Wells Fargo 2011 Annual Report Download - page 129

characteristics for the consumer loan portfolio segment.
Impaired loans are evaluated on an individual loan basis and
predominantly include loans on nonaccrual status for
commercial and industrial, commercial real estate, foreign loans
and any loans modified in a TDR, on both accrual and
nonaccrual status. Commercial and consumer PCI loans may
require an allowance subsequent to their acquisition due to
probable decreases in expected principal and interest cash flows
(other than due to decreases in interest rate indices and changes
in prepayment assumptions).
The allowance for each portfolio segment includes an
amount for imprecision or uncertainty that may change from
period to period. This imprecision amount represents
management’s judgment of risks inherent in the evaluation
processes and assumptions used in establishing the allowance.
While our methodology attributes portions of the allowance to
the specific portfolio segments, the entire allowance is available
to absorb credit losses inherent in the total loan portfolio and
unfunded credit commitments. No single statistic or
measurement determines the adequacy of the allowance for
credit losses.
Securitizations and Beneficial Interests
In certain asset securitization transactions that meet the
applicable criteria to be accounted for as a sale, assets are sold to
an entity referred to as an SPE, which then issues beneficial
interests in the form of senior and subordinated interests
collateralized by the assets. In some cases, we may retain
beneficial interests issued by the entity. Additionally, from time
to time, we may also re-securitize certain assets in a new
securitization transaction.
The assets and liabilities transferred to an SPE are excluded
from our consolidated balance sheet if the transfer qualifies as a
sale and we are not required to consolidate the SPE.
For transfers of financial assets recorded as sales, we
recognize and initially measure at fair value all assets obtained
(including beneficial interests) and liabilities incurred. We
record a gain or loss in noninterest income for the difference
between the carrying amount and the fair value of the assets
sold. Fair values are based on quoted market prices, quoted
market prices for similar assets, or if market prices are not
available, then the fair value is estimated using discounted cash
flow analyses with assumptions for credit losses, prepayments
and discount rates that are corroborated by and independently
verified against market observable data, where possible.
Retained interests from securitizations with off-balance sheet
entities, including SPEs and VIEs where we are not the primary
beneficiary, are classified as available for sale securities, trading
account assets or loans, and are accounted for as described
herein.
Mortgage Servicing Rights (MSRs)
We recognize the rights to service mortgage loans for others, or
MSRs, as assets whether we purchase the MSRs or the MSRs
result from a sale or securitization of loans we originate (asset
transfers). We initially record all of our MSRs at fair value.
Subsequently, residential loan MSRs are carried at either fair
value or LOCOM based on our strategy for managing interest
rate risk. Currently, substantially all of our residential loan
MSRs are carried at fair value. All of our MSRs related to our
commercial mortgage loans are subsequently measured at
LOCOM.
We base the fair value of MSRs on the present value of
estimated future net servicing income cash flows. We estimate
future net servicing income cash flows with assumptions that
market participants would use to estimate fair value, including
estimates of prepayment speeds (including housing price
volatility), discount rates, default rates, cost to service (including
delinquency and foreclosure costs), escrow account earnings,
contractual servicing fee income, ancillary income and late fees.
Our valuation approach is independently validated by our
internal valuation model validation group and our valuation
estimates are periodically benchmarked to independent
appraisals.
Changes in the fair value of MSRs occur primarily due to the
collection/realization of expected cash flows, as well as changes
in valuation inputs and assumptions. For MSRs carried at fair
value, changes in fair value are reported in noninterest income in
the period in which the change occurs. MSRs subsequently
measured at LOCOM are amortized in proportion to, and over
the period of, estimated net servicing income. The amortization
of MSRs is reported in noninterest income, analyzed monthly
and adjusted to reflect changes in prepayment speeds, as well as
other factors.
MSRs accounted for at LOCOM are periodically evaluated for
impairment based on the fair value of those assets. For purposes
of impairment evaluation and measurement, we stratify MSRs
based on the predominant risk characteristics of the underlying
loans, including investor and product type. If, by individual
stratum, the carrying amount of these MSRs exceeds fair value, a
valuation reserve is established. The valuation reserve is
adjusted as the fair value changes.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Capital leases, where we are the
lessee, are included in premises and equipment at the capitalized
amount less accumulated amortization.
We primarily use the straight-line method of depreciation
and amortization. Estimated useful lives range up to 40 years for
buildings, up to 10 years for furniture and equipment, and the
shorter of the estimated useful life or lease term for leasehold
improvements. We amortize capitalized leased assets on a
straight-line basis over the lives of the respective leases.
Goodwill and Identifiable Intangible Assets
Goodwill is recorded in business combinations under the
purchase method of accounting when the purchase price is
higher than the fair value of net assets, including identifiable
intangible assets.
We assess goodwill for impairment annually, and more
frequently in certain circumstances. We initially perform a
qualitative assessment of goodwill to test for impairment. If,
based on our qualitative review, we conclude that more likely
than not a reporting unit’s fair value is less than its carrying
amount, then we complete quantitative steps as described below
to determine if there is goodwill impairment. If we conclude that
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