Bank of America 2013 Annual Report Download - page 180

178 Bank of America 2013
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 6772
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.