Bank of America 2007 Annual Report Download - page 169

Note 20 – Fair Value of Financial Instruments (SFAS 107 Disclosure)
SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”
(SFAS 107), requires the disclosure of the estimated fair value of financial
instruments including those financial instruments for which the Corpo-
ration did not elect the fair value option. The fair values of such instru-
ments have been derived, in part, by management’s assumptions, the
estimated amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimated fair
values. Accordingly, the net realizable values could be materially different
from the estimates presented below. In addition, the estimates are only
indicative of the value of individual financial instruments and should not be
considered an indication of the fair value of the Corporation.
The provisions of SFAS 107 do not require the disclosure of the fair
value of lease financing arrangements and nonfinancial instruments,
including goodwill and intangible assets such as purchased credit card,
affinity and trust relationships.
The following disclosures represent financial instruments in which the
ending balance at December 31, 2007 are not carried at fair value in its
entirety on the Corporation’s Consolidated Balance Sheet.
Short-term Financial Instruments
The carrying value of short-term financial instruments, including cash and
cash equivalents, time deposits placed, federal funds sold and purchased,
resale and certain repurchase agreements, commercial paper and other
short-term investments and borrowings, approximates the fair value of
these instruments. These financial instruments generally expose the
Corporation to limited credit risk and have no stated maturities or have
short-term maturities and carry interest rates that approximate market. In
accordance with SFAS 159, the Corporation elected to fair value certain
structured reverse repurchase agreements. See Note 19 – Fair Value Dis-
closures to the Consolidated Financial Statements for additional
information on these structured reverse repurchase agreements.
Loans
Fair values were estimated for certain groups of similar loans based upon
type of loan and maturity. The fair value of these loans was determined by
discounting estimated cash flows using interest rates approximating the
Corporation’s current origination rates for similar loans and adjusted to
reflect the inherent credit risk. Where quoted market prices were available,
primarily for certain residential mortgage loans and commercial loans,
such market prices were utilized as estimates for fair values. In accord-
ance with SFAS 159, the Corporation elected to fair value certain large
corporate loans which exceeded the Corporation’s single name credit risk
concentration guidelines. See Note 19 – Fair Value Disclosures to the
Consolidated Financial Statements for additional information on loans for
which the Corporation adopted the fair value option.
Substantially all of the foreign loans reprice within relatively short
timeframes. Accordingly, for foreign loans, the net carrying values were
assumed to approximate their fair values.
Deposits
The fair value for certain deposits with stated maturities was calculated by
discounting contractual cash flows using current market rates for instru-
ments with similar maturities. The carrying value of foreign time deposits
approximates fair value. For deposits with no stated maturities, the carry-
ing amount was considered to approximate fair value and does not take
into account the significant value of the cost advantage and stability of the
Corporation’s long-term relationships with depositors. In accordance with
SFAS 159, the Corporation elected to fair value certain long-term fixed rate
deposits which are economically hedged with derivatives. See Note 19 –
Fair Value Disclosures to the Consolidated Financial Statements for addi-
tional information on these long-term fixed rate deposits.
Long-term Debt
The Corporation uses quoted market prices for its long-term debt when
available. When quoted market prices are not available, fair value is esti-
mated based on current market interest rates for debt with similar matur-
ities.
The book and fair values of certain financial instruments at
December 31, 2007 and 2006 are presented in the table below.
December 31
2007 2006
(Dollars in millions)
Book
Value Fair Value
Book
Value Fair Value
Financial assets
Loans
(1)
$842,392 $847,405 $675,544 $679,738
Financial liabilities
Deposits 805,177 806,511 693,497 693,041
Long-term debt 197,508 195,835 146,000 148,120
(1) Presented net of allowance for loan losses.
Bank of America 2007 167