Bank of America 2011 Annual Report Download - page 159

Bank of America 2011 157
estimate default include refreshed LTV or in the case of a
subordinated lien, refreshed combined loan-to-value (CLTV),
borrower credit score, months since origination (referred to as
vintage) and geography, all of which are further broken down by
present collection status (whether the loan is current, delinquent,
in default or in bankruptcy). This estimate is based on the
Corporation’s historical experience with the loan portfolio. The
estimate is adjusted to reflect an assessment of environmental
factors not yet reflected in the historical data underlying the loss
estimates, such as changes in real estate values, local and
national economies, underwriting standards and the regulatory
environment. The probability of default on a loan is based on an
analysis of the movement of loans with the measured attributes
from either current, or any of the delinquency categories, to default
over a twelve-month period. On home equity loans where the
Corporation holds only a second-lien position and foreclosure is
not the best alternative, the loss severity is estimated at 100
percent.
The allowance on certain commercial loans (except business
card and certain small business loans) is calculated using loss
rates delineated by risk rating and product type. Factors considered
when assessing loss rates include the value of the underlying
collateral, if applicable, the industry of the obligor, and the obligor’s
liquidity and other financial indicators along with certain qualitative
factors. These statistical models are updated regularly for changes
in economic and business conditions. Included in the analysis of
consumer and commercial loan portfolios are reserves which are
maintained to cover uncertainties that affect the Corporation’s
estimate of probable losses including domestic and global
economic uncertainty and large single name defaults.
The remaining commercial portfolios, including nonperforming
commercial loans, as well as consumer real estate loans modified
in a TDR, renegotiated credit card, unsecured consumer and small
business loans are reviewed in accordance with applicable
accounting guidance on impaired loans and TDRs. If necessary, a
specific allowance is established for these loans if they are
deemed to be impaired. 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/or interest, according to the contractual terms of the
agreement, and once a loan has been identified as impaired,
management measures impairment. Impaired loans and TDRs are
primarily measured based on the present value of payments
expected to be received, discounted at the loans’ original effective
contractual interest rates, or discounted at the portfolio average
contractual annual percentage rate, excluding promotionally priced
loans, in effect prior to restructuring for the renegotiated TDR
portfolio. Impaired loans and TDRs may also be measured based
on observable market prices, or for loans that are solely dependent
on the collateral for repayment, the estimated fair value of the
collateral less estimated costs to sell. If the recorded investment
in impaired loans exceeds this amount, a specific allowance is
established as a component of the allowance for loan and lease
losses unless these are consumer real estate loans that are solely
dependent on the collateral for repayment, in which case the initial
amount that exceeds the fair value of the collateral is charged off.
Generally, when determining the fair value of the collateral
securing consumer loans that are solely dependent on the
collateral for repayment, prior to performing a detailed property
valuation including a walk-through of a property, the Corporation
initially estimates the fair value of the collateral securing consumer
loans that are solely dependent on the collateral for repayment
using an automated valuation method (AVM). An AVM is a tool that
estimates the value of a property by reference to market data
including sales of comparable properties and price trends specific
to the Metropolitan Statistical Area in which the property being
valued is located. In the event that an AVM value is not available,
the Corporation utilizes publicized indices or if these methods
provide less reliable valuations, the Corporation uses appraisals
or broker price opinions to estimate the fair value of the collateral.
While there is inherent imprecision in these valuations, the
Corporation believes that they are representative of the portfolio
in the aggregate.
In addition to the allowance for loan and lease losses, the
Corporation also estimates probable losses related to unfunded
lending commitments, such as letters of credit and financial
guarantees, and binding unfunded loan commitments. The reserve
for unfunded lending commitments excludes commitments
accounted for under the fair value option. Unfunded lending
commitments are subject to individual 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, utilization assumptions,
current economic conditions, performance trends within the
portfolio and any other pertinent information, result in the
estimation of the reserve for unfunded lending commitments.
The allowance for credit losses related to the loan and lease
portfolio is reported separately on the Consolidated Balance Sheet
whereas the reserve for unfunded lending commitments is
reported on the Consolidated Balance Sheet in accrued expenses
and other liabilities. The provision for credit losses related to the
loan and lease portfolio and unfunded lending commitments is
reported in the Consolidated Statement of Income.
Nonperforming Loans and Leases, Charge-offs and
Delinquencies
Nonperforming loans and leases generally include loans and
leases that have been placed on nonaccrual status including
nonaccruing loans whose contractual terms have been
restructured in a manner that grants a concession to a borrower
experiencing financial difficulties. Loans accounted for under the
fair value option, PCI loans and LHFS are not reported as
nonperforming loans and leases.
In accordance with the Corporation’s policies, credit card loans
where the borrower is not deceased or in bankruptcy and
unsecured consumer loans are charged off no later than the end
of the month in which the account becomes 180 days past due.
The outstanding balance of real estate-secured loans that is in
excess of the estimated property value, less estimated costs to
sell, is charged off no later than the end of the month in which the
account becomes 180 days past due unless repayment of the loan
is insured by the Federal Housing Administration (FHA) or through
individually insured long-term standby agreements with Fannie Mae
(FNMA) and Freddie Mac (FHLMC) (the fully-insured portfolio). The
estimated property value, less estimated costs to sell, is
determined using the same process as described for impaired
loans in the Allowance for Credit Losses section of this Note on
page 156. Personal property-secured loans are charged off no
later than the end of the month in which the account becomes
120 days past due. Unsecured accounts associated with
borrowers who became deceased or are in bankruptcy, including
credit cards, are charged off 60 days after receipt of notification.
For secured products, accounts in bankruptcy are written down to