JP Morgan Chase 2005 Annual Report Download - page 44

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Management’s discussion and analysis
JPMorgan Chase & Co.
42 JPMorgan Chase & Co. /2005 Annual Report
The following table details the MSR risk management results in the Home
Finance business:
MSR risk management results
Year ended December 31,(a)
(in millions) 2005 2004 2003
Reported amounts:
MSR valuation adjustments(b) $ 777 $ (248) $ (253)
Derivative valuation adjustments
and other risk management
gains (losses)(c) (494) 361 1,037
MSR risk management results $ 283 $ 113 $ 784
(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) Excludes subprime loan MSR activity of $(7) million and $(2) million in 2005 and 2004,
respectively. There was no subprime loan MSR activity in 2003.
(c) Includes gains, losses and interest income associated with derivatives, both designated
and not designated, as a SFAS 133 hedge, and securities classified as both trading and
available-for-sale.
Consumer & Small Business Banking
Consumer & Small Business Banking offers a full array of financial services
through a branch network spanning 17 states as well as through the Internet.
Product offerings include checking and savings accounts, mutual funds and
annuities, credit cards, mortgages and home equity loans, and loans for small
business customers (customers with annual sales generally less than $10 million).
Selected income statement data
Year ended December 31,(a)
(in millions) 2005 2004 2003
Noninterest revenue $ 2,929 $1,864 $ 828
Net interest income 5,476 3,521 1,594
Total net revenue 8,405 5,385 2,422
Provision for credit losses 214 165 76
Noninterest expense 5,431 3,981 2,358
Operating earnings (loss) 1,684 760 (4)
(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.
2005 compared with 2004
Operating earnings totaled $1.7 billion, up $924 million from the prior year.
While growth largely reflected the Merger, results also included increased
deposit balances and wider spreads, as well as higher debit card and other
banking fees. These factors contributed to net revenue increasing to $8.4 billion
from $5.4 billion in the prior year. The Provision for credit losses of $214 million
increased by $49 million; excluding the special provision of $90 million related
to Hurricane Katrina, the Provision would have decreased by $41 million from
the prior year, reflecting lower net charge-offs and improved credit quality
trends. Noninterest expense increased by $1.5 billion to $5.4 billion, as a
result of the Merger and continued investment in branch distribution and
sales, partially offset by merger efficiencies.
2004 compared with 2003
Operating earnings totaled $760 million, up from a loss of $4 million in
the prior-year period. The increase was largely due to the Merger but also
reflected wider spreads on deposits and lower expenses. These benefits were
partially offset by a higher Provision for credit losses.
Total net revenue was $5.4 billion, compared with $2.4 billion in the prior
year. While the increase was primarily attributable to the Merger, total net
revenue also benefited from wider spreads on deposits.
The Provision for credit losses increased to $165 million from $76 million in
the prior year. The increase was in part due to the Merger but also reflected an
increase in the allowance for credit losses to cover high-risk portfolio segments.
The increase in Noninterest expense to $4.0 billion was largely attributable to
the Merger. Incremental expense from investment in the branch distribution
network was also a contributing factor.
The table below reconciles management’s disclosure of Home Finance’s revenue into the reported U.S. GAAP line items shown on the Consolidated statements of
income and in the related Notes to Consolidated financial statements:
Year ended December 31,(a) Prime production and servicing Consumer real estate lending Total revenue
(in millions) 2005 2004 2003 2005 2004 2003 2005 2004 2003
Net interest income $ 426 $ 700 $ 1,556 $ 2,672 $ 2,245 $1,226 $ 3,098 $ 2,945 $ 2,782
Securities / private equity gains (losses) 3(89) 359 ——— 3(89) 359
Mortgage fees and related income(b) 1,181 881 661 32 131 247 1,213 1,012 908
Total $ 1,610 $ 1,492 $ 2,576 $ 2,704 $ 2,376 $1,473 $ 4,314 $ 3,868 $ 4,049
(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 activity reported elsewhere as Other income.