Bank of America 2015 Annual Report Download - page 104

102 Bank of America 2015
specific reporting unit, market equity risk premium and in certain
cases an unsystematic (company-specific) risk factor. The
unsystematic risk factor is the input that specifically addresses
uncertainty related to our projections of earnings and growth,
including the uncertainty related to loss expectations. We utilized
discount rates that we believe adequately reflect the risk and
uncertainty in the financial markets generally and specifically in
our internally developed forecasts. We estimated expected rates
of equity returns based on historical market returns and risk/return
rates for industries similar to each reporting unit. We use our
internal forecasts to estimate future cash flows and actual results
may differ from forecasted results.
We completed our annual goodwill impairment test as of June
30, 2015 for all of our reporting units that had goodwill. In
performing the first step of the annual goodwill impairment
analysis, we compared the fair value of each reporting unit to its
estimated carrying value as measured by allocated equity, which
includes goodwill. We also evaluated the U.K. Card business within
All Other, as the U.K. Card business comprises substantially all
of the goodwill included in All Other. To determine fair value, we
utilized a combination of the market approach and the income
approach. Under the market approach, we compared earnings and
equity multiples of the individual reporting units to multiples of
public companies comparable to the individual reporting units. The
control premium used in the June 30, 2015 annual goodwill
impairment test was 30 percent, based upon observed
comparable premiums paid for change in control transactions for
financial institutions, for all reporting units. The discount rates
used in the June 30, 2015 annual goodwill impairment test ranged
from 10.2 percent to 13.7 percent depending on the relative risk
of a reporting unit. Growth rates developed by management for
individual revenue and expense items in each reporting unit ranged
from negative 3.5 percent to positive 8.0 percent.
The Corporation’s market capitalization remained below our
recorded book value during 2015. As none of our reporting units
are publicly-traded, individual reporting unit fair value
determinations may not directly correlate to the Corporation’s
market capitalization. We considered the comparison of the
aggregate fair value of the reporting units with assigned goodwill
to the Corporation’s market capitalization as of June 30, 2015.
Although we believe it is reasonable to conclude that market
capitalization could be an indicator of fair value over time, we do
not believe that our current market capitalization would reflect the
aggregate fair value of our individual reporting units with assigned
goodwill, as reporting units with no assigned goodwill have not
been valued and are excluded (e.g., LAS) from the comparison and
our market capitalization does not include consideration of
individual reporting unit control premiums. Although the individual
reporting units have considered the impact of recent regulatory
changes in their forecasts and valuations, overall regulatory and
market uncertainties persist that we believe further impact the
Corporation’s stock price.
Based on the results of step one of the annual goodwill
impairment test, we determined that step two was not required
for any of the reporting units as their fair value exceeded their
carrying value indicating there was no impairment.
2014 Annual Impairment Test
We completed our annual goodwill impairment test as of June 30,
2014 for all of our reporting units that had goodwill. We also
evaluated the U.K. Card business within All Other, as the U.K. Card
business comprises the majority of the goodwill included in All
Other.
Based on the results of step one of the annual goodwill
impairment test, we determined that step two was not required
for any of the reporting units as their fair value exceeded their
carrying value indicating there was no impairment.
Representations and Warranties Liability
The methodology used to estimate the liability for obligations under
representations and warranties related to transfers of residential
mortgage loans is a function of the type of representations and
warranties provided in the sales contract and considers a variety
of factors. Depending upon the counterparty, these factors include
actual defaults, estimated future defaults, historical loss
experience, estimated home prices, other economic conditions,
estimated probability that we will receive a repurchase request,
number of payments made by the borrower prior to default and
estimated probability that we will be required to repurchase a loan.
It also considers other relevant facts and circumstances, such as
bulk settlements and identity of the counterparty or type of
counterparty, as appropriate. The estimate of the liability for
obligations under representations and warranties is based upon
currently available information, significant judgment, and a number
of factors, including those set forth above, that are subject to
change. Changes to any one of these factors could significantly
impact the estimate of our liability.
The representations and warranties provision may vary
significantly each period as the methodology used to estimate the
expense continues to be refined based on the level and type of
repurchase requests presented, defects identified, the latest
experience gained on repurchase requests and other relevant facts
and circumstances. The estimate of the liability for representations
and warranties is sensitive to future defaults, loss severity and
the net repurchase rate. An assumed simultaneous increase or
decrease of 10 percent in estimated future defaults, loss severity
and the net repurchase rate would result in an increase or decrease
of approximately $300 million in the representations and
warranties liability as of December 31, 2015. These sensitivities
are hypothetical and are intended to provide an indication of the
impact of a significant change in these key assumptions on the
representations and warranties liability. In reality, changes in one
assumption may result in changes in other assumptions, which
may or may not counteract the sensitivity.
For more information on representations and warranties
exposure and the corresponding estimated range of possible loss,
see Off-Balance Sheet Arrangements and Contractual Obligations
– Representations and Warranties on page 44, as well as Note 7
– Representations and Warranties Obligations and Corporate
Guarantees and Note 12 – Commitments and Contingencies to the
Consolidated Financial Statements.