JPMORGAN CHASE & CO
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934
| For the fiscal year ended | Commission file | |
| December 31, 2010 | number 1-5805 |
JPMorgan Chase & Co.
(Exact name of registrant as specified in its charter)
| Delaware | 13-2624428 | |
| (State or other jurisdiction of | (I.R.S. employer | |
| incorporation or organization) | identification no.) | |
| 270 Park Avenue, New York, NY | 10017 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered | |
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Common stock
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The
New York Stock Exchange
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The London Stock Exchange
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The Tokyo Stock Exchange
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Warrants, each to purchase one share of Common Stock
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The New York Stock Exchange
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Depositary Shares, each representing a one-four hundredth interest in a share of 8.625%
Non-Cumulative Preferred Stock, Series J
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The New York Stock Exchange
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Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan Chase Capital X
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The New York Stock Exchange
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Guarantee of 5.875% Capital Securities, Series K, of J.P. Morgan Chase Capital XI
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The New York Stock Exchange
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Guarantee of 6.25% Capital Securities, Series L, of J.P. Morgan Chase Capital XII
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The New York Stock Exchange
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Guarantee of 6.20% Capital Securities, Series N, of JPMorgan Chase Capital XIV
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The New York Stock Exchange
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Guarantee of 6.35% Capital Securities, Series P, of JPMorgan Chase Capital XVI
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The New York Stock Exchange
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Guarantee of 6.625% Capital Securities, Series S, of JPMorgan Chase Capital XIX
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The New York Stock Exchange
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Guarantee of 6.875% Capital Securities, Series X, of JPMorgan Chase Capital XXIV
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The New York Stock Exchange
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Guarantee of Fixed-to-Floating Rate Capital Securities, Series Z, of JPMorgan Chase Capital XXVI
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The New York Stock Exchange
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Guarantee of Fixed-to-Floating Rate Capital Securities, Series BB, of JPMorgan Chase Capital XXVIII
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The New York Stock Exchange
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Guarantee of 6.70% Capital Securities, Series CC, of JPMorgan Chase Capital XXIX
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The New York Stock Exchange
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Guarantee of 7.20% Preferred Securities of BANK ONE Capital VI
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The New York Stock Exchange
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KEYnotes Exchange Traded Notes Linked to the First Trust Enhanced 130/30 Large Cap Index
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The New York Stock Exchange
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Alerian MLP Index ETNs due May 24, 2024
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NYSE Arca, Inc.
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JPMorgan Double Short US 10 Year Treasury Futures ETNs due September 30, 2025
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NYSE Arca, Inc.
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JPMorgan Double Short US 10 Long Bond Treasury Futures ETNs due September 30, 2025
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NYSE Arca, Inc.
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Euro Floating Rate Global Notes due July 27, 2012
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The NYSE Alternext U.S. LLC
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Principal Protected Notes Linked to the Dow Jones Industrial Average
SM
due March 23, 2011
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The NYSE Alternext U.S. LLC
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Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
x
Yes
o
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or
Section 15(d)
of the Act.
o
Yes
x
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or
15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
x
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
x
Yes
o
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K
.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| x Large accelerated filer | o Accelerated filer |
o Non-accelerated filer (Do not check if a smaller reporting company) |
o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
x
No
The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates of
JPMorgan Chase & Co. on June 30, 2010 was approximately $144,824,681,723.
Number of shares of common stock outstanding on January 31, 2011: 3,983,509,889
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for the
annual meeting of stockholders to be held on May 17, 2011, are incorporated by reference in this
Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III.
Form 10-K Index
Table of Contents
Part I
ITEM 1: BUSINESS
Overview
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is a financial holding company incorporated
under Delaware law in 1968. JPMorgan Chase is one of the largest banking institutions in the United
States of America (“U.S.”), with $2.1 trillion in assets, $176.1 billion in stockholders’ equity
and operations in more than 60 countries.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association
(“JPMorgan Chase Bank, N.A.”), a national bank with U.S. branches in 23 states, and
Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that
is the Firm’s credit card–issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P.
Morgan Securities LLC (“JPMorgan Securities”), the Firm’s U.S. investment banking firm. The bank
and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches
and subsidiaries, representative offices and subsidiary foreign banks.
The Firm’s website is www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through
its website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the U.S. Securities and
Exchange Commission (the “SEC”). The Firm has adopted, and posted on its website, a Code of Ethics
for its Chairman and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and
other senior financial officers.
Business segments
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business
segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the
Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments.
The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments.
A description of the Firm’s business segments and the products and services they provide to their
respective client bases is provided in the “Business segment results” section of Management’s
discussion and analysis of financial condition and results of operations (“MD&A”), beginning on
page 67 and in Note 34 on pages 290–291.
Competition
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment.
Competitors include other banks, brokerage firms, investment banking companies, merchant banks,
hedge funds, commodity trading companies, private equity firms, insurance companies, mutual fund companies, credit card companies, mortgage banking
companies, trust companies, securities processing companies, automobile financing companies,
leasing companies, e-commerce and other Internet-based companies, and a variety of other financial
services and
advisory companies. JPMorgan Chase’s businesses generally compete on the basis of the
quality and range of their products and services, transaction execution, innovation and price.
Competition also varies based on the types of clients, customers, industries and geographies
served. With respect to some of its geographies and products, JPMorgan Chase competes globally;
with respect to others, the Firm competes on a regional basis. The Firm’s ability to compete also
depends on its ability to attract and retain its professional and other personnel, and on its
reputation.
The financial services industry has experienced consolidation and convergence in recent years, as
financial institutions involved in a broad range of financial products and services have merged
and, in some cases, failed. This convergence trend is expected to continue. Consolidation could
result in competitors of JPMorgan Chase gaining greater capital and other resources, such as a
broader range of products and services and geographic diversity. It is likely that competition will
become even more intense as the Firm’s businesses continue to compete with other financial
institutions that are or may become larger or better capitalized, or that may have a stronger local
presence in certain geographies.
Supervision and regulation
The Firm is subject to regulation under state and federal laws in the United States, as well as the
applicable laws of each of the various jurisdictions outside the United States in which the Firm
does business.
Recent events affecting the Firm:
On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which will make significant
structural reforms to the financial services industry. These changes include the following:
| • | Volcker Rule . The Dodd-Frank Act’s Volcker Rule prohibits banking entities, such as JPMorgan Chase, from engaging in certain proprietary trading activities and restricts their ownership of, investment in or sponsorship of, hedge funds and private equity funds. |
| • | Derivatives . The Dodd-Frank Act requires comprehensive regulation of the over-the-counter derivatives market, including strict capital and margin requirements, central clearing of standardized over-the-counter derivatives, and heightened supervision of over-the-counter derivatives dealers and major market participants, including JPMorgan Chase. The Dodd-Frank Act also requires banking entities, such as JPMorgan Chase, to significantly restructure their derivatives businesses, including changing the legal entities through which such businesses are conducted. |
| • | Debit Interchange . The Federal Reserve is required to restrict the interchange fees payable on debit card transactions. |
| • | Capital . The treatment of trust preferred securities as Tier 1 capital for regulatory capital purposes will be phased out over a three year period, beginning in 2013. For more information, see “Capital requirements” below. |
| • | FDIC Deposit Insurance Fund Assessments . The FDIC is required to amend its regulations to revise the assessment base for the calculation of banking industry assessments, |
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Part I
| which support the Deposit Insurance Fund. For more information, see “Deposit Insurance” below. |
| • | Bureau of Consumer Financial Protection . The Dodd-Frank Act establishes a Bureau of Consumer Financial Protection having broad authority to regulate providers of credit, payment and other consumer financial products and services, and may narrow the scope of federal preemption of state consumer laws and expand the authority of state attorneys general to bring actions to enforce federal consumer protection legislation. |
| • | Heightened prudential standards for systemically important financial institutions . The Dodd-Frank Act creates a structure to regulate systemically important financial companies, and subjects them to heightened prudential standards, including liquidity, risk management, resolution plan, concentration limit, and credit exposure report requirements. Bank holding companies with over $50 billion in assets, including JPMorgan Chase, are considered systemically important. If the regulators determine that the size or scope of activities of the company pose a threat to the safety and soundness of the company or the financial stability of the United States, the regulators have the power to require such companies to sell or transfer assets and terminate activities. |
| • | Concentration limits . The Dodd-Frank Act restricts acquisitions by financial companies if, as a result of the acquisition, the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies. |
The Dodd-Frank Act instructs U.S. federal banking and other regulatory agencies to conduct
approximately 285 rulemakings and 130 studies and reports. These regulatory agencies include the
Commodity Futures Trading Commission (the “CFTC”); the Securities and Exchange Commission (the
“SEC”); the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”); the
Office of the Comptroller of the Currency (the “OCC”); the Federal Deposit Insurance Corporation
(the “FDIC”); the new Bureau of Consumer Financial Protection (the “CFPB”); and the new Financial
Stability Oversight Council (the “FSOC”).
Other proposals have been made internationally, including additional capital and liquidity
requirements that will apply to non-U.S. subsidiaries of JPMorgan Chase, such as J.P. Morgan
Securities Ltd., the Firm’s U.K. broker-dealer subsidiary.
It is not clear at this time what form all of the rulemakings will take, or what new proposals may
be made. The description below summarizes the current regulatory structure in which the Firm
operates, which could change significantly and, accordingly, the structure of the Firm and the
products and services it offers could also change significantly as a result.
Permissible business activities:
JPMorgan Chase elected to become a financial holding company as of
March 13, 2000, pursuant to the provisions of the Gramm-Leach-Bliley Act (“GLBA”). Under
regulations implemented by the Federal Reserve Board, if any depository institution controlled by a financial holding company ceases to meet certain capital or management standards, the Federal
Reserve Board may impose corrective capital and/or managerial requirements on the financial holding
company and place limitations on its ability to conduct
the broader financial activities
permissible for financial holding companies. In addition, the Federal Reserve Board may require
divestiture of the holding company’s depository institutions if the deficiencies persist. The
regulations also provide that if any depository institution controlled by a financial holding
company fails to maintain a satisfactory rating under the Community Reinvestment Act, the Federal
Reserve Board must prohibit the financial holding company and its subsidiaries from engaging in any
additional activities other than those permissible for bank holding companies that are not
financial holding companies. So long as the depository-institution subsidiaries of JPMorgan Chase
meet the capital, management and Community Reinvestment Act requirements, the Firm is permitted to
conduct the broader activities permitted under GLBA.
Financial holding companies and bank holding companies are required to obtain the approval of the
Federal Reserve Board before they may acquire more than five percent of the voting shares of an
unaffiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the “Riegle-Neal Act”), the Federal Reserve Board may approve an application for such an
acquisition without regard to whether the transaction is prohibited under the law of any state,
provided that the acquiring bank holding company, before or after the acquisition, does not control
more than 10% of the total amount of deposits of insured depository institutions in the U.S. or
more than 30% (or such greater or lesser amounts as permitted under state law) of the total
deposits of insured depository institutions in the state in which the acquired bank has its home
office or a branch. In addition, the Dodd-Frank Act restricts acquisitions by financial companies
if, as a result of the acquisition, the total liabilities of the financial company would exceed 10%
of the total liabilities of all financial companies.
Regulation by Federal Reserve Board:
The Federal Reserve Board acts as an “umbrella regulator” and
certain of JPMorgan Chase’s subsidiaries are regulated directly by additional authorities based on
the particular activities of those subsidiaries. For example, JPMorgan Chase Bank, N.A., and Chase
Bank USA, N.A., are regulated by the OCC. See “Other supervision and regulation” below for a
further description of the regulatory supervision to which the Firm’s subsidiaries are subject. In
addition, under the Dodd-Frank Act, the Federal Reserve will remain the regulator of JPMorgan
Chase, and will be imposing heightened prudential standards in its role as the regulator of
systemically important financial institutions.
Dividend restrictions:
Federal law imposes limitations on the payment of dividends by national
banks. Dividends payable by JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., as national bank
subsidiaries of JPMorgan Chase, are limited to the lesser of the amounts calculated under a “recent
earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not
be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the
retained net income of the two preceding years, unless the national bank obtains the approval of
the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bank’s
“undivided profits.” See Note 28 on page 273 for the amount of dividends that the Firm’s principal
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Table of Contents
bank subsidiaries could pay, at January 1, 2011, to their respective bank holding
companies without the approval of their banking regulators.
In addition to the dividend restrictions described above, the OCC, the Federal Reserve Board and
the FDIC have authority to prohibit or limit the payment of dividends by the banking organizations
they supervise, including JPMorgan Chase and its bank and bank holding company subsidiaries, if, in
the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound
practice in light of the financial condition of the banking organization.
Moreover, the Federal Reserve Board has issued supervisory guidance requiring bank holding
companies, such as JPMorgan Chase, to consult with Federal Reserve Board staff before taking
actions, such as increasing dividends, implementing common stock repurchase programs or redeeming
or repurchasing capital instruments. Such guidance provides for a supervisory capital assessment
program that outlines Federal Reserve Board expectations concerning the processes that such bank
holding companies should have in place to ensure they hold adequate capital under adverse
conditions to maintain ready access to funding. The procedures require the implementation of a
comprehensive capital plan and demonstration that the bank holding company will meet proposed Basel
III regulatory capital standards, including the Basel III fully phased-in 7% tier 1 common equity
target after giving effect to proposed dividend increases or other capital actions. The Firm is
currently undergoing a capital assessment review pursuant to this supervisory program.
Capital requirements:
Federal banking regulators have adopted risk-based capital and leverage
guidelines that require the Firm’s capital-to-assets ratios to meet certain minimum standards.
The
risk-based capital ratio is determined by allocating assets and specified off–balance sheet
financial instruments into risk-weighted categories, with higher levels of capital being required
for the categories perceived as representing greater risk. Under the guidelines, capital is divided
into two tiers: Tier 1 capital and Tier 2 capital. The amount of Tier 2 capital may not exceed
the amount of Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital. Under
the guidelines, banking organizations are required to maintain a total capital ratio (total capital
to risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%. For a further description of
these guidelines, see Note 29 on pages 273–274.
The federal banking regulators also have established minimum leverage ratio guidelines. The
leverage ratio is defined as Tier 1 capital divided by adjusted average total assets. The minimum
leverage ratio is 3% for bank holding companies that are considered “strong” under Federal Reserve
Board guidelines or which have implemented the Federal Reserve Board’s risk-based capital measure
for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. Bank
holding companies may be expected to maintain ratios well above the minimum levels, depending upon
their particular condition, risk profile and growth plans.
The minimum risk-based capital requirements adopted by the federal banking agencies follow the
Capital Accord of the Basel Committee on Banking Supervision (“Basel I”). In 2004, the Basel
Committee published a revision to the Accord (“Basel II”). The goal of the Basel II Framework is to
provide more risk-sensitive regulatory capital calculations and promote enhanced risk management
practices among large, internationally active banking operations. In December 2010, the Basel
Committee finalized further revisions to the Accord (“Basel III”) which narrowed the definition of
capital, increased capital requirements for specific exposures, introduced short-term liquidity
coverage and term funding standards, and established an international leverage ratio. In addition,
the U.S. federal banking agencies have published for public comment proposed risk-based capital
floors pursuant to the requirements of the Dodd-Frank Act to establish a permanent Basel I floor
under Basel II/Basel III calculations. For further description of these capital requirements, see
pages 102–104.
Effective January 1, 2008, the SEC authorized JPMorgan Securities to use the alternative method of
computing net capital for broker/dealers that are part of Consolidated Supervised Entities as
defined by SEC rules. Accordingly, JPMorgan Securities may calculate deductions for market risk
using its internal market risk models.
For additional information regarding the Firm’s regulatory capital, see Regulatory capital on pages
102–104.
Federal Deposit Insurance Corporation Improvement Act:
The Federal Deposit Insurance Corporation
Improvement Act of 1991 requires the relevant federal banking regulator to take “prompt corrective
action” with respect to a depository institution if that institution does not meet certain capital
adequacy standards.
The regulations apply only to banks and not to bank holding companies, such as JPMorgan Chase.
However, the Federal Reserve Board is authorized to take appropriate action against the bank
holding company based on the undercapitalized status of any bank subsidiary. In certain instances,
the bank holding company would be required to guarantee the performance of the capital restoration
plan for its undercapitalized subsidiary.
Deposit Insurance:
The FDIC deposit insurance fund provides insurance coverage for certain
deposits, which insurance is funded through assessments on banks, such as JPMorgan Chase Bank, N.A.
and Chase Bank USA, N.A. Higher levels of bank failures over the past three years have
dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. In
addition, the amount of FDIC insurance coverage for insured deposits has been increased generally
from $100,000 per depositor to $250,000 per depositor, and until January 1, 2013, the coverage for non-interest bearing demand deposits is unlimited. In light of the increased
stress on the deposit insurance fund caused by these developments, and in order to maintain a
strong funding position and restore the reserve ratios of the deposit insurance fund, the FDIC
imposed a special assessment in June 2009, has increased assessment rates of insured institutions
generally, and required insured institutions to prepay on December 30, 2009 the premiums that are
expected to become due over the next three years.
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Part I
The Dodd-Frank Act requires the FDIC to amend its regulations to change the base for calculating
assessments from deposits to assets minus tangible equity. In February 2011, the FDIC issued a
final rule changing the assessment base and the method for calculating the assessment rate. These
changes are expected to result in an increase in the assessments that the Firm’s bank
subsidiaries pay to the deposit insurance fund.
Powers of the FDIC upon insolvency of an insured depository institution or the Firm:
Upon the
insolvency of an insured depository institution, the FDIC will be appointed the conservator or
receiver under the Federal Deposit Insurance Act. In such an insolvency, the FDIC has the power:
| • | to transfer any assets and liabilities to a new obligor without the approval of the institution’s creditors; |
| • | to enforce the terms of the institution’s contracts pursuant to their terms; or |
| • | to repudiate or disaffirm any contract or lease to which the institution is a party. |
The above provisions would be applicable to obligations and liabilities of JPMorgan Chase’s
subsidiaries that are insured depository institutions, such as JPMorgan Chase Bank, N.A., and Chase
Bank USA, N.A., including, without limitation, obligations under senior or subordinated debt issued
by those banks to investors (referred to below as “public noteholders”) in the public markets.
Under federal law, the claims of a receiver of an insured depository institution for administrative
expense and the claims of holders of U.S. deposit liabilities (including the FDIC) have priority
over the claims of other unsecured creditors of the institution, including public noteholders and
depositors in non-U.S. offices.
An FDIC-insured depository institution can be held liable for any loss incurred or expected to be
incurred by the FDIC in connection with another FDIC-insured institution under common control with
such institution being “in default” or “in danger of default” (commonly referred to as
“cross-guarantee” liability). An FDIC cross-guarantee claim against a depository institution is
generally superior in right of payment to claims of the holding company and its affiliates against
such depository institution.
Under the Dodd-Frank Act, where a systemically important financial institution, such as JPMorgan
Chase, is in default or danger of default, the FDIC may be appointed receiver in order to conduct
an orderly liquidation of such systemically important financial institution. The FDIC is in the
process of proposing rules to implement its orderly liquidation authority. While the FDIC may have powers as receiver similar to those described above, the details of those powers are the subject of
the proposed rules.
The Bank Secrecy Act:
The Bank Secrecy Act (“BSA”) requires all financial institutions, including
banks and securities broker-dealers, to, among other things, establish a risk-based system of
internal controls reasonably designed to prevent money laundering and the financing of terrorism.
The BSA includes a variety of recordkeeping and reporting requirements (such as cash and suspicious
activity reporting), as well as due diligence/know-your-customer documentation requirements. The
Firm has established a global anti-money laundering program in order to comply with BSA
requirements.
Other supervision and regulation:
Under current Federal Reserve Board policy, JPMorgan Chase is
expected to act as a source of financial strength to its bank subsidiaries and to commit resources
to support these subsidiaries in circumstances where it might not do so absent such policy.
Effective July 2011, provisions of the Dodd-Frank Act codify the Federal Reserve Board’s policy,
and require a bank holding company to serve as a source of strength for any depository institution
subsidiary. However, because GLBA provides for functional regulation of financial holding company
activities by various regulators, GLBA prohibits the Federal Reserve Board from requiring payment
by a holding company or subsidiary to a depository institution if the functional regulator of the
payor objects to such payment. In such a case, the Federal Reserve Board could instead require the
divestiture of the depository institution and impose operating restrictions pending the
divestiture.
The bank subsidiaries of JPMorgan Chase are subject to certain restrictions imposed by federal law
on extensions of credit to, and certain other transactions with, the Firm and certain other
affiliates, and on investments in stock or securities of JPMorgan Chase and those affiliates.
These restrictions prevent JPMorgan Chase and other affiliates from borrowing from a bank
subsidiary unless the loans are secured in specified amounts and are subject to certain other
limits. For more information, see Note 28 on page 273. Effective in 2012, the Dodd-Frank Act
extends such restrictions to derivatives and securities lending transactions. In addition, the
Dodd-Frank Act’s Volcker Rule imposes similar restrictions on transactions between banking
entities, such as JPMorgan Chase and its subsidiaries, and hedge funds or private equity funds for
which the banking entity serves as the investment manager, investment advisor or sponsor.
The Firm’s banks and certain of its nonbank subsidiaries are subject to direct supervision and
regulation by various other federal and state authorities (some of which are considered “functional
regulators” under GLBA). JPMorgan Chase’s national bank subsidiaries, such as JPMorgan Chase Bank,
N.A., and Chase Bank USA, N.A., are subject to supervision and regulation by the OCC and, in
certain matters, by the Federal Reserve Board and the FDIC. Supervision and regulation by the
responsible regulatory agency generally includes comprehensive annual reviews of all major aspects
of the relevant bank’s business and condition, and imposition of periodic reporting requirements
and limitations on investments, among other powers.
The Firm conducts securities underwriting, dealing and brokerage activities in the United States
through JPMorgan Securities and other broker-dealer subsidiaries, all of which are subject to
regulations of the SEC, the Financial Industry Regulatory Authority and the New York Stock
Exchange, among others. The Firm conducts similar securities activities outside the United States
subject to local regulatory requirements. In the United Kingdom (“U.K.”), those activities are
conducted by J.P. Morgan Securities Ltd., which is regulated by the Financial Services Authority of
the U.K. The operations of JPMorgan Chase mutual funds also are subject to regulation by the SEC.
The Firm has subsidiaries that are members of futures exchanges in the United States and abroad and
are registered accordingly.
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In the United States, three subsidiaries are registered as futures
commission merchants, and other subsidiaries are either registered with the CFTC as commodity pool
operators and commodity trading advisors or exempt from such registration. These CFTC-registered
subsidiaries are also members of the National Futures Association. The Firm’s U.S. energy business
is subject to regulation by the Federal Energy Regulatory Commission. It is also subject to other
extensive and evolving energy, commodities, environmental and other governmental regulation both in
the U.S. and other jurisdictions globally.
Under the Dodd-Frank Act, the CFTC and SEC will be the regulators of the Firm’s derivatives
businesses. Certain of the Firm’s subsidiaries will likely be required to register with the CFTC
and SEC as swaps dealers or security-based swaps dealers.
The types of activities in which the non-U.S. branches of JPMorgan Chase Bank, N.A. and the
international subsidiaries of JPMorgan Chase may engage are subject to various restrictions imposed
by the Federal Reserve Board. Those non-U.S. branches and international subsidiaries also are
subject to the laws and regulatory authorities of the countries in which they operate.
The activities of JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. as consumer lenders also are
subject to regulation under various U.S. federal laws, including the Truth-in-Lending, Equal Credit
Opportunity, Fair Credit Reporting, Fair Debt Collection Practice, Electronic Funds Transfer and
CARD acts
,
as well as various state laws. These statutes impose requirements on consumer loan
origination and collection practices. Under the Dodd-Frank Act, the new CFPB will be responsible
for rulemaking and enforcement pursuant to such statutes.
Under the requirements imposed by GLBA, JPMorgan Chase and its subsidiaries are required
periodically to disclose to their retail customers the Firm’s policies and practices with respect
to the sharing of nonpublic customer information with JPMorgan Chase affiliates and others, and the
confidentiality and security of that information. Under GLBA, retail customers also must be given
the opportunity to “opt out” of information-sharing arrangements with nonaffiliates, subject to
certain exceptions set forth in GLBA.
ITEM 1A: RISK FACTORS
The following discussion sets forth some of the more important risk factors that could materially
affect JPMorgan Chase’s financial condition and operations. Other factors that could affect the
Firm’s financial condition and operations are discussed in the “Forward-looking statements” section
on page 157. However, factors besides those discussed below, in MD&A or elsewhere in this or other
reports that JPMorgan Chase filed or furnished with the SEC, also could adversely affect the Firm.
Readers should not consider any descriptions of such factors to be a complete set of all potential
risks that could affect the Firm.
JPMorgan Chase’s results of operations have been, and may continue to be, adversely affected by
U.S. and international financial market and economic conditions.
JPMorgan Chase’s businesses are materially affected by economic and market conditions, including
the liquidity of the global financial markets; the level and volatility of debt and equity prices,
interest rates and currency and commodities prices;
investor sentiment; events that reduce
confidence in the financial markets; inflation and unemployment; the availability and cost of
capital and credit; the occurrence of natural disasters, acts of war or terrorism; and the health
of U.S. or international economies.
In the Firm’s wholesale businesses, the above-mentioned factors can affect transactions involving
the Firm’s underwriting and advisory businesses; the realization of cash returns from its private
equity business; the volume of transactions that the Firm executes for its customers and,
therefore, the revenue that the Firm receives from commissions and spreads; and the willingness of
financial sponsors or other investors to participate in loan syndications or underwritings managed
by the Firm.
The Firm generally maintains large positions in the fixed income, currency, commodity and equity
markets, and from time to time the Firm may have trading positions that lack pricing transparency
or liquidity. The revenue derived from these positions is affected by many factors, including the
Firm’s success in effectively hedging its market and other risks, volatility in interest rates and
equity, debt and commodities, markets credit spreads, and availability of liquidity in the capital
markets, all of which are affected by economic and market conditions. The Firm anticipates that
revenue relating to its trading and private equity businesses will continue to experience
volatility, which will affect pricing or the ability to realize returns from such investments, and
that this could materially adversely affect the Firm’s earnings.
The fees that the Firm earns for managing third-party assets are also dependent upon general
economic conditions. For example, a higher level of U.S. or non-U.S. interest rates or a downturn
in securities markets could affect the valuations of the third-party assets that the Firm manages
or holds in custody, which, in turn, could affect the Firm’s revenue. Macroeconomic or market
concerns may also prompt outflows from the Firm’s funds or accounts. Moreover, even in the absence
of a market downturn, sub-par
performance by the Firm’s investment management businesses could cause outflows of assets under
management and, therefore, reduce the fees that the Firm receives.
The Firm’s consumer businesses are particularly affected by domestic economic conditions, including
U.S. interest rates; the rate of unemployment; housing prices; the level of consumer confidence;
changes in consumer spending; and the number of personal bankruptcies. Any deterioration in these
conditions can diminish demand for the products and services of the Firm’s consumer businesses, or
increase the cost to provide such products and services. In addition, adverse economic conditions,
such as declines in home prices or persistent high levels of unemployment, could lead to an
increase in mortgage, credit card and other loan delinquencies and higher net charge-offs, which
can reduce the Firm’s earnings.
If JPMorgan Chase does not effectively manage its liquidity, its business could suffer.
JPMorgan Chase’s liquidity is critical to its ability to operate its businesses. Some potential
conditions that could impair the Firm’s liquidity include markets that become illiquid or are
otherwise disrupted, unforeseen cash or capital requirements (including, among others, commitments
that may be triggered to special purpose entities (“SPEs”) or other entities), difficulty in
selling or
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inability to sell assets, unforeseen outflows of cash or collateral, and lack of market
or customer confidence in the Firm or financial markets in general. These conditions may be caused
by events over which the Firm has little or no control. The widespread crisis in investor
confidence and resulting liquidity crisis experienced in 2008 and into early 2009 increased the
Firm’s cost of funding and limited its access to some of its traditional sources of liquidity such
as securitized debt offerings backed by mortgages, credit card receivables and other assets, and
there is no assurance that these conditions could not occur in the future.
The credit ratings of JPMorgan Chase & Co., JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. are
important to maintaining the Firm’s liquidity. A reduction in their credit ratings could reduce the
Firm’s access to debt markets or materially increase the cost of issuing debt, trigger additional
collateral or funding requirements, and decrease the number of investors and counterparties willing
or permitted, contractually or otherwise, to do business with or lend to the Firm, thereby
curtailing the Firm’s business operations and reducing its profitability. Reduction in the ratings
of certain SPEs or other entities to which the Firm has funding or other commitments could also
impair the Firm’s liquidity where such ratings changes lead, directly or indirectly, to the Firm
being required to purchase assets or otherwise provide funding.
Critical factors in maintaining high credit ratings include a stable and diverse earnings stream,
strong capital ratios, strong credit quality and risk management controls, diverse funding sources,
and disciplined liquidity monitoring procedures. Although the Firm closely monitors and manages
factors influencing its credit ratings, there is no assurance that such ratings will not be lowered
in the future. Such downgrades may come at times
of broader market instability, when the Firm’s options for responding to events are more limited
and general investor confidence is low.
As a holding company, JPMorgan Chase & Co. relies on the earnings of its subsidiaries for its cash
flow and, consequently, its ability to pay dividends and satisfy its debt and other obligations.
These payments by subsidiaries may take the form of dividends, loans or other payments. Several of
JPMorgan Chase & Co.’s principal subsidiaries are subject to capital adequacy requirements or other
regulatory or contractual restrictions on their ability to provide such payments. Limitations in
the payments that JPMorgan Chase & Co. receives from its subsidiaries could reduce its liquidity
position.
Some global regulators have proposed legislation or regulations requiring large banks to
incorporate a separate subsidiary in every country in which they operate, and to maintain
independent capital and liquidity for such subsidiaries. If adopted, these requirements could
decrease the Firm’s ability to manage and increase the risk of its liquidity positions.
JPMorgan Chase operates within a highly regulated industry and the Firm’s business and results are
significantly affected by the laws and regulations to which it is subject, including
recently-adopted legislation and regulations.
JPMorgan Chase is subject to regulation under state and federal laws in the United States, as well
as the applicable laws of each
of the various other jurisdictions outside the United States in
which the Firm does business. These laws and regulations affect the way that the Firm does
business, may restrict the scope of its existing businesses, limit its ability to expand its
product offerings or pursue acquisitions, or make offering its products to clients more expensive.
Extensive legislation affecting the financial services industry has recently been adopted in the
United States and in other jurisdictions, and regulations are in the process of being implemented.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act was adopted in
2010 and will effect significant structural reforms to the financial services industry. This
legislation provides for, among other things: the establishment of a Bureau of Consumer Financial
Protection which will have broad authority to regulate the credit, savings, payment and other
consumer financial products and services that the Firm offers; the creation of a structure to
regulate systemically important financial companies, and provide regulators with the power to
require such companies to sell or transfer assets and terminate activities if the regulators
determine that the size or scope of activities of the company pose a threat to the safety and
soundness of the company or the financial stability of the United States; more comprehensive
regulation of the over-the-counter derivatives market, including providing for higher capital and
margin requirements, the central clearing of standardized over-the-counter derivatives, and
heightened supervision of all over-the-counter derivatives dealers and major market participants,
including the Firm; so-called “push out” provisions that could require the Firm to significantly
restructure or restrict its derivatives businesses, change the legal entities through which such
businesses are conducted, or limit the Firm’s ability to manage collateral, margin and other risks;
prohibitions on the Firm engaging in certain proprietary trading activities and restricting its ownership of,
investment in or sponsorship of, hedge funds and private equity funds; restrictions on the
interchange fees that the Firm earns on debit card transactions; and a requirement that bank
regulators phase out the treatment of trust preferred capital debt securities as Tier 1 capital for
regulatory capital purposes.
The European Union (“EU”) has created a European Systemic Risk Board to monitor financial stability
and implemented rules that will increase capital requirements for certain trading instruments or
exposures and impose compensation limits on certain employees located in affected countries. In
addition, the EU Commission is considering a wide array of other initiatives, including new
legislation that will affect derivatives trading, impose surcharges on “globally” systemically
important firms and possibly impose new levies on bank balance sheets.
The Basel Committee on Banking Supervision announced in December 2010 revisions to its Capital
Accord, which will require higher capital ratio requirements for banks, narrow the definition of
capital, and introduce short term liquidity and term funding standards, among other things. Also
being considered is the imposition of a bank surcharge on institutions that are determined to be
“globally significant financial institutions”. These requirements could increase the Firm’s funding
and operational costs.
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These and any additional legislative or regulatory actions in the United States or other countries, and any
required changes to the Firm’s business operations resulting from such legislation and regulations,
could result in significant loss of revenue, limit the Firm’s ability to pursue business
opportunities in which it might otherwise consider engaging, affect the value of assets that the
Firm holds, require the Firm to increase its prices and therefore reduce demand for its products,
impose additional costs on the Firm, or otherwise adversely affect the Firm’s businesses.
Accordingly, the Firm cannot provide assurance that any such new legislation or regulations would
not have an adverse effect on its business, results of operations or financial condition in the
future.
If the Firm does not comply with current or future legislation and regulations that apply to its
operations, the Firm may be subject to fines, penalties or material restrictions on its businesses
in the jurisdiction where the violation occurred. In recent years, regulatory oversight and
enforcement have increased substantially, imposing additional costs and increasing the potential
risks associated with the Firm’s operations. As this regulatory trend continues, it could adversely
affect the Firm’s operations and, in turn, its financial results.
The financial condition of JPMorgan Chase’s customers, clients and counterparties, including other
financial institutions, could adversely affect the Firm
.
If the current economic environment were to deteriorate, more of JPMorgan Chase’s customers may
become delinquent on their loans or other obligations to the Firm which, in turn, could result in a
higher level of charge-offs and provision for credit losses, or in requirements that the Firm
purchase assets from or provide other funding to its clients
and counterparties, any of which could adversely affect the Firm’s financial condition. Moreover, a significant deterioration in the credit quality of one of the Firm’s counterparties could lead to
concerns in the market about the credit quality of other counterparties in the same industry,
thereby exacerbating the Firm’s credit risk exposure, and increasing the losses (including
mark-to-market losses) that the Firm could incur in its trading and clearing businesses.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. The Firm routinely executes transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, investment banks, mutual and
hedge funds, and other institutional clients. Many of these transactions expose the Firm to credit
risk in the event of a default by the counterparty or client, which can be exacerbated during
periods of market illiquidity. During such periods, the Firm’s credit risk also may be further
increased when the collateral held by the Firm cannot be realized upon or is liquidated at prices
that are not sufficient to recover the full amount of the loan, derivative or other exposure due to
the Firm. In addition, disputes with counterparties as to the valuation of collateral significantly
increase in times of market stress and illiquidity. Periods of illiquidity, as experienced in 2008
and early 2009, may occur again and could produce losses if the Firm is unable to realize upon
collateral or manage declines in the value of collateral.
Concentration of credit and market risk could increase the potential for significant losses.
JPMorgan Chase has exposure to increased levels of risk when customers are engaged in similar
business activities or activities in the same geographic region, or when they have similar economic
features that would cause their ability to meet contractual obligations to be similarly affected by
changes in economic conditions. As a result, the Firm regularly monitors various segments of its
portfolio exposures to assess potential concentration risks. The Firm’s efforts to diversify or
hedge its credit portfolio against concentration risks may not be successful.
In addition, increased concentration within the Firm’s securities or loan portfolios, or in other
positions that the Firm may hold, may occur for reasons outside of the Firm’s control. Disruptions
in the liquidity or transparency of the financial markets may result in the Firm’s inability to
sell, syndicate or realize upon its positions, thereby leading to increased concentrations. The
inability to reduce the Firm’s positions not only increases the market and credit risks associated
with such positions, but also increases the level of risk-weighted assets on the Firm’s balance
sheet, thereby increasing its capital requirements and funding costs, all of which could adversely
affect the operations and profitability of the Firm’s businesses.
JPMorgan Chase’s framework for managing risks may not be effective in mitigating risk and loss to
the Firm.
JPMorgan Chase’s risk management framework seeks to mitigate risk and loss to the Firm. The Firm
has established processes and procedures intended to identify, measure, monitor, report and analyze
the types of risk to which the Firm is subject, including liquidity risk, credit risk, market risk,
interest rate risk, operational risk, legal and fiduciary risk, reputational risk and private
equity risk, among others. However, as with any risk management framework, there are inherent
limitations to the Firm’s risk management strategies because there may exist, or develop in the
future, risks that the Firm has not appropriately anticipated or identified. If the Firm’s risk
management framework proves ineffective, the Firm could suffer unexpected losses and could be
materially adversely affected. As the Firm’s businesses change and grow and the markets in which
they operate continue to evolve, the Firm’s risk management framework may not always keep
sufficient pace with those changes. As a result, there is the risk that the credit and market risks
associated with new products or new business strategies may not be appropriately identified,
monitored or managed. In addition, in a difficult or less liquid market environment, the Firm’s
risk management strategies may not be effective because other market participants may be attempting
to use the same or similar strategies to deal with the challenging market conditions. In such
circumstances, it may be difficult for the Firm to reduce its risk positions due to the activity of
such other market participants.
The Firm’s products, including loans, leases, lending commitments, derivatives, trading account
assets and assets held-for-sale, expose the Firm to credit risk. As one of the nation’s largest
lenders, the Firm has exposures arising from its many different products and counterparties, and
the credit quality of the Firm’s exposures can have a significant impact on its earnings. The Firm
establishes reserves for probable credit losses
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inherent in its credit exposure (including unfunded
lending commitments). The Firm also employs stress testing and other methods to determine the
capital and liquidity necessary to protect the Firm in the event of adverse economic or market
events. These processes are critical to the Firm’s financial results and condition, and require
difficult, subjective and complex judgments, including forecasts of how economic conditions might
impair the ability of the Firm’s borrowers and counterparties to repay their loans or other
obligations. As is the case with any such assessments, there is always the chance that the Firm
will fail to identify the proper factors or that the Firm will fail to accurately estimate the
impact of factors that it identifies.
JPMorgan Chase’s trading businesses may expose the Firm to unexpected market, credit and
operational risks that could cause the Firm to suffer unexpected losses. Severe declines in asset
values, unanticipated credit events, or unforeseen circumstances that may cause previously
uncorrelated factors to become correlated (and vice versa) may create losses resulting from risks
not appropriately taken into account in the development, structuring or pricing of a trading
instrument such as a derivative. Certain of the Firm’s derivative transactions require the physical
settlement by delivery of securities, commodities or obligations that the Firm does not own; if the
Firm is unable to obtain such securities, commodities or obligations within the required timeframe
for delivery, this could cause the Firm to forfeit payments otherwise due to it and could result in
settlement delays, which could damage the Firm’s reputation and ability to transact future
business. In addition, in situations where trades are not settled or confirmed on a timely
basis, the Firm may be subject to heightened credit and operational risk, and in the event of a
default, the Firm may be exposed to market and operational losses. In particular, disputes
regarding the terms or the settlement procedures of derivatives contracts could arise, which could
force the Firm to incur unexpected costs, including transaction, legal and litigation costs, and
impair the Firm’s ability to manage effectively its risk exposure from these products.
Many of the Firm’s hedging strategies and other risk management techniques have a basis in
historical market behavior, and all such strategies and techniques are based to some degree on
management’s subjective judgment. For example, many models used by the Firm are based on
assumptions regarding correlations among prices of various asset classes or other market
indicators. In times of market stress, or in the event of other unforeseen circumstances,
previously uncorrelated indicators may become correlated, or conversely, previously correlated
indicators may make unrelated movements. These sudden market movements or unanticipated or
unidentified market or economic movements have in some circumstances limited the effectiveness of
the Firm’s risk management strategies, causing the Firm to incur losses. The Firm cannot provide
assurance that its risk management framework, including the Firm’s underlying assumptions or
strategies, will at all times be accurate and effective.
JPMorgan Chase’s operations are subject to risk of loss from unfavorable economic, monetary,
political, legal and other developments in the United States and around the world.
JPMorgan Chase’s businesses and earnings are affected by the fiscal and other policies that are
adopted by various U.S. and non-U.S. regulatory authorities and agencies. The Federal Reserve Board
regulates the supply of money and credit in the United States and its policies determine in large
part the cost of funds for lending and investing in the United States and the return earned on
those loans and investments. The market impact from such policies can also materially decrease the
value of financial assets that the Firm holds, such as mortgage servicing rights (“MSRs”). Federal
Reserve Board policies also can adversely affect the Firm’s borrowers and counterparties,
potentially increasing the risk that they may fail to repay their loans or satisfy their
obligations to the Firm. Changes in Federal Reserve Board policies (as well as the fiscal and
monetary policies of non-U.S. central banks or regulatory authorities and agencies) are beyond the
Firm’s control and, consequently, the impact of changes in these policies on the Firm’s activities
and results of operations is difficult to predict.
The Firm’s businesses and revenue are also subject to risks inherent in investing and trading in
securities of companies worldwide. These risks include, among others, risk of loss from unfavorable
political, legal or other developments, including social or political instability, expropriation,
nationalization, confiscation of assets, price controls, capital controls, exchange controls, and
changes in laws and regulations. Crime, corruption, war or military actions, acts of terrorism and
a lack of an established legal and regulatory framework are additional challenges in certain
emerging markets.
Revenue from international operations and trading in non-U.S. securities and other obligations may
be subject to negative fluctuations as a result of the above considerations. The impact of these
fluctuations could be accentuated as some trading markets are smaller, less liquid and more
volatile than larger markets. Also, any of the above-mentioned events or circumstances in one
country can, and has in the past, affected the Firm’s operations and investments in another country
or countries, including the Firm’s operations in the United States. As a result, any such
unfavorable conditions or developments could have an adverse impact on the Firm’s business and
results of operations.
Several of the Firm’s businesses engage in transactions with, or trade in obligations of, U.S. and
non-U.S. governmental entities, including national, state, provincial, municipal and local
authorities. These activities can expose the Firm to enhanced sovereign, credit-related,
operational and reputational risks, including the risks that a governmental entity may default on
or restructure its obligations or may claim that actions taken by government officials were beyond
the legal authority of those officials, which could adversely affect the Firm’s financial condition
and results of operations.
Further, various countries in which the Firm operates or invests, or in which the Firm may do so in
the future, have in the past experienced severe economic disruptions particular to that country or
region, including extreme currency fluctuations, high inflation, or low or negative growth, among
other negative conditions. In 2010, concerns were raised about certain European countries,
including Greece, Ireland, Italy, Portugal and Spain, regarding perceived weaknesses in their
economic and fiscal
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condition, and how such weaknesses might affect other economies as well as
financial institutions, including the Firm, which lent funds to or did business with or in those
countries. There is always the chance that economic disruptions in other countries, even in
countries in which the Firm does not conduct business or have operations, will adversely affect the
Firm.
JPMorgan Chase’s results of operations may be adversely affected by loan repurchase and indemnity
obligations.
In connection with the sale and securitization of loans (whether with or without recourse), the
originator is generally required to make a variety of representations and warranties regarding both
the originator and the loans being sold or securitized. JPMorgan Chase and some of its
subsidiaries, including those acquired through the Bear Stearns merger and the Washington Mutual
transaction, have made such representations and warranties in connection with the sale and
securitization of loans, and the Firm will continue to do so when it securitizes loans it has
originated. If a loan that does not comply with such representations or warranties is sold or
securitized, the Firm may be obligated to repurchase the loan and incur any associated loss
directly, or the Firm may be obligated to indemnify the purchaser against any such losses. In 2010,
the costs of repurchasing mortgage loans that had been sold to government agencies such as Fannie
Mae and Freddie Mac (the “GSEs”) increased substantially, and there is no assurance that such costs
could not continue to increase substantially in the future. Accordingly, repurchase
or indemnity obligations to the GSEs or to private third-party purchasers could materially and
adversely affect the Firm’s results of operations and earnings in the future.
The repurchase liability that the Firm records with respect to its loan repurchase obligations is
estimated based on several factors, including the level of current and estimated probable future
repurchase demands made by purchasers, the Firm’s ability to cure the defects identified in the
repurchases demands, and the severity of loss upon repurchase or foreclosure. While the Firm
believes that its current repurchase liability reserves are adequate, the factors referred to above
are subject to change in light of market developments, the economic environment and other
circumstances. Accordingly, such reserves may be increased in the future.
The Firm also faces litigation related to securitizations, primarily related to securitizations not
sold to the GSEs. The Firm separately evaluates its exposure to such litigation in establishing its
litigation reserves. While the Firm believes that its current reserves in respect of such
litigation matters are adequate, there can be no assurance that such reserves will not need to be
increased in the future.
JPMorgan Chase may incur additional costs and expenses in ensuring that it satisfies requirements
relating to mortgage foreclosures.
In late September 2010, JPMorgan Chase commenced implementation of a temporary suspension of
obtaining mortgage foreclosure judgments in the states and territories that require a judicial
foreclosure process. Subsequently, the Firm extended this temporary suspension to foreclosure sales
in those states and territories that require a judicial foreclosure process, and to foreclosures
and foreclosure sales in the majority of remaining
states where a judicial process is not required,
but where an affidavit signed by Firm personnel may have been used as part of the foreclosure
process. In mid-October, the Firm also temporarily suspended evictions in the states and
territories in which the Firm had suspended foreclosures and foreclosure sales, as well as in
certain additional states in which an affidavit signed by Firm personnel may have been used in
connection with eviction proceedings.
This temporary suspension arose out of questions about affidavits of indebtedness prepared by local
foreclosure counsel, signed by Firm employees, and filed or used in mortgage foreclosure
proceedings in certain states. Based on the Firm’s work to date, the Firm believes that the
information in those affidavits of indebtedness about the fact of default and amount of
indebtedness was materially accurate. However, the underlying review and verification of this
information was performed by personnel other than the affiants, or the affidavits may not have been
properly notarized. The Firm has since resumed filing new foreclosure actions in most of the states
in which the Firm had previously halted such actions, using revised procedures in connection with
the execution of the affidavits and other documents that may be used in the foreclosure process,
and the Firm intends to resume filing new foreclosure actions in all remaining states. The Firm is
also in the process of reviewing pending foreclosure matters to determine whether the remediation
of previously filed affidavits or other documents is necessary, and the Firm
intends to resume pending foreclosure proceedings as the review, and if necessary, remediation, of
each pending matter is completed.
The Firm expects to incur additional costs and expenses in connection with its efforts to correct
and enhance its mortgage foreclosure procedures. Multiple state and federal officials have announced
investigations into the procedures followed by mortgage servicing companies and banks, including
JPMorgan Chase and its affiliates,
relating to foreclosure
and loss mitigation processes.
The Firm is
cooperating with these investigations,
and these investigations could result in material fines, penalties, equitable remedies
(including requiring default servicing or other process changes), or other enforcement actions, as well as significant
legal costs in responding to governmental investigations and additional litigation.
The Firm cannot predict the ultimate outcome of these matters or the impact that they could have on the Firm’s financial results.
JPMorgan Chase’s commodities activities are subject to extensive regulation, potential catastrophic
events and environmental risks and regulation that may expose the Firm to significant cost and
liability.
JPMorgan Chase engages in the storage, transportation, marketing or trading of several commodities,
including metals, agricultural products, crude oil, oil products, natural gas, electric power,
emission credits, coal, freight, and related products and indices. The Firm is also engaged in
power generation and has invested in companies engaged in wind energy and in sourcing, developing
and trading emission reduction credits. As a result of all of these activities, the Firm is subject
to extensive and evolving energy, commodities, environmental, and other governmental laws and
regulations. The Firm expects laws and regulations affecting its commodities activities to expand
in scope and complexity, and to restrict some of the Firm’s activities, which could result in lower
revenues from the Firm’s commodities
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activities. In addition, the Firm may incur substantial costs
in complying with current or future laws and regulations, and the failure to comply with these laws
and regulations may result in substantial civil and criminal fines and penalties. Furthermore,
liability may be incurred without regard to fault under certain environmental laws and regulations
for remediation of contaminations.
The Firm’s commodities activities also further expose the Firm to the risk of unforeseen and
catastrophic events, including natural disasters, leaks, spills, explosions, release of toxic
substances, fires, accidents on land and at sea, wars, and terrorist attacks that could result in
personal injuries, loss of life, property damage, damage to the Firm’s reputation and suspension of
operations. The Firm’s commodities activities are also subject to disruptions, many of which are
outside of the Firm’s control, from the breakdown or failure of power generation equipment,
transmission lines or other equipment or processes, and the contractual failure of performance by
third-party suppliers or service providers, including the failure to obtain and deliver raw
materials necessary for the operation of power generation facilities. The Firm’s actions to
mitigate its risks related to the above-mentioned considerations may not prove adequate to address
every contingency. In addition, insurance covering some of these risks may not be available, and
the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect
to particular incidents. As a result, the Firm’s financial condition and results of operations may
be adversely affected by such events.
Damage to JPMorgan Chase’s reputation could damage its businesses.
Maintaining trust in JPMorgan Chase is critical to the Firm’s ability to attract and maintain
customers, investors and employees. Damage to the Firm’s reputation can therefore cause significant
harm to the Firm’s business and prospects. Harm to the Firm’s reputation can arise from numerous
sources, including, among others, employee misconduct, compliance failures, litigation or
regulatory outcomes or governmental investigations. In addition, a failure to deliver appropriate
standards of service and quality, or a failure or perceived failure to treat customers and clients
fairly, can result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all
of which can lead to lost revenue, higher operating costs and harm to reputation for the Firm.
Adverse publicity regarding the Firm, whether or not true, may result in harm to the Firm’s
prospects. Actions by the financial services industry generally or by certain members of or
individuals in the industry can also affect the Firm’s reputation. For example, the role played by
financial services firms in the financial crisis, including concerns that consumers have been
treated unfairly by financial institutions, has damaged the reputation of the industry as a whole.
Should any of these or other events or factors that can undermine the Firm’s reputation occur,
there is no assurance that the additional costs and expenses that the Firm may need to incur to
address the issues giving rise to the reputational harm could not adversely affect the Firm’s
earnings and results of operations.
Management of potential conflicts of interests has become increasingly complex as the Firm
continues to expand its business activities through more numerous transactions, obligations and
interests with and among the Firm’s clients. The failure to adequately address, or the perceived
failure to adequately address, conflicts of interest could affect the willingness of clients to
deal with the Firm, or give rise to litigation or enforcement actions, as well as cause serious
reputational harm to the Firm.
JPMorgan Chase relies on its systems, employees and certain counterparties, and certain failures
could materially adversely affect the Firm’s operations.
JPMorgan Chase’s businesses are dependent on the Firm’s ability to process, record and monitor a
large number of complex transactions. If the Firm’s financial, accounting, or other data processing
systems fail or have other significant shortcomings, the Firm could be materially adversely
affected. The Firm is similarly dependent on its employees. The Firm could be materially adversely
affected if one of its employees causes a significant operational break-down or failure, either as
a result of human error or where an individual purposefully sabotages or fraudulently manipulates
the Firm’s operations or systems. Third parties with which the Firm does business could also be
sources of operational risk to the Firm, including relating to breakdowns or failures of such
parties’ own systems or employees. Any of these occurrences could diminish the Firm’s ability to
operate one or more of its businesses, or result in potential liability to clients, increased
operating expenses, higher litigation costs (including fines and sanctions), reputational
damage, regulatory intervention or weaker competitive standing, any of which could materially
adversely affect the Firm.
If personal, confidential or proprietary information of customers or clients in the Firm’s
possession were to be mishandled or misused, the Firm could suffer significant regulatory
consequences, reputational damage and financial loss. Such mishandling or misuse could include
circumstances where, for example, such information was erroneously provided to parties who are not
permitted to have the information, either by fault of the Firm’s systems, employees, or
counterparties, or where such information was intercepted or otherwise inappropriately taken by
third parties.
The Firm may be subject to disruptions of its operating systems arising from events that are wholly
or partially beyond the Firm’s control, which may include, for example, computer viruses,
electrical or telecommunications outages, failures of computer servers or other damage to the
Firm’s property or assets; natural disasters; health emergencies or pandemics; or events arising
from local or larger scale political events, including terrorist acts. Such disruptions may give
rise to losses in service to customers and loss or liability to the Firm.
In a firm as large and complex as JPMorgan Chase, lapses or deficiencies in internal control over
financial reporting may occur from time to time, and there is no assurance that significant
deficiencies or material weaknesses in internal controls may not occur in the future. As processes
are changed, or new products and services are introduced, the Firm may not fully appreciate or
identify new operational risks that may arise from such changes. In addition, there is the risk
that the Firm’s controls and procedures as well as business continuity and data security systems
could prove to be inadequate. Any such failure could adversely affect the Firm’s business and
results of operations by
10
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requiring the Firm to expend significant resources to correct the defect,
as well as by exposing the Firm to litigation, regulatory fines or penalties or losses not covered
by insurance.
JPMorgan Chase faces significant legal risks, both from regulatory investigations and proceedings
and from private actions brought against the Firm.
JPMorgan Chase is named as a defendant or is otherwise involved in various legal proceedings,
including class actions and other litigation or disputes with third parties, as well as
investigations or proceedings brought by regulatory agencies. Actions brought against the Firm may
result in judgments, settlements, fines, penalties or other results adverse to the Firm, which
could materially adversely affect the Firm’s business, financial condition or results of
operations, or cause serious reputational harm to the Firm. As a participant in the financial
services industry, it is likely that the Firm will continue to experience a high level of
litigation and regulatory scrutiny and investigations related to its businesses and operations.
The financial services industry is highly competitive, and JPMorgan Chase’s inability to compete
successfully may adversely affect its results of operations.
JPMorgan Chase operates in a highly competitive environment and the Firm expects competitive
conditions to continue to intensify as continued consolidation in the financial services industry
produces larger, better-capitalized and more geographically diverse companies that are capable of
offering a wider array of financial products and services at more competitive prices.
Competitors include other banks, brokerage firms, investment banking companies, merchant banks,
hedge funds, commodity trading companies, private equity firms, insurance companies, mutual fund
companies, credit card companies, mortgage banking companies, trust companies, securities
processing companies, automobile financing companies, leasing companies, e-commerce and other
Internet-based companies, and a variety of other financial services and advisory companies.
Technological advances and the growth of e-commerce have made it possible for non-depository
institutions to offer products and services that traditionally were banking products, and for
financial institutions and other companies to provide electronic and Internet-based financial
solutions, including electronic securities trading. The Firm’s businesses generally compete on the
basis of the quality and variety of the Firm’s products and services, transaction execution,
innovation, reputation and price. Ongoing or increased competition in any one or all of these areas
may put downward pressure on prices for the Firm’s products and services or may cause the Firm to
lose market share. Increased competition also may require the Firm to make additional capital
investments in its businesses in order to remain competitive. These investments may increase
expense or may require the Firm to extend more of its capital on behalf of clients in order to
execute larger, more competitive transactions. The Firm cannot provide assurance that the
significant competition in the financial services industry will not materially adversely affect its
future results of operations.
JPMorgan Chase’s acquisitions and the integration of acquired businesses may not result in all of
the benefits anticipated.
JPMorgan Chase has in the past and may in the future seek to expand its business by acquiring other
businesses. There can be no assurance that the Firm’s acquisitions will have the anticipated
positive results, including results relating to: the total cost of integration; the time required
to complete the integration; the amount of longer-term cost savings; the overall performance of the
combined entity; or an improved price for JPMorgan Chase & Co.’s common stock. Integration efforts
could divert management attention and resources, which could adversely affect the Firm’s operations
or results. The Firm cannot provide assurance that any integration efforts in connection with
acquisitions already consummated or any new acquisitions would not result in the occurrence of
unanticipated costs or losses.
Acquisitions may also result in business disruptions that cause the Firm to lose customers or cause
customers to move their business to competing financial institutions. It is possible that the
integration process related to acquisitions could result in the disruption of the Firm’s ongoing
businesses or inconsistencies in standards, controls, procedures and policies that could adversely
affect the Firm’s ability to maintain relationships with
clients, customers, depositors and other business partners. The loss of key employees in connection
with an acquisition could adversely affect the Firm’s ability to successfully conduct its business.
JPMorgan Chase’s ability to attract and retain qualified employees is critical to the success of
its business, and failure to do so may materially adversely affect the Firm’s performance.
JPMorgan Chase’s employees are the Firm’s most important resource, and in many areas of the
financial services industry, competition for qualified personnel is intense. The imposition on the
Firm or its employees of certain existing and proposed restrictions or taxes on executive
compensation may adversely affect the Firm’s ability to attract and retain qualified senior
management and employees. If the Firm is unable to continue to retain and attract qualified
employees, the Firm’s performance, including its competitive position, could be materially
adversely affected.
JPMorgan Chase’s financial statements are based in part on assumptions and estimates which, if
incorrect, could cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the United States, JPMorgan Chase is
required to use certain assumptions and estimates in preparing its financial statements, including
in determining credit loss reserves, mortgage repurchase liability and reserves related to
litigations, among other items. Certain of the Firm’s financial instruments, including trading
assets and liabilities, available-for-sale securities, certain loans, MSRs, private equity
investments, structured notes and certain repurchase and resale agreements, among other items,
require a determination of their fair value in order to prepare the Firm’s financial statements.
Where quoted market prices are not available, the Firm may make fair value determinations based on
internally developed models or other means which ultimately rely to some degree on management
judgment. Some of these and other assets and liabilities may have no direct observable price
levels, making their valuation particularly subjective, as they are based on significant estimation
and judgment. In addition, sudden illiquidity in markets or declines in prices of certain loans
11
Table of Contents
and
securities may make it more difficult to value certain balance sheet items, which may lead to the
possibility that such valuations will be subject to further change or adjustment. If assumptions or
estimates underlying the Firm’s financial statements are incorrect, the Firm may experience
material losses.
ITEM 1B: UNRESOLVED SEC STAFF COMMENTS
None.
ITEM 2: PROPERTIES
JPMorgan Chase’s headquarters is located in New York City at 270 Park Avenue, a 50-story office
building owned by JPMorgan Chase. This location contains approximately 1.3 million square feet of
space. The building is currently undergoing a major renovation.
The design seeks to attain the highest sustainability rating for renovations of existing buildings
under the Leadership in Energy and Environmental Design (“LEED”) Green Building Rating System. The
total renovation is expected to be substantially completed in 2011.
In connection with the Bear Stearns merger in 2008, JPMorgan Chase acquired 383 Madison Avenue in
New York City, a 45-story, 1.1 million square-foot office building on land which is subject to a
ground lease through 2096. This building serves as the U.S. headquarters of JPMorgan Chase’s
Investment Bank. For further discussion, see Building purchase commitments in Note 30, on page 278.
In total, JPMorgan Chase owned or leased approximately 12.4 million square feet of commercial
office space and retail space in New York City at December 31, 2010. JPMorgan Chase and its
subsidiaries also own or lease significant administrative and operational facilities in Chicago,
Illinois (3.8 million square feet); Houston and Dallas, Texas (3.7 million square feet); Columbus,
Ohio (2.7 million square feet); Phoenix, Arizona (1.4 million square feet); Jersey City, New Jersey
(1.1 million square feet); and 5,268 retail branches in 23 states. At December 31, 2010, the Firm
occupied approximately 68.2 million total square feet of space in the United States.
At December 31, 2010, the Firm also managed and occupied approximately 5.6 million total square
feet of space in Europe, the Middle East and Africa.
In the United Kingdom, at December 31, 2010, JPMorgan Chase owned or leased approximately 4.7
million square feet of office space and owned a 424,000 square-foot operations center. In December
2010, JPMorgan Chase acquired a 999-year leasehold interest in 25 Bank Street in London’s Canary
Wharf. With 1.0 million square feet of space, 25 Bank Street will become the new European
headquarters of the Investment Bank in 2012. In addition, JPMorgan Chase agreed to purchase 60
Victoria Embankment in 2011, a 518,000 square-foot office building the Firm has been leasing since
1991. For further discussion, see Building purchase commitments in Note 30, on page 278.
In 2008, JPMorgan Chase acquired a 999-year leasehold interest in land at London’s Canary Wharf and
entered into a building agreement to develop the site and construct a European headquarters
building. However, acquisition of 25 Bank Street allows the Firm to
accelerate by four years the
consolidation of its Investment Bank personnel in one location. In December 2010, JPMorgan Chase
signed an amended building agreement to allow continued development of the Canary Wharf site for
future use. The amended terms extend the building agreement to October 30, 2016.
JPMorgan Chase and its subsidiaries also occupy offices and other administrative and operational
facilities in the Asia Pacific region, Latin America and Canada under various types of ownership
and leasehold agreements, aggregating approximately 5.3 million total square feet of space at
December 31, 2010. JPMorgan Chase and its subsidiaries lease significant administrative and
operational facilities in India (1.8 million square feet) and the Philippines (1.0 million square
feet).
The properties occupied by JPMorgan Chase are used across all of the Firm’s business segments and
for corporate purposes. JPMorgan Chase continues to evaluate its current and projected space
requirements and may determine from time to time that certain of its premises and facilities are no
longer necessary for its operations. There is no assurance that the Firm will be able to dispose of
any such excess premises or that it will not incur charges in connection with such dispositions.
Such disposition costs may be material to the Firm’s results of operations in a given period. For a
discussion of occupancy expense, see the Consolidated Results of Operations discussion on pages
59–63.
ITEM 3: LEGAL PROCEEDINGS
As of December 31, 2010, the Firm and its subsidiaries are defendants or putative defendants in
more than 10,000 legal proceedings, in the form of regulatory/government
investigations as well as private, civil litigations. The litigations
range from individual actions involving a
single plaintiff to class action lawsuits with potentially millions of class members.
Investigations involve both formal and informal proceedings, by both governmental agencies and
self-regulatory organizations. These legal proceedings are at varying stages of adjudication,
arbitration or investigation, and involve each of the Firm’s lines of business and geographies and
a wide variety of claims (including common law tort and contract claims and statutory antitrust,
securities and consumer protection claims), some of which present novel claims or legal theories.
The Firm believes it has meritorious defenses to the claims asserted against it in its currently
outstanding legal proceedings and it intends to defend itself vigorously in all such matters.
The Firm believes the estimate of the aggregate range of reasonably possible losses, in excess of
reserves established, for its legal proceedings is from $0 to
approximately $4.5 billion at December
31, 2010. This estimated aggregate range of reasonably possible losses is based upon currently
available information for those proceedings in which the Firm is involved, taking into account the
Firm’s best estimate of such losses for those cases for which
such estimate can be made. For certain cases, the Firm does not
believe that an estimate can currently be made. The Firm’s
estimate involves significant judgment, given the varying stages of
the proceedings (including the fact that many of them are currently
in preliminary stages), the existence of
multiple defendants (including the Firm) in many of such proceedings whose share of liability has
yet to be determined, the numerous yet-unresolved issues in many of
the proceedings (including issues regarding class certification and
the scope of many of the claims), and the
attendant uncertainty of the various potential outcomes of such proceedings. Accordingly, the
Firm’s estimate will change from
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time to time, and actual losses may be more than the current estimate.
The Firm has established reserves for several hundred of its currently outstanding legal
proceedings. The Firm accrues for potential liability arising from such proceedings when it is probable that such liability has been incurred and the amount of the loss can be reasonably
estimated. The Firm evaluates its outstanding legal proceedings each quarter to assess its
litigation reserves, and makes adjustments in such reserves, upwards or downwards, as appropriate,
based on management’s best judgment after consultation with counsel.
In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly
where the claimants seek very large or indeterminate damages, or where the matters present novel
legal theories, involve a large number of parties or are in early stages of discovery, the Firm
cannot state with confidence what the eventual outcome of the currently pending matters will be,
what the timing of the ultimate resolution of these pending matters will be or what the
eventual loss, fines, penalties or impact related to each pending matter may be. JPMorgan Chase
believes, based upon its current knowledge, after consultation with counsel and after taking into
account its current litigation reserves, that the legal proceedings currently pending against it
should not have a material adverse effect on the Firm’s consolidated financial condition. The Firm
notes, however, that in light of the uncertainties involved in such proceedings, there is no
assurance the ultimate resolution of these matters will not significantly exceed the reserves
currently accrued by the Firm; as a result, the outcome of a particular matter may be material to
JPMorgan Chase’s operating results for a particular period, depending on, among other factors, the
size of the loss or liability imposed and the level of JPMorgan Chase’s income for that period.
For a
description of the Firm’s material legal proceedings, see Note 32 on pages 282–289.
Part II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market for registrant’s common equity
The outstanding shares of JPMorgan Chase common stock are listed and traded on the New York Stock
Exchange, the London Stock Exchange and the Tokyo Stock Exchange. For the quarterly high and low
prices of JPMorgan Chase’s common stock for the last two years, see the section entitled
“Supplementary information – Selected quarterly financial
data (unaudited)” on pages 295–296. For a
comparison of the cumulative total return for JPMorgan Chase common stock with the comparable total
return of the S&P 500 Index and the S&P Financial Index over the five-year period ended December
31, 2010, see “Five-year stock performance,” on page 53.
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend
from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders
of record on April 6, 2009. The action enabled the Firm to retain approximately $5.5 billion in
common equity in each of 2010 and 2009, and was taken to ensure the Firm had sufficient capital
strength in the event the very weak economic conditions that existed at the beginning of 2009
deteriorated further. JPMorgan Chase declared quarterly cash dividends on its common stock in the
amount of $0.05 per share for each quarter of 2010 and 2009.
The common dividend payout ratio, based on reported net income, was 5% for 2010, 9% for 2009, and
114% for 2008. For a discussion of restrictions on dividend payments, see Note 23 on pages
267–268. At January 31, 2011, there were
225,114 holders of record of JPMorgan Chase common stock.
For information regarding securities authorized for issuance under the Firm’s employee stock-based
compensation plans, see Item 12 on page 16.
Stock repurchases under the stock repurchase program
Under the stock repurchase program authorized by the Firm’s Board of Directors, the Firm is
authorized to repurchase up to $10.0 billion of the Firm’s common stock plus the 88 million
warrants sold by the U.S. Treasury in 2009. During 2009, the Firm did not
repurchase any shares of its common stock or warrants. In the second quarter of 2010, the Firm
resumed common stock repurchases, and during the year repurchased an
aggregate of 78 million shares
for $3.0 billion at an average price per share of $38.49. The Firm’s share repurchase activities in
2010 were intended to offset sharecount increases resulting from employee stock-based incentive
awards and were consistent with the Firm’s goal of maintaining an appropriate sharecount. The Firm
did not repurchase any of the warrants during 2010. As of December 31, 2010, $3.2 billion of
authorized repurchase capacity remained with respect to the common stock, and all of the authorized
repurchase capacity remained with respect to the warrants.
The Firm may, from time to time, enter into written trading plans under Rule 10b5-1 of the
Securities Exchange Act of 1934 to facilitate the repurchase of common stock and warrants in
accordance with the repurchase program. A Rule 10b5-1 repurchase plan allows the Firm to repurchase
its equity during periods when it would not otherwise be repurchasing
common stock – for example
during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be made
according to a predefined plan established when the Firm is not aware of material nonpublic
information.
The authorization to repurchase common stock and warrants will be utilized at management’s
discretion, and the timing of purchases and the exact number of shares and warrants purchased is
subject to various factors, including market conditions; legal considerations affecting the amount
and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and
intangibles); internal capital generation; and alternative potential investment opportunities. The
repurchase program does not include specific price targets or
13
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timetables; may be executed through
open market purchases or privately negotiated transactions, including through the use of Rule
10b5-1 programs; and may be suspended at any time.
For a discussion of restrictions on stock repurchases, see Note 23 on pages 267–268.
| Dollar value | ||||||||||||
| of remaining | ||||||||||||
| authorized | ||||||||||||
| Year ended | Total shares | Average price | repurchase | |||||||||
| December 31, 2010 | repurchased | paid per share (a) | (in millions) (b) | |||||||||
|
First quarter
|
— | $ | — | $ | 6,221 | |||||||
|
Second quarter
|
3,491,900 | 38.73 | 6,085 | |||||||||
|
Third quarter
|
56,517,833 | 38.52 | 3,908 | |||||||||
|
October
|
17,300,020 | 38.40 | 3,244 | |||||||||
|
November
|
589,800 | 37.40 | 3,222 | |||||||||
|
December
|
— | — | 3,222 | |||||||||
|
Fourth quarter
|
17,889,820 | 38.37 | 3,222 | |||||||||
|
Total for 2010
|
77,899,553 | $ | 38.49 | $ | 3,222 | |||||||
| (a) | Excludes commissions cost. | |
| (b) | The amount authorized by the Board of Directors excludes commissions cost. |
Stock repurchases under the stock-based incentive plans
Participants in the Firm’s stock-based incentive plans may have shares withheld to cover income
taxes. Shares withheld to pay income taxes are repurchased pursuant to the terms of the applicable
plan and not under the Firm’s share repurchase program. Shares repurchased pursuant to these plans
during 2010 were as follows:
| Year ended | Total shares | Average price | ||||||
| December 31, 2010 | repurchased | paid per share | ||||||
|
First quarter
|
2,444 | $ | 41.88 | |||||
|
Second quarter
|
393 | 30.01 | ||||||
|
Third quarter
|
293 | 37.49 | ||||||
|
October
|
— | — | ||||||
|
November
|
128,964 | 37.52 | ||||||
|
December
|
62 | 39.31 | ||||||
|
Fourth quarter
|
129,026 | 37.52 | ||||||
|
Total for 2010
|
132,156 | $ | 37.58 | |||||
ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see “Five-year summary of consolidated financial
highlights (unaudited)” on pages 52–53 and “Selected annual financial data (unaudited)” on pages
297–298.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations, entitled
“Management’s discussion and analysis,” appears on
pages 53–156. Such information should be read
in conjunction with the Consolidated Financial Statements and Notes thereto, which appear on pages
160–294.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to market risk, see the “Market Risk Management” section on pages
142–146.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, together with the Notes thereto and the report of
PricewaterhouseCoopers LLP dated February 28, 2011, thereon, appear on pages 159–294.
Supplementary financial data for each full quarter within the two years ended December 31, 2010,
are included on pages 295–296 in the table entitled “Selected quarterly financial data
(unaudited).” Also included is a “Glossary of terms’’ on pages 300–303.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Firm’s management, including its Chairman and Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on
that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded
that these disclosure controls and procedures were effective. See Exhibits 31.1 and 31.2 for the
Certification statements issued by the Chairman and Chief Executive Officer and Chief Financial
Officer.
The Firm is committed to maintaining high standards of internal control over financial reporting.
Nevertheless, because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. In addition, in a firm as large and complex as JPMorgan Chase,
lapses or deficiencies in internal controls may occur from time to time, and there can be no
assurance that any such deficiencies will not result in significant deficiencies – or even
material weaknesses – in internal controls in the future. See page 158 for “Management’s report on
internal control over financial reporting.” There was no change in the Firm’s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that
occurred during the fourth quarter of 2010 that has materially affected, or is reasonably likely to
materially affect, the Firm’s internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None.
14
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ITEM
10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive officers of the registrant
| Name | Age | Positions and offices | ||||
| (at December 31, 2010) | ||||||
|
James Dimon
|
54 | Chairman of the Board since December 31, 2006, and President and Chief Executive Officer since December 31, 2005. | ||||
|
|
||||||
|
Frank J. Bisignano
|
51 | Chief Administrative Officer. | ||||
|
|
||||||
|
Douglas L.
Braunstein
|
49 | Chief Financial Officer since June 2010. He had been head of Investment Banking for the Americas since 2008, prior to which he had served in a number of senior Investment Banking roles, including as head of Global Mergers and Acquisitions. | ||||
|
|
||||||
|
Michael J. Cavanagh
|
44 | Chief Executive Officer of Treasury & Securities Services since June 2010, prior to which he had been Chief Financial Officer. | ||||
|
|
||||||
|
Stephen M. Cutler
|
49 | General Counsel since February 2007. Prior to joining JPMorgan Chase, he was a partner and co-chair of the Securities Department at the law firm of WilmerHale since October 2005. Prior to joining WilmerHale, he had been Director of the Division of Enforcement at the U.S. Securities and Exchange Commission. | ||||
|
|
||||||
|
John L. Donnelly
|
54 | Director of Human Resources since January 2009. Prior to joining JPMorgan Chase, he had been Global Head of Human Resources at Citigroup, Inc. since July 2007 and Head of Human Resources and Corporate Affairs for Citi Markets and Banking business from 1998 until 2007. | ||||
|
|
||||||
|
Ina R. Drew
|
54 | Chief Investment Officer. | ||||
|
|
||||||
|
Mary Callahan Erdoes
|
43 | Chief Executive Officer of Asset Management since September 2009, prior to which she had been Chief Executive Officer of Private Banking. | ||||
|
|
||||||
|
Samuel Todd Maclin
|
54 | Chief Executive Officer of Commercial Banking. | ||||
|
|
||||||
|
Jay Mandelbaum
|
48 | Head of Strategy and Business Development. | ||||
|
|
||||||
|
Heidi Miller
|
57 | President of International since June 2010 prior to which she had been Chief Executive Officer of Treasury & Securities Services. | ||||
|
|
||||||
|
Charles W. Scharf
|
45 | Chief Executive Officer of Retail Financial Services. | ||||
|
|
||||||
|
Gordon A. Smith
|
52 | Chief Executive Officer of Card Services since June 2007. Prior to joining JPMorgan Chase, he was with American Express Company for more than 25 years. From August 2005 until June 2007, he was president of American Express’ global commercial card business. | ||||
|
|
||||||
|
James E. Staley
|
54 | Chief Executive Officer of the Investment Bank since September 2009, prior to which he had been Chief Executive Officer of Asset Management. | ||||
|
|
||||||
|
Barry L. Zubrow
|
57 | Chief Risk Officer since November 2007. Prior to joining JPMorgan Chase, he was a private investor and was Chairman of the New Jersey Schools Development Authority from March 2006 through August 2010. | ||||
Unless otherwise noted, during the five fiscal years ended December 31, 2010, all of JPMorgan
Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan
Chase. There are no family relationships among the foregoing executive officers. See also Item 13.
ITEM 11: EXECUTIVE COMPENSATION
See Item 13.
15
Table of Contents
Parts
III and IV
ITEM 12:
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
For security ownership of certain beneficial owners and
management, see Item 13 below.
management, see Item 13 below.
The following table details the total number of shares available for issuance under JPMorgan
Chase’s employee stock-based incentive plans (including shares available for issuance to
nonemployee directors). The Firm is not authorized to grant stock-based incentive awards to
nonemployees, other than to nonemployee directors.
| Number of shares to be | Weighted-average | Number of shares remaining | ||||||||||
| December 31, 2010 | issued upon exercise of | exercise price of | available for future issuance under | |||||||||
| (Shares in thousands) | outstanding options/SARs | outstanding options/SARs | stock compensation plans | |||||||||
|
Plan category
|
||||||||||||
|
Employee stock-based
incentive plans
approved
by shareholders |
168,678,150 | $ | 42.67 | 113,194,301 | (a) | |||||||
|
Employee stock-based
incentive plans not
approved
by shareholders |
65,239,147 | 45.05 | — | |||||||||
|
Total
|
233,917,297 | $ | 43.33 | 113,194,301 | ||||||||
| (a) | Represents future shares available under the shareholder-approved 2005 Long-Term Incentive Plan, as amended and restated effective May 20, 2008. |
All future shares will be issued under the shareholder-approved 2005 Long-Term Incentive Plan,
as amended and restated effective May 20, 2008. For further discussion, see Note 10 on pages
210–212.
ITEM 13: CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information to be provided in Items 10, 11, 12, 13 and 14 of Form 10-K and not otherwise
included herein is incorporated by reference to the Firm’s definitive proxy statement for its 2011
Annual Meeting of Stockholders to be held on May 17, 2011, which will be filed with the SEC within
120 days of the end of the Firm’s fiscal year ended December 31, 2010.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 13.
Part IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| Exhibits, financial statement schedules |
| 1. | Financial statements | |
| The Consolidated Financial Statements, the Notes thereto and the report thereon listed in Item 8 are set forth commencing on page 159. | ||
| 2. | Financial statement schedules | |
| 3. | Exhibits | |
| 3.1 | Restated Certificate of Incorporation of JPMorgan Chase & Co., effective April 5, 2006 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 7, 2006). | |
| 3.2 | Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008). |
| 3.3 | Certificate of Designations of 8.625% Non-Cumulative Preferred Stock, Series J (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K/A of JPMorgan Chase & Co. (File No. 1-5805) filed September 17, 2008). | |
| 3.4 | By-laws of JPMorgan Chase & Co., effective January 19, 2010 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed January 25, 2010). | |
| 4.1 | Indenture, dated as of October 21, 2010, between JPMorgan Chase & Co. and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.1-5805) filed October 21, 2010). | |
| 4.2 | Indenture, dated as of October 21, 2010, between JPMorgan Chase & Co. and U.S. Bank Trust National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.1-5805) filed October 21, 2010). | |
| 4.3(a) | Indenture, dated as of May 25, 2001, between JPMorgan Chase & Co. and Bankers Trust Company (succeeded by Deutsche Bank Trust Company Americas), as Trustee (incorporated by reference to Exhibit 4(a)(1) to the |
16
Table of Contents
| Registration Statement on Form S-3 of JPMorgan Chase & Co. (File No. 333-52826) filed June 13, 2001). | ||
| 4.4 | Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008). | |
| 4.5 | Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 21, 2008). |
| Other instruments defining the rights of holders of long-term debt securities of JPMorgan Chase & Co. and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. JPMorgan Chase & Co. agrees to furnish copies of these instruments to the SEC upon request. |
| 10.1 | Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., as amended and restated July 2001 and as of December 31, 2004 (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* | |
| 10.2 | 2005 Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., effective as of January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* | |
| 10.3 | Post-Retirement Compensation Plan for Non-Employee Directors of The Chase Manhattan Corporation, as amended and restated, effective May 21, 1996 (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.4 | 2005 Deferred Compensation Program of JPMorgan Chase & Co., restated effective as of December 31, 2008 (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.5 | JPMorgan Chase & Co. 2005 Long-Term Incentive Plan as amended and restated effective May 20, 2008 (incorporated by reference to Appendix B of Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed March 31, 2008).* |
| 10.6 | Key Executive Performance Plan of JPMorgan Chase & Co., restated as of January 1, 2005 (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).* | |
| 10.7 | Excess Retirement Plan of JPMorgan Chase & Co., restated and amended as of December 31, 2008, as amended (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).* | |
| 10.8 | 1995 Stock Incentive Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies, as amended, dated December 11, 1996 (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.9 | Executive Retirement Plan of JPMorgan Chase & Co., as amended and restated December 31, 2008 (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.10 | Amendment to Bank One Corporation Director Stock Plan, as amended and restated effective February 1, 2003 (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.11 | Summary of Bank One Corporation Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).* | |
| 10.12 | Bank One Corporation Stock Performance Plan, as amended and restated effective February 20, 2001 (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.13 | Bank One Corporation Supplemental Savings and Investment Plan, as amended and restated effective December 31, 2008 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.14 | Revised and Restated Banc One Corporation 1989 Stock Incentive Plan, effective January 18, 1989 (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.15 | Banc One Corporation Revised and Restated 1995 Stock Incentive Plan, effective April 17, 1995 (incorporated by |
17
Table of Contents
| reference to Exhibit 10.15 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | ||
| 10.16 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 2005 stock appreciation rights (incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).* | |
| 10.17 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of October 2005 stock appreciation rights (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).* | |
| 10.18 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* | |
| 10.19 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 restricted stock units (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* | |
| 10.20 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.21 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.22 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for restricted stock units, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.23 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of February 3, 2010 (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).* |
| 10.24 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member restricted stock units, dated as of February 3, 2010 (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).* | |
| 10.25 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member restricted stock units, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).* | |
| 10.26 | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights for James Dimon (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).* | |
| 10.27 | Form of JPMorgan Chase & Co. Performance-Based Incentive Compensation Plan, effective as of January 1, 2006, as amended (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).* | |
| 10.28 | Form of Warrant to purchase common stock (incorporated by reference to Exhibit 4.2 to the Form 8-A of JPMorgan Chase & Co. (File No. 1-5805) filed December 11, 2009). | |
| 12.1 | Computation of ratio of earnings to fixed charges.*** | |
| 12.2 | Computation of ratio of earnings to fixed charges and preferred stock dividend requirements.*** | |
| 21.1 | List of Subsidiaries of JPMorgan Chase & Co.*** | |
| 22.1 | Annual Report on Form 11-K of The JPMorgan Chase 401(k) Savings Plan for the year ended December 31, 2010 (to be filed pursuant to Rule 15d-21 under the Securities Exchange Act of 1934). | |
| 23.1 | Consent of independent registered public accounting firm.*** | |
| 31.1 | Certification.*** | |
| 31.2 | Certification.*** | |
| 32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
18
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| 101.INS | XBRL Instance Document. Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2010, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008, (ii) the Consolidated Balance Sheets as of December 31, 2010 and 2009, (iii) the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2010, 2009 and 2008, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008, and (v) the Notes to Consolidated Financial Statements.*** |
| 101.SCH | XBRL Taxonomy Extension Schema Document.*** | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.*** | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document.*** | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.*** | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.*** |
| * | This exhibit is a management contract or compensatory plan or arrangement. | |
| ** | This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. | |
| *** | Filed herewith. |
19
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Pages 20–50 not used
20
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Table of contents
| Audited financial statements: | ||
|
|
||
|
158
|
Management’s Report on Internal Control
Over
Financial Reporting |
|
|
|
||
|
159
|
Report of Independent Registered Public Accounting Firm | |
|
|
||
|
160
|
Consolidated Financial Statements | |
|
|
||
|
164
|
Notes to Consolidated Financial Statements | |
|
|
||
| Supplementary information: | ||
|
|
||
|
295
|
Selected Quarterly Financial Data | |
|
|
||
|
297
|
Selected Annual Financial Data | |
|
|
||
|
299
|
Short-term and other borrowed funds | |
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||
|
300
|
Glossary of Terms | |
| JPMorgan Chase & Co. / 2010 Annual Report | 51 |
Table of Contents
Financial
Five-year summary of consolidated financial highlights
| (unaudited) | ||||||||||||||||||||
| (in millions, except per share, headcount and ratio data) | ||||||||||||||||||||
| As of or for the year ended December 31, | 2010 | 2009 | 2008 (d) | 2007 | 2006 | |||||||||||||||
|
Selected income statement data
|
||||||||||||||||||||
|
Total net revenue
|
$ | 102,694 | $ | 100,434 | $ | 67,252 | $ | 71,372 | $ | 61,999 | ||||||||||
|
Total noninterest expense
|
61,196 | 52,352 | 43,500 | 41,703 | 38,843 | |||||||||||||||
|
Pre-provision profit
(a)
|
41,498 | 48,082 | 23,752 | 29,669 | 23,156 | |||||||||||||||
|
Provision for credit losses
|
16,639 | 32,015 | 19,445 | 6,864 | 3,270 | |||||||||||||||
|
Provision for credit losses –
accounting conformity
(b)
|
— | — | 1,534 | — | — | |||||||||||||||
|
Income from continuing operations before income tax
expense/(benefit) and extraordinary gain
|
24,859 | 16,067 | 2,773 | 22,805 | 19,886 | |||||||||||||||
|
Income tax expense/(benefit)
|
7,489 | 4,415 | (926 | ) | 7,440 | 6,237 | ||||||||||||||
|
Income from continuing operations
|
17,370 | 11,652 | 3,699 | 15,365 | 13,649 | |||||||||||||||
|
Income from discontinued operations
(c)
|
— | — | — | — | 795 | |||||||||||||||
|
Income before extraordinary gain
|
17,370 | 11,652 | 3,699 | 15,365 | 14,444 | |||||||||||||||
|
Extraordinary gain
(d)
|
— | 76 | 1,906 | — | — | |||||||||||||||
|
Net income
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | $ | 15,365 | $ | 14,444 | ||||||||||
|
Per common share data
|
||||||||||||||||||||
|
Basic earnings
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 3.98 | $ | 2.25 | $ | 0.81 | $ | 4.38 | $ | 3.83 | ||||||||||
|
Net income
|
3.98 | 2.27 | 1.35 | 4.38 | 4.05 | |||||||||||||||
|
Diluted earnings
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 3.96 | $ | 2.24 | $ | 0.81 | $ | 4.33 | $ | 3.78 | ||||||||||
|
Net income
|
3.96 | 2.26 | 1.35 | 4.33 | 4.00 | |||||||||||||||
|
Cash dividends declared per share
|
0.20 | 0.20 | 1.52 | 1.48 | 1.36 | |||||||||||||||
|
Book value per share
|
43.04 | 39.88 | 36.15 | 36.59 | 33.45 | |||||||||||||||
|
Common shares outstanding
|
||||||||||||||||||||
|
Average: Basic
|
3,956.3 | 3,862.8 | 3,501.1 | 3,403.6 | 3,470.1 | |||||||||||||||
|
Diluted
|
3,976.9 | 3,879.7 | 3,521.8 | 3,445.3 | 3,516.1 | |||||||||||||||
|
Common shares at period-end
|
3,910.3 | 3,942.0 | 3,732.8 | 3,367.4 | 3,461.7 | |||||||||||||||
|
Share
price
(f)
|
||||||||||||||||||||
|
High
|
$ | 48.20 | $ | 47.47 | $ | 50.63 | $ | 53.25 | $ | 49.00 | ||||||||||
|
Low
|
35.16 | 14.96 | 19.69 | 40.15 | 37.88 | |||||||||||||||
|
Close
|
42.42 | 41.67 | 31.53 | 43.65 | 48.30 | |||||||||||||||
|
Market capitalization
|
165,875 | 164,261 | 117,695 | 146,986 | 167,199 | |||||||||||||||
|
Selected ratios
|
||||||||||||||||||||
|
Return on common equity (“ROE”)
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
10 | % | 6 | % | 2 | % | 13 | % | 12 | % | ||||||||||
|
Net income
|
10 | 6 | 4 | 13 | 13 | |||||||||||||||
|
Return on tangible common equity (“ROTCE”)
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
15 | 10 | 4 | 22 | 24 | |||||||||||||||
|
Net income
|
15 | 10 | 6 | 22 | 24 | |||||||||||||||
|
Return on assets (“ROA”)
|
||||||||||||||||||||
|
Income from continuing operations
|
0.85 | 0.58 | 0.21 | 1.06 | 1.04 | |||||||||||||||
|
Net income
|
0.85 | 0.58 | 0.31 | 1.06 | 1.10 | |||||||||||||||
|
Overhead ratio
|
60 | 52 | 65 | 58 | 63 | |||||||||||||||
|
Deposits-to-loans ratio
|
134 | 148 | 135 | 143 | 132 | |||||||||||||||
|
Tier 1
capital ratio
(g)
|
12.1 | 11.1 | 10.9 | 8.4 | 8.7 | |||||||||||||||
|
Total capital ratio
|
15.5 | 14.8 | 14.8 | 12.6 | 12.3 | |||||||||||||||
|
Tier 1 leverage ratio
|
7.0 | 6.9 | 6.9 | 6.0 | 6.2 | |||||||||||||||
|
Tier 1
common capital ratio
(h)
|
9.8 | 8.8 | 7.0 | 7.0 | 7.3 | |||||||||||||||
|
Selected balance sheet data
(period-end)
(g)
|
||||||||||||||||||||
|
Trading assets
|
$ | 489,892 | $ | 411,128 | $ | 509,983 | $ | 491,409 | $ | 365,738 | ||||||||||
|
Securities
|
316,336 | 360,390 | 205,943 | 85,450 | 91,975 | |||||||||||||||
|
Loans
|
692,927 | 633,458 | 744,898 | 519,374 | 483,127 | |||||||||||||||
|
Total assets
|
2,117,605 | 2,031,989 | 2,175,052 | 1,562,147 | 1,351,520 | |||||||||||||||
|
Deposits
|
930,369 | 938,367 | 1,009,277 | 740,728 | 638,788 | |||||||||||||||
|
Long-term debt
|
247,669 | 266,318 | 270,683 | 199,010 | 145,630 | |||||||||||||||
|
Common stockholders’ equity
|
168,306 | 157,213 | 134,945 | 123,221 | 115,790 | |||||||||||||||
|
Total stockholders’ equity
|
176,106 | 165,365 | 166,884 | 123,221 | 115,790 | |||||||||||||||
|
Headcount
|
239,831 | 222,316 | 224,961 | 180,667 | 174,360 | |||||||||||||||
| (a) | Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses. | |
| (b) | Results for 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Bank’s (“Washington Mutual “) banking operations. | |
| (c) | On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses were reported as discontinued operations. | |
| (d) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, a wholly-owned subsidiary of JPMorgan Chase merged with and into The Bear Stearns Companies Inc. (“Bear Stearns”), and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. The Washington Mutual acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. For additional information on these transactions, see Note 2 on pages 166–170 of this Annual Report. | |
| (e) | The calculation of 2009 earnings per share (“EPS”) and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital in the second quarter of 2009. Excluding this reduction, the adjusted ROE and ROTCE were 7% and 11%, respectively, for 2009. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. For further discussion, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 64–66 of this Annual Report. |
| 52 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| (f) | Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange. | |
| (g) | Effective January 1, 2010, the Firm adopted accounting guidance that amended the accounting for the transfer of financial assets and the consolidation of variable interest entities (“VIEs”). Upon adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders’ equity and the Tier 1 capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders’ equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date. | |
| (h) | The Firm uses Tier 1 common capital (“Tier 1 common”) along with the other capital measures to assess and monitor its capital position. The Tier 1 common capital ratio (“Tier 1 common ratio”) is Tier 1 common divided by risk-weighted assets. For further discussion, see Regulatory capital on pages 102–104 of this Annual Report. |
FIVE-YEAR STOCK PERFORMANCE
The following table and graph compare the five-year cumulative total return for JPMorgan Chase &
Co. (“JPMorgan Chase” or the “Firm”) common stock with the cumulative return of the S&P 500 Stock
Index and the S&P Financial Index. The S&P 500 Index is a commonly referenced U.S. equity benchmark
consisting of leading companies from different economic sectors. The
S&P Financial Index is an
index of 81 financial companies, all of which are within the S&P 500. The Firm is a component of both industry indices.
The following table and graph assume simultaneous investments of $100 on December 31, 2005, in
JPMorgan Chase common stock and in each of the above S&P indices. The comparison assumes that all
dividends are reinvested.
| December 31, | |||||||||||||||||||
| (in dollars) | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||
|
JPMorgan Chase
|
$ | 100.00 | $ | 125.55 | $ | 116.75 | $ | 87.19 | $ | 116.98 | $ | 119.61 | |||||||
|
S&P Financial Index
|
100.00 | 119.19 | 96.99 | 43.34 | 50.80 | 56.96 | |||||||||||||
|
S&P 500 Index
|
100.00 | 115.79 | 122.16 | 76.96 | 97.33 | 111.99 | |||||||||||||
This section of JPMorgan Chase’s Annual Report for the year ended December 31, 2010 (“Annual
Report”) provides management’s discussion and analysis (“MD&A”) of the financial condition and
results of operations of JPMorgan Chase. See the Glossary of terms on pages 300–303 for
definitions of terms used throughout this Annual Report. The MD&A included in this Annual Report
contains statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of
JPMorgan Chase’s management and are subject
to significant risks and uncertainties. These risks and
uncertainties could cause the Firm’s actual results to differ materially from those set forth in
such forward-looking statements. Certain of such risks and uncertainties are described herein (see
Forward-looking Statements on page 157 of this Annual Report) and in the JPMorgan Chase Annual
Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”), in Part I, Item 1A:
Risk factors, to which reference is hereby made.
| JPMorgan Chase & Co. / 2010 Annual Report | 53 |
Table of Contents
Management’s discussion and analysis
INTRODUCTION
JPMorgan Chase & Co., a financial holding company incorporated under Delaware
law in 1968, is a leading global financial services firm and one of the largest banking
institutions in the United States of America (“U.S.”), with $2.1 trillion in assets, $176.1 billion
in stockholders’ equity and operations in more than 60 countries as of December 31, 2010. The Firm
is a leader in investment banking, financial services for consumers, small business and commercial
banking, financial transaction processing, asset management and private equity. Under the J.P.
Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s
most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association
(“JPMorgan Chase Bank, N.A.”), a national bank with branches in 23 states in the U.S.; and Chase
Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit
card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC
(“JPMorgan Securities”; formerly J.P. Morgan Securities
Inc.), the Firm’s U.S. investment banking
firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business
segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the
Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments.
The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A
description of the Firm’s business segments, and the products and services they provide to their
respective client bases, follows.
Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and
broad product capabilities. The clients of the Investment Bank (“IB”) are corporations, financial
institutions, governments and institutional investors. The Firm offers a full range of investment
banking products and services in all major capital markets, including advising on corporate
strategy and structure, capital-raising in equity and debt markets, sophisticated risk management,
market-making in cash securities and derivative instruments, prime brokerage, and research.
Retail Financial Services
Retail Financial Services (“RFS”) serves consumers and businesses through personal service at bank
branches and through ATMs, online banking and telephone banking, as well as through auto
dealerships and school financial-aid offices. Customers can use more than 5,200 bank branches
(third-largest nationally) and 16,100 ATMs (second-largest nationally), as well as online and
mobile banking around the clock. More than 28,900 branch salespeople assist customers with checking
and savings accounts, mortgages, home equity and business loans, and investments
across the
23-state footprint from New York and Florida to California. Consumers also can obtain loans through
more than 16,200 auto dealerships and 2,200 schools and universities nationwide.
Card Services
Card Services (“CS”) is one of the nation’s largest credit card issuers, with over $137 billion in
loans and over 90 million open accounts. Customers used Chase cards to meet $313 billion of their
spending needs in 2010. Through its merchant acquiring business, Chase Paymentech Solutions, CS is
a global leader in payment processing and merchant acquiring.
Commercial Banking
Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated
service to nearly 24,000 clients nationally, including corporations, municipalities, financial
institutions and not-for-profit entities with annual revenue generally ranging from $10 million to
$2 billion, and nearly 35,000 real estate investors/owners. CB partners with the Firm’s other
businesses to provide comprehensive solutions, including lending, treasury services, investment
banking and asset management to meet its clients’ domestic and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in transaction, investment and
information services. TSS is one of the world’s largest cash management providers and a leading
global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and
liquidity products and services to small- and mid-sized companies, multinational corporations,
financial institutions and government entities. TS partners with IB, CB, RFS and Asset Management
businesses to serve clients firmwide. Certain TS revenue is included in other segments’ results.
Worldwide Securities Services holds, values, clears and services securities, cash and alternative
investments for investors and broker-dealers, and manages depositary receipt programs globally.
Asset Management
Asset Management (“AM”), with assets under supervision of $1.8 trillion, is a global leader in
investment and wealth management. AM clients include institutions, retail investors and
high-net-worth individuals in every major market throughout the world. AM offers global investment
management in equities, fixed income, real estate, hedge funds, private equity and liquidity
products, including money-market instruments and bank deposits. AM also provides trust and estate,
banking and brokerage services to high-net-worth clients, and retirement services for corporations
and individuals. The majority of AM’s client assets are in actively managed portfolios.
| 54 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
EXECUTIVE OVERVIEW
This executive overview of MD&A highlights selected information and may
not contain all of the information that is important to readers of this Annual Report. For a
complete description of events, trends and uncertainties, as well as the capital, liquidity,
credit, operational and market risks, and the critical accounting
estimates, affecting the Firm and
its various lines of business, this Annual Report should be read in its entirety.
Economic environment
The business environment in 2010 continued to improve, as signs of growth and stability returned to
both the global capital markets and the U.S. economy. The year began with a continuation of the
trends seen at the end of 2009: although unemployment had reached 10%, its highest level since
1983, signs were emerging that deterioration in the labor markets was abating and economic activity
was beginning to expand. The housing sector also showed some signs of improvement, which was helped
by a new round of home-buyer credits. Overall, during 2010, the business environment continued to
improve and the U.S. economy grew, though the pace of growth was not sufficient to meaningfully
affect unemployment which, at year-end 2010, stood at 9.4%. Consumer spending expanded at a
moderate rate early in the year and accelerated as the year progressed, as households continued to
reduce debt and increase savings. Businesses began to spend aggressively, with outlays for
equipment and software expanding at a double-digit pace over the course of the year. Additionally,
businesses cautiously added to payrolls in every month of the year.
Low inflation allowed the Federal Reserve to maintain its accommodative stance throughout 2010, in
order to help promote the U.S. economic recovery. The Federal Reserve maintained the target range
for the federal funds rate at zero to one-quarter percent and continued to indicate that economic
conditions were likely to warrant a low federal funds rate for an extended period.
The U.S. and global economic recovery paused briefly during the second quarter of 2010 as concerns
arose that European countries would have to take measures to address their worsening fiscal
positions. Equity markets fell sharply, and bond yields tumbled. Concerns about the developed
economies, particularly in Europe, persisted throughout 2010 and have continued into 2011.
However, fears that the U.S. recovery was faltering proved unfounded, and the U.S. economy
continued to grow over the second half of the year. At the same time, growth in the emerging
economies remained robust. During the fourth quarter, the Federal Reserve announced a program to
purchase longer-term Treasury securities through 2011 in order to restrain interest rates and boost
the economy. These developments, combined with record U.S. corporate profit margins and rapid
international growth, continued to support stock markets as financial market conditions improved
and risk spreads continued to narrow.
Financial performance of JPMorgan Chase
| Year ended December 31, | ||||||||||||
| (in millions, except per share data and ratios) | 2010 | 2009 | Change | |||||||||
|
Selected income statement data
|
||||||||||||
|
Total net revenue
|
$ | 102,694 | $ | 100,434 | 2 | % | ||||||
|
Total noninterest expense
|
61,196 | 52,352 | 17 | |||||||||
|
Pre-provision profit
|
41,498 | 48,082 | (14 | ) | ||||||||
|
Provision for credit losses
|
16,639 | 32,015 | (48 | ) | ||||||||
|
Income before extraordinary gain
|
17,370 | 11,652 | 49 | |||||||||
|
Extraordinary gain
|
— | 76 | NM | |||||||||
|
Net income
|
17,370 | 11,728 | 48 | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 3.96 | $ | 2.24 | 77 | |||||||
|
Net income
|
3.96 | 2.26 | 75 | |||||||||
|
Return on common equity
|
||||||||||||
|
Income before extraordinary gain
|
10 | % | 6 | % | ||||||||
|
Net income
|
10 | 6 | ||||||||||
|
Capital ratios
|
||||||||||||
|
Tier 1 capital
|
12.1 | 11.1 | ||||||||||
|
Tier 1 common capital
|
9.8 | 8.8 | ||||||||||
Business overview
Against the backdrop of the improvement in the business environment during the year, JPMorgan Chase
reported full-year 2010 record net income of $17.4 billion, or $3.96 per share, on net revenue of $102.7
billion. Net income was up 48% compared with net income of $11.7 billion, or $2.26 per share, in
2009. Return on common equity was 10% for the year, compared with 6% for the prior year.
The increase in net income for 2010 was driven by a lower provision for credit losses and higher
net revenue, partially offset by higher noninterest expense. The lower provision for credit losses
reflected improvements in both the consumer and wholesale provisions. The increase in net revenue
was due predominantly to higher securities gains in the Corporate/Private Equity segment, increased
other income and increased principal transactions revenue, partially offset by lower credit card
income. The increase in noninterest expense was largely due to higher litigation expense.
JPMorgan Chase benefited from an improvement in the credit environment during 2010. Compared with
2009, delinquency trends were more favorable and estimated losses were lower in the consumer
businesses, although they remained at elevated levels. The credit quality of the commercial and
industrial loan portfolio across the Firm’s wholesale businesses improved. In addition, for the
year, net charge-offs were lower across all businesses, though the level of net charge-offs in the
Firm’s mortgage portfolio remained very high and continued to be a significant drag on returns.
These positive credit trends resulted in reductions in the allowance for credit losses in Card
Services, the loan portfolio in Retail Financial Services (excluding purchased credit-impaired
loans), and in the Investment Bank and Commercial Banking. Nevertheless, the allowance for loan
losses associated with the Washington Mutual purchased credit-impaired loan portfolio in
| JPMorgan Chase & Co. / 2010 Annual Report | 55 |
Table of Contents
Management’s discussion and analysis
Retail
Financial Services increased, reflecting an increase in estimated future credit losses largely
related to home equity, and, to a lesser extent, option ARM loans. Total firmwide credit reserves
at December 31, 2010, were $33.0 billion, resulting in a firmwide loan loss coverage ratio of 4.5%
of total loans.
Strong client relationships and continued investments for growth resulted in good results across
most of the Firm’s businesses, including record revenue and net income in Commercial Banking,
record revenue in Asset Management and solid results across most other businesses. For the year,
the Investment Bank ranked #1 for Global Investment Banking Fees; Retail Financial Services added
more than 150 new branches and 5,000 salespeople, and opened more than 1.5 million net new checking
accounts; Card Services rolled out new products and opened 11.3 million new accounts; Treasury &
Securities Services grew assets under custody to $16.1 trillion; and Asset Management reported
record long-term AUM net inflows of $69 billion.
The Firm also continued to strengthen its balance sheet during 2010, ending the year with a Tier 1
Common ratio of 9.8% and a Tier 1 Capital ratio of 12.1%. Total stockholders’ equity at December
31, 2010, was $176.1 billion.
Throughout 2010, JPMorgan Chase continued to support the economic recovery by providing capital,
financing and liquidity to its clients in the U.S. and around the world. During the year, the Firm
loaned or raised capital of more than $1.4 trillion for its clients, which included more than $10
billion of credit provided to more than 250,000 small businesses in the U.S., an increase of more
than 50% over 2009. JPMorgan Chase also made substantial investments in the future of its
businesses, including hiring more than 8,000 people in the U.S. alone. The Firm remains committed
to helping homeowners and preventing foreclosures. Since the beginning of 2009, the Firm has
offered 1,038,000 trial modifications to struggling homeowners. Of the 285,000 modifications that the Firm has
completed, more than half were modified under Chase programs, and the remainder were offered under
government-sponsored or agency programs.
Although the Firm continues to face challenges, there are signs of stability and growth returning
to both the global capital markets and the U.S. economy. The Firm intends to continue to innovate
and invest in the products that support and serve its clients and the communities where it does
business.
The discussion that follows highlights the performance of each business segment compared with the
prior year and presents results on a managed basis. Managed basis starts with the reported U.S.
GAAP results and, for each line of business and the Firm as a whole, includes certain
reclassifications to present total net revenue on a tax-equivalent basis. Effective January 1,
2010, the Firm adopted accounting guidance that required it to consolidate its Firm-sponsored
credit card securitization trusts; as a result, reported and managed basis relating to credit card
securitizations are equivalent for periods beginning after January 1, 2010. Prior to the adoption
of this accounting guidance, in 2009 and all other
prior periods, U.S. GAAP results for CS and the
Firm were also adjusted for certain reclassifications that assumed credit card loans that had been
securitized and sold by CS remained on the Consolidated Balance Sheets. These adjustments (“managed
basis”) had no impact on net income as reported by the Firm as a whole or by the lines of business.
For more information about managed basis, as well as other non-GAAP financial measures used by
management to evaluate the performance of each line of business, see
pages 64–66 of this Annual
Report.
Investment Bank
net income decreased from the prior year, reflecting lower net revenue and higher
noninterest expense, partially offset by a benefit from the provision for credit losses and gains
of $509 million from the widening of the Firm’s credit spread on certain structured and derivative
liabilities (compared with losses of $2.3 billion on the tightening of the spread on those
liabilities in the prior year). The decrease in net revenue was driven by a decline in Fixed Income
Markets revenue as well as lower investment banking fees. The provision for credit losses was a
benefit in 2010, compared with an expense in 2009, and reflected a reduction in the allowance for
loan losses, largely related to net repayments and loan sales. Noninterest expense increased,
driven by higher noncompensation expense, including increased litigation reserves, as well as
higher compensation expense, including the impact of the U.K. Bank Payroll Tax.
Retail Financial Services
net income increased significantly from the prior year, driven by a lower
provision for credit losses, partially offset by increased noninterest expense and lower net
revenue. Net revenue decreased, driven by lower deposit-related fees (including the impact of the
legislative changes related to non-sufficient funds and overdraft fees), and lower loan balances.
These decreases were partially offset by a shift to wider-spread deposit products, and growth in
debit card income and auto operating lease income. The provision for
credit losses decreased from the 2009 level, reflecting improved delinquency trends and reduced net
charge-offs. The provision also reflected an increase in the allowance for loan losses for the
purchased credit-impaired portfolio, partially offset by a reduction in the allowance for loan
losses, predominantly for the mortgage loan portfolios. Noninterest expense increased from the
prior year, driven by higher default-related expense for mortgage loans serviced, and sales force
increases in Business Banking and bank branches.
Card Services
reported net income compared with a net loss in the prior year, as a lower provision
for credit losses was partially offset by lower net revenue. The decrease in net revenue was driven
by a decline in net interest income, reflecting lower average loan balances, the impact of
legislative changes and a decreased level of fees. These decreases were partially offset by a
decrease in revenue reversals associated with lower net charge-offs. The provision for credit
losses decreased from the prior year, reflecting lower net charge-offs and a reduction in the
allowance for loan losses due to lower estimated losses. The prior-year provision included an
increase to the allowance for loan losses. Noninterest expense increased due to higher marketing
expense.
| 56 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Commercial Banking
reported record net income, driven by a reduction in the provision for
credit losses and record net revenue. The increase in net revenue was driven by growth in liability
balances, wider loan spreads, higher net gains from asset sales, higher lending-related fees, an
improvement in the market conditions impacting the value of investments held at fair value, and
higher investment banking fees; these were largely offset by spread compression on liability
products and lower loan balances. Results also included the impact of the purchase of a $3.5
billion loan portfolio during the third quarter of 2010. The provision for credit losses decreased
from 2009 and reflected a reduction in the allowance for credit losses, primarily due to
stabilization in the credit quality of the loan portfolio and refinements to credit loss estimates.
Noninterest expense increased slightly, reflecting higher headcount-related expense.
Treasury and Securities Services
net income decreased from the prior year, driven by higher
noninterest expense, partially offset by a benefit from the provision for credit losses and higher
net revenue. Worldwide Securities Services net revenue was relatively flat, as higher market levels
and net inflows of assets under custody were offset by lower spreads in securities lending, lower
volatility on foreign exchange, and lower balances on liability products. Treasury Services net
revenue was relatively flat, as lower spreads on liability products were offset by higher trade
loan and card product volumes. Assets under custody grew to $16.1 trillion during 2010, an 8% increase.
Noninterest expense for TSS increased, driven by continued investment in new product
platforms, primarily related to international expansion, and higher performance-based compensation
expense.
Asset Management
net income increased from the prior year on record revenue, largely offset by
higher noninterest expense. The growth in net revenue was driven by the effect of higher market
levels, net inflows to products with higher margins, higher loan originations, higher deposit and
loan balances, and higher performance fees, partially offset by narrower deposit spreads. Assets
under supervision increased 8% during 2010 driven by the effect of higher market valuations, record
net inflows of $69 billion to long-term products, and inflows in custody and brokerage products,
offset partially by net outflows from liquidity products. Noninterest expense increased due to
higher headcount and performance-based compensation.
Corporate/Private Equity
net income decreased from the prior year, driven by higher noninterest
expense partially offset by higher net revenue. The increase in net revenue reflected higher
securities gains, primarily associated with actions taken to reposition the Corporate investment
securities portfolio in connection with managing the Firm’s structural interest rate risk, and
higher private equity gains. These gains were partially offset by lower net interest income from
the investment portfolio. The increase in noninterest expense was due to an increase in litigation
reserves, including those for mortgage-related matters, partially offset by the absence of a $675
million FDIC special assessment in 2009.
2011 Business outlook
The following forward-looking statements are based on the current beliefs and expectations of
JPMorgan Chase’s management and are subject to significant risks and uncertainties. As noted above,
these risks and uncertainties could cause the Firm’s actual results to differ materially from those
set forth in such forward-looking statements. See Forward-Looking Statements on page 157 and Risk
Factors on pages 5–12 of this Annual Report.
JPMorgan Chase’s outlook for 2011 should be viewed against the backdrop of the global and U.S.
economies, financial markets activity, the geopolitical environment, the competitive environment,
client activity levels, and regulatory and legislative developments in the U.S. and other countries
where the Firm does business. Each of these linked factors will affect the performance of the Firm
and its lines of business. Economic and macroeconomic factors, such as market and credit trends,
customer behavior, client business strategies and competition, are all expected to affect the
Firm’s businesses. The outlook for RFS and CS, in particular, reflects the expected effect of
current economic trends in the U.S relating to high unemployment levels and the continuing stress
and uncertainty in the housing markets. The Firm’s wholesale businesses will be affected by market
levels and volumes, which are volatile and quickly subject to change.
In the
Mortgage Banking, Auto & Other Consumer Lending business within RFS, management expects
mortgage fees and related income to be $1 billion or less for
the first quarter of 2011, given the levels of mortgage interest
rates and production volumes experienced year-to-date. If mortgage
interest rates remain at current levels or rise in the future, loan
production and margins could continue to be negatively affected
resulting in lower revenue for the full year 2011. In addition, revenue could
continue to be negatively affected by continued elevated levels of repurchases of mortgages
previously sold, predominantly to U.S. government-sponsored entities (“GSEs”). Management estimates
that realized repurchase losses could total approximately $1.2 billion in 2011. In addition, the
Firm is dedicating significant resources to address, correct and enhance its mortgage loan
foreclosure procedures and is cooperating with various state and federal investigations into its
procedures. As a result, the Firm expects to incur additional costs and expenses in resolving these
issues.
In the Real Estate Portfolios business within RFS, management believes that, based on the current
outlook for delinquencies and loss severity, it is possible that total quarterly net charge-offs
could be approximately $1.2 billion during 2011. Given current origination and production levels,
combined with management’s current estimate of portfolio runoff levels, the residential real estate
portfolio is expected to decline by approximately 10% to 15% annually for the foreseeable future.
The annual reductions in the residential real estate portfolio are expected to reduce net interest
income in each period, including a reduction of approximately $700 million in 2011 from the 2010
level; however, over time the reduction in net interest income is expected to be more than offset
by an improvement in credit costs and lower expenses. As the portfolio continues to run off,
management anticipates that approximately $1.0 billion of capital may become available for
| JPMorgan Chase & Co. / 2010 Annual Report | 57 |
Table of Contents
Management’s discussion and analysis
redeployment each year, subject to the capital requirements associated with the remaining
portfolio.
Also, in RFS, management expects noninterest expense in 2011 to remain modestly above 2010 levels,
reflecting investments in new branch builds and sales force hires, as well as continued elevated
servicing-, default- and foreclosed asset-related costs.
In CS, management expects end-of-period outstandings for the Chase portfolio (excluding the
Washington Mutual portfolio) to continue to decline in 2011. This decline may be as much as $10
billion in the first quarter, reflecting both continued portfolio run-off and seasonal activity.
The decline in the Chase portfolio is expected to bottom out in the third quarter of 2011, and by
the end of 2011, outstandings in the portfolio are anticipated to be approximately $120 billion and
reflect a better mix of customers. The Washington Mutual portfolio declined to approximately $14
billion at the end of 2010, from $20 billion at the end of 2009. Management estimates that the
Washington Mutual portfolio could decline to $10 billion by the end of 2011. The effect of such
reductions in the Chase and Washington Mutual portfolios is expected to reduce 2011 net interest
income in CS by approximately $1.4 billion from the 2010 level.
The net charge-off rates for both the Chase and Washington Mutual credit card portfolios are
anticipated to continue to improve. If current delinquency trends continue, the net charge-off rate
for the Chase portfolio (excluding the Washington Mutual portfolio) could be below 6.5% in the first
quarter of 2011.
Despite these positive economic trends, results for RFS and CS will depend on the economic
environment. Although the positive economic data seen in 2010 seemed to imply that the U.S. economy
was not falling back into recession, high unemployment rates and the difficult housing market have
been persistent. Even as consumer lending net charge-offs and delinquencies have improved, the
consumer credit portfolio remains under stress. Further declines in U.S. housing prices and
increases in the unemployment rate remain possible; if this were to occur, results for both RFS and
CS could be adversely affected.
In IB, TSS and AM, revenue will be affected by market levels, volumes and volatility, which will
influence client flows and assets under management, supervision and custody. In addition, IB and CB
results will continue to be affected by the credit environment, which will influence levels of
charge-offs, repayments and provision for credit losses.
In Private Equity (within the Corporate/Private Equity segment), earnings will likely continue to
be volatile and be influenced by capital markets activity, market levels, the performance of the
broader economy and investment-specific issues. Corporate’s net interest income levels will
generally trend with the size and duration of the investment securities portfolio. Corporate net
income (excluding Private Equity, and excluding merger-related items, material litigation expenses
and significant nonrecurring items, if any) is anticipated to trend toward a level of approximately
$300 million per quarter.
Furthermore, continued repositioning of the investment securities portfolio in Corporate could
result in modest downward pressure on the Firm’s net interest margin in the first quarter of 2011.
Regarding regulatory reform, JPMorgan Chase intends to continue to work with the Firm’s regulators as they
proceed with the extensive rulemaking required to implement financial reform. The Firm will
continue to devote substantial resources to achieving implementation of regulatory reforms in a way
that preserves the value the Firm delivers to its clients.
Management and the Firm’s Board of Directors continually evaluate ways to deploy the Firm’s strong
capital base in order to enhance shareholder value. Such alternatives could include the repurchase
of common stock, increasing the common stock dividend and pursuing alternative investment
opportunities. Management and the Board will continue to assess and make decisions regarding these
alternatives, as appropriate, over the course of the year.
| 58 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
CONSOLIDATED RESULTS OF OPERATIONS
This following section provides a comparative discussion of JPMorgan Chase’s Consolidated
Results of Operations on a reported basis for the three-year period ended December 31, 2010.
Factors that related primarily to a single business segment are discussed in more detail within
that business segment. For a discussion of the Critical Accounting Estimates used by the Firm that
affect the Consolidated Results of Operations, see pages 149–154 of this Annual Report.
Revenue
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Investment banking fees
|
$ | 6,190 | $ | 7,087 | $ | 5,526 | ||||||
|
Principal transactions
|
10,894 | 9,796 | (10,699 | ) | ||||||||
|
Lending- and deposit-related fees
|
6,340 | 7,045 | 5,088 | |||||||||
|
Asset management, administration
and commissions
|
13,499 | 12,540 | 13,943 | |||||||||
|
Securities gains
|
2,965 | 1,110 | 1,560 | |||||||||
|
Mortgage fees and related income
|
3,870 | 3,678 | 3,467 | |||||||||
|
Credit card income
|
5,891 | 7,110 | 7,419 | |||||||||
|
Other income
|
2,044 | 916 | 2,169 | |||||||||
|
Noninterest revenue
|
51,693 | 49,282 | 28,473 | |||||||||
|
Net interest income
|
51,001 | 51,152 | 38,779 | |||||||||
|
Total net revenue
|
$ | 102,694 | $ | 100,434 | $ | 67,252 | ||||||
2010 compared with 2009
Total net revenue for 2010 was $102.7 billion, up by $2.3 billion, or 2%, from 2009. Results for
2010 were driven by a higher level of securities gains and private equity gains in
Corporate/Private Equity, higher asset management fees in AM and administration fees in TSS, and
higher other income in several businesses, partially offset by lower credit card income.
Investment banking fees decreased from 2009 due to lower equity underwriting and advisory fees,
partially offset by higher debt underwriting fees. Competitive markets combined with flat
industry-wide equity underwriting and completed M&A volumes, resulted in lower equity underwriting
and advisory fees; while strong industry-wide loan syndication and high-yield bond volumes drove
record debt underwriting fees in IB. For additional information on investment banking fees, which
are primarily recorded in IB, see IB segment results on pages
69–71 of this
Annual Report.
Principal transactions revenue, which consists of revenue from the Firm’s trading and private
equity investing activities, increased compared with 2009. This was driven by the Private Equity
business, which had significant private equity gains in 2010, compared with a small loss in 2009,
reflecting improvements in market conditions. Trading revenue decreased, reflecting lower results
in Corporate, offset by higher revenue in IB primarily reflecting gains from the widening of the
Firm’s credit spread on certain structured and derivative liabilities. For additional information
on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages
69–71 and 89–
90, respectively, and Note 7 on pages 199–200 of this Annual Report.
Lending- and deposit-related fees decreased in 2010 from 2009 levels, reflecting lower
deposit-related fees in RFS associated, in part, with newly-enacted legislation related to
non-sufficient funds and overdraft fees; this was partially offset by higher lending-related
service fees in IB, primarily from growth in business volume, and in CB, primarily from higher
commitment and letter-of-credit fees. For additional information on lending- and deposit-related
fees, which are mostly recorded in IB, RFS, CB and TSS, see segment
results for IB on pages 69–71,
RFS on pages 72–78, CB on pages 82–83 and TSS on pages
84–85 of this Annual Report.
Asset management, administration and commissions revenue increased from 2009. The increase largely
reflected higher asset management fees in AM, driven by the effect of higher market levels, net
inflows to products with higher margins and higher performance fees; and higher administration fees
in TSS, reflecting the effects of higher market levels and net inflows of assets under custody.
This increase was partially offset by lower brokerage commissions in IB, as a result of lower
market volumes. For additional information on these fees and commissions, see the segment
discussions for AM on pages 86–88 and TSS on pages 84–85 of this Annual Report.
Securities gains were significantly higher in 2010 compared with 2009, resulting primarily from the
repositioning of the portfolio in response to changes in the interest rate environment and to
rebalance exposure. For additional information on securities gains, which are mostly recorded in
the Firm’s Corporate segment, see the Corporate/Private Equity
segment discussion on pages 89–90
of this Annual Report.
Mortgage fees and related income increased in 2010 compared with 2009, driven by higher mortgage
production revenue, reflecting increased mortgage origination volumes in RFS and AM, and wider
margins, particularly in RFS. This increase was largely offset by higher repurchase losses in RFS
(recorded as contra-revenue), which were attributable to higher estimated losses related to
repurchase demands, predominantly from GSEs. For additional information
on mortgage fees and related income, which is recorded primarily in
RFS, see RFS’s Mortgage Banking, Auto
& Other Consumer Lending discussion on pages 74–77 of this Annual Report. For additional
information on repurchase losses, see the repurchase liability
discussion on pages 98–101 and Note 30
on pages 275–280 of this Annual Report.
Credit card income decreased during 2010, predominantly due to the impact of the accounting
guidance related to VIEs, effective January 1, 2010, that required the Firm to consolidate the
assets and liabilities of its Firm-sponsored credit card securitization trusts. Adoption of the new
guidance resulted in the elimination of all servicing fees received from Firm-sponsored credit card
securitization trusts (which was offset by related increases in net
| JPMorgan Chase & Co. / 2010 Annual Report | 59 |
Table of Contents
Management’s discussion and analysis
interest income and the
provision for credit losses, and the elimination of securitization income/(losses) in other
income). Lower income from other fee-based products also contributed to the decrease in credit card
income. Excluding the impact of the adoption of the new accounting guidance, credit card income
increased in 2010, reflecting higher customer charge volume on credit and debit cards. For a more
detailed discussion of the impact of the adoption of the new accounting guidance on the
Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP
Financial Measures on pages 64–66 of this Annual Report. For additional information on credit card
income, see the CS and RFS segment results on pages 79–81, and
pages 72–78, respectively, of this
Annual Report.
Other income increased in 2010, largely due to the write-down of securitization interests during
2009 and higher auto operating lease income in RFS.
Net interest income was relatively flat in 2010 compared with 2009. The effect of lower loan
balances was predominantly offset by the effect of the adoption of the new accounting guidance
related to VIEs (which increased net interest income by approximately $5.8 billion in 2010).
Excluding the impact of the adoption of the new accounting guidance, net interest income decreased,
driven by lower average loan balances, primarily in CS, RFS and IB, reflecting the continued runoff
of the credit card balances and residential real estate loans, and net repayments and loan sales;
lower yields and fees on credit card receivables, reflecting the impact of legislative changes; and
lower yields on securities in Corporate resulting from investment portfolio repositioning. The
Firm’s average interest-earning assets were $1.7 trillion in 2010, and the net yield on those
assets, on a FTE basis, was 3.06%, a decrease of 6 basis points from 2009. For a more detailed
discussion of the impact of the adoption of the new accounting guidance related to VIEs on the
Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP
Financial Measures on pages 64–66 of this Annual Report. For further information on the impact of
the legislative changes on the Consolidated Statements of Income, see CS discussion on Credit Card
Legislation on page 79 of this Annual Report.
2009 compared with 2008
Total net revenue was $100.4 billion, up by $33.2 billion, or 49%, from the prior year. The
increase was driven by higher principal transactions revenue, primarily related to improved
performance across most fixed income and equity products, and the absence of net markdowns on
legacy leveraged lending and mortgage positions in IB, as well as higher levels of trading gains
and investment securities income in Corporate/Private Equity. Results also benefited from the
impact of the Washington Mutual transaction, which contributed to increases in net interest income,
lending- and deposit-related fees, and mortgage fees and related income. Lastly, higher investment
banking fees also contributed to revenue growth. These increases in revenue were offset partially
by reduced fees and commissions from the effect of lower market levels on assets under management
and custody, and the absence of proceeds from the sale of Visa shares in its initial public
offering in the first quarter of 2008.
Investment banking fees increased from the prior year, due to higher equity and debt underwriting
fees. For a further discussion of investment banking fees, which are primarily recorded in IB, see
IB segment results on pages 69–71 of this Annual Report.
Principal transactions revenue, which consists of revenue from trading and private equity investing
activities, was significantly higher compared with the prior year. Trading revenue increased,
driven by improved performance across most fixed income and equity products; modest net gains on
legacy leveraged lending and mortgage-related positions, compared with net markdowns of $10.6
billion in the prior year; and gains on trading positions in Corporate/Private Equity, compared
with losses in the prior year of $1.1 billion on markdowns of Federal National Mortgage Association
(“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred securities.
These increases in revenue were offset partially by an aggregate loss of $2.3 billion from the
tightening of the Firm’s credit spread on certain structured liabilities and derivatives, compared
with gains of $2.0 billion in the prior year from widening spreads on these liabilities and
derivatives. The Firm’s private equity investments produced a slight net loss in 2009, a
significant improvement from a larger net loss in 2008. For a further discussion of principal
transactions revenue, see IB and Corporate/Private Equity segment
results on pages 69–71 and
89–90, respectively, and Note 7 on pages 199–200 of this Annual Report.
| 60 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Lending- and deposit-related fees rose from the prior year, predominantly reflecting the impact of
the Washington Mutual transaction and organic growth in both lending- and deposit-related fees in
RFS, CB, IB and TSS. For a further discussion of lending- and deposit-related fees, which are
mostly recorded in RFS, TSS and CB, see the RFS segment results on
pages 72–78, the TSS segment
results on pages 84–85, and the CB segment results on pages
82–83 of this Annual Report.
The decline in asset management, administration and commissions revenue compared with the prior
year was largely due to lower asset management fees in AM from the effect of lower market levels.
Also contributing to the decrease were lower administration fees in TSS, driven by the effect of
market depreciation on certain custody assets and lower securities lending balances; and lower
brokerage commissions revenue in IB, predominantly related to lower transaction volume. For
additional information on these fees and commissions, see the segment discussions for TSS and AM on
pages 84–85 and pages 86–88, respectively, of this Annual Report.
Securities gains were lower in 2009 and included credit losses related to other-than-temporary
impairment and lower gains on the sale of MasterCard shares totaling $241 million in 2009, compared
with $668 million in 2008. These decreases were offset partially by higher gains from repositioning
the Corporate investment securities portfolio in connection with managing the Firm’s structural
interest rate risk. For a further discussion of securities gains, which are mostly recorded in
Corporate/Private Equity, see the Corporate/Private Equity segment
discussion on pages 89–90 of
this Annual Report.
Mortgage fees and related income increased slightly from the prior year, as higher net mortgage
servicing revenue was largely offset by lower production revenue. The increase in net mortgage
servicing revenue was driven by growth in average third-party loans serviced as a result of the
Washington Mutual transaction. Mortgage production revenue declined from the prior year, reflecting
an increase in estimated losses from the repurchase of previously-sold loans, offset partially by
wider margins on new originations. For a discussion of mortgage fees and related income, which is
recorded primarily in RFS, see RFS’s Mortgage Banking, Auto & Other Consumer Lending discussion on pages
74–77 of this Annual Report.
Credit card income, which includes the impact of the Washington Mutual transaction, decreased
slightly compared with the prior year, due to lower servicing fees earned in connection with CS
securitization activities, largely as a result of higher credit losses. The decrease was partially
offset by wider loan margins on securitized credit card loans; higher merchant servicing revenue
related to the dissolution of the Chase Paymentech Solutions joint venture; and higher interchange
income. For a further discussion of credit card income, see the CS
segment results on pages 79–81
of this Annual Report.
Other income decreased from the prior year, due predominantly to the absence of $1.5 billion in
proceeds from the sale of Visa shares as part of its initial public offering in the first quarter
of 2008; a $1.0 billion gain on the dissolution of the Chase Paymentech Solutions joint venture in
the fourth quarter of 2008; and lower net securitization income in CS. These items were partially
offset by a $464 million charge recognized in 2008 related to the repurchase of auction-rate
securities at par; the absence of a $423 million loss incurred in the second quarter of 2008,
reflecting the Firm’s 49.4% share of Bear Stearns’s losses from April 8 to May 30, 2008; and higher
valuations on certain investments, including seed capital in AM.
Net interest income increased from the prior year, driven by the Washington Mutual transaction,
which contributed to higher average loans and deposits. The Firm’s interest-earning assets were
$1.7 trillion, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was
3.12%, an increase of 25 basis points from 2008. Excluding the impact of the Washington Mutual
transaction, the increase in net interest income in 2009 was driven by a higher level of investment
securities, as well as a wider net interest margin, which reflected the overall decline in market
interest rates during the year. Declining interest rates had a positive effect on the net interest
margin, as rates paid on the Firm’s interest-bearing liabilities decreased faster relative to the
decline in rates earned on interest-earning assets. These increases in net interest income were
offset partially by lower loan balances, which included the effect of lower customer demand,
repayments and charge-offs.
| JPMorgan Chase & Co. / 2010 Annual Report | 61 |
Table of Contents
Management’s discussion and analysis
Provision for credit losses
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Wholesale
|
$ | (850 | ) | $ | 3,974 | $ | 3,327 | |||||
|
Consumer, excluding credit card
(a)
|
9,452 | 16,022 | 10,610 | |||||||||
|
Credit card
(a)
|
8,037 | 12,019 | 7,042 | |||||||||
|
Total provision for credit losses
|
$ | 16,639 | $ | 32,015 | $ | 20,979 | ||||||
| (a) | Includes adjustments to the provision for credit losses recognized in the Corporate/Private Equity segment related to the Washington Mutual transaction in 2008. |
2010 compared with 2009
The provision for credit losses declined by $15.4 billion compared with 2009, due to decreases in
both the consumer and wholesale provisions. The decreases in the consumer provisions reflected
reductions in the allowance for credit losses for mortgages and credit cards as a result of
improved delinquency trends and lower estimated losses. This was partially offset by an increase in
the allowance for credit losses associated with the Washington Mutual purchased credit-impaired
loans portfolio, resulting from increased estimated future credit losses. The decrease in the
wholesale provision in 2010 reflected a reduction in the allowance for credit losses, predominantly
as a result of continued improvement in the credit quality of the commercial and industrial loan
portfolio, reduced net charge-offs, and net repayments and loan sales. For a more detailed
discussion of the loan portfolio and the allowance for credit losses, see the segment discussions
for RFS on pages 72–78, CS on pages 79–81, IB on pages
69–71 and CB on pages 82–83, and the
Allowance for Credit Losses section on pages 139–141 of this Annual Report.
2009 compared with 2008
The provision for credit losses in 2009 rose by $11.0 billion compared with the prior year,
predominantly due to a significant increase in the consumer provision. The prior year included a
$1.5 billion charge to conform Washington Mutual’s allowance for loan losses, which affected both
the consumer and wholesale portfolios. For the purpose of the following analysis, this charge is
excluded. The consumer provision reflected additions to the allowance for loan losses for the home
equity, mortgage and credit card portfolios, as weak economic conditions, housing price declines
and higher unemployment rates continued to drive higher estimated losses for these portfolios.
Included in the 2009 addition to the allowance for loan losses was a $1.6 billion provision related
to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. The
wholesale provision increased from the prior year, reflecting continued weakness in the credit
environment in 2009 compared with the prior year. For a more detailed discussion of the loan
portfolio and the allowance for loan losses, see the segment
discussions for RFS on pages 72–78,
CS on pages 79–81, IB on pages 69–71 and CB on pages
82–83, and the Allowance for Credit Losses
section on pages 139–141 of this Annual Report.
Noninterest expense
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Compensation expense
(a)
|
$ | 28,124 | $ | 26,928 | $ | 22,746 | ||||||
|
Noncompensation expense:
|
||||||||||||
|
Occupancy expense
|
3,681 | 3,666 | 3,038 | |||||||||
|
Technology, communications
and equipment
|
4,684 | 4,624 | 4,315 | |||||||||
|
Professional and outside services
|
6,767 | 6,232 | 6,053 | |||||||||
|
Marketing
|
2,446 | 1,777 | 1,913 | |||||||||
|
Other expense
(b)(c)(d)
|
14,558 | 7,594 | 3,740 | |||||||||
|
Amortization of intangibles
|
936 | 1,050 | 1,263 | |||||||||
|
Total noncompensation expense
|
33,072 | 24,943 | 20,322 | |||||||||
|
Merger costs
|
— | 481 | 432 | |||||||||
|
Total noninterest expense
|
$ | 61,196 | $ | 52,352 | $ | 43,500 | ||||||
| (a) | Expense for 2010 included a payroll tax expense related to the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees. | |
| (b) | In 2010, 2009 and 2008, included litigation expense of $7.4 billion, $161 million and a net benefit of $781 million, respectively. | |
| (c) | In 2010, 2009 and 2008, included foreclosed property expense of $1.0 billion, $1.4 billion and $213 million, respectively. For additional information regarding foreclosed property, see Note 11 on page 213 of this Annual Report. | |
| (d) | Expense for 2009 included a $675 million FDIC special assessment. |
2010 compared with 2009
Total noninterest expense for 2010 was $61.2 billion, up by
$8.8 billion, or 17%, from 2009. The increase was driven by higher noncompensation expense, largely
due to higher litigation expense, and the effect of investments in the businesses.
Compensation expense increased from the prior year, predominantly due to higher salary expense
related to investments in the businesses, including additional sales staff in RFS and client
advisors in AM, and the impact of the U.K. Bank Payroll Tax.
In addition to the aforementioned higher litigation expense, which was largely for mortgage-related
matters in Corporate and IB, the increase in noncompensation expense was driven by higher marketing
expense in CS; higher professional services expense, due to continued investments in new product
platforms in the businesses, including those related to international expansion; higher
default-related expense, including costs associated with foreclosure affidavit-related suspensions
(recorded in other expense), for the serviced portfolio in RFS; and higher brokerage, clearing and
exchange transaction processing expense in IB. Partially offsetting these increases was the absence
of a $675 million FDIC special assessment recognized in 2009. For a further discussion of
litigation expense, see the Litigation reserve discussion in Note 32 pages 282–289 of this Annual
Report. For a discussion of amortization of intangibles, refer to Note 17 on pages 260–263 of this
Annual Report.
There were no merger costs recorded in 2010, compared with merger costs of $481 million in 2009.
For additional information on merger costs, refer to Note 11 on page 213 of this Annual Report.
| 62 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
2009 compared with 2008
Total noninterest expense was $52.4 billion, up by $8.9 billion, or 20%, from the prior year. The
increase was driven by the impact of the Washington Mutual transaction, higher performance-based
compensation expense, higher FDIC-related costs, and increased mortgage servicing and
default-related expense. These items were offset partially by lower headcount-related expense,
including salary and benefits but excluding performance-based incentives, and other noncompensation
costs related to employees.
Compensation expense increased in 2009 compared with the prior year, reflecting higher
performance-based incentives, as well as the impact of the Washington Mutual transaction. Excluding
these two items, compensation expense decreased as a result of a reduction in headcount,
particularly in the wholesale businesses and in Corporate.
Noncompensation expense increased from the prior year, due predominantly to the following: the
impact of the Washington Mutual transaction; higher ongoing FDIC insurance premiums and an FDIC
special assessment of $675 million recognized in the second quarter of 2009; higher mortgage
servicing and default-related expense, which included an increase in foreclosed property expense of
$1.2 billion; higher litigation costs; and the effect of the dissolution of the Chase Paymentech
Solutions joint venture. These increases were partially offset by lower headcount-related expense,
particularly in IB, TSS and AM; a decrease in amortization of intangibles, predominantly related to
purchased credit card relationships; lower mortgage reinsurance losses; and a decrease in credit
card marketing expense. For a discussion of amortization of intangibles, refer to Note 17 on pages
260–263 of this Annual Report.
For information on merger costs, refer to Note 11 on page 213 of this Annual Report.
Income tax expense
| Year ended December 31, | ||||||||||||
| (in millions, except rate) | 2010 | 2009 | 2008 | |||||||||
|
Income before income tax expense/ (benefit) and extraordinary gain
|
$ | 24,859 | $ | 16,067 | $ | 2,773 | ||||||
|
Income tax expense/(benefit)
|
7,489 | 4,415 | (926 | ) | ||||||||
|
Effective tax rate
|
30.1 | % | 27.5 | % | (33.4 | )% | ||||||
2010 compared with 2009
The increase in the effective tax rate compared with the prior year was primarily the result of
higher reported pretax book income, as well as changes in the proportion of income subject to U.S.
federal and state and local taxes. These increases were partially offset by increased benefits
associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be
reinvested indefinitely, as well as tax benefits recognized upon the resolution of tax audits in
2010. For additional information on income taxes, see Critical Accounting Estimates Used by the
Firm on pages 149–154 and Note 27 on pages 271–273 of this Annual Report.
2009 compared with 2008
The change in the effective tax rate compared with the prior year was primarily the result of
higher reported pretax income and changes in the proportion of income subject to U.S. federal,
state and local taxes. Benefits related to tax-exempt income, business tax credits and tax audit
settlements increased in 2009 relative to 2008; however, the impact of these items on the effective
tax rate was reduced by the significantly higher level of pretax income in 2009. In addition, 2008
reflected the realization of benefits of $1.1 billion from the release of deferred tax liabilities
associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be
reinvested indefinitely.
Extraordinary gain
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. This
transaction was accounted for under the purchase method of accounting for business combinations.
The adjusted net asset value of the banking operations after purchase accounting adjustments was
higher than the consideration paid by JPMorgan Chase, resulting in an extraordinary gain. The
preliminary gain recognized in 2008 was $1.9 billion. In the third quarter of 2009, the Firm
recognized an additional $76 million extraordinary gain associated with the final purchase
accounting adjustments for the acquisition. For a further discussion of the Washington Mutual
transaction, see Note 2 on pages 166–170 of the Firm’s 2009 Annual Report.
| JPMorgan Chase & Co. / 2010 Annual Report | 63 |
Table of Contents
Management’s discussion and analysis
EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its consolidated financial statements using accounting principles
generally accepted in the U.S. (“U.S. GAAP”); these financial statements appear on pages 160–163
of this Annual Report. That presentation, which is referred to as “reported basis,” provides the
reader with an understanding of the Firm’s results that can be tracked consistently from year to
year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial
statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s
results and the results of the lines of business on a “managed” basis, which is a non-GAAP
financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP
results and includes certain reclassifications to present total net revenue for the Firm (and each
of the business segments) on a FTE basis. Accordingly, revenue from tax-exempt securities and
investments that receive tax credits is presented in the managed results on a basis comparable to
taxable securities and investments. This non-GAAP financial measure allows management to assess the
comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income
tax impact related to these items is recorded within income tax expense. These adjustments have no
impact on net income as reported by the Firm as a whole or by the lines of business.
Prior to January 1, 2010, the Firm’s managed-basis presentation also included certain
reclassification adjustments that assumed credit card loans securitized by CS remained on the
balance sheet. Effective January 1, 2010, the Firm adopted accounting guidance that required the
Firm to consolidate its Firm-sponsored credit card securitization trusts. The income, expense and
credit costs associated with these securitization activities are now recorded in the 2010
Consolidated Statements of Income in the same classifications that were previously used to report
such items on a managed basis. As a result of the consolidation of the credit card securitization
trusts, reported and managed basis relating to credit card securitizations are equivalent for
periods beginning after January 1, 2010. For additional information on the accounting guidance, see
Note 16 on pages 244–259 of this Annual Report.
The presentation in 2009 and 2008 of CS results on a managed basis assumed that credit card loans that had been securitized and sold in accordance with U.S. GAAP remained on the Consolidated Balance
The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
(Table continues on next page)
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| Fully | Fully | |||||||||||||||||||||||||||||||
| Year ended December 31, | tax- | tax- | ||||||||||||||||||||||||||||||
| (in millions, except | Reported | equivalent | Managed | Reported | equivalent | Managed | ||||||||||||||||||||||||||
| per share and ratio data) | results | Credit card (c) | adjustments | basis | results | Credit card (c) | adjustments | basis | ||||||||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||||||||||
|
Investment banking fees
|
$ | 6,190 | NA | $ | — | $ | 6,190 | $ | 7,087 | $ | — | $ | — | $ | 7,087 | |||||||||||||||||
|
Principal transactions
|
10,894 | NA | — | 10,894 | 9,796 | — | — | 9,796 | ||||||||||||||||||||||||
|
Lending- and deposit-related fees
|
6,340 | NA | — | 6,340 | 7,045 | — | — | 7,045 | ||||||||||||||||||||||||
|
Asset management, administration
and commissions
|
13,499 | NA | — | 13,499 | 12,540 | — | — | 12,540 | ||||||||||||||||||||||||
|
Securities gains
|
2,965 | NA | — | 2,965 | 1,110 | — | — | 1,110 | ||||||||||||||||||||||||
|
Mortgage fees and related income
|
3,870 | NA | — | 3,870 | 3,678 | — | — | 3,678 | ||||||||||||||||||||||||
|
Credit card income
|
5,891 | NA | — | 5,891 | 7,110 | (1,494 | ) | — | 5,616 | |||||||||||||||||||||||
|
Other income
|
2,044 | NA | 1,745 | 3,789 | 916 | — | 1,440 | 2,356 | ||||||||||||||||||||||||
|
Noninterest revenue
|
51,693 | NA | 1,745 | 53,438 | 49,282 | (1,494 | ) | 1,440 | 49,228 | |||||||||||||||||||||||
|
Net interest income
|
51,001 | NA | 403 | 51,404 | 51,152 | 7,937 | 330 | 59,419 | ||||||||||||||||||||||||
|
Total net revenue
|
102,694 | NA | 2,148 | 104,842 | 100,434 | 6,443 | 1,770 | 108,647 | ||||||||||||||||||||||||
|
Noninterest expense
|
61,196 | NA | — | 61,196 | 52,352 | — | — | 52,352 | ||||||||||||||||||||||||
|
Pre-provision profit
|
41,498 | NA | 2,148 | 43,646 | 48,082 | 6,443 | 1,770 | 56,295 | ||||||||||||||||||||||||
|
Provision for credit losses
|
16,639 | NA | — | 16,639 | 32,015 | 6,443 | — | 38,458 | ||||||||||||||||||||||||
|
Provision for credit losses – accounting
conformity
(a)
|
— | NA | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Income before income tax expense/
(benefit) and extraordinary gain
|
24,859 | NA | 2,148 | 27,007 | 16,067 | — | 1,770 | 17,837 | ||||||||||||||||||||||||
|
Income tax expense/(benefit)
|
7,489 | NA | 2,148 | 9,637 | 4,415 | — | 1,770 | 6,185 | ||||||||||||||||||||||||
|
Income before extraordinary gain
|
17,370 | NA | — | 17,370 | 11,652 | — | — | 11,652 | ||||||||||||||||||||||||
|
Extraordinary gain
|
— | NA | — | — | 76 | — | — | 76 | ||||||||||||||||||||||||
|
Net income
|
$ | 17,370 | NA | $ | — | $ | 17,370 | $ | 11,728 | $ | — | $ | — | $ | 11,728 | |||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Diluted earnings per share
(b)
|
$ | 3.96 | NA | $ | — | $ | 3.96 | $ | 2.24 | $ | — | $ | — | $ | 2.24 | |||||||||||||||||
|
Return on assets
(b)
|
0.85 | % | NA | NM | 0.85 | % | 0.58 | % | NM | NM | 0.55 | % | ||||||||||||||||||||
|
Overhead ratio
|
60 | NA | NM | 58 | 52 | NM | NM | 48 | ||||||||||||||||||||||||
|
Loans – period-end
|
$ | 692,927 | NA | $ | — | $ | 692,927 | $ | 633,458 | $ | 84,626 | $ | — | $ | 718,084 | |||||||||||||||||
|
Total assets – average
|
2,053,251 | NA | — | 2,053,251 | 2,024,201 | 82,233 | — | 2,106,434 | ||||||||||||||||||||||||
| (a) | 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations. | |
| (b) | Based on income before extraordinary gain. | |
| (c) | See pages 79–81 of this Annual Report for a discussion of the effect of credit card securitizations on CS results. | |
| NA: Not applicable |
| 64 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Sheets, and that the earnings on the securitized loans were classified in the same manner as
the earnings on retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase had used
this managed-basis information to evaluate the credit performance and overall financial performance
of the entire managed credit card portfolio. Operations were funded and decisions were made about
allocating resources, such as employees and capital, based on managed financial information. In
addition, the same underwriting standards and ongoing risk monitoring are used for both loans on
the Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale
of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships,
as the customers may continue to use their credit cards; accordingly, the customer’s credit
performance affects both the securitized loans and the loans retained on the Consolidated Balance
Sheets. JPMorgan Chase believed that this managed-basis information was useful to investors, as it
enabled them to understand both the credit risks associated with the loans reported on the
Consolidated Balance Sheets and the Firm’s retained interests in securitized loans. For a
reconciliation of 2009 and 2008 reported to managed basis results for CS, see CS segment results on
pages 79–81 of this Annual
(Table continued from previous page)
| 2008 | |||||||||||||||
| Fully | |||||||||||||||
| Reported | tax-equivalent | Managed | |||||||||||||
| results | Credit card (c) | adjustments | basis | ||||||||||||
| $ | 5,526 | $ | — | $ | — | $ | 5,526 | ||||||||
| (10,699 | ) | — | — | (10,699 | ) | ||||||||||
| 5,088 | — | — | 5,088 | ||||||||||||
| 13,943 | — | — | 13,943 | ||||||||||||
| 1,560 | — | — | 1,560 | ||||||||||||
| 3,467 | — | — | 3,467 | ||||||||||||
| 7,419 | (3,333 | ) | — | 4,086 | |||||||||||
| 2,169 | — | 1,329 | 3,498 | ||||||||||||
| 28,473 | (3,333 | ) | 1,329 | 26,469 | |||||||||||
| 38,779 | 6,945 | 579 | 46,303 | ||||||||||||
| 67,252 | 3,612 | 1,908 | 72,772 | ||||||||||||
| 43,500 | — | — | 43,500 | ||||||||||||
| 23,752 | 3,612 | 1,908 | 29,272 | ||||||||||||
| 19,445 | 3,612 | — | 23,057 | ||||||||||||
| 1,534 | — | — | 1,534 | ||||||||||||
| 2,773 | — | 1,908 | 4,681 | ||||||||||||
| (926 | ) | — | 1,908 | 982 | |||||||||||
| 3,699 | — | — | 3,699 | ||||||||||||
| 1,906 | — | — | 1,906 | ||||||||||||
| $ | 5,605 | $ | — | $ | — | $ | 5,605 | ||||||||
| $ | 0.81 | $ | — | $ | — | $ | 0.81 | ||||||||
| 0.21 | % | NM | NM | 0.20 | % | ||||||||||
| 65 | NM | NM | 60 | ||||||||||||
| $ | 744,898 | $ | 85,571 | $ | — | $ | 830,469 | ||||||||
| 1,791,617 | 76,904 | — | 1,868,521 | ||||||||||||
Report. For information regarding the securitization process, and loans
and residual interests sold and securitized, see Note 16 on pages 244–259 of this Annual Report.
Tangible common equity (“TCE”) represents common stockholders’ equity (i.e., total stockholders’
equity less preferred stock) less identifiable intangible assets (other than mortgage servicing
rights (“MSRs”)) and goodwill, net of related deferred tax liabilities. ROTCE, a non-GAAP financial
ratio, measures the Firm’s earnings as a percentage of TCE and is, in management’s view, a
meaningful measure to assess the Firm’s use of equity.
Management also uses certain non-GAAP financial measures at the business-segment level, because it
believes these other non-GAAP financial measures provide information to investors about the
underlying operational performance and trends of the particular business segment and, therefore,
facilitate a comparison of the business segment with the performance of its competitors. Non-GAAP
financial measures used by the Firm may not be comparable to similarly named non-GAAP financial
measures used by other companies.
Calculation of certain U.S. GAAP and non-GAAP metrics
The table below reflects the formulas used to calculate both the
following U.S. GAAP and non-GAAP measures.
Return on common equity
Net income* / Average common stockholders’ equity
Return on tangible common equity
(d)
Net income* / Average tangible common equity
Return on assets
Reported net income / Total average assets
Managed net income / Total average managed assets(e)
(including average securitized credit card receivables)
Managed net income / Total average managed assets(e)
(including average securitized credit card receivables)
Overhead ratio
Total noninterest expense / Total net revenue
| * | Represents net income applicable to common equity | |
| (d) | The Firm uses ROTCE, a non-GAAP financial measure, to evaluate its use of equity and to facilitate comparisons with competitors. Refer to the following page for the calculation of average tangible common equity. | |
| (e) | The Firm uses return on managed assets, a non-GAAP financial measure, to evaluate the overall performance of the managed credit card portfolio, including securitized credit card loans. |
| JPMorgan Chase & Co. / 2010 Annual Report | 65 |
Table of Contents
Management’s discussion and analysis
Average tangible common equity
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Common stockholders’ equity
|
$ | 161,520 | $ | 145,903 | $ | 129,116 | ||||||
|
Less: Goodwill
|
48,618 | 48,254 | 46,068 | |||||||||
|
Less: Certain identifiable
intangible assets
|
4,178 | 5,095 | 5,779 | |||||||||
|
Add: Deferred tax
liabilities
(a)
|
2,587 | 2,547 | 2,369 | |||||||||
|
Tangible Common Equity
|
$ | 111,311 | $ | 95,101 | $ | 79,638 | ||||||
| (a) | Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in non-taxable transactions, which are netted against goodwill and other intangibles when calculating TCE. |
Impact of TARP preferred stock issued to the U.S. Treasury
The calculation of 2009 net income applicable to common equity included a one-time, noncash
reduction of $1.1 billion resulting from the repayment of TARP preferred capital. Excluding this
reduction, ROE would have been 7% for 2009. The Firm views adjusted ROE, a non-GAAP financial
measure, as meaningful because it enables the comparability to prior periods.
| Year ended December 31, 2009 | Excluding the | |||||||
| (in millions, except ratios) | As reported | TARP redemption | ||||||
|
Return on equity
|
||||||||
|
Net income
|
$ | 11,728 | $ | 11,728 | ||||
|
Less: Preferred stock dividends
|
1,327 | 1,327 | ||||||
|
Less: Accelerated amortization
from redemption of preferred
stock issued to the U.S. Treasury
|
1,112 | — | ||||||
|
Net income applicable to common
equity
|
9,289 | 10,401 | ||||||
|
Average common stockholders’
equity
|
$ | 145,903 | $ | 145,903 | ||||
|
ROE
|
6 | % | 7 | % | ||||
In addition, the calculated net income applicable to common equity for the year ended December
31, 2009, was also affected by the TARP repayment. The following table presents the effect on net
income applicable to common stockholders and the $0.27 reduction to diluted earnings per share
(“EPS”) for the year ended December 31, 2009.
| Year ended December 31, 2009 | Effect of | |||||||
| (in millions, except per share) | As reported | TARP redemption | ||||||
|
Diluted earnings per share
|
||||||||
|
Net income
|
$ | 11,728 | $ | — | ||||
|
Less: Preferred stock dividends
|
1,327 | — | ||||||
|
Less: Accelerated amortization
from redemption of preferred
stock issued to the U.S.
Treasury
|
1,112 | 1,112 | ||||||
|
Net income applicable to common
equity
|
9,289 | (1,112 | ) | |||||
|
Less: Dividends and
undistributed earnings allocated
to participating securities
|
515 | (62 | ) | |||||
|
Net income applicable to common
stockholders
|
8,774 | (1,050 | ) | |||||
|
Total weighted average diluted
shares outstanding
|
3,879.7 | 3,879.7 | ||||||
|
Net income per share
|
$ | 2.26 | $ | (0.27 | ) | |||
Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding home
lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust
(“WMMT”). For a further discussion of this credit metric, see Allowance for Credit Losses on pages
139—141 of this Annual Report.
| 66 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
BUSINESS SEGMENT RESULTS
The Firm is managed on a line of business basis. The business segment financial results
presented reflect the current organization of JPMorgan Chase. There are six major reportable
business segments: Investment Bank, Retail Financial Services, Card Services, Commercial Banking,
Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment.
The business segments are determined based on the products and services provided, or the type of
customer served, and reflect the manner in which financial information is currently evaluated by
management. Results of these lines of business are presented on a managed basis.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a
stand-alone business. The management reporting process that derives business segment results
allocates income and expense using market-based methodologies. Business segment reporting
methodologies used by the Firm are discussed below. The Firm continues to assess the assumptions,
methodologies and reporting classifications used for segment reporting, and further refinements
may be implemented in future periods.
Revenue sharing
When business segments join efforts to sell products and services to the Firm’s clients, the
participating business segments agree to share revenue from those transactions. The segment results
reflect these revenue-sharing agreements.
Funds transfer pricing
Funds transfer pricing is used to allocate interest income and expense to each business and
transfer the primary interest rate risk exposures to the Treasury group within the
Corporate/Private Equity business segment. The allocation process is unique to each business
segment and considers the interest rate risk, liquidity risk and regulatory requirements of that
segment’s stand-alone peers. This process is overseen by senior management and reviewed by the
Firm’s Asset-Liability Committee (“ALCO”). Business segments may be permitted to retain certain
interest rate exposures subject to management approval.
| JPMorgan Chase & Co. / 2010 Annual Report | 67 |
Table of Contents
Management’s discussion and analysis
Capital allocation
Each business segment is allocated capital by taking into consideration stand-alone peer
comparisons, economic risk measures and regulatory capital requirements. The amount of capital
assigned to each business is referred to as equity. Effective January 1, 2010, the Firm enhanced
its line-of-business equity framework to better align equity assigned to each line of business as a
result of the changes anticipated to occur in the business, and in the competitive and regulatory
landscape. The lines of business are now capitalized based on the Tier 1 common standard, rather
than the Tier 1 capital standard. For a further discussion of the changes, see Capital Management
– Line of business equity on page 105 of this Annual Report.
Expense allocation
Where business segments use services provided by support units within the Firm, the costs of those
support units are allocated to the business segments. The expense is allocated based on their
actual cost or the lower of actual cost or market, as well as upon usage of the services provided.
In contrast, certain other expense related to certain corporate functions, or to certain technology
and operations, are not allocated to the business segments and are retained in Corporate. Retained
expense includes: parent company costs that would not be incurred if the segments were stand-alone
businesses; adjustments to align certain corporate staff, technology and operations allocations
with market prices; and other one-time items not aligned with a particular business segment.
Segment results – Managed basis
(a)
The following table summarizes the business segment results for the periods indicated.
| Year ended December 31, | Total net revenue | Noninterest expense | ||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Investment Bank
(b)
|
$ | 26,217 | $ | 28,109 | $ | 12,335 | $ | 17,265 | $ | 15,401 | $ | 13,844 | ||||||||||||
|
Retail Financial Services
|
31,756 | 32,692 | 23,520 | 17,864 | 16,748 | 12,077 | ||||||||||||||||||
|
Card Services
|
17,163 | 20,304 | 16,474 | 5,797 | 5,381 | 5,140 | ||||||||||||||||||
|
Commercial Banking
|
6,040 | 5,720 | 4,777 | 2,199 | 2,176 | 1,946 | ||||||||||||||||||
|
Treasury & Securities Services
|
7,381 | 7,344 | 8,134 | 5,604 | 5,278 | 5,223 | ||||||||||||||||||
|
Asset Management
|
8,984 | 7,965 | 7,584 | 6,112 | 5,473 | 5,298 | ||||||||||||||||||
|
Corporate/Private Equity
(b)
|
7,301 | 6,513 | (52 | ) | 6,355 | 1,895 | (28 | ) | ||||||||||||||||
|
Total
|
$ | 104,842 | $ | 108,647 | $ | 72,772 | $ | 61,196 | $ | 52,352 | $ | 43,500 | ||||||||||||
| Year ended December 31, | Pre-provision profit (d) | Provision for credit losses | ||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Investment Bank
(b)
|
$ | 8,952 | $ | 12,708 | $ | (1,509 | ) | $ | (1,200 | ) | $ | 2,279 | $ | 2,015 | ||||||||||
|
Retail Financial Services
|
13,892 | 15,944 | 11,443 | 9,452 | 15,940 | 9,905 | ||||||||||||||||||
|
Card Services
|
11,366 | 14,923 | 11,334 | 8,037 | 18,462 | 10,059 | ||||||||||||||||||
|
Commercial Banking
|
3,841 | 3,544 | 2,831 | 297 | 1,454 | 464 | ||||||||||||||||||
|
Treasury & Securities Services
|
1,777 | 2,066 | 2,911 | (47 | ) | 55 | 82 | |||||||||||||||||
|
Asset Management
|
2,872 | 2,492 | 2,286 | 86 | 188 | 85 | ||||||||||||||||||
|
Corporate/Private Equity
(b)
|
946 | 4,618 | (24 | ) | 14 | 80 | 1,981 | |||||||||||||||||
|
Total
|
$ | 43,646 | $ | 56,295 | $ | 29,272 | $ | 16,639 | $ | 38,458 | $ | 24,591 | ||||||||||||
| Year ended December 31, | Net income/(loss) | Return on equity | ||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Investment Bank
(b)
|
$ | 6,639 | $ | 6,899 | $ | (1,175 | ) | 17 | % | 21 | % | (5 | )% | |||||||||||
|
Retail Financial Services
|
2,526 | 97 | 880 | 9 | — | 5 | ||||||||||||||||||
|
Card Services
|
2,074 | (2,225 | ) | 780 | 14 | (15 | ) | 5 | ||||||||||||||||
|
Commercial Banking
|
2,084 | 1,271 | 1,439 | 26 | 16 | 20 | ||||||||||||||||||
|
Treasury & Securities Services
|
1,079 | 1,226 | 1,767 | 17 | 25 | 47 | ||||||||||||||||||
|
Asset Management
|
1,710 | 1,430 | 1,357 | 26 | 20 | 24 | ||||||||||||||||||
|
Corporate/Private Equity
(b)(c)
|
1,258 | 3,030 | 557 | NM | NM | NM | ||||||||||||||||||
|
Total
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | 10 | % | 6 | % | 4 | % | ||||||||||||
| (a) | Represents reported results on a tax-equivalent basis. The managed basis also assumes that credit card loans in Firm-sponsored credit card securitization trusts remained on the balance sheet for 2009 and 2008. Firm-sponsored credit card securitizations were consolidated at their carrying values on January 1, 2010, under the accounting guidance related to VIEs. | |
| (b) | IB reports its credit reimbursement from TSS as a component of its total net revenue, whereas TSS reports its credit reimbursement to IB as a separate line item on its income statement (not part of total net revenue). Corporate/Private Equity includes an adjustment to offset IB’s inclusion of the credit reimbursement in total net revenue. | |
| (c) | Net income included an extraordinary gain of $76 million and $1.9 billion related to the Washington Mutual transaction for 2009 and 2008, respectively. | |
| (d) | Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses. |
| 68 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
INVESTMENT BANK
J.P. Morgan is one of the world’s leading investment banks, with
deep client relationships and broad product capabilities. The clients of IB
are corporations, financial institutions, governments and institutional
investors. The Firm offers a full range of investment banking products and
services in all major capital markets, including advising on corporate
strategy and structure, capital-raising in equity and debt markets,
sophisticated risk management, market-making in cash securities and derivative
instruments, prime brokerage, and research.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 (e) | |||||||||
|
Revenue
|
||||||||||||
|
Investment banking fees
|
$ | 6,186 | $ | 7,169 | $ | 5,907 | ||||||
|
Principal transactions
(a)
|
8,454 | 8,154 | (7,042 | ) | ||||||||
|
Lending- and deposit-related fees
|
819 | 664 | 463 | |||||||||
|
Asset management, administration
and commissions
|
2,413 | 2,650 | 3,064 | |||||||||
|
All other income
(b)
|
381 | (115 | ) | (341 | ) | |||||||
|
Noninterest revenue
|
18,253 | 18,522 | 2,051 | |||||||||
|
Net interest income
|
7,964 | 9,587 | 10,284 | |||||||||
|
Total net
revenue
(c)
|
26,217 | 28,109 | 12,335 | |||||||||
|
Provision for credit losses
|
(1,200 | ) | 2,279 | 2,015 | ||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
9,727 | 9,334 | 7,701 | |||||||||
|
Noncompensation expense
|
7,538 | 6,067 | 6,143 | |||||||||
|
Total noninterest expense
|
17,265 | 15,401 | 13,844 | |||||||||
|
Income/(loss) before income tax
expense/(benefit)
|
10,152 | 10,429 | (3,524 | ) | ||||||||
|
Income tax expense/(benefit)
(d)
|
3,513 | 3,530 | (2,349 | ) | ||||||||
|
Net income/(loss)
|
$ | 6,639 | $ | 6,899 | $ | (1,175 | ) | |||||
|
Financial ratios
|
||||||||||||
|
ROE
|
17 | % | 21 | % | (5 | )% | ||||||
|
ROA
|
0.91 | 0.99 | (0.14 | ) | ||||||||
|
Overhead ratio
|
66 | 55 | 112 | |||||||||
|
Compensation expense as % of total
net revenue
(f)
|
37 | 33 | 62 | |||||||||
| (a) | The 2009 results reflect modest net gains on legacy leveraged lending and mortgage-related positions, compared with net markdowns of $10.6 billion in 2008. | |
| (b) | TSS was charged a credit reimbursement related to certain exposures managed within IB’s credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in all other income. | |
| (c) | Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing and alternative energy investments as well as tax-exempt income from municipal bond investments of $1.7 billion, $1.4 billion and $1.7 billion for 2010, 2009 and 2008, respectively. | |
| (d) | The income tax benefit in 2008 includes the result of reduced deferred tax liabilities on overseas earnings. | |
| (e) | Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase results. | |
| (f) | The compensation expense as a percentage of total net revenue ratio includes the impact of the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009 to April 5, 2010 to relevant banking employees. For comparability to prior periods, IB excludes the impact of the U.K. Bank Payroll Tax expense, which results in a compensation expense as a percentage of total net revenue for 2010 of 35%, which is a non-GAAP financial measure. |
The following table provides IB’s total net revenue by business segment.
| Year ended December 31, | ||||||||||||||
| (in millions) | 2010 | 2009 | 2008 (e) | |||||||||||
|
Revenue by business
|
||||||||||||||
|
Investment banking fees:
|
||||||||||||||
|
Advisory
|
$ | 1,469 | $ | 1,867 | $ | 2,008 | ||||||||
|
Equity underwriting
|
1,589 | 2,641 | 1,749 | |||||||||||
|
Debt underwriting
|
3,128 | 2,661 | 2,150 | |||||||||||
|
Total investment banking fees
|
6,186 | 7,169 | 5,907 | |||||||||||
|
Fixed income markets
(a)
|
15,025 | 17,564 | 1,957 | |||||||||||
|
Equity markets
(b)
|
4,763 | 4,393 | 3,611 | |||||||||||
|
Credit portfolio
(c)(d)
|
243 | (1,017 | ) | 860 | ||||||||||
|
Total net revenue
|
$ | 26,217 | $ | 28,109 | $ | 12,335 | ||||||||
|
Revenue by region
(d)
|
||||||||||||||
|
Americas
|
$ | 15,189 | $ | 15,156 | $ | 2,610 | ||||||||
|
Europe/Middle East/Africa
|
7,405 | 9,790 | 7,710 | |||||||||||
|
Asia/Pacific
|
3,623 | 3,163 | 2,015 | |||||||||||
|
Total net revenue
|
$ | 26,217 | $ | 28,109 | $ | 12,335 | ||||||||
| (a) | Fixed income markets primarily include revenue related to market-making across global fixed income markets, including foreign exchange, interest rate, credit and commodities markets. | |
| (b) | Equities markets primarily include revenue related to market-making across global equity products, including cash instruments, derivatives, convertibles and prime services. | |
| (c) | Credit portfolio revenue includes net interest income, fees and loan sale activity, as well as gains or losses on securities received as part of a loan restructuring, for IB’s credit portfolio. Credit portfolio revenue also includes the results of risk management related to the Firm’s lending and derivative activities. See pages 116–118 of the Credit Risk Management section of this Annual Report for further discussion. | |
| (d) | TSS was charged a credit reimbursement related to certain exposures managed within IB’s credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in all other income. | |
| (e) | Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase & Co. results. |
2010 compared with 2009
Net income was $6.6 billion, down 4% compared with the prior year. These results primarily
reflected lower net revenue as well as higher noninterest expense, largely offset by a benefit from
the provision for credit losses, compared with an expense in the prior year.
Net revenue was $26.2 billion, compared with $28.1 billion in the prior year. Investment banking
fees were $6.2 billion, down 14% from the prior year; these consisted of record debt underwriting
fees of $3.1 billion (up 18%), equity underwriting fees of $1.6 billion (down 40%), and advisory
fees of $1.5 billion (down 21%). Fixed Income Markets revenue was $15.0 billion, compared with
$17.6 billion in the prior year. The decrease from the prior year largely reflected lower results
in rates and credit markets, partially offset by gains of $287 million from the widening of the
Firm’s credit spread on certain structured liabilities, compared with losses of $1.1 billion in the
prior year. Equity Markets revenue was $4.8 billion, compared with $4.4 billion in the prior year,
reflecting solid client revenue, as well as gains of $181 million from the widening of the Firm’s
credit spread on certain structured liabilities, compared with losses of $596 million in the prior
year. Credit Portfolio revenue was $243 million, primarily reflecting net interest income and fees
on loans, partially offset by the negative impact of
| JPMorgan Chase & Co. / 2010 Annual Report | 69 |
Table of Contents
Management’s discussion and analysis
credit spreads on derivative assets and mark-to-market losses on hedges of retained loans.
The provision for credit losses was a benefit of $1.2 billion, compared with an expense of $2.3
billion in the prior year. The current-year provision reflected a reduction in the allowance for
loan losses, largely related to net repayments and loan sales. Net charge-offs were $735 million,
compared with $1.9 billion in the prior year.
Noninterest expense was $17.3 billion, up $1.9 billion from the prior year, driven by higher
noncompensation expense, which included increased litigation reserves, and higher compensation
expense which included the impact of the U.K. Bank Payroll Tax.
Return on Equity was 17% on $40.0 billion of average allocated capital.
2009 compared with 2008
Net income was $6.9 billion, compared with a net loss of $1.2 billion in the prior year. These
results reflected significantly higher total net revenue, partially offset by higher noninterest
expense and a higher provision for credit losses.
Total net revenue was $28.1 billion, compared with $12.3 billion in the prior year. Investment
banking fees were up 21% to $7.2 billion, consisting of debt underwriting fees of $2.7 billion (up
24%), equity underwriting fees of $2.6 billion (up 51%), and advisory fees of $1.9 billion (down
7%). Fixed Income Markets revenue was $17.6 billion, compared with $2.0 billion in the prior year,
reflecting improved performance across most products and modest net gains on legacy leveraged
lending and mortgage-related positions, compared with net markdowns of $10.6 billion in the prior
year. Equity Markets revenue was $4.4 billion, up 22% from the prior year, driven by strong client
revenue across products, particularly prime services, and improved
trading results. Fixed Income and Equity Markets results also included
losses of $1.7 billion from the tightening of the Firm’s
credit spread on certain structured liabilities, compared with gains
of $1.2 billion in the prior year. Credit Portfolio
revenue was a loss of $1.0 billion versus a gain of $860 million in the prior year, driven by
mark-to-market losses on hedges of retained loans compared with gains in the prior year, partially
offset by the positive net impact of credit spreads on derivative assets and liabilities.
The provision for credit losses was $2.3 billion, compared with $2.0 billion in the prior year,
reflecting continued weakness in the credit environment. The allowance for loan losses to
end-of-period loans retained was 8.25%, compared with 4.83% in the prior year. Net charge-offs were
$1.9 billion, compared with $105 million in the prior year. Total nonperforming assets were $4.2
billion, compared with $2.5 billion in the prior year.
Noninterest expense was $15.4 billion, up $1.6 billion, or 11%, from the prior year, driven by
higher performance-based compensation expense, partially offset by lower headcount-related expense.
Return on Equity was 21% on $33.0 billion of average allocated capital, compared with negative 5%
on $26.1 billion of average allocated capital in the prior year.
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except headcount) | 2010 | 2009 | 2008 | |||||||||
|
Selected balance sheet data
(period-end)
|
||||||||||||
|
Loans:
(a)
|
||||||||||||
|
Loans retained
(b)
|
$ | 53,145 | $ | 45,544 | $ | 71,357 | ||||||
|
Loans held-for-sale and
loans at
fair value
|
3,746 | 3,567 | 13,660 | |||||||||
|
Total loans
|
56,891 | 49,111 | 85,017 | |||||||||
|
Equity
|
40,000 | 33,000 | 33,000 | |||||||||
|
|
||||||||||||
|
Selected balance sheet data
(average)
|
||||||||||||
|
Total assets
|
$ | 731,801 | $ | 699,039 | $ | 832,729 | ||||||
|
Trading assets – debt and
equity
instruments
|
307,061 | 273,624 | 350,812 | |||||||||
|
Trading assets – derivative
receivables
|
70,289 | 96,042 | 112,337 | |||||||||
|
Loans:
(a)
|
||||||||||||
|
Loans retained
(b)
|
54,402 | 62,722 | 73,108 | |||||||||
|
Loans held-for-sale and
loans at
fair value
|
3,215 | 7,589 | 18,502 | |||||||||
|
Total
loans
|
57,617 | 70,311 | 91,610 | |||||||||
|
|
||||||||||||
|
Adjusted assets
(c)
|
540,449 | 538,724 | 679,780 | |||||||||
|
Equity
|
40,000 | 33,000 | 26,098 | |||||||||
|
|
||||||||||||
|
Headcount
|
26,314 | 24,654 | 27,938 | |||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firm-administered multi-seller conduits. As a result, $15.1 billion of related loans were recorded in loans on the Consolidated Balance Sheets. | |
| (b) | Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans at fair value. | |
| (c) | Adjusted assets, a non-GAAP financial measure, equals total assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities (“VIEs”); (3) cash and securities segregated and on deposit for regulatory and other purposes; (4) goodwill and intangibles; (5) securities received as collateral; and (6) investments purchased under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML Facility”). The amount of adjusted assets is presented to assist the reader in comparing IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. IB believes an adjusted asset amount that excludes the assets discussed above, which were considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry. |
| 70 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Credit data and quality statistics
|
||||||||||||
|
Net charge-offs
|
$ | 735 | $ | 1,904 | $ | 105 | ||||||
|
Nonperforming assets:
|
||||||||||||
|
Nonaccrual loans:
|
||||||||||||
|
Nonaccrual loans retained
(a)(b)
|
3,159 | 3,196 | 1,143 | |||||||||
|
Nonaccrual loans held-for-sale and
loans at fair value
|
460 | 308 | 32 | |||||||||
|
Total nonperforming loans
|
3,619 | 3,504 | 1,175 | |||||||||
|
Derivative receivables
|
34 | 529 | 1,079 | |||||||||
|
Assets acquired in loan satisfactions
|
117 | 203 | 247 | |||||||||
|
Total nonperforming assets
|
3,770 | 4,236 | 2,501 | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
|
1,863 | 3,756 | 3,444 | |||||||||
|
Allowance for lending-related
commitments
|
447 | 485 | 360 | |||||||||
|
Total allowance for credit
losses
|
2,310 | 4,241 | 3,804 | |||||||||
|
Net charge-off rate
(a)(c)
|
1.35 | % | 3.04 | % | 0.14 | % | ||||||
|
Allowance for loan losses to period-end
loans retained
(a)(c)
|
3.51 | 8.25 | 4.83 | |||||||||
|
Allowance for loan losses to average
loans retained
(a)(c)(d)
|
3.42 | 5.99 | 4.71 | (i) | ||||||||
|
Allowance for loan losses to
nonaccrual loans retained
(a)(b)(c)
|
59 | 118 | 301 | |||||||||
|
Nonaccrual loans to total
period-end loans
|
6.36 | 7.13 | 1.38 | |||||||||
|
Nonaccrual loans to average loans
|
6.28 | 4.98 | 1.28 | |||||||||
|
Market risk–average trading and
credit portfolio VaR – 95%
confidence level
(e)
|
||||||||||||
|
Trading activities:
|
||||||||||||
|
Fixed income
|
$ | 65 | $ | 160 | $ | 162 | ||||||
|
Foreign exchange
|
11 | 18 | 23 | |||||||||
|
Equities
|
22 | 47 | 47 | |||||||||
|
Commodities and other
|
16 | 20 | 23 | |||||||||
|
Diversification
(f)
|
(43 | ) | (91 | ) | (88 | ) | ||||||
|
Total
trading VaR
(g)
|
71 | 154 | 167 | |||||||||
|
Credit portfolio VaR
(h)
|
26 | 52 | 45 | |||||||||
|
Diversification
(f)
|
(10 | ) | (42 | ) | (36 | ) | ||||||
|
Total trading and credit portfolio VaR
|
$ | 87 | $ | 164 | $ | 176 | ||||||
| (a) | Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans accounted for at fair value. | |
| (b) | Allowance for loan losses of $1.1 billion, $1.3 billion and $430 million were held against these nonaccrual loans at December 31, 2010, 2009 and 2008, respectively. | |
| (c) | Loans held-for-sale and loans at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate. | |
| (d) | Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase & Co.’s results only. | |
| (e) | For 2008, 95% VaR reflects data only for the last six months of the year as the Firm began to calculate VaR using a 95% confidence level effective in the third quarter of 2008, rather than the prior 99% confidence level. | |
| (f) | Average value-at-risk (“VaR”) was less than the sum of the VaR of the components described above, which is due to portfolio diversification. The diversification effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves. | |
| (g) | Trading VaR includes predominantly all trading activities in IB, as well as syndicated lending facilities that the Firm intends to distribute; however, |
| particular risk parameters of certain products are not fully captured, for example, correlation risk. Trading VaR does not include the debit valuation adjustments (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of the Firm. See VaR discussion on pages 142–146 and the DVA Sensitivity table on page 144 of this Annual Report for further details. Trading VaR includes the estimated credit spread sensitivity of certain mortgage products. | ||
| (h) | Credit portfolio VaR includes the derivative credit valuation adjustments (“CVA”), hedges of the CVA and mark-to-market (“MTM”) hedges of the retained loan portfolio, which were all reported in principal transactions revenue. This VaR does not include the retained loan portfolio. | |
| (i) | Excluding the impact of a loan originated in March 2008 to Bear Stearns, the adjusted ratio would be 4.84% for 2008. The average balance of the loan extended to Bear Stearns was $1.9 billion for 2008. |
Market shares and rankings
(a)
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Year ended | Market | Market | Market | |||||||||||||||||||||
| December 31, | share | Rankings | share | Rankings | share | Rankings | ||||||||||||||||||
|
Global investment
banking fees
(b)
|
8 | % | #1 | 9 | % | #1 | 9 | % | #2 | |||||||||||||||
|
Debt, equity and
equity-related
|
||||||||||||||||||||||||
|
Global
|
7 | 1 | 9 | 1 | 8 | 2 | ||||||||||||||||||
|
U.S.
|
11 | 2 | 15 | 1 | 14 | 2 | ||||||||||||||||||
|
Syndicated loans
|
||||||||||||||||||||||||
|
Global
|
9 | 1 | 8 | 1 | 9 | 1 | ||||||||||||||||||
|
U.S.
|
19 | 2 | 22 | 1 | 22 | 1 | ||||||||||||||||||
|
Long-term debt
(c)
|
||||||||||||||||||||||||
|
Global
|
7 | 2 | 8 | 1 | 8 | 3 | ||||||||||||||||||
|
U.S.
|
11 | 2 | 14 | 1 | 14 | 2 | ||||||||||||||||||
|
Equity and equity-
related
|
||||||||||||||||||||||||
|
Global
(d)
|
7 | 3 | 12 | 1 | 12 | 2 | ||||||||||||||||||
|
U.S.
|
13 | 2 | 16 | 2 | 16 | 2 | ||||||||||||||||||
|
Announced M&A
(e)
|
||||||||||||||||||||||||
|
Global
|
16 | 4 | 24 | 3 | 25 | 1 | ||||||||||||||||||
|
U.S.
|
23 | 3 | 36 | 2 | 31 | 2 | ||||||||||||||||||
| (a) | Source: Dealogic. Global Investment Banking fees reflects ranking of fees and market share. Remainder of rankings reflects transaction volume rank and market share. Results for 2008 are pro forma for the Bear Stearns merger. | |
| (b) | Global IB fees exclude money market, short-term debt and shelf deals. | |
| (c) | Long-term debt tables include investment-grade, high-yield, supranationals, sovereigns, agencies, covered bonds, asset-backed securities and mortgage-backed securities; and exclude money market, short-term debt, and U.S. municipal securities. | |
| (d) | Equity and equity-related rankings include rights offerings and Chinese A-Shares. | |
| (e) | Global announced M&A is based on transaction value at announcement; all other rankings are based on transaction proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%. M&A for 2010, 2009 and 2008, reflects the removal of any withdrawn transactions. U.S. announced M&A represents any U.S. involvement ranking. |
According to Dealogic, the Firm was ranked #1 in Global
Investment Banking Fees generated during 2010, based on revenue; #1 in Global Debt, Equity and
Equity-related; #1 in Global Syndicated Loans; #2 in Global Long-Term Debt; #3 in Global Equity
and Equity-related; and #4 in Global Announced M&A, based on volume.
| JPMorgan Chase & Co. / 2010 Annual Report | 71 |
Table of Contents
Management’s discussion and analysis
RETAIL FINANCIAL SERVICES
Retail Financial Services (“RFS”) serves consumers and businesses
through personal service at bank branches and through ATMs, online banking
and telephone banking, as well as through auto dealerships and school
financial-aid offices. Customers can use more than 5,200 bank branches
(third-largest nationally) and 16,100 ATMs (second-largest nationally), as
well as online and mobile banking around the clock. More than 28,900 branch
salespeople assist customers with checking and savings accounts, mortgages,
home equity and business loans, and investments across the 23-state footprint
from New York and Florida to California. Consumers also can obtain loans
through more than 16,200 auto dealerships and 2,200 schools and universities
nationwide.
Prior to January 1, 2010, RFS was reported as:
Retail Banking and Consumer Lending. Commencing in 2010, Consumer Lending is presented as:
(1) Mortgage Banking, Auto & Other Consumer Lending,
and (2) Real Estate Portfolios. Mortgage Banking, Auto & Other Consumer Lending comprises mortgage
production and servicing, auto finance, and student and other lending activities. Real Estate
Portfolios comprises residential mortgages and home equity loans, including the purchased
credit-impaired portfolio acquired in the Washington Mutual transaction. These reporting revisions
were intended to provide further clarity around the Real Estate Portfolios. Retail Banking, which
includes branch banking and business banking activities, was not affected by these reporting
revisions.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Revenue
|
||||||||||||
|
Lending- and deposit-related fees
|
$ | 3,117 | $ | 3,969 | $ | 2,546 | ||||||
|
Asset management, administration
and commissions
|
1,784 | 1,674 | 1,510 | |||||||||
|
Mortgage fees and related income
|
3,855 | 3,794 | 3,621 | |||||||||
|
Credit card income
|
1,956 | 1,635 | 939 | |||||||||
|
Other income
|
1,516 | 1,128 | 739 | |||||||||
|
Noninterest revenue
|
12,228 | 12,200 | 9,355 | |||||||||
|
Net interest income
|
19,528 | 20,492 | 14,165 | |||||||||
|
Total net revenue
(a)
|
31,756 | 32,692 | 23,520 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
9,452 | 15,940 | 9,905 | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
7,432 | 6,712 | 5,068 | |||||||||
|
Noncompensation expense
|
10,155 | 9,706 | 6,612 | |||||||||
|
Amortization of intangibles
|
277 | 330 | 397 | |||||||||
|
Total noninterest expense
|
17,864 | 16,748 | 12,077 | |||||||||
|
Income before income tax
expense/(benefit)
|
4,440 | 4 | 1,538 | |||||||||
|
Income tax expense/(benefit)
|
1,914 | (93 | ) | 658 | ||||||||
|
Net income
|
$ | 2,526 | $ | 97 | $ | 880 | ||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
9 | % | — | % | 5 | % | ||||||
|
Overhead ratio
|
56 | 51 | 51 | |||||||||
|
Overhead ratio excluding
core deposit intangibles (b) |
55 | 50 | 50 | |||||||||
| (a) | Total net revenue included tax-equivalent adjustments associated with tax-exempt loans to municipalities and other qualified entities of $15 million, $22 million and $23 million for the years ended December 31, 2010, 2009 and 2008, respectively. | |
| (b) | RFS uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years. This method would therefore result in an improving overhead ratio over time, all things remaining equal. The non-GAAP ratio excludes Retail Banking’s CDI amortization expense related to prior business combination transactions of $276 million, $328 million and $394 million for the years ended December 31, 2010, 2009 and 2008, respectively. |
2010 compared with 2009
Net income was $2.5 billion, compared with $97 million in the prior year.
Net revenue was $31.8 billion, a decrease of $936 million, or 3%, compared with the prior year. Net
interest income was $19.5 billion, down by $964 million, or 5%, reflecting the impact of lower loan
and deposit balances and narrower loan spreads, partially offset by a shift to wider-spread deposit
products. Noninterest revenue was $12.2 billion, flat to the prior year, as lower deposit-related
fees were largely offset by higher debit card income and auto operating lease income.
The provision for credit losses was $9.5 billion, compared with $15.9 billion in the prior year.
The current-year provision reflected an addition to the allowance for loan losses of $3.4 billion
for the purchased credit-impaired (“PCI”) portfolio and a reduction in the allowance for loan
losses of $1.8 billion, predominantly for the mortgage loan portfolios. In comparison, the
prior-year provision reflected an addition to the allowance for loan
losses of $5.8 billion, predominantly for the home equity and mortgage portfolios, but which also
included an addition of $1.6 billion for the PCI portfolio. While delinquency trends and net
charge-offs improved compared with the prior year, the provision continued to reflect elevated
losses for the mortgage and home equity portfolios. See page 130 of this Annual Report for the net
charge-off amounts and rates. To date, no charge-offs have been recorded on PCI loans.
Noninterest expense was $17.9 billion, an increase of $1.1 billion, or 7%, from the prior year,
reflecting higher default-related expense.
2009 compared with 2008
The following discussion of RFS’s financial results reflects the acquisition of Washington Mutual’s
retail bank network and mortgage banking activities as a result of the Washington Mutual
transaction on September 25, 2008. See Note 2 on pages 166–170 of this Annual Report for more
information concerning this transaction.
Net income was $97 million, a decrease of $783 million from the prior year, as the increase in
provision for credit losses more than offset the positive impact of the Washington Mutual
transaction.
Net revenue was $32.7 billion, an increase of $9.2 billion, or 39%, from the prior year. Net
interest income was $20.5 billion, up by $6.3 billion, or 45%, reflecting the impact of the
Washington Mutual transaction, and wider loan and deposit spreads.
| 72 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Noninterest revenue was $12.2
billion, up by $2.8 billion, or 30%, driven by the impact of the Washington Mutual transaction,
wider margins on mortgage originations and higher net mortgage servicing revenue, partially offset
by $1.6 billion in estimated losses related to the repurchase of previously sold loans.
The provision for credit losses was $15.9 billion, an increase of $6.0 billion from the prior year.
Weak economic conditions and housing price declines continued to drive higher estimated losses for
the home equity and mortgage loan portfolios. The provision included an addition of $5.8 billion to
the allowance for loan losses, compared with an addition of $5.0 billion in the prior year.
Included in the 2009 addition to the allowance for loan losses was a $1.6 billion increase related
to estimated deterioration in the Washington Mutual PCI portfolio.
See page 130 of this Annual
Report for the net charge-off amounts and rates. To date, no charge-offs have been recorded on PCI
loans.
Noninterest expense was $16.7 billion, an increase of $4.7 billion, or 39%. The increase reflected
the impact of the Washington Mutual transaction and higher servicing and default-related
expense.
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except headcount and | ||||||||||||
| ratios) | 2010 | 2009 | 2008 | |||||||||
|
Selected balance sheet data
(period-end) |
||||||||||||
|
Assets
|
$ | 366,841 | $ | 387,269 | $ | 419,831 | ||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
316,725 | 340,332 | 368,786 | |||||||||
|
Loans held-for-sale and loans
at fair value
(a)
|
14,863 | 14,612 | 9,996 | |||||||||
|
Total
loans
|
331,588 | 354,944 | 378,782 | |||||||||
|
Deposits
|
370,819 | 357,463 | 360,451 | |||||||||
|
Equity
|
28,000 | 25,000 | 25,000 | |||||||||
|
|
||||||||||||
|
Selected balance sheet data
(average)
|
||||||||||||
|
Assets
|
$ | 381,337 | $ | 407,497 | $ | 304,442 | ||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
331,330 | 354,789 | 257,083 | |||||||||
|
Loans held-for-sale and loans
at fair value
(a)
|
16,515 | 18,072 | 17,056 | |||||||||
|
Total
loans
|
347,845 | 372,861 | 274,139 | |||||||||
|
Deposits
|
362,386 | 367,696 | 258,362 | |||||||||
|
Equity
|
28,000 | 25,000 | 19,011 | |||||||||
|
|
||||||||||||
|
Headcount
|
121,876 | 108,971 | 102,007 | |||||||||
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except headcount and | ||||||||||||
| ratios) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Credit data and quality statistics
|
||||||||||||
|
Net charge-offs
|
$ | 7,906 | $ | 10,113 | $ | 4,877 | ||||||
|
Nonaccrual loans:
|
||||||||||||
|
Nonaccrual loans retained
|
8,768 | 10,611 | 6,548 | |||||||||
|
Nonaccrual loans held-for-
sale and loans at fair value
|
145 | 234 | 236 | |||||||||
|
Total
nonaccrual loans
(b)(c)(d)
|
8,913 | 10,845 | 6,784 | |||||||||
|
Nonperforming assets
(b)(c)(d)
|
10,266 | 12,098 | 9,077 | |||||||||
|
Allowance for loan losses
|
16,453 | 14,776 | 8,918 | |||||||||
|
|
||||||||||||
|
Net charge-off rate
(e)
|
2.39 | % | 2.85 | % | 1.90 | % | ||||||
|
Net charge-off rate excluding PCI loans
(e)(f)
|
3.11 | 3.75 | 2.08 | |||||||||
|
Allowance for loan losses to ending loans retained
(e)
|
5.19 | 4.34 | 2.42 | |||||||||
|
Allowance for loan losses to ending loans excluding
PCI loans
(e)(f)
|
4.72 | 5.09 | 3.19 | |||||||||
|
Allowance for loan losses to
nonaccrual loans
retained
(b)(e)(f)
|
131 | 124 | 136 | |||||||||
|
Nonaccrual loans to total loans
|
2.69 | 3.06 | 1.79 | |||||||||
|
Nonaccrual loans to total loans excluding PCI loans
(b)
|
3.44 | 3.96 | 2.34 | |||||||||
| (a) | Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loans totaled $14.7 billion, $12.5 billion and $8.0 billion at December 31, 2010, 2009 and 2008, respectively. Average balances of these loans totaled $15.2 billion, $15.8 billion and $14.2 billion for the years ended December 31, 2010, 2009 and 2008, respectively. | |
| (b) | Excludes PCI loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past-due status of the pools, or that of the individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. | |
| (c) | Certain of these loans are classified as trading assets on the Consolidated Balance Sheets. | |
| (d) | At December 31, 2010, 2009 and 2008, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion, $9.0 billion and $3.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.9 billion, $579 million and $364 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program (“FFELP”), of $625 million, $542 million and $437 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (e) | Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and the net charge-off rate. | |
| (f) | Excludes the impact of PCI loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. An allowance for loan losses of $4.9 billion and $1.6 billion was recorded for these loans at December 31, 2010 and 2009, respectively, which has also been excluded from the applicable ratios. No allowance for loan losses was recorded for these loans at December 31, 2008. To date, no charge-offs have been recorded for these loans. |
| JPMorgan Chase & Co. / 2010 Annual Report | 73 |
Table of Contents
Management’s discussion and analysis
Retail Banking
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Noninterest revenue
|
$ | 6,792 | $ | 7,169 | $ | 4,951 | ||||||
|
Net interest income
|
10,785 | 10,781 | 7,659 | |||||||||
|
Total net
revenue
|
17,577 | 17,950 | 12,610 | |||||||||
|
Provision for credit losses
|
607 | 1,142 | 449 | |||||||||
|
Noninterest expense
|
10,657 | 10,357 | 7,232 | |||||||||
|
Income before income
tax expense
|
6,313 | 6,451 | 4,929 | |||||||||
|
Net income
|
$ | 3,614 | $ | 3,903 | $ | 2,982 | ||||||
|
Overhead ratio
|
61 | % | 58 | % | 57 | % | ||||||
|
Overhead ratio excluding core deposit intangibles
(a)
|
59 | 56 | 54 | |||||||||
| (a) | Retail Banking uses the overhead ratio (excluding the amortization of CDI), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would therefore result in an improving overhead ratio over time, all things remaining equal. The non-GAAP ratio excludes Retail Banking’s CDI amortization expense related to prior business combination transactions of $276 million, $328 million and $394 million for the years ended December 31, 2010, 2009 and 2008, respectively. |
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in billions, except ratios and | ||||||||||||
| where otherwise noted) | 2010 | 2009 | 2008 | |||||||||
|
Business metrics
|
||||||||||||
|
Business banking origination volume
(in millions) |
$ | 4,688 | $ | 2,299 | $ | 5,531 | ||||||
|
End-of-period loans owned
|
16.8 | 17.0 | 18.4 | |||||||||
|
End-of-period deposits:
|
||||||||||||
|
Checking
|
$ | 131.7 | $ | 121.9 | $ | 109.2 | ||||||
|
Savings
|
166.6 | 153.4 | 144.0 | |||||||||
|
Time and other
|
45.9 | 58.0 | 89.1 | |||||||||
|
Total
end-of-period deposits
|
344.2 | 333.3 | 342.3 | |||||||||
|
Average loans owned
|
$ | 16.7 | $ | 17.8 | $ | 16.7 | ||||||
|
Average deposits:
|
||||||||||||
|
Checking
|
$ | 123.4 | $ | 113.5 | $ | 77.1 | ||||||
|
Savings
|
162.1 | 150.9 | 114.3 | |||||||||
|
Time and other
|
51.0 | 76.4 | 53.2 | |||||||||
|
Total
average deposits
|
336.5 | 340.8 | 244.6 | |||||||||
|
Deposit margin
|
3.03 | % | 2.96 | % | 2.89 | % | ||||||
|
Average assets
|
$ | 28.3 | $ | 28.9 | $ | 26.3 | ||||||
|
Credit data and quality statistics
(in millions, except ratios) |
||||||||||||
|
Net charge-offs
|
$ | 707 | $ | 842 | $ | 346 | ||||||
|
Net charge-off rate
|
4.23 | % | 4.73 | % | 2.07 | % | ||||||
|
Nonperforming assets
|
$ | 846 | $ | 839 | $ | 424 | ||||||
Retail branch business metrics
| Year ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
Investment sales volume (in millions)
|
$ | 23,579 | $ | 21,784 | $ | 17,640 | ||||||
|
|
||||||||||||
|
Number of:
|
||||||||||||
|
Branches
|
5,268 | 5,154 | 5,474 | |||||||||
|
ATMs
|
16,145 | 15,406 | 14,568 | |||||||||
|
Personal bankers
|
21,715 | 17,991 | 15,825 | |||||||||
|
Sales specialists
|
7,196 | 5,912 | 5,661 | |||||||||
|
Active online customers
(in thousands) |
17,744 | 15,424 | 11,710 | |||||||||
|
Checking accounts
(in thousands) |
27,252 | 25,712 | 24,499 | |||||||||
2010 compared with 2009
Retail Banking
reported net income of $3.6 billion, a decrease of $289 million, or 7%, compared
with the prior year. Total net revenue was $17.6 billion, down 2% compared with the prior year. The
decrease was driven by lower deposit-related fees, largely offset by higher debit card income and a
shift to wider-spread deposit products. The provision for credit losses was $607 million, down $535
million compared with the prior year. The current-year provision reflected lower net charge-offs
and a reduction of $100 million to the allowance for loan losses due to lower estimated losses,
compared with a $300 million addition to the allowance for loan losses in the prior year. Retail
Banking net charge-offs were $707 million, compared with $842 million in the prior year.
Noninterest expense was $10.7 billion, up 3% compared with the prior year, resulting from sales
force increases in Business Banking and bank branches.
2009 compared with 2008
Retail Banking
reported net income of $3.9 billion, up by $921 million, or 31%, from the prior
year. Total net revenue was $18.0 billion, up by $5.3 billion, or 42%, from the prior year. The
increase reflected the impact of the Washington Mutual transaction, wider deposit spreads, higher
average deposit balances and higher debit card income. The provision for credit losses was $1.1
billion, compared with $449 million in
the prior year, reflecting higher estimated losses in the Business Banking portfolio. Noninterest
expense was $10.4 billion, up by $3.1 billion, or 43%. The increase reflected the impact of the
Washington Mutual transaction, higher FDIC insurance premiums and higher headcount-related expense.
Mortgage Banking, Auto & Other Consumer Lending
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Noninterest revenue
|
$ | 5,321 | $ | 5,057 | $ | 4,689 | ||||||
|
Net interest income
|
3,311 | 3,165 | 2,279 | |||||||||
|
Total net
revenue
|
8,632 | 8,222 | 6,968 | |||||||||
|
Provision for credit losses
|
614 | 1,235 | 895 | |||||||||
|
Noninterest expense
|
5,580 | 4,544 | 3,956 | |||||||||
|
Income before income
tax expense
|
2,438 | 2,443 | 2,117 | |||||||||
|
Net income
|
$ | 1,405 | $ | 1,643 | $ | 1,286 | ||||||
|
Overhead ratio
|
65 | % | 55 | % | 57 | % | ||||||
2010 compared with 2009
Mortgage Banking, Auto & Other Consumer Lending
reported net income of $1.4 billion, a decrease of $238
million, or 14%, from the prior year.
Net revenue was $8.6 billion, up by $410 million, or 5%, from the prior year. Mortgage Banking net
revenue was $5.2 billion, flat to the prior year. Other Consumer Lending net revenue, comprising
Auto and Student Lending, was $3.5 billion, up by $447 million, predominantly as a result of higher
auto loan and lease balances.
Mortgage Banking net revenue included $904 million of net interest income, $3.9 billion of mortgage
fees and related income,
| 74 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
and $413 million of other noninterest revenue. Mortgage fees and related
revenue comprised $528 million of net production revenue, $2.2 billion of servicing operating
revenue and $1.1 billion of MSR risk management revenue. Production revenue, excluding repurchase
losses, was $3.4 billion, an increase of $1.3 billion, reflecting wider mortgage margins and higher
origination volumes. Total production revenue was reduced by $2.9 billion of repurchase losses,
compared with $1.6 billion in the prior year, and included a $1.6 billion increase in the
repurchase reserve during the current year, reflecting higher estimated future repurchase demands.
Servicing operating revenue was $2.2 billion, an increase of $528 million, reflecting an
improvement in other changes in the MSR asset fair value driven by lower runoff of the MSR asset
due to time decay, partially offset by lower loan servicing revenue as a result of lower
third-party loans serviced. MSR risk management revenue was $1.1 billion, a decrease of $492
million.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was
$614 million, compared with $1.2 billion in the prior year. The current-year provision reflected
lower net charge-offs and a reduction of $135 million to the allowance for loan losses due to lower
estimated losses, compared with a $307 million addition to the allowance for loan losses in the
prior year. See page 130 of this Annual Report for the net charge-off amounts and rates.
Noninterest expense was $5.6 billion, up by $1.0 billion, or 23%, from the prior year, driven by an
increase in default-related expense for the serviced portfolio, including costs associated with
foreclosure affidavit-related suspensions.
2009 compared with 2008
Mortgage Banking, Auto & Other Consumer Lending
reported net income of $1.6 billion, an increase of $357
million, or 28%, from the prior year.
Net revenue was $8.2 billion, up by $1.3 billion, or 18%, from the prior year. Mortgage Banking net
revenue was $5.2 billion, up by $701 million. Other Consumer Lending net revenue, comprising Auto
and Student Lending, was $3.0 billion, up by $553 million, largely as a result of wider loan
spreads.
Mortgage Banking net revenue included $973 million of net interest income, $3.8 billion of mortgage
fees and related income, and $442 million of other noninterest revenue. Mortgage fees and related
income comprised $503 million of net production revenue, $1.7 billion of servicing operating
revenue and $1.6 billion of MSR risk management revenue. Production revenue, excluding repurchase
losses, was $2.1 billion, an increase of $965 million, reflecting wider margins on new
originations. Total production revenue was reduced by $1.6 billion of repurchase losses, compared
with repurchase losses of $252 million in the prior year. Servicing operating revenue was $1.7
billion, an increase of $457 million, reflecting growth in average third-party loans serviced as a
result of the Washington Mutual transaction. MSR risk management revenue was $1.6 billion, an
increase of $111 million, reflecting the positive impact of a decrease in estimated future
prepayments during 2009.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was
$1.2 billion, compared with $895 million in the prior year. The current- and prior-year provision
reflected an increase in the allowance for loan losses for student
and auto loans. See page 130 of
this Annual Report for the net charge-off amounts and rates.
Noninterest expense was $4.5 billion, up by $588 million, or 15%, from the prior year, driven by
higher servicing and default-related expense and the impact of the Washington Mutual transaction.
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in billions, except ratios and | ||||||||||||
| where otherwise noted) | 2010 | 2009 | 2008 | |||||||||
|
Business metrics
|
||||||||||||
|
End-of-period loans owned:
|
||||||||||||
|
Auto
|
$ | 48.4 | $ | 46.0 | $ | 42.6 | ||||||
|
Mortgage
(a)
|
14.2 | 11.9 | 6.5 | |||||||||
|
Student and other
|
14.4 | 15.8 | 16.3 | |||||||||
|
Total end-of-period loans owned
|
$ | 77.0 | $ | 73.7 | $ | 65.4 | ||||||
|
Average loans owned:
|
||||||||||||
|
Auto
|
$ | 47.6 | $ | 43.6 | $ | 43.8 | ||||||
|
Mortgage
(a)
|
13.4 | 8.8 | 4.3 | |||||||||
|
Student and other
|
16.2 | 16.3 | 13.8 | |||||||||
|
Total average loans owned
(b)
|
$ | 77.2 | $ | 68.7 | $ | 61.9 | ||||||
|
Credit data and quality statistics
(in millions) |
||||||||||||
|
Net charge-offs:
|
||||||||||||
|
Auto
|
$ | 298 | $ | 627 | $ | 568 | ||||||
|
Mortgage
|
41 | 14 | 5 | |||||||||
|
Student and other
|
410 | 287 | 64 | |||||||||
|
Total net charge-offs
|
$ | 749 | $ | 928 | $ | 637 | ||||||
|
Net charge-off rate:
|
||||||||||||
|
Auto
|
0.63 | % | 1.44 | % | 1.30 | % | ||||||
|
Mortgage
|
0.31 | 0.17 | 0.13 | |||||||||
|
Student and other
|
2.72 | 1.98 | 0.57 | |||||||||
|
Total net charge-off rate
(b)
|
0.99 | 1.40 | 1.08 | |||||||||
|
30+ day delinquency rate
(c)(d)
|
1.69 | 1.75 | 1.91 | |||||||||
|
Nonperforming assets (in millions)
(e)
|
$ | 996 | $ | 912 | $ | 866 | ||||||
|
|
||||||||||||
|
Origination volume:
|
||||||||||||
|
Mortgage origination volume by channel:
|
||||||||||||
|
Retail
|
$ | 68.8 | $ | 53.9 | $ | 41.1 | ||||||
|
Wholesale
(f)
|
1.3 | 3.6 | 26.7 | |||||||||
|
Correspondent
(f)
|
75.3 | 81.0 | 58.2 | |||||||||
|
CNT (negotiated transactions)
|
10.2 | 12.2 | 43.0 | |||||||||
|
Total mortgage origination
volume
|
$ | 155.6 | $ | 150.7 | $ | 169.0 | ||||||
|
Student
|
1.9 | 4.2 | 6.9 | |||||||||
|
Auto
|
23.0 | 23.7 | 19.4 | |||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 75 |
Table of Contents
Management’s discussion and analysis
Selected metrics
| As of or for the year ended | ||||||||||||
| December 31, | ||||||||||||
| (in billions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Application volume:
|
||||||||||||
|
Mortgage application volume
by channel:
|
||||||||||||
|
Retail
|
$ | 115.1 | $ | 90.9 | $ | 89.1 | ||||||
|
Wholesale
(f)
|
2.4 | 4.9 | 58.6 | |||||||||
|
Correspondent
(f)
|
97.3 | 110.8 | 86.9 | |||||||||
|
Total mortgage application volume
|
$ | 214.8 | $ | 206.6 | $ | 234.6 | ||||||
|
|
||||||||||||
|
Average mortgage loans held-for-sale and loans at fair value
(g)
|
$ | 15.4 | $ | 16.2 | $ | 14.6 | ||||||
|
Average assets
|
126.0 | 115.0 | 98.8 | |||||||||
|
Repurchase reserve (ending)
|
3.0 | 1.4 | 1.0 | |||||||||
|
Third-party mortgage loans serviced (ending)
|
967.5 | 1,082.1 | 1,172.6 | |||||||||
|
Third-party mortgage loans serviced (average)
|
1,037.6 | 1,119.1 | 774.9 | |||||||||
|
MSR net carrying value (ending)
|
13.6 | 15.5 | 9.3 | |||||||||
|
Ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending)
|
1.41 | % | 1.43 | % | 0.79 | % | ||||||
|
Ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average)
|
0.44 | 0.44 | 0.42 | |||||||||
|
MSR revenue multiple
(h)
|
3.20 | x | 3.25 | x | 1.88 | x | ||||||
| Supplemental mortgage fees | ||||||||||||
| and related income details | ||||||||||||
| As of or for the year ended | ||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net production revenue:
|
||||||||||||
|
Production revenue
|
$ | 3,440 | $ | 2,115 | $ | 1,150 | ||||||
|
Repurchase losses
|
(2,912 | ) | (1,612 | ) | (252 | ) | ||||||
|
Net production revenue
|
528 | 503 | 898 | |||||||||
|
Net mortgage servicing revenue:
|
||||||||||||
|
Operating revenue:
|
||||||||||||
|
Loan servicing revenue
|
4,575 | 4,942 | 3,258 | |||||||||
|
Other changes in MSR asset
fair value
|
(2,384 | ) | (3,279 | ) | (2,052 | ) | ||||||
|
Total
operating revenue
|
2,191 | 1,663 | 1,206 | |||||||||
|
Risk management:
|
||||||||||||
|
Changes in MSR asset fair value due to inputs or assumptions in model
|
(2,268 | ) | 5,804 | (6,849 | ) | |||||||
|
Derivative valuation adjustments and other
|
3,404 | (4,176 | ) | 8,366 | ||||||||
|
Total
risk management
|
1,136 | 1,628 | 1,517 | |||||||||
|
Total net
mortgage servicing revenue
|
3,327 | 3,291 | 2,723 | |||||||||
|
Mortgage fees and related income
|
$ | 3,855 | $ | 3,794 | $ | 3,621 | ||||||
| (a) | Predominantly represents prime loans repurchased from Government National Mortgage Association (“Ginnie Mae”) pools, which are insured by U.S. government agencies. See further discussion of loans repurchased from Ginnie Mae pools in Repurchase liability on pages 98—101 of this Annual Report. | |
| (b) | Total average loans owned includes loans held-for-sale of $1.3 billion, $2.2 billion and $2.8 billion for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts are excluded when calculating the net charge-off rate. | |
| (c) | Excludes mortgage loans that are insured by U.S. government agencies of $11.4 billion, $9.7 billion and $3.5 billion at December 31, 2010, 2009 and 2008, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (d) | Excludes loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $1.1 billion, $942 million and $824 million at December 31, 2010, 2009 and 2008, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (e) | At December 31, 2010, 2009 and 2008, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion, $9.0 billion and $3.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.9 billion, $579 million and $364 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $625 million, $542 million and $437 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (f) | Includes rural housing loans sourced through brokers and correspondents, which are underwritten under U.S. Department of Agriculture guidelines. Prior period amounts have been revised to conform with the current period presentation. | |
| (g) | Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. Average balances of these loans totaled $15.2 billion, $15.8 billion and $14.2 billion for the years ended December 31, 2010, 2009 and 2008, respectively. | |
| (h) | Represents the ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending) divided by the ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average). |
Mortgage origination channels comprise the following:
Retail
– Borrowers who are buying or refinancing a home through direct contact with a mortgage banker employed by the
Firm using a branch office, the Internet or by phone. Borrowers are frequently referred to a mortgage banker by a banker
in a Chase branch, real estate brokers, home builders or other third parties.
Wholesale
– A third-party mortgage broker refers loan applications to a mortgage banker at the Firm. Brokers are
independent loan originators that specialize in finding and counseling borrowers but do not provide funding for loans.
The Firm exited the broker channel during 2008.
Correspondent
– Banks, thrifts, other mortgage banks and other financial institutions that sell closed loans to the Firm.
Correspondent negotiated transactions (“CNTs”)
– These transactions occur when mid- to large-sized mortgage lenders,
banks and bank-owned mortgage companies sell servicing to the Firm, on an as-originated basis, and exclude purchased bulk
servicing transactions. These transactions supplement traditional production channels and provide growth opportunities in
the servicing portfolio in stable and periods of rising interest rates.
Net production revenue
– Includes net gains or losses on originations and sales of
prime and subprime mortgage loans, other production-related fees and losses related to
the repurchase of previously-sold loans.
| 76 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Net mortgage servicing revenue
includes the following
components:
| (a) | Operating revenue comprises: | |
| – all gross income earned from servicing third-party mortgage loans including stated service fees, excess service fees, late fees and other ancillary fees; and | ||
| – modeled servicing portfolio runoff (or time decay). | ||
| (b) | Risk management comprises: | |
| – changes in MSR asset fair value due to market-based inputs such as interest rates and volatility, as well as updates to assumptions used in the MSR valuation model. | ||
| – derivative valuation adjustments and other, which represents changes in the fair value of derivative instruments used to offset the impact of changes in the market-based inputs to the MSR valuation model. |
Real Estate Portfolios
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Noninterest revenue
|
$ | 115 | $ | (26 | ) | $ | (285 | ) | ||||
|
Net interest income
|
5,432 | 6,546 | 4,227 | |||||||||
|
Total net revenue
|
5,547 | 6,520 | 3,942 | |||||||||
|
Provision for credit losses
|
8,231 | 13,563 | 8,561 | |||||||||
|
Noninterest expense
|
1,627 | 1,847 | 889 | |||||||||
|
Income/(loss) before income tax expense/(benefit)
|
(4,311 | ) | (8,890 | ) | (5,508 | ) | ||||||
|
Net income/(loss)
|
$ | (2,493 | ) | $ | (5,449 | ) | $ | (3,388 | ) | |||
|
Overhead ratio
|
29 | % | 28 | % | 23 | % | ||||||
2010 compared with 2009
Real Estate Portfolios
reported a net loss of $2.5 billion, compared with a net loss of $5.4
billion in the prior year. The improvement was driven by a lower provision for credit losses,
partially offset by lower net interest income.
Net revenue was $5.5 billion, down by $973 million, or 15%, from the prior year. The decrease was
driven by a decline in net interest income as a result of lower loan balances, reflecting net
portfolio runoff.
The provision for credit losses was $8.2 billion, compared with $13.6 billion in the prior year.
The current-year provision reflected a $1.9 billion reduction in net charge-offs and a
$1.6 billion reduction in the allowance for the mortgage loan portfolios. This reduction in the
allowance for loan losses included the effect of $632 million of charge-offs related to an adjustment of the estimated
net realizable value of the collateral underlying delinquent
residential home loans. For additional information, refer to
Portfolio analysis on page 131 of this
Annual Report. The remaining reduction of the allowance of approximately $950 million was a result
of an improvement in delinquencies and lower estimated losses, compared with prior year additions
of $3.6 billion for the home equity and mortgage portfolios. Additionally, the current-year
provision reflected an addition to the allowance for loan losses of $3.4 billion for the PCI
portfolio,
compared with a prior year addition of $1.6 billion for this portfolio. (For further
detail, see the RFS discussion of the provision for credit losses on
page 72 of this Annual Report.)
Noninterest expense was $1.6 billion, down by $220 million, or 12%, from the prior year, reflecting
lower default-related expense.
2009 compared with 2008
Real Estate Portfolios
reported a net loss of $5.4 billion, compared with a net loss of $3.4
billion in the prior year.
Net revenue was $6.5 billion, up by $2.6 billion, or 65%, from the prior year. The increase was
driven by the impact of the Washington Mutual transaction and wider loan spreads, partially offset
by lower heritage Chase loan balances.
The provision for credit losses was $13.6 billion, compared with $8.6 billion in the prior year.
The provision reflected weakness in the home equity and mortgage portfolios. (For further detail,
see the RFS discussion of the provision for credit losses for further
detail) on pages 72–73 of this
Annual Report.
Noninterest expense was $1.8 billion, compared with $889 million in the prior year, reflecting
higher default-related expense.
Included within Real Estate Portfolios are PCI loans that the Firm acquired in the Washington
Mutual transaction. For PCI loans, the excess of the undiscounted gross cash flows expected to be
collected over the carrying value of the loans (“the accretable yield”) is accreted into interest
income at a level rate of return over the expected life of the loans.
The net spread between the PCI loans and the related liabilities are expected to be relatively constant over
time, except for any basis risk or other residual interest rate risk that remains and for certain
changes in the accretable yield percentage (e.g. from extended loan liquidation periods and from
prepayments). As of December 31, 2010, the remaining weighted-average life of the PCI loan
portfolio is expected to be 7.0 years. For further information, see Note 14, PCI loans, on pages
233–236 of this Annual Report. The loan balances are expected to decline more rapidly in the
earlier years as the most troubled loans are liquidated, and more slowly thereafter as the
remaining troubled borrowers have limited refinancing opportunities. Similarly, default and
servicing expense are expected to be higher in the earlier years and decline over time as
liquidations slow down.
To date the impact of the PCI loans on Real Estate Portfolios’ net income has been modestly
negative. This is due to the current net spread of the portfolio, the provision for loan losses
recognized subsequent to its acquisition, and the higher level of default and servicing expense
associated with the portfolio. Over time, the Firm expects that this portfolio will contribute
positively to net income.
| JPMorgan Chase & Co. / 2010 Annual Report | 77 |
Table of Contents
Management’s discussion and analysis
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in billions) | 2010 | 2009 | 2008 | |||||||||
|
Loans excluding PCI loans
(a)
|
||||||||||||
|
End-of-period loans owned:
|
||||||||||||
|
Home equity
|
$ | 88.4 | $ | 101.4 | $ | 114.3 | ||||||
|
Prime mortgage
|
41.7 | 47.5 | 58.7 | |||||||||
|
Subprime mortgage
|
11.3 | 12.5 | 15.3 | |||||||||
|
Option ARMs
|
8.1 | 8.5 | 9.0 | |||||||||
|
Other
|
0.8 | 0.7 | 0.9 | |||||||||
|
Total end-of-period loans owned
|
$ | 150.3 | $ | 170.6 | $ | 198.2 | ||||||
|
Average loans owned:
|
||||||||||||
|
Home equity
|
$ | 94.8 | $ | 108.3 | $ | 99.9 | ||||||
|
Prime mortgage
|
44.9 | 53.4 | 40.7 | |||||||||
|
Subprime mortgage
|
12.7 | 13.9 | 15.3 | |||||||||
|
Option ARMs
|
8.5 | 8.9 | 2.3 | |||||||||
|
Other
|
1.0 | 0.8 | 0.9 | |||||||||
|
Total average loans owned
|
$ | 161.9 | $ | 185.3 | $ | 159.1 | ||||||
|
PCI loans
(a)
|
||||||||||||
|
End-of-period loans owned:
|
||||||||||||
|
Home equity
|
$ | 24.5 | $ | 26.5 | $ | 28.6 | ||||||
|
Prime mortgage
|
17.3 | 19.7 | 21.8 | |||||||||
|
Subprime mortgage
|
5.4 | 6.0 | 6.8 | |||||||||
|
Option ARMs
|
25.6 | 29.0 | 31.6 | |||||||||
|
Total end-of-period loans owned
|
$ | 72.8 | $ | 81.2 | $ | 88.8 | ||||||
|
Average loans owned:
|
||||||||||||
|
Home equity
|
$ | 25.5 | $ | 27.6 | $ | 7.1 | ||||||
|
Prime mortgage
|
18.5 | 20.8 | 5.4 | |||||||||
|
Subprime mortgage
|
5.7 | 6.3 | 1.7 | |||||||||
|
Option ARMs
|
27.2 | 30.5 | 8.0 | |||||||||
|
Total average loans owned
|
$ | 76.9 | $ | 85.2 | $ | 22.2 | ||||||
|
Total Real Estate Portfolios
|
||||||||||||
|
End-of-period loans owned:
|
||||||||||||
|
Home equity
|
$ | 112.9 | $ | 127.9 | $ | 142.9 | ||||||
|
Prime mortgage
|
59.0 | 67.2 | 80.5 | |||||||||
|
Subprime mortgage
|
16.7 | 18.5 | 22.1 | |||||||||
|
Option ARMs
|
33.7 | 37.5 | 40.6 | |||||||||
|
Other
|
0.8 | 0.7 | 0.9 | |||||||||
|
Total end-of-period loans owned
|
$ | 223.1 | $ | 251.8 | $ | 287.0 | ||||||
|
Average loans owned:
|
||||||||||||
|
Home equity
|
$ | 120.3 | $ | 135.9 | $ | 107.0 | ||||||
|
Prime mortgage
|
63.4 | 74.2 | 46.1 | |||||||||
|
Subprime mortgage
|
18.4 | 20.2 | 17.0 | |||||||||
|
Option ARMs
|
35.7 | 39.4 | 10.3 | |||||||||
|
Other
|
1.0 | 0.8 | 0.9 | |||||||||
|
Total average loans owned
|
$ | 238.8 | $ | 270.5 | $ | 181.3 | ||||||
|
Average assets
|
$ | 227.0 | $ | 263.6 | $ | 179.3 | ||||||
|
Home equity origination volume
|
1.2 | 2.4 | 16.3 | |||||||||
| (a) | PCI loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase’s acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the underlying loans are contractually past due. |
Credit data and quality statistics
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Net charge-offs excluding PCI loans
(a)
:
|
||||||||||||
|
Home equity
|
$ | 3,444 | $ | 4,682 | $ | 2,391 | ||||||
|
Prime mortgage
|
1,475 | 1,872 | 521 | |||||||||
|
Subprime mortgage
|
1,374 | 1,648 | 933 | |||||||||
|
Option ARMs
|
98 | 63 | — | |||||||||
|
Other
|
59 | 78 | 49 | |||||||||
|
Total net charge-offs
|
$ | 6,450 | $ | 8,343 | $ | 3,894 | ||||||
|
Net charge-off rate excluding PCI loans
(a)
:
|
||||||||||||
|
Home equity
|
3.63 | % | 4.32 | % | 2.39 | % | ||||||
|
Prime mortgage
|
3.29 | 3.51 | 1.28 | |||||||||
|
Subprime mortgage
|
10.82 | 11.86 | 6.10 | |||||||||
|
Option ARMs
|
1.15 | 0.71 | — | |||||||||
|
Other
|
5.90 | 9.75 | 5.44 | |||||||||
|
Total net charge-off rate excluding PCI loans
|
3.98 | 4.50 | 2.45 | |||||||||
|
Net
charge-off rate – reported:
|
||||||||||||
|
Home equity
|
2.86 | % | 3.45 | % | 2.23 | % | ||||||
|
Prime mortgage
|
2.33 | 2.52 | 1.13 | |||||||||
|
Subprime mortgage
|
7.47 | 8.16 | 5.49 | |||||||||
|
Option ARMs
|
0.27 | 0.16 | — | |||||||||
|
Other
|
5.90 | 9.75 | 5.44 | |||||||||
|
Total net charge-off rate – reported
|
2.70 | 3.08 | 2.15 | |||||||||
|
30+ day delinquency rate excluding
PCI
loans (b) |
6.45 | % | 7.73 | % | 4.97 | % | ||||||
|
Allowance for loan losses
|
$ | 14,659 | $ | 12,752 | $ | 7,510 | ||||||
|
Nonperforming assets
(c)
|
8,424 | 10,347 | 7,787 | |||||||||
|
Allowance for loan losses to ending
loans retained
|
6.57 | % | 5.06 | % | 2.62 | % | ||||||
|
Allowance for loan losses to ending
loans retained excluding PCI loans
(a)
|
6.47 | 6.55 | 3.79 | |||||||||
| (a) | Excludes the impact of PCI loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. An allowance for loan losses of $4.9 billion and $1.6 billion was recorded for these loans at December 31, 2010 and 2009, respectively, which has also been excluded from the applicable ratios. No allowance for loan losses was recorded for these loans at December 31, 2008. To date, no charge-offs have been recorded for these loans. | |
| (b) | The delinquency rate for PCI loans was 28.20%, 27.62% and 17.89% at December 31, 2010, 2009 and 2008, respectively. | |
| (c) | Excludes PCI loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past-due status of the pools, or that of the individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. |
| 78 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
CARD SERVICES
Card Services is one of the nation’s largest
credit card issuers, with over $137 billion in loans and over 90 million open
accounts. Customers used Chase cards to meet $313 billion of their spending
needs in 2010.
Chase continues to innovate, despite a very difficult business environment,
offering products and services such as Blueprint, Chase Freedom, Ultimate
Rewards, Chase Sapphire and Ink from Chase, and earning a market leadership
position in building loyalty and rewards programs. Through its merchant
acquiring business, Chase Paymentech Solutions, CS is a global leader in
payment processing and merchant acquiring.
Selected income statement data – managed basis
(a)
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Revenue
|
||||||||||||
|
Credit card income
|
$ | 3,513 | $ | 3,612 | $ | 2,768 | ||||||
|
All other income
(b)
|
(236 | ) | (692 | ) | (49 | ) | ||||||
|
Noninterest revenue
|
3,277 | 2,920 | 2,719 | |||||||||
|
Net interest income
|
13,886 | 17,384 | 13,755 | |||||||||
|
Total net revenue
|
17,163 | 20,304 | 16,474 | |||||||||
|
Provision for credit losses
|
8,037 | 18,462 | 10,059 | |||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
1,291 | 1,376 | 1,127 | |||||||||
|
Noncompensation expense
|
4,040 | 3,490 | 3,356 | |||||||||
|
Amortization of intangibles
|
466 | 515 | 657 | |||||||||
|
Total noninterest expense
|
5,797 | 5,381 | 5,140 | |||||||||
|
Income/(loss) before income tax expense/(benefit)
|
3,329 | (3,539 | ) | 1,275 | ||||||||
|
Income tax expense/(benefit)
|
1,255 | (1,314 | ) | 495 | ||||||||
|
Net income/(loss)
|
$ | 2,074 | $ | (2,225 | ) | $ | 780 | |||||
|
Memo: Net securitization income/(loss)
|
NA | $ | (474 | ) | $ | (183 | ) | |||||
|
Financial ratios
|
||||||||||||
|
ROE
|
14 | % | (15 | )% | 5 | % | ||||||
|
Overhead ratio
|
34 | 27 | 31 | |||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the securitization trusts, reported and managed basis are equivalent for periods beginning after January 1, 2010. See Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 64–66 of this Annual Report for additional information. Also, for further details regarding the Firm’s application and impact of the VIE guidance, see Note 16 on pages 244–259 of this Annual Report. | |
| (b) | Includes the impact of revenue sharing agreements with other JPMorgan Chase business segments. For periods prior to January 1, 2010, net securitization income/(loss) is also included. |
NA: Not applicable
2010 compared with 2009
Net income was $2.1 billion, compared with a net loss of $2.2 billion in the prior year. The
improved results were driven by a lower provision for credit losses, partially offset by lower net
revenue.
End-of-period loans were $137.7 billion, a decrease of $25.7 billion, or 16%, from the prior year.
Average loans were $144.4 billion, a decrease of $28.0 billion, or 16%, from the prior year. The
declines in both end-of-period and average loans were due to a decline in lower-yielding
promotional balances and the Washington Mutual portfolio runoff.
Net revenue was $17.2 billion, a decrease of $3.1 billion, or 15%, from the prior year. Net
interest income was $13.9 billion, down by $3.5 billion, or 20%. The decrease in net interest
income was driven by lower average loan balances, the impact of legislative changes, and a
decreased level of fees. These decreases were offset partially by lower revenue reversals
associated with lower charge-offs. Noninterest revenue was $3.3 billion, an increase of $357
million, or 12%, driven by the prior-year write-down of securitization interests, offset partially by
lower revenue from fee-based products.
The provision for credit losses was $8.0 billion, compared with $18.5 billion in the prior year.
The current-year provision reflected lower net charge-offs and a reduction of $6.0 billion to the
allowance for loan losses due to lower estimated losses. The prior-year provision included an
addition of $2.4 billion to the allowance for loan losses. Including the Washington Mutual
portfolio, the net charge-off rate was 9.72%, including loans held-for-sale, up from 9.33% in the
prior year; and the 30-day delinquency rate was 4.07%, down from 6.28% in the prior
year. Excluding the Washington Mutual portfolio, the net charge-off rate was 8.72%, including loans
held-for-sale, up from 8.45% in the prior year; and the 30-day delinquency rate was 3.66%, down
from 5.52% in the prior year.
Noninterest expense was $5.8 billion, an increase of $416 million, or 8%, due to higher marketing
expense.
Credit Card Legislation
In May 2009, the CARD Act was enacted. Management estimates that the total reduction in net income
resulting from the CARD Act is approximately $750 million annually. The run-rate impact of this
reduction in net income is reflected in results as of the end of the fourth quarter of 2010. The
full year impact on 2010 net income was approximately $300 million.
The most significant effects of the CARD Act include: (a) the inability to change the pricing of
existing balances; (b) the allocation of customer payments above the minimum payment to the
existing balance with the highest annual percentage rate (“APR”); (c) the requirement that
customers opt-in in order to receive, for a fee, overlimit protection that permits an authorized
transaction over their credit limit; (d) the requirement that statements must be mailed or
delivered not later than 21 days before the payment due date; (e) the limiting of the amount of
penalty fees that can be assessed; and (f) the requirement to review customer accounts for
potential interest rate reductions in certain circumstances.
As a result of the CARD Act, CS has implemented certain changes to its business practices to manage
its inability to price loans to customers at rates that are commensurate with their risk over time.
These changes include: (a) selectively increasing pricing; (b) reducing the volume and duration of
low-rate promotional pricing offered to customers; and (c) reducing the amount of credit that is
granted to certain new and existing customers.
| JPMorgan Chase & Co. / 2010 Annual Report | 79 |
Table of Contents
Management’s discussion and analysis
2009 compared with 2008
The following discussion of CS’s financial results reflects the acquisition of Washington Mutual’s
credit cards operations as a result of the Washington Mutual transaction on September 25, 2008, and
the dissolution of the Chase Paymentech Solutions joint venture on November 1, 2008. See Note 2 on
pages 166–170 of this Annual Report for more information concerning these transactions.
Card Services reported a net loss of $2.2 billion, compared with net income of $780 million in the
prior year. The decrease was driven by a higher provision for credit losses, partially offset by
higher total net revenue.
End-of-period managed loans were $163.4 billion, a decrease of $26.9 billion, or 14%, from the
prior year, reflecting lower charge volume and a higher level of charge-offs. Average managed loans
were $172.4 billion, an increase of $9.5 billion, or 6%, from the prior year, primarily due to the
impact of the Washington Mutual transaction. Excluding the impact of the Washington Mutual
transaction, end-of-period and average managed loans for 2009 were $143.8 billion and $148.8
billion, respectively.
Managed total net revenue was $20.3 billion, an increase of $3.8 billion, or 23%, from the prior
year. Net interest income was $17.4 billion, up by $3.6 billion, or 26%, from the prior year,
driven by wider loan spreads and the impact of the Washington Mutual transaction. These benefits
were offset partially by higher revenue reversals associated with higher charge-offs, a decreased
level of fees, lower average managed loan balances, and the impact of legislative changes.
Noninterest revenue was $2.9 billion, an increase of $201 million, or 7%, from the prior year. The
increase was driven by higher merchant servicing revenue related to the dissolution of the Chase
Paymentech Solutions joint venture and the impact of the Washington Mutual transaction, partially
offset by a larger write-down of securitization interests.
The managed provision for credit losses was $18.5 billion, an increase of $8.4 billion from the
prior year, reflecting a higher level of charge-offs and an addition of $2.4 billion to the
allowance for loan losses, reflecting continued weakness in the credit environment. The managed net
charge-off rate was 9.33%, up from 5.01% in the prior year. The 30-day managed delinquency rate was
6.28%, up from 4.97% in the prior year. Excluding the impact of the Washington Mutual transaction,
the managed net charge-off rate was 8.45%, and the 30-day managed delinquency rate was 5.52%.
Noninterest expense was $5.4 billion, an increase of $241 million, or 5%, from the prior year, due
to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington
Mutual transaction, partially offset by lower marketing expense.
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except headcount, ratios | ||||||||||||
| and where otherwise noted) | 2010 | 2009 | 2008 | |||||||||
|
Financial ratios
(a)
|
||||||||||||
|
Percentage of average outstandings:
|
||||||||||||
|
Net interest income
|
9.62 | % | 10.08 | % | 8.45 | % | ||||||
|
Provision for credit losses
|
5.57 | 10.71 | 6.18 | |||||||||
|
Noninterest revenue
|
2.27 | 1.69 | 1.67 | |||||||||
|
Risk adjusted margin
(b)
|
6.32 | 1.07 | 3.94 | |||||||||
|
Noninterest expense
|
4.02 | 3.12 | 3.16 | |||||||||
|
Pretax income/(loss) (ROO)
(c)
|
2.31 | (2.05 | ) | 0.78 | ||||||||
|
Net income/(loss)
|
1.44 | (1.29 | ) | 0.48 | ||||||||
|
Business metrics
|
||||||||||||
|
Sales volume (in billions)
|
$ | 313.0 | $ | 294.1 | $ | 298.5 | ||||||
|
New accounts opened
|
11.3 | 10.2 | 14.9 | |||||||||
|
Open accounts
|
90.7 | 93.3 | 109.5 | |||||||||
|
Merchant acquiring business
(d)
|
||||||||||||
|
Bank card volume (in billions)
|
$ | 469.3 | $ | 409.7 | $ | 713.9 | ||||||
|
Total transactions (in billions)
|
20.5 | 18.0 | 21.4 | |||||||||
|
Selected balance sheet data
(period-end) |
||||||||||||
|
Loans:
|
||||||||||||
|
Loans on balance sheets
|
$ | 137,676 | $ | 78,786 | $ | 104,746 | ||||||
|
Securitized loans
(a)
|
NA | 84,626 | 85,571 | |||||||||
|
Total loans
|
137,676 | 163,412 | 190,317 | |||||||||
|
Equity
|
15,000 | 15,000 | 15,000 | |||||||||
|
Selected balance sheet data (average)
|
||||||||||||
|
Managed assets
|
$ | 145,750 | $ | 192,749 | $ | 173,711 | ||||||
|
Loans:
|
||||||||||||
|
Loans on balance sheets
|
144,367 | 87,029 | 83,293 | |||||||||
|
Securitized loans
(a)
|
NA | 85,378 | 79,566 | |||||||||
|
Total average loans
|
144,367 | 172,407 | 162,859 | |||||||||
|
Equity
|
$ | 15,000 | $ | 15,000 | $ | 14,326 | ||||||
|
Headcount
|
20,739 | 22,676 | 24,025 | |||||||||
|
Credit quality statistics
(a)
|
||||||||||||
|
Net charge-offs
|
$ | 14,037 | $ | 16,077 | $ | 8,159 | ||||||
|
Net charge-off rate
(e)(f)
|
9.73 | % | 9.33 | % | 5.01 | % | ||||||
|
Delinquency rates
(a)(e)
|
||||||||||||
|
30+ day
|
4.07 | 6.28 | 4.97 | |||||||||
|
90+ day
|
2.22 | 3.59 | 2.34 | |||||||||
|
Allowance for loan losses
(a)(g)
|
$ | 11,034 | $ | 9,672 | $ | 7,692 | ||||||
|
Allowance for loan losses to period-end loans
(a)(g)(h)(i)
|
8.14 | % | 12.28 | % | 7.34 | % | ||||||
|
Key stats – Washington Mutual only
(j)
|
||||||||||||
|
Loans
|
$ | 13,733 | $ | 19,653 | $ | 28,250 | ||||||
|
Average loans
|
16,055 | 23,642 | 6,964 | |||||||||
|
Net interest income
(k)
|
15.66 | % | 17.11 | % | 14.87 | % | ||||||
|
Risk adjusted margin
(b)(k)
|
10.42 | (0.93 | ) | 4.18 | ||||||||
|
Net charge-off rate
(l)
|
18.73 | 18.79 | 12.09 | |||||||||
|
30+ day delinquency rate
(l)
|
7.74 | 12.72 | 9.14 | |||||||||
|
90+ day delinquency rate
(l)
|
4.40 | 7.76 | 4.39 | |||||||||
|
Key stats – excluding Washington Mutual
|
||||||||||||
|
Loans
|
$ | 123,943 | $ | 143,759 | $ | 162,067 | ||||||
|
Average loans
|
128,312 | 148,765 | 155,895 | |||||||||
|
Net interest income
(k)
|
8.86 | % | 8.97 | % | 8.16 | % | ||||||
|
Risk adjusted margin
(b)(k)
|
5.81 | 1.39 | 3.93 | |||||||||
|
Net charge-off rate
|
8.72 | 8.45 | 4.92 | |||||||||
|
30+ day delinquency rate
|
3.66 | 5.52 | 4.36 | |||||||||
|
90+ day delinquency rate
|
1.98 | 3.13 | 2.09 | |||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For further details regarding the Firm’s application and impact of the guidance, see Note 16 on pages 244–259 of this Annual Report. | |
| (b) | Represents total net revenue less provision for credit losses. |
| 80 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| (c) | Pretax return on average managed outstandings. | |
| (d) | The Chase Paymentech Solutions joint venture was dissolved effective November 1, 2008. JPMorgan Chase retained approximately 51% of the business and operates the business under the name Chase Paymentech Solutions. For the period January 1 through October 31, 2008, the data presented represents activity for the Chase Paymentech Solutions joint venture, and for the period November 1, 2008, through December 31, 2010, the data presented represents activity for Chase Paymentech Solutions. | |
| (e) | Results reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the WMMT in the second quarter of 2009. The delinquency rates as of December 31, 2010, were not affected. | |
| (f) | Total average loans includes loans held-for-sale of $148 million for full year 2010. These amounts are excluded when calculating the net charge-off rate. The net charge-off rate including loans held-for-sale, which is a non-GAAP financial measure, would have been 9.72% for the full year 2010. | |
| (g) | Based on loans on the Consolidated Balance Sheets. | |
| (h) | Includes $1.0 billion of loans at December 31, 2009, held by the WMMT, which were consolidated onto the Card Services balance sheet at fair value during the second quarter of 2009. No allowance for loan losses was recorded for these loans as of December 31, 2009. Excluding these loans, the allowance for loan losses to period-end loans would have been 12.43% as of December 31, 2009. | |
| (i) | Total period-end loans includes loans held-for-sale of $2.2 billion at December 31, 2010. No allowance for loan losses was recorded for these loans as of December 31, 2010. The loans held-for-sale are excluded when calculating the allowance for loan losses to period-end loans. | |
| (j) | Statistics are only presented for periods after September 25, 2008, the date of the Washington Mutual transaction. | |
| (k) | As a percentage of average managed outstandings. | |
| (l) | Excludes the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the WMMT in the second quarter of 2009. |
NA: Not applicable
Reconciliation from reported basis to managed basis
The financial information presented in the following table reconciles reported basis and managed basis to disclose
the effect of securitizations reported in 2009 and 2008. Effective January 1, 2010, the Firm
adopted accounting guidance related to VIEs. As a result of the consolidation of the credit card
securitization trusts, reported and managed basis relating to credit card securitizations are
equivalent for periods beginning after January 1, 2010. For further details regarding the Firm’s
application and impact of the guidance, see Note 16 on pages 244–259 of this Annual Report.
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Income statement data
|
||||||||||||
|
Credit card income
|
||||||||||||
|
Reported
|
$ | 3,513 | $ | 5,106 | $ | 6,082 | ||||||
|
Securitization adjustments
|
NA | (1,494 | ) | (3,314 | ) | |||||||
|
Managed credit card income
|
$ | 3,513 | $ | 3,612 | $ | 2,768 | ||||||
|
Net interest income
|
||||||||||||
|
Reported
|
$ | 13,886 | $ | 9,447 | $ | 6,838 | ||||||
|
Securitization adjustments
|
NA | 7,937 | 6,917 | |||||||||
|
Managed net interest income
|
$ | 13,886 | $ | 17,384 | $ | 13,755 | ||||||
|
Total net revenue
|
||||||||||||
|
Reported
|
$ | 17,163 | $ | 13,861 | $ | 12,871 | ||||||
|
Securitization adjustments
|
NA | 6,443 | 3,603 | |||||||||
|
Managed total net
revenue
|
$ | 17,163 | $ | 20,304 | $ | 16,474 | ||||||
|
Provision for credit losses
|
||||||||||||
|
Reported
|
$ | 8,037 | $ | 12,019 | $ | 6,456 | ||||||
|
Securitization adjustments
|
NA | 6,443 | 3,603 | |||||||||
|
Managed provision for credit losses
|
$ | 8,037 | $ | 18,462 | $ | 10,059 | ||||||
|
Balance sheet – average balances
|
||||||||||||
|
Total average assets
|
||||||||||||
|
Reported
|
$ | 145,750 | $ | 110,516 | $ | 96,807 | ||||||
|
Securitization adjustments
|
NA | 82,233 | 76,904 | |||||||||
|
Managed average assets
|
$ | 145,750 | $ | 192,749 | $ | 173,711 | ||||||
|
Credit quality statistics
|
||||||||||||
|
Net charge-offs
|
||||||||||||
|
Reported
|
$ | 14,037 | $ | 9,634 | $ | 4,556 | ||||||
|
Securitization adjustments
|
NA | 6,443 | 3,603 | |||||||||
|
Managed net charge-offs
|
$ | 14,037 | $ | 16,077 | $ | 8,159 | ||||||
|
Net charge-off rates
|
||||||||||||
|
Reported
|
9.73 | % | 11.07 | % | 5.47 | % | ||||||
|
Securitized
|
NA | 7.55 | 4.53 | |||||||||
|
Managed net charge-off rate
|
9.73 | 9.33 | 5.01 | |||||||||
NA: Not applicable
The following are brief descriptions of selected business metrics within Card Services.
| • | Sales volume – Dollar amount of cardmember purchases, net of returns. | |
| • | Open accounts – Cardmember accounts with charging privileges. | |
| • | Merchant acquiring business – A business that processes bank card transactions for merchants. | |
| • | Bank card volume – Dollar amount of transactions processed for merchants. | |
| • | Total transactions – Number of transactions and authorizations processed for merchants. |
| JPMorgan Chase & Co. / 2010 Annual Report | 81 |
Table of Contents
Management’s discussion and analysis
COMMERCIAL BANKING
Commercial Banking delivers extensive industry knowledge, local
expertise and dedicated service to nearly 24,000 clients nationally, including
corporations, municipalities, financial institutions and not-for-profit
entities with annual revenue generally ranging from $10 million to $2 billion,
and nearly 35,000 real estate investors/owners. CB partners with the Firm’s
other businesses to provide comprehensive solutions, including lending,
treasury services, investment banking and asset management to meet its
clients’ domestic and international financial needs.
Commercial Banking is divided into four primary client segments: Middle Market Banking, Commercial
Term Lending, Mid-Corporate Banking, and Real Estate Banking. Middle Market Banking covers
corporate, municipal, financial institution and not-for-profit clients, with annual revenue
generally ranging between $10 million and $500 million. Mid-Corporate Banking covers clients with
annual revenue generally ranging between $500 million and $2 billion and focuses on clients that
have broader investment banking needs. Commercial Term Lending primarily provides term financing to
real estate investors/
owners for multi-family properties as well as financing office, retail and industrial properties.
Real Estate Banking provides full-service banking to investors and developers of
institutional-grade real estate properties.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Revenue
|
||||||||||||
|
Lending- and deposit-related fees
|
$ | 1,099 | $ | 1,081 | $ | 854 | ||||||
|
Asset management, administration and commissions
|
144 | 140 | 113 | |||||||||
|
All other income
(a)
|
957 | 596 | 514 | |||||||||
|
Noninterest
revenue
|
2,200 | 1,817 | 1,481 | |||||||||
|
Net interest income
|
3,840 | 3,903 | 3,296 | |||||||||
|
Total net
revenue
(b)
|
6,040 | 5,720 | 4,777 | |||||||||
|
Provision for credit losses
|
297 | 1,454 | 464 | |||||||||
|
Noninterest
expense
|
||||||||||||
|
Compensation expense
|
820 | 776 | 692 | |||||||||
|
Noncompensation expense
|
1,344 | 1,359 | 1,206 | |||||||||
|
Amortization of intangibles
|
35 | 41 | 48 | |||||||||
|
Total
noninterest expense
|
2,199 | 2,176 | 1,946 | |||||||||
|
Income before income tax expense
|
3,544 | 2,090 | 2,367 | |||||||||
|
Income tax expense
|
1,460 | 819 | 928 | |||||||||
|
Net income
|
$ | 2,084 | $ | 1,271 | $ | 1,439 | ||||||
|
Revenue by product:
|
||||||||||||
|
Lending
|
$ | 2,749 | $ | 2,663 | $ | 1,743 | ||||||
|
Treasury services
|
2,632 | 2,642 | 2,648 | |||||||||
|
Investment banking
|
466 | 394 | 334 | |||||||||
|
Other
(c)
|
193 | 21 | 52 | |||||||||
|
Total Commercial Banking revenue
|
$ | 6,040 | $ | 5,720 | $ | 4,777 | ||||||
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
IB revenue, gross
(d)
|
$ | 1,335 | $ | 1,163 | $ | 966 | ||||||
|
Revenue by client segment:
|
||||||||||||
|
Middle Market Banking
|
$ | 3,060 | $ | 3,055 | $ | 2,939 | ||||||
|
Commercial Term Lending
(e)
|
1,023 | 875 | 243 | |||||||||
|
Mid-Corporate Banking
|
1,154 | 1,102 | 921 | |||||||||
|
Real Estate Banking
(e)
|
460 | 461 | 413 | |||||||||
|
Other
(e)(f)
|
343 | 227 | 261 | |||||||||
|
Total Commercial Banking revenue
|
$ | 6,040 | $ | 5,720 | $ | 4,777 | ||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
26 | % | 16 | % | 20 | % | ||||||
|
Overhead ratio
|
36 | 38 | 41 | |||||||||
| (a) | CB client revenue from investment banking products and commercial card transactions is included in all other income. | |
| (b) | Total net revenue included tax-equivalent adjustments from income tax credits related to equity investments in designated community development entities that provide loans to qualified businesses in low-income communities as well as tax-exempt income from municipal bond activity of $238 million, $170 million and $125 million for the years ended December 31, 2010, 2009 and 2008, respectively. | |
| (c) | Other product revenue primarily includes tax-equivalent adjustments generated from Community Development Banking segment activity and certain income derived from principal transactions. | |
| (d) | Represents the total revenue related to investment banking products sold to CB clients. | |
| (e) | 2008 results reflect the partial year impact of the Washington Mutual transaction. | |
| (f) | Other primarily includes revenue related to the Community Development Banking and Chase Capital segments. |
2010 compared with 2009
Record net income was $2.1 billion, an increase of $813 million, or 64%, from the prior year. The
increase was driven by a reduction in the provision for credit losses and higher net revenue.
Net revenue was a record $6.0 billion, up by $320 million, or 6%, compared with the prior year. Net
interest income was $3.8 billion, down by $63 million, or 2%, driven by spread compression on
liability products and lower loan balances, predominantly offset by growth in liability balances
and wider loan spreads. Noninterest revenue was $2.2 billion, an increase of $383 million, or 21%,
from the prior year, reflecting higher net gains from asset sales, higher lending-related fees, an
improvement in the market conditions impacting the value of investments held at fair value, higher
investment banking fees and increased community development investment-related revenue.
On a client segment basis, revenue from Middle Market Banking was $3.1 billion, flat compared with
the prior year. Revenue from Commercial Term Lending was $1.0 billion, an increase of $148 million,
or 17%, and includes the impact of the purchase of a $3.5 billion loan portfolio during the third
quarter of 2010 and higher net gains from asset sales. Mid-Corporate Banking revenue was $1.2
billion, an increase of $52 million, or 5%, compared with the prior year due to wider loan spreads,
higher lending-related fees and higher investment banking fees offset partially by reduced loan
balances. Real Estate Banking revenue was $460 million, flat compared with the prior year.
| 82 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The provision for credit losses was $297 million, compared with $1.5 billion in the prior year. The
decline was mainly due to stabilization in the credit quality of the loan portfolio and refinements
to credit loss estimates. Net charge-offs were $909 million (0.94% net charge-off rate), compared
with $1.1 billion (1.02% net charge-off rate) in the prior year. The allowance for loan losses to
period-end loans retained was 2.61%, down from 3.12% in the prior year. Nonaccrual loans were $2.0
billion, a decrease of $801 million, or 29%, from the prior year.
Noninterest expense was $2.2 billion, an increase of $23 million, or 1%, compared with the prior
year reflecting higher headcount-related expense partially offset by lower volume-related expense.
2009 compared with 2008
The following discussion of CB’s results reflects the September 25, 2008 acquisition of the
commercial banking operations of Washington Mutual from the FDIC. The Washington Mutual transaction
added approximately $44.5 billion in loans to the Commercial Term Lending, Real Estate Banking, and
Other client segments in Commercial Banking.
Net income was $1.3 billion, a decrease of $168 million, or 12%, from the prior year, as higher
provision for credit losses and noninterest expense was partially offset by higher net revenue,
reflecting the impact of the Washington Mutual transaction.
Record net revenue of $5.7 billion increased $943 million, or 20%, from the prior year. Net
interest income of $3.9 billion increased $607 million, or 18%, driven by the impact of the
Washington Mutual transaction. Noninterest revenue was $1.8 billion, an increase of $336 million,
or 23%, from the prior year, reflecting higher lending- and deposit-related fees and higher
investment banking fees and other income.
On a client segment basis, revenue from Middle Market Banking was $3.1 billion, an increase of $116
million, or 4%, from the prior year due to higher liability balances, a shift to higher-spread
liability products, wider loan spreads, higher lending- and deposit-related fees, and higher other
income, partially offset by a narrowing of spreads on liability products and reduced loan balances.
Revenue from Commercial Term Lending (a new client segment acquired in the Washington Mutual
transaction encompassing multi-family and commercial mortgage loans) was $875 million, an increase
of $632 million. Mid-Corporate Banking revenue was $1.1 billion, an increase of $181 million, or
20%, driven by higher investment banking fees, increased loan spreads, and higher lending- and
deposit-related fees. Real Estate Banking revenue was $461 million, an increase of $48 million, or
12%, due to the impact of the Washington Mutual transaction.
The provision for credit losses was $1.5 billion, compared with
$464 million in the prior year, reflecting continued weakness in the credit environment,
predominantly in real estate-related segments. Net charge-offs were $1.1 billion (1.02% net
charge-off rate), compared with $288 million (0.35% net charge-off rate) in the prior year. The
allowance for loan losses to end-of-period loans retained was 3.12%, up from 2.45% in the prior
year. Nonperforming loans were $2.8 billion, an increase of $1.8 billion from the prior year.
Noninterest expense was $2.2 billion, an increase of $230 million, or 12%, from the prior year, due
to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
Selected metrics
| Year ended December 31, (in millions, | ||||||||||||
| except headcount and ratio data) | 2010 | 2009 | 2008 | |||||||||
|
Selected balance sheet data
(period-end): |
||||||||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
$ | 97,900 | $ | 97,108 | $ | 115,130 | ||||||
|
Loans held-for-sale and loans at fair value
|
1,018 | 324 | 295 | |||||||||
|
Total
loans
|
$ | 98,918 | $ | 97,432 | $ | 115,425 | ||||||
|
Equity
|
8,000 | 8,000 | 8,000 | |||||||||
|
Selected balance sheet data (average):
|
||||||||||||
|
Total assets
|
$ | 133,654 | $ | 135,408 | $ | 114,299 | ||||||
|
Loans:
|
||||||||||||
|
Loans retained
|
$ | 96,584 | $ | 106,421 | $ | 81,931 | ||||||
|
Loans held-for-sale and loans at fair value
|
422 | 317 | 406 | |||||||||
|
Total loans
|
$ | 97,006 | $ | 106,738 | $ | 82,337 | ||||||
|
Liability balances
(a)
|
138,862 | 113,152 | 103,121 | |||||||||
|
Equity
|
8,000 | 8,000 | 7,251 | |||||||||
|
Average loans by client segment:
|
||||||||||||
|
Middle Market Banking
|
$ | 35,059 | $ | 37,459 | $ | 42,193 | ||||||
|
Commercial Term Lending
(b)
|
36,978 | 36,806 | 9,310 | |||||||||
|
Mid-Corporate Banking
|
11,926 | 15,951 | 16,297 | |||||||||
|
Real Estate Banking
(b)
|
9,344 | 12,066 | 9,008 | |||||||||
|
Other
(b)(c)
|
3,699 | 4,456 | 5,529 | |||||||||
|
Total Commercial Banking loans
|
$ | 97,006 | $ | 106,738 | $ | 82,337 | ||||||
|
Headcount
|
4,881 | 4,151 | 5,206 | |||||||||
|
Credit data and quality statistics:
|
||||||||||||
|
Net charge-offs
|
$ | 909 | $ | 1,089 | $ | 288 | ||||||
|
Nonaccrual loans:
|
||||||||||||
|
Nonaccrual loans retained
(d)
|
1,964 | 2,764 | 1,026 | |||||||||
|
Nonaccrual loans held-for-sale
and loans held at fair value
|
36 | 37 | — | |||||||||
|
Total nonaccrual loans
|
2,000 | 2,801 | 1,026 | |||||||||
|
Assets acquired in loan satisfactions
|
197 | 188 | 116 | |||||||||
|
Total nonperforming assets
|
2,197 | 2,989 | 1,142 | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
|
2,552 | 3,025 | 2,826 | |||||||||
|
Allowance for lending-related commitments
|
209 | 349 | 206 | |||||||||
|
Total allowance for credit losses
|
2,761 | 3,374 | 3,032 | |||||||||
|
Net charge-off rate
|
0.94 | % | 1.02 | % | 0.35 | % | ||||||
|
Allowance for loan losses to period-end loans retained
|
2.61 | 3.12 | 2.45 | |||||||||
|
Allowance for loan losses to average loans retained
|
2.64 | 2.84 | 3.04 | (e) | ||||||||
|
Allowance for loan losses
to nonaccrual loans retained
|
130 | 109 | 275 | |||||||||
|
Nonaccrual loans to total period-end loans
|
2.02 | 2.87 | 0.89 | |||||||||
|
Nonaccrual loans to total average loans
|
2.06 | 2.62 | 1.10 | (e) | ||||||||
| (a) | Liability balances include deposits, as well as deposits that are swept to on–balance sheet liabilities (e.g., commercial paper, federal funds purchased, time deposits and securities loaned or sold under repurchase agreements) as part of customer cash management programs. | |
| (b) | 2008 results reflect the partial year impact of the Washington Mutual transaction. | |
| (c) | Other primarily includes lending activity within the Community Development Banking and Chase Capital segments. | |
| (d) | Allowance for loan losses of $340 million, $581 million and $208 million were held against nonaccrual loans retained for the periods ended December 31, 2010, 2009, and 2008, respectively. | |
| (e) | Average loans in the calculation of this ratio were adjusted to include $44.5 billion of loans acquired in the Washington Mutual transaction as if the transaction occurred on July 1, 2008. Excluding this adjustment, the unadjusted allowance for loan losses to average loans retained and nonaccrual loans to total average loans ratios would have been 3.45% and 1.25%, respectively, for the period ended December 31, 2008. |
| JPMorgan Chase & Co. / 2010 Annual Report | 83 |
Table of Contents
Management’s discussion and analysis
TREASURY & SECURITIES SERVICES
Treasury & Securities Services is a global leader in transaction,
investment and information services. TSS is one of the world’s largest cash
management providers and a leading global custodian. Treasury Services
provides cash management, trade, wholesale card and liquidity products and
services to small- and mid-sized companies, multinational corporations,
financial institutions and government entities. TS partners with IB, CB, RFS
and AM businesses to serve clients firmwide. Certain TS revenue is included in
other segments’ results. Worldwide Securities Services holds, values, clears
and services securities, cash and alternative investments for investors and
broker-dealers, and manages depositary receipt programs globally.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratio data) | 2010 | 2009 | 2008 | |||||||||
|
Revenue
|
||||||||||||
|
Lending- and deposit-related fees
|
$ | 1,256 | $ | 1,285 | $ | 1,146 | ||||||
|
Asset management, administration and commissions
|
2,697 | 2,631 | 3,133 | |||||||||
|
All other income
|
804 | 831 | 917 | |||||||||
|
Noninterest revenue
|
4,757 | 4,747 | 5,196 | |||||||||
|
Net interest income
|
2,624 | 2,597 | 2,938 | |||||||||
|
Total net revenue
|
7,381 | 7,344 | 8,134 | |||||||||
|
Provision for credit losses
|
(47 | ) | 55 | 82 | ||||||||
|
Credit reimbursement to IB
(a)
|
(121 | ) | (121 | ) | (121 | ) | ||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
2,734 | 2,544 | 2,602 | |||||||||
|
Noncompensation expense
|
2,790 | 2,658 | 2,556 | |||||||||
|
Amortization of intangibles
|
80 | 76 | 65 | |||||||||
|
Total noninterest expense
|
5,604 | 5,278 | 5,223 | |||||||||
|
Income before income tax expense
|
1,703 | 1,890 | 2,708 | |||||||||
|
Income tax expense
|
624 | 664 | 941 | |||||||||
|
Net income
|
$ | 1,079 | $ | 1,226 | $ | 1,767 | ||||||
|
Revenue by business
|
||||||||||||
|
Treasury Services
|
$ | 3,698 | $ | 3,702 | $ | 3,779 | ||||||
|
Worldwide Securities Services
|
3,683 | 3,642 | 4,355 | |||||||||
|
Total net revenue
|
$ | 7,381 | $ | 7,344 | $ | 8,134 | ||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
17 | % | 25 | % | 47 | % | ||||||
|
Overhead ratio
|
76 | 72 | 64 | |||||||||
|
Pretax margin ratio
|
23 | 26 | 33 | |||||||||
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except headcount) | 2010 | 2009 | 2008 | |||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||
|
Loans
(b)
|
$ | 27,168 | $ | 18,972 | $ | 24,508 | ||||||
|
Equity
|
6,500 | 5,000 | 4,500 | |||||||||
|
Selected balance sheet data (average)
|
||||||||||||
|
Total assets
|
$ | 42,494 | $ | 35,963 | $ | 54,563 | ||||||
|
Loans
(b)
|
23,271 | 18,397 | 26,226 | |||||||||
|
Liability balances
|
248,451 | 248,095 | 279,833 | |||||||||
|
Equity
|
6,500 | 5,000 | 3,751 | |||||||||
|
Headcount
|
29,073 | 26,609 | 27,070 | |||||||||
| (a) | IB credit portfolio group manages certain exposures on behalf of clients shared with TSS. TSS reimburses IB for a portion of the total cost of managing the credit portfolio. IB recognizes this credit reimbursement as a component of noninterest revenue. | |
| (b) | Loan balances include wholesale overdrafts, commercial card and trade finance loans. |
2010 compared with 2009
Net income was $1.1 billion, a decrease of $147 million, or 12%, from the prior year. These results
reflected higher noninterest expense partially offset by the benefit from the provision for credit
losses and higher net revenue.
Net revenue was $7.4 billion, an increase of $37 million, or 1%, from the prior year. Treasury
Services net revenue was $3.7 billion, relatively flat compared with the prior year as lower
spreads on liability products were offset by higher trade loan and card product volumes. Worldwide
Securities Services net revenue was $3.7 billion, relatively flat compared with the prior year as
higher market levels and net inflows of assets under custody were offset by lower spreads in
securities lending, lower volatility on foreign exchange, and lower balances on liability products.
TSS generated firmwide net revenue of $10.3 billion, including $6.6 billion by Treasury Services;
of that amount, $3.7 billion was recorded in Treasury Services, $2.6 billion in Commercial Banking
and $247 million in other lines of business. The remaining $3.7 billion of firmwide net revenue was
recorded in Worldwide Securities Services.
The provision for credit losses was a benefit of $47 million, compared with an expense of $55
million in the prior year. The decrease in the provision expense was primarily due to an
improvement in credit quality.
Noninterest expense was $5.6 billion, up $326 million, or 6%, from the prior year. The increase was
driven by continued investment in new product platforms, primarily related to international
expansion and higher performance-based compensation.
| 84 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
2009 compared with 2008
Net income was $1.2 billion, a decrease of $541 million, or 31%, from the prior year, driven by
lower net revenue.
Net revenue was $7.3 billion, a decrease of $790 million, or 10%, from the prior year. Worldwide
Securities Services net revenue was $3.6 billion, a decrease of $713 million, or 16%. The decrease
was driven by lower securities lending balances, primarily as a result of declines in asset
valuations and demand, lower balances and spreads on liability products, and the effect of market
depreciation on certain custody assets. Treasury Services net revenue was
$3.7 billion, a decrease of $77 million, or 2%, reflecting spread compression on deposit products,
offset by higher trade revenue driven by wider spreads and growth across cash management and card
product volumes.
TSS generated firmwide net revenue of $10.2 billion, including $6.6 billion of net revenue in
Treasury Services; of that amount, $3.7 billion was recorded in the Treasury Services business,
$2.6 billion was recorded in the Commercial Banking business, and $245 million was recorded in
other lines of business. The remaining $3.6 billion of net revenue was recorded in Worldwide
Securities Services.
The provision for credit losses was $55 million, a decrease of $27 million from the prior year.
Noninterest expense was $5.3 billion, an increase of $55 million from the prior year. The increase
was driven by higher FDIC insurance premiums, predominantly offset by lower headcount-related
expense.
Selected metrics
| Year ended December 31, | ||||||||||||
| (in millions, except ratio data) | 2010 | 2009 | 2008 | |||||||||
|
TSS firmwide disclosures
|
||||||||||||
|
Treasury
Services revenue – reported
|
$ | 3,698 | $ | 3,702 | $ | 3,779 | ||||||
|
Treasury Services revenue
reported in CB
|
2,632 | 2,642 | 2,648 | |||||||||
|
Treasury Services revenue
reported in other lines of
business
|
247 | 245 | 299 | |||||||||
|
Treasury Services firmwide
revenue (a) |
6,577 | 6,589 | 6,726 | |||||||||
|
Worldwide Securities Services revenue
|
3,683 | 3,642 | 4,355 | |||||||||
|
Treasury & Securities Services firmwide revenue
(a)
|
$ | 10,260 | $ | 10,231 | $ | 11,081 | ||||||
|
Treasury Services firmwide liability balances (average)
(b)
|
$ | 308,028 | $ | 274,472 | $ | 264,195 | ||||||
|
Treasury & Securities Services firmwide liability balances
(average)
(b)
|
387,313 | 361,247 | 382,947 | |||||||||
|
TSS firmwide financial ratios
|
||||||||||||
|
Treasury Services firmwide overhead ratio
(c)
|
55 | % | 53 | % | 50 | % | ||||||
|
Treasury & Securities Services firmwide overhead ratio
(c)
|
65 | 62 | 57 | |||||||||
Selected metrics
| As of or for the year ended | ||||||||||||
| December 31, | ||||||||||||
| (in millions, except ratio data | ||||||||||||
| and where otherwise noted) | 2010 | 2009 | 2008 | |||||||||
|
Firmwide business metrics
|
||||||||||||
|
Assets under custody (in billions)
|
$ | 16,120 | $ | 14,885 | $ | 13,205 | ||||||
|
|
||||||||||||
|
Number of:
|
||||||||||||
|
U.S.$ ACH transactions
originated
|
3,892 | 3,896 | 4,000 | |||||||||
|
Total U.S.$ clearing volume
(in thousands)
|
122,123 | 113,476 | 115,742 | |||||||||
|
International electronic funds transfer volume (in thousands)
(d)
|
232,453 | 193,348 | 171,036 | |||||||||
|
Wholesale check volume
|
2,060 | 2,184 | 2,408 | |||||||||
|
Wholesale cards issued
(in thousands)
(e)
|
29,785 | 27,138 | 22,784 | |||||||||
|
|
||||||||||||
|
Credit data and quality statistics
|
||||||||||||
|
Net charge-offs/(recoveries)
|
$ | 1 | $ | 19 | $ | (2 | ) | |||||
|
Nonaccrual loans
|
12 | 14 | 30 | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
|
65 | 88 | 74 | |||||||||
|
Allowance for lending-related
commitments
|
51 | 84 | 63 | |||||||||
|
Total allowance for credit losses
|
116 | 172 | 137 | |||||||||
|
Net charge-off/(recovery) rate
|
— | % | 0.10 | % | (0.01 | )% | ||||||
|
Allowance for loan losses to period-end loans
|
0.24 | 0.46 | 0.30 | |||||||||
|
Allowance for loan losses to average loans
|
0.28 | 0.48 | 0.28 | |||||||||
|
Allowance for loan losses to nonaccrual loans
|
NM | NM | 247 | |||||||||
|
Nonaccrual loans to period-end loans
|
0.04 | 0.07 | 0.12 | |||||||||
|
Nonaccrual loans to average loans
|
0.05 | 0.08 | 0.11 | |||||||||
| (a) | TSS firmwide revenue includes foreign exchange (“FX”) revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of IB. However, some of the FX revenue associated with TSS customers who are FX customers of IB is not included in TS and TSS firmwide revenue. The total FX revenue generated was $636 million, $661 million and $880 million, for the years ended December 31, 2010, 2009 and 2008, respectively. | |
| (b) | Firmwide liability balances include liability balances recorded in CB. | |
| (c) | Overhead ratios have been calculated based on firmwide revenue and TSS and TS expense, respectively, including those allocated to certain other lines of business. FX revenue and expense recorded in IB for TSS-related FX activity are not included in this ratio. | |
| (d) | International electronic funds transfer includes non-U.S. dollar Automated Clearing House (“ACH”) and clearing volume. | |
| (e) | Wholesale cards issued and outstanding include U.S. domestic commercial, stored value, prepaid and government electronic benefit card products. |
| JPMorgan Chase & Co. / 2010 Annual Report | 85 |
Table of Contents
Management’s discussion and analysis
ASSET MANAGEMENT
Asset Management, with assets under supervision of $1.8 trillion,
is a global leader in investment and wealth management. AM clients include
institutions, retail investors and high-net-worth individuals in every major
market throughout the world. AM offers global investment management in
equities, fixed income, real estate, hedge funds, private equity and
liquidity, including money market instruments and bank deposits. AM also
provides trust and estate, banking and brokerage services to high-net-worth
clients, and retirement services for corporations and individuals. The
majority of AM’s client assets are in actively managed portfolios.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Revenue
|
||||||||||||
|
Asset management,
administration and commissions
|
$ | 6,374 | $ | 5,621 | $ | 6,004 | ||||||
|
All other income
|
1,111 | 751 | 62 | |||||||||
|
Noninterest revenue
|
7,485 | 6,372 | 6,066 | |||||||||
|
Net interest income
|
1,499 | 1,593 | 1,518 | |||||||||
|
Total net revenue
|
8,984 | 7,965 | 7,584 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
86 | 188 | 85 | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
3,763 | 3,375 | 3,216 | |||||||||
|
Noncompensation expense
|
2,277 | 2,021 | 2,000 | |||||||||
|
Amortization of intangibles
|
72 | 77 | 82 | |||||||||
|
Total noninterest expense
|
6,112 | 5,473 | 5,298 | |||||||||
|
Income before income tax expense
|
2,786 | 2,304 | 2,201 | |||||||||
|
Income tax expense
|
1,076 | 874 | 844 | |||||||||
|
Net income
|
$ | 1,710 | $ | 1,430 | $ | 1,357 | ||||||
|
|
||||||||||||
|
Revenue by client segment
|
||||||||||||
|
Private Banking
(a)
|
$ | 4,860 | $ | 4,320 | $ | 4,189 | ||||||
|
Institutional
|
2,180 | 2,065 | 1,775 | |||||||||
|
Retail
|
1,944 | 1,580 | 1,620 | |||||||||
|
Total net revenue
|
$ | 8,984 | $ | 7,965 | $ | 7,584 | ||||||
|
|
||||||||||||
|
Financial ratios
|
||||||||||||
|
ROE
|
26 | % | 20 | % | 24 | % | ||||||
|
Overhead ratio
|
68 | 69 | 70 | |||||||||
|
Pretax margin ratio
|
31 | 29 | 29 | |||||||||
| (a) | Private Banking is a combination of the previously disclosed client segments: Private Bank, Private Wealth Management and JPMorgan Securities. |
2010 compared with 2009
Net income was $1.7 billion, an increase of $280 million, or 20%, from the prior year, due to
higher net revenue and a lower provision for credit losses, largely offset by higher noninterest
expense.
Net revenue was a record $9.0 billion, an increase of $1.0 billion, or 13%, from the prior year.
Noninterest revenue was $7.5 billion, an increase of $1.1 billion, or 17%, due to the effect of
higher
market levels, net inflows to products with higher margins, higher loan originations, and
higher performance fees. Net interest income was $1.5 billion, down by $94 million, or 6%, from the
prior year, due to narrower deposit spreads, largely offset by higher deposit and loan balances.
Revenue from Private Banking was $4.9 billion, up 13% from the prior year due to higher loan
originations, higher deposit and loan balances, the effect of higher market levels and net inflows
to products with higher margins, partially offset by narrower deposit spreads. Revenue from
Institutional was $2.2 billion, up 6% due to the effect of higher market levels, partially offset
by liquidity outflows. Revenue from Retail was $1.9 billion, up 23% due to the effect of higher
market levels and net inflows to products with higher margins, partially offset by lower valuations
of seed capital investments.
The provision for credit losses was $86 million, compared with $188 million in the prior year,
reflecting an improving credit environment.
Noninterest expense was $6.1 billion, an increase of $639 million, or 12%, from the prior year,
resulting from increased headcount and higher performance-based compensation.
2009 compared with 2008
Net income was $1.4 billion, an increase of $73 million, or 5%, from the prior year, due to higher
total net revenue, offset largely by higher noninterest expense and provision for credit losses.
Total net revenue was $8.0 billion, an increase of $381 million, or 5%, from the prior year.
Noninterest revenue was $6.4 billion, an increase of $306 million, or 5%, due to higher valuations
of seed capital investments and net inflows, offset largely by lower market levels. Net interest
income was $1.6 billion, up by $75 million, or 5%, from the prior year, due to wider loan spreads
and higher deposit balances, offset partially by narrower deposit spreads.
Revenue from Private Banking was $4.3 billion, up 3% from the prior year due to wider loan spreads
and higher deposit balances, offset largely by the effect of lower market levels. Revenue from
Institutional was $2.1 billion, up 16% due to higher valuations of seed capital investments and net
inflows, offset partially by the effect of lower market levels. Revenue from Retail was $1.6
billion, down 2% due to the effect of lower market levels, offset largely by higher valuations of
seed capital investments.
The provision for credit losses was $188 million, an increase of $103 million from the prior year,
reflecting continued weakness in the credit environment.
Noninterest expense was $5.5 billion, an increase of $175 million, or 3%, from the prior year due
to the effect of the Bear Stearns merger, higher performance-based compensation and higher FDIC
insurance premiums, offset largely by lower headcount-related expense.
| 86 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Selected metrics
| As of or for the year ended December 31, | ||||||||||||
| (in millions, except headcount, ranking | ||||||||||||
| data, and where | ||||||||||||
| otherwise noted) | 2010 | 2009 | 2008 | |||||||||
|
Business metrics
|
||||||||||||
|
Number of:
|
||||||||||||
|
Client advisors
|
2,245 | 1,934 | 1,840 | |||||||||
|
Retirement planning services participants (in
thousands)
|
1,580 | 1,628 | 1,531 | |||||||||
|
JPMorgan Securities brokers
(a)
|
415 | 376 | 324 | |||||||||
|
|
||||||||||||
|
% of customer assets in 4 & 5 Star Funds
(b)
|
49 | % | 42 | % | 42 | % | ||||||
|
|
||||||||||||
|
% of AUM in 1
st
and 2
nd
quartiles:
(c)
|
||||||||||||
|
1 year
|
67 | % | 57 | % | 54 | % | ||||||
|
3 years
|
72 | % | 62 | % | 65 | % | ||||||
|
5 years
|
80 | % | 74 | % | 76 | % | ||||||
|
|
||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||
|
Loans
|
$ | 44,084 | $ | 37,755 | $ | 36,188 | ||||||
|
Equity
|
6,500 | 7,000 | 7,000 | |||||||||
|
|
||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||
|
Total assets
|
$ | 65,056 | $ | 60,249 | $ | 65,550 | ||||||
|
Loans
|
38,948 | 34,963 | 38,124 | |||||||||
|
Deposits
|
86,096 | 77,005 | 70,179 | |||||||||
|
Equity
|
6,500 | 7,000 | 5,645 | |||||||||
|
Headcount
|
16,918 | 15,136 | 15,339 | |||||||||
|
|
||||||||||||
|
Credit data and quality statistics
|
||||||||||||
|
Net charge-offs
|
$ | 76 | $ | 117 | $ | 11 | ||||||
|
Nonaccrual loans
|
375 | 580 | 147 | |||||||||
|
Allowance for credit losses:
|
||||||||||||
|
Allowance for loan losses
|
267 | 269 | 191 | |||||||||
|
Allowance for lending- related commitments
|
4 | 9 | 5 | |||||||||
|
Total allowance for credit losses
|
$ | 271 | $ | 278 | $ | 196 | ||||||
|
Net charge-off rate
|
0.20 | % | 0.33 | % | 0.03 | % | ||||||
|
Allowance for loan losses to period-end loans
|
0.61 | 0.71 | 0.53 | |||||||||
|
Allowance for loan losses to average loans
|
0.69 | 0.77 | 0.50 | |||||||||
|
Allowance for loan losses to nonaccrual loans
|
71 | 46 | 130 | |||||||||
|
Nonaccrual loans to period-end loans
|
0.85 | 1.54 | 0.41 | |||||||||
|
Nonaccrual loans to average loans
|
0.96 | 1.66 | 0.39 | |||||||||
| (a) | JPMorgan Securities was formerly known as Bear Stearns Private Client Services prior to January 1, 2010. | |
| (b) | Derived from Morningstar for the U.S., the U.K., Luxembourg, France, Hong Kong and Taiwan; and Nomura for Japan. | |
| (c) | Quartile ranking sourced from: Lipper for the U.S. and Taiwan; Morningstar for the U.K., Luxembourg, France and Hong Kong; and Nomura for Japan. |
AM’s client segments comprise the following:
Private Banking
offers investment advice and wealth management services to high- and
ultra-high-net-worth individuals, families, money managers, business owners and small corporations
worldwide, including investment management, capital markets and risk management, tax and estate
planning, banking, capital raising and specialty-wealth advisory services.
Institutional
brings comprehensive global investment services – including asset management,
pension analytics, asset-liability management and active risk-budgeting strategies – to corporate
and public institutions, endowments, foundations, not-for-profit organizations and governments
worldwide.
Retail
provides worldwide investment management services and retirement planning and
administration, through third-party and direct distribution of a full range of investment
vehicles.
J.P. Morgan Asset Management has two high-level measures of its overall fund performance.
| • | Percentage of assets under management in funds rated 4 and 5 stars (three year). Mutual fund rating services rank funds based on their risk-adjusted performance over various periods. A 5 star rating is the best and represents the top 10% of industry wide ranked funds. A 4 star rating represents the next 22% of industry wide ranked funds. The worst rating is a 1 star rating. | |
| • | Percentage of assets under management in first- or second- quartile funds (one, three and five years). Mutual fund rating services rank funds according to a peer-based performance system, which measures returns according to specific time and fund classification (small-, mid-, multi- and large-cap). |
| JPMorgan Chase & Co. / 2010 Annual Report | 87 |
Table of Contents
Management’s discussion and analysis
Assets under supervision
2010 compared with 2009
Assets under supervision were $1.8 trillion at December 31, 2010, an increase of $139 billion, or
8%, from the prior year. Assets under management were $1.3 trillion, an increase of $49 billion, or
4%, due to the effect of higher market levels and net inflows in long-term products, largely offset
by net outflows in liquidity products. Custody, brokerage, administration and deposit balances were
$542 billion, up by $90 billion, or 20%, due to custody and brokerage inflows and the effect of
higher market levels. The Firm also has a 41% interest in American Century Companies, Inc., whose
AUM totaled $103 billion and $86 billion at December 31, 2010 and 2009, respectively; these are
excluded from the AUM above.
2009 compared with 2008
Assets under supervision were $1.7 trillion at December 31, 2009, an increase of $205 billion, or
14%, from the prior year. Assets under management were $1.2 trillion, an increase of $116 billion,
or 10%, from the prior year. The increases were due to the effect of higher market valuations and
inflows in fixed income and equity products offset partially by outflows in cash products. Custody,
brokerage, administration and deposit balances were $452 billion, up by $89 billion, due to the
effect of higher market levels on custody and brokerage balances, and brokerage inflows in Private
Banking. The Firm also had a 42% interest in American Century Companies, Inc. at December 31, 2009,
whose AUM totaled $86 billion and $70 billion at December 31, 2009 and 2008, respectively; these
are excluded from the AUM above.
| Assets under supervision (a) | ||||||||||||
| As of or for the year ended | ||||||||||||
| December 31, (in billions) | 2010 | 2009 | 2008 | |||||||||
|
Assets by asset class
|
||||||||||||
|
Liquidity
|
$ | 497 | $ | 591 | $ | 613 | ||||||
|
Fixed income
|
289 | 226 | 180 | |||||||||
|
Equities and multi-asset
|
404 | 339 | 240 | |||||||||
|
Alternatives
|
108 | 93 | 100 | |||||||||
|
Total assets under management
|
1,298 | 1,249 | 1,133 | |||||||||
|
Custody/brokerage/administration/
deposits
|
542 | 452 | 363 | |||||||||
|
Total assets under supervision
|
$ | 1,840 | $ | 1,701 | $ | 1,496 | ||||||
|
|
||||||||||||
|
Assets by client segment
|
||||||||||||
|
Private Banking
(b)
|
$ | 284 | $ | 270 | $ | 258 | ||||||
|
Institutional
|
686 | 709 | 681 | |||||||||
|
Retail
|
328 | 270 | 194 | |||||||||
|
Total assets under management
|
$ | 1,298 | $ | 1,249 | $ | 1,133 | ||||||
|
Private Banking
(b)
|
$ | 731 | $ | 636 | $ | 552 | ||||||
|
Institutional
|
687 | 710 | 682 | |||||||||
|
Retail
|
422 | 355 | 262 | |||||||||
|
Total assets under supervision
|
$ | 1,840 | $ | 1,701 | $ | 1,496 | ||||||
| Assets by geographic region | ||||||||||||
| December 31, (in billions) | 2010 | 2009 | 2008 | |||||||||
|
U.S./Canada
|
$ | 862 | $ | 837 | $ | 798 | ||||||
|
International
|
436 | 412 | 335 | |||||||||
|
Total assets under management
|
$ | 1,298 | $ | 1,249 | $ | 1,133 | ||||||
|
U.S./Canada
|
$ | 1,271 | $ | 1,182 | $ | 1,084 | ||||||
|
International
|
569 | 519 | 412 | |||||||||
|
Total assets under supervision
|
$ | 1,840 | $ | 1,701 | $ | 1,496 | ||||||
|
|
||||||||||||
|
Mutual fund assets by
asset class
|
||||||||||||
|
Liquidity
|
$ | 446 | $ | 539 | $ | 553 | ||||||
|
Fixed income
|
92 | 67 | 41 | |||||||||
|
Equities and multi-asset
|
169 | 143 | 92 | |||||||||
|
Alternatives
|
7 | 9 | 7 | |||||||||
|
Total mutual fund assets
|
$ | 714 | $ | 758 | $ | 693 | ||||||
|
Assets under management rollforward
|
||||||||||||
| Year ended December 31, (in billions) | 2010 | 2009 | 2008 | |||||||||
|
Beginning balance, January 1
|
$ | 1,249 | $ | 1,133 | $ | 1,193 | ||||||
|
Net asset flows:
|
||||||||||||
|
Liquidity
|
(89 | ) | (23 | ) | 210 | |||||||
|
Fixed income
|
50 | 34 | (12 | ) | ||||||||
|
Equities, multi-asset and
alternatives
|
19 | 17 | (47 | ) | ||||||||
|
Market/performance/other impacts
(c)
|
69 | 88 | (211 | ) | ||||||||
|
Ending balance, December 31
|
$ | 1,298 | $ | 1,249 | $ | 1,133 | ||||||
|
|
||||||||||||
|
Assets under supervision
rollforward
|
||||||||||||
|
Beginning balance, January 1
|
$ | 1,701 | $ | 1,496 | $ | 1,572 | ||||||
|
Net asset flows
|
28 | 50 | 181 | |||||||||
|
Market/performance/other impacts
(c)
|
111 | 155 | (257 | ) | ||||||||
|
Ending balance, December 31
|
$ | 1,840 | $ | 1,701 | $ | 1,496 | ||||||
| (a) | Excludes assets under management of American Century Companies, Inc., in which the Firm had a 41%, 42% and 43% ownership at December 31, 2010, 2009 and 2008, respectively. | |
| (b) | Private Banking is a combination of the previously disclosed client segments: Private Bank, Private Wealth Management and JPMorgan Securities. | |
| (c) | Includes $15 billion for assets under management and $68 billion for assets under supervision, which were acquired in the Bear Stearns merger in the second quarter of 2008. |
| 88 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
CORPORATE/PRIVATE EQUITY
The Corporate/Private Equity sector
comprises Private Equity, Treasury, the Chief Investment Office, corporate
staff units and expense that is centrally managed. Treasury and the Chief
Investment Office manage capital, liquidity and structural risks of the Firm.
The corporate staff units include Central Technology and Operations, Internal
Audit, Executive Office, Finance, Human Resources, Marketing & Communications,
Legal & Compliance, Corporate Real Estate and General Services, Risk
Management, Corporate Responsibility and Strategy & Development. Other
centrally managed expense includes the Firm’s occupancy and pension-related
expense, net of allocations to the business.
Selected income statement data
| Year ended December 31, | ||||||||||||
| (in millions, except headcount) | 2010 | 2009 | 2008 | |||||||||
|
Revenue
|
||||||||||||
|
Principal transactions
(a)
|
$ | 2,208 | $ | 1,574 | $ | (3,588 | ) | |||||
|
Securities gains
(b)
|
2,898 | 1,139 | 1,637 | |||||||||
|
All other income
(c)
|
253 | 58 | 1,673 | |||||||||
|
Noninterest revenue
|
5,359 | 2,771 | (278 | ) | ||||||||
|
Net interest income
|
2,063 | 3,863 | 347 | |||||||||
|
Total net revenue
(d)
|
7,422 | 6,634 | 69 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
14 | 80 | 447 | (j) | ||||||||
|
|
||||||||||||
|
Provision for credit losses –
accounting conformity
(e)
|
— | — | 1,534 | |||||||||
|
|
||||||||||||
|
Noninterest expense
Compensation expense |
2,357 | 2,811 | 2,340 | |||||||||
|
Noncompensation expense
(f)
|
8,788 | 3,597 | 1,841 | |||||||||
|
Merger costs
|
— | 481 | 432 | |||||||||
|
Subtotal
|
11,145 | 6,889 | 4,613 | |||||||||
|
Net expense allocated to other businesses
|
(4,790 | ) | (4,994 | ) | (4,641 | ) | ||||||
|
Total noninterest expense
|
6,355 | 1,895 | (28 | ) | ||||||||
|
Income/(loss) before income
tax expense/(benefit) and
extraordinary gain
|
1,053 | 4,659 | (1,884 | ) | ||||||||
|
Income tax expense/(benefit)
(g)
|
(205 | ) | 1,705 | (535 | ) | |||||||
|
Income/(loss) before
extraordinary gain
|
1,258 | 2,954 | (1,349 | ) | ||||||||
|
Extraordinary gain
(h)
|
— | 76 | 1,906 | |||||||||
|
Net income
|
$ | 1,258 | $ | 3,030 | $ | 557 | ||||||
|
|
||||||||||||
|
Total net revenue
|
||||||||||||
|
Private equity
|
$ | 1,239 | $ | 18 | $ | (963 | ) | |||||
|
Corporate
|
6,183 | 6,616 | 1,032 | |||||||||
|
Total net revenue
|
$ | 7,422 | $ | 6,634 | $ | 69 | ||||||
|
Net income/(loss)
|
||||||||||||
|
Private equity
|
$ | 588 | $ | (78 | ) | $ | (690 | ) | ||||
|
Corporate
(i)
|
670 | 3,108 | 1,247 | |||||||||
|
Total net income
|
$ | 1,258 | $ | 3,030 | $ | 557 | ||||||
|
Headcount
|
20,030 | 20,119 | 23,376 | |||||||||
| (a) | Included losses on preferred equity interests in Fannie Mae and Freddie Mac in 2008. | |
| (b) | Included gain on sale of MasterCard shares in 2008. | |
| (c) | Included a gain from the dissolution of the Chase Paymentech Solutions joint venture and proceeds from the sale of Visa shares in its initial public offering in 2008. |
| (d) | Total net revenue included tax-equivalent adjustments, predominantly due to tax-exempt income from municipal bond investments of $226 million, $151 million and $57 million for 2010, 2009 and 2008, respectively. | |
| (e) | Represents an accounting conformity credit loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations. | |
| (f) | Includes litigation expense of $5.7 billion for 2010, compared with net benefits of $0.3 billion and $1.0 billion for 2009 and 2008, respectively. Included in the net benefits were a release of credit card litigation reserves in 2008 and insurance recoveries related to settlement of the Enron and WorldCom class action litigations. Also included a $675 million FDIC special assessment during 2009. | |
| (g) | Includes tax benefits recognized upon the resolution of tax audits. | |
| (h) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The acquisition resulted in negative goodwill, and accordingly, the Firm recognized an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. | |
| (i) | 2009 and 2008 included merger costs and the extraordinary gain related to the Washington Mutual transaction, as well as items related to the Bear Stearns merger, including merger costs, asset management liquidation costs and JPMorgan Securities broker retention expense. | |
| (j) | In November 2008, the Firm transferred $5.8 billion of higher quality credit card loans from the legacy Chase portfolio to a securitization trust previously established by Washington Mutual (“the Trust”). As a result of converting higher credit quality Chase-originated on-book receivables to the Trust’s seller’s interest which had a higher overall loss rate reflective of the total assets within the Trust, approximately $400 million of incremental provision expense was recorded during the fourth quarter of 2008. This incremental provision expense was recorded in the Corporate segment as the action related to the acquisition of Washington Mutual’s banking operations. For further discussion of credit card securitizations, see Note 16 on pages 244–259 of this Annual Report. |
2010 compared with 2009
Net income was $1.3 billion compared with $3.0 billion in the prior year. The decrease was driven
by higher litigation expense, partially offset by higher net revenue.
Net income for Private Equity was $588 million, compared with a net loss of $78 million in the
prior year, reflecting the impact of improved market conditions on certain investments in the
portfolio. Net revenue was $1.2 billion compared with $18 million in the prior year, reflecting
private equity gains of $1.3 billion compared with losses of $54 million. Noninterest expense was
$323 million, an increase of $182 million, driven by higher compensation expense.
Net income for Corporate was $670 million, compared with $3.1 billion in the prior year. Current
year results reflect after-tax litigation expense of $3.5 billion, lower net interest income and
trading gains, partially offset by a higher level of securities gains, primarily driven by
repositioning of the portfolio in response to changes in the interest rate environment and to
rebalance exposure. The prior year included merger-related net loss of $635 million and a $419
million FDIC assessment.
| JPMorgan Chase & Co. / 2010 Annual Report | 89 |
Table of Contents
Management’s discussion and analysis
2009 compared with 2008
Net income was $3.0 billion compared with $557 million in the
prior year. The increase was driven by higher net revenue, partially offset by higher litigation
expense.
Net loss for Private Equity was $78 million compared with a net loss of $690 million in the prior
year. Net revenue was $18 million, an increase of $981 million, reflecting private equity losses of
$54 million compared with losses of $894 million. Noninterest expense was $141 million, an increase
of $21 million.
Net income for Corporate, including merger-related items, was $3.1 billion, compared with $1.2
billion in the prior year. Results in 2009 reflected higher levels of trading gains, net interest
income and an after-tax gain of $150 million from the sale of MasterCard shares, partially offset
by $635 million merger-related losses, a $419 million FDIC special assessment, lower securities
gains and the absence of the $1.9 billion extraordinary gain related to the Washington Mutual
merger in 2008. Trading gains and net interest income increased due to the Chief Investment Office’s
(“CIO”) significant purchases of mortgage-backed securities guaranteed by U.S. government agencies,
corporate debt securities, U.S. Treasury and government agency securities and other asset-backed
securities. These investments were generally associated with the management of interest rate risk
and investment of cash resulting from the excess funding the Firm continued to experience during
2009. The increase in securities was partially offset by sales of higher-coupon instruments (part
of repositioning the investment portfolio) as well as prepayments and maturities.
After-tax results in 2008 included $955 million in proceeds from the sale of Visa shares in its
initial public offering and $627 million from the dissolution of
the Chase Paymentech Solutions joint
venture. These items were partially offset by losses of $642 million on preferred securities of
Fannie Mae and Freddie Mac, a $248 million charge related to the offer to repurchase auction-rate
securities and $211 million net merger costs.
Treasury and CIO
Selected income statement and balance sheet data
| As of or for the year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Securities gains
(a)
|
$ | 2,897 | $ | 1,147 | $ | 1,652 | ||||||
|
Investment securities portfolio (average)
|
323,673 | 324,037 | 113,010 | |||||||||
|
Investment securities portfolio (ending)
|
310,801 | 340,163 | 192,564 | |||||||||
|
Mortgage loans (average)
|
9,004 | 7,427 | 7,059 | |||||||||
|
Mortgage loans (ending)
|
10,739 | 8,023 | 7,292 | |||||||||
| (a) | Results for 2008 included a gain on the sale of MasterCard shares. All periods reflect repositioning of the Corporate investment securities portfolio. |
For further information on the investment securities portfolio, see Note 3 and Note 12 on pages
170–187 and 214–218, respectively, of this Annual Report. For further information on CIO VaR and
the Firm’s earnings-at-risk, see the Market Risk Management
section on pages 142–146 of this
Annual Report.
Private Equity Portfolio
Selected income statement and balance sheet data
| As of or for the year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Private equity gains/(losses)
|
||||||||||||
|
Realized gains
|
$ | 1,409 | $ | 109 | $ | 1,717 | ||||||
|
Unrealized gains/(losses)
(a)
|
(302 | ) | (81 | ) | (2,480 | ) | ||||||
|
Total direct investments
|
1,107 | 28 | (763 | ) | ||||||||
|
Third-party fund investments
|
241 | (82 | ) | (131 | ) | |||||||
|
Total private equity gains/(losses)
(b)
|
$ | 1,348 | $ | (54 | ) | $ | (894 | ) | ||||
|
|
||||||||||||
|
Private equity portfolio information
(c)
|
||||||||||||
|
Direct investments
|
||||||||||||
|
Publicly held securities
|
||||||||||||
|
Carrying value
|
$ | 875 | $ | 762 | $ | 483 | ||||||
|
Cost
|
732 | 743 | 792 | |||||||||
|
Quoted public value
|
935 | 791 | 543 | |||||||||
|
Privately held direct securities
|
||||||||||||
|
Carrying value
|
5,882 | 5,104 | 5,564 | |||||||||
|
Cost
|
6,887 | 5,959 | 6,296 | |||||||||
|
Third-party fund investments
(d)
|
||||||||||||
|
Carrying value
|
1,980 | 1,459 | 805 | |||||||||
|
Cost
|
2,404 | 2,079 | 1,169 | |||||||||
|
Total private equity portfolio
|
||||||||||||
|
Carrying value
|
$ | 8,737 | $ | 7,325 | $ | 6,852 | ||||||
|
Cost
|
$ | 10,023 | $ | 8,781 | $ | 8,257 | ||||||
| (a) | Unrealized gains/(losses) contain reversals of unrealized gains and losses that were recognized in prior periods and have now been realized. | |
| (b) | Included in principal transactions revenue in the Consolidated Statements of Income. | |
| (c) | For more information on the Firm’s policies regarding the valuation of the private equity portfolio, see Note 3 on pages 170–187 of this Annual Report. | |
| (d) | Unfunded commitments to third-party equity funds were $1.0 billion, $1.5 billion and $1.4 billion at December 31, 2010, 2009 and 2008, respectively. |
2010 compared with 2009
The carrying value of the private equity portfolio at December 31, 2010, was $8.7 billion, up from
$7.3 billion at December 31, 2009. The portfolio increase was primarily due to incremental
follow-on investments. The portfolio represented 6.9% of the Firm’s stockholders’ equity less
goodwill at December 31, 2010, up from 6.3% at December 31, 2009.
2009 compared with 2008
The carrying value of the private equity portfolio at December 31, 2009, was $7.3 billion, up from
$6.9 billion at December 31, 2008. The portfolio increase was primarily driven by additional
follow-on investments and net unrealized gains on the existing portfolio, partially offset by sales
during 2009. The portfolio represented 6.3% of the Firm’s stockholders’ equity less goodwill at
December 31, 2009, up from 5.8% at December 31, 2008.
| 90 | JPMorgan Chase & Co./2010 Annual Report |
Table of Contents
INTERNATIONAL OPERATIONS
In 2010,
the Firm reported approximately $22.2 billion of revenue involving clients, customers
and counterparties residing outside of the United States. Of that
amount, approximately 64% was derived from Europe/Middle
East/Africa (“EMEA”), approximately 26% from Asia Pacific,
approximately 8% from Latin America/Caribbean, and the balance from
other geographies outside the United States.
The Firm is committed to further expanding its wholesale
businesses (IB, AM and TSS) outside the United States and intends to add additional client-serving bankers, as well as product and sales support personnel, to
address the needs of the Firm’s clients located in these regions.
With a comprehensive and coordinated international business strategy and growth plan, efforts
and investments for growth will be accelerated and prioritized.
Set forth
below are certain key metrics related to the Firm’s wholesale
international operations including, for each of EMEA, Latin America/Caribbean and Asia Pacific, the number of countries in each such region in which it operates, front office headcount, number of clients and selected revenue
and balance sheet data. For additional information regarding
international operations, see Note 33 on page 290 of this
Annual Report.
| Asia Pacific |
Latin America/
Caribbean |
EMEA | ||
|
•
2010 revenue of $5.8 billion
•
2005 – 2010 CAGR: 15%
•
Operating in 16 countries in the region
•
6 new offices opened in 2010
•
Headcount of 15,419
(a)
•
4,366 front office
•
450+ significant clients
(b)
•
$49.1 billion in deposits
(c)
•
$20.6 billion in loans outstanding
(d)
•
$118 billion in AUM
|
•
2010 revenue of $1.8 billion
•
2005 – 2010 CAGR: 13%
•
Operating in 8 countries in the region
•
2 new offices opened in 2010
•
Headcount of 1,770
(a)
•
1,024 front office
•
160+ significant
clients
(b)
•
$1.7 billion in deposits
(c)
•
$16.5 billion in loans
outstanding
(d)
•
$32 billion in AUM
|
•
2010 revenue of $14.1 billion
•
2005 – 2010 CAGR: 13%
•
Operating in 33 countries in the region
•
5 new offices opened in 2010
•
Headcount of 16,312
(a)
•
6,192 front office
•
940+ significant clients
(b)
•
$135.8 billion in deposits
(c)
•
$27.9 billion in loans outstanding
(d)
•
$281 billion in AUM
|
| (a) | Total headcount includes employees and, in certain cases, contractors whose functions are considered integral to the operations of the business. Employees in offshore service centers supporting line of business operations in each region are also included. | |
| (b) | Significant clients defined as a company with over $1 million in international revenue in the region (excludes private banking clients). | |
| (c) | Deposits reflect average balances and are based on booking location. | |
| (d) | Loans outstanding reflect period-end balances, are based on client domicile, and exclude loans held-for-sale and loans carried at fair value. |
The
following graphs provide the wholesale international revenue and net income for the periods indicated.
|
|
| (a) | Based on wholesale international operations (RFS and CS are excluded from this analysis). |
| JPMorgan Chase & Co. / 2010 Annual Report | 91 |
Table of Contents
Management’s discussion and analysis
BALANCE SHEET ANALYSIS
Selected Consolidated Balance Sheets data
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 27,567 | $ | 26,206 | ||||
|
Deposits with banks
|
21,673 | 63,230 | ||||||
|
Federal funds sold and securities purchased
under resale agreements
|
222,554 | 195,404 | ||||||
|
Securities borrowed
|
123,587 | 119,630 | ||||||
|
Trading assets:
|
||||||||
|
Debt and equity instruments
|
409,411 | 330,918 | ||||||
|
Derivative receivables
|
80,481 | 80,210 | ||||||
|
Securities
|
316,336 | 360,390 | ||||||
|
Loans
|
692,927 | 633,458 | ||||||
|
Allowance for loan losses
|
(32,266 | ) | (31,602 | ) | ||||
|
Loans, net of allowance for loan losses
|
660,661 | 601,856 | ||||||
|
Accrued interest and accounts receivable
|
70,147 | 67,427 | ||||||
|
Premises and equipment
|
13,355 | 11,118 | ||||||
|
Goodwill
|
48,854 | 48,357 | ||||||
|
Mortgage servicing rights
|
13,649 | 15,531 | ||||||
|
Other intangible assets
|
4,039 | 4,621 | ||||||
|
Other assets
|
105,291 | 107,091 | ||||||
|
Total assets
|
$ | 2,117,605 | $ | 2,031,989 | ||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits
|
$ | 930,369 | $ | 938,367 | ||||
|
Federal funds purchased and securities loaned
or sold under repurchase agreements
|
276,644 | 261,413 | ||||||
|
Commercial paper
|
35,363 | 41,794 | ||||||
|
Other borrowed funds
|
57,309 | 55,740 | ||||||
|
Trading liabilities:
|
||||||||
|
Debt and equity instruments
|
76,947 | 64,946 | ||||||
|
Derivative payables
|
69,219 | 60,125 | ||||||
|
Accounts payable and other liabilities
|
170,330 | 162,696 | ||||||
|
Beneficial interests issued by consolidated VIEs
|
77,649 | 15,225 | ||||||
|
Long-term debt
|
247,669 | 266,318 | ||||||
|
Total liabilities
|
1,941,499 | 1,866,624 | ||||||
|
Stockholders’ equity
|
176,106 | 165,365 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,117,605 | $ | 2,031,989 | ||||
Consolidated Balance Sheets overview
Total assets were $2.1 trillion, up by $85.6 billion from December 31, 2009. The increase was
primarily a result of higher trading assets – debt and equity instruments, principally due to
improved market activity; higher loans, largely due to the January 1, 2010, adoption of accounting
guidance related to VIEs; and higher federal funds sold and securities purchased under resale
agreements, predominantly due to higher financing volume in IB. These increases were partially
offset by a reduction in deposits with banks, as market stress eased from the end of 2009.
Total liabilities were $1.9 trillion, up by $74.9 billion. The increase was predominantly a result
of higher beneficial interests issued by consolidated VIEs, due to the adoption of the accounting
guidance related to VIEs.
Stockholders’ equity was $176.1 billion, up by $10.7 billion. The increase was driven predominantly
by net income, partially offset by the cumulative effect of changes in accounting principles as a
result of the adoption of the accounting guidance related to the consolidation of VIEs.
The following is a discussion of the significant changes in the specific line captions of the
Consolidated Balance Sheets from December 31, 2009.
Deposits with banks; federal funds sold and securities purchased under resale agreements; and
securities borrowed
securities borrowed
The Firm uses these instruments as part of its liquidity management activities; to manage its cash
positions and risk-based capital requirements; and to support its trading and risk management
activities. In particular, securities purchased under resale agreements and securities borrowed are
used to provide funding or liquidity to clients by purchasing and borrowing their securities for
the short term. The decrease in deposits with banks was largely due to lower deposits with the
Federal Reserve Banks and lower interbank lending, as market stress eased from the end of 2009.
Securities purchased under resale agreements increased, predominantly due to higher financing
volume in IB. For additional information on the Firm’s Liquidity Risk Management, see pages
110–115 of this Annual Report.
Trading assets and liabilities – debt and equity instruments
Debt and equity trading instruments are used primarily for market-making activity. These
instruments consist predominantly of fixed-income securities, including government and corporate
debt; equity securities, including convertible securities; loans, including prime mortgage and
other loans warehoused by RFS and IB for sale or securitization purposes and accounted for at fair
value; and physical commodities inventories carried at the lower of cost or fair value. Trading
assets – debt and equity instruments increased, principally due to improved market activity,
primarily in equity securities, foreign debt and physical commodities. Trading liabilities – debt
and equity instruments increased, largely due to higher levels of positions to facilitate customer
trading. For additional information, refer to Note 3 on pages 170–187 of this Annual Report.
Trading assets and liabilities – derivative receivables and payables
The Firm uses derivative instruments predominantly for market-making activity. Derivatives enable
customers and the Firm to manage their exposures to fluctuations in interest rates, currencies and
other markets. The Firm also uses derivative instruments to manage its credit exposure. Derivative
receivables were flat compared with the prior year. Derivative payables increased, reflecting
tighter credit spreads, appreciation of the U.S. dollar and higher commodity derivatives balances
(driven by increasing commodity prices and the RBS Sempra
acquisition). For additional information, refer to Derivative
contracts on pages 125–128, and
| 92 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Note 3 and Note 6 on pages
170–187 and 191–199, respectively, of this Annual Report.
Securities
Substantially all of the securities portfolio is classified as available-for-sale (“AFS”) and used
primarily to manage the Firm’s exposure to interest rate movements and to invest cash resulting
from excess funding positions. Securities decreased, largely due to repositioning of the portfolio
in Corporate, in response to changes in the interest rate environment and to rebalance exposures.
The repositioning reduced U.S. government agency securities and increased non-U.S. mortgage-backed
securities. The adoption of the new accounting guidance related to VIEs, which resulted in the
elimination of retained AFS securities issued by Firm-sponsored credit card securitization trusts,
also contributed to the decrease. For information related to securities, refer to the
Corporate/Private Equity segment on pages 89–90, and Note 3 and Note 12 on pages 170–187 and
214–218, respectively, of this Annual Report.
Loans and allowance for loan losses
The Firm provides loans to a variety of customers, from large corporate and institutional clients
to individual consumers. Loans and the allowance for loan losses increased as a result of the
Firm’s adoption of accounting guidance related to VIEs at January 1, 2010. Excluding the impact of
the adoption of the new accounting guidance, loans decreased due to the continued runoff of the
residential real estate loans and credit card balances. The decrease was partially offset by an
increase in wholesale loans, mainly in TSS and AM.
The allowance for loan losses, excluding the impact of this adoption, decreased primarily due to a
decline in the credit card and wholesale allowance. The decrease was offset partially by an
increase in the consumer (excluding credit card) allowance.
For a more detailed discussion of the loan portfolio and the allowance for loan losses, refer to
Credit Risk Management on pages 116–141, and Notes 3, 4, 14 and 15 on pages 170–187, 187–189,
220–238 and 239–243, respectively, of this Annual Report.
Accrued interest and accounts receivable
This line caption consists of accrued interest receivables from interest-earning assets;
receivables from customers (primarily from activities related to IB’s Prime Services business);
receivables from brokers, dealers and clearing organizations; and receivables from failed
securities sales. Accrued interest and accounts receivable increased, reflecting higher customer
receivables in IB’s Prime Services business due to increased client activity. The increase was
offset partially by the elimination of retained securitization interests upon the adoption of the
new accounting guidance that resulted in the consolidation of Firm-sponsored credit card
securitization trusts. For a more detailed discussion of the adoption, see Note 1 and Note 16 on
pages 164–165 and 244–259, respectively, of this Annual Report.
Premises and equipment
The Firm’s premises and equipment consist of land, buildings, leasehold improvements, furniture and
fixtures, hardware and software, and other equipment. The increase in premises and equipment was
primarily due to the purchase of two buildings, one in New York and one in London; investments in
hardware, software and other equipment also contributed to the increase. The increase was partially
offset by the related depreciation and amortization of these assets.
Goodwill
Goodwill arises from business combinations and represents the excess of the purchase price of an
acquired entity or business over the fair values assigned to assets acquired and liabilities
assumed. The increase in goodwill was largely due to the acquisition of RBS Sempra Commodities’
global oil, global metal, and European power and gas businesses by IB; and the purchase of a
majority interest in Gávea Investimentos, a leading alternative asset management company in Brazil,
by AM. For additional information on goodwill, see Note 17 on pages 260–263 of this Annual Report.
Mortgage servicing rights
MSRs represent the fair value of future cash flows for performing specified mortgage-servicing
activities (predominantly related to residential mortgages) for others. MSRs are either purchased
from third parties or retained upon the sale or securitization of mortgage loans. Servicing
activities include collecting principal, interest and escrow payments from borrowers; making tax
and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure
proceedings; and accounting for and remitting principal and interest payments to the related
investors of the mortgage-backed securities. MSRs decreased, predominantly due to a significant
decline in market interest rates during 2010, as well as from servicing portfolio runoff and
dispositions of MSRs. These decreases were partially offset by increases related to sales in RFS of
originated loans for which servicing rights were retained. For additional information on MSRs, see
Note 3 and Note 17 on pages 170–187 and 260–263, respectively, of this Annual Report
Other intangible assets
Other intangible assets consist of purchased credit card relationships, other credit card–related
intangibles, core deposit intangibles and other intangibles. The decrease in other intangible
assets was predominately due to amortization, partially offset by an increase resulting from the
aforementioned Gávea Investimentos transaction. For additional information on other intangible
assets, see Note 17 on pages 260–263 of this Annual Report.
Other assets
Other assets consist of private equity and other investments, cash collateral pledged, corporate
and bank-owned life insurance policies, assets acquired in loan satisfactions (including real
estate owned) and all other assets. At December 31, 2010, other assets were relatively flat
compared with December 31, 2009.
| JPMorgan Chase & Co. / 2010 Annual Report | 93 |
Table of Contents
Management’s discussion and analysis
Deposits
Deposits represent a liability to customers, both retail and wholesale, related to non-brokerage
funds held on their behalf. Deposits are classified by location (U.S. and non-U.S.), whether they
are interest- or noninterest-bearing, and by type (i.e., demand, money-market, savings, time or
negotiable order of withdrawal accounts). Deposits provide a stable and consistent source of
funding for the Firm. Deposits decreased, reflecting a decline in wholesale funding due to the
Firm’s lower funding needs, and lower deposit levels in TSS
.
These factors were offset partially by
net inflows from existing customers and new business in CB, RFS and AM. For more information on
deposits, refer to the RFS and AM segment discussions on pages
72–78 and 86–88, respectively; the
Liquidity Risk Management discussion on pages 110–115; and Note 3 and Note 19 on pages 170–187
and 263–264, respectively, of this Annual Report. For more information on wholesale liability
balances, which includes deposits, refer to the CB and TSS segment
discussions on pages 82–83 and
84–85, respectively, of this Annual Report.
Federal funds purchased and securities loaned or sold under repurchase agreements
The Firm uses these instruments as part of its liquidity management activities and to support its
trading and risk management activities. In particular, federal funds purchased and securities
loaned or sold under repurchase agreements are used as short-term funding sources and to make
securities available to clients for their short-term liquidity purposes. Securities sold under
repurchase agreements increased, largely due to increased levels of activity in IB, partially
offset by a decrease in CIO repositioning activities. For additional information on the Firm’s
Liquidity Risk Management, see pages 110–115 of this Annual Report.
Commercial paper and other borrowed funds
The Firm uses commercial paper and other borrowed funds in its liquidity management activities to
meet short-term funding needs, and in connection with a TSS liquidity management product, whereby
excess client funds are transferred into commercial paper overnight sweep accounts. Commercial
paper and other borrowed funds, which includes advances from Federal Home Loan Banks (“FHLBs”),
decreased due to lower funding requirements. For additional information on the Firm’s Liquidity
Risk Management and other borrowed funds, see pages 110–115, and Note 20 on page 264 of this
Annual Report.
Accounts payable and other liabilities
Accounts payable and other liabilities consist of payables to customers (primarily from activities
related to IB’s Prime Services business); payables to brokers, dealers and clearing organizations;
payables from failed securities purchases; accrued expense, including interest-bearing liabilities;
and all other liabilities, including litigation reserves and obligations to return securities
received as collateral. Accounts payable and other liabilities increased due to additional
litigation reserves, largely for mortgage-related matters.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs represent interest-bearing beneficial-interest
liabilities, which increased, predominantly due to the Firm’s adoption of accounting guidance
related to VIEs, partially offset by maturities of $24.9 billion related to Firm-sponsored credit
card securitization trusts. For additional information on Firm-sponsored VIEs and loan
securitization trusts, see Off–Balance Sheet Arrangements and Contractual Cash Obligations below,
and Note 16 and Note 22 on pages 244–259 and 265–266, respectively, of this Annual Report.
The Firm uses long-term debt (including trust-preferred capital debt securities) to provide
cost-effective and diversified sources of funds and as critical components of the Firm’s liquidity
and capital management activities. Long-term debt decreased, due to lower funding requirements.
Maturities and redemptions totaled $53.4 billion during 2010 and were partially offset by new
issuances of $36.0 billion. For additional information on the Firm’s long-term debt activities, see
the Liquidity Risk Management discussion on pages 110–115, and Note 22 on pages 265–266 of this
Annual Report.
Stockholders’ equity
Total stockholders’ equity increased, predominantly due to net income, and net issuances and
commitments to issue under the Firm’s employee stock-based compensation plans. The increase was
partially offset by the impact of the adoption of the new accounting guidance related to VIEs,
which resulted in a reduction of $4.5 billion, driven by the establishment of an allowance for loan
losses of $7.5 billion (pretax) related to receivables predominantly held in credit card
securitization trusts that were consolidated at the adoption date. Also partially offsetting the
increase were stock repurchases; the purchase of the remaining interest in a consolidated
subsidiary from noncontrolling shareholders; and the declaration of cash dividends on common and
preferred stock. For a more detailed discussion of the adoption of new consolidated guidance
related to VIEs, see Notes 1 and 16 on pages 164–165 and 244–259, respectively, of this Annual
Report.
| 94 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
JPMorgan Chase is
involved with several types of off–balance sheet arrangements, including through unconsolidated
special-purpose entities (“SPEs”), which are a type of VIE, and through lending-related financial
instruments (e.g., commitments and guarantees).
Special-purpose entities
SPEs are the most common type of VIE, used in securitization transactions to isolate
certain assets and distribute related cash flows to investors. The basic SPE structure involves a company
selling assets to the SPE. The SPE funds the purchase of those assets by issuing securities to
investors in the form of commercial paper, short-term asset-backed notes, medium-term notes and
other forms of interest. SPEs are generally structured to insulate investors from claims on the
SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.
As a result of new accounting guidance, certain VIEs were consolidated on the Firm’s Consolidated
Balance Sheets effective January 1, 2010. Nevertheless, SPEs continue to be an important part of
the financial markets, as they provide market liquidity by facilitating investors’ access to
specific portfolios of assets and risks. These arrangements are integral to the markets for
mortgage-backed securities, commercial paper and other asset-backed securities.
JPMorgan Chase uses SPEs as a source of liquidity for itself and its clients by securitizing
financial assets, and by creating investment products for clients. The Firm is involved with SPEs
through multi-seller conduits, investor intermediation activities, and loan securitizations. See
Note 16 on pages 244–259 for further information on these types of SPEs.
The Firm holds capital, as deemed appropriate, against all SPE-related transactions and related
exposures, such as derivative transactions and lending-related commitments and guarantees.
The Firm has no commitments to issue its own stock to support any SPE transaction, and its policies
require that transactions with SPEs be conducted at arm’s length and reflect market pricing.
Consistent with this policy, no JPMorgan Chase employee is permitted to invest in SPEs with which
the Firm is involved where such investment would violate the Firm’s Code of Conduct. These rules
prohibit employees from self-dealing and acting on behalf of the Firm in transactions with which
they or their family have any significant financial interest.
Implications of a credit rating downgrade to
JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A., were downgraded below specific levels, primarily “P-1”, “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. The aggregate amount of these liquidity commitments, to both consolidated and nonconsolidated SPEs, were $34.2 billion at both December 31, 2010 and 2009. Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the Firm could be replaced by another liquidity provider in lieu of
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A., were downgraded below specific levels, primarily “P-1”, “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. The aggregate amount of these liquidity commitments, to both consolidated and nonconsolidated SPEs, were $34.2 billion at both December 31, 2010 and 2009. Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the Firm could be replaced by another liquidity provider in lieu of
providing
funding under the liquidity commitment or, in certain circumstances, the Firm could facilitate the
sale or refinancing of the assets in the SPE in order to provide liquidity.
Special-purpose entities revenue
The following table summarizes certain revenue information related to consolidated and nonconsolidated VIEs with which the Firm has significant involvement. The revenue reported in the table below primarily represents contractual servicing and credit fee income (i.e., fee income from acting as administrator, structurer or liquidity provider). It does not include gains and losses from changes in the fair value of trading positions (such as derivative transactions) entered into with VIEs. Those gains and losses are recorded in principal transactions revenue.
The following table summarizes certain revenue information related to consolidated and nonconsolidated VIEs with which the Firm has significant involvement. The revenue reported in the table below primarily represents contractual servicing and credit fee income (i.e., fee income from acting as administrator, structurer or liquidity provider). It does not include gains and losses from changes in the fair value of trading positions (such as derivative transactions) entered into with VIEs. Those gains and losses are recorded in principal transactions revenue.
Revenue
from VIEs and Securitization
Entities
(a)
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Multi-seller conduits
|
$ | 240 | $ | 460 | $ | 314 | ||||||
|
Investor intermediation
|
49 | 34 | 22 | |||||||||
|
Other securitization entities
(b)
|
2,005 | 2,510 | 1,742 | |||||||||
|
Total
|
$ | 2,294 | $ | 3,004 | $ | 2,078 | ||||||
| (a) | Includes revenue associated with both consolidated VIEs and significant nonconsolidated VIEs. | |
| (b) | Excludes servicing revenue from loans sold to and securitized by third parties. |
Loan modifications
The Firm modifies certain loans that it services, and that were sold to off-balance sheet SPEs, pursuant to the U.S. Treasury’s Making Home Affordable (“MHA”) programs and the Firm’s other loss mitigation programs. See Consumer Credit Portfolio on pages 129–138 of this Annual Report for more details on these loan modifications.
The Firm modifies certain loans that it services, and that were sold to off-balance sheet SPEs, pursuant to the U.S. Treasury’s Making Home Affordable (“MHA”) programs and the Firm’s other loss mitigation programs. See Consumer Credit Portfolio on pages 129–138 of this Annual Report for more details on these loan modifications.
Off-balance sheet lending-related financial instruments and other guarantees
JPMorgan Chase uses lending-related financial instruments (e.g., commitments and guarantees) to
meet the financing needs of its customers. The contractual amount of these financial instruments
represents the Firm’s maximum possible credit risk should the counterparty draw upon the commitment
or the Firm be required to fulfill its obligation under the
guarantee, and should the counterparty
subsequently fail to perform according to the terms of the contract. Most of these commitments and
guarantees expire without being drawn or a default occurring. As a result, the total contractual
amount of these instruments is not, in the Firm’s view, representative of its actual future credit
exposure or funding requirements. For further discussion of lending-related commitments and
guarantees and the Firm’s accounting for them, see
Lending-related commitments on page 128 and Note
30 on pages 275–280 of this Annual Report.
The accompanying table presents, as of December 31, 2010, the amounts by contractual maturity of
off–balance sheet lending-related financial instruments and other guarantees. The amounts in the
table for credit card and home equity lending-related commitments represent the total available
credit for these products.
| JPMorgan Chase & Co. / 2010 Annual Report | 95 |
Table of Contents
Management’s discussion and analysis
The Firm has not experienced, and does not anticipate, that all
available lines of credit for these products would be utilized at the same time. The Firm can
reduce or cancel credit card lines of credit by providing the borrower prior notice or, in some
cases, without notice as permitted by law. The Firm may reduce or close home equity lines of credit
when there are significant decreases in the value of the underlying property or when there has been
a
demonstrable decline in the creditworthiness of the borrower. The accompanying table excludes
certain guarantees that do not have a contractual maturity date (e.g., loan sale and
securitization-related indemnification obligations). For further discussion, see discussion of Loan sale and
securitization-related indemnification obligations in Note 30 on pages 275–280 of this Annual
Report.
Off-balance sheet lending-related financial instruments and other guarantees
| By remaining maturity at December 31, | 2010 | 2009 | ||||||||||||||||||||||
| (in millions) | 2011 | 2012-2013 | 2014-2015 | After 2015 | Total | Total | ||||||||||||||||||
|
Lending-related
|
||||||||||||||||||||||||
|
Consumer, excluding credit card:
|
||||||||||||||||||||||||
|
Home equity
– senior lien
|
$ | 617 | $ | 3,100 | $ | 5,936 | $ | 6,407 | $ | 16,060 | $ | 19,246 | ||||||||||||
|
Home equity
– junior lien
|
1,125 | 7,169 | 10,742 | 9,645 | 28,681 | 37,231 | ||||||||||||||||||
|
Prime mortgage
|
1,266 | — | — | — | 1,266 | 1,654 | ||||||||||||||||||
|
Subprime mortgage
|
— | — | — | — | — | — | ||||||||||||||||||
|
Auto
|
5,095 | 144 | 6 | 1 | 5,246 | 5,467 | ||||||||||||||||||
|
Business banking
|
9,116 | 264 | 85 | 237 | 9,702 | 9,040 | ||||||||||||||||||
|
Student and other
|
76 | 6 | — | 497 | 579 | 2,189 | ||||||||||||||||||
|
Total consumer, excluding credit card
|
17,295 | 10,683 | 16,769 | 16,787 | 61,534 | 74,827 | ||||||||||||||||||
|
Credit card
|
547,227 | — | — | — | 547,227 | 569,113 | ||||||||||||||||||
|
Total consumer
|
564,522 | 10,683 | 16,769 | 16,787 | 608,761 | 643,940 | ||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||||||
|
Other unfunded commitments to extend
credit
(a)
(b)
(c)
|
62,786 | 99,698 | 32,177 | 5,198 | 199,859 | 192,145 | ||||||||||||||||||
|
Asset purchase agreements
(b)
|
— | — | — | — | — | 22,685 | ||||||||||||||||||
|
Standby letters of credit and other
financial guarantees
(a)
(c)
(d)
(e)
|
25,346 | 48,408 | 16,729 | 4,354 | 94,837 | 91,485 | ||||||||||||||||||
|
Unused advised lines of credit
|
34,354 | 9,154 | 373 | 839 | 44,720 | 35,673 | ||||||||||||||||||
|
Other letters of credit
(a)
(e)
|
3,903 | 2,304 | 456 | — | 6,663 | 5,167 | ||||||||||||||||||
|
Total wholesale
|
126,389 | 159,564 | 49,735 | 10,391 | 346,079 | 347,155 | ||||||||||||||||||
|
Total lending-related
|
$ | 690,911 | $ | 170,247 | $ | 66,504 | $ | 27,178 | $ | 954,840 | $ | 991,095 | ||||||||||||
|
Other guarantees
|
||||||||||||||||||||||||
|
Securities lending indemnifications
(f)
|
$ | 181,717 | $ | — | $ | — | $ | — | $ | 181,717 | $ | 170,777 | ||||||||||||
|
Derivatives qualifying as guarantees
(g)
|
3,140 | 585 | 48,308 | 35,735 | 87,768 | 98,052 | (i) | |||||||||||||||||
|
Other guarantees and commitments
(h)
|
90 | 226 | 288 | 3,162 | 3,766 | 3,671 | ||||||||||||||||||
| (a) | At December 31, 2010 and 2009, represents the contractual amount net of risk participations totaling $542 million and $643 million, respectively, for other unfunded commitments to extend credit; $22.4 billion and $24.6 billion, respectively, for standby letters of credit and other financial guarantees; and $1.1 billion and $690 million, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these commitments are shown gross of risk participations. | |
| (b) | Upon the adoption of the accounting guidance related to VIEs, $24.2 billion of lending-related commitments between the Firm and Firm-administered multi-seller conduits were eliminated upon consolidation. The decrease in lending-related commitments was partially offset by the addition of $6.5 billion of unfunded commitments directly between the multi-seller conduits and clients; these unfunded commitments of the consolidated conduits are now included as off–balance sheet lending-related commitments of the Firm. | |
| (c) | Includes credit enhancements and bond and commercial paper liquidity commitments to U.S. states and municipalities, hospitals and other not-for-profit entities of $43.4 billion and $44.1 billion, at December 31, 2010 and 2009, respectively. | |
| (d) | At December 31, 2010 and 2009, includes unissued standby letters of credit commitments of $41.6 billion and $38.4 billion, respectively. | |
| (e) | At December 31, 2010 and 2009, JPMorgan Chase held collateral relating to $37.8 billion and $31.5 billion, respectively, of standby letters of credit; and $2.1 billion and $1.3 billion, respectively, of other letters of credit. | |
| (f) | At December 31, 2010 and 2009, collateral held by the Firm in support of securities lending indemnification agreements totaled $185.0 billion and $173.2 billion, respectively. Securities lending collateral comprises primarily cash, and securities issued by governments that are members of the Organisation for Economic Co-operation and Development (“OECD”) and U.S. government agencies. | |
| (g) | Represents the notional amounts of derivative contracts qualifying as guarantees. For further discussion of guarantees, see Note 6 on pages 191–199 and Note 30 on pages 275–280 of this Annual Report. | |
| (h) | Amounts include letters of credit hedged by derivative transactions and managed on a market risk basis. | |
| (i) | The prior period has been revised to conform with current presentation. |
| 96 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Contractual cash obligations
In the normal course of business, the Firm enters into various contractual obligations that may
require future cash payments. On-balance sheet obligations include deposits; secured and unsecured
borrowings (both short- and long-term); beneficial interests issued by consolidated VIEs; current
income taxes payable; accrued interest payments and certain employee benefit-related obligations.
In addition, JPMorgan Chase has certain off-balance-sheet contractual obligations that may require
future cash payments; these include unsettled reverse repurchase and securities borrowing
agreements, future interest payments, noncancelable operating leases, capital expenditures related
to real estate (including building purchase commitments) and equipment; equity investment
commitments; and contracts to purchase future services.
The accompanying table summarizes, by remaining maturity, JPMorgan Chase’s significant contractual
cash obligations at December 31, 2010. The contractual cash obligations included in the table below
reflect the minimum contractual obligation under legally enforceable contracts with terms that are
both fixed and determinable. The carrying amount of on-balance sheet obligations on the
Consolidated Balance Sheets may differ from the amounts of the obligations reported below. Excluded
are contingent payments associated with certain acquisitions, and loan repurchase liabilities. For
a discussion of loan repurchase liabilities, see Repurchase liability
on pages 98–101 of this
Annual Report. For further discussion of other obligations, see the Notes to
Consolidated Financial Statements in this Annual Report.
Contractual cash obligations
| By remaining maturity at December 31, | 2010 | 2009 | ||||||||||||||||||||||
| (in millions) | 2011 | 2012-2013 | 2014-2015 | After 2015 | Total | Total | ||||||||||||||||||
|
On-balance sheet obligations
|
||||||||||||||||||||||||
|
Deposits
(a)
|
$ | 910,802 | $ | 12,084 | $ | 4,139 | $ | 657 | $ | 927,682 | $ | 935,265 | ||||||||||||
|
Federal funds purchased and securities loaned or
sold under repurchase agreements
|
272,602 | 2,167 | 1,059 | 816 | 276,644 | 261,413 | ||||||||||||||||||
|
Commercial paper
|
35,363 | — | — | — | 35,363 | 41,794 | ||||||||||||||||||
|
Other borrowed funds
(a)
|
33,758 | 8,833 | 4,030 | 915 | 47,536 | 50,398 | ||||||||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
38,989 | 24,310 | 4,708 | 9,642 | 77,649 | 15,225 | ||||||||||||||||||
|
Long-term debt
(a)
|
41,290 | 64,544 | 38,272 | 82,403 | 226,509 | 242,465 | ||||||||||||||||||
|
Current income taxes payable
(b)
|
— | — | — | — | — | 457 | ||||||||||||||||||
|
Other
(c)
|
2,450 | 1,141 | 961 | 2,777 | 7,329 | 7,438 | ||||||||||||||||||
|
Total on-balance sheet obligations
|
1,335,254 | 113,079 | 53,169 | 97,210 | 1,598,712 | 1,554,455 | ||||||||||||||||||
|
Off-balance sheet obligations
|
||||||||||||||||||||||||
|
Unsettled reverse repurchase and securities
borrowing agreements
(d)
|
39,927 | — | — | — | 39,927 | 48,187 | ||||||||||||||||||
|
Contractual interest payments
(e)
|
12,887 | 13,089 | 9,297 | 43,181 | 78,454 | 77,015 | ||||||||||||||||||
|
Operating leases
(f)
|
1,884 | 3,478 | 2,860 | 7,778 | 16,000 | 15,952 | ||||||||||||||||||
|
Building purchase commitments
(g)
|
258 | — | — | — | 258 | 670 | ||||||||||||||||||
|
Equity investment commitments
(h)
|
1,296 | 9 | 23 | 1,140 | 2,468 | 2,374 | ||||||||||||||||||
|
Contractual purchases and capital expenditures
|
1,384 | 701 | 335 | 402 | 2,822 | 3,104 | ||||||||||||||||||
|
Obligations under affinity and co-brand programs
|
990 | 2,002 | 1,475 | 1,334 | 5,801 | 6,898 | ||||||||||||||||||
|
Other
|
142 | 120 | 32 | 15 | 309 | 15 | ||||||||||||||||||
|
Total off-balance sheet obligations
|
58,768 | 19,399 | 14,022 | 53,850 | 146,039 | 154,215 | ||||||||||||||||||
|
Total contractual cash obligations
|
$ | 1,394,022 | $ | 132,478 | $ | 67,191 | $ | 151,060 | $ | 1,744,751 | $ | 1,708,670 | ||||||||||||
| (a) | Excludes structured notes where the Firm is not obligated to return a stated amount of principal at the maturity of the notes, but is obligated to return an amount based on the performance of the structured notes. | |
| (b) | 2011 excludes the expected benefit of net prepayments of income taxes as of December 31, 2010. | |
| (c) | Primarily includes deferred annuity contracts, pension and postretirement obligations and insurance liabilities. | |
| (d) | For further information, refer to Unsettled reverse repurchase and securities borrowing agreements in Note 30 on page 278 of this Annual Report. | |
| (e) | Includes accrued interest and future contractual interest obligations. Excludes interest related to structured notes where the Firm’s payment obligation is based on the performance of certain benchmarks. | |
| (f) | Includes noncancelable operating leases for premises and equipment used primarily for banking purposes and for energy-related tolling service agreements. Excludes the benefit of noncancelable sublease rentals of $1.8 billion at both December 31, 2010 and 2009. | |
| (g) | For further information, refer to Building purchase commitments in Note 30 on page 278 of this Annual Report. | |
| (h) | At December 31, 2010 and 2009, includes unfunded commitments of $1.0 billion and $1.5 billion, respectively, to third-party private equity funds that are generally fair valued at net asset value as discussed in Note 3 on pages 170–187 of this Annual Report; and $1.4 billion and $897 million, respectively, to other equity investments. |
| JPMorgan Chase & Co. / 2010 Annual Report | 97 |
Table of Contents
Management’s discussion and analysis
Repurchase liability
In connection with the Firm’s loan sale and securitization activities with Fannie Mae and
Freddie Mac (the “GSEs”) and other loan sale and private-label securitization transactions, the
Firm has made representations and warranties that the loans sold meet certain requirements. For
transactions with the GSEs, these representations relate to type of collateral, underwriting
standards, validity of certain borrower representations in connection with the loan, primary
mortgage insurance being in
force for any mortgage loan with a loan-to-value ratio (“LTV”) greater than 80%, and the use of the
GSEs’ standard legal documentation. The Firm may be, and has been, required to repurchase loans
and/or indemnify the GSEs and other investors for losses due to material breaches of these
representations and warranties; however, predominantly all of the repurchase demands received by
the Firm and the Firm’s losses realized to date are related to loans sold to the GSEs.
To date, the repurchase demands the Firm has received from the GSEs primarily relate to loans
originated from 2005 to 2008. Demands against the pre-2005 and post-2008 vintages have not been
significant; the Firm attributes this to the comparatively favorable credit performance of these
vintages and to the enhanced underwriting and loan qualification standards implemented
progressively during 2007 and 2008. From 2005 to 2008, excluding Washington Mutual, loans sold to
the GSEs subject to representations and warranties for which the Firm may be liable were
approximately $380 billion; this amount represents the principal amount of loans sold throughout
2005 to 2008 and has not been adjusted for subsequent activity, such as borrower repayments of
principal or repurchases completed to date. See the discussion below for information concerning the
process the Firm uses to evaluate repurchase demands for breaches of representations and
warranties, and the Firm’s estimate of probable losses related to such exposure.
From 2005 to 2008, Washington Mutual sold approximately $150 billion of loans to the GSEs subject
to certain representations and warranties. Subsequent to the Firm’s acquisition of certain assets
and liabilities of Washington Mutual from the FDIC in September 2008, the Firm resolved and/or
limited certain current and future repurchase demands for loans sold to the GSEs by Washington
Mutual, although it remains the Firm’s position that such obligations remain with the FDIC
receivership. Nevertheless, certain payments have been made with respect to certain of the then
current and future repurchase demands, and the Firm will continue to evaluate and may pay certain
future repurchase demands related to individual loans. In addition to the payments already made,
the Firm estimates it has a remaining repurchase liability of approximately $190 million as of
December 31, 2010, relating to unresolved and future demands on loans sold to the GSEs by
Washington Mutual. After consideration of this repurchase liability, the Firm believes that the
remaining GSE repurchase exposure related to Washington Mutual presents minimal future risk to the
Firm’s financial results.
The Firm also sells loans in securitization transactions with Ginnie Mae; these loans are typically
insured by the Federal Housing Administration (“FHA”) or the Rural Housing Administration (“RHA”)
and/or guaranteed by the U.S. Department of Veterans Affairs (“VA”). The Firm, in its role as
servicer, may elect to repurchase delinquent loans securitized by Ginnie Mae in accordance with
guidelines prescribed by Ginnie Mae, FHA, RHA and VA. Amounts due under the terms of these loans
continue to be insured and the reimbursement of insured amounts is proceeding normally.
Accordingly, the Firm has not recorded any repurchase liability related to these loans.
From 2005 to 2008, the Firm and certain acquired entities sold or deposited approximately $450
billion of residential mortgage loans to securitization trusts in private-label securitizations they sponsored. In connection therewith certain representations and warranties were made related to these loans. With respect to the $165 billion of private-label
securitizations originated by Washington Mutual, it is the Firm’s position that repurchase obligations remain with
the FDIC receivership.
While the
terms of the securitization transactions vary, they generally differ from loan sales to
GSEs in that, among other things: (i) in order to direct the trustee to investigate loan files, the
security holders must make a formal request for the trustee to do so, and typically, this requires
agreement of the holders of a specified percentage of the outstanding securities; (ii) generally,
the mortgage loans are not required to meet all GSE eligibility criteria; and (iii) in many cases,
the party demanding repurchase is required to demonstrate that a loan-level breach of a
representation or warranty has materially and adversely affected the value of the loan. Of the $450
billion originally sold or deposited (including $165 billion by Washington Mutual, as to which the Firm maintains the repurchase
obligations remain with the FDIC receivership), approximately $180 billion of principal has been repaid.
Approximately $80 billion of loans have been liquidated, with an average loss severity of 57%. The
remaining outstanding principal balance of these loans as of December 31, 2010, was approximately
$190 billion.
To date, loan-level repurchase demands in private-label securitizations have been
limited. As a result, the Firm’s repurchase reserve primarily relates to loan sales to the GSEs and
is predominantly derived from repurchase activity with the GSEs. While it is possible that the
volume of repurchase demands in private-label securitizations will increase in the future, the Firm
cannot offer a reasonable estimate of those future demands based on historical experience to date.
Thus far, claims related to private-label securitizations (including from insurers that have guaranteed
certain obligations of the securitization trusts) have generally manifested themselves through
securities-related litigation. The Firm separately evaluates its exposure to such litigation in
establishing its litigation reserves. For additional information regarding litigation, see Note 32
on pages 282–289 of this Annual Report.
| 98 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Repurchase
Demand Process
The Firm first becomes aware that a GSE is evaluating a particular loan for repurchase when the Firm receives a request from the GSE to review the underlying loan file (“file request”). Upon completing its review, the GSE may submit a repurchase demand to the Firm; historically, most file requests have not resulted in repurchase demands.
The Firm first becomes aware that a GSE is evaluating a particular loan for repurchase when the Firm receives a request from the GSE to review the underlying loan file (“file request”). Upon completing its review, the GSE may submit a repurchase demand to the Firm; historically, most file requests have not resulted in repurchase demands.
The primary reasons for repurchase demands from the GSEs relate to alleged misrepresentations
primarily arising from: (i) credit quality and/or undisclosed debt of the borrower; (ii) income
level and/or employment status of the borrower; and (iii) appraised value of collateral.
Ineligibility of the borrower for the particular product, mortgage insurance rescissions and
missing documentation are other reasons for repurchase demands. Beginning in 2009, mortgage
insurers more frequently rescinded mortgage insurance coverage. The successful rescission of
mortgage insurance typically results in a violation of representations and warranties made to the
GSEs and, therefore, has been a significant cause of repurchase demands from the GSEs. The Firm
actively reviews all rescission notices from mortgage insurers and
contests them when appropriate.
As soon as practicable after receiving a repurchase demand from a GSE, the Firm evaluates the
request and takes appropriate actions based on the nature of the repurchase demand. Loan-level
appeals with the GSEs are typical and the Firm seeks to provide a final response to a repurchase
demand within three to four months of the date of receipt. In many cases, the Firm ultimately is
not required to repurchase a loan because it is able to resolve the purported defect. Although
repurchase demands may be made for
as long as the loan is outstanding, most repurchase demands from
the GSEs historically have related to loans that became delinquent in the first 24 months following
origination.
When the Firm accepts a repurchase demand from one of the GSEs, the Firm may either a) repurchase
the loan or the underlying collateral from the GSE at the unpaid principal balance of the loan plus
accrued interest, or b) reimburse the GSE for its realized loss on a liquidated property (a
“make-whole” payment).
Estimated
Repurchase Liability
To estimate the Firm’s repurchase liability arising from breaches of representations and warranties, the Firm considers:
To estimate the Firm’s repurchase liability arising from breaches of representations and warranties, the Firm considers:
| (i) | the level of current unresolved repurchase demands and mortgage insurance rescission notices, | |
| (ii) | estimated probable future repurchase demands considering historical experience, | |
| (iii) | the potential ability of the Firm to cure the defects identified in the repurchase demands (“cure rate”), | |
| (iv) | the estimated severity of loss upon repurchase of the loan or collateral, make-whole settlement, or indemnification, | |
| (v) | the Firm’s potential ability to recover its losses from third-party originators, and | |
| (vi) | the terms of agreements with certain mortgage insurers and other parties. |
Based on these factors, the Firm has recognized a repurchase liability of $3.3 billion and $1.7
billion, including the Washington Mutual liability described above, as of December 31, 2010, and
2009, respectively.
The following table provides information about outstanding repurchase demands and mortgage
insurance rescission notices, excluding those related to Washington Mutual, at each of the five
most recent quarter-end dates. Due to the rate at which developments have occurred in this area,
management does not believe that it would be useful or meaningful to report quarterly information
for periods prior to the quarter ended December 31, 2009; the most meaningful trends are those
which are more recent.
Outstanding repurchase demands and mortgage insurance rescission notices by counterparty type
| December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
| (in millions) | 2010 | 2010 | 2010 | 2010 | 2009 | |||||||||||||||
|
GSEs and other
|
$ 1,071 | $ 1,063 | $ 1,331 | $ 1,358 | $ 1,339 | |||||||||||||||
|
Mortgage insurers
|
624 | 556 | 998 | 1,090 | 865 | |||||||||||||||
|
Overlapping population
(a)
|
(63 | ) | (69 | ) | (220 | ) | (232 | ) | (169 | ) | ||||||||||
|
Total
|
$ 1,632 | $ 1,550 | $ 2,109 | $ 2,216 | $ 2,035 | |||||||||||||||
| (a) | Because the GSEs may make repurchase demands based on mortgage insurance rescission notices that remain unresolved, certain loans may be subject to both an unresolved mortgage insurance rescission notice and an unresolved repurchase demand. |
Probable future repurchase demands are generally estimated based on loans that are or
ever have been 90 days past due. The Firm estimates probable future repurchase demands by
considering the unpaid principal balance of these delinquent loans and expected repurchase demand
rates based on historical experience and data, including the age of the loan when it first became
delinquent. Through the first three quarters of 2010, the Firm experienced a sustained trend of
increased file requests and repurchase demands from the GSEs across most vintages, including the
2005-2008 vintages, in spite of improved delinquency statistics and the aging of the 2005-2008
vintages. File requests from the GSEs, excluding those
related to Washington Mutual, and private investors decreased by 29% between the second and third quarters of 2009 and remained relatively
stable through the fourth quarter of 2009. After this period of decline and relative stability,
file requests from the GSEs and private investors then experienced quarter over quarter increases
of 5%, 18% and 15% in the first, second and third quarters of 2010, respectively. The number of
file requests received from the GSEs and private investors decreased in the fourth quarter of 2010,
but the level of file requests continues to be elevated and volatile.
The Firm expects that the change in GSE behavior that it began to observe earlier in 2010 will
alter the historical relationship between
| JPMorgan Chase & Co. / 2010 Annual Report | 99 |
Table of Contents
Management’s discussion and analysis
delinquencies and repurchase demands. In response to
these changing trends, in the third quarter of 2010, the Firm refined its estimate of probable
future repurchase demands by separately forecasting near-term repurchase demands (using outstanding
file requests) and longer-term repurchase demands (considering delinquent loans for which no file
request has been received).
The Firm believes that this refined estimation process produces a better estimate of probable
future repurchase demands since it directly incorporates the Firm’s recent file request experience.
The Firm also believes that the refined estimation process will better
reflect emerging trends in
file requests as well as the relationship between file requests and ultimate repurchase demands.
This refinement in the Firm’s estimation process resulted in a higher estimated amount of probable
future demands from the GSEs, and this revised future repurchase demand assumption, along with an
overall increase in repurchase demands from the GSEs during 2010, were the primary drivers of the
$1.6 billion increase in the Firm’s repurchase liability during 2010.
The following tables show the trend in repurchase demands and mortgage insurance rescission
notices received by loan origination vintage, excluding those related to Washington Mutual, for the
five most recent quarters. Due to the rate at which developments have occurred in this area,
management does not believe that it would be useful or meaningful to report quarterly information
for periods prior to the quarter ended December 31, 2009; the most meaningful trends are those
which are more recent.
Quarterly repurchase demands received by loan origination vintage
| December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
| (in millions) | 2010 | 2010 | 2010 | 2010 | 2009 | |||||||||||||||
|
Pre-2005
|
$ | 38 | $ | 31 | $ | 35 | $ | 16 | $ | 12 | ||||||||||
|
2005
|
72 | 67 | 94 | 50 | 40 | |||||||||||||||
|
2006
|
195 | 185 | 234 | 189 | 166 | |||||||||||||||
|
2007
|
537 | 498 | 521 | 403 | 425 | |||||||||||||||
|
2008
|
254 | 191 | 186 | 98 | 157 | |||||||||||||||
|
Post-2008
|
65 | 46 | 53 | 20 | 26 | |||||||||||||||
|
Total repurchase
demands received
|
$ | 1,161 | $ | 1,018 | $ | 1,123 | $ | 776 | $ | 826 | ||||||||||
|
Quarterly mortgage insurance rescission notices received by loan origination vintage
|
||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
| (in millions) | 2010 | 2010 | 2010 | 2010 | 2009 | |||||||||||||||
|
Pre-2005
|
$ | 3 | $ | 4 | $ | 4 | $ | 2 | $ | 3 | ||||||||||
|
2005
|
7 | 5 | 7 | 18 | 22 | |||||||||||||||
|
2006
|
40 | 39 | 39 | 57 | 50 | |||||||||||||||
|
2007
|
113 | 105 | 155 | 203 | 221 | |||||||||||||||
|
2008
|
49 | 44 | 52 | 60 | 69 | |||||||||||||||
|
Post-2008
|
1 | — | — | — | — | |||||||||||||||
|
Total mortgage insurance
rescissions received
(a)
|
$ | 213 | $ | 197 | $ | 257 | $ | 340 | $ | 365 | ||||||||||
| (a) | Mortgage insurance rescissions may ultimately result in a repurchase demand from the GSEs on a lagged basis. This table includes mortgage insurance rescissions where the GSEs have also issued a repurchase demand. |
Because the Firm has demonstrated an ability to cure certain types of defects more
frequently than others (e.g., missing documents), trends in the types of defects identified as well
as the Firm’s historical data are considered in estimating the future cure rate. During 2010, the
Firm’s overall cure rate, excluding Washington Mutual loans, has been approximately 50%. While the
actual cure rate may vary from quarter to quarter, the Firm expects that the overall cure rate will
remain in the 40–50% range for the foreseeable future.
The Firm has not observed a direct relationship between the type of defect that causes the breach
of representations and warranties and the severity of the realized loss. Therefore, the loss
severity assumption is estimated using the Firm’s historical experience and projections regarding
home price appreciation. Actual loss severities on finalized repurchases and “make-whole”
settlements, excluding any related to Washington Mutual loans, currently average approximately 50%,
but may vary from quarter to quarter based on the characteristics of the underlying loans and
changes in home prices.
| 100 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
When a loan was originated by a third-party correspondent, the Firm typically has the right to seek
a recovery of related repurchase losses from the correspondent originator. Correspondent-originated
loans comprise approximately 40 percent of loans underlying outstanding repurchase demands,
excluding those related to Washington Mutual. The Firm experienced a decrease in third-party
recoveries from late 2009 into 2010. However, the actual third-party recovery rate may vary from
quarter to quarter based upon the underlying mix of correspondents (e.g., active, inactive,
out-of-business) from which recoveries are being sought.
The Firm is engaged in discussions with various mortgage insurers on their rights and practices of
rescinding mortgage insurance coverage. The Firm has entered into agreements with two mortgage
insurers to resolve their claims on certain portfolios for which the Firm is a servicer. The impact
of these agreements is reflected in the repurchase liability and the disclosed outstanding mortgage
insurance rescission notices as of December 31, 2010.
Substantially all of the estimates and assumptions underlying the Firm’s methodology
for computing its recorded repurchase liability–including factors such as the amount of probable
future demands from purchasers (which is in part based on historical experience), the ability of
the Firm to cure identified defects, the severity of loss upon repurchase or foreclosure and
recoveries from third parties–require application of a significant level of management judgment.
Estimating the repurchase liability is further complicated by limited and rapidly
changing historical data and uncertainty surrounding numerous external factors, including: (i)
economic factors (e.g., further declines in home prices and changes in borrower behavior may lead
to increases in the number of defaults, the severity of losses, or both), and (ii) the level of
future demands, which is dependent, in part, on actions taken by third parties, such as the GSEs
and mortgage insurers. While the Firm uses the best information available to it in estimating its
repurchase liability, the estimation process is inherently uncertain, imprecise and potentially
volatile as additional information is obtained and external factors continue to evolve.
The following table summarizes the change in the repurchase liability for each of the periods
presented.
Summary of changes in repurchase liability
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Repurchase liability at
beginning of period
|
$ | 1,705 | $ | 1,093 | $ | 15 | ||||||
|
Realized losses
(a)
|
(1,423 | ) | (1,253 | ) (c) | (155 | ) | ||||||
|
Provision for repurchase losses
|
3,003 | 1,865 | 1,233 | (d) | ||||||||
|
Repurchase liability at end of
period
|
$ | 3,285 | (b) | $ | 1,705 | $ | 1,093 | |||||
| (a) | Includes principal losses and accrued interest on repurchased loans, “make-whole” settlements, settlements with claimants, and certain related expense. For the years ended December 31, 2010, 2009 and 2008, make-whole settlements were $632 million, $277 million and $34 million, respectively. | |
| (b) | Includes $190 million at December 31, 2010, related to future demands on loans sold by Washington Mutual to the GSEs. | |
| (c) | Includes the Firm’s resolution of certain current and future repurchase demands for certain loans sold by Washington Mutual. The unpaid principal balance of loans related to this resolution is not included in the table below, which summarizes the unpaid principal balance of repurchased loans. | |
| (d) | Includes a repurchase liability assumed for certain loans sold by Washington Mutual; this assumed liability was reported as a reduction of the extraordinary gain rather than as a charge to the provision for repurchase losses. |
The following table summarizes the total unpaid principal balance of repurchases during the
periods indicated.
Unpaid principal balance of loan repurchases
(a)
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Ginnie Mae
(b)
|
$ | 8,717 | $ | 6,966 | $ | 4,452 | ||||||
|
GSEs and other
(c)
(d)
|
1,790 | 1,019 | 587 | |||||||||
|
Total
|
$ | 10,507 | $ | 7,985 | $ | 5,039 | ||||||
| (a) | Excludes mortgage insurers. While the rescission of mortgage insurance may ultimately trigger a repurchase demand, the mortgage insurers themselves do not present repurchase demands to the Firm. | |
| (b) | In substantially all cases, these repurchases represent the Firm’s voluntary repurchase of certain delinquent loans from loan pools or packages as permitted by Ginnie Mae guidelines (i.e., they do not result from repurchase demands due to breaches of representations and warranties). In certain cases, the Firm repurchases these delinquent loans as it continues to service them and/or manage the foreclosure process in accordance with applicable requirements of Ginnie Mae, the FHA, RHA and/or the VA. | |
| (c) | Predominantly all of the repurchases related to the GSEs. | |
| (d) | Nonaccrual loans held-for-investment included $354 million and $218 million at December 31, 2010 and 2009, respectively, of loans repurchased as a result of breaches of representations and warranties. |
| JPMorgan Chase & Co. / 2010 Annual Report | 101 |
Table of Contents
Management’s discussion and analysis
CAPITAL MANAGEMENT
A strong capital position is essential to the Firm’s business strategy and competitive
position. The Firm’s capital strategy focuses on long-term stability, which enables it to build and
invest in market-leading businesses, even in a highly stressed environment. Senior management
considers the implications on the Firm’s capital strength prior to making any decision on future
business activities. Capital and earnings are inextricably linked, as earnings directly affect
capital generation for the Firm. In addition to considering the Firm’s earnings outlook, senior
management evaluates all sources and uses of capital and makes decisions to vary sources or uses to
preserve the Firm’s capital strength.
The Firm’s capital management objectives are to hold capital sufficient to:
| • | Cover all material risks underlying the Firm’s business activities; |
| • | Maintain “well-capitalized” status under regulatory requirements; |
| • | Achieve debt rating targets; |
| • | Remain flexible to take advantage of future opportunities; and |
| • | Build and invest in businesses, even in a highly stressed environment. |
To meet
these objectives, the Firm maintains a robust and disciplined capital adequacy assessment
process, which is performed quarterly, and which is intended to enable the Firm to remain well-capitalized and fund ongoing
operations under adverse conditions. The process assesses the potential impact of alternative
economic and business scenarios on earnings and capital for the Firm’s businesses individually and
in the aggregate over a rolling three-year period. Economic scenarios, and the parameters
underlying those scenarios, are defined centrally and applied uniformly across the businesses.
These scenarios are articulated in terms of macroeconomic factors, which are key drivers of
business results; global market shocks, which generate short-term but severe trading losses; and
operational risk events, which generate significant one-time losses. However, even when defining a
broad range of scenarios, realized events can always be worse. Accordingly, management considers
additional stresses outside these scenarios as necessary. The Firm utilized this capital adequacy
process in completing the Federal Reserve Comprehensive Capital Plan. The assessment of capital
adequacy is also evaluated together with the Firm’s Liquidity Risk Management processes. For
further information on the Firm’s liquidity risk management, see
pages 110–115 of this Annual
Report.
The quality and composition of capital are key factors in senior management’s evaluation of the
Firm’s capital adequacy. Accordingly, the Firm holds a significant amount of its capital in the form of
common equity. The Firm uses three capital disciplines:
| • | Regulatory capital – The capital required according to standards stipulated by U.S. bank regulatory agencies. |
| • | Economic risk capital – A bottom-up assessment of the underlying risks of the Firm’s business activities, utilizing internal risk-assessment methodologies. |
| • | Line of business equity – The amount of equity the Firm believes each business segment would require if it were operating independently, which incorporates sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. |
Regulatory capital
The Federal Reserve establishes capital requirements, including well-capitalized standards, for
the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”)
establishes similar capital requirements and standards for the Firm’s national banks,
including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
In connection with the U.S. Government’s Supervisory Capital Assessment Program in 2009, U.S.
banking regulators developed a new measure of capital, Tier 1 common, which is defined as Tier 1
capital less elements of Tier 1 capital not in the form of common equity – such as perpetual
preferred stock, noncontrolling interests in subsidiaries and trust preferred capital debt
securities. Tier 1 common, a non-GAAP financial measure, is used by banking regulators, investors
and analysts to assess and compare the quality and composition of the Firm’s capital with the
capital of other financial services companies. The Firm uses Tier 1 common along with the other
capital measures to assess and monitor its capital position.
At December 31, 2010 and 2009, JPMorgan Chase maintained Tier 1 and Total capital ratios in excess
of the well-capitalized standards established by the Federal Reserve, as indicated in the tables
below. In addition, the Firm’s Tier 1 common ratio was significantly above the 4% well-capitalized
standard established at the time of the Supervisory Capital Assessment Program. For more
information, see Note 29 on pages 273–274 of this Annual Report.
| 102 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Risk-based capital ratios
| December 31, | 2010 | 2009 | ||||||
|
Tier 1 capital
(a)
|
12.1 | % | 11.1 | % | ||||
|
Total capital
|
15.5 | 14.8 | ||||||
|
Tier 1 leverage
|
7.0 | 6.9 | ||||||
|
Tier 1 common
|
9.8 | 8.8 | ||||||
| (a) | On January 1, 2010, the Firm adopted accounting standards which required the consolidation of the Firm’s credit card securitization trusts, Firm-administered multi-seller conduits, and certain mortgage and other consumer securitization entities. Refer to Note 16 on pages 244–259 of this Annual Report for additional information about the impact to the Firm of the new guidance. |
A reconciliation of Total stockholders’ equity to Tier 1 common capital, Tier 1 capital and
Total qualifying capital is presented in the table below.
Risk-based capital components and assets
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Tier 1 capital
|
||||||||
|
Tier 1 common:
|
||||||||
|
Total stockholders’ equity
|
$ | 176,106 | $ | 165,365 | ||||
|
Less: Preferred stock
|
7,800 | 8,152 | ||||||
|
Common stockholders’ equity
|
168,306 | 157,213 | ||||||
|
Effect of certain items in accumulated other
comprehensive income/(loss)
excluded from Tier 1 common equity
|
(748 | ) | 75 | |||||
|
Less: Goodwill
(a)
|
46,915 | 46,630 | ||||||
|
Fair value DVA on derivative and
structured note liabilities related
to the Firm’s credit quality
|
1,261 | 912 | ||||||
|
Investments in certain subsidiaries
and other
|
1,032 | 802 | ||||||
|
Other intangible assets
(a)
|
3,587 | 3,660 | ||||||
|
Tier 1 common
|
114,763 | 105,284 | ||||||
|
Preferred stock
|
7,800 | 8,152 | ||||||
|
Qualifying hybrid securities and
noncontrolling interests
(b)
|
19,887 | 19,535 | ||||||
|
Total Tier 1 capital
|
142,450 | 132,971 | ||||||
|
Tier 2 capital
|
||||||||
|
Long-term debt and other instruments
qualifying as Tier 2
|
25,018 | 28,977 | ||||||
|
Qualifying allowance for credit losses
|
14,959 | 15,296 | ||||||
|
Adjustment for investments in certain
subsidiaries and other
|
(211 | ) | (171 | ) | ||||
|
Total Tier 2 capital
|
39,766 | 44,102 | ||||||
|
Total qualifying capital
|
$ | 182,216 | $ | 177,073 | ||||
|
Risk-weighted assets
(c)
(d)
|
$ | 1,174,978 | $ | 1,198,006 | ||||
|
Total adjusted average assets
(e)
|
$ | 2,024,515 | $ | 1,933,767 | ||||
| (a) | Goodwill and other intangible assets are net of any associated deferred tax liabilities. | |
| (b) | Primarily includes trust preferred capital debt securities of certain business trusts. | |
| (c) | Risk-weighted assets consist of on– and off–balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On–balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off–balance sheet assets – such as lending-related commitments, guarantees, derivatives and other applicable off–balance sheet positions – are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on–balance sheet credit-equivalent amount, which is then risk-weighted based on the same factors used for on–balance sheet assets. Risk-weighted assets also incorporate a measure for the market risk related to applicable trading assets–debt and equity instruments, and foreign exchange and commodity derivatives. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets. |
| (d) | Includes off–balance sheet risk-weighted assets at December 31, 2010 and 2009, of $282.9 billion and $367.4 billion, respectively. Risk-weighted assets are calculated in accordance with U.S. federal regulatory capital standards. | |
| (e) | Adjusted average assets, for purposes of calculating the leverage ratio, include total average assets adjusted for unrealized gains/(losses) on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital. |
The Firm’s Tier 1 common capital was $114.8 billion at December 31, 2010, compared with $105.3
billion at December 31, 2009, an increase of $9.5 billion. The increase was predominantly due to
net income (adjusted for DVA) of $17.0 billion and net issuances and commitments to issue common
stock under the Firm’s employee stock-based compensation plans of $2.8 billion. The increase was
partially offset by $4.4 billion of cumulative effect adjustments to retained earnings that
predominantly resulted from the adoption of new accounting guidance related to VIEs; $3.0 billion
of common stock repurchases; $1.5 billion of dividends on common and preferred stock; and a $1.3
billion reduction related to the purchase of the remaining interest in a consolidated subsidiary
from noncontrolling shareholders. The Firm’s Tier 1 capital was $142.5 billion at December 31,
2010, compared with $133.0 billion at December 31, 2009, an increase of $9.5 billion. The increase
in Tier 1 capital reflected the increase in Tier 1 common and a net issuance of trust preferred
capital debt securities, offset by the redemption of preferred stock.
For additional information regarding federal regulatory capital requirements and capital ratios of
the Firm and the Firm’s significant banking subsidiaries at December 31, 2010 and 2009, see Note 29
on pages 273–274 of this Annual Report.
Basel II
The minimum risk-based capital requirements adopted by the U.S. federal banking agencies follow the
Capital Accord of the Basel Committee on Banking Supervision (“Basel I”). In 2004, the Basel
Committee published a revision to the Accord (“Basel II”). The goal of the Basel II Framework is to
provide more risk-sensitive regulatory capital calculations and promote enhanced risk management
practices among large, internationally active banking organizations. U.S. banking regulators
published a final Basel II rule in December 2007, which requires JPMorgan Chase to implement Basel
II at the holding company level, as well as at certain of its key U.S. bank subsidiaries.
Prior to full implementation of the new Basel II Framework, JPMorgan Chase is required to complete
a qualification period of four consecutive quarters during which it needs to demonstrate that it
meets the requirements of the rule to the satisfaction of its primary U.S. banking regulators. The
U.S. implementation timetable consists of the qualification period, starting no later than April 1,
2010, followed by a minimum transition period of three years. During the transition period, Basel
II risk-based capital requirements cannot fall below certain floors
based on current Basel I regulations. JPMorgan Chase is currently in the qualification period and expects to be in
compliance with all relevant Basel II rules within the established timelines. In addition, the Firm
has adopted, and will con-
| JPMorgan Chase & Co. / 2010 Annual Report | 103 |
Table of Contents
Management’s discussion and analysis
tinue to adopt, based on various established timelines, Basel II rules in
certain non-U.S. jurisdictions, as required.
Basel III
In addition to the Basel II Framework, on December 16, 2010, the Basel Committee issued the final
version of the Capital Accord, called “Basel III”, which included narrowing the definition of
capital, increasing capital requirements for specific exposures, introducing short-term liquidity
coverage and term funding standards, and establishing an international leverage ratio. The Basel
Committee also announced higher capital ratio requirements under Basel III which provide that the
common equity requirement will be increased to 7%, comprised of a minimum of 4.5% plus a 2.5%
capital conservation buffer.
In addition, the U.S. federal banking agencies have published for public comment proposed
risk-based capital floors pursuant to the requirements of the Dodd-Frank Act to establish a
permanent Basel I floor under Basel II / Basel III capital calculations.
The Firm fully expects to
be in compliance with the higher Basel III capital standards when they become effective on January
1, 2019, as well as additional Dodd-Frank Act capital requirements when they are implemented. The
Firm estimates that its Tier 1 common ratio under Basel III rules (including the changes for
calculating capital on trading assets and securitizations) would be 7% as of December 31, 2010.
This estimate reflects the Firm’s current understanding of the Basel III rules and their
application to its businesses as currently conducted; accordingly, this estimate will evolve over
time as the Firm’s businesses change and as a result of further rule-making on Basel III
implementation from U.S. federal banking agencies. The Firm also believes it may need to modify the
current liquidity profile of its assets and liabilities in response to the short-term liquidity
coverage and term funding standards contained in Basel III. The Basel III revisions
governing liquidity and capital requirements are subject to prolonged observation and transition
periods. The observation period for the liquidity coverage ratio and
term funding standards begins in 2011, with
implementation in 2015 and 2018, respectively. The transition period for banks to meet the revised common equity
requirement will begin in 2013, with implementation on January 1, 2019. The Firm will continue to
monitor the ongoing rule-making process to assess both the timing and the impact of Basel III on
its businesses and financial condition.
Broker-dealer regulatory capital
JPMorgan Chase’s principal U.S. broker-dealer subsidiaries
are J.P. Morgan Securities LLC (“JPMorgan Securities”; formerly J.P. Morgan Securities Inc.), and
J.P. Morgan Clearing Corp. (“JPMorgan Clearing”). JPMorgan Securities became a limited liability
company on September 1, 2010. JPMorgan Clearing is a subsidiary of JPMorgan Securities and provides
clearing and settlement services. JPMorgan Securities and JPMorgan Clearing are each subject to
Rule 15c3-1 under the Securities Exchange Act of 1934 (the “Net Capital Rule”). JPMorgan Securities
and JPMorgan Clearing are also registered as futures commission
merchants and subject to Rule 1.17
of the Commodity Futures Trading Commission (“CFTC”).
JPMorgan Securities and JPMorgan Clearing have elected to compute their minimum net capital
requirements in accordance with the “Alternative Net Capital Requirements” of the Net Capital Rule.
At December 31, 2010, JPMorgan Securities’ net capital, as defined by the Net Capital Rule, was
$6.9 billion, exceeding the minimum requirement by $6.3 billion, and JPMorgan Clearing’s net
capital was $5.7 billion, exceeding the minimum requirement by $3.9 billion.
In addition to its minimum net capital requirement, JPMorgan Securities is required to hold
tentative net capital in excess of $1.0 billion and is also required to notify the Securities and
Exchange Commission (“SEC”) in the event that tentative net capital is less than $5.0 billion, in
accordance with the market and credit risk standards of Appendix E of the Net Capital Rule. As of
December 31, 2010, JPMorgan Securities had tentative net capital in excess of the minimum and
notification requirements.
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying its business
activities, using internal risk-assessment methodologies. The Firm measures economic capital
primarily based on four risk factors: credit, market, operational and private equity risk.
| Economic risk capital | Yearly Average | |||||||
| Year ended December 31, (in billions) | 2010 | 2009 | ||||||
|
Credit risk
|
$ | 49.7 | $ | 51.3 | ||||
|
Market risk
|
15.1 | 15.4 | ||||||
|
Operational risk
|
7.4 | 8.5 | ||||||
|
Private equity risk
|
6.2 | 4.7 | ||||||
|
Economic risk capital
|
78.4 | 79.9 | ||||||
|
Goodwill
|
48.6 | 48.3 | ||||||
|
Other
(a)
|
34.5 | 17.7 | ||||||
|
Total common stockholders’ equity
|
$ | 161.5 | $ | 145.9 | ||||
| (a) | Reflects additional capital required, in the Firm’s view, to meet its regulatory and debt rating objectives. |
Credit risk capital
Credit risk capital is estimated separately for the wholesale businesses (IB, CB, TSS and AM) and
consumer businesses (RFS and CS).
Credit risk capital for the overall wholesale credit portfolio is defined in terms of unexpected
credit losses, both from defaults and from declines in the portfolio value due to credit
deterioration measured over a one-year period at a confidence level consistent with an “AA” credit
rating standard. Unexpected losses are losses in excess of those for which allowances for credit
losses are maintained. The capital methodology is based on several principal drivers of credit
risk: exposure at default (or loan-equivalent amount), default likelihood, credit spreads, loss
severity and portfolio correlation.
| 104 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Credit risk capital for the consumer portfolio is based on product and other relevant risk
segmentation. Actual segment-level default and severity experience are used to estimate unexpected
losses for a one-year horizon at a confidence level consistent with an “AA” credit rating standard.
See Credit Risk Management on pages 116–118 of this Annual Report for more information about these
credit risk measures.
Market risk capital
The Firm calculates market risk capital guided by the principle that capital should reflect the
risk of loss in the value of portfolios and financial instruments caused by adverse movements in
market variables, such as interest and foreign exchange rates, credit spreads, and securities and
commodities prices, taking into account the liquidity of the financial instruments. Results from
daily VaR, biweekly stress-tests, issuer credit spreads and default risk calculations, as well as
other factors, are used to determine appropriate capital levels. Market risk capital is allocated
to each business segment based on its risk assessment. See Market
Risk Management on pages 142–146
of this Annual Report for more information about these market risk measures.
Operational risk capital
Capital is allocated to the lines of business for operational risk using a risk-based capital
allocation methodology which estimates operational risk on a bottom-up basis. The operational risk
capital model is based on actual losses and potential scenario-based stress losses, with
adjustments to the capital calculation to reflect changes in the quality of the control environment
or the use of risk-transfer products. The Firm believes its model is consistent with the Basel II
Framework. See Operational Risk Management on pages 147–148 of this Annual Report for more
information about operational risk.
Private equity risk capital
Capital is allocated to privately- and publicly-held securities, third-party fund investments, and
commitments in the private equity portfolio to cover the potential loss associated with a decline
in equity markets and related asset devaluations. In addition to negative market fluctuations,
potential losses in private equity investment portfolios can be magnified by liquidity risk.
Capital allocation for the private equity portfolio is based on measurement of the loss experience
suffered by the Firm and other market participants over a prolonged period of adverse equity market
conditions.
Line of business equity
The Firm’s framework for allocating capital is based on the following objectives:
| • | Integrate firmwide capital management activities with capital management activities within each of the lines of business; |
| • | Measure performance consistently across all lines of business; and |
| • | Provide comparability with peer firms for each of the lines of business |
Equity for a line of business represents the amount the Firm believes the business would require if
it were operating independently, incorporating sufficient capital to address economic risk
measures, regulatory capital requirements and capital levels for similarly rated peers. Capital is
also allocated to each line of business for, among other things, goodwill and other intangibles
associated with acquisitions effected by the line of business. Return on common equity is measured
and internal targets for expected returns are established as key measures of a business segment’s
performance.
| Line of business equity | ||||||||
| December 31, (in billions) | 2010 | 2009 | ||||||
|
Investment Bank
|
$ | 40.0 | $ | 33.0 | ||||
|
Retail Financial Services
|
28.0 | 25.0 | ||||||
|
Card Services
|
15.0 | 15.0 | ||||||
|
Commercial Banking
|
8.0 | 8.0 | ||||||
|
Treasury & Securities Services
|
6.5 | 5.0 | ||||||
|
Asset Management
|
6.5 | 7.0 | ||||||
|
Corporate/Private Equity
|
64.3 | 64.2 | ||||||
|
Total common stockholders’ equity
|
$ | 168.3 | $ | 157.2 | ||||
| Line of business equity | Yearly Average | |||||||||||
| (in billions) | 2010 | 2009 | 2008 | |||||||||
|
Investment Bank
|
$ | 40.0 | $ | 33.0 | $ | 26.1 | ||||||
|
Retail Financial Services
|
28.0 | 25.0 | 19.0 | |||||||||
|
Card Services
|
15.0 | 15.0 | 14.3 | |||||||||
|
Commercial Banking
|
8.0 | 8.0 | 7.3 | |||||||||
|
Treasury & Securities Services
|
6.5 | 5.0 | 3.8 | |||||||||
|
Asset Management
|
6.5 | 7.0 | 5.6 | |||||||||
|
Corporate/Private Equity
|
57.5 | 52.9 | 53.0 | |||||||||
|
Total common
stockholders’ equity
|
$ | 161.5 | $ | 145.9 | $ | 129.1 | ||||||
Effective January 1, 2010, the Firm enhanced its line of business equity framework to better
align equity assigned to the lines of business with changes anticipated to occur in each line
of business, and to reflect the competitive and regulatory landscape. The lines of business are now
capitalized based on the Tier 1 common standard, rather than the Tier 1 capital standard. In 2011,
the Firm will further evaluate its line-of-business equity framework as appropriate to reflect
future Basel III Tier 1 common capital requirements.
| JPMorgan Chase & Co. / 2010 Annual Report | 105 |
Table of Contents
Management’s discussion and analysis
Capital actions
Dividends
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend
from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders
of record on April 6, 2009. The action enabled the Firm to retain approximately $5.5 billion in
common equity in each of 2010 and 2009, and was taken to ensure the Firm had sufficient capital
strength in the event the very weak economic conditions that existed at the beginning of 2009
deteriorated further. JPMorgan Chase declared quarterly cash dividends on its common stock in the
amount of $0.05 per share for each quarter of 2010 and 2009.
For information regarding dividend restrictions, see Note 23 and Note 28 on pages 267–268 and 273,
respectively, of this Annual Report.
The following table shows the common dividend payout ratio based on reported net income.
| Year ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
Common dividend payout ratio
|
5 | % | 9 | % | 114 | % | ||||||
Issuance
On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of common stock at $35.25 per
share. On September 30, 2008, the Firm issued $11.5 billion, or 284 million shares, of common stock
at $40.50 per share. The proceeds from these issuances were used for general corporate purposes.
For additional information regarding common stock, see Note 24 on page 268 of this Annual Report.
Capital Purchase Program
Pursuant
to the U.S. Treasury’s Capital Purchase Program, on October 28, 2008, the Firm issued to the U.S.
Treasury, for total proceeds of $25.0 billion, (i) 2.5 million shares of Series K Preferred Stock,
and (ii) a Warrant to purchase up to 88,401,697 shares of the Firm’s common stock, at an exercise
price of $42.42 per share, subject to certain antidilution and other adjustments. On June 17, 2009,
the Firm redeemed all of the outstanding shares of Series K Preferred Stock and repaid the full
$25.0 billion principal amount together with accrued dividends. The U.S. Treasury exchanged the
Warrant for 88,401,697 warrants, each of which is a warrant to purchase a share of the Firm’s
common stock at an exercise price of $42.42 per share, and, on December 11, 2009, sold the warrants
in a secondary public offering for $950 million. The Firm did not purchase any of the warrants sold
by the U.S. Treasury.
Stock repurchases
Under the stock repurchase program authorized by the Firm’s Board of Directors, the Firm is
authorized to repurchase up to $10.0 billion of the Firm’s common stock plus the 88 million
warrants sold by the U.S. Treasury in 2009. During 2009, the Firm did not
repurchase any shares of its common stock or warrants. In the second quarter of 2010, the Firm
resumed common stock repurchases, and during the year repurchased an
aggregate of 78 million shares
for $3.0 billion at an average price per share of $38.49. The Firm’s share repurchase activities in
2010 were intended to offset sharecount increases resulting from employee stock-based incentive
awards and were consistent with the Firm’s goal of maintaining an appropriate sharecount. The Firm
did not repurchase any of the warrants during 2010. As of December 31, 2010, $3.2 billion of
authorized repurchase capacity remained with respect to the common stock, and all of the authorized
repurchase capacity remained with respect to the warrants.
The Firm may, from time to time, enter into written trading plans under Rule 10b5-1 of the
Securities Exchange Act of 1934 to facilitate the repurchase of common stock and warrants in
accordance with the repurchase program. A Rule 10b5-1 repurchase plan allows the Firm to repurchase
its equity during periods when it would not otherwise be repurchasing common stock – for example,
during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be made
according to a predefined plan established when the Firm is not aware of material nonpublic
information.
The authorization to repurchase common stock and warrants will be utilized at management’s
discretion, and the timing of purchases and the exact number of shares and warrants purchased is
subject to various factors, including market conditions; legal considerations affecting the amount
and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and
intangibles); internal capital generation; and alternative potential investment opportunities. The
repurchase program does not include specific price targets or timetables; may be executed through
open market purchases or privately negotiated transactions, including through the use of Rule
10b5-1 programs; and may be suspended at any time.
For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item
5, Market for registrant’s common equity, related stockholder matters and issuer purchases of
equity securities, on pages 13–14 of JPMorgan Chase’s 2010 Form 10-K.
| 106 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk
management framework and governance structure are intended to provide comprehensive controls and
ongoing management of the major risks taken in its business activities. The Firm employs a holistic
approach to risk management to ensure the broad spectrum of risk types are considered in managing
its business activities. The Firm’s risk management framework is intended to create a culture of
risk awareness and personal responsibility throughout the Firm where collaboration, discussion,
escalation and sharing of information is encouraged.
The Firm’s overall risk appetite is established in the context of the Firm’s capital, earnings
power, and diversified business model. The Firm employs a formal risk appetite framework to
clearly link risk appetite and return targets, controls and capital management. The Firm’s CEO is
responsible for setting the overall risk appetite of the Firm and the LOB CEOs are responsible for
setting the risk appetite for their respective lines of business. The Risk Policy
Committee of the Firm’s Board of Directors approves the risk appetite policy on behalf of the entire Board of Directors.
Risk governance
The Firm’s risk governance structure is based on the principle that each line of business is
responsible for managing the risk inherent in its business, albeit with appropriate Corporate
oversight. Each line of business risk committee is responsible for decisions regarding the
business’ risk strategy, policies and controls.
Overlaying line of business risk management are four corporate functions with risk
management–related responsibilities: Risk Management, the Chief Investment Office, Corporate
Treasury, and Legal and Compliance.
Risk Management operates independently to provide oversight of firmwide risk management and
controls, and is viewed as a partner in achieving appropriate business objectives. Risk Management
coordinates and communicates with each line of business through the line of business risk
committees and chief risk officers to manage risk. The Risk Management function is headed by the
Firm’s Chief Risk Officer, who is a member of the Firm’s Operating Committee and who reports to the
Chief Executive Officer and the Board of Directors, primarily through the Board’s Risk Policy
Committee. The Chief Risk Officer is also a member of the line of business risk committees. Within
the Firm’s Risk Management function are units responsible for credit risk, market risk, operational
risk and private equity risk, as well as risk reporting, risk policy and risk technology and
operations. Risk technology and operations is responsible for building the information technology
infrastructure used to monitor and manage risk.
The Chief Investment Office and Corporate Treasury are responsible for measuring, monitoring,
reporting and managing the Firm’s liquidity, interest rate and foreign exchange risk, and other
structural risks.
Legal and Compliance has oversight for legal and fiduciary risk.
In addition to the risk committees of the lines of business and the above-referenced risk
management functions, the Firm also has an Investment Committee, an Asset-Liability Committee and
three other risk-related committees – the Risk Working Group, the Global Counterparty Committee
and the Markets Committee. All of these committees are accountable to the Operating Committee. The
membership of these committees are composed of senior management of the Firm, including
representatives of lines of business, Risk Management, Finance and other senior executives. The
committees meet frequently to discuss a broad range of topics including, for example, current
market conditions and other external events, risk exposures, and risk concentrations to ensure that the
impact of risk factors are considered broadly across the Firm’s businesses.
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Management’s discussion and analysis
The Asset-Liability Committee, chaired by the Corporate Treasurer, monitors the Firm’s
overall interest rate risk and liquidity risk. ALCO is responsible for reviewing and approving the
Firm’s liquidity policy and contingency funding plan. ALCO also reviews the Firm’s funds transfer
pricing policy (through which lines of business “transfer” interest rate and foreign exchange risk
to Corporate Treasury in the Corporate/Private Equity segment), earnings at risk, overall interest
rate position, funding requirements and strategy, and the Firm’s securitization programs (and any
required liquidity support by the Firm of such programs).
The Investment Committee, chaired by the Firm’s Chief Financial Officer, oversees global merger
and acquisition activities undertaken by JPMorgan Chase for its own account that fall outside the
scope of the Firm’s private equity and other principal finance activities.
The Risk Working Group, chaired by the Firm’s Chief Risk Officer, meets monthly to review issues
that cross lines of business such as risk policy, risk methodology, risk concentrations, regulatory
capital and other regulatory issues, and such other topics referred to it by line of business risk
committees.
The Markets Committee, chaired by the Firm’s Chief Risk Officer, meets weekly to review, monitor
and discuss significant risk matters, which may include credit, market and operational risk issues;
market moving events; large transactions; hedging strategies; reputation risk; conflicts of
interest; and other issues.
The Global Counterparty Committee, chaired by the Firm’s Chief Risk Officer, reviews exposures to
counterparties when such exposure levels are above portfolio-established thresholds. The Committee
meets quarterly to review total exposures with these counterparties, with particular focus on
counterparty trading exposures to ensure that such exposures are deemed appropriate to support the
Firm’s trading activities, and to direct changes in exposure levels as needed.
The Board of Directors exercises its oversight of risk management, principally through the Board’s
Risk Policy Committee and Audit Committee. The Risk Policy Committee oversees senior management
risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks. The Audit Committee is responsible for
oversight of guidelines and policies that
govern the process by which risk assessment and
management is undertaken. In addition, the Audit Committee reviews with management the system of
internal controls that is relied upon to provide reasonable assurance of
compliance with the Firm’s operational risk management processes.
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Risk monitoring and control
The Firm’s ability to properly identify, measure, monitor and report risk is critical to both its
soundness and profitability.
| • | Risk identification: The Firm’s exposure to risk through its daily business dealings, including lending and capital markets activities, is identified and aggregated through the Firm’s risk management infrastructure. In addition, individuals who manage risk positions, particularly those that are complex, are responsible for identifying and estimating potential losses that could arise from specific or unusual events that may not be captured in other models, and for communicating those risks to senior management. |
| • | Risk measurement: The Firm measures risk using a variety of methodologies, including calculating probable loss, unexpected loss and value-at-risk, and by conducting stress tests and making comparisons to external benchmarks. Measurement models and related assumptions are routinely subject to internal model review, |
| empirical validation and benchmarking with the goal of ensuring that the Firm’s risk estimates are reasonable and reflective of the risk of the underlying positions. |
| • | Risk monitoring/control: The Firm’s risk management policies and procedures incorporate risk mitigation strategies and include approval limits by customer, product, industry, country and business. These limits are monitored on a daily, weekly and monthly basis, as appropriate. |
| • | Risk reporting: The Firm reports risk exposures on both a line of business and a consolidated basis. This information is reported to management on a daily, weekly and monthly basis, as appropriate. There are eight major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, private equity risk, operational risk, legal and fiduciary risk, and reputation risk. |
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Management’s discussion and analysis
LIQUIDITY RISK MANAGEMENT
The ability to maintain surplus levels of liquidity
through economic cycles is crucial to financial services companies, particularly during periods of
adverse conditions. The Firm’s funding strategy is intended to ensure liquidity and diversity of
funding sources to meet actual and contingent liabilities through both normal and stress periods.
JPMorgan Chase’s primary sources of liquidity include a diversified deposit base, which was $930.4
billion at December 31, 2010, and access to the equity capital markets and long-term unsecured and
secured funding sources, including asset securitizations and borrowings from FHLBs. Additionally,
JPMorgan Chase maintains large pools of highly-liquid unencumbered assets. The Firm actively
monitors the availability of funding in the wholesale markets across various geographic regions and
in various currencies. The Firm’s ability to generate funding from a broad range of sources in a
variety of geographic locations and in a range of tenors is intended to enhance financial
flexibility and limit funding concentration risk.
Management considers the Firm’s liquidity position to be strong, based on its liquidity metrics as
of December 31, 2010, and believes that the Firm’s unsecured and secured funding capacity is
sufficient to meet its on– and off–balance sheet obligations. The Firm was able to access the
funding markets as needed during 2010 and throughout the recent financial crisis.
Governance
The Firm’s governance process is designed to ensure that its liquidity position remains strong. The
Asset-Liability Committee reviews and approves the Firm’s liquidity policy and contingency funding
plan. Corporate Treasury formulates and is responsible for executing the Firm’s liquidity policy
and contingency funding plan as well as measuring, monitoring, reporting and managing the Firm’s
liquidity risk profile. JPMorgan Chase centralizes the management of global funding and liquidity
risk within Corporate Treasury to maximize liquidity access, minimize funding costs and enhance
global identification and coordination of liquidity risk. This centralized approach involves
frequent communication with the business segments, disciplined management of liquidity at the
parent holding company, comprehensive market-based pricing of all assets and liabilities,
continuous balance sheet monitoring, frequent stress testing of liquidity sources, and frequent
reporting to and communication with senior management and the Board of Directors regarding the
Firm’s liquidity position.
Liquidity monitoring
The Firm employs a variety of metrics to monitor and manage liquidity. One set of analyses used by
the Firm relates to the timing of liquidity sources versus liquidity uses (e.g., funding gap
analysis and parent holding company funding, which is discussed below). A second set of analyses
focuses on ratios of funding and liquid collateral (e.g., measurements of the Firm’s reliance on
short-term unsecured funding as a percentage of total liabilities, as well as analyses of the
relationship of short-term unsecured funding to highly-liquid assets, the deposits-to-loans ratio
and other balance sheet measures).
The Firm performs regular liquidity stress tests as part of its liquidity monitoring. The purpose
of the liquidity stress tests is intended to ensure sufficient liquidity for the Firm under both
idiosyncratic and systemic market stress conditions. These scenarios evaluate the Firm’s liquidity
position across a full year horizon by analyzing the net funding gaps resulting from contractual
and contingent cash and collateral outflows versus by the Firm’s ability to generate additional
liquidity by pledging or selling excess collateral and issuing unsecured debt. The scenarios are
produced for the parent holding company and major bank subsidiaries as well as the Firm’s major
U.S. broker-dealer subsidiaries.
The idiosyncratic stress scenario employed by the Firm is a JPMorgan Chase-specific event that
evaluates the Firm’s net funding gap after a short-term ratings downgrade from the current level of
A-1+/P-1 to A-2/P-2. The systemic market stress scenario evaluates the Firm’s net funding gap
during a period of severe market stress similar to market conditions in 2008 and assumes the Firm
is not uniquely stressed versus its peers. The Firm’s liquidity
position is strong under the Firm-defined stress scenarios outlined
above.
Parent holding company
Liquidity monitoring on the parent holding company takes into consideration regulatory restrictions
that limit the extent to which bank subsidiaries may extend credit to the parent holding company
and other nonbank subsidiaries. Excess cash generated by parent holding company issuance activity
is placed with both bank and nonbank subsidiaries in the form of deposits and advances to satisfy a
portion of subsidiary funding requirements. The remainder of the excess cash is used to purchase
liquid collateral through reverse repurchase agreements. As discussed below, the Firm’s liquidity
management activities are also intended to ensure that its subsidiaries have the ability to
generate replacement funding in the event the parent holding company requires repayment of the
aforementioned deposits and advances.
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The Firm closely monitors the ability of the parent holding company to meet all of its obligations
with liquid sources of cash or cash equivalents for an extended period of time without access to
the unsecured funding markets. The Firm targets pre-funding of parent holding company obligations
for at least 12 months; however, due to conservative liquidity management actions taken by the Firm
in the current environment, the current pre-funding of such obligations is significantly greater
than target.
Global Liquidity Reserve
In addition to the parent holding company, the Firm maintains a significant amount of liquidity –
primarily at its bank subsidiaries, but also at its nonbank subsidiaries. The Global Liquidity
Reserve represents consolidated sources of available liquidity to the Firm, including cash on
deposit at central banks, and cash proceeds reasonably expected to be received in secured
financings of highly liquid, unencumbered securities – such as government-issued debt, government-
and FDIC-guaranteed corporate debt, U.S. government agency debt and agency mortgage-backed
securities (“MBS”). The liquidity amount anticipated to be realized from secured financings is
based on management’s current judgment and assessment of the Firm’s ability to quickly raise
secured financings. The Global Liquidity Reserve also includes the Firm’s borrowing capacity at
various FHLBs, the Federal Reserve Bank discount window and various other central banks from
collateral pledged by the Firm to such banks. Although considered as a source of available
liquidity, the Firm does not view borrowing capacity at the Federal Reserve Bank discount window
and various other central banks as a primary source of funding. As of December 31, 2010, the Global
Liquidity Reserve was approximately $262 billion.
In addition to the Global Liquidity Reserve, the Firm has significant amounts of other
high-quality, marketable securities available to raise liquidity, such as corporate debt and equity
securities.
Basel III
On December 16, 2010, the Basel Committee published the final Basel III rules pertaining to capital
and liquidity requirements, including minimum standards for short-term liquidity coverage – the
liquidity coverage ratio (the “LCR”) – and term funding – the net stable funding ratio (the
“NSFR”). These minimum standards will be phased in over time. The observation period for both the
LCR and the NSFR commences in 2011, with implementation in 2015 and 2018, respectively. For more
information, see the discussion on Basel III on page 104 of this Annual Report.
Funding
Sources of funds
A key strength of the Firm is its diversified deposit franchise, through the RFS, CB, TSS and AM
lines of business, which provides a stable source of funding and decreases reliance on the
wholesale markets. As of December 31, 2010, total deposits for the Firm were $930.4 billion,
compared with $938.4 billion at December 31, 2009. Average total deposits for the Firm were $881.1
billion during 2010, compared with $882.0 billion during 2009. The Firm typically experiences
higher deposit balances at period ends driven by higher seasonal customer deposit inflows. A
significant portion of the Firm’s deposits are retail deposits (40% and 38% at December 31, 2010
and 2009, respectively), which are considered particularly stable as they are less sensitive to
interest rate changes or market volatility. A significant portion of the Firm’s wholesale deposits
are also considered stable sources of funding due to the nature of the relationships from which
they are generated, particularly customers’ operating service relationships with the Firm. As of
December 31, 2010, the Firm’s deposits-to-loans ratio was 134%, compared with 148% at December 31,
2009. The decline in the Firm’s deposits-to-loans ratio was predominately due to an increase in
loans resulting from the January 1, 2010, implementation of new accounting guidance related to
VIEs. The impact of the new accounting guidance on the deposits-to-loans ratio was partially offset
by continued attrition of the heritage Washington Mutual residential loan and credit card loan
portfolios. For further discussions of deposit and liability balance trends, see the discussion of
the results for the Firm’s business segments and the Balance
Sheet Analysis on pages 69–88 and
92–94, respectively, of this Annual Report. For a more detailed discussion of the adoption of the
new accounting guidance, see Note 1 on pages 164–165 of this Annual Report.
Additional sources of funding include a variety of unsecured and secured short-term and long-term
instruments. Short-term unsecured funding sources include federal funds and Eurodollars purchased,
certificates of deposit, time deposits, commercial paper and bank notes. Long-term unsecured
funding sources include long-term debt, trust preferred capital debt securities, preferred stock
and common stock.
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Management’s discussion and analysis
The Firm’s short-term secured sources of funding consist of securities loaned or sold under
agreements to repurchase and borrowings from the Chicago, Pittsburgh and San Francisco FHLBs.
Secured long-term funding sources include asset-backed securitizations, and borrowings from the
Chicago, Pittsburgh and San Francisco FHLBs.
Funding markets are evaluated on an ongoing basis to achieve an appropriate global balance of
unsecured and secured funding at favorable rates.
Short-term funding
The Firm’s reliance on short-term unsecured funding sources such as federal funds and Eurodollars
purchased, certificates of deposit, time deposits, commercial paper and bank notes is limited.
Total commercial paper liabilities for the Firm were $35.4 billion as of December 31, 2010,
compared with $41.8 billion as of December 31, 2009. However, of those totals, $29.2 billion and
$28.7 billion as of December 31, 2010 and 2009, respectively, originated from deposits that
customers chose to sweep into commercial paper liabilities as a cash management product offered by
the Firm. Therefore, commercial paper liabilities sourced from wholesale funding markets were $6.2
billion as of December 31, 2010, compared with $13.1 billion as of December 31, 2009. There were no
material differences between the average and year-end balances of commercial paper outstanding for
the year ended and as of December 31, 2010.
Securities loaned or sold under agreements to repurchase are secured predominantly by high quality
securities collateral, including government-issued debt, agency debt and agency MBS. The balances
of securities loaned or sold under agreements to repurchase, which constitute a significant portion
of the federal funds purchased and securities loaned or sold under repurchase agreements, was
$273.3 billion as of December 31, 2010, compared with $253.5 billion as of December 31, 2009. There
were no material differences between the average and year-end balances of securities loaned or sold
under agreements to repurchase for the year ended and as of December 31, 2010. The balances
associated with securities loaned or sold under agreements to repurchase fluctuate over time due to
customers’ investment and financing activities; the Firm’s demand for financing; the Firm’s matched
book activity; the ongoing management of the mix of the Firm’s liabilities, including its secured
and unsecured financing (for both the investment and trading portfolios); and other market and
portfolio factors. For additional information, see the Balance Sheet
Analysis on pages 92–94, Note
13 on page 219 and Note 20 on page 264 of this Annual Report.
The short-term portion of total other borrowed funds for the Firm was $34.3 billion as of December
31, 2010, compared with $32.9 billion as of December 31, 2009. There were no material differences
between the average and year-end balances of other borrowed funds for the year ended and as of
December 31, 2010.
For additional information, see the table for Short-term and other borrowed funds on page 299 of
this Annual Report.
Long-term funding and issuance
During 2010, the Firm issued $36.1 billion of long-term debt, including $17.1 billion of senior
notes issued in the U.S. market, $2.9 billion of senior notes issued in the non-U.S. markets, $1.5
billion of trust preferred capital debt securities, and $14.6 billion of IB structured notes. In
addition, in January 2011, the Firm issued $4.3 billion of long-term debt, including $3.5 billion
of senior notes in the U.S. market and $800 million of senior notes issued in non-U.S. markets.
During 2009, the Firm issued $19.7 billion of FDIC-guaranteed long-term debt under the Temporary
Liquidity Guarantee Program. During 2009, the Firm also issued non-FDIC-guaranteed debt of $16.1
billion (including $11.0 billion of senior notes and $2.5 billion of trust preferred capital debt
securities issued in the U.S. market, and $2.6 billion of senior notes issued in non-U.S. markets)
and $15.5 billion of IB structured notes. During 2010, $53.4 billion of long-term debt matured or
were redeemed, including $907 million of trust preferred capital debt securities redeemed on
December 28, 2010, through a tender offer, and $22.8 billion of IB structured notes. During 2009,
$55.7 billion of long-term debt (including trust preferred capital debt securities) matured or were
redeemed, including $27.2 billion of IB structured notes.
In addition to the unsecured long-term funding and issuances discussed above, the Firm securitizes
consumer credit card loans, residential mortgages, auto loans and student loans for funding
purposes. Loans securitized by the Firm’s wholesale businesses are related to client-driven
transactions and are not considered to be a source of funding for the Firm. Effective January 1,
2010, certain Firm-sponsored credit card loan, student loan and auto loan securitization trusts
were consolidated as a result of the accounting guidance related to VIEs. As a result of
consolidating these securitization trusts, the maturities or redemptions of the beneficial
interests issued by the securitization trusts are reported as a component of the Firm’s cash flows
from financing activities. During 2010, the Firm did not securitize any credit card loans,
residential mortgage loans, auto loans or student loans through consolidated or nonconsolidated
securitization trusts. During 2009, the Firm securitized $26.5 billion of credit card loans via
nonconsolidated securitization trusts. During 2010, $25.8 billion of loan securitizations matured
or were redeemed,
including $24.9 billion of credit card loan securitizations, $210 million of auto loan
securitizations, $294 million of residential mortgage loan securitizations and $326 million of
student loan securitizations. For further discussion of loan securitizations, see Note 16 on pages
244–259 in this Annual Report.
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During 2010, the Firm borrowed $18.7 billion of new long-term advances from the FHLBs, which were
offset by $18.6 billion of maturities. During 2009, the Firm did not access the FHLBs for any new
long-term advances and maturities were $9.5 billion during the period.
Termination of replacement capital covenants
In connection with the issuance of certain of its trust preferred capital debt securities and its
noncumulative perpetual preferred stock, the Firm had entered into Replacement Capital Covenants
(“RCCs”). These RCCs granted certain rights to the holders of “covered debt,” as defined in the
RCCs, that prohibited the repayment, redemption or purchase of such trust preferred capital debt
securities and noncumulative perpetual preferred stock except, with limited exceptions, to the
extent that JPMorgan Chase had received, in each such case, specified amounts of proceeds from the
sale of certain qualifying securities. On December 10, 2010, the Firm received consents from the
holders of a majority in liquidation amount of the covered debt to the termination of the RCCs, and
the Firm terminated the RCCs pursuant to their terms.
Cash flows
For the years ended December 31, 2010, 2009 and 2008, cash and due from banks increased $1.4
billion, and decreased $689 million and $13.2 billion, respectively. The following discussion
highlights the major activities and transactions that affected JPMorgan Chase’s cash flows during
2010, 2009 and 2008.
Cash flows from operating activities
JPMorgan Chase’s operating assets and liabilities support the Firm’s capital markets and lending activities, including the origination or purchase of loans initially designated as held-for-sale. Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by client-driven activities, market conditions and trading strategies. Management believes cash flows from operations, available cash balances and the Firm’s ability to generate cash through short- and long-term borrowings are sufficient to fund the Firm’s operating liquidity needs.
JPMorgan Chase’s operating assets and liabilities support the Firm’s capital markets and lending activities, including the origination or purchase of loans initially designated as held-for-sale. Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by client-driven activities, market conditions and trading strategies. Management believes cash flows from operations, available cash balances and the Firm’s ability to generate cash through short- and long-term borrowings are sufficient to fund the Firm’s operating liquidity needs.
For the year ended December 31, 2010, net cash used by operating activities was $3.8 billion,
mainly driven by an increase primarily in trading assets—debt and equity instruments; principally
due to improved market activity primarily in equity securities, foreign debt and physical
commodities, partially offset by an increase in trading liabilities due to higher levels of positions taken to facilitate customer driven trading. Net cash was provided by net income and from
adjustments for non-cash items such as the provision for credit losses, depreciation and
amortization and stock-based compensation. Additionally, proceeds from sales and paydowns of loans
originated or purchased with an initial intent to sell were higher than cash used to acquire such
loans.
For the years ended December 31, 2009 and 2008, net cash provided by operating activities was
$122.8 billion and $23.9 billion, respectively. In 2009, the net decline in trading assets and
liabilities was affected by the impact of the challenging capital markets environment that existed
in 2008, and continued into the first half of 2009. In 2009 and 2008, net cash generated from
operating activities was higher than net income, largely as a result of adjustments for non-cash
items such as the provision for credit losses. In addition, for 2009 and 2008 proceeds from sales,
securitizations and paydowns of loans originated or purchased with an initial intent to sell were
higher than cash used to acquire such loans, but the cash flows from these loan activities
remained at reduced levels as a result of the lower activity in these markets.
Cash flows from investing activities
The Firm’s investing activities predominantly include loans originated to be held for investment, the AFS securities portfolio and other short-term interest-earning assets. For the year ended December 31, 2010, net cash of $54.0 billion was provided by investing activities. This resulted from a decrease in deposits with banks largely due to a decline in deposits placed with the Federal Reserve Bank and lower interbank lending as market stress eased since the end of 2009; net sales and maturities of AFS securities used in the Firm’s interest rate risk management activities largely due to repositioning of the portfolio in Corporate, in response to changes in the interest rate environment and to rebalance exposures; and a net decrease in the loan portfolio, driven by the expected runoff of the Washington Mutual credit card portfolio, a decline in lower-yielding promotional credit card balances, continued runoff of the residential real estate portfolios, and repayments and loan sales in IB and CB; the decrease was partially offset by higher originations across the wholesale and consumer businesses. Partially offsetting these cash proceeds was an increase in securities purchased under resale agreements, predominantly due to higher financing volume in IB; and cash used for business acquisitions, primarily RBS Sempra.
The Firm’s investing activities predominantly include loans originated to be held for investment, the AFS securities portfolio and other short-term interest-earning assets. For the year ended December 31, 2010, net cash of $54.0 billion was provided by investing activities. This resulted from a decrease in deposits with banks largely due to a decline in deposits placed with the Federal Reserve Bank and lower interbank lending as market stress eased since the end of 2009; net sales and maturities of AFS securities used in the Firm’s interest rate risk management activities largely due to repositioning of the portfolio in Corporate, in response to changes in the interest rate environment and to rebalance exposures; and a net decrease in the loan portfolio, driven by the expected runoff of the Washington Mutual credit card portfolio, a decline in lower-yielding promotional credit card balances, continued runoff of the residential real estate portfolios, and repayments and loan sales in IB and CB; the decrease was partially offset by higher originations across the wholesale and consumer businesses. Partially offsetting these cash proceeds was an increase in securities purchased under resale agreements, predominantly due to higher financing volume in IB; and cash used for business acquisitions, primarily RBS Sempra.
For the year ended December 31, 2009, net cash of $29.4 billion was provided by investing
activities, primarily from a decrease in deposits with banks reflecting lower demand for inter-bank
lending and lower deposits with the Federal Reserve Bank relative to the elevated levels at the end
of 2008; a net decrease in the loan portfolio across most businesses, driven by continued lower customer demand and loan sales in the wholesale businesses, lower charge volume on credit cards,
slightly higher credit card securitizations, and paydowns; and the maturity of all asset-backed
commercial paper issued by money market mutual funds in connection with the AML facility of the
Federal Reserve Bank of Boston. Largely offsetting these cash proceeds were net purchases of AFS
securities associated with the Firm’s management of interest rate risk and investment of cash
resulting from an excess funding position.
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Management’s discussion and analysis
For the year ended December 31, 2008, net cash of $283.7 billion was used in investing activities,
primarily for: increased deposits with banks as the result of the availability of excess cash for
short-term investment opportunities through interbank lending, and reserve balances held by the
Federal Reserve (which became an investing activity in 2008, reflecting a policy change of the
Federal Reserve to pay interest to depository institutions on reserve balances); net purchases of
investment securities in the AFS portfolio to manage the Firm’s exposure to interest rate
movements; net additions to the wholesale loan portfolio from organic growth in CB; additions to
the consumer prime mortgage portfolio as a result of the decision to retain, rather than sell, new
originations of nonconforming prime mortgage loans; an increase in securities purchased under
resale agreements reflecting growth in demand from clients for liquidity; and net purchases of
asset-backed commercial paper from money market mutual funds in connection with the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML facility”) of the Federal
Reserve Bank of Boston. Partially offsetting these uses of cash were proceeds from loan sales and
securitization activities as well as net cash received from acquisitions and the sale of an
investment. Additionally, in June 2008, in connection with the Bear Stearns merger, the Firm sold
assets acquired from Bear Stearns to the FRBNY and received cash proceeds of $28.85 billion.
Cash flows from financing activities
The Firm’s financing activities primarily reflect cash flows related to raising customer deposits, and issuing long-term debt (including trust preferred capital debt securities) as well as preferred and common stock. In 2010, net cash used in financing activities was $49.2 billion. This resulted from net payments of long-term borrowings and trust preferred capital debt securities as new issuances were more than offset by payments primarily reflecting a decline in beneficial interests issued by consolidated VIEs due to maturities related to Firm-sponsored credit card securitization trusts; a decline in deposits associated with wholesale funding activities due to the Firm’s lower funding needs; lower deposit levels in TSS, offset partially by net inflows from existing customers and new business in AM, CB and RFS; a decline in commercial paper and other borrowed funds due to lower funding requirements; payments of cash dividends; and repurchases of common stock. Cash was generated as a result of an increase in securities sold under repurchase agreements largely as a result of an increase in activity levels in IB partially offset by a decrease in CIO reflecting repositioning activities.
The Firm’s financing activities primarily reflect cash flows related to raising customer deposits, and issuing long-term debt (including trust preferred capital debt securities) as well as preferred and common stock. In 2010, net cash used in financing activities was $49.2 billion. This resulted from net payments of long-term borrowings and trust preferred capital debt securities as new issuances were more than offset by payments primarily reflecting a decline in beneficial interests issued by consolidated VIEs due to maturities related to Firm-sponsored credit card securitization trusts; a decline in deposits associated with wholesale funding activities due to the Firm’s lower funding needs; lower deposit levels in TSS, offset partially by net inflows from existing customers and new business in AM, CB and RFS; a decline in commercial paper and other borrowed funds due to lower funding requirements; payments of cash dividends; and repurchases of common stock. Cash was generated as a result of an increase in securities sold under repurchase agreements largely as a result of an increase in activity levels in IB partially offset by a decrease in CIO reflecting repositioning activities.
In 2009, net cash used in financing activities was $153.1 billion; this reflected a decline in
wholesale deposits, predominantly in TSS, driven by the continued normalization of wholesale
deposit levels resulting from the mitigation of credit concerns, compared with the heightened
market volatility and credit concerns in the latter part of 2008; a decline in other borrowings,
due to the absence of borrowings from the Federal Reserve under the Term Auction Facility program;
net repayments of short-term advances from FHLBs and the maturity of the nonrecourse advances under
the Federal Reserve Bank of Boston AML Facility; the June 17, 2009, repayment in full of the $25.0
billion principal amount of Series K Preferred Stock issued to the U.S. Treasury; and the payment
of cash dividends on common and preferred stock. Cash was also used for the net payment of
long-term borrowings and trust preferred capital debt securities, as issuances of FDIC-guaranteed
debt and non-FDIC guaranteed debt in both the U.S. and European markets were more than offset by
repayments including long-term advances from FHLBs. Cash proceeds resulted from an increase in
securities loaned or sold under repurchase agreements, partly attributable to favorable pricing and
to financing the increased size of the Firm’s AFS securities portfolio; and the issuance of $5.8
billion of common stock. There were no repurchases in the open market of common stock or the
warrants during 2009.
In 2008, net cash provided by financing activities was $247.0 billion due to growth in wholesale
deposits, in particular, interest- and noninterest-bearing deposits in TSS (driven by both new and
existing clients, and due to the deposit inflows related to the heightened volatility and credit
concerns affecting the global markets that began in the third quarter of 2008), as well as
increases in AM and CB (due to organic growth); proceeds of $25.0 billion from the issuance of
preferred stock and the Warrant to the U.S. Treasury under the Capital Purchase Program; additional
issuances of common stock and preferred stock used for general corporate purposes; an increase in
other borrowings due to nonrecourse secured advances under the Federal Reserve Bank of Boston AML
Facility to fund the purchase of asset-backed commercial paper from money market mutual funds;
increases in federal funds purchased and securities loaned or sold under repurchase agreements in
connection with higher client demand for liquidity and to finance growth in the Firm’s AFS
securities portfolio; and a net increase in long-term borrowings due to a combination of non-FDIC
guaranteed debt and trust preferred capital debt securities issued prior to December 4, 2008, and
the issuance of $20.8 billion of FDIC-guaranteed long-term debt issued during the fourth quarter of
2008. The fourth-quarter FDIC-guaranteed debt issuance was offset partially by maturities of
non-FDIC guaranteed long-term debt during the same period. The increase in long-term borrowings and
trust preferred capital debt securities was used primarily to fund certain illiquid assets held by
the parent holding company and to build liquidity. Cash was also used to pay dividends on common and preferred stock. The Firm did not repurchase
any shares of its common stock during 2008.
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Credit ratings
The cost and availability of financing are influenced by credit ratings. Reductions in these ratings
could have an adverse effect on the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral or funding requirements
and decrease the number of investors and counterparties willing to lend to the Firm. Additionally, the Firm’s funding requirements for VIEs and other third-party
commitments may be adversely affected by a decline in credit ratings. For additional information on the impact of a credit ratings downgrade
on the funding requirements
for VIEs, and on derivatives and collateral agreements, see
Special-purpose entities on page 95 and Ratings profile of
derivative receivables MTM on page 124, and Note 6 on pages 191–199, respectively,
of this Annual Report.
Critical factors in maintaining high credit ratings include a stable and diverse earnings
stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources, and disciplined liquidity monitoring procedures.
The credit ratings of the parent holding company and each of the Firm’s significant banking
subsidiaries as of December 31, 2010, were as follows.
| Short-term debt | Senior long-term debt | |||||||||||||||||||||||
| Moody’s | S&P | Fitch | Moody’s | S&P | Fitch | |||||||||||||||||||
|
JPMorgan Chase & Co.
|
P | -1 | A-1 | F1+ | Aa3 | A+ | AA- | |||||||||||||||||
|
JPMorgan Chase Bank, N.A.
|
P | -1 | A-1+ | F1+ | Aa1 | AA- | AA- | |||||||||||||||||
|
Chase Bank USA, N.A.
|
P | -1 | A-1+ | F1+ | Aa1 | AA- | AA- | |||||||||||||||||
The senior unsecured ratings from Moody’s, S&P and Fitch on JPMorgan Chase and
its principal bank subsidiaries remained unchanged at December 31, 2010, from December 31, 2009. At
December 31, 2010, Moody’s and S&P’s outlook remained negative, while Fitch’s outlook remained
stable.
Following the Firm’s earnings release on January 14, 2011, S&P and Moody’s announced that their
ratings on the Firm remained unchanged.
If the Firm’s senior long-term debt ratings were downgraded by one notch, the Firm believes the
incremental cost of funds or loss of funding would be manageable, within the context of current
market conditions and the Firm’s liquidity resources. JPMorgan Chase’s
unsecured debt does not
contain requirements that would call for an acceleration of payments, maturities or changes in the
structure of the existing debt, provide any limitations on future borrowings or require additional
collateral, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings,
or stock price.
Several rating agencies have announced that they will be evaluating the effects of the financial
regulatory reform legislation in order to determine the extent, if any, to which financial
institutions, including the Firm, may be negatively impacted. There is no assurance the Firm’s
credit ratings will not be downgraded in the future as a result of any such reviews.
| JPMorgan Chase & Co. / 2010 Annual Report | 115 |
Table of Contents
Management’s discussion and analysis
CREDIT RISK MANAGEMENT
Credit risk is the risk of loss from obligor or counterparty default. The Firm provides
credit (for example, through loans, lending-related commitments, guarantees and derivatives) to a
variety of customers, from large corporate and institutional clients to the individual consumer.
Loans originated or acquired by the Firm’s wholesale businesses are generally retained on the
balance sheet. Credit risk management actively monitors the wholesale portfolio to ensure that it
is well diversified across industry, geography, risk rating, maturity and individual client
categories. Portfolio management for wholesale loans includes, for the Firm’s syndicated loan
business, distributing originations into the market place, targeting exposure held in the retained
wholesale portfolio at less than 10% of the customer facility. With regard to the consumer credit
market, the Firm focuses on creating a portfolio that is diversified from a product, industry and
geographic perspective. Loss mitigation strategies are being employed for all home lending
portfolios. These strategies include rate reductions, forbearance and other actions intended to
minimize economic loss and avoid foreclosure. In the mortgage business, originated loans are either
retained in the mortgage portfolio or securitized and sold to U.S. government agencies and U.S.
government-sponsored enterprises.
Credit risk organization
Credit risk management is overseen by the Chief Risk Officer and implemented within the lines of
business. The Firm’s credit risk management governance consists of the following functions:
| • | Establishing a comprehensive credit risk policy framework | |
| • | Monitoring and managing credit risk across all portfolio segments, including transaction and line approval | |
| • | Assigning and managing credit authorities in connection with the approval of all credit exposure | |
| • | Managing criticized exposures and delinquent loans | |
| • | Determining the allowance for credit losses and ensuring appropriate credit risk-based capital management |
Risk identification
The Firm
is exposed to credit risk through lending and capital markets activities. Credit Risk
Management works in partnership with the business segments in identifying and aggregating exposures
across all lines of business.
Risk measurement
To measure credit risk, the Firm employs several methodologies for estimating the likelihood of
obligor or counterparty default. Methodologies for measuring credit risk vary depending on several
factors, including type of asset (e.g., consumer versus wholesale), risk measurement parameters
(e.g., delinquency status and borrower’s credit score versus wholesale risk-rating) and risk
management and collection processes (e.g., retail collection center versus centrally managed
workout groups). Credit risk measurement is based on the amount of exposure should the obligor or
the counterparty default, the probability of default and the loss severity given a default event.
Based on these factors and related market-based inputs, the Firm estimates both probable and
unexpected losses for the wholesale and consumer portfolios as follows:
| • | Probable losses are based primarily upon statistical estimates of credit losses as a result of obligor or counterparty default. However, probable losses are not the sole indicators of risk. | |
| • | Unexpected losses, reflected in the allocation of credit risk capital, represent the potential volatility of actual losses relative to the probable level of losses. |
Risk measurement for the wholesale portfolio is assessed primarily on a risk-rated basis; for the
consumer portfolio, it is assessed primarily on a credit-scored basis.
Risk-rated exposure
Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis by Credit Risk Management and revised, if needed, to reflect the borrowers’ current financial positions, risk profiles and the related collateral. For portfolios that are risk-rated, probable and unexpected loss calculations are based on estimates of probability of default and loss severity given a default. These risk-rated portfolios are generally held in IB, CB, TSS and AM; they also include approximately $18 billion of certain business banking and auto loans in RFS that are risk-rated because they have characteristics similar to commercial loans. Probability of default is the likelihood that a loan will not be repaid and will default. Probability of default is calculated for each client who has a risk-rated loan (wholesale and certain risk-rated consumer loans). Loss given default is an estimate of losses given a default event and takes into consideration collateral and structural support for each credit facility. Calculations and assumptions are based on management information systems and methodologies which are under continual review.
Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis by Credit Risk Management and revised, if needed, to reflect the borrowers’ current financial positions, risk profiles and the related collateral. For portfolios that are risk-rated, probable and unexpected loss calculations are based on estimates of probability of default and loss severity given a default. These risk-rated portfolios are generally held in IB, CB, TSS and AM; they also include approximately $18 billion of certain business banking and auto loans in RFS that are risk-rated because they have characteristics similar to commercial loans. Probability of default is the likelihood that a loan will not be repaid and will default. Probability of default is calculated for each client who has a risk-rated loan (wholesale and certain risk-rated consumer loans). Loss given default is an estimate of losses given a default event and takes into consideration collateral and structural support for each credit facility. Calculations and assumptions are based on management information systems and methodologies which are under continual review.
| 116 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Credit-scored exposure
For credit-scored portfolios (generally held in RFS and CS), probable loss is based on a statistical analysis of inherent losses expected to emerge over discrete periods of time for each portfolio. The credit-scored portfolio includes mortgage, home equity, certain business banking and auto loans, student loans, as well as credit card loans. Probable losses inherent in the portfolio are estimated using sophisticated portfolio modeling, credit scoring and decision-support tools, which take into account factors such as delinquency, geography, LTV ratios and credit scores. These analyses are applied to the Firm’s current portfolios in order to estimate the severity of losses, which determines the amount of probable losses. Other risk characteristics utilized to evaluate probable losses include recent loss experience in the portfolios, changes in origination sources, portfolio seasoning, potential borrower behavior and the macroeconomic environment. These factors and analyses are updated at least on a quarterly basis or more frequently as market conditions dictate.
For credit-scored portfolios (generally held in RFS and CS), probable loss is based on a statistical analysis of inherent losses expected to emerge over discrete periods of time for each portfolio. The credit-scored portfolio includes mortgage, home equity, certain business banking and auto loans, student loans, as well as credit card loans. Probable losses inherent in the portfolio are estimated using sophisticated portfolio modeling, credit scoring and decision-support tools, which take into account factors such as delinquency, geography, LTV ratios and credit scores. These analyses are applied to the Firm’s current portfolios in order to estimate the severity of losses, which determines the amount of probable losses. Other risk characteristics utilized to evaluate probable losses include recent loss experience in the portfolios, changes in origination sources, portfolio seasoning, potential borrower behavior and the macroeconomic environment. These factors and analyses are updated at least on a quarterly basis or more frequently as market conditions dictate.
Risk monitoring and control
The Firm has developed policies and practices that are designed to preserve the independence and
integrity of the approval and decision-making process of extending credit and to ensure credit
risks are assessed accurately, approved properly, monitored regularly and managed actively at both
the transaction and portfolio levels. The policy framework establishes credit approval authorities,
concentration limits, risk-rating methodologies, portfolio review parameters and guidelines for
management of distressed exposure.
For
consumer credit risk, delinquency and other trends, including any concentrations at the
portfolio level, are monitored for potential problems, as certain of these trends can be ameliorated
through changes in underwriting policies and portfolio guidelines. Consumer Credit Risk Management
evaluates delinquency and other trends against business expectations, current and forecasted
economic conditions, and industry benchmarks. All of these historical and forecasted trends are
incorporated into the modeling of estimated consumer credit losses and are part of the monitoring
of the credit risk profile of the portfolio.
Wholesale credit risk is monitored regularly at an aggregate portfolio, industry and individual
counterparty basis with established concentration limits that are reviewed and revised, as deemed
appropriate by management, on an annual basis. Industry and counterparty limits, as measured in
terms of exposure and economic credit risk capital, are subject to
stress-based loss constraints for
the aggregate portfolio.
Management of the Firm’s wholesale exposure is accomplished through a number of means including:
| • | Loan syndication and participations | |
| • | Loan sales and securitizations | |
| • | Credit derivatives | |
| • | Use of master netting agreements | |
| • | Collateral and other risk-reduction techniques |
In addition to Risk Management, the Firm’s Audit department provides periodic reviews, as well as
continuous monitoring, where appropriate, of the Firm’s consumer and wholesale portfolios.
In the Firm’s wholesale and certain risk-rated consumer credit portfolios, a credit review group
within the Audit department is responsible for:
| • | Independently assessing and validating the changing risk grades assigned to exposures; and | |
| • | Evaluating the effectiveness of business units’ risk rating, including the accuracy and consistency of risk grades, the timeliness of risk grade changes and the justification of risk grades in credit memoranda |
In the Firm’s consumer credit portfolio, the Audit department periodically tests the internal
controls around the modeling process including the integrity of the data utilized. In addition, the
risk inherent in the Firm’s consumer based loans is evaluated using models whose construction,
assumptions and on-going performance relative to expectations are reviewed by an independent risk
management group that is separate from the lines of business. For further discussion on consumer
loans, see Note 14 on pages 220–238 of this Annual Report.
Risk reporting
To enable monitoring of credit risk and decision-making, aggregate credit exposure, credit quality
forecasts, concentration levels and risk profile changes are reported regularly to senior Credit
Risk Management. Detailed portfolio reporting of industry, customer, product and geographic
concentrations occurs monthly, and the appropriateness of the allowance for credit losses is
reviewed by senior management at least on a quarterly basis. Through the risk reporting and
governance structure, credit risk trends and limit exceptions are provided regularly to, and
discussed with, senior management. For further discussion of risk monitoring and control, see page
109 of this Annual Report.
| JPMorgan Chase & Co. / 2010 Annual Report | 117 |
Table of Contents
Management’s discussion and analysis
2010 Credit risk overview
During 2010, the credit environment improved compared with 2009, resulting in decreased downgrade,
default and charge-off activity and improved delinquency trends. Despite challenging
macroeconomic conditions, particularly in the first half of 2010, the Firm continued to actively
manage its underperforming and nonaccrual loans and reduce such exposures through repayments, loan
sales and workouts. These efforts resulted in an improvement in the credit quality of the portfolio
compared with 2009 and contributed to the Firm’s reduction in the allowance for credit losses,
particularly in CS and IB. During the year and particularly in the second half of 2010, customer
demand for credit improved, loan origination activity and market liquidity improved and credit
spreads tightened from 2009.
In the wholesale portfolio, criticized assets, nonperforming assets and charge-offs decreased from
peak loss levels experienced in 2009, reflecting general improvement in the portfolio, partially
offset by continued weakness in commercial real estate (“CRE”). Toward the end of 2010, CRE
exposure showed some positive signs of stabilization as property values improved somewhat from the
declines witnessed over the prior two years. The wholesale portfolio continues to be actively
managed, in part by conducting ongoing, in-depth reviews of credit
quality and of industry, product
and client concentrations. Underwriting guidelines across all areas of lending have remained in
focus, consistent with evolving market conditions and the Firm’s risk management activities.
Reflecting the improvement
in credit quality of the wholesale portfolio throughout the year, the
wholesale allowance for loan loss coverage ratio was 2.14%, compared with 3.57% at the end of 2009.
For further discussion of the wholesale credit environment and wholesale loans, see Wholesale
Credit Portfolio on pages 120–129 and Note 14 on pages 220–238 of this Annual Report.
The consumer portfolio credit performance improved from 2009 with lower delinquent loans,
nonperforming assets and charge-offs. However, credit performance continued to be negatively
affected by the economic environment. High unemployment and weak overall economic conditions
continued to have a negative impact in the number of loans charged off, while continued weak
housing prices have resulted in an elevated severity of loss recognized on defaulted real estate
loans. The Firm has taken proactive action to assist homeowners most in need of financial
assistance throughout the economic downturn. The Firm is participating in the U.S. Treasury’s MHA
programs and continuing its other loss-mitigation efforts for financially distressed borrowers who
do not qualify for the U.S. Treasury’s programs. In addition, over the past several years, the Firm
has taken actions to reduce risk exposure to consumer loans by tightening both underwriting and
loan qualification standards, as well as eliminating certain products
and loan origination channels. For further
discussion of the consumer credit environment and consumer loans, see Consumer Credit Portfolio on
pages 129–138 and Note 14 on pages 220–238 of this Annual Report.
CREDIT PORTFOLIO
The following table presents JPMorgan Chase’s credit portfolio as of December 31, 2010 and
2009. Total credit exposure of $1.8 trillion at December 31, 2010, decreased by $46.9 billion from
December 31, 2009, reflecting a decrease of $83.8 billion in the consumer portfolio, partly offset
by an increase of $36.9 billion in the wholesale portfolio. During 2010, lending-related
commitments decreased by $36.3 billion, loans decreased by $25.2 billion and receivables from
customers increased by $16.8 billion. The overall decrease in total loans was primarily related to
repayments, low customer demand and loan sales, partially offset by the adoption of the accounting
guidance related to VIEs, predominantly in the wholesale portfolio.
While overall portfolio exposure declined, the Firm provided and raised nearly $1.4 trillion in new
and renewed credit and capital for consumers, corporations, small businesses, municipalities and
not-for-profit organizations during 2010.
| 118 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
In the table below, reported loans include loans retained; loans held-for-sale (which are carried
at the lower of cost or fair value, with changes in value recorded in noninterest revenue); and
loans accounted for at fair value. For additional information on the Firm’s loans and derivative
receivables, including the Firm’s accounting policies, see Notes 14 and 6 on pages 220–238 and
191–199, respectively, of this Annual Report. Average retained loan balances are used for the net
charge-off rate calculations.
Total credit portfolio
| Average annual net | ||||||||||||||||||||||||||||||||
| As of or for the year ended December 31, | Credit exposure | Nonperforming (h) (i) | Net charge-offs | charge-off ratio (j) (k) | ||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Total credit portfolio
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans retained
(a)
|
$ | 685,498 | $ | 627,218 | $ | 14,345 | $ | 17,219 | $ | 23,673 | $ | 22,965 | 3.39 | % | 3.42 | % | ||||||||||||||||
|
Loans held-for-sale
|
5,453 | 4,876 | 341 | 234 | — | — | — | — | ||||||||||||||||||||||||
|
Loans at fair value
|
1,976 | 1,364 | 155 | 111 | — | — | — | — | ||||||||||||||||||||||||
|
Loans
– reported
(a)
|
692,927 | 633,458 | 14,841 | 17,564 | 23,673 | 22,965 | 3.39 | 3.42 | ||||||||||||||||||||||||
|
Loans – securitized
(a)
(b)
|
NA | 84,626 | NA | — | NA | 6,443 | NA | 7.55 | ||||||||||||||||||||||||
|
Total loans
(a)
|
692,927 | 718,084 | 14,841 | 17,564 | 23,673 | 29,408 | 3.39 | 3.88 | ||||||||||||||||||||||||
|
Derivative receivables
|
80,481 | 80,210 | 34 | 529 | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Receivables from customers
(c)
|
32,541 | 15,745 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Interests in purchased receivables
(a)
(d)
|
391 | 2,927 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total credit-related assets
(a)
|
806,340 | 816,966 | 14,875 | 18,093 | 23,673 | 29,408 | 3.39 | 3.88 | ||||||||||||||||||||||||
|
Lending-related commitments
(a)
(e)
|
954,840 | 991,095 | 1,005 | 1,577 | — | — | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Assets acquired in loan satisfactions
|
||||||||||||||||||||||||||||||||
|
Real estate owned
|
NA | NA | 1,610 | 1,548 | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Other
|
NA | NA | 72 | 100 | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Total assets acquired in loan satisfactions
|
NA | NA | 1,682 | 1,648 | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Total credit portfolio
|
$ | 1,761,180 | $ | 1,808,061 | $ | 17,562 | $ | 21,318 | $ | 23,673 | $ | 29,408 | 3.39 | % | 3.88 | % | ||||||||||||||||
|
Net credit derivative hedges notional
(f)
|
$ | (23,108 | ) | $ | (48,376 | ) | $ | (55 | ) | $ | (139 | ) | NA | NA | NA | NA | ||||||||||||||||
|
Liquid securities and other cash collateral held against derivatives
(g)
|
(16,486 | ) | (15,519 | ) | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon the adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. As a result, related assets are now primarily recorded in loans or other assets on the Consolidated Balance Sheet. As a result of the consolidation of the credit card securitization trusts, reported and managed basis are equivalent for periods beginning after January 1, 2010. For further discussion, see Note 16 on pages 244–259 of this Annual Report. | |
| (b) | Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans. For further discussion of credit card securitizations, see Note 16 on pages 244–259 of this Annual Report. | |
| (c) | Represents primarily margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets. | |
| (d) | Represents an ownership interest in cash flows of a pool of receivables transferred by a third-party seller into a bankruptcy-remote entity, generally a trust. | |
| (e) | The amounts in nonperforming represent unfunded commitments that are risk rated as nonaccrual. | |
| (f) | Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and non-performing credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives on pages 126–128 and Note 6 on pages 191–199 of this Annual Report. | |
| (g) | Represents other liquid securities collateral and other cash collateral held by the Firm. | |
| (h) | At December 31, 2010 and 2009, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion and $9.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.9 billion and $579 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $625 million and $542 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”). Credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. | |
| (i) | Excludes PCI loans acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. | |
| (j) | For the year ended December 31, 2010, net charge-off ratios were calculated using average retained loans of $698.2 billion; and for the year ended December 31, 2009, average retained loans of $672.3 billion and average securitized loans of $85.4 billion. | |
| (k) | For the years ended December 31, 2010 and 2009, firmwide net charge-off ratios were calculated including average PCI loans of $77.0 billion and $85.4 billion, respectively. Excluding the impact of PCI loans, the total Firm’s managed net charge-off rate would have been 3.81% and 4.37% respectively. |
| JPMorgan Chase & Co. / 2010 Annual Report | 119 |
Table of Contents
Management’s discussion and analysis
WHOLESALE CREDIT PORTFOLIO
As of December 31, 2010, wholesale exposure (IB, CB, TSS and AM) increased by $36.9 billion
from December 31, 2009. The overall increase was primarily driven by increases of $23.5 billion in
loans and $16.8 billion of receivables from customers, partially
offset by decreases in interests in
purchase receivables and lending-related commitments of $2.5 billion and $1.1 billion,
respectively. The decrease in lending-related commitments and the increase in loans were primarily
related to the January 1, 2010, adoption of the accounting guidance related to VIEs, which resulted
in the elimination of a net $17.7 billion of lending-related commitments between the Firm and
its
administrated multi-seller conduits upon consolidation. Assets of the consolidated conduits
included $15.1 billion of wholesale loans at January 1, 2010. Excluding the effect of the
accounting guidance, lending-related commitments and loans would have increased by $16.6 billion
and $8.4 billion, respectively, mainly related to increased client activity. The increase in loans
also included the purchase of a $3.5 billion loan portfolio in
CB during the third quarter of 2010. The
increase of $16.8 billion in receivables from customers was due
to increased client activity,
predominantly in Prime Services.
Wholesale
| December 31, | Credit exposure | Nonperforming (f) | ||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Loans retained
|
$ | 222,510 | $ | 200,077 | $ | 5,510 | $ | 6,559 | ||||||||
|
Loans held-for-sale
|
3,147 | 2,734 | 341 | 234 | ||||||||||||
|
Loans at fair value
|
1,976 | 1,364 | 155 | 111 | ||||||||||||
|
Loans
– reported
|
227,633 | 204,175 | 6,006 | 6,904 | ||||||||||||
|
Derivative receivables
|
80,481 | 80,210 | 34 | 529 | ||||||||||||
|
Receivables from customers
(a)
|
32,541 | 15,745 | — | — | ||||||||||||
|
Interests in purchased receivables
(b)
|
391 | 2,927 | — | — | ||||||||||||
|
Total wholesale credit-related assets
|
341,046 | 303,057 | 6,040 | 7,433 | ||||||||||||
|
Lending-related commitments
(c)
|
346,079 | 347,155 | 1,005 | 1,577 | ||||||||||||
|
Total wholesale credit exposure
|
$ | 687,125 | $ | 650,212 | $ | 7,045 | $ | 9,010 | ||||||||
|
Net credit derivative hedges notional
(d)
|
$ | (23,108 | ) | $ | (48,376 | ) | $ | (55 | ) | $ | (139 | ) | ||||
|
Liquid securities and other cash collateral held against derivatives
(e)
|
(16,486 | ) | (15,519 | ) | NA | NA | ||||||||||
| (a) | Represents primarily margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets. | |
| (b) | Represents an ownership interest in cash flows of a pool of receivables transferred by a third-party seller into a bankruptcy-remote entity, generally a trust. | |
| (c) | The amounts in nonperforming represent unfunded commitments that are risk rated as nonaccrual. | |
| (d) | Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and nonperforming credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives on pages 126–128, and Note 6 on pages 191–199 of this Annual Report. | |
| (e) | Represents other liquid securities collateral and other cash collateral held by the Firm. | |
| (f) | Excludes assets acquired in loan satisfactions. |
The following table presents summaries of the maturity and ratings profiles of the wholesale
portfolio as of December 31, 2010 and 2009. The ratings scale is based on the Firm’s internal risk
ratings, which generally correspond to the ratings as defined by S&P and Moody’s. Also included in
this table is the notional value of net credit derivative hedges; the counterparties to these
hedges are predominantly investment grade banks and finance companies.
| 120 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Wholesale credit exposure – maturity and ratings profile
| Maturity profile (e) | Ratings profile | |||||||||||||||||||||||||||||||
| December 31, 2010 | Due in 1 | Due after 1 year | Due after | Investment-grade (“IG”) | Noninvestment-grade | Total % | ||||||||||||||||||||||||||
| (in millions, except ratios) | year or less | through 5 years | 5 years | Total | AAA/Aaa to BBB-/Baa3 | BB+/Ba1 & below | Total | of IG | ||||||||||||||||||||||||
|
Loans
|
$ | 78,017 | $ | 85,987 | $ | 58,506 | $ | 222,510 | $ | 146,047 | $ | 76,463 | $ | 222,510 | 66 | % | ||||||||||||||||
|
Derivative receivables
(a)
|
80,481 | 80,481 | ||||||||||||||||||||||||||||||
|
Less: Liquid securities and other cash
collateral held against derivatives
|
(16,486 | ) | (16,486 | ) | ||||||||||||||||||||||||||||
|
Total derivative receivables,
net of all collateral
|
11,499 | 24,415 | 28,081 | 63,995 | 47,557 | 16,438 | 63,995 | 74 | ||||||||||||||||||||||||
|
Lending-related commitments
|
126,389 | 209,299 | 10,391 | 346,079 | 276,298 | 69,781 | 346,079 | 80 | ||||||||||||||||||||||||
|
Subtotal
|
215,905 | 319,701 | 96,978 | 632,584 | 469,902 | 162,682 | 632,584 | 74 | ||||||||||||||||||||||||
|
Loans held-for-sale and loans at fair
value
(b)
(c)
|
5,123 | 5,123 | ||||||||||||||||||||||||||||||
|
Receivables from customers
(c)
|
32,541 | 32,541 | ||||||||||||||||||||||||||||||
|
Interests in purchased
receivables
(c)
|
391 | 391 | ||||||||||||||||||||||||||||||
|
Total exposure – excluding liquid
securities and other cash collateral
held against derivatives
|
$ | 670,639 | $ | 670,639 | ||||||||||||||||||||||||||||
|
Net credit derivative hedges notional
(d)
|
$ | (1,228 | ) | $ | (16,415 | ) | $ | (5,465 | ) | $ | (23,108 | ) | $ | (23,159 | ) | $ | 51 | $ | (23,108 | ) | 100 | % | ||||||||||
| Maturity profile (e) | Ratings profile | |||||||||||||||||||||||||||||||
| December 31, 2009 | Due in 1 | Due after 1 year | Due after | Investment-grade (“IG”) | Noninvestment-grade | Total % | ||||||||||||||||||||||||||
| (in millions, except ratios) | year or less | through 5 years | 5 years | Total | AAA/Aaa to BBB-/Baa3 | BB+/Ba1 & below | Total | of IG | ||||||||||||||||||||||||
|
Loans
|
$ | 57,381 | $ | 79,636 | $ | 63,060 | $ | 200,077 | $ | 118,531 | $ | 81,546 | $ | 200,077 | 59 | % | ||||||||||||||||
|
Derivative receivables
(a)
|
80,210 | 80,210 | ||||||||||||||||||||||||||||||
|
Less: Liquid securities and other cash
collateral held against derivatives
|
(15,519 | ) | (15,519 | ) | ||||||||||||||||||||||||||||
|
Total derivative receivables, net of
all collateral
|
7,535 | 27,123 | 30,033 | 64,691 | 47,305 | 17,386 | 64,691 | 73 | ||||||||||||||||||||||||
|
Lending-related commitments
|
141,621 | 198,215 | 7,319 | 347,155 | 280,811 | 66,344 | 347,155 | 81 | ||||||||||||||||||||||||
|
Subtotal
|
206,537 | 304,974 | 100,412 | 611,923 | 446,647 | 165,276 | 611,923 | 73 | ||||||||||||||||||||||||
|
Loans held-for-sale and loans at fair
value
(b)
(c)
|
4,098 | 4,098 | ||||||||||||||||||||||||||||||
|
Receivables from customers
(c)
|
15,745 | 15,745 | ||||||||||||||||||||||||||||||
|
Interests in purchased
receivables
(c)
|
2,927 | 2,927 | ||||||||||||||||||||||||||||||
|
Total exposure – excluding liquid
securities and other cash collateral
held against derivatives
|
$ | 634,693 | $ | 634,693 | ||||||||||||||||||||||||||||
|
Net credit derivative hedges notional
(d)
|
$ | (23,568 | ) | $ | (20,322 | ) | $ | (4,486 | ) | $ | (48,376 | ) | $ | (48,110 | ) | $ | (266 | ) | $ | (48,376 | ) | 99 | % | |||||||||
| (a) | Represents the fair value of derivative receivables as reported on the Consolidated Balance Sheets. | |
| (b) | Loans held-for-sale and loans at fair value relate primarily to syndicated loans and loans transferred from the retained portfolio. | |
| (c) | From a credit risk perspective maturity and ratings profiles are not meaningful. | |
| (d) | Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. | |
| (e) | The maturity profile of loans and lending-related commitments is based on the remaining contractual maturity. The maturity profile of derivative receivables is based on the maturity profile of average exposure. For further discussion of average exposure, see Derivative receivables marked to market on pages 125–126 of this Annual Report. |
Customer receivables representing primarily margin loans to prime and retail brokerage
clients of $32.5 billion and $15.7 billion at December 31, 2010 and 2009, respectively, are
included in the table. These margin loans are generally over-collateralized through a pledge of
assets maintained in clients’ brokerage accounts and are subject to daily minimum collateral
requirements. In the event that the collateral value decreases, a
maintenance margin call is made to the
client to provide additional collateral into the account. If additional collateral is not provided
by the client, the client’s positions may be liquidated by the Firm to meet the minimum collateral
requirements.
Wholesale credit exposure – selected industry exposures
The Firm focuses on the management and diversification of its industry exposures, with particular
attention paid to industries with actual or potential credit concerns. Exposures deemed criticized
generally represent a ratings profile similar to a rating of “CCC+”/”Caa1” and lower, as defined by
S&P and Moody’s. The total criticized component of the portfolio, excluding loans held-for-sale and
loans at fair value, decreased to $22.4 billion at December 31, 2010, from $33.2 billion at
year-end 2009. The decrease was primarily related to net repayments and loan sales.
| JPMorgan Chase & Co. / 2010 Annual Report | 121 |
Table of Contents
Management’s discussion and analysis
Below are summaries of the top 25 industry exposures as of December 31, 2010 and 2009. For
additional information on industry concentrations, see Note 5 on pages 189–190 of this Annual
Report.
Wholesale credit exposure – selected industry exposures
| Liquid securities | ||||||||||||||||||||||||||||||||||||
| and other | ||||||||||||||||||||||||||||||||||||
| 30 days or | cash collateral | |||||||||||||||||||||||||||||||||||
| As of or for the year ended | Noninvestment grade | more past due | Year-to-date | Credit | held against | |||||||||||||||||||||||||||||||
| December 31, 2010 | Credit | Investment | Criticized | Criticized | and accruing | net charge-offs/ | derivative | derivative | ||||||||||||||||||||||||||||
| (in millions) | exposure (c) | grade | Noncriticized | performing | nonperforming | loans | (recoveries) | hedges (d) | receivables | |||||||||||||||||||||||||||
|
Top 25 industries
(a)
|
||||||||||||||||||||||||||||||||||||
|
Banks and finance companies
|
$ | 65,867 | $ | 54,839 | $ | 10,428 | $ | 467 | $ | 133 | $ | 26 | $ | 69 | $ | (3,456 | ) | $ | (9,216 | ) | ||||||||||||||||
|
Real estate
|
64,351 | 34,440 | 20,569 | 6,404 | 2,938 | 399 | 862 | (76 | ) | (57 | ) | |||||||||||||||||||||||||
|
Healthcare
|
41,093 | 33,752 | 7,019 | 291 | 31 | 85 | 4 | (768 | ) | (161 | ) | |||||||||||||||||||||||||
|
State and municipal governments
|
35,808 | 34,641 | 912 | 231 | 24 | 34 | 3 | (186 | ) | (233 | ) | |||||||||||||||||||||||||
|
Asset managers
|
29,364 | 25,533 | 3,401 | 427 | 3 | 7 | — | — | (2,948 | ) | ||||||||||||||||||||||||||
|
Consumer products
|
27,508 | 16,747 | 10,379 | 371 | 11 | 217 | 1 | (752 | ) | (2 | ) | |||||||||||||||||||||||||
|
Oil and gas
|
26,459 | 18,465 | 7,850 | 143 | 1 | 24 | — | (87 | ) | (50 | ) | |||||||||||||||||||||||||
|
Utilities
|
25,911 | 20,951 | 4,101 | 498 | 361 | 3 | 49 | (355 | ) | (230 | ) | |||||||||||||||||||||||||
|
Retail and consumer services
|
20,882 | 12,021 | 8,316 | 338 | 207 | 8 | 23 | (623 | ) | (3 | ) | |||||||||||||||||||||||||
|
Technology
|
14,348 | 9,355 | 4,534 | 399 | 60 | 47 | 50 | (158 | ) | — | ||||||||||||||||||||||||||
|
Machinery and equipment
manufacturing
|
13,311 | 7,690 | 5,372 | 244 | 5 | 8 | 2 | (74 | ) | (2 | ) | |||||||||||||||||||||||||
|
Building materials/construction
|
12,808 | 6,557 | 5,065 | 1,129 | 57 | 9 | 6 | (308 | ) | — | ||||||||||||||||||||||||||
|
Chemicals/plastics
|
12,312 | 8,375 | 3,656 | 274 | 7 | — | 2 | (70 | ) | — | ||||||||||||||||||||||||||
|
Metals/mining
|
11,426 | 5,260 | 5,748 | 362 | 56 | 7 | 35 | (296 | ) | — | ||||||||||||||||||||||||||
|
Business services
|
11,247 | 6,351 | 4,735 | 115 | 46 | 11 | 15 | (5 | ) | — | ||||||||||||||||||||||||||
|
Central government
|
11,173 | 10,677 | 496 | — | — | — | — | (6,897 | ) | (42 | ) | |||||||||||||||||||||||||
|
Media
|
10,967 | 5,808 | 3,945 | 672 | 542 | 2 | 92 | (212 | ) | (3 | ) | |||||||||||||||||||||||||
|
Insurance
|
10,918 | 7,908 | 2,690 | 320 | — | — | (1 | ) | (805 | ) | (567 | ) | ||||||||||||||||||||||||
|
Telecom services
|
10,709 | 7,582 | 2,295 | 821 | 11 | 3 | (8 | ) | (820 | ) | — | |||||||||||||||||||||||||
|
Holding companies
|
10,504 | 8,375 | 2,091 | 38 | — | 33 | 5 | — | (362 | ) | ||||||||||||||||||||||||||
|
Transportation
|
9,652 | 6,630 | 2,739 | 245 | 38 | — | (16 | ) | (132 | ) | — | |||||||||||||||||||||||||
|
Securities firms and exchanges
|
9,415 | 7,678 | 1,700 | 37 | — | — | 5 | (38 | ) | (2,358 | ) | |||||||||||||||||||||||||
|
Automotive
|
9,011 | 3,915 | 4,822 | 269 | 5 | — | 52 | (758 | ) | — | ||||||||||||||||||||||||||
|
Agriculture/paper manufacturing
|
7,368 | 4,510 | 2,614 | 242 | 2 | 8 | 7 | (44 | ) | (2 | ) | |||||||||||||||||||||||||
|
Aerospace
|
5,732 | 4,903 | 732 | 97 | — | — | — | (321 | ) | — | ||||||||||||||||||||||||||
|
All other
(b)
|
140,926 | 122,594 | 14,924 | 2,402 | 1,006 | 921 | 470 | (5,867 | ) | (250 | ) | |||||||||||||||||||||||||
|
Subtotal
|
$ | 649,070 | $ | 485,557 | $ | 141,133 | $ | 16,836 | $ | 5,544 | $ | 1,852 | $ | 1,727 | $ | (23,108 | ) | $ | (16,486 | ) | ||||||||||||||||
|
Loans held-for-sale and loans at
fair value
|
5,123 | |||||||||||||||||||||||||||||||||||
|
Receivables from customers
|
32,541 | |||||||||||||||||||||||||||||||||||
|
Interest in purchased receivables
|
391 | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 687,125 | $ | 485,557 | $ | 141,133 | $ | 16,836 | $ | 5,544 | $ | 1,852 | $ | 1,727 | $ | (23,108 | ) | $ | (16,486 | ) | ||||||||||||||||
Presented below is a discussion of several industries to which the Firm has significant
exposure, as well as industries the Firm continues to monitor because of actual or potential credit
concerns. For additional information, refer to the tables above and on the preceding page.
| • | Banks and finance companies: Exposure to this industry increased by 22% or $11.8 billion, and criticized exposure decreased 71%, compared with 2009. This portfolio experienced improvement in credit quality as a result of growth in investment-grade lending, as well as upgrades in risk ratings to financial counterparties. | |
| • | Real estate: Real estate loans decreased by 6% or $3.6 billion from 2009, including a 19% decline in the criticized portion of the portfolio, mainly as a result of repayments and loans sales. While this sector continued to be challenged throughout 2010, the portfolio experienced stabilization toward the end of the year. The ratio of nonaccrual loans to total loans increased due to a downgrade of a loan to nonaccrual in the fourth quarter |
| of 2010. Excluding this downgrade, the ratio would have improved in line with the broader real estate portfolio. For further discussion on commercial real estate loans, see Note 14 on pages 220–238 of this Annual Report. | ||
| • | State and municipal governments: Exposure to this segment increased by $1.1 billion or 3% in 2010 to $35.8 billion. Lending-related commitments comprise approximately 70% of exposure to this sector, mainly bond liquidity and standby letter of credit commitments. Credit quality of the portfolio remains high as 97% of the portfolio was rated investment grade, up from 93% in 2009. Criticized exposure was less than 1% of this industry’s exposure. The Firm continues to actively monitor and manage this exposure in light of the challenging environment faced by state and municipal governments. For further discussion of commitments for bond liquidity and standby letters of credit, see Note 30 on pages 275–280 of this Annual Report. |
| 122 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| Liquid securities | ||||||||||||||||||||||||||||||||||||
| and other | ||||||||||||||||||||||||||||||||||||
| 30 days or | cash collateral | |||||||||||||||||||||||||||||||||||
| As of or for the year ended | Noninvestment grade | more past due | Year-to-date | Credit | held against | |||||||||||||||||||||||||||||||
| December 31, 2009 | Credit | Investment | Criticized | Criticized | and accruing | net charge-offs/ | derivative | derivative | ||||||||||||||||||||||||||||
| (in millions) | exposure (c) | grade | Noncriticized | performing | nonperforming | loans | (recoveries) | hedges (d) | receivables | |||||||||||||||||||||||||||
|
Top 25 industries
(a)
|
||||||||||||||||||||||||||||||||||||
|
Banks and finance companies
|
$ | 54,053 | $ | 43,576 | $ | 8,424 | $ | 1,559 | $ | 494 | $ | 43 | $ | 719 | $ | (3,718 | ) | $ | (8,353 | ) | ||||||||||||||||
|
Real estate
|
68,509 | 37,724 | 18,810 | 8,872 | 3,103 | 937 | 688 | (1,168 | ) | (35 | ) | |||||||||||||||||||||||||
|
Healthcare
|
35,605 | 29,576 | 5,700 | 310 | 19 | 30 | 10 | (2,545 | ) | (125 | ) | |||||||||||||||||||||||||
|
State and municipal governments
|
34,726 | 32,410 | 1,850 | 400 | 66 | 15 | — | (204 | ) | (193 | ) | |||||||||||||||||||||||||
|
Asset managers
|
24,920 | 20,498 | 3,742 | 442 | 238 | 28 | 7 | (40 | ) | (2,105 | ) | |||||||||||||||||||||||||
|
Consumer products
|
27,004 | 17,384 | 9,105 | 479 | 36 | 13 | 35 | (3,638 | ) | (4 | ) | |||||||||||||||||||||||||
|
Oil and gas
|
23,322 | 17,082 | 5,854 | 378 | 8 | 28 | 16 | (2,567 | ) | (6 | ) | |||||||||||||||||||||||||
|
Utilities
|
27,178 | 22,063 | 3,877 | 1,236 | 2 | 3 | 182 | (3,486 | ) | (360 | ) | |||||||||||||||||||||||||
|
Retail and consumer services
|
20,673 | 12,024 | 7,867 | 687 | 95 | 10 | 35 | (3,073 | ) | — | ||||||||||||||||||||||||||
|
Technology
|
14,169 | 8,877 | 4,004 | 1,125 | 163 | 5 | 28 | (1,730 | ) | (130 | ) | |||||||||||||||||||||||||
|
Machinery and equipment
manufacturing
|
12,759 | 7,287 | 5,122 | 329 | 21 | 13 | 12 | (1,327 | ) | (1 | ) | |||||||||||||||||||||||||
|
Building materials/construction
|
10,448 | 4,512 | 4,537 | 1,309 | 90 | 19 | 98 | (1,141 | ) | — | ||||||||||||||||||||||||||
|
Chemicals/plastics
|
9,870 | 6,633 | 2,626 | 600 | 11 | 5 | 22 | (1,357 | ) | — | ||||||||||||||||||||||||||
|
Metals/mining
|
12,547 | 7,002 | 4,906 | 547 | 92 | 4 | 24 | (1,963 | ) | — | ||||||||||||||||||||||||||
|
Business services
|
10,667 | 6,464 | 3,859 | 241 | 103 | 7 | 8 | (107 | ) | — | ||||||||||||||||||||||||||
|
Central government
|
9,557 | 9,480 | 77 | — | — | — | — | (4,814 | ) | (30 | ) | |||||||||||||||||||||||||
|
Media
|
12,379 | 6,789 | 3,898 | 1,056 | 636 | 57 | 464 | (1,606 | ) | — | ||||||||||||||||||||||||||
|
Insurance
|
13,421 | 9,221 | 3,601 | 581 | 18 | — | 7 | (2,735 | ) | (793 | ) | |||||||||||||||||||||||||
|
Telecom services
|
11,265 | 7,741 | 3,273 | 191 | 60 | — | 31 | (3,455 | ) | (62 | ) | |||||||||||||||||||||||||
|
Holding companies
|
16,018 | 13,801 | 2,107 | 42 | 68 | 44 | 275 | (421 | ) | (320 | ) | |||||||||||||||||||||||||
|
Transportation
|
9,749 | 6,416 | 2,745 | 553 | 35 | 41 | 61 | (870 | ) | (242 | ) | |||||||||||||||||||||||||
|
Securities firms and exchanges
|
10,832 | 8,220 | 2,467 | 36 | 109 | 2 | — | (289 | ) | (2,139 | ) | |||||||||||||||||||||||||
|
Automotive
|
9,357 | 3,865 | 4,252 | 1,195 | 45 | 2 | 52 | (1,541 | ) | — | ||||||||||||||||||||||||||
|
Agriculture/paper manufacturing
|
5,801 | 2,169 | 3,132 | 331 | 169 | 36 | 10 | (897 | ) | — | ||||||||||||||||||||||||||
|
Aerospace
|
5,254 | 4,442 | 743 | 69 | — | 13 | — | (963 | ) | — | ||||||||||||||||||||||||||
|
All other
(b)
|
137,359 | 115,446 | 16,979 | 3,527 | 1,407 | 671 | 348 | (2,721 | ) | (621 | ) | |||||||||||||||||||||||||
|
Subtotal
|
$ | 627,442 | $ | 460,702 | $ | 133,557 | $ | 26,095 | $ | 7,088 | $ | 2,026 | $ | 3,132 | $ | (48,376 | ) | $ | (15,519 | ) | ||||||||||||||||
|
Loans held-for-sale and loans at
fair value
|
4,098 | |||||||||||||||||||||||||||||||||||
|
Receivables from customers
|
15,745 | |||||||||||||||||||||||||||||||||||
|
Interest in purchased receivables
|
2,927 | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 650,212 | $ | 460,702 | $ | 133,557 | $ | 26,095 | $ | 7,088 | $ | 2,026 | $ | 3,132 | $ | (48,376 | ) | $ | (15,519 | ) | ||||||||||||||||
| (a) | All industry rankings are based on exposure at December 31, 2010. The industry rankings presented in the 2009 table are based on the industry rankings of the corresponding exposures at December 31, 2010, not actual rankings of such exposures at December 31, 2009. | |
| (b) | For more information on exposures to SPEs included in all other, see Note 16 on pages 244–259 of this Annual Report. | |
| (c) | Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans. | |
| (d) | Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. |
| • | Media: Exposure to this industry decreased by 11% in 2010 to $11.0 billion. Credit quality in this portfolio stabilized somewhat in 2010 as a result of repayments and loan sales. Criticized exposure also decreased by 28% from 2009 to $1.2 billion, but remains elevated relative to total industry exposure due to continued pressure on the traditional media business model from expanding digital and online technology. |
| • | All other: All other at December 31, 2010 (excluding loans held-for-sale and loans at fair value), included $140.9 billion of credit exposure to eight industry segments. Exposures related to: (1) Individuals, Private Education & Civic Organizations were 47% and (2) SPEs were 39% of this category. SPEs provide secured financing (generally backed by receivables, loans or bonds with a diverse group of obligors). For further discussion of SPEs, see Note 1 on pages 164–165 of this Annual Report. The remaining all other exposure is well-diversified across industries and none comprise more than 6% of total exposure. |
| JPMorgan Chase & Co. / 2010 Annual Report | 123 |
Table of Contents
Management’s discussion and analysis
The following table presents the geographic distribution of wholesale credit, nonperforming assets
and past due loans as of December 31, 2010 and 2009. The geographic distribution of the wholesale
portfolio is determined based predominantly on the domicile of the borrower.
| Assets | 30 days or | |||||||||||||||||||||||||||||||||||||||
| Credit exposure | Nonperforming | acquired | more past | |||||||||||||||||||||||||||||||||||||
| December 31, 2010 | Lending-related | Derivative | Total credit | Lending-related | Total | in loan | due and | |||||||||||||||||||||||||||||||||
| (in millions) | Loans | commitments | receivables | exposure | Loans (a) | Derivatives | commitments | nonperforming (b) | satisfactions | accruing loans | ||||||||||||||||||||||||||||||
|
Europe/Middle East
and Africa
|
$ | 27,934 | $ | 58,418 | $ | 35,196 | $ | 121,548 | $ | 153 | $ | 1 | $ | 23 | $ | 177 | $ | — | $ | 127 | ||||||||||||||||||||
|
Asia and Pacific
|
20,552 | 15,002 | 10,991 | 46,545 | 579 | 21 | — | 600 | — | 74 | ||||||||||||||||||||||||||||||
|
Latin America and the
Caribbean
|
16,480 | 12,170 | 5,634 | 34,284 | 649 | — | 13 | 662 | 1 | 131 | ||||||||||||||||||||||||||||||
|
Other
|
1,185 | 6,149 | 2,039 | 9,373 | 6 | — | 5 | 11 | — | — | ||||||||||||||||||||||||||||||
|
Total non-U.S.
|
66,151 | 91,739 | 53,860 | 211,750 | 1,387 | 22 | 41 | 1,450 | 1 | 332 | ||||||||||||||||||||||||||||||
|
Total U.S.
|
156,359 | 254,340 | 26,621 | 437,320 | 4,123 | 12 | 964 | 5,099 | 320 | 1,520 | ||||||||||||||||||||||||||||||
|
Loans held-for-sale and
loans at fair value
|
5,123 | — | — | 5,123 | 496 | NA | — | 496 | NA | — | ||||||||||||||||||||||||||||||
|
Receivables from customers
|
— | — | — | 32,541 | NA | NA | NA | NA | NA | — | ||||||||||||||||||||||||||||||
|
Interests in purchased
receivables
|
— | — | — | 391 | NA | NA | NA | NA | NA | — | ||||||||||||||||||||||||||||||
|
Total
|
$ | 227,633 | $ | 346,079 | $ | 80,481 | $ | 687,125 | $ | 6,006 | $ | 34 | $ | 1,005 | $ | 7,045 | $ | 321 | $ | 1,852 | ||||||||||||||||||||
| Assets | 30 days or | |||||||||||||||||||||||||||||||||||||||
| Credit exposure | Nonperforming | acquired | more past | |||||||||||||||||||||||||||||||||||||
| December 31, 2009 | Lending-related | Derivative | Total credit | Lending-related | Total | in loan | due and | |||||||||||||||||||||||||||||||||
| (in millions) | Loans | commitments | receivables | exposure | Loans (a) | Derivatives | commitments | nonperforming (b) | satisfactions | accruing loans | ||||||||||||||||||||||||||||||
|
Europe/Middle East
and Africa
|
$ | 26,688 | $ | 56,106 | $ | 37,411 | $ | 120,205 | $ | 269 | $ | — | $ | 22 | $ | 291 | $ | — | $ | 103 | ||||||||||||||||||||
|
Asia and Pacific
|
11,612 | 13,450 | 8,784 | 33,846 | 357 | 2 | 1 | 360 | — | — | ||||||||||||||||||||||||||||||
|
Latin America and the
Caribbean
|
13,350 | 10,249 | 6,948 | 30,547 | 272 | 3 | 6 | 281 | 52 | 134 | ||||||||||||||||||||||||||||||
|
Other
|
1,967 | 5,895 | 1,467 | 9,329 | 81 | — | — | 81 | — | 54 | ||||||||||||||||||||||||||||||
|
Total non-U.S.
|
53,617 | 85,700 | 54,610 | 193,927 | 979 | 5 | 29 | 1,013 | 52 | 291 | ||||||||||||||||||||||||||||||
|
Total U.S.
|
146,460 | 261,455 | 25,600 | 433,515 | 5,580 | 524 | 1,548 | 7,652 | 341 | 1,735 | ||||||||||||||||||||||||||||||
|
Loans held-for-sale and
loans at fair value
|
4,098 | — | — | 4,098 | 345 | NA | — | 345 | NA | — | ||||||||||||||||||||||||||||||
|
Receivables from customers
|
— | — | — | 15,745 | NA | NA | NA | NA | NA | — | ||||||||||||||||||||||||||||||
|
Interests in purchased
receivables
|
— | — | — | 2,927 | NA | NA | NA | NA | NA | — | ||||||||||||||||||||||||||||||
|
Total
|
$ | 204,175 | $ | 347,155 | $ | 80,210 | $ | 650,212 | $ | 6,904 | $ | 529 | $ | 1,577 | $ | 9,010 | $ | 393 | $ | 2,026 | ||||||||||||||||||||
| (a) | The Firm held allowance for loan losses of $1.6 billion and $2.0 billion related to nonaccrual retained loans resulting in allowance coverage ratios of 29% and 31% at December 31, 2010 and 2009, respectively. Wholesale nonaccrual loans represent 2.64% and 3.38% of total wholesale loans at December 31, 2010 and 2009, respectively. | |
| (b) | Total nonperforming include nonaccrual loans, nonperforming derivatives and nonperforming lending-related commitments. |
| 124 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Loans
In the normal course of business, the Firm provides loans to a variety of wholesale customers, from
large corporate and institutional 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 syndicated 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 commitments, recognizing
net losses of $38 million. These results included gains or losses on sales of nonaccrual loans, if
any, as discussed below. These activities are not related to the Firm’s securitization 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
|
2,389 | 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 December 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 instruments 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 receivables, 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 collateral. The derivative receivables MTM, net of all
collateral, also do not include other credit enhancements, such as letters of credit.
| JPMorgan Chase & Co. / 2010 Annual Report | 125 |
Table of Contents
Management’s discussion and analysis
While useful as a current view of credit exposure, the net MTM value of the derivative receivables
does not capture the potential future variability of that credit exposure. To capture the potential
future variability of credit exposure, the Firm calculates, on a client-by-client basis, three
measures of potential derivatives-related credit loss: Peak, Derivative Risk Equivalent (“DRE”),
and Average exposure (“AVG”). These measures all incorporate netting and collateral benefits, where
applicable.
Peak exposure to a counterparty is an extreme measure of exposure calculated at a 97.5% confidence
level. DRE exposure is a measure that expresses the risk of derivative exposure on a basis intended
to be equivalent to the risk of loan exposures. The measurement is done by equating the unexpected
loss in a derivative counterparty exposure (which takes into consideration both the loss volatility
and the credit rating of the counterparty) with the unexpected loss in a loan exposure (which takes
into consideration only the credit rating of the counterparty). DRE is a less extreme measure of
potential credit loss than Peak and is the primary measure used by the Firm for credit approval of
derivative transactions.
Finally, AVG is a measure of the expected MTM value of the Firm’s derivative receivables at future
time periods, including the benefit of collateral. AVG exposure over the total life of the
derivative contract is used as the primary metric for pricing purposes and is used to calculate
credit capital and the CVA, as further described below. AVG exposure was $45.3 billion and $49.0
billion at December 31, 2010 and 2009, respectively, compared with derivative receivables MTM, net
of all collateral, of $64.0 billion and $64.7 billion at December 31, 2010 and 2009, respectively.
The MTM value of the Firm’s derivative receivables incorporates an adjustment, the CVA, to reflect
the credit quality of counterparties. The CVA is based on the Firm’s AVG to a counterparty and the
counterparty’s credit spread in the credit derivatives market. The
primary components of changes in CVA are credit spreads, new deal activity or unwinds, and changes
in the underlying market environment. The Firm believes that active risk management is essential to
controlling the dynamic credit risk in the derivatives portfolio. In addition, the Firm’s credit
approval process takes into consideration the potential for correlation between the Firm’s AVG to a
counterparty and the counterparty’s credit quality. The Firm risk manages exposure to changes in
CVA by entering into credit derivative transactions, as well as interest rate, foreign exchange,
equity and commodity derivative transactions.
The accompanying graph shows exposure profiles to derivatives over the next 10 years as calculated
by the DRE and AVG metrics. The two measures generally show declining exposure after the first
year, if no new trades were added to the portfolio.
Exposure profile of derivatives measures
The following table summarizes the ratings profile of the Firm’s derivative receivables MTM,
net of other liquid securities collateral, for the dates indicated.
Ratings profile of derivative receivables MTM
| Rating equivalent | 2010 | 2009 | ||||||||||||||
| December 31, | Exposure net of | % of exposure net | Exposure net of | % of exposure net | ||||||||||||
| (in millions, except ratios) | of all collateral | of all collateral | of all collateral | of all collateral | ||||||||||||
|
AAA/Aaa to AA-/Aa3
|
$ | 23,342 | 36 | % | $ | 25,530 | 40 | % | ||||||||
|
A+/A1 to A-/A3
|
15,812 | 25 | 12,432 | 19 | ||||||||||||
|
BBB+/Baa1 to BBB-/Baa3
|
8,403 | 13 | 9,343 | 14 | ||||||||||||
|
BB+/Ba1 to B-/B3
|
13,716 | 22 | 14,571 | 23 | ||||||||||||
|
CCC+/Caa1 and below
|
2,722 | 4 | 2,815 | 4 | ||||||||||||
|
Total
|
$ | 63,995 | 100 | % | $ | 64,691 | 100 | % | ||||||||
As noted above, the Firm uses collateral agreements to mitigate counterparty credit
risk in derivatives. The percentage of the Firm’s derivatives transactions subject to collateral
agreements – excluding foreign exchange spot trades, which are not typically covered by collateral
agreements due to their short maturity – was 88% as of December 31, 2010, largely unchanged from
89% at December 31, 2009. The Firm posted $58.3 billion and $56.7 billion of collateral at December
31, 2010 and 2009, respectively.
Credit derivatives
For risk management purposes, the Firm is primarily a purchaser of credit protection. As a
purchaser of credit protection, the Firm has risk that the counterparty providing the credit
protection will default. As a seller of credit protection, the Firm has risk that the underlying
instrument referenced in the contract will be subject to a credit event.
The Firm uses credit derivatives for two primary purposes: first, in its capacity as a market-maker
in the dealer/client business to meet the needs of customers; and second, in order to mitigate the
Firm’s own credit risk associated with its overall derivative receivables and traditional
commercial credit lending exposures (loans and unfunded commitments).
| 126 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Of the Firm’s $80.5 billion of total derivative receivables MTM at December 31, 2010, $7.7 billion,
or 10%, was associated with credit derivatives, before the benefit of liquid securities collateral.
One type of credit derivatives the Firm enters into with counterparties are credit default swaps
(“CDS”). The large majority of CDS are subject to collateral arrangements to protect the Firm from
counterparty credit risk. The use of collateral to settle against defaulting counterparties
generally performed as
designed in significantly mitigating the Firm’s exposure to these
counterparties. In 2010, the frequency and size of defaults related to the underlying debt
referenced in credit derivatives was lower than 2009. For further
discussion of derivatives, see Note 6 on pages 191–199
of this Annual Report.
The following table presents the Firm’s notional amounts of credit derivatives protection purchased
and sold as of December 31, 2010 and 2009, distinguishing between dealer/client activity and credit
portfolio activity.
| 2010 | 2009 | |||||||||||||||||||||||||||||||||||||||
| Dealer/client | Credit portfolio | Dealer/client | Credit portfolio | |||||||||||||||||||||||||||||||||||||
| December 31, | Protection | Protection | Protection | Protection | Protection | Protection | Protection | Protection | ||||||||||||||||||||||||||||||||
| (in millions) | purchased (b) | sold | purchased (c) | sold | Total | purchased (b) | sold | purchased (c) | sold | Total | ||||||||||||||||||||||||||||||
|
Credit default swaps
|
$ | 2,661,657 | $ | 2,658,825 | $ | 23,523 | $ | 415 | $ | 5,344,420 | $ | 2,957,277 | $ | 2,936,987 | $ | 48,831 | $ | 455 | $ | 5,943,550 | ||||||||||||||||||||
|
Other credit
derivatives
(a)
|
34,250 | 93,776 | — | — | 128,026 | 39,763 | 10,575 | — | — | 50,338 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 2,695,907 | $ | 2,752,601 | $ | 23,523 | $ | 415 | $ | 5,472,446 | $ | 2,997,040 | $ | 2,947,562 | $ | 48,831 | $ | 455 | $ | 5,993,888 | ||||||||||||||||||||
| (a) | Primarily consists of total return swaps and credit default swap options. | |
| (b) | Included $2,662 billion and $2,987 billion at December 31, 2010 and 2009, respectively, of notional exposure where the Firm has sold protection on the identical underlying reference instruments. | |
| (c) | Included zero and $19.7 billion at December 31, 2010 and 2009, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio. |
Dealer/client business
Within the dealer/client business, the Firm actively manages credit derivatives by buying and
selling credit protection, predominantly on corporate debt obligations, according to client demand.
For further information, see Note 6 on pages 191–199 of this Annual Report.
At December 31, 2010, the total notional amount of protection purchased and sold decreased by
$496.1 billion from year-end 2009. The decrease was primarily due to the impact of industry efforts
to reduce offsetting trade activity.
Credit portfolio activities
Management of the Firm’s wholesale exposure is accomplished through a number of means including
loan syndication and participations, loan sales, securitizations, credit derivatives, use of master
netting agreements, and collateral and other risk-reduction techniques. The Firm also manages its
wholesale credit exposure by purchasing protection through single-name and portfolio credit
derivatives to manage the credit risk associated with loans, lending-related commitments and
derivative receivables. Changes in credit risk on the credit derivatives are expected to offset
changes in credit risk on the loans, lending-related commitments or derivative receivables. This
activity does not reduce the reported level of assets on the balance sheet or the level of reported
off–balance sheet commitments, although it does provide the Firm with credit risk protection. The
Firm also diversifies its exposures by selling credit protection, which increases exposure to
industries or clients where the Firm has little or no client-related exposure; however, this
activity is not material to the Firm’s overall credit exposure.
Use of single-name and portfolio credit derivatives
| December 31, | Notional amount of protection purchased and sold | |||||||
| (in millions) | 2010 | 2009 | ||||||
|
Credit
derivatives used to manage
|
||||||||
|
Loans and lending-related commitments
|
$ | 6,698 | $ | 36,873 | ||||
|
Derivative receivables
|
16,825 | 11,958 | ||||||
|
Total
protection purchased
(a)
|
23,523 | 48,831 | ||||||
|
Total protection sold
|
415 | 455 | ||||||
|
Credit
derivatives hedges notional, net
|
$ | 23,108 | $ | 48,376 | ||||
| (a) | Included zero and $19.7 billion at December 31, 2010 and 2009, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio. |
The credit derivatives used by JPMorgan Chase for credit portfolio management activities do not
qualify for hedge accounting under U.S. GAAP; these derivatives are reported at fair value, with
gains and losses recognized in principal transactions revenue. In contrast, the loans and
lending-related commitments being risk-managed are accounted for on an accrual basis. This
asymmetry in accounting treatment, between loans and lending-related commitments and the credit
derivatives used in credit portfolio management activities, causes earnings volatility that is not
representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit
exposure. The MTM value related to the Firm’s credit derivatives used for managing credit exposure,
as well as the MTM value related to the CVA (which reflects the credit quality of derivatives
counterparty exposure) are included in the gains and losses realized on credit derivatives
disclosed in the table below. These results can vary from period to period due to market conditions
that affect specific positions in the portfolio.
| JPMorgan Chase & Co. / 2010 Annual Report | 127 |
Table of Contents
Management’s discussion and analysis
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Hedges of lending-related commitments
(a)
|
$ | (279 | ) | $ | (3,258 | ) | $ | 2,216 | ||||
|
CVA and hedges of CVA
(a)
|
(403 | ) | 1,920 | (2,359 | ) | |||||||
|
Net gains/(losses)
|
$ | (682 | ) | $ | (1,338 | ) | $ | (143 | ) | |||
| (a) | These hedges do not qualify for hedge accounting under U.S. GAAP. |
Lending-related commitments
JPMorgan Chase uses lending-related financial instruments, such as commitments and guarantees, to
meet the financing needs of its customers. The contractual amount of these financial instruments
represents the maximum possible credit risk should the counterparties draw down on these
commitments or the Firm fulfills its obligation under these
guarantees, and should the counterparties
subsequently fail to perform according to the terms of these contracts.
Wholesale lending-related commitments were $346.1 billion at December 31, 2010, compared with
$347.2 billion at December 31, 2009. The decrease reflected the January 1, 2010, adoption of
accounting guidance related to VIEs. Excluding the effect of the accounting guidance,
lending-related commitments would have increased by $16.6 billion.
In the Firm’s view, the total contractual amount of these wholesale lending-related commitments is
not representative of the Firm’s actual credit risk exposure or funding requirements. In
determining the amount of credit risk exposure the Firm has to wholesale lending-related
commitments, which is used as the basis for allocating credit risk capital to these commitments,
the Firm has established a “loan-equivalent” amount for each commitment; this amount represents the
portion of the unused commitment or other contingent exposure that is expected, based on average
portfolio historical experience, to become drawn upon in an event of a default by an obligor. The
loan-equivalent amounts of the Firm’s lending-related commitments were $189.9 billion and $179.8
billion as of December 31, 2010 and 2009, respectively.
Country exposure
The Firm’s wholesale portfolio includes country risk exposures to both developed and emerging
markets. The Firm seeks to diversify its country exposures, including its credit-related lending,
trading and investment activities, whether cross-border or locally funded.
Country exposure under the Firm’s internal risk management approach is reported based on the
country where the assets of the obligor, counterparty or guarantor are located. Exposure amounts,
including resale agreements, are adjusted for collateral and for credit enhancements (e.g.,
guarantees and letters of credit) provided by third parties; outstandings supported by a guarantor
located outside the country or backed by collateral held outside the country are assigned to the
country of the enhancement provider. In addition, the effect of credit derivative hedges and other
short credit or equity trading positions are taken into consideration. Total exposure measures
include activity with both government and private-sector entities in a country.
The Firm also reports country exposure for regulatory purposes following FFIEC guidelines, which
are different from the Firm’s internal risk management approach for measuring country exposure. For
additional information on the FFIEC exposures, see Cross-border outstandings on page 314 of this
Annual Report.
Several European countries, including Greece, Portugal, Spain, Italy and Ireland, have been subject
to credit deterioration due to weaknesses in their economic and fiscal situations. The Firm is
closely monitoring its exposures to these five countries. Aggregate net exposures to these five
countries as measured under the Firm’s internal approach was less than $15.0 billion at December
31, 2010, with no country representing a majority of the exposure. Sovereign exposure in all five
countries represented less than half the aggregate net exposure. The Firm currently believes its
exposure to these five countries is modest relative to the Firm’s overall risk exposures and is
manageable given the size and types of exposures to each of the countries and the diversification
of the aggregate exposure. The Firm continues to conduct business and support client activity in
these countries and, therefore, the Firm’s aggregate net exposures may vary over time. In addition,
the net exposures may be impacted by changes in market conditions, and the effects of interest
rates and credit spreads on market valuations.
As part of its ongoing country risk management process, the Firm monitors exposure to emerging
market countries, and utilizes country stress tests to measure and manage the risk of extreme loss
associated with a sovereign crisis. There is no common definition of emerging markets, but the Firm
generally includes in its definition those countries whose sovereign debt ratings are equivalent to
“A+” or lower. The table below presents the Firm’s exposure to its top 10 emerging markets
countries based on its internal measurement approach. The selection of countries is based solely on
the Firm’s largest total exposures by country and does not represent its view of any actual or
potentially adverse credit conditions.
| 128 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Top 10 emerging markets country exposure
| At December 31, 2010 | Cross-border | Total | ||||||||||||||||||||||
| (in billions) | Lending (a) | Trading (b) | Other (c) | Total | Local (d) | exposure | ||||||||||||||||||
|
Brazil
|
$ | 3.0 | $ | 1.8 | $ | 1.1 | $ | 5.9 | $ | 3.9 | $ | 9.8 | ||||||||||||
|
South Korea
|
3.0 | 1.4 | 1.5 | 5.9 | 3.1 | 9.0 | ||||||||||||||||||
|
India
|
4.2 | 2.1 | 1.4 | 7.7 | 1.1 | 8.8 | ||||||||||||||||||
|
China
|
3.6 | 1.1 | 1.0 | 5.7 | 1.2 | 6.9 | ||||||||||||||||||
|
Hong Kong
|
2.5 | 1.5 | 1.2 | 5.2 | — | 5.2 | ||||||||||||||||||
|
Mexico
|
2.1 | 2.3 | 0.5 | 4.9 | — | 4.9 | ||||||||||||||||||
|
Malaysia
|
0.6 | 2.0 | 0.3 | 2.9 | 0.4 | 3.3 | ||||||||||||||||||
|
Taiwan
|
0.3 | 0.6 | 0.4 | 1.3 | 1.9 | 3.2 | ||||||||||||||||||
|
Thailand
|
0.3 | 1.1 | 0.4 | 1.8 | 0.9 | 2.7 | ||||||||||||||||||
|
Russia
|
1.2 | 1.0 | 0.3 | 2.5 | — | 2.5 | ||||||||||||||||||
| At December 31, 2009 | Cross-border | Total | |||||||||||||||||||||
| (in billions) | Lending (a) | Trading (b) | Other (c) | Total | Local (d) | exposure | |||||||||||||||||
|
South Korea
|
$ | 2.7 | $ | 1.7 | $ | 1.3 | $ | 5.7 | $ | 3.3 | $ | 9.0 | |||||||||||
|
India
|
1.5 | 2.7 | 1.1 | 5.3 | 0.3 | 5.6 | |||||||||||||||||
|
Brazil
|
1.8 | (0.5 | ) | 1.0 | 2.3 | 2.2 | 4.5 | ||||||||||||||||
|
China
|
1.8 | 0.4 | 0.8 | 3.0 | — | 3.0 | |||||||||||||||||
|
Taiwan
|
0.1 | 0.8 | 0.3 | 1.2 | 1.8 | 3.0 | |||||||||||||||||
|
Hong Kong
|
1.1 | 0.2 | 1.3 | 2.6 | — | 2.6 | |||||||||||||||||
|
Mexico
|
1.2 | 0.8 | 0.4 | 2.4 | — | 2.4 | |||||||||||||||||
|
Chile
|
0.8 | 0.6 | 0.5 | 1.9 | — | 1.9 | |||||||||||||||||
|
Malaysia
|
0.1 | 1.3 | 0.3 | 1.7 | 0.2 | 1.9 | |||||||||||||||||
|
South Africa
|
0.4 | 0.8 | 0.5 | 1.7 | — | 1.7 | |||||||||||||||||
| (a) | Lending includes loans and accrued interest receivable, interest-earning deposits with banks, acceptances, other monetary assets, issued letters of credit net of participations, and undrawn commitments to extend credit. | |
| (b) | Trading includes: (1) issuer exposure on cross-border debt and equity instruments, held both in trading and investment accounts and adjusted for the impact of issuer hedges, including credit derivatives; and (2) counterparty exposure on derivative and foreign exchange contracts as well as securities financing trades (resale agreements and securities borrowed). | |
| (c) | Other represents mainly local exposure funded cross-border, including capital investments in local entities. | |
| (d) | Local exposure is defined as exposure to a country denominated in local currency and booked locally. Any exposure not meeting these criteria is defined as cross-border exposure. |
CONSUMER CREDIT PORTFOLIO
JPMorgan Chase’s consumer portfolio consists primarily of residential mortgages, home
equity loans, credit cards, auto loans, student loans and business banking loans
.
The Firm’s
primary focus is on serving the prime consumer credit market. For further information on the
consumer loans, see Note 14 on pages 220–238 of this Annual Report.
A substantial portion of the consumer loans acquired in the Washington Mutual transaction were
identified as purchased credit-impaired based on an analysis of high-risk characteristics,
including product type, LTV ratios, FICO scores and delinquency status. These PCI loans are
accounted for on a pool basis, and the pools are considered to be
performing. See pages 132–134
of this Annual Report for further information on the purchased credit-impaired loans.
The credit performance of the consumer portfolio across the entire product spectrum has stabilized
but high unemployment and weak overall economic conditions continue to put pressure on the number
of loans charged off, and weak housing prices continue to negatively affect the severity of loss
recognized on real estate loans that default. Delinquencies and nonaccrual loans remain elevated
but have improved. The delinquency trend exhibited improvement in the first half of 2010;
early-stage delinquencies (30–89 days delinquent) then flattened across most RFS products early in
the second half of the year, before once again showing improvement at the end of the year.
Late-stage residential real estate delinquencies (150+ days delinquent) remain
elevated. The
elevated level of these credit quality metrics is due, in part, to loss-mitigation activities
currently being undertaken and elongated foreclosure processing timelines. Losses related to these
loans continued to be recognized in accordance with the Firm’s standard charge-off practices, but
some delinquent loans that would have otherwise been foreclosed upon remain in the mortgage and
home equity loan portfolios.
Since mid-2007, the Firm has taken actions to reduce risk exposure to consumer loans by tightening
both underwriting and loan qualification standards, as well as eliminating certain products and
loan origination channels for residential real estate lending. The tightening of underwriting criteria for auto
loans has resulted in the reduction of both extended-term and high LTV financing. In addition, new
originations of private student loans are limited to school-certified loans, the majority of which
include a qualified co-borrower.
As a further action to reduce risk associated with lending-related commitments, the Firm has
reduced or canceled certain lines of credit as permitted by law. For example, the Firm may reduce
or close home equity lines of credit when there are significant decreases in the value of the
underlying property or when there has been a demonstrable decline in the creditworthiness of the
borrower. Also, the Firm typically closes credit card lines when the borrower is 60 days or more
past due. Finally, certain inactive credit card lines have been closed, and a number of active
credit card lines have been reduced.
| JPMorgan Chase & Co./2010 Annual Report | 129 |
Table of Contents
Management’s discussion and analysis
The
following table presents managed consumer credit–related information (including RFS, CS
and residential real estate loans reported in the Corporate/Private Equity segment) for the dates
indicated. For further information about the Firm’s nonaccrual and charge-off accounting policies,
see Note 14 on pages 220–238 of this Annual Report.
Consumer
| Credit | Nonaccrual | Net charge-offs | ||||||||||||||||||||||||||||||
| As of or for the year ended December 31, | exposure | loans (k)(l) | Net charge-off | rate (m)(n) | ||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Consumer, excluding credit card
Loans, excluding PCI loans and loans held-for-sale |
||||||||||||||||||||||||||||||||
|
Home equity – senior lien
(a)
|
$ | 24,376 | $ | 27,376 | $ | 479 | $ | 477 | $ | 262 | $ | 234 | 1.00 | % | 0.80 | % | ||||||||||||||||
|
Home equity – junior lien
(b)
|
64,009 | 74,049 | 784 | 1,188 | 3,182 | 4,448 | 4.63 | 5.62 | ||||||||||||||||||||||||
|
Prime mortgage, including option
ARMs
(c)
|
74,539 | 75,428 | 4,320 | 4,667 | 1,627 | 1,957 | 2.15 | 2.51 | ||||||||||||||||||||||||
|
Subprime mortgage
(c)
|
11,287 | 12,526 | 2,210 | 3,248 | 1,374 | 1,648 | 10.82 | 11.86 | ||||||||||||||||||||||||
|
Auto
(c)(d)
|
48,367 | 46,031 | 141 | 177 | 298 | 627 | 0.63 | 1.44 | ||||||||||||||||||||||||
|
Business banking
|
16,812 | 16,974 | 832 | 826 | 707 | 842 | 4.23 | 4.73 | ||||||||||||||||||||||||
|
Student and other
(c)
|
15,311 | 14,726 | 67 | 74 | 459 | 443 | 2.85 | 2.90 | ||||||||||||||||||||||||
|
Total loans, excluding PCI loans and
loans held-for-sale
|
254,701 | 267,110 | 8,833 | 10,657 | 7,909 | 10,199 | 3.00 | 3.68 | ||||||||||||||||||||||||
|
Loans
– PCI
(e)
|
||||||||||||||||||||||||||||||||
|
Home equity
|
24,459 | 26,520 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Prime mortgage
|
17,322 | 19,693 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Subprime mortgage
|
5,398 | 5,993 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Option ARMs
|
25,584 | 29,039 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Total
loans – PCI
|
72,763 | 81,245 | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
|
Total
loans – retained
|
327,464 | 348,355 | 8,833 | 10,657 | 7,909 | 10,199 | 2.32 | 2.82 | ||||||||||||||||||||||||
|
Loans held-for-sale
(f)
|
154 | 2,142 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total
loans – reported
|
327,618 | 350,497 | 8,833 | 10,657 | 7,909 | 10,199 | 2.32 | 2.82 | ||||||||||||||||||||||||
|
Lending-related commitments
|
||||||||||||||||||||||||||||||||
|
Home equity
– senior lien
(a)(g)
|
16,060 | 19,246 | ||||||||||||||||||||||||||||||
|
Home equity
– junior lien
(b)(g)
|
28,681 | 37,231 | ||||||||||||||||||||||||||||||
|
Prime mortgage
|
1,266 | 1,654 | ||||||||||||||||||||||||||||||
|
Subprime mortgage
|
— | — | ||||||||||||||||||||||||||||||
|
Auto
|
5,246 | 5,467 | ||||||||||||||||||||||||||||||
|
Business banking
|
9,702 | 9,040 | ||||||||||||||||||||||||||||||
|
Student and other
|
579 | 2,189 | ||||||||||||||||||||||||||||||
|
Total lending-related commitments
|
61,534 | 74,827 | ||||||||||||||||||||||||||||||
|
Total consumer exposure, excluding
credit card
|
389,152 | 425,324 | ||||||||||||||||||||||||||||||
|
Credit Card
|
||||||||||||||||||||||||||||||||
|
Loans retained
(c)(h)(i)
|
135,524 | 78,786 | 2 | 3 | 14,037 | 9,634 | 9.73 | 11.07 | ||||||||||||||||||||||||
|
Loans held-for-sale
|
2,152 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total
loans – reported
|
137,676 | 78,786 | 2 | 3 | 14,037 | 9,634 | 9.73 | 11.07 | ||||||||||||||||||||||||
|
Securitized
(c)(j)
|
NA | 84,626 | NA | — | NA | 6,443 | NA | 7.55 | ||||||||||||||||||||||||
|
Total
loans – managed
(c)
|
137,676 | 163,412 | 2 | 3 | 14,037 | 16,077 | 9.73 | 9.33 | ||||||||||||||||||||||||
|
Lending-related commitments
(g)
|
547,227 | 569,113 | ||||||||||||||||||||||||||||||
|
Total credit card exposure
|
684,903 | 732,525 | ||||||||||||||||||||||||||||||
|
Total
consumer credit portfolio –
reported
|
1,074,055 | 1,073,223 | 8,835 | 10,660 | 21,946 | 19,833 | 4.53 | % | 4.41 | % | ||||||||||||||||||||||
|
Total
consumer credit portfolio –
managed
(c)
|
$ | 1,074,055 | $ | 1,157,849 | $ | 8,835 | $ | 10,660 | $ | 21,946 | $ | 26,276 | 4.53 | % | 4.91 | % | ||||||||||||||||
| (a) | Represents loans where JPMorgan Chase holds the first security interest on the property. | |
| (b) | Represents loans where JPMorgan Chase holds a security interest that is subordinate in rank to other liens. | |
| (c) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon the adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts and certain other consumer loan securitization entities, primarily mortgage-related. As a result, related receivables are now recorded as loans on the Consolidated Balance Sheet. As a result of the consolidation of the securitization trusts, reported and managed basis are equivalent for periods beginning after January 1, 2010. For further discussion, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 64–66 of this Form 10-K. | |
| (d) | Excluded operating lease–related assets of $3.7 billion and $2.9 billion at December 31, 2010 and 2009, respectively. | |
| (e) | Charge-offs are not recorded on PCI loans until actual losses exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. To date, no charge-offs have been recorded for these loans. | |
| (f) | At December 31, 2010 and 2009, loans held-for-sale included prime mortgages of $154 million and $450 million, respectively, and student loans of zero and $1.7 billion, respectively. | |
| (g) | The credit card and home equity lending-related commitments represent the total available lines of credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit would be used at the same time. For credit card commitments and home equity commitments (if certain conditions are met), the Firm can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law. |
| 130 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| (h) | Included $1.0 billion of loans at December 31, 2009, held by the WMMT, which were consolidated onto the Firm’s Consolidated Balance Sheets at fair value in 2009. Such loans had been fully repaid or charged off as of December 31, 2010. See Note 16 on pages 244–259 this Annual Report. | |
| (i) | Included billed finance charges and fees net of an allowance for uncollectible amounts. | |
| (j) | Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and not included in reported loans. For a further discussion of credit card securitizations, see CS on pages 79–81 of this Annual Report. | |
| (k) | At December 31, 2010 and 2009, nonaccrual loans excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion and $9.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; and (2) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $625 million and $542 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under guidance issued by the FFIEC, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. | |
| (l) | Excludes PCI loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past-due status of the pools, or that of individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. | |
| (m) | Average consumer loans held-for-sale and loans at fair value were $1.5 billion and $2.2 billion for the years ended December 31, 2010 and 2009, respectively. These amounts were excluded when calculating net charge-off rates. | |
| (n) | As further discussed below, net charge-off rates for 2010 reflect the impact of an aggregate $632 million adjustment related to the Firm’s estimate of the net realizable value of the collateral underlying the loans at the charge-off date. Absent this adjustment, net charge-off rates would have been 0.92%, 4.57%, 1.73% and 8.87% for home equity – senior lien; home equity – junior lien; prime mortgage (including option ARMs); and subprime mortgage, respectively. Total consumer, excluding credit card and PCI loans, and total consumer, excluding credit card net charge-off rates would have been 2.76% and 2.14%, respectively, excluding this adjustment. |
Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon
adoption of this guidance, the Firm consolidated its Firm-sponsored credit card securitization
trusts and certain other consumer loan securitization entities. The following table summarizes the
impact on consumer loans at adoption.
Reported loans
| January 1, 2010 (in millions) | ||||
|
Consumer, excluding credit card
|
||||
|
Prime mortgage, including option ARMs
|
$ | 1,858 | ||
|
Subprime mortgage
|
1,758 | |||
|
Auto
|
218 | |||
|
Student
|
1,008 | |||
|
Total consumer, excluding credit card
|
4,842 | |||
|
Credit card
|
84,663 | |||
|
Total increase in consumer loans
|
$ | 89,505 | ||
Consumer, excluding credit card
Portfolio analysis
The following discussion relates to the specific loan and lending-related categories. Purchased
credit-impaired loans are excluded from individual loan product discussions and are addressed
separately below. For further information about the Firm’s consumer portfolio, related delinquency
information and other credit quality indicators, see Note 14 on pages
220–238 of this Annual
Report.
It is the Firm’s policy to charge down residential real estate loans to net realizable value at no
later than 180 days past due. During the fourth quarter of 2010, the Firm recorded an aggregate
adjustment of $632 million to increase net charge-offs related to the estimated net realizable
value of the collateral underlying delinquent residential home loans. Because these losses were
previously recognized in the provision and allowance for loan losses, this adjustment had no impact
on the Firm’s net income. The impact of this aggregate adjustment on reported net charge-off rates
is provided in footnote (n) above.
Home
equity:
Home equity loans at December 31, 2010, were $88.4 billion, compared with $101.4
billion at December 31, 2009. The decrease in this portfolio primarily reflected loan paydowns and
charge-offs. Junior lien net charge-offs declined from the prior year but remained high. Senior
lien nonaccrual loans remained relatively flat, while junior lien nonaccrual loans decreased from
prior year-end as a result of improvement in early-stage delinquencies.
Improvements in
delinquencies and charge-offs slowed during the second half of the year and stabilized at these
elevated levels. In addition to delinquent accounts, the Firm monitors current junior lien loans
where the borrower has a first mortgage loan which is either
delinquent or has been modified, as
such junior lien loans are considered to be at higher risk of delinquency. The portfolio contained
an estimated $4 billion of such junior lien loans. The risk associated with these junior lien loans
was considered in establishing the allowance for loan losses at December 31, 2010.
Mortgage:
Mortgage loans at December 31, 2010, including prime and subprime mortgages and mortgage
loans held-for-sale, were $86.0 billion, compared with $88.4 billion at December 31, 2009. The
decrease was primarily due to portfolio runoff, partially offset by the addition of loans to the
balance sheet as a result of the adoption of the accounting guidance related to VIEs. Net
charge-offs decreased from the prior year but remained elevated.
Prime mortgages at December 31, 2010, including option ARMs, were $74.7 billion, compared with
$75.9 billion at December 31, 2009. The decrease in loans was due to paydowns and charge-offs on
delinquent loans, partially offset by the addition of loans as a result of the adoption of the
accounting guidance related to VIEs. Early-stage delinquencies showed improvement during the year
but remained at elevated levels. Late-stage delinquencies increased during the first half of the
year, then trended lower for several months before flattening toward the end of 2010. Nonaccrual
loans showed improvement, but also remained elevated as a result of ongoing modification activity
and foreclosure processing delays. Charge-offs declined year over year but remained high.
Option ARM
loans, which are included in the prime mortgage portfolio, were $8.1 billion at December 31, 2010,
and represented 11% of the prime mortgage portfolio. These are primarily loans with low LTV ratios
and high borrower FICOs. Accordingly, the Firm expects substantially lower losses on this portfolio
when compared with the PCI option ARM pool. As of December 31,
2010, approximately 8% of
the option ARM borrowers were delinquent, 4% were making interest-only or negatively amortizing
payments, and 88% were making amortizing payments. Substantially all borrowers within the
portfolio are subject to risk of payment shock due to future payment recast as a limited number of
these loans have been modified. The cumulative amount of unpaid interest added to the
| JPMorgan Chase & Co. / 2010 Annual Report | 131 |
Table of Contents
Management’s discussion and analysis
unpaid principal balance due to negative amortization of option ARMs was $24 million and $78
million at December 31, 2010 and 2009, respectively. The
Firm estimates the following balances of option ARM loans will experience a recast that results in a payment increase: $72
million in 2011, $241 million in 2012 and $784 million in 2013. The Firm did not originate option
ARMs and new originations of option ARMs were discontinued by Washington Mutual prior to the date
of JPMorgan Chase’s acquisition of its banking operations.
Subprime mortgages at December 31, 2010 were $11.3 billion, compared with $12.5 billion at December
31, 2009. The decrease was due to paydowns and charge-offs on delinquent loans, partially offset by
the addition of loans as a result of the adoption of the accounting guidance related to VIEs.
Late-stage delinquencies remained elevated but continued to improve, albeit at a slower rate during
the second half of the year, while early-stage delinquencies stabilized at an elevated level during
this period. Nonaccrual loans improved largely as a result of the improvement in late-stage
delinquencies. Charge-offs reflected modest improvement.
Auto:
Auto loans at December 31, 2010, were $48.4 billion, compared with $46.0 billion at December
31, 2009. Delinquent and nonaccrual loans have decreased. In addition, net charge-offs have
declined 52% from the prior year. Provision expense decreased due to favorable loss severity as a
result of a strong used-car market nationwide and reduced loss frequency due to the tightening of
underwriting criteria in earlier periods. The auto loan portfolio reflected a high concentration of
prime quality credits.
Business
banking:
Business banking loans at December 31, 2010, were $16.8 billion, compared with
$17.0 billion at December 31, 2009. The decrease was primarily a result of run-off of the
Washington Mutual portfolio and charge-offs on delinquent loans. These loans primarily include
loans which are highly collateralized, often with personal loan guarantees. Nonaccrual loans
continued to remain elevated. After having increased during the first half of 2010, nonaccrual
loans as of December 31, 2010, declined to year-end 2009 levels.
Student and other:
Student and other loans at December 31, 2010, including loans held-for-sale,
were $15.3 billion, compared with $16.4 billion at December 31, 2009. Other loans primarily include
other secured and unsecured consumer loans. Delinquencies reflected some stabilization in the
second half of 2010, but remained elevated. Charge-offs during 2010 remained relatively flat with
2009 levels reflecting the impact of elevated unemployment levels.
Purchased
credit-impaired loans:
PCI loans at December 31, 2010, were $72.8 billion compared with
$81.2 billion at December 31, 2009. This portfolio represents loans acquired in the Washington
Mutual transaction that were recorded at fair value at the time of acquisition. That fair value
included an estimate of credit losses expected to be realized over the remaining lives of the
loans, and therefore no allowance for loan losses was recorded for these loans as of the
acquisition date.
The Firm regularly updates the amount of principal and interest cash flows expected to be collected
for these loans. Probable decreases in expected loan principal cash flows would trigger the
recognition of impairment through the provision for loan losses. Probable and significant increases
in expected cash flows (e.g., decreased principal credit losses, the net benefit of modifications)
would first reverse any previously recorded allowance for loan losses, with any remaining increase
in the expected cash flows recognized prospectively in interest income over the remaining estimated
lives of the underlying loans.
During 2010, management concluded as part of the Firm’s regular assessment of the PCI pools that it
was probable that higher expected principal credit losses would result in a decrease in expected
cash flows. Accordingly, the Firm recognized an aggregate $3.4 billion impairment related to the
home equity, prime mortgage, option ARM and subprime mortgage PCI portfolios. As a result of this
impairment, the Firm’s allowance for loan losses for the home equity, prime mortgage, option ARM
and subprime mortgage PCI portfolios was $1.6 billion, $1.8 billion, $1.5 billion and $98 million,
respectively, at December 31, 2010, compared with an allowance for loan losses of $1.1 billion and
$491 million for the prime mortgage and option ARM PCI portfolios, respectively, at December 31,
2009.
Approximately
39% of the option ARM borrowers were delinquent, 5% were making interest-only or
negatively amortizing payments, and 56% were making amortizing payments. Approximately 50% of
current borrowers are subject to risk of payment
shock due to future payment recast; substantially all of the remaining loans have been modified to
a fixed rate fully amortizing loan. The cumulative amount of unpaid interest added to the unpaid
principal balance of the option ARM PCI pool was $1.4 billion and $1.9 billion at December 31, 2010
and 2009, respectively. The Firm estimates the following
balances of option ARM PCI loans will experience a recast that results in a payment increase: $1.2 billion in 2011, $2.7
billion in 2012 and $508 million in 2013.
The following table provides a summary of lifetime loss estimates included in both the
nonaccretable difference and the allowance for loan losses. Principal charge-offs will not be
recorded on these pools until the nonaccretable difference has been fully depleted.
| Lifetime loss estimates (a) | LTD liquidation losses (b) | |||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Option ARMs
|
$ | 11,588 | $ | 10,650 | $ | 4,860 | $ | 1,744 | ||||||||
|
Home equity
|
14,698 | 13,138 | 8,810 | 6,060 | ||||||||||||
|
Prime mortgage
|
4,870 | 4,240 | 1,495 | 794 | ||||||||||||
|
Subprime mortgage
|
3,732 | 3,842 | 1,250 | 796 | ||||||||||||
|
Total
|
$ | 34,888 | $ | 31,870 | $ | 16,415 | $ | 9,394 | ||||||||
| (a) | Includes the original nonaccretable difference established in purchase accounting of $30.5 billion for principal losses only. The remaining nonaccretable difference for principal losses only was $14.1 billion and $21.1 billion at December 31, 2010 and 2009, respectively. All probable increases in principal losses and foregone interest subsequent to the purchase date are reflected in the allowance for loan losses. | |
| (b) | Life-to-date (“LTD”) liquidation losses represent realization of loss upon loan resolution. |
| 132 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Geographic composition and current estimated LTVs of residential real estate loans
| (a) | Represents residential real estate loan related, excluding purchased credit-impaired loans acquired in the Washington Mutual transaction and loans insured by U.S. government agencies. |
The consumer credit portfolio is geographically diverse. The greatest concentration of residential
real estate loans is in California. Excluding mortgage loans insured by U.S. government agencies
and PCI loans, California-based loans retained represented 24% of total residential real estate
loans retained at December 31, 2010, compared with 25% at December 31, 2009. Of the total
residential real estate loan portfolio retained, excluding mortgage loans insured by U.S.
government agencies and PCI loans, $86.4 billion, or 54%, were concentrated in California, New
York, Arizona, Florida and Michigan at December 31, 2010, compared with $95.9 billion, or 54%, at
December 31, 2009.
The current estimated average LTV ratio for residential real estate loans retained, excluding
mortgage loans insured by U.S. government agencies and PCI loans, was 83% at December 31, 2010,
compared with 81% at December 31, 2009. Excluding mortgage loans insured
by U.S. government
agencies and PCI loans, 24% of the retained portfolio had a current estimated LTV ratio greater
than 100%, and 10% of the retained portfolio had a current estimated LTV ratio greater than 125% at
December 31, 2010, compared with 22% with a current estimated LTV ratio greater than 100%, and 9%
with a current estimated LTV ratio greater than 125%, at December 31, 2009. The decline in home
prices had a significant impact on the collateral value underlying the Firm’s residential real
estate loan portfolio. In general, the delinquency rate for loans with high LTV ratios is greater
than the delinquency rate for loans in which the borrower has equity in the collateral. While a
large portion of the loans with current estimated LTV ratios greater than 100% continue to pay and
are current, the continued willingness and ability of these borrowers to pay remains uncertain.
The following table presents the current estimated LTV ratio, as well as the ratio of the carrying
value of the underlying loans to the current estimated collateral value, for PCI loans. Because
such loans were initially measured at fair value, the ratio of the carrying value to the current
estimated collateral value will be lower than the current estimated LTV ratio, which is based on
the unpaid principal balance. The estimated collateral values used to calculate these ratios do not
represent actual appraised loan-level collateral values; as such, the resulting ratios are
necessarily imprecise and should therefore be viewed as estimates.
LTV
ratios and ratios of carrying values to current estimated collateral values – PCI loans
| Ratio of carrying | ||||||||||||||||
| December 31, 2010 | Current estimated LTV | Carrying | value to current estimated | |||||||||||||
| (in millions, except ratios) | Unpaid principal balance (a) | ratio (b) | value (d) | collateral value (e) | ||||||||||||
|
Home equity
|
$ | 28,312 | 117 | % (c) | $ | 24,459 | 95 | % | ||||||||
|
Prime mortgage
|
18,928 | 109 | 17,322 | 90 | ||||||||||||
|
Subprime mortgage
|
8,042 | 113 | 5,398 | 74 | ||||||||||||
|
Option ARMs
|
30,791 | 111 | 25,584 | 87 | ||||||||||||
| Ratio of carrying | ||||||||||||||||
| December 31, 2009 | Current estimated LTV | Carrying | value to current estimated | |||||||||||||
| (in millions, except ratios) | Unpaid principal balance (a) | ratio (b) | value (d) | collateral value (e) | ||||||||||||
|
Home equity
|
$ | 32,958 | 113 | % (c) | $ | 26,520 | 91 | % | ||||||||
|
Prime mortgage
|
21,972 | 103 | 19,693 | 87 | ||||||||||||
|
Subprime mortgage
|
9,021 | 107 | 5,993 | 71 | ||||||||||||
|
Option ARMs
|
37,379 | 111 | 29,039 | 85 | ||||||||||||
| (a) | Represents the contractual amount of principal owed at December 31, 2010 and 2009. |
| JPMorgan Chase & Co. / 2010 Annual Report | 133 |
Table of Contents
Management’s discussion and analysis
| (b) | Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated based on home valuation models utilizing nationally recognized home price index valuation estimates. Prior period amounts have been revised to conform to the current period presentation. | |
| (c) | Represents current estimated combined LTV, which considers all available lien positions related to the property. All other products are presented without consideration of subordinate liens on the property. | |
| (d) | Carrying value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition. | |
| (e) | At December 31, 2010, and 2009, the ratios of carrying value to current estimated collateral value are net of the allowance for loan losses of $1.6 billion and zero for home equity, respectively, $1.8 billion and $1.1 billion for prime mortgage, respectively, $98 million and zero for subprime mortgage, respectively, and $1.5 billion and $491 million for option ARMs, respectively. |
PCI loans in the states of California and Florida represented 53% and 10%,
respectively, of total PCI loans at December 31, 2010, compared with 54% and 11%, respectively, at
December 31, 2009. The current estimated average LTV ratios were 118% and 135% for California and
Florida loans, respectively, at December 31, 2010, compared with 114% and 131%, respectively, at
December 31, 2009. Continued pressure on housing prices in California and Florida have contributed
negatively to both the current estimated average LTV ratio and the ratio of carrying value to
current collateral value for loans in the PCI portfolio. For the PCI portfolio, 63% had a current
estimated LTV ratio greater than 100%, and 31% of the PCI portfolio had a current estimated LTV
ratio greater than 125% at December 31, 2010; this compared with 59% of the PCI portfolio with a
current estimated LTV ratio greater than 100%, and 28% with a current estimated LTV ratio greater
than 125%, at December 31, 2009.
The carrying value of PCI loans is below the current estimated collateral value of the loans and,
accordingly, the ultimate performance of this portfolio is highly dependent on borrowers’ behavior
and ongoing ability and willingness to continue to make payments on homes with negative equity, as
well as on the cost of alternative housing. For further information on the geographic composition
and current estimated LTVs of residential real estate — non PCI and PCI loans, see Note 14 on
pages 220–238 of this Annual Report.
Loan modification activities
For additional information about consumer loan modification activities, including consumer loan
modifications accounted for as troubled debt restructurings, see Note
14 on pages 220–238 of this
Annual Report.
Residential real estate loans:
For both the Firm’s on-balance sheet loans and loans serviced for
others, more than 1,038,000 mortgage modifications have been offered to borrowers and approximately
318,000 have been approved since the beginning of 2009. Of these, approximately 285,000 have
achieved permanent modification as of December 31, 2010. Of the remaining 720,000 modifications,
34% are in a trial period or still being reviewed for a modification, while 66% have dropped out of
the modification program or otherwise were not eligible for final modification.
The Firm is participating in the U.S. Treasury’s MHA programs and is continuing to expand its other
loss-mitigation efforts for financially distressed borrowers who do not qualify for the U.S.
Treasury’s programs. The MHA programs include the Home Affordable Modification Program (“HAMP”) and
the Second Lien Modification Program (“2MP”); these programs mandate standard modification terms
across the industry and provide incentives to borrowers, servicers and investors who participate.
The Firm completed its first permanent modifications under HAMP in September 2009. Under 2MP, which
the Firm implemented in May 2010, homeowners are offered a way to modify their second mortgage to
make it more affordable when their first mortgage has been modified under HAMP.
The Firm’s other loss-mitigation programs for troubled borrowers who do not qualify for HAMP
include the traditional modification programs offered by the GSE’s and Ginnie Mae, as well as the
Firm’s proprietary modification programs, which include similar concessions to those offered under
HAMP but with expanded eligibility criteria. In addition, the Firm has offered modification
programs targeted specifically to borrowers with higher-risk mortgage products.
MHA, as well as the Firm’s other loss-mitigation programs, generally provide various concessions to
financially troubled borrowers, including, but not limited to, interest rate reductions, term or
payment extensions, and deferral of principal payments that would have otherwise been required
under the terms of the original agreement. For the 54,500 on—balance sheet loans modified under
HAMP and the Firm’s other loss-mitigation programs since July 1, 2009, 55% of permanent
loan modifications have included interest rate reductions, 49% have included term or payment
extensions, 9% have included principal deferment and 22% have included principal forgiveness.
Principal forgiveness has been limited to a specific modification program for option ARMs. The sum
of the percentages of the types of loan modifications exceeds 100% because, in some cases, the
modification of an individual loan includes more than one type of concession.
Generally, borrowers must make at least three payments under the revised contractual terms during a
trial modification and be successfully re-underwritten with income verification before a mortgage
or home equity loan can be permanently modified. When the Firm modifies home equity lines of
credit, future lending commitments related to the modified loans are canceled as part of the terms
of the modification.
The ultimate success of these modification programs and their impact on reducing credit losses
remains uncertain given the short period of time since modification. The primary indicator used by
management to monitor the success of these programs is the rate at which the modified loans
redefault. Modification redefault rates are affected by a number of factors, including the type of
loan modified, the borrower’s overall ability and willingness to repay the modified loan and other
macroeconomic factors. Reduction in payment size for a borrower has shown to be the most
significant driver in improving redefault rates. Modifications completed after July 1, 2009,
whether under HAMP or under the Firm’s other modification programs, differ from modifications
completed under prior programs in that they are generally fully underwritten after a
| 134 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
successful
trial payment period of at least three months. Approximately 87% of on–balance sheet
modifications completed since July 1, 2009, were completed in 2010, with approximately 10%
completed as recently as the fourth quarter of 2010. Performance metrics to date for modifications seasoned
more than six months show
weighted average redefault rates of 25% and 28% for HAMP and the Firm’s
other modification programs, respectively. While these rates compare favorably to equivalent
metrics for modifications completed under prior programs, ultimate redefault rates will remain
uncertain until modified loans have seasoned.
The following table presents information as of December 31, 2010 and 2009, relating to
restructured on–balance sheet residential real estate loans for which concessions have been
granted to borrowers experiencing financial difficulty. Modifications of PCI loans continue to be
accounted for and reported as PCI loans, and the impact of the modification is incorporated into
the Firm’s quarterly assessment of estimated future cash flows. Modifications of consumer loans
other than PCI loans are generally accounted for and reported as troubled debt restructurings
(“TDRs”).
Restructured residential real estate loans
| 2010 | 2009 | |||||||||||||||
| Nonaccrual | Nonaccrual | |||||||||||||||
| On-balance | on-balance | On-balance | on-balance | |||||||||||||
| December 31, (in millions) | sheet loans | sheet loans(d) | sheet loans | sheet loans(d) | ||||||||||||
|
Restructured residential real estate loans – excluding PCI loans
(a)(b)
|
||||||||||||||||
|
Home equity – senior lien
|
$ | 226 | $ | 38 | $ | 168 | $ | 30 | ||||||||
|
Home equity – junior lien
|
283 | 63 | 222 | 43 | ||||||||||||
|
Prime mortgage, including option ARMs
|
2,084 | 534 | 642 | 249 | ||||||||||||
|
Subprime mortgage
|
2,751 | 632 | 1,998 | 598 | ||||||||||||
|
Total restructured residential real estate loans
– excluding PCI loans
|
$ | 5,344 | $ | 1,267 | $ | 3,030 | $ | 920 | ||||||||
|
Restructured PCI loans
(c)
|
||||||||||||||||
|
Home equity
|
$ | 492 | NA | $ | 453 | NA | ||||||||||
|
Prime mortgage
|
3,018 | NA | 1,526 | NA | ||||||||||||
|
Subprime mortgage
|
3,329 | NA | 1,954 | NA | ||||||||||||
|
Option ARMs
|
9,396 | NA | 2,972 | NA | ||||||||||||
|
Total restructured PCI loans
|
$ | 16,235 | NA | $ | 6,905 | NA | ||||||||||
| (a) | Amounts represent the carrying value of restructured residential real estate loans. | |
| (b) | At December 31, 2010 and 2009, $3.0 billion and $296 million, respectively, of loans modified subsequent to repurchase from Ginnie Mae were excluded from loans accounted for as TDRs. When such loans perform subsequent to modification they are generally sold back into Ginnie Mae loan pools. Modified loans that do not re-perform become subject to foreclosure. Substantially all amounts due under the terms of these loans continue to be insured and, where applicable, reimbursement of insured amounts is proceeding normally. | |
| (c) | Amounts represent the unpaid principal balance of restructured PCI loans. | |
| (d) | Nonaccrual loans modified in a TDR may be returned to accrual status when repayment is reasonably assured and the borrower has made a minimum of six payments under the new terms. As of December 31, 2010 and 2009, nonaccrual loans of $580 million and $256 million, respectively, are TDRs for which the borrowers have not yet made six payments under their modified terms. |
Foreclosure prevention:
Foreclosure is a last resort and the Firm makes significant
efforts to help borrowers stay in their homes. Since the first quarter of 2009, the Firm has
prevented two foreclosures (through loan modification, short sales, and other foreclosure
prevention means) for every foreclosure completed.
The Firm has a well-defined foreclosure prevention process when a borrower fails to pay on his or
her loan. Customer contacts are attempted multiple times in various ways to pursue options other
than foreclosure (including through loan modification, short sales, and other foreclosure
prevention means). In addition, if the Firm is unable to contact a customer, various reviews are
completed of borrower’s facts and circumstances before a foreclosure sale is completed. By the time
of a foreclosure sale, borrowers have not made a payment on average for approximately 14 months.
Foreclosure process issues
The foreclosure process is governed by laws and regulations established on a state-by-state basis.
In some states, the foreclosure process involves a judicial process requiring filing documents with
a court. In other states, the process is mostly non-judicial, involving various processes, some of
which require filing documents with governmental agencies. During the
third quarter of 2010, the Firm
became aware that certain documents executed by Firm personnel in connection with the foreclosure
process may not have complied with all applicable procedural requirements. For example, in certain
instances, the underlying loan file review and verification of information for inclusion in an
affidavit was performed by Firm personnel other than the affiant, or the affidavit may not have
been properly notarized. The Firm instructed its outside foreclosure counsel to temporarily suspend
foreclosures, foreclosure sales and evictions in 43 states so that it could review its processes.
These matters are the subject of investigation by federal and state officials. For further
discussion, see “Mortgage Foreclosure Investigations and
Litigation” in Note 32 on pages 282–289
of this Annual Report.
| JPMorgan Chase & Co. / 2010 Annual Report | 135 |
Table of Contents
Management’s discussion and analysis
As a result of these foreclosure process issues, the Firm has undertaken remedial actions to ensure
that it satisfies all procedural requirements relating to mortgage foreclosures. These actions
include:
| • | A complete review of the foreclosure document execution policies and procedures; | |
| • | The creation of model affidavits that will comply with all local law requirements and be used in every case; | |
| • | Implementation of enhanced procedures designed to ensure that employees who execute affidavits personally verify their contents and that the affidavits are executed only in the physical presence of a licensed notary; | |
| • | Extensive training for all personnel who will have responsibility for document execution going forward and certification of those personnel by outside counsel; | |
| • | Implementation of a rigorous quality control double-check review of affidavits completed by the Firm’s employees; and | |
| • | Review and verification of our revised procedures by outside experts. |
As of January 2011, the Firm has resumed initiation of new
foreclosure proceedings in nearly all states in which it had previously suspended such proceedings.
The
following table presents information as of December 31, 2010 and
2009, about the Firm’s nonperforming consumer assets, excluding
credit card.
| Nonperforming assets (a) | |||||||||||||||
| December 31, (in millions) | 2010 | 2009 | |||||||||||||
|
Nonaccrual loans
(b)
|
|||||||||||||||
|
Home equity
– senior lien
|
$ | 479 | $ | 477 | |||||||||||
|
Home equity
– junior lien
|
784 | 1,188 | |||||||||||||
|
Prime mortgage, including option ARMs
|
4,320 | 4,667 | |||||||||||||
|
Subprime mortgage
|
2,210 | 3,248 | |||||||||||||
|
Auto
|
141 | 177 | |||||||||||||
|
Business banking
|
832 | 826 | |||||||||||||
|
Student and other
|
67 | 74 | |||||||||||||
|
Total nonaccrual loans
|
8,833 | 10,657 | |||||||||||||
|
Assets acquired in loan satisfactions
|
|||||||||||||||
|
Real estate owned
|
1,294 | 1,156 | |||||||||||||
|
Other
|
67 | 99 | |||||||||||||
|
Total assets acquired in loan satisfactions
|
1,361 | 1,255 | |||||||||||||
|
Total nonperforming assets
|
$ | 10,194 | $ | 11,912 | |||||||||||
| (a) | At December 31, 2010 and 2009, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion and $9.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.9 billion and $579 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $625 million and $542 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (b) | Excludes PCI loans that were acquired as part of the Washington Mutual transaction, which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past-due status of the pools, or that of individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. |
Nonaccrual loans:
Total consumer nonaccrual loans, excluding credit card, were $8.8
billion, compared with $10.7 billion at December 31, 2009. Nonaccrual loans have stabilized, but
remained at elevated levels. The increase in loan modification activities is expected to continue
to result in elevated levels of nonaccrual loans in the residential real estate portfolios as a
result of both redefault of modified loans as well as the Firm’s policy that modified loans remain
in nonaccrual status until repayment is reasonably assured and the borrower has made a minimum of
six payments under the new terms. Nonaccrual loans in the residential real estate portfolio totaled
$7.8 billion at December 31, 2010, of which 71% were greater than 150 days past due; this compared
with nonaccrual residential real estate loans of $9.6 billion at December 31, 2009, of which 64%
were greater than 150 days past due. Modified residential real estate loans of $1.3 billion and
$920 million at December 31, 2010 and 2009, respectively, were classified as nonaccrual loans. Of
these modified residential real estate loans, $580 million and $256 million had yet to make six
payments under their modified terms at December 31, 2010 and 2009, respectively, with the remaining
nonaccrual modified loans having redefaulted. In the aggregate, the unpaid principal balance of
residential real estate loans greater than 150 days past due was charged down by approximately 46%
and 36% to estimated collateral value at December 31, 2010 and 2009, respectively.
Real estate owned (“REO”):
As part of the residential real estate foreclosure process, loans are
written down to the fair value of the underlying real estate asset, less costs to sell, at
acquisition. Typically, any further gains or losses on REO assets are recorded as part of other
income. In those instances where the Firm gains ownership and possession of individual properties
at the completion of the foreclosure process, these REO assets are managed for prompt sale and
disposition at the best possible economic value. Operating expense, such as
real estate taxes and maintenance, are charged to other expense. REO assets, excluding those
insured by U.S. government agencies, increased by $138 million from December 31, 2009 to $1.3
billion, primarily related to foreclosures of non-PCI loans. It is anticipated that REO assets will
continue to increase over the next several quarters, as loans moving through the foreclosure
process are expected to increase.
| 136 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Credit Card
Credit card receivables (which include receivables in Firm-sponsored credit card
securitization trusts that were not reported on the Consolidated Balance Sheets prior to January 1,
2010) were $137.7 billion at December 31, 2010, a decrease of $25.7 billion from December 31, 2009,
due to the decline in lower-yielding promotional balances and runoff of the Washington Mutual
portfolio.
The 30-day delinquency rate decreased to 4.07% at December 31, 2010, from 6.28% at December 31,
2009, while the net charge-off rate increased to 9.73% for 2010, from 9.33% in 2009 due primarily
to the decline in outstanding loans. The delinquency trend is showing improvement, especially
within early stage delinquencies. Charge-offs were elevated in 2010 but showed improvement in the
second half of the year as a result of lower delinquent loans and higher repayment rates. The
credit card portfolio continues to reflect a well-seasoned, largely rewards-based portfolio that
has good U.S. geographic diversification. The greatest geographic concentration of credit card
loans is in California which represented 13% of total loans at December 2010, compared with 14% at
December 2009. Loan concentration for the top five states of California, New York, Texas, Florida
and Illinois consisted of $55.1 billion in receivables, or 40% of the
portfolio, at December 2010,
compared with $65.9 billion, or 40%, at December 2009.
Credit card receivables, excluding the Washington Mutual portfolio, were $123.9 billion at December
31, 2010, compared with $143.8 billion at December 31, 2009. The 30-day delinquency rate, excluding
the Washington Mutual portfolio, was 3.66% at December 31, 2010, down from 5.52% at December 31,
2009, while the net charge-off rate increased to 8.72% in 2010 from 8.45% in 2009 due largely to
the decrease in outstanding loans.
Credit card receivables in the Washington Mutual portfolio were $13.7 billion at December 31, 2010,
compared with $19.7 billion at December 31, 2009. The Washington Mutual portfolio’s 30-day
delinquency rate was 7.74% at December 31, 2010, down from 12.72% at December 31, 2009; the 2009
delinquency rate excludes the impact of the consolidation of the Washington Mutual Master Trust
(“WMMT”) in the second quarter of 2009. The net charge-off rate in 2010 was 18.73%, compared with
18.79% in 2009, excluding the impact of the purchase accounting adjustments related to the
consolidation of the WMMT in the second quarter of 2009.
Modifications of credit card loans
For additional information about credit card loan modification activities, including credit card
loan modifications accounted for as troubled debt restructurings, see Note 14 on pages 220–238 of
this Annual Report.
JPMorgan Chase may offer one of a number of loan modification programs to 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 Firm’s 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 short-term and long-term, are considered to be TDRs.
Based on the Firm’s historical experience, the Firm expects that a significant portion of the
borrowers will not ultimately comply with the modified payment terms.
| JPMorgan Chase & Co./2010 Annual Report | 137 |
Table of Contents
Management’s discussion and analysis
If the cardholder does not comply with the modified payment terms, then the credit card loan
agreement generally reverts back to its pre-modification payment rate terms. Assuming that those
borrowers do not begin to perform in accordance with those payment terms, the loans continue to age
and will ultimately be charged off in accordance with the Firm’s standard charge-off policy. In
addition, if a borrower successfully completes a short-term modification program, then the loan
reverts back to its pre-modification payment terms. However, in most cases the Firm does not
reinstate the borrower’s line of credit.
At December 31, 2010 and 2009, the Firm had $10.0 billion and $6.2 billion, respectively, of
on–balance sheet credit card loans outstanding that have been modified in troubled debt
restructurings.
These balances include both credit card loans with modified payment terms and
credit card loans that have reverted back to their pre-modification payment terms. The increase in
modified credit card loans outstanding 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 regarding consolidation of
VIEs.
Consistent with the Firm’s policy, all credit card loans typically remain on accrual status.
However, the Firm separately establishes an allowance for the estimated uncollectible portion of
billed and accrued interest and fee income on credit card loans.
COMMUNITY REINVESTMENT ACT EXPOSURE
The Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of
borrowers in all segments of their communities, including neighborhoods with low or moderate
incomes. JPMorgan Chase is a national leader in community development by providing loans,
investments and community development services in communities across the United States.
At December 31, 2010 and 2009, the Firm’s CRA loan portfolio was approximately $16 billion and $18 billion, respectively. Of the CRA portfolio 65% were residential mortgage loans and 15% were
business banking loans at both December 31, 2010 and 2009, respectively; 9% and 8%, respectively,
were commercial real estate loans; and 11% and 12%, respectively, were other loans. The CRA
nonaccrual loans were 6% of the Firm’s nonaccrual loans at both December 31, 2010 and 2009. Net
charge-offs in the CRA portfolio were 3% of the Firm’s net charge-offs in both 2010 and 2009.
| 138 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
ALLOWANCE FOR CREDIT LOSSES
JPMorgan Chase’s allowance for loan losses covers the wholesale (risk-rated), and
consumer (primarily scored) portfolios. The allowance represents management’s estimate of probable
credit losses inherent in the Firm’s loan portfolio. Management also determines an allowance for
wholesale and consumer (excluding credit card) lending-related commitments using a methodology
similar to that used for the wholesale loans. During 2010, the Firm did not make any significant
changes to the methodologies or policies used to establish its allowance for credit losses.
For a further discussion of the components of the allowance for credit losses, see Critical
Accounting Estimates Used by the Firm on pages 149–154 and Note
15 on pages 239–243 of this
Annual Report.
At least quarterly, the allowance for credit losses is reviewed by the Chief Risk Officer, the
Chief Financial Officer and the Controller of the Firm and discussed with the Risk Policy and Audit
Committees of the Board of Directors of the Firm. As of December 31, 2010, JPMorgan Chase deemed
the allowance for credit losses to be appropriate (i.e., sufficient to absorb losses inherent in
the portfolio, including those not yet identifiable).
The allowance for credit losses was $33.0 billion at December 31, 2010, an increase of $442 million
from $32.5 billion at December 31, 2009. The increase was primarily due to the Firm’s adoption of
accounting guidance related to VIEs. As a result of the consolidation of certain securitization
entities, the Firm established an allowance for loan losses of $7.5 billion at January 1, 2010,
primarily related to the receivables that had been held in credit card securitization trusts.
Excluding the $7.5 billion transition adjustment at adoption, the allowance decreased by $6.8 billion in the
consumer and wholesale portfolios, generally reflecting an improvement in credit quality.
The consumer (excluding
credit card) allowance for loan losses increased $1.6 billion largely due to a $3.4 billion
increase related to further estimated deterioration in the Washington Mutual PCI pools, partially
offset by a $1.8 billion reduction predominantly in non-credit-impaired residential real estate
reserves reflecting improved loss outlook as a result of the resumption of favorable delinquency
trends at the end of 2010, as well as a $632 million adjustment related to the estimated net
realizable value of the collateral underlying delinquent residential home loans. For additional
information, refer to page 131 of this Annual Report.
The credit card allowance for loan losses increased $1.4 billion from December 31, 2009, largely
due to the impact of the adoption of the accounting guidance related to VIEs. Excluding the effect
of the transition adjustment at adoption, the credit card allowance decreased by $6.0 billion from December 31, 2009,
reflecting lower estimated losses primarily related to improved delinquency trends as well as lower
levels of outstandings.
The wholesale allowance for loan losses decreased by $2.4 billion from December 31, 2009, primarily
due to repayments and loan sales, as well as continued improvement in the credit quality of the
commercial and industrial loan portfolio.
The allowance for lending-related commitments for both wholesale and consumer (excluding credit
card), which is reported in other liabilities, was $717 million and $939 million at December 31,
2010 and 2009, respectively. The decrease primarily reflected the continued improvement in the
credit quality of the wholesale commercial and industrial loan portfolio.
The credit ratios in the table below are based on retained loan balances, which exclude loans
held-for-sale and loans accounted for at fair value.
| JPMorgan Chase & Co. / 2010 Annual Report | 139 |
Table of Contents
Management’s discussion and analysis
Summary of changes in the allowance for credit losses
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| Consumer, | Consumer, | |||||||||||||||||||||||||||||||
| Year ended December 31, | excluding | excluding | ||||||||||||||||||||||||||||||
| (in millions, except ratios) | Wholesale | credit card | Credit Card | Total | Wholesale | credit card | Credit Card | Total | ||||||||||||||||||||||||
|
Allowance for loan losses
|
||||||||||||||||||||||||||||||||
|
Beginning balance at January 1,
|
$ | 7,145 | $ | 14,785 | $ | 9,672 | $ | 31,602 | $ | 6,545 | $ | 8,927 | $ | 7,692 | $ | 23,164 | ||||||||||||||||
|
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 | 3,226 | 10,421 | 10,371 | 24,018 | ||||||||||||||||||||||||
|
Gross (recoveries)
(a)
|
(262 | ) | (474 | ) | (1,373 | ) | (2,109 | ) | (94 | ) | (222 | ) | (737 | ) | (1,053 | ) | ||||||||||||||||
|
Net charge-offs
(a)
|
1,727 | 7,909 | 14,037 | 23,673 | 3,132 | 10,199 | 9,634 | 22,965 | ||||||||||||||||||||||||
|
Provision for loan losses
(a)
|
(673 | ) | 9,458 | 8,037 | 16,822 | 3,684 | 16,032 | 12,019 | 31,735 | |||||||||||||||||||||||
|
Other
(b)
|
2 | 10 | 9 | 21 | 48 | 25 | (405 | ) | (332 | ) | ||||||||||||||||||||||
|
Ending balance
|
$ | 4,761 | $ | 16,471 | $ | 11,034 | $ | 32,266 | $ | 7,145 | $ | 14,785 | $ | 9,672 | $ | 31,602 | ||||||||||||||||
|
Impairment methodology
|
||||||||||||||||||||||||||||||||
|
Asset-specific
(c)(d)(e)
|
$ | 1,574 | $ | 1,075 | $ | 4,069 | $ | 6,718 | $ | 2,046 | $ | 896 | $ | 3,117 | $ | 6,059 | ||||||||||||||||
|
Formula-based
(a)(e)
|
3,187 | 10,455 | 6,965 | 20,607 | 5,099 | 12,308 | 6,555 | 23,962 | ||||||||||||||||||||||||
|
PCI
|
— | 4,941 | — | 4,941 | — | 1,581 | — | 1,581 | ||||||||||||||||||||||||
|
Total allowance for loan losses
|
$ | 4,761 | $ | 16,471 | $ | 11,034 | $ | 32,266 | $ | 7,145 | $ | 14,785 | $ | 9,672 | $ | 31,602 | ||||||||||||||||
|
Allowance for lending-related
commitments
|
||||||||||||||||||||||||||||||||
|
Beginning balance at January 1,
|
$ | 927 | $ | 12 | $ | — | $ | 939 | $ | 634 | $ | 25 | $ | — | $ | 659 | ||||||||||||||||
|
Cumulative effect of change in
accounting principles
(a)
|
(18 | ) | — | — | (18 | ) | — | — | — | — | ||||||||||||||||||||||
|
Provision for lending-related
commitments
(a)
|
(177 | ) | (6 | ) | — | (183 | ) | 290 | (10 | ) | — | 280 | ||||||||||||||||||||
|
Other
|
(21 | ) | — | — | (21 | ) | 3 | (3 | ) | — | — | |||||||||||||||||||||
|
Ending balance
|
$ | 711 | $ | 6 | $ | — | $ | 717 | $ | 927 | $ | 12 | $ | — | $ | 939 | ||||||||||||||||
|
Impairment methodology
|
||||||||||||||||||||||||||||||||
|
Asset-specific
|
$ | 180 | $ | — | $ | — | $ | 180 | $ | 297 | $ | — | $ | — | $ | 297 | ||||||||||||||||
|
Formula-based
|
531 | 6 | — | 537 | 630 | 12 | — | 642 | ||||||||||||||||||||||||
|
Total allowance for lending-related commitments
|
$ | 711 | $ | 6 | $ | — | $ | 717 | $ | 927 | $ | 12 | $ | — | $ | 939 | ||||||||||||||||
|
Total allowance for credit losses
|
$ | 5,472 | $ | 16,477 | $ | 11,034 | $ | 32,983 | $ | 8,072 | $ | 14,797 | $ | 9,672 | $ | 32,541 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Memo:
|
||||||||||||||||||||||||||||||||
|
Retained loans, end of period
|
$ | 222,510 | $ | 327,464 | $ | 135,524 | $ | 685,498 | $ | 200,077 | $ | 348,355 | $ | 78,786 | $ | 627,218 | ||||||||||||||||
|
Retained loans, average
|
213,609 | 340,334 | 144,219 | 698,162 | 223,047 | 362,216 | 87,029 | 672,292 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Credit ratios
|
||||||||||||||||||||||||||||||||
|
Allowance for loan losses to retained loans
|
2.14 | % | 5.03 | % | 8.14 | % | 4.71 | % | 3.57 | % | 4.24 | % | 12.28 | % | 5.04 | % | ||||||||||||||||
|
Allowance for loan losses to retained nonaccrual loans
(f)
|
86 | 186 | NM | 225 | 109 | 139 | NM | 184 | ||||||||||||||||||||||||
|
Allowance for loan losses to retained nonaccrual loans excluding credit card
|
86 | 186 | NM | 148 | 109 | 139 | NM | 127 | ||||||||||||||||||||||||
|
Net charge-off rates
(g)
|
0.81 | 2.32 | 9.73 | 3.39 | 1.40 | 2.82 | 11.07 | 3.42 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Credit ratios excluding home lending PCI loans and loans held by the WMMT
|
||||||||||||||||||||||||||||||||
|
Allowance for loan losses to retained loans
(h)
|
2.14 | 4.53 | 8.14 | 4.46 | 3.57 | 4.94 | 12.43 | 5.51 | ||||||||||||||||||||||||
|
Allowance for loan losses to retained nonaccrual loans
(f)(h)
|
86 | 131 | NM | 190 | 109 | 124 | NM | 174 | ||||||||||||||||||||||||
|
Allowance for loan losses to retained nonaccrual loans excluding credit card
(f)(h)
|
86 | 131 | NM | 114 | 109 | 124 | NM | 118 | ||||||||||||||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon the adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. As a result $7.4 billion, $14 million and $127 million, respectively, of allowance for loan losses were recorded on-balance sheet associated with the consolidation of these entities. For further discussion, see Note 16 on pages 244–259 of this Annual Report. | |
| (b) | Other predominantly includes a reclassification in 2009 related to the issuance and retention of securities from the Chase Issuance Trust. | |
| (c) | Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR. | |
| (d) | The asset-specific consumer (excluding credit card) allowance for loan losses includes TDR reserves of $985 million and $754 million at December 31, 2010 and 2009, respectively. Prior-period amounts have been reclassified from formula-based to conform with the current period presentation. | |
| (e) | At December 31, 2010, the Firm’s allowance for loan losses on credit card loans for which the Firm has modified the terms of the loans for borrowers who are experiencing financial difficulty was reclassified to the asset-specific allowance. Prior periods have been revised to reflect the current presentation. |
| 140 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| (f) | The Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under the guidance issued by the FFIEC, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. | |
| (g) | Charge-offs are not recorded on PCI loans until actual losses exceed estimated losses recorded as purchase accounting adjustments at the time of acquisition. | |
| (h) | Excludes the impact of PCI loans acquired as part of the Washington Mutual transaction. The allowance for loan losses on PCI loans was $4.9 billion and $1.6 billion as of December 31, 2010 and 2009, respectively. |
The following table presents a credit ratio excluding: home lending PCI loans acquired in the
Washington Mutual transaction; and credit card loans held by the Washington Mutual Master Trust
which were consolidated onto the Firm’s balance sheet at fair value during the second quarter of
2009. The PCI loans were accounted for at fair value on the acquisition date, which incorporated
management’s estimate, as of that date, of credit losses over the remaining life of the portfolio.
Accordingly, no allowance for loan losses was recorded for these loans as of the acquisition date.
Subsequent evaluations of
estimated credit deterioration in this portfolio resulted in the
recording of an allowance for loan losses of $4.9 billion and $1.6 billion at December 31, 2010 and
2009, respectively. For more information on home lending PCI loans,
see pages 132–134 of this
Annual Report. For more information on the consolidation of assets from the Washington Mutual
Master Trust, see Note 16 on pages 244–259 of this Annual Report.
The calculation of the allowance for loan losses to total retained loans, excluding PCI loans and
loans held by the WMMT, is presented below.
| December 31, (in millions, except ratios) | 2010 | 2009 | ||||||
|
Allowance for loan losses
|
$ | 32,266 | $ | 31,602 | ||||
|
Less: Allowance for PCI loans
|
4,941 | 1,581 | ||||||
|
Adjusted
allowance for loan losses
|
$ | 27,325 | $ | 30,021 | ||||
|
|
||||||||
|
Total loans retained
|
$ | 685,498 | $ | 627,218 | ||||
|
Less: Firmwide PCI loans
|
72,807 | 81,380 | ||||||
|
Loans held by the WMMT
|
— | 1,002 | ||||||
|
Adjusted
loans
|
$ | 612,691 | $ | 544,836 | ||||
|
Allowance for loan losses to ending loans excluding PCI loans and loans held by the WMMT
|
4.46 | % | 5.51 | % | ||||
Provision for credit losses
The provision for credit losses was
$16.6 billion for the year ended December 31, 2010, down by
$21.8 billion, or 57%, from the prior-year provision. The total consumer provision (excluding
credit card) for credit losses was $9.5 billion, reflecting an addition to the allowance for loan
losses of $1.6 billion (primarily related to the increase in allowance for the PCI portfolio of
$3.4 billion), partially offset by a $1.8 billion reduction in allowance predominantly for
non-credit-impaired residential real estate loans. The prior year provision was $16.0 billion
reflecting additions of $5.8 billion predominantly for the home equity and mortgage portfolios,
including $1.6 billion for the PCI portfolio.
The total credit card provision for credit losses was
$8.0 billion, primarily reflecting a reduction in the allowance for credit losses of $6.0 billion
as a result of improved delinquency trends and reduced net charge-offs. The prior year managed
provision was $18.5 billion reflecting additions to the allowance of $2.4 billion. The wholesale
provision for credit losses was a benefit of $850 million, compared with expense of $4.0 billion,
reflecting a reduction in the allowance for credit losses predominantly as a result of continued
improvement in the credit quality of the commercial and industrial portfolio, reduced net
charge-offs and repayments.
| Provision for | ||||||||||||||||||||||||||||||||||||
| Year ended December 31, | Provision for loan losses | lending-related commitments | Total provision for credit losses | |||||||||||||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
|
Wholesale
|
$ | (673 | ) | $ | 3,684 | $ | 3,536 | $ | (177 | ) | $ | 290 | $ | (209 | ) | $ | (850 | ) | $ | 3,974 | $ | 3,327 | ||||||||||||||
|
Consumer, excluding credit
card
(a)
|
9,458 | 16,032 | 10,659 | (6 | ) | (10 | ) | (49 | ) | 9,452 | 16,022 | 10,610 | ||||||||||||||||||||||||
|
Credit card
– reported
(a)(b)
|
8,037 | 12,019 | 7,042 | — | — | — | 8,037 | 12,019 | 7,042 | |||||||||||||||||||||||||||
|
Total provision for credit
losses – reported
|
16,822 | 31,735 | 21,237 | (183 | ) | 280 | (258 | ) | 16,639 | 32,015 | 20,979 | |||||||||||||||||||||||||
|
Credit card
– securitized
(b)(c)
|
NA | 6,443 | 3,612 | NA | — | — | NA | 6,443 | 3,612 | |||||||||||||||||||||||||||
|
Total provision for credit
losses – managed
|
$ | 16,822 | $ | 38,178 | $ | 24,849 | $ | (183 | ) | $ | 280 | $ | (258 | ) | $ | 16,639 | $ | 38,458 | $ | 24,591 | ||||||||||||||||
| (a) | Includes adjustments to the provision for credit losses recognized in the Corporate/Private Equity segment related to the Washington Mutual transaction in 2008. | |
| (b) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For further discussion regarding the Firm’s application and the impact of the new guidance, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 64–65 of this Annual Report. | |
| (c) | Loans securitized are defined as loans that were sold to unconsolidated securitization trusts and were not included in reported loans. For further discussion of credit card securitizations, see Note 16 on pages 244–259 of this Annual Report. |
| JPMorgan Chase & Co. / 2010 Annual Report | 141 |
Table of Contents
Management’s discussion and analysis
MARKET RISK MANAGEMENT
Market risk is the exposure to an adverse change in the market value of portfolios and
financial instruments caused by a change in market prices or rates.
Market risk management
Market Risk is an independent risk management function that works in close partnership with the
business segments to identify and monitor market risks throughout the Firm and to define market
risk policies and procedures. The risk management function is headed by the Firm’s Chief Risk
Officer.
Market Risk seeks to facilitate efficient risk/return decisions, reduce volatility in operating
performance and provide transparency into the Firm’s market risk profile for senior management, the
Board of Directors and regulators. Market Risk is responsible for the following functions:
| • | establishing a market risk policy framework | |
| • | independent measurement, monitoring and control of line-of-business market risk | |
| • | definition, approval and monitoring of limits | |
| • | performance of stress testing and qualitative risk assessments |
Risk identification and classification
Each line of business is responsible for the comprehensive identification and verification of
market risks within its units. The Firm’s market risks arise primarily from the activities in IB,
Mortgage Banking, and CIO in Corporate/Private Equity.
IB makes markets and trades its products across the fixed income, foreign exchange, equities and
commodities markets. This trading activity may lead to a potential decline in net income due to
adverse changes in market rates. In addition to these trading risks, there are risks in IB’s credit
portfolio from retained loans and commitments, derivative credit valuation adjustments, hedges of
the credit valuation adjustments and mark-to-market hedges of the retained loan portfolio.
Additional risk positions result from the debit valuation adjustments taken on certain structured
liabilities and derivatives to reflect the credit quality of the Firm.
The Firm’s Mortgage Banking business includes the Firm’s mortgage pipeline and warehouse loans,
MSRs and all related hedges. These activities give rise to complex interest rate risks, as well as
option and basis risk. Option risk arises primarily from prepayment options embedded in mortgages
and changes in the probability of newly
originated mortgage commitments actually closing. Basis
risk results from differences in the relative movements of the rate indices underlying mortgage
exposure and other interest rates.
CIO is primarily concerned with managing structural risks which arise out of the various business
activities of the Firm. Market Risk measures and monitors the gross structural exposures as well as
the net exposures related to these activities.
Risk measurement
Tools used to measure risk
Because no single measure can reflect all aspects of market risk, the Firm uses various
metrics, both statistical and nonstatistical, including:
| • | Value-at-risk (“VaR”) | |
| • | Economic-value stress testing | |
| • | Nonstatistical risk measures | |
| • | Loss advisories | |
| • | Revenue drawdowns | |
| • | Risk identification for large exposures (“RIFLEs”) | |
| • | Earnings-at-risk stress testing |
Value-at-risk
JPMorgan Chase utilizes VaR, a statistical risk measure, to estimate the potential loss from
adverse market moves. Each business day, as part of its risk management activities, the Firm
undertakes a comprehensive VaR calculation that includes the majority of its material market risks.
VaR provides a consistent cross-business measure of risk profiles and levels of diversification and
is used for comparing risks across businesses and monitoring limits. These VaR results are reported
to senior management and regulators, and they feed regulatory capital calculations.
The Firm calculates VaR to estimate possible economic outcomes for current positions using
historical data from the previous twelve months. This approach assumes that historical
changes in market values are representative of current risk; this assumption may not always
be valid. VaR is calculated using a one-day time horizon and an expected tail-loss
methodology, which approximates a 95% confidence level. This means the Firm would expect to
incur losses greater than that predicted by VaR estimates five times in every 100 trading
days, or about 12 to 13 times a year.
| 142 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The table below shows the results of the Firm’s VaR measure using a 95% confidence level.
95% Confidence-Level VaR
Total IB trading VaR by risk type, credit portfolio VaR and other VaR
| As of or for the year ended | 2010 | 2009 | At December 31, | |||||||||||||||||||||||||||||
| December 31, (in millions) | Average | Minimum | Maximum | Average | Minimum | Maximum | 2010 | 2009 | ||||||||||||||||||||||||
|
IB VaR by risk type
|
||||||||||||||||||||||||||||||||
|
Fixed income
|
$ | 65 | $ | 33 | $ | 95 | $ | 160 | $ | 80 | $ | 216 | $ | 52 | $ | 80 | ||||||||||||||||
|
Foreign exchange
|
11 | 6 | 20 | 18 | 7 | 39 | 16 | 10 | ||||||||||||||||||||||||
|
Equities
|
22 | 10 | 52 | 47 | 8 | 156 | 30 | 43 | ||||||||||||||||||||||||
|
Commodities and other
|
16 | 11 | 32 | 20 | 11 | 35 | 13 | 14 | ||||||||||||||||||||||||
|
Diversification benefit to IB
trading VaR |
(43 | ) (a) | NM | (b) | NM | (b) | (91 | ) (a) | NM | (b) | NM | (b) | (34 | ) (a) | (54 | ) (a) | ||||||||||||||||
|
IB trading VaR
|
$ | 71 | $ | 40 | $ | 107 | $ | 154 | $ | 77 | $ | 236 | $ | 77 | $ | 93 | ||||||||||||||||
|
Credit portfolio VaR
|
26 | 15 | 40 | 52 | 18 | 106 | 27 | 21 | ||||||||||||||||||||||||
|
Diversification benefit to IB
trading and credit portfolio VaR
|
(10 | ) (a) | NM | (b) | NM | (b) | (42 | ) (a) | NM | (b) | NM | (b) | (5 | ) (a) | (9 | ) (a) | ||||||||||||||||
|
Total IB trading and credit
portfolio VaR
|
$ | 87 | $ | 50 | $ | 128 | $ | 164 | $ | 93 | $ | 256 | $ | 99 | $ | 105 | ||||||||||||||||
|
Mortgage Banking VaR
|
$ | 23 | $ | 8 | $ | 47 | $ | 57 | $ | 19 | $ | 151 | $ | 9 | $ | 28 | ||||||||||||||||
|
Chief Investment Office
(“CIO”) VaR
|
61 | 44 | 80 | 103 | 71 | 126 | 56 | 76 | ||||||||||||||||||||||||
|
Diversification benefit to total
other VaR |
(13 | ) (a) | NM | (b) | NM | (b) | (36 | ) (a) | NM | (b) | NM | (b) | (10 | ) (a) | (13 | ) (a) | ||||||||||||||||
|
Total other VaR
|
$ | 71 | $ | 48 | $ | 100 | $ | 124 | $ | 79 | $ | 202 | $ | 55 | $ | 91 | ||||||||||||||||
|
Diversification benefit to total
IB and other VaR |
(59 | ) (a) | NM | (b) | NM | (b) | (82 | ) (a) | NM | (b) | NM | (b) | (65 | ) (a) | (73 | ) (a) | ||||||||||||||||
|
Total IB and other VaR
|
$ | 99 | $ | 66 | $ | 142 | $ | 206 | $ | 111 | $ | 328 | $ | 89 | $ | 123 | ||||||||||||||||
| (a) | Average VaR and period-end VaR were less than the sum of the VaR of the components described above, which is due to portfolio diversification. The diversification effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves. | |
| (b) | Designated as not meaningful (“NM”), because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful to compute a portfolio-diversification effect. |
VaR measurement
IB trading and credit portfolio VaR includes substantially all trading activities in IB, including
the credit spread sensitivities of certain mortgage products and syndicated lending facilities that
the Firm intends to distribute. The Firm uses proxies to estimate the VaR for these products since
daily time series are largely not available. It is likely that using an actual price-based time
series for these products, if available, would affect the VaR results presented. In addition, for
certain products included in IB trading and credit portfolio VaR, particular risk parameters are
not fully captured – for example, correlation risk.
Total other VaR includes certain positions employed as part of the Firm’s risk management function
within CIO and in the Mortgage Banking business. CIO VaR includes positions, primarily in debt
securities and credit products, used to manage structural and other risks including interest rate,
credit and mortgage risks arising from the Firm’s ongoing
business activities. The Mortgage Banking VaR includes the Firm’s mortgage pipeline and warehouse
loans, MSRs and all related hedges.
In the Firm’s view, including IB trading and credit portfolio VaR within total other VaR produces a
more complete and transparent perspective of the Firm’s market risk profile.
IB and other VaR does not include the retained credit portfolio, which is not marked to market;
however, it does include hedges of those
positions. It also does not include debit valuation
adjustments (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of
the Firm, principal investments (mezzanine financing, tax-oriented investments, etc.), and certain
securities and investments held by the Corporate/Private Equity line of business, including private
equity investments, capital management positions and longer-term investments managed by CIO. These
longer-term positions are managed through the Firm’s earnings at risk and other cash flow
monitoring processes, rather than by using a VaR measure. Principal investing activities and
Private Equity positions are managed using stress and scenario analyses. See the DVA Sensitivity
table on page 144 of this Annual Report for further details. For a discussion of Corporate/Private
Equity, see pages 89–90 of this Annual Report.
2010 and 2009 VaR results
As presented in the table, average total IB and other VaR totaled $99 million for 2010, compared
with $206 million for 2009. The decrease in average VaR in 2010 was driven by a decline in market
volatility in early 2009, as well as a reduction in exposures, primarily in CIO and IB. Average
total IB trading and credit portfolio VaR for 2010 was $87 million, compared with $164 million for
2009. The decrease in IB trading and credit portfolio VaR for 2010 was also driven by the decline
in market volatility, as well as a reduction in exposure, primarily in the fixed income risk
component. CIO VaR averaged $61 million for 2010, compared with $103 million for 2009. Mortgage
Banking VaR averaged $23 million for 2010,
| JPMorgan Chase & Co. / 2010 Annual Report | 143 |
Table of Contents
Management’s discussion and analysis
compared with $57 million for 2009. Decreases in CIO and
Mortgage Banking VaR for 2010 were again driven by the decline in market volatility and position
changes. The decline in Mortgage Banking VaR at December 31, 2010, reflects management’s decision
to reduce risk given market volatility at the time.
The Firm’s average IB and other VaR diversification benefit was $59 million or 37% of the sum for
2010, compared with $82 million or 28% of the sum for 2009. The Firm experienced an increase in the
diversification benefit in 2010 as positions changed and correlations decreased. In general, over
the course of the year, VaR exposure can vary significantly as positions change, market volatility
fluctuates and diversification benefits change.
VaR back-testing
The Firm conducts daily back-testing of VaR against its market risk-related revenue, which is
defined as the change in value of: principal transactions revenue for IB and CIO (less Private
Equity gains/losses and revenue from longer-term CIO investments); trading-related net interest
income for IB, CIO and Mortgage Banking; IB brokerage commissions, underwriting fees or other
revenue; revenue from syndicated lending facilities that the Firm intends to distribute; and
mortgage fees and related income for the Firm’s mortgage pipeline and warehouse loans, MSRs, and
all related hedges. Daily firmwide market risk–related revenue excludes gains and losses from DVA.
The following histogram illustrates the daily market risk–related gains and losses for IB,
CIO and Mortgage Banking positions for 2010. The chart shows that the Firm posted market
risk–related gains on 248 out of 261 days in this period, with 12 days exceeding $210 million. The
inset graph looks at those days on which the Firm experienced losses and depicts the amount by
which the 95% confidence-level VaR exceeded the actual loss on each of those days. During 2010,
losses were sustained on 13 days, none of which exceeded the VaR measure.
The following table provides information about the gross sensitivity of DVA to a
one-basis-point increase in JPMorgan Chase’s credit spreads. This sensitivity represents the impact
from a one-basis-point parallel shift in JPMorgan Chase’s entire credit curve. As credit curves do
not typically move in a parallel fashion, the sensitivity multiplied by the change in spreads at a
single maturity point may not be representative of the actual revenue recognized.
Debit valuation adjustment sensitivity
| 1 Basis point increase in | ||||
| December 31, (in millions) | JPMorgan Chase’s credit spread | |||
|
2010
|
$ | 35 | ||
|
2009
|
$ | 39 | ||
| 144 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Economic value stress testing
While VaR reflects the risk of loss due to adverse changes in markets using recent historical
market behavior as an indicator of losses, stress testing captures the Firm’s exposure to unlikely
but plausible events in abnormal markets using multiple scenarios that assume significant changes
in credit spreads, equity prices, interest rates, currency rates or commodity prices. Scenarios
are updated dynamically and may be redefined on an ongoing basis to reflect current market
conditions. Along with VaR, stress testing is important in measuring and controlling risk; it
enhances understanding of the Firm’s risk profile and loss potential, as stress losses are
monitored against limits. Stress testing is also employed in cross-business risk management.
Stress-test results, trends and explanations based on current market risk positions are reported to
the Firm’s senior management and to the lines of business to allow them to better understand event
risk—sensitive positions and manage risks with more transparency.
Nonstatistical risk measures
Nonstatistical risk measures as well as stress testing include sensitivities to variables used
to value positions, such as credit spread sensitivities, interest rate basis point values and
market values. These measures provide granular information on the Firm’s market risk exposure. They
are aggregated by line-of-business and by risk type, and are used for tactical control and
monitoring limits.
Loss advisories and revenue drawdowns
Loss advisories and net revenue drawdowns are tools used to highlight trading losses above
certain levels of risk tolerance. Net revenue drawdown is defined as the decline in net revenue
since the year-to-date peak revenue level.
Risk identification for large exposures
Individuals who manage risk positions in IB are responsible for identifying potential losses
that could arise from specific, unusual events, such as a potential change in tax legislation, or a
particular combination of unusual market moves. This information is aggregated centrally for IB.
Trading businesses are responsible for RIFLEs, thereby permitting the Firm to monitor further
earnings vulnerability not adequately covered by standard risk measures.
Earnings-at-risk stress testing
The VaR and stress-test measures described above illustrate the total economic sensitivity of the
Firm’s Consolidated Balance Sheets to changes in market variables. The effect of interest rate
exposure on reported net income is also important. Interest rate risk exposure in the Firm’s core
nontrading business activities (i.e., asset/liability management positions, including accrual loans
within IB and CIO) results from on— and off—balance sheet positions. ALCO establishes the Firm’s
interest rate risk policies, sets risk guidelines and limits and reviews the risk profile of the
Firm. Treasury, working in partnership with the lines of business, calculates the Firm’s interest
rate risk profile weekly and reports to senior management.
Interest rate risk for nontrading activities can occur due to a variety of factors, including:
| • | Differences in the timing among the maturity or repricing of assets, liabilities and off—balance sheet instruments. For example, if liabilities reprice more quickly than assets and funding interest rates are declining, earnings will increase initially. | |
| • | Differences in the amounts of assets, liabilities and off—balance sheet instruments that are repricing at the same time. For example, if more deposit liabilities are repricing than assets when general interest rates are declining, earnings will increase initially. | |
| • | Differences in the amounts by which short-term and long-term market interest rates change (for example, changes in the slope of the yield curve) because the Firm has the ability to lend at long-term fixed rates and borrow at variable or short-term fixed rates. Based on these scenarios, the Firm’s earnings would be affected negatively by a sudden and unanticipated increase in short-term rates paid on its liabilities (e.g., deposits) without a corresponding increase in long-term rates received on its assets (e.g., loans). Conversely, higher long-term rates received on assets generally are beneficial to earnings, particularly when the increase is not accompanied by rising short-term rates paid on liabilities. | |
| • | The impact of changes in the maturity of various assets, liabilities or off—balance sheet instruments as interest rates change. For example, if more borrowers than forecasted pay down higher-rate loan balances when general interest rates are declining, earnings may decrease initially. |
The Firm manages interest rate exposure related to its assets and liabilities on a consolidated,
corporate-wide basis. Business units transfer their interest rate risk to Treasury through a
transfer-pricing system, which takes into account the elements of interest rate exposure that can
be risk-managed in financial markets. These elements include asset and liability balances and
contractual rates of interest, contractual principal payment schedules, expected prepayment
experience, interest rate reset dates and maturities, rate indices used for repricing, and any
interest rate ceilings or floors for adjustable rate products. All transfer-pricing assumptions are
dynamically reviewed.
The Firm conducts simulations of changes in net interest income from its nontrading activities
under a variety of interest rate scenarios. Earnings-at-risk tests measure the potential change in
the Firm’s net interest income, and the corresponding impact to the Firm’s pretax earnings, over
the following 12 months. These tests highlight exposures to various rate-sensitive factors, such as
the rates themselves (e.g., the prime lending rate), pricing strategies on deposits, optionality
and changes in product mix. The tests include forecasted balance sheet changes, such as asset sales
and securitizations, as well as prepayment and reinvestment behavior. Mortgage prepayment
assumptions are based on current interest rates compared with underlying contractual rates, the
time since origination, and other factors which are updated periodically based on historical
experience and forward market expectations. The balance and pricing assumptions of deposits that
have no stated maturity are based on historical performance, the competitive environment, customer
behavior, and product mix.
| JPMorgan Chase & Co. / 2010 Annual Report | 145 |
Table of Contents
Management’s discussion and analysis
Immediate changes in interest rates present a limited view of risk, and so a number of alternative
scenarios are also reviewed. These scenarios include the implied forward curve, nonparallel rate
shifts and severe interest rate shocks on selected key rates. These scenarios are intended to
provide a comprehensive view of JPMorgan Chase’s earnings at risk over a wide range of outcomes.
JPMorgan Chase’s 12-month pretax earnings sensitivity profiles as of December 31, 2010 and 2009,
were as follows.
| Immediate change in rates | ||||||||||||||||
| December 31, (in millions) | +200bp | +100bp | -100bp | -200bp | ||||||||||||
|
2010
|
$ | 2,465 | $ | 1,483 | NM | (a)(b) | NM | (a)(b) | ||||||||
|
2009
|
$ | (1,594 | ) | $ | (554 | ) | NM | (a) | NM | (a) | ||||||
| (a) | Downward 100- and 200-basis-point parallel shocks result in a Fed Funds target rate of zero, and negative three- and six-month Treasury rates. The earnings-at-risk results of such a low-probability scenario are not meaningful. | |
| (b) | Excludes economic value stress losses. |
The change in earnings at risk from December 31, 2009, resulted from investment portfolio
repositioning, assumed higher levels of deposit balances and reduced levels of fixed-rate loans.
The Firm’s risk to rising rates was largely the result of widening deposit margins, which are
currently compressed due to very low short-term interest rates.
Additionally, another interest rate scenario conducted by the Firm – involving a steeper yield
curve with long-term rates rising by 100 basis points and short-term rates staying at current
levels – results in a 12-month pretax earnings benefit of $770 million. The increase in earnings
under this scenario is due to reinvestment of maturing assets at the higher
long-term
rates, with
funding costs remaining unchanged.
Risk monitoring and control
Limits
Market risk is controlled primarily through a series of limits. Limits reflect the Firm’s risk
appetite in the context of the market environment and business strategy. In setting limits, the
Firm takes into consideration factors such as senior management risk appetite, market volatility,
product liquidity, accommodation of client business and management experience.
Market risk management regularly reviews and updates risk limits. Senior management, including the
Firm’s Chief Executive Officer and Chief Risk Officer, is responsible for reviewing and approving
certain risk limits on an ongoing basis.
The Firm maintains different levels of limits. Corporate-level limits include VaR and stress
limits. Similarly, line-of-business limits include VaR and stress limits and may be supplemented by
loss advisories, nonstatistical measurements and profit and loss drawdowns. Businesses are
responsible for adhering to established limits, against which exposures are monitored and reported.
Limit breaches are reported in a timely manner to senior management, and the affected
line-of-business is required to reduce trading positions or consult with senior management on the
appropriate action.
Model review
Some of the Firm’s financial instruments cannot be valued based on quoted market prices but
are instead valued using pricing models. These pricing models and VaR models are used for
management of risk positions, such as reporting against limits, as well as for valuation. The Model
Risk Group, which is independent of the businesses and market risk management, reviews the models
the Firm uses and assesses model appropriateness and consistency. The model reviews consider a
number of factors about the model’s suitability for valuation and risk management of a particular
product. These factors include whether the model accurately reflects the characteristics of the
transaction and its significant risks, the suitability and convergence properties of numerical
algorithms, reliability of data sources, consistency of the treatment with models for similar
products, and sensitivity to input parameters and assumptions that cannot be priced from the
market.
Reviews are conducted of new or changed models, as well as previously accepted models, to assess
whether there have been any changes in the product or market that may affect the model’s validity
and whether there are theoretical or competitive developments that may require reassessment of the
model’s adequacy. For a summary of valuations based on models, see Critical Accounting Estimates
Used by the Firm on pages 149–154 of this Annual Report.
Risk reporting
Nonstatistical risk measures,
VaR, loss advisories and limit excesses are reported daily to the
lines of business and to senior
management. Market risk exposure trends, VaR trends, profit-and-loss changes and portfolio
concentrations are reported weekly. Stress-test results are also reported weekly to the lines of
business and to senior management.
| 146 | JPMorgan Chase & Co. / 2010 Annual Report |
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PRIVATE EQUITY RISK MANAGEMENT
The Firm makes principal investments in private equity. The illiquid nature and long-term holding
periods associated with these investments differentiates private equity risk from the risk of
positions held in the trading portfolios. The Firm’s approach to managing private equity risk is
consistent with the Firm’s general risk governance structure. Controls are in place establishing
expected levels for total and annual investment in order to control the overall size of the
portfolios. Industry and geographic concentration limits are in place and intended to ensure
diversification of the portfolios. All investments are approved by investment committees that
include
executives who are not part of the investing businesses. An independent valuation function
is responsible for reviewing the appropriateness of the carrying values of private equity
investments in accordance with relevant accounting policies. At December 31, 2010 and 2009, the
carrying value of the Private Equity portfolio was $8.7 billion and $7.3 billion, respectively, of
which $875 million and $762 million, respectively, represented publicly-traded positions. For
further information on the Private Equity portfolio, see page 90 of this Annual Report.
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk of loss resulting from inadequate or failed processes or
systems, human factors or external events.
Overview
Operational risk is inherent in each of the Firm’s businesses and support activities. Operational
risk can manifest itself in various ways, including errors, fraudulent acts, business
interruptions, inappropriate behavior of employees, or vendors that do not perform in accordance
with their arrangements. These events could result in financial losses and other damage to the
Firm, including reputational harm.
To monitor and control operational risk, the Firm maintains a system of comprehensive policies and
a control framework designed to provide a sound and well-controlled operational environment. The
goal is to keep operational risk at appropriate levels, in light of the Firm’s financial strength,
the characteristics of its businesses, the markets in which it operates, and the competitive and
regulatory environment to which it is subject. Notwithstanding these control measures, the Firm
incurs operational losses.
The Firm’s approach to operational risk management is intended to mitigate such losses by
supplementing traditional control-based approaches to operational risk with risk measures, tools
and disciplines that are risk-specific, consistently applied and utilized firmwide. Key themes are
transparency of information, escalation of key issues and accountability for issue resolution.
One of the ways operational risk is mitigated is through insurance maintained by the Firm. The Firm
purchases insurance to be in compliance with local laws and regulations, as well as to serve other
needs of the Firm. Insurance may also be required by third parties with whom the Firm does
business. The insurance purchased is reviewed and approved by senior management.
The Firm’s operational risk framework is supported by Phoenix, an internally designed operational
risk software tool. Phoenix integrates the individual components of the operational risk management
framework into a unified, web-based tool. Phoenix enhances the capture, reporting and analysis of
operational risk data by enabling risk identification, measurement, monitoring, reporting and
analysis to be done in an integrated manner, thereby enabling efficiencies in the Firm’s monitoring
and management of its operational risk.
For purposes of identification, monitoring, reporting and analysis, the Firm categorizes
operational risk events as follows:
| • | Client service and selection | |
| • | Business practices | |
| • | Fraud, theft and malice | |
| • | Execution, delivery and process management | |
| • | Employee disputes | |
| • | Disasters and public safety | |
| • | Technology and infrastructure failures |
Risk identification
Risk identification is the recognition of the operational risk events that management believes may
give rise to operational losses. All businesses utilize the Firm’s standard self-assessment process
and supporting architecture as a dynamic risk management tool. The goal of the self-assessment
process is for each business to identify the key operational risks specific to its environment and
assess the degree to which it maintains appropriate controls. Action plans are developed for
control issues that are identified, and businesses are held accountable for tracking and resolving
these issues on a timely basis.
Risk measurement
Operational risk is measured for each business on the basis of historical loss experience using a
statistically based loss-distribution approach. The current business environment, potential stress
scenarios and measures of the control environment are then factored into the statistical measure in
determining firmwide operational risk capital. This methodology is designed to comply with the
advanced measurement rules under the Basel II Framework.
Risk monitoring
The Firm has a process for monitoring operational risk-event data, permitting analysis of errors
and losses as well as trends. Such analysis, performed both at a line-of-business level and by
risk-event type, enables identification of the causes associated with risk events faced by the
businesses. Where available, the internal data can be supplemented with external data for
comparative analysis with industry patterns. The data reported enables the Firm to back-test
against self-assessment results. The Firm is a founding member of the Operational Riskdata eXchange
Association, a not-for-profit industry association formed for the purpose of collecting operational
loss data, sharing data in an anonymous form and benchmarking results
back to mem-
| JPMorgan Chase & Co. / 2010 Annual Report | 147 |
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Management’s discussion and analysis
bers. Such
information supplements the Firm’s ongoing operational risk measurement and analysis.
Risk reporting and analysis
Operational risk management reports provide timely and accurate information, including information
about actual operational loss levels and self-assessment results, to the lines of business and
senior management. The purpose of these reports is to enable management to maintain operational
risk at appropriate levels within each line of
business, to escalate issues and to provide
consistent data aggregation across the Firm’s businesses and support areas.
Audit alignment
Internal Audit utilizes a risk-based program of audit coverage to provide an independent assessment
of the design and effectiveness of key controls over the Firm’s operations, regulatory compliance
and reporting. This includes reviewing the operational risk framework, the effectiveness of the
business self-assessment process, and the loss data-collection and reporting activities.
REPUTATION AND FIDUCIARY RISK MANAGEMENT
The Firm’s success depends not only on its prudent management of the liquidity, credit,
market and operational risks that are part of its business risk, but equally on the maintenance
among its many constituents–customers and clients, investors, regulators, as well as the general
public–of a reputation for business practices of the highest quality. Attention to reputation has
always been a key aspect of the Firm’s practices, and maintenance of the Firm’s reputation is the
responsibility of each individual employee at the Firm. JPMorgan Chase bolsters this individual
responsibility in many ways, including through the Firm’s Code of Conduct, which is based on the
Firm’s fundamental belief that no one should ever sacrifice integrity – or give the impression that
he or she has – even if one thinks it would help the Firm’s business. The Code requires prompt
reporting of any known or suspected violation of the Code, any internal Firm policy, or any law or
regulation applicable to the Firm’s business. It also requires the reporting of any illegal
conduct, or conduct that violates the underlying principles of the Code, by any of our customers,
suppliers, contract workers, business partners or agents. Concerns may be reported anonymously and
the Firm prohibits retaliation against employees for the good faith reporting of any actual or
suspected violations of the Code.
In addition to training of employees with regard to the principles and requirements of the Code,
and requiring annual affirmation by each employee of compliance with the Code, the Firm has
established policies and procedures, and has in place various oversight functions, intended to
promote the Firm’s culture of “doing the right thing”. These include a Conflicts Office which
examines wholesale transactions with the potential to create conflicts of interest for the Firm. In
addition, each line of business has a risk committee which includes in its mandate oversight of the
reputational risks in its business that may produce significant losses or
reputational damage. In
IB, there is a separate Reputation Risk Office and several regional reputation risk committees,
members of which are senior representatives of businesses and control functions, that focus on
transactions that raise reputational issues. Such transactions may include, for example, complex
derivatives and structured finance transactions. The Firm also established this year a Consumer
Reputational Risk Committee, comprised of senior management from the Firm’s Operating Committee,
including the heads of its primary consumer facing businesses, RFS and CS, that helps to ensure
that the Firm has a consistent, disciplined focus on the review of the impact on consumers of Chase
products and practices, including any that could raise reputational issues.
Fiduciary Risk Management
The Fiduciary Risk Management function works with relevant line of business risk committees, with
the goal of ensuring that businesses providing investment or risk management products or services
that give rise to fiduciary duties to clients perform at the appropriate standard relative to their
fiduciary relationship with a client. Of particular focus are the policies and practices that
address a business’ responsibilities to a client, including performance and service requirements
and expectations; client suitability determinations; and disclosure obligations and communications.
In this way, the relevant line of business risk committees, together with the Fiduciary Risk
Management function, provide oversight of the Firm’s efforts to monitor, measure and control the
performance and risks that may arise in the delivery of products or services to clients that give
rise to such fiduciary duties, as well as those stemming from any of the Firm’s fiduciary
responsibilities under the Firm’s various employee benefit plans.
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CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM
JPMorgan Chase’s accounting policies and use of estimates are integral to understanding
its reported results. The Firm’s most complex accounting estimates require management’s judgment to
ascertain the value of assets and liabilities. The Firm has established detailed policies and
control procedures intended to ensure that valuation methods, including any judgments made as part
of such methods, are well-controlled, independently reviewed and applied consistently from period
to period. In addition, the policies and procedures are intended to ensure that the process for
changing methodologies occurs in an appropriate manner. The Firm believes its estimates for
determining the value of its assets and liabilities are appropriate. The following is a brief
description of the Firm’s critical accounting estimates involving significant valuation judgments.
Allowance for credit losses
JPMorgan Chase’s allowance for credit losses covers the retained wholesale and consumer loan
portfolios, as well as the Firm’s wholesale and consumer lending-related commitments. The allowance
for loan losses is intended to adjust the value of the Firm’s loan assets to reflect probable
credit losses inherent in the portfolio as of the balance sheet date. The allowance for
lending-related commitments is established to cover probable losses in the lending-related
commitments portfolio. For a further discussion of the methodologies used in establishing the
Firm’s allowance for credit losses, see Note 15 on pages 239—243 of this Annual Report.
Wholesale loans and lending-related commitments
The methodology for calculating the allowance for loan losses and the allowance for lending-related
commitments involves significant judgment. First and foremost, it involves the early identification
of credits that are deteriorating. Second, it involves judgment in establishing the inputs used to
estimate the allowances. Third, it involves management judgment to evaluate certain macroeconomic
factors, underwriting standards, and other relevant internal and external factors affecting the
credit quality of the current portfolio, and to refine loss factors to better reflect these
conditions.
The Firm uses a risk-rating system to determine the credit quality of its wholesale loans.
Wholesale loans are reviewed for information affecting the obligor’s ability to fulfill its
obligations. In assessing the risk rating of a particular loan, among the factors considered are
the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the
amount and sources for repayment, the level and nature of contingencies, management strength, and
the industry and geography in which the obligor operates. These factors are based on an evaluation
of historical and current information and involve subjective assessment and interpretation.
Emphasizing one factor over another or considering additional factors could affect the risk rating
assigned by the Firm to that loan.
The Firm applies its judgment to establish loss factors used in calculating the allowances.
Wherever possible, the Firm uses independent, verifiable data or the Firm’s own historical loss
experience in its models for estimating the allowances. Many factors can affect estimates of loss,
including volatility of loss given default, probability of default and rating migrations.
Consideration is given as to whether the loss estimates should be calculated as an average over the
entire credit cycle or at a particular point in the credit cycle, as well as to which external data
should be used and when they should be used. Choosing data that are not reflective of the Firm’s
specific loan portfolio characteristics could also affect loss estimates. The application of
different inputs would change the amount of the allowance for credit losses determined appropriate
by the Firm.
Management also applies its judgment to adjust the loss factors derived, taking into consideration
model imprecision, external factors and economic events that have occurred but are not yet
reflected in the loss factors. Historical experience of both loss given default and probability of
default are considered when estimating these adjustments. Factors related to concentrated and
deteriorating industries also are incorporated where relevant. These estimates are based on
management’s view of uncertainties that relate to current macroeconomic and political conditions,
quality of underwriting standards and other relevant internal and external factors affecting the
credit quality of the current portfolio.
As noted above, the Firm’s wholesale allowance is sensitive to the risk rating assigned to a loan.
As of December 31, 2010, assuming a one-notch downgrade in the Firm’s internal risk ratings for its
entire wholesale portfolio, the allowance for loan losses for the wholesale portfolio would
increase by approximately $1.3 billion. This sensitivity analysis is hypothetical. In the Firm’s
view, the likelihood of a one-notch downgrade for all wholesale loans within a short timeframe is
remote. The purpose of this analysis is to provide an indication of the impact of risk ratings on
the estimate of the allowance for loan losses for wholesale loans. It is not intended to imply
management’s expectation of future deterioration in risk ratings. Given the process the Firm
follows in determining the risk ratings of its loans, management believes the risk ratings
currently assigned to wholesale loans are appropriate.
Consumer loans and lending-related commitments
The allowance for credit losses for the consumer portfolio, including credit card, is sensitive to
changes in the economic environment, delinquency status, the realizable value of collateral, FICO
scores, borrower behavior and other risk factors, and is intended to represent management’s best
estimate of probable losses inherent in the portfolio as of the balance sheet date. The credit
performance of the consumer portfolio across the entire consumer credit product spectrum has
stabilized but high unemployment and weak overall economic conditions continue to result in an
elevated level of charge-offs, while weak housing prices continue to negatively affect the severity
of losses realized on residential real estate loans that default. Significant judgment is required
to estimate the duration and severity
| JPMorgan Chase & Co. / 2010 Annual Report | 149 |
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Management’s discussion and analysis
of the current economic downturn, as well as its potential
impact on housing prices and the labor market. While the allowance for credit losses is highly
sensitive to both home prices and unemployment rates, in the current market it is difficult to
estimate how potential changes in one or both of these factors might affect the allowance for
credit losses. For example, while both factors are important determinants of overall allowance
levels, changes in one factor or the other may not occur at the same rate, or changes may be
directionally inconsistent such that improvement in one factor may offset deterioration in the
other. In addition, changes in these factors would not necessarily be consistent across all
geographies or product types. Finally, it is difficult to predict the extent to which changes in
both or either of these factors would ultimately affect the frequency of losses, the severity of
losses or both; overall loss rates are a function of both the frequency and severity of individual
loan losses.
The consumer allowance is calculated by applying statistical loss factors and other risk indicators
to pools of loans with similar risk characteristics to arrive at an estimate of incurred losses in
the portfolio. Management applies judgment to the statistical loss estimates for each loan
portfolio category, using delinquency trends and other risk characteristics to estimate probable
losses inherent in the portfolio. Management uses additional statistical methods
and considers
portfolio and collateral valuation trends to review the appropriateness of the primary statistical
loss estimate. The statistical calculation is then adjusted to take into consideration model
imprecision, external factors and current economic events that have occurred but are not yet
reflected in the factors used to derive the statistical calculation; this adjustment is
accomplished in part by analyzing the historical loss experience for each major product segment. In
the current economic environment, it is difficult to predict whether historical loss experience is
indicative of future loss levels. Management applies judgment in making this adjustment, taking
into account uncertainties associated with current macroeconomic and political conditions, quality
of underwriting standards, borrower behavior and other relevant internal and external factors
affecting the credit quality of the portfolio. For junior lien products, management considers the
delinquency and/or modification status of any senior liens in determining the adjustment. The
application of different inputs into the statistical calculation, and the assumptions used by
management to adjust the statistical calculation, are subject to management judgment, and
emphasizing one input or assumption over another, or considering other inputs or assumptions, could
affect the estimate of the allowance for loan losses for the consumer credit portfolio.
| 150 | JPMorgan Chase & Co. / 2010 Annual Report |
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Management’s discussion and analysis
Fair value of financial instruments, MSRs and commodities inventories
JPMorgan Chase carries a
portion of its assets and liabilities at fair value. The majority of such assets and liabilities
are carried at fair value on a recurring basis. Certain assets and liabilities are measured at fair
value on a nonrecurring basis, including loans accounted for at the lower of cost or fair value
that are only subject to fair value adjustments under certain circumstances.
Under U.S. GAAP there is a three-level valuation hierarchy for disclosure of fair value
measurements. An instrument’s categorization within the hierarchy is based on the lowest level of
input that
is significant to the fair value measurement. Therefore, for instruments classified in
levels 1 and 2 of the hierarchy, where inputs are principally based on observable market data,
there is less judgment applied in arriving at a fair value measurement. For instruments classified
within level 3 of the hierarchy, judgments are more significant. The Firm reviews and updates the
fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next
related to the observability of inputs to a fair value measurement may result in a reclassification
between hierarchy levels.
Assets measured at fair value
The following table includes the Firm’s assets measured at fair value and the portion of such
assets that are classified within level 3 of the valuation hierarchy.
| December 31, | 2010 | 2009 | ||||||||||||||
| (in billions, except ratio data) | Total at fair value | Level 3 total | Total at fair value | Level 3 total | ||||||||||||
|
Trading debt and equity instruments
(a)
|
$ | 409.4 | $ | 33.9 | $ | 330.9 | $ | 35.2 | ||||||||
|
Derivative
receivables – gross
|
1,529.4 | 35.3 | 1,565.5 | 46.7 | ||||||||||||
|
Netting adjustment
|
(1,448.9 | ) | — | (1,485.3 | ) | — | ||||||||||
|
Derivative receivables – net
|
80.5 | 35.3 | (d) | 80.2 | 46.7 | (d) | ||||||||||
|
AFS securities
|
316.3 | 14.3 | 360.4 | 13.2 | ||||||||||||
|
Loans
|
2.0 | 1.5 | 1.4 | 1.0 | ||||||||||||
|
MSRs
|
13.6 | 13.6 | 15.5 | 15.5 | ||||||||||||
|
Private equity investments
|
8.7 | 7.9 | 7.3 | 6.6 | ||||||||||||
|
Other
(b)
|
43.8 | 4.1 | 44.4 | 9.5 | ||||||||||||
|
Total assets measured at fair value on a recurring basis
|
874.3 | 110.6 | 840.1 | 127.7 | ||||||||||||
|
Total assets measured at fair value on a nonrecurring
basis
(c)
|
10.1 | 4.2 | 8.2 | 2.7 | ||||||||||||
|
Total assets measured at fair value
|
$ | 884.4 | $ | 114.8 | (e) | $ | 848.3 | $ | 130.4 | (e) | ||||||
|
Total Firm assets
|
$ | 2,117.6 | $ | 2,032.0 | ||||||||||||
|
Level 3 assets as a percentage of total Firm assets
|
5 | % | 6 | % | ||||||||||||
|
Level 3 assets as a percentage of total Firm assets at
fair value
|
13 | 15 | ||||||||||||||
| (a) | Includes physical commodities generally carried at the lower of cost or fair value. | |
| (b) | Includes certain securities purchased under resale agreements, securities borrowed, accrued interest receivable and other investments. | |
| (c) | Predominantly includes mortgage, home equity and other loans, where the carrying value is based on the fair value of the underlying collateral, and on credit card and leveraged lending loans carried on the Consolidated Balance Sheets at the lower of cost or fair value. | |
| (d) | Derivative receivable and derivative payable balances, and the related cash collateral received and paid, are presented net on the Consolidated Balance Sheets where there is a legally enforceable master netting agreement in place with counterparties. For purposes of the table above, the Firm does not reduce level 3 derivative receivable balances for netting adjustments, as such an adjustment is not relevant to a presentation that is based on the transparency of inputs to the valuation. Therefore, the derivative balances reported in the fair value hierarchy levels are gross of any counterparty netting adjustments. However, if the Firm were to net such balances within level 3, the reduction in the level 3 derivative receivable and payable balances would be $12.7 billion and $16.0 billion at December 31, 2010 and 2009, respectively, exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances. | |
| (e) | At December 31, 2010 and 2009, included $66.0 billion and $80.0 billion, respectively, of level 3 assets, consisting of recurring and nonrecurring assets carried by IB. |
| JPMorgan Chase & Co. / 2010 Annual Report | 151 |
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Management’s discussion and analysis
Valuation
The Firm has an established and well-documented process for determining fair value. Fair value is
based on quoted market prices, where available. If listed prices or quotes are not available, fair
value is based on internally developed models that primarily use as inputs market-based or
independently sourced market parameters. The Firm’s process is intended to ensure that all
applicable inputs are appropriately calibrated to market data, including but not limited to yield
curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit
curves. In addition to market information, models also incorporate transaction details, such as
maturity. Valuation adjustments may be made to ensure that financial instruments are recorded at
fair value. These adjustments include amounts to reflect counterparty credit quality, the Firm’s
creditworthiness, constraints on liquidity and unobservable parameters that are applied
consistently over time.
For instruments classified within level 3 of the hierarchy, judgments used to estimate fair value
may be significant. In arriving at an estimate of fair value for an instrument within level 3,
management must first determine the appropriate model to use. Second, due to the lack of
observability of significant inputs, management must assess all relevant empirical data in deriving
valuation inputs – including, but not limited to, yield curves, interest rates, volatilities,
equity or debt prices, foreign exchange rates and credit curves. In addition to market information,
models also incorporate transaction details, such as maturity. Finally, management judgment must be
applied to assess the appropriate level of valuation adjustments to reflect counterparty credit
quality, the Firm’s creditworthiness, constraints on liquidity and unobservable parameters, where
relevant. The judgments made are typically affected by the type of product and its specific
contractual terms, and the level of liquidity for the product or within the market as a whole. The
Firm has numerous controls in place to ensure that its valuations are appropriate. An independent
model review group reviews the Firm’s valuation models and approves them for use for specific
products. All valuation models of the Firm are subject to this review process. A price verification
group, independent from the risk-taking functions, ensures observable market prices and
market-based parameters are used for valuation whenever possible. For those products with material
parameter risk for which observable market levels do not exist, an independent review of the
assumptions made on pricing is performed. Additional review includes deconstruction of the model
valuations for certain structured instruments into their components; benchmarking valuations, where
possible, to similar products; validating valuation estimates through actual cash settlement; and
detailed review and explanation of recorded gains and losses, which are analyzed daily and over
time. Valuation adjustments, which are also determined by the independent price verification group,
are based on established policies and applied consistently over time. Any changes to the valuation
methodology are reviewed by management to confirm the changes are justified. As markets and
products develop and the pricing for certain products becomes more transparent, the Firm continues
to refine its valuation methodologies. During 2010, no changes were made to
the Firm’s valuation
models that had, or are expected to have, a material impact on the Firm’s Consolidated Balance
Sheets or results of operations.
Imprecision in estimating unobservable market inputs can affect the amount of revenue or loss
recorded for a particular position. Furthermore, while the Firm believes its valuation methods are
appropriate and consistent with those of other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date. For a detailed discussion of
the determination of fair value for individual financial instruments,
see Note 3 on pages 170–187
of this Annual Report.
Purchased credit-impaired loans
In connection with the Washington Mutual transaction, JPMorgan Chase acquired certain loans with
evidence of deterioration of credit quality since origination and for which it was probable, at
acquisition, that the Firm would be unable to collect all contractually required payments
receivable. These loans are considered to be purchased credit-impaired (“PCI”) loans and are
accounted for as described in Note 14 on pages 220–238 of this Annual Report. The application of
the accounting guidance for PCI loans requires a number of significant estimates and judgment, such
as determining: (i) which loans are within the scope of PCI accounting guidance, (ii) the fair
value of the PCI loans at acquisition, (iii) how loans are aggregated to apply the guidance on
accounting for pools of loans, and (iv) estimates of cash flows to be collected over the term of
the loans.
Determining which loans are in the scope of PCI accounting guidance is highly subjective and
requires significant judgment. In the Washington Mutual transaction, consumer loans with certain
attributes (e.g., higher loan-to-value ratios, borrowers with lower FICO scores, delinquencies)
were determined to be credit-impaired, provided that those attributes arose subsequent to the
loans’ origination dates. A wholesale loan was determined to be credit-impaired if it was
risk-rated such that it would otherwise have required an asset-specific allowance for loan losses.
At the acquisition date, the Firm recorded its PCI loans at fair value, which included an estimate
of losses that were then expected to be incurred over the estimated remaining lives of the loans.
The Firm estimated the fair value of its PCI loans at the acquisition date by discounting the cash
flows expected to be collected at a market-observable discount rate, when available, adjusted for
factors that a market participant would consider in determining fair value. The initial estimate of
cash flows to be collected was derived from assumptions such as default rates, loss severities and
the amount and timing of prepayments.
The PCI accounting guidance states that investors may aggregate loans into pools that have common
risk characteristics and thereby use a composite interest rate and estimate of cash flows expected
to be collected for the pools. The pools then become the unit of accounting and are considered one
loan for purposes of accounting for these loans at and subsequent to acquisition. Once a pool is
assembled, the integrity of the pool must be
| 152 | JPMorgan Chase & Co. / 2010 Annual Report |
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maintained. The Firm has aggregated substantially all
of the PCI loans identified in the Washington Mutual transaction (i.e., the residential real estate
loans) into pools with common risk characteristics. Significant judgment is required to determine
whether individual loans have common risk characteristics for purposes of establishing pools of
loans.
The Firm’s estimate of cash flows expected to be collected must be updated each reporting period
based on updated assumptions regarding default rates, loss severities, the amounts and timing of
prepayments and other factors that are reflective of current and expected future market conditions.
These estimates are dependent on assumptions regarding the level of future home price declines, and
the duration and severity of the current economic downturn, among other factors. These estimates
and assumptions require significant management judgment and certain assumptions are highly
subjective. These estimates of cash flows expected to be collected may have a significant impact on
the recognition of impairment losses and/or interest income. As of December 31, 2010, a 1% decrease
in expected future principal cash payments for the entire portfolio of purchased credit-impaired
loans would result in the recognition of an allowance for loan losses for these loans of
approximately $670 million.
Goodwill impairment
Under U.S. GAAP, goodwill must be allocated to reporting units and tested for impairment at least
annually. The Firm’s process and methodology used to conduct goodwill impairment testing is
described in Note 17 on pages 260–263 of this Annual Report.
Management applies significant judgment when estimating the fair value of its reporting units.
Estimates of fair value are dependent upon estimates of (a) the future earnings potential of the
Firm’s reporting units, including the estimated effects of regulatory and legislative changes, such
as the Dodd-Frank Act, the CARD Act, and limitations on non-sufficient funds and overdraft fees and (b) the
relevant cost of equity and long-term growth rates. Imprecision in estimating these factors can
affect the estimated fair value of the reporting units. The fair values of a significant majority
of the Firm’s reporting units exceeded their carrying values by substantial amounts (fair value as
a percent of carrying value ranged from 120% to 380%) and did not indicate a significant risk of
goodwill impairment based on current projections and valuations.
However, the fair value of the Firm’s consumer lending businesses in RFS and CS each exceeded their
carrying values by approximately 25% and 7% respectively and the associated goodwill remains at
an elevated risk of impairment due to their exposure to U.S. consumer credit risk and the effects of
regulatory and legislative changes. The assumptions used in the valuation of these businesses
include (a) estimates of future cash flows (which are dependent on portfolio outstanding balances,
net interest margin, operating expense, credit losses, and the amount of capital necessary given
the risk of business activities to meet regulatory capital requirements), (b) the cost of equity
used to discount those cash flows to a present value. Each of these factors requires significant
judgment and the assumptions used are based on management’s best and most current projections,
including those derived from the Firm’s business forecasting process reviewed with senior management. These
projections are consistent with the short-term assumptions discussed in Business Outlook on pages
57—58 of this Form 10-K and, in the longer term, incorporate a set of macroeconomic assumptions
(for example, allowing for relatively high but gradually declining unemployment rates for the next
few years) and the Firm’s best estimates of long-term growth and returns of its businesses. Where
possible, the Firm uses third-party and peer data to benchmark its assumptions and estimates. The
cost of equity used in the discounted cash flow model reflected the estimated risk and uncertainty
in these businesses and was evaluated in comparison with relevant market peers.
The Firm did not recognize goodwill impairment as of December 31, 2010, or at anytime during 2010,
based on management’s best estimates. However, deterioration in economic market conditions,
increased estimates of the effects of recent regulatory or legislative changes, or additional
regulatory or legislative changes may result in declines in projected business performance beyond
management’s current expectations. For example, in CS such declines could result from deterioration
in economic conditions, such as: increased unemployment claims or bankruptcy filings that result in
increased credit losses, changes in customer behavior that cause decreased account activity or
receivables balances, or unanticipated effects of regulatory or legislative changes. In RFS, such
declines could result from deterioration in economic conditions that result in increased credit
losses, including decreases in home prices beyond management’s current expectations; or loan
repurchase costs that significantly exceed management’s current expectations. Such declines in
business performance, or increases in the estimated cost of equity, could cause the estimated fair
values of the Firm’s reporting units or their associated goodwill to decline, which could result in
a material impairment charge to earnings in a future period related to some portion of the associated goodwill.
| JPMorgan Chase & Co. / 2010 Annual Report | 153 |
Table of Contents
Management’s discussion and analysis
Income taxes
JPMorgan Chase is subject to the income tax laws of the various jurisdictions in which
it operates, including U.S. federal, state and local and non-U.S. jurisdictions. These laws are
often complex and may be subject to different interpretations. To determine the financial statement
impact of accounting for income taxes, including the provision for income tax expense and
unrecognized tax benefits, JPMorgan Chase must make assumptions and judgments about how to
interpret and apply these complex tax laws to numerous transactions and business events, as well as
make judgments regarding the timing of when certain items may affect taxable income in the U.S. and non-U.S. tax
jurisdictions.
JPMorgan Chase’s interpretations of tax laws around the world are subject to review and examination
by the various taxing authorities in the jurisdictions where the Firm operates, and disputes may
occur regarding its view on a tax position. These disputes over interpretations with the various
taxing authorities may be settled by audit, administrative appeals or adjudication in the court
systems of the tax jurisdictions in which the Firm operates. JPMorgan Chase regularly reviews
whether it may be assessed additional income taxes as a result of the resolution of these matters,
and the Firm records additional reserves as appropriate. In addition, the Firm may revise its
estimate of income taxes due to changes in income tax laws, legal interpretations and tax planning
strategies. It is possible that revisions in the Firm’s estimate of income taxes may materially
affect the Firm’s results of operations in any reporting period.
The Firm’s provision for income taxes is composed of current and deferred taxes. Deferred taxes
arise from differences between assets and liabilities measured for financial reporting versus
income tax
return purposes. Deferred tax assets are recognized if, in management’s judgment, their
realizability is determined to be more likely than not. The Firm has also recognized deferred tax
assets in connection with certain net operating losses. The Firm performs regular reviews to
ascertain whether deferred tax assets are realizable. These reviews include management’s estimates
and assumptions regarding future taxable income, which also incorporates various tax planning
strategies, including strategies that may be available to utilize net operating losses before they
expire. In connection with these reviews, if it is determined that a deferred tax asset is not
realizable, a valuation allowance is established. The valuation allowance may be reversed in a
subsequent reporting period if the Firm determines that, based on revised estimates of future
taxable income or changes in tax planning strategies, it is more likely than not that all or part
of the deferred tax asset will become realizable. As of December 31, 2010, management has
determined it is more likely than not that the Firm will realize its deferred tax assets, net of
the existing valuation allowance.
The Firm adjusts its unrecognized tax benefits as necessary when additional information becomes
available. Uncertain tax positions that meet the more-likely-than-not recognition threshold are
measured to determine the amount of benefit to recognize. An uncertain tax position is measured at
the largest amount of benefit that management believes is more likely than not to be realized upon
settlement. It is possible that the reassessment of JPMorgan Chase’s unrecognized tax benefits may
have a material impact on its effective tax rate in the period in which the reassessment occurs.
For additional information on income taxes, see Note 27 on pages 271-273 of this Annual Report.
| 154 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
ACCOUNTING AND REPORTING DEVELOPMENTS
Accounting for transfers of financial assets and
consolidation of variable interest entities
Effective January 1, 2010, the Firm implemented new accounting guidance that amends the accounting
for the transfers of financial assets and the consolidation of VIEs. Upon adoption of the new
guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts,
Firm-administered multi-seller conduits, and certain mortgage and other consumer loan
securitization entities. The Financial Accounting Standards Board (“FASB”) deferred the
requirements of the new accounting guidance for VIEs for certain investment funds, including mutual
funds, private equity funds and hedge funds, until the FASB reconsiders the appropriate accounting
guidance for these funds. For additional information about the impact of the adoption of the new
accounting guidance on January 1, 2010, see Note 16 on pages
244–259 of this Annual Report.
Fair value measurements and disclosures
In January 2010, the FASB issued guidance that requires new disclosures, and clarifies existing
disclosure requirements, about fair value measurements. The clarifications and the requirement to
separately disclose transfers of instruments between level 1 and level 2 of the fair value
hierarchy are effective for interim reporting periods beginning after December 15, 2009; the Firm
adopted this guidance in the first quarter of 2010. For additional information about the impact of
the adoption of the new fair value measurements guidance, see Note 3
on pages 170–187 of this
Annual Report. In addition, a new requirement to provide purchases, sales, issuances and
settlements in the level 3 rollforward on a gross basis is effective for fiscal years beginning
after December 15, 2010.
Subsequent events
In May 2009, the FASB issued guidance that established general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The guidance was effective for interim or annual financial
periods ending after June 15, 2009. In February 2010, the FASB amended the guidance by eliminating
the requirement for SEC filers to disclose the date through which it evaluated subsequent events.
The Firm adopted the amended guidance in the first quarter of 2010. The application of the guidance
had no effect on the Firm’s Consolidated Balance Sheets or results of operations.
Accounting for certain embedded credit derivatives
In March 2010, the FASB issued guidance clarifying the circumstances in which a credit derivative
embedded in beneficial interests in securitized financial assets is required to be separately
accounted for as a derivative instrument. The guidance is effective for the first fiscal quarter
beginning after June 15, 2010, with early adoption permitted. Upon adoption, the new guidance
permits the election of the fair value option for beneficial interests in securitized financial
assets. The Firm adopted the new guidance prospectively, effective July 1, 2010. The adoption of
the guidance did not have a material impact on the Firm’s Consolidated Balance Sheets or results of
operations. For additional information about the impact of the adoption of the new guidance, see
Note 6 on pages 191–199 of this Annual Report.
Accounting for troubled debt restructurings of purchased credit-impaired loans that are part of a pool
In April 2010, the FASB issued guidance that amends the accounting for troubled debt restructurings
(“TDRs”) of PCI loans accounted for within a pool. The guidance clarifies that modified PCI loans
should not be removed from a pool even if the modification would otherwise be considered a TDR.
Additionally, the guidance clarifies that the impact of modifications should be included in
evaluating whether a pool of loans is impaired. The guidance was effective for the Firm beginning
in the third quarter of 2010, and is to be applied prospectively. The guidance is consistent with
the Firm’s previously existing accounting practice and, therefore, had no impact on the Firm’s
Consolidated Balance Sheets or results of operations.
Disclosures about the credit quality of financing receivables and the allowance for credit losses
In July 2010, the FASB issued guidance that requires enhanced disclosures surrounding the credit
characteristics of the Firm’s loan portfolio. Under the new guidance, the Firm is required to
disclose its accounting policies, the methods it uses to determine the components of the allowance
for credit losses, and qualitative and quantitative information about the credit risk inherent in
the loan portfolio, including additional information on certain types of loan modifications. For
the Firm, the new disclosures became effective for the 2010 Annual
Report. For additional information, see Notes 14 and 15 on
pages 220-243 of this Annual Report. The adoption of this
guidance only affects JPMorgan Chase’s disclosures of financing receivables and not its
Consolidated Balance Sheets or results of operations. In January 2011, the FASB issued guidance
that deferred the effective date of certain disclosures in this guidance regarding TDRs, pending
resolution on the FASB’s project to amend the scope of TDR guidance
.
| JPMorgan Chase & Co. / 2010 Annual Report | 155 |
Table of Contents
Management’s discussion and analysis
NONEXCHANGE-TRADED COMMODITY DERIVATIVE CONTRACTS AT FAIR VALUE
In the normal course of business, JPMorgan Chase trades nonexchange-traded commodity
derivative contracts. To determine the fair value of these contracts, the Firm uses various fair
value estimation techniques, primarily based on internal models with significant observable market
parameters. The Firm’s nonexchange-traded commodity derivative contracts are primarily
energy-related.
The following table summarizes the changes in fair value for nonexchange-traded commodity
derivative contracts for the year ended December 31, 2010.
| For the year ended | ||||||||
| December 31, 2010 | ||||||||
| (in millions) | Asset position | Liability position | ||||||
|
Net fair value of contracts outstanding
at January 1, 2010
|
$ | 5,027 | $ | 1,737 | ||||
|
Effect of legally enforceable master
netting agreements
|
25,282 | 26,490 | ||||||
|
Gross fair value of contracts
outstanding at January 1, 2010
|
30,309 | 28,227 | ||||||
|
Contracts realized or otherwise settled
|
(18,309 | ) | (17,232 | ) | ||||
|
Fair value of new contracts
|
24,294 | 23,194 | ||||||
|
Changes in fair values attributable to
changes in valuation techniques and
assumptions
|
— | — | ||||||
|
Other changes in fair value
|
13,156 | 14,914 | ||||||
|
Gross fair value of contracts
outstanding at December 31, 2010
|
49,450 | 49,103 | ||||||
|
Effect of legally enforceable master
netting agreements
|
(41,284 | ) | (41,919 | ) | ||||
|
Net fair value of contracts
outstanding at December 31, 2010
|
$ | 8,166 | $ | 7,184 | ||||
The following table indicates the maturities of nonexchange-traded commodity derivative
contracts at December 31, 2010.
| December 31, 2010 (in millions) | Asset position | Liability position | ||||||
|
Maturity less than 1 year
|
$ | 22,713 | $ | 19,402 | ||||
|
Maturity
1–3 years
|
16,689 | 16,074 | ||||||
|
Maturity
4–5 years
|
8,500 | 7,840 | ||||||
|
Maturity in excess of 5 years
|
1,548 | 5,787 | ||||||
|
Gross fair value of contracts
outstanding at December 31, 2010
|
49,450 | 49,103 | ||||||
|
Effect of legally enforceable master
netting agreements
|
(41,284 | ) | (41,919 | ) | ||||
|
Net fair value of contracts
outstanding at December 31, 2010
|
$ | 8,166 | $ | 7,184 | ||||
| 156 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
FORWARD-LOOKING STATEMENTS
From time to time, the Firm has made and will make forward-looking statements. These
statements can be identified by the fact that they do not relate strictly to historical or current
facts. Forward-looking statements often use words such as “anticipate,” “target,” “expect,”
“estimate,” “intend,” “plan,” “goal,” “believe,” or other words of similar meaning. Forward-looking
statements provide JPMorgan Chase’s current expectations or forecasts of future events,
circumstances, results or aspirations. JPMorgan Chase’s disclosures in this Annual Report contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Firm also may make forward-looking statements in its other documents filed or furnished
with the Securities and Exchange Commission. In addition, the Firm’s senior management may make
forward-looking statements orally to analysts, investors, representatives of the media and others.
All forward-looking statements are, by their nature, subject to risks and uncertainties, many of
which are beyond the Firm’s control. JPMorgan Chase’s actual future results may differ materially
from those set forth in its forward-looking statements. While there is no assurance that any list
of risks and uncertainties or risk factors is complete, below are certain factors which could cause
actual results to differ from those in the forward-looking statements:
| • | local, regional and international business, economic and political conditions and geopolitical events; | |
| • | changes in laws and regulatory requirements, including as a result of the newly-enacted financial services legislation; | |
| • | changes in trade, monetary and fiscal policies and laws; | |
| • | securities and capital markets behavior, including changes in market liquidity and volatility; | |
| • | changes in investor sentiment or consumer spending or savings behavior; | |
| • | ability of the Firm to manage effectively its liquidity; | |
| • | changes in credit ratings assigned to the Firm or its subsidiaries; | |
| • | damage to the Firm’s reputation; | |
| • | ability of the Firm to deal effectively with an economic slowdown or other economic or market disruption; | |
| • | technology changes instituted by the Firm, its counterparties or competitors; |
| • | mergers and acquisitions, including the Firm’s ability to integrate acquisitions; | |
| • | ability of the Firm to develop new products and services, and the extent to which products or services previously sold by the Firm require the Firm to incur liabilities or absorb losses not contemplated at their initiation or origination; | |
| • | acceptance of the Firm’s new and existing products and services by the marketplace and the ability of the Firm to increase market share; | |
| • | ability of the Firm to attract and retain employees; | |
| • | ability of the Firm to control expense; | |
| • | competitive pressures; | |
| • | changes in the credit quality of the Firm’s customers and counterparties; | |
| • | adequacy of the Firm’s risk management framework; | |
| • | adverse judicial or regulatory proceedings; | |
| • | changes in applicable accounting policies; | |
| • | ability of the Firm to determine accurate values of certain assets and liabilities; | |
| • | occurrence of natural or man-made disasters or calamities or conflicts, including any effect of any such disasters, calamities or conflicts on the Firm’s power generation facilities and the Firm’s other commodity-related activities; | |
| • | the other risks and uncertainties detailed in Part 1, Item 1A: Risk Factors in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2010. |
Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are
made, and JPMorgan Chase does not undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the date the forward-looking statements were
made. The reader should, however, consult any further disclosures of a forward-looking nature the
Firm may make in any subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, or
Current Reports on Form 8-K.
| JPMorgan Chase & Co. / 2010 Annual Report | 157 |
Table of Contents
Management’s report on internal control over financial reporting
Management of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, the Firm’s principal executive and
principal financial officers, or persons performing similar functions, and effected by JPMorgan
Chase’s Board of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally
accepted in the United States of America.
JPMorgan Chase’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Firm’s assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
Firm are being made only in accordance with authorizations of JPMorgan Chase’s management and
directors; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Firm’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management has completed an assessment of the effectiveness of the Firm’s internal control over
financial reporting as of December 31, 2010. In making the assessment, management used the
framework in “Internal Control — Integrated Framework” promulgated by the Committee of Sponsoring
Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria.
Based upon the assessment performed, management concluded that as of December 31, 2010, JPMorgan
Chase’s internal control over financial reporting was effective based upon the COSO criteria.
Additionally, based upon management’s assessment, the Firm determined that there were no material
weaknesses in its internal control over financial reporting as of December 31, 2010.
The effectiveness of the Firm’s internal control over financial reporting as of December 31,
2010, has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
James Dimon
Chairman and Chief Executive Officer
Douglas L. Braunstein
Executive Vice President and Chief Financial Officer
February 28, 2011
| 158 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Report of independent registered public accounting firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of JPMorgan Chase & Co.:
To the Board of Directors and Stockholders of JPMorgan Chase & Co.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, changes in stockholders’ equity and comprehensive income and cash flows
present fairly, in all material respects, the financial position of JPMorgan Chase & Co. and its
subsidiaries (the “Firm”) at December 31, 2010 and 2009, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2010, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion,
the Firm maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Firm’s
management is responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying “Management’s report on internal control
over financial reporting.” Our responsibility is to express opinions on these financial statements
and on the Firm’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
February 28, 2011
PricewaterhouseCoopers LLP
•
300 Madison Avenue
•
New York, NY 10017
|
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|
159 |
Table of Contents
| Year ended December 31, (in millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
|
Revenue
|
||||||||||||
|
Investment banking fees
|
$ | 6,190 | $ | 7,087 | $ | 5,526 | ||||||
|
Principal transactions
|
10,894 | 9,796 | (10,699 | ) | ||||||||
|
Lending- and deposit-related fees
|
6,340 | 7,045 | 5,088 | |||||||||
|
Asset management, administration and commissions
|
13,499 | 12,540 | 13,943 | |||||||||
|
Securities gains
(a)
|
2,965 | 1,110 | 1,560 | |||||||||
|
Mortgage fees and related income
|
3,870 | 3,678 | 3,467 | |||||||||
|
Credit card income
|
5,891 | 7,110 | 7,419 | |||||||||
|
Other income
|
2,044 | 916 | 2,169 | |||||||||
|
Noninterest revenue
|
51,693 | 49,282 | 28,473 | |||||||||
|
Interest income
|
63,782 | 66,350 | 73,018 | |||||||||
|
Interest expense
|
12,781 | 15,198 | 34,239 | |||||||||
|
Net interest income
|
51,001 | 51,152 | 38,779 | |||||||||
|
Total net revenue
|
102,694 | 100,434 | 67,252 | |||||||||
|
|
||||||||||||
|
Provision for credit losses
|
16,639 | 32,015 | 20,979 | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Compensation expense
|
28,124 | 26,928 | 22,746 | |||||||||
|
Occupancy expense
|
3,681 | 3,666 | 3,038 | |||||||||
|
Technology, communications and equipment expense
|
4,684 | 4,624 | 4,315 | |||||||||
|
Professional and outside services
|
6,767 | 6,232 | 6,053 | |||||||||
|
Marketing
|
2,446 | 1,777 | 1,913 | |||||||||
|
Other expense
|
14,558 | 7,594 | 3,740 | |||||||||
|
Amortization of intangibles
|
936 | 1,050 | 1,263 | |||||||||
|
Merger costs
|
— | 481 | 432 | |||||||||
|
Total noninterest expense
|
61,196 | 52,352 | 43,500 | |||||||||
|
Income before income tax expense/(benefit) and extraordinary gain
|
24,859 | 16,067 | 2,773 | |||||||||
|
Income tax expense/(benefit)
|
7,489 | 4,415 | (926 | ) | ||||||||
|
Income before extraordinary gain
|
17,370 | 11,652 | 3,699 | |||||||||
|
Extraordinary gain
|
— | 76 | 1,906 | |||||||||
|
Net income
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | ||||||
|
Net income applicable to common stockholders
|
$ | 15,764 | $ | 8,774 | $ | 4,742 | ||||||
|
|
||||||||||||
|
Per common share data
|
||||||||||||
|
Basic earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 3.98 | $ | 2.25 | $ | 0.81 | ||||||
|
Net income
|
3.98 | 2.27 | 1.35 | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
3.96 | 2.24 | 0.81 | |||||||||
|
Net income
|
3.96 | 2.26 | 1.35 | |||||||||
|
|
||||||||||||
|
Weighted-average basic shares
|
3,956 | 3,863 | 3,501 | |||||||||
|
Weighted-average diluted shares
|
3,977 | 3,880 | 3,522 | |||||||||
|
|
||||||||||||
|
Cash dividends declared per common share
|
$ | 0.20 | $ | 0.20 | $ | 1.52 | ||||||
|
|
||||||||||||
|
(a) The following other-than-temporary impairment losses are
included in securities gains for
the periods presented.
|
||||||||||||
|
|
||||||||||||
|
Year ended December 31, (in millions)
|
2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Total other-than-temporary impairment losses
|
$ | (94 | ) | $ | (946 | ) | ||||||
|
Losses recorded in/(reclassified from) other comprehensive income
|
(6 | ) | 368 | |||||||||
|
|
||||||||||||
|
Total credit losses recognized in income
|
$ | (100 | ) | $ | (578 | ) | ||||||
|
|
||||||||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
|
160
|
JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| December 31, (in millions, except share data) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 27,567 | $ | 26,206 | ||||
|
Deposits with banks
|
21,673 | 63,230 | ||||||
|
Federal funds sold and securities purchased under resale agreements (included
$20,299
and $20,536
at fair value)
|
222,554 | 195,404 | ||||||
|
Securities borrowed (included
$13,961
and $7,032 at fair value)
|
123,587 | 119,630 | ||||||
|
Trading assets (included assets pledged of
$73,056
and $38,315)
|
489,892 | 411,128 | ||||||
|
Securities (included
$316,318
and $360,365 at fair value and assets pledged
of $86,891
and
$140,631)
|
316,336 | 360,390 | ||||||
|
Loans (included
$1,976
and $1,364 at fair value)
|
692,927 | 633,458 | ||||||
|
Allowance for loan losses
|
(32,266 | ) | (31,602 | ) | ||||
|
Loans, net of allowance for loan losses
|
660,661 | 601,856 | ||||||
|
Accrued interest and accounts receivable (included
zero
and $5,012 at fair value)
|
70,147 | 67,427 | ||||||
|
Premises and equipment
|
13,355 | 11,118 | ||||||
|
Goodwill
|
48,854 | 48,357 | ||||||
|
Mortgage servicing rights
|
13,649 | 15,531 | ||||||
|
Other intangible assets
|
4,039 | 4,621 | ||||||
|
Other assets (included
$18,201
and $19,165 at fair value and assets pledged of
$1,485
and $1,762)
|
105,291 | 107,091 | ||||||
|
Total assets
(a)
|
$ | 2,117,605 | $ | 2,031,989 | ||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits (included
$4,369
and $4,455 at fair value)
|
$ | 930,369 | $ | 938,367 | ||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements (included
$4,060
and $3,396 at fair value)
|
276,644 | 261,413 | ||||||
|
Commercial paper
|
35,363 | 41,794 | ||||||
|
Other borrowed funds (included
$9,931
and $5,637 at fair value)
|
57,309 | 55,740 | ||||||
|
Trading liabilities
|
146,166 | 125,071 | ||||||
|
Accounts payable and other liabilities (included the allowance for lending-related commitments of
$717
and $939 and
$236
and $357 at fair value)
|
170,330 | 162,696 | ||||||
|
Beneficial interests issued by consolidated variable interest entities (included
$1,495
and
$1,410 at fair value)
|
77,649 | 15,225 | ||||||
|
Long-term debt (included
$38,839
and $48,972 at fair value)
|
247,669 | 266,318 | ||||||
|
Total liabilities
(a)
|
1,941,499 | 1,866,624 | ||||||
|
Commitments and contingencies (see Note 31 on pages 280–281 of this Annual Report)
|
||||||||
|
|
||||||||
|
Stockholders’ equity
|
||||||||
|
Preferred stock ($1 par value; authorized 200,000,000 shares; issued
780,000
and 2,538,107 shares)
|
7,800 | 8,152 | ||||||
|
Common stock ($1 par value; authorized 9,000,000,000 shares; issued
4,104,933,895
shares)
|
4,105 | 4,105 | ||||||
|
Capital surplus
|
97,415 | 97,982 | ||||||
|
Retained earnings
|
73,998 | 62,481 | ||||||
|
Accumulated other comprehensive income/(loss)
|
1,001 | (91 | ) | |||||
|
Shares held in RSU Trust, at cost (
1,192,712
shares and 1,526,944 shares)
|
(53 | ) | (68 | ) | ||||
|
Treasury stock, at cost (
194,639,785
shares and 162,974,783 shares)
|
(8,160 | ) | (7,196 | ) | ||||
|
Total stockholders’ equity
|
176,106 | 165,365 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,117,605 | $ | 2,031,989 | ||||
|
|
||||||||
|
(a) The following table presents information on assets and liabilities
related to VIEs that
are consolidated by the Firm at December 31, 2010 and 2009. The
difference between total VIE
assets and liabilities represents the Firm’s interests in those
entities, which were
eliminated in consolidation.
|
||||||||
|
|
||||||||
|
December 31, (in millions)
|
2010 | 2009 | ||||||
|
|
||||||||
|
Assets
|
||||||||
|
Trading assets
|
$ | 9,837 | $ | 6,347 | ||||
|
Loans
|
95,587 | 13,004 | ||||||
|
All other assets
|
3,494 | 5,043 | ||||||
|
|
||||||||
|
Total assets
|
$ | 108,918 | $ | 24,394 | ||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Beneficial interests issued by consolidated variable interest entities
|
$ | 77,649 | $ | 15,225 | ||||
|
All other liabilities
|
1,922 | 2,197 | ||||||
|
|
||||||||
|
Total liabilities
|
$ | 79,571 | $ | 17,422 | ||||
|
|
||||||||
| The assets of the consolidated VIEs are used to settle the liabilities of those entities. The holders of the beneficial interests do not have recourse to the general credit of JPMorgan Chase. At December 31, 2010, the Firm provided limited program-wide credit enhancement of $2.0 billion related to its Firm-administered multi-seller conduits. For further discussion, see Note 16 on pages 244–259 of this Annual Report. |
The Notes to Consolidated Financial Statements are an integral part of these statements.
|
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|
161 |
Table of Contents
Consolidated statements of changes in stockholders’ equity and comprehensive income
| Year ended December 31, (in millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
|
Preferred stock
|
||||||||||||
|
Balance at January 1
|
$ | 8,152 | $ | 31,939 | $ | — | ||||||
|
Issuance of preferred stock
|
— | — | 31,550 | |||||||||
|
Issuance of preferred stock – conversion of the Bear Stearns
preferred stock
|
— | — | 352 | |||||||||
|
Accretion of preferred stock discount on issuance to the U.S. Treasury
|
— | 1,213 | 37 | |||||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
— | (25,000 | ) | — | ||||||||
|
Redemption of other preferred stock
|
(352 | ) | — | — | ||||||||
|
Balance at December 31
|
7,800 | 8,152 | 31,939 | |||||||||
|
Common stock
|
||||||||||||
|
Balance at January 1
|
4,105 | 3,942 | 3,658 | |||||||||
|
Issuance of common stock
|
— | 163 | 284 | |||||||||
|
Balance at December 31
|
4,105 | 4,105 | 3,942 | |||||||||
|
Capital surplus
|
||||||||||||
|
Balance at January 1
|
97,982 | 92,143 | 78,597 | |||||||||
|
Issuance of common stock
|
— | 5,593 | 11,201 | |||||||||
|
Warrant issued to U.S. Treasury in connection with issuance of
preferred stock
|
— | — | 1,250 | |||||||||
|
Preferred stock issue cost
|
— | — | (54 | ) | ||||||||
|
Shares issued and commitments to issue common stock for employee
stock-based compensation
|
||||||||||||
|
awards and related tax effects
|
706 | 474 | 859 | |||||||||
|
Net change from the Bear Stearns merger:
|
||||||||||||
|
Reissuance of treasury stock and the Share Exchange agreement
|
— | — | 48 | |||||||||
|
Employee stock awards
|
— | — | 242 | |||||||||
|
Other
|
(1,273 | ) | (228 | ) | — | |||||||
|
Balance at December 31
|
97,415 | 97,982 | 92,143 | |||||||||
|
Retained earnings
|
||||||||||||
|
Balance at January 1
|
62,481 | 54,013 | 54,715 | |||||||||
|
Cumulative effect of changes in accounting principles
|
(4,376 | ) | — | — | ||||||||
|
Net income
|
17,370 | 11,728 | 5,605 | |||||||||
|
Dividends declared:
|
||||||||||||
|
Preferred stock
|
(642 | ) | (1,328 | ) | (674 | ) | ||||||
|
Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
|
— | (1,112 | ) | — | ||||||||
|
Common stock ($0.20, $0.20 and $1.52 per share for 2010, 2009 and 2008, respectively)
|
(835 | ) | (820 | ) | (5,633 | ) | ||||||
|
Balance at December 31
|
73,998 | 62,481 | 54,013 | |||||||||
|
Accumulated other comprehensive income/(loss)
|
||||||||||||
|
Balance at January 1
|
(91 | ) | (5,687 | ) | (917 | ) | ||||||
|
Cumulative effect of changes in accounting principles
|
(144 | ) | — | — | ||||||||
|
Other comprehensive income/(loss)
|
1,236 | 5,596 | (4,770 | ) | ||||||||
|
Balance at December 31
|
1,001 | (91 | ) | (5,687 | ) | |||||||
|
Shares held in RSU Trust
|
||||||||||||
|
Balance at January 1
|
(68 | ) | (217 | ) | — | |||||||
|
Resulting from the Bear Stearns merger
|
— | — | (269 | ) | ||||||||
|
Reissuance from RSU Trust
|
15 | 149 | 52 | |||||||||
|
Balance at December 31
|
(53 | ) | (68 | ) | (217 | ) | ||||||
|
Treasury stock, at cost
|
||||||||||||
|
Balance at January 1
|
(7,196 | ) | (9,249 | ) | (12,832 | ) | ||||||
|
Purchase of treasury stock
|
(2,999 | ) | — | — | ||||||||
|
Reissuance from treasury stock
|
2,040 | 2,079 | 2,454 | |||||||||
|
Share repurchases related to employee stock-based compensation awards
|
(5 | ) | (26 | ) | (21 | ) | ||||||
|
Net change from the Bear Stearns merger as a result of the reissuance
of treasury
stock and the Share Exchange agreement
|
— | — | 1,150 | |||||||||
|
Balance at December 31
|
(8,160 | ) | (7,196 | ) | (9,249 | ) | ||||||
|
Total stockholders’ equity
|
$ | 176,106 | $ | 165,365 | $ | 166,884 | ||||||
|
Comprehensive income
|
||||||||||||
|
Net income
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | ||||||
|
Other comprehensive income/(loss)
|
1,236 | 5,596 | (4,770 | ) | ||||||||
|
Comprehensive income
|
$ | 18,606 | $ | 17,324 | $ | 835 | ||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
|
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Table of Contents
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Operating activities
|
||||||||||||
|
Net income
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | ||||||
|
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
|
||||||||||||
|
Provision for credit losses
|
16,639 | 32,015 | 20,979 | |||||||||
|
Depreciation and amortization
|
4,029 | 3,308 | 3,265 | |||||||||
|
Amortization of intangibles
|
936 | 1,050 | 1,263 | |||||||||
|
Deferred tax benefit
|
(968 | ) | (3,622 | ) | (2,637 | ) | ||||||
|
Investment securities gains
|
(2,965 | ) | (1,110 | ) | (1,560 | ) | ||||||
|
Proceeds on sale of investment
|
— | — | (1,540 | ) | ||||||||
|
Stock-based compensation
|
3,251 | 3,355 | 2,637 | |||||||||
|
Originations and purchases of loans held-for-sale
|
(37,085 | ) | (22,417 | ) | (34,902 | ) | ||||||
|
Proceeds from sales, securitizations and paydowns of loans held-for-sale
|
40,155 | 33,902 | 38,036 | |||||||||
|
Net change in:
|
||||||||||||
|
Trading assets
|
(72,082 | ) | 133,488 | (12,787 | ) | |||||||
|
Securities borrowed
|
(3,926 | ) | 4,452 | 15,408 | ||||||||
|
Accrued interest and accounts receivable
|
443 | (6,312 | ) | 10,221 | ||||||||
|
Other assets
|
(12,452 | ) | 32,557 | (32,919 | ) | |||||||
|
Trading liabilities
|
19,344 | (79,314 | ) | 24,061 | ||||||||
|
Accounts payable and other liabilities
|
17,325 | (26,450 | ) | 1,012 | ||||||||
|
Other operating adjustments
|
6,234 | 6,167 | (12,212 | ) | ||||||||
|
Net cash (used in)/provided by operating activities
|
(3,752 | ) | 122,797 | 23,930 | ||||||||
|
|
||||||||||||
|
Investing activities
|
||||||||||||
|
Net change in:
|
||||||||||||
|
Deposits with banks
|
41,625 | 74,829 | (118,929 | ) | ||||||||
|
Federal funds sold and securities purchased under resale agreements
|
(26,957 | ) | 7,082 | (44,597 | ) | |||||||
|
Held-to-maturity securities:
|
||||||||||||
|
Proceeds
|
7 | 9 | 10 | |||||||||
|
Available-for-sale securities:
|
||||||||||||
|
Proceeds from maturities
|
92,740 | 87,712 | 44,414 | |||||||||
|
Proceeds from sales
|
118,600 | 114,041 | 96,806 | |||||||||
|
Purchases
|
(179,487 | ) | (346,372 | ) | (248,599 | ) | ||||||
|
Proceeds from sales and securitizations of loans held-for-investment
|
8,853 | 30,434 | 27,531 | |||||||||
|
Other changes in loans, net
|
3,645 | 51,251 | (59,123 | ) | ||||||||
|
Net cash (used)/received in business acquisitions or dispositions
|
(4,910 | ) | (97 | ) | 2,128 | |||||||
|
Proceeds from assets sale to the FRBNY
|
— | — | 28,850 | |||||||||
|
Net maturities/(purchases) of asset-backed commercial paper guaranteed by the FRBB
|
— | 11,228 | (11,228 | ) | ||||||||
|
All other investing activities, net
|
(114 | ) | (762 | ) | (934 | ) | ||||||
|
Net cash provided by/(used in) investing activities
|
54,002 | 29,355 | (283,671 | ) | ||||||||
|
|
||||||||||||
|
Financing activities
|
||||||||||||
|
Net change in:
|
||||||||||||
|
Deposits
|
(9,637 | ) | (107,700 | ) | 177,331 | |||||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
15,202 | 67,785 | 15,250 | |||||||||
|
Commercial paper and other borrowed funds
|
(6,869 | ) | (67,198 | ) | 9,219 | |||||||
|
Beneficial interests issued by consolidated variable interest entities
|
2,426 | (4,076 | ) | (55 | ) | |||||||
|
Proceeds from long-term borrowings and trust preferred capital debt securities
|
55,181 | 51,324 | 72,407 | |||||||||
|
Payments of long-term borrowings and trust preferred capital debt securities
|
(99,043 | ) | (68,441 | ) | (65,344 | ) | ||||||
|
Excess tax benefits related to stock-based compensation
|
26 | 17 | 148 | |||||||||
|
Proceeds from issuance of preferred stock and Warrant to the U.S. Treasury
|
— | — | 25,000 | |||||||||
|
Proceeds from issuance of other preferred stock
|
— | — | 7,746 | |||||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
— | (25,000 | ) | — | ||||||||
|
Redemption of other preferred stock
|
(352 | ) | — | — | ||||||||
|
Proceeds from issuance of common stock
|
— | 5,756 | 11,500 | |||||||||
|
Treasury stock purchased
|
(2,999 | ) | — | — | ||||||||
|
Dividends paid
|
(1,486 | ) | (3,422 | ) | (5,911 | ) | ||||||
|
All other financing activities, net
|
(1,666 | ) | (2,124 | ) | (292 | ) | ||||||
|
Net cash (used in)/provided by financing activities
|
(49,217 | ) | (153,079 | ) | 246,999 | |||||||
|
Effect of exchange rate changes on cash and due from banks
|
328 | 238 | (507 | ) | ||||||||
|
Net increase/(decrease) in cash and due from banks
|
1,361 | (689 | ) | (13,249 | ) | |||||||
|
Cash and due from banks at the beginning of the year
|
26,206 | 26,895 | 40,144 | |||||||||
|
Cash and due from banks at the end of the year
|
$ | 27,567 | $ | 26,206 | $ | 26,895 | ||||||
|
Cash interest paid
|
$ | 12,404 | $ | 16,875 | $ | 37,267 | ||||||
|
Cash income taxes paid, net
|
9,747 | 5,434 | 2,280 | |||||||||
| Note: | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated noncash assets and liabilities of $87.7 billion and $92.2 billion, respectively. |
| In 2008, the fair values of noncash assets acquired and liabilities assumed in: (1) the merger with Bear Stearns were $288.2 billion and $287.7 billion, respectively (approximately 26 million shares of common stock valued at approximately $1.2 billion were issued in connection with the Bear Stearns merger); and (2) the Washington Mutual transaction were $260.3 billion and $260.1 billion, respectively. |
The Notes to Consolidated Financial Statements are an integral part of these statements.
|
JPMorgan Chase & Co. / 2010 Annual Report
|
163 |
Table of Contents
Notes to consolidated financial statements
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated
under Delaware law in 1968, is a leading global financial services firm and one of the largest
banking institutions in the United States of America (“U.S.”), with operations worldwide. The Firm
is a leader in investment banking, financial services for consumers, small business and commercial
banking, financial transaction processing, asset management and private equity. For a discussion of
the Firm’s business segment information, see Note 34 on pages 290–293 of this Annual Report.
The accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to
accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Additionally, where applicable, the policies conform to the accounting and reporting guidelines
prescribed by bank regulatory authorities.
Certain amounts in prior periods have been reclassified to conform to the current presentation.
Consolidation
The Consolidated Financial Statements include the accounts of JPMorgan Chase and other entities in
which the Firm has a controlling financial interest. All material intercompany balances and
transactions have been eliminated. The Firm determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is a voting interest entity or a
variable interest entity (“VIE”).
Voting Interest Entities
Voting interest entities are entities that have sufficient equity and provide the equity investors
voting rights that enable them to make significant decisions relating to the entity’s operations.
For these types of entities, the Firm’s determination of whether it has a controlling interest is
primarily based on the amount of voting equity interests held. Entities in which the Firm has a
controlling financial interest, through ownership of the majority of the entities’ voting equity
interests, or through other contractual rights that give the Firm control, are consolidated by the
Firm.
Investments in companies in which the Firm has significant influence over operating and financing
decisions (but does not own a majority of the voting equity interests) are accounted for (i) in
accordance with the equity method of accounting (which requires the Firm to recognize its
proportionate share of the entity’s net earnings), or (ii) at fair value if the fair value option
was elected at the inception of the Firm’s investment. These investments are generally included in
other assets, with income or loss included in other income.
The Firm-sponsored asset management funds are generally structured as limited partnerships or
limited liability companies, which are typically considered voting interest entities. For the
significant majority of these entities, the Firm is the general partner or managing member, but the
non-affiliated partners or members have the ability to remove the Firm as the general partner or
managing member without cause (i.e., kick-out rights), based on a simple majority vote, or the
non-affiliated partners or members have rights to participate in important decisions. Accordingly,
the Firm does not consolidate these funds. In the limited cases where the non-affiliated partners
or members do not have substantive kick-out or participating rights, the Firm consolidates the
funds.
The Firm’s investment companies make investments in both public and private entities, including
investments in buyouts, growth equity and venture opportunities. These investments are accounted
for under investment company guidelines and accordingly, irrespective of the percentage of equity
ownership interests held, are carried on the Consolidated Balance Sheets at fair value, and are
recorded in other assets.
Variable Interest Entities
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to
finance its activities without additional subordinated financial support from other parties, or (2)
have equity investors that do not have the ability to make significant decisions relating to
the entity’s operations through voting rights, or do not have the obligation to absorb the expected
losses, or do not have the right to receive the residual returns of the entity.
The most common type of VIE is a special purpose entity (“SPE”). SPEs are commonly used in
securitization transactions in order to isolate certain assets and distribute the cash flows from
those assets to investors. SPEs are an important part of the financial markets, including the
mortgage- and asset-backed securities and commercial paper markets, as they provide market
liquidity by facilitating investors’ access to specific portfolios of assets and risks. SPEs may be
organized as trusts, partnerships or corporations and are typically established for a single,
discrete purpose. SPEs are not typically operating entities and usually have a limited life and no
employees. The basic SPE structure involves a company selling assets to the SPE; the SPE funds the
purchase of those assets by issuing securities to investors. The legal documents that govern the
transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and
other parties that have rights to those cash flows. SPEs are generally structured to insulate
investors from claims on the SPE’s assets by creditors of other entities, including the creditors
of the seller of the assets.
On January 1, 2010, the Firm implemented new consolidation accounting guidance related to VIEs. The
new guidance eliminates the concept of qualified special purpose entities (“QSPEs”) that were
previously exempt from consolidation, and introduces a new framework for consolidation of VIEs. The
primary beneficiary of a VIE is required to consolidate the assets and liabilities of the VIE.
Under the new guidance, the primary beneficiary is the party that has both (1) the power to direct
the activities of an entity that most significantly impact the VIE’s economic performance; and (2)
through its interests in the VIE, the obligation to absorb losses or the right to receive benefits
from the VIE that could potentially be significant to the VIE.
To assess whether the Firm has the power to direct the activities of a VIE that most significantly
impact the VIE’s economic performance, the Firm considers all the facts and circumstances,
including its role in establishing the VIE and its ongoing rights and responsibilities. This
assessment includes, first, identifying the activities that most significantly impact the VIE’s
economic performance; and second, identifying which party, if any, has power over those activities.
In general, the parties that make the most significant decisions affecting the VIE (such as asset
managers, collateral managers, servicers, or owners of call options or liquidation rights over the
VIE’s assets) or have the right to unilaterally remove those decision-makers are deemed to have the
power to direct the activities of a VIE.
|
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JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
To assess whether the Firm has the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE that could potentially be significant to the VIE, the Firm considers all of
its economic interests, including debt and equity investments, servicing fees, and derivative or
other arrangements deemed to be variable interests in the VIE. This assessment requires that the
Firm apply judgment in determining whether these interests, in the aggregate, are considered
potentially significant to the VIE. Factors considered in assessing significance include: the
design of the VIE, including its capitalization structure; subordination of interests; payment
priority; relative share of interests held across various classes within the VIE’s capital
structure; and the reasons why the interests are held by the Firm.
The Firm performs on-going reassessments of: (1) whether entities previously evaluated under the
majority voting-interest framework have become VIEs, based on certain events, and therefore subject
to the VIE consolidation framework; and (2) whether changes in the facts and circumstances
regarding the Firm’s involvement with a VIE cause the Firm’s consolidation conclusion to change.
For further details regarding the Firm’s application of the accounting guidance effective January
1, 2010, see Note 16 on pages 244–259 of this Annual Report.
The Financial Accounting Standards Board (“FASB”) issued an amendment which deferred the
requirements of the accounting guidance for certain investment funds, including mutual funds,
private equity funds and hedge funds. For the funds to which the deferral applies, the Firm
continues to apply other existing authoritative guidance to determine whether such funds should be
consolidated.
Assets held for clients in an agency or fiduciary capacity by the Firm are not assets of JPMorgan
Chase and are not included in the Consolidated Balance Sheets.
For reporting periods prior to January 1, 2010, there were two different accounting frameworks
applicable to SPEs: The qualifying special purpose entity (“QSPE”) framework and the VIE framework.
The applicable framework depended on the nature of the entity and the Firm’s relation to that
entity. The QSPE framework was applicable when an entity sold financial assets to an SPE meeting
certain defined criteria that were designed to ensure that the activities of the entity were
essentially predetermined at the inception of the vehicle and that the transferor of the financial
assets could not exercise control over the entity and the assets therein. QSPEs were not
consolidated by the transferor or other counterparties as long as they did not have the unilateral
ability to liquidate or to cause the entity to no longer meet the QSPE criteria. The Firm’s
securitizations of residential and commercial mortgages, credit card, automobile and student loans
generally were evaluated using the QSPE framework. For further details, see Note 16 on pages
244–259 of this Annual Report.
Additionally, the other SPEs were evaluated using the VIE framework, which was based on a risk and
reward approach, and required a variable interest holder (i.e., an investor or other counterparty
to a VIE) to consolidate the VIE if that party absorbed a majority of the expected losses of the
VIE, received the majority of the expected residual returns of the VIE, or both. In making the
determination of whether the Firm should consolidate a VIE, the Firm evaluated the VIE’s design,
capital structure and relationships among the variable interest holders. If the Firm could not
identify the party that
consolidates a VIE through a qualitative analysis, the Firm performed a
quantitative analysis, which computed and allocated expected losses or residual returns to variable
interest holders. The allocation of expected cash flows in this analysis was based on the relative
rights and preferences of each variable interest holder in the VIE’s capital structure. The Firm
reconsidered whether it was the primary beneficiary of a VIE only when certain defined events
occurred.
Use of estimates in the preparation of consolidated financial statements
The preparation of Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense, and disclosures of contingent assets and liabilities. Actual results could be different from these estimates.
The preparation of Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense, and disclosures of contingent assets and liabilities. Actual results could be different from these estimates.
Foreign currency translation
JPMorgan Chase revalues assets, liabilities, revenue and expense denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates.
JPMorgan Chase revalues assets, liabilities, revenue and expense denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates.
Gains and losses relating to translating functional currency financial statements for U.S.
reporting are included in other comprehensive income/(loss) within stockholders’ equity. Gains and
losses relating to nonfunctional currency transactions, including non-U.S. operations where the
functional currency is the U.S. dollar, are reported in the Consolidated Statements of Income.
Statements of cash flows
For JPMorgan Chase’s Consolidated Statements of Cash Flows, cash is defined as those amounts included in cash and due from banks.
For JPMorgan Chase’s Consolidated Statements of Cash Flows, cash is defined as those amounts included in cash and due from banks.
Significant accounting policies
The following table identifies JPMorgan Chase’s other significant accounting policies and the Note and page where a detailed description of each policy can be found.
The following table identifies JPMorgan Chase’s other significant accounting policies and the Note and page where a detailed description of each policy can be found.
|
Business changes and developments
|
Note 2 | Page 166 | ||||||
|
Fair value measurement
|
Note 3 | Page 170 | ||||||
|
Fair value option
|
Note 4 | Page 187 | ||||||
|
Derivative instruments
|
Note 6 | Page 191 | ||||||
|
Noninterest revenue
|
Note 7 | Page 199 | ||||||
|
Interest income and interest expense
|
Note 8 | Page 200 | ||||||
|
Pension and other postretirement employee
benefit plans
|
Note 9 | Page 201 | ||||||
|
Employee stock-based incentives
|
Note 10 | Page 210 | ||||||
|
Securities
|
Note 12 | Page 214 | ||||||
|
Securities financing activities
|
Note 13 | Page 219 | ||||||
|
Loans
|
Note 14 | Page 220 | ||||||
|
Allowance for credit losses
|
Note 15 | Page 239 | ||||||
|
Variable interest entities
|
Note 16 | Page 244 | ||||||
|
Goodwill and other intangible assets
|
Note 17 | Page 260 | ||||||
|
Premises and equipment
|
Note 18 | Page 263 | ||||||
|
Long-term debt
|
Note 22 | Page 265 | ||||||
|
Income taxes
|
Note 27 | Page 271 | ||||||
|
Off–balance sheet lending-related financial
instruments, guarantees and other
commitments
|
Note 30 | Page 275 | ||||||
|
Litigation
|
Note 32 | Page 282 | ||||||
|
JPMorgan Chase & Co. / 2010 Annual Report
|
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Table of Contents
Notes to consolidated financial statements
Decrease in common stock dividend
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009.
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009.
Acquisition of the banking operations of Washington
Mutual Bank
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”) from the FDIC for $1.9 billion. The acquisition expanded JPMorgan Chase’s consumer branch network into several states, including California, Florida Washington, Georgia, Idaho, Nevada and Oregon and created the third largest branch network in the U.S. The acquisition also extended the reach of the Firm’s business banking, commercial banking, credit card, consumer lending and wealth management businesses.
Mutual Bank
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”) from the FDIC for $1.9 billion. The acquisition expanded JPMorgan Chase’s consumer branch network into several states, including California, Florida Washington, Georgia, Idaho, Nevada and Oregon and created the third largest branch network in the U.S. The acquisition also extended the reach of the Firm’s business banking, commercial banking, credit card, consumer lending and wealth management businesses.
The acquisition was accounted for under the purchase method of accounting, which requires that the
assets and liabilities of Washington Mutual be initially reported at fair value.
In 2008, the $1.9 billion purchase price was preliminarily allocated to the Washington Mutual
assets acquired and liabilities assumed, which resulted in negative goodwill.
In accordance with U.S. GAAP for business combinations that was in effect at the time of
the acquisition, noncurrent
nonfinancial assets acquired in the Washington Mutual transaction that were not held-for-sale, such
as the premises and equipment and other intangibles, were written down against the negative
goodwill.
The negative goodwill that remained after writing down the nonfinancial assets was
recognized as an extraordinary gain of $1.9 billion at December 31, 2008. The final total
extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion.
The final summary computation of the purchase price and the allocation of the final total
purchase price of $1.9 billion to the net assets acquired of
Washington Mutual, based on their
respective fair values as of September 25, 2008, and the resulting final negative goodwill of $2.0
billion are
presented below.
| September 25, 2008 (in millions) | ||||||||
|
Purchase price
|
||||||||
|
Purchase price
|
$ | 1,938 | ||||||
|
Direct acquisition costs
|
3 | |||||||
|
|
||||||||
|
Total purchase price
|
1,941 | |||||||
|
Net assets acquired:
|
||||||||
|
Washington Mutual’s net assets before fair value adjustments
|
$ | 39,186 | ||||||
|
Washington Mutual’s goodwill and other intangible assets
|
(7,566 | ) | ||||||
|
|
||||||||
|
Subtotal
|
31,620 | |||||||
|
|
||||||||
|
Adjustments to reflect assets acquired at fair value:
|
||||||||
|
Securities
|
(16 | ) | ||||||
|
Trading assets
|
(591 | ) | ||||||
|
Loans
|
(30,998 | ) | ||||||
|
Allowance for loan losses
|
8,216 | |||||||
|
Premises and equipment
|
680 | |||||||
|
Accrued interest and accounts receivable
|
(243 | ) | ||||||
|
Other assets
|
4,010 | |||||||
|
|
||||||||
|
Adjustments to reflect liabilities assumed at fair value:
|
||||||||
|
Deposits
|
(686 | ) | ||||||
|
Other borrowed funds
|
68 | |||||||
|
Accounts payable, accrued expense and other liabilities
|
(1,124 | ) | ||||||
|
Long-term debt
|
1,063 | |||||||
|
|
||||||||
|
Fair value of net assets acquired
|
11,999 | |||||||
|
|
||||||||
|
Negative goodwill before allocation to nonfinancial assets
|
(10,058 | ) | ||||||
|
Negative goodwill allocated to nonfinancial assets
(a)
|
8,076 | |||||||
|
|
||||||||
|
Negative goodwill resulting from the acquisition
(b)
|
$ | (1,982 | ) | |||||
| (a) | The acquisition was accounted for as a purchase business combination, which requires the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of an acquired business to be recorded at their respective fair values as of the effective date of the acquisition and consolidated with those of JPMorgan Chase. The fair value of the net assets of Washington Mutual’s banking operations exceeded the $1.9 billion purchase price, resulting in negative goodwill. Noncurrent, nonfinancial assets not held-for-sale, such as premises and equipment and other intangibles, were written down against the negative goodwill. The negative goodwill that remained after writing down transaction-related core deposit intangibles of approximately $4.9 billion and premises and equipment of approximately $3.2 billion was recognized as an extraordinary gain of $2.0 billion. | |
| (b) | The extraordinary gain was recorded net of tax expense in Corporate/Private Equity. |
|
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Table of Contents
Condensed statement of net assets acquired
The following condensed statement of net assets acquired reflects the final value assigned to the Washington Mutual net assets as of September 25, 2008.
The following condensed statement of net assets acquired reflects the final value assigned to the Washington Mutual net assets as of September 25, 2008.
| (in millions) | September 25, 2008 | |||
|
Assets
|
||||
|
Cash and due from banks
|
$ | 3,680 | ||
|
Deposits with banks
|
3,517 | |||
|
Federal funds sold and securities purchased under resale agreements
|
1,700 | |||
|
Trading assets
|
5,691 | |||
|
Securities
|
17,224 | |||
|
Loans (net of allowance for loan losses)
|
206,456 | |||
|
Accrued interest and accounts receivable
|
3,253 | |||
|
Mortgage servicing rights
|
5,874 | |||
|
All other assets
|
16,596 | |||
|
Total assets
|
$ | 263,991 | ||
|
Liabilities
|
||||
|
Deposits
|
$ | 159,872 | ||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
4,549 | |||
|
Other borrowed funds
|
81,636 | |||
|
Trading liabilities
|
585 | |||
|
Accounts payable, accrued expense and other liabilities
|
6,708 | |||
|
Long-term debt
|
6,718 | |||
|
Total liabilities
|
260,068 | |||
|
Washington Mutual net assets acquired
|
$ | 3,923 | ||
Merger with The Bear Stearns Companies Inc.
Effective May 30, 2008, BSC Merger Corporation, a wholly owned subsidiary of JPMorgan Chase, merged with The Bear Stearns Companies Inc. (“Bear Stearns”) pursuant to the Agreement and Plan of Merger, dated as of March 16, 2008, as amended March 24, 2008, and Bear Stearns became a wholly owned subsidiary of JPMorgan Chase. The merger provided the Firm with a leading global prime brokerage platform; strengthened the Firm’s equities and asset management businesses; enhanced capabilities in mortgage origination, securitization and servicing; and expanded the platform of the Firm’s energy business. The merger was accounted for under the purchase method of accounting, which requires that the assets and liabilities of Bear Stearns be fair valued. The final total purchase price to complete the merger was $1.5 billion.
Effective May 30, 2008, BSC Merger Corporation, a wholly owned subsidiary of JPMorgan Chase, merged with The Bear Stearns Companies Inc. (“Bear Stearns”) pursuant to the Agreement and Plan of Merger, dated as of March 16, 2008, as amended March 24, 2008, and Bear Stearns became a wholly owned subsidiary of JPMorgan Chase. The merger provided the Firm with a leading global prime brokerage platform; strengthened the Firm’s equities and asset management businesses; enhanced capabilities in mortgage origination, securitization and servicing; and expanded the platform of the Firm’s energy business. The merger was accounted for under the purchase method of accounting, which requires that the assets and liabilities of Bear Stearns be fair valued. The final total purchase price to complete the merger was $1.5 billion.
The merger with Bear Stearns was accomplished through a series of transactions that were reflected
as step acquisitions.
On April 8, 2008, pursuant to a share exchange agreement, JPMorgan Chase
acquired 95 million newly issued shares of Bear Stearns common stock (or 39.5% of Bear Stearns
common stock after giving effect to the issuance) for 20.7 million shares of JPMorgan Chase common
stock. Further, between March 24, 2008, and May 12, 2008, JPMorgan Chase acquired approximately 24
million shares of Bear Stearns common stock in the open market at an average purchase price of
$12.37 per share. The share exchange and cash purchase transactions resulted in JPMorgan Chase
owning approximately 49.4% of Bear Stearns common stock immediately prior to consummation of the
merger. Finally, on May 30, 2008, JPMorgan Chase completed the merger. As a result of the merger,
each outstanding share of Bear Stearns common stock (other than shares
then held by JPMorgan Chase)
was converted into the right to receive 0.21753 shares of common stock of JPMorgan Chase. Also, on
May 30, 2008, the shares of common stock that JPMorgan Chase and Bear Stearns acquired from each
other in the share exchange transaction were cancelled.
From April 8, 2008, through May 30, 2008,
JPMorgan Chase accounted for the investment in Bear Stearns under the equity method of accounting.
During this period, JPMorgan Chase recorded reductions to its investment in Bear Stearns
representing its share of Bear Stearns net losses, which was recorded in other income and
accumulated other comprehensive income.
The difference between the net assets acquired and the fair
value of
the net assets acquired (including goodwill), presented in the tables below, represent JPMorgan
Chase’s net losses recorded under the equity method of accounting.
In conjunction with the Bear Stearns merger, in June 2008, the Federal Reserve Bank of New York
(the “FRBNY”) took control, through a limited liability company (“LLC”) formed for this purpose, of
a portfolio of $30 billion in assets acquired from Bear Stearns, based on the value of the
portfolio as of March 14, 2008. The assets of the LLC were funded by a $28.85 billion term loan
from the FRBNY, and a $1.15 billion subordinated loan from JPMorgan Chase. The JPMorgan Chase loan
is subordinated to the FRBNY loan and will bear the first $1.15 billion of any losses of the
portfolio. Any remaining assets in the portfolio after repayment of the FRBNY loan, the JPMorgan
Chase note and the expense of the LLC will be for the account of the FRBNY.
|
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|
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Table of Contents
Notes to consolidated financial statements
As a result of step acquisition accounting, the final total purchase price of $1.5 billion was
allocated to the Bear Stearns assets acquired and liabilities assumed using their fair values as of
April 8, 2008, and May 30, 2008, respectively. The final summary computation of the purchase price
and the allocation of the final total purchase price of $1.5 billion to the net assets acquired of
Bear Stearns are presented below.
| May 30, 2008 (in millions, except shares, per share amounts, ratios and where otherwise noted) | ||||||||
|
Purchase price
|
||||||||
|
Shares exchanged in the Share Exchange transaction (April 8, 2008)
|
95,000 | |||||||
|
Other Bear Stearns shares outstanding
|
145,759 | |||||||
|
|
||||||||
|
Total Bear Stearns stock outstanding
|
240,759 | |||||||
|
Cancellation of shares issued in the Share Exchange transaction
|
(95,000 | ) | ||||||
|
Cancellation of shares acquired by JPMorgan Chase for cash in the open market
|
(24,061 | ) | ||||||
|
|
||||||||
|
Bear Stearns common stock exchanged as of May 30, 2008
|
121,698 | |||||||
|
Exchange ratio
|
0.21753 | |||||||
|
|
||||||||
|
JPMorgan Chase common stock issued
|
26,473 | |||||||
|
Average purchase price per JPMorgan Chase common share
(a)
|
$ | 45.26 | ||||||
|
|
||||||||
|
Total fair value of JPMorgan Chase common stock issued
|
$ | 1,198 | ||||||
|
Bear Stearns common stock acquired for cash in the open market (24 million
shares at an average share price of $12.37 per share)
|
298 | |||||||
|
Fair value of employee stock awards (largely to be settled by shares held in
the RSU Trust
(b)
)
|
242 | |||||||
|
Direct acquisition costs
|
27 | |||||||
|
Less: Fair value of Bear Stearns common stock held in the RSU Trust and
included in the exchange of common stock
|
(269 | ) (b) | ||||||
|
|
||||||||
|
Total purchase price
|
1,496 | |||||||
|
|
||||||||
|
Net assets acquired
|
||||||||
|
Bear Stearns common stockholders’ equity
|
$ | 6,052 | ||||||
|
Adjustments to reflect assets acquired at fair value:
|
||||||||
|
Trading assets
|
(3,877 | ) | ||||||
|
Premises and equipment
|
509 | |||||||
|
Other assets
|
(288 | ) | ||||||
|
Adjustments to reflect liabilities assumed at fair value:
|
||||||||
|
Long-term debt
|
504 | |||||||
|
Other liabilities
|
(2,289 | ) | ||||||
|
|
||||||||
|
Fair value of net assets acquired excluding goodwill
|
611 | |||||||
|
|
||||||||
|
Goodwill resulting from the merger
(c)
|
$ | 885 | ||||||
| (a) | The value of JPMorgan Chase common stock was determined by averaging the closing prices of JPMorgan Chase’s common stock for the four trading days during the period March 19 through 25, 2008. | |
| (b) | Represents shares of Bear Stearns common stock held in an irrevocable grantor trust (the “RSU Trust”), to be used to settle stock awards granted to selected employees and certain key executives under certain heritage Bear Stearns employee stock plans. Shares in the RSU Trust were exchanged for 6 million shares of JPMorgan Chase common stock at the merger exchange ratio of 0.21753. For further discussion of the RSU Trust, see Note 10 on pages 210–212 of this Annual Report. | |
| (c) | The goodwill was recorded in Investment Bank and is not tax-deductible. |
Condensed statement of net assets acquired
The following condensed statement of net assets acquired reflects the final values assigned to the Bear Stearns net assets as of May 30, 2008.
The following condensed statement of net assets acquired reflects the final values assigned to the Bear Stearns net assets as of May 30, 2008.
| (in millions) | May 30, 2008 | |||
|
Assets
|
||||
|
Cash and due from banks
|
$ | 534 | ||
|
Federal funds sold and securities purchased under resale agreements
|
21,204 | |||
|
Securities borrowed
|
55,195 | |||
|
Trading assets
|
136,489 | |||
|
Loans
|
4,407 | |||
|
Accrued interest and accounts receivable
|
34,677 | |||
|
Goodwill
|
885 | |||
|
All other assets
|
35,377 | |||
|
Total assets
|
$ | 288,768 | ||
|
Liabilities
|
||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
$ | 54,643 | ||
|
Other borrowings
|
16,166 | |||
|
Trading liabilities
|
24,267 | |||
|
Beneficial interests issued by consolidated VIEs
|
47,042 | |||
|
Long-term debt
|
67,015 | |||
|
Accounts payable and other liabilities
|
78,569 | |||
|
Total liabilities
|
287,702 | |||
|
Bear Stearns net assets
(a)
|
$ | 1,066 | ||
| (a) | Reflects the fair value assigned to 49.4% of the Bear Stearns net assets acquired on April 8, 2008 (net of related amortization), and the fair value assigned to the remaining 50.6% of the Bear Stearns net assets acquired on May 30, 2008. The difference between the net assets acquired, as presented above, and the fair value of the net assets acquired (including goodwill), presented in the previous table, represents JPMorgan Chase’s net losses recorded under the equity method of accounting. |
|
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Unaudited pro forma condensed combined financial information reflecting the Bear Stearns merger and Washington Mutual transaction
The following unaudited pro forma condensed combined financial information presents the 2008
results of operations of the Firm as they may have appeared, if the Bear Stearns merger and the
Washington Mutual transaction had been completed on January 1, 2008.
| Year ended December 31, | ||||||||
| (in millions, except per share data) | 2008 | |||||||
|
Total net revenue
|
$ | 68,149 | ||||||
|
Loss before extraordinary gain
|
(14,090 | ) | ||||||
|
Net loss
|
(12,184 | ) | ||||||
|
|
||||||||
|
Net loss per common share data:
|
||||||||
|
Basic earnings per share
|
||||||||
|
Loss before extraordinary gain
|
$ | (4.26 | ) | |||||
|
Net loss
|
(3.72 | ) | ||||||
|
Diluted earnings per share
(a)
|
||||||||
|
Loss before extraordinary gain
|
(4.26 | ) | ||||||
|
Net loss
|
(3.72 | ) | ||||||
|
Average common shares issued and
outstanding
|
||||||||
|
Basic
|
3,510.5 | |||||||
|
Diluted
|
3,510.5 | |||||||
| (a) | Common equivalent shares have been excluded from the pro forma computation of diluted loss per share for the year ended December 31, 2008, as the effect would be antidilutive. |
The unaudited pro forma combined financial information is presented for illustrative purposes
only and does not indicate the financial results of the combined company had the companies actually
been combined as of January 1, 2008, nor is it indicative of the results of operations in future
periods. Included in the unaudited pro forma combined financial information for the year ended
December 31, 2008, were pro forma adjustments to reflect the results of operations of Bear Stearns
and Washington Mutual’s banking operations, considering the purchase accounting, valuation and
accounting conformity adjustments. For the Washington Mutual transaction, the amortization of
purchase accounting adjustments to report interest-earning assets acquired and interest-bearing
liabilities assumed at current interest rates is reflected for the year ended December 31, 2008.
Valuation adjustments and the adjustment to conform allowance methodologies in the Washington
Mutual transaction, and valuation and accounting conformity adjustments related to the Bear Stearns
merger are reflected in the results for the year ended December 31, 2008.
Internal reorganization related to the Bear Stearns merger
On June 30, 2008, JPMorgan Chase fully and unconditionally guaranteed each series of outstanding
preferred stock of Bear Stearns, as well as all of Bear Stearns’ outstanding U.S. Securities and
Exchange Commission (“SEC”) registered U.S. debt securities and obligations relating to trust
preferred capital debt securities. Subsequently, on July 15, 2008, JPMorgan Chase completed an
internal merger transaction, which resulted in each series of outstanding preferred stock of Bear
Stearns being automatically exchanged into newly-issued shares of JPMorgan Chase preferred stock
having substantially identical terms. In addition, pursuant to internal transactions in July 2008
and the first quarter of 2009, JPMorgan Chase assumed or guaranteed the remaining outstanding
securities of Bear Stearns and its subsidiaries, in each case in accordance with the indentures and
other agreements governing those securities. As discussed below, all of the above series of
preferred stock, and the depositary shares representing such preferred stock, were redeemed on
August 20, 2010.
Other business events
Redemption of Series E, F and G cumulative preferred stock
On August 20, 2010, JPMorgan Chase redeemed at stated redemption value, all outstanding shares of
its Series E 6.15% Cumulative Preferred Stock; Series F 5.72% Cumulative Preferred Stock; and
Series G 5.49% Cumulative Preferred Stock. For a further discussion of preferred stock, see Note 23
on pages 267–268 of this Annual Report.
RBS Sempra transaction
On July 1, 2010, JPMorgan Chase completed the acquisition of RBS Sempra Commodities’ global oil,
global metals and European power and gas businesses. The Firm acquired approximately $1.7 billion
of net assets which included $3.3 billion of debt which was immediately repaid. This acquisition
almost doubled the number of clients the Firm’s commodities business can serve and will enable the
Firm to offer clients more products in more regions of the world.
Purchase of remaining interest in J.P. Morgan Cazenove
On January 4, 2010, JPMorgan Chase purchased the remaining interest in J.P. Morgan Cazenove, an
investment banking business partnership formed in 2005, which resulted in an adjustment to the
Firm’s capital surplus of approximately $1.3 billion.
| JPMorgan Chase & Co. / 2010 Annual Report | 169 |
Table of Contents
Notes to consolidated financial statements
Termination of Chase Paymentech Solutions joint venture
The dissolution of the Chase Paymentech Solutions joint venture, a global payments and merchant
acquiring joint venture between JPMorgan Chase and First Data Corporation, was completed on
November 1, 2008. JPMorgan Chase retained approximately 51% of the business, which it operates
under the name Chase Paymentech Solutions. The dissolution
of the Chase Paymentech Solutions joint venture was accounted for as a step acquisition in
accordance with U.S. GAAP for business combinations, and the Firm recognized an after-tax gain of
$627 million in the fourth quarter of 2008 as a result of the dissolution. The gain represents the
amount by which the fair value of the net assets acquired (predominantly intangible assets and
goodwill) exceeded JPMorgan Chase’s carrying value in the net assets transferred to First Data
Corporation. Upon dissolution, the Firm consolidated the retained Chase Paymentech Solutions
business.
Proceeds from Visa Inc. shares
On March 19, 2008, Visa Inc. (“Visa”) completed its initial public offering (“IPO”). Prior to the
IPO, JPMorgan Chase held approximately a 13% equity interest in Visa. On March 28, 2008, Visa used
a portion of the proceeds from the offering to redeem a portion of the Firm’s equity interest,
which resulted in the recognition of a pretax gain of $1.5 billion (recorded in other income). In
conjunction with the IPO, Visa placed $3.0 billion in escrow to cover liabilities related to
certain litigation matters. The escrow was increased by $1.1 billion in 2008, $700 million in 2009
and by $1.3 billion in 2010.
Increases in Visa’s escrow account results in a dilution of the value
of the Firm’s ownership of Visa Inc. JPMorgan Chase’s interest in the escrow was recorded as a
reduction of other expense and reported net to the extent of established litigation reserves.
Purchase of remaining interest in Highbridge Capital Management
In January 2008, JPMorgan Chase purchased an additional equity interest in Highbridge Capital
Management, LLC (“Highbridge”), which resulted in the Firm owning 77.5% of Highbridge. In July
2009, JPMorgan Chase completed its purchase of the remaining interest in Highbridge, which resulted
in a $228 million adjustment to capital surplus.
JPMorgan Chase carries a portion of its assets and liabilities at fair value. The majority of
such assets and liabilities are carried at fair value on a recurring basis. Certain assets and
liabilities are carried at fair value on a nonrecurring basis, including held-for-sale loans, which
are accounted for at the lower of cost or fair value and that are only subject to fair value
adjustments under certain circumstances.
The Firm has an established and well-documented process for determining fair values. Fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is based on
quoted market prices, where available. If listed prices or quotes are not available, fair value is
based on internally developed models that primarily use, as inputs, market-based or independently
sourced market parameters, including but not limited to yield curves, interest rates, volatilities,
equity or debt prices, foreign exchange rates and credit curves. In
addition to market information, models also incorporate transaction details, such as maturity of
the instrument. Valuation adjustments may be made to ensure that financial instruments are recorded
at fair value. These adjustments include amounts to reflect counterparty credit quality, the Firm’s
creditworthiness, constraints on liquidity and unobservable parameters. Valuation adjustments are
applied consistently over time.
| • | Credit valuation adjustments (“CVA”) are necessary when the market price (or parameter) is not indicative of the credit quality of the counterparty. As few classes of derivative contracts are listed on an exchange, the majority of derivative positions are valued using internally developed models that use as their basis observable market parameters. An adjustment is necessary to reflect the credit quality of each derivative counterparty to arrive at fair value. The adjustment also takes into account contractual factors designed to reduce the Firm’s credit exposure to each counterparty, such as collateral and legal rights of offset. | |
| • | Debit valuation adjustments (“DVA”) are necessary to reflect the credit quality of the Firm in the valuation of liabilities measured at fair value. The methodology to determine the adjustment is consistent with CVA and incorporates JPMorgan Chase’s credit spread as observed through the credit default swap market. |
| 170 | JPMorgan Chase & Co. / 2010 Annual Report |
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| • | Liquidity valuation adjustments are necessary when the Firm may not be able to observe a recent market price for a financial instrument that trades in inactive (or less active) markets or to reflect the cost of exiting larger-than-normal market-size risk positions (liquidity adjustments are not taken for positions classified within level 1 of the fair value hierarchy; see below). The Firm estimates the amount of uncertainty in the initial valuation based on the degree of liquidity in the market in which the financial instrument trades and makes liquidity adjustments to the carrying value of the financial instrument. The Firm measures the liquidity adjustment based on the following factors: (1) the amount of time since the last relevant pricing point; (2) whether there was an actual trade or relevant external quote; and (3) the volatility of the principal risk component of the financial instrument. Costs to exit larger-than-normal market-size risk positions are determined based on the size of the adverse market move that is likely to occur during the period required to bring a position down to a nonconcentrated level. | |
| • | Unobservable parameter valuation adjustments are necessary when positions are valued using internally developed models that use as their basis unobservable parameters – that is, parameters that must be estimated and are, therefore, subject to management judgment. Such positions are normally traded less actively. Examples include certain credit products where parameters such as correlation and recovery rates are unobservable. Unobservable parameter valuation adjustments are applied to mitigate the possibility of error and revision in the estimate of the market price provided by the model. |
The Firm has numerous controls in place intended to ensure that its fair values are appropriate. An
independent model review group reviews the Firm’s valuation models and approves them for use for
specific products. All valuation models within the Firm are subject to this review process. A price
verification group, independent from the risk-taking function, ensures observable market prices and
market-based parameters are used
for valuation wherever possible. For those products with material parameter risk for which
observable market levels do not exist, an independent review of the assumptions made on pricing is
performed. Additional review includes deconstruction of the model valuations for certain structured
instruments into their components and benchmarking valuations, where possible, to similar products;
validating valuation estimates through actual cash settlement; and detailed review and explanation
of recorded gains and losses, which are analyzed daily and over time. Valuation adjustments, which
are also determined by the independent price verification group, are based on established policies
and applied consistently over time. Any changes to the valuation methodology are reviewed by
management to confirm that the changes are justified. As markets and products develop and the
pricing for certain products becomes more or less transparent, the Firm continues to refine its
valuation methodologies. During 2010, no changes were made to the Firm’s valuation models that had,
or are ex-
pected to have, a material impact on the Firm’s Consolidated Balance Sheets or results of
operations.
The methods described above to estimate fair value may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values. Furthermore, while
the Firm believes its valuation methods are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair value at the reporting
date.
Valuation Hierarchy
A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of fair value
measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are defined as follows.
| • | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| • | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| • | Level 3 – one or more inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level
of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used by the Firm to measure instruments
at fair value, including the general classification of such instruments pursuant to the valuation
hierarchy.
Assets
Securities purchased under resale agreements (“resale agreements”) and securities borrowed
To estimate the fair value of resale agreements and securities borrowed transactions, cash flows
are first evaluated taking into consideration any derivative features of the resale agreement and
are then discounted using the appropriate market rates for the applicable maturity. As the inputs
into the valuation are primarily based on readily observable pricing information, such resale
agreements are classified within level 2 of the valuation hierarchy.
Loans and unfunded lending-related commitments
The majority of the Firm’s loans and lending-related commitments are not carried at fair value on a
recurring basis on the Consolidated Balance Sheets, nor are they actively traded.
The fair value of
such loans and lending-related commitments is included in the additional disclosures of fair value
of certain financial instruments required by U.S. GAAP on pages
185–186 of this Note. Loans
| JPMorgan Chase & Co. / 2010 Annual Report | 171 |
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Notes to consolidated financial statements
carried at fair value on a recurring and nonrecurring basis are included in the applicable tables
that follow.
Wholesale
There is no liquid secondary market for most loans and lending-related commitments in the Firm’s
wholesale portfolio. In the limited circumstances where direct
secondary market information –
including pricing of actual market transactions, broker quotations or quoted market prices for
similar instruments – is available (principally for loans in the Firm’s secondary trading
portfolio), such information is used in the determination of fair value. For the remainder of the
portfolio, fair value is estimated using a discounted cash flow (“DCF”) model. In addition to the
characteristics of the underlying loans (including principal, contractual interest rate and
contractual fees), key inputs to the model include interest rates, prepayment rates and credit
spreads. The credit spread input is derived from the cost of credit default swaps (“CDS”) and, as a
result, also incorporates the effects of secondary market liquidity. As many of the Firm’s clients
do not have bonds traded with sufficient liquidity in the public markets to have observable CDS
spreads, the Firm principally develops benchmark credit curves by industry and credit rating to
estimate fair value. Also incorporated into the valuation process are additional adjustments to
account for the difference in loss severity rates between bonds, on which the cost of credit
derivatives is based, and loans as well as loan equivalents (which represent the portion of an
unused commitment expected, based on the Firm’s average portfolio historical experience, to become
outstanding prior to an obligor default). Certain floating rate loans that are not carried on the
balance sheet at fair value are carried at amounts that approximate fair value due to their short
term nature and negligible credit risk (e.g. based on historical experience or collateralization).
The Firm’s loans and unfunded lending-related commitments carried at fair value are classified
within level 2 or 3 of the valuation hierarchy, depending on the level of liquidity and activity in
the markets for a particular product.
Consumer
The only products in the Firm’s consumer loan portfolio with a meaningful level of secondary market
activity in the current economic environment are certain conforming
residential mortgages. These loans are classified as trading assets and carried at fair value on
the Consolidated Balance Sheets. They are predominantly classified within level 2 of the valuation
hierarchy based on the level of market liquidity and activity.
The fair value of the Firm’s other consumer loans (except for credit card receivables) is generally
determined by discounting the loan principal and interest cash flows expected to be collected at a
market observable discount rate, when available. Portfolio-specific factors that a market
participant would consider in determining fair value (e.g., expected lifetime credit losses,
estimated prepayments, servicing costs and market liquidity) are either modeled into the cash flow
projections or incorporated as an adjustment to the discount rate. For products that continue to
be offered in the market, discount rates are derived from market-observable primary origination rates.
Where primary origination rates are not available (i.e., subprime mortgages, subprime home equity
and option adjustable-rate mortgages (“option ARMs”)) the valuation is based on the Firm’s estimate
of a market participant’s required return on equity for similar products (i.e., a hypothetical
origination spread). Estimated lifetime credit losses consider expected and current default rates
for existing portfolios, collateral prices (where applicable) and expectations about changes in the
economic environment (e.g., unemployment rates).
The fair value of credit card receivables is determined using a discounted expected cash flow
methodology. Key estimates and assumptions include: projected interest income and late fee revenue,
funding, servicing, credit costs, and loan payment rates. The projected loan payment rates are used
to determine the estimated life of the credit card loan receivables, which are then discounted
using a risk-appropriate discount rate. The discount rate is derived from the Firm’s estimate of a
market participant’s expected return on credit card receivables.
As the credit card portfolio has a short-term life, an amount equal
to the allowance for loan losses is considered a
reasonable proxy for the credit cost component.
Loans that are not carried on the Consolidated Balance Sheets at fair value are not classified
within the fair value hierarchy.
Mortgage
loans carried at fair value
For certain loans that are expected to be securitized, fair value is estimated using a combination
of observed transaction prices, independent pricing services and relevant broker quotes.
Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship
of recently evidenced market activity to the prices provided from independent pricing services.
When relevant market activity is not occurring or is limited, fair value is estimated by projecting
the expected cash flows and discounting those cash flows at a rate reflective of current market
liquidity. To estimate the projected cash flows of a residential mortgage loan (inclusive of
assumptions of prepayment, default rates and loss severity), specific consideration is given to
both borrower-specific and other market factors, including, but not limited to: the borrower’s FICO
score; the type of collateral supporting the loans; the level of documentation for the loan; and
market-derived expectations for home price appreciation or depreciation in the respective geography
of the borrower. For commercial mortgages, consideration is given to both borrower-specific and
other market factors, including but not limited to: the borrower’s debt-to-service coverage ratio;
the type of commercial property (e.g., retail, office, lodging, multi-family,
etc.); an estimate of the current loan-to-value ratio; and market-derived expectations for property
price appreciation or depreciation in the respective geographic location. In addition, commercial
mortgage loans typically have lock-out periods where the borrower is restricted from prepaying the
loan due to prepayment penalties. These features reduce prepayment risk for commercial mortgages
rela-
| 172 | JPMorgan Chase & Co. / 2010 Annual Report |
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tive to that of residential mortgages. These loans are classified within level 2 or 3 of the
valuation hierarchy, depending on the level of liquidity and activity in the markets for the
particular product.
Securities
Where quoted prices for identical securities are available in an active market, securities are
classified in level 1 of the valuation hierarchy. Level 1 securities include highly liquid
government bonds; mortgage products for which there are quoted prices in active markets such as
U.S. government agency or U.S. government-sponsored enterprise (collectively, “U.S. government
agencies”) markets; pass-through mortgage-backed securities (“MBS”); and exchange-traded equities
(e.g., common and preferred stocks).
If quoted market prices are not available for the specific security, the Firm may estimate the
value of such instruments using a combination of observed transaction prices, independent pricing
services and relevant broker quotes. Consideration is given to the nature of the quotes (e.g.,
indicative or firm) and the relationship of recently evidenced market activity to the prices
provided from independent pricing services. The Firm may also use pricing models or discounted cash
flows. The majority of such instruments are classified within level 2 of the valuation hierarchy;
however, in cases where there is limited activity or less transparency around inputs to the
valuation, securities are classified within level 3 of the valuation hierarchy.
For mortgage-backed securities, where market activity is not occurring or is limited, fair value is
estimated considering the value of the collateral and the specific attributes of the securities
held by the Firm. The value of the collateral pool supporting the securities is analyzed using the
same techniques and factors described above for residential mortgage loans, albeit in a more
aggregated manner across the pool. For example, for residential MBS, factors evaluated may include
average FICO scores, average delinquency rates, average loss severities and prepayment rates, among
other metrics. For commercial MBS, factors evaluated may include average delinquencies, loan or
geographic concentrations, and average debt-service coverage ratios, among other metrics. In
addition, as each securitization vehicle distributes cash in a manner or order that is
predetermined at the inception of the vehicle, the priority in which each particular MBS is
allocated cash flows, and the level of credit enhancement in place to support those cash flows, are
key considerations in deriving the value of MBS. Finally, the risk premium that investors demand
for securitized products in the current market is factored into the valuation. To benchmark its
valuations, the Firm looks to transactions for similar instruments and uses independent pricing
provided by third-party vendors, broker quotes and relevant market indices, such as the ABX index,
as applicable. While none of those sources are solely indicative of fair value, they serve as
directional indicators for the appropriateness of the Firm’s estimates.
For certain collateralized mortgage and debt obligations, asset-backed securities (“ABS”) and
high-yield debt securities, the determination of fair value may require benchmarking to similar
instruments or analyzing default and recovery rates. For cash collateralized debt obligations
(“CDOs”), external price information is not available. Therefore, cash CDOs are valued using
market-standard models, such as Intex, to model the specific collateral composition and cash flow
structure of each deal; key inputs to the model are market spread data for each credit rating,
collateral type and other relevant contractual features. Asset-backed securities are valued based
on external prices or market spread data, using current market assumptions on prepayments and
defaults. For ABS where the external price data is not observable or the limited available data is
opaque, the collateral performance is monitored and considered in the valuation of the security. To
benchmark its valuations, the Firm looks to transactions for similar instruments and uses
independent prices provided by third-party vendors, broker quotes and relevant market indices, such
as the ABX index, as applicable. While none of those sources are solely indicative of fair value,
they serve as directional indicators for the appropriateness of the Firm’s estimates. The majority
of collateralized mortgage and debt obligations, high-yield debt securities and ABS are currently
classified in level 3 of the valuation hierarchy.
Collateralized loan obligations (“CLOs”) are securities backed by corporate loans, and they are
predominantly held in the Firm’s available-for-sale (“AFS”) securities portfolio. For these
securities, external pricing information is not readily available. They are therefore valued using
market-standard models to model the specific collateral composition and cash flow structure of each
deal; key inputs to the model are market spread data for each credit rating, collateral type and
other relevant contractual features. For further discussion, see Note
12 on pages 214–218
of this Annual Report.
Commodities
Commodities inventory is generally carried at the lower of cost or fair value.
The fair value of
commodities inventory is determined primarily using pricing and data derived from the markets on
which the commodities are traded. The majority of commodities inventory is classified within level
1 of the valuation hierarchy.
The Firm also has positions in commodities-based derivatives that can be traded on an exchange or
over-the-counter (“OTC”) and carried at fair value.
The pricing inputs to these derivatives include
forward curves of underlying commodities, basis curves, volatilities, correlations, and
occasionally other model parameters. The valuation of these derivatives is based on calibrating to
market transactions, as well as to independent pricing information from sources such as brokers and
consensus pricing services. Where inputs are historical time series data, they are adjusted for
uncertainty where appropriate. The majority of commodities-based derivatives are classified within
level 2 of the valuation hierarchy.
| JPMorgan Chase & Co. / 2010 Annual Report | 173 |
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Notes to consolidated financial statements
Derivatives
Exchange-traded derivatives valued using quoted prices are classified within level 1 of the
valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus,
the majority of the Firm’s derivative positions are valued using internally developed models that
use as their basis readily observable market parameters – that is, parameters that are actively
quoted and can be validated to external sources, including industry pricing services. Depending on
the types and contractual terms of derivatives, fair value can be modeled using a series of
techniques, such as the Black-Scholes option pricing model, simulation models or a combination of
various models, which are consistently applied. Where derivative products have been established for
some time, the Firm uses models that are widely accepted in the financial services industry. These
models reflect the contractual terms of the derivatives, including the period to maturity, and
market-based parameters such as interest rates, volatility, and the credit quality of the
counterparty. Further, many of these models do not contain a high level of subjectivity, as the
methodologies used in the models do not require significant judgment, and inputs to the models are
readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate
swaps, option contracts and CDS. Such instruments are generally classified within level 2 of the
valuation hierarchy.
Derivatives that are valued based on models with significant unobservable market parameters and
that are normally traded less actively, have trade activity that is one way, and/or are traded in
less-developed markets are classified within level 3 of the valuation hierarchy. Level 3
derivatives include, for example, CDS referenced to certain MBS, certain types of CDO transactions,
options on baskets of single-name stocks, and callable exotic interest rate options.
Other complex products, such as those sensitive to correlation between two or more underlying
parameters, also fall within level 3 of the valuation hierarchy, and include structured credit
derivatives which are illiquid and non-standard in nature (e.g., synthetic CDOs collateralized by a
portfolio of credit default swaps “CDS”). For most CDO transactions, while inputs such as CDS
spreads may be observable, the correlation between the underlying debt instruments is unobservable.
Correlation levels are modeled on a transaction basis and calibrated to liquid benchmark tranche
indices. For all structured credit derivatives, actual transactions, where available, are used
regularly to recalibrate all unobservable parameters.
Correlation sensitivity is also material to the overall valuation of options on baskets of
single-name stocks; the valuation of these baskets is typically not observable due to their
non-standardized structuring. Correlation for products such as these is typically estimated based
on an observable basket of stocks and then adjusted to reflect the differences between the
underlying equities.
For callable exotic interest rate options, while most of the assumptions in the valuation can be
observed in active markets (e.g., interest rates and volatility), the callable option transaction
flow is essentially one-way, and as such, price observability is limited. As pricing information is
limited, assumptions are based on the dynamics of the underlying markets (e.g., the interest rate
markets) including the range and possible outcomes of the applicable inputs. In addition, the
models used are
calibrated, as relevant, to liquid benchmarks, and valuation is tested against monthly independent
pricing services and actual transactions.
Mortgage servicing rights and certain retained interests in securitizations
Mortgage servicing rights (“MSRs”) and certain retained interests from securitization activities do
not trade in an active, open market with readily observable prices. Accordingly, the Firm estimates
the fair value of MSRs and certain other retained interests in securitizations using DCF models.
| • | For MSRs, the Firm uses an option-adjusted spread (“OAS”) valuation model in conjunction with the Firm’s proprietary prepayment model to project MSR cash flows over multiple interest rate scenarios; these scenarios are then discounted at risk-adjusted rates to estimate the fair value of the MSRs. The OAS model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Firm reassesses and periodically adjusts the underlying inputs and assumptions used in the OAS model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. Due to the nature of the valuation inputs, MSRs are classified within level 3 of the valuation hierarchy. | |
| • | For certain retained interests in securitizations, the Firm estimates the fair value for those retained interests by calculating the present value of future expected cash flows using modeling techniques. Such models incorporate management’s best estimates of key variables, such as expected credit losses, prepayment speeds and the appropriate discount rates, considering the risk involved. Changes in the assumptions used may have a significant impact on the Firm’s valuation of retained interests, and such interests are therefore typically classified within level 3 of the valuation hierarchy. |
For both MSRs and certain other retained interests in securitizations, the Firm compares its fair
value estimates and assumptions to observable market data where available and to recent market
activity and actual portfolio experience. For further discussion of the most significant
assumptions used to value retained interests and MSRs, as well as the applicable stress tests for
those assumptions, see Note 16 on pages 244–259, and Note 17 on
pages 260–263 of this Annual
Report.
| 174 | JPMorgan Chase & Co. / 2010 Annual Report |
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Private equity investments
The valuation of nonpublic private equity investments, which are held primarily by the Private
Equity business within the Corporate/Private Equity line of business, requires significant
management judgment due to the absence of quoted market prices, the inherent lack of liquidity and
the long-term nature of such assets.
As such, nonpublic private equity investments are valued
initially based on cost. Each quarter, valuations are reviewed using available and relevant market
data to determine if the carrying value of these investments should be adjusted.
Such market data primarily include observations of
the trading multiples of public companies considered comparable
to the private companies being valued and the operating performance of the
underlying portfolio company, including its historical and projected net income and its earnings
before interest, taxes, depreciation and amortization (“EBITDA”). Valuations are adjusted to
account for company-specific issues, the lack of liquidity inherent in a nonpublic investment, and
the fact that comparable public companies are not identical to the companies being valued. In
addition, a variety of additional factors are reviewed by management, including, but not limited
to, financing and sales transactions with third parties, future expectations of the particular
investment, changes in market outlook and the third-party financing environment. Nonpublic private
equity investments are included in level 3 of the valuation hierarchy.
Private equity investments also include publicly held equity investments, generally obtained
through the initial public offering of privately held equity investments.
Investments in securities
of publicly held companies that trade in liquid markets are marked to market at the quoted public
value less adjustments for regulatory or contractual sales restrictions.
Discounts for restrictions
are quantified by analyzing the length of the restriction period and the volatility of the equity
security. Publicly held investments are predominantly classified in level 2 of the valuation
hierarchy.
Other fund investments
The Firm holds investments in mutual/collective investment funds, private equity funds, hedge funds
and real estate funds. Where the funds produce a daily net asset value (“NAV”) that is validated by
a sufficient level of observable activity (purchases and sales at NAV), the NAV is used to value
the fund investment and it is classified in level 1 of the valuation hierarchy. Where adjustments
to the NAV are required, for example, with respect to interests in funds subject to restrictions on
redemption (such as lock-up periods or withdrawal limitations) and/or observable activity for the
fund investment is limited, investments are classified within level 2 or 3 of the valuation
hierarchy.
Liabilities
Securities sold under repurchase agreements (“repurchase agreements”)
To estimate the fair value of repurchase agreements, cash flows are first evaluated taking into
consideration any derivative features of the repurchase agreements and are then discounted using
the appropriate market rates for the applicable maturity. Generally, for these types of agreements,
there is a requirement that collateral be maintained with a market value equal to, or in excess of,
the principal amount loaned; as a result, there would be no adjustment, or an immaterial
adjustment, to reflect the credit quality of the Firm (i.e., DVA) related to these agreements. As
the inputs into the valuation are primarily based on observable pricing information, repurchase
agreements are classified within level 2 of the valuation hierarchy.
Beneficial interests issued by consolidated VIEs
The fair value of beneficial interests issued by consolidated VIEs (“beneficial interests”) is
estimated based on the fair value of the underlying assets held by the VIEs. The valuation of
beneficial interests does not include an adjustment to reflect the credit quality of the Firm, as
the holders of these beneficial interests do not have recourse to the general credit of JPMorgan
Chase. Where the inputs into the valuation are based on observable market pricing information, the
beneficial interests are classified within level 2 of the valuation hierarchy. Where significant
inputs into the valuation are unobservable, the beneficial interests are classified within level 3
of the valuation hierarchy.
Deposits, other borrowed funds and long-term debt
To estimate the fair value of long-term debt, cash flows are discounted using the appropriate
market rates for the applicable maturities, with an adjustment to reflect the credit quality of the
Firm (i.e., the DVA). Included within deposits, other borrowed funds and long-term debt are
structured notes issued by the Firm that are financial instruments containing embedded derivatives.
In addition to the above, the estimation of the fair value of structured notes takes into
consideration any derivative features. Where the inputs into the valuation are primarily based on
observable market prices, the structured notes are classified within level 2 of the valuation
hierarchy. Where significant inputs are unobservable, the structured notes are classified within
level 3 of the valuation hierarchy.
| JPMorgan Chase & Co. / 2010 Annual Report | 175 |
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Notes to consolidated financial statements
The following tables present assets and liabilities measured at fair value as of December 31, 2010
and 2009, by major product category and by the fair value hierarchy (as described above).
Assets and liabilities measured at fair value on a recurring basis
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2010 (in millions) | Level 1 (i) | Level 2 (i) | Level 3 (i) | adjustments | fair value | |||||||||||||||
|
Federal funds sold and securities purchased under resale agreements
|
$ | — | $ | 20,299 | $ | — | $ | — | $ | 20,299 | ||||||||||
|
Securities borrowed
|
— | 13,961 | — | — | 13,961 | |||||||||||||||
|
|
||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
36,813 | 10,738 | 174 | — | 47,725 | |||||||||||||||
|
Residential
– nonagency
|
— | 2,807 | 687 | — | 3,494 | |||||||||||||||
|
Commercial – nonagency
|
— | 1,093 | 2,069 | — | 3,162 | |||||||||||||||
|
Total mortgage-backed securities
|
36,813 | 14,638 | 2,930 | — | 54,381 | |||||||||||||||
|
U.S. Treasury and government
agencies
(a)
|
12,863 | 9,026 | — | — | 21,889 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
— | 11,715 | 2,257 | — | 13,972 | |||||||||||||||
|
Certificates of deposit, bankers’ acceptances and
commercial paper
|
— | 3,248 | — | — | 3,248 | |||||||||||||||
|
Non-U.S. government debt securities
|
31,127 | 38,482 | 697 | — | 70,306 | |||||||||||||||
|
Corporate debt securities
|
— | 42,280 | 4,946 | — | 47,226 | |||||||||||||||
|
Loans
(b)
|
— | 21,736 | 13,144 | — | 34,880 | |||||||||||||||
|
Asset-backed securities
|
— | 2,743 | 7,965 | — | 10,708 | |||||||||||||||
|
Total debt instruments
|
80,803 | 143,868 | 31,939 | — | 256,610 | |||||||||||||||
|
Equity securities
|
124,400 | 3,153 | 1,685 | — | 129,238 | |||||||||||||||
|
Physical commodities
(c)
|
18,327 | 2,708 | — | — | 21,035 | |||||||||||||||
|
Other
|
— | 2,275 | 253 | — | 2,528 | |||||||||||||||
|
Total debt and equity
instruments
(d)
|
223,530 | 152,004 | 33,877 | — | 409,411 | |||||||||||||||
|
Derivative receivables:
|
||||||||||||||||||||
|
Interest rate
|
2,278 | 1,120,282 | 5,422 | (1,095,427 | ) | 32,555 | ||||||||||||||
|
Credit
(e)
|
— | 111,827 | 17,902 | (122,004 | ) | 7,725 | ||||||||||||||
|
Foreign exchange
|
1,121 | 163,114 | 4,236 | (142,613 | ) | 25,858 | ||||||||||||||
|
Equity
|
30 | 38,041 | 5,562 | (39,429 | ) | 4,204 | ||||||||||||||
|
Commodity
|
1,324 | 56,076 | 2,197 | (49,458 | ) | 10,139 | ||||||||||||||
|
Total derivative receivables
(f)
|
4,753 | 1,489,340 | 35,319 | (1,448,931 | ) | 80,481 | ||||||||||||||
|
Total trading assets
|
228,283 | 1,641,344 | 69,196 | (1,448,931 | ) | 489,892 | ||||||||||||||
|
|
||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
104,736 | 15,490 | — | — | 120,226 | |||||||||||||||
|
Residential – nonagency
|
— | 48,969 | 5 | — | 48,974 | |||||||||||||||
|
Commercial – nonagency
|
— | 5,403 | 251 | — | 5,654 | |||||||||||||||
|
Total mortgage-backed securities
|
104,736 | 69,862 | 256 | — | 174,854 | |||||||||||||||
|
U.S. Treasury and government
agencies
(a)
|
522 | 10,826 | — | — | 11,348 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
31 | 11,272 | 256 | — | 11,559 | |||||||||||||||
|
Certificates of deposit
|
6 | 3,641 | — | — | 3,647 | |||||||||||||||
|
Non-U.S. government debt securities
|
13,107 | 7,670 | — | — | 20,777 | |||||||||||||||
|
Corporate debt securities
|
1 | 61,793 | — | — | 61,794 | |||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||
|
Credit card receivables
|
— | 7,608 | — | — | 7,608 | |||||||||||||||
|
Collateralized loan obligations
|
— | 128 | 13,470 | — | 13,598 | |||||||||||||||
|
Other
|
— | 8,777 | 305 | — | 9,082 | |||||||||||||||
|
Equity securities
|
1,998 | 53 | — | — | 2,051 | |||||||||||||||
|
Total available-for-sale securities
|
120,401 | 181,630 | 14,287 | — | 316,318 | |||||||||||||||
|
Loans
|
— | 510 | 1,466 | — | 1,976 | |||||||||||||||
|
Mortgage servicing rights
|
— | — | 13,649 | — | 13,649 | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Private equity investments
(g)
|
49 | 826 | 7,862 | — | 8,737 | |||||||||||||||
|
All other
|
5,093 | 192 | 4,179 | — | 9,464 | |||||||||||||||
|
Total other assets
|
5,142 | 1,018 | 12,041 | — | 18,201 | |||||||||||||||
|
Total assets measured at fair value on a
recurring basis
(h)
|
$ | 353,826 | $ | 1,858,762 | $ | 110,639 | $ | (1,448,931 | ) | $ | 874,296 | |||||||||
| 176 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2010 (in millions) | Level 1 (i) | Level 2 (i) | Level 3 (i) | adjustments | fair value | |||||||||||||||
|
Deposits
|
$ | — | $ | 3,736 | $ | 633 | $ | — | $ | 4,369 | ||||||||||
|
Federal funds purchased and
securities loaned or sold under
repurchase agreements
|
— | 4,060 | — | — | 4,060 | |||||||||||||||
|
Other borrowed funds
|
— | 8,959 | 972 | — | 9,931 | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||
|
Debt and equity
instruments
(d)
|
58,468 | 18,425 | 54 | — | 76,947 | |||||||||||||||
|
Derivative payables:
|
||||||||||||||||||||
|
Interest rate
|
2,625 | 1,085,233 | 2,586 | (1,070,057 | ) | 20,387 | ||||||||||||||
|
Credit
(e)
|
— | 112,545 | 12,516 | (119,923 | ) | 5,138 | ||||||||||||||
|
Foreign exchange
|
972 | 158,908 | 4,850 | (139,715 | ) | 25,015 | ||||||||||||||
|
Equity
|
22 | 39,046 | 7,331 | (35,949 | ) | 10,450 | ||||||||||||||
|
Commodity
|
862 | 54,611 | 3,002 | (50,246 | ) | 8,229 | ||||||||||||||
|
Total derivative
payables
(f)
|
4,481 | 1,450,343 | 30,285 | (1,415,890 | ) | 69,219 | ||||||||||||||
|
Total trading liabilities
|
62,949 | 1,468,768 | 30,339 | (1,415,890 | ) | 146,166 | ||||||||||||||
|
Accounts payable and other liabilities
|
— | — | 236 | — | 236 | |||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
— | 622 | 873 | — | 1,495 | |||||||||||||||
|
Long-term debt
|
— | 25,795 | 13,044 | — | 38,839 | |||||||||||||||
|
Total liabilities measured at fair
value on a recurring basis
|
$ | 62,949 | $ | 1,511,940 | $ | 46,097 | $ | (1,415,890 | ) | $ | 205,096 | |||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 177 |
Table of Contents
Notes to consolidated financial statements
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2009 (in millions) | Level 1 | Level 2 | Level 3 | adjustments | fair value | |||||||||||||||
|
Federal funds sold and securities purchased under
resale agreements
|
$ | — | $ | 20,536 | $ | — | $ | — | $ | 20,536 | ||||||||||
|
Securities borrowed
|
— | 7,032 | — | — | 7,032 | |||||||||||||||
|
Trading assets:
|
||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
33,092 | 8,373 | 260 | — | 41,725 | |||||||||||||||
|
Residential – nonagency
|
— | 2,284 | 1,115 | — | 3,399 | |||||||||||||||
|
Commercial – nonagency
|
— | 537 | 1,770 | — | 2,307 | |||||||||||||||
|
Total mortgage-backed securities
|
33,092 | 11,194 | 3,145 | — | 47,431 | |||||||||||||||
|
U.S. Treasury and government
agencies
(a)
|
13,701 | 9,559 | — | — | 23,260 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
— | 5,681 | 1,971 | — | 7,652 | |||||||||||||||
|
Certificates of deposit, bankers’ acceptances and
commercial paper
|
— | 5,419 | — | — | 5,419 | |||||||||||||||
|
Non-U.S. government debt securities
|
25,684 | 32,487 | 734 | — | 58,905 | |||||||||||||||
|
Corporate debt securities
|
— | 48,754 | 5,241 | — | 53,995 | |||||||||||||||
|
Loans
(b)
|
— | 18,330 | 13,218 | — | 31,548 | |||||||||||||||
|
Asset-backed securities
|
— | 1,428 | 7,975 | — | 9,403 | |||||||||||||||
|
Total debt instruments
|
72,477 | 132,852 | 32,284 | — | 237,613 | |||||||||||||||
|
Equity securities
|
75,053 | 3,450 | 1,956 | — | 80,459 | |||||||||||||||
|
Physical commodities
(c)
|
9,450 | 586 | — | — | 10,036 | |||||||||||||||
|
Other
|
— | 1,884 | 926 | — | 2,810 | |||||||||||||||
|
Total debt and equity instruments
(d)
|
156,980 | 138,772 | 35,166 | — | 330,918 | |||||||||||||||
|
Derivative receivables
(e)(f)
|
2,344 | 1,516,490 | 46,684 | (1,485,308 | ) | 80,210 | ||||||||||||||
|
Total trading assets
|
159,324 | 1,655,262 | 81,850 | (1,485,308 | ) | 411,128 | ||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
158,957 | 8,941 | — | — | 167,898 | |||||||||||||||
|
Residential – nonagency
|
— | 14,773 | 25 | — | 14,798 | |||||||||||||||
|
Commercial – nonagency
|
— | 4,590 | — | — | 4,590 | |||||||||||||||
|
Total mortgage-backed securities
|
158,957 | 28,304 | 25 | — | 187,286 | |||||||||||||||
|
U.S. Treasury and government
agencies
(a)
|
405 | 29,592 | — | — | 29,997 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
— | 6,188 | 349 | — | 6,537 | |||||||||||||||
|
Certificates of deposit
|
— | 2,650 | — | — | 2,650 | |||||||||||||||
|
Non-U.S. government debt securities
|
5,506 | 18,997 | — | — | 24,503 | |||||||||||||||
|
Corporate debt securities
|
1 | 62,007 | — | — | 62,008 | |||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||
|
Credit card receivables
|
— | 25,742 | — | — | 25,742 | |||||||||||||||
|
Collateralized debt and loan obligations
|
— | 5 | 12,144 | — | 12,149 | |||||||||||||||
|
Other
|
— | 6,206 | 588 | — | 6,794 | |||||||||||||||
|
Equity securities
|
2,466 | 146 | 87 | — | 2,699 | |||||||||||||||
|
Total available-for-sale securities
|
167,335 | 179,837 | 13,193 | — | 360,365 | |||||||||||||||
|
Loans
|
— | 374 | 990 | — | 1,364 | |||||||||||||||
|
Mortgage servicing rights
|
— | — | 15,531 | — | 15,531 | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Private equity investments
(g)
|
165 | 597 | 6,563 | — | 7,325 | |||||||||||||||
|
All other
(j)
|
7,241 | 90 | 9,521 | — | 16,852 | |||||||||||||||
|
Total other assets
|
7,406 | 687 | 16,084 | — | 24,177 | |||||||||||||||
|
Total assets measured at fair value on a recurring
basis
(h)
|
$ | 334,065 | $ | 1,863,728 | $ | 127,648 | $ | (1,485,308 | ) | $ | 840,133 | |||||||||
| 178 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| December 31, 2009 (in millions) | Level 1 | Level 2 | Level 3 | adjustments | fair value | |||||||||||||||
|
Deposits
|
$ | — | $ | 3,979 | $ | 476 | $ | — | $ | 4,455 | ||||||||||
|
Federal funds purchased and
securities loaned or sold under
repurchase agreements
|
— | 3,396 | — | — | 3,396 | |||||||||||||||
|
Other borrowed funds
|
— | 5,095 | 542 | — | 5,637 | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||
|
Debt and equity
instruments
(d)
|
50,577 | 14,359 | 10 | — | 64,946 | |||||||||||||||
|
Derivative payables
(e)(f)
|
2,038 | 1,481,813 | 35,332 | (1,459,058 | ) | 60,125 | ||||||||||||||
|
Total trading liabilities
|
52,615 | 1,496,172 | 35,342 | (1,459,058 | ) | 125,071 | ||||||||||||||
|
Accounts payable and other liabilities
|
— | 2 | 355 | — | 357 | |||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
— | 785 | 625 | — | 1,410 | |||||||||||||||
|
Long-term debt
|
— | 30,685 | 18,287 | — | 48,972 | |||||||||||||||
|
Total liabilities measured at fair
value on a recurring basis
|
$ | 52,615 | $ | 1,540,114 | $ | 55,627 | $ | (1,459,058 | ) | $ | 189,298 | |||||||||
|
(a)
|
At December 31, 2010 and 2009, included total U.S. government-sponsored enterprise obligations of $137.3 billion and $195.8 billion respectively, which were predominantly mortgage-related. | |
|
(b)
|
At December 31, 2010 and 2009, included within trading loans were $22.7 billion and $20.7 billion, respectively, of residential first-lien mortgages and $2.6 billion and $2.7 billion, respectively, of commercial first-lien mortgages. Residential mortgage loans include conforming mortgage loans originated with the intent to sell to U.S. government agencies of $13.1 billion and $11.1 billion, respectively, and reverse mortgages of $4.0 billion and $4.5 billion, respectively. | |
|
(c)
|
Physical commodities inventories are generally accounted for at the lower of cost or fair value. | |
|
(d)
|
Balances reflect the reduction of securities owned (long positions) by the amount of securities sold but not yet purchased (short positions) when the long and short positions have identical Committee on Uniform Security Identification Procedures (“CUSIPs”). | |
|
(e)
|
The level 3 amounts for derivative receivables and derivative payables related to credit primarily include structured credit derivative instruments. For further information on the classification of instruments within the valuation hierarchy, see pages 171–175 of this Note. | |
|
(f)
|
As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of an asset or liability. Therefore, the balances reported in the fair value hierarchy table above are gross of any counterparty netting adjustments. However, if the Firm were to net such balances within level 3, the reduction in the level 3 derivative receivable and derivative payable balances would be $12.7 billion and $16.0 billion at December 31, 2010 and 2009, respectively, exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances. | |
|
(g)
|
Private equity instruments represent investments within the Corporate/Private Equity line of business. The cost basis of the private equity investment portfolio totaled $10.0 billion and $8.8 billion at December 31, 2010 and 2009, respectively. | |
|
(h)
|
At December 31, 2010 and 2009, balances included investments valued at net asset value of $12.1 billion and $16.8 billion, respectively, of which $5.9 billion and $9.0 billion, respectively, were classified in level 1, $2.0 billion and $3.2 billion, respectively, in level 2 and $4.2 billion and $4.6 billion in level 3. | |
|
(i)
|
For the year ended December 31, 2010, there were no significant transfers between levels 1 and 2. Transfers from level 3 into level 2 included $1.2 billion of trading loans due to increased price transparency. There were no significant transfers into level 3. | |
|
(j)
|
Included assets within accrued interest receivable and other assets at December 31, 2009. |
Changes in level 3 recurring fair value measurements
The following tables include a rollforward of the balance sheet amounts (including changes in fair
value) for financial instruments classified by the Firm within level 3 of the fair value hierarchy
for the years ended December 31, 2010, 2009 and 2008. When a determination is made to classify a
financial instrument within level 3, the determination is based on the significance of the
unobservable parameters to the overall fair value measurement. However, level 3 financial
instruments typically include, in addition to the unobservable or level 3 components, observable
components (that is, components that are actively quoted and can be validated to external sources);
accordingly, the gains and losses in the table
below include changes in fair value due in part to observable factors that are part of the valuation methodology.
Also, the Firm risk-manages the observable components of level 3 financial instruments using securities and
derivative positions that are classified within level 1 or 2 of the fair value hierarchy; as these
level 1 and level 2 risk management instruments are not included below, the gains or losses in the
following tables do not reflect the effect of the Firm’s risk management activities related to such
level 3 instruments.
| JPMorgan Chase & Co. / 2010 Annual Report | 179 |
Table of Contents
Notes to consolidated financial statements
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| gains/ | ||||||||||||||||||||||||
| (losses) | ||||||||||||||||||||||||
| Fair value measurements using significant unobservable inputs | related to | |||||||||||||||||||||||
| Fair | Total | Fair | financial | |||||||||||||||||||||
| Value | realized/ | Purchases, | Transfers | value | instruments | |||||||||||||||||||
| Year ended | at | unrealized | issuances | into and/or | at | held at | ||||||||||||||||||
| December 31, 2010 | January 1, | gains/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2010 | (losses) | net | level 3 (e) | 2010 | 2010 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 260 | $ | 24 | $ | (107 | ) | $ | (3 | ) | $ | 174 | $ | (31 | ) | |||||||||
|
Residential – nonagency
|
1,115 | 178 | (564 | ) | (42 | ) | 687 | 110 | ||||||||||||||||
|
Commercial – nonagency
|
1,770 | 230 | (33 | ) | 102 | 2,069 | 130 | |||||||||||||||||
|
Total mortgage-backed
securities
|
3,145 | 432 | (704 | ) | 57 | 2,930 | 209 | |||||||||||||||||
|
Obligations of U.S.
states and municipalities
|
1,971 | 2 | 142 | 142 | 2,257 | (30 | ) | |||||||||||||||||
|
Non-U.S. government debt
securities
|
734 | (132 | ) | 140 | (45 | ) | 697 | (105 | ) | |||||||||||||||
|
Corporate debt securities
|
5,241 | (325 | ) | 115 | (85 | ) | 4,946 | 28 | ||||||||||||||||
|
Loans
|
13,218 | (40 | ) | 1,296 | (1,330 | ) | 13,144 | (385 | ) | |||||||||||||||
|
Asset-backed securities
|
7,975 | 333 | (354 | ) | 11 | 7,965 | 292 | |||||||||||||||||
|
Total debt instruments
|
32,284 | 270 | 635 | (1,250 | ) | 31,939 | 9 | |||||||||||||||||
|
Equity securities
|
1,956 | 133 | (351 | ) | (53 | ) | 1,685 | 199 | ||||||||||||||||
|
Other
|
926 | 10 | (762 | ) | 79 | 253 | 98 | |||||||||||||||||
|
Total debt and equity
instruments
|
35,166 | 413 | (a) | (478 | ) | (1,224 | ) | 33,877 | 306 | (a) | ||||||||||||||
|
Net derivative
receivables:
|
||||||||||||||||||||||||
|
Interest rate
|
2,040 | 3,057 | (2,520 | ) | 259 | 2,836 | 487 | |||||||||||||||||
|
Credit
|
10,350 | (1,757 | ) | (3,102 | ) | (105 | ) | 5,386 | (1,048 | ) | ||||||||||||||
|
Foreign exchange
|
1,082 | (913 | ) | (434 | ) | (349 | ) | (614 | ) | (464 | ) | |||||||||||||
|
Equity
|
(1,791 | ) | 7 | (121 | ) | 136 | (1,769 | ) | (11 | ) | ||||||||||||||
|
Commodity
|
(329 | ) | (700 | ) | 134 | 90 | (805 | ) | (76 | ) | ||||||||||||||
|
Total net derivative
receivables
|
11,352 | (306 | ) (a) | (6,043 | ) | 31 | 5,034 | (1,112 | ) (a) | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||
|
Asset-backed securities
|
12,732 | (146 | ) | 1,189 | — | 13,775 | (129 | ) | ||||||||||||||||
|
Other
|
461 | (49 | ) | 37 | 63 | 512 | 18 | |||||||||||||||||
|
Total available-for-sale
securities
|
13,193 | (195 | ) (b) | 1,226 | 63 | 14,287 | (111 | ) (b) | ||||||||||||||||
|
Loans
|
990 | 145 | (a) | 323 | 8 | 1,466 | 37 | (a) | ||||||||||||||||
|
Mortgage servicing rights
|
15,531 | (2,268 | ) (c) | 386 | — | 13,649 | (2,268 | ) (c) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,563 | 1,038 | (a) | 715 | (454 | ) | 7,862 | 688 | (a) | |||||||||||||||
|
All other
|
9,521 | (113 | ) (d) | (5,132 | ) | (97 | ) | 4,179 | 37 | (d) | ||||||||||||||
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| (gains)/ | ||||||||||||||||||||||||
| losses | ||||||||||||||||||||||||
| Fair value measurements using significant unobservable inputs | related to | |||||||||||||||||||||||
| Fair | Total | Fair | financial | |||||||||||||||||||||
| value | realized/ | Purchases, | Transfers | value | instruments | |||||||||||||||||||
| Year ended | at | unrealized | issuances | into and/or | at | held at | ||||||||||||||||||
| December 31, 2010 | January 1, | (gains)/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2010 | losses | net | level 3 (e) | 2010 | 2010 | ||||||||||||||||||
|
Liabilities
(f)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 476 | $ | 54 | (a) | $ | (226 | ) | $ | 329 | $ | 633 | $ | (77 | ) (a) | |||||||||
|
Other borrowed funds
|
542 | (123 | ) (a) | 795 | (242 | ) | 972 | 445 | (a) | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity
instruments
|
10 | 2 | (a) | 19 | 23 | 54 | — | (a) | ||||||||||||||||
|
Accounts payable
and other
liabilities
|
355 | (138 | ) (d) | 19 | — | 236 | 37 | (d) | ||||||||||||||||
|
Beneficial
interests issued by
consolidated VIEs
|
625 | (7 | ) (a) | 87 | 168 | 873 | (76 | ) (a) | ||||||||||||||||
|
Long-term debt
|
18,287 | (532 | ) (a) | (4,796 | ) | 85 | 13,044 | 662 | (a) | |||||||||||||||
| 180 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| gains/ | ||||||||||||||||||||||||
| (losses) | ||||||||||||||||||||||||
| Fair value measurements using significant unobservable inputs | related to | |||||||||||||||||||||||
| Total | financial | |||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | Fair | instruments | |||||||||||||||||||
| Year ended | value, | unrealized | issuances | into and/or | value, | held at | ||||||||||||||||||
| December 31, 2009 | January 1, | gains/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2009 | (losses) | net | level 3 (e) | 2009 | 2009 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 163 | $ | (38 | ) | $ | 62 | $ | 73 | $ | 260 | $ | (38 | ) | ||||||||||
|
Residential – nonagency
|
3,339 | (782 | ) | (245 | ) | (1,197 | ) | 1,115 | (871 | ) | ||||||||||||||
|
Commercial – nonagency
|
2,487 | (242 | ) | (325 | ) | (150 | ) | 1,770 | (313 | ) | ||||||||||||||
|
Total mortgage-backed
securities
|
5,989 | (1,062 | ) | (508 | ) | (1,274 | ) | 3,145 | (1,222 | ) | ||||||||||||||
|
Obligations of U.S.
states and municipalities
|
2,641 | (22 | ) | (648 | ) | — | 1,971 | (123 | ) | |||||||||||||||
|
Non-U.S. government debt
securities
|
707 | 38 | (75 | ) | 64 | 734 | 34 | |||||||||||||||||
|
Corporate debt securities
|
5,280 | 38 | (3,416 | ) | 3,339 | 5,241 | (72 | ) | ||||||||||||||||
|
Loans
|
17,091 | (871 | ) | (3,497 | ) | 495 | 13,218 | (1,167 | ) | |||||||||||||||
|
Asset-backed securities
|
7,106 | 1,436 | (378 | ) | (189 | ) | 7,975 | 734 | ||||||||||||||||
|
Total debt instruments
|
38,814 | (443 | ) | (8,522 | ) | 2,435 | 32,284 | (1,816 | ) | |||||||||||||||
|
Equity securities
|
1,380 | (149 | ) | (512 | ) | 1,237 | 1,956 | (51 | ) | |||||||||||||||
|
Other
|
1,226 | (79 | ) | (253 | ) | 32 | 926 | (119 | ) | |||||||||||||||
|
Total debt and equity
instruments
|
41,420 | (671 | ) (a) | (9,287 | ) | 3,704 | 35,166 | (1,986 | ) (a) | |||||||||||||||
|
Total net derivative
receivables
|
9,507 | (11,406 | ) (a) | (3,448 | ) | 16,699 | 11,352 | (10,835 | ) (a) | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||
|
Asset-backed securities
|
11,447 | (2 | ) | 1,112 | 175 | 12,732 | (48 | ) | ||||||||||||||||
|
Other
|
944 | (269 | ) | 302 | (516 | ) | 461 | 43 | ||||||||||||||||
|
Total available-for-sale
securities
|
12,391 | (271 | ) (b) | 1,414 | (341 | ) | 13,193 | (5 | ) (b) | |||||||||||||||
|
Loans
|
2,667 | (448 | ) (a) | (1,906 | ) | 677 | 990 | (488 | ) (a) | |||||||||||||||
|
Mortgage servicing rights
|
9,403 | 5,807 | (c) | 321 | — | 15,531 | 5,807 | (c) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,369 | (407 | ) (a) | 582 | 19 | 6,563 | (369 | ) (a) | ||||||||||||||||
|
All other
(g)
|
8,114 | (676 | ) (d) | 2,439 | (356 | ) | 9,521 | (612 | ) (d) | |||||||||||||||
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| (gains)/ | ||||||||||||||||||||||||
| losses | ||||||||||||||||||||||||
| Fair value measurements using significant unobservable inputs | related to | |||||||||||||||||||||||
| Fair | Total | financial | ||||||||||||||||||||||
| value | realized/ | Purchases, | Transfers | instruments | ||||||||||||||||||||
| Year ended | at | unrealized | issuances | into and/or | Fair value at | held at | ||||||||||||||||||
| December 31, 2009 | January 1, | (gains)/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2009 | losses | net | level 3 (e) | 2009 | 2009 | ||||||||||||||||||
|
Liabilities
(f)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 1,235 | $ | 47 | (a) | $ | (870 | ) | $ | 64 | $ | 476 | $ | (36 | ) (a) | |||||||||
|
Other borrowed funds
|
101 | (73 | ) (a) | 621 | (107 | ) | 542 | 9 | (a) | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity
instruments
|
288 | 64 | (a) | (339 | ) | (3 | ) | 10 | 12 | (a) | ||||||||||||||
|
Accounts payable
and other
liabilities
|
— | (55 | ) (a) | 410 | — | 355 | (29 | ) (a) | ||||||||||||||||
|
Beneficial
interests issued by
consolidated VIEs
|
— | 344 | (a) | (598 | ) | 879 | 625 | 327 | (a) | |||||||||||||||
|
Long-term debt
|
16,548 | 1,367 | (a) | (2,738 | ) | 3,110 | 18,287 | 1,728 | (a) | |||||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 181 |
Table of Contents
Notes to consolidated financial statements
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| gains/ | ||||||||||||||||||||||||
| (losses) | ||||||||||||||||||||||||
| Fair value measurements using significant unobservable inputs | related to | |||||||||||||||||||||||
| Total | Fair | financial | ||||||||||||||||||||||
| Fair | realized/ | Purchases, | Transfers | value | instruments | |||||||||||||||||||
| Year ended | value at | unrealized | issuances | into and/or | at | held at | ||||||||||||||||||
| December 31, 2008 | January 1, | gains/ | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2008 | (losses) | net | level 3 (e) | 2008 | 2008 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
$ | 24,066 | $ | (12,805 | ) (a) | $ | 6,201 | $ | 23,958 | $ | 41,420 | $ | (9,860 | ) (a) | ||||||||||
|
Total net derivative receivables
|
633 | 4,556 | (a) | 2,290 | 2,028 | 9,507 | 1,814 | (a) | ||||||||||||||||
|
Available-for-sale securities
|
101 | (1,232 | ) (b) | 3,772 | 9,750 | 12,391 | (422 | ) (b) | ||||||||||||||||
|
Loans
|
8,380 | (1,547 | ) (a) | 12 | (4,178 | ) | 2,667 | (1,324 | ) (a) | |||||||||||||||
|
Mortgage servicing rights
|
8,632 | (6,933 | ) (c) | 7,704 | — | 9,403 | (6,933 | ) (c) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,763 | (638 | ) (a) | 320 | (76 | ) | 6,369 | (1,089 | ) (a) | |||||||||||||||
|
All other
(g)
|
5,978 | (940 | ) (d) | 2,787 | 289 | 8,114 | (753 | ) (d) | ||||||||||||||||
| Change in | ||||||||||||||||||||||||
| unrealized | ||||||||||||||||||||||||
| (gains)/ | ||||||||||||||||||||||||
| losses | ||||||||||||||||||||||||
| Fair value measurements using significant unobservable inputs | related to | |||||||||||||||||||||||
| Fair | Fair | financial | ||||||||||||||||||||||
| value | Total | Purchases, | Transfers | Value | instruments | |||||||||||||||||||
| Year ended | at | realized/ | issuances | into and/or | at | held at | ||||||||||||||||||
| December 31, 2008 | January 1, | unrealized | settlements, | out of | December 31, | December 31, | ||||||||||||||||||
| (in millions) | 2008 | (gains)/losses | net | level 3 (e) | 2008 | 2008 | ||||||||||||||||||
|
Liabilities
(f)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 1,161 | $ | (57 | ) (a) | $ | 79 | $ | 52 | $ | 1,235 | $ | (69 | ) (a) | ||||||||||
|
Other borrowed funds
|
105 | (7 | ) (a) | 53 | (50 | ) | 101 | (24 | ) (a) | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity
instruments
|
480 | (73 | ) (a) | (33 | ) | (86 | ) | 288 | (125 | ) (a) | ||||||||||||||
|
Accounts payable
and other
liabilities
|
25 | (25 | ) (a) | — | — | — | — | |||||||||||||||||
|
Beneficial
interests issued by
consolidated VIEs
|
82 | (24 | ) (a) | (603 | ) | 545 | — | — | ||||||||||||||||
|
Long-term debt
|
21,938 | (4,502 | ) (a) | (1,717 | ) | 829 | 16,548 | (3,682 | ) (a) | |||||||||||||||
| (a) | Predominantly reported in principal transactions revenue, except for changes in fair value for Retail Financial Services mortgage loans originated with the intent to sell, which are reported in mortgage fees and related income. | |
| (b) | Realized gains and losses on available-for-sale securities, as well as other-than-temporary impairment losses that are recorded in earnings, are reported in securities gains. Unrealized gains and losses are reported in other comprehensive income. | |
| (c) | Changes in fair value for Retail Financial Services mortgage servicing rights are reported in mortgage fees and related income. | |
| (d) | Predominantly reported in other income. | |
| (e) | All transfers into and/or out of level 3 are assumed to occur at the beginning of the reporting period. | |
| (f) | Level 3 liabilities as a percentage of total Firm liabilities accounted for at fair value (including liabilities measured at fair value on a nonrecurring basis) were 22%, 29% and 25% at December 31, 2010, 2009 and 2008, respectively. | |
| (g) | Includes certain assets that are classified within accrued interest receivable and other assets on the Consolidated Balance Sheet at December 31, 2009 and 2008. |
Assets and liabilities measured at fair value on a nonrecurring basis
Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on
a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but instead
are subject to fair value adjustments only in certain circumstances (for example, when there is
evidence of impairment).
The following tables present the assets and liabilities carried on the
Consolidated Balance Sheets by caption and level within the valuation hierarchy (as described
above) as of December 31, 2010 and 2009, for which a nonrecurring change in fair value has been
recorded during the reporting period.
| Fair value hierarchy | ||||||||||||||||
| December 31, 2010 (in millions) | Level 1 (d) | Level 2 (d) | Level 3 (d) | Total fair value | ||||||||||||
|
Loans retained
(a)
|
$ | — | $ | 5,484 | $ | 690 | $ | 6,174 | ||||||||
|
Loans held-for-sale
(b)
|
— | 312 | 3,200 | 3,512 | ||||||||||||
|
Total loans
|
— | 5,796 | 3,890 | 9,686 | ||||||||||||
|
Other real estate owned
|
— | 78 | 311 | 389 | ||||||||||||
|
Other assets
|
— | — | 2 | 2 | ||||||||||||
|
Total other assets
|
— | 78 | 313 | 391 | ||||||||||||
|
Total assets at fair value on a
nonrecurring basis
|
$ | — | $ | 5,874 | $ | 4,203 | $ | 10,077 | ||||||||
|
Accounts payable and other liabilities
(c)
|
$ | — | $ | 53 | $ | 18 | $ | 71 | ||||||||
|
Total liabilities at fair value on a
nonrecurring basis
|
$ | — | $ | 53 | $ | 18 | $ | 71 | ||||||||
| 182 | JPMorgan Chase & Co./2010 Annual Report |
Table of Contents
| Fair value hierarchy | ||||||||||||||||
| December 31, 2009 (in millions) | Level 1 | Level 2 | Level 3 | Total fair value | ||||||||||||
|
Loans retained
(a)
|
$ | — | $ | 4,544 | $ | 1,137 | $ | 5,681 | ||||||||
|
Loans held-for-sale
(b)
|
— | 601 | 1,029 | 1,630 | ||||||||||||
|
Total
loans
|
— | 5,145 | 2,166 | 7,311 | ||||||||||||
|
Other real estate owned
|
— | 307 | 387 | 694 | ||||||||||||
|
Other assets
|
— | — | 184 | 184 | ||||||||||||
|
Total other assets
|
— | 307 | 571 | 878 | ||||||||||||
|
Total assets at fair value on a
nonrecurring basis
|
$ | — | $ | 5,452 | $ | 2,737 | $ | 8,189 | ||||||||
|
Accounts payable and other liabilities
(c)
|
$ | — | $ | 87 | $ | 39 | $ | 126 | ||||||||
|
Total liabilities at fair value on a
nonrecurring basis
|
$ | — | $ | 87 | $ | 39 | $ | 126 | ||||||||
| (a) | Reflects mortgage, home equity and other loans where the carrying value is based on the fair value of the underlying collateral. | |
| (b) | Predominantly includes credit card loans at December 31, 2010. Predominantly includes leveraged lending loans at December 31, 2009. Loans held-for-sale are carried on the Consolidated Balance Sheets at the lower of cost or fair value. | |
| (c) | Represents, at December 31, 2010 and 2009, fair value adjustments associated with $517 million and $648 million, respectively, of unfunded held-for-sale lending-related commitments within the leveraged lending portfolio. | |
| (d) | In the year ended December 31, 2010, transfers between levels 1, 2 and 3 were not significant. |
The method used to estimate the fair value of impaired collateral-dependent loans,
and other loans where the carrying value is based on the fair value of the underlying collateral
(e.g., residential mortgage loans charged off in accordance with regulatory guidance), depends on
the type of collateral (e.g., securities, real estate, nonfinancial assets) underlying the loan.
Fair value of the collateral is estimated based on quoted market prices, broker quotes or
independent appraisals, or by using a DCF model. For further information, see Note 15 on pages
239–243 of this Annual Report.
Nonrecurring fair value changes
The following table presents the total change in value of assets and liabilities for which a fair
value adjustment has been included
in the Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008,
related to financial instruments held at those dates.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Loans retained
|
$ | (3,413 | ) | $ | (3,550 | ) | $ | (1,159 | ) | |||
|
Loans held-for-sale
|
29 | (389 | ) | (2,728 | ) | |||||||
|
Total
loans
|
(3,384 | ) | (3,939 | ) | (3,887 | ) | ||||||
|
Other assets
|
25 | (104 | ) | (685 | ) | |||||||
|
Accounts payable and
other liabilities
|
6 | 31 | (285 | ) | ||||||||
|
Total nonrecurring
fair
value gains/(losses)
|
$ | (3,353 | ) | $ | (4,012 | ) | $ | (4,857 | ) | |||
In the above table, loans predominantly include: (1) mortgage, home equity, and other loans where
changes in the carrying value are based on the fair value of the underlying collateral; and (2) the
change in fair value for leveraged lending loans carried on the Consolidated Balance Sheets at the
lower of cost or fair value. Accounts payable and other liabilities predominantly include the
change in fair value for unfunded lending-related commitments within the leveraged lending
portfolio.
Level 3 analysis
Level 3 assets at December 31, 2010, predominantly include derivative receivables, mortgage
servicing rights (“MSRs”), collateralized loan obligations (“CLOs”) held within the
available-for-sale securities portfolio, trading loans, asset-backed trading securities and private
equity investments.
| • | Derivative receivables included $35.3 billion of interest rate, credit, foreign exchange, equity and commodity contracts classified within level 3 at December 31, 2010. Included within this balance was $11.6 billion of structured credit derivatives with corporate debt underlying. In assessing the Firm’s risk exposure to structured credit derivatives, the Firm believes consideration should also be given to derivative liabilities with similar, and therefore offsetting, risk profiles. At December 31, 2010, $5.6 billion of level 3 derivative liabilities had risk characteristics similar to those of the derivative receivable assets classified in level 3. | |
| • | Mortgage servicing rights represent the fair value of future cash flows for performing specified mortgage servicing activities for others (predominantly with respect to residential mortgage loans). For a further description of the MSR asset, interest rate risk management and the valuation methodology used for MSRs, including valuation assumptions and sensitivities, see Note 17 on pages 260–263 of this Annual Report. | |
| • | CLOs totaling $13.5 billion were securities backed by corporate loans held in the Firm’s AFS securities portfolio. Substantially all of these securities are rated “AAA,” “AA” and “A” and had an average credit enhancement of 30%. Credit enhancement in CLOs is primarily in the form of subordination, which is a form of structural credit enhancement where realized losses associated with assets held by an issuing vehicle are allocated to issued tranches considering their relative seniority. For further discussion, see Note 12 on pages 214–218 of this Annual Report. | |
| • | Trading loans totaling $13.1 billion included $4.4 billion of nonagency residential mortgage whole loans and commercial mortgage loans held in IB for which there is limited price transparency; and $4.0 billion of reverse mortgages for which the principal risk sensitivities are mortality risk and home prices. The fair value of |
| JPMorgan Chase & Co./2010 Annual Report | 183 |
Table of Contents
Notes to consolidated financial statements
| the commercial and residential mortgage loans is estimated by projecting expected cash flows, considering relevant borrower-specific and market factors, and discounting those cash flows at a rate reflecting current market liquidity. Loans are partially hedged by level 2 instruments, including credit default swaps and interest rate derivatives, which are observable and liquid. |
Consolidated Balance Sheets changes
Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 5% of total
Firm assets at December 31, 2010.
The following describes significant changes to level 3 assets during the year.
For the year ended December 31, 2010
Level 3 assets decreased by $15.5 billion during 2010, due to the following:
| • | $11.4 billion decrease in derivative receivables, predominantly driven by changes in credit spreads; |
| • | A net decrease of $3.5 billion due to the adoption of new accounting guidance related to VIEs. As a result of the adoption of the new guidance, there was a decrease of $5.0 billion in accrued interest and accounts receivable related to retained securitization interests in Firm-sponsored credit card securitization trusts that were eliminated upon consolidation, partially offset by an increase of $1.5 billion in trading debt and equity instruments; |
| • | $2.8 billion decrease in trading assets – debt and equity instruments, driven by sales, securitizations and transfers of trading loans to level 2 due to increased price transparency; |
| • | $1.9 billion decrease in MSRs. For a further discussion of the change, refer to Note 17 on pages 260–263 of this Annual Report; |
| • | $2.2 billion increase in nonrecurring loans held-for-sale, largely driven by an increase in credit card loans; |
| • | $1.3 billion increase in private equity investments, largely driven by additional follow-on investments and net gains in the portfolio; and |
| • | $1.0 billion increase in asset-backed AFS securities, predominantly driven by purchases of CLOs. |
Gains and Losses
Gains and losses included in the tables for 2010, 2009 and 2008 included:
2010
Included in the tables for the year ended December 31, 2010
| • | $2.3 billion of losses on MSRs; and |
| • | $1.0 billion gain in private equity, largely driven by gains on investments in the portfolio. |
2009
Included in the tables for the year ended December 31, 2009
| • | $11.4 billion of net losses on derivatives, primarily related to the tightening of credit spreads; |
| • | Net losses on trading – debt and equity instruments of $671 million, consisting of $2.1 billion of losses, primarily related to residential and commercial loans and MBS, principally driven by markdowns and sales, partially offset by gains of $1.4 billion, reflecting increases in the fair value of other ABS; |
| • | $5.8 billion of gains on MSRs; and |
| • | $1.4 billion of losses related to structured note liabilities, predominantly due to volatility in the equity markets. |
2008
Included in the tables for the year ended December 31, 2008
| • | Losses on trading-debt and equity instruments of approximately $12.8 billion, principally from mortgage-related transactions and auction-rate securities; |
| • | Losses of $6.9 billion on MSRs; |
| • | Losses of approximately $3.9 billion on leveraged loans; |
| • | Net gains of $4.6 billion related to derivatives, principally due to changes in credit spreads and rate curves; |
| • | Gains of $4.5 billion related to structured notes, principally due to significant volatility in the fixed income, commodities and equity markets; and |
| • | Private equity losses of $638 million. |
For further information on changes in the fair value of the MSRs, see Note 17 on pages 260–263 of
this Annual Report.
Credit adjustments
When determining the fair value of an instrument, it may be necessary to record a valuation
adjustment to arrive at an exit price under U.S. GAAP. Valuation adjustments include, but are not
limited to, amounts to reflect counterparty credit quality and the Firm’s own creditworthiness.
The market’s view of the Firm’s credit quality is reflected in credit spreads observed in the credit
default swap market. For a detailed discussion of the valuation adjustments the Firm considers, see
the valuation discussion at the beginning of this Note.
The following table provides the credit adjustments, excluding the effect of any hedging activity,
reflected within the Consolidated Balance Sheets as of the dates indicated.
| December 31, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
|
Derivative receivables balance
|
$ | 80,481 | $ | 80,210 | ||||
|
Derivatives CVA
(a)
|
(4,362 | ) | (3,697 | ) | ||||
|
Derivative payables balance
|
69,219 | 60,125 | ||||||
|
Derivatives DVA
|
(882 | ) | (841 | ) (d) | ||||
|
Structured notes balance
(b)(c)
|
53,139 | 59,064 | ||||||
|
Structured notes DVA
|
(1,153 | ) | (685 | ) (d) | ||||
| (a) | Derivatives credit valuation adjustments (“CVA”), gross of hedges, includes results managed by credit portfolio and other lines of business within IB. | |
| (b) | Structured notes are recorded within long-term debt, other borrowed funds or deposits on the Consolidated Balance Sheets, based on the tenor and legal form of the note. | |
| (c) | Structured notes are measured at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 187–189 of this Annual Report. | |
| (d) | The prior period has been revised. |
| 184 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following table provides the impact of credit adjustments on earnings in the respective
periods, excluding the effect of any hedging activity.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Credit adjustments:
|
||||||||||||
|
Derivative CVA
(a)
|
$ | (665 | ) | $ | 5,869 | $ | (7,561 | ) | ||||
|
Derivative DVA
|
41 | (548 | ) (c) | 789 | ||||||||
|
Structured note
DVA
(b)
|
468 | (1,748 | ) (c) | 1,211 | ||||||||
| (a) | Derivatives CVA, gross of hedges, includes results managed by credit portfolio and other lines of business within IB. | |
| (b) | Structured notes are measured at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 187–189 of this Annual Report. | |
| (c) | The 2009 prior period has been revised. |
Additional disclosures about the fair value of financial instruments (including financial
instruments not carried at fair value)
U.S. GAAP requires disclosure of the estimated fair value of certain financial instruments, and the
methods and significant assumptions used to estimate their fair value. Financial instruments within
the scope of these disclosure requirements are included in the following table. However, certain
financial instruments and all nonfinancial instruments are excluded from the scope of these
disclosure requirements. Accordingly, the fair value disclosures provided in the following table
include only a partial estimate of the fair value of JPMorgan Chase’s assets and liabilities.
For
example, the Firm has developed long-term relationships with its customers through its deposit base
and credit card accounts, commonly referred to as core deposit intangibles and credit card
relationships. In the opinion of management, these items, in the aggregate, add significant value
to JPMorgan Chase, but their fair value is not disclosed in this Note.
Financial instruments for which carrying value approximates fair value
Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets
are carried at amounts that approximate fair value, due to their short-term nature and generally
negligible credit risk. These instruments include cash and due from banks; deposits with banks;
federal funds sold; securities purchased under resale agreements and securities borrowed with
short-dated maturities; short-term receivables and accrued interest receivable; commercial paper;
federal funds purchased; securities loaned and sold under repurchase agreements with short-dated
maturities; other borrowed funds (excluding advances from the Federal Home Loan Banks (“FHLBs”));
accounts payable; and accrued liabilities. In addition, U.S. GAAP requires that the fair value for
deposit liabilities with no stated maturity (i.e., demand, savings and certain money market
deposits) be equal to their carrying value; recognition of the inherent funding value of these
instruments is not permitted.
| JPMorgan Chase & Co. / 2010 Annual Report | 185 |
Table of Contents
Notes to consolidated financial statements
The following table presents the carrying value and estimated fair values of financial assets and
liabilities.
| 2010 | 2009 | |||||||||||||||||||||||
| Carrying | Estimated | Appreciation/ | Carrying | Estimated | Appreciation/ | |||||||||||||||||||
| December 31, (in billions) | value | fair value | (depreciation) | value | fair value | (depreciation) | ||||||||||||||||||
|
Financial assets
|
||||||||||||||||||||||||
|
Assets for which fair value
approximates carrying value
|
$ | 49.2 | $ | 49.2 | $ | — | $ | 89.4 | $ | 89.4 | $ | — | ||||||||||||
|
Accrued interest and accounts
receivable (included
zero
and
$5.0 at fair value)
|
70.1 | 70.1 | — | 67.4 | 67.4 | — | ||||||||||||||||||
|
Federal funds sold and
securities purchased under
resale agreements (included
$20.3
and $20.5 at fair value)
|
222.6 | 222.6 | — | 195.4 | 195.4 | — | ||||||||||||||||||
|
Securities borrowed (included
$14.0
and $7.0 at fair value)
|
123.6 | 123.6 | — | 119.6 | 119.6 | — | ||||||||||||||||||
|
Trading assets
|
489.9 | 489.9 | — | 411.1 | 411.1 | — | ||||||||||||||||||
|
Securities
(included
$316.3
and $360.4 at fair value)
|
316.3 | 316.3 | — | 360.4 | 360.4 | — | ||||||||||||||||||
|
Loans (included
$2.0
and $1.4
at fair value)
(a)(b)
|
660.7 | 663.5 | 2.8 | 601.9 | 598.3 | (3.6 | ) | |||||||||||||||||
|
Mortgage servicing rights at
fair value
|
13.6 | 13.6 | — | 15.5 | 15.5 | — | ||||||||||||||||||
|
Other (included
$18.2
and
$19.2 at fair value)
|
64.9 | 65.0 | 0.1 | 73.4 | 73.2 | (0.2 | ) | |||||||||||||||||
|
Total financial assets
|
$ | 2,010.9 | $ | 2,013.8 | $ | 2.9 | $ | 1,934.1 | $ | 1,930.3 | $ | (3.8 | ) | |||||||||||
|
Financial liabilities
|
||||||||||||||||||||||||
|
Deposits
(included
$4.4
and
$4.5 at fair value)
|
$ | 930.4 | $ | 931.5 | $ | (1.1 | ) | $ | 938.4 | $ | 939.5 | $ | (1.1 | ) | ||||||||||
|
Federal funds purchased and
securities loaned or sold
under repurchase agreements
(included
$4.1
and
$3.4 at fair value)
|
276.6 | 276.6 | — | 261.4 | 261.4 | — | ||||||||||||||||||
|
Commercial paper
|
35.4 | 35.4 | — | 41.8 | 41.8 | — | ||||||||||||||||||
|
Other borrowed funds (included
$9.9
and $5.6 at fair value)
|
57.3 | 57.2 | 0.1 | 55.7 | 55.9 | (0.2 | ) | |||||||||||||||||
|
Trading liabilities
|
146.2 | 146.2 | — | 125.1 | 125.1 | — | ||||||||||||||||||
|
Accounts payable and other
liabilities (included
$0.2
and
$0.4 at fair value)
|
138.2 | 138.2 | — | 136.8 | 136.8 | — | ||||||||||||||||||
|
Beneficial interests issued by
consolidated VIEs (included
$1.5
and $1.4 at fair value)
|
77.6 | 77.9 | (0.3 | ) | 15.2 | 15.2 | — | |||||||||||||||||
|
Long-term debt and junior
subordinated deferrable
interest debentures (included
$38.8
and $49.0 at fair value)
|
247.7 | 249.0 | (1.3 | ) | 266.3 | 268.4 | (2.1 | ) | ||||||||||||||||
|
Total financial liabilities
|
$ | 1,909.4 | $ | 1,912.0 | $ | (2.6 | ) | $ | 1,840.7 | $ | 1,844.1 | $ | (3.4 | ) | ||||||||||
|
Net appreciation/(depreciation)
|
$ | 0.3 | $ | (7.2 | ) | |||||||||||||||||||
| (a) | For originated or purchased loans held for investment, other than PCI loans, the carrying value is the principal amount outstanding, net of the allowance for loan losses, net charge-offs, interest applied to principal (for loans accounted for on the cost recovery method), unamortized discounts and premiums, and deferred loan fees or costs. For a further discussion of the Firm’s loan accounting framework, see Note 14 on pages 220–238 of this Annual Report. | |
| (b) | Fair value is typically estimated using a discounted cash flow model that incorporates the characteristics of the underlying loans (including principal, contractual interest rate and contractual fees) and key inputs, including expected lifetime credit losses, interest rates, prepayment rates, and primary origination or secondary market spreads. The difference between the estimated fair value and carrying value is the result of the different methodologies used to determine fair value as compared to carrying value. For example, credit losses are estimated for the asset’s remaining life in a fair value calculation but are estimated for a loss emergence period in a loan loss reserve calculation; future loan income (interest and fees) is incorporated in a fair value calculation but is generally not considered in a loan loss reserve calculation. For a further discussion of the Firm’s methodologies for estimating the fair value of loans and lending-related commitments, see pages 171–173 of this Note. |
The majority of the Firm’s unfunded lending-related commitments are not carried at fair value on a
recurring basis on the Consolidated Balance Sheets, nor are they actively traded. The carrying
value and estimated fair value of the Firm’s wholesale lending-related commitments were as follows
for the periods indicated.
| 2010 | 2009 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| December 31, (in billions) | value (a) | fair value | value (a) | fair value | ||||||||||||
|
Wholesale lending-related commitments
|
$ | 0.7 | $ | 0.9 | $ | 0.9 | $ | 1.3 | ||||||||
| (a) | Represents the allowance for wholesale unfunded lending-related commitments. Excludes the current carrying values of the guarantee liability and the offsetting asset each recognized at fair value at the inception of guarantees. |
The Firm does not estimate the fair value of consumer lending-related commitments. In many cases,
the Firm can reduce or cancel these commitments by providing the borrower prior notice or, in some
cases, without notice as permitted by law. For a further discussion of the valuation of
lending-related commitments, see pages 171–173 of this Note.
| 186 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Trading assets and liabilities
Trading assets include debt and equity instruments held for trading purposes that JPMorgan Chase
owns (“long” positions), certain loans managed on a fair value basis and for which the Firm has
elected the fair value option, and physical commodities inventories that are generally accounted
for at the lower of cost or fair value. Trading liabilities include debt and equity instruments
that the Firm has sold to other parties but does not own (“short” positions). The Firm is obligated
to purchase instruments at a future date to cover
the short positions. Included in trading assets
and trading liabilities are the reported receivables (unrealized gains) and payables (unrealized
losses) related to derivatives. Trading assets and liabilities are carried at fair value on the
Consolidated Balance Sheets. Balances reflect the reduction of securities owned (long positions) by
the amount of securities sold but not yet purchased (short positions) when the long and short
positions have identical Committee on Uniform Security Identification Procedures (“CUSIPs”).
Trading assets and liabilities–average balances
Average trading assets and liabilities were as follows for the periods indicated.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Trading assets – debt and equity instruments
(a)
|
$ | 354,441 | $ | 318,063 | $ | 384,102 | ||||||
|
Trading assets – derivative receivables
|
84,676 | 110,457 | 121,417 | |||||||||
|
Trading liabilities – debt and equity instruments
(a)(b)
|
78,159 | 60,224 | 78,841 | |||||||||
|
Trading liabilities – derivative payables
|
65,714 | 77,901 | 93,200 | |||||||||
| (a) | Balances reflect the reduction of securities owned (long positions) by the amount of securities sold, but not yet purchased (short positions) when the long and short positions have identical CUSIPs. | |
| (b) | Primarily represent securities sold, not yet purchased. |
The fair value option provides an option to elect fair value as an alternative measurement for
selected financial assets, financial liabilities, unrecognized firm commitments, and written loan
commitments not previously carried at fair value.
Elections
Elections were made by the Firm to:
| • | Mitigate income statement volatility caused by the differences in the measurement basis of elected instruments (for example, certain instruments elected were previously accounted for on an accrual basis) while the associated risk management arrangements are accounted for on a fair value basis; |
| • | Eliminate the complexities of applying certain accounting models (e.g., hedge accounting or bifurcation accounting for hybrid instruments); and |
| • | Better reflect those instruments that are managed on a fair value basis. |
| Elections include the following: |
| • | Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis. |
| • | Securities financing arrangements with an embedded derivative and/or a maturity of greater than one year. |
| • | Owned beneficial interests in securitized financial assets that contain embedded credit derivatives, which would otherwise be required to be separately accounted for as a derivative instrument. |
| • | Certain tax credits and other equity investments acquired as part of the Washington Mutual transaction. |
| • | Structured notes issued as part of IB’s client-driven activities. (Structured notes are financial instruments that contain embedded derivatives.) |
| • | Long-term beneficial interests issued by IB’s consolidated securitization trusts where the underlying assets are carried at fair value. |
| JPMorgan Chase & Co. / 2010 Annual Report | 187 |
Table of Contents
Notes to consolidated financial statements
Changes in fair value under the fair value option election
The following table presents
the changes in fair value
included in the Consolidated
Statements of Income for the
years ended December 31,
2010, 2009 and 2008, for
items for which the fair
value election was made. The
profit and loss information
presented below only
includes the financial
instruments that were
elected to be measured at
fair value; related risk
management instruments,
which are required to be
measured at fair value, are
not included in the
table.
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Total changes | Total changes | Total changes | ||||||||||||||||||||||||||||||||||
| Principal | Other | in fair value | Principal | Other | in fair value | Principal | Other | in fair value | ||||||||||||||||||||||||||||
| December 31, (in millions) | transactions | income | recorded | transactions | income | recorded | transactions | income | recorded | |||||||||||||||||||||||||||
|
Federal funds sold and
securities purchased under
resale agreements
|
$ | 173 | $ | — | $ | 173 | $ | (553 | ) | $ | — | $ | (553 | ) | $ | 1,139 | $ | — | $ | 1,139 | ||||||||||||||||
|
Securities borrowed
|
31 | — | 31 | 82 | — | 82 | 29 | — | 29 | |||||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||||||||||||||
|
Debt and equity
instruments,
excluding loans
|
556 | (2 | ) (c) | 554 | 619 | 25 | (c) | 644 | (870 | ) | (58 | ) (c) | (928 | ) | ||||||||||||||||||||||
|
Loans reported as trading
assets:
|
||||||||||||||||||||||||||||||||||||
|
Changes in
instrument-
specific credit risk
|
1,279 | (6 | ) (c) | 1,273 | (300 | ) | (177 | ) (c) | (477 | ) | (9,802 | ) | (283 | ) (c) | (10,085 | ) | ||||||||||||||||||||
|
Other changes in fair value
|
(312 | ) | 4,449 | (c) | 4,137 | 1,132 | 3,119 | (c) | 4,251 | 696 | 1,178 | (c) | 1,874 | |||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||||||
|
Changes in
instrument-specific
credit risk
|
95 | — | 95 | (78 | ) | — | (78 | ) | (1,991 | ) | — | (1,991 | ) | |||||||||||||||||||||||
|
Other changes in fair
value
|
90 | — | 90 | (343 | ) | — | (343 | ) | (42 | ) | — | (42 | ) | |||||||||||||||||||||||
|
Other assets
|
— | (263 | ) (d) | (263 | ) | — | (731 | ) (d) | (731 | ) | — | (660 | ) (d) | (660 | ) | |||||||||||||||||||||
|
Deposits
(a)
|
(564 | ) | — | (564 | ) | (770 | ) | — | (770 | ) | (132 | ) | — | (132 | ) | |||||||||||||||||||||
|
Federal funds purchased and
securities loaned or sold
under repurchase agreements
|
(29 | ) | — | (29 | ) | 116 | — | 116 | (127 | ) | — | (127 | ) | |||||||||||||||||||||||
|
Other borrowed funds
(a)
|
123 | — | 123 | (1,287 | ) | — | (1,287 | ) | 1,888 | — | 1,888 | |||||||||||||||||||||||||
|
Trading liabilities
|
(23 | ) | — | (23 | ) | (3 | ) | — | (3 | ) | 35 | — | 35 | |||||||||||||||||||||||
|
Beneficial interests issued
by
consolidated VIEs
|
(12 | ) | — | (12 | ) | (351 | ) | — | (351 | ) | 355 | — | 355 | |||||||||||||||||||||||
|
Other liabilities
|
(9 | ) | 8 | (d) | (1 | ) | 64 | — | 64 | — | — | — | ||||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||||||
|
Changes in
instrument-specific
credit risk(a)
|
400 | — | 400 | (1,704 | ) | — | (1,704 | ) | 1,174 | — | 1,174 | |||||||||||||||||||||||||
|
Other changes in fair
value
(b)
|
1,297 | — | 1,297 | (2,393 | ) | — | (2,393 | ) | 16,202 | — | 16,202 | |||||||||||||||||||||||||
| (a) | Total changes in instrument-specific credit risk related to structured notes were $468 million, $(1.7) billion and $1.2 billion for the years ended December 31, 2010, 2009 and 2008, respectively. These totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt. The 2009 prior period has been revised. | |
| (b) | Structured notes are debt instruments with embedded derivatives that are tailored to meet a client’s need for derivative risk in funded form. The embedded derivative is the primary driver of risk. The 2008 gain included in “Other changes in fair value” results from a significant decline in the value of certain structured notes where the embedded derivative is principally linked to either equity indices or commodity prices, both of which declined sharply during the third quarter of 2008. Although the risk associated with the structured notes is actively managed, the gains reported in this table do not include the income statement impact of such risk management instruments. | |
| (c) | Reported in mortgage fees and related income. | |
| (d) | Reported in other income. |
Determination of instrument-specific credit risk for items for which a fair value election
was made
The following describes how the gains and losses included in earnings during 2010, 2009 and 2008,
which were attributable to changes in instrument-specific credit risk, were determined.
| • | Loans and lending-related commitments: For floating-rate instruments, all changes in value are attributed to instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate-related and changes in value that are credit-related. Allocations are generally based on an analysis of bor- |
| rower-specific credit spread and recovery information, where available, or benchmarking to similar entities or industries. |
| • | Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in the Firm’s credit spread. |
| • | Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment or an immaterial adjustment for instrument-specific credit risk related to these agreements. |
| 188 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Difference between aggregate fair value and aggregate remaining contractual principal
balance outstanding
The following table reflects the difference between the aggregate fair value and the aggregate
remaining contractual principal balance outstanding as of December 31, 2010 and 2009, for loans,
long-term debt and long-term beneficial interests for which the fair value option has been elected.
| 2010 | 2009 | |||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||
| over/(under) | over/(under) | |||||||||||||||||||||||
| Contractual | contractual | Contractual | contractual | |||||||||||||||||||||
| principal | principal | principal | principal | |||||||||||||||||||||
| December 31, (in millions) | outstanding | Fair value | outstanding | outstanding | Fair value | outstanding | ||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||
|
Performing loans 90 days or
more past due
|
||||||||||||||||||||||||
|
Loans reported as trading assets
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Loans
|
— | — | — | — | — | — | ||||||||||||||||||
|
Nonaccrual
loans
|
||||||||||||||||||||||||
|
Loans reported as trading assets
|
5,246 | 1,239 | (4,007 | ) | 7,264 | 2,207 | (5,057 | ) | ||||||||||||||||
|
Loans
|
927 | 132 | (795 | ) | 1,126 | 151 | (975 | ) | ||||||||||||||||
|
Subtotal
|
6,173 | 1,371 | (4,802 | ) | 8,390 | 2,358 | (6,032 | ) | ||||||||||||||||
|
All other
performing loans
|
||||||||||||||||||||||||
|
Loans reported as trading assets
|
39,490 | 33,641 | (5,849 | ) | 35,095 | 29,341 | (5,754 | ) | ||||||||||||||||
|
Loans
|
2,496 | 1,434 | (1,062 | ) | 2,147 | 1,000 | (1,147 | ) | ||||||||||||||||
|
Total loans
|
$ | 48,159 | $ | 36,446 | $ | (11,713 | ) | $ | 45,632 | $ | 32,699 | $ | (12,933 | ) | ||||||||||
|
Long-term debt
|
||||||||||||||||||||||||
|
Principal-protected debt
|
$ | 20,761 | (b) | $ | 21,315 | $ | 554 | $ | 26,765 | (b) | $ | 26,378 | $ | (387 | ) | |||||||||
|
Nonprincipal-protected debt
(a)
|
NA | 17,524 | NA | NA | 22,594 | NA | ||||||||||||||||||
|
Total long-term debt
|
NA | $ | 38,839 | NA | NA | $ | 48,972 | NA | ||||||||||||||||
|
Long-term beneficial interests
|
||||||||||||||||||||||||
|
Principal-protected debt
|
$ | 49 | $ | 49 | $ | — | $ | 90 | $ | 90 | $ | — | ||||||||||||
|
Nonprincipal-protected debt
(a)
|
NA | 1,446 | NA | NA | 1,320 | NA | ||||||||||||||||||
|
Total long-term beneficial
interests
|
NA | $ | 1,495 | NA | NA | $ | 1,410 | NA | ||||||||||||||||
| (a) | Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected notes, for which the Firm is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected notes do not obligate the Firm to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying variable or derivative feature embedded in the note. | |
| (b) | Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflected as the remaining contractual principal is the final principal payment at maturity. |
At December 31, 2010 and 2009, the contractual amount of letters of credit
for which the fair value option was elected was $3.8 billion and $3.7 billion,
respectively, with a corresponding fair value of $6 million at both December 31, 2010 and 2009. For
further information regarding off-balance sheet commitments, see Note 30 on pages 275–280 of this
Annual Report.
Concentrations of credit risk arise when a number of customers are engaged in similar business
activities or activities in the same geographic region, or when they have similar economic features
that would cause their ability to meet contractual obligations to be similarly affected by changes
in economic conditions.
JPMorgan Chase regularly monitors various segments of its credit portfolio to assess potential
concentration risks and to obtain collateral when deemed necessary. Senior management is
significantly involved in the credit approval and review process, and risk levels are adjusted as
needed to reflect management’s risk tolerance.
In the Firm’s wholesale portfolio, risk concentrations are evaluated primarily by industry and
monitored regularly on both an aggregate portfolio level and on an individual customer basis.
Management of the Firm’s wholesale exposure is accomplished through loan syndication and
participation, loan sales, securitizations, credit derivatives, use of master netting agreements,
and collateral and other risk-reduction techniques. In the consumer portfolio, concentrations are
evaluated primarily by product and by U.S. geographic region, with a key focus on trends and
concentrations at the portfolio level, where potential risk concentrations can be remedied through
changes in underwriting policies and portfolio guidelines.
The Firm does not believe that its exposure to any particular loan product (e.g., option ARMs),
industry segment (e.g., commercial real estate) or its exposure to residential real estate loans
with high loan-to-value ratios results in a significant concentration of credit risk. Terms of loan
products and collateral coverage are included in the Firm’s assessment when extending credit and
establishing its allowance for loan losses.
For further information regarding on–balance sheet credit concentrations by major product and/or
geography, see Notes 14 and 15 on pages 220–238 and 239–243, respectively, of this Annual Report.
For information regarding concentrations of off–balance sheet lending-related financial
instruments by major product, see Note 30 on pages 275–280 of this Annual Report.
Customer receivables representing primarily margin loans to prime and retail brokerage clients of
$32.5 billion and $15.7 billion at December 31, 2010 and 2009, respectively, are included in the
table below. These margin loans are generally over-collateralized through a pledge of assets
maintained in clients’ brokerage accounts and are subject to daily minimum collateral requirements.
In the event that the collateral value decreases, a maintenance margin
call is made to the client to
provide additional collateral into the account. If additional collateral is not
| JPMorgan Chase & Co. / 2010 Annual Report | 189 |
Table of Contents
Notes to consolidated financial statements
provided by the
client, the client’s positions may be liquidated by the Firm
to meet the minimum collateral requirements. As a result of the Firm’s credit risk mitigation
practices, the Firm does not hold any
reserves for credit impairment on these agreements as of
December 31, 2010 and 2009.
The table below presents both on—balance sheet and off—balance
sheet wholesale- and consumer-related credit exposure by the Firm’s three portfolio segments as of
December 31, 2010, and 2009.
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| Credit | On-balance sheet | Off-balance | Credit | On-balance sheet | Off-balance | |||||||||||||||||||||||||||
| December 31, (in millions) | exposure | Loans | Derivatives | sheet (d) | exposure | Loans | Derivatives | sheet (d) | ||||||||||||||||||||||||
|
Wholesale
(a)
|
||||||||||||||||||||||||||||||||
|
Banks and finance companies
|
$ | 65,867 | $ | 21,562 | $ | 20,935 | $ | 23,370 | $ | 54,053 | $ | 14,396 | $ | 17,957 | $ | 21,700 | ||||||||||||||||
|
Real estate
|
64,351 | 53,635 | 868 | 9,848 | 68,509 | 57,195 | 1,112 | 10,202 | ||||||||||||||||||||||||
|
Healthcare
|
41,093 | 6,047 | 2,121 | 32,925 | 35,605 | 4,992 | 1,917 | 28,696 | ||||||||||||||||||||||||
|
State and municipal
governments
|
35,808 | 6,095 | 5,148 | 24,565 | 34,726 | 5,687 | 4,979 | 24,060 | ||||||||||||||||||||||||
|
Asset managers
|
29,364 | 7,070 | 7,124 | 15,170 | 24,920 | 5,930 | 6,640 | 12,350 | ||||||||||||||||||||||||
|
Consumer products
|
27,508 | 7,921 | 1,039 | 18,548 | 27,004 | 7,880 | 1,094 | 18,030 | ||||||||||||||||||||||||
|
Oil and gas
|
26,459 | 5,701 | 3,866 | 16,892 | 23,322 | 5,895 | 2,309 | 15,118 | ||||||||||||||||||||||||
|
Utilities
|
25,911 | 4,220 | 3,104 | 18,587 | 27,178 | 5,451 | 3,073 | 18,654 | ||||||||||||||||||||||||
|
Retail and consumer services
|
20,882 | 5,876 | 796 | 14,210 | 20,673 | 5,611 | 769 | 14,293 | ||||||||||||||||||||||||
|
Technology
|
14,348 | 2,752 | 1,554 | 10,042 | 14,169 | 3,802 | 1,409 | 8,958 | ||||||||||||||||||||||||
|
Machinery and equipment
manufacturing
|
13,311 | 3,601 | 445 | 9,265 | 12,759 | 3,189 | 456 | 9,114 | ||||||||||||||||||||||||
|
Building
materials/construction
|
12,808 | 3,285 | 295 | 9,228 | 10,448 | 3,252 | 281 | 6,915 | ||||||||||||||||||||||||
|
Chemicals/plastics
|
12,312 | 3,372 | 350 | 8,590 | 9,870 | 2,719 | 392 | 6,759 | ||||||||||||||||||||||||
|
Metals/mining
|
11,426 | 3,301 | 1,018 | 7,107 | 12,547 | 3,410 | 1,158 | 7,979 | ||||||||||||||||||||||||
|
Business services
|
11,247 | 3,850 | 370 | 7,027 | 10,667 | 3,627 | 397 | 6,643 | ||||||||||||||||||||||||
|
Central government
|
11,173 | 1,146 | 6,052 | 3,975 | 9,557 | 1,703 | 5,501 | 2,353 | ||||||||||||||||||||||||
|
Media
|
10,967 | 3,711 | 284 | 6,972 | 12,379 | 4,173 | 329 | 7,877 | ||||||||||||||||||||||||
|
Insurance
|
10,918 | 1,103 | 1,660 | 8,155 | 13,421 | 1,292 | 2,511 | 9,618 | ||||||||||||||||||||||||
|
Telecom services
|
10,709 | 1,524 | 1,362 | 7,823 | 11,265 | 2,042 | 1,273 | 7,950 | ||||||||||||||||||||||||
|
Holding companies
|
10,504 | 3,885 | 894 | 5,725 | 16,018 | 4,360 | 1,042 | 10,616 | ||||||||||||||||||||||||
|
Transportation
|
9,652 | 3,754 | 822 | 5,076 | 9,749 | 3,141 | 1,238 | 5,370 | ||||||||||||||||||||||||
|
Securities firms and exchanges
|
9,415 | 1,722 | 5,038 | 2,655 | 10,832 | 3,457 | 4,796 | 2,579 | ||||||||||||||||||||||||
|
Automotive
|
9,011 | 2,026 | 248 | 6,737 | 9,357 | 2,510 | 357 | 6,490 | ||||||||||||||||||||||||
|
Agriculture/paper
manufacturing
|
7,368 | 1,918 | 250 | 5,200 | 5,801 | 1,928 | 251 | 3,622 | ||||||||||||||||||||||||
|
Aerospace
|
5,732 | 516 | 197 | 5,019 | 5,254 | 597 | 79 | 4,578 | ||||||||||||||||||||||||
|
All other
(b)
|
140,926 | 62,917 | 14,641 | 63,368 | 137,359 | 41,838 | 18,890 | 76,631 | ||||||||||||||||||||||||
|
Subtotal
|
649,070 | 222,510 | 80,481 | 346,079 | 627,442 | 200,077 | 80,210 | 347,155 | ||||||||||||||||||||||||
|
Loans held-for-sale and loans
at
fair value
|
5,123 | 5,123 | — | — | 4,098 | 4,098 | — | — | ||||||||||||||||||||||||
|
Receivables from customers
|
32,541 | — | — | — | 15,745 | — | — | — | ||||||||||||||||||||||||
|
Interests in purchased
receivables
|
391 | — | — | — | 2,927 | — | — | — | ||||||||||||||||||||||||
|
Total wholesale
|
687,125 | 227,633 | 80,481 | 346,079 | 650,212 | 204,175 | 80,210 | 347,155 | ||||||||||||||||||||||||
|
Consumer, excluding credit
card
|
||||||||||||||||||||||||||||||||
|
Home equity – senior lien
|
40,436 | 24,376 | — | 16,060 | 46,622 | 27,376 | — | 19,246 | ||||||||||||||||||||||||
|
Home equity – junior lien
|
92,690 | 64,009 | — | 28,681 | 111,280 | 74,049 | — | 37,231 | ||||||||||||||||||||||||
|
Prime mortgage, including
option ARMs
(a)
|
75,805 | 74,539 | — | 1,266 | 77,082 | 75,428 | — | 1,654 | ||||||||||||||||||||||||
|
Subprime mortgage
(a)
|
11,287 | 11,287 | — | — | 12,526 | 12,526 | — | — | ||||||||||||||||||||||||
|
Auto
(a)
|
53,613 | 48,367 | — | 5,246 | 51,498 | 46,031 | — | 5,467 | ||||||||||||||||||||||||
|
Business banking
|
26,514 | 16,812 | — | 9,702 | 26,014 | 16,974 | — | 9,040 | ||||||||||||||||||||||||
|
Student and other
(a)
|
15,890 | 15,311 | — | 579 | 16,915 | 14,726 | — | 2,189 | ||||||||||||||||||||||||
|
PCI-Home equity
|
24,459 | 24,459 | — | — | 26,520 | 26,520 | — | — | ||||||||||||||||||||||||
|
PCI-Prime mortgage
|
17,322 | 17,322 | — | — | 19,693 | 19,693 | — | — | ||||||||||||||||||||||||
|
PCI-Subprime mortgage
|
5,398 | 5,398 | — | — | 5,993 | 5,993 | — | — | ||||||||||||||||||||||||
|
PCI-option ARMs
|
25,584 | 25,584 | — | — | 29,039 | 29,039 | — | — | ||||||||||||||||||||||||
|
Loans held-for-sale
|
154 | 154 | — | — | 2,142 | 2,142 | — | — | ||||||||||||||||||||||||
|
Total consumer, excluding
credit card
|
389,152 | 327,618 | — | 61,534 | 425,324 | 350,497 | — | 74,827 | ||||||||||||||||||||||||
|
Credit Card
|
||||||||||||||||||||||||||||||||
|
Credit card – retained
(a)(c)
|
682,751 | 135,524 | — | 547,227 | 647,899 | 78,786 | — | 569,113 | ||||||||||||||||||||||||
|
Credit card – held-for-sale
|
2,152 | 2,152 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total credit card
|
684,903 | 137,676 | — | 547,227 | 647,899 | 78,786 | — | 569,113 | ||||||||||||||||||||||||
|
Total exposure
|
$ | 1,761,180 | $ | 692,927 | $ | 80,481 | $ | 954,840 | $ | 1,723,435 | $ | 633,458 | $ | 80,210 | $ | 991,095 | ||||||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon the adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts and certain other consumer loan securitization entities, primarily mortgage-related. As a result, related receivables are now recorded as loans on the Consolidated Balance Sheet. For further information, see Note 16 on pages 244–259 of this Annual Report. | |
| (b) | For more information on exposures to SPEs included in all other, see Note 16 on pages 244–259 of this Annual Report. | |
| (c) | Excludes $84.6 billion of securitized credit card receivables at December 31, 2009. | |
| (d) | Represents lending-related financial instruments. |
| 190 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Derivative instruments enable end-users to modify or mitigate exposure to credit or market
risks. Counterparties to a derivative contract seek to obtain risks and rewards similar to those
that could be obtained from purchasing or selling a related cash instrument without having to
exchange upfront the full purchase or sales price. JPMorgan Chase makes markets in derivatives for
customers and also uses derivatives to hedge or manage its own market risk exposures. The majority
of the Firm’s derivatives are entered into for market-making purposes.
Trading derivatives
The Firm makes markets in a variety of derivatives in its trading portfolios to meet the needs of
customers (both dealers and clients) and to generate revenue through this trading activity (“client
derivatives”). Customers use derivatives to mitigate or modify interest rate, credit, foreign
exchange, equity and commodity risks. The Firm actively manages the risks from its exposure to
these derivatives by entering into other derivative transactions or by purchasing or selling other
financial instruments that partially or fully offset the exposure from client derivatives. The Firm
also seeks to earn a spread between the client derivatives and offsetting positions, and from the
remaining open risk positions.
Risk management derivatives
The Firm manages its market risk exposures using various derivative instruments.
Interest rate contracts are used to minimize fluctuations in earnings that are caused by changes in
interest rates. Fixed-rate assets and liabilities appreciate or depreciate in market value as
interest rates change. Similarly, interest income and expense increase or decrease as a result of
variable-rate assets and liabilities resetting to current market rates, and as a result of the
repayment and subsequent origination or issuance of fixed-rate assets and liabilities at current
market rates. Gains or losses on the derivative instruments that are related to such assets and
liabilities are expected to substantially offset this variability in earnings. The Firm generally
uses interest rate swaps, forwards and futures to manage the impact of interest rate fluctuations
on earnings.
Foreign currency forward contracts are used to manage the foreign exchange risk associated with
certain foreign currency–denominated (i.e., non-U.S.) assets and liabilities and forecasted
transactions, as well as the Firm’s net investments in certain non-U.S. subsidiaries or branches
whose functional currencies are not the U.S. dollar. As a result of fluctuations in foreign
currencies, the U.S. dollar–equivalent values of the foreign currency–denominated assets and
liabilities or forecasted revenue or expense increase or decrease. Gains or losses on the
derivative instruments related to these foreign currency–denominated assets or liabilities, or
forecasted transactions, are expected to substantially offset this variability.
Commodities based forward and futures contracts are used to manage the price risk of certain
inventory, including gold and base metals, in the Firm’s commodities portfolio. Gains or losses on
the forwards and futures are expected to substantially offset the
depreciation or appreciation of
the related inventory. Also in the commodities portfolio, electricity and natural gas futures and
forwards contracts are used to manage price risk associated with energy-related tolling and
load-serving contracts and investments.
The Firm uses credit derivatives to manage the counterparty credit risk associated with loans and
lending-related commitments. Credit derivatives compensate the purchaser when the entity referenced
in the contract experiences a credit event, such as bankruptcy or a failure to pay an obligation
when due. For a further discussion of credit derivatives, see the discussion in the Credit
derivatives section on pages 197–199 of this Note.
For more information about risk management derivatives, see the risk management derivatives gains
and losses table on page 196 of this Annual Report, and the hedge accounting gains and losses
tables on pages 194–195 of this Note.
Accounting for derivatives
All free-standing derivatives are required to be recorded on the Consolidated Balance Sheets at
fair value. As permitted under U.S. GAAP, the Firm nets derivative assets and liabilities, and the
related cash collateral received and paid, when a legally enforceable master netting agreement
exists between the Firm and the derivative counterparty. The accounting for changes in value of a
derivative depends on whether or not the transaction has been designated and qualifies for hedge
accounting. Derivatives that are not designated as hedges are marked to market through earnings.
The tabular disclosures on pages 192–199 of this Note provide additional information on the amount
of, and reporting for, derivative assets, liabilities, gains and losses. For further discussion of
derivatives embedded in structured notes, see Notes 3 and 4 on pages 170–187 and 187–189,
respectively, of this Annual Report.
Derivatives designated as hedges
The Firm applies hedge accounting to certain derivatives executed for risk management purposes –
generally interest rate, foreign exchange and gold and base metal derivatives.
However, JPMorgan
Chase does not seek to apply hedge accounting to all of the derivatives involved in the Firm’s risk
management activities. For example, the Firm does not apply hedge accounting to purchased credit
default swaps used to manage the credit risk of loans and commitments, because of the difficulties
in qualifying such contracts as hedges. For the same reason, the Firm does not apply hedge
accounting to certain interest rate and commodity derivatives used for risk management purposes.
To qualify for hedge accounting, a derivative must be highly effective at reducing the risk
associated with the exposure being hedged. In addition, for a derivative to be designated as a
hedge, the risk management objective and strategy must be documented. Hedge documentation must
identify the derivative hedging instrument, the asset or liability or forecasted transaction and
type of risk to be hedged, and how the effectiveness of the derivative is assessed prospectively
and retrospectively.
To assess effectiveness, the Firm uses statistical methods such as regression
analysis, as
| JPMorgan Chase & Co. / 2010 Annual Report | 191 |
Table of Contents
Notes to consolidated financial statements
well as nonstatistical methods including dollar-value comparisons of the change in the
fair value of the derivative to the change in the fair value or cash flows of the hedged item.
The
extent to which a derivative has been, and is expected to continue to be, effective at offsetting
changes in the fair value or cash flows of the hedged item must be assessed and documented at least
quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated
derivative instrument does not exactly offset the change in the hedged item attributable to the
hedged risk) must be reported in current-period earnings. If it is determined that a derivative is
not highly effective at hedging the designated exposure, hedge accounting is discontinued.
There are three types of hedge accounting designations: fair value hedges, cash flow hedges and net
investment hedges. JPMorgan Chase uses fair value hedges primarily to hedge fixed-rate long-term
debt, AFS securities and gold and base metal inventory. For qualifying fair value hedges, the
changes in the fair value of the derivative, and in the value of the hedged item, for the risk
being hedged, are recognized in earnings. If the hedge relationship is terminated, then the fair
value adjustment to the hedged item continues to be reported as part of the basis of the hedged
item and for interest-bearing instruments is amortized to earnings as a yield adjustment.
Derivative amounts affecting earnings are recognized consistent with the classification of the
hedged item – primarily net interest income and principal transactions revenue.
JPMorgan Chase uses cash flow hedges to hedge the exposure to variability in cash flows from
floating-rate financial instruments and forecasted transactions, primarily the rollover of
short-term assets and liabilities, and foreign currency–denominated revenue and expense. For
qualifying cash flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in other comprehensive income/(loss) (“OCI”) and recognized in the
Consolidated Statements of Income when the hedged cash flows affect earnings. Derivative amounts
affecting earnings are recognized consistent with the classification of the hedged item –
primarily interest income, interest expense, noninterest revenue and compensation expense. The
ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge
relationship is terminated, then the value of the derivative recorded in accumulated other
comprehensive income/(loss) (“AOCI”) is recognized in earnings when the cash flows that were hedged
affect earnings. For hedge relationships that are discontinued because a forecasted transaction is
not expected to occur according to the original hedge forecast, any related derivative values
recorded in AOCI are immediately recognized in earnings.
JPMorgan Chase uses foreign currency hedges to protect the value of the Firm’s net investments in
certain non-U.S. subsidiaries or
branches whose functional currencies are not the U.S. dollar. For
foreign currency qualifying net investment hedges, changes in the fair value of the derivatives are
recorded in the translation adjustments account within AOCI.
Notional amount of derivative contracts
The following table summarizes the notional amount of derivative contracts outstanding as of
December 31, 2010 and 2009.
| Notional amounts (b) | ||||||||
| December 31, (in billions) | 2010 | 2009 | ||||||
|
Interest
rate contracts
|
||||||||
|
Swaps
|
$ | 46,299 | $ | 47,663 | ||||
|
Futures and forwards
|
9,298 | 6,986 | ||||||
|
Written options
|
4,075 | 4,553 | ||||||
|
Purchased options
|
3,968 | 4,584 | ||||||
|
Total interest rate contracts
|
63,640 | 63,786 | ||||||
|
Credit
derivatives
(a)
|
5,472 | 5,994 | ||||||
|
Foreign
exchange contracts
|
||||||||
|
Cross-currency swaps
|
2,568 | 2,217 | ||||||
|
Spot, futures and forwards
|
3,893 | 3,578 | ||||||
|
Written options
|
674 | 685 | ||||||
|
Purchased options
|
649 | 699 | ||||||
|
Total foreign exchange contracts
|
7,784 | 7,179 | ||||||
|
Equity
contracts
|
||||||||
|
Swaps
|
116 | 81 | ||||||
|
Futures and forwards
|
49 | 45 | ||||||
|
Written options
|
430 | 502 | ||||||
|
Purchased options
|
377 | 449 | ||||||
|
Total equity contracts
|
972 | 1,077 | ||||||
|
Commodity
contracts
|
||||||||
|
Swaps
|
349 | 178 | ||||||
|
Spot, futures and forwards
|
170 | 113 | ||||||
|
Written options
|
264 | 201 | ||||||
|
Purchased options
|
254 | 205 | ||||||
|
Total commodity contracts
|
1,037 | 697 | ||||||
|
Total derivative notional amounts
|
$ | 78,905 | $ | 78,733 | ||||
| (a) | Primarily consists of credit default swaps. For more information on volumes and types of credit derivative contracts, see the Credit derivatives discussion on pages 197–199 of this Note. | |
| (b) | Represents the sum of gross long and gross short third-party notional derivative contracts. |
While the notional amounts disclosed above give an indication of the volume of the Firm’s
derivative activity, the notional amounts significantly exceed, in the Firm’s view, the possible
losses that could arise from such transactions. For most derivative transactions, the notional
amount does not change hands; it is used simply as a reference to calculate payments.
Impact of derivatives on the Consolidated Balance Sheets
The following tables summarize derivative fair values as of December 31, 2010 and 2009, by
accounting designation (e.g., whether the derivatives were designated as hedges or not) and
contract type.
| 192 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Free-standing derivatives
(a)
| Derivative receivables | Derivative payables | |||||||||||||||||||||||
| Not | ||||||||||||||||||||||||
| December 31, 2010 | Not designated | Designated | Total derivative | designated | Designated | Total derivative | ||||||||||||||||||
| (in millions) | as hedges | as hedges | receivables | as hedges | as hedges | payables | ||||||||||||||||||
|
Trading assets and
liabilities
|
||||||||||||||||||||||||
|
Interest rate
|
$ | 1,121,703 | $ | 6,279 | $ | 1,127,982 | $ | 1,089,604 | $ | 840 | $ | 1,090,444 | ||||||||||||
|
Credit
|
129,729 | — | 129,729 | 125,061 | — | 125,061 | ||||||||||||||||||
|
Foreign exchange
(b)
|
165,240 | 3,231 | 168,471 | 163,671 | 1,059 | 164,730 | ||||||||||||||||||
|
Equity
|
43,633 | — | 43,633 | 46,399 | — | 46,399 | ||||||||||||||||||
|
Commodity
|
59,573 | 24 | 59,597 | 56,397 | 2,078 | (d) | 58,475 | |||||||||||||||||
|
Gross fair value of
trading assets and
liabilities
|
$ | 1,519,878 | $ | 9,534 | $ | 1,529,412 | $ | 1,481,132 | $ | 3,977 | $ | 1,485,109 | ||||||||||||
|
Netting adjustment
(c)
|
(1,448,931 | ) | (1,415,890 | ) | ||||||||||||||||||||
|
Carrying value of
derivative trading
assets and trading
liabilities on the
Consolidated Balance
Sheets
|
$ | 80,481 | $ | 69,219 | ||||||||||||||||||||
| Derivative receivables | Derivative payables | |||||||||||||||||||||||
| Not | ||||||||||||||||||||||||
| December 31, 2009 | Not designated | Designated | Total derivative | designated | Designated | Total derivative | ||||||||||||||||||
| (in millions) | as hedges | as hedges | receivables | as hedges | as hedges | payables | ||||||||||||||||||
|
Trading assets and
liabilities
|
||||||||||||||||||||||||
|
Interest rate
|
$ | 1,148,901 | $ | 6,568 | $ | 1,155,469 | $ | 1,121,978 | $ | 427 | $ | 1,122,405 | ||||||||||||
|
Credit
|
170,864 | — | 170,864 | 164,790 | — | 164,790 | ||||||||||||||||||
|
Foreign exchange
(b)
|
141,790 | 2,497 | 144,287 | 137,865 | 353 | 138,218 | ||||||||||||||||||
|
Equity
|
57,871 | — | 57,871 | 58,494 | — | 58,494 | ||||||||||||||||||
|
Commodity
|
36,988 | 39 | 37,027 | 35,082 | 194 | (d) | 35,276 | |||||||||||||||||
|
Gross fair value of
trading assets and
liabilities
|
$ | 1,556,414 | $ | 9,104 | $ | 1,565,518 | $ | 1,518,209 | $ | 974 | $ | 1,519,183 | ||||||||||||
|
Netting adjustment
(c)
|
(1,485,308 | ) | (1,459,058 | ) | ||||||||||||||||||||
|
Carrying value of
derivative trading
assets and trading
liabilities on the
Consolidated Balance
Sheets
|
$ | 80,210 | $ | 60,125 | ||||||||||||||||||||
| (a) | Excludes structured notes for which the fair value option has been elected. See Note 4 on pages 187—189 of this Annual Report for further information. | |
| (b) | Excludes $21 million of foreign currency-denominated debt designated as a net investment hedge at December 31, 2010. The Firm did not use foreign currency-denominated debt as a hedging instrument in 2009, and therefore there was no impact as of December, 31, 2009. | |
| (c) | U.S. GAAP permits the netting of derivative receivables and payables, and the related cash collateral received and paid when a legally enforceable master netting agreement exists between the Firm and a derivative counterparty. | |
| (d) | Excludes $1.0 billion and $1.3 billion related to commodity derivatives that are embedded in a debt instrument and used as fair value hedging instruments that are recorded in the line item of the host contract (other borrowed funds) for December 31, 2010 and 2009, respectively. |
Derivative receivables and payables mark-to-market
The following table summarizes the fair values of derivative receivables and payables, including
those designated as hedges, by contract type after netting adjustments as of December 31, 2010 and
2009.
| Trading assets – Derivative receivables | Trading liabilities – Derivative payables | |||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Contract type
|
||||||||||||||||
|
Interest rate
(a)
|
$ | 32,555 | $ | 33,733 | $ | 20,387 | $ | 19,688 | ||||||||
|
Credit
(a)
|
7,725 | 11,859 | 5,138 | 6,036 | ||||||||||||
|
Foreign exchange
|
25,858 | 21,984 | 25,015 | 19,818 | ||||||||||||
|
Equity
|
4,204 | 6,635 | 10,450 | 11,554 | ||||||||||||
|
Commodity
|
10,139 | 5,999 | 8,229 | 3,029 | ||||||||||||
|
Total
|
$ | 80,481 | $ | 80,210 | $ | 69,219 | $ | 60,125 | ||||||||
| (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 receivables, of $7.0 billion, and an increase to interest rate derivative payables and a corresponding decrease to credit derivative payables of $4.5 billion as of December 31, 2009. |
| JPMorgan Chase & Co. / 2010 Annual Report | 193 |
Table of Contents
Notes to consolidated financial statements
| The tables that follow reflect the derivative-related income statement impact by accounting designation for the years ended December 31, 2010 and 2009, respectively. |
Fair value hedge gains and losses
The following tables present derivative instruments, by contract type, used in fair value hedge
accounting relationships, as well as pretax gains/(losses) recorded on such derivatives and the
related hedged items for the years ended December 31, 2010 and 2009. The Firm includes
gains/(losses) on the hedging derivative and the related hedged item in the same line item in the
Consolidated Statements of Income.
| Gains/(losses) recorded in income | Income statement impact due to: | |||||||||||||||||||
| Year ended | ||||||||||||||||||||
| December 31, 2010 | Total income | Hedge | Excluded | |||||||||||||||||
| (in millions) | Derivatives | Hedged items | statement impact (d) | ineffectiveness (e) | components (f) | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | 1,066 | $ | (454 | ) | $ | 612 | $ | 172 | $ | 440 | |||||||||
|
Foreign exchange
(b)
|
1,357 | (g) | (1,812 | ) | (455 | ) | — | (455 | ) | |||||||||||
|
Commodity
(c)
|
(1,354 | ) | 1,882 | 528 | — | 528 | ||||||||||||||
|
Total
|
$ | 1,069 | $ | (384 | ) | $ | 685 | $ | 172 | $ | 513 | |||||||||
| Gains/(losses) recorded in income | Income statement impact due to: | |||||||||||||||||||
| Year ended | ||||||||||||||||||||
| December 31, 2009 | Total income | Hedge | Excluded | |||||||||||||||||
| (in millions) | Derivatives | Hedged items | statement impact (d) | ineffectiveness (e) | components (f) | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (3,830 | ) | $ | 4,638 | $ | 808 | $ | (466 | ) | $ | 1,274 | ||||||||
|
Foreign exchange
(b)
|
(1,421 | ) (g) | 1,445 | 24 | — | 24 | ||||||||||||||
|
Commodity
(c)
|
(430 | ) | 399 | (31 | ) | — | (31 | ) | ||||||||||||
|
Total
|
$ | (5,681 | ) | $ | 6,482 | $ | 801 | $ | (466 | ) | $ | 1,267 | ||||||||
| (a) | Primarily consists of hedges of the benchmark (e.g., London Interbank Offered Rate (“LIBOR”)) interest rate risk of fixed-rate long-term debt and AFS securities. Gains and losses were recorded in net interest income. | |
| (b) | Primarily consists of hedges of the foreign currency risk of long-term debt and AFS securities for changes in spot foreign currency rates. Gains and losses related to the derivatives and the hedged items, due to changes in spot foreign currency rates, were recorded in principal transactions revenue. | |
| (c) | Consists of overall fair value hedges of gold and base metal inventory. Gains and losses were recorded in principal transactions revenue. | |
| (d) | Total income statement impact for fair value hedges consists of hedge ineffectiveness and any components excluded from the assessment of hedge effectiveness. The related amount for the year ended December 31, 2008 was a net gain of $434 million. | |
| (e) | Hedge ineffectiveness is the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk. | |
| (f) | Certain components of hedging derivatives are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on a futures or forward contract. Amounts related to excluded components are recorded in current-period income. | |
| (g) | For the years ended December 31, 2010 and 2009, includes $278 million and $(1.6) billion of revenue related to certain foreign exchange trading derivatives designated as fair value hedging instruments, respectively. |
| 194 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Cash flow hedge gains and losses
The following tables present derivative instruments, by contract type, used in cash flow hedge accounting relationships, and the pretax gains/(losses) recorded on such derivatives, for the years ended December 31, 2010 and 2009, respectively. The Firm includes the gain/(loss) on the hedging derivative in the same line item as the offsetting change in cash flows on the hedged item in the Consolidated Statements of Income.
The following tables present derivative instruments, by contract type, used in cash flow hedge accounting relationships, and the pretax gains/(losses) recorded on such derivatives, for the years ended December 31, 2010 and 2009, respectively. The Firm includes the gain/(loss) on the hedging derivative in the same line item as the offsetting change in cash flows on the hedged item in the Consolidated Statements of Income.
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||||||
| Derivatives – | Hedge | |||||||||||||||||||
| effective portion | ineffectiveness | Derivatives – | Total change | |||||||||||||||||
| Year ended | reclassified from | recorded directly | Total income | effective portion | in OCI | |||||||||||||||
| December 31, 2010 (in millions) | AOCI to income | in income (d) | statement impact | recorded in OCI | for period | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | 288 | (c) | $ | 20 | $ | 308 | $ | 388 | $ | 100 | |||||||||
|
Foreign exchange
(b)
|
(82 | ) | (3 | ) | (85 | ) | (141 | ) | (59 | ) | ||||||||||
|
Total
|
$ | 206 | $ | 17 | $ | 223 | $ | 247 | $ | 41 | ||||||||||
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||||||
| Derivatives – | Hedge | |||||||||||||||||||
| effective portion | ineffectiveness | Derivatives – | Total change | |||||||||||||||||
| Year ended | reclassified from | recorded directly | Total income | effective portion | in OCI | |||||||||||||||
| December 31, 2009 (in millions) | AOCI to income | in income (d) | statement impact | recorded in OCI | for period | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (158 | ) (c) | $ | (62 | ) | $ | (220 | ) | $ | 61 | $ | 219 | |||||||
|
Foreign exchange
(b)
|
282 | — | 282 | 706 | 424 | |||||||||||||||
|
Total
|
$ | 124 | $ | (62 | ) | $ | 62 | $ | 767 | $ | 643 | |||||||||
| (a) | Primarily consists of benchmark interest rate hedges of LIBOR-indexed floating-rate assets and floating-rate liabilities. Gains and losses were recorded in net interest income. | |
| (b) | Primarily consists of hedges of the foreign currency risk of non–U.S. dollar–denominated revenue and expense. The income statement classification of gains and losses follows the hedged item – primarily net interest income, compensation expense and other expense. | |
| (c) | In 2010, the Firm reclassified a $25 million loss from accumulated other comprehensive income (“AOCI”) to earnings because the Firm determined that it is probable that forecasted interest payment cash flows related to certain wholesale deposits will not occur. The Firm did not experience forecasted transactions that failed to occur for the year ended December 31, 2009. | |
| (d) | Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk. Hedge ineffectiveness recorded directly in income for cash flow hedges was a net gain of $18 million for the year ended December 31, 2008. |
Over the next 12 months, the Firm expects that $282 million (after-tax) of net losses recorded
in AOCI at December 31, 2010, related to cash flow hedges will be recognized in income. The maximum
length of time over which forecasted transactions are hedged is 10 years, and such transactions
primarily relate to core lending and borrowing activities.
Net investment hedge gains and losses
The following table presents hedging instruments, by contract type, that were used in net investment hedge accounting relationships, and the pretax gains/(losses) recorded on such instruments for the years ended December 31, 2010 and 2009.
The following table presents hedging instruments, by contract type, that were used in net investment hedge accounting relationships, and the pretax gains/(losses) recorded on such instruments for the years ended December 31, 2010 and 2009.
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||
| Hedging instruments – excluded components | Hedging instruments – effective portion | |||||||||||||||
| Year ended | recorded directly in income (a) | recorded in OCI | ||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Contract type
|
||||||||||||||||
|
Foreign exchange derivatives
|
$ | (139 | ) | $ | (112 | ) | $ | (30 | ) | $ | (259 | ) | ||||
|
Foreign currency denominated debt
|
— | NA | 41 | NA | ||||||||||||
|
Total
|
$ | (139 | ) | $ | (112 | ) | $ | 11 | $ | (259 | ) | |||||
| (a) | Certain components of hedging derivatives are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on a futures or forward contract. Amounts related to excluded components are recorded in current-period income. There was no ineffectiveness for net investment hedge accounting relationships during 2010 and 2009. |
| JPMorgan Chase & Co. / 2010 Annual Report | 195 |
Table of Contents
Notes to consolidated financial statements
Risk management derivatives gains and losses (not designated as hedging instruments)
The following table presents nontrading derivatives, by contract type, that were not designated in hedge accounting relationships, and the pretax gains/(losses) recorded on such derivatives for the years ended December 31, 2010 and 2009. These derivatives are risk management instruments used to mitigate or transform market risk exposures arising from banking activities other than trading activities, which are discussed separately below.
The following table presents nontrading derivatives, by contract type, that were not designated in hedge accounting relationships, and the pretax gains/(losses) recorded on such derivatives for the years ended December 31, 2010 and 2009. These derivatives are risk management instruments used to mitigate or transform market risk exposures arising from banking activities other than trading activities, which are discussed separately below.
| Derivatives gains/(losses) | ||||||||
| Year ended December 31, | recorded in income | |||||||
| (in millions) | 2010 | 2009 | ||||||
|
Contract type
|
||||||||
|
Interest rate
(a)
|
$ | 4,997 | $ | (3,113 | ) | |||
|
Credit
(b)
|
(237 | ) | (3,222 | ) | ||||
|
Foreign exchange
(c)
|
(85 | ) | (197 | ) | ||||
|
Equity
(b)
|
— | (8 | ) | |||||
|
Commodity
(b)
|
(24 | ) | (50 | ) | ||||
|
Total
|
$ | 4,651 | $ | (6,590 | ) | |||
| (a) | Gains and losses were recorded in principal transactions revenue, mortgage fees and related income, and net interest income. | |
| (b) | Gains and losses were recorded in principal transactions revenue. | |
| (c) | Gains and losses were recorded in principal transactions revenue and net interest income. |
Trading derivative gains and losses
The Firm has elected to present derivative gains and losses related to its trading activities together with the cash instruments with which they are risk managed. All amounts are recorded in principal transactions revenue in the Consolidated Statements of Income for the years ended December 31, 2010 and 2009. The amounts below do not represent a comprehensive view of the Firm’s trading activities because they do not include certain revenue associated with those activities, including net interest income earned on cash instruments used in trading activities and gains and losses on cash instruments that are risk managed without derivative instruments.
The Firm has elected to present derivative gains and losses related to its trading activities together with the cash instruments with which they are risk managed. All amounts are recorded in principal transactions revenue in the Consolidated Statements of Income for the years ended December 31, 2010 and 2009. The amounts below do not represent a comprehensive view of the Firm’s trading activities because they do not include certain revenue associated with those activities, including net interest income earned on cash instruments used in trading activities and gains and losses on cash instruments that are risk managed without derivative instruments.
| Gains/(losses) recorded in principal | ||||||||
| Year ended December 31, | transactions revenue | |||||||
| (in millions) | 2010 | 2009 | ||||||
|
Type of instrument
|
||||||||
|
Interest rate
|
$ | (683 | ) | $ | 4,375 | |||
|
Credit
|
4,636 | 5,022 | ||||||
|
Foreign exchange
(a)
|
1,854 | 2,583 | ||||||
|
Equity
|
1,827 | 1,475 | ||||||
|
Commodity
|
256 | 1,329 | ||||||
|
Total
|
$ | 7,890 | $ | 14,784 | ||||
| (a) | In 2010, the reporting of trading gains and losses was enhanced to include trading gains and losses related to certain trading derivatives designated as fair value hedging instruments. Prior period amounts have been revised to conform to the current presentation. |
Credit risk, liquidity risk and credit-related contingent features
In addition to the specific market risks introduced by each derivative contract type, derivatives expose JPMorgan Chase to credit risk – the risk that derivative counterparties may fail to meet their payment obligations under the derivative contracts and the collateral, if any, held by the Firm proves to be of insufficient value to cover the payment obligation. It is the policy of JPMorgan Chase to enter into legally enforceable master netting agreements as well as to actively pursue the use of collateral agreements to mitigate derivative counterparty credit risk. The amount of derivative receivables reported on the Consolidated Balance Sheets is the fair value of the derivative contracts after giving effect to legally enforceable master netting agreements and cash collateral held by the Firm. These amounts represent the cost to the Firm to replace the contracts at then-current market rates should the counterparty default.
In addition to the specific market risks introduced by each derivative contract type, derivatives expose JPMorgan Chase to credit risk – the risk that derivative counterparties may fail to meet their payment obligations under the derivative contracts and the collateral, if any, held by the Firm proves to be of insufficient value to cover the payment obligation. It is the policy of JPMorgan Chase to enter into legally enforceable master netting agreements as well as to actively pursue the use of collateral agreements to mitigate derivative counterparty credit risk. The amount of derivative receivables reported on the Consolidated Balance Sheets is the fair value of the derivative contracts after giving effect to legally enforceable master netting agreements and cash collateral held by the Firm. These amounts represent the cost to the Firm to replace the contracts at then-current market rates should the counterparty default.
While derivative receivables expose the Firm to credit risk, derivative payables expose the Firm to
liquidity risk, as the derivative contracts typically require the Firm to post cash or securities
collateral with counterparties as the mark-to-market
(“MTM”) of the contracts moves in the counterparties’ favor, or
upon specified downgrades in the Firm’s and its subsidiaries’ respective credit ratings. Certain
derivative contracts also provide for termination of the contract, generally upon a downgrade of
either the Firm or the counterparty, at the fair value of the derivative contracts. The aggregate
fair value of net derivative payables that contain contingent collateral or termination features
triggered upon a downgrade was $19.8 billion and $22.6 billion at December 31, 2010 and 2009,
respectively, for which the Firm has posted collateral of $14.6 billion and $22.3 billion,
respectively, in the normal course of business. At December 31, 2010 and 2009, the impact of a
single-notch and two-notch ratings downgrade to JPMorgan Chase & Co. and its subsidiaries,
primarily JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), would have
required $1.9 billion and $3.5 billion, respectively, and
$1.2 billion and $2.2 billion,
respectively, of additional collateral to be posted by the Firm. In addition, at December 31, 2010
and 2009, the impact of single-notch and two-notch ratings downgrades to JPMorgan Chase & Co. and
its subsidiaries, primarily JPMorgan Chase Bank, N.A., related to contracts with termination
triggers would have required the Firm to settle trades with a fair value of $430 million and $1.0
billion, respectively, and $260 million and $270 million, respectively.
| 196 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following table shows the current credit risk of derivative receivables after netting
adjustments, and the current liquidity risk of derivative payables after netting adjustments, as of
December 31, 2010 and 2009.
| Derivative receivables | Derivative payables | |||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Gross derivative fair value
|
$ | 1,529,412 | $ | 1,565,518 | $ | 1,485,109 | $ | 1,519,183 | ||||||||
|
Netting adjustment –
offsetting
receivables/payables
|
(1,376,969 | ) | (1,419,840 | ) | (1,376,969 | ) | (1,419,840 | ) | ||||||||
|
Netting adjustment – cash
collateral received/paid
|
(71,962 | ) | (65,468 | ) | (38,921 | ) | (39,218 | ) | ||||||||
|
Carrying value on
Consolidated Balance
Sheets
|
$ | 80,481 | $ | 80,210 | $ | 69,219 | $ | 60,125 | ||||||||
In addition to the collateral amounts reflected in the table above, at December 31, 2010
and 2009, the Firm had received liquid securities and other cash collateral in the amount of $16.5
billion and $15.5 billion, respectively, and had posted $10.9 billion and $11.7 billion,
respectively. The Firm also receives and delivers collateral at the initiation of derivative
transactions, which is available as security against potential exposure that could arise should the
fair value of the transactions move in the Firm’s or client’s favor, respectively. Furthermore, the
Firm and its counterparties hold collateral related to contracts that have a non-daily call
frequency for collateral to be posted, and collateral that the Firm or a counterparty has agreed to
return but has not yet settled as of the reporting date. At December 31, 2010 and 2009, the Firm
had received $18.0 billion and $16.9 billion, respectively,
and delivered $8.4 billion and $5.8
billion, respectively, of such additional collateral. These amounts were not netted against the
derivative receivables and payables in the table above, because, at an individual counterparty
level, the collateral exceeded the fair value exposure at December 31, 2010 and 2009.
Credit derivatives
Credit derivatives are financial instruments whose value is derived from the credit risk associated with the debt of a third-party issuer (the reference entity) and which allow one party (the protection purchaser) to transfer that risk to another party (the protection seller). Credit derivatives expose the protection purchaser to the creditworthiness of the protection seller, as the protection seller is required to make payments under the contract when the reference entity experiences a credit event, such as a bankruptcy, a failure to pay its obligation or a restructuring. The seller of credit protection receives a premium for providing protection but has the risk that the underlying instrument referenced in the contract will be subject to a credit event.
Credit derivatives are financial instruments whose value is derived from the credit risk associated with the debt of a third-party issuer (the reference entity) and which allow one party (the protection purchaser) to transfer that risk to another party (the protection seller). Credit derivatives expose the protection purchaser to the creditworthiness of the protection seller, as the protection seller is required to make payments under the contract when the reference entity experiences a credit event, such as a bankruptcy, a failure to pay its obligation or a restructuring. The seller of credit protection receives a premium for providing protection but has the risk that the underlying instrument referenced in the contract will be subject to a credit event.
The Firm is both a purchaser and seller of protection in the credit derivatives market and uses
these derivatives for two primary purposes. First, in its capacity as a market-maker in the
dealer/client business, the Firm actively risk manages a portfolio of credit derivatives by
purchasing and selling credit protection, predominantly on corporate debt obligations, to meet the
needs of customers. As a seller of protection, the Firm’s exposure to a given reference entity may
be offset partially, or entirely, with a contract to purchase protection from another counterparty
on the same or similar reference entity. Second, the Firm uses credit derivatives to mitigate
credit risk associated with its overall derivative receivables and traditional commercial credit
lending exposures (loans and unfunded commitments) as well as to manage its exposure to
residential
and commercial mortgages. See Note 3 on pages 170–187 of this Annual Report for further
information on the Firm’s mortgage-related exposures. In accomplishing the above, the Firm uses
different types of credit derivatives. Following is a summary of various types of credit
derivatives.
Credit default swaps
Credit derivatives may reference the credit of either a single reference entity (“single-name”) or a broad-based index. The Firm purchases and sells protection on both single- name and index-reference obligations. Single-name CDS and index CDS contracts are OTC derivative contracts. Single-name CDS are used to manage the default risk of a single reference entity, while index CDS contracts are used to manage the credit risk associated with the broader credit markets or credit market segments. Like the S&P 500 and other market indices, a CDS index comprises a portfolio of CDS across many reference entities. New series of CDS indices are periodically established with a new underlying portfolio of reference entities to reflect changes in the credit markets. If one of the reference entities in the index experiences a credit event, then the reference entity that defaulted is removed from the index. CDS can also be referenced against specific portfolios of reference names or against customized exposure levels based on specific client demands: for example, to provide protection against the first $1 million of realized credit losses in a $10 million portfolio of exposure. Such structures are commonly known as tranche CDS.
Credit derivatives may reference the credit of either a single reference entity (“single-name”) or a broad-based index. The Firm purchases and sells protection on both single- name and index-reference obligations. Single-name CDS and index CDS contracts are OTC derivative contracts. Single-name CDS are used to manage the default risk of a single reference entity, while index CDS contracts are used to manage the credit risk associated with the broader credit markets or credit market segments. Like the S&P 500 and other market indices, a CDS index comprises a portfolio of CDS across many reference entities. New series of CDS indices are periodically established with a new underlying portfolio of reference entities to reflect changes in the credit markets. If one of the reference entities in the index experiences a credit event, then the reference entity that defaulted is removed from the index. CDS can also be referenced against specific portfolios of reference names or against customized exposure levels based on specific client demands: for example, to provide protection against the first $1 million of realized credit losses in a $10 million portfolio of exposure. Such structures are commonly known as tranche CDS.
For both single-name CDS contracts and index CDS contracts, upon the occurrence of a credit event,
under the terms of a CDS contract neither party to the CDS contract has recourse to the reference
entity. The protection purchaser has recourse to the protection seller for the difference between
the face value of the CDS contract and the fair value of the reference obligation at the time of
settling the credit derivative contract, also known as the recovery value. The protection purchaser
does not need to hold the debt instrument of the underlying reference entity in order to receive
amounts due under the CDS contract when a credit event occurs.
Credit-related notes
A credit-related note is a funded credit derivative where the issuer of the credit-related note purchases from the note investor credit protection on a referenced entity. Under the contract, the investor pays the issuer the par value of the note at the inception of the transaction, and in return, the issuer pays periodic payments to the investor, based on the credit risk of the referenced entity. The issuer also repays the investor the par value of the note at maturity unless the reference entity experiences a specified credit event. If a credit event
A credit-related note is a funded credit derivative where the issuer of the credit-related note purchases from the note investor credit protection on a referenced entity. Under the contract, the investor pays the issuer the par value of the note at the inception of the transaction, and in return, the issuer pays periodic payments to the investor, based on the credit risk of the referenced entity. The issuer also repays the investor the par value of the note at maturity unless the reference entity experiences a specified credit event. If a credit event
| JPMorgan Chase & Co. / 2010 Annual Report | 197 |
Table of Contents
Notes to consolidated financial statements
occurs, the issuer is not obligated to repay the par value of the note, but rather, the issuer pays
the investor the difference between the par value of the note and the fair value of the defaulted
reference obligation at the time of settlement. Neither party to the credit-related note has
recourse to the defaulting reference entity. For a further discussion of credit-related notes, see
Note 16 on pages 244–259 of this Annual Report.
Effective July 1, 2010, the Firm adopted new accounting guidance prospectively related to credit
derivatives embedded in beneficial interests in securitized financial assets, which resulted in the
election of the fair value option for certain instruments in the AFS securities portfolio. The
related cumulative effect adjustment increased retained earnings and decreased accumulated other
comprehensive income by $15 million, respectively, as of July 1, 2010.
The following table presents a summary of the notional amounts of credit derivatives and
credit-related notes the Firm sold and purchased as of December 31, 2010 and 2009. Upon a credit
event,
the Firm as seller of protection would typically pay out only a percentage of the full
notional amount of net protection sold, as the amount actually required to be paid on the contracts
takes into account the recovery value of the reference obligation at the time of settlement. The
Firm manages the credit risk on contracts to sell protection by purchasing protection with
identical or similar underlying reference entities. Other purchased protection referenced in the
following table includes credit derivatives bought on related, but not identical, reference
positions (including indices, portfolio coverage and other reference points) as well as protection
purchased through credit-related notes.
The Firm does not use notional amounts as the primary measure of risk management for credit
derivatives, because the notional amount does not take into account the probability of the
occurrence of a credit event, the recovery value of the reference obligation, or related cash
instruments and economic hedges.
Total credit derivatives and credit-related notes
| Maximum payout/Notional amount | ||||||||||||||||
| December 31, 2010 | Protection purchased with | Other protection | ||||||||||||||
| (in millions) | Protection sold | identical underlyings (c) | Net protection (sold)/purchased (d) | purchased (e) | ||||||||||||
|
Credit derivatives
|
||||||||||||||||
|
Credit default swaps
|
$ | (2,659,240 | ) | $ | 2,652,313 | $ | (6,927 | ) | $ | 32,867 | ||||||
|
Other credit
derivatives
(a)
|
(93,776 | ) | 10,016 | (83,760 | ) | 24,234 | ||||||||||
|
Total credit derivatives
|
(2,753,016 | ) | 2,662,329 | (90,687 | ) | 57,101 | ||||||||||
|
Credit-related notes
(b)
|
(2,008 | ) | — | (2,008 | ) | 3,327 | ||||||||||
|
Total
|
$ | (2,755,024 | ) | $ | 2,662,329 | $ | (92,695 | ) | $ | 60,428 | ||||||
| Maximum payout/Notional amount | ||||||||||||||||
| December 31, 2009 | Protection purchased with | Other protection | ||||||||||||||
| (in millions) | Protection sold | identical underlyings (c) | Net protection (sold)/purchased (d) | purchased (e) | ||||||||||||
|
Credit derivatives
|
||||||||||||||||
|
Credit default swaps
|
$ | (2,937,442 | ) | $ | 2,978,044 | $ | 40,602 | $ | 28,064 | |||||||
|
Other credit
derivatives
(a)
|
(10,575 | ) | 9,290 | (1,285 | ) | 30,473 | ||||||||||
|
Total credit derivatives
|
(2,948,017 | ) | 2,987,334 | 39,317 | 58,537 | |||||||||||
|
Credit-related notes
|
(4,031 | ) | — | (4,031 | ) | 1,728 | ||||||||||
|
Total
|
$ | (2,952,048 | ) | $ | 2,987,334 | $ | 35,286 | $ | 60,265 | |||||||
| (a) | Primarily consists of total return swaps and credit default swap options. | |
| (b) | As a result of the adoption of new accounting guidance, effective July 1, 2010, includes beneficial interests in securitized financial assets that contain embedded credit derivatives. | |
| (c) | Represents the total notional amount of protection purchased where the underlying reference instrument is identical to the reference instrument on protection sold; the notional amount of protection purchased for each individual identical underlying reference instrument may be greater or lower than the notional amount of protection sold. | |
| (d) | Does not take into account the fair value of the reference obligation at the time of settlement, which would generally reduce the amount the seller of protection pays to the buyer of protection in determining settlement value. | |
| (e) | Represents protection purchased by the Firm through single-name and index credit default swap or credit-related notes. |
| 198 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following tables summarize the notional and fair value amounts of credit derivatives and
credit-related notes as of December 31, 2010 and 2009, where JPMorgan Chase is the seller of
protection. The maturity profile is based on the remaining contractual maturity of the credit
derivative contracts. The ratings profile is based on the rating of the reference entity on which
the credit derivative contract is based. The ratings and maturity profile of protection purchased
are comparable to the profile reflected below.
Protection sold – credit derivatives and credit-related notes ratings
(a)
/maturity profile
| Total | ||||||||||||||||||||
| December 31, 2010 (in millions) | <1 year | 1 – 5 years | >5 years | notional amount | Fair value (b) | |||||||||||||||
|
Risk
rating of reference entity
|
||||||||||||||||||||
|
Investment-grade
|
$ | (175,618 | ) | $ | (1,194,695 | ) | $ | (336,309 | ) | $ | (1,706,622 | ) | $ | (17,261 | ) | |||||
|
Noninvestment-grade
|
(148,434 | ) | (702,638 | ) | (197,330 | ) | (1,048,402 | ) | (59,939 | ) | ||||||||||
|
Total
|
$ | (324,052 | ) | $ | (1,897,333 | ) | $ | (533,639 | ) | $ | (2,755,024 | ) | $ | (77,200 | ) | |||||
| Total | ||||||||||||||||||||
| December 31, 2009 (in millions) | <1 year | 1 – 5 years | >5 years | notional amount | Fair value (b) | |||||||||||||||
|
Risk
rating of reference entity
|
||||||||||||||||||||
|
Investment-grade
|
$ | (215,580 | ) | $ | (1,140,133 | ) | $ | (367,015 | ) | $ | (1,722,728 | ) | $ | (16,607 | ) | |||||
|
Noninvestment-grade
|
(150,122 | ) | (806,139 | ) | (273,059 | ) | (1,229,320 | ) | (90,410 | ) | ||||||||||
|
Total
|
$ | (365,702 | ) | $ | (1,946,272 | ) | $ | (640,074 | ) | $ | (2,952,048 | ) | $ | (107,017 | ) | |||||
| (a) | The ratings scale is based on the Firm’s internal ratings, which generally correspond to ratings as defined by S&P and Moody’s. | |
| (b) | Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral held by the Firm. |
Investment banking fees
This revenue category includes advisory and equity and debt underwriting fees. Advisory fees are recognized as revenue when the related services have been performed and the fee has been earned. Underwriting fees are recognized as revenue when the Firm has rendered all services to the issuer and is entitled to collect the fee from the issuer, as long as there are no other contingencies associated with the fee (e.g., the fee is not contingent upon the customer obtaining financing). Underwriting fees are net of syndicate expense; the Firm recognizes credit arrangement and syndication fees as revenue after satisfying certain retention, timing and yield criteria.
This revenue category includes advisory and equity and debt underwriting fees. Advisory fees are recognized as revenue when the related services have been performed and the fee has been earned. Underwriting fees are recognized as revenue when the Firm has rendered all services to the issuer and is entitled to collect the fee from the issuer, as long as there are no other contingencies associated with the fee (e.g., the fee is not contingent upon the customer obtaining financing). Underwriting fees are net of syndicate expense; the Firm recognizes credit arrangement and syndication fees as revenue after satisfying certain retention, timing and yield criteria.
The following table presents the components of investment banking fees.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Underwriting:
|
||||||||||||
|
Equity
|
$ | 1,589 | $ | 2,487 | $ | 1,477 | ||||||
|
Debt
|
3,172 | 2,739 | 2,094 | |||||||||
|
Total
underwriting
|
4,761 | 5,226 | 3,571 | |||||||||
|
Advisory
(a)
|
1,429 | 1,861 | 1,955 | |||||||||
|
Total investment banking fees
|
$ | 6,190 | $ | 7,087 | $ | 5,526 | ||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firm-administered multi-seller conduits. The consolidation of the conduits did not significantly change the Firm’s net income as a whole; however, it did affect the classification of items on the Firm’s Consolidated Statements of Income. As a result, certain advisory fees were considered inter-company and eliminated, and the fees charged by the consolidated multi-seller conduits to its customers were classified as lending-and-deposit-related fees. |
Principal transactions
Principal transactions revenue consists of realized and unrealized gains and losses from trading activities (including physical commodities inventories that are generally accounted for at the lower of cost or fair value), changes in fair value associated with financial instruments held by IB for which the fair value option was elected, and loans held-for-sale within the wholesale lines of business. Principal transactions revenue also includes private equity gains and losses.
Principal transactions revenue consists of realized and unrealized gains and losses from trading activities (including physical commodities inventories that are generally accounted for at the lower of cost or fair value), changes in fair value associated with financial instruments held by IB for which the fair value option was elected, and loans held-for-sale within the wholesale lines of business. Principal transactions revenue also includes private equity gains and losses.
The following table presents principal transactions revenue.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Trading revenue
|
$ | 9,404 | $ | 9,870 | $ | (9,791 | ) | |||||
|
Private equity
gains/(losses)
(a)
|
1,490 | (74 | ) | (908 | ) | |||||||
|
Principal transactions
|
$ | 10,894 | $ | 9,796 | $ | (10,699 | ) | |||||
| (a) | Includes revenue on private equity investments held in the Private Equity business within Corporate/Private Equity, as well as those held in other business segments. |
Lending- and deposit-related fees
This revenue category includes fees from loan commitments, standby letters of credit, financial guarantees, deposit-related fees in lieu of compensating balances, cash management-related activities or transactions, deposit accounts and other loan-servicing activities. These fees are recognized over the period in which the related service is provided.
This revenue category includes fees from loan commitments, standby letters of credit, financial guarantees, deposit-related fees in lieu of compensating balances, cash management-related activities or transactions, deposit accounts and other loan-servicing activities. These fees are recognized over the period in which the related service is provided.
Asset management, administration and commissions
This revenue category includes fees from investment management and related services, custody, brokerage services, insurance premiums and commissions, and other products. These fees are recognized over the period in which the related service is provided. Performance-based fees, which are earned based on exceeding certain benchmarks or other performance targets, are accrued and recognized at the end of the performance period in which the target is met.
This revenue category includes fees from investment management and related services, custody, brokerage services, insurance premiums and commissions, and other products. These fees are recognized over the period in which the related service is provided. Performance-based fees, which are earned based on exceeding certain benchmarks or other performance targets, are accrued and recognized at the end of the performance period in which the target is met.
The following table presents the components of asset management, administration and commissions.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Asset management:
|
||||||||||||
|
Investment management fees
|
$ | 5,632 | $ | 4,997 | $ | 5,562 | ||||||
|
All other asset management fees
|
496 | 356 | 432 | |||||||||
|
Total
asset management fees
|
6,128 | 5,353 | 5,994 | |||||||||
|
Total administration fees
(a)
|
2,023 | 1,927 | 2,452 | |||||||||
|
Commission and other fees:
|
||||||||||||
|
Brokerage commissions
|
2,804 | 2,904 | 3,141 | |||||||||
|
All other commissions and fees
|
2,544 | 2,356 | 2,356 | |||||||||
|
Total
commissions and fees
|
5,348 | 5,260 | 5,497 | |||||||||
|
Total asset management,
administration and commissions
|
$ | 13,499 | $ | 12,540 | $ | 13,943 | ||||||
| (a) | Includes fees for custody, securities lending, funds services and securities clearance. |
| JPMorgan Chase & Co. / 2010 Annual Report | 199 |
Table of Contents
Notes to consolidated financial statements
Mortgage fees and related income
This revenue category primarily reflects Retail Financial Services’s (“RFS”) mortgage banking revenue, including: fees and income derived from mortgages originated with the intent to sell; mortgage sales and servicing including losses related to the repurchase of previously-sold loans; the impact of risk management activities associated with the mortgage pipeline, warehouse loans and MSRs; and revenue related to any residual interests held from mortgage securitizations. This revenue category also includes gains and losses on sales and lower of cost or fair value adjustments for mortgage loans held-for-sale, as well as changes in fair value for mortgage loans originated with the intent to sell and measured at fair value under the fair value option. Changes in the fair value of RFS mortgage servicing rights are reported in mortgage fees and related income. Net interest income from mortgage loans, and securities gains and losses on AFS securities used in mortgage-related risk management activities, are recorded in interest income and securities gains/(losses), respectively. For a further discussion of MSRs, see Note 17 on pages 260–263 of this Annual Report.
This revenue category primarily reflects Retail Financial Services’s (“RFS”) mortgage banking revenue, including: fees and income derived from mortgages originated with the intent to sell; mortgage sales and servicing including losses related to the repurchase of previously-sold loans; the impact of risk management activities associated with the mortgage pipeline, warehouse loans and MSRs; and revenue related to any residual interests held from mortgage securitizations. This revenue category also includes gains and losses on sales and lower of cost or fair value adjustments for mortgage loans held-for-sale, as well as changes in fair value for mortgage loans originated with the intent to sell and measured at fair value under the fair value option. Changes in the fair value of RFS mortgage servicing rights are reported in mortgage fees and related income. Net interest income from mortgage loans, and securities gains and losses on AFS securities used in mortgage-related risk management activities, are recorded in interest income and securities gains/(losses), respectively. For a further discussion of MSRs, see Note 17 on pages 260–263 of this Annual Report.
Credit card income
This revenue category includes interchange income from credit and debit cards. Prior to 2010, this revenue category included servicing fees earned in connection with securitization activities. Effective January 1, 2010, the Firm consolidated its Firm-sponsored credit card securitization trusts (see Note 16 on pages 244–259 of this Annual Report) and, as a result, the servicing fees were eliminated in consolidation. Volume-related payments to partners and expense for rewards programs are netted against interchange income; expense related to rewards programs are recorded when the rewards are earned by the customer. Other fee revenue is recognized as earned, except for annual fees, which are deferred and recognized on a straight-line basis over the 12-month period to which they pertain. Direct loan origination costs are also deferred and recognized over a 12-month period. In addition, due to the consolidation of Chase Paymentech Solutions in the fourth quarter of 2008, this category now includes net fees earned for processing card transactions for merchants.
This revenue category includes interchange income from credit and debit cards. Prior to 2010, this revenue category included servicing fees earned in connection with securitization activities. Effective January 1, 2010, the Firm consolidated its Firm-sponsored credit card securitization trusts (see Note 16 on pages 244–259 of this Annual Report) and, as a result, the servicing fees were eliminated in consolidation. Volume-related payments to partners and expense for rewards programs are netted against interchange income; expense related to rewards programs are recorded when the rewards are earned by the customer. Other fee revenue is recognized as earned, except for annual fees, which are deferred and recognized on a straight-line basis over the 12-month period to which they pertain. Direct loan origination costs are also deferred and recognized over a 12-month period. In addition, due to the consolidation of Chase Paymentech Solutions in the fourth quarter of 2008, this category now includes net fees earned for processing card transactions for merchants.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous affinity organizations and co-brand partners, which grant the Firm exclusive rights to market to the members or customers of such organizations and partners. These organizations and partners endorse the credit card programs and provide their mailing lists to the Firm, and they may also conduct marketing activities and provide awards under the various credit card programs. The terms of these agreements generally range from three to 10 years. The economic incentives the Firm pays to the endorsing organizations and partners typically include payments based on new account originations, charge volumes, and the cost of the endorsing organizations’ or partners’ marketing activities and awards.
The Firm has contractual agreements with numerous affinity organizations and co-brand partners, which grant the Firm exclusive rights to market to the members or customers of such organizations and partners. These organizations and partners endorse the credit card programs and provide their mailing lists to the Firm, and they may also conduct marketing activities and provide awards under the various credit card programs. The terms of these agreements generally range from three to 10 years. The economic incentives the Firm pays to the endorsing organizations and partners typically include payments based on new account originations, charge volumes, and the cost of the endorsing organizations’ or partners’ marketing activities and awards.
The Firm recognizes the payments made to the affinity organizations and co-brand partners based on
new account originations as direct loan origination costs. Payments based on charge volumes are
considered by the Firm as revenue sharing with the affinity organizations and co-brand partners,
which are deducted from interchange income as the related revenue is
earned. Payments based on
marketing efforts undertaken by the endorsing organization
or partner are expensed by the Firm as
incurred. These costs are recorded within noninterest expense.
Interest income and interest expense is recorded in the Consolidated Statements of Income and
classified based on the nature of the underlying asset or liability. Interest income and interest
expense includes the current-period interest accruals for financial instruments measured at fair
value, except for financial instruments containing embedded derivatives that would be separately
accounted for in accordance with U.S. GAAP absent the fair value option election; for those
instruments, all changes in fair value, including any interest elements, are reported in principal
transactions revenue. For financial instruments that are not measured at fair value, the related
interest is included within interest income or interest expense, as applicable.
Details of interest income and interest expense were as follows.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Interest income
|
||||||||||||
|
Loans
|
$ | 40,388 | $ | 38,704 | $ | 38,347 | ||||||
|
Securities
|
9,540 | 12,377 | 6,344 | |||||||||
|
Trading assets
|
11,007 | 12,098 | 17,236 | |||||||||
|
Federal funds sold and securities
purchased under resale agreements
|
1,786 | 1,750 | 5,983 | |||||||||
|
Securities borrowed
|
175 | 4 | 2,297 | |||||||||
|
Deposits with banks
|
345 | 938 | 1,916 | |||||||||
|
Other assets
(a)
|
541 | 479 | 895 | |||||||||
|
Total interest income
(b)
|
63,782 | 66,350 | 73,018 | |||||||||
|
Interest expense
|
||||||||||||
|
Interest-bearing deposits
|
3,424 | 4,826 | 14,546 | |||||||||
|
Short-term and other liabilities
(c)
|
2,708 | 3,845 | 10,933 | |||||||||
|
Long-term debt
|
5,504 | 6,309 | 8,355 | |||||||||
|
Beneficial interests issued by
consolidated
VIEs |
1,145 | 218 | 405 | |||||||||
|
Total interest expense
(b)
|
12,781 | 15,198 | 34,239 | |||||||||
|
Net interest income
|
$ | 51,001 | $ | 51,152 | $ | 38,779 | ||||||
|
Provision for credit losses
|
16,639 | 32,015 | 19,445 | |||||||||
|
Provision for credit losses – accounting
conformity
(d)
|
— | — | 1,534 | |||||||||
|
Total provision for credit losses
|
$ | 16,639 | $ | 32,015 | $ | 20,979 | ||||||
|
Net interest income after
provision for
credit losses |
$ | 34,362 | $ | 19,137 | $ | 17,800 | ||||||
| (a) | Predominantly margin loans. | |
| (b) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon the adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. The consolidation of these VIEs did not significantly change the Firm’s total net income. However, it did affect the classification of items on the Firm’s Consolidated Statements of Income; as a result of the adoption of the guidance, certain noninterest revenue was eliminated in consolidation, offset by the recognition of interest income, interest expense, and provision for credit losses. | |
| (c) | Includes brokerage customer payables. | |
| (d) | 2008 includes an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations. |
| 200 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The Firm’s defined benefit pension plans and its other postretirement employee benefit (“OPEB”)
plans (collectively the “Plans”) are accounted for in accordance with U.S. GAAP for
retirement benefits.
Defined benefit pension plans
The Firm has a qualified noncontributory U.S. defined benefit pension plan that provides benefits to substantially all U.S. employees. The U.S. plan employs a cash balance formula in the form of pay and interest credits to determine the benefits to be provided at retirement, based on eligible compensation and years of service. Employees begin to accrue plan benefits after completing one year of service, and benefits generally vest after three years of service. In November 2009, the Firm announced certain changes to the pay credit schedule and amount of eligible compensation recognized under the U.S. plan effective February 1, 2010. The Firm also offers benefits through defined benefit pension plans to qualifying employees in certain non-U.S. locations based on factors such as eligible compensation, age and/or years of service.
The Firm has a qualified noncontributory U.S. defined benefit pension plan that provides benefits to substantially all U.S. employees. The U.S. plan employs a cash balance formula in the form of pay and interest credits to determine the benefits to be provided at retirement, based on eligible compensation and years of service. Employees begin to accrue plan benefits after completing one year of service, and benefits generally vest after three years of service. In November 2009, the Firm announced certain changes to the pay credit schedule and amount of eligible compensation recognized under the U.S. plan effective February 1, 2010. The Firm also offers benefits through defined benefit pension plans to qualifying employees in certain non-U.S. locations based on factors such as eligible compensation, age and/or years of service.
It is the Firm’s policy to fund the pension plans in amounts sufficient to meet the requirements
under applicable laws. On January 15, 2009, and August 28, 2009, the Firm made discretionary cash
contributions to its U.S. defined benefit pension plan of $1.3 billion and $1.5 billion,
respectively. The amount of potential 2011 contributions to the U.S. defined benefit pension plans,
if any, is not determinable at this time. The expected amount of 2011 contributions to the non-U.S.
defined benefit pension plans is $166 million of which $154 million is contractually required.
JPMorgan Chase also has a number of defined benefit pension plans not subject to Title IV of the
Employee Retirement Income Security Act. The most significant of these plans is the Excess
Retirement Plan, pursuant to which certain employees earn pay and interest credits on compensation
amounts above the maximum stipulated by law under a qualified plan. The Firm announced that,
effective May 1, 2009, pay credits would no longer be provided on compensation amounts above the
maximum stipulated by law. The Excess Retirement Plan had an unfunded projected benefit obligation
in the amount of $266 million and $267 million, at December 31, 2010 and 2009, respectively.
Defined contribution plans
JPMorgan Chase currently provides two qualified defined contribution plans in the U.S. and other similar arrangements in certain non-U.S. locations, all of which are administered in accordance with applicable local laws and regulations. The most significant of these plans is The JPMorgan Chase 401(k) Savings Plan (the “401(k) Savings Plan”), which covers substantially all U.S. employees. The 401(k) Savings Plan allows employees to make pretax and Roth 401(k) contributions to tax-deferred investment portfolios. The JPMorgan Chase Common Stock Fund, which is an investment option under the 401(k) Savings Plan, is a nonleveraged employee stock ownership plan.
JPMorgan Chase currently provides two qualified defined contribution plans in the U.S. and other similar arrangements in certain non-U.S. locations, all of which are administered in accordance with applicable local laws and regulations. The most significant of these plans is The JPMorgan Chase 401(k) Savings Plan (the “401(k) Savings Plan”), which covers substantially all U.S. employees. The 401(k) Savings Plan allows employees to make pretax and Roth 401(k) contributions to tax-deferred investment portfolios. The JPMorgan Chase Common Stock Fund, which is an investment option under the 401(k) Savings Plan, is a nonleveraged employee stock ownership plan.
The Firm matched eligible employee contributions up to 5% of benefits-eligible compensation (e.g.,
base pay) on a per pay period basis through April 30, 2009, and then amended the plan to provide
that thereafter matching contributions would be made annually. Employees begin to receive matching
contributions after completing a one-year-of-service requirement. Employees with total annual cash
compensation of $250,000 or more are not eligible for matching contributions. Matching
contributions are immediately vested for employees hired before May 1, 2009, and will vest after
three years of service for employees hired on or after May 1, 2009. The 401(k) Savings Plan also
permits discretionary profit-sharing contributions by participating companies for certain
employees, subject to a specified vesting schedule.
Effective August 10, 2009, JPMorgan Chase Bank, N.A. became the sponsor of the WaMu Savings Plan
and that plan's assets were merged into the 401(k) Savings Plan effective March 31, 2010.
OPEB plans
JPMorgan Chase offers postretirement medical and life insurance benefits to certain retirees and postretirement medical benefits to qualifying U.S. employees. These benefits vary with length of service and date of hire and provide for limits on the Firm’s share of covered medical benefits. The medical and life insurance benefits are both contributory. Postretirement medical benefits also are offered to qualifying U.K. employees.
JPMorgan Chase offers postretirement medical and life insurance benefits to certain retirees and postretirement medical benefits to qualifying U.S. employees. These benefits vary with length of service and date of hire and provide for limits on the Firm’s share of covered medical benefits. The medical and life insurance benefits are both contributory. Postretirement medical benefits also are offered to qualifying U.K. employees.
JPMorgan Chase’s U.S. OPEB obligation is funded with corporate-owned life insurance (“COLI”)
purchased on the lives of eligible employees and retirees. While the Firm owns the COLI policies,
COLI proceeds (death benefits, withdrawals and other distributions) may be used only to reimburse
the Firm for its net postretirement benefit claim payments and related administrative expense. The
U.K. OPEB plan is unfunded.
| JPMorgan Chase & Co. / 2010 Annual Report | 201 |
Table of Contents
Notes to consolidated financial statements
The following table presents the changes in benefit obligations and plan assets and funded status
amounts reported on the Consolidated Balance Sheets for the Firm’s U.S. and non-U.S. defined
benefit pension and OPEB plans.
| Defined benefit pension plans | ||||||||||||||||||||||||
| As of or for the year ended December 31, | U.S. | Non-U.S. | OPEB plans (f) | |||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Change in benefit obligation
|
||||||||||||||||||||||||
|
Benefit obligation, beginning of year
|
$ | (7,977 | ) | $ | (7,796 | ) | $ | (2,536 | ) | $ | (2,007 | ) | $ | (1,025 | ) | $ | (1,095 | ) | ||||||
|
Benefits earned during the year
|
(230 | ) | (313 | ) | (30 | ) | (30 | ) | (2 | ) | (3 | ) | ||||||||||||
|
Interest cost on benefit obligations
|
(468 | ) | (514 | ) | (128 | ) | (122 | ) | (55 | ) | (64 | ) | ||||||||||||
|
Plan amendments
|
— | 384 | 10 | 1 | — | — | ||||||||||||||||||
|
Business combinations
|
— | (4 | ) (b) | (12 | ) (b) | — | — | (40 | ) (b) | |||||||||||||||
|
Employee contributions
|
NA | NA | (4 | ) | (3 | ) | (70 | ) | (64 | ) | ||||||||||||||
|
Net gain/(loss)
|
(249 | ) | (408 | ) | (71 | ) | (287 | ) | 13 | 101 | ||||||||||||||
|
Benefits paid
|
604 | 674 | 96 | 95 | 168 | 160 | ||||||||||||||||||
|
Expected Medicare Part D subsidy receipts
|
NA | NA | NA | NA | (10 | ) | (9 | ) | ||||||||||||||||
|
Curtailments
|
— | — | — | 1 | — | (7 | ) | |||||||||||||||||
|
Settlements
|
— | — | 5 | 4 | — | — | ||||||||||||||||||
|
Special termination benefits
|
— | — | (1 | ) | (1 | ) | — | — | ||||||||||||||||
|
Foreign exchange impact and other
|
— | — | 71 | (187 | ) | 1 | (4 | ) | ||||||||||||||||
|
Benefit obligation, end of year
|
$ | (8,320 | ) | $ | (7,977 | ) | $ | (2,600 | ) | $ | (2,536 | ) | $ | (980 | ) | $ | (1,025 | ) | ||||||
|
Change in plan assets
|
||||||||||||||||||||||||
|
Fair value of plan assets, beginning of year
|
$ | 10,218 | $ | 6,948 | $ | 2,432 | $ | 2,008 | $ | 1,269 | $ | 1,126 | ||||||||||||
|
Actual return on plan assets
|
1,179 | 1,145 | 228 | 218 | 137 | 172 | ||||||||||||||||||
|
Firm contributions
|
35 | 2,799 | 157 | 115 | 3 | 2 | ||||||||||||||||||
|
Employee contributions
|
— | — | 4 | 3 | — | — | ||||||||||||||||||
|
Benefits paid
|
(604 | ) | (674 | ) | (96 | ) | (95 | ) | (28 | ) | (31 | ) | ||||||||||||
|
Settlements
|
— | — | (5 | ) | (4 | ) | — | — | ||||||||||||||||
|
Foreign exchange impact and other
|
— | — | (73 | ) | 187 | — | — | |||||||||||||||||
|
Fair value of plan assets, end of year
|
$ | 10,828 | (c)(d) | $ | 10,218 | (c)(d) | $ | 2,647 | (d) | $ | 2,432 | (d) | $ | 1,381 | $ | 1,269 | ||||||||
|
Funded/(unfunded) status
(a)
|
$ | 2,508 | (e) | $ | 2,241 | (e) | $ | 47 | $ | (104 | ) | $ | 401 | $ | 244 | |||||||||
|
Accumulated benefit obligation, end of year
|
$ | (8,271 | ) | $ | (7,964 | ) | $ | (2,576 | ) | $ | (2,510 | ) | NA | NA | ||||||||||
| (a) | Represents overfunded plans with an aggregate balance of $3.5 billion and $3.0 billion at December 31, 2010 and 2009, respectively, and underfunded plans with an aggregate balance of $561 million and $623 million at December 31, 2010 and 2009, respectively. | |
| (b) | Represents change resulting from RBS Sempra Commodities business in 2010 and from the Washington Mutual plan in 2009. | |
| (c) | At December 31, 2010 and 2009, approximately $385 million and $332 million, respectively, of U.S. plan assets included participation rights under participating annuity contracts. | |
| (d) | At December 31, 2010 and 2009, defined benefit pension plan amounts not measured at fair value include $52 million and $82 million, respectively, of accrued receivables, and $187 million and $189 million, respectively, of accrued liabilities, for U.S. plans; and $9 million and $8 million, respectively, of accrued receivables for non-U.S. plans. | |
| (e) | Does not include any amounts attributable to the Washington Mutual Qualified Pension plan. The disposition of this plan remained subject to litigation and was not determinable. | |
| (f) | Includes an unfunded accumulated postretirement benefit obligation of $36 million and $29 million at December 31, 2010 and 2009, respectively, for the U.K. plan. |
Gains and losses
For the Firm’s defined benefit pension plans, fair value is used to determine the expected return on plan assets. For the Firm’s OPEB plans, a calculated value that recognizes changes in fair value over a five-year period is used to determine the expected return on plan assets. Amortization of net gains and losses is included in annual net periodic benefit cost if, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the projected benefit obligation or the fair value of the plan assets. Any excess, as well
For the Firm’s defined benefit pension plans, fair value is used to determine the expected return on plan assets. For the Firm’s OPEB plans, a calculated value that recognizes changes in fair value over a five-year period is used to determine the expected return on plan assets. Amortization of net gains and losses is included in annual net periodic benefit cost if, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the projected benefit obligation or the fair value of the plan assets. Any excess, as well
as prior service costs, are amortized over the
average future service period of defined benefit pension plan participants, which for the U.S.
defined benefit pension plan is currently nine years. For OPEB plans, any excess net gains and
losses also are amortized over the average future service period, which is currently five years;
however, prior service costs are amortized over the average years of service remaining to full
eligibility age, which is currently three years.
| 202 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following table presents pretax pension and OPEB amounts recorded in AOCI.
| Defined benefit pension plans | ||||||||||||||||||||||||
| December 31, | U.S. | Non-U.S. | OPEB plans | |||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Net gain/(loss)
|
$ | (2,627 | ) | $ | (3,039 | ) | $ | (566 | ) | $ | (666 | ) | $ | (119 | ) | $ | (171 | ) | ||||||
|
Prior service credit/(cost)
|
321 | 364 | 13 | 3 | 9 | 22 | ||||||||||||||||||
|
Accumulated other comprehensive income/
(loss), pretax, end of year
|
$ | (2,306 | ) | $ | (2,675 | ) | $ | (553 | ) | $ | (663 | ) | $ | (110 | ) | $ | (149 | ) | ||||||
The following table presents the components of net periodic benefit costs reported in the
Consolidated Statements of Income and other comprehensive income for the Firm’s U.S. and non-U.S.
defined benefit pension, defined contribution and OPEB plans.
| Pension plans | ||||||||||||||||||||||||||||||||||||
| U.S. | Non-U.S. | OPEB plans | ||||||||||||||||||||||||||||||||||
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||||||||||||||||||||||
|
Benefits earned during the year
|
$ | 230 | $ | 313 | $ | 278 | $ | 31 | $ | 28 | $ | 29 | $ | 2 | $ | 3 | $ | 5 | ||||||||||||||||||
|
Interest cost on benefit obligations
|
468 | 514 | 488 | 128 | 122 | 142 | 55 | 65 | 74 | |||||||||||||||||||||||||||
|
Expected return on plan assets
|
(742 | ) | (585 | ) | (719 | ) | (126 | ) | (115 | ) | (152 | ) | (96 | ) | (97 | ) | (98 | ) | ||||||||||||||||||
|
Amortization:
|
||||||||||||||||||||||||||||||||||||
|
Net loss
|
225 | 304 | — | 56 | 44 | 25 | (1 | ) | — | — | ||||||||||||||||||||||||||
|
Prior service cost/(credit)
|
(43 | ) | 4 | 4 | (1 | ) | — | — | (13 | ) | (14 | ) | (16 | ) | ||||||||||||||||||||||
|
Curtailment (gain)/loss
|
— | 1 | 1 | — | — | — | — | 5 | 4 | |||||||||||||||||||||||||||
|
Settlement (gain)/loss
|
— | — | — | 1 | 1 | — | — | — | — | |||||||||||||||||||||||||||
|
Special termination benefits
|
— | — | — | 1 | 1 | 3 | — | — | — | |||||||||||||||||||||||||||
|
Net periodic benefit cost
|
138 | 551 | 52 | 90 | 81 | 47 | (53 | ) | (38 | ) | (31 | ) | ||||||||||||||||||||||||
|
Other defined benefit pension plans
(a)
|
14 | 15 | 11 | 11 | 12 | 14 | NA | NA | NA | |||||||||||||||||||||||||||
|
Total defined benefit plans
|
152 | 566 | 63 | 101 | 93 | 61 | (53 | ) | (38 | ) | (31 | ) | ||||||||||||||||||||||||
|
Total defined contribution plans
|
332 | 359 | 263 | 251 | 226 | 286 | NA | NA | NA | |||||||||||||||||||||||||||
|
Total pension and OPEB cost included
in compensation expense
|
$ | 484 | $ | 925 | $ | 326 | $ | 352 | $ | 319 | $ | 347 | $ | (53 | ) | $ | (38 | ) | $ | (31 | ) | |||||||||||||||
|
Changes in plan assets and benefit
obligations recognized in other
comprehensive income
|
||||||||||||||||||||||||||||||||||||
|
Net (gain)/loss arising during the year
|
$ | (187 | ) | $ | (168 | ) | $ | 3,243 | $ | (21 | ) | $ | 183 | $ | 235 | $ | (54 | ) | $ | (176 | ) | $ | 248 | |||||||||||||
|
Prior service credit arising during the year
|
— | (384 | ) | — | (10 | ) | (1 | ) | — | — | — | — | ||||||||||||||||||||||||
|
Amortization of net loss
|
(225 | ) | (304 | ) | — | (56 | ) | (44 | ) | (27 | ) | 1 | — | — | ||||||||||||||||||||||
|
Amortization of prior service (cost)/credit
|
43 | (6 | ) | (5 | ) | 1 | — | — | 13 | 15 | 15 | |||||||||||||||||||||||||
|
Curtailment (gain)/loss
|
— | — | — | — | — | — | — | 2 | 3 | |||||||||||||||||||||||||||
|
Settlement loss/(gain)
|
— | — | — | (1 | ) | (1 | ) | — | — | — | — | |||||||||||||||||||||||||
|
Foreign exchange impact and other
|
— | 18 | — | (23 | ) | 36 | (150 | ) | 1 | (1 | ) | 3 | ||||||||||||||||||||||||
|
Total recognized in other comprehensive income
|
(369 | ) | (844 | ) | 3,238 | (110 | ) | 173 | 58 | (39 | ) | (160 | ) | 269 | ||||||||||||||||||||||
|
Total recognized in net periodic benefit
cost and other comprehensive income
|
$ | (231 | ) | $ | (293 | ) | $ | 3,290 | $ | (20 | ) | $ | 254 | $ | 105 | $ | (92 | ) | $ | (198 | ) | $ | 238 | |||||||||||||
| (a) | Includes various defined benefit pension plans, which are individually immaterial. |
The estimated pretax amounts that will be amortized from AOCI into net periodic benefit cost in
2011 are as follows.
| Defined benefit pension plans | OPEB plans | |||||||||||||||
| (in millions) | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
|
Net loss
|
$ | 168 | $ | 44 | $ | — | $ | — | ||||||||
|
Prior service cost/(credit)
|
(43 | ) | (1 | ) | (8 | ) | — | |||||||||
|
Total
|
$ | 125 | $ | 43 | $ | (8 | ) | $ | — | |||||||
The following table presents the actual rate of return on plan assets for the
U.S. and non-U.S. defined benefit pension and OPEB plans.
| U.S. | Non-U.S. | |||||||||||||||||||||||
| December 31, | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Actual rate of return:
|
||||||||||||||||||||||||
|
Defined benefit pension plans
|
12.23 | % | 13.78 | % | (25.17 | )% | 0.77-10.65 | % | 3.17-22.43 | % | (21.58)-5.06 | % | ||||||||||||
|
OPEB plans
|
11.23 | 15.93 | (17.89 | ) | NA | NA | NA | |||||||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 203 |
Table of Contents
Notes to consolidated financial statements
Plan assumptions
JPMorgan Chase’s expected long-term rate of return for U.S. defined benefit pension and OPEB plan assets is a blended average of the investment advisor’s projected long-term (10 years or more) returns for the various asset classes, weighted by the asset allocation. Returns on asset classes are developed using a forward-looking building-block approach and are not strictly based on historical returns. Equity returns are generally developed as the sum of inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of inflation, real bond yield and risk spread (as appropriate), adjusted for the expected effect on returns from changing yields. Other asset-class returns are derived from their relationship to the equity and bond markets. Consideration is also given to current market conditions and the short-term portfolio mix of each plan; as a result, in 2010 the Firm generally maintained the same expected return on assets as in the prior year.
JPMorgan Chase’s expected long-term rate of return for U.S. defined benefit pension and OPEB plan assets is a blended average of the investment advisor’s projected long-term (10 years or more) returns for the various asset classes, weighted by the asset allocation. Returns on asset classes are developed using a forward-looking building-block approach and are not strictly based on historical returns. Equity returns are generally developed as the sum of inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of inflation, real bond yield and risk spread (as appropriate), adjusted for the expected effect on returns from changing yields. Other asset-class returns are derived from their relationship to the equity and bond markets. Consideration is also given to current market conditions and the short-term portfolio mix of each plan; as a result, in 2010 the Firm generally maintained the same expected return on assets as in the prior year.
For the U.K. defined benefit pension plans, which represent the most significant of the non-U.S.
defined benefit pension plans, procedures similar to those in the U.S. are used to develop the
expected long-term rate of return on defined benefit pension plan
assets, taking into consideration
local market conditions and the specific allocation of plan assets. The expected long-term rate of
return on U.K. plan assets is an average of projected long-term returns for each asset class. The
return on equities has been selected by reference to the yield on long-term U.K. government bonds
plus an equity risk premium above the risk-free rate. The return on “AA”-rated long-term corporate
bonds has been taken as the average yield on such bonds.
The discount rate used in determining the benefit obligation under the U.S. defined benefit pension
and OPEB plans was selected by reference to the yields on portfolios of bonds with maturity dates
and coupons that closely match each of the plan’s projected cash flows; such portfolios are derived
from a broad-based universe of high-quality corporate bonds as of the measurement date. In years in
which these hypothetical bond portfolios generate excess cash, such excess is assumed to be
reinvested at the one-year forward rates implied by the Citigroup Pension Discount Curve published
as of the measurement date. The discount rate for the U.K. defined benefit pension and OPEB plans
represents a rate implied from the yield curve of the year-end iBoxx £ corporate “AA” 15-year-plus
bond index.
The following tables present the weighted-average annualized actuarial assumptions for the
projected and accumulated postretirement benefit obligations, and the components of net periodic
benefit costs, for the Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans, as of and
for the periods indicated.
Weighted-average assumptions used to determine benefit obligations
| U.S. | Non-U.S. | |||||||||||||||
| December 31, | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Discount rate:
|
||||||||||||||||
|
Defined benefit pension plans
|
5.50 | % | 6.00 | % | 1.60-5.50 | % | 2.00-5.70 | % | ||||||||
|
OPEB plans
|
5.50 | 6.00 | 5.50 | 5.70 | ||||||||||||
|
Rate of compensation increase
|
4.00 | 4.00 | 3.00-4.50 | 3.00-4.50 | ||||||||||||
|
Health care cost trend rate:
|
||||||||||||||||
|
Assumed for next year
|
7.00 | 7.75 | 6.50 | 5.40 | ||||||||||||
|
Ultimate
|
5.00 | 5.00 | 6.00 | 4.50 | ||||||||||||
|
Year when rate will reach ultimate
|
2017 | 2014 | 2015 | 2014 | ||||||||||||
Weighted-average assumptions used to determine net periodic benefit costs
| U.S. | Non-U.S. | |||||||||||||||||||||||
| Year ended December 31, | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Discount rate:
|
||||||||||||||||||||||||
|
Defined benefit pension plans
|
6.00 | % | 6.65 | % | 6.60 | % | 2.00-5.70 | % | 2.00-6.20 | % | 2.25-5.80 | % | ||||||||||||
|
OPEB plans
|
6.00 | 6.70 | 6.60 | 5.70 | 6.20 | 5.80 | ||||||||||||||||||
|
Expected long-term rate of return on
plan assets:
|
||||||||||||||||||||||||
|
Defined benefit pension plans
|
7.50 | 7.50 | 7.50 | 2.40-6.20 | 2.50-6.90 | 3.25-5.75 | ||||||||||||||||||
|
OPEB plans
|
7.00 | 7.00 | 7.00 | NA | NA | NA | ||||||||||||||||||
|
Rate of compensation increase
|
4.00 | 4.00 | 4.00 | 3.00-4.50 | 3.00-4.00 | 3.00-4.25 | ||||||||||||||||||
|
Health care cost trend rate:
|
||||||||||||||||||||||||
|
Assumed for next year
|
7.75 | 8.50 | 9.25 | 5.40 | 7.00 | 5.75 | ||||||||||||||||||
|
Ultimate
|
5.00 | 5.00 | 5.00 | 4.50 | 5.50 | 4.00 | ||||||||||||||||||
|
Year when rate will reach ultimate
|
2014 | 2014 | 2014 | 2014 | 2012 | 2010 | ||||||||||||||||||
| 204 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following table presents the effect of a one-percentage-point change in the assumed health
care cost trend rate on JPMorgan Chase’s total service and interest cost and accumulated
postretirement benefit obligation.
| 1-Percentage- | 1-Percentage- | |||||||
| Year ended December 31, 2010 | point | point | ||||||
| (in millions) | increase | decrease | ||||||
|
Effect on total service and interest
cost
|
$ | 2 | $ | (2 | ) | |||
|
Effect on accumulated postretirement
benefit obligation
|
36 | (31 | ) | |||||
At December 31, 2010, the Firm decreased the discount rates used to determine its benefit
obligations for the U.S. defined benefit pension and OPEB plans in light of current market interest
rates, which will result in an increase in expense of approximately $21 million for 2011. The 2011
expected long-term rate of return on U.S. defined benefit pension plan assets and U.S. OPEB plan
assets are 7.50% and 6.25%, respectively, as compared to 7.50% and 7.00% in 2010
.
The initial
health care benefit obligation trend assumption declined from 7.75% in 2010 to 7.00% in 2011. The
ultimate health care trend assumption will remain at 5.00% in 2011, but the year to ultimate was
adjusted from 2014 to 2017. As of December 31, 2010, the interest crediting rate assumption and
the assumed rate of compensation increase remained at 5.25% and 4.00%, respectively.
JPMorgan Chase’s U.S. defined benefit pension and OPEB plan expense is sensitive to the expected
long-term rate of return on plan assets and the discount rate. With all other assumptions held
constant, a 25-basis point decline in the expected long-term rate of return on U.S. plan assets
would result in an increase of approximately an aggregate $30 million in 2011 U.S. defined benefit
pension and OPEB plan expense. A 25-basis point decline in the discount rate for the U.S. plans
would result in an increase in 2011 U.S. defined benefit pension and OPEB plan expense of
approximately an aggregate $11 million and an increase in the related benefit obligations of
approximately an aggregate $169 million. A 25-basis point increase in the interest crediting rate
for the U.S. defined benefit pension plan would result in an increase in 2011 U.S. defined benefit
pension expense of approximately $19 million and an increase in the related projected benefit
obligations of approximately $76 million. A 25-basis point decline in the discount rates for the
non-U.S. plans would result in an increase in the 2011 non-U.S. defined benefit pension plan
expense of approximately $11 million.
Investment strategy and asset allocation
The Firm’s U.S. defined benefit pension plan assets are held in trust and are invested in a well-diversified portfolio of equity and fixed income securities, real estate, cash and cash equivalents, and alternative investments (e.g., hedge funds, private equity funds, and real estate funds). Non-U.S. defined benefit pension plan assets are held in various trusts and are also invested in well-diversified portfolios of equity, fixed income and other securities. Assets of the Firm’s COLI policies, which are used to partially fund the U.S. OPEB plan, are held
The Firm’s U.S. defined benefit pension plan assets are held in trust and are invested in a well-diversified portfolio of equity and fixed income securities, real estate, cash and cash equivalents, and alternative investments (e.g., hedge funds, private equity funds, and real estate funds). Non-U.S. defined benefit pension plan assets are held in various trusts and are also invested in well-diversified portfolios of equity, fixed income and other securities. Assets of the Firm’s COLI policies, which are used to partially fund the U.S. OPEB plan, are held
in separate
accounts with an insurance company and are invested in equity and fixed income index funds.
The investment policy for the Firm’s U.S. defined benefit pension plan assets is to optimize the
risk-return relationship as appropriate to the needs and goals using a global portfolio of various
asset classes diversified by market segment, economic sector, and issuer. Periodically the Firm
performs a comprehensive analysis on the U.S. defined benefit pension plan asset allocations,
incorporating projected asset and liability data, which focuses on the short-and long-term impact
of the asset allocation on cumulative pension expense, economic cost, present value of
contributions and funded status. Currently, approved asset allocation ranges are: U.S. equity
15–35%, international equity 15–25%, debt securities 10–30%, hedge funds 10–30%, real estate
5–20%, and private equity 5–20%. Asset allocations are not managed to a specific target but seek
to shift asset class allocations within these stated ranges. Assets are managed by a combination of
internal and external investment managers. Asset allocation decisions also incorporate the economic
outlook and anticipated implications of the macroeconomic environment on the various asset classes
and managers. Maintaining an appropriate level of liquidity, which takes into consideration
forecasted requirements for cash is a major consideration in the asset allocation process. The Firm
regularly reviews the asset allocations and all factors that continuously impact the portfolio,
which is rebalanced when deemed necessary.
For the U.K. defined benefit pension plans, which represent the most significant of the non-U.S.
defined benefit pension plans, the assets are invested to maximize returns subject to an
appropriate level of risk relative to the plans’ liabilities. In order to reduce the volatility in
returns relative to the plan’s liability profiles, the U.K. defined benefit pension plans’ largest
asset allocations are to debt securities of appropriate durations. Other assets, mainly equity
securities, are then invested for capital appreciation, to provide long-term investment growth.
Similar to the U.S. defined benefit pension plan, asset allocations for the U.K. plans are reviewed
and rebalanced on a regular basis.
Investments held by the Plans include financial instruments which are exposed to various risks such
as interest rate, market and credit risks. Exposure to a concentration of credit risk is mitigated
by the broad diversification of both U.S. and non-U.S. investment instruments. Additionally, the
investments in each of the common/
collective trust funds and registered investment companies are further diversified into various
financial instruments. As of December 31, 2010, assets held by the Firm’s U.S. and non-U.S. defined
benefit pension and OPEB plans do not include JPMorgan Chase common stock, except in connection
with investments in third-party stock-index funds. The plans hold investments in funds that are
sponsored or managed by affiliates of JPMorgan Chase in the amount of $1.7 billion and $1.6 billion
for U.S. plans and $155 million and $474 million for non-U.S. plans, as of December 31, 2010 and
2009, respectively.
| JPMorgan Chase & Co. / 2010 Annual Report | 205 |
Table of Contents
Notes to consolidated financial statements
The following table presents the weighted-average asset allocation of the fair values of total plan
assets at December 31 for the years indicated, as well as the respective approved range/target
allocation by asset category, for the Firm’s U.S. and non-U.S. defined benefit pension and OPEB
plans.
| Defined benefit pension plans | ||||||||||||||||||||||||||||||||||||
| U.S. | Non-U.S. | OPEB plans (c) | ||||||||||||||||||||||||||||||||||
| Target | % of plan assets | Target | % of plan assets | Target | % of plan assets | |||||||||||||||||||||||||||||||
| December 31, | Allocation | 2010 | 2009 | Allocation | 2010 | 2009 | Allocation | 2010 | 2009 | |||||||||||||||||||||||||||
|
Asset
category
|
||||||||||||||||||||||||||||||||||||
|
Debt securities
(a)
|
10-30 | % | 29 | % | 29 | % | 72 | % | 71 | % | 75 | % | 50 | % | 50 | % | 50 | % | ||||||||||||||||||
|
Equity securities
|
25-60 | 40 | 40 | 26 | 28 | 23 | 50 | 50 | 50 | |||||||||||||||||||||||||||
|
Real estate
|
5-20 | 4 | 4 | 1 | — | 1 | — | — | — | |||||||||||||||||||||||||||
|
Alternatives
(b)
|
15-50 | 27 | 27 | 1 | 1 | 1 | — | — | — | |||||||||||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
| (a) | Debt securities primarily include corporate debt, U.S. federal, state, local and non-U.S. government, and mortgage-backed securities. | |
| (b) | Alternatives primarily include limited partnerships. | |
| (c) | Represents the U.S. OPEB plan only, as the U.K. OPEB plan is unfunded. |
Fair value measurement of the plans’ assets and liabilities
The following details the instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, as described in Note 3 on pages 170–187 of this Annual Report.
The following details the instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, as described in Note 3 on pages 170–187 of this Annual Report.
Cash and cash equivalents
Cash and cash equivalents includes currency on hand, demand deposits with banks or other financial institutions, and any short-term, highly liquid investments readily convertible into cash (i.e., investments with original maturities of three months or less). Due to the highly liquid nature of these assets, they are classified within level 1 of the valuation hierarchy.
Cash and cash equivalents includes currency on hand, demand deposits with banks or other financial institutions, and any short-term, highly liquid investments readily convertible into cash (i.e., investments with original maturities of three months or less). Due to the highly liquid nature of these assets, they are classified within level 1 of the valuation hierarchy.
Equity securities
Common and preferred stocks are valued at the closing price reported on the major market on which the individual securities are traded and are generally classified within level 1 of the valuation hierarchy. If quoted exchange prices are not available for the specific security, other independent pricing or broker quotes are consulted for valuation purposes. Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship of recently evidenced market activity to the prices provided from independent pricing services. Common and preferred stock that do not have quoted exchange prices are generally classified within level 2 of the valuation hierarchy.
Common and preferred stocks are valued at the closing price reported on the major market on which the individual securities are traded and are generally classified within level 1 of the valuation hierarchy. If quoted exchange prices are not available for the specific security, other independent pricing or broker quotes are consulted for valuation purposes. Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship of recently evidenced market activity to the prices provided from independent pricing services. Common and preferred stock that do not have quoted exchange prices are generally classified within level 2 of the valuation hierarchy.
Common/collective trust funds
These investments are public investment vehicles valued based on the calculated NAV of the fund. Where the funds produce a daily NAV that is validated by a sufficient level of observable activity (purchases and sales at NAV), the NAV is used to value the fund investment and it is classified in level 1 of the valuation hierarchy. Where adjustments to the NAV are required, for example, with respect to interests in funds subject to restrictions on redemption (such as withdrawal limitations) and/or observable activity for the fund investment is limited, investments are classified within level 2 of the valuation hierarchy.
These investments are public investment vehicles valued based on the calculated NAV of the fund. Where the funds produce a daily NAV that is validated by a sufficient level of observable activity (purchases and sales at NAV), the NAV is used to value the fund investment and it is classified in level 1 of the valuation hierarchy. Where adjustments to the NAV are required, for example, with respect to interests in funds subject to restrictions on redemption (such as withdrawal limitations) and/or observable activity for the fund investment is limited, investments are classified within level 2 of the valuation hierarchy.
Limited partnerships
Limited partnerships include investments in hedge funds, private equity funds and real estate funds. Hedge funds are valued based on quoted NAV and are classified within level 2 or 3 of the valuation hierarchy depending on the level of liquidity and activity in the markets for each investment. Certain of these hedge fund investments are subject to restrictions on redemption (such as initial lock-up periods, withdrawal limitations and illiquid assets) and are therefore classified within level 3 of the valuation hierarchy. The valuation of private equity investments and real estate funds require significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets and therefore, they are generally classified within level 3 of the valuation hierarchy. Unfunded commitments to purchase limited partnership investments for the Plans were $1.1 billion and $1.3 billion for 2010 and 2009, respectively.
Limited partnerships include investments in hedge funds, private equity funds and real estate funds. Hedge funds are valued based on quoted NAV and are classified within level 2 or 3 of the valuation hierarchy depending on the level of liquidity and activity in the markets for each investment. Certain of these hedge fund investments are subject to restrictions on redemption (such as initial lock-up periods, withdrawal limitations and illiquid assets) and are therefore classified within level 3 of the valuation hierarchy. The valuation of private equity investments and real estate funds require significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets and therefore, they are generally classified within level 3 of the valuation hierarchy. Unfunded commitments to purchase limited partnership investments for the Plans were $1.1 billion and $1.3 billion for 2010 and 2009, respectively.
Corporate debt securities and U.S. federal, state, local and non-government debt securities
The Firm estimates the value of debt instruments using a combination of observed transaction prices, independent pricing services and relevant broker quotes. Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship of recently evidenced market activity to the prices provided from independent pricing services. The Firm may also use pricing models or discounted cash flows. Such securities are generally classified within level 2 of the valuation hierarchy.
The Firm estimates the value of debt instruments using a combination of observed transaction prices, independent pricing services and relevant broker quotes. Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship of recently evidenced market activity to the prices provided from independent pricing services. The Firm may also use pricing models or discounted cash flows. Such securities are generally classified within level 2 of the valuation hierarchy.
Mortgage-backed securities
MBS include both U.S. government agency and U.S. government-sponsored enterprise (collectively, “U.S. government agencies”) securities, and nonagency pass-through securities. U.S. government agency securities are valued based on quoted prices in active markets and are therefore classified in level 1 of the valuation hierarchy. Nonagency securities are primarily “AAA” rated residential and commercial MBS valued using a combination of observed transaction prices, independent pricing services and relevant broker quotes. Consideration is given to the nature of the quotes and the relationships of recently evidenced market activity to the prices provided from independent pricing services. Such securities are generally classified within level 2 of the valuation hierarchy.
MBS include both U.S. government agency and U.S. government-sponsored enterprise (collectively, “U.S. government agencies”) securities, and nonagency pass-through securities. U.S. government agency securities are valued based on quoted prices in active markets and are therefore classified in level 1 of the valuation hierarchy. Nonagency securities are primarily “AAA” rated residential and commercial MBS valued using a combination of observed transaction prices, independent pricing services and relevant broker quotes. Consideration is given to the nature of the quotes and the relationships of recently evidenced market activity to the prices provided from independent pricing services. Such securities are generally classified within level 2 of the valuation hierarchy.
| 206 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Derivative receivables and derivative payables
In the normal course of business, foreign exchange, credit, interest rate and equity derivative contracts are used to minimize fluctuations in the value of plan assets caused by exposure to credit or market risks. These instruments may also be used in lieu of investing in cash instruments. Exchange traded derivatives valued using quoted prices are classified within level 1 of the valuation hierarchy. However, a majority of the derivative instruments are valued using internally developed models that use as their basis readily observable market parameters and are therefore classified within level 2 of the valuation hierarchy.
In the normal course of business, foreign exchange, credit, interest rate and equity derivative contracts are used to minimize fluctuations in the value of plan assets caused by exposure to credit or market risks. These instruments may also be used in lieu of investing in cash instruments. Exchange traded derivatives valued using quoted prices are classified within level 1 of the valuation hierarchy. However, a majority of the derivative instruments are valued using internally developed models that use as their basis readily observable market parameters and are therefore classified within level 2 of the valuation hierarchy.
Other
Other consists of exchange traded funds (“ETFs”), mutual fund investments, and participating and non-participating annuity contracts (“Annuity Contracts”). ETFs are valued at the closing price reported on the major market on which the individual securities are
Other consists of exchange traded funds (“ETFs”), mutual fund investments, and participating and non-participating annuity contracts (“Annuity Contracts”). ETFs are valued at the closing price reported on the major market on which the individual securities are
traded and are generally
classified within level 1 of the valuation hierarchy. Mutual fund investments are valued using NAV.
Those fund investments with a daily NAV that are validated by a sufficient level of observable
activity (purchases and sales at NAV) are classified in level 1 of the valuation hierarchy. Where
adjustments to the NAV are required, for example, for fund investments subject to restrictions on
redemption (such as lock-up periods or withdrawal limitations), and/or observable activity for the
fund investment is limited, the mutual fund investments are classified in level 2 or 3 of the
valuation hierarchy. Annuity Contracts are valued at the amount by which the fair value of the
assets held in the separate account exceeds the actuarially determined guaranteed benefit
obligation covered under the Annuity Contracts. Annuity Contracts lack market mechanisms for
transferring each individual policy and generally include restrictions on the timing of surrender;
therefore, these investments are classified within level 3 of the valuation hierarchy.
Pension and OPEB plan assets and liabilities measured at fair value
| U.S. defined benefit pension plans | Non-U.S. defined benefit pension plans | |||||||||||||||||||||||||||||||
| December 31, 2010 | Total | Total | ||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | fair value | Level 1 | Level 2 | Level 3 | fair value | ||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | — | $ | — | $ | — | $ | 81 | $ | — | $ | — | $ | 81 | ||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||||||||||
|
Capital equipment
|
748 | 9 | — | 757 | 68 | 13 | — | 81 | ||||||||||||||||||||||||
|
Consumer goods
|
712 | — | — | 712 | 75 | 21 | — | 96 | ||||||||||||||||||||||||
|
Banks and finance companies
|
414 | 1 | — | 415 | 113 | 9 | — | 122 | ||||||||||||||||||||||||
|
Business services
|
444 | — | — | 444 | 53 | 10 | — | 63 | ||||||||||||||||||||||||
|
Energy
|
195 | — | — | 195 | 59 | 6 | — | 65 | ||||||||||||||||||||||||
|
Materials
|
205 | — | — | 205 | 50 | 13 | — | 63 | ||||||||||||||||||||||||
|
Real Estate
|
21 | — | — | 21 | 1 | — | — | 1 | ||||||||||||||||||||||||
|
Other
|
857 | 6 | — | 863 | 194 | 16 | — | 210 | ||||||||||||||||||||||||
|
Total equity securities
|
3,596 | 16 | — | 3,612 | 613 | 88 | — | 701 | ||||||||||||||||||||||||
|
Common/collective trust funds
(a)
|
1,195 | 756 | — | 1,951 | 46 | 180 | — | 226 | ||||||||||||||||||||||||
|
Limited partnerships:
|
||||||||||||||||||||||||||||||||
|
Hedge funds
|
— | 959 | 1,102 | 2,061 | — | — | — | — | ||||||||||||||||||||||||
|
Private equity funds
|
— | — | 1,232 | 1,232 | — | — | — | — | ||||||||||||||||||||||||
|
Real estate
|
— | — | 304 | 304 | — | — | — | — | ||||||||||||||||||||||||
|
Total limited partnerships
|
— | 959 | 2,638 | 3,597 | — | — | — | — | ||||||||||||||||||||||||
|
Corporate debt securities
(b)
|
— | 424 | 1 | 425 | — | 718 | — | 718 | ||||||||||||||||||||||||
|
U.S. federal, state, local and non-U.S.
government debt securities
|
— | 453 | — | 453 | — | 864 | — | 864 | ||||||||||||||||||||||||
|
Mortgage-backed securities
(c)
|
188 | 55 | — | 243 | 1 | — | — | 1 | ||||||||||||||||||||||||
|
Derivative receivables
(d)
|
2 | 194 | — | 196 | — | 3 | — | 3 | ||||||||||||||||||||||||
|
Other
|
218 | 58 | 387 | 663 | 18 | 51 | — | 69 | ||||||||||||||||||||||||
|
Total
assets measured at fair value
(e)(f)
|
$ | 5,199 | $ | 2,915 | $ | 3,026 | $ | 11,140 | $ | 759 | $ | 1,904 | $ | — | $ | 2,663 | ||||||||||||||||
|
Derivative payables
|
— | (177 | ) | — | (177 | ) | — | (25 | ) | — | (25 | ) | ||||||||||||||||||||
|
Total
liabilities measured at fair value
|
$ | — | $ | (177 | ) | $ | — | $ | (177 | ) (g) | $ | — | $ | (25 | ) | $ | — | $ | (25 | ) | ||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 207 |
Table of Contents
Notes to consolidated financial statements
| U.S. defined benefit pension plans | Non-U.S. defined benefit pension plans | |||||||||||||||||||||||||||||||
| December 31, 2009 | Total | Total | ||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | fair value | Level 1 | Level 2 | Level 3 | fair value | ||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 71 | $ | — | $ | — | $ | 71 | $ | 27 | $ | — | $ | — | $ | 27 | ||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||||||||||
|
Capital equipment
|
608 | 13 | — | 621 | 49 | 16 | — | 65 | ||||||||||||||||||||||||
|
Consumer goods
|
554 | — | — | 554 | 64 | 18 | — | 82 | ||||||||||||||||||||||||
|
Banks and finance companies
|
324 | — | — | 324 | 90 | 12 | — | 102 | ||||||||||||||||||||||||
|
Business services
|
322 | — | — | 322 | 39 | 13 | — | 52 | ||||||||||||||||||||||||
|
Energy
|
188 | — | — | 188 | 45 | 13 | — | 58 | ||||||||||||||||||||||||
|
Materials
|
186 | — | — | 186 | 35 | 3 | — | 38 | ||||||||||||||||||||||||
|
Real estate
|
19 | — | — | 19 | — | — | — | — | ||||||||||||||||||||||||
|
Other
|
571 | 1 | — | 572 | 171 | — | — | 171 | ||||||||||||||||||||||||
|
Total
equity securities
|
2,772 | 14 | — | 2,786 | 493 | 75 | — | 568 | ||||||||||||||||||||||||
|
Common/collective trust funds
(a)
|
1,868 | 610 | — | 2,478 | 23 | 185 | — | 208 | ||||||||||||||||||||||||
|
Limited partnerships:
|
||||||||||||||||||||||||||||||||
|
Hedge funds
|
— | 912 | 627 | 1,539 | — | — | — | — | ||||||||||||||||||||||||
|
Private equity funds
|
— | — | 874 | 874 | — | — | — | — | ||||||||||||||||||||||||
|
Real estate
|
— | — | 196 | 196 | — | — | — | — | ||||||||||||||||||||||||
|
Total
limited partnerships
|
— | 912 | 1,697 | 2,609 | — | — | — | — | ||||||||||||||||||||||||
|
Corporate debt securities
(b)
|
— | 941 | — | 941 | — | 685 | — | 685 | ||||||||||||||||||||||||
|
U.S. federal, state, local and non-U.S.
government debt securities
|
— | 406 | — | 406 | — | 841 | — | 841 | ||||||||||||||||||||||||
|
Mortgage-backed securities
(c)
|
169 | 54 | — | 223 | — | — | — | — | ||||||||||||||||||||||||
|
Derivative receivables
(d)
|
— | 90 | — | 90 | — | 5 | — | 5 | ||||||||||||||||||||||||
|
Other
|
348 | 115 | 334 | 797 | 18 | 89 | 13 | 120 | ||||||||||||||||||||||||
|
Total
assets measured at fair
value
(e)(f)
|
$ | 5,228 | $ | 3,142 | $ | 2,031 | $ | 10,401 | $ | 561 | $ | 1,880 | $ | 13 | $ | 2,454 | ||||||||||||||||
|
Derivative payables
|
— | (76 | ) | — | (76 | ) | — | (30 | ) | — | (30 | ) | ||||||||||||||||||||
|
Total
liabilities measured at fair value
|
$ | — | $ | (76 | ) | $ | — | $ | (76 | ) (g) | $ | — | $ | (30 | ) | $ | — | $ | (30 | ) | ||||||||||||
| (a) | At December 31, 2010 and 2009, common/collective trust funds generally include commingled funds that primarily included 22% and 39%, respectively, of short-term investment funds; 21% and 24%, respectively, of equity (index) investments; and 16% and 15%, respectively, of international investments. | |
| (b) | Corporate debt securities include debt securities of U.S. and non-U.S. corporations. | |
| (c) | At December 31, 2010 and 2009, mortgage-backed securities were generally invested 77% and 72%, respectively, in debt securities issued by U.S. government agencies. | |
| (d) | At December 31, 2010 and 2009, derivative receivables primarily included 89% and 80%, respectively, of foreign exchange contracts; and 11% and 16%, respectively, of equity warrants. | |
| (e) | At December 31, 2010 and 2009, the fair value of investments valued at NAV were $4.1 billion and $4.2 billion, respectively, which were classified within the valuation hierarchy as follows: $1.3 billion and $2.0 billion in level 1, $1.7 billion and $1.6 billion in level 2 and $1.1 billion and $600 million in level 3. | |
| (f) | At December 31, 2010 and 2009, excluded U.S. defined benefit pension plan receivables for investments sold and dividends and interest receivables of $52 million and $82 million, respectively; and excluded non-U.S. defined benefit pension plan receivables for dividends and interest receivables of $9 million and $8 million, respectively. | |
| (g) | At December 31, 2010 and 2009, excluded $149 million and $177 million, respectively, of U.S. defined benefit pension plan payables for investments purchased; and $38 million and $12 million, respectively, of other liabilities. |
At December 31, 2010 and 2009, the Firm’s OPEB plan was partially funded with COLI policies of
$1.4 billion and $1.3 billion, respectively, which were classified in level 3 of the valuation
hierarchy.
| 208 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Changes in level 3 fair value measurements using significant unobservable inputs
| Year ended | Total realized/ | Fair value, | ||||||||||||||||||
| December 31, 2010 | Fair value, | unrealized | Purchases, sales | Transfers in and/or | December 31, | |||||||||||||||
| (in millions) | January 1, 2010 | gains/(losses)(a) | and settlements, net | out of level 3 | 2010 | |||||||||||||||
|
U.S.
defined benefit pension plans
|
||||||||||||||||||||
|
Limited partnerships:
|
||||||||||||||||||||
|
Hedge funds
|
$ | 627 | $ | 8 | $ | 388 | $ | 79 | $ | 1,102 | ||||||||||
|
Private equity funds
|
874 | 111 | 235 | 12 | 1,232 | |||||||||||||||
|
Real estate
|
196 | 19 | 89 | — | 304 | |||||||||||||||
|
Total
limited partnerships
|
$ | 1,697 | $ | 138 | $ | 712 | $ | 91 | $ | 2,638 | ||||||||||
|
Corporate debt securities
|
— | — | — | 1 | 1 | |||||||||||||||
|
Other
|
334 | 53 | — | — | 387 | |||||||||||||||
|
Total
U.S. plans
|
$ | 2,031 | $ | 191 | $ | 712 | $ | 92 | $ | 3,026 | ||||||||||
|
Non-U.S. defined benefit pension
plans
|
||||||||||||||||||||
|
Other
|
$ | 13 | $ | (1 | ) | $ | (12 | ) | $ | — | $ | — | ||||||||
|
Total
non-U.S. plans
|
$ | 13 | $ | (1 | ) | $ | (12 | ) | $ | — | $ | — | ||||||||
|
OPEB
plans
|
||||||||||||||||||||
|
COLI
|
$ | 1,269 | $ | 137 | $ | (25 | ) | $ | — | $ | 1,381 | |||||||||
|
Total
OPEB plans
|
$ | 1,269 | $ | 137 | $ | (25 | ) | $ | — | $ | 1,381 | |||||||||
| Year ended | Total realized/ | Fair value, | ||||||||||||||||||
| December 31, 2009 | Fair value, | unrealized | Purchases, sales | Transfers in and/or | December 31, | |||||||||||||||
| (in millions) | January 1, 2009 | gains/(losses)(a) | and settlements, net | out of level 3 | 2009 | |||||||||||||||
|
U.S.
defined benefit pension plans
|
||||||||||||||||||||
|
Limited partnerships:
|
||||||||||||||||||||
|
Hedge funds
|
$ | 524 | $ | 112 | $ | (9 | ) | $ | — | $ | 627 | |||||||||
|
Private equity funds
|
810 | (1 | ) | 80 | (15 | ) | 874 | |||||||||||||
|
Real estate
|
203 | (107 | ) | 100 | — | 196 | ||||||||||||||
|
Total
limited partnerships
|
$ | 1,537 | $ | 4 | $ | 171 | $ | (15 | ) | $ | 1,697 | |||||||||
|
Corporate debt securities
|
— | — | — | — | — | |||||||||||||||
|
Other
|
315 | 19 | — | — | 334 | |||||||||||||||
|
Total
U.S. plans
|
$ | 1,852 | $ | 23 | $ | 171 | $ | (15 | ) | $ | 2,031 | |||||||||
|
Non-U.S. defined benefit pension
plans
|
||||||||||||||||||||
|
Other
|
$ | 14 | $ | (1 | ) | $ | — | $ | — | $ | 13 | |||||||||
|
Total
non-U.S. plans
|
$ | 14 | $ | (1 | ) | $ | — | $ | — | $ | 13 | |||||||||
|
OPEB
plans
|
||||||||||||||||||||
|
COLI
|
$ | 1,126 | $ | 172 | $ | (29 | ) | $ | — | $ | 1,269 | |||||||||
|
Total
OPEB plans
|
$ | 1,126 | $ | 172 | $ | (29 | ) | $ | — | $ | 1,269 | |||||||||
| (a) | For the years ended December 31, 2010, and 2009, respectively, total realized (unrealized) gains/(losses) are the changes in unrealized gains or losses relating to assets held at December 31, 2010 and 2009, respectively. |
| JPMorgan Chase & Co. / 2010 Annual Report | 209 |
Table of Contents
Notes to consolidated financial statements
Estimated future benefit payments
The following table presents benefit payments expected to be paid, which include the effect of expected future service, for the years indicated. The OPEB medical and life insurance payments are net of expected retiree contributions.
The following table presents benefit payments expected to be paid, which include the effect of expected future service, for the years indicated. The OPEB medical and life insurance payments are net of expected retiree contributions.
| U.S. | Non-U.S. | |||||||||||||||
| Year ended December 31, | defined benefit | defined benefit | OPEB before | Medicare | ||||||||||||
| (in millions) | pension plans | pension plans | Medicare Part D subsidy | Part D subsidy | ||||||||||||
|
2011
|
$ | 1,001 | $ | 84 | $ | 99 | $ | 10 | ||||||||
|
2012
|
1,011 | 92 | 97 | 11 | ||||||||||||
|
2013
|
587 | 98 | 95 | 12 | ||||||||||||
|
2014
|
593 | 102 | 94 | 13 | ||||||||||||
|
2015
|
592 | 111 | 92 | 14 | ||||||||||||
|
Years 2016—2020
|
3,013 | 640 | 418 | 78 | ||||||||||||
Employee stock-based awards
In 2010, 2009, and 2008, JPMorgan Chase granted long-term stock-based awards to certain key employees under the 2005 Long-Term Incentive Plan (the “2005 Plan”). The 2005 Plan became effective on May 17, 2005, and was amended in May 2008. Under the terms of the amended 2005 plan, as of December 31, 2010, 113 million shares of common stock are available for issuance through May 2013. The amended 2005 Plan is the only active plan under which the Firm is currently granting stock-based incentive awards. In the following discussion, the 2005 Plan, plus prior Firm plans and plans assumed as the result of acquisitions, are referred to collectively as the “LTI Plans,” and such plans constitute the Firm’s stock-based incentive plans.
In 2010, 2009, and 2008, JPMorgan Chase granted long-term stock-based awards to certain key employees under the 2005 Long-Term Incentive Plan (the “2005 Plan”). The 2005 Plan became effective on May 17, 2005, and was amended in May 2008. Under the terms of the amended 2005 plan, as of December 31, 2010, 113 million shares of common stock are available for issuance through May 2013. The amended 2005 Plan is the only active plan under which the Firm is currently granting stock-based incentive awards. In the following discussion, the 2005 Plan, plus prior Firm plans and plans assumed as the result of acquisitions, are referred to collectively as the “LTI Plans,” and such plans constitute the Firm’s stock-based incentive plans.
Restricted stock units (“RSUs”) are awarded at no cost to the recipient upon their grant. RSUs are
generally granted annually and generally vest at a rate of 50% after two years and 50% after three
years and convert into shares of common stock at the vesting date. In addition, RSUs typically
include full-career eligibility provisions, which allow employees to continue to vest upon
voluntary termination, subject to post-employment and other restrictions based on age or
service-related requirements. All of these awards are subject to forfeiture until vested. An RSU
entitles the recipient to receive cash payments equivalent to any dividends paid on the underlying
common stock during the period the RSU is outstanding and, as such, are considered participating
securities as discussed in Note 25 on page 269 of this Annual Report.
Under the LTI Plans, stock options and stock appreciation rights (“SARs”) have generally been
granted with an exercise price equal to the fair value of JPMorgan Chase’s common stock on the
grant date. The Firm typically awards SARs to certain key employees once per year, and it also
periodically grants discretionary stock-based incentive awards to individual employees, primarily
in the form of both employee stock options and SARs. The 2010, 2009 and 2008 grants of SARs to key
employees vest ratably over five years (i.e., 20% per year). The 2010 grants of SARs contain
full-career eligibility provisions; the 2009 and 2008 grants of SARs do not include any full-career
eligibility provisions. SARs generally expire 10 years after the grant date.
The Firm separately recognizes compensation expense for each tranche of each award as if it were a
separate award with its own vesting date. Generally, for each tranche granted, compensation expense
is recognized on a straight-line basis from the grant date until the vesting date of the respective
tranche, provided that the employees will not become full-career eligible during the vesting
period. For awards with full-career eligibility provisions and awards granted with no future
substantive service requirement, the Firm accrues the estimated value of awards expected to be
awarded to employees as of the grant date without giving consideration to the impact of
post-employment restrictions. For each tranche granted to employees who will become full-career
eligible during the vesting period, compensation expense is recognized on a straight-line basis
from the grant date until the earlier of the employee’s full-career eligibility date or the vesting
date of the respective tranche.
The Firm’s policy for issuing shares upon settlement of employee stock-based incentive awards is to
issue either new shares of common stock or treasury shares. During 2010, 2009 and 2008, the Firm
settled all of its employee stock-based awards by issuing treasury shares.
In January 2008, the Firm awarded to its Chairman and Chief Executive Officer up to 2 million SARs.
The terms of this award are distinct from, and more restrictive than, other equity grants regularly
awarded by the Firm. The SARs, which have a 10-year term, will become exercisable no earlier than
January 22, 2013, and have an exercise price of $39.83. The number of SARs that will become
exercisable (ranging from none to the full 2 million) and their exercise date or dates may be
determined by the Board of Directors based on an annual assessment of the performance of both the
CEO and JPMorgan Chase. The Firm recognizes this award ratably over an assumed five-year service
period, subject to a requirement to recognize changes in the fair value of the award through the
grant date. The Firm recognized $4 million, $9 million and $1 million in compensation expense in
2010, 2009 and 2008, respectively, for this award.
| 210 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
In connection with the Bear Stearns merger, 46 million Bear Stearns employee stock awards,
principally RSUs, capital appreciation plan units and stock options, were exchanged for equivalent
JPMorgan Chase awards using the merger exchange ratio of 0.21753. The fair value of these employee
stock awards was included in the Bear Stearns purchase price, since substantially all of the awards
were fully vested immediately after the merger date under provisions that provided for accelerated
vesting upon a change of control of Bear Stearns. However, Bear Stearns vested employee stock
options had no impact on the purchase price; since the employee stock options were significantly
out of the money at the merger date, the fair value of these awards was equal to zero upon their
conversion into JPMorgan Chase options.
The Firm also exchanged 6 million shares of its common stock for
27 million shares of Bear Stearns common stock held in an irrevocable grantor trust (the “RSU
Trust”), using the merger exchange ratio of 0.21753. The RSU
Trust was established to hold common stock underlying awards granted to selected
employees and key executives under certain Bear Stearns
employee stock plans. The RSU Trust was consolidated on JPMorgan Chase’s Consolidated Balance
Sheets as of June 30, 2008, and the shares held in the RSU Trust were recorded in “Shares held in
RSU Trust,” which reduced stockholders’ equity, similar to the treatment for treasury stock. The
related obligation to issue stock under these employee stock plans is reported in capital surplus.
The issuance of shares held in the RSU Trust to employees has no effect on the Firm’s total
stockholders’ equity, net income or earnings per share. Shares held in the RSU Trust were
distributed in 2008, 2009 and 2010, with a majority of the shares in the RSU Trust having been
distributed through December 2010. There were 1 million shares in the RSU Trust as of December 31,
2010. These remaining shares are expected to be distributed over the next two years.
RSU activity
Compensation expense for RSUs is measured based on the number of shares granted multiplied by the stock price at the grant date and is recognized in income as previously described. The following table summarizes JPMorgan Chase’s RSU activity for 2010.
Compensation expense for RSUs is measured based on the number of shares granted multiplied by the stock price at the grant date and is recognized in income as previously described. The following table summarizes JPMorgan Chase’s RSU activity for 2010.
| Weighted- | ||||||||
| Year ended December 31, 2010 | Number of | average grant | ||||||
| (in thousands, except weighted average data) | shares | date fair value | ||||||
|
Outstanding, January 1
|
221,265 | $ | 29.32 | |||||
|
Granted
|
80,142 | 42.92 | ||||||
|
Vested
|
(59,137 | ) | 43.05 | |||||
|
Forfeited
|
(8,149 | ) | 31.15 | |||||
|
Outstanding, December 31
|
234,121 | $ | 30.45 | |||||
The total fair value of shares that vested during the years ended December 31, 2010, 2009 and
2008, was $2.3 billion, $1.3 billion and $1.6 billion, respectively.
Employee stock option and SARs activity
Compensation expense for employee stock options and SARs, which is measured at the grant date as the fair value of employee stock options and SARs, is recognized in net income as described above.
Compensation expense for employee stock options and SARs, which is measured at the grant date as the fair value of employee stock options and SARs, is recognized in net income as described above.
| JPMorgan Chase & Co. / 2010 Annual Report | 211 |
Table of Contents
Notes to consolidated financial statements
The following table summarizes JPMorgan Chase’s employee stock option and SARs activity for the
year ended December 31, 2010, including awards granted to key employees and awards granted in prior
years under broad-based plans.
| Year ended December 31, 2010 | ||||||||||||||||
| (in thousands, except | ||||||||||||||||
| weighted-average data, and | Number of | Weighted-average | Weighted-average remaining | Aggregate | ||||||||||||
| where otherwise noted) | options/SARs | exercise price | contractual life (in years) | intrinsic value | ||||||||||||
|
Outstanding, January 1
|
266,568 | $ | 45.83 | |||||||||||||
|
Granted
|
20,949 | 42.96 | ||||||||||||||
|
Exercised
|
(12,870 | ) | 30.69 | |||||||||||||
|
Forfeited
|
(3,076 | ) | 34.82 | |||||||||||||
|
Canceled
|
(37,044 | ) | 65.95 | |||||||||||||
|
Outstanding, December 31
|
234,527 | $ | 43.33 | 3.4 | $ | 1,191,151 | ||||||||||
|
Exercisable, December 31
|
181,183 | 45.52 | 2.1 | 788,217 | ||||||||||||
The weighted-average grant date per share fair value of stock options and SARs granted
during the years ended December 31, 2010, 2009 and 2008, was $12.27, $8.24 and $10.36,
respectively. The total intrinsic value of options exercised during the years ended December 31,
2010, 2009 and 2008, was $154 million, $154 million and $391 million, respectively.
Compensation expense
The Firm recognized the following noncash compensation expense related to its various employee stock-based incentive plans in its Consolidated Statements of Income.
The Firm recognized the following noncash compensation expense related to its various employee stock-based incentive plans in its Consolidated Statements of Income.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Cost of prior grants of RSUs and SARs
that are amortized over their applicable
vesting periods
|
$ | 2,479 | $ | 2,510 | $ | 2,228 | ||||||
|
Accrual of estimated costs of RSUs and
SARs to be granted in future periods
including those to full-career eligible
employees
|
772 | 845 | 409 | |||||||||
|
Total noncash compensation expense
related to employee stock-based incentive
plans
|
$ | 3,251 | $ | 3,355 | $ | 2,637 | ||||||
At December 31, 2010, approximately $1.5 billion (pretax) of compensation cost related to
unvested awards had not yet been charged to net income. That cost is expected to be amortized into
compensation expense over a weighted-average period of 0.9 years.
The Firm does not capitalize any
compensation cost related to share-based compensation awards to employees.
Cash flows and tax benefits
Income tax benefits related to stock-based incentive arrangements recognized in the Firm’s Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008, were $1.3 billion, $1.3 billion and $1.1 billion, respectively.
Income tax benefits related to stock-based incentive arrangements recognized in the Firm’s Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008, were $1.3 billion, $1.3 billion and $1.1 billion, respectively.
The following table sets forth the cash received from the exercise of stock options under all
stock-based incentive arrangements, and the actual income tax benefit realized related to tax
deductions from the exercise of the stock options.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Cash received for options exercised
|
$ | 205 | $ | 437 | $ | 1,026 | ||||||
|
Tax benefit realized
|
14 | 11 | 72 | |||||||||
In June 2007, the FASB ratified guidance which requires that realized tax benefits from
dividends or dividend equivalents paid on equity-classified share-based payment awards that are
charged to retained earnings be recorded as an increase to additional paid-in capital and included
in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment
awards. Prior to the issuance of this guidance, the Firm did not include these tax benefits as part
of this pool of excess tax benefits. The Firm adopted this guidance on January 1, 2008; its
adoption did not have an impact on the Firm’s Consolidated Balance Sheets or results of operations.
Valuation assumptions
The following table presents the assumptions used to value employee stock options and SARs granted during the years ended December 31, 2010, 2009 and 2008, under the Black-Scholes valuation model.
The following table presents the assumptions used to value employee stock options and SARs granted during the years ended December 31, 2010, 2009 and 2008, under the Black-Scholes valuation model.
| Year ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
Weighted-average annualized
|
||||||||||||
|
valuation assumptions
|
||||||||||||
|
Risk-free interest rate
|
3.89 | % | 2.33 | % | 3.90 | % | ||||||
|
Expected dividend yield(a)
|
3.13 | 3.40 | 3.57 | |||||||||
|
Expected common stock
price volatility
|
37 | 56 | 34 | |||||||||
|
Expected life (in years)
|
6.4 | 6.6 | 6.8 | |||||||||
| (a) | In 2010 and 2009, the expected dividend yield was determined using historical dividend yields. |
The expected volatility assumption is derived from the implied volatility of JPMorgan Chase’s
publicly traded stock options.
The expected life assumption is an estimate of the length of time that an employee might hold an
option or SAR before it is exercised or canceled, and the assumption is based on the Firm’s
historical experience.
| 212 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following table presents the components of noninterest expense.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Compensation expense
(a)
|
$ | 28,124 | $ | 26,928 | $ | 22,746 | ||||||
|
Noncompensation expense:
|
||||||||||||
|
Occupancy expense
|
3,681 | 3,666 | 3,038 | |||||||||
|
Technology, communications and equipment expense
|
4,684 | 4,624 | 4,315 | |||||||||
|
Professional and outside services
|
6,767 | 6,232 | 6,053 | |||||||||
|
Marketing
|
2,446 | 1,777 | 1,913 | |||||||||
|
Other expense
(b)(c)(d)
|
14,558 | 7,594 | 3,740 | |||||||||
|
Amortization of intangibles
|
936 | 1,050 | 1,263 | |||||||||
|
Total
noncompensation expense
|
33,072 | 24,943 | 20,322 | |||||||||
|
Merger costs
|
— | 481 | 432 | |||||||||
|
Total noninterest expense
|
$ | 61,196 | $ | 52,352 | $ | 43,500 | ||||||
| (a) | 2010 includes a payroll tax expense related to the United Kingdom (“U.K.”) Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees. | |
| (b) | In 2010, 2009 and 2008, included litigation expense of $7.4 billion, $161 million and a net benefit of $781 million, respectively. | |
| (c) | Includes foreclosed property expense of $1.0 billion, $1.4 billion and $213 million in 2010, 2009 and 2008, respectively. | |
| (d) | Expense for 2009 included a $675 million FDIC special assessment. |
Merger costs
Costs associated with the Bear Stearns merger and the Washington Mutual transaction in 2008 are
reflected in the merger costs caption of the Consolidated Statements of Income. For a further
discussion of the Bear Stearns merger and the Washington Mutual transaction, see Note 2 on pages
166–170 of this Annual Report. A summary of merger-related costs is shown in the following table.
| 2009 | 2008 | |||||||||||||||||||||||
| Bear | Washington | Bear | Washington | |||||||||||||||||||||
| Year ended December 31, (in millions) | Stearns | Mutual | Total | Stearns | Mutual | Total | ||||||||||||||||||
|
Expense category
|
||||||||||||||||||||||||
|
Compensation
|
$ | (9 | ) | $ | 256 | $ | 247 | $ | 181 | $ | 113 | $ | 294 | |||||||||||
|
Occupancy
|
(3 | ) | 15 | 12 | 42 | — | 42 | |||||||||||||||||
|
Technology and communications and other
|
38 | 184 | 222 | 85 | 11 | 96 | ||||||||||||||||||
|
Total
(a)(b)
|
$ | 26 | $ | 455 | $ | 481 | $ | 308 | $ | 124 | $ | 432 | ||||||||||||
| (a) | With the exception of occupancy- and technology-related write-offs, all of the costs in the table required the expenditure of cash. | |
| (b) | There were no merger costs for 2010. |
The table below shows changes in the merger reserve balance related to costs associated with the
above transactions.
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Bear | Washington | Bear | Washington | Bear | Washington | |||||||||||||||||||||||||||||||
| Year ended December 31, (in millions) | Stearns | Mutual | Total | Stearns | Mutual | Total | Stearns | Mutual | Total | |||||||||||||||||||||||||||
|
Merger reserve balance,
beginning of period
|
$ | 32 | $ | 57 | $ | 89 | $ | 327 | $ | 441 | $ | 768 | $ | — | $ | — | $ | — | ||||||||||||||||||
|
Recorded as merger costs
(a)
|
— | — | — | 26 | 455 | 481 | 308 | 124 | 432 | |||||||||||||||||||||||||||
|
Recorded as goodwill
|
— | — | — | (5 | ) | — | (5 | ) | 1,112 | 435 | 1,547 | |||||||||||||||||||||||||
|
Utilization of merger reserve
|
(32 | ) | (57 | ) | (89 | ) | (316 | ) | (839 | ) | (1,155 | ) | (1,093 | ) | (118 | ) | (1,211 | ) | ||||||||||||||||||
|
Merger reserve balance, end
of period
|
$ | — | $ | — | $ | — | $ | 32 | $ | 57 | $ | 89 | $ | 327 | $ | 441 | $ | 768 | ||||||||||||||||||
| (a) | There were no merger costs for 2010. |
| JPMorgan Chase & Co. / 2010 Annual Report | 213 |
Table of Contents
Notes to consolidated financial statements
Securities are classified as AFS,
held-to-maturity (“HTM”) or trading.
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 movements 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 adjustments, 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
considers 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 specifically related to the
industry, geographic area or financial condition 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 securitization, the Firm also takes into consideration underlying loan-level data, and
structural features of the securitization, such as subordination, 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) | 2010 | 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
securities 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 municipalities 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. |
| 214 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The amortized costs and estimated fair values of AFS and HTM securities were as follows at December
31, 2010 and 2009.
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Amortized | unrealized | unrealized | Fair | Amortized | unrealized | unrealized | Fair. | |||||||||||||||||||||||||
| December 31, (in millions) | cost | gains | losses | value | cost | gains | losses | value | ||||||||||||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||||||||||
|
U.S. government agencies
(a)
|
$ | 117,364 | $ | 3,159 | $ | 297 | $ | 120,226 | $ | 166,094 | $ | 2,412 | $ | 608 | $ | 167,898 | ||||||||||||||||
|
Residential:
|
||||||||||||||||||||||||||||||||
|
Prime and Alt-A
|
2,173 | 81 | 250 | (d) | 2,004 | 5,234 | 96 | 807 | (d) | 4,523 | ||||||||||||||||||||||
|
Subprime
|
— | — | — | — | 17 | — | — | 17 | ||||||||||||||||||||||||
|
Non-U.S.
|
47,089 | 290 | 409 | 46,970 | 10,003 | 320 | 65 | 10,258 | ||||||||||||||||||||||||
|
Commercial
|
5,169 | 502 | 17 | 5,654 | 4,521 | 132 | 63 | 4,590 | ||||||||||||||||||||||||
|
Total mortgage-backed securities
|
171,795 | 4,032 | 973 | 174,854 | 185,869 | 2,960 | 1,543 | 187,286 | ||||||||||||||||||||||||
|
U.S. Treasury and government
agencies
(a)
|
11,258 | 118 | 28 | 11,348 | 30,044 | 88 | 135 | 29,997 | ||||||||||||||||||||||||
|
Obligations of U.S. states and
municipalities
|
11,732 | 165 | 338 | 11,559 | 6,270 | 292 | 25 | 6,537 | ||||||||||||||||||||||||
|
Certificates of deposit
|
3,648 | 1 | 2 | 3,647 | 2,649 | 1 | — | 2,650 | ||||||||||||||||||||||||
|
Non-U.S. government debt securities
|
20,614 | 191 | 28 | 20,777 | 24,320 | 234 | 51 | 24,503 | ||||||||||||||||||||||||
|
Corporate debt securities
(b)
|
61,718 | 495 | 419 | 61,794 | 61,226 | 812 | 30 | 62,008 | ||||||||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||||||||||
|
Credit card receivables
|
7,278 | 335 | 5 | 7,608 | 25,266 | 502 | 26 | 25,742 | ||||||||||||||||||||||||
|
Collateralized loan obligations
|
13,336 | 472 | 210 | 13,598 | 12,172 | 413 | 436 | 12,149 | ||||||||||||||||||||||||
|
Other
|
8,968 | 130 | 16 | 9,082 | 6,719 | 129 | 54 | 6,794 | ||||||||||||||||||||||||
|
Total available-for-sale debt
securities
|
310,347 | 5,939 | 2,019 | (d) | 314,267 | 354,535 | 5,431 | 2,300 | (d) | 357,666 | ||||||||||||||||||||||
|
Available-for-sale equity securities
|
1,894 | 163 | 6 | 2,051 | 2,518 | 185 | 4 | 2,699 | ||||||||||||||||||||||||
|
Total available-for-sale securities
|
$ | 312,241 | $ | 6,102 | $ | 2,025 | (d) | $ | 316,318 | $ | 357,053 | $ | 5,616 | $ | 2,304 | (d) | $ | 360,365 | ||||||||||||||
|
Total held-to-maturity securities
(c)
|
$ | 18 | $ | 2 | $ | — | $ | 20 | $ | 25 | $ | 2 | $ | — | $ | 27 | ||||||||||||||||
| (a) | Includes total U.S. government-sponsored enterprise obligations with fair values of $94.2 billion and $153.0 billion at December 31, 2010 and 2009, respectively, which were predominantly mortgage-related. | |
| (b) | Consists primarily of bank debt including sovereign government-guaranteed bank debt. | |
| (c) | Consists primarily of mortgage-backed securities issued by U.S. government-sponsored enterprises. | |
| (d) | Includes a total of $133 million and $368 million (before tax) of unrealized losses related to prime mortgage-backed securities for which credit losses have been recognized in income at December 31, 2010 and 2009, respectively. These unrealized losses are not credit-related and remain reported in AOCI. |
| JPMorgan Chase & Co. / 2010 Annual Report | 215 |
Table of Contents
Notes to consolidated financial statements
Securities impairment
The following table presents the fair value and gross unrealized losses for AFS securities by aging
category at December 31, 2010 and 2009.
| Securities with gross unrealized losses | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | |||||||||||||||||||||||
| Gross | Gross | Total gross | ||||||||||||||||||||||
| Fair | unrealized | Fair | unrealized | Total fair | unrealized | |||||||||||||||||||
| December 31, 2010 (in millions) | value | losses | value | losses | value | losses | ||||||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 14,039 | $ | 297 | $ | — | $ | — | $ | 14,039 | $ | 297 | ||||||||||||
|
Residential:
|
||||||||||||||||||||||||
|
Prime and Alt-A
|
— | — | 1,193 | 250 | 1,193 | 250 | ||||||||||||||||||
|
Subprime
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-U.S.
|
35,166 | 379 | 1,080 | 30 | 36,246 | 409 | ||||||||||||||||||
|
Commercial
|
548 | 14 | 11 | 3 | 559 | 17 | ||||||||||||||||||
|
Total
mortgage-backed securities
|
49,753 | 690 | 2,284 | 283 | 52,037 | 973 | ||||||||||||||||||
|
U.S. Treasury and government agencies
|
921 | 28 | — | — | 921 | 28 | ||||||||||||||||||
|
Obligations of U.S. states and municipalities
|
6,890 | 330 | 20 | 8 | 6,910 | 338 | ||||||||||||||||||
|
Certificates of deposit
|
1,771 | 2 | — | — | 1,771 | 2 | ||||||||||||||||||
|
Non-U.S. government debt securities
|
6,960 | 28 | — | — | 6,960 | 28 | ||||||||||||||||||
|
Corporate debt securities
|
18,783 | 418 | 90 | 1 | 18,873 | 419 | ||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||
|
Credit card receivables
|
— | — | 345 | 5 | 345 | 5 | ||||||||||||||||||
|
Collateralized loan obligations
|
460 | 10 | 6,321 | 200 | 6,781 | 210 | ||||||||||||||||||
|
Other
|
2,615 | 9 | 32 | 7 | 2,647 | 16 | ||||||||||||||||||
|
Total
available-for-sale debt securities
|
88,153 | 1,515 | 9,092 | 504 | 97,245 | 2,019 | ||||||||||||||||||
|
Available-for-sale equity securities
|
— | — | 2 | 6 | 2 | 6 | ||||||||||||||||||
|
Total securities with gross unrealized losses
|
$ | 88,153 | $ | 1,515 | $ | 9,094 | $ | 510 | $ | 97,247 | $ | 2,025 | ||||||||||||
| Securities with gross unrealized losses | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | |||||||||||||||||||||||
| Gross | Gross | Total gross | ||||||||||||||||||||||
| Fair | unrealized | Fair | unrealized | Total fair | unrealized | |||||||||||||||||||
| December 31, 2009 (in millions) | value | losses | value | losses | value | losses | ||||||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 43,235 | $ | 603 | $ | 644 | $ | 5 | $ | 43,879 | $ | 608 | ||||||||||||
|
Residential:
|
||||||||||||||||||||||||
|
Prime and Alt-A
|
183 | 27 | 3,032 | 780 | 3,215 | 807 | ||||||||||||||||||
|
Subprime
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-U.S.
|
391 | 1 | 1,773 | 64 | 2,164 | 65 | ||||||||||||||||||
|
Commercial
|
679 | 34 | 229 | 29 | 908 | 63 | ||||||||||||||||||
|
Total mortgage-backed securities
|
44,488 | 665 | 5,678 | 878 | 50,166 | 1,543 | ||||||||||||||||||
|
U.S. Treasury and government agencies
|
8,433 | 135 | — | — | 8,433 | 135 | ||||||||||||||||||
|
Obligations of U.S. states and municipalities
|
472 | 11 | 389 | 14 | 861 | 25 | ||||||||||||||||||
|
Certificates of deposit
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-U.S. government debt securities
|
2,471 | 46 | 835 | 5 | 3,306 | 51 | ||||||||||||||||||
|
Corporate debt securities
|
1,831 | 12 | 4,634 | 18 | 6,465 | 30 | ||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||
|
Credit card receivables
|
— | — | 745 | 26 | 745 | 26 | ||||||||||||||||||
|
Collateralized loan obligations
|
42 | 1 | 7,883 | 435 | 7,925 | 436 | ||||||||||||||||||
|
Other
|
767 | 8 | 1,767 | 46 | 2,534 | 54 | ||||||||||||||||||
|
Total
available-for-sale debt securities
|
58,504 | 878 | 21,931 | 1,422 | 80,435 | 2,300 | ||||||||||||||||||
|
Available-for-sale equity securities
|
1 | 1 | 3 | 3 | 4 | 4 | ||||||||||||||||||
|
Total securities with gross unrealized losses
|
$ | 58,505 | $ | 879 | $ | 21,934 | $ | 1,425 | $ | 80,439 | $ | 2,304 | ||||||||||||
| 216 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Other-than-temporary impairment
The following table presents credit losses that are included in the securities gains and losses
table above.
| Year ended December 31, (in millions) | 2010 | 2009 | ||||||
|
Debt securities the Firm does not intend to
sell that have credit losses
|
||||||||
|
Total other-than-temporary impairment
losses
(a)
|
$ | (94 | ) | $ | (946 | ) | ||
|
Losses recorded in/(reclassified from)
other comprehensive income
|
(6 | ) | 368 | |||||
|
Credit losses recognized in income
(b)(c)
|
$ | (100 | ) | $ | (578 | ) | ||
| (a) | For initial OTTI, represents the excess of the amortized cost over the fair value of AFS debt securities. For subsequent OTTI of the same security, represents additional declines in fair value subsequent to the previously recorded OTTI, if applicable. | |
| (b) | Represents the credit loss component of certain prime mortgage-backed securities and obligations of U.S. states and municipalities for 2010, and certain prime and subprime mortgage-backed securities and obligations of U.S. states and municipalities for 2009 that the Firm does not intend to sell. Subsequent credit losses may be recorded on securities without a corresponding further decline in fair value if there has been a decline in expected cash flows. | |
| (c) | Excluded from this table are OTTI losses of $7 million that were recognized in income in 2009, related to subprime mortgage-backed debt securities the Firm intended to sell. These securities were sold in 2009, resulting in the recognition of a recovery of $1 million. |
Changes in the credit loss component of credit-impaired debt securities
The following table presents a rollforward for the years ended December 31, 2010 and 2009, of the
credit loss component of OTTI losses that were recognized in income related to debt securities that
the Firm does not intend to sell.
| Year ended December 31, (in millions) | 2010 | 2009 | ||||||
|
Balance, beginning of period
|
$ | 578 | $ | — | ||||
|
Additions:
|
||||||||
|
Newly credit-impaired securities
|
— | 578 | ||||||
|
Increase in losses on previously credit-impaired
securities
|
94 | — | ||||||
|
Losses reclassified from other comprehensive
income on previously credit-impaired securities
|
6 | — | ||||||
|
Reductions:
|
||||||||
|
Sales of credit-impaired securities
|
(31 | ) | — | |||||
|
Impact of new accounting guidance related
to VIEs
|
(15 | ) | — | |||||
|
Balance, end of period
|
$ | 632 | $ | 578 | ||||
Gross unrealized losses
Gross unrealized losses have generally decreased since December 31, 2009, due primarily to market
spread improvement and increased liquidity, driving asset prices higher. However, gross unrealized
losses on certain securities have increased, including on certain corporate debt securities, which
are primarily government-guaranteed positions that experienced credit spread widening. As of
December 31, 2010, the Firm does not intend to sell the securities with a loss position in AOCI,
and it is not likely that the Firm will be required to sell these securities before recovery of
their amortized cost basis. Except for the securities reported in the table above for which credit
losses have been recognized in income, the Firm believes that the securities with an unrealized
loss in AOCI are not other-than-temporarily impaired as of December 31, 2010.
Following is a description of the Firm’s principal security investments with the most significant
unrealized losses as of December 31, 2010, and the key assumptions used in the Firm’s estimate of
the present value of the cash flows most likely to be collected from these investments.
Mortgage-backed securities – Prime and Alt-A nonagency
As of December 31, 2010, gross unrealized losses related to prime and Alt-A residential
mortgage-backed securities issued by private issuers were $250 million, all of which have been in
an unrealized loss position for 12 months or more. Approximately 70% of the total portfolio (by
amortized cost) are currently rated below investment-grade; the Firm has recorded
other-than-temporary impairment losses on 55% of the below investment-grade positions. In analyzing
prime and Alt-A residential mortgage-backed securities for potential credit losses, the Firm
utilizes a methodology that focuses on loan-level detail to estimate future cash flows, which are
then allocated to the various tranches of the securities. The loan-level analysis primarily
considers current home value, loan-to-value (“LTV”) ratio, loan type and geographical location of
the underlying property to forecast prepayment, home price, default rate and loss severity. The
forecasted weighted average underlying default rate on the positions was 21% and the related
weighted average loss severity was 50%. Based on this analysis, an OTTI loss of $6 million was
recognized in 2010 related to securities that experienced increased delinquency rates associated
with specific collateral types and origination dates. Overall losses have decreased since December
31, 2009, with the recovery in security prices resulting from increased demand for higher-yielding
asset classes and a deceleration in the pace of home price declines due in part to the U.S.
government programs to facilitate financing and to spur home purchases. The unrealized loss of $250
million is considered temporary, based on management’s assessment that the estimated future cash
flows together with the credit enhancement levels for those securities remain sufficient to support
the Firm’s investment. The credit enhancements associated with the below investment-grade and
investment-grade positions are 9% and 24%, respectively.
Asset-backed securities – Collateralized loan obligations
As of December 31, 2010, gross unrealized losses related to CLOs were $210 million, of which $200
million related to securities that were in an unrealized loss position for 12 months or more.
Overall losses have decreased since December 31, 2009, mainly as a result of lower default
forecasts and spread tightening across various asset classes. Substantially all of these securities
are rated “AAA,” “AA” and “A” and have an average credit enhancement of 30%. Credit enhancement in
CLOs is primarily in the form of subordination, which is a form of structural credit enhancement
where realized losses associated with assets held by an issuing vehicle are allocated to issued
tranches considering their relative seniority. The key assumptions considered in analyzing
potential credit losses were underlying loan and debt security defaults and loss severity. Based on
current default trends, the Firm assumed collateral default rates of 2.1% for 2010 and 5%
thereafter. Further, loss severities were assumed to be 48% for loans and 78% for debt securities.
Losses on collateral were estimated to occur approximately 18 months after default.
| JPMorgan Chase & Co. / 2010 Annual Report | 217 |
Table of Contents
Notes to consolidated financial statements
Contractual maturities and yields
The following table presents the amortized cost and estimated fair value at December 31, 2010, of
JPMorgan Chase’s AFS and HTM securities by contractual maturity.
| Due after one | Due after five | |||||||||||||||||||
| By remaining maturity | Due in one | year through | years through | Due after | ||||||||||||||||
| December 31, 2010 (in millions) | year or less | five years | 10 years | 10 years (c) | Total | |||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||
|
Mortgage-backed securities:
(a)
|
||||||||||||||||||||
|
Amortized cost
|
$ | 15 | $ | 259 | $ | 2,781 | $ | 168,740 | $ | 171,795 | ||||||||||
|
Fair value
|
15 | 282 | 2,825 | 171,732 | 174,854 | |||||||||||||||
|
Average yield
(b)
|
8.63 | % | 6.25 | % | 2.71 | % | 3.85 | % | 3.84 | % | ||||||||||
|
U.S. Treasury and government agencies:
(a)
|
||||||||||||||||||||
|
Amortized cost
|
$ | 1,843 | $ | 4,913 | $ | 4,251 | $ | 251 | $ | 11,258 | ||||||||||
|
Fair value
|
1,850 | 5,007 | 4,260 | 231 | 11,348 | |||||||||||||||
|
Average yield
(b)
|
1.68 | % | 2.62 | % | 3.84 | % | 3.86 | % | 2.95 | % | ||||||||||
|
Obligations of U.S. states and municipalities:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 39 | $ | 160 | $ | 333 | $ | 11,200 | $ | 11,732 | ||||||||||
|
Fair value
|
39 | 167 | 351 | 11,002 | 11,559 | |||||||||||||||
|
Average yield
(b)
|
3.21 | % | 4.30 | % | 5.25 | % | 5.07 | % | 5.06 | % | ||||||||||
|
Certificates of deposit:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 3,642 | $ | 6 | $ | — | $ | — | $ | 3,648 | ||||||||||
|
Fair value
|
3,641 | 6 | — | — | 3,647 | |||||||||||||||
|
Average yield
(b)
|
5.16 | % | 10.75 | % | — | % | — | % | 5.17 | % | ||||||||||
|
Non-U.S. government debt securities:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 5,666 | $ | 13,557 | $ | 1,388 | $ | 3 | $ | 20,614 | ||||||||||
|
Fair value
|
5,673 | 13,712 | 1,389 | 3 | 20,777 | |||||||||||||||
|
Average yield
(b)
|
1.81 | % | 2.23 | % | 3.56 | % | 5.34 | % | 2.21 | % | ||||||||||
|
Corporate debt securities:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 12,515 | $ | 44,137 | $ | 5,065 | $ | 1 | $ | 61,718 | ||||||||||
|
Fair value
|
12,597 | 44,100 | 5,096 | 1 | 61,794 | |||||||||||||||
|
Average yield
(b)
|
2.25 | % | 2.19 | % | 4.81 | % | 1.07 | % | 2.42 | % | ||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 38 | $ | 3,371 | $ | 13,567 | $ | 12,606 | $ | 29,582 | ||||||||||
|
Fair value
|
38 | 3,454 | 14,041 | 12,755 | 30,288 | |||||||||||||||
|
Average yield
(b)
|
8.94 | % | 2.05 | % | 2.48 | % | 2.19 | % | 2.32 | % | ||||||||||
|
Total available-for-sale debt securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 23,758 | $ | 66,403 | $ | 27,385 | $ | 192,801 | $ | 310,347 | ||||||||||
|
Fair value
|
23,853 | 66,728 | 27,962 | 195,724 | 314,267 | |||||||||||||||
|
Average yield
(b)
|
2.56 | % | 2.24 | % | 3.23 | % | 3.81 | % | 3.33 | % | ||||||||||
|
Available-for-sale equity securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | — | $ | — | $ | — | $ | 1,894 | $ | 1,894 | ||||||||||
|
Fair value
|
— | — | — | 2,051 | 2,051 | |||||||||||||||
|
Average yield
(b)
|
— | % | — | % | — | % | 0.29 | % | 0.29 | % | ||||||||||
|
Total available-for-sale securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 23,758 | $ | 66,403 | $ | 27,385 | $ | 194,695 | $ | 312,241 | ||||||||||
|
Fair value
|
23,853 | 66,728 | 27,962 | 197,775 | 316,318 | |||||||||||||||
|
Average yield
(b)
|
2.56 | % | 2.24 | % | 3.23 | % | 3.78 | % | 3.31 | % | ||||||||||
|
Total held-to-maturity securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | — | $ | 6 | $ | 11 | $ | 1 | $ | 18 | ||||||||||
|
Fair value
|
— | 6 | 12 | 2 | 20 | |||||||||||||||
|
Average yield
(b)
|
— | % | 6.97 | % | 6.83 | % | 6.49 | % | 6.85 | % | ||||||||||
| (a) | U.S. government agencies and U.S. government-sponsored enterprises were the only issuers whose securities exceeded 10% of JPMorgan Chase’s total stockholders’ equity at December 31, 2010. | |
| (b) | Average yield was based on amortized cost balances at the end of the period and did not give effect to changes in fair value reflected in accumulated other comprehensive income/(loss). Yields are derived by dividing interest/dividend income (including the effect of related derivatives on AFS securities and the amortization of premiums and accretion of discounts) by total amortized cost. Taxable-equivalent yields are used where applicable. | |
| (c) | Includes securities with no stated maturity. Substantially all of the Firm’s residential mortgage-backed securities and collateralized mortgage obligations are due in 10 years or more, based on contractual maturity. The estimated duration, which reflects anticipated future prepayments based on a consensus of dealers in the market, is approximately five years for agency residential mortgage-backed securities, three years for agency residential collateralized mortgage obligations and six years for nonagency residential collateralized mortgage obligations. |
| 218 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
JPMorgan Chase enters into resale agreements, repurchase agreements, securities borrowed
transactions and securities loaned transactions (collectively, “securities financing agreements”)
primarily to finance the Firm’s inventory positions, acquire securities to cover short positions,
accommodate customers’ financing needs, and settle other securities obligations.
Securities financing agreements are treated as collateralized financings on the Firm’s Consolidated
Balance Sheets. Resale and repurchase agreements are generally carried at the amounts at which the
securities will be subsequently sold or repurchased, plus accrued interest. Securities borrowed and
securities loaned transactions are generally carried at the amount of cash collateral advanced or
received. Where appropriate under applicable accounting guidance, resale and repurchase agreements
with the same counterparty are reported on a net basis. Fees received or paid in connection with
securities financing agreements are recorded in interest income or interest expense.
The Firm has elected the fair value option for certain securities financing agreements. For a
further discussion of the fair value option, see Notes 4 on pages 187–189 of this Annual Report.
The securities financing agreements for which the fair value option has been elected are reported
within securities purchased under resale agreements; securities loaned or sold under repurchase
agreements; and securities borrowed on the Consolidated Balance Sheets. Generally, for agreements
carried at fair value, current-period interest accruals are recorded within interest income and
interest expense, with changes in fair value reported in principal transactions revenue. However,
for financial instruments containing embedded derivatives that would be separately accounted for in
accordance with accounting guidance for hybrid instruments, all changes in fair value, including
any interest elements, are reported in principal transactions revenue.
The following table details the Firm’s securities financing agreements, all of which are accounted
for as collateralized financings during the periods presented.
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Securities purchased under resale agreements
(a)
|
$ | 222,302 | $ | 195,328 | ||||
|
Securities borrowed
(b)
|
123,587 | 119,630 | ||||||
|
Securities sold under repurchase agreements
(c)
|
$ | 262,722 | $ | 245,692 | ||||
|
Securities loaned
|
10,592 | 7,835 | ||||||
| (a) | Includes resale agreements of $20.3 billion and $20.5 billion accounted for at fair value at December 31, 2010 and 2009, respectively. | |
| (b) | Includes securities borrowed of $14.0 billion and $7.0 billion accounted for at fair value at December 31, 2010 and 2009, respectively. | |
| (c) | Includes repurchase agreements of $4.1 billion and $3.4 billion accounted for at fair value at December 31, 2010 and 2009, respectively. |
The amounts reported in the table above have been reduced by $112.7 billion and $121.2 billion at
December 31, 2010 and 2009, respectively, as a result of agreements in effect that meet the
specified conditions for net presentation under applicable accounting guidance.
JPMorgan Chase’s policy is to take possession, where possible, of securities purchased under resale
agreements and of securities borrowed. The Firm monitors the market value of the underlying securities that
it has received from its counterparties and either requests
additional collateral or returns a
portion of the collateral when appropriate in light of the market value of the underlying securities.
Margin levels are established initially based upon the counterparty and type of collateral and
monitored on an ongoing basis to protect against declines in collateral value in the event of
default. JPMorgan Chase typically enters into master netting agreements and other collateral
arrangements with its resale agreement and securities borrowed counterparties, which provide for
the right to liquidate the purchased or borrowed securities in the event of a customer default. As
a result of the Firm’s credit risk mitigation practices described above on resale and securities
borrowed agreements, the Firm did not hold any reserves for credit
impairment on these agreements
as of December 31, 2010 and 2009.
For a further discussion of assets pledged and collateral received in securities financing
agreements see Note 31 on pages 280–281 of this Annual Report.
| JPMorgan Chase & Co. / 2010 Annual Report | 219 |
Table of Contents
Notes to consolidated financial statements
Loan accounting framework
The accounting for a loan depends on management’s strategy for the loan, and on whether the loan
was credit-impaired at the date of acquisition. The Firm accounts for loans based on the following
categories:
| • | Originated or purchased loans held-for-investment (other than purchased credit-impaired (“PCI”) loans); |
| • | Loans held-for-sale; |
| • | Fair value loans; |
| • | PCI loans held-for-investment |
The following provides a detailed accounting discussion of these loan categories:
Loans held-for-investment (other than PCI loans)
Originated or purchased loans held-for-investment, other than PCI loans, are measured at the
principal amount outstanding, net of the following: allowance for loan losses; net charge-offs;
interest applied to principal (for loans accounted for on the cost recovery method); unamortized
discounts and premiums; and deferred loan fees or cost.
Interest income
Interest income on performing loans held-for-investment, other than PCI loans, is accrued and
recognized as interest income at the contractual rate of interest. Purchase price discounts or
premiums, as well as net deferred loan fees or costs, are amortized into interest income over the
life of the loan to produce a level rate of return.
Nonaccrual loans
Nonaccrual loans are those on which the accrual of interest has been suspended. Loans (other than
credit card loans and certain consumer loans insured by U.S. government agencies) are placed on
nonaccrual status and considered nonperforming when full payment of principal and interest is in
doubt, which is generally determined when principal or interest is 90 days or more past due and
collateral, if any, is insufficient to cover principal and interest. A loan is determined to be
past due when the minimum payment is not received from the borrower by the contractually specified
due date or for certain loans (e.g., residential real estate loans), when a monthly payment is due
and unpaid for 30 days or more. All interest accrued but not collected is reversed against interest
income at the date a loan is placed on nonaccrual status. In addition, the amortization of deferred
amounts is suspended. In certain cases, interest income on nonaccrual loans may be recognized to
the extent cash is received (i.e., cash basis) when the recorded loan balance is deemed fully
collectible; however, if there is doubt regarding the ultimate collectability of the recorded loan
balance, all interest cash receipts are applied to reduce the carrying value of the loan (the cost
recovery method).
A loan may be returned to accrual status when repayment is reasonably assured and there has been
demonstrated performance under the terms of the loan or, if applicable, the terms of the
restructured loan.
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 accrued interest and fee income on
credit card loans.
Allowance for loan losses
The allowance for loan losses represents the estimated probable losses on held-for-investment
loans. Changes in the allowance for loan losses are recorded in the Provision for credit losses on
the Firm’s Consolidated Statements of Income.
See Note 15 on pages 239–243 for further information
on the Firm’s accounting polices for the allowance for loan losses.
Charge-offs
Wholesale loans and risk-rated business banking and auto loans are charged off against the
allowance for loan losses when it is highly certain that a loss has been realized. This
determination includes many factors, including the prioritization of the Firm’s claim in
bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s
equity.
Consumer loans, other than risk-rated business banking and auto loans and PCI loans, are generally
charged off to the allowance for loan losses upon reaching specified stages of delinquency, in
accordance with the Federal Financial Institutions Examination Council (“FFIEC”) policy.
Residential mortgage loans and scored business banking loans are generally charged down to
estimated net realizable value at no later than 180 days past due. Certain consumer loans,
including auto loans and non-government guaranteed student loans, are generally charged down to
estimated net realizable value at 120 days past due. The Firm regularly assesses the assumptions
that it uses to estimate these net realizable values, and updates the underlying assumptions as
necessary to further refine its estimates.
Credit card loans are charged off by the end of the month in which the account becomes 180 days
past due, or within 60 days from receiving notification about a specified event (e.g., bankruptcy
of the borrower), whichever is earlier.
Certain impaired loans are deemed collateral-dependent because repayment of the loan is expected to
be provided solely by the underlying collateral, rather than by cash flows from the borrower’s
operations, income or other resources. Impaired collateral-dependent loans are charged-off to the
fair value of the collateral, less costs to sell.
See Note 15 on pages 239–243 for information on
the Firm’s charge-off and valuation policies for collateral-dependent loans.
| 220 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Loans held-for-sale
Held-for-sale loans are measured at the lower of cost or fair value, with valuation changes
recorded in noninterest revenue. For wholesale loans, the valuation is performed on an individual
loan basis. For consumer loans, the valuation is performed on a portfolio basis.
Interest income on loans held-for-sale is accrued and recognized based on the contractual rate of
interest.
Loan origination fees or costs and purchase price discounts or premiums are deferred in a contra
loan account until the related loan is sold. The deferred fees and discounts or premiums are an
adjustment to the basis of the loan and therefore are included in the periodic determination of the
lower of cost or fair value adjustments and/or the gain or losses recognized at the time of sale.
Held-for-sale loans are subject to the nonaccrual policies described above.
Because held-for-sale loans are recognized at the lower of cost or fair value, the Firm’s allowance
for loan losses and charge-off policies do not apply to these loans.
Fair value loans
Loans used in a trading strategy or risk managed on a fair value basis are measured at fair value,
with changes in fair value recorded in noninterest revenue.
For these loans, the earned current contractual interest payment is recognized in interest income.
Changes in fair value are recognized in noninterest revenue. Loan origination fees are recognized
upfront in noninterest revenue. Loan origination costs are recognized in the associated expense
category as incurred.
Because these loans are recognized at fair value, the Firm’s nonaccrual, allowance for loan losses,
and charge-off policies do not apply to these loans.
See Note 4 on pages 187–189 of this Annual Report for further information on the Firm’s elections
of fair value accounting under the fair value option. See Note 3 and Note 4 on pages 170–187 and
187–189 of this Annual Report for further information on loans carried at fair value and
classified as trading assets.
PCI loans
PCI loans held-for-investment are initially measured at fair value. PCI loans have evidence of
credit deterioration since the loan’s origination date and therefore it is probable, at
acquisition, that all contractually required payments will not be collected. Because PCI loans are
initially measured at fair value, which includes an estimate of future credit losses, no allowance
for loan losses related to PCI loans is recorded at the acquisition
date.
See page 233 of this Note
for information on accounting for PCI loans subsequent to their acquisition.
Loan classification changes
Loans in the held-for-investment portfolio that management decides to sell are transferred to the
held-for-sale portfolio at the lower of cost or fair value on the date of transfer. Credit-related
losses are charged against the allowance for loan losses; losses due to changes in interest rates
or foreign currency exchange rates are recognized in noninterest revenue.
In certain limited cases, loans in the held-for-sale portfolio that management decides to retain
are transferred to the held-for-investment portfolio at the lower of cost or fair value on the date
of transfer. These loans are subsequently assessed for impairment based on the Firm’s allowance
methodology.
For a further discussion of the methodologies used in establishing the Firm’s
allowance for loan losses, see Note 15 on pages 239–243 of this Annual Report.
Loan modifications
The Firm seeks to modify certain loans in conjunction with its loss-mitigation activities. Through
the modification, JPMorgan Chase grants one or more concessions to a borrower who is experiencing
financial difficulty in order to minimize the Firm’s economic loss, avoid foreclosure or
repossession of the collateral and to ultimately maximize payments received by the Firm from the
borrower. The concessions granted vary by program and by borrower-specific characteristics, and may
include interest rate reductions, term extensions, payment deferrals, or the acceptance of equity
or other assets in lieu of payments. In certain limited circumstances, loan modifications include
principal forgiveness.
Such modifications are accounted for and reported as troubled debt restructurings (“TDRs”). A loan
that has been modified in a TDR is generally considered to be impaired until it matures, is repaid,
or is otherwise liquidated, regardless of whether the borrower performs under the modified terms.
In certain limited cases, the effective interest rate applicable to the modified loan is at or
above the current market rate at the time of the restructuring. In such circumstances, and assuming
that the loan subsequently performs under its modified terms and the Firm expects to collect all
contractual principal and interest cash flows, the loan is disclosed as impaired and as a TDR only
during the year of the modification; in subsequent years, the loan is not disclosed as an impaired
loan or as a TDR so long as repayment of the restructured loan under its modified terms is
reasonably assured.
Loans, except for credit card loans, modified in a TDR are generally placed on nonaccrual status,
although in most cases such loans were already on nonaccrual status prior to modification. These
loans may be returned to performing status (resuming the accrual of interest) if the following
criteria are met: (a) the borrower has performed under the modified terms for a minimum of six
months and/or six payments, and (b) the Firm has an expectation that repayment of the modified loan
is reasonably assured based on, for example, the borrower’s debt capacity and level of future
earnings, collateral values, LTV ratios, and other current market considerations.
| JPMorgan Chase & Co. / 2010 Annual Report | 221 |
Table of Contents
Notes to consolidated financial statements
Because TDRs are considered to be impaired, these loans are evaluated for an asset-specific
allowance, which considers the expected re-default rates for the modified loans and is determined
based on the same methodology used to estimate the Firm’s asset-specific allowance component
regardless of whether the loan is performing and has been returned to accrual status.
For further
discussion of the methodology used to estimate the Firm’s asset-specific allowance, see Note 15 on
pages 239–243 of this Annual Report.
Foreclosed property
The Firm acquires property from borrowers through loan restructurings, workouts, and foreclosures.
Property acquired may include real property (e.g., residential real estate, land, buildings, and
fixtures) and commercial and personal property (e.g., aircraft, railcars, and ships).
At the time JPMorgan Chase takes physical possession, the property is recorded in other assets on
the Consolidated Balance Sheets at fair value less estimated costs to sell. Each quarter the fair
value of the acquired property is reviewed and adjusted, if necessary. Subsequent changes to fair
value are charged/credited to noninterest revenue. Operating expense, such as real estate taxes and
maintenance, are charged to other expense.
Loan Portfolio
The Firm's
loan portfolio is divided into three portfolio segments, which are
the same segments used by the Firm to determine the allowance for loan losses: Wholesale; Consumer,
excluding credit card; and Credit Card. Within each portfolio segment, the Firm monitors and
assesses the credit risk in the following classes of loans, based on
the risk characteristics of each loan class:
| Wholesale (a) |
Consumer,
excluding
credit card (b) |
Credit Card | ||
|
•
Commercial
and industrial
•
Real
estate
•
Financial
institutions
•
Government
agencies
•
Other
|
Residential
real estate – excluding PCI
•
Home
equity – senior lien
•
Home
equity – junior lien
•
Prime
mortgage, including option ARMs
•
Subprime
mortgage
Other
consumer loans
•
Auto
(c)
•
Business
banking
(c)
•
Student
and other
Residential
real estate – PCI
•
Home
equity
•
Prime
mortgage
•
Subprime
mortgage
•
Option
ARMs
|
•
Chase,
excluding accounts originated by Washington Mutual
•
Accounts
originated by Washington Mutual
|
| (a) | Includes loans reported in Investment Bank, Commercial Banking, Treasury & Securities Services, Asset Management and Corporate/Private Equity segments. | |
| (b) | Includes RFS and residential real estate loans reported in the Corporate/Private Equity segment. | |
| (c) | Includes risk-rated loans that apply the Firm’s wholesale methodology for determining the allowance for loan losses; these loans are managed by RFS, and therefore for consistency in presentation, are included with the other consumer loan classes. |
| 222 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following table summarizes the Firm’s loan balances by portfolio segment:
| Consumer, excluding | ||||||||||||||||
| December 31, 2010 (in millions) | Wholesale | credit card | Credit Card | Total | ||||||||||||
|
Retained
(a)
|
$ | 222,510 | $ | 327,464 | $ | 135,524 | $ | 685,498 | (b) | |||||||
|
Held-for-sale
|
3,147 | 154 | 2,152 | 5,453 | ||||||||||||
|
At fair value
|
1,976 | — | — | 1,976 | ||||||||||||
|
Total
|
$ | 227,633 | $ | 327,618 | $ | 137,676 | $ | 692,927 | ||||||||
| Consumer, excluding | ||||||||||||||||
| December 31, 2009 (in millions) | Wholesale | credit card | Credit Card | Total | ||||||||||||
|
Retained
|
$ | 200,077 | $ | 348,355 | $ | 78,786 | $ | 627,218 | (b) | |||||||
|
Held-for-sale
|
2,734 | 2,142 | — | 4,876 | ||||||||||||
|
At fair value
|
1,364 | — | — | 1,364 | ||||||||||||
|
Total
|
$ | 204,175 | $ | 350,497 | $ | 78,786 | $ | 633,458 | ||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated $84.7 billion of loans associated with Firm-sponsored credit card securitization trusts; $15.1 billion of wholesale loans; and $4.8 billion of loans associated with certain other consumer securitization entities, primarily mortgage-related. For further information, see Note 16 on pages 244–259 of this Annual Report. | |
| (b) | Loans (other than PCI loans and those for which the fair value option has been selected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $1.9 billion and $1.4 billion at December 31, 2010 and 2009, respectively. |
On an
on-going basis, the Firm manages its exposure to credit risk. Selling
loans is one way that the Firm reduces its credit exposures. The following table provides information about the Firm’s loan
sales by portfolio segment.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net gains/(losses) on sales of loans
(including lower of cost or fair
value adjustments)
(a)
|
||||||||||||
|
Wholesale
|
$ | 215 | $ | 291 | $ | (2,647 | ) | |||||
|
Consumer, excluding credit card
|
265 | 127 | (11 | ) | ||||||||
|
Credit Card
|
(16 | ) | 21 | 150 | ||||||||
|
Total net gains/(losses) on sales of
loans (including lower of cost or
fair value adjustments)
(a)
|
$ | 464 | $ | 439 | $ | (2,508 | ) | |||||
| (a) | Excludes sales related to loans accounted for at fair value. |
Wholesale loan portfolio
Wholesale loans include loans made to a variety of customers from large corporate and
institutional clients to certain high-net worth individuals.
The primary credit quality indicator for wholesale loans is the risk rating assigned each loan.
Risk ratings are used to identify the credit quality of loans and differentiate risk within the
portfolio. Risk ratings on loans consider the probability of default (“PD”) and the loss given
default (“LGD”). PD is the likelihood that a loan will not be repaid at default. The LGD is the
estimated loss on the loan that would be realized upon the default of the borrower and takes into
consideration collateral and structural support for each credit facility.
Management considers several factors to determine an appropriate risk rating, including the
obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount
and sources for repayment, the level and nature of contingencies, management strength, and the
industry and geography in which the obligor operates. Risk ratings generally represent ratings
profiles similar to those defined by S&P and
Moody’s. Investment grade ratings range from “AAA/Aaa”
to “BBB-/Baa3”. Noninvestment grade ratings are further
classified as noncriticized (“BB+/Ba1 and B-/B3”) and criticized (“CCC+”/”Caa1 and lower”), and the
criticized portion is further subdivided into performing and nonaccrual loans, representing
management’s assessment of the collectibility of principal and interest. Criticized loans have a
higher probability of default than noncriticized loans.
Risk ratings are reviewed on a regular and ongoing basis by Credit Risk Management and are
adjusted as necessary for updated information affecting the obligor’s ability to fulfill its
obligations.
As noted above, the risk rating of a loan considers the industry in which the obligor conducts its
operations. As part of the overall credit risk management framework, the Firm focuses on the
management and diversification of its industry and client exposures, with particular attention paid
to industries with actual or potential credit concern. See Note 5 on
pages 189–190 in this Annual
Report for further detail on industry concentrations.
| JPMorgan Chase & Co. / 2010 Annual Report | 223 |
Table of Contents
Notes to consolidated financial statements
The table below provides information by class of receivable for the retained loans in the Wholesale
portfolio segment.
| Commercial | ||||||||||||||||
| As of or for the year ended December 31, | and industrial | Real estate | ||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Loans by risk ratings
|
||||||||||||||||
|
Investment grade
|
$ | 31,697 | $ | 31,203 | $ | 28,504 | $ | 31,986 | ||||||||
|
Noninvestment grade:
|
||||||||||||||||
|
Noncriticized
|
30,874 | 28,714 | 16,425 | 14,462 | ||||||||||||
|
Criticized performing
|
2,371 | 6,079 | 5,769 | 7,859 | ||||||||||||
|
Criticized-total nonaccrual
|
1,634 | 2,245 | 2,937 | 2,888 | ||||||||||||
|
Total noninvestment grade
|
34,879 | 37,038 | 25,131 | 25,209 | ||||||||||||
|
Total retained loans
|
$ | 66,576 | $ | 68,241 | $ | 53,635 | $ | 57,195 | ||||||||
|
% of total criticized to total retained loans
|
6.02 | % | 12.20 | % | 16.23 | % | 18.79 | % | ||||||||
|
% of nonaccrual loans to total retained loans
|
2.45 | 3.29 | 5.48 | 5.05 | ||||||||||||
|
|
||||||||||||||||
|
Loans by geographic distribution
(a)
|
||||||||||||||||
|
Total non-U.S.
|
$ | 17,731 | $ | 19,138 | $ | 1,963 | $ | 2,227 | ||||||||
|
Total U.S.
|
48,845 | 49,103 | 51,672 | 54,968 | ||||||||||||
|
Total retained loans
|
$ | 66,576 | $ | 68,241 | $ | 53,635 | $ | 57,195 | ||||||||
|
|
||||||||||||||||
|
Net charge-offs
|
$ | 403 | $ | 1,243 | $ | 862 | $ | 688 | ||||||||
|
% of net charge-offs to retained loans
(b)
|
0.61 | % | 1.82 | % | 1.61 | % | 1.20 | % | ||||||||
|
|
||||||||||||||||
|
Loan delinquency
(c)
|
||||||||||||||||
|
Current and less than 30 days past due and still accruing
|
$ | 64,501 | $ | 65,692 | $ | 50,299 | $ | 53,370 | ||||||||
|
30–89 days past due and still accruing
|
434 | 276 | 290 | 823 | ||||||||||||
|
90 or more days past due and still accruing
(d)
|
7 | 28 | 109 | 114 | ||||||||||||
|
Nonaccrual
|
1,634 | 2,245 | 2,937 | 2,888 | ||||||||||||
|
Total retained loans
|
$ | 66,576 | $ | 68,241 | $ | 53,635 | $ | 57,195 | ||||||||
| (a) | U.S. and non-U.S. distribution is determined based predominantly on the domicile of the borrower. | |
| (b) | Ratios were calculated using end-of-period retained loans. | |
| (c) | For wholesale loans, the past due status of a loan is generally not a significant indicator of credit quality due to the ongoing review and monitoring of an obligor’s ability to meet contractual obligations. For a discussion of more significant factors, see page 223 of this Note. | |
| (d) | Represents loans that are 90 days or more past due as to principal and/or interest, but that are still accruing interest; these loans are considered well-collateralized. | |
| (e) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated $15.1 billion of wholesale loans. For further information, see Note 16 on pages 244–259 of this Annual Report. | |
| (f) | Other primarily includes loans to special purpose entities and loans to private banking clients. See Note 1 on page 164–165 of this Annual Report for additional information on SPEs. |
The
following table presents additional information on the real estate
class of loans within the wholesale portfolio segment for the
periods ended December 31, 2010 and 2009. The real estate class primarily consists of secured
commercial loans mainly to borrowers for multi-family and commercial lessor properties.
Multi-family lending specifically finances apartment buildings. Commercial lessors receive
financing specifically for real estate leased to retail, office and industrial tenants. The
commercial construction and development loans represent financing for the construction of
apartments, office and professional buildings and malls. Other real estate loans include lodging, real estate investment trusts (“REITs”), single-family, homebuilders
and other real estate.
| December 31, | Multi-family | Commercial lessors | ||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Real estate retained loans
|
$ | 30,604 | $ | 31,077 | $ | 15,796 | $ | 15,170 | ||||||||
|
Criticized exposure
|
3,798 | 3,942 | 3,593 | 3,855 | ||||||||||||
|
% of total real estate retained loans
|
12.41 | % | 12.68 | % | 22.75 | % | 25.41 | % | ||||||||
|
Criticized nonaccrual
|
$ | 1,016 | $ | 1,109 | $ | 1,549 | $ | 687 | ||||||||
|
% of total real estate retained loans
|
3.32 | % | 3.57 | % | 9.81 | % | 4.53 | % | ||||||||
| 224 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
(table continued from previous page)
| Financial | Total | |||||||||||||||||||||||||||||||
| institutions | Government agencies | Other (e)(f) | retained loans (e) | |||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
$ | 22,525 | $ | 14,878 | $ | 6,871 | $ | 6,684 | $ | 56,450 | $ | 33,780 | $ | 146,047 | $ | 118,531 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
8,480 | 8,319 | 382 | 624 | 6,012 | 6,704 | 62,173 | 58,823 | ||||||||||||||||||||||||
|
|
317 | 1,201 | 3 | 28 | 320 | 997 | 8,780 | 16,164 | ||||||||||||||||||||||||
|
|
136 | 729 | 22 | 5 | 781 | 692 | 5,510 | 6,559 | ||||||||||||||||||||||||
|
|
8,933 | 10,249 | 407 | 657 | 7,113 | 8,393 | 76,463 | 81,546 | ||||||||||||||||||||||||
|
|
$ | 31,458 | $ | 25,127 | $ | 7,278 | $ | 7,341 | $ | 63,563 | $ | 42,173 | $ | 222,510 | $ | 200,077 | ||||||||||||||||
|
|
1.44 | % | 7.68 | % | 0.34 | % | 0.45 | % | 1.73 | % | 4.00 | % | 6.42 | % | 11.36 | % | ||||||||||||||||
|
|
0.43 | 2.90 | 0.30 | 0.07 | 1.23 | 1.64 | 2.48 | 3.28 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
$ | 19,756 | $ | 11,755 | $ | 870 | $ | 1,707 | $ | 25,831 | $ | 18,790 | $ | 66,151 | $ | 53,617 | ||||||||||||||||
|
|
11,702 | 13,372 | 6,408 | 5,634 | 37,732 | 23,383 | 156,359 | 146,460 | ||||||||||||||||||||||||
|
|
$ | 31,458 | $ | 25,127 | $ | 7,278 | $ | 7,341 | $ | 63,563 | $ | 42,173 | $ | 222,510 | $ | 200,077 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
$ | 72 | $ | 734 | $ | 2 | $ | — | $ | 388 | $ | 467 | $ | 1,727 | $ | 3,132 | ||||||||||||||||
|
|
0.23 | % | 2.92 | % | 0.03 | % | — | % | 0.61 | % | 1.11 | % | 0.78 | % | 1.57 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
$ | 31,289 | $ | 24,324 | $ | 7,222 | $ | 7,321 | $ | 61,837 | $ | 40,785 | $ | 215,148 | $ | 191,492 | ||||||||||||||||
|
|
31 | 68 | 34 | 15 | 704 | 512 | 1,493 | 1,694 | ||||||||||||||||||||||||
|
|
2 | 6 | — | — | 241 | 184 | 359 | 332 | ||||||||||||||||||||||||
|
|
136 | 729 | 22 | 5 | 781 | 692 | 5,510 | 6,559 | ||||||||||||||||||||||||
|
|
$ | 31,458 | $ | 25,127 | $ | 7,278 | $ | 7,341 | $ | 63,563 | $ | 42,173 | $ | 222,510 | $ | 200,077 | ||||||||||||||||
(table continued from previous page)
| Commercial construction and development | Other | Total real estate loans | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
|
|
$ | 3,395 | $ | 4,599 | $ | 3,840 | $ | 6,349 | $ | 53,635 | $ | 57,195 | ||||||||||||
|
|
619 | 1,359 | 696 | 1,591 | 8,706 | 10,747 | ||||||||||||||||||
|
|
18.23 | % | 29.55 | % | 18.13 | % | 25.06 | % | 16.23 | % | 18.79 | % | ||||||||||||
|
|
$ | 174 | $ | 313 | $ | 198 | $ | 779 | $ | 2,937 | $ | 2,888 | ||||||||||||
|
|
5.13 | % | 6.81 | % | 5.16 | % | 12.27 | % | 5.48 | % | 5.05 | % | ||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 225 |
Table of Contents
Notes
to consolidated financial statements
Wholesale impaired loans and loan modifications
Wholesale impaired loans include loans that have been placed on nonaccrual status and/or that have
been modified in a TDR. All impaired loans are evaluated for an asset-specific allowance as
described in Note 15 on pages 239–243 of this Annual Report.
The table below set forth information about the Firm’s wholesale impaired loans.
| Commercial | Financial | Government | Total | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, | and industrial | Real estate | institutions | agencies | Other | retained loans | ||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
|
Impaired loans
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
With an allowance
|
$ | 1,512 | $ | 2,171 | $ | 2,510 | $ | 2,998 | $ | 127 | $ | 579 | $ | 22 | $ | 4 | $ | 697 | $ | 595 | $ | 4,868 | $ | 6,347 | ||||||||||||||||||||||||
|
Without an
allowance
(a)
|
157 | 89 | 445 | 363 | 8 | 149 | — | — | 8 | 12 | 618 | 613 | ||||||||||||||||||||||||||||||||||||
|
Total impaired loans
|
$ | 1,669 | $ | 2,260 | $ | 2,955 | $ | 3,361 | $ | 135 | $ | 728 | $ | 22 | $ | 4 | $ | 705 | $ | 607 | $ | 5,486 | $ | 6,960 | ||||||||||||||||||||||||
|
Allowance for loan losses
related to
impaired loans
(b)
|
$ | 435 | $ | 454 | $ | 825 | $ | 1,212 | $ | 61 | $ | 165 | $ | 14 | $ | 1 | $ | 239 | $ | 214 | $ | 1,574 | $ | 2,046 | ||||||||||||||||||||||||
|
Unpaid principal balance of
impaired
loans
(c)
|
2,453 | 3,042 | 3,487 | 3,649 | 244 | 918 | 30 | 4 | 1,046 | 760 | 7,260 | 8,373 | ||||||||||||||||||||||||||||||||||||
| (a) | When the discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, then the loan does not require an allowance. This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the loan balance. | |
| (b) | The allowance for impaired loans is included in JPMorgan Chase’s asset-specific allowance for loan losses. | |
| (c) | Represents the contractual amount of principal owed at December 31, 2010 and 2009. The unpaid principal balance differs from the impaired loan balances due to various factors, including charge-offs; interest payments received and applied to the carrying value; net deferred loan fees or costs; and discount or premiums on purchased loans. |
The following table presents the Firm’s average impaired loans for the years ended 2010, 2009 and
2008.
| For the year ended | ||||||||||||
| December 31, | Impaired loans (average) | |||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Commercial and industrial
|
$ | 1,655 | $ | 1,767 | $ | 337 | ||||||
|
Real estate
|
3,101 | 2,420 | 389 | |||||||||
|
Financial institutions
|
304 | 685 | 49 | |||||||||
|
Government agencies
|
5 | 4 | 1 | |||||||||
|
Other
|
884 | 468 | 120 | |||||||||
|
Total
(a)
|
$ | 5,949 | $ | 5,344 | $ | 896 | ||||||
| (a) | The related interest income on accruing impaired loans, largely in real estate, was $21 million, $15 million and zero for the years ended December 31, 2010, 2009 and 2008. The interest income recognized on a cash basis was not material for the years 2010, 2009 and 2008. |
The following table provides information about the Firm’s wholesale loans modified in troubled debt
restructurings. These TDR loans are included as impaired loans in the above tables.
| Commercial and | Financial | Government | Total | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, | industrial | Real estate | institutions | agencies | Other | retained loans | ||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
|
Loans modified in
troubled debt
restructurings
(a)
|
$ | 212 | $ | 253 | $ | 907 | $ | 856 | $ | 1 | $ | — | $ | 22 | $ | — | $ | 1 | $ | — | $ | 1,143 | $ | 1,109 | ||||||||||||||||||||||||
|
TDRs on nonaccrual status
|
163 | 222 | 831 | 269 | 1 | — | 22 | — | 1 | — | 1,018 | 491 | ||||||||||||||||||||||||||||||||||||
|
Additional commitments
to lend to borrowers
whose loans have been
modified in TDRs
|
1 | 33 | — | 6 | — | — | — | — | — | — | 1 | 39 | ||||||||||||||||||||||||||||||||||||
| (a) | These modifications generally provided interest rate concessions to the borrower or deferral of principal repayments. |
| 226 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Consumer loan portfolio
Consumer loans, excluding credit card loans, consist primarily of residential mortgages, home
equity loans, auto loans, business banking loans, and student and other loans, with a primary focus
on serving the prime consumer credit market. The portfolio also includes home equity loans secured
by junior liens and mortgage loans with interest-only payment options to predominantly prime
borrowers, as well as certain payment-option loans originated by Washington Mutual that may result
in negative amortization.
The table below provides information about consumer retained loans by class, excluding the credit
card loan portfolio segment.
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Residential real estate –
excluding PCI
|
||||||||
|
Home equity:
|
||||||||
|
Senior lien
(a)
|
$ | 24,376 | $ | 27,376 | ||||
|
Junior lien
(b)
|
64,009 | 74,049 | ||||||
|
Mortgages:
|
||||||||
|
Prime, including option ARMs
(c)
|
74,539 | 75,428 | ||||||
|
Subprime
(c)
|
11,287 | 12,526 | ||||||
|
Other consumer loans
|
||||||||
|
Auto
(c)
|
48,367 | 46,031 | ||||||
|
Business banking
|
16,812 | 16,974 | ||||||
|
Student and other
(c)
|
15,311 | 14,726 | ||||||
|
Residential real estate – PCI
|
||||||||
|
Home equity
|
24,459 | 26,520 | ||||||
|
Prime mortgage
|
17,322 | 19,693 | ||||||
|
Subprime mortgage
|
5,398 | 5,993 | ||||||
|
Option ARMs
|
25,584 | 29,039 | ||||||
|
Total retained loans
|
$ | 327,464 | $ | 348,355 | ||||
| (a) | Represents loans where JPMorgan Chase holds the first security interest on the property. | |
| (b) | Represents loans where JPMorgan Chase holds a security interest that is subordinate in rank to other liens. | |
| (c) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated $4.8 billion of certain consumer loan securitization entities, primarily mortgage-related. For further information, see Note 16 on pages 244–259 of this Annual Report. |
Delinquency rates are a primary credit quality indicator for consumer loans. Loans that are more
than 30 days past due provide an early warning of borrowers that may be experiencing financial
difficulties and/or who may be unable or unwilling to repay the loan. As the loan continues to age,
it becomes more clear that the borrower is likely either unable or unwilling to pay. In the case of
residential real estate loans, late-stage delinquencies (greater than 150 days past due) are a
strong indicator of loans
that will
ultimately result in a short sale or foreclosure. In addition to
delinquency rates, other credit
quality indicators for consumer loans vary based on the class of loan, as follows:
| • | For residential real estate loans, including both non-PCI and PCI portfolios, the current estimated loan-to-value (“LTV”) ratio, or the combined LTV ratio in the case of loans with a junior lien, is an indicator of the potential loss severity in the event of default. Additionally, LTV or combined LTV can provide insight into a borrower’s continued willingness to pay, as the delinquency rate of high-LTV loans tends to be greater than that for loans where the borrower has equity in the collateral. The geographic distribution of the loan collateral also provides in-sight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes and specific events such as hurricanes, earthquakes, etc. will affect credit quality. The borrowers’ current or “refreshed” FICO score is a secondary credit-quality indicator for certain loans, as FICO scores are an indication of the borrower’s credit payment history. Thus, a loan to a borrower with a low FICO score (660 or below) is considered to be of higher risk than a loan to a borrower with a high FICO score. Further, a loan to a borrower with a high LTV ratio and a low FICO score is at greater risk of default than a loan to a borrower that has both a high LTV ratio and a high FICO score. | |
| • | For auto, scored business banking and student loans, geographic distribution is an indicator of the credit performance of the portfolio. Similar to residential real estate loans, geographic distribution provides insights into the portfolio performance based on regional economic activity and events. | |
| • | Risk-rated business banking and auto loans are similar to wholesale loans in that the primary credit quality indicators are the risk rating that is assigned to the loan and whether the loans are considered to be criticized and/or nonaccrual. Risk ratings are reviewed on a regular and ongoing basis by Credit Risk Management and are adjusted as necessary for updated information affecting borrowers’ ability to fulfill their obligations. Consistent with other classes of consumer loans, the geographic distribution of the portfolio provides insights into portfolio performance based on regional economic activity and events. |
| JPMorgan Chase & Co. / 2010 Annual Report | 227 |
Table of Contents
Notes
to consolidated financial statements
Residential
real estate – excluding PCI loans
The tables below provide information by class for residential real estate (excluding PCI) retained
loans in the consumer, excluding credit card portfolio segment.
| Home equity | ||||||||||||||||
| As of or for the year ended | Senior lien | Junior lien | ||||||||||||||
| December 31, (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Net charge-offs
|
$ | 262 | $ | 234 | $ | 3,182 | $ | 4,448 | ||||||||
|
% of net charge-offs to retained loans
|
1.00 | % | 0.80 | % | 4.63 | % | 5.62 | % | ||||||||
|
|
||||||||||||||||
|
Loan delinquency
|
||||||||||||||||
|
Current and less than 30 days past due
|
$ | 23,615 | $ | 26,543 | $ | 62,315 | $ | 71,534 | ||||||||
|
30–149 days past due
|
414 | 512 | 1,508 | 2,224 | ||||||||||||
|
150 or more days past due
|
347 | 321 | 186 | 291 | ||||||||||||
|
Total retained loans
|
$ | 24,376 | $ | 27,376 | $ | 64,009 | $ | 74,049 | ||||||||
|
|
||||||||||||||||
|
% of 30+ days past due to total retained loans
|
3.12 | % | 3.04 | % | 2.65 | % | 3.40 | % | ||||||||
|
90 or more days past due and still accruing
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Nonaccrual loans
(a)
|
479 | 477 | 784 | 1,188 | ||||||||||||
|
Current estimated LTV ratios
(b)(c)(d)
|
||||||||||||||||
|
Greater than 125% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
$ | 528 | $ | 472 | $ | 6,928 | $ | 6,788 | ||||||||
|
Less than 660
|
238 | 235 | 2,495 | 2,703 | ||||||||||||
|
|
||||||||||||||||
|
101% to 125% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
974 | 933 | 9,403 | 10,616 | ||||||||||||
|
Less than 660
|
325 | 319 | 2,873 | 3,277 | ||||||||||||
|
|
||||||||||||||||
|
80% to 100% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
2,860 | 3,038 | 13,333 | 16,098 | ||||||||||||
|
Less than 660
|
738 | 825 | 3,155 | 3,657 | ||||||||||||
|
|
||||||||||||||||
|
Less than 80% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
15,994 | 18,591 | 22,527 | 27,225 | ||||||||||||
|
Less than 660
|
2,719 | 2,963 | 3,295 | 3,685 | ||||||||||||
|
|
||||||||||||||||
|
U.S. government-guaranteed
|
— | — | — | — | ||||||||||||
|
Total retained loans
|
$ | 24,376 | $ | 27,376 | $ | 64,009 | $ | 74,049 | ||||||||
|
Geographic region
|
||||||||||||||||
|
California
|
$ | 3,348 | $ | 3,658 | $ | 14,656 | $ | 16,990 | ||||||||
|
New York
|
3,272 | 3,438 | 12,278 | 13,456 | ||||||||||||
|
Texas
|
3,594 | 4,306 | 2,239 | 2,711 | ||||||||||||
|
Florida
|
1,088 | 1,198 | 3,470 | 4,123 | ||||||||||||
|
Illinois
|
1,635 | 1,795 | 4,248 | 4,849 | ||||||||||||
|
Ohio
|
2,010 | 2,338 | 1,568 | 1,865 | ||||||||||||
|
New Jersey
|
732 | 777 | 3,617 | 4,090 | ||||||||||||
|
Michigan
|
1,176 | 1,329 | 1,618 | 1,900 | ||||||||||||
|
Arizona
|
1,481 | 1,648 | 2,979 | 3,582 | ||||||||||||
|
Washington
|
776 | 868 | 2,142 | 2,481 | ||||||||||||
|
All other
(e)
|
5,264 | 6,021 | 15,194 | 18,002 | ||||||||||||
|
Total retained loans
|
$ | 24,376 | $ | 27,376 | $ | 64,009 | $ | 74,049 | ||||||||
| (a) | At December 31, 2010 and 2009, nonaccrual loans excluded mortgage loans insured by U.S. government agencies of $10.5 billion and $9.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (b) | Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated, at a minimum, quarterly, based on home valuation models utilizing nationally recognized home price index valuation estimates and do not represent actual appraised loan level collateral values; as such, the resulting ratios are necessarily imprecise and should be viewed as estimates. | |
| (c) | Junior lien represents combined LTV, which considers all available lien positions related to the property. All other products are presented without consideration of subordinate liens on the property. | |
| (d) | Refreshed FICO scores represent each borrower’s most recent credit score obtained by the Firm; current FICO scores are obtained at least quarterly. | |
| (e) | At December 31, 2010 and 2009, includes prime mortgage loans insured by U.S. government agencies of $12.9 billion and $10.8 billion, respectively. | |
| (f) | At December 31, 2010 and 2009, includes 30+ day delinquent mortgage loans that are insured by U.S. government agencies of $11.4 billion and $9.7 billion, respectively. These amounts are considered current as reimbursement of insured amounts is proceeding normally. |
| 228 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
(table continued from previous page)
| Mortgages | Total residential real | |||||||||||||||||||||||
| Prime, including option ARMs | Subprime | estate (excluding PCI) | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
| $ | 1,627 | $ | 1,957 | $ | 1,374 | $ | 1,648 | $ | 6,445 | $ | 8,287 |
|
||||||||||||
| 2.15 | % | 2.51 | % | 10.82 | % | 11.86 | % | 3.52 | % | 4.14 | % |
|
||||||||||||
|
|
||||||||||||||||||||||||
| $ | 69,562 | (f) | $ | 69,458 | (f) | $ | 8,477 | $ | 8,294 | $ | 163,969 | $ | 175,829 |
|
||||||||||
| 1,576 | 2,629 | 1,184 | 1,883 | 4,682 | 7,248 |
|
||||||||||||||||||
| 3,401 | 3,341 | 1,626 | 2,349 | 5,560 | 6,302 |
|
||||||||||||||||||
| $ | 74,539 | $ | 75,428 | $ | 11,287 | $ | 12,526 | $ | 174,211 | $ | 189,379 |
|
||||||||||||
|
|
||||||||||||||||||||||||
| 6.68 | % | 7.91 | % | 24.90 | % | 33.79 | % | 5.88 | % | 7.15 | % |
|
||||||||||||
| $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
|
||||||||||||
| 4,320 | 4,667 | 2,210 | 3,248 | 7,793 | 9,580 |
|
||||||||||||||||||
| $ | 3,039 | $ | 2,435 | $ | 338 | $ | 335 | $ | 10,833 | $ | 10,030 |
|
||||||||||||
| 1,595 | 1,339 | 1,153 | 1,169 | 5,481 | 5,446 |
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
| 4,733 | 4,763 | 506 | 593 | 15,616 | 16,905 |
|
||||||||||||||||||
| 1,775 | 1,913 | 1,486 | 1,902 | 6,459 | 7,411 |
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
| 10,720 | 12,889 | 925 | 1,094 | 27,838 | 33,119 |
|
||||||||||||||||||
| 2,786 | 3,152 | 1,955 | 2,663 | 8,634 | 10,297 |
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
| 32,385 | 33,368 | 2,252 | 2,063 | 73,158 | 81,247 |
|
||||||||||||||||||
| 4,557 | 4,803 | 2,672 | 2,707 | 13,243 | 14,158 |
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
| 12,949 | 10,766 | — | — | 12,949 | 10,766 |
|
||||||||||||||||||
| $ | 74,539 | $ | 75,428 | $ | 11,287 | $ | 12,526 | $ | 174,211 | $ | 189,379 |
|
||||||||||||
|
|
||||||||||||||||||||||||
| $ | 19,278 | $ | 21,538 | $ | 1,730 | $ | 1,720 | $ | 39,012 | $ | 43,906 |
|
||||||||||||
| 9,587 | 9,784 | 1,381 | 1,535 | 26,518 | 28,213 |
|
||||||||||||||||||
| 2,569 | 2,185 | 345 | 407 | 8,747 | 9,609 |
|
||||||||||||||||||
| 4,840 | 5,293 | 1,422 | 1,625 | 10,820 | 12,239 |
|
||||||||||||||||||
| 3,765 | 3,250 | 468 | 584 | 10,116 | 10,478 |
|
||||||||||||||||||
| 462 | 461 | 275 | 299 | 4,315 | 4,963 |
|
||||||||||||||||||
| 2,026 | 2,207 | 534 | 617 | 6,909 | 7,691 |
|
||||||||||||||||||
| 963 | 1,009 | 294 | 324 | 4,051 | 4,562 |
|
||||||||||||||||||
| 1,320 | 1,414 | 244 | 301 | 6,024 | 6,945 |
|
||||||||||||||||||
| 2,056 | 2,174 | 247 | 274 | 5,221 | 5,797 |
|
||||||||||||||||||
| 27,673 | 26,113 | 4,347 | 4,840 | 52,478 | 54,976 |
|
||||||||||||||||||
| $ | 74,539 | $ | 75,428 | $ | 11,287 | $ | 12,526 | $ | 174,211 | $ | 189,379 |
|
||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 229 |
Table of Contents
Notes
to consolidated financial statements
Residential real estate impaired loans and loan
modifications
– excluding PCI loans
The Firm is participating in the U.S. Treasury’s Making Home Affordable (“MHA”) programs and is
continuing to expand its other loss-mitigation efforts for financially distressed borrowers who do
not qualify for the MHA programs.
MHA, as well as the Firm’s other loss-mitigation programs, generally provide various concessions to
financially troubled borrowers including, but not limited to, interest rate reductions, term or
payment extensions and deferral of principal payments that would otherwise have been required under
the terms of the original agreement. Principal forgiveness has been limited to a specific
modification program for option ARMs.
Generally, borrowers must make at least three payments under the revised contractual terms during a
trial modification and be successfully re-underwritten with income verification before a mortgage
or home equity loan can be permanently modified. When the Firm modifies home equity lines of credit
in troubled debt restructurings, future lending commitments related to the modified loans are
canceled as part of the terms of the modification.
Modifications of residential real estate loans other than PCI loans are generally accounted for and
reported as TDRs. For further discussion of the accounting for loan modifications and TDRs, see
Loan modifications on pages 221–222 of this Note.
The tables below set forth information about the Firm’s residential real estate impaired
loans, excluding PCI. These loans are considered to be impaired as they have been modified in a
TDR. All impaired loans are evaluated for an asset-specific allowance as described in Note 15 on
pages 239–243 of this Annual Report.
| Home equity | Mortgages | Total residential real | ||||||||||||||||||||||||||||||||||||||
| December 31, | Senior lien | Junior lien | Prime, including option ARMs | Subprime | estate (excluding PCI) | |||||||||||||||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||
|
Impaired loans
(a)(b)
|
||||||||||||||||||||||||||||||||||||||||
|
With an
allowance
|
$ | 211 | $ | 167 | $ | 258 | $ | 221 | $ | 1,525 | $ | 552 | $ | 2,563 | $ | 1,952 | $ | 4,557 | $ | 2,892 | ||||||||||||||||||||
|
Without an
allowance
(c)
|
15 | 1 | 25 | 1 | 559 | 90 | 188 | 46 | 787 | 138 | ||||||||||||||||||||||||||||||
|
Total impaired loans
(d)
|
$ | 226 | $ | 168 | $ | 283 | $ | 222 | $ | 2,084 | $ | 642 | $ | 2,751 | $ | 1,998 | $ | 5,344 | $ | 3,030 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Allowance for loan
losses related to
impaired loans
|
$ | 77 | $ | 73 | $ | 82 | $ | 100 | $ | 97 | $ | 70 | $ | 555 | $ | 494 | $ | 811 | $ | 737 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Unpaid principal balance of
impaired loans
(e)
|
265 | 178 | 402 | 273 | 2,751 | 783 | 3,777 | 2,303 | 7,195 | 3,537 | ||||||||||||||||||||||||||||||
|
Impaired loans on
nonaccrual status
|
38 | 30 | 63 | 43 | 534 | 249 | 632 | 598 | 1,267 | 920 | ||||||||||||||||||||||||||||||
| (a) | Represents loans modified in a TDR. These modifications generally provided interest rate concessions to the borrower or deferral of principal repayments. | |
| (b) | There are no additional commitments to lend to borrowers whose loans have been modified in TDRs as of December 31, 2010 and 2009. | |
| (c) | When discounted cash flows or collateral value equals or exceeds the recorded investment in the loan, then the loan does not require an allowance. This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the loan balance. | |
| (d) | At December 31, 2010 and 2009, $3.0 billion and $296 million, respectively, of loans modified subsequent to repurchase from Ginnie Mae were excluded from loans accounted for as TDRs. When such loans perform subsequent to modification they are generally sold back into Ginnie Mae loan pools. Modified loans that do not re-perform become subject to foreclosure. Substantially all amounts due under the terms of these loans continue to be insured and, where applicable, reimbursement of insured amounts is proceeding normally. | |
| (e) | Represents the contractual amount of principal owed at December 31, 2010 and 2009. The unpaid principal balance differs from the impaired loan balances due to various factors, including charge-offs; interest payments received and applied to the principal balance; net deferred loan fees or costs; and discounts or premiums on purchased loans. |
The following table presents average impaired loans and the related interest income reported by the
Firm.
| Interest income on impaired | ||||||||||||||||||||||||||||||||||||
| For the year ended December 31, | Impaired loans (average) | Interest income on impaired loans (a) | loans on a cash basis (a) | |||||||||||||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
|
Home equity
|
||||||||||||||||||||||||||||||||||||
|
Senior lien
|
$ | 207 | $ | 142 | $ | 39 | $ | 15 | $ | 7 | $ | 2 | $ | 1 | $ | 1 | $ | — | ||||||||||||||||||
|
Junior lien
|
266 | 187 | 39 | 10 | 9 | 3 | 1 | 1 | — | |||||||||||||||||||||||||||
|
Mortgages
|
||||||||||||||||||||||||||||||||||||
|
Prime, including option ARMs
|
1,530 | 496 | 41 | 70 | 34 | 2 | 14 | 8 | — | |||||||||||||||||||||||||||
|
Subprime
|
2,539 | 1,948 | 690 | 121 | 98 | 47 | 19 | 6 | 2 | |||||||||||||||||||||||||||
|
Total residential real estate
(excluding PCI)
|
$ | 4,542 | $ | 2,773 | $ | 809 | $ | 216 | $ | 148 | $ | 54 | $ | 35 | $ | 16 | $ | 2 | ||||||||||||||||||
| (a) | Generally, interest income on loans modified in a TDR is recognized on a cash basis until such time as the borrower has made a minimum of six payments under the new terms. As of December 31, 2010 and 2009, loans of $580 million and $256 million, respectively, are TDRs for which the borrowers have not yet made six payments under their modified terms. |
| 230 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Other consumer loans
The tables below provide information for other consumer retained loan classes, including auto,
business banking and student loans.
| As of or for the year ended | ||||||||||||||||||||||||||||||||
| December 31, | Auto (c) | Business banking | Student and other (c) | Total other consumer | ||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Net charge-offs
|
$ | 298 | $ | 627 | $ | 707 | $ | 842 | $ | 459 | $ | 443 | $ | 1,464 | $ | 1,912 | ||||||||||||||||
|
% of net charge-offs to
retained loans
|
0.63 | % | 1.44 | % | 4.23 | % | 4.73 | % | 2.85 | % | 2.90 | % | 1.82 | % | 2.49 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loan delinquency
|
||||||||||||||||||||||||||||||||
|
Current and less than 30 days
past due
|
$ | 47,778 | $ | 45,281 | $ | 16,240 | $ | 16,277 | $ | 15,074 | (d) | $ | 14,479 | (d) | $ | 79,092 | $ | 76,037 | ||||||||||||||
|
30–119 days past due
|
579 | 720 | 351 | 427 | 232 | 240 | 1,162 | 1,387 | ||||||||||||||||||||||||
|
120 or more days past due
|
10 | 30 | 221 | 270 | 5 | 7 | 236 | 307 | ||||||||||||||||||||||||
|
Total retained loans
|
$ | 48,367 | $ | 46,031 | $ | 16,812 | $ | 16,974 | $ | 15,311 | $ | 14,726 | $ | 80,490 | $ | 77,731 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
% of 30+ days past due to
total retained loans
|
1.22 | % | 1.63 | % | 3.40 | % | 4.11 | % | 1.55 | % | 1.68 | % | 1.74 | % | 2.18 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
90 or more days past due and still
accruing
|
$ | — | $ | — | $ | — | $ | — | $ | 625 | $ | 542 | $ | 625 | $ | 542 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Nonaccrual loans
(a)
|
141 | 177 | 832 | 826 | 67 | 74 | 1,040 | 1,077 | ||||||||||||||||||||||||
|
Geographic region
|
||||||||||||||||||||||||||||||||
|
California
|
$ | 4,307 | $ | 4,440 | $ | 851 | $ | 515 | $ | 1,330 | $ | 1,304 | $ | 6,488 | $ | 6,259 | ||||||||||||||||
|
New York
|
3,875 | 3,756 | 2,877 | 3,040 | 1,305 | 1,243 | 8,057 | 8,039 | ||||||||||||||||||||||||
|
Texas
|
4,505 | 4,330 | 2,550 | 2,487 | 1,273 | 1,197 | 8,328 | 8,014 | ||||||||||||||||||||||||
|
Florida
|
1,923 | 1,750 | 220 | 166 | 722 | 715 | 2,865 | 2,631 | ||||||||||||||||||||||||
|
Illinois
|
2,608 | 2,440 | 1,320 | 1,380 | 940 | 868 | 4,868 | 4,688 | ||||||||||||||||||||||||
|
Ohio
|
2,961 | 3,153 | 1,647 | 1,783 | 1,010 | 957 | 5,618 | 5,893 | ||||||||||||||||||||||||
|
New Jersey
|
1,842 | 1,776 | 422 | 426 | 502 | 475 | 2,766 | 2,677 | ||||||||||||||||||||||||
|
Michigan
|
2,434 | 2,108 | 1,401 | 1,613 | 729 | 686 | 4,564 | 4,407 | ||||||||||||||||||||||||
|
Arizona
|
1,499 | 1,479 | 1,218 | 1,210 | 387 | 366 | 3,104 | 3,055 | ||||||||||||||||||||||||
|
Washington
|
716 | 627 | 115 | 84 | 279 | 266 | 1,110 | 977 | ||||||||||||||||||||||||
|
All other
|
21,697 | 20,172 | 4,191 | 4,270 | 6,834 | 6,649 | 32,722 | 31,091 | ||||||||||||||||||||||||
|
Total retained loans
|
$ | 48,367 | $ | 46,031 | $ | 16,812 | $ | 16,974 | $ | 15,311 | $ | 14,726 | $ | 80,490 | $ | 77,731 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans by risk ratings
(b)
|
||||||||||||||||||||||||||||||||
|
Noncriticized
|
$ | 5,803 | $ | 4,564 | $ | 10,831 | $ | 10,450 | NA | NA | $ | 16,634 | $ | 15,014 | ||||||||||||||||||
|
Criticized performing
|
265 | 448 | 502 | 517 | NA | NA | 767 | 965 | ||||||||||||||||||||||||
|
Criticized nonaccrual
|
12 | 39 | 574 | 542 | NA | NA | 586 | 581 | ||||||||||||||||||||||||
| (a) | At December 31, 2010 and 2009, excludes student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $625 million and $542 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (b) | For risk-rated business banking and auto loans, the primary credit quality indicator is the risk-rating of the loan, including whether the loans are considered to be criticized and/or nonaccrual. | |
| (c) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon the adoption of the guidance, the Firm consolidated certain consumer loan securitization entities. For further information, see Note 16 on pages 244–259 of this Annual Report. | |
| (d) | Includes 30+ day delinquent loans that are 30 days or more past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $1.1 billion and $942 million at December 31, 2010 and 2009, respectively. These amounts are considered current as reimbursement of insured amounts is proceeding normally. |
| JPMorgan Chase & Co. / 2010 Annual Report | 231 |
Table of Contents
Notes
to consolidated financial statements
Other consumer impaired loans
The tables below set forth information about the Firm’s other consumer impaired loans, including
risk-rated business banking and auto loans that have been placed on
nonaccrual status, and any loan
that has been modified in a troubled debt restructuring.
| Auto | Business banking | Total other consumer (c) | ||||||||||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Impaired loans
|
||||||||||||||||||||||||
|
With an allowance
|
$ | 102 | $ | 118 | $ | 774 | $ | 500 | $ | 876 | $ | 618 | ||||||||||||
|
Without an allowance
(a)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total impaired loans
|
$ | 102 | $ | 118 | $ | 774 | $ | 500 | $ | 876 | $ | 618 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance for loan losses related to
impaired loans
|
$ | 16 | $ | 30 | $ | 248 | $ | 129 | $ | 264 | $ | 159 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Unpaid principal balance of impaired loans
(b)
|
132 | 137 | 899 | 577 | 1,031 | 714 | ||||||||||||||||||
| (a) | When discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, then the loan does not require an allowance. This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the loan balance. | |
| (b) | Represents the contractual amount of principal owed at December 31, 2010 and 2009. The unpaid principal balance differs from the impaired loan balances due to various factors, including charge-offs; interest payments received and applied to the principal balance; net deferred loan fees or costs; and discounts or premiums on purchased loans. | |
| (c) | There were no student and other loans modified in TDRs at December 31, 2010 and 2009. |
The following table presents average impaired loans.
| For the year ended December 31, | Impaired loans (average) (b) | |||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Auto
|
$ | 120 | $ | 100 | $ | 71 | ||||||
|
Business banking
|
682 | 396 | 200 | |||||||||
|
Total other consumer
(a)
|
$ | 802 | $ | 496 | $ | 271 | ||||||
| (a) | There were no student and other loans modified in TDRs at December 31, 2010, 2009 and 2008. | |
| (b) | The related interest income on impaired loans, including those on cash basis, were not material for the years 2010, 2009 and 2008. |
The following table provides information about the Firm’s other consumer loans modified in troubled
debt restructurings. These TDR loans are included as impaired loans in the tables above.
| Auto | Business banking | Total other consumer (c) | ||||||||||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Loans modified in
troubled debt
restructurings
(a)(b)
|
$ | 91 | $ | 79 | $ | 395 | $ | 17 | $ | 486 | $ | 96 | ||||||||||||
|
TDRs on nonaccrual status
|
39 | 30 | 268 | 16 | 307 | 46 | ||||||||||||||||||
| (a) | These modifications generally provided interest rate concessions to the borrower or deferral of principal repayments. | |
| (b) | Additional commitments to lend to borrowers whose loans have been modified in TDRs as of December 31, 2010 and 2009 are immaterial. | |
| (c) | There were no student and other loans modified in TDRs at December 31, 2010 and 2009. |
| 232 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Purchased credit-impaired (“PCI”) loans
PCI loans were determined to be credit-impaired upon acquisition based on specific risk
characteristics of the loan, including product type, loan-to-value ratios, FICO scores, and
past-due status. Upon acquisition, credit-impaired loans acquired in the same fiscal quarter may be
aggregated into one or more pools, provided that the loans have common risk characteristics. A pool
is then accounted for as a single asset with a single composite interest rate and an aggregate
expectation of cash flows. With respect to the Washington Mutual transaction, all of the consumer
loans were aggregated into pools of loans with common risk characteristics.
PCI loans are initially recorded at fair value upon acquisition. For each PCI loan, or pool of
loans, the Firm is required to estimate the total cash flows (both principal and interest) expected
to be collected over the remaining life of the loan or pool. These estimates incorporate
assumptions regarding default rates, loss severities, the amounts and timing of prepayments and
other factors that reflect then-current market conditions.
The excess of cash flows expected to be collected over the carrying value of the underlying loans
is referred to as the accretable yield. This amount is not reported on the Firm’s Consolidated
Balance Sheets but is accreted into interest income at a level rate of return over the remaining
estimated lives of the underlying pools of loans. For variable-rate loans, expected future cash
flows were initially based on the rate in effect at acquisition; expected future cash flows are
recalculated as rates change over the lives of the loans.
On a quarterly basis, the Firm updates the amount of loan principal and interest cash flows
expected to be collected. Probable decreases in expected loan principal cash flows trigger the
recognition of impairment, which is then measured as the present value of the expected principal
loss plus any related foregone interest cash flows, discounted at the pool’s effective interest
rate. Impairments are recognized through the provision and allowance for loan losses. Probable and
significant increases in expected cash flows (e.g., decreased principal credit losses, the net
benefit of modifications) would first reverse any previously recorded allowance for loan losses
with any remaining increases recognized prospectively as a yield adjustment over the remaining
estimated lives of the underlying loans. The impacts of (i) pre-
payments, (ii) changes in variable
interest rates, and (iii) any other changes in the timing of expected cash flows are recognized
prospectively as adjustments to interest income. Disposals of loans
– which may include sales of
loans, receipt of payments in full by the borrower, or foreclosure
– result in removal of the loan
from the PCI portfolio.
If the timing and/or amounts of expected cash flows on PCI loans were determined not to be
reasonably estimable, no interest would be accreted and the loans would be reported as nonaccrual
loans; however, since the timing and amounts of expected cash flows for the Firm’s PCI consumer
loans are reasonably estimable, interest is being accreted and the loans are being reported as
performing loans.
Charge-offs are not recorded on PCI loans until actual losses exceed the estimated losses that were
recorded as purchase accounting adjustments at acquisition date. To date, no charge-offs have been
recorded for these consumer loans.
The PCI portfolio affects the Firm’s results of operations primarily through: (i) contribution to
net interest margin; (ii) expense related to defaults and servicing resulting from the liquidation
of the loans; and (iii) any provision for loan losses. The PCI loans acquired in the Washington
Mutual transaction were funded based on the interest rate characteristics of the loans. For
example, variable-rate loans were funded with variable-rate liabilities and fixed-rate loans were
funded with fixed-rate liabilities with a similar maturity profile. A net spread will be earned
on the declining balance of the portfolio, which is estimated as
of December 31, 2010, to have a remaining weighted-average life of 7.0 years.
The Firm
continues to modify certain PCI loans.
The impact of these modifications is incorporated
into the Firm’s quarterly assessment of whether a probable and significant change in expected cash
flows has occurred, and the loans continue to be accounted for and reported as PCI loans.
The impact of modifications on expected cash flows is estimated using the Firm’s experience with
previously modified loans and other relevant data. Additionally, the Firm monitors the performance
of modifications and updates and/or refines assumptions as experience and changes in circumstances
or data warrant.
| JPMorgan Chase & Co. / 2010 Annual Report | 233 |
Table of Contents
Notes
to consolidated financial statements
Residential
real estate – PCI loans
The table below sets forth information about the Firm’s consumer PCI loans.
| December 31, | Home equity | Prime mortgage | ||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Carrying value
(a)
|
$ | 24,459 | $ | 26,520 | $ | 17,322 | $ | 19,693 | ||||||||
|
Related allowance for loan losses
(b)
|
1,583 | — | 1,766 | 1,090 | ||||||||||||
|
|
||||||||||||||||
|
Loan delinquency (based on unpaid
principal balance)
|
||||||||||||||||
|
Current and less than 30 days past due
|
$ | 25,783 | $ | 29,697 | $ | 13,035 | $ | 15,404 | ||||||||
|
30–149 days past due
|
1,348 | 2,117 | 1,468 | 2,026 | ||||||||||||
|
150 or more days past due
|
1,181 | 1,144 | 4,425 | 4,542 | ||||||||||||
|
Total loans
|
$ | 28,312 | $ | 32,958 | $ | 18,928 | $ | 21,972 | ||||||||
|
|
||||||||||||||||
|
% of 30+ days past due to total loans
|
8.93 | % | 9.89 | % | 31.13 | % | 29.89 | % | ||||||||
|
|
||||||||||||||||
|
Current estimated LTV ratios
(based on unpaid principal balance) (c)(d) |
||||||||||||||||
|
Greater than 125% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
$ | 6,324 | $ | 6,139 | $ | 2,400 | $ | 1,935 | ||||||||
|
Less than 660
|
4,052 | 4,401 | 2,744 | 2,244 | ||||||||||||
|
|
||||||||||||||||
|
101% to 125% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
6,097 | 6,875 | 3,815 | 4,566 | ||||||||||||
|
Less than 660
|
2,701 | 3,141 | 3,011 | 3,213 | ||||||||||||
|
|
||||||||||||||||
|
80% to 100% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
4,019 | 5,713 | 1,970 | 3,364 | ||||||||||||
|
Less than 660
|
1,483 | 1,930 | 1,857 | 2,594 | ||||||||||||
|
|
||||||||||||||||
|
Lower than 80% and refreshed FICO scores:
|
||||||||||||||||
|
Equal to or greater than 660
|
2,539 | 3,330 | 1,443 | 1,832 | ||||||||||||
|
Less than 660
|
1,097 | 1,429 | 1,688 | 2,224 | ||||||||||||
|
Total unpaid principal balance
|
$ | 28,312 | $ | 32,958 | $ | 18,928 | $ | 21,972 | ||||||||
|
|
||||||||||||||||
|
Geographic region (based on unpaid principal balance)
|
||||||||||||||||
|
California
|
$ | 17,012 | $ | 19,749 | $ | 10,891 | $ | 12,657 | ||||||||
|
New York
|
1,316 | 1,495 | 1,111 | 1,239 | ||||||||||||
|
Texas
|
525 | 616 | 194 | 231 | ||||||||||||
|
Florida
|
2,595 | 3,045 | 1,519 | 1,801 | ||||||||||||
|
Illinois
|
627 | 723 | 562 | 650 | ||||||||||||
|
Ohio
|
38 | 47 | 91 | 106 | ||||||||||||
|
New Jersey
|
540 | 625 | 486 | 540 | ||||||||||||
|
Michigan
|
95 | 113 | 279 | 307 | ||||||||||||
|
Arizona
|
539 | 653 | 359 | 438 | ||||||||||||
|
Washington
|
1,535 | 1,766 | 451 | 533 | ||||||||||||
|
All other
|
3,490 | 4,126 | 2,985 | 3,470 | ||||||||||||
|
Total unpaid principal balance
|
$ | 28,312 | $ | 32,958 | $ | 18,928 | $ | 21,972 | ||||||||
| (a) | Carrying value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition. | |
| (b) | Management concluded as part of the Firm’s regular assessment of the PCI loan pools that it was probable that higher expected principal credit losses would result in a decrease in expected cash flows. As a result, an allowance for loan losses for impairment of these pools has been recognized. | |
| (c) | Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated, at a minimum quarterly, based on home valuation models utilizing nationally recognized home price index valuation estimates and do not represent actual appraised loan level collateral values; as such the resulting ratios are necessarily imprecise and should be viewed as estimates. Current estimated combined LTV for junior lien home equity loans considers all available lien positions related to the property. | |
| (d) | Refreshed FICO scores represent each borrower’s most recent credit score obtained by the Firm; current FICO scores are obtained at least quarterly. |
| 234 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
(table continued from previous page)
| Subprime mortgage | Option ARMs | Total PCI | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
| $ | 5,398 | $ | 5,993 | $ | 25,584 | $ | 29,039 | $ | 72,763 | $ | 81,245 | |||||||||||||
| 98 | — | 1,494 | 491 | 4,941 | 1,581 | |||||||||||||||||||
| $ | 4,312 | $ | 4,531 | $ | 18,672 | $ | 23,709 | $ | 61,802 | $ | 73,341 | |||||||||||||
| 1,020 | 1,383 | 2,215 | 4,010 | 6,051 | 9,536 | |||||||||||||||||||
| 2,710 | 3,107 | 9,904 | 9,660 | 18,220 | 18,453 | |||||||||||||||||||
| $ | 8,042 | $ | 9,021 | $ | 30,791 | $ | 37,379 | $ | 86,073 | $ | 101,330 | |||||||||||||
| 46.38 | % | 49.77 | % | 39.36 | % | 36.57 | % | 28.20 | % | 27.62 | % | |||||||||||||
| $ | 432 | $ | 409 | $ | 2,681 | $ | 4,081 | $ | 11,837 | $ | 12,564 | |||||||||||||
| 2,129 | 2,084 | 6,330 | 6,761 | 15,255 | 15,490 | |||||||||||||||||||
| 424 | 481 | 4,292 | 5,518 | 14,628 | 17,440 | |||||||||||||||||||
| 1,663 | 1,877 | 5,005 | 6,291 | 12,380 | 14,522 | |||||||||||||||||||
| 374 | 497 | 4,152 | 4,925 | 10,515 | 14,499 | |||||||||||||||||||
| 1,477 | 1,917 | 3,551 | 4,213 | 8,368 | 10,654 | |||||||||||||||||||
| 186 | 179 | 2,281 | 2,549 | 6,449 | 7,890 | |||||||||||||||||||
| 1,357 | 1,577 | 2,499 | 3,041 | 6,641 | 8,271 | |||||||||||||||||||
| $ | 8,042 | $ | 9,021 | $ | 30,791 | $ | 37,379 | $ | 86,073 | $ | 101,330 | |||||||||||||
|
|
||||||||||||||||||||||||
| $ | 1,971 | $ | 2,244 | $ | 16,130 | $ | 19,637 | $ | 46,004 | $ | 54,287 | |||||||||||||
| 736 | 774 | 1,703 | 1,848 | 4,866 | 5,356 | |||||||||||||||||||
| 435 | 476 | 155 | 191 | 1,309 | 1,514 | |||||||||||||||||||
| 906 | 1,049 | 3,916 | 5,106 | 8,936 | 11,001 | |||||||||||||||||||
| 438 | 480 | 760 | 896 | 2,387 | 2,749 | |||||||||||||||||||
| 122 | 135 | 131 | 156 | 382 | 444 | |||||||||||||||||||
| 316 | 350 | 1,064 | 1,166 | 2,406 | 2,681 | |||||||||||||||||||
| 214 | 245 | 345 | 448 | 933 | 1,113 | |||||||||||||||||||
| 165 | 194 | 528 | 708 | 1,591 | 1,993 | |||||||||||||||||||
| 178 | 200 | 745 | 877 | 2,909 | 3,376 | |||||||||||||||||||
| 2,561 | 2,874 | 5,314 | 6,346 | 14,350 | 16,816 | |||||||||||||||||||
| $ | 8,042 | $ | 9,021 | $ | 30,791 | $ | 37,379 | $ | 86,073 | $ | 101,330 | |||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 235 |
Table of Contents
Notes
to consolidated financial statements
The table below sets forth the accretable yield activity for the Firm’s PCI
consumer loans for the years ended December 31, 2010, 2009 and 2008.
| Year ended December 31, | Total PCI | |||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | |||||||||
|
Balance, January 1
|
$ | 25,544 | $ | 32,619 | $ | — | ||||||
|
Washington Mutual acquisition
|
— | — | 39,454 | |||||||||
|
Accretion into interest income
|
(3,232 | ) | (4,363 | ) | (1,292 | ) | ||||||
|
Changes in interest rates on variable rate loans
|
(819 | ) | (4,849 | ) | (5,543 | ) | ||||||
|
Other changes in expected cash flows
(a)
|
(2,396 | ) | 2,137 | — | ||||||||
|
Balance, December 31
|
$ | 19,097 | $ | 25,544 | $ | 32,619 | ||||||
|
Accretable yield percentage
|
4.35 | % | 5.14 | % | 5.81 | % | ||||||
| (a) | Other changes in expected cash flows may vary from period to period as the Firm continues to refine its cash flow model and periodically updates model assumptions. For the years ended December 31, 2010 and 2009, other changes in expected cash flows were principally driven by changes in prepayment assumptions, as well as reclassification to the nonaccretable difference. Such changes are expected to have an insignificant impact on the accretable yield percentage. |
The factors that most significantly affect estimates of gross cash flows expected to be
collected, and accordingly the accretable yield balance, include: (i) changes in the benchmark
interest rate indices for variable rate products such as option ARM and home
equity loans; and (ii) changes in prepayment assumptions.
To date, the decrease in the accretable yield percentage has been primarily related to a decrease
in interest rates on
variable-rate loans and, to a lesser extent, extended loan liquidation
periods. Certain events, such as extended loan liquidation periods, affect the timing of expected
cash flows but not the amount of cash expected to be received (i.e., the accretable yield balance).
Extended loan liquidation periods reduce the accretable yield percentage because the same
accretable yield balance is recognized against a higher-than-expected loan balance over a
longer-than-expected period of time.
| 236 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Credit card loans
The credit card portfolio segment includes credit card loans originated and purchased by the Firm,
including those acquired in the Washington Mutual transaction. Delinquency rates are the primary
credit quality indicator for credit card loans as they provide an
early warning that borrowers may be
experiencing difficulties (30-days past due), as well as information on those borrowers that
have been delinquent for a longer period of time (90-days past due). In addition to delinquency
rates, the geographic distribution of the loans provides insight as to the credit quality of the
portfolio based on the regional economy.
The borrower’s credit score is another general indicator of credit quality. Because the borrower’s
credit score tends to be a lagging indicator of credit quality, the Firm does not use credit scores
as a primary indicator of credit quality. However, the distribution of such scores provides a
general indicator of credit quality trends within the portfolio. Refreshed FICO score information
for a random sample of the credit card portfolio is indicated in the
table below, as FICO is considered to be the
industry benchmark for credit scores.
The Firm generally originates new card accounts to prime consumer borrowers. However, certain
cardholders’ refreshed FICO scores may change over time, depending on the performance of the
cardholder and changes in credit score technology.
The table
below sets forth information about the Firm’s Credit card loans.
| As of or for the year ended December 31, | Chase, excluding | Washington Mutual | ||||||||||||||||||||||||
| (in millions, except ratios) | Washington Mutual portfolio (e) | portfolio (e) | Total credit card | |||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | (f) | 2010 | 2009 | (f) | |||||||||||||||||||
|
Net charge-offs
|
$ | 11,191 | $ | 6,466 | $ | 2,846 | $ | 3,168 | $ | 14,037 | $ | 9,634 | ||||||||||||||
|
% of net charge-offs to retained loans
|
8.73 | % | 9.76 | % | 17.73 | % | 15.26 | % | 9.73 | % | 11.07 | % | ||||||||||||||
|
|
||||||||||||||||||||||||||
|
Loan delinquency
(a)(b)
|
||||||||||||||||||||||||||
|
Current and less than 30 days past due and
still accruing
|
$ | 117,248 | $ | 55,374 | $ | 12,670 | $ | 17,316 | $ | 129,918 | $ | 72,690 | ||||||||||||||
|
30 – 89 days past due and still
accruing
|
2,092 | 1,638 | 459 | 974 | 2,551 | 2,612 | ||||||||||||||||||||
|
90 or more days past due and still
accruing
|
2,449 | 2,118 | 604 | 1,363 | 3,053 | 3,481 | ||||||||||||||||||||
|
Nonaccrual loans
|
2 | 3 | — | — | 2 | 3 | ||||||||||||||||||||
|
Total retained loans
|
$ | 121,791 | $ | 59,133 | $ | 13,733 | $ | 19,653 | 135,524 | $ | 78,786 | |||||||||||||||
|
Loan delinquency ratios
|
||||||||||||||||||||||||||
|
% of 30 plus days past due to total retained
loans
|
3.73 | % | 6.35 | % | 7.74 | % | 11.89 | % | 4.14 | % | 7.73 | % | ||||||||||||||
|
% of 90 plus days past due to total retained
loans
|
2.01 | 3.58 | 4.40 | 6.94 | 2.25 | 4.42 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Credit card loans by geographic region
|
||||||||||||||||||||||||||
|
California
|
$ | 15,454 | $ | 7,115 | $ | 2,650 | $ | 3,873 | $ | 18,104 | $ | 10,988 | ||||||||||||||
|
New York
|
9,540 | 4,527 | 1,032 | 1,458 | 10,572 | 5,985 | ||||||||||||||||||||
|
Texas
|
9,217 | 4,154 | 1,006 | 1,421 | 10,223 | 5,575 | ||||||||||||||||||||
|
Florida
|
6,724 | 3,439 | 1,165 | 1,735 | 7,889 | 5,174 | ||||||||||||||||||||
|
Illinois
|
7,077 | 3,166 | 542 | 771 | 7,619 | 3,937 | ||||||||||||||||||||
|
Ohio
|
5,035 | 2,506 | 401 | 562 | 5,436 | 3,068 | ||||||||||||||||||||
|
New Jersey
|
5,070 | 2,337 | 494 | 707 | 5,564 | 3,044 | ||||||||||||||||||||
|
Michigan
|
3,956 | 1,977 | 273 | 397 | 4,229 | 2,374 | ||||||||||||||||||||
|
Virginia
|
3,020 | 1,386 | 295 | 417 | 3,315 | 1,803 | ||||||||||||||||||||
|
Pennsylvania
|
4,521 | 2,243 | 424 | 598 | 4,945 | 2,841 | ||||||||||||||||||||
|
Washington
|
2,053 | 911 | 438 | 596 | 2,491 | 1,507 | ||||||||||||||||||||
|
Georgia
|
2,834 | 1,477 | 398 | 562 | 3,232 | 2,039 | ||||||||||||||||||||
|
All other
|
47,290 | 23,895 | 4,615 | 6,556 | 51,905 | 30,451 | ||||||||||||||||||||
|
Total retained loans
(c)
|
$ | 121,791 | $ | 59,133 | $ | 13,733 | $ | 19,653 | $ | 135,524 | $ | 78,786 | ||||||||||||||
|
|
||||||||||||||||||||||||||
|
Percentage of portfolio based on carrying
value with estimated refreshed FICO scores
(d)
|
||||||||||||||||||||||||||
|
Equal to or greater than 660
|
80.6 | % | 72.6 | % | 56.4 | % | 49.2 | % | 77.9 | % | 66.7 | % | ||||||||||||||
|
Less than 660
|
19.4 | 27.4 | 43.6 | 50.8 | 22.1 | 33.3 | ||||||||||||||||||||
| (a) | Results reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the WMMT in the second quarter of 2009. | |
| (b) | The Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under guidance issued by the FFIEC, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. | |
| (c) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts. For further information, see Note 16 on pages 244–259 of this Annual Report. | |
| (d) | Refreshed FICO scores are estimated based on a statistically significant random sample of credit card accounts in the credit card portfolio for the period shown. The Firm obtains refreshed FICO scores on a quarterly basis. | |
| (e) | Includes billed finance charges and fees net of an allowance for uncollectible amounts. | |
| (f) | Includes $1.0 billion of loans at December 31, 2009, held by the WMMT, which were consolidated onto the Firm’s Consolidated Balance Sheets at fair value during the second quarter of 2009. Such loans had been fully repaid or charged off as of December 31, 2010. For further discussion, see Note 16 on pages 244–259 of this Annual Report. |
| JPMorgan Chase & Co. / 2010 Annual Report | 237 |
Table of Contents
Notes
to consolidated financial statements
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 addition, if a borrower successfully completes a short-term modification program, then the loan reverts back
to its pre-modification payment terms. However, in most cases, the Firm does not reinstate the
borrower’s line of credit.
The Firm
measures the allowance for loans losses related to impaired 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 contractual
interest rate and, therefore, does not consider any incremental 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 | Washington Mutual | |||||||||||||||||||||||
| portfolio | 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
impaired 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 accrued interest and fee income on credit card loans. |
| 238 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
JPMorgan Chase’s allowance for loan losses covers the wholesale and consumer,
including credit card loan portfolios, and represents management’s estimate of
probable credit losses inherent in the Firm’s loan portfolio. Management also computes an allowance
for wholesale and consumer lending-related commitments using methodologies similar to those used to
compute the allowance on the underlying loans. During 2010, the Firm did not make any significant
changes to the methodologies or policies used to determine its
allowance for credit losses, which policies are described in the following paragraphs.
The allowance for loan losses includes an asset-specific component, a formula-based component and a
component related to PCI loans.
The asset-specific component relates to loans considered to be impaired, which includes loans that
have been modified in a troubled debt restructuring as well as risk-rated loans that have been
placed on nonaccrual status. An asset-specific allowance for impaired loans is established when the
loan’s discounted cash flows (or, in certain cases, the loan’s observable market price) is lower
than the recorded investment in the loan. To compute the asset-specific component of the allowance,
larger loans are evaluated individually, while smaller loans are evaluated as pools using
historical loss experience for the respective class of assets. Risk-rated loans (primarily
wholesale loans) are pooled by risk rating, while scored loans (i.e., consumer loans) are pooled by
product type.
The Firm generally measures the asset-specific allowance 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 effective interest rate. Subsequent changes in impairment due to
the impact of discounting are reported as an adjustment to the provision for loan losses, not as an
adjustment to interest income. An asset-specific allowance for an impaired loan that is determined
using an observable market price is measured as the difference between the recorded investment in
the loan and the loan’s fair value.
Certain loans are deemed collateral-dependent because repayment of the loan is expected to be
provided solely by the underlying collateral, rather than by cash flows from the borrower’s
operations, income or other resources. Impaired collateral-dependent loans are charged-off to the
fair value of the collateral, less costs to sell, rather than being subject to an asset-specific
reserve as for other impaired loans.
The determination of the fair value of the collateral depends on the type of collateral (e.g.,
securities, real estate). In cases where the collateral is in the form of liquid securities, the
fair value is based on quoted market prices or broker quotes. For illiquid securities or other
financial assets, the fair value of the collateral is estimated using a discounted cash flow model.
For
residential real estate loans, collateral values are based upon
external valuation sources. When it becomes likely that a borrower is
either unable or unwilling to pay, the Firm obtains a broker's price
opinion of the home based on an exterior-only valuation
(“exterior opinions”). As soon as practicable after taking
physical possession of the property through foreclosure, the Firm
obtains an appraisal based on
an
inspection that includes the
interior of the home (“interior appraisals”). Exterior
opinions and interior appraisals are discounted based upon the Firm's
experience with actual liquidation values as compared to the
estimated values provided by exterior opinions and interior
appraisals, considering state- and product-specific factors.
For commercial real estate loans, the collateral value is generally based on appraisals from
internal and external valuation sources. Collateral values are typically updated every six to
twelve months, either by obtaining a new appraisal or by performing an internal analysis, in
accordance with the Firm’s policies. The Firm also considers both borrower- and market-specific
factors, which may result in obtaining appraisal updates or broker price opinions at more frequent
intervals.
See Note 3 on pages 170–187 of this Annual Report for further information on the fair value
hierarchy for impaired collateral-dependent loans.
The formula-based component is based on a statistical calculation to provide for probable principal
losses inherent in performing risk-rated loans and consumer loans, except for loans restructured in
troubled debt restructurings and PCI loans. See Note 14 on pages 220–238 of this Annual Report for
more information on PCI loans.
For risk-rated loans, the statistical calculation is the product of an estimated probability of
default and an estimated loss given default. These factors are differentiated by
risk rating and expected maturity. In assessing the risk rating of a particular loan, among the
factors considered are the obligor’s debt capacity and financial flexibility, the level of the
obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies,
management strength, and the industry and geography in which the obligor operates. These factors
are based on an evaluation of historical and current information, and involve subjective assessment
and interpretation. Emphasizing one factor over another or considering additional factors could
impact the risk rating assigned by the Firm to that loan. PD estimates are based on observable
external through-the-cycle data, using credit-rating agency default statistics. LGD estimates are
based on the Firm’s history of actual credit losses over more than one credit cycle.
For scored loans, the statistical calculation is performed on pools of loans with similar risk
characteristics (e.g., product type) and generally computed as the product of actual outstandings,
an expected-loss factor and an estimated-loss coverage period. Expected-loss factors are
statistically derived and consider historical factors such as loss frequency and severity. In
developing loss frequency and severity assumptions, the Firm considers known and anticipated
changes in the economic environment, including changes in housing prices, unemployment rates and
other risk indicators.
A nationally recognized home price index measure is used to develop loss severity estimates on
defaulted residential real estate loans at the metropolitan statistical areas (“MSA”) level. These
loss severity estimates are regularly validated by comparison to actual losses
| JPMorgan Chase & Co. / 2010 Annual Report | 239 |
Table of Contents
Notes to consolidated financial statements
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
modifications.
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 management’s view of uncertainties that have occurred but are not yet reflected 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 methodology 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 | ||||||||||||||||
| Consumer, | ||||||||||||||||
| Year ended December 31, | excluding | |||||||||||||||
| (in millions) | Wholesale | 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 December 31
|
$ | 4,761 | $ | 16,471 | $ | 11,034 | $ | 32,266 | ||||||||
|
|
||||||||||||||||
|
Allowance for loan losses by impairment methodology
|
||||||||||||||||
|
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 allowance for loan losses
|
$ | 4,761 | $ | 16,471 | $ | 11,034 | $ | 32,266 | ||||||||
|
|
||||||||||||||||
|
Loans by impairment methodology
|
||||||||||||||||
|
Asset-specific
(c)
|
$ | 5,486 | $ | 6,220 | $ | 10,005 | $ | 21,711 | ||||||||
|
Formula-based
|
216,980 | 248,481 | 125,519 | 590,980 | ||||||||||||
|
PCI
|
44 | 72,763 | — | 72,807 | ||||||||||||
|
Total retained loans
|
$ | 222,510 | $ | 327,464 | $ | 135,524 | $ | 685,498 | ||||||||
| 240 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Determining the appropriateness of the allowance is complex and requires judgment by management
about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan
portfolio, in light of the factors then prevailing, may result in significant changes in the
allowances for loan losses and lending-related commitments in future periods.
At least quarterly, the allowance for credit losses is reviewed by the Chief Risk Officer, the
Chief Financial Officer and the Controller of the Firm and discussed with the Risk Policy and Audit
Committees of the Board of Directors of the Firm. As of December 31, 2010, JPMorgan Chase deemed
the allowance for credit losses to be appropriate (i.e., sufficient to absorb losses that are
inherent in the portfolio, including those not yet identifiable).
(table continued from previous page)
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Consumer, | Consumer, | |||||||||||||||||||||||||||||||
| excluding | excluding | |||||||||||||||||||||||||||||||
| Wholesale | credit card | Credit Card | Total | Wholesale | credit card | Credit Card | Total | |||||||||||||||||||||||||
| $ | 6,545 |
|
$ | 8,927 | $ | 7,692 | $ | 23,164 | $ | 3,154 | $ | 2,673 | $ | 3,407 | $ | 9,234 | ||||||||||||||||
| — |
|
— | — | — | — | — | — | — | ||||||||||||||||||||||||
| 3,226 |
|
10,421 | 10,371 | 24,018 | 521 | 5,086 | 5,157 | 10,764 | ||||||||||||||||||||||||
| (94 | ) |
|
(222 | ) | (737 | ) | (1,053 | ) | (119 | ) | (209 | ) | (601 | ) | (929 | ) | ||||||||||||||||
| 3,132 |
|
10,199 | 9,634 | 22,965 | 402 | 4,877 | 4,556 | 9,835 | ||||||||||||||||||||||||
| 3,684 |
|
16,032 | 12,019 | 31,735 | 2,895 | 10,309 | 6,456 | 19,660 | ||||||||||||||||||||||||
| — |
|
— | — | — | 641 | 350 | 586 | 1,577 | ||||||||||||||||||||||||
| 3,684 |
|
16,032 | 12,019 | 31,735 | 3,536 | 10,659 | 7,042 | 21,237 | ||||||||||||||||||||||||
| — |
|
— | — | — | 229 | 897 | 1,409 | 2,535 | ||||||||||||||||||||||||
| 48 |
|
25 | (405 | ) | (332 | ) | 28 | (425 | ) | 390 | (7 | ) | ||||||||||||||||||||
| $ | 7,145 |
|
14,785 | $ | 9,672 | $ | 31,602 | $ | 6,545 | $ | 8,927 | $ | 7,692 | 23,164 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| $ | 2,046 |
|
$ | 896 | $ | 3,117 | 6,059 | $ | 712 | $ | 332 | $ | 1,450 | $ | 2,494 | |||||||||||||||||
| 5,099 |
|
12,308 | 6,555 | 23,962 | 5,833 | 8,595 | 6,242 | 20,670 | ||||||||||||||||||||||||
| — |
|
1,581 | — | 1,581 | — | — | — | — | ||||||||||||||||||||||||
| $ | 7,145 |
|
$ | 14,785 | $ | 9,672 | $ | 31,602 | $ | 6,545 | $ | 8,927 | $ | 7,692 | $ | 23,164 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| $ | 6,960 |
|
3,648 | $ | 6,245 | $ | 16,853 | $ | 2,088 | $ | 2,086 | $ | 3,048 | $ | 7,222 | |||||||||||||||||
| 192,982 |
|
263,462 | 72,541 | 528,985 | 245,777 | 285,181 | 101,647 | 632,605 | ||||||||||||||||||||||||
| 135 |
|
81,245 | — | 81,380 | 224 | 88,813 | 51 | 89,088 | ||||||||||||||||||||||||
| $ | 200,077 |
|
$ | 348,355 | $ | 78,786 | $ | 627,218 | $ | 248,089 | $ | 376,080 | $ | 104,746 | $ | 728,915 | ||||||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 241 |
Table of Contents
Notes to consolidated financial statements
| 2010 | ||||||||||||||||
| Consumer, | ||||||||||||||||
| Year ended December 31, | excluding | |||||||||||||||
| (in millions) | Wholesale | credit card | Credit Card | Total | ||||||||||||
|
Allowance for lending-related commitments
|
||||||||||||||||
|
Beginning balance at January 1,
|
$ | 927 | $ | 12 | $ | — | $ | 939 | ||||||||
|
Cumulative effect of change in accounting principles
(a)
|
(18 | ) | — | — | (18 | ) | ||||||||||
|
Provision for lending-related commitments:
|
||||||||||||||||
|
Excluding accounting conformity
(a)
|
(177 | ) | (6 | ) | — | (183 | ) | |||||||||
|
Accounting conformity
(b)
|
— | — | — | — | ||||||||||||
|
Total provision for lending-related commitments
|
(177 | ) | (6 | ) | — | (183 | ) | |||||||||
|
Acquired allowance resulting from Washington Mutual transaction
|
— | — | — | — | ||||||||||||
|
Other
(c)
|
(21 | ) | — | — | (21 | ) | ||||||||||
|
Ending balance at December 31
|
$ | 711 | $ | 6 | $ | — | $ | 717 | ||||||||
|
|
||||||||||||||||
|
Allowance for lending-related commitments by impairment
methodology
|
||||||||||||||||
|
Asset-specific
|
$ | 180 | $ | — | $ | — | $ | 180 | ||||||||
|
Formula-based
|
531 | 6 | — | 537 | ||||||||||||
|
Total allowance for lending-related commitments
|
$ | 711 | $ | 6 | $ | — | $ | 717 | ||||||||
|
|
||||||||||||||||
|
Lending-related commitments by impairment methodology
|
||||||||||||||||
|
Asset-specific
|
$ | 1,005 | $ | — | $ | — | $ | 1,005 | ||||||||
|
Formula-based
|
345,074 | 61,534 | 547,227 | 953,835 | ||||||||||||
|
Total lending-related commitments
|
$ | 346,079 | $ | 61,534 | $ | 547,227 | $ | 954,840 | ||||||||
|
|
||||||||||||||||
|
Impaired collateral-dependent loans
|
||||||||||||||||
|
Net charge-offs
|
$ | 269 | $ | 304 | $ | — | $ | 573 | ||||||||
|
Loans measured at fair value of collateral less cost to sell
|
806 | 890 | — | 1,696 | ||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. As a result, $7.4 billion, $14 million and $127 million, respectively, of allowance for loan losses were recorded on-balance sheet associated with the consolidation of these entities. For further discussion, see Note 16 on pages 244–259 of this Annual Report. | |
| (b) | Represents adjustments to the provision for credit losses recognized in Corporate/Private Equity related to the Washington Mutual transaction in 2008. | |
| (c) | The 2009 amount predominantly represents a reclassification related to the issuance and retention of securities from the Chase Issuance Trust. For further information, see Note 16 on pages 244–259 of this Annual Report. The 2008 amount predominantly represents a transfer of allowance between Corporate/Private Equity and Credit card. | |
| (d) | Relates to risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a troubled debt restructuring. | |
| (e) | At December 31, 2010, 2009 and 2008 the asset-specific consumer excluding card allowance for loan losses included troubled debt restructuring reserves of $985 million, $754 million and $258 million respectively. The asset-specific credit card allowance for loan losses is related to loans modified in troubled debt restructurings. | |
| (f) | At December 31, 2010, the Firm’s allowance for loan losses on all impaired credit card loans was reclassified to the asset-specific allowance. This reclassification had no incremental impact on the Firm’s allowance for loan losses. Prior periods have been revised to reflect the current presentation. |
| 242 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
(table continued from previous page)
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Consumer, | Consumer, | |||||||||||||||||||||||||||||||
| excluding | excluding | |||||||||||||||||||||||||||||||
| Wholesale | credit card | Credit card | Total | Wholesale | credit card | Credit card | Total | |||||||||||||||||||||||||
| $ | 634 |
|
$ | 25 | $ | — | $ | 659 | $ | 835 | $ | 15 | $ | — | $ | 850 | ||||||||||||||||
| — |
|
— | — | — | — | — | — | — | ||||||||||||||||||||||||
| 290 |
|
(10 | ) | — | 280 | (214 | ) | (1 | ) | — | (215 | ) | ||||||||||||||||||||
| — |
|
— | — | — | 5 | (48 | ) | — | (43 | ) | ||||||||||||||||||||||
| 290 |
|
(10 | ) | — | 280 | (209 | ) | (49 | ) | — | (258 | ) | ||||||||||||||||||||
| — |
|
— | — | — | — | 66 | — | 66 | ||||||||||||||||||||||||
| 3 |
|
(3 | ) | — | — | 8 | (7 | ) | — | 1 | ||||||||||||||||||||||
| $ | 927 |
|
$ | 12 | $ | — | $ | 939 | $ | 634 | $ | 25 | $ | — | $ | 659 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| $ | 297 |
|
$ | — | $ | — | $ | 297 | $ | 29 | $ | — | $ | — | $ | 29 | ||||||||||||||||
| 630 |
|
12 | — | 642 | 605 | 25 | — | 630 | ||||||||||||||||||||||||
| $ | 927 |
|
$ | 12 | $ | — | $ | 939 | $ | 634 | $ | 25 | $ | — | $ | 659 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| $ | 1,577 |
|
$ | — | $ | — | $ | 1,577 | $ | 233 | $ | — | $ | — | $ | 233 | ||||||||||||||||
| 345,578 |
|
74,827 | 569,113 | 989,518 | 379,638 | 117,805 | 623,702 | 1,121,145 | ||||||||||||||||||||||||
| $ | 347,155 |
|
$ | 74,827 | $ | 569,113 | $ | 991,095 | $ | 379,871 | $ | 117,805 | $ | 623,702 | $ | 1,121,378 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| $ | 500 |
|
$ | 166 | $ | — | $ | 666 | $ | 124 | $ | 22 | $ | — | $ | 146 | ||||||||||||||||
| 1,127 |
|
210 | — | 1,337 | 1,032 | 33 | — | 1,065 | ||||||||||||||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 243 |
Table of Contents
Notes to consolidated financial statements
For a further description of JPMorgan Chase’s accounting policies regarding
consolidation of VIEs, see Note 1 on pages 164–165 of this Annual Report.
The following table summarizes the most significant types of Firm-sponsored VIEs by business
segment. The Firm considers a “sponsored” VIE to include any entity where: (1) JPMorgan Chase is
the principal beneficiary of the structure; (2) the VIE is used by JPMorgan Chase to securitize
Firm assets; (3) the VIE issues financial instruments with the JPMorgan Chase name; or (4)
the entity is a JPMorgan Chase–administered asset-backed commercial paper (“ABCP”) conduit.
| Annual Report | ||||||||
| Line-of-Business | Transaction Type | Activity | page reference | |||||
|
Card Services
|
Credit card securitization trusts | Securitization of both originated and purchased credit card receivables | 245–246 | |||||
|
|
||||||||
|
RFS
|
Mortgage and other securitization trusts | Securitization of originated and purchased residential mortgages, automobile and student loans | 246–249 | |||||
|
|
||||||||
|
IB
|
Mortgage and other securitization trusts | Securitization of both originated and purchased residential and commercial mortgages, automobile and student loans | 246–249 | |||||
|
|
||||||||
|
|
Multi-seller conduits
Investor intermediation activities: |
Assist clients in accessing the financial markets in a cost-efficient manner and structures transactions to meet investor needs | 249–250 | |||||
|
|
||||||||
|
|
Municipal bond vehicles | 250–251 | ||||||
|
|
Credit-related note vehicles | 252 | ||||||
|
|
Asset swap vehicles | 252–253 | ||||||
The Firm’s other business segments are also involved with VIEs, but to a lesser extent, as
follows:
| • | Asset Management (“AM”): Sponsors and manages a limited number of funds that are deemed VIEs. As asset manager of the funds, AM earns a fee based on assets managed; the fee varies with each fund’s investment objective and is competitively priced. For the limited number of fund entities that qualify as VIEs, AM’s interests are, in certain cases, considered to be significant variable interests that result in consolidation of the financial results of these entities. | |
| • | Treasury & Securities Services (“TSS”): Provides services to a number of VIEs that are similar to those provided to non-VIEs. TSS earns market-based fees for the services it provides. TSS’s interests are generally not considered to be significant variable interests and/or do not control these VIEs; therefore, TSS does not consolidate these VIEs. | |
| • | Commercial Banking (“CB”): CB makes investments in and provides lending to community development entities that may meet the definition of a VIE. In addition, CB provides financing and lending related services to certain client sponsored VIEs. In general, CB does not control the activities of these entities and does not consolidate these entities. | |
| • | Corporate/Private Equity: Corporate uses VIEs to issue guaranteed capital debt securities. See Note 22 on pages 265–266 of this Annual Report for further information. The Private Equity business, within Corporate/Private Equity, may be involved with entities that are deemed VIEs. However, the Firm’s private equity business is subject to specialized investment company accounting, which does not require the consolidation of investments, including VIEs. |
The Firm also invests in and provides financing and other services to VIEs sponsored by third
parties, as described on page 253 of this Note.
New consolidation accounting guidance for VIEs
On January 1, 2010, the Firm implemented consolidation accounting guidance related to VIEs. The
following table summarizes the incremental impact at adoption.
| (in millions, except ratios) | U.S. GAAP assets | U.S. GAAP liabilities | Stockholders' equity | Tier 1 capital | ||||||||||||
|
As of December 31, 2009
|
$ | 2,031,989 | $ | 1,866,624 | $ | 165,365 | 11.10 | % | ||||||||
|
Impact of new accounting guidance for
consolidation
of VIEs
|
||||||||||||||||
|
Credit card
(a)
|
60,901 | 65,353 | (4,452 | ) | (0.30 | )% | ||||||||||
|
Multi-seller conduits
(b)
|
17,724 | 17,744 | (20 | ) | — | |||||||||||
|
Mortgage & other
(c)(d)
|
9,059 | 9,107 | (48 | ) | (0.04 | )% | ||||||||||
|
Total impact of new guidance
|
87,684 | 92,204 | (4,520 | ) | (0.34) | % (e) | ||||||||||
|
Beginning balance as of January 1, 2010
|
$ | 2,119,673 | $ | 1,958,828 | $ | 160,845 | 10.76 | % | ||||||||
| (a) | The assets and liabilities of the Firm-sponsored credit card securitization trusts that were consolidated were initially measured at their carrying values, primarily amortized cost, as this method is consistent with the approach that Card Services utilizes to manage its other assets. These assets were primarily recorded in loans on the Firm’s Consolidated Balance Sheet. In addition, Card Services established an allowance for loan losses of $7.4 billion (pretax), which was reported as a transition ad- |
| 244 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
| justment in stockholders’ equity. The impact to stockholders’ equity also includes a decrease to AOCI of $116 million, as a result of the reversal of the fair value adjustments taken on retained AFS securities that were eliminated in consolidation. | ||
| (b) | The assets and liabilities of the Firm-administered multi-seller conduits which were consolidated were initially measured at their carrying values, primarily amortized cost, as this method is consistent with the business’s intent to hold the assets for the longer-term. The assets are recorded primarily in loans and in other assets on the Firm’s Consolidated Balance Sheets. | |
| (c) | RFS consolidated certain mortgage and other consumer securitizations, which resulted in a net increase in both assets and liabilities of $4.7 billion ($3.5 billion related to residential mortgage securitizations and $1.2 billion related to other consumer securitizations). These assets were initially measured at their unpaid principal balance and recorded primarily in loans on the Firm’s Consolidated Balance Sheets. This method was elected as a practical expedient. | |
| (d) | IB consolidated certain mortgage and other consumer securitizations, which resulted in a net increase in both assets and liabilities of $4.3 billion ($3.7 billion related to residential mortgage securitizations and $0.6 billion related to other consumer securitizations). These assets were initially measured at their fair value, as this method is consistent with the approach that IB utilizes to manage similar assets. These assets were recorded primarily in trading assets on the Firm’s Consolidated Balance Sheets. | |
| (e) | The U.S. GAAP consolidation of the credit card securitization trusts did not have a significant impact on risk-weighted assets on the adoption date because the Chase Issuance Trust (the Firm’s primary credit card securitization trust) had been consolidated for regulatory capital purposes beginning in the second quarter of 2009, which added approximately $40.0 billion of risk-weighted assets for regulatory capital purposes. In addition, the Firm elected a two-quarter regulatory implementation deferral of the effect of this accounting guidance on risk-weighted assets and risk-based capital requirements, as permitted for its Firm-administered multi-seller conduits and certain mortgage-related and other securitization entities. The deferral period ended July 1, 2010, and the Firm consolidated, for regulatory capital purposes, the deferred amounts, which had a negligible impact on risk-weighted assets and risk-based capital ratios. |
Significant Firm-sponsored variable interest entities
Credit card securitizations
Credit card securitizations
The Card Services (“CS”) business securitizes originated and purchased credit card loans, primarily
through the Chase Issuance Trust (the “Trust”). The Firm’s continuing involvement in credit card securitizations includes servicing the receivables, retaining an undivided seller’s interest in the
receivables, retaining certain senior and subordinated securities and maintaining escrow accounts. As servicer, the Firm receives contractual servicing fees based on the securitized loan balance
plus excess servicing fees, which are recorded in credit card income as discussed in Note 7 on page 200 of this Annual Report.
Effective January 1, 2010, the Firm consolidated the assets and liabilities of Firm-sponsored
credit card securitization trusts, including its primary card securitization trust, Chase Issuance
Trust, as a result of the implementation of new accounting guidance. The consolidation
determination was based on the Firm’s ability to direct the activities of these VIEs through its
servicing responsibilities and other
duties, including making decisions as to the receivables that
are transferred into those trusts and as to
any related modifications and workouts. Additionally, the nature and extent of the Firm’s other
continuing involvement with the trusts, as indicated above, obligates the Firm to absorb losses and
gives the Firm the right to receive certain benefits from these VIEs that could potentially be
significant.
Upon consolidation at January 1, 2010, the Firm recorded a net increase in GAAP assets of $60.9
billion on the Consolidated Balance Sheet, as follows: $84.7 billion of loans; $7.4 billion of
allowance for loan losses; $4.4 billion of other assets, partially offset by $20.8 billion of
previously recognized assets, consisting primarily of retained AFS securities that were eliminated
upon consolidation. In addition, the Firm recognized $65.4 billion of liabilities representing the
trusts’ beneficial interests issued to third parties.
The following table summarizes the assets and liabilities of the Firm-sponsored credit card
securitization trusts at December 31, 2010.
| Total assets held by Firm-sponsored | Beneficial interests issued to | |||||||||||||||
| (in billions) | Loans | Other assets | credit card securitization trusts | third parties | ||||||||||||
|
December 31, 2010
|
$ | 67.2 | $ | 1.3 | $ | 68.5 | $ | 44.3 | ||||||||
The underlying securitized credit card receivables and other assets are available only
for payment of the beneficial interests issued by the securitization trusts; they are not available
to pay the Firm’s other obligations or the claims of the Firm’s other creditors.
The agreements with the credit card securitization trusts require the Firm to maintain a minimum
undivided interest in the credit card trusts (which generally ranges from 4% to 12%). As of
December 31, 2010, the Firm held undivided interests in Firm-sponsored credit card securitization
trusts of $17.2 billion. The Firm maintained an average undivided interest in principal receivables
owned by those trusts of approximately 19% for the year ended December 31, 2010. The Firm also
retained $1.1 billion of senior securities and $3.2 billion of subordinated securities in certain
of its credit card securitization trusts as of December 31, 2010. The Firm’s undivided interests in
the credit card trusts and securities retained are eliminated in consolidation.
Accounting Treatment Prior to January 1, 2010
Prior to January 1, 2010, the Firm accounted for its credit card securitizations as QSPEs and
therefore these entities were not consolidated. The Firm recorded only its retained interests in
the entities on its Consolidated Balance Sheets.
As of December 31, 2009, the principal amount outstanding of total assets held by Firm-sponsored
nonconsolidated credit card securitizations QSPEs was $109.6 billion in which the Firm had
continuing involvement.
At December 31, 2009, the Firm retained undivided interests in its Firm-sponsored credit card
securitization trusts of $16.7 billion, which were classified within loans on its Consolidated
Balance Sheets. The Firm maintained an average undivided interest in principal receivables owned by
those trusts of approximately 16% for the year ended December 31, 2009. The Firm also retained $7.2
billion of senior securities and $6.6 billion of subordinated
| JPMorgan Chase & Co. / 2010 Annual Report | 245 |
Table of Contents
Notes to consolidated financial statements
securities in certain of its credit
card securitization trusts as of December 31, 2009, which were classified as AFS securities.
Additionally, the Firm’s interests included $1.0 billion of escrow accounts and $3.2 billion of
retained subordinated interests in accrued interest and fees on securitized receivables, which were
classified as “other assets.”
During 2009, the Firm took certain actions permitted by the trust agreements with respect to two of
the Firm’s credit card securitization trusts.
| • | Chase Issuance Trust (the “Trust”): In 2009, the Firm consolidated, for regulatory capital purposes, the Chase Issuance Trust (the Firm’s primary issuance trust) as a result of taking certain actions permitted by the Trust agreements, including increasing the required credit enhancement level of each tranche of outstanding notes issued by the Trust and increasing the excess spread for the Trust. These actions resulted in the addition of approximately $40 billion of risk-weighted assets for regulatory capital purposes, which decreased the Firm’s Tier 1 capital ratio by approximately 40 basis points, at that time, but did not have a material impact on the Firm’s Consolidated Balance Sheets or results of operations . | |
| • | Washington Mutual Master Trust (“WMMT”): The Firm acquired an interest in the WMMT as part of the acquisition of the Washington Mutual banking operations. In 2009, the Firm removed all remaining credit card receivables originated by Washington Mutual, resulting in the consolidation of the WMMT for accounting and regulatory capital purposes. As a result, the Firm recorded, during the second quarter of 2009, additional assets with an initial fair value of $6.0 billion, additional liabilities with an initial fair value of $6.1 billion and a pretax loss of approximately $64 million. |
Firm-sponsored mortgage and other securitization trusts
The Firm securitizes originated and purchased residential mortgages, commercial mortgages and other
consumer loans (including automobile and student loans) primarily in its RFS and IB businesses.
Depending on the particular transaction, as well as the respective business involved, the Firm may
act as the servicer of the loans and/or retain certain beneficial interests in the securitization
trusts.
Effective January 1, 2010, the Firm consolidated certain mortgage securitization trusts (both
residential and commercial) and Firm-sponsored automobile and student loan trusts as a result of
the implementation of the accounting guidance. The consolidation determination was based on the
Firm’s ability to direct the activities of these VIEs through its servicing responsibilities and
duties, including making decisions related to loan modifications and workouts. Additionally, the
nature and extent of the Firm’s continuing economic involvement with these trusts obligates the
Firm to absorb losses and gives the Firm the right to receive
benefits from the VIEs that could
potentially be significant.
Prior to January 1, 2010, the Firm accounted for its residential and commercial mortgage,
automobile, and certain student loan securitizations as QSPEs and therefore did not consolidate
these entities; only the Firm’s retained interests in these entities were recorded on its
Consolidated Balance Sheets. In addition, the Firm previously consolidated certain other student
loan securitizations in accordance with the accounting treatment under prior accounting guidance.
The following table presents the total unpaid principal amount of assets held in JPMorgan
Chase–sponsored securitization entities in which the Firm has continuing involvement, including
those that are consolidated by the Firm and those that are not consolidated by the Firm. Continuing
involvement includes servicing the loans; holding senior interests or subordinated interests;
recourse or guarantee arrangements; and derivative transactions. In certain instances, the Firm’s only continuing
involvement is servicing the loans. In the table below, the amount of beneficial interests held by
JPMorgan Chase does not equal the assets held in nonconsolidated VIEs
because of the existence of beneficial interests held by third parties, which are reflected at their current outstanding par amounts; and
because a portion of the Firm’s retained interests (trading assets and AFS securities) are
reflected at their fair values. See Securitization activity on pages 255–258 of this Note for
further information regarding the Firm’s cash flows with and interests retained in nonconsolidated
VIEs.
| 246 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Firm-sponsored mortgage and other consumer securitization trusts
| JPMorgan Chase interest in securitized assets | ||||||||||||||||||||||||||||
| Principal amount outstanding | in nonconsolidated VIEs (d)(e)(f)(g)(h) | |||||||||||||||||||||||||||
| Assets held in | ||||||||||||||||||||||||||||
| nonconsolidated | Total interests | |||||||||||||||||||||||||||
| Total assets | Assets held in | securitization VIEs | held by | |||||||||||||||||||||||||
| December 31, 2010 (a) | held by | consolidated | with continuing | Trading | AFS | Other | JPMorgan | |||||||||||||||||||||
| (in billions) | securitization VIEs | securitization VIEs | involvement | assets | securities | assets | Chase | |||||||||||||||||||||
|
Securitization-related
|
||||||||||||||||||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||
|
Prime
(b)
|
$ | 153.1 | $ | 2.2 | $ | 143.8 | $ | 0.7 | $ | — | $ | — | $ | 0.7 | ||||||||||||||
|
Subprime
|
44.0 | 1.6 | 40.7 | — | — | — | — | |||||||||||||||||||||
|
Option ARMs
|
36.1 | 0.3 | 35.8 | — | — | — | — | |||||||||||||||||||||
|
Commercial and other
(c)
|
153.4 | — | 106.2 | 2.0 | 0.9 | — | 2.9 | |||||||||||||||||||||
|
Student
|
4.5 | 4.5 | — | — | — | — | — | |||||||||||||||||||||
|
Auto
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 391.1 | $ | 8.6 | $ | 326.5 | $ | 2.7 | $ | 0.9 | $ | — | $ | 3.6 | ||||||||||||||
| JPMorgan Chase interest in securitized assets | ||||||||||||||||||||||||||||
| Principal amount outstanding | in nonconsolidated VIEs (d)(e)(f)(g)(h) | |||||||||||||||||||||||||||
| Assets held in | ||||||||||||||||||||||||||||
| nonconsolidated | Total interests | |||||||||||||||||||||||||||
| Total assets | Assets held in | securitization VIEs | held by | |||||||||||||||||||||||||
| December 31, 2009 (a) | held by | consolidated | with continuing | Trading | AFS | Other | JPMorgan | |||||||||||||||||||||
| (in billions) | securitization VIEs | securitization VIEs | involvement | assets | securities | assets | Chase | |||||||||||||||||||||
|
Securitization-related
|
||||||||||||||||||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||
|
Prime
(b)
|
$ | 183.3 | $ | — | $ | 171.5 | $ | 0.9 | $ | 0.2 | $ | — | $ | 1.1 | ||||||||||||||
|
Subprime
|
50.0 | — | 47.3 | — | — | — | — | |||||||||||||||||||||
|
Option ARMs
|
42.0 | — | 42.0 | — | 0.1 | — | 0.1 | |||||||||||||||||||||
|
Commercial and other
(c)
|
155.3 | — | 24.8 | 1.6 | 0.8 | — | 2.4 | |||||||||||||||||||||
|
Student
|
4.8 | 3.8 | 1.0 | — | — | 0.1 | 0.1 | |||||||||||||||||||||
|
Auto
|
0.2 | — | 0.2 | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 435.6 | $ | 3.8 | $ | 286.8 | $ | 2.5 | $ | 1.1 | $ | 0.1 | $ | 3.7 | ||||||||||||||
| (a) | Excludes loan sales to U.S. government agencies. See page 257 of this Note for information on the Firm’s loan sales to U.S. government agencies. | |
| (b) | Includes Alt-A loans. | |
| (c) | Consists of securities backed by commercial loans (predominantly real estate) and non-mortgage-related consumer receivables purchased from third parties. The Firm generally does not retain a residual interest in its sponsored commercial mortgage securitization transactions. Includes co-sponsored commercial securitizations and, therefore, includes non–JPMorgan Chase–originated commercial mortgage loans. | |
| (d) | Excludes retained servicing (for a discussion of MSRs, see Note 17 on pages 260–263 of this Annual Report) and securities retained from loan sales to U.S. government agencies. | |
| (e) | Excludes senior and subordinated securities of $182 million and $18 million, respectively, at December 31, 2010, and $729 million and $146 million, respectively, at December 31, 2009, which the Firm purchased in connection with IB’s secondary market-making activities. | |
| (f) | Includes investments acquired in the secondary market that are predominantly for held-for-investment purposes, of $315 million and $139 million as of December 31, 2010 and 2009, respectively. This comprises $238 million and $91 million of AFS securities, related to commercial and other; and $77 million and $48 million of investments classified as trading assets-debt and equity instruments, including $39 million and $47 million of residential mortgages, and $38 million and $1 million of commercial and other, all respectively, at December 31, 2010 and 2009. | |
| (g) | Excludes interest rate and foreign exchange derivatives primarily used to manage the interest rate and foreign exchange risks of the securitization entities. See Note 6 on pages 191–199 of this Annual Report for further information on derivatives. | |
| (h) | Includes interests held in re-securitization transactions. |
| JPMorgan Chase & Co. / 2010 Annual Report | 247 |
Table of Contents
Notes to consolidated financial statements
Residential mortgage
The Firm securitizes residential mortgage loans originated by RFS, as well as residential mortgage
loans purchased from third parties by either RFS or IB. RFS generally retains servicing for all
residential mortgage loans originated or purchased by RFS, and for certain mortgage loans purchased
by IB.
For securitizations serviced by RFS, the Firm has the power to direct the significant activities of
the VIE because it is responsible for decisions related to loan modifications and workouts. In a
limited number of these securitizations, RFS also retains an interest in the VIE that could
potentially be significant to the VIE. In these instances, the Firm is deemed to be the primary
beneficiary. At December 31, 2010, approximately $2.9 billion of assets and $3.0 billion of liabilities of
Firm-sponsored residential mortgage securitization trusts were consolidated on balance sheet. For
Firm-sponsored securitizations serviced by unrelated third parties, the Firm does not consolidate
the VIE as the power to direct the significant activities resides with the third party servicer. At
December 31, 2009, RFS did not consolidate any VIEs in accordance with the accounting treatment
under prior accounting rules. RFS held retained interests of approximately $205 million and $537
million as of December 31, 2010 and 2009, respectively, in nonconsolidated residential mortgage
securitization entities. See pages 257–258 of this Note for further information on retained
interests held in nonconsolidated VIEs; these retained interests are classified as trading assets
or AFS securities.
The Firm’s mortgage loan sales are primarily nonrecourse, thereby effectively transferring the risk
of future credit losses to the purchaser of the mortgage-backed securities issued by the trust.
However, for a limited number of loan sales, the Firm is obligated to share a portion of the credit
risk associated with the sold loans with the purchaser. See Note 30 on pages 275–280 of this
Annual Report for additional information on loans sold with recourse, as well as information on
indemnification liability for breaches of representations and warranties. See page 257 of this Note for
further information on loans sold to U.S. government agencies.
IB engages in underwriting and trading activities involving securities issued by Firm-sponsored
securitization trusts. As a result, IB at times retains senior and/or subordinated interests
(including residual interests) in residential mortgage securitizations upon securitization, and/or
reacquires positions in the secondary market in the normal course of business. In certain
instances, as a result of the positions retained or reacquired by IB, when considered together with
the servicing arrangements entered into by RFS, the Firm is deemed to be the primary beneficiary of
certain securitization trusts. At December 31, 2010, $1.2 billion of VIE assets and $702 million of
liabilities were consolidated due to IB’s involvement with such trusts. IB did not consolidate any
residential securitization VIEs at December 31, 2009, in accordance with the accounting treatment
under prior accounting rules. IB held approximately
$461 million, and $479 million of senior and
subordinated interests at December 31, 2010 and 2009, respectively, in nonconsolidated residential
mortgage securitization entities. This includes approximately $1 million and $2 million of residual
interests at December
31, 2010
and 2009, respectively. See pages 257–258 of this Note for further
information on interests held in nonconsolidated securitizations. These retained interests are
accounted for at fair value and classified as trading assets.
Commercial mortgages and other consumer securitizations
IB originates and securitizes commercial mortgage loans, and engages in underwriting and trading
activities involving the securities issued by securitization trusts. IB may retain unsold senior
and/or subordinated interests in commercial mortgage securitizations at the time of securitization
but, generally, the Firm does not service commercial loan securitizations. For commercial mortgage
securitizations the power to direct the significant activities of the VIE generally is held by the
servicer or investors
in a specified class of securities (“controlling class”). At December 31, 2010, approximately $84
million of VIE assets and $82 million of VIE liabilities of commercial mortgage securitization
trusts were consolidated due to the Firm holding certain subordinated interests that give the Firm
the power to direct the activities of these entities as well as a significant interest. IB did not
consolidate any commercial mortgage securitization VIEs at December 31, 2009, in accordance with
the accounting treatment under prior accounting rules. At December 31, 2010 and 2009, the Firm held
$2.0 billion and $1.6 billion, respectively, of retained interests in nonconsolidated commercial
mortgage securitizations. This included approximately zero and $22 million of residual interests as
of December 31, 2010 and 2009, respectively.
The Firm also securitizes automobile and student loans originated by RFS, and consumer loans
(including automobile and student loans) purchased by IB. The Firm retains servicing
responsibilities for all originated and certain purchased student and automobile loans and has the
power to direct the activities of these VIEs through these servicing responsibilities. At December
31, 2010, $4.5 billion of assets and $3.2 billion of liabilities of student loan securitizations
were consolidated due to the combination of retained interests held by the Firm and servicing
responsibilities. Auto loans previously securitized were repurchased by the Firm during 2010 as
these securitization entities were terminated. As of December 31, 2009, the Firm held $9 million
and $49 million of retained interests in securitized automobile and student loan securitizations,
respectively, which were not consolidated in accordance with the accounting treatment under prior
accounting rules. These retained interests were reported in other assets. In addition, at December
31, 2009, the Firm held interests in other student loans which resulted in $3.8 billion of other
student loans being consolidated on the balance sheet in accordance with the accounting treatment
under prior accounting rules.
Re-securitizations
The Firm engages in re-securitization transactions in which securities are transferred to a VIE in
exchange for new beneficial interests. Re-securitizations involve the repackaging of securities
previously issued by both agency sponsored (Fannie Mae, Freddie Mac and Ginnie Mae) and nonagency
(private-label) VIEs that are generally backed by either residential or commercial mortgages. A
re-securitization entity receives principal and interest payments
| 248 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
from the securities held in the
entity and passes them to the beneficial interest holders. These entities are not actively managed
and are passive in nature. Re-securitization entities are often established to the specifications
of the investors. In a re-securitization entity, the most significant power is in the design of the
entity (i.e., the decision as to the specific security or securities to be repackaged and the terms
of the beneficial interests issued). The power over a re-securitization entity is often considered
to be shared between the sponsor and investor(s) that are significantly involved in the creation
and design of the re-securitization entity. At December 31, 2010, the Firm did not consolidate any
agency re-securitizations, as it did not have the unilateral power to direct the significant
activities of the re-securitization entity. At December 31, 2010, the Firm consolidated $477
million of assets and $230 million of liabilities of private-label re-securitizations, as the Firm
had both the unilateral power to direct the significant activities of, and retained a significant
interest in, these re-securitization entities. As of December 31, 2009, the Firm did not consolidate
any re-securitization entities (agency or private-label) in accordance with the accounting
treatment under prior accounting rules.
During the years ended December 31, 2010, 2009, and 2008, the Firm transferred $33.9 billion, $19.1
billion and $16.8 billion, respectively, of securities to agency re-securitization entities and
$1.3 billion, $4.0 billion and $2.7 billion to private-label re-securitization entities. At
December 31, 2010 and 2009, the Firm held approximately $3.5 billion
and $1.6 billion of both senior and subordinated interests in nonconsolidated agency
re-securitization entities and $46 million and $220 million of both senior and subordinated
interests, in nonconsolidated private-label re-securitization
entities. See pages 257–258 of this
Note for further information on interests held in nonconsolidated securitization VIEs.
Multi-seller conduits
The Firm is an active participant in the asset-backed securities business, and it helps customers
meet their financing needs by providing access to the commercial paper markets through VIEs known
as multi-seller conduits. Multi-seller conduit entities are separate bankruptcy remote entities
that purchase interests in, and make loans secured by, pools of receivables and other financial
assets pursuant to agreements with customers of the Firm. The conduits fund their purchases and
loans through the issuance of highly rated commercial paper to third-party investors. The primary
source of repayment of the commercial paper is the cash flows from the pools of assets. In most
instances, the assets are structured with deal-specific credit enhancements provided by the
customers (i.e., sellers) to the conduits or other third parties. Deal-specific credit enhancements
are generally structured to cover a multiple of historical losses expected on the pool of assets,
and are typically in the form of overcollateralization provided by the seller, but also may include
any combination of the following: recourse to the seller or originator, cash collateral accounts,
letters of credit, excess spread, retention of subordinated interests or third-party guarantees.
The deal-specific credit enhancements mitigate the Firm’s potential losses on its agreements with
the conduits.
To ensure timely repayment of the commercial paper, each asset pool financed by the conduits has a
minimum 100% deal-specific liquidity facility associated with it. Deal-specific liquidity
facilities are the primary source of liquidity support for the conduits and are typically in the
form of asset purchase agreements. They are generally structured so the liquidity that will be
provided by the Firm (as liquidity provider) will be effected by the Firm purchasing, or lending
against, a pool of nondefaulted, performing assets. In limited circumstances, the Firm may provide
unconditional liquidity.
The conduit’s administrative agent can require the liquidity provider to perform under its asset
purchase agreement with the conduit at any time. These agreements may cause the liquidity provider,
which is generally the Firm, to purchase an asset from the conduit at an amount above the asset’s
then current fair value – in effect, providing a guarantee of the asset’s initial value.
The Firm also provides the multi-seller conduit vehicles with program-wide liquidity facilities in
the form of uncommitted short-term revolving facilities established to
handle funding increments too small to be funded by commercial paper and that can be accessed by the conduits only in the event of short-term
disruptions in the commercial paper market.
Because the majority of the deal-specific liquidity facilities will only fund nondefaulted assets,
program-wide credit enhancement is required to absorb losses on defaulted receivables in excess of
losses absorbed by any deal-specific credit enhancement. Program-wide credit enhancement may be
provided by JPMorgan Chase in the form of standby letters of credit or by third-party surety bond
providers. The amount of program-wide credit enhancement required varies by conduit and ranges
between 5% and 10% of the applicable commercial paper that is outstanding. The Firm provided $2.0
billion and $2.4 billion of program-wide credit enhancement at December 31, 2010 and 2009,
respectively.
JPMorgan Chase receives fees for structuring multi-seller conduit transactions and compensation
from the multi-seller conduits for its role as administrative agent, liquidity provider, and
provider of program-wide credit enhancement.
Effective January 1, 2010, the Firm consolidated its Firm-administered multi-seller conduits, as
the Firm has both the
power to direct the significant activities of the conduits and a potentially significant economic
interest in the conduits. The Firm directs the economic performance of the conduits as
administrative agent and in its role in structuring transactions for the conduits. In these roles,
the Firm makes decisions regarding concentration of asset types and credit quality of transactions,
and is responsible for managing the commercial paper funding needs of the conduits. The Firm’s
interests that could potentially be significant to the VIEs include the fees received as
administrative agent, liquidity provider and provider of program-wide credit enhancement, as well
as the Firm’s potential exposure as a result of the liquidity and credit enhancement facilities
provided to the conduits.
| JPMorgan Chase & Co. / 2010 Annual Report | 249 |
Table of Contents
Notes to consolidated financial statements
| Total assets held by Firm- | Commercial paper | |||||||||||||||
| December 31, 2010 (in billions) | Loans | Other assets | administered multi-seller conduits | issued to third parties | ||||||||||||
|
Consolidated
(a)
|
$ | 21.1 | $ | 0.6 | $ | 21.7 | $ | 21.6 | ||||||||
| (a) | The Firm provided certain deal-specific liquidity facilities (primarily asset purchase agreements); program-wide liquidity facilities; and program-wide credit enhancements that were eliminated in consolidation. |
Accounting Treatment Prior to January 1, 2010
Prior to January 1, 2010, the Firm had consolidated one of its multi-seller conduits; all other
Firm-administered multi-seller conduits were not consolidated in accordance with prior accounting
rules. Under prior accounting rules, the party that absorbed the majority of the entity’s expected
losses, received a majority of the entity’s residual returns, or
both, would consolidate. Each
nonconsolidated multi-seller conduit administered by the Firm at December 31, 2009 had issued
Expected Loss Notes (“ELNs”), the holders of which were committed to absorbing the majority of the
expected loss of each respective conduit. The total amounts of ELNs outstanding for nonconsolidated
conduits at December 31, 2009 was $96 million.
At December 31, 2009, total assets funded and commercial paper issued by Firm-sponsored
multi-seller conduits were as follows.
| Total | Commercial | |||||||
| December 31, 2009 (in billions) | assets funded | paper issued | ||||||
|
Consolidated
|
$ | 5.1 | $ | 5.1 | ||||
|
Non-consolidated
(a)
|
17.8 | 17.8 | ||||||
| (a) | The Firm provided certain deal-specific liquidity facilities (primarily asset purchase agreements) of $24.2 billion. Additionally, the Firm provided program-wide liquidity facilities of $13.0 billion and program-wide credit enhancements of $2.0 billion. |
The Firm’s maximum exposure to loss on nonconsolidated Firm-administered multi-seller conduits
was $24.8 billion at December 31, 2009. The maximum exposure to loss, calculated separately for
each multi-seller conduit, included the Firm’s exposure to both deal-specific liquidity facilities
and program wide credit enhancements. For purposes of calculating
maximum exposure to loss, Firm-provided program-wide credit
enhancement was limited to deal-specific liquidity facilities
provided to third parties.
VIEs associated with investor intermediation activities
As a financial intermediary, the Firm creates certain types of VIEs and also structures
transactions, typically using derivatives, with these VIEs to meet investor needs. The Firm may
also provide liquidity and other support. The risks inherent in the derivative instruments or
liquidity commitments are managed similarly to other credit, market or liquidity risks to which the
Firm is exposed. The principal types of VIEs for which the Firm is engaged in on behalf of clients
are municipal bond vehicles, credit-related note vehicles and asset swap vehicles.
Municipal bond vehicles
The Firm has created a series of trusts that provide short-term investors with qualifying
tax-exempt investments, and that allow investors in tax-exempt securities to finance their
investments at short-term tax-exempt rates. In a typical transaction, the vehicle purchases
fixed-rate longer-term highly rated municipal bonds and funds the purchase by issuing two types of
securities: (1) putable floating-rate certificates and (2) inverse floating-rate residual interests
(“residual interests”). The maturity of each of the putable floating-rate certificates and the
residual interests is equal to the life of the vehicle, while the maturity of the underlying
municipal bonds is longer. Holders of the putable floating-rate certificates may “put,” or tender,
the certificates if the remarketing agent cannot successfully remarket the floating-rate
certificates to another investor. A liquidity facility conditionally obligates the liquidity
provider to fund the purchase of the tendered floating-rate certificates. If funded, the liquidity
facility would be repaid by the proceeds from the sale of the underlying municipal bonds upon
termination of the vehicle. In certain transactions, if the proceeds from the sale of the
underlying municipal bonds are not sufficient to repay the liquidity facility, the liquidity
provider has recourse to the residual interest holders for reimbursement.
The holders of the residual interests in these vehicles could experience losses if the face amount
of the putable floating-rate certificates exceeds the market value of the municipal bonds upon
termination of the vehicle. Certain vehicles require a smaller initial investment by the residual
interest holders and thus do not result in excess collateralization. For these vehicles there
exists a reimbursement obligation which requires the residual interest holders to post, during the
life of the vehicle, additional collateral to the Firm, as liquidity
provider, on a daily basis should
the market value of the municipal bonds decline.
JPMorgan
Chase Bank, N.A. often serves as the sole liquidity provider, and J.P. Morgan Securities
LLC as remarketing agent, of the putable floating-rate certificates. The liquidity provider’s
obligation to perform is conditional and is limited by certain termination events, which include
bankruptcy or failure to pay by the municipal bond issuer or credit enhancement provider, an event
of taxability on the municipal bonds or the immediate downgrade of the municipal bond to below
investment grade. A downgrade of JPMorgan Chase Bank, N.A.’s short-term rating does not affect the
Firm’s obligation under the liquidity facility. However, in the event of a downgrade in the Firm’s
credit ratings, holders of the putable floating-rate certificates supported by those liquidity
facility commitments might choose to sell their instruments, which could increase the likelihood
that the liquidity commitments could be drawn. In vehicles in which third-party investors own the
residual interests, in addition to the termination events, the Firm’s exposure as liquidity
provider is further limited by
| 250 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
the high credit quality of the underlying municipal bonds, the
excess collateralization in the vehicle or in certain transactions the reimbursement agreements
with the residual interest holders.
As remarketing agent, the Firm may hold putable floating-rate certificates of the municipal bond
vehicles. At December 31, 2010 and 2009, respectively, the Firm held $248 million and $72 million
of these certificates on its Consolidated Balance Sheets. The largest amount held by the Firm at
any time during 2010 was $796 million, or 6%, of the municipal
bond vehicles’ aggregate outstanding putable
floating-rate certificates. The Firm did not have and continues not to have any intent to protect
any residual interest holder from potential losses on any of the municipal bond holdings.
The long-term credit ratings of the putable floating-rate certificates are directly related to the
credit ratings of the underlying municipal bonds, and to the credit rating of any insurer of the
underlying municipal bond. A downgrade of a bond insurer would result in a downgrade of the insured municipal bonds, which would affect the rating of the putable
floating-rate
certificates. This could cause demand for these certificates by investors to decline or disappear,
as putable floating-rate certificate holders typically require an “AA-” bond rating. At December
31, 2010 and 2009, 96% and 98%, respectively, of the municipal bonds
held by vehicles for which the
Firm served as liquidity provider were rated “AA-” or better, based on either the rating of the
underlying municipal bond itself or the bond rating including any credit enhancement. At December
31, 2010 and 2009, $3.4 billion and $2.3 billion, respectively, of the bonds were insured by
monoline bond insurers.
The Firm consolidates municipal bond vehicles if it owns the residual interest. The residual
interest generally allows the owner to make decisions that significantly impact the economic
performance of the municipal bond vehicle, primarily by directing the sale of the municipal bonds
owned by the vehicle. In addition, the residual interest owners have the right to receive benefits
and bear losses that could potentially be significant to the municipal bond vehicle. The Firm does
not consolidate municipal bond vehicles if it does not own the residual interests, since the Firm
does not have the power to make decisions that significantly impact the economic performance of the
municipal bond vehicle.
The Firm’s exposure to nonconsolidated municipal bond VIEs at December 31, 2010 and 2009, including
the ratings profile of the VIEs’ assets, was as follows.
| Fair value of assets | Maximum | |||||||||||||||
| December 31, (in billions) | held by VIEs | Liquidity facilities (b) | Excess/(deficit) (c) | exposure | ||||||||||||
|
Nonconsolidated municipal bond vehicles
(a)
|
||||||||||||||||
|
2010
|
$ | 13.7 | $ | 8.8 | $ | 4.9 | $ | 8.8 | ||||||||
|
2009
|
13.2 | 8.4 | 4.8 | 8.4 | ||||||||||||
| Ratings profile of VIE assets (d) | ||||||||||||||||||||||||||||
| Fair | Wt. avg. | |||||||||||||||||||||||||||
| December 31, | Investment-grade | Noninvestment-grade | value of | expected life | ||||||||||||||||||||||||
| (in billions, except where | AAA | AA+ | A+ | BBB | BB+ | assets held | of assets | |||||||||||||||||||||
| otherwise noted) | to AAA- | to AA- | to A- | to BBB- | and below | by VIEs | (years) | |||||||||||||||||||||
|
Nonconsolidated municipal
bond vehicles
(a)
|
||||||||||||||||||||||||||||
|
2010
|
$ | 1.9 | $ | 11.2 | $ | 0.6 | $ | — | $ | — | $ | 13.7 | 15.5 | |||||||||||||||
|
2009
|
1.6 | 11.4 | 0.2 | — | — | 13.2 | 10.1 | |||||||||||||||||||||
| (a) | Excluded $4.6 billion and $2.8 billion, as of December 31, 2010 and 2009, respectively, which were consolidated due to the Firm owning the residual interests. | |
| (b) | The Firm may serve as credit enhancement provider to municipal bond vehicles in which it serves as liquidity provider. The Firm provided insurance on underlying municipal bonds, in the form of letters of credit, of $10 million at both December 31, 2010 and 2009. | |
| (c) | Represents the excess/(deficit) of the fair values of municipal bond assets available to repay the liquidity facilities, if drawn. | |
| (d) | The ratings scale is based on the Firm’s internal risk ratings and is presented on an S&P-equivalent basis. |
| JPMorgan Chase & Co. / 2010 Annual Report | 251 |
Table of Contents
Notes to consolidated financial statements
Credit-related note vehicles
The Firm structures transactions with credit-related note vehicles in which the VIE purchases
highly rated assets, such as asset-backed securities, and enters into a credit derivative contract
with the Firm to obtain exposure to a referenced credit which the VIE otherwise does not hold. The
VIE then issues credit-linked notes (“CLNs”) with maturities predominantly ranging from one to 10
years in order to transfer the risk of the referenced credit to the VIE’s investors. Clients and
investors often prefer using a CLN vehicle since the CLNs issued by the VIE generally carry a
higher credit rating than such notes would if issued directly by JPMorgan Chase. The Firm’s
exposure to the CLN vehicles is generally limited to its rights and obligations under the credit
derivative contract with the VIE, as the Firm does not provide any additional contractual financial
support to the VIE. In addition, the Firm has not historically provided any financial support to
the CLN vehicles over and above its contractual obligations. Accordingly, the Firm typically does
not consolidate the CLN vehicles. As a derivative counterparty in a credit-related note structure,
the Firm has a senior claim on the collateral of the VIE and reports such derivatives on its
balance sheet at fair value. The collateral purchased by such VIEs is largely investment-grade,
with a significant amount being rated “AAA.” The Firm divides its credit-related note structures
broadly into two types: static and managed.
In a static credit-related note structure, the CLNs and associated credit derivative contract
either reference a single credit (e.g., a multi-national corporation), or all or part of a fixed
portfolio of credits. The Firm generally buys protection from the VIE under the
credit derivative.
In a managed credit-related note structure, the CLNs and associated credit derivative generally
reference all or part of an actively managed portfolio of credits. An agreement exists between a
portfolio manager and the VIE that gives the portfolio manager the ability to substitute each
referenced credit in the portfolio for an alternative credit. By participating in a structure where
a portfolio manager has the ability to substitute credits within pre-agreed terms, the investors
who own the CLNs seek to reduce the risk that any single credit in the portfolio will default. The
Firm does not act as portfolio manager; its involvement with the VIE is generally limited to being
a derivative counterparty. As a net buyer of credit protection, in both static and managed
credit-related note structures, the Firm pays a premium to the VIE in return for the receipt of a
payment (up to the notional of the derivative) if one or more of the credits within the portfolio
defaults, or if the losses resulting from the default of reference credits exceed specified levels.
Since each CLN is established to the specifications of the investors, the investors have the power
over the activities of that VIE that most significantly affect the performance of the CLN.
Accordingly, the Firm does not generally consolidate these credit-related note entities.
Furthermore, the Firm does not have a variable interest that could potentially be significant. As a
derivative counterparty, the Firm has a senior claim on the collateral of the VIE and reports such
derivatives on its balance sheet at fair value. Substantially all of the assets purchased by such
VIEs are investment-grade.
Exposure to nonconsolidated credit-related note VIEs at December 31, 2010 and 2009, was as follows.
| Par value of | ||||||||||||||||
| Net derivative | Trading | Total | collateral | |||||||||||||
| December 31, 2010 (in billions) | receivables | assets (b) | exposure (c) | held by VIEs (d) | ||||||||||||
|
Credit-related notes
(a)
|
||||||||||||||||
|
Static structure
|
$ | 1.0 | $ | — | $ | 1.0 | $ | 9.5 | ||||||||
|
Managed structure
|
2.8 | — | 2.8 | 10.7 | ||||||||||||
|
Total
|
$ | 3.8 | $ | — | $ | 3.8 | $ | 20.2 | ||||||||
| Par value of | ||||||||||||||||
| Net derivative | Trading | Total | collateral | |||||||||||||
| December 31, 2009 (in billions) | receivables | assets (b) | exposure (c) | held by VIEs (d) | ||||||||||||
|
Credit-related notes
(a)
|
||||||||||||||||
|
Static structure
|
$ | 1.9 | $ | 0.7 | $ | 2.6 | $ | 10.8 | ||||||||
|
Managed structure
|
5.0 | 0.6 | 5.6 | 15.2 | ||||||||||||
|
Total
|
$ | 6.9 | $ | 1.3 | $ | 8.2 | $ | 26.0 | ||||||||
| (a) | Excluded collateral with a fair value of $142 million and $855 million at December 31, 2010 and 2009, respectively, which was consolidated, as the Firm, in its role as secondary market-maker, held a majority of the issued credit-related notes of certain vehicles. | |
| (b) | Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making. | |
| (c) | On–balance sheet exposure that includes net derivative receivables and trading assets – debt and equity instruments. | |
| (d) | The Firm’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives. The Firm relies on the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collateral is expected to be sufficient to pay amounts due under the derivative contracts. |
Asset swap vehicles
The Firm structures and executes transactions with asset swap vehicles on behalf of investors. In
such transactions, the VIE purchases a specific asset or assets and then enters into a derivative
with the Firm in order to tailor the interest rate or foreign exchange currency risk, or both,
according to investors’ requirements. Generally, the assets are
held by the VIE to maturity, and
the tenor of the derivatives would match the maturity of the assets. Investors typically invest in
the notes issued by such VIEs in order to obtain exposure to the credit risk of the specific
assets, as well as exposure to foreign exchange and interest rate risk that is tailored to their
specific needs. The derivative transaction between the Firm and the VIE may include currency swaps
| 252 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
to hedge assets held by the VIE denominated in foreign currency into the investors’ local currency
or interest rate swaps to hedge the interest rate risk of assets held by the VIE; to add additional
interest rate exposure into the VIE in order to increase the return
on the issued notes; or to
convert an interest-bearing asset into a zero-coupon bond.
The Firm’s exposure to asset swap vehicles is generally limited to its rights and obligations
under the interest rate and/or foreign exchange derivative contracts. The Firm historically has not
provided
any financial support to the asset swap vehicles over and above its contractual
obligations. The Firm does not generally consolidate these asset swap vehicles, since the Firm does
not have the power to direct the significant activities of these entities and does not have a
variable interest that could potentially be significant. As a derivative counterparty, the Firm has
a senior claim on the collateral of the VIE and reports such derivatives on its balance sheet at
fair value. Substantially all of the assets purchased by such VIEs are investment-grade.
Exposure to nonconsolidated asset swap VIEs at December 31, 2010 and 2009, was as follows.
| Net derivative | Trading | Total | Par value of collateral | |||||||||||||
| December 31, (in billions) | receivables | assets (b) | exposure (c) | held by VIEs (d) | ||||||||||||
|
2010
(a)
|
$ | 0.3 | $ | — | $ | 0.3 | $ | 7.6 | ||||||||
|
2009
(a)
|
0.1 | — | 0.1 | 10.2 | ||||||||||||
| (a) | Excluded the fair value of collateral of zero and $623 million at December 31, 2010 and 2009, respectively, which was consolidated as the Firm, in its role as secondary market-maker, held a majority of the issued notes of certain vehicles. | |
| (b) | Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making. | |
| (c) | On–balance sheet exposure that includes net derivative receivables and trading assets – debt and equity instruments. | |
| (d) | The Firm’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives. The Firm relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collateral is expected to be sufficient to pay amounts due under the derivative contracts. |
VIEs sponsored by third parties
Investment in a third-party credit card securitization trust
Investment in a third-party credit card securitization trust
The Firm holds two interests in a third-party-sponsored VIE, which is a credit card securitization
trust that owns credit card receivables issued by a national retailer. The Firm is not the primary
beneficiary of the trust, as the Firm does not have the power to direct the activities of the VIE
that most significantly impact the VIE’s economic performance. The first note is structured so that
the principal amount can float up to 47% of the principal amount of the receivables held by the
trust, not to exceed $4.2 billion. The Firm accounts for its investment at fair value within AFS
securities. At December 31, 2010 and 2009, the amortized cost of the note was $3.0 billion and $3.5
billion, respectively, and the fair value was $3.1 billion and $3.5 billion, respectively. The Firm
accounts for its other interest with the trust, which is not subject to the limits noted above, as
a loan at amortized cost. This senior loan had an amortized cost and fair value of approximately
$1.0 billion at both December 31, 2010 and 2009. For more information on AFS securities and loans,
see Notes 12 and 14 on pages 214–218 and 220–238, respectively, of this Annual Report.
VIE used in FRBNY transaction
In conjunction with the Bear Stearns merger, in June 2008, the Federal Reserve Bank of New York
(“FRBNY”) took control, through an LLC formed for this purpose, of a portfolio of $30.0 billion in
assets, based on the value of the portfolio as of March 14, 2008. The assets of the LLC were funded
by a $28.85 billion term loan from the FRBNY and a $1.15 billion subordinated loan from JPMorgan
Chase. The JPMorgan Chase loan is subordinated to the
FRBNY loan and will bear the first $1.15
billion of any losses of the portfolio. Any remaining assets in the portfolio after repayment of
the FRBNY loan, repayment of the JPMorgan Chase loan and the expense of the LLC will be for the
account of the FRBNY. The extent to which the FRBNY and JPMorgan Chase loans will be repaid will
depend on the value of the assets in the portfolio and the liquidation strategy directed by the
FRBNY. The Firm does not consolidate the LLC, as it does not have the power to direct the
activities of the VIE that most significantly impact the VIE’s economic performance. Prior to
January 1, 2010, the Firm did not consolidate the LLC in accordance with the accounting treatment
under prior consolidation accounting guidance since it did not have the obligation to absorb the
majority of the vehicle’s expected losses, receive a majority of the vehicle’s residual returns, or
both.
Other VIEs sponsored by third parties
The Firm enters into transactions with VIEs structured by other parties. These include, for
example, acting as a derivative counterparty, liquidity provider, investor, underwriter, placement
agent, trustee or custodian. These transactions are conducted at arm’s length, and individual credit
decisions are based on the analysis of the specific VIE, taking into consideration the quality of
the underlying assets. Where the Firm does not have the power to direct the activities of the VIE
that most significantly impact the VIE’s economic performance, or a variable interest that could
potentially be significant, the Firm records and reports these positions on its Consolidated
Balance Sheets similarly to the way it would record and report
positions in respect of any other third-party
transaction.
| JPMorgan Chase & Co. / 2010 Annual Report | 253 |
Table of Contents
Notes to consolidated financial statements
Consolidated VIE assets and liabilities
The following table presents information on assets and liabilities related to VIEs that are
consolidated by the Firm as of December 31, 2010 and 2009.
| Assets | Liabilities | |||||||||||||||||||||||||||
| Trading assets – | Beneficial | |||||||||||||||||||||||||||
| December 31, 2010 | debt and equity | Total | interests in | |||||||||||||||||||||||||
| (in billions) | instruments | Loans | Other (a) | assets (b) | VIE assets (c) | Other (d) | Total liabilities | |||||||||||||||||||||
|
VIE program type
|
||||||||||||||||||||||||||||
|
Firm-sponsored credit card trusts
|
$ | — | $ | 67.2 | $ | 1.3 | $ | 68.5 | $ | 44.3 | $ | — | $ | 44.3 | ||||||||||||||
|
Firm-administered multi-seller conduits
|
— | 21.1 | 0.6 | 21.7 | 21.6 | 0.1 | 21.7 | |||||||||||||||||||||
|
Mortgage securitization entities
|
1.8 | 2.9 | — | 4.7 | 2.4 | 1.6 | 4.0 | |||||||||||||||||||||
|
Other
|
8.0 | 4.4 | 1.6 | 14.0 | 9.3 | 0.3 | 9.6 | |||||||||||||||||||||
|
Total
|
$ | 9.8 | $ | 95.6 | $ | 3.5 | $ | 108.9 | $ | 77.6 | $ | 2.0 | $ | 79.6 | ||||||||||||||
| Assets | Liabilities | |||||||||||||||||||||||||||
| Trading assets – | Beneficial | |||||||||||||||||||||||||||
| December 31, 2009 | debt and equity | Total | interests in | |||||||||||||||||||||||||
| (in billions) | instruments | Loans | Other (a) | assets (b) | VIE assets (c) | Other (d) | Total liabilities | |||||||||||||||||||||
|
VIE program type
|
||||||||||||||||||||||||||||
|
Firm-sponsored credit card trusts
(e)
|
$ | — | $ | 6.1 | $ | 0.8 | $ | 6.9 | $ | 3.9 | $ | — | $ | 3.9 | ||||||||||||||
|
Firm-administered multi-seller conduits
|
— | 2.2 | 2.9 | 5.1 | 4.8 | — | 4.8 | |||||||||||||||||||||
|
Mortgage securitization entities
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Other
|
6.4 | 4.7 | 1.3 | 12.4 | 6.5 | 2.2 | 8.7 | |||||||||||||||||||||
|
Total
|
$ | 6.4 | $ | 13.0 | $ | 5.0 | $ | 24.4 | $ | 15.2 | $ | 2.2 | $ | 17.4 | ||||||||||||||
| (a) | Included assets classified as cash, resale agreements, derivative receivables, available-for-sale, and other assets within the Consolidated Balance Sheets. | |
| (b) | The assets of the consolidated VIEs included in the program types above are used to settle the liabilities of those entities. The difference between total assets and total liabilities recognized for consolidated VIEs represents the Firm’s interest in the consolidated VIEs for each program type. | |
| (c) | The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item on the Consolidated Balance Sheets titled, “Beneficial interests issued by consolidated variable interest entities.” The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase. Included in beneficial interests in VIE assets are long-term beneficial interests of $52.6 billion and $10.4 billion at December 31, 2010 and 2009, respectively. The maturities of the long-term beneficial interests as of December 31, 2010, were as follows: $13.9 billion under one year, $29.0 billion between one and five years, and $9.7 billion over five years. | |
| (d) | Included liabilities predominately classified as other liabilities as of December 31, 2010, and predominately classified as other liabilities and other borrowed funds as of December 31, 2009. | |
| (e) | Includes the receivables and related liabilities of the WMMT. For further discussion, see page 246 of this Note. |
Supplemental information on loan securitizations
For loan securitizations in which the Firm is not required to consolidate the trust, the Firm
records the transfer of the loan receivable to the trust as a sale when the accounting criteria for
a sale are met. Those criteria are: (1) the transferred financial assets are legally isolated from
the Firm’s creditors; (2) the transferee or beneficial interest holder can pledge or exchange the
transferred financial assets; and (3) the Firm does not maintain effective control over the
transferred financial assets (e.g., the Firm cannot repurchase the transferred assets before their
maturity and it does not have the ability to unilaterally cause the holder to return the
transferred assets).
For loan securitizations accounted for as a sale, the Firm recognizes a gain or loss based on the
difference between the value of proceeds received (including cash, beneficial interests, or
servicing assets received) and the carrying value of the assets sold. Gains and losses on
securitizations are reported in noninterest revenue. The value of the proceeds received is
determined under the Firm’s valuation policies described in Note 3 on pages 170–187 of this Annual
Report.
| 254 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The accounting for retained interests is dependent upon several factors, including the form and
economic characteristics of the retained interest. Interests retained by IB are classified as
trading assets. Interests retained in other business segments, including RFS and Corporate
Treasury, may be classified as AFS securities or trading assets. See Note 12 on pages 214–218 of
this Annual Report for more information on AFS securities.
Securitization activity
The following tables provide information related to the Firm’s securitization activities for the
years ended December 31, 2010, 2009 and 2008, related to assets held in JPMorgan Chase–
sponsored securitization entities that were not consolidated by the Firm for the periods presented.
For the years ended December 31, 2009 and 2008, there were no residential mortgage loans that were
securitized, and there were no cash flows from the Firm to the SPEs related to recourse or
guarantee arrangements. Effective January 1, 2010, all of the Firm-sponsored credit card, student
loan and auto securitization trusts were consolidated as a result of the accounting guidance
related to VIEs and, accordingly, are not included in the securitization activity tables below for
the year ended December 31, 2010.
| Year ended December 31, 2010 | Residential mortgage | Commercial | ||||||||||||||
| (in millions, except rates) | Prime (f)(h) | Subprime | Option ARMs | and other | ||||||||||||
|
Principal securitized
|
$ | 35 | $ | — | $ | — | $ | 2,237 | ||||||||
|
Pretax gains
|
— | — | — | — | (g) | |||||||||||
|
|
||||||||||||||||
|
All cash flows during the period
(a)
|
||||||||||||||||
|
Proceeds from new securitizations
(b)
|
$ | 36 | $ | — | $ | — | $ | 2,369 | ||||||||
|
Servicing fees collected
|
311 | 209 | 448 | 4 | ||||||||||||
|
Other cash flows received
|
— | — | — | — | ||||||||||||
|
Proceeds from collections reinvested in revolving securitizations
|
— | — | — | — | ||||||||||||
|
Purchases of previously transferred financial assets (or the underlying collateral)
(c)
|
211 | 109 | 1 | — | ||||||||||||
|
Cash flows received on the interests that continue to be held by the Firm
(d)
|
288 | 26 | 5 | 143 | ||||||||||||
|
Key assumptions used to measure retained interests originated during the year (rates per annum)
|
||||||||||||||||
|
Prepayment rate
(e)
|
— | 100 | % | |||||||||||||
|
|
CPR | |||||||||||||||
|
Weighted-average life (in years)
|
— | 7.1 | ||||||||||||||
|
Expected credit losses
|
— | — | % | |||||||||||||
|
Discount rate
|
— | 7.7 | % | |||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 255 |
Table of Contents
Notes to consolidated financial statements
| Year ended December 31, 2009 | Residential mortgage | Commercial | ||||||||||||||||||||||||||
| (in millions, except rates) | Credit card | Prime (f) | Subprime | Option ARMs | and other | Student | Auto | |||||||||||||||||||||
|
Principal securitized
|
$ | 26,538 | $ | — | $ | — | $ | — | $ | 500 | $ | — | $ | — | ||||||||||||||
|
Pretax gains
|
22 | — | — | — | — | (g) | — | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
All cash flows during the period
(a)
|
||||||||||||||||||||||||||||
|
Proceeds from new securitizations
(b)
|
$ | 26,538 | $ | — | $ | — | $ | — | $ | 542 | $ | — | $ | — | ||||||||||||||
|
Servicing fees collected
|
1,251 | 432 | 185 | 494 | 11 | 3 | 4 | |||||||||||||||||||||
|
Other cash flows received
|
5,000 | 7 | 4 | — | — | — | — | |||||||||||||||||||||
|
Proceeds from collections reinvested in revolving
securitizations
|
161,428 | — | — | — | — | — | — | |||||||||||||||||||||
|
Purchases of previously transferred financial assets
(or the underlying collateral)
(c)
|
— | 136 | — | 29 | — | — | 249 | |||||||||||||||||||||
|
Cash flows received on the interests that continue to
be held by the Firm
(d)
|
261 | 475 | 25 | 38 | 109 | 7 | 4 | |||||||||||||||||||||
|
Key assumptions used to measure retained
interests originated during the year (rates per annum) |
||||||||||||||||||||||||||||
|
Prepayment rate
(e)
|
16.7 | % | 100 | % | ||||||||||||||||||||||||
|
|
PPR | CPY | ||||||||||||||||||||||||||
|
Weighted-average life (in years)
|
0.5 | 9.0 | ||||||||||||||||||||||||||
|
Expected credit losses
|
8.9 | % | — | % | ||||||||||||||||||||||||
|
Discount rate
|
16.0 | % | 10.7 | % | ||||||||||||||||||||||||
| Year ended December 31, 2008 | Residential mortgage | Commercial | ||||||||||||||||||||||||||
| (in millions, except rates) | Credit card | Prime (f) | Subprime | Option ARMs | and other | Student | Auto | |||||||||||||||||||||
|
Principal securitized
|
$ | 21,390 | $ | — | $ | — | $ | — | $ | 1,023 | $ | — | $ | — | ||||||||||||||
|
Pretax gains
|
151 | — | — | — | — | (g) | — | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
All cash flows during the period
(a)
|
||||||||||||||||||||||||||||
|
Proceeds from new securitizations
(b)
|
$ | 21,389 | $ | — | $ | — | $ | — | $ | 989 | $ | — | $ | — | ||||||||||||||
|
Servicing fees collected
|
1,162 | 279 | 146 | 129 | 11 | 4 | 15 | |||||||||||||||||||||
|
Other cash flows received
|
4,985 | 23 | 16 | — | — | — | — | |||||||||||||||||||||
|
Proceeds from collections reinvested in revolving
securitizations
|
152,399 | — | — | — | — | — | — | |||||||||||||||||||||
|
Purchases of previously transferred financial assets
(or the underlying collateral)
(c)
|
— | 217 | 13 | 6 | — | — | 359 | |||||||||||||||||||||
|
Cash flows received on the interests that continue to
be held by the Firm
(d)
|
117 | 267 | 23 | 53 | 455 | — | 43 | |||||||||||||||||||||
|
Key assumptions used to measure retained
interests originated during the year (rates per annum) |
||||||||||||||||||||||||||||
|
Prepayment rate
(e)
|
19.1 | % | 1.5 | % | ||||||||||||||||||||||||
|
|
PPR | CPR | ||||||||||||||||||||||||||
|
Weighted-average life (in years)
|
0.4 | 2.1 | ||||||||||||||||||||||||||
|
Expected credit losses
|
4.6 | % | 1.5 | % | ||||||||||||||||||||||||
|
Discount rate
|
12.5 | % | 25.0 | % | ||||||||||||||||||||||||
| (a) | Excludes loan sales for which the Firm did not securitize (including loans sold to U.S. government agencies). | |
| (b) | Includes $36 million of proceeds from prime mortgage securitizations received as securities in 2010, $2.4 billion, $542 million, and $989 million from new securitizations of commercial and other in 2010, 2009 and 2008, respectively, and $12.8 billion and $5.5 billion from credit card in 2009 and 2008, respectively. These securities were primarily classified as level 2 of the fair value measurement hierarchy. | |
| (c) | Includes cash paid by the Firm to reacquire assets from the off–balance sheet, nonconsolidated entities – for example, servicer clean-up calls. | |
| (d) | Includes cash flows received on retained interests – including, for example, principal repayments and interest payments. | |
| (e) | PPR: principal payment rate; CPR: constant prepayment rate; CPY: constant prepayment yield. | |
| (f) | Includes Alt-A loans and re-securitization transactions. | |
| (g) | The Firm elected the fair value option for loans pending securitization. The carrying value of these loans accounted for at fair value approximated the proceeds received from securitization. | |
| (h) | There were no retained interests held in the residential mortgage securitization completed in 2010. |
| 256 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Loans sold to U.S. government agencies and other third-party sponsored securitization entities
In addition to the amounts reported in the securitization activity tables above, the Firm, in the
normal course of business, sells originated and purchased mortgage loans, predominantly to U.S.
government agencies. These loans are sold primarily for the purpose of securitization by U.S.
government agencies, which also provide credit enhancement of the loans through certain guarantee
provisions. In connection with these loan sales, the Firm makes certain representations and
warranties. For additional information about the Firm’s loan sale- and securitization-related
indemnifications, see Note 30 on pages 275–280 of this Annual Report.
The Firm generally retains the right to service the mortgage loans in accordance with the
respective servicing guidelines and standards, and records a servicing asset at the time of sale.
The following table summarizes these loan sale activities.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Carrying value of loans sold
(a)(b)
|
$ | 156,615 | $ | 154,571 | $ | 132,111 | ||||||
|
Proceeds received from loan sales as cash
|
3,887 | 1,702 | 7,112 | |||||||||
|
Proceeds received from loan sales as securities
(c)
|
149,786 | 149,343 | 121,947 | |||||||||
|
Total proceeds received from loan sales
|
$ | 153,673 | $ | 151,045 | $ | 129,059 | ||||||
|
Gains on loan sales
|
212 | 89 | 30 | |||||||||
| (a) | Predominantly to U.S. government agencies. | |
| (b) | MSRs were excluded from the above table. See Note 17 on pages 260–263 of this Annual Report for further information on originated MSRs. | |
| (c) | Predominantly includes securities from U.S. government agencies that are generally sold shortly after receipt. |
The Firm has the option to repurchase certain loans sold to U.S. government agencies
(predominantly loans securitized in Ginnie Mae pools) if they reach certain delinquency triggers.
Once the delinquency trigger has been met, regardless of whether the repurchase option has been
exercised, the Firm recognizes the loan on the Consolidated Balance Sheet. The Firm also recognizes
an offsetting liability in accounts payable and other liabilities for any loans subject to the
repurchase option, but for which the option to repurchase has not been exercised.
As of December
31, 2010 and 2009, loans repurchased or with the option to repurchase were $13.0 billion and $10.8
billion, respectively. Additionally, real estate owned resulting from repurchases of loans sold to
U.S. government agencies was $1.9 billion and $579 million as of December 31, 2010 and 2009,
respectively. Substantially all of these loans and real estate continue to be insured or guaranteed by U.S. government
agencies and, where applicable, reimbursement is proceeding normally.
JPMorgan Chase’s interests in Firm-sponsored securitized assets
The following table summarizes the Firm’s interests in Firm-sponsored non-consolidated
securitizations, which are carried at fair value on the Firm’s Consolidated Balance Sheets at
December 31, 2010 and 2009. The risk ratings are periodically reassessed as information becomes
available. As of December 31, 2010 and 2009, 66% and 76%, respectively, of the Firm’s retained
securitization interests in Firm-sponsored securitizations were risk-rated “A” or better.
| Ratings profile of interests held (b)(c)(d) | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| Investment- | Noninvestment- | Retained | Investment- | Noninvestment- | Retained | |||||||||||||||||||
| December 31, (in billions) | grade | grade | interests | grade | grade | interests (e) | ||||||||||||||||||
|
Asset types
|
||||||||||||||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||
|
Prime
(a)
|
$ | 0.2 | $ | 0.5 | $ | 0.7 | $ | 0.7 | $ | 0.4 | $ | 1.1 | ||||||||||||
|
Subprime
|
— | — | — | — | — | — | ||||||||||||||||||
|
Option ARMs
|
— | — | — | 0.1 | — | 0.1 | ||||||||||||||||||
|
Commercial and other
|
2.6 | 0.3 | 2.9 | 2.2 | 0.2 | 2.4 | ||||||||||||||||||
|
Total
|
$ | 2.8 | $ | 0.8 | $ | 3.6 | $ | 3.0 | $ | 0.6 | $ | 3.6 | ||||||||||||
| (a) | Includes retained interests in Alt-A loans and re-securitization transactions. | |
| (b) | The ratings scale is presented on an S&P-equivalent basis. | |
| (c) | Includes $315 million and $139 million of investments acquired in the secondary market, but predominantly held for investment purposes, as of December 31, 2010 and 2009, respectively. Of this amount, $276 million and $108 million is classified as investment-grade as of December 31, 2010 and 2009, respectively. | |
| (d) | Excludes senior and subordinated securities of $200 million and $875 million at December 31, 2010 and 2009, respectively, which the Firm purchased in connection with IB’s secondary market-making activities. | |
| (e) | Excludes $49 million of retained interests in student loans at December 31, 2009. |
| JPMorgan Chase & Co. / 2010 Annual Report | 257 |
Table of Contents
Notes to consolidated financial statements
The table below outlines the key economic assumptions used to determine the fair value as of
December 31, 2010 and 2009, of certain of the Firm’s retained interests in nonconsolidated
Firm-sponsored securitizations, other than MSRs, that are valued using modeling techniques. The
table below also outlines the sensitivities of those fair values to immediate 10% and 20% adverse
changes in assumptions used to determine fair value. For a discussion of MSRs, see Note 17 on pages
260–263 of this Annual Report.
| December 31, 2010 | Residential mortgage | Commercial | ||||||||||||||
| (in millions, except rates and where otherwise noted) | Prime (b) | Subprime | Option ARMs | and other (g) | ||||||||||||
|
JPMorgan Chase interests in securitized assets
(a)(c)
|
$ | 708 | $ | 14 | $ | 29 | $ | 2,906 | ||||||||
|
Weighted-average life (in years)
|
5.5 | 6.6 | 7.7 | 3.3 | ||||||||||||
|
Weighted-average constant prepayment rate
(d)
|
7.9 | % | 5.7 | % | 8.4 | % | — | % | ||||||||
|
|
CPR | CPR | CPR | CPR | ||||||||||||
|
Impact of 10% adverse change
|
$ | (15 | ) | $ | — | $ | — | $ | — | |||||||
|
Impact of 20% adverse change
|
(27 | ) | (1 | ) | (1 | ) | — | |||||||||
|
Weighted-average loss assumption
|
5.2 | % | 16.2 | % | 30.0 | % | 2.1 | % | ||||||||
|
|
||||||||||||||||
|
Impact of 10% adverse change
|
$ | (12 | ) | $ | (1 | ) | $ | — | $ | (76 | ) | |||||
|
Impact of 20% adverse change
|
(21 | ) | (2 | ) | (1 | ) | (151 | ) | ||||||||
|
|
||||||||||||||||
|
Weighted-average discount rate
|
11.6 | % | 10.7 | % | 6.3 | % | 16.4 | % | ||||||||
|
Impact of 10% adverse change
|
$ | (26 | ) | $ | — | $ | (1 | ) | $ | (69 | ) | |||||
|
Impact of 20% adverse change
|
(47 | ) | (1 | ) | (2 | ) | (134 | ) | ||||||||
| December 31, 2009 | ||||||||||||||||||||||||||||
| (in millions, except rates and where | Residential mortgage | Commercial | ||||||||||||||||||||||||||
| otherwise noted) | Credit card (e) | Prime (b) | Subprime | Option ARMs | and other (g) | Student | Auto | |||||||||||||||||||||
|
JPMorgan Chase interests in securitized assets
(c)
|
$ | 4,016 | $ | 1,143 | $ | 27 | $ | 113 | $ | 2,361 | $ | 51 | $ | 9 | ||||||||||||||
|
Weighted-average life (in years)
|
0.6 | 8.3 | 4.3 | 5.1 | 3.5 | 8.1 | 0.6 | |||||||||||||||||||||
|
Weighted-average constant prepayment rate
(d)
|
14.3 | % | 4.9 | % | 21.8 | % | 15.7 | % | — | % | 5.0 | % | 1.4 | % | ||||||||||||||
|
|
PPR | CPR | CPR | CPR | CPR | CPR | ABS | |||||||||||||||||||||
|
Impact of 10% adverse change
|
$ | (1 | ) | $ | (15 | ) | $ | (2 | ) | $ | — | $ | — | $ | (1 | ) | $ | — | ||||||||||
|
Impact of 20% adverse change
|
(2 | ) | (31 | ) | (3 | ) | (1 | ) | — | (2 | ) | (1 | ) | |||||||||||||||
|
Weighted-average loss assumption
|
6.8 | % | 3.2 | % | 2.7 | % | 0.7 | % | 1.4 | % | — | % (f) | 0.8 | % | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Impact of 10% adverse change
|
$ | (1 | ) | $ | (15 | ) | $ | (4 | ) | $ | — | $ | (41 | ) | $ | — | $ | — | ||||||||||
|
Impact of 20% adverse change
|
(3 | ) | (29 | ) | (7 | ) | — | (100 | ) | — | — | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Weighted-average discount rate
|
12.0 | % | 11.4 | % | 23.2 | % | 5.4 | % | 12.5 | % | 9.0 | % | 2.8 | % | ||||||||||||||
|
Impact of 10% adverse change
|
$ | (10 | ) | $ | (41 | ) | $ | (2 | ) | $ | (1 | ) | $ | (72 | ) | $ | (2 | ) | $ | — | ||||||||
|
Impact of 20% adverse change
|
(20 | ) | (82 | ) | (4 | ) | (3 | ) | (139 | ) | (4 | ) | — | |||||||||||||||
| (a) | Effective January 1, 2010, all of the Firm-sponsored credit card, student loan and auto securitization trusts were consolidated as a result of the accounting guidance related to VIEs and, accordingly, are not included in the table above for the year ended December 31, 2010. | |
| (b) | Includes retained interests in Alt-A and re-securitization transactions. | |
| (c) | Includes certain investments acquired in the secondary market but predominantly held for investment purposes. | |
| (d) | PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate. | |
| (e) | Excludes the Firm’s retained senior and subordinated AFS securities in its credit card securitization trusts, which are discussed on pages 245–246 of this Note. | |
| (f) | Expected losses for student loans securitizations are minimal and are incorporated into other assumptions. | |
| (g) | The anticipated credit losses, including expected static pool losses, are immaterial for the Firm’s retained interests on commercial and other securitizations that had occurred during 2010, 2009 and 2008. |
The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based on
a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the
relationship of the change in the assumptions to the change in fair value may not be linear. Also,
in the table, the effect that a change in a particular assumption may have on the fair value is
calculated without changing any other assumption. In reality, changes in one factor may result in
changes in another, which might counteract or magnify the sensitivities. The above sensitivities
also do not reflect risk management practices the Firm may undertake to mitigate such risks.
| 258 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Loan delinquencies and net charge-offs
The table below includes information about delinquencies, net charge-offs and components of
off–balance sheet securitized financial assets as of December 31, 2010 and 2009.
| 90 days past due | ||||||||||||||||||||||||||||||||
| As of or for the year ended | Credit exposure | and still accruing | Nonaccrual loans | Net loan charge-offs (d) | ||||||||||||||||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Securitized
loans
(a)
|
||||||||||||||||||||||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||||||
|
Prime mortgage
(b)
|
$ | 143,764 | $ | 171,547 | $ | — | $ | — | $ | 33,093 | $ | 33,838 | $ | 6,257 | $ | 9,333 | ||||||||||||||||
|
Subprime mortgage
|
40,721 | 47,261 | — | — | 15,456 | 19,505 | 3,598 | 7,123 | ||||||||||||||||||||||||
|
Option ARMs
|
35,786 | 41,983 | — | — | 10,788 | 10,973 | 2,305 | 2,287 | ||||||||||||||||||||||||
|
Commercial and other
|
106,245 | 24,799 | — | — | 5,791 | 1,244 | 618 | 15 | ||||||||||||||||||||||||
|
Credit card
|
NA | 84,626 | NA | 2,385 | NA | — | NA | 6,443 | ||||||||||||||||||||||||
|
Student
|
NA | 1,008 | NA | 64 | NA | — | NA | 1 | ||||||||||||||||||||||||
|
Automobile
|
NA | 218 | NA | — | NA | 1 | NA | 4 | ||||||||||||||||||||||||
|
Total
loans securitized
(c)
|
$ | 326,516 | $ | 371,442 | $ | — | $ | 2,449 | $ | 65,128 | $ | 65,561 | $ | 12,778 | $ | 25,206 | ||||||||||||||||
| (a) | Total assets held in securitization-related SPEs, including credit card securitization trusts, were $391.1 billion and $545.2 billion at December 31, 2010 and 2009, respectively. The $326.5 billion and $371.4 billion of loans securitized at December 31, 2010 and 2009, respectively, excludes: $56.0 billion and $145.0 billion of securitized loans in which the Firm has no continuing involvement, zero and $16.7 billion of seller’s interests in credit card master trusts, zero and $8.3 billion of cash amounts on deposit and escrow accounts, and $8.6 billion and $3.8 billion of loan securitizations consolidated on the Firm’s Consolidated Balance Sheets at December 31, 2010 and 2009, respectively. | |
| (b) | Includes Alt-A loans. | |
| (c) | Includes securitized loans that were previously recorded at fair value and classified as trading assets. | |
| (d) | Net charge-offs represent losses realized upon liquidation of the assets held by off–balance sheet securitization entities. |
| JPMorgan Chase & Co. / 2010 Annual Report | 259 |
Table of Contents
Notes to consolidated financial statements
Goodwill and other intangible assets consist of the following.
| December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Goodwill
|
$ | 48,854 | $ | 48,357 | $ | 48,027 | ||||||
|
Mortgage
servicing rights
|
13,649 | 15,531 | 9,403 | |||||||||
|
Other
intangible assets
|
||||||||||||
|
Purchased credit card relationships
|
$ | 897 | $ | 1,246 | $ | 1,649 | ||||||
|
Other credit card–related intangibles
|
593 | 691 | 743 | |||||||||
|
Core deposit intangibles
|
879 | 1,207 | 1,597 | |||||||||
|
Other intangibles
|
1,670 | 1,477 | 1,592 | |||||||||
|
Total other intangible assets
|
$ | 4,039 | $ | 4,621 | $ | 5,581 | ||||||
Goodwill
Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of the net assets acquired. Subsequent to initial recognition, goodwill is not amortized but is tested for impairment during the fourth quarter of each fiscal year, or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment.
Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of the net assets acquired. Subsequent to initial recognition, goodwill is not amortized but is tested for impairment during the fourth quarter of each fiscal year, or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment.
The goodwill associated with each business combination is allocated to the related reporting units,
which are determined based on how the Firm’s businesses are managed and how they are reviewed by
the Firm’s Operating Committee. The following table presents goodwill attributed to the business
segments.
| December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Investment Bank
|
$ | 5,278 | $ | 4,959 | $ | 4,765 | ||||||
|
Retail Financial Services
|
16,813 | 16,831 | 16,840 | |||||||||
|
Card Services
|
14,205 | 14,134 | 13,977 | |||||||||
|
Commercial Banking
|
2,866 | 2,868 | 2,870 | |||||||||
|
Treasury & Securities Services
|
1,680 | 1,667 | 1,633 | |||||||||
|
Asset Management
|
7,635 | 7,521 | 7,565 | |||||||||
|
Corporate/Private Equity
|
377 | 377 | 377 | |||||||||
|
Total goodwill
|
$ | 48,854 | $ | 48,357 | $ | 48,027 | ||||||
The following table presents changes in the carrying amount of goodwill.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Beginning balance at January 1,
(a)
:
|
$ | 48,357 | $ | 48,027 | $ | 45,270 | ||||||
|
Changes from:
|
||||||||||||
|
Business combinations
|
556 | 271 | 2,481 | |||||||||
|
Dispositions
|
(19 | ) | — | (38 | ) | |||||||
|
Other
(b)
|
(40 | ) | 59 | 314 | ||||||||
|
Balance at December 31,
(a)
|
$ | 48,854 | $ | 48,357 | $ | 48,027 | ||||||
| (a) | Reflects gross goodwill balances as the Firm has not recognized any impairment losses to date. | |
| (b) | Includes foreign currency translation adjustments and other tax-related adjustments. |
The increase in goodwill during 2010 was largely due to the acquisition of the RBS Sempra Commodities
business in IB, and the purchase of a majority interest in Gávea Investimentos, a leading
alternative asset management company in Brazil, by AM. The increase in goodwill during 2009 was
primarily due to final purchase accounting adjustments related to the Bear Stearns merger and the
acquisition of a commodities business (each primarily allocated to IB), and foreign currency
translation adjustments related to the Firm’s credit card business, partially offset by accounting
adjustments associated with the Bear Stearns and Bank One mergers. The increase in goodwill during
2008 was primarily due to the dissolution of the Chase Paymentech Solutions joint venture
(allocated to Card Services), the merger with Bear Stearns, the purchase of an additional equity
interest in Highbridge and tax-related purchase accounting adjustments
associated with the Bank One
merger (which were primarily attributed to IB).
Impairment Testing
Goodwill was not impaired at December 31, 2010 or 2009, nor was any goodwill written off due to impairment during 2010, 2009 or 2008.
Goodwill was not impaired at December 31, 2010 or 2009, nor was any goodwill written off due to impairment during 2010, 2009 or 2008.
The goodwill impairment test is performed in two steps. In the first step, the current fair value
of each reporting unit is compared with its carrying value, including goodwill. If the fair value
is in excess of the carrying value (including goodwill), then the reporting unit’s goodwill is
considered not to be impaired. If the fair value is less than the carrying value (including
goodwill), then a second step is performed. In the second step, the implied current fair value of
the reporting unit’s goodwill is determined by comparing the fair value of the reporting unit (as
determined in step one) to the fair value of the net assets of the reporting unit, as if the
reporting unit were being acquired in a business combination. The resulting implied current fair
value of goodwill is then compared with the carrying value of the reporting unit’s goodwill. If the
carrying value of the goodwill exceeds its implied current fair value, then an impairment charge is
recognized for the excess. If the carrying value of goodwill is less than its implied current fair
value, then no goodwill impairment is recognized.
The primary method the Firm uses to estimate the fair value of its reporting units is the income
approach.
The models project cash flows for the forecast period and use the perpetuity growth
method to calculate terminal values. These cash flows and terminal values are then discounted using
an appropriate discount rate. Projections of cash flows are based on the reporting units’ earnings
forecasts, which include the estimated effects of regulatory and legislative changes (including,
but not limited to the Dodd-Frank Act, the CARD Act, and limitations on non-sufficient funds and overdraft fees).
These forecasts are also reviewed with the Operating Committee of the Firm. The Firm’s cost of
equity is determined using the Capital Asset Pricing Model, which is consistent with methodologies
and assumptions the Firm uses when advising clients in third party transactions. The discount rate
used for each reporting unit represents an estimate of the cost of equity capital for that
reporting unit and is determined based on the Firm’s overall cost of equity, as adjusted for the
risk characteristics specific to each reporting unit (for example, for higher levels of risk or
uncertainty associated with the business or management’s forecasts and assumptions). To assess the
reasonableness of the discount rates used for each reporting unit, management compares the discount
rate to the estimated cost of equity for publicly traded institutions with similar businesses and
risk characteristics. In addition, the weighted average cost of equity (aggregating the various
reporting units) is compared with the Firms’ overall cost of equity to ensure reasonableness.
The valuations derived from the discounted cash flow models are then compared with market-based
trading and transaction multiples for relevant competitors. Precise conclusions generally can not
be drawn from these comparisons due to the differences that naturally exist between the Firm’s
businesses and competitor insti-
| 260 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
tutions. However, trading and transaction comparables are used as
general indicators to assess the general reasonableness of the estimated fair values. Management
also takes into consideration a comparison between the aggregate fair value of the Firm’s reporting
units and JPMorgan Chase’s market capitalization. In evaluating this comparison, management
considers several factors, including (a) a control premium that would exist in a market
transaction, (b) factors related to the level of execution risk that would exist at the firm-wide
level that do not exist at the reporting unit level and (c) short-term market volatility and other
factors that do not directly affect the value of individual reporting units.
While no impairment of goodwill was recognized during 2010, the Firm’s consumer lending businesses
in RFS and CS remain at elevated risk of goodwill impairment due to their exposure to U.S. consumer
credit risk and the effects of regulatory and legislative changes. The valuation of these
businesses is particularly dependent upon economic conditions (including new unemployment claims
and home prices), and regulatory and legislative changes that may affect consumer credit card use.
The assumptions used in the discounted cash flow model were
determined using management’s best estimates. The cost of equity reflected the related risk
and uncertainty, and was evaluated in comparison to relevant market peers. Deterioration in these
assumptions could cause the estimated fair values of these reporting units and their associated
goodwill to decline, which may result in a material impairment charge to earnings in a future
period related to some portion of the associated goodwill.
Mortgage servicing rights
Mortgage servicing rights represent the fair value of future cash flows for performing specified mortgage servicing activities (predominantly with respect to residential mortgage) for others. MSRs are either purchased from third parties or retained upon sale or securitization of mortgage loans. Servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to the investors of the mortgage-backed securities.
Mortgage servicing rights represent the fair value of future cash flows for performing specified mortgage servicing activities (predominantly with respect to residential mortgage) for others. MSRs are either purchased from third parties or retained upon sale or securitization of mortgage loans. Servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to the investors of the mortgage-backed securities.
JPMorgan Chase made the determination to treat its MSRs as one class of servicing assets based on
the availability of market inputs used to measure its MSR asset at fair value and its treatment of
MSRs as one aggregate pool for risk management purposes. As permitted by U.S. GAAP, the Firm
elected to account for this one class of servicing assets at fair value.
The Firm estimates the
fair value of MSRs using an option-adjusted spread model (“OAS”), which projects MSR cash flows
over multiple interest rate scenarios in conjunction with the
Firm’s prepayment model, and then
discounts these cash flows at risk-adjusted rates. The model considers portfolio characteristics,
contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges,
other ancillary revenue and costs to service, and other economic factors. The Firm reassesses and
periodically adjusts the underlying inputs and assumptions used in the OAS model to reflect market
conditions
and assumptions that a market participant would consider in valuing the MSR asset.
During 2010 and 2009, the Firm continued to refine its proprietary prepayment model based on a
number of market-related factors, including a downward trend in home prices, general tightening of
credit underwriting standards and the associated impact on refinancing activity. The Firm compares
fair value estimates and assumptions to observable market data where available, and to recent
market activity and actual portfolio experience.
The fair value of MSRs is sensitive to changes in interest rates, including their effect on
prepayment speeds. JPMorgan Chase uses combinations of derivatives and securities to manage changes
in the fair value of MSRs. The intent is to offset any changes in the fair value of MSRs with
changes in the fair value of the related risk management instruments. MSRs decrease in value when
interest rates decline. Conversely, securities (such as mortgage-backed securities), principal-only
certificates and certain derivatives (when the Firm receives fixed-rate interest payments) increase
in value when interest rates decline.
The following table summarizes MSR activity for the years ended December 31, 2010, 2009 and 2008.
| Year ended December 31, | ||||||||||||
| (in millions, except where otherwise noted) | 2010 | 2009 | 2008 | |||||||||
|
Fair value at beginning of period
|
$ | 15,531 | $ | 9,403 | $ | 8,632 | ||||||
|
MSR activity
|
||||||||||||
|
Originations of MSRs
|
3,153 | 3,615 | 3,061 | |||||||||
|
Purchase of MSRs
|
26 | 2 | 6,755 | (f) | ||||||||
|
Disposition of MSRs
|
(407 | ) | (10 | ) | – | |||||||
|
Total net additions
|
2,772 | 3,607 | 9,816 | |||||||||
|
Change in valuation due to inputs and assumptions
(a)
|
(2,268 | ) | 5,807 | (6,933 | ) | |||||||
|
Other changes in fair value
(b)
|
(2,386 | ) | (3,286 | ) | (2,112 | ) | ||||||
|
Total change in fair value of
MSRs
(c)
|
(4,654 | ) | 2,521 | (9,045 | ) | |||||||
|
Fair value at December 31
(d)
|
$ | 13,649 | $ | 15,531 | $ | 9,403 | ||||||
|
Change in unrealized gains/ (losses) included in
income related to MSRs held at December 31
|
$ | (2,268 | ) | $ | 5,807 | $ | (6,933 | ) | ||||
|
Contractual service fees, late fees and other
ancillary fees included
in income
|
$ | 4,484 | $ | 4,818 | $ | 3,353 | ||||||
|
Third-party mortgage loans serviced at December 31
(in billions)
|
$ | 976 | $ | 1,091 | $ | 1,185 | ||||||
|
Servicer advances, net at December 31 (in billions)
(e)
|
$ | 9.9 | $ | 7.7 | $ | 5.2 | ||||||
| (a) | Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model. “Total realized/unrealized gains/(losses)” columns in the Changes in level 3 recurring fair value measurements tables in Note 3 on pages 170–187 of this Annual Report include these amounts. | |
| (b) | Includes changes in MSR value due to modeled servicing portfolio runoff (or time decay). “Purchases, issuances, settlements, net” columns in the Changes in level 3 recurring fair value measurements tables in Note 3 on pages 170–187 of this Annual Report include these amounts. | |
| (c) | Includes changes related to commercial real estate of $(1) million, $(4) million and $(4) million for the years ended December 31, 2010, 2009 and 2008, respectively. | |
| (d) | Includes $40 million, $41 million and $55 million related to commercial real estate at December 31, 2010, 2009 and 2008, respectively. | |
| (e) | Represents amounts the Firm pays as the servicer (e.g., scheduled principal and interest to a trust, taxes and insurance), which will generally be reimbursed within a short period of time after the advance from future cash flows from the trust or the underlying loans. The Firm’s credit risk associated with these advances is minimal because reimbursement of the advances is senior to all cash payments to investors. In addition, the Firm maintains the right to stop payment if the collateral is insufficient to cover the advance. |
| JPMorgan Chase & Co. / 2010 Annual Report | 261 |
Table of Contents
Notes to consolidated financial statements
| (f) | Includes MSRs acquired as a result of the Washington Mutual transaction (of which $59 million related to commercial real estate) and the Bear Stearns merger. For further discussion, see Note 2 on pages 166–170 of this Annual Report. |
The following table presents the components of mortgage fees and related income (including the
impact of MSR risk management activities) for the years ended December 31, 2010, 2009 and 2008.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
RFS mortgage fees and related income
|
||||||||||||
|
Net production revenue:
|
||||||||||||
|
Production revenue
|
$ | 3,440 | $ | 2,115 | $ | 1,150 | ||||||
|
Repurchase losses
|
(2,912 | ) | (1,612 | ) | (252 | ) | ||||||
|
Net production revenue
|
528 | 503 | 898 | |||||||||
|
Net
mortgage servicing revenue
|
||||||||||||
|
Operating revenue:
|
||||||||||||
|
Loan servicing revenue
|
4,575 | 4,942 | 3,258 | |||||||||
|
Other changes in MSR asset
fair value
(a)
|
(2,384 | ) | (3,279 | ) | (2,052 | ) | ||||||
|
Total
operating revenue
|
2,191 | 1,663 | 1,206 | |||||||||
|
Risk management:
|
||||||||||||
|
Changes in MSR asset fair
value due to inputs or
assumptions in model
(b)
|
(2,268 | ) | 5,804 | (6,849 | ) | |||||||
|
Derivative valuation adjust-
ments and other
|
3,404 | (4,176 | ) | 8,366 | ||||||||
|
Total
risk management
|
1,136 | 1,628 | 1,517 | |||||||||
|
Total RFS net mortgage servicing revenue
|
3,327 | 3,291 | 2,723 | |||||||||
|
All other
(c)
|
15 | (116 | ) | (154 | ) | |||||||
|
Mortgage fees and related income
|
$ | 3,870 | $ | 3,678 | $ | 3,467 | ||||||
| (a) | Includes changes in the MSR value due to modeled servicing portfolio runoff (or time decay). “Purchases, issuances, settlements, net” columns in the Changes in level 3 recurring fair value measurements tables in Note 3 on pages 170–187 of this Annual Report include these amounts. |
| (b) | Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model. “Total realized/unrealized gains/(losses)” columns in the Changes in level 3 recurring fair value measurements tables in Note 3 on pages 170–187 of this Annual Report include these amounts. | |
| (c) | Primarily represents risk management activities performed by the Chief Investment Office (“CIO”) in the Corporate sector. |
The table below outlines the key economic assumptions used to determine the fair value of the
Firm’s MSRs at December 31, 2010 and 2009; and it outlines the sensitivities of those fair values
to immediate adverse changes in those assumptions, as defined below.
| Year ended December 31, | ||||||||
| (in millions, except rates) | 2 010 | 2009 | ||||||
|
Weighted-average prepayment speed
assumption (CPR)
|
11.29 | % | 11.37 | % | ||||
|
Impact on fair value of 10% adverse change
|
$ | (809 | ) | $ | (896 | ) | ||
|
Impact on fair value of 20% adverse change
|
(1,568 | ) | (1,731 | ) | ||||
|
Weighted-average option adjusted spread
|
3.94 | % | 4.63 | % | ||||
|
Impact on fair value of 100 basis points
adverse change
|
$ | (578 | ) | $ | (641 | ) | ||
|
Impact on fair value of 200 basis points
adverse change
|
(1,109 | ) | (1,232 | ) | ||||
| CPR: | Constant prepayment rate. |
The sensitivity analysis in the preceding table is hypothetical and should be used with caution.
Changes in fair value based on variation in assumptions generally cannot be easily extrapolated,
because the relationship of the change in the assumptions to the change in fair value may not be
linear. Also, in this table, the effect that a change in a particular assumption may have on the
fair value is calculated without changing any other assumption. In reality, changes in one factor
may result in changes in another, which might magnify or counteract the sensitivities.
Other intangible assets
Other intangible assets are recorded at their fair value upon completion of a business combination or certain other transactions, and generally represent the value of customer relationships or arrangements. Subsequently, the Firm’s intangible assets with finite lives, including core deposit intangibles, purchased credit card relationships, and other intangible assets, are amortized over their useful lives in a manner that best reflects the economic benefits of the intangible asset. The decrease in other intangible assets during 2010 was predominantly due to amortization, partially offset by an increase resulting from the aforementioned Gávea Investimentos transaction.
Other intangible assets are recorded at their fair value upon completion of a business combination or certain other transactions, and generally represent the value of customer relationships or arrangements. Subsequently, the Firm’s intangible assets with finite lives, including core deposit intangibles, purchased credit card relationships, and other intangible assets, are amortized over their useful lives in a manner that best reflects the economic benefits of the intangible asset. The decrease in other intangible assets during 2010 was predominantly due to amortization, partially offset by an increase resulting from the aforementioned Gávea Investimentos transaction.
The components of credit card relationships, core deposits and other intangible assets were as
follows.
| 2010 | 2009 | |||||||||||||||||||||||
| Net | Net | |||||||||||||||||||||||
| Gross | Accumulated | carrying | Gross | Accumulated | carrying | |||||||||||||||||||
| December 31, (in millions) | amount | amortization | value | amount | amortization | value | ||||||||||||||||||
|
Purchased credit card relationships
|
$ | 5,789 | $ | 4,892 | $ | 897 | $ | 5,783 | $ | 4,537 | $ | 1,246 | ||||||||||||
|
Other credit card–related intangibles
|
907 | 314 | 593 | 894 | 203 | 691 | ||||||||||||||||||
|
Core deposit intangibles
|
4,280 | 3,401 | 879 | 4,280 | 3,073 | 1,207 | ||||||||||||||||||
|
Other intangibles
|
2,515 | 845 | 1,670 | 2,200 | 723 | 1,477 | ||||||||||||||||||
| 262 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Amortization expense
Intangible assets of approximately $600 million, consisting primarily of asset management advisory contracts, were determined to have an indefinite life and are not amortized.
Intangible assets of approximately $600 million, consisting primarily of asset management advisory contracts, were determined to have an indefinite life and are not amortized.
The following table presents amortization expense related to credit card relationships, core
deposits and all other intangible assets.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Purchased credit card relationships
|
$ | 355 | $ | 421 | $ | 625 | ||||||
|
All other intangibles:
|
||||||||||||
|
Other credit card–related intangibles
|
111 | 94 | 33 | |||||||||
|
Core deposit intangibles
|
328 | 390 | 469 | |||||||||
|
Other intangibles
|
142 | 145 | 136 | |||||||||
|
Total amortization expense
|
$ | 936 | $ | 1,050 | $ | 1,263 | ||||||
Future amortization expense
The following table presents estimated future amortization expense related to credit card relationships, core deposits and all other intangible assets at December 31, 2010.
The following table presents estimated future amortization expense related to credit card relationships, core deposits and all other intangible assets at December 31, 2010.
| Other credit | ||||||||||||||||||||
| Purchased credit | card-related | Core deposit | All other | |||||||||||||||||
| Year ended December 31, (in millions) | card relationships | intangibles | intangibles | intangible assets | Total | |||||||||||||||
|
2011
|
$ | 294 | $ | 103 | $ | 284 | $ | 116 | $ | 797 | ||||||||||
|
2012
|
254 | 106 | 240 | 111 | 711 | |||||||||||||||
|
2013
|
213 | 103 | 195 | 108 | 619 | |||||||||||||||
|
2014
|
109 | 102 | 100 | 94 | 405 | |||||||||||||||
|
2015
|
23 | 95 | 25 | 76 | 219 | |||||||||||||||
Impairment testing
The Firm’s intangible assets are tested for impairment if events or changes in circumstances indicate that the asset might be impaired, and, for intangible assets with indefinite lives, on an annual basis.
The Firm’s intangible assets are tested for impairment if events or changes in circumstances indicate that the asset might be impaired, and, for intangible assets with indefinite lives, on an annual basis.
The impairment test for a finite-lived intangible asset compares the undiscounted cash flows
associated with the use or disposition of the intangible asset to its carrying value. If the sum of
the undiscounted cash flows exceeds its carrying value, then no impairment charge is recorded. If
the sum of the undiscounted cash flows is less than its carrying value, then an impairment charge
is recognized to the extent the carrying amount of the asset exceeds its fair value.
The impairment test for indefinite-lived intangible assets compares the fair value of the
intangible asset to its carrying amount. If the carrying value exceeds the fair value, then an
impairment charge is recognized for the difference.
Premises and equipment, including leasehold improvements, are carried at cost less accumulated
depreciation and amortization. JPMorgan Chase computes depreciation using the straight-line method
over the estimated useful life of an asset. For leasehold improvements, the Firm uses the
straight-line method computed over the lesser of the remaining term of the leased facility or the
estimated useful life of the leased asset.
JPMorgan Chase has recorded immaterial asset retirement
obligations related to asbestos remediation in those cases where it has sufficient information to
estimate the obligations’ fair value.
JPMorgan Chase capitalizes certain costs associated with the acquisition or development of
internal-use software. Once the software is ready for its intended use, these costs are amortized
on
a straight-line basis over the software’s expected useful life and reviewed for impairment on an
ongoing basis.
At December 31, 2010 and 2009, noninterest-bearing and interest-bearing deposits were as follows.
| December 31, (in millions) | 2010 | 2009 | ||||||
|
U.S. offices
|
||||||||
|
Noninterest-bearing
|
$ | 228,555 | $ | 204,003 | ||||
|
Interest-bearing:
|
||||||||
|
Demand
(a)
|
33,368 | 15,964 | ||||||
|
Savings
(b)
|
334,632 | 297,949 | ||||||
|
Time (included $2,733 and $1,463
at fair value at December 31,
2010 and 2009, respectively)
(c)
|
87,237 | 125,191 | ||||||
|
Total interest-bearing deposits
|
455,237 | 439,104 | ||||||
|
Total deposits in U.S. offices
|
683,792 | 643,107 | ||||||
|
Non-U.S. offices
|
||||||||
|
Noninterest-bearing
|
10,917 | 8,082 | ||||||
|
Interest-bearing:
|
||||||||
|
Demand
|
174,417 | 186,885 | ||||||
|
Savings
|
607 | 661 | ||||||
|
Time (included $1,636 and $2,992
at fair value at December 31,
2010 and 2009, respectively)
(c)
|
60,636 | 99,632 | ||||||
|
Total interest-bearing deposits
|
235,660 | 287,178 | ||||||
|
Total deposits in non-U.S. offices
|
246,577 | 295,260 | ||||||
|
Total deposits
|
$ | 930,369 | $ | 938,367 | ||||
| (a) | 2010 and 2009 includes Negotiable Order of Withdrawal (“NOW”) accounts. 2010 includes certain trust accounts. |
| (b) | Includes Money Market Deposit Accounts (“MMDAs”). |
| (c) | See Note 4 on pages 187–189 of this Annual Report for further information on structured notes classified as deposits for which the fair value option has been elected. |
| JPMorgan Chase & Co. / 2010 Annual Report | 263 |
Table of Contents
Notes to consolidated financial statements
At December 31, 2010 and 2009, time deposits in denominations of $100,000 or more were as follows.
| December 31, (in millions) | 2010 | 2009 | ||||||
|
U.S.
|
$ | 59,653 | $ | 90,552 | ||||
|
Non-U.S.
|
44,544 | 77,887 | ||||||
|
Total
|
$ | 104,197 | $ | 168,439 | ||||
At
December 31, 2010, the maturities of interest-bearing time deposits were as follows.
| December 31, 2010 | ||||||||||||
| (in millions) | U.S. | Non-U.S. | Total | |||||||||
|
2011
|
$ | 71,930 | $ | 60,043 | $ | 131,973 | ||||||
|
2012
|
7,382 | 287 | 7,669 | |||||||||
|
2013
|
4,281 | 153 | 4,434 | |||||||||
|
2014
|
1,432 | 22 | 1,454 | |||||||||
|
2015
|
2,074 | — | 2,074 | |||||||||
|
After 5 years
|
138 | 131 | 269 | |||||||||
|
Total
|
$ | 87,237 | $ | 60,636 | $ | 147,873 | ||||||
On
November 21, 2008, the FDIC released final rules on the FDIC Temporary Liquidity Guarantee
Program (the “TLG Program”). One component of this program, the Transaction Account Guarantee
Program (the “TAG Program”), provided unlimited deposit insurance through December 31, 2009, on
certain noninterest-bearing transaction accounts at FDIC-insured participating institutions. The
Firm elected to participate in the TLG Program and, as a result, was required to pay additional
insurance premiums to the FDIC in an amount equal to an annualized 10 basis points on balances in
noninterest-bearing transaction accounts that exceeded the $250,000
FDIC deposit insurance limits. The expiration date of the program was extended to December 31, 2010, to provide continued support to those
institutions most affected by the financial crisis and to enable the
program to be phased-out in an orderly
manner. Beginning January 1, 2010, the Firm no longer participated in the TAG Program. As a result,
funds held in noninterest-bearing transaction accounts after December 31, 2009, were
no longer
guaranteed in full. Instead, they are insured up to $250,000 under the FDIC’s general deposit
rules.
The following table details the components of other borrowed funds.
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Advances from Federal Home Loan Banks
(a)
|
$ | 25,234 | $ | 27,847 | ||||
|
Other
|
32,075 | 27,893 | ||||||
|
Total
(b)(c)
|
$ | 57,309 | $ | 55,740 | ||||
| (a) | Advances from the FHLBs of $11.4 billion, $1.5 billion, $7.3 billion, $1.0 billion and $3.0 billion matures in each of the 12-month periods ending December 31, 2011, 2012, 2013, 2014, and 2015, respectively, and $928 million matures after December 31, 2015. | |
| (b) | Includes other borrowed funds of $9.9 billion and $5.6 billion accounted for at fair value at December 31, 2010 and 2009, respectively. See Note 3 on pages 170–187 of this Annual Report for further information. | |
| (c) | Includes other borrowed funds of $37.8 billion and $30.4 billion secured by assets totaling $95.3 billion and $144.1 billion at December 31, 2010 and 2009, respectively. |
As of December 31, 2010 and 2009, JPMorgan Chase had no significant lines of credit for general
corporate purposes.
The following table details the components of accounts payable and other liabilities.
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Brokerage payables
(a)
|
$ | 95,359 | $ | 92,848 | ||||
|
Accounts payable and other
liabilities
(b)
|
74,971 | 69,848 | ||||||
|
Total
|
$ | 170,330 | $ | 162,696 | ||||
| (a) | Includes payables to customers, brokers, dealers and clearing organizations, and securities fails. | |
| (b) | Includes $236 million and $357 million accounted for at fair value at December 31, 2010 and 2009, respectively. |
| 264 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
JPMorgan Chase issues long-term debt denominated in various currencies, although predominantly U.S.
dollars, with both fixed and variable interest rates. Included in senior and subordinated debt
below are various equity-linked or other indexed instruments, which the Firm has elected to measure
at fair value. These hybrid securities are classified in the line item of the host contract on the
Consolidated Balance Sheets. Changes in fair value are recorded in principal transactions revenue
in the Consolidated Statements of Income.
The following table is a summary of long-term debt
carrying values (including unamortized original issue discount, valuation adjustments and fair
value adjustments, where applicable) by remaining contractual maturity as of December 31, 2010.
| By remaining maturity at | 2010 | |||||||||||||||||||||||
| December 31, 2010 | Under | After | 2009 | |||||||||||||||||||||
| (in millions, except rates) | 1 year | 1-5 years | 5 years | Total | Total | |||||||||||||||||||
|
Parent company
|
||||||||||||||||||||||||
|
Senior debt:
|
Fixed rate | (a) | $ | 20,384 | $ | 47,031 | $ | 31,372 | $ | 98,787 | $ | 93,729 | ||||||||||||
|
|
Variable rate | (b) | 15,648 | 37,119 | 6,260 | 59,027 | 73,335 | |||||||||||||||||
|
|
Interest rates | (c) | 0.36–6.00 | % | 0.31–7.00 | % | 0.24–7.25 | % | 0.24–7.25 | % | 0.22–7.50 | % | ||||||||||||
|
Subordinated debt:
|
Fixed rate | $ | 2,865 | $ | 9,649 | $ | 9,486 | $ | 22,000 | $ | 24,851 | |||||||||||||
|
|
Variable rate | — | 1,987 | 9 | 1,996 | 1,838 | ||||||||||||||||||
|
|
Interest rates | (c) | 5.90–6.75 | % | 1.37–6.63 | % | 2.16–8.53 | % | 1.37–8.53 | % | 1.14–10.00 | % | ||||||||||||
|
|
Subtotal | $ | 38,897 | $ | 95,786 | $ | 47,127 | $ | 181,810 | $ | 193,753 | |||||||||||||
|
Subsidiaries
|
||||||||||||||||||||||||
|
Senior debt:
|
Fixed rate | $ | 546 | $ | 1,782 | $ | 2,900 | $ | 5,228 | $ | 3,310 | |||||||||||||
|
|
Variable rate | 6,435 | 17,199 | 6,911 | 30,545 | 39,835 | ||||||||||||||||||
|
|
Interest rates | (c) | 0.26–2.00 | % | 0.21–3.75 | % | 0.32–14.21 | % | 0.21–14.21 | % | 0.16–14.21 | % | ||||||||||||
|
Subordinated debt:
|
Fixed rate | $ | — | $ | — | $ | 8,605 | $ | 8,605 | $ | 8,655 | |||||||||||||
|
|
Variable rate | — | — | 1,150 | 1,150 | 1,150 | ||||||||||||||||||
|
|
Interest rates | (c) | — | % | — | % | 0.63–8.25 | % | 0.63–8.25 | % | 0.58–8.25 | % | ||||||||||||
|
|
Subtotal | $ | 6,981 | $ | 18,981 | $ | 19,566 | $ | 45,528 | $ | 52,950 | |||||||||||||
|
Junior subordinated debt:
|
Fixed rate | $ | — | $ | — | $ | 15,249 | $ | 15,249 | $ | 16,349 | |||||||||||||
|
|
Variable rate | — | — | 5,082 | 5,082 | 3,266 | ||||||||||||||||||
|
|
Interest rates | (c) | — | % | — | % | 0.79–8.75 | % | 0.79–8.75 | % | 0.78–8.75 | % | ||||||||||||
|
|
Subtotal | $ | — | $ | — | $ | 20,331 | $ | 20,331 | $ | 19,615 | |||||||||||||
|
Total long-term debt
(d)(e)(f)
|
$ | 45,878 | $ | 114,767 | $ | 87,024 | $ | 247,669 | (h)(i) | $ | 266,318 | |||||||||||||
|
Long-term beneficial interests:
|
||||||||||||||||||||||||
|
|
Fixed rate | $ | 3,095 | $ | 4,328 | $ | 2,372 | $ | 9,795 | $ | 1,034 | |||||||||||||
|
|
Variable rate | 10,798 | 24,691 | 7,270 | 42,759 | 9,404 | ||||||||||||||||||
|
|
Interest rates | 0.28–7.00 | % | 0.25–11.00 | % | 0.05–7.47 | % | 0.05–11.00 | % | 0.25–7.13 | % | |||||||||||||
|
Total long-term beneficial interests
(g)
|
$ | 13,893 | $ | 29,019 | $ | 9,642 | $ | 52,554 | $ | 10,438 | ||||||||||||||
| (a) | Included $18.5 billion and $21.6 billion as of December 31, 2010 and 2009, respectively, guaranteed by the FDIC under the TLG Program. | |
| (b) | Included $17.9 billion and $19.3 billion as of December 31, 2010 and 2009, respectively, guaranteed by the FDIC under the TLG Program. | |
| (c) | The interest rates shown are the range of contractual rates in effect at year-end, including non-U.S. dollar fixed- and variable-rate issuances, which excludes the effects of the associated derivative instruments used in hedge accounting relationships, if applicable. The use of these derivative instruments modifies the Firm’s exposure to the contractual interest rates disclosed in the table above. Including the effects of the hedge accounting derivatives, the range of modified rates in effect at December 31, 2010, for total long-term debt was (0.12)% to 14.21%, versus the contractual range of 0.21% to 14.21% presented in the table above. The interest rate ranges shown exclude structured notes accounted for at fair value. | |
| (d) | Included long-term debt of $8.3 billion and $8.1 billion secured by assets totaling $11.7 billion and $11.4 billion at December 31, 2010 and 2009, respectively. Excludes amounts related to hybrid instruments. | |
| (e) | Included $38.8 billion and $49.0 billion of outstanding structured notes accounted for at fair value at December 31, 2010 and 2009, respectively. | |
| (f) | Included $879 million and $3.4 billion of outstanding zero-coupon notes at December 31, 2010 and 2009, respectively. The aggregate principal amount of these notes at their respective maturities was $2.7 billion and $6.6 billion, respectively. | |
| (g) | Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated VIEs. Also included $1.5 billion and $1.4 billion of outstanding structured notes accounted for at fair value at December 31, 2010 and 2009, respectively. Excluded short-term commercial paper and other short-term beneficial interests of $25.1 billion and $4.8 billion at December 31, 2010 and 2009, respectively. | |
| (h) | At December 31, 2010, long-term debt aggregating $35.6 billion was redeemable at the option of JPMorgan Chase, in whole or in part, prior to maturity, based on the terms specified in the respective notes. | |
| (i) | The aggregate carrying values of debt that matures in each of the five years subsequent to 2010 is $45.9 billion in 2011, $51.9 billion in 2012, $20.4 billion in 2013, $23.5 billion in 2014 and $18.9 billion in 2015. |
The weighted-average contractual interest rates for total long-term debt excluding
structured notes accounted for at fair value were 3.78% and 3.52% as of December 31, 2010 and 2009,
respectively. In order to modify exposure to interest rate and currency exchange rate movements,
JPMorgan Chase utilizes derivative instruments, primarily
interest rate and cross-currency interest
rate swaps, in conjunction with some of its debt issues. The use of these instruments modifies the
Firm’s interest expense on the associated debt. The modified weighted-average interest rates for
total long-term debt, including the effects of
| JPMorgan Chase & Co. / 2010 Annual Report | 265 |
Table of Contents
Notes to consolidated financial statements
related derivative instruments, were 2.52% and 1.86%
as of December 31, 2010 and 2009, respectively.
The Firm
participated in the TLG Program commencing in December 2008. The TLG
Program was available to,
among others, all U.S. depository institutions insured by the FDIC and all U.S. bank holding
companies, unless they opted out or the FDIC terminated their participation.
Under the TLG Program, the FDIC guaranteed through the earlier of maturity or June 30, 2012,
certain senior unsecured debt issued though October 31, 2009, in return for a fee to be paid based
on the amount and maturity of the debt. Under the TLG Program, the FDIC would pay the unpaid
principal and interest on an FDIC-guaranteed debt instrument upon the failure of the participating
entity to make a timely payment of principal or interest in accordance with the terms of the
instrument.
JPMorgan Chase & Co. (Parent Company) has guaranteed certain debt of its subsidiaries, including
both long-term debt and structured notes sold as part of the Firm’s market-making activities. These
guarantees rank on parity with all of the Firm’s other unsecured and unsubordinated indebtedness.
Guaranteed liabilities totaled $3.7 billion and $4.5 billion at December 31, 2010 and 2009,
respectively. For additional information, see Note 2 on pages 166–170 of this Annual Report.
The Firm’s unsecured debt does not contain requirements that would call for an acceleration of
payments, maturities or changes in the structure of the existing debt, provide any limitations on
future borrowings or require additional collateral, based on unfavorable changes in the Firm’s
credit ratings, financial ratios, earnings or stock price.
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital
debt securities
At December 31, 2010, the Firm had established 26 wholly-owned Delaware statutory business trusts (“issuer trusts”) that had issued guaranteed capital debt securities.
At December 31, 2010, the Firm had established 26 wholly-owned Delaware statutory business trusts (“issuer trusts”) that had issued guaranteed capital debt securities.
The junior subordinated deferrable interest debentures issued by the Firm to the issuer trusts,
totaling $20.3 billion and $19.6 billion at December 31, 2010 and 2009, respectively, were
reflected in the Firm’s Consolidated Balance Sheets in long-term debt, and in the table on the
preceding page under the caption “Junior subordinated debt” (i.e., trust preferred capital debt
securities). The Firm also records the common capital securities issued by the issuer trusts in
other assets in its Consolidated Balance Sheets at December 31, 2010 and 2009.
The debentures
issued to the issuer trusts by the Firm, less the common capital securities of the issuer trusts,
qualified as Tier 1 capital as of December 31, 2010.
The following is a summary of the outstanding trust preferred capital debt securities,
including unamortized original issue discount, issued by each trust, and the junior subordinated
deferrable interest debenture issued to each trust, as of December 31, 2010.
| Amount of | ||||||||||||||||||||||
| trust preferred | Stated maturity | |||||||||||||||||||||
| capital debt | Principal amount | of trust preferred | Interest rate of | |||||||||||||||||||
| securities | of debenture | capital securities | Earliest | trust preferred | Interest | |||||||||||||||||
| issued | issued | Issue | and | redemption | capital securities | payment/ | ||||||||||||||||
| December 31, 2010 (in millions) | by trust (a) | to trust (b) | date | debentures | date | and debentures | distribution dates | |||||||||||||||
|
Bank One Capital III
|
$ | 474 | $ | 674 | 2000 | 2030 | Any time | 8.75% | Semiannually | |||||||||||||
|
Bank One Capital VI
|
525 | 553 | 2001 | 2031 | Any time | 7.20% | Quarterly | |||||||||||||||
|
Chase Capital II
|
482 | 497 | 1997 | 2027 | Any time | LIBOR + 0.50% | Quarterly | |||||||||||||||
|
Chase Capital III
|
295 | 305 | 1997 | 2027 | Any time | LIBOR + 0.55% | Quarterly | |||||||||||||||
|
Chase Capital VI
|
241 | 249 | 1998 | 2028 | Any time | LIBOR + 0.625% | Quarterly | |||||||||||||||
|
First Chicago NBD Capital I
|
249 | 256 | 1997 | 2027 | Any time | LIBOR + 0.55% | Quarterly | |||||||||||||||
|
J.P. Morgan Chase Capital X
|
1,000 | 1,015 | 2002 | 2032 | Any time | 7.00% | Quarterly | |||||||||||||||
|
J.P. Morgan Chase Capital XI
|
1,075 | 1,004 | 2003 | 2033 | Any time | 5.88% | Quarterly | |||||||||||||||
|
J.P. Morgan Chase Capital XII
|
400 | 390 | 2003 | 2033 | Any time | 6.25% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XIII
|
465 | 480 | 2004 | 2034 | 2014 | LIBOR + 0.95% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XIV
|
600 | 586 | 2004 | 2034 | Any time | 6.20% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XV
|
93 | 132 | 2005 | 2035 | Any time | 5.88% | Semiannually | |||||||||||||||
|
JPMorgan Chase Capital XVI
|
500 | 492 | 2005 | 2035 | Any time | 6.35% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XVII
|
496 | 558 | 2005 | 2035 | Any time | 5.85% | Semiannually | |||||||||||||||
|
JPMorgan Chase Capital XVIII
|
748 | 749 | 2006 | 2036 | Any time | 6.95% | Semiannually | |||||||||||||||
|
JPMorgan Chase Capital XIX
|
563 | 564 | 2006 | 2036 | 2011 | 6.63% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XX
|
995 | 996 | 2006 | 2036 | Any time | 6.55% | Semiannually | |||||||||||||||
|
JPMorgan Chase Capital XXI
|
836 | 837 | 2007 | 2037 | 2012 | LIBOR + 0.95% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XXII
|
996 | 997 | 2007 | 2037 | Any time | 6.45% | Semiannually | |||||||||||||||
|
JPMorgan Chase Capital XXIII
|
643 | 643 | 2007 | 2047 | 2012 | LIBOR + 1.00% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XXIV
|
700 | 700 | 2007 | 2047 | 2012 | 6.88% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XXV
|
1,492 | 1,844 | 2007 | 2037 | 2037 | 6.80% | Semiannually | |||||||||||||||
|
JPMorgan Chase Capital XXVI
|
1,815 | 1,815 | 2008 | 2048 | 2013 | 8.00% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XXVII
|
995 | 995 | 2009 | 2039 | 2039 | 7.00% | Semiannually | |||||||||||||||
|
JPMorgan Chase Capital XXVIII
|
1,500 | 1,500 | 2009 | 2039 | 2014 | 7.20% | Quarterly | |||||||||||||||
|
JPMorgan Chase Capital XXIX
|
1,500 | 1,500 | 2010 | 2040 | 2015 | 6.70% | Quarterly | |||||||||||||||
|
Total
|
$ | 19,678 | $ | 20,331 | ||||||||||||||||||
| (a) | Represents the amount of trust preferred capital debt securities issued to the public by each trust, including unamortized original issue discount. | |
| (b) | Represents the principal amount of JPMorgan Chase debentures issued to each trust, including unamortized original-issue discount. The principal amount of debentures issued to the trusts includes the impact of hedging and purchase accounting fair value adjustments that were recorded on the Firm’s Consolidated Financial Statements. |
| 266 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
At December 31, 2010 and 2009, JPMorgan Chase was authorized to issue 200 million shares of
preferred stock, in one or more series, with a par value of $1 per share.
In the event of a liquidation or dissolution of the Firm, JPMorgan Chase’s preferred stock then
outstanding takes precedence over the Firm’s common stock for the payment of dividends and the
distribution of assets.
Generally, dividends on shares of each outstanding series of preferred stock are payable quarterly,
except for the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I (“Series
I”), which is payable semiannually as discussed below.
On April 23, 2008, the Firm issued 600,000 shares of Series I preferred stock, for total proceeds
of $6.0 billion. Dividends on Series I shares are payable semiannually at a fixed annual dividend
rate of 7.90% through April 2018, and then become payable quarterly at an annual dividend rate of
three-month LIBOR plus 3.47%.
On July 15, 2008, each series of Bear Stearns preferred stock then issued and outstanding was
exchanged into a series of JPMorgan Chase preferred stock with substantially identical terms (6.15%
Cumulative Preferred Stock, Series E (“Series E”); 5.72%
Cumulative Preferred Stock, Series F
(“Series F”); and 5.49% Cumulative Preferred Stock, Series G (“Series G”)). As a result of the
exchange, these series ranked equally with other series of the Firm’s preferred stock. On August
20, 2010, the Firm redeemed all of the outstanding shares of its Series E, Series F and Series G
preferred stock at their stated redemption value.
On August 21, 2008, the Firm issued 180,000 shares of 8.625% Non-Cumulative Preferred Stock, Series
J (“Series J”), for total proceeds of $1.8 billion.
On October 28, 2008, pursuant to the U.S. Treasury’s Capital Purchase Program, the Firm issued to
the U.S. Treasury, for total proceeds of $25.0 billion, (i) 2.5 million shares of the Firm’s Fixed
Rate Cumulative Perpetual Preferred Stock, Series K, par value $1 per share and liquidation
preference $10,000 per share (the “Series K Preferred Stock”); and (ii) a warrant to purchase up to
88,401,697 shares of the Firm’s common stock at an exercise price of $42.42 per share (the
“Warrant”), subject to certain antidilution and other adjustments. The Series K Preferred Stock was
nonvoting, qualified as Tier 1 capital and ranked equally with other series of the Firm’s preferred
stock in terms of dividend payments and upon liquidation of the Firm. On June 17, 2009, the Firm
redeemed all outstanding shares of the Series K Preferred Stock and repaid the full $25.0 billion
principal amount together with accrued but unpaid dividends. See Note 24 on page 268 for further
discussion regarding the Warrant.
The following is a summary of JPMorgan Chase’s preferred
stock outstanding as of December 31, 2010 and 2009.
| Share value | Contractual rate | |||||||||||||||||||||||||
| and redemption | Shares (b) | Carrying value (in millions) | Earliest | in effect at | ||||||||||||||||||||||
| December 31, | price per share (a) | 2010 | 2009 | 2010 | 2009 | redemption date | December 31, 2010 | |||||||||||||||||||
|
Cumulative Preferred Stock, Series E
|
$ | 200 | — | 818,113 | $ | — | $ | 164 | — | NA | ||||||||||||||||
|
Cumulative Preferred Stock, Series F
|
200 | — | 428,825 | — | 86 | — | NA | |||||||||||||||||||
|
Cumulative Preferred Stock, Series G
|
200 | — | 511,169 | — | 102 | — | NA | |||||||||||||||||||
|
Fixed-to-Floating
Rate
Non-Cumulative Perpetual Preferred Stock, Series I |
10,000 | 600,000 | 600,000 | 6,000 | 6,000 | 4/30/2018 | 7.90 | % | ||||||||||||||||||
|
Non-Cumulative Perpetual Preferred
Stock, Series J
|
10,000 | 180,000 | 180,000 | 1,800 | 1,800 | 9/1/2013 | 8.63 | |||||||||||||||||||
|
Total preferred stock
|
780,000 | 2,538,107 | $ | 7,800 | $ | 8,152 | ||||||||||||||||||||
| (a) | The redemption price includes the amount shown in the table plus any accrued but unpaid dividends. | |
| (b) | Represented by depositary shares. |
| JPMorgan Chase & Co. / 2010 Annual Report | 267 |
Table of Contents
Notes to consolidated financial statements
Dividend and stock repurchase restrictions
Prior to the redemption of the Series K Preferred Stock on June 17, 2009, the Firm was subject to certain restrictions regarding the declaration of dividends and share repurchases. As a result of the redemption of the Series K Preferred Stock, JPMorgan Chase is no longer subject to any of these restrictions.
Prior to the redemption of the Series K Preferred Stock on June 17, 2009, the Firm was subject to certain restrictions regarding the declaration of dividends and share repurchases. As a result of the redemption of the Series K Preferred Stock, JPMorgan Chase is no longer subject to any of these restrictions.
At December 31, 2010 and 2009, JPMorgan Chase was authorized to issue 9.0 billion shares of common
stock with a par value of $1 per share. On June 5, 2009, the Firm issued $5.8 billion, or 163
million new shares, of its common stock at $35.25 per share. On September 30, 2008, the Firm issued
$11.5 billion, or 284 million new shares, of its common stock at $40.50 per share.
On April 8, 2008, pursuant to the Share Exchange Agreement dated March 24, 2008, between JPMorgan
Chase and Bear Stearns, 20.7 million newly issued shares of JPMorgan Chase common stock were issued
to Bear Stearns in a transaction that was exempt from registration under the Securities Act of
1933, pursuant to Section 4(2) thereof, in exchange for 95.0 million newly issued shares of Bear
Stearns common stock (or 39.5% of Bear Stearns common stock after giving effect to the issuance).
Upon the consummation of the Bear Stearns merger, on May 30, 2008, the 20.7 million shares of
JPMorgan Chase common stock and 95.0 million shares of Bear Stearns common stock were cancelled.
For a further discussion of this transaction, see Note 2 on pages 166–170 of this Annual Report.
Common shares issued (newly issued or distributed from treasury) by JPMorgan Chase during the years
ended December 31, 2010, 2009 and 2008 were as follows.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Issued – balance at January 1
|
4,104.9 | 3,941.6 | 3,657.7 | |||||||||
|
Newly issued:
|
||||||||||||
|
Common stock:
|
||||||||||||
|
Open market issuance
|
– | 163.3 | 283.9 | |||||||||
|
Bear Stearns Share Exchange
Agreement
|
– | – | 20.7 | |||||||||
|
Total newly issued
|
– | 163.3 | 304.6 | |||||||||
|
Canceled shares
|
– | – | (20.7 | ) | ||||||||
|
Total issued – balance at
December 31
|
4,104.9 | 4,104.9 | 3,941.6 | |||||||||
|
Treasury – balance at January 1
|
(162.9 | ) | (208.8 | ) | (290.3 | ) | ||||||
|
Purchase of treasury stock
|
(77.9 | ) | – | – | ||||||||
|
Share repurchases related to employee
stock-based
awards
(a)
|
(0.1 | ) | (1.1 | ) | (0.5 | ) | ||||||
|
Issued from treasury:
|
||||||||||||
|
Net change from the Bear Stearns
merger as a result of the reissuance
of Treasury stock and the Share
Exchange Agreement
|
– | – | 26.5 | |||||||||
|
Employee benefits and compensation
plans
|
45.3 | 45.7 | 54.4 | |||||||||
|
Employee stock purchase
plans
|
1.0 | 1.3 | 1.1 | |||||||||
|
Total issued from treasury
|
46.3 | 47.0 | 82.0 | |||||||||
|
Total treasury – balance at
December 31
|
(194.6 | ) | (162.9 | ) | (208.8 | ) | ||||||
|
Outstanding
|
3,910.3 | 3,942.0 | 3,732.8 | |||||||||
| (a) | Participants in the Firm’s stock-based incentive plans may have shares withheld to cover income taxes. |
As noted in Note 23 on pages 267–268, pursuant to the U.S. Treasury’s Capital Purchase Program,
the Firm issued to the U.S. Treasury a Warrant to purchase up to 88,401,697 shares of the Firm’s
common stock, at an exercise price of $42.42 per share, subject to certain antidilution and other
adjustments. The U.S. Treasury exchanged the Warrant for 88,401,697 warrants, each of which was a
warrant to purchase a share of the Firm’s common stock at an exercise price of $42.42 per share
and, on December 11, 2009, sold the warrants in a secondary public offering for $950 million. The
warrants are exercisable, in whole or in part, at any time and from time to time until October 28,
2018. The Firm did not purchase any of the warrants sold by the U.S. Treasury.
Under the stock repurchase program authorized by the Firm’s Board of Directors, the Firm is
authorized to repurchase up to $10.0 billion of the Firm’s common stock plus 88 million warrants
sold by the U.S. Treasury in 2009. During 2009, the Firm did not repurchase any shares of its
common stock or warrants. In the second quarter of 2010, the Firm resumed common stock repurchases,
and during the year repurchased an aggregate of 78 million shares for $3.0 billion at an average
price per share of $38.49. The Firm’s share repurchase activities in 2010 were intended to offset
sharecount increases resulting from employee stock-based incentive awards and were consistent with
the Firm’s goal of maintaining an appropriate sharecount. The Firm did not repurchase any of the
warrants during 2010. As of December 31, 2010, $3.2 billion of authorized repurchase capacity
remained with respect to the common stock, and all of the authorized repurchase capacity remained
with respect to the warrants.
The Firm may, from time to time, enter into written trading plans under Rule 10b5-1 of the
Securities Exchange Act of 1934 to facilitate the repurchase of common stock and warrants in
accordance with the repurchase program. A Rule 10b5-1 repurchase plan allows the Firm to repurchase
its equity during periods when it would not otherwise be repurchasing common stock – for example
during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be made
according to a predefined plan established when the Firm is not aware of material nonpublic
information.
As of December 31, 2010, approximately 564 million unissued shares of common stock were reserved
for issuance under various employee incentive, compensation, option and stock purchase plans,
director compensation plans, and the warrants sold by the U.S. Treasury as discussed above.
| 268 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Effective January 1, 2009, the Firm implemented accounting guidance for participating
securities, which clarifies that unvested stock-based compensation awards containing nonforfeitable
rights to dividends or dividend equivalents (collectively, “dividends”) are participating
securities and should be included in the earnings per share (“EPS”) calculation using the two-class
method. Under the two-class method, all earnings (distributed and undistributed) are allocated to
each class of common stock and participating securities, based on their respective rights to
receive dividends.
JPMorgan Chase grants restricted stock and RSUs to certain employees under its
stock-based compensation programs, which entitle the recipients to receive nonforfeitable dividends
during the vesting period on a basis equivalent to the dividends paid to holders of common stock;
these unvested awards meet the definition of participating securities. EPS data for the prior
periods were revised as required by the accounting guidance.
Options issued under employee benefit
plans that have an antidilutive effect are excluded from the computation of diluted EPS.
The following table presents the calculation of basic and diluted EPS for the years ended December
31, 2010, 2009 and 2008.
| Year ended December 31, | ||||||||||||
| (in millions, except per share amounts) | 2010 | 2009 | 2008 | |||||||||
|
Basic earnings per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 17,370 | $ | 11,652 | $ | 3,699 | ||||||
|
Extraordinary gain
|
— | 76 | 1,906 | |||||||||
|
Net income
|
17,370 | 11,728 | 5,605 | |||||||||
|
Less: Preferred stock dividends
|
642 | 1,327 | 674 | |||||||||
|
Less: Accelerated amortization from
redemption of preferred stock issued
to the U.S. Treasury
|
— | 1,112 | (c) | — | ||||||||
|
Net income applicable to common equity
|
16,728 | 9,289 | (c) | 4,931 | ||||||||
|
Less: Dividends and undistributed
earnings allocated to participating
securities
|
964 | 515 | 189 | |||||||||
|
Net income applicable to common stockholders
|
$ | 15,764 | $ | 8,774 | $ | 4,742 | ||||||
|
Total weighted-average basic shares
outstanding
|
3,956.3 | 3,862.8 | 3,501.1 | |||||||||
|
Per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 3.98 | $ | 2.25 | (c) | $ | 0.81 | |||||
|
Extraordinary gain
|
— | 0.02 | 0.54 | |||||||||
|
Net income
|
$ | 3.98 | $ | 2.27 | (c) | $ | 1.35 | |||||
| Year ended December 31, | ||||||||||||
| (in millions, except per share | ||||||||||||
| amounts) | 2010 | 2009 | 2008 | |||||||||
|
Diluted earnings per share
|
||||||||||||
|
Net income applicable to common
stockholders
|
$ | 15,764 | $ | 8,774 | $ | 4,742 | ||||||
|
Total weighted-average basic
shares outstanding
|
3,956.3 | 3,862.8 | 3,501.1 | |||||||||
|
Add: Employee stock options,
SARs and
warrants
(a)
|
20.6 | 16.9 | 20.7 | |||||||||
|
Total weighted-average diluted
shares outstanding
(b)
|
3,976.9 | 3,879.7 | 3,521.8 | |||||||||
|
Per share
|
||||||||||||
|
Income before extraordinary gain
|
$ | 3.96 | $ | 2.24 | (c) | $ | 0.81 | |||||
|
Extraordinary gain
|
— | 0.02 | 0.54 | |||||||||
|
Net income per share
|
$ | 3.96 | $ | 2.26 | (c) | $ | 1.35 | |||||
| (a) | Excluded from the computation of diluted EPS (due to their antidilutive effect) were options issued under employee benefit plans and the warrants originally issued in 2008 under the U.S. Treasury’s Capital Purchase Program to purchase shares of the Firm’s common stock aggregating 233 million, 266 million and 209 million for the full years ended December 31, 2010, 2009 and 2008, respectively. | |
| (b) | Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the calculation using the treasury stock method. | |
| (c) | The calculation of basic and diluted EPS and net income applicable to common equity for full year 2009 includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of the U.S. Troubled Asset Relief Program (“TARP”) preferred capital. |
| JPMorgan Chase & Co. / 2010 Annual Report | 269 |
Table of Contents
Notes to consolidated financial statements
Accumulated other comprehensive income/(loss) includes the after-tax change in unrealized
gains/(losses) on AFS securities, foreign currency translation adjustments (including the impact of
related derivatives), cash flow hedging activities and net loss and prior service costs/(credit)
related to the Firm’s defined benefit pension and OPEB plans.
| Net loss and prior | ||||||||||||||||||||
| Translation | service costs/(credit) of | Accumulated other | ||||||||||||||||||
| As of or for the year ended | Unrealized gains/(losses) | adjustments, | defined benefit pension | comprehensive | ||||||||||||||||
| December 31, (in millions) | on AFS securities (b) | net of hedges | Cash flow hedges | and OPEB plans | income/(loss) | |||||||||||||||
|
Balance at December 31, 2007
|
$ | 380 | $ | 8 | $ | (802 | ) | $ | (503 | ) | $ | (917 | ) | |||||||
|
Net change
|
(2,481 | ) (c) | (606 | ) | 600 | (2,283 | ) | (4,770 | ) | |||||||||||
|
Balance at December 31, 2008
|
(2,101 | ) | (598 | ) | (202 | ) | (2,786 | ) | (5,687 | ) | ||||||||||
|
Net change
|
4,133 | (d) | 582 | 383 | 498 | 5,596 | ||||||||||||||
|
Balance at December 31, 2009
|
2,032 | (e) | (16 | ) | 181 | (2,288 | ) | (91 | ) | |||||||||||
|
Cumulative effect of changes in accounting principles
(a)
|
(144 | ) | — | — | — | (144 | ) | |||||||||||||
|
Net
change
|
610 | (f) | 269 | 25 | 332 | 1,236 | ||||||||||||||
|
Balance at December 31, 2010
|
$ | 2,498 | (e) | $ | 253 | $ | 206 | $ | (1,956 | ) | $ | 1,001 | ||||||||
| (a) | Reflects the effect of adoption of accounting guidance related to the consolidation of VIEs, and to embedded credit derivatives in beneficial interests in securitized financial assets. AOCI decreased by $129 million due to the adoption of the accounting guidance related to VIEs as a result of the reversal of the fair value adjustments taken on retained AFS securities that were eliminated in consolidation; for further discussion see Note 16 on pages 244–259 of this Annual Report. AOCI decreased by $15 million due to the adoption of the new guidance related to credit derivatives embedded in certain of the Firm’s AFS securities; for further discussion, see Note 6 on pages 191–199 of this Annual Report. | |
| (b) | Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in other assets. | |
| (c) | The net change during 2008 was due primarily to spread widening related to credit card asset-backed securities, nonagency MBS and collateralized loan obligations. | |
| (d) | The net change during 2009 was due primarily to overall market spread and market liquidity improvement as well as changes in the composition of investments. | |
| (e) | Includes after-tax unrealized losses of $(81) million and $(226) million not related to credit on debt securities for which credit losses have been recognized in income at December 31, 2010 and 2009, respectively. | |
| (f) | The net change during 2010 was due primarily to the narrowing of spreads on commercial and nonagency MBS as well as on collateralized loan obligations; also reflects increased market value on pass-through MBS due to narrowing of spreads and other market factors. |
The following table presents the before- and after-tax changes in net unrealized gains/(losses);
reclassification adjustments for realized (gains)/losses on AFS securities and cash flow hedges;
changes resulting from foreign currency translation adjustments (including the impact of related
derivatives); net gains/(losses) and prior service costs/(credits) from pension and OPEB plans; and
amortization of pension and OPEB amounts into net income. Reclassification adjustments include
amounts recognized in net income that had been recorded previously in other comprehensive
income/(loss).
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Before | Tax | After | Before | Tax | After | Before | Tax | After | ||||||||||||||||||||||||||||
| Year ended December 31, (in millions) | tax | effect | tax | tax | effect | tax | tax | effect | tax | |||||||||||||||||||||||||||
|
Unrealized gains/(losses) on AFS securities:
|
||||||||||||||||||||||||||||||||||||
|
Net unrealized gains/(losses) arising during the period
|
$ | 3,982 | $ | (1,540 | ) | $ | 2,442 | $ | 7,870 | $ | (3,029 | ) | $ | 4,841 | $ | (3,071 | ) | $ | 1,171 | $ | (1,900 | ) | ||||||||||||||
|
Reclassification adjustment for realized (gains)/losses included in
net income
|
(2,982 | ) | 1,150 | (1,832 | ) | (1,152 | ) | 444 | (708 | ) | (965 | ) | 384 | (581 | ) | |||||||||||||||||||||
|
Net change
|
1,000 | (390 | ) | 610 | 6,718 | (2,585 | ) | 4,133 | (4,036 | ) | 1,555 | (2,481 | ) | |||||||||||||||||||||||
|
Translation adjustments:
|
||||||||||||||||||||||||||||||||||||
|
Translation
|
402 | (139 | ) | 263 | 1,139 | (398 | ) | 741 | (1,781 | ) | 682 | (1,099 | ) | |||||||||||||||||||||||
|
Hedges
|
11 | (5 | ) | 6 | (259 | ) | 100 | (159 | ) | 820 | (327 | ) | 493 | |||||||||||||||||||||||
|
Net change
|
413 | (144 | ) | 269 | 880 | (298 | ) | 582 | (961 | ) | 355 | (606 | ) | |||||||||||||||||||||||
|
Cash flow hedges:
|
||||||||||||||||||||||||||||||||||||
|
Net unrealized gains/(losses) arising during the period
|
247 | (96 | ) | 151 | 767 | (308 | ) | 459 | 584 | (226 | ) | 358 | ||||||||||||||||||||||||
|
Reclassification adjustment for realized (gains)/losses
|
||||||||||||||||||||||||||||||||||||
|
included in net income
|
(206 | ) | 80 | (126 | ) | (124 | ) | 48 | (76 | ) | 402 | (160 | ) | 242 | ||||||||||||||||||||||
|
Net change
|
41 | (16 | ) | 25 | 643 | (260 | ) | 383 | 986 | (386 | ) | 600 | ||||||||||||||||||||||||
|
Net loss and prior service cost/(credit) of defined benefit pension
and OPEB plans:
|
||||||||||||||||||||||||||||||||||||
|
Net gains/(losses) and prior service credits arising during the period
|
294 | (96 | ) | 198 | 494 | (200 | ) | 294 | (3,579 | ) | 1,289 | (2,290 | ) | |||||||||||||||||||||||
|
Reclassification adjustment for net loss and prior
service credits included in net income
|
224 | (90 | ) | 134 | 337 | (133 | ) | 204 | 14 | (7 | ) | 7 | ||||||||||||||||||||||||
|
Net change
|
518 | (186 | ) | 332 | 831 | (333 | ) | 498 | (3,565 | ) | 1,282 | (2,283 | ) | |||||||||||||||||||||||
|
Total
other comprehensive income/(loss)
|
$ | 1,972 | $ | (736 | ) | $ | 1,236 | $ | 9,072 | $ | (3,476 | ) | $ | 5,596 | $ | (7,576 | ) | $ | 2,806 | $ | (4,770 | ) | ||||||||||||||
| 270 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax return.
JPMorgan Chase uses the asset and liability method to provide income taxes on all transactions
recorded in the Consolidated Financial Statements. This method requires that income taxes reflect
the expected future tax consequences of temporary differences between the carrying amounts of
assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for
each temporary difference is determined based on the tax rates that the Firm expects to be in
effect when the underlying items of income and expense are realized. JPMorgan Chase’s expense for
income taxes includes the current and deferred portions of that expense. A valuation allowance is
established to reduce deferred tax assets to the amount the Firm expects to realize.
Due to the inherent complexities arising from the nature of the Firm’s businesses, and from
conducting business and being taxed in a substantial number of jurisdictions, significant judgments
and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the
many tax jurisdictions in which the Firm files tax returns may not be finalized for several years.
Thus, the Firm’s final tax-related assets and liabilities may ultimately be different from those
currently reported.
The components of income tax expense/(benefit) included in the Consolidated Statements of Income
were as follows for each of the years ended December 31, 2010, 2009 and 2008.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Current income tax expense
|
||||||||||||
|
U.S. federal
|
$ | 4,001 | $ | 4,698 | $ | 395 | ||||||
|
Non-U.S.
|
2,712 | 2,368 | 1,009 | |||||||||
|
U.S. state and local
|
1,744 | 971 | 307 | |||||||||
|
Total current income
tax expense
|
8,457 | 8,037 | 1,711 | |||||||||
|
Deferred income tax expense/(benefit)
|
||||||||||||
|
U.S. federal
|
(753 | ) | (2,867 | ) | (3,015 | ) | ||||||
|
Non-U.S.
|
169 | (454 | ) | 1 | ||||||||
|
U.S. state and local
|
(384 | ) | (301 | ) | 377 | |||||||
|
Total deferred income
tax expense/(benefit)
|
(968 | ) | (3,622 | ) | (2,637 | ) | ||||||
|
Total income tax expense/
(benefit) before
extraordinary gain
|
$ | 7,489 | $ | 4,415 | $ | (926 | ) | |||||
Total income tax expense includes $485 million, $280 million and $55 million of tax benefits
recorded in 2010, 2009 and 2008, respectively, as a result of tax audit resolutions.
The preceding table does not reflect the tax effect of certain items that are recorded each period
directly in stockholders’ equity and certain tax benefits associated with the Firm’s employee
stock-based compensation plans. The tax effect of all items recorded directly to stockholders’
equity resulted in an increase of $1.8
billion in 2010, a decrease of $3.7 billion in 2009, and an
increase of $3.0 billion in 2008.
U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S.
subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period
of time.
During 2008, as part of JPMorgan Chase’s periodic review of the business requirements and
capital needs of its non-U.S. subsidiaries, combined with the formation of specific strategies and
steps taken to fulfill these requirements and needs, the Firm determined that the undistributed
earnings of certain of its subsidiaries, for which U.S. federal income taxes had been provided,
would be indefinitely reinvested to fund the current and future growth of the related businesses.
As management does not intend to use the earnings of these subsidiaries as a source of funding for
its U.S. operations, such earnings will not be distributed to the U.S. in the foreseeable future.
This determination resulted in the release of deferred tax liabilities and the recognition of an
income tax benefit of $1.1 billion associated with these undistributed earnings in 2008. For 2010,
pretax earnings of approximately $3.5 billion were generated that will be indefinitely reinvested
in these subsidiaries. At December 31, 2010, the cumulative amount of undistributed pretax earnings
in these subsidiaries approximated $19.3 billion. If the Firm were to record a deferred tax
liability associated with these undistributed earnings, the amount would be $4.3 billion at
December 31, 2010.
Tax expense applicable to securities gains and losses for the years 2010, 2009 and 2008 was $1.1
billion, $427 million, and $608 million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for
each of the years ended December 31, 2010, 2009 and 2008, is presented in the following table.
| Year ended December 31, | 2010 | 2009 | 2008 | |||||||||
|
Statutory U.S. federal tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Increase/(decrease) in tax
rate resulting from:
|
||||||||||||
|
U.S. state and local income
taxes, net of U.S. federal
income tax benefit
|
3.6 | 2.7 | 16.0 | |||||||||
|
Tax-exempt income
|
(2.4 | ) | (3.9 | ) | (14.8 | ) | ||||||
|
Non-U.S. subsidiary earnings
(a)
|
(2.2 | ) | (1.7 | ) | (53.6 | ) | ||||||
|
Business tax credits
|
(3.7 | ) | (5.5 | ) | (24.5 | ) | ||||||
|
Bear Stearns equity losses
|
— | — | 5.7 | |||||||||
|
Other, net
|
(0.2 | ) | 0.9 | 2.8 | ||||||||
|
Effective tax rate
|
30.1 | % | 27.5 | % | (33.4 | )% | ||||||
| (a) | Includes earnings deemed to be reinvested indefinitely in non-U.S. subsidiaries. |
Deferred income tax expense/(benefit) results from differences between assets and liabilities
measured for financial reporting versus income-tax return purposes.
Deferred tax assets are
recognized if, in management’s judgment, their realizability is determined to be more likely than
not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is
established.
The significant components of deferred tax assets and liabilities are reflected in the
following table as of December 31, 2010 and 2009.
| JPMorgan Chase & Co. / 2010 Annual Report | 271 |
Table of Contents
Notes to consolidated financial statements
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Deferred tax assets
|
||||||||
|
Allowance for loan losses
|
$ | 12,287 | $ | 12,376 | ||||
|
Employee benefits
|
4,279 | 4,424 | ||||||
|
Allowance for other than loan losses
|
6,029 | 3,995 | ||||||
|
Non-U.S. operations
|
956 | 1,926 | ||||||
|
Tax attribute carryforwards
|
1,370 | 912 | ||||||
|
Fee income
|
446 | — | ||||||
|
Fair value adjustments
(a)
|
51 | — | ||||||
|
Gross deferred tax assets
|
$ | 25,418 | $ | 23,633 | ||||
|
Deferred tax liabilities
|
||||||||
|
Depreciation and amortization
|
$ | 3,500 | $ | 4,832 | ||||
|
Leasing transactions
|
2,160 | 2,054 | ||||||
|
Non-U.S. operations
|
1,136 | 1,338 | ||||||
|
Fee income
|
— | 670 | ||||||
|
Fair value adjustments
(a)
|
— | 328 | ||||||
|
Other, net
|
519 | 147 | ||||||
|
Gross deferred tax liabilities
|
$ | 7,315 | $ | 9,369 | ||||
|
Valuation allowance
|
1,784 | 1,677 | ||||||
|
Net deferred tax asset
|
$ | 16,319 | $ | 12,587 | ||||
| (a) | Includes fair value adjustments related to AFS securities, cash flows hedging activities and other portfolio investments. |
JPMorgan Chase has recorded deferred tax assets of $1.4 billion at December 31, 2010, in connection
with U.S. federal, state and local and non-U.S. subsidiary net operating loss carryforwards and
foreign tax credit carryforwards. At December 31, 2010, the U.S. federal net operating loss
carryforward was approximately $1.2 billion; the state and local net operating loss carryforward was
approximately $1.0 billion; the non-U.S. subsidiary net operating loss carryforward was $515
million; and the U.S. foreign tax credit carryforward was approximately $750 million.
If not utilized, the U.S. federal net operating loss carryforward and the state and local net
operating loss carryforward will expire in 2027; and the U.S. foreign tax credit carryforward will
expire in 2020. The non-U.S. subsidiary net operating loss carryforward has an unlimited
carryforward period.
A valuation allowance has been recorded for losses associated with non-U.S. subsidiaries and
certain portfolio investments, and certain state and local tax benefits.
At December 31, 2010, 2009 and 2008, JPMorgan Chase’s unrecognized tax benefits, excluding related
interest expense and penalties, were $7.8 billion, $6.6 billion and $5.9 billion, respectively, of
which $3.8 billion, $3.5 billion and $2.9 billion, respectively, if recognized, would reduce the
annual effective tax rate. As JPMorgan Chase is presently under audit by a number of tax
authorities, it is reasonably possible that significant changes in the gross balance of
unrecognized tax benefits may occur within the next 12 months. JPMorgan Chase does not expect that
any changes over the next twelve months in its gross balance of unrecognized tax benefits caused by
such audits would result in a significant change in its annual effective tax rate.
The following table presents a reconciliation of the beginning and ending amount of unrecognized
tax benefits for the years ended December 31, 2010, 2009 and 2008.
Unrecognized tax benefits
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Balance at January 1,
|
$ | 6,608 | $ | 5,894 | $ | 4,811 | ||||||
|
Increases based on tax
positions related to
the current period
|
813 | 584 | 890 | |||||||||
|
Decreases based on tax
positions related to
the current period
|
(24 | ) | (6 | ) | (109 | ) | ||||||
|
Increases associated
with the Bear Stearns
merger
|
— | — | 1,387 | |||||||||
|
Increases based on tax
positions related to
prior periods
|
1,681 | 703 | 501 | |||||||||
|
Decreases based on tax
positions related to
prior periods
|
(1,198 | ) | (322 | ) | (1,386 | ) | ||||||
|
Decreases related to
settlements with
taxing authorities
|
(74 | ) | (203 | ) | (181 | ) | ||||||
|
Decreases related to a
lapse of applicable
statute of limitations
|
(39 | ) | (42 | ) | (19 | ) | ||||||
|
Balance at December 31,
|
$ | 7,767 | $ | 6,608 | $ | 5,894 | ||||||
After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in
income tax expense were $(54) million, $101 million and $346 million in 2010, 2009 and 2008,
respectively.
Included in accounts payable and other liabilities at December 31, 2010 and 2009, in addition to
the Firm’s liability for unrecognized tax benefits, was $1.6 billion and $2.4 billion,
respectively, for income tax-related interest and penalties.
JPMorgan Chase is subject to ongoing tax examinations by the tax authorities of the various
jurisdictions in which it operates, including U.S. federal, state and local, and non-U.S.
jurisdictions. The Firm’s consolidated federal income tax returns are presently under examination
by the Internal Revenue Service (“IRS”) for the years 2003, 2004 and 2005. This examination is
expected to conclude in 2011. The consolidated federal income tax returns of Bear Stearns for the
years ended November 30, 2006, and November 30, 2007, and for the period December 1, 2007, through
May 30, 2008, are presently under examination. This examination is expected to conclude in 2012.
The IRS audits of the consolidated federal income tax returns of JPMorgan Chase for the years 2006,
2007 and 2008 are expected to commence in 2011. Administrative appeals are pending with the IRS
relating to prior periods that were examined for JPMorgan Chase and for certain of its predecessor
entities. For 2002 and prior years, refund claims relating to income and credit adjustments, and to
tax attribute carrybacks, for JPMorgan Chase have been filed. Refund claims have been filed for
Bank One for the period January 1, 2004, through July 31, 2004, and for prior years primarily to
reflect income adjustments. Amended returns to reflect refund claims primarily attributable to net
operating losses and tax credit carrybacks are anticipated to be filed for the final Bear Stearns
U.S. federal consolidated tax return for the period December 1, 2007, through May 30, 2008, and for
prior years.
| 272 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
The following table presents the U.S. and non-U.S. components of income before income tax
expense/(benefit) and extraordinary gain for the years ended December 31, 2010, 2009 and 2008.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
U.S.
|
$ | 16,568 | $ | 6,263 | $ | (2,094 | ) | |||||
|
Non-U.S.
(a)
|
8,291 | 9,804 | 4,867 | |||||||||
|
Income before income
tax expense/(benefit)
and
extraordinary gain
|
$ | 24,859 | $ | 16,067 | $ | 2,773 | ||||||
| (a) | For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S. |
The business of JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”) is subject
to examination and regulation by the Office of the Comptroller of the Currency (“OCC”). The Bank is
a member of the U.S. Federal Reserve System, and its deposits in the U.S. are insured by the FDIC.
The Board of Governors of the Federal Reserve System (the “Federal Reserve”) requires depository
institutions to maintain cash reserves with a Federal Reserve Bank. The average amount of reserve
balances deposited by the Firm’s bank subsidiaries with various Federal Reserve Banks was
approximately $803 million and $821 million in 2010 and 2009, respectively.
Restrictions imposed by U.S. federal law prohibit JPMorgan Chase and certain of its affiliates from
borrowing from banking subsidiaries unless the loans are secured in specified amounts. Such secured
loans to the Firm or to other affiliates are generally limited to 10% of the banking subsidiary’s
total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such
loans is limited to 20% of the banking subsidiary’s total capital.
The
principal sources of JPMorgan Chase’s income (on a parent company-only basis) are dividends
and interest from JPMorgan Chase Bank, N.A., and the other banking and nonbanking subsidiaries of
JPMorgan Chase. In addition to dividend restrictions set forth in statutes and regulations, the
Federal Reserve, the OCC and the FDIC have authority under the Financial Institutions Supervisory
Act to prohibit or to limit the payment of dividends by the banking organizations they supervise,
including JPMorgan Chase and its subsidiaries that are banks or bank holding companies, if, in the
banking regulator’s opinion, payment of a dividend would constitute
an unsafe or unsound practice
in light of the financial condition of the banking organization.
At January 1, 2011, JPMorgan Chase’s banking subsidiaries could pay, in the aggregate,
$2.0 billion in dividends to their respective bank holding
companies without the prior approval of their relevant banking regulators. The capacity to pay
dividends in 2011 will be supplemented by the banking subsidiaries’ earnings during the year.
In compliance with rules and regulations established by U.S. and non-U.S. regulators, as of
December 31, 2010 and 2009, cash in the amount of $25.0 billion and $24.0 billion, respectively,
and securities with a fair value of $9.7 billion and $10.2 billion, respectively, were segregated
in special bank accounts for the benefit of securities and futures brokerage customers.
The Federal Reserve establishes capital requirements, including well-capitalized standards for the
consolidated financial holding company. The OCC establishes similar capital requirements and
standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A., and Chase Bank USA,
N.A.
There are two categories of risk-based capital: Tier 1 capital and Tier 2 capital. Tier 1 capital
consists of common stockholders’ equity, perpetual preferred stock, noncontrolling interests in
subsidiaries and trust preferred capital debt securities, less goodwill and certain other
adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1, subordinated
long-term debt and other instruments qualifying as Tier 2, and the aggregate allowance for credit
losses up to a certain percentage of risk-weighted assets. Total capital is Tier 1 capital plus
Tier 2 capital. Under the risk-based capital guidelines of the Federal Reserve, JPMorgan Chase is
required to maintain minimum ratios of Tier 1 and Total capital to risk-weighted assets, as well as
minimum leverage ratios (which are defined as Tier 1 capital divided by adjusted quarterly average
assets). Failure to meet these minimum requirements could cause the Federal Reserve to take action.
Banking subsidiaries also are subject to these capital requirements by their respective primary
regulators. As of December 31, 2010 and 2009, JPMorgan Chase and all of its banking subsidiaries
were well-capitalized and met all capital requirements to which each was subject.
| JPMorgan Chase & Co. / 2010 Annual Report | 273 |
Table of Contents
Notes to consolidated financial statements
The following table presents the regulatory capital, assets and risk-based capital ratios for
JPMorgan Chase and its significant banking subsidiaries at December 31, 2010 and 2009. These
amounts are determined in accordance with regulations issued by the Federal Reserve and/or OCC.
| Well- | Minimum | |||||||||||||||||||||||||||||||
| JPMorgan Chase & Co. (e) | JPMorgan Chase Bank, N.A. (e) | Chase Bank USA, N.A. (e) | capitalized | capital | ||||||||||||||||||||||||||||
| December 31, (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ratios (g) | ratios (g) | ||||||||||||||||||||||||
|
Regulatory capital
|
||||||||||||||||||||||||||||||||
|
Tier 1
(a)
|
$ | 142,450 | $ | 132,971 | $ | 91,764 | $ | 96,372 | $ | 12,966 | $ | 15,534 | ||||||||||||||||||||
|
Total
|
182,216 | 177,073 | 130,444 | 136,646 | 16,659 | 19,198 | ||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Risk-weighted
(b)(c)
|
1,174,978 | (f) | 1,198,006 | 965,897 | 1,011,995 | 116,992 | 114,693 | |||||||||||||||||||||||||
|
Adjusted average
(d)
|
2,024,515 | (f) | 1,933,767 | 1,611,486 | 1,609,081 | 117,368 | 74,087 | |||||||||||||||||||||||||
|
Capital ratios
|
||||||||||||||||||||||||||||||||
|
Tier 1
(a)
|
12.1% | (f) | 11.1 | % | 9.5 | % | 9.5 | % | 11.1 | % | 13.5 | % | 6.0 | % | 4.0 | % | ||||||||||||||||
|
Total
|
15.5 | 14.8 | 13.5 | 13.5 | 14.2 | 16.7 | 10.0 | 8.0 | ||||||||||||||||||||||||
|
Tier 1 leverage
|
7.0 | 6.9 | 5.7 | 6.0 | 11.0 | 21.0 | 5.0 | (h) | 3.0 | (i) | ||||||||||||||||||||||
| (a) | At December 31, 2010, for JPMorgan Chase and JPMorgan Chase Bank, N.A., trust preferred capital debt securities were $19.8 billion and $600 million, respectively. If these securities were excluded from the calculation at December 31, 2010, Tier 1 capital would be $122.7 billion and $91.2 billion, respectively, and the Tier 1 capital ratio would be 10.4% and 9.4%, respectively. At December 31, 2010, Chase Bank USA, N.A. had no trust preferred capital debt securities. | |
| (b) | Risk-weighted assets consist of on– and off–balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On–balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off–balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off–balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on–balance sheet credit-equivalent amount, which is then risk-weighted based on the same factors used for on–balance sheet assets. Risk-weighted assets also incorporate a measure for the market risk related to applicable trading assets–debt and equity instruments, and foreign exchange and commodity derivatives. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets. | |
| (c) | Includes off–balance sheet risk-weighted assets at December 31, 2010, of $282.9 billion, $274.2 billion and $31 million, and at December 31, 2009, of $367.4 billion, $312.3 billion and $49.9 billion, for JPMorgan Chase, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., respectively. | |
| (d) | Adjusted average assets, for purposes of calculating the leverage ratio, include total quarterly average assets adjusted for unrealized gains/(losses) on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital. | |
| (e) | Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions; whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions. | |
| (f) | Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for the consolidation of VIEs, which resulted in a decrease in the Tier 1 capital ratio of 34 basis points. See Note 16 on pages 244–259 of this Annual Report for further information. | |
| (g) | As defined by the regulations issued by the Federal Reserve, OCC and FDIC. | |
| (h) | Represents requirements for banking subsidiaries pursuant to regulations issued under the FDIC Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company. | |
| (i) | The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4%, depending on factors specified in regulations issued by the Federal Reserve and OCC. | |
| Note: | Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities, which have resulted from both nontaxable business combinations and from tax-deductible goodwill. The Firm had deferred tax liabilities resulting from nontaxable business combinations totaling $647 million and $812 million at December 31, 2010 and 2009, respectively; and deferred tax liabilities resulting from tax-deductible goodwill of $1.9 billion and $1.7 billion at December 31, 2010 and 2009, respectively. |
A reconciliation of the Firm’s Total stockholders’ equity to Tier 1 capital and Total qualifying
capital is presented in the table below.
| December 31, (in millions) | 2010 | 2009 | ||||||
|
Tier 1 capital
|
||||||||
|
Total stockholders’ equity
|
$ | 176,106 | $ | 165,365 | ||||
|
Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1 capital
|
(748 | ) | 75 | |||||
|
Qualifying hybrid securities and noncontrolling interests
(a)
|
19,887 | 19,535 | ||||||
|
Less: Goodwill
(b)
|
46,915 | 46,630 | ||||||
|
Fair value DVA on derivative and structured note liabilities related to the Firm’s credit quality
|
1,261 | 912 | ||||||
|
Investments in certain subsidiaries and other
|
1,032 | 802 | ||||||
|
Other intangible assets
(b)
|
3,587 | 3,660 | ||||||
|
Total Tier 1 capital
|
142,450 | 132,971 | ||||||
|
Tier 2 capital
|
||||||||
|
Long-term debt and other instruments qualifying as Tier 2
|
25,018 | 28,977 | ||||||
|
Qualifying allowance for credit losses
|
14,959 | 15,296 | ||||||
|
Adjustment for investments in certain subsidiaries and other
|
(211 | ) | (171 | ) | ||||
|
Total Tier 2 capital
|
39,766 | 44,102 | ||||||
|
Total qualifying capital
|
$ | 182,216 | $ | 177,073 | ||||
| (a) | Primarily includes trust preferred capital debt securities of certain business trusts. | |
| (b) | Goodwill and other intangible assets are net of any associated deferred tax liabilities. |
| 274 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and
guarantees) to meet the financing needs of its customers. The contractual amount of these financial
instruments represents the Firm’s maximum possible credit risk should the counterparty draw upon
the commitment or the Firm be required to fulfill its obligation
under the guarantee, and should the
counterparty subsequently fail to perform according to the terms of the contract. Most of these
commitments and guarantees expire without being drawn or a default occurring. As a result, the
total contractual amount of these instruments is not, in the Firm’s view, representative of its
actual future credit exposure or funding requirements.
To provide for the risk of loss inherent in wholesale and consumer (excluding credit card) related
contracts, an allowance for credit losses on lending-related commitments is maintained.
See Note 15
on pages
239–243 of this Annual Report for further discussion regarding the allowance for credit
losses on lending-related commitments.
The
following table summarizes the contractual amounts and carrying values of off-balance sheet
lending-related financial instruments, guarantees and other commitments at December 31, 2010 and
2009. The amounts in the table below for credit card and home equity lending-related commitments
represent the total available credit for these products. The Firm has not experienced, and does not
anticipate, that all available lines of credit for these products will be utilized at the same
time. The Firm can reduce or cancel credit card lines of credit by providing the borrower prior
notice or, in some cases, without notice as permitted by law. The Firm may reduce or close home
equity lines of credit when there are significant decreases in the value of the underlying property
or when there has been a demonstrable decline in the creditworthiness of the borrower.
Off-balance sheet lending-related financial instruments, guarantees and other commitments
| Contractual amount | Carrying value (l) | |||||||||||||||
| December 31, (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Lending-related
|
||||||||||||||||
|
Consumer, excluding credit card:
|
||||||||||||||||
|
Home equity
– senior lien
|
$ | 16,060 | $ | 19,246 | $ | — | $ | — | ||||||||
|
Home equity
– junior lien
|
28,681 | 37,231 | — | — | ||||||||||||
|
Prime mortgage
|
1,266 | 1,654 | — | — | ||||||||||||
|
Subprime mortgage
|
— | — | — | — | ||||||||||||
|
Auto
|
5,246 | 5,467 | 2 | 7 | ||||||||||||
|
Business banking
|
9,702 | 9,040 | 4 | 5 | ||||||||||||
|
Student and other
|
579 | 2,189 | — | — | ||||||||||||
|
Total consumer, excluding credit card
|
61,534 | 74,827 | 6 | 12 | ||||||||||||
|
Credit card
|
547,227 | 569,113 | — | — | ||||||||||||
|
Total consumer
|
608,761 | 643,940 | 6 | 12 | ||||||||||||
|
Wholesale:
|
||||||||||||||||
|
Other unfunded commitments to extend credit
(a)(b)(c)
|
199,859 | 192,145 | 364 | 356 | ||||||||||||
|
Asset
purchase
agreements
(b)
|
— | 22,685 | — | 126 | ||||||||||||
|
Standby
letters of credit and other financial
guarantees
(a)(c)(d)(e)
|
94,837 | 91,485 | 705 | 919 | ||||||||||||
|
Unused advised lines of credit
|
44,720 | 35,673 | — | — | ||||||||||||
|
Other
letters of
credit
(a)(e)
|
6,663 | 5,167 | 2 | 1 | ||||||||||||
|
Total wholesale
|
346,079 | 347,155 | 1,071 | 1,402 | ||||||||||||
|
Total lending-related
|
$ | 954,840 | $ | 991,095 | $ | 1,077 | $ | 1,414 | ||||||||
|
Other guarantees and commitments
|
||||||||||||||||
|
Securities
lending
indemnifications
(f)
|
$ | 181,717 | $ | 170,777 | $ | NA | $ | NA | ||||||||
|
Derivatives
qualifying as
guarantees
(g)
|
87,768 | 98,052 | (k) | 294 | 896 | (k) | ||||||||||
|
Unsettled reverse repurchase and securities borrowing agreements
|
39,927 | 48,187 | — | — | ||||||||||||
|
Equity
investment
commitments
(h)
|
2,468 | 2,374 | — | — | ||||||||||||
|
Building purchase commitments
|
258 | 670 | — | — | ||||||||||||
|
Other
guarantees and
commitments
(i)
|
3,766 | 3,671 | 6 | 6 | ||||||||||||
|
Loan sale and securitization-related indemnifications:
|
||||||||||||||||
|
Repurchase
liability
(j)
|
NA | NA | 3,285 | 1,705 | ||||||||||||
|
Loans sold with recourse
|
10,982 | 13,544 | 153 | 271 | ||||||||||||
| (a) | At December 31, 2010 and 2009, represents the contractual amount net of risk participations totaling $542 million and $643 million, respectively, for other unfunded commitments to extend credit; $22.4 billion and $24.6 billion, respectively, for standby letters of credit and other financial guarantees; and $1.1 billion and $690 million, respectively, for other letters of credit. In regulatory filings with the Federal Reserve Board these commitments are shown gross of risk participations. | |
| (b) | Upon the adoption of the accounting guidance related to VIEs, $24.2 billion of lending-related commitments between the Firm and Firm-administered multi-seller conduits were eliminated upon consolidation. The decrease in lending-related commitments was partially offset by the addition of $6.5 billion of unfunded commitments directly between the multi-seller conduits and clients; these unfunded commitments of the consolidated conduits are now included as off–balance sheet lending-related commitments of the Firm. The carrying value of asset purchase agreements of $126 million at December 31, 2009 was comprised of $18 million for the allowance for lending-related commitments; and $108 million for the guarantee liability and corresponding asset. |
| JPMorgan Chase & Co. / 2010 Annual Report | 275 |
Table of Contents
Notes to consolidated financial statements
| (c) | Includes credit enhancements and bond and commercial paper liquidity commitments to U.S. states and municipalities, hospitals and other not-for-profit entities of $43.4 billion and $44.1 billion, at December 31, 2010 and 2009, respectively. | |
| (d) | At December 31, 2010 and 2009, includes unissued standby letters of credit commitments of $41.6 billion and $38.4 billion, respectively. | |
| (e) | At December 31, 2010 and 2009, JPMorgan Chase held collateral relating to $37.8 billion and $31.5 billion, respectively, of standby letters of credit; and $2.1 billion and $1.3 billion, respectively, of other letters of credit. | |
| (f) | At December 31, 2010 and 2009, collateral held by the Firm in support of securities lending indemnification agreements was $185.0 billion and $173.2 billion, respectively. Securities lending collateral comprises primarily cash, and securities issued by governments that are members of the Organisation for Economic Co-operation and Development (“OECD”) and U.S. government agencies. | |
| (g) | Represents notional amounts of derivatives qualifying as guarantees. The carrying value at December 31, 2010 and 2009, reflects derivative payables of $390 million and $974 million, respectively, less derivative receivables of $96 million and $78 million, respectively. | |
| (h) | At December 31, 2010 and 2009, includes unfunded commitments of $1.0 billion and $1.5 billion, respectively, to third-party private equity funds that are generally fair valued at net asset value as discussed in Note 3 on pages 170–187 of this Annual Report; and $1.4 billion and $897 million, respectively, to other equity investments. | |
| (i) | Amounts include letters of credit hedged by derivative transactions and managed on a market risk basis. | |
| (j) | Represents estimated repurchase liability related to indemnifications for breaches of representations and warranties in loan sale and securitization agreements. For additional information, see Loan sale and securitization-related indemnifications on pages 278–279 of this Note. | |
| (k) | The prior period has been revised to conform to current presentation. | |
| (l) | For lending-related products the carrying value represents the allowance for lending-related commitments and the fair value of the guarantee liability, for derivative-related products the carrying value represents the fair value. For all other products the carrying value represents the valuation reserve. |
Other unfunded commitments to extend credit
Other unfunded commitments to extend credit are generally comprised of commitments for working capital and general corporate purposes as well as extensions of credit to support commercial paper facilities and bond financings in the event that those obligations cannot be remarketed to new investors.
Other unfunded commitments to extend credit are generally comprised of commitments for working capital and general corporate purposes as well as extensions of credit to support commercial paper facilities and bond financings in the event that those obligations cannot be remarketed to new investors.
Also included in other unfunded commitments to extend credit are commitments to noninvestment-grade
counterparties in connection with leveraged and acquisition finance activities which were $5.9
billion and $7.0 billion at December 31, 2010 and 2009, respectively. For further information, see
Note 3 and Note 4 on pages 170–187 and 187–189 respectively, of this Annual Report.
Guarantees
U.S. GAAP requires that a guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing the guarantee. U.S. GAAP defines a guarantee as a contract that contingently requires the guarantor to pay a guaranteed party based upon: (a) changes in an underlying asset, liability or equity security of the guaranteed party; or (b) a third party’s failure to perform under a specified agreement. The Firm considers the following off–balance sheet lending-related arrangements to be guarantees under U.S. GAAP: certain asset purchase agreements, standby letters of credit and financial guarantees, securities lending indemnifications, certain indemnification agreements included within third-party contractual arrangements and certain derivative contracts.
U.S. GAAP requires that a guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing the guarantee. U.S. GAAP defines a guarantee as a contract that contingently requires the guarantor to pay a guaranteed party based upon: (a) changes in an underlying asset, liability or equity security of the guaranteed party; or (b) a third party’s failure to perform under a specified agreement. The Firm considers the following off–balance sheet lending-related arrangements to be guarantees under U.S. GAAP: certain asset purchase agreements, standby letters of credit and financial guarantees, securities lending indemnifications, certain indemnification agreements included within third-party contractual arrangements and certain derivative contracts.
As required by U.S. GAAP, the Firm initially records guarantees at the inception date fair value of
the obligation assumed (e.g., the amount of consideration received, the net present value of the
premium receivable). For certain types of guarantees, the Firm records this fair value amount in
other liabilities with an offsetting entry recorded in cash (for
premiums received), or other
assets (for premiums receivable). Any premium receivable recorded in other assets is reduced as cash is received under the contract, and the fair value of the liability
recorded at inception is amortized into income as lending- and deposit-related fees over the life of
the guarantee contract. For indemnifications provided in sales agreements, a portion of the sale
proceeds is allocated to the guarantee, which adjusts the gain or loss that would otherwise result
from the transaction. For these indemnifications, the initial liability is amortized to income as
the Firm’s risk is reduced (i.e., over time or when the indemnification expires). Any contingent
liability that exists as a result of issuing the guarantee or indemnification is recognized when it
become probable and reasonably estimable. The contingent portion of the liability is not recognized
if the estimated amount is less than the carrying amount of the liability recognized at inception
(adjusted for any amortization).
The recorded amounts of the liabilities related to guarantees and
indemnifications at December 31, 2010 and 2009, excluding the allowance for credit losses on
lending-related commitments, are discussed in footnote (b) to the table above and below in this
Note on pages 276–280.
Standby letters of credit
Standby letters of credit (“SBLC”) and other financial guarantees are conditional lending commitments issued by the Firm to guarantee the performance of a customer to a third party under certain arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade and similar transactions. The carrying values of standby and other letters of credit were $707 million and $920 million at December 31, 2010 and 2009, respectively, which were classified in accounts payable and other liabilities on the Consolidated Balance Sheets; these carrying values include $347 million and $553 million, respectively, for the allowance for lending-related commitments, and $360 million and $367 million, respectively, for the guarantee liability and corresponding asset.
Standby letters of credit (“SBLC”) and other financial guarantees are conditional lending commitments issued by the Firm to guarantee the performance of a customer to a third party under certain arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade and similar transactions. The carrying values of standby and other letters of credit were $707 million and $920 million at December 31, 2010 and 2009, respectively, which were classified in accounts payable and other liabilities on the Consolidated Balance Sheets; these carrying values include $347 million and $553 million, respectively, for the allowance for lending-related commitments, and $360 million and $367 million, respectively, for the guarantee liability and corresponding asset.
| 276 | JPMorgan Chase & Co. / 2010 Annual Report |
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The
following table presents standby letters of credit and
other letters of credit arrangements by the ratings profiles of the Firm’s
customers as of December 31, 2010 and 2009.
Standby letters of credit and other financial guarantees and other letters of credit
| 2010 | 2009 | |||||||||||||||
| Standby letters | Standby letters | |||||||||||||||
| of credit and other | Other letters | of credit and other | Other letters | |||||||||||||
| December 31, (in millions) | financial guarantees | of credit | financial guarantees | of credit | ||||||||||||
|
Investment-grade
(a)
|
$ | 70,236 | $ | 5,289 | $ | 66,786 | $ | 3,861 | ||||||||
|
Noninvestment-grade
(a)
|
24,601 | 1,374 | 24,699 | 1,306 | ||||||||||||
|
Total contractual amount
(b)
|
94,837 | (c) | 6,663 | 91,485 | (c) | 5,167 | ||||||||||
|
Allowance for lending-related commitments
|
345 | 2 | 552 | 1 | ||||||||||||
|
Commitments with collateral
|
37,815 | 2,127 | 31,454 | 1,315 | ||||||||||||
| (a) | The ratings scale is based on the Firm’s internal ratings which generally correspond to ratings as defined by S&P and Moody’s. | |
| (b) | At December 31, 2010 and 2009, represents the contractual amount net of risk participations totaling $22.4 billion and $24.6 billion, respectively, for standby letters of credit and other financial guarantees; and $1.1 billion and $690 million, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these commitments are shown gross of risk participations. | |
| (c) | At December 31, 2010 and 2009, includes unissued standby letters of credit commitments of $41.6 billion and $38.4 billion, respectively. |
Indemnification
agreements – general
In connection with issuing securities to investors, the Firm may enter into contractual arrangements with third parties that require the Firm to make a payment to them in the event of a change in tax law or an adverse interpretation of tax law. In certain cases, the contract also may include a termination clause, which would allow the Firm to settle the contract at its fair value in lieu of making a payment under the indemnification clause. The Firm may also enter into indemnification clauses in connection with the licensing of software to clients (“software licensees”) or when it sells a business or assets to a third party (“third-party purchasers”), pursuant to which it indemnifies software licensees for claims of liability or damages that may occur subsequent to the licensing of the software, or third-party purchasers for losses they may incur due to actions taken by the Firm prior to the sale of the business or assets. It is difficult to estimate the Firm’s maximum exposure under these indemnification arrangements, since this would require an assessment of future changes in tax law and future claims that may be made against the Firm that have not yet occurred. However, based on historical experience, management expects the risk of loss to be remote.
In connection with issuing securities to investors, the Firm may enter into contractual arrangements with third parties that require the Firm to make a payment to them in the event of a change in tax law or an adverse interpretation of tax law. In certain cases, the contract also may include a termination clause, which would allow the Firm to settle the contract at its fair value in lieu of making a payment under the indemnification clause. The Firm may also enter into indemnification clauses in connection with the licensing of software to clients (“software licensees”) or when it sells a business or assets to a third party (“third-party purchasers”), pursuant to which it indemnifies software licensees for claims of liability or damages that may occur subsequent to the licensing of the software, or third-party purchasers for losses they may incur due to actions taken by the Firm prior to the sale of the business or assets. It is difficult to estimate the Firm’s maximum exposure under these indemnification arrangements, since this would require an assessment of future changes in tax law and future claims that may be made against the Firm that have not yet occurred. However, based on historical experience, management expects the risk of loss to be remote.
Securities lending indemnification
Through the Firm’s securities lending program, customers’ securities, via custodial and non-custodial arrangements, may be lent to third parties. As part of this program, the Firm provides an indemnification in the lending agreements which protects the lender against the failure of the third-party borrower to return the lent securities in the event the Firm did not obtain sufficient collateral. To minimize its liability under these indemnification agreements, the Firm obtains cash or other highly liquid collateral with a market value exceeding 100% of the value of the securities on loan from the borrower. Collateral is marked to market daily to help assure that collateralization is adequate. Additional collateral is called from the borrower if a shortfall exists, or collateral may be released to the borrower in the event of overcollateralization. If a borrower defaults, the Firm would use the collateral held to purchase replacement securities in the market or to credit the lending customer with the cash equivalent thereof. Also, as part of this program, the
Through the Firm’s securities lending program, customers’ securities, via custodial and non-custodial arrangements, may be lent to third parties. As part of this program, the Firm provides an indemnification in the lending agreements which protects the lender against the failure of the third-party borrower to return the lent securities in the event the Firm did not obtain sufficient collateral. To minimize its liability under these indemnification agreements, the Firm obtains cash or other highly liquid collateral with a market value exceeding 100% of the value of the securities on loan from the borrower. Collateral is marked to market daily to help assure that collateralization is adequate. Additional collateral is called from the borrower if a shortfall exists, or collateral may be released to the borrower in the event of overcollateralization. If a borrower defaults, the Firm would use the collateral held to purchase replacement securities in the market or to credit the lending customer with the cash equivalent thereof. Also, as part of this program, the
Firm invests cash collateral received from the borrower in accordance with approved
guidelines.
Derivatives qualifying as guarantees
In addition to the contracts described above, the Firm transacts certain derivative contracts that meet the characteristics of a guarantee under U.S. GAAP. These contracts include written put options that require the Firm to purchase assets upon exercise by the option holder at a specified price by a specified date in the future. The Firm may enter into written put option contracts in order to meet client needs, or for trading purposes. The terms of written put options are typically five years or less. Derivative guarantees also include contracts such as stable value derivatives that require the Firm to make a payment of the difference between the market value and the book value of a counterparty’s reference portfolio of assets in the event that market value is less than book value and certain other conditions have been met. Stable value derivatives, commonly referred to as “stable value wraps”, are transacted in order to allow investors to realize investment returns with less volatility than an unprotected portfolio and are typically longer-term or may have no stated maturity, but allow the Firm to terminate the contract under certain conditions.
In addition to the contracts described above, the Firm transacts certain derivative contracts that meet the characteristics of a guarantee under U.S. GAAP. These contracts include written put options that require the Firm to purchase assets upon exercise by the option holder at a specified price by a specified date in the future. The Firm may enter into written put option contracts in order to meet client needs, or for trading purposes. The terms of written put options are typically five years or less. Derivative guarantees also include contracts such as stable value derivatives that require the Firm to make a payment of the difference between the market value and the book value of a counterparty’s reference portfolio of assets in the event that market value is less than book value and certain other conditions have been met. Stable value derivatives, commonly referred to as “stable value wraps”, are transacted in order to allow investors to realize investment returns with less volatility than an unprotected portfolio and are typically longer-term or may have no stated maturity, but allow the Firm to terminate the contract under certain conditions.
Derivative guarantees are recorded on the Consolidated Balance Sheets at fair value in trading
assets and trading liabilities.
The total notional amount of the derivatives that the Firm deems to
be guarantees was $87.8 billion and $98.1 billion at December 31, 2010 and 2009, respectively. The
notional amount generally represents the Firm’s maximum exposure to derivatives qualifying as
guarantees. However, exposure to certain stable value derivatives is contractually limited to a
substantially lower percentage of the notional amount; the notional amount on these stable value
contracts was $25.9 billion and $24.9 billion and the
maximum exposure to loss was $2.7 billion and $2.5 billion,
at December 31, 2010 and 2009, respectively. The fair values of the contracts reflects the
probability of whether the Firm will be required to perform under the contract. The fair value
related to derivative guarantees were derivative payables of $390 million and $974 million and
derivative receivables of $96 million and $78 million at
December 31, 2010 and 2009, respec-
| JPMorgan Chase & Co. / 2010 Annual Report | 277 |
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Notes to consolidated financial statements
tively. The Firm reduces exposures to these contracts by entering into offsetting transactions, or by
entering into contracts that hedge the market risk related to the derivative guarantees.
In addition to derivative contracts that meet the characteristics of a guarantee, the Firm is both
a purchaser and seller of credit protection in the credit derivatives market. For a further
discussion of credit derivatives, see Note 6 on pages 191–199 of this Annual Report.
Unsettled reverse repurchase and securities borrowing agreements
In the normal course of business, the Firm enters into reverse repurchase agreements and securities borrowing agreements that settle at a future date. At settlement, these commitments require that the Firm advance cash to and accept securities from the counterparty. These agreements generally do not meet the definition of a derivative, and therefore, are not recorded on the Consolidated Balance Sheets until settlement date. At December 31, 2010 and 2009, the amount of commitments related to forward starting reverse repurchase agreements and securities borrowing agreements were $14.4 billion and $23.4 billion, respectively. Commitments related to unsettled reverse repurchase agreements and securities borrowing agreements with regular way settlement periods were $25.5 billion and $24.8 billion at December 31, 2010 and 2009, respectively.
In the normal course of business, the Firm enters into reverse repurchase agreements and securities borrowing agreements that settle at a future date. At settlement, these commitments require that the Firm advance cash to and accept securities from the counterparty. These agreements generally do not meet the definition of a derivative, and therefore, are not recorded on the Consolidated Balance Sheets until settlement date. At December 31, 2010 and 2009, the amount of commitments related to forward starting reverse repurchase agreements and securities borrowing agreements were $14.4 billion and $23.4 billion, respectively. Commitments related to unsettled reverse repurchase agreements and securities borrowing agreements with regular way settlement periods were $25.5 billion and $24.8 billion at December 31, 2010 and 2009, respectively.
Building purchase commitments
In connection with the Bear Stearns merger, the Firm succeeded to an operating lease arrangement for the building located at 383 Madison Avenue in New York City (the “Synthetic Lease”). Under the terms of the Synthetic Lease, the Firm was obligated to a maximum residual value guarantee of approximately $670 million if the building were sold and the proceeds of the sale were insufficient to satisfy the lessor’s debt obligation. Effective November 1, 2010, the lease expired and the Firm purchased the property recognizing the $670 million purchase price in premises and equipment.
In connection with the Bear Stearns merger, the Firm succeeded to an operating lease arrangement for the building located at 383 Madison Avenue in New York City (the “Synthetic Lease”). Under the terms of the Synthetic Lease, the Firm was obligated to a maximum residual value guarantee of approximately $670 million if the building were sold and the proceeds of the sale were insufficient to satisfy the lessor’s debt obligation. Effective November 1, 2010, the lease expired and the Firm purchased the property recognizing the $670 million purchase price in premises and equipment.
On December 15, 2010, the Firm entered into an agreement to purchase the leasehold property at 60
Victoria Embankment in London, a building the Firm has leased since 1991, for approximately $253
million. The purchase of this building is expected to close in the second quarter of 2011.
Loan sale and securitization-related indemnifications
Indemnifications for breaches of representations and warranties
Indemnifications for breaches of representations and warranties
In connection with the Firm’s loan sale and securitization activities with the GSEs and other loan
sale and private-label securitization transactions, as described in Notes 14 and 16 on pages
220–238 and 244–259, respectively, of this Annual Report, the Firm has made representations and
warranties that the loans sold meet certain requirements. For transactions with the GSEs, these
representations include type of collateral, underwriting standards, validity of certain borrower
representations in connection with the loan, that primary mortgage insurance is in force for any
mortgage loan with an LTV ratio greater than 80%, and the use of the GSEs’ standard legal
documentation. The Firm may be, and has been,
required to repurchase loans and/or indemnify the
GSEs and other investors for losses due to material breaches of these representations and
warranties; however, predominantly all of the repurchase demands received by the Firm and the
Firm’s losses realized to date are related to loans sold to the GSEs. Generally, the maximum amount
of future payments the Firm would be required to make for breaches of these representations and
warranties would be equal to the unpaid principal balance of such loans that are deemed to have
defects sold to purchasers (including securitization-related SPEs) plus, in certain circumstances,
accrued and unpaid interest on such loans and certain expense.
Subsequent to the Firm’s acquisition of certain assets and liabilities of Washington Mutual from
the FDIC in September 2008, the Firm resolved and/or limited certain current and future repurchase
demands for loans sold to the GSEs by Washington Mutual, although it remains the Firm’s position
that such obligations remain with the FDIC receivership. Nevertheless, certain payments have been
made with respect to certain of the then current and future repurchase demands, and the Firm will
continue to evaluate and may pay certain future repurchase demands related to individual loans. In
addition to the payments already made, the Firm has a remaining repurchase liability of
approximately $190 million as of December 31, 2010, relating to unresolved and future demands on
the Washington Mutual portfolio.
The primary reasons for repurchase demands from the GSEs relate to alleged misrepresentations
primarily driven by: (i) credit quality and/or undisclosed debt of the borrower; (ii) income level
and/or employment status of the borrower; and (iii) appraised value of collateral. Ineligibility of
the borrower for the particular product, mortgage insurance rescissions and missing documentation
are other reasons for repurchase demands.
Beginning in 2009, mortgage insurers more frequently rescinded mortgage insurance coverage. The
successful rescission of mortgage insurance typically results in a violation of representations and
warranties made to the GSEs and, therefore, has been a significant cause of repurchase demands from
the GSEs. The Firm actively reviews all rescission notices from mortgage insurers and contests them
when appropriate. In addition, the Firm is engaged in discussions with various mortgage insurers on
their rights and practices related to rescinding mortgage insurance coverage. The Firm has entered
into agreements with two mortgage insurers to make processes more efficient and reduce exposure on
claims on certain portfolios for which the Firm is a servicer. The impact of these agreements is
reflected in the repurchase liability as of December 31, 2010.
When the
Firm accepts a repurchase demand from one of the GSEs, the Firm may either (a) repurchase
the loan or the underlying collateral from the GSE at the unpaid principal balance of the loan plus
accrued interest, or (b) reimburse the GSE for its realized loss on a liquidated property (a
“make-whole” payment).
To estimate the Firm’s repurchase liability arising from breaches of representations and
warranties, the Firm considers:
| (i) | the level of current unresolved repurchase demands and mortgage insurance rescission notices, |
| 278 | JPMorgan Chase & Co. / 2010 Annual Report |
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| (ii) | estimated probable future repurchase demands based upon loans that are or ever have been 90 days past due considering historical experience, |
| (iii) | the potential ability of the Firm to cure the defects identified in the repurchase demands, |
| (iv) | the estimated severity of loss upon repurchase of the loan or collateral, make-whole settlement, or indemnification, |
| (v) | the Firm’s potential ability to recover its losses from third-party originators, and |
| (vi) | the terms of agreements with certain mortgage insurers and other parties. |
Based on these factors, the Firm has recognized a repurchase liability of $3.3 billion and $1.7
billion, including the Washington Mutual liability described above, as of December 31, 2010 and
2009, respectively, which is reported in accounts payable and other liabilities net of probable
recoveries from third parties.
Substantially all of the estimates and assumptions underlying the Firm’s established methodology
for computing its recorded repurchase liability – including factors such as the amount of probable
future demands from purchasers, the ability of the Firm to cure identified defects, the severity of
loss upon repurchase or foreclosure, and recoveries from third
parties – require application of a
significant level of management judgment. Estimating the repurchase liability is further
complicated by limited and rapidly changing historical data and uncertainty surrounding numerous
external factors, including: (i) macro-economic factors, and (ii) the level of future demands,
which is dependent, in part, on actions taken by third parties such as the GSEs and mortgage
insurers. While the Firm uses the best information available to it in estimating its repurchase
liability, the estimation process is inherently uncertain and imprecise and, accordingly, losses in
excess of the amounts accrued as of December 31, 2010 are reasonably possible.
The Firm believes the estimate of the range of reasonably possible losses, in excess of reserves
established, for its repurchase liability is from $0 to approximately
$2 billion at December 31,
2010. This estimated range of reasonably possible loss is based on an assumed peak to trough
decline in home prices of 46%, which is an additional 12 percentage point decline in home prices beyond the Firm’s
current assumptions. Such a decline could increase the level of loan delinquencies, thereby
potentially increasing the repurchase demand rate from the GSEs and increasing loss severity on
repurchased loans, each of which could affect the Firm’s repurchase liability. The Firm does not
consider such a further decline in home prices to be likely to occur, and actual repurchase losses
could vary significantly from the Firm’s recorded repurchase liability or this estimate of
reasonably possible additional losses, depending on the outcome of various factors, including those
considered above.
The following table summarizes the change in the repurchase liability for each of the periods
presented.
Summary of changes in repurchase liability
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Repurchase
liability at beginning of
period
|
$ | 1,705 | $ | 1,093 | $ | 15 | ||||||
|
Realized losses
(a)
|
(1,423 | ) | (1,253 | ) (c) | (155 | ) | ||||||
|
Provision for repurchase losses
|
3,003 | 1,865 | 1,233 | (d) | ||||||||
|
Repurchase liability at end of period
|
$ | 3,285 | (b) | $ | 1,705 | $ | 1,093 | |||||
| (a) | Includes principal losses and accrued interest on repurchased loans, “make-whole” settlements, settlements with claimants, and certain related expense. For the years ended December 31, 2010, 2009 and 2008, make-whole settlements were $632 million, $277 million and $34 million, respectively. | |
| (b) | Includes $190 million at December 31, 2010, related to future demands on loans sold by Washington Mutual to the GSEs. | |
| (c) | Includes the Firm’s resolution of certain current and future repurchase demands for certain loans sold by Washington Mutual. | |
| (d) | Includes a repurchase liability assumed for certain loans sold by Washington Mutual; this assumed liability was reported as a reduction of the extraordinary gain rather than as a charge to the provision for credit losses. |
Loans sold with recourse
The Firm provides servicing for mortgages and certain commercial lending products on both a recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to the Firm is the cost of temporary servicing advances of funds (i.e., normal servicing advances). In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as Fannie Mae or Freddie Mac or a private investor, insurer or guarantor. Losses on recourse servicing predominantly occur when foreclosure sales proceeds of the property underlying a defaulted loan are less than the sum of the outstanding principal balance, plus accrued interest on the loan and the cost of holding and disposing of the underlying property. The Firm’s securitizations are predominantly nonrecourse, thereby effectively transferring the risk of future credit losses to the purchaser of the mortgage-backed securities issued by the trust. At December 31, 2010 and 2009, the unpaid principal balance of loans sold with recourse totaled $11.0 billion and $13.5 billion, respectively. The carrying value of the related liability that the Firm has recorded, which is representative of the Firm’s view of the likelihood it will have to perform under this guarantee, was $153 million and $271 million at December 31, 2010 and 2009, respectively.
The Firm provides servicing for mortgages and certain commercial lending products on both a recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to the Firm is the cost of temporary servicing advances of funds (i.e., normal servicing advances). In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as Fannie Mae or Freddie Mac or a private investor, insurer or guarantor. Losses on recourse servicing predominantly occur when foreclosure sales proceeds of the property underlying a defaulted loan are less than the sum of the outstanding principal balance, plus accrued interest on the loan and the cost of holding and disposing of the underlying property. The Firm’s securitizations are predominantly nonrecourse, thereby effectively transferring the risk of future credit losses to the purchaser of the mortgage-backed securities issued by the trust. At December 31, 2010 and 2009, the unpaid principal balance of loans sold with recourse totaled $11.0 billion and $13.5 billion, respectively. The carrying value of the related liability that the Firm has recorded, which is representative of the Firm’s view of the likelihood it will have to perform under this guarantee, was $153 million and $271 million at December 31, 2010 and 2009, respectively.
Credit card charge-backs
Prior to November 1, 2008, the Firm was a partner with one of the leading companies in electronic payment services in a joint venture operating under the name of Chase Paymentech Solutions, LLC (the “joint venture”). The joint venture provided merchant processing services in the U.S. and Canada. The dissolution of the joint venture was completed on November 1, 2008, and JPMorgan Chase retained approximately 51% of the business under the Chase Paymentech name.
Prior to November 1, 2008, the Firm was a partner with one of the leading companies in electronic payment services in a joint venture operating under the name of Chase Paymentech Solutions, LLC (the “joint venture”). The joint venture provided merchant processing services in the U.S. and Canada. The dissolution of the joint venture was completed on November 1, 2008, and JPMorgan Chase retained approximately 51% of the business under the Chase Paymentech name.
| JPMorgan Chase & Co. / 2010 Annual Report | 279 |
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Notes to consolidated financial statements
Under the rules of Visa USA, Inc., and MasterCard International, JPMorgan Chase Bank, N.A., is
liable primarily for the amount of each processed credit card sales transaction that is the subject
of a dispute between a cardmember and a merchant. If a dispute is resolved in the cardmember’s
favor, Chase Paymentech will (through the cardmember’s issuing bank) credit or refund the amount to
the cardmember and will charge back the transaction to the merchant. If Chase Paymentech is unable
to collect the amount from the merchant, Chase Paymentech will bear the loss for the amount
credited or refunded to the cardmember. Chase Paymentech mitigates this risk by withholding future
settlements, retaining cash reserve accounts or by obtaining other security. However, in the
unlikely event that: (1) a merchant ceases operations and is unable to deliver products, services
or a refund; (2) Chase Paymentech does not have sufficient collateral from the merchant to provide
customer refunds; and (3) Chase Paymentech does not have sufficient financial resources to provide
customer refunds, JPMorgan Chase Bank, N.A., would be liable for the amount of the transaction. For
the year ended December 31, 2010, Chase Paymentech incurred aggregate credit losses of $12 million
on $469.3 billion of aggregate volume processed, and at December 31, 2010, it held $189 million of
collateral. For the year ended December 31, 2009, Chase Paymentech incurred aggregate credit losses
of $11 million on $409.7 billion of aggregate volume processed, and at December 31, 2009, it held
$213 million of collateral. For the year ended December 31, 2008, Chase Paymentech incurred
aggregate credit losses of $13 million on $713.9 billion of aggregate volume processed, and at
December 31, 2008, it held $222 million of collateral. The Firm believes that, based on historical
experience and the collateral held by Chase Paymentech, the fair value of the Firm’s charge
back-related obligations, which are representative of the payment or
performance risk to the Firm,
is immaterial.
Exchange and clearinghouse guarantees
The Firm is a member of several securities and futures exchanges and clearinghouses, both in the U.S. and other countries. Membership in some of these organizations requires the Firm to pay a pro rata share of the losses incurred by the organization as a result of the default of another member. Such obligations vary with different organizations. These obligations may be limited to members who dealt with the defaulting member or to the amount (or a multiple of the amount) of the Firm’s contribution to a member’s guarantee fund, or, in a few cases, the obligation may be unlimited. It is difficult to estimate the Firm’s maximum exposure under these membership agreements, since this would require an assessment of future claims that may be made against the Firm that have not yet occurred. However, based on historical experience, management expects the risk of loss to be remote.
The Firm is a member of several securities and futures exchanges and clearinghouses, both in the U.S. and other countries. Membership in some of these organizations requires the Firm to pay a pro rata share of the losses incurred by the organization as a result of the default of another member. Such obligations vary with different organizations. These obligations may be limited to members who dealt with the defaulting member or to the amount (or a multiple of the amount) of the Firm’s contribution to a member’s guarantee fund, or, in a few cases, the obligation may be unlimited. It is difficult to estimate the Firm’s maximum exposure under these membership agreements, since this would require an assessment of future claims that may be made against the Firm that have not yet occurred. However, based on historical experience, management expects the risk of loss to be remote.
Lease commitments
At December 31, 2010, JPMorgan Chase and its subsidiaries were obligated under a number of noncancelable operating leases for premises and equipment used primarily for banking purposes, and for energy-related tolling service agreements. Certain leases contain renewal options or escalation clauses providing for increased rental payments based on maintenance, utility and tax increases, or they require the Firm to perform restoration work on leased premises. No lease agreement imposes restrictions on the Firm’s ability to pay dividends, engage in debt or equity financing transactions or enter into further lease agreements.
At December 31, 2010, JPMorgan Chase and its subsidiaries were obligated under a number of noncancelable operating leases for premises and equipment used primarily for banking purposes, and for energy-related tolling service agreements. Certain leases contain renewal options or escalation clauses providing for increased rental payments based on maintenance, utility and tax increases, or they require the Firm to perform restoration work on leased premises. No lease agreement imposes restrictions on the Firm’s ability to pay dividends, engage in debt or equity financing transactions or enter into further lease agreements.
The following table presents required future minimum rental payments under operating leases with
noncancelable lease terms that expire after December 31, 2010.
| Year ended December 31, (in millions) | ||||
|
2011
|
$ | 1,884 | ||
|
2012
|
1,804 | |||
|
2013
|
1,674 | |||
|
2014
|
1,497 | |||
|
2015
|
1,363 | |||
|
After 2015
|
7,778 | |||
|
Total
minimum payments
required
(a)
|
16,000 | |||
|
Less: Sublease rentals under noncancelable subleases
|
(1,848 | ) | ||
|
Net minimum payment required
|
$ | 14,152 | ||
| (a) | Lease restoration obligations are accrued in accordance with U.S. GAAP, and are not reported as a required minimum lease payment. |
Total rental expense was as follows.
| Year ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Gross rental expense
|
$ | 2,212 | $ | 1,884 | $ | 1,917 | ||||||
|
Sublease rental income
|
(545 | ) | (172 | ) | (415 | ) | ||||||
|
Net rental expense
|
$ | 1,667 | $ | 1,712 | $ | 1,502 | ||||||
| 280 | JPMorgan Chase & Co. / 2010 Annual Report |
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Pledged assets
At December 31, 2010, assets were pledged to collateralize repurchase agreements, other securities financing agreements, derivative transactions and for other purposes, including to secure borrowings and public deposits. Certain of these pledged assets may be sold or repledged by the secured parties and are identified as financial instruments owned (pledged to various parties) on the Consolidated Balance Sheets. In addition, at December 31, 2010 and 2009, the Firm had pledged $288.7 billion and $344.6 billion, respectively, of financial instruments it owns that may not be sold or repledged by the secured parties. The significant components of the Firm’s pledged assets were as follows.
At December 31, 2010, assets were pledged to collateralize repurchase agreements, other securities financing agreements, derivative transactions and for other purposes, including to secure borrowings and public deposits. Certain of these pledged assets may be sold or repledged by the secured parties and are identified as financial instruments owned (pledged to various parties) on the Consolidated Balance Sheets. In addition, at December 31, 2010 and 2009, the Firm had pledged $288.7 billion and $344.6 billion, respectively, of financial instruments it owns that may not be sold or repledged by the secured parties. The significant components of the Firm’s pledged assets were as follows.
| December 31, (in billions) | 2010 | 2009 | ||||||
|
Securities
|
$ | 112.1 | $ | 155.3 | ||||
|
Loans
|
214.8 | 285.5 | ||||||
|
Trading assets and other
|
123.2 | 84.6 | ||||||
|
Total
assets
pledged
(a)
|
$ | 450.1 | $ | 525.4 | ||||
| (a) | Total assets pledged do not include assets of consolidated VIEs; these assets are used to settle the liabilities of those entities. See Note 16 on pages 244–259 of this Annual Report for additional information on assets and liabilities of consolidated VIEs. |
Collateral
At December 31, 2010 and 2009, the Firm had accepted assets as collateral that it could sell or repledge, deliver or otherwise use with a fair value of approximately $655.0 billion and $635.6 billion, respectively. This collateral was generally obtained under resale agreements, securities borrowing agreements, customer margin loans and derivative agreements. Of the collateral received, approximately $521.3 billion and $472.7 billion were sold or repledged, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales and to collateralize deposits and derivative agreements. The reporting of collateral sold or repledged was revised in 2010 to include certain securities used to cover short sales and to collateralize deposits and derivative agreements. Prior period amounts have been revised to conform to the current presentation. This revision had no impact on the Firm’s Consolidated Balance Sheets or its results of operations.
At December 31, 2010 and 2009, the Firm had accepted assets as collateral that it could sell or repledge, deliver or otherwise use with a fair value of approximately $655.0 billion and $635.6 billion, respectively. This collateral was generally obtained under resale agreements, securities borrowing agreements, customer margin loans and derivative agreements. Of the collateral received, approximately $521.3 billion and $472.7 billion were sold or repledged, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales and to collateralize deposits and derivative agreements. The reporting of collateral sold or repledged was revised in 2010 to include certain securities used to cover short sales and to collateralize deposits and derivative agreements. Prior period amounts have been revised to conform to the current presentation. This revision had no impact on the Firm’s Consolidated Balance Sheets or its results of operations.
Contingencies
In 2008, the Firm resolved with the IRS issues related to compliance with reporting and withholding requirements for certain accounts transferred to The Bank of New York Mellon Corporation (“BNYM”) in connection with the Firm’s sale to BNYM of its corporate trust business. The resolution of these issues did not have a material effect on the Firm.
In 2008, the Firm resolved with the IRS issues related to compliance with reporting and withholding requirements for certain accounts transferred to The Bank of New York Mellon Corporation (“BNYM”) in connection with the Firm’s sale to BNYM of its corporate trust business. The resolution of these issues did not have a material effect on the Firm.
| JPMorgan Chase & Co. / 2010 Annual Report | 281 |
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Notes to consolidated financial statements
As of December 31, 2010, the Firm and its subsidiaries are defendants or putative defendants in
more than 10,000 legal proceedings, in the form of regulatory/government investigations as well as
private, civil litigations. The litigations range from individual actions involving a single
plaintiff to class action lawsuits with potentially millions of class members. Investigations
involve both formal and informal proceedings, by both governmental agencies and self-regulatory
organizations. These legal proceedings are at varying stages of adjudication, arbitration or
investigation, and involve each of the Firm’s lines of business and geographies and a wide variety
of claims (including common law tort and contract claims and statutory antitrust, securities and
consumer protection claims), some of which present novel claims or legal theories.
The Firm believes the estimate of the aggregate range of reasonably possible losses, in excess of
reserves established, for its legal proceedings is from $0 to
approximately $4.5 billion at December
31, 2010. This estimated aggregate range of reasonably possible losses is based upon currently
available information for those proceedings in which the Firm is involved, taking into account the
Firm’s best estimate of such losses for those cases for which
such estimate can be made. For certain cases, the Firm does not
believe that an estimate can currently be made. The Firm’s
estimate involves significant judgment, given the varying stages of
the proceedings (including the fact that many of them are currently
in preliminary stages), the existence of
multiple defendants (including the Firm) in many of such proceedings whose share of liability has
yet to be determined, the numerous yet-unresolved issues in many of
the proceedings (including issues regarding class certification and
the scope of many of the claims), and the
attendant uncertainty of the various potential outcomes of such proceedings. Accordingly, the
Firm’s estimate will change from time to time, and actual losses may be more than the current
estimate.
Set forth below are descriptions of the Firm’s material legal proceedings.
Auction-Rate Securities Investigations and Litigation.
Beginning in March 2008, several regulatory
authorities initiated investigations of a number of industry participants, including the Firm,
concerning possible state and federal securities law violations in connection with the sale of
auction-rate securities. The market for many such securities had frozen and a significant number of
auctions for those securities began to fail in February 2008.
The Firm, on behalf of itself and affiliates, agreed to a settlement in principle with the New York
Attorney General’s Office which provided, among other things, that the Firm would offer to purchase
at par certain auction-rate securities purchased from J.P. Morgan Securities LLC (“JPMorgan
Securities”; formerly J.P. Morgan Securities Inc.), Chase Investment Services Corp. and Bear,
Stearns & Co. Inc. by individual investors, charities and small- to medium-sized businesses. The
Firm also agreed to a substantively similar settlement in principle with the Office of Financial
Regulation for the State of Florida and the North American Securities Administrator Association
(“NASAA”) Task Force, which agreed to recommend approval of the settlement to all remaining states,
Puerto Rico and the U.S. Virgin Islands. The Firm has finalized the settlement agreements with the
New York Attorney General’s Office and the Office of Financial Regulation for the State of Florida.
The
settlement agreements provide for the payment of penalties totaling $25 million to all states.
The Firm is currently in the process of finalizing consent agreements with NASAA’s member states;
over 40 of these consent agreements have been finalized to date.
The Firm also faces a number of civil actions relating to the Firm’s sales of auction-rate
securities, including a putative securities class action in the United States District Court for
the Southern District of New York that seeks unspecified damages, and individual arbitrations and
lawsuits in various forums brought by institutional and individual investors that, together, seek
damages totaling more than $200 million relating to the Firm’s sales of auction-rate securities.
One action is brought by an issuer of auction-rate securities. The
actions generally allege that the Firm and other firms manipulated the market for auction-rate
securities by placing bids at auctions that affected these securities’ clearing rates or otherwise
supported the auctions without properly disclosing these activities. Some actions also allege that
the Firm
misrepresented that auction-rate securities were short-term instruments. The Firm has
filed motions to dismiss each of the actions, which are being coordinated before the Southern
District. These motions are currently pending.
Additionally, the Firm was named in two putative antitrust class actions in the United States
District Court for the Southern District of New York. The actions allege that the Firm, along with
numerous other financial institution defendants, colluded to maintain and stabilize the
auction-rate securities market and then to withdraw their support for the auction-rate securities
market. In January 2010, the District Court dismissed both actions. The Second Circuit Court of
Appeals consolidated the two appeals. That appeal is currently pending.
Bear Stearns Hedge Fund Matters.
Bear Stearns, certain current or former subsidiaries of Bear
Stearns, including Bear Stearns Asset Management, Inc. (“BSAM”) and Bear, Stearns & Co. Inc., and
certain current or former Bear Stearns employees are named defendants (collectively the “Bear
Stearns defendants”) in multiple civil actions and arbitrations relating to alleged losses of more
than $1 billion resulting from the failure of the Bear Stearns High Grade Structured Credit
Strategies Master Fund, Ltd. (the “High Grade Fund”) and the Bear Stearns High Grade Structured
Credit Strategies Enhanced Leverage Master Fund, Ltd. (the “Enhanced Leverage Fund”) (collectively,
the “Funds”). BSAM served as investment manager for both of the Funds, which were organized such
that there were U.S. and Cayman Islands “feeder funds” that invested substantially all their
assets, directly or indirectly, in the Funds. The Funds are in liquidation.
There are currently four civil actions pending in the United States District Court for the Southern
District of New York relating to the Funds. Two of these actions involve derivative lawsuits
brought on behalf of purchasers of partnership interests in the two U.S. feeder funds, alleging
that the Bear Stearns defendants mismanaged the Funds and made material misrepresentations to
and/or withheld information from investors in the feeder funds. These actions seek, among other
things, unspecified compensatory damages based on alleged investor losses. The third action,
brought by the Joint Vol-
| 282 | JPMorgan Chase & Co. / 2010 Annual Report |
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untary Liquidators of the Cayman Islands feeder funds, makes allegations
similar to those asserted in the derivative lawsuits related to the U.S. feeder funds, and seeks
compensatory and punitive damages. Motions to dismiss in these three cases have been granted in
part and denied in part. An agreement in principle has been reached, pursuant to which BSAM would
pay a maximum of approximately $19 million to settle the one derivative action relating to the
feeder fund to the High Grade Fund. BSAM has reserved the right not to proceed with this settlement
if plaintiff is unable to secure the participation of investors whose net contributions meet a
prescribed percentage of the aggregate net contributions to the High Grade Fund. The agreement in
principle remains subject to documentation and approval by the Court. Discovery in the other two
actions is ongoing.
The fourth action was brought by Bank of America and Banc of America Securities LLC (together
“BofA”) alleging breach of contract and fraud in connection with a May 2007 $4 billion
securitization, known as a “CDO-squared,” for which BSAM served as collateral manager. This
securitization was composed of certain collateralized debt obligation (“CDO”) holdings that were
purchased by BofA from the Funds. Bank of America seeks in excess of $3 billion in damages.
Defendants’ motion to dismiss in this action was largely denied, an amended complaint was filed and
discovery is ongoing.
Bear Stearns Shareholder Litigation and Related Matters.
Various shareholders of Bear Stearns have
commenced purported class actions against Bear Stearns and certain of its former officers and/or
directors on behalf of all persons who purchased or otherwise acquired common stock of Bear Stearns
between December 14, 2006 and March 14, 2008 (the “Class Period”). During the Class Period Bear
Stearns had between 115 and 120 million common shares outstanding, and the price of those
securities declined from a high of $172.61 to a low of $30 at the end of the period. The actions,
originally commenced in several federal courts, allege that the defendants issued materially false
and misleading statements regarding Bear Stearns’ business and financial results and that, as a
result of those false statements, Bear Stearns’ common stock traded at artificially inflated prices
during the Class Period. Separately, several individual shareholders of Bear Stearns have commenced
or threatened to commence arbitration proceedings and lawsuits asserting claims similar to those in
the putative class actions. In addition, Bear Stearns and certain of its former officers and/or
directors have also been named as defendants in a number of purported class actions commenced in
the United States District Court for the Southern District of New York seeking to represent the
interests of participants in the Bear Stearns Employee Stock Ownership Plan (“ESOP”) during the
time period of December 2006 to March 2008. These actions, brought under the Employee Retirement
Income Security Act (“ERISA”), allege that defendants breached their fiduciary duties to plaintiffs
and to the other participants and beneficiaries of the ESOP by (a) failing to manage prudently the
ESOP’s investment in Bear Stearns securities; (b) failing to communicate fully and accurately about
the risks of the ESOP’s investment in Bear Stearns stock; (c) failing to avoid or address
alleged
conflicts of interest; and (d) failing to monitor those who managed and administered the ESOP.
Bear Stearns, former members of Bear Stearns’ Board of Directors and certain of Bear Stearns’
former executive officers have also been named as defendants in two purported shareholder
derivative suits, subsequently consolidated into one action, pending in the United States District
Court for the Southern District of New York. Plaintiffs are asserting claims for breach of
fiduciary duty, violations of federal securities laws, waste of corporate assets and gross
mismanagement, unjust enrichment, abuse of control and indemnification and contribution in
connection with the losses sustained by Bear Stearns as a result of its purchases of subprime loans
and certain repurchases of its own common stock. Certain individual defendants are also alleged to
have sold their holdings of Bear Stearns common stock while in possession of material nonpublic
information. Plaintiffs seek compensatory damages in an unspecified amount. Plaintiffs later filed
a second amended complaint asserting, for the first time, purported class action claims, as well as
new allegations concerning events that took place in March 2008.
All of the above-described actions filed in federal courts were ordered transferred and joined for
pre-trial purposes before the United States District Court for the Southern District of New York.
Defendants moved to dismiss the purported securities class action, the shareholders’ derivative
action and the ERISA action. In January 2011, the District Court granted the motions to dismiss the
derivative and ERISA actions, and denied the motion as to the securities action. Plaintiffs in the
derivative action have filed a motion for reconsideration of the dismissal. Discovery will now
commence in the securities action.
City of Milan Litigation and Criminal Investigation.
In January 2009, the City of Milan, Italy (the
“City”) issued civil proceedings against (among others) JPMorgan Chase Bank, N.A. and J.P. Morgan
Securities Ltd. (together, “JPMorgan Chase”) in the District Court of Milan. The proceedings relate
to (a) a bond issue by the City in June 2005 (the “Bond”) and (b) an associated swap transaction, which was
subsequently restructured on a number of occasions between 2005 and 2007 (the “Swap”). The City
seeks damages and/or other remedies against JPMorgan Chase (among others) on the grounds of alleged
“fraudulent and deceitful acts” and alleged breach of advisory obligations by JPMorgan Chase (among
others) in connection with the Swap and the Bond, together with related swap transactions with
other counterparties. The civil proceedings continue and there will be an initial hearing on March
9, 2011. JPMorgan Chase Bank, N.A. will seek an adjournment on the grounds that it has filed a
challenge to the Italian Supreme Court’s jurisdiction over JPMorgan Chase Bank, N.A., which has yet
to be decided. The judge directed four current and former JPMorgan Chase personnel and JPMorgan
Chase Bank, N.A. (as well as other individuals and three other banks) to go forward to a full trial
that started in May 2010. Although the Firm is not charged with any crime and does not face
criminal liability, if one or more of its employees were found guilty, the Firm could be subject to
administrative sanctions, including restrictions on its ability to conduct
| JPMorgan Chase & Co. / 2010 Annual Report | 283 |
Table of Contents
Notes to consolidated financial statements
business in Italy and
monetary penalties. In the initial hearings, the City successfully applied to join some of the
claims in the civil proceedings against the individuals and JPMorgan Chase Bank, N.A. to the
criminal proceedings. In addition, a consumer association has also been given leave to join the
criminal proceedings to seek damages from the defendant banks.
Enron Litigation.
JPMorgan Chase and certain of its officers and directors are involved in several
lawsuits that together seek substantial damages arising out of the Firm’s banking relationships
with Enron Corp. and its subsidiaries (“Enron”). A number of actions and other proceedings against
the Firm previously were resolved, including a class action lawsuit captioned Newby v. Enron Corp.
and adversary proceedings brought by Enron’s bankruptcy estate. The remaining Enron-related actions
include individual actions by Enron investors, an action by an Enron counterparty, and a purported
class action filed on behalf of JPMorgan Chase employees who participated in the Firm’s 401(k) plan
asserting claims under the ERISA for alleged breaches of fiduciary duties by JPMorgan Chase, its
directors and named officers. That action has been dismissed, and is on appeal to the United States
Court of Appeals for the Second Circuit.
Interchange Litigation.
A group of merchants has filed a series of putative class action complaints
in several federal courts. The complaints allege that VISA and MasterCard, as well as certain other
banks and their respective bank holding companies, conspired to set the price of credit and debit
card interchange fees, enacted respective association rules in violation of anti-trust laws, and
engaged in tying/bundling and exclusive dealing. The complaint seeks unspecified damages and
injunctive relief based on the theory that interchange would be lower or eliminated but for the
challenged conduct. Based on publicly available estimates, Visa and MasterCard branded payment
cards generated approximately $40 billion of interchange fees industry-wide in 2009. All cases have
been consolidated in the United States District Court for the Eastern District of New York for
pretrial proceedings. The Court has dismissed all claims relating to periods prior to January 2004.
The Court has not yet ruled on motions relating to the remainder of the case. Fact and expert
discovery in the case have closed. The plaintiffs have filed a motion seeking class certification,
and the defendants have opposed that motion. The Court has not yet ruled on the class certification
motion.
In addition to the consolidated class action complaint, plaintiffs filed supplemental complaints
challenging the initial public offerings (“IPOs”) of MasterCard and Visa (the “IPO Complaints”).
With respect to the MasterCard IPO, plaintiffs allege that the
offering violated Section 7 of the Clayton Act and Section 1 of the Sherman Act and that the
offering was a fraudulent conveyance. With respect to the Visa IPO, plaintiffs are challenging the
Visa IPO on antitrust theories parallel to those articulated in the MasterCard IPO pleading.
Defendants have filed motions to dismiss the IPO Complaints. The Court has not yet ruled on those
motions.
Investment Management Litigation.
Four cases have been filed claiming that investment portfolios
managed by JPMorgan Investment
Management Inc. (“JPMorgan Investment Management”) were
inappropriately invested in securities backed by subprime residential real estate collateral.
Plaintiffs claim that JPMorgan Investment Management and related defendants are liable for losses
of more than $1 billion in market value of these securities. The first case was filed by NM Homes
One, Inc. in federal District Court in New York, and the Court granted JPMorgan Chase Bank, N.A.’s
motion to dismiss nine of plaintiff’s ten causes of action, leaving a breach of contract claim. The
Court thereafter granted the plaintiff’s motion for reconsideration and reinstated the common law
non-fraud claims for breach of fiduciary duty, negligence, and gross negligence. The plaintiff
withdrew its claim for negligent misrepresentation. The Firm has filed a renewed motion to dismiss
the common law non-fraud claims and a motion for judgment on the pleadings as to the breach of
contract claim. In the second case, which was filed by Assured Guaranty (U.K.) in New York state
court, the New York State Appellate Division allowed plaintiff to proceed with its claims for
breach of fiduciary duty and gross negligence, and for breach of contract based on alleged
violations of the Delaware Insurance Code. The Firm sought and has obtained leave to appeal to the
New York State Court of Appeals the decision by the Appellate Division to allow the breach of
fiduciary duty and gross negligence claims to proceed. In the third case, filed by Ambac Assurance
UK Limited in New York state court, the lower court granted JPMorgan Investment Management’s motion
to dismiss, and plaintiff has filed a notice of appeal. The fourth case was filed by CMMF LLP in
New York state court; the lower court granted JPMorgan Investment Management’s motion to dismiss
the claims, other than claims for breach of contract and negligent misrepresentation. The Appellate
Division affirmed the lower court’s decision. Plaintiff has since filed an amended complaint
seeking to assert claims under New York law for breach of fiduciary duty, gross negligence, breach
of contract and negligent misrepresentation.
Lehman Brothers Bankruptcy Proceedings.
In March 2010, the Examiner appointed by the Bankruptcy
Court presiding over the Chapter 11 bankruptcy proceedings of Lehman Brothers Holdings Inc (“LBHI”)
and several of its subsidiaries (collectively, “Lehman”) released a report as to his investigation
into Lehman’s failure and related matters. The Examiner concluded that one common law claim
potentially could be asserted against the Firm for contributing to Lehman’s failure, though he
characterized the claim as “not strong.” The Examiner also opined that certain cash and securities
collateral provided by LBHI to the Firm in the weeks and days preceding LBHI’s demise potentially
could be challenged under the Bankruptcy Code’s fraudulent conveyance or preference provisions,
though the Firm is of the view that its right to such collateral is protected by the Bankruptcy
Code’s safe harbor provisions. In May 2010, LBHI and its Official Committee of Unsecured Creditors
filed an adversary proceeding against JPMorgan Chase Bank, N.A. in the United States Bankruptcy
Court for the Southern District of New York. The complaint asserts both federal bankruptcy law and
state common law claims, and seeks, among other relief, to recover $8.6 billion in collateral that
was transferred to JPMorgan Chase Bank,
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N.A. in the week preceding LBHI’s bankruptcy. The complaint
also seeks unspecified damages on the grounds that JPMorgan Chase Bank, N.A.’s collateral requests
hastened LBHI’s demise. The Firm has moved to
dismiss plaintiffs’ amended complaint in its entirety. The Firm also filed counterclaims against
LBHI alleging that LBHI fraudulently induced the Firm to make large clearing advances to Lehman
against inappropriate collateral, which left the Firm with more than $25 billion in claims against
the estate of Lehman’s broker-dealer, which could be unpaid if the Firm is required to return any
collateral to Lehman. The case is in the early stages, with a trial scheduled for 2012. In
addition, the Firm may also face claims in the liquidation proceeding pending before the same
Bankruptcy Court under the Securities Investor Protection Act (“SIPA”) for LBHI’s U.S.
broker-dealer subsidiary, Lehman Brothers Inc. (“LBI”). The SIPA Trustee has advised the Firm that
certain of the securities and cash pledged as collateral for the Firm’s claims against LBI may be
customer property free from any security interest in favor of the
Firm. The Firm has also responded to various regulatory inquiries
regarding the Lehman matter.
Madoff Litigation.
JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., JPMorgan Securities LLC, and
JPMorgan Securities Ltd. have been named as defendants in a lawsuit brought by the trustee for the
liquidation of Bernard L. Madoff Investment Securities LLC (the “Trustee”). The Trustee asserts 28
causes of action against JPMorgan Chase, 16 of which seek to avoid certain transfers (direct or
indirect) made to JPMorgan Chase that are alleged to have been preferential or fraudulent under the
federal Bankruptcy Code and the New York Debtor and Creditor Law. The remaining causes of action
are for, among other things, aiding and abetting fraud, aiding and abetting breach of fiduciary
duty, conversion and unjust enrichment. The complaint generally alleges that JPMorgan Chase, as
Madoff’s long-time bank, facilitated the maintenance of Madoff’s Ponzi scheme and overlooked signs
of wrongdoing in order to obtain profits and fees. The complaint purports to seek approximately $6
billion in damages from JPMorgan Chase, and to recover approximately $425 million in transfers that
JPMorgan Chase allegedly received directly or indirectly from Bernard Madoff’s brokerage firm.
JPMorgan Chase has filed a motion to return the case from the Bankruptcy Court to the District
Court, and intends to seek the dismissal of all or most of the Trustee’s claims once that motion is
decided.
Separately, J.P. Morgan Trust Company (Cayman) Limited, JPMorgan (Suisse) SA, and J.P. Morgan
Securities Ltd. have been named as defendants in several suits in Bankruptcy Court and state and
federal courts in New York arising out of the liquidation proceedings of Fairfield Sentry Limited
and Fairfield Sigma Limited (together, “Fairfield”), so-called Madoff feeder funds. These actions
advance theories of mistake and restitution and seek to recover payments previously made to
defendants by the funds totaling approximately $140 million.
Mortgage-Backed Securities Litigation and Regulatory Investigations.
JPMorgan Chase and affiliates,
Bear Stearns and affiliates and Washington Mutual and affiliates have been named as defendants in a
number of cases in their various roles as issuer and/or
underwriter in mortgage-backed securities
(“MBS”) offerings. These cases include purported class action suits, actions by individual
purchasers of securities and actions by insurance companies that guaranteed payments of principal
and interest for particular tranches. Although the allegations vary by lawsuit, these cases
generally allege that the offering documents for more than $100 billion of securities issued by
dozens of securitization trusts contained material misrepresentations and omissions, including
statements regarding the underwriting standards pursuant to which the underlying mortgage loans
were issued.
In the actions against the Firm as an MBS issuer (and, in some cases, also as an underwriter of its
own MBS offerings), three purported class actions are pending against JPMorgan Chase and Bear
Stearns, and/or certain of their affiliates and current and former employees, in the United States
District Courts for the Eastern and Southern Districts of
New York. Defendants have moved to dismiss these actions. In addition, Washington Mutual
affiliates, WaMu Asset Acceptance Corp. and WaMu Capital Corp., are defendants, along with certain
former officers or directors of WaMu Asset Acceptance Corp., have been named as defendants in three
now-consolidated purported class action cases pending in the Western District of Washington.
Defendants’ motion to dismiss was granted in part to dismiss all claims relating to MBS offerings
in which a named plaintiff was not a purchaser. Discovery is ongoing.
In other actions brought against the Firm as an MBS issuer (and, in some cases, also as an
underwriter) certain JPMorgan Chase entities, several Bear Stearns entities, and certain Washington
Mutual affiliates are defendants in nine separate individual actions commenced by the Federal Home
Loan Banks of Pittsburgh, Seattle, San Francisco, Chicago, Indianapolis and Atlanta in various
state courts around the country; and certain JPMorgan Chase, Bear Stearns and Washington Mutual
entities are also among the defendants named in separate individual actions commenced by Cambridge
Place Investment Management Inc. in Massachusetts state court, by The Charles Schwab Corporation in
state court in California and by Allstate in state court in New York.
EMC Mortgage Corporation (“EMC”), a subsidiary of JPMorgan Chase, is a defendant in four pending
actions commenced by bond insurers that guaranteed payments of principal and interest on
approximately $3.6 billion of certain classes of seven different MBS offerings sponsored by EMC.
Three of those actions, commenced by Assured Guaranty Corp., Ambac Assurance Corporation and
Syncora Guarantee, Inc., respectively, are pending in the United States District Court for the
Southern District of New York. The fourth action, commenced by CIFG Assurance North America, Inc.,
is pending in state court in Texas. In each action, plaintiff claims that the underlying mortgage
loans had origination defects that purportedly violate certain representations and warranties given
by EMC to plaintiffs, and that EMC has breached the relevant agreements between the parties by
failing to repurchase allegedly defective mortgage loans. Each action seeks unspecified damages and
an order compelling EMC to repurchase those loans.
| JPMorgan Chase & Co. / 2010 Annual Report | 285 |
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Notes to consolidated financial statements
In the actions against the Firm solely as an underwriter of other issuers’ MBS offerings, the Firm
has contractual rights to indemnification from the issuers, but those indemnity rights may prove
effectively unenforceable where the issuers are now defunct, such as affiliates of IndyMac Bancorp
(“IndyMac Trusts”) and Thornburg Mortgage (“Thornburg”). With respect to the IndyMac Trusts,
JPMorgan Securities, along with numerous other underwriters and individuals, is named as a
defendant, both in its own capacity and as successor to Bear Stearns in a purported class action
pending in the United States District Court for the Southern District of New York brought on behalf
of purchasers of securities in various IndyMac Trust MBS offerings. The Court in that action has
dismissed claims as to certain such securitizations, including all offerings in which no named
plaintiff purchased securities, and allowed claims as to other offerings to proceed. Plaintiffs’
motion to certify a class of investors in certain offerings is pending, and discovery is ongoing.
In addition, JPMorgan Securities and JPMorgan Chase are named as defendants in an individual action
filed by the Federal Home Loan Bank of Pittsburgh in connection with a single offering by an
affiliate of IndyMac Bancorp. Discovery in that action is ongoing. Separately, JPMorgan Securities,
as successor to Bear, Stearns & Co. Inc., along with other underwriters and certain individuals,
are defendants in an action pending in state court in California brought by MBIA Insurance Corp.
(“MBIA”). The action relates to certain securities issued by IndyMac trusts in offerings in which
Bear Stearns was an underwriter, and as to which MBIA provided guaranty insurance policies. MBIA
purports to be subrogated
to the rights of the MBS holders, and seeks recovery of sums it has paid and will pay pursuant to
those policies. Discovery is ongoing. With respect to Thornburg, a Bear Stearns subsidiary is a
named defendant in a purported class action pending in the United States District Court for the
District of New Mexico along with a number of other financial institutions that served as
depositors and/or underwriters for three Thornburg MBS offerings.
In addition to the above-described litigation, the Firm has also received, and responded to, a
number of subpoenas and informal requests for information from federal authorities concerning
mortgage-related matters, including inquiries concerning a number of transactions involving the
Firm’s underwriting and issuance of MBS and its participation in offerings of certain
collateralized debt obligations.
In addition to the above mortgage-related matters, the Firm is now a defendant in an action
commenced by Deutsche Bank, described in more detail below with respect to the Washington Mutual
Litigations.
Mortgage Foreclosure Investigations and Litigation.
Multiple state and federal officials have
announced investigations into the procedures followed by mortgage servicing companies and banks,
including JPMorgan Chase & Co. and its affiliates, relating to foreclosure and loss mitigation processes. The Firm is
cooperating with these investigations, and these investigations could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, as well as significant legal costs in responding to governmental investigations and additional litigation. Three purported class action lawsuits have also been filed
against the Firm relating to its mortgage foreclosure procedures.
These investigations and actions follow the Firm’s decision in late September 2010 to commence a
temporary suspension of obtaining
mortgage foreclosure judgments in the states and territories that
require a judicial foreclosure process. Subsequently, the Firm extended this temporary suspension
to foreclosure sales in those states and territories that require a judicial foreclosure process,
and to foreclosures and foreclosure sales in the majority of remaining states where a judicial
process is not required, but where affidavits signed by Firm personnel may have been used as part
of the foreclosure process. In mid-October, the Firm also temporarily suspended evictions in the
states and territories in which it had suspended foreclosures and foreclosure sales, as well as in
certain additional states in which an affidavit signed by Firm personnel may have been used in
connection with eviction proceedings.
The Firm’s temporary suspension arose out of certain questions about affidavits of indebtedness
prepared by local foreclosure counsel, signed by Firm employees and filed or used in mortgage
foreclosure proceedings in certain states. Although the Firm believes, based on its work to date,
that the statements in those affidavits of indebtedness regarding the fact of default and amount of
indebtedness were materially accurate, in certain instances, the underlying review and verification
of this information was performed by Firm personnel other than the affiants, or the affidavits may
not have been properly notarized.
As of January 2011, the Firm has resumed initiation of new foreclosure proceedings in nearly all
states in which it had previously suspended such proceedings, utilizing revised procedures in
connection with the execution of affidavits and other documents used by Firm employees in the
foreclosure process. The Firm is also in the process of reviewing pending foreclosure matters in
these states to determine whether remediation of specific documentation is necessary, and intends
to resume pending foreclosures as the review, and if necessary, remediation, of each pending matter
is completed. The Firm intends to begin taking these same actions in all remaining states in the
near future.
Municipal Derivatives Investigations and Litigation.
The Department of Justice (in conjunction with
the Internal Revenue Service), the Securities and Exchange Commission (“SEC”), a group of state
attorneys general and the Office
of the Comptroller of the Currency (“OCC”) have been investigating JPMorgan Chase and Bear Stearns
for possible antitrust, securities and tax-related violations in connection with the bidding or
sale of guaranteed investment contracts and derivatives to municipal issuers. The Philadelphia
Office of the SEC provided notice to JPMorgan Securities that it intends to recommend that the SEC
bring civil charges in connection with its investigation. JPMorgan Securities has responded to that
notice, as well as to a separate notice that that Philadelphia Office of the SEC provided to Bear,
Stearns & Co. Inc. The Firm has been cooperating with all of
these investigations, and is seeking
to resolve them on a negotiated basis.
Purported class action lawsuits and individual actions (the “Municipal Derivatives Actions”) have
been filed against JPMorgan Chase and Bear Stearns, as well as numerous other providers and
brokers, alleging antitrust violations in the reportedly $100 billion to $300 billion annual market
for financial instruments related to municipal
| 286 | JPMorgan Chase & Co. / 2010 Annual Report |
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bond offerings referred to collectively as
“municipal derivatives.” The Municipal Derivatives Actions have been consolidated in the United
States District Court for the Southern District of New York. The Court denied in part and granted
in part defendants’ motions to dismiss the purported class and individual actions, permitting
certain claims to proceed against the Firm and others under federal and California state antitrust
laws and under the California false claims act. Subsequently, a number of additional individual
actions asserting substantially similar claims, including claims under New York and West Virginia
state antitrust statutes, were filed against JPMorgan Chase, Bear Stearns and numerous other
defendants. Most of these cases have been coordinated for pretrial purposes in the United States
District Court for the Southern District of New York. The Firm is seeking to have the balance of
these cases coordinated before the same court. Discovery is ongoing.
Following JPMorgan Securities’ settlement with the SEC in connection with certain Jefferson County,
Alabama (the “County”) warrant underwritings and swap transactions, the County filed a complaint
against the Firm and several other defendants in the Circuit Court of Jefferson County, Alabama.
The suit alleges that the Firm made payments to certain third parties in exchange for being chosen
to underwrite more than $3 billion in warrants issued by the County and chosen as the counterparty
for certain swaps executed by the County. In its complaint, Jefferson County alleges that the Firm
concealed these third-party payments and that, but for this concealment, the County would not have
entered into the transactions. The County further alleges that the transactions increased the risks
of its capital structure and that, following the downgrade of certain insurers that insured the
warrants, the County’s interest obligations increased and the principal due on a portion of its
outstanding warrants was accelerated. The Court denied the Firm’s motion to dismiss the complaint.
The Firm filed a mandamus petition with the Alabama Supreme Court, seeking immediate appellate
review of this decision. The petition is now fully briefed and all proceedings have been stayed
pending adjudication of the petition.
A putative class action was filed on behalf of sewer ratepayers against JPMorgan Chase and Bear
Stearns and numerous other defendants, based on substantially the same alleged conduct described
above. The Firm’s motion to dismiss the complaint for lack of standing was denied in January 2011.
Two insurance companies that guaranteed the payment of principal and interest on warrants issued by
Jefferson County have filed separate actions against JPMorgan Chase (and one of the insurers has
also named Jefferson County) in New York state court asserting that defendants fraudulently misled
them into issuing the insurance coverage, based upon substantially the same alleged conduct
described above and other alleged non-disclosures. One insurer claims that it insured an aggregate principal amount of nearly $1.2
billion in warrants, and seeks unspecified damages in excess of $400 million, as well as
unspecified punitive damages. The other insurer claims that it insured an aggregate principal
amount of more than $378 million and seeks recovery of $4 million that it alleges it paid under the
policies to date as well as any payments it will make in the future and unspecified punitive
damages. In December 2010, the court denied the Firm’s motions to dismiss each of the complaints
and the parties are currently engaged in discovery.
The
Alabama Public Schools and College Authority (“APSCA”)
brought a declaratory judgment action in
the United States District Court for the Northern District of Alabama claiming that certain
interest rate swaption transactions entered into with JPMorgan Chase Bank, N.A. are void on the
grounds that the APSCA purportedly did not have the authority to enter into the transactions or,
alternatively, are voidable at the APSCA’s option because of its alleged inability to issue
refunding bonds in relation to the swaption. The action was settled in December 2010 for a payment
by APSCA to the Firm and, pursuant to the settlement, the court dismissed the action by order dated
December 27, 2010.
Overdraft Fee/Debit Posting Order Litigation.
JPMorgan Chase Bank, N.A. has been named as a
defendant in several purported class actions relating to its practices in posting debit card
transactions to customers’ deposit accounts. Plaintiffs allege that the Firm improperly re-ordered
debit card transactions from the highest amount to lowest amount before processing these
transactions in order to generate unwarranted overdraft fees. Plaintiffs contend that the Firm
should have processed such transactions in the chronological order they were authorized. Plaintiffs
seek the disgorgement of all overdraft fees paid to the Firm by plaintiffs, since approximately
2003, as a result of the re-ordering of debit card transactions. The claims against the Firm have
been consolidated with numerous complaints against other national banks in Multi-District
Litigation pending in the United States District Court for the Southern District of Florida. The
Firm’s motion to compel arbitration of certain plaintiffs’ claims was denied by the District Court.
That ruling is currently on appeal. Discovery is proceeding in the District Court. Plaintiffs’
motion for class certification is due to be filed in April 2011.
Petters Bankruptcy and Related Matters.
JPMorgan Chase and certain of its affiliates, including One
Equity Partners, LLC (“OEP”), have been named as defendants in several actions filed in connection
with the receivership and bankruptcy proceedings pertaining to Thomas J. Petters and certain
entities affiliated with Petters (collectively, “Petters”) and the Polaroid Corporation. The
principal actions against JPMorgan Chase and its affiliates have been brought by the receiver and
bankruptcy trustee for Petters and generally seek to avoid, on fraudulent transfer and preference
grounds, certain purported transfers in connection with (i) the 2005 acquisition of Polaroid by
Petters, which at the time was majority-owned by OEP; (ii) two credit facilities that JPMorgan
Chase and other financial institutions entered into with Polaroid; and (iii) a credit line and
investment accounts held by Petters. The actions collectively seek recovery of approximately $450
million.
Securities Lending Litigation.
JPMorgan Chase Bank, N.A. has been named as a defendant in four
putative class actions asserting ERISA and other claims pending in the United States District Court
for the Southern District of New York brought by participants in the Firm’s securities lending
business. A fifth lawsuit was filed in New York
| JPMorgan Chase & Co. / 2010 Annual Report | 287 |
Table of Contents
Notes to consolidated financial statements
state court by an individual participant in the
program. Three of the purported class actions, which have been consolidated, relate to investments
of approximately $500 million in medium-term notes of Sigma Finance Inc. (“Sigma”). In August 2010,
the Court certified a plaintiff class consisting of all securities lending participants that held
Sigma medium-term notes on September 30, 2008, including those that held the notes by virtue of
participation in the investment of cash collateral through a collective fund, as well as those that
held the notes by virtue of the investment of cash collateral through individual accounts. All
discovery has been completed. The Court has set a schedule for filing summary judgment briefs,
pursuant to which the Firm’s motion is to be fully briefed by April 2011.
The fourth putative class action concerns investments of approximately $500 million in Lehman
Brothers medium-term notes. The Firm has moved to dismiss the amended complaint and is awaiting a
decision. The Magistrate Judge ordered discovery to proceed while the motion is pending, but this
ruling is on appeal to the District Judge and also is awaiting a decision. The New York state court
action, which is not a class action, concerns the plaintiff’s alleged loss of money in both Sigma
and Lehman Brothers medium-term notes. The Firm has answered the complaint. The Court denied the
Firm’s motion to stay this action pending resolution of the proceedings in federal court
,
and
discovery has commenced.
Service Members Civil Relief Act and Housing and Economic Recovery Act Investigations and
Litigation.
Multiple government officials have announced their intent to commence, or have
commenced, inquiries into the Firm’s procedures related to the Service Members Civil Relief Act
(“SCRA”) and the Housing and Economic Recovery Act of 2008 (“HERA”). These inquiries have been
prompted by the Firm’s public statements about its SCRA and HERA compliance and actions to remedy
certain instances in which the Firm mistakenly charged active or recently-active military personnel
mortgage interest and fees in excess of that permitted by SCRA and HERA, and in a number of
instances, foreclosed on borrowers protected by SCRA and HERA. The Firm has implemented a number of
procedural enhancements and controls to strengthen its SCRA and HERA compliance and is still
reviewing the circumstances under which these issues arose. In addition, an individual borrower has
filed a purported nationwide class action in United States District Court for South Carolina
against the Firm alleging violations of the SCRA.
Washington Mutual Litigations.
Subsequent to JPMorgan Chase’s acquisition from the Federal Deposit
Insurance Corporation (“FDIC”) of substantially all of the assets and certain specified liabilities
of Washington Mutual Bank, Henderson Nevada (“Washington Mutual Bank”), in September 2008,
Washington Mutual Bank’s parent holding company, Washington Mutual, Inc. (“WMI”) and its
wholly-owned subsidiary, WMI Investment Corp. (together, the “Debtors”), both commenced voluntary
cases under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court
for the District of Delaware (the “Bankruptcy Case”). In the Bankruptcy Case, the Debtors have
asserted rights and interests in certain assets. The assets in dispute include principally
the
following: (a) approximately $4 billion in trust securities contributed by WMI to Washington Mutual
Bank (the “Trust Securities”); (b) the right to tax refunds arising from overpayments attributable
to operations of Washington Mutual Bank and its subsidiaries; (c) ownership of and other rights in
approximately $4 billion that WMI contends are deposit accounts at Washington Mutual Bank and one
of its subsidiaries; and (d) ownership of and rights in various other contracts and other assets
(collectively, the “Disputed Assets”).
WMI, JPMorgan Chase and the FDIC have since been involved in litigations over these and other
claims pending in the Bankruptcy Court and the United States District Court for the District of
Columbia.
In May 2010, WMI, JPMorgan Chase and the FDIC announced a global settlement agreement among
themselves and significant creditor groups (the “Global Settlement Agreement”). The Global
Settlement Agreement is incorporated into WMI’s proposed Chapter 11 plan (“the Plan”) that has
been submitted to the Bankruptcy Court. If approved by the Bankruptcy Court, the Global Settlement
would resolve numerous disputes among WMI, JPMorgan Chase, the FDIC in its capacity as receiver for
Washington Mutual Bank and the FDIC in its corporate capacity, as well as those of significant
creditor groups, including disputes relating to the Disputed Assets.
Other proceedings related to Washington Mutual’s failure are also pending before the Bankruptcy
Court. Among other actions, in July 2010, certain holders of the Trust Securities commenced an
adversary proceeding in the Bankruptcy Court against JPMorgan Chase, WMI, and other entities
seeking, among other relief, a declaratory judgment that WMI and JPMorgan Chase do not have any
right, title or interest in the Trust Securities. In early January 2011, the Bankruptcy Court
granted summary judgment to JPMorgan Chase and denied summary judgment to the plaintiffs in the
Trust Securities adversary proceeding.
The Bankruptcy Court considered confirmation of the Plan, including the Global Settlement
Agreement, in hearings in early December 2010. In early January 2011, the Bankruptcy Court issued
an opinion in which it concluded that the Global Settlement Agreement is fair and reasonable, but
that the Plan cannot be confirmed until the parties correct certain deficiencies, which include the
scope of releases. None of these deficiencies relate to the Disputed Assets. The Equity Committee
has filed a petition seeking a direct appeal to the United States Court of Appeals for the Third
Circuit from so much of the Bankruptcy Court’s ruling that found the settlement to be fair and
reasonable. A revised Plan was filed with the Bankruptcy Court in February 2011, and the Bankruptcy
Court has scheduled a hearing for May 2, 2011. If the Global Settlement is effected and the Plan is
confirmed, the Firm currently estimates it will not incur additional obligations beyond those
already reflected in its liabilities for the numerous disputes covered by the Global Settlement.
Other proceedings related to Washington Mutual’s failure are pending before the United States
District Court for the District of Columbia include a lawsuit brought by Deutsche Bank National
Trust Company, initially against the FDIC, asserting an estimated $6 billion to $10 billion in
damages based upon alleged breach of
| 288 | JPMorgan Chase & Co. / 2010 Annual Report |
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various mortgage securitization agreements and alleged
violation of certain representations and warranties given by certain WMI subsidiaries in connection
with those securitization agreements. Deutsche Bank filed an amended complaint in August 2010,
adding JPMorgan Chase Bank, N.A. as a party. The amended complaint includes assertions that
JPMorgan Chase may have assumed liabilities relating to the mortgage securitization agreements. In
November 2010, JPMorgan Chase and the FDIC moved to dismiss the complaint. JPMorgan Chase also
moved for a partial summary judgment holding that the FDIC retained liability for Deutsche Bank’s
claims.
In addition, JPMorgan Chase was sued in an action originally filed in State District Court in Texas
(the “Texas Action”) by certain holders of WMI common stock and debt of WMI and Washington Mutual
Bank who seek unspecified damages alleging that JPMorgan Chase acquired substantially all of the
assets of Washington Mutual Bank from the FDIC at an allegedly too-low price. The Texas Action was
transferred to the United States District Court for the District of Columbia, which ultimately
granted JPMorgan Chase’s and the FDIC’s motions to dismiss the complaint. Plaintiffs have appealed
this dismissal to the United States Court of Appeals for the District of Columbia Circuit. Oral
argument is currently scheduled for April 5, 2011.
* * *
In addition to the various legal proceedings discussed above, JPMorgan Chase and its subsidiaries
are named as defendants or otherwise involved in a substantial number of other legal proceedings.
The Firm believes it has meritorious defenses
to the claims asserted against it in its currently outstanding legal proceedings and it intends to
defend itself vigorously in all such matters. Additional legal proceedings may be initiated from
time to time in the future.
The Firm has established reserves for several hundred of its currently outstanding legal
proceedings. The Firm accrues for potential liability arising from such proceedings when it is
probable that such liability has been incurred and the amount of the loss can be reasonably
estimated. The Firm evaluates its outstanding legal proceedings each quarter to assess its
litigation reserves, and makes adjustments in such reserves, upwards or downwards, as appropriate,
based on management’s best judgment after consultation with counsel.
During the years ended
December 31, 2010 and 2009, the Firm incurred $7.4 billion and $161 million, respectively, of
litigation expense. During the year ended December 31, 2008, the Firm recorded a net benefit of $781 million to litigation expense. There is no assurance that the Firm’s litigation reserves will
not need to be adjusted in the future.
In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly
where the claimants seek very large or indeterminate damages, or where the matters present novel
legal theories, involve a large number of parties or are in early stages of discovery, the Firm
cannot state with confidence what the eventual outcome of the currently pending matters will be,
what the timing of the ultimate resolution of these pending matters will be or what the eventual
loss, fines, penalties or impact related to each currently pending matter may be. JPMorgan Chase
believes, based upon its current knowledge, after consultation with counsel and after taking into
account its current litigation reserves, that the legal proceedings currently pending against it
should not have a material adverse effect on the Firm’s consolidated financial condition. The Firm
notes, however, that in light of the uncertainties involved in such proceedings, there is no
assurance the ultimate resolution of these matters will not significantly exceed the reserves
currently accrued by the Firm; as a result, the outcome of a particular matter may be material to
JPMorgan Chase’s operating results for a particular period, depending on, among other factors, the
size of the loss or liability imposed and the level of JPMorgan Chase’s income for that period.
| JPMorgan Chase & Co. / 2010 Annual Report | 289 |
Table of Contents
Notes to consolidated financial statements
The
following table presents income statement–related information for JPMorgan Chase by major
international geographic area. The Firm defines international activities as business transactions
that involve customers residing outside of the U.S., and the information presented below is based
primarily upon the domicile of the customer, the location from which the customer relationship is
managed or the location of the trading desk. However, many of the Firm’s U.S. operations serve
international businesses.
As the Firm’s operations are highly integrated, estimates and subjective assumptions have been made
to apportion revenue and expense between U.S. and international operations. These estimates and
assumptions are consistent with the allocations used for the Firm’s segment reporting as set forth
in Note 34 on pages 290–293 of this Annual Report.
The Firm’s long-lived assets for the periods presented are not considered by management to be
significant in relation to total assets. The majority of the Firm’s long-lived assets are located
in the United States.
| Income (loss) before income | ||||||||||||||||||||
| tax expense/(benefit) | ||||||||||||||||||||
| Year ended December 31, (in millions) | Revenue (a) | Expense (b) | and extraordinary gain | Net income | Average assets | |||||||||||||||
|
2010
|
||||||||||||||||||||
|
Europe/Middle East and Africa
|
$ | 14,113 | $ | 8,712 | $ | 5,401 | $ | 3,655 | $ | 425,374 | ||||||||||
|
Asia and Pacific
|
5,791 | 3,577 | 2,214 | 1,470 | 134,787 | |||||||||||||||
|
Latin America and the Caribbean
|
1,810 | 1,152 | 658 | 395 | 30,021 | |||||||||||||||
|
Other
|
510 | 413 | 97 | 59 | 6,579 | |||||||||||||||
|
Total international
|
22,224 | 13,854 | 8,370 | 5,579 | 596,761 | |||||||||||||||
|
Total U.S.
|
80,470 | 63,981 | 16,489 | 11,791 | 1,456,490 | |||||||||||||||
|
Total
|
$ | 102,694 | $ | 77,835 | $ | 24,859 | $ | 17,370 | $ | 2,053,251 | ||||||||||
|
2009
|
||||||||||||||||||||
|
Europe/Middle East and Africa
|
$ | 16,915 | $ | 8,610 | $ | 8,305 | $ | 5,485 | $ | 383,003 | ||||||||||
|
Asia and Pacific
|
5,088 | 3,438 | 1,650 | 1,119 | 100,932 | |||||||||||||||
|
Latin America and the Caribbean
|
1,982 | 1,112 | 870 | 513 | 23,227 | |||||||||||||||
|
Other
|
659 | 499 | 160 | 105 | 7,074 | |||||||||||||||
|
Total international
|
24,644 | 13,659 | 10,985 | 7,222 | 514,236 | |||||||||||||||
|
Total U.S.
|
75,790 | 70,708 | 5,082 | 4,506 | 1,509,965 | |||||||||||||||
|
Total
|
$ | 100,434 | $ | 84,367 | $ | 16,067 | $ | 11,728 | $ | 2,024,201 | ||||||||||
|
2008
|
||||||||||||||||||||
|
Europe/Middle East and Africa
|
$ | 11,449 | $ | 8,403 | $ | 3,046 | $ | 2,483 | $ | 352,558 | ||||||||||
|
Asia and Pacific
|
4,097 | 3,580 | 517 | 672 | 108,751 | |||||||||||||||
|
Latin America and the Caribbean
|
1,353 | 903 | 450 | 274 | 30,940 | |||||||||||||||
|
Other
|
499 | 410 | 89 | 21 | 6,553 | |||||||||||||||
|
Total international
|
17,398 | 13,296 | 4,102 | 3,450 | 498,802 | |||||||||||||||
|
Total U.S.
|
49,854 | 51,183 | (1,329 | ) | 2,155 | 1,292,815 | ||||||||||||||
|
Total
|
$ | 67,252 | $ | 64,479 | $ | 2,773 | $ | 5,605 | $ | 1,791,617 | ||||||||||
|
(a)
|
Revenue is composed of net interest income and noninterest revenue. | |
|
(b)
|
Expense is composed of noninterest expense and the provision for credit losses. |
The Firm is managed on a line-of-business basis. There are six major reportable business segments
– Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury &
Securities Services and Asset Management, as well as a Corporate/Private Equity segment. The
business segments are determined based on the products and services provided, or the type of
customer served, and they reflect the manner in which financial information is currently evaluated
by management. Results of these lines of business are presented on a managed basis. For a
definition of managed basis, see Explanation and Reconciliation of the Firm’s use of non-GAAP
financial measures, on pages 64–65 of this Annual Report. For a further discussion concerning
JPMorgan Chase’s business segments, see Business segment results
on pages 67–68 of this Annual
Report.
The following is a description of each of the Firm’s business segments:
Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and
broad product capabilities. The clients of IB are corporations, financial institutions, governments
and institutional investors. The Firm offers a full range of investment banking products and
services in all major capital markets, including advising on corporate strategy and structure,
capital-raising in equity and debt markets, sophisticated risk management, market-making in cash
securities and derivative instruments, prime brokerage, and research.
| 290 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Retail Financial Services
RFS serves consumers and businesses through personal service at bank branches and through ATMs,
online banking and telephone banking, as well as through auto dealerships and school financial-aid
offices. Customers can use more than 5,200 bank branches (third-largest nationally) and 16,100 ATMs
(second-largest nationally), as well as online and mobile banking around the clock. More than
28,900 branch salespeople assist customers with checking and savings accounts, mortgages, home
equity and business loans, and investments across the 23-state footprint from New York and Florida
to California. Consumers also can obtain loans through more than 16,200 auto dealerships and 2,200
schools and universities nationwide.
Card Services
CS is one of the nation’s largest credit card issuers, with over $137 billion in loans and over 90
million open accounts. Customers used Chase cards to meet $313 billion of their spending needs in
2010. Through its merchant acquiring business, Chase Paymentech Solutions, CS is a global leader in
payment processing and merchant acquiring.
Commercial Banking
CB delivers extensive industry knowledge, local expertise and dedicated service to nearly 24,000
clients nationally, including corporations, municipalities, financial institutions and
not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and
nearly 35,000 real estate investors/owners. CB partners with the Firm’s other businesses to provide
comprehensive solutions, including lending, treasury services, investment banking and asset
management to meet its clients’ domestic and international financial needs.
Treasury & Securities Services
TSS is a global leader in transaction, investment and information services. TSS is one of the
world’s largest cash management providers and a leading global custodian. Treasury Services (“TS”)
provides cash management, trade, wholesale card and liquidity products and services to small- and
mid-sized companies, multinational corporations, financial institutions and government entities. TS
partners with IB, CB, RFS and AM businesses to serve clients firmwide. Certain TS revenue is
included in other segments’ results.
Worldwide Securities Services holds, values, clears and
services securities, cash and alternative investments for investors and broker-dealers, and manages
depositary receipt programs globally.
Asset Management
AM, with assets under supervision of $1.8 trillion, is a global leader in investment and wealth
management. AM clients include institutions, retail investors and high-net-worth individuals in
every major market throughout the world. AM offers global investment management in equities, fixed
income, real estate, hedge funds, private equity and liquidity products, including money-market
instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to
high-net-worth clients, and retirement services for corporations and individuals. The majority of
AM’s client assets are in actively managed portfolios.
Corporate/Private Equity
The Corporate/Private Equity sector comprises Private Equity, Treasury, the Chief Investment
Office, corporate staff units and expense that is centrally managed. Treasury and the Chief
Investment Office manage capital, liquidity, and structural risks of the Firm. The corporate staff
units include Central Technology and Operations, Internal Audit, Executive Office, Finance, Human
Resources, Marketing & Communications, Legal & Compliance, Corporate Real Estate and General
Services, Risk Management, Corporate Responsibility and
Strategy & Development. Other centrally managed expense includes the Firm’s occupancy and
pension-related expense, net of allocations to the business.
Effective January 1, 2010, the Firm enhanced its line-of-business equity framework to better align
equity assigned to each line of business with changes anticipated to occur in the business and
in the competitive and regulatory landscape. The lines of business are now capitalized based on the
Tier 1 common standard, rather than the Tier 1 capital standard. Line-of-business equity increased
during the second quarter of 2008 in IB and AM due to the Bear Stearns merger and for AM, the
purchase of the additional equity interest in Highbridge. At the end of the third quarter of 2008,
equity was increased for each line of business with a view toward the future implementation of the
new Basel II capital rules. In addition, equity allocated to RFS, CS and CB was increased as a
result of the Washington Mutual transaction.
| JPMorgan Chase & Co. / 2010 Annual Report | 291 |
Table of Contents
Notes to consolidated financial statements
Segment results
The following table provides a summary of the Firm’s segment results for 2010, 2009 and 2008 on a
managed basis. Prior to the January 1, 2010, adoption of the accounting guidance related to VIEs,
the impact of credit card securitization adjustments had been included in reconciling items so that
the total Firm results are on a reported basis. Finally, total net revenue (noninterest revenue and
net interest income) for each of the segments is presented on a tax-equivalent basis. Accordingly,
revenue from tax-exempt securities and investments that receive tax credits are presented in the
managed results on a basis comparable to taxable securities and investments. This approach allows
management to assess the comparability of revenue arising from both taxable and tax-exempt sources.
The corresponding income tax impact related to these items is recorded within income tax
expense/(benefit).
Segment results and reconciliation
(a)
(table continued on next page)
| Year ended December 31, | Investment Bank | Retail Financial Services | Card Services (f) | Commercial Banking | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||
|
Noninterest revenue
|
$ | 18,253 | $ | 18,522 | $ | 2,051 | $ | 12,228 | $ | 12,200 | $ | 9,355 | $ | 3,277 | $ | 2,920 | $ | 2,719 | $ | 2,200 | $ | 1,817 | $ | 1,481 | ||||||||||||||||||||||||
|
Net interest income
|
7,964 | 9,587 | 10,284 | 19,528 | 20,492 | 14,165 | 13,886 | 17,384 | 13,755 | 3,840 | 3,903 | 3,296 | ||||||||||||||||||||||||||||||||||||
|
Total net revenue
|
26,217 | 28,109 | 12,335 | 31,756 | 32,692 | 23,520 | 17,163 | 20,304 | 16,474 | 6,040 | 5,720 | 4,777 | ||||||||||||||||||||||||||||||||||||
|
Provision for credit losses
|
(1,200 | ) | 2,279 | 2,015 | 9,452 | 15,940 | 9,905 | 8,037 | 18,462 | 10,059 | 297 | 1,454 | 464 | |||||||||||||||||||||||||||||||||||
|
Credit reimbursement
(to)/from TSS
(b)
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Noninterest
expense
(c)
|
17,265 | 15,401 | 13,844 | 17,864 | 16,748 | 12,077 | 5,797 | 5,381 | 5,140 | 2,199 | 2,176 | 1,946 | ||||||||||||||||||||||||||||||||||||
|
Income/(loss) before income tax
expense/(benefit) and
extraordinary gain
|
10,152 | 10,429 | (3,524 | ) | 4,440 | 4 | 1,538 | 3,329 | (3,539 | ) | 1,275 | 3,544 | 2,090 | 2,367 | ||||||||||||||||||||||||||||||||||
|
Income tax expense/(benefit)
|
3,513 | 3,530 | (2,349 | ) | 1,914 | (93 | ) | 658 | 1,255 | (1,314 | ) | 495 | 1,460 | 819 | 928 | |||||||||||||||||||||||||||||||||
|
Income/(loss) before
extraordinary gain
|
6,639 | 6,899 | (1,175 | ) | 2,526 | 97 | 880 | 2,074 | (2,225 | ) | 780 | 2,084 | 1,271 | 1,439 | ||||||||||||||||||||||||||||||||||
|
Extraordinary gain
(d)
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Net income/(loss)
|
$ | 6,639 | $ | 6,899 | $ | (1,175 | ) | $ | 2,526 | $ | 97 | $ | 880 | $ | 2,074 | $ | (2,225 | ) | $ | 780 | $ | 2,084 | $ | 1,271 | $ | 1,439 | ||||||||||||||||||||||
|
Average common equity
|
$ | 40,000 | $ | 33,000 | $ | 26,098 | $ | 28,000 | $ | 25,000 | $ | 19,011 | $ | 15,000 | $ | 15,000 | $ | 14,326 | $ | 8,000 | $ | 8,000 | $ | 7,251 | ||||||||||||||||||||||||
|
Average assets
|
731,801 | 699,039 | 832,729 | 381,337 | 407,497 | 304,442 | 145,750 | 192,749 | 173,711 | 133,654 | 135,408 | 114,299 | ||||||||||||||||||||||||||||||||||||
|
Return on average
equity
(e)
|
17 | % | 21 | % | (5 | )% | 9 | % | — | % | 5 | % | 14 | % | (15 | )% | 5 | % | 26 | % | 16 | % | 20 | % | ||||||||||||||||||||||||
|
Overhead ratio
|
66 | 55 | 112 | 56 | 51 | 51 | 34 | 27 | 31 | 36 | 38 | 41 | ||||||||||||||||||||||||||||||||||||
|
(a)
|
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s lines of business results on a “managed basis,” which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that do not have any impact on net income as reported by the lines of business or by the Firm as a whole. | |
|
(b)
|
TSS was charged a credit reimbursement related to certain exposures managed within IB credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in all other income. |
|
(c)
|
Includes merger costs, which are reported in the Corporate/Private Equity segment. There were no merger costs in 2010. Merger costs attributed to the business segments for 2009 and 2008 were as follows. |
| Year ended December 31, (in millions) | 2009 | 2008 | ||||||
|
Investment Bank
|
$ | 27 | $ | 183 | ||||
|
Retail Financial Services
|
228 | 90 | ||||||
|
Card Services
|
40 | 20 | ||||||
|
Commercial Banking
|
6 | 4 | ||||||
|
Treasury & Securities Services
|
11 | — | ||||||
|
Asset Management
|
6 | 3 | ||||||
|
Corporate/Private Equity
|
163 | 132 | ||||||
|
(d)
|
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual from the FDIC for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale, such as premises and equipment and other intangibles, acquired in the Washington Mutual transaction were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain. | |
|
(e)
|
Ratio is based on income/(loss) before extraordinary gain for 2009 and 2008. |
|
(f)
|
Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Prior to the adoption of the new guidance, managed results for credit card excluded the impact of credit card securitizations on total net revenue, provision for credit losses and average assets, as JPMorgan Chase treated the sold receivables as if they were still on the balance sheet in evaluating the credit performance of the entire managed credit card portfolio, as operations are funded, and decisions are made about allocating resources, such as employees and capital, based on managed information. These adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results. The related securitization adjustments were as follows. |
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Noninterest revenue
|
NA | $ | (1,494 | ) | $ | (3,333 | ) | |||||
|
Net interest income
|
NA | 7,937 | 6,945 | |||||||||
|
Provision for credit losses
|
NA | 6,443 | 3,612 | |||||||||
|
Average assets
|
NA | 82,233 | 76,904 | |||||||||
|
(g)
|
Included a $1.5 billion charge to conform Washington Mutual’s credit loss reserve to JPMorgan Chase’s allowance methodology. |
| 292 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
(table continued from previous page)
| Treasury & | Asset | Reconciling | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities Services | Management | Corporate/Private Equity | items (f)(i) | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||||||||||
| $ |
4,757
|
$ | 4,747 | $ | 5,196 | $ | 7,485 | $ | 6,372 | $ | 6,066 | $ | 5,359 | $ | 2,771 | $ | (278 | ) | $ | (1,866 | ) | $ | (67 | ) | $ | 1,883 | $ | 51,693 | $ | 49,282 | $ | 28,473 | |||||||||||||||||||||||||
|
2,624
|
2,597 | 2,938 | 1,499 | 1,593 | 1,518 | 2,063 | 3,863 | 347 | (403 | ) | (8,267 | ) | (7,524 | ) | 51,001 | 51,152 | 38,779 | ||||||||||||||||||||||||||||||||||||||||
|
7,381
|
7,344 | 8,134 | 8,984 | 7,965 | 7,584 | 7,422 | 6,634 | 69 | (2,269 | ) | (8,334 | ) | (5,641 | ) | 102,694 | 100,434 | 67,252 | ||||||||||||||||||||||||||||||||||||||||
|
(47
|
) | 55 | 82 | 86 | 188 | 85 | 14 | 80 | 1,981 | (g)(h) | — | (6,443 | ) | (3,612 | ) | 16,639 | 32,015 | 20,979 | |||||||||||||||||||||||||||||||||||||||
|
(121
|
) | (121 | ) | (121 | ) | — | — | — | — | — | — | 121 | 121 | 121 | — | — | — | ||||||||||||||||||||||||||||||||||||||||
|
5,604
|
5,278 | 5,223 | 6,112 | 5,473 | 5,298 | 6,355 | 1,895 | (28 | ) | — | — | — | 61,196 | 52,352 | 43,500 | ||||||||||||||||||||||||||||||||||||||||||
|
1,703 |
1,890 | 2,708 | 2,786 | 2,304 | 2,201 | 1,053 | 4,659 | (1,884 | ) | (2,148 | ) | (1,770 | ) | (1,908 | ) | 24,859 | 16,067 | 2,773 | |||||||||||||||||||||||||||||||||||||||
|
624 |
664 | 941 | 1,076 | 874 | 844 | (205 | ) | 1,705 | (535 | ) | (2,148 | ) | (1,770 | ) | (1,908 | ) | 7,489 | 4,415 | (926 | ) | |||||||||||||||||||||||||||||||||||||
|
1,079
|
1,226 |
1,767 | 1,710 | 1,430 | 1,357 | 1,258 | 2,954 | (1,349 | ) | — | — | — | 17,370 | 11,652 | 3,699 | ||||||||||||||||||||||||||||||||||||||||||
|
—
|
— | — | — | — | — | — | 76 | 1,906 | — | — | — | — | 76 | 1,906 | |||||||||||||||||||||||||||||||||||||||||||
| $ |
1,079
|
$ | 1,226 | $ | 1,767 | $ | 1,710 | $ | 1,430 | $ | 1,357 | $ | 1,258 | $ | 3,030 | $ | 557 | $ | — | $ | — | $ | — | $ | 17,370 | $ | 11,728 | $ | 5,605 | ||||||||||||||||||||||||||||
| $ |
6,500
|
$ | 5,000 | $ | 3,751 | $ | 6,500 | $ | 7,000 | $ | 5,645 | $ | 57,520 | $ | 52,903 | $ | 53,034 | $ | — | $ | — | $ | — | $ | 161,520 | $ | 145,903 | $ | 129,116 | ||||||||||||||||||||||||||||
|
42,494
|
35,963 | 54,563 | 65,056 | 60,249 | 65,550 | 553,159 | 575,529 | 323,227 | NA | (82,233 | ) | (76,904 | ) | 2,053,251 | 2,024,201 | 1,791,617 | |||||||||||||||||||||||||||||||||||||||||
|
17
|
% | 25 | % | 47 | % | 26 | % | 20 | % | 24 | % | NM | NM | NM | NM | NM | NM | 10 | % | 6 | % | 4 | % | ||||||||||||||||||||||||||||||||||
|
76
|
72 | 64 | 68 | 69 | 70 | NM | NM | NM | NM | NM | NM | 60 | 52 | 65 | |||||||||||||||||||||||||||||||||||||||||||
|
(h)
|
In November 2008, the Firm transferred $5.8 billion of higher quality credit card loans from the legacy Chase portfolio to a securitization trust previously established by WMMT. As a result of converting higher credit quality Chase-originated on-book receivables to the Trust’s seller’s interest which has a higher overall loss rate reflective of the total assets within the Trust, approximately $400 million of incremental provision for credit losses was recorded during the fourth quarter of 2008. This incremental provision for credit losses was recorded in the Corporate/Private Equity segment as the action related to the acquisition of Washington Mutual’s banking operations. For further discussion of credit card securitizations, see Note 16 on pages 244–259 of this Annual Report. |
|
(i)
|
Segment managed results reflect revenue on a tax-equivalent basis with the corresponding income tax impact recorded within income tax expense/(benefit). These adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results. Tax-equivalent adjustments for the years ended December 31, 2010, 2009 and 2008 were as follows. |
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Noninterest revenue
|
$ | 1,745 | $ | 1,440 | $ | 1,329 | ||||||
|
Net interest income
|
403 | 330 | 579 | |||||||||
|
Income tax expense
|
2,148 | 1,770 | 1,908 | |||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 293 |
Table of Contents
Notes to consolidated financial statements
Parent company – statements of income
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Income
|
||||||||||||
|
Dividends from subsidiaries:
|
||||||||||||
|
Bank and bank holding
company
|
$ | 16,554 | $ | 15,235 | $ | 3,085 | ||||||
|
Nonbank
(a)
|
932 | 1,036 | 1,687 | |||||||||
|
Interest income from subsidiaries
|
985 | 1,501 | 4,539 | |||||||||
|
Other interest income
|
294 | 266 | 212 | |||||||||
|
Other income from subsidiaries,
primarily fees:
|
||||||||||||
|
Bank and bank holding company
|
680 | 233 | 244 | |||||||||
|
Nonbank
|
312 | 742 | 95 | |||||||||
|
Other income/(loss)
|
157 | 844 | (1,038 | ) | ||||||||
|
Total income
|
19,914 | 19,857 | 8,824 | |||||||||
|
|
||||||||||||
|
Expense
|
||||||||||||
|
Interest expense to subsidiaries
(a)
|
1,263 | 1,118 | 1,302 | |||||||||
|
Other interest expense
|
3,782 | 4,696 | 6,879 | |||||||||
|
Compensation expense
|
177 | 574 | 43 | |||||||||
|
Other noninterest expense
|
363 | 414 | 732 | |||||||||
|
Total expense
|
5,585 | 6,802 | 8,956 | |||||||||
|
Income/(loss) before income tax
benefit
and undistributed net income of
subsidiaries
|
14,329 | 13,055 | (132 | ) | ||||||||
|
Income tax benefit
|
511 | 1,269 | 2,582 | |||||||||
|
Equity in undistributed net income
of subsidiaries
|
2,530 | (2,596 | ) | 3,155 | ||||||||
|
Net income
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | ||||||
| Parent company – balance sheets | ||||||||
| December 31, (in millions) | 2010 | 2009 | ||||||
|
|
||||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 96 | $ | 102 | ||||
|
Deposits with banking subsidiaries
|
80,201 | 87,893 | ||||||
|
Trading assets
|
16,038 | 14,808 | ||||||
|
Available-for-sale securities
|
3,176 | 2,647 | ||||||
|
Loans
|
1,849 | 1,316 | ||||||
|
Advances to, and receivables from, subsidiaries:
|
||||||||
|
Bank and bank holding company
|
54,887 | 54,152 | ||||||
|
Nonbank
|
72,080 | 81,365 | ||||||
|
Investments (at equity) in subsidiaries:
|
||||||||
|
Bank and bank holding company
|
150,876 | 157,412 | ||||||
|
Nonbank
(a)
|
38,000 | 32,547 | ||||||
|
Goodwill and other intangibles
|
1,050 | 1,104 | ||||||
|
Other assets
|
17,171 | 14,793 | ||||||
|
Total assets
|
$ | 435,424 | $ | 448,139 | ||||
|
|
||||||||
|
Liabilities and stockholders’ equity
|
||||||||
|
Borrowings from, and payables to, subsidiaries
(a)
|
$ | 28,332 | $ | 39,532 | ||||
|
Other borrowed funds, primarily commercial paper
|
41,874 | 41,454 | ||||||
|
Other liabilities
|
7,302 | 8,035 | ||||||
|
Long-term debt
(b)
|
181,810 | 193,753 | ||||||
|
Total liabilities
|
259,318 | 282,774 | ||||||
|
Total stockholders’ equity
|
176,106 | 165,365 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 435,424 | $ | 448,139 | ||||
| Parent company – statements of cash flows | ||||||||||||
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Operating activities
|
||||||||||||
|
Net income
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | ||||||
|
Less: Net income of subsidiaries
(a)
|
20,016 | 13,675 | 7,927 | |||||||||
|
Parent company net loss
|
(2,646 | ) | (1,947 | ) | (2,322 | ) | ||||||
|
Cash dividends from subsidiaries
(a)
|
17,432 | 16,054 | 4,648 | |||||||||
|
Other, net
|
1,685 | 1,852 | 1,920 | |||||||||
|
Net cash provided by operating activities
|
16,471 | 15,959 | 4,246 | |||||||||
|
|
||||||||||||
|
Investing activities
|
||||||||||||
|
Net change in:
|
||||||||||||
|
Deposits with banking subsidiaries
|
7,692 | (27,342 | ) | (7,579 | ) | |||||||
|
Available-for-sale securities:
|
||||||||||||
|
Purchases
|
(1,387 | ) | (1,454 | ) | (1,475 | ) | ||||||
|
Proceeds from sales and maturities
|
745 | 522 | — | |||||||||
|
Loans, net
|
(90 | ) | 209 | (102 | ) | |||||||
|
Advances to subsidiaries, net
|
8,051 | 28,808 | (82,725 | ) | ||||||||
|
Investments (at equity) in subsidiaries,
net
(a)
|
(871 | ) | (6,582 | ) | (26,212 | ) | ||||||
|
Net cash
provided by/(used in) investing activities
|
14,140 | (5,839 | ) | (118,093 | ) | |||||||
|
|
||||||||||||
|
Financing activities
|
||||||||||||
|
Net change in borrowings from
subsidiaries
(a)
|
(2,039 | ) | (4,935 | ) | 20,529 | |||||||
|
Net change in other borrowed funds
|
(11,843 | ) | 1,894 | (12,880 | ) | |||||||
|
Proceeds from the issuance of long-term
debt
|
21,610 | 32,304 | 50,013 | |||||||||
|
Proceeds from the assumption of
subsidiaries long-term debt
(c)
|
— | 15,264 | 39,778 | |||||||||
|
Repayments of long-term debt
|
(32,893 | ) | (31,964 | ) | (22,972 | ) | ||||||
|
Proceeds from issuance of common stock
|
— | 5,756 | 11,500 | |||||||||
|
Excess tax benefits related to
stock-based compensation
|
26 | 17 | 148 | |||||||||
|
Proceeds from issuance of preferred
stock and Warrant to the U.S. Treasury
|
— | — | 25,000 | |||||||||
|
Proceeds from issuance of other
preferred stock
(d)
|
— | — | 8,098 | |||||||||
|
Redemption of preferred stock issued to
the U.S. Treasury
|
— | (25,000 | ) | — | ||||||||
|
Redemption of other preferred stock
|
(352 | ) | — | — | ||||||||
|
Treasury stock repurchased
|
(2,999 | ) | — | — | ||||||||
|
Dividends paid
|
(1,486 | ) | (3,422 | ) | (5,911 | ) | ||||||
|
All other financing activities, net
|
(641 | ) | 33 | 469 | ||||||||
|
Net cash
(used in)/provided by financing activities
|
(30,617 | ) | (10,053 | ) | 113,772 | |||||||
|
Net increase/(decrease) in cash and due
from banks
|
(6 | ) | 67 | (75 | ) | |||||||
|
Cash and due from banks at the
beginning of the year, primarily with
bank subsidiaries
|
102 | 35 | 110 | |||||||||
|
Cash and due from banks at the end of
the year, primarily with bank
subsidiaries
|
$ | 96 | $ | 102 | $ | 35 | ||||||
|
Cash interest paid
|
$ | 5,090 | $ | 5,629 | $ | 7,485 | ||||||
|
Cash income taxes paid, net
|
7,001 | 3,124 | 156 | |||||||||
| (a) | Subsidiaries include trusts that issued guaranteed capital debt securities (“issuer trusts”). The Parent received dividends of $13 million, $14 million and $15 million from the issuer trusts in 2010, 2009 and 2008, respectively. For further discussion on these issuer trusts, see Note 22 on pages 265–266 of this Annual Report. | |
| (b) | At December 31, 2010, long-term debt that contractually matures in 2011 through 2015 totaled $38.9 billion, $42.4 billion, $17.6 billion, $19.0 billion and $16.8 billion, respectively. | |
| (c) | Represents the assumption of Bear Stearns long-term debt by JPMorgan Chase & Co. | |
| (d) | 2008 included the conversion of Bear Stearns’ preferred stock into JPMorgan Chase preferred stock. |
| 294 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Supplementary information
Selected quarterly financial data (unaudited)
| As of or for the period ended | 2010 | 2009 | ||||||||||||||||||||||||||||||
| (in millions, except per share, ratio and headcount data) | 4th quarter | 3rd quarter | 2nd quarter | 1st quarter | 4th quarter | 3rd quarter | 2nd quarter | 1st quarter | ||||||||||||||||||||||||
|
Selected income statement data
|
||||||||||||||||||||||||||||||||
|
Noninterest revenue
|
$ | 13,996 | $ | 11,322 | $ | 12,414 | $ | 13,961 | $ | 10,786 | $ | 13,885 | $ | 12,953 | $ | 11,658 | ||||||||||||||||
|
Net interest income
|
12,102 | 12,502 | 12,687 | 13,710 | 12,378 | 12,737 | 12,670 | 13,367 | ||||||||||||||||||||||||
|
Total net revenue
|
26,098 | 23,824 | 25,101 | 27,671 | 23,164 | 26,622 | 25,623 | 25,025 | ||||||||||||||||||||||||
|
Total noninterest expense
|
16,043 | 14,398 | 14,631 | 16,124 | 12,004 | 13,455 | 13,520 | 13,373 | ||||||||||||||||||||||||
|
Pre-provision profit
(a)
|
10,055 | 9,426 | 10,470 | 11,547 | 11,160 | 13,167 | 12,103 | 11,652 | ||||||||||||||||||||||||
|
Provision for credit losses
|
3,043 | 3,223 | 3,363 | 7,010 | 7,284 | 8,104 | 8,031 | 8,596 | ||||||||||||||||||||||||
|
Income before income tax expense and extraordinary gain
|
7,012 | 6,203 | 7,107 | 4,537 | 3,876 | 5,063 | 4,072 | 3,056 | ||||||||||||||||||||||||
|
Income tax expense
|
2,181 | 1,785 | 2,312 | 1,211 | 598 | 1,551 | 1,351 | 915 | ||||||||||||||||||||||||
|
Income before extraordinary gain
|
4,831 | 4,418 | 4,795 | 3,326 | 3,278 | 3,512 | 2,721 | 2,141 | ||||||||||||||||||||||||
|
Extraordinary gain
(b)
|
— | — | — | — | — | 76 | — | — | ||||||||||||||||||||||||
|
Net income
|
$ | 4,831 | $ | 4,418 | $ | 4,795 | $ | 3,326 | $ | 3,278 | $ | 3,588 | $ | 2,721 | $ | 2,141 | ||||||||||||||||
|
Per common share data
|
||||||||||||||||||||||||||||||||
|
Basic earnings
|
||||||||||||||||||||||||||||||||
|
Income before extraordinary gain
|
$ | 1.13 | $ | 1.02 | $ | 1.10 | $ | 0.75 | $ | 0.75 | $ | 0.80 | $ | 0.28 | $ | 0.40 | ||||||||||||||||
|
Net income
|
1.13 | 1.02 | 1.10 | 0.75 | 0.75 | 0.82 | 0.28 | 0.40 | ||||||||||||||||||||||||
|
Diluted earnings
(c)
|
||||||||||||||||||||||||||||||||
|
Income before extraordinary gain
|
$ | 1.12 | $ | 1.01 | $ | 1.09 | $ | 0.74 | $ | 0.74 | $ | 0.80 | $ | 0.28 | $ | 0.40 | ||||||||||||||||
|
Net income
|
1.12 | 1.01 | 1.09 | 0.74 | 0.74 | 0.82 | 0.28 | 0.40 | ||||||||||||||||||||||||
|
Cash dividends declared per share
|
0.05 | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 | ||||||||||||||||||||||||
|
Book value per share
|
43.04 | 42.29 | 40.99 | 39.38 | 39.88 | 39.12 | 37.36 | 36.78 | ||||||||||||||||||||||||
|
Common shares outstanding
|
||||||||||||||||||||||||||||||||
|
Average: Basic
|
3,917.0 | 3,954.3 | 3,983.5 | 3,970.5 | 3,946.1 | 3,937.9 | 3,811.5 | 3,755.7 | ||||||||||||||||||||||||
|
Diluted
|
3,935.2 | 3,971.9 | 4,005.6 | 3,994.7 | 3,974.1 | 3,962.0 | 3,824.1 | 3,758.7 | ||||||||||||||||||||||||
|
Common shares at period-end
|
3,910.3 | 3,925.8 | 3,975.8 | 3,975.4 | 3,942.0 | 3,938.7 | 3,924.1 | 3,757.7 | ||||||||||||||||||||||||
|
Share
price
(d)
|
||||||||||||||||||||||||||||||||
|
High
|
$ | 43.12 | $ | 41.70 | $ | 48.20 | $ | 46.05 | $ | 47.47 | $ | 46.50 | $ | 38.94 | $ | 31.64 | ||||||||||||||||
|
Low
|
36.21 | 35.16 | 36.51 | 37.03 | 40.04 | 31.59 | 25.29 | 14.96 | ||||||||||||||||||||||||
|
Close
|
42.42 | 38.06 | 36.61 | 44.75 | 41.67 | 43.82 | 34.11 | 26.58 | ||||||||||||||||||||||||
|
Market capitalization
|
165,875 | 149,418 | 145,554 | 177,897 | 164,261 | 172,596 | 133,852 | 99,881 | ||||||||||||||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||||||||||
|
Return on common equity
(c)
|
||||||||||||||||||||||||||||||||
|
Income before extraordinary gain
|
11 | % | 10 | % | 12 | % | 8 | % | 8 | % | 9 | % | 3 | % | 5 | % | ||||||||||||||||
|
Net income
|
11 | 10 | 12 | 8 | 8 | 9 | 3 | 5 | ||||||||||||||||||||||||
|
Return on tangible common equity
(c)
|
||||||||||||||||||||||||||||||||
|
Income before extraordinary gain
|
16 | 15 | 17 | 12 | 12 | 13 | 5 | 8 | ||||||||||||||||||||||||
|
Net income
|
16 | 15 | 17 | 12 | 12 | 14 | 5 | 8 | ||||||||||||||||||||||||
|
Return on assets
|
||||||||||||||||||||||||||||||||
|
Income before extraordinary gain
|
0.92 | 0.86 | 0.94 | 0.66 | 0.65 | 0.70 | 0.54 | 0.42 | ||||||||||||||||||||||||
|
Net income
|
0.92 | 0.86 | 0.94 | 0.66 | 0.65 | 0.71 | 0.54 | 0.42 | ||||||||||||||||||||||||
|
Overhead ratio
|
61 | 60 | 58 | 58 | 52 | 51 | 53 | 53 | ||||||||||||||||||||||||
|
Deposits-to-loans ratio
|
134 | 131 | 127 | 130 | 148 | 133 | 127 | 128 | ||||||||||||||||||||||||
|
Tier 1
capital ratio
(e)
|
12.1 | 11.9 | 12.1 | 11.5 | 11.1 | 10.2 | 9.7 | 11.4 | ||||||||||||||||||||||||
|
Total capital ratio
|
15.5 | 15.4 | 15.8 | 15.1 | 14.8 | 13.9 | 13.3 | 15.2 | ||||||||||||||||||||||||
|
Tier 1 leverage ratio
|
7.0 | 7.1 | 6.9 | 6.6 | 6.9 | 6.5 | 6.2 | 7.1 | ||||||||||||||||||||||||
|
Tier 1
common capital ratio
(f)
|
9.8 | 9.5 | 9.6 | 9.1 | 8.8 | 8.2 | 7.7 | 7.3 | ||||||||||||||||||||||||
|
Selected balance sheet data
(period-end)
(e)
|
||||||||||||||||||||||||||||||||
|
Trading assets
|
$ | 489,892 | $ | 475,515 | $ | 397,508 | $ | 426,128 | $ | 411,128 | $ | 424,435 | $ | 395,626 | $ | 429,700 | ||||||||||||||||
|
Securities
|
316,336 | 340,168 | 312,013 | 344,376 | 360,390 | 372,867 | 345,563 | 333,861 | ||||||||||||||||||||||||
|
Loans
|
692,927 | 690,531 | 699,483 | 713,799 | 633,458 | 653,144 | 680,601 | 708,243 | ||||||||||||||||||||||||
|
Total assets
|
2,117,605 | 2,141,595 | 2,014,019 | 2,135,796 | 2,031,989 | 2,041,009 | 2,026,642 | 2,079,188 | ||||||||||||||||||||||||
|
Deposits
|
930,369 | 903,138 | 887,805 | 925,303 | 938,367 | 867,977 | 866,477 | 906,969 | ||||||||||||||||||||||||
|
Long-term debt
|
247,669 | 255,589 | 248,618 | 262,857 | 266,318 | 272,124 | 271,939 | 261,845 | ||||||||||||||||||||||||
|
Common stockholders’ equity
|
168,306 | 166,030 | 162,968 | 156,569 | 157,213 | 154,101 | 146,614 | 138,201 | ||||||||||||||||||||||||
|
Total stockholders’ equity
|
176,106 | 173,830 | 171,120 | 164,721 | 165,365 | 162,253 | 154,766 | 170,194 | ||||||||||||||||||||||||
|
Headcount
|
239,831 | 236,810 | 232,939 | 226,623 | 222,316 | 220,861 | 220,255 | 219,569 | ||||||||||||||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 295 |
Table of Contents
Supplementary information
| As of or for the period ended | 2010 | 2009 | ||||||||||||||||||||||||||||||
| (in millions, except ratio data) | 4th quarter | 3rd quarter | 2nd quarter | 1st quarter | 4th quarter | 3rd quarter | 2nd quarter | 1st quarter | ||||||||||||||||||||||||
|
Credit quality metrics
|
||||||||||||||||||||||||||||||||
|
Allowance for credit losses
|
$ | 32,983 | $ | 35,034 | $ | 36,748 | $ | 39,126 | $ | 32,541 | $ | 31,454 | $ | 29,818 | $ | 28,019 | ||||||||||||||||
|
Allowance for loan losses to total
retained loans
|
4.71 | % | 4.97 | % | 5.15 | % | 5.40 | % | 5.04 | % | 4.74 | % | 4.33 | % | 3.95 | % | ||||||||||||||||
|
Allowance for loan losses to retained
loans excluding purchased
credit-impaired
loans
(g)
|
4.46 | 5.12 | 5.34 | 5.64 | 5.51 | 5.28 | 5.01 | 4.53 | ||||||||||||||||||||||||
|
Nonperforming assets
|
$ | 16,557 | $ | 17,656 | $ | 18,156 | $ | 19,019 | $ | 19,741 | $ | 20,362 | $ | 17,517 | $ | 14,654 | ||||||||||||||||
|
Net charge-offs
|
5,104 | 4,945 | 5,714 | 7,910 | 6,177 | 6,373 | 6,019 | 4,396 | ||||||||||||||||||||||||
|
Net charge-off rate
|
2.95 | % | 2.84 | % | 3.28 | % | 4.46 | % | 3.85 | % | 3.84 | % | 3.52 | % | 2.51 | % | ||||||||||||||||
|
Wholesale net charge-off rate
|
0.49 | 0.49 | 0.44 | 1.84 | 2.31 | 1.93 | 1.19 | 0.32 | ||||||||||||||||||||||||
|
Consumer net charge-off rate
(h)
|
4.12 | 3.90 | 4.49 | 5.56 | 4.60 | 4.79 | 4.69 | 3.61 | ||||||||||||||||||||||||
| (a) | Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses. | |
| (b) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, a wholly-owned subsidiary of JPMorgan Chase merged with and into The Bear Stearns Companies, Inc. (“Bear Stearns”), and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. The Washington Mutual acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. For additional information of these transactions, see Note 2 on pages 166–170 of this Annual Report. | |
| (c) | The calculation of second-quarter 2009 earnings per share and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital. Excluding this reduction, the adjusted return on common equity (“ROE”) and Return on tangible common equity (“ROTCE”) were 6% and 10%, respectively, for second-quarter 2009. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. For further discussion, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on page 64–66 of this Annual Report. | |
| (d) | Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange. | |
| (e) | Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for the transfer of financial assets and the consolidation of VIEs. Upon adoption of the new guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders’ equity and the Tier 1 capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders’ equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date. | |
| (f) | The Firm uses Tier 1 common along with the other capital measures to assess and monitor its capital position. The Tier 1 common ratio is Tier 1 common divided by risk-weighted assets. For further discussion, see Regulatory capital on pages 102–104 of this Annual Report. | |
| (g) | Excludes the impact of home lending PCI loans and loans held by the Washington Mutual Master Trust. For further discussion, see Allowance for credit losses on pages 139–141 of this Annual Report. | |
| (h) | The fourth quarter of 2010 includes an aggregate adjustment of $632 million to increase net charge-offs related to the estimated net realizable value of the collateral underlying delinquent residential home loans. Because these losses were previously recognized in the provision and allowance for loan losses, this adjustment had no impact on the Firm’s net income. |
| 296 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Selected annual financial data (unaudited)
| As of or for the year ended December 31, | ||||||||||||||||||||
| (in millions, except per share, ratio and headcount data) | 2010 | 2009 | 2008 (d) | 2007 | 2006 | |||||||||||||||
|
Selected income statement data
|
||||||||||||||||||||
|
Noninterest revenue
|
$ | 51,693 | $ | 49,282 | $ | 28,473 | $ | 44,966 | $ | 40,757 | ||||||||||
|
Net interest income
|
51,001 | 51,152 | 38,779 | 26,406 | 21,242 | |||||||||||||||
|
Total net revenue
|
102,694 | 100,434 | 67,252 | 71,372 | 61,999 | |||||||||||||||
|
Total noninterest expense
|
61,196 | 52,352 | 43,500 | 41,703 | 38,843 | |||||||||||||||
|
Pre-provision profit
(a)
|
41,498 | 48,082 | 23,752 | 29,669 | 23,156 | |||||||||||||||
|
Provision for credit losses
|
16,639 | 32,015 | 19,445 | 6,864 | 3,270 | |||||||||||||||
|
Provision
for credit losses – accounting conformity
(b)
|
— | — | 1,534 | — | — | |||||||||||||||
|
Income from continuing operations before income tax expense/
(benefit) and extraordinary gain
|
24,859 | 16,067 | 2,773 | 22,805 | 19,886 | |||||||||||||||
|
Income tax expense/(benefit)
|
7,489 | 4,415 | (926 | ) | 7,440 | 6,237 | ||||||||||||||
|
Income from continuing operations
|
17,370 | 11,652 | 3,699 | 15,365 | 13,649 | |||||||||||||||
|
Income from discontinued operations
(c)
|
— | — | — | — | 795 | |||||||||||||||
|
Income before extraordinary gain
|
17,370 | 11,652 | 3,699 | 15,365 | 14,444 | |||||||||||||||
|
Extraordinary gain
(d)
|
— | 76 | 1,906 | — | — | |||||||||||||||
|
Net income
|
$ | 17,370 | $ | 11,728 | $ | 5,605 | $ | 15,365 | $ | 14,444 | ||||||||||
|
Per common share data
|
||||||||||||||||||||
|
Basic earnings
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 3.98 | $ | 2.25 | $ | 0.81 | $ | 4.38 | $ | 3.83 | ||||||||||
|
Net income
|
3.98 | 2.27 | 1.35 | 4.38 | 4.05 | |||||||||||||||
|
Diluted earnings
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 3.96 | $ | 2.24 | $ | 0.81 | $ | 4.33 | $ | 3.78 | ||||||||||
|
Net income
|
3.96 | 2.26 | 1.35 | 4.33 | 4.00 | |||||||||||||||
|
Cash dividends declared per share
|
0.20 | 0.20 | 1.52 | 1.48 | 1.36 | |||||||||||||||
|
Book value per share
|
43.04 | 39.88 | 36.15 | 36.59 | 33.45 | |||||||||||||||
|
Common shares outstanding
|
||||||||||||||||||||
|
Average: Basic
|
3,956.3 | 3,862.8 | 3,501.1 | 3,403.6 | 3,470.1 | |||||||||||||||
|
Diluted
|
3,976.9 | 3,879.7 | 3,521.8 | 3,445.3 | 3,516.1 | |||||||||||||||
|
Common shares at period-end
|
3,910.3 | 3,942.0 | 3,732.8 | 3,367.4 | 3,461.7 | |||||||||||||||
|
Share
price
(f)
|
||||||||||||||||||||
|
High
|
$ | 48.20 | $ | 47.47 | $ | 50.63 | $ | 53.25 | $ | 49.00 | ||||||||||
|
Low
|
35.16 | 14.96 | 19.69 | 40.15 | 37.88 | |||||||||||||||
|
Close
|
42.42 | 41.67 | 31.53 | 43.65 | 48.30 | |||||||||||||||
|
Market capitalization
|
165,875 | 164,261 | 117,695 | 146,986 | 167,199 | |||||||||||||||
|
Financial ratios
|
||||||||||||||||||||
|
Return on common equity
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
10 | % | 6 | % | 2 | % | 13 | % | 12 | % | ||||||||||
|
Net income
|
10 | 6 | 4 | 13 | 13 | |||||||||||||||
|
Return on tangible common equity
(e)
|
||||||||||||||||||||
|
Income from continuing operations
|
15 | 10 | 4 | 22 | 24 | |||||||||||||||
|
Net income
|
15 | 10 | 6 | 22 | 24 | |||||||||||||||
|
Return on assets
|
||||||||||||||||||||
|
Income from continuing operations
|
0.85 | 0.58 | 0.21 | 1.06 | 1.04 | |||||||||||||||
|
Net income
|
0.85 | 0.58 | 0.31 | 1.06 | 1.10 | |||||||||||||||
|
Overhead ratio
|
60 | 52 | 65 | 58 | 63 | |||||||||||||||
|
Deposits-to-loans ratio
|
134 | 148 | 135 | 143 | 132 | |||||||||||||||
|
Tier 1
capital ratio
(g)
|
12.1 | 11.1 | 10.9 | 8.4 | 8.7 | |||||||||||||||
|
Total capital ratio
|
15.5 | 14.8 | 14.8 | 12.6 | 12.3 | |||||||||||||||
|
Tier 1 leverage ratio
|
7.0 | 6.9 | 6.9 | 6.0 | 6.2 | |||||||||||||||
|
Tier 1
common capital ratio
(h)
|
9.8 | 8.8 | 7.0 | 7.0 | 7.3 | |||||||||||||||
|
Selected
balance sheet data (period-end)
(g)
|
||||||||||||||||||||
|
Trading assets
|
$ | 489,892 | $ | 411,128 | $ | 509,983 | $ | 491,409 | $ | 365,738 | ||||||||||
|
Securities
|
316,336 | 360,390 | 205,943 | 85,450 | 91,975 | |||||||||||||||
|
Loans
|
692,927 | 633,458 | 744,898 | 519,374 | 483,127 | |||||||||||||||
|
Total assets
|
2,117,605 | 2,031,989 | 2,175,052 | 1,562,147 | 1,351,520 | |||||||||||||||
|
Deposits
|
930,369 | 938,367 | 1,009,277 | 740,728 | 638,788 | |||||||||||||||
|
Long-term debt
|
247,669 | 266,318 | 270,683 | 199,010 | 145,630 | |||||||||||||||
|
Common stockholders’ equity
|
168,306 | 157,213 | 134,945 | 123,221 | 115,790 | |||||||||||||||
|
Total stockholders’ equity
|
176,106 | 165,365 | 166,884 | 123,221 | 115,790 | |||||||||||||||
|
Headcount
|
239,831 | 222,316 | 224,961 | 180,667 | 174,360 | |||||||||||||||
| JPMorgan Chase & Co. / 2010 Annual Report | 297 |
Table of Contents
Supplementary information
| As of or for the year ended December 31, | ||||||||||||||||||||
| (in millions, except ratio data) | 2010 | 2009 | 2008 (d) | 2007 | 2006 | |||||||||||||||
|
Credit quality metrics
|
||||||||||||||||||||
|
Allowance for credit losses
|
$ | 32,983 | $ | 32,541 | $ | 23,823 | $ | 10,084 | $ | 7,803 | ||||||||||
|
Allowance for loan losses to total retained loans
|
4.71 | % | 5.04 | % | 3.18 | % | 1.88 | % | 1.70 | % | ||||||||||
|
Allowance for loan losses to retained loans, excluding PCI loans
(i)
|
4.46 | 5.51 | 3.62 | 1.88 | 1.70 | |||||||||||||||
|
Nonperforming assets
|
$ | 16,557 | $ | 19,741 | $ | 12,714 | $ | 3,933 | $ | 2,341 | ||||||||||
|
Net charge-offs
|
23,673 | 22,965 | 9,835 | 4,538 | 3,042 | |||||||||||||||
|
Net charge-off rate
|
3.39 | % | 3.42 | % | 1.73 | % | 1.00 | % | 0.73 | % | ||||||||||
|
Wholesale net charge-off/(recovery) rate
|
0.81 | 1.40 | 0.18 | 0.04 | (0.01 | ) | ||||||||||||||
|
Consumer net charge-off rate
|
4.53 | 4.41 | 2.71 | 1.61 | 1.17 | |||||||||||||||
| (a) | Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses. | |
| (b) | Results for 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations. | |
| (c) | On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business-banking and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses were reported as discontinued operations. | |
| (d) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, a wholly-owned subsidiary of JPMorgan Chase merged with and into Bear Stearns, and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. The Washington Mutual acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. For additional information on these transactions, see Note 2 on pages 166–170 of this Annual Report. | |
| (e) | The calculation of 2009 earnings per share and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of TARP preferred capital in the second quarter of 2009. Excluding this reduction, the adjusted return on equity (“ROE”) and return on tangible common equity (“ROTCE”) were 7% and 11%, respectively, for 2009. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. For further discussion, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 64–66 of this Annual Report. | |
| (f) | Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange. | |
| (g) | Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for the transfer of financial assets and the consolidation of VIEs. Upon adoption of the new guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders’ equity and the Tier 1 capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders’ equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date. | |
| (h) | The Firm uses Tier 1 common along with the other capital measures to assess and monitor its capital position. The Tier 1 common ratio is Tier 1 common divided by risk-weighted assets. For further discussion, see Regulatory capital on pages 102–104 of this Annual Report. | |
| (i) | Excludes the impact of home lending PCI loans and loans held by the Washington Mutual Master Trust. For further discussion, see Allowance for credit losses on pages 139–141 of this Annual Report. |
| 298 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
Short-term and other borrowed funds
The following table provides a summary of JPMorgan Chase’s short-term and other borrowed funds
for the years indicated.
| As of or for the year ending December 31, (in millions, except rates) | 2010 | 2009 | 2008 | |||||||||
|
Federal funds purchased and securities loaned or sold under repurchase
agreements:
|
||||||||||||
|
Balance at year-end
|
$ | 276,644 | $ | 261,413 | $ | 192,546 | ||||||
|
Average daily balance during the year
|
278,603 | 275,862 | 196,739 | |||||||||
|
Maximum month-end balance
|
314,161 | 310,802 | 224,075 | |||||||||
|
Weighted-average rate at December 31
|
0.18 | % | 0.04 | % | 0.97 | % | ||||||
|
Weighted-average rate during the year
|
(0.07 | )(c) | 0.21 | 2.37 | ||||||||
|
Commercial paper:
|
||||||||||||
|
Balance at year-end
|
$ | 35,363 | $ | 41,794 | $ | 37,845 | ||||||
|
Average daily balance during the year
|
36,000 | 39,055 | 45,734 | |||||||||
|
Maximum month-end balance
|
50,554 | 53,920 | 54,480 | |||||||||
|
Weighted-average rate at December 31
|
0.21 | % | 0.18 | % | 0.82 | % | ||||||
|
Weighted-average rate during the year
|
0.20 | 0.28 | 2.24 | |||||||||
|
Other borrowed funds:
(a)
|
||||||||||||
|
Balance at year-end
|
$ | 134,256 | $ | 120,686 | $ | 177,674 | ||||||
|
Average daily balance during the year
|
121,949 | 130,767 | 118,714 | |||||||||
|
Maximum month-end balance
|
137,347 | 188,004 | 244,040 | |||||||||
|
Weighted-average rate at December 31
|
4.48 | % | 3.37 | % | 3.65 | % | ||||||
|
Weighted-average rate during the year
|
2.34 | 2.92 | 4.29 | |||||||||
|
|
||||||||||||
|
Short-term beneficial interests
:
(b)
|
||||||||||||
|
|
||||||||||||
|
Commercial paper and other borrowed funds:
|
||||||||||||
|
Balance at year-end
|
$ | 25,095 | $ | 4,787 | $ | — | ||||||
|
Average daily balance during the year
|
21,853 | 3,275 | 1,846 | |||||||||
|
Maximum month-end balance
|
25,095 | 7,751 | 3,459 | |||||||||
|
Weighted-average rate at December 31
|
0.25 | % | 0.17 | % | NA | |||||||
|
Weighted-average rate during the year
|
0.27 | 0.24 | 2.49 | % | ||||||||
| (a) | Includes securities sold but not yet purchased. | |
| (b) | Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated variable interest entities. | |
| (c) | Reflects a benefit from the favorable market environments for U.S. dollar-roll financings. |
Federal funds purchased represent overnight funds. Securities loaned or sold under
repurchase agreements generally mature between one day and three months. Commercial paper generally
is issued in amounts not less than $100,000, and with maturities of
270 days or less. Other
borrowed funds consist of demand notes, term federal funds purchased, and various other borrowings
that generally have maturities of one year or less.
| JPMorgan Chase & Co. / 2010 Annual Report | 299 |
Table of Contents
Glossary of terms
ACH:
Automated Clearing House.
Advised lines of credit:
An authorization which specifies the maximum amount of a credit facility
the Firm has made available to an obligor on a revolving but non-binding basis. The borrower
receives written or oral advice of this facility. The Firm may cancel this facility at any time.
Allowance for loan losses to total loans:
Represents period-end Allowance for loan losses divided
by retained loans.
Assets under management:
Represent assets actively managed by AM on behalf of Private Banking,
Institutional and Retail clients. Includes “Committed capital not Called,” on which AM earns fees.
Excludes assets managed by American Century Companies, Inc., in which the Firm has a 41% ownership
interest as of December 31, 2010.
Assets under supervision:
Represent assets under management as well as custody, brokerage,
administration and deposit accounts.
Average managed assets:
Refers to total assets on the Firm’s Consolidated Balance Sheets plus
credit card receivables that have been securitized and removed from the Firm’s Consolidated Balance
Sheets, for periods ended prior to the January 1, 2010, adoption of new accounting guidance
requiring the consolidation of the Firm-sponsored credit card securitization trusts.
Bear Stearns merger:
Effective May 30, 2008, JPMorgan Chase merged with The Bear Stearns Companies
Inc. (“Bear Stearns”), and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. The
final total purchase price to complete the merger was $1.5 billion. For additional information, see
Note 2 on pages 166–170 of this Annual Report.
Beneficial interest issued by consolidated VIEs:
Represents the interest of third-party holders of
debt/equity securities, or other obligations, issued by VIEs that JPMorgan Chase consolidates. The
underlying obligations of the VIEs consist of short-term borrowings, commercial paper and long-term
debt. The related assets consist of trading assets, available-for-sale securities, loans and other
assets.
Benefit obligation:
Refers to the projected benefit obligation for pension plans and the
accumulated postretirement benefit obligation for OPEB plans.
CAGR:
Compound annual growth rate.
Corporate/Private Equity:
Includes Private Equity, Treasury and Chief Investment Office, and
Corporate Other, which includes other centrally managed expense and discontinued operations.
Credit card securitizations:
For periods ended prior to the January 1, 2010, adoption of new
guidance relating to the accounting for the transfer of financial assets and the consolidation of
VIEs, CS’ results were presented on a “managed” basis that assumed that credit card loans that had
been securitized and sold in accordance with U.S. GAAP remained on
the Consolidated Balance Sheets
and that earnings on the securitized loans were classified in the same manner as the earnings on
retained loans recorded on the
Consolidated Balance Sheets. “Managed” results excluded the impact
of credit card securitizations on total net revenue, the provision for credit losses, net
charge-offs and loans. Securitization did not change reported net income; however, it did affect
the classification of items on the Consolidated Statements of Income and Consolidated Balance
Sheets.
Credit derivatives:
Contractual agreements that provide protection against a credit event on one or
more referenced credits. The nature of a credit event is established by the protection buyer and
protection seller at the inception of a transaction, and such events include bankruptcy, insolvency
or failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic
fee in return for a payment by the protection seller upon the occurrence, if any, of a credit
event.
Credit cycle:
A period of time over which credit quality improves, deteriorates and then improves
again. The duration of a credit cycle can vary from a couple of years to several years.
Deposit margin:
Represents net interest income expressed as a percentage of average deposits.
Discontinued operations:
A component of an entity that is classified as held-for-sale or that has
been disposed of from ongoing operations in its entirety or piecemeal, and for which the entity
will not have any significant, continuing involvement. A discontinued operation may be a separate
major business segment, a component of a major business segment or a geographical area of
operations of the entity that can be separately distinguished operationally and for financial
reporting purposes.
FASB:
Financial Accounting Standards Board.
FDIC:
Federal Deposit Insurance Corporation.
FICO:
Fair Isaac Corporation.
Forward points:
Represents the interest rate differential between two currencies, which is either
added to or subtracted from the current exchange rate (i.e., “spot rate”) to determine the forward
exchange rate.
FRBB:
Federal Reserve Bank of Boston.
Headcount-related expense:
Includes salary and benefits (excluding performance-based incentives),
and other noncompensation costs related to employees.
Interchange income:
A fee that is paid to a credit card issuer in the clearing and settlement of a
sales or cash advance transaction.
Interests in purchased receivables:
Represents an ownership interest in cash flows of an underlying
pool of receivables transferred by a third-party seller into a bankruptcy-remote entity, generally a
trust.
Investment-grade:
An indication of credit quality based on JPMorgan Chase’s internal risk
assessment system. “Investment grade”
| 300 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
generally represents a risk profile similar to a rating of a
“BBB-”/“Baa3”
or better, as defined
by independent rating agencies.
LLC:
Limited Liability Company.
Loan-to-value (“LTV”) ratio:
For residential real estate loans, the relationship expressed as a
percent, between the principal amount of a loan and the appraised value of the collateral (i.e.,
residential real estate) securing the loan.
Origination date LTV ratio
The LTV ratio at the origination date of the loan. Origination date LTV ratios are calculated based
on the actual appraised values of collateral (i.e., loan-level data) at the origination date.
Current estimated LTV ratio
An estimate of the LTV as of a certain date. The current estimated LTV ratios are calculated using
estimated collateral values derived from a nationally recognized home price index measured at the
MSA level. These MSA-level home price indices comprise actual data to the extent available and
forecasted data where actual data is not available. As a result, the estimated collateral values
used to calculate these ratios do not represent actual appraised loan-level collateral values; as
such, the resulting LTV ratios are necessarily imprecise and should therefore be viewed as
estimates.
Combined LTV ratio
The LTV ratio considering all lien positions related to the property. Combined LTV ratios are used
for junior lien home equity products.
Managed basis:
A non-GAAP presentation of financial results that includes reclassifications to
present revenue on a fully taxable-equivalent basis, and for periods ended prior to the January 1,
2010, adoption of accounting guidance relating to the accounting for the transfer of financial
assets and the consolidation of VIEs related to credit card securitizations. Management uses this
non-GAAP financial measure at the segment level, because it believes this provides information to
enable investors to understand the underlying operational performance and trends of the particular
business segment and facilitates a comparison of the business segment with the performance of
competitors.
Managed credit card portfolio:
Refers to credit card receivables on the Firm’s Consolidated Balance
Sheets plus credit card receivables that have been securitized and removed from the Firm’s
Consolidated Balance Sheets, for periods ended prior to the January 1, 2010, adoption of new
guidance requiring the consolidation of the Firm-sponsored credit card securitization trusts.
Mark-to-market exposure:
A measure, at a point in time, of the value of a derivative or foreign
exchange contract in the open market. When the MTM value is positive, it indicates the counterparty
owes JPMorgan Chase and, therefore, creates credit risk for the Firm. When the MTM value is
negative, JPMorgan Chase owes the counterparty; in this situation, the Firm has liquidity risk.
Master netting agreement:
An agreement between two counterparties who have multiple derivative
contracts with each other that provides for the net settlement of all contracts, as well as cash
collateral, through a single payment, in a single currency, in the event of default on or
termination of any one contract.
Merger costs:
Reflects costs associated with the Bear Stearns merger and the Washington Mutual
transaction in 2008.
Mortgage product types:
Alt-A
Alt-A loans are generally higher in credit quality than subprime loans but have characteristics
that would disqualify the borrower from a traditional prime loan. Alt-A lending characteristics may
include one or more of the following: (i) limited documentation; (ii) high combined-loan-to-value
(“CLTV”) ratio; (iii) loans secured by non-owner occupied properties; or (iv) debt-to-income ratio
above normal limits. Perhaps the most important characteristic is limited documentation. A
substantial proportion of traditional Alt-A loans are those where a borrower does not provide
complete documentation of his or her assets or the amount or source of his or her income.
Option ARMs
The option ARM real estate loan product is an adjustable-rate mortgage loan that provides the
borrower with the option each month to make a fully amortizing, interest-only, or minimum payment.
The minimum payment on an option ARM loan is based on the interest rate charged during the
introductory period. This introductory rate is usually significantly below the fully indexed rate.
The fully indexed rate is calculated using an index rate plus a margin. Once the introductory
period ends, the contractual interest rate charged on the loan increases to the fully indexed rate
and adjusts monthly to reflect movements in the index. The minimum payment is typically
insufficient to cover interest accrued in the prior month, and any unpaid interest is deferred and
added to the principal balance of the loan. Option ARM loans are subject to payment recast, which
converts the loan to a variable-rate fully amortizing loan upon meeting specified loan balance and
anniversary date triggers.
Prime
Prime mortgage loans generally have low default risk and are made to borrowers with good credit
records and a monthly income that is at least three to four times greater than their monthly
housing expense (mortgage payments plus taxes and other debt payments). These borrowers provide
full documentation and generally have reliable payment histories.
Subprime
Subprime loans are designed for customers with one or more high risk characteristics, including but
not limited to: (i) unreliable or poor payment histories; (ii) a high LTV ratio of greater than 80%
(without borrower-paid mortgage insurance); (iii) a high debt-to-income ratio; (iv) an occupancy
type for the loan is other than the borrower’s primary residence; or (v) a history of delinquencies
or late payments on the loan.
MSR risk management revenue:
Includes changes in MSR asset fair value due to market-based inputs,
such as interest rates and volatility, as well as updates to assumptions used in the MSR
| JPMorgan Chase & Co. / 2010 Annual Report | 301 |
Table of Contents
Glossary of terms
valuation model; and derivative valuation adjustments and other, which represents changes in the
fair value of derivative instruments used to offset the impact of changes in the market-based
inputs to the MSR valuation model.
Multi-asset:
Any fund or account that allocates assets under management to more than one asset
class (e.g., long-term fixed income, equity, cash, real assets, private equity, or hedge funds).
NA:
Data is not applicable or available for the period presented.
Net charge-off ratio:
Represents net charge-offs (annualized) divided by average retained loans for
the reporting period.
Net yield on interest-earning assets:
The average rate for interest-earning assets less the average
rate paid for all sources of funds.
NM:
Not meaningful.
Nonconforming mortgage loans:
Mortgage loans that do not meet the requirements for sale to U.S.
government agencies and U.S. government sponsored enterprises. These requirements include limits on
loan-to-value ratios, loan terms, loan amounts, down payments, borrower creditworthiness and other
requirements.
OPEB:
Other postretirement employee benefits.
Overhead ratio:
Noninterest expense as a percentage of total net revenue.
Participating securities:
Represent unvested stock-based compensation awards containing
nonforfeitable rights to dividends or dividend equivalents (collectively, “dividends”), which are
included in the earnings per share calculation using the two-class method. JPMorgan Chase grants
restricted stock and RSUs to certain employees under its stock-based compensation programs, which
entitle the recipients to receive nonforfeitable dividends during the vesting period on a basis
equivalent to the dividends paid to holders of common stock. These unvested awards meet the
definition of participating securities. Under the two-class method, all earnings (distributed and
undistributed) are allocated to each class of common stock and participating securities, based on
their respective rights to receive dividends.
Personal bankers:
Retail branch office personnel who acquire, retain and expand new and existing
customer relationships by assessing customer needs and recommending and selling appropriate banking
products and services.
Portfolio activity:
Describes changes to the risk profile of existing lending-related exposures and
their impact on the allowance for credit losses from changes in customer profiles and inputs used
to estimate the allowances.
Pre-provision profit:
The Firm believes that this financial measure is useful in assessing the
ability of a lending institution to generate income in excess of its provision for credit losses.
Pretax margin:
Represents income before income tax expense divided by total net revenue, which is,
in management’s view, a
comprehensive measure of pretax performance derived by measuring earnings
after all costs are taken into consideration. It is, therefore, another basis that management uses
to evaluate the performance of TSS and AM against the performance of their respective competitors.
Principal transactions:
Realized and unrealized gains and losses from trading activities (including
physical commodities inventories that are accounted for at the lower of cost or fair value) and
changes in fair value associated with financial instruments held predominantly by IB for which the
fair value option was elected. Principal transactions revenue also includes private equity gains
and losses.
Purchased credit-impaired (“PCI”) loans:
Acquired loans deemed to be credit-impaired under the FASB
guidance for PCI loans. The guidance allows purchasers to aggregate credit-impaired loans acquired
in the same fiscal quarter into one or more pools, provided that the loans have common risk
characteristics (e.g., FICO score, geographic location). A pool is then accounted for as a single
asset with a single composite interest rate and an aggregate expectation of cash flows. Wholesale
loans are determined to be credit-impaired if they meet the definition of an impaired loan under
U.S. GAAP at the acquisition date. Consumer loans are determined to be credit-impaired based on
specific risk characteristics of the loan, including product type, LTV ratios, FICO scores, and
past due status.
Real estate investment trust (“REIT”):
A special purpose investment vehicle that provides investors
with the ability to participate directly in the ownership or financing of real-estate related
assets by pooling their capital to purchase and manage income property (i.e., equity REIT) and/or
mortgage loans (i.e., mortgage REIT). REITs can be publicly- or privately-held and they also
qualify for certain favorable tax considerations.
Receivables from customers:
Primarily represents margin loans to prime and retail brokerage
customers which are included in accrued interest and accounts receivable on the Consolidated
Balance Sheets for the wholesale lines of business.
Reported basis:
Financial statements prepared under U.S. GAAP, which excludes the impact of
taxable-equivalent adjustments. For periods ended prior to the January 1, 2010, adoption of new
guidance requiring the consolidation of the Firm-sponsored credit card securitization trusts, the
reported basis included the impact of credit card securitizations.
Retained loans:
Loans that are held for investment excluding loans held-for-sale and loans at fair
value.
Sales specialists:
Retail branch office personnel who specialize in the marketing of a single
product, including mortgages, investments and business banking, by partnering with the personal
bankers.
Seed capital:
Initial JPMorgan capital invested in products, such as mutual funds, with the
intention of ensuring the fund is of
| 302 | JPMorgan Chase & Co. / 2010 Annual Report |
Table of Contents
sufficient size to represent a viable offering to clients, enabling pricing of its shares, and
allowing the manager to develop a commercially attractive track record. After these goals are
achieved, the intent is to remove the Firm’s capital from the investment.
Stress testing:
A scenario that measures market risk under unlikely but plausible events in
abnormal markets.
TARP:
Troubled Asset Relief Program.
Taxable-equivalent basis:
Total net revenue for each of the business segments and the Firm is
presented on a tax-equivalent basis. Accordingly, revenue from tax-exempt securities and
investments that receive tax credits is presented in the managed results on a basis comparable to
fully taxable securities and investments.
This non-GAAP financial measure allows management to assess the comparability of revenue arising
from both taxable and tax-exempt sources. The corresponding income tax impact related to these
items is recorded within income tax expense.
Troubled debt restructuring (“TDR”):
Occurs when the Firm modifies the original terms of a loan
agreement by granting a concession to a borrower that is experiencing financial difficulty.
Unaudited:
Financial statements and information that have not been subjected to auditing procedures
sufficient to permit an independent certified public accountant to express an opinion.
U.S. GAAP:
Accounting principles generally accepted in the United States of America.
U.S. government and federal agency obligations:
Obligations of the U.S. government or an
instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to
the timely payment of principal and interest by the full faith and credit of the U.S. government.
U.S. government-sponsored enterprise obligations:
Obligations of agencies originally established or
chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these
obligations are not explicitly guaranteed as to the timely payment of principal and interest by the
full faith and credit of the U.S. government.
U.S. Treasury:
U.S. Department of the Treasury.
Value-at-risk (“VaR”):
A measure of the dollar amount of potential loss from adverse market moves
in an ordinary market environment.
Washington Mutual transaction:
On September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual Bank (“Washington Mutual”) from the FDIC for $1.9 billion. The
final allocation of the purchase price resulted in the recognition of negative goodwill and an
extraordinary gain of $2.0 billion. For additional information,
see Note 2 on pages 166–170 of
this Annual Report.
| JPMorgan Chase & Co. / 2010 Annual Report | 303 |
Table of Contents
Distribution of assets, liabilities and stockholders’ equity;
interest rates and interest differentials
interest rates and interest differentials
Consolidated average balance sheet, interest and rates
Provided below is a summary of JPMorgan Chase’s consolidated average balances, interest rates
and interest differentials on a taxable-equivalent basis for the years 2008 through 2010. Income
computed on a taxable-equivalent basis is the income reported in the Consolidated Statements of
Income, adjusted to make income and earnings
yields on assets exempt from income taxes (primarily
federal taxes) comparable with other taxable income. The incremental tax rate used for calculating
the taxable-equivalent adjustment was approximately 39% in 2010 and 2009, and 40% in 2008. A
substantial portion of JPMorgan Chase’s securities are taxable.
| (Table continued on next page) | ||||||||||||
| 2010 | ||||||||||||
| Year ended December 31, | Average | Average | ||||||||||
| (Taxable-equivalent interest and rates; in millions, except rates) | balance | Interest | rate | |||||||||
|
Assets
|
||||||||||||
|
Deposits with banks
|
$ | 47,611 | $ | 345 | 0.72 | % | ||||||
|
Federal funds sold and securities purchased under resale agreements
|
188,394 | 1,786 | 0.95 | |||||||||
|
Securities borrowed
|
117,416 | 175 | 0.15 | |||||||||
|
Trading assets – debt instruments
|
254,898 | 11,128 | 4.37 | |||||||||
|
Securities
|
330,166 | 9,729 | 2.95 | (e) | ||||||||
|
Loans
|
703,540 | 40,481 | (c) | 5.75 | ||||||||
|
Other assets
(a)
|
35,496 | 541 | 1.52 | |||||||||
|
Total interest-earning assets
|
1,677,521 | 64,185 | 3.83 | |||||||||
|
Allowance for loan losses
|
(36,588 | ) | ||||||||||
|
Cash and due from banks
|
30,318 | |||||||||||
|
Trading assets – equity instruments
|
99,543 | |||||||||||
|
Trading assets – derivative receivables
|
84,676 | |||||||||||
|
Goodwill
|
48,618 | |||||||||||
|
Other intangible assets:
|
||||||||||||
|
Mortgage servicing rights
|
12,896 | |||||||||||
|
Purchased credit card relationships
|
1,061 | |||||||||||
|
Other intangibles
|
3,117 | |||||||||||
|
Other assets
|
132,089 | |||||||||||
|
Total assets
|
$ | 2,053,251 | ||||||||||
|
Liabilities
|
||||||||||||
|
Interest-bearing deposits
|
$ | 668,640 | $ | 3,424 | 0.51 | % | ||||||
|
Federal funds purchased and securities loaned or sold under
repurchase agreements
|
278,603 | (192 | ) (d) | (0.07 | ) (d) | |||||||
|
Commercial paper
|
36,000 | 72 | 0.20 | |||||||||
|
Trading liabilities – debt instruments
|
71,987 | 1,926 | 2.68 | |||||||||
|
Other borrowings and liabilities
|
131,071 | 902 | 0.69 | |||||||||
|
Beneficial interests issued by consolidated VIEs
|
87,493 | 1,145 | 1.31 | |||||||||
|
Long-term debt
|
256,075 | 5,504 | 2.15 | |||||||||
|
Total interest-bearing liabilities
|
1,529,869 | 12,781 | 0.84 | |||||||||
|
Noninterest-bearing deposits
|
212,414 | |||||||||||
|
Trading liabilities – equity instruments
|
6,172 | |||||||||||
|
Trading liabilities – derivative payables
|
65,714 | |||||||||||
|
All other liabilities, including the allowance for lending-related
commitments
|
69,539 | |||||||||||
|
Total liabilities
|
1,883,708 | |||||||||||
|
Stockholders’ equity
|
||||||||||||
|
Preferred stock
|
8,023 | |||||||||||
|
Common stockholders’ equity
|
161,520 | |||||||||||
|
Total stockholders’ equity
|
169,543 | (b) | ||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,053,251 | ||||||||||
|
Interest rate spread
|
2.99 | % | ||||||||||
|
Net interest income and net yield on interest-earning assets
|
$ | 51,404 | 3.06 | |||||||||
| (a) | Includes margin loans and the Firm’s investment in asset-backed commercial paper under the Federal Reserve Bank of Boston’s Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML facility”). | |
| (b) | The ratio of average stockholders’ equity to average assets was 8.3% for 2010, 8.1% for 2009 and 7.7% for 2008. The return on average stockholders’ equity, based on net income, was 10.2% for 2010, 7.1% for 2009 and 4.1% for 2008. | |
| (c) | Fees and commissions on loans included in loan interest amounted to $1.5 billion in 2010, $2.0 billion in 2009 and $2.0 billion in 2008. | |
| (d) | Reflects a benefit from the favorable market environments for dollar-roll financings. | |
| (e) | The annualized rate for available-for-sale securities based on amortized cost was 3.00% in 2010, 3.66% in 2009, and 5.17% in 2008, and does not give effect to changes in fair value that are reflected in accumulated other comprehensive income/(loss). | |
| (f) | On September 25, 2008, JPMorgan Chase & Co. acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 166—170. |
304
Table of Contents
Within the Consolidated average balance sheets, interest and rates summary, the
principal amounts of nonaccrual loans have been included in the average loan balances used to
determine the average
interest rate earned on loans. For additional information on nonaccrual
loans, including interest accrued, see Note 14 on pages 220—238.
|
(Table
continued from previous page)
|
||||||||||||||||||||||
| 2009 | 2008 (f) | |||||||||||||||||||||
|
Average
balance |
Interest |
Average
rate |
Average
balance |
Interest |
Average
rate |
|||||||||||||||||
| $ | 67,015 | $ | 938 | 1.40 | % | $ | 54,666 | $ | 1,916 | 3.51 | % | |||||||||||
| 152,926 | 1,750 | 1.14 | 170,006 | 5,983 | 3.52 | |||||||||||||||||
| 124,462 | 4 | — | 110,598 | 2,297 | 2.08 | |||||||||||||||||
| 251,035 | 12,283 | 4.89 | 298,266 | 17,556 | 5.89 | |||||||||||||||||
| 342,655 | 12,506 | 3.65 | (e) | 123,551 | 6,447 | 5.22 | (e) | |||||||||||||||
| 682,885 | 38,720 | (c) | 5.67 | 588,801 | 38,503 | (c) | 6.54 | |||||||||||||||
| 29,510 | 479 | 1.62 | 27,404 | 895 | 3.27 | |||||||||||||||||
| 1,650,488 | 66,680 | 4.04 | 1,373,292 | 73,597 | 5.36 | |||||||||||||||||
| (27,635 | ) | (13,477 | ) | |||||||||||||||||||
| 24,873 | 30,323 | |||||||||||||||||||||
| 67,028 | 85,836 | |||||||||||||||||||||
| 110,457 | 121,417 | |||||||||||||||||||||
| 48,254 | 46,068 | |||||||||||||||||||||
| 12,898 | 11,229 | |||||||||||||||||||||
| 1,436 | 1,976 | |||||||||||||||||||||
| 3,659 | 3,803 | |||||||||||||||||||||
| 132,743 | 131,150 | |||||||||||||||||||||
| $ | 2,024,201 | $ | 1,791,617 | |||||||||||||||||||
| $ | 684,016 | $ | 4,826 | 0.71 | % | $ | 645,058 | $ | 14,546 | 2.26 | % | |||||||||||
| 275,862 | 573 | 0.21 | 196,739 | 4,668 | 2.37 | |||||||||||||||||
| 39,055 | 108 | 0.28 | 45,734 | 1,023 | 2.24 | |||||||||||||||||
| 48,530 | 1,918 | 3.95 | 62,783 | 3,068 | 4.89 | |||||||||||||||||
| 152,652 | 1,246 | 0.82 | 98,772 | 2,174 | 2.20 | |||||||||||||||||
| 14,930 | 218 | 1.46 | 13,220 | 405 | 3.06 | |||||||||||||||||
| 268,238 | 6,309 | 2.35 | 234,909 | 8,355 | 3.56 | |||||||||||||||||
| 1,483,283 | 15,198 | 1.02 | 1,297,215 | 34,239 | 2.64 | |||||||||||||||||
| 197,989 | 140,749 | |||||||||||||||||||||
| 11,694 | 16,058 | |||||||||||||||||||||
| 77,901 | 93,200 | |||||||||||||||||||||
| 88,377 | 106,141 | |||||||||||||||||||||
| 1,859,244 | 1,653,363 | |||||||||||||||||||||
| 19,054 | 9,138 | |||||||||||||||||||||
| 145,903 | 129,116 | |||||||||||||||||||||
| 164,957 | (b) | 138,254 | (b) | |||||||||||||||||||
| $ | 2,024,201 | $ | 1,791,617 | |||||||||||||||||||
| 3.02 | % | 2.72 | % | |||||||||||||||||||
| $ | 51,482 | 3.12 | $ | 39,358 | 2.87 | |||||||||||||||||
305
Table of Contents
Interest
rates and interest differential analysis of net interest income – U.S. and non-U.S.
Presented below is a summary of interest rates and interest differentials segregated between
U.S. and non-U.S. operations for the years 2008 through 2010. The segregation of U.S. and non-U.S.
components is based on the location of the office recording the transaction. Intracompany funding
generally comprises dollar-denominated deposits originated in various locations that are
| (Table continued on next page) | ||||||||||||
| 2010 | ||||||||||||
| Year ended December 31, | Average | Average | ||||||||||
| (Taxable-equivalent interest and rates; in millions, except rates) | balance | Interest | rate | |||||||||
|
Interest-earning assets
|
||||||||||||
|
Deposits with banks, primarily non-U.S.
|
$ | 47,611 | $ | 345 | 0.72 | % | ||||||
|
Federal funds sold and securities purchased under resale agreements:
|
||||||||||||
|
U.S.
|
89,619 | 830 | 0.93 | |||||||||
|
Non-U.S.
|
98,775 | 956 | 0.97 | |||||||||
|
Securities borrowed:
|
||||||||||||
|
U.S.
|
67,031 | (237 | ) | (0.35 | ) | |||||||
|
Non-U.S.
|
50,385 | 412 | 0.82 | |||||||||
|
Trading assets – debt instruments:
|
||||||||||||
|
U.S.
|
119,660 | 5,513 | 4.61 | |||||||||
|
Non-U.S.
|
135,238 | 5,615 | 4.15 | |||||||||
|
Securities:
|
||||||||||||
|
U.S.
|
226,345 | 7,210 | 3.19 | |||||||||
|
Non-U.S.
|
103,821 | 2,519 | 2.43 | |||||||||
|
Loans:
|
||||||||||||
|
U.S.
|
644,504 | 38,800 | 6.02 | |||||||||
|
Non-U.S.
|
59,036 | 1,681 | 2.85 | |||||||||
|
Other assets, primarily U.S.
|
35,496 | 541 | 1.52 | |||||||||
|
Total interest-earning assets
|
1,677,521 | 64,185 | 3.83 | |||||||||
|
Interest-bearing liabilities
|
||||||||||||
|
Interest-bearing deposits:
|
||||||||||||
|
U.S.
|
433,227 | 2,156 | 0.50 | |||||||||
|
Non-U.S.
|
235,413 | 1,268 | 0.54 | |||||||||
|
Federal funds purchased and securities loaned or sold under
repurchase agreements:
|
||||||||||||
|
U.S.
|
231,710 | (635 | ) (b) | (0.27 | ) (b) | |||||||
|
Non-U.S.
|
46,893 | 443 | 0.95 | |||||||||
|
Other borrowings and liabilities:
|
||||||||||||
|
U.S.
|
162,421 | 1,026 | 0.63 | |||||||||
|
Non-U.S.
|
76,637 | 1,874 | 2.45 | |||||||||
|
Beneficial interests issued by consolidated VIEs, primarily U.S.
|
87,493 | 1,145 | 1.31 | |||||||||
|
Long-term debt, primarily U.S.
|
256,075 | 5,504 | 2.15 | |||||||||
|
Intracompany funding:
|
||||||||||||
|
U.S.
|
(88,286 | ) | (359 | ) | — | |||||||
|
Non-U.S.
|
88,286 | 359 | — | |||||||||
|
Total interest-bearing liabilities
|
1,529,869 | 12,781 | 0.84 | |||||||||
|
Noninterest-bearing liabilities
(a)
|
147,652 | |||||||||||
|
Total investable funds
|
$ | 1,677,521 | $ | 12,781 | 0.76 | % | ||||||
|
Net interest income and net yield:
|
$ | 51,404 | 3.06 | % | ||||||||
|
U.S.
|
44,059 | 3.65 | ||||||||||
|
Non-U.S.
|
7,345 | 1.56 | ||||||||||
|
Percentage of total assets and liabilities attributable to non-U.S.
operations:
|
||||||||||||
|
Assets
|
31.9 | |||||||||||
|
Liabilities
|
25.2 | |||||||||||
| (a) | Represents the amount of noninterest-bearing liabilities funding interest-earning assets. | |
| (b) | Reflects a benefit from the favorable market environments for dollar-roll financings. | |
| (c) | On September 25, 2008, JPMorgan Chase & Co. acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 166–170. |
306
Table of Contents
centrally managed by JPMorgan Chase’s Treasury unit. U.S. Net interest income was $44.1 billion
in 2010, a decrease of $39 million
from the prior year. Net interest income from non-U.S.
operations was $7.3 billion for 2010, a decrease of $39 million
from $7.4 billion in 2009. For
further information, see the “Net interest income” discussion in Consolidated Results of Operations
on pages 60–61.
|
(Table
continued from previous page)
|
||||||||||||||||||||||
| 2009 | 2008 (c) | |||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||
| balance | Interest | rate | balance | Interest | rate | |||||||||||||||||
| $ | 67,015 | $ | 938 | 1.40 | % | $ | 54,666 | $ | 1,916 | 3.51 | % | |||||||||||
| 72,619 | 997 | 1.37 | 95,301 | 3,084 | 3.24 | |||||||||||||||||
| 80,307 | 753 | 0.94 | 74,705 | 2,899 | 3.88 | |||||||||||||||||
| 75,301 | (354 | ) | (0.47 | ) | 60,592 | 985 | 1.63 | |||||||||||||||
| 49,161 | 358 | 0.73 | 50,006 | 1,312 | 2.62 | |||||||||||||||||
| 130,558 | 6,742 | 5.16 | 169,447 | 9,614 | 5.67 | |||||||||||||||||
| 120,477 | 5,541 | 4.60 | 128,819 | 7,942 | 6.17 | |||||||||||||||||
| 275,601 | 11,015 | 4.00 | 108,663 | 5,859 | 5.39 | |||||||||||||||||
| 67,054 | 1,491 | 2.22 | 14,888 | 588 | 3.95 | |||||||||||||||||
| 620,716 | 36,476 | 5.88 | 506,513 | 33,570 | 6.63 | |||||||||||||||||
| 62,169 | 2,244 | 3.61 | 82,288 | 4,933 | 5.99 | |||||||||||||||||
| 29,510 | 479 | 1.62 | 27,404 | 895 | 3.27 | |||||||||||||||||
| 1,650,488 | 66,680 | 4.04 | 1,373,292 | 73,597 | 5.36 | |||||||||||||||||
| 440,326 | 3,781 | 0.86 | 407,699 | 8,420 | 2.07 | |||||||||||||||||
| 243,690 | 1,045 | 0.43 | 237,359 | 6,126 | 2.58 | |||||||||||||||||
| 238,691 | 296 | 0.12 | 158,054 | 3,326 | 2.10 | |||||||||||||||||
| 37,171 | 277 | 0.75 | 38,685 | 1,342 | 3.47 | |||||||||||||||||
| 201,025 | 1,505 | 0.75 | 161,509 | 3,390 | 2.10 | |||||||||||||||||
| 39,212 | 1,767 | 4.51 | 45,780 | 2,875 | 6.28 | |||||||||||||||||
| 14,930 | 218 | 1.46 | 13,220 | 405 | 3.06 | |||||||||||||||||
| 268,238 | 6,309 | 2.35 | 234,909 | 8,355 | 3.56 | |||||||||||||||||
| (42,711 | ) | (510 | ) | — | (17,637 | ) | (927 | ) | — | |||||||||||||
| 42,711 | 510 | — | 17,637 | 927 | — | |||||||||||||||||
| 1,483,283 | 15,198 | 1.02 | 1,297,215 | 34,239 | 2.64 | |||||||||||||||||
| 167,205 | 76,077 | |||||||||||||||||||||
| $ | 1,650,488 | $ | 15,198 | 0.92 | % | $ | 1,373,292 | $ | 34,239 | 2.49 | % | |||||||||||
| $ | 51,482 | 3.12 | % | $ | 39,358 | 2.87 | % | |||||||||||||||
| 44,098 | 3.61 | 31,651 | 3.24 | |||||||||||||||||||
| 7,384 | 1.72 | 7,707 | 1.95 | |||||||||||||||||||
| 28.9 | 30.4 | |||||||||||||||||||||
| 25.1 | 28.0 | |||||||||||||||||||||
307
Table of Contents
Changes in net interest income, volume and rate analysis
The table presents an analysis of the effect of net interest income of volume and rate changes
for the periods 2010 versus 2009 and 2009 versus 2008. In this analysis, the change due to the
volume/rate has been allocated to volume.
| 2010 versus 2009 | 2009 versus 2008 | |||||||||||||||||||||||
| Year ended December 31, | Increase/(decrease) due to change in: | Net | Increase/(decrease) due to change in: | Net | ||||||||||||||||||||
| (On a taxable-equivalent basis: in millions) | Volume | Rate | change | Volume | Rate | change | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-earning assets
|
||||||||||||||||||||||||
|
Deposits with banks, primarily
non-U.S.
|
$ | (137 | ) | $ | (456 | ) | $ | (593 | ) | $ | 175 | $ | (1,153 | ) | $ | (978 | ) | |||||||
|
Federal funds sold and securities
purchased under resale agreements:
|
||||||||||||||||||||||||
|
U.S.
|
153 | (320 | ) | (167 | ) | (305 | ) | (1,782 | ) | (2,087 | ) | |||||||||||||
|
Non-U.S.
|
179 | 24 | 203 | 50 | (2,196 | ) | (2,146 | ) | ||||||||||||||||
|
Securities borrowed:
|
||||||||||||||||||||||||
|
U.S.
|
27 | 90 | 117 | (67 | ) | (1,272 | ) | (1,339 | ) | |||||||||||||||
|
Non-U.S.
|
10 | 44 | 54 | (9 | ) | (945 | ) | (954 | ) | |||||||||||||||
|
Trading assets – debt instruments:
|
||||||||||||||||||||||||
|
U.S.
|
(511 | ) | (718 | ) | (1,229 | ) | (2,008 | ) | (864 | ) | (2,872 | ) | ||||||||||||
|
Non-U.S.
|
616 | (542 | ) | 74 | (379 | ) | (2,022 | ) | (2,401 | ) | ||||||||||||||
|
Securities:
|
||||||||||||||||||||||||
|
U.S.
|
(1,573 | ) | (2,232 | ) | (3,805 | ) | 6,666 | (1,510 | ) | 5,156 | ||||||||||||||
|
Non-U.S.
|
887 | 141 | 1,028 | 1,161 | (258 | ) | 903 | |||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
U.S.
|
1,455 | 869 | 2,324 | 6,705 | (3,799 | ) | 2,906 | |||||||||||||||||
|
Non-U.S.
|
(91 | ) | (472 | ) | (563 | ) | (731 | ) | (1,958 | ) | (2,689 | ) | ||||||||||||
|
Other assets, primarily U.S.
|
92 | (30 | ) | 62 | 36 | (452 | ) | (416 | ) | |||||||||||||||
|
Change in interest income
|
1,107 | (3,602 | ) | (2,495 | ) | 11,294 | (18,211 | ) | (6,917 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||
|
Interest-bearing deposits:
|
||||||||||||||||||||||||
|
U.S.
|
(40 | ) | (1,585 | ) | (1,625 | ) | 294 | (4,933 | ) | (4,639 | ) | |||||||||||||
|
Non-U.S.
|
(45 | ) | 268 | 223 | 22 | (5,103 | ) | (5,081 | ) | |||||||||||||||
|
Federal funds purchased and
securities loaned or sold under
repurchase
agreements:
|
||||||||||||||||||||||||
|
U.S.
|
— | (931 | ) | (931 | ) | 99 | (3,129 | ) | (3,030 | ) | ||||||||||||||
|
Non-U.S.
|
92 | 74 | 166 | (13 | ) | (1,052 | ) | (1,065 | ) | |||||||||||||||
|
Other borrowings and liabilities:
|
||||||||||||||||||||||||
|
U.S.
|
(238 | ) | (241 | ) | (479 | ) | 295 | (2,180 | ) | (1,885 | ) | |||||||||||||
|
Non-U.S.
|
915 | (808 | ) | 107 | (298 | ) | (810 | ) | (1,108 | ) | ||||||||||||||
|
Beneficial interests issued by
consolidated VIEs, primarily U.S.
|
949 | (22 | ) | 927 | 25 | (212 | ) | (187 | ) | |||||||||||||||
|
Long-term debt, primarily U.S.
|
(269 | ) | (536 | ) | (805 | ) | 796 | (2,842 | ) | (2,046 | ) | |||||||||||||
|
Intracompany funding:
|
||||||||||||||||||||||||
|
U.S.
|
(182 | ) | 333 | 151 | (301 | ) | 718 | 417 | ||||||||||||||||
|
Non-U.S.
|
182 | (333 | ) | (151 | ) | 301 | (718 | ) | (417 | ) | ||||||||||||||
|
Change in
interest expense
|
1,364 | (3,781 | ) | (2,417 | ) | 1,220 | (20,261 | ) | (19,041 | ) | ||||||||||||||
|
Change in net interest income
|
$ | (257 | ) | $ | 179 | $ | (78 | ) | $ | 10,074 | $ | 2,050 | $ | 12,124 | ||||||||||
308
Table of Contents
Securities portfolio
For information regarding the securities portfolio as of December 31, 2010 and 2009, and for
the years ended December 31, 2010 and 2009, see Note 12 on pages
214–218. For the
available–for–sale securities portfolio, at December 31, 2008, the fair value and amortized cost
of U.S. Treasury and government agency obligations was $127.7 billion and $125.6 billion,
respectively; the fair value and amortized cost of all other securities was $78.2 billion and $83.7
billion, respectively; and the total fair value and amortized cost of the total portfolio was
$205.9 billion and $209.3 billion respectively.
At December 31, 2008, the fair value and amortized cost of U.S. Treasury and government agency
obligations in held-to-maturity securities portfolio was $35 million and $34 million, respectively.
There were no other held-to-maturity securities at December 31, 2008.
309
Table of Contents
Loan portfolio
The table below presents loans with the line-of-business basis that is presented in Credit Risk
Management on pages 119, 120 and 130, and in Note 14 on pages 220–238, at the periods indicated.
| December 31, (in millions) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
U.S. wholesale loans:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 50,912 | $ | 51,113 | $ | 74,153 | $ | 70,081 | $ | 48,500 | ||||||||||
|
Real estate
|
51,734 | 54,970 | 61,890 | 15,977 | 18,047 | |||||||||||||||
|
Financial institutions
|
12,120 | 13,557 | 20,953 | 15,113 | 15,632 | |||||||||||||||
|
Government agencies
|
6,408 | 5,634 | 5,919 | 5,770 | 4,148 | |||||||||||||||
|
Other
|
38,298 | 23,811 | 23,861 | 26,312 | 32,359 | |||||||||||||||
|
Total U.S. wholesale loans
|
159,472 | 149,085 | 186,776 | 133,253 | 118,686 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-U.S. wholesale loans:
|
||||||||||||||||||||
|
Commercial and industrial
|
19,053 | 20,188 | 35,291 | 33,829 | 22,378 | |||||||||||||||
|
Real estate
|
1,973 | 2,270 | 2,811 | 3,632 | 2,325 | |||||||||||||||
|
Financial institutions
|
20,043 | 11,848 | 17,552 | 17,245 | 19,174 | |||||||||||||||
|
Government agencies
|
870 | 1,707 | 602 | 720 | 2,543 | |||||||||||||||
|
Other
|
26,222 | 19,077 | 19,012 | 24,397 | 18,636 | |||||||||||||||
|
Total non-U.S. wholesale loans
|
68,161 | 55,090 | 75,268 | 79,823 | 65,056 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total wholesale loans:
|
||||||||||||||||||||
|
Commercial and industrial
|
69,965 | 71,301 | 109,444 | 103,910 | 70,878 | |||||||||||||||
|
Real estate
|
53,707 | 57,240 | 64,701 | 19,609 | 20,372 | |||||||||||||||
|
Financial institutions
|
32,163 | 25,405 | 38,505 | 32,358 | 34,806 | |||||||||||||||
|
Government agencies
|
7,278 | 7,341 | 6,521 | 6,490 | 6,691 | |||||||||||||||
|
Other
|
64,520 | 42,888 | 42,873 | 50,709 | 50,995 | |||||||||||||||
|
Total wholesale loans
|
227,633 | 204,175 | 262,044 | 213,076 | 183,742 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total consumer loans:
|
||||||||||||||||||||
|
Home equity
|
112,844 | 127,945 | 142,890 | 94,832 | 85,730 | |||||||||||||||
|
Mortgage
|
134,284 | 143,129 | 157,078 | 56,031 | 59,668 | |||||||||||||||
|
Auto
|
48,367 | 46,031 | 42,603 | 42,350 | 41,009 | |||||||||||||||
|
Credit card
|
137,676 | 78,786 | 104,746 | 84,352 | 85,881 | |||||||||||||||
|
Other
|
32,123 | 33,392 | 35,537 | 28,733 | 27,097 | |||||||||||||||
|
Total consumer loans
|
465,294 | 429,283 | 482,854 | 306,298 | 299,385 | |||||||||||||||
|
Total loans
(a)
|
$ | 692,927 | $ | 633,458 | $ | 744,898 | $ | 519,374 | $ | 483,127 | ||||||||||
|
Memo:
|
||||||||||||||||||||
|
Loans held-for-sale
|
$ | 5,453 | $ | 4,876 | $ | 8,287 | $ | 18,899 | $ | 55,251 | ||||||||||
|
Loans at fair value
|
1,976 | 1,364 | 7,696 | 8,739 | — | |||||||||||||||
|
Total loans held-for-sale and
loans at fair value
|
$ | 7,429 | $ | 6,240 | $ | 15,983 | $ | 27,638 | $ | 55,251 | ||||||||||
| (a) | Loans (other than purchased credit-impaired loans and those for which the fair value option have been elected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $1.9 billion, $1.4 billion, $2.0 billion, $1.3 billion and $3.0 billion at December 31, 2010, 2009, 2008, 2007 and 2006, respectively. |
310
Table of Contents
Maturities and sensitivity to changes in interest rates
The table below shows, at December 31, 2010, wholesale loan maturity and distribution between fixed
and floating interest rates based on the stated terms of the wholesale loan agreements. The table
below also reflects the line-of-business basis that is presented in Credit Risk Management on pages
119, 120 and 130, and in Note 14 on pages 220–238. The table does not include the impact of
derivative instruments.
| Within | 1-5 | After 5 | ||||||||||||||
| December 31, 2010 (in millions) | 1 year (a) | years | years | Total | ||||||||||||
|
|
||||||||||||||||
|
U.S.
|
||||||||||||||||
|
Commercial and industrial
|
$ | 12,975 | $ | 31,688 | $ | 6,249 | $ | 50,912 | ||||||||
|
Real estate
|
6,446 | 8,397 | 36,891 | 51,734 | ||||||||||||
|
Financial institutions
|
4,548 | 5,188 | 2,384 | 12,120 | ||||||||||||
|
Government agencies
|
2,397 | 1,659 | 2,352 | 6,408 | ||||||||||||
|
Other
|
13,090 | 21,471 | 3,737 | 38,298 | ||||||||||||
|
Total U.S.
|
39,456 | 68,403 | 51,613 | 159,472 | ||||||||||||
|
Non-U.S.
|
||||||||||||||||
|
Commercial and industrial
|
6,670 | 9,422 | 2,961 | 19,053 | ||||||||||||
|
Real estate
|
1,024 | 826 | 123 | 1,973 | ||||||||||||
|
Financial institutions
|
17,924 | 1,972 | 147 | 20,043 | ||||||||||||
|
Government agencies
|
735 | 58 | 77 | 870 | ||||||||||||
|
Other
|
13,649 | 7,302 | 5,271 | 26,222 | ||||||||||||
|
Total non-U.S.
|
40,002 | 19,580 | 8,579 | 68,161 | ||||||||||||
|
Total wholesale loans
|
$ | 79,458 | $ | 87,983 | $ | 60,192 | $ | 227,633 | ||||||||
|
Loans at fixed interest rates
|
$ | 11,760 | $ | 33,414 | ||||||||||||
|
Loans at variable interest rates
|
76,223 | 26,778 | ||||||||||||||
|
Total wholesale loans
|
$ | 87,983 | $ | 60,192 | ||||||||||||
| (a) | Includes demand loans and overdrafts. |
311
Table of Contents
Risk elements
The following table sets forth nonperforming assets, contractually past-due assets, and accruing
restructured loans with the line-of-business basis that is presented in Credit Risk Management on
pages 119, 120, and 130, at the periods indicated.
| December 31, (in millions) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Nonperforming assets
|
||||||||||||||||||||
|
U.S. nonaccrual loans:
|
||||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 1,745 | $ | 2,182 | $ | 1,052 | $ | 63 | $ | 238 | ||||||||||
|
Real estate
|
2,390 | 2,647 | 806 | 216 | 18 | |||||||||||||||
|
Financial institutions
|
111 | 663 | 60 | 10 | 5 | |||||||||||||||
|
Government agencies
|
— | 4 | — | 1 | — | |||||||||||||||
|
Other
|
267 | 348 | 205 | 200 | 49 | |||||||||||||||
|
Consumer
|
8,835 | 10,660 | 6,571 | 2,768 | 1,686 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total U.S. nonaccrual loans
|
13,348 | 16,504 | 8,694 | 3,258 | 1,996 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-U.S. nonaccrual loans:
|
||||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||
|
Commercial and industrial
|
234 | 281 | 45 | 14 | 41 | |||||||||||||||
|
Real estate
|
585 | 241 | — | — | — | |||||||||||||||
|
Financial institutions
|
30 | 118 | 115 | 8 | 24 | |||||||||||||||
|
Government agencies
|
22 | — | — | — | — | |||||||||||||||
|
Other
|
622 | 420 | 99 | 2 | 16 | |||||||||||||||
|
Consumer
|
— | — | — | — | — | |||||||||||||||
|
Total non-U.S. nonaccrual loans
|
1,493 | 1,060 | 259 | 24 | 81 | |||||||||||||||
|
Total nonaccrual loans
|
14,841 | 17,564 | 8,953 | 3,282 | 2,077 | |||||||||||||||
|
Derivative receivables
|
34 | 529 | 1,079 | 29 | 36 | |||||||||||||||
|
Assets acquired in loan satisfactions
|
1,682 | 1,648 | 2,682 | 622 | 228 | |||||||||||||||
|
Nonperforming assets
|
$ | 16,557 | $ | 19,741 | $ | 12,714 | $ | 3,933 | $ | 2,341 | ||||||||||
|
Memo:
|
||||||||||||||||||||
|
Loans held-for-sale
|
$ | 341 | $ | 234 | $ | 12 | $ | 45 | $ | 120 | ||||||||||
|
Loans at fair value
|
155 | 111 | 20 | 5 | — | |||||||||||||||
|
Total loans held-for-sale and loans at fair value
|
$ | 496 | $ | 345 | $ | 32 | $ | 50 | $ | 120 | ||||||||||
|
|
||||||||||||||||||||
|
Contractually past-due assets
(a)
:
|
||||||||||||||||||||
|
U.S. loans:
|
||||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 7 | $ | 23 | $ | 30 | $ | 7 | $ | 5 | ||||||||||
|
Real estate
|
109 | 114 | 76 | 34 | 1 | |||||||||||||||
|
Financial institutions
|
2 | 6 | — | — | — | |||||||||||||||
|
Government agencies
|
— | — | — | — | — | |||||||||||||||
|
Other
|
171 | 75 | 54 | 28 | 23 | |||||||||||||||
|
Consumer
|
3,640 | 3,985 | 3,084 | 1,945 | 1,708 | |||||||||||||||
|
Total U.S. loans
|
3,929 | 4,203 | 3,244 | 2,014 | 1,737 | |||||||||||||||
|
Non-U.S. loans:
|
||||||||||||||||||||
|
Wholesale:
|
||||||||||||||||||||
|
Commercial and industrial
|
— | 5 | — | — | — | |||||||||||||||
|
Real estate
|
— | — | — | — | — | |||||||||||||||
|
Financial institutions
|
— | — | — | — | — | |||||||||||||||
|
Government agencies
|
— | — | — | — | — | |||||||||||||||
|
Other
|
70 | 109 | 3 | 6 | — | |||||||||||||||
|
Consumer
|
38 | 38 | 28 | 23 | 16 | |||||||||||||||
|
Total non-U.S. loans
|
108 | 152 | 31 | 29 | 16 | |||||||||||||||
|
Total
|
$ | 4,037 | $ | 4,355 | $ | 3,275 | $ | 2,043 | $ | 1,753 | ||||||||||
|
|
||||||||||||||||||||
|
Accruing restructured loans
(b)
|
||||||||||||||||||||
|
U.S.:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | — | $ | — | $ | — | $ | 8 | $ | — | ||||||||||
|
Real estate
|
76 | 5 | — | — | — | |||||||||||||||
|
Other
|
— | — | — | — | — | |||||||||||||||
|
Consumer
(c)
|
14,261 | 8,405 | 4,029 | 1,867 | — | |||||||||||||||
|
Total U.S.
|
14,337 | 8,410 | 4,029 | 1,875 | — | |||||||||||||||
|
Non-U.S.:
|
||||||||||||||||||||
|
Commercial and industrial
|
49 | 31 | 5 | — | — | |||||||||||||||
|
Real estate
|
— | 582 | — | — | — | |||||||||||||||
|
Consumer
|
— | — | — | — | — | |||||||||||||||
|
Total non-U.S.
|
49 | 613 | 5 | — | — | |||||||||||||||
|
Total
|
$ | 14,386 | $ | 9,023 | $ | 4,034 | $ | 1,875 | $ | — | ||||||||||
| (a) | Represents accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonaccrual loans. | |
| (b) | Represents performing loans modified in troubled debt restructurings in which an economic concession was granted by the Firm and the borrower has demonstrated its ability to repay the loans according to the terms of the restructuring. As defined in U.S. GAAP, concessions include the reduction of interest rates or the deferral of interest or principal payments, resulting from deterioration in the borrowers’ financial condition. Excludes nonaccrual assets and contractually past-due assets, which are included in the sections above. | |
| (c) | Includes credit card loans that have been modified in a troubled debt restructuring. Prior periods excluding 2006 have been revised to reflect the current presentation. |
For a discussion of nonperforming loans, past-due loan accounting policies, and accruing
restructured loans see Credit Risk Management on pages 116–141,
and Note 14 on pages 220–238.
312
Table of Contents
Impact of nonaccrual loans and accruing restructured loans on interest income
The negative impact on interest income from nonaccrual loans represents the difference between the
amount of interest income that would have been recorded on such nonaccrual loans according to their
original contractual terms had they been performing and the amount of interest that actually was
recognized on a cash basis. The negative impact on interest income from accruing restructured loans
represents the difference between the amount of interest income that would have been recorded on
such loans according to their original contractual terms and the amount of interest that actually
was recognized under the modified terms. The following table sets forth this data for the years
specified. The change in foregone interest income from 2008 through 2010 was primarily driven by
the change in the levels of nonaccrual loans.
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Nonaccrual loans
|
||||||||||||
|
U.S.:
|
||||||||||||
|
Wholesale:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
$ | 110 | $ | 88 | $ | 87 | ||||||
|
Interest that was recognized in income
|
(21 | ) | (13 | ) | (7 | ) | ||||||
|
Total U.S. wholesale
|
89 | 75 | 80 | |||||||||
|
Consumer:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
860 | 932 | 584 | |||||||||
|
Interest that was recognized in income
|
(139 | ) | (208 | ) | (193 | ) | ||||||
|
Total U.S. consumer
|
721 | 724 | 391 | |||||||||
|
Negative impact — U.S.
|
810 | 799 | 471 | |||||||||
|
Non-U.S.:
|
||||||||||||
|
Wholesale:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
26 | 58 | 11 | |||||||||
|
Interest that was recognized in income
|
(17 | ) | (7 | ) | (2 | ) | ||||||
|
Total non-U.S. wholesale
|
9 | 51 | 9 | |||||||||
|
Consumer:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
— | — | — | |||||||||
|
Interest that was recognized in income
|
— | — | — | |||||||||
|
Total non-U.S. consumer
|
— | — | — | |||||||||
|
Negative impact — non-U.S.
|
9 | 51 | 9 | |||||||||
|
Total negative impact on interest income
|
$ | 819 | $ | 850 | $ | 480 | ||||||
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | |||||||||
|
Accruing restructured loans
|
||||||||||||
|
U.S.:
|
||||||||||||
|
Wholesale
(a)
:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
$ | 5 | $ | — | $ | — | ||||||
|
Interest that was recognized in income
|
(2 | ) | — | — | ||||||||
|
Total
U.S. wholesale
|
3 | — | — | |||||||||
|
Consumer:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
2,022 | 819 | 416 | |||||||||
|
Interest that was recognized in income
|
(797 | ) | (386 | ) | (222 | ) | ||||||
|
Total U.S. consumer
|
1,225 | 433 | 194 | |||||||||
|
Negative impact — U.S.
|
1,228 | 433 | 194 | |||||||||
|
Non-U.S.:
|
||||||||||||
|
Wholesale
(a)
:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
3 | 38 | — | |||||||||
|
Interest that was recognized in income
|
(2 | ) | (15 | ) | — | |||||||
|
Total
non-U.S. wholesale
|
1 | 23 | — | |||||||||
|
Consumer:
|
||||||||||||
|
Gross amount of interest that would
have been recorded at the original
terms
|
— | — | — | |||||||||
|
Interest that was recognized in income
|
— | — | — | |||||||||
|
Total non-U.S. consumer
|
— | — | — | |||||||||
|
Negative impact — non-U.S.
|
1 | 23 | — | |||||||||
|
Total negative impact on interest income
|
$ | 1,229 | $ | 456 | $ | 194 | ||||||
| (a) | Predominantly real estate-related. |
313
Table of Contents
Cross-border outstandings
Cross-border disclosure is based on the Federal Financial Institutions Examination Council’s (“FFIEC”) guidelines governing the determination of cross-border risk. Based on rules from the FFIEC, securities purchased under resale agreements are allocated to a country based on the domicile of the counterparty. Additionally, local foreign office commitments are now included in commitments; previously they were excluded.
Cross-border disclosure is based on the Federal Financial Institutions Examination Council’s (“FFIEC”) guidelines governing the determination of cross-border risk. Based on rules from the FFIEC, securities purchased under resale agreements are allocated to a country based on the domicile of the counterparty. Additionally, local foreign office commitments are now included in commitments; previously they were excluded.
The following table lists all countries in which JPMorgan Chase’s cross-border outstandings exceed
0.75% of consolidated assets as of any of the dates specified. The disclosure includes certain
exposures that are not required under the disclosure requirements of the SEC. The most significant
differences between the FFIEC and SEC
methodologies are: the FFIEC methodology includes
mark-to-market exposures of foreign exchange and derivatives; net local country assets are reduced
by local country liabilities (regardless of currency denomination); and securities purchased under
resale agreements are reported based on the counterparty, without regard to the underlying security
collateral.
JPMorgan Chase’s total cross-border exposure tends to fluctuate greatly, and the amount of exposure
at year-end tends to be a function of timing rather than representing a consistent trend. For a
further discussion of JPMorgan Chase’s emerging markets cross-border exposure, see Country exposure on pages 128–129.
Cross-border outstandings exceeding 0.75% of total assets
| Net local | Total | |||||||||||||||||||||||||||||||
| country | cross-border | Total | ||||||||||||||||||||||||||||||
| (in millions) | December 31, | Governments | Banks | Other (a) | assets | outstandings (b) | Commitments (c) | exposure | ||||||||||||||||||||||||
|
United Kingdom
|
2010 | $ | 787 | $ | 12,133 | $ | 10,770 | $ | — | $ | 23,690 | $ | 668,610 | $ | 692,300 | |||||||||||||||||
|
|
2009 | 347 | 15,822 | 11,565 | — | 27,734 | 624,754 | 652,488 | ||||||||||||||||||||||||
|
|
2008 | 1,173 | 23,490 | 19,624 | — | 44,287 | 562,980 | 607,267 | ||||||||||||||||||||||||
|
Germany
|
2010 | $ | 15,339 | $ | 9,900 | $ | 17,759 | $ | — | $ | 42,998 | $ | 108,141 | $ | 151,139 | |||||||||||||||||
|
|
2009 | 13,291 | 10,704 | 10,718 | — | 34,713 | 175,323 | 210,036 | ||||||||||||||||||||||||
|
|
2008 | 8,437 | 24,312 | 10,297 | 3,660 | 46,706 | 348,635 | 395,341 | ||||||||||||||||||||||||
|
France
|
2010 | $ | 4,699 | $ | 16,541 | $ | 26,374 | $ | 1,473 | $ | 49,087 | $ | 101,141 | $ | 150,228 | |||||||||||||||||
|
|
2009 | 9,505 | 16,428 | 19,642 | 1,377 | 46,952 | 160,536 | 207,488 | ||||||||||||||||||||||||
|
|
2008 | 6,666 | 25,479 | 24,665 | 28 | 56,838 | 353,074 | 409,912 | ||||||||||||||||||||||||
|
Japan
|
2010 | $ | 233 | $ | 24,386 | $ | 4,231 | $ | 25,050 | $ | 53,900 | $ | 63,980 | $ | 117,880 | |||||||||||||||||
|
|
2009 | 404 | 22,022 | 8,984 | 4,622 | 36,032 | 66,487 | 102,519 | ||||||||||||||||||||||||
|
|
2008 | 687 | 17,401 | 18,568 | 2,174 | 38,830 | 64,583 | 103,413 | ||||||||||||||||||||||||
|
Netherlands
|
2010 | $ | 506 | $ | 8,093 | $ | 36,060 | $ | — | $ | 44,659 | $ | 47,015 | $ | 91,674 | |||||||||||||||||
|
|
2009 | 690 | 9,037 | 22,770 | — | 32,497 | 74,789 | 107,286 | ||||||||||||||||||||||||
|
|
2008 | 1,360 | 8,645 | 19,356 | — | 29,361 | 132,574 | 161,935 | ||||||||||||||||||||||||
|
Italy
|
2010 | $ | 5,292 | $ | 3,490 | $ | 2,543 | $ | 832 | $ | 12,157 | $ | 70,522 | $ | 82,679 | |||||||||||||||||
|
|
2009 | 12,912 | 2,065 | 3,643 | 128 | 18,748 | 86,790 | 105,538 | ||||||||||||||||||||||||
|
|
2008 | 7,680 | 6,804 | 3,742 | 448 | 18,674 | 134,851 | 153,525 | ||||||||||||||||||||||||
|
Spain
|
2010 | $ | 936 | $ | 5,877 | $ | 4,390 | $ | 785 | $ | 11,988 | $ | 40,147 | $ | 52,135 | |||||||||||||||||
|
|
2009 | 2,705 | 8,724 | 4,884 | 1,189 | 17,502 | 52,363 | 69,865 | ||||||||||||||||||||||||
|
|
2008 | 906 | 11,867 | 4,466 | 1,161 | 18,400 | 104,956 | 123,356 | ||||||||||||||||||||||||
|
Cayman Islands
|
2010 | $ | 73 | $ | 136 | $ | 38,278 | $ | — | $ | 38,487 | $ | 7,926 | $ | 46,413 | |||||||||||||||||
|
|
2009 | 243 | 216 | 30,830 | — | 31,289 | 8,218 | 39,507 | ||||||||||||||||||||||||
|
|
2008 | 87 | 115 | 30,869 | — | 31,071 | 6,843 | 37,914 | ||||||||||||||||||||||||
|
Canada
|
2010 | $ | 4,995 | $ | 4,482 | $ | 6,599 | $ | — | $ | 16,076 | $ | 23,434 | $ | 39,510 | |||||||||||||||||
|
|
2009 | 5,119 | 2,057 | 4,836 | — | 12,012 | 24,719 | 36,731 | ||||||||||||||||||||||||
|
|
2008 | 3,043 | 2,793 | 7,547 | — | 13,383 | 33,266 | 46,649 | ||||||||||||||||||||||||
|
Ireland
|
2010 | $ | 189 | $ | 6,300 | $ | 12,307 | $ | — | $ | 18,796 | $ | 11,453 | $ | 30,249 | |||||||||||||||||
|
|
2009 | 700 | 5,584 | 8,413 | — | 14,697 | 13,075 | 27,772 | ||||||||||||||||||||||||
|
|
2008 | — | 2,847 | 10,249 | — | 13,096 | 16,403 | 29,499 | ||||||||||||||||||||||||
|
Brazil
|
2010 | $ | 2,611 | $ | 5,302 | $ | 4,252 | $ | 4,750 | $ | 16,915 | $ | 11,139 | $ | 28,054 | |||||||||||||||||
|
|
2009 | 2,082 | 2,165 | 3,681 | 1,793 | 9,721 | 11,727 | 21,448 | ||||||||||||||||||||||||
|
|
2008 | 2,665 | 1,253 | 2,846 | 874 | 7,638 | 20,398 | 28,036 | ||||||||||||||||||||||||
|
Norway
|
2010 | $ | 2,868 | $ | 678 | $ | 261 | $ | — | $ | 3,807 | $ | 5,396 | $ | 9,203 | |||||||||||||||||
|
|
2009 | 4,329 | 259 | 222 | — | 4,810 | 7,448 | 12,258 | ||||||||||||||||||||||||
|
|
2008 | 15,944 | 616 | 718 | — | 17,278 | 11,393 | 28,671 | ||||||||||||||||||||||||
| (a) | Consists primarily of commercial and industrial. | |
| (b) | Outstandings includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, resale agreements, other monetary assets, cross-border trading debt and equity instruments, mark-to-market exposure of foreign exchange and derivative contracts, and local country assets, net of local country liabilities. The amounts associated with foreign exchange and derivative contracts are presented after taking into account the impact of legally enforceable master netting agreements. | |
| (c) | Commitments include outstanding letters of credit, undrawn commitments to extend credit, and the notional value of credit derivatives where JPMorgan Chase is a protection seller. |
314
Table of Contents
Summary of loan and lending-related commitments loss experience
The tables below summarize the changes in the allowance for loan losses and the allowance for
lending-related commitments during the periods indicated. For a further discussion, see Allowance
for credit losses on pages 139—141, and Note 15 on pages 239—243.
Allowance for loan losses
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Balance at beginning of year
|
$ | 31,602 | $ | 23,164 | $ | 9,234 | $ | 7,279 | $ | 7,090 | ||||||||||
|
Addition resulting from mergers and
acquisitions
(a)
|
— | — | 2,535 | — | — | |||||||||||||||
|
Provision for loan losses
|
16,822 | 31,735 | 21,237 | 6,538 | 3,153 | |||||||||||||||
|
U.S. charge-offs
|
||||||||||||||||||||
|
Commercial and industrial
|
467 | 1,233 | 183 | 34 | 80 | |||||||||||||||
|
Real estate
|
698 | 700 | 217 | 46 | 10 | |||||||||||||||
|
Financial institutions
|
146 | 671 | 17 | 9 | 1 | |||||||||||||||
|
Government agencies
|
3 | — | — | 10 | 2 | |||||||||||||||
|
Other
|
102 | 151 | 35 | 81 | 36 | |||||||||||||||
|
Consumer
|
23,630 | 20,638 | 10,140 | 5,181 | 3,635 | |||||||||||||||
|
Total U.S. charge-offs
|
25,046 | 23,393 | 10,592 | 5,361 | 3,764 | |||||||||||||||
|
Non-U.S. charge-offs
|
||||||||||||||||||||
|
Commercial and industrial
|
23 | 64 | 40 | 2 | 43 | |||||||||||||||
|
Real estate
|
239 | — | — | — | — | |||||||||||||||
|
Financial institutions
|
— | 66 | 29 | — | — | |||||||||||||||
|
Government agencies
|
— | — | — | — | — | |||||||||||||||
|
Other
|
311 | 341 | — | 3 | 14 | |||||||||||||||
|
Consumer
|
163 | 154 | 103 | 1 | 63 | |||||||||||||||
|
Total non-U.S. charge-offs
|
736 | 625 | 172 | 6 | 120 | |||||||||||||||
|
Total charge-offs
|
25,782 | 24,018 | 10,764 | 5,367 | 3,884 | |||||||||||||||
|
U.S. recoveries
|
||||||||||||||||||||
|
Commercial and industrial
|
(86 | ) | (53 | ) | (60 | ) | (48 | ) | (89 | ) | ||||||||||
|
Real estate
|
(75 | ) | (12 | ) | (5 | ) | (1 | ) | (4 | ) | ||||||||||
|
Financial institutions
|
(74 | ) | (3 | ) | (2 | ) | (3 | ) | (4 | ) | ||||||||||
|
Government agencies
|
(1 | ) | — | — | — | — | ||||||||||||||
|
Other
|
(25 | ) | (25 | ) | (29 | ) | (40 | ) | (48 | ) | ||||||||||
|
Consumer
|
(1,819 | ) | (941 | ) | (793 | ) | (716 | ) | (622 | ) | ||||||||||
|
Total U.S. recoveries
|
(2,080 | ) | (1,034 | ) | (889 | ) | (808 | ) | (767 | ) | ||||||||||
|
Non-U.S. recoveries
|
||||||||||||||||||||
|
Commercial and industrial
|
(1 | ) | (1 | ) | (16 | ) | (8 | ) | (26 | ) | ||||||||||
|
Real estate
|
— | — | — | — | — | |||||||||||||||
|
Financial institutions
|
— | — | — | (1 | ) | (11 | ) | |||||||||||||
|
Government agencies
|
— | — | — | — | — | |||||||||||||||
|
Other
|
— | — | (7 | ) | (12 | ) | (26 | ) | ||||||||||||
|
Consumer
|
(28 | ) | (18 | ) | (17 | ) | — | (12 | ) | |||||||||||
|
Total non-U.S. recoveries
|
(29 | ) | (19 | ) | (40 | ) | (21 | ) | (75 | ) | ||||||||||
|
Total recoveries
|
(2,109 | ) | (1,053 | ) | (929 | ) | (829 | ) | (842 | ) | ||||||||||
|
Net charge-offs
|
23,673 | 22,965 | 9,835 | 4,538 | 3,042 | |||||||||||||||
|
Allowance related to purchased portfolios
|
— | — | 6 | — | 75 | |||||||||||||||
|
Change in accounting principles
(b)
|
7,494 | — | — | (56 | ) | — | ||||||||||||||
|
Other
|
21 | (332 | ) (c) | (13 | ) | 11 | 3 | |||||||||||||
|
Balance at year-end
|
$ | 32,266 | $ | 31,602 | $ | 23,164 | $ | 9,234 | $ | 7,279 | ||||||||||
| (a) | The 2008 amount relates to the Washington Mutual transaction. | |
| (b) | Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. As a result $7.4 million, $14 million and $127 million of allowance for loan losses were recorded on-balance sheet associated with the Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits, and certain other consumer loan securitization entities, primarily mortgage-related, respectively. For further discussion, see Note 16 on pages 244—259 of this Annual Report. | |
| (c) | Predominantly includes a reclassification in 2009 related to the issuance and retention of securities from the Chase Issuance Trust. |
Allowance for lending-related commitments
| Year ended December 31, (in millions) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Balance at beginning of year
|
$ | 939 | $ | 659 | $ | 850 | $ | 524 | $ | 400 | ||||||||||
|
Addition resulting from mergers and
acquisitions
(a)
|
— | — | 66 | — | — | |||||||||||||||
|
Provision for lending-related commitments
|
(183 | ) | 280 | (258 | ) | 326 | 117 | |||||||||||||
|
Net charge-offs
|
— | — | — | — | — | |||||||||||||||
|
Change in accounting principles
(b)
|
(18 | ) | — | — | — | — | ||||||||||||||
|
Other
|
(21 | ) | — | 1 | — | 7 | ||||||||||||||
|
Balance at year-end
|
$ | 717 | $ | 939 | $ | 659 | $ | 850 | $ | 524 | ||||||||||
| (a) | The 2008 amount relates to the Washington Mutual transaction. | |
| (b) | Relates to the adoption of the new accounting guidance related to VIEs. |
315
Table of Contents
Loan loss analysis
| As of or for the year ended December 31, | ||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2008 (c) | 2007 | 2006 | |||||||||||||||
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Balances
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Loans – average
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$ | 703,540 | $ | 682,885 | $ | 588,801 | $ | 479,679 | $ | 454,535 | ||||||||||
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Loans – year-end
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692,927 | 633,458 | 744,898 | 519,374 | 483,127 | |||||||||||||||
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Net charge-offs
(a)
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23,673 | 22,965 | 9,835 | 4,538 | 3,042 | |||||||||||||||
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Allowance for loan losses:
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U.S.
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31,111 | 29,802 | 21,830 | 8,454 | 6,654 | |||||||||||||||
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Non-U.S.
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1,155 | 1,800 | 1,334 | 780 | 625 | |||||||||||||||
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Total allowance for loan losses
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32,266 | 31,602 | 23,164 | 9,234 | 7,279 | |||||||||||||||
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Nonperforming loans
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14,841 | 17,564 | 8,953 | 3,282 | 2,077 | |||||||||||||||
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Ratios
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Net charge-offs to:
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Loans retained – average
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3.39 | % | 3.42 | % | 1.73 | % | 1.00 | % | 0.73 | % | ||||||||||
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Allowance for loan losses
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73.37 | 72.67 | 42.46 | 49.14 | 41.79 | |||||||||||||||
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Allowance for loan losses to:
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Loans retained – year-end
(b)
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4.71 | 5.04 | 3.18 | 1.88 | 1.70 | |||||||||||||||
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Nonaccrual loans retained
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225 | 184 | 260 | 286 | 372 | |||||||||||||||
| (a) | There were no net charge-offs/(recoveries) on lending-related commitments in 2010, 2009, 2008, 2007 or 2006. | |
| (b) | The allowance for loan losses as a percentage of retained loans declined from 2009 to 2010, due to an improvement in credit quality of the wholesale and consumer credit portfolios. Deteriorating credit conditions from 2007 to 2009, primarily within consumer lending, resulted in increasing losses and correspondingly higher loan loss provisions for those periods. During 2006, the credit environment remained relatively benign. For a more detailed discussion of the 2008 through 2010 provision for credit losses, see Provision for Credit Losses on page 141. | |
| (c) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction. |
316
Table of Contents
Deposits
The following table provides a summary of the average balances and average interest rates of
JPMorgan Chase’s various deposits for the years indicated.
| Year ended December 31, | Average balances | Average interest rates | ||||||||||||||||||||||
| (in millions, except interest rates) | 2010 | 2009 | 2008 (a) | 2010 | 2009 | 2008 (a) | ||||||||||||||||||
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U.S.
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Noninterest-bearing demand
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$ | 54,305 | $ | 48,865 | $ | 39,476 | — | % | — | % | — | % | ||||||||||||
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Interest-bearing demand
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18,881 | 14,873 | 13,165 | 0.04 | 0.44 | 0.59 | ||||||||||||||||||
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Savings
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455,856 | 412,363 | 313,939 | 0.19 | 0.22 | 1.13 | ||||||||||||||||||
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Time
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106,644 | 154,420 | 175,117 | 1.22 | 1.82 | 2.74 | ||||||||||||||||||
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Total U.S. deposits
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635,686 | 630,521 | 541,697 | 0.34 | 0.60 | 1.55 | ||||||||||||||||||
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Non-U.S.
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Noninterest-bearing demand
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9,955 | 7,794 | 6,751 | — | — | — | ||||||||||||||||||
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Interest-bearing demand
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163,550 | 163,512 | 155,015 | 0.35 | 0.25 | 2.37 | ||||||||||||||||||
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Savings
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605 | 559 | 480 | 0.28 | 0.18 | 0.58 | ||||||||||||||||||
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Time
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71,258 | 79,619 | 81,864 | 0.97 | 0.80 | 3.00 | ||||||||||||||||||
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Total non-U.S. deposits
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245,368 | 251,484 | 244,110 | 0.52 | 0.42 | 2.51 | ||||||||||||||||||
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Total deposits
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$ | 881,054 | $ | 882,005 | $ | 785,807 | 0.39 | % | 0.55 | % | 1.85 | % | ||||||||||||
| (a) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 166—170. |
At December 31, 2010, other U.S. time deposits in denominations of $100,000 or more totaled
$39.1 billion, substantially all of which mature in three months or less. In addition, the table
below presents the maturities for U.S. time certificates of deposit in denominations of $100,000 or
more.
| By remaining maturity at | Three months | Over three months | Over six months | Over | ||||||||||||||||
| December 31, 2010 (in millions) | or less | but within six months | but within 12 months | 12 months | Total | |||||||||||||||
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U.S. time certificates of deposit ($100,000 or more)
|
$ | 5,187 | $ | 3,688 | $ | 5,925 | $ | 5,765 | $ | 20,565 | ||||||||||
317
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned, thereunto duly
authorized.
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JPMorgan Chase & Co.
(Registrant) |
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By: /s/ JAMES DIMON
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| (James Dimon | ||||
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Chairman and Chief Executive Officer)
Date: February 28, 2011 |
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Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the registrant and in the
capacity and on the date indicated. JPMorgan Chase & Co. does not exercise the power of attorney to
sign on behalf of any Director.
| Capacity | Date | ||||
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/s/ JAMES DIMON
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Director, Chairman and Chief Executive Officer
(Principal Executive Officer) |
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/s/ CRANDALL C. BOWLES
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Director | February 28, 2011 | |||
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/s/ STEPHEN B. BURKE
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Director | ||||
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/s/ DAVID M. COTE
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Director | ||||
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/s/ JAMES S. CROWN
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Director | ||||
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/s/ ELLEN V. FUTTER
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Director | ||||
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/s/ WILLIAM H. GRAY, III
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Director | ||||
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/s/ LABAN P. JACKSON, JR.
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Director | ||||
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/s/ DAVID C. NOVAK
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Director | ||||
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/s/ LEE R. RAYMOND
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Director | ||||
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/s/ WILLIAM C. WELDON
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Director |
318
Table of Contents
| Capacity | Date | ||||
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/s/ DOUGLAS L. BRAUNSTEIN
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Executive Vice President
and Chief Financial Officer (Principal Financial Officer) |
February 28, 2011 | |||
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/s/ LOUIS RAUCHENBERGER
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Managing Director and Controller
(Principal Accounting Officer) |
319
TABLE OF CONTENTS
Part IItem 1B: Unresolved Sec Staff CommentsItem 2: PropertiesItem 3: Legal ProceedingsPart IIItem 5: Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6: Selected Financial DataItem 7: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A: Quantitative and Qualitative Disclosures About Market RiskItem 8: Financial Statements and Supplementary DataItem 9: Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A: Controls and ProceduresItem 9B: Other InformationPart IIIItem 10: Directors, Executive Officers and Corporate GovernanceItem 11: Executive CompensationItem 12: Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13: Certain Relationships and Related Transactions, and Director IndependenceItem 14: Principal Accounting Fees and ServicesPart IVItem 15: Exhibits, Financial Statement SchedulesNote 3 and Note 6 on Pages 170 187 and 191 199, Respectively, Of This Annual ReportNote 1 Basis Of PresentationNote 2 Business Changes and DevelopmentsNote 3 Fair Value MeasurementNote 4 Fair Value OptionNote 5 Credit Risk ConcentrationsNote 6 Derivative InstrumentsNote 7 Noninterest RevenueNote 8 Interest Income and Interest ExpenseNote 9 Pension and Other Postretirement Employee Benefit PlansNote 10 Employee Stock-based IncentivesNote 11 Noninterest ExpenseNote 12 SecuritiesNote 13 Securities Financing ActivitiesNote 14 LoansNote 15 Allowance For Credit LossesNote 16 Variable Interest EntitiesNote 17 Goodwill and Other Intangible AssetsNote 18 Premises and EquipmentNote 19 DepositsNote 20 Other Borrowed FundsNote 21 Accounts Payable and Other LiabilitiesNote 22 Long-term DebtNote 23 Preferred StockNote 24 Common StockNote 25 Earnings Per ShareNote 26 Accumulated Other Comprehensive Income/(loss)Note 27 Income TaxesNote 28 Restrictions on Cash and Intercompany Funds TransfersNote 29 CapitalNote 30 Off-balance Sheet Lending-related Financial Instruments, Guarantees and Other CommitmentsNote 31 Commitments, Pledged Assets, Collateral and ContingenciesNote 32 LitigationNote 33 International OperationsNote 34 Business SegmentsNote 35 Parent Company