JP Morgan Chase 2015 Annual Report Download - page 252

Notes to consolidated financial statements
242 JPMorgan Chase & Co./2015 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 (i.e.,
“retained”), other than purchased credit-impaired
(“PCI”) loans
• Loans held-for-sale
• Loans at fair value
• 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;
charge-offs; interest applied to principal (for loans
accounted for on the cost recovery method); unamortized
discounts and premiums; and net deferred loan fees or
costs. Credit card loans also include billed finance charges
and fees net of an allowance for uncollectible amounts.
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 premiums, 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, or when principal and interest has been in
default for a period of 90 days or more, unless the loan is
both well-secured and in the process of collection. 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. Finally, collateral-dependent loans are
typically maintained on nonaccrual status.
On the date a loan is placed on nonaccrual status, all
interest accrued but not collected is reversed against
interest income. In addition, the amortization of deferred
amounts is suspended. Interest income on nonaccrual loans
may be recognized as cash interest payments are received
(i.e., on a cash basis) if the recorded loan balance is
deemed fully collectible; however, if there is doubt
regarding the ultimate collectibility of the recorded loan
balance, all interest cash receipts are applied to reduce the
carrying value of the loan (the cost recovery method). For
consumer loans, application of this policy typically results in
the Firm recognizing interest income on nonaccrual
consumer loans on a cash basis.
A loan may be returned to accrual status when repayment is
reasonably assured and there has been demonstrated
performance 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, interest 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 accrued interest
and fee income on credit card loans. The allowance is
established with a charge to interest income and is reported
as an offset to loans.
Allowance for loan losses
The allowance for loan losses represents the estimated
probable credit losses inherent in the held-for-investment
loan portfolio at the balance sheet date. 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 for further information on the Firm’s
accounting policies for the allowance for loan losses.
Charge-offs
Consumer loans, other than risk-rated business banking,
risk-rated auto and PCI loans, are generally charged off or
charged down to the net realizable value of the underlying
collateral (i.e., fair value less costs to sell), with an offset to
the allowance for loan losses, upon reaching specified
stages of delinquency in accordance with standards
established by the Federal Financial Institutions
Examination Council (“FFIEC”). Residential real estate loans,
non-modified credit card loans and scored business banking
loans are generally charged off at 180 days past due. Auto
and student loans are charged off no later than 120 days
past due, and modified credit card loans are charged off at
120 days past due.
Certain consumer loans will be charged off earlier than the
FFIEC charge-off standards in certain circumstances as
follows:
• A charge-off is recognized when a loan is modified in a
troubled debt restructuring (“TDR”) if the loan is
determined to be collateral-dependent. A loan is
considered to be collateral-dependent when repayment
of the loan is expected to be provided solely by the
underlying collateral, rather than by cash flows from the
borrower’s operations, income or other resources.
• Loans to borrowers who have experienced an event
(e.g., bankruptcy) that suggests a loss is either known or
highly certain are subject to accelerated charge-off
standards. Residential real estate and auto loans are
charged off when the loan becomes 60 days past due, or
sooner if the loan is determined to be collateral-