Bank of America 2003 Annual Report Download - page 47

The sensitivities in the preceding table and related to the Certificates
are hypothetical and should be used with caution. As the amounts
indicate, changes in fair value based on variations in assumptions
generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear.
Also, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities.
Additionally, the Corporation has the ability to hedge interest rate risk
associated with retained residual positions. The above sensitivities
do not reflect any hedge strategies that may be undertaken to miti-
gate such risk.
Static pool net credit losses are considered in determining the
value of retained interests. Static pool net credit losses include
actual losses incurred plus projected credit losses divided by the orig-
inal balance of each securitization pool. Expected static pool net
credit losses at December 31, 2003 were 5.83 percent, 9.91 per-
Foreclosed properties amounted to $148 million and $225 mil-
lion at December 31, 2003 and 2002, respectively. The cost of car-
rying foreclosed properties amounted to $3 million, $7 million and
$15 million in 2003, 2002 and 2001, respectively.
Note 8 Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit
losses for 2003, 2002 and 2001:
(Dollars in millions) 2003 2002 2001
Allowance for loan and
lease losses, January 1 $6,358 $6,278 $ 6,365
Loans and leases charged off (3,867) (4,460) (4,844)
Recoveries of loans and
leases previously charged off 761 763 600
Net charge-offs (3,106) (3,697) (4,244)
Provision for loan and
lease losses
2,916 3,801 4,163
Other, net (5) (24) (6)
Allowance for loan and
lease losses, December 31 $6,163 $6,358 $ 6,278
Reserve for unfunded lending
commitments, January 1 $493 $597 $ 473
Provision for unfunded lending
commitments (77) (104) 124
Reserve for unfunded
lending commitments,
December 31 $416 $493 $ 597
Total $6,579 $6,851 $ 6,875
Note 9 Special Purpose Financing Entities
The Corporation securitizes assets and may retain a portion or all of
the securities, subordinated tranches, interest-only strips and, in
some cases, a cash reserve account, all of which are considered
retained interests in the securitized assets. Those assets may be
serviced by the Corporation or by third parties to whom the servicing
has been sold. See Note 1 of the consolidated financial statements
for a more detailed discussion of securitizations.
Mortgage-related Securitizations
The Corporation securitizes the majority of its mortgage loan origina-
tions in conjunction with or shortly after loan closing. In 2003 and
2002, the Corporation converted a total of $121.1 billion (including
$13.0 billion originated by other entities on behalf of the Corporation)
and $53.7 billion (including $2.8 billion originated by other entities
on behalf of the Corporation), respectively, of residential first mort-
gages into mortgage-backed securities issued through Fannie Mae,
Freddie Mac, Government National Mortgage Association (Ginnie
Mae) and Banc of America Mortgage Securities. At December 31,
2003, the Corporation retained $1.7 billion of securities. The
Corporation did not retain any of the securities issued in 2002. At
December 31, 2002, $1.8 billion of securities issued prior to 2002
had been retained. These retained interests are valued using quoted
market values.
For 2003, the Corporation reported $2.4 billion in gains on loans
converted into securities and sold, of which $2.0 billion was from
loans originated by the Corporation and $381 million was from loans
originated by other entities on behalf of the Corporation. For 2002, the
Corporation reported $480 million in gains on loans converted into
securities and sold, of which $408 million was from loans originated
by the Corporation and $72 million was from loans originated by other
entities on behalf of the Corporation. At December 31, 2003, the
Corporation had recourse obligations of $531 million with varying
terms up to seven years on loans that had been securitized and sold.
In addition to the retained interests in the securities, the
Corporation has retained the servicing asset and the Certificates
from securitized mortgage loans (see the Mortgage Banking Assets
section of Note 1 of the consolidated financial statements). Mort-
gage Certificate and servicing fee income on all loans serviced,
including securitizations, was $738 million and $944 million in 2003
and 2002, respectively.
The Certificates of $2.3 billion at December 31, 2003 and
$1.6 billion at December 31, 2002 are classified as MBAs and
marked to market with gains or losses recorded in trading account
profits. At December 31, 2003, key economic assumptions and the
sensitivities of the valuations of the Certificates and MSRs to imme-
diate changes in those assumptions were analyzed. The sensitivity
analysis included the impact on fair value of modeled prepayment
and discount rate changes under favorable and adverse conditions.
A decrease of 10 percent and 20 percent in modeled prepayments
would result in an increase in value ranging from $134 million to
$282 million, and an increase in modeled prepayments of 10 percent
and 20 percent would result in a decrease in value ranging from
$122 million to $234 million. A decrease of 100 and 200 basis
points (bps) in the discount rate would result in an increase in value
ranging from $119 million to $248 million, and an increase in the
discount rate of 100 and 200 bps would result in a decrease in value
ranging from $110 million to $211 million. See Note 1 of the
consolidated financial statements for additional disclosures related
to the Certificates.
Other Securitizations
In December 2001, in conjunction with the strategic decision to exit
the subprime real estate lending business, the Corporation securitized
$17.5 billion of subprime real estate loans in two bond-insured trans-
actions and retained all of the related AAA-rated securities in the avail-
able-for-sale portfolio. During 2002, the Corporation re-securitized and
sold $10.4 billion of those securities to third parties. At December 31,
2003 and 2002, $2.1 billion and $3.5 billion, respectively, of the AAA-
rated securities remained in the available-for-sale portfolio.
The Corporation has provided protection on a subset of one
consumer finance securitization in the form of a guarantee with a
maximum payment of $220 million that is only paid out if over-
collateralization is not sufficient to absorb losses and certain other
conditions are met. The Corporation projects no payments will be due
over the life of the contract, which is approximately two years.
Key economic assumptions used in measuring the fair value of certain residual interests (included in other assets) in securitizations
and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are as follows:
cent, 8.22 percent, 5.50 percent and 10.83 percent for 2001, 1999,
1998, 1997 and 1995, respectively. Expected static pool net credit
losses at December 31, 2002 were 6.86 percent, 8.28 percent,
6.69 percent, 5.30 percent, 4.87 percent and 6.27 percent for 2001,
1999, 1998, 1997, 1996 and 1995, respectively.
Proceeds from collections reinvested in revolving credit card
securitizations were $14.7 billion and $16.1 billion in 2003 and
2002, respectively. Other cash flows received from retained interests
that represent amounts received on retained interests by the trans-
feror other than servicing fees such as cash flows from interest-only
strips, were $279 million and $451 million in 2003 and 2002,
respectively, for credit card securitizations.
The Corporation reviews its loans and leases portfolio on a man-
aged basis. Managed loans and leases are defined as on-balance
sheet loans and leases as well as securitized credit card loans. New
advances under previously securitized accounts will be recorded on
the Corporation’s balance sheet after the revolving period of the
securitization, which has the effect of increasing loans on the
90 BANK OF AMERICA 2003 BANK OF AMERICA 2003 91
Credit Card Consumer Finance(1)
(Dollars in millions) 2003 2002 2003 2002
Carrying amount of residual interests (at fair value) $76 $123 $328 $395
Balance of unamortized securitized loans(2) 1,782 4,732 9,409 15,545
Weighted-average life to call (in years)(3) 1.43 1.47 1.64 3.04
Revolving structures – annual payment rate 14.9% 14.2%
Amortizing structures – annual constant prepayment rate:
Fixed rate loans 7.8-32.6% 9.3-29.1%
Adjustable rate loans 27.0-42.41% 27.0%
Impact on fair value of 100 bps favorable change $– $3 $(11) $–
Impact on fair value of 200 bps favorable change –7(15) 2
Impact on fair value of 100 bps adverse change –(3) 4(1)
Impact on fair value of 200 bps adverse change –(5) 11 (2)
Expected credit losses(4) 5.3% 5.6% 4.6-11.02% 4.2-10.0%
Impact on fair value of 10% favorable change $2 $6 $37 $40
Impact on fair value of 25% favorable change 515 100 115
Impact on fair value of 10% adverse change (2) (7) (37) (36)
Impact on fair value of 25% adverse change (5) (16) (82) (79)
Residual cash flows discount rate (annual rate) 6.0% 6.0% 15.0-30.0% 15.0-30.0%
Impact on fair value of 100 bps favorable change $– $– $8 $14
Impact on fair value of 200 bps favorable change ––16 29
Impact on fair value of 100 bps adverse change ––(8) (13)
Impact on fair value of 200 bps adverse change ––(15) (26)
(1) Consumer finance includes subprime real estate loan and manufactured housing loan securitizations, which are all serviced by third parties.
(2) Balances represent securitized loans at December 31, 2003 and 2002. At December 31, 2003 and 2002, the Corporation retained in the available-for-sale portfolio $2.1 billion and $3.5 billion, respec-
tively, of the AAA-rated bonds created from the December 2001 subprime real estate loan securitizations.
(3) Before any optional clean-up calls are executed, economic analyses will be performed.
(4) Annual rates of expected credit losses are presented for credit card and commercial – domestic securitizations. Cumulative lifetime rates of expected credit losses (incurred plus projected) are presented
for consumer finance loans.