Bank of America 2012 Annual Report Download - page 268

266 Bank of America 2012
The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial
assets and liabilities at December 31, 2012.
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
(Dollars in millions) Inputs
Financial Instrument
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted
Average
Instruments backed by residential real estate assets $ 9,932
Discounted cash
flow, Market
comparables
Yield 3% to 5% 3%
Loans held-for-sale 748 Prepayment speed 3% to 30% 15%
Loans and leases 9,184 Default rate 0% to 55% 7%
Loss severity 6% to 66% 48%
OREO discount 0% to 28% 15%
Cost to sell 8% n/a
Instruments backed by commercial real estate assets $ 388 Discounted cash
flow
Yield 4% to 13% 6%
Loans held-for-sale 388 Loss severity 24% to 88% 53%
n/a = not applicable
Instruments backed by residential real estate assets represent
residential mortgages where the loan has been written down to
the fair value of the underlying collateral or, in the case of LHFS,
are carried at the lower of cost or fair value.
In addition to the instruments disclosed in the table above, the
Corporation holds foreclosed residential properties where the fair
value is based on unadjusted third-party appraisals or broker price
opinions. Appraisals are conducted every 90 days. Factors
considered in determining the fair value include geographic sales
trends, the value of comparable surrounding properties as well as
the condition of the property.
NOTE 22 Fair Value Option
Loans and Loan Commitments
The Corporation elects to account for certain consumer and
commercial loans and loan commitments that exceeded the
Corporation’s single name credit risk concentration guidelines
under the fair value option. Lending commitments, both funded
and unfunded, are actively managed and monitored and, as
appropriate, credit risk for these lending relationships may be
mitigated through the use of credit derivatives, with the
Corporation’s public side credit view and market perspectives
determining the size and timing of the hedging activity. These credit
derivatives do not meet the requirements for designation as
accounting hedges and therefore are carried at fair value with
changes in fair value recorded in other income (loss). Electing the
fair value option allows the Corporation to carry these loans and
loan commitments at fair value, which is more consistent with
management’s view of the underlying economics and the manner
in which they are managed. In addition, election of the fair value
option allows the Corporation to reduce the accounting volatility
that would otherwise result from the asymmetry created by
accounting for the financial instruments at historical cost and the
credit derivatives at fair value. Of the changes in fair value for
these loans, $1.2 billion was attributable to changes in borrower-
specific credit risk.
Loans Held-for-sale
The Corporation elects to account for residential mortgage LHFS,
commercial mortgage LHFS and other LHFS under the fair value
option with interest income on these LHFS recorded in other
interest income. These loans are actively managed and monitored
and, as appropriate, certain market risks of the loans may be
mitigated through the use of derivatives. The Corporation has
elected not to designate the derivatives as qualifying accounting
hedges and therefore they are carried at fair value with changes
in fair value recorded in other income (loss). The changes in fair
value of the loans are largely offset by changes in the fair value
of the derivatives. Of the changes in fair value for these loans,
$425 million was attributable to changes in borrower-specific
credit risk. Election of the fair value option allows the Corporation
to reduce the accounting volatility that would otherwise result from
the asymmetry created by accounting for the financial instruments
at the lower of cost or fair value and the derivatives at fair value.
The Corporation has not elected to account for other LHFS under
the fair value option primarily because these loans are floating-
rate loans that are not hedged using derivative instruments.
Loans Reported as Trading Account Assets
The Corporation elects to account for certain loans that are held
for the purpose of trading and risk-managed on a fair value basis
under the fair value option. An immaterial portion of the changes
in fair value for these loans was attributable to changes in borrower-
specific credit risk.
Other Assets
The Corporation elects to account for certain private equity
investments that are not in an investment company under the fair
value option as this measurement basis is consistent with
applicable accounting guidance for similar investments that are
in an investment company. The Corporation also elects to account
for certain long-term fixed-rate margin loans that are hedged with
derivatives under the fair value option. Election of the fair value
option allows the Corporation to reduce the accounting volatility
that would otherwise result from the asymmetry created by
accounting for the financial instruments at historical cost and the
derivatives at fair value.