JP Morgan Chase 2006 Annual Report Download - page 55

CORPORATE
The Corporate sector comprises Private Equity, Treasury, corpo-
rate 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, Internal
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.
On August 1, 2006, the buyout and growth equity professionals of JPMorgan
Partners (“JPMP”) formed an independent firm, CCMP Capital, LLC (“CCMP”),
and the venture professionals separately formed an independent firm,
Panorama Capital, LLC (“Panorama”). The investment professionals of CCMP
and Panorama continue to manage the former JPMP investments pursuant to a
management agreement with the Firm.
On October 1, 2006, the Firm completed the exchange of selected corporate trust
businesses, including trustee, paying agent, loan agency and document manage-
ment services, for the consumer, business banking and middle-market banking
businesses of The Bank of New York. These corporate trust businesses, which were
previously reported in TSS, are now reported as discontinued operations for all
periods presented within Corporate. The related balance sheet and income state-
ment activity were transferred to the Corporate segment commencing with the
second quarter of 2006. Periods prior to the second quarter of 2006 have been
revised to reflect this transfer.
Selected income statement data
Year ended December 31,
(in millions) 2006 2005 2004(f)
Revenue
Principal transactions $ 1,175 $ 1,524 $ 1,542
Securities gains (losses) (608) (1,487) 332
All other income(a) 485 1,583 109
Noninterest revenue 1,052 1,620 1,983
Net interest income (1,044) (2,756) (1,214)
Total net revenue 8 (1,136) 769
Provision for credit losses(b) (1) 10 748
Noninterest expense
Compensation expense 2,626 3,148 2,426
Noncompensation expense(c) 2,351 5,962 7,418
Merger costs 305 722 1,365
Subtotal 5,282 9,832 11,209
Net expenses allocated to other businesses (4,141) (4,505) (4,839)
Total noninterest expense 1,141 5,327 6,370
Income (loss) from continuing operations
before income tax expense (1,132) (6,473) (6,349)
Income tax expense (benefit)(d) (1,179) (2,690) (2,661)
Income (loss) from continuing operations 47 (3,783) (3,688)
Income from discontinued operations(e) 795 229 206
Net income (loss) $ 842 $ (3,554) $(3,482)
JPMorgan Chase & Co. / 2006 Annual Report 53
(a) Includes a gain of $103 million in 2006 related to the initial public offering of Mastercard,
and a gain of $1.3 billion on the sale of BrownCo in 2005.
(b) 2004 includes $858 million related to accounting policy conformity adjustments in connec-
tion with the Merger.
(c) Includes insurance recoveries related to material legal proceedings of $512 million and
$208 million in 2006 and 2005, respectively. Includes litigation reserve charges of $2.8 bil-
lion and $3.7 billion in 2005 and 2004, respectively.
(d) Includes tax benefits recognized upon resolution of tax audits.
(e) Includes a $622 million gain from exiting the corporate trust business in the fourth quarter
of 2006.
(f) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
2006 compared with 2005
Net income was $842 million compared with a net loss of $3.6 billion in the
prior year. In comparison with the prior year, Private Equity earnings was $627
million, down from $821 million; Treasury net loss was $560 million compared
with a net loss of $2.0 billion; the net loss in Other Corporate (including
Merger costs) was $20 million compared with a net loss of $2.6 billion; and
the Net income from discontinued operations was $795 million compared with
$229 million.
Total net revenue was $8 million, as compared with a negative $1.1 billion in
the prior year. Net interest income was a negative $1.0 billion compared with
negative $2.8 billion in the prior year. Treasury was the primary driver of the
improvement, with Net interest income of negative $140 million compared
with negative $1.7 billion in the prior year, benefiting primarily from an
improvement in Treasury’s net interest spread and an increase in available-for-
sale securities. Noninterest revenue was $1.1 billion compared with $1.6 bil-
lion, reflecting the absence of the $1.3 billion gain on the sale of BrownCo
last year and lower Private Equity gains of $1.3 billion compared with gains of
$1.7 billion in the prior year. These declines were offset by $619 million in
securities losses in Treasury compared with securities losses of $1.5 billion in
the prior year and a gain of $103 million related to the sale of Mastercard
shares in its initial public offering in the current year.
Total noninterest expense was $1.1 billion, down by $4.2 billion from $5.3 billion
in the prior year. Insurance recoveries relating to certain material litigation were
$512 million in the current year, while the prior-year results included a material lit-
igation charge of $2.8 billion, and related insurance recoveries of $208 million.
Prior-year expense included a $145 million cost due to the accelerated vesting of
stock options. Merger costs were $305 million compared with $722 million in the
prior year.
Discontinued operations include the results of operations of selected corporate
trust businesses sold to The Bank of New York on October 1, 2006. Prior to the
sale, the selected corporate trust businesses produced $173 million of Net
income in the current year compared with Net income of $229 million in the
prior year. Net income from discontinued operations for 2006 also included a
one-time gain of $622 million related to the sale of these businesses.
2005 compared with 2004
Total net revenue was a negative $1.1 billion compared with Total net revenue
of $769 million in the prior year. Noninterest revenue of $1.6 billion decreased
by $363 million and included securities losses of $1.5 billion due to the fol-
lowing: 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 further discussion on the
sale of BrownCo, see Note 2 on page 97 of this Annual Report.