Bank of America 2014 Annual Report Download - page 153

Bank of America 2014 151
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 on the number of
loans that will default and the loss in the event of default. Using
modeling methodologies, the Corporation estimates the number
of homogeneous loans that 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 defaults include
refreshed LTV or, in the case of a subordinated lien, refreshed
combined LTV, 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 12-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 portfolios, including nonperforming commercial
loans, as well as consumer and commercial loans modified in a
troubled debt restructuring (TDR), 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, in accordance with the contractual terms
of the agreement, or the loan has been modified in a TDR. Once
a loan has been identified as impaired, management measures
impairment primarily 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. 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 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 secured consumer
loans that are solely dependent on the collateral for repayment,
in which case the amount that exceeds the fair value of the
collateral is charged off.
Generally, when determining the fair value of the collateral
securing consumer real estate-secured 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 these consumer loans 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