JP Morgan Chase 2008 Annual Report Download - page 50

Management’s discussion and analysis
48 JPMorgan Chase & Co./ 2008 Annual Report
defaults in RFS; an increase in technology, communications and
equipment expense reflecting higher depreciation expense on owned
automobiles subject to operating leases in RFS, and other technolo-
gy-related investments across the businesses; and, an increase in
occupancy expense partly for the expansion of RFS’ retail distribution
network. For a further discussion of amortization of intangibles, refer
to Note 18 on pages 198–201 of this Annual Report.
For information on merger costs, refer to Note 11 on page 170 of
this Annual Report.
2007 compared with 2006
Total noninterest expense for 2007 was $41.7 billion, up $2.9 bil-
lion, or 7%, from the prior year. The increase was driven by higher
compensation expense, as well as investments across the business
segments and acquisitions.
The increase in compensation expense from 2006 was primarily the
result of investments and acquisitions in the businesses, including
additional headcount from the Bank of New York transaction; the
classification of certain private equity carried interest from principal
transactions revenue; the classification of certain loan origination
costs (loan origination costs previously netted against revenue com-
menced being recorded as an expense in the first quarter of 2007
due to the adoption of SFAS 159); and higher performance-based
incentives. Partially offsetting these increases were business divesti-
tures and continuing business efficiencies.
Noncompensation expense increased from 2006 due to higher profes-
sional & outside services primarily reflecting higher brokerage expense
and credit card processing costs resulting from growth in transaction
volume, as well as investments in the businesses and acquisitions.
Also contributing to the increase was higher other expense due to
increased net legal-related costs, reflecting a lower level of insurance
recoveries and increased costs of credit card-related litigation, and
other increases driven by business growth and investments in the
businesses. Other noncompensation expense increases also included
higher occupancy expense driven by ongoing investments in the busi-
nesses, in particular, the retail distribution network and the Bank of
New York transaction; and higher technology, communications and
equipment expense due primarily to higher depreciation expense on
owned automobiles subject to operating leases in RFS, and other
technology-related investments in the businesses to support business
growth. These increases were offset partially by lower credit card mar-
keting expense; decreases due to the sale of the insurance business at
the beginning of the third quarter of 2006 and lower credit card
fraud-related losses, both in other expense. In addition, expense in
general was reduced by the effect of continuing business efficiencies.
For a discussion of amortization of intangibles, refer to Note 18 on
pages 198–201 of this Annual Report.
For information on merger costs, refer to Note 11 on page 170 of
this Annual Report.
credit losses due to portfolio activity, which included the effect of a
weakening credit environment and portfolio growth. 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, CB on pages 66–67 and Credit
Risk Management on pages 92–111 of this Annual Report.
Noninterest expense
Year ended December 31,
(in millions) 2008(a) 2007 2006
Compensation expense $ 22,746 $22,689 $21,191
Noncompensation expense:
Occupancy expense 3,038 2,608 2,335
Technology, communications
and equipment expense 4,315 3,779 3,653
Professional & outside services 6,053 5,140 4,450
Marketing 1,913 2,070 2,209
Other expense 3,740 3,814 3,272
Amortization of intangibles 1,263 1,394 1,428
Total noncompensation expense 20,322 18,805 17,347
Merger costs 432 209 305
Total noninterest expense $ 43,500 $41,703 $38,843
(a) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington
Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. 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
Total noninterest expense for 2008 was $43.5 billion, up $1.8 bil-
lion, or 4%, from the prior year. The increase was driven by the addi-
tional operating costs related to the Washington Mutual transaction
and Bear Stearns merger, and investments in the businesses, partially
offset by lower performance-based incentives.
Compensation expense increased slightly from the prior year pre-
dominantly driven by investments in the businesses, including head-
count additions associated with the Bear Stearns merger and
Washington Mutual transaction, largely offset by lower performance-
based incentives.
Noncompensation expense increased from the prior year as a result
of the Bear Stearns merger and Washington Mutual transaction.
Excluding the effect of these transactions, noncompensation expense
decreased due to a net reduction in other expense related to litiga-
tion; lower credit card and consumer lending marketing expense; and
a decrease in the amortization of intangibles as certain purchased
credit card relationships were fully amortized in 2007 and the amor-
tization rate for core deposit intangibles declined in accordance with
the amortization schedule. These decreases were offset partially by
increases in professional & outside services, driven by investments in
new product platforms in TSS, business and volume growth in CS
credit card processing and IB brokerage, clearing and exchange
transaction processing. Also contributing to the increases were an
increase in other expense due to higher mortgage reinsurance losses
and mortgage servicing expense due to increased delinquencies and