US Bank 2012 Annual Report Download - page 38

Investment Securities The Company uses its investment
securities portfolio to manage enterprise interest rate risk,
provide liquidity (including the ability to meet proposed
regulatory requirements), generate interest and dividend
income, and as collateral for public deposits and wholesale
funding sources. While the Company intends to hold its
investment securities indefinitely, it may sell available-for-sale
securities in response to structural changes in the balance
sheet and related interest rate risk and to meet liquidity
requirements, among other factors.
Investment securities totaled $74.5 billion at
December 31, 2012, compared with $70.8 billion at
December 31, 2011. The $3.7 billion (5.2 percent) increase
primarily reflected $3.1 billion of net investment purchases
and a $517 million favorable change in net unrealized gains
(losses) on available-for-sale investment securities. Held-to-
maturity securities were $34.4 billion at December 31, 2012,
compared with $18.9 billion at December 31, 2011, due to
the transfer of approximately $11.7 billion of available-for-
sale investment securities to the held-to-maturity category
during 2012, reflecting the Company’s intent to hold those
securities to maturity, and growth in government agency
mortgage-backed securities as the Company increased its on-
balance sheet liquidity in response to anticipated regulatory
requirements.
Average investment securities were $72.5 billion in 2012,
compared with $63.6 billion in 2011. The weighted-average
yield of the available-for-sale portfolio was 2.93 percent at
December 31, 2012, compared with 3.19 percent at
December 31, 2011. The average maturity of the available-
for-sale portfolio was 4.1 years at December 31, 2012,
compared with 5.2 years at December 31, 2011. The
weighted-average yield of the held-to-maturity portfolio was
1.94 percent at December 31, 2012, compared with 2.21
percent at December 31, 2011. The average maturity of the
held-to-maturity portfolio was 3.3 years at December 31,
2012, compared with 3.9 years at December 31, 2011.
Investment securities by type are shown in Table 13.
The Company’s available-for-sale securities are carried at
fair value with changes in fair value reflected in other
comprehensive income (loss) unless a security is deemed to be
other-than-temporarily impaired. At December 31, 2012, the
Company’s net unrealized gains on available-for-sale securities
were $1.1 billion, compared with $581 million at
December 31, 2011. The favorable change in net unrealized
gains was primarily due to increases in the fair value of non-
agency mortgage-backed and state and political securities.
Gross unrealized losses on available-for-sale securities totaled
$147 million at December 31, 2012, compared with $691
million at December 31, 2011.
The Company conducts a regular assessment of its
investment portfolio to determine whether any securities are
other-than-temporarily impaired. When assessing unrealized
losses for other-than-temporary impairment, the Company
considers the nature of the investment, the financial condition
of the issuer, the extent and duration of unrealized loss,
expected cash flows of underlying assets and market
conditions. At December 31, 2012, the Company had no
plans to sell securities with unrealized losses and believes it is
more likely than not that it would not be required to sell such
securities before recovery of their amortized cost.
There is limited market activity for non-agency mortgage-
backed securities held by the Company. As a result, the
Company estimates the fair value of these securities using
estimates of expected cash flows, discount rates and
management’s assessment of various other market factors,
which are judgmental in nature. The Company recorded
$46 million of impairment charges in earnings during 2012 on
non-agency mortgage-backed securities. These impairment
charges were due to changes in expected cash flows primarily
resulting from increases in defaults in the underlying mortgage
pools. During 2012, the Company also recognized impairment
charges of $27 million in earnings related to certain perpetual
preferred securities issued by financial institutions, following
the downgrades of money center banks by a rating agency.
The unrealized loss on perpetual preferred securities in a loss
position at December 31, 2012, was $14 million. Further
adverse changes in market conditions may result in additional
impairment charges in future periods.
During 2011, the Company recorded $35 million of
impairment charges in earnings predominately on non-agency
mortgage-backed securities. These impairment charges were
due to changes in expected cash flows primarily resulting from
increases in defaults in the underlying mortgage pools.
Refer to Notes 4 and 20 in the Notes to Consolidated
Financial Statements for further information on investment
securities.
34 U.S. BANCORP