JP Morgan Chase 2006 Annual Report Download - page 116

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
114 JPMorgan Chase & Co. / 2006 Annual Report
The table below summarizes the changes in the Allowance for lending-related
commitments:
Year ended December 31, (in millions) 2006 2005 2004(c)
Allowance for lending-related
commitments at January 1 $ 400 $ 492 $ 324
Addition resulting from the Merger,
July 1, 2004 —— 508
Provision for lending-related commitments:
Provision excluding accounting
policy conformity 117 (92) (112)
Accounting policy conformity —— (227)(d)
Total Provision for lending-related
commitments 117 (92) (339)
Other(a) 7— (1)
Allowance for lending-related
commitments at December 31(b) $ 524 $ 400 $ 492
(a) 2006 amount relates to The Bank of New York transaction.
(b) 2006 includes $33 million of asset-specific and $491 million of formula-based allowance. 2005
includes $60 million of asset-specific and $340 million of formula-based allowance. 2004
includes $130 million of asset-specific and $362 million of formula-based allowance. The
formula-based allowance for lending-related commitments is based upon a statistical calculation.
There is no adjustment to the statistical calculation for lending-related commitments.
(c) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
(d) Represents a reduction of $227 million to conform provision methodologies in the whole-
sale portfolio.
Note 14 – Loan securitizations
JPMorgan Chase securitizes and sells a variety of its consumer and wholesale
loans. Consumer activities include securitizations of residential real estate, credit
card and automobile loans that are originated or purchased by Retail Financial
Services (“RFS”), and Card Services (“CS”). Wholesale activities include securiti-
zations of purchased residential real estate loans and commercial loans (prima-
rily real estate–related) originated by the Investment Bank (“IB”).
JPMorgan Chase–sponsored securitizations utilize SPEs as part of the securiti-
zation process. These SPEs are structured to meet the definition of a QSPE (as
discussed in Note 1 on page 94 of this Annual Report); accordingly, the
assets and liabilities of securitization-related QSPEs are not reflected in the
Firm’s Consolidated balance sheets (except for retained interests, as described
below) but are included on the balance sheet of the QSPE purchasing the
assets. Assets held by securitization-related QSPEs as of December 31, 2006
and 2005, were as follows:
December 31, (in billions) 2006 2005
Consumer activities
Credit card receivables $ 86.4 $ 96.0
Automobile loans 4.9 5.5
Residential mortgage receivables 40.7 29.8
Wholesale activities
Residential mortgages 43.8 11.1
Commercial and other(a)(b) 87.1 61.8
Total $ 262.9 $ 204.2
(a) Cosponsored securitizations include non-JPMorgan originated assets
(b) Commercial and other consists of commercial loans (primarily real estate) and
non-mortgage consumer receivables purchased from third parties.
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 iso-
lated from the Firm’s creditors; (2) the entity can pledge or exchange the
financial assets or, if the entity is a QSPE, its investors can pledge or exchange
their interests; and (3) the Firm does not maintain effective control via an
agreement 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 and
are allocated between the loans sold and the retained interests, based upon
their relative fair values at the date of sale. Gains on securitizations are
reported in Noninterest revenue. When quoted market prices for the retained
interests are not available, the Firm estimates the fair value for these retained
interests by determining the present value of future expected cash flows
using modeling techniques. Such models incorporate management’s best esti-
mates of key variables, such as expected credit losses, prepayment speeds and
the discount rates appropriate for the risks involved.
Interests in the securitized loans may be retained by the Firm in the form of
senior or subordinated interest-only strips, senior and subordinated tranches,
and escrow accounts. The classification of retained interests is dependent
upon several factors, including the type of interest (e.g., whether the retained
interest is represented by a security certificate) and when it was retained, due
to the adoption of SFAS 155. The Firm has elected to fair value all interests in
securitized loans retained after December 31, 2005, that have an embedded
derivative required to be bifurcated under SFAS 155; these retained interests
are classified primarily as Trading assets. Retained interests from wholesale
activities are classified as Trading assets. For consumer activities, senior and
subordinated retained interests represented by a security certificate are classi-
fied as AFS. Retained interests not represented by a security certificate are
classified in Other assets. For those retained interests that are subject to pre-
payment risk (such that JPMorgan Chase may not recover substantially all of
its investment) but are not required to be bifurcated under SFAS 155, the
retained interests are recorded at fair value; subsequent adjustments are
reflected in earnings or in Other comprehensive income (loss). Retained inter-
ests classified as AFS are subject to the impairment provisions of EITF 99-20.
Credit card securitization trusts require the Firm to maintain a minimum undi-
vided interest in the trusts, representing the Firm’s interests in the receivables
transferred to the trust that have not been securitized. These seller’s interests
are not represented by security certificates. The Firm’s undivided interests are
carried at historical cost and are classified in Loans.