JP Morgan Chase 2009 Annual Report Download - page 125

JPMorgan Chase & Co./2009 Annual Report 123
Portfolio transfers: The Firm regularly evaluates market condi-
tions and overall economic returns and makes an initial determina-
tion as to whether new originations will be held-for-investment or
sold within the foreseeable future. The Firm also periodically evalu-
ates the expected economic returns of previously originated loans
under prevailing market conditions to determine whether their
designation as held-for-sale or held-for-investment continues to be
appropriate. When the Firm determines that a change in this desig-
nation is appropriate, the loans are transferred to the appropriate
classification. Since the second half of 2007, all new prime mort-
gage originations that cannot be sold to U.S. government agencies
and U.S. government-sponsored enterprises have been designated
as held-for-investment. Prime mortgage loans originated with the
intent to sell are accounted for at fair value and classified as trad-
ing assets in the Consolidated Balance Sheets.
ALLOWANCE FOR CREDIT LOSSES
JPMorgan Chase’s allowance for loan losses covers the wholesale
(risk-rated) and consumer (primarily scored) loan portfolios and
represents management’s estimate of probable credit losses inherent
in the Firm’s loan portfolio. Management also computes an allow-
ance for wholesale lending-related commitments using a methodol-
ogy similar to that used for the wholesale loans. During 2009, the
Firm did not make any significant changes to the methodologies or
policies described in the following paragraphs.
Wholesale loans are charged off to the allowance for loan losses when
it is highly certain that a loss has been realized; this determination
considers many factors, including the prioritization of the Firm’s claim in
bankruptcy, expectations of the workout/restructuring of the loan, and
valuation of the borrower’s equity. Consumer loans, other than pur-
chased credit-impaired loans, are generally charged off to the allowance
for loan losses upon reaching specified stages of delinquency, in accor-
dance with the Federal Financial Institutions Examination Council 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 of
receiving notification about a specified event (e.g., bankruptcy of the
borrower), whichever is earlier. Residential mortgage products are
generally charged off to an amount equal to the net realizable value of
the underlying collateral, no later than the date the loan becomes 180
days past due. Other consumer products, if collateralized, are generally
charged off to the net realizable value of the underlying collateral at
120 days past due.
Determining the appropriateness of the allowance is complex and
requires judgment about the effect of matters that are inherently
uncertain. Assumptions about unemployment rates, housing prices
and overall economic conditions could have a significant impact on
the Firm’s determination of loan quality. Subsequent evaluations of
the loan portfolio, in light of then-prevailing factors, may result in
significant changes in the allowances for loan losses and lending-
related commitments in future periods. At least quarterly, the allow-
ance for credit losses is reviewed by the Chief Risk Officer, the Chief
Financial Officer and the Controller of the Firm and discussed with the
Risk Policy and Audit Committees of the Board of Directors of the
Firm. As of December 31, 2009, JPMorgan Chase deemed the allow-
ance for credit losses to be appropriate (i.e., sufficient to absorb
losses inherent in the portfolio, including those not yet identifiable).
For a further discussion of the components of the allowance for credit
losses, see Critical Accounting Estimates Used by the Firm on pages
135–139 and Note 14 on pages 204–206 of this Annual Report.
The allowance for credit losses increased by $8.7 billion from the
prior year to $32.5 billion. Excluding held-for-sale loans, loans carried
at fair value, and purchased credit-impaired consumer loans, the
allowance for loan losses represented 5.51% of loans at December
31, 2009, compared with 3.62% at December 31, 2008.
The consumer allowance for loan losses increased by $7.8 billion
from the prior year, primarily as a result of an increased allowance for
loan losses in residential real estate and credit card. The increase
included additions to the allowance for loan losses of $5.2 billion,
driven by higher estimated losses for residential mortgage and home
equity loans as the weak labor market and weak overall economic
conditions have resulted in increased delinquencies, and continued
weak housing prices have driven a significant increase in loss severity.
The allowance for loan losses related to credit card increased $2.0
billion from the prior year, reflecting continued weakness in the credit
environment. The increase reflects an addition of $2.4 billion through
the provision for loan losses, partially offset by the reclassification of
$298 million related to the issuance and retention of securities from
the Chase Issuance Trust.
The wholesale allowance for loan losses increased by $600 million
from December 31, 2008, reflecting the effect of a continued weak-
ening credit environment.
To provide for the risk of loss inherent in the Firm’s process of extend-
ing credit an allowance for lending-related commitments is held for
the Firm, which is reported in other liabilities. The allowance is com-
puted using a methodology similar to that used for the wholesale
loan portfolio, modified for expected maturities and probabilities of
drawdown. For a further discussion on the allowance for lending-
related commitments, see Note 14 on page 204–206 of this Annual
Report.
The allowance for lending-related commitments for both wholesale
and consumer, which is reported in other liabilities, was $939 million
and $659 million at December 31, 2009 and 2008, respectively. The
increase reflects downgrades within the wholesale portfolio due to
the continued weakening credit environment during 2009.
The credit ratios in the table below are based on retained loan bal-
ances, which exclude loans held-for-sale and loans accounted for at
fair value. As of December 31, 2009 and 2008, wholesale retained
loans were $200.1 billion and $248.1 billion, respectively; and con-
sumer retained loans were $427.1 billion and $480.8 billion, respec-
tively. For the years ended December 31, 2009 and 2008, average
wholesale retained loans were $223.0 billion and $219.6 billion,
respectively; and average consumer retained loans were $449.2
billion and $347.4 billion, respectively.