JP Morgan Chase 2010 Annual Report Download - page 131

JPMorgan Chase & Co./2010 Annual Report 131
(h) Included $1.0 billion of loans at December 31, 2009, held by the WMMT, which were consolidated onto the Firm’s Consolidated Balance Sheets at fair value in 2009.
Such loans had been fully repaid or charged off as of December 31, 2010. See Note 16 on pages 244–259 this Annual Report.
(i) Included billed finance charges and fees net of an allowance for uncollectible amounts.
(j) Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and not included in reported loans. For a further discussion of credit card
securitizations, see CS on pages 79–81 of this Annual Report.
(k) At December 31, 2010 and 2009, nonaccrual loans excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion and $9.0 billion, respectively,
that are 90 days past due and accruing at the guaranteed reimbursement rate; and (2) student loans that are 90 days past due and still accruing, which are insured by
U.S. government agencies under the FFELP, of $625 million and $542 million, respectively. These amounts are excluded as reimbursement of insured amounts is pro-
ceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Un-
der guidance issued by the FFIEC, 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 about a specified event (e.g., bankruptcy of the borrower), whichever is earlier.
(l) Excludes PCI loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a
single asset with a single composite interest rate and an aggregate expectation of cash flows, the past-due status of the pools, or that of individual loans within the
pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing.
(m) Average consumer loans held-for-sale and loans at fair value were $1.5 billion and $2.2 billion for the years ended December 31, 2010 and 2009, respectively. These
amounts were excluded when calculating net charge-off rates.
(n) As further discussed below, net charge-off rates for 2010 reflect the impact of an aggregate $632 million adjustment related to the Firm’s estimate of the net realizable
value of the collateral underlying the loans at the charge-off date. Absent this adjustment, net charge-off rates would have been 0.92%, 4.57%, 1.73% and 8.87% for
home equity – senior lien; home equity – junior lien; prime mortgage (including option ARMs); and subprime mortgage, respectively. Total consumer, excluding credit
card and PCI loans, and total consumer, excluding credit card net charge-off rates would have been 2.76% and 2.14%, respectively, excluding this adjustment.
Effective January 1, 2010, the Firm adopted accounting guidance
related to VIEs. Upon adoption of this guidance, the Firm consoli-
dated its Firm-sponsored credit card securitization trusts and certain
other consumer loan securitization entities. The following table
summarizes the impact on consumer loans at adoption.
Reported loans
January 1, 2010 (in millions)
Consumer, excluding credit card
Prime mortgage
, including option ARMs
$ 1,
858
Subprime mortgage
1,758
Auto
218
Student
1,008
Total
consumer, excluding credit card
4,842
Credit card
84,663
Total increase in consumer loans
$ 89,505
Consumer, excluding credit card
Portfolio analysis
The following discussion relates to the specific loan and lending-
related categories. Purchased credit-impaired loans are excluded
from individual loan product discussions and are addressed sepa-
rately below. For further information about the Firm’s consumer
portfolio, related delinquency information and other credit quality
indicators, see Note 14 on pages 220–238 of this Annual Report.
It is the Firm’s policy to charge down residential real estate loans to
net realizable value at no later than 180 days past due. During the
fourth quarter of 2010, the Firm recorded an aggregate adjustment
of $632 million to increase net charge-offs related to the estimated
net realizable value of the collateral underlying delinquent residen-
tial home loans. Because these losses were previously recognized in
the provision and allowance for loan losses, this adjustment had no
impact on the Firm’s net income. The impact of this aggregate
adjustment on reported net charge-off rates is provided in footnote
(n) above.
Home equity: Home equity loans at December 31, 2010, were
$88.4 billion, compared with $101.4 billion at December 31, 2009.
The decrease in this portfolio primarily reflected loan paydowns and
charge-offs. Junior lien net charge-offs declined from the prior year
but remained high. Senior lien nonaccrual loans remained relatively
flat, while junior lien nonaccrual loans decreased from prior year-
end as a result of improvement in early-stage delinquencies. Im-
provements in delinquencies and charge-offs slowed during the
second half of the year and stabilized at these elevated levels. In
addition to delinquent accounts, the Firm monitors current junior
lien loans where the borrower has a first mortgage loan which is
either delinquent or has been modified, as such junior lien loans are
considered to be at higher risk of delinquency. The portfolio con-
tained an estimated $4 billion of such junior lien loans. The risk
associated with these junior lien loans was considered in establish-
ing the allowance for loan losses at December 31, 2010.
Mortgage: Mortgage loans at December 31, 2010, including
prime and subprime mortgages and mortgage loans held-for-sale,
were $86.0 billion, compared with $88.4 billion at December 31,
2009. The decrease was primarily due to portfolio runoff, partially
offset by the addition of loans to the balance sheet as a result of
the adoption of the accounting guidance related to VIEs. Net
charge-offs decreased from the prior year but remained elevated.
Prime mortgages at December 31, 2010, including option ARMs,
were $74.7 billion, compared with $75.9 billion at December 31,
2009. The decrease in loans was due to paydowns and charge-offs
on delinquent loans, partially offset by the addition of loans as a
result of the adoption of the accounting guidance related to VIEs.
Early-stage delinquencies showed improvement during the year but
remained at elevated levels. Late-stage delinquencies increased
during the first half of the year, then trended lower for several
months before flattening toward the end of 2010. Nonaccrual loans
showed improvement, but also remained elevated as a result of
ongoing modification activity and foreclosure processing delays.
Charge-offs declined year over year but remained high.
Option ARM loans, which are included in the prime mortgage
portfolio, were $8.1 billion at December 31, 2010, and represented
11% of the prime mortgage portfolio. These are primarily loans
with low LTV ratios and high borrower FICOs. Accordingly, the Firm
expects substantially lower losses on this portfolio when compared
with the PCI option ARM pool. As of December 31, 2010, ap-
proximately 8% of the option ARM borrowers were delinquent, 4%
were making interest-only or negatively amortizing payments, and
88% were making amortizing payments. Substantially all borrowers
within the portfolio are subject to risk of payment shock due to
future payment recast as a limited number of these loans have been
modified. The cumulative amount of unpaid interest added to the