JP Morgan Chase 2009 Annual Report Download - page 68

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report 66
RETAIL FINANCIAL SERVICES
Retail Financial Services, which includes the Retail Banking
and Consumer Lending businesses, serves consumers and
businesses through personal service at bank branches and
through ATMs, online banking and telephone banking, as
well as through auto dealerships and school financial-aid
offices. Customers can use more than 5,100 bank branches
(third-largest nationally) and 15,400 ATMs (second-largest
nationally), as well as online and mobile banking around
the clock. More than 23,900 branch salespeople assist cus-
tomers with checking and savings accounts, mortgages,
home equity and business loans, and investments across
the 23-state footprint from New York and Florida to Cali-
fornia. Consumers also can obtain loans through more than
15,700 auto dealerships and nearly 2,100 schools and uni-
versities nationwide.
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, Geor-
gia, Idaho, Nevada and Oregon and created the nation’s third-largest
branch network.
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2009 2008 2007
Revenue
Lending- and deposit-related fees $ 3,969 $
2,546
$
1,881
Asset management, administration
and commissions 1,674 1,510 1,275
Mortgage fees and related income 3,794 3,621 2,094
Credit card income 1,635 939 646
Other income 1,128 739 883
Noninterest revenue 12,200 9,355 6,779
Net interest income 20,492 14,165 10,526
Total net revenue 32,692 23,520 17,305
Provision for credit losses 15,940 9,905
2,610
Noninterest expense
Compensation expense 6,712 5,068 4,369
Noncompensation expense 9,706 6,612 5,071
Amortization of intangibles 330 397 465
Total noninterest expense 16,748 12,077 9,905
Income before income tax
expense/(benefit) 4
1,538
4,790
Income tax expense/(benefit) (93) 658
1,865
Net income $ 97 $ 880
$
2,925
Financial ratios
ROE —% 5%
18
%
Overhead ratio 51 51
57
Overhead ratio excluding core
deposit intangibles(a) 50 50
55
(a) Retail Financial Services uses the overhead ratio (excluding the amortization
of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evalu-
ate the underlying expense trends of the business. Including CDI amortization
expense in the overhead ratio calculation would result in a higher overhead
ratio in the earlier years and a lower overhead ratio in later years; this method
would therefore result in an improving overhead ratio over time, all things
remaining equal. The 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 $328 million, $394 million and $460 million for
the years ended December 31, 2009, 2008 and 2007, respectively.
2009 compared with 2008
Net income was $97 million, a decrease of $783 million from the
prior year, as the increase in provision for credit losses more than
offset the positive impact of the Washington Mutual transaction.
Net revenue was $32.7 billion, an increase of $9.2 billion, or 39%,
from the prior year. Net interest income was $20.5 billion, up by
$6.3 billion, or 45%, reflecting the impact of the Washington
Mutual transaction, and wider loan and deposit spreads. Noninter-
est revenue was $12.2 billion, up by $2.8 billion, or 30%, driven by
the impact of the Washington Mutual transaction, wider margins
on mortgage originations and higher net mortgage servicing reve-
nue, partially offset by $1.6 billion in estimated losses related to
the repurchase of previously sold loans.
The provision for credit losses was $15.9 billion, an increase of
$6.0 billion from the prior year. Weak economic conditions and
housing price declines continued to drive higher estimated losses
for the home equity and mortgage loan portfolios. The provision
included an addition of $5.8 billion to the allowance for loan
losses, compared with an addition of $5.0 billion in the prior year.
Included in the 2009 addition to the allowance for loan losses was
a $1.6 billion increase related to estimated deterioration in the
Washington Mutual purchased credit-impaired portfolio. To date,
no charge-offs have been recorded on purchased credit-impaired
loans; see page 70 of this Annual Report for the net charge-off
rates, as reported. Home equity net charge-offs were $4.7 billion
(4.32% excluding purchased credit-impaired loans), compared with
$2.4 billion (2.39% excluding purchased credit-impaired loans) in
the prior year. Subprime mortgage net charge-offs were $1.6 billion
(11.86% excluding purchased credit-impaired loans), compared
with $933 million (6.10% excluding purchased credit-impaired
loans) in the prior year. Prime mortgage net charge-offs were $1.9
billion (3.05% excluding purchased credit-impaired loans), com-
pared with $526 million (1.18% excluding purchased credit-
impaired loans) in the prior year.
Noninterest expense was $16.7 billion, an increase of $4.7 billion,
or 39%. The increase reflected the impact of the Washington
Mutual transaction and higher servicing and default-related
expense.