Bank of America 2014 Annual Report Download - page 242

240 Bank of America 2014
Corporation’s own credit risk. The Corporation also incorporates
FVA within its fair value measurements to include funding costs
on uncollateralized derivatives and derivatives where the
Corporation is not permitted to use the collateral it receives. An
estimate of severity of loss is also used in the determination of
fair value, primarily based on market data.
Loans and Loan Commitments
The fair values of loans and loan commitments are based on
market prices, where available, or discounted cash flow analyses
using market-based credit spreads of comparable debt
instruments or credit derivatives of the specific borrower or
comparable borrowers. Results of discounted cash flow analyses
may be adjusted, as appropriate, to reflect other market conditions
or the perceived credit risk of the borrower.
Mortgage Servicing Rights
The fair values of MSRs are determined using models that rely on
estimates of prepayment rates, the resultant weighted-average
lives of the MSRs and the option-adjusted spread levels. For more
information on MSRs, see Note 23 – Mortgage Servicing Rights.
Loans Held-for-sale
The fair values of LHFS are based on quoted market prices, where
available, or are determined by discounting estimated cash flows
using interest rates approximating the Corporation’s current
origination rates for similar loans adjusted to reflect the inherent
credit risk. The borrower-specific credit risk is embedded within
the quoted market prices or is implied by considering loan
performance when selecting comparables.
Private Equity Investments
Private equity investments consist of direct investments and fund
investments which are initially valued at their transaction price.
Thereafter, the fair value of direct investments is based on an
assessment of each individual investment using methodologies
that include publicly-traded comparables derived by multiplying a
key performance metric (e.g., earnings before interest, taxes,
depreciation and amortization) of the portfolio company by the
relevant valuation multiple observed for comparable companies,
acquisition comparables, entry level multiples and discounted
cash flow analyses, and are subject to appropriate discounts for
lack of liquidity or marketability. After initial recognition, the fair
value of fund investments is based on the Corporation’s
proportionate interest in the fund’s capital as reported by the
respective fund managers.
Short-term Borrowings and Long-term Debt
The Corporation issues structured liabilities that have coupons or
repayment terms linked to the performance of debt or equity
securities, indices, currencies or commodities. The fair values of
these structured liabilities are estimated using quantitative
models for the combined derivative and debt portions of the notes.
These models incorporate observable and, in some instances,
unobservable inputs including security prices, interest rate yield
curves, option volatility, currency, commodity or equity rates and
correlations among these inputs. The Corporation also considers
the impact of its own credit spreads in determining the discount
rate used to value these liabilities. The credit spread is determined
by reference to observable spreads in the secondary bond market.
Securities Financing Agreements
The fair values of certain reverse repurchase agreements,
repurchase agreements and securities borrowed transactions are
determined using quantitative models, including discounted cash
flow models that require the use of multiple market inputs including
interest rates and spreads to generate continuous yield or pricing
curves, and volatility factors. The majority of market inputs are
actively quoted and can be validated through external sources,
including brokers, market transactions and third-party pricing
services.
Deposits
The fair values of deposits are determined using quantitative
models, including discounted cash flow models that require the
use of multiple market inputs including interest rates and spreads
to generate continuous yield or pricing curves, and volatility factors.
The majority of market inputs are actively quoted and can be
validated through external sources, including brokers, market
transactions and third-party pricing services. The Corporation
considers the impact of its own credit spreads in the valuation of
these liabilities. The credit risk is determined by reference to
observable credit spreads in the secondary cash market.
Asset-backed Secured Financings
The fair values of asset-backed secured financings are based on
external broker bids, where available, or are determined by
discounting estimated cash flows using interest rates
approximating the Corporation’s current origination rates for
similar loans adjusted to reflect the inherent credit risk.