JP Morgan Chase 2009 Annual Report Download - page 208

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 206
The table below summarizes the changes in the allowance for
loan losses.
Year ended December 31,
(in millions)
2009 2008 2007
Allowance for loan losses at
January 1
$ 23,164 $ 9,234 $ 7,279
Cumulative effect of change in
accounting principles(a) — — (56 )
Allowance for loan losses at
January 1, adjusted 23,164 9,234 7,223
Gross charge-offs 24,018 10,764 5,367
Gross/(recoveries) (1,053)
(929) (829 )
Net charge-offs 22,965 9,835 4,538
Provision for loan losses:
Provision excluding accounting
conformity 31,735 19,660 6,538
Provision for loan losses –
accounting conformity(b) — 1,577 —
Total provision for loan losses
31,735 21,237 6,538
Addition resulting from Washing
ton
Mutual transaction — 2,535 —
Other(c) (332) (7) 11
Allowance for loan losses at
December 31
$ 31,602 $ 23,164 $ 9,234
Components:
Asset-specific(d)(e) $ 3,042 $ 1,091 $ 188
Formula-based 26,979 22,073 9,046
Purchased credit-impaired 1,581 — —
Total allowance for loan losses
$ 31,602 $ 23,164 $ 9,234
(a) Reflects the effect of the adoption of the fair value option at January 1, 2007. For
a further discussion of the fair value option, see Note 4 on pages 173–175 of this
Annual Report.
(b) Related to the Washington Mutual transaction in 2008.
(c) The 2009 amount predominantly represents a reclassification related to the
issuance and retention of securities from the Chase Issuance Trust. See Note 15
on pages 206–213 of this Annual Report. The 2008 amount represents foreign
exchange translation. The 2007 amount includes assets acquired of $5 million and
$5 million of foreign exchange translation.
(d) Relates to risk-rated loans that have been placed on nonaccrual status and loans
that have been modified in a troubled debt restructuring.
(e) The asset-specific consumer allowance for loan losses includes troubled debt
restructuring reserves of $754 million and $258 million at December 31,
2009 and 2008, respectively and none at December 31, 2007. Prior period
amounts have been reclassified to conform to the current presentation.
The table below summarizes the changes in the allowance for
lending-related commitments.
Year ended December 31, (in millions) 2009 2008 2007
Allowance for lending-related commitments
at January 1 $ 659 $ 850 $ 524
Provision for lending-related commitments
Provision excluding accounting conformity 280 (215) 326
Provision for lending-related commitments
accounting conformity(a) — (43) —
Total provision for lending-related
commitments 280 (258) 326
Addition resulting from Washington Mutual
transaction — 66 —
Other — 1 —
Allowance for lending-related
commitments at December 31 $ 939 $ 659 $ 850
Components:
Asset-specific $ 297 $ 29 $ 28
Formula-based 642 630 822
Total allowance for lending-related
commitments $ 939 $ 659 $ 850
(a) Related to the Washington Mutual transaction in 2008.
Note 15 – Loan securitizations
JPMorgan Chase securitizes and sells a variety of loans, including
residential mortgage, credit card, automobile, student, and com-
mercial loans (primarily related to real estate). JPMorgan Chase-
sponsored securitizations utilize SPEs as part of the securitization
process. These SPEs are structured to meet the definition of a QSPE
(as discussed in Note 1 on page 150 of this Annual Report); accord-
ingly, the assets and liabilities of securitization-related QSPEs are
not reflected on the Firm’s Consolidated Balance Sheets (except for
retained interests, as described below). The primary purpose of
these securitization vehicles is to meet investor needs and to gen-
erate liquidity for the Firm through the sale of loans to the QSPEs.
These QSPEs are financed through the issuance of fixed- or float-
ing-rate asset-backed securities. See Note 16 on pages 221–222
for further information on the new accounting guidance, effective
January 1, 2010, which eliminates the concept of QSPEs and re-
vises the criteria for the consolidation of VIEs.
The Firm records a loan securitization as a sale when the accounting
criteria for a sale are met. Those criteria are: (1) the transferred assets
are legally isolated from the Firm’s creditors; (2) the entity can pledge
or exchange the financial assets, or if the entity is a QSPE, its inves-
tors can pledge or exchange their interests; and (3) the Firm does not
maintain effective control to repurchase the transferred assets before
their maturity, or have the ability to unilaterally cause the holder to
return the transferred assets.
For loan securitizations that meet the accounting sales criteria, the
gains or losses recorded depend, in part, on the carrying amount of
the loans sold except for servicing assets which are initially recorded
at fair value. At the time of sale, any retained servicing asset is ini-
tially recognized at fair value. The remaining carrying amount of the
loans sold is allocated between the loans sold and the other interests
retained, based on their relative fair values on the date of sale. Gains
on securitizations are reported in noninterest revenue.
When quoted market prices are not available, the Firm estimates
the fair value for these retained interests by calculating the present
value of future expected cash flows using modeling techniques.
Such models incorporate management’s best estimates of key
variables, such as expected credit losses, prepayment speeds and
the discount rates appropriate for the risks involved.
The Firm may retain interests in the securitized loans in the form of
undivided seller’s interest, senior or subordinated interest-only
strips, debt and equity tranches, escrow accounts and servicing
rights. The classification of retained interests is dependent upon
several factors, including the type of interest, whether or not the
retained interest is represented by a security certificate and when it
was retained. Interests retained by IB are classified as trading
assets. See credit card securitizations and mortgage securitizations
sections of this Note for further information on the classification of
their related retained interests. Retained interests classified as AFS
that are rated below “AA” by an external rating agency are subject
to impairment evaluations, as discussed in Note 11 on page 197 of
this Annual Report.