Bank of America 2015 Annual Report Download - page 162

160 Bank of America 2015
The Corporation recorded OTTI losses on AFS debt securities
in 2015, 2014 and 2013 as presented in the Net Credit-related
Impairment Losses Recognized in Earnings table. Substantially all
OTTI losses in 2015, 2014 and 2013 consisted of credit losses
on non-agency residential mortgage-backed securities (RMBS) and
were recorded in other income in the Consolidated Statement of
Income. The credit losses on the RMBS in 2015 were driven by
decreases in the estimated RMBS cash flows primarily due to a
model change resulting in the refinement of expected cash flows.
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 Credit-related Impairment Losses Recognized in
Earnings
(Dollars in millions) 2015 2014 2013
Total OTTI losses $ (111) $ (30) $ (21)
Less: non-credit portion of total OTTI
losses recognized in OCI 30 14 1
Net credit-related impairment losses
recognized in earnings $ (81) $ (16) $ (20)
The table below presents a rollforward of the credit losses
recognized in earnings in 2015, 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 OTTI Credit Losses Recognized
(Dollars in millions) 2015 2014 2013
Balance, January 1 $ 200 $ 184 $ 243
Additions for credit losses recognized on AFS debt securities that had no previous impairment losses 52 14 6
Additions for credit losses recognized on AFS debt securities that had previously incurred impairment losses 29 2 14
Reductions for AFS debt securities matured, sold or intended to be sold (15) — (79)
Balance, December 31 $ 266 $ 200 $ 184
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 December 31, 2015.
Significant Assumptions
Range (1)
Weighted-
average
10th
Percentile (2)
90th
Percentile (2)
Prepayment speed 12.6% 3.8% 25.5%
Loss severity 32.6 12.9 34.8
Life default rate 26.0 0.8 86.1
(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.
Constant prepayment speed and loss severity rates are
projected considering collateral characteristics such as LTV,
creditworthiness of borrowers as measured using FICO scores,
and geographic concentrations. The weighted-average severity by
collateral type was 29.2 percent for prime, 31.4 percent for Alt-A
and 42.9 percent for subprime at December 31, 2015.
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 16.1 percent for prime, 28.0 percent for Alt-
A and 27.2 percent for subprime at December 31, 2015.