Wells Fargo 2010 Annual Report Download - page 127

We recognized $252 million of OTTI in 2010 on $14.5 billion
of agency mortgage-backed securities we intended to sell as of
December 31, 2010. These securities have been disposed of in
first quarter 2011 and are not included in the preceding table, as
any related unrealized losses were recognized in earnings. We do
not intend to sell any other securities in an unrealized loss
position. For debt securities included in the table, we have
concluded it is more likely than not that we will not be required
to sell prior to recovery of the amortized cost basis. We have
assessed each security for credit impairment. For debt securities,
we evaluate, where necessary, whether credit impairment exists
by comparing the present value of the expected cash flows to the
securities amortized cost basis. For equity securities, we consider
numerous factors in determining whether impairment exists,
including our intent and ability to hold the securities for a period
of time sufficient to recover the cost basis of the securities.
See Note 1 – “Securities” for the factors that we consider in
our analysis of OTTI for debt and equity securities available for
sale.
SECURITIES OF U.S. TREASURY AND FEDERAL AGENCIES AND
FEDERAL AGENCY MORTGAGE-BACKED SECURITIES (MBS)
The unrealized losses associated with U.S. Treasury and federal
agency securities and federal agency MBS are primarily driven
by changes in interest rates and not due to credit losses given the
explicit or implicit guarantees provided by the U.S. government.
SECURITIES OF U.S. STATES AND POLITICAL SUBDIVISIONS
The unrealized losses associated with securities of U.S. states
and political subdivisions are primarily driven by changes in
interest rates and not due to the credit quality of the securities.
Substantially all of these investments are investment grade. The
securities were generally underwritten in accordance with our
own investment standards prior to the decision to purchase,
without relying on a bond insurer’s guarantee in making the
investment decision. These investments will continue to be
monitored as part of our ongoing impairment analysis, but are
expected to perform, even if the rating agencies reduce the credit
rating of the bond insurers. As a result, we expect to recover the
entire amortized cost basis of these securities.
RESIDENTIAL AND COMMERCIAL MORTGAGE-BACKED
SECURITIES (MBS) The unrealized losses associated with
private residential MBS and commercial MBS are primarily
driven by changes in projected collateral losses, credit spreads
and interest rates. We assess for credit impairment using a cash
flow model. The key assumptions include default rates, severities
and prepayment rates. We estimate losses to a security by
forecasting the underlying mortgage loans in each transaction.
We use forecasted loan performance to project cash flows to the
various tranches in the structure. We also consider cash flow
forecasts and, as applicable, independent industry analyst
reports and forecasts, sector credit ratings, and other
independent market data. Based upon our assessment of the
expected credit losses of the security given the performance of
the underlying collateral compared with our credit
enhancement, we expect to recover the entire amortized cost
basis of these securities.
CORPORATE DEBT SECURITIES The unrealized losses
associated with corporate debt securities are primarily related to
securities backed by commercial loans and individual issuer
companies. For securities with commercial loans as the
underlying collateral, we have evaluated the expected credit
losses in the security and concluded that we have sufficient
credit enhancement when compared with our estimate of credit
losses for the individual security. For individual issuers, we
evaluate the financial performance of the issuer on a quarterly
basis to determine that the issuer can make all contractual
principal and interest payments. Based upon this assessment, we
expect to recover the entire cost basis of these securities.
COLLATERALIZED DEBT OBLIGATIONS (CDOS) The unrealized
losses associated with CDOs relate to securities primarily backed
by commercial, residential or other consumer collateral. The
losses are primarily driven by changes in projected collateral
losses, credit spreads and interest rates. We assess for credit
impairment using a cash flow model. The key assumptions
include default rates, severities and prepayment rates. We also
consider cash flow forecasts and, as applicable, independent
industry analyst reports and forecasts, sector credit ratings, and
other independent market data. Based upon our assessment of
the expected credit losses of the security given the performance
of the underlying collateral compared with our credit
enhancement, we expect to recover the entire amortized cost
basis of these securities.
OTHER DEBT SECURITIES The unrealized losses associated with
other debt securities primarily relate to other asset-backed
securities, which are primarily backed by auto, home equity and
student loans. The losses are primarily driven by changes in
projected collateral losses, credit spreads and interest rates. We
assess for credit impairment using a cash flow model. The key
assumptions include default rates, severities and prepayment
rates. Based upon our assessment of the expected credit losses of
the security given the performance of the underlying collateral
compared with our credit enhancement, we expect to recover the
entire amortized cost basis of these securities.
MARKETABLE EQUITY SECURITIES Our marketable equity
securities include investments in perpetual preferred securities,
which provide very attractive tax-equivalent yields. We evaluated
these hybrid financial instruments with investment-grade
ratings for impairment using an evaluation methodology similar
to that used for debt securities. Perpetual preferred securities are
not considered to be other-than-temporarily impaired if there is
no evidence of credit deterioration or investment rating
downgrades of any issuers to below investment grade, and we
expect to continue to receive full contractual payments. We will
continue to evaluate the prospects for these securities for
recovery in their market value in accordance with our policy for
estimating OTTI. We have recorded impairment write-downs on
perpetual preferred securities where there was evidence of credit
deterioration.
125