JP Morgan Chase 2005 Annual Report Download - page 42

Management’s discussion and analysis
JPMorgan Chase & Co.
40 JPMorgan Chase & Co. /2005 Annual Report
Selected income statement data by business
Year ended December 31,(a)
(in millions) 2005 2004 2003
Prime production and servicing
Production $692 $ 728 $ 1,339
Servicing:
Mortgage servicing revenue,
net of amortization 635 651 453
MSR risk management results(b) 283 113 784
Total net revenue 1,610 1,492 2,576
Noninterest expense 943 1,115 1,124
Operating earnings 422 240 918
Consumer real estate lending
Total net revenue 2,704 2,376 1,473
Provision for credit losses 298 74 240
Noninterest expense 940 922 606
Operating earnings 935 881 414
Total Home Finance
Total net revenue 4,314 3,868 4,049
Provision for credit losses 298 74 240
Noninterest expense 1,883 2,037 1,730
Operating earnings 1,357 1,121 1,332
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(b) For additional information, see page 42 of this Annual Report.
2005 compared with 2004
Operating earnings were $1.4 billion, up $236 million from the prior year,
primarily due to the Merger, higher loan balances, reduced expenses and
improved MSR risk management results.
Operating earnings for the Prime Production & Servicing segment totaled
$422 million, up $182 million from the prior year. Net revenue of $1.6 billion
increased by $118 million, reflecting improved MSR risk management results.
The increase in MSR risk management results was due in part to the absence
of prior-year securities losses on repositioning of the risk management asset.
Decreased mortgage production revenue attributable to lower volume partially
offset this benefit. Noninterest expense of $943 million decreased by $172
million, reflecting lower production volume and operating efficiencies.
Operating earnings for the Consumer Real Estate Lending segment increased
by $54 million to $935 million. The current year included a loss of $120 million
associated with the transfer of $3.3 billion of mortgage loans to held-for-sale,
and a $140 million special provision related to Hurricane Katrina. Prior-year
results included a $95 million net benefit associated with the sale of a $4.0
billion manufactured home loan portfolio and a $52 million charge related to
a transfer of adjustable rate mortgage loans to held-for-sale. Excluding the
after-tax impact of these items, earnings would have been up $242 million,
reflecting the Merger, higher loan balances and lower expenses, partially
offset by loan spread compression due to rising short-term interest rates and
a flat yield curve, which contributed to accelerated home equity loan payoffs.
Home Finance uses a combination of derivatives, AFS securities and trading
securities to manage changes in the fair value of the MSR asset. These risk
management activities are intended to protect the economic value of the
MSR asset by providing offsetting changes in the fair value of the related risk
management instruments. The type and amount of instruments used in
this risk management activity change over time as market conditions and
approach dictate.
Selected metrics
Year ended December 31,(a)
(in millions, except headcount and ratios) 2005 2004 2003
Selected ending balances
Total assets $ 224,801 $226,560 $139,316
Loans(b) 197,299 202,473 121,921
Core deposits(c) 161,666 156,885 75,850
Total deposits 191,415 182,372 86,162
Selected average balances
Total assets $ 226,368 $185,928 $147,435
Loans(d) 198,153 162,768 120,750
Core deposits(c) 160,641 120,758 80,116
Total deposits 186,811 137,404 89,793
Equity 13,383 9,092 4,220
Headcount 60,998 59,632 32,278
Credit data and quality statistics
Net charge-offs(e) $ 572 $ 990 $ 381
Nonperforming loans(f) 1,338 1,161 569
Nonperforming assets 1,518 1,385 775
Allowance for loan losses 1,363 1,228 1,094
Net charge-off rate(d) 0.31% 0.67% 0.40%
Allowance for loan losses to
ending loans(b) 0.75 0.67 1.04
Allowance for loan losses to
nonperforming loans(f) 104 107 209
Nonperforming loans to total loans 0.68 0.57 0.47
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(b) Includes loans held for sale of $16,598 million, $18,022 million and $17,105 million at
December 31, 2005, 2004 and 2003, respectively. These amounts are not included in the
allowance coverage ratios.
(c) Includes demand and savings deposits.
(d) Average loans include loans held for sale of $15,675 million, $14,736 million and $25,293
million for 2005, 2004 and 2003, respectively. These amounts are not included in the net
charge-off rate.
(e) Includes $406 million of charge-offs related to the manufactured home loan portfolio in
2004.
(f) Nonperforming loans include loans held for sale of $27 million, $13 million and $45 million
at December 31, 2005, 2004 and 2003, respectively. These amounts are not included in the
allowance coverage ratios.
Home Finance
Home Finance is comprised of two key business segments: Prime Production &
Servicing and Consumer Real Estate Lending. The Prime Production & Servicing
segment includes the operating results associated with the origination, sale
and servicing of prime mortgages. Consumer Real Estate Lending reflects the
operating results of consumer loans that are secured by real estate, retained
by the Firm and held in the portfolio. This portfolio includes prime and
subprime first mortgages, home equity lines and loans, and manufactured
home loans. The Firm stopped originating manufactured home loans early in
2004 and sold substantially all of its remaining portfolio in 2004.