Note 2—Securities

Securities Available for Sale

At September 30, 2012 and December 31, 2011, the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below.


	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in millions)	Cost		Gains		Losses		Value
U.S. government sponsored agencies	$	2,599	$	30	$	—	$	2,629
Residential mortgage-backed securities:
U.S. government and government sponsored agencies		11,687		285		2		11,970
Privately issued		505		10		17		498
Commercial mortgage-backed securities		2,251		110		—		2,361
Collateralized loan obligations (CLOs)		1,652		4		66		1,590
Other debt securities		1,804		35		84		1,755
Equity securities		104		—		—		104

Total securities available for sale	$	20,602	$	474	$	169	$	20,907

Other debt securities in the table above include approximately $0.9 billion of tax-exempt conduit debt bonds. These instruments were recorded as loans held for investment at December 31, 2011 and prior periods.


	December 31, 2011
(Dollars in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government sponsored agencies	$	6,943	$	54	$	—	$	6,997
Residential mortgage-backed securities:
U.S. government and government sponsored agencies		13,307		182		4		13,485
Privately issued		800		1		63		738
Commercial mortgage-backed securities		1,032		29		1		1,060
Other debt securities		463		11		2		472
Equity securities		81		—		—		81

Total securities available for sale	$	22,626	$	277	$	70	$	22,833

The Company’s securities available for sale with a continuous unrealized loss position at September 30, 2012 and December 31, 2011 are shown below, identified for periods less than 12 months and 12 months or more.


	September 30, 2012
	Less than 12 months				12 months or more				Total
(Dollars in millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Residential mortgage-backed securities:
U.S. government and government sponsored agencies	$	562	$	2	$	24	$	—	$	586	$	2
Privately issued		59		1		158		16		217		17
CLOs		—		—		1,106		66		1,106		66
Other debt securities		985		84		23		—		1,008		84

Total securities available for sale	$	1,606	$	87	$	1,311	$	82	$	2,917	$	169


	December 31, 2011
	Less than 12 months				12 months or more				Total
(Dollars in millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Residential mortgage-backed securities:
U.S. government and government sponsored agencies	$	1,106	$	4	$	59	$	—	$	1,165	$	4
Privately issued		551		23		99		40		650		63
Commercial mortgage-backed securities		95		1		—		—		95		1
Other debt securities		23		2		3		—		26		2

Total securities available for sale	$	1,775	$	30	$	161	$	40	$	1,936	$	70

At September 30, 2012, the Company did not have the intent to sell temporarily impaired securities before a recovery of the amortized cost, which may be at maturity. The Company also believes that it is more likely than not that it will not have to sell the securities prior to recovery of amortized cost.

Privately issued residential mortgage-backed securities are issued by financial institutions with no guarantee from government sponsored entities. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The securities are primarily rated investment grade. The unrealized losses on privately issued residential mortgage-backed securities resulted from declining credit quality of underlying collateral and additional credit spread widening since purchase. The Company estimated loss projections for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Based on this assessment of expected credit losses of each security, impairment recognized during the nine months ended September 30, 2012 was not significant. With respect to the remaining portfolio, at September 30, 2012, the Company expects to recover the entire amortized cost basis of these securities.

The Company’s CLOs consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. Unrealized losses typically arise from widening credit spreads and deteriorating credit quality of the underlying collateral. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of September 30, 2012, no other-than-temporary impairment was recorded.

Other debt securities primarily consist of private placement tax-exempt debt conduit bonds, which are largely not rated. The unrealized losses on these securities resulted from credit spreads widening since purchase. The Company estimated loss projections for each security by assessing the underlying collateral of each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using estimates of current key assumptions, such as probability of default and loss severity. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of September 30, 2012, no other-than-temporary impairment was recorded.

The amortized cost and fair value of debt securities available for sale by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.


	September 30, 2012
(Dollars in millions)	Amortized Cost		Fair Value
Due in one year or less	$	1,195	$	1,202
Due after one year through five years		2,557		2,578
Due after five years through ten years		2,295		2,231
Due after ten years		14,451		14,792

Total debt securities available for sale	$	20,498	$	20,803

The proceeds from sales of securities available for sale and gross realized gains and losses are shown below. The specific identification method is used to calculate realized gains and losses on sales.


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(Dollars in millions)	2012		2011		2012		2011
Proceeds from sales	$	1,985	$	632	$	6,109	$	4,463
Gross realized gains		43		1		92		59
Gross realized losses		1		—		2		—

Securities Held to Maturity

The securities held to maturity consist of CLOs and U.S. government and government sponsored agencies residential mortgage-backed securities. Management has asserted the positive intent and ability to hold these securities to maturity. At September 30, 2012 and December 31, 2011, the amortized cost, gross unrealized gains and losses recognized in other comprehensive income (OCI), carrying amount, gross unrealized gains and losses not recognized in OCI, and fair values of securities held to maturity are presented below.


	September 30, 2012
			Recognized in OCI						Not Recognized in OCI
(Dollars in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
CLOs	$	157	$	—	$	21	$	136	$	25	$	—	$	161
U.S. government and government sponsored agencies—residential mortgage backed securities		1,041		5		—		1,046		17		—		1,063

Total securities held to maturity	$	1,198	$	5	$	21	$	1,182	$	42	$	—	$	1,224


	December 31, 2011
			Recognized in OCI						Not Recognized in OCI
(Dollars in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
CLOs	$	1,653	$	—	$	380	$	1,273	$	159	$	3	$	1,429

For securities held to maturity, the amount recognized in OCI primarily reflects the unrealized gain or loss at date of transfer to the held to maturity classification, net of amortization. Amortized cost is defined as the original purchase cost, adjusted for any accretion or amortization of a purchase discount or premium, less principal payments and any impairment previously recognized in earnings.

On September 30, 2012, we transferred certain of our CLOs with a carrying amount of $1.1 billion from held to maturity to available for sale, due to a significant increase in the risk weights of debt securities used for regulatory capital purposes under rules proposed by the U.S. federal banking agencies in June 2012. The Notices of Proposed Rulemaking (NPRs) would revise regulatory capital rules for U.S. Banking organizations and align them with the Basel III capital framework issued by the Basel Committee on Banking Supervision. Although the NPRs have not yet been formally adopted, the Company is required to include in its annual capital plan certain components of the NPRs that adversely affect the risk weights of the transferred CLOs. The Company plans to file its capital plan with the Federal Reserve in 2013. These regulatory capital changes were not forseeable when the Company initially transferred the CLOs from available for sale to held to maturity during the first quarter of 2009. Accordingly, the Company no longer intends to hold these securities to maturity.

The carrying amount of the CLOs immediately prior to the transfer on September 30, 2012, totaled $1.1 billion, which included $301 million of unrealized losses in unamortized OCI. Following the transfer, the securities are recorded at fair value, with an unrealized loss of $62 million now recorded in OCI.

The Company’s securities held to maturity with a continuous unrealized loss position at September 30, 2012 and December 31, 2011 are shown below, separately for periods less than 12 months and 12 months or more.


	September 30, 2012
	Less than 12 months						12 months or more						Total
			Unrealized Losses						Unrealized Losses						Unrealized Losses
(Dollars in millions)	Fair Value		Recognized in OCI		Not Recognized in OCI		Fair Value		Recognized in OCI		Not Recognized in OCI		Fair Value		Recognized in OCI		Not Recognized in OCI
CLOs	$	6	$	—	$	—	$	155	$	21	$	—	$	161	$	21	$	—


	December 31, 2011
	Less than 12 months						12 months or more						Total
			Unrealized Losses						Unrealized Losses						Unrealized Losses
(Dollars in millions)	Fair Value		Recognized in OCI		Not Recognized in OCI		Fair Value		Recognized in OCI		Not Recognized in OCI		Fair Value		Recognized in OCI		Not Recognized in OCI
CLOs	$	—	$	—	$	—	$	1,420	$	380	$	3	$	1,420	$	380	$	3

The amortized cost, carrying amount and fair value of securities held to maturity by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.


	September 30, 2012
(Dollars in millions)	Amortized Cost		Carrying Amount		Fair Value
Due after one year through five years	$	157	$	136	$	161
Due after ten years		1,041		1,046		1,063

Total securities held to maturity	$	1,198	$	1,182	$	1,224

Securities Pledged as Collateral

Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the same or substantially the same securities before maturity at a fixed or determinable price. The Company’s policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

The Company separately identifies in the consolidated balance sheets, securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At September 30, 2012, the Company had $4.4 billion of securities available for sale pledged as collateral where the secured party cannot resell or repledge such securities. These available for sale securities have been pledged to secure borrowings ($1.0 billion), to support unrealized losses on derivative transactions reported in trading liabilities ($0.6 billion) and to secure public and trust deposits ($2.8 billion).

At September 30, 2012 and December 31, 2011, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $7 million (none of which has been repledged) and $12 million (all of which has been repledged to secure public agency or bankruptcy deposits and to cover short sales), respectively. These securities were received as collateral for secured lending.