JP Morgan Chase 2010 Annual Report Download - page 77

JPMorgan Chase & Co./2010 Annual Report
77
Net mortgage servicing revenue includes the following
components:
(a) Operating revenue comprises:
– all gross income earned from servicing third-party mortgage
loans including stated service fees, excess service fees, late
fees and other ancillary fees; and
– modeled servicing portfolio runoff (or time decay).
(b) Risk management comprises:
– changes in MSR asset fair value due to market-based inputs
such as interest rates and volatility, as well as updates to
assumptions used in the MSR valuation model.
– derivative valuation adjustments and other, which represents
changes in the fair value of derivative instruments used to
offset the impact of changes in the market-based inputs to
the MSR valuation model.
Real Estate Portfolios
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2010 2009 2008
Noninterest revenue
$
115
$ (26) $ (285 )
Net interest income
5,432
6,546 4,227
Total net revenue
5,547
6,520 3,942
Provision for credit losses 8,231 13,563 8,561
Noninterest expense
1,627
1,847 889
Income/(loss) before income
tax expense/(benefit) (4,311 ) (8,890) (5,508 )
Net i
n
come/(loss)
$
(2,493
)
$ (5,449) $ (3,388 )
Overhead ratio
29
%
28% 23 %
2010 compared with 2009
Real Estate Portfolios reported a net loss of $2.5 billion,
compared with a net loss of $5.4 billion in the prior year. The
improvement was driven by a lower provision for credit losses,
partially offset by lower net interest income.
Net revenue was $5.5 billion, down by $973 million, or 15%,
from the prior year. The decrease was driven by a decline in net
interest income as a result of lower loan balances, reflecting net
portfolio runoff.
The provision for credit losses was $8.2 billion, compared with
$13.6 billion in the prior year. The current-year provision
reflected a $1.9 billion reduction in net charge-offs and a
$1.6 billion reduction in the allowance for the mortgage loan
portfolios. This reduction in the allowance for loan losses included
the effect of $632 million of charge-offs related to an adjustment of
the estimated net realizable value of the collateral underlying
delinquent residential home loans. For additional information,
refer to Portfolio analysis on page 131 of this Annual Report. The
remaining reduction of the allowance of approximately $950
million was a result of an improvement in delinquencies and
lower estimated losses, compared with prior year additions of
$3.6 billion for the home equity and mortgage portfolios.
Additionally, the current-year provision reflected an addition to
the allowance for loan losses of $3.4 billion for the PCI portfolio,
compared with a prior year addition of $1.6 billion for this
portfolio. (For further detail, see the RFS discussion of the
provision for credit losses on page 72 of this Annual Report.)
Noninterest expense was $1.6 billion, down by $220 million, or
12%, from the prior year, reflecting lower default-related expense.
2009 compared with 2008
Real Estate Portfolios reported a net loss of $5.4 billion,
compared with a net loss of $3.4 billion in the prior year.
Net revenue was $6.5 billion, up by $2.6 billion, or 65%, from the
prior year. The increase was driven by the impact of the
Washington Mutual transaction and wider loan spreads, partially
offset by lower heritage Chase loan balances.
The provision for credit losses was $13.6 billion, compared with
$8.6 billion in the prior year. The provision reflected weakness in
the home equity and mortgage portfolios. (For further detail, see
the RFS discussion of the provision for credit losses for further
detail) on pages 72–73 of this Annual Report.
Noninterest expense was $1.8 billion, compared with $889 million
in the prior year, reflecting higher default-related expense.
Included within Real Estate Portfolios are PCI loans that the Firm
acquired in the Washington Mutual transaction. For PCI loans, the
excess of the undiscounted gross cash flows expected to be
collected over the carrying value of the loans (“the accretable
yield”) is accreted into interest income at a level rate of return over
the expected life of the loans.
The net spread between the PCI loans and the related liabilities are
expected to be relatively constant over time, except for any basis
risk or other residual interest rate risk that remains and for certain
changes in the accretable yield percentage (e.g. from extended loan
liquidation periods and from prepayments). As of December 31,
2010, the remaining weighted-average life of the PCI loan portfolio
is expected to be 7.0 years. For further information, see Note 14,
PCI loans, on pages 233–236 of this Annual Report. The loan
balances are expected to decline more rapidly in the earlier years as
the most troubled loans are liquidated, and more slowly thereafter
as the remaining troubled borrowers have limited refinancing
opportunities. Similarly, default and servicing expense are expected
to be higher in the earlier years and decline over time as
liquidations slow down.
To date the impact of the PCI loans on Real Estate Portfolios’ net
income has been modestly negative. This is due to the current net
spread of the portfolio, the provision for loan losses recognized
subsequent to its acquisition, and the higher level of default and
servicing expense associated with the portfolio. Over time, the Firm
expects that this portfolio will contribute positively to net income.