JP Morgan Chase 2010 Annual Report Download - page 221

JPMorgan Chase & Co./2010 Annual Report 221
Loans held-for-sale
Held-for-sale loans are measured at the lower of cost or fair
value, with valuation changes recorded in noninterest revenue.
For wholesale loans, the valuation is performed on an individual
loan basis. For consumer loans, the valuation is performed on a
portfolio basis.
Interest income on loans held-for-sale is accrued and recognized
based on the contractual rate of interest.
Loan origination fees or costs and purchase price discounts or
premiums are deferred in a contra loan account until the related
loan is sold. The deferred fees and discounts or premiums are an
adjustment to the basis of the loan and therefore are included in
the periodic determination of the lower of cost or fair value
adjustments and/or the gain or losses recognized at the time of
sale.
Held-for-sale loans are subject to the nonaccrual policies de-
scribed above.
Because held-for-sale loans are recognized at the lower of cost or
fair value, the Firm’s allowance for loan losses and charge-off
policies do not apply to these loans.
Fair value loans
Loans used in a trading strategy or risk managed on a fair value
basis are measured at fair value, with changes in fair value re-
corded in noninterest revenue.
For these loans, the earned current contractual interest payment
is recognized in interest income. Changes in fair value are recog-
nized in noninterest revenue. Loan origination fees are recognized
upfront in noninterest revenue. Loan origination costs are recog-
nized in the associated expense category as incurred.
Because these loans are recognized at fair value, the Firm’s
nonaccrual, allowance for loan losses, and charge-off policies do
not apply to these loans.
See Note 4 on pages 187–189 of this Annual Report for further
information on the Firm’s elections of fair value accounting under
the fair value option. See Note 3 and Note 4 on pages 170–187
and 187–189 of this Annual Report for further information on
loans carried at fair value and classified as trading assets.
PCI loans
PCI loans held-for-investment are initially measured at fair value.
PCI loans have evidence of credit deterioration since the loan’s
origination date and therefore it is probable, at acquisition, that all
contractually required payments will not be collected. Because PCI
loans are initially measured at fair value, which includes an estimate
of future credit losses, no allowance for loan losses related to PCI
loans is recorded at the acquisition date. See page 233 of this Note
for information on accounting for PCI loans subsequent to their
acquisition.
Loan classification changes
Loans in the held-for-investment portfolio that management
decides to sell are transferred to the held-for-sale portfolio at the
lower of cost or fair value on the date of transfer. Credit-related
losses are charged against the allowance for loan losses; losses
due to changes in interest rates or foreign currency exchange
rates are recognized in noninterest revenue.
In certain limited cases, loans in the held-for-sale portfolio that
management decides to retain are transferred to the held-for-
investment portfolio at the lower of cost or fair value on the date of
transfer. These loans are subsequently assessed for impairment
based on the Firm’s allowance methodology. For a further discus-
sion of the methodologies used in establishing the Firm’s allowance
for loan losses, see Note 15 on pages 239–243 of this Annual
Report.
Loan modifications
The Firm seeks to modify certain loans in conjunction with its
loss-mitigation activities. Through the modification, JPMorgan
Chase grants one or more concessions to a borrower who is
experiencing financial difficulty in order to minimize the Firm’s
economic loss, avoid foreclosure or repossession of the collateral
and to ultimately maximize payments received by the Firm from
the borrower. The concessions granted vary by program and by
borrower-specific characteristics, and may include interest rate
reductions, term extensions, payment deferrals, or the acceptance
of equity or other assets in lieu of payments. In certain limited
circumstances, loan modifications include principal forgiveness.
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 until it matures, is
repaid, or is otherwise liquidated, regardless of whether the
borrower performs under the modified terms. In certain limited
cases, the effective interest rate applicable to the modified loan is
at or above the current market rate at the time of the restructur-
ing. In such circumstances, and assuming that the loan subse-
quently performs under its modified terms and the Firm expects to
collect all contractual principal and interest cash flows, the loan is
disclosed as impaired and as a TDR only during the year of the
modification; in subsequent years, the loan is not disclosed as an
impaired loan or as a TDR so long as repayment of the restruc-
tured loan under its modified terms is reasonably assured.
Loans, except for credit card loans, modified in a TDR are gener-
ally placed on nonaccrual status, although in most cases such
loans were already on nonaccrual status prior to modification.
These loans may be returned to performing status (resuming the
accrual of interest) if the following criteria are met: (a) the bor-
rower has performed under the modified terms for a minimum of
six months and/or six payments, and (b) the Firm has an expecta-
tion that repayment of the modified loan is reasonably assured
based on, for example, the borrower’s debt capacity and level of
future earnings, collateral values, LTV ratios, and other current
market considerations.