Investments

9 Months Ended

Sep. 30, 2020

Investment Securities

Securities are classified as HTM, AFS or trading. HTM securities, which management has the intent and ability to hold until maturity, are carried at amortized cost. AFS securities are carried at fair value and unrealized gains and losses are reported as net increases or decreases to accumulated other comprehensive income (“AOCI”). Trading securities are carried at fair value with gains and losses recognized in current period earnings. The carrying values of our securities do not include accrued interest receivables of $51 million and $58 million at September 30, 2020 and December 31, 2019, respectively. These receivables are presented in the Consolidated Balance Sheet within the Other Assets line item.

The purchase premiums for callable debt securities classified as HTM or AFS are amortized at an effective yield to the earliest call date. The purchase premiums and discounts for all other HTM and AFS securities are recognized in interest income over the contractual life of the security using the effective yield method. As principal repayments are received on securities, a proportionate amount of the related premium or discount is recognized in income so that the effective yield on the remaining portion of the security continues unchanged. Note 3 of our 2019 Annual Report on Form 10-K discusses the process to estimate fair value for investment securities.


	September 30, 2020
(In millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	592	$	4	$	—	$	596
Available-for-sale
U.S. Treasury securities	195		4		—		199
U.S. Government agencies and corporations:
Agency securities	1,058		37		2		1,093
Agency guaranteed mortgage-backed securities	10,461		280		5		10,736
Small Business Administration loan-backed securities	1,277		1		39		1,239
Municipal securities	1,254		66		—		1,320
Other debt securities	75		—		—		75
Total available-for-sale debt securities	14,320		388		46		14,662
Total investment securities	$	14,912	$	392	$	46	$	15,258


	December 31, 2019
(In millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	592	$	5	$	—	$	597
Available-for-sale
U.S. Treasury securities	25		—		—		25
U.S. Government agencies and corporations:
Agency securities	1,301		5		4		1,302
Agency guaranteed mortgage-backed securities	9,518		83		42		9,559
Small Business Administration loan-backed securities	1,535		1		41		1,495
Municipal securities	1,282		37		—		1,319
Other debt securities	25		—		—		25
Total available-for-sale debt securities	13,686		126		87		13,725


Total investment securities	$	14,278	$	131	$	87	$	14,322

Maturities

The following schedule shows the amortized cost and weighted average yields of investment debt securities by contractual maturity of principal payments as of September 30, 2020. Actual principal payments may differ from contractual or expected principal payments because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2020
	Total debt investment securities				Due in one year or less				Due after one year through five years				Due after five years through ten years				Due after ten years
(Dollar amounts in millions)	Amortized cost		Avg yield		Amortized cost		Avg yield		Amortized cost		Avg yield		Amortized cost		Avg yield		Amortized cost		Avg yield

Held-to-maturity
Municipal securities 1	$	592	3.55	%	$	158	2.80	%	$	198	3.69	%	$	129	3.70	%	$	107	4.20	%
Available-for-sale
U.S. Treasury securities	195		0.99		50		0.14		—		—		—		—		145		1.28
U.S. Government agencies and corporations:
Agency securities	1,058		2.37		—		—		151		1.01		392		2.57		515		2.62
Agency guaranteed mortgage-backed securities	10,461		2.05		1		4.40		284		1.49		774		1.79		9,402		2.09
Small Business Administration loan-backed securities	1,277		1.46		—		—		33		1.27		146		1.50		1,098		1.46
Municipal securities 1	1,254		2.51		89		1.78		595		2.34		448		2.77		122		2.97
Other debt securities	75		2.22		—		—		—		—		60		2.03		15		3.00
Total available-for-sale debt securities	14,320		2.05		140		1.21		1,063		1.89		1,820		2.18		11,297		2.05
Total investment securities	$	14,912	2.11	%	$	298	2.05	%	$	1,261	2.17	%	$	1,949	2.28	%	$	11,404	2.07	%

1 The yields on tax-exempt securities are calculated on a tax-equivalent basis.

The following is a summary of the amount of gross unrealized losses for debt securities and the estimated fair value by length of time the securities have been in an unrealized loss position:


	September 30, 2020
	Less than 12 months				12 months or more				Total
(In millions)	Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	—	$	55	$	—	$	16	$	—	$	71




Available-for-sale

U.S. Government agencies and corporations:
Agency securities	1		68		1		63		2		131
Agency guaranteed mortgage-backed securities	3		704		2		201		5		905
Small Business Administration loan-backed securities	—		19		39		1,141		39		1,160
Municipal securities	—		54		—		—		—		54
Other	—		50		—		—		—		50





Total available-for-sale	4		895		42		1,405		46		2,300


Total investment securities	$	4	$	950	$	42	$	1,421	$	46	$	2,371


	December 31, 2019
	Less than 12 months				12 months or more				Total
(In millions)	Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	—	$	73	$	—	$	45	$	—	$	118




Available-for-sale
U.S. Government agencies and corporations:
Agency securities	2		222		2		359		4		581
Agency guaranteed mortgage-backed securities	4		1,173		38		3,215		42		4,388
Small Business Administration loan-backed securities	1		172		40		1,215		41		1,387
Municipal securities	—		50		—		5		—		55
Other	—		—		—		—		—		—





Total available-for-sale	7		1,617		80		4,794		87		6,411


Total investment securities	$	7	$	1,690	$	80	$	4,839	$	87	$	6,529

At September 30, 2020 and December 31, 2019, respectively, 68 and 146 HTM and 587 and 849 AFS investment securities were in an unrealized loss position.

Impairment

Ongoing Policy

We review investment securities on a quarterly basis for the presence of impairment. For AFS securities, we assess whether impairment is present on an individual security basis when the fair value of a debt security is less than its amortized cost basis at the balance sheet date. When determining if the fair value of an investment is less than the amortized cost basis we have elected to exclude accrued interest from the amortized cost basis of the investment. If we have an intent to sell an identified security, or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, then we recognize an impairment equal to any existing allowance written off against the security.

If we do not have the intent to sell a security, and it is more likely than not that we will not be required to sell a security prior to recovery of its amortized cost basis, then we determine whether there is any impairment attributable to credit-related factors. We analyze certain factors, primarily internal and external credit ratings, to determine if the decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. If a credit impairment is determined to exist, then we measure the amount of credit loss and recognize an allowance for the credit loss. In measuring the credit loss, we generally compare the present value of cash flows expected to be collected from the security to the amortized cost basis of the security. These cash flows are credit adjusted using, among other things, assumptions for default probability and loss severity. Certain other unobservable inputs such as prepayment rate assumptions are also utilized. In addition, certain internal models may be utilized. To determine the credit-related portion of impairment we use the security-specific effective interest rate when estimating the present value of cash flows. If the present value of cash flows is less than the amortized cost basis of the security, then this amount is recorded as an allowance for credit loss, limited to the amount that the fair value is less than the amortized cost basis (i.e., the credit impairment cannot result in the security being carried at an amount lower than its fair value). The assumptions used to estimate the expected cash flows depends on the particular asset class, structure and credit rating of the security. Declines in fair value that are not recorded in the allowance are recorded in other comprehensive income, net of applicable taxes.

AFS Impairment Conclusions

The Bank did not recognize any impairment on its AFS investment securities portfolio during the first nine months of 2020. Unrealized losses relate to changes in interest rates subsequent to purchase and are not attributable to credit. At September 30, 2020, we had not initiated any sales of AFS securities nor did we have an intent to sell any identified securities with unrealized losses, and we do not believe it is more likely than not we would be required to sell such securities before recovery of their amortized cost basis.

HTM Credit Quality

For HTM securities, the allowance for credit losses ("ACL") is assessed consistent with the approach discussed in Note 6 for loans carried at amortized cost. The ACL on HTM securities was less than $1 million at September 30, 2020. All HTM securities were risk-graded as "pass" in terms of credit quality and none were past due as of September 30, 2020. The amortized cost basis of HTM securities categorized by year of issuance is summarized as follows:


	September 30, 2020
	Amortized cost basis by year of issuance
(In millions)	2020		2019		2018		2017		2016		Prior		Total Securities
Held-to-maturity	$	116	$	18	$	1	$	34	$	183	$	240	$	592

Securities Gains and Losses Recognized in Income

The following summarizes gains and losses that were recognized in the statement of income:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
(In millions)	Gross gains		Gross losses		Gross gains		Gross losses		Gross gains		Gross losses		Gross gains		Gross losses




Other noninterest-bearing investments	$	5	$	1	$	2	$	—	$	13	$	18	$	7	$	7

Net gains (losses) 1			$	4			$	2			$	(5)			$	—

1 Net gains (losses) were recognized in securities gains (losses), net in the statement of income.

Interest income by security type is as follows:


	Three Months Ended September 30,
	2020						2019
(In millions)	Taxable		Nontaxable		Total		Taxable		Nontaxable		Total
Investment securities:
Held-to-maturity	$	2	$	3	$	5	$	3	$	3	$	6
Available-for-sale	61		6		67		74		7		81
Trading	—		2		2		—		1		1
Total securities	$	63	$	11	$	74	$	77	$	11	$	88


	Nine Months Ended September 30,
	2020						2019
(In millions)	Taxable		Nontaxable		Total		Taxable		Nontaxable		Total
Investment securities:
Held-to-maturity	$	7	$	8	$	15	$	7	$	11	$	18
Available-for-sale	196		19		215		238		19		257
Trading	—		5		5		—		4		4
Total	$	203	$	32	$	235	$	245	$	34	$	279

Investment securities with a carrying value of $2.2 billion and $2.0 billion at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public and trust deposits, advances, and for other purposes as required by law. Securities are also pledged as collateral for security repurchase agreements.