JP Morgan Chase 2006 Annual Report Download - page 101

JPMorgan Chase & Co. / 2006 Annual Report 99
Private equity also holds publicly held equity investments, generally obtained
through the initial public offering of privately held equity investments. Publicly
held investments are marked-to-market at the quoted public value. To deter-
mine the carrying values of these investments, Private equity incorporates the
use of discounts to take into account the fact that it cannot immediately real-
ize the quoted public values as a result of regulatory and/or contractual sales
restrictions imposed on these holdings.
Note 5 – Other noninterest revenue
Investment banking fees
This revenue category includes advisory and equity and debt underwriting fees.
Advisory fees are recognized as revenue when the related services have been per-
formed. Underwriting fees are recognized as revenue when the Firm has rendered
all services to the issuer and is entitled to collect the fee from the issuer, as long
as there are no other contingencies associated with the fee (e.g., the fee is not
contingent upon the customer obtaining financing). Underwriting fees are net of
syndicate expenses. The Firm recognizes credit arrangement and syndication fees
as revenue after satisfying certain retention, timing and yield criteria.
The following table presents the components of Investment banking fees:
Year ended December 31, (in millions) 2006 2005 2004(a)
Underwriting:
Equity $ 1,179 $ 864 $ 780
Debt 2,703 1,969 1,858
Total Underwriting 3,882 2,833 2,638
Advisory 1,638 1,255 898
Total $ 5,520 $ 4,088 $ 3,536
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
Lending & deposit related fees
This revenue category includes fees from loan commitments, standby letters of
credit, financial guarantees, deposit-related fees in lieu of compensating bal-
ances, cash management-related activities or transactions, deposit accounts,
and other loan servicing activities. These fees are recognized over the period
in which the related service is provided.
Asset management, administration and commissions
This revenue category includes fees from investment management and related
services, custody, brokerage services, insurance premiums and commissions and
other products. These fees are recognized over the period in which the related
service is provided. Performance-based fees, which are earned based upon
exceeding certain benchmarks or other performance targets, are accrued and
recognized at the end of the performance period in which the target is met.
Mortgage fees and related income
This revenue category includes fees and income derived from mortgage origina-
tion, sales and servicing, and includes the effect of risk management activities
associated with the mortgage pipeline, warehouse and the mortgage servicing
rights (“MSRs”) asset (excluding gains and losses on the sale of Available-for-
sale (“AFS”) securities). Origination fees and gains or losses on loan sales are
r ecognized in income upon sale. Mortgage servicing fees are recognized over
the period the related service is provided. Valuation changes in the mortgage
pipeline, warehouse, MSR asset and corresponding risk management instruments
are recognized in earnings as these changes occur. Net interest income and secu-
rities gains and losses on AFS securities used in mortgage-related risk manage-
ment activities are not included in Mortgage fees and related income. For a fur-
ther discussion of MSRs, see Note 16 on pages 121–122 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 expenses for rewards programs are netted
against interchange income. Expenses related to rewards programs are recorded
when the rewards are earned by the customer. Other Fee revenues are recog-
nized as earned, except for annual fees, which are deferred with direct loan
origination costs and recognized on a straight-line basis over the 12-month
period to which they pertain.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity organizations and
co-brand partners, which grant to the Firm exclusive rights to market to their
members or customers. These organizations and partners endorse the credit card
programs and provide their mailing lists to the Firm, and they may also conduct
marketing activities and provide awards under the various credit card programs.
The terms of these agreements generally range from 3 to 10 years. The economic
incentives the Firm pays to the endorsing organizations and partners typically
include payments based upon new account originations, charge volumes, and the
cost of the endorsing organizations’ or partners’ marketing activities and awards.
The Firm recognizes the payments made to the affinity organizations and co-
brand partners based upon new account originations as direct loan origination
costs. Payments based upon charge volumes are considered by the Firm as rev-
enue sharing with the affinity organizations and co-brand partners, which are
deducted from Credit card income as the related revenue is earned. Payments
based upon marketing efforts undertaken by the endorsing organization or
partner are expensed by the Firm as incurred. These costs are recorded within
Noninterest expense.
Note 6 – Interest income and Interest expense
Details of Interest income and Interest expense were as follows:
Year ended December 31, (in millions) 2006 2005(b) 2004(b)(c)
Interest income
Loans $ 33,121 $ 26,056 $ 16,768
Securities 4,147 3,129 3,377
Trading assets 10,942 9,117 7,527
Federal funds sold and securities
purchased under resale agreements 5,578 3,562 1,380
Securities borrowed 3,402 1,618 578
Deposits with banks 1,265 660 539
Interests in purchased receivables(a) 652 933 291
Total interest income 59,107 45,075 30,460
Interest expense
Interest-bearing deposits 17,042 9,986 4,515
Short-term and other liabilities 14,086 10,002 6,474
Long-term debt 5,503 4,160 2,466
Beneficial interests issued by
consolidated VIEs 1,234 1,372 478
Total interest expense 37,865 25,520 13,933
Net interest income 21,242 19,555 16,527
Provision for credit losses 3,270 3,483 2,544
Net interest income after Provision
for credit losses $ 17,972 $ 16,072 $13,983
(a) As a result of restructuring certain multi-seller conduits the Firm administers, JPMorgan
Chase deconsolidated $29 billion of Interests in purchased receivables, $3 billion of Loans
and $1 billion of Securities, and recorded $33 billion of lending-related commitments during
the second quarter of 2006.
(b) Prior periods have been adjusted to reflect the reclassification of certain amounts to
more appropriate Interest income and Interest expense lines.
(c) 2004 results include six months of the combined Firm’s results and six months of
heritage JPMorgan Chase results.