JP Morgan Chase 2008 Annual Report Download - page 180

Notes to consolidated financial statements
178 JPMorgan Chase & Co./ 2008 Annual Report
The tables below set forth information about JPMorgan Chase’s
impaired loans, excluding credit card loans which are discussed
below. The Firm primarily uses the discounted cash flow method for
valuing impaired loans.
December 31, (in millions) 2008 2007
Impaired loans with an allowance:
Wholesale $ 2,026 $ 429
Consumer(a) 2,252 322
Total impaired loans with an allowance(b) 4,278 751
Impaired loans without an allowance:(c)
Wholesale 62 28
Consumer(a) ——
Total impaired loans without an allowance 62 28
Total impaired loans(b) $ 4,340 $ 779
Allowance for impaired loans under SFAS 114:
Wholesale $ 712 $ 108
Consumer(a) 379 116
Total allowance for impaired loans under
SFAS 114(d) $ 1,091 $ 224
Year ended December 31, (in millions) 2008 2007 2006
Average balance of impaired loans
during the period:
Wholesale $ 896 $ 316 $ 697
Consumer(a) 1,211 317 300
Total impaired loans(b) $ 2,107 $ 633 $ 997
Interest income recognized on impaired
loans during the period:
Wholesale $—$— $ 2
Consumer(a) 57 ——
Total interest income recognized on
impaired loans during the period $ 57 $— $ 2
(a) Excludes credit card loans.
(b) In 2008, methodologies for calculating impaired loans have changed. Prior periods
have been revised to conform to current presentation.
(c) When the discounted cash flows, collateral value or market price equals or exceeds
the carrying value of the loan, then the loan does not require an allowance under
SFAS 114.
(d) The allowance for impaired loans under SFAS 114 is included in JPMorgan Chase’s
allowance for loan losses. The allowance for certain consumer impaired loans has
been categorized in the allowance for loan losses as formula-based.
During 2008, loss mitigation efforts related to delinquent mortgage
and home equity loans increased substantially, resulting in a signifi-
cant increase in consumer troubled debt restructurings. In the fourth
quarter of 2008, the Firm announced plans to further expand loss
mitigation efforts related to these portfolios, including plans to open
regional counseling centers, hire additional loan counselors, intro-
duce new financing alternatives, proactively reach out to borrowers
to offer pre-qualified modifications, and commence a new process to
independently review each loan before moving it into the foreclosure
process. These loss mitigation efforts, which generally represent vari-
ous forms of term extensions, rate reductions and forbearances, are
expected to result in additional increases in the balance of modified
loans carried on the Firm’s balance sheet, including loans accounted
for as troubled debt restructurings, while minimizing the economic
loss to the Firm and providing alternatives to foreclosure.
JPMorgan Chase may modify the terms of its credit card loan agree-
ments with borrowers who have experienced financial difficulty. Such
modifications may include canceling the customer’s available line of
credit on the credit card, reducing the interest rate on the card, and
placing the customer on a fixed payment plan not exceeding 60
months. If the cardholder does not comply with the modified terms,
then the credit card loan agreement will revert back to its original
terms, with the amount of any loan outstanding reflected in the
appropriate delinquency “bucket” and the loan amounts then
charged-off in accordance with the Firm’s standard charge-off policy.
Under these procedures, $2.4 billion and $1.4 billion of on-balance
sheet credit card loan outstandings have been modified at December
31, 2008 and 2007, respectively. In accordance with the Firm’s
methodology for determining its consumer allowance for loan losses,
the Firm had already provisioned for these credit card loans; the
modifications to these credit card loans had no incremental impact
on the Firm’s allowance for loan losses.
Note 15 – Allowance for credit losses
During 2008, in connection with the Washington Mutual transaction,
the Firm recorded adjustments to its provision for credit losses in the
aggregate amount of $1.5 billion to conform the Washington Mutual
loan loss reserve methodologies to the appropriate JPMorgan Chase
methodology, based upon the nature and characteristics of the
underlying loans. This amount included an adjustment of $646 mil-
lion to the wholesale provision for credit losses and an adjustment of
$888 million to the consumer provision for credit losses. The Firm’s
methodologies for determining its allowance for credit losses, which
have been applied to the Washington Mutual loans, are described
more fully below.
JPMorgan Chase’s allowance for loan losses covers the wholesale
(risk-rated) and consumer (scored) loan portfolios and represents
management’s estimate of probable credit losses inherent in the
Firm’s loan portfolio. Management also computes an allowance for
wholesale lending-related commitments using a methodology similar
to that used for the wholesale loans.
The allowance for loan losses includes an asset-specific component
and a formula-based component. The asset-specific component
relates to provisions for losses on loans considered impaired and
measured pursuant to SFAS 114. An allowance is established when
the discounted cash flows (or collateral value or observable market
price) of the loan is lower than the carrying value of that loan. To
compute the asset-specific component of the allowance, larger
impaired loans are evaluated individually, and smaller impaired loans
are evaluated as a pool using historical loss experience for the
respective class of assets. An allowance for loan losses will also be
recorded for purchased credit-impaired loans accounted for in accor-
dance with SOP 03-3 if there are probable decreases in expected
future cash flows other than decreases related to repricing of vari-
able rate loans. Any required allowance would be measured based
on the present value of expected cash flows discounted at the loan’s
(or pool’s) effective interest rate. For additional information on pur-
chased credit-impaired loans, see Note 14 on pages 175–178 of this
Annual Report.