Bank of America 2002 Annual Report Download - page 50

48 BANK OF AMERICA 2002
For reporting purposes, the Corporation allocates its allowance across
products; however, the allowance is available to absorb all credit
losses without restriction. Table 16 represents our current allocation by
product type and Table 17 presents an allocation by component.
During the fourth quarter of 2002, the Corporation updated his-
toric loss rate factors used in estimating the allowance for loan losses
to incorporate more current information. The most significant result
was a decrease in the allowance for commercial – domestic real estate
and an increase in the allowance for commercial – domestic loans.
TABLE 16 Allocation of the Allowance for Credit Losses
December 31
(Dollars in millions) 2002 2001
Commercial – domestic $ 2,392 $ 1,974
Commercial – foreign 886 766
Commercial real estate – domestic 439 924
Commercial real estate – foreign 98
Total commercial 3,726 3,672
Residential mortgage 108 145
Home equity lines 49 83
Direct/Indirect consumer 361 367
Consumer finance 323 433
Credit card 1,031 821
Foreign consumer 910
Total consumer 1,881 1,859
General 1,244 1,344
Total $ 6,851 $ 6,875
TABLE 17 Allocation of the Allowance for Credit Losses
December 31
2002 2001
(Dollars in millions) Amount Percent Amount Percent
Commercial non-impaired $ 2,807 41.0% $ 2,909 42.3%
Commercial impaired 919 13.4 763 11.1
Total commercial 3,726 54.4 3,672 53.4
Total consumer 1,881 27.5 1,859 27.0
General 1,244 18.2 1,344 19.5
Total $ 6,851 100% $ 6,875 100%
While the allowance for commercial credit losses remained relatively
flat at $3.7 billion, individual product reserves changed as a result of
updated reserve rates based on a review of performance trends and port-
folio deterioration. Commercial–domestic reserves increased $418 mil-
lion year-to-year to end at $2.4 billion on December 31, 2002. This
reflects an increased reserve rate partially offset by a $13.2 billion
decrease in loans between December 31, 2002 and December 31,
2001. Similarly, commercial-foreign reserves increased $120 million
reflecting increased reserve rates due to portfolio deterioration and
partially offset by a $3.1 billion decrease in the portfolio. Reserves for
commercial real estate-domestic loans decreased $485 million from
December 31, 2001 due to updated reserve rates based on portfolio
performance and a loan portfolio reduction of $2.4 billion since
December 31, 2001. Specific reserves on impaired loans increased
$156 million in 2002 reflecting an increase in our investment in specific
loans considered impaired which was $4.1 billion at December 31,
2002 compared to $3.9 billion at December 31, 2001. Commercial –
domestic impaired loans declined $585 million to $2.6 billion at
December 31, 2002 compared to December 31, 2001. Commercial – for-
eign impaired loans increased $854 million to $1.4 billion. Commercial
real estate impaired loans decreased $81 million to $159 million.
The allowance for credit losses in the consumer portfolio was
$1.9 billion at December 31, 2002, consistent with December 31,
2001. Growth in the credit card and residential mortgage portfolios
was offset by the application of updated performance trends that
decreased consumer real estate reserve rates. Management expects
continued growth in the credit card portfolio.
General reserves at December 31, 2002 were $1.2 billion, down
$100 million from December 31, 2001, representing approximately
18 percent of the total allowance for credit losses. Management
reviewed and adjusted the margin of imprecision and the binding
unfunded loan commitment components of the general reserve due to
updated information and factors. Partially offsetting these adjust-
ments were increases to industry concentration components.
Problem Loan Management
In 2001, the Corporation realigned certain problem loan management
activities into a wholly-owned subsidiary, Banc of America Strategic
Solutions, Inc. (SSI). SSI was established to better align the manage-
ment of commercial loan credit workout operations. The Corporation
believes that economic returns will improve with more effective and
efficient management processes afforded a closely aligned end-to-
end function. The Corporation believes that economic returns will be
maximized by assisting borrowing companies in refinancing with
other lenders or through the capital markets, facilitating the sale of
entire borrowing companies or certain assets/subsidiaries, negotiat-
ing traditional restructurings using borrowing company cash flows to
repay debts, selling individual assets in the secondary market when
the market prices are attractive relative to assessed collateral values
and by executing collateralized debt obligations or otherwise dis-
posing of assets in bulk. From time to time, the Corporation may
contribute or sell certain loans to SSI.
In September 2001, Bank of America, N.A. (BANA), a wholly-
owned subsidiary of the Corporation, contributed to SSI, a consoli-
dated subsidiary of BANA, commercial loans with a gross book
balance of $3.2 billion in exchange for a class of preferred and for a
class of common stock of SSI. For financial reporting under GAAP, the
loan contribution was accounted for at carryover book basis as
appropriate for entities under common control, and there was no
change in the designation or measurement of the loans because the
individual loan resolution strategies were not affected by the realign-
ment or contribution. From time to time, management may identify
certain loans to be considered for accelerated disposition. At that
time, such loans or pools of loans would be redesignated as held for
sale and remeasured at lower of cost or market.