JP Morgan Chase 2010 Annual Report Download - page 200

Notes to consolidated financial statements
200 JPMorgan Chase & Co./2010 Annual Report
Mortgage fees and related income
This revenue category primarily reflects Retail Financial Services’s
(“RFS”) mortgage banking revenue, including: fees and income
derived from mortgages originated with the intent to sell; mortgage
sales and servicing including losses related to the repurchase of
previously-sold loans; the impact of risk management activities asso-
ciated with the mortgage pipeline, warehouse loans and MSRs; and
revenue related to any residual interests held from mortgage securiti-
zations. This revenue category also includes gains and losses on sales
and lower of cost or fair value adjustments for mortgage loans held-
for-sale, as well as changes in fair value for mortgage loans origi-
nated with the intent to sell and measured at fair value under the fair
value option. Changes in the fair value of RFS mortgage servicing
rights are reported in mortgage fees and related income. Net interest
income from mortgage loans, and securities gains and losses on AFS
securities used in mortgage-related risk management activities, are
recorded in interest income and securities gains/(losses), respectively.
For a further discussion of MSRs, see Note 17 on pages 260–263 of
this Annual Report.
Credit card income
This revenue category includes interchange income from credit and
debit cards. Prior to 2010, this revenue category included servicing
fees earned in connection with securitization activities. Effective
January 1, 2010, the Firm consolidated its Firm-sponsored credit
card securitization trusts (see Note 16 on pages 244–259 of this
Annual Report) and, as a result, the servicing fees were eliminated
in consolidation. Volume-related payments to partners and expense
for rewards programs are netted against interchange income;
expense related to rewards programs are recorded when the re-
wards are earned by the customer. Other fee revenue is recognized
as earned, except for annual fees, which are deferred and recog-
nized on a straight-line basis over the 12-month period to which
they pertain. Direct loan origination costs are also deferred and
recognized over a 12-month period. In addition, due to the consoli-
dation of Chase Paymentech Solutions in the fourth quarter of
2008, this category now includes net fees earned for processing
card transactions for merchants.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity or-
ganizations and co-brand partners, which grant the Firm exclusive
rights to market to the members or customers of such organizations
and partners. These organizations and partners endorse the credit
card programs 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 10 years. The economic incentives the
Firm pays to the endorsing organizations and partners typically
include payments based on 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 organiza-
tions and co-brand partners based on new account originations as
direct loan origination costs. Payments based on charge volumes
are considered by the Firm as revenue sharing with the affinity
organizations and co-brand partners, which are deducted from
interchange income as the related revenue is earned. Payments
based on marketing efforts undertaken by the endorsing organiza-
tion or partner are expensed by the Firm as incurred. These costs
are recorded within noninterest expense.
Note 8 – Interest income and Interest
expense
Interest income and interest expense is recorded in the Consoli-
dated Statements of Income and classified based on the nature of
the underlying asset or liability. Interest income and interest ex-
pense includes the current-period interest accruals for financial
instruments measured at fair value, except for financial instruments
containing embedded derivatives that would be separately ac-
counted for in accordance with U.S. GAAP absent the fair value
option election; for those instruments, all changes in fair value,
including any interest elements, are reported in principal transac-
tions revenue. For financial instruments that are not measured at
fair value, the related interest is included within interest income or
interest expense, as applicable.
Details of interest income and interest expense were as follows.
Year ended December 31, (in millions)
20
10
2009 2008
Interest income
Loans
$
40,388
$ 38,704 $ 38,347
Securities
9,540
12,377 6,344
Trading assets
11,007
12,098 17,236
Federal funds sold and
securities
purchased under resale agreements 1,786 1,750 5,983
Securities borrowed
175
4 2,297
Deposits with banks
345
938 1,916
Other assets
(
a
)
541 479 895
Total interest income
(
b
)
63,782 66,350
73,018
Interest expense
Interest-bearing deposits
3,424
4,826 14,546
Short-term and other liabilities
(
c
)
2,708 3,845 10,933
Long-term debt
5,504
6,309 8,355
Beneficial interests issued by
consolidated VIEs 1,145 218 405
Total interest expense
(
b
)
12,781 15,198 34,239
Net inte
r
est income
$
51,001
$ 51,152 $ 38,779
Provision for credit losses
$
16,639
$ 32,015 $ 19,445
Provision for credit losses
–
accounting
conformity(d) —— 1,534
Total provision for credit losses
$
16,639
$ 32,015 $ 20,979
Net interest income after
provision for credit losses $ 34,362 $ 19,137 $ 17,800
(a) Predominantly margin loans.
(b) Effective January 1, 2010, the Firm adopted accounting guidance related to
VIEs. Upon the adoption of the guidance, the Firm consolidated its Firm-
sponsored credit card securitization trusts, its Firm-administered multi-seller
conduits and certain other consumer loan securitization entities, primarily
mortgage-related. The consolidation of these VIEs did not significantly change
the Firm’s total net income. However, it did affect the classification of items
on the Firm’s Consolidated Statements of Income; as a result of the adoption
of the guidance, certain noninterest revenue was eliminated in consolidation,
offset by the recognition of interest income, interest expense, and provision
for credit losses.
(c) Includes brokerage customer payables.
(d) 2008 includes an accounting conformity loan loss reserve provision related to
the acquisition of Washington Mutual’s banking operations.