JP Morgan Chase 2010 Annual Report Download - page 72

Management’s discussion and analysis
JPMorgan Chase & Co./2010 Annual Report
72
RETAIL FINANCIAL SERVICES
Retail Financial Services (“RFS”) 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
5,200 bank branches (third-largest nationally) and
16,100 ATMs (second-largest nationally), as well as
online and mobile banking around the clock. More than
28,900 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
16,200 auto dealerships and 2,200 schools and
universities nationwide.
Prior to January 1, 2010, RFS was reported as: Retail Banking and
Consumer Lending. Commencing in 2010, Consumer Lending is
presented as: (1) Mortgage Banking, Auto & Other Consumer
Lending, and (2) Real Estate Portfolios. Mortgage Banking, Auto &
Other Consumer Lending comprises mortgage production and
servicing, auto finance, and student and other lending activities. Real
Estate Portfolios comprises residential mortgages and home equity
loans, including the purchased credit-impaired portfolio acquired in
the Washington Mutual transaction. These reporting revisions were
intended to provide further clarity around the Real Estate Portfolios.
Retail Banking, which includes branch banking and business banking
activities, was not affected by these reporting revisions.
Selected income statement data
Year ended Dece
m
ber 31,
(in millions, except ratios) 2010 2009 2008
Revenue
Lending- and deposit-related fees
$
3,117
$ 3,969 $
2,546
Asset management, administr
a
tion
and commissions 1,784 1,674 1,510
Mortgage fees and related income
3,855
3,794 3,621
Credit card income
1,956
1,635 939
Other income
1,516
1,128 739
Noninterest rev
e
nue
12,228
12,200 9,355
Net interest income
19
,528
20,492 14,165
Total net revenue(a) 31,756 32,692 23,520
Provision for credit losses 9,452 15,940 9,905
Noninterest e
x
pense
Compensation expense
7,432
6,712 5,068
Noncompensation expense
10,155
9,706 6,612
Amortization of intangibles
277
330 397
Total noninterest e
x
pense
17,864
16,748 12,077
Income before income tax
expense/(benefit) 4,440 4
1,538
Income tax expense/(benefit)
1,914
(93) 658
Net income
$
2,526
$ 97 $ 880
Financial ratios
ROE
9
%
—% 5%
Overhead ratio
56
51 51
Overhead ratio excluding core
deposit intangibles(b) 55 50 50
(a) Total net revenue included tax-equivalent adjustments associated with tax-exempt
loans to municipalities and other qualified entities of $15 million, $22 million and
$23 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(b) RFS uses the overhead ratio (excluding the amortization of core deposit intangibles
(“CDI”)), a non-GAAP financial measure, to evaluate 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 CDI amortization expense related to prior business combination
transactions of $276 million, $328 million and $394 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
2010 compared with 2009
Net income was $2.5 billion, compared with $97 million in the
prior year.
Net revenue was $31.8 billion, a decrease of $936 million, or 3%,
compared with the prior year. Net interest income was $19.5
billion, down by $964 million, or 5%, reflecting the impact of lower
loan and deposit balances and narrower loan spreads, partially
offset by a shift to wider-spread deposit products. Noninterest
revenue was $12.2 billion, flat to the prior year, as lower deposit-
related fees were largely offset by higher debit card income and
auto operating lease income.
The provision for credit losses was $9.5 billion, compared with $15.9
billion in the prior year. The current-year provision reflected an
addition to the allowance for loan losses of $3.4 billion for the
purchased credit-impaired (“PCI”) portfolio and a reduction in the
allowance for loan losses of $1.8 billion, predominantly for the
mortgage loan portfolios. In comparison, the prior-year provision
reflected an addition to the allowance for loan losses of $5.8 billion,
predominantly for the home equity and mortgage portfolios, but
which also included an addition of $1.6 billion for the PCI portfolio.
While delinquency trends and net charge-offs improved compared
with the prior year, the provision continued to reflect elevated losses
for the mortgage and home equity portfolios. See page 130 of this
Annual Report for the net charge-off amounts and rates. To date,
no charge-offs have been recorded on PCI loans.
Noninterest expense was $17.9 billion, an increase of $1.1 billion, or
7%, from the prior year, reflecting higher default-related expense.
2009 compared with 2008
The following discussion of RFS’s financial results reflects the
acquisition of Washington Mutual’s retail bank network and
mortgage banking activities as a result of the Washington Mutual
transaction on September 25, 2008. See Note 2 on pages 166–170
of this Annual Report for more information concerning this
transaction.
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.