Bank of America 2007 Annual Report Download - page 75

SOP 03-3
SOP 03-3 addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor’s initial
investment in loans acquired in a transfer if those differences are attribut-
able, at least in part, to credit quality. SOP 03-3 requires that impaired
loans be recorded at fair value and prohibits “carrying over” or the creation
of valuation allowances in the initial accounting of loans acquired in a
transfer that are within the scope of this SOP (categories of loans for
which it is probable, at the time of acquisition, that all amounts due
according to the contractual terms of the loan agreement will not be
collected). The prohibition of the valuation allowance carryover applies to
the purchase of an individual loan, a pool of loans, a group of loans, and
loans acquired in a purchase business combination.
In accordance with SOP 03-3, certain acquired loans of LaSalle in
2007 and MBNA in 2006 that were considered impaired were written
down to fair value at the acquisition date. Therefore, reported net charge-
offs and managed net losses were lower since these impaired loans that
would have been charged off during the period were reduced to fair value
as of the acquisition date. SOP 03-3 does not apply to the acquired loans
that have been securitized as they are not held on the Corporation’s Bal-
ance Sheet.
Consumer net charge-offs, managed net losses, and associated
ratios excluding the impact of SOP 03-3 for 2007 and 2006 are presented
in Table 14. Management believes that excluding the impact of SOP 03-3
provides a more accurate reflection of portfolio credit quality.
Table 14 Consumer Net Charge-offs/Managed Net Losses (Excluding the Impact of SOP 03-3) (1, 2, 3, 4)
Held Managed
Net Charge-offs Ratio Net Losses Ratio
(Dollars in millions) 2007 2006 2007 2006 2007 2006 2007 2006
Residential mortgage $59 $39 0.02 % 0.02 % $59 $39 0.02 % 0.02 %
Credit card – domestic 3,063 3,193 5.29 5.00 6,960 5,494 4.91 3.96
Credit card – foreign 378 278 3.06 3.05 1,254 1,033 4.24 4.17
Home equity 282 51 0.29 0.07 282 51 0.29 0.07
Direct/Indirect consumer 1,375 729 1.96 1.36 1,605 1,044 2.14 1.69
Other consumer 278 217 6.54 2.97 278 217 6.54 2.97
Total consumer $5,435 $4,507 1.07 1.07 $10,438 $7,878 1.69 1.50
(1) Excluding the impact of SOP 03-3 is a non-GAAP financial measure. The impact of SOP 03-3 on average outstanding held and managed consumer loans and leases in 2007 and 2006 was not material.
(2) Net charge-off/loss ratios are calculated as held net charge-offs or managed net losses divided by average outstanding held or managed loans and leases during the year for each loan and lease category.
(3) Historical ratios have been adjusted for home equity, direct/indirect consumer and other consumer due to the reclassification of home equity loan balances from direct/indirect consumer to home equity, and certain foreign
consumer loans from other consumer to direct/indirect consumer.
(4) Including the impact of SOP 03-3 would decrease net charge-offs on residential mortgage $2 million, home equity $8 million, direct/indirect consumer $2 million in 2007. Including the impact of SOP 03-3 would decrease net
charge-offs on credit card – domestic $99 million, credit card – foreign $53 million and direct/indirect consumer $119 million in 2006.
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