Wells Fargo 2013 Annual Report Download - page 146

Note 1: Summary of Significant Accounting Policies (continued)
and LHFS is calculated based upon the note rate of the loan and
is recorded to interest income.
Our lines of business are authorized to originate held-for-
investment loans that meet or exceed established loan product
profitability criteria, including minimum positive net interest
margin spreads in excess of funding costs. When a
determination is made at the time of commitment to originate
loans as held for investment, it is our intent to hold these loans
to maturity or for the “foreseeable future,” subject to periodic
review under our corporate asset/liability management process.
In determining the “foreseeable future” for these loans,
management considers (1) the current economic environment
and market conditions, (2) our business strategy and current
business plans, (3) the nature and type of the loan receivable,
including its expected life, and (4) our current financial
condition and liquidity demands. Consistent with our core
banking business of managing the spread between the yield on
our assets and the cost of our funds, loans are periodically re-
evaluated to determine if our minimum net interest margin
spreads continue to meet our profitability objectives. If
subsequent changes in interest rates significantly impact the
ongoing profitability of certain loan products, we may
subsequently change our intent to hold these loans, and we
would take actions to sell such loans in response to the
Corporate ALCO directives to reposition our balance sheet
because of the changes in interest rates. These directives identify
both the type of loans to be sold and the weighted average
coupon rate of such loans no longer meeting our ongoing
investment criteria. Upon the issuance of such directives, we
immediately transfer these loans to the MHFS portfolio at
LOCOM.
Loans
Loans are reported at their outstanding principal balances net of
any unearned income, cumulative charge-offs, unamortized
deferred fees and costs on originated loans and unamortized
premiums or discounts on purchased loans. PCI loans are
reported net of any remaining purchase accounting adjustments.
See the “Purchased Credit-Impaired Loans” section in this Note
for our accounting policy for PCI loans.
Unearned income, deferred fees and costs, and discounts and
premiums are amortized to interest income over the contractual
life of the loan using the interest method. Loan commitment fees
are generally deferred and amortized into noninterest income on
a straight-line basis over the commitment period.
Loans also include direct financing leases that are recorded at
the aggregate of minimum lease payments receivable plus the
estimated residual value of the leased property, less unearned
income. Leveraged leases, which are a form of direct financing
leases, are recorded net of related nonrecourse debt. Leasing
income is recognized as a constant percentage of outstanding
lease financing balances over the lease terms in interest income.
NONACCRUAL AND PAST DUE LOANS We generally place
loans on nonaccrual status when:
the full and timely collection of interest or principal
becomes uncertain (generally based on an assessment of the
borrower’s financial condition and the adequacy of
collateral, if any);
they are 90 days (120 days with respect to real estate 1-4
family first and junior lien mortgages) past due for interest
or principal, unless both well-secured and in the process of
collection;
part of the principal balance has been charged off (including
loans discharged in bankruptcy);
for junior lien mortgages, we have evidence that the related
first lien mortgage may be 120 days past due or in the
process of foreclosure regardless of the junior lien
delinquency status; or
performing consumer loans are discharged in bankruptcy,
regardless of their delinquency status.
PCI loans are written down at acquisition to fair value using
an estimate of cash flows deemed to be collectible. Accordingly,
such loans are no longer classified as nonaccrual even though
they may be contractually past due because we expect to fully
collect the new carrying values of such loans (that is, the new
cost basis arising out of purchase accounting).
When we place a loan on nonaccrual status, we reverse the
accrued unpaid interest receivable against interest income and
amortization of any net deferred fees is suspended. If the
ultimate collectability of the recorded loan balance is in doubt on
a nonaccrual loan, the cost recovery method is used and cash
collected is applied to first reduce the carrying value of the loan.
Otherwise, interest income may be recognized to the extent cash
is received. Generally, we return a loan to accrual status when all
delinquent interest and principal become current under the
terms of the loan agreement and collectability of remaining
principal and interest is no longer doubtful.
For modified loans, we re-underwrite at the time of a
restructuring to determine if there is sufficient evidence of
sustained repayment capacity based on the borrower’s financial
strength, including documented income, debt to income ratios
and other factors. If the borrower has demonstrated
performance under the previous terms and the underwriting
process shows the capacity to continue to perform under the
restructured terms, the loan will generally remain in accruing
status. When a loan classified as a troubled debt restructuring
(TDR) performs in accordance with its modified terms, the loan
either continues to accrue interest (for performing loans) or will
return to accrual status after the borrower demonstrates a
sustained period of performance (generally six consecutive
months of payments, or equivalent, inclusive of consecutive
payments made prior to the modification). Loans will be placed
on nonaccrual status and a corresponding charge-off is recorded
if we believe it is probable that principal and interest
contractually due under the modified terms of the agreement
will not be collectible.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
LOAN CHARGE-OFF POLICIES For commercial loans, we
generally fully charge off or charge down to net realizable value
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