Bank of America 2005 Annual Report Download - page 137

BANK OF AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
carried at estimated fair value based on market prices and recorded as Other Assets. Nonpublic and other equity
investments for which representative market quotes are not readily available are initially valued at cost. Subsequently,
these investments are reviewed semi-annually or on a quarterly basis, where appropriate, and adjusted to reflect
changes in value as a result of initial public offerings, market liquidity, the investees’ financial results, sales restrictions,
or other than temporary declines in value. Gains and losses on equity investments, both unrealized and realized, are
recorded in Equity Investment Gains.
Loans and Leases
Loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized
deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Loan origination fees and
certain direct origination costs are deferred and recognized as adjustments to income over the lives of the related loans.
Unearned income, discounts and premiums are amortized to income using methods that approximate the interest
method.
The Corporation provides equipment financing to its customers through a variety of lease arrangements. Direct
financing leases are carried at the aggregate of lease payments receivable plus estimated residual value of the leased
property, less unearned income. Leveraged leases, which are a form of financing lease, are carried net of nonrecourse
debt. Unearned income on leveraged and direct financing leases is amortized over the lease terms by methods that
approximate the interest method.
Allowance for Credit Losses
The allowance for credit losses which includes the Allowance for Loan and Lease Losses and the reserve for
unfunded lending commitments, represents management’s estimate of probable losses inherent in the Corporation’s
lending activities. The Allowance for Loan and Lease Losses represents the estimated probable credit losses in funded
consumer and commercial loans and leases while the reserve for unfunded lending commitments, including standby
letters of credit (SBLCs) and binding unfunded loan commitments, represents estimated probable credit losses in these
off-balance sheet credit instruments based on utilization assumptions. Credit exposures, excluding Derivative Assets and
Trading Account Assets, deemed to be uncollectible are charged against these accounts. Cash recovered on previously
charged off amounts are credited to these accounts.
The Corporation performs periodic and systematic detailed reviews of its lending portfolios to identify credit risks
and to assess the overall collectibility of those portfolios. The allowance on certain homogeneous loan portfolios, which
generally consist of consumer loans, is based on aggregated portfolio segment evaluations generally by product type.
Loss forecast models are utilized for these segments which consider a variety of factors including, but not limited to,
historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic
conditions and credit scores. These consumer loss forecast models are updated on a quarterly basis in order to
incorporate information reflective of the current economic environment. The remaining commercial portfolios are
reviewed on an individual loan basis. Loans subject to individual reviews 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, industry performance trends, geographic or obligor concentrations within each
portfolio segment, and any other pertinent information (including individual valuations on nonperforming loans in
accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114)) result in the estimation
of the allowance for credit losses. The historical loss experience is updated quarterly to incorporate the most recent data
reflective of the current economic environment.
If necessary, a specific Allowance for Loan and Lease Losses is established for individual impaired commercial loans.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be
unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement.
Once a loan has been identified as individually impaired, management measures impairment in accordance with SFAS
114. Individually impaired loans are measured based on the present value of payments expected to be received,
observable market prices, or for loans that are solely dependent on the collateral for repayment, the estimated fair value
of the collateral. If the recorded investment in impaired loans exceeds the present value of payments expected to be
received, a specific allowance is established as a component of the Allowance for Loan and Lease Losses.
Two components of the Allowance for Loan and Lease Losses are allocated to cover the estimated probable losses in
each loan and lease category based on the results of the Corporation’s detailed review process described above. The first
component covers those commercial loans that are either nonperforming or impaired. The second component covers
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