SECURITIES

Investments include debt and marketable equity securities and other investment securities. The Company classifies debt securities as AFS, HTM, or trading based on management’s intent to hold to maturity at the time of purchase, and marketable equity securities as AFS or trading.

Securities that will be held for indefinite periods of time and may be sold in response to changes in interest rates, changes in prepayment risk, or other factors considered in managing the Company’s asset/liability strategy are classified as AFS and reported at fair value, with unrealized gains and losses reported in OCI as a separate component of stockholders’ equity, net of taxes. Gains and losses on the sales of securities are recognized in noninterest income and are computed using the specific identification method.

Debt securities for which the Company has the ability and intent to hold to maturity are classified as HTM. The securities are reported at amortized cost. Transfers of debt securities to the HTM classification are recognized at fair value at the date of transfer.

For debt securities classified as AFS or HTM, interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and the accretion of discounts. Premiums and discounts on debt securities are amortized or accreted using the effective interest method over the estimated lives of the individual securities. The Company uses actual prepayment experience and estimates of future prepayments to determine the constant effective yield necessary to apply the effective interest method of income recognition. Estimates of future prepayments are based on the underlying collateral characteristics of each security and are derived from market sources. Judgment is involved in making determinations about prepayment expectations and in changing those expectations in response to changes in interest rates and macroeconomic conditions. The amortization of premiums and discounts associated with mortgage-backed securities may be significantly impacted by changes in prepayment assumptions.

Securities that are classified as trading are bought and held principally for the purpose of selling them in the near term and are carried at fair value, with changes in fair value recognized in earnings. When applicable, realized and unrealized gains and losses on such assets are reported in noninterest income in the Consolidated Statements of Operations.

Other investment securities are primarily composed of FHLB stock and FRB stock (which are carried at cost) and money market mutual fund investments held by the Company’s broker-dealers (which are carried at fair value, with changes in fair value recognized in noninterest income). Other investment securities that are carried at cost are reviewed at least annually for impairment, with valuation adjustments recognized in noninterest income.

The following table presents the major components of securities at amortized cost and fair value:



	December 31, 2017									December 31, 2016
(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Treasury and other		$12		$—		$—			$12		$30		$—		$—			$30
State and political subdivisions	6		—		—			6		8		—		—			8
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	20,065		40		(277		)	19,828		19,231		78		(264		)	19,045
Other/non-agency	311		7		(7		)	311		427		2		(28		)	401
Total mortgage-backed securities	20,376		47		(284		)	20,139		19,658		80		(292		)	19,446
Total debt securities available for sale	20,394		47		(284		)	20,157		19,696		80		(292		)	19,484
Marketable equity securities	—		—		—			—		5		—		—			5
Other equity securities	—		—		—			—		12		—		—			12
Total equity securities available for sale	—		—		—			—		17		—		—			17
Total securities available for sale		$20,394		$47		($284	)		$20,157		$19,713		$80		($292	)		$19,501
Securities Held to Maturity
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities		$3,853		$7		($46	)		$3,814		$4,126		$12		($44	)		$4,094
Other/non-agency	832		22		—			854		945		19		—			964
Total securities held to maturity		$4,685		$29		($46	)		$4,668		$5,071		$31		($44	)		$5,058
Other Investment Securities, at Fair Value
Money market mutual fund		$165		$—		$—			$165		$91		$—		$—			$91
Other investments	4		—		—			4		5		—		—			5
Total other investment securities, at fair value		$169		$—		$—			$169		$96		$—		$—			$96
Other Investment Securities, at Cost
Federal Reserve Bank stock		$463		$—		$—			$463		$463		$—		$—			$463
Federal Home Loan Bank stock	252		—		—			252		479		—		—			479
Other equity securities	7		—		—			7		—		—		—			—
Total other investment securities, at cost		$722		$—		$—			$722		$942		$—		$—			$942

The amortized cost and fair value of debt securities by contractual maturity are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.



	Distribution of Maturities
(in millions)	1 Year or Less		1-5 Years		5-10 Years		After 10 Years		Total
Amortized Cost:
Debt securities available for sale
U.S. Treasury and other		$12		$—		$—		$—		$12
State and political subdivisions	—		—		—		6		6
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		261		1,067		18,737		20,065
Other/non-agency	1		21		—		289		311
Total debt securities available for sale	13		282		1,067		19,032		20,394
Debt securities held to maturity:
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		3,853		3,853
Other/non-agency	—		—		—		832		832
Total debt securities held to maturity	—		—		—		4,685		4,685
Total amortized cost of debt securities		$13		$282		$1,067		$23,717		$25,079

Fair Value:
Debt securities available for sale
U.S. Treasury and other		$12		$—		$—		$—		$12
State and political subdivisions	—		—		—		6		6
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		261		1,071		18,496		19,828
Other/non-agency	1		21		—		289		311
Total debt securities available for sale	13		282		1,071		18,791		20,157
Debt securities held to maturity
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		3,814		3,814
Other/non-agency	—		—		—		854		854
Total debt securities held to maturity	—		—		—		4,668		4,668
Total fair value of debt securities		$13		$282		$1,071		$23,459		$24,825

Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $625 million, $584 million and $621 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Realized gains and losses on securities are presented below:



	Year Ended December 31,
(in millions)	2017		2016			2015
Gains on sale of debt securities		$11		$18			$41
Losses on sale of debt securities	—		(2		)	(12		)
Debt securities gains, net		$11		$16			$29
Equity securities gains		$1		$3			$3

In advance of the July 2017 Volcker Rule’s effective date, during the year ended December 31, 2015, the Company sold a $73 million mortgage-backed security that was classified as HTM, which would have been prohibited under the Volcker Rule, and recognized a $2 million gain.

The amortized cost and fair value of securities pledged are presented below:



	December 31, 2017				December 31, 2016
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Pledged against repurchase agreements		$358		$357		$631		$620
Pledged against FHLB borrowed funds	839		861		953		972
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law	3,113		3,082		3,575		3,563

The Company regularly enters into security repurchase agreements with unrelated counterparties. Repurchase agreements are financial transactions that involve the transfer of a security from one party to another and a subsequent transfer of substantially the same security back to the original party. The Company’s repurchase agreements are typically short-term transactions, but they may be extended to longer terms to maturity. Such transactions are accounted for as secured borrowed funds on the Company’s Consolidated Balance Sheets. When permitted by GAAP, the Company offsets short-term receivables associated with its reverse repurchase agreements against short-term payables associated with its repurchase agreements. The Company recognized no offsetting of short-term receivables or payables as of December 31, 2017 or 2016. The Company offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 13 “Derivatives.”

Securitizations of mortgage loans retained in the investment portfolio for the years ended December 31, 2017, 2016 and 2015, were $134 million, $68 million and $3 million, respectively. These securitizations included a substantive guarantee by third parties. In 2017, the guarantors were Fannie Mae, Freddie Mac, and Ginnie Mae. In 2016, the guarantors were Fannie Mae and Ginnie Mae. In 2015, the guarantor was Freddie Mac. These securitizations were accounted for as a sale of the transferred loans and as a purchase of securities. The securities received from the guarantors are classified as AFS.

Impairment

The Company reviews its securities for other-than-temporary impairment on a quarterly basis or more frequently if a potential loss triggering event occurs. The initial indicator of other-than-temporary impairment for both debt and equity securities is a decline in fair value below its recorded investment amount, as well as the severity and duration of the decline. For a security of which there has been a decline in fair value below the cost basis, the Company recognizes other-than-temporary impairment if (i) management has the intent to sell the security, (ii) it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, or (iii) the Company does not expect to recover the entire cost basis of the security.

Estimating the recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of cash flows expected to be collected, discounted at the security’s original effective yield, is less than amortized cost, other-than-temporary impairment is considered to have occurred. In addition to these cash flow projections, several other characteristics of each debt security are reviewed when determining whether a credit loss exists and the period over which the debt security is expected to recover. These characteristics include: (i) the type of investment, (ii) various market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), (iii) the length and severity of impairment, and (iv) the public credit rating of the instrument.

The Company estimates the portion of loss attributable to credit using a collateral loss model and integrated cash flow engine. The model calculates prepayment, default and loss severity assumptions using collateral performance data. These assumptions are used to produce cash flows that generate loss projections. These loss projections are reviewed on a quarterly basis by a cross-functional governance committee to determine whether security impairments are other-than-temporary.

If the Company intends to sell an impaired security, or if it is more likely than not it will be required to sell the security before recovery, the impairment loss recognized in current period earnings equals the difference between the amortized cost basis and the fair value of the security. If the Company does not intend to sell the impaired security, and it is not likely that the Company will be required to sell the impaired security, the other-than-temporary impairment write-down is separated into an amount representing the credit loss, which is recognized in current period earnings and the amount related to all other factors, is recognized in OCI.

The following table presents the net securities impairment losses recognized in earnings:



	Year Ended December 31,
(in millions)	2017			2016			2015
Other-than-temporary impairment:
Total other-than-temporary impairment losses		($7	)		($39	)		($43	)
Portions of loss recognized in other comprehensive income (before taxes)	—			27			36
Net securities impairment losses recognized in earnings		($7	)		($12	)		($7	)

The following tables present securities whose fair values are below carrying values, segregated by those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer:



	December 31, 2017
	Less than 12 Months						12 Months or Longer						Total
(dollars in millions)	Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	294		$10,163		($97	)	152		$8,061		($226	)	446		$18,224		($323	)
Other/non-agency	6	55		(1		)	10	84		(6		)	16	139		(7		)
Total mortgage-backed securities	300	10,218		(98		)	162	8,145		(232		)	462	18,363		(330		)
Total	300		$10,218		($98	)	162		$8,145		($232	)	462		$18,363		($330	)



	December 31, 2016
	Less than 12 Months						12 Months or Longer						Total
(dollars in millions)	Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses
State and political subdivisions	1		$8		$—		—		$—		$—		1		$8		$—
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	323	15,387		(292		)	25	461		(16		)	348	15,848		(308		)
Other/non-agency	4	8		—			20	302		(28		)	24	310		(28		)
Total mortgage-backed securities	327	15,395		(292		)	45	763		(44		)	372	16,158		(336		)
Total	328		$15,403		($292	)	45		$763		($44	)	373		$16,166		($336	)

The following table presents the cumulative credit related losses recognized in earnings on debt securities held by the Company:



	Year Ended December 31,
(in millions)	2017			2016			2015
Cumulative balance at beginning of period		$75			$66			$62
Credit impairments recognized in earnings on securities that have been previously impaired	7			12			7
Reductions due to increases in cash flow expectations on impaired securities ⁽¹⁾	(2		)	(3		)	(3		)
Cumulative balance at end of period		$80			$75			$66

⁽¹⁾Reported in interest income from investment securities on the Consolidated Statements of Operations.

Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of December 31, 2017, 2016 and 2015 were $80 million, $75 million and $66 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of December 31, 2017, 2016 and 2015.

For the years ended December 31, 2017, 2016 and 2015, the Company incurred non-agency MBS credit related other-than-temporary impairment losses in earnings of $7 million, $12 million and $7 million, respectively. Other-than-temporary impairment losses for the year ended December 31, 2016 included the $5 million impact of a one-time adjustment from a new model implementation. This adjustment was the result of the Company migrating in June 2016 from a proprietary internal process to a vendor-based model to estimate other-than-temporary impairment.

There were no credit impaired debt securities sold during the years ended December 31, 2017, 2016 and 2015, respectively. The Company does not currently have the intent to sell these debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases.

The Company has determined that credit losses are not expected to be incurred on the remaining agency and non-agency MBS identified with unrealized losses as of December 31, 2017. The unrealized losses on these debt securities reflect non- credit-related factors such as changing interest rates and market liquidity. Therefore, the Company has determined that these debt securities are not other-than-temporarily impaired because the Company does not currently have the intent to sell these debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases. Any subsequent increases in the valuation of impaired debt securities do not impact their recorded cost bases. Additionally, as of December 31, 2017, there were no pre-tax non-credit related losses deferred in AOCI and there were $27 million and $36 million for the years ended December 31, 2016 and 2015, respectively.