Bank of America 2009 Annual Report Download - page 136

Corporation continues to evaluate this information and other credit-related
information as it becomes available. Interest income on purchased
non-impaired loans is recognized using a level yield methodology based
on the contractually required payments receivable. For purchased
impaired loans, applicable accounting guidance addresses the accounting
for differences between contractual cash flows and expected cash flows
from the Corporation’s initial investment in loans if those differences are
attributable, at least in part, to credit quality. The excess of the cash
flows expected to be collected 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 acquisition date and the cash flows expected to be col-
lected is referred to as the nonaccretable difference.
The initial fair values for purchased impaired loans are determined by
discounting both principal and interest cash flows expected to be col-
lected using an observable discount rate for similar instruments with
adjustments that management believes a market participant would
consider in determining fair value. The Corporation estimates the cash
flows expected to be collected upon acquisition 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.
Subsequent decreases to expected principal cash flows result in a
charge to provision for credit losses and a corresponding increase to a
valuation allowance included in the allowance for loan and lease losses.
Subsequent increases in expected principal cash flows result in a recov-
ery of any previously recorded allowance for loan and lease losses, to the
extent applicable, and a reclassification from nonaccretable difference to
accretable yield for any remaining increase. Changes in expected interest
cash flows may result in reclassifications to/from the nonaccretable
difference. Loan disposals, which may include sales of loans, receipt of
payments in full from the borrower, foreclosure or troubled debt restructur-
ing (TDR), result in removal of the loan from the purchased impaired loan
pool at its allocated carrying amount.
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 nonrecourse 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 already reflect a
credit component. The allowance for loan and lease losses represents
the estimated probable credit losses in 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. Credit
exposures deemed to be uncollectible, excluding derivative assets, trad-
ing account assets and loans carried at fair value, are charged against
these accounts. Cash recovered on previously charged off amounts is
recorded as a recovery to these accounts.
The Corporation performs periodic and systematic detailed reviews of
its lending portfolios to identify credit risks and to assess the overall col-
lectability of those portfolios. The allowance on certain homogeneous
loan portfolios, which generally consist of consumer loans (e.g.,
consumer real estate and credit card loans) and certain commercial loans
(e.g., business card and small business portfolios), 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, esti-
mated defaults or foreclosures based on portfolio trends, delinquencies,
economic conditions and credit scores. These models are updated on a
quarterly basis to incorporate information reflecting the current economic
environment. The loss forecasts also incorporate the estimated increased
volume and impact of consumer real estate loan modification programs,
including losses associated with estimated re-default after modification.
The remaining commercial portfolios are reviewed on an individual
loan basis. Loans subject to individual reviews are analyzed and segre-
gated by risk according to the Corporation’s internal risk rating scale.
These risk classifications, in conjunction with an analysis of historical
loss experience, current economic conditions, industry performance
trends, geographic or obligor concentrations within each portfolio seg-
ment, and any other pertinent information (including individual valuations
on nonperforming loans) result in the estimation of the allowance for
credit losses. The historical loss experience is updated quarterly to
incorporate the most recent data reflecting the current economic
environment.
If necessary, a specific allowance is established for individual
impaired loans. 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 interest, according to
the contractual terms of the agreement, and once a loan has been identi-
fied as individually impaired, management measures impairment.
Individually impaired loans are measured based on the present value of
payments expected to be received, 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.
Purchased impaired loans are recorded at fair value and applicable
accounting guidance prohibits the carrying over or creation of valuation
allowances in the initial accounting for impaired loans acquired in a trans-
fer. This applies to the purchase of an individual loan, a pool of loans and
portfolios of loans acquired in a purchase business combination. Sub-
sequent to acquisition, decreases in expected principal cash flows of
purchased impaired loans are recorded as a valuation allowance included
in the allowance for loan and lease losses. Subsequent increases in
expected principal cash flows result in a recovery of any previously
recorded allowance for loan and lease losses, to the extent applicable.
Write-downs on purchased impaired loans in excess of the nonaccretable
difference are charged against the allowance for loan and lease losses.
For more information on the purchased impaired portfolios associated
with acquisitions, see Note 6 – Outstanding Loans and Leases.
The allowance for loan and lease losses includes two components
that are allocated to cover the estimated probable losses in each loan
and lease category based on the results of the Corporation’s detailed
review process described above. The first component covers those
commercial loans that are either nonperforming or impaired and
134 Bank of America 2009