JP Morgan Chase 2013 Annual Report Download - page 118

Management’s discussion and analysis
124 JPMorgan Chase & Co./2013 Annual Report
levels. Net charge-offs continued to improve as a result of
improvement in delinquencies and home prices.
Auto: Auto loans at December 31, 2013, were $52.8
billion, compared with $49.9 billion at December 31, 2012.
Loan balances increased due to new originations, partially
offset by paydowns and payoffs. Delinquencies and
nonaccrual loans improved compared with December 31,
2012. Net charge-offs decreased from the prior year due to
prior year incremental charge-offs reported in accordance
with regulatory guidance on certain loans discharged under
Chapter 7 bankruptcy. Loss levels are considered low as a
result of favorable trends in both loss frequency and loss
severity, mainly due to enhanced underwriting standards
and a strong used car market. The auto loan portfolio
reflected a high concentration of prime-quality credits.
Business banking: Business banking loans at December 31,
2013, were $19.0 billion, compared with $18.9 billion at
December 31, 2012. Business Banking loans primarily
include loans that are collateralized, often with personal
loan guarantees, and may also include Small Business
Administration guarantees. Nonaccrual loans showed
improvement from December 31, 2012. Net charge-offs
declined for the year ended December 31, 2013, compared
with the year ended December 31, 2012.
Student and other: Student and other loans at
December 31, 2013, were $11.6 billion, compared with
$12.2 billion at December 31, 2012. The decrease was
primarily due to runoff of the student loan portfolio. Other
loans primarily include other secured and unsecured
consumer loans. Nonaccrual loans increased compared with
December 31, 2012, while net charge-offs decreased for
the year ended December 31, 2013, compared with the
prior year.
Purchased credit-impaired loans: PCI loans at
December 31, 2013, were $53.1 billion, compared with
$59.7 billion at December 31, 2012. This portfolio
represents loans acquired in the Washington Mutual
transaction, which were recorded at fair value at the time of
acquisition. PCI HELOCs originated by Washington Mutual
were generally revolving loans for a 10-year period, after
which time the HELOC converts to an interest-only loan with
a balloon payment at the end of the loan’s term.
Substantially all undrawn HELOCs within the revolving
period have been blocked.
As of December 31, 2013, approximately 19% of the
option ARM PCI loans were delinquent and approximately
54% have been modified into fixed-rate, fully amortizing
loans. Substantially all of the remaining loans are making
amortizing payments, although such payments are not
necessarily fully amortizing. This latter group of loans are
subject to the risk of payment shock due to future payment
recast.
Default rates generally increase on option ARM loans when
payment recast results in a payment increase. The expected
increase in default rates is considered in the Firm’s
quarterly impairment assessment. The cumulative amount
of unpaid interest added to the unpaid principal balance of
the option ARM PCI pool was $724 million and $879 million
at December 31, 2013, and December 31, 2012,
respectively. The Firm estimates the following balances of
option ARM PCI loans will undergo a payment recast that
results in a payment increase: $487 million in 2014, $810
million in 2015 and $710 million in 2016.
The following table provides a summary of lifetime principal
loss estimates included in both the nonaccretable difference
and the allowance for loan losses.
Summary of lifetime principal loss estimates
December 31,
(in billions) Lifetime loss
estimates(a)
LTD liquidation
losses(b)
2013 2012 2013 2012
Home equity $ 14.7 $ 14.9 $ 12.1 $ 11.5
Prime mortgage 3.8 4.2 3.3 2.9
Subprime mortgage 3.3 3.6 2.6 2.2
Option ARMs 10.2 11.3 8.8 8.0
Total $ 32.0 $ 34.0 $ 26.8 $ 24.6
(a) Includes the original nonaccretable difference established in purchase
accounting of $30.5 billion for principal losses only plus additional principal
losses recognized subsequent to acquisition through the provision and
allowance for loan losses. The remaining nonaccretable difference for principal
losses only was $3.8 billion and $5.8 billion at December 31, 2013 and 2012,
respectively.
(b) Life-to-date (“LTD”) liquidation losses represent both realization of loss upon
loan resolution and any principal forgiven upon modification. LTD liquidation
losses included $53 million of write-offs of prime mortgages for the year ended
December 31, 2013.
Lifetime principal loss estimates declined from
December 31, 2012, to December 31, 2013, reflecting
improvement in home prices and delinquencies. The decline
in lifetime principal loss estimates during the year ended
December 31, 2013, resulted in a $1.5 billion reduction of
the PCI allowance for loan losses ($1.0 billion related to
option ARM loans, $200 million to subprime mortgage,
$150 million to home equity loans and $150 million to
prime mortgage). In addition, for the year ended
December 31, 2013, PCI write-offs of $53 million were
recorded against the prime mortgage allowance for loan
losses. For further information about the Firm’s PCI loans,
including write-offs, see Note 14 on pages 258–283 of this
Annual Report.
As a result of reserve actions and PCI prime mortgage
write-offs, the allowance for loan loss for the PCI portfolio
declined from $5.7 billion at December 31, 2012, to $4.2
billion at December 31, 2013. The allowance for loan losses
decreased from $1.5 billion to $494 million for the option
ARM portfolio, from $1.9 billion to $1.7 billion for prime
mortgage, from $380 million to $180 million for subprime
mortgage and from $1.9 billion to $1.8 billion for the home
equity portfolio from December 31, 2012 to December 31,
2013.