Wells Fargo 2013 Annual Report Download - page 145

our evaluation of PPS are whether there is any evidence of
deterioration in the credit of the issuer as indicated by a decline
in cash flows or a rating agency downgrade to below investment
grade and the estimated recovery period. Additionally, in
determining if there was evidence of credit deterioration, we
evaluate: (1) the severity of decline in market value below cost,
(2) the period of time for which the decline in fair value has
existed, and (3) the financial condition and near-term prospects
of the issuer, including any specific events which may influence
the operations of the issuer. We consider PPS to be other-than-
temporarily impaired if cash flows expected to be collected are
insufficient to recover our investment or if we no longer believe
the security will recover within the estimated recovery period.
OTTI write-downs of PPS are recognized in earnings equal to the
difference between the cost basis and fair value of the security.
Based upon the factors considered in our OTTI evaluation, we
believe our investments in PPS currently rated investment grade
will be fully realized and, accordingly, have not recognized OTTI
on such securities.
For marketable equity securities other than PPS, OTTI
evaluations focus on whether evidence exists that supports
recovery of the unrealized loss within a timeframe consistent
with temporary impairment. This evaluation considers the
severity of and length of time fair value is below cost, our intent
and ability to hold the security until forecasted recovery of the
fair value of the security, and the investee's financial condition,
capital strength, and near-term prospects.
The securities portfolio is an integral part of our
asset/liability management process. We manage these
investments to provide liquidity, manage interest rate risk and
maximize portfolio yield within capital risk limits approved by
management and the Board of Directors and monitored by the
Corporate Asset/Liability Management Committee (Corporate
ALCO). We recognize realized gains and losses on the sale of
these securities in noninterest income using the specific
identification method.
Unamortized premiums and discounts are recognized in
interest income over the contractual life of the security using the
interest method. As principal repayments are received on
securities (i.e., primarily mortgage-backed securities (MBS)) a
proportionate amount of the related premium or discount is
recognized in income so that the effective interest rate on the
remaining portion of the security continues unchanged.
HELD-TO-MATURITY SECURITIES Debt securities for which
the Company has the positive intent and ability to hold to
maturity are reported at historical cost adjusted for amortization
of premiums and accretion of discounts. We recognize OTTI
when there is a decline in fair market value and we do not expect
to recover the entire amortized cost basis of the debt security.
The amortized cost is written-down to fair value with the credit
loss component recorded to earnings and the remaining
component recognized in OCI. The OTTI assessment related to
whether we expect recovery of the amortized cost basis and
determination of any credit loss component recognized in
earnings for held-to-maturity securities is the same as described
for available-for-sale securities. Security transfers to the held-to-
maturity classification are accounted for at fair value. Unrealized
gains or losses from the transfer of available for sale securities
continue to be reported in cumulative OCI and are amortized
into earnings over the remaining life of the security using the
effective interest method.
NONMARKETABLE EQUITY INVESTMENTS Nonmarketable
equity investments include low income housing tax credit
investments, equity securities that are not publicly traded and
securities acquired for various purposes, such as to meet
regulatory requirements (for example, Federal Reserve Bank and
Federal Home Loan Bank (FHLB) stock). We elected the fair
value option for certain of these investments. The rest of these
investments are accounted for under the cost or equity method.
All nonmarketable equity investments are included in other
assets. We review those assets accounted for under the cost or
equity method at least quarterly for possible OTTI. Our review
typically includes an analysis of the facts and circumstances of
each investment, the expectations for the investment's cash
flows and capital needs, the viability of its business model and
our exit strategy. We reduce the asset value when we consider
declines in value to be other than temporary. We recognize the
estimated loss as a loss from equity investments in noninterest
income.
Securities Purchased and Sold Agreements
Securities purchased under resale agreements and securities sold
under repurchase agreements are accounted for as collateralized
financing transactions and are recorded at the acquisition or sale
price plus accrued interest. It is our policy to take possession of
securities purchased under resale agreements, which are
primarily U.S. Government and Government agency securities.
We monitor the market value of securities purchased and sold,
and obtain collateral from or return it to counterparties when
appropriate. These financing transactions do not create material
credit risk given the collateral provided and the related
monitoring process.
Mortgages and Loans Held for Sale
Mortgages held for sale (MHFS) include commercial and
residential mortgages originated for sale and securitization in
the secondary market, which is our principal market, or for sale
as whole loans. We elect the fair value option for substantially all
residential MHFS (see Note 17). The remaining residential
MHFS are held at the lower of cost or market value (LOCOM),
and are valued on an aggregate portfolio basis. Commercial
MHFS are held at LOCOM and are valued on an individual loan
basis.
Loans held for sale (LHFS) are carried at LOCOM or at fair
value. Generally, consumer loans are valued on an aggregate
portfolio basis, and commercial loans are valued on an
individual loan basis.
Gains and losses on MHFS are recorded in mortgage banking
noninterest income. Gains and losses on LHFS are recorded in
other noninterest income. Direct loan origination costs and fees
for MHFS and LHFS under the fair value option are recognized
in income at origination. For MHFS and LHFS recorded at
LOCOM, loan costs and fees are deferred at origination and are
recognized in income at time of sale. Interest income on MHFS
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