Bank of America 2004 Annual Report Download - page 71

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The allowance for commercial loan and lease losses as presented
in Table 25 was $3.2 billion at December 31, 2004, a $726 million
increase from December 31, 2003. This increase was due to the
addition on April 1, 2004 of $1.7 billion of FleetBoston allowance for
commercial loans and leases to the portfolio partially offset by reduc-
tions resulting from improvement in the commercial loan portfolio.
Commercial credit quality continues to improve as reflected in the
continued declines in both commercial criticized exposure and com-
mercial nonperforming loans and leases. Specific reserves on com-
mercial impaired loans decreased $189 million, or 48 percent, in
2004, reflecting the decrease in our investment in specific loans con-
sidered impaired of $910 million to $1.2 billion at December 31,
2004. The net decrease of $910 million included the addition of
FleetBoston impaired loans on April 1, 2004 of $914 million offset
by net decreases of $1.8 billion in 2004. The decreased levels of crit-
icized, nonperforming and impaired loans, and the respective
reserves were driven by overall improvement in commercial credit
quality, including paydowns and payoffs, loan sales, net charge-offs
and returns to performing status.
The general portion of the Allowance for Loan and Lease Losses
increased $438 million during 2004. The addition of FleetBoston
general reserves on April 1, 2004 accounted for $508 million of the
increase. Although uncertainty regarding the depth and pace of the
economic recovery existed early in the year, the fourth quarter demon-
strated a strengthening of the economy, which led to a reduction in gen-
eral reserves of $70 million in 2004.
Reserve for Unfunded Lending Commitments
In addition to the Allowance for Loan and Lease Losses, we also estimate
probable losses related to unfunded lending commitments, such as
letters of credit and financial guarantees, and binding unfunded loan
commitments. Unfunded lending commitments are subject to individ-
ual reviews, and are analyzed and segregated by risk according to the
Corporation’s internal risk rating scale. These risk classifications, in
conjunction with an analysis of historical loss experience, current
economic conditions and performance trends within specific portfolio
segments, and any other pertinent information result in the estima-
tion of the reserve for unfunded lending commitments. The reserve
for unfunded lending commitments is included in Accrued Expenses
and Other Liabilities on the Consolidated Balance Sheet.
We monitor differences between estimated and actual incurred
credit losses. This monitoring process includes periodic assess-
ments by senior management of credit portfolios and the models
used to estimate incurred losses in those portfolios.
Additions to the reserve for unfunded lending commitments are
made by charges to the Provision for Credit Losses. Credit exposures
(excluding derivatives) deemed to be uncollectible are charged
against the reserve.
The reserve for unfunded lending commitments decreased $14
million from December 31, 2003, primarily due to improved economic
conditions and improvement in the level of criticized letters of credit,
partially offset by the addition of $85 million of reserves on April 1,
2004 associated with FleetBoston unfunded lending commitments.
70 BANK OF AMERICA 2004