JP Morgan Chase 2010 Annual Report Download - page 262

Notes to consolidated financial statements
JPMorgan Chase & Co./2010 Annual Report
262
(f) Includes MSRs acquired as a result of the Washington Mutual transaction (of which
$59 million related to commercial real estate) and the Bear Stearns merger. For
further discussion, see Note 2 on pages 166–170 of this Annual Report.
The following table presents the components of mortgage fees and
related income (including the impact of MSR risk management
activities) for the years ended December 31, 2010, 2009 and 2008.
Year
ended December 31,
(in millions) 2010 2009 2008
RFS mortgage fees and related income
Net production revenue:
Production revenue
$
3,440
$ 2,115 $1,150
Repurchase losses
(2,912
) (1,612) (252)
Net p
roduction revenue
528
503 898
Net mortgage servicing rev
e
nue
Operating revenue:
Loan servicing revenue
4,575
4,942 3,258
Other changes in MSR a
s
set
fair value(a) (2,384) (3,279) (2,052)
Total operating revenue
2
,191
1,663 1,206
Risk management:
Changes in MSR asset fair
value due to inputs or
assumptions in model(b) (2,268) 5,804 (6,849)
Derivative valuation adjus
t
-
ments and other 3,404 (4,176) 8,366
Total risk
management
1,136
1,628 1,517
Total RFS net mortgage
servicing revenue 3,327 3,291 2,723
All other
(c)
15 (116) (154)
Mortgage fees and related
income $ 3,870 $ 3,678 $ 3,467
(a) Includes changes in the MSR value due to modeled servicing portfolio runoff
(or time decay). “Purchases, issuances, settlements, net” columns in the
Changes in level 3 recurring fair value measurements tables in Note 3 on
pages 170–187 of this Annual Report include these amounts.
(b) Represents MSR asset fair value adjustments due to changes in inputs, such
as interest rates and volatility, as well as updates to assumptions used in the
valuation model. “Total realized/unrealized gains/(losses)” columns in the
Changes in level 3 recurring fair value measurements tables in Note 3 on
pages 170–187 of this Annual Report include these amounts.
(c) Primarily represents risk management activities performed by the Chief
Investment Office (“CIO”) in the Corporate sector.
The table below outlines the key economic assumptions used to
determine the fair value of the Firm’s MSRs at December 31, 2010
and 2009; and it outlines the sensitivities of those fair values to
immediate adverse changes in those assumptions, as defined
below.
Year ended December 31,
(in millions, except rates) 2010 2009
Weighted
-
average prepayment speed
assumption (CPR)
11.29
% 11.37%
Impact on fair value of 10% adverse change
$
(809
)
$ (896)
Impact on fair value of 20% adverse change
(1,568
)
(1,731)
Weighted-average option adjusted spread
3.94
%
4.63%
Impact on fair value of 100 basis points
adverse change $
(578
) $ (641)
Impact on fair value of 200 basis points
adverse change (
1,109
) (1,232)
CPR: Constant prepayment rate.
The sensitivity analysis in the preceding table is hypothetical and
should be used with caution. Changes in fair value based on variation
in assumptions generally cannot be easily extrapolated, because the
relationship of the change in the assumptions to the change in fair
value may not be linear. Also, in this table, the effect that a change in
a particular assumption may have on the fair value is calculated
without changing any other assumption. In reality, changes in one
factor may result in changes in another, which might magnify or
counteract the sensitivities.
Other intangible assets
Other intangible assets are recorded at their fair value upon completion of a business combination or certain other transactions, and generally
represent the value of customer relationships or arrangements. Subsequently, the Firm’s intangible assets with finite lives, including core deposit
intangibles, purchased credit card relationships, and other intangible assets, are amortized over their useful lives in a manner that best reflects the eco-
nomic benefits of the intangible asset. The decrease in other intangible assets during 2010 was predominantly due to amortization, partially offset by an
increase resulting from the aforementioned Gávea Investimentos transaction.
The components of credit card relationships, core deposits and other intangible assets were as follows.
2010 2009
Gross Accumulated
Net
carrying Gross Accumulated
Net
carrying
December 31, (in millions) amount amortization value amount amortization
value
Purchased credit card relationships $ 5,789 $ 4,892 $ 897 $ 5,783 $ 4,537 $ 1,246
Other credit card–related intangibles 907 314 593 894 203 691
Core deposit intangibles 4,280 3,401 879 4,280 3,073 1,207
Other intangibles 2,515 845 1,670 2,200 723 1,477