JP Morgan Chase 2006 Annual Report Download - page 114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
112 JPMorgan Chase & Co. / 2006 Annual Report
Note 12 – Loans
Loans that are originated or purchased by the Firm and that management has
the intent and ability to hold for the foreseeable future are reported at the
principal amount outstanding, net of the Allowance for loan losses, unearned
income and any net deferred loan fees. Loans that are either originated or pur-
chased by the Firm and that management intends to sell or to securitize are
classified as held-for-sale and are carried at the lower of cost or fair value,
with valuation changes recorded in Noninterest revenue. Gains or losses on
held-for-sale loans are also recorded in Noninterest revenue. Interest income is
recognized using the interest method, or on a basis approximating a level rate
of return over the term of the loan.
Loans are transferred from the retained portfolio to the held-for-sale portfolio
when management decides to sell the loan. Transfers to held-for-sale are
recorded at the lower of cost or fair value on the date of transfer; losses attrib-
uted to credit losses are charged off to the Allowance for loan losses and losses
due to interest rates, or exchange rates, are recognized in Noninterest revenue.
Nonaccrual loans are those on which the accrual of interest is discontinued.
Loans (other than certain consumer loans discussed below) are placed on
nonaccrual status immediately if, in the opinion of management, full payment
of principal or interest is in doubt, or when principal or interest is 90 days or
more past due and collateral, if any, is insufficient to cover principal and inter-
est. Interest accrued but not collected at the date a loan is placed on nonac-
crual status is reversed against Interest income. In addition, the amortization
of net deferred loan fees is suspended. Interest income on nonaccrual loans is
recognized only to the extent it is received in cash. However, where there is
doubt regarding the ultimate collectibility of loan principal, all cash thereafter
received is applied to reduce the carrying value of such loans. Loans are
restored to accrual status only when interest and principal payments are
brought current and future payments are reasonably assured. Loans are
charged off to the Allowance for loan losses when it is highly certain that a
loss has been realized.
Consumer loans are generally charged to the Allowance for loan losses upon
reaching specified stages of delinquency, in accordance with the Federal
Financial Institutions Examination Council (“FFIEC”) policy. For example, credit
card loans are charged off by the end of the month in which the account
becomes 180 days past due or within 60 days from receiving notification of
the filing of bankruptcy, whichever is earlier. Residential mortgage products
are generally charged off to net realizable value at 180 days past due. Other
consumer products, if collateralized, are generally charged off to net realizable
value at 120 days past due. Accrued interest on residential mortgage prod-
ucts, automobile financings, education financings and certain other consumer
loans are accounted for in accordance with the nonaccrual loan policy discussed
in the preceding paragraph. Interest and fees related to credit card loans con-
tinue to accrue until the loan is charged off or paid in full. Accrued interest
on all other consumer loans is generally reversed against Interest income
when the loan is charged off. A collateralized loan is considered an in-sub-
stance foreclosure and is reclassified to assets acquired in loan satisfactions,
within Other assets, only when JPMorgan Chase has taken physical possession
of the collateral, regardless of whether formal foreclosure proceedings have
taken place.
The composition of the loan portfolio at each of the dates indicated was
as follows:
December 31, (in millions) 2006 2005
U.S. wholesale loans:
Commercial and industrial $ 77,788 $ 70,233
Real estate 14,237 13,612
Financial institutions 14,103 11,100
Lease financing receivables 2,608 2,621
Other 9,950 14,499
Total U.S. wholesale loans 118,686 112,065
Non-U.S. wholesale loans:
Commercial and industrial 43,428 27,452
Real estate 1,146 1,475
Financial institutions 19,163 7,975
Lease financing receivables 1,174 1,144
Other 145 —
Total non-U.S. wholesale loans 65,056 38,046
Total wholesale loans:(a)
Commercial and industrial 121,216 97,685
Real estate(b) 15,383 15,087
Financial institutions 33,266 19,075
Lease financing receivables 3,782 3,765
Other 10,095 14,499
Total wholesale loans 183,742 150,111
Total consumer loans:(c)
Home equity 85,730 73,866
Mortgage 59,668 58,959
Auto loans and leases 41,009 46,081
All other loans 27,097 18,393
Credit card receivables(d) 85,881 71,738
Total consumer loans 299,385 269,037
Total loans(e)(f) $ 483,127 $ 419,148
(a) Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset
Management.
(b) Represents credits extended for real estate–related purposes to borrowers who are primarily
in the real estate development or investment businesses and for which the primary repayment
is from the sale, lease, management, operations or refinancing of the property.
(c) Includes Retail Financial Services and Card Services.
(d) Includes billed finance charges and fees net of an allowance for uncollectible amounts.
(e) Loans are presented net of unearned income and net deferred loan fees of $2.3 billion and
$3.0 billion at December 31, 2006 and 2005, respectively.
(f) Includes loans held-for-sale (primarily related to securitization and syndication activities) of
$55.2 billion and $34.2 billion at December 31, 2006 and 2005, respectively.
The following table reflects information about the Firm’s loan sales:
Year ended December 31, (in millions) 2006 2005(a) 2004(a)(b)
Net gains on sales of loans (including
lower of cost or fair value adjustments) $ 568 $ 365 $ 459
(a) Prior periods have been revised to reflect the current presentation.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.