JPMorgan Chase’s allowance for loan losses covers the consumer (primarily scored) portfolio; and wholesale (risk-rated) portfolio. The allowance represents management’s estimate of probable credit losses inherent in the Firm’s loan portfolio. Management also determines an allowance for wholesale and certain consumer lending-related commitments.
The allowance for loan losses includes an asset-specific component, a formula-based component, and a component related to PCI loans. For a further discussion of the components of the allowance for credit losses and related management judgments, see Critical Accounting Estimates Used by the Firm on pages 174–178 and Note 15 on pages 284–287 of this Annual Report.
At least quarterly, the allowance for credit losses is reviewed by the Chief Risk Officer, the Chief Financial Officer and the Controller of the Firm, and discussed with the Risk Policy and Audit Committees of the Board of Directors of the Firm. As of December 31, 2013, JPMorgan Chase deemed the allowance for credit losses to be appropriate and sufficient to absorb probable credit losses inherent in the portfolio.
The allowance for credit losses was $17.0 billion at December 31, 2013, a decrease of $5.6 billion from
$22.6 billion at December 31, 2012. The decrease in the allowance for loan losses was due to a $5.5 billion reduction in the consumer portfolio allowance reflecting lower estimated losses due to the impact of improved home prices on the residential real estate portfolio and improved delinquency trends in the residential real estate and credit card portfolios. However, relatively high unemployment, uncertainties regarding the ultimate success of loan modifications, and the risk attributes of certain loans within the portfolio (e.g., loans with high LTV ratios, junior lien loans that are subordinate to a delinquent or modified senior lien, HELOCs with future payment recast) continued to contribute to uncertainty regarding the performance of the residential real estate portfolio; these uncertainties were considered in estimating the allowance for loan losses.
The consumer, excluding credit card, allowance for loan losses decreased $3.8 billion from December 31, 2012, of which $2.3 billion was from the real estate portfolio non credit-impaired allowance and $1.6 billion from the PCI allowance. The decrease in the allowance was largely due to the impact of improved home prices as well as improved delinquency trends. For additional information about delinquencies and nonaccrual loans in the consumer, excluding credit card, loan portfolio, see Consumer Credit Portfolio on pages 120–129 and Note 14 on pages 258–
283 of this Annual Report.
The credit card allowance for loan losses decreased by
$1.7 billion from December 31, 2012. The decrease included reductions in both the asset-specific and formula-based allowance. The reduction in the asset-specific allowance, which relates to loans restructured in TDRs, largely reflects the changing profile of the TDR portfolio.
The volume of new TDRs, which have higher loss rates due to expected redefaults, continues to decrease, and the loss rate on existing TDRs is also decreasing over time as previously restructured loans continue to perform. The reduction in the formula-based allowance was primarily driven by the continuing trend of improving delinquencies and a reduction in bankruptcies. For additional information about delinquencies in the credit card loan portfolio, see Consumer Credit Portfolio on pages 120–129 and Note 14 on pages 258–283 of this Annual Report.
The wholesale allowance was relatively unchanged reflecting a favorable credit environment and stable credit quality trends.
The allowance for lending-related commitments for both the consumer, excluding credit card, and wholesale portfolios, which is reported in other liabilities, was $705 million and
$668 million at December 31, 2013, and December 31, 2012, respectively.
Management’s discussion and analysis
140 JPMorgan Chase & Co./2013 Annual Report
Summary of changes in the allowance for credit losses
2013 2012
Year ended December 31, Consumer,
excluding
credit card Credit card Wholesale Total
Consumer, excluding
credit card Credit card Wholesale Total (in millions, except ratios)
Allowance for loan losses
Beginning balance at January 1, $ 12,292 $ 5,501 $ 4,143 $ 21,936 $ 16,294 $ 6,999 $ 4,316 $ 27,609
Gross charge-offs 2,754 4,472 241 7,467 4,805 (d) 5,755 346 10,906
Gross recoveries (847) (593) (225) (1,665) (508) (811) (524) (1,843)
Net charge-offs/(recoveries) 1,907 3,879 16 5,802 4,297 (d) 4,944 (178) 9,063
Write-offs of PCI loans(a) 53 — — 53 — — — —
Provision for loan losses (1,872) 2,179 (119) 188 302 3,444 (359) 3,387
Other (4) (6) 5 (5) (7) 2 8 3
Ending balance at December 31, $ 8,456 $ 3,795 $ 4,013 $ 16,264 $ 12,292 $ 5,501 $ 4,143 $ 21,936 Impairment methodology
Asset-specific(b) $ 601 $ 971 $ 181 $ 1,753 $ 729 $ 1,681 $ 319 $ 2,729
Formula-based 3,697 2,824 3,832 10,353 5,852 3,820 3,824 13,496
PCI 4,158 — — 4,158 5,711 — — 5,711
Total allowance for loan losses $ 8,456 $ 3,795 $ 4,013 $ 16,264 $ 12,292 $ 5,501 $ 4,143 $ 21,936 Allowance for lending-related
commitments
Beginning balance at January 1, $ 7 $ — $ 661 $ 668 $ 7 $ — $ 666 $ 673
Provision for lending-related
commitments 1 — 36 37 — — (2) (2)
Other — — — — — — (3) (3)
Ending balance at December 31, $ 8 $ — $ 697 $ 705 $ 7 $ — $ 661 $ 668
Impairment methodology
Asset-specific $ — $ — $ 60 $ 60 $ — $ — $ 97 $ 97
Formula-based 8 — 637 645 7 — 564 571
Total allowance for lending-related
commitments $ 8 $ — $ 697 $ 705 $ 7 $ — $ 661 $ 668
Total allowance for credit losses $ 8,464 $ 3,795 $ 4,710 $ 16,969 $ 12,299 $ 5,501 $ 4,804 $ 22,604 Memo:
Retained loans, end of period $ 288,449 $ 127,465 $ 308,263 $ 724,177 $ 292,620 $ 127,993 $ 306,222 $ 726,835
Retained loans, average 289,294 123,518 307,340 720,152 300,024 125,031 291,980 717,035
PCI loans, end of period 53,055 — 6 53,061 59,737 — 19 59,756
Credit ratios
Allowance for loan losses to retained
loans 2.93% 2.98% 1.30% 2.25% 4.20% 4.30% 1.35 % 3.02%
Allowance for loan losses to retained
nonaccrual loans(c) 113 NM 489 196 134 NM 289 207
Allowance for loan losses to retained
nonaccrual loans excluding credit card 113 NM 489 150 134 NM 289 155
Net charge-off/(recovery) rates 0.66 3.14 0.01 0.81 1.43 (d) 3.95 (0.06) 1.26
Credit ratios, excluding residential real estate PCI loans
Allowance for loan losses to
retained loans 1.83 2.98 1.30 1.80 2.83 4.30 1.35 2.43
Allowance for loan losses to
retained nonaccrual loans(c) 57 NM 489 146 72 NM 289 153
Allowance for loan losses to retained nonaccrual loans excluding
credit card(b) 57 NM 489 100 72 NM 289 101
Net charge-off/(recovery) rates 0.82% 3.14% 0.01% 0.87% 1.81%(d) 3.95% (0.06)% 1.38%
(a) Write-offs of PCI loans are recorded against the allowance for loan losses when actual losses for a pool exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. Any write-offs of PCI loans are recognized when the underlying loan is removed from a pool (e.g., upon liquidation).
(b) Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR.
(c) The Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance.
(d) Net charge-offs and net charge-off rates for the year ended December 31, 2012, included $800 million of charge-offs of Chapter 7 loans. See Consumer Credit Portfolio on pages 120–129 of this Annual Report for further details.
JPMorgan Chase & Co./2013 Annual Report 141
Provision for credit losses
For the year ended December 31, 2013, the provision for credit losses was $225 million, down by 93% from 2012.
The provision for the year ended December 31, 2013 included a $5.6 billion reduction in the allowance for loan losses, due to the impact of improved home prices on the residential real estate portfolio and improved delinquency trends in the residential real estate and credit card portfolios.
Total consumer provision for credit losses was $308 million in 2013, compared with $3.7 billion in 2012. The decline in the total consumer provision was attributable to continued reductions in the allowance for loan losses, resulting from the impact of improved home prices on the residential real
estate portfolio, and improved delinquency trends in the residential real estate and credit card portfolios, as well as lower net charge-offs, partially due to the prior year incremental charge-offs of $800 million recorded in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy.
In 2013 the wholesale provision for credit losses was a benefit of $83 million, compared with a benefit of $361 million in 2012. The current periods’ wholesale provision for credit losses reflected a favorable credit environment and stable credit quality trends. For further information on the provision for credit losses, see the Consolidated Results of Operations on pages 71–74 of this Annual Report.
Year ended December 31, Provision for loan losses
Provision for
lending-related commitments Total provision for credit losses
(in millions) 2013 2012 2011 2013 2012 2011 2013 2012 2011
Consumer, excluding credit card $ (1,872)$ 302 $ 4,670 $ 1 $ — $ 2 $ (1,871)$ 302 $ 4,672
Credit card 2,179 3,444 2,925 — — — 2,179 3,444 2,925
Total consumer 307 3,746 7,595 1 — 2 308 3,746 7,597
Wholesale (119) (359) 17 36 (2) (40) (83) (361) (23)
Total provision for credit losses $ 188 $ 3,387 $ 7,612 $ 37 $ (2) $ (38) $ 225 $ 3,385 $ 7,574
Management’s discussion and analysis
142 JPMorgan Chase & Co./2013 Annual Report