Wells Fargo 2010 Annual Report Download - page 61

PURCHASED CREDIT-IMPAIRED (PCI) LOANS As of
December 31, 2008, certain of the loans acquired from Wachovia
had evidence of credit deterioration since their origination, and
it was probable that we would not collect all contractually
required principal and interest payments. Such loans identified
at the time of the acquisition were accounted for using the
measurement provisions for PCI loans. PCI loans were recorded
at fair value at the date of acquisition, and the historical
allowance for credit losses related to these loans was not carried
over.
PCI loans were written down to an amount estimated to be
collectible. Accordingly, such loans are not 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 our purchase
accounting).
A nonaccretable difference was established in purchase
accounting for PCI loans to absorb losses expected at that time
on those loans. Amounts absorbed by the nonaccretable
difference do not affect the income statement or the allowance
for credit losses.
Substantially all commercial and industrial, CRE and foreign
PCI loans are accounted for as individual loans. Conversely,
Pick-a-Pay and other consumer PCI loans have been aggregated
into several pools based on common risk characteristics. Each
pool is accounted for as a single asset with a single composite
interest rate and an aggregate expectation of cash flows.
Resolutions of loans may include sales of loans to third
parties, receipt of payments in settlement with the borrower, or
foreclosure of the collateral. Our policy is to remove an
individual loan from a pool based on comparing the amount
received from its resolution with its contractual amount. Any
difference between these amounts is absorbed by the
nonaccretable difference. This removal method assumes that the
amount received from resolution approximates pool
performance expectations. The remaining accretable yield
balance is unaffected and any material change in remaining
effective yield caused by this removal method is addressed by
our quarterly cash flow evaluation process for each pool. For
loans that are resolved by payment in full, there is no release of
the nonaccretable difference for the pool because there is no
difference between the amount received at resolution and the
contractual amount of the loan. Modified PCI loans are not
removed from a pool even if those loans would otherwise be
deemed troubled debt restructurings (TDRs). Modified PCI
loans that are accounted for individually are considered TDRs,
and removed from PCI accounting, if there has been a
concession granted in excess of the original nonaccretable
difference.
During 2010, we recognized in income $989 million of
nonaccretable difference related to commercial PCI loans due to
payoffs and dispositions of these loans. We also transferred
$3.4 billion from the nonaccretable difference to the accretable
yield, of which $2.4 billion was due to sustained positive
performance in the Pick-a-Pay portfolio evidenced through an
increase in expected cash flows. Table 21 provides an analysis of
changes in the nonaccretable difference related to principal that
is not expected to be collected.
Table 21: Changes in Nonaccretable Difference for PCI Loans
Other
(in millions) Commercial Pick-a-Pay consumer Total
Balance at December 31, 2008 $ 10,410 26,485 4,069 40,964
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1) (330) - - (330)
Loans resolved by sales to third parties (2) (86) - (85) (171)
Reclassification to accretable yield for loans with improving cash flows (3) (138) (27) (276) (441)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4) (4,853) (10,218) (2,086) (17,157)
Balance at December 31, 2009 5,003 16,240 1,622 22,865
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1) (817) - - (817)
Loans resolved by sales to third parties (2) (172) - - (172)
Reclassification to accretable yield for loans with improving cash flows (3) (726) (2,356) (317) (3,399)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4) (1,698) (2,959) (391) (5,048)
Balance at December 31, 2010 $ 1,590 10,925 914 13,429
(1) Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay
and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approxi
mates
the pool performance expectations.
(2) Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
(3) Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield
adjustment over the remaining life of the loan or pool of loans.
(4) Write-downs to net realizable value of PCI loans are absorbed by the nonaccretable difference when severe delinquency (normally 180 days) or other indications of severe
borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
59