JP Morgan Chase 2010 Annual Report Download - page 63

JPMorgan Chase & Co./2010 Annual Report
63
2009 compared with 2008
Total noninterest expense was $52.4 billion, up by $8.9 billion, or
20%, from the prior year. The increase was driven by the impact of
the Washington Mutual transaction, higher performance-based
compensation expense, higher FDIC-related costs, and increased
mortgage servicing and default-related expense. These items were
offset partially by lower headcount-related expense, including
salary and benefits but excluding performance-based incentives,
and other noncompensation costs related to employees.
Compensation expense increased in 2009 compared with the prior
year, reflecting higher performance-based incentives, as well as the
impact of the Washington Mutual transaction. Excluding these two
items, compensation expense decreased as a result of a reduction in
headcount, particularly in the wholesale businesses and in Corporate.
Noncompensation expense increased from the prior year, due
predominantly to the following: the impact of the Washington
Mutual transaction; higher ongoing FDIC insurance premiums and
an FDIC special assessment of $675 million recognized in the
second quarter of 2009; higher mortgage servicing and default-
related expense, which included an increase in foreclosed property
expense of $1.2 billion; higher litigation costs; and the effect of the
dissolution of the Chase Paymentech Solutions joint venture. These
increases were partially offset by lower headcount-related expense,
particularly in IB, TSS and AM; a decrease in amortization of
intangibles, predominantly related to purchased credit card
relationships; lower mortgage reinsurance losses; and a decrease in
credit card marketing expense. For a discussion of amortization of
intangibles, refer to Note 17 on pages 260–263 of this Annual
Report.
For information on merger costs, refer to Note 11 on page 213 of
this Annual Report.
Income tax expense
Year ended December 31,
(in millions, except rate) 2010 2009
2008
Income before income tax expense/
(benefit) and extraordinary gain $ 24,859 $ 16,067 $
2,773
Income tax expense/(benefit)
7,489
4,415
(926
)
Effective tax rate
30.1%
27.5%
(33.4
)%
2010 compared with 2009
The increase in the effective tax rate compared with the prior year
was primarily the result of higher reported pretax book income, as
well as changes in the proportion of income subject to U.S. federal
and state and local taxes. These increases were partially offset by
increased benefits associated with the undistributed earnings of
certain non-U.S. subsidiaries that were deemed to be reinvested
indefinitely, as well as tax benefits recognized upon the resolution
of tax audits in 2010. For additional information on income taxes,
see Critical Accounting Estimates Used by the Firm on pages 149–
154 and Note 27 on pages 271–273 of this Annual Report.
2009 compared with 2008
The change in the effective tax rate compared with the prior year
was primarily the result of higher reported pretax income and
changes in the proportion of income subject to U.S. federal, state
and local taxes. Benefits related to tax-exempt income, business tax
credits and tax audit settlements increased in 2009 relative to
2008; however, the impact of these items on the effective tax rate
was reduced by the significantly higher level of pretax income in
2009. In addition, 2008 reflected the realization of benefits of $1.1
billion from the release of deferred tax liabilities associated with the
undistributed earnings of certain non-U.S. subsidiaries that were
deemed to be reinvested indefinitely.
Extraordinary gain
On September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual. This transaction was accounted
for under the purchase method of accounting for business
combinations. The adjusted net asset value of the banking
operations after purchase accounting adjustments was higher than
the consideration paid by JPMorgan Chase, resulting in an
extraordinary gain. The preliminary gain recognized in 2008 was
$1.9 billion. In the third quarter of 2009, the Firm recognized an
additional $76 million extraordinary gain associated with the final
purchase accounting adjustments for the acquisition. For a further
discussion of the Washington Mutual transaction, see Note 2 on
pages 166–170 of the Firm’s 2009 Annual Report.