JPMorgan Chase Reports 2005 First-Quarter Net Income of $2.3 Billion after Litigation Charge of $558 Million and Merger Charge of $90 Million

Business Wire, April 20, 2005

The provision for credit losses totaled $94 million, up $40 million from last year. The increase was largely due to the merger. Both the prior year and current quarter included reductions in the allowance for loan losses due to improved credit trends in most consumer lending portfolios. Results also included the benefit of reductions in the allowance for loan losses totaling $20 million related to the sale of the recreational vehicle loan portfolio and the transfer of auto loans to held-for-sale. These benefits were partially offset by an increase in provision expense related to the decision to retain subprime mortgage loans rather than securitize.

Expenses rose to $2.2 billion, an increase of $921 million, primarily due to the merger. Results also included continued investment in the retail banking distribution system and a $40 million charge related to the dissolution of a student loan joint venture in the Education Finance segment. These increases were more than offset by merger-related savings in all businesses.

Home Finance operating earnings were $442 million, up $221 million compared to the prior year. Operating earnings for the Prime Production & Servicing segment of $158 million were up $93 million from the prior year. Results benefited from an increase in risk management revenue associated with the MSR asset and secondary marketing activities, as well as lower expenses. These were partially offset by a decrease in revenue due to lower prime mortgage originations. Earnings for the Consumer Real Estate Lending segment of $284 million were up $128 million from the prior year. Growth was largely due to the merger, but also reflected higher retained home equity loan balances and merger-related expense savings. These increases were partially offset by the absence of the $4 billion manufactured home loan portfolio that was sold in late 2004.

Consumer & Small Business operating earnings totaled $477 million, up $526 million from the prior year. While growth was largely due to the merger, the results also benefited from wider spreads on deposits, increased deposit balances and merger-related expenses savings. These benefits were partially offset by continued investment in the distribution network. Compared to the prior quarter, operating earnings increased $47 million, or 11%, primarily due to the seasonal impact of tax-refund anticipation lending.

Auto & Education Finance operating earnings of $55 million were up $25 million from last year. The current quarter results included a $78 million loss associated with auto loans transferred to held-for-sale, a $40 million joint venture dissolution charge and a benefit of $34 million from the sale of a $2 billion recreational vehicle loan portfolio. The prior year results included a $40 million charge related to auto lease residuals. Excluding the after-tax impact of these four items, operating earnings would have increased $51 million, primarily due to the merger and improved credit quality. Results continued to reflect lower production volumes and narrower margins, due to the competitive nature of the operating environment.