Quarterly report pursuant to Section 13 or 15(d)

Securities

v2.4.0.8
Securities
3 Months Ended
Mar. 31, 2014
Investments, Debt and Equity Securities [Abstract]  
Securities
NOTE 3 – Securities

The following tables present the amortized cost, gross unrealized gains and losses, and fair value of available-for-sale (AFS) debt securities, other debt securities carried at fair value, held-to-maturity (HTM) debt securities and AFS marketable equity securities at March 31, 2014 and December 31, 2013.

Debt Securities and Available-for-Sale Marketable Equity Securities
 
March 31, 2014
(Dollars in millions)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
29,580

 
$
108

 
$
(121
)
 
$
29,567

Mortgage-backed securities:
 
 
 
 
 
 
 
Agency
169,216

 
830

 
(4,299
)
 
165,747

Agency-collateralized mortgage obligations
18,464

 
217

 
(109
)
 
18,572

Non-agency residential (1)
5,111

 
244

 
(97
)
 
5,258

Commercial
1,713

 
26

 
(5
)
 
1,734

Non-U.S. securities
7,109

 
31

 
(18
)
 
7,122

Corporate/Agency bonds
831

 
18

 
(4
)
 
845

Other taxable securities, substantially all asset-backed securities
14,695

 
42

 
(15
)
 
14,722

Total taxable securities
246,719

 
1,516

 
(4,668
)
 
243,567

Tax-exempt securities
6,443

 
4

 
(33
)
 
6,414

Total available-for-sale debt securities
253,162

 
1,520

 
(4,701
)
 
249,981

Other debt securities carried at fair value
36,453

 
82

 
(940
)
 
35,595

Total debt securities carried at fair value
289,615

 
1,602

 
(5,641
)
 
285,576

Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
55,120

 
50

 
(2,064
)
 
53,106

Total debt securities
$
344,735

 
$
1,652

 
$
(7,705
)
 
$
338,682

Available-for-sale marketable equity securities (2)
$
236

 
$

 
$
(20
)
 
$
216

 
 
 
 
 
 
 
 
 
December 31, 2013
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
8,910

 
$
106

 
$
(62
)
 
$
8,954

Mortgage-backed securities:
 
 
 
 
 
 
 
Agency
170,112

 
777

 
(5,954
)
 
164,935

Agency-collateralized mortgage obligations
22,731

 
76

 
(315
)
 
22,492

Non-agency residential (1)
6,124

 
238

 
(123
)
 
6,239

Commercial
2,429

 
63

 
(12
)
 
2,480

Non-U.S. securities
7,207

 
37

 
(24
)
 
7,220

Corporate/Agency bonds
860

 
20

 
(7
)
 
873

Other taxable securities, substantially all asset-backed securities
16,805

 
30

 
(5
)
 
16,830

Total taxable securities
235,178

 
1,347

 
(6,502
)
 
230,023

Tax-exempt securities
5,967

 
10

 
(49
)
 
5,928

Total available-for-sale debt securities
241,145

 
1,357

 
(6,551
)
 
235,951

Other debt securities carried at fair value
34,145

 
34

 
(1,335
)
 
32,844

Total debt securities carried at fair value
275,290

 
1,391

 
(7,886
)
 
268,795

Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
55,150

 
20

 
(2,740
)
 
52,430

Total debt securities
$
330,440

 
$
1,411

 
$
(10,626
)
 
$
321,225

Available-for-sale marketable equity securities (2)
$
230

 
$

 
$
(7
)
 
$
223

(1) 
At March 31, 2014 and December 31, 2013, the underlying collateral type included approximately 88 percent and 89 percent prime, seven percent and seven percent Alt-A, and five percent and four percent subprime.
(2) 
Classified in other assets on the Consolidated Balance Sheet.
At March 31, 2014, the accumulated net unrealized loss on AFS debt securities included in accumulated OCI was $2.0 billion, net of the related income tax benefit of $1.2 billion. At March 31, 2014 and December 31, 2013, the Corporation had nonperforming AFS debt securities of $100 million and $103 million.

The table below presents the components of other debt securities carried at fair value where the changes in fair value are reported in other income (loss). In the three months ended March 31, 2014 and 2013, the Corporation recorded an unrealized mark-to-market net gain in other income (loss) of $444 million and a net loss of $159 million, and realized losses of $17 million and realized gains of $2 million on other debt securities carried at fair value, which excludes the benefit of certain hedges the results of which are also reported in other income (loss).

Other Debt Securities Carried at Fair Value
 
 
 
(Dollars in millions)
March 31
2014
 
December 31
2013
U.S. Treasury and agency securities
$
4,182

 
$
4,062

Mortgage-backed securities:
 
 
 
Agency
16,290

 
16,500

Agency-collateralized mortgage obligations
123

 
218

Commercial
770

 
749

Non-U.S. securities (1)
14,230

 
11,315

Total
$
35,595

 
$
32,844

(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, 2014 and 2013 are presented in the table below.

Gains and Losses on Sales of AFS Debt Securities
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Gross gains
$
378

 
$
69

Gross losses
(1
)
 
(1
)
Net gains on sales of AFS debt securities
$
377

 
$
68

Income tax expense attributable to realized net gains on sales of AFS debt securities
$
143

 
$
25



The amortized cost and fair value of the Corporation's debt securities carried at fair value and HTM debt securities from Fannie Mae (FNMA), the Government National Mortgage Association (GNMA), U.S. Treasury securities and Freddie Mac (FHLMC), where the investment exceeded 10 percent of consolidated shareholders' equity at March 31, 2014 and December 31, 2013, are presented in the table below.

Selected Securities Exceeding 10 Percent of Shareholders' Equity
 
March 31, 2014
 
December 31, 2013
(Dollars in millions)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Fannie Mae
$
123,366

 
$
119,649

 
$
123,813

 
$
118,708

Government National Mortgage Association
114,050

 
111,994

 
118,700

 
115,314

U.S. Treasury securities
31,291

 
31,264

 
10,533

 
10,428

Freddie Mac
24,468

 
23,959

 
24,908

 
24,075


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, 2014 and December 31, 2013.

Temporarily Impaired and Other-than-temporarily Impaired AFS Debt Securities
 
 
March 31, 2014
 
Less than 12 Months
 
12 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
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
23,797

 
$
(119
)
 
$
93

 
$
(2
)
 
$
23,890

 
$
(121
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
131,550

 
(3,910
)
 
9,518

 
(389
)
 
141,068

 
(4,299
)
Agency-collateralized mortgage obligations
3,340

 
(49
)
 
2,900

 
(60
)
 
6,240

 
(109
)
Non-agency residential
531

 
(8
)
 
959

 
(88
)
 
1,490

 
(96
)
Commercial
530

 
(5
)
 

 

 
530

 
(5
)
Non-U.S. securities

 

 
42

 
(18
)
 
42

 
(18
)
Corporate/Agency bonds

 

 
313

 
(4
)
 
313

 
(4
)
Other taxable securities, substantially all asset-backed securities
2,300

 
(10
)
 
457

 
(5
)
 
2,757

 
(15
)
Total taxable securities
162,048

 
(4,101
)
 
14,282

 
(566
)
 
176,330

 
(4,667
)
Tax-exempt securities
1,588

 
(17
)
 
1,018

 
(16
)
 
2,606

 
(33
)
Total temporarily impaired AFS debt securities
163,636

 
(4,118
)
 
15,300

 
(582
)
 
178,936

 
(4,700
)
Other-than-temporarily impaired AFS debt securities (1)
 
 
 
 
 
 
 
 
 
 
 
Non-agency residential mortgage-backed securities

 

 
1

 
(1
)
 
1

 
(1
)
Total temporarily impaired and other-than-temporarily impaired AFS debt securities
$
163,636

 
$
(4,118
)
 
$
15,301

 
$
(583
)
 
$
178,937

 
$
(4,701
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
Temporarily impaired AFS debt securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
5,770

 
$
(61
)
 
$
19

 
$
(1
)
 
$
5,789

 
$
(62
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
132,032

 
(5,457
)
 
9,324

 
(497
)
 
141,356

 
(5,954
)
Agency-collateralized mortgage obligations
13,438

 
(210
)
 
2,661

 
(105
)
 
16,099

 
(315
)
Non-agency residential
819

 
(15
)
 
1,237

 
(106
)
 
2,056

 
(121
)
Commercial
286

 
(12
)
 

 

 
286

 
(12
)
Non-U.S. securities

 

 
45

 
(24
)
 
45

 
(24
)
Corporate/Agency bonds
106

 
(3
)
 
282

 
(4
)
 
388

 
(7
)
Other taxable securities, substantially all asset-backed securities
116

 
(2
)
 
280

 
(3
)
 
396

 
(5
)
Total taxable securities
152,567

 
(5,760
)
 
13,848

 
(740
)
 
166,415

 
(6,500
)
Tax-exempt securities
1,789

 
(30
)
 
990

 
(19
)
 
2,779

 
(49
)
Total temporarily impaired AFS debt securities
154,356

 
(5,790
)
 
14,838

 
(759
)
 
169,194

 
(6,549
)
Other-than-temporarily impaired AFS debt securities (1)
 
 
 
 
 
 
 
 
 
 
 
Non-agency residential mortgage-backed securities
2

 
(1
)
 
1

 
(1
)
 
3

 
(2
)
Total temporarily impaired and other-than-temporarily impaired AFS debt securities
$
154,358

 
$
(5,791
)
 
$
14,839

 
$
(760
)
 
$
169,197

 
$
(6,551
)
(1)
Includes other-than-temporarily impaired AFS debt securities on which an OTTI loss remains in accumulated OCI.

The Corporation recorded other-than-temporary impairment (OTTI) losses on AFS debt securities for the three months ended March 31, 2014 and 2013 as presented in the table below. All such OTTI losses in the three months ended March 31, 2014 and 2013 were on non-agency residential mortgage-backed securities (RMBS). A debt security is impaired when its fair value is less than its amortized cost. If the Corporation intends or will more-likely-than-not be required to sell a debt security prior to recovery, the entire impairment loss is recorded in the Consolidated Statement of Income. For AFS debt securities the Corporation does not intend or will not more-likely-than-not be required to sell, an analysis is performed to determine if any of the impairment is due to credit or whether it is due to other factors (e.g., interest rate). Credit losses are considered unrecoverable and are recorded in the Consolidated Statement of Income with the remaining unrealized losses recorded in accumulated OCI. In certain instances, the credit loss on a debt security may exceed the total impairment, in which case, the portion of the credit loss that exceeds the total impairment is recorded as an unrealized gain in accumulated OCI.

Net Impairment Losses Recognized in Earnings
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Total OTTI losses (unrealized and realized)
$
(1
)
 
$
(14
)
Unrealized OTTI losses recognized in accumulated OCI

 
5

Net impairment losses recognized in earnings
$
(1
)
 
$
(9
)


The Corporation's net impairment losses recognized in earnings consisted entirely of credit losses. The table below presents a rollforward of the credit losses recognized in earnings for the three months ended March 31, 2014 and 2013 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 Credit Losses Recognized
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Balance, beginning of period
$
184

 
$
243

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

 
4

Additions for credit losses recognized on AFS debt securities that had previously incurred impairment losses
1

 
5

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

 
(8
)
Balance, March 31
$
185

 
$
244



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 mortgage-backed securities (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, 2014.

Significant Assumptions
 
 
 
Range (1)
 
Weighted-
average
 
10th
Percentile (2)
 
90th
Percentile (2)
Annual prepayment speed
11.4
%
 
1.7
%
 
23.0
%
Loss severity
39.5

 
13.9

 
49.2

Life default rate
37.7

 
0.8

 
99.5

(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 FICO scores and geographic concentrations. The weighted-average severity by collateral type was 36.9 percent for prime, 40.0 percent for Alt-A and 47.5 percent for subprime at March 31, 2014. 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 26.3 percent for prime, 46.9 percent for Alt-A and 32.3 percent for subprime at March 31, 2014.

The expected maturity distribution of the Corporation's MBS, the contractual maturity distribution of the Corporation's debt securities carried at fair value and HTM debt securities, and the yields on the Corporation's debt securities carried at fair value and HTM debt securities at March 31, 2014 are summarized in the table below. Actual maturities may differ from the contractual or expected maturities since borrowers may have the right to prepay obligations with or without prepayment penalties.

Maturities of Debt Securities Carried at Fair Value and Held-to-maturity Debt Securities
 
March 31, 2014
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
505

0.53
%
 
$
17,791

1.62
%
 
$
14,061

2.32
%
 
$
1,348

3.78
%
 
$
33,705

1.98
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
12

4.61

 
11,613

2.77

 
115,370

3.05

 
59,393

2.91

 
186,388

2.99

Agency-collateralized mortgage obligations
1,226

0.01

 
3,750

1.74

 
13,577

2.94

 
25

0.61

 
18,578

2.50

Non-agency residential
727

4.15

 
1,513

3.92

 
1,008

3.37

 
1,863

6.73

 
5,111

4.87

Commercial
541

4.82

 
195

7.67

 
1,785

2.68

 
7

4.09

 
2,528

3.53

Non-U.S. securities
18,650

0.95

 
2,552

3.42

 
126

7.58

 
8

3.17

 
21,336

1.29

Corporate/Agency bonds
393

2.25

 
181

4.96

 
113

4.04

 
144

1.31

 
831

2.92

Other taxable securities, substantially all asset-backed securities
6,677

1.51

 
5,563

1.37

 
1,803

2.10

 
652

0.81

 
14,695

1.49

Total taxable securities
28,731

1.20

 
43,158

2.14

 
147,843

2.97

 
63,440

3.01

 
283,172

2.67

Tax-exempt securities
177

2.16

 
2,716

1.49

 
2,551

1.78

 
999

0.60

 
6,443

1.53

Total amortized cost of debt securities carried at fair value
$
28,908

1.21

 
$
45,874

2.10

 
$
150,394

2.95

 
$
64,439

2.97

 
$
289,615

2.65

Amortized cost of HTM debt securities (2)
$


 
$
130

1.51

 
$
54,288

2.58

 
$
702

2.62

 
$
55,120

2.58

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
507

 
 
$
17,737

 
 
$
14,102

 
 
$
1,403

 
 
$
33,749

 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
12

 
 
11,751

 
 
113,240

 
 
57,034

 
 
182,037

 
Agency-collateralized mortgage obligations
1,229

 
 
3,718

 
 
13,723

 
 
25

 
 
18,695

 
Non-agency residential
725

 
 
1,607

 
 
1,037

 
 
1,889

 
 
5,258

 
Commercial
550

 
 
212

 
 
1,735

 
 
7

 
 
2,504

 
Non-U.S. securities
18,634

 
 
2,579

 
 
131

 
 
8

 
 
21,352

 
Corporate/Agency bonds
394

 
 
193

 
 
115

 
 
143

 
 
845

 
Other taxable securities, substantially all asset-backed securities
6,683

 
 
5,561

 
 
1,822

 
 
656

 
 
14,722

 
Total taxable securities
28,734

 
 
43,358

 
 
145,905

 
 
61,165

 
 
279,162

 
Tax-exempt securities
176

 
 
2,714

 
 
2,536

 
 
988

 
 
6,414

 
Total debt securities carried at fair value
$
28,910

 
 
$
46,072

 
 
$
148,441

 
 
$
62,153

 
 
$
285,576

 
Fair value of HTM debt securities (2)
$

 
 
$
130

 
 
$
52,311

 
 
$
665

 
 
$
53,106

 
(1) 
Average yield is computed using the effective yield of each security at the end of the period, weighted based on the amortized cost of each security. The effective yield considers the contractual coupon, amortization of premiums and accretion of discounts, and excludes the effect of related hedging derivatives.
(2) 
Substantially all U.S. agency MBS.

Certain Corporate and Strategic Investments


In 2013, the Corporation sold its remaining investment in China Construction Bank Corporation (CCB). The strategic assistance agreement between the Corporation and CCB, which includes cooperation in specific business areas, has been extended through 2016.

The Corporation's 49 percent investment in a merchant services joint venture, which is recorded in Consumer & Business Banking (CBB), had a carrying value of $3.2 billion at both March 31, 2014 and December 31, 2013. For additional information, see Note 10 – Commitments and Contingencies.