JP Morgan Chase 2008 Annual Report Download - page 49

JPMorgan Chase & Co./ 2008 Annual Report 47
Mortgage fees and related income increased from the prior year as
MSRs asset valuation adjustments and growth in third-party mort-
gage loans serviced drove an increase in net mortgage servicing rev-
enue. Production revenue also grew, as an increase in mortgage loan
originations and the classification of certain loan origination costs as
expense (loan origination costs previously netted against revenue
commenced being recorded as an expense in the first quarter of
2007 due to the adoption of SFAS 159) more than offset markdowns
on the mortgage warehouse and pipeline. For a discussion of mort-
gage fees and related income, which is recorded primarily in RFS’
Consumer Lending business, see the Consumer Lending discussion
on pages 59–62 of this Annual Report.
Credit card income remained relatively unchanged from the 2006
level, as lower servicing fees earned in connection with securitization
activities, which were affected unfavorably by higher net credit losses
and narrower loan margins, were offset by increases in net inter-
change income earned on the Firm’s credit and debit cards. For fur-
ther discussion of credit card income, see CS’ segment results on
pages 63–65 of this Annual Report.
Other income declined compared with the prior year, driven by lower
gains from loan sales and workouts, and the absence of a $103 mil-
lion gain in the second quarter of 2006 related to the sale of
MasterCard shares in its initial public offering. (The 2007 gain on the
sale of MasterCard shares was recorded in securities gains (losses) as
the shares were transferred to the AFS portfolio subsequent to the
IPO.) Increased income from automobile operating leases and higher
gains on the sale of leveraged leases and student loans partially off-
set the decline.
Net interest income rose from the prior year, primarily due to the fol-
lowing: higher trading-related net interest income, due to a shift of
Interest expense to principal transactions revenue (related to certain
IB structured notes to which fair value accounting was elected in
connection with the adoption of SFAS 159); growth in liability and
deposit balances in the wholesale and consumer businesses; a higher
level of credit card loans; the impact of the Bank of New York trans-
action; and an improvement in Corporate’s net interest spread. The
Firm’s total average interest-earning assets for 2007 were $1.1 tril-
lion, up 12% from the prior year. The increase was primarily driven
by higher trading assets – debt instruments, loans, and AFS securi-
ties, partially offset by a decline in interests in purchased receivables
as a result of the restructuring and deconsolidation during the sec-
ond quarter of 2006 of certain multi-seller conduits that the Firm
administered. The net interest yield on these assets, on a fully taxable
equivalent basis, was 2.39%, an increase of 23 basis points from the
prior year, due in part to the adoption of SFAS 159.
Provision for credit losses
Year ended December 31,
(in millions) 2008(b) 2007 2006
Wholesale:
Provision for credit losses $ 2,681 $ 934 $ 321
Provision for credit losses –
accounting conformity(a) 646 ——
Total wholesale provision for
credit losses 3,327 934 321
Consumer:
Provision for credit losses 16,764 5,930 2,949
Provision for credit losses –
accounting conformity(a) 888 ——
Total consumer provision for
credit losses 17,652 5,930 2,949
Total provision for credit losses $ 20,979 $ 6,864 $ 3,270
(a) 2008 included adjustments to the provision for credit losses to conform the
Washington Mutual loan loss reserve methodologies to the Firm’s methodologies in
connection with the Washington Mutual transaction.
(b) On September 25, 2008, JPMorgan Chase acquired the banking operations of
Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consum-
mated. Each of these transactions was accounted for as a purchase and their respective
results of operations are included in the Firm’s results from each respective transaction
date. For additional information on these transactions, see Note 2 on pages 135–140
of this Annual Report.
2008 compared with 2007
The provision for credit losses in 2008 rose by $14.1 billion com-
pared with the prior year due to increases in both the consumer and
wholesale provisions. The increase in the consumer provision reflect-
ed higher estimated losses for home equity and mortgages resulting
from declining housing prices; an increase in estimated losses for the
auto, student and business banking loan portfolios; and an increase
in the allowance for loan losses and higher charge-offs of credit card
loans. The increase in the wholesale provision was driven by a higher
allowance resulting from a weakening credit environment and
growth in retained loans. The wholesale provision in the first quarter
of 2008 also included the effect of the transfer of $4.9 billion of
funded and unfunded leveraged lending commitments to retained
loans from held-for-sale. In addition, in 2008 both the consumer and
wholesale provisions were affected by a $1.5 billion charge to con-
form assets acquired from Washington Mutual to the Firm’s loan loss
methodologies. For a more detailed discussion of the loan portfolio
and the allowance for loan losses, see the segment discussions for
RFS on pages 57–62, CS on pages 63–65, IB on pages 54–56 and
CB on pages 66–67, and the Credit Risk Management section on
pages 92–111 of this Annual Report.
2007 compared with 2006
The provision for credit losses in 2007 rose $3.6 billion from the prior
year due to increases in both the consumer and wholesale provisions.
The increase in the consumer provision from the prior year was largely
due to an increase in estimated losses related to home equity, credit
card and subprime mortgage loans. Credit card net charge-offs in
2006 benefited following the change in bankruptcy legislation in the
fourth quarter of 2005. The increase in the wholesale provision from
the prior year primarily reflected an increase in the allowance for