Wells Fargo 2009 Annual Report Download - page 124

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We consider a loan to be impaired under the accounting
guidance for loan impairment provisions when, based on
current information and events, we determine that we will
not be able to collect all amounts due according to the loan
contract, including scheduled interest payments. We assess
and account for as impaired certain nonaccrual commercial,
CRE and foreign loan exposures that are over $5 million and
certain consumer, commercial, CRE and foreign loans whose
terms have been modified in a TDR. The recorded investment
in impaired loans and the methodology used to measure
impairment was:
The excess of cash flows expected to be collected over the
initial fair value of PCI loans is referred to as the accretable
yield and is accreted into interest income over the estimated
life of the PCI loans using the effective yield method.
The accretable yield will change due to:
• estimate of the remaining life of PCI loans which may
change the amount of future interest income, and possibly
principal, expected to be collected;
• estimate of the amount of contractually required principal
and interest payments over the estimated life that will not
be collected (the nonaccretable difference); and
• indices for PCI loans with variable rates of interest.
For PCI loans, the impact of loan modifications is included
in the evaluation of expected cash flows for subsequent
decreases or increases of cash flows. For variable rate PCI
loans, expected future cash flows will be recalculated as the
rates adjust over the lives of the loans. At acquisition, the
expected future cash flows were based on the variable rates
that were in effect at that time. The change in the accretable
yield related to PCI loans is presented in the following table.
When it is estimated that the expected cash flows have
decreased subsequent to acquisition for a PCI loan or pool
of loans, an allowance is established and a provision for addi-
tional loss is recorded as a charge to income. The table below
summarizes the changes in allowance for PCI loan losses.
December 31,
(in millions) 2009 2008
Impairment measurement based on:
Collateral value method $ 561 88
Discounted cash flow method (1) 15,217 3,552
Total (2) $15,778 3,640
(1) The December 31, 2009, balance includes $501 million of GNMA loans that are
insured by the FHA or guaranteed by the VA. Although both principal and
interest are insured, the insured interest rate may be different than the original
contractual interest rate prior to modification, resulting in interest impairment
under a discounted cash flow methodology.
(2) Includes $15.0 billion and $3.5 billion of impaired loans with a related allowance
of $2.8 billion and $816 million at December 31, 2009 and 2008, respectively.
The remaining impaired loans do not have a specific impaired allowance
associated with them.
(in millions) December 31, 2008 (refined)
Contractually required payments
including interest $115,008
Nonaccretable difference (1) (45,398)
Cash flows expected to be collected (2) 69,610
Accretable yield (10,447)
Fair value of loans acquired $ 59,163
(1) Includes $40.9 billion in principal cash flows not expected to be collected,
$2.0 billion of pre-acquisition charge-offs and $2.5 billion of future interest
not expected to be collected.
(2) Represents undiscounted expected principal and interest cash flows.
The average recorded investment in these impaired loans
was $10.6 billion, $2.0 billion and $313 million, in 2009, 2008
and 2007, respectively.
When the ultimate collectibility of the total principal of an
impaired loan is in doubt and the loan is on nonaccrual status,
all payments are applied to principal, under the cost recovery
method. When the ultimate collectibility of the total principal
of an impaired loan is not in doubt and the loan is on nonac-
crual status, contractual interest is credited to interest income
when received, under the cash basis method. Total interest
income recognized for impaired loans in 2009, 2008 and 2007
under the cash basis method was not significant.
Purchased Credit-Impaired Loans
PCI loans had an unpaid principal balance of $83.6 billion
at December 31, 2009, and $98.2 billion at December 31, 2008
(refined), and a carrying value, before the deduction of the
allowance for loan losses, of $51.7 billion and $59.2 billion,
respectively. The following table provides details on the
PCI loans acquired from Wachovia.
Note 6: Loans and Allowance for Credit Losses (continued)
(in millions) Year ended December 31, 2009
Total, beginning of year (refined) $(10,447)
Accretion (recognized in earnings) 2,606
Reclassification from nonaccretable
difference for loans with
improving cash flows (441)
Changes in expected cash
flows that do not affect
nonaccretable difference (1) (6,277)
Total, end of year $(14,559)
(1) Represents changes in interest cash flows due to the impact of modifications
incorporated into the quarterly assessment of expected future cash flows
and/or changes in interest rates on variable rate loans.
Commercial,
CRE and Other
(in millions) foreign Pick-a-Pay consumer Total
Balance at December 31, 2008 $ ————
Provision for losses due to credit deterioration 850 — 3 853
Charge-offs (520) — — (520)
Balance at December 31, 2009 $ 330 — 3 333