Bank of America 2009 Annual Report Download - page 209

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. The
Corporation elected to account for certain long-term fixed-rate deposits
which are economically hedged with derivatives under the fair value
option. See Note 20 – Fair Value Measurements 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 Corporation elected to account for cer-
tain structured notes under the fair value option. See Note 20 – Fair
Value Measurements for additional information on these structured
notes.
The carrying and fair values of certain financial instruments at
December 31, 2009 and 2008 were as follows:
December 31
2009 2008
(Dollars in millions) Carrying Value
(1)
Fair Value Carrying Value
(1)
Fair Value
Financial assets
Loans
(2)
$841,020 $813,596 $886,198 $841,629
Financial liabilities
Deposits 991,611 991,768 882,997 883,987
Long-term debt 438,521 440,246 268,292 260,291
(1) The carrying value of loans is presented net of allowance for loan and lease losses. Amounts exclude leases.
(2) 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 at December 31, 2009 and 2008. However, the
Corporation expects to collect the principal cash flows underlying the book values as well as the related interest cash flows.
NOTE 22 – Mortgage Servicing Rights
The Corporation accounts for consumer MSRs at fair value with changes
in fair value recorded in the Consolidated Statement of Income in mort-
gage banking income. The Corporation economically hedges these MSRs
with certain derivatives and securities including MBS and U.S. Treasuries.
The securities that economically hedge the MSRs are recorded in other
assets with changes in the fair value of the securities and the related
interest income recorded as mortgage banking income.
The following table presents activity for residential first mortgage
MSRs for 2009 and 2008.
(Dollars in millions) 2009 2008
Balance, January 1 $12,733 $ 3,053
Merrill Lynch balance, January 1, 2009
209 —
Countrywide balance, July 1, 2008
— 17,188
Additions / sales
5,728 2,587
Impact of customer payments
(3,709) (3,313)
Other changes in MSR market value
4,504 (6,782)
Balance, December 31 $19,465 $12,733
Mortgage loans serviced for investors (in billions) $ 1,716 $ 1,654
During 2009 and 2008, other changes in MSR market value were $4.5
billion and $(6.8) billion. These amounts reflect the change in discount
rates and prepayment speed assumptions, mostly due to changes in
interest rates, as well as the effect of changes in other assumptions. The
amounts do not include $782 million in gains in 2009 resulting from
lower than expected prepayments and $(333) million in losses in 2008
resulting from higher than expected prepayments. The net amounts of
$5.3 billion and $(7.1) billion are included in the line “mortgage banking
income (loss)” in the table “Level 3 – Total Realized and Unrealized Gains
(Losses) Included in Earnings” in Note 20 – Fair Value Measurements.
At December 31, 2009 and 2008, the fair value of consumer MSRs
was $19.5 billion and $12.7 billion. The Corporation uses an OAS valu-
ation approach to determine the fair value of MSRs which factors in pre-
payment risk. This approach consists of projecting servicing cash flows
under multiple interest rate scenarios and discounting these cash flows
using risk-adjusted discount rates. The key economic assumptions used
in valuations of MSRs include weighted-average lives of the MSRs and
the OAS levels.
Key economic assumptions used in determining the fair value of
MSRs at December 31, 2009 and 2008 were as follows:
December 31
2009 2008
(Dollars in millions) Fixed Adjustable Fixed Adjustable
Weighted-average option
adjusted spread 1.67% 4.64% 1.71% 6.40%
Weighted-average life,
in years 5.62 3.26 3.26 2.71
Bank of America 2009 207