JP Morgan Chase 2005 Annual Report Download - page 132

Notes to consolidated financial statements
JPMorgan Chase & Co.
130 JPMorgan Chase & Co. /2005 Annual Report
Note 31 – Business segments
JPMorgan Chase is organized into six major reportable business segments
(the Investment Bank, Retail Financial Services, Card Services, Commercial
Banking, Treasury & Securities Services and Asset & Wealth Management), as
well as a Corporate segment. The segments are based upon the products and
services provided or the type of customer served, and they reflect the manner
in which financial information is currently evaluated by management. Results
of these lines of business are presented on an operating basis. For a definition
of operating basis, see the footnotes to the table below. For a further
discussion concerning JPMorgan Chase’s business segments, see Business
segment results on pages 34–35 of this Annual Report.
In the third quarter of 2004, in connection with the Merger, business segment
reporting was realigned to reflect the new business structure of the combined
Firm. Treasury was transferred from the Investment Bank into Corporate. The
segment formerly known as Chase Financial Services had been comprised of
Chase Home Finance, Chase Cardmember Services, Chase Auto Finance,
Chase Regional Banking and Chase Middle Market; as a result of the Merger,
this segment is now called Retail Financial Services and is comprised of Home
Finance, Auto & Education Finance, Consumer & Small Business Banking and
Insurance. Chase Cardmember Services is now its own segment called Card
Services, and Chase Middle Market moved into Commercial Banking.
Investment Management & Private Banking was renamed Asset & Wealth
Management. JPMorgan Partners, which formerly was a stand-alone business
segment, was moved into Corporate. Corporate currently comprises Private
Equity (JPMorgan Partners and ONE Equity Partners) and Treasury, and the
Segment results and reconciliation(a) (table continued on next page)
Year ended December 31,(b) Investment Bank(d) Retail Financial Services Card Services(e) Commercial Banking
(in millions, except ratios) 2005 2004 2003 2005 2004 2003 2005 2004 2003 2005 2004 2003
Noninterest revenue $ 13,168 $ 11,280 $ 11,017 $ 4,625 $ 3,077 $ 2,208 $ 3,563 $ 2,371 $ 1,092 $986$ 682 $ 393
Net interest income 1,410 1,325 1,667 10,205 7,714 5,220 11,803 8,374 5,052 2,610 1,692 959
Total net revenue 14,578 12,605 12,684 14,830 10,791 7,428 15,366 10,745 6,144 3,596 2,374 1,352
Provision for credit losses (838) (640) (181) 724 449 521 7,346 4,851 2,904 73 41 6
Credit reimbursement
(to)/from TSS(c) 154 90 (36) ——— ——— ———
Merger costs —————— ——— ———
Litigation reserve charge —— 100 ——— ——— ———
Other noninterest expense 9,739 8,696 8,202 8,585 6,825 4,471 4,999 3,883 2,178 1,872 1,343 822
Total noninterest expense 9,739 8,696 8,302 8,585 6,825 4,471 4,999 3,883 2,178 1,872 1,343 822
Income (loss) before
income tax expense 5,831 4,639 4,527 5,521 3,517 2,436 3,021 2,011 1,062 1,651 990 524
Income tax expense (benefit) 2,173 1,691 1,722 2,094 1,318 889 1,114 737 379 644 382 217
Net income (loss) $ 3,658 $ 2,948 $ 2,805 $ 3,427 $ 2,199 $ 1,547 $ 1,907 $ 1,274 $ 683 $ 1,007 $ 608 $ 307
Average equity $ 20,000 $ 17,290 $ 18,350 $ 13,383 $ 9,092 $ 4,220 $ 11,800 $ 7,608 $ 3,440 $ 3,400 $ 2,093 $ 1,059
Average assets 598,118 473,121 436,488 226,368 185,928 147,435 141,933 94,741 51,406 56,561 36,435 16,460
Return on average equity 18% 17% 15% 26% 24% 37% 16% 17% 20% 30% 29% 29%
Overhead ratio 67 69 65 58 63 60 33 36 35 52 57 61
(a) In addition to analyzing the Firm’s results on a reported basis, management reviews the line of business results on an “operating basis,” which is a non-GAAP financial measure. The definition of oper-
ating basis starts with the reported U.S. GAAP results. In the case of the Investment Bank, operating basis noninterest revenue includes, in Trading revenue, Net interest income (“NII”) related to trad-
ing activities. In the case of Card Services, refer to footnote (e). These adjustments do not change JPMorgan Chase’s reported net income. Operating basis also excludes Merger costs, nonoperating
Litigation reserve charges and accounting policy conformity adjustments, as management believes these items are not part of the Firm’s normal daily business operations (and, therefore, not indicative
of trends) and do not provide meaningful comparisons with other periods. Finally, operating results reflect revenues (Noninterest revenue and NII) on a tax-equivalent basis. Refer to footnote (f) for the
impact of these adjustments.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(c) TSS reimburses the IB for credit portfolio exposures the IB manages on behalf of clients the segments share. At the time of the Merger, the reimbursement methodology was revised to be based upon pre-tax
earnings, net of the cost of capital related to those exposures. Prior to the Merger, the credit reimbursement was based upon pre-tax earnings, plus the allocated capital associated with the shared clients.
(d) Segment operating results include the reclassification of NII related to trading activities to Trading revenue within Noninterest revenue, which impacts primarily the Investment Bank. Trading-related NII
reclassified to Trading revenue was $159 million, $2.0 billion and $2.1 billion in 2005, 2004 and 2003, respectively. These amounts are eliminated in Corporate/reconciling items to arrive at NII and
Noninterest revenue on a reported GAAP basis for JPMorgan Chase.
(e) Operating results for Card Services exclude the impact of credit card securitizations on revenue, provision for credit losses and average assets, as JPMorgan Chase treats the sold receivables as if they
were still on the balance sheet in evaluating the overall performance of the credit card portfolio. These adjustments are eliminated in Corporate/reconciling items to arrive at the Firm’s reported GAAP
results.The related securitization adjustments were as follows:
Year ended December 31, (in millions)(b) 2005 2004 2003
Net interest income $ 6,494 $ 5,251 $ 3,320
Noninterest revenue (2,718) (2,353) (1,450)
Provision for credit losses 3,776 2,898 1,870
Average assets 67,180 51,084 32,365