JP Morgan Chase 2006 Annual Report Download - page 77

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JPMorgan Chase & Co. / 2006 Annual Report 75
Summary of changes in the allowance for credit losses
Year ended December 31, 2006 2005
(in millions) Wholesale Consumer Total Wholesale Consumer Total
Loans:
Beginning balance at January 1, $ 2,453 $ 4,637 $ 7,090 $ 3,098 $ 4,222 $ 7,320
Gross charge-offs (186) (3,698) (3,884) (255) (4,614) (4,869)
Gross recoveries 208 634 842 332 718 1,050
Net (charge-offs) recoveries 22 (3,064) (3,042) 77 (3,896) (3,819)
Provision for loan losses(a) 213 2,940 3,153 (716) 4,291 3,575
Other 23 55 78(d) (6) 20 14
Ending balance at December 31 $ 2,711(b) $ 4,568(c) $ 7,279 $ 2,453(b) $ 4,637(c) $ 7,090
Components:
Asset specific $51 $ — $51 $ 203 $ — $ 203
Statistical component 1,757 3,398 5,155 1,629 3,422 5,051
Adjustment to statistical component 903 1,170 2,073 621 1,215 1,836
Total Allowance for loan losses $ 2,711 $ 4,568 $ 7,279 $ 2,453 $ 4,637 $ 7,090
Lending-related commitments:
Beginning balance at January 1, $ 385 $ 15 $ 400 $ 480 $ 12 $ 492
Provision for lending-related commitments 108 9 117 (95) 3 (92)
Other 617
(d) ———
Ending balance at December 31 $ 499 $ 25 $ 524 $ 385 $ 15 $ 400
Components:
Asset specific $33 $ — $33 $60 $— $60
Statistical component 466 25 491 325 15 340
Total allowance for
lending-related commitments $ 499 $ 25 $ 524 $ 385 $ 15 $ 400
(a) 2006 includes a $157 million release of Allowance for loan losses related to Hurricane Katrina. 2005 includes $400 million of allowance related to Hurricane Katrina.
(b) The ratio of the wholesale allowance for loan losses to total wholesale loans was 1.68% and 1.85%, excluding wholesale HFS loans of $22.5 billion and $17.6 billion at December 31, 2006 and
2005, respectively.
(c) The ratio of the consumer allowance for loan losses to total consumer loans was 1.71% and 1.84%, excluding consumer HFS loans of $32.7 billion and $16.6 billion at December 31, 2006 and
2005, respectively.
(d) Primarily relates to loans acquired in The Bank of New York transaction in the fourth quarter of 2006.
ALLOWANCE FOR CREDIT LOSSES
JPMorgan Chase’s allowance for credit losses is intended to cover probable
credit losses, including losses where the asset is not specifically identified or
the size of the loss has not been fully determined. At least quarterly, the
allowance 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. The
allowance is reviewed relative to the risk profile of the Firm’s credit portfolio
and current economic conditions and is adjusted if, in management’s judg-
ment, changes are warranted. The allowance includes an asset-specific com-
ponent and a formula-based component, the latter of which consists of a
statistical calculation and adjustments to the statistical calculation. For fur-
ther discussion of the components of the allowance for credit losses, see
Critical accounting estimates used by the Firm on page 83 and Note 13 on
pages 113–114 of this Annual Report. At December 31, 2006, management
deemed the allowance for credit losses to be appropriate (i.e., sufficient to
absorb losses that are inherent in the portfolio, including losses that are not
specifically identified or for which the size of the loss has not yet been fully
determined).