Wells Fargo 2012 Annual Report Download - page 135

such loans are no longer 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 purchase accounting).
When we place a loan on nonaccrual status, we reverse the
accrued unpaid interest receivable against interest income and
amortization of any net deferred fees is suspended. If the
ultimate collectability of the recorded loan balance is in doubt on
a nonaccrual loan, the cost recovery method is used and cash
collected is applied to first reduce the carrying value of the loan.
Otherwise, interest income may be recognized to the extent cash
is received. Generally, we return a loan to accrual status when all
delinquent interest and principal become current under the
terms of the loan agreement and collectability of remaining
principal and interest is no longer doubtful.
For modified loans, we re-underwrite at the time of a
restructuring to determine if there is sufficient evidence of
sustained repayment capacity based on the borrower’s financial
strength, including documented income, debt to income ratios
and other factors. If the borrower has demonstrated
performance under the previous terms and the underwriting
process shows the capacity to continue to perform under the
restructured terms, the loan will generally remain in accruing
status. When a loan classified as a TDR performs in accordance
with its modified terms, the loan either continues to accrue
interest (for performing loans) or will return to accrual status
after the borrower demonstrates a sustained period of
performance (generally six consecutive months of payments, or
equivalent, inclusive of consecutive payments made prior to the
modification). Loans will be placed on nonaccrual status and a
corresponding charge-off is recorded if we believe it is probable
that principal and interest contractually due under the modified
terms of the agreement will not be collectible.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
LOAN CHARGE-OFF POLICIES For commercial loans, we
generally fully charge off or charge down to net realizable value
(fair value of collateral, less estimated costs to sell) for loans
secured by collateral when:
x management judges the loan to be uncollectible;
x repayment is deemed to be protracted beyond reasonable
time frames;
x the loan has been classified as a loss by either our internal
loan review process or our banking regulatory agencies;
x the customer has filed bankruptcy and the loss becomes
evident owing to a lack of assets; or
x the loan is 180 days past due unless both well-secured and
in the process of collection.
For consumer loans, we fully charge off or charge down to net
realizable value when deemed uncollectible due to bankruptcy or
other factors, or no later than reaching a defined number of days
past due, as follows:
x 1-4 family first and junior lien mortgages – We generally
charge down to net realizable value when the loan is
180 days past due.
x Auto loans – We generally fully charge off when the loan is
120 days past due.
x Credit card loans – We generally fully charge off when the
loan is 180 days past due.
x Unsecured loans (closed end) – We generally charge off
when the loan is 120 days past due.
x Unsecured loans (open end) – We generally charge off when
the loan is 180 days past due.
x Other secured loans – We generally fully or partially charge
down to net realizable value when the loan is 120 days past
due.
We implemented the guidance in the Office of the Comptroller
of the Currency (OCC) update to Bank Accounting Advisory
Series (OCC guidance) issued in third quarter 2012, which
requires consumer loans discharged in bankruptcy to be written
down to net realizable value and classified as nonaccrual
troubled debt restructurings (TDRs), regardless of their
delinquency status.
IMPAIRED LOANS We consider a loan to be impaired 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. This evaluation
is generally based on delinquency information, an assessment of
the borrower’s financial condition and the adequacy of collateral,
if any. Our impaired loans predominantly include loans on
nonaccrual status for commercial and industrial, commercial
real estate (CRE), foreign loans and any loans modified in a
TDR, on both accrual and nonaccrual status.
When we identify a loan as impaired, we measure the
impairment based on the present value of expected future cash
flows, discounted at the loan’s effective interest rate. When
collateral is the sole source of repayment for the loan, we may
measure impairment based on the fair value of the collateral. If
foreclosure is probable, we use the current fair value of the
collateral less estimated selling costs, instead of discounted cash
flows.
If we determine that the value of an impaired loan is less than
the recorded investment in the loan (net of previous charge-offs,
deferred loan fees or costs and unamortized premium or
discount), we recognize impairment. When the value of an
impaired loan is calculated by discounting expected cash flows,
interest income is recognized using the loan’s effective interest
rate over the remaining life of the loan.
TROUBLED DEBT RESTRUCTURINGS (TDRs) In situations
where, for economic or legal reasons related to a borrower’s
financial difficulties, we grant a concession for other than an
insignificant period of time to the borrower that we would not
otherwise consider, the related loan is classified as a TDR. These
modified terms may include rate reductions, principal
forgiveness, term extensions, payment forbearance and other
actions intended to minimize our economic loss and to avoid
foreclosure or repossession of the collateral. For modifications
where we forgive principal, the entire amount of such principal
forgiveness is immediately charged off. Loans classified as TDRs,
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