JP Morgan Chase 2010 Annual Report Download - page 214

Notes to consolidated financial statements
214 JPMorgan Chase & Co./2010 Annual Report
Note 12 – Securities
Securities are classified as AFS, held-to-maturity (“HTM”) or trad-
ing. Trading securities are discussed in Note 3 on pages 170–187
of this Annual Report. Securities are classified primarily as AFS
when used to manage the Firm’s exposure to interest rate move-
ments or used for longer-term strategic purposes. AFS securities are
carried at fair value on the Consolidated Balance Sheets. Unrealized
gains and losses, after any applicable hedge accounting adjust-
ments, are reported as net increases or decreases to accumulated
other comprehensive income/(loss). The specific identification
method is used to determine realized gains and losses on AFS
securities, which are included in securities gains/(losses) on the
Consolidated Statements of Income. Securities that the Firm has the
positive intent and ability to hold to maturity are classified as HTM
and are carried at amortized cost on the Consolidated Balance
Sheets. The Firm has not classified new purchases of securities as
HTM for the past several years.
Other-than-temporary impairment
AFS debt and equity securities in unrealized loss positions are
analyzed as part of the Firm’s ongoing assessment of other-than-
temporary impairment (“OTTI”). For debt securities, the Firm con-
siders a decline in fair value to be other-than-temporary when the
Firm does not expect to recover the entire amortized cost basis of
the security. The Firm also considers an OTTI to have occurred when
there is an adverse change in cash flows to beneficial interests in
securitizations that are rated below “AA” at their acquisition, or
that can be contractually prepaid or otherwise settled in such a way
that the Firm would not recover substantially all of its recorded
investment. For AFS equity securities, the Firm considers a decline
in fair value to be other-than-temporary if it is probable that the
Firm will not recover its amortized cost basis.
For debt securities, OTTI losses must be recognized in earnings if an
investor has the intent to sell the debt security, or if it is more likely
than not that the investor will be required to sell the debt security
before recovery of its amortized cost basis. However, even if an
investor does not expect to sell a debt security, it must evaluate the
expected cash flows to be received and determine if a credit loss
exists. In the event of a credit loss, only the amount of impairment
associated with the credit loss is recognized in income. Amounts
relating to factors other than credit losses are recorded in OCI.
When the Firm intends to sell AFS debt or equity securities, it
recognizes an impairment loss equal to the full difference between
the amortized cost basis and the fair value of those securities.
When the Firm does not intend to sell AFS debt or equity securities
in an unrealized loss position, potential OTTI is considered using a
variety of factors, including the length of time and extent to which
the market value has been less than cost; adverse conditions spe-
cifically related to the industry, geographic area or financial condi-
tion of the issuer or underlying collateral of a security; payment
structure of the security; changes to the rating of the security by a
rating agency; the volatility of the fair value changes; and changes
in fair value of the security after the balance sheet date. For debt
securities, the Firm estimates cash flows over the remaining lives of
the underlying collateral to assess whether credit losses exist and,
where applicable for purchased or retained beneficial interests in
securitized assets, to determine if any adverse changes in cash
flows have occurred. The Firm’s cash flow estimates take into
account expectations of relevant market and economic data as of
the end of the reporting period. For securities issued in a securitiza-
tion, the Firm also takes into consideration underlying loan-level
data, and structural features of the securitization, such as subordi-
nation, excess spread, overcollateralization or other forms of credit
enhancement, and compares the losses projected for the underlying
collateral (“pool losses”) against the level of credit enhancement in
the securitization structure to determine whether these features are
sufficient to absorb the pool losses, or whether a credit loss on the
AFS debt security exists. The Firm also performs other analyses to
support its cash flow projections, such as first-loss analyses or
stress scenarios.
For equity securities, the Firm considers the above factors, as well
as the Firm’s intent and ability to retain its investment for a period
of time sufficient to allow for any anticipated recovery in market
value, and whether evidence exists to support a realizable value
equal to or greater than the carrying value.
Realized gains and losses
The following table presents realized gains and losses from AFS
securities.
Year ended December 31,
(in millions)
20
10
2009 2008
Realized gains
$
3,382
$ 2,268 $ 1,890
Realized losses (317) (580) (330 )
(c)
Net realized gains
(a)
3,065 1,688
1,560
Credit losses included in secur
i
ties
gains(b) (100) (578)
NA
Net securities gains
$
2,965
$ 1,110 $ 1,560
(a) Proceeds from securities sold were within approximately 3% of amortized cost
in 2010 and 2009 and within approximately 2% of amortized cost in 2008.
(b) Includes other-than-temporary impairment losses recognized in income on certain
prime mortgage-backed securities and obligations of U.S. states and municipali-
ties for the year ended December 31, 2010, and on certain subprime and prime
mortgage-backed securities and obligations of U.S. states and municipalities for
the year ended December 31, 2009.
(c) Includes $76 million of losses due to other-than temporary impairment of
subprime mortgage-backed securities.