SEC Company Response from BANK OF AMERICA (BAC) — Feb 23, 2010
BANK OF AMERICA CORP /DE/ (BAC, BAC-PB, BAC-PE, BAC-PK, BAC-PL, BAC-PM, BAC-PN, BAC-PO, BAC-PP, BAC-PQ, BAC-PS, BML-PG, BML-PL) (CIK 0000070858)
Date: Feb. 23, 2010 · CIK: 0000070858 · Accession: 0001193125-10-037722
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-06523
Referenced dates: January 29, 2010
Letter
Division of Corporation Finance Washington, DC 20549 RE: Bank of America Corporation Form 8-K filed January 20, 2010 File No. 001-06523
Dear Mr. West:
We have received and reviewed your letter dated January 29, 2010. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff’s comments. Our responses are intended to address the questions raised by the Staff. We are ready to assist the Staff in resolving any matter requiring further attention.
Form 8-K filed January 20, 2010
1. We note your footnote disclosure on page 40 of your supplemental information reporting package furnished as part of Exhibit 99.2 that your policy is not to classify consumer credit card, consumer non-real estate loans, and business card loans as nonperforming. Given that your policy may not be consistent with others in the industry, please ensure that this disclosure is clear throughout your documents. Additionally, given that these types of loans are never classified as nonperforming, tell us why you believe it is appropriate in your allowance to nonperforming loan ratios to include the allowance allocated to these types of loans. In this regard, we note that page 43 of your supplemental reporting information shows that at least $12.0 billion of your allowance for loan and losses at December 31, 2009 is allocated to consumer credit cards, direct/indirect consumer and other consumer loan balances, and that it is unclear how much of the allowance relates to your business card loans. We note if the allowance to nonperforming loan ratios were revised to exclude the allowance for loan and lease items which are never included as nonperforming, the ratios would be significantly different. Please advise, and ensure that your disclosures in future filings are clear on how these amounts are calculated.
Response: In future filings, we will include additional disclosures to provide clarity regarding the reporting of nonperforming loans and leases. In addition, we will ensure that the disclosure in our supplemental reporting information clearly describes what types of loans are excluded from the nonperforming loans and leases classification.
As disclosed in our financial statements and consistent with industry practice, our accounting policy is to charge off non-bankrupt credit card loans (consumer and business) and open-end unsecured consumer loans in the month in which the account becomes 180 days past due. In addition, loans secured by personal property are charged off in the month the account becomes 120 days past due. Given the nature of these loans and the type of collateral, if secured, the transition from accruing yet delinquent (considered to be 90 days past due) to charge-off (at 120 or 180 days past due, depending on the loan/collateral type) is very short (90 days or less). It is impractical to specifically review each individual loan or credit card receivable to determine whether it should be considered nonperforming, and in our experience there is a high cure rate (i.e., customers begin making payments again) between 90 days past due and charge-off. We also consider an arbitrary allocation of this population of loans between nonperforming and performing to be not particularly relevant. As these loans remain in accrual status until the charge-off dates stated above, these loans are not reported as nonaccrual and are not considered to be nonperforming. We do disclose in our filings the credit quality associated with these loans as we disclose loans that are past due 90 days or more and still accruing.
Our calculation of the ratio of the allowance for loan and lease losses to total nonperforming loans and leases has consistently included the total allowance for loan and lease losses balance as of period end which we believe is consistent with industry practice (see below). For reporting purposes, we allocate the allowance for loan and lease losses across products. However, as disclosed in our filings, the allowance is available to absorb any credit losses without restriction. We view the allowance for loan and lease losses as an estimate of incurred losses in our total portfolio of loans and leases and therefore, we do not believe that it is appropriate to carve out specific components of the allowance for loan and lease losses to compare to nonperforming loans and leases.
Based on our review of peer disclosures, including Citigroup, Inc., JP Morgan Chase & Co., PNC Financial Services Group, Inc., US Bancorp, and Wells Fargo & Company, we noted that our financial statement disclosures surrounding nonperforming loans and leases are consistent with industry practice, specifically around the exclusion of certain loan types (e.g., credit cards and non-real estate consumer loans) from nonperforming. Additionally, our ratio of the allowance for loan and lease losses to total nonperforming loans and leases appears to be calculated consistently with industry practice, specifically around the inclusion of the total allowance for loan and lease losses versus specific components.
2. We note your disclosure on page 39 of your supplemental information reporting package furnished as part of Exhibit 99.2 that total nonperforming assets does not include loans accounted for as purchased impaired loans even though the customer may be contractually past due. Please clarify whether you would classify the purchased impaired loans as nonperforming in the future once you determine that an allowance for loan losses is required for those loans. If not, tell us whether you adjust your allowance to nonperforming loan ratios to exclude the allowance related to these loans since the loans would not be included in the denominator of this ratio. In this regard, we note that you appear to have a $3.9 billion allowance for loan losses related to the Countrywide purchased impaired loan portfolio. If you do not adjust this ratio for any allowance related to these loans which do not get classified as nonperforming, please ensure that your disclosures in future filings are clear as to how this impacts the ratios and comparability among other companies in your industry.
Response: As noted in our response to Comment #1 above, we will provide additional clarity regarding the definition of nonperforming loans and leases in our future filings, as well as in our supplemental reporting information, as it relates to the ratio of the allowance for loan and lease losses to nonperforming loans and leases.
Additionally, we believe that our disclosures surrounding nonperforming loans and leases are consistent with industry practice, including the exclusion of purchased impaired loans. As disclosed in Note 1 – Summary of Significant Accounting Principles in our Annual Report on Form 10-K and discussed in our response to Comment #4 below:
Purchased impaired loans are recorded at fair value at the acquisition date. Although the purchased impaired loans may be contractually delinquent, 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 the loan. In addition, reported net charge-offs exclude write-downs on purchased impaired loans as the fair value already considers the estimated credit losses.
We exclude our purchased impaired loan pools from the nonperforming disclosures as the purchased impaired loan pools continue to accrete interest income in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, even when a valuation allowance has been established for certain of the loan pools. As these loan pools remain in accretion status, they are not considered to be nonperforming, which we believe is consistent with industry practice.
In accordance with ASC 310-30, we do maintain a valuation reserve on purchased impaired loan pools for losses which have been incurred subsequent to acquisition where the expected principal cash flows are lower than that estimated at acquisition. We classify that valuation allowance as a component of our overall allowance for loan and lease losses. As noted in our response to Comment #1 above, we believe that our ratio of the allowance for loan and lease losses to total nonperforming loans and leases is calculated consistently with industry practice. We disclose that our purchased impaired loan portfolio is excluded from nonperforming loans and leases and also disclose in the footnotes and MD&A, the amount of the allowance for loan and lease losses associated with the purchased impaired loan portfolio. However, given the unique accounting for purchased impaired loans, in future filings, effective with our 2009 Annual Report on Form 10-K, we will disclose the ratio of allowance for loan and lease losses to nonperforming loans and leases, adjusted to exclude the allowance related to the purchased impaired loans, in addition to the current disclosure. A footnote on the allowance for loan and lease losses as a percentage of total nonperforming loans and leases will include the following:
Allowance for loan and lease losses includes $3.9 billion and $750 million of valuation allowance for purchased impaired loans at December 31, 2009 and 2008. Excluding the valuation allowance for purchased impaired loan pools, the ratio would have been 99 percent and 136 percent at December 31, 2009 and 2008.
3. We note your disclosure in footnote 2 to the Consumer Asset Quality Key Indicators chart furnished as part of your supplemental information reporting package which indicates two separate adjustments were made during the third and fourth quarter related to changes in valuation processes for residential mortgages and real estate owned, as well as a $223 million adjustment related to collections under certain insurance contracts in the home equity portfolio. Please tell us more about each of these adjustments/refinements, including the specific changes and improvements that may have been made in the valuation processes. Please also tell us and discuss as appropriate in future filings whether additional adjustments may be needed related to protracted nature of collections under certain insurance contracts and any changes you have made to better estimate the allowance needed in the future related to this.
Response: The adjustments referenced in footnote 2 to the Consumer Asset Quality Key Indicators chart furnished as part of our supplemental information reporting package represent refinements to our loss estimation process related to our consumer real estate portfolio. Like any estimation process, we continually assess and refine our processes to ensure our recorded loss estimates are indicative of market conditions and are based on the best and most current information available. Specifically, we believe our current processes related to the allowance for loan and lease losses consider all relevant, available information. When future refinements are made to our processes and estimates, we will provide relevant disclosures to the users of our financial information.
The $110 million credit loss recorded in the fourth quarter of 2009 is related to our decision to use third party appraisals where available for certain mortgage loans secured by a vacant lot (lot-loans) instead of an automated valuation methodology (AVM) or other index values to estimate the credit losses associated with these loans. In the current market environment, there has been a decline in the number of market transactions (only cash transactions taking place, no financing available) in the lot-loan sector, and AVMs, which heavily rely on comparable sales data, have become significantly less reliable. Given the nature of lot loans, we believe that estimates of collateral value on a full appraisal represent a more accurate estimate of the collateral value.
The third quarter of 2009 adjustment to our real estate owned (REO) valuation process resulted in the recording of a credit loss of $152 million for the portfolio. Based upon our recent experience related to REO properties, we determined that an additional loss estimate was needed to reflect the negative impact on a property’s selling price of the property going into foreclosure. As a property goes into foreclosure, we have experienced, in certain instances, a decline in the borrowers’ maintenance and upkeep of a property, as well as some borrowers removing appliances, plumbing and other items that traditionally remained in a home at sale date. Furthermore, bank-owned real estate transactions appear to carry a negative perception among buyers and in today’s market, command a lower price than traditional real estate transactions.
The other adjustment made in the third quarter of 2009 resulted in a credit loss of $223 million related to the change in timing and amount of estimated insurance recoveries. For a portion of our home equity portfolio, we obtain lien protection insurance from a third party. If we determine that our lien position is less than we originally expected (e.g., we hold the third lien instead of the second) and we incur losses on a home equity loan, our insurance contract would provide some protection from loss. This insurance coverage is inseparable from the individual loans. Because of the protracted nature of the potential collection of insurance, we no longer include insurance recoveries as a benefit in our loss estimate in establishing the allowance for loan and lease losses. Although we consider this refinement to be a change in estimate, we note that had it been made in a prior period, the effect would have been immaterial.
4. We note that in certain situations throughout your various filings you appear to use the word “nonperforming” loans and in other situations you refer to “nonaccrual” loans. Please tell us and clarify in future filings how these two metrics relate to each other and the differences between them. Please carefully review other references to these terms and their related definitions in your future periodic filings and ensure that they are clearly defined in your Critical Accounting Policies, Accounting Policy Footnote(s), Industry Guide III Information and other ancillary disclosures. Changes to how you define any term should be clearly indicated at a level of granularity necessary to understand the individual components comprising each term. Supporting disclosures should also be provided to allow for comparability of all financial information, including ratios and other metrics impacted. As part of your response, it may be helpful to provide a reconciliation of the two numbers to illustrate the differences.
Response: Nonperforming loans are comprised of loans that are on nonaccrual status, including nonaccruing loans whose contractual terms have been modified in a troubled debt restructuring (TDR). Loans for which we have elected the fair value option election are not reported as nonperforming loans because they are recorded at fair value with changes in credit quality incorporated into the fair value changes recorded in earnings. Purchased impaired loans are not reported as nonperforming loans as they were initially recorded at fair value and the Corporation subsequently records the accretable yield into interest income over the life of the loans. Loans held-for-sale are not included in the definition of nonperforming loans even if on nonaccrual status, as they are reported as a separate line item on the Corporation’s consolidated bala
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CORRESP
1
filename1.htm
Correspondence
Confidential Treatment of Portions of this Letter
Has Been Requested by Bank of America
Corporation Pursuant to 17 C.F.R. § 200.83.
Asterisks denote such omissions.
February 23, 2010
Mr. Hugh West
Accounting Branch Chief
United State Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 4720
100 F Street, NE
Washington, DC 20549
RE:
Bank of America Corporation
Form 8-K filed January 20, 2010
File No. 001-06523
Dear Mr. West:
We have received and reviewed
your letter dated January 29, 2010. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff’s comments. Our responses are intended to address the questions raised by the
Staff. We are ready to assist the Staff in resolving any matter requiring further attention.
Form 8-K filed January 20, 2010
1.
We note your footnote disclosure on page 40 of your supplemental information reporting package furnished as part of Exhibit 99.2 that your policy is not to classify
consumer credit card, consumer non-real estate loans, and business card loans as nonperforming. Given that your policy may not be consistent with others in the industry, please ensure that this disclosure is clear throughout your documents.
Additionally, given that these types of loans are never classified as nonperforming, tell us why you believe it is appropriate in your allowance to nonperforming loan ratios to include the allowance allocated to these types of loans. In this regard,
we note that page 43 of your supplemental reporting information shows that at least $12.0 billion of your allowance for loan and losses at December 31, 2009 is allocated to consumer credit cards, direct/indirect consumer and other consumer loan
balances, and that it is unclear how much of the allowance relates to your business card loans. We note if the allowance to nonperforming loan ratios were revised to exclude the allowance for loan and lease items which are never included as
nonperforming, the ratios would be significantly different. Please advise, and ensure that your disclosures in future filings are clear on how these amounts are calculated.
Response:
In future filings, we will include additional disclosures to provide clarity regarding the reporting of nonperforming loans and leases. In addition, we will
ensure that the disclosure in our supplemental reporting information clearly describes what types of loans are excluded from the nonperforming loans and leases classification.
As disclosed in our financial statements and consistent with industry practice, our accounting policy is to charge off non-bankrupt credit card loans (consumer and
business) and open-end unsecured consumer loans in the month in which the account becomes 180 days past due. In addition, loans secured by personal property are charged off in the month the account becomes 120 days past due. Given the nature of
these loans and the type of collateral, if secured, the transition from accruing yet delinquent (considered to be 90 days past due) to charge-off (at 120 or 180 days past due, depending on the loan/collateral type) is very short (90 days or less).
It is impractical to specifically review each individual loan or credit card receivable to determine whether it should be considered nonperforming, and in our experience there is a high cure rate (i.e., customers begin making payments again) between
90 days past due and charge-off. We also consider an arbitrary allocation of this population of loans between nonperforming and performing to be not particularly relevant. As these loans remain in accrual status until the charge-off dates stated
above, these loans are not reported as nonaccrual and are not considered to be nonperforming. We do disclose in our filings the credit quality associated with these loans as we disclose loans that are past due 90 days or more and still accruing.
Our calculation of the ratio of the allowance for loan and lease losses to total nonperforming loans and leases has consistently included the total allowance for loan
and lease losses balance as of period end which we believe is consistent with industry practice (see below). For reporting purposes, we allocate the allowance for loan and lease losses across products. However, as disclosed in our filings, the
allowance is available to absorb any credit losses without restriction. We view the allowance for loan and lease losses as an estimate of incurred losses in our total portfolio of loans and leases and therefore, we do not believe that it is
appropriate to carve out specific components of the allowance for loan and lease losses to compare to nonperforming loans and leases.
Based on our review of peer disclosures, including Citigroup, Inc., JP Morgan Chase & Co., PNC Financial Services Group, Inc., US Bancorp, and Wells
Fargo & Company, we noted that our financial statement disclosures surrounding nonperforming loans and leases are consistent with industry practice, specifically around the exclusion of certain loan types (e.g., credit cards and non-real
estate consumer loans) from nonperforming. Additionally, our ratio of the allowance for loan and lease losses to total nonperforming loans and leases appears to be calculated consistently with industry practice, specifically around the inclusion of
the total allowance for loan and lease losses versus specific components.
2.
We note your disclosure on page 39 of your supplemental information reporting package furnished as part of Exhibit 99.2 that total nonperforming assets does not
include loans accounted for as purchased impaired loans even though the customer may be contractually past due. Please clarify whether you would classify the purchased impaired loans as nonperforming in the future once you determine that an
allowance for loan losses is required for those loans. If not, tell us whether you adjust your allowance to nonperforming loan ratios to exclude the allowance related to these loans since the loans would not be included in the denominator of this
ratio. In this regard, we note that you appear to have a $3.9 billion allowance for loan losses related to the Countrywide purchased impaired loan portfolio. If you do not adjust this ratio for any allowance related to these loans which do not get
classified as nonperforming, please ensure that your disclosures in future filings are clear as to how this impacts the ratios and comparability among other companies in your industry.
Response:
As noted in our response to Comment #1 above, we will provide additional clarity regarding the definition of nonperforming loans and leases in our future
filings, as well as in our supplemental reporting information, as it relates to the ratio of the allowance for loan and lease losses to nonperforming loans and leases.
Additionally, we believe that our disclosures surrounding nonperforming loans and leases are consistent with industry practice, including the exclusion of purchased
impaired loans. As disclosed in Note 1 – Summary of Significant Accounting Principles in our Annual Report on Form 10-K and discussed in our response to Comment #4 below:
Purchased impaired loans are recorded at fair value at the acquisition date. Although the purchased impaired loans may be contractually
delinquent, 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 the loan. In
addition, reported net charge-offs exclude write-downs on purchased impaired loans as the fair value already considers the estimated credit losses.
We exclude our purchased impaired loan pools from the nonperforming disclosures as the purchased impaired loan pools continue to accrete interest income in accordance
with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, even when a valuation allowance has been established for certain of the loan pools. As these loan pools remain in accretion status, they are not
considered to be nonperforming, which we believe is consistent with industry practice.
In accordance with ASC 310-30, we do maintain a valuation reserve on purchased impaired loan pools for losses which have been incurred subsequent to acquisition where
the expected principal cash flows are lower than that estimated at acquisition. We classify that valuation allowance as a component of our overall allowance for loan and lease losses. As noted in our response to Comment #1 above, we believe that our
ratio of the allowance for loan and lease losses to total nonperforming loans and leases is calculated consistently with industry practice. We disclose that our purchased impaired loan portfolio is excluded from nonperforming loans and leases and
also disclose in the footnotes and MD&A, the amount of the allowance for loan and lease losses associated with the purchased impaired loan portfolio. However, given the unique accounting for purchased impaired loans, in future filings, effective
with our 2009 Annual Report on Form 10-K, we will disclose the ratio of allowance for loan and lease losses to nonperforming loans and leases, adjusted to exclude the allowance related to the purchased impaired loans, in addition to the current
disclosure. A footnote on the allowance for loan and lease losses as a percentage of total nonperforming loans and leases will include the following:
Allowance for loan and lease losses includes $3.9 billion and $750 million of valuation allowance for purchased impaired loans at December 31, 2009 and 2008. Excluding the valuation allowance for
purchased impaired loan pools, the ratio would have been 99 percent and 136 percent at December 31, 2009 and 2008.
3.
We note your disclosure in footnote 2 to the Consumer Asset Quality Key Indicators chart furnished as part of your supplemental information reporting package which
indicates two separate adjustments were made during the third and fourth quarter related to changes in valuation processes for residential mortgages and real estate owned, as well as a $223 million adjustment related to collections under certain
insurance contracts in the home equity portfolio. Please tell us more about each of these adjustments/refinements, including the specific changes and improvements that may have been made in the valuation processes. Please also tell us and discuss as
appropriate in future filings whether additional adjustments may be needed related to protracted nature of collections under certain insurance contracts and any changes you have made to better estimate the allowance needed in the future related to
this.
Response:
The adjustments referenced in footnote 2 to the Consumer Asset Quality Key Indicators chart furnished as part of our supplemental information reporting package
represent refinements to our loss estimation process related to our consumer real estate portfolio. Like any estimation process, we continually assess and refine our processes to ensure our recorded loss estimates are indicative of market conditions
and are based on the best and most current information available. Specifically, we believe our current processes related to the allowance for loan and lease losses consider all relevant, available information. When future refinements are made to our
processes and estimates, we will provide relevant disclosures to the users of our financial information.
The $110 million credit loss recorded in the fourth quarter of 2009 is related to our decision to use third party appraisals where available for certain mortgage loans
secured by a vacant lot (lot-loans) instead of an automated valuation methodology (AVM) or other index values to estimate the credit losses associated with these loans. In the current market environment, there has been a decline in the number of
market transactions (only cash transactions taking place, no financing available) in the lot-loan sector, and AVMs, which heavily rely on comparable sales data, have become significantly less reliable. Given the nature of lot loans, we believe that
estimates of collateral value on a full appraisal represent a more accurate estimate of the collateral value.
The third quarter of 2009 adjustment to our real estate owned (REO) valuation process resulted in the recording of a credit loss of $152 million for the portfolio.
Based upon our recent experience related to REO properties, we determined that an additional loss estimate was needed to reflect the negative impact on a property’s selling price of the property going into foreclosure. As a property goes into
foreclosure, we have experienced, in certain instances, a decline in the borrowers’ maintenance and upkeep of a property, as well as some borrowers removing appliances, plumbing and other items that traditionally remained in a home at sale
date. Furthermore, bank-owned real estate transactions appear to carry a negative perception among buyers and in today’s market, command a lower price than traditional real estate transactions.
The other adjustment made in the third quarter of 2009 resulted in a credit loss of $223 million related to the change in timing and amount of estimated insurance
recoveries. For a portion of our home equity portfolio, we obtain lien protection insurance from a third party. If we determine that our lien position is less than we originally expected (e.g., we hold the third lien instead of the second) and we
incur losses on a home equity loan, our insurance contract would provide some protection from loss. This insurance coverage is inseparable from the individual loans. Because of the protracted nature of the potential collection of insurance, we no
longer include insurance recoveries as a benefit in our loss estimate in establishing the allowance for loan and lease losses. Although we consider this refinement to be a change in estimate, we note that had it been made in a prior period, the
effect would have been immaterial.
4.
We note that in certain situations throughout your various filings you appear to use the word “nonperforming” loans and in other situations you refer to
“nonaccrual” loans. Please tell us and clarify in future filings how these two metrics relate to each other and the differences between them. Please carefully review other references to these terms and their related definitions in your
future periodic filings and ensure that they are clearly defined in your Critical Accounting Policies, Accounting Policy Footnote(s), Industry Guide III Information and other ancillary disclosures. Changes to how you define any term should be
clearly indicated at a level of granularity necessary to understand the individual components comprising each term. Supporting disclosures should also be provided to allow for comparability of all financial information, including ratios and other
metrics impacted. As part of your response, it may be helpful to provide a reconciliation of the two numbers to illustrate the differences.
Response:
Nonperforming loans are comprised of loans that are on nonaccrual status, including nonaccruing loans whose contractual terms have been modified in a troubled debt
restructuring (TDR). Loans for which we have elected the fair value option election are not reported as nonperforming loans because they are recorded at fair value with changes in credit quality incorporated into the fair value changes recorded in
earnings. Purchased impaired loans are not reported as nonperforming loans as they were initially recorded at fair value and the Corporation subsequently records the accretable yield into interest income over the life of the loans. Loans
held-for-sale are not included in the definition of nonperforming loans even if on nonaccrual status, as they are reported as a separate line item on the Corporation’s consolidated bala