Bank of America 2012 Annual Report Download - page 164

162 Bank of America 2012
immediately available as of the purchase date. Purchased loans
with evidence of credit quality deterioration for which it is probable
that the Corporation will not receive all contractually required
payments receivable are accounted for as PCI loans. The excess
of the cash flows expected to be collected on PCI loans, measured
as of the acquisition date, over the estimated fair value is referred
to as the accretable yield and is recognized in interest income over
the remaining life of the loan using a level yield methodology. The
difference between contractually required payments as of the
acquisition date and the cash flows expected to be collected is
referred to as the nonaccretable difference. PCI loans that have
similar risk characteristics, primarily credit risk, collateral type and
interest rate risk, are pooled and accounted for as a single asset
with a single composite interest rate and an aggregate expectation
of cash flows. Once a pool is assembled, it is treated as if it was
one loan for purposes of applying the accounting guidance for PCI
loans. An individual loan is removed from a PCI loan pool if it is
sold, foreclosed, forgiven or the expectation of any future proceeds
is remote. When a loan is removed from a PCI loan pool and the
foreclosure or recovery value of the loan is less than the loan’s
carrying value, the difference is first applied against the PCI pool’s
nonaccretable difference. If the nonaccretable difference has been
fully utilized, only then is the PCI pool’s basis applicable to that
loan written-off against its valuation reserve; however, the integrity
of the pool is maintained and it continues to be accounted for as
if it was one loan.
The Corporation continues to estimate cash flows expected to
be collected over the life of the PCI loans using internal credit risk,
interest rate and prepayment risk models that incorporate
management’s best estimate of current key assumptions such as
default rates, loss severity and payment speeds. If, upon
subsequent evaluation, the Corporation determines it is probable
that the present value of the expected cash flows has decreased,
the PCI loan is considered to be further impaired resulting in a
charge to the provision for credit losses and a corresponding
increase to a valuation allowance included in the allowance for
loan and lease losses. If, upon subsequent evaluation, it is
probable that there is an increase in the present value of the
expected cash flows, the Corporation reduces any remaining
valuation allowance. If there is no remaining valuation allowance,
the Corporation recalculates the amount of accretable yield as the
excess of the revised expected cash flows over the current carrying
value resulting in a reclassification from nonaccretable difference
to accretable yield. The present value of the expected cash flows
is determined using the PCI loans’ effective interest rate, adjusted
for changes in the PCI loans’ interest rate indices.
Leases
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 leases,
are carried net of non-recourse debt. Unearned income on
leveraged and direct financing leases is accreted to interest
income over the lease terms using 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 and the reserve for unfunded
lending commitments exclude amounts for loans and unfunded
lending commitments accounted for under the fair value option as
the fair values of these instruments reflect a credit component.
The allowance for loan and lease losses does not include amounts
related to accrued interest receivable, other than billed interest
and fees on credit card receivables, as accrued interest receivable
is reversed when a loan is placed on nonaccrual status. The
allowance for loan and lease losses represents the estimated
probable credit losses on 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
on these unfunded credit instruments based on utilization
assumptions. Lending-related credit exposures deemed to be
uncollectible, excluding loans carried at fair value, are charged
against these accounts. Write-offs on PCI loans on which there is
a valuation allowance are written-off against the valuation
allowance. For additional information, see Purchased Credit-
impaired Loans. Cash recovered on previously charged off
amounts is recorded as a recovery to these accounts.
Management evaluates the adequacy of the allowance for credit
losses based on the combined total of the allowance for loan and
lease losses and the reserve for unfunded lending commitments.
The Corporation performs periodic and systematic detailed
reviews of its lending portfolios to identify credit risks and to
assess the overall collectability of those portfolios. The allowance
on certain homogeneous consumer loan portfolios, which
generally consist of consumer real estate within the Home Loans
portfolio segment and credit card loans within the Credit Card and
Other Consumer portfolio segment, is based on aggregated
portfolio segment evaluations generally by product type. Loss
forecast models are utilized for these portfolios which consider a
variety of factors including, but not limited to, historical loss
experience, estimated defaults or foreclosures based on portfolio
trends, delinquencies, bankruptcies, economic conditions and
credit scores.
The Corporation’s Home Loans portfolio segment is comprised
primarily of large groups of homogeneous consumer loans secured
by residential real estate. The amount of losses incurred in the
homogeneous loan pools is estimated based upon how many of
the loans will default and the loss in the event of default. Using
modeling methodologies, the Corporation estimates how many of
the homogeneous loans will default based on the individual loans’
attributes aggregated into pools of homogeneous loans with
similar attributes. The attributes that are most significant to the
probability of default and are used to 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