Bank of America 2009 Annual Report Download - page 137

consumer real estate loans that have been modified as TDRs. These
loans are subject to impairment measurement at the loan level based on
the present value of expected future cash flows discounted at the loan’s
contractual effective interest rate. Where the present value is less than
the recorded investment in the loan, impairment is recognized through the
provision for credit losses with a corresponding increase in the allowance
for loan and lease losses. The second component covers consumer loans
and performing commercial loans and leases. Included within this second
component of the allowance for loan and lease losses and determined
separately from the procedures outlined above 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. Management evaluates the adequacy of
the allowance for loan and lease losses based on the combined total of
these two components.
In addition to the allowance for loan and lease losses, the Corporation
also estimates probable losses related to unfunded lending commit-
ments, such as letters of credit and financial guarantees, and binding
unfunded loan commitments. The reserve for unfunded lending commit-
ments 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 analy-
sis of historical loss experience, utilization assumptions, current
economic conditions, performance trends within specific portfolio seg-
ments 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 Con-
solidated Balance Sheet in accrued expenses and other liabilities. Provi-
sion 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, purchased impaired loans and
LHFS are not reported as nonperforming loans and leases.
In accordance with the Corporation’s policies, non-bankrupt credit card
loans 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 cost 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 guaranteed by the Federal Housing
Administration (FHA). Personal property-secured loans are charged off no
later than the end of the month in which the account becomes 120 days
past due. Accounts in bankruptcy are charged off for credit card and cer-
tain unsecured accounts 60 days after bankruptcy notification. For
secured products, accounts in bankruptcy are written down to the
collateral value, less cost to sell, by the end of the month in which the
account becomes 60 days past due. Consumer credit card loans,
consumer loans secured by personal property and unsecured consumer
loans are not placed on nonaccrual status prior to charge-off and there-
fore are not reported as nonperforming loans. Real estate-secured loans
are generally placed on nonaccrual status and classified as non-
performing at 90 days past due. However, consumer loans secured by
real estate where repayments are guaranteed by the FHA are not placed
on nonaccrual status, and therefore, are not reported as nonperforming
loans. Interest accrued but not collected is reversed when a consumer
loan is placed on nonaccrual status. Interest collections on nonaccruing
consumer loans for which the ultimate collectability of principal is
uncertain are applied as principal reductions; otherwise, such collections
are credited to interest income when received. These loans may be
restored to accrual status when all principal and interest is current and
full repayment of the remaining contractual principal and interest is
expected, or when the loan otherwise becomes well-secured and is in the
process of collection. Consumer loans whose contractual terms have
been modified in a TDR and are current at the time of restructuring
remain on accrual status if there is demonstrated performance prior to
the restructuring and payment in full under the restructured terms is
expected. Otherwise, the loans are placed on nonaccrual status and
reported as nonperforming until there is sustained repayment perform-
ance for a reasonable period, generally six months. Consumer TDRs that
are on accrual status are reported as performing TDRs through the end of
the calendar year in which the restructuring occurred or the year in which
the loans are returned to accrual status. In addition, if accruing consumer
TDRs bear less than a market rate of interest at the time of modification,
they are reported as performing TDRs throughout the remaining lives of
the loans.
Commercial loans and leases, excluding business card loans, that are
past due 90 days or more as to principal or interest, or where reasonable
doubt exists as to timely collection, including loans that are individually
identified as being impaired, are generally placed on nonaccrual status
and classified as nonperforming unless well-secured and in the process
of collection. Commercial loans and leases whose contractual terms have
been modified in a TDR are placed on nonaccrual status and reported as
nonperforming until the loans have performed for an adequate period of
time under the restructured agreement. Accruing commercial TDRs are
reported as performing TDRs through the end of the calendar year in
which the loans are returned to accrual status. In addition, if accruing
commercial TDRs bear less than a market rate of interest at the time of
modification, they are reported as performing TDRs throughout the
remaining lives of the loans. Interest accrued but not collected is
reversed when a commercial loan is placed on nonaccrual status. Interest
collections on nonaccruing commercial loans and leases for which the
ultimate collectability of principal is uncertain are applied as principal
reductions; otherwise, such collections are credited to income when
received. Commercial loans and leases may be restored to accrual status
when all principal and interest is current and full repayment of the remain-
ing contractual principal and interest is expected, or when the loan other-
wise becomes well-secured and is in the process of collection. Business
card loans are charged off no later than the end of the month in which the
account becomes 180 days past due or where 60 days have elapsed
since receipt of notification of bankruptcy filing, whichever comes first.
These loans are not placed on nonaccrual status prior to charge-off and
therefore are not reported as nonperforming loans.
The entire balance of a consumer and commercial loan is con-
tractually delinquent if the minimum payment is not received by the speci-
fied due date on the customer’s billing statement. Interest and fees
continue to accrue on past due loans until the date the loan goes into
nonaccrual status, if applicable.
Purchased impaired loans are recorded at fair value at the acquisition
date. Although the purchased impaired loans may be contractually delin-
quent, the Corporation does not classify these loans as nonperforming as
the loans were written down to fair value at the acquisition date and the
accretable yield is recognized in interest income over the remaining life of
Bank of America 2009 135