JP Morgan Chase 2010 Annual Report Download - page 238

Notes to consolidated financial statements
238 JPMorgan Chase & Co./2010 Annual Report
Credit card impaired loans
JPMorgan Chase may offer one of a number of loan modification
programs to credit card borrowers who are experiencing financial
difficulty. The Firm has short-term programs for borrowers who
may be in need of temporary relief, and long-term programs for
borrowers who are experiencing a more fundamental level of
financial difficulties. Most of the Firm’s modified credit card loans
have been modified under the long-term programs. Modifications
under the Firm’s long-term programs involve placing the customer
on a fixed payment plan not exceeding 60 months. Modifications
under all of these programs typically include reducing the interest
rate on the card. Also in all cases, the Firm cancels the customer’s
available line of credit on the credit card. Substantially all of these
modifications, both long-term and short-term are considered to
be troubled debt restructurings.
If the cardholder does not comply with the modified payment
terms, then the credit card loan agreement reverts back to its pre-
modification payment terms. Assuming that the cardholder does
not begin to perform in accordance with those payment terms,
the loan continues to age and will ultimately be charged-off in
accordance with the Firm’s standard charge-off policy. In addi-
tion, if a borrower successfully completes a short-term modifica-
tion program, then the loan reverts back to its pre-modification
payment terms. However, in most cases, the Firm does not rein-
state the borrower’s line of credit.
The Firm measures the allowance for loan losses related to im-
paired credit card loans as the difference between the recorded
investment in the loan and the present value of the cash flows
expected to be collected, discounted at the loan’s original con-
tractual interest rate and, therefore, does not consider any incre-
mental penalty rate in this measurement.
The tables below set forth information about the Firm’s impaired
credit card loans. All of these loans are considered to be impaired
as they have been modified in troubled debt restructurings.
Chase, excluding
Washington Mutual
portfolio
Washington Mutual
portfolio Total credit card
December 31, (in millions)
2010
2009
2010
2009
2010
2009
Impaired loans with an allowance
(a)
(b)
Credit card loans with modified payment terms
(c)
$ 6,685 $ 3,513 $ 1,570 $ 1,617 $ 8,255 $ 5,130
Modified credit card loans that have reverted to
pre-modification payment terms(d) 1,439 812 311 303 1,750 1,115
Total impaired loans
(e)
$ 8,124 $ 4,325 $ 1,881 $ 1,920 $10,005 $ 6,245
Allowance for loan losses related to i
m
paired
loans $ 3,175 $ 2,038 $ 894 $ 1,079 $ 4,069 $ 3,117
(a) The carrying value and the unpaid principal balance are the same for credit card impaired loans.
(b) There are no impaired loans without an allowance.
(c) Represents credit card loans outstanding to borrowers then enrolled in a credit card modification program.
(d) Represents credit card loans that were modified in troubled debt restructurings but that have subsequently reverted back to the loans’ pre-modification payment
terms. Of the $1.8 billion total loan amount at December 31, 2010, approximately $1.2 billion of loans have reverted back to the pre-modification payment terms
of the loans due to noncompliance with the terms of the modified loans. A substantial portion of these loans is expected to be charged-off in accordance with the
Firm’s standard charge-off policy. The remaining $590 million of loans are to borrowers who have successfully completed a short-term modification program. The
Firm continues to report these loans as troubled debt restructurings since the borrowers’ credit lines remain closed. Prior-period amounts have been revised to
conform to the current presentation.
(e) The increase in troubled debt restructurings from December 31, 2009 to December 31, 2010, is primarily attributable to previously-modified loans held in Firm-
sponsored credit card securitization trusts being consolidated as a result of adopting the new accounting guidance related to VIEs.
The following table presents average balances of impaired credit card loans and interest income recognized on those loans.
For the year ended
December 31, Impaired loans (average) Interest income on impaired loans(a)
(in millions)
2010
2009
2008
2010
2009
2008
Chase, excluding Washington Mutual portfolio $ 8,747 $ 3,059 $ 2,386 $ 479 $ 181 $
167
Washington Mutual portfolio
1,983 991 — 126 70
—
Total credit card
$ 10,730 $ 4,050 $ 2,386 $ 605 $ 251 $
167
(a) As permitted by regulatory guidance, credit card loans are generally exempt from being placed on nonaccrual status; accordingly, interest and fees related to credit card loans
continue to accrue until the loan is charged off or paid in full. However, the Firm separately establishes an allowance for the estimated uncollectible portion of billed and ac-
crued interest and fee income on credit card loans.