Wells Fargo 2012 Annual Report Download - page 76

Risk Management – Credit Risk Management (continued)
In addition to the allowance for credit losses there was
$7.0 billion, $10.7 billion and $13.4 billion of nonaccretable
difference at December 31, 2012, 2011 and 2010 respectively, to
absorb losses for PCI loans. The allowance for credit losses is
lower than otherwise would have been required without PCI
loan accounting. As a result of PCI loans, certain ratios of the
Company may not be directly comparable with periods prior to
the Wachovia merger and credit-related metrics for other
financial institutions. For additional information on PCI loans,
see the “Risk Management – Credit Risk Management –
Purchased Credit-Impaired Loans” section, Note 1 (Summary of
Significant Accounting Policies) and Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
The ratio of the allowance for credit losses to total
nonaccrual loans may fluctuate significantly from period to
period due to such factors as the mix of loan types in the
portfolio, borrower credit strength and the value and
marketability of collateral. Over half of nonaccrual loans were
home mortgages at December 31, 2012.
The 2012 provision of $7.2 billion was $1.8 billion less than
net charge-offs as a result of continued strong credit
performance. The provision incorporated estimated losses
attributable to Super Storm Sandy, which caused destruction
along the northeast coast of the U.S. in late October 2012 and
affected primarily our consumer real estate loan portfolios.
Based on available damage assessments, the extent of insurance
coverage, the availability of government assistance for our
borrowers, and our estimate of the potential impact on
borrowers’ ability and willingness to repay their loans, we
estimated the increase in net charge-offs attributable to Super
Storm Sandy to be between $200 million and $800 million.
After considering various factors, including our estimate of the
probabilities associated with various outcomes, we incorporated
$425 million into our provision for 2012. The OCC guidance
issued in 2012 requires consumer loans discharged in
bankruptcy to be placed on nonaccrual status and written down
to net realizable collateral value, regardless of their delinquency
status. While the impact of the OCC guidance accelerated
charge-offs of performing consumer loans discharged in
bankruptcy in 2012, the allowance had coverage for these
charge-offs. Total provision for credit losses was $7.2 billion in
2012, $7.9 billion in 2011 and $15.8 billion in 2010.
The 2011 provision of $7.9 billion was $3.4 billion less than
net charge-offs. Primary drivers of the 2011 allowance release
were decreased net charge-offs and continued improvement in
the credit quality of the commercial and consumer portfolios
and related loss estimates as seen in declining delinquency and
nonperforming loan levels.
In 2010, the provision of $15.8 billion was $2.0 billion less
than net charge-offs. The allowance release was primarily due to
continued improvement in the consumer portfolios and related
loss estimates and improvement in economic conditions. These
drivers were partially offset by an increase in impaired loans and
related allowance primarily associated with increased consumer
loan modification efforts and a $693 million addition to the
allowance due to adoption of consolidation accounting guidance
on January 1, 2010.
In determining the appropriate allowance attributable to our
residential real estate portfolios, our process considers the
associated credit cost, including re-defaults of modified loans
and projected loss severity for loan modifications that occur or
are probable to occur. In addition, our process incorporates the
estimated allowance associated with recent events including our
settlements announced in February 2012 and January 2013 with
federal and state government entities relating to our mortgage
servicing and foreclosure practices and high risk portfolios
defined in the Interagency Guidance relating to junior lien
mortgages.
Changes in the allowance reflect changes in statistically
derived loss estimates, historical loss experience, current trends
in borrower risk and/or general economic activity on portfolio
performance, and management’s estimate for imprecision and
uncertainty.
We believe the allowance for credit losses of $17.5 billion at
December 31, 2012, was appropriate to cover credit losses
inherent in the loan portfolio, including unfunded credit
commitments, at that date. The allowance for credit losses is
subject to change and reflects existing factors as of the date of
determination, including economic or market conditions and
ongoing internal and external examination processes. Due to the
sensitivity of the allowance for credit losses to changes in the
economy and business environment, it is possible that we will
incur incremental credit losses not anticipated as of the balance
sheet date. Absent significant deterioration in the economy, we
continue to expect future allowance releases in 2013, but at a
lower level than 2012. Our process for determining the
allowance for credit losses is discussed in the “Critical
Accounting Policies – Allowance for Credit Losses” section and
Note 1 (Summary of Significant Accounting Policies) to Financial
Statements in this Report.
LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES We
sell residential mortgage loans to various parties, including (1)
government-sponsored entities Freddie Mac and Fannie Mae
(GSEs) who include the mortgage loans in GSE-guaranteed
mortgage securitizations, (2) SPEs that issue private label MBS,
and (3) other financial institutions that purchase mortgage loans
for investment or private label securitization. In addition, we
pool FHA-insured and VA-guaranteed mortgage loans that back
securities guaranteed by the Government National Mortgage
Association (GNMA). We may be required to repurchase these
mortgage loans, indemnify the securitization trust, investor or
insurer, or reimburse the securitization trust, investor or insurer
for credit losses incurred on loans (collectively, repurchase) in
the event of a breach of contractual representations or
warranties that is not remedied within a period (usually 90 days
or less) after we receive notice of the breach.
We have established a mortgage repurchase liability related
to various representations and warranties that reflect
management’s estimate of probable losses for loans for which we
have a repurchase obligation, whether or not we currently
service those loans, based on a combination of factors. Our
mortgage repurchase liability estimation process also
incorporates a forecast of repurchase demands associated with
mortgage insurance rescission activity. Our mortgage
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