JP Morgan Chase 2008 Annual Report Download - page 163

JPMorgan Chase & Co./ 2008 Annual Report 161
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity organiza-
tions and co-brand partners, which grant the Firm exclusive rights to
market to the members or customers of such organizations and part-
ners. These organizations and partners endorse the credit card pro-
grams and provide their mailing lists to the Firm, and they may also
conduct marketing activities and provide awards under the various
credit card programs. The terms of these agreements generally range
from three to ten years. The economic incentives the Firm pays to the
endorsing organizations and partners typically include payments based
upon new account originations, charge volumes, and the cost of the
endorsing organizations’ or partners’ marketing activities and awards.
The Firm recognizes the payments made to the affinity organizations
and co-brand partners based upon new account originations as
direct loan origination costs. Payments based upon charge volumes
are considered by the Firm as revenue sharing with the affinity
organizations and co-brand partners, which are deducted from inter-
change income as the related revenue is earned. Payments based
upon marketing efforts undertaken by the endorsing organization or
partner are expensed by the Firm as incurred. These costs are record-
ed within noninterest expense.
Note 8 – Interest income and Interest expense
Details of interest income and interest expense were as follows.
Year ended December 31, (in millions) 2008 2007 2006
Interest income(a)
Loans(b) $38,347 $ 36,660 $ 33,121
Securities(b) 6,344 5,232 4,147
Trading assets 17,236 17,041 10,942
Federal funds sold and securities
purchased under resale agreements 5,983 6,497 5,578
Securities borrowed 2,297 4,539 3,402
Deposits with banks 1,916 1,418 1,265
Interests in purchased receivables(b) — — 652
Other assets(c) 895 ——
Total interest income 73,018 71,387 59,107
Interest expense(a)
Interest-bearing deposits 14,546 21,653 17,042
Short-term and other liabilities(d) 10,933 16,142 14,086
Long-term debt 8,355 6,606 5,503
Beneficial interests issued by
consolidated VIEs 405 580 1,234
Total interest expense 34,239 44,981 37,865
Net interest income 38,779 26,406 21,242
Provision for credit losses 19,445 6,864 3,270
Provision for credit losses –
accounting conformity(e) 1,534 ——
Total provision for credit losses $20,979 $ 6,864 $ 3,270
Net interest income after
provision for credit losses $17,800 $ 19,542 $ 17,972
(a)
Interest income and interest expense include the current period interest accruals for
financial instruments measured at fair value except for financial instruments containing
embedded derivatives that would be separately accounted for in accordance with SFAS
133 absent the SFAS 159 fair value election; for those instruments, all changes in fair
value, including any interest elements, are reported in principal transactions revenue.
(b) As a result of restructuring certain multi-seller conduits the Firm administers, JPMorgan
Chase deconsolidated $29 billion of interests in purchased receivables, $3 billion of
loans and $1 billion of securities and recorded $33 billion of lending-related commit-
ments during 2006.
(c) Predominantly margin loans.
(d) Includes brokerage customer payables.
(e) Includes accounting conformity loan loss reserve provision related to the acquisition of
Washington Mutual’s banking operations.
Note 9 – Pension and other postretirement
employee benefit plans
The Firm’s defined benefit pension plans are accounted for in accor-
dance with SFAS 87 and SFAS 88, and its other postretirement
employee benefit (“OPEB”) plans are accounted for in accordance
with SFAS 106. In September 2006, the FASB issued SFAS 158,
which requires companies to recognize on their Consolidated
Balance Sheets the overfunded or underfunded status of their
defined benefit postretirement plans, measured as the difference
between the fair value of plan assets and the benefit obligation.
SFAS 158 requires unrecognized amounts (e.g., net loss and prior
service costs) to be recognized in accumulated other comprehensive
income (loss) (“AOCI”) and that these amounts be adjusted as they
are subsequently recognized as components of net periodic benefit
cost based upon the current amortization and recognition require-
ments of SFAS 87 and SFAS 106. The Firm prospectively adopted
SFAS 158 on December 31, 2006, and recorded an after-tax charge
to AOCI of $1.1 billion at that date.
SFAS 158 also eliminates the provisions of SFAS 87 and SFAS 106
that allow plan assets and obligations to be measured as of a date
not more than three months prior to the reporting entity’s balance
sheet date. The Firm uses a measurement date of December 31 for
its defined benefit pension and OPEB plans; therefore, this provision
of SFAS 158 had no effect on the Firm’s financial statements.
For the Firm’s defined benefit pension plans, fair value is used to
determine the expected return on plan assets. For the Firm’s OPEB
plans, a calculated value that recognizes changes in fair value over a
five-year period is used to determine the expected return on plan
assets. Amortization of net gains and losses is included in annual net
periodic benefit cost if, as of the beginning of the year, the net gain
or loss exceeds 10 percent of the greater of the projected benefit
obligation or the fair value of the plan assets. Any excess, as well as
prior service costs, are amortized over the average future service
period of defined benefit pension plan participants, which for the
U.S. defined benefit pension plan is currently nine years (the
decrease of one year from the prior year in the assumptions is relat-
ed to pension plan demographic assumption revisions at December
31, 2007, to reflect recent experience relating to the form and timing
of benefit distributions and rates of turnover). For OPEB plans, any
excess net gains and losses also are amortized over the average
future service period, which is currently six years; however, prior serv-
ice costs are amortized over the average years of service remaining
to full eligibility age, which is currently four years. The amortization
periods for net gains and losses and prior service costs for OPEB are
unchanged from the prior year.