Investment Securities

Investment securities held by us are classified as either trading, AFS, or HTM at the time of purchase and reassessed periodically, based on management’s intent.

Generally, trading assets are debt and equity securities purchased in connection with our trading activities and, as such, are expected to be sold in the near term. Our trading activities typically involve active and frequent buying and selling with the objective of generating profits on short-term movements. AFS investment securities are those securities that we intend to hold for an indefinite period of time. AFS investment securities include securities utilized as part of our asset-and-liability management activities that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. HTM securities are debt securities that management has the intent and the ability to hold to maturity.

Trading assets are carried at fair value. Both realized and unrealized gains and losses on trading assets are recorded in trading services revenue in our consolidated statement of income. Debt and marketable equity securities classified as AFS are carried at fair value, and after-tax net unrealized gains and losses are recorded in AOCI. Gains or losses realized on sales of AFS investment securities are computed using the specific identification method and are recorded in gains (losses) related to investment securities, net, in our consolidated statement of income. HTM investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts.

The following table presents the amortized cost, fair value and associated unrealized gains and losses of investment securities as of the dates indicated:



	September 30, 2017								December 31, 2016
	Amortized Cost		Gross Unrealized				Fair Value		Amortized Cost		Gross Unrealized				Fair Value
(In millions)			Gains		Losses						Gains		Losses
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations	$	617	$	4	$	1	$	620	$	4,265	$	7	$	9	$	4,263
Mortgage-backed securities	11,044		51		95		11,000		13,340		76		159		13,257
Asset-backed securities:
Student loans⁽¹⁾	4,795		39		8		4,826		5,659		12		75		5,596
Credit cards	1,567		3		22		1,548		1,377		—		26		1,351
Sub-prime	—		—		—		—		289		1		18		272
Other⁽²⁾	1,213		8		—		1,221		895		10		—		905
Total asset-backed securities	7,575		50		30		7,595		8,220		23		119		8,124
Non-U.S. debt securities:
Mortgage-backed securities	7,041		36		3		7,074		6,506		35		6		6,535
Asset-backed securities	2,833		6		—		2,839		2,513		4		1		2,516
Government securities	6,666		8		16		6,658		5,834		8		6		5,836
Other⁽³⁾	5,783		39		4		5,818		5,587		31		5		5,613
Total non-U.S. debt securities	22,323		89		23		22,389		20,440		78		18		20,500
State and political subdivisions	9,444		322		28		9,738		10,233		201		112		10,322
Collateralized mortgage obligations	1,522		15		9		1,528		2,610		18		35		2,593
Other U.S. debt securities	2,923		20		15		2,928		2,481		18		30		2,469
U.S. equity securities	40		8		2		46		39		6		3		42
Non-U.S. equity securities	—		—		—		—		3		—		—		3
U.S. money-market mutual funds	394		—		—		394		409		—		—		409
Non-U.S. money-market mutual funds	—		—		—		—		16		—		—		16
Total	$	55,882	$	559	$	203	$	56,238	$	62,056	$	427	$	485	$	61,998
Held-to-maturity:
U.S. Treasury and federal agencies:
Direct obligations	$	17,456	$	20	$	37	$	17,439	$	17,527	$	17	$	58	$	17,486
Mortgage-backed securities	12,375		38		169		12,244		10,334		20		221		10,133
Asset-backed securities:
Student loans⁽¹⁾	3,116		25		13		3,128		2,883		5		30		2,858
Credit cards	798		3		—		801		897		2		—		899
Other	1		—		—		1		35		—		—		35
Total asset-backed securities	3,915		28		13		3,930		3,815		7		30		3,792
Non-U.S. debt securities:
Mortgage-backed securities	1,000		84		7		1,077		1,150		70		15		1,205
Asset-backed securities	325		1		—		326		531		—		—		531
Government securities	483		2		—		485		286		3		—		289
Other	47		—		—		47		113		1		—		114
Total non-U.S. debt securities	1,855		87		7		1,935		2,080		74		15		2,139
Collateralized mortgage obligations	1,249		44		5		1,288		1,413		42		11		1,444
Total	$	36,850	$	217	$	231	$	36,836	$	35,169	$	160	$	335	$	34,994

⁽¹⁾ Primarily composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and accrued interest on the underlying loans.

⁽²⁾As of September 30, 2017 and December 31, 2016, the fair value of other ABS was primarily composed of $1,221 million and $905 million, respectively, of CLOs.

⁽³⁾As of September 30, 2017 and December 31, 2016, the fair value of other non-U.S. debt securities was primarily composed of $3,600 million and $3,769 million, respectively, of covered bonds and $1,503 million and $988 million, as of September 30, 2017 and December 31, 2016, respectively, of corporate bonds.

Aggregate investment securities with carrying values of approximately $52 billion and $46 billion as of September 30, 2017 and December 31, 2016, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.

In the first quarter of 2017, we sold $2.7 billion of AFS, primarily Agency MBS and U.S. Treasury securities in our investment portfolio, in response to the current interest rate environment resulting in a pre-tax loss of $40 million.

The following tables present the aggregate fair values of investment securities that have been in a continuous unrealized loss position for less than 12 months, and those that have been in a continuous unrealized loss position for 12 months or longer, as of the dates indicated:



	Less than 12 months				12 months or longer				Total
September 30, 2017	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
(In millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations	$	—	$	—	$	153	$	1	$	153	$	1
Mortgage-backed securities	4,382		51		1,880		44		6,262		95
Asset-backed securities:
Student loans	—		—		1,191		8		1,191		8
Credit cards	499		22		—		—		499		22
Total asset-backed securities	499		22		1,191		8		1,690		30
Non-U.S. debt securities:
Mortgage-backed securities	780		2		569		1		1,349		3
Government securities	4,965		16		—		—		4,965		16
Other	447		3		229		1		676		4
Total non-U.S. debt securities	6,192		21		798		2		6,990		23
State and political subdivisions	1,052		15		525		13		1,577		28
Collateralized mortgage obligations	550		7		56		2		606		9
Other U.S. debt securities	1,141		14		75		1		1,216		15
U.S. equity securities	—		—		6		2		6		2
Total	$	13,816	$	130	$	4,684	$	73	$	18,500	$	203
Held-to-maturity:
U.S. Treasury and federal agencies:
Direct obligations	$	9,660	$	36	$	77	$	1	$	9,737	$	37
Mortgage-backed securities	6,939		152		493		17		7,432		169
Asset-backed securities:
Student loans	544		8		389		5		933		13
Total asset-backed securities	544		8		389		5		933		13
Non-U.S. debt securities:
Mortgage-backed securities	—		—		259		7		259		7
Total non-U.S. debt securities	—		—		259		7		259		7
Collateralized mortgage obligations	245		2		176		3		421		5
Total	$	17,388	$	198	$	1,394	$	33	$	18,782	$	231



	Less than 12 months				12 months or longer				Total
December 31, 2016	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
(In millions)
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations	$	651	$	8	$	180	$	1	$	831	$	9
Mortgage-backed securities	7,072		131		1,114		28		8,186		159
Asset-backed securities:
Student loans	54		—		3,745		75		3,799		75
Credit cards	795		1		494		25		1,289		26
Sub-prime	1		—		252		18		253		18
Other	75		—		—		—		75		—
Total asset-backed securities	925		1		4,491		118		5,416		119
Non-U.S. debt securities:
Mortgage-backed securities	442		1		893		5		1,335		6
Asset-backed securities	253		—		276		1		529		1
Government securities	1,314		6		—		—		1,314		6
Other	670		4		218		1		888		5
Total non-U.S. debt securities	2,679		11		1,387		7		4,066		18
State and political subdivisions	3,390		102		304		10		3,694		112
Collateralized mortgage obligations	1,259		31		162		4		1,421		35
Other U.S. debt securities	944		24		157		6		1,101		30
U.S. equity securities	8		—		5		3		13		3
Total	$	16,928	$	308	$	7,800	$	177	$	24,728	$	485
Held-to-maturity:
U.S. Treasury and federal agencies:
Direct obligations	$	8,891	$	57	$	86	$	1	$	8,977	$	58
Mortgage-backed securities	6,838		221		—		—		6,838		221
Asset-backed securities:
Student loans	705		9		1,235		21		1,940		30
Credit cards	33		—		—		—		33		—
Other	18		—		9		—		27		—
Total asset-backed securities	756		9		1,244		21		2,000		30
Non-U.S. debt securities:
Mortgage-backed securities	54		2		330		13		384		15
Asset-backed securities	28		—		35		—		63		—
Government securities	180		—		—		—		180		—
Total non-U.S. debt securities	262		2		365		13		627		15
Collateralized mortgage obligations	537		4		204		7		741		11
Total	$	17,284	$	293	$	1,899	$	42	$	19,183	$	335

The following table presents contractual maturities of debt investment securities by carrying amount as of September 30, 2017. The maturities of certain ABS, MBS, and collateralized mortgage obligations are based on expected principal payments. Actual maturities may differ from these expected maturities since certain borrowers have the right to prepay obligations with or without prepayment penalties.



	Under 1 Year		1 to 5 Years		6 to 10 Years		Over 10 Years		Total
(In millions)	Under 1 Year		1 to 5 Years		6 to 10 Years		Over 10 Years		Total
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations	$	232	$	7	$	55	$	326	$	620
Mortgage-backed securities	270		1,311		3,424		5,995		11,000
Asset-backed securities:
Student loans	408		1,634		1,159		1,625		4,826
Credit cards	—		1,296		252		—		1,548
Other	—		120		1,101		—		1,221
Total asset-backed securities	408		3,050		2,512		1,625		7,595
Non-U.S. debt securities:
Mortgage-backed securities	837		4,128		1,046		1,063		7,074
Asset-backed securities	395		2,182		262		—		2,839
Government securities	3,000		2,288		1,370		—		6,658
Other	1,485		3,607		726		—		5,818
Total non-U.S. debt securities	5,717		12,205		3,404		1,063		22,389
State and political subdivisions	433		2,525		5,020		1,760		9,738
Collateralized mortgage obligations	7		148		343		1,030		1,528
Other U.S. debt securities	404		1,052		1,472		—		2,928
Total	$	7,471	$	20,298	$	16,230	$	11,799	$	55,798
Held-to-maturity:
U.S. Treasury and federal agencies:
Direct obligations	$	1,827	$	15,552	$	14	$	63	$	17,456
Mortgage-backed securities	—		172		1,427		10,776		12,375
Asset-backed securities:
Student loans	87		240		298		2,491		3,116
Credit cards	178		620		—		—		798
Other	—		—		—		1		1
Total asset-backed securities	265		860		298		2,492		3,915
Non-U.S. debt securities:
Mortgage-backed securities	173		221		49		557		1,000
Asset-backed securities	84		241		—		—		325
Government securities	364		119		—		—		483
Other	—		47		—		—		47
Total non-U.S. debt securities	621		628		49		557		1,855
Collateralized mortgage obligations	9		117		373		750		1,249
Total	$	2,722	$	17,329	$	2,161	$	14,638	$	36,850

The following table presents a roll-forward with respect to net impairment losses that have been recognized in income for the periods indicated.



	Nine Months Ended September 30,
(In millions)	2017			2016
Balance, beginning of period	$	66		$	92
Additions:
Losses for which OTTI was previously recognized	—			2
Deductions:
Previously recognized losses related to securities sold or matured	(2		)	(26		)
Balance, end of period	$	64		$	68

Interest income related to debt securities is recognized in our consolidated statement of income using the effective interest method, or on a basis approximating a level rate of return over the contractual or estimated life of the security. The level rate of return considers any non-refundable fees or costs, as well as purchase premiums or discounts, resulting in amortization or accretion, accordingly.

For debt securities acquired for which we consider it probable as of the date of acquisition that we will be unable to collect all contractually required principal, interest and other payments, the excess of our estimate of undiscounted future cash flows from these securities over their initial recorded investment is accreted into interest income on a level-yield basis over the securities’ estimated remaining terms. Subsequent decreases in these securities’ expected future cash flows are either recognized prospectively through an adjustment of the yields on the securities over their remaining terms, or are evaluated for other-than-temporary impairment. Increases in expected future cash flows are recognized prospectively over the securities’ estimated remaining terms through the recalculation of their yields.

For certain debt securities acquired which are considered to be beneficial interests in securitized financial assets, the excess of our estimate of undiscounted future cash flows from these securities over their initial recorded investment is accreted into interest income on a level-yield basis over the securities’ estimated remaining terms. Subsequent decreases in these securities’ expected future cash flows are either recognized prospectively through an adjustment of the yields on the securities over their remaining terms, or are evaluated for OTTI. Increases in expected future cash flows are recognized prospectively over the securities’ estimated remaining terms through the recalculation of their yields.