JP Morgan Chase 2010 Annual Report Download - page 240

Notes to consolidated financial statements
240 JPMorgan Chase & Co./2010 Annual Report
recognized on defaulted loans, market-specific real estate appraisals
and property sales activity. Real estate broker price opinions are
obtained when the loan is being evaluated for charge-off and at least
every six months thereafter. When foreclosure is determined to be
probable, a third-party appraisal is obtained as soon as practicable.
Forecasting methods are used to estimate expected-loss factors,
including credit loss forecasting models and vintage-based loss
forecasting.
The economic impact of potential modifications of residential real
estate loans is not included in the formula-based allowance because
of the uncertainty regarding the type and results of such modifica-
tions. As discussed in Note 14 on pages 220–238 of this Annual
Report, modified residential real estate loans are generally accounted
for as troubled debt restructurings upon contractual modification and
are evaluated for an asset-specific allowance at and subsequent to
modification. Assumptions regarding the loans’ expected re-default
rates are incorporated into the measurement of the asset-specific
allowance.
Management applies judgment within an established framework to
adjust the results of applying the statistical calculation described above.
The determination of the appropriate adjustment is based on manage-
ment’s view of uncertainties that have occurred but are not yet re-
flected in the loss factors and that relate to current macroeconomic and
political conditions, the quality of underwriting standards and other
relevant internal and external factors affecting the credit quality of the
portfolio. In addition, for the risk-rated portfolios, any adjustments
made to the statistical calculation also consider concentrated and
deteriorating industries. For the scored loan portfolios, adjustments to
the statistical calculation are accomplished in part by analyzing the
historical loss experience for each major product segment. Factors
related to unemployment, housing prices, borrower behavior and lien
position are incorporated into the calculation, where relevant.
Management establishes an asset-specific allowance for lending-
related commitments that are considered impaired and computes a
formula-based allowance for performing wholesale and consumer
lending-related commitments. These are computed using a method-
ology similar to that used for the wholesale loan portfolio, modified
for expected maturities and probabilities of drawdown.
Allowance for credit losses and loans and lending-related commitments by impairment methodology
2010
Year ended December 31,
(in millions) Wholesale
Consumer,
excluding credit card Credit Card Total
Allowance for loan losses
Beginning balance at January 1,
$
7,145
$
14,785
$
9,672
$
31,602
Cumulative effect of change in accounting principles
(a)
14 127 7,353 7,494
Gross charge-offs
(a)
1,989 8,383 15,410 25,782
Gross (recoveries)
(a)
(262) (474) (1,373) (2,109)
Net charge-offs
(a)
1,727 7,909 14,037 23,673
Provision for loan losses:
Excluding accounting conformity
(a)
(673) 9,458 8,037 16,822
Accounting conformity
(b)
— — — —
Total provision for loan losses
(673)
9,458
8,037
16,822
Acquired allowance resulting from Washington Mutual transaction
—
—
—
—
Other
(c)
2 10 9 21
Ending balance at D
e
cember 31
$
4,761
$
16,471
$
11,03
4
$
32,266
Allowance for loan losses by i
mpairment metho
d
ology
Asset-specific
(
d
)(
e
)
(
f
)
$ 1,574 $ 1,075 $ 4,069 $ 6,718
Formula-based
(a)(
f
)
3,187 10,455 6,965 20,607
PCI
—
4,941
—
4,941
Total allo
w
ance for loan
losses
$
4,761
$
16,471
$
11,034
$
32,266
Loans by impairment methodo
l
ogy
Asset-specific
(c)
$ 5,486 $ 6,220 $ 10,005 $ 21,711
Formula-based
216
,
980
248,481
125,519
590,
980
PCI
4
4
72,763
—
72,
807
Total
retained
loa
ns
$
222,510
$
327,4
6
4
$
135,524
$
685,498