Note 4

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, 2014												December 31, 2013
					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	$	2,679	$	8	$	–		$	(40	)	$	2,647	$	3,114	$	5	$	–		$	(79	)	$	3,040
Mortgage-backed securities
Residential
Agency		41,419		244		–			(358	)		41,305		35,671		187		–			(665	)		35,193
Non-agency non-prime (d)		1		–		–			–			1		1		–		–			–			1
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		8		–			–			8		–		9		–			–			9
Other		14		4		(1	)		–			17		16		4		(1	)		(1	)		18
Obligations of state and political subdivisions		10		–		–			–			10		12		–		–			–			12
Obligations of foreign governments		9		–		–			–			9		7		–		–			–			7
Other debt securities		99		–		–			(2	)		97		99		–		–			(11	)		88
Total held-to-maturity	$	44,231	$	264	$	(1	)	$	(400	)	$	44,094	$	38,920	$	205	$	(1	)	$	(756	)	$	38,368
Available-for-sale (b)
U.S. Treasury and agencies	$	2,692	$	7	$	–		$	(21	)	$	2,678	$	1,108	$	4	$	–		$	(67	)	$	1,045
Mortgage-backed securities
Residential
Agency		41,734		524		–			(421	)		41,837		31,633		449		–			(529	)		31,553
Non-agency
Prime (c)		420		11		(4	)		(1	)		426		486		4		(8	)		(4	)		478
Non-prime (d)		270		15		(1	)		–			284		297		5		(5	)		–			297
Commercial agency		119		3		–			–			122		148		4		–			–			152
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		19		4		–			–			23		20		4		–			–			24
Other		609		13		–			–			622		616		13		–			–			629
Obligations of state and political subdivisions		5,327		239		–			(3	)		5,563		5,673		116		–			(51	)		5,738
Obligations of foreign governments		6		–		–			–			6		6		–		–			–			6
Corporate debt securities		690		3		–			(54	)		639		734		–		–			(94	)		640
Perpetual preferred securities		201		27		–			(8	)		220		205		24		–			(17	)		212
Other investments		227		27		–			–			254		133		28		–			–			161
Total available-for-sale	$	52,314	$	873	$	(5	)	$	(508	)	$	52,674	$	41,059	$	651	$	(13	)	$	(762	)	$	40,935

(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 4.9 years at September 30, 2014, compared with 6.0 years at December 31, 2013. The corresponding weighted-average yields were 2.35 percent and 2.64 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 4.4 years at September 30, 2014, compared with 4.5 years at December 31, 2013. The corresponding weighted-average yields were 1.93 percent and 2.00 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, 2014, 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 $12.9 billion at September 30, 2014, and $17.3 billion at December 31, 2013, 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 $640 million at September 30, 2014, and $2.1 billion at December 31, 2013.

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)	2014		2013		2014		2013
Taxable	$	419	$	357	$	1,203	$	1,029
Non-taxable		57		63		175		193
Total interest income from investment securities	$	476	$	420	$	1,378	$	1,222

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)	2014		2013		2014		2013
Realized gains	$	–	$	–	$	8	$	21
Realized losses		–		–		–		–
Net realized gains (losses)	$	–	$	–	$	8	$	21
Income tax (benefit) on net realized gains (losses)	$	–	$	–	$	3	$	8

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:


	2014								2013
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	)
Non-prime (b)		–			–		–			(2	)		1		(1	)
Perpetual preferred securities		(3	)		–		(3	)		–			–		–
Total available-for-sale	$	(3	)	$	–	$	(3	)	$	(3	)	$	1	$	(2	)

(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.


	2014								2013
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
Prime (a)	$	(1	)	$	1	$	–		$	(5	)	$	2	$	(3	)
Non-prime (b)		(2	)		–		(2	)		(8	)		6		(2	)
Perpetual preferred securities		(3	)		–		(3	)		–			–		–
Total available-for-sale	$	(6	)	$	1	$	(5	)	$	(13	)	$	8	$	(5	)

(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 significant assumptions used for those available-for-sale non-agency mortgage-backed securities determined to be other-than-temporarily impaired during the three months ended September 30, 2014:


	Non-Prime (a)
	Minimum			Maximum			Average
Estimated lifetime prepayment rates		8	%		10	%		8	%
Lifetime probability of default rates		6			8			8
Lifetime loss severity rates		40			55			42

(a)

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						Nine Months Ended
	September 30,						September 30,
(Dollars in Millions)	2014			2013			2014			2013
Balance at beginning of period	$	111		$	124		$	116		$	134
Additions to Credit Losses Due to Other-than-temporary Impairments
Decreases in expected cash flows on securities for which other-than-temporary impairment was previously recognized		–			3			3			13
Total other-than-temporary impairment on debt securities		–			3			3			13
Other Changes in Credit Losses
Increases in expected cash flows		(2	)		(1	)		(4	)		(2	)
Realized losses (a)		(4	)		(4	)		(10	)		(18	)
Credit losses on security sales and securities expected to be sold		–			–			–			(5	)
Balance at end of period	$	105		$	122		$	105		$	122

(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, 2014, 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, 2014:


	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	$	577	$	(2	)	$	968	$	(38	)	$	1,545	$	(40	)
Residential agency mortgage-backed securities		11,469		(76	)		9,607		(282	)		21,076		(358	)
Other asset-backed securities		–		–			6		(1	)		6		(1	)
Other debt securities		–		–			22		(2	)		22		(2	)
Total held-to-maturity	$	12,046	$	(78	)	$	10,603	$	(323	)	$	22,649	$	(401	)
Available-for-sale
U.S. Treasury and agencies	$	1,173	$	(1	)	$	825	$	(20	)	$	1,998	$	(21	)
Mortgage-backed securities
Residential
Agency		9,519		(91	)		8,317		(330	)		17,836		(421	)
Non-agency (a)
Prime (b)		40		(1	)		114		(4	)		154		(5	)
Non-prime (c)		12		–			22		(1	)		34		(1	)
Other asset-backed securities		2		–			24		–			26		–
Obligations of state and political subdivisions		15		–			217		(3	)		232		(3	)
Obligations of foreign governments		6		–			–		–			6		–
Corporate debt securities		–		–			453		(54	)		453		(54	)
Perpetual preferred securities		45		–			76		(8	)		121		(8	)
Total available-for-sale	$	10,812	$	(93	)	$	10,048	$	(420	)	$	20,860	$	(513	)

(a)

The Company has $6 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, 2014, 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.