JP Morgan Chase 2004 Annual Report Download

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ANNUAL REPORT 2004

Table of contents

  • Page 1
    A N N U A L REPO RT 2 0 0 4

  • Page 2
    Financial highlights As of or for the year ended December 31, (in millions, except per share, ratio and headcount data) 2004 2003 Re port e d ba sis(a) Total net revenue Net income Net income per share: Basic Diluted Return on common equity Headcount $ 43,097 4,466 $ 33,384 6,719 1.59 1.55 6% ...

  • Page 3
    ... you our plan to unite Bank One and JPMorgan Chase with the goal of creating the best financial services company in the world. T hroughout the year, we have worked hard to execute one of the largest mergers in financial services history. As expected, the process has been challenging and rewarding...

  • Page 4
    ... technology decisions, including the selection of our national deposit platform, general ledger, customer identification system and credit card processing system. Created a disciplined operating structure consisting of common reporting, risk management, talent management, monthly business reviews...

  • Page 5
    ...reporting and management information systems. In we created a new internal and external financial reporting architecture with high-quality and transparent accounting policies that cover capital allocation, revenue sharing, expense allocation and funds-transfer pricing. We then worked with our line...

  • Page 6
    ... managed in the constantly changing economic and business environment. While we continue to set risk policy and manage overall risk centrally, we have established line of business risk committees that are accountable for risk performance within the business. By working directly with the businesses...

  • Page 7
    ...of Card Services by bringing the Chase brand to a broader customer base; maximizing our partnerships with many of the nation's best-known brands; innovating continuously; and expanding product breadth; • Increasing our Private Bank's ultra high net worth client base by entering eight new markets...

  • Page 8
    ... client service, high performance standards, integrity and commitment to relationships. T he Investment Bank, our international services and Asset & Wealth Management businesses - which include investment management, the Private Bank and Private Client Services - will now be marketed solely...

  • Page 9
    ... JPMorgan Chase employees around the world dedicated hours to volunteer community service projects. In we made an billion, -year public commitment to provide loans and investments that will benefit the credit and capital needs of minority and lower-income households and communities. In...

  • Page 10
    ... product base to clients; leverage partnerships with Commercial Banking's Middle Market segment, Treasury & Securities Services and Chase Home Finance. • Focus on generating higher returns relative to our risk taking. • Invest in growth businesses, including Energy and Commodities, Fixed Income...

  • Page 11
    ... to open new checking accounts and to build on these and existing relationships to include sales of investments, credit cards, and home equity and small business loans. • Integrate mortgage lenders into bank branches to serve 9 million branch customers. • Achieve incremental merger savings...

  • Page 12
    ... except ratios) 2004 2003 Total net revenue $15,001 $13,968 Operating earnings 1,681 1,368 Return on common equity 14% 12% Our businesses With 94 million cards in circulation and more than $135 billion in managed loans, Chase Card Services is the largest issuer of general-purpose credit cards in...

  • Page 13
    ... local market presence and a strong customer service model coupled with a focus on risk management provide a solid infrastructure for Commercial Banking to offer the complete product set of JPMorgan Chase, including lending, treasury services, investment banking and investment management. Commercial...

  • Page 14
    ... corporate trust securities under administration by 6%. • Acquired two companies that expanded product depth and geographic reach: Tranaut, a recognized best-in-class hedge fund administrator; and TASC, the largest third-party asset administration service provider in South Africa. 2005 execution...

  • Page 15
    ... billion in alternative assets under management • 2 million retail clients, plus institutional and high net worth clients • #1 U.S. Private Bank; #2 Global Money Market Asset Manager; #2 Offshore Fund Manager; #3 Global Private Bank; #3 U.S. Active Asset Manager; #5 U.S. Mutual Fund Company 13

  • Page 16
    ... Technology and Operations; Internal Audit; Executive Office; Finance; General Services; Human Resources; Marketing & Communications; Office of the General Counsel; Real Estate and Business Services; Risk Management; and Strategy and Development. 2004 accomplishments • Generated strong Private...

  • Page 17
    ...loans and investments that will benefit the credit and capital needs of minority and lower-income households and communities • Earned "The Ron Brown Award for Corporate Leadership," a U.S. presidential award that recognizes companies for outstanding achievement in employee and community relations...

  • Page 18
    ... Committee 2. Compensation & Management Development Committee 3. Corporate Governance & Nominating Committee 4. Public Responsibility Committee 5. Risk Policy Committee Execut ive Commit t ee William B. Harrison, Jr. * Chairman and Chief Executive Officer James Dimon* President and Chief Operating...

  • Page 19
    ... management 76 Private equity risk management 77 Critical accounting estimates used by the Firm 80 Nonexchange-traded commodity contracts at fair value 80 Accounting and reporting developments Audited financial statements: 82 Management's report on internal control over financial reporting 83 Report...

  • Page 20
    ... investors worldwide. The Firm provides a full range of investment banking products and services, including advising on corporate strategy and structure, capital raising in equity and debt markets, sophisticated risk management, and market-making in cash securities and derivative instruments...

  • Page 21
    ... investment management to institutional investors across all asset classes. The Private bank and Private client services businesses provide integrated wealth management services to ultra-high-net-worth and high-net-worth clients, respectively. Other business events Electronic Financial Services...

  • Page 22
    ... in the allowance for credit losses related to the sale of a $4 billion manufactured home loan portfolio. Higher compensation expenses were due to continued expansion of the branch office network, including 130 new locations (106 net additional branches) opened during 2004 for the combined Firm...

  • Page 23
    ... with 2004, the Investment Bank expects a reduction in credit portfolio revenues, as both net interest income on loans and gains from workouts are likely to decrease. Financial market movements and activity levels also affect Asset & Wealth Management and Treasury & Securities Services. Asset...

  • Page 24
    ...672 Lending & deposit related fees Asset management, administration and commissions 7,967 1,874 Securities/private equity gains Mortgage fees and related income 1,004 4,840 Credit card income Other income 830 Noninterest revenue Net interest income Total net revenue 26,336 16,761 $ 43,097 (a) 2004...

  • Page 25
    ... origination and sales activity and other fees derived from volume and market-share growth. For a discussion of Mortgage fees and related income, which is primarily recorded in RFS's Home Finance business, see the Home Finance discussion on pages 34-36 of this Annual Report. Credit card income rose...

  • Page 26
    ...tax rate for 2004, as compared with 2003, was the result of various factors, including lower reported pre-tax income, a higher level of business tax credits, and changes in the proportion of income subject to federal, state and local taxes, partially offset by purchase accounting adjustments related...

  • Page 27
    ... statement by reclassifying as credit card income, interest income, certain fee revenue, and recoveries in excess of interest paid to the investors, gross credit losses and other trust expenses related to the securitized receivables. For a reconciliation of reported to managed basis of Card Services...

  • Page 28
    ... per share and ratio data) Revenue Investment banking fees Trading revenue(c) Lending & deposit related fees Asset management, administration and commissions Securities/private equity gains Mortgage fees and related income Credit card income Other income Noninterest revenue(c) Net interest income...

  • Page 29
    ... Reported $ 216,364 733,357 Securitized $ 30,722 26,519 Managed $ 247,086 759,876 Overhead ratio Reported Total noninterest expense / Total net revenue Operating Total noninterest expense / Total net revenue * Represents earnings applicable to common stock JPMorgan Chase & Co. / 2004 Annual Report...

  • Page 30
    ...Bank Product types: • Investment banking: - Advisory - Debt and equity underwriting • Market-making and trading: - Fixed income - Equities - Credit • Corporate lending JPMorgan Card Partners Services Businesses: • Credit Card • Merchant Acquiring Commercial Banking Businesses: • Middle...

  • Page 31
    ...Year ended December 31, (in millions, except ratios) Investment Bank Retail Financial Services Card Services Commercial Banking Treasury & Securities Services Asset & Wealth Management Corporate Total 2004 $ 2,948 2,199 1,274 608 440 681 61 $ 8,211 Operating earnings 2003 $ 2,805 1,547 683 307 422...

  • Page 32
    ... the Merger. The decline in revenue from Fixed income markets was driven by weaker portfolio management trading results, mainly in the interest rate markets business. Total credit portfolio revenues were down due to lower net interest income and lending fees, primarily driven by lower loan balances...

  • Page 33
    ... 31,(a) (in millions, except headcount and ratios) Revenue by business Investment banking fees Fixed income markets Equities markets Credit portfolio Total net revenue Revenue by region Americas Europe/Middle East/Africa Asia/Pacific Total net revenue $ 2004 3,572 6,314 1,491 1,228 $ 2003 2,871...

  • Page 34
    ... corporate debt, foreign exchange, interest rate and commodities markets. Equities markets includes client and portfolio management revenue related to market-making and proprietary risk-taking across global equity products, including cash instruments, derivatives and convertibles. Credit portfolio...

  • Page 35
    ... income statement data Year ended December 31,(a) (in millions, except ratios) Revenue Lending & deposit related fees Asset management, administration and commissions Securities/private equity gains (losses) Mortgage fees and related income Credit card income Other income Noninterest revenue Net...

  • Page 36
    ... 955 0.48% NA 181 NA Selected income statement data by business Year ended December 31,(a) (in millions) Prime production and servicing Production Servicing: Mortgage servicing revenue, net of amortization MSR risk management results Total net revenue Noninterest expense Operating earnings Consumer...

  • Page 37
    ... Bank One home equity lending business but also reflected growth in retained loan balances and a $95 million net benefit associated with the sale of the $4 billion manufactured home loan portfolio; partially offsetting these increases were lower subprime mortgage securitization gains. These factors...

  • Page 38
    ... Banking offers a full array of financial services through a branch network spanning 17 states as well as through the Internet. Product offerings include checking and savings accounts, mutual funds and annuities, credit cards, mortgages and home equity loans, and loans for small business customers...

  • Page 39
    ... Consumer & Small Business Banking. • Personal bankers - Retail branch office personnel who acquire, retain and expand new and existing customer relationships by assessing customer needs and recommending and selling appropriate banking products and services. • Investment sales representatives...

  • Page 40
    ...protection. Products and services are distributed through both internal lines of business and external markets. Selected income statement data Year ended December 31,(a) (in millions) Total net revenue Noninterest expense Operating earnings Memo: Consolidated gross insurance-related revenue(b) 2004...

  • Page 41
    ... (such as net charge-off rates) of the entire managed credit card portfolio. Operating results exclude the impact of credit card securitizations on revenue, the provision for credit losses, net charge-offs and receivables. Securitization does not change reported net income versus operating earnings...

  • Page 42
    ... cash advance activity. • Net accounts opened - Includes originations, purchases and sales. • Merchant acquiring business - Represents an entity that processes payments for merchants. JPMorgan Chase is a majority owner of Paymentech, Inc. and a 50% owner of Chase Merchant Services. • Bank card...

  • Page 43
    ...Banking manages a customer base and loan portfolio that is highly diversified across a broad range of industries and geographic locations. Commercial Banking was known prior to the Merger as Chase Middle Market and was a business within the former Chase Financial Services. Selected income statement...

  • Page 44
    ..., through loan syndications, investment-grade debt, assetbacked securities, private placements, high-yield bonds and equity underwriting, and balance sheet and risk management tools through foreign exchange, derivatives, M&A and advisory services. 42 JPMorgan Chase & Co. / 2004 Annual Report

  • Page 45
    ... corporate deposit pricing methodology in 2004 and wider deposit spreads. Growth in fees and commissions was driven by a 20% increase in assets under custody to $9.1 trillion as well as new business growth in trade, commercial card, global equity products, securities lending, fund services, clearing...

  • Page 46
    ...) Corporate trust securities under administration (in billions)(c) Selected balance sheet (average) Total assets Loans Deposits U.S. deposits Non-U.S. deposits Total deposits Equity Memo Treasury Services firmwide deposits(d) Treasury & Securities Services firmwide deposits(d) Headcount $ 2004...

  • Page 47
    ...delivers investment management to institutional investors across all asset classes. The Private bank and Private client services businesses provide integrated wealth management services to ultra-high-net-worth and high-net-worth clients, respectively. The Provision for credit losses was a benefit of...

  • Page 48
    ..., asset-liability management, active risk budgeting and overlay strategies. Private client services offers high-net-worth individuals, families and business owners comprehensive wealth management solutions that include financial planning, personal trust, investment and banking products and services...

  • Page 49
    ... Equity Partners businesses. Treasury manages the structural interest rate risk and investment portfolio for the Firm. The corporate staff areas include Central Technology and Operations, Internal Audit, Executive Office, Finance, General Services, Human Resources, Marketing & Communications, Office...

  • Page 50
    ... (losses) Total direct investments Third-party fund investments Total private equity gains (losses) Other income Net interest income Total net revenue Total noninterest expense Operating earnings (loss) before income tax expense Income tax expense (benefit) Operating earnings (losses) $ 2004 2003...

  • Page 51
    ..., foreign exchange, equity, credit and commodity derivatives for market-making, proprietary risk-taking and risk management purposes. The decline from 2003 was primarily due to the Firm's election, effective January 1, 2004, to report the fair value of derivative assets and liabilities net of cash...

  • Page 52
    ... investment banking clients, yielding a forwardlooking measure of credit risk. This facilitates more active risk management by utilizing the growing market in credit derivatives and secondary market loan sales. For privately-held firms in the commercial banking portfolio, default likelihood is based...

  • Page 53
    ... risk capital models. Private equity risk capital Capital is allocated to publicly- and privately-held securities and third party fund investments and commitments in the Private Equity portfolio to cover the potential loss associated with a decline in equity markets and related asset devaluations...

  • Page 54
    ... investment products for clients. These arrangements are an important part of the financial markets, providing market liquidity by facilitating investors' access to specific portfolios of assets and risks. For example, SPEs are integral to the markets for mortgage-backed securities, commercial paper...

  • Page 55
    ... of credit(a) Total wholesale Total lending-related commitments Contractual cash obligations By remaining maturity at December 31, 2004 (in millions) Certificates of deposit of $100,000 and over Long-term debt Trust preferred capital securities FIN 46R long-term beneficial interests(c) Operating...

  • Page 56
    ...Risk Committee Retail Financial Services Risk & Credit Policy Committee Card Services Risk Committee Commercial Banking Risk Committee Treasury & Securities Services Risk Committee Asset & Wealth Management Risk Committee Overlaying risk management within the lines of business is the corporate...

  • Page 57
    ...'s credit risk, market risk, interest rate risk, investment risk and liquidity risk, and is also responsible for review of the Firm's fiduciary and asset management activities. Both committees are responsible for oversight of reputational risk. The Chief Risk Officer and other management report on...

  • Page 58
    ... management policy, the Firm has raised funds at the parent holding company sufficient to cover maturing obligations over the next 12 months and to support the less liquid assets on its balance sheet. High investor cash positions and increased foreign investor participation in the corporate markets...

  • Page 59
    ...Credit Portfolio Group • Manages risk in credit positions from traditional lending and derivative trading activities, through the purchase or sale of credit derivative hedges, other market instruments and secondary market loan sales • Manages derivatives collateral risk Risk Management Services...

  • Page 60
    ... manufactured home loan portfolio, de-emphasizing vehicle leasing and, subsequent to year-end 2004, the sale of a $2 billion recreational vehicle portfolio. Continued growth in the core consumer lending product set (residential real estate, auto and education finance, credit cards and small business...

  • Page 61
    ... Chase only. Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management. Amounts are presented gross of the Allowance for loan losses. Net charge-off rates exclude year-to-date average wholesale loans HFS of $6.4 billion and $3.8 billion for 2004...

  • Page 62
    ... ratings scale is based on the Firm's internal risk ratings and is presented on an S&P-equivalent basis. Wholesale exposure At December 31, 2004 (in billions, except ratios) Loans Derivative receivables(b) Interests in purchased receivables Lending-related commitments(b)(c) Total exposure(d) Credit...

  • Page 63
    ...December 31, 2004 (in millions, except ratios) Top 10 industries(a) Banks and finance companies Real estate Healthcare Retail and consumer services Consumer products Utilities Asset managers State and municipal governments Securities firms and exchanges Media All other Total Credit exposure(c) $ 56...

  • Page 64
    ...receivables marked to market ("MTM") Notional amounts(a) As of December 31, (in billions) Interest rate Foreign exchange Equity Credit derivatives Commodity Total Collateral held against derivative receivables Exposure net of collateral 2004 $ 37,022 1,886 434 1,071 101 40,514 NA NA 2003(b) $ 31,252...

  • Page 65
    ...market environment. The Firm believes that active risk management is essential to controlling the dynamic credit risk in the derivatives portfolio. The Firm risk manages its exposure to changes in CVA by entering into credit derivative transactions, as well as interest rate, foreign exchange, equity...

  • Page 66
    ... recognized in Net interest income, and impairment is recognized in the Provision for credit losses. This asymmetry in accounting treatment, between loans and lending-related commitments and the credit derivatives utilized in portfolio management 64 JPMorgan Chase & Co. / 2004 Annual Report

  • Page 67
    ... process for measuring and managing its exposures and risk in emerging markets countries - defined as those countries potentially vulnerable to sovereign events. Exposures to a country include all credit-related lending, trading, and investment activities, whether cross-border or locally funded...

  • Page 68
    ... 5.64 2.31 NA 2.31 NA NA NA NA NA 2.31% Total consumer loans - managed(b) Assets acquired in loan satisfactions Total consumer related assets - managed Consumer lending-related commitments: Home finance Auto & education finance Consumer & small business and other Credit cards Total lending-related...

  • Page 69
    ...and lending-related categories within the consumer portfolio: Retail Financial Services Average RFS loan balances for 2004 were $163 billion. New loans originated in 2004 reflect higher credit quality, consistent with management's focus on the prime credit market segment. The net charge-off rate for...

  • Page 70
    ... the Operating Committee, relative to the risk profile of the Firm's credit portfolio and current economic conditions. The allowance is adjusted based on that review if, in management's judgment, changes are warranted. The allowance includes an asset-specific component and a formula-based component...

  • Page 71
    ... the Merger. For the year ended December 31,(a) (in millions) Investment Bank Commercial Banking Treasury & Securities Services Asset & Wealth Management Corporate Total Wholesale Retail Financial Services Card Services Total Consumer Accounting policy conformity(b) Total provision for credit losses...

  • Page 72
    ... level of client activity. Other risks include passive long-term investments in numerous hedge funds that may have exposure to fixed income, foreign exchange, equity and commodity risk within their portfolio risk structures. Nontrading risk The execution of the Firm's core business strategies, the...

  • Page 73
    ... the Firm's products have embedded optionality that impact pricing and balance levels. The Firm manages interest rate exposure related to its assets and liabilities on a consolidated, corporate-wide basis. Business units transfer their interest rate risk to Treasury through a transfer-pricing system...

  • Page 74
    ... mark-to-market trading activities in the IB, plus available for sale securities held for the IB's proprietary purposes. Amounts exclude VAR related to the Firm's private equity business. For a discussion of Private equity risk management, see page 76 of this Annual Report. (b) 2004 results include...

  • Page 75
    ... assessment of developing market trends. They are continually reviewed and updated to reflect changes in the Firm's risk profile and economic events. Stress-test results, trends and explanations are provided each month to the Firm's executive management and to the lines of business to help them...

  • Page 76
    ... financial instruments cannot be valued based on quoted market prices but are instead valued using pricing models. Such models are used for management of risk positions, such as reporting risk against limits, as well as for valuation. A model review group, independent of the lines of business units...

  • Page 77
    ...Audit partners with business management and members of the control community in providing guidance on the operational risk framework, and reviews the effectiveness and accuracy of the business self-assessment process as part of its business unit audits. JPMorgan Chase & Co. / 2004 Annual Report 75

  • Page 78
    ... to sales and risk management issues. Risk management programs are limited but are considered when practical and as circumstances dictate. Over time, the Firm may change the nature and type of Private equity risk management programs it enters into. 76 JPMorgan Chase & Co. / 2004 Annual Report

  • Page 79
    ... majority of the Firm's assets reported at fair value are based on quoted market prices or on internally developed models that utilize independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates. The degree of management judgment involved in...

  • Page 80
    ... derivatives and loans with similar characteristics. If market prices are not available, fair value is based on the estimated cash flows, adjusted for credit risk that is discounted using a rate appropriate for each maturity that incorporates the effects of interest rate changes. Private equity...

  • Page 81
    ..., which would be recorded as a charge against Net income. The fair values of the reporting units are determined using discounted cash flow models based on each reporting unit's internal forecasts. In addition, analysis using market-based trading and transaction multiples, where available, are used...

  • Page 82
    ... the SFAS 123 approach. However, SFAS 123R requires all sharebased payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. 80 JPMorgan Chase & Co. / 2004 Annual Report

  • Page 83
    ... 2004 Consolidated financial statements. Accounting for certain loans or debt securities acquired in a transfer In December 2003, the AICPA issued SOP 03-3, which requires that loans purchased at a discount due to poor credit quality be recorded at fair value and prohibits the recognition of a loss...

  • Page 84
    ... registered public accounting firm, who also audited the Firm's financial statements as of and for the year ended December 31, 2004, as stated in their report which is included herein. William B. Harrison, Jr. Chairman and Chief Executive Officer James Dimon President and Chief Operating Officer...

  • Page 85
    ..., the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of JPMorgan Chase & Co. and its subsidiaries (the "Company") at December 31, 2004 and 2003...

  • Page 86
    ...of income JPMorgan Chase & Co. Year ended December 31, (in millions, except per share data)(a) Revenue Investment banking fees Trading revenue Lending & deposit related fees Asset management, administration and commissions Securities/private equity gains Mortgage fees and related income Credit card...

  • Page 87
    ... Loans Allowance for loan losses Loans, net of Allowance for loan losses Private equity investments Accrued interest and accounts receivable Premises and equipment Goodwill Other intangible assets: Mortgage servicing rights Purchased credit card relationships All other intangibles Other assets Total...

  • Page 88
    ... at beginning of year Purchase of treasury stock Reissuance from treasury stock Share repurchases related to employee stock-based awards Balance at end of year Total stockholders' equity Comprehensive income Net income Other comprehensive income (loss) Comprehensive income $ 2004 1,009 (670) 339...

  • Page 89
    ...to sales and securitizations Net cash received (used) in business acquisitions All other investing activities, net Net cash (used in) provided by investing activities Financing Activities Net change in: Deposits Federal funds purchased and securities sold under repurchase agreements Commercial paper...

  • Page 90
    ... services for consumers and businesses, financial transaction processing, investment management, private banking and private equity. For a discussion of the Firm's business segment information, see Note 31 on pages 126-127 of this Annual Report. The accounting and financial reporting policies...

  • Page 91
    ... employee benefit plans Employee stock-based incentives Securities and private equity investments Securities financing activities Loans Allowance for credit losses Loan securitizations Variable interest entities Goodwill and other intangible assets Premises and equipment Income taxes Derivative...

  • Page 92
    ... Core deposit intangibles $ 3,650 Purchased credit card relationships 3,340 Other credit card-related intangibles 295 Other customer relationship intangibles 870 Subtotal Indefinite-lived asset management intangibles Total 8,155 510 $ 8,665 Up to 20 NA (a) 2004 results include six months of the...

  • Page 93
    ... changes occur. Net interest income and securities gains and losses on AFS securities used in mortgage-related risk management activities are not included in Mortgage fees and related income. For a further discussion of MSRs, see Note 15 on pages 109-111 of this Annual Report. Credit card income...

  • Page 94
    ... changes in fair value over a five-year period, is used to determine the expected return on plan assets. Unrecognized net actuarial gains and losses are amortized over the average remaining service period of active plan participants, if required. 92 JPMorgan Chase & Co. / 2004 Annual Report

  • Page 95
    ... One Actual return on plan assets Firm contributions Benefits paid Settlement payments Foreign exchange impact and other Fair value of plan assets at end of year Reconciliation of funded status Funded status Unrecognized amounts: Net transition asset Prior service cost Net actuarial (gain) loss 2004...

  • Page 96
    ... for the expected effect on returns from changing yields. Other asset-class returns are derived from their relationship to the equity and bond markets. For the year ended December 31, Weighted-average assumptions used to determine benefit obligations Discount rate Rate of compensation increase In...

  • Page 97
    ... asset classes diversified by market segment, economic sector and issuer. Specifically, the goal is to optimize the asset mix for future benefit obligations, while managing various risk factors and each plan's investment return objectives. For example, long-duration fixed income securities are...

  • Page 98
    ... stock price targets are not achieved. Broad-based employee stock options In January 2004, JPMorgan Chase granted a total of 6.3 million options and SARs to all eligible full-time (75 options each) and part-time (38 options each) employees under the Value Sharing Plan, a nonshareholder-approved plan...

  • Page 99
    ... employee Broad-based employee 10.71 Converted Bank One options 14.05 Restricted stock and RSUs (all payable solely in stock) 39.58 Weighted-average annualized stock option valuation assumptions 3.44% Risk-free interest rate 3.59 Expected dividend yield(b) Expected common stock price volatility 41...

  • Page 100
    ...or in anticipation of changes in market conditions, or as part of the Firm's management of its structural interest rate risk. AFS securities are carried at fair value on the Consolidated balance sheets. Unrealized gains and losses after SFAS 133 valuation adjustments are reported as net increases or...

  • Page 101
    ...value Gross unrealized losses Total Fair value Total Gross unrealized losses December 31, 2004 (in millions) Available-for-sale securities U.S. government and federal agencies/corporations obligations: Mortgage-backed securities Collateralized mortgage obligations U.S. treasuries Agency obligations...

  • Page 102
    ... financial statements JPMorgan Chase & Co. Private equity investments are primarily held by the Private Equity business within Corporate (which includes JPMorgan Partners, reported as a standalone business segment prior to the Merger, and Bank One's ONE Equity Partners). The Private Equity business...

  • Page 103
    ... Heritage JPMorgan Chase only. (b) Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management. (c) Represents credits extended for real estate-related purposes to borrowers who are primarily in the real estate development or investment businesses and...

  • Page 104
    ...for credit losses is reviewed by the Chief Risk Officer and the Deputy Chief Risk Officer of the Firm and is discussed with a risk subgroup of the Operating Committee, relative to the risk profile of the Firm's credit portfolio and current economic conditions. As of December 31, 2004, JPMorgan Chase...

  • Page 105
    ... in Loans. JPMorgan Chase retains servicing responsibilities for all residential mortgage, credit card and automobile loan securitizations and for certain wholesale activity securitizations it sponsors, and receives annual servicing fees based JPMorgan Chase & Co. / 2004 Annual Report 103

  • Page 106
    ... National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("Freddie Mac"). For a discussion of mortgage servicing rights, see Note 15 on pages 109-111 of this Annual Report. Year ended December 31,(a) (in millions) Principal securitized Pre-tax gains (losses) Cash flow...

  • Page 107
    ... 0.0-3.6 NA 2003(b) Automobile 0.9% 0.9 NA Mortgage 0.0-2.4% 0.0-2.8 0.1-3.7 2002(b) Automobile 0.8% 0.8 0.9 (a) Static-pool losses not applicable to credit card securitizations, due to their revolving structure. (b) Heritage JPMorgan Chase only. JPMorgan Chase & Co. / 2004 Annual Report 105

  • Page 108
    ...other financial assets pursuant to agreements with customers. The entities fund their purchases and loans through the issuance of highly-rated commercial paper. The primary source of repayment of the commercial paper is the cash flow from the pools of assets. 106 JPMorgan Chase & Co. / 2004 Annual...

  • Page 109
    ...funds a diversified portfolio of highly rated assets by issuing commercial paper, medium-term notes and capital. The assets and liabilities of this SIV were approximately $7.1 billion and are included in the Firm's Consolidated balance sheet at December 31, 2004. Client intermediation As a financial...

  • Page 110
    ... directly by JPMorgan Chase. The Firm is involved with municipal bond vehicles for the purpose of creating a series of secondary market trusts that allow tax-exempt investors to finance their investments at short-term tax-exempt rates. The VIE purchases fixed-rate, longer-term highly rated municipal...

  • Page 111
    ...- 61 1,390 4,153 377 $ 8,511 Investment Bank $ 3,309 Retail Financial Services 15,022 Card Services 12,781 Commercial Banking 2,650 Treasury & Securities Services 2,044 Asset & Wealth Management 7,020 Corporate (Private Equity) 377 Total goodwill (a) Heritage JPMorgan Chase only. $ 43,203 Note 15...

  • Page 112
    ... and losses on AFS securities are reported in Other comprehensive income. Finally, certain nonhedge derivatives, which have not been designated by management in SFAS 133 hedge relationships, are used to manage the economic risk exposure of MSRs and are recorded in Mortgage fees and related income...

  • Page 113
    ... Purchased credit card relationships Other credit card-related intangibles Core deposit intangibles All other intangibles Total amortization expense $ (a) Includes $16 million of amortization expense related to servicing assets on securitized automobile loans, which is recorded in Asset management...

  • Page 114
    ...the corresponding junior subordinated debentures in its Consolidated statements of income. The Firm also records the common capital securities issued by the issuer trusts in Other assets in its Consolidated balance sheets at December 31, 2004 and 2003. 112 JPMorgan Chase & Co. / 2004 Annual Report

  • Page 115
    ... unamortized discount amounts. The principal amount of debentures held by the trusts includes the impact of hedging and purchase accounting fair value adjustments that are recorded on the Firm's financial statements. Note 18 - Preferred stock JPMorgan Chase is authorized to issue 200 million shares...

  • Page 116
    ... gains and losses on AFS securities, cash flow hedging activities and foreign currency translation adjustments (including the impact of related derivatives). Year ended December 31,(a) (in millions) Balance at December 31, 2001 Net change Balance at December 31, 2002 Net change Balance at December...

  • Page 117
    ... 866 Cash flow hedges: Net unrealized holdings gains (losses) arising during the period, net of taxes(d) $ 34 Reclassification adjustment for (gains) losses included in income, net of taxes(e) (130) Net change $ (96) $ 86 (631) $ 663 144 $ 807 $ (545) (a) 2004 results include six months of the...

  • Page 118
    ... to 10% of the banking subsidiary's total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such loans is limited to 20% of the banking subsidiary's total capital. The principal sources of JPMorgan Chase's income (on a parent companyonly basis) are dividends...

  • Page 119
    ... under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company. The following table shows the components of the Firm's Tier 1 and total capital: December 31, (in millions) 2004 2003(a) $ 46,154...

  • Page 120
    ... of variables such as equity, foreign exchange, credit, commodity or interest rate prices or indices. JPMorgan Chase makes markets in derivatives for its customers and also is an end-user of derivatives in order to manage the Firm's exposure to credit and market risks. SFAS 133, as amended...

  • Page 121
    ...respectively, of asset purchase agreements to structured wholesale loan vehicles and other third-party entities. The allowance for credit losses on lending-related commitments related to these agreements was insignificant at December 31, 2004 and 2003. JPMorgan Chase & Co. / 2004 Annual Report 119

  • Page 122
    ... credit losses on lending-related commitments at December 31, 2004 and 2003, included $292 million and $165 million, respectively, related to standby letters of credit and financial guarantees. The Firm holds customers' securities under custodial arrangements. At times, these securities are loaned...

  • Page 123
    ...: 2004 December 31, (in billions) Wholesale-related: Banks and finance companies Real estate Healthcare Retail and consumer services Consumer products All other wholesale Total wholesale-related Consumer-related: Home finance Auto & education finance Consumer & small business and other Credit card...

  • Page 124
    ... due to their variable interest terms and negligible credit risk. The estimated fair values for fixed-rate interests in purchased receivables are determined using a discounted cash flow analysis using appropriate market rates for similar instruments. 122 JPMorgan Chase & Co. / 2004 Annual Report

  • Page 125
    ... discount rates used for credit card receivables incorporate only the effects of interest rate changes, since the expected cash flows already reflect an adjustment for credit risk. • The fair value of loans in the held-for-sale and trading portfolios is generally based on observable market prices...

  • Page 126
    .... 2004 December 31, (in billions) Financial assets $ Assets for which fair value approximates carrying value Federal funds sold and securities purchased under resale agreements Trading assets Securities Loans: Wholesale, net of allowance for loan losses Consumer, net of allowance for loan losses...

  • Page 127
    ... on pages 126-127 of this Annual Report. The Firm's long-lived assets for the periods presented are not considered by management to be significant in relation to total assets. The majority of the Firm's long-lived assets are located in the United States. Income before income taxes $ 1,931 865 405 35...

  • Page 128
    ... 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 Middle Market moved into Commercial Banking, and Chase Cardmember Services is now its own segment called Card Services...

  • Page 129
    ... corporate support areas, which include Central Technology and Operations, Internal Audit, Executive Office, Finance, General Services, Human Resources, Marketing & Communications, the Office of General Counsel, Real Estate and Business Services, Risk Management and Strategy and Development. Segment...

  • Page 130
    ... Net income Parent company - balance sheets December 31, (in millions) Assets Cash with banks, primarily with bank subsidiaries Deposits with banking subsidiaries Securities purchased under resale agreements, primarily with nonbank subsidiaries Trading assets Available-for-sale securities Loans...

  • Page 131
    ...' equity Total stockholders' equity Credit quality metrics Allowance for credit losses Nonperforming assets Allowance for loan losses to total loans(e) Net charge-offs Net charge-off rate(c)(f) Wholesale net charge-off rate(c)(f) Managed Card net charge-off rate(c) Headcount Share price(g) High Low...

  • Page 132
    ...' equity Total stockholders' equity Credit quality metrics Allowance for credit losses Nonperforming assets Allowance for loan losses to total loans(c) Net charge-offs Net charge-off rate(d) Headcount Share price(e) High Low Close (a) (b) (c) (d) Heritage JPMorgan Chase only 2004(a) $ 16...

  • Page 133
    ... Creation Act of 2004." Investment-grade: An indication of credit quality based on JPMorgan Chase's internal risk assessment system. "Investment-grade" generally represents a risk profile similar to a rating of a BBB-/Baa3 or better, as defined by independent rating agencies. Mark-to-market exposure...

  • Page 134
    ..., DC Luis M iranda Chairman Audubon Partnership for Economic Development New York, NY M arlon M itchell Executive Director City of Houston Small Business Development Corp. Houston, TX (continued on next page) * Board membership as of January 2005 132 JPM organ Chase & Co. / 2004 Annual Report

  • Page 135
    ... Director National Federation of Community Development Credit Unions New York, NY Winston Ross Executive Director Westchester Community Opportunity Program Elmsford, NY David Scheck Executive Director NJ Community Capital Corp. Trenton, NJ Doris Schnider President Delaw are Community Investment Corp...

  • Page 136
    ...Group Richard W. Scott Senior M anaging Director, Head of Global Fixed Income AIG Global Investment Group, Inc. David L. Shedlarz Executive Vice President and Chief Financial Officer Pfizer Inc. Henry R. Silverman Chairman and Chief Executive Officer Cendant Corporation Barry S. Sternlicht Executive...

  • Page 137
    ...& Company New York, New York M ichael A. Chaney M anaging Director Wesfarmers Limited Perth, Australia André Desmarais President and Co-Chief Executive Officer Pow er Corporation of Canada M ontreal, Canada M artin Feldstein President and Chief Executive Officer National Bureau of Economic Research...

  • Page 138
    ... predecessor company. • The Board determined to maintain the existing Board committee structure with the principal committees consisting of Audit, Compensation & Management Development, Corporate Governance & Nominating, Public Responsibility and Risk Policy. Each committee reviewed its charter...

  • Page 139
    ... e rs 270 Park Avenue New York, New York 10017-2070 Telephone: 212-270-6000 http://www.jpmorganchase.com Principa l subsidia rie s JPMorgan Chase Bank, National Association Chase Bank USA, National Association J.P. Morgan Securities Inc. Annua l re port on Form 10-K The Annual Report on Form 10-K of...