JP Morgan Chase 2008 Annual Report Download - page 79

JPMorgan Chase & Co. / 2008 Annual Report 77
Securities
Almost all of the Firm’s securities portfolio is classified as AFS and is
used predominantly to manage the Firm’s exposure to interest rate
movements, as well as to make strategic longer-term investments.
The AFS portfolio increased from December 31, 2007, predominantly
as a result of purchases, partially offset by sales and maturities. For
additional information related to securities, refer to the Corporate/Private
Equity segment discussion, Note 4 and Note 12 on pages 73–75,
141–155 and 170–174, respectively, of this Annual Report.
Loans and allowance for loan losses
The Firm provides loans to a variety of customers, from large corpo-
rate and institutional clients to individual consumers. Loans increased
from December 31, 2007, largely due to loans acquired in the
Washington Mutual transaction, organic growth in lending in the
wholesale businesses, particularly CB, and growth in the consumer
prime mortgage portfolio driven by the decision to retain, rather than
sell, new originations of nonconforming mortgage loans.
Both the consumer and wholesale components of the allowance for
loan losses increased from the prior year reflecting the addition of
noncredit-impaired loans acquired in the Washington Mutual transac-
tion, including an increase to conform the allowance applicable to
assets acquired from Washington Mutual to the Firm’s loan loss
methodologies. Excluding the Washington Mutual transaction the con-
sumer allowance rose due to an increase in estimated losses for home
equity, subprime mortgage, prime mortgage and credit card loans due
to the effects of continued housing price declines, rising unemploy-
ment and a weakening economic environment. Excluding the
Washington Mutual transaction, the increase in the wholesale
allowance was due to the impact of the transfer of $4.9 billion of
funded and unfunded leveraged lending loans in IB to the retained
loan portfolio from the held-for-sale loan portfolio, the effect of a
weakening credit environment and loan growth. For a more detailed
discussion of the loan portfolio and the allowance for loan losses,
refer to Credit Risk Management on pages 92–111, and Notes 4, 5,
14 and 15 on pages 141–155, 156–158, 175–178 and 178–180,
respectively, of this Annual Report.
Accrued interest and accounts receivable; accounts payable
and other liabilities
The Firm’s accrued interest and accounts receivable consist of accrued
interest receivable from interest-earning assets; receivables from cus-
tomers (primarily from activities related to IB’s Prime Services busi-
ness); receivables from brokers, dealers and clearing organizations;
and receivables from failed securities sales. The Firm’s accounts
payable and other liabilities consist of accounts payable to customers
(primarily from activities related to IB’s Prime Services business),
payables to brokers, dealers and clearing organizations; payables from
failed securities purchases; accrued expense, including for interest-
bearing liabilities; and all other liabilities, including obligations to
return securities received as collateral. The increase in accrued interest
and accounts receivable from December 31, 2007, was due largely to
the Bear Stearns merger, reflecting higher customer receivables in IB’s
Prime Services business and the Washington Mutual transaction. The
increase in accounts payable and other liabilities was predominantly
due to the Bear Stearns merger, reflecting higher customer payables
(primarily related to IB’s Prime Services business), as well as higher
obligations to return securities received as collateral. For additional
information, see Note 22 on page 202 of this Annual Report.
Goodwill
Goodwill arises from business combinations and represents the
excess of the cost of an acquired entity over the net fair value
amounts assigned to assets acquired and liabilities assumed. The
increase in goodwill was due predominantly to the dissolution of
Chase Paymentech Solutions joint venture, the merger with Bear
Stearns, the purchase of an additional equity interest in Highbridge
and tax-related purchase accounting adjustments associated with the
Bank One merger, which increased goodwill attributed to IB. These
items were offset partially by a decrease in goodwill attributed to TSS
predominantly resulting from the sale of a previously consolidated
subsidiary. For additional information, see Note 18 on pages
198–201 of this Annual Report.
Other intangible assets
The Firm’s other intangible assets consist of MSRs, purchased credit
card relationships, other credit card-related intangibles, core deposit
intangibles, and other intangibles. MSRs increased due to the
Washington Mutual transaction and the Bear Stearns merger; sales
in RFS of originated loans; and purchases of MSRs. These increases in
MSRs were partially offset by markdowns of the fair value of the
MSR asset due to changes to inputs and assumptions in the MSR
valuation model, including updates to prepayment assumptions to
reflect current expectations, and to servicing portfolio run-offs. The
decrease in other intangible assets reflects amortization expense
associated with credit card-related and core deposit intangibles, par-
tially offset by increases due to the dissolution of the Chase
Paymentech Solutions joint venture, the purchase of an additional
equity interest in Highbridge, and the acquisition of an institutional
global custody portfolio. For additional information on MSRs and
other intangible assets, see Note 18 on pages 198–201 of this
Annual Report.
Other assets
The Firm’s other assets consist of private equity and other invest-
ments, collateral received, corporate and bank-owned life insurance
policies, premises and equipment, assets acquired in loan satisfaction
(including real estate owned), and all other assets. The increase in
other assets from December 31, 2007, was due to the Bear Stearns
merger, which partly resulted in a higher volume of collateral received
from customers, the Washington Mutual transaction, and the pur-
chase of asset-backed commercial paper from money market mutual
funds in connection with the Federal Reserve’s Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility
(“AML Facility”), which was established by the Federal Reserve on
September 19, 2008, as a temporary lending facility to provide liquidity
to eligible U.S. money market mutual funds. For additional information
regarding the AML Facility, see Executive Overview and Note 21 on
pages 41–44 and 202 respectively, of this Annual Report.