Bank of America 2006 Annual Report Download - page 75

resulting from bankruptcy reform and the absence of the $210 million
provision recorded in 2005 to establish reserves for changes in credit card
minimum payment requirements were partially offset by portfolio season-
ing. Consumer provision expense increased throughout the year as most
products trended toward more normalized credit cost levels due to portfo-
lio seasoning and an upward trend in bankruptcy-related charge-offs from
the unusually low levels experienced post bankruptcy reform. Credit costs
in Europe increased throughout the year due to seasoning of the credit
card portfolio and higher personal insolvencies in the United Kingdom. For
discussions of the impact of SOP 03-3, see Consumer Portfolio Credit Risk
Management beginning on page 63.
The commercial portion of the Provision for Credit Losses for 2006
was $243 million compared to negative $370 million in 2005. The
increase was driven by the absence in 2006 in Global Corporate and
Investment Banking of benefits from the release of reserves in 2005
related to an improved risk profile in Latin America and reduced
uncertainties associated with the FleetBoston credit integration. Also con-
tributing to the increase were both the addition of MBNA and seasoning of
the business card and small business portfolios in Global Consumer and
Small Business Banking, as well as lower recoveries in 2006 in Global
Corporate and Investment Banking. Partially offsetting these increases
were reductions in Global Corporate and Investment Banking commercial
reserves in 2006 as a stable economic environment throughout 2006
drove sustained favorable commercial credit market conditions.
The Provision for Credit Losses related to unfunded lending commit-
ments was $9 million in 2006 compared to negative $7 million in 2005.
Allowance for Credit Losses
Allowance for Loan and Lease Losses
The Allowance for Loan and Lease Losses is allocated based on two
components. We evaluate the adequacy of the Allowance for Loan and
Lease Losses based on the combined total of these two components.
The first component of the Allowance for Loan and Lease Losses
covers those commercial loans that are either nonperforming or impaired.
An allowance is allocated when the discounted cash flows (or collateral
value or observable market price) are lower than the carrying value of that
loan. For purposes of computing the specific loss component of the allow-
ance, larger impaired loans are evaluated individually and smaller impaired
loans are evaluated as a pool using historical loss experience for the
respective product type and risk rating of the loans.
The second component of the Allowance for Loan and Lease Losses
covers performing commercial loans and leases, and consumer loans. The
allowance for commercial loan and lease losses is established by product
type after analyzing historical loss experience by internal risk rating, cur-
rent economic conditions, industry performance trends, geographic or obli-
gor concentrations within each portfolio segment, and any other pertinent
information. The commercial historical loss experience is updated quar-
terly to incorporate the most recent data reflective of the current economic
environment. As of December 31, 2006, quarterly updating of historical
loss experience did not have a material impact on the Allowance for Loan
and Lease Losses. The allowance for consumer and certain homogeneous
commercial loan and lease products is based on aggregated portfolio
segment evaluations, generally by product type. Loss forecast models are
utilized that consider a variety of factors including, but not limited to, his-
torical loss experience, estimated defaults or foreclosures based on
portfolio trends, delinquencies, economic trends and credit scores. These
loss forecast models are updated on a quarterly basis in order to
incorporate information reflective of the current economic environment. As
of December 31, 2006, quarterly updating of the loss forecast models
increased the Allowance for Loan and Lease Losses due to portfolio sea-
soning and the trend toward more normalized loss levels. Included within
this second component of the Allowance for Loan and Lease Losses and
determined separately from the procedures outlined above are reserves
which are maintained to cover uncertainties that affect our estimate of
probable losses including the imprecision inherent in the forecasting
methodologies, as well as domestic and global economic uncertainty,
large single name defaults and event risk. During 2006, commercial
reserves were released as a stable economic environment throughout
2006 drove sustained favorable commercial credit market conditions.
We monitor differences between estimated and actual incurred loan
and lease losses. This monitoring process includes periodic assessments
by senior management of loan and lease portfolios and the models used
to estimate incurred losses in those portfolios.
Additions to the Allowance for Loan and Lease Losses are made by
charges to the Provision for Credit Losses. Credit exposures deemed to be
uncollectible are charged against the Allowance for Loan and Lease Loss-
es. Recoveries of previously charged off amounts are credited to the
Allowance for Loan and Lease Losses.
The Allowance for Loan and Lease Losses for the consumer portfolio
as presented in Table 27 was $5.6 billion at December 31, 2006, an
increase of $1.0 billion from December 31, 2005. This increase was
primarily attributable to the addition of MBNA.
The allowance for commercial loan and lease losses was $3.5 billion
at December 31, 2006, a $74 million decrease from December 31, 2005.
Commercial – foreign allowance levels decreased due to the sale of our
Brazilian operations. The increase in commercial – domestic allowance
levels was primarily attributable to the addition of MBNA partially offset by
the above mentioned reductions in commercial reserves in 2006.
Within the individual consumer and commercial product categories,
credit card – domestic allowance levels include reductions throughout
2006 from new securitizations and reductions as reserves established in
2005 for changes in minimum payment requirements were utilized to
absorb associated net charge-offs. Direct/indirect consumer allowance
levels increased as the Corporation discontinued new sales of receivables
into the Card Services unsecured lending securitization trusts. Commercial
– domestic allowance levels also increased as reserves were established
for new advances on business card accounts for which previous loan
balances were sold to the securitization trusts.
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 commit-
ments. Unfunded lending commitments are subject to individual reviews
and are analyzed and segregated by risk according to our internal risk rat-
ing scale. These risk classifications, in conjunction with an analysis of
historical loss experience, utilization assumptions, current economic con-
ditions and performance trends within specific portfolio segments, and any
other pertinent information result in the estimation 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 upon draws of the commitments. This monitoring process includes
periodic assessments by senior management of credit portfolios and the
models used to estimate incurred losses in those portfolios.
Bank of America 2006 73