Wells Fargo 2010 Annual Report Download - page 117

including its expected life, and (4) our current financial
condition and liquidity demands. Consistent with our core
banking business of managing the spread between the yield on
our assets and the cost of our funds, loans are periodically
reevaluated to determine if our minimum net interest margin
spreads continue to meet our profitability objectives. If
subsequent changes in interest rates significantly impact the
ongoing profitability of certain loan products, we may
subsequently change our intent to hold these loans, and we
would take actions to sell such loans in response to the
Corporate ALCO directives to reposition our balance sheet
because of the changes in interest rates. These directives identify
both the type of loans to be sold and the weighted average
coupon rate of such loans no longer meeting our ongoing
investment criteria. Upon the issuance of such directives, we
immediately transfer these loans to the MHFS portfolio at
LOCOM.
Loans Held for Sale
Loans held for sale (LHFS) are carried at LOCOM or at fair value
for certain portfolios that we intend to hold for trading purposes.
Generally, consumer loans are valued on an aggregate portfolio
basis, and commercial loans are valued on an individual loan
basis. Gains and losses on LHFS are recorded in other
noninterest income. For LHFS recorded at LOCOM, direct loan
origination costs and fees are deferred at origination and are
recognized in other noninterest income at time of sale. For loans
recorded at fair value, direct loan origination costs and fees are
recorded in other noninterest income at origination. The fair
value of LHFS is based on what secondary markets are currently
offering for portfolios with similar characteristics, and related
gains and losses are recorded in noninterest income.
Loans
Loans are reported at their outstanding principal balances net of
any unearned income, cumulative charge-offs, unamortized
deferred fees and costs on originated loans and unamortized
premiums or discounts on purchased loans. PCI loans are
reported net of any remaining purchase accounting adjustments.
See the “Purchased Credit-Impaired Loans” section in this Note
for our accounting policy for PCI loans.
Unearned income, deferred fees and costs, and discounts and
premiums are amortized to interest income over the contractual
life of the loan using the interest method. Loan commitment fees
are generally deferred and amortized into noninterest income on
a straight-line basis over the commitment period.
Loans also include direct financing leases that are recorded at
the aggregate of minimum lease payments receivable plus the
estimated residual value of the leased property, less unearned
income. Leveraged leases, which are a form of direct financing
leases, are recorded net of related nonrecourse debt. Leasing
income is recognized as a constant percentage of outstanding
lease financing balances over the lease terms in interest income.
NONACCRUAL AND PAST DUE LOANS We generally place loans
on nonaccrual status when:
• the full and timely collection of interest or principal
becomes uncertain;
• they are 90 days (120 days with respect to real estate 1-4
family first and junior lien mortgages) past due for interest
or principal, unless both well-secured and in the process of
collection; or
• part of the principal balance has been charged off and no
restructuring has occurred.
PCI loans are written down at acquisition to fair value using
an estimate of cash flows deemed to be collectible. Accordingly,
such loans are no longer classified as nonaccrual even though
they may be contractually past due because we expect to fully
collect the new carrying values of such loans (that is, the new
cost basis arising out of purchase accounting).
When we place a loan on nonaccrual status, we reverse the
accrued unpaid interest receivable against interest income and
amortization of any net deferred fees is suspended. A loan will
remain in accruing status provided it is both well-secured and in
the process of collection. If the ultimate collectability of a loan is
in doubt and the loan is on nonaccrual, the cost recovery method
is used and cash collected is applied to first reduce the principal
outstanding. Generally, we return a loan to accrual status when
all delinquent interest and principal become current under the
terms of the loan agreement and collectability of remaining
principal and interest is no longer doubtful.
For modified loans, we underwrite at the time of a
restructuring to determine if there is sufficient evidence of
sustained repayment capacity based on the borrower’s financial
strength, including documented income, debt to income ratios
and other factors. If the borrower has demonstrated
performance under the previous terms and the underwriting
process shows the capacity to continue to perform under the
restructured terms, the loan will remain in accruing status.
When a loan classified as a TDR performs in accordance with its
modified terms, the loan either continues to accrue interest (for
performing loans) or will return to accrual status after the
borrower demonstrates a sustained period of performance
(generally six consecutive months of payments, or equivalent,
inclusive of consecutive payments made prior to the
modification). Loans will be placed on nonaccrual status and a
corresponding charge-off is recorded if we believe it is probable
that principal and interest contractually due under the modified
terms of the agreement will not be collectible.
Generally, consumer loans not secured by real estate or autos
are placed on nonaccrual status only when part of the principal
has been charged off. Loans are fully charged off or charged
down to net realizable value (fair value of collateral less
estimated costs to sell) when deemed uncollectible due to
bankruptcy or other factors, or when they reach a defined
number of days past due based on loan product, industry
practice, country, terms and other factors.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
LOAN CHARGE-OFF POLICIES For commercial loans, we
generally fully charge off or charge down to net realizable value
for loans secured by collateral when:
• management judges the loan to be uncollectible;
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