JP Morgan Chase 2006 Annual Report Download - page 40

RETAIL FINANCIAL SERVICES
Retail Financial Services, which includes Regional Banking,
Mortgage Banking and Auto Finance reporting segments, helps
meet the financial needs of consumers and businesses. RFS pro-
vides convenient consumer banking through the nation’s fourth-
largest branch network and third-largest ATM network. RFS is a
top-five mortgage originator and servicer, the second-largest
home equity originator, the largest noncaptive originator of auto-
mobile loans and one of the largest student loan originators.
RFS serves customers through more than 3,000 bank branches,
8,500 ATMs and 270 mortgage offices, and through relation-
ships with more than 15,000 auto dealerships and 4,300
schools and universities. More than 11,000 branch salespeople
assist customers, across a 17-state footprint from New York to
Arizona, with checking and savings accounts, mortgage, home
equity and business loans, investments and insurance. Over
1,200 additional mortgage officers provide home loans
throughout the country.
During the first quarter of 2006, RFS completed the purchase of Collegiate
Funding Services, which contributed an education loan servicing capability and
provided an entry into the Federal Family Education Loan Program consolida-
tion market. On July 1, 2006, RFS sold its life insurance and annuity underwrit-
ing businesses to Protective Life Corporation. On October 1, 2006, JPMorgan
Chase completed The Bank of New York transaction, significantly strengthening
RFS’s distribution network in the New York Tri-state area.
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2006 2005 2004(b)
Revenue
Lending & deposit related fees $ 1,597 $ 1,452 $ 1,013
Asset management, administration
and commissions 1,422 1,498 1,020
Securities gains (losses) (57) 9 (83)
Mortgage fees and related income 618 1,104 866
Credit card income 523 426 230
Other income 557 136 31
Noninterest revenue 4,660 4,625 3,077
Net interest income 10,165 10,205 7,714
Total net revenue 14,825 14,830 10,791
Provision for credit losses 561 724 449
Noninterest expense
Compensation expense 3,657 3,337 2,621
Noncompensation expense 4,806 4,748 3,937
Amortization of intangibles 464 500 267
Total noninterest expense 8,927 8,585 6,825
Income before income tax expense 5,337 5,521 3,517
Income tax expense 2,124 2,094 1,318
Net income $ 3,213 $ 3,427 $ 2,199
Financial ratios
ROE 22% 26% 24%
ROA 1.39 1.51 1.18
Overhead ratio 60 58 63
Overhead ratio excluding core
deposit intangibles(a) 57 55 61
(a) Retail Financial Services 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
results in a higher overhead ratio in the earlier years and a lower overhead ratio in later
years; this method would result in an improving overhead ratio over time, all things remain-
ing equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amorti-
zation expense related to The Bank of New York transaction and the Bank One merger of
$458 million, $496 million and $264 million for the years ended December 31, 2006, 2005
and 2004, respectively.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
2006 compared with 2005
Net income of $3.2 billion was down by $214 million, or 6%, from the prior
year. A decline in Mortgage Banking was offset partially by improved results in
Regional Banking and Auto Finance.
Total net revenue of $14.8 billion was flat compared with the prior year. Net
interest income of $10.2 billion was down slightly due to narrower spreads on
loans and deposits in Regional Banking, lower auto loan and lease balances
and the sale of the insurance business. These declines were offset by the benefit
of higher deposit and loan balances in Regional Banking, wider loan spreads in
Auto Finance and The Bank of New York transaction. Noninterest revenue of
$4.7 billion was up $35 million, or 1%, from the prior year. Results benefited
from increases in deposit-related and branch production fees, higher automobile
operating lease revenue and The Bank of New York transaction. This benefit was
offset by lower net mortgage servicing revenue, the sale of the insurance busi-
ness and losses related to loans transferred to held-for-sale. In 2006, losses of
$233 million, compared with losses of $120 million in 2005, were recognized in
Regional Banking related to mortgage loans transferred to held-for-sale; and
losses of $50 million, compared with losses of $136 million in the prior year,
were recognized in Auto Finance related to automobile loans transferred to
held-for-sale.
The provision for credit losses of $561 million was down by $163 million from
the prior-year provision due to the absence of a $250 million special provision
for credit losses related to Hurricane Katrina in the prior year, partially offset
by the establishment of additional allowance for loan losses related to loans
acquired from The Bank of New York.
Noninterest expense of $8.9 billion was up by $342 million, or 4%, primarily
due to The Bank of New York transaction, the acquisition of Collegiate
Funding Services, investments in the retail distribution network and higher
depreciation expense on owned automobiles subject to operating leases. These
increases were offset partially by the sale of the insurance business and merg-
er-related and other operating efficiencies and the absence of a $40 million
prior-year charge related to the dissolution of a student loan joint venture.
2005 compared with 2004
Net income was $3.4 billion, up $1.2 billion from the prior year. The increase
was due largely to the Merger but also reflected increased deposit balances
and wider spreads, higher home equity and subprime mortgage balances, and
expense savings in all businesses. These benefits were offset partially by nar-
rower spreads on retained loan portfolios, the special provision for Hurricane
Katrina and net losses associated with portfolio loan sales in Regional
Banking and Auto Finance.
Total net revenue increased to $14.8 billion, up $4.0 billion, or 37%, due pri-
marily to the Merger. Net interest income of $10.2 billion increased by $2.5
billion as a result of the Merger, increased deposit balances and wider
spreads, and growth in retained consumer real estate loans. These benefits
were offset partially by narrower spreads on loan balances and the absence
of loan portfolios sold in late 2004 and early 2005. Noninterest revenue of
$4.6 billion increased by $1.5 billion due to the Merger, improved MSR risk
management results, higher automobile operating lease income and increased
MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
38 JPMorgan Chase & Co. / 2006 Annual Report