Bank of America 2014 Annual Report Download - page 172

170 Bank of America 2014
The Corporation recorded other-than-temporary impairment
(OTTI) losses on AFS debt securities in 2014, 2013 and 2012 as
presented in the Net Impairment Losses Recognized in Earnings
table. Substantially all OTTI losses in 2014, 2013 and 2012
consisted of credit losses on non-agency residential mortgage-
backed securities (RMBS) and were recorded in other income in
the Consolidated Statement of Income. 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 OCI. In certain
instances, the credit loss on a debt security may exceed the total
impairment, in which case, the excess of the credit loss over the
total impairment is recorded as an unrealized gain in OCI.
Net Impairment Losses Recognized in Earnings
(Dollars in millions) 2014 2013 2012
Total OTTI losses (unrealized and
realized) $(30)
$ (21) $ (57)
Unrealized OTTI losses recognized in
OCI 14 14
Net impairment losses recognized in
earnings $(16)
$ (20) $ (53)
The table below presents a rollforward of the credit losses
recognized in earnings in 2014, 2013 and 2012 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) 2014 2013 2012
Balance, January 1 $ 184 $ 243 $ 310
Additions for credit losses recognized on AFS debt securities that had no previous impairment losses 14 67
Additions for credit losses recognized on AFS debt securities that had previously incurred impairment losses 214 46
Reductions for AFS debt securities matured, sold or intended to be sold —(79) (120)
Balance, December 31 $ 200 $ 184 $ 243
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 December 31, 2014.
Significant Assumptions
Range
(1)
Weighted-
average
10th
Percentile (2)
90th
Percentile (2)
Prepayment speed 15.3% 3.1% 29.9%
Loss severity 35.2 11.8 44.7
Life default rate 39.6 1.5 98.6
(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 31.0 percent for prime, 34.1 percent
for Alt-A and 45.0 percent for subprime at December 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 24.5 percent for prime, 42.4 percent for Alt-
A and 42.0 percent for subprime at December 31, 2014.