Bank of America 2008 Annual Report Download - page 142

Note 7 – Allowance for Credit Losses
The following table summarizes the changes in the allowance for credit losses for 2008, 2007 and 2006.
(Dollars in millions) 2008 2007 2006
Allowance for loan and lease losses, January 1 $ 11,588 $ 9,016 $ 8,045
Adjustment due to the adoption of SFAS 159 – (32) –
Loans and leases charged off (17,666) (7,730) (5,881)
Recoveries of loans and leases previously charged off 1,435 1,250 1,342
Net charge-offs (16,231) (6,480) (4,539)
Provision for loan and lease losses 26,922 8,357 5,001
Other
(1)
792 727 509
Allowance for loan and lease losses, December 31 23,071 11,588 9,016
Reserve for unfunded lending commitments, January 1 518 397 395
Adjustment due to the adoption of SFAS 159 – (28) –
Provision for unfunded lending commitments (97) 28 9
Other
(2)
– 121 (7)
Reserve for unfunded lending commitments, December 31 421 518 397
Allowance for credit losses, December 31 $ 23,492 $12,106 $ 9,413
(1) The 2008 amount includes the $1.2 billion addition of the Countrywide allowance for loan losses as of July 1, 2008. The 2007 amount includes the $725 million and $25 million additions of the LaSalle and U.S. Trust
Corporation allowance for loan losses as of October 1, 2007 and July 1, 2007. The 2006 amount includes the $577 million addition of the MBNA allowance for loan losses as of January 1, 2006.
(2) The 2007 amount includes the $124 million addition of the LaSalle reserve for unfunded lending commitments as of October 1, 2007.
Note 8 – Securitizations
The Corporation routinely securitizes loans and debt securities. These
securitizations are a source of funding for the Corporation in addition to
transferring the economic risk of the loans or debt securities to third par-
ties. In a securitization, various classes of debt securities may be issued
and are generally collateralized by a single class of transferred assets
which most often consist of residential mortgages, but may also include
commercial mortgages, credit card receivables, home equity loans, auto-
mobile loans or mortgage-backed securities. The securitized loans may be
serviced by the Corporation or by third parties. With each securitization,
the Corporation may retain a portion of the securities, subordinated
tranches, interest-only strips, subordinated interests in accrued interest
and fees on the securitized receivables, and, in some cases, over-
collateralization and cash reserve accounts, all of which are called
retained interests. These retained interests are recorded in other assets,
AFS debt securities, or trading account assets and are carried at fair
value or amounts that approximate fair value with changes recorded in
income or accumulated OCI. Changes in the fair value of credit card
related interest-only strips are recorded in card income. In addition, the
Corporation may enter into derivatives with the securitization trust to miti-
gate the trust’s interest rate or foreign exchange risk. These derivatives
are entered into at market terms and are generally senior in payment. The
Corporation also may serve as the underwriter and distributor of the
securitization, serve as the administrator of the trust, and from time to
time, make markets in securities issued by the securitization trusts. For
more information related to derivatives, see Note 4 – Derivatives to the
Consolidated Financial Statements.
First Lien Mortgage-related Securitizations
The Corporation securitizes a portion of its residential mortgage loan origi-
nations in conjunction with or shortly after loan closing. In addition, the
Corporation may, from time to time, securitize commercial mortgages and
first lien residential mortgages that it originates or purchases from other
entities.
The following table summarizes selected information related to mortgage securitizations for 2008 and 2007.
Residential Mortgage
Non-Agency
Agency Prime Subprime Alt-A
Commercial
Mortgage
(Dollars in millions) 2008 2007 2008 2007 2008
(1)
2007 2008 2007 2008 2007
Cash proceeds from new
securitizations
(2)
$ 123,653 $ 50,866 $ 1,038 $17,499 $ 1,377 $– $– $ 745 $ 3,557 $15,409
Gains on securitizations
(3, 4)
25 52 2 27 24 – – 1 29 103
Cash flows received on residual
interests – – 6 – 33 – 4 – – –
Principal balance outstanding
(5, 6)
1,123,916 192,627 111,683 44,565 57,933 – 136,027 12,157 55,403 47,587
Senior securities held 13,815 4,702 4,926 5,261 121 – 2,946 553 184 584
Subordinated securities held – – 43 143 4 – 18 36 136 77
Residual interests held – – – – 13 – – – 7 13
(1) The cash proceeds related to the non-agency subprime securitization were received during 2007; however, this securitization did not achieve sale accounting until 2008.
(2) The Corporation sells residential mortgage loans to government-sponsored agencies in the normal course of business and receives mortgage-backed securities in exchange. These mortgage-backed securities are then
subsequently sold into the market to third party investors for cash proceeds.
(3) Net of hedges
(4) Substantially all of the residential mortgages securitized are initially classified as LHFS and recorded at fair value under SFAS 159. As such, gains are recognized on these LHFS prior to securitization. During 2008 and
2007, the Corporation recognized $1.6 billion and $212 million of gains on these LHFS.
(5) Generally, the Corporation as transferor will service the sold loans and thus recognize an MSR upon securitization. See additional information to follow related to the Corporation’s role as servicer and Note 21 –
Mortgage Servicing Rights to the Consolidated Financial Statements.
(6) The increase in principal balance outstanding at December 31, 2008 from the prior year was due to the addition of Countrywide securitizations.
140 Bank of America 2008