JP Morgan Chase 2005 Annual Report Download - page 55

JPMorgan Chase & Co. /2005 Annual Report 53
Corporate
The Corporate sector is comprised of Private Equity, Treasury,
corporate staff units and expenses that are centrally managed.
Private Equity includes the JPMorgan Partners and ONE Equity
Partners businesses. Treasury manages the structural interest
rate risk and investment portfolio for the Firm. The corporate
staff units include Central Technology and Operations, Audit,
Executive Office, Finance, Human Resources, Marketing &
Communications, Office of the General Counsel, Corporate Real
Estate and General Services, Risk Management, and Strategy
and Development. Other centrally managed expenses include
the Firm’s occupancy and pension-related expenses, net of
allocations to the business.
Selected income statement data
Year ended December 31,(a)
(in millions) 2005 2004(d) 2003(d)
Revenue
Securities/private equity gains $ 200 $ 1,786 $ 1,031
Other income(b) 1,410 315 303
Noninterest revenue 1,610 2,101 1,334
Net interest income (2,736) (1,216) (133)
Total net revenue (1,126) 885 1,201
Provision for credit losses(c) 10 (110) 124
Noninterest expense
Compensation expense 3,151 2,426 1,893
Noncompensation expense 4,216 4,088 3,216
Subtotal 7,367 6,514 5,109
Net expenses allocated to other businesses (5,343) (5,213) (4,580)
Total noninterest expense 2,024 1,301 529
Operating earnings before income
tax expense (3,160) (306) 548
Income tax expense (benefit) (1,429) (367) (120)
Operating earnings (loss) $ (1,731) $ 61 $ 668
(a) 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.
(b) Includes $1.3 billion (pre-tax) gain on the sale of BrownCo in 2005.
(c) 2005 includes a $12 million special provision related to Hurricane Katrina.
(d) In 2005, the Corporate sector’s and the Firm’s operating results were presented on a tax-
equivalent basis. Prior period results have been restated.This restatement had no impact on
the Corporate sector’s or the Firm’s operating earnings.
2005 compared with 2004
Operating loss of $1.7 billion declined from earnings of $61 million in the
prior year.
Net revenue was a loss of $1.1 billion compared with revenue of $885 million
in the prior year. Noninterest revenue of $1.6 billion decreased by $491 million
and included securities losses of $1.5 billion due to the repositioning of the
Treasury investment portfolio, to manage exposure to interest rates, the gain
on the sale of BrownCo of $1.3 billion and the increase in private equity
gains of $262 million. For a further discussion on the sale of BrownCo, see
Note 2 on page 93 of this Annual Report.
Net interest income was a loss of $2.7 billion compared with a loss of
$1.2 billion in the prior year. Actions and policies adopted in conjunction
with the Merger and the repositioning of the Treasury investment portfolio
were the main drivers of the increased loss.
Noninterest expense was $2.0 billion, up $723 million, or 56%, from the prior
year, primarily due to the Merger and the cost of the accelerated vesting of
certain employee stock options. These increases were offset partially by merger-
related savings and other expense efficiencies.
On September 15, 2004, JPMorgan Chase and IBM announced the Firm’s plans
to reintegrate the portions of its technology infrastructure – including data
centers, help desks, distributed computing, data networks and voice networks
– that were previously outsourced to IBM. In January 2005, approximately
3,100 employees and 800 contract employees were transferred to the Firm.
2004 compared with 2003
Operating earnings were $61 million, down from earnings of $668 million in
the prior year.
Noninterest revenue was $2.1 billion, up 57% from the prior year. The primary
component of noninterest revenue is Securities/private equity gains, which
totaled $1.8 billion, up 73% from the prior year. The increase was a result of
net gains in the Private Equity portfolio of $1.4 billion in 2004 compared with
$27 million in net gains in 2003. Partially offsetting these gains were lower
investment securities gains in Treasury.
Net interest income was a loss of $1.2 billion compared with a loss of
$133 million in the prior year. The increased loss was driven primarily by
actions and policies adopted in conjunction with the Merger.
Noninterest expense of $1.3 billion was up $772 million from the prior
year due to the Merger. The Merger resulted in higher gross compensation
and noncompensation expenses. Allocations of compensation and noncom-
pensation expenses to the businesses were lower than the gross expense
increase due to certain policies adopted in conjunction with the Merger,
which retain in Corporate overhead costs that would not be incurred by the
lines of business if operated on a stand-alone basis, and costs in excess of
the market price for services provided by the corporate staff and technology
and operations areas.
Selected metrics
Year ended December 31,(a)
(in millions, except headcount) 2005 2004 2003
Selected average balances
Short-term investments(b) $ 16,808 $ 14,590 $ 4,076
Investment portfolio(c) 54,481 65,985 65,113
Goodwill(d) 43,475 21,773 293
Total assets 160,720 162,234 104,395
Headcount 28,384 24,806 13,391
Treasury
Securities gains (losses) $ (1,502) $ 347 $ 999
Investment portfolio (average) 46,520 57,776 56,299
Investment portfolio (ending) 30,741 64,949 45,811
(a) 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.
(b) Represents Federal funds sold, Securities borrowed, Trading assets – debt and equity instru-
ments and Trading assets – derivative receivables.
(c) Represents Investment securities and private equity investments.
(d) As of July 1, 2004, the Firm revised the goodwill allocation methodology to retain all good-
will in Corporate. Effective with the first quarter of 2006, the Firm will refine its methodolo-
gy to allocate goodwill to the lines of business.