JP Morgan Chase 2006 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
34 JPMorgan Chase & Co. / 2006 Annual Report
BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business basis. The business segment finan-
cial results presented reflect 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 segment. The seg-
ments are based upon the products and services provided, or the type of cus-
tomer served, and they reflect the manner in which financial information is
currently evaluated by management. Results of these lines of business are pre-
sented on a managed basis. Segment results for 2004 include six months of
the combined Firm’s results and six months of heritage JPMorgan Chase only.
Asset
Management
Businesses:
• Treasury Services
• Worldwide
Securities Services
JPMorgan Chase
Businesses:
• Middle Market
Banking
• Mid-Corporate
Banking
• Real Estate
Banking
• Chase Business
Credit
• Chase Equipment
Leasing
Commercial
Banking
Businesses:
• Investment Banking:
- Advisory
- Debt and equity
underwriting
• Market-Making
and Trading:
- Fixed income
- Equities
• Corporate Lending
• Principal Investing
Investment
Bank
Retail
Financial
Services
Card
Services
Businesses:
• Investment
Management:
- Institutional
- Retail
• Private Banking
• Private Client
Services
Businesses:
• Credit Card
• Merchant Acquiring
Businesses:
• Regional Banking:
- Consumer and
Business Banking
- Home equity lending
- Education lending
• Mortgage Banking
• Auto Finance
Treasury &
Securities
Services
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it
were essentially a stand-alone business. During 2006, JPMorgan Chase modified
certain of its segment disclosures to reflect more closely the manner in which
the Firm’s business segments are managed and to provide improved compara-
bility with competitors. These financial disclosure modifications are reflected in
this Annual Report and, except as indicated, the financial information for prior
periods has been revised to reflect the changes as if they had been in effect
throughout all periods reported. A summary of the changes follows:
• The presentation of operating earnings in 2005 and 2004 that excluded
from reported results merger costs and material litigation reserve charges
and recoveries was eliminated effective January 1, 2006. These items had
been excluded previously from operating results because they were deemed
nonrecurring; they are included now in the Corporate business segment’s
results.
• Trading-related net interest income is no longer reclassified from Net inter-
est income to Principal transactions.
• Various wholesale banking clients, together with the related balance sheet
and income statement items, were transferred among CB, the IB and TSS.
The primary client transfer was corporate mortgage finance from CB to the
IB and TSS.
• TSS firmwide disclosures have been adjusted to reflect a refined set of TSS
products as well as a revised allocation of liability balances and lending-
related revenue related to certain client transfers.
• As a result of the transaction with The Bank of New York, selected corpo-
rate trust businesses have been transferred from TSS to the Corporate seg-
ment and reported in discontinued operations for all periods reported.
The management reporting process that derives business segment results
allocates income and expense using market-based methodologies. The Firm
continues to assess the assumptions, methodologies and reporting classifica-
tions used for segment reporting, and further refinements may be implement-
ed in future periods. Segment reporting methodologies used by the Firm are
discussed below.
Revenue sharing
When business segments join efforts to sell products and services to the
Firm’s clients, the participating business segments agree to share revenues
from those transactions. The segment results reflect these revenue-sharing
agreements.
Funds transfer pricing
Funds transfer pricing (“FTP”) is used to allocate interest income and
expense to each business and transfer the primary interest rate risk exposures
to the Corporate business segment. The allocation process is unique to each
business segment and considers the interest rate risk, liquidity risk and regu-
latory requirements of that segment’s stand-alone peers. This process is over-
seen by the Firm’s Asset-Liability Committee (“ALCO”). Business segments
may retain certain interest rate exposures, subject to management approval,
that would be expected in the normal operation of a similar peer business.