Wells Fargo 2012 Annual Report Download - page 56

Risk Management – Credit Risk Management (continued)
Since December 31, 2008, we have released $7.2 billion in
nonaccretable difference, including $5.4 billion transferred from
the nonaccretable difference to the accretable yield and
$1.8 billion released to income through loan resolutions. Also,
we have provided $1.8 billion for losses on certain PCI loans or
pools of PCI loans that have had credit-related decreases to cash
flows expected to be collected. The net result is a $5.4 billion
reduction from December 31, 2008, through December 31, 2012,
in our initial projected losses of $41.0 billion on all PCI loans.
At December 31, 2012, the allowance for credit losses on
certain PCI loans was $117 million. The allowance is necessary to
absorb credit-related decreases in cash flows expected to be
collected and primarily relates to individual PCI commercial
loans. Table 19 analyzes the actual and projected loss results on
PCI loans since acquisition through December 31, 2012.
For additional information on PCI loans, see Note 1
(Summary of Significant Accounting Policies – Loans) and
Note 6 (Loans and Allowance for Credit Losses) to Financial
Statements in this Report.
Table 19: Actual and Projected Loss Results on PCI Loans Since Acquisition of Wachovia
Other
(in millions) Commercial Pick-a-Pay consumer Total
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1) $ 1,426 - - 1,426
Loans resolved by sales to third parties (2) 303 - 85 388
Reclassification to accretable yield for loans with improving credit-related cash flows (3) 1,531 3,031 792 5,354
Total releases of nonaccretable difference due to better than expected losses 3,260 3,031 877 7,168
Provision for losses due to credit deterioration (4) (1,693) - (123) (1,816)
Actual and projected losses on PCI loans less than originally expected $ 1,567 3,031 754 5,352
(1) Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay
and Other consumer PCI loans do not reflect nonaccretable difference releases for settlements with borrowers due to pool accounting for those loans, which assumes that the
amount received approximates the pool performance expectations.
(2) Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
(3) Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield
adjustment over the remaining life of the loan or pool of loans.
(4) Provision for additional losses is recorded as a charge to income when it is estimated that the cash flows expected to be collected for a PCI loan or pool of loans may not
support full realization of the carrying value.
Significant Portfolio Reviews Measuring and monitoring our
credit risk is an ongoing process that tracks delinquencies,
collateral values, FICO scores, economic trends by geographic
areas, loan-level risk grading for certain portfolios (typically
commercial) and other indications of credit risk. Our credit risk
monitoring process is designed to enable early identification of
developing risk and to support our determination of an
appropriate allowance for credit losses. The following discussion
provides additional characteristics and analysis of our significant
portfolios. See Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report for more analysis and credit
metric information.
COMMERCIAL AND INDUSTRIAL LOANS AND LEASE
FINANCING For purposes of portfolio risk management, we
aggregate commercial and industrial loans and lease financing
according to market segmentation and standard industry
codes. Table 20 summarizes commercial and industrial loans
and lease financing by industry with the related nonaccrual
totals. We generally subject commercial and industrial loans and
lease financing to individual risk assessment using our internal
borrower and collateral quality ratings. Our ratings are aligned
to pass and criticized categories with our criticized categories
aligned to special mention, substandard and doubtful categories
as defined by bank regulatory agencies.
Across our non-PCI commercial loans and leases, the
commercial and industrial loans and lease financing portfolio
generally experienced credit improvement in 2012. Of the total
commercial and industrial loans and lease financing non-PCI
portfolio, 0.02% was 90 days or more past due and still accruing
at December 31, 2012, compared with 0.09% at
December 31, 2011, 0.72% (1.22% at December 31, 2011) was
nonaccruing and 9.43% (12.5% at December 31, 2011) was
criticized. The net charge-off rate for this portfolio declined to
0.46% in 2012 from 0.70% for 2011.
A majority of our commercial and industrial loans and lease
financing portfolio is secured by short-term assets, such as
accounts receivable, inventory and securities, as well as long-
lived assets, such as equipment and other business assets.
Generally, the collateral securing this portfolio represents a
secondary source of repayment. See Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report for additional credit metric information.
54