Wells Fargo 2013 Annual Report Download - page 60

Risk Management – Credit Risk Management (continued)
Table 19: Actual and Projected Loss Results on PCI Loans Since Acquisition of Wachovia
(in millions) Commercial Pick-a-Pay
Other
consumer Total
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1) $ 1,512 - - 1,512
Loans resolved by sales to third parties (2) 308 - 85 393
Reclassification to accretable yield for loans with improving credit-related cash flows (3) 1,605 3,897 823 6,325
Total releases of nonaccretable difference due to better than expected losses 3,425 3,897 908 8,230
Provision for losses due to credit deterioration (4) (1,641) - (107) (1,748)
Actual and projected losses on PCI loans less than originally expected $ 1,784 3,897 801 6,482
(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 Loan 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 regulatory definitions of pass and criticized categories with
criticized divided between special mention, substandard and
doubtful categories.
The commercial and industrial loans and lease financing
portfolio, which totaled $209.2 billion or 25% of total loans at
December 31, 2013, generally experienced credit improvement in
2013. The net charge-off rate for this portfolio declined to 0.18%
in 2013 from 0.46% in 2012. At December 31, 2013, 0.37% of
this portfolio was nonaccruing compared with 0.72% at
December 31, 2012. In addition, $15.5 billion of this portfolio
was rated as criticized in accordance with regulatory guidance at
December 31, 2013, down from $19.0 billion at
December 31, 2012.
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.
Table 20: Commercial and Industrial Loans and Lease
Financing by Industry
December 31, 2013
(in millions)
Nonaccrual
loans
Total
portfolio (1)
% of
total
loans
Investors $ 17 19,627 2 %
Cyclical Retailers 25 15,112 2
Oil & Gas 67 14,102 2
Food and beverage 45 12,719 2
Financial Institutions 44 12,055 1
Healthcare 39 11,608 1
Real Estate Lessor 16 11,242 1
Industrial Equipment 6 10,483 1
Technology 7 7,386 1
Transportation 7 5,936 1
Public Administration 16 5,832 1
Business Services 34 5,798 1
Other 444 77,344 (2) 9
Total $ 767 209,244 25 %
* Less than 1%.
(1) Includes $215 million PCI loans, which are considered to be accruing due to the
existence of the accretable yield and not based on consideration given to
contractual interest payments.
(2) No other single category had loans in excess of $4.8 billion.
Risk mitigation actions, including the restructuring of
repayment terms, securing collateral or guarantees, and entering
into extensions, are based on a re-underwriting of the loan and
our assessment of the borrower’s ability to perform under the
agreed-upon terms. Extension terms generally range from six to
thirty-six months and may require that the borrower provide
additional economic support in the form of partial repayment, or
additional collateral or guarantees. In cases where the value of
collateral or financial condition of the borrower is insufficient to
repay our loan, we may rely upon the support of an outside
repayment guarantee in providing the extension.
Our ability to seek performance under a guarantee is directly
related to the guarantor’s creditworthiness, capacity and
willingness to perform, which is evaluated on an annual basis, or
more frequently as warranted. Our evaluation is based on the
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