JP Morgan Chase 2008 Annual Report Download - page 59

JPMorgan Chase & Co./ 2008 Annual Report 57
RETAIL FINANCIAL SERVICES
On September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual from the FDIC for $1.9 billion
through a purchase of substantially all of the assets and assumption
of specified liabilities of Washington Mutual. Washington Mutual’s
banking operations consisted of a retail bank network of 2,244
branches, a nationwide credit card lending business, a multi-family
and commercial real estate lending business, and nationwide mort-
gage banking activities. The transaction expanded the Firm’s U.S.
consumer branch network in California, Florida, Washington,
Georgia, Idaho, Nevada and Oregon and created the nation’s third-
largest branch network.
During the first quarter of 2006, RFS completed the purchase of
Collegiate Funding Services, which contributed a student loan servic-
ing capability and provided an entry into the Federal Family
Education Loan Program consolidation market. On July 1, 2006, RFS
sold its life insurance and annuity underwriting businesses to
Protective Life Corporation. On October 1, 2006, JPMorgan Chase
completed the Bank of New York transaction, significantly strength-
ening RFS’ distribution network in the New York tri-state area.
Selected income statement data
Year ended December 31,
(in millions) 2008 2007 2006
Revenue
Lending & deposit-related fees $ 2,546 $ 1,881 $ 1,597
Asset management, administration
and commissions 1,510 1,275 1,422
Securities gains (losses) —1 (57)
Mortgage fees and related income(a) 3,621 2,094 618
Credit card income 939 646 523
Other income 739 882 557
Noninterest revenue 9,355 6,779 4,660
Net interest income 14,165 10,526 10,165
Total net revenue 23,520 17,305 14,825
Provision for credit losses 9,905 2,610 561
Noninterest expense
Compensation expense(a) 5,068 4,369 3,657
Noncompensation expense(a) 6,612 5,071 4,806
Amortization of intangibles 397 465 464
Total noninterest expense 12,077 9,905 8,927
Year ended December 31,
(in millions, except ratios) 2008 2007 2006
Income before income
tax expense 1,538 4,790 5,337
Income tax expense 658 1,865 2,124
Net income $ 880 $ 2,925 $ 3,213
Financial ratios
ROE 5% 18% 22%
Overhead ratio 51 57 60
Overhead ratio excluding core
deposit intangibles(b) 50 55 57
(a) The Firm adopted SFAS 159 in the first quarter of 2007. As a result, beginning in
the first quarter of 2007, certain loan-origination costs have been classified as
expense.
(b) Retail Financial Services uses the overhead ratio (excluding the amortization of core
deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the under-
lying 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 method would result in an improving
overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes
Retail Banking’s core deposit intangible amortization expense related to the Bank of
New York transaction and the Bank One merger of $394 million, $460 million and
$458 million for the years ended December 31, 2008, 2007 and 2006, respectively.
2008 compared with 2007
Net income was $880 million, a decrease of $2.0 billion, or 70%,
from the prior year, as a significant increase in the provision for cred-
it losses was partially offset by positive MSR risk management results
and the positive impact of the Washington Mutual transaction.
Total net revenue was $23.5 billion, an increase of $6.2 billion, or
36%, from the prior year. Net interest income was $14.2 billion, up
$3.6 billion, or 35%, benefiting from the Washington Mutual trans-
action, wider loan and deposit spreads, and higher loan and deposit
balances. Noninterest revenue was $9.4 billion, up $2.6 billion, or
38%, as positive MSR risk management results, the impact of the
Washington Mutual transaction, higher mortgage origination volume
and higher deposit-related fees were partially offset by an increase in
reserves related to the repurchase of previously sold loans and mark-
downs on the mortgage warehouse.
The provision for credit losses was $9.9 billion, an increase of $7.3
billion from the prior year. Delinquency rates have increased due to
overall weak economic conditions, while housing price declines have
continued to drive increased loss severities, particularly for high loan-
to-value home equity and mortgage loans. The provision includes $4.7
billion in additions to the allowance for loan losses for the heritage
Chase home equity and mortgage portfolios. Home equity net charge-
offs were $2.4 billion (2.23% net charge-off rate; 2.39% excluding
purchased credit-impaired loans), compared with $564 million
(0.62% net charge-off rate) in the prior year. Subprime mortgage net
charge-offs were $933 million (5.49% net charge-off rate; 6.10%
excluding purchased credit-impaired loans), compared with $157 mil-
lion (1.55% net charge-off rate) in the prior year. Prime mortgage net
charge-offs were $526 million (1.05% net charge-off rate; 1.18%
excluding purchased credit-impaired loans), compared with $33 mil-
lion (0.13% net charge-off rate) in the prior year. The provision for
credit losses was also affected by an increase in estimated losses for
the auto, student and business banking loan portfolios.
Retail Financial Services, which includes the Retail Banking
and Consumer Lending reporting segments, serves con-
sumers and businesses through multiple channels.
Customers can use more than 5,400 bank branches (third-
largest nationally), 14,500 ATMs (second-largest nationally)
as well as online and mobile banking. More than 21,400
branch salespeople assist customers with checking and
savings accounts, mortgages, home equity and business
loans, and investments across the 23-state footprint from
New York and Florida to California. Consumers also can
obtain loans through more than 16,000 auto dealerships
and 4,800 schools and universities nationwide.