JP Morgan Chase 2010 Annual Report Download - page 125

JPMorgan Chase & Co./2010 Annual Report 125
Loans
In the normal course of business, the Firm provides loans to a
variety of wholesale customers, from large corporate and institu-
tional clients to high-net-worth individuals. For further discussion on
loans, including information on credit quality indicators, see Note 14
on pages 220–238 of this Annual Report.
Retained wholesale loans were $222.5 billion at December 31, 2010,
compared with $200.1 billion at December 31, 2009. The $22.4
billion increase was primarily related to the January 1, 2010, adoption
of accounting guidance related to VIEs. Excluding the effect of the
adoption of the accounting guidance, loans increased by $7.4 billion.
Loans held-for-sale and loans at fair value relate primarily to syndi-
cated loans and loans transferred from the retained portfolio.
The Firm actively manages wholesale credit exposure through sales of
loans and lending-related commitments. During 2010 the Firm sold
$7.7 billion of loans and commitments, recognizing revenue gains of
$98.9 million. In 2009, the Firm sold $3.9 billion of loans and com-
mitments, recognizing net losses of $38 million. These results in-
cluded gains or losses on sales of nonaccrual loans, if any, as
discussed below. These activities are not related to the Firm’s securiti-
zation activities. For further discussion of securitization activity, see
Liquidity Risk Management and Note 16 on pages 110–115 and
244–259 respectively, of this Annual Report.
The following table presents the change in the nonaccrual loan
portfolio for the years ended December 31, 2010 and 2009.
Wholesale nonaccrual loan activity
(a)
Year ended December 31, (in millions)
2010
2009
Beginning balance
$
6,904
$ 2,382
Additions
9,
249
13,591
Reductions:
Paydowns and other
5,
540
4,964
Gross charge-offs
1,
854
2,974
Returned to performing
364
341
Sales
2,
3
89
790
Total reductions
10,
147
9,069
Net additions
/(reductions)
(898)
4,522
Ending balance
$
6,006
$ 6,904
(a) This table includes total wholesale loans – reported.
Nonaccrual wholesale loans decreased by $898 million from Decem-
ber 31, 2009, reflecting primarily net repayments and loan sales.
The following table presents net charge-offs, which are defined as
gross charge-offs less recoveries, for the years ended December 31,
2010 and 2009. The amounts in the table below do not include
revenue gains from sales of nonaccrual loans.
Wholesale net charge
-
offs
Year ended December 31,
(in millions, except ratios) 2010 2009
Loans
–
reported
Average loans retained
$
213,609
$ 223,047
Net charge-offs
1,727
3,132
Average annual net charge-off ratio
0
.81%
1.40 %
Derivative contracts
In the normal course of business, the Firm uses derivative instru-
ments predominantly for market-making activity. Derivatives enable
customers and the Firm to manage exposures to fluctuations in
interest rates, currencies and other markets. The Firm also uses
derivative instruments to manage its credit exposure. For further
discussion of derivative contracts, see Note 5 and Note 6 on pages
189–190 and 191–199, respectively, of this Annual Report.
The following tables summarize the net derivative receivables MTM
for the periods presented.
Derivative receivables MTM
December 31,
Derivative receivables MTM
(in millions)
2010
2009
Interest rate
(a)
$ 32,555 $ 33,733
Credit derivatives
(a)
7,725 11,859
Foreign exchange
25,858
21,984
Equity
4,204
6,635
Commodity
10,139
5,999
Total, net of cash collateral
80,481
80,210
Liquid securities
and other cash
collateral held against derivative
receivables (16,486) (15,519)
Total, net of all collateral
$
63,995
$ 64,691
(a) In 2010, the reporting of cash collateral netting was enhanced to reflect a
refined allocation by product. Prior periods have been revised to conform to
the current presentation. The refinement resulted in an increase to interest rate
derivative receivables, and an offsetting decrease to credit derivative receiv-
ables, of $7.0 billion as of December 31, 2009.
Derivative receivables reported on the Consolidated Balance
Sheets were $80.5 billion and $80.2 billion at December 31,
2010 and 2009, respectively. These represent the fair value (e.g.
MTM) of the derivative contracts after giving effect to legally
enforceable master netting agreements, cash collateral held by
the Firm and the credit valuation adjustment (“CVA”). These
amounts reported on the Consolidated Balance Sheets represent
the cost to the Firm to replace the contracts at current market
rates should the counterparty default. However, in management’s
view, the appropriate measure of current credit risk should also
reflect additional liquid securities and other cash collateral held
by the Firm of $16.5 billion and $15.5 billion at December 31,
2010 and 2009, respectively, resulting in total exposure, net of
all collateral, of $64.0 billion and $64.7 billion at December 31,
2010 and 2009, respectively.
The Firm also holds additional collateral delivered by clients at the
initiation of transactions, as well as collateral related to contracts that
have a non-daily call frequency and collateral that the Firm has
agreed to return but has not yet settled as of the reporting date.
Though this collateral does not reduce the balances noted in the table
above, it is available as security against potential exposure that could
arise should the MTM of the client’s derivative transactions move in
the Firm’s favor. As of December 31, 2010 and 2009, the Firm held
$18.0 billion and $16.9 billion, respectively, of this additional collat-
eral. The derivative receivables MTM, net of all collateral, also do not
include other credit enhancements, such as letters of credit.