JP Morgan Chase 2009 Annual Report Download

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THE WAY FORWARD 
Annual Report 2009

Table of contents

  • Page 1
    annual report 2009 T h e Wa y F o r W a r d ›››

  • Page 2
    ... global financial services firm with assets of $2.0 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity...

  • Page 3
    ... by offering mortgage modifications. • By promoting responsible management of personal finances through innovative services, like Chase Blueprint, and more customer-friendly practices, like our new overdraft policy. • By maintaining strong capital levels and always following responsible business...

  • Page 4
    .... Today, our strategic position is clear, and JPMorgan Chase is a leader in all of its businesses. If you had been a Bank One shareholder from 2000 to year-end 2009 (this represents approximately 40% of the current company) and you held on to your stock, you would have received a total return on...

  • Page 5
    ...Chairman and Chief Executive Officer On March 16, 2008, we announced our acquisition of Bear Stearns at the request of the U.S. government; on September 25, 2008, 10 days after the collapse of Lehman Brothers, we bought Washington Mutual. We loaned $70 billion in the global interbank market when it...

  • Page 6
    ... our company continued to serve us well. we maintained our focus on risk management; high-quality capital; strong loan loss reserves; honest, transparent reporting; and appropriately conservative accounting. we maintained an extremely strong tier 1 common ratio, which stood at 8.8% at year-end...

  • Page 7
    ...30 20 10 Retail Financial Services $32,692 Card Services $20,304 19% 30% 5% 7% 7% 26% 6% Commercial Banking $5,720 Treasury & Securities Services $7,344 Asset Management $7,965 Asset Managemen Corporate $6,513 $71.4 $62.0 $54.2 $67.3 2005 2006 2007 2008 2009 Investment Bank $28,109 Pretax...

  • Page 8
    ...investment bankers: • Advised on 322 mergers and acquisitions globally - more than any other bank. • Loaned or syndicated loans of more than $200 billion to 295 companies, helping them grow and create jobs. • Raised $620 billion of equity or bonds in public markets for clients around the world...

  • Page 9
    ... (in millions, except for ratio and per share data) 2005 Investment Bank Retail Financial Services Card Services Commercial Banking Treasury & Securities Services Asset Management Corporate* * Includes extraordinary gains and merger costs. For more details on the Corporate sector, see page 82...

  • Page 10
    ...and savings accounts and investments, as well as home, business, auto and student loans. For our rFs professionals, 2009 was a year of numerous accomplishments: • Retail operations teams processed 700 million teller transactions, 3.5 billion debit card purchases, 100 million Atm deposits, close to...

  • Page 11
    ...small business bankers to our current workforce. in late 2009, we committed to boosting lending to small businesses by $4 billion in 2010 (to a total of $10 billion) through increased access to working capital, term loans for expansion, commercial mortgages, lines of credit and business credit cards...

  • Page 12
    ... grow market share in terms of accounts and customer spending; and our credit loss performance - 8.5% on Chase cards - while poor, was better than our competitors' performance. What we do in Card Services to provide better service to our millions of customers, we plan to add 2,700 personal bankers...

  • Page 13
    ... of the credit card business. even through the recent tumultuous times, we never stopped investing in new products and services to meet our customers' needs. in 2009, chase launched more products at one time than any other issuer. new products and services included two chase-branded card programs...

  • Page 14
    ... the conversion of commercial client accounts acquired through washington mutual, commercial Banking is well-positioned to grow. The business already is taking advantage of chase's retail branch network to expand its offerings into five new states - California, Washington, oregon, georgia and...

  • Page 15
    ... 90 global markets, holding nearly $15 trillion in assets; corporate cash management, moving an astounding $10 trillion a day of cash transactions around the world for clients; corporate card services, providing 27 million cards to more than 5,000 corporate clients and government agencies; and trade...

  • Page 16
    ... in assets for our clients. our second primary business is Private Banking. Our 1,900 private bankers help the world's wealthiest individuals and families grow, manage and sustain their wealth with investing, portfolio structuring, capital advisory, philanthropy and banking services. throughout 2009...

  • Page 17
    ...we plan to expand Private Banking globally by adding more than 500 bankers, investors and client service employees. in addition, we intend to continue to invest in the growth of the brokerage business we acquired from Bear Stearns. We anticipate a slowly improving but volatile investment environment...

  • Page 18
    ... while many of these people work in the Investment Bank, others work in Asset management, credit and risk Analysis, Consumer Lending and Treasury & securities services, as well as in data centers across the firm. employees of JPmorgan chase receive ongoing training and development to ensure they are...

  • Page 19
    ... committee members of the company (and many others), and the Board members periodically review - with and without me - your company's key succession plans. Ongoing assessment and development At JPmorgan chase, we are fortunate to attract world-class talent. we owe it to our employees, our customers...

  • Page 20
    ... of whether or not the overall company does well. many companies pay certain individuals based on their specific performance (sales and service employees) and not necessarily on the performance of the company. JPmorgan chase does employ a number of highly compensated individuals, probably more than...

  • Page 21
    ...data. 4 Revenue based on 2009 gross revenue before interest expense. 5 Includes investment banks, asset management firms, capital markets firms and other nonlending financial institutions. 6 Includes regional banks, credit card companies and other credit/ lending institutions. NA - Not applicable...

  • Page 22
    ... guarantee that our employees will act like owners, but it certainly improves the odds. How we pay individuals our starting point when it comes to compensation is, as it should be, risk-adjusted financial performance. we keep thousands of profit-andloss statements (by branch, by trading desk, etc...

  • Page 23
    ... branches and operating centers. these metrics may be increased or reduced somewhat by the company's performance. there also are a few senior people who are paid on specific metrics. For example, bankers who manage money for our clients have their compensation tightly tied to the kind of job they...

  • Page 24
    ..., Finance and risk. it's also necessary to set up the right structure. when tri-heads report to co-heads, all decisions become political - a setup for failure, not success. Morale-building high morale is developed through fixing problems, dealing directly and honestly with issues, earning respect...

  • Page 25
    ... both within and outside the company. there are markets for talent, just like products, and a company must pay a reasonable price to compete. Big business needs entrepreneurs, too there are examples of individuals who have been thrust, wholly unprepared, into positions of leadership and actually...

  • Page 26
    ...? did they build the systems and products that will strengthen the company, not just in the current year but in future years? did they develop real management teams? in essence, are they building something with sustainable, long-term value? making these determinations requires courage and judgment...

  • Page 27
    ..., we had a "run" on the capital markets. • Regulatory lapses and mistakes: Basel capital rules that required too little capital and didn't account for liquidity and relied too much on rating agencies; the securities and exchange commission allowing u.s. investment banks to get too leveraged; and...

  • Page 28
    ... from blame. crisis and contributed to the stabilization and recovery (e.g., our purchase of Bear Stearns and wamu and our interbank lending; that is, loans that banks make directly to each other). Yes, we should thank the government for its extraordinary actions As noted in last year's letter, we...

  • Page 29
    ...financial crisis, JPmorgan chase never posted a quarterly loss. we served as a safe haven for depositors, worked closely with the federal government and remained an active lender. our fortress balance sheet enabled us to buy Bear Stearns in March 2008, adding $289 billion in assets; then we acquired...

  • Page 30
    ... we borrow in the secured markets, we do so under the assumption that we would have access to some, not all, of that funding in a crisis. we always maintained excess liquidity at the bank holding company. we had and continue to have enough cash or cash equivalents on hand to fund ourselves for more...

  • Page 31
    ... worth almost $1 billion - a direct cost to our shareholders. we did participate in the Federal deposit insurance corporation (Fdic) guarantee program, under which we issued $40 billion of debt with an Fdic guarantee. many banks that used this program would not have had access to the capital markets...

  • Page 32
    ...funded by insurance companies, pension plans, and corporate and foreign investors - reduced the credit they were providing to the system by nearly half a trillion dollars. 2. Bank lending did go up in the months immediately after Lehman's collapse, but during the course of 2009, bank lending started...

  • Page 33
    ...reduce loan-to-value ratios in mortgages or to minimize speculation in the financial markets by reducing the leverage used in the repo markets). • Recognizing distortions as they develop in the broader economy (fiscal deficits, trade imbalances, structural state budget deficits) and forcing policy...

  • Page 34
    ...be paid for by the financial industry (like the Fdic is today). • All institutions under this regime should live with the exact same rules. • Regulators should make sure that companies have enough equity and unsecured debt to prevent the resolution fund from ever running out of money. to give an...

  • Page 35
    ...on money market funds. • The ability to buy shareholder or creditor voting rights without owning and being exposed to the risks of owning the underlying securities should be extremely limited. investors should not have the ability to vote the capital securities actually owned if the investors are...

  • Page 36
    ... social programs. over the last 20 years, Brazil has adopted many policies that dramatically strengthened its economy. it also bolstered its institutions, privatized its businesses, improved the rule of law, left the bulk of capital allocation to the private capital markets and developed world-class...

  • Page 37
    ... we work through job creation and appropriate tax payments. JPmorgan chase, on average, pays more than $12 billion a year in taxes to governments around the world. Building a great company allows investment in the future, provides opportunities to employees, builds better products for customers and...

  • Page 38
    ...connect markets around the globe, in places like China, India, Brazil, south Africa and russia; to execute diverse and large-scale transactions; to offer a range of products and services, from loan underwriting and risk management to local lines of credit; to process terabytes of financial data; and...

  • Page 39
    ... and the part we can play to support our clients and communities. our 220,000 people go to work every day to do a great job serving clients, whose trust we have to earn over many years. The vast majority of our people, customers, operations and shareholders are far from Wall Street - they actually...

  • Page 40
    ...offer a complete range of financial services to help clients achieve their goals. We provide strategic advice, lend money, raise capital, help manage risk, make markets and extend liquidity, and we hold global leadership positions in all of our major business lines. • Delivered record net income...

  • Page 41
    ... in 1,800 Washington Mutual branches and rebranding them Chase. • Added 2,400 personal bankers, business bankers, investment specialists and mortgage officers in bank branches to serve customers better. • Increased in-branch sales of mortgages by 84%, investments by 23% and credit cards by...

  • Page 42
    ... is designed to help customers pay down balances, manage everyday spending and pay off major purchases. • Invested in activities - such as the launch of Ultimate RewardsSM, a new rewards platform for Chase's proprietary credit cards - designed to attract new customers and further engage...

  • Page 43
    ... with access to global financial solutions. Our bankers build long-term relationships to help our clients succeed by supporting their lending, treasury, investment banking and asset management needs. 2009 HIgHLIgHTS AND ACCOMPLISHMeNTS Commercial Banking serves nearly 25,000 clients nationally...

  • Page 44
    ... assets under custody. We operate through two divisions: 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. Worldwide Securities Services...

  • Page 45
    ...Asset Management offers its clients global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including money market instruments and bank deposits. Asset Management also provides trust and estate, banking and brokerage services to high-net-worth...

  • Page 46
    ... 2005 2006 2007 2008 2009 26% 42% Education Employee programs Other 4% 12% • Provided in excess of $690 million in financing for the construction or preservation of more than 5,500 units of affordable housing and made investments in low-income communities through our New Markets Tax Credits...

  • Page 47
    ... Financial Measures Business Segment Results Balance Sheet Analysis Off-Balance Sheet Arrangements and Contractual Cash Obligations Capital Management Risk Management Liquidity Risk Management 101 Credit Risk Management 126 Market Risk Management 132 Private Equity Risk Management 133 Operational...

  • Page 48
    ...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...

  • Page 49
    ... 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...

  • Page 50
    ... 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...

  • Page 51
    ... of Series K Preferred Stock issued to the U.S. Treasury under the Capital Purchase Program. Even with this adjustment, the Financial performance of JPMorgan Chase Year ended December 31, (in millions, except per share data and ratios) 2009 Selected income statement data Total net revenue $ 100,434...

  • Page 52
    ... 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...

  • Page 53
    ...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...

  • Page 54
    ... 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...

  • Page 55
    ... Investment banking fees Principal transactions Lending- and deposit-related fees Asset management, administration and commissions Securities gains Mortgage fees and related income Credit card income Other income Noninterest revenue Net interest income Total net revenue $ 2009 7,087 9,796 7,045 2008...

  • Page 56
    ... 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...

  • Page 57
    ... are mostly recorded in the Firm's Corporate/Private Equity business, see the Corporate/Private Equity segment discussion on pages 82-83 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...

  • Page 58
    ... 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...

  • Page 59
    ... 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...

  • Page 60
    ... 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...

  • Page 61
    ... 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...

  • Page 62
    ... 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 123-125 of this Annual Report. 60 JPMorgan Chase & Co./2009 Annual Report

  • Page 63
    ... 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...

  • Page 64
    ... table summarizes the business segment results for the periods indicated. Year ended December 31, (in millions) Investment Bank(b) Retail Financial Services Card Services Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity(b) Total Year ended December 31...

  • Page 65
    .... (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...

  • Page 66
    ... 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...

  • Page 67
    ... 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) 3,444 360 3,804 0.14% 4.83 4.71(h) 301 1.38 1.28 2009 December 31, Global debt, equity and equity-related Global syndicated loans Global long-term debt...

  • Page 68
    ... branch network. Selected income statement data Year ended December 31, (in millions, except ratios) Revenue Lending- and deposit-related fees Asset management, administration and commissions Mortgage fees and related income Credit card income Other income Noninterest revenue Net interest income...

  • Page 69
    ... 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...

  • Page 70
    ... 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, 68 JPMorgan Chase & Co./2009 Annual Report

  • Page 71
    ...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...

  • Page 72
    ... mortgage fees and related income details (in millions) Production revenue Net mortgage servicing revenue: Operating revenue: Loan servicing revenue Other changes in MSR asset fair value Total operating revenue Risk management: Changes in MSR asset fair value due to inputs or assumptions in model...

  • Page 73
    ... 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...

  • Page 74
    ... the Chase Paymentech Solutions joint venture on November 1, 2008. See Note 2 on pages 151-156 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 Revenue Credit card income...

  • Page 75
    ... 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...

  • Page 76
    ...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...

  • Page 77
    ... 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...

  • Page 78
    ... assets Loans: Loans retained Loans held-for-sale and loans at fair value Total loans Liability balances(a) Equity Average loans by business: Middle Market Banking Commercial Term Lending(b) Mid-Corporate Banking Real Estate Banking(b) Other(b) Total Commercial Banking loans Headcount Credit data...

  • Page 79
    .... 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. Year ended December 31, 2009 (in millions, except headcount) Selected balance sheet data (period...

  • Page 80
    ... 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. 78 JPMorgan Chase & Co./2009 Annual Report

  • Page 81
    ... 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. Selected income statement data Year ended...

  • Page 82
    ... 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...

  • Page 83
    ... class Liquidity Fixed income Equities & multi-asset Alternatives Total assets under management Custody/brokerage/administration/ deposits Total assets under supervision Assets by client segment Institutional Private Bank(b) Retail Private Wealth Management(b) Bear Stearns Private Client Services...

  • Page 84
    ..., 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...

  • Page 85
    ...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...

  • Page 86
    Management's discussion and analysis BALANCE SHEET ANALYSIS Selected Consolidated Balance Sheets data December 31, (in millions) Assets Cash and due from banks Deposits with banks Federal funds sold and securities purchased under resale agreements Securities borrowed Trading assets: Debt and equity ...

  • Page 87
    ... 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...

  • Page 88
    ...offered to borrowers in 2009. Of these, 89,000 have 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 assetbacked notes, medium-term...

  • Page 89
    ... 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...

  • Page 90
    ... 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...

  • Page 91
    ... 31, (in millions) Time deposits Advances from the Federal Home Loan Banks Long-term debt Long-term beneficial interests(f) Operating leases(g) Equity investment commitments(h) Contractual purchases and capital expenditures Obligations under affinity and co-brand programs Other liabilities(i) Total...

  • Page 92
    ... 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...

  • Page 93
    ...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 236-237 of this Annual Report. Capital Purchase Program Pursuant to the Capital Purchase Program, on October 28, 2008...

  • Page 94
    ... its model is consistent with the new Basel II Framework. See Operational Risk Management on page 133 of this Annual Report for more information about operational risk. Private equity risk capital Capital is allocated to privately- and publicly- held securities, thirdparty fund investments, and...

  • Page 95
    ...'s performance. Relative to 2008, line of business equity remained largely unchanged during 2009. Line of business equity December 31, (in billions) Investment Bank Retail Financial Services Card Services Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity...

  • Page 96
    ... 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...

  • Page 97
    ... Services Risk Committee Commercial Banking Risk Committee TSS Risk Committee Asset Management Risk Committee CIO Risk Committee Corporate Treasury and Chief Investment Office (Liquidity, Interest Rate and Foreign Exchange Risk) Risk Management (Market, Credit, Operational and Private Equity...

  • Page 98
    ... 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...

  • Page 99
    ... 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...

  • Page 100
    ... 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...

  • Page 101
    ... 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...

  • Page 102
    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 ...

  • Page 103
    ...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...

  • Page 104
    ...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...

  • Page 105
    ... information, see Credit derivatives on pages 111-112 and Note 5 on pages 175-183 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...

  • Page 106
    ... Loans held-for-sale Loans at fair value Loans - reported Derivative receivables Receivables from customers Interests in purchased receivables Total wholesale credit-related assets Lending-related commitments Total wholesale credit exposure Net credit derivative hedges notional(a) Liquid securities...

  • Page 107
    ... 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...

  • Page 108
    ...(130) (793) December 31, 2009 (in millions, except ratios) Top 25 industries(a) Real estate Banks and finance companies Healthcare State and municipal governments Utilities Consumer products Asset managers Oil and gas Retail and consumer services Holding companies Technology Insurance Machinery and...

  • Page 109
    December 31, 2008 (in millions, except ratios) Top 25 industries(a) Real estate Banks and finance companies Healthcare State and municipal governments Utilities Consumer products Asset managers Oil and gas Retail and consumer services Holding companies Technology Insurance Machinery and equipment ...

  • Page 110
    ...6,904(a) Derivatives $ 529(b) - - - - $ 529 Assets acquired in loan satisfactions Real estate owned Other $ 203 187 - 2 - $ 392 $- 1 - - - $ 1 (in millions) Investment Bank Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total Retained $ 45,544 97,108 18...

  • Page 111
    ...382(a) Derivatives $ 1,079(b) - - - - $ 1,079 Assets acquired in loan satisfactions Real estate owned Other $ 247 102 - - - $ 349 $- 14 - 25 - $ 39 (in millions) Investment Bank Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total Retained $ 71,357 115...

  • Page 112
    ... below do not include gains from sales of nonperforming loans. Net charge-offs Wholesale Year ended December 31, (in millions, except ratios) Loans - reported Average loans retained Net charge-offs Average annual net charge-off rate 2009 $ 223,047 3,132 1.40% 2008 $ 219,612 402 0.18 % Derivative...

  • Page 113
    ... 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 111

  • Page 114
    ... credit risk on the loans, lending-related commitments or derivative receivables. This activity does not reduce 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...

  • Page 115
    ...- - - - - 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. Trading includes: (1) issuer exposure on cross-border debt and equity...

  • Page 116
    ..., 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...

  • Page 117
    ...off accounting policies, see Note 13 on pages 200-204 of this Annual Report. Consumer portfolio As of or for the year ended December 31, Credit exposure (in millions, except ratios) 2009 2008 Consumer loans - excluding purchased credit-impaired loans and loans held-for-sale Home equity - senior lien...

  • Page 118
    ... 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...

  • Page 119
    ...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...

  • Page 120
    ... 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...

  • Page 121
    ... 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...

  • Page 122
    ... rate for loans with high current estimated combined LTV ratios is greater than the delinConsumer 30+ day delinquency information December 31, (in millions, except ratios) Consumer loans - excluding purchased credit-impaired loans(a) Home equity - senior lien Home equity - junior lien Prime...

  • Page 123
    ... 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...

  • Page 124
    ... 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 ex- pense, such as real estate taxes and maintenance, are charged to other expense. REO assets declined from year-end 2008 as...

  • Page 125
    ... 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...

  • Page 126
    ... 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...

  • Page 127
    ...2009 and 2008. Allowance for credit losses December 31, (in millions) Investment Bank Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total Wholesale Retail Financial Services Card Services Corporate/Private Equity Total Consumer Total 2009 Lending-related...

  • Page 128
    ... 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...

  • Page 129
    ... level. 99% Confidence-Level VaR IB trading VaR by risk type and credit portfolio VaR As of or for the year ended December 31, (a) (in millions) By risk type: Fixed income Foreign exchange Equities Commodities and other Diversification Trading VaR Credit portfolio VaR Diversification Total trading...

  • Page 130
    ... 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...

  • Page 131
    ... 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...

  • Page 132
    .... 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. 130 JPMorgan Chase & Co./2009 Annual Report

  • Page 133
    ... 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...

  • Page 134
    ... based on models, see Critical Accounting Estimates Used by the Firm on pages 135-139 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...

  • Page 135
    ... 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...

  • Page 136
    ... 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...

  • Page 137
    ... 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 JPMorgan Chase & Co./2009 Annual...

  • Page 138
    ...assets that are classified within level 3 of the valuation hierarchy. December 31, (in billions, except ratio data) Trading debt and equity securities(a) Derivative receivables - gross Netting adjustment Derivative receivables - net Available-for-sale securities Loans MSRs Private equity investments...

  • Page 139
    ... 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...

  • Page 140
    ...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...

  • Page 141
    ... 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...

  • Page 142
    ...'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...

  • Page 143
    ...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 195-199 of this Annual Report. Determining fair value when the volume and level of activity for the asset or...

  • Page 144
    ...-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...

  • Page 145
    ...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...

  • Page 146
    ... 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...

  • Page 147
    ... 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...

  • Page 148
    Consolidated statements of income Year ended December 31, (in millions, except per share data) Revenue Investment banking fees Principal transactions Lending- and deposit-related fees Asset management, administration and commissions Securities gains(a) Mortgage fees and related income Credit card ...

  • Page 149
    Consolidated balance sheets December 31, (in millions, except share data) Assets Cash and due from banks Deposits with banks 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) Securities ...

  • Page 150
    ... from treasury stock Share repurchases related to employee stock-based compensation awards Net change from the Bear Stearns merger as a result of the reissuance of treasury stock and the Share Exchange agreement Balance at December 31 Total stockholders' equity Comprehensive income Net income Other...

  • Page 151
    ... activities Net change in: Deposits Federal funds purchased and securities loaned or sold under repurchase agreements Commercial paper and other borrowed funds Beneficial interests issued by consolidated variable interest entities Proceeds from issuance of long-term debt and trust preferred capital...

  • Page 152
    ... 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 245-247 of this Annual Report. The accounting...

  • Page 153
    ...'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...

  • Page 154
    ... statement of net assets acquired reflects the final value assigned to the Washington Mutual net assets as of September 25, 2008. (in millions) Assets Cash and due from banks Deposits with banks Federal funds sold and securities purchased under resale agreements Trading assets Securities Loans (net...

  • Page 155
    ... 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...

  • Page 156
    ... of net assets acquired reflects the final values assigned to the Bear Stearns net assets as of May 30, 2008. (in millions) Assets Cash and due from banks Federal funds sold and securities purchased under resale agreements Securities borrowed Trading assets Loans Accrued interest and accounts...

  • Page 157
    ... 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...

  • Page 158
    ... 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...

  • Page 159
    ... carried at fair value" section of this Note on pages 169-170. 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. JPMorgan Chase & Co./2009 Annual Report 157

  • Page 160
    ... 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...

  • Page 161
    ...'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 159

  • Page 162
    ... 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...

  • Page 163
    ... of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities: Credit card receivables Collateralized debt and loan obligations Other Equity securities Total available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments...

  • Page 164
    Notes to consolidated financial statements Fair value hierarchy December 31, 2009 (in millions) Deposits Federal funds purchased and securities loaned or sold under repurchase agreements Other borrowed funds Trading liabilities: Debt and equity instruments Derivative payables(e) Total trading ...

  • Page 165
    ... of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities: Credit card receivables Collateralized debt and loan obligations Other Equity securities Total available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments...

  • Page 166
    Notes to consolidated financial statements Fair value hierarchy December 31, 2008 (in millions) Deposits Federal funds purchased and securities loaned or sold under repurchase agreements Other borrowed funds Trading liabilities: Debt and equity instruments Derivative payables(e) Total trading ...

  • Page 167
    ... of level 3(g) Change in unrealized gains/(losses) related to financial instruments held at December 31, 2009 Year ended December 31, 2009 (in millions) Assets: Trading assets: Debt instruments: Mortgage-backed securities: U.S. government agencies Residential - nonagency(a) Commercial - nonagency...

  • Page 168
    .../(losses) related to financial instruments held at December 31, 2008 Year ended December 31, 2008 (in millions) Assets: Trading assets: Debt and equity instruments Net derivative receivables Available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments All...

  • Page 169
    ... 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...

  • Page 170
    ... 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 223-224 of this Annual Report. 168...

  • Page 171
    ..., 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...

  • Page 172
    ...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 195-199 of this Annual Report. 170 JPMorgan Chase & Co./2009...

  • Page 173
    ... 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...

  • Page 174
    ... and $29.2 at fair value at December 31, 2009 and 2008, respectively) 73.4 Total financial assets $ 1,934.1 Financial liabilities Deposits (included $4.5 and $5.6 at fair value at December 31, 2009 and 2008, respectively) $ 938.4 Federal funds purchased and securities loaned or sold under repurchase...

  • Page 175
    ... 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...

  • Page 176
    ... credit risk Other changes in fair value Other assets Deposits(a) Federal funds purchased and securities loaned or sold under repurchase agreements Other borrowed funds(a) Trading liabilities Accounts payable and other liabilities Beneficial interests issued by consolidated VIEs Long-term debt...

  • Page 177
    ... 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...

  • Page 178
    ... futures and forwards contracts are used to manage price risk associated with energyrelated 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...

  • Page 179
    ... foreign currency-denominated revenue and expense. For qualifying cash flow hedges, the effective portion of Free-standing derivatives(a) Derivative receivables December 31, 2009 (in millions) Trading assets and liabilities Interest rate Credit Foreign exchange Equity Commodity Gross fair value of...

  • Page 180
    ... December 31, 2009, by accounting designation. Consolidated Statements of Income (in millions) Year ended December 31, 2009 Fair value hedges(a) $ 801 Cash flow hedges $ 62 Derivative-related gains/(losses) Risk management Net investment activities hedges $ (112) $ (6,590) Trading activities(a) $ 16...

  • Page 181
    ...related hedged item in the same line item in the Consolidated Statements of Income. Gains/(losses) recorded in income Year ended December 31, 2009 (in millions) Contract type Interest rate(a) Foreign exchange(b) Commodity(c) Total Total income statement impact(d) $ 808 24 (31) $ 801 Income statement...

  • Page 182
    ... 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 (in millions) Type of instrument Interest rate Credit Foreign exchange Equity...

  • Page 183
    ... 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...

  • Page 184
    ... 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...

  • Page 185
    ... 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...

  • Page 186
    ...see Note 17 on pages 222-225 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...

  • Page 187
    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 ...

  • Page 188
    ...of year Actual return on plan assets Firm contributions Employee contributions Benefits paid Settlements Foreign exchange impact and other Fair value of plan assets, end of year Funded/(unfunded) status(a) Accumulated benefit obligation, end of year U.S. 2009 $ (7,796) (313) (514) 384 (4)(b) NA (408...

  • Page 189
    ... plans 2009 13.78% 15.93 U.S. 2008 (25.17)% (17.89) 2007 7.96% 6.51 2009 3.17-22.43% NA Non-U.S. 2008 (21.58)-5.06% NA 2007 0.06-7.51% 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...

  • Page 190
    ... 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...

  • Page 191
    ...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...

  • Page 192
    ...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...

  • Page 193
    ... 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...

  • Page 194
    ... 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...

  • Page 195
    ...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...

  • Page 196
    ... 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. Bear Stearns $ 327 26 (5) (316) $ 32 2009 Washington...

  • Page 197
    ... Treasury and government agencies(b) Obligations of U.S. states and municipalities Certificates of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities(a): Credit card receivables Collateralized debt and loan obligations Other Total available-for-sale debt...

  • Page 198
    ... Treasury and government agencies(a) Obligations of U.S. states and municipalities Certificates of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities(a): Credit card receivables Collateralized debt and loan obligations Other Total available-for-sale debt...

  • Page 199
    ...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...

  • Page 200
    ... 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...

  • Page 201
    ... Due after one year through five years 2009 Due after five years through 10 years By remaining maturity December 31, (in millions) Available-for-sale debt securities Mortgage-backed securities(b) Amortized cost Fair value Average yield(a) U.S. Treasury and government agencies(b) Amortized cost Fair...

  • Page 202
    ... 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...

  • Page 203
    ... Commercial and industrial Real estate(c) Financial institutions Government agencies Other Loans held-for-sale and at fair value(d) Total wholesale loans Consumer loans:(e) Home equity - senior lien(f) Home equity - junior lien(g) Prime mortgage Subprime mortgage Option ARMs Auto loans Credit card...

  • Page 204
    ... 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...

  • Page 205
    ... yield activity for these loans for the years ended December 31, 2009 and 2008. Accretable Yield Activity (in millions) Balance, January 1 Washington Mutual acquisition(a) Accretion into interest income Changes in interest rates on variable rate loans Other changes in expected cash flows(b) Balance...

  • Page 206
    ... 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...

  • Page 207
    ...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...

  • Page 208
    ... of securities from the Chase Issuance Trust. See Note 15 on pages 206-213 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...

  • Page 209
    ... 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 222-225 of this Annual Report). (f) Excludes senior and subordinated securities of $875 million and $974 million at December 31, 2009 and 2008...

  • Page 210
    ... 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...

  • Page 211
    .... 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 241 of this Annual Report for additional information on loans sold with recourse and other securitization related indemnifications...

  • Page 212
    ...-average life (in years) Expected credit losses Discount rate Year ended December 31, 2008 (in millions, except for ratios and where otherwise noted) Principal securitized Pretax gains All cash flows during the period: Proceeds from new securitizations Servicing fees collected Other cash flows...

  • Page 213
    ... at fair value, were risk rated "A" or better. Ratings profile of interests held (c)(d)(e) December 31, (in billions) Asset types: Credit card(a) Residential mortgage: Prime(b) Subprime Option ARMs Commercial and other Student loans Auto Total Investment grade $ 15.6 0.7 - 0.1 2.2 - - $ 18.6 2009...

  • Page 214
    ... this Annual Report. Residential mortgage December 31, 2009 (in millions, except rates, and where otherwise noted) JPMorgan Chase interests in securitized assets(a) Weighted-average life (in years) Weighted-average prepayment rate(b) Impact of 10% adverse change Impact of 20% adverse change Weighted...

  • Page 215
    ... 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...

  • Page 216
    ... 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...

  • Page 217
    ...'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...

  • Page 218
    ...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...

  • Page 219
    ...-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...

  • Page 220
    ...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...

  • Page 221
    ... 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...

  • Page 222
    ...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...

  • Page 223
    ...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 206-213 of this Annual Report. In addition, the banking regulatory agencies issued regulatory capital rules relating to...

  • Page 224
    ... consolidation under other existing authoritative guidance; these funds are not included in the impact noted above. December 31, (in millions) Investment Bank Retail Financial Services Card Services Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total...

  • Page 225
    ... 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...

  • Page 226
    ... 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 151-156 of this Annual Report. (a) Includes changes in the...

  • Page 227
    ... 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...

  • Page 228
    ... 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...

  • Page 229
    ... 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...

  • Page 230
    ... 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...

  • Page 231
    ... 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...

  • Page 232
    ...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...

  • Page 233
    ...treasury: Net change from the Bear Stearns merger as a result of the reissuance of Treasury stock and the Share Exchange Agreement Employee benefits and compensation plans Employee stock purchase plans Total issued from treasury Total treasury - balance at December 31 Outstanding 2009 3,941.6 2008...

  • Page 234
    ...) 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...

  • Page 235
    ...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...

  • Page 236
    ... U.S. federal tax rate Increase/(decrease) in tax rate resulting from: U.S. state and local income taxes, net of U.S. federal income tax benefit Tax-exempt income Non-U.S. subsidiary earnings Business tax credits Bear Stearns equity losses Other, net Effective tax rate 2009 35.0% 2008 35.0% 2007 35...

  • Page 237
    ...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...

  • Page 238
    ... accounts for the benefit of securities and futures brokerage customers. $ 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. Note 28 - Restrictions on cash and intercompany funds transfers The business...

  • Page 239
    ...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...

  • Page 240
    ... Note 16 on pages 214-222 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...

  • Page 241
    ...Lending-related Consumer: Home equity - senior lien Home equity - junior lien Prime mortgage Subprime mortgage Option ARMs Auto loans Credit card All other loans Total consumer Wholesale: Other unfunded commitments to extend credit(a) Asset purchase agreements Standby letters of credit and financial...

  • Page 242
    ... 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...

  • Page 243
    ... 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...

  • Page 244
    ... by major product and geography, see Note 13 on pages 200-204 of this Annual Report. For information regarding concentrations of off-balance sheet lending-related financial instruments by major product, see Note 31 on pages 238-242 of this Annual Report. 242 JPMorgan Chase & Co./2009 Annual Report

  • Page 245
    ... exposure Wholesale-related(a): Real estate $ 68,509 Banks and finance companies 54,053 Healthcare 35,605 State and municipal governments 34,726 Utilities 27,178 Consumer products 27,004 Asset managers 24,920 Oil and gas 23,322 Retail & consumer services 20,673 Holding companies 16,018 Technology 14...

  • Page 246
    Notes to consolidated financial statements Note 33 - International operations 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 ...

  • Page 247
    ... 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...

  • Page 248
    ...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) Investment Bank Retail Financial Services Card Services Commercial Banking Treasury & Securities Services Asset Management...

  • Page 249
    ... 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 208 of this Annual Report. (g) Managed results for credit card exclude the impact of credit...

  • Page 250
    ...13,055 Income tax benefit 1,269 Equity in undistributed net income of subsidiaries (2,596) Net income $ 11,728 Parent company - balance sheets December 31, (in millions) Assets Cash and due from banks $ Deposits with banking subsidiaries Trading assets Available-for-sale securities Loans Advances to...

  • Page 251
    ... Tier 1 capital ratio Total capital ratio Tier 1 leverage ratio Tier 1 common capital ratio (f) Overhead ratio Selected balance sheet data (period-end) Trading assets Securities Loans Total assets Deposits Long-term debt Common stockholders' equity Total stockholders' equity Headcount Credit quality...

  • Page 252
    ...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...

  • Page 253
    ... 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...

  • Page 254
    ... 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...

  • Page 255
    ... 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...

  • Page 256
    ...Former Prime Minister of Great Britain and Northern Ireland London, United Kingdom Dr. Jacob. A. Frenkel Chairman JPMorgan Chase International New York, New York Ratan Naval Tata Carla A. Hills Chairman and Chief Executive Officer Hills & Company Washington, D.C. Chairman Tata Sons Limited Mumbai...

  • Page 257
    ... and Chief Executive Officer CONMED Corporation Kenneth L. Wallach Chairman and CEO Central National-Gottesman Inc. Richard S. LeFrak Emil Duda Senior Executive Vice President and Chief Financial Officer Lifetime Healthcare Company/ Excellus Health Plan Inc. Chairman and Chief Executive Of...

  • Page 258
    ...Phil Di Iorio Asset Management David B. Lowman Home Lending Charles W. Scharf* Retail Financial Services Frank J. Bisignano* Chief Administrative Officer John L. Donnelly* Human Resources Samuel Todd Maclin* Commercial Banking Peter L. Scher Global Government Relations & Public Policy Steven...

  • Page 259
    ... Chase & Co. Corporate headquarters 270 Park Avenue New York, NY 10017-2070 Telephone: 212-270-6000 www.jpmorganchase.com Principal subsidiaries JPMorgan Chase Bank, National Association Chase Bank USA, National Association J.P. Morgan Securities Inc. Annual Report on Form 10-K The Annual Report...

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