NOTE 3—INVESTMENT SECURITIES

Our investment portfolio consisted primarily of the following: U.S. Treasury debt, U.S. agency debt and corporate debt securities guaranteed by U.S. government agencies; agency and non-agency mortgage-backed securities (“MBS”); other asset-backed securities and other investments. The carrying value of our investments in U.S. Treasury, agency securities and other securities guaranteed by the U.S. government or agencies of the U.S. government represented 76% and 77% of our total investment securities as of September 30, 2013, and December 31, 2012, respectively.

Our investment security portfolio includes securities available for sale as well as securities held to maturity. We reported securities available for sale in our condensed consolidated balance sheets at fair value with unrealized gains and losses recorded, net of tax, as a component of accumulated other comprehensive income (“AOCI”). We report securities held to maturity on our consolidated balance sheets at carrying value. Carrying value is amortized cost, includes any unamortized unrealized gains and losses recognized in AOCI prior to reclassifying the securities from securities available for sale to securities held to maturity. Investment securities transferred into the held to maturity category from the available for sale category are recorded at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in AOCI and in the carrying value of the securities held to maturity. Such unrealized gains/(losses) are accreted over the remaining life of the security with no impact on future net income.

In the third quarter of 2013, we transferred securities with a fair value of $18.3 billion on the date of transfer, from securities available for sale to securities held to maturity. We transferred these securities to held to maturity to reduce the impact of price volatility on accumulated other comprehensive income and in consideration of potential changes to regulatory capital requirements under the final Basel III capital standards. The securities included net pre-tax unrealized losses of $1.5 billion at the date of transfer.

Table 3.1 Overview of Investment Portfolio


(Dollars in millions)	September 30, 2013		December 31, 2012
Securities available for sale, at fair value	$	43,132	$	63,979
Securities held to maturity, at carrying value		18,276		9

Total investments	$	61,408	$	63,988

Table 3.2 Investment Securities Available for Sale

September 30, 2013

(Dollars in millions)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses⁽¹⁾

Fair
Value

Investment securities available for sale:

U.S. Treasury debt obligations

834

837

U.S. agency debt obligations⁽²⁾

Corporate debt securities guaranteed by U.S. government
agencies⁽³⁾

1,311

(40

)

1,272

Residential mortgage-backed securities (“RMBS”):

Agency⁽⁴⁾

22,009

282

(230

)

22,061

Non-agency

3,277

373

(27

)

3,623

Total RMBS

25,286

655

(257

)

25,684

Commercial mortgage-backed securities (“CMBS”):

Agency⁽⁴⁾

4,130

(60

)

4,097

Non-agency

1,697

(55

)

1,661

Total CMBS

5,827

(115

)

5,758

Other asset-backed securities (“ABS”)⁽⁵⁾

7,642

(34

)

7,656

Other securities⁽⁶⁾

1,951

(48

)

1,924

Total investment securities available for sale

42,852

774

(494

)

43,132


	December 31, 2012
(Dollars in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses⁽¹⁾			Fair Value
Investment securities available for sale:
U.S. Treasury debt obligations	$	1,548	$	4	$	0		$	1,552
U.S. agency debt obligations⁽²⁾		301		2		(1	)		302
Corporate debt securities guaranteed by U.S. government agencies⁽³⁾		1,003		10		(1	)		1,012
Residential mortgage-backed securities (“RMBS”):
Agency⁽⁴⁾		39,408		652		(58	)		40,002
Non-agency		3,607		312		(48	)		3,871

Total RMBS		43,015		964		(106	)		43,873

Commercial mortgage-backed securities (“CMBS”):
Agency⁽⁴⁾		6,045		103		(4	)		6,144
Non-agency		1,425		62		(2	)		1,485

Total CMBS		7,470		165		(6	)		7,629

Other asset-backed securities (“ABS”)⁽⁵⁾		8,393		70		(5	)		8,458
Other securities⁽⁶⁾		1,120		34		(1	)		1,153

Total investment securities available for sale	$	62,850	$	1,249	$	(120	)	$	63,979

⁽¹⁾	Includes cumulative non-credit other-than-temporary (“OTTI”) losses recorded in AOCI. We have $20 million and $38 million of non-credit OTTI losses related to non-agency RMBS as of September 30, 2013 and December 31, 2012, respectively.

⁽²⁾	Includes debt securities issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development.

⁽³⁾	Consists of corporate debt securities guaranteed by other U.S. government agencies, such as the Export-Import Bank of the United States.

⁽⁴⁾	Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

⁽⁵⁾

The other asset-backed securities portfolio was collateralized by approximately 66% credit card loans, 15% auto dealer floor plan inventory loans and leases, 6% auto loans, 4% equipment loans, 1% student loans and 8% of other assets as of September 30, 2013. In comparison, the distribution was approximately 64% credit card loans, 18% auto dealer floor plan inventory loans and leases, 6% auto loans, 5% equipment loans, 1% student loans, 2% commercial paper and 4% of other assets as of December 31, 2012. Approximately 87% of the securities in our other asset-backed security portfolio were rated AAA or its equivalent as of September 30, 2013, compared with 82% as of December 31, 2012.

⁽⁶⁾	Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the Community Reinvestment Act (“CRA”).

Table 3.3 Investment Securities Held to Maturity


	September 30, 2013
(Dollars in millions)	Amortized Cost		Unrealized Losses Recorded in AOCI⁽¹⁾			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Investment securities held to maturity:
Residential mortgage-backed securities (“RMBS”):
Agency⁽²⁾	$	18,053	$	(1,331	)	$	16,722	$	355	$	(2	)	$	17,075
Commercial mortgage-backed securities (“CMBS”):
Agency⁽²⁾		1,688		(134	)		1,554		33		0			1,587

Total investment securities held to maturity	$	19,741	$	(1,465	)	$	18,276	$	388	$	(2	)	$	18,662


	December 31, 2012
(Dollars in millions)	Amortized Cost		Unrealized Losses Recorded in AOCI⁽¹⁾		Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities held to maturity:
Other asset-backed securities (“ABS”)	$	9	$	0	$	9	$	0	$	0	$	9

Total investment securities held to maturity	$	9	$	0	$	9	$	0	$	0	$	9

⁽¹⁾	Represents the unrealized holding gain or loss at the date of transfer from available for sale to held to maturity, net of any accretion.

⁽²⁾	Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

Investment Securities in a Gross Unrealized Loss Position

The table below provides, by major security type, information about our securities available for sale in a gross unrealized loss position and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2013 and December 31, 2012.

Table 3.4: Securities in Unrealized Loss Position


	September 30, 2013
	Less than 12 Months					12 Months or Longer					Total
(Dollars in millions)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Investment securities available for sale:
U.S. agency debt obligations⁽¹⁾	$	0	$	0		$	0	$	0		$	0	$	0
Corporate debt securities guaranteed by U.S. government agencies⁽²⁾		1,151		(40	)		0		0			1,151		(40	)
RMBS:
Agency⁽³⁾		9,461		(225	)		499		(5	)		9,960		(230	)
Non-agency		244		(15	)		343		(12	)		587		(27	)

Total RMBS		9,705		(240	)		842		(17	)		10,547		(257	)

CMBS:
Agency⁽³⁾		2,745		(59	)		35		(1	)		2,780		(60	)
Non-agency		1,119		(55	)		0		0			1,119		(55	)

Total CMBS		3,864		(114	)		35		(1	)		3,899		(115	)

Other ABS		3,155		(31	)		251		(3	)		3,406		(34	)
Other securities		1,134		(47	)		26		(1	)		1,160		(48	)

Total investment securities available for sale in a gross unrealized loss position	$	19,009	$	(472	)	$	1,154	$	(22	)	$	20,163	$	(494	)


	December 31, 2012
	Less than 12 Months					12 Months or Longer					Total
(Dollars in millions)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Investment securities available for sale:
U.S. agency debt obligations⁽¹⁾	$	199	$	(1	)	$	0	$	0		$	199	$	(1	)
Corporate debt securities guaranteed by U.S. government agencies⁽²⁾		172		(1	)		0		0			172		(1	)
RMBS:
Agency⁽³⁾		8,720		(46	)		884		(12	)		9,604		(58	)
Non-agency		196		(19	)		471		(29	)		667		(48	)

Total RMBS		8,916		(65	)		1,355		(41	)		10,271		(106	)

CMBS:
Agency⁽³⁾		1,009		(4	)		0		0			1,009		(4	)
Non-agency		201		(2	)		0		0			201		(2	)

Total CMBS		1,210		(6	)		0		0			1,210		(6	)

Other ABS		1,102		(4	)		99		(1	)		1,201		(5	)
Other securities		103		0			13		(1	)		116		(1	)

Total investment securities available for sale in a gross unrealized loss position	$	11,702	$	(77	)	$	1,467	$	(43	)	$	13,169	$	(120	)

⁽¹⁾	Includes debt securities issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development.

⁽²⁾	Includes corporate debt securities guaranteed by other U.S. government agencies, such as the Export-Import Bank of the United States.

⁽³⁾	Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

As of September 30, 2013, our securities held to maturity had a fair value of $18.7 billion and unrealized losses of $1.5 billion. The unrealized losses related to our securities held to maturity have been in a loss position for less than 12 months as of September 30, 2013.

The gross unrealized losses on our securities available for sale of $494 million as of September 30, 2013 relate to 898 individual securities. The gross unrealized losses on our available-for-sale securities investment of $120 million as of December 31, 2012 relate to 532 individual securities. Our investments in non-agency MBS, non-agency asset-backed securities, and other securities accounted for $164 million, or 33%, of total gross unrealized losses as of September 30, 2013. Of the $494 million gross unrealized losses as of September 30, 2013, $22 million related to investment securities that had been in a loss position for 12 months or longer. As discussed in more detail below, we conduct periodic reviews of all investment securities with unrealized losses to assess whether the impairment is other-than-temporary. Based on our assessments, we have recorded OTTI for a portion of our non-agency residential MBS, which is discussed in more detail in the “Other-Than-Temporary Impairment” section of this footnote.

Maturities and Yields of Investment Securities

The following tables summarizes the remaining scheduled contractual maturities, assuming no prepayments, of our investment securities as of September 30, 2013:

Table 3.5: Contractual Maturities of Securities Available for Sale


(Dollars in millions)	September 30, 2013
Investment securities available for sale	Amortized Cost		Fair Value
Due in 1 year or less	$	2,064	$	2,067
Due after 1 year through 5 years		6,230		6,238
Due after 5 years through 10 years		4,271		4,204
Due after 10 years⁽¹⁾		30,287		30,623

Total	$	42,852	$	43,132

⁽¹⁾	Investments with no stated maturities, which consist of equity securities, are included with contractual maturities due after 10 years.

Table 3.6: Contractual Maturities of Securities Held to Maturity


(Dollars in millions)	September 30, 2013
Investment securities held to maturity	Carrying Value		Fair Value
Due in 1 year or less	$	0	$	0
Due after 1 year through 5 years		0		0
Due after 5 years through 10 years		1,045		1,071
Due after 10 years		17,231		17,591

Total	$	18,276	$	18,662

Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented above. The table below summarizes, by major security type, the expected maturities and the weighted average yields of our investment securities as of September 30, 2013.

Table 3.7: Expected Maturities and Weighted Average Yields of Securities

September 30, 2013

Due in 1 Year
or Less

Due > 1 Year
through
5 Years

Due > 5 Years
through
10 Years

Due > 10 Years

Total

(Dollars in millions)

Amount

Fair value of securities available for sale:

U.S. Treasury debt obligations

837

U.S. agency debt obligations⁽²⁾

Corporate debt securities guaranteed by U.S. government agencies⁽³⁾

228

1,030

1,272

RMBS:

Agency⁽⁴⁾

6,371

15,603

22,061

Non-agency

1,803

1,600

164

3,623

Total RMBS

143

8,174

17,203

164

25,684

CMBS:

Agency⁽⁴⁾

352

2,761

984

4,097

Non-agency

142

293

1,208

1,661

Total CMBS

494

3,054

2,192

5,758

Other ABS

1,949

4,773

818

116

7,656

Other securities⁽⁵⁾

531

484

787

122

1,924

Total securities available for sale

3,118

17,550

22,030

434

43,132

Amortized cost of securities available for sale

3,117

17,334

22,007

394

42,852

Weighted average yield for securities available for sale⁽¹⁾

1.44

2.45

2.99

5.19

2.68

Carrying value of securities held to maturity:

RMBS:

Agency⁽⁴⁾

11,559

5,163

16,722

CMBS:

Agency⁽⁴⁾

402

1,144

1,554

Total securities held for maturity

402

12,703

5,171

18,276

Fair value of securities held to maturity

407

12,969

5,286

18,662

Weighted average yield for securities held to maturity⁽¹⁾

0.00

2.11

2.34

2.71

2.44

⁽¹⁾	Yields are calculated based on the amortized cost of each security.

⁽²⁾	Includes debt securities issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development.

⁽³⁾	Includes corporate debt securities guaranteed by other U.S. government agencies, such as the Export-Import Bank of the United States.

⁽⁴⁾	Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

⁽⁵⁾	Yields of tax-exempt securities are calculated on a fully taxable-equivalent (“FTE”) basis.

Other-Than-Temporary Impairment

We evaluate all securities in an unrealized loss position at least quarterly, and more often as market conditions require, to assess whether the impairment is other-than-temporary. Our OTTI assessment is a subjective process which requires the careful use of judgments and assumptions. Accordingly, we consider a number of qualitative and quantitative criteria in our assessment, including the extent and duration of the impairment; recent events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings of the issuer and any failure or delay of the issuer to make scheduled interest or principal payments; the value of underlying collateral; our intent and ability to hold the security; and current market conditions.

We assess and recognize OTTI in accordance with the accounting guidance for recognition and presentation of OTTI. Under this guidance, OTTI is recognized in earnings for debt securities that we intent to sell or we believe it is more-likely-than-not that we will be required to sell prior to recovery of the amortized cost basis. For those securities that we do not intend to sell or expect to be required to sell, credit-related impairment is recognized in earnings, with the non-credit related impairment recorded in AOCI. We determine the credit component based on the difference between the security’s amortized cost basis and the present value of its expected future cash flows, discounted based on the effective yield. The non-credit component represents the difference between the security’s fair value and the present value of expected future cash flows.

We recorded net OTTI in earnings totaling $11 million and $13 million for the three months ended September 30, 2013 and 2012, respectively, and $40 million for both of the nine months ended September 30, 2013 and 2012. We estimate the portion of losses attributable to credit using a discounted cash flow model and we estimate the expected cash flows from the underlying collateral using internal information to derive key assumptions. Our calculation takes into consideration security specific delinquencies, product specific delinquency roll rates and expected severities. Key assumptions used in estimating the expected cash flows include default rates, loss severity and prepayment rates. Assumptions used can vary widely based on the collateral underlying the securities and are influenced by factors such as collateral type, loan interest rate, geographical location of the borrower, and borrower characteristics.

We believe the $474 million gross unrealized losses as of September 30, 2013 related to securities available for sale for which we have not recognized OTTI are attributable to issuer specific credit spreads and changes in market interest rates and asset spreads. Therefore, we currently do not expect to incur credit losses related to these securities. In addition, we have no intent to sell these securities with unrealized losses, and it is not likely that we will be required to sell these securities prior to recovery of their amortized cost. Accordingly, we have concluded that the impairment on these securities is not other than temporary.

The table below presents activity for the three and nine months ended September 30, 2013 and 2012, related to the credit component of OTTI recognized in earnings on investment debt securities:

Table 3.8 Credit Impairment Rollforward


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2013		2012		2013		2012
Credit loss component, beginning of period	$	149	$	95	$	120	$	68
Additions:
Initial credit impairment		3		6		14		16
Subsequent credit impairment		8		7		26		24

Total additions		11		13		40		40

Reductions:
Sales of credit-impaired securities		0		0		0		0

Total reductions		0		0		0		0

Credit loss component, end of period	$	160	$	108	$	160	$	108

AOCI Related to Securities

The table below presents for the three and nine months ended September 30, 2013 and 2012, the changes in AOCI related to our debt securities. The net unrealized gains and losses represent fair value adjustments recorded during the period. The net realized gains and losses reclassified from AOCI into earnings includes accretion of the unrealized losses on securities held to maturity into earnings.

Table 3.9: AOCI Related to Securities, Net of Tax


	Three Months Ended September 30,
	2013									2012
(Dollars in millions)	Available for Sale			Held to Maturity			Total			Available for Sale			Held to Maturity		Total
Beginning balance AOCI related to securities	$	(517	)	$	0		$	(517	)	$	418		$	0	$	418
Net unrealized gains (losses)		(224	)		0			(224	)		327			0		327
Transfers from available for sale to held to maturity		916			(916	)		0			0			0		0
Net realized (gains) losses reclassified from AOCI into earnings⁽¹⁾		0			1			1			(1	)		0		(1	)

Ending balance AOCI related to securities	$	175		$	(915	)	$	(740	)	$	744		$	0	$	744


	Nine Months Ended September 30,
	2013									2012
(Dollars in millions)	Available for Sale			Held to Maturity			Total			Available for Sale			Held to Maturity		Total
Beginning balance AOCI related to securities	$	703		$	0		$	703		$	286		$	0	$	286
Unrealized gains (losses)		(1,442	)		0			(1,442	)		485			0		485
Transfers from available for sale to held to maturity		916			(916	)		0			0			0		0
Net realized (gains) losses reclassified from AOCI into earnings⁽¹⁾		(2	)		1			(1	)		(27	)		0		(27	)

Ending balance AOCI related to securities		175			(915	)		(740	)		744			0		744

⁽¹⁾	The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of the premium or discount created from the transfer into securities held to maturity, which occurred at fair value.

Realized Gains and Losses on Securities

The following table presents the gross realized gains and losses on the sale and redemption of securities available for sale recognized in earnings for the three and nine months ended September 30, 2013 and 2012. The gross realized investment losses presented below exclude credit losses recognized in earnings attributable to OTTI. We also present the proceeds from the sale of securities available for sale for the periods presented. The investment securities we sold were predominantly agency MBS. We did not sell any investment securities that are held to maturity for the nine months ended September 30, 2013 and 2012.

Table 3.10: Realized Gains and Losses on Securities Available for Sale


	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in millions)	2013		2012			2013			2012
Gross realized investment gains	$	0	$	2		$	6		$	51
Gross realized investment losses		0		(1	)		(3	)		(9	)

Net realized gains	$	0	$	1		$	3		$	42

Total proceeds from sales	$	35	$	16		$	1,355		$	14,274

Securities Pledged and Received

As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties including the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank. We also pledge securities to secure trust and public deposits and for other purposes as required or permitted by law. We pledged securities available for sale with a fair value of $11.6 billion and $13.8 billion as of September 30, 2013 and December 31, 2012, respectively. We pledged securities held to maturity with a carrying value of $7.1 billion as of September 30, 2013, and we did not pledge any securities held to maturity as of December 31, 2012. All the securities pledged were primarily related to FHLB transactions and Public Fund deposits. We accepted pledges of securities with a fair value of $37 million and $238 million as of September 30, 2013 and December 31, 2012, respectively, primarily related to our derivative transactions.

Securities Acquired

Our investment portfolio includes certain securities acquired in the ING Direct acquisition and other securities we purchased that were deemed to be credit impaired as of the purchase date. In accordance with accounting guidance for purchased credit-impaired securities, we recorded these securities at fair value as of the purchase date and determined the contractually required payments due based on the total undiscounted amount of all uncollected principal and interest payments, adjusted for the effect of estimated prepayments. We then estimated the undiscounted cash flows we expect to collect. The difference between the contractually required payments due and the cash flows we expect to collect at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses expected to be incurred over the life of the security. The excess of cash flows expected to be collected over the estimated fair value of credit-impaired debt securities at acquisition is referred to as the accretable yield, which is accreted into interest income over the remaining life of the security using the effective interest method. Subsequent to acquisition, we complete quarterly evaluations of expected cash flows. Decreases in expected cash flows attributable to credit result in the recognition of other-than-temporary impairment. Increases in expected cash flows are recognized prospectively over the remaining life of the security as an adjustment to the accretable yield.

Outstanding Balance and Carrying Value of Acquired Securities

The table below presents the outstanding contractual balance and the carrying value of the acquired credit-impaired investment debt securities as of September 30, 2013.

Table 3.11: Outstanding Balance and Carrying Value of Acquired Securities


(Dollars in millions)	September 30, 2013		December 31, 2012
Contractual principal and interest	$	4,882	$	5,242

Carrying value	$	2,865	$	2,887

Amortized Cost	$	2,491	$	2,585

Changes in Accretable Yield of Acquired Securities

The following table presents changes in the accretable yield related to the acquired credit-impaired debt securities:

Table 3.12: Changes in Accretable Yield of Acquired Securities


(Dollars in millions)	Purchased Credit-Impaired Securities
Accretable yield as of December 31, 2011	$	0
Additions from new acquisitions⁽¹⁾		1,743
Accretion recognized in earnings		(202	)
Reductions due to disposals, transfers, and other non-credit related changes		0
Net reclassifications (to)/from nonaccretable difference		(29	)

Accretable yield as of December 31, 2012	$	1,512
Additions from new acquisitions		82
Accretion recognized in earnings		(184	)
Reductions due to disposals, transfers, and other non-credit related changes		1
Net reclassifications (to)/from nonaccretable difference		31

Accretable yield as of September 30, 2013	$	1,442

⁽¹⁾	Includes securities acquired in the ING Direct acquisition as well as other securities purchased.