Bank of America 2009 Annual Report Download - page 68

the Contingent Warrants automatically expired without becoming
exercisable, and the CES ceased to exist.
Credit Risk Management
The economic recession accelerated in late 2008 and continued to
deepen into the first half of 2009 but has shown some signs of stabiliza-
tion and possible improvement over the second half of the year. Consum-
ers continued to be under financial stress as unemployment and
underemployment remained at elevated levels and individuals spent lon-
ger periods without work. These factors combined with further reductions
in spending by consumers and businesses, continued home price
declines and turmoil in sectors of the financial markets continued to
negatively impact both the consumer and commercial loan portfolios.
During 2009, these conditions drove increases in net charge-offs and
nonperforming loans and foreclosed properties as well as higher commer-
cial criticized utilized exposure and reserve increases across most portfo-
lios. The depth, breadth and duration of the economic downturn, as well
as the resulting impact on the credit quality of the loan portfolios remain
unclear into 2010.
We continue to refine our credit standards to meet the changing
economic environment. In our consumer businesses, we have
implemented a number of initiatives to mitigate losses. These include
increased use of judgmental lending and adjustment of underwriting, and
account and line management standards and strategies, including
reducing unfunded lines where appropriate. Additionally, we have
increased collections, loan modification and customer assistance infra-
structures to enhance customer support. In 2009, we provided home
ownership retention opportunities to approximately 460,000 customers.
This included completion of 260,000 customer loan modifications with
total unpaid balances of approximately $55 billion and approximately
200,000 customers who were in trial-period modifications under the
government’s Making Home Affordable program. As of January 2010,
approximately 220,000 customers were in trial period modifications and
more than 12,700 were in permanent modifications. Of the 260,000
modifications done during 2009, in terms of both the volume of mod-
ifications and the unpaid principal balance associated with the underlying
loans most are in the portfolio serviced for investors and is not on our
balance sheet. During 2008, Bank of America and Countrywide completed
230,000 loan modifications. The most common types of modifications
include rate reductions, capitalization of past due amounts or a combina-
tion of rate reduction and capitalization of past due amounts, which are
17 percent, 21 percent and 40 percent, respectively, of modifications
completed in 2009. We also provide rate and payment extensions, princi-
pal forbearance or forgiveness, and other actions. These modification
types are generally considered TDRs except for certain short-term mod-
ifications where we expect to collect the full contractual principal and
interest.
A number of initiatives have also been implemented in our small busi-
ness commercial – domestic portfolio including changes to underwriting
thresholds augmented by a judgmental decision-making process by
experienced underwriters including increasing minimum FICO scores and
lowering initial line assignments. We have also increased the intensity of
our existing customer line management strategies.
To mitigate losses in the commercial businesses, we have increased
the frequency and intensity of portfolio monitoring, hedging activity and
our efforts in managing an exposure when we begin to see signs of
deterioration. Our lines of business and risk management personnel use
a variety of tools to continually monitor the ability of a borrower or
counterparty to perform under its obligations. It is our practice to transfer
the management of deteriorating commercial exposures to independent
Special Asset officers as a credit approaches criticized levels. Our experi-
ence has shown that this discipline generates an objective assessment
of the borrower’s financial health and the value of our exposure, and
maximizes our recovery upon resolution. As part of our underwriting proc-
ess we have increased scrutiny around stress analysis and required pric-
ing and structure to reflect current market dynamics. Given the volatility of
the financial markets, we increased the frequency of various tests
designed to understand what the volatility could mean to our underlying
credit risk. Given the potential for single name risk associated with any
disruption in the financial markets, we use a real-time counterparty event
management process to monitor key counterparties.
Additionally, we account for certain large corporate loans and loan
commitments (including issued but unfunded letters of credit which are
considered utilized for credit risk management purposes) that exceed our
single name credit risk concentration guidelines under the fair value
option. These loans and loan commitments are then actively managed
and hedged, principally by purchasing credit default protection. By includ-
ing the credit risk of the borrower in the fair value adjustments, any credit
spread deterioration or improvement is recorded in other income immedi-
ately as part of the fair value adjustment. As a result, the allowance for
loan and lease losses and the reserve for unfunded lending commitments
are not used to capture credit losses inherent in any nonperforming or
impaired loans and unfunded commitments carried at fair value. See the
Commercial Loans Carried at Fair Value section on page 81 for more
information on the performance of these loans and loan commitments
and see Note 20 – Fair Value Measurements to the Consolidated Finan-
cial Statements for additional information on our fair value option elec-
tions.
The acquisition of Merrill Lynch contributed to both our consumer and
commercial loans and commitments. Acquired consumer loans consisted
of residential mortgages, home equity loans and lines of credit and
direct/indirect loans (principally securities-based lending margin loans).
Commercial exposures were comprised of both investment and
non-investment grade loans and included exposures to CMBS, monolines
and leveraged finance. Consistent with other acquisitions, we
incorporated the acquired assets into our overall credit risk management
processes.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial
underwriting and continues throughout a borrower’s credit cycle. Stat-
istical techniques in conjunction with experiential judgment are used in all
aspects of portfolio management including underwriting, product pricing,
risk appetite, setting credit limits, operating processes and metrics to
quantify and balance risks and returns. Statistical models are built using
detailed behavioral information from external sources such as credit
bureaus and/or internal historical experience. These models are a
component of our consumer credit risk management process and are
used, in part, to help determine both new and existing credit decisions,
portfolio management strategies including authorizations and line man-
agement, collection practices and strategies, determination of the allow-
ance for loan and lease losses, and economic capital allocations for
credit risk.
For information on our accounting policies regarding delinquencies,
nonperforming status and charge-offs for the consumer portfolio, see
Note 1 – Summary of Significant Accounting Principles to the Con-
solidated Financial Statements.
Consumer Credit Portfolio
Weakness in the economy and housing markets, elevated unemployment
and underemployment and tighter credit conditions resulted in deterio-
ration across most of our consumer portfolios during 2009. However,
66 Bank of America 2009