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2003 Annual Report: Financial Review: Statements and Notes: Note 4 Securities

Note 4

Securities

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale debt and marketable equity securities and held-to maturity debt securities at December 31, 2003, 2002 and 2001 were:
(Dollars in millions) Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Available-for-sale securities
2003
Available-for-sale debt securities
U.S. Treasury securities and agency debentures $ 710 $ 5 $ 2 $ 713
Mortgage-backed securities 56,405 63 575 55,893
Foreign sovereign securities 2,815 24 38 2,801
Other taxable securities 6,375 35 69 6,341
     Total taxable 66,305 127 684 65,748
Tax-exempt securities 2,167 79 1 2,245
     Total available-for-sale debt securities $ 68,472 $ 206 $ 685 $ 67,993
Available-for-sale marketable equity securities(1) $ 1,192 $ 394 $ 31 $ 1,555
2002
Available-for-sale debt securities
U.S. Treasury securities and agency debentures $ 691 $ 20 $ - $ 711
Mortgage-backed securities 58,813 847 5 59,655
Foreign sovereign securities 2,235 30 103 2,162
Other taxable securities 2,691 25 38 2,678
     Total taxable 64,430 922 146 65,206
Tax-exempt securities 2,824 96 4 2,916
     Total available-for-sale debt securities $ 67,254 $ 1,018 $ 150 $ 68,122
Available-for-sale marketable equity securities(1) $ 1,165 $ 19 $ 127 $ 1,057
2001
Available-for-sale debt securities
U.S. Treasury securities and agency debentures $ 1,271 $ 17 $ 8 $ 1,280
Mortgage-backed securities 73,546 381 826 73,101
Foreign sovereign securities 3,213 54 123 3,144
Other taxable securities 4,739 11 108 4,642
     Total taxable 82,769 463 1,065 82,167
Tax-exempt securities 2,324 5 46 2,283
     Total available-for-sale debt securities $ 85,093 $ 468 $ 1,111 $ 84,450
Available-for-sale marketable equity securities(1) $ 648 $ 45 $ 157 $ 536
Held-to-maturity debt securities
2003
Mortgage-backed securities $ 1 $ - $ - $ 1
Foreign sovereign securities 49 - 3 46
Other taxable securities 46 3 - 49
     Total taxable 96 3 3 96
Tax-exempt securities 151 7 - 158
     Total held-to-maturity debt securities $ 247 $ 10 $ 3 $ 254
2002
Mortgage-backed securities $ 3 $ - $ - $ 3
Foreign sovereign securities 788 10 49 749
Other taxable securities 45 4 - 49
     Total taxable 836 14 49 801
Tax-exempt securities 190 10 - 200
     Total held-to-maturity debt securities $ 1,026 $ 24 $ 49 $ 1,001
2001
U.S. Treasury securities and agency debentures $ 5 $ - $ - $ 5
Mortgage-backed securities 5 - - 5
Foreign sovereign securities 797 5 54 748
Other taxable securities 26 1 - 27
     Total taxable 833 6 54 785
Tax-exempt securities 216 9 1 224
     Total held-to-maturity debt securities $ 1,049 $ 15 $ 55 $ 1,009
(1)  Available-for-sale marketable equity securities are recorded in other assets on the Consolidated Balance Sheet.

At December 31, 2003, net unrealized losses on available-for-sale debt and marketable equity securities included in shareholders' equity were $70 million, net of the related income tax benefit of $46 million. At December 31, 2002, net unrealized gains on these securities were $494 million, net of the related income tax expense of $266 million.

The following table presents the current fair value and the associated unrealized losses only on investments in debt securities with unrealized losses at December 31, 2003. Unrealized losses on marketable equity securities at December 31, 2003 were not considered material. The table also discloses whether these securities have had unrealized losses for less than 12 months, or for 12 months or longer.
Less than 12 months 12 months or longer Total
(Dollars in millions) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Debt securities
U.S. Treasury securities and agency debentures $ 210 $ (2 ) $ - $ - $ 210 $ (2 )
Mortgage-backed securities(1) 41,067 (575 ) 12 - 41,079 (575 )
Foreign sovereign securities 71 (7 ) 266 (31 ) 337 (38 )
Other taxable securities 4,036 (69 ) - - 4,036 (69 )
Tax-exempt securities(1) 20 (1 ) 22 - 42 (1 )
     Total temporarily-impaired debt securities $ 45,404 $ (654 ) $ 300 $ (31 ) $ 45,704 $ (685 )
(1)  Unrealized losses less than $500,000 are shown as zero.

The unrealized losses associated with U.S. Treasury securities and agency debentures, mortgage-backed securities, certain foreign sovereign securities, other taxable securities and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer. The Corporation also has unrealized losses associated with other foreign sovereign securities; however, these losses are not considered other-than- temporary because the principal of these securities is guaranteed by the U.S. government.

Excluding securities issued by the U.S. government and its agencies and corporations (including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)), there were no investments in securities from one issuer that exceeded 10 percent of consolidated shareholders' equity at December 31, 2003 or 2002.

Securities are pledged or assigned to secure borrowed funds, government and trust deposits and for other purposes. The carrying value of pledged securities was $20.9 billion and $32.9 billion at December 31, 2003 and 2002, respectively.

The expected maturity distribution and yields of the Corporation's securities portfolio at December 31, 2003 are summarized below. Actual maturities may differ from the contractual or expected maturities shown in the following table since borrowers may have the right to prepay obligations with or without prepayment penalties.
Due in 1 year
or less		 Due after 1
year through
5 years		 Due after 5
years through
10 years		 Due after
10 years(1)		 Total
(Dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Fair value of
     available-for-sale debt securities
U.S. Treasury securities and
     agency debentures $ 42 2.35 % $ 554 3.03 % $ 96 4.14 % $ 21 5.54 % $ 713 3.09 %
Mortgage-backed securities 18 5.42 21,824 4.79 34,016 5.01 35 9.00 55,893 4.93
Foreign sovereign securities 188 3.99 1,627 2.12 79 5.35 907 3.77 2,801 2.88
Other taxable securities 34 3.64 4,015 8.47 630 5.09 1,662 5.59 6,341 7.37
     Total taxable 282 3.79 28,020 5.13 34,821 5.01 2,625 5.01 65,748 5.06
Tax-exempt securities(2) 7 4.79 12 5.59 968 6.08 1,258 6.60 2,245 6.36
     Total available-for-sale
          debt securities $ 289 3.81 % $ 28,032 5.13 % $ 35,789 5.04 % $ 3,883 5.53 % $ 67,993 5.10 %
Amortized cost of available-for-sale
     debt securities $ 288 $ 28,149 $ 36,152 $ 3,885 $ 68,472
Amortized cost of
     held-to-maturity debt securities
Mortgage-backed securities $ - - % $ 1 1.62 % $ - - % $ - - % $ 1 1.62 %
Foreign sovereign securities 7 3.73 27 2.09 - - 15 6.75 49 3.75
Other taxable securities - - - - 46 6.00 - - 46 6.02
     Total taxable 7 3.73 28 2.07 46 6.00 15 6.75 96 4.82
Tax-exempt securities(2) 25 9.97 52 8.99 42 8.11 32 5.95 151 8.26
     Total held-to-maturity
          debt securities $ 32 8.61 % $ 80 6.57 % $ 88 7.01 % $ 47 6.21 % $ 247 6.92 %
Fair value of held-to-maturity
     debt securities $ 33 $ 88 $ 87 $ 46 $ 254
(1)  Includes securities with no stated maturity.
(2)  Yield of tax-exempt securities calculated on a fully taxable-equivalent basis.

The components of realized gains and losses on sales of debt securities for 2003, 2002 and 2001 were:

(Dollars in millions) 2003 2002 2001
Gross gains $ 1,246 $ 1,035 $ 1,074
Gross losses (305 ) (405 ) (599 )
     Net gains on sales
          of debt securities $ 941 $ 630 $ 475

The income tax expense attributable to realized net gains on debt securities sales was $329 million, $220 million and $166 million in 2003, 2002 and 2001, respectively.


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