Note 5 Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS debt and marketable equity securities at December 31, 2006 and 2005 were:
(Dollars in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
---|---|---|---|---|
2006 | ||||
U.S. Treasury securities and agency debentures |
$ |
$ |
$ |
$ |
Mortgage-backed securities | 161,693 | 4 | (4,804) | 156,893 |
Foreign securities | 12,126 | 2 | (78) | 12,050 |
Other taxable securities (1) | 16,776 | 10 | (134) | 16,652 |
Total taxable securities
|
191,292 | 16 | (5,025) | 186,283 |
Tax-exempt securities | 6,493 | 64 | (34) | 6,523 |
Total available-for-sale debt securities
|
$ |
$ |
$ |
$ |
Available-for-sale marketable equity
securities (2) |
$ |
$ |
$ |
$ |
2005 | ||||
U.S. Treasury securities and agency debentures |
$ |
$ |
$ |
$ |
Mortgage-backed securities | 197,101 | 198 | (5,268) | 192,031 |
Foreign securities | 10,944 | 1 | (54) | 10,891 |
Other taxable securities (1) | 13,198 | 126 | (99) | 13,225 |
Total taxable securities
|
221,973 | 325 | (5,434) | 216,864 |
Tax-exempt securities | 4,693 | 31 | (32) | 4,692 |
Total available-for-sale debt securities
|
$ |
$ |
$ |
$ |
Available-for-sale marketable equity
securities (2) |
$ |
$ |
$ |
$ |
At December 31, 2006, the amortized cost and fair value of both taxable and tax-exempt Held-to-maturity Securities was $40 million. At December 31, 2005, the amortized cost and fair value of both taxable and tax-exempt Held-to-maturity Securities was $47 million.
At December 31, 2006, accumulated net unrealized losses on AFS debt and marketable equity securities included in Accumulated OCI were $2.9 billion, net of the related income tax benefit of $1.7 billion. At December 31, 2005, accumulated net unrealized losses on these securities were $3.0 billion, net of the related income tax benefit of $1.8 billion.
The following table presents the current fair value and the associated gross unrealized losses only on investments in securities with gross unrealized losses at December 31, 2006 and 2005. The table also discloses whether these securities have had gross unrealized losses for less than twelve months, or for twelve months or longer.
December 31, 2006 | ||||||
---|---|---|---|---|---|---|
Less than twelve months | Twelve months or longer | Total | ||||
(Dollars in millions) | Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Available-for-sale securities | ||||||
U.S. Treasury securities and agency debentures |
$ |
$ |
$ |
$ |
$ |
$ |
Mortgage-backed securities | 4,684 | (128) | 151,092 | (4,676) | 155,776 | (4,804) |
Foreign securities | 45 | (1) | 6,908 | (77) | 6,953 | (78) |
Other taxable securities | 5,452 | (125) | 287 | (9) | 5,739 | (134) |
Total taxable securities
|
10,568 | (263) | 158,287 | (4,762) | 168,855 | (5,025) |
Tax-exempt securities | 811 | (4) | 1,271 | (30) | 2,082 | (34) |
Total temporarily-impaired available-for-sale
debt securities |
11,379 | (267) | 159,558 | (4,792) | 170,937 | (5,059) |
Temporarily-impaired marketable equity securities | 244 | (10) | | | 244 | (10) |
Total temporarily-impaired securities
|
$ |
$ |
$ |
$ |
$ |
$ |
December 31, 2005 | ||||||
---|---|---|---|---|---|---|
Less than twelve months |
Twelve months or longer | Total | ||||
(Dollars in millions) | Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Available-for-sale securities | ||||||
U.S. Treasury securities and agency debentures |
$ |
$ |
$ |
$ |
$ |
$ |
Mortgage-backed securities | 149,979 | (3,766) | 40,236 | (1,502) | 190,215 | (5,268) |
Foreign securities | 3,455 | (41) | 852 | (13) | 4,307 | (54) |
Other taxable securities | 3,882 | (79) | 469 | (20) | 4,351 | (99) |
Total taxable securities
|
157,567 | (3,895) | 41,720 | (1,539) | 199,287 | (5,434) |
Tax-exempt securities | 2,308 | (27) | 156 | (5) | 2,464 | (32) |
Total temporarily-impaired available-for-sale
debt securities |
159,875 | (3,922) | 41,876 | (1,544) | 201,751 | (5,466) |
Temporarily-impaired marketable equity securities | 146 | (18) | | | 146 | (18) |
Total temporarily-impaired securities
|
$ |
$ |
$ |
$ |
$ |
$ |
Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when conditions warrant such evaluation. Factors considered in determining whether an impairment is other-than-temporary include (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
At December 31, 2006, the amortized cost of approximately 5,000 securities in AFS securities exceeded their fair value by $5.1 billion. Included in the $5.1 billion of gross unrealized losses on AFS securities at December 31, 2006, was $277 million of gross unrealized losses that have existed for less than twelve months and $4.8 billion of gross unrealized losses that have existed for a period of twelve months or longer. Of the gross unrealized losses existing for twelve months or more, $4.7 billion, or 98 percent, of the gross unrealized loss is related to approximately 1,500 mortgage-backed securities. These securities are predominately all investment grade, with more than 90 percent rated AAA. The gross unrealized losses on these mortgage-backed securities are due to overall increases in market interest rates. The Corporation has the ability and intent to hold these securities for a period of time sufficient to recover all gross unrealized losses. Accordingly, the Corporation has not recognized any other-than-temporary impairment for these securities.
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, 2006 and 2005. Those investments had market values of $109.9 billion and $42.0 billion at December 31, 2006, and $144.1 billion and $46.9 billion at December 31, 2005. In addition, these investments had total amortized costs of $113.5 billion and $43.3 billion at December 31, 2006, and $148.0 billion and $48.3 billion at December 31, 2005. As disclosed in the preceding paragraph, the Corporation has not recognized any other-than-temporary impairment for these securities.
Securities are pledged or assigned to secure borrowed funds, government and trust deposits and for other purposes. The carrying value of pledged securities was $83.8 billion and $116.7 billion at December 31, 2006 and 2005.
The expected maturity distribution of the Corporation's mortgage-backed securities and the contractual maturity distribution of the Corporation's other debt securities, and the yields of the Corporation's AFS debt securities portfolio at December 31, 2006 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 one year or less |
Due after one year through five years |
Due after five years through ten years |
Due after ten 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
debt securities
|
||||||||||
U.S. Treasury securities and
agency debentures
|
$ |
4.08 % |
$ |
3.96 % |
$ |
4.31 % |
$ |
5.73 % |
$ |
4.03 % |
Mortgage-backed securities
|
17 | 5.59 | 11,456 | 4.40 | 143,370 | 5.04 | 2,050 | 8.62 | 156,893 | 5.04 |
Foreign securities
|
819 | 4.88 | 6,177 | 5.27 | 4,949 | 5.37 | 105 | 6.27 | 12,050 | 5.29 |
Other taxable securities
|
3,581 | 4.70 | 10,435 | 5.19 | 2,237 | 5.33 | 399 | 6.40 | 16,652 | 5.13 |
Total taxable
|
4,495 | 4.73 | 28,592 | 4.87 | 150,636 | 5.06 | 2,560 | 8.17 | 186,283 | 5.06 |
Tax-exempt
securities (3)
|
1,000 | 5.82 | 1,169 | 5.90 | 3,226 | 5.82 | 1,128 | 6.44 | 6,523 | 5.94 |
Total
available-for-sale debt
securities |
$ |
4.93 % |
$ |
4.91 % |
$ |
5.07 % |
$ |
7.64 % |
$ |
5.09 % |
Amortized cost
of available-for-sale debt securities |
$ |
$ |
$ |
$ |
$ |
The components of realized gains and losses on sales of debt securities for 2006, 2005 and 2004 were:
(Dollars in millions) | 2006 | 2005 | 2004 |
---|---|---|---|
Gross gains |
$ |
$ |
$ |
Gross losses | (530) | (70) | (546) |
Net gains (losses) on sales of debt securities
|
$ |
$ |
$ |
The Income Tax Expense (Benefit) attributable to realized net gains (losses) on debt securities sales was $(163) million, $400 million, and $640 million in 2006, 2005 and 2004, respectively.
Pursuant to an agreement dated June 17, 2005, the Corporation agreed to purchase approximately nine percent, or 19.1 billion shares, of the stock of China Construction Bank (CCB). These shares are accounted for at cost as they are non-transferable until the third anniversary of the initial public offering in October 2008. The Corporation also holds an option to increase its ownership interest in CCB to 19.9 percent. This option expires in February 2011. At December 31, 2006, the investment in the CCB shares was included in Other Assets.
Additionally, the Corporation sold its Brazilian operations to Banco Itaú Holding Financeira S.A. (Banco Itaú) for approximately $1.9 billion in preferred stock. These shares are non-transferable for three years from the date of the agreement dated May 1, 2006 and are accounted for at cost. The sale closed in September 2006. At December 31, 2006, this $1.9 billion of preferred stock was included in Other Assets.
The shares of CCB and Banco Itaú are currently carried at cost but, as required by GAAP, will be accounted for as AFS marketable equity securities and carried at fair value with an offset to Accumulated OCI beginning in the fourth quarter of 2007 and second quarter of 2008, respectively. The fair values of the CCB shares and Banco Itaú shares were approximately $12.2 billion and $2.5 billion at December 31, 2006.