Excerpts from the 2008 Annual Report for J.P. Morgan Chase & Co. (“JPMC”) are provided in Exhibit 8.1.

EXHIBIT 8.1Consolidated Balance Sheets

December 31 (in millions, except share data)	2008	2007
Assets
Cash and due from banks	$26,895	$40,144
Deposits with banks	138,139	11,466
Federal funds sold and securities purchased under resale agreements (included $20,843 and $19,131 at fair value at December 31, 2008 and 2007, respectively)	203,115	170,897
Securities borrowed (included $3,381 and zero at fair value at December 31, 2008 and 2007, respectively)	124,000	84,184
Trading assets (included assets pledged of $75,063 and $79,229 at December 31, 2008 and 2007, respectively)	509,983	491,409
Securities (included $205,909 and $85,406 at fair value at December 31, 2008 and 2007, respectively, and assets pledged of $25,942 and $3,958 at December 31, 2008 and 2007, respectively)	205,943	85,450
Loans (included $7,696 and $8,739 at fair value at December 31, 2008 and 2007, respectively)	744,898	519,374
Allowance for loan losses	(23,164)	(9,234)
Loans, net of allowance for loan losses	721,734	510,140
Accrued interest and accounts receivable	60,987	24,823
Premises and equipment	10,045	9,319
Goodwill	48,027	45,270
Other intangible assets:
Mortgage servicing rights	9,403	8,632
Purchased credit card relationships	1,649	2,303
All other intangibles	3,932	3,796
Other assets (included $29,199 and $22,151 at fair value at December 31, 2008 and 2007, respectively)	111,200	74,314
Total assets	$2,175,052	$1,562,147

Consolidated statements of cash flows
Year ended December 31 (in millions)	2008	2007	2006
Operating activities
Net income	$5,605	$15,365	$14,444
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for credit losses	20,979	6,864	3,270
Depreciation and amortization	3,143	2,427	2,149
Amortization of intangibles	1,263	1,394	1,428
Deferred tax (benefit) expense	(2,637)	1,307	(1,810)
Investment securities (gains) losses	(1,560)	(164)	543
Proceeds on sale of investment	(1,540)	—	—
Gains on disposition of businesses	(199)	—	(1,136)
Stock‐based compensation	2,637	2,025	2,368
Originations and purchases of loans held‐for‐sale	(34,902)	(116,471)	(178,355)
Proceeds from sales, securitizations, and paydowns of loans held‐for‐sale	38,036	107,350	173,448
Net change in:
Trading assets	(12,787)	(121,240)	(61,664)
Securities borrowed	15,408	(10,496)	916
Accrued interest and accounts receivable	10,221	(1,932)	(1,170)
Other assets	(33,629)	(21,628)	(7,193)
Trading liabilities	24,061	12,681	(4,521)
Accounts payable and other liabilities	1,012	4,284	7,815
Other operating adjustments	(12,013)	7,674	(111)
Net cash provided by (used in) operating activities	23,098	(110,560)	(49,579)

Consolidated statements of income
Year ended December 31 (in millions, except per share data)	2008	2007	2006
Revenue
Investment banking fees	$5,526	$6,635	$5,520
Principal transactions	(10,699)	9,015	10,778
Lending and deposit‐related fees	5,088	3,938	3,468
Asset management, administration, and commissions	13,943	14,356	11,855
Securities gains (losses)	1,560	164	(543)
Mortgage fees and related income	3,467	2,118	591
Credit card income	7,419	6,911	6,913
Other income	2,169	1,829	2,175
Noninterest revenue	28,473	44,966	40,757
Interest income	73,018	71,387	59,107
Interest expense	34,239	44,981	37,865
Net interest income	38,779	26,406	21,242
Total net revenue	67,252	71,372	61,999
Provision for credit losses	20,979	6,864	3,270
Noninterest expense
Compensation expense	22,746	22,689	21,191
Occupancy expense	3,038	2,608	2,335
Technology, communications, and equipment expense	4,315	3,779	3,653
Professional and outside services	6,053	5,140	4,450
Marketing	1,913	2,070	2,209
Other expense	3,740	3,814	3,272
Amortization of intangibles	1,263	1,394	1,428
Merger costs	432	209	305
Total noninterest expense	43,500	41,703	38,843
Income from continuing operations before income tax expense (benefit)	2,773	22,805	19,886
Income tax expense (benefit)	(926)	7,440	6,237
Income from continuing operations	3,699	15,365	13,649
Income from discontinued operations	—	—	795
Income before extraordinary gain	3,699	15,365	14,444
Extraordinary gain	1,906	—	—
Net income	$5,605	$15,365	$14,444
Net income applicable to common stock	$4,931	$15,365	$14,440

Note that the balance in the allowance for loan losses account at the end of JPMC's fiscal 2006 was $7,279 million, and the balance in their loan asset account was $483,127 million at the same date.

Required

1. Calculate JPMC's allowance for loan losses as a percentage of gross loans outstanding for each of the three years for which information has been provided.
2. What is the dollar value of JPMC's loan write‐offs in 2007 and 2008?
3. Comment upon JPMC's loan loss provisioning over the periods shown. Do they appear to have used the provision to create hidden reserves? Are they sitting on a “cookie jar” reserve or are you expecting a big hit to the income statement in future periods as a result of past under provisioning for bad loans?

Answer rating: 100% (QA)

Calculate JPMCs allowance for loan losses as a percentage of gross loans outstanding for each of the three years for which information has been provid... View the full answer