JP Morgan Chase 2003 Annual Report Download - page 66

M anagement’s discussion and analysis
J.P. M organ Chase & Co.
64 J.P. Morgan Chase & Co. / 2003 Annual Report
Nonperforming assets decreased by $1.7 billion, or 35% , during
the year ended December 31, 2003, to $3.1 billion. The decrease
w as due to activity in the commercial portfolio: total reductions,
including repayments, loan sales and net charge-offs exceeded
new additions, resulting in net reductions of $1.7 billion. By
contrast, there w ere commercial net additions during 2002. A
decline in exposure to the Telecom services, Utilities and M edia
industries accounted for more than half of the overall $1.7 bil-
lion decrease.
Commercial
Commercial nonperforming loans decreased by 45% , to
$2.0 billion as of December 31, 2003, from $3.7 billion at year-
end 2002. Over the same period, nonperforming commercial
loans as a percentage of total commercial loans fell to 2.42%
from 4.01% . Commercial loan net charge-offs in 2003 w ere
$816 million, compared w ith $1.9 billion in 2002, the result of
improved credit quality in the portfolio and increased recoveries
resulting from restructurings. There w ere no net charge-offs of
commercial lending–related commitments in 2003, compared
w ith $212 million in 2002. The average annual net charge-off
rate for commercial loans improved significantly, to 0.91% in
2003 from 1.93% in 2002.
Commercial net charge-offs in 2004 are expected to decline,
but at a slow er pace than in the second half of 2003.
Consumer
The $21 million decrease in consumer nonperforming loans
reflected improved credit quality in the portfolio. While net
charge-offs increased by $92 million during the year reflecting a
10% grow th in the portfolio, the average annual net charge-off
rate declined to 1.96% from 2.30% during 2002.
In 2004, the amount of gross charge-offs is expected to increase
due to growth in outstandings, but net charge-off rates are
expected to remain stable.
Allowance for credit losses
JPM organ Chase’s Allow ance for credit losses is intended to
cover probable credit losses, including losses w here the asset is
not specifically identified or the size of the loss has not been
determined. At least quarterly, the Firm’s Risk M anagement
Committee review s the Allow ance for credit losses relative to the
risk profile of the Firm’s credit portfolio and current economic
conditions. The allow ance is adjusted based on that review if, in
management’s judgment, changes are w arranted. The allow ance
includes specific and expected loss components and a residual
component. For further discussion of the components of the
Allow ance for credit losses, see Critical accounting estimates
used by the Firm on pages 75–76 and Note 12 on page 100
of this Annual Report. At December 31, 2003, management
deemed the allow ance for credit losses to be appropriate to
absorb losses that currently may exist but are not yet identifiable.
Summary of changes in the allowance
2003 2002
(in millions) Commercial Consumer Residual Tot al Commercial Consumer Residual Total
Loans:
Beginning balance at January 1 $2,216 $ 2,360 $ 774 $ 5,350 $ 1,724 $ 2,105 $ 695 $ 4,524
Net charge-offs (816) (1,456) — (2,272) (1,881) (1,795) — (3,676)
Provision for loan losses (30) 1,491 118 1,579 2,371 1,589 79 4,039
Other 1(138)(c) 3(134) 2 461 — 463
Ending balance at December 31 $1,371(a) $2,257 $ 895 $ 4,523 $ 2,216 (a) $ 2,360 $ 774 $ 5,350
Lending-related com mitments:
Beginning balance at January 1 $324 $ — $ 39 $ 363 $ 226 $ — $ 56 $ 282
Net charge-offs — ——— (212) — — (212)
Provision for lending-related commitments (47) — 8 (39) 309 — (17) 292
Other — ——— 1——1
Ending balance at December 31 $277
(b) $— $47$ 324 $ 324 (b) $— $39$363
(a) Includes $917 million and $454 million of commercial specific and commercial expected loss components, respectively, at December 31, 2003. Includes $1.6 billion and $613 million of commercial
specific and commercial expected loss components, respectively, at December 31, 2002.
(b) Includes $172 million and $105 million of commercial specific and commercial expected loss components, respectively, at December 31, 2003. Includes $237 million and $87 million of commercial
specific and commercial expected loss components, respectively, at December 31, 2002.
(c) Includes $138 million related to the transfer of the allowance for accrued interest and fees on securitized credit card loans.