Morgan Stanley 2015 Annual Report Download - page 145

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest Income. Interest income on performing loans held for investment 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.
Allowance for Loan Losses. The allowance for loan losses estimates probable losses related to loans specifically identified
for impairment in addition to the probable losses inherent in the held for investment loan portfolio.
The Company utilizes the U.S. banking regulators’ definition of criticized exposures, which consist of the special mention
substandard, doubtful and loss categories as credit quality indicators. For further information on the credit indicators, see
Note 7. Substandard loans are regularly reviewed for impairment. Factors considered by management when determining
impairment include payment status, fair value of collateral, and probability of 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.
There are two components of the allowance for loan losses: the specific allowance component and the inherent allowance
component.
The specific allowance component of the allowance for loan losses is used to estimate probable losses for non-homogeneous
exposures that have been specifically identified for impairment analysis by the Company and determined to be impaired.
When a loan is specifically identified for impairment, 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.
The inherent allowance component of the allowance for loan losses is used to estimate the probable losses inherent in the
loan portfolio and includes non-homogeneous loans that have not been identified as impaired and portfolios of smaller
balance homogeneous loans. The Company maintains methodologies by loan product for calculating an allowance for loan
losses that estimates the inherent losses in the loan portfolio. 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. The
allowance for loan losses is maintained at a level reasonable to ensure that it can adequately absorb the estimated probable
losses inherent in the portfolio. The Company recognizes an allowance and a charge to the provision for loan losses within
Other revenues.
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. TDRs are also generally classified as nonaccrual and may only be returned to accrual status after
considering the borrower’s sustained repayment performance for a reasonable period.
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.
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