Quarterly report pursuant to Section 13 or 15(d)

Securities

v3.7.0.1
Securities
3 Months Ended
Mar. 31, 2017
Investments, Debt and Equity Securities [Abstract]  
Securities
Securities
The table below presents the amortized cost, gross unrealized gains and losses, and fair value of AFS debt securities, other debt securities carried at fair value, held-to-maturity (HTM) debt securities and AFS marketable equity securities at March 31, 2017 and December 31, 2016.
 
 
 
 
 
 
 
 
Debt Securities and Available-for-Sale Marketable Equity Securities
 
 
 
 
 
 
 
March 31, 2017
(Dollars in millions)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale debt securities
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 

Agency
$
190,684

 
$
553

 
$
(2,194
)
 
$
189,043

Agency-collateralized mortgage obligations
7,848

 
78

 
(49
)
 
7,877

Commercial
12,809

 
27

 
(264
)
 
12,572

Non-agency residential (1)
1,758

 
209

 
(24
)
 
1,943

Total mortgage-backed securities
213,099

 
867

 
(2,531
)
 
211,435

U.S. Treasury and agency securities
51,056

 
168

 
(666
)
 
50,558

Non-U.S. securities
6,744

 
13

 
(4
)
 
6,753

Other taxable securities, substantially all asset-backed securities
9,754

 
76

 
(11
)
 
9,819

Total taxable securities
280,653

 
1,124

 
(3,212
)
 
278,565

Tax-exempt securities
17,443

 
80

 
(188
)
 
17,335

Total available-for-sale debt securities
298,096

 
1,204

 
(3,400
)
 
295,900

Less: Available-for-sale securities of business held for sale (2)
(691
)
 

 

 
(691
)
Other debt securities carried at fair value
16,714

 
164

 
(75
)
 
16,803

Total debt securities carried at fair value
314,119

 
1,368

 
(3,475
)
 
312,012

Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
116,033

 
166

 
(2,196
)
 
114,003

Total debt securities (3)
$
430,152

 
$
1,534

 
$
(5,671
)
 
$
426,015

Available-for-sale marketable equity securities (4)
$
8

 
$
57

 
$

 
$
65

 
 
 
 
 
 
 
 
 
December 31, 2016
Available-for-sale debt securities
 
 
 
 
 
 
 
Mortgage-backed securities:
 

 
 

 
 

 
 

Agency
$
190,809

 
$
640

 
$
(1,963
)
 
$
189,486

Agency-collateralized mortgage obligations
8,296

 
85

 
(51
)
 
8,330

Commercial
12,594

 
21

 
(293
)
 
12,322

Non-agency residential (1)
1,863

 
181

 
(31
)
 
2,013

Total mortgage-backed securities
213,562

 
927

 
(2,338
)
 
212,151

U.S. Treasury and agency securities
48,800

 
204

 
(752
)
 
48,252

Non-U.S. securities
6,372

 
13

 
(3
)
 
6,382

Other taxable securities, substantially all asset-backed securities
10,573

 
64

 
(23
)
 
10,614

Total taxable securities
279,307

 
1,208

 
(3,116
)
 
277,399

Tax-exempt securities
17,272

 
72

 
(184
)
 
17,160

Total available-for-sale debt securities
296,579

 
1,280

 
(3,300
)
 
294,559

Less: Available-for-sale securities of business held for sale (2)
(619
)
 

 

 
(619
)
Other debt securities carried at fair value
19,748

 
121

 
(149
)
 
19,720

Total debt securities carried at fair value
315,708

 
1,401

 
(3,449
)
 
313,660

Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
117,071

 
248

 
(2,034
)
 
115,285

Total debt securities (3)
$
432,779

 
$
1,649

 
$
(5,483
)
 
$
428,945

Available-for-sale marketable equity securities (4)
$
325

 
$
51

 
$
(1
)
 
$
375

(1) 
At both March 31, 2017 and December 31, 2016, the underlying collateral type included approximately 60 percent prime, 19 percent Alt-A, and 21 percent subprime.
(2) 
Represents AFS debt securities of business held for sale of which there were no unrealized gains or losses.
(3) 
The Corporation had debt securities from Fannie Mae (FNMA) and Freddie Mac (FHLMC) that each exceeded 10 percent of shareholders’ equity, with an amortized cost of $156.5 billion and $47.9 billion, and a fair value of $154.3 billion and $47.4 billion at March 31, 2017. Debt securities from FNMA and FHLMC that exceeded 10 percent of shareholders’ equity had an amortized cost of $156.4 billion and $48.7 billion, and a fair value of $154.4 billion and $48.3 billion at December 31, 2016.
(4) 
Classified in other assets on the Consolidated Balance Sheet.
At March 31, 2017, the accumulated net unrealized loss on AFS debt securities included in accumulated OCI was $1.4 billion, net of the related income tax benefit of $838 million. The Corporation had nonperforming AFS debt securities of $121 million at both March 31, 2017 and December 31, 2016.
The following table presents the components of other debt securities carried at fair value where the changes in fair value are reported in other income. In the three months ended March 31, 2017, the Corporation recorded unrealized mark-to-market net gains of $117 million and realized net losses of $103 million, compared to unrealized mark-to-market net losses of $95 million and realized net losses of $3 million in the three months ended March 31, 2016. These amounts exclude hedge results.

 
 
 
 
Other Debt Securities Carried at Fair Value
 
 
 
 
(Dollars in millions)
March 31
2017
 
December 31
2016
Mortgage-backed securities:
 
 
 
Agency-collateralized mortgage obligations
$
5

 
$
5

Non-agency residential
3,082

 
3,139

Total mortgage-backed securities
3,087

 
3,144

Non-U.S. securities (1)
13,482

 
16,336

Other taxable securities, substantially all asset-backed securities
234

 
240

Total
$
16,803

 
$
19,720

(1) 
These securities are primarily used to satisfy certain international regulatory liquidity requirements.
The gross realized gains and losses on sales of AFS debt securities for the three months ended March 31, 2017 and 2016 are presented in the following table.
 
 
 
 
Gains and Losses on Sales of AFS Debt Securities
 
 
 
 
 
Three Months Ended March 31
(Dollars in millions)
2017
 
2016
Gross gains
$
54

 
$
203

Gross losses
(2
)
 
(13
)
Net gains on sales of AFS debt securities
$
52

 
$
190

Income tax expense attributable to realized net gains on sales of AFS debt securities
$
20

 
$
72

The table below presents the fair value and the associated gross unrealized losses on AFS debt securities and whether these securities have had gross unrealized losses for less than 12 months or for 12 months or longer at March 31, 2017 and December 31, 2016.
 
 
 
 
 
 
 
 
 
 
 
 
Temporarily Impaired and Other-than-temporarily Impaired AFS Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
Less than Twelve Months
 
Twelve Months or Longer
 
Total
(Dollars in millions)
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
Temporarily impaired AFS debt securities
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
$
142,657

 
$
(2,076
)
 
$
3,603

 
$
(118
)
 
$
146,260

 
$
(2,194
)
Agency-collateralized mortgage obligations
2,580

 
(24
)
 
964

 
(25
)
 
3,544

 
(49
)
Commercial
8,460

 
(264
)
 

 

 
8,460

 
(264
)
Non-agency residential
201

 
(3
)
 
162

 
(12
)
 
363

 
(15
)
Total mortgage-backed securities
153,898

 
(2,367
)
 
4,729

 
(155
)
 
158,627

 
(2,522
)
U.S. Treasury and agency securities
31,304

 
(666
)
 

 

 
31,304

 
(666
)
Non-U.S. securities
96

 
(3
)
 
5

 
(1
)
 
101

 
(4
)
Other taxable securities, substantially all asset-backed securities
273

 
(2
)
 
1,352

 
(9
)
 
1,625

 
(11
)
Total taxable securities
185,571

 
(3,038
)
 
6,086

 
(165
)
 
191,657

 
(3,203
)
Tax-exempt securities
3,567

 
(91
)
 
2,865

 
(97
)
 
6,432

 
(188
)
Total temporarily impaired AFS debt securities
189,138

 
(3,129
)
 
8,951

 
(262
)
 
198,089

 
(3,391
)
Other-than-temporarily impaired AFS debt securities (1)
 
 
 
 
 
 
 
 
 
 
 
Non-agency residential mortgage-backed securities

 

 
125

 
(9
)
 
125

 
(9
)
Total temporarily impaired and other-than-temporarily impaired
AFS debt securities
$
189,138

 
$
(3,129
)
 
$
9,076

 
$
(271
)
 
$
198,214

 
$
(3,400
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
Temporarily impaired AFS debt securities
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
$
135,210

 
$
(1,846
)
 
$
3,770

 
$
(117
)
 
$
138,980

 
$
(1,963
)
Agency-collateralized mortgage obligations
3,229

 
(25
)
 
1,028

 
(26
)
 
4,257

 
(51
)
Commercial
9,018

 
(293
)
 

 

 
9,018

 
(293
)
Non-agency residential
212

 
(1
)
 
204

 
(13
)
 
416

 
(14
)
Total mortgage-backed securities
147,669

 
(2,165
)
 
5,002

 
(156
)
 
152,671

 
(2,321
)
U.S. Treasury and agency securities
28,462

 
(752
)
 

 

 
28,462

 
(752
)
Non-U.S. securities
52

 
(1
)
 
142

 
(2
)
 
194

 
(3
)
Other taxable securities, substantially all asset-backed securities
762

 
(5
)
 
1,438

 
(18
)
 
2,200

 
(23
)
Total taxable securities
176,945

 
(2,923
)
 
6,582

 
(176
)
 
183,527

 
(3,099
)
Tax-exempt securities
4,782

 
(148
)
 
1,873

 
(36
)
 
6,655

 
(184
)
Total temporarily impaired AFS debt securities
181,727

 
(3,071
)
 
8,455

 
(212
)
 
190,182

 
(3,283
)
Other-than-temporarily impaired AFS debt securities (1)
 
 
 
 
 
 
 
 
 
 
 
Non-agency residential mortgage-backed securities
94

 
(1
)
 
401

 
(16
)
 
495

 
(17
)
Total temporarily impaired and other-than-temporarily impaired
AFS debt securities
$
181,821

 
$
(3,072
)
 
$
8,856

 
$
(228
)
 
$
190,677

 
$
(3,300
)
(1) 
Includes other-than-temporary impairment (OTTI) AFS debt securities on which an OTTI loss, primarily related to changes in interest rates, remains in accumulated OCI.
The Corporation recorded OTTI losses on AFS debt securities for the three months ended March 31, 2017 and 2016 as presented in the following table. Substantially all OTTI losses in the three months ended March 31, 2017 and 2016 consisted of credit losses on non-agency residential mortgage-backed securities (RMBS) and were recorded in other income in the Consolidated Statement of Income.
 
 
 
 
Net Credit-related Impairment Losses Recognized in Earnings
 
 
 
 
 
Three Months Ended March 31
(Dollars in millions)
2017
 
2016
Total OTTI losses
$
(35
)
 
$
(30
)
Less: non-credit portion of total OTTI losses recognized in OCI
8

 
23

Net credit-related impairment losses recognized in earnings
$
(27
)
 
$
(7
)

The table below presents a rollforward of the credit losses recognized in earnings for the three months ended March 31, 2017 and 2016 on AFS debt securities that the Corporation does not have the intent to sell or will not more-likely-than-not be required to sell.
 
 
 
 
Rollforward of OTTI Credit Losses Recognized
 
 
 
 
 
Three Months Ended March 31
(Dollars in millions)
2017
 
2016
Balance, beginning of period
$
253

 
$
266

Additions for credit losses recognized on AFS debt securities that had no previous impairment losses
4

 
1

Additions for credit losses recognized on AFS debt securities that had previously incurred impairment losses
22

 
6

Reductions for AFS debt securities matured, sold or intended to be sold

 
(4
)
Balance, March 31
$
279

 
$
269


The Corporation estimates the portion of a loss on a security that is attributable to credit using a discounted cash flow model and estimates the expected cash flows of the underlying collateral using internal credit, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Assumptions used for the underlying loans that support the MBS can vary widely from loan to loan and are influenced by such factors as loan interest rate, geographic location of the borrower, borrower characteristics and collateral type. Based on these assumptions, the Corporation then determines how the underlying collateral cash flows will be distributed to each MBS issued from the applicable special purpose entity. Expected principal and interest cash flows on an impaired AFS debt security are discounted using the effective yield of each individual impaired AFS debt security.
Significant assumptions used in estimating the expected cash flows for measuring credit losses on non-agency RMBS were as follows at March 31, 2017.
 
 
 
 
 
 
Significant Assumptions
 
 
 
 
 
 
 
 
 
Range (1)
 
Weighted-
average
 
10th
Percentile (2)
 
90th
Percentile (2)
Prepayment speed
11.4
%
 
2.8
%
 
20.0
%
Loss severity
21.3

 
9.5

 
39.2

Life default rate
22.9

 
1.3

 
80.4

(1) 
Represents the range of inputs/assumptions based upon the underlying collateral.
(2) 
The value of a variable below which the indicated percentile of observations will fall.
Annual constant prepayment speed and loss severity rates are projected considering collateral characteristics such as loan-to-value (LTV), creditworthiness of borrowers as measured using Fair Isaac Corporation (FICO) scores, and geographic concentrations. The weighted-average severity by collateral type was 17.8 percent for prime, 19.9 percent for Alt-A and 31.9 percent for subprime at March 31, 2017. Additionally, default rates are projected by considering collateral characteristics including, but not limited to, LTV, FICO and geographic concentration. Weighted-average life default rates by collateral type were 16.3 percent for prime, 23.9 percent for Alt-A and 24.3 percent for subprime at March 31, 2017.

The remaining contractual maturity distribution and yields of the Corporation’s debt securities carried at fair value and HTM debt securities at March 31, 2017 are summarized in the table below. Actual duration and yields may differ as prepayments on the loans underlying the mortgages or other asset-backed securities (ABS) are passed through to the Corporation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturities of Debt Securities Carried at Fair Value and Held-to-maturity Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
Due in One
Year or Less
 
Due after One Year
through Five Years
 
Due after Five Years
through Ten Years
 
Due after
Ten Years
 
Total
(Dollars in millions)
Amount
 
Yield (1)
 
Amount
 
Yield (1)
 
Amount
 
Yield (1)
 
Amount
 
Yield (1)
 
Amount
 
Yield (1)
Amortized cost of debt securities carried at fair value
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Agency
$
4

 
4.75
%
 
$
48

 
3.80
%
 
$
347

 
2.63
%
 
$
190,285

 
3.23
%
 
$
190,684

 
3.25
%
Agency-collateralized mortgage obligations

 

 

 

 

 

 
7,852

 
3.18

 
7,852

 
3.18

Commercial
48

 
7.92

 
542

 
1.95

 
11,668

 
2.47

 
551

 
2.29

 
12,809

 
2.46

Non-agency residential

 

 

 

 
30

 
0.01

 
4,729

 
8.29

 
4,759

 
8.24

Total mortgage-backed securities
52

 
7.68

 
590

 
2.10

 
12,045

 
2.47

 
203,417

 
3.34

 
216,104

 
3.31

U.S. Treasury and agency securities
695

 
0.71

 
29,457

 
1.59

 
20,790

 
1.87

 
114

 
5.40

 
51,056

 
1.70

Non-U.S. securities (2)
18,719

 
0.29

 
1,259

 
2.03

 
29

 
1.96

 
217

 
6.53

 
20,224

 
0.47

Other taxable securities, substantially all asset-backed securities
2,358

 
2.06

 
4,305

 
2.11

 
1,956

 
2.78

 
1,364

 
2.98

 
9,983

 
2.35

Total taxable securities
21,824

 
0.51

 
35,611

 
1.68

 
34,820

 
2.13

 
205,112

 
3.35

 
297,367

 
2.81

Tax-exempt securities
604

 
1.70

 
6,287

 
1.28

 
8,328

 
1.42

 
2,224

 
1.52

 
17,443

 
1.39

Total amortized cost of debt securities carried at fair value (2)
$
22,428

 
0.54

 
$
41,898

 
1.62

 
$
43,148

 
1.99

 
$
207,336

 
3.33

 
$
314,810

 
2.73

Amortized cost of HTM debt securities (3)
$

 

 
$
24

 
4.43

 
$
922

 
2.39

 
$
115,087

 
3.01

 
$
116,033

 
3.01

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities carried at fair value
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Agency
$
4

 
 

 
$
49

 
 

 
$
350

 
 

 
$
188,640

 
 

 
$
189,043

 
 

Agency-collateralized mortgage obligations

 
 

 

 
 

 

 
 

 
7,882

 
 

 
7,882

 
 

Commercial
48

 
 

 
543

 
 

 
11,446

 
 

 
535

 
 

 
12,572

 
 

Non-agency residential

 
 

 

 
 

 
40

 
 

 
4,985

 
 

 
5,025

 
 

Total mortgage-backed securities
52

 
 
 
592

 
 
 
11,836

 
 
 
202,042

 
 
 
214,522

 
 
U.S. Treasury and agency securities
697

 
 
 
29,297

 
 
 
20,443

 
 
 
121

 
 
 
50,558

 
 
Non-U.S. securities (2)
18,722

 
 

 
1,261

 
 

 
31

 
 

 
221

 
 

 
20,235

 
 

Other taxable securities, substantially all asset-backed securities
2,359

 
 

 
4,307

 
 

 
1,963

 
 

 
1,424

 
 

 
10,053

 
 

Total taxable securities
21,830

 
 

 
35,457

 
 

 
34,273

 
 

 
203,808

 
 

 
295,368

 
 

Tax-exempt securities
603

 
 

 
6,287

 
 

 
8,234

 
 

 
2,211

 
 

 
17,335

 
 

Total debt securities carried at fair value (2)
$
22,433

 
 

 
$
41,744

 
 

 
$
42,507

 
 

 
$
206,019

 
 

 
$
312,703

 
 

Fair value of HTM debt securities (3)
$

 
 
 
$
24

 
 
 
$
885

 
 
 
$
113,094

 
 
 
$
114,003

 
 
(1) 
The average yield is computed based on a constant effective interest rate over the contractual life of each security. The average yield considers the contractual coupon and the amortization of premiums and accretion of discounts, excluding the effect of related hedging derivatives.
(2) 
Includes $691 million of amortized cost and fair value for AFS debt securities of business held for sale on the Consolidated Balance Sheet at March 31, 2017. These AFS debt securities mature in one year or less and have an average yield of 0.13 percent.
(3) 
Substantially all U.S. agency MBS.