, 2009 and 2008, respectively.
On December 4, 2008, the Firm elected to participate in the TLG Program, which was available to,
among others, all U.S. depository institutions insured by the FDIC and all U.S. bank holding
companies, unless they opted out of the TLG Program or the FDIC terminated their participation.
Under the TLG Program, the FDIC guaranteed through the earlier of maturity or June 30, 2012,
certain senior unsecured debt issued though October 31, 2009, in return for a fee to be paid based
on the amount and maturity of the debt. Under the TLG Program, the FDIC would pay the unpaid
principal and interest on an FDIC-guaranteed debt instrument upon the failure of the participating
entity to make a timely payment of principal or interest in accordance with the terms of the
instrument.
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 Firm’s market-making activities. These
guarantees rank on a parity with all of the Firm’s other unsecured and unsubordinated indebtedness.
Guaranteed liabilities totaled $4.5 billion and $4.8 billion at December 31, 2009 and 2008,
respectively. For additional information, see Note 2 on pages 143–148 of this Annual Report.
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital
debt securities
At December 31, 2009, the Firm had established 25 wholly-owned Delaware statutory business trusts
(“issuer trusts”) that had issued guaranteed capital debt securities.
The junior subordinated deferrable interest debentures issued by the Firm to the issuer trusts,
totaling $19.6 billion and $18.6 billion at December 31, 2009 and 2008, respectively, were
reflected in the Firm’s Consolidated Balance Sheets in long-term debt, and in the table on the
preceding page under the caption “Junior subordinated debt” (i.e., trust preferred 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, 2009 and 2008. The debentures
issued to the issuer trusts by the Firm, less the common capital securities of the issuer trusts,
qualify as Tier 1 capital.
The following is a summary of the outstanding trust preferred capital debt securities,
including unamortized original issue discount, issued by each trust, and the junior subordinated
deferrable interest debenture issued to each trust, as of December 31, 2009.
| Amount of | ||||||||||||||||||||||||||||
| trust preferred | Stated maturity | |||||||||||||||||||||||||||
| capital debt | Principal amount | of trust preferred | Interest rate of | |||||||||||||||||||||||||
| securities | of debenture | capital securities | Earliest | trust preferred | Interest | |||||||||||||||||||||||
| issued | issued | Issue | and | redemption | capital securities | payment/ | ||||||||||||||||||||||
| December 31, 2009 (in millions) | by trust (a) | to trust (b) | date | debentures | date | and debentures | distribution dates | |||||||||||||||||||||
|
Bank One Capital III
|
$ | 474 | $ | 650 | 2000 | 2030 | Any time | 8.75 | % | Semiannually | ||||||||||||||||||
|
Bank One Capital VI
|
525 | 553 | 2001 | 2031 | Any time | 7.20 | % | Quarterly | ||||||||||||||||||||
|
Chase Capital II
|
481 | 497 | 1997 | 2027 | Any time | LIBOR + 0.50% | Quarterly | |||||||||||||||||||||
|
Chase Capital III
|
295 | 304 | 1997 | 2027 | Any time | LIBOR + 0.55% | Quarterly | |||||||||||||||||||||
|
Chase Capital VI
|
241 | 249 | 1998 | 2028 | Any time | LIBOR + 0.625% | Quarterly | |||||||||||||||||||||
|
First Chicago NBD Capital I
|
248 | 256 | 1997 | 2027 | Any time | LIBOR + 0.55% | Quarterly | |||||||||||||||||||||
|
J.P. Morgan Chase Capital X
|
1,000 | 1,014 | 2002 | 2032 | Any time | 7.00 | % | Quarterly | ||||||||||||||||||||
|
J.P. Morgan Chase Capital XI
|
1,075 | 1,000 | 2003 | 2033 | Any time | 5.88 | % | Quarterly | ||||||||||||||||||||
|
J.P. Morgan Chase Capital XII
|
400 | 389 | 2003 | 2033 | Any time | 6.25 | % | Quarterly | ||||||||||||||||||||
|
JPMorgan Chase Capital XIII
|
465 | 480 | 2004 | 2034 | 2014 | LIBOR + 0.95% | Quarterly | |||||||||||||||||||||
|
JPMorgan Chase Capital XIV
|
600 | 584 | 2004 | 2034 | 2009 | 6.20 | % | Quarterly | ||||||||||||||||||||
|
JPMorgan Chase Capital XV
|
995 | 1,101 | 2005 | 2035 | Any time | 5.88 | % | Semiannually | ||||||||||||||||||||
|
JPMorgan Chase Capital XVI
|
500 | 491 | 2005 | 2035 | 2010 | 6.35 | % | Quarterly | ||||||||||||||||||||
|
JPMorgan Chase Capital XVII
|
496 | 517 | 2005 | 2035 | Any time | 5.85 | % | Semiannually | ||||||||||||||||||||
|
JPMorgan Chase Capital XVIII
|
748 | 749 | 2006 | 2036 | Any time | 6.95 | % | Semiannually | ||||||||||||||||||||
|
JPMorgan Chase Capital XIX
|
563 | 564 | 2006 | 2036 | 2011 | 6.63 | % | Quarterly | ||||||||||||||||||||
|
JPMorgan Chase Capital XX
|
995 | 996 | 2006 | 2036 | Any time | 6.55 | % | Semiannually | ||||||||||||||||||||
|
JPMorgan Chase Capital XXI
|
836 | 837 | 2007 | 2037 | 2012 | LIBOR + 0.95% | Quarterly | |||||||||||||||||||||
|
JPMorgan Chase Capital XXII
|
996 | 997 | 2007 | 2037 | Any time | 6.45 | % | Semiannually | ||||||||||||||||||||
|
JPMorgan Chase Capital XXIII
|
643 | 643 | 2007 | 2047 | 2012 | LIBOR + 1.00% | Quarterly | |||||||||||||||||||||
|
JPMorgan Chase Capital XXIV
|
700 | 700 | 2007 | 2047 | 2012 | 6.88 | % | Quarterly | ||||||||||||||||||||
|
JPMorgan Chase Capital XXV
|
1,492 | 1,734 | 2007 | 2037 | 2037 | 6.80 | % | Semiannually | ||||||||||||||||||||
|
JPMorgan Chase Capital XXVI
|
1,815 | 1,815 | 2008 | 2048 | 2013 | 8.00 | % | Quarterly | ||||||||||||||||||||
|
JPMorgan Chase Capital XXVII
|
995 | 995 | 2009 | 2039 | 2039 | 7.00 | % | Semiannually | ||||||||||||||||||||
|
JPMorgan Chase Capital XXVIII
|
1,500 | 1,500 | 2009 | 2039 | 2014 | 7.20 | % | Quarterly | ||||||||||||||||||||
|
Total
|
$ | 19,078 | $ | 19,615 | ||||||||||||||||||||||||
| (a) | Represents the amount of trust preferred capital debt securities issued to the public by each trust, including unamortized original issue discount. | |
| (b) | Represents the principal amount of JPMorgan Chase debentures issued to each trust, including unamortized original-issue discount. The principal amount of debentures issued to the trusts includes the impact of hedging and purchase accounting fair value adjustments that were recorded on the Firm’s Consolidated Financial Statements. |
| JPMorgan Chase & Co. / 2009 Annual Report | 221 |
Table of Contents
Notes to consolidated financial statements
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.
On April 23, 2008, the Firm issued 600,000 shares of Fixed to Floating Rate Noncumulative Preferred
Stock, Series I (“Series I”), for total proceeds of $6.0 billion.
On July 15, 2008, each series of Bear Stearns preferred stock then issued and outstanding was
exchanged into a series of JPMorgan Chase preferred stock (Cumulative Preferred Stock, Series E,
Series F and Series G) having substantially identical terms. As a result of the exchange, these
preferred shares rank equally with the other series of the Firm’s preferred stock.
On August 21, 2008, the Firm issued 180,000 shares of 8.625% Noncumulative Preferred Stock, Series
J (“Series J”), for total proceeds of $1.8 billion.
On October 28, 2008, pursuant to the U.S. Department of the Treasury’s (the “U.S. Treasury”)
Capital Purchase Program (the “Capital Purchase Program”), the Firm issued to the U.S. Treasury,
for total proceeds of $25.0 billion, (i) 2.5 million shares of the Firm’s Fixed Rate Cumulative
Perpetual Preferred Stock, Series K, par value $1 per share and liquidation preference $10,000 per
share (the “Series K Preferred Stock”); and (ii) a warrant to purchase up to 88,401,697 shares of
the Firm’s common stock at an exercise price of $42.42 per share (the “Warrant”), subject to
certain anti-dilution and other adjustments. The $25.0 billion proceeds were allocated to the
Series K Preferred Stock and the Warrant based on the relative fair value of the instruments. The
difference between the initial carrying value of $23.7 billion allocated to the Series K Preferred
Stock and its redemption value of $25.0 billion was being amortized to retained earnings (with a
corresponding increase in the carrying value of the Series K
Preferred Stock) over the first five
years of the contract as an adjustment to the dividend yield, using the effective-yield method. The
Series K Preferred Stock was nonvoting, qualified as Tier 1 capital and ranked equally with the
Firm’s other series of preferred stock. On June 17, 2009, the Firm redeemed all of the outstanding
shares of Series K Preferred Stock and repaid the full $25.0 billion principal amount together with
accrued but unpaid dividends.
In the event of a liquidation or dissolution of the Firm, JPMorgan Chase’s preferred stock then
outstanding takes precedence over the Firm’s common stock for the payment of dividends and the
distribution of assets.
Generally, dividends on shares of outstanding series of preferred stock are payable quarterly.
Dividends on the shares of Series I preferred stock are payable semiannually at a fixed annual
dividend rate of 7.90% through April 2018, and then become payable quarterly at an annual dividend
rate of three-month LIBOR plus 3.47%. The Series K Preferred Stock bore cumulative dividends,
payable quarterly, at a rate of 5% per year for the first five years and 9% per year thereafter.
Dividends could only be paid if, as and when declared by the Firm’s Board of Directors. The
effective dividend yield on the Series K Preferred Stock was 6.16%. The Series K Preferred Stock
ranked equally with the Firm’s existing 6.15% Cumulative Preferred Stock, Series E; 5.72%
Cumulative Preferred Stock, Series F; 5.49% Cumulative Preferred Stock, Series G; Fixed-to-Floating
Rate Noncumulative Perpetual Preferred Stock, Series I; and 8.63% Noncumulative Perpetual Preferred
Stock, Series J, in terms of dividend payments and upon liquidation of the Firm.
The following is a summary of JPMorgan Chase’s preferred stock outstanding as of December
31, 2009 and 2008.
| Share value | Contractual rate | |||||||||||||||||||||||||||
| and redemption | Shares | Amount (in millions) | Earliest | in effect at | ||||||||||||||||||||||||
| December 31, | price per share (b) | 2009 | 2008 | 2009 | 2008 | redemption date | December 31, 2009 | |||||||||||||||||||||
|
Cumulative Preferred Stock, Series E
(a)
|
$ | 200 | 818,113 | 818,113 | $ | 164 | $ | 164 | Any time | 6.15 | % | |||||||||||||||||
|
Cumulative Preferred Stock, Series F
(a)
|
200 | 428,825 | 428,825 | 86 | 86 | Any time | 5.72 | |||||||||||||||||||||
|
Cumulative Preferred Stock, Series G
(a)
|
200 | 511,169 | 511,169 | 102 | 102 | Any time | 5.49 | |||||||||||||||||||||
|
Fixed to Floating Rate
Noncumulative Perpetual Preferred Stock, Series I
(a)
|
10,000 | 600,000 | 600,000 | 6,000 | 6,000 | 4/30/2018 | 7.90 | |||||||||||||||||||||
|
Noncumulative Perpetual Preferred Stock, Series J
(a)
|
10,000 | 180,000 | 180,000 | 1,800 | 1,800 | 9/1/2013 | 8.63 | |||||||||||||||||||||
|
Fixed Rate Cumulative
Perpetual Preferred Stock,
Series K
|
10,000 | — | 2,500,000 | — | 23,787 | (c) | — | NA | ||||||||||||||||||||
|
Total preferred stock
|
2,538,107 | 5,038,107 | $ | 8,152 | $ | 31,939 | ||||||||||||||||||||||
| (a) | Represented by depositary shares. | |
| (b) | Redemption price includes amount shown in the table plus any accrued but unpaid dividends. | |
| (c) | Represents the carrying value as of December 31, 2008. The redemption value was $25.0 billion. |
| 222 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Dividend restrictions
Prior to the redemption of the Series K Preferred Stock, any accrued and unpaid dividends on the
Series K Preferred Stock were required to be fully paid before dividends could be declared or paid
on stock ranking junior or equally with the Series K Preferred Stock. In addition, the U.S.
Treasury’s consent was required for any increase in dividends on common stock from the $0.38 per
share quarterly dividend paid on October 31, 2008. As a result of the redemption of the Series K
Preferred Stock, JPMorgan Chase is no longer subject to any of these restrictions.
Stock repurchase restrictions
Prior to the redemption of the Series K Preferred Stock, the Firm could not repurchase or redeem any common stock or other equity securities of the Firm, or any trust preferred capital debt securities issued by the Firm or any of its affiliates, without the prior consent of the U.S. Treasury (other than (i) repurchases of the Series K Preferred Stock, and (ii) repurchases of junior preferred shares or common stock in connection with any employee benefit plan in the ordinary course of business consistent with past practice). As a result of the redemption of the Series K Preferred Stock, JPMorgan Chase is no longer subject to any of these restrictions.
Prior to the redemption of the Series K Preferred Stock, the Firm could not repurchase or redeem any common stock or other equity securities of the Firm, or any trust preferred capital debt securities issued by the Firm or any of its affiliates, without the prior consent of the U.S. Treasury (other than (i) repurchases of the Series K Preferred Stock, and (ii) repurchases of junior preferred shares or common stock in connection with any employee benefit plan in the ordinary course of business consistent with past practice). As a result of the redemption of the Series K Preferred Stock, JPMorgan Chase is no longer subject to any of these restrictions.
At December 31, 2009, JPMorgan Chase was authorized to issue 9.0 billion shares of common stock
with a par value of $1 per share. On June 5, 2009, the Firm issued $5.8 billion, or 163 million new
shares, of its common stock at $35.25 per share. On September 30, 2008, the Firm issued $11.5
billion, or 284 million new shares, of its common stock at $40.50 per share.
On April 8, 2008, pursuant to the Share Exchange Agreement dated March 24, 2008, between JPMorgan
Chase and Bear Stearns, 20.7 million newly issued shares of JPMorgan Chase common stock were issued
to Bear Stearns in a transaction that was exempt from registration under the Securities Act of
1933, pursuant to Section 4(2) thereof, in exchange for 95.0 million newly issued shares of Bear
Stearns common stock (or 39.5% of Bear Stearns common stock after giving effect to the issuance).
Upon the consummation of the Bear Stearns merger, on May 30, 2008, the 20.7 million shares of
JPMorgan Chase common stock and 95.0 million shares of Bear Stearns common stock were cancelled.
For a further discussion of this transaction, see Note 2 on pages 143—148 of this Annual Report.
Common shares issued (newly issued or distributed from treasury) by JPMorgan Chase during the years
ended December 31, 2009, 2008 and 2007 were as follows.
| December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Issued – balance at January 1
|
3,941.6 | 3,657.7 | 3,657.8 | |||||||||
|
Newly issued:
|
||||||||||||
|
Common stock:
|
||||||||||||
|
Open market issuance
|
163.3 | 283.9 | — | |||||||||
|
Bear Stearns Share Exchange
Agreement
|
— | 20.7 | — | |||||||||
|
Total newly issued
|
163.3 | 304.6 | — | |||||||||
|
Canceled shares
|
— | (20.7 | ) | (0.1 | ) | |||||||
|
Total issued – balance at
December 31
|
4,104.9 | 3,941.6 | 3,657.7 | |||||||||
|
Treasury – balance at January 1
|
(208.8 | ) | (290.3 | ) | (196.1 | ) | ||||||
|
Purchase of treasury stock
|
— | — | (168.2 | ) | ||||||||
|
Share repurchases related to
employee stock-based
awards
(a)
|
(1.1 | ) | (0.5 | ) | (2.7 | ) | ||||||
|
Issued from treasury:
|
||||||||||||
|
Net change from the Bear
Stearns merger as a result of the
reissuance of Treasury stock and
the Share Exchange Agreement
|
— | 26.5 | — | |||||||||
|
Employee benefits and
compensation plans
|
45.7 | 54.4 | 75.7 | |||||||||
|
Employee stock purchase plans
|
1.3 | 1.1 | 1.0 | |||||||||
|
Total issued from treasury
|
47.0 | 82.0 | 76.7 | |||||||||
|
Total treasury – balance at
December 31
|
(162.9 | ) | (208.8 | ) | (290.3 | ) | ||||||
|
Outstanding
|
3,942.0 | 3,732.8 | 3,367.4 | |||||||||
| (a) | Participants in the Firm’s stock-based incentive plans may have shares withheld to cover income taxes. |
Pursuant to the Capital Purchase Program, the Firm issued to the U.S. Treasury a Warrant to
purchase up to 88,401,697 shares of the Firm’s common stock, at an exercise price of $42.42 per
share, subject to certain antidilution and other adjustments. Based on the Warrant’s fair value
relative to the fair value of the Series K Preferred Stock on October 28, 2008, as discussed in
Note 23 on pages 222—223 of this Annual Report, the Warrant was recorded at a value of $1.3
billion. The U.S. Treasury exchanged the Warrant for 88,401,697 warrants, each of which was a
warrant to purchase a share of the Firm’s common stock at an exercise price of $42.42 per share
and, on December 11, 2009, sold the warrants in a secondary public offering for $950 million. The
warrants are exercisable, in whole or in part, at any time and from time to time until October 28,
2018. The Firm did not purchase any of the warrants sold by the U.S. Treasury.
In April 2007, the Board of Directors approved a stock repurchase program that authorizes the
repurchase of up to $10.0 billion of the Firm’s common shares. In connection with the U.S.
Treasury’s sale of the warrants, the Board of Directors amended the Firm’s securities repurchase
program to authorize the repurchase of warrants for its stock. During the years ended December 31,
2009 and 2008, the Firm did not repurchase any shares of its common stock. During 2007, the Firm
repurchased 168 million shares of common stock under stock repurchase programs approved by the
Board of Directors. As of December 31, 2009, $6.2 billion of authorized repurchase capacity
remained under the repurchase program with respect to repurchases of common stock, and all the
authorized repurchase capacity remained with respect to the warrants.
The authorization to repurchase common stock and warrants will be utilized at management’s
discretion, and the timing of purchases and
| JPMorgan Chase & Co. / 2009 Annual Report | 223 |
Table of Contents
Notes to consolidated financial statements
the exact number of shares and warrants purchased is
subject to various factors, including: market conditions; legal considerations affecting the amount
and timing of repurchase activity; the Firm’s capital position, taking into account goodwill and
intangibles; internal capital generation; and alternative potential investment opportunities. The
repurchase program does not include specific price targets or timetables; may be executed through
open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and
may be suspended at any time. A Rule 10b5-1 repurchase plan allows the Firm to repurchase its
equity during periods when it would not otherwise be repurchasing common stock – for example,
during internal trading “black-out periods.” All purchases under a Rule
10b5-1 plan must be made according to a predefined plan that is established when the Firm is not
aware of material nonpublic information.
As of December 31, 2009, approximately 582 million unissued shares of common stock were reserved
for issuance under various employee incentive, compensation, option and stock purchase plans,
director compensation plans, and the Warrants issued under the Capital Purchase Program as
discussed above.
Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities,
which clarifies that unvested stock-based compensation awards containing nonforfeitable rights to
dividends or dividend equivalents (collectively, “dividends”) are participating securities and
should be included in the earnings per share (“EPS”) calculation using the two-class method.
JPMorgan Chase grants restricted stock and RSUs to certain employees under its stock-based
compensation programs, which entitle the recipients to receive nonforfeitable dividends during the
vesting period on a basis equivalent to the dividends paid to holders of common stock; these
unvested awards meet the definition of participating securities. Under the two-class method, all
earnings (distributed and undistributed) are allocated to each
class of common stock and participating securities, based on their respective rights to receive
dividends. EPS data for the prior periods were revised as required by the FASB’s guidance.
The following table presents the calculation of basic and diluted EPS for the years ended December
31, 2009, 2008 and 2007.
| Year ended December 31, | ||||||||||||
| (in millions, except per share amounts) | 2009 | 2008 | 2007 | |||||||||
|
Basic earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 11,652 | $ | 3,699 | $ | 15,365 | ||||||
|
Extraordinary gain
|
76 | 1,906 | — | |||||||||
|
Net
income
|
11,728 | 5,605 | 15,365 | |||||||||
|
Less: Preferred stock dividends
|
1,327 | 674 | — | |||||||||
|
Less: Accelerated amortization from redemption
of preferred stock issued to the U.S. Treasury
|
1,112 | (e) | — | — | ||||||||
|
Net income applicable to common equity
|
9,289 | 4,931 | 15,365 | |||||||||
|
|
||||||||||||
|
Less: Dividends and undistributed earnings
allocated to participating securities
|
515 | 189 | 441 | |||||||||
|
Net income applicable to common stockholders
(a)
|
8,774 | 4,742 | 14,924 | |||||||||
|
Total weighted-average basic shares outstanding
|
3,862.8 | 3,501.1 | 3,403.6 | |||||||||
|
Per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 2.25 | $ | 0.81 | $ | 4.38 | ||||||
|
Extraordinary gain
|
0.02 | 0.54 | — | |||||||||
|
Net income
(b)
|
$ | 2.27 | (e) | $ | 1.35 | $ | 4.38 | |||||
| Year ended December 31, | ||||||||||||
| (in millions, except per share | ||||||||||||
| amounts) | 2009 | 2008 | 2007 | |||||||||
|
Diluted earnings per share
|
||||||||||||
|
Net income applicable to common equity
|
$ | 9,289 | $ | 4,931 | $ | 15,365 | ||||||
|
Less: Dividends and undistributed earnings
allocated to participating securities
|
515 | 189 | 438 | |||||||||
|
Net income applicable to common stockholders
(a)
|
8,774 | 4,742 | 14,927 | |||||||||
|
|
||||||||||||
|
Total weighted-average basic shares outstanding
|
3,862.8 | 3,501.1 | 3,403.6 | |||||||||
|
Add: Employee stock options, SARs and Warrants
(c)
|
16.9 | 20.7 | 41.7 | |||||||||
|
Total weighted-average diluted shares outstanding
(d)
|
3,879.7 | 3,521.8 | 3,445.3 | |||||||||
|
Per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 2.24 | $ | 0.81 | $ | 4.33 | ||||||
|
Extraordinary gain
|
0.02 | 0.54 | — | |||||||||
|
Net income per share
(b)
|
$ | 2.26 | (e) | $ | 1.35 | $ | 4.33 | |||||
| (a) | Net income applicable to common stockholders for diluted and basic EPS may differ under the two-class method as a result of adding common stock equivalents for options, SARs and warrants to dilutive shares outstanding, which alters the ratio used to allocate earnings to common stockholders and participating securities for purposes of calculating diluted EPS. | |
| (b) | EPS data has been revised to reflect the retrospective application of new FASB guidance for participating securities, which resulted in a reduction of basic and diluted EPS for the year ended December 31, 2009, of $0.13 and $0.05, respectively; for the year ended December 31, 2008, of $0.06 and $0.02, respectively; and for the year ended December 31, 2007, of $0.13 and $0.05, respectively. | |
| (c) | Excluded from the computation of diluted EPS (due to the antidilutive effect) were options issued under employee benefit plans and, for 2008, the Warrant issued under the U.S. Treasury’s Capital Purchase Program to purchase shares of the Firm’s common stock totaling 266 million, 209 million and 129 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (d) | Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the calculation using the treasury-stock method. | |
| (e) | The calculation of basic and diluted EPS for the year ended December 31, 2009, includes a one-time noncash reduction of $1.1 billion, or $0.27 per share, resulting from the redemption of the Series K Preferred Stock issued to the U.S. Treasury. |
| 224 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Accumulated other comprehensive income/(loss) includes the after-tax change in unrealized
gains/(losses) on AFS securities, foreign currency translation adjustments (including the impact of
related derivatives), cash flow hedging activities and net loss and prior service cost/(credit)
related to the Firm’s defined benefit pension and OPEB plans.
| Net loss and prior | ||||||||||||||||||||
| Translation | service costs/(credit) of | Accumulated other | ||||||||||||||||||
| Unrealized gains/(losses) | adjustments, | defined benefit pension | comprehensive | |||||||||||||||||
| (in millions) | on AFS securities (a) | net of hedges | Cash flow hedges | and OPEB plans | income/(loss) | |||||||||||||||
|
Balance at December 31, 2006
|
$ | 29 | $ | 5 | $ | (489 | ) | $ | (1,102 | ) | $ | (1,557 | ) | |||||||
|
Cumulative effect of changes in
accounting principles (for fair
value
option elections)
|
(1 | ) | — | — | — | (1 | ) | |||||||||||||
|
Balance at January 1, 2007, adjusted
|
28 | 5 | (489 | ) | (1,102 | ) | (1,558 | ) | ||||||||||||
|
Net change
|
352 | (b) | 3 | (313 | ) | 599 | 641 | |||||||||||||
|
Balance at December 31, 2007
|
380 | 8 | (802 | ) | (503 | ) | (917 | ) | ||||||||||||
|
Net change
|
(2,481 | ) (c) | (606 | ) | 600 | (2,283 | ) | (4,770 | ) | |||||||||||
|
Balance at December 31, 2008
|
(2,101 | ) | (598 | ) | (202 | ) | (2,786 | ) | (5,687 | ) | ||||||||||
|
Net change
|
4,133 | (d) | 582 | 383 | 498 | 5,596 | ||||||||||||||
|
Balance at December 31, 2009
|
$ | 2,032 | (e) | $ | (16 | ) | $ | 181 | $ | (2,288 | ) | $ | (91 | ) | ||||||
| (a) | Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in other assets. | |
| (b) | The net change during 2007 was due primarily to a decline in interest rates. | |
| (c) | The net change during 2008 was due primarily to spread widening related to credit card asset-backed securities, nonagency mortgage-backed securities and collateralized loan obligations. | |
| (d) | The net change during 2009 was due primarily to overall market spread and market liquidity improvement as well as changes in the composition of investments. | |
| (e) | Includes after-tax unrealized losses of $(226) million not related to credit on debt securities for which credit losses have been recognized in income. |
The following table presents the before- and after-tax changes in net unrealized
gains/(losses); and reclassification adjustments for realized (gains)/losses on AFS securities and
cash flow hedges; changes resulting from foreign currency translation adjustments (including the
impact of related derivatives); net gains/(losses) and prior service costs/(credits) from pension
and OPEB plans; and amortization of pension and OPEB amounts into net income. Reclassification
adjustments include amounts recognized in net income that had been recorded previously in other
comprehensive income/(loss).
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Before | Tax | After | Before | Tax | After | Before | Tax | After | ||||||||||||||||||||||||||||
| Year ended December 31, (in millions) | tax | effect | tax | tax | effect | tax | tax | effect | tax | |||||||||||||||||||||||||||
|
Unrealized gains/(losses) on AFS securities:
|
||||||||||||||||||||||||||||||||||||
|
Net unrealized gains/(losses) arising
during the period
|
$ | 7,870 | $ | (3,029 | ) | $ | 4,841 | $ | (3,071 | ) | $ | 1,171 | $ | (1,900 | ) | $ | 759 | $ | (310 | ) | $ | 449 | ||||||||||||||
|
Reclassification adjustment for realized
(gains)/losses included in net income
|
(1,152 | ) | 444 | (708 | ) | (965 | ) | 384 | (581 | ) | (164 | ) | 67 | (97 | ) | |||||||||||||||||||||
|
Net change
|
6,718 | (2,585 | ) | 4,133 | (4,036 | ) | 1,555 | (2,481 | ) | 595 | (243 | ) | 352 | |||||||||||||||||||||||
|
Translation adjustments:
|
||||||||||||||||||||||||||||||||||||
|
Translation
|
1,139 | (398 | ) | 741 | (1,781 | ) | 682 | (1,099 | ) | 754 | (281 | ) | 473 | |||||||||||||||||||||||
|
Hedges
|
(259 | ) | 100 | (159 | ) | 820 | (327 | ) | 493 | (780 | ) | 310 | (470 | ) | ||||||||||||||||||||||
|
Net change
|
880 | (298 | ) | 582 | (961 | ) | 355 | (606 | ) | (26 | ) | 29 | 3 | |||||||||||||||||||||||
|
Cash flow hedges:
|
||||||||||||||||||||||||||||||||||||
|
Net unrealized gains/(losses) arising
during the period
|
767 | (308 | ) | 459 | 584 | (226 | ) | 358 | (737 | ) | 294 | (443 | ) | |||||||||||||||||||||||
|
Reclassification adjustment for realized
(gains)/losses
included in net income
|
(124 | ) | 48 | (76 | ) | 402 | (160 | ) | 242 | 217 | (87 | ) | 130 | |||||||||||||||||||||||
|
Net change
|
643 | (260 | ) | 383 | 986 | (386 | ) | 600 | (520 | ) | 207 | (313 | ) | |||||||||||||||||||||||
|
Net loss and prior service cost/(credit) of
defined benefit pension and OPEB plans:
|
||||||||||||||||||||||||||||||||||||
|
Net gains/(losses) and prior service
credits arising during the period
|
494 | (200 | ) | 294 | (3,579 | ) | 1,289 | (2,290 | ) | 934 | (372 | ) | 562 | |||||||||||||||||||||||
|
Reclassification adjustment for net loss
and prior
service credits included in net income
|
337 | (133 | ) | 204 | 14 | (7 | ) | 7 | 59 | (22 | ) | 37 | ||||||||||||||||||||||||
|
Net change
|
831 | (333 | ) | 498 | (3,565 | ) | 1,282 | (2,283 | ) | 993 | (394 | ) | 599 | |||||||||||||||||||||||
|
Total Other comprehensive income/(loss)
|
$ | 9,072 | $ | (3,476 | ) | $ | 5,596 | $ | (7,576 | ) | $ | 2,806 | $ | (4,770 | ) | $ | 1,042 | $ | (401 | ) | $ | 641 | ||||||||||||||
| JPMorgan Chase & Co. / 2009 Annual Report | 225 |
Table of Contents
Notes to consolidated financial statements
JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax
return. JPMorgan Chase uses the asset and liability method 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 asset or
liability for each temporary difference is determined based on the tax rates that the Firm expects
to be in effect when the underlying items of income and expense are realized. JPMorgan Chase’s
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 Firm’s 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 Firm’s final tax-related assets and liabilities may ultimately be different from those
currently reported.
The components of income tax expense/(benefit) included in the Consolidated Statements of Income
were as follows for each of the years ended December 31, 2009, 2008 and 2007.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Current income tax expense
|
||||||||||||
|
U.S. federal
|
$ | 4,698 | $ | 395 | $ | 2,805 | ||||||
|
Non-U.S.
|
2,368 | 1,009 | 2,985 | |||||||||
|
U.S. state and local
|
971 | 307 | 343 | |||||||||
|
Total current income
tax expense
|
8,037 | 1,711 | 6,133 | |||||||||
|
Deferred income tax expense/
(benefit)
|
||||||||||||
|
U.S. federal
|
(2,867 | ) | (3,015 | ) | 1,122 | |||||||
|
Non-U.S.
|
(454 | ) | 1 | (185 | ) | |||||||
|
U.S. state and local
|
(301 | ) | 377 | 370 | ||||||||
|
Total deferred income
tax expense/(benefit)
|
(3,622 | ) | (2,637 | ) | 1,307 | |||||||
|
Total income tax expense/
(benefit) before
extraordinary gain
|
$ | 4,415 | $ | (926 | ) | $ | 7,440 | |||||
Total income tax expense includes $280 million, $55 million and $74 million of tax benefits
recorded in 2009, 2008 and 2007, respectively, as a result of tax audit resolutions.
The preceding table does not reflect the tax effect of certain items that are recorded each period
directly in stockholders’ equity and certain tax benefits associated with the Firm’s employee
stock-based compensation plans. The table also does not reflect the cumulative tax effects of
initially implementing new accounting pronouncements in 2007. The tax effect of all items recorded
directly to stockholders’ equity resulted in a decrease of $3.7 billion in 2009 and an increase in
stockholders’ equity of $3.0 billion and $159 million in 2008 and 2007, respectively.
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. During 2008, as part of JPMorgan Chase’s periodic review of the business requirements and
capital needs of its non-U.S. subsidiaries, combined with the formation of specific strategies and
steps taken to fulfill these requirements and needs, the Firm determined that the undistributed
earnings of certain of its subsidiaries, for which U.S. federal income taxes had been provided,
will be indefinitely reinvested to fund the current and future growth of the related businesses. As
management does not intend to use the earnings of these subsidiaries as a source of funding for its
U.S. operations, such earnings will not be distributed to the U.S. in the foreseeable future. This
determination resulted in the release of deferred tax liabilities and the recognition of an income
tax benefit of $1.1 billion associated with these undistributed earnings. For 2009, pretax earnings
of approximately $2.8 billion were generated that will be indefinitely reinvested in these
subsidiaries. At December 31, 2009, the cumulative amount of undistributed pretax earnings in these
subsidiaries approximated $15.7 billion. If the Firm were to record a deferred tax liability
associated with these undistributed earnings, the amount would be $3.6 billion at December 31,
2009.
The tax expense applicable to securities gains and losses for the years 2009, 2008 and 2007 was $427
million, $608 million, and $60 million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for
each of the years ended December 31, 2009, 2008 and 2007, is presented in the following table.
| Year ended December 31, | 2009 | 2008 | 2007 | |||||||||
|
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 U.S. federal
income tax benefit
|
2.7 | 16.0 | 2.0 | |||||||||
|
Tax-exempt income
|
(3.9 | ) | (14.8 | ) | (2.4 | ) | ||||||
|
Non-U.S. subsidiary earnings
|
(1.7 | ) | (53.6 | ) | (1.1 | ) | ||||||
|
Business tax credits
|
(5.5 | ) | (24.5 | ) | (2.5 | ) | ||||||
|
Bear Stearns equity losses
|
— | 5.7 | — | |||||||||
|
Other, net
|
0.9 | 2.8 | 1.6 | |||||||||
|
Effective tax rate
|
27.5 | % | (33.4 | )% | 32.6 | % | ||||||
| 226 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Deferred income tax expense/(benefit) results from differences between assets and liabilities
measured for financial reporting versus income-tax return purposes. The significant components of
deferred tax assets and liabilities are reflected in the following table as of December 31, 2009
and 2008.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Deferred tax assets
|
||||||||
|
Allowance for loan losses
|
$ | 12,376 | $ | 8,029 | ||||
|
Employee benefits
|
4,424 | 4,841 | ||||||
|
Allowance for other than loan losses
|
3,995 | 3,686 | ||||||
|
Non-U.S. operations
|
1,926 | 2,504 | ||||||
|
Tax attribute carryforwards
|
912 | 1,383 | ||||||
|
Fair value adjustments
(a)
|
— | 2,565 | ||||||
|
Gross deferred tax assets
|
$ | 23,633 | $ | 23,008 | ||||
|
Deferred tax liabilities
|
||||||||
|
Depreciation and amortization
|
$ | 4,832 | $ | 4,681 | ||||
|
Leasing transactions
|
2,054 | 1,895 | ||||||
|
Non-U.S. operations
|
1,338 | 946 | ||||||
|
Fee income
|
670 | 1,015 | ||||||
|
Fair value adjustments
(a)
|
328 | — | ||||||
|
Other, net
|
147 | 202 | ||||||
|
Gross deferred tax liabilities
|
$ | 9,369 | $ | 8,739 | ||||
|
Valuation allowance
|
1,677 | 1,266 | ||||||
|
Net deferred tax asset
|
$ | 12,587 | $ | 13,003 | ||||
| (a) | Includes fair value adjustments related to AFS securities, cash flows hedging activities and other portfolio investments. |
JPMorgan Chase has recorded deferred tax assets of $912 million at December 31, 2009, in
connection with U.S. federal, state and local and non-U.S. subsidiary net operating loss
carryforwards. At December 31, 2009, the U.S. federal net operating loss carryforward was
approximately $1.2 billion, the state and local net operating loss carryforwards were approximately
$4.4 billion and the non-U.S. subsidiary net operating loss carryforward was $768 million.
If not
utilized, the U.S. federal net operating loss carryforward will expire in 2027 and the state
and local net operating loss carryforwards will expire in years 2026, 2027 and 2028. The non-U.S.
subsidiary net operating loss carryforward has an unlimited carryforward period.
A valuation allowance has been recorded for losses associated with non-U.S. subsidiaries and
certain portfolio investments, and certain state and local tax benefits. The increase in the
valuation allowance from 2008 was predominantly related to non-U.S. subsidiaries.
At December 31, 2009, 2008 and 2007, JPMorgan Chase’s unrecognized tax benefits, excluding related
interest expense and penalties, were $6.6 billion, $5.9 billion and $4.8 billion, respectively, of
which $3.5 billion, $2.9 billion and $1.3 billion, respectively, if recognized, would reduce the
annual effective tax rate. As JPMorgan Chase is presently under audit by a number of tax
authorities, it is reasonably possible that unrecognized tax benefits could significantly change
over the next 12 months, which could also significantly impact JPMorgan Chase’s quarterly and
annual effective tax rates.
The following table presents a reconciliation of the beginning and ending amount of unrecognized
tax benefits for the years ended December 31, 2009, 2008 and 2007.
| Unrecognized tax benefits | ||||||||||||
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Balance at January 1,
|
$ | 5,894 | $ | 4,811 | $ | 4,677 | ||||||
|
Increases based on tax
positions related to the
current period
|
584 | 890 | 434 | |||||||||
|
Decreases based on tax
positions related to the
current period
|
(6 | ) | (109 | ) | (241 | ) | ||||||
|
Increases associated with the
Bear Stearns merger
|
— | 1,387 | — | |||||||||
|
Increases based on tax
positions related to prior
periods
|
703 | 501 | 903 | |||||||||
|
Decreases based on tax
positions related to prior
periods
|
(322 | ) | (1,386 | ) | (791 | ) | ||||||
|
Decreases related to
settlements with taxing
authorities
|
(203 | ) | (181 | ) | (158 | ) | ||||||
|
Decreases related to a lapse
of applicable statute of
limitations
|
(42 | ) | (19 | ) | (13 | ) | ||||||
|
Balance at December 31,
|
$ | 6,608 | $ | 5,894 | $ | 4,811 | ||||||
Pretax interest expense and penalties related to income tax liabilities recognized in income
tax expense were $154 million ($101 million after-tax) in 2009; $571 million ($346 million
after-tax) in 2008; and $516 million ($314 million after-tax) in 2007. Included in accounts
payable and other liabilities at December 31, 2009 and 2008, in addition to the
Firm’s liability for unrecognized tax benefits, was $2.4 billion and $2.3 billion, respectively,
for income tax-related interest and penalties, of which the penalty component was insignificant.
JPMorgan Chase is subject to ongoing tax examinations by the tax authorities of the various
jurisdictions in which it operates, including U.S. federal, state and local, and non-U.S.
jurisdictions. The Firm’s consolidated federal income tax returns are presently under examination
by the Internal Revenue Service (“IRS”) for the years 2003, 2004 and 2005. The consolidated federal
income tax returns of Bear Stearns for the years ended November 30, 2003, 2004 and 2005, are also
under examination. Both examinations are expected to conclude in 2010.
The IRS audits of the consolidated federal income tax returns of JPMorgan Chase for the years 2006,
2007 and 2008, and for Bear Stearns for the years ended November 30, 2006, November 30, 2007, and
for the period December 1, 2007, through May 30, 2008, are expected to commence in 2010.
Administrative appeals are pending with the IRS relating to prior periods that were examined. For
2002 and prior years, refund claims relating to income and credit adjustments, and to tax attribute
carrybacks, for JPMorgan Chase and its predecessor entities, including Bank One, have been filed.
Amended returns to reflect refund claims primarily attributable to net operating losses and tax
credit carrybacks will be filed for the final Bear Stearns U.S. federal consolidated tax return for
the period December 1, 2007, through May 30, 2008, and for prior years.
On January 1, 2007, the Firm adopted FASB guidance which addresses the recognition and measurement
of tax positions taken or expected to be taken, and also guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure, to all of its income tax
positions, resulting in a $436 million cumulative effect increase to retained earnings, a reduction
in goodwill of $113 million and a $549 million decrease in the liability for income taxes.
| JPMorgan Chase & Co. / 2009 Annual Report | 227 |
Table of Contents
Notes to consolidated financial statements
The following table presents the U.S. and non-U.S. components of income before income tax
expense/(benefit) and extraordinary gain for the years ended December 31, 2009, 2008 and 2007.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
U.S.
|
$ | 6,263 | $ | (2,094 | ) | $ | 13,720 | |||||
|
Non-U.S.
(a)
|
9,804 | 4,867 | 9,085 | |||||||||
|
Income before income tax
expense/(benefit) and
extraordinary gain
|
$ | 16,067 | $ | 2,773 | $ | 22,805 | ||||||
| (a) | For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S. |
The business of JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”) is
subject to examination and regulation by the Office of the Comptroller of the Currency (“OCC”). The
Bank is a member of the U.S. Federal Reserve System, and its deposits are insured by the FDIC.
The Board of Governors of the Federal Reserve System (the “Federal Reserve”) requires depository
institutions to maintain cash reserves with a Federal Reserve Bank. The average amount of reserve
balances deposited by the Firm’s bank subsidiaries with various Federal Reserve Banks was
approximately $821 million and $1.6 billion in 2009 and 2008, respectively.
Restrictions imposed by U.S. federal law prohibit JPMorgan Chase and certain of its 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 subsidiary’s
total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such
loans is limited to 20% of the banking subsidiary’s total capital.
The principal sources of JPMorgan Chase’s income (on a parent company-only basis) are dividends and
interest from JPMorgan Chase Bank, N.A., and the other banking and nonbanking subsidiaries of
JPMorgan Chase. In addition to dividend restrictions set forth in statutes and regulations, the
Federal Reserve, 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 regulator’s 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, 2010 and 2009, JPMorgan Chase’s banking subsidiaries could pay, in the aggregate,
$3.6 billion and $17.0 billion, respectively, in dividends to their respective bank holding
companies without the prior approval of their relevant banking regulators. The capacity to pay
dividends in 2010 will be supplemented by the banking subsidiaries’ earnings during the year.
In compliance with rules and regulations established by U.S. and non-U.S. regulators, as of
December 31, 2009 and 2008, cash in the amount of $24.0 billion and $34.8 billion, respectively,
and securities with a fair value of $10.2 billion and $23.4 billion, respectively, were segregated
in special bank accounts for the benefit of securities and futures brokerage customers.
The Federal Reserve establishes capital requirements, including well-capitalized standards for
the consolidated financial holding company. The OCC establishes similar capital requirements and
standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A., and Chase Bank USA,
N.A.
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 Federal Reserve, 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 on-balance sheet assets). Failure
to meet these minimum requirements could cause the Federal Reserve to take action. Banking
subsidiaries also are subject to these capital requirements by their respective primary regulators.
As of December 31, 2009 and 2008, JPMorgan Chase and all of its banking subsidiaries were
well-capitalized and met all capital requirements to which each was subject.
| 228 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The following table presents the risk-based capital ratios for JPMorgan Chase and its significant
banking subsidiaries at December 31, 2009 and 2008.
| Well- | Minimum | |||||||||||||||||||||||||||||||
| JPMorgan Chase & Co. (c) | JPMorgan Chase Bank, N.A. (c) | Chase Bank USA, N.A. (c) | capitalized | capital | ||||||||||||||||||||||||||||
| December 31, (in millions, except ratios) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ratios (f) | ratios (f) | ||||||||||||||||||||||||
|
Regulatory capital:
|
||||||||||||||||||||||||||||||||
|
Tier 1
|
$ | 132,971 | $ | 136,104 | $ | 96,372 | $ | 100,597 | $ | 15,534 | $ | 11,190 | ||||||||||||||||||||
|
Total
|
177,073 | 184,720 | 136,646 | 143,832 | 19,198 | 12,901 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||
|
Risk-weighted
(a)
|
1,198,006 | (d) | 1,244,659 | (e) | 1,011,995 | 1,150,938 | (e) | 114,693 | 101,472 | |||||||||||||||||||||||
|
Adjusted average
(b)
|
1,933,767 | (d) | 1,966,895 | (e) | 1,609,081 | 1,705,754 | (e) | 74,087 | 87,286 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Capital ratios:
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital
|
11.1 | % (d) | 10.9 | % | 9.5 | % | 8.7 | % | 13.5 | % | 11.0 | % | 6.0 | % | 4.0 | % | ||||||||||||||||
|
Total capital
|
14.8 | 14.8 | 13.5 | 12.5 | 16.7 | 12.7 | 10.0 | 8.0 | ||||||||||||||||||||||||
|
Tier 1 leverage
|
6.9 | 6.9 | 6.0 | 5.9 | 21.0 | 12.8 | 5.0 | (g) | 3.0 | (h) | ||||||||||||||||||||||
| (a) | Includes off-balance sheet risk-weighted assets at December 31, 2009, of $367.4 billion, $312.3 billion and $49.9 billion, and at December 31, 2008, of $357.5 billion, $330.1 billion and $18.6 billion, for JPMorgan Chase, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., respectively. Risk-weighted assets are calculated in accordance with U.S. federal regulatory capital standards. | |
| (b) | Adjusted average assets, for purposes of calculating the leverage ratio, include total average assets adjusted for unrealized gains/(losses) on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital. | |
| (c) | Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions. | |
| (d) | On January 1, 2010 the Firm adopted new accounting standards, which required the consolidation of the Firm’s credit card securitization trusts, bank-administered asset-backed commercial paper conduits and certain mortgage and other consumer securitization VIEs. At adoption, the Firm added approximately $88 billion of U.S. GAAP assets and decreased the Tier 1 capital ratio by approximately 30 basis points. The impact to the Tier 1 capital ratio predominantly reflects the establishment of allowance for loan losses of approximately $7 billion (pretax) related to the receivables held in the credit card securitization trusts that were consolidated at the adoption date. The impact to the Tier 1 capital ratio does not include guidance issued by the banking regulators that changed the regulatory treatment for consolidated ABCP conduits, since the Firm elected the optional two-quarter implementation delay, which may be followed by a two-quarter partial (50%) implementation of the effect on risk-weighted assets and risk-based capital requirements for entities where the Firm has not provided implicit or voluntary support. As a result of the election of the implementation delay as well as certain actions taken by the Firm during the second quarter of 2009 that resulted in the regulatory capital consolidation of the Chase Issuance Trust (the Firm’s primary credit card securitization trust) which added approximately $40 billion of risk-weighted assets, the U.S. GAAP consolidation of these entities did not have a significant impact on risk-weighted assets at the adoption date. | |
| (e) | The Federal Reserve granted the Firm, for a period of 18 months following the Bear Stearns merger, relief up to a certain specified amount, and subject to certain conditions from the Federal Reserve’s risk-based capital and leverage requirements, with respect to Bear Stearns’ risk-weighted assets and other exposures acquired. The OCC granted JPMorgan Chase Bank, N.A. similar relief from its risk-based capital and leverage requirements. The relief would have ended, by its terms, on September 30, 2009. Commencing in the second quarter of 2009, the Firm no longer adjusted its risk-based capital ratios to take into account the relief in the calculation of its risk-based capital ratios as of June 30, 2009. | |
| (f) | As defined by the regulations issued by the Federal Reserve, OCC and FDIC. | |
| (g) | Represents requirements for banking subsidiaries pursuant to regulations issued under the FDIC Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company. | |
| (h) | The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4%, depending on factors specified in regulations issued by the Federal Reserve and OCC. | |
| Note: | Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities, which have resulted from both nontaxable business combinations and from tax-deductible goodwill. The Firm had deferred tax liabilities resulting from nontaxable business combinations totaling $812 million and $1.1 billion at December 31, 2009 and 2008, respectively. Additionally, the Firm had deferred tax liabilities resulting from tax-deductible goodwill of $1.7 billion and $1.6 billion at December 31, 2009 and 2008, respectively. |
A reconciliation of the Firm’s total stockholders’ equity to Tier 1 capital and Total
qualifying capital is presented in the following table.
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Tier 1 capital
|
||||||||
|
Total stockholders’ equity
|
$ | 165,365 | $ | 166,884 | ||||
|
Effect of certain items in accumulated other comprehensive
income/(loss) excluded from Tier 1 capital
|
75 | 5,084 | ||||||
|
Qualifying hybrid securities and noncontrolling interests
(a)
|
19,535 | 17,257 | ||||||
|
Less: Goodwill
(b)
|
46,630 | 46,417 | ||||||
|
Fair value DVA on derivative and structured note liabilities
related to the Firm’s credit quality
|
912 | 2,358 | ||||||
|
Investments in certain subsidiaries
|
802 | 679 | ||||||
|
Other intangible assets
|
3,660 | 3,667 | ||||||
|
Total Tier 1 capital
|
132,971 | 136,104 | ||||||
|
Tier 2 capital
|
||||||||
|
Long-term debt and other instruments qualifying as Tier 2 capital
|
28,977 | 31,659 | ||||||
|
Qualifying allowance for credit losses
|
15,296 | 17,187 | ||||||
|
Adjustment for investments in certain subsidiaries and other
|
(171 | ) | (230 | ) | ||||
|
Total Tier 2 capital
|
44,102 | 48,616 | ||||||
|
Total qualifying capital
|
$ | 177,073 | $ | 184,720 | ||||
| (a) | Primarily includes trust preferred capital debt securities of certain business trusts. | |
| (b) | Goodwill is net of any associated deferred tax liabilities. |
| JPMorgan Chase & Co. / 2009 Annual Report | 229 |
Table of Contents
Notes to consolidated financial statements
At December 31, 2009, JPMorgan Chase and its subsidiaries were obligated under a number of
noncancelable operating leases for premises and equipment used primarily for banking purposes, and
for energy-related tolling service agreements. Certain leases contain renewal options or escalation
clauses providing for increased rental payments based on maintenance, utility and tax increases, or
they require the Firm to perform restoration work on leased premises. No lease agreement imposes
restrictions on the Firm’s ability to pay dividends, engage in debt or equity financing
transactions or enter into further lease agreements.
The following table presents required future minimum rental payments under operating leases with
noncancelable lease terms that expire after December 31, 2009.
| Year ended December 31, (in millions) | ||||
|
2010
|
$ | 1,652 | ||
|
2011
|
1,629 | |||
|
2012
|
1,550 | |||
|
2013
|
1,478 | |||
|
2014
|
1,379 | |||
|
After 2014
|
8,264 | |||
|
Total minimum payments required
(a)
|
15,952 | |||
|
Less: Sublease rentals under noncancelable subleases
|
(1,800 | ) | ||
|
Net minimum payment required
|
$ | 14,152 | ||
| (a) | Lease restoration obligations are accrued in accordance with U.S. GAAP, and are not reported as a required minimum lease payment. |
Total rental expense was as follows.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Gross rental expense
|
$ | 1,884 | $ | 1,917 | $ | 1,380 | ||||||
|
Sublease rental income
|
(172 | ) | (415 | ) | (175 | ) | ||||||
|
Net rental expense
|
$ | 1,712 | $ | 1,502 | $ | 1,205 | ||||||
At December 31, 2009, 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) | 2009 | 2008 | ||||||
|
Reverse repurchase/securities borrowing agreements
|
$ | 392.9 | $ | 456.6 | ||||
|
Securities
|
115.6 | 31.0 | ||||||
|
Loans
|
289.0 | 342.3 | ||||||
|
Trading assets and other
|
76.8 | 98.0 | ||||||
|
Total assets pledged
(a)
|
$ | 874.3 | $ | 927.9 | ||||
| (a) | Total assets pledged do not include assets of consolidated VIEs. These assets are not generally used to satisfy liabilities to third parties. See Note 16 on pages 206–214 of this Annual Report for additional information on assets and liabilities of consolidated VIEs. |
In 2008, the Firm resolved with the IRS issues related to compliance with reporting and
withholding requirements for certain accounts transferred to The Bank of New York Mellon
Corporation (“BNYM”) in connection with the Firm’s sale to BNYM of its corporate trust business.
The resolution of these issues did not have a material effect on the Firm.
Litigation reserve
The Firm maintains litigation reserves for certain of its outstanding litigation. JPMorgan Chase
accrues for a litigation-related liability when it is probable that such a liability has been
incurred and the amount of the loss can be reasonably estimated. When the Firm is named as a
defendant in a litigation and may be subject to joint and several liability, and a judgment-sharing
agreement is in place, the Firm recognizes expense and obligations net of amounts expected to be
paid by other signatories to the judgment-sharing agreement.
While the outcome of litigation is inherently uncertain, management believes, in light of all
information known to it at December 31, 2009, the Firm’s litigation reserves were adequate at such
date. Management reviews litigation reserves at least quarterly, and the reserves may be increased
or decreased in the future to reflect further relevant developments. The Firm believes it has
meritorious defenses to the 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 management’s judgment as to what is in the best interests of JPMorgan
Chase stockholders.
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 counterparties draw down the
commitment or the Firm fulfill its obligation under the guarantee, and the counterparties
subsequently fail to perform according to the terms of the contract. Most of these commitments and
guarantees expire without a default occurring or without being drawn. As a result, the total
contractual amount of these instruments is not, in the Firm’s view, representative of its actual
future credit exposure or funding requirements. Further, certain commitments, predominantly 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 14 on pages 196–198 of this Annual
Report for further discussion of 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, 2009 and 2008. The amounts in the table below for credit card and home
equity lending-related commitments represent the total available credit for these products. The
Firm has not experienced, and does not anticipate, that all available lines of credit for these
products will be utilized at the same time. The Firm can reduce or cancel these lines of credit by
providing the borrower prior notice or, in some cases, without notice as permitted by law.
| 230 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Off-balance sheet lending-related financial instruments, guarantees and other commitments
| Contractual amount | Carrying Value (h) | ||||||||||||||||
| December 31, (in millions) | 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Lending-related
|
|||||||||||||||||
|
Consumer:
|
|||||||||||||||||
|
Home equity – senior lien
|
$ | 19,246 | $ | 27,998 | $ | — | $ | — | |||||||||
|
Home equity – junior lien
|
37,231 | 67,745 | — | — | |||||||||||||
|
Prime mortgage
|
1,654 | 5,079 | — | — | |||||||||||||
|
Subprime mortgage
|
— | — | — | — | |||||||||||||
|
Option ARMs
|
— | — | — | — | |||||||||||||
|
Auto loans
|
5,467 | 4,726 | 7 | 3 | |||||||||||||
|
Credit card
|
569,113 | 623,702 | — | — | |||||||||||||
|
All other loans
|
11,229 | 12,257 | 5 | 22 | |||||||||||||
|
Total consumer
|
643,940 | 741,507 | 12 | 25 | |||||||||||||
|
Wholesale:
|
|||||||||||||||||
|
Other unfunded commitments to extend credit
(a)
|
192,145 | 189,563 | 356 | 349 | |||||||||||||
|
Asset purchase agreements
|
22,685 | 53,729 | 126 | 147 | |||||||||||||
|
Standby letters of credit and financial guarantees
(a)(b)(c)
|
91,485 | 95,352 | 919 | 671 | |||||||||||||
|
Unused advised lines of credit
|
35,673 | 36,300 | — | — | |||||||||||||
|
Other letters of credit
(a)(b)
|
5,167 | 4,927 | 1 | 2 | |||||||||||||
|
Total wholesale
|
347,155 | 379,871 | 1,402 | 1,169 | |||||||||||||
|
Total lending-related
|
$ | 991,095 | $ | 1,121,378 | $ | 1,414 | $ | 1,194 | |||||||||
|
Other guarantees and commitments
|
|||||||||||||||||
|
Securities lending guarantees
(d)
|
$ | 170,777 | $ | 169,281 | $ | NA | $ | NA | |||||||||
|
Residual value guarantees
|
672 | 670 | — | — | |||||||||||||
|
Derivatives qualifying as guarantees
(e)
|
87,191 | 83,835 | 762 | 5,418 | |||||||||||||
|
Equity investment commitments
(f)
|
2,374 | 2,424 | — | — | |||||||||||||
|
Loan sale and securitization-related indemnifications:
|
|||||||||||||||||
|
Repurchase liability
(g)
|
NA | NA | 1,705 | 1,093 | |||||||||||||
|
Loans sold with recourse
|
13,544 | 15,020 | 271 | 241 | |||||||||||||
| (a) | Represents the contractual amount net of risk participations totaling $24.6 billion and $26.4 billion for standby letters of credit and other financial guarantees at December 31, 2009 and 2008, respectively, $690 million and $1.1 billion for other letters of credit at December 31, 2009 and 2008, respectively, and $643 million and $789 million for other unfunded commitments to extend credit at December 31, 2009 and 2008, respectively. In regulatory filings with the Federal Reserve Board these commitments are shown gross of risk participations. | |
| (b) | JPMorgan Chase held collateral relating to $31.5 billion and $31.0 billion of standby letters of credit and $1.3 billion and $1.0 billion of other letters of credit at December 31, 2009 and 2008, respectively. | |
| (c) | Includes unissued standby letter of credit commitments of $38.4 billion and $39.5 billion at December 31, 2009 and 2008, respectively. | |
| (d) | Collateral held by the Firm in support of securities lending indemnification agreements was $173.2 billion and $170.1 billion at December 31, 2009 and 2008, respectively. Securities lending collateral comprises primarily cash, and securities issued by governments that are members of the Organization for Economic Co-operation and Development (“OECD”) and U.S. government agencies. | |
| (e) | Represents notional amounts of derivatives qualifying as guarantees. The carrying value at December 31, 2009 and 2008, reflects derivative payables of $981 million and $5.6 billion, respectively, less derivative receivables of $219 million and $184 million, respectively. | |
| (f) | Includes unfunded commitments to third-party private equity funds of $1.5 billion and $1.4 billion at December 31, 2009 and 2008, respectively. Also includes unfunded commitments for other equity investments of $897 million and $1.0 billion at December 31, 2009 and 2008, respectively. These commitments include $1.5 billion at December 31, 2009, related to investments that are generally fair valued at net asset value as discussed in Note 3 on pages 148-165 of this Annual Report. | |
| (g) | Indemnifications for breaches of representations and warranties in loan sale and securitization agreements. For additional information, see Loan sale and securitization-related indemnifications on page 233 of this Note. | |
| (h) | For lending-related products the carrying value represents the allowance for lending-related commitments and the fair value of the guarantee liability, for derivative-related products the carrying value represents the fair value, and for all other products the carrying value represents the valuation reserve. |
Other unfunded commitments to extend credit
Other unfunded commitments to extend credit include commitments to U.S. domestic states and
municipalities, hospitals and other not-for-profit entities to provide funding for periodic tenders
of their variable-rate demand bond obligations or commercial paper. Performance by the Firm is
required in the event that the variable-rate demand bonds or commercial paper cannot be remarketed
to new investors. The amount of commitments related to variable-rate demand bonds and commercial
paper of U.S. domestic states and municipalities, hospitals and not-for-profit entities was $23.3
billion and $23.5 billion at December 31, 2009 and 2008, respectively. Similar commitments exist to
extend credit in the form of liquidity facility agreements with nonconsolidated municipal bond
VIEs. For further information, see Note 16 on pages 206-214 of this Annual Report.
Also included in other unfunded commitments to extend credit are commitments to investment- and
noninvestment-grade counterparties in connection with leveraged acquisitions. These commitments are
dependent on whether the acquisition by the borrower is successful, tend to be short-term in nature
and, in most cases, are subject to certain conditions based on the borrower’s financial condition
or other factors. The amounts of commitments related to leveraged acquisitions at December 31, 2009
and 2008, were $2.9 billion and $3.6 billion, respectively. For further information, see Note 3 and
Note 4 on pages 148-165 and 165-167 respectively, of this Annual Report.
Guarantees
The Firm considers the following off-balance sheet lending-related arrangements to be guarantees
under U.S. GAAP: certain asset
| JPMorgan Chase & Co. / 2009 Annual Report | 231 |
Table of Contents
Notes to consolidated financial statements
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. The amount of the liability related to guarantees
recorded at December 31, 2009 and 2008, excluding the allowance for credit losses on
lending-related commitments and derivative contracts discussed below, was $475 million and $535
million, respectively.
Asset purchase agreements
Asset purchase agreements are principally used as a mechanism to provide liquidity to SPEs,
predominantly multi-seller conduits, as described in Note 16 on pages 206–214 of this Annual
Report.
The carrying value of asset purchase agreements was $126 million and $147 million at December 31,
2009 and 2008, respectively, which was classified in accounts payable and other liabilities on the
Consolidated Balance Sheets; the carrying values include $18
million and $9 million, respectively,
for the allowance for lending-related commitments, and $108 million and $138 million, respectively,
for the fair value of the guarantee liability.
Standby letters of credit
Standby letters of credit (“SBLC”) and financial guarantees are conditional lending commitments
issued by the Firm 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. The carrying values of standby and other letters of credit were $920
million and $673 million at December 31, 2009 and 2008, respectively, which was classified in
accounts payable and other liabilities on the Consolidated Balance Sheets; these carrying values
include $553 million and $276 million, respectively, for the allowance for lending-related
commitments, and $367 million and $397 million, respectively, for the fair value of the guarantee
liability.
The following table summarizes the type of facilities under which standby letters of credit and
other letters of credit arrangements are outstanding by the ratings profiles of the Firm’s
customers as of December 31, 2009 and 2008. The ratings scale represents the current status of the
payment or performance risk of the guarantee, and is based on the Firm’s internal risk ratings,
which generally correspond to ratings defined by S&P and Moody’s.
| 2009 | 2008 | |||||||||||||||
| Standby letters | Standby letters | |||||||||||||||
| of credit and other | Other letters | of credit and other | Other letters | |||||||||||||
| December 31, (in millions) | financial guarantees | of credit | financial guarantees | of credit (d) | ||||||||||||
|
Investment-grade
(a)
|
$ | 66,786 | $ | 3,861 | $ | 73,394 | $ | 3,772 | ||||||||
|
Noninvestment-grade
(a)
|
24,699 | 1,306 | 21,958 | 1,155 | ||||||||||||
|
Total contractual amount
(b)
|
$ | 91,485 | (c) | $ | 5,167 | $ | 95,352 | (c) | $ | 4,927 | ||||||
|
Allowance for lending-related commitments
|
$ | 552 | $ | 1 | $ | 274 | $ | 2 | ||||||||
|
Commitments with collateral
|
31,454 | 1,315 | 30,972 | 1,000 | ||||||||||||
| (a) | Ratings scale is based on the Firm’s internal ratings which generally correspond to ratings defined by S&P and Moody’s. | |
| (b) | Represents the contractual amount net of risk participations totaling $24.6 billion and $26.4 billion for standby letters of credit and other financial guarantees at December 31, 2009 and 2008, respectively, and $690 million and $1.1 billion for other letters of credit at December 31, 2009 and 2008, respectively. In regulatory filings with the Federal Reserve Board these commitments are shown gross of risk participations. | |
| (c) | Includes unissued standby letters of credit commitments of $38.4 billion and $39.5 billion at December 31, 2009 and 2008, respectively. | |
| (d) | The investment-grade and noninvestment-grade amounts have been revised from previous disclosures. |
Derivatives qualifying as guarantees
In addition to the contracts described above, the Firm transacts certain derivative contracts that
meet the characteristics of a guarantee under U.S. GAAP. These contracts include written put
options that require the Firm to purchase assets upon exercise by the option holder at a specified
price by a specified date in the future. The Firm may enter into written put option contracts in
order to meet client needs, or for trading purposes. The terms of written put options are typically
five years or less. Derivative guarantees also include contracts such as stable value derivatives
that require the Firm to make a payment of the difference between the market value and the book
value of a counterparty’s reference portfolio of assets in the event that market value is less than
book value and certain other conditions have been met. Stable value derivatives, commonly referred
to as “stable value wraps”, are transacted in order to allow investors to realize investment
returns with less volatility than an unprotected portfolio and are typically longer-term or may
have no stated maturity, but allow the Firm to terminate the contract under certain conditions.
Derivative guarantees are recorded on the Consolidated Balance Sheets at fair value in trading
assets and trading liabilities. The total notional value of the derivatives that the Firm deems to
be guarantees
was $87.2 billion and $83.8 billion at December 31, 2009 and 2008, respectively. The
notional value generally represents the Firm’s maximum exposure to derivatives qualifying as
guarantees, although exposure to certain stable value derivatives is contractually limited to a
substantially lower percentage of the notional value. The fair value of the contracts reflects the
probability of whether the Firm will be required to perform under the contract. The fair value
related to derivative guarantees were derivative receivables of $219 million and $184 million and
derivative payables of $981 million and $5.6 billion at December 31, 2009 and 2008, 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 the derivative guarantees.
In addition to derivative contracts that meet the characteristics of a guarantee, the Firm is both
a purchaser and seller of credit protection in the credit derivatives market. For a further
discussion of credit derivatives, see Note 5 on pages 167-175 of this Annual Report.
Securities lending indemnification
Through the Firm’s securities lending program, customers’ securities, via custodial and
non-custodial arrangements, may be lent to
| 232 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
third parties. As part of this program, the Firm provides an indemnification in the lending
agreements which protects the lender against the failure of the third-party borrower to return the
lent securities in the event the Firm did not obtain sufficient collateral. To minimize its
liability under these indemnification agreements, the Firm obtains cash or other highly liquid
collateral with a market value exceeding 100% of the value of the securities on loan from the
borrower. Collateral is marked to market daily to help assure that collateralization is adequate.
Additional collateral is called from the borrower if a shortfall exists, or collateral may be
released to the borrower in the event of overcollateralization. If a borrower defaults, the Firm
would use the collateral held to purchase replacement securities in the market or to credit the
lending customer with the cash equivalent thereof.
Also, as part of this program, the Firm invests cash collateral received from the borrower in
accordance with approved guidelines.
Indemnification agreements – general
In connection with issuing securities to investors, the Firm may enter into contractual
arrangements with third parties that 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 also may
include a termination clause, which would allow the Firm to settle the contract at its fair value
in lieu of making a payment under the indemnification clause. The Firm may also enter into
indemnification clauses in connection with the licensing of software to clients (“software
licensees”) or when it sells a business or assets to a third party (“third-party purchasers”),
pursuant to which it indemnifies software licensees for claims of liability or damages that may
occur subsequent to the licensing of the software, or third-party purchasers for losses they may
incur due to actions taken by the Firm prior to the sale of the business or assets. It is difficult
to estimate the Firm’s 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 on historical experience, management expects the
risk of loss to be remote.
Loan sale and securitization-related indemnifications
Indemnifications for breaches of representations and warranties
As part of the Firm’s loan sale and securitization activities, as
described in Note 13 and Note 15 on pages 192–196 and 198–205, respectively, of this Annual Report,
the Firm generally makes
representations and warranties in its loan sale and securitization agreements that the loans sold
meet certain requirements. These agreements may require the Firm (including in its roles as a
servicer) 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 for breaches under these representations and warranties
would be equal to the unpaid principal balance of such loans held by purchasers, including
securitization-related SPEs, that are deemed to have defects plus, in certain circumstances,
accrued and unpaid interest on such loans and certain expense.
At
December 31, 2009 and 2008, the Firm had recorded repurchase
liabilities of $1.7 billion and $1.1 billion, respectively. The
repurchase liabilities are intended to reflect the likelihood that JPMorgan Chase will have to
perform under these representations and warranties and is based on information available
at the reporting date. The estimate incorporates both presented
demands and probable future demands and is the product of an
estimated cure rate, an estimated loss severity and an estimated
recovery rate from third parties, where applicable. The liabilities
have been reported net of probable recoveries from third-parties and
predominately as a reduction of mortgage fees and related income.
During 2009, the Firm settled certain current and future claims for
certain loans originated and sold by Washington Mutual Bank.
Loans sold with recourse
The Firm provides servicing for mortgages and certain commercial lending products on both a
recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to the Firm is
the cost of temporary servicing advances of funds (i.e., normal servicing advances). In recourse
servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as
Fannie Mae or Freddie Mac or a private investor, insurer or guarantor. Losses on recourse servicing
predominantly occur when foreclosure sales proceeds of the property underlying a defaulted loan are
less than the sum of the outstanding principal balance, plus accrued interest on the loan and the
cost of holding and disposing of the underlying property. The Firm’s securitizations are
predominantly nonrecourse, thereby effectively transferring the risk of future credit losses to the
purchaser of the mortgage-backed securities issued by the trust. At December 31, 2009 and 2008, the
unpaid principal balance of loans sold with recourse totaled $13.5 billion and $15.0 billion,
respectively. The carrying value of the related liability that the Firm has recorded, which is
representative of the Firm’s view of the likelihood it will have to perform under this guarantee,
was $271 million and $241 million at December 31, 2009 and 2008, respectively.
Credit card charge-backs
Prior to November 1, 2008, the Firm was 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 by
the Firm and First Data Corporation, its joint venture partner, to integrate the companies’ jointly
owned Chase Merchant Services and Paymentech merchant businesses. The joint venture provided
merchant processing services in the United States and Canada. The dissolution of the joint venture
was completed on November 1, 2008, and JPMorgan Chase retained approximately 51% of the business
under the Chase Paymentech name.
Under the rules of Visa USA, Inc., and MasterCard International, JPMorgan Chase Bank, N.A., is
liable primarily for the amount of each processed credit card sales transaction that is the subject
of a dispute between a cardmember and a merchant. If a dispute is resolved in the cardmember’s
favor, Chase Paymentech will (through the cardmember’s issuing bank) credit or refund the amount to
the cardmember and will charge back the transaction to the merchant. If Chase Paymentech is unable
to collect the amount from the merchant, Chase Paymentech will bear the loss for the amount
credited or refunded to the cardmember. Chase Paymentech mitigates this risk by withholding future
settlements, retaining cash reserve accounts or by obtaining other security. However, in the
unlikely event that: (1) a merchant ceases operations and is unable to deliver products, services
or a refund; (2) Chase Paymentech does not have sufficient collateral from the merchant to provide
customer refunds; and (3) Chase Paymentech does not have sufficient financial resources to provide
customer refunds, JPMorgan Chase Bank, N.A., would be liable for the amount of the
| JPMorgan Chase & Co. / 2009 Annual Report | 233 |
Table of Contents
Notes to consolidated financial statements
transaction. For the year ended December 31, 2009, Chase Paymentech incurred aggregate credit
losses of $11 million on $409.7 billion of aggregate volume processed, and at December 31, 2009, it
held $213 million of collateral. For the year ended December 31, 2008, Chase Paymentech incurred
aggregate credit losses of $13 million on $713.9 billion of aggregate volume processed, and at
December 31, 2008, it held $222 million of collateral. The Firm believes that, based on historical
experience and the collateral held by Chase Paymentech, the fair value of the Firm’s charge
back-related obligations, which are representative of the payment or performance risk to the Firm
is immaterial.
Credit card association, exchange and clearinghouse guarantees
The Firm holds an equity interest in VISA Inc. During October 2007, certain VISA-related entities
completed a series of restructuring transactions to combine their operations, including VISA USA,
under one holding company, VISA Inc. Upon the restructuring, the Firm’s membership interest in VISA
USA was converted into an equity interest in VISA Inc. VISA Inc. sold shares via an initial public
offering and used a portion of the proceeds from the offering to redeem a portion of the Firm’s
equity interest in Visa Inc. Prior to the restructuring, VISA USA’s by-laws obligated the Firm upon
demand by VISA USA to indemnify VISA USA for, among other things, litigation obligations of Visa
USA. The accounting for that guarantee was not subject to initial recognition at fair value. Upon
the restructuring event, the Firm’s obligation to indemnify Visa Inc. was limited to certain
identified litigations. Such a limitation is deemed a modification of the indemnity by-law and,
accordingly, became subject to initial recognition at fair value. The value of the litigation
guarantee has been recorded in the Firm’s financial statements based on its then fair value; the
net amount recorded (within other liabilities) did not have a material adverse effect on the Firm’s
financial statements. In addition to Visa, the Firm is a member of other associations, including
several securities and futures exchanges and clearinghouses, both in the United States and other
countries. 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
obligations vary with different organizations. These obligations may be limited to members who
dealt with the defaulting member or to the amount (or a multiple of the amount) of the Firm’s
contribution to a member’s guarantee fund, or, in a few cases, the obligation may be unlimited. It
is difficult to estimate the Firm’s 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 on historical experience, management expects the risk of loss to be
remote.
Residual value guarantee
In connection with the Bear Stearns merger, the Firm succeeded to an operating lease arrangement
for the building located at 383 Madison Avenue in New York City (the “Synthetic Lease”). Under the
terms of the Synthetic Lease, the Firm is obligated to make periodic payments based on the lessor’s
underlying interest costs. The Synthetic Lease expires on November 1, 2010. Under the terms of the
Synthetic Lease, the Firm has the right to purchase the
building for the amount of the then
outstanding indebtedness of the lessor, or to arrange for the sale of the building, with the
proceeds of the sale to be used to satisfy the lessor’s debt obligation. If the sale does not
generate sufficient proceeds to satisfy the lessor’s debt obligation, the Firm is required to fund
the shortfall, up to a maximum residual value guarantee. As of December 31, 2009, there was no
expected shortfall and the maximum residual value guarantee was approximately $670 million.
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 its credit portfolio to assess potential
concentration risks and to obtain collateral when deemed necessary. Senior management is
significantly involved in the credit approval and review process, and risk levels are adjusted as
needed to reflect management’s risk tolerance.
In the Firm’s wholesale portfolio, risk concentrations are evaluated primarily by industry and
geographic region, and monitored regularly on both an aggregate portfolio level and on an
individual customer basis. Management of the Firm’s wholesale exposure is accomplished through loan
syndication and participation, loan sales, securitizations, credit derivatives, use of master
netting agreements, and collateral and other risk-reduction techniques. In the consumer portfolio,
concentrations are evaluated primarily by product and by U.S. geographic region, with a key focus
on trends and concentrations at the portfolio level, where potential risk concentrations can be
remedied through changes in underwriting policies and portfolio guidelines.
The Firm does not believe that its exposure to any particular loan product (e.g., option ARMs),
portfolio segment (e.g., commercial real estate) or its exposure to residential real estate loans
with high loan-to-value ratios results in a significant concentration of credit risk. Terms of loan
products and collateral coverage are included in the Firm’s 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 13 on pages 192-196 of this Annual Report. For information regarding
concentrations of off-balance sheet lending-related financial instruments by major product, see
Note 31 on pages 230-234 of this Annual Report.
| 234 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The table below presents both on-balance
sheet and off-balance sheet wholesale- and
consumer-related credit exposure as of
December 31, 2009 and 2008.
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| On-balance sheet | On-balance sheet | |||||||||||||||||||||||||||||||
| Credit | Off-balance | Credit | Off-balance | |||||||||||||||||||||||||||||
| December 31, (in millions) | exposure | Loans | Derivatives | sheet (d) | exposure | Loans | Derivatives | sheet (d) | ||||||||||||||||||||||||
|
Wholesale-related
(a)
:
|
||||||||||||||||||||||||||||||||
|
Real estate
|
$ | 68,509 | $ | 57,195 | $ | 1,112 | $ | 10,202 | $ | 80,284 | $ | 64,510 | $ | 2,021 | $ | 13,753 | ||||||||||||||||
|
Banks and finance companies
|
54,053 | 14,396 | 17,957 | 21,700 | 75,577 | 19,055 | 33,457 | 23,065 | ||||||||||||||||||||||||
|
Healthcare
|
35,605 | 4,992 | 1,917 | 28,696 | 38,032 | 7,004 | 3,723 | 27,305 | ||||||||||||||||||||||||
|
State and municipal governments
|
34,726 | 5,687 | 4,979 | 24,060 | 36,772 | 5,882 | 10,191 | 20,699 | ||||||||||||||||||||||||
|
Utilities
|
27,178 | 5,451 | 3,073 | 18,654 | 34,246 | 9,184 | 4,664 | 20,398 | ||||||||||||||||||||||||
|
Consumer products
|
27,004 | 7,880 | 1,094 | 18,030 | 29,766 | 10,081 | 2,225 | 17,460 | ||||||||||||||||||||||||
|
Asset managers
|
24,920 | 5,930 | 6,640 | 12,350 | 49,256 | 9,640 | 18,806 | 20,810 | ||||||||||||||||||||||||
|
Oil and gas
|
23,322 | 5,895 | 2,309 | 15,118 | 24,746 | 8,796 | 2,220 | 13,730 | ||||||||||||||||||||||||
|
Retail & consumer services
|
20,673 | 5,611 | 769 | 14,293 | 23,223 | 7,597 | 1,537 | 14,089 | ||||||||||||||||||||||||
|
Holding companies
|
16,018 | 4,360 | 1,042 | 10,616 | 14,466 | 6,247 | 2,846 | 5,373 | ||||||||||||||||||||||||
|
Technology
|
14,169 | 3,802 | 1,409 | 8,958 | 17,025 | 4,965 | 1,340 | 10,720 | ||||||||||||||||||||||||
|
Insurance
|
13,421 | 1,292 | 2,511 | 9,618 | 17,744 | 1,942 | 5,494 | 10,308 | ||||||||||||||||||||||||
|
Machinery and equipment
manufacturing
|
12,759 | 3,189 | 456 | 9,114 | 14,501 | 4,642 | 943 | 8,916 | ||||||||||||||||||||||||
|
Metals/mining
|
12,547 | 3,410 | 1,158 | 7,979 | 14,980 | 6,470 | 1,991 | 6,519 | ||||||||||||||||||||||||
|
Media
|
12,379 | 4,173 | 329 | 7,877 | 13,177 | 6,486 | 480 | 6,211 | ||||||||||||||||||||||||
|
Telecom services
|
11,265 | 2,042 | 1,273 | 7,950 | 13,237 | 3,828 | 1,298 | 8,111 | ||||||||||||||||||||||||
|
Securities firms and exchanges
|
10,832 | 3,457 | 4,796 | 2,579 | 25,590 | 6,360 | 14,111 | 5,119 | ||||||||||||||||||||||||
|
Business services
|
10,667 | 3,627 | 397 | 6,643 | 11,247 | 3,677 | 757 | 6,813 | ||||||||||||||||||||||||
|
Building materials/construction
|
10,448 | 3,252 | 281 | 6,915 | 12,065 | 4,625 | 613 | 6,827 | ||||||||||||||||||||||||
|
Chemicals/plastics
|
9,870 | 2,719 | 392 | 6,759 | 11,719 | 3,745 | 1,201 | 6,773 | ||||||||||||||||||||||||
|
Transportation
|
9,749 | 3,141 | 1,238 | 5,370 | 10,253 | 3,904 | 1,651 | 4,698 | ||||||||||||||||||||||||
|
Central government
|
9,557 | 1,703 | 5,501 | 2,353 | 14,441 | 545 | 9,773 | 4,123 | ||||||||||||||||||||||||
|
Automotive
|
9,357 | 2,510 | 357 | 6,490 | 11,448 | 3,746 | 1,111 | 6,591 | ||||||||||||||||||||||||
|
Leisure
|
6,822 | 2,718 | 353 | 3,751 | 8,158 | 4,051 | 659 | 3,448 | ||||||||||||||||||||||||
|
Agriculture/paper manufacturing
|
5,801 | 1,928 | 251 | 3,622 | 6,920 | 2,593 | 653 | 3,674 | ||||||||||||||||||||||||
|
All other
|
135,791 | 39,717 | 18,616 | 77,458 | 181,713 | 38,514 | 38,861 | 104,338 | ||||||||||||||||||||||||
|
Loans held-for-sale and loans
at
fair value
|
4,098 | 4,098 | — | — | 13,955 | 13,955 | — | — | ||||||||||||||||||||||||
|
Receivables from customers
(b)
|
15,745 | — | — | — | 16,141 | — | — | — | ||||||||||||||||||||||||
|
Interests in purchased
receivables
|
2,927 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total wholesale-related
|
650,212 | 204,175 | 80,210 | 347,155 | 820,682 | 262,044 | 162,626 | 379,871 | ||||||||||||||||||||||||
|
Consumer-related excluding
purchased credit-impaired
loans:
|
||||||||||||||||||||||||||||||||
|
Home equity – senior lien
|
46,622 | 27,376 | — | 19,246 | 57,791 | 29,793 | — | 27,998 | ||||||||||||||||||||||||
|
Home equity – junior lien
|
111,280 | 74,049 | — | 37,231 | 152,287 | 84,542 | — | 67,745 | ||||||||||||||||||||||||
|
Prime mortgage
|
68,546 | 66,892 | — | 1,654 | 77,345 | 72,266 | — | 5,079 | ||||||||||||||||||||||||
|
Subprime mortgage
|
12,526 | 12,526 | — | — | 15,330 | 15,330 | — | — | ||||||||||||||||||||||||
|
Option ARMs
|
8,536 | 8,536 | — | — | 9,018 | 9,018 | — | — | ||||||||||||||||||||||||
|
Auto loans
|
51,498 | 46,031 | — | 5,467 | 47,329 | 42,603 | — | 4,726 | ||||||||||||||||||||||||
|
Credit card – reported
(c)
|
647,899 | 78,786 | — | 569,113 | 728,448 | 104,746 | — | 623,702 | ||||||||||||||||||||||||
|
All other loans
|
42,929 | 31,700 | — | 11,229 | 45,972 | 33,715 | — | 12,257 | ||||||||||||||||||||||||
|
Loans held-for-sale
|
2,142 | 2,142 | — | — | 2,028 | 2,028 | — | — | ||||||||||||||||||||||||
|
Total consumer-related
excluding purchased
credit-impaired loans
|
991,978 | 348,038 | — | 643,940 | 1,135,548 | 394,041 | — | 741,507 | ||||||||||||||||||||||||
|
Consumer-related purchased
credit-impaired loans
|
||||||||||||||||||||||||||||||||
|
Home equity
|
26,520 | 26,520 | — | — | 28,555 | 28,555 | — | — | ||||||||||||||||||||||||
|
Prime mortgage
|
19,693 | 19,693 | — | — | 21,855 | 21,855 | — | — | ||||||||||||||||||||||||
|
Subprime mortgage
|
5,993 | 5,993 | — | — | 6,760 | 6,760 | — | — | ||||||||||||||||||||||||
|
Option ARMs
|
29,039 | 29,039 | — | — | 31,643 | 31,643 | — | — | ||||||||||||||||||||||||
|
Total consumer-related
purchased credit-impaired
loans
|
81,245 | 81,245 | — | — | 88,813 | 88,813 | — | — | ||||||||||||||||||||||||
|
Total consumer
|
1,073,223 | 429,283 | — | 643,940 | 1,224,361 | 482,854 | — | 741,507 | ||||||||||||||||||||||||
|
Total exposure
|
$ | 1,723,435 | $ | 633,458 | $ | 80,210 | $ | 991,095 | $ | 2,045,043 | $ | 744,898 | $ | 162,626 | $ | 1,121,378 | ||||||||||||||||
| (a) | During the fourth quarter of 2009, certain industry classifications were modified to better reflect risk correlations and enhance the Firm’s management of industry risk. Prior periods have been revised to reflect the current presentation. | |
| (b) | Primarily represents margin loans to prime and retail brokerage customers which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets. | |
| (c) | Excludes $84.6 billion and $85.6 billion of securitized credit card receivables at December 31, 2009 and 2008, respectively. | |
| (d) | Represents lending-related financial instruments. |
| JPMorgan Chase & Co. / 2009 Annual Report | 235 |
Table of Contents
Notes to consolidated financial statements
The following table presents income statement—related information for JPMorgan Chase by major
international geographic area. The Firm defines international activities as business transactions
that involve customers residing outside of the U.S., and the information presented below is based
primarily upon the domicile of the customer, the location from which the customer relationship is
managed or the location of the trading desk. However, many of the Firm’s U.S. operations serve
international businesses.
As the Firm’s 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 Firm’s segment reporting as set forth
in Note 34 on pages 237–239 of this Annual Report.
The Firm’s long-lived assets for the periods presented are not considered by management to be
significant in relation to total assets. The majority of the Firm’s long-lived assets are located
in the United States.
| Income before income | ||||||||||||||||
| tax expense/(benefit) | ||||||||||||||||
| Year ended December 31, (in millions) | Revenue (a) | Expense (b) | and extraordinary gain | Net income | ||||||||||||
|
2009
|
||||||||||||||||
|
Europe/Middle East and Africa
|
$ | 16,915 | $ | 8,610 | $ | 8,290 | $ | 5,485 | ||||||||
|
Asia and Pacific
|
5,088 | 3,438 | 1,646 | 1,119 | ||||||||||||
|
Latin America and the Caribbean
|
1,982 | 1,112 | 861 | 513 | ||||||||||||
|
Other
|
659 | 499 | 160 | 105 | ||||||||||||
|
Total international
|
24,644 | 13,659 | 10,957 | 7,222 | ||||||||||||
|
Total U.S.
|
75,790 | 70,708 | 5,110 | 4,506 | ||||||||||||
|
Total
|
$ | 100,434 | $ | 84,367 | $ | 16,067 | $ | 11,728 | ||||||||
|
2008
|
||||||||||||||||
|
Europe/Middle East and Africa
|
$ | 11,449 | $ | 8,403 | $ | 3,046 | $ | 2,483 | ||||||||
|
Asia and Pacific
|
4,097 | 3,580 | 517 | 672 | ||||||||||||
|
Latin America and the Caribbean
|
1,353 | 903 | 450 | 274 | ||||||||||||
|
Other
|
499 | 410 | 89 | 21 | ||||||||||||
|
Total international
|
17,398 | 13,296 | 4,102 | 3,450 | ||||||||||||
|
Total U.S.
|
49,854 | 51,183 | (1,329 | ) | 2,155 | |||||||||||
|
Total
|
$ | 67,252 | $ | 64,479 | $ | 2,773 | $ | 5,605 | ||||||||
|
2007
|
||||||||||||||||
|
Europe/Middle East and Africa
|
$ | 12,070 | $ | 8,445 | $ | 3,625 | $ | 2,585 | ||||||||
|
Asia and Pacific
|
4,730 | 3,117 | 1,613 | 945 | ||||||||||||
|
Latin America and the Caribbean
|
2,028 | 975 | 1,053 | 630 | ||||||||||||
|
Other
|
407 | 289 | 118 | 79 | ||||||||||||
|
Total international
|
19,235 | 12,826 | 6,409 | 4,239 | ||||||||||||
|
Total U.S.
|
52,137 | 35,741 | 16,396 | 11,126 | ||||||||||||
|
Total
|
$ | 71,372 | $ | 48,567 | $ | 22,805 | $ | 15,365 | ||||||||
| (a) | Revenue is composed of net interest income and noninterest revenue. | |
| (b) | Expense is composed of noninterest expense and the provision for credit losses. |
| 236 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
The Firm is managed on a line-of-business basis. There are six major reportable business
segments – Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury
& Securities Services and Asset Management, as well as a Corporate/Private Equity segment. The
business segments are determined based on the products and services provided, or the type of
customer served, and they reflect the manner in which financial information is currently evaluated
by management. Results of these lines of business are presented on a managed basis. For a
definition of managed basis, see Explanation and Reconciliation of the Firm’s use of non-GAAP
financial measures, on pages 50–52 of this Annual Report. For a further discussion concerning
JPMorgan Chase’s business segments, see Business segment results
on pages 53–54 of this Annual
Report.
The following is a description of each of the Firm’s business segments:
Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The clients of the Investment Bank (“IB”) are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research. IB also commits the Firm’s own capital to principal investing and trading activities on a limited basis.
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The clients of the Investment Bank (“IB”) are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research. IB also commits the Firm’s own capital to principal investing and trading activities on a limited basis.
Retail Financial Services
Retail Financial Services (“RFS”), which includes the Retail Banking and Consumer Lending businesses, serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,100 bank branches (third-largest nationally) and 15,400 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 23,900 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. Consumers also can obtain loans through 15,700 auto dealerships and nearly 2,100 schools and universities nationwide.
Retail Financial Services (“RFS”), which includes the Retail Banking and Consumer Lending businesses, serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,100 bank branches (third-largest nationally) and 15,400 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 23,900 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. Consumers also can obtain loans through 15,700 auto dealerships and nearly 2,100 schools and universities nationwide.
Card Services
Card Services is one of the nation’s largest credit card issuers, with more than 145 million credit cards in circulation and over $163 billion in managed loans. Customers used Chase cards to meet more than $328 billion of their spending needs in 2009.
Card Services is one of the nation’s largest credit card issuers, with more than 145 million credit cards in circulation and over $163 billion in managed loans. Customers used Chase cards to meet more than $328 billion of their spending needs in 2009.
Chase continues to innovate, despite a very difficult business environment, launching new products
and services such as Blueprint, Ultimate Rewards, Chase Sapphire and Ink from Chase, and earning a
market leadership position in building loyalty and rewards programs. Through its merchant acquiring
business, Chase Paymentech Solutions, Chase is one of the leading processors of credit-card
payments.
Commercial Banking
Commercial Banking serves nearly 25,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and more than 30,000 real estate investors/owners. Delivering extensive industry knowledge, local expertise and dedicated service, CB partners with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Commercial Banking serves nearly 25,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and more than 30,000 real estate investors/owners. Delivering extensive industry knowledge, local expertise and dedicated service, CB partners with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in transaction, investment and information services. TSS is one of the world’s largest cash management providers and a leading global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and liquidity products and services to small and mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a result, certain TS revenue is included in other segments’ results. Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and it manages depositary receipt programs globally.
Treasury & Securities Services (“TSS”) is a global leader in transaction, investment and information services. TSS is one of the world’s largest cash management providers and a leading global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and liquidity products and services to small and mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a result, certain TS revenue is included in other segments’ results. Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and it manages depositary receipt programs globally.
Asset Management
AM, with assets under supervision of $1.7 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including money market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.
AM, with assets under supervision of $1.7 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including money market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.
Corporate/Private Equity
The Corporate/Private Equity sector comprises Private Equity, Treasury, the Chief Investment Office, corporate staff units and expense that is centrally managed. Treasury and the Chief Investment Office manage capital, liquidity, interest rate and foreign exchange risk and the investment portfolio for the Firm. The corporate staff units include Central Technology and Operations, Internal Audit, Executive Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, Corporate Real Estate and General Services, Risk Management, Corporate Responsibility and Strategy & Development. Other centrally managed expense includes the Firm’s occupancy and pension-related expense, net of allocations to the business.
The Corporate/Private Equity sector comprises Private Equity, Treasury, the Chief Investment Office, corporate staff units and expense that is centrally managed. Treasury and the Chief Investment Office manage capital, liquidity, interest rate and foreign exchange risk and the investment portfolio for the Firm. The corporate staff units include Central Technology and Operations, Internal Audit, Executive Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, Corporate Real Estate and General Services, Risk Management, Corporate Responsibility and Strategy & Development. Other centrally managed expense includes the Firm’s occupancy and pension-related expense, net of allocations to the business.
Line of business equity increased during the second quarter of 2008 in IB and AM due to the Bear
Stearns merger and for AM, the purchase of the additional equity interest in Highbridge. At the end
of the third quarter of 2008, equity was increased for each line of business with a view toward the
future implementation of the new Basel II capital rules. In addition, equity allocated to RFS, CS
and CB was increased as a result of the Washington Mutual transaction.
| JPMorgan Chase & Co. / 2009 Annual Report | 237 |
Table of Contents
Notes to consolidated financial statements
Segment results
The following table provides a summary of the Firm’s segment results for 2009, 2008 and 2007 on a
managed basis. The impacts of credit card securitizations and tax-equivalent adjustments have been
included in Reconciling items so that the total Firm results are on a reported basis.
Segment results and reconciliation
(a)
(table continued on next page)
| Year ended December 31, | Investment Bank | Retail Financial Services | Card Services | Commercial Banking | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except ratios) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||
|
Noninterest revenue
|
$ | 18,522 | $ | 2,051 | $ | 14,215 | $ | 12,200 | $ | 9,355 | $ | 6,779 | $ | 2,920 | $ | 2,719 | $ | 3,046 | $ | 1,817 | $ | 1,481 | $ | 1,263 | ||||||||||||||||||||||||
|
Net interest income
|
9,587 | 10,284 | 4,076 | 20,492 | 14,165 | 10,526 | 17,384 | 13,755 | 12,189 | 3,903 | 3,296 | 2,840 | ||||||||||||||||||||||||||||||||||||
|
Total net revenue
|
28,109 | 12,335 | 18,291 | 32,692 | 23,520 | 17,305 | 20,304 | 16,474 | 15,235 | 5,720 | 4,777 | 4,103 | ||||||||||||||||||||||||||||||||||||
|
Provision for credit losses
|
2,279 | 2,015 | 654 | 15,940 | 9,905 | 2,610 | 18,462 | 10,059 | 5,711 | 1,454 | 464 | 279 | ||||||||||||||||||||||||||||||||||||
|
Credit reimbursement
(to)/from TSS
(b)
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Noninterest expense
(c)
|
15,401 | 13,844 | 13,074 | 16,748 | 12,077 | 9,905 | 5,381 | 5,140 | 4,914 | 2,176 | 1,946 | 1,958 | ||||||||||||||||||||||||||||||||||||
|
Income/(loss) before income tax
expense/(benefit) and extraordinary
gain
|
10,429 | (3,524 | ) | 4,563 | 4 | 1,538 | 4,790 | (3,539 | ) | 1,275 | 4,610 | 2,090 | 2,367 | 1,866 | ||||||||||||||||||||||||||||||||||
|
Income tax expense/(benefit)
|
3,530 | (2,349 | ) | 1,424 | (93 | ) | 658 | 1,865 | (1,314 | ) | 495 | 1,691 | 819 | 928 | 732 | |||||||||||||||||||||||||||||||||
|
Income/(loss) before
extraordinary gain
|
6,899 | (1,175 | ) | 3,139 | 97 | 880 | 2,925 | (2,225 | ) | 780 | 2,919 | 1,271 | 1,439 | 1,134 | ||||||||||||||||||||||||||||||||||
|
Extraordinary gain
(d)
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Net income/(loss)
|
$ | 6,899 | $ | (1,175 | ) | $ | 3,139 | $ | 97 | $ | 880 | $ | 2,925 | $ | (2,225 | ) | $ | 780 | $ | 2,919 | $ | 1,271 | $ | 1,439 | $ | 1,134 | ||||||||||||||||||||||
|
Average common equity
|
$ | 33,000 | $ | 26,098 | $ | 21,000 | $ | 25,000 | $ | 19,011 | $ | 16,000 | $ | 15,000 | $ | 14,326 | $ | 14,100 | $ | 8,000 | $ | 7,251 | $ | 6,502 | ||||||||||||||||||||||||
|
Average assets
|
699,039 | 832,729 | 700,565 | 407,497 | 304,442 | 241,112 | 192,749 | 173,711 | 155,957 | 135,408 | 114,299 | 87,140 | ||||||||||||||||||||||||||||||||||||
|
Return on average equity
|
21 | % | (5 | )% | 15 | % | — | % | 5 | % | 18 | % | (15 | )% | 5 | % | 21 | % | 16 | % | 20 | % | 17 | % | ||||||||||||||||||||||||
|
Overhead ratio
|
55 | 112 | 71 | 51 | 51 | 57 | 27 | 31 | 32 | 38 | 41 | 48 | ||||||||||||||||||||||||||||||||||||
| (a) | In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s lines of business results on a “managed basis,” which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that do not have any impact on net income as reported by the lines of business or by the Firm as a whole. | |
| (b) | In the second quarter of 2009, IB began reporting credit reimbursement from TSS as a component of total net revenue, whereas TSS continues to report its credit reimbursement to IB as a separate line item on its income statement (not part of net revenue). Reconciling items include an adjustment to offset IB’s inclusion of the credit reimbursement in total net revenue. Prior periods have been revised for IB and Reconciling items to reflect this presentation. | |
| (c) | Includes merger costs, which are reported in the Corporate/Private Equity segment. Merger costs attributed to the business segments for 2009, 2008 and 2007 were as follows. |
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Investment Bank
|
$ | 27 | $ | 183 | $ | (2 | ) | |||||
|
Retail Financial Services
|
228 | 90 | 14 | |||||||||
|
Card Services
|
40 | 20 | (1 | ) | ||||||||
|
Commercial Banking
|
6 | 4 | (1 | ) | ||||||||
|
Treasury & Securities Services
|
11 | — | 121 | |||||||||
|
Asset Management
|
6 | 3 | 20 | |||||||||
|
Corporate/Private Equity
|
163 | 132 | 58 | |||||||||
| (d) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual from the FDIC for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale, such as premises and equipment and other intangibles, acquired in the Washington Mutual transaction were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain. | |
| (e) | Included a $1.5 billion charge to conform Washington Mutual’s loan loss reserve to JPMorgan Chase’s allowance methodology. |
| 238 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
(table continued from previous page)
| Treasury & | Asset | Reconciling | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities Services | Management | Corporate/Private Equity | items (g) (h) | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||||||||||||
|
|
$ | 4,747 | $ | 5,196 | $ | 4,681 | $ | 6,372 | $ | 6,066 | $ | 7,475 | $ | 2,771 | $ | (278 | ) | $ | 5,056 | $ | (67 | ) | $ | 1,883 | $ | 2,451 | $ | 49,282 | $ | 28,473 | $ | 44,966 | ||||||||||||||||||||||||||||
|
|
2,597 | 2,938 | 2,264 | 1,593 | 1,518 | 1,160 | 3,863 | 347 | (637 | ) | (8,267 | ) | (7,524 | ) | (6,012 | ) | 51,152 | 38,779 | 26,406 | |||||||||||||||||||||||||||||||||||||||||
|
|
7,344 | 8,134 | 6,945 | 7,965 | 7,584 | 8,635 | 6,634 | 69 | 4,419 | (8,334 | ) | (5,641 | ) | (3,561 | ) | 100,434 | 67,252 | 71,372 | ||||||||||||||||||||||||||||||||||||||||||
|
|
55 | 82 | 19 | 188 | 85 | (18 | ) | 80 | 1,981 | (e) (f) | (11 | ) | (6,443 | ) | (3,612 | ) | (2,380 | ) | 32,015 | 20,979 | 6,864 | |||||||||||||||||||||||||||||||||||||||
|
|
(121 | ) | (121 | ) | (121 | ) | — | — | — | — | — | — | 121 | 121 | 121 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
5,278 | 5,223 | 4,580 | 5,473 | 5,298 | 5,515 | 1,895 | (28 | ) | 1,757 | — | — | — | 52,352 | 43,500 | 41,703 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
1,890 | 2,708 | 2,225 | 2,304 | 2,201 | 3,138 | 4,659 | (1,884 | ) | 2,673 | (1,770 | ) | (1,908 | ) | (1,060 | ) | 16,067 | 2,773 | 22,805 | |||||||||||||||||||||||||||||||||||||||||
|
|
664 | 941 | 828 | 874 | 844 | 1,172 | 1,705 | (535 | ) | 788 | (1,770 | ) | (1,908 | ) | (1,060 | ) | 4,415 | (926 | ) | 7,440 | ||||||||||||||||||||||||||||||||||||||||
|
|
1,226 | 1,767 | 1,397 | 1,430 | 1,357 | 1,966 | 2,954 | (1,349 | ) | 1,885 | — | — | — | 11,652 | 3,699 | 15,365 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
— | — | — | — | — | — | 76 | 1,906 | — | — | — | — | 76 | 1,906 | — | |||||||||||||||||||||||||||||||||||||||||||||
|
|
$ | 1,226 | $ | 1,767 | $ | 1,397 | $ | 1,430 | $ | 1,357 | $ | 1,966 | $ | 3,030 | $ | 557 | $ | 1,885 | $ | — | $ | — | $ | — | $ | 11,728 | $ | 5,605 | $ | 15,365 | ||||||||||||||||||||||||||||||
|
|
$ | 5,000 | $ | 3,751 | $ | 3,000 | $ | 7,000 | $ | 5,645 | $ | 3,876 | $ | 52,903 | $ | 53,034 | $ | 54,245 | $ | — | $ | — | $ | — | $ | 145,903 | $ | 129,116 | $ | 118,723 | ||||||||||||||||||||||||||||||
|
|
35,963 | 54,563 | 53,350 | 60,249 | 65,550 | 51,882 | $ | 575,529 | 323,227 | 231,818 | (82,233 | ) | (76,904 | ) | (66,780 | ) | 2,024,201 | 1,791,617 | 1,455,044 | |||||||||||||||||||||||||||||||||||||||||
|
|
25 | % | 47 | % | 47 | % | 20 | % | 24 | % | 51 | % | NM | NM | NM | NM | NM | NM | 6 | % | 4 | % (i) | 13 | % | ||||||||||||||||||||||||||||||||||||
|
|
72 | 64 | 66 | 69 | 70 | 64 | NM | NM | NM | NM | NM | NM | 52 | 65 | 58 | |||||||||||||||||||||||||||||||||||||||||||||
| (f) | In November 2008, the Firm transferred $5.8 billion of higher quality credit card loans from the legacy Chase portfolio to a securitization trust previously established by Washington Mutual (“the Trust”). As a result of converting higher credit quality Chase-originated on-book receivables to the Trust’s seller’s interest which has a higher overall loss rate reflective of the total assets within the Trust, approximately $400 million of incremental provision for credit losses was recorded during the fourth quarter of 2008. This incremental provision for credit losses was recorded in the Corporate/Private Equity segment as the action related to the acquisition of Washington Mutual’s banking operations. For further discussion of credit card securitizations, see Note 15 on page 200 of this Annual Report. | |
| (g) | Managed results for credit card exclude the impact of credit card securitizations on total net revenue, provision for credit losses and average assets, as JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in evaluating the credit performance of the entire managed credit card portfolio as operations are funded, and decisions are made about allocating resources such as employees and capital, based on managed information. These adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results. The related securitization adjustments were as follows. |
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Noninterest revenue
|
$ | (1,494 | ) | $ | (3,333 | ) | $ | (3,255 | ) | |||
|
Net interest income
|
7,937 | 6,945 | 5,635 | |||||||||
|
Provision for credit losses
|
6,443 | 3,612 | 2,380 | |||||||||
|
Average assets
|
82,233 | 76,904 | 66,780 | |||||||||
| (h) | Segment managed results reflect revenue on a tax-equivalent basis with the corresponding income tax impact recorded within income tax expense/(benefit). The adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results. Tax-equivalent adjustments for the years ended December 31, 2009, 2008 and 2007 were as follows. |
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Noninterest revenue
|
$ | 1,440 | $ | 1,329 | $ | 683 | ||||||
|
Net interest income
|
330 | 579 | 377 | |||||||||
|
Income tax expense
|
1,770 | 1,908 | 1,060 | |||||||||
| (i) | Ratio is based on net income. |
| JPMorgan Chase & Co. / 2009 Annual Report | 239 |
Table of Contents
Notes to consolidated financial statements
Parent
company – statements of income
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Income
|
||||||||||||
|
Dividends from subsidiaries:
|
||||||||||||
|
Bank and bank holding company
|
$ | 15,235 | $ | 3,085 | $ | 5,834 | ||||||
|
Nonbank
(a)
|
1,036 | 1,687 | 2,463 | |||||||||
|
Interest income from subsidiaries
|
1,501 | 4,539 | 5,082 | |||||||||
|
Other interest income
|
266 | 212 | 263 | |||||||||
|
Other income from subsidiaries,
primarily fees:
|
||||||||||||
|
Bank and bank holding company
|
233 | 244 | 182 | |||||||||
|
Nonbank
|
742 | 95 | 960 | |||||||||
|
Other income/(loss)
|
844 | (1,038 | ) | (131 | ) | |||||||
|
Total income
|
19,857 | 8,824 | 14,653 | |||||||||
|
Expense
|
||||||||||||
|
Interest expense to subsidiaries
(a)
|
1,118 | 1,302 | 1,239 | |||||||||
|
Other interest expense
|
4,696 | 6,879 | 6,427 | |||||||||
|
Compensation expense
|
574 | 43 | 125 | |||||||||
|
Other noninterest expense
|
414 | 732 | 329 | |||||||||
|
Total expense
|
6,802 | 8,956 | 8,120 | |||||||||
|
Income/(loss) before income tax benefit
and undistributed net income of
subsidiaries
|
13,055 | (132 | ) | 6,533 | ||||||||
|
Income tax benefit
|
1,269 | 2,582 | 589 | |||||||||
|
Equity in undistributed net income of
subsidiaries
|
(2,596 | ) | 3,155 | 8,243 | ||||||||
|
Net income
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | ||||||
| Parent company balance sheets | ||||||||
| December 31, (in millions) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 102 | $ | 35 | ||||
|
Deposits with banking subsidiaries
|
87,893 | 60,551 | ||||||
|
Trading assets
|
14,808 | 12,487 | ||||||
|
Available-for-sale securities
|
2,647 | 1,587 | ||||||
|
Loans
|
1,316 | 1,525 | ||||||
|
Advances to, and receivables from,
subsidiaries:
|
||||||||
|
Bank and bank holding company
|
54,152 | 33,293 | ||||||
|
Nonbank
|
81,365 | 131,032 | ||||||
|
Investments (at equity) in subsidiaries:
|
||||||||
|
Bank and bank holding company
|
157,412 | 153,140 | ||||||
|
Nonbank
(a)
|
32,547 | 27,968 | ||||||
|
Goodwill and other intangibles
|
1,104 | 1,616 | ||||||
|
Other assets
|
14,793 | 12,934 | ||||||
|
Total assets
|
$ | 448,139 | $ | 436,168 | ||||
|
Liabilities and stockholders’ equity
|
||||||||
|
Borrowings from, and payables to,
subsidiaries
(a)
|
$ | 39,532 | $ | 44,467 | ||||
|
Other borrowed funds, primarily
commercial paper
|
41,454 | 39,560 | ||||||
|
Other liabilities
|
8,035 | 9,363 | ||||||
|
Long-term debt
(b)
|
193,753 | 175,894 | ||||||
|
Total liabilities
|
282,774 | 269,284 | ||||||
|
Total stockholders’ equity
|
165,365 | 166,884 | ||||||
|
Total liabilities and stockholders’
equity
|
$ | 448,139 | $ | 436,168 | ||||
| Parent company statements of cash flows | ||||||||||||
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating activities
|
||||||||||||
|
Net income
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | ||||||
|
Less: Net income of subsidiaries
(a)
|
13,675 | 7,927 | 16,540 | |||||||||
|
Parent company net loss
|
(1,947 | ) | (2,322 | ) | (1,175 | ) | ||||||
|
Add: Cash dividends from
subsidiaries
(a)
|
16,054 | 4,648 | 8,061 | |||||||||
|
Other, net
|
1,852 | 1,920 | 3,496 | |||||||||
|
Net cash provided by operating activities
|
15,959 | 4,246 | 10,382 | |||||||||
|
|
||||||||||||
|
Investing activities
|
||||||||||||
|
Net change in:
|
||||||||||||
|
Deposits with banking subsidiaries
|
(27,342 | ) | (7,579 | ) | (34,213 | ) | ||||||
|
Available-for-sale securities:
|
||||||||||||
|
Purchases
|
(1,454 | ) | (1,475 | ) | (104 | ) | ||||||
|
Proceeds from sales and maturities
|
522 | — | 318 | |||||||||
|
Loans, net
|
209 | (102 | ) | (452 | ) | |||||||
|
Advances to subsidiaries, net
|
28,808 | (82,725 | ) | (24,553 | ) | |||||||
|
Investments (at equity) in subsidiaries,
net
(a)
|
(6,582 | ) | (26,212 | ) | (4,135 | ) | ||||||
|
Net cash used in investing activities
|
(5,839 | ) | (118,093 | ) | (63,139 | ) | ||||||
|
|
||||||||||||
|
Financing activities
|
||||||||||||
|
Net change in borrowings from
subsidiaries
(a)
|
(4,935 | ) | 20,529 | 4,755 | ||||||||
|
Net change in other borrowed funds
|
1,894 | (12,880 | ) | 31,429 | ||||||||
|
Proceeds from the issuance of long-term
debt
|
32,304 | 50,013 | 38,986 | |||||||||
|
Proceeds from the assumption of
subsidiaries long-term debt
(c)
|
15,264 | 39,778 | — | |||||||||
|
Repayments of long-term debt
|
(31,964 | ) | (22,972 | ) | (11,662 | ) | ||||||
|
Proceeds from issuance of common stock
|
5,756 | 11,500 | — | |||||||||
|
Excess tax benefits related to
stock-based compensation
|
17 | 148 | 365 | |||||||||
|
Proceeds from issuance of preferred
stock and Warrant to the U.S. Treasury
|
— | 25,000 | — | |||||||||
|
Proceeds from issuance of preferred
stock
(d)
|
— | 8,098 | — | |||||||||
|
Redemption of preferred stock issued to
the U.S. Treasury
|
(25,000 | ) | — | — | ||||||||
|
Repurchases of treasury stock
|
— | — | (8,178 | ) | ||||||||
|
Dividends paid
|
(3,422 | ) | (5,911 | ) | (5,051 | ) | ||||||
|
All other financing activities, net
|
33 | 469 | 1,467 | |||||||||
|
Net cash provided by financing activities
|
(10,053 | ) | 113,772 | 52,111 | ||||||||
|
Net increase/(decrease) in cash and due
from banks
|
67 | (75 | ) | (646 | ) | |||||||
|
Cash and due from banks at the
beginning of the year, primarily with
bank subsidiaries
|
35 | 110 | 756 | |||||||||
|
Cash and due from banks at the end of
the year, primarily with bank
subsidiaries
|
$ | 102 | $ | 35 | $ | 110 | ||||||
|
Cash interest paid
|
$ | 5,629 | $ | 7,485 | $ | 7,470 | ||||||
|
Cash income taxes paid
|
3,124 | 156 | 5,074 | |||||||||
| (a) | Subsidiaries include trusts that issued guaranteed capital debt securities (“issuer trusts”). The Parent received dividends of $14 million, $15 million and $18 million from the issuer trusts in 2009, 2008 and 2007, respectively. For further discussion on these issuer trusts, see Note 22 on page 221 of this Annual Report. | |
| (b) | At December 31, 2009, long-term debt that contractually matures in 2010 through 2014 totaled $30.2 billion, $38.3 billion, $41.7 billion, $15.1 billion and $19.2 billion, respectively. | |
| (c) | Represents the assumption of Bear Stearns long-term debt by JPMorgan Chase & Co. | |
| (d) | 2008 included the conversion of Bear Stearns’ preferred stock into JPMorgan Chase preferred stock. |
| 240 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Supplementary information
Selected quarterly financial data (unaudited)
| As of or for the period ended | 2009 | 2008 | ||||||||||||||||||||||||||||||
| (in millions, except per-share, ratio and headcount data) | 4th | 3rd | 2nd | 1st | 4th | 3rd | 2nd | 1st | ||||||||||||||||||||||||
|
Selected income statement data
|
||||||||||||||||||||||||||||||||
|
Noninterest revenue
|
$ | 10,786 | $ | 13,885 | $ | 12,953 | $ | 11,658 | $ | 3,394 | $ | 5,743 | $ | 10,105 | $ | 9,231 | ||||||||||||||||
|
Net interest income
|
12,378 | 12,737 | 12,670 | 13,367 | 13,832 | 8,994 | 8,294 | 7,659 | ||||||||||||||||||||||||
|
Total net revenue
|
23,164 | 26,622 | 25,623 | 25,025 | 17,226 | 14,737 | 18,399 | 16,890 | ||||||||||||||||||||||||
|
Total noninterest expense
|
12,004 | 13,455 | 13,520 | 13,373 | 11,255 | 11,137 | 12,177 | 8,931 | ||||||||||||||||||||||||
|
Pre-provision profit
(a)
|
11,160 | 13,167 | 12,103 | 11,652 | 5,971 | 3,600 | 6,222 | 7,959 | ||||||||||||||||||||||||
|
Provision for credit losses
|
7,284 | 8,104 | 8,031 | 8,596 | 7,755 | 3,811 | 3,455 | 4,424 | ||||||||||||||||||||||||
|
Provision
for credit losses – accounting
conformity
(b)
|
— | — | — | — | (442 | ) | 1,976 | — | — | |||||||||||||||||||||||
|
Income/(loss) before income tax
expense/(benefit) and extraordinary gain
|
3,876 | 5,063 | 4,072 | 3,056 | (1,342 | ) | (2,187 | ) | 2,767 | 3,535 | ||||||||||||||||||||||
|
Income tax expense/(benefit)
|
598 | 1,551 | 1,351 | 915 | (719 | ) | (2,133 | ) | 764 | 1,162 | ||||||||||||||||||||||
|
Income/(loss) before extraordinary gain
|
3,278 | 3,512 | 2,721 | 2,141 | (623 | ) | (54 | ) | 2,003 | 2,373 | ||||||||||||||||||||||
|
Extraordinary gain
(c)
|
— | 76 | — | — | 1,325 | 581 | — | — | ||||||||||||||||||||||||
|
Net income
|
$ | 3,278 | $ | 3,588 | $ | 2,721 | $ | 2,141 | $ | 702 | $ | 527 | $ | 2,003 | $ | 2,373 | ||||||||||||||||
|
Per-common-share data
|
||||||||||||||||||||||||||||||||
|
Basic earnings
(d)
|
||||||||||||||||||||||||||||||||
|
Income/(loss) before extraordinary gain
|
$ | 0.75 | $ | 0.80 | $ | 0.28 | $ | 0.40 | $ | (0.29 | ) | $ | (0.08 | ) | $ | 0.54 | $ | 0.67 | ||||||||||||||
|
Net income
|
0.75 | 0.82 | 0.28 | 0.40 | 0.06 | 0.09 | 0.54 | 0.67 | ||||||||||||||||||||||||
|
Diluted earnings
(d)
(e)
|
||||||||||||||||||||||||||||||||
|
Income/(loss) before extraordinary gain
|
$ | 0.74 | $ | 0.80 | $ | 0.28 | $ | 0.40 | $ | (0.29 | ) | $ | (0.08 | ) | $ | 0.53 | $ | 0.67 | ||||||||||||||
|
Net income
|
0.74 | 0.82 | 0.28 | 0.40 | 0.06 | 0.09 | 0.53 | 0.67 | ||||||||||||||||||||||||
|
Cash dividends declared per share
|
0.05 | 0.05 | 0.05 | 0.05 | 0.38 | 0.38 | 0.38 | 0.38 | ||||||||||||||||||||||||
|
Book value per share
|
39.88 | 39.12 | 37.36 | 36.78 | 36.15 | 36.95 | 37.02 | 36.94 | ||||||||||||||||||||||||
|
Common shares outstanding
|
||||||||||||||||||||||||||||||||
|
Average: Basic
|
3,946.1 | 3,937.9 | 3,811.5 | 3,755.7 | 3,737.5 | 3,444.6 | 3,426.2 | 3,396.0 | ||||||||||||||||||||||||
|
Diluted
(d)
|
3,974.1 | 3,962.0 | 3,824.1 | 3,758.7 | 3,737.5 | (h) | 3,444.6 | (h) | 3,453.1 | 3,423.3 | ||||||||||||||||||||||
|
Common shares at period-end
|
3,942.0 | 3,938.7 | 3,924.1 | 3,757.7 | 3,732.8 | 3,726.9 | 3,435.7 | 3,400.8 | ||||||||||||||||||||||||
|
Share price
|
||||||||||||||||||||||||||||||||
|
High
|
$ | 47.47 | $ | 46.50 | $ | 38.94 | $ | 31.64 | $ | 50.63 | $ | 49.00 | $ | 49.95 | $ | 49.29 | ||||||||||||||||
|
Low
|
40.04 | 31.59 | 25.29 | 14.96 | 19.69 | 29.24 | 33.96 | 36.01 | ||||||||||||||||||||||||
|
Close
|
41.67 | 43.82 | 34.11 | 26.58 | 31.53 | 46.70 | 34.31 | 42.95 | ||||||||||||||||||||||||
|
Market capitalization
|
164,261 | 172,596 | 133,852 | 99,881 | 117,695 | 174,048 | 117,881 | 146,066 | ||||||||||||||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||||||||||
|
Return on common equity:
(e)
|
||||||||||||||||||||||||||||||||
|
Income/(loss) before extraordinary gain
|
8 | % | 9 | % | 3 | % | 5 | % | (3 | )% | (1 | )% | 6 | % | 8 | % | ||||||||||||||||
|
Net income
|
8 | 9 | 3 | 5 | 1 | 1 | 6 | 8 | ||||||||||||||||||||||||
|
Return on tangible common equity
|
||||||||||||||||||||||||||||||||
|
Income/(loss) before extraordinary gain
|
12 | 13 | 5 | 8 | (5 | ) | (1 | ) | 10 | 13 | ||||||||||||||||||||||
|
Net income
|
12 | 14 | 5 | 8 | 1 | 2 | 10 | 13 | ||||||||||||||||||||||||
|
Return on assets:
|
||||||||||||||||||||||||||||||||
|
Income/(loss) before extraordinary gain
|
0.65 | 0.70 | 0.54 | 0.42 | (0.11 | ) | (0.01 | ) | 0.48 | 0.61 | ||||||||||||||||||||||
|
Net income
|
0.65 | 0.71 | 0.54 | 0.42 | 0.13 | 0.12 | 0.48 | 0.61 | ||||||||||||||||||||||||
|
Tier 1 capital ratio
|
11.1 | 10.2 | 9.7 | 11.4 | 10.9 | 8.9 | 9.2 | 8.3 | ||||||||||||||||||||||||
|
Total capital ratio
|
14.8 | 13.9 | 13.3 | 15.2 | 14.8 | 12.6 | 13.4 | 12.5 | ||||||||||||||||||||||||
|
Tier 1 leverage ratio
|
6.9 | 6.5 | 6.2 | 7.1 | 6.9 | 7.2 | 6.4 | 5.9 | ||||||||||||||||||||||||
|
Tier 1 common capital ratio
(f)
|
8.8 | 8.2 | 7.7 | 7.3 | 7.0 | 6.8 | 7.1 | 6.9 | ||||||||||||||||||||||||
|
Overhead ratio
|
52 | 51 | 53 | 53 | 65 | 76 | 66 | 53 | ||||||||||||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||||||||||||||
|
Trading assets
|
$ | 411,128 | $ | 424,435 | $ | 395,626 | $ | 429,700 | $ | 509,983 | $ | 520,257 | $ | 531,997 | $ | 485,280 | ||||||||||||||||
|
Securities
|
360,390 | 372,867 | 345,563 | 333,861 | 205,943 | 150,779 | 119,173 | 101,647 | ||||||||||||||||||||||||
|
Loans
|
633,458 | 653,144 | 680,601 | 708,243 | 744,898 | 761,381 | 538,029 | 537,056 | ||||||||||||||||||||||||
|
Total assets
|
2,031,989 | 2,041,009 | 2,026,642 | 2,079,188 | 2,175,052 | 2,251,469 | 1,775,670 | 1,642,862 | ||||||||||||||||||||||||
|
Deposits
|
938,367 | 867,977 | 866,477 | 906,969 | 1,009,277 | 969,783 | 722,905 | 761,626 | ||||||||||||||||||||||||
|
Long-term debt
|
266,318 | 272,124 | 271,939 | 261,845 | 270,683 | 255,432 | 277,455 | 205,367 | ||||||||||||||||||||||||
|
Common stockholders’ equity
|
157,213 | 154,101 | 146,614 | 138,201 | 134,945 | 137,691 | 127,176 | 125,627 | ||||||||||||||||||||||||
|
Total stockholders’ equity
|
165,365 | 162,253 | 154,766 | 170,194 | 166,884 | 145,843 | 133,176 | 125,627 | ||||||||||||||||||||||||
|
Headcount
|
222,316 | 220,861 | 220,255 | 219,569 | 224,961 | 228,452 | 195,594 | 182,166 | ||||||||||||||||||||||||
|
Credit quality metrics
|
||||||||||||||||||||||||||||||||
|
Allowance for credit losses
|
$ | 32,541 | $ | 31,454 | $ | 29,818 | $ | 28,019 | $ | 23,823 | $ | 19,765 | $ | 13,932 | $ | 12,601 | ||||||||||||||||
|
Allowance for loan losses to total retained loans
|
5.04 | % | 4.74 | % | 4.33 | % | 3.95 | % | 3.18 | % | 2.56 | % | 2.57 | % | 2.29 | % | ||||||||||||||||
|
Allowance for loan losses to retained loans
excluding
purchased credit-impaired loans
(g)
|
5.51 | 5.28 | 5.01 | 4.53 | 3.62 | 2.87 | 2.57 | 2.29 | ||||||||||||||||||||||||
|
Nonperforming assets
|
$ | 19,741 | $ | 20,362 | $ | 17,517 | $ | 14,654 | $ | 12,714 | $ | 9,520 | $ | 6,233 | $ | 5,143 | ||||||||||||||||
|
Net charge-offs
|
6,177 | 6,373 | 6,019 | 4,396 | 3,315 | 2,484 | 2,130 | 1,906 | ||||||||||||||||||||||||
|
Net charge-off rate
|
3.85 | % | 3.84 | % | 3.52 | % | 2.51 | % | 1.80 | % | 1.91 | % | 1.67 | % | 1.53 | % | ||||||||||||||||
|
Wholesale net charge-off rate
|
2.31 | 1.93 | 1.19 | 0.32 | 0.33 | 0.10 | 0.08 | 0.18 | ||||||||||||||||||||||||
|
Consumer net charge-off rate
|
4.60 | 4.79 | 4.69 | 3.61 | 2.59 | 3.13 | 2.77 | 2.43 | ||||||||||||||||||||||||
| (a) | Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses. | |
| (b) | The third and fourth quarters of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations. | |
| (c) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, a wholly-owned subsidiary of JPMorgan Chase merged with and into The Bear Stearns Companies, Inc. (“Bear Stearns”), and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. The Washington Mutual acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. For additional information of these transactions, see Note 2 on pages 143–148 of this Annual Report. | |
| (d) | Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities. Accordingly, prior-period amounts have been revised as required. For further discussion of the Guidance, see Note 25 on page 224 of this Annual Report. | |
| (e) | The calculation of second-quarter 2009 earnings per share and net income applicable to common equity include a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital. Excluding this reduction, the adjusted Return on common equity (“ROE”) and Return on tangible common equity (“ROTCE”) were 6% and 10% for second-quarter 2009. For further discussion, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on page 50–52 of this Annual Report. | |
| (f) | Tier 1 common is calculated as Tier 1 capital less qualifying perpetual preferred stock, qualifying trust preferred securities and qualifying minority interest in subsidiaries. The Firm uses the Tier 1 common capital ratio, a non-GAAP financial measure, to assess and compare the quality and composition of the Firm’s capital with the capital of other financial services companies. For further discussion, see Regulatory capital on pages 82–85 of this Annual Report. | |
| (g) | Excludes the impact of home lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust. For further discussion, see Allowance for credit losses on pages 115–117 of this Annual Report. | |
| (h) | Common equivalent shares have been excluded from the computation of diluted earnings per share for the third and fourth quarters of 2008, as the effect on income/(loss) before extraordinary gain would be antidilutive. |
| JPMorgan Chase & Co. / 2009 Annual Report | 241 |
Table of Contents
Supplementary information
Selected annual financial data (unaudited)
| As of or for the year ended December 31, | ||||||||||||||||||||
| (in millions, except per-share, headcount and ratio data), | 2009 | 2008 (d) | 2007 | 2006 | 2005 | |||||||||||||||
|
Selected income statement data
|
||||||||||||||||||||
|
Noninterest revenue
|
$ | 49,282 | $ | 28,473 | $ | 44,966 | $ | 40,757 | $ | 34,693 | ||||||||||
|
Net interest income
|
51,152 | 38,779 | 26,406 | 21,242 | 19,555 | |||||||||||||||
|
Total net revenue
|
100,434 | 67,252 | 71,372 | 61,999 | 54,248 | |||||||||||||||
|
Total noninterest expense
|
52,352 | 43,500 | 41,703 | 38,843 | 38,926 | |||||||||||||||
|
Pre-provision profit
(a)
|
48,082 | 23,752 | 29,669 | 23,156 | 15,322 | |||||||||||||||
|
Provision for credit losses
|
32,015 | 19,445 | 6,864 | 3,270 | 3,483 | |||||||||||||||
|
Provision
for credit losses – accounting conformity
(b)
|
— | 1,534 | — | — | — | |||||||||||||||
|
Income from continuing operations before income tax
expense/ (benefit) and extraordinary gain
|
16,067 | 2,773 | 22,805 | 19,886 | 11,839 | |||||||||||||||
|
Income tax expense/(benefit)
|
4,415 | (926 | ) | 7,440 | 6,237 | 3,585 | ||||||||||||||
|
Income from continuing operations
|
11,652 | 3,699 | 15,365 | 13,649 | 8,254 | |||||||||||||||
|
Income from discontinued operations
(c)
|
— | — | — | 795 | 229 | |||||||||||||||
|
Income before extraordinary gain
|
11,652 | 3,699 | 15,365 | 14,444 | 8,483 | |||||||||||||||
|
Extraordinary gain
(d)
|
76 | 1,906 | — | — | — | |||||||||||||||
|
Net income
|
$ | 11,728 | $ | 5,605 | $ | 15,365 | $ | 14,444 | $ | 8,483 | ||||||||||
|
Per-common-share data
|
||||||||||||||||||||
|
Basic earnings
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 2.25 | $ | 0.81 | $ | 4.38 | $ | 3.83 | $ | 2.30 | ||||||||||
|
Net income
|
2.27 | 1.35 | 4.38 | 4.05 | 2.37 | |||||||||||||||
|
Diluted earnings
(e)
(f)
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 2.24 | $ | 0.81 | $ | 4.33 | $ | 3.78 | $ | 2.29 | ||||||||||
|
Net income
|
2.26 | 1.35 | 4.33 | 4.00 | 2.35 | |||||||||||||||
|
Cash dividends declared per share
|
0.20 | 1.52 | 1.48 | 1.36 | 1.36 | |||||||||||||||
|
Book value per share
|
39.88 | 36.15 | 36.59 | 33.45 | 30.71 | |||||||||||||||
|
Common shares outstanding
|
||||||||||||||||||||
|
Average: Basic
(e)
|
3,862.8 | 3,501.1 | 3,403.6 | 3,470.1 | 3,491.7 | |||||||||||||||
|
Diluted
(e)
|
3,879.7 | 3,521.8 | 3,445.3 | 3,516.1 | 3,511.9 | |||||||||||||||
|
Common shares at period-end
|
3,942.0 | 3,732.8 | 3,367.4 | 3,461.7 | 3,486.7 | |||||||||||||||
|
Share price
|
||||||||||||||||||||
|
High
|
$ | 47.47 | $ | 50.63 | $ | 53.25 | $ | 49.00 | $ | 40.56 | ||||||||||
|
Low
|
14.96 | 19.69 | 40.15 | 37.88 | 32.92 | |||||||||||||||
|
Close
|
41.67 | 31.53 | 43.65 | 48.30 | 39.69 | |||||||||||||||
|
Market capitalization
|
164,261 | 117,695 | 146,986 | 167,199 | 138,387 | |||||||||||||||
|
Financial ratios
|
||||||||||||||||||||
|
Return on common equity:
(f)
|
||||||||||||||||||||
|
Income from continuing operations
|
6 | % | 2 | % | 13 | % | 12 | % | 8 | % | ||||||||||
|
Net income
|
6 | 4 | 13 | 13 | 8 | |||||||||||||||
|
Return on tangible common equity
(f)
(g)
|
||||||||||||||||||||
|
Income from continuing operations
|
10 | 4 | 22 | 24 | 15 | |||||||||||||||
|
Net income
|
10 | 6 | 22 | 24 | 15 | |||||||||||||||
|
Return on assets:
|
||||||||||||||||||||
|
Income from continuing operations
|
0.58 | 0.21 | 1.06 | 1.04 | 0.70 | |||||||||||||||
|
Net income
|
0.58 | 0.31 | 1.06 | 1.10 | 0.72 | |||||||||||||||
|
Tier 1 capital ratio
|
11.1 | 10.9 | 8.4 | 8.7 | 8.5 | |||||||||||||||
|
Total capital ratio
|
14.8 | 14.8 | 12.6 | 12.3 | 12.0 | |||||||||||||||
|
Tier 1 leverage ratio
|
6.9 | 6.9 | 6.0 | 6.2 | 6.3 | |||||||||||||||
|
Tier 1 common capital ratio
(h)
|
8.8 | 7.0 | 7.0 | 7.3 | 7.0 | |||||||||||||||
|
Overhead ratio
|
52 | 65 | 58 | 63 | 72 | |||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||
|
Trading assets
|
$ | 411,128 | $ | 509,983 | $ | 491,409 | $ | 365,738 | $ | 298,377 | ||||||||||
|
Securities
|
360,390 | 205,943 | 85,450 | 91,975 | 47,600 | |||||||||||||||
|
Loans
|
633,458 | 744,898 | 519,374 | 483,127 | 419,148 | |||||||||||||||
|
Total assets
|
2,031,989 | 2,175,052 | 1,562,147 | 1,351,520 | 1,198,942 | |||||||||||||||
|
Deposits
|
938,367 | 1,009,277 | 740,728 | 638,788 | 554,991 | |||||||||||||||
|
Long-term debt
|
266,318 | 270,683 | 199,010 | 145,630 | 119,886 | |||||||||||||||
|
Common stockholders’ equity
|
157,213 | 134,945 | 123,221 | 115,790 | 107,072 | |||||||||||||||
|
Total stockholders’ equity
|
165,365 | 166,884 | 123,221 | 115,790 | 107,211 | |||||||||||||||
|
Headcount
|
222,316 | 224,961 | 180,667 | 174,360 | 168,847 | |||||||||||||||
|
Credit quality metrics
|
||||||||||||||||||||
|
Allowance for credit losses
|
$ | 32,541 | $ | 23,823 | $ | 10,084 | $ | 7,803 | $ | 7,490 | ||||||||||
|
Allowance for loan losses to total retained loans
|
5.04 | % | 3.18 | % | 1.88 | % | 1.70 | % | 1.84 | % | ||||||||||
|
Allowance for loan losses to retained loans excluding
purchased credit-impaired loans
(i)
|
5.51 | 3.62 | 1.88 | 1.70 | 1.84 | |||||||||||||||
|
Nonperforming assets
|
19,741 | 12,714 | 3,933 | 2,341 | 2,590 | |||||||||||||||
|
Net charge-offs
|
$ | 22,965 | $ | 9,835 | $ | 4,538 | $ | 3,042 | $ | 3,819 | ||||||||||
|
Net charge-off rate
|
3.42 | % | 1.73 | % | 1.00 | % | 0.73 | % | 1.00 | % | ||||||||||
|
Wholesale net charge-off/(recovery) rate
|
1.40 | 0.18 | 0.04 | (0.01 | ) | (0.06 | ) | |||||||||||||
|
Consumer net charge-off rate
|
4.41 | 2.71 | 1.61 | 1.17 | 1.56 | |||||||||||||||
| (a) | Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income | |
| in excess of its provision for credit losses. | ||
| (b) | Results for 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations. | |
| (c) | On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses are reported as discontinued operations for each of the periods presented. | |
| (d) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, a wholly-owned subsidiary of JPMorgan Chase merged with and into Bear Stearns and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. The Washington Mutual acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. For additional information on these transactions, see Note 2 on pages 143–148 of this Annual Report. | |
| (e) | Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities. Accordingly, prior-period amounts have been revised as required. For further discussion of the guidance, see Note 25 on page 224 of this Annual Report. | |
| (f) | The calculation of 2009 earnings per share and net income applicable to common equity include a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of TARP preferred capital in the second quarter of 2009. Excluding this reduction, the adjusted ROE and ROTCE were 7% and 11% for 2009. For further discussion, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 50–52 of this Annual Report. | |
| (g) | For a further discussion of ROTCE, a non-GAAP financial measure, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on page 50–52 of this Annual Report. | |
| (h) | Tier 1 common is calculated as Tier 1 capital less qualifying perpetual preferred stock, qualifying trust preferred securities and qualifying minority interest in subsidiaries. The Firm uses the Tier 1 common capital ratio, a non-GAAP financial measure, to assess and compare the quality and composition of the Firm’s capital with the capital of other financial services companies. For further discussion, see Regulatory capital on pages 82–84 of this Annual Report. | |
| (i) | Excludes the impact of home lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust. For further discussion, see Allowance for credit losses on pages 115–117 of this Annual Report. |
| 242 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Glossary of terms
ACH:
Automated Clearing House.
Advised lines of credit:
An authorization which specifies the maximum amount of a credit facility
the Firm has made available to an obligor on a revolving but non-binding basis. The borrower
receives written or oral advice of this facility. The Firm may cancel this facility at any time.
AICPA:
American Institute of Certified Public Accountants.
Alternative
assets:
The following types of assets constitute alternative investments – hedge
funds, currency, real estate and private equity.
Assets under management:
Represent assets actively managed by Asset Management on behalf of
Institutional, Retail, Private Banking, Private Wealth Management and Bear Stearns Private Client
Services clients. Includes Committed Capital not Called, on which we earn fees. Excludes assets
managed by American Century Companies, Inc., in which the Firm has a 42% ownership interest as of
December 31, 2009.
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 Firm’s Consolidated Balance Sheets plus
credit card receivables that have been securitized and removed from the Firm’s Consolidated Balance
Sheets.
Beneficial interest issued by consolidated VIEs:
Represents the interest of third-party holders of
debt/equity securities, or other obligations, issued by VIEs that JPMorgan Chase consolidates. The
underlying obligations of the VIEs consist of short-term borrowings, commercial paper and long-term
debt. The related assets consist of trading assets, available-for-sale securities, loans and other
assets.
Benefit obligation:
Refers to the projected benefit obligation for pension plans and the
accumulated postretirement benefit obligation for OPEB plans.
Combined effective loan-to-value ratio:
For residential real estate loans, an indicator of how much
equity a borrower has in a secured borrowing based on current estimates of the value of the
collateral and considering all lien positions related to the property.
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 about a specific
event (e.g., bankruptcy of the borrower), whichever is earlier.
Credit card securitizations:
Card Services’ managed results excludes the impact of credit card
securitizations on total net revenue, the provision for credit losses, net charge-offs and loan
receivables. Through securitization, the Firm transforms a portion of its credit card receivables
into securities, which are sold to investors. The credit card receivables are removed from the
Consolidated Balance Sheets through the transfer of the receivables to a trust, and through the
sale of undivided interests to investors that entitle
the investors to specific cash flows
generated from the credit card receivables. The Firm retains the remaining undivided interests as
seller’s interests, which are recorded in loans on the Consolidated Balance Sheets. A gain or loss
on the sale of credit card receivables to investors is recorded in other income. Securitization
also affects the Firm’s Consolidated Statements of Income, as the aggregate amount of interest
income, certain fee revenue and recoveries that is in excess of the aggregate amount of interest
paid to investors, gross credit losses and other trust expense related to the securitized
receivables are reclassified into credit card income in the Consolidated Statements of Income.
Credit derivatives:
Contractual agreements that provide protection against a credit event on one or
more referenced credits. The nature of a credit event is established by the protection buyer and
protection seller at the inception of a transaction, and such events include bankruptcy, insolvency
or failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic
fee in return for a payment by the protection seller upon the occurrence, if any, of a credit
event.
Credit cycle:
A period of time over which credit quality improves, deteriorates and then improves
again. The duration of a credit cycle can vary from a couple of years to several years.
Deposit margin:
Represents net interest income expressed as a percentage of average deposits.
Discontinued operations:
A component of an entity that is classified as held-for-sale or that has
been disposed of from ongoing operations in its entirety or piecemeal, and for which the entity
will not have any significant, continuing involvement. A discontinued operation may be a separate
major business segment, a component of a major business segment or a geographical area of
operations of the entity that can be separately distinguished operationally and for financial
reporting purposes.
EITF:
Emerging Issues Task Force.
FASB:
Financial Accounting Standards Board.
FICO:
Fair Isaac Corporation.
Forward points:
Represents the interest rate differential between two currencies, which is either
added to or subtracted from the current exchange rate (i.e., “spot rate”) to determine the forward
exchange rate.
Headcount-related expense:
Includes salary and benefits (excluding performance-based incentives),
and other noncompensation costs related to employees.
Interchange income:
A fee that is paid to a credit card issuer in the clearing and settlement of a
sales or cash advance transaction.
Interests in purchased receivables:
Represents an ownership interest in cash flows of an underlying
pool of receivables transferred by a third-party seller into a bankruptcy-remote entity, generally
a trust.
| JPMorgan Chase & Co. / 2009 Annual Report | 243 |
Table of Contents
Glossary of terms
Investment-grade:
An indication of credit quality based on JPMorgan Chase’s internal risk
assessment system. “Investment grade” generally represents a risk profile similar to a rating of a
“BBB-"/“Baa3” or better, as defined by independent rating agencies.
Managed basis:
A non-GAAP presentation of financial results that includes reclassifications related
to credit card securitizations and to present revenue on a fully taxable-equivalent basis.
Management uses this non-GAAP financial measure at the segment level because it believes this
provides information to enable investors to understand the underlying operational performance and
trends of the particular business segment and facilitates a comparison of the business segment with
the performance of competitors.
Managed credit card receivables:
Refers to credit card receivables on the Firm’s Consolidated
Balance Sheets plus credit card receivables that have been securitized and removed from the Firm’s
Consolidated Balance Sheets.
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.
Mortgage product types:
Alt-A
Alt-A loans are generally higher in credit quality than subprime loans but have characteristics
that would disqualify the borrower from a traditional prime loan. Alt-A lending characteristics may
include one or more of the following:
(i)
limited documentation; (ii) high combined-loan-to-value
(“CLTV”) ratio; (iii) loans secured by non-owner occupied properties; or (iv) debt-to-income ratio
above normal limits. Perhaps the most important characteristic is limited documentation. A
substantial proportion of traditional Alt-A loans are those where a borrower does not provide
complete documentation of his or her assets or the amount or source of his or her income.
Option ARMs
The option ARM residential real estate loan product is an adjustable-rate mortgage loan that
provides the borrower with the option each month to make a fully amortizing, interest-only, or
minimum payment. The minimum payment on an option ARM loan is based on the interest rate charged
during the introductory period. This introductory rate has usually been significantly below the
fully indexed rate. The fully indexed rate is calculated using an index rate plus a margin. Once
the introductory period ends, the contractual interest rate charged on the loan increases to the
fully indexed rate and adjusts
monthly to reflect movements in the index. The minimum payment is
typically insufficient to cover interest accrued in the prior month, and any unpaid interest is
deferred and added to the principal balance of the loan.
Prime
Prime mortgage loans generally have low default risk and are made to borrowers with good credit
records and a monthly income that is at least three to four times greater than their monthly
housing expense (mortgage payments plus taxes and other debt payments). These borrowers provide
full documentation and generally have reliable payment histories.
Subprime
Subprime loans are designed for customers with one or more high risk characteristics, including but
not limited to:
(i)
unreliable or poor payment histories; (ii) high loan-to-value (“LTV”) ratio of
greater than 80% (without borrower-paid mortgage insurance); (iii) high debt-to-income ratio; (iv)
the occupancy type for the loan is other than the borrower’s primary residence; or (v) a history of
delinquencies or late payments on the loan.
MSR risk management revenue:
Includes changes in MSR asset fair value due to inputs or assumptions
in model and derivative valuation adjustments.
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.
Nonconforming mortgage loans:
Mortgage loans that do not meet the requirements for sale to U.S.
government agencies and U.S. government sponsored enterprises. These requirements include limits on
loan-to-value ratios, loan terms, loan amounts, down payments, borrower credit worthiness and other
requirements.
OPEB:
Other postretirement employee benefits.
Overhead ratio:
Noninterest expense as a percentage of total net revenue.
Personal bankers:
Retail branch office personnel who acquire, retain and expand new and existing
customer relationships by assessing customer needs and recommending and selling appropriate banking
products and services.
Portfolio activity:
Describes changes to the risk profile of existing lending-related exposures and
their impact on the allowance for credit losses from changes in customer profiles and inputs used
to estimate the allowances.
| 244 | JPMorgan Chase & Co. / 2009 Annual Report |
Table of Contents
Glossary of terms
Principal transactions:
Realized and unrealized gains and losses from trading activities (including
physical commodities inventories that are accounted for at the lower of cost or fair value) and
changes in fair value associated with financial instruments held by the Investment Bank for which
the fair value option was elected. Principal transactions revenue also include private equity gains
and losses.
Purchased credit-impaired loans:
Acquired loans deemed to be credit-impaired under the FASB
guidance for purchased credit-impaired loans. The guidance allows purchasers to aggregate
credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the
loans have common risk characteristics (e.g., FICO score, geographic location). A pool is then
accounted for as a single asset with a single composite interest rate and an aggregate expectation
of cash flows. Wholesale loans were determined to be credit-impaired if they meet the definition of
an impaired loan under U.S. GAAP at the acquisition date. Consumer loans are determined to be
purchased credit-impaired based on specific risk characteristics of the loan, including product
type, loan-to-value ratios, FICO scores, and past due status.
Receivables from customers:
Primarily represents margin loans to prime and retail brokerage
customers which are included in accrued interest and accounts receivable on the Consolidated
Balance Sheets for the wholesale lines of business.
Reported basis:
Financial statements prepared under U.S. GAAP. The reported basis includes the
impact of credit card securitizations but excludes the impact of taxable-equivalent adjustments.
Seed capital:
Initial JPMorgan capital invested in products, such as mutual funds, with the
intention of ensuring the fund is of sufficient size to represent a viable offering to clients,
enabling pricing of its shares, and allowing the manager to develop a commercially attractive track
record. After these goals are achieved, the intent is to remove the Firm’s capital from the
investment.
Stress testing:
A scenario that measures market risk under unlikely but plausible events in
abnormal markets.
Unaudited:
Financial statements and information that have not been subjected to auditing procedures
sufficient to permit an independent certified public accountant to express an opinion.
U.S. GAAP:
Accounting principles generally accepted in the United States of America.
U.S. government and federal agency obligations:
Obligations of the U.S. government or an
instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to
the timely payment of principal and interest by the full faith and credit of the U.S. government.
U.S. government-sponsored enterprise obligations:
Obligations of agencies originally established or
chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these
obligations are not explicitly guaranteed as to the timely payment of principal and interest by the
full faith and credit of the U.S. government.
Value-at-risk (“VaR”):
A measure of the dollar amount of potential loss from adverse market moves
in an ordinary market environment.
| JPMorgan Chase & Co. / 2009 Annual Report | 245 |
Table of Contents
Distribution of assets, liabilities and stockholders’ equity;
interest rates and interest differentials
interest rates and interest differentials
Consolidated average balance sheet, interest and rates
Provided below is a summary of JPMorgan Chase’s consolidated average balances, interest rates and interest differentials on a taxable-equivalent basis for the years 2007 through 2009. Income computed on a taxable-equivalent basis is the income reported in the Consolidated Statements of Income, adjusted to make income and earnings
Provided below is a summary of JPMorgan Chase’s consolidated average balances, interest rates and interest differentials on a taxable-equivalent basis for the years 2007 through 2009. Income computed on a taxable-equivalent basis is the income reported in the Consolidated Statements of Income, adjusted to make income and earnings
yields on assets exempt from income taxes (primarily federal
taxes) comparable with other taxable income. The incremental tax rate used for
calculating the taxable-equivalent adjustment was approximately 39% in 2009, and
40% in both 2008 and 2007. A substantial portion of JPMorgan Chase’s securities
are taxable.
(Table continued on next page)
| 2009 | ||||||||||||
| Year ended December 31, | Average | Average | ||||||||||
| (Taxable-equivalent interest and rates; in millions, except rates) | balance | Interest | rate | |||||||||
|
Assets
|
||||||||||||
|
Deposits with banks
|
$ | 67,015 | $ | 938 | 1.40 | % | ||||||
|
Federal funds sold and securities purchased under resale agreements
|
152,926 | 1,750 | 1.14 | |||||||||
|
Securities borrowed
|
124,462 | 4 | — | |||||||||
|
Trading assets – debt instruments
|
251,035 | 12,283 | 4.89 | |||||||||
|
Securities
|
342,655 | 12,506 | 3.65 | (d) | ||||||||
|
Loans
|
682,885 | 38,720 | (c) | 5.67 | ||||||||
|
Other assets
(a)
|
29,510 | 479 | 1.62 | |||||||||
|
Total interest-earning assets
|
1,650,488 | 66,680 | 4.04 | |||||||||
|
Allowance for loan losses
|
(27,635 | ) | ||||||||||
|
Cash and due from banks
|
24,873 | |||||||||||
|
Trading assets – equity instruments
|
67,028 | |||||||||||
|
Trading assets – derivative receivables
|
110,457 | |||||||||||
|
Goodwill
|
48,254 | |||||||||||
|
Other intangible assets
|
17,993 | |||||||||||
|
Other assets
|
132,743 | |||||||||||
|
Total assets
|
$ | 2,024,201 | ||||||||||
|
|
||||||||||||
|
Liabilities
|
||||||||||||
|
Interest-bearing deposits
|
$ | 684,016 | $ | 4,826 | 0.71 | % | ||||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
275,862 | 573 | 0.21 | |||||||||
|
Commercial paper
|
39,055 | 108 | 0.28 | |||||||||
|
Other borrowings and liabilities
|
201,182 | 3,164 | 1.57 | |||||||||
|
Beneficial interests issued by consolidated VIEs
|
14,930 | 218 | 1.46 | |||||||||
|
Long-term debt
|
268,238 | 6,309 | 2.35 | |||||||||
|
Total interest-bearing liabilities
|
1,483,283 | 15,198 | 1.02 | |||||||||
|
Noninterest-bearing deposits
|
197,989 | |||||||||||
|
Trading liabilities – derivative payables
|
77,901 | |||||||||||
|
All other liabilities, including the allowance for lending-related commitments
|
100,071 | |||||||||||
|
Total liabilities
|
1,859,244 | |||||||||||
|
|
||||||||||||
|
Stockholders’ equity
|
||||||||||||
|
Preferred stock
|
19,054 | |||||||||||
|
Common stockholders’ equity
|
145,903 | |||||||||||
|
Total stockholders’ equity
|
164,957 | (b) | ||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,024,201 | ||||||||||
|
Interest rate spread
|
3.02 | % | ||||||||||
|
Net interest income and net yield on interest-earning assets
|
$ | 51,482 | 3.12 | |||||||||
| (a) | Includes margin loans and the Firm’s investment in asset-backed commercial paper under the Federal Reserve Bank of Boston’s AML facility. | |
| (b) | The ratio of average stockholders’ equity to average assets was 8.1% for 2009, 7.7% for 2008 and 8.2% for 2007. The return on average stockholders’ equity was 7.1% for 2009, 4.1% for 2008 and 12.9% for 2007. | |
| (c) | Fees and commissions on loans included in loan interest amounted to $2.0 billion in 2009, $2.0 billion in 2008 and $1.7 billion in 2007. | |
| (d) | The annualized rate for available-for-sale securities based on amortized cost was 3.66% in 2009, 5.17% in 2008, and 5.64% in 2007, and does not give effect to changes in fair value that are reflected in accumulated other comprehensive income/(loss). | |
| (e) | On September 25, 2008, JPMorgan Chase & Co. acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 143–148. |
246
Table of Contents
Within the Consolidated average balance sheets, interest and rates summary, the principal amounts
of nonaccrual loans have been included in the average loan balances used to determine the
average
interest rate earned on loans. For additional information on nonaccrual loans, including interest
accrued, see Note 13 on pages 192–196.
(Continuation of table)
| 2008 (e) | 2007 | |||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||
| balance | Interest | rate | balance | Interest | rate | |||||||||||||||||
| $ | 54,666 | $ | 1,916 | 3.51 | % | $ | 29,010 | $ | 1,418 | 4.89 | % | |||||||||||
| 170,006 | 5,983 | 3.52 | 135,677 | 6,497 | 4.79 | |||||||||||||||||
| 110,598 | 2,297 | 2.08 | 86,072 | 4,539 | 5.27 | |||||||||||||||||
| 298,266 | 17,556 | 5.89 | 292,846 | 17,241 | 5.89 | |||||||||||||||||
| 123,551 | 6,447 | 5.22 | (d) | 95,290 | 5,387 | 5.65 | (d) | |||||||||||||||
| 588,801 | 38,503 | (c) | 6.54 | 479,679 | 36,682 | (c) | 7.65 | |||||||||||||||
| 27,404 | 895 | 3.27 | — | — | — | |||||||||||||||||
| 1,373,292 | 73,597 | 5.36 | 1,118,574 | 71,764 | 6.42 | |||||||||||||||||
| (13,477 | ) | (7,620 | ) | |||||||||||||||||||
| 30,323 | 32,781 | |||||||||||||||||||||
| 85,836 | 88,569 | |||||||||||||||||||||
| 121,417 | 65,439 | |||||||||||||||||||||
| 46,068 | 45,226 | |||||||||||||||||||||
| 17,008 | 15,249 | |||||||||||||||||||||
| 131,150 | 96,826 | |||||||||||||||||||||
| $ | 1,791,617 | $ | 1,455,044 | |||||||||||||||||||
| $ | 645,058 | $ | 14,546 | 2.26 | % | $ | 535,359 | $ | 21,653 | 4.04 | % | |||||||||||
| 196,739 | 4,668 | 2.37 | 196,500 | 9,785 | 4.98 | |||||||||||||||||
| 45,734 | 1,023 | 2.24 | 30,799 | 1,434 | 4.65 | |||||||||||||||||
| 161,555 | 5,242 | 3.24 | 100,181 | 4,923 | 4.91 | |||||||||||||||||
| 13,220 | 405 | 3.06 | 14,563 | 580 | 3.98 | |||||||||||||||||
| 234,909 | 8,355 | 3.56 | 170,206 | 6,606 | 3.88 | |||||||||||||||||
| 1,297,215 | 34,239 | 2.64 | 1,047,608 | 44,981 | 4.29 | |||||||||||||||||
| 140,749 | 121,861 | |||||||||||||||||||||
| 93,200 | 65,198 | |||||||||||||||||||||
| 122,199 | 101,654 | |||||||||||||||||||||
| 1,653,363 | 1,336,321 | |||||||||||||||||||||
| 9,138 | — | |||||||||||||||||||||
| 129,116 | 118,723 | |||||||||||||||||||||
| 138,254 | (b) | 118,723 | (b) | |||||||||||||||||||
| $ | 1,791,617 | $ | 1,455,044 | |||||||||||||||||||
| 2.72 | % | 2.13 | % | |||||||||||||||||||
| $ | 39,358 | 2.87 | $ | 26,783 | 2.39 | |||||||||||||||||
247
Table of Contents
Interest rates and interest differential analysis of net interest income –
U.S. and non-U.S.
Presented below is a summary of interest rates and interest differentials segregated between
U.S. and non-U.S. operations for the years 2007 through 2009. The segregation of U.S. and
non-U.S.
components is based on the location of the office recording the transaction. Intracompany funding
generally comprises dollar-denominated deposits originated in various locations that are
(Table continued on next page)
| 2009 | ||||||||||||
| Year ended December 31, | Average | Average | ||||||||||
| (Taxable-equivalent interest and rates; in millions, except rates) | balance | Interest | rate | |||||||||
|
|
||||||||||||
|
Interest-earning assets:
|
||||||||||||
|
Deposits with banks, primarily non-U.S.
|
$ | 67,015 | $ | 938 | 1.40 | % | ||||||
|
Federal funds sold and securities purchased under resale agreements:
|
||||||||||||
|
U.S.
|
72,619 | 997 | 1.37 | |||||||||
|
Non-U.S.
|
80,307 | 753 | 0.94 | |||||||||
|
Securities borrowed:
|
||||||||||||
|
U.S.
|
75,301 | (354 | ) | (0.47 | ) | |||||||
|
Non-U.S.
|
49,161 | 358 | 0.73 | |||||||||
|
Trading assets – debt instruments:
|
||||||||||||
|
U.S.
|
130,558 | 6,742 | 5.16 | |||||||||
|
Non-U.S.
|
120,477 | 5,541 | 4.60 | |||||||||
|
Securities:
|
||||||||||||
|
U.S.
|
275,601 | 11,015 | 4.00 | |||||||||
|
Non-U.S.
|
67,054 | 1,491 | 2.22 | |||||||||
|
Loans:
|
||||||||||||
|
U.S.
|
620,716 | 36,476 | 5.88 | |||||||||
|
Non-U.S.
|
62,169 | 2,244 | 3.61 | |||||||||
|
Other assets, primarily U.S.
|
29,510 | 479 | 1.62 | |||||||||
|
Total interest-earning assets
|
1,650,488 | 66,680 | 4.04 | |||||||||
|
|
||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||
|
Interest-bearing deposits:
|
||||||||||||
|
U.S.
|
440,326 | 3,781 | 0.86 | |||||||||
|
Non-U.S.
|
243,690 | 1,045 | 0.43 | |||||||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements:
|
||||||||||||
|
U.S.
|
238,691 | 296 | 0.12 | |||||||||
|
Non-U.S.
|
37,171 | 277 | 0.75 | |||||||||
|
Other borrowings and liabilities:
|
||||||||||||
|
U.S.
|
201,025 | 1,505 | 0.75 | |||||||||
|
Non-U.S.
|
39,212 | 1,767 | 4.51 | |||||||||
|
Beneficial interests issued by consolidated VIEs, primarily U.S.
|
14,930 | 218 | 1.46 | |||||||||
|
Long-term debt, primarily U.S.
|
268,238 | 6,309 | 2.35 | |||||||||
|
Intracompany funding:
|
||||||||||||
|
U.S.
|
(42,711 | ) | (510 | ) | — | |||||||
|
Non-U.S.
|
42,711 | 510 | — | |||||||||
|
Total interest-bearing liabilities
|
1,483,283 | 15,198 | 1.02 | |||||||||
|
|
||||||||||||
|
Noninterest-bearing liabilities
(a)
|
167,205 | |||||||||||
|
Total investable funds
|
$ | 1,650,488 | $ | 15,198 | 0.92 | % | ||||||
|
|
||||||||||||
|
Net interest income and net yield:
|
$ | 51,482 | 3.12 | % | ||||||||
|
U.S.
|
44,098 | 3.61 | ||||||||||
|
Non-U.S.
|
7,384 | 1.72 | ||||||||||
|
Percentage of total assets and liabilities attributable to non-U.S. operations:
|
||||||||||||
|
Assets
|
28.9 | |||||||||||
|
Liabilities
|
25.1 | |||||||||||
| (a) | Represents the amount of noninterest-bearing liabilities funding interest-earning assets. | |
| (b) | On September 25, 2008, JPMorgan Chase & Co. acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 143–148. |
248
Table of Contents
centrally managed by JPMorgan Chase’s Treasury unit. U.S. Net interest income was $44.1 billion in
2009, an increase of $12.4 billion from the prior year. Net interest income from non-U.S.
operations was $7.4 billion for 2009, a decrease of $323 million
from $7.7 billion in 2008. For
further information, see the “Net interest income” discussion in Consolidated Results of Operations
on page 46.
(Continuation of table)
| 2008 (b) | 2007 | |||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||
| balance | Interest | rate | balance | Interest | rate | |||||||||||||||||
| $ | 54,666 | $ | 1,916 | 3.51 | % | $ | 29,010 | $ | 1,418 | 4.89 | % | |||||||||||
| 95,301 | 3,084 | 3.24 | 71,467 | 3,672 | 5.14 | |||||||||||||||||
| 74,705 | 2,899 | 3.88 | 64,210 | 2,825 | 4.40 | |||||||||||||||||
| 60,592 | 985 | 1.63 | 39,855 | 2,472 | 6.20 | |||||||||||||||||
| 50,006 | 1,312 | 2.62 | 46,217 | 2,067 | 4.47 | |||||||||||||||||
| 169,447 | 9,614 | 5.67 | 148,071 | 9,235 | 6.24 | |||||||||||||||||
| 128,819 | 7,942 | 6.17 | 144,775 | 8,006 | 5.53 | |||||||||||||||||
| 108,663 | 5,859 | 5.39 | 82,405 | 4,855 | 5.89 | |||||||||||||||||
| 14,888 | 588 | 3.95 | 12,885 | 532 | 4.13 | |||||||||||||||||
| 506,513 | 33,570 | 6.63 | 413,507 | 32,483 | 7.86 | |||||||||||||||||
| 82,288 | 4,933 | 5.99 | 66,172 | 4,199 | 6.35 | |||||||||||||||||
| 27,404 | 895 | 3.27 | — | — | — | |||||||||||||||||
| 1,373,292 | 73,597 | 5.36 | 1,118,574 | 71,764 | 6.42 | |||||||||||||||||
| 407,699 | 8,420 | 2.07 | 353,133 | 13,641 | 3.86 | |||||||||||||||||
| 237,359 | 6,126 | 2.58 | 182,226 | 8,012 | 4.40 | |||||||||||||||||
| 158,054 | 3,326 | 2.10 | 148,918 | 7,826 | 5.26 | |||||||||||||||||
| 38,685 | 1,342 | 3.47 | 47,582 | 1,959 | 4.12 | |||||||||||||||||
| 161,509 | 3,390 | 2.10 | 76,585 | 3,897 | 5.09 | |||||||||||||||||
| 45,780 | 2,875 | 6.28 | 54,395 | 2,460 | 4.52 | |||||||||||||||||
| 13,220 | 405 | 3.06 | 14,563 | 580 | 3.98 | |||||||||||||||||
| 234,909 | 8,355 | 3.56 | 170,206 | 6,606 | 3.88 | |||||||||||||||||
| (17,637 | ) | (927 | ) | — | (17,054 | ) | (555 | ) | — | |||||||||||||
| 17,637 | 927 | — | 17,054 | 555 | — | |||||||||||||||||
| 1,297,215 | 34,239 | 2.64 | 1,047,608 | 44,981 | 4.29 | |||||||||||||||||
| 76,077 | 70,966 | |||||||||||||||||||||
| $ | 1,373,292 | $ | 34,239 | 2.49 | % | $ | 1,118,574 | $ | 44,981 | 4.02 | % | |||||||||||
| $ | 39,358 | 2.87 | % | $ | 26,783 | 2.39 | % | |||||||||||||||
| 31,651 | 3.24 | 21,007 | 2.78 | |||||||||||||||||||
| 7,707 | 1.95 | 5,776 | 1.59 | |||||||||||||||||||
| 30.4 | 36.5 | |||||||||||||||||||||
| 28.0 | 34.1 | |||||||||||||||||||||
249
Table of Contents
Changes in net interest income, volume and rate analysis
The table presents an analysis of the effect of net interest income of volume and rate changes for
the periods 2009 versus 2008 and 2008 versus 2007. In this analysis, the change due to the
volume/rate has been allocated to volume.
| 2009 versus 2008 | 2008 versus 2007 | |||||||||||||||||||||||
| Year ended December 31, | Increase/(decrease) due to change in: | Net | Increase/(decrease) due to change in: | Net | ||||||||||||||||||||
| (On a taxable-equivalent basis: in millions) | Volume | Rate | change | Volume | Rate | change | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Deposits with banks, primarily non-U.S.
|
$ | 175 | $ | (1,153 | ) | $ | (978 | ) | $ | 898 | $ | (400 | ) | $ | 498 | |||||||||
|
Federal funds sold and securities purchased
under resale agreements:
|
||||||||||||||||||||||||
|
U.S.
|
(305 | ) | (1,782 | ) | (2,087 | ) | 770 | (1,358 | ) | (588 | ) | |||||||||||||
|
Non-U.S.
|
50 | (2,196 | ) | (2,146 | ) | 408 | (334 | ) | 74 | |||||||||||||||
|
Securities borrowed:
|
||||||||||||||||||||||||
|
U.S.
|
(67 | ) | (1,272 | ) | (1,339 | ) | 334 | (1,821 | ) | (1,487 | ) | |||||||||||||
|
Non-U.S.
|
(9 | ) | (945 | ) | (954 | ) | 100 | (855 | ) | (755 | ) | |||||||||||||
|
Trading assets – debt instruments:
|
||||||||||||||||||||||||
|
U.S.
|
(2,008 | ) | (864 | ) | (2,872 | ) | 1,223 | (844 | ) | 379 | ||||||||||||||
|
Non-U.S.
|
(379 | ) | (2,022 | ) | (2,401 | ) | (991 | ) | 927 | (64 | ) | |||||||||||||
|
Securities:
|
||||||||||||||||||||||||
|
U.S.
|
6,666 | (1,510 | ) | 5,156 | 1,416 | (412 | ) | 1,004 | ||||||||||||||||
|
Non-U.S.
|
1,161 | (258 | ) | 903 | 79 | (23 | ) | 56 | ||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
U.S.
|
6,705 | (3,799 | ) | 2,906 | 6,173 | (5,086 | ) | 1,087 | ||||||||||||||||
|
Non-U.S.
|
(731 | ) | (1,958 | ) | (2,689 | ) | 972 | (238 | ) | 734 | ||||||||||||||
|
Other assets, primarily U.S.
|
36 | (452 | ) | (416 | ) | 895 | — | 895 | ||||||||||||||||
|
Change in interest income
|
11,294 | (18,211 | ) | (6,917 | ) | 12,277 | (10,444 | ) | 1,833 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Interest-bearing deposits:
|
||||||||||||||||||||||||
|
U.S.
|
294 | (4,933 | ) | (4,639 | ) | 1,100 | (6,321 | ) | (5,221 | ) | ||||||||||||||
|
Non-U.S.
|
22 | (5,103 | ) | (5,081 | ) | 1,431 | (3,317 | ) | (1,886 | ) | ||||||||||||||
|
Federal funds purchased and securities
loaned or sold under repurchase
agreements:
|
||||||||||||||||||||||||
|
U.S.
|
99 | (3,129 | ) | (3,030 | ) | 206 | (4,706 | ) | (4,500 | ) | ||||||||||||||
|
Non-U.S.
|
(13 | ) | (1,052 | ) | (1,065 | ) | (308 | ) | (309 | ) | (617 | ) | ||||||||||||
|
Other borrowings and liabilities:
|
||||||||||||||||||||||||
|
U.S.
|
295 | (2,180 | ) | (1,885 | ) | 1,783 | (2,290 | ) | (507 | ) | ||||||||||||||
|
Non-U.S.
|
(298 | ) | (810 | ) | (1,108 | ) | (542 | ) | 957 | 415 | ||||||||||||||
|
Beneficial interests issued by consolidated
VIEs, primarily U.S.
|
25 | (212 | ) | (187 | ) | (41 | ) | (134 | ) | (175 | ) | |||||||||||||
|
Long-term debt, primarily U.S.
|
796 | (2,842 | ) | (2,046 | ) | 2,294 | (545 | ) | 1,749 | |||||||||||||||
|
Intracompany funding:
|
||||||||||||||||||||||||
|
U.S.
|
(301 | ) | 718 | 417 | (31 | ) | (341 | ) | (372 | ) | ||||||||||||||
|
Non-U.S.
|
301 | (718 | ) | (417 | ) | 31 | 341 | 372 | ||||||||||||||||
|
Change in interest income
|
1,220 | (20,261 | ) | (19,041 | ) | 5,923 | (16,665 | ) | (10,742 | ) | ||||||||||||||
|
Change in net interest income
|
$ | 10,074 | $ | 2,050 | $ | 12,124 | $ | 6,354 | $ | 6,221 | $ | 12,575 | ||||||||||||
250
Table of Contents
Securities portfolio
For information regarding the securities portfolio as of and for the years ended December 31, 2009
and 2008, see Note 11 on pages 187-191. For the available–for–sale securities portfolio, at
December 31, 2007, the fair value and amortized cost of U.S. Treasury and government agency
obligations was $65.7 billion and $65.1 billion, respectively; the fair value and amortized cost of
all other securities were both $19.7 billion; and the total fair value and amortized cost of the
total portfolio was $85.4 billion and $84.8 billion respectively.
At December 31, 2007, the fair value and amortized cost of U.S. Treasury and government agency
obligations in held to maturity securities portfolio was $45 million and $44 million, respectively.
There were no other held-to-maturity securities at December 31, 2007.
251
Table of Contents
Loans portfolio
The table below presents loans with the line of business basis that is presented in Credit Risk
Management on pages 95, 96 and 107, and in Note 13 on page 193, at the periods indicated. Prior
periods have been changed to reflect this presentation.
| December 31, (in millions) | 2009 | 2008 (b) | 2007 (b) | 2006 (b) | 2005 (b) | |||||||||||||||
|
|
||||||||||||||||||||
|
U.S. wholesale loans:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 51,113 | $ | 74,153 | $ | 70,081 | $ | 48,500 | $ | 43,578 | ||||||||||
|
Real estate
|
54,970 | 61,890 | 15,977 | 18,047 | 16,505 | |||||||||||||||
|
Financial institutions
|
13,557 | 20,953 | 15,113 | 15,632 | 13,681 | |||||||||||||||
|
Government agencies
|
5,634 | 5,919 | 5,770 | 4,148 | 3,709 | |||||||||||||||
|
Other
|
23,811 | 23,861 | 26,312 | 32,359 | 34,592 | |||||||||||||||
|
Total U.S. wholesale loans
|
149,085 | 186,776 | 133,253 | 118,686 | 112,065 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-U.S. wholesale loans:
|
||||||||||||||||||||
|
Commercial and industrial
|
20,188 | 35,291 | 33,829 | 22,378 | 18,545 | |||||||||||||||
|
Real estate
|
2,270 | 2,811 | 3,632 | 2,325 | 1,393 | |||||||||||||||
|
Financial institutions
|
11,848 | 17,552 | 17,245 | 19,174 | 8,093 | |||||||||||||||
|
Government agencies
|
1,707 | 602 | 720 | 2,543 | 1,296 | |||||||||||||||
|
Other
|
19,077 | 19,012 | 24,397 | 18,636 | 8,719 | |||||||||||||||
|
Total non-U.S. wholesale loans
|
55,090 | 75,268 | 79,823 | 65,056 | 38,046 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total wholesale loans:
|
||||||||||||||||||||
|
Commercial and industrial
|
71,301 | 109,444 | 103,910 | 70,878 | 62,123 | |||||||||||||||
|
Real estate
|
57,240 | 64,701 | 19,609 | 20,372 | 17,898 | |||||||||||||||
|
Financial institutions
|
25,405 | 38,505 | 32,358 | 34,806 | 21,774 | |||||||||||||||
|
Government agencies
|
7,341 | 6,521 | 6,490 | 6,691 | 5,005 | |||||||||||||||
|
Other
|
42,888 | 42,873 | 50,709 | 50,995 | 43,311 | |||||||||||||||
|
Total wholesale loans
|
204,175 | 262,044 | 213,076 | 183,742 | 150,111 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total consumer loans:
|
||||||||||||||||||||
|
Home equity
|
127,945 | 142,890 | 94,832 | 85,730 | 73,866 | |||||||||||||||
|
Mortgage
|
143,129 | 157,078 | 56,031 | 59,668 | 58,959 | |||||||||||||||
|
Auto loans
|
46,031 | 42,603 | 42,350 | 41,009 | 46,081 | |||||||||||||||
|
Credit card receivables
|
78,786 | 104,746 | 84,352 | 85,881 | 71,738 | |||||||||||||||
|
Other
|
33,392 | 35,537 | 28,733 | 27,097 | 18,393 | |||||||||||||||
|
Total consumer loans
|
429,283 | 482,854 | 306,298 | 299,385 | 269,037 | |||||||||||||||
|
Total loans
(a)(b)
|
$ | 633,458 | $ | 744,898 | $ | 519,374 | $ | 483,127 | $ | 419,148 | ||||||||||
|
Memo:
|
||||||||||||||||||||
|
Loans held-for-sale
|
$ | 4,876 | $ | 8,287 | $ | 18,899 | $ | 55,251 | $ | 34,150 | ||||||||||
|
Loans at fair value
|
1,364 | 7,696 | 8,739 | — | — | |||||||||||||||
|
Total loans held-for-sale and loans at fair value
|
$ | 6,240 | $ | 15,983 | $ | 27,638 | $ | 55,251 | $ | 34,150 | ||||||||||
| (a) | Loans (other than purchased credit-impaired loans and those for which the fair value option have been elected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $1.4 billion, $2.0 billion, $1.3 billion, $3.0 billion and $4.1 billion at December 31, 2009, 2008, 2007, 2006 and 2005, respectively. | |
| (b) | During the fourth quarter of 2009, certain industry classifications were modified to better reflect risk correlations and enhance the Firm’s management of industry risk. Prior periods have been revised to reflect the current presentation. |
252
Table of Contents
Maturities and sensitivity to changes in interest rates
The table below shows, at December 31, 2009, wholesale loan maturity and distribution between fixed and floating interest rates based on the stated terms of the wholesale loan agreements. The table below also reflects the line of business basis that is presented in Credit Risk Management on pages 95, 96 and 107, and in Note 13 on page 193. The table does not include the impact of derivative instruments.
The table below shows, at December 31, 2009, wholesale loan maturity and distribution between fixed and floating interest rates based on the stated terms of the wholesale loan agreements. The table below also reflects the line of business basis that is presented in Credit Risk Management on pages 95, 96 and 107, and in Note 13 on page 193. The table does not include the impact of derivative instruments.
| Within | 1-5 | After 5 | ||||||||||||||
| December 31, 2009 (in millions) | 1 year (a) | years | years | Total | ||||||||||||
|
|
||||||||||||||||
|
U.S.:
|
||||||||||||||||
|
Commercial and industrial
|
$ | 12,831 | $ | 32,735 | $ | 5,547 | $ | 51,113 | ||||||||
|
Real estate
|
8,338 | 10,046 | 36,586 | 54,970 | ||||||||||||
|
Financial institutions
|
6,883 | 5,593 | 1,081 | 13,557 | ||||||||||||
|
Government agencies
|
2,057 | 1,590 | 1,987 | 5,634 | ||||||||||||
|
Other
|
4,976 | 8,327 | 10,508 | 23,811 | ||||||||||||
|
Total U.S.
|
35,085 | 58,291 | 55,709 | 149,085 | ||||||||||||
|
Non-U.S.
|
||||||||||||||||
|
Commercial and industrial
|
4,467 | 12,922 | 2,799 | 20,188 | ||||||||||||
|
Real estate
|
424 | 1,462 | 384 | 2,270 | ||||||||||||
|
Financial institutions
|
8,998 | 2,314 | 536 | 11,848 | ||||||||||||
|
Government agencies
|
1,573 | 49 | 85 | 1,707 | ||||||||||||
|
Other
|
10,884 | 3,180 | 5,013 | 19,077 | ||||||||||||
|
Total non-U.S.
|
26,346 | 19,927 | 8,817 | 55,090 | ||||||||||||
|
Total wholesale loans
|
$ | 61,431 | $ | 78,218 | $ | 64,526 | $ | 204,175 | ||||||||
|
Loans at fixed interest rates
|
17,365 | 6,808 | ||||||||||||||
|
Loans at variable interest rates
|
60,853 | 57,718 | ||||||||||||||
|
Total wholesale loans
|
$ | 78,218 | $ | 64,526 | ||||||||||||
| (a) | Includes demand loans and overdrafts. |
253
Table of Contents
Risk elements
The following table sets forth nonperforming assets and contractually past-due assets, with the
line of business basis that is presented in Credit Risk Management on pages 95, 96, and 107, at the
periods indicated.
| December 31, (in millions) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Nonperforming assets
|
||||||||||||||||||||
|
U.S. nonaccrual loans:
|
||||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 2,182 | $ | 1,052 | $ | 63 | $ | 238 | $ | 555 | ||||||||||
|
Real estate
|
2,647 | 806 | 216 | 18 | 44 | |||||||||||||||
|
Financial institutions
|
663 | 60 | 10 | 5 | 87 | |||||||||||||||
|
Government agencies
|
4 | — | 1 | — | 3 | |||||||||||||||
|
Other
|
348 | 205 | 200 | 49 | 130 | |||||||||||||||
|
Consumer
|
10,660 | 6,571 | 2,768 | 1,686 | 1,351 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total U.S. nonaccrual loans
|
16,504 | 8,694 | 3,258 | 1,996 | 2,170 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-U.S. nonaccrual loans:
|
||||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||
|
Commercial and industrial
|
281 | 45 | 14 | 41 | 105 | |||||||||||||||
|
Real estate
|
241 | — | — | — | — | |||||||||||||||
|
Financial institutions
|
118 | 115 | 8 | 24 | 51 | |||||||||||||||
|
Government agencies
|
— | — | — | — | 3 | |||||||||||||||
|
Other
|
420 | 99 | 2 | 16 | 14 | |||||||||||||||
|
Consumer
|
— | — | — | — | — | |||||||||||||||
|
Total non-U.S. nonaccrual loans
|
1,060 | 259 | 24 | 81 | 173 | |||||||||||||||
|
Total nonaccrual loans
|
17,564 | 8,953 | 3,282 | 2,077 | 2,343 | |||||||||||||||
|
Derivative receivables
|
529 | 1,079 | 29 | 36 | 50 | |||||||||||||||
|
Assets acquired in loan satisfactions
|
1,648 | 2,682 | 622 | 228 | 197 | |||||||||||||||
|
Nonperforming assets
|
$ | 19,741 | $ | 12,714 | $ | 3,933 | $ | 2,341 | $ | 2,590 | ||||||||||
|
Memo:
|
||||||||||||||||||||
|
Loans held-for-sale
|
$ | 234 | $ | 12 | $ | 45 | $ | 120 | $ | 136 | ||||||||||
|
Loans at fair value
|
111 | 20 | 5 | — | — | |||||||||||||||
|
Total loans held-for-sale and loans at fair value
|
345 | 32 | 50 | 120 | 136 | |||||||||||||||
|
|
||||||||||||||||||||
|
Contractually past-due assets
(a)
:
|
||||||||||||||||||||
|
U.S. loans:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 24 | $ | 30 | $ | 7 | $ | 5 | $ | 6 | ||||||||||
|
Real estate
|
114 | 76 | 34 | 1 | 1 | |||||||||||||||
|
Financial institutions
|
6 | — | — | — | — | |||||||||||||||
|
Government agencies
|
— | — | — | — | 6 | |||||||||||||||
|
Other
|
74 | 54 | 28 | 23 | 37 | |||||||||||||||
|
Consumer
|
3,985 | 3,084 | 1,945 | 1,708 | 1,068 | |||||||||||||||
|
Total U.S. loans
|
4,203 | 3,244 | 2,014 | 1,737 | 1,118 | |||||||||||||||
|
Non-U.S. loans
|
||||||||||||||||||||
|
Commercial and industrial
|
5 | — | — | — | — | |||||||||||||||
|
Real estate
|
— | — | — | — | — | |||||||||||||||
|
Financial institutions
|
— | — | — | — | — | |||||||||||||||
|
Government agencies
|
— | — | — | — | — | |||||||||||||||
|
Other
|
109 | 3 | 6 | — | — | |||||||||||||||
|
Consumer
|
38 | 28 | 23 | 16 | 10 | |||||||||||||||
|
Total non-U.S. loans
|
152 | 31 | 29 | 16 | 10 | |||||||||||||||
|
Total
|
$ | 4,355 | $ | 3,275 | $ | 2,043 | $ | 1,753 | $ | 1,128 | ||||||||||
|
|
||||||||||||||||||||
|
Accruing restructured loans
(b)(c)
|
||||||||||||||||||||
|
U.S.
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 5 | $ | — | $ | 8 | $ | — | $ | — | ||||||||||
|
Consumer
|
2,159 | 981 | — | — | — | |||||||||||||||
|
Total U.S.
|
2,164 | 981 | 8 | — | — | |||||||||||||||
|
Non-U.S.
|
||||||||||||||||||||
|
Commercial and industrial
|
613 | 5 | — | — | — | |||||||||||||||
|
Consumer
|
— | — | — | — | — | |||||||||||||||
|
Total Non-U.S.
|
613 | 5 | — | — | — | |||||||||||||||
|
Total
|
$ | 2,777 | $ | 986 | $ | 8 | $ | — | $ | — | ||||||||||
| (a) | Represents accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonperforming loans. | |
| (b) | Represents performing loans modified in troubled debt restructurings in which an economic concession was granted by the Firm and the borrower has demonstrated its ability to repay the loans according to the terms of the restructuring. As defined in U.S. GAAP, concessions include the reduction of interest rates or the deferral of interest or principal payments, resulting from a deterioration in the borrowers’ financial condition. Excludes nonperforming assets and contractually past-due assets, which are included in the sections above. | |
| (c) | Excludes credit card loans that have been modified in the amounts of $5.1 billion, $2.4 billion, and $1.4 billion at December 31, 2009, 2008, and 2007, respectively. For further discussion see Note 13 on pages 192–196 |
For a discussion of nonperforming loans and past-due loan accounting policies, see Credit Risk
Management on pages 93-117, and Note 13 on pages 192–196.
254
Table of Contents
Impact of nonperforming loans on interest income
The negative impact on interest income from nonperforming loans represents the difference between
the amount of interest income that
would have been recorded on such nonperforming loans according to their contractual terms had they
been performing and the amount of interest that actually was recognized on a cash basis. The
following table sets forth this data for the years specified. The increase in total negative impact
on interest income from 2007 through 2009 was primarily driven by the increase in nonperforming
loans.
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | |||||||||
|
U.S.:
|
||||||||||||
|
Wholesale
|
||||||||||||
|
Gross amount of interest that would have been recorded at the original rate
|
$ | 88 | $ | 87 | $ | 71 | ||||||
|
Interest that was recognized in income
|
(13 | ) | (7 | ) | (5 | ) | ||||||
|
Total U.S. wholesale
|
75 | 80 | 66 | |||||||||
|
Consumer
|
||||||||||||
|
Gross amount of interest that would have been recorded at the original rate
|
932 | 584 | 230 | |||||||||
|
Interest that was recognized in income
|
(208 | ) | (193 | ) | (8 | ) | ||||||
|
Total U.S. consumer
|
724 | 391 | 222 | |||||||||
|
Negative impact – U.S.
|
799 | 471 | 288 | |||||||||
|
Non-U.S.:
|
||||||||||||
|
Wholesale
|
||||||||||||
|
Gross amount of interest that would have been recorded at the original rate
|
58 | 11 | 2 | |||||||||
|
Interest that was recognized in income
|
(7 | ) | (2 | ) | (1 | ) | ||||||
|
Total Non-U.S. wholesale
|
51 | 9 | 1 | |||||||||
|
Consumer
|
||||||||||||
|
Gross amount of interest that would have been recorded at the original rate
|
— | — | — | |||||||||
|
Interest that was recognized in income
|
— | — | — | |||||||||
|
Total Non-U.S. consumer
|
— | — | — | |||||||||
|
Negative impact – Non-U.S.
|
51 | 9 | 1 | |||||||||
|
Total negative impact on interest income
|
$ | 850 | $ | 480 | $ | 289 | ||||||
255
Table of Contents
Cross-border outstandings
Cross-border disclosure is based on the Federal Financial Institutions Examination Council’s (“FFIEC”) guidelines governing the determination of cross-border risk. Based on rules from the FFIEC, securities purchased under resale agreements are allocated to a country based on the domicile of the counterparty. Additionally, local foreign office commitments are now included in commitments; previously they were excluded.
Cross-border disclosure is based on the Federal Financial Institutions Examination Council’s (“FFIEC”) guidelines governing the determination of cross-border risk. Based on rules from the FFIEC, securities purchased under resale agreements are allocated to a country based on the domicile of the counterparty. Additionally, local foreign office commitments are now included in commitments; previously they were excluded.
The following table lists all countries in which JPMorgan Chase’s cross-border outstandings exceed
0.75% of consolidated assets as of any of the dates specified. The disclosure includes certain
exposures that are not required under the disclosure requirements of the
SEC. The most significant
differences between the FFIEC and SEC methodologies are: the FFIEC methodology includes
mark-to-market exposures of foreign exchange and derivatives; net local country assets are reduced
by local country liabilities (regardless of currency denomination); and securities purchased under
resale agreements are reported based on the counterparty, without regard to the underlying security
collateral.
JPMorgan Chase’s total cross-border exposure tends to fluctuate greatly, and the amount of exposure
at year-end tends to be a function of timing rather than representing a consistent trend. For a
further discussion of JPMorgan Chase’s emerging markets cross-border exposure, see Emerging markets
country exposure on page 105.
Cross-border outstandings exceeding 0.75% of total assets
| Net local | Total | |||||||||||||||||||||||||||||
| country | cross-border | Total | ||||||||||||||||||||||||||||
| (in millions) | December 31, | Governments | Banks | Other (a) | assets | outstandings (b) | Commitments (c) | exposure | ||||||||||||||||||||||
|
United Kingdom
|
2009 | $ | 347 | $ | 15,822 | $ | 11,565 | $ | — | $ | 27,734 | $ | 624,754 | $ | 652,488 | |||||||||||||||
|
|
2008 | 1,173 | 23,490 | 19,624 | — | 44,287 | 562,980 | 607,267 | ||||||||||||||||||||||
|
|
2007 | 324 | 8,245 | 14,450 | — | 23,019 | 475,046 | 498,065 | ||||||||||||||||||||||
|
Germany
|
2009 | $ | 13,291 | $ | 10,704 | $ | 10,718 | $ | — | $ | 34,713 | $ | 175,323 | $ | 210,036 | |||||||||||||||
|
|
2008 | 8,437 | 24,312 | 10,297 | 3,660 | 46,706 | 348,635 | 395,341 | ||||||||||||||||||||||
|
|
2007 | 10,095 | 11,468 | 18,656 | — | 40,219 | 284,879 | 325,098 | ||||||||||||||||||||||
|
France
|
2009 | $ | 9,505 | $ | 16,428 | $ | 19,642 | $ | 1,377 | $ | 46,952 | $ | 160,536 | $ | 207,488 | |||||||||||||||
|
|
2008 | 6,666 | 25,479 | 24,665 | 28 | 56,838 | 353,074 | 409,912 | ||||||||||||||||||||||
|
|
2007 | 8,351 | 9,278 | 20,303 | 75 | 38,007 | 288,044 | 326,051 | ||||||||||||||||||||||
|
Netherlands
|
2009 | $ | 690 | $ | 9,037 | $ | 22,770 | $ | — | $ | 32,497 | $ | 74,789 | $ | 107,286 | |||||||||||||||
|
|
2008 | 1,360 | 8,645 | 19,356 | — | 29,361 | 132,574 | 161,935 | ||||||||||||||||||||||
|
|
2007 | 895 | 3,945 | 15,180 | — | 20,020 | 138,136 | 158,156 | ||||||||||||||||||||||
|
Italy
|
2009 | $ | 12,912 | $ | 2,065 | $ | 3,643 | $ | 128 | $ | 18,748 | $ | 86,790 | $ | 105,538 | |||||||||||||||
|
|
2008 | 7,680 | 6,804 | 3,742 | 448 | 18,674 | 134,851 | 153,525 | ||||||||||||||||||||||
|
|
2007 | 5,301 | 5,285 | 5,593 | 1,401 | 17,580 | 120,179 | 137,759 | ||||||||||||||||||||||
|
Japan
|
2009 | $ | 404 | $ | 22,022 | $ | 8,984 | $ | 4,622 | $ | 36,032 | $ | 66,487 | $ | 102,519 | |||||||||||||||
|
|
2008 | 687 | 17,401 | 18,568 | 2,174 | 38,830 | 64,583 | 103,413 | ||||||||||||||||||||||
|
|
2007 | 12,895 | 9,687 | 9,138 | — | 31,720 | 49,407 | 81,127 | ||||||||||||||||||||||
|
Spain
|
2009 | $ | 2,705 | $ | 8,724 | $ | 4,884 | $ | 1,189 | $ | 17,502 | $ | 52,363 | $ | 69,865 | |||||||||||||||
|
|
2008 | 906 | 11,867 | 4,466 | 1,161 | 18,400 | 104,956 | 123,356 | ||||||||||||||||||||||
|
|
2007 | 1,995 | 3,484 | 5,728 | 1,337 | 12,544 | 90,135 | 102,679 | ||||||||||||||||||||||
|
Cayman Islands
|
2009 | $ | 243 | $ | 216 | $ | 30,830 | $ | — | $ | 31,289 | $ | 8,218 | $ | 39,507 | |||||||||||||||
|
|
2008 | 87 | 115 | 30,869 | — | 31,071 | 6,843 | 37,914 | ||||||||||||||||||||||
|
|
2007 | 6 | 41 | 36,310 | — | 36,357 | 14,054 | 50,411 | ||||||||||||||||||||||
|
Norway
|
2009 | $ | 4,329 | $ | 259 | $ | 222 | $ | — | $ | 4,810 | $ | 7,448 | $ | 12,258 | |||||||||||||||
|
|
2008 | 15,944 | 616 | 718 | — | 17,278 | 11,393 | 28,671 | ||||||||||||||||||||||
|
|
2007 | 9,727 | 650 | 690 | — | 11,067 | 8,929 | 19,996 | ||||||||||||||||||||||
| (a) | Consists primarily of commercial and industrial. | |
| (b) | Outstandings includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, resale agreements, other monetary assets, cross-border trading debt and equity instruments, mark-to-market exposure of foreign exchange and derivative contracts, and local country assets, net of local country liabilities. The amounts associated with foreign exchange and derivative contracts are presented after taking into account the impact of legally enforceable master netting agreements. | |
| (c) | Commitments include outstanding letters of credit, undrawn commitments to extend credit, and the notional value of credit derivatives where JPMorgan Chase is a protection seller. |
256
Table of Contents
Summary of loan and lending-related commitments loss experience
The tables below summarize the changes in the allowance for loan losses and the allowance for
lending-related commitments during
the periods indicated. For a further discussion, see Allowance for credit losses on pages 115-117,
and Note 14 on pages 196–198.
Allowance for loan losses
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Balance at beginning of year
|
$ | 23,164 | $ | 9,234 | $ | 7,279 | $ | 7,090 | $ | 7,320 | ||||||||||
|
Addition resulting from mergers and
acquisitions
(a)
|
— | 2,535 | — | — | — | |||||||||||||||
|
Provision for loan losses
|
31,735 | 21,237 | 6,538 | 3,153 | 3,575 | |||||||||||||||
|
U.S. charge-offs
|
||||||||||||||||||||
|
Commercial and industrial
|
1,233 | 183 | 34 | 80 | 154 | |||||||||||||||
|
Real estate
|
700 | 217 | 46 | 10 | 2 | |||||||||||||||
|
Financial institutions
|
671 | 17 | 9 | 1 | 2 | |||||||||||||||
|
Government agencies
|
— | — | 10 | 2 | — | |||||||||||||||
|
Other
|
151 | 35 | 81 | 36 | 64 | |||||||||||||||
|
Consumer
|
20,638 | 10,140 | 5,181 | 3,635 | 4,604 | |||||||||||||||
|
Total U.S. charge-offs
|
23,393 | 10,592 | 5,361 | 3,764 | 4,826 | |||||||||||||||
|
Non-U.S. charge-offs
|
||||||||||||||||||||
|
Commercial and industrial
|
64 | 40 | 2 | 43 | 32 | |||||||||||||||
|
Real estate
|
— | — | — | — | — | |||||||||||||||
|
Financial institutions
|
66 | 29 | — | — | — | |||||||||||||||
|
Government agencies
|
— | — | — | — | — | |||||||||||||||
|
Other
|
341 | — | 3 | 14 | 1 | |||||||||||||||
|
Consumer
|
154 | 103 | 1 | 63 | 10 | |||||||||||||||
|
Total non-U.S. charge-offs
|
625 | 172 | 6 | 120 | 43 | |||||||||||||||
|
Total charge-offs
|
24,018 | 10,764 | 5,367 | 3,884 | 4,869 | |||||||||||||||
|
U.S. recoveries
|
||||||||||||||||||||
|
Commercial and industrial
|
(53 | ) | (60 | ) | (48 | ) | (89 | ) | (110 | ) | ||||||||||
|
Real estate
|
(12 | ) | (5 | ) | (1 | ) | (4 | ) | (4 | ) | ||||||||||
|
Financial institutions
|
(3 | ) | (2 | ) | (3 | ) | (4 | ) | (6 | ) | ||||||||||
|
Government agencies
|
— | — | — | — | — | |||||||||||||||
|
Other
|
(25 | ) | (29 | ) | (40 | ) | (48 | ) | (46 | ) | ||||||||||
|
Consumer
|
(941 | ) | (793 | ) | (716 | ) | (622 | ) | (717 | ) | ||||||||||
|
Total U.S. recoveries
|
(1,034 | ) | (889 | ) | (808 | ) | (767 | ) | (883 | ) | ||||||||||
|
Non-U.S. recoveries
|
||||||||||||||||||||
|
Commercial and industrial
|
(1 | ) | (16 | ) | (8 | ) | (26 | ) | (122 | ) | ||||||||||
|
Real estate
|
— | — | — | — | — | |||||||||||||||
|
Financial institutions
|
— | — | (1 | ) | (11 | ) | (7 | ) | ||||||||||||
|
Government agencies
|
— | — | — | — | (15 | ) | ||||||||||||||
|
Other
|
— | (7 | ) | (12 | ) | (26 | ) | (22 | ) | |||||||||||
|
Consumer
|
(18 | ) | (17 | ) | — | (12 | ) | (1 | ) | |||||||||||
|
Total non-U.S. recoveries
|
(19 | ) | (40 | ) | (21 | ) | (75 | ) | (167 | ) | ||||||||||
|
Total recoveries
|
(1,053 | ) | (929 | ) | (829 | ) | (842 | ) | (1,050 | ) | ||||||||||
|
Net charge-offs
|
22,965 | 9,835 | 4,538 | 3,042 | 3,819 | |||||||||||||||
|
Allowance related to purchased portfolios
|
— | 6 | — | 75 | 17 | |||||||||||||||
|
Change in accounting principles
|
— | — | (56 | ) | — | — | ||||||||||||||
|
Other
|
(332) | (b) | (13 | ) | 11 | 3 | (3 | ) | ||||||||||||
|
Balance at year-end
|
$ | 31,602 | $ | 23,164 | $ | 9,234 | $ | 7,279 | $ | 7,090 | ||||||||||
| (a) | The 2008 amount relates to the Washington Mutual transaction. | |
| (b) | Predominantly includes a reclassification in 2009 related to the issuance and retention of securities from the Chase Issuance Trust. |
Allowance for lending-related commitments
| Year ended December 31, (in millions) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Balance at beginning of year
|
$ | 659 | $ | 850 | $ | 524 | $ | 400 | $ | 492 | ||||||||||
|
Addition resulting from mergers and acquisitions
(a)
|
— | 66 | — | — | — | |||||||||||||||
|
Provision for lending-related commitments
|
280 | (258 | ) | 326 | 117 | (92 | ) | |||||||||||||
|
Net charge-offs
|
— | — | — | — | — | |||||||||||||||
|
Other
|
— | 1 | — | 7 | — | |||||||||||||||
|
Balance at year-end
|
$ | 939 | $ | 659 | $ | 850 | $ | 524 | $ | 400 | ||||||||||
| (a) | The 2008 amount relates to the Washington Mutual transaction. |
257
Table of Contents
Loan loss analysis
| As of or for the year ended December 31, | ||||||||||||||||||||
| (in millions, except ratios) | 2009 | 2008 (c) | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balances
|
||||||||||||||||||||
|
Loans – average
|
$ | 682,885 | $ | 588,801 | $ | 479,679 | $ | 454,535 | $ | 409,988 | ||||||||||
|
Loans – year-end
|
633,458 | 744,898 | 519,374 | 483,127 | 419,148 | |||||||||||||||
|
Net charge-offs
(a)
|
22,965 | 9,835 | 4,538 | 3,042 | 3,819 | |||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
U.S.
|
29,802 | 21,830 | 8,454 | 6,654 | 6,642 | |||||||||||||||
|
Non-U.S.
|
1,800 | 1,334 | 780 | 625 | 448 | |||||||||||||||
|
Total allowance for loan losses
|
31,602 | 23,164 | 9,234 | 7,279 | 7,090 | |||||||||||||||
|
Nonperforming loans
|
17,564 | 8,953 | 3,282 | 2,077 | 2,343 | |||||||||||||||
|
|
||||||||||||||||||||
|
Ratios
|
||||||||||||||||||||
|
Net charge-offs to:
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Loans retained – average
|
3.42 | % | 1.73 | % | 1.00 | % | 0.73 | % | 1.00 | % | ||||||||||
|
Allowance for loan losses
|
72.67 | 42.46 | 49.14 | 41.79 | 53.86 | |||||||||||||||
|
Allowance for loan losses to:
|
||||||||||||||||||||
|
Loans retained – year-end
(b)
|
5.04 | 3.18 | 1.88 | 1.70 | 1.84 | |||||||||||||||
|
Nonperforming loans retained
|
184 | 260 | 286 | 372 | 321 | |||||||||||||||
| (a) | There were no net charge-offs/(recoveries) on lending-related commitments in 2009, 2008, 2007, 2006 or 2005. | |
| (b) | While the provision for loan losses increased during 2005 due to the July 2004 Bank One merger, the allowance for loan losses as a percentage of total loans declined from 2005 through 2006 as a result of a relatively benign credit environment. Deteriorating credit conditions in 2007 through 2009, primarily within consumer lending, resulted in increasing losses and correspondingly higher loan loss provisions for those periods. For a more detailed discussion of the 2007 through 2009 provision for credit losses, see Provision for Credit Losses on page 117. | |
| (c) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 143–148. |
Deposits
The following table provides a summary of the average balances and average interest rates of
JPMorgan Chase’s various deposits for the years indicated.
| Average balances | Average interest rates | |||||||||||||||||||||||
| (in millions, except interest rates) | 2009 | 2008 (a) | 2007 | 2009 | 2008 (a) | 2007 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
U.S.:
|
||||||||||||||||||||||||
|
Noninterest-bearing demand
|
$ | 48,865 | $ | 39,476 | $ | 40,359 | — | % | — | % | — | % | ||||||||||||
|
Interest-bearing demand
|
14,873 | 13,165 | 10,737 | 0.44 | 0.59 | 1.31 | ||||||||||||||||||
|
Savings
|
412,363 | 313,939 | 270,149 | 0.22 | 1.13 | 2.62 | ||||||||||||||||||
|
Time
|
154,420 | 175,117 | 147,503 | 1.82 | 2.74 | 4.35 | ||||||||||||||||||
|
Total U.S. deposits
|
630,521 | 541,697 | 468,748 | 0.60 | 1.55 | 2.91 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Non-U.S.:
|
||||||||||||||||||||||||
|
Noninterest-bearing demand
|
7,794 | 6,751 | 6,246 | — | — | — | ||||||||||||||||||
|
Interest-bearing demand
|
163,512 | 155,015 | 102,959 | 0.25 | 2.37 | 4.71 | ||||||||||||||||||
|
Savings
|
559 | 480 | 624 | 0.18 | 0.58 | 0.59 | ||||||||||||||||||
|
Time
|
79,619 | 81,864 | 78,643 | 0.80 | 3.00 | 4.01 | ||||||||||||||||||
|
Total non-U.S. deposits
|
251,484 | 244,110 | 188,472 | 0.42 | 2.51 | 4.25 | ||||||||||||||||||
|
Total deposits
|
$ | 882,005 | $ | 785,807 | $ | 657,220 | 0.55 | % | 1.85 | % | 3.29 | |||||||||||||
| (a) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 143-148. |
At December 31, 2009, other U.S. time deposits in denominations of $100,000 or more totaled $63.2
billion, substantially all of which mature in three months or less. In addition, the table below
presents the maturities for U.S. time certificates of deposit in denominations of $100,000 or more.
| By remaining maturity at | 3 months | Over 3 months | Over 6 months | Over | ||||||||||||||||
| December 31, 2009 (in millions) | or less | but within 6 months | but within 12 months | 12 months | Total | |||||||||||||||
|
U.S. time certificates of deposit ($100,000 or more)
|
$ | 8,854 | $ | 5,108 | $ | 5,886 | $ | 7,546 | $ | 27,394 | ||||||||||
258
Table of Contents
Short-term and other borrowed funds
The following table provides a summary of JPMorgan Chase’s short-term and other borrowed funds for
the years indicated.
| As of or for the year ending December 31, (in millions, except rates) | 2009 | 2008 | 2007 | |||||||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements:
|
||||||||||||
|
Balance at year-end
|
$ | 261,413 | $ | 192,546 | $ | 154,398 | ||||||
|
Average daily balance during the year
|
275,862 | 196,739 | 196,500 | |||||||||
|
Maximum month-end balance
|
310,802 | 224,075 | 222,119 | |||||||||
|
Weighted-average rate at December 31
|
0.04 | % | 0.97 | % | 4.41 | % | ||||||
|
Weighted-average rate during the year
|
0.21 | 2.37 | 4.98 | |||||||||
|
|
||||||||||||
|
Commercial paper:
|
||||||||||||
|
Balance at year-end
|
$ | 41,794 | $ | 37,845 | $ | 49,596 | ||||||
|
Average daily balance during the year
|
39,055 | 45,734 | 30,799 | |||||||||
|
Maximum month-end balance
|
53,920 | 54,480 | 51,791 | |||||||||
|
Weighted-average rate at December 31
|
0.18 | % | 0.82 | % | 4.27 | % | ||||||
|
Weighted-average rate during the year
|
0.28 | 2.24 | 4.65 | |||||||||
|
|
||||||||||||
|
Other borrowed funds:
(a)
|
||||||||||||
|
Balance at year-end
|
$ | 120,686 | $ | 177,674 | $ | 117,997 | ||||||
|
Average daily balance during the year
|
130,767 | 118,714 | 100,181 | |||||||||
|
Maximum month-end balance
|
188,004 | 244,040 | 133,871 | |||||||||
|
Weighted-average rate at December 31
|
3.37 | % | 3.65 | % | 4.93 | % | ||||||
|
Weighted-average rate during the year
|
2.92 | 4.29 | 4.91 | |||||||||
|
|
||||||||||||
|
Short-term beneficial interests:
(b)
|
||||||||||||
|
|
||||||||||||
|
Commercial paper:
|
||||||||||||
|
Balance at year-end
|
$ | 4,787 | $ | — | $ | 55 | ||||||
|
Average daily balance during the year
|
3,275 | 3 | 919 | |||||||||
|
Maximum month-end balance
|
7,751 | — | 3,866 | |||||||||
|
Weighted-average rate at December 31
|
0.17 | % | NA | 4.38 | % | |||||||
|
Weighted-average rate during the year
|
0.24 | 3.23 | % | 4.82 | ||||||||
|
|
||||||||||||
|
Other borrowed funds:
|
||||||||||||
|
Balance at year-end
|
$ | — | $ | — | $ | 3,474 | ||||||
|
Average daily balance during the year
|
— | 1,843 | 3,033 | |||||||||
|
Maximum month-end balance
|
— | 3,459 | 3,474 | |||||||||
|
Weighted-average rate at December 31
|
NA | NA | 1.86 | % | ||||||||
|
Weighted-average rate during the year
|
NA | 2.49 | % | 2.54 | ||||||||
| (a) | Includes securities sold but not yet purchased. | |
| (b) | Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated variable interest entities. |
Federal funds purchased represent overnight funds. Securities loaned or sold under
repurchase agreements generally mature between one day and three months. Commercial paper generally
is issued in amounts not less than $100,000, and with maturities of 270 days or less. Other
borrowed funds consist of demand notes,
term federal funds purchased, and various other borrowings
that generally have maturities of one year or less. At December 31, 2009, 2008 and 2007, JPMorgan
Chase had no lines of credit for general corporate purposes.
259
Table of Contents
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.
|
JPMorgan Chase & Co.
(Registrant) |
||||
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By: /s/ JAMES DIMON
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Chairman and Chief Executive Officer)
Date: February 24, 2010 |
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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. JPMorgan Chase & Co. does not exercise the power of attorney to
sign on behalf of any Director.
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/s/ JAMES DIMON
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Director, Chairman and Chief Executive Officer | ||||
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(James Dimon)
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(Principal Executive Officer) | ||||
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/s/ CRANDALL C. BOWLES
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Director | February 24, 2010 | |||
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/s/ STEPHEN B. BURKE
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Director | ||||
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/s/ DAVID M. COTE
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Director | ||||
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/s/ JAMES S. CROWN
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Director | ||||
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/s/ ELLEN V. FUTTER
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Director | ||||
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/s/ WILLIAM H. GRAY, III
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Director | ||||
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/s/ LABAN P. JACKSON, JR.
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Director | ||||
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/s/ DAVID C. NOVAK
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Director | ||||
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/s/ LEE R. RAYMOND
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Director | ||||
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/s/ WILLIAM C. WELDON
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Director |
260
Table of Contents
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/s/ MICHAEL J. CAVANAGH
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Executive Vice President
and Chief Financial Officer |
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(Principal Financial Officer) | February 24, 2010 | |||
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/s/ LOUIS RAUCHENBERGER
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Managing Director and Controller
(Principal Accounting Officer) |
261
TABLE OF CONTENTS
Part IItem 4: Submission Of Matters To A Vote Of Security HoldersPart IIItem 5: Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6: Selected Financial DataItem 7: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A: Quantitative and Qualitative Disclosures About Market RiskItem 8: Financial Statements and Supplementary DataItem 9: Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A: Controls and ProceduresItem 9B: Other InformationPart IIIItem 10: Directors, Executive Officers and Corporate GovernanceItem 11: Executive CompensationItem 12: Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13: Certain Relationships and Related Transactions, and Director IndependenceItem 14: Principal Accounting Fees and ServicesPart IVItem 15: Exhibits, Financial Statement SchedulesNote 1 Basis Of PresentationNote 2 Business Changes and DevelopmentsNote 3 Fair Value MeasurementNote 4 Fair Value OptionNote 5 Derivative InstrumentsNote 6 Noninterest RevenueNote 7 Interest Income and Interest ExpenseNote 8 Pension and Other Postretirement Employee Benefit PlansNote 9 Employee Stock-based IncentivesNote 10 Noninterest ExpenseNote 11 SecuritiesNote 12 Securities Financing ActivitiesNote 13 LoansNote 14 Allowance For Credit LossesNote 15 Loan SecuritizationsNote 16 Variable Interest EntitiesNote 17 Goodwill and Other Intangible AssetsNote 18 Premises and EquipmentNote 19 DepositsNote 20 Other Borrowed FundsNote 21 Accounts Payable and Other LiabilitiesNote 22 Long-term DebtNote 23 Preferred StockNote 24 Common StockNote 25 Earnings Per ShareNote 26 Accumulated Other Comprehensive Income/(loss)Note 27 Income TaxesNote 28 Restrictions on Cash and Intercompany Funds TransfersNote 29 CapitalNote 30 Commitments and ContingenciesNote 31 Off-balance Sheet Lending-related Financial Instruments, Guarantees and Other CommitmentsNote 32 Credit Risk ConcentrationsNote 33 International OperationsNote 34 Business SegmentsNote 35 Parent Company