BANK OF AMERICA CORP /DE/ | 2013 | FY | 3

Securities
The Corporation’s debt securities carried at fair value include debt securities purchased for longer term investment purposes and are used as part of ALM and other strategic activities. Generally, debt securities carried at fair value are accounted for as available-for-sale (AFS) debt securities with unrealized gains and losses reported in accumulated OCI. For certain other debt securities purchased for ALM and other strategic purposes, the Corporation has elected to report those securities at fair value with unrealized gains and losses reported in other income (loss) in the Consolidated Statement of Income.
As a result of growth in the portfolio of debt securities carried at fair value with unrealized gains and losses recorded in other income (loss) and to better reflect how such a portfolio is managed as part of the ALM activities, the Corporation changed the presentation of such securities in 2013 to combine debt securities carried at fair value into one line item on the Consolidated Balance Sheet. Previously, the portfolio of debt securities carried at fair value with unrealized gains and losses recorded in other income (loss) was classified in other assets. The Corporation may hedge these debt securities with risk management derivatives with the unrealized gains and losses also reported in other income (loss). Certain debt securities are carried at fair value with unrealized gains and losses reported in other income (loss) to mitigate accounting asymmetry with the risk management derivatives and to achieve operational simplifications. Prior-period amounts have been reclassified to conform to the current period presentation.
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 December 31, 2013 and 2012.
 
 
 
 
 
 
 
 
Debt Securities and Available-for-Sale Marketable Equity Securities
 
 
 
 
 
 
 
December 31, 2013
(Dollars in millions)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
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

 
 
 
 
 
 
 
 
 
December 31, 2012
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
24,232

 
$
324

 
$
(84
)
 
$
24,472

Mortgage-backed securities:
 

 
 

 
 

 
 

Agency
183,247

 
5,048

 
(146
)
 
188,149

Agency-collateralized mortgage obligations
36,329

 
1,427

 
(218
)
 
37,538

Non-agency residential (1)
9,231

 
391

 
(128
)
 
9,494

Non-agency commercial
3,576

 
348

 
—

 
3,924

Non-U.S. securities
5,574

 
50

 
(6
)
 
5,618

Corporate/Agency bonds
1,415

 
51

 
(16
)
 
1,450

Other taxable securities, substantially all asset-backed securities
12,089

 
54

 
(15
)
 
12,128

Total taxable securities
275,693

 
7,693

 
(613
)
 
282,773

Tax-exempt securities
4,167

 
13

 
(47
)
 
4,133

Total available-for-sale debt securities
279,860

 
7,706

 
(660
)
 
286,906

Other debt securities carried at fair value
23,927

 
120

 
(103
)
 
23,944

Total debt securities carried at fair value
303,787

 
7,826

 
(763
)
 
310,850

Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
49,481

 
815

 
(26
)
 
50,270

Total debt securities
$
353,268

 
$
8,641

 
$
(789
)
 
$
361,120

Available-for-sale marketable equity securities (2)
$
780

 
$
732

 
$
—

 
$
1,512

(1) 
At December 31, 2013 and 2012, the underlying collateral type included approximately 89 percent and 91 percent prime, seven percent and six percent Alt-A, and four percent and three percent subprime.
(2) 
Classified in other assets on the Consolidated Balance Sheet.
At December 31, 2013, the accumulated net unrealized loss on AFS debt securities included in accumulated OCI was $3.3 billion, net of the related income tax benefit of $1.9 billion. At December 31, 2013 and 2012, the Corporation had nonperforming AFS debt securities of $103 million and $91 million.
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 (loss) at December 31, 2013 and 2012. In 2013, the Corporation recorded unrealized mark-to-market net losses in other income (loss) of $1.3 billion and realized losses of $1.0 billion 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). Amounts in 2012 were insignificant.
 
 
 
 
Other Debt Securities Carried at Fair Value
 
 
 
 
 
December 31
(Dollars in millions)
2013
 
2012
U.S. Treasury and agency securities
$
4,062

 
$
491

Mortgage-backed securities:
 
 
 
Agency
16,500

 
13,073

Agency-collateralized mortgage obligations
218

 
929

Commercial
749

 
—

Non-U.S. securities (1)
11,315

 
9,451

Total
$
32,844

 
$
23,944

(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 2013, 2012 and 2011 are presented in the table below.
 
 
 
 
 
 
Gains and Losses on Sales of AFS Debt Securities
 
 
 
 
 
 
(Dollars in millions)
2013
 
2012
 
2011
Gross gains
$
1,302

 
$
2,128

 
$
3,685

Gross losses
(31
)
 
(466
)
 
(311
)
Net gains on sales of AFS debt securities
$
1,271

 
$
1,662

 
$
3,374

Income tax expense attributable to realized net gains on sales of AFS debt securities
$
470

 
$
615

 
$
1,248


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) and Freddie Mac (FHLMC), where the investment exceeded 10 percent of consolidated shareholders’ equity at December 31, 2013 and 2012, are presented in the table below.
 
 
 
 
 
 
 
 
Selected Securities Exceeding 10 Percent of Shareholders’ Equity
 
 
 
 
 
 
 
 
 
December 31
 
2013
 
2012
(Dollars in millions)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Fannie Mae
$
123,813

 
$
118,708

 
$
121,522

 
$
123,933

Government National Mortgage Association
118,700

 
115,314

 
124,348

 
127,541

Freddie Mac
24,908

 
24,075

 
22,995

 
23,502


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 December 31, 2013 and 2012.
 
 
 
 
 
 
 
 
 
 
 
 
Temporarily Impaired and Other-than-temporarily Impaired AFS Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
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 available-for-sale 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 available-for-sale debt securities
154,356

 
(5,790
)
 
14,838

 
(759
)
 
169,194

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

 
(1
)
 
1

 
(1
)
 
3

 
(2
)
Total temporarily impaired and other-than-temporarily impaired available-for-sale securities (2)
$
154,358

 
$
(5,791
)
 
$
14,839

 
$
(760
)
 
$
169,197

 
$
(6,551
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
Temporarily impaired available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
—

 
$
—

 
$
5,608

 
$
(84
)
 
$
5,608

 
$
(84
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
15,593

 
(133
)
 
735

 
(13
)
 
16,328

 
(146
)
Agency-collateralized mortgage obligations
5,135

 
(121
)
 
4,994

 
(97
)
 
10,129

 
(218
)
Non-agency residential
592

 
(13
)
 
1,555

 
(110
)
 
2,147

 
(123
)
Non-U.S. securities
1,715

 
(1
)
 
563

 
(5
)
 
2,278

 
(6
)
Corporate/Agency bonds
—

 
—

 
277

 
(16
)
 
277

 
(16
)
Other taxable securities, substantially all asset-backed securities
1,678

 
(1
)
 
1,436

 
(14
)
 
3,114

 
(15
)
Total taxable securities
24,713

 
(269
)
 
15,168

 
(339
)
 
39,881

 
(608
)
Tax-exempt securities
1,609

 
(9
)
 
1,072

 
(38
)
 
2,681

 
(47
)
Total temporarily impaired available-for-sale debt securities
26,322

 
(278
)
 
16,240

 
(377
)
 
42,562

 
(655
)
Other-than-temporarily impaired available-for-sale debt securities (1)
 
 
 
 
 
 
 
 
 
 
 
Non-agency residential mortgage-backed securities
14

 
(1
)
 
74

 
(4
)
 
88

 
(5
)
Total temporarily impaired and other-than-temporarily impaired available-for-sale securities (2)
$
26,336

 
$
(279
)
 
$
16,314

 
$
(381
)
 
$
42,650

 
$
(660
)
(1) 
Includes other-than-temporarily impaired AFS debt securities on which an OTTI loss remains in accumulated OCI.
(2)
At December 31, 2013 and 2012, the amortized cost of approximately 4,700 and 2,600 AFS debt securities exceeded their fair value by $6.6 billion and $660 million.
The Corporation recorded other-than-temporary impairment (OTTI) losses on AFS debt securities in 2013, 2012 and 2011 as presented in the table below. 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
 
 
 
 
 
 
 
 
 
 
 
 
2013
(Dollars in millions)
Non-agency
Residential
MBS
 
Non-agency
Commercial
MBS
 
Other
Taxable
Securities
 
Total
Total OTTI losses (unrealized and realized)
$
(21
)
 
$
—

 
$
—

 
$
(21
)
Unrealized OTTI losses recognized in accumulated OCI
1

 
—

 
—

 
1

Net impairment losses recognized in earnings
$
(20
)
 
$
—

 
$
—

 
$
(20
)
 
 
 
 
 
 
 
 
 
2012
Total OTTI losses (unrealized and realized)
$
(50
)
 
$
(7
)
 
$
—

 
$
(57
)
Unrealized OTTI losses recognized in accumulated OCI
4

 
—

 
—

 
4

Net impairment losses recognized in earnings
$
(46
)
 
$
(7
)
 
$
—

 
$
(53
)
 
 
 
 
 
 
 
 
 
2011
Total OTTI losses (unrealized and realized)
$
(348
)
 
$
(10
)
 
$
(2
)
 
$
(360
)
Unrealized OTTI losses recognized in accumulated OCI
61

 
—

 
—

 
61

Net impairment losses recognized in earnings
$
(287
)
 
$
(10
)
 
$
(2
)
 
$
(299
)

The Corporation’s net impairment losses recognized in earnings consist of credit losses in 2013, 2012 and 2011. Also included in 2011 were write-downs to fair value on AFS debt securities the Corporation had the intent to sell.
The table below presents a rollforward of the credit losses recognized in earnings in 2013, 2012 and 2011 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
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
2013
 
2012
 
2011

Balance, January 1
$
243

 
$
310

 
$
2,148

Additions for credit losses recognized on AFS debt securities that had no previous impairment losses
6

 
7

 
72

Additions for credit losses recognized on AFS debt securities that had previously incurred impairment losses
14

 
46

 
149

Reductions for AFS debt securities matured, sold or intended to be sold
(51
)
 
(120
)
 
(2,059
)
Balance, December 31
$
212

 
$
243

 
$
310


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 residential mortgage-backed securities (RMBS) were as follows at December 31, 2013.
 
 
 
 
 
 
Significant Assumptions
 
 
 
 
 
 
 
 
 
Range (1)
 
Weighted-
average
 
10th
Percentile (2)
 
90th
Percentile (2)
Prepayment speed
11.6
%
 
1.8
%
 
23.6
%
Loss severity
41.3

 
14.7

 
52.1

Life default rate
39.4

 
0.9

 
99.6

(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 38.1 percent for prime, 42.0 percent for Alt-A and 49.9 percent for subprime at December 31, 2013. 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 27.7 percent for prime, 49.1 percent for Alt-
A and 34.1 percent for subprime at December 31, 2013.
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 December 31, 2013 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
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
$
535

 
0.62
%
 
$
2,337

 
1.71
%
 
$
8,844

 
2.44
%
 
$
1,339

 
3.84
%
 
$
13,055

 
2.38
%
Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Agency
11

 
4.44

 
9,649

 
2.93

 
90,407

 
3.10

 
87,728

 
2.96

 
187,795

 
3.03

Agency-collateralized mortgage obligations
1,482

 
0.01

 
3,373

 
2.09

 
18,036

 
2.96

 
29

 
0.93

 
22,920

 
2.63

Non-agency residential
815

 
4.10

 
2,200

 
4.06

 
1,149

 
3.13

 
1,960

 
2.59

 
6,124

 
3.42

Commercial
1,683

 
5.01

 
466

 
6.43

 
1,089

 
2.51

 
7

 
4.09

 
3,245

 
4.37

Non-U.S. securities
16,288

 
1.04

 
2,074

 
3.98

 
149

 
3.34

 
8

 
3.10

 
18,519

 
1.39

Corporate/Agency bonds
395

 
2.48

 
206

 
5.69

 
112

 
4.12

 
147

 
1.38

 
860

 
3.27

Other taxable securities, substantially all asset-backed securities
6,655

 
1.58

 
7,274

 
1.37

 
2,105

 
2.06

 
771

 
0.84

 
16,805

 
1.50

Total taxable securities
27,864

 
1.46

 
27,579

 
2.56

 
121,891

 
3.01

 
91,989

 
2.95

 
269,323

 
2.78

Tax-exempt securities
195

 
1.66

 
2,324

 
1.49

 
2,429

 
1.90

 
1,019

 
0.61

 
5,967

 
1.54

Total amortized cost of debt securities carried at fair value
$
28,059

 
1.47

 
$
29,903

 
2.46

 
$
124,320

 
2.99

 
$
93,008

 
2.92

 
$
275,290

 
2.75

Amortized cost of held-to-maturity debt securities (2)
$
—

 
—

 
$
125

 
1.79

 
$
53,699

 
2.60

 
$
1,326

 
2.72

 
$
55,150

 
2.61

Debt securities carried at fair value
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities
$
537

 
 

 
$
2,333

 
 

 
$
8,831

 
 

 
$
1,315

 
 

 
$
13,016

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Agency
11

 
 

 
9,708

 
 

 
88,191

 
 

 
83,525

 
 

 
181,435

 
 

Agency-collateralized mortgage obligations
1,480

 
 

 
3,284

 
 

 
17,916

 
 

 
30

 
 

 
22,710

 
 

Non-agency residential
805

 
 

 
2,236

 
 

 
1,173

 
 

 
2,025

 
 

 
6,239

 
 

Commercial
1,715

 
 

 
494

 
 

 
1,013

 
 

 
7

 
 

 
3,229

 
 

Non-U.S. securities
16,273

 
 

 
2,099

 
 

 
155

 
 

 
8

 
 

 
18,535

 
 

Corporate/Agency bonds
395

 
 

 
220

 
 

 
116

 
 

 
142

 
 

 
873

 
 

Other taxable securities, substantially all asset-backed securities
6,656

 
 

 
7,280

 
 

 
2,120

 
 

 
774

 
 

 
16,830

 
 

Total taxable securities
27,872

 
 

 
27,654

 
 

 
119,515

 
 

 
87,826

 
 

 
262,867

 
 

Tax-exempt securities
194

 
 

 
2,319

 
 

 
2,409

 
 

 
1,006

 
 

 
5,928

 
 

Total debt securities carried at fair value
$
28,066

 
 

 
$
29,973

 
 

 
$
121,924

 
 

 
$
88,832

 
 

 
$
268,795

 
 

Fair value of held-to-maturity debt securities (2)
$
—

 
 
 
$
125

 
 
 
$
51,062

 
 
 
$
1,243

 
 
 
$
52,430

 
 
(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 of 2.0 billion shares of China Construction Bank Corporation (CCB) and realized a pre-tax gain of $753 million reported in equity investment income in the Consolidated Statement of Income. At December 31, 2012, these shares, representing approximately one percent of CCB, were classified as AFS marketable equity securities and carried at fair value with the after-tax unrealized gain included in accumulated OCI. 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 and $3.3 billion at December 31, 2013 and 2012. For additional information, see Note 12 – Commitments and Contingencies.

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