JP Morgan Chase 2008 Annual Report Download - page 179

JPMorgan Chase & Co./ 2008 Annual Report 177
The following table reflects information about the Firm’s loan sales.
Year ended December 31, (in millions) 2008 2007 2006
Net gains/(losses) on sales of loans (including
lower of cost or fair value adjustments)(a) $(2,508) $ 99 $ 672
(a) Excludes sales related to loans accounted for at fair value.
Purchased credit-impaired loans
In connection with the Washington Mutual transaction, JPMorgan
Chase acquired certain loans that it deemed to be credit-impaired
under SOP 03-3. Wholesale loans with a carrying amount of $224
million at December 31, 2008, were determined to be credit-
impaired at the date of acquisition in accordance with SFAS 114.
These wholesale loans are being accounted for individually (not on
a pooled basis) and are reported as nonperforming loans since cash
flows for each individual loan are not reasonably estimable. Such
loans are excluded from the remainder of the following discussion,
which relates solely to purchased credit-impaired consumer loans.
Purchased credit-impaired consumer loans were determined to be
credit-impaired based upon specific risk characteristics of the loan,
including product type, loan-to-value ratios, FICO scores, and past
due status. SOP 03-3 allows purchasers to aggregate credit-impaired
loans acquired in the same fiscal quarter into one or more pools,
provided that the loans have common risk characteristics. A pool is
then accounted for as a single asset with a single composite interest
rate and an aggregate expectation of cash flows. With respect to the
Washington Mutual transaction, all of the consumer loans were
aggregated into pools of loans with common risk characteristics.
The table below sets forth information about these purchased credit-
impaired consumer loans at the acquisition date.
(in millions) September 25, 2008(a)(b)
Contractually required payments receivable
(including interest) $ 168,460
Less: Nonaccretable difference (45,690)
Cash flows expected to be collected(c) 122,770
Less: Accretable yield(d) (32,662)
Fair value of loans acquired $ 90,108
(a) Date of the Washington Mutual transaction.
(b) The amounts in the table above were revised in the fourth quarter of 2008 due to
the Firm’s refinement of both estimates and its application of certain provisions of
SOP 03-3.
(c) Represents undiscounted principal and interest cash flows expected at acquisition.
(d) This amount is recognized into interest income over the estimated life of the underly-
ing loans.
The Firm determined the fair value of the purchased credit-impaired
consumer loans by discounting the cash flows expected to be collect-
ed at a market observable discount rate, when available, adjusted for
factors that a market participant would consider in determining fair
value. In determining the cash flows expected to be collected, man-
agement incorporated assumptions regarding default rates, loss
severities and the amounts and timing of prepayments. Contractually
required payments were determined following the same process used
to estimate cash flows expected to be collected, but without incorpo-
rating assumptions related to default rates and loss severities.
Purchased credit-impaired loans acquired in the Washington Mutual
transaction are reported in loans on the Firm’s Consolidated Balance
Sheets. Following the initial acquisition date of these loans, the
allowance for loan losses, if any is required, would be reported as a
reduction of the carrying amount of the loans. No allowance has
been recorded for these loans as of December 31, 2008. The out-
standing balance and the carrying value of the purchased credit-
impaired consumer loans were as follows.
December 31, 2008 (in millions)
Outstanding balance(a) $ 118,180
Carrying amount 88,813
(a) Represents the sum of principal and earned interest at the reporting date.
Interest income is being accreted on the purchased credit-impaired
consumer loans based on the Firm’s belief that both the timing and
amount of cash flows expected to be collected is reasonably
estimable. For variable rate loans, expected future cash flows are
based on the current contractual rate of the underlying loans.
The table below sets forth the accretable yield activity for these loans
for the year ended December 31, 2008.
Accretable Yield Activity
(in millions)
Balance, September 30, 2008 $ 32,662
Accretion into interest income (1,292)
Changes in interest rates on variable rate loans (4,877)
Balance, December 31, 2008 $ 26,493
Impaired loans
A loan is considered impaired when, based upon current information
and events, it is probable that the Firm will be unable to collect all
amounts due (including principal and interest) according to the con-
tractual terms of the loan agreement. Impaired loans include certain
nonaccrual wholesale loans and loans for which a charge-off has
been recorded based upon the fair value of the underlying collateral.
Impaired loans also include loans that have been modified in trou-
bled debt restructurings as a concession to borrowers experiencing
financial difficulties. Troubled debt restructurings typically result from
the Firm’s loss mitigation activities and could include rate reductions,
principal forgiveness, forbearance and other actions intended to min-
imize the economic loss and to avoid foreclosure or repossession of
collateral. When the Firm modifies home equity lines of credit in trou-
bled debt restructurings, future lending commitments related to the
modified loans are canceled as part of the terms of the modification.
Accordingly, the Firm does not have future commitments to lend
additional funds related to these modified loans. Purchased credit-
impaired loans are not required to be reported as impaired loans as
long as it is probable that the Firm expects to collect all cash flows
expected at acquisition, plus additional cash flows expected to be
collected arising from changes in estimates after acquisition.
Accordingly, none of the credit-impaired loans acquired in the
Washington Mutual transaction are reported in the following tables.
Interest income on impaired loans is recognized based on the Firm’s
policy for recognizing interest on accrual and nonaccrual loans.
Certain loans that have been modified through troubled debt restruc-
turings accrue interest under this policy.