Bank of America 2009 Annual Report Download - page 135

cash flows related to the customer relationship are excluded from the
valuation of IRLCs. Prior to January 1, 2008, the Corporation did not
record any unrealized gain or loss at the inception of a loan commitment,
which is the time the commitment is issued to the borrower, as appli-
cable accounting guidance at that time did not allow expected net future
cash flows related to servicing of a loan to be included in the measure-
ment of written loan commitments that are accounted for at fair value
through earnings.
Outstanding IRLCs expose the Corporation to the risk that the price of
the loans underlying the commitments might decline from inception of the
rate lock to funding of the loan. To protect against this risk, the Corpo-
ration utilizes forward loan sales commitments and other derivative
instruments, including interest rate swaps and options, to economically
hedge the risk of potential changes in the value of the loans that would
result from the commitments. The changes in the fair value of these
derivatives are recorded in mortgage banking income.
Securities
Debt securities are classified based on management’s intention on the
date of purchase and recorded on the Consolidated Balance Sheet as
debt securities as of the trade date. Debt securities which management
has the intent and ability to hold to maturity are classified as
held-to-maturity (HTM) and reported at amortized cost. Debt securities
that are bought and held principally for the purpose of resale in the near
term are classified as trading and are carried at fair value with unrealized
gains and losses included in trading account profits (losses). Other debt
securities are classified as available-for-sale (AFS) and carried at fair
value with net unrealized gains and losses included in accumulated OCI
on an after-tax basis.
The Corporation regularly evaluates each AFS and HTM debt security
whose value has declined below amortized cost to assess whether the
decline in fair value is other-than-temporary. In determining whether an
impairment is other-than-temporary, the Corporation considers the
severity and duration of the decline in fair value, the length of time
expected for recovery, the financial condition of the issuer, and other
qualitative factors, as well as whether the Corporation either plans to sell
the security or it is more-likely-than-not that it will be required to sell the
security before recovery of its amortized cost. Beginning in 2009, under
new accounting guidance for impairments of debt securities that are
deemed to be other-than-temporary, the credit component of an other-
than-temporary impairment loss is recognized in earnings and the
non-credit component is recognized in accumulated OCI in situations
where the Corporation does not intend to sell the security and it is more-
likely-than-not that the Corporation will not be required to sell the security
prior to recovery. Prior to January 1, 2009, unrealized losses (both the
credit and non-credit components) on AFS debt securities that were
deemed to be other-than-temporary were included in current period earn-
ings. If there is an other-than-temporary impairment in the fair value of
any individual security classified as HTM, the Corporation writes down the
security to fair value with a corresponding charge to other income.
Interest on debt securities, including amortization of premiums and
accretion of discounts, is included in interest income. Realized gains and
losses from the sales of debt securities, which are included in gains
(losses) on sales of debt securities, are determined using the specific
identification method.
Marketable equity securities are classified based on management’s
intention on the date of purchase and recorded on the Consolidated
Balance Sheet as of the trade date. Marketable equity securities that are
bought and held principally for the purpose of resale in the near term are
classified as trading and are carried at fair value with unrealized gains
and losses included in trading account profits (losses). Other marketable
equity securities are accounted for as AFS and classified in other assets.
All AFS marketable equity securities are carried at fair value with net
unrealized gains and losses included in accumulated OCI on an after-tax
basis. If there is an other-than-temporary decline in the fair value of any
individual AFS marketable equity security, the Corporation reclassifies the
associated net unrealized loss out of accumulated OCI with a correspond-
ing charge to equity investment income. Dividend income on all AFS
marketable equity securities is included in equity investment income.
Realized gains and losses on the sale of all AFS marketable equity secu-
rities, which are recorded in equity investment income, are determined
using the specific identification method.
Equity investments without readily determinable fair values are
recorded in other assets. Impairment testing is based on applicable
accounting guidance and the cost basis is reduced when an impairment
is deemed to be other-than-temporary.
Certain equity investments held by Global Principal Investments, the
Corporation’s diversified equity investor in private equity, real estate and
other alternative investments, are subject to investment company
accounting under applicable accounting guidance, and accordingly, are
carried at fair value with changes in fair value reported in equity invest-
ment income. These investments are included in other assets. Initially,
the transaction price of the investment is generally considered to be the
best indicator of fair value. Thereafter, valuation of direct investments is
based on an assessment of each individual investment using method-
ologies that include publicly traded comparables derived by multiplying a
key performance metric (e.g., earnings before interest, taxes, deprecia-
tion and amortization) of the portfolio company by the relevant valuation
multiple observed for comparable companies, acquisition comparables,
entry level multiples and discounted cash flows, and are subject to
appropriate discounts for lack of liquidity or marketability. Certain factors
that may influence changes in fair value include but are not limited to,
recapitalizations, subsequent rounds of financing and offerings in the
equity or debt capital markets. For fund investments, the Corporation
generally records the fair value of its proportionate interest in the fund’s
capital as reported by the fund’s respective managers.
Other investments held by Global Principal Investments are accounted
for under either the equity method or at cost, depending on the Corpo-
ration’s ownership interest, and are reported in other assets.
Loans and Leases
Loans measured at historical cost are reported at their outstanding princi-
pal balances net of any unearned income, charge-offs, unamortized
deferred fees and costs on originated loans, and for purchased loans, net
of any premiums or discounts. Loan origination fees and certain direct
origination costs are deferred and recognized as adjustments to income
over the lives of the related loans. Unearned income, discounts and
premiums are amortized to interest income using a level yield method-
ology. The Corporation elects to account for certain loans under the fair
value option. Fair values for these loans 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.
Purchased Impaired Loans
The Corporation purchases loans with and without evidence of credit qual-
ity deterioration since origination. Evidence of credit quality deterioration
as of the purchase date may include statistics such as past due status,
refreshed borrower credit scores and refreshed loan-to-value (LTV) ratios,
some of which are not immediately available as of the purchase date. The
Bank of America 2009 133