JP Morgan Chase 2006 Annual Report Download - page 58

MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
56 JPMorgan Chase & Co. / 2006 Annual Report
Loans
The Firm provides loans to customers of all sizes, from large corporate clients to
individual consumers. The Firm manages the risk/reward relationship of each
portfolio and discourages the retention of loan assets that do not generate a
positive return above the cost of risk-adjusted capital. The $63.8 billion increase
in loans, net of the Allowance for loan losses, from December 31, 2005, was due
primarily to an increase of $33.6 billion in the wholesale portfolio, mainly in the
IB, reflecting an increase in capital markets activity, including financings associat-
ed with client acquisitions, securitizations and loan syndications. CB loans also
increased as a result of organic growth and The Bank of New York transaction.
The $30.3 billion increase in consumer loans was due largely to increases in CS
(reflecting strong organic growth, a reduction in credit card securitization activity,
and the acquisitions of private-label credit card portfolios), increases in education
loans resulting from the 2006 first-quarter acquisition of Collegiate Funding
Services, and as a result of The Bank of New York transaction. These increases
were offset partially by a decline in auto loans and leases. The Allowance for
loan losses increased $189 million, or 3%, from December 31, 2005. For a more
detailed discussion of the loan portfolio and the Allowance for loan losses, refer
to Credit risk management on pages 64–76 of this Annual Report.
Goodwill
Goodwill arises from business combinations and represents the excess of the
cost of an acquired entity over the net fair value amounts assigned to assets
acquired and liabilities assumed. The $1.6 billion increase in Goodwill primarily
resulted from the addition of $1.8 billion of goodwill from The Bank of New
York transaction in the 2006 fourth quarter and from the 2006 first-quarter
acquisition of Collegiate Funding Services. Partially offsetting the increase in
Goodwill were reductions of $402 million resulting from the sale of selected
corporate trust businesses to The Bank of New York; purchase accounting
adjustments associated with the 2005 fourth-quarter acquisition of the Sears
Canada credit card business; the 2006 second quarter sale of the insurance
business; and a reduction related to reclassifying net assets of a subsidiary as
held-for-sale. For additional information, see Notes 3 and 16 on pages 97 and
121–123 of this Annual Report.
Other intangible assets
The Firm’s other intangible assets consist of mortgage servicing rights (“MSRs”),
purchased credit card relationships, other credit card – related intangibles, core
deposit intangibles, and all other intangibles. The $293 million increase in Other
intangible assets primarily reflects higher MSRs due to growth in the servicing
portfolio, the addition of core deposit intangibles from The Bank of New York
transaction and purchase accounting adjustments related to the Sears Canada
credit card business. Partially offsetting these increases were the amortization of
intangibles and a $436 million reduction in Other intangible assets as a result of
the sale of selected corporate trust businesses to The Bank of New York. For addi-
tional information on MSRs and other intangible assets, see Notes 3 and 16 on
pages 97 and 121–123 of this Annual Report.
Deposits
The Firm’s deposits represent a liability to customers, both retail and wholesale,
for funds held on their behalf. Deposits are generally classified by location (U.S.
and non-U.S.), whether they are interest- or noninterest-bearing, and by type
(demand, money market deposit accounts (“MMDAs”), savings, time, negotiable
order of withdrawal (“NOW”) accounts), and help provide a stable and consis-
tent source of funding to the Firm. Deposits increased by 15% from December
31, 2005. Growth in retail deposits reflected The Bank of New York transaction,
new account acquisitions, and the ongoing expansion of the retail branch distri-
bution network. Wholesale deposits increased driven by growth in business vol-
umes. Partially offsetting the growth in wholesale deposits was a $24.0 billion
decline as a result of the sale of selected corporate trust businesses to The Bank
of New York. For more information on deposits, refer to the RFS segment discus-
sion and the Liquidity risk management discussion on pages 38–42 and 62–63,
respectively, of this Annual Report. For more information on wholesale liability
balances, including deposits, refer to the CB and TSS segment discussions on
pages 46–47 and 48–49, respectively, of this Annual Report.
Long-term debt and trust preferred capital debt securities
The Firm utilizes Long-term debt and trust preferred capital debt securities as
part of its liquidity and capital management activities. Long-term debt and trust
preferred capital debt securities increased by $25.7 billion, or 21%, from
December 31, 2005, primarily due to net new issuances. Continued strong for-
eign investor participation in the global corporate markets allowed JPMorgan
Chase to identify attractive opportunities globally to further diversify its funding
and capital sources. During 2006, JPMorgan Chase issued approximately $56.7
billion of long-term debt and trust preferred capital debt securities. These
issuances were offset partially by $34.3 billion of long-term debt and trust pre-
ferred capital debt securities that matured or were redeemed. For additional
information on the Firm’s long-term debt activities, see the Liquidity risk man-
agement discussion on pages 62–63 and Note 19 on pages 124–125 of this
Annual Report.
Stockholders’ equity
Total stockholders’ equity increased by $8.6 billion, or 8%, from year-end 2005
to $115.8 billion at December 31, 2006. The increase was primarily the result of
Net income for 2006 and net shares issued under the Firm’s employee stock-
based compensation plans, offset partially by the declaration of cash dividends,
stock repurchases, a charge of $1.1 billion to Accumulated other comprehensive
income (loss) related to the prospective adoption, as required on December 31,
2006, of SFAS 158 for the Firm’s defined benefit pension and OPEB plans, and
the redemption of preferred stock. For a further discussion of capital, see the
Capital management section that follows. For a further discussion of SFAS 158,
see Note 7 on pages 100–105 of this Annual Report.