Wells Fargo 2014 Annual Report Download - page 143

the amount related to all other factors, which is recognized in
OCI. The measurement of the credit loss component is equal to
the difference between the debt security's amortized cost basis
and the present value of its expected future cash flows
discounted at the security's effective yield. The remaining
difference between the security’s fair value and the present value
of future expected cash flows is due to factors that are not credit-
related and, therefore, is recognized in OCI. We believe that we
will fully collect the carrying value of securities on which we have
recorded a non-credit-related impairment in OCI.
We hold investments in perpetual preferred securities (PPS)
that are structured in equity form, but have many of the
characteristics of debt instruments, including periodic cash flows
in the form of dividends, call features, ratings that are similar to
debt securities and pricing like long-term callable bonds.
Because of the hybrid nature of these securities, we evaluate
PPS for OTTI using a model similar to the model we use for debt
securities as described above. Among the factors we consider in
our evaluation of PPS are whether there is any evidence of
deterioration in the credit of the issuer as indicated by a decline
in cash flows or a rating agency downgrade to below investment
grade and the estimated recovery period. Additionally, in
determining if there was evidence of credit deterioration, we
evaluate: (1) the severity of decline in market value below cost,
(2) the period of time for which the decline in fair value has
existed, and (3) the financial condition and near-term prospects
of the issuer, including any specific events which may influence
the operations of the issuer. We consider PPS to be other-than-
temporarily impaired if cash flows expected to be collected are
insufficient to recover our investment or if we no longer believe
the security will recover within the estimated recovery period.
OTTI write-downs of PPS are recognized in earnings equal to the
difference between the cost basis and fair value of the security.
Based upon the factors considered in our OTTI evaluation, we
believe our investments in PPS currently rated investment grade
will be fully realized and, accordingly, have not recognized OTTI
on such securities.
For marketable equity securities other than PPS, OTTI
evaluations focus on whether evidence exists that supports
recovery of the unrealized loss within a timeframe consistent
with temporary impairment. This evaluation considers the
severity of and length of time fair value is below cost, our intent
and ability to hold the security until forecasted recovery of the
fair value of the security, and the investee's financial condition,
capital strength, and near-term prospects.
We recognize realized gains and losses on the sale of
investment securities in noninterest income using the specific
identification method.
Unamortized premiums and discounts are recognized in
interest income over the contractual life of the security using the
interest method. As principal repayments are received on
securities (i.e., primarily mortgage-backed securities (MBS)) a
proportionate amount of the related premium or discount is
recognized in income so that the effective interest rate on the
remaining portion of the security continues unchanged.
HELD-TO-MATURITY SECURITIES Debt securities for which
the Company has the positive intent and ability to hold to
maturity are reported at historical cost adjusted for amortization
of premiums and accretion of discounts. We recognize OTTI
when there is a decline in fair value and we do not expect to
recover the entire amortized cost basis of the debt security. The
amortized cost is written-down to fair value with the credit loss
component recorded to earnings and the remaining component
recognized in OCI. The OTTI assessment related to whether we
expect recovery of the amortized cost basis and determination of
any credit loss component recognized in earnings for held-to-
maturity securities is the same as described for available-for-sale
securities. Security transfers to the held-to-maturity
classification are recorded at fair value. Unrealized gains or
losses from the transfer of available-for-sale securities continue
to be reported in cumulative OCI and are amortized into
earnings over the remaining life of the security using the
effective interest method.
NONMARKETABLE EQUITY INVESTMENTS Nonmarketable
equity investments include low income housing tax credit
investments, equity securities that are not publicly traded and
securities acquired for various purposes, such as to meet
regulatory requirements (for example, Federal Reserve Bank and
Federal Home Loan Bank (FHLB) stock). We have elected the
fair value option for some of these investments with the
remainder of these investments accounted for under the cost or
equity method, which we review at least quarterly for possible
OTTI. Our review typically includes an analysis of the facts and
circumstances of each investment, the expectations for the
investment's cash flows and capital needs, the viability of its
business model and our exit strategy. We reduce the asset value
when we consider declines in value to be other than temporary.
We recognize the estimated loss as a loss from equity
investments in noninterest income.
Securities Purchased and Sold Agreements
Securities purchased under resale agreements and securities sold
under repurchase agreements are accounted for as collateralized
financing transactions and are recorded at the acquisition or sale
price plus accrued interest. We monitor the fair value of
securities purchased and sold, and obtain collateral from or
return it to counterparties when appropriate. These financing
transactions do not create material credit risk given the
collateral provided and the related monitoring process.
Mortgages and Loans Held for Sale
Mortgages held for sale (MHFS) include commercial and
residential mortgages originated for sale and securitization in
the secondary market, which is our principal market, or for sale
as whole loans. We elect the fair value option for substantially all
residential MHFS (see Note 17 (Fair Values of Assets and
Liabilities)). The remaining residential MHFS are held at the
lower of cost or fair value (LOCOM), and are valued on an
aggregate portfolio basis. Commercial MHFS are held at LOCOM
and are valued on an individual loan basis.
Loans held for sale (LHFS) are carried at LOCOM.
Generally, consumer loans are valued on an aggregate portfolio
basis, and commercial loans are valued on an individual loan
basis.
Gains and losses on MHFS are recorded in mortgage
banking noninterest income. Gains and losses on LHFS are
recorded in other noninterest income. Direct loan origination
costs and fees for MHFS and LHFS under the fair value option
are recognized in income at origination. For MHFS and LHFS
recorded at LOCOM, loan costs and fees are deferred at
origination and are recognized in income at time of sale. Interest
income on MHFS 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
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