Wells Fargo 2013 Annual Report Download - page 148

Note 1: Summary of Significant Accounting Policies (continued)
income as a prospective yield adjustment over the remaining life
of the loan, or pool of loans. Estimates of cash flows are
impacted by changes in interest rate indices for variable rate
loans and prepayment assumptions, both of which are treated as
prospective yield adjustments included in interest income.
Resolutions of loans may include sales of loans to third
parties, receipt of payments in settlement with the borrower, or
foreclosure of the collateral. For individual PCI loans, gains or
losses on sales to third parties are included in noninterest
income, and gains or losses as a result of a settlement with the
borrower are included in interest income. Our policy is to
remove an individual loan from a pool based on comparing the
amount received from its resolution with its contractual amount.
Any difference between these amounts is absorbed by the
nonaccretable difference for the entire pool. This removal
method assumes that the amount received from resolution
approximates pool performance expectations. The remaining
accretable yield balance is unaffected and any material change in
remaining effective yield caused by this removal method is
addressed by our quarterly cash flow evaluation process for each
pool. For loans that are resolved by payment in full, there is no
release of the nonaccretable difference for the pool because there
is no difference between the amount received at resolution and
the contractual amount of the loan. Modified PCI loans are not
removed from a pool even if those loans would otherwise be
deemed TDRs. Modified PCI loans that are accounted for
individually are considered TDRs, and removed from PCI
accounting if there has been a concession granted in excess of
the original nonaccretable difference. We include these TDRs in
our impaired loans.
FORECLOSED ASSETS Foreclosed assets obtained through our
lending activities primarily include real estate. Generally, loans
have been written down to their net realizable value prior to
foreclosure. Any further reduction to their net realizable value is
recorded with a charge to the allowance for credit losses at
foreclosure. We allow up to 90 days after foreclosure to finalize
determination of net realizable value. Thereafter, changes in net
realizable value are recorded to noninterest expense. The net
realizable value of these assets is reviewed and updated
periodically depending on the type of property.
ALLOWANCE FOR CREDIT LOSSES (ACL) The allowance for
credit losses is management’s estimate of credit losses inherent
in the loan portfolio, including unfunded credit commitments, at
the balance sheet date. We have an established process to
determine the appropriateness of the allowance for credit losses
that assesses the losses inherent in our portfolio and related
unfunded credit commitments. While we attribute portions of
the allowance to our respective commercial and consumer
portfolio segments, the entire allowance is available to absorb
credit losses inherent in the total loan portfolio and unfunded
credit commitments.
Our process involves procedures to appropriately consider
the unique risk characteristics of our commercial and consumer
loan portfolio segments. For each portfolio segment, losses are
estimated collectively for groups of loans with similar
characteristics, individually or pooled for impaired loans or, for
PCI loans, based on the changes in cash flows expected to be
collected.
Our allowance levels are influenced by loan volumes, loan
grade migration or delinquency status, historic loss experience
influencing loss factors, and other conditions influencing loss
expectations, such as economic conditions.
COMMERCIAL PORTFOLIO SEGMENT ACL METHODOLOGY
Generally, commercial loans are assessed for estimated losses by
grading each loan using various risk factors as identified through
periodic reviews. We apply historic grade-specific loss factors to
the aggregation of each funded grade pool. These historic loss
factors are also used to estimate losses for unfunded credit
commitments. In the development of our statistically derived
loan grade loss factors, we observe historical losses over a
relevant period for each loan grade. These loss estimates are
adjusted as appropriate based on additional analysis of long-
term average loss experience compared to previously forecasted
losses, external loss data or other risks identified from current
economic conditions and credit quality trends.
The allowance also includes an amount for the estimated
impairment on nonaccrual commercial loans and commercial
loans modified in a TDR, whether on accrual or nonaccrual
status.
CONSUMER PORTFOLIO SEGMENT ACL METHODOLOGY
For consumer loans that are not identified as a TDR, we
determine the allowance predominantly on a collective basis
utilizing forecasted losses to represent our best estimate of
inherent loss. We pool loans, generally by product types with
similar risk characteristics, such as residential real estate
mortgages and credit cards. As appropriate and to achieve
greater accuracy, we may further stratify selected portfolios by
sub-product, origination channel, vintage, loss type, geographic
location and other predictive characteristics. Models designed
for each pool are utilized to develop the loss estimates. We use
assumptions for these pools in our forecast models, such as
historic delinquency and default, loss severity, home price
trends, unemployment trends, and other key economic variables
that may influence the frequency and severity of losses in the
pool.
In determining the appropriate allowance attributable to our
residential mortgage portfolio, we take into consideration
portfolios determined to be at elevated risk, such as junior lien
mortgages behind delinquent first lien mortgages and junior lien
lines of credit subject to near term significant payment increases.
We incorporate the default rates and high severity of loss for
these higher risk portfolios, including the impact of our
established loan modification programs. When modifications
occur or are probable to occur, our allowance considers the
impact of these modifications, taking into consideration the
associated credit cost, including re-defaults of modified loans
and projected loss severity. Accordingly, the loss content
associated with the effects of existing and probable loan
modifications and higher risk portfolios has been captured in our
allowance methodology.
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