JP Morgan Chase 2005 Annual Report Download - page 43

JPMorgan Chase & Co. /2005 Annual Report 41
During 2005, positive MSR valuation adjustments of $777 million were
partially offset by losses of $494 million on risk management instruments,
including net interest earned on AFS securities. In 2004, negative MSR valuation
adjustments of $248 million were more than offset by $361 million of aggregate
risk management gains, including net interest earned on AFS securities.
Unrealized losses on AFS securities were $174 million, $3 million and $144
million at December 31, 2005, 2004 and 2003, respectively. For a further
discussion of MSRs, see Critical accounting estimates on page 83 and Note 15
on pages 114–116 of this Annual Report.
2004 compared with 2003
Operating earnings in the Prime Production & Servicing segment dropped to
$240 million from $918 million in the prior year. Results reflected a decrease
in prime mortgage production revenue, to $728 million from $1.3 billion, due
to a decline in mortgage originations. Operating earnings were also adversely
affected by a drop in MSR risk management revenue, to $113 million from
$784 million in the prior year. Results in 2004 included realized losses of
$89 million on the sale of AFS securities associated with the risk management
of the MSR asset, compared with securities gains of $359 million in the prior
year. Noninterest expense was relatively flat at $1.1 billion.
Operating earnings for the Consumer Real Estate Lending segment more
than doubled to $881 million from $414 million in the prior year. The increase
was largely due to the addition of the Bank One home equity lending business
but also reflected growth in retained loan balances and a $95 million net
benefit associated with the sale of the $4 billion manufactured home loan
portfolio; partially offsetting these increases were lower subprime mortgage
securitization gains as a result of management’s decision in 2004 to retain
these loans. These factors contributed to total net revenue rising 61% to
$2.4 billion. The provision for credit losses, at $74 million, decreased by 69%
from a year ago. This improvement was the result of an $87 million reduction
in the allowance for loan losses associated with the manufactured home loan
portfolio sale, improved credit quality and lower delinquencies, partially offset
by the Merger. Noninterest expense totaled $922 million, up 52% from the
year-ago period, largely due to the Merger.
Selected metrics
Year ended December 31,(a)
(in millions, except ratios and
where otherwise noted) 2005 2004 2003
Origination volume by channel (in billions)
Retail $ 83.9 $ 74.2 $ 90.8
Wholesale 50.4 48.5 65.6
Correspondent 14.0 22.8 44.5
Correspondent negotiated transactions 34.5 41.5 83.3
Total 182.8 187.0 284.2
Origination volume by business (in billions)
Mortgage $ 128.7 $ 144.6 $ 259.5
Home equity 54.1 42.4 24.7
Total 182.8 187.0 284.2
Business metrics (in billions)
Third-party mortgage loans
serviced (ending)(b) $ 467.5 $ 430.9 $ 393.7
MSR net carrying value (ending) 6.5 5.1 4.8
End-of-period loans owned
Mortgage loans held-for-sale 13.7 14.2 15.9
Mortgage loans retained 43.0 42.6 34.5
Home equity and other loans 76.8 67.9 24.1
Total end of period loans owned 133.5 124.7 74.5
Average loans owned
Mortgage loans held-for-sale 12.1 12.1 23.5
Mortgage loans retained 46.4 40.7 32.0
Home equity and other loans 70.2 47.0 19.4
Total average loans owned 128.7 99.8 74.9
Overhead ratio 44% 53% 43%
Credit data and quality statistics
30+ day delinquency rate(c) 1.61% 1.27% 1.81%
Net charge-offs
Mortgage $25 $19 $26
Home equity and other loans(d) 129 554 109
Total net charge-offs 154 573 135
Net charge-off rate
Mortgage 0.05% 0.05% 0.08%
Home equity and other loans 0.18 1.18 0.56
Total net charge-off rate(e) 0.13 0.65 0.26
Nonperforming assets(f) $ 998 $ 844 $ 546
(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 prime first mortgage loans and subprime loans.
(c) Excludes delinquencies related to loans eligible for repurchase as well as loans repurchased
from GNMA pools that are insured by government agencies of $0.9 billion, $0.9 billion and
$0.1 billion, for December 31, 2005, 2004 and 2003, respectively. These amounts are
excluded as reimbursement is proceeding normally.
(d) Includes $406 million of charge-offs related to the manufactured home loan portfolio in 2004.
(e) Excludes mortgage loans held for sale.
(f) Excludes nonperforming assets related to loans eligible for repurchase as well as loans
repurchased from GNMA pools that are insured by government agencies of $1.1 billion,
$1.5 billion and $2.3 billion for December 31, 2005, 2004 and 2003, respectively. These
amounts are excluded as reimbursement is proceeding normally.
Home Finance’s origination channels are comprised of the
following:
Retail – Borrowers who are buying or refinancing a home are directly
contacted by a mortgage banker employed by the Firm using a branch
office, the Internet or by phone. Borrowers are frequently referred to
a mortgage banker by real estate brokers, home builders or other
third parties.
Wholesale – A third-party mortgage broker refers loan applications to
a mortgage banker at the Firm. Brokers are independent loan originators
that specialize in finding and counseling borrowers but do not provide
funding for loans.
Correspondent – Banks, thrifts, other mortgage banks and other
financial institutions sell closed loans to the Firm.
Correspondent negotiated transactions (“CNT”) – Mid- to large-
sized mortgage lenders, banks and bank-owned mortgage companies
sell servicing to the Firm on an as-originated basis. These transactions
supplement traditional production channels and provide growth opportu-
nities in the servicing portfolio in stable and rising-rate periods.