INVESTMENT SECURITIES

Available-for-sale

Investment Securities Summary - Available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of securities available-for-sale at the dates indicated:



	September 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury and government agency securities	$	1,503,237	$	902	$	(850	)	$	1,503,289
Corporate debt securities	2,161,981		32,947		(6,339		)	2,188,589
Asset-backed securities	2,585,766		22,857		(2,242		)	2,606,381
Equity securities	10,544		1		(352		)	10,193
State and municipal securities	1,793,723		35,769		(6,378		)	1,823,114
Mortgage-backed securities:
U.S. government agencies	2,415,819		522		(56,353		)	2,359,988
FHLMC and FNMA debt securities	4,721,458		1,624		(165,707		)	4,557,375
Non-agency securities	13,170		370		—			13,540
Total investment securities available-for-sale	$	15,205,698	$	94,992	$	(238,221	)	$	15,062,469



	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury and government agency securities	$	24,993	$	4	$	—		$	24,997
Corporate debt securities	2,195,004		35,611		(12,435		)	2,218,180
Asset-backed securities	2,727,235		9,345		(4,350		)	2,732,230
Equity securities	10,331		—		(490		)	9,841
State and municipal securities	1,891,996		20,515		(62,362		)	1,850,149
Mortgage-backed securities:
U.S. government agencies	1,904,178		134		(103,889		)	1,800,423
FHLMC and FNMA debt securities	3,202,428		1,486		(207,392		)	2,996,522
Non-agency securities	13,898		—		—			13,898
Total investment securities available-for-sale	$	11,970,063	$	67,095	$	(390,918	)	$	11,646,240

The Company continuously evaluates its investment strategies in light of changes in the regulatory and market environments that could have an impact on capital and liquidity. Based on this evaluation, it is reasonably possible that the Company may elect to pursue other strategies relative to its investment securities portfolio.

During the third quarter of 2014, SHUSA sold $1.53 billion of qualifying residential loans to FHLMC in return for $1.57 billion of mortgage-backed securities issued by FHLMC resulting in a net realized gain on sale of $38.4 million which is included in Mortgage banking revenue/(expense), net line of the Company's Condensed Consolidated Statement of Operations.

As of September 30, 2014 and December 31, 2013, the Company had investment securities available-for-sale with an estimated fair value of $4.4 billion and $3.6 billion, respectively, pledged as collateral, which was made up of the following: $3.6 billion and $2.6 billion were pledged to secure public fund deposits; $313.0 million and $445.9 million, respectively, were pledged at various brokers to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; and $465.0 million and $562.3 million, respectively, were pledged to secure the Bank's customer overnight sweep product.

NOTE 4. INVESTMENT SECURITIES (continued)

At September 30, 2014 and December 31, 2013, the Company had $64.0 million and $60.5 million, respectively, of accrued interest related to investment securities.

The Company's state and municipal bond portfolio primarily consists of general obligation bonds of states, cities, counties and school districts. The portfolio had a weighted average underlying credit risk rating of AA as of September 30, 2014. The largest geographic concentrations of state and local municipal bonds are in Texas, Florida and California, which represented 15.3%, 12.0%, and 11.1%, respectively, of the total portfolio. No other state comprised more than 10% of the total portfolio.

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s debt securities available-for-sale at September 30, 2014 are as follows:



	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	558,337	$	560,391
Due after 1 year but within 5 years	4,403,855		4,447,163
Due after 5 years but within 10 years	1,257,252		1,259,703
Due after 10 years	8,975,710		8,785,019
Total	$	15,195,154	$	15,052,276

Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.

Gross Unrealized Loss and Fair Value of Securities Available-for-Sale

The following tables present the aggregate amount of unrealized losses as of September 30, 2014 and December 31, 2013 on securities in the Company’s investment portfolio classified according to the amount of time that those securities have been in a continuous loss position:



	September 30, 2014
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
U.S. Treasury and government agency securities	$	650,419	$	(850	)	$	—	$	—		$	650,419	$	(850	)
Corporate debt securities	509,236		(2,380		)	214,934		(3,959		)	724,170		(6,339		)
Asset-backed securities	146,977		(857		)	357,102		(1,385		)	504,079		(2,242		)
Equity securities	149		—			9,806		(352		)	9,955		(352		)
State and municipal securities	40,345		(102		)	410,018		(6,276		)	450,363		(6,378		)
Mortgage-backed securities:
U.S. government agencies	480,485		(3,859		)	1,604,394		(52,494		)	2,084,879		(56,353		)
FHLMC and FNMA debt securities	913,595		(5,029		)	2,636,386		(160,678		)	3,549,981		(165,707		)
Total	$	2,741,206	$	(13,077	)	$	5,232,640	$	(225,144	)	$	7,973,846	$	(238,221	)

NOTE 4. INVESTMENT SECURITIES (continued)



	December 31, 2013
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Corporate debt securities	$	743,041	$	(10,868	)	$	32,020	$	(1,567	)	$	775,061	$	(12,435	)
Asset-backed securities	803,685		(4,111		)	24,316		(239		)	828,001		(4,350		)
Equity securities	5,020		(188		)	4,797		(302		)	9,817		(490		)
State and municipal securities	710,456		(45,972		)	126,345		(16,390		)	836,801		(62,362		)
Mortgage-backed securities:
U.S. government agencies	1,648,691		(94,937		)	139,791		(8,952		)	1,788,482		(103,889		)
FHLMC and FNMA debt securities	2,271,301		(150,996		)	695,830		(56,396		)	2,967,131		(207,392		)
Total	$	6,182,194	$	(307,072	)	$	1,023,099	$	(83,846	)	$	7,205,293	$	(390,918	)

Other-Than-Temporary Impairment

Management evaluates all investment products in an unrealized loss position for OTTI on at least a quarterly basis. Individual securities are further assessed for OTTI as deemed necessary. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average FICO and weighted average LTV ratio, rating or scoring, credit ratings and market spreads, as applicable.

The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.

As a result of rising market interest rates, management made the decision during the second quarter of 2013 to reposition its balance sheet. Consistent with this strategy, the Company designated certain available-for-sale securities with a book value of $2.5 billion to be sold, which were in an unrealized loss position due to changes in market rates and asset spreads. The intent to sell these securities resulted in the Company recording $63.6 million of OTTI in the Condensed Consolidated Statement of Operations during the second quarter of 2013. All of the securities designated for sale were sold in the third quarter of 2013, which at the time of sale had a book value of $2.3 billion. The Company incurred an additional loss on the sale of these securities during the third quarter of 2013 of $23.5 million. The Company did not record any OTTI in earnings related to its investment securities in the first quarter of 2013 or in the three-month and nine-month periods ended September 30, 2014.

Management has concluded that the remaining unrealized losses on its debt and equity securities for which it has not recognized OTTI (which was comprised of 292 individual securities at September 30, 2014) are temporary in nature since (1) they are not related to the underlying credit quality of the issuers, (2) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (3) the Company does not intend to sell these investments at a loss and (4) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which may be at maturity. Accordingly, the Company has concluded that the impairment on these securities is not other-than-temporary.

NOTE 4. INVESTMENT SECURITIES (continued)

Gains (Losses) and Proceeds on Sales of Securities

Proceeds from sales of investment securities and the realized gross gains and losses from those sales are as follows:



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,
	2014		2013			2014			2013
	(in thousands)
Proceeds from the sales of available-for-sale securities	$	21,138	$	2,349,525		$	311,019		$	8,044,695

Gross realized gains	131		48			11,547			115,229
Gross realized losses	—		(23,470		)	(67		)	(42,456		)
OTTI	—		—			—			(63,630		)
Net realized gains/(losses)	$	131	$	(23,422	)	$	11,480		$	9,143

The Company uses the specific identification method to determine the cost of the securities sold and the gain or loss recognized.

The net gain realized for the three-month period ended September 30, 2014 was due to the sale of corporate debt securities with a book value of $88.4 million for a gain of $0.1 million. The net gain realized for the nine-month period ended September 30, 2014 was primarily comprised of the sale of state and municipal securities with a book value of $89.0 million for a gain of $5.2 million, the sale of corporate debt securities with a book value of $434.8 million for a gain of $4.7 million, and the sale of MBS with a book value of $21.6 million for a gain of $1.3 million. The net loss realized for the three-month period ended September 30, 2013 was primarily due to the sale of MBS, including collateralized mortgage obligations, with a book value of $2.3 billion for a loss of $24.2 million. The net gain realized for the nine-month period ended September 30, 2013 also included the sale of collateralized mortgage obligations with a book value of $4.1 billion for a gain of $69.0 million and the sale of corporate debt securities with a book value of $905.7 million for a gain of $34.7 million, offset by the OTTI charge of $63.6 million and fair market value changes on derivative positions related to investment sales.

Trading Securities

The Company held $122.9 million of trading securities as of September 30, 2014. There were no trading securities at December 31, 2013. Gains and losses on trading securities are recorded within Mortgage banking income, net, in the Company's Condensed Consolidated Statement of Operations as the Company utilizes trading securities portfolio to economically hedge the MSR portfolio. The portion of trading gains and losses related to trading securities still held at the reporting date are as follows:



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,
	2014			2013		2014			2013
	(in thousands)
Net gains recognized during the period on trading securities	$	1,899		$	—	$	3,386		$	—
Less: Net gains recognized during the period on trading securities sold during the period	2,047			—		3,782			—
Unrealized losses during the reporting period on trading securities still held at the reporting date	$	(148	)	$	—	$	(396	)	$	—

As of September 30, 2014, the Company had trading securities with an estimated fair value of $33.0 million pledged as collateral to secure the Bank's customer overnight sweep product.

NOTE 4. INVESTMENT SECURITIES (continued)

Other Investments

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB with aggregate carrying amounts of $802.9 million and $800.5 million as of September 30, 2014 and December 31, 2013, respectively. The stocks do not have readily determinable fair values because their ownership is restricted and they lack a market. The stocks can be sold back only at their par value of $100 per share and only to FHLBs or to another member institution. Accordingly, these stocks are carried at cost. During the three-month and nine-month periods ended September 30, 2014, the Company sold $97.0 million and $263.1 million, respectively, of FHLB stock at par. There was no gain or loss associated with these sales.

The Company evaluates these investments for impairment based on the ultimate recoverability of the par value, rather than by recognizing temporary declines in value.