Morgan Stanley 2014 Annual Report Download - page 174

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
collecting scheduled principal and interest payments when due. The impairment analysis required depends on the
nature and type of loans. Loans classified as Doubtful or Loss are considered impaired. When a loan is impaired,
the impairment is measured based on the present value of expected future cash flows discounted at the loan’s
effective interest rate or as a practical expedient, the observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent. If the present value of the expected future cash flows (or
alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded
investment in the loan, then the Company recognizes an allowance and a charge to the provision for loan losses
within Other revenues.
Generally, inherent losses in the portfolio for non-impaired loans are estimated using statistical analysis and
judgment around the exposure at default, the probability of default and the loss given default. Qualitative and
environmental factors such as economic and business conditions, nature and volume of the portfolio and lending
terms, and volume and severity of past due loans may also be considered in the calculations.
Troubled Debt Restructurings. The Company may modify the terms of certain loans for economic or legal
reasons related to a borrower’s financial difficulties by granting one or more concessions that the Company
would not otherwise consider. Such modifications are accounted for and reported as troubled debt restructurings
(“TDRs”). A loan that has been modified in a TDR is generally considered to be impaired and is evaluated for the
extent of impairment using the Company’s specific allowance methodology.
Nonaccrual Loans. The Company places loans on nonaccrual status if principal or interest is past due for a
period of 90 days or more or payment of principal or interest is in doubt unless the obligation is well-secured and
in the process of collection. A loan is considered past due when a payment due according to the contractual terms
of the loan agreement has not been remitted by the borrower. Substandard loans, if identified as impaired, are
categorized as nonaccrual. Loans classified as Doubtful or Loss are categorized as nonaccrual.
Payments received on nonaccrual loans held for investment are applied to principal if there is doubt regarding the
ultimate collectability of principal (i.e., cost recovery method). If collection of the principal of nonaccrual loans
held for investment is not in doubt, interest income is recognized on a cash basis. If neither principal nor interest
collection is in doubt, loans are on accrual status and interest income is recognized using the effective interest
method. Loans that are on nonaccrual status may not be restored to accrual status until all delinquent principal
and/or interest has been brought current, after a reasonable period of performance, typically a minimum of
six months.
Charge-offs. The Company charges off a loan in the period that it is deemed uncollectible and records a
reduction in the allowance for loan losses and the balance of the loan. In general, any portion of the recorded
investment in a collateral dependent loan (including any capitalized accrued interest, net deferred loan fees or
costs and unamortized premium or discount) in excess of the fair value of the collateral that can be identified as
uncollectible, and is therefore deemed a confirmed loss, is charged off against the allowance for loan losses. A
loan is collateral-dependent if the repayment of the loan is expected to be provided solely by the sale or operation
of the underlying collateral. A loan that is charged off is recorded as a reduction in the allowance for loan losses
and the balance of the loan. In addition, for loan transfers from loans held for investment to loans held for sale, at
the time of transfer, any reduction in the loan value is reflected as a charge-off of the recorded investment,
resulting in a new cost basis.
Loan Commitments. The Company records the liability and related expense for the credit exposure related to
commitments to fund loans that will be held for investment in a manner similar to outstanding loans disclosed
above. The analysis also incorporates a credit conversion factor, which is the expected utilization of the undrawn
170