Bank of America 2008 Annual Report Download - page 183

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 finan-
cial instruments including those financial instruments for which the
Corporation did not elect the fair value option. The fair values of such
instruments 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 instru-
ments 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, 2008 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 pur-
chased, 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 Disclosures to the Consolidated Financial Statements for addi-
tional information on these structured reverse repurchase agreements.
Loans
Fair values were generally determined by discounting both principal and
interest cash flows expected to be collected using an observable discount
rate for similar instruments with adjustments that management believes
a market participant would consider in determining fair value. The Corpo-
ration estimates the cash flows expected to be collected at 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 prepayment speeds for the life of
the loan. In accordance 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.
Deposits
The fair value for certain deposits with stated maturities was calculated
by discounting contractual cash flows using current market rates for
instruments with similar maturities. The carrying value of foreign time
deposits approximates fair value. For deposits with no stated maturities,
the carrying 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 additional 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
estimated based on current market interest rates and credit spreads for
debt with similar maturities.
The book and fair values of certain financial instruments at
December 31, 2008 and 2007 were as follows:
December 31
2008 2007
(Dollars in millions) Book Value
(1)
Fair Value Book Value
(1)
Fair Value
Financial assets
Loans
(2)
$886,198 $841,629 $842,392 $847,405
Financial liabilities
Deposits 882,997 883,987 805,177 806,511
Long-term debt 268,292 260,291 197,508 195,835
(1) Loans are presented net of allowance for loan losses. Amounts exclude leases.
(2) The fair value is determined based on the present value of future cash flows using credit spreads or risk adjusted rates of return that a buyer of the portfolio would require in the dislocated markets as of December 31,
2008. However, the Corporation expects to collect the principal cash flows underlying the book values as well as the related interest cash flows.
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