JPMORGAN CHASE & CO
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
June 30, 2010
Commission file 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, New York | 10017 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code
(212) 270-6000
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.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, 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).
þ
Yes
o
No
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 the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a 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
þ
No
Number of shares of common stock outstanding as of July 31, 2010: 3,965,167,399
FORM 10-Q
TABLE OF CONTENTS
TABLE OF CONTENTS
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Part I — Financial information
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Item 1 Consolidated Financial Statements — JPMorgan Chase & Co.:
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| EX-32 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
2
Table of Contents
JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
CONSOLIDATED FINANCIAL HIGHLIGHTS
| (unaudited) | ||||||||||||||||||||||||||||
| (in millions, except per share, headcount and ratios) | Six months ended June 30, | |||||||||||||||||||||||||||
| As of or for the period ended, | 2Q10 | 1Q10 | 4Q09 | 3Q09 | 2Q09 | 2010 | 2009 | |||||||||||||||||||||
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Selected income statement data
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Total net revenue
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$ | 25,101 | $ | 27,671 | $ | 23,164 | $ | 26,622 | $ | 25,623 | $ | 52,772 | $ | 50,648 | ||||||||||||||
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Total noninterest expense
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14,631 | 16,124 | 12,004 | 13,455 | 13,520 | 30,755 | 26,893 | |||||||||||||||||||||
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Pre-provision profit
(a)
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10,470 | 11,547 | 11,160 | 13,167 | 12,103 | 22,017 | 23,755 | |||||||||||||||||||||
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Provision for credit losses
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3,363 | 7,010 | 7,284 | 8,104 | 8,031 | 10,373 | 16,627 | |||||||||||||||||||||
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Income before income tax expense and
extraordinary gain
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7,107 | 4,537 | 3,876 | 5,063 | 4,072 | 11,644 | 7,128 | |||||||||||||||||||||
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Income tax expense
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2,312 | 1,211 | 598 | 1,551 | 1,351 | 3,523 | 2,266 | |||||||||||||||||||||
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Income before extraordinary gain
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4,795 | 3,326 | 3,278 | 3,512 | 2,721 | 8,121 | 4,862 | |||||||||||||||||||||
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Extraordinary gain
(b)
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— | — | — | 76 | — | — | — | |||||||||||||||||||||
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Net income
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$ | 4,795 | $ | 3,326 | $ | 3,278 | $ | 3,588 | $ | 2,721 | $ | 8,121 | $ | 4,862 | ||||||||||||||
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Per common share data
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Basic earnings
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Income before extraordinary gain
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$ | 1.10 | $ | 0.75 | $ | 0.75 | $ | 0.80 | $ | 0.28 | $ | 1.84 | $ | 0.68 | ||||||||||||||
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Net income
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1.10 | 0.75 | 0.75 | 0.82 | 0.28 | 1.84 | 0.68 | |||||||||||||||||||||
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Diluted earnings
(c)
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Income before extraordinary gain
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$ | 1.09 | $ | 0.74 | $ | 0.74 | $ | 0.80 | $ | 0.28 | $ | 1.83 | $ | 0.68 | ||||||||||||||
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Net income
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1.09 | 0.74 | 0.74 | 0.82 | 0.28 | 1.83 | 0.68 | |||||||||||||||||||||
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Cash dividends declared
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0.05 | 0.05 | 0.05 | 0.05 | 0.05 | 0.10 | 0.10 | |||||||||||||||||||||
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Book value
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40.99 | 39.38 | 39.88 | 39.12 | 37.36 | |||||||||||||||||||||||
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Common shares outstanding
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||||||||||||||||||||||||||||
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Weighted-average: Basic
|
3,983.5 | 3,970.5 | 3,946.1 | 3,937.9 | 3,811.5 | 3,977.0 | 3,783.6 | |||||||||||||||||||||
|
Diluted
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4,005.6 | 3,994.7 | 3,974.1 | 3,962.0 | 3,824.1 | 4,000.2 | 3,791.4 | |||||||||||||||||||||
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Common shares at period-end
(d)
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3,975.8 | 3,975.4 | 3,942.0 | 3,938.7 | 3,924.1 | |||||||||||||||||||||||
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Share price
(e)
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High
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$ | 48.20 | $ | 46.05 | $ | 47.47 | $ | 46.50 | $ | 38.94 | $ | 48.20 | $ | 38.94 | ||||||||||||||
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Low
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36.51 | 37.03 | 40.04 | 31.59 | 25.29 | 36.51 | 14.96 | |||||||||||||||||||||
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Close
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36.61 | 44.75 | 41.67 | 43.82 | 34.11 | |||||||||||||||||||||||
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Market capitalization
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145,554 | 177,897 | 164,261 | 172,596 | 133,852 | |||||||||||||||||||||||
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Selected ratios
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Return on common equity
(“ROE”)
(c)
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Income before extraordinary gain
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12 | % | 8 | % | 8 | % | 9 | % | 3 | % | 10 | % | 4 | % | ||||||||||||||
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Net income
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12 | 8 | 8 | 9 | 3 | 10 | 4 | |||||||||||||||||||||
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Return on tangible common equity
(“ROTCE”)
(c)
|
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Income before extraordinary gain
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17 | 12 | 12 | 13 | 5 | 15 | 6 | |||||||||||||||||||||
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Net income
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17 | 12 | 12 | 14 | 5 | 15 | 6 | |||||||||||||||||||||
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Return on assets (“ROA”)
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Income before extraordinary gain
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0.94 | 0.66 | 0.65 | 0.70 | 0.54 | 0.80 | 0.48 | |||||||||||||||||||||
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Net income
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0.94 | 0.66 | 0.65 | 0.71 | 0.54 | 0.80 | 0.48 | |||||||||||||||||||||
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Overhead ratio
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58 | 58 | 52 | 51 | 53 | 58 | 53 | |||||||||||||||||||||
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Tier 1 capital ratio
(f)
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12.1 | 11.5 | 11.1 | 10.2 | 9.7 | |||||||||||||||||||||||
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Total capital ratio
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15.8 | 15.1 | 14.8 | 13.9 | 13.3 | |||||||||||||||||||||||
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Tier 1 leverage ratio
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6.9 | 6.6 | 6.9 | 6.5 | 6.2 | |||||||||||||||||||||||
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Tier 1 common capital ratio
(g)
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9.6 | 9.1 | 8.8 | 8.2 | 7.7 | |||||||||||||||||||||||
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Selected balance sheet data
(period-end)
(f)
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Trading assets
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$ | 397,508 | $ | 426,128 | $ | 411,128 | $ | 424,435 | $ | 395,626 | ||||||||||||||||||
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Securities
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312,013 | 344,376 | 360,390 | 372,867 | 345,563 | |||||||||||||||||||||||
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Loans
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699,483 | 713,799 | 633,458 | 653,144 | 680,601 | |||||||||||||||||||||||
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Total assets
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2,014,019 | 2,135,796 | 2,031,989 | 2,041,009 | 2,026,642 | |||||||||||||||||||||||
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Deposits
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887,805 | 925,303 | 938,367 | 867,977 | 866,477 | |||||||||||||||||||||||
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Long-term debt
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248,618 | 262,857 | 266,318 | 272,124 | 271,939 | |||||||||||||||||||||||
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Common stockholders’ equity
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162,968 | 156,569 | 157,213 | 154,101 | 146,614 | |||||||||||||||||||||||
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Total stockholders’ equity
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171,120 | 164,721 | 165,365 | 162,253 | 154,766 | |||||||||||||||||||||||
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Headcount
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232,939 | 226,623 | 222,316 | 220,861 | 220,255 | |||||||||||||||||||||||
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Table of Contents
| (unaudited) | Six months ended | |||||||||||||||||||||||||||
| (in millions, except ratios) | June 30, | |||||||||||||||||||||||||||
| As of or for the period ended, | 2Q10 | 1Q10 | 4Q09 | 3Q09 | 2Q09 | 2010 | 2009 | |||||||||||||||||||||
|
Credit quality metrics
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Allowance for credit losses
(f)
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$ | 36,748 | $ | 39,126 | $ | 32,541 | $ | 31,454 | $ | 29,818 | ||||||||||||||||||
|
Allowance for loan losses to total retained loans
(f)
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5.15 | % | 5.40 | % | 5.04 | % | 4.74 | % | 4.33 | % | ||||||||||||||||||
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Allowance for loan losses to retained loans excluding
purchased credit-impaired loans
(f)(h)
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5.34 | 5.64 | 5.51 | 5.28 | 5.01 | |||||||||||||||||||||||
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Nonperforming assets
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$ | 18,156 | $ | 19,019 | $ | 19,741 | $ | 20,362 | $ | 17,517 | ||||||||||||||||||
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Net charge-offs
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5,714 | 7,910 | 6,177 | 6,373 | 6,019 | $ | 13,624 | $ | 10,415 | |||||||||||||||||||
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Net charge-off rate
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3.28 | % | 4.46 | % | 3.85 | % | 3.84 | % | 3.52 | % | 3.88 | % | 3.01 | % | ||||||||||||||
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Wholesale net charge-off rate
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0.44 | 1.84 | 2.31 | 1.93 | 1.19 | 1.14 | 0.75 | |||||||||||||||||||||
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Consumer net charge-off rate
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4.49 | 5.56 | 4.60 | 4.79 | 4.69 | 5.03 | 4.15 | |||||||||||||||||||||
| (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 Bank (“Washington Mutual”). 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. | |
| (c) | The calculation of second-quarter 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. Excluding this reduction, the adjusted ROE and ROTCE for the second quarter 2009 would have been 6% and 10%, respectively. 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 15-19 of this Form 10-Q and pages 50-52 of JPMorgan Chase’s 2009 Annual Report. | |
| (d) | On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of its common stock at $35.25 per share. | |
| (e) | 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. | |
| (f) | Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for the transfer of financial assets and the consolidation of variable interest entities (“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 I 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. | |
| (g) | 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-weighed assets. For further discussion, see Regulatory capital on pages 82-84 of JPMorgan Chase’s 2009 Annual Report. | |
| (h) | Excludes the impact of home lending purchased credit-impaired loans for all periods. Also excludes, as of December 31, 2009, September 30, 2009, and June 30, 2009, the loans held by the Washington Mutual Master Trust (“WMMT”), which were consolidated onto the balance sheet at fair value during the second quarter of 2009; such loans have been fully repaid or charged off as of June 30, 2010. See Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report. |
4
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q 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
181-184 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form
10-Q 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 pages 187-188 and Part II, Item 1A: Risk Factors on pages 196-197
of this Form 10-Q), and see Part I, Item 1A, Risk Factors on pages 4-10 of JPMorgan Chase’s Annual
Report on Form 10-K for the year ended December 31, 2009, filed with the U.S. Securities and
Exchange Commission (“2009 Annual Report” or “2009 Form 10-K”), to which reference is hereby made.
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 $2.0 trillion in assets, $171.1 billion in stockholders’ equity
and operations in more than 60 countries as of June 30, 2010. The Firm is a leader in investment
banking, financial services for consumers and businesses, financial transaction processing and
asset management. 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 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 5,100 bank branches
(third-largest nationally) and 15,600 ATMs (second-largest nationally), as well as online and
mobile banking around the clock. More than 26,900 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 15,900 auto dealerships and 1,800 schools and universities nationwide.
5
Table of Contents
Card Services
Card Services (“CS”) is one of the nation’s largest credit card issuers, with nearly $143 billion
in loans and nearly 90 million open accounts. In the six months ended June 30, 2010, customers used
Chase cards to meet nearly $148 billion of their spending needs. 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 more than 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 over 30,000 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 the CB, RFS and Asset Management
businesses to serve clients firmwide. As a result, 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 $1.6 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.
6
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 Form 10-Q. For a complete description of events,
trends and uncertainties, as well as the capital, liquidity, credit and market risks, and the
critical accounting estimates, affecting the Firm and its various lines of business, this Form 10-Q
should be read in its entirety.
The U.S. and global economic recovery proceeded in the second quarter of 2010, though the pace of
growth slowed, particularly in the U.S. and Asia. Concerns about the outlook for fiscal policy in
the developed economies, and the impact that might have on the global economic recovery, led to a
decline in equity markets and a rally in the bond markets. However, conditions within the U.S.
labor market continued to improve gradually and household spending increased, but at a slow pace.
Business spending on equipment and technology rose significantly, supported by the strong financial
condition of U.S. businesses; however, investment in nonresidential building projects remained
weak. Furthermore, inflation continued to trend lower during the quarter and the Federal Reserve
indicated that these economic conditions were likely to warrant an exceptionally low federal funds
rate for an extended period.
In response to the recent financial crisis, the U.S. Congress and regulators, as well as
legislative and regulatory bodies in other countries, continue to focus on the regulation of
financial institutions. On July 21, 2010, the U.S. enacted the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”), financial reform legislation that
expands the range of financial companies and activities that are subject to federal oversight. This
new law also provides more comprehensive regulation of the over-the-counter derivatives market;
provides limitations on proprietary trading and the investment activities of banks; imposes
limitations on debit card interchange transaction fees; and includes several other provisions that
affect the Firm’s business activities. As discussed in the Business outlook section, the full
impact of this legislation is unclear, and many challenges and uncertainties remain.
Financial performance of JPMorgan Chase
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
| (in millions, except per share data and ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Selected income statement data
|
||||||||||||||||||||||||
|
Total net revenue
|
$ | 25,101 | $ | 25,623 | (2 | )% | $ | 52,772 | $ | 50,648 | 4 | % | ||||||||||||
|
Total noninterest expense
|
14,631 | 13,520 | 8 | 30,755 | 26,893 | 14 | ||||||||||||||||||
|
Pre-provision profit
|
10,470 | 12,103 | (13 | ) | 22,017 | 23,755 | (7 | ) | ||||||||||||||||
|
Provision for credit losses
|
3,363 | 8,031 | (58 | ) | 10,373 | 16,627 | (38 | ) | ||||||||||||||||
|
Net income
|
4,795 | 2,721 | 76 | 8,121 | 4,862 | 67 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Diluted earnings per share
(a)
|
$ | 1.09 | $ | 0.28 | 289 | $ | 1.83 | $ | 0.68 | 169 | ||||||||||||||
|
Return on common equity
(b)
|
12 | % | 3 | % | 10 | % | 4 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Capital ratios
|
||||||||||||||||||||||||
|
Tier 1 capital
|
12.1 | 9.7 | ||||||||||||||||||||||
|
Tier 1 common
|
9.6 | 7.7 | ||||||||||||||||||||||
| (a) | The calculation of second quarter 2009 EPS includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share ($0.28 per share for the six months ended June 30, 2009), resulting from repayment of TARP preferred capital. For further discussion, see “Impact on diluted EPS of redemption of TARP preferred stock issued to the U.S. Treasury” on page 19 of this Form 10-Q. | |
| (b) | The calculation of second quarter 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from repayment of TARP preferred capital. Excluding this reduction, the adjusted ROE was 6% for the second quarter and first six months of 2009. For further discussion of adjusted ROE, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 15-19 of this Form 10-Q. |
Business overview
JPMorgan Chase reported second-quarter 2010 net income of $4.8 billion, or $1.09 per share,
compared with net income of $2.7 billion, or $0.28 per share, in the second quarter of 2009.
Current-quarter EPS included a benefit from a $1.5 billion, or $0.36 per share, reduction of loan
loss reserves, partially offset by a charge of $550 million, or
$0.14 per share, for the United
Kingdom (“U.K.”) Bank Payroll Tax. Prior-year EPS reflected a one-time, noncash reduction in net
income applicable to common stockholders of $1.1 billion, or $0.27 per share, resulting from
repayment of TARP preferred capital. ROE for the quarter was 12%, compared with 3% in the prior
year.
The increase in earnings from the second quarter of 2009 was driven by a significantly lower
provision for credit losses, partially offset by lower net revenue and higher noninterest expense.
The decline in net revenue was driven by lower principal transactions revenue, reflecting lower
trading results, and lower investment banking fees, partially offset by higher securities gains.
The lower provision for credit losses reflected improvements in both the consumer and wholesale
provisions. The consumer provision reflected a reduction in the allowance for credit losses as a
result of improved delinquency trends and reduced net charge-offs. The wholesale provision was a
benefit in the second
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quarter of 2010, compared with an expense in the second quarter of 2009. Noninterest expense in the
second quarter of 2010 included 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, and included higher
litigation expense. JPMorgan Chase maintained very high liquidity, with a deposit-to-loan ratio of
127%, and generated additional capital, ending the quarter with a strong Tier 1 common ratio of
9.6%.
Credit trends continued to improve during the second quarter; however, the levels of charge-offs
and delinquencies in the consumer-lending businesses remained extremely high. The wholesale
businesses experienced reduced credit costs, reflecting a reduction in the allowance for credit
losses mainly due to net repayments, loan sales, refinements to credit loss estimates, and
improvement in the credit quality of the commercial and industrial portfolio. Total firmwide credit
reserves fell to $36.7 billion, as loan balances remained flat and credit costs declined, resulting
in a ratio of firmwide reserves to total loans (excluding purchased credit-impaired loans) of 5.3%.
Net income for the first six months of 2010 was $8.1 billion, or $1.83 per share, compared with
$4.9 billion, or $0.68 per share, in the first half of 2009. The increase in earnings from the
comparable 2009 six-month period 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 and
the higher noninterest expense reflected the same factors as those that drove the second quarter
2010 results. The higher net revenue reflected solid markets revenue in IB and elevated levels of
securities gains from the investment portfolio in Corporate. Prior-year EPS reflected a one-time,
noncash reduction in net income applicable to common stockholders of $1.1 billion, or $0.28 per
share, resulting from repayment of TARP preferred capital.
JPMorgan Chase continued to support the economic recovery by assisting customers, providing sound
lending and continuing its efforts to prevent foreclosure. The Firm loaned or raised capital for
its clients of nearly $700 billion during the first half of 2010, and its small-business
originations were up 37%. The Firm has offered 880,000 mortgage modifications and has approved
245,000 since the beginning of 2009. Of these, nearly 193,000 have achieved permanent modification
as of June 30, 2010.
The discussion that follows highlights the current-quarter performance of each business segment,
compared with the prior-year quarter. 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 new
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 the new accounting
guidance, in 2009 and all other prior periods, the 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 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 15-19 of this Form 10-Q.
Investment Bank
net income decreased, reflecting lower net revenue and higher noninterest expense,
predominantly offset by a benefit from the provision for credit losses. The decrease in net revenue
was driven by a decline in Fixed Income Markets revenue, largely reflecting lower results in credit
markets, rates and commodities. Investment banking fees also decreased, driven by lower levels of
equity underwriting, debt underwriting and advisory fees. Partially offsetting the revenue decline
was an increase in Equity Markets revenue, reflecting solid client revenue. The provision for
credit losses was a benefit in the second quarter of 2010, compared with an expense in the second
quarter of 2009, and reflected a reduction in the allowance for loan losses, largely related to net
repayments and loan sales. Noninterest expense in the second quarter of 2010 included 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. Net revenue decreased, driven by lower loan and deposit balances and
declining deposit-related fees. These decreases were predominantly offset by a shift to
wider-spread deposit products, and growth in mortgage fees and related income, debit card income
and auto operating lease income. The provision for credit losses decreased from the prior year and
reflected improved delinquency trends and reduced net charge-offs. Noninterest expense increased
from the prior year, driven by higher default-related expense and sales force increases, partially
offset by a decrease in foreclosed asset expense.
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
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were partially offset by lower revenue reversals associated with lower charge-offs and a prior-year
write-down of securitization interests. The provision for credit losses decreased from the prior
year, reflecting reduced net charge-offs and lower estimated losses, primarily related to improved
delinquency trends and lower loan balances. Noninterest expense increased due to higher marketing
expense.
Commercial Banking
net income increased from the prior year, driven by a reduction in the provision
for credit losses. Net revenue was relatively flat from the prior year, as growth in liability
balances, wider loan spreads, gains on sales of loans and other real estate owned, and higher
lending-related fees were predominantly offset by spread compression on liability products and
lower loan balances. The provision for credit losses was a benefit in the second quarter of 2010
compared with an expense in the second quarter of 2009 and included a reduction to the allowance
for credit losses, mainly due to refinements to credit loss estimates and improvement in the credit
quality of the commercial and industrial portfolio. Noninterest expense was relatively flat
compared with the prior year.
Treasury and Securities Services
net income decreased from the prior year, driven by lower net
revenue and higher noninterest expense. Worldwide Securities Services net revenue was relatively
flat, as lower spreads in securities lending and the impact of lower volatility on foreign exchange
were offset by higher market levels and net inflows of assets under custody. Similarly, TS net
revenue was relatively flat, as lower deposit spreads were offset by higher trade loan and card
product volumes. Noninterest expense for TSS increased, driven by higher performance-based
compensation and continued investment in new product platforms, primarily related to international
expansion.
Asset Management
net income increased from the prior year, as higher net revenue and a lower
provision for credit losses were partially offset by higher noninterest expense. Net revenue
increased, due to the effects of higher market levels, net inflows to products with higher margins
and higher performance fees; partially offset by lower quarterly valuations of seed capital
investments and lower net interest income due to narrower deposit spreads, largely offset by higher
deposit balances. The increase in noninterest expense was driven by higher headcount.
Corporate/Private Equity
net income decreased from the prior year, driven by lower net revenue and
higher noninterest expense. Although lower than in the prior year, net revenue included elevated
levels of securities gains from the repositioning of the investment portfolio and elevated levels
of net interest income from the size of the investment portfolio. Net revenue also included modest
private equity gains. Noninterest expense rose, largely due to higher litigation expense.
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. These risks and
uncertainties could cause the Firm’s actual results to differ materially from those set forth in
such forward-looking statements.
JPMorgan Chase’s outlook for the third quarter of 2010 should be viewed against the backdrop of the
global and U.S. economies, financial markets activity, the geopolitical environment, the
competitive environment and client activity levels. Each of these linked factors will affect the
performance of the Firm and its lines of business. Accordingly, the Firm continues to monitor closely U.S.
and international economies and political environments.
As mentioned above, the Dodd-Frank Act was signed into law on July 21, 2010. There are a number of
positive aspects of this new legislation, including systemic risk oversight and resolution
authority. However, with hundreds of implementing rules to be written, there remain many challenges
and uncertainties. The Firm continues to be committed to helping ensure that the reforms are
implemented in a way that protects consumers and the competitiveness of the U.S. financial system,
while ensuring the flow of safe and sound credit.
In
addition to this legislation, any further legislation or regulations that are adopted in the U.S.
or in other countries could limit or restrict the Firm’s operations, impose additional costs on the
Firm in order to comply with such new laws or regulations, or significantly and adversely affect
the revenue of certain lines of business.
In the Retail Banking business within RFS, management expects continued strong revenue over the
next several quarters, despite continued economic pressure on consumers and consumer spending
levels. The Firm has already made changes consistent with and, in certain respects,
beyond the requirements of the newly-enacted legislation in its policies relating to non-sufficient
funds and overdraft fees. Management has refined its estimate of the cost of these changes to the
business based on its most recent assessment of customer behavior and now estimates that Retail
Banking net income may be reduced, on an annualized basis, by approximately $700 million by the
fourth quarter of 2010, an increase from management’s prior estimate of approximately $500 million.
Results in the second quarter of 2010 reflect approximately 50% of the estimated quarterly impact
of this reduction in net income.
In the Mortgage Banking & Other Consumer Lending business within RFS, management expects revenue to
continue to be negatively affected by continued elevated levels of repurchases of mortgages
previously sold to, for example, U.S. government-sponsored entities. In the Real Estate Portfolios
business within RFS, management believes that, at the current rate
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of delinquencies and loss severity, quarterly net charge-offs could be approximately $1.0 billion
for the home equity portfolio, $400 million for the prime mortgage portfolio and $400 million for
the subprime mortgage portfolio over the next several quarters. 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. Based on management’s preliminary estimate, the effect of such a reduction
in the residential real estate portfolio is expected to reduce the portfolio’s 2010 net interest
income up to $1.0 billion from the 2009 level, excluding any impact from further changes in
the interest rate environment.
Also, in RFS, management expects noninterest expense to remain modestly above 2009 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 full-year average outstandings in 2010 to decline by approximately 15%
from 2009 levels, possibly to approximately $140 billion of average outstandings by the end of the
fourth quarter of 2010, due to runoff of both the Washington Mutual portfolio and lower-yielding
promotional balances. In addition, management estimates that CS net income may be reduced, on an
annualized basis, by approximately $750 million as a result of the impact of the Credit Card Act of
2009, including the recent regulatory guidance defining reasonable and proportional fees. Results
in the second quarter of 2010 reflect approximately 25% of the estimated quarterly impact of this
reduction in net income. The net charge-off rate for CS (excluding the Washington Mutual credit
card portfolio) is anticipated to continue to improve if current delinquency trends continue and
could be approximately 8.5% in the third quarter of 2010; however, results will depend on the
economic environment and any resulting reserve actions.
While some normalization of the financial markets occurred during the second quarter of 2010 and
consumer-lending net charge-offs and delinquencies have declined as noted above, 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, it would adversely affect the Firm’s
results.
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 and
securities gains will generally trend with the size and duration of the investment securities
portfolio. Corporate net income (excluding Private Equity, merger-related items and any significant
nonrecurring items) is anticipated to trend toward a level of approximately $300 million per
quarter.
The Firm’s second-quarter results reflected lower net interest margin, compared with the prior
quarter. Management expects modest continued downward pressure on net interest margin in the third
quarter of 2010, primarily resulting from continued repositioning of the investment securities
portfolio in Corporate, runoff of loans with higher contractual interest rates in the Real Estate
Portfolios and CS businesses, and the impact of the Card Act legislation on CS.
Management and the Firm’s Board of Directors continuously evaluate alternatives to deploy the
Firm’s strong capital base in ways that will enhance shareholder value. Such
alternatives could include the repurchase of common stock, increasing the common stock dividend and
pursuing alternative investment opportunities. The Firm resumed its repurchases
of common stock beginning in the second quarter under its
pre-existing Board authorization. The Firm’s current share
repurchase activity is intended to offset share count increases
resulting from employee equity awards and is consistent with the
Firm’s goal of maintaining an appropriate share count. The aggregate amount and timing of
future repurchases will depend, among
other factors, on market conditions and management’s judgment regarding economic conditions, the
Firm’s earnings outlook, the need to maintain adequate capital levels (in light of business needs
and regulatory requirements) and alternative investment opportunities. With regard to any decision
by the Firm’s Board of Directors concerning any increase in the level of the common stock dividend,
their determination will be subject to their judgment that the likelihood of another severe
economic downturn has sufficiently diminished; that there is evidence of sustained underlying
growth in employment for at least several months; that overall business performance and credit have
stabilized or improved; and that such action is warranted, taking into consideration, among other
factors, the Firm’s earnings outlook, the need to maintain adequate capital levels (in light of
business needs and regulatory requirements), alternative investment opportunities and appropriate
dividend payout ratios. Ultimately, the Board would seek to return to the Firm’s historical
dividend ratio of approximately 30% to 40% of normalized earnings over time, though it would
consider moving to that level in stages.
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CONSOLIDATED RESULTS OF OPERATIONS
This section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of
Operations on a reported basis. Factors that relate 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 100-102
of this Form 10-Q and pages 127-131 of JPMorgan Chase’s 2009 Annual Report.
Revenue
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
| (in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Investment banking fees
|
$ | 1,421 | $ | 2,106 | (33 | )% | $ | 2,882 | $ | 3,492 | (17 | )% | ||||||||||||
|
Principal transactions
|
2,090 | 3,097 | (33 | ) | 6,638 | 5,098 | 30 | |||||||||||||||||
|
Lending- and deposit-related fees
|
1,586 | 1,766 | (10 | ) | 3,232 | 3,454 | (6 | ) | ||||||||||||||||
|
Asset management, administration
and commissions
|
3,349 | 3,124 | 7 | 6,614 | 6,021 | 10 | ||||||||||||||||||
|
Securities gains
|
1,000 | 347 | 188 | 1,610 | 545 | 195 | ||||||||||||||||||
|
Mortgage fees and related income
|
888 | 784 | 13 | 1,546 | 2,385 | (35 | ) | |||||||||||||||||
|
Credit card income
|
1,495 | 1,719 | (13 | ) | 2,856 | 3,556 | (20 | ) | ||||||||||||||||
|
Other income
|
585 | 10 | NM | 997 | 60 | NM | ||||||||||||||||||
|
Noninterest revenue
|
12,414 | 12,953 | (4 | ) | 26,375 | 24,611 | 7 | |||||||||||||||||
|
Net interest income
|
12,687 | 12,670 | — | 26,397 | 26,037 | 1 | ||||||||||||||||||
|
Total net revenue
|
$ | 25,101 | $ | 25,623 | (2 | )% | $ | 52,772 | $ | 50,648 | 4 | % | ||||||||||||
Total net revenue for the second quarter of 2010 was $25.1 billion, down by $522 million, or
2%, from the second quarter of 2009. Total net revenue for the first six months of 2010 was $52.8
billion, up by $2.1 billion, or 4%, from the prior year. The decrease from the prior-year quarter
was driven by lower principal transactions revenue, reflecting lower trading results, and lower
investment banking fees, partially offset by higher securities gains and other income. The increase
from the first six months of 2009 was driven by higher principal transactions revenue, reflecting
higher trading revenue and private equity gains (compared with private equity losses in the prior
year) in Corporate/Private Equity; the absence of mark-to-market
losses on hedges of retained loans in IB; higher securities gains
in Corporate; and higher other income. These increases were partially offset by lower mortgage fees
and related income in RFS and lower investment banking fees.
Investment banking fees for the second quarter and first six months of 2010 decreased from the
comparable periods of 2009, predominantly reflecting a decline from the record level of equity
underwriting fees last year and lower advisory fees. Debt underwriting fees also contributed to the
decline in the second quarter of 2010; however, for the first six months of 2010, debt underwriting
fees increased compared with the prior year. Overall industry-wide volumes across bonds and equity
were lower in the second quarter and first six months of 2010 compared with the respective periods
in 2009. For additional information on investment banking fees, which are primarily recorded in IB,
see IB segment results on pages 21-24 of this Form 10-Q.
Principal transactions revenue, which consists of revenue from the Firm’s trading and private
equity investing activities, decreased from the second quarter of 2009, reflecting lower results in
Corporate and lower fixed income revenue in IB, largely reflecting weaker results in credit
markets, rates and commodities. The decrease was offset partially by
gains from the widening of the Firm’s credit spreads on certain
structured liabilities in the IB compared with losses in the prior
year. Trading revenue increased for the first six months of 2010,
primarily due to the absence of mark-to-market losses on hedges of
retained loans in IB compared with the prior year. This
increase was offset partially by lower fixed income revenue in IB, largely reflecting weaker
results in rates, credit markets and commodities. Private equity gains in both the second quarter
and first six months of 2010 improved from the losses incurred in the comparable 2009 periods. For
additional information on principal transactions revenue, see IB and Corporate/Private Equity
segment results on pages 21-24 and 51-53, respectively, and Note 3 on pages 110-124 of this Form
10-Q.
Lending- and deposit-related fees for the second quarter and first six months of 2010 decreased
from the prior-year periods, reflecting declining deposit-related fees and lower deposit balances
in RFS, offset partially by higher lending-related service fees in IB and CB. For additional
information on lending- and deposit-related fees, which are mostly recorded in RFS, TSS and CB, see
the RFS segment results on pages 25-35, the TSS segment results on pages 44-46 and the CB segment
results on pages 41-43 of this Form 10-Q.
Asset management, administration and commissions revenue for the second quarter and first six
months of 2010 rose from the comparable periods of 2009. The increase was driven by higher asset
management fees in AM, which reflected the effect of higher market levels, higher placement fees,
net inflows to products with higher margins, and higher performance fees. Also contributing to the
increase was higher administration fees in TSS, resulting from the effect of
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higher market levels and net inflows of assets under custody. For additional information on these
fees and commissions, see the segment discussions for AM on pages 47-51 and TSS on pages 44-46 of
this Form 10-Q.
Securities gains increased from the second quarter and first six months of 2009, due to continued
repositioning of the Corporate investment portfolio in connection with managing the Firm’s
structural interest rate risk. The second quarter of 2009 included a $241 million gain on the sale
of MasterCard shares. For additional information on securities gains, which are mostly recorded in
the Firm’s Corporate business, and Corporate’s investment securities portfolio, see the
Corporate/Private Equity segment discussion on pages 51-53 of this Form 10-Q.
Mortgage fees and related income increased from the second quarter of 2009, due to higher net
mortgage servicing revenue, predominantly reflecting higher mortgage
servicing rights (“MSR”) risk
management results. Partially offsetting this increase was lower production revenue, predominantly
reflecting higher repurchase losses. Mortgage fees and related income decreased from the first six
months of 2009 due to lower production revenue, reflecting higher repurchase losses and, to a
lesser extent, lower net mortgage servicing revenue, as lower MSR risk management results were
offset partially by higher operating revenue. For additional information on mortgage fees and
related income, which is recorded primarily in RFS, see RFS’s Mortgage Banking & Other Consumer
Lending discussion on pages 29-32 of this Form 10-Q.
Credit card income decreased from the second quarter and first six months of 2009, due
predominantly to the impact of the new consolidation 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 (offset by a
respective increase in net interest income and the provision for loan losses, and elimination of
securitization income/losses in other income). For a more detailed discussion of the impact of the
adoption of the new consolidation guidance on the Consolidated Statements of Income, see
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of
this Form 10-Q. For additional information on credit card income, see the CS segment results on
pages 36-40 of this Form 10-Q.
Other income increased in the second quarter and first six months of 2010 compared with the
prior-year periods, due largely to the absence of the write-down of securitization interests in
2010, compared with losses of $268 million and $448 million during the second quarter and first
half of 2009, respectively. Higher auto operating lease income in RFS also contributed
to the increase in other income.
Net interest income for the second quarter of 2010 was relatively flat compared with the prior-year
quarter, as the impact of the adoption of the new consolidation guidance related to VIEs (which
increased net interest income by approximately $1.4 billion) offset the decline in loan and deposit
balances. The Firm’s interest-earning assets for the second quarter of 2010 were $1.7 trillion, and
the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 3.06%, a decrease
of one basis point from 2009. Compared with the first quarter of 2010, the net yield on
interest-earning assets declined by 26 basis points, driven by lower yields on loans, primarily in
CS and RFS, lower credit card outstandings, and lower yields on securities resulting from
investment portfolio repositioning. Net interest income for the first six months of 2010 increased
slightly from the prior-year period, driven by the impact of the new consolidation guidance related
to VIEs which increased net interest income by approximately $3.2 billion, mainly as a result of
the consolidation of Firm-sponsored credit card securitization trusts. 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 — and lower yields on credit card receivables,
reflecting the impact of legislative changes. The Firm’s interest-earning assets for the first six
months of 2010 were $1.7 trillion, and the net yield on those assets, on a FTE basis, was 3.19%, an
increase of one basis point from 2009. For a more detailed discussion of the impact of the adoption
of the new consolidation 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 15-19 of
this Form 10-Q.
| Provision for credit losses | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Wholesale
|
$ | (572 | ) | $ | 1,244 | NM | $ | (808 | ) | $ | 2,774 | NM | ||||||||||||
|
Consumer
|
3,935 | 6,787 | (42 | )% | 11,181 | 13,853 | (19 | )% | ||||||||||||||||
|
Total provision for credit losses
|
$ | 3,363 | $ | 8,031 | (58 | )% | $ | 10,373 | $ | 16,627 | (38 | )% | ||||||||||||
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The provision for credit losses decreased from the second quarter and first six months of
2009. The decrease in the wholesale provision in both 2010 periods reflected a reduction in the
allowance for credit losses, mainly due to net repayments and loan sales in IB; and refinements to
credit loss estimates and improvement in the credit quality of the commercial and industrial
portfolio in CB. The decrease in the consumer provision for both 2010 periods reflected improved
delinquency trends and reduced net charge-offs across most consumer portfolios; it included
reductions in the allowance for loan losses in CS of $1.5 billion and $2.5 billion in the second
quarter and first six months of 2010, respectively (compared with additions of $250 million and
$1.4 billion in the comparable 2009 periods). The first six months of 2010 also included a $1.2
billion addition to the allowance for loan losses in RFS, related to further estimated
deterioration in the Washington Mutual prime and option adjustable-rate mortgage (“ARM”) purchased
credit-impaired portfolios. For a more detailed discussion of
the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on
pages 25-35, CS on pages 36-40, IB on pages 21-24 and CB on pages 41-43, and the Allowance for
Credit Losses section on pages 91-94 of this Form 10-Q.
Noninterest expense
The following table presents the components of noninterest expense.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
| (in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Compensation expense
(a)
|
$ | 7,616 | $ | 6,917 | 10 | % | $ | 14,892 | $ | 14,505 | 3 | % | ||||||||||||
|
Noncompensation expense:
|
||||||||||||||||||||||||
|
Occupancy
|
883 | 914 | (3 | ) | 1,752 | 1,799 | (3 | ) | ||||||||||||||||
|
Technology, communications and equipment
|
1,165 | 1,156 | 1 | 2,302 | 2,302 | — | ||||||||||||||||||
|
Professional and outside services
|
1,685 | 1,518 | 11 | 3,260 | 3,033 | 7 | ||||||||||||||||||
|
Marketing
|
628 | 417 | 51 | 1,211 | 801 | 51 | ||||||||||||||||||
|
Other
(b)(c)(d)
|
2,419 | 2,190 | 10 | 6,860 | 3,565 | 92 | ||||||||||||||||||
|
Amortization of intangibles
|
235 | 265 | (11 | ) | 478 | 540 | (11 | ) | ||||||||||||||||
|
Total noncompensation expense
|
7,015 | 6,460 | 9 | 15,863 | 12,040 | 32 | ||||||||||||||||||
|
Merger costs
|
— | 143 | NM | — | 348 | NM | ||||||||||||||||||
|
Total noninterest expense
|
$ | 14,631 | $ | 13,520 | 8 | % | $ | 30,755 | $ | 26,893 | 14 | % | ||||||||||||
| (a) | The second quarter and first six months of 2010 included a 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) | Includes litigation expense of $792 million and $3.7 billion for the three and six months ended June 30, 2010, compared with $14 million and a net benefit of $256 million for the three and six months ended June 30, 2009, respectively. | |
| (c) | Includes foreclosed property expense of $244 million and $547 million for the three and six months ended June 30, 2010, respectively, compared with $294 million and $619 million for the three and six months ended June 30, 2009, respectively. For additional information regarding foreclosed property, see Note 13 on page 196 of JPMorgan Chase’s 2009 Annual Report. | |
| (d) | The second quarter of 2009 included a $675 million Federal Deposit Insurance Corporation (“FDIC”) special assessment. |
Total noninterest expense for the second quarter of 2010 was $14.6 billion, up by $1.1
billion, or 8%, from the second quarter of 2009. For the first six months of 2010, total
noninterest expense was $30.8 billion, up by $3.9 billion, or 14%, from the comparable 2009 period.
The increase for both periods was driven by higher noncompensation expense, predominantly due to
significant additions to litigation reserves; and higher compensation expense, reflecting a payroll
tax expense predominantly in IB, related to the U.K. Bank Payroll Tax on certain compensation
awarded from December 9, 2009, to April 5, 2010, to relevant banking employees. These increases
were partially offset by lower performance-based incentives, and by the absence of a $675 million
FDIC special assessment recognized in the second quarter of 2009.
Compensation expense in the second quarter and first six months of 2010 increased compared with the
prior-year periods, due to the impact of the U.K. Bank Payroll Tax described above; ongoing
investments in the businesses, including sales force increases in RFS; and higher performance-based
compensation expense in several businesses. This was offset partially by lower performance-based
compensation expense in IB.
Noncompensation expense increased for the second quarter and first six months of 2010 compared with
the prior-year periods, due predominantly to significant additions to litigation reserves; higher
marketing expense in CS; and higher brokerage, clearing and exchange transaction processing expense
in IB. The increase for both periods was partially offset by the absence of a $675 million FDIC
special assessment recognized in the second quarter of 2009.
For a discussion of amortization of intangibles, refer to Note 16 on pages 166-167 of this Form
10-Q.
13
Table of Contents
There were no merger costs recorded in the second quarter or first six months of 2010. Merger costs
of $143 million and $348 million were recorded in the second quarter and first six months of 2009,
respectively. For additional information on merger costs, refer to Note 10 on page 139 of this Form
10-Q.
Income tax expense
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions, except rate) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Income before income tax expense
|
$ | 7,107 | $ | 4,072 | $ | 11,644 | $ | 7,128 | ||||||||
|
Income tax expense
|
2,312 | 1,351 | 3,523 | 2,266 | ||||||||||||
|
Effective tax rate
|
32.5 | % | 33.2 | % | 30.3 | % | 31.8 | % | ||||||||
The decrease in the effective tax rate for the second quarter and first six months of 2010
compared with the prior-year periods was primarily the result of lower state and local income
taxes, as well as tax benefits recognized upon the resolution of tax audits in 2010. The decrease
was partially offset by the impact of higher reported pretax income for 2010. For additional
information on income taxes, see Critical Accounting Estimates Used
by the Firm on pages 100-102
of this Form 10-Q.
14
Table of Contents
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 104-107 of this
Form 10-Q. 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 new accounting guidance that required
the Firm to consolidate its Firm-sponsored credit card securitizations 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 new accounting guidance,
see Note 15 on pages 151-163 of this Form 10-Q.
The presentation in 2009 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 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 used the concept of
managed basis 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
reported to managed basis results for CS, see CS segment results on pages 36-40 of this Form 10-Q.
For information regarding the securitization process, and loans and residual interests sold and
securitized, see Note 15 on pages 151-163 of this Form 10-Q.
Tangible common equity (“TCE”) represents common stockholders’ equity (i.e., total stockholders’
equity less preferred stock) less identifiable intangible assets (other than 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.
15
Table of Contents
The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to
managed basis.
| Three months ended June 30, 2010 | ||||||||||||||||
| Fully | ||||||||||||||||
| Reported | Credit | tax-equivalent | Managed | |||||||||||||
| (in millions, except per share and ratios) | results | card (b) | adjustments | basis | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Investment banking fees
|
$ | 1,421 | NA | $ | — | $ | 1,421 | |||||||||
|
Principal transactions
|
2,090 | NA | — | 2,090 | ||||||||||||
|
Lending- and
deposit-related fees
|
1,586 | NA | — | 1,586 | ||||||||||||
|
Asset management, administration and commissions
|
3,349 | NA | — | 3,349 | ||||||||||||
|
Securities gains
|
1,000 | NA | — | 1,000 | ||||||||||||
|
Mortgage fees and related income
|
888 | NA | — | 888 | ||||||||||||
|
Credit card income
|
1,495 | NA | — | 1,495 | ||||||||||||
|
Other income
|
585 | NA | 416 | 1,001 | ||||||||||||
|
Noninterest revenue
|
12,414 | NA | 416 | 12,830 | ||||||||||||
|
Net interest income
|
12,687 | NA | 96 | 12,783 | ||||||||||||
|
Total net revenue
|
25,101 | NA | 512 | 25,613 | ||||||||||||
|
Noninterest expense
|
14,631 | NA | — | 14,631 | ||||||||||||
|
Pre-provision profit
|
10,470 | NA | 512 | 10,982 | ||||||||||||
|
Provision for credit losses
|
3,363 | NA | — | 3,363 | ||||||||||||
|
Income before income tax expense
|
7,107 | NA | 512 | 7,619 | ||||||||||||
|
Income tax expense
|
2,312 | NA | 512 | 2,824 | ||||||||||||
|
Net income
|
$ | 4,795 | NA | $ | — | $ | 4,795 | |||||||||
|
Diluted earnings per share
|
$ | 1.09 | NA | $ | — | $ | 1.09 | |||||||||
|
Return on assets
|
0.94 | % | NA | NM | 0.94 | % | ||||||||||
|
Overhead ratio
|
58 | NA | NM | 57 | ||||||||||||
| Three months ended June 30, 2009 | ||||||||||||||||
| Fully | ||||||||||||||||
| Reported | Credit | tax-equivalent | Managed | |||||||||||||
| (in millions, except per share and ratios) | results | card (b) | adjustments | basis | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Investment banking fees
|
$ | 2,106 | $ | — | $ | — | $ | 2,106 | ||||||||
|
Principal transactions
|
3,097 | — | — | 3,097 | ||||||||||||
|
Lending- and
deposit-related fees
|
1,766 | — | — | 1,766 | ||||||||||||
|
Asset management, administration and commissions
|
3,124 | — | — | 3,124 | ||||||||||||
|
Securities gains
|
347 | — | — | 347 | ||||||||||||
|
Mortgage fees and related income
|
784 | — | — | 784 | ||||||||||||
|
Credit card income
|
1,719 | (294 | ) | — | 1,425 | |||||||||||
|
Other income
|
10 | — | 335 | 345 | ||||||||||||
|
Noninterest revenue
|
12,953 | (294 | ) | 335 | 12,994 | |||||||||||
|
Net interest income
|
12,670 | 1,958 | 87 | 14,715 | ||||||||||||
|
Total net revenue
|
25,623 | 1,664 | 422 | 27,709 | ||||||||||||
|
Noninterest expense
|
13,520 | — | — | 13,520 | ||||||||||||
|
Pre-provision profit
|
12,103 | 1,664 | 422 | 14,189 | ||||||||||||
|
Provision for credit losses
|
8,031 | 1,664 | — | 9,695 | ||||||||||||
|
Income before income tax expense
|
4,072 | — | 422 | 4,494 | ||||||||||||
|
Income tax expense
|
1,351 | — | 422 | 1,773 | ||||||||||||
|
Net income
|
$ | 2,721 | $ | — | $ | — | $ | 2,721 | ||||||||
|
Diluted earnings per share
(a)
|
$ | 0.28 | $ | — | $ | — | $ | 0.28 | ||||||||
|
Return on assets
|
0.54 | % | NM | NM | 0.51 | % | ||||||||||
|
Overhead ratio
|
53 | NM | NM | 49 | ||||||||||||
NA: Not applicable
16
Table of Contents
| Six months ended June 30, 2010 | ||||||||||||||||
| Fully | ||||||||||||||||
| Reported | Credit | tax-equivalent | Managed | |||||||||||||
| (in millions, except per share and ratios) | results | card (b) | adjustments | basis | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Investment banking fees
|
$ | 2,882 | NA | $ | — | $ | 2,882 | |||||||||
|
Principal transactions
|
6,638 | NA | — | 6,638 | ||||||||||||
|
Lending- and
deposit-related fees
|
3,232 | NA | — | 3,232 | ||||||||||||
|
Asset management, administration and commissions
|
6,614 | NA | — | 6,614 | ||||||||||||
|
Securities gains
|
1,610 | NA | — | 1,610 | ||||||||||||
|
Mortgage fees and related income
|
1,546 | NA | — | 1,546 | ||||||||||||
|
Credit card income
|
2,856 | NA | — | 2,856 | ||||||||||||
|
Other income
|
997 | NA | 827 | 1,824 | ||||||||||||
|
Noninterest revenue
|
26,375 | NA | 827 | 27,202 | ||||||||||||
|
Net interest income
|
26,397 | NA | 186 | 26,583 | ||||||||||||
|
Total net revenue
|
52,772 | NA | 1,013 | 53,785 | ||||||||||||
|
Noninterest expense
|
30,755 | NA | — | 30,755 | ||||||||||||
|
Pre-provision profit
|
22,017 | NA | 1,013 | 23,030 | ||||||||||||
|
Provision for credit losses
|
10,373 | NA | — | 10,373 | ||||||||||||
|
Income before income tax expense
|
11,644 | NA | 1,013 | 12,657 | ||||||||||||
|
Income tax expense
|
3,523 | NA | 1,013 | 4,536 | ||||||||||||
|
Net income
|
$ | 8,121 | NA | $ | — | $ | 8,121 | |||||||||
|
Diluted earnings per share
|
$ | 1.83 | NA | $ | — | $ | 1.83 | |||||||||
|
Return on assets
|
0.80 | % | NA | NM | 0.80 | % | ||||||||||
|
Overhead ratio
|
58 | NA | NM | 57 | ||||||||||||
| Six months ended June 30, 2009 | ||||||||||||||||
| Fully | ||||||||||||||||
| Reported | Credit | tax-equivalent | Managed | |||||||||||||
| (in millions, except per share and ratios) | results | card (b) | adjustments | basis | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Investment banking fees
|
$ | 3,492 | $ | — | $ | — | $ | 3,492 | ||||||||
|
Principal transactions
|
5,098 | — | — | 5,098 | ||||||||||||
|
Lending- and
deposit-related fees
|
3,454 | — | — | 3,454 | ||||||||||||
|
Asset management, administration and commissions
|
6,021 | — | — | 6,021 | ||||||||||||
|
Securities gains
|
545 | — | — | 545 | ||||||||||||
|
Mortgage fees and related income
|
2,385 | — | — | 2,385 | ||||||||||||
|
Credit card income
|
3,556 | (834 | ) | — | 2,722 | |||||||||||
|
Other income
|
60 | — | 672 | 732 | ||||||||||||
|
Noninterest revenue
|
24,611 | (834 | ) | 672 | 24,449 | |||||||||||
|
Net interest income
|
26,037 | 3,962 | 183 | 30,182 | ||||||||||||
|
Total net revenue
|
50,648 | 3,128 | 855 | 54,631 | ||||||||||||
|
Noninterest expense
|
26,893 | — | — | 26,893 | ||||||||||||
|
Pre-provision profit
|
23,755 | 3,128 | 855 | 27,738 | ||||||||||||
|
Provision for credit losses
|
16,627 | 3,128 | — | 19,755 | ||||||||||||
|
Income before income tax expense
|
7,128 | — | 855 | 7,983 | ||||||||||||
|
Income tax expense
|
2,266 | — | 855 | 3,121 | ||||||||||||
|
Net income
|
$ | 4,862 | $ | — | $ | — | $ | 4,862 | ||||||||
|
Diluted earnings per share
(a)
|
$ | 0.68 | $ | — | $ | — | $ | 0.68 | ||||||||
|
Return on assets
|
0.48 | % | NM | NM | 0.46 | % | ||||||||||
|
Overhead ratio
|
53 | NM | NM | 49 | ||||||||||||
| (a) | The calculation of second quarter 2009 EPS includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share ($0.28 per share for the six months ended June 30, 2009), resulting from the repayment of TARP preferred capital. | |
| (b) | See pages 36-40 of this Form 10-Q for a discussion of the effect of credit card securitizations on CS results. |
NA: Not applicable
17
Table of Contents
| Three months ended June 30, | 2010 | 2009 | ||||||||||||||||||||||
| (in millions) | Reported | Securitized (a) | Managed | Reported | Securitized (a) | Managed | ||||||||||||||||||
|
Loans — Period-end
|
$ | 699,483 | NA | $ | 699,483 | $ | 680,601 | $ | 85,790 | $ | 766,391 | |||||||||||||
|
Total assets — average
|
2,043,647 | NA | 2,043,647 | 2,038,372 | 81,588 | 2,119,960 | ||||||||||||||||||
| Six months ended June 30, | 2010 | 2009 | ||||||||||||||||||||||
| (in millions) | Reported | Securitized (a) | Managed | Reported | Securitized (a) | Managed | ||||||||||||||||||
|
Loans — Period-end
|
$ | 699,483 | NA | $ | 699,483 | $ | 680,601 | $ | 85,790 | $ | 766,391 | |||||||||||||
|
Total assets — average
|
2,041,177 | NA | 2,041,177 | 2,052,666 | 82,182 | 2,134,848 | ||||||||||||||||||
| (a) | Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans as of or for the three and six months ended June 30, 2009. For further discussion of credit card securitizations, see Note 15 on pages 151-163 of this Form 10-Q. |
Average tangible common equity
| Three months ended | Six months ended | |||||||||||||||||||||||||||
| June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||
| (in millions) | 2010 | 2010 | 2009 | 2009 | 2009 | 2010 | 2009 | |||||||||||||||||||||
|
Common stockholders’ equity
|
$ | 159,069 | $ | 156,094 | $ | 156,525 | $ | 149,468 | $ | 140,865 | $ | 157,590 | $ | 138,691 | ||||||||||||||
|
Less: Goodwill
|
48,348 | 48,542 | 48,341 | 48,328 | 48,273 | 48,445 | 48,173 | |||||||||||||||||||||
|
Less: Certain identifiable intangible assets
|
4,265 | 4,307 | 4,741 | 4,984 | 5,218 | 4,285 | 5,329 | |||||||||||||||||||||
|
Add: Deferred tax liabilities
(a)
|
2,564 | 2,541 | 2,533 | 2,531 | 2,518 | 2,553 | 2,562 | |||||||||||||||||||||
|
Tangible common equity (TCE)
|
$ | 109,020 | $ | 105,786 | $ | 105,976 | $ | 98,687 | $ | 89,892 | $ | 107,413 | $ | 87,751 | ||||||||||||||
| (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 on ROE of redemption of TARP preferred stock issued to the U.S. Treasury
The calculation of second quarter and year-to-date of 2009 net income applicable to common equity
includes a one-time, noncash reduction of $1.1 billion resulting from the repayment of TARP
preferred capital. Excluding this reduction ROE would have been 6% for both the second quarter and
year-to-date 2009 as disclosed in the table below. The Firm views the adjusted ROE, a non-GAAP
financial measure, as meaningful because it increases the comparability to prior periods.
| Three months ended June 30, 2009 | Six months ended June 30, 2009 | |||||||||||||||
| Excluding the | Excluding the | |||||||||||||||
| (in millions, except ratios) | As reported | TARP redemption | As reported | TARP redemption | ||||||||||||
|
Return on equity
|
||||||||||||||||
|
Net income
|
$ | 2,721 | $ | 2,721 | $ | 4,862 | $ | 4,862 | ||||||||
|
Less: Preferred stock dividends
|
473 | 473 | 1,002 | 1,002 | ||||||||||||
|
Less: Accelerated amortization from
redemption of preferred stock
issued
to the U.S. Treasury
|
1,112 | — | 1,112 | — | ||||||||||||
|
Net income applicable to common
equity
|
$ | 1,136 | $ | 2,248 | $ | 2,748 | $ | 3,860 | ||||||||
|
Average common stockholders’ equity
|
$ | 140,865 | $ | 140,865 | $ | 138,691 | $ | 138,691 | ||||||||
|
Return on common equity
|
3 | % | 6 | % | 4 | % | 6 | % | ||||||||
18
Table of Contents
Impact on diluted earnings per share of redemption of TARP preferred stock issued to the U.S.
Treasury
Net income applicable to common equity for the second quarter and year-to-date 2009 includes a
one-time, noncash reduction of approximately $1.1 billion resulting from the repayment of TARP
preferred capital. The following table presents the calculations of the effect on net income
applicable to common stockholders for the second quarter and year-to-date 2009 and the $0.27 and
$0.28 reduction, respectively, to diluted EPS which resulted from the repayment.
| Three months ended June 30, 2009 | Six months ended June 30, 2009 | |||||||||||||||
| Effect of TARP | Effect of TARP | |||||||||||||||
| (in millions, except per share) | As reported | redemption | As reported | redemption | ||||||||||||
|
Diluted earnings per share
|
||||||||||||||||
|
Net income
|
$ | 2,721 | $ | — | $ | 4,862 | $ | — | ||||||||
|
Less: Preferred stock dividends
|
473 | — | 1,002 | — | ||||||||||||
|
Less: Accelerated amortization from redemption
of preferred stock issued to the U.S.
Treasury
|
1,112 | 1,112 | 1,112 | 1,112 | ||||||||||||
|
Net income applicable to common equity
|
$ | 1,136 | $ | (1,112 | ) | $ | 2,748 | $ | (1,112 | ) | ||||||
|
Less: Dividends and undistributed earnings
allocated to participating securities
|
64 | (64 | ) | 157 | (65 | ) | ||||||||||
|
Net income applicable to common stockholders
|
$ | 1,072 | $ | (1,048 | ) | $ | 2,591 | $ | (1,047 | ) | ||||||
|
Total weighted average diluted shares
outstanding
|
3,824.1 | 3,824.1 | 3,791.4 | 3,791.4 | ||||||||||||
|
Net income per share
|
$ | 0.28 | $ | (0.27 | ) | $ | 0.68 | $ | (0.28 | ) | ||||||
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 WMMT. For a further discussion of
this credit metric, see Allowance for Credit Losses on pages 91-94 of this Form 10-Q.
19
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: the 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. For a further discussion of those
methodologies, see Business Segment Results — Description of business segment reporting
methodology on pages 53-54 of JPMorgan Chase’s 2009 Annual Report. The Firm continues to assess
the assumptions, methodologies and reporting classifications used for segment reporting, and
further refinements may be implemented in future periods.
Business segment capital allocation changes
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 with
the changes anticipated to occur in the business, and in the competitive and regulatory landscape.
Equity was assigned to the lines of business 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 pages 63-64 of this Form 10-Q.
Segment Results — Managed Basis
(a)
The following table summarizes the business segment results for the periods indicated.
| Three months ended | Return | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | Total net revenue | Noninterest expense | Net income/(loss) | on equity | ||||||||||||||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | 2010 | 2009 | Change | 2010 | 2009 | |||||||||||||||||||||||||||||||||
|
Investment Bank
(b)
|
$ | 6,332 | $ | 7,301 | (13 | )% | $ | 4,522 | $ | 4,067 | 11 | % | $ | 1,381 | $ | 1,471 | (6 | )% | 14 | % | 18 | % | ||||||||||||||||||||||
|
Retail Financial Services
|
7,809 | 7,970 | (2 | ) | 4,281 | 4,079 | 5 | 1,042 | 15 | NM | 15 | — | ||||||||||||||||||||||||||||||||
|
Card Services
|
4,217 | 4,868 | (13 | ) | 1,436 | 1,333 | 8 | 343 | (672 | ) | NM | 9 | (18 | ) | ||||||||||||||||||||||||||||||
|
Commercial Banking
|
1,486 | 1,453 | 2 | 542 | 535 | 1 | 693 | 368 | 88 | 35 | 18 | |||||||||||||||||||||||||||||||||
|
Treasury & Securities Services
|
1,881 | 1,900 | (1 | ) | 1,399 | 1,288 | 9 | 292 | 379 | (23 | ) | 18 | 30 | |||||||||||||||||||||||||||||||
|
Asset Management
|
2,068 | 1,982 | 4 | 1,405 | 1,354 | 4 | 391 | 352 | 11 | 24 | 20 | |||||||||||||||||||||||||||||||||
|
Corporate/Private Equity
(b)
|
1,820 | 2,235 | (19 | ) | 1,046 | 864 | 21 | 653 | 808 | (19 | ) | NM | NM | |||||||||||||||||||||||||||||||
|
Total
|
$ | 25,613 | $ | 27,709 | (8 | )% | $ | 14,631 | $ | 13,520 | 8 | % | $ | 4,795 | $ | 2,721 | 76 | % | 12 | % | 3 | % | ||||||||||||||||||||||
| Six months ended | Return | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | Total net revenue | Noninterest expense | Net income/(loss) | on equity | ||||||||||||||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | 2010 | 2009 | Change | 2010 | 2009 | |||||||||||||||||||||||||||||||||
|
Investment Bank
(b)
|
$ | 14,651 | $ | 15,672 | (7 | )% | $ | 9,360 | $ | 8,841 | 6 | % | $ | 3,852 | $ | 3,077 | 25 | % | 19 | % | 19 | % | ||||||||||||||||||||||
|
Retail Financial Services
|
15,585 | 16,805 | (7 | ) | 8,523 | 8,250 | 3 | 911 | 489 | 86 | 7 | 4 | ||||||||||||||||||||||||||||||||
|
Card Services
|
8,664 | 9,997 | (13 | ) | 2,838 | 2,679 | 6 | 40 | (1,219 | ) | NM | 1 | (16 | ) | ||||||||||||||||||||||||||||||
|
Commercial Banking
|
2,902 | 2,855 | 2 | 1,081 | 1,088 | (1 | ) | 1,083 | 706 | 53 | 27 | 18 | ||||||||||||||||||||||||||||||||
|
Treasury & Securities Services
|
3,637 | 3,721 | (2 | ) | 2,724 | 2,607 | 4 | 571 | 687 | (17 | ) | 18 | 28 | |||||||||||||||||||||||||||||||
|
Asset Management
|
4,199 | 3,685 | 14 | 2,847 | 2,652 | 7 | 783 | 576 | 36 | 24 | 17 | |||||||||||||||||||||||||||||||||
|
Corporate/Private Equity
(b)
|
4,147 | 1,896 | 119 | 3,382 | 776 | 336 | 881 | 546 | 61 | NM | NM | |||||||||||||||||||||||||||||||||
|
Total
|
$ | 53,785 | $ | 54,631 | (2 | )% | $ | 30,755 | $ | 26,893 | 14 | % | $ | 8,121 | $ | 4,862 | 67 | % | 10 | % | 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. Firm-sponsored credit card securitizations were consolidated at their carrying values on January 1, 2010, under the new consolidation guidance related to VIEs. | |
| (b) | Corporate/Private Equity includes an adjustment to offset IB’s inclusion of the credit reimbursement from TSS in total net revenue; TSS reports the reimbursement to IB as a separate line on its income statement (not part of total revenue). |
20
Table of Contents
INVESTMENT BANK
For a
discussion of the business profile of IB, see pages 55-57 of JPMorgan Chase’s 2009
Annual Report and Introduction on page 5 of this Form 10-Q.
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Investment banking fees
|
$ | 1,405 | $ | 2,239 | (37 | )% | $ | 2,851 | $ | 3,619 | (21 | )% | ||||||||||||
|
Principal transactions
|
2,105 | 1,841 | 14 | 6,036 | 5,356 | 13 | ||||||||||||||||||
|
Lending- and deposit-related fees
|
203 | 167 | 22 | 405 | 305 | 33 | ||||||||||||||||||
|
Asset management, administration
and commissions
|
633 | 717 | (12 | ) | 1,196 | 1,409 | (15 | ) | ||||||||||||||||
|
All other income
(a)
|
86 | (108 | ) | NM | 135 | (164 | ) | NM | ||||||||||||||||
|
Noninterest revenue
|
4,432 | 4,856 | (9 | ) | 10,623 | 10,525 | 1 | |||||||||||||||||
|
Net interest income
(b)
|
1,900 | 2,445 | (22 | ) | 4,028 | 5,147 | (22 | ) | ||||||||||||||||
|
Total net revenue
(c)
|
6,332 | 7,301 | (13 | ) | 14,651 | 15,672 | (7 | ) | ||||||||||||||||
|
Provision for credit losses
|
(325 | ) | 871 | NM | (787 | ) | 2,081 | NM | ||||||||||||||||
|
Noninterest expense
|
||||||||||||||||||||||||
|
Compensation expense
|
2,923 | 2,677 | 9 | 5,851 | 6,007 | (3 | ) | |||||||||||||||||
|
Noncompensation expense
|
1,599 | 1,390 | 15 | 3,509 | 2,834 | 24 | ||||||||||||||||||
|
Total noninterest expense
|
4,522 | 4,067 | 11 | 9,360 | 8,841 | 6 | ||||||||||||||||||
|
Income before income tax expense
|
2,135 | 2,363 | (10 | ) | 6,078 | 4,750 | 28 | |||||||||||||||||
|
Income tax expense
|
754 | 892 | (15 | ) | 2,226 | 1,673 | 33 | |||||||||||||||||
|
Net income
|
$ | 1,381 | $ | 1,471 | (6 | ) | $ | 3,852 | $ | 3,077 | 25 | |||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||
|
Return on common equity
|
14 | % | 18 | % | 19 | % | 19 | % | ||||||||||||||||
|
Return on assets
|
0.78 | 0.83 | 1.12 | 0.86 | ||||||||||||||||||||
|
Overhead ratio
|
71 | 56 | 64 | 56 | ||||||||||||||||||||
|
Compensation expense as a
percentage of total net
revenue
(d)
|
37 | 37 | 36 | 38 | ||||||||||||||||||||
|
Revenue by business
|
||||||||||||||||||||||||
|
Investment banking fees:
|
||||||||||||||||||||||||
|
Advisory
|
$ | 355 | $ | 393 | (10 | ) | $ | 660 | $ | 872 | (24 | ) | ||||||||||||
|
Equity underwriting
|
354 | 1,103 | (68 | ) | 767 | 1,411 | (46 | ) | ||||||||||||||||
|
Debt underwriting
|
696 | 743 | (6 | ) | 1,424 | 1,336 | 7 | |||||||||||||||||
|
Total investment banking fees
|
1,405 | 2,239 | (37 | ) | 2,851 | 3,619 | (21 | ) | ||||||||||||||||
|
Fixed income markets
|
3,563 | 4,929 | (28 | ) | 9,027 | 9,818 | (8 | ) | ||||||||||||||||
|
Equity markets
|
1,038 | 708 | 47 | 2,500 | 2,481 | 1 | ||||||||||||||||||
|
Credit portfolio
(a)
|
326 | (575 | ) | NM | 273 | (246 | ) | NM | ||||||||||||||||
|
Total net revenue
|
$ | 6,332 | $ | 7,301 | (13 | ) | $ | 14,651 | $ | 15,672 | (7 | ) | ||||||||||||
|
Revenue by region
(a)
|
||||||||||||||||||||||||
|
Americas
|
$ | 3,935 | $ | 4,118 | (4 | ) | $ | 8,497 | $ | 8,434 | 1 | |||||||||||||
|
Europe/Middle East/Africa
|
1,537 | 2,303 | (33 | ) | 4,351 | 5,376 | (19 | ) | ||||||||||||||||
|
Asia/Pacific
|
860 | 880 | (2 | ) | 1,803 | 1,862 | (3 | ) | ||||||||||||||||
|
Total net revenue
|
$ | 6,332 | $ | 7,301 | (13 | ) | $ | 14,651 | $ | 15,672 | (7 | ) | ||||||||||||
| (a) | 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. | |
| (b) | The decrease in net interest income in the second quarter was primarily due to lower loan balance, lower Prime Services spreads and spread tightening and increased liquidity in rates markets. | |
| (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 $401 million and $334 million for the quarters ended June 30, 2010 and 2009, respectively, and $804 million and $699 million for year-to-date 2010 and 2009, respectively. | |
| (d) | The compensation expense as a percentage of total net revenue ratio for the second quarter and year-to-date of 2010 excludes payroll tax expense related to the U.K. Bank Payroll Tax on certain compensation awarded from December 31, 2009, to April 5, 2010, to relevant banking employees, which is a non-GAAP financial measure. IB excludes this tax from the ratio because it enables comparability with prior periods. If this tax were included in the ratio for the second quarter and year-to-date of 2010, the ratio would have been 46% and 40%, respectively. |
21
Table of Contents
Quarterly results
Net income was $1.4 billion, down 6% compared with the prior year. These results reflected lower
revenue and higher noninterest expense, predominantly offset by a benefit from the provision for
credit losses.
Net
revenue was $6.3 billion, compared with $7.3 billion in the
prior year. Investment banking fees decreased by 37% to
$1.4 billion, consisting of equity underwriting fees of
$354 million (down 68%), debt underwriting fees of
$696 million (down 6%) and advisory fees of $355 million
(down 10%). Fixed Income Markets revenue was $3.6 billion,
compared with $4.9 billion in the prior year, largely reflecting
lower results in credit markets, rates and commodities. These
declines were offset partially by gains of $397 million from the
widening of the Firm’s credit spreads on certain structured
liabilities compared to losses of $773 million in the prior
year. Equity Markets revenue was $1.0 billion, compared with
$708 million in the prior year, reflecting solid client revenue
as well as gains of $191 million from the widening of the
Firm’s credit spreads on certain structured liabilities compared
with losses of $326 million in the prior year. Credit Portfolio
revenue was $326 million, primarily reflecting net interest
income and fees on retained loans.
The provision for credit losses was a benefit of $325 million, compared with an expense of $871
million in the prior year. The current-quarter provision reflected a reduction in the allowance for
loan losses, largely related to net repayments and loan sales. The allowance for loan losses to
end-of-period loans retained was 3.98%, compared with 7.91% in the prior year. The decline in the
allowance ratio was due largely to the consolidation of asset-backed commercial paper conduits in
accordance with new accounting guidance, effective January 1, 2010. Excluding these balances, the
current-quarter allowance coverage ratio was 6.49%. Net charge-offs were $28 million, compared with
$433 million in the prior year. Nonperforming loans were $2.3 billion, down by $1.3 billion from
the prior year.
Noninterest expense was $4.5 billion, compared with $4.1 billion in the prior year. Current-quarter
results included the impact of the U.K. Bank Payroll Tax.
ROE was 14% on $40.0 billion of average allocated capital.
Year-to-date results
Net income was $3.9 billion, up 25% compared with the prior year. These results reflect lower net
revenue and higher noninterest expense, which was more than offset by a benefit from the provision
for credit losses.
Net revenue was $14.7 billion, compared with $15.7 billion in prior year. Investment banking fees decreased 21% to $2.9 billion, consisting of equity
underwriting fees of $767 million (down 46%), advisory fees of $660 million (down 24%) and debt
underwriting fees of $1.4 billion (up 7%). Fixed Income Markets revenue was $9.0 billion, compared
with $9.8 billion in the prior year. The decrease reflected lower results in rates, credit markets,
and commodities. Equity Markets revenue of $2.5 billion was flat compared with the prior year,
reflecting solid client revenue. Credit Portfolio revenue was $273 million, primarily reflecting
net interest income and fees on retained loans.
The provision for credit losses was a benefit of $787 million, compared with an expense of $2.1
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 $725 million,
compared with $469 million in prior year.
Noninterest expense was $9.4 billion, compared with $8.8 billion in prior year, driven by increased
litigation reserves, including those for mortgage-related matters, partially offset by lower
performance-based compensation. Current year results also included the impact of the U.K. Bank
Payroll Tax.
ROE was 19% on $40.0 billion of average allocated capital.
22
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except headcount and ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||||||
|
Loans
(a)
:
|
||||||||||||||||||||||||
|
Loans retained
(b)
|
$ | 54,049 | $ | 64,500 | (16 | )% | $ | 54,049 | $ | 64,500 | (16 | )% | ||||||||||||
|
Loans held-for-sale and loans at fair value
|
3,221 | 6,814 | (53 | ) | 3,221 | 6,814 | (53 | ) | ||||||||||||||||
|
Total loans
|
57,270 | 71,314 | (20 | ) | 57,270 | 71,314 | (20 | ) | ||||||||||||||||
|
Equity
|
40,000 | 33,000 | 21 | 40,000 | 33,000 | 21 | ||||||||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||||||||||||||
|
Total assets
|
$ | 710,005 | $ | 710,825 | — | $ | 693,157 | $ | 721,934 | (4 | ) | |||||||||||||
|
Trading assets—debt and equity instruments
|
296,031 | 265,336 | 12 | 290,091 | 269,146 | 8 | ||||||||||||||||||
|
Trading assets—derivative receivables
|
65,847 | 100,536 | (35 | ) | 65,998 | 112,711 | (41 | ) | ||||||||||||||||
|
Loans:
(a)
|
||||||||||||||||||||||||
|
Loans retained
(b)
|
53,351 | 68,224 | (22 | ) | 55,912 | 69,128 | (19 | ) | ||||||||||||||||
|
Loans held-for-sale and loans at fair value
|
3,530 | 8,934 | (60 | ) | 3,341 | 10,658 | (69 | ) | ||||||||||||||||
|
Total loans
|
56,881 | 77,158 | (26 | ) | 59,253 | 79,786 | (26 | ) | ||||||||||||||||
|
Adjusted assets
(c)
|
527,520 | 531,632 | (1 | ) | 517,135 | 560,239 | (8 | ) | ||||||||||||||||
|
Equity
|
40,000 | 33,000 | 21 | 40,000 | 33,000 | 21 | ||||||||||||||||||
|
Headcount
|
26,279 | 25,783 | 2 | 26,279 | 25,783 | 2 | ||||||||||||||||||
|
Credit data and quality statistics
|
||||||||||||||||||||||||
|
Net charge-offs
|
$ | 28 | $ | 433 | (94 | ) | $ | 725 | $ | 469 | 55 | |||||||||||||
|
Nonperforming assets:
|
||||||||||||||||||||||||
|
Nonperforming loans:
|
||||||||||||||||||||||||
|
Nonperforming loans retained
(b)(d)
|
1,926 | 3,407 | (43 | ) | 1,926 | 3,407 | (43 | ) | ||||||||||||||||
|
Nonperforming loans held-for-sale
and loans at fair value
|
334 | 112 | 198 | 334 | 112 | 198 | ||||||||||||||||||
|
Total nonperforming loans
|
2,260 | 3,519 | (36 | ) | 2,260 | 3,519 | (36 | ) | ||||||||||||||||
|
Derivative receivables
|
315 | 704 | (55 | ) | 315 | 704 | (55 | ) | ||||||||||||||||
|
Assets acquired in loan satisfactions
|
151 | 311 | (51 | ) | 151 | 311 | (51 | ) | ||||||||||||||||
|
Total nonperforming assets
|
2,726 | 4,534 | (40 | ) | 2,726 | 4,534 | (40 | ) | ||||||||||||||||
|
Allowance for credit losses:
|
||||||||||||||||||||||||
|
Allowance for loan losses
|
2,149 | 5,101 | (58 | ) | 2,149 | 5,101 | (58 | ) | ||||||||||||||||
|
Allowance for lending-related commitments
|
564 | 351 | 61 | 564 | 351 | 61 | ||||||||||||||||||
|
Total allowance for credit losses
|
2,713 | 5,452 | (50 | ) | 2,713 | 5,452 | (50 | ) | ||||||||||||||||
|
Net charge-off rate
(b)(e)
|
0.21 | % | 2.55 | % | 2.61 | % | 1.37 | % | ||||||||||||||||
|
Allowance for loan losses to period-end loans
retained
(b)(e)
|
3.98 | 7.91 | 3.98 | 7.91 | ||||||||||||||||||||
|
Allowance for loan losses to average loans retained
(b)(e)
|
4.03 | 7.48 | 3.84 | 7.38 | ||||||||||||||||||||
|
Allowance for loan losses to nonperforming loans
retained
(b)(d)(e)
|
112 | 150 | 112 | 150 | ||||||||||||||||||||
|
Nonperforming loans to period-end loans
|
3.95 | 4.93 | 3.95 | 4.93 | ||||||||||||||||||||
|
Nonperforming loans to average loans
|
3.97 | 4.56 | 3.81 | 4.41 | ||||||||||||||||||||
|
Market risk—average trading and credit portfolio VaR — 95%
confidence level
|
||||||||||||||||||||||||
|
Trading activities:
|
||||||||||||||||||||||||
|
Fixed income
|
$ | 64 | $ | 179 | (64 | ) | $ | 66 | $ | 168 | (61 | ) | ||||||||||||
|
Foreign exchange
|
10 | 16 | (38 | ) | 12 | 19 | (37 | ) | ||||||||||||||||
|
Equities
|
20 | 50 | (60 | ) | 22 | 73 | (70 | ) | ||||||||||||||||
|
Commodities and other
|
20 | 22 | (9 | ) | 18 | 21 | (14 | ) | ||||||||||||||||
|
Diversification
(f)
|
(42 | ) | (97 | ) | 57 | (46 | ) | (101 | ) | 54 | ||||||||||||||
|
Total trading VaR
(g)
|
72 | 170 | (58 | ) | 72 | 180 | (60 | ) | ||||||||||||||||
|
Credit portfolio VaR
(h)
|
27 | 68 | (60 | ) | 23 | 77 | (70 | ) | ||||||||||||||||
|
Diversification
(f)
|
(9 | ) | (60 | ) | 85 | (9 | ) | (62 | ) | 85 | ||||||||||||||
|
Total trading and credit portfolio VaR
|
$ | 90 | $ | 178 | (49 | ) | $ | 86 | $ | 195 | (56 | ) | ||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon adoption of the new 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 include credit portfolio loans, leveraged leases and other accrual loans, and exclude loans held-for-sale and loans accounted for 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 consolidated 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 |
23
Table of Contents
| 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. | ||
| (d) | Allowance for loan losses of $617 million and $1.6 billion were held against these nonperforming loans at June 30, 2010 and 2009, respectively. | |
| (e) | Loans held-for-sale and loans at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate. | |
| (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. For a further discussion of VaR, see pages 95-97 of this Form 10-Q. | |
| (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 95-97 and the DVA Sensitivity table on page 97 of this Form 10-Q 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. |
According to Dealogic, for the first six months of 2010, the Firm was ranked #1 in Global
Debt, Equity and Equity-Related; #1 in Global Equity and Equity-Related; #2 in Global Long-Term
Debt; #1 in Global Syndicated Loans and #4 in Global Announced M&A based on volume.
According to Dealogic, the Firm was ranked #1 in Investment Banking fees generated for the first
six months of 2010, based on revenue.
| Six months ended June 30, 2010 | Full-year 2009 | |||||||||||||||
| Market shares and rankings (a) | Market Share | Rankings | Market Share | Rankings | ||||||||||||
|
Global investment banking fees
(b)
|
8 | % | #1 | 9 | % | #1 | ||||||||||
|
Global debt, equity and equity-related
|
7 | #1 | 9 | #1 | ||||||||||||
|
Global syndicated loans
|
10 | #1 | 8 | #1 | ||||||||||||
|
Global long-term debt
(c)
|
7 | #2 | 8 | #1 | ||||||||||||
|
Global equity and equity-related
(d)
|
8 | #1 | 12 | #1 | ||||||||||||
|
Global announced M&A
(e)
|
14 | #4 | 24 | #3 | ||||||||||||
|
U.S. debt, equity and equity-related
|
12 | #1 | 15 | #1 | ||||||||||||
|
U.S. syndicated loans
|
21 | #2 | 22 | #1 | ||||||||||||
|
U.S. long-term debt
(c)
|
11 | #2 | 14 | #1 | ||||||||||||
|
U.S. equity and equity-related
|
16 | #1 | 16 | #2 | ||||||||||||
|
U.S. announced M&A
(e)
|
22 | #3 | 36 | #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. | |
| (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 year-to-date 2010 and full-year 2009 reflects the removal of any withdrawn transactions. U.S. announced M&A represents any U.S. involvement ranking. |
24
Table of Contents
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 5,100 bank branches
(third-largest nationally) and 15,600 ATMs (second-largest nationally), as well as online and
mobile banking around the clock. More than 26,900 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 15,900 auto dealerships and 1,800 schools and universities nationwide. Prior to January
1, 2010, RFS was reported as: Retail Banking and Consumer Lending. Commencing January 1, 2010,
Consumer Lending for reporting purposes is presented as: (1) Mortgage Banking & Other Consumer
Lending, and (2) Real Estate Portfolios. Mortgage Banking & 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. This change is intended
solely to provide further clarity around the Real Estate Portfolios. Retail Banking, which includes
branch banking and business banking activities, is not affected by these reporting revisions.
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Lending- and deposit-related fees
|
$ | 780 | $ | 1,003 | (22 | )% | $ | 1,621 | $ | 1,951 | (17 | )% | ||||||||||||
|
Asset management, administration
and commissions
|
433 | 425 | 2 | 885 | 860 | 3 | ||||||||||||||||||
|
Mortgage fees and related income
|
886 | 807 | 10 | 1,541 | 2,440 | (37 | ) | |||||||||||||||||
|
Credit card income
|
480 | 411 | 17 | 930 | 778 | 20 | ||||||||||||||||||
|
Other income
|
413 | 294 | 40 | 767 | 508 | 51 | ||||||||||||||||||
|
Noninterest revenue
|
2,992 | 2,940 | 2 | 5,744 | 6,537 | (12 | ) | |||||||||||||||||
|
Net interest income
|
4,817 | 5,030 | (4 | ) | 9,841 | 10,268 | (4 | ) | ||||||||||||||||
|
Total net revenue
|
7,809 | 7,970 | (2 | ) | 15,585 | 16,805 | (7 | ) | ||||||||||||||||
|
Provision for credit losses
|
1,715 | 3,846 | (55 | ) | 5,448 | 7,723 | (29 | ) | ||||||||||||||||
|
Noninterest expense
|
||||||||||||||||||||||||
|
Compensation expense
|
1,842 | 1,631 | 13 | 3,612 | 3,262 | 11 | ||||||||||||||||||
|
Noncompensation expense
|
2,369 | 2,365 | — | 4,771 | 4,822 | (1 | ) | |||||||||||||||||
|
Amortization of intangibles
|
70 | 83 | (16 | ) | 140 | 166 | (16 | ) | ||||||||||||||||
|
Total noninterest expense
|
4,281 | 4,079 | 5 | 8,523 | 8,250 | 3 | ||||||||||||||||||
|
Income before income tax expense
|
1,813 | 45 | NM | 1,614 | 832 | 94 | ||||||||||||||||||
|
Income tax expense
|
771 | 30 | NM | 703 | 343 | 105 | ||||||||||||||||||
|
Net income
|
$ | 1,042 | $ | 15 | NM | $ | 911 | $ | 489 | 86 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||
|
Return on common equity
|
15 | % | — | % | 7 | % | 4 | % | ||||||||||||||||
|
Overhead ratio
|
55 | 51 | 55 | 49 | ||||||||||||||||||||
|
Overhead ratio excluding core
deposit intangibles
(a)
|
54 | 50 | 54 | 48 | ||||||||||||||||||||
| (a) | 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 $69 million and $82 million for the quarters ended June 30, 2010 and 2009, respectively, and $139 million and $165 million for the six months ended June 30, 2010 and 2009, respectively. |
25
Table of Contents
Quarterly results
Net income was $1.0 billion, compared with $15 million in the prior year.
Net revenue was $7.8 billion, a decrease of $161 million, or 2%, compared with the prior year. Net
interest income was $4.8 billion, down by $213 million, or 4%, reflecting the impact of lower loan
and deposit balances, partially offset by a shift to wider-spread deposit products. Noninterest
revenue was $3.0 billion, relatively flat compared with the prior year, as increased mortgage fees
and related income, debit card income and auto operating lease income were offset by declining
deposit-related fees.
The provision for credit losses was $1.7 billion, a decrease of $2.1 billion from the prior year.
Although losses for the mortgage and home equity portfolios continued to be extremely high, the
current-quarter provision reflected improved delinquency trends and reduced net charge-offs as
compared with the prior period. Additionally, the prior-year provision included an addition to the
allowance for loan losses of $1.2 billion. Home equity net charge-offs were $796 million (3.32% net
charge-off rate), compared with $1.3 billion (4.61% net charge-off rate) in the prior year.
Subprime mortgage net charge-offs were $282 million (8.63% net charge-off rate), compared with $410
million (11.50% net charge-off rate). Prime mortgage net charge-offs were $264 million (1.79% net
charge-off rate), compared with $481 million (3.07% net charge-off rate). The allowance for loan
losses to ending loans retained, excluding purchased credit-impaired loans, was 5.26%, compared
with 4.41% in the prior year.
Noninterest expense was $4.3 billion, an increase of $202 million, or 5%, from the prior year.
Year-to-date results
Net income was $911 million, compared with $489 million in the prior year.
Net revenue was $15.6 billion, a decrease of $1.2 billion, or 7%, compared with the prior year. Net
interest income was $9.8 billion, down by $427 million, or 4%, reflecting the impact of lower loan
and deposit balances, partially offset by a shift to wider-spread deposit products. Noninterest
revenue was $5.7 billion, a decrease of $793 million, or 12%, as a decline in mortgage fees and
related income and deposit-related fees were partially offset by an increase in debit card income
and auto operating lease income.
The provision for credit losses was $5.4 billion, a decrease of $2.3 billion from the prior year.
Although losses for the mortgage and home equity portfolios continued to be extremely high, the
provision reflected improved delinquency trends and reduced net charge-offs as compared with the
prior period. Additionally, the current period included an addition to the allowance for loan
losses of $1.2 billion compared with an addition of $2.9 billion in the prior year. Home equity net
charge-offs were $1.9 billion (3.96% net charge-off rate), compared with $2.4 billion (4.27% net
charge-off rate) in the prior year. Subprime mortgage net charge-offs were $739 million (11.12% net
charge-off rate), compared with $774 million (10.69% net charge-off rate). Prime mortgage net
charge-offs were $723 million (2.45% net charge-off rate), compared with $793 million (1.88% net
charge-off rate).
Noninterest expense was $8.5 billion, an increase of $273 million, or 3%, from the prior
year.
26
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except headcount and ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||||||
|
Assets
|
$ | 375,329 | $ | 399,916 | (6 | )% | $ | 375,329 | $ | 399,916 | (6 | )% | ||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Loans retained
|
330,329 | 353,934 | (7 | ) | 330,329 | 353,934 | (7 | ) | ||||||||||||||||
|
Loans held-for-sale and loans at fair value
(a)
|
12,599 | 13,192 | (4 | ) | 12,599 | 13,192 | (4 | ) | ||||||||||||||||
|
Total loans
|
342,928 | 367,126 | (7 | ) | 342,928 | 367,126 | (7 | ) | ||||||||||||||||
|
Deposits
|
359,974 | 371,241 | (3 | ) | 359,974 | 371,241 | (3 | ) | ||||||||||||||||
|
Equity
|
28,000 | 25,000 | 12 | 28,000 | 25,000 | 12 | ||||||||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||||||||||||||
|
Assets
|
$ | 381,906 | $ | 410,228 | (7 | ) | $ | 387,854 | $ | 416,813 | (7 | ) | ||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Loans retained
|
335,308 | 359,372 | (7 | ) | 339,131 | 363,127 | (7 | ) | ||||||||||||||||
|
Loans held-for-sale and loans at fair value
(a)
|
14,426 | 19,043 | (24 | ) | 15,734 | 17,792 | (12 | ) | ||||||||||||||||
|
Total loans
|
349,734 | 378,415 | (8 | ) | 354,865 | 380,919 | (7 | ) | ||||||||||||||||
|
Deposits
|
362,010 | 377,259 | (4 | ) | 359,486 | 373,788 | (4 | ) | ||||||||||||||||
|
Equity
|
28,000 | 25,000 | 12 | 28,000 | 25,000 | 12 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Headcount
|
116,879 | 103,733 | 13 | 116,879 | 103,733 | 13 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Credit data and quality statistics
|
||||||||||||||||||||||||
|
Net charge-offs
|
$ | 1,761 | $ | 2,649 | (34 | ) | $ | 4,199 | $ | 4,825 | (13 | ) | ||||||||||||
|
Nonperforming loans
:
|
||||||||||||||||||||||||
|
Nonperforming loans retained
|
10,457 | 8,792 | 19 | 10,457 | 8,792 | 19 | ||||||||||||||||||
|
Nonperforming loans held-for-sale and loans at fair value
|
176 | 203 | (13 | ) | 176 | 203 | (13 | ) | ||||||||||||||||
|
Total nonperforming loans
(b)(c)(d)
|
10,633 | 8,995 | 18 | 10,633 | 8,995 | 18 | ||||||||||||||||||
|
Nonperforming assets
(b)(c)(d)
|
11,907 | 10,554 | 13 | 11,907 | 10,554 | 13 | ||||||||||||||||||
|
Allowance for loan losses
|
16,152 | 11,832 | 37 | 16,152 | 11,832 | 37 | ||||||||||||||||||
|
Net charge-off rate
(e)
|
2.11 | % | 2.96 | % | 2.50 | % | 2.68 | % | ||||||||||||||||
|
Net charge-off rate
excluding purchased
credit-impaired loans
(e)(f)
|
2.75 | 3.89 | 3.26 | 3.53 | ||||||||||||||||||||
|
Allowance for loan losses to ending loans
(e)
|
4.89 | 3.34 | 4.89 | 3.34 | ||||||||||||||||||||
|
Allowance for loan losses to ending loans
excluding purchased credit-impaired
loans
(e)(f)
|
5.26 | 4.41 | 5.26 | 4.41 | ||||||||||||||||||||
|
Allowance for loan losses to nonperforming loans
retained
(b)(e)(f)
|
128 | 135 | 128 | 135 | ||||||||||||||||||||
|
Nonperforming loans to total loans
|
3.10 | 2.45 | 3.10 | 2.45 | ||||||||||||||||||||
|
Nonperforming loans to total loans excluding purchased
credit-impaired loans
(b)
|
4.00 | 3.19 | 4.00 | 3.19 | ||||||||||||||||||||
| (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 $12.2 billion and $11.3 billion at June 30, 2010 and 2009, respectively. Average balances of these loans totaled $12.5 billion and $16.2 billion for the quarters ended June 30, 2010 and 2009, respectively, and $13.3 billion and $14.9 billion for the six months ended June 30, 2010 and 2009, respectively. | |
| (b) | Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing. | |
| (c) | Certain of these loans are classified as trading assets on the Consolidated Balance Sheets. | |
| (d) | At June 30, 2010 and 2009, nonperforming loans and assets exclude: (1) mortgage loans insured by U.S. government agencies of $10.1 billion and $4.2 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 $1.4 billion and $508 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 $447 million and $473 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 purchased credit-impaired 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 $2.8 billion was recorded for these loans at June 30, 2010, which has also been excluded from applicable ratios. No allowance for loan losses was recorded for these loans at June 30, 2009. To date, no charge-offs have been recorded for these loans. |
27
Table of Contents
RETAIL BANKING
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Noninterest revenue
|
$ | 1,684 | $ | 1,803 | (7 | )% | $ | 3,386 | $ | 3,521 | (4 | )% | ||||||||||||
|
Net interest income
|
2,712 | 2,719 | — | 5,347 | 5,333 | — | ||||||||||||||||||
|
Total net revenue
|
4,396 | 4,522 | (3 | ) | 8,733 | 8,854 | (1 | ) | ||||||||||||||||
|
Provision for credit losses
|
168 | 361 | (53 | ) | 359 | 686 | (48 | ) | ||||||||||||||||
|
Noninterest expense
|
2,633 | 2,557 | 3 | 5,210 | 5,137 | 1 | ||||||||||||||||||
|
Income before income tax expense
|
1,595 | 1,604 | (1 | ) | 3,164 | 3,031 | 4 | |||||||||||||||||
|
Net income
|
$ | 914 | $ | 970 | (6 | ) | $ | 1,812 | $ | 1,833 | (1 | ) | ||||||||||||
|
Overhead ratio
|
60 | % | 57 | % | 60 | % | 58 | % | ||||||||||||||||
|
Overhead ratio excluding core
deposit
intangibles
(a)
|
58 | 55 | 58 | 56 | ||||||||||||||||||||
| (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 $69 million and $82 million for the quarters ended June 30, 2010 and 2009, respectively, and $139 million and $165 million for the six months ended June 30, 2010 and 2009, respectively. |
Quarterly results
Retail Banking
reported net income of $914 million, a decrease of $56 million, or 6%, compared with
the prior year.
Net revenue was $4.4 billion, down 3% compared with the prior year. The decrease was driven by
declining deposit-related fees and lower deposit balances, largely offset by a shift to
wider-spread deposit products and higher debit card income.
The provision for credit losses was $168 million, compared with $361 million in the prior year. The
prior-year provision reflected an increase in the Business Banking allowance for loan losses.
Retail Banking net charge-offs were $168 million (4.04% net charge-off rate), compared with $211
million (4.70% net charge-off rate) in the prior year.
Noninterest expense was $2.6 billion, up 3% compared with the prior year, resulting from sales
force increases.
Year-to-date results
Retail Banking
reported net income of $1.8 billion, relatively flat compared with the prior year.
Net revenue was $8.7 billion, relatively flat compared with the prior year, with declining
deposit-related fees and lower deposit balances, offset by a shift to wider-spread deposit products
and higher debit card income.
The provision for credit losses was $359 million, compared with $686 million in the prior year. The
prior-year provision reflected an increase in the Business Banking allowance for loan losses.
Retail Banking net charge-offs were $359 million (4.31% net charge-off rate), compared with $386
million (4.28% net charge-off rate) in the prior year.
Noninterest expense was $5.2 billion, relatively flat compared with the prior year.
28
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in billions, except ratios and where | ||||||||||||||||||||||||
| otherwise noted) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Business metrics
|
||||||||||||||||||||||||
|
Business banking origination volume
|
$ | 1.2 | $ | 0.6 | 100 | % | $ | 2.1 | $ | 1.1 | 91 | % | ||||||||||||
|
End-of-period loans owned
|
16.6 | 17.8 | (7 | ) | 16.6 | 17.8 | (7 | ) | ||||||||||||||||
|
End-of-period deposits:
|
||||||||||||||||||||||||
|
Checking
|
$ | 123.5 | $ | 114.1 | 8 | $ | 123.5 | $ | 114.1 | 8 | ||||||||||||||
|
Savings
|
161.8 | 150.4 | 8 | 161.8 | 150.4 | 8 | ||||||||||||||||||
|
Time and other
|
50.5 | 78.9 | (36 | ) | 50.5 | 78.9 | (36 | ) | ||||||||||||||||
|
Total end-of-period deposits
|
335.8 | 343.4 | (2 | ) | 335.8 | 343.4 | (2 | ) | ||||||||||||||||
|
Average loans owned
|
$ | 16.7 | $ | 18.0 | (7 | ) | $ | 16.8 | $ | 18.2 | (8 | ) | ||||||||||||
|
Average deposits:
|
||||||||||||||||||||||||
|
Checking
|
$ | 123.6 | $ | 114.2 | 8 | $ | 121.7 | $ | 111.8 | 9 | ||||||||||||||
|
Savings
|
162.8 | 151.2 | 8 | 160.7 | 149.6 | 7 | ||||||||||||||||||
|
Time and other
|
51.4 | 82.7 | (38 | ) | 53.5 | 85.6 | (38 | ) | ||||||||||||||||
|
Total average deposits
|
337.8 | 348.1 | (3 | ) | 335.9 | 347.0 | (3 | ) | ||||||||||||||||
|
Deposit margin
|
3.05 | % | 2.92 | % | 3.03 | % | 2.89 | % | ||||||||||||||||
|
Average assets
|
$ | 28.4 | $ | 29.1 | (2 | ) | $ | 28.7 | $ | 29.6 | (3 | ) | ||||||||||||
|
Credit
data and quality statistics
(in millions, except ratio) |
||||||||||||||||||||||||
|
Net charge-offs
|
$ | 168 | $ | 211 | (20 | ) | $ | 359 | $ | 386 | (7 | ) | ||||||||||||
|
Net charge-off rate
|
4.04 | % | 4.70 | % | 4.31 | % | 4.28 | % | ||||||||||||||||
|
Nonperforming assets
|
$ | 920 | $ | 686 | 34 | $ | 920 | $ | 686 | 34 | ||||||||||||||
|
Retail branch business metrics
|
||||||||||||||||||||||||
|
Investment sales volume (in millions)
|
$ | 5,756 | $ | 5,292 | 9 | $ | 11,712 | $ | 9,690 | 21 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Number of:
|
||||||||||||||||||||||||
|
Branches
|
5,159 | 5,203 | (1 | ) | 5,159 | 5,203 | (1 | ) | ||||||||||||||||
|
ATMs
|
15,654 | 14,144 | 11 | 15,654 | 14,144 | 11 | ||||||||||||||||||
|
Personal bankers
|
20,170 | 15,959 | 26 | 20,170 | 15,959 | 26 | ||||||||||||||||||
|
Sales specialists
|
6,785 | 5,485 | 24 | 6,785 | 5,485 | 24 | ||||||||||||||||||
|
Active online customers (in thousands)
|
16,584 | 13,930 | 19 | 16,584 | 13,930 | 19 | ||||||||||||||||||
|
Checking accounts (in thousands)
|
26,351 | 25,252 | 4 | 26,351 | 25,252 | 4 | ||||||||||||||||||
MORTGAGE BANKING & OTHER CONSUMER LENDING
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratio) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Noninterest revenue
(a)
|
$ | 1,256 | $ | 1,134 | 11 | % | $ | 2,274 | $ | 3,055 | (26 | )% | ||||||||||||
|
Net interest income
|
792 | 721 | 10 | 1,685 | 1,529 | 10 | ||||||||||||||||||
|
Total net revenue
|
2,048 | 1,855 | 10 | 3,959 | 4,584 | (14 | ) | |||||||||||||||||
|
Provision for credit losses
|
175 | 366 | (52 | ) | 392 | 771 | (49 | ) | ||||||||||||||||
|
Noninterest expense
|
1,243 | 1,105 | 12 | 2,489 | 2,242 | 11 | ||||||||||||||||||
|
Income before income tax
expense
|
630 | 384 | 64 | 1,078 | 1,571 | (31 | ) | |||||||||||||||||
|
Net income
(a)
|
$ | 364 | $ | 235 | 55 | $ | 621 | $ | 965 | (36 | ) | |||||||||||||
|
Overhead ratio
|
61 | % | 60 | % | 63 | % | 49 | % | ||||||||||||||||
| (a) | Losses related to the repurchase of previously-sold loans are recorded as a reduction of production revenue. These losses totaled $667 million and $255 million for the quarters ended June 30, 2010 and 2009, respectively, and $1.1 billion and $475 million for the six months ended June 30, 2010 and 2009, respectively. The losses resulted in a negative impact on net income of $388 million and $157 million for the quarters ended June 30, 2010 and 2009, respectively, and $640 million and $292 million for the six months ended June 30, 2010 and 2009, respectively. For further discussion, see Repurchase liability on pages 58-60 and Note 22 on pages 170-174 of this Form 10-Q, and Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual Report. |
29
Table of Contents
Quarterly results
Mortgage Banking & Other Consumer Lending
reported net income of $364 million, an increase of $129
million, or 55%, from the prior year. The increase was driven by higher noninterest revenue and a
lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue of $2.0 billion was up by $193 million, or 10%, from the prior year, and includes
Mortgage Banking revenue of $1.2 billion, up by $62 million, and Other Consumer Lending revenue
(comprised of Auto and Student Lending) of $850 million, up by $131 million predominantly as a
result of higher auto loan and lease balances. Mortgage Banking revenue includes $212 million of
net interest income, $886 million of mortgage fees and related income and $100 million of other
noninterest revenue. Included in mortgage fees and related income is $9 million of production
revenue, compared with $284 million in the prior year, reflecting higher repurchase losses in the
current year and the impact of write-downs on the mortgage warehouse in the prior year. Repurchase
losses were $667 million, compared with $255 million in the prior year. Also included is net
mortgage servicing revenue of $877 million, up by $354 million from the prior year, which is
comprised of operating revenue and MSR risk management revenue. Operating revenue of $566 million
was up by $124 million as the improvement in other changes in MSR asset fair value was partially
offset by lower loan servicing revenue as a result of lower third-party loans serviced. MSR risk
management results were $311 million, compared with $81 million in the prior year.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was
$175 million, compared with $366 million in the prior year. The prior-year provision reflected an
increase in the allowance for loan losses for student and auto loans. Student loan and other net
charge-offs were $150 million (4.04% net charge-off rate), compared with $101 million (2.79% net
charge-off rate) in the prior year. Auto loan net charge-offs were $58 million (0.49% net
charge-off rate), compared with $146 million (1.36% net charge-off rate) in the prior year.
Noninterest expense was $1.2 billion, up by $138 million, or 12%, from the prior year, driven by an
increase in default-related expense.
Year-to-date results
Mortgage Banking & Other Consumer Lending
reported net income of $621 million, compared with $965
million in the prior year. The decrease was driven by lower noninterest revenue and higher
noninterest expense, partially offset by a lower provision for credit losses and higher net
interest income.
Net revenue of $4.0 billion was down by $625 million, or 14%, from the prior year, and includes
Mortgage Banking revenue of $2.2 billion, down by $955 million, and Other Consumer Lending revenue
(comprised of Auto and Student Lending) of $1.8 billion, up by $330 million predominantly as a
result of higher auto loan and lease balances. Mortgage Banking revenue includes $428 million of
net interest income, $1.5 billion of mortgage fees and related income and $191 million of other
noninterest revenue. Included in mortgage fees and related income is $10 million of production
revenue, compared with $765 million in the prior year, reflecting higher repurchase losses in the
current year and the impact of write-downs on the mortgage warehouse in the prior year. Repurchase
losses were $1.1 billion, compared with $475 million in the prior year. Also included is net
mortgage servicing revenue of $1.5 billion, down by $144 million from the prior year, which is
comprised of operating revenue and MSR risk management revenue. Operating revenue of $1.1 billion
was up $477 million as the improvement in other changes in MSR asset fair value was partially
offset by lower loan servicing revenue as a result of lower third-party loans serviced. MSR risk
management results were $463 million, compared with $1.1 billion in the prior year.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was
$392 million, compared with $771 million in the prior year. The prior-year provision reflected an
increase in the allowance for loan losses for student and auto loans. Student loan and other net
charge-offs were $214 million (2.80% net charge-off rate), compared with $135 million (1.84% net
charge-off rate) in the prior year. Auto loan net charge-offs were $160 million (0.68% net
charge-off rate), compared with $320 million (1.51% net charge-off rate) in the prior year.
Noninterest expense was $2.5 billion, up by $247 million, or 11%, from the prior year, driven by an
increase in default-related expense.
30
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in billions, except ratios and where otherwise noted) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Business metrics
|
||||||||||||||||||||||||
|
End-of-period loans owned:
|
||||||||||||||||||||||||
|
Auto loans
|
$ | 47.5 | $ | 42.9 | 11 | % | $ | 47.5 | $ | 42.9 | 11 | % | ||||||||||||
|
Mortgage
(a)
|
13.2 | 8.9 | 48 | 13.2 | 8.9 | 48 | ||||||||||||||||||
|
Student loans and other
|
15.1 | 15.7 | (4 | ) | 15.1 | 15.7 | (4 | ) | ||||||||||||||||
|
Total end-of-period loans owned
|
75.8 | 67.5 | 12 | 75.8 | 67.5 | 12 | ||||||||||||||||||
|
Average loans owned:
|
||||||||||||||||||||||||
|
Auto loans
|
$ | 47.5 | $ | 43.1 | 10 | $ | 47.2 | $ | 42.8 | 10 | ||||||||||||||
|
Mortgage
(a)
|
13.6 | 8.4 | 62 | 13.0 | 8.0 | 63 | ||||||||||||||||||
|
Student loans and other
|
16.7 | 16.8 | (1 | ) | 17.6 | 17.2 | 2 | |||||||||||||||||
|
Total average loans owned
(b)
|
77.8 | 68.3 | 14 | 77.8 | 68.0 | 14 | ||||||||||||||||||
|
Credit
data and quality statistics
(in millions, except ratios) |
||||||||||||||||||||||||
|
Net charge-offs:
|
||||||||||||||||||||||||
|
Auto loans
|
$ | 58 | $ | 146 | (60 | ) | $ | 160 | $ | 320 | (50 | ) | ||||||||||||
|
Mortgage
|
13 | 2 | NM | 19 | 7 | 171 | ||||||||||||||||||
|
Student loans and other
|
150 | 101 | 49 | 214 | 135 | 59 | ||||||||||||||||||
|
Total net charge-offs
|
221 | 249 | (11 | ) | 393 | 462 | (15 | ) | ||||||||||||||||
|
Net charge-off rate:
|
||||||||||||||||||||||||
|
Auto loans
|
0.49 | % | 1.36 | % | 0.68 | % | 1.51 | % | ||||||||||||||||
|
Mortgage
|
0.39 | 0.10 | 0.30 | 0.19 | ||||||||||||||||||||
|
Student loans and other
|
4.04 | 2.79 | 2.80 | 1.84 | ||||||||||||||||||||
|
Total net charge-off rate
(b)
|
1.17 | 1.52 | 1.05 | 1.43 | ||||||||||||||||||||
|
30+ day delinquency rate
(c)(d)
|
1.42 | % | 1.80 | % | 1.42 | % | 1.80 | % | ||||||||||||||||
|
Nonperforming assets (in millions)
(e)
|
$ | 866 | $ | 783 | 11 | $ | 866 | $ | 783 | 11 | ||||||||||||||
|
Origination volume:
|
||||||||||||||||||||||||
|
Mortgage origination volume by channel
|
||||||||||||||||||||||||
|
Retail
|
$ | 15.3 | $ | 14.7 | 4 | $ | 26.7 | $ | 28.3 | (6 | ) | |||||||||||||
|
Wholesale
(f)
|
0.4 | 0.7 | (43 | ) | 0.8 | 2.3 | (65 | ) | ||||||||||||||||
|
Correspondent
(f)
|
14.7 | 21.9 | (33 | ) | 30.7 | 39.9 | (23 | ) | ||||||||||||||||
|
CNT (negotiated transactions)
|
1.8 | 3.8 | (53 | ) | 5.7 | 8.3 | (31 | ) | ||||||||||||||||
|
Total mortgage origination volume
|
32.2 | 41.1 | (22 | ) | 63.9 | 78.8 | (19 | ) | ||||||||||||||||
|
Student loans
|
$ | 0.1 | $ | 0.4 | (75 | ) | $ | 1.7 | $ | 2.1 | (19 | ) | ||||||||||||
|
Auto
|
5.8 | 5.3 | 9 | 12.1 | 10.9 | 11 | ||||||||||||||||||
31
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in billions, except ratios and where otherwise noted) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Application volume:
|
||||||||||||||||||||||||
|
Mortgage application volume by channel
|
||||||||||||||||||||||||
|
Retail
|
$ | 27.8 | $ | 23.0 | 21 | % | $ | 48.1 | $ | 55.7 | (14 | )% | ||||||||||||
|
Wholesale
(f)
|
0.6 | 1.3 | (54 | ) | 1.4 | 3.1 | (55 | ) | ||||||||||||||||
|
Correspondent
(f)
|
23.5 | 29.7 | (21 | ) | 41.7 | 58.9 | (29 | ) | ||||||||||||||||
|
Total mortgage application volume
|
$ | 51.9 | $ | 54.0 | (4 | ) | $ | 91.2 | $ | 117.7 | (23 | ) | ||||||||||||
|
Average mortgage loans held-for-sale and loans at fair
value
(g)
|
$ | 12.6 | $ | 16.7 | (25 | ) | $ | 13.5 | $ | 15.3 | (12 | ) | ||||||||||||
|
Average assets
|
123.2 | 111.6 | 10 | 124.0 | 112.5 | 10 | ||||||||||||||||||
|
Third-party mortgage loans serviced (ending)
|
1,055.2 | 1,117.5 | (6 | ) | 1,055.2 | 1,117.5 | (6 | ) | ||||||||||||||||
|
Third-party mortgage loans serviced (average)
|
1,063.7 | 1,128.1 | (6 | ) | 1,070.1 | 1,141.6 | (6 | ) | ||||||||||||||||
|
MSR net carrying value (ending)
|
11.8 | 14.6 | (19 | ) | 11.8 | 14.6 | (19 | ) | ||||||||||||||||
|
Ratio of MSR net carrying value (ending) to third-party
mortgage loans serviced (ending)
|
1.12 | % | 1.31 | % | 1.12 | % | 1.31 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Supplemental mortgage fees and related income details
|
||||||||||||||||||||||||
|
(in millions)
|
||||||||||||||||||||||||
|
Production revenue
(h)
|
$ | 9 | $ | 284 | (97 | ) | $ | 10 | $ | 765 | (99 | ) | ||||||||||||
|
Net mortgage servicing revenue:
|
||||||||||||||||||||||||
|
Operating revenue:
|
||||||||||||||||||||||||
|
Loan servicing revenue
|
1,186 | 1,279 | (7 | ) | 2,293 | 2,501 | (8 | ) | ||||||||||||||||
|
Other changes in MSR asset fair value
|
(620 | ) | (837 | ) | 26 | (1,225 | ) | (1,910 | ) | 36 | ||||||||||||||
|
Total operating revenue
|
566 | 442 | 28 | 1,068 | 591 | 81 | ||||||||||||||||||
|
Risk management:
|
||||||||||||||||||||||||
|
Changes in MSR asset fair value due to inputs or
assumptions in model
|
(3,584 | ) | 3,831 | NM | (3,680 | ) | 5,141 | NM | ||||||||||||||||
|
Derivative valuation adjustments and other
|
3,895 | (3,750 | ) | NM | 4,143 | (4,057 | ) | NM | ||||||||||||||||
|
Total risk management
|
311 | 81 | 284 | 463 | 1,084 | (57 | ) | |||||||||||||||||
|
Total net mortgage servicing revenue
|
877 | 523 | 68 | 1,531 | 1,675 | (9 | ) | |||||||||||||||||
|
Mortgage fees and related income
|
$ | 886 | $ | 807 | 10 | $ | 1,541 | $ | 2,440 | (37 | ) | |||||||||||||
|
Ratio of annualized loan servicing revenue to third-party
mortgage loans serviced (average)
|
0.45 | % | 0.45 | % | 0.43 | % | 0.44 | % | ||||||||||||||||
|
MSR revenue multiple
(i)
|
2.49 | x | 2.91 | x | 2.60 | x | 2.98 | x | ||||||||||||||||
| (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 58-60 of this Form 10-Q. | |
| (b) | Total average loans owned includes loans held-for-sale of $1.9 billion and $2.8 billion for the quarters ended June 30, 2010 and 2009, respectively, and $2.4 billion and $2.9 billion for the six months ended June 30, 2010 and 2009, 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 $10.9 billion and $5.1 billion at June 30, 2010 and 2009, 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 $988 million and $854 million at June 30, 2010 and 2009, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (e) | At June 30, 2010 and 2009, nonperforming loans and assets exclude: (1) mortgage loans insured by U.S. government agencies of $10.1 billion and $4.2 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 $1.4 billion and $508 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 $447 million and $473 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 $12.5 billion and $16.2 billion for the quarters ended June 30, 2010 and 2009, respectively, and $13.3 billion and $14.9 billion for the six months ended June 30, 2010 and 2009, respectively. | |
| (h) | Losses related to the repurchase of previously-sold loans are recorded as a reduction of production revenue. These losses totaled $667 million and $255 million for the quarters ended June 30, 2010 and 2009, respectively, and $1.1 billion and $475 million for the six months ended June 30, 2010 and 2009, respectively. For further discussion, see Repurchase liability on pages 58-60 and Note 22 on pages 170-174 of this Form 10-Q, and Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual Report. | |
| (i) | 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). |
32
Table of Contents
REAL ESTATE PORTFOLIOS
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Noninterest revenue
|
$ | 52 | $ | 3 | NM | $ | 84 | $ | (39 | ) | NM | |||||||||||||
|
Net interest income
|
1,313 | 1,590 | (17 | )% | 2,809 | 3,406 | (18 | )% | ||||||||||||||||
|
Total net revenue
|
1,365 | 1,593 | (14 | ) | 2,893 | 3,367 | (14 | ) | ||||||||||||||||
|
Provision for credit losses
|
1,372 | 3,119 | (56 | ) | 4,697 | 6,266 | (25 | ) | ||||||||||||||||
|
Noninterest expense
|
405 | 417 | (3 | ) | 824 | 871 | (5 | ) | ||||||||||||||||
|
Income/(loss) before income
tax expense/(benefit)
|
(412 | ) | (1,943 | ) | 79 | (2,628 | ) | (3,770 | ) | 30 | ||||||||||||||
|
Net income/(loss)
|
$ | (236 | ) | $ | (1,190 | ) | 80 | $ | (1,522 | ) | $ | (2,309 | ) | 34 | ||||||||||
|
Overhead ratio
|
30 | % | 26 | % | 28 | % | 26 | % | ||||||||||||||||
Quarterly results
Real Estate Portfolios
reported a net loss of $236 million, compared with a net loss of $1.2
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 $1.4 billion, down by $228 million, or 14%, from the prior year. The decrease was
driven by a decline in net interest income as a result of lower loan balances, reflecting portfolio
runoff.
The provision for credit losses was $1.4 billion, compared with $3.1 billion in the prior year. The
current-quarter provision reflected improved delinquency trends and reduced net charge-offs, while
the prior-year provision included an addition to the allowance for loan losses of $930 million in
the home equity and mortgage loan portfolios. (For further detail, see RFS discussion of the
provision for credit losses.)
Noninterest expense was $405 million, down by $12 million, or 3%, from the prior year, reflecting a
decrease in foreclosed asset expense.
Year-to-date results
Real Estate Portfolios
reported a net loss of $1.5 billion, compared with a net loss of $2.3
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 $2.9 billion, down by $474 million, or 14%, from the prior year. The decrease was
driven by a decline in net interest income as a result of lower loan balances, reflecting portfolio
runoff.
The provision for credit losses was $4.7 billion, compared with $6.3 billion in the prior year. The
provision reflected an addition to the allowance for loan losses for the purchased credit-impaired
portfolio of $1.2 billion as well as impacts of improved delinquency trends and reduced net
charge-offs, while the prior-year provision included an addition to the allowance for loan losses
of $2.3 billion in the home equity and mortgage loan portfolios. (For further detail, see RFS
discussion of the provision for credit losses.)
Noninterest expense was $824 million, down by $47 million, or 5%, from the prior year, reflecting a
decrease in foreclosed asset expense.
33
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in billions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Loans excluding purchased credit-impaired
loans
(a)
|
||||||||||||||||||||||||
|
End-of-period loans owned:
|
||||||||||||||||||||||||
|
Home equity
|
$ | 94.8 | $ | 108.2 | (12 | )% | $ | 94.8 | $ | 108.2 | (12 | )% | ||||||||||||
|
Prime mortgage
|
44.6 | 53.2 | (16 | ) | 44.6 | 53.2 | (16 | ) | ||||||||||||||||
|
Subprime mortgage
|
12.6 | 13.8 | (9 | ) | 12.6 | 13.8 | (9 | ) | ||||||||||||||||
|
Option ARMs
|
8.5 | 9.0 | (6 | ) | 8.5 | 9.0 | (6 | ) | ||||||||||||||||
|
Other
|
1.0 | 0.9 | 11 | 1.0 | 0.9 | 11 | ||||||||||||||||||
|
Total end-of-period loans owned
|
$ | 161.5 | $ | 185.1 | (13 | ) | $ | 161.5 | $ | 185.1 | (13 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Average loans owned:
|
||||||||||||||||||||||||
|
Home equity
|
$ | 96.3 | $ | 110.1 | (13 | ) | $ | 97.9 | $ | 111.7 | (12 | ) | ||||||||||||
|
Prime mortgage
|
45.7 | 54.9 | (17 | ) | 46.8 | 56.4 | (17 | ) | ||||||||||||||||
|
Subprime mortgage
|
13.1 | 14.3 | (8 | ) | 13.4 | 14.6 | (8 | ) | ||||||||||||||||
|
Option ARMs
|
8.6 | 9.1 | (5 | ) | 8.7 | 9.0 | (3 | ) | ||||||||||||||||
|
Other
|
1.0 | 0.9 | 11 | 1.0 | 0.9 | 11 | ||||||||||||||||||
|
Total average loans owned
|
$ | 164.7 | $ | 189.3 | (13 | ) | $ | 167.8 | $ | 192.6 | (13 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Purchased credit-impaired loans
(a)
|
||||||||||||||||||||||||
|
End-of-period loans owned:
|
||||||||||||||||||||||||
|
Home equity
|
$ | 25.5 | $ | 27.7 | (8 | ) | $ | 25.5 | $ | 27.7 | (8 | ) | ||||||||||||
|
Prime mortgage
|
18.5 | 20.8 | (11 | ) | 18.5 | 20.8 | (11 | ) | ||||||||||||||||
|
Subprime mortgage
|
5.6 | 6.4 | (13 | ) | 5.6 | 6.4 | (13 | ) | ||||||||||||||||
|
Option ARMs
|
27.3 | 30.5 | (10 | ) | 27.3 | 30.5 | (10 | ) | ||||||||||||||||
|
Total end-of-period loans owned
|
$ | 76.9 | $ | 85.4 | (10 | ) | $ | 76.9 | $ | 85.4 | (10 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Average loans owned:
|
||||||||||||||||||||||||
|
Home equity
|
$ | 25.7 | $ | 28.0 | (8 | ) | $ | 26.0 | $ | 28.2 | (8 | ) | ||||||||||||
|
Prime mortgage
|
18.8 | 21.0 | (10 | ) | 19.1 | 21.3 | (10 | ) | ||||||||||||||||
|
Subprime mortgage
|
5.8 | 6.5 | (11 | ) | 5.8 | 6.6 | (12 | ) | ||||||||||||||||
|
Option ARMs
|
27.7 | 31.0 | (11 | ) | 28.2 | 31.2 | (10 | ) | ||||||||||||||||
|
Total average loans owned
|
$ | 78.0 | $ | 86.5 | (10 | ) | $ | 79.1 | $ | 87.3 | (9 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total Real Estate Portfolios
|
||||||||||||||||||||||||
|
End-of-period loans owned:
|
||||||||||||||||||||||||
|
Home equity
|
$ | 120.3 | $ | 135.9 | (11 | ) | $ | 120.3 | $ | 135.9 | (11 | ) | ||||||||||||
|
Prime mortgage
|
63.1 | 74.0 | (15 | ) | 63.1 | 74.0 | (15 | ) | ||||||||||||||||
|
Subprime mortgage
|
18.2 | 20.2 | (10 | ) | 18.2 | 20.2 | (10 | ) | ||||||||||||||||
|
Option ARMs
|
35.8 | 39.5 | (9 | ) | 35.8 | 39.5 | (9 | ) | ||||||||||||||||
|
Other
|
1.0 | 0.9 | 11 | 1.0 | 0.9 | 11 | ||||||||||||||||||
|
Total end-of-period loans owned
|
$ | 238.4 | $ | 270.5 | (12 | ) | $ | 238.4 | $ | 270.5 | (12 | ) | ||||||||||||
|
Average loans owned:
|
||||||||||||||||||||||||
|
Home equity
|
$ | 122.0 | $ | 138.1 | (12 | ) | $ | 123.9 | $ | 139.9 | (11 | ) | ||||||||||||
|
Prime mortgage
|
64.5 | 75.9 | (15 | ) | 65.9 | 77.7 | (15 | ) | ||||||||||||||||
|
Subprime mortgage
|
18.9 | 20.8 | (9 | ) | 19.2 | 21.2 | (9 | ) | ||||||||||||||||
|
Option ARMs
|
36.3 | 40.1 | (9 | ) | 36.9 | 40.2 | (8 | ) | ||||||||||||||||
|
Other
|
1.0 | 0.9 | 11 | 1.0 | 0.9 | 11 | ||||||||||||||||||
|
Total average loans owned
|
$ | 242.7 | $ | 275.8 | (12 | ) | $ | 246.9 | $ | 279.9 | (12 | ) | ||||||||||||
|
Average assets
|
$ | 230.3 | $ | 269.5 | (15 | ) | $ | 235.2 | $ | 274.7 | (14 | ) | ||||||||||||
|
Home equity origination volume
|
0.3 | 0.6 | (50 | ) | 0.6 | 1.5 | (60 | ) | ||||||||||||||||
| (a) | Purchased credit-impaired 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 loan as long as cash flows are reasonably estimable, even if the underlying loans are contractually past due. |
Included within Real Estate Portfolios are purchased credit-impaired loans that the Firm
acquired in the Washington Mutual transaction. For purchased credit-impaired loans, the excess of
the undiscounted gross cash flows initially expected to be collected over the fair value of the
loans at the acquisition date is accreted into interest income at a level rate of return over the
expected life of the loans. This is commonly referred to as the “accretable yield.” The estimate of
gross cash flows expected to be collected is updated each reporting period based on updated
assumptions. Probable decreases in expected loan principal cash flows require recognition of an
allowance for loan losses; probable and significant increases in expected cash flows would first
reverse any previously recorded allowance for loan losses with any remaining increases recognized
over time through interest income.
34
Table of Contents
The net spread between the purchased credit-impaired loans and the related liabilities should be
relatively constant over time, except for any basis risk or other residual interest rate risk that
remains and changes in the accretable yield percentage (e.g., extended loan liquidation periods).
As of June 30, 2010, the remaining weighted-average life of the purchased credit-impaired loan
portfolio is expected to be 6.6 years. For further information, see Note 13, Purchased
credit-impaired loans, on pages 149-150 of this Form 10-Q. 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 purchased credit-impaired 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.
| Credit data and quality statistics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Net charge-offs excluding purchased
credit-impaired loans
(a)
:
|
||||||||||||||||||||||||
|
Home equity
|
$ | 796 | $ | 1,265 | (37 | )% | $ | 1,922 | $ | 2,363 | (19 | )% | ||||||||||||
|
Prime mortgage
|
251 | 479 | (48 | ) | 704 | 786 | (10 | ) | ||||||||||||||||
|
Subprime mortgage
|
282 | 410 | (31 | ) | 739 | 774 | (5 | ) | ||||||||||||||||
|
Option ARMs
|
22 | 15 | 47 | 45 | 19 | 137 | ||||||||||||||||||
|
Other
|
21 | 20 | 5 | 37 | 35 | 6 | ||||||||||||||||||
|
Total net charge-offs
|
$ | 1,372 | $ | 2,189 | (37 | ) | $ | 3,447 | $ | 3,977 | (13 | ) | ||||||||||||
|
Net charge-off rate excluding purchased
credit-impaired loans
(a)
:
|
||||||||||||||||||||||||
|
Home equity
|
3.32 | % | 4.61 | % | 3.96 | % | 4.27 | % | ||||||||||||||||
|
Prime mortgage
|
2.20 | 3.50 | 3.03 | 2.81 | ||||||||||||||||||||
|
Subprime mortgage
|
8.63 | 11.50 | 11.12 | 10.69 | ||||||||||||||||||||
|
Option ARMs
|
1.03 | 0.66 | 1.04 | 0.43 | ||||||||||||||||||||
|
Other
|
8.42 | 8.91 | 7.46 | 7.84 | ||||||||||||||||||||
|
Total net charge-off rate excluding purchased
credit-impaired loans
|
3.34 | 4.64 | 4.14 | 4.16 | ||||||||||||||||||||
|
Net charge-off rate — reported:
|
||||||||||||||||||||||||
|
Home equity
|
2.62 | % | 3.67 | % | 3.13 | % | 3.41 | % | ||||||||||||||||
|
Prime mortgage
|
1.56 | 2.53 | 2.15 | 2.04 | ||||||||||||||||||||
|
Subprime mortgage
|
5.98 | 7.91 | 7.76 | 7.36 | ||||||||||||||||||||
|
Option ARMs
|
0.24 | 0.15 | 0.25 | 0.10 | ||||||||||||||||||||
|
Other
|
8.42 | 8.91 | 7.46 | 7.84 | ||||||||||||||||||||
|
Total net charge-off rate — reported
|
2.27 | 3.18 | 2.82 | 2.87 | ||||||||||||||||||||
|
30+ day delinquency rate excluding purchased
credit-impaired loans
(b)
|
6.88 | % | 6.46 | % | 6.88 | % | 6.46 | % | ||||||||||||||||
|
Allowance for loan losses
|
$ | 14,127 | $ | 9,821 | 44 | $ | 14,127 | $ | 9,821 | 44 | ||||||||||||||
|
Nonperforming assets
(c)
|
10,121 | 9,085 | 11 | 10,121 | 9,085 | 11 | ||||||||||||||||||
|
Allowance for loan losses to ending loans retained
|
5.93 | % | 3.63 | % | 5.93 | % | 3.63 | % | ||||||||||||||||
|
Allowance for loan losses to ending loans
retained excluding purchased credit-impaired
loans
(a)
|
7.01 | 5.31 | 7.01 | 5.31 | ||||||||||||||||||||
| (a) | Excludes the impact of purchased credit-impaired 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 $2.8 billion was recorded for these loans at June 30, 2010, which has also been excluded from the applicable ratios. No allowance for loan losses was recorded for these loans at June 30, 2009. To date, no charge-offs have been recorded for these loans. | |
| (b) | The delinquency rate for purchased credit-impaired loans was 27.91% and 23.37% at June 30, 2010 and 2009, respectively. | |
| (c) | Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing. |
35
Table of Contents
CARD SERVICES
For a discussion of the business profile of CS, see pages 64-66 of JPMorgan Chase’s 2009
Annual Report and Introduction on page 6 of this Form 10-Q.
Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Prior to
the adoption of the new guidance, JPMorgan Chase used the concept of “managed basis” to evaluate
the credit performance of its credit card loans, both loans on the balance sheet and loans that had
been securitized. Managed results excluded the impact of credit card securitizations on total net
revenue, the provision for credit losses, net charge-offs and loan receivables. Securitization did
not change reported net income; however, it did affect the classification of items on the
Consolidated Statements of Income and 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 information, see Explanation and Reconciliation of the Firm’s Use of
Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q.
| Selected income statement data- | ||||||||||||||||||||||||
| managed basis (a) | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Credit card income
|
$ | 908 | $ | 921 | (1 | )% | $ | 1,721 | $ | 1,765 | (2 | )% | ||||||||||||
|
All other income
|
(47 | ) | (364 | ) | 87 | (102 | ) | (561 | ) | 82 | ||||||||||||||
|
Noninterest revenue
|
861 | 557 | 55 | 1,619 | 1,204 | 34 | ||||||||||||||||||
|
Net interest income
|
3,356 | 4,311 | (22 | ) | 7,045 | 8,793 | (20 | ) | ||||||||||||||||
|
Total net revenue
|
4,217 | 4,868 | (13 | ) | 8,664 | 9,997 | (13 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
2,221 | 4,603 | (52 | ) | 5,733 | 9,256 | (38 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Noninterest expense
|
||||||||||||||||||||||||
|
Compensation expense
|
327 | 329 | (1 | ) | 657 | 686 | (4 | ) | ||||||||||||||||
|
Noncompensation expense
|
986 | 873 | 13 | 1,935 | 1,723 | 12 | ||||||||||||||||||
|
Amortization of intangibles
|
123 | 131 | (6 | ) | 246 | 270 | (9 | ) | ||||||||||||||||
|
Total noninterest expense
|
1,436 | 1,333 | 8 | 2,838 | 2,679 | 6 | ||||||||||||||||||
|
Income/(loss) before income tax
expense/(benefit)
|
560 | (1,068 | ) | NM | 93 | (1,938 | ) | NM | ||||||||||||||||
|
Income tax expense/(benefit)
|
217 | (396 | ) | NM | 53 | (719 | ) | NM | ||||||||||||||||
|
Net income/(loss)
|
$ | 343 | $ | (672 | ) | NM | $ | 40 | $ | (1,219 | ) | NM | ||||||||||||
|
|
||||||||||||||||||||||||
|
Memo: Net securitization income/(loss)
|
NA | $ | (268 | ) | NM | NA | $ | (448 | ) | NM | ||||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||
|
Return on common equity
|
9 | % | (18 | )% | 1 | % | (16 | )% | ||||||||||||||||
|
Overhead ratio
|
34 | 27 | 33 | 27 | ||||||||||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted new accounting guidance related to the transfer of financial assets and the consolidation of VIEs. For further details regarding the Firm’s application and impact of the new guidance, see Note 15 on pages 151-163 of this Form 10-Q. |
NA: Not applicable
Quarterly results
Net income was $343 million, compared with a net loss of $672 million 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 $143.0 billion, a decrease of $28.5 billion, or 17%, from the prior year.
Average loans were $146.3 billion, a decrease of $27.8 billion, or 16%, from the prior year. The
declines in both end-of-period and average loans were due to the decline in lower yielding
promotional balances and the Washington Mutual portfolio runoff.
Net revenue was $4.2 billion, a decrease of $651 million, or 13%, from the prior year. Net interest
income was $3.4 billion, down by $955 million, or 22%. The decrease 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 $861 million, an increase of $304 million, or 55%. The prior year included a write-down
of securitization interests.
36
Table of Contents
The provision for credit losses was $2.2 billion, compared with $4.6 billion in the prior year. The
current-quarter provision included a reduction of $1.5 billion to the allowance for loan losses,
reflecting reduced net charge-offs and lower estimated losses primarily related to improved
delinquency trends as well as lower loan balances. The prior-year provision included an addition of
$250 million to the allowance for loan losses. The net charge-off rate was 10.20%, up from 10.03%
in the prior year. The 30-day delinquency rate was 4.96%, down from 5.86% in the prior year.
Excluding the Washington Mutual portfolio, the net charge-off rate was 9.02%, up from 8.97% in the
prior year; and the 30-day delinquency rate was 4.48%, down from 5.27% in the prior year.
Noninterest expense was $1.4 billion, an increase of $103 million, or 8%, due to higher marketing
expense.
Year-to-date results
Net income was $40 million, compared with a net loss of $1.2 billion in the prior year. The
improved results were driven by a lower provision for credit losses, partially offset by lower net
revenue.
Average loans were $151.0 billion, a decrease of $27.7 billion, or 16%, from the prior year due to
the decline in lower yielding promotional balances and the Washington Mutual portfolio runoff.
Net revenue was $8.7 billion, a decrease of $1.3 billion, or 13%, from the prior year. Net interest
income was $7.0 billion, down by $1.7 billion, or 20%. The decrease was driven by lower average
loan balances, a decreased level of fees, and the impact of legislative changes. Noninterest
revenue was $1.6 billion, an increase of $415 million, or 34%, driven by a prior-year write-down of
securitization interests.
The provision for credit losses was $5.7 billion, compared with $9.3 billion in the prior year. The
current-year provision included a reduction of $2.5 billion to the allowance for loan losses,
reflecting lower estimated losses primarily related to improved delinquency trends as well as lower
loan balances. The prior-year provision included an addition of $1.4 billion to the allowance for
loan losses. The net charge-off rate was 10.99%, up from 8.85% in the prior year. Excluding the
Washington Mutual portfolio, the net charge-off rate was 9.80%, up from 7.90% in the prior year.
Noninterest expense was $2.8 billion, an increase of $159 million, or 6%, due to higher marketing
expense.
Credit Card Legislation
In May 2009, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (“CARD Act”)
was enacted. Management estimates that the total annualized reduction in net income from the CARD
Act, including recent regulatory guidance that defines reasonable and proportional fees, could be
approximately $750 million. Results in the second quarter of 2010 reflect approximately 25% of the
estimated quarterly impact of this reduction in net income.
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; and (d) the requirement that statements must be mailed or
delivered not later than 21 days before the payment due date. In addition, certain rules were
finalized in June, including those limiting the amount of penalty fees that can be assessed and
those that would require CS 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.
37
Table of Contents
| Selected metrics | ||||||||||||||||||||||||
| (in millions, except headcount, ratios and where | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| otherwise noted) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Financial ratios
(a)
|
||||||||||||||||||||||||
|
Percentage of average outstandings:
|
||||||||||||||||||||||||
|
Net interest income
|
9.20 | % | 9.93 | % | 9.41 | % | 9.92 | % | ||||||||||||||||
|
Provision for credit losses
|
6.09 | 10.60 | 7.66 | 10.44 | ||||||||||||||||||||
|
Noninterest revenue
|
2.36 | 1.28 | 2.16 | 1.36 | ||||||||||||||||||||
|
Risk adjusted margin
(b)
|
5.47 | 0.61 | 3.91 | 0.84 | ||||||||||||||||||||
|
Noninterest expense
|
3.94 | 3.07 | 3.79 | 3.02 | ||||||||||||||||||||
|
Pretax income/(loss) (ROO)
(c)
|
1.54 | (2.46 | ) | 0.12 | (2.19 | ) | ||||||||||||||||||
|
Net income/(loss)
|
0.94 | (1.55 | ) | 0.05 | (1.38 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Business metrics
|
||||||||||||||||||||||||
|
Sales volume (in billions)
|
$ | 78.1 | $ | 74.0 | 6 | % | $ | 147.5 | $ | 140.6 | 5 | % | ||||||||||||
|
New accounts opened (in millions)
|
2.7 | 2.4 | 13 | 5.2 | 4.6 | 13 | ||||||||||||||||||
|
Open accounts (in millions)
|
88.9 | 100.3 | (11 | ) | 88.9 | 100.3 | (11 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Merchant acquiring business
|
||||||||||||||||||||||||
|
Bank card volume (in billions)
|
$ | 117.1 | $ | 101.4 | 15 | $ | 225.1 | $ | 195.8 | 15 | ||||||||||||||
|
Total transactions (in billions)
|
5.0 | 4.5 | 11 | 9.7 | 8.6 | 13 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Loans on balance sheets
|
$ | 142,994 | $ | 85,736 | 67 | $ | 142,994 | $ | 85,736 | 67 | ||||||||||||||
|
Securitized loans
(a)
|
NA | 85,790 | NM | NA | 85,790 | NM | ||||||||||||||||||
|
Total loans
|
$ | 142,994 | $ | 171,526 | (17 | ) | $ | 142,994 | $ | 171,526 | (17 | ) | ||||||||||||
|
Equity
|
$ | 15,000 | $ | 15,000 | — | $ | 15,000 | $ | 15,000 | — | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||||||||||||||
|
Managed assets
|
$ | 146,816 | $ | 193,310 | (24 | ) | $ | 151,864 | $ | 197,234 | (23 | ) | ||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Loans on balance sheets
|
$ | 146,302 | $ | 89,692 | 63 | $ | 151,020 | $ | 93,715 | 61 | ||||||||||||||
|
Securitized loans
(a)
|
NA | 84,417 | NM | NA | 85,015 | NM | ||||||||||||||||||
|
Total average loans
|
$ | 146,302 | $ | 174,109 | (16 | ) | $ | 151,020 | $ | 178,730 | (16 | ) | ||||||||||||
|
Equity
|
$ | 15,000 | $ | 15,000 | — | $ | 15,000 | $ | 15,000 | — | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Headcount
|
21,529 | 22,897 | (6 | ) | 21,529 | 22,897 | (6 | ) | ||||||||||||||||
38
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Credit quality statistics
(a)
|
||||||||||||||||||||||||
|
Net charge-offs
|
$ | 3,721 | $ | 4,353 | (15 | )% | $ | 8,233 | $ | 7,846 | 5 | % | ||||||||||||
|
Net charge-off rate
(d)
|
10.20 | % | 10.03 | % | 10.99 | % | 8.85 | % | ||||||||||||||||
|
Delinquency rates
(a)(d)
|
||||||||||||||||||||||||
|
30+ day
|
4.96 | % | 5.86 | % | 4.96 | % | 5.86 | % | ||||||||||||||||
|
90+ day
|
2.76 | 3.25 | 2.76 | 3.25 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance for loan losses
(a)(e)
|
$ | 14,524 | $ | 8,839 | 64 | $ | 14,524 | $ | 8,839 | 64 | ||||||||||||||
|
Allowance for loan losses to period-end
loans
(a)(e)(f)
|
10.16 | % | 10.31 | % | 10.16 | % | 10.31 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Key stats — Washington Mutual only
|
||||||||||||||||||||||||
|
Loans
|
$ | 15,615 | $ | 23,093 | (32 | ) | $ | 15,615 | $ | 23,093 | (32 | ) | ||||||||||||
|
Average loans
|
16,455 | 24,418 | (33 | ) | 17,525 | 25,990 | (33 | ) | ||||||||||||||||
|
Net interest income
(g)
|
14.97 | % | 17.90 | % | 15.02 | % | 17.14 | % | ||||||||||||||||
|
Risk adjusted margin
(b)(g)
|
15.43 | (3.89 | ) | 8.59 | 0.49 | |||||||||||||||||||
|
Net charge-off rate
(h)
|
19.53 | 19.17 | 21.97 | 16.75 | ||||||||||||||||||||
|
30+ day delinquency rate
(h)
|
8.86 | 11.98 | 8.86 | 11.98 | ||||||||||||||||||||
|
90+ day delinquency rate
(h)
|
5.17 | 6.85 | 5.17 | 6.85 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Key stats — excluding Washington Mutual
|
||||||||||||||||||||||||
|
Loans
|
$ | 127,379 | $ | 148,433 | (14 | ) | $ | 127,379 | $ | 148,433 | (14 | ) | ||||||||||||
|
Average loans
|
129,847 | 149,691 | (13 | ) | 133,495 | 152,740 | (13 | ) | ||||||||||||||||
|
Net interest income
(g)
|
8.47 | % | 8.63 | % | 8.67 | % | 8.69 | % | ||||||||||||||||
|
Risk adjusted margin
(b)(g)
|
4.21 | 1.34 | 3.30 | 0.89 | ||||||||||||||||||||
|
Net charge-off rate
|
9.02 | 8.97 | 9.80 | 7.90 | ||||||||||||||||||||
|
30+ day delinquency rate
|
4.48 | 5.27 | 4.48 | 5.27 | ||||||||||||||||||||
|
90+ day delinquency rate
|
2.47 | 2.90 | 2.47 | 2.90 | ||||||||||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted new accounting guidance related to the transfer of financial assets and the consolidation of 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 new guidance, see Note 15 on pages 151-163 of this Form 10-Q. | |
| (b) | Represents total net revenue less provision for credit losses. | |
| (c) | Pretax return on average managed outstandings. | |
| (d) | 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. Net charge-off rate for the three months ended June 30, 2010, and delinquency rates for the three and six months ended June 30, 2010 were not affected. | |
| (e) | Based on loans on the Consolidated Balance Sheets. | |
| (f) | Includes $5.0 billion of loans at June 30, 2009, held by the WMMT, which were consolidated onto the CS balance sheet at fair value during the second quarter of 2009. No allowance for loan losses was recorded for these loans as of June 30, 2009. Excluding these loans, the allowance for loan losses to period-end loans would have been 10.95%. | |
| (g) | As a percentage of average managed outstandings. | |
| (h) | 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.
39
Table of Contents
Reconciliation from reported basis to managed basis
The financial information presented below reconciles reported basis and managed basis to disclose
the effect of securitizations reported in 2009. Effective January 1, 2010, the Firm adopted new
accounting guidance that amended the accounting for the transfer of financial assets and the
consolidation of 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 new guidance, see Note 15 on pages 151-163 of this Form 10-Q.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Income statement data
|
||||||||||||||||||||||||
|
Credit card income
|
||||||||||||||||||||||||
|
Reported
|
$ | 908 | $ | 1,215 | (25 | )% | $ | 1,721 | $ | 2,599 | (34 | )% | ||||||||||||
|
Securitization adjustments
|
NA | (294 | ) | NM | NA | (834 | ) | NM | ||||||||||||||||
|
Managed credit card income
|
$ | 908 | $ | 921 | (1 | ) | $ | 1,721 | $ | 1,765 | (2 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income
|
||||||||||||||||||||||||
|
Reported
|
$ | 3,356 | $ | 2,353 | 43 | $ | 7,045 | $ | 4,831 | 46 | ||||||||||||||
|
Securitization adjustments
|
NA | 1,958 | NM | NA | 3,962 | NM | ||||||||||||||||||
|
Managed net interest income
|
$ | 3,356 | $ | 4,311 | (22 | ) | $ | 7,045 | $ | 8,793 | (20 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total net revenue
|
||||||||||||||||||||||||
|
Reported
|
$ | 4,217 | $ | 3,204 | 32 | $ | 8,664 | $ | 6,869 | 26 | ||||||||||||||
|
Securitization adjustments
|
NA | 1,664 | NM | NA | 3,128 | NM | ||||||||||||||||||
|
Managed total net revenue
|
$ | 4,217 | $ | 4,868 | (13 | ) | $ | 8,664 | $ | 9,997 | (13 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
||||||||||||||||||||||||
|
Reported
|
$ | 2,221 | $ | 2,939 | (24 | ) | $ | 5,733 | $ | 6,128 | (6 | ) | ||||||||||||
|
Securitization adjustments
|
NA | 1,664 | NM | NA | 3,128 | NM | ||||||||||||||||||
|
Managed provision for credit losses
|
$ | 2,221 | $ | 4,603 | (52 | ) | $ | 5,733 | $ | 9,256 | (38 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Balance sheets — average balances
|
||||||||||||||||||||||||
|
Total average assets
|
||||||||||||||||||||||||
|
Reported
|
$ | 146,816 | $ | 111,722 | 31 | $ | 151,864 | $ | 115,052 | 32 | ||||||||||||||
|
Securitization adjustments
|
NA | 81,588 | NM | NA | 82,182 | NM | ||||||||||||||||||
|
Managed average assets
|
$ | 146,816 | $ | 193,310 | (24 | ) | $ | 151,864 | $ | 197,234 | (23 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Credit quality statistics
|
||||||||||||||||||||||||
|
Net charge-offs
|
||||||||||||||||||||||||
|
Reported
|
$ | 3,721 | $ | 2,689 | 38 | $ | 8,233 | $ | 4,718 | 75 | ||||||||||||||
|
Securitization adjustments
|
NA | 1,664 | NM | NA | 3,128 | NM | ||||||||||||||||||
|
Managed net charge-offs
|
$ | 3,721 | $ | 4,353 | (15 | ) | $ | 8,233 | $ | 7,846 | 5 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net charge-off rates
|
||||||||||||||||||||||||
|
Reported
|
10.20 | % | 12.03 | % | 10.99 | % | 10.15 | % | ||||||||||||||||
|
Securitized
|
NA | 7.91 | NA | 7.42 | ||||||||||||||||||||
|
Managed net charge-off rate
|
10.20 | 10.03 | 10.99 | 8.85 | ||||||||||||||||||||
NA: Not applicable
40
Table of Contents
COMMERCIAL BANKING
For a
discussion of the business profile of CB, see pages 67-68 of JPMorgan Chase’s 2009
Annual Report and Introduction on page 6 of this Form 10-Q.
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Lending- and deposit-related fees
|
$ | 280 | $ | 270 | 4 | % | $ | 557 | $ | 533 | 5 | % | ||||||||||||
|
Asset management, administration
and commissions
|
36 | 36 | — | 73 | 70 | 4 | ||||||||||||||||||
|
All other income
(a)
|
230 | 152 | 51 | 416 | 277 | 50 | ||||||||||||||||||
|
Noninterest revenue
|
546 | 458 | 19 | 1,046 | 880 | 19 | ||||||||||||||||||
|
Net interest income
|
940 | 995 | (6 | ) | 1,856 | 1,975 | (6 | ) | ||||||||||||||||
|
Total net revenue
(b)
|
1,486 | 1,453 | 2 | 2,902 | 2,855 | 2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
(235 | ) | 312 | NM | (21 | ) | 605 | NM | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Noninterest expense
|
||||||||||||||||||||||||
|
Compensation expense
|
196 | 197 | (1 | ) | 402 | 397 | 1 | |||||||||||||||||
|
Noncompensation expense
|
337 | 327 | 3 | 661 | 669 | (1 | ) | |||||||||||||||||
|
Amortization of intangibles
|
9 | 11 | (18 | ) | 18 | 22 | (18 | ) | ||||||||||||||||
|
Total noninterest expense
|
542 | 535 | 1 | 1,081 | 1,088 | (1 | ) | |||||||||||||||||
|
Income before income tax expense
|
1,179 | 606 | 95 | 1,842 | 1,162 | 59 | ||||||||||||||||||
|
Income tax expense
|
486 | 238 | 104 | 759 | 456 | 66 | ||||||||||||||||||
|
Net income
|
$ | 693 | $ | 368 | 88 | $ | 1,083 | $ | 706 | 53 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenue by product
|
||||||||||||||||||||||||
|
Lending
|
$ | 649 | $ | 684 | (5 | ) | $ | 1,307 | $ | 1,349 | (3 | ) | ||||||||||||
|
Treasury services
|
665 | 679 | (2 | ) | 1,303 | 1,325 | (2 | ) | ||||||||||||||||
|
Investment banking
|
115 | 114 | 1 | 220 | 187 | 18 | ||||||||||||||||||
|
Other
|
57 | (24 | ) | NM | 72 | (6 | ) | NM | ||||||||||||||||
|
Total Commercial Banking revenue
|
$ | 1,486 | $ | 1,453 | 2 | $ | 2,902 | $ | 2,855 | 2 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
IB revenue, gross
(c)
|
$ | 333 | $ | 328 | 2 | $ | 644 | $ | 534 | 21 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenue by client segment
|
||||||||||||||||||||||||
|
Middle Market Banking
|
$ | 767 | $ | 772 | (1 | ) | $ | 1,513 | $ | 1,524 | (1 | ) | ||||||||||||
|
Commercial Term Lending
|
237 | 224 | 6 | 466 | 452 | 3 | ||||||||||||||||||
|
Mid-Corporate Banking
|
285 | 305 | (7 | ) | 548 | 547 | — | |||||||||||||||||
|
Real Estate Banking
|
125 | 120 | 4 | 225 | 240 | (6 | ) | |||||||||||||||||
|
Other
|
72 | 32 | 125 | 150 | 92 | 63 | ||||||||||||||||||
|
Total Commercial Banking revenue
|
$ | 1,486 | $ | 1,453 | 2 | $ | 2,902 | $ | 2,855 | 2 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||
|
Return on common equity
|
35 | % | 18 | % | 27 | % | 18 | % | ||||||||||||||||
|
Overhead ratio
|
36 | 37 | 37 | 38 | ||||||||||||||||||||
| (a) | Revenue from investment banking products sold to CB clients and commercial card fee revenue 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 $49 million and $39 million for the quarters ended June 30, 2010 and 2009, respectively, and $94 million and $74 million for year-to-date 2010 and 2009, respectively. | |
| (c) | Represents the total revenue related to investment banking products sold to CB clients. |
41
Table of Contents
Quarterly results
Net income was $693 million, an increase of $325 million, or 88%, from the prior year. The increase
was driven by a reduction in the provision for credit losses.
Net revenue was $1.5 billion, relatively flat compared with the prior year. Net interest income was
$940 million, down by $55 million, or 6%, 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 $546 million, an increase of $88 million, or 19%. The current quarter
reflected gains on sales of loans and other real estate owned, and higher lending-related fees,
while the prior year reflected markdowns on certain assets held at fair value.
Revenue from Middle Market Banking was $767 million, a decrease of $5 million, or 1%, from the
prior year. Revenue from Commercial Term Lending was $237 million, an increase of $13 million, or
6%. Revenue from Mid-Corporate Banking was $285 million, a decrease of $20 million, or 7%. Revenue
from Real Estate Banking was $125 million, an increase of $5 million, or 4%.
The provision for credit losses was a benefit of $235 million, compared with an expense of $312
million in the prior year. The current-quarter provision included a reduction of $413 million to
the allowance for credit losses, mainly due to refinements to credit loss estimates and improvement
in the credit quality of the commercial and industrial portfolio. Net charge-offs were $176 million
(0.74% net charge-off rate), compared with $181 million (0.67% net charge-off rate) in the prior
year. Current-quarter net charge-offs were largely related to commercial real estate. The allowance
for loan losses to end-of-period loans retained was 2.82%, down from 2.87% in the prior year.
Nonperforming loans were $3.1 billion, up by $1.0 billion from the prior year, reflecting increases
in nonperforming commercial real estate loans.
Noninterest expense was $542 million, an increase of $7 million, relatively flat compared with the
prior year.
Year-to-date results
Net income was $1.1 billion, an increase of $377 million, or 53%, from the prior year. The increase
was driven by a reduction in the provision for credit losses.
Net revenue was $2.9 billion, relatively flat compared with the prior year. Net interest income was
$1.9 billion down by $119 million, or 6%, driven by spread compression on liability products and
lower loan balances, but largely offset by growth in liability balances and wider loan spreads.
Noninterest revenue was $1.0 billion, an increase of $166 million, or 19%, from the prior year. The
current year reflected gains on sales of loans and other real estate owned, higher lending-related
fees and higher investment banking fees, while the prior year reflected markdowns on certain assets
held at fair value.
Revenue from Middle Market Banking was $1.5 billion, relatively flat with the prior year. Revenue
from Commercial Term Lending was $466 million, an increase of $14 million, or 3%. Mid-Corporate
Banking revenue was $548 million, flat compared with the prior year. Real Estate Banking revenue
was $225 million, a decrease of $15 million, or 6%.
The provision for credit losses was a benefit of $21 million, compared with an expense of $605
million in the prior year. The reduction was mainly due to refinements to credit loss estimates and
improvement in the credit quality of the commercial and industrial portfolio. Net charge-offs were
$405 million (0.85% net charge-off rate), compared with $315 million (0.57% net charge-off rate) in
the prior year.
Noninterest expense was $1.1 billion, relatively flat with the prior year.
42
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except headcount and ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Selected balance sheet data (period-end):
|
||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Loans retained
|
$ | 95,090 | $ | 105,556 | (10 | )% | $ | 95,090 | $ | 105,556 | (10 | )% | ||||||||||||
|
Loans held-for-sale and loans at fair value
|
446 | 296 | 51 | 446 | 296 | 51 | ||||||||||||||||||
|
Total loans
|
95,536 | 105,852 | (10 | ) | 95,536 | 105,852 | (10 | ) | ||||||||||||||||
|
Equity
|
8,000 | 8,000 | — | 8,000 | 8,000 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Selected balance sheet data (average):
|
||||||||||||||||||||||||
|
Total assets
|
$ | 133,309 | $ | 137,283 | (3 | ) | $ | 133,162 | $ | 140,771 | (5 | ) | ||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Loans retained
|
95,521 | 108,750 | (12 | ) | 95,917 | 111,146 | (14 | ) | ||||||||||||||||
|
Loans held-for-sale and loans at fair value
|
391 | 288 | 36 | 344 | 292 | 18 | ||||||||||||||||||
|
Total loans
|
95,912 | 109,038 | (12 | ) | 96,261 | 111,438 | (14 | ) | ||||||||||||||||
|
Liability balances
(a)
|
136,770 | 105,829 | 29 | 134,966 | 110,377 | 22 | ||||||||||||||||||
|
Equity
|
8,000 | 8,000 | — | 8,000 | 8,000 | — | ||||||||||||||||||
|
Average loans by client segment:
|
||||||||||||||||||||||||
|
Middle Market Banking
|
$ | 34,424 | $ | 38,193 | (10 | ) | $ | 34,173 | $ | 39,453 | (13 | ) | ||||||||||||
|
Commercial Term Lending
|
35,956 | 36,963 | (3 | ) | 36,006 | 36,889 | (2 | ) | ||||||||||||||||
|
Mid-Corporate Banking
|
11,875 | 17,012 | (30 | ) | 12,065 | 17,710 | (32 | ) | ||||||||||||||||
|
Real Estate Banking
|
9,814 | 12,347 | (21 | ) | 10,124 | 12,803 | (21 | ) | ||||||||||||||||
|
Other
|
3,843 | 4,523 | (15 | ) | 3,893 | 4,583 | (15 | ) | ||||||||||||||||
|
Total Commercial Banking loans
|
$ | 95,912 | $ | 109,038 | (12 | ) | $ | 96,261 | $ | 111,438 | (14 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Headcount
|
4,808 | 4,228 | 14 | 4,808 | 4,228 | 14 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Credit data and quality statistics:
|
||||||||||||||||||||||||
|
Net charge-offs
|
$ | 176 | $ | 181 | (3 | ) | $ | 405 | $ | 315 | 29 | |||||||||||||
|
Nonperforming loans:
|
||||||||||||||||||||||||
|
Nonperforming loans retained
(b)
|
3,036 | 2,090 | 45 | 3,036 | 2,090 | 45 | ||||||||||||||||||
|
Nonperforming loans held-for-sale and
loans at fair value
|
41 | 21 | 95 | 41 | 21 | 95 | ||||||||||||||||||
|
Total nonperforming loans
|
3,077 | 2,111 | 46 | 3,077 | 2,111 | 46 | ||||||||||||||||||
|
Nonperforming assets
|
3,285 | 2,255 | 46 | 3,285 | 2,255 | 46 | ||||||||||||||||||
|
Allowance for credit losses:
|
||||||||||||||||||||||||
|
Allowance for loan losses
|
2,686 | 3,034 | (11 | ) | 2,686 | 3,034 | (11 | ) | ||||||||||||||||
|
Allowance for lending-related commitments
|
267 | 272 | (2 | ) | 267 | 272 | (2 | ) | ||||||||||||||||
|
Total allowance for credit losses
|
2,953 | 3,306 | (11 | ) | 2,953 | 3,306 | (11 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net charge-off rate
|
0.74 | % | 0.67 | % | 0.85 | % | 0.57 | % | ||||||||||||||||
|
Allowance
for loan losses to period-end loans retained
|
2.82 | 2.87 | 2.82 | 2.87 | ||||||||||||||||||||
|
Allowance for loan losses to average loans retained
|
2.81 | 2.79 | 2.80 | 2.73 | ||||||||||||||||||||
|
Allowance for loan losses to nonperforming loans retained
|
88 | 145 | 88 | 145 | ||||||||||||||||||||
|
Nonperforming loans to period-end loans
|
3.22 | 1.99 | 3.22 | 1.99 | ||||||||||||||||||||
|
Nonperforming loans to average loans
|
3.21 | 1.94 | 3.20 | 1.89 | ||||||||||||||||||||
| (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) | Allowance for loan losses of $586 million and $460 million were held against nonperforming loans retained at June 30, 2010 and 2009, respectively. |
43
Table of Contents
TREASURY & SECURITIES SERVICES
For a
discussion of the business profile of TSS, see pages 56-57 of JPMorgan Chase’s 2009
Annual Report and Introduction on page 6 of this Form 10-Q.
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except headcount and ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Lending- and
deposit-related fees
|
$ | 313 | $ | 314 | — | % | $ | 624 | $ | 639 | (2 | )% | ||||||||||||
|
Asset management, administration and
commissions
|
705 | 710 | (1 | ) | 1,364 | 1,336 | 2 | |||||||||||||||||
|
All other income
|
209 | 221 | (5 | ) | 385 | 418 | (8 | ) | ||||||||||||||||
|
Noninterest revenue
|
1,227 | 1,245 | (1 | ) | 2,373 | 2,393 | (1 | ) | ||||||||||||||||
|
Net interest income
|
654 | 655 | — | 1,264 | 1,328 | (5 | ) | |||||||||||||||||
|
Total net revenue
|
1,881 | 1,900 | (1 | ) | 3,637 | 3,721 | (2 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
(16 | ) | (5 | ) | (220 | ) | (55 | ) | (11 | ) | (400 | ) | ||||||||||||
|
Credit reimbursement to IB
(a)
|
(30 | ) | (30 | ) | — | (60 | ) | (60 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Noninterest expense
|
||||||||||||||||||||||||
|
Compensation expense
|
697 | 618 | 13 | 1,354 | 1,247 | 9 | ||||||||||||||||||
|
Noncompensation expense
|
684 | 650 | 5 | 1,334 | 1,321 | 1 | ||||||||||||||||||
|
Amortization of intangibles
|
18 | 20 | (10 | ) | 36 | 39 | (8 | ) | ||||||||||||||||
|
Total noninterest expense
|
1,399 | 1,288 | 9 | 2,724 | 2,607 | 4 | ||||||||||||||||||
|
Income before income tax expense
|
468 | 587 | (20 | ) | 908 | 1,065 | (15 | ) | ||||||||||||||||
|
Income tax expense
|
176 | 208 | (15 | ) | 337 | 378 | (11 | ) | ||||||||||||||||
|
Net income
|
$ | 292 | $ | 379 | (23 | ) | $ | 571 | $ | 687 | (17 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Revenue by business
|
||||||||||||||||||||||||
|
Treasury Services
|
$ | 926 | $ | 934 | (1 | ) | $ | 1,808 | $ | 1,865 | (3 | ) | ||||||||||||
|
Worldwide Securities Services
|
955 | 966 | (1 | ) | 1,829 | 1,856 | (1 | ) | ||||||||||||||||
|
Total net revenue
|
$ | 1,881 | $ | 1,900 | (1 | ) | $ | 3,637 | $ | 3,721 | (2 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||
|
Return on common equity
|
18 | % | 30 | % | 18 | % | 28 | % | ||||||||||||||||
|
Overhead ratio
|
74 | 68 | 75 | 70 | ||||||||||||||||||||
|
Pretax margin ratio
|
25 | 31 | 25 | 29 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||||||
|
Loans
(b)
|
$ | 24,513 | $ | 17,929 | 37 | $ | 24,513 | $ | 17,929 | 37 | ||||||||||||||
|
Equity
|
6,500 | 5,000 | 30 | 6,500 | 5,000 | 30 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||||||||||||||
|
Total assets
|
$ | 42,868 | $ | 35,520 | 21 | $ | 40,583 | $ | 37,092 | 9 | ||||||||||||||
|
Loans
(b)
|
22,137 | 17,524 | 26 | 20,865 | 18,825 | 11 | ||||||||||||||||||
|
Liability balances
(c)
|
246,690 | 234,163 | 5 | 247,294 | 255,208 | (3 | ) | |||||||||||||||||
|
Equity
|
6,500 | 5,000 | 30 | 6,500 | 5,000 | 30 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Headcount
|
27,943 | 27,252 | 3 | 27,943 | 27,252 | 3 | ||||||||||||||||||
| (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. | |
| (c) | 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. |
44
Table of Contents
Quarterly results
Net income was $292 million, a decrease of $87 million, or 23%, from the prior year. These results
reflected lower net revenue and higher noninterest expense.
Net revenue was $1.9 billion, a decrease of $19 million, or 1%, from the prior year. Worldwide
Securities Services net revenue was $955 million, relatively flat compared with the prior year, as
lower spreads in securities lending and the impact of lower volatility on foreign exchange were
offset by higher market levels and net inflows of assets under custody. Similarly, TS net revenue
was $926 million, relatively flat as lower deposit spreads were offset by higher trade loan and
card product volumes.
TSS generated firmwide net revenue of $2.6 billion, including $1.7 billion by TS; of that amount,
$926 million was recorded in TS, $665 million in CB and $62 million in other lines of business. The
remaining $955 million of firmwide net revenue was recorded in Worldwide Securities Services.
The provision for credit losses was a benefit of $16 million, compared with a benefit of $5 million
in the prior year.
Noninterest expense was $1.4 billion, up $111 million, or 9% from the prior year. The increase was
driven by higher performance-based compensation and continued investment in new product platforms,
primarily related to international expansion.
Year-to-date results
Net income was $571 million, a decrease of $116 million, or 17%, from the prior year. These results
reflected lower net revenue and higher noninterest expense.
Net revenue was $3.6 billion, a decrease of $84 million, or 2% from the prior year. Worldwide
Securities Services net revenue of $1.8 billion was relatively flat as lower spreads in securities
lending, the impact of lower volatility on foreign exchange and lower balances on liability
products, were offset by the effects of higher market levels and net inflows of assets under
custody. TS net revenue was $1.8 billion, a decrease of $57 million, or 3%. The decrease primarily
reflected lower deposit spreads, partially offset by higher trade loan and card product volumes.
TSS generated firmwide net revenue of $5.1 billion, including $3.2 billion by TS; of that amount,
$1.8 billion was recorded in TS, $1.3 billion in CB and $118 million in other lines of business.
The remaining $1.8 billion of net revenue was recorded in Worldwide Securities Services.
The provision for credit losses was a benefit of $55 million compared with a benefit of $11 million
in the prior year.
Noninterest expense was $2.7 billion, up $117 million, or 4%. The increase was driven by higher
performance-based compensation as well as continued investment in new product platforms, primarily
related to international expansion.
45
Table of Contents
| Selected metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios and where otherwise noted) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
TSS firmwide disclosures
|
||||||||||||||||||||||||
|
Treasury Services revenue — reported
|
$ | 926 | $ | 934 | (1 | )% | $ | 1,808 | $ | 1,865 | (3 | )% | ||||||||||||
|
Treasury Services revenue reported in CB
|
665 | 679 | (2 | ) | 1,303 | 1,325 | (2 | ) | ||||||||||||||||
|
Treasury Services revenue reported in other lines of
business
|
62 | 63 | (2 | ) | 118 | 125 | (6 | ) | ||||||||||||||||
|
Treasury Services firmwide revenue
(a)
|
1,653 | 1,676 | (1 | ) | 3,229 | 3,315 | (3 | ) | ||||||||||||||||
|
Worldwide Securities Services revenue
|
955 | 966 | (1 | ) | 1,829 | 1,856 | (1 | ) | ||||||||||||||||
|
Treasury & Securities Services firmwide
revenue
(a)
|
$ | 2,608 | $ | 2,642 | (1 | ) | $ | 5,058 | $ | 5,171 | (2 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Treasury Services firmwide liability balances
(average)
(b)
|
$ | 303,224 | $ | 258,312 | 17 | $ | 304,159 | $ | 273,892 | 11 | ||||||||||||||
|
Treasury & Securities Services firmwide liability
balances (average)
(b)
|
383,460 | 339,992 | 13 | 382,260 | 365,584 | 5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
TSS firmwide financial ratios
|
||||||||||||||||||||||||
|
Treasury
Services firmwide overhead ratio
(c)
|
54 | % | 51 | % | 55 | % | 52 | % | ||||||||||||||||
|
Treasury & Securities Services firmwide overhead
ratio
(c)
|
64 | 59 | 65 | 61 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Firmwide business metrics
|
||||||||||||||||||||||||
|
Assets under custody (in billions)
|
$ | 14,857 | $ | 13,748 | 8 | $ | 14,857 | $ | 13,748 | 8 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Number of:
|
||||||||||||||||||||||||
|
U.S.$ ACH transactions originated (in millions)
|
970 | 978 | (1 | ) | 1,919 | 1,956 | (2 | ) | ||||||||||||||||
|
Total U.S.$ clearing volume (in thousands)
|
30,531 | 28,193 | 8 | 59,200 | 55,379 | 7 | ||||||||||||||||||
|
International electronic funds transfer volume
(in thousands)
(d)
|
58,484 | 47,096 | 24 | 114,238 | 91,461 | 25 | ||||||||||||||||||
|
Wholesale check volume (in millions)
|
526 | 572 | (8 | ) | 1,004 | 1,140 | (12 | ) | ||||||||||||||||
|
Wholesale cards issued (in thousands)
(e)
|
28,066 | 25,501 | 10 | 28,066 | 25,501 | 10 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Credit data and quality statistics
|
||||||||||||||||||||||||
|
Net charge-offs
|
$ | — | $ | 17 | NM | $ | — | $ | 19 | NM | ||||||||||||||
|
Nonperforming loans
|
14 | 14 | — | 14 | 14 | — | ||||||||||||||||||
|
Allowance for credit losses:
|
||||||||||||||||||||||||
|
Allowance for loan losses
|
48 | 15 | 220 | 48 | 15 | 220 | ||||||||||||||||||
|
Allowance for lending-related commitments
|
68 | 92 | (26 | ) | 68 | 92 | (26 | ) | ||||||||||||||||
|
Total allowance for credit losses
|
116 | 107 | 8 | 116 | 107 | 8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net charge-off rate
|
— | % | 0.39 | % | — | % | 0.20 | % | ||||||||||||||||
|
Allowance for loan losses to period-end loans
|
0.20 | 0.08 | 0.20 | 0.08 | ||||||||||||||||||||
|
Allowance for loan losses to average loans
|
0.22 | 0.09 | 0.23 | 0.08 | ||||||||||||||||||||
|
Allowance for loan losses to nonperforming loans
|
343 | 107 | 343 | 107 | ||||||||||||||||||||
|
Nonperforming loans to period-end loans
|
0.06 | 0.08 | 0.06 | 0.08 | ||||||||||||||||||||
|
Nonperforming loans to average loans
|
0.06 | 0.08 | 0.07 | 0.07 | ||||||||||||||||||||
| (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 $175 million and $191 million for the three months ended June 30, 2010 and 2009, respectively, and $312 million and $345 million for the six months ended June 30, 2010 and 2009, 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. |
46
Table of Contents
ASSET MANAGEMENT
For a
discussion of the business profile of AM, see pages 71-73 of JPMorgan Chase’s 2009
Annual Report and Introduction on page 6 of this Form 10-Q.
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
Asset management, administration
and commissions
|
$ | 1,522 | $ | 1,315 | 16 | % | $ | 3,030 | $ | 2,546 | 19 | % | ||||||||||||
|
All other income
|
177 | 253 | (30 | ) | 443 | 322 | 38 | |||||||||||||||||
|
Noninterest revenue
|
1,699 | 1,568 | 8 | 3,473 | 2,868 | 21 | ||||||||||||||||||
|
Net interest income
|
369 | 414 | (11 | ) | 726 | 817 | (11 | ) | ||||||||||||||||
|
Total net revenue
|
2,068 | 1,982 | 4 | 4,199 | 3,685 | 14 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
5 | 59 | (92 | ) | 40 | 92 | (57 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Noninterest expense:
|
||||||||||||||||||||||||
|
Compensation expense
|
861 | 810 | 6 | 1,771 | 1,610 | 10 | ||||||||||||||||||
|
Noncompensation expense
|
527 | 525 | — | 1,041 | 1,004 | 4 | ||||||||||||||||||
|
Amortization of intangibles
|
17 | 19 | (11 | ) | 35 | 38 | (8 | ) | ||||||||||||||||
|
Total noninterest expense
|
1,405 | 1,354 | 4 | 2,847 | 2,652 | 7 | ||||||||||||||||||
|
Income before income tax expense
|
658 | 569 | 16 | 1,312 | 941 | 39 | ||||||||||||||||||
|
Income tax expense
|
267 | 217 | 23 | 529 | 365 | 45 | ||||||||||||||||||
|
Net income
|
$ | 391 | $ | 352 | 11 | $ | 783 | $ | 576 | 36 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenue by client segment
|
||||||||||||||||||||||||
|
Private Bank
|
$ | 695 | $ | 640 | 9 | $ | 1,393 | $ | 1,223 | 14 | ||||||||||||||
|
Retail
|
482 | 411 | 17 | 897 | 664 | 35 | ||||||||||||||||||
|
Institutional
|
433 | 487 | (11 | ) | 999 | 947 | 5 | |||||||||||||||||
|
Private Wealth Management
|
348 | 334 | 4 | 691 | 646 | 7 | ||||||||||||||||||
|
JPMorgan Securities
(a)
|
110 | 110 | — | 219 | 205 | 7 | ||||||||||||||||||
|
Total net revenue
|
$ | 2,068 | $ | 1,982 | 4 | $ | 4,199 | $ | 3,685 | 14 | ||||||||||||||
|
Financial ratios
|
||||||||||||||||||||||||
|
Return on common equity
|
24 | % | 20 | % | 24 | % | 17 | % | ||||||||||||||||
|
Overhead ratio
|
68 | 68 | 68 | 72 | ||||||||||||||||||||
|
Pretax margin ratio
|
32 | 29 | 31 | 26 | ||||||||||||||||||||
| (a) | JPMorgan Securities was formerly known as Bear Stearns Private Client Services prior to January 1, 2010. |
47
Table of Contents
Quarterly results
Net income was $391 million, an increase of $39 million, or 11%, from the prior year. These results
reflected higher net revenue and a lower provision for credit losses, partially offset by higher
noninterest expense.
Net revenue was $2.1 billion, an increase of $86 million, or 4%, from the prior year. Noninterest
revenue was $1.7 billion, up by $131 million, or 8%, due to the effects of higher market levels,
net inflows to products with higher margins and higher performance fees, partially offset by lower
quarterly valuations of seed capital investments. Net interest income was $369 million, down by $45
million, or 11%, due to narrower deposit spreads, largely offset by higher deposit balances.
Revenue from the Private Bank was $695 million, up 9% from the prior year. Revenue from Retail was
$482 million, up 17%. Revenue from Institutional was $433 million, down 11%. Revenue from Private
Wealth Management was $348 million, up 4%. Revenue from JPMorgan Securities was $110 million, flat
compared with the prior year.
The provision for credit losses was $5 million, compared with $59 million in the prior year.
Noninterest expense was $1.4 billion, an increase of $51 million, or 4%, from the prior year,
reflecting higher headcount.
Year-to-date results
Net income was $783 million, an increase of $207 million, or 36%, from the prior year, due to
higher net revenue and a lower provision for credit losses, partially offset by higher noninterest
expense.
Net revenue was $4.2 billion, an increase of $514 million, or 14%, from the prior year. Noninterest
revenue was $3.5 billion, an increase of $605 million, or 21%, due to the effects of higher market
levels, higher placement fees, net inflows to products with higher margins and higher performance
fees. Net interest income was $726 million, down by $91 million, or 11%, from the prior year, due
to narrower deposit spreads, partially offset by higher deposit balances.
Revenue from the Private Bank was $1.4 billion, up 14% from the prior year. Revenue from
Institutional was $999 million, up 5%. Revenue from Retail was $897 million, up 35%. Revenue from
Private Wealth Management was $691 million, up 7%. Revenue from JPMorgan Securities was $219
million, up 7%.
The provision for credit losses was $40 million, compared with $92 million in the prior year.
Noninterest expense was $2.8 billion, an increase of $195 million, or 7%, from the prior year due
to higher performance-based compensation and higher headcount.
48
Table of Contents
| Business metrics | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except headcount, ratios, | ||||||||||||||||||||||||
| ranking data, and where otherwise noted) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Number of:
|
||||||||||||||||||||||||
|
Client advisors
|
2,055 | 1,838 | 12 | % | 2,055 | 1,838 | 12 | % | ||||||||||||||||
|
Retirement planning services participants
(in thousands)
|
1,653 | 1,595 | 4 | 1,653 | 1,595 | 4 | ||||||||||||||||||
|
JPMorgan Securities brokers
(a)
|
402 | 362 | 11 | 402 | 362 | 11 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
% of customer assets in 4 & 5 Star Funds
(b)
|
43 | % | 45 | % | (4 | ) | 43 | % | 45 | % | (4 | ) | ||||||||||||
|
% of AUM in 1
st
and 2
nd
quartiles:
(c)
|
||||||||||||||||||||||||
|
1 year
|
58 | % | 62 | % | (6 | ) | 58 | % | 62 | % | (6 | ) | ||||||||||||
|
3 years
|
67 | % | 69 | % | (3 | ) | 67 | % | 69 | % | (3 | ) | ||||||||||||
|
5 years
|
78 | % | 80 | % | (3 | ) | 78 | % | 80 | % | (3 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Selected balance sheet data (period-end)
|
||||||||||||||||||||||||
|
Loans
|
$ | 38,744 | $ | 35,474 | 9 | $ | 38,744 | $ | 35,474 | 9 | ||||||||||||||
|
Equity
|
6,500 | 7,000 | (7 | ) | 6,500 | 7,000 | (7 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Selected balance sheet data (average)
|
||||||||||||||||||||||||
|
Total assets
|
$ | 63,426 | $ | 59,334 | 7 | $ | 62,978 | $ | 58,783 | 7 | ||||||||||||||
|
Loans
|
37,407 | 34,292 | 9 | 37,007 | 34,438 | 7 | ||||||||||||||||||
|
Deposits
|
86,453 | 75,355 | 15 | 83,573 | 78,534 | 6 | ||||||||||||||||||
|
Equity
|
6,500 | 7,000 | (7 | ) | 6,500 | 7,000 | (7 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Headcount
|
16,019 | 14,840 | 8 | 16,019 | 14,840 | 8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Credit data and quality statistics
|
||||||||||||||||||||||||
|
Net charge-offs
|
$ | 27 | $ | 46 | (41 | ) | $ | 55 | $ | 65 | (15 | ) | ||||||||||||
|
Nonperforming loans
|
309 | 313 | (1 | ) | 309 | 313 | (1 | ) | ||||||||||||||||
|
Allowance for credit losses:
|
||||||||||||||||||||||||
|
Allowance for loan losses
|
250 | 226 | 11 | 250 | 226 | 11 | ||||||||||||||||||
|
Allowance for lending-related commitments
|
3 | 4 | (25 | ) | 3 | 4 | (25 | ) | ||||||||||||||||
|
Total allowance for credit losses
|
253 | 230 | 10 | 253 | 230 | 10 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net charge-off rate
|
0.29 | % | 0.54 | % | 0.30 | % | 0.38 | % | ||||||||||||||||
|
Allowance for loan losses to period-end loans
|
0.65 | 0.64 | 0.65 | 0.64 | ||||||||||||||||||||
|
Allowance for loan losses to average loans
|
0.67 | 0.66 | 0.68 | 0.66 | ||||||||||||||||||||
|
Allowance for loan losses to nonperforming loans
|
81 | 72 | 81 | 72 | ||||||||||||||||||||
|
Nonperforming loans to period-end loans
|
0.80 | 0.88 | 0.80 | 0.88 | ||||||||||||||||||||
|
Nonperforming loans to average loans
|
0.83 | 0.91 | 0.83 | 0.91 | ||||||||||||||||||||
| (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 rankings sourced from Lipper for the U.S. and Taiwan; Morningstar for the U.K., Luxembourg, France and Hong Kong; and Nomura for Japan. |
49
Table of Contents
Assets under supervision
Assets under supervision were $1.6 trillion, an increase of $97 billion, or 6%, from the
prior year. Assets under management were $1.2 trillion, a decrease of $10 billion, or 1%, due to
outflows in liquidity products, predominantly offset by inflows in fixed income and equity products
and the effect of higher market levels. Custody, brokerage, administration and deposit balances
were $479 billion, up by $107 billion, or 29%, due to custody and brokerage inflows and the effect
of higher market levels.
| ASSETS UNDER SUPERVISION (a) (in billions) | ||||||||
| As of June 30, | 2010 | 2009 | ||||||
|
Assets by asset class
|
||||||||
|
Liquidity
|
$ | 489 | $ | 617 | ||||
|
Fixed income
|
259 | 194 | ||||||
|
Equities and multi-asset
|
322 | 264 | ||||||
|
Alternatives
|
91 | 96 | ||||||
|
Total assets under management
|
1,161 | 1,171 | ||||||
|
Custody/brokerage/administration/deposits
|
479 | 372 | ||||||
|
Total assets under supervision
|
$ | 1,640 | $ | 1,543 | ||||
|
|
||||||||
|
Assets by client segment
|
||||||||
|
|
||||||||
|
Institutional
|
$ | 634 | $ | 697 | ||||
|
Private Bank
|
177 | 179 | ||||||
|
Retail
|
269 | 216 | ||||||
|
Private Wealth Management
|
66 | 67 | ||||||
|
JPMorgan Securities
(b)
|
15 | 12 | ||||||
|
Total assets under management
|
$ | 1,161 | $ | 1,171 | ||||
|
|
||||||||
|
Institutional
|
$ | 636 | $ | 697 | ||||
|
Private Bank
|
469 | 390 | ||||||
|
Retail
|
351 | 289 | ||||||
|
Private Wealth Management
|
130 | 123 | ||||||
|
JPMorgan Securities
(b)
|
54 | 44 | ||||||
|
Total assets under supervision
|
$ | 1,640 | $ | 1,543 | ||||
|
|
||||||||
|
Assets by geographic region
|
||||||||
|
U.S./Canada
|
$ | 791 | $ | 814 | ||||
|
International
|
370 | 357 | ||||||
|
Total assets under management
|
$ | 1,161 | $ | 1,171 | ||||
|
U.S./Canada
|
$ | 1,151 | $ | 1,103 | ||||
|
International
|
489 | 440 | ||||||
|
Total assets under supervision
|
$ | 1,640 | $ | 1,543 | ||||
|
|
||||||||
|
Mutual fund assets by asset class
|
||||||||
|
Liquidity
|
$ | 440 | $ | 569 | ||||
|
Fixed income
|
79 | 48 | ||||||
|
Equities and multi-asset
|
133 | 111 | ||||||
|
Alternatives
|
8 | 9 | ||||||
|
Total mutual fund assets
|
$ | 660 | $ | 737 | ||||
| (a) | Excludes assets under management of American Century Companies, Inc., in which the Firm had a 42% ownership at both June 30, 2010 and 2009. | |
| (b) | JPMorgan Securities was formerly known as Bear Stearns Private Client Services prior to January 1, 2010. |
50
Table of Contents
| Assets under management rollforward | Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| (in billions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Beginning balance
|
$ | 1,219 | $ | 1,115 | $ | 1,249 | $ | 1,133 | ||||||||
|
Net asset flows:
|
||||||||||||||||
|
Liquidity
|
(29 | ) | (7 | ) | (91 | ) | 12 | |||||||||
|
Fixed income
|
12 | 8 | 28 | 9 | ||||||||||||
|
Equities, multi-asset and alternatives
|
1 | 2 | 7 | (3 | ) | |||||||||||
|
Market/performance/other impacts
|
(42 | ) | 53 | (32 | ) | 20 | ||||||||||
|
Total assets under management
|
$ | 1,161 | $ | 1,171 | $ | 1,161 | $ | 1,171 | ||||||||
|
|
||||||||||||||||
|
Assets under supervision rollforward
|
||||||||||||||||
|
Beginning balance
|
$ | 1,707 | $ | 1,464 | $ | 1,701 | $ | 1,496 | ||||||||
|
Net asset flows
|
(4 | ) | (9 | ) | (14 | ) | 16 | |||||||||
|
Market/performance/other impacts
|
(63 | ) | 88 | (47 | ) | 31 | ||||||||||
|
Total assets under supervision
|
$ | 1,640 | $ | 1,543 | $ | 1,640 | $ | 1,543 | ||||||||
CORPORATE / PRIVATE EQUITY
For a
discussion of the business profile of Corporate/Private Equity, see pages 74-75 of
JPMorgan Chase’s 2009 Annual Report.
| Selected income statement data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions, except headcount) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Principal transactions
|
$ | (69 | ) | $ | 1,243 | NM | $ | 478 | $ | (250 | ) | NM | ||||||||||||
|
Securities gains
|
990 | 366 | 170 | % | 1,600 | 580 | 176 | % | ||||||||||||||||
|
All other income
|
182 | (209 | ) | NM | 306 | (228 | ) | NM | ||||||||||||||||
|
Noninterest revenue
|
1,103 | 1,400 | (21 | ) | 2,384 | 102 | NM | |||||||||||||||||
|
Net interest income
|
747 | 865 | (14 | ) | 1,823 | 1,854 | (2 | ) | ||||||||||||||||
|
Total net revenue
(a)
|
1,850 | 2,265 | (18 | ) | 4,207 | 1,956 | 115 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
(2 | ) | 9 | NM | 15 | 9 | 67 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Noninterest expense
|
||||||||||||||||||||||||
|
Compensation expense
|
770 | 655 | 18 | 1,245 | 1,296 | (4 | ) | |||||||||||||||||
|
Noncompensation expense
(b)
|
1,468 | 1,319 | 11 | 4,509 | 1,664 | 171 | ||||||||||||||||||
|
Merger costs
|
— | 143 | NM | — | 348 | NM | ||||||||||||||||||
|
Subtotal
|
2,238 | 2,117 | 6 | 5,754 | 3,308 | 74 | ||||||||||||||||||
|
Net expense allocated to other businesses
|
(1,192 | ) | (1,253 | ) | 5 | (2,372 | ) | (2,532 | ) | 6 | ||||||||||||||
|
Total noninterest expense
|
1,046 | 864 | 21 | 3,382 | 776 | 336 | ||||||||||||||||||
|
Income before income tax expense
|
806 | 1,392 | (42 | ) | 810 | 1,171 | (31 | ) | ||||||||||||||||
|
Income tax expense/(benefit)
(c)
|
153 | 584 | (74 | ) | (71 | ) | 625 | NM | ||||||||||||||||
|
Net income
|
$ | 653 | $ | 808 | (19 | ) | $ | 881 | $ | 546 | 61 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Total net revenue
|
||||||||||||||||||||||||
|
Private equity
|
$ | 48 | $ | (1 | ) | NM | $ | 163 | $ | (450 | ) | NM | ||||||||||||
|
Corporate
|
1,802 | 2,266 | (20 | ) | 4,044 | 2,406 | 68 | |||||||||||||||||
|
Total net revenue
|
$ | 1,850 | $ | 2,265 | (18 | ) | $ | 4,207 | $ | 1,956 | 115 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net income/(loss)
|
||||||||||||||||||||||||
|
Private equity
|
$ | 11 | $ | (27 | ) | NM | $ | 66 | $ | (307 | ) | NM | ||||||||||||
|
Corporate
(d)
|
642 | 835 | (23 | ) | 815 | 853 | (4 | ) | ||||||||||||||||
|
Total net income
|
$ | 653 | $ | 808 | (19 | ) | $ | 881 | $ | 546 | 61 | |||||||||||||
|
Headcount
|
19,482 | 21,522 | (9 | ) | 19,482 | 21,522 | (9 | ) | ||||||||||||||||
| (a) | Total net revenue included tax-equivalent adjustments, predominantly due to tax-exempt income from municipal bond investments of $57 million and $44 million for the quarters ended June 30, 2010 and 2009, respectively, and $105 million and $70 million for the six months ended June 30, 2010 and 2009, respectively. | |
| (b) | The three and six months ended June 30, 2010, included litigation expense of $694 million and $3.0 billion, respectively. The second quarter of 2009 included a $675 million FDIC special assessment. | |
| (c) | The income tax expense in the first quarter of 2010 includes tax benefits recognized upon the resolution of tax audits. | |
| (d) | The 2009 periods 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 Bear Stearns Private Client Services (which was renamed to JPMorgan Securities effective January 2010) broker retention expense. |
51
Table of Contents
Quarterly results
Net income was $653 million, compared with net income of $808 million in the prior year.
Private Equity net income was $11 million, compared with a net loss of $27 million in the prior
year. Net revenue was $48 million, an increase of $49 million, driven by higher private equity
gains from more favorable market conditions and underlying performance on certain portfolio
investments. Noninterest expense was $32 million, a decrease of $10 million.
Corporate net income was $642 million, compared with $835 million in the prior year. Net revenue
was $1.8 billion, a decrease of $464 million, reflecting
lower trading revenue primarily from the absence of spread tightening
and increases in asset prices experienced in the second
quarter of 2009; the decrease was offset partially by higher
securities gains, from the repositioning of the investment portfolio. Noninterest expense was $1.0 billion,
up from $822 million in the prior year, largely due to higher litigation expense.
Year-to-date results
Net income was $881 million, compared with $546 million in the prior year.
Private Equity net income was $66 million, compared with a net loss of $307 million in the prior
year. Net revenue was $163 million, an increase of $613 million, driven by higher private equity
gains from more favorable market conditions and underlying performance on certain portfolio
investments. Noninterest expense was $62 million, an increase of $31 million.
Net income for Corporate was $815 million compared with $853 million. Net revenue was $4.0 billion
compared with $2.4 billion reflecting elevated levels of securities gains from the investment
portfolio. Noninterest expense was $3.3 billion compared with $744 million, reflecting an increase
of litigation reserves. Prior year included a $675 million FDIC special assessment.
| Treasury and Chief Investment Office (“CIO”) | ||||||||||||||||||||||||
| Selected income statement and | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| balance sheet data | ||||||||||||||||||||||||
| (in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Securities gains
(a)
|
$ | 989 | $ | 374 | 164 | % | $ | 1,599 | $ | 588 | 172 | % | ||||||||||||
|
Investment securities portfolio (average)
|
320,578 | 336,263 | (5 | ) | 325,553 | 301,219 | 8 | |||||||||||||||||
|
Investment securities portfolio (ending)
|
305,288 | 326,414 | (6 | ) | 305,288 | 326,414 | (6 | ) | ||||||||||||||||
|
Mortgage loans (average)
|
8,539 | 7,228 | 18 | 8,352 | 7,219 | 16 | ||||||||||||||||||
|
Mortgage loans (ending)
|
8,900 | 7,368 | 21 | 8,900 | 7,368 | 21 | ||||||||||||||||||
| (a) | Reflects repositioning of the Corporate investment securities portfolio and excludes gains/losses on securities used to manage risk associated with MSRs. |
For
further information on the investment portfolio, see Note 3 and Note 11 on pages 110-124
and 139-144, respectively, of this Form 10-Q. For further information on CIO VaR and the Firm’s
earnings-at-risk, see the Market Risk Management section on pages 95-98 of this Form 10-Q.
| Selected income statement and balance sheet data | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| (in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Private equity gains/(losses)
|
||||||||||||||||||||||||
|
Realized gains
|
$ | 78 | $ | 25 | 212 | % | $ | 191 | $ | 40 | 378 | % | ||||||||||||
|
Unrealized gains/(losses)
(a)
|
(7 | ) | 16 | NM | (82 | ) | (393 | ) | 79 | |||||||||||||||
|
Total direct investments
|
71 | 41 | 73 | 109 | (353 | ) | NM | |||||||||||||||||
|
Third-party fund investments
|
4 | (61 | ) | NM | 102 | (129 | ) | NM | ||||||||||||||||
|
Total private equity gains/(losses)
(b)
|
$ | 75 | $ | (20 | ) | NM | $ | 211 | $ | (482 | ) | NM | ||||||||||||
52
Table of Contents
| Private equity portfolio information (c) | ||||||||||||
| Direct investments | ||||||||||||
| (in millions) | June 30, 2010 | December 31, 2009 | Change | |||||||||
|
Publicly held securities
|
||||||||||||
|
Carrying value
|
$ | 873 | $ | 762 | 15 | % | ||||||
|
Cost
|
901 | 743 | 21 | |||||||||
|
Quoted public value
|
974 | 791 | 23 | |||||||||
|
|
||||||||||||
|
Privately held direct securities
|
||||||||||||
|
Carrying value
|
5,464 | 5,104 | 7 | |||||||||
|
Cost
|
6,507 | 5,959 | 9 | |||||||||
|
|
||||||||||||
|
Third-party fund investments
(d)
|
||||||||||||
|
Carrying value
|
1,782 | 1,459 | 22 | |||||||||
|
Cost
|
2,315 | 2,079 | 11 | |||||||||
|
Total private equity portfolio — Carrying value
|
$ | 8,119 | $ | 7,325 | 11 | |||||||
|
Total private equity portfolio — Cost
|
$ | 9,723 | $ | 8,781 | 11 | |||||||
| (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 110-124 of this Form 10-Q. | |
| (d) | Unfunded commitments to third-party private equity funds were $1.2 billion and $1.5 billion at June 30, 2010, and December 31, 2009, respectively. |
The carrying value of the private equity portfolio at June 30, 2010, and December 31, 2009,
was $8.1 billion and $7.3 billion, respectively. The increase in the portfolio during the first
half of the year is primarily due to approximately $1.0 billion in new and follow-on investments,
partially offset by unrealized losses on markdowns. The portfolio represented 6.6% and 6.3% of the
Firm’s stockholders’ equity less goodwill at June 30, 2010, and December 31, 2009, respectively.
BALANCE SHEET ANALYSIS
| Selected Consolidated Balance Sheets data (in millions) | June 30, 2010 | December 31, 2009 | ||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash and due from banks
|
$ | 32,806 | $ | 26,206 | ||||||||||||||||||||
|
Deposits with banks
|
39,430 | 63,230 | ||||||||||||||||||||||
|
Federal funds sold and securities purchased under resale agreements
|
199,024 | 195,404 | ||||||||||||||||||||||
|
Securities borrowed
|
122,289 | 119,630 | ||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
317,293 | 330,918 | ||||||||||||||||||||||
|
Derivative receivables
|
80,215 | 80,210 | ||||||||||||||||||||||
|
Securities
|
312,013 | 360,390 | ||||||||||||||||||||||
|
Loans
|
699,483 | 633,458 | ||||||||||||||||||||||
|
Allowance for loan losses
|
(35,836 | ) | (31,602 | ) | ||||||||||||||||||||
|
Loans, net of allowance for loan losses
|
663,647 | 601,856 | ||||||||||||||||||||||
|
Accrued interest and accounts receivable
|
61,295 | 67,427 | ||||||||||||||||||||||
|
Premises and equipment
|
11,267 | 11,118 | ||||||||||||||||||||||
|
Goodwill
|
48,320 | 48,357 | ||||||||||||||||||||||
|
Mortgage servicing rights
|
11,853 | 15,531 | ||||||||||||||||||||||
|
Other intangible assets
|
4,178 | 4,621 | ||||||||||||||||||||||
|
Other assets
|
110,389 | 107,091 | ||||||||||||||||||||||
|
Total assets
|
$ | 2,014,019 | $ | 2,031,989 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits
|
$ | 887,805 | $ | 938,367 | ||||||||||||||||||||
|
Federal funds purchased and securities loaned or sold under
repurchase agreements
|
237,455 | 261,413 | ||||||||||||||||||||||
|
Commercial paper
|
41,082 | 41,794 | ||||||||||||||||||||||
|
Other borrowed funds
|
44,431 | 55,740 | ||||||||||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
74,745 | 64,946 | ||||||||||||||||||||||
|
Derivative payables
|
60,137 | 60,125 | ||||||||||||||||||||||
|
Accounts payable and other liabilities
|
160,478 | 162,696 | ||||||||||||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
88,148 | 15,225 | ||||||||||||||||||||||
|
Long-term debt
|
248,618 | 266,318 | ||||||||||||||||||||||
|
Total liabilities
|
1,842,899 | 1,866,624 | ||||||||||||||||||||||
|
Stockholders’ equity
|
171,120 | 165,365 | ||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,014,019 | $ | 2,031,989 | ||||||||||||||||||||
53
Table of Contents
Consolidated Balance Sheets overview
Total assets were $2.0 trillion, down modestly from December 31, 2009. Total assets decreased,
primarily as a result of repositioning the Firm’s securities portfolio in response to changes in
the interest rate environment, and reducing deposits with banks as market stress gradually eased
since the end of 2009. The decrease was partially offset by an increase in loans, primarily due to
the January 1, 2010, adoption of new consolidation guidance related to VIEs.
Total liabilities were $1.8 trillion, down modestly. The decrease in liabilities was a result of
customer deposits declining primarily due to lower short-term funding needs. Partially offsetting
these liability decreases was an increase in beneficial interests issued by consolidated VIEs,
which was also a result of the adoption of the new consolidation guidance related to VIEs.
Stockholders’ equity was $171.1 billion, an increase of $5.8 billion, or 3%, from the prior
year-end. Stockholders’ equity increased driven predominantly by growth in net income and a net
increase in accumulated other comprehensive income (“AOCI”); these were partially offset by the
cumulative effect of a change in accounting principles as a result of the adoption of the new
consolidation guidance related to VIEs.
The following is a discussion of the significant changes in the specific line captions of the
Consolidated Balance Sheets from December 31, 2009. For a description of the specific line captions
discussed below, see pages 76-78 of JPMorgan Chase’s 2009 Annual Report.
Deposits with banks; federal funds sold and securities purchased under resale agreements;
securities borrowed
Deposits with banks decreased, largely due to lower deposits with the Federal Reserve Bank and
lower interbank lending, as market stress gradually eased since the end of 2009. Securities
purchased under resale agreements increased, predominantly due to higher financing volume in IB,
offset partially by a decline in Corporate due to a reduced level of funds to be invested on a
short-term basis. For additional information on the Firm’s Liquidity Risk Management, see pages
65-67 of this Form 10-Q.
Trading assets and liabilities – debt and equity instruments
Trading assets — debt and equity instruments decreased, primarily reflecting lower client flows as
a result of unfavorable financial markets in the second quarter of 2010. Trading liabilities —
debt and equity instruments increased, reflecting an increase in business activity in markets
outside of the U.S. (mainly Asia Pacific) in the first quarter of 2010; this was partially offset
by unfavorable financial markets in the second quarter of 2010. For additional information, refer
to Note 3 on pages 110-124 of this Form 10-Q.
Trading
assets and liabilities – derivative receivables and payables
Derivative receivables and payables were flat and reflected the effect of declining interest rates
and increased levels of foreign exchange-rate volatility, offset by declining equity valuations and
lower energy and base metal commodity prices. For additional information, refer to Derivative
contracts on pages 75-77, and Note 3 and Note 5 on pages 110-124 and
128-136, respectively, of
this Form 10-Q.
Securities
Securities decreased, largely due to repositioning of the Firm’s securities portfolio in response
to changes in the interest rate environment and to rebalance issuer exposures. The repositioning
reduced U.S. government agency securities and increased non-U.S. mortgage-backed securities. The
adoption of the new consolidation guidance related to VIEs, which resulted in the elimination of
retained available-for-sale (“AFS”) securities issued by Firm-sponsored credit card securitization
trusts, also contributed to the decrease. For a more detailed discussion of the adoption of the new
consolidation guidance, see Note 1 on pages 108-109 of this Form 10-Q. For additional information
related to securities, refer to the Corporate/Private Equity segment
on pages 51-53, and Note 3
and Note 11 on pages 110-124 and 139-144, respectively, of this Form 10-Q.
Loans and allowance for loan losses
Loans increased as a result of the new consolidation guidance related to VIEs that required the
Firm to consolidate the assets and liabilities of its Firm-sponsored credit card securitization
trusts, Firm-administered multi-seller conduits and certain other consumer securitization entities,
primarily mortgage-related. Excluding the impact of the adoption of the new accounting guidance,
loans decreased due to the Washington Mutual credit card portfolio runoff; the decline in
lower-yielding promotional credit card balances; continued runoff of the residential real estate
portfolios; net repayments and loan sales in IB; and net charge-offs. Client demand, in general,
remains low.
54
Table of Contents
The allowance for loan losses increased, largely due to the impact of new consolidation guidance
related to VIEs that required the Firm to consolidate the assets and liabilities of its
Firm-sponsored credit card securitization trusts. Excluding the effect of the new consolidation
guidance, the allowance decreased, as a result of reductions of $2.0 billion and $1.2 billion in
the wholesale and consumer allowances, respectively. The wholesale allowance decreased, due
primarily to net repayments, loan sales, refinements to credit loss estimates, and improvement in
the credit quality of the commercial and industrial portfolio. The consumer allowance decreased, as
a result of a $2.5 billion reduction for CS, reflecting lower estimated losses, primarily related
to improved delinquency trends, as well as lower levels of outstandings; these were partially
offset by a $1.2 billion increase in the first quarter in RFS related to further estimated
deterioration in the Washington Mutual prime and option ARM purchased credit-impaired pools. For a
more detailed discussion of the adoption of the new consolidated guidance, see Notes 1, 14 and 15
on pages 108-109, 150-151 and 151-163, respectively, of this Form 10-Q. For a more detailed
discussion of the loan portfolio and the allowance for loan losses, refer to Credit Portfolio on
pages 68-94 and Notes 3, 4, 13 and 14 on pages 110-124, 125-127, 145-150 and 150-151,
respectively, of this Form 10-Q.
Accrued interest and accounts receivable
Accrued interest and accounts receivable decreased, due to the elimination of retained
securitization interests upon the adoption of the new consolidation guidance that resulted in the
consolidation of Firm-sponsored credit card securitization trusts. This decrease was offset
partially by higher customer receivables in IB’s Prime Services business due to increased client
activity. For a more detailed discussion of the adoption of the new consolidated guidance, see
Notes 1 and 15 on pages 108-109 and 151-163, respectively, of this Form 10-Q.
Mortgage servicing rights
MSRs decreased, primarily due to a significant decline in market interest rates during the first
six months of 2010, as well as servicing portfolio runoff. The decrease was partially offset by an
increase related to sales in RFS of originated loans for which servicing rights were retained. For
additional information on MSRs, see Note 16 on pages 165-166 of this Form 10-Q.
Other intangible assets
Other intangible assets decreased, primarily as a result of amortization expense. For additional
information on other intangible assets, see Note 16 on pages 164-167 of this Form 10-Q.
Deposits
Deposits decreased, reflecting a decline associated with wholesale funding activities due to the
Firm’s lower funding needs, and the continued normalization of TSS deposit levels from year-end
inflows. These factors were offset partially by net inflows from existing customers and new
business in AM, CB and RFS. For more information on deposits, refer to the RFS and AM segment
discussions on pages 25-35 and 47-51, respectively; the Liquidity Risk Management discussion on
pages 65-67; and Note 17 on page 167 of this Form 10-Q. For more information on wholesale
liability balances, including deposits, refer to the CB and TSS segment discussions on pages 41-43
and 44-46, respectively, of this Form 10-Q.
Federal funds purchased and securities loaned or sold under repurchase agreements
Securities sold under repurchase agreements decreased, largely as a result of a decline in funding
requirements associated with lower AFS securities in Corporate and reduced short-term funding
requirements in IB. For additional information on the Firm’s Liquidity Risk Management, see pages
65-67 of this Form 10-Q.
Commercial paper and other borrowed funds
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 65-67, and Note 18 on page 167 of
this Form 10-Q.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs increased, predominantly due to the adoption of
the new consolidation guidance related to VIEs, offset modestly by maturities of $13.2 billion
related to Firm-sponsored credit card securitization trusts. For additional information on
Firm-administered VIEs and loan securitization trusts, see Note 15 on pages 151-163 of this Form
10-Q.
Long-term debt
Long-term debt decreased, predominantly due to maturities and redemptions, partially offset by new
issuances. For additional information on the Firm’s long-term debt activities, see the Liquidity
Risk Management discussion on pages 65-67 of this Form 10-Q.
55
Table of Contents
Stockholders’ equity
Total stockholders’ equity increased, as a result of growth in net income for the first six months
of 2010; a net increase in AOCI, due primarily to the narrowing of spreads on mortgage-backed
securities and collateralized loan obligations, offset partially by declines in non-U.S. government
debt securities and realization of gains due to portfolio repositioning; and net issuances under
the Firm’s employee stock-based compensation plans. The increase in stockholders’ equity was
partially offset by the impact of the adoption of the new consolidation guidance related to VIEs
that 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 held in credit card securitization trusts
that were consolidated at the adoption date. Also partially offsetting the increase were the
purchase of the remaining interest in a consolidated subsidiary from noncontrolling shareholders;
the declaration of cash dividends on preferred and common stock; and stock repurchases. For a more
detailed discussion of the adoption of new consolidated guidance, see Notes 1 and 15 on pages
108-109 and 151-163, respectively, of this Form 10-Q.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
JPMorgan Chase is involved with several types of off-balance sheet arrangements, including
through special-purpose entities (“SPEs”), which are a type of VIE, and through lending-related
financial instruments (e.g., commitments and guarantees). For further discussion of contractual
cash obligations, see Off-Balance Sheet Arrangements and Contractual Cash Obligations on pages
78-81 of JPMorgan Chase’s 2009 Annual Report.
Special-purpose entities
SPEs are the most common type of VIE, used in securitization transactions
in order to isolate certain assets and distribute the cash flows from those assets to investors. As
a result of new accounting guidance, certain VIEs were consolidated on to the Firm’s Consolidated
Balance Sheets effective January 1, 2010. Nevertheless, SPEs continue to be 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. 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. For further information on the Firm’s involvement with SPEs, see Note 1 on pages
108-109 and Note 15 on pages 151-163 of this Form 10-Q; and Note 1 on pages 142-143, Note 15 on
pages 198-205 and Note 16 on pages 206-214 of JPMorgan Chase’s 2009 Annual Report.
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 $36.1 billion and $34.2 billion at June 30, 2010, and December 31, 2009, respectively.
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., income from acting as administrator, structurer or liquidity provider). It does not
include MTM 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 | Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Multi-seller conduits
|
$ | 60 | $ | 136 | $ | 127 | $ | 256 | ||||||||
|
Investor intermediation
|
12 | 8 | 25 | 14 | ||||||||||||
|
Other securitization entities
(a)
|
544 | 617 | 1,088 | 1,254 | ||||||||||||
|
Total
|
$ | 616 | $ | 761 | $ | 1,240 | $ | 1,524 | ||||||||
| (a) | Excludes servicing revenue from loans sold to and securitized by third parties. |
56
Table of Contents
Loan modifications
The Firm modifies loans that it services, including loans 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. For both the Firm’s on-balance sheet loans and loans serviced for
others, approximately 121,000 and 281,000 mortgage modifications had been offered to borrowers
during the three and six months ended June 30, 2010, respectively; and more than 59,000 and 123,000
permanent mortgage modifications were approved during the three and six months ended June 30, 2010,
respectively. See Consumer Credit Portfolio on pages 79-91 of this Form 10-Q for more details on
these loan modifications.
Off-balance sheet lending-related financial instruments, guarantees and other commitments
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 maximum possible credit risk should the counterparty draw upon the commitment or the
Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently
fail to perform according to the terms of the contract. These commitments and guarantees often
expire without being drawn, and even higher proportions expire without a default. 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 77 and Note 22 on pages 170-174 of this Form 10-Q; and Lending-related commitments on page
105 and Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual Report.
The following table presents, as of June 30, 2010, the amounts by contractual maturity of
off-balance sheet lending-related financial instruments, guarantees and other commitments. The
amounts in the table 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 would be utilized at the same time. 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. The table excludes certain commitments and guarantees
that do not have a contractual maturity date (e.g., loan sale and securitization-related
indemnifications). For further discussion, see discussion of repurchase liability below and Note 22
on pages 170-174 of this Form 10-Q, and Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual
Report.
57
Table of Contents
Off—balance sheet lending-related financial instruments, guarantees and other commitments
| June 30, 2010 | Dec. 31, 2009 | |||||||||||||||||||||||
| Due after | ||||||||||||||||||||||||
| Due after | 3 years | |||||||||||||||||||||||
| By remaining maturity | Due in 1 year | 1 year through | through | Due after | ||||||||||||||||||||
| (in millions) | or less | 3 years | 5 years | 5 years | Total | Total | ||||||||||||||||||
|
Lending-related
|
||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
Home equity — senior lien
|
$ | 436 | $ | 2,214 | $ | 6,076 | $ | 9,594 | $ | 18,320 | $ | 19,246 | ||||||||||||
|
Home equity — junior lien
|
788 | 5,453 | 11,944 | 15,800 | 33,985 | 37,231 | ||||||||||||||||||
|
Prime mortgage
|
958 | — | — | — | 958 | 1,654 | ||||||||||||||||||
|
Subprime mortgage
|
— | — | — | — | — | — | ||||||||||||||||||
|
Option ARMs
|
— | — | — | — | — | — | ||||||||||||||||||
|
Auto loans
|
5,852 | 172 | 3 | 2 | 6,029 | 5,467 | ||||||||||||||||||
|
Credit card
|
550,442 | — | — | — | 550,442 | 569,113 | ||||||||||||||||||
|
All other loans
|
8,828 | 257 | 102 | 1,020 | 10,207 | 11,229 | ||||||||||||||||||
|
Total consumer
|
$ | 567,304 | $ | 8,096 | $ | 18,125 | $ | 26,416 | $ | 619,941 | $ | 643,940 | ||||||||||||
|
Wholesale:
|
||||||||||||||||||||||||
|
Other unfunded commitments to extend
credit
(a)(b)
|
60,894 | 102,796 | 20,677 | 3,726 | 188,093 | 192,145 | ||||||||||||||||||
|
Asset purchase agreements
(b)
|
— | — | — | — | — | 22,685 | ||||||||||||||||||
|
Standby letters of credit and other financial
guarantees
(a)(c)(d)
|
26,882 | 47,226 | 13,058 | 4,001 | 91,167 | 91,485 | ||||||||||||||||||
|
Unused advised lines of credit
|
34,192 | 4,441 | 82 | 201 | 38,916 | 35,673 | ||||||||||||||||||
|
Other letters of credit
(a)(d)
|
3,700 | 2,158 | 518 | — | 6,376 | 5,167 | ||||||||||||||||||
|
Total wholesale
|
125,668 | 156,621 | 34,335 | 7,928 | 324,552 | 347,155 | ||||||||||||||||||
|
Total lending-related
|
$ | 692,972 | $ | 164,717 | $ | 52,460 | $ | 34,344 | $ | 944,493 | $ | 991,095 | ||||||||||||
|
Other guarantees and commitments
|
||||||||||||||||||||||||
|
Securities lending guarantees
(e)
|
$ | 161,514 | $ | — | $ | — | $ | — | $ | 161,514 | $ | 170,777 | ||||||||||||
|
Derivatives qualifying as guarantees
(f)
|
8,642 | 871 | 41,875 | 27,871 | 79,259 | 87,191 | ||||||||||||||||||
|
Equity investment commitments
(g)
|
1,231 | 15 | 30 | 931 | 2,207 | 2,374 | ||||||||||||||||||
|
Building purchase commitment
(h)
|
670 | — | — | — | 670 | 670 | ||||||||||||||||||
| (a) | At June 30, 2010, and December 31, 2009, represents the contractual amount net of risk participations totaling $609 million and $643 million, respectively, for other unfunded commitments to extend credit; $23.4 billion and $24.6 billion, respectively, for standby letters of credit and other financial guarantees; and $828 million 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 new consolidation 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) | At June 30, 2010, and December 31, 2009, includes unissued standby letters of credit commitments of $39.4 billion and $38.4 billion, respectively. | |
| (d) | At June 30, 2010, and December 31, 2009, JPMorgan Chase held collateral relating to $34.7 billion and $31.5 billion, respectively, of standby letters of credit; and $2.7 billion and $1.3 billion, respectively, of other letters of credit. | |
| (e) | At June 30, 2010, and December 31, 2009, collateral held by the Firm in support of securities lending indemnification agreements totaled $164.5 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. | |
| (f) | Represents notional amounts of derivatives qualifying as guarantees. | |
| (g) | At June 30, 2010, and December 31, 2009, includes unfunded commitments to third-party private equity funds of $1.2 billion and $1.5 billion, respectively. Also includes unfunded commitments for other equity investments of $981 million and $897 million, respectively. These commitments include $1.2 billion and $1.5 billion, respectively, related to investments that are generally fair valued at net asset value as discussed in Note 3 on pages 110-124 of this Form 10-Q. | |
| (h) | For further information refer to Building purchase commitment in Note 22 on page 174 of this Form 10-Q. |
Repurchase liability
The Firm conducts a significant portion of its loan sale and securitization activities with
Fannie Mae and Freddie Mac (the “GSEs”). In connection with these and other securitization
transactions, the Firm makes certain representations and warranties that the loans sold meet
certain requirements (e.g., type of collateral, underwriting standards, validity of borrower representations in connection with the loan, primary mortgage insurance is in force for any mortgage
loan with a loan-to-value ratio (“LTV”) greater than 80%, use of the GSEs’ standard legal
documentation). The Firm may be required to repurchase the loans and/or indemnify the GSEs or other
purchasers against losses due to material breaches of these representations and warranties. For
additional information about the Firm’s loan sale and securitization-related indemnifications,
including a description of how the Firm estimates its repurchase liability, see Note 22 on pages
170—174 of this Form 10-Q, and Note 31 on pages 230—234 of JPMorgan Chase’s 2009 Annual Report.
The repurchase liability recorded by the Firm is estimated based on several factors, including the
level of current and estimated probable future repurchase demands made by purchasers, the ability
of the Firm to cure the defects identified
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in the repurchase demands (considering the types of those defects), and the severity of loss
upon repurchase or foreclosure.
The Firm estimates probable future repurchase demands in part by considering the time period over
which the GSEs or other purchasers typically demand repurchase. Although the GSEs or other
purchasers may demand repurchase at any time, the majority of repurchase demands have historically
related to loans that became delinquent in the first 24 to 36 months following origination of the
mortgage loan. Currently, repurchase demands predominantly relate to the 2006 to 2008 vintages.
During the second quarter of 2010, the Firm experienced a slight increase in repurchase
demands across most vintages, including its older vintages. The Firm has considered this
development in estimating its repurchase liability. To date, demands against the 2009 vintage have
not been significant. The Firm attributes the comparatively favorable performance of the 2009
vintage to the tightened underwriting and loan qualification standards that were implemented in
2007 and 2008.
The primary reasons for repurchase demands relate to documents missing from the mortgage file.
Other factors that give rise to repurchase demands include alleged misrepresentations relating to: (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 and
mortgage insurance rescissions are other reasons for repurchase demands. While the Firm has
demonstrated an ability to more frequently cure certain defects (for example, missing documents)
than others, 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.
Beginning in 2009, the mortgage insurers have more frequently rescinded mortgage insurance
coverage. Accordingly, rescission of mortgage insurance has become a more significant cause of
repurchase demands from the GSEs. While the Firm actively reviews all rescission notices from mortgage
insurers and appeals them when appropriate, there can be no assurance regarding the success of the Firm’s appeals. The Firm had unresolved mortgage insurance rescission
notices on loans with an unpaid principal balance of $1.7 billion and $1.5 billion at June 30,
2010, and December 31, 2009, respectively.
As soon as practicable after receiving a repurchase demand from one of the GSEs (whether due to
mortgage insurance rescission or alleged breach of another representation and warranty), the Firm
evaluates the request and takes appropriate actions based on the nature of the repurchase demand.
Loan-level negotiations 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. The unpaid
principal balance of loans subject to unresolved repurchase demands received from the GSEs was $1.4
billion and $1.3 billion at June 30, 2010, and December 31, 2009, respectively. Because the GSEs
may make repurchase demands based on mortgage insurance rescission notices that remain unresolved,
certain loans are the subject of both unresolved mortgage insurance rescission
notices and unresolved repurchase demands. This overlapping population included approximately $220 million and
$175 million of unpaid principal balances at June 30, 2010, and December 31, 2009, respectively.
The estimated loss resulting from the unresolved mortgage insurance rescission notices and
repurchase demands from GSEs, after consideration of the Firm’s ability to cure the identified
defects, is considered in the Firm’s recorded repurchase liability. In addition the Firm’s recorded
repurchase liability considers projected future demands that have not been presented. However, the repurchase liability recorded by the Firm incorporates a number of estimates requiring management
judgment, such as the amount of probable future demands from purchasers (which is in part dependent
on the amount of rescissions by mortgage insurers), the ability of the Firm to cure identified
defects, the severity of loss upon repurchase or foreclosure and recoveries from third parties.
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 and requires the application
of judgment. An assumed simultaneous 10% adverse change in the assumptions noted above would
increase the repurchase liability as of June 30, 2010, by approximately $1.2 billion. This
estimate is based upon a hypothetical scenario and is intended to provide an indication of the
impact on the estimated repurchase liability of significant and simultaneous adverse changes in
the key underlying assumptions. Actual changes in these assumptions may not occur at the
same time or to the same degree, or improvement in one factor may offset deterioration in another.
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The following table summarizes the change in the repurchase liability for each of the periods
presented.
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Repurchase liability at beginning of period
|
$ | 1,982 | $ | 662 | $ | 1,705 | $ | 1,093 | |||||||||
|
Realized losses
(a)
|
(317 | ) | (173 | ) | (563 | ) | (887) (b) | ||||||||||
|
Provision for repurchase losses
|
667 | 267 | 1,190 | 550 | |||||||||||||
|
Repurchase liability at end of period
|
$ | 2,332 | $ | 756 | $ | 2,332 | $ | 756 | |||||||||
| (a) | Includes principal losses and accrued interest on repurchased loans, “make-whole” settlements, settlements with claimants, and certain related expenses. | |
| (b) | Primarily related to the Firm’s settlement of claims for certain loans originated and sold by Washington Mutual. The unpaid principal balance of loans related to this settlement is not included in the first table below, which summarizes the unpaid principal balance of repurchased loans. |
The Firm also sells loans in securitization transactions with Ginnie Mae; these loans are
typically insured by the Federal Housing Administration (“FHA”), 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. Substantially all 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.
The following table summarizes the total unpaid principal balance of repurchases for the periods
indicated.
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||
| (in millions) (a) | 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Ginnie Mae
(b)
|
$ | 3,230 | $ | 55 | $ | 5,240 | $ | 2,114 | |||||||||
|
GSEs and other
(c)
|
515 | 350 | 837 | 498 | |||||||||||||
|
Total
|
$ | 3,745 | $ | 405 | $ | 6,077 | $ | 2,612 | |||||||||
| (a) | Excludes mortgage insurers. While the rescission of mortgage insurance may result in a breach of representations and warranties, which may 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 GSEs. |
In lieu of repurchasing loans, the Firm may reimburse the purchaser for a realized loss on a
liquidated property. The Firm has recognized these “make-whole” settlements for the periods
indicated.
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
GSEs and other
(a)
|
$ | 150 | $ | 69 | $ | 255 | $ | 125 | |||||||||
| (a) | Predominantly all of the settlements related to GSEs. |
Nonperforming loans held-for-investment included $293 million and $218 million at June 30,
2010, and December 31, 2009, respectively, of loans repurchased due to breaches of representations
and warranties.
CAPITAL MANAGEMENT
The following discussion of JPMorgan Chase’s capital management highlights developments since
December 31, 2009, and should be read in conjunction with
Capital Management on pages 82-85 of
JPMorgan Chase’s 2009 Annual Report.
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. |
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. As of June 30, 2010, and December 31, 2009,
JPMorgan Chase and all of its banking subsidiaries were well-capitalized and met all capital
requirements to which each was subject.
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The following table presents the risk-based capital ratios for JPMorgan Chase and its significant
banking subsidiaries at June 30, 2010, and December 31, 2009.
| JPMorgan Chase & Co. (e) | JPMorgan Chase Bank, N.A. (e) | Chase Bank USA, N.A. (e) | ||||||||||||||||||||||||||||||
| Well- | Minimum | |||||||||||||||||||||||||||||||
| (in millions, | June 30, | Dec. 31, | June 30, | Dec. 31, | June 30, | Dec. 31, | capitalized | capital | ||||||||||||||||||||||||
| except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ratios (g) | ratios (g) | ||||||||||||||||||||||||
|
Regulatory capital
|
||||||||||||||||||||||||||||||||
|
Tier 1
(a)
|
$ | 137,077 | $ | 132,971 | $ | 97,549 | $ | 96,372 | $ | 11,584 | $ | 15,534 | ||||||||||||||||||||
|
Total
|
178,293 | 177,073 | 135,654 | 136,646 | 15,418 | 19,198 | ||||||||||||||||||||||||||
|
Tier 1 common
(b)
|
108,175 | 105,284 | 96,795 | 95,353 | 11,584 | 15,534 | ||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Risk-weighted
(c)
|
1,131,030 | (f) | 1,198,006 | 928,740 | 1,011,995 | 125,282 | 114,693 | |||||||||||||||||||||||||
|
Adjusted average
(d)
|
1,983,839 | (f) | 1,933,767 | 1,600,868 | 1,609,081 | 130,911 | 74,087 | |||||||||||||||||||||||||
|
Capital ratios
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital
(a)
|
12.1% | (f) | 11.1 | % | 10.5 | % | 9.5 | % | 9.2 | % | 13.5 | % | 6.0 | % | 4.0 | % | ||||||||||||||||
|
Total capital
|
15.8 | 14.8 | 14.6 | 13.5 | 12.3 | 16.7 | 10.0 | 8.0 | ||||||||||||||||||||||||
|
Tier 1 leverage
|
6.9 | 6.9 | 6.1 | 6.0 | 8.8 | 21.0 | 5.0 | (h) | 3.0 | (i) | ||||||||||||||||||||||
|
Tier 1 common
(b)
|
9.6 | 8.8 | 10.4 | 9.4 | 9.2 | 13.5 | NA | NA | ||||||||||||||||||||||||
| (a) | At June 30, 2010, for JPMorgan Chase and JPMorgan Chase Bank, N.A., trust preferred capital debt securities were $20.7 billion and $600 million, respectively. If these securities were excluded from the calculation at June 30, 2010, Tier 1 capital would be $116.4 billion and $96.9 billion, respectively, and the Tier 1 capital ratio would be 10.3% and 10.4%, respectively. At June 30, 2010, Chase Bank USA, N.A. had no trust preferred capital debt securities. | |
| (b) | Tier 1 common ratio is Tier 1 common divided by risk-weighted assets. Tier 1 common is defined as Tier 1 capital less elements of 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. | |
| (c) | Includes off-balance sheet risk-weighted assets at June 30, 2010, of $269.4 billion, $261.2 billion and $32 million, respectively, for JPMorgan Chase, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., and at December 31, 2009, of $367.4 billion, $312.3 billion and $49.9 billion, respectively. Risk-weighted assets are calculated in accordance with U.S. federal regulatory capital standards. | |
| (d) | 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. | |
| (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 15 on pages 151-163 of this Form 10-Q 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 of $730 million and $812 million at June 30, 2010, and December 31,
2009, respectively. Additionally, the Firm had deferred tax liabilities resulting from
tax-deductible goodwill of $1.9 billion and $1.7 billion at June 30, 2010, and December 31,
2009, respectively.
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A reconciliation of the Firm’s Total stockholders’ equity to Tier 1 common, Tier 1 capital and
Total qualifying capital is presented in the table below:
| Risk-based capital components and assets | June 30, | December 31, | ||||||
| (in millions) | 2010 | 2009 | ||||||
|
Tier 1 capital
|
||||||||
|
Tier 1 common:
|
||||||||
|
Total stockholders’ equity
|
$ | 171,120 | $ | 165,365 | ||||
|
Less: Preferred stock
|
8,152 | 8,152 | ||||||
|
Common stockholders’ equity
|
162,968 | 157,213 | ||||||
|
Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1
common equity
|
(2,444 | ) | 75 | |||||
|
Less: Goodwill
(a)
|
46,466 | 46,630 | ||||||
|
Fair value DVA on derivative and structured note liabilities related to the Firm’s
credit quality
|
1,558 | 912 | ||||||
|
Investments in certain subsidiaries and other
|
1,050 | 802 | ||||||
|
Other intangible assets
|
3,275 | 3,660 | ||||||
|
Tier 1 common
|
108,175 | 105,284 | ||||||
|
Preferred stock
|
8,152 | 8,152 | ||||||
|
Qualifying hybrid securities and noncontrolling interests
(b)
|
20,750 | 19,535 | ||||||
|
Total Tier 1 capital
|
137,077 | 132,971 | ||||||
|
Tier 2 capital
|
||||||||
|
Long-term debt and other instruments qualifying as Tier 2
|
26,984 | 28,977 | ||||||
|
Qualifying allowance for credit losses
|
14,474 | 15,296 | ||||||
|
Adjustment for investments in certain subsidiaries and other
|
(242 | ) | (171 | ) | ||||
|
Total Tier 2 capital
|
41,216 | 44,102 | ||||||
|
Total qualifying capital
|
$ | 178,293 | $ | 177,073 | ||||
|
Risk-weighted assets
|
$ | 1,131,030 | $ | 1,198,006 | ||||
|
Total adjusted average assets
|
$ | 1,983,839 | $ | 1,933,767 | ||||
| (a) | Goodwill is net of any associated deferred tax liabilities. | |
| (b) | Primarily includes trust preferred capital debt securities of certain business trusts. |
The Firm’s Tier 1 common was $108.2 billion at June 30, 2010, compared with $105.3 billion at
December 31, 2009, an increase of $2.9 billion. The increase was predominantly due to net income
(adjusted for DVA) of $7.5 billion and net issuances of common stock under the Firm’s employee
stock-based compensation plans of $1.7 billion. The increase was partially offset by the $4.4
billion cumulative effect adjustment to retained earnings that resulted from the Firm’s
adoption of new consolidation guidance related to VIEs; a $1.3 billion reduction in common
stockholders’ equity related to the purchase of the remaining interest in a consolidated subsidiary
from noncontrolling shareholders; dividends on preferred and common stock outstanding; and
repurchases of common stock. The Firm’s Tier 1 capital was $137.1 billion at June 30, 2010,
compared with $133.0 billion at December 31, 2009, an increase of $4.1 billion. The increase in
Tier 1 capital reflected the increase in Tier 1 common, and an issuance of trust preferred capital
debt securities. Additional information regarding the Firm’s capital ratios and the federal
regulatory capital standards to which it is subject is presented in Note 29 on pages 228-229 of
JPMorgan Chase’s 2009 Annual Report.
Basel II and Basel III
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. In 2004, the Basel Committee
published a revision to the Accord (“Basel II”). The goal of the new 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 will require 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 will be required to
complete a qualification period of four consecutive quarters during which it will need to
demonstrate that it meets the requirements of the new 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 l”) 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 continue to adopt, based on various
established timelines, Basel II rules in certain non-U.S. jurisdictions, as required.
In addition to the Basel II Framework, the Basel Committee is developing further proposed revisions
to the Capital Accord (Basel III). In July 2010, the committee revised a broad range of potential
changes, including narrowing the
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definition of capital, increasing capital requirements for
specific exposures, introducing short-term liquidity coverage and term funding standards, and
establishing an international leverage ratio. If these revisions were adopted as currently
proposed, the Firm estimates that they would, taken together with the changes already approved by
the Basel Committee for calculating capital on trading assets and securitizations, result in a
reduction in the Firm’s Tier 1 common ratio ranging from approximately 100 to 200 basis points.
This estimate of the potential reduction in the Tier 1 common ratio reflects the Firm’s current
understanding of the proposed revisions and their application to its businesses as currently
conducted; accordingly, this estimate will evolve over time as the Firm’s businesses change and the
requirements are finalized. In addition, if these revisions were adopted as currently proposed, the
Firm believes it would need to modify the current liquidity profile of its assets and liabilities
to become more liquid in response to the proposed short-term liquidity coverage and term funding
standards. 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 Inc.
(“JPMorgan Securities”) and J.P. Morgan Clearing Corp. J.P. Morgan Clearing Corp. is a subsidiary
of JPMorgan Securities and provides clearing and settlement services. JPMorgan Securities and J.P.
Morgan Clearing Corp. are each subject to Rule 15c3-1 under the Securities Exchange Act of 1934
(the “Net Capital Rule”). JPMorgan Securities and J.P. Morgan Clearing Corp. are also registered as
futures commission merchants and subject to Rule 1.17 under the Commodity Futures Trading
Commission (“CFTC”).
JPMorgan Securities and J.P. Morgan Clearing Corp. have elected to compute their minimum net
capital requirements in accordance with the “Alternative Net Capital Requirements” of the Net
Capital Rule. At June 30, 2010, JPMorgan Securities’ net capital, as defined by the Net Capital
Rule, was $7.5 billion, exceeding the minimum requirement by $7.0 billion. J.P. Morgan Clearing
Corp’s net capital was $5.5 billion, exceeding the minimum requirement by $3.9 billion.
In addition to its net capital requirements, 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 June 30,
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 based
primarily on four risk factors: credit, market, operational and private equity risk.
| Economic risk capital | Quarterly Averages | |||||||||||
| (in billions) | 2Q10 | 4Q09 | 2Q09 | |||||||||
|
Credit risk
|
$ | 48.1 | $ | 48.5 | $ | 51.9 | ||||||
|
Market risk
|
15.6 | 15.8 | 15.7 | |||||||||
|
Operational risk
|
7.5 | 7.9 | 8.4 | |||||||||
|
Private equity risk
|
6.0 | 4.9 | 4.5 | |||||||||
|
Economic risk capital
|
77.2 | 77.1 | 80.5 | |||||||||
|
Goodwill
|
48.3 | 48.3 | 48.3 | |||||||||
|
Other
(a)
|
33.6 | 31.1 | 12.1 | |||||||||
|
Total common stockholders’ equity
|
$ | 159.1 | $ | 156.5 | $ | 140.9 | ||||||
| (a) | Reflects additional capital required, in the Firm’s view, to meet its regulatory and debt rating objectives. |
Line-of-business equity
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. ROE is measured and internal targets
for expected returns are established as a key measure of a business segment’s performance.
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Table of Contents
Effective January 1, 2010, the Firm enhanced its line of business equity framework to better align
equity assigned to each line of business with the changes anticipated to occur in the 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.
| Line-of-business equity | ||||||||
| (in billions) | June 30, 2010 | December 31, 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
|
59.0 | 64.2 | ||||||
|
Total common stockholders’ equity
|
$ | 163.0 | $ | 157.2 | ||||
| Line-of-business equity | Quarterly Averages | |||||||||||
| (in billions) | 2Q10 | 4Q09 | 2Q09 | |||||||||
|
Investment Bank
|
$ | 40.0 | $ | 33.0 | $ | 33.0 | ||||||
|
Retail Financial Services
|
28.0 | 25.0 | 25.0 | |||||||||
|
Card Services
|
15.0 | 15.0 | 15.0 | |||||||||
|
Commercial Banking
|
8.0 | 8.0 | 8.0 | |||||||||
|
Treasury & Securities Services
|
6.5 | 5.0 | 5.0 | |||||||||
|
Asset Management
|
6.5 | 7.0 | 7.0 | |||||||||
|
Corporate/Private Equity
|
55.1 | 63.5 | 47.9 | |||||||||
|
Total common stockholders’ equity
|
$ | 159.1 | $ | 156.5 | $ | 140.9 | ||||||
Capital actions
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 88 million warrants
issued in 2008 as part of the U.S. Treasury’s Capital Purchase Program. During the second quarter
of 2010, the Firm resumed common stock repurchases, repurchasing a total of 3 million shares for
$135 million at an average price of $38.73 per share. The
Firm’s current share repurchase activity is intended to offset
share count increases resulting from employee equity awards and is
consistent with the Firm’s goal of maintaining an appropriate
share count. The Firm did not repurchase any of the
warrants. As of June 30, 2010, $6.1 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. For a further discussion of the Firm’s stock repurchase program, see Stock repurchases on
page 85 of JPMorgan Chase 2009 Annual Report.
The Firm has determined that it 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. For additional information regarding repurchases of the Firm’s equity
securities, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, on
pages 197-198 of this Form 10-Q.
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 inherent in its business activities. In addition, this framework
recognizes the diversity among the Firm’s core businesses, which helps reduce the impact of
volatility in any particular area on the Firm’s operating results as a whole. There are eight major
types of risk identified in the business activities of the Firm: liquidity, credit, market,
interest rate, operational, legal and reputation, fiduciary, and private equity risk.
For further discussion of these risks, see Risk Management on pages 86-126 of JPMorgan Chase’s
2009 Annual Report and the information below.
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LIQUIDITY RISK MANAGEMENT
The following discussion of JPMorgan Chase’s liquidity risk management framework highlights
developments since December 31, 2009, and should be read in conjunction with pages 88-92 of
JPMorgan Chase’s 2009 Annual Report.
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 $887.8 billion deposit base 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 its available capacity in the wholesale funding 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 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 June 30, 2010, and believes that the Firm’s unsecured and secured funding capacity is sufficient
to meet its on- and off-balance sheet obligations at that date.
Liquidity monitoring
The Firm 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. The Firm utilizes 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). The 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 deposit-to-loan ratio and other balance sheet measures). The Firm
conducts a variety of stress tests intended to ensure that ample liquidity is available through
stressed as well as normal market conditions.
Parent holding company
In addition to monitoring liquidity on a firm-wide basis, the Firm also monitors liquidity for the
parent holding company. This monitoring 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. As discussed below,
the Firm’s liquidity management is also intended to ensure that those subsidiaries have the ability
to generate replacement funding in the event the parent holding company requires repayment.
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.
Liquidity reserves
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. Liquidity reserves at
bank subsidiaries include cash on deposit with central banks as well as high-quality unencumbered
securities which can be quickly converted to cash through repurchase agreements or sales. Liquidity
reserves fluctuate over time, reflecting market conditions and balance sheet composition. The Firm
expects its current liquidity reserves to decrease over time as the economic environment stabilizes
and loan demand increases. Although the Firm does not consider it to be a primary means of
contingent funding, the Firm also maintains access to secured funding capacity through overnight
borrowings from the Federal Reserve and various central banks collateralized by pledging certain
loan and securities portfolios.
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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 June 30, 2010, total deposits for the Firm were $887.8 billion, compared
with $938.4 billion at December 31, 2009. A significant portion of the Firm’s deposits are retail
deposits (41% and 38% at June 30, 2010, and December 31, 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 to be 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 June 30, 2010, the Firm’s
deposit-to-loan ratio was 127%, compared with 148% at December 31, 2009. The decline in the Firm’s
deposit-to-loan ratio was partly due to an increase in loans resulting from the January 1, 2010,
implementation of new consolidation accounting guidance related to VIEs. 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 21-51 and 53-56, respectively, of this Form
10-Q. For a more detailed discussion of the adoption of the new consolidation guidance, see Note 1
on pages 108-109 of this Form 10-Q.
The Firm’s reliance on short-term unsecured funding sources such as commercial paper, federal funds
and Eurodollars purchased, certificates of deposit, time deposits, and bank notes is limited. Total
commercial paper liabilities for the Firm were $41.1 billion as of June 30, 2010, compared with
$41.8 billion as of December 31, 2009. However, of those totals, $30.9 billion and $28.7 billion as
of June 30, 2010 and December 31, 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 $10.2 billion
as of June 30, 2010, compared with $13.1 billion as of December 31, 2009.
Issuance
During the three months ended June 30, 2010, the Firm issued $7.1 billion of long-term debt,
including $1.3 billion of senior notes issued in the U.S. market, $1.5 billion of trust preferred
capital debt securities, and $4.3 billion of IB structured notes. During the six months ended June
30, 2010, the Firm issued $18.0 billion of long-term debt, including $6.9 billion of senior notes
issued in the U.S. market, $904 million of senior notes issued in non-U.S. markets, $1.5 billion of
trust preferred capital debt securities, and $8.7 billion of IB structured notes. In addition, in
July 2010, the Firm issued $2.9 billion of senior notes in the U.S. market. During the three and
six months ended June 30, 2010, $16.2 billion and $30.3 billion of long-term debt matured or were
redeemed, including $5.4 billion and $12.8 billion of IB structured notes. The maturities or
redemptions in the first six months of 2010 were partially offset by the issuances during the
period.
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 has entered into Replacement Capital Covenants
(“RCCs”). These RCCs grant certain rights to the holders of “covered debt,” as defined in the RCCs,
that prohibit 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 has received, in each such case, specified amounts of proceeds from the sale of
certain qualifying securities. Currently, the Firm’s covered debt is its 5.875% Junior Subordinated
Deferrable Interest Debentures, Series O, due in 2035. For more information regarding these
covenants, reference is made to the respective RCCs (including any supplements thereto) entered
into by the Firm in relation to such trust preferred capital debt securities and noncumulative
perpetual preferred stock, which are available in filings made by the Firm with the SEC.
Cash flows
Cash and due from banks was $32.8 billion and $25.1 billion at June 30, 2010 and 2009,
respectively; these balances increased by $6.6 billion from December 31, 2009, and decreased by
$1.8 billion from December 31, 2008. The following discussion highlights the major activities and
transactions that affected JPMorgan Chase’s cash flows during the first six months of 2010 and
2009.
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.
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For the six months ended June 30, 2010, net cash provided by operating activities was $47.6
billion, primarily driven by an increase in trading liabilities, reflecting an increase in business
activity in markets outside of the U.S., mainly Asia Pacific, in the first quarter of 2010,
partially offset by a decrease in trading assets driven by lower client flows as a result of
unfavorable financial markets in the second quarter of 2010. Also, 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, stock-based compensation, and depreciation and
amortization. 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 six months ended June 30, 2009, net cash provided by operating activities was $103.3
billion, largely due to a net decline in trading activity reflecting the effect of the challenging
capital markets environment. In addition, net cash generated from operating activities was higher
than net income; this was also partially the result of 2009’s non-cash adjustments which are the
same non-cash items as those mentioned above for 2010. 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 a reduced level as
a result of the continued volatility and stress in the markets.
Cash flows from investing activities
The Firm’s investing activities predominantly include originating loans to be held for investment,
the AFS securities portfolio and other short-term interest-earning assets. For the six months ended
June 30, 2010, net cash of $73.7 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 has gradually eased since the end of
2009; a net decrease in the loan portfolio, driven by a decline in credit card loans due to the
runoff of the Washington Mutual portfolio and decrease in lower-yielding promotional loans,
continued runoff of the residential real estate portfolios, repayments and loan sales in IB;
continued low client demand; and proceeds from sales and maturities of AFS securities used in the
Firm’s interest rate risk management activities being higher than cash used to acquire such
securities.
For the six months ended June 30, 2009, net cash of $36.3 billion was provided by investing
activities. This was primarily due to a decrease in deposits with banks, as interbank lending and
deposits with the Federal Reserve Bank declined relative to the elevated level at the end of 2008;
a net decrease in the loan portfolio, reflecting declines across all businesses, including lower
customer demand in the wholesale businesses, the seasonal decline in credit card receivables,
credit card securitization activities, and paydowns; and a decrease in securities purchased under
resale agreements, reflecting a lower volume of excess cash available for short-term investments.
Largely offsetting these cash proceeds were net purchases of AFS securities to manage the Firm’s
exposure to a declining interest rate environment.
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 the first six months of 2010 net cash used in financing activities was $114.2
billion. This resulted from a decline in deposits associated with wholesale funding activities
reflecting the Firm’s lower funding needs; a decline in TSS deposits reflecting the normalization
of deposit levels, offset partially by net inflows from existing customers and new business in AM,
CB and RFS; net repayment of long-term debt and trust preferred capital debt securities as new
issuances were more than offset by repayments; payments of cash dividends; and repurchases of
common stock. Additionally, cash was used as a result of a decline in securities loaned or sold
under repurchase agreements largely due to reduced funding requirements associated with lower AFS
securities in Corporate and reduced short-term funding requirements in IB; a decline in beneficial
interests issued by consolidated VIEs due to maturities related to Firm-sponsored credit card
securitization trusts; and a decline in other borrowed funds due to maturities of advances from
FHLBs.
In the first six months of 2009, net cash used in financing activities was $141.2 billion; this
reflected a decline in wholesale deposits in TSS, compared with the elevated level during the
latter part of 2008 due to heightened volatility and credit concerns in the markets at that time; a
decline in other borrowings due to the absence of borrowings from the Federal Reserve under the
Term Auction Facility program and net repayments of advances from FHLBs; the June 17, 2009,
repayment in full of the $25.0 billion principal amount of Series K preferred stock; and the
payment of cash dividends. Cash proceeds resulted from an increase in securities loaned or sold
under repurchase agreements, partly attributable to favorable pricing and to financing the Firm’s
increased AFS securities portfolio; the issuance of $5.8 billion of common stock; and a slight net
increase in long-term debt, as issuances of FDIC-guaranteed debt as well as non-FDIC guaranteed
debt in both the European and U.S. markets were offset by redemptions. There were no open-market
stock repurchases during the first half of 2009.
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Credit ratings
The cost and availability of financing are influenced by credit ratings. Reductions in credit
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-rating downgrade on the
funding requirements for VIEs, and on derivatives and collateral agreements, see Special-purpose
entities on pages 56-57, Ratings profile of derivative receivables marked to market (“MTM”) on
page 76, and Note 5 on pages 128-136 of this Form 10-Q.
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.
Ratings from Moody’s, S&P and Fitch on JPMorgan Chase and its principal bank subsidiaries remained
unchanged at June 30, 2010, from December 31, 2009. At June 30, 2010, Moody’s and S&P’s outlook
remained negative, while Fitch’s outlook remained stable.
Several rating agencies have recently 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.
CREDIT PORTFOLIO
The following table presents JPMorgan Chase’s credit portfolio as of June 30, 2010, and
December 31, 2009. Total managed credit exposure of $1.7 trillion at June 30, 2010, decreased by
$59.1 billion from December 31, 2009, reflecting decreases of $55.3 billion in the consumer
portfolio and $3.8 billion in the wholesale portfolio. During the first six months of 2010,
lending-related commitments decreased by $46.6 billion, managed loans decreased by $18.6 billion
and receivables from customers increased by $7.2 billion. The decrease in lending-related
commitments was partially related to the January 1, 2010, adoption of the new consolidation
guidance related to VIEs, which resulted in the elimination of $24.2 billion of wholesale
lending-related commitments between the Firm and its administrated multi-seller conduits upon
consolidation. This decrease in lending-related commitments was partially offset by the addition of
$6.5 billion of unfunded commitments between the consolidated multi-seller conduits and their
clients. The decrease in managed loans was primarily related to lower customer demand, net
repayments, and loan sales, partially offset by the adoption of the new consolidation guidance
related to VIEs.
While overall portfolio exposure declined, the Firm provided and raised nearly $700 billion in new
and renewed credit and capital for consumers, corporations, small businesses, municipalities and
not-for-profit organizations during the first half of the year.
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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. Loans retained are presented net of unearned income, unamortized
discounts and premiums, and net deferred loan costs. Nonperforming assets include nonaccrual loans
and assets acquired in satisfaction of debt (primarily real estate owned). Nonaccrual loans are
those for which the accrual of interest has been suspended in accordance with the Firm’s accounting
policies. For additional information on these loans, including the Firm’s accounting policies, see
Note 13 on pages 145-150 of this Form 10-Q, and Note 13 on pages 192-196 of JPMorgan Chase’s 2009
Annual Report.
| Credit | Nonperforming | 90 days or more past due | ||||||||||||||||||||||
| exposure | assets (e)(f) | and still accruing (f) | ||||||||||||||||||||||
| June 30, | Dec. 31, | June 30, | Dec. 31, | June 30, | Dec. 31, | |||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Total credit portfolio
|
||||||||||||||||||||||||
|
Loans — retained
(a)
|
$ | 695,210 | $ | 627,218 | $ | 15,804 | $ | 17,219 | $ | 4,611 | $ | 4,355 | ||||||||||||
|
Loans held-for-sale
|
1,911 | 4,876 | 255 | 234 | — | — | ||||||||||||||||||
|
Loans at fair value
|
2,362 | 1,364 | 120 | 111 | — | — | ||||||||||||||||||
|
Loans — reported
(a)
|
699,483 | 633,458 | 16,179 | 17,564 | 4,611 | 4,355 | ||||||||||||||||||
|
Loans — securitized
(a)(b)
|
NA | 84,626 | NA | — | NA | 2,385 | ||||||||||||||||||
|
Total managed loans
(a)
|
699,483 | 718,084 | 16,179 | 17,564 | 4,611 | 6,740 | ||||||||||||||||||
|
Derivative receivables
|
80,215 | 80,210 | 315 | 529 | — | — | ||||||||||||||||||
|
Receivables from customers
(c)
|
22,966 | 15,745 | — | — | — | — | ||||||||||||||||||
|
Interests in purchased receivables
(a)
|
1,836 | 2,927 | — | — | — | — | ||||||||||||||||||
|
Total managed credit-related assets
(a)
|
804,500 | 816,966 | 16,494 | 18,093 | 4,611 | 6,740 | ||||||||||||||||||
|
Lending-related commitments
(a)
|
944,493 | 991,095 | NA | NA | NA | NA | ||||||||||||||||||
|
Assets acquired in loan satisfactions
|
||||||||||||||||||||||||
|
Real estate owned
|
NA | NA | 1,569 | 1,548 | NA | NA | ||||||||||||||||||
|
Other
|
NA | NA | 93 | 100 | NA | NA | ||||||||||||||||||
|
Total assets acquired in loan satisfactions
|
NA | NA | 1,662 | 1,648 | NA | NA | ||||||||||||||||||
|
Total credit portfolio
|
$ | 1,748,993 | $ | 1,808,061 | $ | 18,156 | $ | 19,741 | $ | 4,611 | $ | 6,740 | ||||||||||||
|
Net credit derivative hedges notional
(d)
|
$ | (32,010 | ) | $ | (48,376 | ) | $ | (14 | ) | $ | (139) | NA | NA | |||||||||||
|
Liquid securities collateral held against
derivatives
|
(19,276 | ) | (15,519 | ) | NA | NA | NA | NA | ||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||
| Average annual net | Average annual net | |||||||||||||||||||||||||||||||
| Net charge-offs | charge-off rate (g)(h) | Net charge-offs | charge-off rate (g)(h) | |||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Total credit portfolio
|
||||||||||||||||||||||||||||||||
|
Loans — reported
|
$ | 5,714 | $ | 6,019 | 3.28 | % | 3.52 | % | $ | 13,624 | $ | 10,415 | 3.88 | % | 3.01 | % | ||||||||||||||||
|
Loans — securitized
(a)(b)
|
NA | 1,664 | NA | 7.91 | NA | 3,128 | NA | 7.42 | ||||||||||||||||||||||||
|
Total managed loans
|
$ | 5,714 | $ | 7,683 | 3.28 | % | 4.00 | % | $ | 13,624 | $ | 13,543 | 3.88 | % | 3.49 | % | ||||||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon the adoption of the new 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 15 on pages 151-163 of this Form 10-Q. | |
| (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 15 on pages 151-163 of this Form 10-Q. | |
| (c) | Represents margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets. | |
| (d) | 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 76-77 and Note 5 on pages 128-136 of this Form 10-Q. | |
| (e) | At June 30, 2010, and December 31, 2009, nonperforming loans and assets exclude: (1) mortgage loans insured by U.S. government agencies of $10.1 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 $1.4 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 $447 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. | |
| (f) | Excludes consumer purchased credit-impaired 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 |
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| 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. | ||
| (g) | For the quarters ended June 30, 2010 and 2009, net charge-off ratios were calculated using: (1) average retained loans of $699.2 billion and $685.4 billion, respectively; (2) average securitized loans of zero and $84.4 billion, respectively; and (3) average managed loans of $699.2 billion and $769.8 billion, respectively. For the year-to-date periods ended June 30, 2010 and 2009, net charge-off ratios were calculated using: (1) average retained loans of $708.8 billion and $697.9 billion; (2) average securitized loans of zero and $85.0 billion; and (3) average managed loans of $708.8 billion and $783.0 billion. | |
| (h) | For the quarters ended June 30, 2010 and 2009, firmwide net charge-off ratios were calculated including average purchased credit-impaired loans of $78.1 billion and $86.7 billion. For the year-to-date periods ended June 30, 2010, and 2009, net charge-off rates were calculated using average purchased credit-impaired loans of $79.2 billion and $87.5 billion, respectively. For the quarters ended June 30, 2010 and 2009, excluding the impact of purchased credit-impaired loans, the total Firm’s managed net charge-off rate would have been 3.69% and 4.51% respectively. |
WHOLESALE CREDIT PORTFOLIO
As of June 30, 2010, wholesale exposure (IB, CB, TSS and AM) decreased by $3.8 billion from
December 31, 2009. The overall decrease was primarily driven by a decrease of $22.6 billion in
lending-related commitments, partially offset by an increase of $12.7 billion in loans. The
decrease in lending-related commitments and the increase in loans were primarily related to the
January 1, 2010, adoption of the new consolidation guidance related to VIEs which resulted in the
elimination of $24.2 billion of lending-related commitments between the Firm and its administrated
multi-seller conduits upon consolidation. This decrease in lending-related commitments was
partially offset by the addition of $6.5 billion of unfunded commitments between the consolidated
multi-seller conduits and their clients. Assets of the consolidated conduits included $15.1 billion
of wholesale loans at January 1, 2010. Excluding the effect of the new consolidation guidance,
lending-related commitments and loans would have decreased by $4.9 billion and $2.4 billion,
respectively, mainly due to net repayments and sales. Partly offsetting these decreases was an
increase of $7.2 billion in receivables from customers due to increased client activity in prime
services.
| Credit | Nonperforming | 90 days past due | ||||||||||||||||||||||
| exposure | assets (c) | and still accruing | ||||||||||||||||||||||
| June 30, | Dec. 31, | June 30, | Dec. 31, | June 30, | Dec. 31, | |||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Loans — retained
|
$ | 212,987 | $ | 200,077 | $ | 5,285 | $ | 6,559 | $ | 212 | $ | 332 | ||||||||||||
|
Loans held-for-sale
|
1,477 | 2,734 | 255 | 234 | — | — | ||||||||||||||||||
|
Loans at fair value
|
2,362 | 1,364 | 120 | 111 | — | — | ||||||||||||||||||
|
Loans — reported
|
216,826 | 204,175 | 5,660 | 6,904 | 212 | 332 | ||||||||||||||||||
|
Derivative receivables
|
80,215 | 80,210 | 315 | 529 | — | — | ||||||||||||||||||
|
Receivables from customers
(a)
|
22,966 | 15,745 | — | — | — | — | ||||||||||||||||||
|
Interests in purchased receivables
|
1,836 | 2,927 | — | — | — | — | ||||||||||||||||||
|
Total wholesale credit-related assets
|
321,843 | 303,057 | 5,975 | 7,433 | 212 | 332 | ||||||||||||||||||
|
Lending-related commitments
|
324,552 | 347,155 | NA | NA | NA | NA | ||||||||||||||||||
|
Total wholesale credit exposure
|
$ | 646,395 | $ | 650,212 | $ | 5,975 | $ | 7,433 | $ | 212 | $ | 332 | ||||||||||||
|
Net credit derivative hedges
notional
(b)
|
$ | (32,010 | ) | $ | (48,376 | ) | $ | (14 | ) | $ | (139 | ) | NA | NA | ||||||||||
|
Liquid securities collateral held
against derivatives
|
(19,276 | ) | (15,519 | ) | NA | NA | NA | NA | ||||||||||||||||
| (a) | Represents margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets. | |
| (b) | 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 76-77 and Note 5 on pages 128-136 of this Form 10-Q. | |
| (c) | Excludes assets acquired in loan satisfactions. For additional information, see the wholesale nonperforming assets by business segment table on page 73 of this Form 10-Q. |
70
Table of Contents
The following table summarizes the maturity and ratings profiles of the wholesale portfolio as
of June 30, 2010, and December 31, 2009. The ratings scale is based on the Firm’s internal risk
ratings, which generally correspond to ratings as defined by S&P and Moody’s.
Wholesale credit exposure — maturity and ratings profile
| Maturity profile (c) | Ratings profile | |||||||||||||||||||||||||||||||
| Investment- | Noninvestment- | |||||||||||||||||||||||||||||||
| grade ("IG") | grade | |||||||||||||||||||||||||||||||
| At June 30, 2010 | Due in 1 year | Due after 1 year | Due after 5 | AAA/Aaa to | BB+/Ba1 | Total % | ||||||||||||||||||||||||||
| (in billions, except ratios) | or less | through 5 years | years | Total | BBB-/Baa3 | & below | Total | of IG | ||||||||||||||||||||||||
|
Loans
|
32 | % | 39 | % | 29 | % | 100 | % | $ | 140 | $ | 73 | $ | 213 | 66 | % | ||||||||||||||||
|
Derivative receivables
|
7 | 45 | 48 | 100 | 63 | 17 | 80 | 79 | ||||||||||||||||||||||||
|
Lending-related
commitments
|
39 | 59 | 2 | 100 | 260 | 64 | 324 | 80 | ||||||||||||||||||||||||
|
Total excluding loans
held-for-sale and
loans at fair value
|
33 | % | 51 | % | 16 | % | 100 | % | $ | 463 | $ | 154 | $ | 617 | 75 | % | ||||||||||||||||
|
Loans held-for-sale and
loans at fair
value
(a)
|
4 | |||||||||||||||||||||||||||||||
|
Receivables from
customers
|
23 | |||||||||||||||||||||||||||||||
|
Interests in purchased
receivables
|
2 | |||||||||||||||||||||||||||||||
|
Total exposure
|
$ | 646 | ||||||||||||||||||||||||||||||
|
Net credit derivative
hedges notional
(b)
|
31 | % | 53 | % | 16 | % | 100 | % | $ | (32 | ) | $ | — | $ | (32 | ) | 100 | % | ||||||||||||||
| Maturity profile (c) | Ratings profile | |||||||||||||||||||||||||||||||
| Investment- | Noninvestment- | |||||||||||||||||||||||||||||||
| grade ("IG") | grade | |||||||||||||||||||||||||||||||
| At December 31, 2009 | Due in 1 year | Due after 1 year | Due after 5 | AAA/Aaa to | BB+/Ba1 | Total % | ||||||||||||||||||||||||||
| (in billions, except ratios) | or less | through 5 years | years | Total | BBB-/Baa3 | & below | Total | of IG | ||||||||||||||||||||||||
|
Loans
|
29 | % | 40 | % | 31 | % | 100 | % | $ | 118 | $ | 82 | $ | 200 | 59 | % | ||||||||||||||||
|
Derivative receivables
|
12 | 42 | 46 | 100 | 61 | 19 | 80 | 76 | ||||||||||||||||||||||||
|
Lending-related
commitments
|
41 | 57 | 2 | 100 | 281 | 66 | 347 | 81 | ||||||||||||||||||||||||
|
Total excluding loans
held-for-sale and
loans at fair value
|
34 | % | 50 | % | 16 | % | 100 | % | $ | 460 | $ | 167 | $ | 627 | 73 | % | ||||||||||||||||
|
Loans held-for-sale and
loans at fair value
(a)
|
4 | |||||||||||||||||||||||||||||||
|
Receivables from
customers
|
16 | |||||||||||||||||||||||||||||||
|
Interests in purchased
receivables
|
3 | |||||||||||||||||||||||||||||||
|
Total exposure
|
$ | 650 | ||||||||||||||||||||||||||||||
|
Net credit derivative
hedges notional
(b)
|
49 | % | 42 | % | 9 | % | 100 | % | $ | (48 | ) | $ | — | $ | (48 | ) | 100 | % | ||||||||||||||
| (a) | Loans held-for-sale and loans at fair value relate primarily to syndicated loans and loans transferred from the retained portfolio. | |
| (b) | 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. | |
| (c) | 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 102-103 of JPMorgan Chase’s 2009 Annual Report. |
71
Table of Contents
Wholesale credit exposure — selected industry concentrations
The Firm focuses on the management and diversification of its industry concentrations, 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, respectively. The total criticized
component of the portfolio, excluding loans held-for-sale and loans at fair value, decreased to
$26.5 billion at June 30, 2010, from $33.2 billion at year-end 2009. The decrease was primarily
related to net repayments and loan sales.
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Total credit exposure | Criticized exposure | Total credit exposure | Criticized exposure | |||||||||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||||||||||
| Credit | % of | criticized | Credit | % of | criticized | |||||||||||||||||||||||||||
| (in millions, except ratios) | exposure (c) | portfolio | Criticized | portfolio | exposure (c) | portfolio | Criticized | portfolio | ||||||||||||||||||||||||
|
Top 25 industries
(a)
|
||||||||||||||||||||||||||||||||
|
Real estate
|
$ | 63,730 | 10 | % | $ | 10,821 | 41 | % | $ | 68,509 | 11 | % | $ | 11,975 | 36 | % | ||||||||||||||||
|
Banks and finance companies
|
57,134 | 9 | 1,036 | 4 | 54,053 | 9 | 2,053 | 6 | ||||||||||||||||||||||||
|
Healthcare
|
37,529 | 6 | 398 | 2 | 35,605 | 6 | 329 | 1 | ||||||||||||||||||||||||
|
State and municipal governments
|
33,940 | 5 | 181 | 1 | 34,726 | 5 | 466 | 1 | ||||||||||||||||||||||||
|
Asset managers
|
29,134 | 5 | 660 | 2 | 24,920 | 4 | 680 | 2 | ||||||||||||||||||||||||
|
Consumer products
|
26,882 | 4 | 608 | 2 | 27,004 | 4 | 515 | 2 | ||||||||||||||||||||||||
|
Utilities
|
25,385 | 4 | 1,107 | 4 | 27,178 | 4 | 1,238 | 4 | ||||||||||||||||||||||||
|
Oil and gas
|
22,928 | 4 | 405 | 2 | 23,322 | 4 | 386 | 1 | ||||||||||||||||||||||||
|
Retail and consumer services
|
20,272 | 3 | 699 | 3 | 20,673 | 3 | 782 | 2 | ||||||||||||||||||||||||
|
Technology
|
13,066 | 2 | 543 | 2 | 14,169 | 2 | 1,288 | 4 | ||||||||||||||||||||||||
|
Machinery and equipment
manufacturing
|
12,254 | 2 | 205 | 1 | 12,759 | 2 | 350 | 1 | ||||||||||||||||||||||||
|
Securities firms and exchanges
|
11,908 | 2 | 49 | — | 10,832 | 2 | 145 | — | ||||||||||||||||||||||||
|
Metals/mining
|
11,650 | 2 | 634 | 2 | 12,547 | 2 | 639 | 2 | ||||||||||||||||||||||||
|
Business services
|
11,546 | 2 | 239 | 1 | 10,667 | 2 | 344 | 1 | ||||||||||||||||||||||||
|
Chemicals/plastics
|
11,349 | 2 | 477 | 2 | 9,870 | 2 | 611 | 2 | ||||||||||||||||||||||||
|
Insurance
|
11,329 | 2 | 481 | 2 | 13,421 | 2 | 599 | 2 | ||||||||||||||||||||||||
|
Central government
|
11,181 | 2 | — | — | 9,557 | 1 | — | — | ||||||||||||||||||||||||
|
Telecom Services
|
10,800 | 2 | 193 | 1 | 11,265 | 2 | 251 | 1 | ||||||||||||||||||||||||
|
Media
|
10,535 | 2 | 1,579 | 6 | 12,379 | 2 | 1,692 | 5 | ||||||||||||||||||||||||
|
Building materials/construction
|
10,106 | 2 | 1,154 | 4 | 10,448 | 2 | 1,399 | 4 | ||||||||||||||||||||||||
|
Holding companies
|
9,784 | 2 | 104 | — | 16,018 | 3 | 110 | — | ||||||||||||||||||||||||
|
Automotive
|
9,028 | 1 | 368 | 1 | 9,357 | 1 | 1,240 | 4 | ||||||||||||||||||||||||
|
Transportation
|
8,608 | 1 | 515 | 2 | 9,749 | 1 | 588 | 2 | ||||||||||||||||||||||||
|
Agriculture/paper manufacturing
|
7,530 | 1 | 312 | 1 | 5,801 | 1 | 500 | 2 | ||||||||||||||||||||||||
|
Leisure
|
5,847 | 1 | 1,065 | 4 | 6,822 | 1 | 1,798 | 5 | ||||||||||||||||||||||||
|
All other
(b)
|
134,299 | 22 | 2,678 | 10 | 135,791 | 22 | 3,205 | 10 | ||||||||||||||||||||||||
|
Subtotal
|
$ | 617,754 | 100 | % | $ | 26,511 | 100 | % | $ | 627,442 | 100 | % | $ | 33,183 | 100 | % | ||||||||||||||||
|
Loans held-for-sale and loans at
fair value
|
3,839 | 920 | 4,098 | 1,545 | ||||||||||||||||||||||||||||
|
Receivables from customers
|
22,966 | 15,745 | ||||||||||||||||||||||||||||||
|
Interest in purchased receivables
|
1,836 | 2,927 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 646,395 | $ | 27,431 | $ | 650,212 | $ | 34,728 | ||||||||||||||||||||||||
| (a) | Rankings are based on exposure at June 30, 2010. The ranking to industries presented in the table as of December 31, 2009, are based on the rankings of the corresponding exposures at June 30, 2010, not the actual rankings of such exposure at December 31, 2009. | |
| (b) | For more information on exposures to SPEs included in all other, see Note 15 on pages 151-163 of this Form 10-Q. | |
| (c) | Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans. |
72
Table of Contents
The following table presents additional information on the wholesale real estate industry at
June 30, 2010, and December 31, 2009.
| % of | Average | |||||||||||||||||||||||||||
| As of the six months | nonperforming | Net | annual net | |||||||||||||||||||||||||
| ended June 30, 2010 | Credit | % of credit | Criticized | Nonperforming | loans to | charge-offs/ | charge-off | |||||||||||||||||||||
| (in millions, except ratios) | exposure | portfolio | exposure | loans | total loans (b) | (recoveries) (c) | rate (b) | |||||||||||||||||||||
|
Commercial real estate
subcategories
|
||||||||||||||||||||||||||||
|
Multi-family
|
$ | 31,246 | 49 | % | $ | 4,056 | $ | 1,316 | 4.34 | % | $ | 110 | 0.73 | % | ||||||||||||||
|
Commercial lessors
|
18,063 | 28 | 3,982 | 652 | 4.60 | 352 | 5.00 | |||||||||||||||||||||
|
Commercial construction and
development
|
5,608 | 9 | 1,129 | 327 | 7.89 | 37 | 1.80 | |||||||||||||||||||||
|
Other
(a)
|
8,813 | 14 | 1,654 | 561 | 11.91 | 29 | 1.24 | |||||||||||||||||||||
|
Total commercial real estate
|
$ | 63,730 | 100 | % | $ | 10,821 | $ | 2,856 | 5.35 | % | $ | 528 | 1.99 | % | ||||||||||||||
| % of | Average | |||||||||||||||||||||||||||
| As of the twelve months ended | nonperforming | Net | annual net | |||||||||||||||||||||||||
| December 31, 2009 | Credit | % of credit | Criticized | Nonperforming | loans to | charge-offs/ | charge-off | |||||||||||||||||||||
| (in millions, except ratios) | exposure | portfolio | exposure | loans | total loans (b) | (recoveries) (d)(e) | rate (b)(d) | |||||||||||||||||||||
|
Commercial real estate
subcategories
|
||||||||||||||||||||||||||||
|
Multi-family
|
$ | 32,073 | 47 | % | $ | 3,986 | $ | 1,109 | 3.57 | % | $ | 287 | 0.92 | % | ||||||||||||||
|
Commercial lessors
(d)
|
18,689 | 27 | 4,194 | 687 | 4.53 | 169 | 1.11 | |||||||||||||||||||||
|
Commercial construction and
development
|
6,593 | 10 | 1,518 | 313 | 6.81 | 101 | 2.20 | |||||||||||||||||||||
|
Other
(a)(d)
|
11,154 | 16 | 2,277 | 779 | 12.27 | 131 | 2.06 | |||||||||||||||||||||
|
Total commercial real estate
|
$ | 68,509 | 100 | % | $ | 11,975 | $ | 2,888 | 5.05 | % | $ | 688 | 1.20 | % | ||||||||||||||
| (a) | Other includes lodging, Real estate investment trusts (“REITs”), single family, homebuilders and other real estate. | |
| (b) | Ratios were calculated using end-of-period retained loans of $53.4 billion and $57.2 billion for the periods ended June 30, 2010, and December 31, 2009, respectively. | |
| (c) | Net charge-offs are presented for the six months ended June 30, 2010. | |
| (d) | Prior periods have been reclassed to conform to current presentation. | |
| (e) | Net charge-offs are presented for the twelve months ended December 31, 2009. |
Loans
The following table presents wholesale loans and nonperforming assets by business segment as
of June 30, 2010, and December 31, 2009.
| June 30, 2010 | ||||||||||||||||||||||||||||||||
| Assets acquired in | ||||||||||||||||||||||||||||||||
| Loans | Nonperforming | loan satisfactions | ||||||||||||||||||||||||||||||
| Held-for-sale | Real estate | Nonperforming | ||||||||||||||||||||||||||||||
| (in millions) | Retained | and fair value | Total | Loans | Derivatives | owned | Other | assets | ||||||||||||||||||||||||
|
Investment Bank
|
$ | 54,049 | $ | 3,221 | $ | 57,270 | $ | 2,260 | $ | 315 | $ | 151 | $ | — | $ | 2,726 | ||||||||||||||||
|
Commercial Banking
|
95,090 | 446 | 95,536 | 3,077 | — | 207 | 1 | 3,285 | ||||||||||||||||||||||||
|
Treasury & Securities
Services
|
24,513 | — | 24,513 | 14 | — | — | — | 14 | ||||||||||||||||||||||||
|
Asset Management
|
38,744 | — | 38,744 | 309 | — | 3 | 25 | 337 | ||||||||||||||||||||||||
|
Corporate/Private Equity
|
591 | 172 | 763 | — | — | — | — | — | ||||||||||||||||||||||||
|
Total
|
$ | 212,987 | $ | 3,839 | $ | 216,826 | $ | 5,660 | (a) | $ | 315 | (b) | $ | 361 | $ | 26 | $ | 6,362 | ||||||||||||||
| December 31, 2009 | ||||||||||||||||||||||||||||||||
| Assets acquired in | ||||||||||||||||||||||||||||||||
| Loans | Nonperforming | loan satisfactions | ||||||||||||||||||||||||||||||
| Held-for-sale | Real estate | Nonperforming | ||||||||||||||||||||||||||||||
| (in millions) | Retained | and fair value | Total | Loans | Derivatives | owned | Other | assets | ||||||||||||||||||||||||
|
Investment Bank
|
$ | 45,544 | $ | 3,567 | $ | 49,111 | $ | 3,504 | $ | 529 | $ | 203 | $ | — | $ | 4,236 | ||||||||||||||||
|
Commercial Banking
|
97,108 | 324 | 97,432 | 2,801 | — | 187 | 1 | 2,989 | ||||||||||||||||||||||||
|
Treasury & Securities
Services
|
18,972 | — | 18,972 | 14 | — | — | — | 14 | ||||||||||||||||||||||||
|
Asset Management
|
37,755 | — | 37,755 | 580 | — | 2 | — | 582 | ||||||||||||||||||||||||
|
Corporate/Private Equity
|
698 | 207 | 905 | 5 | — | — | — | 5 | ||||||||||||||||||||||||
|
Total
|
$ | 200,077 | $ | 4,098 | $ | 204,175 | $ | 6,904 | (a) | $ | 529 | (b) | $ | 392 | $ | 1 | $ | 7,826 | ||||||||||||||
| (a) | The Firm held allowance for loan losses of $1.3 billion and $2.0 billion related to nonperforming retained loans resulting in allowance coverage ratios of 25% and 31%, at June 30, 2010, and December 31, 2009, respectively. Wholesale nonperforming loans represent 2.61% and 3.38% of total wholesale loans at June 30, 2010, and December 31, 2009, respectively. | |
| (b) | Nonperforming derivatives represent less than 1.0% of the total derivative receivables net of cash collateral at both June 30, 2010, and December 31, 2009. |
73
Table of Contents
In the normal course of business, the Firm provides loans to a variety of customers, from
large corporate and institutional clients to high-net-worth individuals.
Retained wholesale loans were $213.0 billion at June 30, 2010, compared with $200.1 billion at
December 31, 2009. The $12.9 billion increase was primarily related to the January 1, 2010,
adoption of new consolidation guidance related to VIEs. Upon adoption of the new guidance, $15.1
billion of wholesale loans associated with Firm-administered multi-seller conduits were added to
the Consolidated Balance Sheets. Excluding the effect of the adoption of the new consolidation
guidance, loans decreased by $2.2 billion. Loans held-for-sale and loans at fair value relate
primarily to syndicated loans and loans transferred from the retained portfolio. Held-for-sale
loans and loans carried at fair value were in aggregate $3.8 billion and $4.1 billion at June 30,
2010, and December 31, 2009, respectively.
The Firm actively manages wholesale credit exposure through sales of loans and lending-related
commitments. During the first six months of 2010 the Firm sold $4.6 billion of loans and
commitments, recognizing gains of $31 million. In the first six months of 2009, the Firm sold $879
million of loans and commitments, recognizing net losses of $23 million. These results include
gains or losses on sales of nonperforming loans, if any, as discussed on pages 74-75 of this Form
10-Q. These activities are not related to the Firm’s securitization activities. For further
discussion of securitization activity, see Liquidity Risk Management and Note 15 on pages 65-67
and 151-163 respectively, of this Form 10-Q.
Nonperforming wholesale loans were $5.7 billion at June 30, 2010, a decrease of $1.2 billion from
December 31, 2009, reflecting primarily net repayments and loan sales.
The following table presents the geographic distribution of wholesale loans and nonperforming loans
as of June 30, 2010, and December 31, 2009. The geographic distribution of the wholesale portfolio
is determined based predominantly on the domicile of the borrower.
Loans and nonperforming loans, U.S. and Non-U.S.
| Wholesale | June 30, 2010 | December 31, 2009 | ||||||||||||||
| Nonperforming | Nonperforming | |||||||||||||||
| (in millions) | Loans | loans | Loans | loans | ||||||||||||
|
U.S.
|
$ | 155,737 | $ | 4,699 | $ | 149,085 | $ | 5,844 | ||||||||
|
Non-U.S.
|
61,089 | 961 | 55,090 | 1,060 | ||||||||||||
|
Ending balance
|
$ | 216,826 | $ | 5,660 | $ | 204,175 | $ | 6,904 | ||||||||
The following table presents the change in the nonperforming loan portfolio during the six
months ended June 30, 2010 and 2009.
Nonperforming loan activity
| Six months ended June 30, | ||||||||
| Wholesale | ||||||||
| (in millions) | 2010 | 2009 | ||||||
|
Beginning balance
|
$ | 6,904 | $ | 2,382 | ||||
|
Additions
|
4,150 | 6,063 | ||||||
|
Reductions:
|
||||||||
|
Paydowns and other
|
2,857 | 1,510 | ||||||
|
Gross charge-offs
|
1,162 | 903 | ||||||
|
Returned to performing
|
113 | 70 | ||||||
|
Sales
|
1,262 | — | ||||||
|
Total reductions
|
5,394 | 2,483 | ||||||
|
Net additions (reductions)
|
(1,244 | ) | 3,580 | |||||
|
Ending balance
|
$ | 5,660 | $ | 5,962 | ||||
74
Table of Contents
The following table presents net charge-offs, which are defined as gross charge-offs less
recoveries, for the three and six months ended June 30, 2010 and 2009. A nonaccrual loan is charged
off to the allowance for loan losses when it is highly certain that a loss has been realized; this
determination considers 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. The amounts in the table below do not include gains from sales of nonperforming loans.
Net charge-offs
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| Wholesale | ||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Loans — reported
|
||||||||||||||||
|
Average loans retained
|
$ | 209,016 | $ | 229,105 | $ | 210,300 | $ | 233,871 | ||||||||
|
Net charge-offs
|
231 | 679 | 1,190 | 870 | ||||||||||||
|
Average annual net charge-off rate
|
0.44 | % | 1.19 | % | 1.14 | % | 0.75 | % | ||||||||
Derivatives
Derivative contracts
In the normal course of business, the Firm uses derivative instruments to meet the needs of
customers; to generate revenue through trading activities; to manage exposure to fluctuations in
interest rates, currencies and other markets; and to manage the Firm’s credit exposure. For further
discussion of these contracts, see Notes 5 and 22 on pages 128-136 and 170-174 of this Form 10-Q
and Notes 5 and 32 on pages 167-175 and 224-235 of JPMorgan Chase’s 2009 Annual Report.
The following table summarizes the net derivative receivables MTM for the periods presented.
| Derivative receivables MTM | ||||||||
| Derivative receivables marked to market | ||||||||
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Interest rate
(a)
|
$ | 42,268 | $ | 33,733 | ||||
|
Credit derivatives
(a)
|
8,346 | 11,859 | ||||||
|
Foreign exchange
|
19,586 | 21,984 | ||||||
|
Equity
|
5,523 | 6,635 | ||||||
|
Commodity
|
4,492 | 5,999 | ||||||
|
Total, net of cash collateral
|
80,215 | 80,210 | ||||||
|
Liquid securities collateral held against derivative receivables
|
(19,276 | ) | (15,519 | ) | ||||
|
Total, net of all collateral
|
$ | 60,939 | $ | 64,691 | ||||
| (a) | In the first quarter of 2010, cash collateral netting reporting was enhanced. Prior periods have been revised to conform to the current presentation. The effect resulted in an increase to interest rate derivative receivables, and a corresponding decrease to credit derivative receivables, of $7.0 billion as of December 31, 2009. |
The amounts of derivative receivables reported on the Consolidated Balance Sheets were $80.2
billion at both June 30, 2010, and December 31, 2009. These are the amounts of the MTM or fair
value of the derivative contracts after giving effect to legally enforceable master netting
agreements, cash collateral held by the Firm and 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. Derivative receivables were flat and reflected the offsetting
effect of declining interest rates and increased levels of foreign exchange-rate volatility, with
declining equity valuations and lower energy and base metal commodity prices. However, in
management’s view, the appropriate measure of current credit risk should also reflect additional
liquid securities held as collateral by the Firm of $19.3 billion and $15.5 billion at June 30,
2010, and December 31, 2009, respectively, resulting in total exposure, net of all collateral, of
$60.9 billion and $64.7 billion, 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 June 30, 2010, and
December 31, 2009, the Firm held $16.1 billion
and $16.9 billion, respectively, of this additional collateral. The derivative receivables MTM, net
of all collateral, also does not include other credit enhancements in the form of letters of
credit. The following table summarizes the ratings profile of the Firm’s derivative receivables
MTM, net of all collateral, for the dates indicated.
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Table of Contents
Ratings profile of derivative receivables MTM
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Rating equivalent | Exposure net of | % of exposure | Exposure net of | % of exposure | ||||||||||||
| (in millions, except ratios) | all collateral | net of all collateral | all collateral | net of all collateral | ||||||||||||
|
AAA/Aaa to AA-/Aa3
|
$ | 25,328 | 42 | % | $ | 25,530 | 40 | % | ||||||||
|
A+/A1 to A-/A3
|
12,876 | 21 | 12,432 | 19 | ||||||||||||
|
BBB+/Baa1 to BBB-/Baa3
|
7,179 | 12 | 9,343 | 14 | ||||||||||||
|
BB+/Ba1 to B-/B3
|
12,757 | 21 | 14,571 | 23 | ||||||||||||
|
CCC+/Caa1 and below
|
2,799 | 4 | 2,815 | 4 | ||||||||||||
|
Total
|
$ | 60,939 | 100 | % | $ | 64,691 | 100 | % | ||||||||
The Firm actively pursues the use of 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 97% as of June 30, 2010, up from 89% at December 31,
2009. The Firm posted $70.7 billion and $56.7 billion of collateral at June 30, 2010, and December
31, 2009, respectively.
Certain derivative and collateral agreements include provisions that require the counterparty
and/or the Firm, upon specified downgrades in the respective credit ratings of their legal
entities, to post collateral for the benefit of the other party. At June 30, 2010, the impact of a
single-notch and six-notch ratings downgrade to JPMorgan Chase & Co., and its subsidiaries,
primarily JPMorgan Chase Bank, N.A., would have required $1.5 billion and $5.0 billion,
respectively, of additional collateral to be posted by the Firm. Certain derivative contracts also
provide for termination of the contract, generally upon a downgrade to a specified rating of either
the Firm or the counterparty, at the then-existing fair value of the derivative contracts.
Credit derivatives
For a more detailed discussion of credit derivatives, including types of derivatives, see Note 5,
Credit derivatives, on pages 135-136 of this Form 10-Q, and Credit derivatives on pages 103-104
and Note 5, Credit derivatives, on pages 173-175 of JPMorgan Chase’s 2009 Annual Report. The
following table presents the Firm’s notional amounts of credit derivatives protection purchased and
sold as of June 30, 2010, and December 31, 2009.
Credit derivative positions
| Notional amount | ||||||||||||||||||||
| Dealer/client | Credit portfolio | |||||||||||||||||||
| Protection | Protection | Protection | Protection | |||||||||||||||||
| (in billions) | purchased (a) | sold | purchased (a)(b) | sold | Total | |||||||||||||||
|
June 30, 2010
|
$ | 2,666 | $ | 2,654 | $ | 32 | $ | — | $ | 5,352 | ||||||||||
|
December 31, 2009
|
2,997 | 2,947 | 49 | 1 | 5,994 | |||||||||||||||
| (a) | Included $2.6 trillion and $3.0 trillion at June 30, 2010, and December 31, 2009, respectively, of notional exposure where the Firm had protection sold with identical underlying reference instruments. | |
| (b) | Included $8.5 billion and $19.7 billion at June 30, 2010, and December 31, 2009, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio. |
Dealer/client
For a further discussion of the dealer/client business related to credit protection, see
Dealer/client business on page 104 of JPMorgan Chase’s 2009 Annual Report. At June 30, 2010, the
total notional amount of protection purchased and sold in the dealer/client business decreased by
$624 billion from year-end 2009, primarily as a result of continuing industry efforts to reduce
offsetting trade activity.
Credit portfolio activities
| Use of single-name and portfolio credit derivatives | Notional amount of protection purchased and sold | |||||||
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Credit derivatives used to manage:
|
||||||||
|
Loans and lending-related commitments
|
$ | 17,271 | $ | 36,873 | ||||
|
Derivative receivables
|
15,165 | 11,958 | ||||||
|
Total protection purchased
(a)
|
32,436 | 48,831 | ||||||
|
Total protection sold
|
426 | 455 | ||||||
|
Credit derivatives hedges notional
|
$ | 32,010 | $ | 48,376 | ||||
| (a) | Included $8.5 billion and $19.7 billion at June 30, 2010, and December 31, 2009, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio. |
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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. For a discussion of CVA related to derivative
contracts, see Derivative receivables MTM on pages 102-103 of JPMorgan Chase’s 2009 Annual Report.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Hedges of lending-related commitments
(a)
|
$ | 60 | $ | (1,512 | ) | $ | (60 | ) | $ | (2,064 | ) | |||||
|
CVA and hedges of CVA
(a)
|
(289 | ) | 1,196 | (290 | ) | 1,319 | ||||||||||
|
Net gains/(losses)
|
$ | (229 | ) | $ | (316 | ) | $ | (350 | ) | $ | (745 | ) | ||||
| (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 the counterparties
subsequently fail to perform according to the terms of these contracts.
Wholesale lending-related commitments were $324.6 billion at June 30, 2010, compared with $347.2
billion at December 31, 2009. The decrease reflected the January 1, 2010, adoption of new
consolidation guidance related to VIEs. Upon adoption of the new consolidation guidance, $24.2
billion of lending-related commitments between the Firm and its administered multi-seller conduits
were eliminated in consolidation. This decrease in lending-related commitments was partially offset
by the addition of $6.5 billion of unfunded commitments between the consolidated multi-seller
conduits and their clients.
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 $166.7 billion and $179.8
billion as of June 30, 2010, and December 31, 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 reflected. 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 264 of
JPMorgan Chase’s 2009 Annual Report.
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In recent months, 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
$20.0 billion at June 30, 2010; no individual country represented a majority of the net
exposure and sovereign exposure 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.
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 ten 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.
Top 10 emerging markets country exposure
| At June 30, 2010 | Cross-border | Total | ||||||||||||||||||||||
| (in billions) | Lending (a) | Trading (b) | Other (c) | Total | Local (d) | exposure | ||||||||||||||||||
|
South Korea
|
$ | 3.6 | $ | 1.5 | $ | 1.4 | $ | 6.5 | $ | 3.3 | $ | 9.8 | ||||||||||||
|
India
|
2.1 | 3.8 | 1.3 | 7.2 | 0.7 | 7.9 | ||||||||||||||||||
|
Brazil
|
2.7 | (0.1 | ) | 1.0 | 3.6 | 4.1 | 7.7 | |||||||||||||||||
|
China
|
3.1 | 0.9 | 0.7 | 4.7 | 0.6 | 5.3 | ||||||||||||||||||
|
Hong Kong
|
1.8 | 1.5 | 1.1 | 4.4 | — | 4.4 | ||||||||||||||||||
|
Mexico
|
1.6 | 1.5 | 0.4 | 3.5 | — | 3.5 | ||||||||||||||||||
|
Taiwan
|
0.3 | 1.0 | 0.4 | 1.7 | 1.7 | 3.4 | ||||||||||||||||||
|
Malaysia
|
0.2 | 2.4 | 0.3 | 2.9 | 0.2 | 3.1 | ||||||||||||||||||
|
Chile
|
0.9 | 1.0 | 0.4 | 2.3 | — | 2.3 | ||||||||||||||||||
|
Turkey
|
0.8 | 0.8 | 0.1 | 1.7 | 0.2 | 1.9 | ||||||||||||||||||
| 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-bearing 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 security 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. |
78
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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. Included within the
portfolio are home equity loans and lines of credit secured by junior liens, and mortgage loans
with interest-only payment options to predominantly prime borrowers, as well as certain
payment-option loans acquired from Washington Mutual that may result in negative amortization. The
Firm’s primary focus is on serving the prime consumer credit market. The Firm has never originated
option ARMs.
A substantial portion of the consumer loans acquired in the Washington Mutual transaction were
identified as credit-impaired based on an analysis of high-risk characteristics, including product
type, LTV ratios, FICO scores and delinquency status. These purchased credit-impaired loans are
accounted for on a pool basis, and the pools are considered to be performing. At the time of the
acquisition, these loans were recorded at fair value, including an estimate of losses that were
expected to be incurred over the estimated remaining lives of the loan pools. Therefore, no
allowance for loan losses was recorded for these loans as of the transaction date. As part of its
ongoing assessment of these loans, management evaluates whether higher expected future credit
losses for certain pools of the purchased credit-impaired portfolio would result in a decrease in
expected future principal cash flows for these pools. No allowance was added in the second quarter
of 2010. The total allowance for loan losses on the purchased credit-impaired portfolio added since
the beginning of the third quarter of 2009 is $2.8 billion.
The credit performance of the consumer portfolio across the entire product spectrum appears to have
stabilized but remains under stress, as 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 nonperforming loans remain elevated, but the delinquency trend is showing continued stability
or improvement, with improvement continuing in early-stage delinquencies (30-89 days delinquent)
across most products. Late-stage 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 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 for risk management purposes.
The following tables present 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 13 on pages 145-150 of this Form 10-Q.
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Table of Contents
Consumer credit-related information
| 90 days or more past due and | ||||||||||||||||||||||||
| Credit exposure | Nonperforming loans (j)(k) | still accruing (k) | ||||||||||||||||||||||
| June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | |||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Consumer loans — excluding purchased
credit-impaired loans and loans held-for-sale
|
||||||||||||||||||||||||
|
Home equity — senior lien
(a)
|
$ | 25,856 | $ | 27,376 | $ | 461 | $ | 477 | $ | — | $ | — | ||||||||||||
|
Home equity — junior lien
(b)
|
68,905 | 74,049 | 750 | 1,188 | — | — | ||||||||||||||||||
|
Prime mortgage
(c)
|
66,429 | 66,892 | 4,653 | 4,355 | — | — | ||||||||||||||||||
|
Subprime mortgage
(c)
|
12,597 | 12,526 | 3,115 | 3,248 | — | — | ||||||||||||||||||
|
Option ARMs
(c)
|
8,594 | 8,536 | 409 | 312 | — | — | ||||||||||||||||||
|
Auto loans
(c)(d)
|
47,548 | 46,031 | 155 | 177 | — | — | ||||||||||||||||||
|
Credit card — reported
(c)(e)(f)
|
142,994 | 78,786 | 3 | 3 | 3,952 | 3,481 | ||||||||||||||||||
|
All other loans
(c)
|
32,399 | 31,700 | 973 | 900 | 447 | 542 | ||||||||||||||||||
|
Total consumer loans
|
405,322 | 345,896 | 10,519 | 10,660 | 4,399 | 4,023 | ||||||||||||||||||
|
Consumer loans — purchased credit-impaired
|
||||||||||||||||||||||||
|
Home equity
|
25,471 | 26,520 | NA | NA | NA | NA | ||||||||||||||||||
|
Prime mortgage
|
18,512 | 19,693 | NA | NA | NA | NA | ||||||||||||||||||
|
Subprime mortgage
|
5,662 | 5,993 | NA | NA | NA | NA | ||||||||||||||||||
|
Option ARMs
|
27,256 | 29,039 | NA | NA | NA | NA | ||||||||||||||||||
|
Total consumer loans — purchased
credit-impaired
|
76,901 | 81,245 | NA | NA | NA | NA | ||||||||||||||||||
|
Total consumer loans — retained
|
482,223 | 427,141 | 10,519 | 10,660 | 4,399 | 4,023 | ||||||||||||||||||
|
Loans held-for-sale
|
434 | 2,142 | — | — | — | — | ||||||||||||||||||
|
Total consumer loans — reported
|
482,657 | 429,283 | 10,519 | 10,660 | 4,399 | 4,023 | ||||||||||||||||||
|
Credit card — securitized
(c)(g)
|
NA | 84,626 | NA | — | NA | 2,385 | ||||||||||||||||||
|
Total consumer loans — managed
(c)
|
482,657 | 513,909 | 10,519 | 10,660 | 4,399 | 6,408 | ||||||||||||||||||
|
Total consumer loans — managed — excluding
purchased credit-impaired
loans
(c)
|
405,756 | 432,664 | 10,519 | 10,660 | 4,399 | 6,408 | ||||||||||||||||||
|
Consumer lending-related
commitments:
|
||||||||||||||||||||||||
|
Home equity — senior lien
(a)(h)
|
18,320 | 19,246 | ||||||||||||||||||||||
|
Home equity — junior lien
(b)(h)
|
33,985 | 37,231 | ||||||||||||||||||||||
|
Prime mortgage
|
958 | 1,654 | ||||||||||||||||||||||
|
Subprime mortgage
|
— | — | ||||||||||||||||||||||
|
Option ARMs
|
— | — | ||||||||||||||||||||||
|
Auto loans
|
6,029 | 5,467 | ||||||||||||||||||||||
|
Credit card
(h)
|
550,442 | 569,113 | ||||||||||||||||||||||
|
All other loans
|
10,207 | 11,229 | ||||||||||||||||||||||
|
Total lending-related commitments
|
619,941 | 643,940 | ||||||||||||||||||||||
|
Total consumer credit portfolio
|
$ | 1,102,598 | $ | 1,157,849 | ||||||||||||||||||||
|
Memo: Credit card — managed
(c)
|
$ | 142,994 | $ | 163,412 | $ | 3 | $ | 3 | $ | 3,952 | $ | 5,866 | ||||||||||||
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Table of Contents
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||
| Average annual | Average annual | |||||||||||||||||||||||||||||||
| Net charge-offs | net charge-off rate (l) | Net charge-offs | net charge-off rate (l) | |||||||||||||||||||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Consumer loans — excluding purchased
credit-impaired loans
|
||||||||||||||||||||||||||||||||
|
Home equity — senior lien
(a)
|
$ | 70 | $ | 65 | 1.06 | % | 0.91 | % | $ | 139 | $ | 99 | 1.05 | % | 0.69 | % | ||||||||||||||||
|
Home equity — junior lien
(b)
|
726 | 1,200 | 4.16 | 5.91 | 1,783 | 2,264 | 5.05 | 5.52 | ||||||||||||||||||||||||
|
Prime mortgage
(c)
|
268 | 483 | 1.59 | 2.76 | 730 | 795 | 2.16 | 2.26 | ||||||||||||||||||||||||
|
Subprime mortgage
(c)
|
282 | 410 | 8.63 | 11.50 | 739 | 774 | 11.12 | 10.69 | ||||||||||||||||||||||||
|
Option ARMs
(c)
|
22 | 15 | 1.03 | 0.66 | 45 | 19 | 1.04 | 0.43 | ||||||||||||||||||||||||
|
Auto loans
(c)
|
58 | 146 | 0.49 | 1.36 | 160 | 320 | 0.68 | 1.51 | ||||||||||||||||||||||||
|
Credit card — reported
(c)
|
3,721 | 2,689 | 10.20 | 12.03 | 8,233 | 4,718 | 10.99 | 10.15 | ||||||||||||||||||||||||
|
All other loans
(c)
|
336 | 332 | 4.13 | 3.99 | 605 | 556 | 3.67 | 3.30 | ||||||||||||||||||||||||
|
Total consumer loans — excluding
purchased credit-impaired
loans
(i)
|
5,483 | 5,340 | 5.34 | 5.79 | 12,434 | 9,545 | 5.98 | 5.11 | ||||||||||||||||||||||||
|
Total consumer loans — reported
|
5,483 | 5,340 | 4.49 | 4.69 | 12,434 | 9,545 | 5.03 | 4.15 | ||||||||||||||||||||||||
|
Credit card — securitized
(c)(g)
|
NA | 1,664 | NA | 7.91 | NA | 3,128 | NA | 7.42 | ||||||||||||||||||||||||
|
Total consumer loans —
managed
(c)
|
5,483 | 7,004 | 4.49 | 5.20 | 12,434 | 12,673 | 5.03 | 4.65 | ||||||||||||||||||||||||
|
Total consumer loans — managed —
excluding purchased credit-
impaired loans
(c)(i)
|
5,483 | 7,004 | 5.34 | 6.18 | 12,434 | 12,673 | 5.98 | 5.53 | ||||||||||||||||||||||||
|
Memo: Credit card — managed
(c)
|
$ | 3,721 | $ | 4,353 | 10.20 | % | 10.03 | % | $ | 8,233 | $ | 7,846 | 10.99 | % | 8.85 | % | ||||||||||||||||
| (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 new consolidation guidance related to VIEs. Upon the adoption of the new 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 15-19 of this Form 10-Q. | |
| (d) | Excluded operating lease-related assets of $3.4 billion and $2.9 billion at June 30, 2010, and December 31, 2009, respectively. | |
| (e) | 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 June 30, 2010. See Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report. | |
| (f) | Includes billed finance charges and fees net of an allowance for uncollectible amounts. | |
| (g) | Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans. For a further discussion of credit card securitizations, see CS on pages 36-40 of this Form 10-Q. | |
| (h) | 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. | |
| (i) | Charge-offs are not recorded on purchased credit-impaired 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. | |
| (j) | At June 30, 2010, and December 31, 2009, nonperforming loans exclude: (1) mortgage loans insured by U.S. government agencies of $10.1 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 $447 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. | |
| (k) | Excludes purchased credit-impaired 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. | |
| (l) | Average consumer loans held-for-sale and loans at fair value were $1.9 billion and $2.8 billion for the quarters ended June 30, 2010 and 2009, respectively, and $2.4 billion and $2.9 billion for year-to-date 2010 and 2009, respectively. These amounts were excluded when calculating the net charge-off rates. |
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The following table presents consumer nonperforming assets by business segment as of June 30,
2010, and December 31, 2009.
Consumer nonperforming assets
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Assets acquired in | Assets acquired in | |||||||||||||||||||||||||||||||
| loan satisfactions | loan satisfactions | |||||||||||||||||||||||||||||||
| Nonperforming | Real estate | Nonperforming | Nonperforming | Real estate | Nonperforming | |||||||||||||||||||||||||||
| (in millions) | loans | owned | Other | assets | loans | owned | Other | assets | ||||||||||||||||||||||||
|
Retail Financial Services
(a)(b)
|
$ | 10,457 | $ | 1,207 | $ | 67 | $ | 11,731 | $ | 10,611 | $ | 1,154 | $ | 99 | $ | 11,864 | ||||||||||||||||
|
Card Services
(a)
|
3 | — | — | 3 | 3 | — | — | 3 | ||||||||||||||||||||||||
|
Corporate/Private Equity
|
59 | 1 | — | 60 | 46 | 2 | — | 48 | ||||||||||||||||||||||||
|
Total
|
$ | 10,519 | $ | 1,208 | $ | 67 | $ | 11,794 | $ | 10,660 | $ | 1,156 | $ | 99 | $ | 11,915 | ||||||||||||||||
| (a) | At June 30, 2010, and December 31, 2009, nonperforming loans and assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.1 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 $1.4 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 $447 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. | |
| (b) | Excludes purchased credit-impaired 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. |
Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for
consolidation of VIEs. Upon adoption of the new 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
| (in millions) | January 1, 2010 | |||
|
Prime mortgage
|
$ | 1,477 | ||
|
Subprime mortgage
|
1,758 | |||
|
Option ARMs
|
381 | |||
|
Auto loans
|
218 | |||
|
Student loans
|
1,008 | |||
|
Credit card
(a)
|
84,663 | |||
|
Total increase in consumer loans
|
$ | 89,505 | ||
| (a) | Represents the impact of adoption of the new consolidation standard related to VIEs on reported loans for Firm-sponsored credit card securitization trusts. 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 15-19 of this Form 10-Q. |
Portfolio analysis
The following discussion relates to the specific loan and lending-related categories within the
consumer portfolio. Purchased credit-impaired loans are excluded from individual loan product
discussions and are addressed separately below.
Home equity:
Home equity loans at June 30, 2010, were $94.8 billion, compared with $101.4 billion
at December 31, 2009. The decrease primarily reflected loan paydowns and charge-offs. Both senior
lien and junior lien nonperforming loans decreased from year-end as a result of continuing
improvement in early-stage delinquencies. Junior lien net charge-offs have declined from the prior
year, but remain extremely high. Delinquencies continued to show improvement, albeit at a slower
pace than the prior quarter, but remain elevated. 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. The portfolio contained an estimated
$4.0 billion of such junior lien loans which are considered to
be at higher risk for delinquency and this risk has been
considered in establishing the allowance for loan losses at June 30, 2010.
Mortgage:
Mortgage loans at June 30, 2010, which include prime mortgages, subprime mortgages,
option ARMs acquired in the Washington Mutual transaction and mortgage loans held-for-sale, were
$87.9 billion, compared with $88.3 billion at December 31, 2009. The decrease is due to portfolio
runoff, partially offset by the addition of loans to the balance
sheet as a result of the adoption of
the new consolidation guidance related to VIEs. Net charge-offs have decreased from the prior year;
however, losses continue to remain elevated.
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Prime mortgages were $66.7 billion, compared with $67.3 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 new consolidation guidance related to VIEs. Delinquencies
continued to show improvement; however, nonperforming assets remain elevated as a result of ongoing
trial modification activity and foreclosure processing delays.
Subprime mortgages were $12.6 billion, relatively flat compared with December 31, 2009, due to the
addition of loans as a result of the adoption of the new consolidation guidance related to VIEs,
offset by paydowns and charge-offs on delinquent loans. Both early-stage and late-stage
delinquencies are showing improvement but remain elevated.
Option ARMs were $8.6 billion, relatively flat compared with December 31, 2009, due to the addition
of loans as a result of the adoption of the new consolidation guidance related to VIEs, offset by
paydowns in the portfolio. The option ARM portfolio represents less than 5% of the non-purchased
credit-impaired residential real estate loans and is primarily comprised of loans with low LTV
ratios and high borrower FICOs. Accordingly, the Firm currently expects substantially lower losses
on this portfolio when compared with the purchased credit-impaired option ARM portfolio. As of June
30, 2010, approximately 62% of option ARM borrowers elected to make an interest-only or minimum
payment. The cumulative amount of unpaid interest added to the unpaid principal balance due to
negative amortization of option ARMs was $68 million and $78 million at June 30, 2010, and December
31, 2009, respectively. Assuming current market interest rates, the Firm would expect the following
balance of current loans to experience a payment recast: $721 million in 2010, $375 million in 2011
and $611 million in 2012. New originations of option ARMs were discontinued by Washington Mutual
prior to the date of JPMorgan Chase’s acquisition of the banking operations of Washington Mutual.
Auto loans:
As of June 30, 2010, auto loans were $47.5 billion, compared with $46.0 billion at
December 31, 2009. Delinquent loans were lower than in the prior year, while provision expense
decreased due to favorable loss severities as a result of higher used-car prices nationwide. The
auto loan portfolio reflects a high concentration of prime quality credits.
Credit card:
Credit card receivables (which include receivables in its Firm-sponsored credit card
securitization trust that were not reported on the Consolidated Balance Sheets prior to January 1,
2010) were $143.0 billion at June 30, 2010, a decrease of $20.4 billion from year-end 2009, due to
the decline in lower-yielding promotional balances and the Washington Mutual portfolio runoff.
The 30-day delinquency rate decreased to 4.96% at June 30, 2010, from 6.28% at December 31, 2009,
while the net charge-off rate increased to 10.20% for the second quarter of 2010, from 10.03% for
the second quarter of 2009. Charge-offs were negatively affected by the current weak economic
environment, especially in metropolitan statistical areas (“MSAs”) experiencing the greatest
housing price depreciation and highest unemployment, and by the credit performance of loans
acquired in the Washington Mutual transaction. The delinquency trend is showing improvement,
especially within early stage delinquencies. Provision expense reflected a $1.5 billion decrease in
the allowance for loan losses in the second quarter of 2010, reflecting lower estimated losses,
primarily related to the improvement in the delinquent loan trend and lower levels of outstandings.
The credit card portfolio continues to reflect a well-seasoned, largely rewards-based portfolio
that has good U.S. geographic diversification.
Credit card receivables, excluding the Washington Mutual portfolio, were $127.4 billion at June 30,
2010, compared with $143.8 billion at December 31, 2009. The 30-day delinquency rate was 4.48% at
June 30, 2010, down from 5.52% at December 31, 2009; the net charge-off rate, excluding the
Washington Mutual portfolio, increased to 9.02% for the second quarter of 2010 from 8.97% in the
second quarter of 2009. Excluding the impact of the payment holiday program offered in the second
quarter of 2009, the net charge-off rate is down from the prior two quarters.
Credit card receivables in the Washington Mutual portfolio were $15.6 billion at June 30, 2010,
compared with $19.7 billion at December 31, 2009. The Washington Mutual portfolio’s 30-day
delinquency rate was 8.86% at June 30, 2010, compared with 12.72% at December 31, 2009; the latter
excludes the impact at December 31, 2009, of the consolidation of the WMMT in the second quarter of
2009 as a result of certain actions taken at that time. The net charge-off rate in the second
quarter of 2010 was 19.53%, compared with 19.17% in the second quarter of 2009, excluding the
impact of the purchase accounting adjustments related to the consolidation of the WMMT in the
second quarter of 2009.
All other:
All other loans primarily include business banking loans (which are highly
collateralized loans, often with personal loan guarantees), student loans, and other secured and
unsecured consumer loans. As of June 30, 2010, other loans, including loans held-for-sale, were
$32.6 billion, compared with $33.6 billion at December 31, 2009.
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Table of Contents
Purchased credit-impaired:
Purchased credit-impaired loans were $76.9 billion at June 30, 2010,
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. The fair
value of these loans 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 expected loan principal and interest cash flows to be
collected for these loans. Probable decreases in expected loan principal cash flows trigger the
recognition of impairment through the provision for loan losses. Probable and significant increases
in expected loan principal cash flows would first trigger the reversal of any allowance for loan
losses. Any remaining increase in the expected principal cash flows would be recognized
prospectively in interest income over the remaining lives of the underlying loans.
During the second quarter of 2010, the Firm did not recognize any impairment as a result of
updating its assessment of expected cash flows for these purchased credit-impaired pools. As a
result of impairment recognized in prior periods, the Firm maintains an allowance for loan losses
for the prime mortgage and option ARM purchased credit-impaired pools of $1.8 billion and $1.0
billion, respectively, at June 30, 2010. The credit performance of the other pools has generally
been consistent with the estimate of losses at the acquisition date. Accordingly, no impairment for
these other pools has been recognized.
Concentrations of credit risk — consumer loans other than purchased credit-impaired loans
Following is tabular information and, where appropriate, supplemental discussions about certain
concentrations of credit risk for the Firm’s consumer loans, other than purchased credit-impaired
loans, including:
| • | Geographic distribution of loans, including certain residential real estate loans with high LTV ratios; and | |
| • | Loans that are 30+ days past due. |
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Table of Contents
The following tables present the geographic distribution of managed consumer credit outstandings by
product as of June 30, 2010, and December 31, 2009, excluding purchased credit-impaired loans.
Consumer loans by geographic region
| Total | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Home | Home | Total | consumer | consumer | ||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2010 | equity- | equity- | Prime | Subprime | Option | home loan | Card- | All other | loans- | Card loans- | loans- | |||||||||||||||||||||||||||||||||||||
| (in billions) | senior lien | junior lien | mortgage | mortgage | ARMs | portfolio | Auto | reported | loans | reported | securitized (b) | managed | ||||||||||||||||||||||||||||||||||||
|
California
|
$ | 3.5 | $ | 15.7 | $ | 16.9 | $ | 1.9 | $ | 3.9 | $ | 41.9 | $ | 4.4 | $ | 19.4 | $ | 1.9 | $ | 67.6 | NA | $ | 67.6 | |||||||||||||||||||||||||
|
New York
|
3.3 | 11.8 | 8.4 | 1.5 | 0.8 | 25.8 | 3.8 | 11.1 | 4.2 | 44.9 | NA | 44.9 | ||||||||||||||||||||||||||||||||||||
|
Texas
|
3.9 | 2.5 | 2.1 | 0.3 | 0.2 | 9.0 | 4.5 | 10.7 | 3.7 | 27.9 | NA | 27.9 | ||||||||||||||||||||||||||||||||||||
|
Florida
|
1.1 | 3.8 | 4.8 | 1.8 | 0.9 | 12.4 | 1.8 | 8.4 | 1.1 | 23.7 | NA | 23.7 | ||||||||||||||||||||||||||||||||||||
|
Illinois
|
1.7 | 4.5 | 3.0 | 0.6 | 0.3 | 10.1 | 2.5 | 7.9 | 2.3 | 22.8 | NA | 22.8 | ||||||||||||||||||||||||||||||||||||
|
Ohio
|
2.2 | 1.7 | 0.5 | 0.3 | — | 4.7 | 3.1 | 5.7 | 2.7 | 16.2 | NA | 16.2 | ||||||||||||||||||||||||||||||||||||
|
New Jersey
|
0.7 | 3.6 | 1.8 | 0.6 | 0.3 | 7.0 | 1.8 | 5.8 | 1.0 | 15.6 | NA | 15.6 | ||||||||||||||||||||||||||||||||||||
|
Michigan
|
1.3 | 1.7 | 1.0 | 0.3 | — | 4.3 | 2.3 | 4.5 | 2.3 | 13.4 | NA | 13.4 | ||||||||||||||||||||||||||||||||||||
|
Arizona
|
1.6 | 3.2 | 1.2 | 0.3 | 0.1 | 6.4 | 1.5 | 3.3 | 1.6 | 12.8 | NA | 12.8 | ||||||||||||||||||||||||||||||||||||
|
Pennsylvania
|
0.2 | 1.1 | 0.4 | 0.4 | 0.1 | 2.2 | 2.1 | 5.2 | 0.8 | 10.3 | NA | 10.3 | ||||||||||||||||||||||||||||||||||||
|
Washington
|
0.8 | 2.3 | 1.7 | 0.3 | 0.4 | 5.5 | 0.7 | 2.6 | 0.3 | 9.1 | NA | 9.1 | ||||||||||||||||||||||||||||||||||||
|
Colorado
|
0.4 | 1.5 | 1.5 | 0.2 | 0.2 | 3.8 | 1.0 | 3.4 | 0.9 | 9.1 | NA | 9.1 | ||||||||||||||||||||||||||||||||||||
|
All other
(a)
|
5.2 | 15.5 | 23.4 | 4.1 | 1.4 | 49.6 | 18.0 | 55.0 | 9.8 | 132.4 | NA | 132.4 | ||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 25.9 | $ | 68.9 | $ | 66.7 | $ | 12.6 | $ | 8.6 | $ | 182.7 | $ | 47.5 | $ | 143.0 | $ | 32.6 | $ | 405.8 | NA | $ | 405.8 | |||||||||||||||||||||||||
| Total | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Home | Home | Total | consumer | consumer | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2009 | equity- | equity- | Prime | Subprime | Option | home loan | Card- | All other | loans- | Card loans- | loans- | |||||||||||||||||||||||||||||||||||||
| (in billions) | senior lien | junior lien | mortgage | mortgage | ARMs | portfolio | Auto | reported | loans | reported | securitized (b) | managed | ||||||||||||||||||||||||||||||||||||
|
California
|
$ | 3.6 | $ | 16.9 | $ | 18.7 | $ | 1.7 | $ | 3.8 | $ | 44.7 | $ | 4.4 | $ | 11.0 | $ | 1.8 | $ | 61.9 | $ | 11.4 | $ | 73.3 | ||||||||||||||||||||||||
|
New York
|
3.4 | 12.4 | 8.7 | 1.5 | 0.9 | 26.9 | 3.8 | 6.0 | 4.2 | 40.9 | 6.7 | 47.6 | ||||||||||||||||||||||||||||||||||||
|
Texas
|
4.2 | 2.7 | 1.4 | 0.4 | 0.2 | 8.9 | 4.3 | 5.6 | 3.8 | 22.6 | 6.5 | 29.1 | ||||||||||||||||||||||||||||||||||||
|
Florida
|
1.2 | 4.1 | 4.9 | 1.9 | 0.7 | 12.8 | 1.8 | 5.2 | 0.9 | 20.7 | 4.8 | 25.5 | ||||||||||||||||||||||||||||||||||||
|
Illinois
|
1.8 | 4.8 | 2.9 | 0.6 | 0.4 | 10.5 | 2.4 | 3.9 | 2.4 | 19.2 | 4.9 | 24.1 | ||||||||||||||||||||||||||||||||||||
|
Ohio
|
2.3 | 1.9 | 0.4 | 0.3 | — | 4.9 | 3.2 | 3.1 | 2.9 | 14.1 | 3.4 | 17.5 | ||||||||||||||||||||||||||||||||||||
|
New Jersey
|
0.8 | 3.8 | 1.9 | 0.6 | 0.3 | 7.4 | 1.8 | 3.0 | 0.9 | 13.1 | 3.6 | 16.7 | ||||||||||||||||||||||||||||||||||||
|
Michigan
|
1.3 | 1.9 | 0.9 | 0.3 | — | 4.4 | 2.1 | 2.4 | 2.5 | 11.4 | 2.9 | 14.3 | ||||||||||||||||||||||||||||||||||||
|
Arizona
|
1.6 | 3.6 | 1.3 | 0.3 | 0.1 | 6.9 | 1.5 | 1.7 | 1.6 | 11.7 | 2.1 | 13.8 | ||||||||||||||||||||||||||||||||||||
|
Pennsylvania
|
0.2 | 1.2 | 0.5 | 0.4 | 0.1 | 2.4 | 2.0 | 2.8 | 0.8 | 8.0 | 3.2 | 11.2 | ||||||||||||||||||||||||||||||||||||
|
Washington
|
0.9 | 2.4 | 1.7 | 0.3 | 0.4 | 5.7 | 0.6 | 1.5 | 0.4 | 8.2 | 1.5 | 9.7 | ||||||||||||||||||||||||||||||||||||
|
Colorado
|
0.4 | 1.7 | 1.6 | 0.2 | 0.2 | 4.1 | 1.0 | 1.6 | 0.8 | 7.5 | 2.1 | 9.6 | ||||||||||||||||||||||||||||||||||||
|
All other
(a)
|
5.7 | 16.6 | 22.4 | 4.0 | 1.4 | 50.1 | 17.1 | 31.0 | 10.6 | 108.8 | 31.5 | 140.3 | ||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 27.4 | $ | 74.0 | $ | 67.3 | $ | 12.5 | $ | 8.5 | $ | 189.7 | $ | 46.0 | $ | 78.8 | $ | 33.6 | $ | 348.1 | $ | 84.6 | $ | 432.7 | ||||||||||||||||||||||||
| (a) | Includes prime mortgage loans repurchased from Ginnie Mae pools, which are insured by U.S. government agencies, of $12.0 billion and $10.4 billion at June 30, 2010, and December 31, 2009, respectively. Prior period amounts have been revised to conform to the current period presentation. See further discussion of loans repurchased from Ginnie Mae pools in Repurchase liability on pages 58-60 of this Form 10-Q. | |
| (b) | Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans at December 31, 2009. For further discussion of credit card securitizations, see Note 15 on pages 151-163 of this Form 10-Q. |
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Table of Contents
The following table presents the geographic distribution of certain residential real estate
loans with current estimated LTV ratios in excess of 100% as of June 30, 2010, and December 31,
2009, excluding purchased credit-impaired loans acquired in the Washington Mutual transaction. The
estimated collateral values used to calculate the current estimated LTV ratios in the following
table were derived from a nationally recognized home price index measured at the MSA level. Because
home price indices can have wide variability, and such derived real estate values do not represent
actual appraised loan-level collateral values, the resulting ratios are necessarily imprecise and
should therefore be viewed as estimates.
Geographic distribution of residential real estate loans with current estimated LTVs >
100%
(a)
| June 30, 2010 | Home equity- | Subprime | % of total | |||||||||||||||||
| (in billions, except ratios) | junior lien (c) | Prime mortgage (d) | mortgage | Total | loans (e) | |||||||||||||||
|
California
|
$ | 6.0 | $ | 5.0 | $ | 0.8 | $ | 11.8 | 34 | % | ||||||||||
|
New York
|
1.8 | 0.3 | 0.2 | 2.3 | 11 | |||||||||||||||
|
Arizona
|
2.1 | 0.6 | 0.2 | 2.9 | 62 | |||||||||||||||
|
Florida
|
2.2 | 2.4 | 0.9 | 5.5 | 53 | |||||||||||||||
|
Michigan
|
1.2 | 0.4 | 0.2 | 1.8 | 60 | |||||||||||||||
|
All other
|
6.6 | 1.7 | 1.2 | 9.5 | 15 | |||||||||||||||
|
Total LTV >100%
|
$ | 19.9 | $ | 10.4 | $ | 3.5 | $ | 33.8 | 25 | % | ||||||||||
|
|
||||||||||||||||||||
|
As a percentage of total loans
|
29 | % | 19 | % | 28 | % | 25 | % | ||||||||||||
|
Total portfolio average LTV at origination
|
73 | 70 | 78 | |||||||||||||||||
|
Total portfolio average current estimated LTV
(b)
|
90 | 81 | 90 | |||||||||||||||||
| December 31, 2009 | Home equity- | Subprime | % of total | |||||||||||||||||
| (in billions, except ratios) | junior lien (c) | Prime mortgage (d) | mortgage | Total | loans (e) | |||||||||||||||
|
California
|
$ | 6.7 | $ | 5.7 | $ | 1.0 | $ | 13.4 | 36 | % | ||||||||||
|
New York
|
1.7 | 0.3 | 0.2 | 2.2 | 10 | |||||||||||||||
|
Arizona
|
2.4 | 0.7 | 0.2 | 3.3 | 63 | |||||||||||||||
|
Florida
|
2.5 | 2.5 | 1.2 | 6.2 | 57 | |||||||||||||||
|
Michigan
|
1.3 | 0.4 | 0.2 | 1.9 | 61 | |||||||||||||||
|
All other
|
6.9 | 1.6 | 1.3 | 9.8 | 15 | |||||||||||||||
|
Total LTV >100%
|
$ | 21.5 | $ | 11.2 | $ | 4.1 | $ | 36.8 | 26 | % | ||||||||||
|
|
||||||||||||||||||||
|
As a percentage of total loans
|
29 | % | 20 | % | 33 | % | 26 | % | ||||||||||||
|
Total portfolio average LTV at origination
|
74 | 71 | 79 | |||||||||||||||||
|
Total portfolio average current estimated LTV
(b)
|
90 | 81 | 95 | |||||||||||||||||
| (a) | Home equity — junior lien, prime mortgage and subprime mortgage loans with current estimated LTVs greater than 80% up to and including 100% were $16.7 billion, $13.4 billion and $3.3 billion, respectively, at June 30, 2010, and $17.9 billion, $15.0 billion and $3.7 billion, respectively, at December 31, 2009. | |
| (b) | The average current estimated LTV ratio reflects the outstanding balance at the balance sheet date, 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. | |
| (c) | 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. Prior period amounts have been revised to conform to the current period presentation. | |
| (d) | Excludes mortgage loans insured by the U.S. government agencies of $6.8 billion and $5.0 billion at June 30, 2010, and December 31, 2009, respectively. Prior period amounts have been revised to conform to the current period presentation. | |
| (e) | Represents total loans of the product types noted in this table by geographic location, excluding mortgage loans insured by U.S. government agencies. |
The consumer credit portfolio is geographically diverse. The greatest concentration of loans
is in California. Excluding mortgage loans insured by U.S. government agencies, California
represents 17% of total managed consumer loans and 25% of total residential real estate loans at
both June 30, 2010, and December 31, 2009. Of the total managed consumer loan portfolio, excluding
mortgage loans insured by U.S. government agencies, $162.4 billion, or 41%, is concentrated in
California, New York, Arizona, Florida and Michigan at June 30, 2010, compared with $174.5 billion,
or 41%, at December 31, 2009.
Declining home prices have 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 estimated LTV ratios greater than 100% continue
to pay and are current, the continued willingness and ability of these borrowers to pay remains
uncertain. Nonperforming loans in the residential real estate portfolio totaled $9.4 billion at
June 30, 2010, of which 76% were greater than 150 days past due; this compared with total
residential real estate nonperforming loans of $9.6 billion at December 31, 2009, of which 64% were
greater than 150 days past due. In the aggregate, the unpaid principal balance of these loans has
been charged down by approximately 32% and 36% to estimated collateral value at June 30, 2010, and
December 31, 2009, respectively.
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Consumer 30+ day delinquency information
| 30+ day delinquent loans | 30+ day delinquency rate | |||||||||||||||
| June 30, | December 31, | June 30, | December 31, | |||||||||||||
| (in millions, except ratios) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Consumer loans — excluding purchased
credit-impaired loans
(a)
|
||||||||||||||||
|
Home equity — senior lien
|
$ | 725 | $ | 833 | 2.80 | % | 3.04 | % | ||||||||
|
Home equity — junior lien
|
1,746 | 2,515 | 2.53 | 3.40 | ||||||||||||
|
Prime mortgage
|
5,221 | (d) | 5,532 | (d) | 7.84 | (f) | 8.21 | (f) | ||||||||
|
Subprime mortgage
|
3,349 | 4,232 | 26.59 | 33.79 | ||||||||||||
|
Option ARMs
|
550 | 438 | 6.40 | 5.13 | ||||||||||||
|
Auto loans
|
446 | 750 | 0.94 | 1.63 | ||||||||||||
|
Credit card — reported
(b)
|
7,087 | 6,093 | 4.96 | 7.73 | ||||||||||||
|
All other loans
|
1,324 | (e) | 1,306 | (e) | 4.06 | 3.91 | ||||||||||
|
Total consumer loans — excluding purchased
credit-impaired loans — reported
|
$ | 20,448 | $ | 21,699 | 5.04 | % | 6.23 | % | ||||||||
|
Credit card — securitized
(b)(c)
|
NA | 4,174 | NA | 4.93 | ||||||||||||
|
Total consumer loans — excluding purchased
credit-impaired loans —
managed
(b)
|
$ | 20,448 | $ | 25,873 | 5.04 | % | 5.98 | % | ||||||||
|
Memo: Credit card — managed
(b)
|
$ | 7,087 | $ | 10,267 | 4.96 | % | 6.28 | % | ||||||||
| (a) | The delinquency rate for purchased credit-impaired loans, which is based on the unpaid principal balance, was 27.91% and 27.79% at June 30, 2010, and December 31, 2009, respectively. | |
| (b) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon the adoption of the new 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 assets are now recorded as loans 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 Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q. | |
| (c) | Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans at December 31, 2009. For a further discussion of credit card securitizations, see CS on pages 36-40 of this Form 10-Q. | |
| (d) | Excludes 30+ day delinquent mortgage loans that are insured by U.S. government agencies of $10.9 billion and $9.7 billion at June 30, 2010, and December 31, 2009, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (e) | Excludes 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 $988 million and $942 million at June 30, 2010, and December 31, 2009, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally. | |
| (f) | The denominator for the calculation of the 30+ day delinquency rate includes: (1) residential real estate loans reported in the Corporate/Private Equity segment; and (2) mortgage loans insured by U.S. government agencies. The 30+ day delinquency rate excluding these loan balances was 11.24% at both June 30, 2010, and December 31, 2009. |
Consumer 30+ day delinquencies have decreased to 5.04% of the consumer loan portfolio at June
30, 2010, compared with 5.98% at December 31, 2009, driven predominantly by a $3.2 billion decrease
in CS delinquencies as well as a $2.0 billion decrease in residential real estate delinquencies.
While early stage delinquencies (30-89 days delinquent) in the residential real estate portfolios
have shown improvement since December 31, 2009, late stage delinquencies (150+ days delinquent)
remain elevated, due in part to loss mitigation activities and elongated foreclosure processing
timelines. Losses related to the residential real estate portfolio continue to be recognized in
accordance with the Firm’s normal charge-off practices; as such, these loans are reflected at their
estimated collateral value.
Concentrations of credit risk — purchased credit-impaired loans
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 purchased
credit-impaired 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 were derived from a nationally recognized home price index measured at the
MSA level. Because home price indices can have wide variability, and such derived real estate
values do not represent actual appraised loan-level collateral values, the resulting ratios are
necessarily imprecise and should therefore be viewed as estimates.
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Table of Contents
LTV ratios and ratios of carrying values to current estimated collateral values — purchased
credit-impaired
| Ratio of carrying value | ||||||||||||||||
| June 30, 2010 | Unpaid principal | Current estimated | Carrying | to current estimated | ||||||||||||
| (in billions, except ratios) | balance (a) | LTV ratio (b) | value (d) | collateral value | ||||||||||||
|
Option ARMs
|
$ | 34.6 | 112 | % | $ | 27.3 | 85 | % (e) | ||||||||
|
Home equity
|
30.4 | 114 | (c) | 25.5 | 96 | |||||||||||
|
Prime mortgage
|
20.4 | 105 | 18.5 | 86 | (e) | |||||||||||
|
Subprime mortgage
|
8.5 | 109 | 5.6 | 73 | ||||||||||||
| Ratio of carrying value | ||||||||||||||||
| December 31, 2009 | Unpaid principal | Current estimated | Carrying | to current estimated | ||||||||||||
| (in billions, except ratios) | balance (a) | LTV ratio (b) | value (d) | collateral value | ||||||||||||
|
Option ARMs
|
$ | 37.4 | 113 | % | $ | 29.0 | 86 | % (e) | ||||||||
|
Home equity
|
32.9 | 115 | (c) | 26.5 | 93 | |||||||||||
|
Prime mortgage
|
22.0 | 106 | 19.7 | 90 | (e) | |||||||||||
|
Subprime mortgage
|
9.0 | 110 | 6.0 | 73 | ||||||||||||
| (a) | Represents the contractual amount of principal owed at June 30, 2010, and December 31, 2009. | |
| (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. | |
| (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. Prior period amounts have been revised to conform to the current period presentation. | |
| (d) | Carrying values include the effect of fair value adjustments that were applied to the consumer purchased credit-impaired portfolio at the date of acquisition. | |
| (e) | As of June 30, 2010, and December 31, 2009, the ratios of the carrying value to current estimated collateral value are net of the allowance for loan losses of $1.8 billion and $1.1 billion for the prime mortgage pool, respectively, and $1.0 billion and $491 million for the option ARM pool, respectively. |
Purchased credit-impaired loans in the states of California and Florida represented 54% and
11%, respectively, of total purchased credit-impaired loans at both June 30, 2010, and December 31,
2009. The current estimated LTV ratios were 117% and 133% for California and Florida loans,
respectively, at June 30, 2010, compared with 118% and 136%, respectively, at December 31, 2009.
Loan concentrations in California and Florida, as well as the continued pressure on housing prices
in those states, have contributed negatively to both the current estimated LTV ratio and the ratio
of carrying value to current collateral value for loans in the purchased credit-impaired portfolio.
While the carrying value of the purchased credit-impaired loans is below the current estimated
collateral value of the loans, the ultimate performance of this portfolio is highly dependent on
the borrowers’ behavior and ongoing ability and willingness to continue to make payments on homes
with negative equity as well as the cost of alternative housing.
Option ARM and prime purchased credit-impaired pools:
Approximately 56% of option ARM borrowers
elected to make an interest-only or minimum payment at June 30, 2010. The cumulative amount of
unpaid interest added to the unpaid principal balance of option ARMs was $1.6 billion and $1.9
billion at June 30, 2010, and December 31, 2009, respectively. Assuming current market interest
rates, the Firm would expect the following balance of current option ARM loans to experience a
payment recast: $2.1 billion in 2010, $3.4 billion in 2011 and $4.6 billion in 2012.
The option ARM and prime purchased credit-impaired pools continue to show some signs of
stabilization and are performing within management’s revised expectations. Accordingly, no
impairment was recognized for the purchased credit-impaired prime mortgage or option ARM pools
during the second quarter of 2010. Previously, management concluded as part of the Firm’s regular
assessment of these pools that it was probable that higher expected principal credit losses for the
prime mortgage and option ARM purchased credit-impaired pools would result in a decrease in
expected cash flows. As a result, an allowance for loan losses for impairment of the prime mortgage
and option ARM pools has been recognized. As of June 30, 2010, the total allowance for loan losses
for the prime mortgage and option ARM purchased credit-impaired pools was $1.8 billion and $1.0
billion, respectively.
Other purchased credit-impaired pools:
The credit performance of the home equity and subprime
purchased credit-impaired pools has generally been consistent with the estimate of losses at the
acquisition date. Accordingly, no impairment for these pools has been recognized.
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The following table provides a summary of lifetime principal loss estimates included in both the
nonaccretable difference and the allowance for loan losses. Principal charge-offs will not be
recorded on these portfolios until the nonaccretable difference has been fully depleted.
| Lifetime loss estimates (a) | LTD liquidation losses (b)(c) | |||||||||||||||
| June 30, | December 31, | June 30, | December 31, | |||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Option ARMs
|
$ | 11,350 | $ | 10,650 | $ | 2,680 | $ | 1,744 | ||||||||
|
Home equity
|
13,138 | 13,138 | 7,701 | 6,060 | ||||||||||||
|
Prime mortgage
|
5,020 | 4,240 | 1,158 | 794 | ||||||||||||
|
Subprime mortgage
|
3,842 | 3,842 | 1,048 | 796 | ||||||||||||
|
Total
|
$ | 33,350 | $ | 31,870 | $ | 12,587 | $ | 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 is $17.9 billion and $21.1 billion at June 30, 2010, and December 31, 2009, respectively. All increases in principal losses subsequent to the purchase date are reflected in the allowance for loan losses. | |
| (b) | Realization of loss upon loan resolution. | |
| (c) | If charge-offs were reported comparable to the non-purchased credit-impaired portfolio, life-to-date (“LTD”) principal charge-offs would have been $20.8 billion and $16.7 billion at June 30, 2010, and December 31, 2009, respectively. |
Loan modification activities
For additional information about consumer loan modification activities, including consumer loan
modifications accounted for as troubled debt restructurings, see Note
13 on pages 145-150 of this
Form 10-Q, and Note 13 on pages 192-196 of JPMorgan Chase’s 2009 Annual Report.
Residential
real estate loans:
For both the Firm’s on-balance sheet loans and loans serviced for
others, more than 880,000 mortgage modifications have been offered to borrowers and nearly 245,000
have been approved since the beginning of 2009. Of these, approximately 193,000 have achieved
permanent modification as of June 30, 2010.
The Firm is participating in the U.S. Treasury’s MHA programs while 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.
All of the Firm’s loan-modification activities are intended to minimize economic loss to the Firm,
while providing the borrower with an alternative to foreclosure and an affordable loan payment.
In July 2009, following the introduction of MHA, the Firm began to offer modifications under
standard programs; prior to that time, residential real estate loan modifications were evaluated
and offered on a case-by-case basis rather than being based on a standardized framework comparable
to HAMP. The Firm completed its first permanent modifications under HAMP in September 2009. HAMP,
as well as the Firm’s other loss-mitigation programs, generally provide various concessions to
financially troubled borrowers, including, but not limited to, term or payment extensions, interest
rate reductions, and deferral of principal payments that would have otherwise been required under
the terms of the original agreement. In certain limited circumstances, loan modifications include
principal forgiveness, which has been minimal to-date.
In addition, JPMorgan Chase announced in March 2010 that it would be joining 2MP, with
implementation occurring in phases beginning in May 2010. Under 2MP, homeowners will be offered a
way to modify their second mortgages to make them more affordable when their first mortgage has
been modified under HAMP. For amortizing second lien loans modified under 2MP, the interest rate
will be reduced to 1%; the interest rate on interest-only second lien loans will be reduced to 2%.
After five years, the interest rate on these modified second lien loans will reset to the
then-current interest rate on the HAMP-modified first-lien.
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.
Except for home equity loans modified under 2MP where the borrower is current, 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.
For the
21,700 on-balance sheet loans modified under HAMP and the Firm’s other loss-mitigation
programs since July 1, 2009, 68% of permanent loan modifications have included interest rate
reductions, 51% have included term or payment extensions and 14% have included principal deferment.
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.
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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, the LTV
ratio of the property and other macroeconomic factors. Modifications of serviced mortgage loans 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 fully underwritten
after a successful trial payment period of at least 3 months.
More than 85% of the modifications completed since July 1, 2009
were completed in 2010 with 41% completed as recently as the second
quarter. Performance metrics to date show redefault rates of
20-30%. 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 June 30, 2010, and December 31, 2009, relating to
restructured on-balance sheet residential real estate loans for which concessions have been
granted to borrowers experiencing financial difficulty. Modifications of purchased credit-impaired
loans continue to be accounted for and reported as purchased credit-impaired loans, and the impact
of the modification is incorporated into the Firm’s quarterly assessment of whether a probable
and/or significant change in estimated future cash flows has occurred. Modifications of loans other
than purchased credit-impaired loans are generally accounted for and reported as troubled debt
restructurings.
Restructured residential real estate loans
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Nonperforming | Nonperforming | |||||||||||||||
| On-balance | on-balance | On-balance | on-balance | |||||||||||||
| (in millions) | sheet loans | sheet loans (d) | sheet loans | sheet loans (d) | ||||||||||||
|
Restructured residential real estate loans — excluding
purchased credit-impaired loans
(a)(b)
|
||||||||||||||||
|
Home equity — senior lien
|
$ | 220 | $ | 46 | $ | 168 | $ | 30 | ||||||||
|
Home equity — junior lien
|
253 | 34 | 222 | 43 | ||||||||||||
|
Prime mortgage
|
1,421 | 567 | 634 | 243 | ||||||||||||
|
Subprime mortgage
|
2,575 | 986 | 1,998 | 598 | ||||||||||||
|
Option ARMs
|
65 | 19 | 8 | 6 | ||||||||||||
|
Total restructured residential real estate loans —
excluding purchased credit-impaired loans
|
$ | 4,534 | $ | 1,652 | $ | 3,030 | $ | 920 | ||||||||
|
Restructured purchased credit-impaired loans
(c)
|
||||||||||||||||
|
Home equity
|
$ | 436 | NA | $ | 453 | NA | ||||||||||
|
Prime mortgage
|
2,276 | NA | 1,526 | NA | ||||||||||||
|
Subprime mortgage
|
2,934 | NA | 1,954 | NA | ||||||||||||
|
Option ARMs
|
4,839 | NA | 2,972 | NA | ||||||||||||
|
Total restructured purchased credit-impaired loans
|
$ | 10,485 | NA | $ | 6,905 | NA | ||||||||||
| (a) | Amounts represent the carrying value of restructured residential real estate loans. | |
| (b) | Excludes $1.7 billion and $296 million of loans at June 30, 2010, and December 31, 2009, respectively, that were repurchased from Ginnie Mae pools and modified subsequent to repurchase. When such loans reperform subsequent to modification they are generally sold back into Ginnie Mae loan pools. Modified loans that do not reperform will become subject to foreclosure. | |
| (c) | Amounts represent the unpaid principal balance of restructured purchased credit-impaired loans. | |
| (d) | Nonperforming loans modified in a troubled debt restructuring 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. |
Excluding purchased credit-impaired loans, 21% of restructured residential real estate loans
are greater than 30 days delinquent, which is within the Firm’s expectations.
Credit card loans:
JPMorgan Chase has also modified the terms of credit card loan agreements with
borrowers who have experienced financial difficulty. Such modifications typically include reducing
the interest rate on the card and, in most cases, involve placing the customer on a fixed payment
plan not exceeding 60 months; in substantially all cases, the Firm cancels the customer’s available
line of credit on the credit card. If the cardholder does not comply with the modified payment
terms, the credit card loan agreement generally reverts back to its original payment and interest
rate terms, resulting in the loan being excluded from modified loans. Assuming that those borrowers
do not begin to perform in accordance with those original payment terms, the loans continue to age
and become subject to the Firm’s standard charge-off policies. Substantially all modifications of
credit card loans performed under the Firm’s existing modification programs are considered to be
troubled debt restructurings. At June 30, 2010, and December 31, 2009, the Firm had $9.3 billion
and $5.1 billion, respectively, of on-balance sheet credit card loans outstanding for borrowers
enrolled in a credit card modification program. The increase in modified credit card loans
outstanding from December 31, 2009, to June 30, 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 consolidation guidance. Consistent with the Firm’s
policy, all credit card
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loans typically remain on accrual status. 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.
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 were up slightly compared with December 31, 2009. It is anticipated
that REO assets will increase over the next several quarters, as loans moving through the
foreclosure process are expected to increase.
Portfolio transfers
The Firm regularly evaluates market conditions and overall economic returns and makes an initial
determination as to whether new originations will be held-for-investment or sold within the
foreseeable future. The Firm also periodically evaluates the expected economic returns of
previously originated loans under prevailing market conditions to determine whether their
designation as held-for-sale or held-for-investment continues to be appropriate. When the Firm
determines that a change in this designation is appropriate, the loans are transferred to the
appropriate classification. Since the second half of 2007, all new prime mortgage originations that
cannot be sold to U.S. government agencies and U.S. government-sponsored enterprises have been
designated as held-for-investment. Prime mortgage loans originated with the intent to sell are
accounted for at fair value and classified as trading assets on the Consolidated Balance
Sheets.
ALLOWANCE FOR CREDIT LOSSES
JPMorgan Chase’s allowance for loan losses covers the wholesale (risk-rated) and consumer
(primarily scored) 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
lending-related commitments using a methodology similar to that used for the wholesale loans.
Determining the appropriateness of the allowance is complex and requires judgment about the effect
of matters that are inherently uncertain. Assumptions about unemployment rates, housing prices and
overall economic conditions could have a significant impact on the Firm’s assessment of loan
quality. Subsequent evaluations of the loan portfolio, in light of then-prevailing factors, 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 June 30, 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).
For a further discussion of the allowance for credit losses, see Critical Accounting Estimates Used
by the Firm on page 100 and Note 14 on pages 150-151 of this Form 10-Q, and Allowance for Credit
Losses on page 115, Critical Accounting Estimates Used by the Firm on
pages 127-131, and Note 14
on pages 196-198 of JPMorgan Chase’s 2009 Annual Report.
The allowance for credit losses was $36.7 billion at June 30, 2010, an increase of $4.2 billion
from $32.5 billion at year-end 2009. The increase was primarily due to the Firm’s adoption of new
consolidation 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 such securitization trusts.
The consumer allowance for loan losses increased predominately due to the aforementioned impact of
new consolidation guidance. Excluding the effect of this adoption, the consumer allowance decreased
by $1.2 billion from December 31, 2009. The decrease reflects a $2.5 billion reduction in the
allowance in CS, reflecting lower estimated losses primarily related to improved delinquency trends
as well as lower levels of outstandings. This decrease was partly offset by a $1.2 billion
allowance increase in RFS during the first quarter, related to further estimated deterioration in
the Washington Mutual prime and option ARM purchased credit-impaired
pools. While RFS delinquencies and credit losses improved as compared
to the prior quarter, they remain at elevated levels and a growing series of environmental, regulatory,
and legislative challenges continue to present significant risk to
credit performance, primarily
in the Home Lending portfolio. After consideration of these factors,
the RFS allowance for loan losses was essentially flat to the prior
quarter.
The wholesale allowance for loan losses was down by $2.0 billion from December 31, 2009. The
decrease was primarily due to net repayments, loan sales, refinements to credit loss estimates, and
improvement in the credit quality of the commercial and industrial portfolio.
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The allowance for lending-related commitments for both wholesale and consumer, which is reported in
other liabilities, was $912 million and $939 million at June 30, 2010, and December 31, 2009. The
decrease primarily reflects lower wholesale commitment levels.
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. As of June 30, 2010 and 2009, wholesale
retained loans were $213.0 billion and $224.1 billion, respectively; and consumer retained loans
were $482.2 billion and $447.0 billion, respectively. For the six months ended June 30, 2010 and
2009, average wholesale retained loans were $210.3 billion and $233.9 billion, respectively; and
average consumer retained loans were $498.5 billion and $464.1 billion, respectively. Excluding
held-for-sale loans, loans carried at fair value, and purchased credit-impaired consumer loans, the
allowance for loan losses represented 5.34% of loans at June 30, 2010, compared with 5.01% at June
30, 2009.
Summary of changes in the allowance for credit losses
| 2010 | 2009 | |||||||||||||||||||||||
| Six months ended June 30, | ||||||||||||||||||||||||
| (in millions) | Wholesale | Consumer | Total | Wholesale | Consumer | Total | ||||||||||||||||||
|
Allowance for loan losses
|
||||||||||||||||||||||||
|
Beginning balance at January 1,
|
$ | 7,145 | $ | 24,457 | $ | 31,602 | $ | 6,545 | $ | 16,619 | $ | 23,164 | ||||||||||||
|
Cumulative effect of change in accounting
principles
(a)
|
14 | 7,480 | 7,494 | — | — | — | ||||||||||||||||||
|
Gross charge-offs
(a)
|
1,278 | 13,374 | 14,652 | 903 | 10,034 | 10,937 | ||||||||||||||||||
|
Gross (recoveries)
(a)
|
(88 | ) | (940 | ) | (1,028 | ) | (33 | ) | (489 | ) | (522 | ) | ||||||||||||
|
Net charge-offs
(a)
|
1,190 | 12,434 | 13,624 | 870 | 9,545 | 10,415 | ||||||||||||||||||
|
Provision for loan losses
(a)
|
(812 | ) | 11,183 | 10,371 | 2,692 | 13,848 | 16,540 | |||||||||||||||||
|
Other
(b)
|
(9 | ) | 2 | (7 | ) | 25 | (242 | ) | (217 | ) | ||||||||||||||
|
Ending balance at June 30
|
$ | 5,148 | $ | 30,688 | $ | 35,836 | $ | 8,392 | $ | 20,680 | $ | 29,072 | ||||||||||||
|
Components:
|
||||||||||||||||||||||||
|
Asset-specific
(c)(d)
|
$ | 1,324 | $ | 1,161 | $ | 2,485 | $ | 2,108 | $ | 801 | $ | 2,909 | ||||||||||||
|
Formula-based
(a)(e)
|
3,824 | 26,716 | 30,540 | 6,284 | 19,879 | 26,163 | ||||||||||||||||||
|
Purchased credit-impaired
|
— | 2,811 | 2,811 | — | — | — | ||||||||||||||||||
|
Total allowance for loan losses
|
$ | 5,148 | $ | 30,688 | $ | 35,836 | $ | 8,392 | $ | 20,680 | $ | 29,072 | ||||||||||||
|
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)
|
4 | (2 | ) | 2 | 82 | 5 | 87 | |||||||||||||||||
|
Other
|
(11 | ) | — | (11 | ) | 3 | (3 | ) | — | |||||||||||||||
|
Ending balance at June 30
|
$ | 902 | $ | 10 | $ | 912 | $ | 719 | $ | 27 | $ | 746 | ||||||||||||
|
Components:
|
||||||||||||||||||||||||
|
Asset-specific
|
$ | 248 | $ | — | $ | 248 | $ | 111 | $ | — | $ | 111 | ||||||||||||
|
Formula-based
|
654 | 10 | 664 | 608 | 27 | 635 | ||||||||||||||||||
|
Total allowance for lending-related commitments
|
$ | 902 | $ | 10 | $ | 912 | $ | 719 | $ | 27 | $ | 746 | ||||||||||||
|
Total allowance for credit losses
|
$ | 6,050 | $ | 30,698 | $ | 36,748 | $ | 9,111 | $ | 20,707 | $ | 29,818 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Credit ratios
|
||||||||||||||||||||||||
|
Allowance for loan losses to retained loans
|
2.42 | % | 6.36 | % | 5.15 | % | 3.75 | % | 4.63 | % | 4.33 | % | ||||||||||||
|
Allowance for loan losses to retained nonperforming
loans
(f)
|
97 | 292 | 227 | 144 | 234 | 198 | ||||||||||||||||||
|
Allowance for loan losses to retained nonperforming
loans excluding credit card
|
97 | 154 | 135 | 144 | 134 | 138 | ||||||||||||||||||
|
Net charge-off rates
(g)
|
1.14 | 5.03 | 3.88 | 0.75 | 4.15 | 3.01 | ||||||||||||||||||
|
Credit ratios excluding home lending purchased
credit-impaired loans and loans held by the
Washington Mutual Master Trust
|
||||||||||||||||||||||||
|
Allowance for loan losses to retained loans
(h)
|
2.42 | 6.88 | 5.34 | 3.75 | 5.80 | 5.01 | ||||||||||||||||||
|
Allowance for loan losses to retained nonperforming
loans
(f)(h)
|
97 | 265 | 209 | 144 | 234 | 198 | ||||||||||||||||||
|
Allowance for loan losses to retained nonperforming
loans excluding credit card
(f)(h)
|
97 | 127 | 117 | 144 | 134 | 138 | ||||||||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon the adoption of the new 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 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 |
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Table of Contents
| certain other consumer loan securitization entities, primarily mortgage-related, respectively. For further discussion, see Note 15 on pages 151-153 of this Form 10-Q. | ||
| (b) | Other predominantly includes a reclassification in 2009 related to the issuance and retention of securities from the Chase Issuance Trust. | |
| (c) | Relates to risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a troubled debt restructuring. | |
| (d) | The asset-specific consumer allowance for loan losses includes troubled debt restructuring reserves of $946 million and $603 million at June 30, 2010 and 2009, respectively. Prior-period amounts have been reclassified from formula-based to conform with the current period presentation. | |
| (e) | Includes all of the Firm’s allowance for loan losses on credit card loans, including those for which the Firm has modified the terms of the loans for borrowers experiencing financial difficulty. | |
| (f) | 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 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. The allowance for loan losses on credit card loans was $14.5 billion and $8.8 billion as of June 30, 2010 and 2009, respectively. | |
| (g) | Charge-offs are not recorded on purchased credit-impaired loans until actual losses exceed estimated losses recorded as purchase accounting adjustments at the time of acquisition. To date, no charge-offs have been recorded for any of these loans. | |
| (h) | Excludes the impact of home lending purchased credit-impaired loans acquired as part of the Washington Mutual transaction. The allowance for loan losses on home lending purchased credit-impaired loans was $2.8 billion and zero as of June 30, 2010 and 2009, respectively. |
For more
information on home lending purchased credit-impaired loans, see pages 87-89 and
Note 13 on pages 149-150 of this Form 10-Q and pages 116-117 of JPMorgan Chase’s 2009 Annual
Report.
The calculation of the allowance for loan losses to total retained loans, excluding home lending
purchased credit-impaired loans and loans held by the WMMT, is presented below.
| June 30, (in millions, except ratios) | 2010 | 2009 | ||||||
|
Allowance for loan losses
|
$ | 35,836 | $ | 29,072 | ||||
|
Less: Allowance for purchased credit-impaired loans
|
2,811 | — | ||||||
|
Adjusted allowance for loan losses
|
$ | 33,025 | $ | 29,072 | ||||
|
|
||||||||
|
Total loans retained
|
$ | 695,210 | $ | 671,116 | ||||
|
Less: Firmwide purchased credit-impaired loans
|
76,995 | 90,628 | ||||||
|
Adjusted loans
|
$ | 618,215 | $ | 580,488 | ||||
|
Allowance for loan losses to ending loans, excluding purchased credit-impaired loans
and loans held by the Washington Mutual Master Trust
|
5.34 | % | 5.01 | % | ||||
The following table presents the allowance for credit losses by business segment at June 30,
2010, and December 31, 2009.
| Allowance for credit losses | ||||||||||||||||||||||||
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Lending-related | Lending-related | |||||||||||||||||||||||
| (in millions) | Loan losses | commitments | Total | Loan losses | commitments | Total | ||||||||||||||||||
|
Investment Bank
(a)
|
$ | 2,149 | $ | 564 | $ | 2,713 | $ | 3,756 | $ | 485 | $ | 4,241 | ||||||||||||
|
Commercial Banking
|
2,686 | 267 | 2,953 | 3,025 | 349 | 3,374 | ||||||||||||||||||
|
Treasury & Securities
Services
|
48 | 68 | 116 | 88 | 84 | 172 | ||||||||||||||||||
|
Asset Management
|
250 | 3 | 253 | 269 | 9 | 278 | ||||||||||||||||||
|
Corporate/Private Equity
|
15 | — | 15 | 7 | — | 7 | ||||||||||||||||||
|
Total Wholesale
|
5,148 | 902 | 6,050 | 7,145 | 927 | 8,072 | ||||||||||||||||||
|
Retail Financial Services
(a)
|
16,152 | 10 | 16,162 | 14,776 | 12 | 14,788 | ||||||||||||||||||
|
Card Services
(a)
|
14,524 | — | 14,524 | 9,672 | — | 9,672 | ||||||||||||||||||
|
Corporate/Private Equity
|
12 | — | 12 | 9 | — | 9 | ||||||||||||||||||
|
Total Consumer
|
30,688 | 10 | 30,698 | 24,457 | 12 | 24,469 | ||||||||||||||||||
|
Total
|
$ | 35,836 | $ | 912 | $ | 36,748 | $ | 31,602 | $ | 939 | $ | 32,541 | ||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon the adoption of the new 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 receivables are now recorded in loans on the Consolidated Balance Sheet. As a result, $7.4 billion, $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 15 on pages 151-163 of this Form 10-Q. |
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Table of Contents
Provision for credit losses
The provision for credit losses was $3.4 billion for the three months ended June 30, 2010, down by
$6.3 billion or 65% from the prior-year provision. The total consumer provision for credit losses
was $3.9 billion, compared with $8.5 billion in the prior year, reflecting a reduction in the
allowance for credit losses as a result of improved delinquency trends and reduced net charge-offs
across most consumer portfolios. The wholesale provision for credit losses was a benefit of $572
million, compared with an expense of $1.2 billion, reflecting a reduction in the allowance for
credit losses due to net repayments, loan sales, refinements to credit loss estimates, and
improvement in the credit quality of the commercial and industrial portfolio.
| Provision for lending- | Total provision | |||||||||||||||||||||||
| Provision for loan losses | related commitments | for credit losses | ||||||||||||||||||||||
| Three months ended June 30, (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Investment Bank
(a)
|
$ | (418 | ) | $ | 815 | $ | 93 | $ | 56 | $ | (325 | ) | $ | 871 | ||||||||||
|
Commercial Banking
|
(143 | ) | 280 | (92 | ) | 32 | (235 | ) | 312 | |||||||||||||||
|
Treasury & Securities Services
|
(8 | ) | (20 | ) | (8 | ) | 15 | (16 | ) | (5 | ) | |||||||||||||
|
Asset Management
|
15 | 59 | (10 | ) | — | 5 | 59 | |||||||||||||||||
|
Corporate/Private Equity
|
(1 | ) | 7 | — | — | (1 | ) | 7 | ||||||||||||||||
|
Total wholesale
|
(555 | ) | 1,141 | (17 | ) | 103 | (572 | ) | 1,244 | |||||||||||||||
|
Retail Financial Services
(a)
|
1,715 | 3,841 | — | 5 | 1,715 | 3,846 | ||||||||||||||||||
|
Card Services — reported
(a)
|
2,221 | 2,939 | — | — | 2,221 | 2,939 | ||||||||||||||||||
|
Corporate/Private Equity
|
(1 | ) | 2 | — | — | (1 | ) | 2 | ||||||||||||||||
|
Total consumer
|
3,935 | 6,782 | — | 5 | 3,935 | 6,787 | ||||||||||||||||||
|
Total provision for credit losses — reported
|
3,380 | 7,923 | (17 | ) | 108 | 3,363 | 8,031 | |||||||||||||||||
|
Credit card — securitized
(a)(b)
|
NA | 1,664 | NA | — | NA | 1,664 | ||||||||||||||||||
|
Total provision for credit losses — managed
(a)
|
$ | 3,380 | $ | 9,587 | $ | (17 | ) | $ | 108 | $ | 3,363 | $ | 9,695 | |||||||||||
| Provision for lending- | Total provision | |||||||||||||||||||||||
| Provision for loan losses | related commitments | for credit losses | ||||||||||||||||||||||
| Six months ended June 30, (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Investment Bank
(a)
|
$ | (895 | ) | $ | 2,089 | $ | 108 | $ | (8 | ) | $ | (787 | ) | $ | 2,081 | |||||||||
|
Commercial Banking
|
61 | 543 | (82 | ) | 62 | (21 | ) | 605 | ||||||||||||||||
|
Treasury & Securities Services
|
(39 | ) | (40 | ) | (16 | ) | 29 | (55 | ) | (11 | ) | |||||||||||||
|
Asset Management
|
46 | 93 | (6 | ) | (1 | ) | 40 | 92 | ||||||||||||||||
|
Corporate/Private Equity
|
15 | 7 | — | — | 15 | 7 | ||||||||||||||||||
|
Total wholesale
|
(812 | ) | 2,692 | 4 | 82 | (808 | ) | 2,774 | ||||||||||||||||
|
Retail Financial Services
(a)
|
5,450 | 7,718 | (2 | ) | 5 | 5,448 | 7,723 | |||||||||||||||||
|
Card Services — reported
(a)
|
5,733 | 6,128 | — | — | 5,733 | 6,128 | ||||||||||||||||||
|
Corporate/Private Equity
|
— | 2 | — | — | — | 2 | ||||||||||||||||||
|
Total consumer
|
11,183 | 13,848 | (2 | ) | 5 | 11,181 | 13,853 | |||||||||||||||||
|
Total provision for credit losses — reported
|
10,371 | 16,540 | 2 | 87 | 10,373 | 16,627 | ||||||||||||||||||
|
Credit card — securitized
(a)(b)
|
NA | 3,128 | NA | — | NA | 3,128 | ||||||||||||||||||
|
Total provision for credit losses — managed
(a)
|
$ | 10,371 | $ | 19,668 | $ | 2 | $ | 87 | $ | 10,373 | $ | 19,755 | ||||||||||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon the adoption of the new 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 of the consolidation of the credit card securitization trusts, reported and managed basis are comparable 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 15-19 of this Form 10-Q. | |
| (b) | 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 15 on pages 151-163 of this Form 10-Q. |
94
Table of Contents
MARKET RISK MANAGEMENT
For discussion of the Firm’s market risk management organization, major market risk drivers
and classification of risks, see pages 118-124 of JPMorgan Chase’s 2009 Annual Report.
Value-at-risk (“VaR”)
JPMorgan Chase’s primary statistical risk measure, VaR, estimates the potential loss from adverse
market moves in a normal market environment and provides a consistent cross-business measure of
risk profiles and levels of diversification. VaR is used for comparing risks across businesses, for
monitoring limits and as an input to economic-capital calculations. Each business day, as part of
its risk management activities, the Firm undertakes a comprehensive VaR calculation that includes
the majority of its market risks. These VaR results are reported to senior management.
To calculate VaR, the Firm uses historical simulation, based on a one-day time horizon and an
expected tail-loss methodology, which measures risk across instruments and portfolios in a
consistent and comparable way. The simulation is based on data for the previous 12 months. This
approach assumes that historical changes in market values are representative of future changes;
this assumption may not always be accurate, particularly when there is volatility in the market
environment. For certain products, such as syndicated lending facilities and some mortgage-related
securities for which price-based time series are not readily available, market-based data are used
in conjunction with sensitivity factors to estimate the risk. It is likely that using an actual
price-based time series for these products, if available, would affect the VaR results presented.
In addition, certain risk parameters, such as correlation risk among certain instruments, are not
fully captured in VaR.
The following section describes JPMorgan Chase’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
| Six months ended | ||||||||||||||||||||||||||||||||||||||||
| Three months ended June 30, | June 30, | |||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | At June 30, | Average | |||||||||||||||||||||||||||||||||||||
| (in millions) | Avg. | Min | Max | Avg. | Min | Max | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||
|
IB VaR by risk type:
|
||||||||||||||||||||||||||||||||||||||||
|
Fixed income
|
$ | 64 | $ | 33 | $ | 95 | $ | 179 | $ | 144 | $ | 207 | $ | 87 | $ | 186 | $ | 66 | $ | 168 | ||||||||||||||||||||
|
Foreign exchange
|
10 | 7 | 18 | 16 | 10 | 27 | 11 | 12 | 12 | 19 | ||||||||||||||||||||||||||||||
|
Equities
|
20 | 12 | 32 | 50 | 13 | 132 | 23 | 36 | 22 | 73 | ||||||||||||||||||||||||||||||
|
Commodities and other
|
20 | 12 | 32 | 22 | 15 | 30 | 12 | 17 | 18 | 21 | ||||||||||||||||||||||||||||||
|
Diversification benefit to
IB trading VaR
|
(42 | ) (a) | NM | (b) | NM | (b) | (97 | ) (a) | NM | (b) | NM | (b) | (42 | ) (a) | (87 | ) (a) | (46 | ) (a) | (101 | ) (a) | ||||||||||||||||||||
|
IB trading VaR
|
$ | 72 | $ | 40 | $ | 107 | $ | 170 | $ | 149 | $ | 213 | $ | 91 | $ | 164 | $ | 72 | $ | 180 | ||||||||||||||||||||
|
Credit portfolio VaR
|
27 | 18 | 40 | 68 | 36 | 99 | 29 | 38 | 23 | 77 | ||||||||||||||||||||||||||||||
|
Diversification benefit to
IB trading and credit
portfolio VaR
|
(9 | ) (a) | NM (b) | NM | (b) | (60 | ) (a) | NM | (b) | NM | (b) | (9 | ) (a) | (44 | ) (a) | (9 | ) (a) | (62 | ) (a) | |||||||||||||||||||||
|
Total IB trading and credit
portfolio VaR
|
$ | 90 | $ | 50 | $ | 128 | $ | 178 | $ | 139 | $ | 231 | $ | 111 | $ | 158 | $ | 86 | $ | 195 | ||||||||||||||||||||
|
Mortgage Banking VaR
|
24 | 12 | 42 | 43 | 31 | 66 | 19 | 40 | 25 | 75 | ||||||||||||||||||||||||||||||
|
Chief Investment Office
(CIO) VaR
|
72 | 55 | 79 | 111 | 98 | 125 | 55 | 102 | 71 | 116 | ||||||||||||||||||||||||||||||
|
Diversification benefit to
total other VaR
|
(14 | ) (a) | NM | (b) | NM | (b) | (29 | ) (a) | NM | (b) | NM | (b) | (12 | ) (a) | (26 | ) (a) | (14 | ) (a) | (45 | ) (a) | ||||||||||||||||||||
|
Total other VaR
|
$ | 82 | $ | 55 | $ | 97 | $ | 125 | $ | 110 | $ | 144 | $ | 62 | $ | 116 | $ | 82 | $ | 146 | ||||||||||||||||||||
|
Diversification benefit to
total IB and other VaR
|
(79 | ) (a) | NM | (b) | NM | (b) | (89 | ) (a) | NM (b) | NM (b) | (59 | ) (a) | (92 | ) (a) | (73 | ) (a) | (91 | ) (a) | ||||||||||||||||||||||
|
Total IB and other VaR
|
$ | 93 | $ | 66 | $ | 133 | $ | 214 | $ | 172 | $ | 263 | $ | 114 | $ | 182 | $ | 95 | $ | 250 | ||||||||||||||||||||
| (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. |
95
Table of Contents
VaR Measurement
The Firm’s IB trading and other VaR measure above includes substantially all trading activities in
IB, as well as syndicated lending facilities that the Firm intends to distribute. Credit portfolio
VaR includes VaR on derivative CVA, hedges of the CVA and MTM hedges of the retained loan
portfolio, which are all reported in principal transactions revenue. Credit portfolio VaR does not
include the retained loan portfolio, which is not MTM. In addition, IB and other VaR measure
include certain positions used as part of the Firm’s risk management function within the CIO and in
the Mortgage Banking businesses. The CIO VaR includes positions, primarily in debt securities and
credit products, used to manage the Firm’s risk concentrations, including interest rate and credit
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.
The VaR measure excludes the DVA taken on certain structured liabilities and derivatives to reflect
the credit quality of the Firm. It also excludes certain activities such as Private Equity and
principal investing (e.g., mezzanine financing, tax-oriented investments, etc.), as well as
structural interest rate risk-management positions, capital management positions, and longer-term
investments managed by the 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
analysis.
2010 and 2009 second-quarter and year-to-date VaR results
As presented in the table on the previous page, total average IB and other VaR for the second
quarter and first half of 2010 was $93 million and $95 million, respectively, compared with $214
million in the second quarter and $250 million in the first half of 2009. The decrease in average
VaR for the second quarter and first half of 2010 was driven by a decline in the impact of the
market volatility experienced in early 2009, as well as a reduction
in exposures primarily in IB. Average total IB trading and credit portfolio VaR for the second quarter of 2010 was $90
million, compared with $178 million for the same prior year period. The decrease in IB trading VaR
for the second quarter and first half of 2010 was driven by a decline in the impact of market
volatility, as well as a reduction in exposures, primarily in the fixed income and equities risk
components. CIO VaR averaged $72 million for the second quarter of 2010, compared with $111 million
for the same prior year period. Mortgage Banking VaR averaged $24 million for the current quarter,
compared with $43 million for the same prior year period. Decreases for the second quarter and
first half of 2010 were again driven by the decline in market volatility.
Average IB and other VaR diversification benefit was 46% of the sum for the second quarter of 2010,
compared with 29% of the sum for the second quarter of 2009. The Firm experienced a gain in
diversification benefit as the market crisis receded, markets started to recover and positions
changed such that correlations decreased. In general, over the course of the year, VaR exposures
can vary significantly as positions change, market volatility fluctuates and diversification
benefits change.
VaR back-testing
To evaluate the soundness of its VaR model the Firm conducts daily back-testing of VaR against the
Firm’s market risk-related revenue, which is defined as: the change in value of principal
transactions revenue for IB and CIO; 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. The daily firmwide
market risk-related revenue excludes gains and losses from DVA and from longer-term corporate
investments and Private Equity losses.
96
Table of Contents
The
following histogram illustrates the daily market risk-related gains and losses for IB, CIO and
Mortgage Banking positions for the first six months of 2010. The chart shows that the Firm posted
market risk-related gains on 121 out of 129 days in this period, with 10 days exceeding $200
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. Losses
were sustained on eight days during the six months ended June 30, 2010, 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
| Change in revenue based upon a 1-basis-point increase | ||||
| (in millions) | in JPMorgan Chase credit spread | |||
|
June 30, 2010
|
$33 | |||
|
December 31, 2009
|
39 | |||
97
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Economic value stress testing
While VaR reflects the risk of loss due to adverse changes in normal markets, stress testing
captures the Firm’s exposure to unlikely but plausible events in abnormal markets. The Firm
conducts economic-value stress tests using multiple scenarios that assume credit spreads widen
significantly, equity prices decline and significant changes in interest rates across the major
currencies. Other scenarios focus on the risks predominant in individual business segments and
include scenarios that focus on the potential for adverse movements in complex portfolios.
Scenarios were updated more frequently in 2009 and, in some cases, redefined to reflect the
significant market volatility which began in late 2008. Along with VaR, stress testing is important
in measuring and controlling risk. Stress testing enhances the understanding of the Firm’s risk
profile and loss potential, and stress losses are monitored against limits. Stress testing is also
utilized in one-off approvals and cross-business risk measurement, as well as an input to economic
capital allocation. 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 help them
better measure and manage risks and to understand event risk-sensitive positions.
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 net income for the Firm’s core nontrading business activities is also important. For
further discussion on the effect of interest rate exposure, see page 123 of JPMorgan Chase’s 2009
Annual Report.
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.
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 June 30, 2010, and December
31, 2009, were as follows.
| Immediate change in rates | ||||||||||||
| (in millions) | +200bp | +100bp | -100bp | -200bp | ||||||||
|
June 30, 2010
|
$ | 1,276 | $ | 947 | NM (a) | NM (a) | ||||||
|
December 31, 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. |
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, under another interest rate scenario used 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, would result in a 12-month pretax earnings benefit of $605 million. The increase in
earnings under this scenario would be due to reinvestment of maturing assets at the higher
long-term rates, with funding costs remaining unchanged.
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PRIVATE EQUITY RISK MANAGEMENT
For a discussion of Private Equity Risk Management, see page 124 of JPMorgan Chase’s 2009
Annual Report. At June 30, 2010, and December 31, 2009, the carrying value of the Private Equity
portfolio was $8.1 billion and $7.3 billion, respectively, of which $873 million and $762 million,
respectively, represented securities with publicly available market quotations.
OPERATIONAL RISK MANAGEMENT
For a discussion of JPMorgan Chase’s Operational Risk Management, see page 125 of JPMorgan
Chase’s 2009 Annual Report.
REPUTATION AND FIDUCIARY RISK MANAGEMENT
For a discussion of the Firm’s Reputation and Fiduciary Risk Management, see page 126 of
JPMorgan Chase’s 2009 Annual Report.
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and Regulation
section on pages 1-4 of JPMorgan Chase’s 2009 Form 10-K. On July 21, 2010, President Obama
signed into law the Dodd-Frank Act which will make significant structural reforms to the
financial services industry. For additional information regarding the Dodd-Frank Act, please see Part II
Other Information, Item 1A Risk Factors on pages 196-197 of this Form 10-Q.
Dividends
At June 30, 2010, JPMorgan Chase’s bank subsidiaries could pay, in the aggregate, $6.8 billion in
dividends to their respective bank holding companies without the prior approval of their relevant
banking regulators.
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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 portfolio of 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
as of the balance sheet date. For a further discussion of the methodologies used in establishing
the Firm’s allowance for credit losses, see Note 14 on pages 196-198 of JPMorgan Chase’s 2009
Annual Report. The methodology for calculating the allowance for loan losses and the allowance for
lending-related commitments involves significant judgment. For a further description of these
judgments, see Allowance for Credit Losses on pages 127-128 of JPMorgan Chase’s 2009 Annual
Report; for amounts recorded as of June 30, 2010 and 2009, see Allowance for Credit Losses on pages
91-94 and Note 14 on pages 150-151 of this Form 10-Q.
As noted on page 127 of JPMorgan Chase’s 2009 Annual Report, many factors can affect estimates of
loss, including volatility of loss given default, probability of default and rating migrations. The
Firm uses a risk-rating system to determine the credit quality of its wholesale loans. The Firm’s
wholesale allowance is sensitive to the risk rating assigned to a loan. As of June 30, 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 $1.2 billion. This sensitivity analysis is hypothetical and intended to provide an
indication of the impact of risk ratings on the estimate of the allowance for loan losses for
wholesale loans. In the Firm’s view, the likelihood of a one-notch downgrade for all wholesale
loans within a short timeframe is remote, and 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.
The allowance for credit losses for the consumer portfolio is sensitive to changes in the economic
environment, delinquency status, FICO scores, the realizable value of collateral, borrower behavior
and other risk factors. The credit performance of the consumer portfolio across the entire consumer
credit product spectrum appears to have stabilized but remains under stress, as high unemployment
and weak overall economic conditions continue to result in a high level of delinquencies, while
continued weak housing prices continue to result in elevated loss severities. Significant judgment
is required to estimate the ultimate duration and severity of the current economic downturn, as
well as its 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 impact 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 improvement in one
factor may offset deterioration in the other. In addition, changes in these factors would not
necessarily be consistent across geographies or product types. Finally, it is difficult to predict
the extent to which changes in both or either of these factors would ultimately impact the
frequency or severity of losses, and overall loss rates are a function of both the frequency and
severity of individual loan losses.
Fair value of financial instruments, MSRs and commodities inventory
JPMorgan Chase carries a portion of its assets and liabilities at fair value. The majority of such
assets and liabilities are measured 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.
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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.
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Total at | Total at | |||||||||||||||
| (in billions) | fair value | Level 3 total | fair value | Level 3 total | ||||||||||||
|
Trading debt and equity instruments
(a)
|
$ | 317.3 | $ | 35.2 | $ | 330.9 | $ | 35.2 | ||||||||
|
Derivative receivables — gross
|
1,810.3 | 45.8 | 1,565.5 | 46.7 | ||||||||||||
|
Netting adjustment
|
(1,730.1 | ) | — | (1,485.3 | ) | — | ||||||||||
|
Derivative receivables — net
|
80.2 | 45.8 | (d) | 80.2 | 46.7 | (d) | ||||||||||
|
AFS securities
|
312.0 | 12.7 | 360.4 | 13.2 | ||||||||||||
|
Loans
|
2.4 | 1.1 | 1.4 | 1.0 | ||||||||||||
|
MSRs
|
11.9 | 11.9 | 15.5 | 15.5 | ||||||||||||
|
Private equity investments
|
8.1 | 7.2 | 7.3 | 6.6 | ||||||||||||
|
Other
(b)
|
44.9 | 4.3 | 44.4 | 9.5 | ||||||||||||
|
Total assets measured at fair value on a recurring basis
|
776.8 | 118.2 | 840.1 | 127.7 | ||||||||||||
|
Total assets measured at fair value on a nonrecurring basis
(c)
|
6.6 | 1.7 | 8.2 | 2.7 | ||||||||||||
|
Total assets measured at fair value
|
$ | 783.4 | $ | 119.9 | (e) | $ | 848.3 | $ | 130.4 | (e) | ||||||
|
Total Firm assets
|
$ | 2,014.0 | $ | 2,032.0 | ||||||||||||
|
Level 3 assets as a percentage of total Firm assets
|
6 | % | 6 | % | ||||||||||||
|
Level 3 assets as a percentage of total Firm assets at fair value
|
15 | 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, assets within accrued interest and other investments. | |
| (c) | Predominantly includes delinquent mortgage and home equity loans, where impairment is based on the fair value of the underlying collateral, and on 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 derivative receivable and derivative payable balances for netting adjustments, either within or across the levels of the fair value hierarchy, as such an adjustment is not relevant to a presentation that is based on the transparency of inputs to the valuation of an asset or liability. 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 $19.0 billion and $16.0 billion at June 30, 2010, and December 31, 2009, respectively, exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances. | |
| (e) | Included in the table above at June 30, 2010, and December 31, 2009, are $77.5 billion and $80.0 billion, respectively, of level 3 assets, consisting of recurring and nonrecurring assets carried by IB. |
Valuation
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, as well as the level of liquidity for the product or within the market as a
whole. For further discussion of changes in level 3 assets, see Note
3 on pages 110-124 of this
Form 10-Q.
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 148-152
of JPMorgan Chase’s 2009 Annual Report. In addition, for a further discussion of the significant
judgments and estimates involved in the determination of the Firm’s mortgage-related exposures, see
“Mortgage-related exposures carried at fair value” in Note
3 on pages 161-162 of JPMorgan Chase’s
2009 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 purchased credit-impaired loans are accounted for
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on a pool basis, and the pools are considered to be performing. At the time of the acquisition,
these loans were recorded at fair value, including an estimate of losses that were expected to be
incurred over the estimated remaining lives of the loan pools. Many of the assumptions and
estimates underlying the estimation of the initial fair value and the ongoing updates to
management’s expectation of future cash flows are both significant and subjective, particularly
considering the current economic environment. The level of future home price declines, the duration
and severity of the current economic downturn, the impact of various government programs and
actions, uncertainties about borrower behavior, and the lack of market liquidity and transparency
are factors that have influenced, and may continue to affect, these assumptions and estimates.
In accounting for these loans on an ongoing basis, probable decreases in expected loan principal
cash flows trigger the recognition of impairment, while probable and significant increases in
expected principal cash flows would first trigger the reversal of any previously recorded allowance
for loan losses; any remaining increases would be recognized prospectively as yield adjustments.
The impact of (i) prepayments, (ii) changes in variable interest rates and (iii) any other changes
in the timing of expected cash flows would be recognized prospectively as yield adjustments. The
process to determine which changes in cash flows trigger the recognition of impairment, and which
changes in cash flows should be recognized as yield adjustments, requires the application of
judgment. As of June 30, 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 $730 million. For additional information on
purchased credit-impaired loans, including the significant assumptions, estimates and judgment
involved, see Purchased credit-impaired loans on pages 129—130 of JPMorgan Chase’s 2009 Annual
Report and Note 13 on pages 149-150 of this Form 10-Q.
Goodwill impairment
Management applies significant judgment when testing goodwill for impairment. For a description of
the significant valuation judgments associated with goodwill impairment, see Goodwill impairment on
page 130 of JPMorgan Chase’s 2009 Annual Report.
During the six months ended June 30, 2010, the Firm updated the discounted cash flow valuations of
certain consumer lending businesses in RFS and CS, which continue to have elevated risk for
goodwill 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 for the business (which are dependent on portfolio
outstanding balances, net interest margin, operating expenses, credit losses and the amount of
capital necessary given the risk of business activities and to meet regulatory capital
requirements), and b) the cost of equity used to discount those cash flows to a present value. Each
of these factors require significant judgment and the assumptions used are based on management’s
best and most current projections, including the anticipated effects of regulatory and legislative
changes, derived from the Firm’s business forecasting process reviewed with senior management.
These projections are consistent with the short-term estimates addressed in the Business Outlook on
pages 9-10 of this Form 10-Q, 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 of its businesses. Where
possible, the Firm uses third-party and peer data to benchmark its assumptions and estimates.
In addition, for its other businesses, the Firm reviewed current conditions (including the
estimated effects of regulatory and legislative changes) and prior projections of business
performance. Based upon the updated valuations for its consumer lending businesses and reviews of
its other businesses, the Firm concluded that goodwill allocated to all of its reporting units was
not impaired at June 30 and March 31, 2010. However, the fair value of the credit card lending
business within CS and a consumer lending business within RFS exceeded their carrying values by
narrow margins at June 30 and March 31, 2010 ranging from 3-15%. 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 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 receivable 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 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 may result in a material impairment charge to earnings in a future period related to some
portion of the associated goodwill.
For
additional information on goodwill, see Note 16 on pages 164-167 of this Form 10-Q.
Income taxes
For a description of the significant assumptions, judgments and interpretations associated with the
accounting for income taxes, see Income taxes on page 131 of JPMorgan Chase’s 2009 Annual Report.
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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
consolidation guidance for VIEs for certain investment funds, including mutual funds, private
equity funds and hedge funds, until the FASB and the International Accounting Standards Board
(“IASB”) complete a joint consolidation project that would provide consistent accounting guidance
for these funds. For additional information about the impact of the adoption of the new
consolidation guidance on January 1, 2010, see Note 15 on pages
151-163 of this Form 10-Q.
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 110-124 of
this Form 10-Q. 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. Early adoption of the guidance is permitted.
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 a beneficial interest 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 any beneficial interest in securitized financial
assets. Adoption of the new guidance will not have a material impact on the Firm’s Consolidated
Balance Sheets or results of operations.
Accounting for modifications of purchased credit-impaired loans that are part of a pool
In April 2010, the FASB issued guidance that amends the accounting for modifications of purchased
credit-impaired loans accounted for within a pool. The guidance clarifies that modified purchased
credit-impaired loans should not be removed from a pool even if the modification would otherwise be
considered a troubled debt restructuring. Additionally, the guidance clarifies that the impact of
modifications should be included in evaluating whether a pool of loans is impaired. The guidance is
effective for modifications of purchased credit-impaired loans occurring in interim and annual
reporting periods ending on or after July 15, 2010, and is to be applied prospectively. Early
adoption is permitted. The guidance is consistent with the Firm’s current accounting practice and,
therefore, will have 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 will require enhanced disclosures surrounding the
credit characteristics of the Firm’s loan portfolio. Under the new guidance, the Firm will be
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 are effective for the 2010 Annual Report. The new
disclosures on the rollforward of the allowance for credit losses and the new disclosures about
troubled-debt modifications are effective for the first quarter 2011 Form 10-Q. The adoption of
this guidance will only affect JPMorgan Chase’s disclosures of financing receivables and not its
Consolidated Balance Sheets or results of operations.
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JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions, except per share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Investment banking fees
|
$ | 1,421 | $ | 2,106 | $ | 2,882 | $ | 3,492 | ||||||||
|
Principal transactions
|
2,090 | 3,097 | 6,638 | 5,098 | ||||||||||||
|
Lending- and deposit-related fees
|
1,586 | 1,766 | 3,232 | 3,454 | ||||||||||||
|
Asset management, administration and commissions
|
3,349 | 3,124 | 6,614 | 6,021 | ||||||||||||
|
Securities gains
(a)
|
1,000 | 347 | 1,610 | 545 | ||||||||||||
|
Mortgage fees and related income
|
888 | 784 | 1,546 | 2,385 | ||||||||||||
|
Credit card income
|
1,495 | 1,719 | 2,856 | 3,556 | ||||||||||||
|
Other income
|
585 | 10 | 997 | 60 | ||||||||||||
|
Noninterest revenue
|
12,414 | 12,953 | 26,375 | 24,611 | ||||||||||||
|
Interest income
|
15,719 | 16,549 | 32,564 | 34,475 | ||||||||||||
|
Interest expense
|
3,032 | 3,879 | 6,167 | 8,438 | ||||||||||||
|
Net interest income
|
12,687 | 12,670 | 26,397 | 26,037 | ||||||||||||
|
Total net revenue
|
25,101 | 25,623 | 52,772 | 50,648 | ||||||||||||
|
|
||||||||||||||||
|
Provision for credit losses
|
3,363 | 8,031 | 10,373 | 16,627 | ||||||||||||
|
|
||||||||||||||||
|
Noninterest expense
|
||||||||||||||||
|
Compensation expense
|
7,616 | 6,917 | 14,892 | 14,505 | ||||||||||||
|
Occupancy expense
|
883 | 914 | 1,752 | 1,799 | ||||||||||||
|
Technology, communications and equipment expense
|
1,165 | 1,156 | 2,302 | 2,302 | ||||||||||||
|
Professional and outside services
|
1,685 | 1,518 | 3,260 | 3,033 | ||||||||||||
|
Marketing
|
628 | 417 | 1,211 | 801 | ||||||||||||
|
Other expense
|
2,419 | 2,190 | 6,860 | 3,565 | ||||||||||||
|
Amortization of intangibles
|
235 | 265 | 478 | 540 | ||||||||||||
|
Merger costs
|
— | 143 | — | 348 | ||||||||||||
|
Total noninterest expense
|
14,631 | 13,520 | 30,755 | 26,893 | ||||||||||||
|
Income before income tax expense
|
7,107 | 4,072 | 11,644 | 7,128 | ||||||||||||
|
Income tax expense
|
2,312 | 1,351 | 3,523 | 2,266 | ||||||||||||
|
Net income
|
$ | 4,795 | $ | 2,721 | $ | 8,121 | $ | 4,862 | ||||||||
|
Net income applicable to common stockholders
|
$ | 4,363 | $ | 1,072 | $ | 7,335 | $ | 2,591 | ||||||||
|
|
||||||||||||||||
|
Net income per common share data
|
||||||||||||||||
|
Basic earnings per share
|
$ | 1.10 | $ | 0.28 | $ | 1.84 | $ | 0.68 | ||||||||
|
Diluted earnings per share
|
1.09 | 0.28 | 1.83 | 0.68 | ||||||||||||
|
Weighted-average basic shares
|
3,983.5 | 3,811.5 | 3,977.0 | 3,783.6 | ||||||||||||
|
Weighted-average diluted shares
|
4,005.6 | 3,824.1 | 4,000.2 | 3,791.4 | ||||||||||||
|
Cash dividends declared per common share
|
$ | 0.05 | $ | 0.05 | $ | 0.10 | $ | 0.10 | ||||||||
| (a) | The following other-than-temporary impairment losses are included in securities gains for the periods presented. |
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Total losses
|
$ | — | $ | (882 | ) | $ | (94 | ) | $ | (887 | ) | |||||
|
Losses recorded in/(reclassified from) other comprehensive income
|
— | 696 | (6 | ) | 696 | |||||||||||
|
Total credit losses recognized in income
|
$ | — | $ | (186 | ) | $ | (100 | ) | $ | (191 | ) | |||||
The Notes to Consolidated Financial Statements (unaudited) are an integral part of these statements.
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JPMORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| June 30, | December 31, | |||||||
| (in millions, except share data) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 32,806 | $ | 26,206 | ||||
|
Deposits with banks
|
39,430 | 63,230 | ||||||
|
Federal funds sold and securities purchased under resale agreements (included $22,750 and $20,536 at fair value at
June 30, 2010, and December 31, 2009, respectively)
|
199,024 | 195,404 | ||||||
|
Securities borrowed (included $11,924 and $7,032 at fair value at June 30, 2010, and December 31, 2009, respectively)
|
122,289 | 119,630 | ||||||
|
Trading assets (included assets pledged of $44,708 and $38,315 at June 30, 2010, and December 31, 2009, respectively)
(a)
|
397,508 | 411,128 | ||||||
|
Securities (included $311,992 and $360,365 at fair value at June 30, 2010, and December 31, 2009,
respectively, and assets pledged of $87,424 and $100,931 at June 30, 2010, and December 31, 2009, respectively)
|
312,013 | 360,390 | ||||||
|
Loans (included $2,362 and $1,364 at fair value at June 30, 2010, and December 31, 2009, respectively)
(a)
|
699,483 | 633,458 | ||||||
|
Allowance for loan losses
|
(35,836 | ) | (31,602 | ) | ||||
|
Loans, net of allowance for loan losses
|
663,647 | 601,856 | ||||||
|
Accrued interest and accounts receivable (included zero and $5,012 at fair value at June 30, 2010, and
December 31, 2009, respectively)
|
61,295 | 67,427 | ||||||
|
Premises and equipment
|
11,267 | 11,118 | ||||||
|
Goodwill
|
48,320 | 48,357 | ||||||
|
Mortgage servicing rights
|
11,853 | 15,531 | ||||||
|
Other intangible assets
|
4,178 | 4,621 | ||||||
|
Other assets (included $18,425 and $19,165 at fair value at June 30, 2010, and December 31, 2009, respectively)
(a)
|
110,389 | 107,091 | ||||||
|
Total assets
(a)
|
$ | 2,014,019 | $ | 2,031,989 | ||||
|
Liabilities
|
||||||||
|
Deposits (included $4,890 and $4,455 at fair value at June 30, 2010, and December 31, 2009, respectively)
|
$ | 887,805 | $ | 938,367 | ||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements (included $6,013 and $3,396 at
fair value at June 30, 2010, and December 31, 2009, respectively)
|
237,455 | 261,413 | ||||||
|
Commercial paper
|
41,082 | 41,794 | ||||||
|
Other borrowed funds (included $7,403 and $5,637 at fair value at June 30, 2010, and December 31, 2009, respectively)
|
44,431 | 55,740 | ||||||
|
Trading liabilities
|
134,882 | 125,071 | ||||||
|
Accounts payable and other liabilities (included the allowance for lending-related commitments of $912 and $939, respectively, at
June 30, 2010, and December 31, 2009, and $450 and $357 at fair value at June 30, 2010, and December 31, 2009, respectively)
|
160,478 | 162,696 | ||||||
|
Beneficial interests issued by consolidated variable interest entities (included $2,057 and $1,410 at fair value at
June 30, 2010, and December 31, 2009, respectively)
(a)
|
88,148 | 15,225 | ||||||
|
Long-term debt (included $41,928 and $48,972 at fair value at June 30, 2010, and December 31, 2009, respectively)
|
248,618 | 266,318 | ||||||
|
Total liabilities
(a)
|
1,842,899 | 1,866,624 | ||||||
|
Commitments and contingencies (see Note 21 of this Form 10-Q)
|
||||||||
|
Stockholders’ equity
|
||||||||
|
Preferred stock ($1 par value; authorized 200,000,000 shares at June 30, 2010, and December 31, 2009;
issued 2,538,107 shares at June 30, 2010, and December 31, 2009)
|
8,152 | 8,152 | ||||||
|
Common stock ($1 par value; authorized 9,000,000,000 shares at June 30, 2010, and December 31, 2009; issued 4,104,933,895 shares
at June 30, 2010, and December 31, 2009)
|
4,105 | 4,105 | ||||||
|
Capital surplus
|
96,745 | 97,982 | ||||||
|
Retained earnings
|
65,465 | 62,481 | ||||||
|
Accumulated other comprehensive income/(loss)
|
2,404 | (91 | ) | |||||
|
Shares held in RSU Trust, at cost (1,527,326 and 1,526,944 shares at June 30, 2010, and December 31, 2009, respectively)
|
(68 | ) | (68 | ) | ||||
|
Treasury stock, at cost (129,122,833 and 162,974,783 shares at June 30, 2010, and December 31, 2009, respectively)
|
(5,683 | ) | (7,196 | ) | ||||
|
Total stockholders’ equity
|
171,120 | 165,365 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,014,019 | $ | 2,031,989 | ||||
| (a) | The following table presents information on assets and liabilities related to VIEs that are consolidated by the Firm at June 30, 2010, and December 31, 2009. The difference between total VIE assets and liabilities represents the Firm’s interests in those entities, which were eliminated in consolidation. |
|
Assets
|
||||||||
|
Trading assets
|
$ | 7,525 | $ | 6,347 | ||||
|
Loans
|
111,965 | 13,004 | ||||||
|
All other assets
|
4,869 | 5,043 | ||||||
|
Total assets
|
$ | 124,359 | $ | 24,394 | ||||
|
Liabilities
|
||||||||
|
Beneficial interests issued by consolidated variable interest entities
|
$ | 88,148 | $ | 15,225 | ||||
|
All other liabilities
|
2,524 | 2,197 | ||||||
|
Total liabilities
|
$ | 90,672 | $ | 17,422 | ||||
The assets of the consolidated VIEs are used to settle the liabilities of those entities. At
June 30, 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 15 on pages 151-162
of this Form 10-Q.
Notes to Consolidated Financial Statements (unaudited) are an integral part of these statements.
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JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
| Six months ended June 30, | ||||||||
| (in millions, except per share data) | 2010 | 2009 | ||||||
|
Preferred stock
|
||||||||
|
Balance at January 1
|
$ | 8,152 | $ | 31,939 | ||||
|
Accretion of preferred stock discount on issuance to the U.S. Treasury
|
— | 1,213 | ||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
— | (25,000 | ) | |||||
|
Balance at June 30
|
8,152 | 8,152 | ||||||
|
Common stock
|
||||||||
|
Balance at January 1
|
4,105 | 3,942 | ||||||
|
Issuance of common stock
|
— | 163 | ||||||
|
Balance at June 30
|
4,105 | 4,105 | ||||||
|
Capital surplus
|
||||||||
|
Balance at January 1
|
97,982 | 92,143 | ||||||
|
Issuance of common stock
|
— | 5,589 | ||||||
|
Shares issued and commitments to issue common stock for employee
stock-based compensation awards, and related tax effects
|
36 | (70 | ) | |||||
|
Other
|
(1,273 | ) | — | |||||
|
Balance at June 30
|
96,745 | 97,662 | ||||||
|
Retained earnings
|
||||||||
|
Balance at January 1
|
62,481 | 54,013 | ||||||
|
Cumulative effect of change in accounting principle
|
(4,391 | ) | — | |||||
|
Net income
|
8,121 | 4,862 | ||||||
|
Dividend declared:
|
||||||||
|
Preferred stock
|
(325 | ) | (1,003 | ) | ||||
|
Accelerated amortization from redemption of preferred stock issued
to the U.S. Treasury
|
— | (1,112 | ) | |||||
|
Common stock ($0.10 per share in each period)
|
(421 | ) | (405 | ) | ||||
|
Balance at June 30
|
65,465 | 56,355 | ||||||
|
Accumulated other comprehensive income/(loss)
|
||||||||
|
Balance at January 1
|
(91 | ) | (5,687 | ) | ||||
|
Cumulative effect of change in accounting principle
|
(129 | ) | — | |||||
|
Other comprehensive income/(loss)
|
2,624 | 2,249 | ||||||
|
Balance at June 30
|
2,404 | (3,438 | ) | |||||
|
Shares held in RSU Trust
|
||||||||
|
Balance at January 1
|
(68 | ) | (217 | ) | ||||
|
Reissuance from RSU Trust
|
— | 131 | ||||||
|
Balance at June 30
|
(68 | ) | (86 | ) | ||||
|
Treasury stock, at cost
|
||||||||
|
Balance at January 1
|
(7,196 | ) | (9,249 | ) | ||||
|
Purchase of treasury stock
|
(135 | ) | — | |||||
|
Reissuance from treasury stock
|
1,648 | 1,284 | ||||||
|
Share repurchases related to employee stock-based compensation awards
|
— | (19 | ) | |||||
|
Balance at June 30
|
(5,683 | ) | (7,984 | ) | ||||
|
Total stockholders’ equity
|
$ | 171,120 | $ | 154,766 | ||||
|
Comprehensive income
|
||||||||
|
Net income
|
$ | 8,121 | $ | 4,862 | ||||
|
Other comprehensive income/(loss)
|
2,624 | 2,249 | ||||||
|
Comprehensive income
|
$ | 10,745 | $ | 7,111 | ||||
The Notes to Consolidated Financial Statements (unaudited) are an integral part of these statements.
106
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JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Six months ended June 30, | |||||||||
| (in millions) | 2010 | 2009 | |||||||
|
Operating activities
|
|||||||||
|
Net income
|
$ | 8,121 | $ | 4,862 | |||||
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|||||||||
|
Provision for credit losses
|
10,373 | 16,627 | |||||||
|
Depreciation and amortization
|
1,926 | 1,209 | |||||||
|
Amortization of intangibles
|
478 | 540 | |||||||
|
Deferred tax benefit
|
(567 | ) | (2,276 | ) | |||||
|
Investment securities gains
|
(1,610 | ) | (545 | ) | |||||
|
Stock-based compensation
|
1,774 | 1,672 | |||||||
|
Originations and purchases of loans held-for-sale
|
(14,259 | ) | (9,850 | ) | |||||
|
Proceeds from sales, securitizations and paydowns of loans held-for-sale
|
18,374 | 16,212 | |||||||
|
Net change in:
|
|||||||||
|
Trading assets
|
19,789 | 140,934 | |||||||
|
Securities borrowed
|
(2,620 | ) | (5,282 | ) | |||||
|
Accrued interest and accounts receivable
|
9,270 | (441 | ) | ||||||
|
Other assets
|
(18,675 | ) | 17,722 | ||||||
|
Trading liabilities
|
19,396 | (61,751 | ) | ||||||
|
Accounts payable and other liabilities
|
(1,066 | ) | (14,854 | ) | |||||
|
Other operating adjustments
|
(3,149 | ) | (1,520 | ) | |||||
|
Net cash provided by operating activities
|
47,555 | 103,259 | |||||||
|
Investing activities
|
|||||||||
|
Net change in:
|
|||||||||
|
Deposits with banks
|
23,866 | 76,177 | |||||||
|
Federal funds sold and securities purchased under resale agreements
|
(3,343 | ) | 43,374 | ||||||
|
Held-to-maturity securities:
|
|||||||||
|
Proceeds
|
4 | 5 | |||||||
|
Available-for-sale securities:
|
|||||||||
|
Proceeds from maturities
|
57,012 | 47,129 | |||||||
|
Proceeds from sales
|
77,754 | 67,472 | |||||||
|
Purchases
|
(102,291 | ) | (249,770 | ) | |||||
|
Proceeds from sales and securitizations of loans held-for-investment
|
5,539 | 17,897 | |||||||
|
Other changes in loans, net
|
13,449 | 37,593 | |||||||
|
Net cash used in business acquisitions or dispositions
|
(6 | ) | (18 | ) | |||||
|
Net purchases of asset-backed commercial paper guaranteed by the FRBB
|
— | (3,257 | ) | ||||||
|
All other investing activities, net
|
1,690 | (337 | ) | ||||||
|
Net cash provided by investing activities
|
73,674 | 36,265 | |||||||
|
Financing activities
|
|||||||||
|
Net change in:
|
|||||||||
|
Deposits
|
(46,179 | ) | (173,304 | ) | |||||
|
Federal funds purchased and securities loaned or sold under repurchase agreements
|
(24,023 | ) | 107,281 | ||||||
|
Commercial paper and other borrowed funds
|
(11,986 | ) | (53,690 | ) | |||||
|
Beneficial interests issued by consolidated variable interest entities
|
(18,297 | ) | (1,835 | ) | |||||
|
Proceeds from long-term debt and trust preferred capital debt securities
|
17,964 | 38,079 | |||||||
|
Payments of long-term debt and trust preferred capital debt securities
|
(30,275 | ) | (34,924 | ) | |||||
|
Excess tax benefits related to stock-based compensation
|
21 | 1 | |||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
— | (25,000 | ) | ||||||
|
Proceeds from issuance of common stock
|
— | 5,756 | |||||||
|
Treasury stock purchased
|
(135 | ) | — | ||||||
|
Dividends paid
|
(745 | ) | (2,681 | ) | |||||
|
All other financing activities, net
|
(497 | ) | (931 | ) | |||||
|
Net cash used in financing activities
|
(114,152 | ) | (141,248 | ) | |||||
|
Effect of exchange rate changes on cash and due from banks
|
(477 | ) | (38 | ) | |||||
|
Net increase (decrease) in cash and due from banks
|
6,600 | (1,762 | ) | ||||||
|
Cash and due from banks at the beginning of the year
|
26,206 | 26,895 | |||||||
|
Cash and due from banks at the end of the period
|
$ | 32,806 | $ | 25,133 | |||||
|
Cash interest paid
|
$ | 6,363 | $ | 8,463 | |||||
|
Cash income taxes paid
|
5,361 | 3,837 | |||||||
| Note: | 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 noncash assets and liabilities of $87.7 billion and $92.2 billion, respectively. |
The
Notes to Consolidated Financial Statements (unaudited) are an integral part of these statements.
107
Table of Contents
See
Glossary of Terms on pages 181-184 of this Form 10-Q for definitions of terms used
throughout the Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 — BASIS OF PRESENTATION
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 and businesses, financial
transaction processing and asset management. For a discussion of the Firm’s business segment
information, see Note 23 on pages 174-178 of this Form 10-Q.
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. The unaudited consolidated financial statements prepared
in conformity with U.S. GAAP require management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expense, and the disclosures of contingent
assets and liabilities. Actual results could be different from these estimates. In the opinion of
management, all normal recurring adjustments have been included for a fair statement of this
interim financial information. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes thereto included
in JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with
the U.S. Securities and Exchange Commission (the “2009 Annual Report”).
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 that are considered to be voting interest entities 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.
Firm-sponsored asset management funds are generally structured as limited partnerships or limited
liability companies and are typically considered voting interest entities. For the significant
majority of these entities, for which the Firm is the general partner or managing member of the
limited partnership or limited liability company (“LLC”), the non-affiliated partners or members
have the substantive ability to remove the Firm as the general partner or managing member without
cause (i.e., kick-out rights), based on a simple unaffiliated majority vote, or the non-affiliated
partners or members have substantive participating rights. Accordingly, the Firm does not
consolidate these funds. In limited cases where the non-affiliated partners or members do not have
substantive kick-out or participating rights, the Firm consolidates the underlying funds.
Private equity investments, which are recorded in other assets on the Consolidated Balance Sheets,
include 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.
108
Table of Contents
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 determining the primary
beneficiary of a VIE. 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 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.
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 any 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 regarding the VIE to
change.
For
further details regarding the Firm’s application of the new
accounting guidance effective January 1, 2010, see Note 15 on pages 151-163 of this Form 10-Q. For a description of the accounting
guidance applied to periods ending prior to January 1, 2010, see Note 1 on page 142 of JPMorgan
Chase’s 2009 Annual Report.
In February 2010, the Financial Accounting Standards Board (“FASB”) issued an amendment which
defers the requirements of the new consolidation accounting guidance for certain investment funds,
including mutual funds, private equity funds and hedge funds. For funds to which the amendment
applies, the consolidation guidance will be deferred until the
completion of the FASB and International Accounting Standards Board
(“IASB”)
joint consolidation project. For the funds to which the amendment 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.
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Table of Contents
NOTE 2 — BUSINESS CHANGES AND DEVELOPMENTS
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.
Subsequent events
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 for approximately $1.6 billion. This
acquisition almost doubled the number of clients the Firm’s commodities business can serve and will
enable the Firm to offer them more products in more regions of the world.
Redemption of Series E, F and G cumulative preferred stock
On July 16, 2010, JPMorgan Chase announced that it will redeem at stated redemption value on August
20, 2010, all outstanding shares of its 6.15% Cumulative Preferred Stock, Series E, 5.72%
Cumulative Preferred Stock, Series F and 5.49% Cumulative Preferred Stock, Series G. For a further
discussion of preferred stock, see Note 23 on pages 222-223 of JPMorgan Chase’s 2009 Annual
Report.
NOTE 3 — FAIR VALUE MEASUREMENT
For a further discussion of the Firm’s valuation methodologies for assets, liabilities and
lending-related commitments measured at fair value and the fair value hierarchy, see Note 3 on
pages 148-165 of JPMorgan Chase’s 2009 Annual Report.
During the first six months of 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.
110
Table of Contents
The following table presents the assets and liabilities measured at fair value as of June 30, 2010,
and December 31, 2009, by major product category and by the fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| June 30, 2010 (in millions) | Level 1 (j) | Level 2 (j) | Level 3 (j) | adjustments | fair value | |||||||||||||||
|
Federal funds sold and securities purchased under
resale agreements
|
$ | — | $ | 22,750 | $ | — | $ | — | $ | 22,750 | ||||||||||
|
Securities borrowed
|
— | 11,924 | — | — | 11,924 | |||||||||||||||
|
|
||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
21,086 | 8,841 | 176 | — | 30,103 | |||||||||||||||
|
Residential — nonagency
(b)
|
— | 2,369 | 804 | — | 3,173 | |||||||||||||||
|
Commercial — nonagency
(b)
|
— | 1,075 | 1,739 | — | 2,814 | |||||||||||||||
|
Total mortgage-backed securities
|
21,086 | 12,285 | 2,719 | — | 36,090 | |||||||||||||||
|
U.S. Treasury and government agencies
(a)
|
14,513 | 11,826 | — | — | 26,339 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
— | 3,983 | 2,008 | — | 5,991 | |||||||||||||||
|
Certificates of deposit, bankers’ acceptances and
commercial paper
|
— | 2,858 | — | — | 2,858 | |||||||||||||||
|
Non-U.S. government debt securities
|
31,081 | 34,966 | 608 | — | 66,655 | |||||||||||||||
|
Corporate debt securities
|
1 | 41,761 | 4,551 | — | 46,313 | |||||||||||||||
|
Loans
(c)
|
— | 16,767 | 14,889 | — | 31,656 | |||||||||||||||
|
Asset-backed securities
|
— | 2,130 | 8,143 | — | 10,273 | |||||||||||||||
|
Total debt instruments
|
66,681 | 126,576 | 32,918 | — | 226,175 | |||||||||||||||
|
Equity securities
|
74,316 | 2,973 | 1,822 | — | 79,111 | |||||||||||||||
|
Physical commodities
(d)
|
9,651 | 363 | — | — | 10,014 | |||||||||||||||
|
Other
|
— | 1,582 | 411 | — | 1,993 | |||||||||||||||
|
Total debt and equity instruments
(e)
|
150,648 | 131,494 | 35,151 | — | 317,293 | |||||||||||||||
|
Derivative receivables:
|
||||||||||||||||||||
|
Interest rate
|
2,510 | 1,394,382 | 5,586 | (1,360,210 | ) | 42,268 | ||||||||||||||
|
Credit
(f)
|
— | 126,631 | 28,710 | (146,995 | ) | 8,346 | ||||||||||||||
|
Foreign exchange
|
1,871 | 156,502 | 3,244 | (142,031 | ) | 19,586 | ||||||||||||||
|
Equity
|
51 | 50,915 | 7,132 | (52,575 | ) | 5,523 | ||||||||||||||
|
Commodity
|
93 | 31,573 | 1,095 | (28,269 | ) | 4,492 | ||||||||||||||
|
Total derivative receivables
(g)
|
4,525 | 1,760,003 | 45,767 | (1,730,080 | ) | 80,215 | ||||||||||||||
|
Total trading assets
|
155,173 | 1,891,497 | 80,918 | (1,730,080 | ) | 397,508 | ||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
U.S. government agencies
(a)
|
120,595 | 19,782 | — | — | 140,377 | |||||||||||||||
|
Residential — nonagency
(b)
|
— | 31,609 | 5 | — | 31,614 | |||||||||||||||
|
Commercial — nonagency
(b)
|
— | 4,836 | 104 | — | 4,940 | |||||||||||||||
|
Total mortgage-backed securities
|
120,595 | 56,227 | 109 | — | 176,931 | |||||||||||||||
|
U.S. Treasury and government agencies
(a)
|
3,894 | 13,940 | — | — | 17,834 | |||||||||||||||
|
Obligations of U.S. states and municipalities
|
37 | 8,397 | 255 | — | 8,689 | |||||||||||||||
|
Certificates of deposit
|
— | 2,238 | — | — | 2,238 | |||||||||||||||
|
Non-U.S. government debt securities
|
11,283 | 8,275 | — | — | 19,558 | |||||||||||||||
|
Corporate debt securities
|
1 | 55,243 | — | — | 55,244 | |||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||
|
Credit card receivables
|
— | 9,380 | — | — | 9,380 | |||||||||||||||
|
Collateralized loan obligations
|
— | 135 | 11,972 | — | 12,107 | |||||||||||||||
|
Other
|
— | 7,391 | 362 | — | 7,753 | |||||||||||||||
|
Equity securities
|
2,211 | 1 | 46 | — | 2,258 | |||||||||||||||
|
Total available-for-sale securities
|
138,021 | 161,227 | 12,744 | — | 311,992 | |||||||||||||||
|
Loans
|
— | 1,297 | 1,065 | — | 2,362 | |||||||||||||||
|
Mortgage servicing rights
|
— | — | 11,853 | — | 11,853 | |||||||||||||||
|
|
||||||||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Private equity investments
(h)
|
78 | 795 | 7,246 | — | 8,119 | |||||||||||||||
|
All other
|
5,950 | 48 | 4,308 | — | 10,306 | |||||||||||||||
|
Total other assets
|
6,028 | 843 | 11,554 | — | 18,425 | |||||||||||||||
|
Total assets measured at fair value on a recurring
basis
(i)
|
$ | 299,222 | $ | 2,089,538 | $ | 118,134 | $ | (1,730,080 | ) | $ | 776,814 | |||||||||
111
Table of Contents
| Fair value hierarchy | ||||||||||||||||||||
| Netting | Total | |||||||||||||||||||
| June 30, 2010 (in millions) | Level 1 (j) | Level 2 (j) | Level 3 (j) | adjustments | fair value | |||||||||||||||
|
Deposits
|
$ | — | $ | 4,006 | $ | 884 | $ | — | $ | 4,890 | ||||||||||
|
Federal funds purchased and securities loaned
or sold under repurchase agreements
|
— | 6,013 | — | — | 6,013 | |||||||||||||||
|
Other borrowed funds
|
— | 7,112 | 291 | — | 7,403 | |||||||||||||||
|
|
||||||||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||
|
Debt and equity instruments
(e)
|
55,672 | 19,069 | 4 | — | 74,745 | |||||||||||||||
|
Derivative payables:
|
||||||||||||||||||||
|
Interest rate
|
2,361 | 1,355,358 | 2,539 | (1,340,217 | ) | 20,041 | ||||||||||||||
|
Credit
(f)
|
— | 130,026 | 18,924 | (144,630 | ) | 4,320 | ||||||||||||||
|
Foreign exchange
|
1,956 | 166,748 | 3,193 | (147,705 | ) | 24,192 | ||||||||||||||
|
Equity
|
41 | 46,556 | 8,782 | (46,847 | ) | 8,532 | ||||||||||||||
|
Commodity
|
149 | 30,998 | 1,512 | (29,607 | ) | 3,052 | ||||||||||||||
|
Total derivative payables
(g)
|
4,507 | 1,729,686 | 34,950 | (1,709,006 | ) | 60,137 | ||||||||||||||
|
Total trading liabilities
|
60,179 | 1,748,755 | 34,954 | (1,709,006 | ) | 134,882 | ||||||||||||||
|
Accounts payable and other liabilities
|
— | 1 | 449 | — | 450 | |||||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
— | 665 | 1,392 | — | 2,057 | |||||||||||||||
|
Long-term debt
|
— | 26,166 | 15,762 | — | 41,928 | |||||||||||||||
|
Total liabilities measured at fair value on a
recurring basis
|
$ | 60,179 | $ | 1,792,718 | $ | 53,732 | $ | (1,709,006 | ) | $ | 197,623 | |||||||||
112
Table of Contents
| 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
(b)
|
— | 2,284 | 1,115 | — | 3,399 | |||||||||||||||
|
Commercial — nonagency
(b)
|
— | 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
(c)
|
— | 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
(d)
|
9,450 | 586 | — | — | 10,036 | |||||||||||||||
|
Other
|
— | 1,884 | 926 | — | 2,810 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total debt and equity instruments
(e)
|
156,980 | 138,772 | 35,166 | — | 330,918 | |||||||||||||||
|
Derivative receivables
(g)
|
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
(b)
|
— | 14,773 | 25 | — | 14,798 | |||||||||||||||
|
Commercial — nonagency
(b)
|
— | 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 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
(h)
|
165 | 597 | 6,563 | — | 7,325 | |||||||||||||||
|
All other
(k)
|
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
(i)
|
$ | 334,065 | $ | 1,863,728 | $ | 127,648 | $ | (1,485,308 | ) | $ | 840,133 | |||||||||
113
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
(e)
|
50,577 | 14,359 | 10 | — | 64,946 | |||||||||||||||
|
Derivative payables
(f)(g)
|
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) | Includes total U.S. government-sponsored enterprise obligations of $144.3 billion and $195.8 billion at June 30, 2010, and December 31, 2009, respectively, which were predominantly mortgage-related. | |
| (b) | For further discussion of residential and commercial mortgage-backed securities (“MBS”), see the “Mortgage-related exposures carried at fair value” section of Note 3 on pages 161-162 of JPMorgan Chase’s 2009 Annual Report. | |
| (c) | Included within trading loans at June 30, 2010, and December 31, 2009, respectively, are $20.1 billion and $20.7 billion of residential first-lien mortgages and $3.8 billion and $2.7 billion of commercial first-lien mortgages. Residential mortgage loans include conforming mortgage loans originated with the intent to sell to U.S. government agencies of $10.6 billion and $11.1 billion, respectively, and reverse mortgages of $3.9 billion and $4.5 billion, respectively. For further discussion of residential and commercial loans carried at fair value or the lower of cost or fair value, see the “Mortgage-related exposures carried at fair value” section of Note 3 on pages 161-162 of JPMorgan Chase’s 2009 Annual Report. | |
| (d) | Physical commodities inventories are generally accounted for at the lower of cost or fair value. | |
| (e) | 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”). | |
| (f) | 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 Note 3 on pages 148-152 of JPMorgan Chase’s 2009 Annual Report. | |
| (g) | 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 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 $19.0 billion and $16.0 billion at June 30, 2010, and December 31, 2009, respectively, exclusive of the netting benefit associated with cash collateral which would further reduce the level 3 balances. | |
| (h) | Private equity instruments represent investments within the Corporate/Private Equity line of business. The cost basis of the private equity investment portfolio totaled $9.7 billion and $8.8 billion at June 30, 2010, and December 31, 2009, respectively. | |
| (i) | At June 30, 2010, and December 31, 2009, balances included investments valued at net asset value of $13.2 billion and $16.8 billion, respectively, of which $7.0 billion and $9.0 billion, respectively, were classified in level 1, $2.1 billion and $3.2 billion, respectively, in level 2 and $4.1 billion and $4.6 billion in level 3. | |
| (j) | In the three and six months ended June 30, 2010, the transfers between levels 1, 2 and 3 were not significant. | |
| (k) | Includes 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 three and six months ended June 30, 2010 and 2009. 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.
114
Table of Contents
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Purchases, | Transfers | gains/(losses) | |||||||||||||||||||||
| Three months ended | Fair value, | realized/ | issuances | into and/or | Fair value, | related to financial | ||||||||||||||||||
| June 30, 2010 | April 1, | unrealized | settlements, | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2010 | gains/(losses) | net | level 3 (f) | 2010 | at June 30, 2010 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 215 | $ | 19 | $ | (55 | ) | $ | (3 | ) | $ | 176 | $ | — | ||||||||||
|
Residential — nonagency
(a)
|
841 | 61 | (36 | ) | (62 | ) | 804 | 56 | ||||||||||||||||
|
Commercial — nonagency
(a)
|
1,673 | 80 | (11 | ) | (3 | ) | 1,739 | 66 | ||||||||||||||||
|
Total mortgage-backed securities
|
2,729 | 160 | (102 | ) | (68 | ) | 2,719 | 122 | ||||||||||||||||
|
Obligations of U.S. states and
municipalities
|
1,975 | 15 | 18 | — | 2,008 | 1 | ||||||||||||||||||
|
Non-U.S. government debt securities
|
713 | (43 | ) | (62 | ) | — | 608 | (43 | ) | |||||||||||||||
|
Corporate debt securities
|
4,947 | (53 | ) | (177 | ) | (166 | ) | 4,551 | (34 | ) | ||||||||||||||
|
Loans
|
15,776 | 41 | (943 | ) | 15 | 14,889 | 49 | |||||||||||||||||
|
Asset-backed securities
|
8,078 | (185 | ) | 310 | (60 | ) | 8,143 | (177 | ) | |||||||||||||||
|
Total debt instruments
|
34,218 | (65 | ) | (956 | ) | (279 | ) | 32,918 | (82 | ) | ||||||||||||||
|
Equity securities
|
1,716 | 101 | 1 | 4 | 1,822 | 154 | ||||||||||||||||||
|
Other
|
425 | 19 | (33 | ) | — | 411 | 29 | |||||||||||||||||
|
Total debt and equity instruments
|
36,359 | 55 | (b) | (988 | ) | (275 | ) | 35,151 | 101 | (b) | ||||||||||||||
|
Derivative receivables:
|
||||||||||||||||||||||||
|
Interest rate
|
2,464 | 1,021 | (534 | ) | 96 | 3,047 | 911 | |||||||||||||||||
|
Credit
|
9,186 | 2,003 | (1,410 | ) | 7 | 9,786 | 2,349 | |||||||||||||||||
|
Foreign exchange
|
329 | (513 | ) | 236 | (1 | ) | 51 | (452 | ) | |||||||||||||||
|
Equity
|
(1,291 | ) | (333 | ) | 46 | (72 | ) | (1,650 | ) | (172 | ) | |||||||||||||
|
Commodity
|
(281 | ) | (241 | ) | 70 | 35 | (417 | ) | (288 | ) | ||||||||||||||
|
Derivative receivables,
net of derivative liabilities
|
10,407 | 1,937 | (b) | (1,592 | ) | 65 | 10,817 | 2,348 | (b) | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||
|
Asset-backed securities
|
12,571 | (39 | ) | (198 | ) | — | 12,334 | (51 | ) | |||||||||||||||
|
Other
|
363 | 10 | (67 | ) | 104 | 410 | (2 | ) | ||||||||||||||||
|
Total available-for-sale securities
|
12,934 | (29) | (c) | (265 | ) | 104 | 12,744 | (53) | (c) | |||||||||||||||
|
Loans
|
1,140 | (12) | (b) | (79 | ) | 16 | 1,065 | (32) | (b) | |||||||||||||||
|
Mortgage servicing rights
|
15,531 | (3,584) | (d) | (94 | ) | — | 11,853 | (3,584) | (d) | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,385 | (12) | (b) | 992 | (119 | ) | 7,246 | (19) | (b) | |||||||||||||||
|
All other
|
4,352 | (40) | (e) | 80 | (84 | ) | 4,308 | (20) | (e) | |||||||||||||||
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Purchases, | Transfers | (gains)/losses | |||||||||||||||||||||
| Three months ended | Fair value, | realized/ | issuances | into and/or | Fair value, | related to financial | ||||||||||||||||||
| June 30, 2010 | April 1, | unrealized | settlements, | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2010 | (gains)/losses | net | level 3 (f) | 2010 | at June 30, 2010 | ||||||||||||||||||
|
Liabilities
(g)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 440 | $ | 15 | (b) | $ | 95 | $ | 334 | $ | 884 | $ | 10 | (b) | ||||||||||
|
Other borrowed funds
|
452 | (48) | (b) | (103 | ) | (10 | ) | 291 | (37) | (b) | ||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
32 | 2 | (b) | (30 | ) | — | 4 | — | (b) | |||||||||||||||
|
Accounts payable and other
liabilities
|
328 | (17) | (b) | 138 | — | 449 | (5) | (b) | ||||||||||||||||
|
Beneficial interests
issued by consolidated
VIEs
|
1,817 | (26) | (b) | (399 | ) | — | 1,392 | (68) | (b) | |||||||||||||||
|
Long-term debt
|
17,518 | (632) | (b) | (1,219 | ) | 95 | 15,762 | (365) | (b) | |||||||||||||||
115
Table of Contents
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Transfers | gains/(losses) | ||||||||||||||||||||||
| Three months ended | Fair value, | realized/ | Purchases, | into and/or | Fair value, | related to financial | ||||||||||||||||||
| June 30, 2009 | April 1, | unrealized | issuances | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2009 | gains/(losses) | settlements, net | level 3 (f) | 2009 | at June 30, 2009 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 288 | $ | (23 | ) | $ | (10 | ) | $ | 2 | $ | 257 | $ | (23 | ) | |||||||||
|
Residential — nonagency
(a)
|
2,469 | (183 | ) | 563 | (17 | ) | 2,832 | (197 | ) | |||||||||||||||
|
Commercial — nonagency
(a)
|
1,890 | (11 | ) | (29 | ) | — | 1,850 | (48 | ) | |||||||||||||||
|
Total mortgage-backed securities
|
4,647 | (217 | ) | 524 | (15 | ) | 4,939 | (268 | ) | |||||||||||||||
|
Obligations of U.S. states and
municipalities
|
2,482 | 32 | (98 | ) | — | 2,416 | (8 | ) | ||||||||||||||||
|
Non-U.S. government debt securities
|
737 | 21 | (32 | ) | — | 726 | 4 | |||||||||||||||||
|
Corporate debt securities
|
6,144 | (21 | ) | (752 | ) | 111 | 5,482 | (44 | ) | |||||||||||||||
|
Loans
|
16,046 | 362 | (866 | ) | (334 | ) | 15,208 | 351 | ||||||||||||||||
|
Asset-backed securities
|
6,488 | 887 | 490 | (182 | ) | 7,683 | 828 | |||||||||||||||||
|
Total debt instruments
|
36,544 | 1,064 | (734 | ) | (420 | ) | 36,454 | 863 | ||||||||||||||||
|
Equity securities
|
963 | 29 | (98 | ) | 615 | 1,509 | 17 | |||||||||||||||||
|
Other
|
1,200 | (20 | ) | 47 | 42 | 1,269 | (9 | ) | ||||||||||||||||
|
Total debt and equity instruments
|
38,707 | 1,073 | (b) | (785 | ) | 237 | 39,232 | 871 | (b) | |||||||||||||||
|
Derivative receivables,
net of derivative liabilities
|
19,148 | (5,707 | ) (b) | 759 | 4,148 | 18,348 | (3,932 | ) (b) | ||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||
|
Asset-backed securities
|
11,078 | 767 | 89 | — | 11,934 | 767 | ||||||||||||||||||
|
Other
|
1,385 | (60 | ) | 346 | 6 | 1,677 | 50 | |||||||||||||||||
|
Total available-for-sale securities
|
12,463 | 707 | (c) | 435 | 6 | 13,611 | 817 | (c) | ||||||||||||||||
|
Loans
|
2,987 | (73 | ) (b) | (1,112 | ) | (46 | ) | 1,756 | (116 | ) (b) | ||||||||||||||
|
Mortgage servicing rights
|
10,634 | 3,831 | (d) | 135 | — | 14,600 | 3,831 | (d) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,245 | (135 | ) (b) | 20 | (1 | ) | 6,129 | (145 | ) (b) | |||||||||||||||
|
All other
(h)
|
7,704 | (304 | ) (e) | 1,829 | (301 | ) | 8,928 | (308 | ) (e) | |||||||||||||||
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Transfers | (gains)/losses related | ||||||||||||||||||||||
| Three months ended | Fair value, | realized/ | Purchases, | into and/or | Fair value, | to financial | ||||||||||||||||||
| June 30, 2009 | April 1, | unrealized | issuances | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2009 | (gains)/losses | settlements, net | level 3 (f) | 2009 | at June 30, 2009 | ||||||||||||||||||
|
Liabilities
(g)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 928 | $ | 9 | (b) | $ | (310 | ) | $ | — | $ | 627 | $ | 9 | (b) | |||||||||
|
Other borrowed funds
|
47 | 9 | (b) | 40 | 38 | 134 | 8 | (b) | ||||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
257 | (4 | ) (b) | (200 | ) | — | 53 | (9 | ) (b) | |||||||||||||||
|
Accounts payable and other
liabilities
|
6 | (2 | ) (b) | 433 | — | 437 | (4 | ) (b) | ||||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
502 | 161 | (b) | (482 | ) | 879 | 1,060 | 160 | (b) | |||||||||||||||
|
Long-term debt
|
16,657 | 883 | (b) | (1,233 | ) | 1,166 | 17,473 | 1,077 | (b) | |||||||||||||||
116
Table of Contents
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Purchases, | Transfers | gains/(losses) related | |||||||||||||||||||||
| Six months ended | Fair value, | realized/ | issuances | into and/or | Fair value, | to financial | ||||||||||||||||||
| June 30, 2010 | January 1, | unrealized | settlements, | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2010 | gains/(losses) | net | level 3 (f) | 2010 | at June 30, 2010 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 260 | $ | 24 | $ | (105 | ) | $ | (3 | ) | $ | 176 | $ | (10 | ) | |||||||||
|
Residential — nonagency
(a)
|
1,115 | 77 | (340 | ) | (48 | ) | 804 | 44 | ||||||||||||||||
|
Commercial — nonagency
(a)
|
1,770 | 116 | (144 | ) | (3 | ) | 1,739 | 30 | ||||||||||||||||
|
Total mortgage-backed securities
|
3,145 | 217 | (589 | ) | (54 | ) | 2,719 | 64 | ||||||||||||||||
|
Obligations of U.S. states and
municipalities
|
1,971 | (27 | ) | (78 | ) | 142 | 2,008 | (42 | ) | |||||||||||||||
|
Non-U.S. government debt securities
|
734 | (90 | ) | (36 | ) | — | 608 | (18 | ) | |||||||||||||||
|
Corporate debt securities
|
5,241 | (331 | ) | (467 | ) | 108 | 4,551 | (5 | ) | |||||||||||||||
|
Loans
|
13,218 | (290 | ) | 2,043 | (82 | ) | 14,889 | (358 | ) | |||||||||||||||
|
Asset-backed securities
|
7,975 | (89 | ) | 241 | 16 | 8,143 | (233 | ) | ||||||||||||||||
|
Total debt instruments
|
32,284 | (610 | ) | 1,114 | 130 | 32,918 | (592 | ) | ||||||||||||||||
|
Equity securities
|
1,956 | 81 | (231 | ) | 16 | 1,822 | 213 | |||||||||||||||||
|
Other
|
926 | 40 | (633 | ) | 78 | 411 | 35 | |||||||||||||||||
|
Total debt and equity instruments
|
35,166 | (489) | (b) | 250 | 224 | 35,151 | (344) | (b) | ||||||||||||||||
|
Derivative receivables:
|
||||||||||||||||||||||||
|
Interest rate
|
2,040 | 1,441 | (575 | ) | 141 | 3,047 | 671 | |||||||||||||||||
|
Credit
|
10,350 | 1,399 | (1,961 | ) | (2 | ) | 9,786 | 1,669 | ||||||||||||||||
|
Foreign exchange
|
1,082 | (893 | ) | 156 | (294 | ) | 51 | (861 | ) | |||||||||||||||
|
Equity
|
(1,791 | ) | (70 | ) | (18 | ) | 229 | (1,650 | ) | 76 | ||||||||||||||
|
Commodity
|
(329 | ) | (652 | ) | 472 | 92 | (417 | ) | (267 | ) | ||||||||||||||
|
Derivative receivables,
net of derivative liabilities
|
11,352 | 1,225 | (b) | (1,926 | ) | 166 | 10,817 | 1,288 | (b) | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||
|
Asset-backed securities
|
12,732 | (105 | ) | (293 | ) | — | 12,334 | (96 | ) | |||||||||||||||
|
Other
|
461 | (67 | ) | (89 | ) | 105 | 410 | (95 | ) | |||||||||||||||
|
Total available-for-sale securities
|
13,193 | (172) | (c) | (382 | ) | 105 | 12,744 | (191 | ) (c) | |||||||||||||||
|
Loans
|
990 | (11) | (b) | 78 | 8 | 1,065 | (48) | (b) | ||||||||||||||||
|
Mortgage servicing rights
|
15,531 | (3,680) | (d) | 2 | — | 11,853 | (3,680) | (d) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,563 | 136 | (b) | 931 | (384 | ) | 7,246 | 11 | (b) | |||||||||||||||
|
All other
|
9,521 | (58) | (e) | (5,060 | ) | (95 | ) | 4,308 | (111) | (e) | ||||||||||||||
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Purchases, | Transfers | (gains)/losses related | |||||||||||||||||||||
| Six months ended | Fair value, | realized/ | issuances | into and/or | Fair value, | to financial | ||||||||||||||||||
| June 30, 2010 | January 1, | unrealized | settlements, | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2010 | (gains)/losses | net | level 3 (f) | 2010 | at June 30, 2010 | ||||||||||||||||||
|
Liabilities
(g)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 476 | $ | 5 | (b) | $ | 94 | $ | 309 | $ | 884 | $ | (32) | (b) | ||||||||||
|
Other borrowed funds
|
542 | (100) | (b) | 92 | (243 | ) | 291 | (110) | (b) | |||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
10 | 4 | (b) | (33 | ) | 23 | 4 | 1 | (b) | |||||||||||||||
|
Accounts payable and other
liabilities
|
355 | (40) | (b) | 134 | — | 449 | (13) | (b) | ||||||||||||||||
|
Beneficial interests
issued by consolidated
VIEs
|
625 | (33) | (b) | 800 | — | 1,392 | (105) | (b) | ||||||||||||||||
|
Long-term debt
|
18,287 | (1,035) | (b) | (1,887 | ) | 397 | 15,762 | (513) | (b) | |||||||||||||||
117
Table of Contents
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Purchases, | Transfers | gains/(losses) | |||||||||||||||||||||
| Six months ended | Fair value, | realized/ | issuances | into and/or | Fair value, | related to financial | ||||||||||||||||||
| June 30, 2009 | January 1, | unrealized | settlements, | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2009 | gains/(losses) | net | level 3 (f) | 2009 | at June 30, 2009 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt instruments:
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | 163 | $ | (35 | ) | $ | 56 | $ | 73 | $ | 257 | $ | (34 | ) | ||||||||||
|
Residential — nonagency
(a)
|
3,339 | (548 | ) | 567 | (526 | ) | 2,832 | (590 | ) | |||||||||||||||
|
Commercial — nonagency
(a)
|
2,487 | (241 | ) | (245 | ) | (151 | ) | 1,850 | (97 | ) | ||||||||||||||
|
Total mortgage-backed securities
|
5,989 | (824 | ) | 378 | (604 | ) | 4,939 | (721 | ) | |||||||||||||||
|
Obligations of U.S. states and
municipalities
|
2,641 | 53 | (278 | ) | — | 2,416 | (25 | ) | ||||||||||||||||
|
Non-U.S. government debt securities
|
707 | 25 | (40 | ) | 34 | 726 | 2 | |||||||||||||||||
|
Corporate debt securities
|
5,280 | (164 | ) | (3,102 | ) | 3,468 | 5,482 | (88 | ) | |||||||||||||||
|
Loans
|
17,091 | (1,188 | ) | (954 | ) | 259 | 15,208 | (1,117 | ) | |||||||||||||||
|
Asset-backed securities
|
7,106 | 669 | 128 | (220 | ) | 7,683 | 574 | |||||||||||||||||
|
Total debt instruments
|
38,814 | (1,429 | ) | (3,868 | ) | 2,937 | 36,454 | (1,375 | ) | |||||||||||||||
|
Equity securities
|
1,380 | (247 | ) | (359 | ) | 735 | 1,509 | (171 | ) | |||||||||||||||
|
Other
|
1,226 | (107 | ) | 94 | 56 | 1,269 | 80 | |||||||||||||||||
|
Total debt and equity instruments
|
41,420 | (1,783 | ) (b) | (4,133 | ) | 3,728 | 39,232 | (1,466 | ) (b) | |||||||||||||||
|
Derivative receivables,
net of derivative liabilities
|
9,507 | (4,938 | ) (b) | (2,233 | ) | 16,012 | 18,348 | (4,870 | ) (b) | |||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||
|
Asset-backed securities
|
11,447 | (138 | ) | 450 | 175 | 11,934 | (331 | ) | ||||||||||||||||
|
Other
|
944 | (60 | ) | 247 | 546 | 1,677 | 50 | |||||||||||||||||
|
Total available-for-sale securities
|
12,391 | (198 | ) (c) | 697 | 721 | 13,611 | (281 | ) (c) | ||||||||||||||||
|
Loans
|
2,667 | (478 | ) (b) | (1,309 | ) | 876 | 1,756 | (433 | ) (b) | |||||||||||||||
|
Mortgage servicing rights
|
9,403 | 5,141 | (d) | 56 | — | 14,600 | 5,141 | (d) | ||||||||||||||||
|
Other assets:
|
||||||||||||||||||||||||
|
Private equity investments
|
6,369 | (473 | ) (b) | 163 | 70 | 6,129 | (459 | ) (b) | ||||||||||||||||
|
All other
(h)
|
8,114 | (651 | ) (e) | 1,806 | (341 | ) | 8,928 | (655 | ) (e) | |||||||||||||||
| Fair value measurements using significant unobservable inputs | ||||||||||||||||||||||||
| Change in unrealized | ||||||||||||||||||||||||
| Total | Purchases, | Transfers | (gains)/losses | |||||||||||||||||||||
| Six months ended | Fair value, | realized/ | issuances | into and/or | Fair value, | related to financial | ||||||||||||||||||
| June 30, 2009 | January 1, | unrealized | settlements, | out of | June 30, | instruments held | ||||||||||||||||||
| (in millions) | 2009 | (gains)/losses | net | level 3 (f) | 2009 | at June 30, 2009 | ||||||||||||||||||
|
Liabilities
(g)
:
|
||||||||||||||||||||||||
|
Deposits
|
$ | 1,235 | $ | 23 | (b) | $ | (693 | ) | $ | 62 | $ | 627 | $ | 36 | (b) | |||||||||
|
Other borrowed funds
|
101 | (86 | ) (b) | 76 | 43 | 134 | 5 | (b) | ||||||||||||||||
|
Trading liabilities:
|
||||||||||||||||||||||||
|
Debt and equity instruments
|
288 | 58 | (b) | (290 | ) | (3 | ) | 53 | (2 | ) (b) | ||||||||||||||
|
Accounts payable and other
liabilities
|
— | (4 | ) (b) | 441 | — | 437 | (4 | ) (b) | ||||||||||||||||
|
Beneficial interests issued by
consolidated VIEs
|
— | 161 | (b) | 20 | 879 | 1,060 | 160 | (b) | ||||||||||||||||
|
Long-term debt
|
16,548 | 41 | (b) | (2,551 | ) | 3,435 | 17,473 | 464 | (b) | |||||||||||||||
| (a) | For further discussion of residential and commercial MBS, see the “Mortgage-related exposures carried at fair value” section of Note 3 on pages 161-162 of JPMorgan Chase’s 2009 Annual Report. | |
| (b) | Predominantly reported in principal transactions revenue, except for changes in fair value for Retail Financial Services (“RFS”) mortgage loans originated with the intent to sell, which are reported in mortgage fees and related income. | |
| (c) | Realized gains and losses on available-for-sale (“AFS”) securities, as well as other-than-temporary impairment (“OTTI”) losses that are recorded in earnings, are reported in securities gains. Unrealized gains and losses are reported in other comprehensive income. | |
| (d) | Changes in fair value for RFS mortgage servicing rights are reported in mortgage fees and related income. | |
| (e) | Predominantly reported in other income. | |
| (f) | All transfers into and/or out of level 3 are assumed to occur at the beginning of the reporting period. |
118
Table of Contents
| (g) | 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 27% and 29% at June 30, 2010, and December 31, 2009, respectively. | |
| (h) | Includes assets within accrued interest receivable and other assets at June 30, 2009. |
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 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 of June 30,
2010, and December 31, 2009, for which a nonrecurring change in fair value has been recorded during
the reporting period.
| Fair value hierarchy | ||||||||||||||||
| June 30, 2010 (in millions) | Level 1 (d) | Level 2 (d) | Level 3 (d) | Total fair value | ||||||||||||
|
Loans retained
(a)
|
$ | — | $ | 4,207 | $ | 946 | $ | 5,153 | ||||||||
|
Loans held-for-sale
(b)
|
— | 607 | 437 | 1,044 | ||||||||||||
|
Total loans
|
— | 4,814 | 1,383 | 6,197 | ||||||||||||
|
Other real estate owned
|
— | 36 | 353 | 389 | ||||||||||||
|
Other assets
|
— | — | 1 | 1 | ||||||||||||
|
Total other assets
|
— | 36 | 354 | 390 | ||||||||||||
|
Total assets at fair value on a nonrecurring basis
|
$ | — | $ | 4,850 | $ | 1,737 | $ | 6,587 | ||||||||
|
Accounts payable and other liabilities
(c)
|
$ | — | $ | 82 | $ | 16 | $ | 98 | ||||||||
|
Total liabilities at fair value on a nonrecurring basis
|
$ | — | $ | 82 | $ | 16 | $ | 98 | ||||||||
| 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 leveraged lending loans carried on the Consolidated Balance Sheets at the lower of cost or fair value. | |
| (c) | Represents, at June 30, 2010, and December 31, 2009, fair value adjustments associated with $501 million and $648 million, respectively, of unfunded held-for-sale lending-related commitments within the leveraged lending portfolio. | |
| (d) | In the three and six months ended June 30, 2010, the 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, and nonfinancial assets). 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 14 on pages
150-151 of this Form 10-Q.
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 three and six
months ended June 30, 2010 and 2009, related to financial instruments held at those dates.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Loans retained
|
$ | (978 | ) | $ | (1,008 | ) | $ | (2,052 | ) | $ | (1,622 | ) | ||||
|
Loans held-for-sale
|
(3 | ) | (339 | ) | 65 | (705 | ) | |||||||||
|
Total loans
|
(981 | ) | (1,347 | ) | (1,987 | ) | (2,327 | ) | ||||||||
|
|
||||||||||||||||
|
Other assets
|
11 | (154 | ) | 29 | (250 | ) | ||||||||||
|
Accounts payable and other liabilities
|
— | 16 | 5 | 47 | ||||||||||||
|
Total nonrecurring fair value gains/(losses)
|
$ | (970 | ) | $ | (1,485 | ) | $ | (1,953 | ) | $ | (2,530 | ) | ||||
119
Table of Contents
Level 3 analysis
Level 3 assets at June 30, 2010, principally include derivative receivables, mortgage servicing
rights (“MSRs”), trading loans, and collateralized loan obligations (“CLOs”) held within the
available-for-sale securities portfolio. For further discussion of JPMorgan Chase’s valuation
methodologies for assets and liabilities measured at fair value, see
Note 3 on pages 148-165 of
JPMorgan Chase’s 2009 Annual Report.
| • | Derivative receivables included $45.8 billion of interest rate, credit, foreign exchange, equity and commodity contracts classified within level 3 at June 30, 2010. Included within this balance were $21.3 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 June 30, 2010, there were $12.1 billion of level 3 derivative liabilities with risk characteristics similar to those of the derivative receivable assets that were classified in level 3. Both derivative receivables and payables are modeled and valued the same way with the same parameters and inputs. In addition, the counterparty credit risk and market risk exposure of all level 3 derivatives is partially hedged with instruments, for which the inputs are largely observable, that are largely liquid, and that are classified within level 2 of the valuation hierarchy. | |
| • | 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 16 on pages 164-167 of this Form 10-Q and Note 17 on pages 214-217 of JPMorgan Chase’s 2009 Annual Report. | |
| • | CLOs of $12.0 billion are securities backed by corporate loans, and they are held in the Firm’s AFS securities portfolio. For these securities, external pricing information is not 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. Substantially all of these securities are rated “AAA,” “AA” and “A” and have an average credit enhancement of 29%. Credit enhancement in CLOs is primarily in the form of overcollateralization, which is the excess of the par amount of collateral over the par amount of the securities. For further discussion, see Note 11 on pages 139-144 of this Form 10-Q. | |
| • | Trading loans principally include $6.5 billion of commercial mortgage loans and nonagency residential mortgage whole loans held in the Investment Bank (“IB”) for which there is limited price transparency; and $3.9 billion of reverse mortgages for which the principal risk sensitivities are mortality risk and home prices. The fair value of 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 6% of total
Firm assets at June 30, 2010. The following describes significant changes to level 3 assets during
the quarter.
For the three months ended June 30, 2010
Level 3 assets were $119.9 billion at June 30, 2010, reflecting a decrease of $2.0 billion from the
first quarter. The decrease is mainly due to:
| • | $3.7 billion decrease in MSRs. For a further discussion of the change, refer to Note 16 on pages 164-167 of this Form 10-Q. |
| • | $887 million decrease in trading loans driven by loans securitizations and loan sales; and |
| • | $2.0 billion increase in derivative receivables, predominantly due to widening of credit spreads. |
For the six months ended June 30, 2010
Level 3 assets decreased by $10.5 billion in the first six months of 2010, due to the following:
| • | $3.7 billion decrease in MSRs. For a further discussion of the change, refer to Note 16 on pages 164-167 of this Form 10-Q. |
| • | A net decrease of $3.5 billion due to the adoption of new consolidation 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; and |
| • | $917 million decrease in derivative receivables due to changes in credit spreads. |
120
Table of Contents
Gains and Losses
Included
in the tables for the three months ended June 30,
2010
| • | $1.9 billion of net gains on derivatives, primarily related to the widening of credit spreads |
| • | $632 million in gains related to long-term structured note liabilities, primarily due to volatility in the equity markets |
| • | $3.6 billion of losses on MSRs |
Included in the tables for the three months ended June 30, 2009
| • | $3.8 billion in gains on MSRs |
| • | $1.1 billion in gains on trading-debt and equity instruments, primarily from certain asset-backed securities |
| • | $5.7 billion of net losses on derivatives primarily related to changes in credit spreads |
| • | $883 million of losses related to long-term structured note liabilities, primarily due to volatility in the equity markets |
Included in the tables for the six months ended June 30, 2010
| • | $3.7 billion of losses on MSRs |
| • | $1.2 billion of gains in net derivatives receivables |
| • | $1.0 billion of gains related to long-term structured note liabilities primarily due to volatility in the equity markets |
Included in the tables for the six months ended June 30, 2009
| • | $5.1 billion of gains on MSRs |
| • | $4.9 billion of net losses on derivatives, primarily related to changes in credit spreads and changes in interest rates |
| • | $2.5 billion of losses on trading debt and equity instruments, primarily related to residential and commercial loans and mortgage-backed securities and principally driven by markdowns and sales; these losses were partially offset by $669 million in gains on certain asset-backed securities |
| • | $850 million of losses on leveraged loans, which are primarily classified as held-for-sale and measured at the lower of cost or fair value and therefore included in nonrecurring fair value assets |
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
Note 3 on pages 148-165 of JPMorgan Chase’s 2009 Annual Report.
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.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Derivative receivables balance
|
$ | 80,215 | $ | 80,210 | ||||
|
Derivatives CVA
(a)
|
(4,611 | ) | (3,697 | ) | ||||
|
Derivative payables balance
|
60,137 | 60,125 | ||||||
|
Derivatives DVA
|
(1,132 | ) | (841 | ) (d) | ||||
|
Structured notes balance
(b)(c)
|
54,221 | 59,064 | ||||||
|
Structured notes DVA
|
(1,381 | ) | (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 125-127 of this Form 10-Q. | |
| (d) | The prior period has been revised. |
121
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.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Credit adjustments:
|
||||||||||||||||
|
Derivative CVA
(a)
|
$ | (1,070 | ) | $ | 3,522 | $ | (914 | ) | $ | 4,399 | ||||||
|
Derivative DVA
|
397 | (793 | ) | 291 | (379 | ) | ||||||||||
|
Structured note DVA
(b)
|
588 | (1,099 | ) | 696 | (461 | ) | ||||||||||
| (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 125-127 of this Form 10-Q. |
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. Additionally, certain financial instruments and all nonfinancial instruments
are excluded from the scope. Accordingly, the fair value disclosures provided in the following
table include only a partial estimate of the fair value of JPMorgan Chase. 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 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.
122
Table of Contents
The following table presents the carrying value and estimated fair value of financial assets and
liabilities.
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Carrying | Estimated | Appreciation/ | Carrying | Estimated | Appreciation/ | |||||||||||||||||||
| (in billions) | value | fair value | (depreciation) | value | fair value | (depreciation) | ||||||||||||||||||
|
Financial assets
|
||||||||||||||||||||||||
|
Assets for which fair value
approximates carrying value
|
$ | 72.2 | $ | 72.2 | $ | — | $ | 89.4 | $ | 89.4 | $ | — | ||||||||||||
|
Accrued interest and accounts
receivable (included zero and $5.0 at
fair value at
June 30, 2010, and December 31, 2009,
respectively)
|
61.3 | 61.3 | — | 67.4 | 67.4 | — | ||||||||||||||||||
|
Federal funds sold and securities
purchased under resale agreements
(included $22.8 and $20.5 at fair
value at June 30, 2010, and December
31, 2009, respectively)
|
199.0 | 199.0 | — | 195.4 | 195.4 | — | ||||||||||||||||||
|
Securities borrowed (included $11.9
and $7.0 at fair value at June 30,
2010, and December 31, 2009,
respectively)
|
122.3 | 122.3 | — | 119.6 | 119.6 | — | ||||||||||||||||||
|
Trading assets
|
397.5 | 397.5 | — | 411.1 | 411.1 | — | ||||||||||||||||||
|
Securities (included $312.0 and $360.4
at fair value at June 30, 2010, and
December 31, 2009, respectively)
|
312.0 | 312.0 | — | 360.4 | 360.4 | — | ||||||||||||||||||
|
Loans (included $2.4 and $1.4 at fair
value at June 30, 2010, and December
31, 2009, respectively)(a)
|
663.6 | 663.3 | (0.3 | ) | 601.9 | 598.3 | (3.6 | ) | ||||||||||||||||
|
Mortgage servicing rights at fair value
|
11.9 | 11.9 | — | 15.5 | 15.5 | — | ||||||||||||||||||
|
Other (included $18.4 and $19.2 at
fair value at June 30, 2010, and
December 31, 2009, respectively)
|
70.7 | 70.6 | (0.1 | ) | 73.4 | 73.2 | (0.2 | ) | ||||||||||||||||
|
Total financial assets
|
$ | 1,910.5 | $ | 1,910.1 | $ | (0.4 | ) | $ | 1,934.1 | $ | 1,930.3 | $ | (3.8 | ) | ||||||||||
|
Financial liabilities
|
||||||||||||||||||||||||
|
Deposits (included $4.9 and $4.5 at
fair value at June 30, 2010, and
December 31, 2009, respectively)
|
$ | 887.8 | $ | 888.9 | $ | (1.1 | ) | $ | 938.4 | $ | 939.5 | $ | (1.1 | ) | ||||||||||
|
Federal funds purchased and securities
loaned or sold under repurchase
agreements (included $6.0 and $3.4 at
fair value at June 30, 2010, and
December 31, 2009, respectively)
|
237.5 | 237.5 | — | 261.4 | 261.4 | — | ||||||||||||||||||
|
Commercial paper
|
41.1 | 41.1 | — | 41.8 | 41.8 | — | ||||||||||||||||||
|
Other borrowed funds (included $7.4
and $5.6 at fair value at June 30,
2010, and December 31, 2009,
respectively)
|
44.4 | 44.4 | — | 55.7 | 55.9 | (0.2 | ) | |||||||||||||||||
|
Trading liabilities
|
134.9 | 134.9 | — | 125.1 | 125.1 | — | ||||||||||||||||||
|
Accounts payable and other liabilities
(included $0.5 and $0.4 at fair value
at June 30, 2010, and December 31,
2009, respectively)
|
131.6 | 131.6 | — | 136.8 | 136.8 | — | ||||||||||||||||||
|
Beneficial interests issued by
consolidated VIEs (included $2.1 and
$1.4 at fair value at June 30, 2010,
and December 31, 2009, respectively)
|
88.1 | 88.7 | (0.6 | ) | 15.2 | 15.2 | — | |||||||||||||||||
|
Long-term debt and junior subordinated
deferrable interest debentures
(included $41.9 and $49.0 at fair
value at June 30, 2010, and December
31, 2009, respectively)
|
248.6 | 247.8 | 0.8 | 266.3 | 268.4 | (2.1 | ) | |||||||||||||||||
|
Total financial liabilities
|
$ | 1,814.0 | $ | 1,814.9 | $ | (0.9 | ) | $ | 1,840.7 | $ | 1,844.1 | $ | (3.4 | ) | ||||||||||
|
Net (depreciation)/appreciation
|
$ | (1.3 | ) | $ | (7.2 | ) | ||||||||||||||||||
| (a) | Fair value is typically estimated using a discounted cash flow model that incorporates the characteristics of the underlying loans (including principal, customer rate and contractual fees) and key inputs including expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads. For a further discussion of the Firm’s methodologies for estimating the fair value of loans and lending-related commitments see Note 3 on pages 148-152 of JPMorgan Chase’s 2009 Annual Report. |
123
Table of Contents
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.
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| (in billions) | value (a) | fair value | value (a) | fair value | ||||||||||||
|
Wholesale lending-related commitments
|
$ | 0.9 | $ | 1.9 | $ | 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 Note 3 on pages 149-150 of JPMorgan Chase’s 2009 Annual Report.
Trading
assets and liabilities – average balances
Average trading assets and liabilities were as follows for the periods indicated.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Trading assets — debt and equity instruments
(a)
|
$ | 340,612 | $ | 308,951 | $ | 336,212 | $ | 311,883 | ||||||||
|
Trading assets — derivative receivables
|
79,409 | 114,096 | 79,048 | 128,092 | ||||||||||||
|
Trading liabilities — debt and equity instruments
(a)(b)
|
77,492 | 54,587 | 74,205 | 54,726 | ||||||||||||
|
Trading liabilities — derivative payables
|
62,547 | 78,155 | 60,809 | 86,503 | ||||||||||||
| (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. |
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Table of Contents
NOTE 4 — FAIR VALUE OPTION
For a discussion of the primary financial instruments for which fair value elections have been
made, including the determination of instrument-specific credit risk for these items and the basis
for those elections, see Note 4 on pages 165-167 of JPMorgan Chase’s 2009 Annual Report.
2010 Elections
In connection with the adoption of the new consolidation guidance related to VIEs, effective
January 1, 2010, the fair value option was elected for long-term beneficial interests related to
securitization trusts within IB that were consolidated where the underlying assets are carried at
fair value.
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 three and six months ended June 30, 2010 and 2009, 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.
| Three months ended June 30, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| Total changes | Total changes | |||||||||||||||||||||||
| Principal | Other | in fair value | Principal | Other | in fair value | |||||||||||||||||||
| (in millions) | transactions | income | recorded | transactions | income | recorded | ||||||||||||||||||
|
Federal funds sold and securities purchased under resale
agreements
|
$ | 261 | $ | — | $ | 261 | $ | (269 | ) | $ | — | $ | (269 | ) | ||||||||||
|
Securities borrowed
|
27 | — | 27 | (12 | ) | — | (12 | ) | ||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt and equity instruments, excluding loans
|
40 | (12 | ) (c) | 28 | 244 | 22 | (c) | 266 | ||||||||||||||||
|
Loans reported as trading assets:
|
||||||||||||||||||||||||
|
Changes in instrument-specific credit risk
|
389 | 28 | (c) | 417 | 8 | (115 | ) (c) | (107 | ) | |||||||||||||||
|
Other changes in fair value
|
(299 | ) | 1,217 | (c) | 918 | 977 | 495 | (c) | 1,472 | |||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Changes in instrument-specific credit risk
|
32 | — | 32 | 124 | — | 124 | ||||||||||||||||||
|
Other changes in fair value
|
(44 | ) | — | (44 | ) | (19 | ) | — | (19 | ) | ||||||||||||||
|
Other assets
|
— | (49 | ) (d) | (49 | ) | — | (187 | ) (d) | (187 | ) | ||||||||||||||
|
Deposits
(a)
|
(103 | ) | — | (103 | ) | (21 | ) | — | (21 | ) | ||||||||||||||
|
Federal funds purchased and securities loaned or sold
under repurchase agreements
|
(56 | ) | — | (56 | ) | 61 | — | 61 | ||||||||||||||||
|
Other borrowed funds
(a)
|
838 | — | 838 | (180 | ) | — | (180 | ) | ||||||||||||||||
|
Trading liabilities
|
— | — | — | (13 | ) | — | (13 | ) | ||||||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
(14 | ) | — | (14 | ) | (139 | ) | — | (139 | ) | ||||||||||||||
|
Other liabilities
|
(19 | ) | 14 | (d) | (5 | ) | 5 | — | 5 | |||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||
|
Changes in instrument-specific credit risk
(a)
|
534 | — | 534 | (1,038 | ) | — | (1,038 | ) | ||||||||||||||||
|
Other changes in fair value
(b)
|
1,332 | — | 1,332 | (2,978 | ) | — | (2,978 | ) | ||||||||||||||||
125
Table of Contents
| Six months ended June 30, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| Total changes | Total changes | |||||||||||||||||||||||
| Principal | Other | in fair value | Principal | Other | in fair value | |||||||||||||||||||
| (in millions) | transactions | income | recorded | transactions | income | recorded | ||||||||||||||||||
|
Federal funds sold and securities purchased under resale
agreements
|
$ | 280 | $ | — | $ | 280 | $ | (495 | ) | $ | — | $ | (495 | ) | ||||||||||
|
Securities borrowed
|
39 | — | 39 | (19 | ) | — | (19 | ) | ||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||
|
Debt and equity instruments, excluding loans
|
196 | (11 | ) (c) | 185 | 304 | 19 | (c) | 323 | ||||||||||||||||
|
Loans reported as trading assets:
|
||||||||||||||||||||||||
|
Changes in instrument-specific credit risk
|
798 | 22 | (c) | 820 | (472 | ) | (165 | ) (c) | (637 | ) | ||||||||||||||
|
Other changes in fair value
|
(683 | ) | 1,972 | (c) | 1,289 | 712 | 1,432 | (c) | 2,144 | |||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Changes in instrument-specific credit risk
|
79 | — | 79 | (329 | ) | — | (329 | ) | ||||||||||||||||
|
Other changes in fair value
|
(71 | ) | — | (71 | ) | (126 | ) | — | (126 | ) | ||||||||||||||
|
Other assets
|
— | (102 | ) (d) | (102 | ) | — | (588 | ) (d) | (588 | ) | ||||||||||||||
|
Deposits
(a)
|
(292 | ) | — | (292 | ) | (186 | ) | — | (186 | ) | ||||||||||||||
|
Federal funds purchased and securities loaned or sold
under repurchase agreements
|
(65 | ) | — | (65 | ) | 94 | — | 94 | ||||||||||||||||
|
Other borrowed funds
(a)
|
912 | — | 912 | (146 | ) | — | (146 | ) | ||||||||||||||||
|
Trading liabilities
|
(3 | ) | — | (3 | ) | (15 | ) | — | (15 | ) | ||||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
32 | — | 32 | (124 | ) | — | (124 | ) | ||||||||||||||||
|
Other liabilities
|
4 | 14 | (d) | 18 | 4 | — | 4 | |||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||
|
Changes in instrument-specific credit risk
(a)
|
585 | — | 585 | (394 | ) | — | (394 | ) | ||||||||||||||||
|
Other changes in fair value
(b)
|
1,558 | — | 1,558 | (1,771 | ) | — | (1,771 | ) | ||||||||||||||||
| (a) | Total changes in instrument-specific credit risk related to structured notes were $588 million and $(1.1) billion for the three months ended June 30, 2010 and 2009, respectively, and $696 million and $(461) million for the six months ended June 30, 2010 and 2009, respectively. Those totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt. | |
| (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. 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. |
126
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 June 30, 2010, and December 31, 2009, for
loans, long-term debt and long-term beneficial interests for which the fair value option has been
elected.
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||
| over/(under) | over/(under) | |||||||||||||||||||||||
| Contractual | contractual | Contractual | contractual | |||||||||||||||||||||
| principal | principal | principal | principal | |||||||||||||||||||||
| (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
|
6,240 | 1,834 | (4,406 | ) | 7,264 | 2,207 | (5,057 | ) | ||||||||||||||||
|
Loans
|
954 | 94 | (860 | ) | 1,126 | 151 | (975 | ) | ||||||||||||||||
|
Subtotal
|
7,194 | 1,928 | (5,266 | ) | 8,390 | 2,358 | (6,032 | ) | ||||||||||||||||
|
All other performing loans
|
||||||||||||||||||||||||
|
Loans reported as trading assets
|
35,806 | 29,822 | (5,984 | ) | 35,095 | 29,341 | (5,754 | ) | ||||||||||||||||
|
Loans
|
3,160 | 2,045 | (1,115 | ) | 2,147 | 1,000 | (1,147 | ) | ||||||||||||||||
|
Total loans
|
$ | 46,160 | $ | 33,795 | $ | (12,365 | ) | $ | 45,632 | $ | 32,699 | $ | (12,933 | ) | ||||||||||
|
Long-term debt
|
||||||||||||||||||||||||
|
Principal—protected debt
|
$ | 21,862 | (b) | $ | 22,152 | $ | 290 | $ | 26,765 | (b) | $ | 26,378 | $ | (387 | ) | |||||||||
|
Nonprincipal—protected debt
(a)
|
NA | 19,776 | NA | NA | 22,594 | NA | ||||||||||||||||||
|
Total long-term debt
|
NA | $ | 41,928 | NA | NA | $ | 48,972 | NA | ||||||||||||||||
|
Long-term beneficial interests
|
||||||||||||||||||||||||
|
Principal—protected debt
|
$ | 60 | $ | 60 | $ | — | $ | 90 | $ | 90 | $ | — | ||||||||||||
|
Nonprincipal—protected debt
(a)
|
NA | 1,997 | NA | NA | 1,320 | NA | ||||||||||||||||||
|
Total long-term beneficial interests
|
NA | $ | 2,057 | 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. |
127
Table of Contents
NOTE 5 — DERIVATIVE INSTRUMENTS
For a further discussion of the Firm’s use and accounting policies regarding derivative
instruments, see Note 5 on pages 167—175 of JPMorgan Chase’s 2009 Annual Report.
Notional amount of derivative contracts
The following table summarizes the notional amount of derivative contracts outstanding as of June
30, 2010, and December 31, 2009.
| Notional amounts (b) | ||||||||
| (in billions) | June 30, 2010 | December 31, 2009 | ||||||
|
Interest rate contracts
|
||||||||
|
Swaps
|
$ | 43,448 | $ | 47,663 | ||||
|
Futures and forwards
|
9,484 | 6,986 | ||||||
|
Written options
|
4,143 | 4,553 | ||||||
|
Purchased options
|
4,013 | 4,584 | ||||||
|
Total interest rate contracts
|
61,088 | 63,786 | ||||||
|
Credit derivatives
(a)
|
5,352 | 5,994 | ||||||
|
Foreign exchange contracts
|
||||||||
|
Cross-currency swaps
|
2,251 | 2,217 | ||||||
|
Spot, futures and forwards
|
4,166 | 3,578 | ||||||
|
Written options
|
742 | 685 | ||||||
|
Purchased options
|
730 | 699 | ||||||
|
Total foreign exchange contracts
|
7,889 | 7,179 | ||||||
|
Equity contracts
|
||||||||
|
Swaps
|
97 | 81 | ||||||
|
Futures and forwards
|
41 | 45 | ||||||
|
Written options
|
575 | 502 | ||||||
|
Purchased options
|
495 | 449 | ||||||
|
Total equity contracts
|
1,208 | 1,077 | ||||||
|
Commodity contracts
|
||||||||
|
Swaps
|
206 | 178 | ||||||
|
Spot, futures and forwards
|
156 | 113 | ||||||
|
Written options
|
221 | 201 | ||||||
|
Purchased options
|
216 | 205 | ||||||
|
Total commodity contracts
|
799 | 697 | ||||||
|
Total derivative notional amounts
|
$ | 76,336 | $ | 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 135—136 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 is not exchanged; it is used simply as a reference to calculate payments.
128
Table of Contents
Impact of derivatives on the Consolidated Balance Sheets
The following tables summarize information on derivative fair values that are reflected on the
Firm’s Consolidated Balance Sheets as of June 30, 2010, and December 31, 2009, by accounting
designation (e.g., whether the derivatives were designated as hedges or not) and contract type.
Free-standing derivatives
(a)
| Derivative receivables | Derivative payables | |||||||||||||||||||||||
| Not | ||||||||||||||||||||||||
| June 30, 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
|
$ | 1,395,286 | $ | 7,192 | $ | 1,402,478 | $ | 1,359,547 | $ | 711 | $ | 1,360,258 | ||||||||||||
|
Credit
|
155,341 | — | 155,341 | 148,950 | — | 148,950 | ||||||||||||||||||
|
Foreign exchange
(b)
|
159,181 | 2,436 | 161,617 | 171,274 | 623 | 171,897 | ||||||||||||||||||
|
Equity
|
58,098 | — | 58,098 | 55,379 | — | 55,379 | ||||||||||||||||||
|
Commodity
|
32,277 | 484 | 32,761 | 32,472 | 187 | (d) | 32,659 | |||||||||||||||||
|
Gross fair value of trading
assets and liabilities
|
$ | 1,800,183 | $ | 10,112 | $ | 1,810,295 | $ | 1,767,622 | $ | 1,521 | $ | 1,769,143 | ||||||||||||
|
Netting adjustment
(c)
|
(1,730,080 | ) | (1,709,006 | ) | ||||||||||||||||||||
|
Carrying value of derivative
trading assets and trading
liabilities on the Consolidated
Balance Sheets
|
$ | 80,215 | $ | 60,137 | ||||||||||||||||||||
| 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 125—127 of this Form 10-Q and Note 4 on pages 165—167 of JPMorgan Chase’s 2009 Annual Report for further information. | |
| (b) | Excludes $36 million of foreign currency-denominated debt designated as a net investment hedge at June 30, 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 $1.3 billion related to separated commodity derivatives used as fair value hedging instruments that are recorded in the line item of the host contract (other borrowed funds) for both June 30, 2010, and December 31, 2009. |
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 June 30, 2010, and
December 31, 2009.
| Trading assets-Derivative receivables | Trading liabilities-Derivative payables | |||||||||||||||
| (in millions) | June 30, 2010 | December 31, 2009 | June 30, 2010 | December 31, 2009 | ||||||||||||
|
Contract type:
|
||||||||||||||||
|
Interest rate
(a)
|
$ | 42,268 | $ | 33,733 | $ | 20,041 | $ | 19,688 | ||||||||
|
Credit
(a)
|
8,346 | 11,859 | 4,320 | 6,036 | ||||||||||||
|
Foreign exchange
|
19,586 | 21,984 | 24,192 | 19,818 | ||||||||||||
|
Equity
|
5,523 | 6,635 | 8,532 | 11,554 | ||||||||||||
|
Commodity
|
4,492 | 5,999 | 3,052 | 3,029 | ||||||||||||
|
Total
|
$ | 80,215 | $ | 80,210 | $ | 60,137 | $ | 60,125 | ||||||||
| (a) | In the first quarter of 2010, cash collateral netting reporting was enhanced. Prior periods have been revised to conform to the current presentation. The revision resulted in an increase to interest rate derivative receivables and a corresponding 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. |
129
Table of Contents
Impact of derivatives and hedged items on the income statement and on other comprehensive
income
The following tables summarize the total pretax impact of JPMorgan Chase’s derivative-related
activities on the Firm’s Consolidated Statements of Income and Other Comprehensive Income for the
three and six months ended June 30, 2010 and 2009, respectively, by accounting designation.
| Consolidated Statements of Income | ||||||||||||||||||||||||
| Derivative-related gains/(losses) | ||||||||||||||||||||||||
| Net | Risk | |||||||||||||||||||||||
| Three months ended June 30, | Fair value | Cash flow | investment | management | Trading | |||||||||||||||||||
| (in millions) | hedges (a) | hedges | hedges (b) | activities | activities (a) | Total | ||||||||||||||||||
|
2010
|
$ | 28 | $ | 15 | $ | (32 | ) | $ | 3,712 | $ | (1,667 | ) | $ | 2,056 | ||||||||||
|
2009
|
363 | 55 | (21 | ) | (4,624 | ) | 6,054 | 1,827 | ||||||||||||||||
| Consolidated Statements of Income | ||||||||||||||||||||||||
| Derivative-related gains/(losses) | ||||||||||||||||||||||||
| Net | Risk | |||||||||||||||||||||||
| Six months ended June 30, | Fair value | Cash flow | investment | management | Trading | |||||||||||||||||||
| (in millions) | hedges (a) | hedges | hedges (b) | activities | activities (a) | Total | ||||||||||||||||||
|
2010
|
$ | 93 | $ | 15 | $ | (73 | ) | $ | 3,689 | $ | 556 | $ | 4,280 | |||||||||||
|
2009
|
470 | 142 | (30 | ) | (5,389 | ) | 10,125 | 5,318 | ||||||||||||||||
| Other Comprehensive Income/(loss) | ||||||||||||||||||||||||
| Derivative-related net changes in other comprehensive income | ||||||||||||||||||||||||
| Net | Risk | |||||||||||||||||||||||
| Three months ended June 30, | Fair value | Cash flow | investment | management | Trading | |||||||||||||||||||
| (in millions) | hedges | hedges | hedges (b) | activities | activities | Total | ||||||||||||||||||
|
2010
|
NA | $ | 135 | $ | 431 | NA | NA | $ | 566 | |||||||||||||||
|
2009
|
NA | (82 | ) | (208 | ) | NA | NA | (290 | ) | |||||||||||||||
| Other Comprehensive Income/(loss) | ||||||||||||||||||||||||
| Derivative-related net changes in other comprehensive income | ||||||||||||||||||||||||
| Net | Risk | |||||||||||||||||||||||
| Six months ended June 30, | Fair value | Cash flow | investment | management | Trading | |||||||||||||||||||
| (in millions) | hedges | hedges | hedges (b) | activities | activities | Total | ||||||||||||||||||
|
2010
|
NA | $ | 277 | $ | 757 | NA | NA | $ | 1,034 | |||||||||||||||
|
2009
|
NA | 168 | (27 | ) | NA | NA | 141 | |||||||||||||||||
| (a) | Includes the hedge accounting impact of the hedged item for fair value hedges and includes cash instruments within trading activities. | |
| (b) | Includes $2 million and $43 million of foreign currency transaction gain related to foreign currency-denominated debt designated as a net investment hedge for the three and six months ended June 30, 2010. The Firm did not use foreign currency-denominated debt as a hedging instrument in 2009 and therefore there was no impact for the three and six months ended June 30, 2009. |
130
Table of Contents
The tables that follow reflect more detailed information regarding the derivative-related
income statement impact by accounting designation for the three and six months ended June 30, 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 three and six months ended June 30, 2010 and 2009, respectively. 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: | |||||||||||||||||||
| Three months ended | Total income | |||||||||||||||||||
| June 30, 2010 | statement | Hedge | Excluded | |||||||||||||||||
| (in millions) | Derivatives | Hedged items | impact (d) | ineffectiveness (e) | components (f) | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | 1,345 | $ | (1,100 | ) | $ | 245 | $ | 96 | $ | 149 | |||||||||
|
Foreign exchange
(b)
|
3,841 | (3,865 | ) | (24 | ) | — | (24 | ) | ||||||||||||
|
Commodity
(c)
|
139 | (332 | ) | (193 | ) | — | (193 | ) | ||||||||||||
|
Total
|
$ | 5,325 | $ | (5,297 | ) | $ | 28 | $ | 96 | $ | (68 | ) | ||||||||
| Gains/(losses) recorded in income | Income statement impact due to: | |||||||||||||||||||
| Three months ended | Total income | |||||||||||||||||||
| June 30, 2009 | statement | Hedge | Excluded | |||||||||||||||||
| (in millions) | Derivatives | Hedged items | impact (d) | ineffectiveness (e) | components (f) | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (3,122 | ) | $ | 3,176 | $ | 54 | $ | (190 | ) | $ | 244 | ||||||||
|
Foreign exchange
(b)
|
(893 | ) | 1,217 | 324 | — | 324 | ||||||||||||||
|
Commodity
(c)
|
(39 | ) | 24 | (15 | ) | — | (15 | ) | ||||||||||||
|
Total
|
$ | (4,054 | ) | $ | 4,417 | $ | 363 | $ | (190 | ) | $ | 553 | ||||||||
| Gains/(losses) recorded in income | Income statement impact due to: | |||||||||||||||||||
| Six months ended | Total income | |||||||||||||||||||
| June 30, 2010 | statement | Hedge | Excluded | |||||||||||||||||
| (in millions) | Derivatives | Hedged items | impact (d) | ineffectiveness (e) | components (f) | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | 1,977 | $ | (1,598 | ) | $ | 379 | $ | 124 | $ | 255 | |||||||||
|
Foreign exchange
(b)
|
5,488 | (5,522 | ) | (34 | ) | — | (34 | ) | ||||||||||||
|
Commodity
(c)
|
(316 | ) | 64 | (252 | ) | — | (252 | ) | ||||||||||||
|
Total
|
$ | 7,149 | $ | (7,056 | ) | $ | 93 | $ | 124 | $ | (31 | ) | ||||||||
| Gains/(losses) recorded in income | Income statement impact due to: | |||||||||||||||||||
| Six months ended | Total income | |||||||||||||||||||
| June 30, 2009 | statement | Hedge | Excluded | |||||||||||||||||
| (in millions) | Derivatives | Hedged items | impact (d) | ineffectiveness (e) | components (f) | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (3,623 | ) | $ | 3,946 | $ | 323 | $ | (484 | ) | $ | 807 | ||||||||
|
Foreign exchange
(b)
|
(1,594 | ) | 1,754 | 160 | — | 160 | ||||||||||||||
|
Commodity
(c)
|
(195 | ) | 182 | (13 | ) | — | (13 | ) | ||||||||||||
|
Total
|
$ | (5,412 | ) | $ | 5,882 | $ | 470 | $ | (484 | ) | $ | 954 | ||||||||
| (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 physical 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. | |
| (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 forwards contract. Amounts related to excluded components are recorded in current-period income. |
131
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 three and six months ended June 30, 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 three and six months ended June 30, 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) | ||||||||||||||||||||
| Hedge | ||||||||||||||||||||
| Derivatives — | ineffectiveness | |||||||||||||||||||
| effective portion | recorded directly | Derivatives — | Total change | |||||||||||||||||
| Three months ended | reclassified from | in | Total income | effective portion | in OCI | |||||||||||||||
| June 30, 2010 (in millions) | AOCI to income | income (d) | statement impact | recorded in OCI | for period | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | 33 | (c) | $ | 8 | $ | 41 | $ | 98 | $ | 65 | |||||||||
|
Foreign exchange
(b)
|
(23 | ) | (3 | ) | (26 | ) | 47 | 70 | ||||||||||||
|
Total
|
$ | 10 | $ | 5 | $ | 15 | $ | 145 | $ | 135 | ||||||||||
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||||||
| Hedge | ||||||||||||||||||||
| Derivatives — | ineffectiveness | |||||||||||||||||||
| effective portion | recorded directly | Derivatives — | ||||||||||||||||||
| Three months ended | reclassified from | in | Total income | effective portion | Total change in OCI | |||||||||||||||
| June 30, 2009 (in millions) | AOCI to income | income (d) | statement impact | recorded in OCI | for period | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (26 | ) (c) | $ | 1 | $ | (25 | ) | $ | (343 | ) | $ | (317 | ) | ||||||
|
Foreign exchange
(b)
|
80 | — | 80 | 315 | 235 | |||||||||||||||
|
Total
|
$ | 54 | $ | 1 | $ | 55 | $ | (28 | ) | $ | (82 | ) | ||||||||
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||||||
| Hedge | ||||||||||||||||||||
| Derivatives — | ineffectiveness | |||||||||||||||||||
| effective portion | recorded directly | Derivatives — | Total change | |||||||||||||||||
| Six months ended | reclassified from | in | Total income | effective portion | in OCI | |||||||||||||||
| June 30, 2010 (in millions) | AOCI to income | income (d) | statement impact | recorded in OCI | for period | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | 82 | (c) | $ | 11 | $ | 93 | $ | 349 | $ | 267 | |||||||||
|
Foreign exchange
(b)
|
(75 | ) | (3 | ) | (78 | ) | (65 | ) | 10 | |||||||||||
|
Total
|
$ | 7 | $ | 8 | $ | 15 | $ | 284 | $ | 277 | ||||||||||
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||||||
| Hedge | ||||||||||||||||||||
| Derivatives — | ineffectiveness | |||||||||||||||||||
| effective portion | recorded directly | Derivatives — | ||||||||||||||||||
| Six months ended | reclassified from | in | Total income | effective portion | Total change in OCI | |||||||||||||||
| June 30, 2009 (in millions) | AOCI to income | income (d) | statement impact | recorded in OCI | for period | |||||||||||||||
|
Contract type
|
||||||||||||||||||||
|
Interest rate
(a)
|
$ | (69 | ) (c) | $ | 2 | $ | (67 | ) | $ | (299 | ) | $ | (230 | ) | ||||||
|
Foreign exchange
(b)
|
209 | — | 209 | 607 | 398 | |||||||||||||||
|
Total
|
$ | 140 | $ | 2 | $ | 142 | $ | 308 | $ | 168 | ||||||||||
| (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 the second quarter of 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 during the three and six months ended June 2009, respectively. | |
| (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. |
Over the next 12 months, the Firm expects that $296 million (after-tax) of net losses recorded
in AOCI at June 30, 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.
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Net investment hedge gains and losses
The following tables present 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 three and six months ended June 30, 2010 and 2009, respectively.
The following tables present 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 three and six months ended June 30, 2010 and 2009, respectively.
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Excluded components | Excluded components | |||||||||||||||
| Three months ended June 30, | recorded directly | Effective portion | recorded directly | Effective portion | ||||||||||||
| (in millions) | in income (a) | recorded in OCI | in income (a) | recorded in OCI | ||||||||||||
|
Contract type
|
||||||||||||||||
|
Foreign exchange derivatives
|
$ | (32 | ) | $ | 429 | $ | (21 | ) | $ | (208 | ) | |||||
|
Foreign currency denominated debt
|
— | 2 | NA | NA | ||||||||||||
|
Total
|
$ | (32 | ) | $ | 431 | $ | (21 | ) | $ | (208 | ) | |||||
| Gains/(losses) recorded in income and other comprehensive income/(loss) | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Excluded components | Excluded components | |||||||||||||||
| Six months ended June 30, | recorded directly | Effective portion | recorded directly | Effective portion | ||||||||||||
| (in millions) | in income (a) | recorded in OCI | in income (a) | recorded in OCI | ||||||||||||
|
Contract type
|
||||||||||||||||
|
Foreign exchange derivatives
|
$ | (73 | ) | $ | 714 | $ | (30 | ) | $ | (27 | ) | |||||
|
Foreign currency denominated debt
|
— | 43 | NA | NA | ||||||||||||
|
Total
|
$ | (73 | ) | $ | 757 | $ | (30 | ) | $ | (27 | ) | |||||
| (a) | Certain components of derivatives used as hedging instruments are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on a futures or forwards contract. Amounts related to excluded components are recorded in current-period income. There was no ineffectiveness for net investment hedge accounting relationships during the three and six months ended June 30, 2010 and 2009. |
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 relationships, and the pretax gains/(losses) recorded on such derivatives for the three and six months ended June 30, 2010 and 2009, respectively. These derivatives are risk management instruments used to mitigate or transform the risk of market 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 relationships, and the pretax gains/(losses) recorded on such derivatives for the three and six months ended June 30, 2010 and 2009, respectively. These derivatives are risk management instruments used to mitigate or transform the risk of market exposures arising from banking activities other than trading activities, which are discussed separately below.
| Derivatives gains/(losses) recorded in income | ||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Contract type
|
||||||||||||||||
|
Interest rate
(a)
|
$ | 3,672 | $ | (3,047 | ) | $ | 3,812 | $ | (3,200 | ) | ||||||
|
Credit
(b)
|
60 | (1,512 | ) | (59 | ) | (2,028 | ) | |||||||||
|
Foreign exchange
(c)
|
(20 | ) | (82 | ) | (41 | ) | (151 | ) | ||||||||
|
Equity
|
— | — | — | — | ||||||||||||
|
Commodity
(b)
|
— | 17 | (23 | ) | (10 | ) | ||||||||||
|
Total
|
$ | 3,712 | $ | (4,624 | ) | $ | 3,689 | $ | (5,389 | ) | ||||||
| (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. |
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Table of Contents
Trading derivative gains and losses
The following table presents trading derivatives gains and losses, by contract type, that are recorded in principal transactions revenue in the Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009, respectively. 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.
The following table presents trading derivatives gains and losses, by contract type, that are recorded in principal transactions revenue in the Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009, respectively. 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.
| Gains/(losses) recorded in principal transactions revenue | ||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Type of instrument
|
||||||||||||||||
|
Interest rate
|
$ | (37 | ) | $ | 1,373 | $ | 70 | $ | 3,758 | |||||||
|
Credit
|
1,287 | 2,332 | 3,412 | 1,683 | ||||||||||||
|
Foreign exchange
|
(3,035 | ) | 2,052 | (4,279 | ) | 3,126 | ||||||||||
|
Equity
|
85 | (62 | ) | 907 | 798 | |||||||||||
|
Commodity
|
33 | 359 | 446 | 760 | ||||||||||||
|
Total
|
$ | (1,667 | ) | $ | 6,054 | $ | 556 | $ | 10,125 | |||||||
Credit risk, liquidity risk and credit-related contingent features
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”) moves in the counterparties’ favor, or upon specified downgrades in the Firm’s or its subsidiaries’ respective credit ratings. At June 30, 2010, the impact of a single-notch and six-notch ratings downgrade to JPMorgan Chase & Co. and its subsidiaries, primarily JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”) would have required $1.5 billion and $5.0 billion, respectively, of additional collateral to be posted by the Firm. 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. At June 30, 2010, the impact of single-notch and six-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 $349 million and $6.3 billion, respectively. The aggregate fair value of net derivative payables that contain contingent collateral or termination features triggered upon a downgrade was $37.0 billion at June 30, 2010, for which the Firm has posted collateral of $30.2 billion in the normal course of business.
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”) moves in the counterparties’ favor, or upon specified downgrades in the Firm’s or its subsidiaries’ respective credit ratings. At June 30, 2010, the impact of a single-notch and six-notch ratings downgrade to JPMorgan Chase & Co. and its subsidiaries, primarily JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”) would have required $1.5 billion and $5.0 billion, respectively, of additional collateral to be posted by the Firm. 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. At June 30, 2010, the impact of single-notch and six-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 $349 million and $6.3 billion, respectively. The aggregate fair value of net derivative payables that contain contingent collateral or termination features triggered upon a downgrade was $37.0 billion at June 30, 2010, for which the Firm has posted collateral of $30.2 billion in the normal course of business.
The following tables show the current credit risk of derivative receivables after netting
adjustments and collateral received, and the current liquidity risk of derivative payables after
netting adjustments and collateral posted, as of June 30, 2010, and December 31, 2009,
respectively.
| June 30, 2010 (in millions) | Derivative receivables | Derivative payables | ||||||
|
Gross derivative fair value
|
$ | 1,810,295 | $ | 1,769,143 | ||||
|
Netting adjustment — offsetting receivables/payables
|
(1,660,105 | ) | (1,660,105 | ) | ||||
|
Netting adjustment — cash collateral received/paid
|
(69,975 | ) | (48,901 | ) | ||||
|
Carrying value on Consolidated Balance Sheets
|
$ | 80,215 | $ | 60,137 | ||||
| December 31, 2009 (in millions) | Derivative receivables | Derivative payables | ||||||
|
Gross derivative fair value
|
$ | 1,565,518 | $ | 1,519,183 | ||||
|
Netting adjustment — offsetting receivables/payables
|
(1,419,840 | ) | (1,419,840 | ) | ||||
|
Netting adjustment — cash collateral received/paid
|
(65,468 | ) | (39,218 | ) | ||||
|
Carrying value on Consolidated Balance Sheets
|
$ | 80,210 | $ | 60,125 | ||||
In addition to the collateral amounts reflected in the tables above, at June 30, 2010, and
December 31, 2009, the Firm had received liquid securities collateral in the amount of $19.3
billion and $15.5 billion, respectively, and posted $12.0 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 June 30, 2010, and December 31, 2009, the Firm had
received $16.1 billion and $16.9 billion, respectively, and delivered $9.7 billion and $5.8
billion, respectively, of such additional collateral. These amounts were not netted against the
derivative receivables and payables in the tables above, because, at an individual counterparty
level, the collateral exceeded the fair value exposure at both June 30, 2010, and December 31,
2009.
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Table of Contents
Credit derivatives
For a more detailed discussion of credit derivatives, including a description of the different types used by the Firm, see Note 5 on pages 167—175, of JPMorgan Chase’s 2009 Annual Report.
For a more detailed discussion of credit derivatives, including a description of the different types used by the Firm, see Note 5 on pages 167—175, of JPMorgan Chase’s 2009 Annual Report.
The following tables present a summary of the notional amounts of credit derivatives and
credit-related notes the Firm sold and purchased as of June 30, 2010, and December 31, 2009. Upon a
credit event, the Firm as a 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. As such, other purchased
protection referenced in the following tables include credit derivatives bought on related, but not
identical, reference positions; these include indices, portfolio coverage and other reference
points. 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 | ||||||||||||||||
| June 30, 2010 | Protection purchased with | Net protection | Other protection | |||||||||||||
| (in millions) | Protection sold | identical underlyings (b) | (sold)/purchased (c) | purchased (d) | ||||||||||||
|
Credit derivatives
|
||||||||||||||||
|
Credit default swaps
|
$ | (2,620,672 | ) | $ | 2,601,815 | $ | (18,857 | ) | $ | 28,970 | ||||||
|
Other credit derivatives
(a)
|
(34,066 | ) | 33,303 | (763 | ) | 33,607 | ||||||||||
|
Total credit derivatives
|
(2,654,738 | ) | 2,635,118 | (19,620 | ) | 62,577 | ||||||||||
|
Credit-related notes
|
(2,426 | ) | — | (2,426 | ) | 2,388 | ||||||||||
|
Total
|
$ | (2,657,164 | ) | $ | 2,635,118 | $ | (22,046 | ) | $ | 64,965 | ||||||
| Maximum payout/Notional amount | ||||||||||||||||
| December 31, 2009 | Protection purchased with | Net protection | Other protection | |||||||||||||
| (in millions) | Protection sold | identical underlyings (b) | (sold)/purchased (c) | purchased (d) | ||||||||||||
|
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) | 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. | |
| (c) | 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. | |
| (d) | Represents single-name and index credit default swap protection the Firm purchased. |
The following tables summarize the notional and fair value amounts of credit derivatives and
credit-related notes as of June 30, 2010, and December 31, 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.
135
Table of Contents
Protection sold — credit derivatives and credit-related notes
ratings
(a)
/maturity profile
| Total | ||||||||||||||||||||
| June 30, 2010 (in millions) | <1 year | 1 - 5 years | >5 years | notional amount | Fair value (b) | |||||||||||||||
|
Risk rating of reference entity
|
||||||||||||||||||||
|
Investment-grade
|
$ | (172,090 | ) | $ | (1,041,476 | ) | $ | (249,712 | ) | $ | (1,463,278 | ) | $ | (22,100 | ) | |||||
|
Noninvestment-grade
|
(142,851 | ) | (800,690 | ) | (250,345 | ) | (1,193,886 | ) | (92,142 | ) | ||||||||||
|
Total
|
$ | (314,941 | ) | $ | (1,842,166 | ) | $ | (500,057 | ) | $ | (2,657,164 | ) | $ | (114,242 | ) | |||||
| 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. |
NOTE 6 — OTHER NONINTEREST REVENUE
For a discussion of the components of and accounting policies for the Firm’s other noninterest
revenue, see Note 6 on pages 175—176 of JPMorgan Chase’s 2009 Annual Report.
The following table presents the components of investment banking fees.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Underwriting:
|
||||||||||||||||
|
Equity
|
$ | 354 | $ | 949 | $ | 767 | $ | 1,257 | ||||||||
|
Debt
|
711 | 766 | 1,462 | 1,369 | ||||||||||||
|
Total underwriting
|
1,065 | 1,715 | 2,229 | 2,626 | ||||||||||||
|
Advisory
(a)
|
356 | 391 | 653 | 866 | ||||||||||||
|
Total investment banking fees
|
$ | 1,421 | $ | 2,106 | $ | 2,882 | $ | 3,492 | ||||||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon the 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 eliminated, which were offset by an increase in lending- and deposit-related fees. |
The following table presents principal transactions revenue.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Trading revenue
|
$ | 2,010 | $ | 3,155 | $ | 6,396 | $ | 5,644 | ||||||||
|
Private equity gains/(losses)
(a)
|
80 | (58 | ) | 242 | (546 | ) | ||||||||||
|
Principal transactions
|
$ | 2,090 | $ | 3,097 | $ | 6,638 | $ | 5,098 | ||||||||
| (a) | Includes revenue on private equity investments held in the Private Equity business within Corporate/Private Equity, and those held in other business segments. |
The following table presents components of asset management, administration and commissions.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Asset management:
|
||||||||||||||||
|
Investment management fees
|
$ | 1,317 | $ | 1,172 | $ | 2,644 | $ | 2,255 | ||||||||
|
All other asset management fees
|
116 | 78 | 225 | 159 | ||||||||||||
|
Total asset management fees
|
1,433 | 1,250 | 2,869 | 2,414 | ||||||||||||
|
Total administration fees
(a)
|
531 | 498 | 1,022 | 953 | ||||||||||||
|
Commission and other fees:
|
||||||||||||||||
|
Brokerage commissions
|
753 | 762 | 1,456 | 1,449 | ||||||||||||
|
All other commissions and fees
|
632 | 614 | 1,267 | 1,205 | ||||||||||||
|
Total commissions and fees
|
1,385 | 1,376 | 2,723 | 2,654 | ||||||||||||
|
Total asset management,
administration and commissions
|
$ | 3,349 | $ | 3,124 | $ | 6,614 | $ | 6,021 | ||||||||
| (a) | Includes fees for custody, securities lending, funds services and securities clearance. |
136
Table of Contents
NOTE 7 — INTEREST INCOME AND INTEREST EXPENSE
Details of interest income and interest expense were as follows.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Interest income
(a)
|
||||||||||||||||
|
Loans
|
$ | 9,969 | $ | 9,825 | $ | 20,526 | $ | 20,333 | ||||||||
|
Securities
|
2,517 | 3,178 | 5,421 | 6,038 | ||||||||||||
|
Trading assets
|
2,574 | 2,954 | 5,334 | 6,168 | ||||||||||||
|
Federal
funds sold and securities purchased under
resale agreements
|
398 | 368 | 805 | 1,018 | ||||||||||||
|
Securities borrowed
|
32 | (96 | ) | 61 | (10 | ) | ||||||||||
|
Deposits with banks
|
92 | 246 | 187 | 689 | ||||||||||||
|
Other assets
(b)
|
137 | 74 | 230 | 239 | ||||||||||||
|
Total interest income
(c)
|
15,719 | 16,549 | 32,564 | 34,475 | ||||||||||||
|
Interest expense
(a)
|
||||||||||||||||
|
Interest-bearing deposits
|
883 | 1,165 | 1,727 | 2,851 | ||||||||||||
|
Short-term and other liabilities
(d)
|
583 | 876 | 1,284 | 1,967 | ||||||||||||
|
Long-term debt
|
1,260 | 1,781 | 2,520 | 3,525 | ||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
306 | 57 | 636 | 95 | ||||||||||||
|
Total interest expense
(c)
|
3,032 | 3,879 | 6,167 | 8,438 | ||||||||||||
|
Net interest income
|
12,687 | 12,670 | 26,397 | 26,037 | ||||||||||||
|
Provision for credit losses
|
3,363 | 8,031 | 10,373 | 16,627 | ||||||||||||
|
Net interest income after provision for credit losses
|
$ | 9,324 | $ | 4,639 | $ | 16,024 | $ | 9,410 | ||||||||
| (a) | Interest income and expense include 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. | |
| (b) | Predominantly margin loans. | |
| (c) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon the adoption of the new 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 new guidance, certain noninterest revenue was eliminated, offset by the recognition of interest income, interest expense, and provision for credit losses. | |
| (d) | Includes brokerage customer payables. |
NOTE 8 — PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFIT PLANS
For a discussion of JPMorgan Chase’s pension and other postretirement employee benefit (“OPEB”)
plans, see Note 8 on pages 176—183 of JPMorgan Chase’s 2009 Annual Report.
The following table presents the components of net periodic benefit cost reported in the
Consolidated Statements of Income 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 | ||||||||||||||||||||||
| Three months ended June 30, (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||||||||||
|
Benefits earned during the period
|
$ | 58 | $ | 80 | $ | 6 | $ | 7 | $ | 1 | $ | 1 | ||||||||||||
|
Interest cost on benefit obligations
|
117 | 128 | 77 | 30 | 13 | 13 | ||||||||||||||||||
|
Expected return on plan assets
|
(185 | ) | (146 | ) | (75 | ) | (28 | ) | (24 | ) | (24 | ) | ||||||||||||
|
Amortization:
|
||||||||||||||||||||||||
|
Net loss
|
56 | 77 | 13 | 11 | — | — | ||||||||||||||||||
|
Prior service cost (credit)
|
(11 | ) | 1 | — | — | (4 | ) | (3 | ) | |||||||||||||||
|
Net periodic defined benefit cost for material plans
|
35 | 140 | 21 | 20 | (14 | ) | (13 | ) | ||||||||||||||||
|
Net periodic defined benefit cost for individually immaterial plans
|
3 | 4 | 1 | 4 | NA | NA | ||||||||||||||||||
|
Total net periodic defined benefit cost for all plans
|
38 | 144 | 22 | 24 | (14 | ) | (13 | ) | ||||||||||||||||
|
Total cost for defined contribution plans
|
84 | 76 | 67 | 63 | NA | NA | ||||||||||||||||||
|
Total pension and OPEB cost included in compensation expense
|
$ | 122 | $ | 220 | $ | 89 | $ | 87 | $ | (14 | ) | $ | (13 | ) | ||||||||||
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| Defined benefit pension plans | ||||||||||||||||||||||||
| U.S. | Non-U.S. | OPEB plans | ||||||||||||||||||||||
| Six months ended June 30, (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||||||||||
|
Benefits earned during the period
|
$ | 116 | $ | 157 | $ | 13 | $ | 14 | $ | 1 | $ | 2 | ||||||||||||
|
Interest cost on benefit obligations
|
234 | 256 | 63 | 56 | 28 | 31 | ||||||||||||||||||
|
Expected return on plan assets
|
(371 | ) | (292 | ) | (62 | ) | (52 | ) | (48 | ) | (48 | ) | ||||||||||||
|
Amortization:
|
||||||||||||||||||||||||
|
Net loss
|
112 | 153 | 27 | 21 | — | — | ||||||||||||||||||
|
Prior service cost (credit)
|
(22 | ) | 2 | — | — | (7 | ) | (7 | ) | |||||||||||||||
|
Net periodic defined benefit cost for material plans
|
69 | 276 | 41 | 39 | (26 | ) | (22 | ) | ||||||||||||||||
|
Net periodic defined benefit cost for individually immaterial plans
|
7 | 7 | 5 | 8 | NA | NA | ||||||||||||||||||
|
Total net periodic defined benefit cost for all plans
|
76 | 283 | 46 | 47 | (26 | ) | (22 | ) | ||||||||||||||||
|
Total cost for defined contribution plans
|
147 | 154 | 132 | 122 | NA | NA | ||||||||||||||||||
|
Total pension and OPEB cost included in compensation expense
|
$ | 223 | $ | 437 | $ | 178 | $ | 169 | $ | (26 | ) | $ | (22 | ) | ||||||||||
The fair value of plan assets for the U.S. defined benefit pension and OPEB plans and for the
material non-U.S. defined benefit pension plans were $11.0 billion and $2.3 billion, respectively,
as of June 30, 2010, and $11.5 billion and $2.4 billion, respectively, as of December 31, 2009. See
Note 20 on pages 168—169 of this Form 10-Q for further information on unrecognized amounts (i.e.,
net loss and prior service costs/(credit)) reflected in AOCI for the six months ended June 30, 2010
and 2009.
The amount, if any, of 2010 potential contributions for the U.S. qualified defined benefit pension
plans is not reasonably estimable at this time. The 2010 potential contributions for the Firm’s
U.S. non-qualified defined benefit pension plans are estimated to be $42 million and for the
non-U.S. defined benefit pension and OPEB plans are estimated to be $171 million and $2 million,
respectively.
NOTE 9 — EMPLOYEE STOCK-BASED INCENTIVES
For a discussion of the accounting policies and other information relating to employee stock-based
incentives, see Note 9 on pages 184—186 of JPMorgan Chase’s 2009 Annual Report.
The Firm recognized noncash compensation expense related to its various employee stock-based
incentive plans of $832 million and $884 million for the three months ended June 30, 2010 and 2009,
respectively, and $1.8 billion and $1.7 billion for the six months ended June 30, 2010 and 2009,
respectively, in its Consolidated Statements of Income. For the three months ended June 30, 2010
and 2009, these amounts included expense of $645 million and $692 million, respectively, related to
the cost of prior grants of restricted stock units (“RSUs”) and stock appreciation rights (“SARs”)
that are amortized over their applicable vesting periods, and expense of $187 million and $192
million, respectively, related to the accrual of estimated costs of RSUs and SARs to be granted in
future periods to full-career eligible employees. For the six months ended June 30, 2010, and 2009,
these amounts included expense of $1.4 billion and $1.4 billion, respectively, related to the cost
of prior grants of RSUs and SARs that are amortized over their applicable vesting periods, and
expense of $440 million and $332 million, respectively, related to the accrual of estimated costs
of RSUs and SARs to be granted in future periods to full-career eligible employees.
In the first quarter of 2010, the Firm granted 71 million RSUs, with a weighted average grant date
fair value of $43.12 per RSU, in connection with its annual incentive grant.
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NOTE 10 — NONINTEREST EXPENSE
The following table presents the components of noninterest expense.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Compensation expense
(a)
|
$ | 7,616 | $ | 6,917 | $ | 14,892 | $ | 14,505 | ||||||||
|
Noncompensation expense:
|
||||||||||||||||
|
Occupancy expense
|
883 | 914 | 1,752 | 1,799 | ||||||||||||
|
Technology, communications and equipment expense
|
1,165 | 1,156 | 2,302 | 2,302 | ||||||||||||
|
Professional and outside services
|
1,685 | 1,518 | 3,260 | 3,033 | ||||||||||||
|
Marketing
|
628 | 417 | 1,211 | 801 | ||||||||||||
|
Other expense
(b)(c)(d)
|
2,419 | 2,190 | 6,860 | 3,565 | ||||||||||||
|
Amortization of intangibles
|
235 | 265 | 478 | 540 | ||||||||||||
|
Total noncompensation expense
|
7,015 | 6,460 | 15,863 | 12,040 | ||||||||||||
|
Merger costs
|
— | 143 | (e) | — | 348 | (e) | ||||||||||
|
Total noninterest expense
|
$ | 14,631 | $ | 13,520 | $ | 30,755 | $ | 26,893 | ||||||||
| (a) | The second quarter and year-to-date of 2010 include 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) | Includes litigation expense of $792 million and $3.7 billion for the three and six months ended June 30, 2010, compared with $14 million and a net benefit of $256 million for the three and six months ended June 30, 2009, respectively. | |
| (c) | Includes foreclosed property expense of $244 million and $547 million for the three and six months ended June 30, 2010, respectively, compared with $294 million and $619 million for the three and six months ended June 30, 2009, respectively. For additional information regarding foreclosed property, see Note 13 on page 196 of JPMorgan Chase’s 2009 Annual Report. | |
| (d) | The second quarter of 2009 includes a $675 million Federal Deposit Insurance Corporation (“FDIC”) special assessment. | |
| (e) | Includes $61 million and $203 million for compensation expense, $15 million and $20 million for occupancy expense and $67 million and $125 million for technology and communications and other expense for the three and six months ended June 30, 2009, respectively. With the exception of occupancy- and technology-related write-offs, all of the costs required the expenditure of cash. |
NOTE 11 — SECURITIES
Securities are classified as AFS, held-to-maturity (“HTM”) or trading. For additional information
regarding AFS and HTM securities, see Note 11 on pages 187—191 of JPMorgan Chase’s 2009 Annual
Report. Trading securities are discussed in Note 3 on pages 110—124 of this Form 10-Q.
Securities gains and losses
The following table presents realized gains and losses and credit losses that were recognized in
income from AFS securities.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Realized gains
|
$ | 1,130 | $ | 743 | $ | 1,882 | $ | 1,153 | ||||||||
|
Realized losses
|
(130 | ) | (210 | ) | (172 | ) | (417 | ) | ||||||||
|
Net realized gains
(a)
|
1,000 | 533 | 1,710 | 736 | ||||||||||||
|
Credit losses included in securities gains
(b)
|
— | (186 | ) | (100 | ) | (191 | ) | |||||||||
|
Net securities gains
|
$ | 1,000 | $ | 347 | $ | 1,610 | $ | 545 | ||||||||
| (a) | Proceeds from securities sold were within approximately 3% of amortized cost. | |
| (b) | Includes OTTI losses recognized in income on certain prime mortgage-backed securities and obligations of U.S. states and municipalities for the six months ended June 30, 2010, and on certain subprime and prime mortgage-backed securities, and obligations of U.S. states and municipalities for the three and six months ended June 30, 2009, respectively. |
139
Table of Contents
The amortized costs and estimated fair values of AFS and HTM securities were as follows for
the dates indicated.
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Amortized | unrealized | unrealized | Amortized | unrealized | unrealized | Fair | ||||||||||||||||||||||||||
| (in millions) | cost | gains | losses | Fair value | cost | gains | losses | value | ||||||||||||||||||||||||
|
Available-for-sale debt
securities
|
||||||||||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||||||||||
|
U.S. government agencies
(a)
|
$ | 135,374 | $ | 5,005 | $ | 2 | $ | 140,377 | $ | 166,094 | $ | 2,412 | $ | 608 | $ | 167,898 | ||||||||||||||||
|
Residential:
|
||||||||||||||||||||||||||||||||
|
Prime and Alt-A
|
3,217 | 107 | 420 | (d) | 2,904 | 5,234 | 96 | 807 | (d) | 4,523 | ||||||||||||||||||||||
|
Subprime
|
— | — | — | — | 17 | — | — | 17 | ||||||||||||||||||||||||
|
Non-U.S.
|
28,551 | 330 | 171 | 28,710 | 10,003 | 320 | 65 | 10,258 | ||||||||||||||||||||||||
|
Commercial
|
4,555 | 390 | 5 | 4,940 | 4,521 | 132 | 63 | 4,590 | ||||||||||||||||||||||||
|
Total mortgage-backed securities
|
171,697 | 5,832 | 598 | 176,931 | 185,869 | 2,960 | 1,543 | 187,286 | ||||||||||||||||||||||||
|
U.S. Treasury and government
agencies
(a)
|
17,614 | 228 | 8 | 17,834 | 30,044 | 88 | 135 | 29,997 | ||||||||||||||||||||||||
|
Obligations of U.S. states and
municipalities
|
8,331 | 370 | 12 | 8,689 | 6,270 | 292 | 25 | 6,537 | ||||||||||||||||||||||||
|
Certificates of deposit
|
2,236 | 2 | — | 2,238 | 2,649 | 1 | — | 2,650 | ||||||||||||||||||||||||
|
Non-U.S. government debt securities
|
19,484 | 180 | 106 | 19,558 | 24,320 | 234 | 51 | 24,503 | ||||||||||||||||||||||||
|
Corporate debt securities
(b)
|
55,022 | 578 | 356 | 55,244 | 61,226 | 812 | 30 | 62,008 | ||||||||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||||||||||
|
Credit card receivables
|
9,017 | 367 | 4 | 9,380 | 25,266 | 502 | 26 | 25,742 | ||||||||||||||||||||||||
|
Collateralized loan
obligations
|
11,911 | 458 | 262 | 12,107 | 12,172 | 413 | 436 | 12,149 | ||||||||||||||||||||||||
|
Other
|
7,626 | 145 | 18 | 7,753 | 6,719 | 129 | 54 | 6,794 | ||||||||||||||||||||||||
|
Total available-for-sale debt
securities
|
302,938 | 8,160 | 1,364 | (d) | 309,734 | 354,535 | 5,431 | 2,300 | (d) | 357,666 | ||||||||||||||||||||||
|
Available-for-sale equity
securities
|
2,122 | 141 | 5 | 2,258 | 2,518 | 185 | 4 | 2,699 | ||||||||||||||||||||||||
|
Total available-for-sale securities
|
$ | 305,060 | $ | 8,301 | $ | 1,369 | (d) | $ | 311,992 | $ | 357,053 | $ | 5,616 | $ | 2,304 | (d) | $ | 360,365 | ||||||||||||||
|
Total held-to-maturity
securities
(c)
|
$ | 21 | $ | 2 | $ | — | $ | 23 | $ | 25 | $ | 2 | $ | — | $ | 27 | ||||||||||||||||
| (a) | Includes total U.S. government-sponsored enterprise obligations with fair values of $113.8 billion and $153.0 billion at June 30, 2010, and December 31, 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 $206 million and $368 million (before tax) of unrealized losses not related to credit reported in AOCI on prime mortgage-backed securities for which credit losses have been recognized in income at June 30, 2010, and December 31, 2009, respectively. |
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Securities impairment
The following tables present the fair value and gross unrealized losses for AFS securities by aging
category at June 30, 2010, and December 31, 2009.
| Securities with gross unrealized losses | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Gross | Gross | Total | gross | |||||||||||||||||||||
| Fair | unrealized | Fair | unrealized | fair | unrealized | |||||||||||||||||||
| June 30, 2010 (in millions) | value | losses | value | losses | value | losses | ||||||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
U.S. government agencies
|
$ | — | $ | — | $ | 254 | $ | 2 | $ | 254 | $ | 2 | ||||||||||||
|
Residential:
|
||||||||||||||||||||||||
|
Prime and Alt-A
|
— | — | 1,769 | 420 | 1,769 | 420 | ||||||||||||||||||
|
Subprime
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-U.S.
|
17,427 | 135 | 1,019 | 36 | 18,446 | 171 | ||||||||||||||||||
|
Commercial
|
172 | 2 | 51 | 3 | 223 | 5 | ||||||||||||||||||
|
Total mortgage-backed securities
|
17,599 | 137 | 3,093 | 461 | 20,692 | 598 | ||||||||||||||||||
|
U.S. Treasury and government agencies
|
2,833 | 8 | — | — | 2,833 | 8 | ||||||||||||||||||
|
Obligations of U.S. states and municipalities
|
638 | 12 | — | — | 638 | 12 | ||||||||||||||||||
|
Certificates of deposit
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-U.S. government debt securities
|
5,323 | 85 | 1,258 | 21 | 6,581 | 106 | ||||||||||||||||||
|
Corporate debt securities
|
18,131 | 354 | 621 | 2 | 18,752 | 356 | ||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||
|
Credit card receivables
|
— | — | 393 | 4 | 393 | 4 | ||||||||||||||||||
|
Collateralized loan obligations
|
— | — | 7,406 | 262 | 7,406 | 262 | ||||||||||||||||||
|
Other
|
1,623 | 9 | 276 | 9 | 1,899 | 18 | ||||||||||||||||||
|
Total available-for-sale debt securities
|
46,147 | 605 | 13,047 | 759 | 59,194 | 1,364 | ||||||||||||||||||
|
Available-for-sale equity securities
|
2 | 1 | 2 | 4 | 4 | 5 | ||||||||||||||||||
|
Total securities with gross unrealized losses
|
$ | 46,149 | $ | 606 | $ | 13,049 | $ | 763 | $ | 59,198 | $ | 1,369 | ||||||||||||
| Securities with gross unrealized losses | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Gross | Gross | Total | gross | |||||||||||||||||||||
| Fair | unrealized | Fair | unrealized | 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 | ||||||||||||
141
Table of Contents
Other-than-temporary impairment (“OTTI”)
The following table presents credit losses that are included in the securities gains and losses
table above.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Debt securities the Firm does not intend to sell that have credit losses
|
||||||||||||||||
|
Total losses
(a)
|
— | $ | (880 | ) | $ | (94 | ) | $ | (880 | ) | ||||||
|
Losses recorded in/(reclassified from) other comprehensive income
|
— | 696 | (6 | ) | 696 | |||||||||||
|
Credit losses recognized in income on debt securities the Firm does not
intend to sell
(b)
|
— | (184 | ) | (100 | ) | (184 | ) | |||||||||
|
Credit losses recognized in income on debt securities the Firm intends to sell
|
— | (2 | ) (c) | — | (7 | ) (c) | ||||||||||
|
Total credit losses recognized in income
|
— | $ | (186 | ) | $ | (100 | ) | $ | (191 | ) | ||||||
| (a) | For initial OTTI, represents the excess of the amortized cost over the fair value of AFS debt securities. For subsequent impairments of the same security, represents additional declines in fair value subsequent to 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 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) | Includes OTTI losses recognized in income on certain subprime mortgage-backed securities. These securities were sold during the third quarter of 2009. |
Changes in the credit loss component of credit-impaired debt securities
The following table presents a rollforward for the three and six months ended June 30, 2010 and
2009, of the credit loss component of OTTI losses that have been recognized in income, related to
debt securities that the Firm does not intend to sell.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Balance, beginning of period
|
$ | 660 | $ | — | $ | 578 | $ | — | ||||||||
|
Additions:
|
||||||||||||||||
|
Increase in losses on previously credit-impaired
securities
|
— | 184 | 94 | 184 | ||||||||||||
|
Losses reclassified from other comprehensive
income
on previously credit-impaired securities
|
— | — | 6 | — | ||||||||||||
|
Reductions:
|
||||||||||||||||
|
Sales of credit-impaired securities
|
(20 | ) | — | (23 | ) | — | ||||||||||
|
Impact of new consolidation guidance related to
VIEs
|
— | — | (15 | ) | — | |||||||||||
|
Balance, end of period
|
$ | 640 | $ | 184 | $ | 640 | $ | 184 | ||||||||
Unrealized losses have generally decreased since December 31, 2009, due primarily to market
spread improvement and increased liquidity, driving asset prices higher. Unrealized losses on
certain securities have increased, including on corporate debt securities which included
government-guaranteed positions that experienced credit spread widening. As of June 30, 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 June 30, 2010.
Following is a description of the Firm’s main security investments with the most significant
unrealized losses as of June 30, 2010, and the key assumptions used in its 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 June 30, 2010, gross unrealized losses related to prime and Alt-A residential mortgage-backed
securities issued by private issuers were $420 million, all of which related to securities that
have been in an unrealized loss position for 12 months or more. Overall losses have
decreased since December 31, 2009, due to increased market stabilization, resulting from increased
demand for higher-yielding asset classes and U.S. government programs. Approximately one-fifth of
these positions (by amortized cost) are currently rated “AAA.” The remaining four-fifths have
experienced downgrades since purchase, and approximately half of the downgraded positions are
currently rated below investment-grade. Despite significant downgrades experienced in the
portfolio, most of these are senior positions and possess adequate credit enhancement to absorb
future expected losses. 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 applied to the various tranches of issued securities
based on their respective contractual provisions of the securitization trust. The loan-level
analysis considers prepayment, home price, default rate and loss severity assumptions. Given this
level of granularity, the underlying assumptions vary significantly taking into consideration such
factors as the financial condition of the borrower, loan-to-value (“LTV”) ratio, loan type and
geographical location of the underlying property. The weighted average underlying default rate on
the positions was 23% and the related weighted average loss severity was 50%. Based on this
analysis, the Firm has not recognized any additional OTTI losses in earnings during the second
quarter of 2010; however, an OTTI loss of $6 million was
142
Table of Contents
recognized in the first quarter of 2010 related to securities that experienced increased
delinquency rates associated with specific collateral types and origination dates. The unrealized
loss of $420 million is considered temporary, based on management’s assessment that the credit
enhancement levels for those securities remain sufficient to support the Firm’s investment.
Asset-backed securities — Collateralized loan obligations
As of June 30, 2010, gross unrealized losses related to CLOs were $262 million, all of which
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 29%. Credit enhancement in
CLOs is primarily in the form of overcollateralization, which is the excess of the par amount of
collateral over the par amount of securities. 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 5% for the second quarter 2010 and
thereafter. Further, loss severities were assumed to be 50% for loans and 80% for debt securities.
Losses on collateral were estimated to occur approximately 24 months after default.
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Table of Contents
Contractual maturities and yields
The following table presents the amortized cost and estimated fair value at June 30, 2010, of JPMorgan Chase’s AFS and HTM securities by contractual maturity.
The following table presents the amortized cost and estimated fair value at June 30, 2010, of JPMorgan Chase’s AFS and HTM securities by contractual maturity.
| June 30, 2010 | ||||||||||||||||||||
| Due after five | ||||||||||||||||||||
| By remaining maturity | Due in one | Due after one year | years through 10 | Due after | ||||||||||||||||
| (in millions) | year or less | through five years | years | 10 years (c) | Total | |||||||||||||||
|
Available-for-sale debt securities
|
||||||||||||||||||||
|
Mortgage-backed securities
(a)
|
||||||||||||||||||||
|
Amortized cost
|
$ | 67 | $ | 1,605 | $ | 4,888 | $ | 165,137 | $ | 171,697 | ||||||||||
|
Fair value
|
67 | 1,747 | 5,187 | 169,930 | 176,931 | |||||||||||||||
|
Average yield
(b)
|
5.40 | % | 5.20 | % | 4.71 | % | 4.06 | % | 4.09 | % | ||||||||||
|
U.S. Treasury and government agencies
(a)
|
||||||||||||||||||||
|
Amortized cost
|
$ | 2,481 | $ | 6,129 | $ | 9,004 | $ | — | $ | 17,614 | ||||||||||
|
Fair value
|
2,494 | 6,248 | 9,092 | — | 17,834 | |||||||||||||||
|
Average yield
(b)
|
0.89 | % | 2.83 | % | 3.24 | % | — | 2.77 | % | |||||||||||
|
Obligations of U.S. states and municipalities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 17 | $ | 140 | $ | 304 | $ | 7,870 | $ | 8,331 | ||||||||||
|
Fair value
|
17 | 148 | 321 | 8,203 | 8,689 | |||||||||||||||
|
Average yield
(b)
|
4.97 | % | 4.30 | % | 5.38 | % | 5.13 | % | 5.13 | % | ||||||||||
|
Certificates of deposit
|
||||||||||||||||||||
|
Amortized cost
|
$ | 2,236 | $ | — | $ | — | $ | — | $ | 2,236 | ||||||||||
|
Fair value
|
2,238 | — | — | — | 2,238 | |||||||||||||||
|
Average yield
(b)
|
5.65 | % | — | — | — | 5.65 | % | |||||||||||||
|
Non-U.S. government debt securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 5,704 | $ | 12,751 | $ | 954 | $ | 75 | $ | 19,484 | ||||||||||
|
Fair value
|
5,714 | 12,822 | 943 | 79 | 19,558 | |||||||||||||||
|
Average yield
(b)
|
1.05 | % | 2.26 | % | 3.32 | % | 1.51 | % | 1.96 | % | ||||||||||
|
Corporate debt securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 5,111 | $ | 46,289 | $ | 3,583 | $ | 39 | $ | 55,022 | ||||||||||
|
Fair value
|
5,135 | 46,590 | 3,480 | 39 | 55,244 | |||||||||||||||
|
Average yield
(b)
|
2.39 | % | 2.12 | % | 4.71 | % | 5.14 | % | 2.32 | % | ||||||||||
|
Asset-backed securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 1,505 | $ | 6,992 | $ | 9,091 | $ | 10,966 | $ | 28,554 | ||||||||||
|
Fair value
|
1,525 | 7,316 | 9,186 | 11,213 | 29,240 | |||||||||||||||
|
Average yield
(b)
|
0.75 | % | 1.96 | % | 1.47 | % | 1.58 | % | 1.59 | % | ||||||||||
|
Total available-for-sale debt securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 17,121 | $ | 73,906 | $ | 27,824 | $ | 184,087 | $ | 302,938 | ||||||||||
|
Fair value
|
17,190 | 74,871 | 28,209 | 189,464 | 309,734 | |||||||||||||||
|
Average yield
(b)
|
2.02 | % | 2.26 | % | 3.13 | % | 3.96 | % | 3.36 | % | ||||||||||
|
Available-for-sale equity securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | — | $ | — | $ | — | $ | 2,122 | $ | 2,122 | ||||||||||
|
Fair value
|
— | — | — | 2,258 | 2,258 | |||||||||||||||
|
Average yield
(b)
|
— | — | — | 0.27 | % | 0.27 | % | |||||||||||||
|
Total available-for-sale securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | 17,121 | $ | 73,906 | $ | 27,824 | $ | 186,209 | $ | 305,060 | ||||||||||
|
Fair value
|
17,190 | 74,871 | 28,209 | 191,722 | 311,992 | |||||||||||||||
|
Average yield
(b)
|
2.02 | % | 2.26 | % | 3.13 | % | 3.92 | % | 3.34 | % | ||||||||||
|
|
||||||||||||||||||||
|
Total held-to-maturity securities
|
||||||||||||||||||||
|
Amortized cost
|
$ | — | $ | 6 | $ | 13 | $ | 2 | $ | 21 | ||||||||||
|
Fair value
|
— | 6 | 15 | 2 | 23 | |||||||||||||||
|
Average yield
(b)
|
— | 6.98 | % | 6.85 | % | 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 June 30, 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 four years for agency residential mortgage-backed securities, three years for agency residential collateralized mortgage obligations and five years for nonagency residential collateralized mortgage obligations. |
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NOTE 12 — SECURITIES FINANCING ACTIVITIES
For a discussion of accounting policies relating to securities financing activities, see Note 12 on
page 192 of JPMorgan Chase’s 2009 Annual Report. For further information regarding securities
borrowed and securities lending agreements for which the fair value option has been elected, see
Note 4 on pages 125-127 of this Form 10-Q.
The following table details the Firm’s repurchase agreements, resale agreements, securities
borrowed transactions and securities loaned transactions, all of which are accounted for as
collateralized financings during the periods presented.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Securities purchased under resale agreements
(a)
|
$ | 198,825 | $ | 195,328 | ||||
|
Securities borrowed
(b)
|
122,289 | 119,630 | ||||||
|
Securities sold under repurchase agreements
(c)
|
$ | 222,018 | $ | 245,692 | ||||
|
Securities loaned
|
10,505 | 7,835 | ||||||
| (a) | Includes resale agreements of $22.8 billion and $20.5 billion accounted for at fair value at June 30, 2010, and December 31, 2009, respectively. | |
| (b) | Includes securities borrowed of $11.9 billion and $7.0 billion accounted for at fair value at June 30, 2010, and December 31, 2009, respectively. | |
| (c) | Includes repurchase agreements of $6.0 billion and $3.4 billion accounted for at fair value at June 30, 2010, and December 31, 2009, respectively. |
The amounts reported in the table above have been reduced by $135.2 billion and $121.2 billion
at June 30, 2010, and December 31, 2009, respectively, as a result of the agreements having met the
specified conditions for net presentation under applicable accounting guidance.
JPMorgan Chase pledges certain financial instruments it owns to collateralize repurchase agreements
and other securities financings. Pledged securities that can be sold or repledged by the secured
party are identified as financial instruments owned (pledged to various parties) on the
Consolidated Balance Sheets.
At June 30, 2010, the Firm
received securities as collateral that could be repledged, delivered or
otherwise used with a fair value of approximately $623.3 billion. This collateral was generally
obtained under resale agreements, securities borrowing agreements and customer margin loans. Of
these securities, approximately $439.0 billion were repledged, delivered or otherwise used,
generally as collateral under repurchase agreements, securities lending agreements or to cover
short sales.
NOTE 13 — LOANS
The accounting for a loan may differ based on whether it is originated or purchased and whether the
loan is used in an investing or trading strategy. The measurement framework for loans in the
Consolidated Financial Statements is one of the following:
| • | At the principal amount outstanding, net of the allowance for loan losses, unearned income, unamortized discounts and premiums, and any net deferred loan fees or costs, for loans held-for-investment (other than purchased credit-impaired loans); |
| • | At the lower of cost or fair value, with valuation changes recorded in noninterest revenue, for loans that are classified as held-for-sale; |
| • | At fair value, with changes in fair value recorded in noninterest revenue, for loans classified as trading assets or risk managed on a fair value basis; or |
| • | Purchased credit-impaired loans held-for-investment are initially measured at fair value, which includes estimated future credit losses. Accordingly, an allowance for loan losses related to these loans is not recorded at the acquisition date. |
For a detailed discussion of the accounting policies relating to loans, see Note 13 on pages
192-196 of JPMorgan Chase’s 2009 Annual Report. See Note 4
on pages 125-127 of this Form 10-Q for
further information on the Firm’s elections of fair value accounting under the fair value option.
See Note 3 on pages 110-124 of this Form 10-Q for further information on loans carried at fair
value and classified as trading assets.
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Table of Contents
The composition of the Firm’s aggregate loan portfolio at each of the dates indicated was as
follows.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
U.S. wholesale loans:
|
||||||||
|
Commercial and industrial
|
$ | 47,431 | $ | 49,103 | ||||
|
Real estate
|
51,409 | 54,968 | ||||||
|
Financial institutions
(a)
|
13,143 | 13,372 | ||||||
|
Government agencies
|
5,626 | 5,634 | ||||||
|
Other
(a)
|
36,488 | 23,383 | ||||||
|
Loans held-for-sale and at fair value
|
1,640 | 2,625 | ||||||
|
Total U.S. wholesale loans
|
155,737 | 149,085 | ||||||
|
Non-U.S. wholesale loans:
|
||||||||
|
Commercial and industrial
|
17,043 | 19,138 | ||||||
|
Real estate
|
1,980 | 2,227 | ||||||
|
Financial institutions
(a)
|
17,248 | 11,755 | ||||||
|
Government agencies
|
267 | 1,707 | ||||||
|
Other
(a)
|
22,352 | 18,790 | ||||||
|
Loans held-for-sale and at fair value
|
2,199 | 1,473 | ||||||
|
Total non-U.S. wholesale loans
|
61,089 | 55,090 | ||||||
|
Total wholesale loans:
(b)
|
||||||||
|
Commercial and industrial
|
64,474 | 68,241 | ||||||
|
Real estate
(c)
|
53,389 | 57,195 | ||||||
|
Financial institutions
(a)
|
30,391 | 25,127 | ||||||
|
Government agencies
|
5,893 | 7,341 | ||||||
|
Other
(a)
|
58,840 | 42,173 | ||||||
|
Loans held-for-sale and at fair value
(d)
|
3,839 | 4,098 | ||||||
|
Total wholesale loans
|
216,826 | 204,175 | ||||||
|
Consumer loans:
(e)
|
||||||||
|
Home equity — senior lien
(f)
|
25,856 | 27,376 | ||||||
|
Home equity — junior lien
(g)
|
68,905 | 74,049 | ||||||
|
Prime mortgage
(a)
|
66,429 | 66,892 | ||||||
|
Subprime mortgage
(a)
|
12,597 | 12,526 | ||||||
|
Option ARMs
(a)
|
8,594 | 8,536 | ||||||
|
Auto loans
(a)
|
47,548 | 46,031 | ||||||
|
Credit card
(a)(h)(i)
|
142,994 | 78,786 | ||||||
|
Other
|
32,399 | 31,700 | ||||||
|
Loans held-for-sale
(j)
|
434 | 2,142 | ||||||
|
Total consumer loans — excluding purchased credit-impaired loans
|
405,756 | 348,038 | ||||||
|
Consumer loans — purchased credit-impaired loans
|
76,901 | 81,245 | ||||||
|
Total consumer loans
|
482,657 | 429,283 | ||||||
|
Total loans
(a)(k)
|
$ | 699,483 | $ | 633,458 | ||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon adoption of the new 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 15 on pages 151-163 of this Form 10-Q. | |
| (b) | Includes IB, Commercial Banking (“CB”), Treasury & Securities Services (“TSS”), Asset Management (“AM”) and Corporate/Private Equity. | |
| (c) | Represents credit extended for real estate-related purposes to borrowers who are primarily in the real estate development or investment businesses, and for which the repayment is predominantly from the sale, lease, management, operations or refinancing of the property. | |
| (d) | Includes loans for commercial and industrial, real estate, financial institutions and other of $1.7 billion, $206 million, $1.3 billion and $661 million, respectively, at June 30, 2010, and $3.1 billion, $44 million, $278 million and $715 million, respectively, at December 31, 2009. | |
| (e) | Includes RFS, Card Services (“CS”) and the Corporate/Private Equity segment. | |
| (f) | Represents loans where JPMorgan Chase holds the first security interest placed upon the property. | |
| (g) | Represents loans where JPMorgan Chase holds a security interest that is subordinate in rank to other liens. | |
| (h) | Includes billed finance charges and fees net of an allowance for uncollectible amounts. | |
| (i) | Includes $1.0 billion of loans at December 31, 2009 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. Such loans had been fully repaid or charged off as of June 30, 2010. See Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report. | |
| (j) | Includes loans for prime mortgages and other (largely student loans) of $185 million and $249 million, respectively, at June 30, 2010, and $450 million and $1.7 billion, respectively, at December 31, 2009. | |
| (k) | Loans (other than purchased credit-impaired loans and those for which the fair value option has been elected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $1.7 billion and $1.4 billion at June 30, 2010, and December 31, 2009, respectively. |
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The following table reflects information about the Firm’s loan sales.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Net gains/(losses) on sales
of loans (including lower
of cost or fair value
adjustments)
(a)
|
$ | 149 | $ | 306 | $ | 258 | $ | 13 | ||||||||
| (a) | Excludes sales related to loans accounted for at fair value. |
Impaired loans
For further discussion of impaired loans, including the nature of such loans and the related
accounting policies, and certain troubled debt restructurings, see
Note 13 on pages 192-196 of
JPMorgan Chase’s 2009 Annual Report.
The tables below set forth information about the Firm’s impaired loans, excluding both purchased
credit-impaired loans and modified credit card loans, which are discussed separately below.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Impaired loans with an allowance:
|
||||||||
|
Wholesale
|
$ | 4,318 | $ | 6,216 | ||||
|
Consumer
(a)
|
4,880 | 3,840 | ||||||
|
Total impaired loans with an allowance
|
9,198 | 10,056 | ||||||
|
Impaired loans without an allowance:
(b)
|
||||||||
|
Wholesale
|
1,343 | 760 | ||||||
|
Consumer
(a)
|
748 | 138 | ||||||
|
Total impaired loans without an allowance
|
2,091 | 898 | ||||||
|
Total impaired loans
|
$ | 11,289 | $ | 10,954 | ||||
|
Allowance for impaired loans:
|
||||||||
|
Wholesale
|
$ | 1,324 | $ | 2,046 | ||||
|
Consumer
|
1,161 | 996 | ||||||
|
Total allowance for impaired loans
(c)
|
$ | 2,485 | $ | 3,042 | ||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Average balance of impaired loans:
|
||||||||||||||||
|
Wholesale
|
$ | 4,801 | $ | 4,375 | $ | 5,244 | $ | 3,639 | ||||||||
|
Consumer
|
5,406 | 3,479 | 4,998 | 3,042 | ||||||||||||
|
Total impaired loans
|
$ | 10,207 | $ | 7,854 | $ | 10,242 | $ | 6,681 | ||||||||
|
Interest income recognized on impaired loans:
|
||||||||||||||||
|
Wholesale
|
$ | 3 | $ | — | $ | 6 | $ | — | ||||||||
|
Consumer
|
37 | 37 | 88 | 67 | ||||||||||||
|
Total interest income recognized on impaired
loans during the period
|
$ | 40 | $ | 37 | $ | 94 | $ | 67 | ||||||||
| (a) | Consumer impaired loans without an allowance includes loans considered to be collateral-dependent based on regulatory guidance, which are charged off to the fair value of the underlying collateral. These loans are considered collateral-dependent because they involve modifications where a significant portion of principal is deferred or an interest-only period is provided. Prior period amounts have been reclassified from impaired loans with an allowance. | |
| (b) | 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. | |
| (c) | The allowance for impaired loans is included in JPMorgan Chase’s asset-specific allowance for loan losses. |
Loan modifications
Certain loan modifications are made in conjunction with the Firm’s 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, payment deferrals, or the acceptance of equity or other assets in
lieu of payments. In certain limited circumstances, loan modifications include principal
forgiveness, which has been minimal to-date. All such modifications are accounted for and reported
as troubled debt restructurings.
A loan that has been modified in a troubled debt restructuring is generally considered to be
impaired until its maturity, regardless of whether the borrower performs under the modified terms.
In certain limited cases, the concession granted relates solely to principal adjustments or other
noninterest-rate concessions, and the effective interest rate applicable to the modified loan is at
or above the current market rate at that time. In such circumstances, the loan is disclosed as
impaired and as a troubled debt restructuring only during the year of the modification; in
subsequent years, the loan is
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Table of Contents
not disclosed as impaired or as a troubled debt restructuring if repayment of the restructured loan
on its modified terms is reasonably assured.
It is the Firm’s general policy to place loans, other than credit card loans, on nonperforming
status when the loan is modified in a troubled debt restructuring. In most cases, residential real
estate and commercial loans modified in a troubled debt restructuring were considered nonperforming
prior to their modification. These loans may be returned to performing status (resuming the accrual
of interest) if the criteria set forth in the Firm’s accounting policy are met. These criteria
generally include (a) performance under the modified terms for a minimum of six months and/or six
payments, and (b) 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. The Firm’s policy exempts credit card loans,
including modified credit card loans, from being placed on nonperforming status as permitted by
regulatory guidance. However, the Firm has separately established an allowance for the portion of
earned interest and fees on such modified credit card loans that it estimates to be uncollectible.
The allowance for loan losses for loans modified in troubled debt restructurings is determined
based on the same methodology used to estimate the Firm’s asset-specific allowance component for as
long as the loan continues to be reported as an impaired loan, regardless of whether the loan has
returned to performing status. For further discussion of the methodology used to estimate the
Firm’s asset-specific allowance, see Note 14 on pages 196-198 of JPMorgan Chase’s 2009 Annual
Report.
Wholesale
As of June 30, 2010, and December 31, 2009, wholesale loans modified in troubled debt
restructurings were $1.1 billion for both periods. These modifications generally provided interest
rate concessions to the borrower or deferral of principal repayments. Of these loans, $524 million
and $491 million were classified as nonperforming at June 30, 2010, and December 31, 2009,
respectively.
Consumer
For detailed discussions on the U.S. Treasury Making Home Affordable (“MHA”) programs and the
Firm’s other loss-mitigation programs, see Note 13, Impaired
loans, on pages 194-195 of JPMorgan
Chase’s 2009 Annual Report. Substantially all of the modifications made under these programs are
accounted for and reported as troubled debt restructurings.
Consumer loans, other than credit card loans and certain home loans repurchased from the Government
National Mortgage Association (“Ginnie Mae”), with balances of approximately $4.9 billion and $3.1
billion have been permanently modified and accounted for as troubled debt restructurings as of June
30, 2010, and December 31, 2009, respectively. Of these loans, $1.9 billion and $966 million were
classified as nonperforming at June 30, 2010, and December 31, 2009, respectively.
At June 30, 2010, and December 31, 2009, $1.7 billion and $296 million, respectively, of loans
modified subsequent to repurchase from Ginnie Mae were excluded from loans accounted for as
troubled debt restructurings. 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.
Credit Card
For a detailed discussion of the modification of the terms of credit card loan agreements, see Note
13 on pages 192-196 of JPMorgan Chase’s 2009 Annual Report. Substantially all modifications of
credit card loans performed under the Firm’s existing modification programs are considered to be
troubled debt restructurings. At June 30, 2010, and December 31, 2009, the Firm had $9.3 billion
and $5.1 billion, respectively, of on-balance sheet credit card loans outstanding for borrowers who
are experiencing financial difficulty and who were then enrolled in a credit card modification
program. The increase in modified credit card loans outstanding from December 31, 2009 to June 30,
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 consolidation guidance
related to VIEs. These modified loan amounts exclude loans to borrowers who have not complied with
the modified payment terms, thereby causing the loan agreement to revert back to its original
payment terms. Assuming that those borrowers do not begin to perform in accordance with the
original payment terms, those loans will continue to age and will ultimately be charged-off in
accordance with the Firm’s accounting policies.
Consistent with the Firm’s policy, all credit card loans typically remain on accrual status.
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The consumer formula-based allowance for loan losses includes $3.6 billion and $2.2 billion at June
30, 2010, and December 31, 2009, specifically attributable to credit card loans in loan
modification programs. This component of the allowance for loan losses has been determined based on
the present value of cash flows expected to be received over the estimated lives of the underlying
loans.
Purchased credit-impaired loans
In connection with the Washington Mutual transaction, JPMorgan Chase acquired certain loans that it
deemed to be credit-impaired. For a detailed discussion of purchased credit-impaired loans,
including the related accounting policies, see Note 13 on pages 192-196 of JPMorgan Chase’s 2009
Annual Report.
The table below sets forth the accretable yield activity for purchased credit-impaired consumer
loans for the three and six months ended June 30, 2010 and 2009.
| Accretable yield activity | Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Beginning balance
|
$ | 20,571 | $ | 29,114 | $ | 25,544 | $ | 32,619 | ||||||||
|
Accretion into interest income
|
(787 | ) | (1,106 | ) | (1,673 | ) | (2,365 | ) | ||||||||
|
Changes in interest rates on variable-rate loans
|
(333 | ) | (1,045 | ) | (727 | ) | (3,291 | ) | ||||||||
|
Other changes in expected cash flows
(a)
|
170 | — | (3,523 | ) | — | |||||||||||
|
Ending balance
|
$ | 19,621 | $ | 26,963 | $ | 19,621 | $ | 26,963 | ||||||||
|
Accretable yield percentage
|
4.20 | % | 5.13 | % | 4.39 | % | 5.46 | % | ||||||||
| (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 six months ended June 30, 2010, other changes in expected cash flows are principally driven by changes in prepayment assumptions, as well as reclassifications 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 upon which customer rates are based for 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.
The purchased credit-impaired portfolio primarily impacts the Firm’s results of operations through:
(i) contribution to net interest margin; and (ii) expense related to defaults and servicing
resulting from the liquidation of the loans; and (iii) any provision for loan losses. The purchased
credit-impaired 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. As a result, the net spread between the purchased credit-impaired loans
and the related liabilities should be relatively constant over time, except for any basis risk or
other residual interest rate risk that remains and changes in the accretable yield percentage
(e.g., from extended loan liquidation periods). The net spread will be earned on a declining loan
balance over the estimated remaining weighted-average life of the portfolio, which is 6.6 years as
of June 30, 2010.
While the Firm has modified certain purchased credit-impaired loans, such modifications have not
yet seasoned and the ongoing performance of these loans is difficult to predict. Accordingly, the
Firm has not yet incorporated the potential positive cash flow effects of these modifications into
its expected cash flow estimates. The Firm will continue to monitor the success of the
modifications and its ability to reliably estimate any related cash flow benefits. If the
modifications ultimately result in a probable and significant increase in expected cash flows, the
Firm will first consider the reversal of any previously recorded allowance for loan losses. Any
remaining increase will be recognized prospectively as interest income (through an increase in
accretable yield).
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As of June 30, 2010, and December 31, 2009, an allowance for loan losses of $2.8 billion and $1.6
billion, respectively, was recorded for the prime mortgage and option adjustable-rate mortgage
(“ARM”) pools. The net aggregate carrying amount of the pools that have an allowance for loan
losses was $43.0 billion and $47.2 billion, respectively, at June 30, 2010, and December 31, 2009.
This allowance for loan losses is reported as a reduction of the carrying amount of the loans in
the table below.
The table below provides additional information about these purchased credit-impaired consumer
loans.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Outstanding balance
(a)
|
$ | 96,079 | $ | 103,369 | ||||
|
Carrying amount
|
74,090 | 79,664 | ||||||
| (a) | Represents the sum of contractual principal, interest and fees earned at the reporting date. |
NOTE 14 — ALLOWANCE FOR CREDIT LOSSES
For further discussion of the allowance for credit losses and the related accounting policies, see
Note 14 on pages 196-198 of JPMorgan Chase’s 2009 Annual Report.
The table below summarizes the changes in the allowance for loan losses.
| Six months ended June 30, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
|
Allowance for loan losses at January 1
|
$ | 31,602 | $ | 23,164 | ||||
|
Cumulative effect of change in accounting principles
(a)
|
7,494 | — | ||||||
|
Gross charge-offs
(a)
|
14,652 | 10,937 | ||||||
|
Gross (recoveries)
(a)
|
(1,028 | ) | (522 | ) | ||||
|
Net charge-offs
(a)
|
13,624 | 10,415 | ||||||
|
Provision for loan losses
(a)
|
10,371 | 16,540 | ||||||
|
Other
(b)
|
(7 | ) | (217 | ) | ||||
|
Allowance for loan losses at June 30
|
$ | 35,836 | $ | 29,072 | ||||
|
Components:
|
||||||||
|
Asset-specific
(c)(d)
|
$ | 2,485 | $ | 2,909 | ||||
|
Formula-based
(a)(e)
|
30,540 | 26,163 | ||||||
|
Purchased credit-impaired
|
2,811 | — | ||||||
|
Total allowance for loan losses
|
$ | 35,836 | $ | 29,072 | ||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon adoption of the new 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 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 15 on pages 151-163 of this Form 10-Q. | |
| (b) | The 2009 amount predominantly represents a reclassification related to the issuance and retention of securities from the Chase Issuance Trust. See Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report. | |
| (c) | Relates to risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a troubled debt restructuring. | |
| (d) | The asset-specific consumer allowance for loan losses includes troubled debt restructurings reserves of $946 million and $603 million at June 30, 2010 and 2009, respectively. Prior period amounts have been reclassified from formula-based to conform with the current period presentation. | |
| (e) | Includes all of the Firm’s allowance for loan losses on credit card loans, including those for which the Firm has modified the terms of the loans for borrowers who are experiencing financial difficulty. |
The table below summarizes the changes in the allowance for lending-related commitments.
| Six months ended June 30, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
|
Allowance for lending-related commitments at January 1
|
$ | 939 | $ | 659 | ||||
|
Cumulative effect of change in accounting principles
(a)
|
(18 | ) | — | |||||
|
Provision for lending-related commitments
(a)
|
2 | 87 | ||||||
|
Other
|
(11 | ) | — | |||||
|
Allowance for lending-related commitments at June 30
|
$ | 912 | $ | 746 | ||||
|
Components:
|
||||||||
|
Asset-specific
|
$ | 248 | $ | 111 | ||||
|
Formula-based
|
664 | 635 | ||||||
|
Total allowance for lending-related commitments
|
$ | 912 | $ | 746 | ||||
| (a) | Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon adoption of the new guidance, the Firm consolidated its Firm-administered multi-seller conduits. As a result, related assets are now primarily recorded in loans and other assets on the Consolidated Balance Sheets. |
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Charge-offs for Collateral-dependent loans
Included in gross charge-offs in the table above are $405 million and $140 million of charge-offs
related to impaired collateral-dependent loans for the six months ended June 30, 2010 and 2009,
respectively. The remaining balance of impaired collateral-dependent loans, measured at fair value
of collateral less costs to sell, was $2.5 billion and $2.3 billion as of June 30, 2010 and 2009,
respectively.
A loan is collateral-dependent when 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. A collateral-dependent loan is deemed to be impaired when the borrower is unable to
repay the loan and the collateral is insufficient to cover principal and interest. Certain impaired
collateral-dependent loans (including those to wholesale customers and those modified in troubled
debt restructurings) are charged-off to the fair value of the collateral less costs to sell.
The determination of the fair value of the collateral depends on the type of collateral (e.g.,
securities, real estate, and nonfinancial assets). 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 value is determined using both internal and external
valuation sources. Broker opinions of fair value are used to estimate the fair value of the
collateral for all properties being evaluated for charge-off. These estimated fair values are
reviewed and compared with prior valuations for reasonableness in light of current,
geography-specific economic conditions and adjusted, as appropriate, for estimated selling costs.
When foreclosure is determined to be probable, a third-party appraisal is obtained as soon as
practicable.
For commercial real-estate loans, the collateral value is generally based on appraisals from
internal and external valuation services. Appraisals are typically obtained and updated every six
to twelve months. 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 page 119 of this Form 10-Q for further information on the fair value hierarchy for
impaired collateral-dependent loans.
NOTE 15 — VARIABLE INTEREST ENTITIES
For a further description of JPMorgan Chase’s accounting policies regarding consolidation of VIEs,
see Note 1 on pages 108-109 of this Form 10-Q. For a more detailed discussion of the Firm’s
principal involvement with VIEs, see Note 16 on page 206 of JPMorgan Chase’s 2009 Annual Report.
The following summarizes the most significant type of Firm-sponsored VIEs by business segment.
| Form 10-Q | ||||||||
| Line of Business | Transaction Type | Activity | page reference | |||||
|
Card Services
|
Credit card securitization trusts | Securitization of both originated and purchased credit card receivables | 152-153 | |||||
|
RFS
|
Mortgage and other securitization trusts | Securitization of originated and purchased residential mortgages, automobile and student loans | 153-155 | |||||
|
IB
|
Mortgage and other securitization trusts | Securitization of both originated and purchased residential and commercial mortgages, automobile and student loans | 154-155 | |||||
|
|
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 | 156 | |||||
|
|
• Municipal bond vehicles | 156-157 | ||||||
|
|
• Credit-linked note vehicles | 157 | ||||||
|
|
• Asset swap vehicles | 158 | ||||||
The Firm also invests in and provides financing and other services to VIEs sponsored by third
parties, as described on page 158 of this Note.
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New Consolidation Accounting Guidance for VIEs
On January 1, 2010, the Firm implemented new consolidation accounting guidance related to VIEs. The
following table summarizes the incremental impact at adoption.
| Stockholders' | ||||||||||||||||
| (in millions) | GAAP assets | GAAP liabilities | 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- 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 CS utilizes to manage its other assets. These assets are primarily recorded in loans on the Firm’s Consolidated Balance Sheet. In addition, CS established an allowance for loan losses of $7.4 billion (pretax), which was reported as a transition adjustment 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 that 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 primarily recorded 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 primarily recorded 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 primarily recorded in trading assets on the Firm’s Consolidated Balance Sheets. | |
| (e) | The U.S. GAAP consolidation of these VIEs did not have a significant impact on risk-weighted assets on the adoption date; this was due to the consolidation, for regulatory capital purposes, of the Chase Issuance Trust (the Firm’s primary credit card securitization trust) in the second quarter of 2009, which added approximately $40 billion of risk-weighted assets for regulatory capital purposes. For further discussion of the Firm’s actions taken in the second quarter of 2009, see Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report. In addition, the U.S. GAAP consolidation of these VIEs did not have a significant regulatory impact because the banking regulatory agencies issued regulatory capital rules relating to the adoption of the new consolidation guidance related to VIEs that permitted an optional two-quarter implementation delay for certain VIEs, which permits the deferral of the effect of this accounting guidance on risk-weighted assets and risk-based capital requirements. The Firm elected this regulatory implementation delay, as permitted under these new regulatory capital rules, for its Firm-administered multi-seller conduits and certain mortgage-related and other securitization entities. Once the deferral period is over, the Firm expects the impact of this new consolidation guidance to be negligible on risk-weighted assets and risk-based capital ratios. |
Firm-sponsored variable interest entities
Credit card securitizations
Effective January 1, 2010, the Firm was deemed to be the primary beneficiary of the Firm-sponsored
credit card securitization trusts and consolidated the assets and liabilities of these trusts,
including its primary card securitization trust, Chase Issuance Trust. The primary beneficiary
determination was based on the Firm’s ability to direct the activities of these VIEs through its
servicing responsibilities and duties, including making decisions as to the receivables that get
transferred into those trusts as well as any related modifications and workouts. Additionally, the
nature and extent of the Firm’s other involvement with the trusts including the retention of an
undivided seller’s interest in the receivables, retaining certain securities issued by the trust
and the maintenance of escrow accounts, obligates the Firm to absorb losses and gives the Firm the
right to receive certain benefits from these VIEs that could potentially be significant. For a more
detailed description of JPMorgan Chase’s principal involvement with credit card securitizations, as
well as the accounting treatment applicable under prior accounting rules, see Note 15 on pages
198-205 of JPMorgan Chase’s 2009 Annual Report.
Upon consolidation at January 1, 2010, the Firm recorded a net increase in GAAP assets of $60.9
billion on the Consolidated Balance Sheet, which comprised: $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.
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The following table summarizes the assets and liabilities of the Firm-sponsored credit card
securitization trusts at June 30, 2010.
| Total assets held by | Beneficial | |||||||||||||||
| Firm-sponsored | interests issued to | |||||||||||||||
| (in billions) | Loans | Other assets | credit card securitization trusts | third parties | ||||||||||||
|
June 30, 2010
|
$ | 82.1 | $ | 1.3 | $ | 83.4 | $ | 56.0 | ||||||||
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%). These
undivided interests represent the Firm’s undivided interests in the receivables transferred to the
credit card trusts that have not been securitized. As of June 30, 2010, the Firm held undivided
interests in Firm-sponsored credit card securitization trusts of $13.2 billion. The Firm maintained
an average undivided interest in principal receivables owned by those trusts of approximately 14%
and 17% for the three and six months ended June 30, 2010. The Firm also retained $1.6 billion of
senior securities and $9.2 billion of subordinated securities in certain of its credit card
securitization trusts as of June 30, 2010. As of January 1, 2010, the Firm’s undivided interests in
the credit card trusts and securities retained were eliminated in consolidation. The credit card
receivables of the trusts underlying the Firm’s undivided interests and securities retained are
classified within loans.
Firm-sponsored mortgage and other securitization trusts
Effective January 1, 2010, the Firm was deemed to be the primary beneficiary of certain mortgage
securitization trusts and the Firm-sponsored automobile and student loan trusts because the Firm
has the power 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 the trusts obligates the Firm
to absorb losses and gives the Firm the right to receive benefits from the VIEs which could
potentially be significant. For a more detailed description of JPMorgan Chase’s principal
involvement with mortgage and other securitization trusts, as well as the accounting treatment
applicable under prior accounting rules, see Note 15 on pages 198-205 of JPMorgan Chase’s 2009
Annual Report.
The following table presents the total unpaid principal amount of assets held in JPMorgan
Chase-sponsored securitization entities at June 30, 2010, and December 31, 2009, including those
that are consolidated by the Firm and those that are not consolidated by the Firm but for which the
Firm has continuing involvement. 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 will not equal the
assets held in nonconsolidated VIEs, because the beneficial interests held by third parties are
reflected at their current outstanding par amounts, and a portion of the Firm’s retained interests
(trading assets and AFS securities) are reflected at their fair values. See Securitization activity
on pages 160-161 of this Note for further information regarding the Firm’s cash flows with and
interests retained in nonconsolidated VIEs.
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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 assets | Assets held in | securitization VIEs | Total interests | |||||||||||||||||||||||||
| June 30, 2010 (a) | held by | consolidated | with continuing | Trading | AFS | Other | held by | |||||||||||||||||||||
| (in billions) | securitization VIEs | securitization VIEs | involvement | assets | securities | assets | JPMorgan Chase | |||||||||||||||||||||
|
Securitization-related:
|
||||||||||||||||||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||
|
Prime
(b)
|
$ | 169.5 | $ | 2.6 | $ | 160.0 | $ | 0.7 | $ | — | $ | — | $ | 0.7 | ||||||||||||||
|
Subprime
|
45.3 | 1.9 | 41.1 | — | — | — | — | |||||||||||||||||||||
|
Option ARMs
|
38.6 | 0.3 | 38.2 | — | 0.1 | — | 0.1 | |||||||||||||||||||||
|
Commercial and other
(c)
|
151.5 | 0.7 | 94.5 | 1.8 | 0.8 | — | 2.6 | |||||||||||||||||||||
|
Student
|
4.7 | 4.7 | — | — | — | — | — | |||||||||||||||||||||
|
Auto
|
0.1 | 0.1 | — | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 409.7 | $ | 10.3 | $ | 333.8 | $ | 2.5 | $ | 0.9 | $ | — | $ | 3.4 | ||||||||||||||
| JPMorgan Chase interest in securitized assets | ||||||||||||||||||||||||||||
| Principal amount outstanding | in nonconsolidated VIEs (d)(e)(f)(g)(h) | |||||||||||||||||||||||||||
| Assets held in | ||||||||||||||||||||||||||||
| nonconsolidated | ||||||||||||||||||||||||||||
| Total assets | Assets held in | securitization VIEs | Total interests | |||||||||||||||||||||||||
| December 31, 2009 (a) | held by | consolidated | with continuing | Trading | AFS | Other | held by | |||||||||||||||||||||
| (in billions) | securitization VIEs | securitization VIEs | involvement | assets | securities | assets | JPMorgan 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 government sponsored entities (“GSEs”). See Securitization activity on pages 160-161 of this Note for information on the Firm’s loan sales to GSEs. | |
| (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 16 on pages 164-167 of this Form 10-Q) and securities retained from loan sales to Ginnie Mae, Fannie Mae and Freddie Mac. | |
| (e) | Excludes senior and subordinated securities of $208 million and $51 million, respectively, at June 30, 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 $182 million and $139 million as of June 30, 2010, and December 31, 2009, respectively. This is comprised of $122 million and $91 million of AFS securities, related to commercial and other; and $60 million and $48 million of investments classified as trading assets-debt and equity instruments, including $59 million and $47 million of residential mortgages, and $1 million and $1 million of commercial and other, all respectively, at June 30, 2010, and December 31, 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 5 on pages 128-136 of this Form 10-Q for further information on derivatives. | |
| (h) | Includes interests held in re-securitization transactions. |
Residential mortgage
The Firm securitizes residential mortgage loans originated by RFS, as well as residential mortgage
loans that may be purchased by either RFS or IB. RFS generally retains servicing for all its
originated and purchased residential mortgage loans. Additionally, RFS may retain servicing for
certain mortgage loans purchased by IB. As servicer, the Firm receives servicing fees based on the
securitized loan balance plus ancillary fees.
For Firm-sponsored securitizations serviced by RFS, the Firm is deemed to have the power to direct
the significant activities of the VIE, as it is the servicer of the loans and is responsible for
decisions related to loan modifications and workouts. For the loans serviced by unrelated third
parties, the Firm is not the primary beneficiary, as the power to direct the significant activities
resides with the third-party servicer. In a limited number of securitizations, RFS, in addition to
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having servicing rights, may retain 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. As of June 30, 2010,
due to RFS’s servicing arrangements and retained interests, the Firm consolidated approximately
$3.3 billion of assets and $3.4 billion of liabilities of Firm-sponsored residential mortgage
securitization trusts. As of December 31, 2009, RFS did not consolidate any VIEs in accordance with
the accounting treatment under prior accounting rules. Additionally, RFS held retained interests of
approximately $245 million and $537 million as of June 30, 2010, and December 31, 2009,
respectively, in nonconsolidated securitization entities. See pages
161-163 of this Note for further
information on retained interests held in nonconsolidated VIEs; these retained interests are
classified as trading assets or AFS securities.
IB may engage in underwriting and trading activities of the 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 size 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 trusts. As of June 30, 2010, the Firm consolidated approximately $1.2
billion of VIE assets and $684 million of liabilities due to IB’s involvement with such trusts.
These entities were not consolidated at December 31, 2009, in accordance with the accounting
treatment under prior accounting rules. Additionally, IB held approximately $488 million, and $699
million of senior and subordinated interests as of June 30, 2010, and December 31, 2009,
respectively, in nonconsolidated securitization entities. This includes approximately $1 million
and $2 million of residual interests as of June 30, 2010, and December 31, 2009, respectively. See
pages 161-163 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.
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 22
on pages 170-174 of this Form
10-Q for additional information on loans sold with recourse, as well as information on
indemnifications for breaches of representations and warranties. See page 161 of this Note for
further information on loans sold to the GSEs.
Commercial mortgages and other consumer securitizations
IB securitizes commercial mortgage loans that it originates. Additionally, IB may also engage in
underwriting and trading of securities issued by the securitization trusts. IB may retain unsold
senior and/or subordinated interests in commercial mortgage securitizations at the time of
securitization but generally does not service commercial loan securitizations. For loans serviced
by unrelated third parties, the Firm generally does not have the power to direct the significant
activities of the VIE and, therefore, does not consolidate the VIEs. As of June 30, 2010, the Firm
consolidated approximately $637 million of commercial mortgage securitization trusts due to the
Firm holding certain subordinated interests that give the Firm the power to direct the activities
of these entities. These entities were not consolidated at December 31, 2009, in accordance with
the accounting treatment under prior accounting rules. At June 30, 2010, and December 31, 2009, the
Firm held $1.8 billion and $1.6 billion, respectively, of retained interests in nonconsolidated
commercial mortgage securitizations. This includes approximately $9 million and $22 million of
residual interests as of June 30, 2010, and December 31, 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. It also
holds a retained interest in these securitizations. As such, the Firm is the primary beneficiary of
and consolidates these VIEs as of June 30, 2010. As of June 30, 2010, the Firm consolidated $4.8
billion of assets and $3.5 billion of liabilities of automobile and student loan securitizations. As of December
31, 2009, the Firm held $9 million and $49 million of retained interests in nonconsolidated
securitized automobile and student loan securitizations, respectively. These entities were not
consolidated at December 31, 2009, in accordance with the accounting treatment under prior
accounting rules. In addition, at December 31, 2009, the Firm consolidated $3.8 billion of other
student loans.
Re-securitizations
The Firm also engages in certain re-securitization transactions in which debt securities are
transferred to a VIE in exchange for new beneficial interests. These transfers occur to both agency
(Fannie Mae, Freddie Mac and Ginnie Mae) and nonagency (private-label) sponsored VIEs, which may be
backed by either residential or commercial mortgages and are often structured on behalf of clients.
As of June 30, 2010, the Firm did not consolidate any agency re-securitizations, as it did not have
the power to direct the significant activities of the trust. As of June 30, 2010, the Firm
consolidated $522 million of assets and $117 million of liabilities of private-label
re-securitizations, as the Firm had both the power to
155
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direct the significant activities of, and retained an interest that is deemed to be significant in,
the trust. For other nonconsolidated private-label re-securitizations, the Firm did not have the
sole power to direct the significant activities of the entity. During the three months and six
months ended June 30, 2010, respectively, the Firm transferred $7.8 billion and $663 million,
respectively, and $14.3 billion and $1.0 billion, respectively, of securities to agency and
private-label VIEs. At June 30, 2010, the Firm held approximately $1.7 billion and $23 million of
senior and subordinated interests, respectively, in nonconsolidated agency and private-label
re-securitization entities. See pages 161-163 of this Note for further information on interests
held in nonconsolidated securitization VIEs.
Multi-seller conduits
Effective January 1, 2010, the Firm consolidated its Firm-administered multi-seller conduits, as
the Firm had both the power to direct the significant activities of the conduits and a potentially
significant economic interest. 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.
For a more detailed description of JPMorgan Chase’s principal involvement with Firm-administered
multi-seller conduits, as well as the accounting treatment applicable under prior accounting rules,
see Note 16 on pages 206-209 of JPMorgan Chase’s 2009 Annual Report.
Consolidated Firm-administered multi-seller conduits
| Total assets held by | ||||||||||||||||
| Firm-administered | Commercial paper | |||||||||||||||
| multi-seller | issued to third | |||||||||||||||
| (in billions) | Loans | Other assets | conduits | parties | ||||||||||||
|
June 30, 2010
|
$ | 20.9 | $ | 1.9 | $ | 22.8 | $ | 22.8 | ||||||||
The Firm provides both deal-specific and program-wide liquidity facilities. 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 applicable commercial paper outstanding. The Firm provided $2.0 billion of program-wide
credit enhancement at June 30, 2010.
VIEs associated with investor intermediation activities
For a more detailed description of JPMorgan Chase’s principal involvement with investor
intermediation activities, see Note 16 on pages 209-212 of JPMorgan Chase’s 2009 Annual Report.
Municipal bond vehicles
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.
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The Firm’s exposure to nonconsolidated municipal bond VIEs at June 30, 2010, and December 31, 2009,
including the ratings profile of the VIEs’ assets, was as follows.
| Fair value of assets | Maximum | |||||||||||||||
| (in billions) | held by VIEs | Liquidity facilities (b) | Excess/(deficit) (c) | exposure | ||||||||||||
|
Nonconsolidated
municipal bond
vehicles
(a)
|
||||||||||||||||
|
June 30, 2010
|
$ | 13.9 | $ | 8.7 | $ | 5.2 | $ | 8.7 | ||||||||
|
December 31, 2009
|
13.2 | 8.4 | 4.8 | 8.4 | ||||||||||||
| Ratings profile of VIE assets (d) | ||||||||||||||||||||||||||||
| Investment-grade | Noninvestment-grade | Fair value of | Wt. avg. | |||||||||||||||||||||||||
| (in billions, except | assets held | expected life | ||||||||||||||||||||||||||
| where otherwise noted) | AAA to AAA- | AA+ to AA- | A+ to A- | BBB to BBB- | BB+ and below | by VIEs | of assets (years) | |||||||||||||||||||||
| Nonconsolidated municipal bond vehicles (a) | ||||||||||||||||||||||||||||
|
June 30, 2010
|
$ | 4.3 | $ | 9.3 | $ | 0.3 | $ | — | $ | — | $ | 13.9 | 9.0 | |||||||||||||||
|
December 31, 2009
|
1.6 | 11.4 | 0.2 | — | — | 13.2 | 10.1 | |||||||||||||||||||||
| (a) | Excluded $2.1 billion and $2.8 billion, as of June 30, 2010, and December 31, 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 June 30, 2010, and December 31, 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. |
Credit-linked note vehicles
The Firm structures transactions with credit-linked note vehicles in which the VIE purchases highly
rated assets, such as asset-backed securities, or 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 CLNs with maturities predominantly ranging from one to ten years in order to transfer the
risk of the referenced credit to the VIE’s investors. The Firm does not generally consolidate these
credit-linked note entities, 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.
Exposure to nonconsolidated credit-linked note VIEs at June 30, 2010, and December 31, 2009, was as
follows.
| Par value | ||||||||||||||||
| Net derivative | Trading | Total | of collateral | |||||||||||||
| June 30, 2010 (in billions) | receivables | assets (b) | exposure (c) | held by VIEs (d) | ||||||||||||
|
Credit-linked notes
(a)
|
||||||||||||||||
|
Static structure
|
$ | 1.5 | $ | — | $ | 1.5 | $ | 9.9 | ||||||||
|
Managed structure
|
4.0 | 0.1 | 4.1 | 11.5 | ||||||||||||
|
Total
|
$ | 5.5 | $ | 0.1 | $ | 5.6 | $ | 21.4 | ||||||||
| Par value | ||||||||||||||||
| Net derivative | Trading | Total | of collateral | |||||||||||||
| December 31, 2009 (in billions) | receivables | assets (b) | exposure (c) | held by VIEs (d) | ||||||||||||
|
Credit-linked 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 $244 million and $855 million at June 30, 2010, and December 31, 2009, respectively, which was consolidated, as the Firm, in its role as secondary market-maker, held a majority of the issued credit-linked 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. |
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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 currency risk, or both, according to
investors’ requirements. 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.
Exposure to nonconsolidated asset swap VIEs at June 30, 2010, and December 31, 2009, was as
follows.
| Net derivative | Trading | Total | Par value of collateral | |||||||||||||
| (in billions) | receivables | assets (b) | exposure (c) | held by VIEs (d) | ||||||||||||
|
June 30, 2010
(a)
|
$ | 0.3 | $ | — | $ | 0.3 | $ | 7.3 | ||||||||
|
December 31, 2009
(a)
|
0.1 | — | 0.1 | 10.2 | ||||||||||||
| (a) | Excluded the fair value of collateral of $532 million and $623 million at June 30, 2010, and December 31, 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
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 June 30, 2010, and December 31, 2009, the amortized cost of the note was $3.1
billion and $3.5 billion, respectively, and the fair value was $3.2 billion and $3.5 billion,
respectively. The Firm accounts for its other interest, which is not subject to limits, as a loan
at amortized cost. This senior loan had an amortized cost and fair value of approximately $1.0
billion at both June 30, 2010, and December 31, 2009. For more information on AFS securities and
loans, see Notes 11 and 13 on pages 139-144 and 145-150, respectively, of this Form 10-Q.
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.
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 from any
other third-party transaction.
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Table of Contents
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 June 30, 2010, and December 31, 2009.
| Assets | ||||||||||||||||
| Trading assets- | ||||||||||||||||
| June 30, 2010 | debt and equity | |||||||||||||||
| (in billions) | instruments | Loans | Other (a) | Total assets (b) | ||||||||||||
|
VIE program type
|
||||||||||||||||
|
Firm-sponsored credit card trusts
|
$ | — | $ | 82.1 | $ | 1.3 | $ | 83.4 | ||||||||
|
Firm-administered multi-seller conduits
|
— | 20.9 | 1.9 | 22.8 | ||||||||||||
|
Mortgage securitization entities
|
2.3 | 3.3 | — | 5.6 | ||||||||||||
|
Other
|
5.2 | 5.7 | 1.7 | 12.6 | ||||||||||||
|
Total
|
$ | 7.5 | $ | 112.0 | $ | 4.9 | $ | 124.4 | ||||||||
| Liabilities | ||||||||||||
| June 30, 2010 | Beneficial interests | |||||||||||
| (in billions) | in VIE assets (c) | Other (d) | Total liabilities | |||||||||
|
VIE program type
|
||||||||||||
|
Firm-sponsored credit card trusts
|
$ | 56.0 | $ | — | $ | 56.0 | ||||||
|
Firm-administered multi-seller conduits
|
22.8 | — | 22.8 | |||||||||
|
Mortgage securitization entities
|
3.0 | 1.8 | 4.8 | |||||||||
|
Other
|
6.3 | 0.8 | 7.1 | |||||||||
|
Total
|
$ | 88.1 | $ | 2.6 | $ | 90.7 | ||||||
| Assets | ||||||||||||||||
| Trading assets- | ||||||||||||||||
| December 31, 2009 | debt and equity | |||||||||||||||
| (in billions) | instruments | Loans | Other (a) | Total assets (b) | ||||||||||||
|
VIE program type
|
||||||||||||||||
|
Firm-sponsored credit card trusts
(e)
|
$ | — | $ | 6.1 | $ | 0.8 | $ | 6.9 | ||||||||
|
Firm-administered multi-seller conduits
|
— | 2.2 | 2.9 | 5.1 | ||||||||||||
|
Mortgage securitization entities
|
— | — | — | — | ||||||||||||
|
Other
|
6.4 | 4.7 | 1.3 | 12.4 | ||||||||||||
|
Total
|
$ | 6.4 | $ | 13.0 | $ | 5.0 | $ | 24.4 | ||||||||
| Liabilities | ||||||||||||
| December 31, 2009 | Beneficial interests | |||||||||||
| (in billions) | in VIE assets (c) | Other (d) | Total liabilities | |||||||||
|
VIE program type
|
||||||||||||
|
Firm-sponsored credit card trusts
(e)
|
$ | 3.9 | $ | — | $ | 3.9 | ||||||
|
Firm-administered multi-seller conduits
|
4.8 | — | 4.8 | |||||||||
|
Mortgage securitization entities
|
— | — | — | |||||||||
|
Other
|
6.5 | 2.2 | 8.7 | |||||||||
|
Total
|
$ | 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 $65.1 billion and $10.4 billion at June 30, 2010, and December 31, 2009, respectively. The maturities of the long-term beneficial interests as of June 30, 2010, were as follows: $22.1 billion under one year, $33.2 billion between one and five years, and $9.8 billion over 5 years. | |
| (d) | Included liabilities classified as other borrowed funds and accounts payable and other liabilities in the Consolidated Balance Sheets. | |
| (e) | Includes the receivables and related liabilities of the WMM Trust. For further discussion, see Note 15 on pages 198-205 respectively, of JPMorgan Chase’s 2009 Annual Report. |
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Table of Contents
Supplemental information on loan securitizations
The Firm securitizes and sells a variety of loans, including residential mortgage, credit card,
automobile, student and commercial (primarily related to real estate) loans, as well as debt
securities. The primary purposes of these securitization transactions are to satisfy investor
demand and to generate liquidity for the Firm.
For a discussion of the accounting treatment under prior accounting rules relating to loan
securitizations, see Note 1 on pages 142-143 and Note 15 on pages 198-205 of JPMorgan Chase’s
2009 Annual Report.
Securitization activity
The following tables provide information related to the Firm’s securitization activities for the
three and six months ended June 30, 2010 and 2009, related to assets held in JPMorgan
Chase-sponsored securitization entities that were not consolidated by the Firm, as sale accounting
was achieved based on the accounting rules in effect at the time of the securitization. For the
three- and six-month periods ended June 30, 2009, there were no 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 new consolidation guidance
related to VIEs and, accordingly, are not included in the securitization activity tables below for
the three and six months ended June 30, 2010 and 2009.
| Three months ended June 30, 2010 | ||||||||||||||||
| Residential mortgage | ||||||||||||||||
| (in millions) | Prime (f) | Subprime | Option ARMs |
Commercial
and other |
||||||||||||
|
Principal securitized
|
$ | — | $ | — | $ | — | $ | 562 | ||||||||
|
Pretax gains
|
— | — | — | — | (g) | |||||||||||
|
All cash flows during the period
(a)
:
|
||||||||||||||||
|
Proceeds from new securitizations
(b)
|
$ | 592 | ||||||||||||||
|
Servicing fees collected
|
$ | 89 | $ | 53 | $ | 118 | 1 | |||||||||
|
Other cash flows received
(c)
|
— | — | — | — | ||||||||||||
|
Purchases of previously transferred financial assets (or the underlying
collateral)
(d)
|
52 | 6 | — | — | ||||||||||||
|
Cash flows received on the interests that continue to be held by the
Firm
(e)
|
73 | 9 | 6 | 30 | ||||||||||||
| Three months ended June 30, 2009 | ||||||||||||||||
| Residential mortgage | ||||||||||||||||
| (in millions) | Prime (f) | Subprime | Option ARMs |
Commercial
and other |
||||||||||||
|
All cash flows during the period
(a)
:
|
||||||||||||||||
|
Servicing fees collected
|
$ | 111 | $ | 41 | $ | 118 | $ | 1 | ||||||||
|
Other cash flows received
(c)
|
2 | 1 | — | — | ||||||||||||
|
Purchases of previously transferred financial
assets (or the underlying
collateral)
(d)
|
35 | — | 10 | — | ||||||||||||
|
Cash flows received on the interests that
continue to be held by the Firm
(e)
|
210 | 8 | 16 | 34 | ||||||||||||
| Six months ended June 30, 2010 | ||||||||||||||||
| Residential mortgage | ||||||||||||||||
| (in millions) | Prime (f) | Subprime | Option ARMs |
Commercial
and other |
||||||||||||
|
Principal securitized
|
$ | — | $ | — | $ | — | $ | 562 | ||||||||
|
Pretax gains
|
— | — | — | — | (g) | |||||||||||
|
All cash flows during the period
(a)
:
|
||||||||||||||||
|
Proceeds from new securitizations
(b)
|
$ | 592 | ||||||||||||||
|
Servicing fees collected
|
$ | 164 | $ | 99 | $ | 235 | 2 | |||||||||
|
Other cash flows received
(c)
|
— | — | — | — | ||||||||||||
|
Purchases of previously transferred financial
assets (or the underlying
collateral)
(d)
|
100 | 6 | — | — | ||||||||||||
|
Cash flows received on the interests that
continue to be held by the Firm
(e)
|
153 | 19 | 12 | 68 | ||||||||||||
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Table of Contents
| Six months ended June 30, 2009 | ||||||||||||||||
| Residential mortgage | ||||||||||||||||
| Commercial | ||||||||||||||||
| (in millions) | Prime (f) | Subprime | Option ARMs | and other | ||||||||||||
|
All cash flows during the period
(a)
:
|
||||||||||||||||
|
Servicing fees collected
|
$ | 232 | $ | 85 | $ | 246 | $ | 8 | ||||||||
|
Other cash flows received
(c)
|
6 | 2 | — | — | ||||||||||||
|
Purchases of previously transferred financial
assets (or the underlying
collateral)
(d)
|
76 | — | 13 | — | ||||||||||||
|
Cash flows received on the interests that
continue to be held by the Firm
(e)
|
364 | 13 | 64 | 158 | ||||||||||||
| (a) | Excludes loan sales for which the Firm did not securitize (including loans sold to Ginnie Mae, Fannie Mae and Freddie Mac). | |
| (b) | Proceeds were received in the form of securities and were classified in level 2 of the fair value measurement hierarchy. A majority of these securities were sold for cash shortly after securitization. | |
| (c) | Includes excess servicing fees and other ancillary fees received. | |
| (d) | Includes cash paid by the Firm to reacquire assets from the off-balance sheet, nonconsolidated entities—for example, servicer clean-up calls. | |
| (e) | Includes cash flows received on retained interests—including, for example, principal repayments and interest payments. | |
| (f) | Includes Alt-A loans and re-securitization transactions. | |
| (g) | As of January 1, 2007, the Firm elected the fair value option for IB warehouse. The carrying value of these loans accounted for at fair value approximated the proceeds received from securitization. |
Loans sold to 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 Ginnie
Mae, Fannie Mae, and Freddie Mac, (the “Agencies”). These loans are sold primarily for the purpose
of securitization by the Agencies, which also provide credit enhancement of the loans through
certain guarantee provisions. The Firm does not consolidate these securitization vehicles as it is
not the primary beneficiary. 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 22 on pages 170-174 of this Form 10-Q.
The Firm generally retains the right to service the mortgage loans in accordance with the
respective servicing guidelines and standards, which is a form of continuing involvement, and
records this right as a servicing asset at the time of sale.
The following table summarizes these loan sale activities.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Carrying value of loans sold
(a)(b)
|
$ | 30,173 | $ | 41,706 | $ | 65,547 | $ | 81,608 | ||||||||
|
Proceeds received from loan sales
(c)
|
29,710 | 40,751 | 64,416 | 79,676 | ||||||||||||
|
Gains on loan sales
|
70 | 29 | 91 | 46 | ||||||||||||
| (a) | Predominantly to the Agencies. | |
| (b) | See Note 16 on pages 164-167 of this Form 10-Q for further information on originated MSRs. | |
| (c) | Predominantly includes securities from the Agencies that are generally sold shortly after receipt. |
JPMorgan Chase’s interest in securitized assets held at fair value
The following table summarizes the Firm’s nonconsolidated securitization interests which are
carried at fair value on the Firm’s Consolidated Balance Sheets at June 30, 2010, and December 31,
2009. The risk ratings are periodically reassessed as information becomes available. As of June 30,
2010, and December 31, 2009, 69% and 76%, respectively, of the Firm’s retained securitization
interests, which are carried at fair value, were risk-rated “A” or better.
161
Table of Contents
| Ratings profile of interests held (b)(c)(d) | ||||||||||||||||||||||||
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Investment- | Noninvestment- | Retained | Investment- | Noninvestment- | Retained | |||||||||||||||||||
| (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 | 0.1 | — | 0.1 | ||||||||||||||||||
|
Commercial and other
|
2.3 | 0.3 | 2.6 | 2.2 | 0.2 | 2.4 | ||||||||||||||||||
|
Total
|
$ | 2.6 | $ | 0.8 | $ | 3.4 | $ | 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 $182 million and $139 million of investments acquired in the secondary market, but predominantly held for investment purposes, as of June 30, 2010, and December 31, 2009, respectively. Of this amount, $147 million and $108 million is classified as investment-grade as of June 30, 2010, and December 31, 2009, respectively. | |
| (d) | Excludes senior and subordinated securities of $259 million and $875 million at June 30, 2010, and December 31, 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. |
The table below outlines the key economic assumptions used to determine the fair value as of
June 30, 2010, and December 31, 2009, of certain of the Firm’s retained interests in
nonconsolidated VIEs, 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 16 on pages 164-167
of this Form 10-Q.
| Residential mortgage | ||||||||||||||||
| June 30, 2010 | Commercial | |||||||||||||||
| (in millions, except rates and where otherwise noted) | Prime (a) | Subprime | Option ARMs | and other | ||||||||||||
|
JPMorgan Chase interests in securitized assets
|
$ | 676 | $ | 26 | $ | 112 | $ | 2,562 | ||||||||
|
Weighted-average life (in years)
|
6.1 | 4.3 | 4.3 | 3.2 | ||||||||||||
|
Weighted-average constant prepayment rate
|
9.2 | % | 3.5 | % | 16.4 | % | — | % | ||||||||
|
|
CPR | CPR | CPR | CPR | ||||||||||||
|
Impact of 10% adverse change
|
$ | (17 | ) | $ | (1 | ) | $ | (2 | ) | $ | — | |||||
|
Impact of 20% adverse change
|
(32 | ) | (1 | ) | (3 | ) | — | |||||||||
|
Weighted-average loss assumption
|
7.0 | % | 30.3 | % | 4.2 | % | 1.8 | % | ||||||||
|
Impact of 10% adverse change
|
$ | (12 | ) | $ | (1 | ) | $ | — | $ | (74 | ) | |||||
|
Impact of 20% adverse change
|
(22 | ) | (2 | ) | — | (168 | ) | |||||||||
|
Weighted-average discount rate
|
12.6 | % | 13.0 | % | 5.9 | % | 15.0 | % | ||||||||
|
Impact of 10% adverse change
|
$ | (28 | ) | $ | (1 | ) | $ | (2 | ) | $ | (73 | ) | ||||
|
Impact of 20% adverse change
|
(57 | ) | (1 | ) | (3 | ) | (133 | ) | ||||||||
| Residential mortgage | ||||||||||||||||
| December 31, 2009 | Commercial | |||||||||||||||
| (in millions, except rates and where otherwise noted) | Prime (a) | Subprime | Option ARMs | and other | ||||||||||||
|
JPMorgan Chase interests in securitized assets
|
$ | 1,143 | $ | 27 | $ | 113 | $ | 2,361 | ||||||||
|
Weighted-average life (in years)
|
8.3 | 4.3 | 5.1 | 3.5 | ||||||||||||
|
Weighted-average constant prepayment rate
|
4.9 | % | 21.8 | % | 15.7 | % | — | % | ||||||||
|
|
CPR | CPR | CPR | CPR | ||||||||||||
|
Impact of 10% adverse change
|
$ | (15 | ) | $ | (2 | ) | $ | — | $ | — | ||||||
|
Impact of 20% adverse change
|
(31 | ) | (3 | ) | (1 | ) | — | |||||||||
|
Weighted-average loss assumption
|
3.2 | % | 2.7 | % | 0.7 | % | 1.4 | % | ||||||||
|
Impact of 10% adverse change
|
$ | (15 | ) | $ | (4 | ) | $ | — | $ | (41 | ) | |||||
|
Impact of 20% adverse change
|
(29 | ) | (7 | ) | — | (100 | ) | |||||||||
|
Weighted-average discount rate
|
11.4 | % | 23.2 | % | 5.4 | % | 12.5 | % | ||||||||
|
Impact of 10% adverse change
|
$ | (41 | ) | $ | (2 | ) | $ | (1 | ) | $ | (72 | ) | ||||
|
Impact of 20% adverse change
|
(82 | ) | (4 | ) | (3 | ) | (139 | ) | ||||||||
| (a) | Includes retained interests in Alt-A loans and re-securitization transactions. |
162
Table of Contents
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.
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 June 30, 2010, and December 31, 2009.
| Credit exposure | Nonperforming loans | Net loan charge-offs (e) | ||||||||||||||||||||||||||||||
| Three months ended | Six months ended | |||||||||||||||||||||||||||||||
| June 30, | Dec. 31, | June 30, | Dec. 31, | June 30, | June 30, | |||||||||||||||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Securitized loans:
(a)
|
||||||||||||||||||||||||||||||||
|
Residential mortgage:
|
||||||||||||||||||||||||||||||||
|
Prime mortgage
(b)(c)
|
$ | 159,991 | $ | 171,547 | $ | 35,008 | $ | 33,838 | $ | 1,696 | $ | 2,395 | $ | 3,385 | $ | 4,591 | ||||||||||||||||
|
Subprime mortgage
(c)
|
41,061 | 47,261 | 17,558 | 19,505 | 951 | 2,044 | 2,116 | 4,278 | ||||||||||||||||||||||||
|
Option ARMs
(c)
|
38,247 | 41,983 | 11,301 | 10,973 | 637 | 474 | 1,226 | 854 | ||||||||||||||||||||||||
|
Commercial and
other
(c)
|
94,479 | 24,799 | 5,158 | 1,244 | 116 | 5 | 143 | 10 | ||||||||||||||||||||||||
|
Total loans
securitized
(d)
|
$ | 333,778 | $ | 285,590 | $ | 69,025 | $ | 65,560 | $ | 3,400 | $ | 4,918 | $ | 6,870 | $ | 9,733 | ||||||||||||||||
| (a) | There were no loans that were 90 days past due and still accruing at June 30, 2010, and December 31, 2009. | |
| (b) | Includes Alt-A loans. | |
| (c) | Total assets held in securitization-related SPEs were $409.7 billion and $435.6 billion at June 30, 2010, and December 31, 2009, respectively. The $333.8 billion and $285.6 billion of loans securitized at June 30, 2010, and December 31, 2009, respectively, excludes: $65.6 billion and $145.0 billion of securitized loans in which the Firm has no continuing involvement, zero and $1.2 billion of nonconsolidated auto and student loan securitizations, and $10.3 billion and $3.8 billion of loan securitizations (including automobile and student loans) consolidated on the Firm’s Consolidated Balance Sheets at June 30, 2010, and December 31, 2009, respectively. | |
| (d) | Includes securitized loans that were previously recorded at fair value and classified as trading assets. | |
| (e) | Net charge-offs represent losses realized upon liquidation of the assets held by off-balance sheet securitization entities. |
163
Table of Contents
NOTE 16 — GOODWILL AND OTHER INTANGIBLE ASSETS
For a discussion of accounting policies related to goodwill and other intangible assets, see Note
17 on pages 214-217 of JPMorgan Chase’s 2009 Annual Report.
Goodwill and other intangible assets consist of the following.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Goodwill
|
$ | 48,320 | $ | 48,357 | ||||
|
Mortgage servicing rights
|
11,853 | 15,531 | ||||||
|
Other intangible assets:
|
||||||||
|
Purchased credit card relationships
|
$ | 1,051 | $ | 1,246 | ||||
|
Other credit
card-related intangibles
|
629 | 691 | ||||||
|
Core deposit intangibles
|
1,041 | 1,207 | ||||||
|
Other intangibles
|
1,457 | 1,477 | ||||||
|
Total other intangible assets
|
$ | 4,178 | $ | 4,621 | ||||
Goodwill
The following table presents goodwill attributed to the business segments.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Investment Bank
|
$ | 4,963 | $ | 4,959 | ||||
|
Retail Financial Services
|
16,816 | 16,831 | ||||||
|
Card Services
|
14,128 | 14,134 | ||||||
|
Commercial Banking
|
2,866 | 2,868 | ||||||
|
Treasury & Securities Services
|
1,665 | 1,667 | ||||||
|
Asset Management
|
7,505 | 7,521 | ||||||
|
Corporate/Private Equity
|
377 | 377 | ||||||
|
Total goodwill
|
$ | 48,320 | $ | 48,357 | ||||
The following table presents changes in the carrying amount of goodwill.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Balance at beginning of period
(a)
|
$ | 48,359 | $ | 48,201 | $ | 48,357 | $ | 48,027 | ||||||||
|
Changes during the period from:
|
||||||||||||||||
|
Business combinations
|
10 | 35 | 19 | 245 | ||||||||||||
|
Dispositions
|
— | — | (19 | ) | — | |||||||||||
|
Other
(b)
|
(49 | ) | 52 | (37 | ) | 16 | ||||||||||
|
Balance at June 30,
(a)
|
$ | 48,320 | $ | 48,288 | $ | 48,320 | $ | 48,288 | ||||||||
| (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 $37 million decrease in goodwill from December 31, 2009, was largely due to foreign
currency translation adjustments related to the Firm’s credit card and merchant businesses, the
divestiture of certain non-strategic businesses, as well as tax-related purchase accounting
adjustments associated with the Bank One merger.
Goodwill was not impaired at June 30, 2010, or December 31, 2009, nor was any goodwill written off
due to impairment during the six month periods ended June 30, 2010 or 2009. During the six months
ended June 30, 2010, in addition to reviewing the current conditions and prior projections for all
of its reporting units, the Firm updated the discounted cash flow valuations of its consumer
lending businesses in RFS and CS, as these businesses continue to have elevated risk for goodwill
impairment due to their exposure to U.S. consumer credit risk and the effects of recent regulatory
and legislative changes. As a result of this review, the Firm concluded that goodwill for these
businesses and the Firm’s other reporting units was not impaired at June 30, 2010.
164
Table of Contents
Mortgage servicing rights
For a further description of the MSR asset, interest rate risk management, and the valuation
methodology of MSRs, see Notes 3 and 17 on pages 151-152 and 214-217, respectively, of JPMorgan
Chase’s 2009 Annual Report.
The following table summarizes MSR activity for the three and six months ended June 30, 2010 and
2009.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions, except where otherwise noted) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Fair value at the beginning of the period
|
$ | 15,531 | $ | 10,634 | $ | 15,531 | $ | 9,403 | ||||||||
|
MSR activity
|
||||||||||||||||
|
Originations of MSRs
|
533 | 984 | 1,222 | 1,978 | ||||||||||||
|
Purchase of MSRs
|
— | — | 14 | 2 | ||||||||||||
|
Disposition of MSRs
|
(5 | ) | (10 | ) | (5 | ) | (10 | ) | ||||||||
|
Total net additions
|
528 | 974 | 1,231 | 1,970 | ||||||||||||
|
Change in valuation due to inputs and assumptions
(a)
|
(3,584 | ) | 3,831 | (3,680 | ) | 5,141 | ||||||||||
|
Other changes in fair value
(b)
|
(622 | ) | (839 | ) | (1,229 | ) | (1,914 | ) | ||||||||
|
Total change in fair value of MSRs
(c)
|
(4,206 | ) | 2,992 | (4,909 | ) | 3,227 | ||||||||||
|
Fair value at June 30
(d)
|
$ | 11,853 | $ | 14,600 | $ | 11,853 | $ | 14,600 | ||||||||
|
Change in unrealized gains/(losses) included in income related
to MSRs held at June 30
|
$ | (3,584 | ) | $ | 3,831 | $ | (3,680 | ) | $ | 5,141 | ||||||
|
Contractual service fees, late fees and other ancillary fees
included in income
|
$ | 1,148 | $ | 1,221 | $ | 2,280 | $ | 2,428 | ||||||||
|
Third-party mortgage loans serviced at June 30 (in billions)
|
$ | 1,064 | $ | 1,126 | $ | 1,064 | $ | 1,126 | ||||||||
| (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 115-118 of this Form 10-Q 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 115-118 of this Form 10-Q include these amounts. | |
| (c) | Includes changes related to commercial real estate of $(2) million for the three months ended June 30, 2010 and 2009, and $(4) million for the six months ended June 30, 2010 and 2009. | |
| (d) | Includes $37 million and $41 million related to commercial real estate at June 30, 2010 and 2009, respectively. |
The following table presents the components of mortgage fees and related income (including the
impact of MSR risk management activities) for the three and six months ended June 30, 2010 and 2009.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
RFS mortgage fees and related income
|
||||||||||||||||
|
Production revenue
(a)
|
$ | 9 | $ | 284 | $ | 10 | $ | 765 | ||||||||
|
Net mortgage servicing revenue
|
||||||||||||||||
|
Operating revenue:
|
||||||||||||||||
|
Loan servicing revenue
|
1,186 | 1,279 | 2,293 | 2,501 | ||||||||||||
|
Other changes in MSR asset fair value
(b)
|
(620 | ) | (837 | ) | (1,225 | ) | (1,910 | ) | ||||||||
|
Total operating revenue
|
566 | 442 | 1,068 | 591 | ||||||||||||
|
Risk management:
|
||||||||||||||||
|
Changes in MSR asset fair value due to inputs or
assumptions in model
(c)
|
(3,584 | ) | 3,831 | (3,680 | ) | 5,141 | ||||||||||
|
Derivative valuation adjustments and other
|
3,895 | (3,750 | ) | 4,143 | (4,057 | ) | ||||||||||
|
Total risk management
|
311 | 81 | 463 | 1,084 | ||||||||||||
|
Total RFS net mortgage servicing revenue
|
877 | 523 | 1,531 | 1,675 | ||||||||||||
|
All other
(d)
|
2 | (23 | ) | 5 | (55 | ) | ||||||||||
|
Mortgage fees and related income
|
$ | 888 | $ | 784 | $ | 1,546 | $ | 2,385 | ||||||||
| (a) | Losses related to the repurchase of previously-sold loans are recorded as a reduction to production revenue. These losses totaled $667 million and $255 million for the three months ended June 30, 2010 and 2009, respectively, and $1.1 billion and $475 million for the six months ended June 30, 2010 and 2009, respectively. | |
| (b) | 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 115-118 of this Form 10-Q include these amounts. | |
| (c) | 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 115-118 of this Form 10-Q include these amounts. | |
| (d) | Primarily represents risk management activities performed by the Chief Investment Office (“CIO”) in the Corporate sector, including $(2) million and $(4) million related to CB MSRs for the three and six months ended June 30, 2010 and 2009, respectively. |
165
Table of Contents
The table below outlines the key economic assumptions used to determine the fair value of the
Firm’s MSRs at June 30, 2010, and December 31, 2009; and it outlines the sensitivities of those
fair values to immediate adverse changes in those assumptions, as defined below.
| (in millions, except rates) | June 30, 2010 | December 31, 2009 | ||||||
|
Weighted-average prepayment speed assumption (CPR)
|
16.47 | % | 11.37 | % | ||||
|
Impact on fair value of 10% adverse change
|
$ | (939 | ) | $ | (896 | ) | ||
|
Impact on fair value of 20% adverse change
|
(1,797 | ) | (1,731 | ) | ||||
|
Weighted-average option adjusted spread
|
4.34 | % | 4.63 | % | ||||
|
Impact on fair value of 100 basis points adverse change
|
$ | (444 | ) | $ | (641 | ) | ||
|
Impact on fair value of 200 basis points adverse change
|
(854 | ) | (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 changes 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
For the six months ended June 30, 2010, purchased credit card relationships, other credit
card-related intangibles, core deposit intangibles and other intangible assets decreased $443
million, primarily reflecting amortization expense.
The components of credit card relationships, core deposits and other intangible assets were as
follows.
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Net | Net | |||||||||||||||||||||||
| Gross | Accumulated | carrying | Gross | Accumulated | carrying | |||||||||||||||||||
| (in millions) | amount | amortization | value | amount | amortization | value | ||||||||||||||||||
|
Purchased credit card relationships
|
$ | 5,782 | $ | 4,731 | $ | 1,051 | $ | 5,783 | $ | 4,537 | $ | 1,246 | ||||||||||||
|
Other credit
card-related intangibles
|
884 | 255 | 629 | 894 | 203 | 691 | ||||||||||||||||||
|
Core deposit intangibles
|
4,280 | 3,239 | 1,041 | 4,280 | 3,073 | 1,207 | ||||||||||||||||||
|
Other intangibles
|
2,226 | 769 | 1,457 | (a) | 2,200 | 723 | 1,477 | |||||||||||||||||
| (a) | The decrease from December 31, 2009 includes the elimination of servicing assets for auto and student loans as a result of the adoption of the new consolidation guidance related to VIEs. |
Amortization expense
The Firm’s intangible assets with finite lives are amortized over their useful lives in a manner
that best reflects the economic benefits of the intangible asset. 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 other intangible assets.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Purchased credit card relationships
|
$ | 97 | $ | 108 | $ | 194 | $ | 224 | ||||||||
|
All other intangibles:
|
||||||||||||||||
|
Other credit
card-related intangibles
|
26 | 23 | 52 | 46 | ||||||||||||
|
Core deposit intangibles
|
83 | 99 | 166 | 198 | ||||||||||||
|
Other intangibles
(a)
|
29 | 35 | 66 | 72 | ||||||||||||
|
Total amortization expense
|
$ | 235 | $ | 265 | $ | 478 | $ | 540 | ||||||||
| (a) | Excludes amortization expense related to servicing assets on securitized automobile loans, which is recorded in lending- and deposit-related fees, of $1 million for the six months ended June 30, 2009. Effective January 1, 2010, the Firm adopted new accounting guidance which resulted in the elimination of those servicing assets. |
166
Table of Contents
Future amortization expense
The following table presents estimated future amortization expense related to credit card
relationships, core deposits and other intangible assets.
| Other credit | ||||||||||||||||||||
| Purchased credit | card related | Core deposit | Other | |||||||||||||||||
| For the year: (in millions) | card relationships | intangibles | intangibles | intangibles | Total | |||||||||||||||
|
2010
(a)
|
$ | 354 | $ | 102 | $ | 329 | $ | 129 | $ | 914 | ||||||||||
|
2011
|
290 | 101 | 284 | 118 | 793 | |||||||||||||||
|
2012
|
251 | 103 | 240 | 114 | 708 | |||||||||||||||
|
2013
|
212 | 103 | 195 | 110 | 620 | |||||||||||||||
|
2014
|
109 | 99 | 103 | 98 | 409 | |||||||||||||||
| (a) | Includes $194 million, $52 million, $166 million and $66 million of amortization expense related to purchased credit card relationships, other credit card-related intangibles, core deposit intangibles and other intangibles, respectively, recognized during the first six months of 2010. |
NOTE 17 — DEPOSITS
For further discussion of deposits, see Note 19 on page 218 in JPMorgan Chase’s 2009 Annual Report.
At June 30, 2010, and December 31, 2009, noninterest-bearing and interest-bearing deposits were as
follows.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
U.S. offices:
|
||||||||
|
Noninterest-bearing
|
$ | 208,064 | $ | 204,003 | ||||
|
Interest-bearing
|
||||||||
|
Demand
(a)
|
15,786 | 15,964 | ||||||
|
Savings
(b)
|
315,486 | 297,949 | ||||||
|
Time (included $2,453 and $1,463 at fair value at June 30, 2010, and
December 31, 2009, respectively)
|
102,492 | 125,191 | ||||||
|
Total interest-bearing deposits
|
433,764 | 439,104 | ||||||
|
Total deposits in U.S. offices
|
641,828 | 643,107 | ||||||
|
Non-U.S. offices:
|
||||||||
|
Noninterest-bearing
|
9,094 | 8,082 | ||||||
|
Interest-bearing
|
||||||||
|
Demand
|
175,636 | 186,885 | ||||||
|
Savings
|
645 | 661 | ||||||
|
Time (included $2,437 and $2,992 at fair value at June 30, 2010, and
December 31, 2009, respectively)
|
60,602 | 99,632 | ||||||
|
Total interest-bearing deposits
|
236,883 | 287,178 | ||||||
|
Total deposits in non-U.S. offices
|
245,977 | 295,260 | ||||||
|
Total deposits
|
$ | 887,805 | $ | 938,367 | ||||
| (a) | Represents Negotiable Order of Withdrawal (“NOW”) accounts. | |
| (b) | Includes Money Market Deposit Accounts (“MMDAs”). |
NOTE 18 — OTHER BORROWED FUNDS
The following table details the components of other borrowed funds.
| (in millions) | June 30, 2010 | December 31, 2009 | ||||||
|
Advances from Federal Home Loan Banks
(a)
|
$ | 14,324 | $ | 27,847 | ||||
|
Other
|
30,107 | 27,893 | ||||||
|
Total other borrowed funds
(b)
|
$ | 44,431 | $ | 55,740 | ||||
| (a) | Maturities of advances from the FHLBs are $10.1 billion, $16 million, $3.2 billion, $20 million, and $12 million in each of the 12-month periods ending June 30, 2011, 2012, 2013, 2014, and 2015, respectively, and $928 million maturing after June 30, 2015. | |
| (b) | Includes other borrowed funds of $7.4 billion and $5.6 billion accounted for at fair value at June 30, 2010, and December 31, 2009, respectively. |
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NOTE 19 — EARNINGS PER SHARE
For a discussion of the computation of basic and diluted earnings per share (“EPS”), see Note 25 on
page 224 of JPMorgan Chase’s 2009 Annual Report. The following table presents the calculation of
basic and diluted EPS for the three and six months ended June 30, 2010 and 2009.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions, except per share amounts) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Basic earnings per share
|
||||||||||||||||
|
Net income
|
$ | 4,795 | $ | 2,721 | $ | 8,121 | $ | 4,862 | ||||||||
|
Less: Preferred stock dividends
|
163 | 473 | 325 | 1,002 | ||||||||||||
|
Less: Accelerated amortization from
redemption of preferred stock issued
to the U.S. Treasury
(a)
|
— | 1,112 | — | 1,112 | ||||||||||||
|
Net income applicable to common equity
|
4,632 | 1,136 | 7,796 | 2,748 | ||||||||||||
|
Less: Dividends and undistributed
earnings allocated to participating
securities
|
269 | 64 | 461 | 157 | ||||||||||||
|
Net income applicable to common
stockholders
|
$ | 4,363 | $ | 1,072 | $ | 7,335 | $ | 2,591 | ||||||||
|
Total weighted-average basic shares
outstanding
|
3,983.5 | 3,811.5 | 3,977.0 | 3,783.6 | ||||||||||||
|
Net income per share
(a)
|
$ | 1.10 | $ | 0.28 | $ | 1.84 | $ | 0.68 | ||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions, except per share amounts) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Diluted earnings per share
|
||||||||||||||||
|
Net income applicable to common stockholders
|
$ | 4,363 | $ | 1,072 | $ | 7,335 | $ | 2,591 | ||||||||
|
Total weighted-average basic shares outstanding
|
3,983.5 | 3,811.5 | 3,977.0 | 3,783.6 | ||||||||||||
|
Add: Employee stock options and SARs
(b)
|
22.1 | 12.6 | 23.2 | 7.8 | ||||||||||||
|
Total weighted-average diluted shares
outstanding
(c)
|
4,005.6 | 3,824.1 | 4,000.2 | 3,791.4 | ||||||||||||
|
Net income per share
(a)
|
$ | 1.09 | $ | 0.28 | $ | 1.83 | $ | 0.68 | ||||||||
| (a) | The calculation of basic and diluted EPS for the three and six months ended June 30, 2009, includes a one-time noncash reduction of $1.1 billion, or $0.27 and $0.28 per share, respectively, resulting from the redemption of the Series K Preferred Stock issued to the U.S. Treasury. | |
| (b) | Excluded from the computation of diluted EPS (due to the antidilutive effect) were options issued under employee benefit plans and warrants originally issued under the U.S. Treasury’s Capital Purchase Program to purchase shares of the Firm’s common stock aggregating 224 million and 315 million shares for the three months ended June 30, 2010 and 2009, respectively, and 232 million and 339 million shares for the six months ended June 30, 2010 and 2009, respectively. | |
| (c) | 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. |
NOTE 20 — ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Accumulated other comprehensive income/(loss) includes the after-tax change in unrealized gains and
losses on AFS securities, foreign currency translation adjustments (including the impact of related
derivatives), cash flow hedging activities and net loss and prior service cost/(credit) related to
the Firm’s defined benefit pension and OPEB plans.
| Net loss and prior | ||||||||||||||||||||
| service costs/(credit) | Accumulated | |||||||||||||||||||
| Six months ended | Unrealized | Translation | of defined benefit | other | ||||||||||||||||
| June 30, 2010 | gains/(losses) on | adjustments, | pension and | comprehensive | ||||||||||||||||
| (in millions) | AFS securities (b) | net of hedges | Cash flow hedges | OPEB plans | income/(loss) | |||||||||||||||
|
Balance at January 1, 2010
|
$ | 2,032 | (c) | $ | (16 | ) | $ | 181 | $ | (2,288 | ) | $ | (91 | ) | ||||||
|
Cumulative effect of
changes in accounting
principles
(a)
|
(129 | ) | — | — | — | (129 | ) | |||||||||||||
|
Net change
|
2,339 | (d) | (25) | (e) | 165 | (f) | 145 | (g) | 2,624 | |||||||||||
|
Balance at June 30, 2010
|
$ | 4,242 | (c) | $ | (41 | ) | $ | 346 | $ | (2,143 | ) | $ | 2,404 | |||||||
168
Table of Contents
| Net loss and prior | ||||||||||||||||||||
| service costs/(credit) | Accumulated | |||||||||||||||||||
| Six months ended | Unrealized | Translation | of defined benefit | other | ||||||||||||||||
| June 30, 2009 | gains/(losses) on | adjustments, | pension and | comprehensive | ||||||||||||||||
| (in millions) | AFS securities (b) | net of hedges | Cash flow hedges | OPEB plans | income/(loss) | |||||||||||||||
|
Balance at January 1, 2009
|
$ | (2,101 | ) | $ | (598 | ) | $ | (202 | ) | $ | (2,786 | ) | $ | (5,687 | ) | |||||
|
Net change
|
1,576 | (d) | 491 | (e) | 95 | (f) | 87 | (g) | 2,249 | |||||||||||
|
Balance at June 30, 2009
|
$ | (525 | ) | $ | (107 | ) | $ | (107 | ) | $ | (2,699 | ) | $ | (3,438 | ) | |||||
| (a) | Reflects the effect of adoption of new consolidation guidance related to VIEs. The decrease in AOCI is 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 15 on pages 151-163 of this Form 10-Q. | |
| (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) | Includes after-tax unrealized losses of $(126) million and $(226) million not related to credit on debt securities for which credit losses have been recognized in income at June 30, 2010, and December 31, 2009, respectively. | |
| (d) | The net change for the six months ended June 30, 2010, was due primarily to the narrowing of spreads on mortgage-backed securities and CLOs partially offset by declines in non-U.S. government debt and realization of gains due to portfolio repositioning. The net change for the six months ended June 30, 2009, was due primarily to the narrowing of spreads on U.S. government agency mortgage-backed securities and credit card ABS positions as a result of improvement in the credit environment. | |
| (e) | Includes $(489) million and $509 million at June 30, 2010 and 2009, respectively, of after-tax gains/(losses) on foreign currency translation from operations for which the functional currency is other than the U.S. dollar, partially offset by $464 million and $(18) million, respectively, of after-tax gains/(losses) on hedges. The Firm may not hedge its entire exposure to foreign currency translation on net investments in foreign operations. | |
| (f) | The net change for the six months ended June 30, 2010, included $6 million of after-tax gains recognized in income, and $171 million of after-tax gains, representing the net change in derivative fair value that was reported in comprehensive income. The net change for the six months ended June 30, 2009, included $86 million of after-tax gains recognized in income and $181 million of after-tax gains, representing the net change in derivative fair value that was reported in comprehensive income. | |
| (g) | The net changes for the six months ended June 30, 2010 and 2009, were primarily due to after-tax adjustments based on the final year-end actuarial valuations for the U.S. and non-U.S. defined benefit pension and OPEB plans (for 2009 and 2008, respectively); and the amortization of net loss and prior service credit into net periodic benefit cost. The net change for 2009 also included an offset for a change in tax rates. |
NOTE 21 — COMMITMENTS AND CONTINGENCIES
For a discussion of the Firm’s commitments and contingencies, see Note 30 on page 230 of JPMorgan
Chase’s 2009 Annual Report.
Litigation reserve
The Firm maintains litigation reserves for certain of its outstanding litigation. At June 30, 2010,
the Firm and its subsidiaries were named as a defendant or were otherwise involved in several
thousand legal proceedings, investigations and litigations in various jurisdictions around the
world. The Firm’s material legal proceedings are described in Item 1: Legal Proceedings on pages
188-196 of this Form 10-Q (the “Legal Proceedings section”), to which reference is hereby made.
The Firm has established reserves for several hundred of its cases. The Firm accrues for a
litigation-related liability when it is probable that such liability has been incurred and the
amount of the loss can be reasonably estimated. The Firm evaluates its litigations, proceedings and
investigations 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 three and six months ended June 30, 2010, the Firm incurred
$792 million and $3.7 billion, respectively, of litigation expense. There is no assurance that the
Firm’s litigation reserves will not need to be adjusted in the future.
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Table of Contents
The Firm’s legal proceedings range from cases involving a single plaintiff to class action lawsuits
with classes involving thousands of plaintiffs. These cases involve each of the various lines of
business of the Firm and a wide variety of claims (including common law tort and contract claims
and statutory antitrust, securities and consumer protection claims), some of which are at
preliminary stages of adjudication and/or present novel factual claims or legal theories. While
some cases pending against the Firm specify the damages claimed by the plaintiff, many seek an
indeterminate amount of damages or are at very early stages; and even where damages are specified
by the plaintiff, such claimed amount may not correlate to reasonably possible losses or those that
might be judicially determined to be payable by the Firm.
The Firm does not believe that an aggregate range of reasonably possible losses (defined by the
relevant accounting literature to include all potential losses other than those deemed “remote”)
can be determined for asserted and probable unasserted claims as of June 30, 2010. This would
require the Firm to make assessments regarding claims, or portion of claims, where actual damages
have not been specified by the plaintiffs, or to assess novel claims or claims that are at
preliminary stages of adjudication . For those legal matters where damages have been specified by
the plaintiff, such claimed damages may, in some instances, provide the upper end of the
range of reasonably possible losses as previously defined. Accordingly, to assist the reader’s
understanding of the potential magnitude of the matters at issue, the Firm has included in its
current description of the status of each matter set forth in the Legal Proceedings section, for
each particular matter where the information is available, the amount of damages claimed or
publicly available information that pertains to the damages claimed where not so specified.
The Firm believes it has meritorious defenses to the claims asserted against it in its
currently outstanding litigations, and it intends to defend itself vigorously in all its cases.
Based upon its current knowledge, after consultation with counsel and after taking into
consideration its current litigation reserves, the Firm believes that the legal actions,
proceedings and investigations currently pending against it should not have a material adverse
effect on the Firm’s consolidated financial condition. However, in light of the uncertainties
involved in such proceedings, actions and investigations, there is no assurance that 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.
NOTE
22 — OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS, GUARANTEES AND OTHER COMMITMENTS
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 maximum possible credit risk should the counterparty draw upon the commitment or the
Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently
fail to perform according to the terms of the contract. These commitments and guarantees often
expire without being drawn, and even higher proportions expire without a default. 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 a
discussion of off-balance sheet
lending-related financial instruments and guarantees, and the Firm’s related accounting policies,
see Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual Report.
To provide for the risk of loss inherent in wholesale-related contracts, an allowance for credit
losses on lending-related commitments is maintained. See Note 14 on
pages 150-151 of this Form
10-Q 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 June 30, 2010, and
December 31, 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 these lines of credit by providing the borrower prior
notice or, in some cases, without notice as permitted by law.
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Off—balance sheet lending-related financial instruments, guarantees and other commitments
| Contractual amount | Carrying value (i) | |||||||||||||||
| June 30, | December 31, | June 30, | December 31, | |||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Lending-related
|
||||||||||||||||
|
Consumer:
|
||||||||||||||||
|
Home equity — senior lien
|
$ | 18,320 | $ | 19,246 | $ | — | $ | — | ||||||||
|
Home equity — junior lien
|
33,985 | 37,231 | — | — | ||||||||||||
|
Prime mortgage
|
958 | 1,654 | — | — | ||||||||||||
|
Subprime mortgage
|
— | — | — | — | ||||||||||||
|
Option ARMs
|
— | — | — | — | ||||||||||||
|
Auto loans
|
6,029 | 5,467 | 5 | 7 | ||||||||||||
|
Credit card
|
550,442 | 569,113 | — | — | ||||||||||||
|
All other loans
|
10,207 | 11,229 | 5 | 5 | ||||||||||||
|
Total consumer
|
619,941 | 643,940 | 10 | 12 | ||||||||||||
|
Wholesale:
|
||||||||||||||||
|
Other unfunded commitments to extend credit
(a)(b)
|
188,093 | 192,145 | 382 | 356 | ||||||||||||
|
Asset purchase agreements
(b)
|
— | 22,685 | — | 126 | ||||||||||||
|
Standby letters of credit and other financial guarantees
(a)(c)(d)
|
91,167 | 91,485 | 879 | 919 | ||||||||||||
|
Unused advised lines of credit
|
38,916 | 35,673 | — | — | ||||||||||||
|
Other letters of credit
(a)(d)
|
6,376 | 5,167 | 1 | 1 | ||||||||||||
|
Total wholesale
|
324,552 | 347,155 | 1,262 | 1,402 | ||||||||||||
|
Total lending-related
|
$ | 944,493 | $ | 991,095 | $ | 1,272 | $ | 1,414 | ||||||||
|
Other guarantees and commitments
|
||||||||||||||||
|
Securities lending guarantees
(e)
|
$ | 161,514 | $ | 170,777 | NA | NA | ||||||||||
|
Derivatives qualifying as guarantees
(f)
|
79,259 | 87,191 | $ | 786 | $ | 762 | ||||||||||
|
Equity investment commitments
(g)
|
2,207 | 2,374 | — | — | ||||||||||||
|
Building purchase commitment
|
670 | 670 | — | — | ||||||||||||
|
Loan sale and securitization-related indemnifications:
|
||||||||||||||||
|
Repurchase liability
(h)
|
NA | NA | 2,332 | 1,705 | ||||||||||||
|
Loans sold with recourse
|
11,328 | 13,544 | 148 | 271 | ||||||||||||
| (a) | At June 30, 2010, and December 31, 2009, represents the contractual amount net of risk participations totaling $609 million and $643 million, respectively, for other unfunded commitments to extend credit; $23.4 billion and $24.6 billion, respectively, for standby letters of credit and other financial guarantees; and $828 million 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 new consolidation 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) | At June 30, 2010, and December 31, 2009, includes unissued standby letters of credit commitments of $39.4 billion and $38.4 billion, respectively. | |
| (d) | At June 30, 2010, and December 31, 2009, JPMorgan Chase held collateral relating to $34.7 billion and $31.5 billion, respectively, of standby letters of credit; and $2.7 billion and $1.3 billion, respectively, of other letters of credit. | |
| (e) | At June 30, 2010, and December 31, 2009, collateral held by the Firm in support of securities lending indemnification agreements totaled $164.5 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. | |
| (f) | Represents notional amounts of derivatives qualifying as guarantees. The carrying value at June 30, 2010, and December 31, 2009, reflects derivative payables of $1.0 billion and $981 million, respectively, less derivative receivables of $232 million and $219 million, respectively. | |
| (g) | At June 30, 2010, and December 31, 2009, includes unfunded commitments to third-party private equity funds of $1.2 billion and $1.5 billion respectively. Also includes unfunded commitments for other equity investments of $981 million and $897 million, respectively. These commitments include $1.2 billion and $1.5 billion, respectively, related to investments that are generally fair valued at net asset value as discussed in Note 3 on pages 110-124 of this Form 10-Q. | |
| (h) | 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 173-174 of this Note. | |
| (i) | For lending-related products, the carrying value represents the allowance for lending-related commitments and 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. |
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Table of Contents
Other unfunded commitments to extend credit
Other unfunded commitments to extend credit include commitments to U.S. states and municipalities,
hospitals and other not-for-profit entities to provide funding for periodic tenders of their
variable-rate demand bond obligations or commercial paper. Performance by the Firm is required in
the event that the variable-rate demand bonds or commercial paper cannot be remarketed to new
investors. The amount of commitments related to variable-rate demand bonds and commercial paper of
U.S. states and municipalities, hospitals and not-for-profit entities was $19.1 billion and $23.3
billion at June 30, 2010, and December 31, 2009, respectively. Similar commitments exist to extend
credit in the form of liquidity facility agreements with nonconsolidated municipal bond VIEs. For
further information, see Note 15 on pages 151-163 of this Form 10-Q.
Also included in other unfunded commitments to extend credit are commitments to investment- and
noninvestment-grade counterparties in connection with leveraged acquisitions. These commitments are
dependent on whether the acquisition by the borrower is successful, tend to be short-term in nature
and, in most cases, are subject to certain conditions based on the borrower’s financial condition
or other factors. The amounts of commitments related to leveraged acquisitions were $2.9 billion at
both June 30, 2010, and December 31, 2009. For further information, see Note 3 and Note 4 on pages
110-124 and 125-127 respectively, of this Form 10-Q.
Guarantees
The Firm
considers the following off-balance sheet lending-related arrangements to be guarantees
under U.S. GAAP: standby letters of credit and financial guarantees, securities lending
indemnifications, certain indemnification agreements included within third-party contractual
arrangements and certain derivative contracts. For a further
discussion of the off-balance sheet
lending-related arrangements the Firm considers to be guarantees, and the related accounting
policies, see Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual Report. The amount of the
liability related to guarantees recorded at June 30, 2010, and December 31, 2009, excluding the
allowance for credit losses on lending-related commitments and derivative contracts discussed
below, was $360 million and $475 million, respectively.
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
$880 million and $920 million at June 30, 2010, and December 31, 2009, respectively, which was
classified in accounts payable and other liabilities on the Consolidated Balance Sheets; these
carrying values include $520 million and $553 million, respectively, for the allowance for
lending-related commitments, and $360 million and $367 million, respectively, for the guarantee
liability.
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Table of Contents
The following table summarizes the types of facilities under which standby letters of credit and
other letters of credit arrangements are outstanding by the ratings profiles of the Firm’s
customers, as of June 30, 2010, and December 31, 2009.
Standby letters of credit and other financial guarantees and other letters of credit
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Standby letters of | Standby letters of | |||||||||||||||
| credit and other | Other letters | credit and other | Other letters | |||||||||||||
| (in millions) | financial guarantees | of credit | financial guarantees | of credit | ||||||||||||
|
Investment-grade
(a)
|
$ | 66,431 | $ | 4,942 | $ | 66,786 | $ | 3,861 | ||||||||
|
Noninvestment-grade
(a)
|
24,736 | 1,434 | 24,699 | 1,306 | ||||||||||||
|
Total contractual amount
(b)
|
$ | 91,167 | (c) | $ | 6,376 | $ | 91,485 | (c) | $ | 5,167 | ||||||
|
Allowance for lending-related commitments
|
$ | 519 | $ | 1 | $ | 552 | $ | 1 | ||||||||
|
Commitments with collateral
|
34,696 | 2,698 | 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 June 30, 2010, and December 31, 2009, represents contractual amount net of risk participations totaling $23.4 billion and $24.6 billion, respectively, for standby letters of credit and other financial guarantees; and $828 million 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 June 30, 2010 , and December 31, 2009, includes unissued standby letters of credit commitments of $39.4 billion and $38.4 billion , respectively. |
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. The total notional value of the
derivatives that the Firm deems to be guarantees was $79.3 billion and $87.2 billion at June 30,
2010, and December 31, 2009, respectively. The notional value generally represents the Firm’s
maximum exposure to derivatives qualifying as guarantees, although exposure to certain stable value
derivatives is contractually limited to a substantially lower percentage of the notional value. The
fair value 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 $1.0 billion and $981 million and derivative receivables of $232 million and $219
million at June 30, 2010, and December 31, 2009, respectively. 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 5 on pages 128-136 of this Form 10-Q, and Note 5 on
pages 167-175 of JPMorgan Chase’s 2009 Annual Report.
Loan sale- and securitization-related indemnifications
Indemnifications for breaches of representations and warranties
As part of the Firm’s loan sale and securitization activities, the Firm generally makes
representations and warranties in its loan sale and securitization agreements that the loans sold
meet certain requirements. These agreements may require the Firm (including in its roles as a
servicer) to repurchase the loan, purchase the property if the loan has already been foreclosed
upon, and/or reimburse the purchaser for losses if the foreclosed property has been liquidated
(commonly referred to as a “make-whole payment”) if the Firm is deemed to have breached such
representations or warranties. Generally, the maximum amount of future payments the Firm would be
required to make for breaches under 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. At June 30, 2010, and December 31, 2009, the Firm had
recorded repurchase liabilities of $2.3 billion and $1.7 billion, respectively, which are reported
in accounts payable and other liabilities net of probable recoveries from third parties. The
Firm does not believe a range of reasonably possible loss (as defined by the relevant accounting
literature) related to its repurchase liability can be determined for asserted and probable
unasserted claims as of June 30, 2010.
For
additional information, see Note 13 and Note 15 on pages 145-150 and
151-163, respectively,
of this Form 10-Q, and Note 13 and Note 15 on pages 192-196 and 198-205, respectively, of
JPMorgan Chase’s 2009 Annual Report.
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Table of Contents
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 June 30, 2010, and December 31,
2009, the unpaid principal balance of loans sold with recourse totaled $11.3 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 $148 million and $271 million at June 30, 2010, and December 31, 2009, respectively.
Building purchase commitment
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. The Firm subsequently served notice to the lessor
indicating the Firm will purchase the property on the expiration date of the lease, November 1,
2010. Accordingly, the residual value guarantee has been reclassified as a building purchase
commitment.
NOTE 23 — BUSINESS SEGMENTS
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 the footnotes to the table below. For a further discussion
concerning JPMorgan Chase’s business segments, see Business Segment Results on page 20 of this Form
10-Q, and pages 53-54 and Note 34 on pages 237-239 of JPMorgan Chase’s 2009 Annual Report.
Segment results
The following tables provide a summary of the Firm’s segment results for the three and six months
ended June 30, 2010, and 2009, on a managed basis. Prior to the January 1, 2010, adoption of the
new consolidation 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).
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Table of Contents
Effective January 1, 2010, the Firm enhanced its line of business equity framework to better align
equity assigned to each line of business with 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.
Segment results and reconciliation
(a)
| Three months ended June 30, 2010 | Investment | Retail Financial | Card | Commercial | ||||||||||||
| (in millions, except ratios) | Bank | Services | Services (e) | Banking | ||||||||||||
|
Noninterest revenue
|
$ | 4,432 | $ | 2,992 | $ | 861 | $ | 546 | ||||||||
|
Net interest income
|
1,900 | 4,817 | 3,356 | 940 | ||||||||||||
|
Total net revenue
|
6,332 | 7,809 | 4,217 | 1,486 | ||||||||||||
|
Provision for credit losses
|
(325 | ) | 1,715 | 2,221 | (235 | ) | ||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
— | — | — | — | ||||||||||||
|
Noninterest expense
(c)
|
4,522 | 4,281 | 1,436 | 542 | ||||||||||||
|
Income/(loss) before income tax expense/(benefit)
|
2,135 | 1,813 | 560 | 1,179 | ||||||||||||
|
Income tax expense/(benefit)
|
754 | 771 | 217 | 486 | ||||||||||||
|
Net income/(loss)
|
$ | 1,381 | $ | 1,042 | $ | 343 | $ | 693 | ||||||||
|
Average common equity
(d)
|
$ | 40,000 | $ | 28,000 | $ | 15,000 | $ | 8,000 | ||||||||
|
Average assets
|
710,005 | 381,906 | 146,816 | 133,309 | ||||||||||||
|
Return on average common equity
|
14 | % | 15 | % | 9 | % | 35 | % | ||||||||
|
Overhead ratio
|
71 | 55 | 34 | 36 | ||||||||||||
| Three months ended June 30, 2010 | Treasury & | Asset | Corporate/ | Reconciling | ||||||||||||||||
| (in millions, except ratios) | Securities Services | Management | Private Equity | Items (e)(f) | Total | |||||||||||||||
|
Noninterest revenue
|
$ | 1,227 | $ | 1,699 | $ | 1,103 | $ | (446 | ) | $ | 12,414 | |||||||||
|
Net interest income
|
654 | 369 | 747 | (96 | ) | 12,687 | ||||||||||||||
|
Total net revenue
|
1,881 | 2,068 | 1,850 | (542 | ) | 25,101 | ||||||||||||||
|
Provision for credit losses
|
(16 | ) | 5 | (2 | ) | — | 3,363 | |||||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
(30 | ) | — | — | 30 | — | ||||||||||||||
|
Noninterest expense
(c)
|
1,399 | 1,405 | 1,046 | — | 14,631 | |||||||||||||||
|
Income/(loss) before income tax
expense/(benefit)
|
468 | 658 | 806 | (512 | ) | 7,107 | ||||||||||||||
|
Income tax expense/(benefit)
|
176 | 267 | 153 | (512 | ) | 2,312 | ||||||||||||||
|
Net income
|
$ | 292 | $ | 391 | $ | 653 | $ | — | $ | 4,795 | ||||||||||
|
Average common equity
(d)
|
$ | 6,500 | $ | 6,500 | $ | 55,069 | $ | — | $ | 159,069 | ||||||||||
|
Average assets
|
42,868 | 63,426 | 565,317 | NA | 2,043,647 | |||||||||||||||
|
Return on average common equity
|
18 | % | 24 | % | NM | NM | 12 | % | ||||||||||||
|
Overhead ratio
|
74 | 68 | NM | NM | 58 | |||||||||||||||
| Three months ended June 30, 2009 | Investment | Retail Financial | Card | Commercial | ||||||||||||
| (in millions, except ratios) | Bank | Services | Services (e) | Banking | ||||||||||||
|
Noninterest revenue
|
$ | 4,856 | $ | 2,940 | $ | 557 | $ | 458 | ||||||||
|
Net interest income
|
2,445 | 5,030 | 4,311 | 995 | ||||||||||||
|
Total net revenue
|
7,301 | 7,970 | 4,868 | 1,453 | ||||||||||||
|
Provision for credit losses
|
871 | 3,846 | 4,603 | 312 | ||||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
— | — | — | — | ||||||||||||
|
Noninterest expense
(c)
|
4,067 | 4,079 | 1,333 | 535 | ||||||||||||
|
Income/(loss) before income tax expense/(benefit)
|
2,363 | 45 | (1,068 | ) | 606 | |||||||||||
|
Income tax expense/(benefit)
|
892 | 30 | (396 | ) | 238 | |||||||||||
|
Net income/(loss)
|
$ | 1,471 | $ | 15 | $ | (672 | ) | $ | 368 | |||||||
|
Average common equity
(d)
|
$ | 33,000 | $ | 25,000 | $ | 15,000 | $ | 8,000 | ||||||||
|
Average assets
|
710,825 | 410,228 | 193,310 | 137,283 | ||||||||||||
|
Return on average common equity
|
18 | % | — | % | (18 | )% | 18 | % | ||||||||
|
Overhead ratio
|
56 | 51 | 27 | 37 | ||||||||||||
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Table of Contents
| Three months ended June 30, 2009 | Treasury & | Asset | Corporate/ | Reconciling | ||||||||||||||||
| (in millions, except ratios) | Securities Services | Management | Private Equity | Items (e)(f) | Total | |||||||||||||||
|
Noninterest revenue
|
$ | 1,245 | $ | 1,568 | $ | 1,400 | $ | (71 | ) | $ | 12,953 | |||||||||
|
Net interest income/(loss)
|
655 | 414 | 865 | (2,045 | ) | 12,670 | ||||||||||||||
|
Total net revenue
|
1,900 | 1,982 | 2,265 | (2,116 | ) | 25,623 | ||||||||||||||
|
Provision for credit losses
|
(5 | ) | 59 | 9 | (1,664 | ) | 8,031 | |||||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
(30 | ) | — | — | 30 | — | ||||||||||||||
|
Noninterest expense
(c)
|
1,288 | 1,354 | 864 | — | 13,520 | |||||||||||||||
|
Income/(loss) before income tax
expense/(benefit)
|
587 | 569 | 1,392 | (422 | ) | 4,072 | ||||||||||||||
|
Income tax expense/(benefit)
|
208 | 217 | 584 | (422 | ) | 1,351 | ||||||||||||||
|
Net income/(loss)
|
$ | 379 | $ | 352 | $ | 808 | $ | — | $ | 2,721 | ||||||||||
|
Average common equity
(d)
|
$ | 5,000 | $ | 7,000 | $ | 47,865 | $ | — | $ | 140,865 | ||||||||||
|
Average assets
|
35,520 | 59,334 | 573,460 | (81,588 | ) | 2,038,372 | ||||||||||||||
|
Return on average common equity
|
30 | % | 20 | % | NM | NM | 3 | % | ||||||||||||
|
Overhead ratio
|
68 | 68 | NM | NM | 53 | |||||||||||||||
| Six months ended June 30, 2010 | Investment | Retail Financial | Card | Commercial | ||||||||||||
| (in millions, except ratios) | Bank | Services | Services (e) | Banking | ||||||||||||
|
Noninterest revenue
|
$ | 10,623 | $ | 5,744 | $ | 1,619 | $ | 1,046 | ||||||||
|
Net interest income
|
4,028 | 9,841 | 7,045 | 1,856 | ||||||||||||
|
Total net revenue
|
14,651 | 15,585 | 8,664 | 2,902 | ||||||||||||
|
Provision for credit losses
|
(787 | ) | 5,448 | 5,733 | (21 | ) | ||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
— | — | — | — | ||||||||||||
|
Noninterest expense
(c)
|
9,360 | 8,523 | 2,838 | 1,081 | ||||||||||||
|
Income/(loss)
before income tax expense/(benefit)
|
6,078 | 1,614 | 93 | 1,842 | ||||||||||||
|
Income tax expense/(benefit)
|
2,226 | 703 | 53 | 759 | ||||||||||||
|
Net income/(loss)
|
$ | 3,852 | $ | 911 | $ | 40 | $ | 1,083 | ||||||||
|
Average common equity
(d)
|
$ | 40,000 | $ | 28,000 | $ | 15,000 | $ | 8,000 | ||||||||
|
Average assets
|
693,157 | 387,854 | 151,864 | 133,162 | ||||||||||||
|
Return on average common equity
|
19 | % | 7 | % | 1 | % | 27 | % | ||||||||
|
Overhead ratio
|
64 | 55 | 33 | 37 | ||||||||||||
| Six months ended June 30, 2010 | Treasury & | Asset | Corporate/ | Reconciling | ||||||||||||||||
| (in millions, except ratios) | Securities Services | Management | Private Equity | Items (e)(f) | Total | |||||||||||||||
|
Noninterest revenue
|
$ | 2,373 | $ | 3,473 | $ | 2,384 | $ | (887 | ) | $ | 26,375 | |||||||||
|
Net interest income
|
1,264 | 726 | 1,823 | (186 | ) | 26,397 | ||||||||||||||
|
Total net revenue
|
3,637 | 4,199 | 4,207 | (1,073 | ) | 52,772 | ||||||||||||||
|
Provision for credit losses
|
(55 | ) | 40 | 15 | — | 10,373 | ||||||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
(60 | ) | — | — | 60 | — | ||||||||||||||
|
Noninterest expense
(c)
|
2,724 | 2,847 | 3,382 | — | 30,755 | |||||||||||||||
|
Income/(loss)
before income tax expense/(benefit)
|
908 | 1,312 | 810 | (1,013 | ) | 11,644 | ||||||||||||||
|
Income tax expense/(benefit)
|
337 | 529 | (71 | ) | (1,013 | ) | 3,523 | |||||||||||||
|
Net income/(loss)
|
$ | 571 | $ | 783 | $ | 881 | $ | — | $ | 8,121 | ||||||||||
|
Average common equity
(d)
|
$ | 6,500 | $ | 6,500 | $ | 53,590 | $ | — | $ | 157,590 | ||||||||||
|
Average assets
|
40,583 | 62,978 | 571,579 | NA | 2,041,177 | |||||||||||||||
|
Return on average common equity
|
18 | % | 24 | % | NM | NM | 10 | % | ||||||||||||
|
Overhead ratio
|
75 | 68 | NM | NM | 58 | |||||||||||||||
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| Six months ended June 30, 2009 | Investment | Retail Financial | Card | Commercial | ||||||||||||
| (in millions, except ratios) | Bank | Services | Services (e) | Banking | ||||||||||||
|
Noninterest revenue
|
$ | 10,525 | $ | 6,537 | $ | 1,204 | $ | 880 | ||||||||
|
Net interest income
|
5,147 | 10,268 | 8,793 | 1,975 | ||||||||||||
|
Total net revenue
|
15,672 | 16,805 | 9,997 | 2,855 | ||||||||||||
|
Provision for credit losses
|
2,081 | 7,723 | 9,256 | 605 | ||||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
— | — | — | — | ||||||||||||
|
Noninterest expense
(c)
|
8,841 | 8,250 | 2,679 | 1,088 | ||||||||||||
|
Income/(loss)
before income tax expense/(benefit)
|
4,750 | 832 | (1,938 | ) | 1,162 | |||||||||||
|
Income tax expense/(benefit)
|
1,673 | 343 | (719 | ) | 456 | |||||||||||
|
Net income/(loss)
|
$ | 3,077 | $ | 489 | $ | (1,219 | ) | $ | 706 | |||||||
|
Average common equity
(d)
|
$ | 33,000 | $ | 25,000 | $ | 15,000 | $ | 8,000 | ||||||||
|
Average assets
|
721,934 | 416,813 | 197,234 | 140,771 | ||||||||||||
|
Return on average common equity
|
19 | % | 4 | % | (16 | )% | 18 | % | ||||||||
|
Overhead ratio
|
56 | 49 | 27 | 38 | ||||||||||||
| Six months ended June 30, 2009 | Treasury & | Asset | Corporate/ | Reconciling | ||||||||||||||||
| (in millions, except ratios) | Securities Services | Management | Private Equity | Items (e)(f) | Total | |||||||||||||||
|
Noninterest revenue
|
$ | 2,393 | $ | 2,868 | $ | 102 | $ | 102 | $ | 24,611 | ||||||||||
|
Net interest income
|
1,328 | 817 | 1,854 | (4,145 | ) | 26,037 | ||||||||||||||
|
Total net revenue
|
3,721 | 3,685 | 1,956 | (4,043 | ) | 50,648 | ||||||||||||||
|
Provision for credit losses
|
(11 | ) | 92 | 9 | (3,128 | ) | 16,627 | |||||||||||||
|
Credit reimbursement (to)/from TSS
(b)
|
(60 | ) | — | — | 60 | — | ||||||||||||||
|
Noninterest expense
(c)
|
2,607 | 2,652 | 776 | — | 26,893 | |||||||||||||||
|
Income/(loss) before income tax expense/(benefit)
|
1,065 | 941 | 1,171 | (855 | ) | 7,128 | ||||||||||||||
|
Income tax expense/(benefit)
|
378 | 365 | 625 | (855 | ) | 2,266 | ||||||||||||||
|
Net income/(loss)
|
$ | 687 | $ | 576 | $ | 546 | $ | — | $ | 4,862 | ||||||||||
|
Average common equity
(d)
|
$ | 5,000 | $ | 7,000 | $ | 45,691 | $ | — | $ | 138,691 | ||||||||||
|
Average assets
|
37,092 | 58,783 | 562,221 | (82,182 | ) | 2,052,666 | ||||||||||||||
|
Return on average common equity
|
28 | % | 17 | % | NM | NM | 4 | % | ||||||||||||
|
Overhead ratio
|
70 | 72 | NM | NM | 53 | |||||||||||||||
| (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) | In the second quarter of 2009, IB began reporting a credit reimbursement from TSS as a component of total net revenue, whereas TSS reports the credit reimbursement as a separate line item on its income statement (not part of net revenue). Reconciling items include an adjustment to offset IB’s inclusion of the credit reimbursement in total net revenue. |
| (c) | Includes merger costs, which are reported in the Corporate/Private Equity segment. Merger costs attributed to the business segments for the three and six months ended June 30, 2010 and 2009, were as follows. |
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Investment Bank
|
$ | — | $ | 1 | $ | — | $ | 16 | ||||||||
|
Retail Financial Services
|
— | 91 | — | 184 | ||||||||||||
|
Card Services
|
— | 8 | — | 36 | ||||||||||||
|
Commercial Banking
|
— | 2 | — | 5 | ||||||||||||
|
Treasury & Securities Services
|
— | 4 | — | 7 | ||||||||||||
|
Asset Management
|
— | 2 | — | 3 | ||||||||||||
|
Corporate/Private Equity
|
— | 35 | — | 97 | ||||||||||||
| (d) | Effective January 1, 2010, the Firm enhanced its line of business equity framework to better align equity assigned to each line of business with the changes anticipated to occur in the business, and in the competitive and regulatory landscape. |
| (e) | Effective January 1, 2010, the Firm adopted new consolidation 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. |
177
Table of Contents
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Noninterest revenue
|
NA | $ | (294 | ) | NA | $ | (834 | ) | ||||||||
|
Net interest income
|
NA | 1,958 | NA | 3,962 | ||||||||||||
|
Provision for credit losses
|
NA | 1,664 | NA | 3,128 | ||||||||||||
|
Average assets
|
NA | 81,588 | NA | 82,182 | ||||||||||||
| (f) | Segment managed results reflect revenue on a tax-equivalent basis, with the corresponding income tax impact recorded within income tax expense. These adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results. Tax-equivalent adjustments for the three and six months ended June 30, 2010 and 2009, were as follows. |
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Noninterest revenue
|
$ | 416 | $ | 335 | $ | 827 | $ | 672 | ||||||||
|
Net interest income
|
96 | 87 | 186 | 183 | ||||||||||||
|
Income tax expense
|
512 | 422 | 1,013 | 855 | ||||||||||||
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Table of Contents
JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
| Three months ended June 30, 2010 | Three months ended June 30, 2009 | |||||||||||||||||||||||
| Average | Rate | Average | Rate | |||||||||||||||||||||
| (in millions, except rates) | balance | Interest | (annualized) | balance | Interest | (annualized) | ||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Deposits with banks
|
$ | 58,737 | $ | 92 | 0.63 | % | $ | 68,001 | $ | 246 | 1.45 | % | ||||||||||||
|
Federal funds sold and securities purchased
under resale agreements
|
189,573 | 398 | 0.84 | 142,226 | 368 | 1.04 | ||||||||||||||||||
|
Securities borrowed
|
113,650 | 32 | 0.11 | 122,235 | (96 | ) | (0.32 | ) | ||||||||||||||||
|
Trading assets — debt instruments
|
245,532 | 2,601 | 4.25 | 245,444 | 3,002 | 4.91 | ||||||||||||||||||
|
Securities
|
327,425 | 2,564 | 3.14 | (b) | 354,216 | 3,210 | 3.64 | (b) | ||||||||||||||||
|
Loans
|
705,189 | 9,991 | 5.68 | 697,908 | 9,832 | 5.65 | ||||||||||||||||||
|
Other
assets
|
34,429 | 137 | 1.60 | 36,638 | 74 | 0.80 | ||||||||||||||||||
|
Total interest-earning assets
|
$ | 1,674,535 | 15,815 | 3.79 | 1,666,668 | 16,636 | 4.00 | |||||||||||||||||
|
Allowance for loan losses
|
(37,929 | ) | (27,384 | ) | ||||||||||||||||||||
|
Cash and due from banks
|
33,535 | 22,816 | ||||||||||||||||||||||
|
Trading assets — equity instruments
|
95,080 | 63,507 | ||||||||||||||||||||||
|
Trading assets — derivative receivables
|
79,409 | 114,096 | ||||||||||||||||||||||
|
Goodwill
|
48,348 | 48,273 | ||||||||||||||||||||||
|
Other intangible assets:
|
||||||||||||||||||||||||
|
Mortgage servicing rights
|
14,510 | 12,256 | ||||||||||||||||||||||
|
Purchased credit card relationships
|
1,102 | 1,485 | ||||||||||||||||||||||
|
Other intangibles
|
3,163 | 3,733 | ||||||||||||||||||||||
|
Other assets
|
131,894 | 132,922 | ||||||||||||||||||||||
|
Total assets
|
$ | 2,043,647 | $ | 2,038,372 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Interest-bearing deposits
|
$ | 668,953 | $ | 883 | 0.53 | % | $ | 672,350 | $ | 1,165 | 0.70 | % | ||||||||||||
|
Federal funds purchased and securities loaned
or sold under repurchase agreements
|
273,614 | (49 | ) (c) | (0.07 | ) (c) | 289,971 | 167 | 0.23 | ||||||||||||||||
|
Commercial paper
|
37,557 | 18 | 0.19 | 37,371 | 23 | 0.24 | ||||||||||||||||||
|
Trading liabilities — debt instruments
|
72,276 | 449 | 2.49 | 43,150 | 404 | 3.76 | ||||||||||||||||||
|
Other
borrowings and
liabilities
(a)
|
131,546 | 165 | 0.50 | 164,339 | 282 | 0.69 | ||||||||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
90,085 | 306 | 1.36 | 14,493 | 57 | 1.59 | ||||||||||||||||||
|
Long-term debt
|
256,089 | 1,260 | 1.97 | 274,323 | 1,781 | 2.60 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
1,530,120 | 3,032 | 0.79 | 1,495,997 | 3,879 | 1.04 | ||||||||||||||||||
|
Noninterest-bearing deposits
|
209,615 | 199,221 | ||||||||||||||||||||||
|
Trading liabilities — equity instruments
|
5,216 | 11,437 | ||||||||||||||||||||||
|
Trading liabilities — derivative payables
|
62,547 | 78,155 | ||||||||||||||||||||||
|
All other liabilities, including the allowance
for lending-related commitments
|
68,928 | 84,359 | ||||||||||||||||||||||
|
Total liabilities
|
1,876,426 | 1,869,169 | ||||||||||||||||||||||
|
Stockholders’ equity
|
||||||||||||||||||||||||
|
Preferred stock
|
8,152 | 28,338 | ||||||||||||||||||||||
|
Common stockholders’ equity
|
159,069 | 140,865 | ||||||||||||||||||||||
|
Total stockholders’ equity
|
167,221 | 169,203 | ||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,043,647 | $ | 2,038,372 | ||||||||||||||||||||
|
Interest rate spread
|
3.00 | % | 2.96 | % | ||||||||||||||||||||
|
Net interest income and net yield on
interest-earning assets
|
$ | 12,783 | 3.06 | % | $ | 12,757 | 3.07 | % | ||||||||||||||||
| (a) | Includes securities sold but not yet purchased. | |
| (b) | For the quarters ended June 30, 2010 and 2009, the annualized rates for AFS securities, based on amortized cost, were 3.19% and 3.62%, respectively. | |
| (c) | Reflects a benefit from the favorable market environments for dollar-roll financings in the second quarter of 2010. |
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JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
| Six months ended June 30, 2010 | Six months ended June 30, 2009 | |||||||||||||||||||||||
| Average | Rate | Average | Rate | |||||||||||||||||||||
| (in millions, except rates) | balance | Interest | (annualized) | balance | Interest | (annualized) | ||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Deposits with banks
|
$ | 61,468 | $ | 187 | 0.61 | % | $ | 78,237 | $ | 689 | 1.78 | % | ||||||||||||
|
Federal funds sold and securities purchased
under resale agreements
|
179,858 | 805 | 0.90 | 151,554 | 1,018 | 1.35 | ||||||||||||||||||
|
Securities borrowed
|
114,140 | 61 | 0.11 | 121,498 | (10 | ) | (0.02 | ) | ||||||||||||||||
|
Trading assets — debt instruments
|
246,804 | 5,392 | 4.41 | 248,753 | 6,277 | 5.09 | ||||||||||||||||||
|
Securities
|
332,405 | 5,508 | 3.34 | (b) | 318,019 | 6,096 | 3.87 | (b) | ||||||||||||||||
|
Loans
|
715,108 | 20,567 | 5.80 | 712,353 | 20,349 | 5.76 | ||||||||||||||||||
|
Other
assets
|
31,175 | 230 | 1.49 | 32,050 | 239 | 1.50 | ||||||||||||||||||
|
Total interest-earning assets
|
$ | 1,680,958 | 32,750 | 3.93 | 1,662,464 | 34,658 | 4.20 | |||||||||||||||||
|
Allowance for loan losses
|
(38,430 | ) | (25,407 | ) | ||||||||||||||||||||
|
Cash and due from banks
|
31,789 | 25,003 | ||||||||||||||||||||||
|
Trading assets — equity instruments
|
89,408 | 63,130 | ||||||||||||||||||||||
|
Trading assets — derivative receivables
|
79,048 | 128,092 | ||||||||||||||||||||||
|
Goodwill
|
48,445 | 48,173 | ||||||||||||||||||||||
|
Other intangible assets:
|
||||||||||||||||||||||||
|
Mortgage servicing rights
|
14,831 | 11,702 | ||||||||||||||||||||||
|
Purchased credit card relationships
|
1,149 | 1,533 | ||||||||||||||||||||||
|
Other intangibles
|
3,136 | 3,796 | ||||||||||||||||||||||
|
Other assets
|
130,843 | 134,180 | ||||||||||||||||||||||
|
Total assets
|
$ | 2,041,177 | $ | 2,052,666 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Interest-bearing deposits
|
$ | 673,169 | $ | 1,727 | 0.52 | % | $ | 704,228 | $ | 2,851 | 0.82 | % | ||||||||||||
|
Federal funds purchased and securities loaned
or sold under repurchase agreements
|
272,779 | (80 | ) (c) | (0.06 | ) (c) | 258,217 | 369 | 0.29 | ||||||||||||||||
|
Commercial paper
|
37,509 | 35 | 0.19 | 35,543 | 62 | 0.35 | ||||||||||||||||||
|
Trading liabilities — debt instruments
|
68,735 | 992 | 2.91 | 41,690 | 767 | 3.71 | ||||||||||||||||||
|
Other
borrowings and
liabilities
(a)
|
127,455 | 337 | 0.53 | 180,309 | 769 | 0.86 | ||||||||||||||||||
|
Beneficial interests issued by consolidated VIEs
|
94,072 | 636 | 1.36 | 12,138 | 95 | 1.58 | ||||||||||||||||||
|
Long-term debt
|
259,279 | 2,520 | 1.96 | 266,571 | 3,525 | 2.67 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
1,532,998 | 6,167 | 0.81 | 1,498,696 | 8,438 | 1.14 | ||||||||||||||||||
|
Noninterest-bearing deposits
|
204,871 | 198,531 | ||||||||||||||||||||||
|
Trading liabilities — equity instruments
|
5,470 | 13,036 | ||||||||||||||||||||||
|
Trading liabilities — derivative payables
|
60,809 | 86,503 | ||||||||||||||||||||||
|
All other liabilities, including the allowance
for lending-related commitments
|
71,287 | 87,071 | ||||||||||||||||||||||
|
Total liabilities
|
1,875,435 | 1,883,837 | ||||||||||||||||||||||
|
Stockholders’ equity
|
||||||||||||||||||||||||
|
Preferred stock
|
8,152 | 30,138 | ||||||||||||||||||||||
|
Common stockholders’ equity
|
157,590 | 138,691 | ||||||||||||||||||||||
|
Total stockholders’ equity
|
165,742 | 168,829 | ||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,041,177 | $ | 2,052,666 | ||||||||||||||||||||
|
Interest rate spread
|
3.12 | % | 3.06 | % | ||||||||||||||||||||
|
Net interest income and net yield on
interest-earning assets
|
$ | 26,583 | 3.19 | % | $ | 26,220 | 3.18 | % | ||||||||||||||||
| (a) | Includes securities sold but not yet purchased. | |
| (b) | For the six months ended June 30, 2010 and 2009, the annualized rates for AFS securities, based on amortized cost, were 3.39% and 3.84%, respectively. | |
| (c) | Reflects a benefit from the favorable market environments for dollar-roll financings during the six months ended June 30, 2010. |
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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.
AICPA:
American Institute of Certified Public Accountants.
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 Institutional,
Retail, Private Bank, Private Wealth Management and JPMorgan Securities clients. Includes
“
c
ommitted
c
apital not
c
alled”, on which AM earns fees. Excludes assets
managed by American Century Companies, Inc. in which the Firm has a 42% ownership interest as of
June 30, 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 FASB 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 143-148 of JPMorgan Chase’s 2009 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.
Combined effective loan-to-value ratio:
For residential real estate loans, an indicator of how much
equity a borrower has in a secured borrowing based on current estimates of the value of the
collateral and considering all lien positions related to the property.
Contractual credit card charge-off:
In accordance with the Federal Financial Institutions
Examination Council policy, 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 specific
event (e.g., bankruptcy of the borrower), whichever is earlier.
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 loan receivables. 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.
Deposit margin:
Represents net interest income expressed as a percentage of average deposits.
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EITF:
Emerging Issues Task Force.
FASB:
Financial Accounting Standards Board.
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.
Headcount-related expense:
Includes salary and benefits (excluding performance-based incentives),
and other noncompensation costs related to employees.
IASB:
International Accounting Standards Board.
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” generally represents a risk profile similar to a rating of a
“BBB-”/“Baa3” or better, as defined by independent rating agencies.
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 new 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 receivables:
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.
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 has usually been 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.
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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.
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.
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.
Preprovision 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 the IB for which
the fair value option was elected. Principal transactions revenue also includes private equity
gains and losses.
Purchased credit-impaired loans:
Acquired loans deemed to be credit-impaired under the FASB
guidance for purchased credit-impaired 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 were 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
purchased 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.
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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.
Risk-layered loans:
Loans with multiple high-risk elements.
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.
Stress testing:
A scenario that measures market risk under unlikely but plausible events in
abnormal markets.
Troubled debt restructuring:
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.
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 143-148 of
JPMorgan Chase’s 2009 Annual Report.
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Table of Contents
LINE OF BUSINESS METRICS
Investment Banking
IB’s revenue comprises the following:
Investment banking fees
include advisory, equity underwriting, bond underwriting and loan
syndication fees.
Fixed income markets
primarily include client and portfolio management revenue related to
market-making across global fixed income markets, including foreign exchange, interest rate, credit
and commodities markets.
Equity markets
primarily include client and portfolio management revenue related to market-making
across global equity products, including cash instruments, derivatives and convertibles.
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, and changes in the CVA, which is the component of the fair value of a
derivative that reflects the credit quality of the counterparty.
Retail Financial Services
Description of selected business metrics within Retail Banking:
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.
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.
Mortgage banking revenue comprises the following:
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.
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; 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. |
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.
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Table of Contents
Card Services
Description of selected business metrics within CS:
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.
Commercial Banking
CB Client Segments:
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.
CB revenue:
Lending
includes a variety of financing alternatives, which are primarily provided on a basis
secured by receivables, inventory, equipment, real estate or other assets. Products include term
loans, revolving lines of credit, bridge financing, asset-based structures and leases.
Treasury services
includes a broad range of products and services enabling clients to transfer,
invest and manage the receipt and disbursement of funds, while providing the related information
reporting. These products and services include U.S. dollar and multi-currency clearing, ACH,
lockbox, disbursement and reconciliation services, check deposits, other check and
currency—related services, trade finance and logistics solutions, commercial card and deposit
products, sweeps and money market mutual funds.
Investment banking
products provide clients with sophisticated capital-raising alternatives, as
well as balance sheet and risk management tools through loan syndications, investment-grade debt,
asset-backed securities, private placements, high-yield bonds, equity underwriting, advisory,
interest rate derivatives, foreign exchange hedges and securities sales.
CB selected business metrics:
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.
IB revenue, gross
represents total revenue related to investment banking products sold to CB
clients.
Treasury & Securities Services
Treasury & Securities Services
firmwide metrics
include certain TSS product revenue and liability
balances reported in other lines of business related to customers who are also customers of those
other lines of business. In order to capture the firmwide impact of Treasury Services and TSS
products and revenue, management reviews firmwide metrics such as liability balances, revenue and
overhead ratios in assessing financial performance for TSS. Firmwide metrics are necessary, in
management’s view, in order to understand the aggregate TSS business.
Description of selected business metrics within TSS:
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.
Asset Management
Assets under management —
Represent assets actively managed by AM on behalf of Institutional,
Retail, Private Bank, Private Wealth Management and JPMorgan Securities clients. Includes
“committed capital not called”, on which AM
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earns fees. Excludes assets managed by American Century Companies, Inc., in which the Firm has a
42% ownership interest as of June 30, 2010.
Assets under supervision —
Represents assets under management as well as custody, brokerage,
administration and deposit accounts.
Alternative assets
— The following types of assets constitute alternative investments — Hedge
funds, currency, real estate and private equity.
AM’s client segments comprise the following:
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.
The Private Bank
addresses every facet of wealth management for ultra-high-net-worth individuals
and families worldwide, including investment management, capital markets and risk management, tax
and estate planning, banking, capital raising and specialty-wealth advisory services.
Private Wealth Management
offers high-net-worth individuals, families and business owners in the
U.S. comprehensive wealth management solutions, including investment management, capital markets
and risk management, tax and estate planning, banking and specialty-wealth advisory services.
JPMorgan Securities
provides investment advice and wealth management services to high-net-worth
individuals, money managers, and small corporations.
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 Form 10-Q 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 financial services regulation; |
| • | 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; |
| • | credit ratings assigned to the Firm or its subsidiaries; |
| • | the Firm’s reputation; |
| • | ability of the Firm to deal effectively with an economic slowdown or other economic or market difficulty; |
| • | 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; |
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| • | 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; |
| • | changes in laws and regulatory requirements; |
| • | adverse judicial 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, 2009 and Part II, Item 1A: Risk Factors in this Form 10-Q on pages 196-197. |
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.
Item 3
Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see the Market
Risk Management section of the Management’s discussion and
analysis on pages 95-98 of this Form
10-Q.
Item 4
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.
Part II Other Information
Item 1
Legal Proceedings
The following information updates and restates the disclosures set forth under Part 1, Item 3
“Legal Proceedings” in the Firm’s 2009 Annual Report on Form 10-K, and Part II, Item 1 “Legal
Proceedings,” in the Firm’s Quarterly Report on Form 10-Q for the quarterly period ending March 31,
2010 (the “Firm’s SEC filings”).
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. In connection with these allegations, the complaints assert claims for
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. 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
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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 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. In connection with these allegations, each
plaintiff asserts claims for violations under various sections of the Employee Retirement Income
Security Act (“ERISA”) and seeks reimbursement to the ESOP for all losses, an unspecified amount of
monetary damages and imposition of a constructive trust.
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 and an order directing
Bear Stearns to improve its corporate governance procedures. Plaintiffs later filed a second
amended complaint asserting, for the first time, purported class action claims for violation of
Section 10(b) of the Securities Exchange Act of 1934, 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.
Motions to dismiss have been filed in the purported securities class action, the shareholders’
derivative action and the ERISA action.
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.
As a result of the voluntary dismissal of one previously pending derivative lawsuit, currently four
civil actions remain 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 funds. These actions seek, among other things, unspecified compensatory
damages based on alleged investor losses. The third action, brought by the Joint Voluntary
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, and discovery
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 High Grade Fund and the Enhanced Leverage
Fund. Bank of America apparently 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
in this case as well.
Ralph
Cioffi and Matthew Tannin, the portfolio managers for the Funds, were
tried on, and acquitted of, criminal
charges of securities fraud and conspiracy to commit securities and wire fraud brought by the
United States Attorney’s Office for the Eastern District of New
York. The United States Securities and Exchange Commission
(“SEC”) is proceeding
with a civil action against Cioffi and Tannin.
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Municipal
Derivatives Investigations and Litigation
. The Department of
Justice and the SEC 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. A group of state attorneys general and the Office
of the Comptroller of the Currency (“OCC”) have opened investigations into the same underlying
conduct. The Firm has been cooperating with all of these investigations. The Philadelphia Office of
the SEC provided notice to J.P. Morgan Securities Inc. (“JPMorgan Securities Inc.”) that it intends to recommend that the SEC bring
civil charges in connection with its investigations. JPMorgan Securities Inc. 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.
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 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.
As
previously reported, following JPMorgan Securities Inc.’s settlement with the SEC in connection with certain
Jefferson County, Alabama (the “County”) warrant underwritings and related 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 which it was 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 in May 2010. The Firm filed a mandamus petition
with the Alabama Supreme Court, seeking immediate appellate review of this decision. The Alabama
Supreme Court set a briefing schedule in connection with the petition and stayed all proceedings
pending its adjudication.
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 conduct described above (the
“Wilson Action”). The plaintiff in the Wilson Action recently filed a sixth amended complaint. The
Firm has moved to dismiss the complaint for lack of standing.
Separately, a plaintiff asserting substantially similar claims to those alleged in the Wilson
Action was recently granted permission to intervene in a separate action brought by the indenture
trustee seeking the appointment of a receiver over Jefferson County’s sewer system. The Firm was
not a party to the original action brought by the indenture trustee but has been named a party by
the intervening plaintiff. After the intervention motion was granted but before the Firm was added
as a party, the Court scheduled the case for trial on September 7, 2010. The Firm has sought
reconsideration of the motion granting the intervention or, alternatively, severance of the claims
against the Firm and consolidation of those claims with the Wilson Action.
Two insurance companies that guaranteed the payment of principal and interest on warrants issued by
Jefferson County have filed separate actions against JPMorgan Chase (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. JPMorgan Chase has moved to dismiss the complaint. The
other insurer claims that it insured an aggregate principal amount of more than $378 million and
seeks recovery of $4 million it alleges it paid under the policies to date as well as any payments
it will make in the future and unspecified punitive damages.
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. Following the denial of its motion to dismiss the
action, JPMorgan Chase Bank, N.A. answered the complaint and filed a counterclaim seeking the
amounts due under the swaption transactions. Discovery is ongoing and the trial is scheduled to
commence in February 2011.
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Interchange Litigation.
A group of merchants have 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 card interchange fees, enacted respective association rules in violation of Section 1 of the
Sherman Act, 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 amended consolidated class action complaint extended the claims beyond
credit to debit cards. Defendants filed a motion to dismiss all claims that predated January 2004.
The Court granted the motion to dismiss those claims. Plaintiffs then filed a second amended
consolidated class action complaint. The basic theories of the complaint remain the same, and
defendants again filed motions to dismiss. The Court has not yet ruled on the motions. Fact
discovery has closed, and expert discovery in the case is ongoing. 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 MasterCard and Visa IPOs (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.
Mortgage-Backed Securities Litigation.
JPMorgan Chase and affiliates, heritage Bear Stearns and
affiliates and heritage Washington Mutual affiliates have been named as defendants in a number of
cases relating to various roles they played in mortgage-backed securities (“MBS”) offerings. These
cases are generally purported class action suits, actions by individual purchasers of securities,
or 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 $150 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, the ratings
given to the tranches by rating agencies, and the appraisal standards that were used.
Purported class actions are pending against JPMorgan Chase and heritage Bear Stearns, and 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 the action that is
pending against JPMorgan Chase entities and certain of their employees in the Eastern District of
New York. Heritage Washington Mutual affiliates, Washington Mutual Asset Acceptance Corp. and
Washington Mutual Capital Corp., are defendants, along with certain former officers or directors of
Washington Mutual Asset Acceptance Corp., in two now-consolidated purported class action cases
pending in the Western District of Washington. In addition to allegations as to mortgage
underwriting standards and ratings, plaintiffs in these cases allege that defendants failed to
disclose Washington Mutual Bank’s alleged coercion of or collusion with appraisal vendors to
inflate appraisal valuations of the loans in the pools. Defendants have moved to dismiss. In
addition to the purported class actions, certain JPMorgan Chase entities and several heritage Bear
Stearns entities are defendants in actions filed in state courts in Pennsylvania and Washington
brought by the Federal Home Loan Banks of Pittsburgh and Seattle, respectively. These actions
relate to each Federal Home Loan Bank’s purchases of certificates in MBS offerings. Defendants
moved to dismiss the complaint brought by the FHLB of Pittsburgh. Defendants removed the action by
FHLB Seattle to federal court, where it was consolidated with 10 other identical lawsuits by that
FHLB against other financial services firms. FHLB of Seattle has moved to remand the consolidated
cases back to state court.
Heritage Bear entities, JPMorgan Securities Inc. and heritage Washington Mutual affiliates are
among the defendants in an individual action filed by Cambridge Place Investment Management Inc. in
Massachusetts state court. Cambridge Place asserts claims under state securities laws, alleging
that, when selling mortgage-backed securities, the defendants made misrepresentations and omissions
related to loan-to-value ratios, appraisals, underwriting standards, occupancy status, due
diligence and credit enhancement.
Heritage Bear entities are also among the defendants named in an individual action filed by The
Charles Schwab Corporation (“Schwab”) in state court in California, which similarly alleges
misrepresentations and omissions by defendants in connection with the sales of mortgage-backed
securities to Schwab. Pursuant to a tolling agreement, that action
has been discontinued as against the heritage Bear entities.
EMC Mortgage Corporation (“EMC”), a subsidiary of JPMorgan Chase, is currently a defendant in four
pending actions commenced by bond insurers that guaranteed
approximately $3 billion of payments on certain classes of MBS
securitizations sponsored by EMC. An action has been commenced by Assured Guaranty Corp. in the
United States District Court for the Southern District of
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New York, involving one securitization sponsored by EMC. Three previously pending actions,
commenced respectively by Ambac Assurance Corporation and Syncora Guarantee, Inc., (“Syncora”) in
the United States District Court for the Southern District of New York and CIFG Assurance North
America, Inc. (“CIFG”) in state court in Texas, involve a total of six securitizations sponsored by
EMC. In each action, plaintiffs claim 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. The action that was commenced by Syncora seeking access to certain loan
files has been resolved through a joint court order proposed by the parties pursuant to which EMC
produced loan files relating to those loans subject to a confidentiality stipulation and protective
order, and the action has been terminated and closed.
Currently pending in the United States District Court for the Southern District of New York is an
action brought on behalf of purchasers of certificates issued by various MBS securitizations
sponsored by affiliates of IndyMac Bancorp (“IndyMac Trusts”). JPMorgan Securities Inc., along with
numerous other underwriters and individuals, is named as a defendant, both in its own capacity and
as successor to Bear Stearns & Co. The Court has dismissed claims as to certain securitizations,
including all offerings in which no named plaintiff purchased certificates, and allowed claims as
to other securitizations to proceed. JPMorgan Chase and JPMorgan Securities Inc. are defendants in
an action pending in state court in Pennsylvania brought by FHLB-Pittsburgh, relating to its
purchase of a certificate issued by one IndyMac Trust. Defendants have moved to dismiss. JPMorgan
Chase and JPMorgan Securities Inc., as alleged successor to Bear Stearns & Co., and other
underwriters, along with certain individuals, are defendants in an action pending in state court in
California brought by MBIA Insurance Corp. (“MBIA”) relating to certain certificates issued by
three IndyMac trusts, as to two of 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
certificate holders, and seeks recovery of sums it has paid and will pay pursuant to those
policies. Defendants have moved for judgment on the pleadings on the grounds that plaintiff does
not have standing to bring these claims.
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 JPMorgan 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 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; more than 35 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 and one action alleges that
the Firm failed to satisfy a condition set forth in the relevant offering documents prior to
selling the securities to the investor. The Firm’s motion to transfer and coordinate before the
Southern District all of the active federal auction-rate securities cases was granted by the
multi-district panel on June 9, 2010.
Additionally, the Firm was named in two putative antitrust class actions in the United States
District Court for the Southern District of New York, which actions allege that the Firm, in
collusion with numerous other financial institution defendants, entered into an unlawful conspiracy
in violation of Section 1 of the Sherman Act. Specifically, the complaints allege that defendants
acted collusively to maintain and stabilize the auction-rate securities market and similarly acted
collusively in withdrawing their support for the auction-rate securities market in February 2008.
On
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January 26, 2010, the District Court dismissed both actions. The appeal is currently pending in the
Second Circuit Court of Appeals.
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, National Association 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 no trial date has been set as yet. JPMorgan Chase Bank, N.A. filed a
challenge to the Italian Supreme Court’s jurisdiction over JPMorgan Chase Bank, N.A. In January
2009, JPMorgan Chase Bank, N.A. also received a notice from the Prosecutor at the Court of Milan
placing it and certain current and former JPMorgan Chase personnel under investigation in
connection with the above transactions. Since April 2009, JPMorgan Chase Bank, N.A. has been
contesting an attachment order obtained by the Prosecutor, purportedly to freeze assets potentially
subject to confiscation in the event of a conviction. The original Euro 92 million attachment has
been reduced to Euro 44.9 million, and JPMorgan Chase Bank, N.A.’s application for a further reduction
remains pending. The judge has 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 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. The trial will resume after the
summer recess on September 24, 2010.
Physical Segregation of Assets in U.K. Affiliate.
On June 3, 2010, the U.K. Financial Services
Authority (the “FSA”) fined the Firm £33.32 million for failing to hold certain client money in a
segregated trust status account with JPMorgan Chase Bank, N.A. as required by FSA rules. The Firm
had discovered the violation in July 2009, and took immediate action at the time to rectify the
error and notify the FSA. No clients suffered any loss. Subsequently, PricewaterhouseCoopers
LLP, whose affiliate had performed audit-related services in respect
of client money accounts,
agreed to provide up to an aggregate of $12.5 million to the Firm in cash and in credits against
fees for audit-related and tax services provided or to be provided to the Firm.
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”).
JPMorgan Chase commenced an adversary proceeding in the Bankruptcy Case against the Debtors and
(for interpleader purposes only) the FDIC seeking a declaratory judgment and other relief
determining JPMorgan Chase’s legal title to and beneficial interest in the Disputed Assets. The
Debtors commenced a separate adversary proceeding in the Bankruptcy Case against JPMorgan Chase,
seeking turnover of the $4 billion in purported deposit funds and recovery for alleged unjust
enrichment for failure to turn over the funds. The Debtors have moved for summary judgment in the
turnover proceeding.
In both JPMorgan Chase’s adversary proceeding and the Debtors’ turnover proceeding, JPMorgan Chase
and the FDIC have argued that the Bankruptcy Court lacks jurisdiction to adjudicate certain claims.
JPMorgan Chase moved to have the adversary proceedings transferred to United States District Court
for the District of Columbia and to withdraw jurisdiction from the Bankruptcy Court to the District
Court. That motion is fully briefed. In addition, JPMorgan Chase
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and the
FDIC have pending with the United States District Court for the District of Delaware
an appeal of the Bankruptcy Court’s rulings rejecting the jurisdictional arguments, and that appeal is
fully briefed. JPMorgan Chase is also appealing a separate Bankruptcy Court decision holding, in
part, that the Bankruptcy Court could proceed with certain matters while the first appeal is
pending.
The Debtors submitted claims substantially similar to those submitted in the Bankruptcy Court in
the FDIC receivership for, among other things, ownership of certain Disputed Assets, as well as
claims challenging the terms of the agreement pursuant to which substantially all of the assets of
Washington Mutual Bank were sold by the FDIC to JPMorgan Chase. The FDIC, as receiver, disallowed
the Debtors’ claims and the Debtors filed an action against the FDIC in the United States District
Court for the District of Columbia challenging the FDIC’s disallowance of the Debtors’ claims,
claiming ownership of the Disputed Assets, and seeking money damages from the FDIC. JPMorgan Chase
has intervened in the action. In January 2010, the District Court stayed the action pending
developments in the Bankruptcy Court. In connection with the stay, the District Court denied WMI’s and the FDIC’s motions to
dismiss without prejudice.
In addition, JPMorgan Chase
has been sued in an action originally filed in the 122nd State District Court of Galveston
County, 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 FDIC intervened in the
Texas Action and, upon motion by the FDIC and JPMorgan Chase, the District Court transferred the
Texas Action to the District of Columbia. Plaintiffs moved to have the FDIC dismissed as a party
and to remand the action to the state court, or, in the alternative, dismissed for lack of subject
matter jurisdiction. JPMorgan Chase and the FDIC moved to have the entire action dismissed. On
April 13, 2010, the United States District Court for the District of Columbia granted JPMorgan
Chase’s motion to dismiss the complaint, granted the FDIC’s parallel motion to dismiss the
complaint and denied plaintiffs’ motion to dismiss the FDIC as a party and to remand the case to
Texas state court. On July 19, 2010, the Court denied plaintiffs’ motion to reconsider its prior
ruling, to vacate the judgment in the Texas Action and to permit them to file an amended complaint.
On July 20, 2010, the plaintiffs in the Texas Action appealed these decisions to the United States
Court of Appeals for the District of Columbia.
Other proceedings related to Washington Mutual’s failure also pending before the United States
District Court for the District of Columbia include a lawsuit brought by Deutsche Bank National
Trust Company against the FDIC seeking more than $6 billion in
damages based upon alleged breach of various mortgage securitization agreements and
alleged violation of certain representations and warranties given by certain WMI subsidiaries in
connection with those securitization agreements. JPMorgan Chase has not been named a party to the
Deutsche Bank litigation, but the complaint, and the FDIC’s motion to dismiss the complaint,
include assertions that JPMorgan Chase may have assumed liabilities
relating to the mortgage securitization agreements. Deutsche Bank is
scheduled to file an amended complaint on August 30, 2010.
On May 19, 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 (“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. While the Plan confirmation
process is ongoing, the appeals and proceedings before the United States District Courts for the
Districts of Delaware and the District of Columbia, are stayed.
Other proceedings related to Washington Mutual’s failure are also pending before the Bankruptcy
Court. On May 4, 2010, certain WMI creditors who have not agreed
to the Global Settlement Agreement
filed a motion to convert the Debtors’ cases to a Chapter 7 liquidation or, in the alternative, for
an order to appoint a trustee to administer the Debtors’ estates. Also, on July 6, 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 a July 20, 2010 hearing in the Bankruptcy Case, the Bankruptcy Court appointed an examiner to
investigate, among other things, the claims and assets that may be property of the Debtors’ estates
that are proposed to be conveyed, released or otherwise compromised and settled under the Plan and
Global Settlement Agreement. The examiner is to prepare a preliminary report for the Bankruptcy
Court by September 7, 2010, and a final report by October 8, 2010. The
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Bankruptcy Court is scheduled to consider confirmation of the Plan, including the Global Settlement
Agreement, beginning on November 1, 2010.
Securities Lending Litigation.
JPMorgan Chase Bank N.A. has been named as a defendant in four
putative class actions asserting ERISA and non-ERISA 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 state court by an individual participant in
the program. Three of the purported class actions, which have been consolidated, relate to losses
of plaintiffs’ money in medium-term notes of Sigma Finance Inc. (“Sigma”). Plaintiffs assert claims
under both ERISA and state law. Fact discovery is substantially complete. 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. The fourth putative class action, as
originally filed, concerned losses of money invested in Lehman Brothers medium-term notes and in
asset-backed securities offered by nine other issuers. The Firm moved to dismiss the complaint.
Before the court ruled on the motion, the plaintiff requested leave to serve a second amended
complaint, which was filed July 15, 2010. The amended complaint includes additional factual
allegations regarding Lehman Brothers and eliminates claims regarding the other asset-backed
securities. The plaintiff asserts only ERISA claims. The Firm’s response to the second amended
complaint is due on September 15, 2010 and a stay of discovery is in place until that date. The New
York state court action, which is not a class action, concerns the plaintiff’s loss of money in
both Sigma and Lehman Brothers medium-term notes. The Firm has answered the complaint and has moved
to stay this action pending resolution of the proceedings in federal court.
Investment Management Litigation.
Four cases have been filed claiming that investment portfolios
managed by JPMorgan Investment Management Inc. (“JPMIM”) were inappropriately invested in
securities backed by subprime residential real estate collateral. Plaintiffs claim that JPMIM and
related defendants are liable for the loss of more than
$1 billion in market value of these securities. The first case was
filed by NM Homes One, Inc. in federal court in New York. The United States District Court for the
Southern District of New York granted JPMIM’s motion to dismiss nine of plaintiff’s ten causes of
action. The Court granted JPMIM’s request for permission to move to dismiss the remaining cause of
action. Plaintiff has moved for reconsideration. The second case, filed by Assured Guaranty (U.K.)
in New York state court, was dismissed and Assured has appealed the court’s decision. In the third
case, filed by Ambac Assurance UK Limited in New York state court, the Court granted JPMIM’s motion
to dismiss in March 2010, and plaintiff has filed a notice of appeal. The fourth case was filed by
CMMF LLP in New York state court in December 2009; the Court granted JPMIM’s motion to dismiss the
claims, other than claims for breach of contract and misrepresentation. Both CMMF and JPMIM have
filed notices of appeal. On May 26, 2010, the New York Appellate Division heard arguments on the
case.
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. On May 26, 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, 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 Court set the case for trial in April 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.
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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 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 Employee Retirement Income Security Act for alleged breaches of fiduciary duties
and negligence by JPMorgan Chase, its directors and named officers.
IPO Allocation Litigation.
JPMorgan Chase and certain of its securities subsidiaries, including
Bear Stearns, were named, along with numerous other firms in the securities industry, as defendants
in a large number of putative class action lawsuits filed in the United States District Court for
the Southern District of New York alleging improprieties in connection with the allocation of
securities in various public offerings, including some offerings for which a JPMorgan Chase entity
served as an underwriter. They also claim violations of securities laws arising from alleged
material misstatements and omissions in registration statements and prospectuses for the initial
public offerings (“IPOs”) and alleged market manipulation with respect to aftermarket transactions
in the offered securities. Antitrust lawsuits based on similar allegations have been dismissed with
prejudice. A settlement was reached in the securities cases, which the District Court approved; the
Firm’s share of the settlement is approximately $62 million. Appeals have been filed in the United
States Court of Appeals for the Second Circuit seeking reversal of the decision approving the
settlement.
In addition to the various cases, proceedings and investigations discussed above, JPMorgan Chase
and its subsidiaries are named as defendants or otherwise involved in a number of other legal
actions and governmental proceedings arising in connection with their businesses. The Firm believes
it has meritorious defenses to the claims asserted against it in its currently outstanding
litigations, investigations and proceedings and it intends to defend itself vigorously in all such
matters. Additional actions, investigations or proceedings may be initiated from time to time in
the future.
In view of the inherent difficulty of predicting the outcome of legal matters, particularly where
the claimants seek very large or indeterminate damages, or where the cases 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 these pending matters will be, what the timing
of the ultimate resolution of these matters will be or what the eventual loss, fines, penalties or
impact related to each pending matter may be. In addition, the Firm
cannot estimate the aggregate range of reasonably possible loss as
defined in ASC 450 for asserted and probable asserted claims as of
June 30, 2010. JPMorgan Chase believes, based upon its current
knowledge, after consultation with counsel and after taking into account its current litigation
reserves, that the legal actions, proceedings and investigations 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, actions and investigations, there is no
assurance that 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.
Item 1A Risk Factors
For a discussion of certain risk factors affecting the Firm, see Part I, Item 1A: Risk Factors, on
pages 4-10 of JPMorgan Chase’s 2009 Annual Report on Form 10-K, and Forward-Looking Statements on
pages 187-188 of this Form 10-Q.
Financial services legislative and regulatory reforms may, if enacted or adopted, have a
significant impact on our business and results of operations and on our credit ratings.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act which will make significant structural reforms to the financial services
industry. The legislation will, among other things: establish a Bureau of Consumer Financial
Protection having broad authority to regulate providers of credit, savings, 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; create 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; require more comprehensive regulation of the over-the-counter
derivatives market, including providing for more strict 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 JPMorgan Chase;
potentially require banking entities, such as JPMorgan Chase, to significantly restructure or
restrict their derivatives businesses or to change the legal entities through which such businesses
are conducted; prohibit banking entities, such as JPMorgan Chase, from engaging in certain
proprietary trading activities and restricting their
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ownership of, investment in or sponsorship of hedge funds and private equity funds; restrict the
interchange fees payable on debit card transactions; and give
regulators the authority to phase out
the treatment of
trust preferred capital debt securities as Tier 1 capital for regulatory capital purposes.
These or any other new legislative changes enacted (as well as any rules or regulations issued by
U.S. regulators implementing any such legislation, and any actions by legislatures and regulatory
bodies in other countries) could result in significant loss of revenue, limit our ability to pursue
business opportunities we might otherwise consider engaging in, impact the value of assets that we
hold, require us to change certain of our business practices, impose additional costs on us,
establish more stringent capital, liquidity and leverage ratio requirements, or otherwise adversely
affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or
regulation would not have an adverse effect on our business, results of operations or financial
condition.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2010, there were no shares of common stock of JPMorgan Chase & Co.
issued in transactions exempt from registration under the Securities Act of 1933, pursuant to
Section 4(2) thereof.
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
issued in 2008 as part of the U.S. Treasury’s Capital Purchase Program. During the second quarter
of 2010, the Firm resumed common stock repurchases, repurchasing a total of 3 million shares for
$135 million at an average price of $38.73 per share. The Firm did not repurchase any of the
warrants. As of June 30, 2010, $6.1 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 has determined that it 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.
| Dollar value of remaining | ||||||||||||
| For the six months ended | Total shares | Average price paid | authorized repurchase | |||||||||
| June 30, 2010 | repurchased | per share (a) | (in millions) (b) | |||||||||
|
First quarter
|
— | $ | — | $ | 6,221 | |||||||
|
April
|
— | — | 6,221 | |||||||||
|
May
|
— | — | 6,221 | |||||||||
|
June
|
3,491,900 | 38.73 | 6,085 | |||||||||
|
Second quarter
|
3,491,900 | 38.73 | 6,085 | |||||||||
|
Year-to-date
|
3,491,900 | $ | 38.73 | $ | 6,085 | |||||||
| (a) | Excludes commission costs. | |
| (b) | The amount authorized by the Board of Directors excludes commissions cost. |
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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 the second quarter of 2010 were as follows:
| For the six months ended | Total shares | Average price paid | ||||||
| June 30, 2010 | repurchased | per share | ||||||
|
First quarter
|
2,444 | $ | 41.88 | |||||
|
April
|
46 | 45.08 | ||||||
|
May
|
325 | 27.29 | ||||||
|
June
|
22 | 38.63 | ||||||
|
Second quarter
|
393 | 30.01 | ||||||
|
Year-to-date
|
2,837 | $ | 40.23 | |||||
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 Other Information
None
Item 6 Exhibits
31.1—Certification
31.2—Certification
32—Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
(a)(b)
101.SCH XBRL Taxonomy Extension Schema Document
(b)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
(b)
101.LAB XBRL Taxonomy Extension Label Linkbase Document
(b)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
(b)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
(b)
| (a) | Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Firm’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009, (ii) the Consolidated Balance Sheets as of June 30, 2010, and December 31, 2009, (iii) the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the six months ended June 30, 2010 and 2009, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009, and (v) the Notes to Consolidated Financial Statements. | |
| (b) | Filed herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| JPMORGAN CHASE & CO. | ||||
|
|
||||
|
|
(Registrant) | |||
|
|
||||
|
|
||||
| Date: August 6, 2010 | By | /s/ Louis Rauchenberger | ||
| Louis Rauchenberger | ||||
|
|
||||
|
Managing Director and Controller
[Principal Accounting Officer] |
||||
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INDEX TO EXHIBITS
| EXHIBIT NO. | EXHIBITS | |
|
|
||
|
31.1
|
Certification | |
|
|
||
|
31.2
|
Certification | |
|
|
||
|
32
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002† | |
|
|
||
|
101.INS
|
XBRL Instance Document†† | |
|
|
||
|
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 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. | |
| †† | As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections. |
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Note 1 Basis Of PresentationprintNote 2 Business Changes and DevelopmentsprintNote 3 Fair Value MeasurementprintNote 4 Fair Value OptionprintNote 5 Derivative InstrumentsprintNote 6 Other Noninterest RevenueprintNote 7 Interest Income and Interest ExpenseprintNote 8 Pension and Other Postretirement Employee Benefit PlansprintNote 9 Employee Stock-based IncentivesprintNote 10 Noninterest ExpenseprintNote 11 SecuritiesprintNote 12 Securities Financing ActivitiesprintNote 13 LoansprintNote 14 Allowance For Credit LossesprintNote 15 Variable Interest EntitiesprintNote 16 Goodwill and Other Intangible AssetsprintNote 17 DepositsprintNote 18 Other Borrowed FundsprintNote 19 Earnings Per ShareprintNote 20 Accumulated Other Comprehensive Income/(loss)printNote 21 Commitments and ContingenciesprintNote 22 Off-balance Sheet Lending-related Financial Instruments, Guarantees and Other CommitmentsprintNote 23 Business SegmentsprintItem 3 Quantitative and Qualitative Disclosures About Market RiskprintItem 4 Controls and ProceduresprintPart II Other InformationprintItem 1 Legal ProceedingsprintItem 1A Risk FactorsprintItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3 Defaults Upon Senior SecuritiesprintItem 4 Submission Of Matters To A Vote Of Security HoldersprintItem 5 Other InformationprintItem 6 Exhibitsprint