JP Morgan Chase 2006 Annual Report Download - page 41

JPMorgan Chase & Co. / 2006 Annual Report 39
Regional Banking
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2006 2005 2004(b)
Noninterest revenue $ 3,204 $ 3,138 $1,975
Net interest income 8,768 8,531 5,949
Total net revenue 11,972 11,669 7,924
Provision for credit losses 354 512 239
Noninterest expense 6,825 6,675 4,978
Income before income tax expense 4,793 4,482 2,707
Net income $ 2,884 $ 2,780 $1,697
ROE 27% 31% 34%
ROA 1.79 1.84 1.53
Overhead ratio 57 57 63
Overhead ratio excluding core
deposit intangibles(a) 53 53 59
(a) Regional Banking uses the overhead ratio (excluding the amortization of core deposit intan-
gibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of
the business. Including CDI amortization expense in the overhead ratio calculation results in
a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this
inclusion would result in an improving overhead ratio over time, all things remaining equal.
This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization
expense related to The Bank of New York transaction and the Bank One merger of $458 mil-
lion, $496 million and $264 million for the years ended December 31, 2006, 2005 and
2004, respectively.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
2006 compared with 2005
Regional Banking Net income of $2.9 billion was up by $104 million from the
prior year. Total net revenue of $12.0 billion was up by $303 million, or 3%,
including the impact of a $233 million current-year loss resulting from $13.3 bil-
lion of mortgage loans transferred to held-for-sale and a prior-year loss of $120
million resulting from $3.3 billion of mortgage loans transferred to held-for-sale.
Results benefited from The Bank of New York transaction; the acquisition of
Collegiate Funding Services; growth in deposits and home equity loans; and
increases in deposit-related fees and credit card sales. These benefits were offset
partially by the sale of the insurance business, narrower spreads on loans, and a
shift to narrower-spread deposit products. The Provision for credit losses
decreased by $158 million, primarily the result of a $230 million special provision
in the prior year related to Hurricane Katrina, which was offset partially by addi-
tional Allowance for loan losses related to the acquisition of loans from The Bank
of New York and increased net charge-offs due to portfolio seasoning and deteri-
oration in subprime mortgages. Noninterest expense of $6.8 billion was up by
$150 million, or 2%, from the prior year. The increase was due to investments in
the retail distribution network, The Bank of New York transaction and the acquisi-
tion of Collegiate Funding Services, partially offset by the sale of the insurance
business, merger savings and operating efficiencies, and the absence of a $40
million prior-year charge related to the dissolution of a student loan joint venture.
2005 compared with 2004
Regional Banking Net income of $2.8 billion was up by $1.1 billion from the
prior year, including the impact of the Merger, and a current-year loss of $120
million resulting from $3.3 billion of mortgage loans transferred to held-for-
sale compared with a prior-year loss of $52 million resulting from $5.2 billion
of mortgage loans transferred to held-for-sale. Growth related to the Merger
was offset partially by the impact of a $230 million special provision for credit
losses related to Hurricane Katrina. Total net revenue of $11.7 billion was up
by $3.7 billion, benefiting from the Merger, wider spreads on increased
deposit balances, higher deposit-related fees and increased loan balances.
These benefits were offset partially by mortgage loan spread compression due
deposit-related fees. These benefits were offset in part by losses on portfolio
loan sales in Regional Banking and Auto Finance.
The Provision for credit losses totaled $724 million, up $275 million, or 61%,
from 2004. Results included a special provision in 2005 for Hurricane Katrina
of $250 million and a release in 2004 of $87 million in the Allowance for
loan losses related to the sale of the manufactured home loan portfolio.
Excluding these items, the Provision for credit losses would have been down
$62 million, or 12%. The decline reflected reductions in the Allowance for
loan losses due to improved credit trends in most consumer lending portfolios
and the benefit of certain portfolios in run-off. These reductions were offset
partially by the Merger and higher provision expense related to subprime
mortgage loans retained on the balance sheet.
Total noninterest expense rose to $8.6 billion, an increase of $1.8 billion from
the prior year, due primarily to the Merger. The increase also reflected contin-
ued investment in retail banking distribution and sales, increased depreciation
expense on owned automobiles subject to operating leases and a $40 million
charge related to the dissolution of a student loan joint venture. Expense
savings across all businesses provided a favorable offset.
Selected metrics
Year ended December 31,
(in millions, except headcount and ratios) 2006 2005 2004(e)
Selected ending balances
Assets $ 237,887 $ 224,801 $226,560
Loans(a) 213,504 197,299 202,473
Deposits 214,081 191,415 182,372
Selected average balances
Assets $ 231,566 $ 226,368 $185,928
Loans(b) 203,882 198,153 162,768
Deposits 201,127 186,811 137,404
Equity 14,629 13,383 9,092
Headcount 65,570 60,998 59,632
Credit data and quality statistics
Net charge-offs(c) $ 576 $ 572 $ 990
Nonperforming loans(d) 1,677 1,338 1,161
Nonperforming assets 1,902 1,518 1,385
Allowance for loan losses 1,392 1,363 1,228
Net charge-off rate(b) 0.31% 0.31% 0.67%
Allowance for loan losses to ending loans
(a)
0.77 0.75 0.67
Allowance for loan losses to
nonperforming loans(d) 89 104 107
Nonperforming loans to total loans 0.79 0.68 0.57
(a) Includes loans held-for-sale of $32,744 million, $16,598 million and $18,022 million at
December 31, 2006, 2005 and 2004, respectively. These amounts are not included in the
allowance coverage ratios.
(b) Average loans include loans held-for-sale of $16,129 million, $15,675 million and $14,736
million for 2006, 2005 and 2004, respectively. These amounts are not included in the net
charge-off rate.
(c) Includes $406 million of charge-offs related to the manufactured home loan portfolio in 2004.
(d ) Nonperforming loans include loans held-for-sale of $116 million, $27 million and $13 mil-
lion at December 31, 2006, 2005 and 2004, respectively. These amounts are not included in
the allowance coverage ratios.
(e) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.