JP Morgan Chase 2010 Annual Report Download - page 220

Notes to consolidated financial statements
220 JPMorgan Chase & Co./2010 Annual Report
Note 14 – Loans
Loan accounting framework
The accounting for a loan depends on management’s strategy for
the loan, and on whether the loan was credit-impaired at the
date of acquisition. The Firm accounts for loans based on the
following categories:
• Originated or purchased loans held-for-investment (other than
purchased credit-impaired (“PCI”) loans);
• Loans held-for-sale;
• Fair value loans;
• PCI loans held-for-investment
The following provides a detailed accounting discussion of these
loan categories:
Loans held-for-investment (other than PCI loans)
Originated or purchased loans held-for-investment, other than PCI
loans, are measured at the principal amount outstanding, net of the
following: allowance for loan losses; net charge-offs; interest applied
to principal (for loans accounted for on the cost recovery method);
unamortized discounts and premiums; and deferred loan fees or cost.
Interest income
Interest income on performing loans held-for-investment, other
than PCI loans, is accrued and recognized as interest income at
the contractual rate of interest. Purchase price discounts or pre-
miums, as well as net deferred loan fees or costs, are amortized
into interest income over the life of the loan to produce a level
rate of return.
Nonaccrual loans
Nonaccrual loans are those on which the accrual of interest has
been suspended. Loans (other than credit card loans and certain
consumer loans insured by U.S. government agencies) are placed
on nonaccrual status and considered nonperforming when full
payment of principal and interest is in doubt, which is generally
determined when principal or interest is 90 days or more past due
and collateral, if any, is insufficient to cover principal and interest.
A loan is determined to be past due when the minimum payment
is not received from the borrower by the contractually specified
due date or for certain loans (e.g., residential real estate loans),
when a monthly payment is due and unpaid for 30 days or more.
All interest accrued but not collected is reversed against interest
income at the date a loan is placed on nonaccrual status. In
addition, the amortization of deferred amounts is suspended. In
certain cases, interest income on nonaccrual loans may be recog-
nized to the extent cash is received (i.e., cash basis) when the
recorded loan balance is deemed fully collectible; however, if
there is doubt regarding the ultimate collectability of the recorded
loan balance, all interest cash receipts are applied to reduce the
carrying value of the loan (the cost recovery method).
A loan may be returned to accrual status when repayment is
reasonably assured and there has been demonstrated perform-
ance under the terms of the loan or, if applicable, the terms of
the restructured loan.
As permitted by regulatory guidance, credit card loans are generally
exempt from being placed on nonaccrual status; accordingly, inter-
est and fees related to credit card loans continue to accrue until the
loan is charged off or paid in full. However, the Firm separately
establishes an allowance for the estimated uncollectible portion of
billed and accrued interest and fee income on credit card loans.
Allowance for loan losses
The allowance for loan losses represents the estimated probable
losses on held-for-investment loans. Changes in the allowance for
loan losses are recorded in the Provision for credit losses on the
Firm’s Consolidated Statements of Income. See Note 15 on pages
239–243 for further information on the Firm’s accounting polices
for the allowance for loan losses.
Charge-offs
Wholesale loans and risk-rated business banking and auto loans
are charged off against the allowance for loan losses when it is
highly certain that a loss has been realized. This determination
includes many factors, including the prioritization of the Firm’s
claim in bankruptcy, expectations of the workout/restructuring of
the loan and valuation of the borrower's equity.
Consumer loans, other than risk-rated business banking and auto
loans and PCI loans, are generally charged off to the allowance
for loan losses upon reaching specified stages of delinquency, in
accordance with the Federal Financial Institutions Examination
Council (“FFIEC”) policy. Residential mortgage loans and scored
business banking loans are generally charged down to estimated
net realizable value at no later than 180 days past due. Certain
consumer loans, including auto loans and non-government guar-
anteed student loans, are generally charged down to estimated
net realizable value at 120 days past due. The Firm regularly
assesses the assumptions that it uses to estimate these net realiz-
able values, and updates the underlying assumptions as necessary
to further refine its estimates.
Credit card loans are charged off by the end of the month in
which the account becomes 180 days past due, or within 60 days
from receiving notification about a specified event (e.g., bank-
ruptcy of the borrower), whichever is earlier.
Certain impaired loans are deemed collateral-dependent because
repayment of the loan is expected to be provided solely by the
underlying collateral, rather than by cash flows from the bor-
rower’s operations, income or other resources. Impaired collat-
eral-dependent loans are charged-off to the fair value of the
collateral, less costs to sell. See Note 15 on pages 239–243 for
information on the Firm’s charge-off and valuation policies for
collateral-dependent loans.