JPMorgan Chase’s allowance for loan losses covers both 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 161–165 and Note 15.
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 DRPC and Audit Committees of the Board of Directors of the Firm. As of December 31, 2014, 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 $14.8 billion at December 31, 2014, a decrease of $2.2 billion from $17.0 billion at December 31, 2013.
The consumer, excluding credit card, allowance for loan losses reflected a reduction from December 31, 2013, primarily due to the continued improvement in home prices and delinquencies in the residential real estate portfolio and the run-off of the student loan portfolio. For additional information about delinquencies and nonaccrual loans in the consumer, excluding credit card, loan portfolio, see Consumer Credit Portfolio on pages 113–119 and Note 14.
The credit card allowance for loan losses reflected a reduction from December 31, 2013, primarily related to a decrease in the asset-specific allowance resulting from increased granularity of the impairment estimates and lower balances related to credit card loans modified in TDRs. For additional information about delinquencies in the credit card loan portfolio, see Consumer Credit Portfolio on pages 113–119 and Note 14.
The wholesale allowance for credit losses decreased from December 31, 2013, reflecting a continued favorable credit environment as evidenced by low charge-off rates, and declining nonaccrual balances and other portfolio activity.
JPMorgan Chase & Co./2014 Annual Report 129
Summary of changes in the allowance for credit losses
2014 2013
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, $ 8,456 $ 3,795 $ 4,013 $ 16,264 $ 12,292 $ 5,501 $ 4,143 $ 21,936
Gross charge-offs 2,132 3,831 151 6,114 2,754 4,472 241 7,467
Gross recoveries (814) (402) (139) (1,355) (847) (593) (225) (1,665)
Net charge-offs 1,318 3,429 12 4,759 1,907 3,879 16 5,802
Write-offs of PCI loans(a) 533 — — 533 53 — — 53
Provision for loan losses 414 3,079 (269) 3,224 (1,872) 2,179 (119) 188
Other 31 (6) (36) (11) (4) (6) 5 (5)
Ending balance at December 31, $ 7,050 $ 3,439 $ 3,696 $ 14,185 $ 8,456 $ 3,795 $ 4,013 $ 16,264 Impairment methodology
Asset-specific(b) $ 539 $ 500 $ 87 $ 1,126 $ 601 $ 971 $ 181 $ 1,753
Formula-based 3,186 2,939 3,609 9,734 3,697 2,824 3,832 10,353
PCI 3,325 — — 3,325 4,158 — — 4,158
Total allowance for loan losses $ 7,050 $ 3,439 $ 3,696 $ 14,185 $ 8,456 $ 3,795 $ 4,013 $ 16,264 Allowance for lending-related commitments
Beginning balance at January 1, $ 8 $ — $ 697 $ 705 $ 7 $ — $ 661 $ 668
Provision for lending-related commitments 5 — (90) (85) 1 — 36 37
Other — — 2 2 — — — —
Ending balance at December 31, $ 13 $ — $ 609 $ 622 $ 8 $ — $ 697 $ 705
Impairment methodology
Asset-specific $ — $ — $ 60 $ 60 $ — $ — $ 60 $ 60
Formula-based 13 — 549 562 8 — 637 645
Total allowance for lending-related
commitments(c) $ 13 $ — $ 609 $ 622 $ 8 $ — $ 697 $ 705
Total allowance for credit losses $ 7,063 $ 3,439 $ 4,305 $ 14,807 $ 8,464 $ 3,795 $ 4,710 $ 16,969 Memo:
Retained loans, end of period $ 294,979 $ 128,027 $ 324,502 $ 747,508 $ 288,449 $ 127,465 $ 308,263 $ 724,177
Retained loans, average 289,212 124,604 316,060 729,876 289,294 123,518 307,340 720,152
PCI loans, end of period 46,696 — 4 46,700 53,055 — 6 53,061
Credit ratios
Allowance for loan losses to retained loans 2.39% 2.69% 1.14% 1.90% 2.93% 2.98% 1.30% 2.25%
Allowance for loan losses to retained nonaccrual
loans(d) 110 NM 617 202 113 NM 489 196
Allowance for loan losses to retained nonaccrual
loans excluding credit card 110 NM 617 153 113 NM 489 150
Net charge-off rates 0.46 2.75 — 0.65 0.66 3.14 0.01 0.81
Credit ratios, excluding residential real estate PCI loans
Allowance for loan losses to
retained loans 1.50 2.69 1.14 1.55 1.83 2.98 1.30 1.80
Allowance for loan losses to
retained nonaccrual loans(d) 58 NM 617 155 57 NM 489 146
Allowance for loan losses to
retained nonaccrual loans excluding credit
card 58 NM 617 106 57 NM 489 100
Net charge-off rates 0.55% 2.75% —% 0.70% 0.82% 3.14% 0.01% 0.87%
Note: In the table above, the financial measures which exclude the impact of PCI loans are non-GAAP financial measures. For additional information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 77–78.
(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. A write-off of a PCI loan is recognized when the underlying loan is removed from a pool (e.g., upon liquidation). During the fourth quarter of 2014, the Firm recorded a $291 million adjustment to reduce the PCI allowance and the recorded investment in the Firm’s PCI loan portfolio, primarily reflecting the cumulative effect of interest forgiveness modifications. This adjustment had no impact to the Firm’s Consolidated statements of income.
(b) Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR.
(c) The allowance for lending-related commitments is reported in other liabilities on the Consolidated balance sheets.
(d) The Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance.
Management’s discussion and analysis
130 JPMorgan Chase & Co./2014 Annual Report
Provision for credit losses
For the year ended December 31, 2014, the provision for credit losses was $3.1 billion, compared with $225 million for the year ended December 31, 2013.
The increase in consumer, excluding credit card, provision for credit losses for the year ended December 31, 2014 reflected a $904 million reduction in the allowance for loan losses, as noted above in the Allowance for Credit Losses discussion, which was lower than the $3.8 billion reduction in the prior year. The lower allowance reduction was partially offset by lower net charge-offs in 2014.
The increase in credit card provision for credit losses for the year ended December 31, 2014 reflected a $350 million
reduction in the allowance for loan losses, as noted above in the Allowance for Credit Losses discussion, which was lower than the $1.7 billion reduction in the prior year. The lower allowance reduction was partially offset by lower net charge-offs in 2014.
The wholesale provision for credit losses for the year ended December 31, 2014 reflected a continued favorable credit environment as evidenced by low charge-off rates, and declining nonaccrual balances and other portfolio activity.
For further information on the provision for credit losses, see the Consolidated Results of Operations on pages 68–71.
Year ended December 31, Provision for loan losses
Provision for
lending-related commitments Total provision for credit losses
(in millions) 2014 2013 2012 2014 2013 2012 2014 2013 2012
Consumer, excluding credit card $ 414 $ (1,872) $ 302 $ 5 $ 1 $ — $ 419 $ (1,871) $ 302
Credit card 3,079 2,179 3,444 — — — 3,079 2,179 3,444
Total consumer 3,493 307 3,746 5 1 — 3,498 308 3,746
Wholesale (269) (119) (359) (90) 36 (2) (359) (83) (361)
Total $ 3,224 $ 188 $ 3,387 $ (85)$ 37 $ (2) $ 3,139 $ 225 $ 3,385
JPMorgan Chase & Co./2014 Annual Report 131