
Note 2		Investment Securities

The amortized cost, other-than-temporary impairment recorded in other comprehensive income (loss), gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale investment securities were as follows:


	September 30, 2013												December 31, 2012
					Unrealized Losses												Unrealized Losses
(Dollars in Millions)	Amortized Cost		Unrealized Gains		Other-than- Temporary (e)			Other (f)			Fair Value		Amortized Cost		Unrealized Gains		Other-than- Temporary (e)			Other (f)			Fair Value
Held-to-maturity (a)
U.S. Treasury and agencies	$	3,368	$	9	$	–		$	(60	)	$	3,317	$	3,154	$	27	$	–		$	–		$	3,181
Mortgage-backed securities
Residential
Agency		33,378		234		–			(454	)		33,158		31,064		545		–			(6	)		31,603
Non-agency non-prime (d)		1		–		–			–			1		1		–		–			–			1
Commercial non-agency		1		–		–			–			1		2		–		–			–			2
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		2		9		–			–			11		7		15		–			–			22
Other		16		4		(1	)		(1	)		18		19		2		(3	)		(1	)		17
Obligations of state and political subdivisions		17		–		–			–			17		20		1		–			–			21
Obligations of foreign governments		7		–		–			–			7		7		–		–			–			7
Other debt securities		114		–		–			(12	)		102		115		–		–			(17	)		98
Total held-to-maturity	$	36,904	$	256	$	(1	)	$	(527	)	$	36,632	$	34,389	$	590	$	(3	)	$	(24	)	$	34,952
Available-for-sale (b)
U.S. Treasury and agencies	$	1,567	$	5	$	–		$	(51	)	$	1,521	$	1,211	$	16	$	–		$	(1	)	$	1,226
Mortgage-backed securities
Residential
Agency		29,136		476		–			(392	)		29,220		28,754		746		–			(5	)		29,495
Non-agency
Prime (c)		513		2		(10	)		(5	)		500		641		3		(16	)		(4	)		624
Non-prime (d)		307		3		(6	)		(1	)		303		372		4		(20	)		(1	)		355
Commercial agency		165		4		–			–			169		185		8		–			–			193
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		20		5		–			–			25		32		10		–			–			42
Other		598		13		–			(1	)		610		579		14		–			(1	)		592
Obligations of state and political subdivisions		5,732		134		–			(46	)		5,820		6,059		396		–			–			6,455
Obligations of foreign governments		6		–		–			–			6		6		–		–			–			6
Corporate debt securities		734		–		–			(92	)		642		814		2		–			(85	)		731
Perpetual preferred securities		205		24		–			(20	)		209		205		27		–			(14	)		218
Other investments		257		25		–			–			282		182		20		–			–			202
Total available-for-sale	$	39,240	$	691	$	(16	)	$	(608	)	$	39,307	$	39,040	$	1,246	$	(36	)	$	(111	)	$	40,139

(a)

Held-to-maturity investment securities are carried at historical cost or at fair value at the time of transfer from the available-for-sale to held-to-maturity category, adjusted for amortization of premiums and accretion of discounts and credit-related other-than-temporary impairment.

(b)

Available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity.

(c)

Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads). When the Company determines the designation, prime securities typically have a weighted average credit score of 725 or higher and a loan-to-value of 80 percent or lower; however, other pool characteristics may result in designations that deviate from these credit score and loan-to-value thresholds.

(d)

Includes all securities not meeting the conditions to be designated as prime.

(e)

Represents impairment not related to credit for those investment securities that have been determined to be other-than-temporarily impaired.

(f)

Represents unrealized losses on investment securities that have not been determined to be other-than-temporarily impaired.

The weighted-average maturity of the available-for-sale investment securities was 5.5 years at September 30, 2013, compared with 4.1 years at December 31, 2012. The corresponding weighted-average yields were 2.70 percent and 2.93 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 4.2 years at September 30, 2013, and 3.3 years at December 31, 2012. The corresponding weighted-average yields were 1.97 percent and 1.94 percent, respectively.

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale investment securities outstanding at September 30, 2013, refer to Table 4 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

Investment securities with a fair value of $15.5 billion at September 30, 2013, and $20.1 billion at December 31, 2012, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities delivered under these types of arrangements had a fair value of $2.0 billion at September 30, 2013, and $3.5 billion at December 31, 2012.

The following table provides information about the amount of interest income from taxable and non-taxable investment securities:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Millions)	2013		2012		2013		2012
Taxable	$	357	$	369	$	1,029	$	1,166
Non-taxable		63		69		193		210
Total interest income from investment securities	$	420	$	438	$	1,222	$	1,376

The following table provides information about the amount of gross gains and losses realized through the sales of available-for-sale investment securities:


	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in Millions)	2013		2012			2013		2012
Realized gains	$	–	$	115		$	21	$	145
Realized losses		–		(99	)		–		(99	)
Net realized gains (losses)	$	–	$	16		$	21	$	46
Income tax (benefit) on net realized gains (losses)	$	–	$	7		$	8	$	18

The Company conducts a regular assessment of its investment securities with unrealized losses to determine whether investment securities are other-than-temporarily impaired considering, among other factors, the nature of the investment securities, credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the investment securities.

The following tables summarize other-than-temporary impairment by investment category:


	2013									2012
Three Months Ended September 30 (Dollars in Millions)		Losses Recorded in Earnings			Other Gains (Losses) (c)		Total			Losses Recorded in Earnings			Other Gains (Losses) (c)			Total
Available-for-sale
Mortgage-backed securities
Non-agency residential
Prime (a)		$	(1	)	$	–	$	(1	)	$	(5	)	$	(3	)	$	(8	)
Non-prime (b)			(2	)		1		(1	)		(10	)		5			(5	)
Total available-for-sale		$	(3	)	$	1	$	(2	)	$	(15	)	$	2		$	(13	)

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

(c)

Losses represent the non-credit portion of other-than-temporary impairment recorded in other comprehensive income (loss) for investment securities determined to be other-than-temporarily impaired during the period. Gains represent recoveries in the fair value of securities that had non-credit other-than-temporary impairment during the period.


	2013									2012
Nine Months Ended September 30 (Dollars in Millions)		Losses Recorded in Earnings			Other Gains (Losses) (c)		Total			Losses Recorded in Earnings			Other Gains (Losses) (c)			Total
Available-for-sale
Mortgage-backed securities
Non-agency residential
Prime (a)		$	(5	)	$	2	$	(3	)	$	(8	)	$	(12	)	$	(20	)
Non-prime (b)			(8	)		6		(2	)		(27	)		15			(12	)
Commercial non-agency			–			–		–			(1	)		(1	)		(2	)
Other asset-backed securities			–			–		–			(1	)		1			–
Perpetual preferred securities			–			–		–			(27	)		–			(27	)
Total available-for-sale		$	(13	)	$	8	$	(5	)	$	(64	)	$	3		$	(61	)

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

(c)

The Company determined the other-than-temporary impairment recorded in earnings for debt securities not intended to be sold by estimating the future cash flows of each individual investment security, using market information where available, and discounting the cash flows at the original effective rate of the investment security. Other-than-temporary impairment recorded in other comprehensive income (loss) was measured as the difference between that discounted amount and the fair value of each investment security. For perpetual preferred securities determined to be other-than-temporarily impaired, the Company recorded a loss in earnings for the entire difference between the securities’ fair value and their amortized cost.

The following table includes the ranges for principal assumptions used for those available-for-sale non-agency mortgage-backed securities determined to be other-than-temporarily impaired:


	Prime (a)									Non-Prime (b)
	Minimum			Maximum			Average			Minimum			Maximum			Average
September 30, 2013
Estimated lifetime prepayment rates		12	%		18	%		13	%		4	%		10	%		6	%
Lifetime probability of default rates		3			5			4			5			10			7
Lifetime loss severity rates		25			50			48			15			60			51
December 31, 2012
Estimated lifetime prepayment rates		6	%		22	%		14	%		3	%		10	%		6	%
Lifetime probability of default rates		3			6			4			3			10			7
Lifetime loss severity rates		40			50			47			45			65			56

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

Changes in the credit losses on debt securities (excluding perpetual preferred securities) are summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2013			2012			2013			2012
Balance at beginning of period	$	124		$	277		$	134		$	298
Additions to Credit Losses Due to Other-than-temporary Impairments
Credit losses on securities not previously considered other-than-temporarily impaired		–			2			–			5
Decreases in expected cash flows on securities for which other-than-temporary impairment was previously recognized		3			13			13			32
Total other-than-temporary impairment on debt securities		3			15			13			37
Other Changes in Credit Losses
Increases in expected cash flows		(1	)		–			(2	)		(14	)
Realized losses (a)		(4	)		(4	)		(18	)		(33	)
Credit losses on security sales and securities expected to be sold		–			(142	)		(5	)		(142	)
Balance at end of period	$	122		$	146		$	122		$	146

(a)

Primarily represents principal losses allocated to mortgage and asset-backed securities in the Company’s portfolio under the terms of the securitization transaction documents.

At September 30, 2013, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at September 30, 2013:


	Less Than 12 Months					12 Months or Greater					Total
(Dollars in Millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Held-to-maturity
U.S. Treasury and agencies	$	1,056	$	(60	)	$	–	$	–		$	1,056	$	(60	)
Mortgage-backed securities
Residential agency		20,034		(452	)		85		(2	)		20,119		(454	)
Commercial non-agency		1		–			–		–			1		–
Other asset-backed securities		–		–			10		(2	)		10		(2	)
Obligations of state and political subdivisions		8		–			–		–			8		–
Other debt securities		–		–			13		(12	)		13		(12	)

Total held-to-maturity	$	21,099	$	(512	)	$	108	$	(16	)	$	21,207	$	(528	)

Available-for-sale
U.S. Treasury and agencies	$	853	$	(51	)	$	–	$	–		$	853	$	(51	)
Mortgage-backed securities
Residential
Agency		13,540		(389	)		343		(3	)		13,883		(392	)
Non-agency (a)
Prime (b)		137		(2	)		206		(13	)		343		(15	)
Non-prime (c)		128		(2	)		81		(5	)		209		(7	)
Commercial agency		61		–			–		–			61		–
Other asset-backed securities		25		(1	)		3		–			28		(1	)
Obligations of state and political subdivisions		1,382		(46	)		10		–			1,392		(46	)
Corporate debt securities		214		(5	)		420		(87	)		634		(92	)
Perpetual preferred securities		–		–			112		(20	)		112		(20	)

Total available-for-sale	$	16,340	$	(496	)	$	1,175	$	(128	)	$	17,515	$	(624	)

(a)

The Company has $22 million of unrealized losses on residential non-agency mortgage-backed securities. Credit-related other-than-temporary impairment on these securities may occur if there is further deterioration in the underlying collateral pool performance. Borrower defaults may increase if economic conditions worsen. Additionally, deterioration in home prices may increase the severity of projected losses.

(b)

(c)

Includes all securities not meeting the conditions to be designated as prime.

The Company does not consider these unrealized losses to be credit-related. These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of investment securities that have unrealized losses are either corporate debt issued with high investment grade credit ratings or agency mortgage-backed securities. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay significant purchase premiums for these investment securities. At September 30, 2013, the Company had no plans to sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.