2004 Annual Report: Financial Review: Statements and Notes: Note 5 Securities

Note 5

Securities

The amortized cost, gross unrealized gains and losses, and fair value of AFS debt and marketable equity securities, and Held-to-maturity Securities at December 31, 2004, 2003 and 2002 were:

(Dollars in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities
2004
U.S. Treasury securities and agency debentures	$    826		$    -		$  1		$    825
Mortgage-backed securities	173,697		174		624		173,247
Foreign sovereign securities	7,437		36		26		7,447
Other taxable securities	9,493		-		13		9,480
Total taxable	191,453		210		664		190,999
Tax-exempt securities	3,662		87		5		3,744
Total available-for-sale securities	$195,115		$  297		$669		$194,743
Available-for-sale marketable equity securities (1)	$  3,571		$   32		$  2		$  3,601
2003
U.S. Treasury securities and agency debentures	$    710		$    5		$  2		$    713
Mortgage-backed securities	56,403		63		575		55,891
Foreign sovereign securities	2,816		23		38		2,801
Other taxable securities	4,765		36		69		4,732
Total taxable	64,694		127		684		64,137
Tax-exempt securities	2,167		79		1		2,245
Total available-for-sale securities	$ 66,861		$  206		$685		$ 66,382
Available-for-sale marketable equity securities (1)	$  2,803		$  394		$ 31		$  3,166
2002
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	1,095		25		38		1,082
Total taxable	62,834		922		146		63,610
Tax-exempt securities	2,824		96		4		2,916
Total available-for-sale securities	$ 65,658		$1,018		$150		$ 66,526
Available-for-sale marketable equity securities (1)	$  2,761		$   19		$127		$  2,653
Held-to-maturity securities
2004
Taxable securities	$     41		$    4		$  4		$     41
Tax-exempt securities	289		-		1		288
Total held-to-maturity securities	$    330		$    4		$  5		$    329
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 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 securities	$  1,026		$   24		$ 49		$  1,001
(1) Represents those AFS marketable equity securities that are recorded in Other Assets on the Consolidated Balance Sheet.

At December 31, 2004, accumulated net unrealized losses on AFS debt and marketable equity securities included in Shareholders’ Equity were $196 million, net of the related income tax benefit of $146 million. At December 31, 2003, accumulated net unrealized losses on these securities were $70 million, net of the related income tax benefit of $46 million.

The following table presents the current fair value and the associated unrealized losses only on investments in securities with unrealized losses at December 31, 2004. Unrealized losses on marketable equity securities at December 31, 2004 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: Fair Value	Less than 12 months: Unrealized Losses	12 months or longer: Fair Value	12 months or longer: Unrealized Losses	Total: Fair Value	Total: Unrealized Losses
	Less than 12 months		12 months or longer		Total
(Dollars in millions)	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Available-for-sale securities
U.S. Treasury securities and agency debentures (1)	$   381	$  (1)	$    22	$   -	$   403	$  (1)
Mortgage-backed securities	52,687	(297)	17,426	(327)	70,113	(624)
Foreign sovereign securities	4,964	(11)	99	(15)	5,063	(26)
Other taxable securities	1,130	(9)	37	(4)	1,167	(13)
Total taxable	59,162	(318)	17,584	(346)	76,746	(664)
Tax-exempt securities (1)	1,088	(5)	21	-	1,109	(5)
Total temporarily-impaired available-for-sale securities	60,250	(323)	17,605	(346)	77,855	(669)
Temporarily-impaired marketable equity securities	83	(2)	-	-	83	(2)
Held-to-maturity securities
Taxable securities	41	(4)	-	-	41	(4)
Tax-exempt securities	288	(1)	-	-	288	(1)
Total temporarily-impaired held-to-maturity securities	329	(5)	-	-	329	(5)
Total temporarily-impaired securities	$60,662	$(330)	$17,605	$(346)	$78,267	$(676)
(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.

The Corporation had investments in Securities from the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) that exceeded 10 percent of consolidated Shareholders’ Equity as of December 31, 2004 and 2003. Those investments had market values of $133.6 billion and $35.8 billion, respectively, at December 31, 2004 and $36.6 billion and $5.9 billion, respectively, as of December 31, 2003. In addition, these investments had total amortized costs of $132.9 billion and $35.9 billion, respectively, as of December 31, 2004 and $37.1 billion and $6.0 billion, respectively, as of December 31, 2003.

Securities are pledged or assigned to secure borrowed funds, government and trust deposits, and for other purposes. The carrying value of pledged Securities was $45.1 billion and $20.9 billion at December 31, 2004 and 2003, respectively.

The contractual maturity distribution and yields of the Corporation’s securities portfolio at December 31, 2004 are summarized in the following table. Actual maturities may differ from the contractual or expected maturities shown below since borrowers may have the right to prepay obligations with or without prepayment penalties.

	Due in 1 year or less: Amount		Due in 1 year or less: Yield(2)		Due after 1 year through 5 years: Amount		Due after 1 year through 5 years: Yield(2)		Due after 5 years through 10 years: Amount		Due after 5 years through 10 years: Yield(2)		Due after 10 years(1): Amount		Due after 10 years(1): Yield(2)		Total: Amount		Total: Yield(2)
	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 (2)		Amount		Yield (2)		Amount		Yield (2)		Amount		Yield (2)		Amount		Yield (2)
Fair value of available-for-sale   securities
U.S. Treasury securities   and agency debentures	$  101		1.94%		$   576		3.04%		$   131		3.86%		$    17		5.40%		$    825		3.09%
Mortgage-backed securities	4		2.15		91,665		5.08		65,622		5.31		15,956		5.51		173,247		5.21
Foreign sovereign securities	757		4.90		1,377		2.46		1,799		3.04		3,514		3.98		7,447		3.56
Other taxable securities	140		2.90		2,614		3.56		2,877		4.98		3,849		5.56		9,480		4.81
Total taxable	1,002		4.31		96,232		4.99		70,429		5.23		23,336		5.29		190,999		5.11
Tax-exempt securities (3)	924		2.55		181		4.52		1,554		6.11		1,085		6.54		3,744		5.28
Total available-for-sale securities	$1,926		3.47%		$96,413		4.99%		$71,983		5.25%		$24,421		5.34%		$194,743		5.12%
Amortized cost of available-   for-sale securities	$1,926				$96,439				$72,010				$24,740				$195,115
Amortized cost of held-to-   maturity securities
Taxable securities	$   41		2.30%		$     -		-%		$     -		-%		$     -		-%		$     41		2.30%
Tax-exempt securities (3)	258		1.72		26		2.70		4		4.37		1		0.26		289		1.85
Total held-to-maturity securities	$  299		1.80%		$    26		2.70%		$     4		4.37%		$     1		0.26%		$    330		1.90%
Fair value of held-to-maturity securities	$  298				$    26				$     4				$     1				$    329
(1) Includes securities with no stated maturity. (2) Yields are calculated based on the amortized cost of the securities. (3) 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 2004, 2003 and 2002 were:

(Dollars in millions)	2004	2003	2002
Gross gains	$2,270	$1,246	$1,035
Gross losses	(147)	(305)	(405)
Net gains on sales of debt securities	$2,123	$  941	$  630

The Income Tax Expense attributable to realized net gains on debt securities sales was $788 million, $329 million and $220 million in 2004, 2003 and 2002, respectively.