Edgar Filing: SUNTRUST BANKS INC

STI-6.30.13 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-08918

SUNTRUST BANKS, INC.

(Exact name of registrant as specified in its charter)



Georgia		58-1575035
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

303 Peachtree Street, N.E., Atlanta, Georgia 30308

(Address of principal executive offices) (Zip Code)

(404) 588-7711

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



	Large accelerated filer x		Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

At July 31, 2013, 537,528,406 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding.

TABLE OF CONTENTS



		Page
Glossary of Defined Terms		i - iii

PART I FINANCIAL INFORMATION		iii

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income	1
	Consolidated Statements of Comprehensive (Loss)/Income	2
	Consolidated Balance Sheets	3
	Consolidated Statements of Shareholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	80
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	123
Item 4.	Controls and Procedures	123

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	123
Item 1A.	Risk Factors	123
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	124
Item 3.	Defaults Upon Senior Securities	125
Item 4.	Mine Safety Disclosures	125
Item 5.	Other Information	125
Item 6.	Exhibits	125

SIGNATURE		126

GLOSSARY OF DEFINED TERMS

ABS — Asset-backed securities.

ACH — Automated clearing house.

AFS — Available for sale.

AIP — Annual Incentive Plan.

ALCO — Asset/Liability Management Committee.

ALM — Asset/Liability Management.

ALLL — Allowance for loan and lease losses.

AOCI — Accumulated other comprehensive income.

ARS — Auction rate securities.

ASU — Accounting standards update.

ATE — Additional termination event.

ATM — Automated teller machine.

Bank — SunTrust Bank.

Basel III — The third Basel Accord developed by the BCBS to strengthen existing regulatory capital requirements.

BCBS — Basel Committee on Banking Supervision.

Board — The Company’s Board of Directors.

C&I — Commercial and Industrial.

CCAR — Comprehensive Capital Analysis and Review.

CDO — Collateralized debt obligation.

CD — Certificate of deposit.

CDS — Credit default swaps.

CEO — Chief Executive Officer.

CFO — Chief Financial Officer.

CIB — Corporate and Investment Banking.

Class A shares — Visa Inc. Class A common stock.

Class B shares —Visa Inc. Class B common stock.

CLO — Collateralized loan obligation.

Coke — The Coca-Cola Company.

Company — SunTrust Banks, Inc.

CP — Commercial paper.

CRE — Commercial Real Estate.

CSA — Credit support annex.

DDA — Demand deposit account.

Dodd-Frank Act — The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

DBRS — DBRS, Inc.

DTA — Deferred tax asset.

EPS — Earnings per share.

ERISA — Employee Retirement Income Security Act of 1974.

Exchange Act — Securities Exchange Act of 1934.

FASB — Financial Accounting Standards Board.

FDIC — The Federal Deposit Insurance Corporation.

Federal Reserve — The Board of Governors of the Federal Reserve System.

Fed funds — Federal funds.

FFELP — Federal Family Education Loan Program.

FHA — Federal Housing Administration.

FHLB — Federal Home Loan Bank.

FICO — Fair Isaac Corporation.

Fitch — Fitch Ratings Ltd.

FRB — Federal Reserve Board.

FTE — Fully taxable-equivalent.

FVO — Fair value option.

GenSpring — GenSpring Family Offices, LLC.

GSE — Government-sponsored enterprise.

HAMP — Home Affordable Modification Program.

HARP — Home Affordable Refinance Program.

HUD — U.S. Department of Housing and Urban Development.

IIS — Institutional Investment Solutions.

IPO — Initial public offering.

IRLC — Interest rate lock commitment.

ISDA — International Swaps and Derivatives Association.

LCR — Liquidity coverage ratio.

LGD — Loss given default.

LHFI — Loans held for investment.

LHFI-FV — Loans held for investment carried at fair value.

LHFS — Loans held for sale.

LIBOR —London InterBank Offered Rate.

LOCOM – Lower of cost or market.

LTI — Long-term incentive.

LTV— Loan to value.

MBS — Mortgage-backed securities.

MD&A — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Moody’s — Moody’s Investors Service.

MRA — Master Repurchase Agreement.

MRMG — Model Risk Management Group.

MSR — Mortgage servicing right.

MVE — Market value of equity.

NOW — Negotiable order of withdrawal account.

NPA — Nonperforming assets.

NPL — Nonperforming loan.

NPR — Notice of Proposed Rulemaking.

OCC — Office of the Comptroller of the Currency.

OCI — Other comprehensive income.

OFAC — Office of Foreign Assets Control.

OIG — Office of Inspector General.

OREO — Other real estate owned.

OTC — Over-the-counter.

OTTI — Other-than-temporary impairment.

Parent Company — SunTrust Banks, Inc., the parent Company of SunTrust Bank and other subsidiaries of

SunTrust Banks, Inc.

PD — Probability of default.

QSPE — Qualifying special-purpose entity.

RidgeWorth — RidgeWorth Capital Management, Inc.

ROA — Return on average total assets.

ROE — Return on average common shareholders’ equity.

RSU — Restricted stock unit.

RWA — Risk-weighted assets.

S&P — Standard and Poor’s.

SBA — Small Business Administration.

SCAP — Supervisory Capital Assessment Program.

SEC — U.S. Securities and Exchange Commission.

SERP — Supplemental Executive Retirement Plan.

SPE — Special purpose entity.

STIS — SunTrust Investment Services, Inc.

STM — SunTrust Mortgage, Inc.

STRH — SunTrust Robinson Humphrey, Inc.

SunTrust — SunTrust Banks, Inc.

SunTrust Community Capital — SunTrust Community Capital, LLC.

TAG — Transaction Account Guarantee.

TDR — Troubled debt restructuring.

TRS — Total return swaps.

U.S. — United States.

U.S. GAAP — Generally Accepted Accounting Principles in the United States.

U.S. Treasury — The United States Department of the Treasury.

VA —Veterans Administration.

VAR —Value at risk.

VI — Variable interest.

VIE — Variable interest entity.

Visa —The Visa, U.S.A. Inc. card association or its affiliates, collectively.

Visa Counterparty — a financial institution which purchased the Company's Visa Class B shares.

W&IM — Wealth and Investment Management.

PART I - FINANCIAL INFORMATION

The following unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary to comply with Regulation S-X have been included. Operating results for the three and six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013.

iii



Item 1.	FINANCIAL STATEMENTS (UNAUDITED)

SunTrust Banks, Inc.

Consolidated Statements of Income



	Three Months Ended June 30				Six Months Ended June 30
(Dollars in millions and shares in thousands, except per share data) (Unaudited)	2013		2012		2013		2012
Interest Income
Interest and fees on loans		$1,157		$1,263		$2,326		$2,563
Interest and fees on loans held for sale	29		31		60		55
Interest and dividends on securities available for sale¹	143		180		286		375
Trading account interest and other	18		18		34		33
Total interest income	1,347		1,492		2,706		3,026
Interest Expense
Interest on deposits	75		118		154		245
Interest on long-term debt	53		90		104		178
Interest on other borrowings	8		10		16		18
Total interest expense	136		218		274		441
Net interest income	1,211		1,274		2,432		2,585
Provision for credit losses	146		300		358		617
Net interest income after provision for credit losses	1,065		974		2,074		1,968
Noninterest Income
Service charges on deposit accounts	164		167		324		332
Trust and investment management income	130		130		254		260
Retail investment services	69		62		130		120
Other charges and fees	97		111		186		208
Investment banking income	93		75		161		147
Trading income	49		70		91		127
Card fees	78		85		154		164
Mortgage production related income	133		103		292		166
Mortgage servicing related income	1		70		39		151
Net securities gains²	—		14		2		32
Other noninterest income	44		53		88		109
Total noninterest income	858		940		1,721		1,816
Noninterest Expense
Employee compensation	635		654		1,246		1,306
Employee benefits	102		108		250		254
Outside processing and software	187		180		365		356
Net occupancy expense	86		88		175		176
Regulatory assessments	41		60		95		111
Equipment expense	46		46		91		91
Operating losses	72		69		111		129
Credit and collection services	52		61		85		116
Marketing and customer development	31		32		61		59
Amortization of intangible assets	6		11		12		22
Other real estate expense	1		52		1		103
Net loss on debt extinguishment	—		13		—		13
Other noninterest expense	138		172		268		351
Total noninterest expense	1,397		1,546		2,760		3,087
Income before provision for income taxes	526		368		1,035		697
Provision for income taxes	146		91		297		160
Net income including income attributable to noncontrolling interest	380		277		738		537
Net income attributable to noncontrolling interest	3		2		9		12
Net income		$377		$275		$729		$525
Net income available to common shareholders		$365		$270		$705		$515
Net income per average common share:
Diluted		$0.68		$0.50		$1.31		$0.96
Basic	0.68		0.51		1.32		0.97
Dividends declared per common share	0.10		0.05		0.15		0.10
Average common shares - diluted	539,763		537,495		539,812		536,951
Average common shares - basic	535,172		533,964		535,425		533,532

¹Includes dividends on Coke common stock of $15 million and $31 million during the three and six months ended June 30, 2012, respectively.

²Includes credit-related OTTI losses of $0 and $2 million that were unrealized losses reclassified from OCI, before taxes, for the three months ended June 30, 2013 and 2012, respectively, and $1 million and $4 million that were unrealized losses reclassified from OCI, before taxes, for the six months ended June 30, 2013 and 2012, respectively.

See Notes to Consolidated Financial Statements (unaudited).

SunTrust Banks, Inc.

Consolidated Statements of Comprehensive (Loss)/Income



	Three Months Ended June 30						Six Months Ended June 30
(Dollars in millions) (Unaudited)	2013			2012			2013			2012
Net income		$377			$275			$729			$525
Components of other comprehensive (loss)/income:
Change in net unrealized gains on securities, net of tax of ($223), $80, ($265), and $107, respectively	(382		)	142			(455		)	192
Change in net unrealized gains on derivatives, net of tax of ($54), ($38), ($96), and ($96), respectively	(91		)	(69		)	(163		)	(170		)
Change related to employee benefit plans, net of tax of $3, ($2), $15, and ($16), respectively	5			(4		)	26			(28		)
Total other comprehensive (loss)/income	(468		)	69			(592		)	(6		)
Total comprehensive (loss)/income		($91	)		$344			$137			$519

See Notes to Consolidated Financial Statements (unaudited).

SunTrust Banks, Inc.

Consolidated Balance Sheets




(Dollars in millions and shares in thousands) (Unaudited)	June 30, 2013			December 31, 2012
Assets
Cash and due from banks		$3,027			$7,134
Federal funds sold and securities borrowed or purchased under agreements to resell	1,111			1,101
Interest-bearing deposits in other banks	21			22
Cash and cash equivalents	4,159			8,257
Trading assets (includes encumbered securities of $926 and $727 at June 30, 2013 and December 31, 2012, respectively)	5,824			6,049
Securities available for sale	23,389			21,953
Loans held for sale¹ ($3,196 and $3,243 at fair value at June 30, 2013 and December 31, 2012, respectively)	3,647			3,399
Loans² ($339 and $379 at fair value at June 30, 2013 and December 31, 2012, respectively)	122,031			121,470
Allowance for loan and lease losses	(2,125		)	(2,174		)
Net loans	119,906			119,296
Premises and equipment	1,506			1,564
Goodwill	6,369			6,369
Other intangible assets (MSRs at fair value: $1,199 and $899 at June 30, 2013 and December 31, 2012, respectively)	1,244			956
Other real estate owned	198			264
Other assets	5,304			5,335
Total assets		$171,546			$173,442
Liabilities and Shareholders’ Equity
Noninterest-bearing consumer and commercial deposits		$37,999			$39,481
Interest-bearing consumer and commercial deposits	87,589			90,699
Total consumer and commercial deposits	125,588			130,180
Brokered time deposits (CDs at fair value: $793 and $832 at June 30, 2013 and December 31, 2012, respectively)	2,006			2,136
Foreign deposits	25			—
Total deposits	127,619			132,316
Funds purchased	420			617
Securities sold under agreements to repurchase	1,869			1,574
Other short-term borrowings	5,825			3,303
Long-term debt ³ ($1,594 and $1,622 at fair value at June 30, 2013 and December 31, 2012, respectively)	9,818			9,357
Trading liabilities	1,176			1,161
Other liabilities	3,812			4,129
Total liabilities	150,539			152,457
Preferred stock, no par value	725			725
Common stock, $1.00 par value	550			550
Additional paid in capital	9,126			9,174
Retained earnings	11,447			10,817
Treasury stock, at cost, and other⁴	(558		)	(590		)
Accumulated other comprehensive (loss)/income, net of tax	(283		)	309
Total shareholders’ equity	21,007			20,985
Total liabilities and shareholders’ equity		$171,546			$173,442

Common shares outstanding	538,653			538,959
Common shares authorized	750,000			750,000
Preferred shares outstanding	7			7
Preferred shares authorized	50,000			50,000
Treasury shares of common stock	11,268			10,962
¹ Includes loans held for sale, at fair value, of consolidated VIEs		$289			$319
² Includes loans of consolidated VIEs	345			365
³ Includes debt of consolidated VIEs ($285 and $286 at fair value at June 30, 2013 and December 31, 2012, respectively)	645			666
⁴ Includes noncontrolling interest held	115			114

See Notes to Consolidated Financial Statements (unaudited).

SunTrust Banks, Inc.

Consolidated Statements of Shareholders’ Equity



(Dollars and shares in millions, except per share data) (Unaudited)	Preferred Stock		Common Shares Outstanding		Common Stock		Additional Paid in Capital			Retained Earnings			Treasury Stock and Other ¹			Accumulated Other Comprehensive (Loss)/Income ²			Total
Balance, January 1, 2012		$275	537			$550		$9,306			$8,978			($792	)		$1,749			$20,066
Net income	—		—		—		—			525			—			—			525
Other comprehensive loss	—		—		—		—			—			—			(6		)	(6		)
Change in noncontrolling interest	—		—		—		—			—			4			—			4
Common stock dividends, $0.10 per share	—		—		—		—			(54		)	—			—			(54		)
Preferred stock dividends, $2,033 per share	—		—		—		—			(6		)	—			—			(6		)
Exercise of stock options and stock compensation expense	—		—		—		(17		)	—			26			—			9
Restricted stock activity	—		1		—		(61		)	—			65			—			4
Amortization of restricted stock compensation	—		—		—		—			—			15			—			15
Issuance of stock for employee benefit plans and other	—		—		—		(10		)	—			21			—			11
Balance, June 30, 2012		$275	538			$550		$9,218			$9,443			($661	)		$1,743			$20,568
Balance, January 1, 2013		$725	539			$550		$9,174			$10,817			($590	)		$309			$20,985
Net income	—		—		—		—			729			—			—			729
Other comprehensive loss	—		—		—		—			—			—			(592		)	(592		)
Change in noncontrolling interest	—		—		—		—			—			1			—			1
Common stock dividends, $0.15 per share	—		—		—		—			(81		)	—			—			(81		)
Preferred stock dividends ³	—		—		—		—			(18		)	—			—			(18		)
Acquisition of treasury stock	—		(2	)	—		—			—			(50		)	—			(50		)
Exercise of stock options and stock compensation expense	—		1		—		(15		)	—			25			—			10
Restricted stock activity	—		1		—		(33		)	—			37			—			4
Amortization of restricted stock compensation	—		—		—		—			—			15			—			15
Issuance of stock for employee benefit plans and other	—		—		—		—			—			4			—			4
Balance, June 30, 2013		$725	539			$550		$9,126			$11,447			($558	)		($283	)		$21,007

¹At June 30, 2013, includes ($605) million for treasury stock, ($68) million for compensation element of restricted stock, and $115 million for noncontrolling interest.

At June 30, 2012, includes ($707) million for treasury stock, ($65) million for compensation element of restricted stock, and $111 million for noncontrolling interest.

²Components of AOCI at June 30, 2013, included $65 million in unrealized net gains on AFS securities, $369 million in unrealized net gains on derivative financial instruments, and ($717) million related to employee benefit plans. At June 30, 2012, components included $2,055 million in unrealized net gains on AFS securities, $399 million in unrealized net gains on derivative financial instruments, and ($711) million related to employee benefit plans.

³Dividends were $2,022 per share for Perpetual Preferred Stock Series A and B and $2,856 per share for Perpetual Preferred Stock Series E for the six months ended June 30, 2013.

See Notes to Consolidated Financial Statements (unaudited).

SunTrust Banks, Inc. Consolidated Statements of Cash Flows

	Six Months Ended June 30
(Dollars in millions) (Unaudited)	2013			2012
Cash Flows from Operating Activities
Net income including income attributable to noncontrolling interest		$738			$537
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	365			382
Origination of mortgage servicing rights	(203		)	(161		)
Provisions for credit losses and foreclosed property	389			706
Mortgage repurchase provision	29			330
Stock option compensation and amortization of restricted stock compensation	16			17
Net loss on extinguishment of debt	—			13
Net securities gains	(2		)	(32		)
Net gain on sale of loans held for sale, loans, and other assets	(350		)	(501		)
Net decrease/(increase) in loans held for sale	141			(121		)
Net increase in other assets	(274		)	(336		)
Net (decrease)/increase in other liabilities	(125		)	18
Net cash provided by operating activities	724			852
Cash Flows from Investing Activities
Proceeds from maturities, calls, and paydowns of securities available for sale	3,233			3,179
Proceeds from sales of securities available for sale	497			2,210
Purchases of securities available for sale	(5,828		)	(1,451		)
Net increase in loans, including purchases of loans	(1,608		)	(4,312		)
Proceeds from sales of loans	383			1,054
Capital expenditures	(43		)	(112		)
Payments related to acquisitions, including contingent consideration	—			(9		)
Proceeds from the sale of other real estate owned and other assets	249			313
Net cash (used in)/provided by investing activities	(3,117		)	872
Cash Flows from Financing Activities
Net (decrease)/increase in total deposits	(4,697		)	481
Net increase/(decrease) in funds purchased, securities sold under agreements to repurchase, and other short-term borrowings	2,620			(1,938		)
Proceeds from the issuance of long-term debt	609			4,000
Repayment of long-term debt	(99		)	(1,991		)
Repurchase of common stock	(50		)	—
Common and preferred dividends paid	(99		)	(60		)
Stock option activity	11			14
Net cash (used in)/provided by financing activities	(1,705		)	506
Net (decrease)/increase in cash and cash equivalents	(4,098		)	2,230
Cash and cash equivalents at beginning of period	8,257			4,509
Cash and cash equivalents at end of period		$4,159			$6,739
Supplemental Disclosures:
Loans transferred from loans held for sale to loans		$17			$31
Loans transferred from loans to loans held for sale	144			1,116
Loans transferred from loans and loans held for sale to other real estate owned	134			200

See Notes to Consolidated Financial Statements (unaudited).

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been

made.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could vary from these estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The Company evaluated subsequent events through the date its financial statements were issued.

These financial statements should be read in conjunction with the Company’s 2012 Annual Report on Form 10-K. During the second quarter of 2013, the Company revised its credit policy relating to residential loans that have been discharged in Chapter 7 bankruptcy and not reaffirmed by the borrower, such that these loans are reclassified to accrual status from nonaccrual status after six months of payment performance following discharge by the bankruptcy court. As a result, the Company reclassified approximately $220 million of performing Chapter 7 bankruptcy loans that have been performing for six months or more since discharge to accrual status from nonaccrual status during the second quarter; however, these loans continued to be reported as TDRs.

Except for accounting policies that have been recently adopted as described below, and the policy change related to Chapter 7 bankruptcy loans noted above, there have been no significant changes to the Company’s accounting policies as disclosed in the Company’s 2012 Annual Report on Form 10-K.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." The ASU requires additional disclosures about financial instruments and derivative instruments that are offset or subject to an enforceable master netting arrangement or similar agreement. In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, which more narrowly defined the scope of financial instruments to only include derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. The Company adopted these ASUs as of January 1, 2013, and the adoption did not have an impact on the Company's financial position, results of operations, or EPS. See Note 2, "Federal Funds Sold and Securities Borrowed or Purchased under Agreements to Resell" and Note 11, "Derivative Financial Instruments."

In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" which provides disclosure guidance on amounts reclassified out of AOCI by component. The Company adopted the ASU as of January 1, 2013, and the adoption did not have an impact on the Company's financial position, results of operations, or EPS. See Note 16, "Accumulated Other Comprehensive Income."

In March 2013, the FASB issued ASU 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)." The ASU requires additional disclosures about joint and several liability arrangements and requires the Company to measure obligations resulting from joint and several liability arrangements as the sum of the amount the Company agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the Company expects to pay on behalf of its co-obligors. The ASU is effective for the fiscal years and interim periods beginning after December 15, 2013. The Company is evaluating the impact of the ASU; however, it is not expected to have a significant impact on the Company's financial position, results of operations, or EPS.

In June 2013, the FASB issued ASU 2013-08, "Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements." The ASU clarifies the characteristics of an investment company and requires an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting. The ASU is effective for the fiscal years and interim periods beginning

Notes to Consolidated Financial Statements (Unaudited), continued

after December 15, 2013. The Company is evaluating the impact of the ASU; however, it is not expected to have a significant impact on the Company's financial position, results of operations, or EPS.

In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the Emerging Issues Task Force).” The ASU permits the Fed Funds Effective Swap Rate (OIS) to be used as a benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury rates and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The ASU was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The ASU has no impact on the Company's current hedging relationships and, thus, no impact on the Company's financial position, results of operations, or EPS.

In July 2013, the FASB issued ASU 2013-11,“Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Emerging Issues Task Force).” Prior to this ASU, U.S. GAAP did not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU requires, with limited exceptions, that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a DTA for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The ASU is effective for fiscal years and interim periods beginning after December 15, 2013. As early adoption is permitted, the Company adopted this ASU upon issuance and it resulted in an immaterial reclassification within liabilities in the Consolidated Balance Sheets. As this ASU only impacts financial statement presentation, there will be no impact on the Company's financial position, results of operations, or EPS.

NOTE 2 - FEDERAL FUNDS SOLD AND SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL

Federal funds sold and securities borrowed or purchased under agreements to resell were as follows:



(Dollars in millions)	June 30, 2013		December 31, 2012
Federal funds		$69		$29
Securities borrowed	265		155
Resell agreements	777		917
Total federal funds sold and securities borrowed or purchased under agreements to resell		$1,111		$1,101

Securities purchased under agreements to resell are primarily collateralized by U.S. government or agency securities and are carried at the amounts at which securities will be subsequently resold. Securities borrowed are primarily collateralized by corporate securities. The Company takes possession of all securities under agreements to resell and securities borrowed and performs the appropriate margin evaluation on the acquisition date based on market volatility, as necessary. It is the Company's policy to obtain possession of collateral with a fair value between 95% to 110% of the principal amount loaned under resale and securities borrowing agreements. The total market value of the collateral held was $1.0 billion and $1.1 billion at June 30, 2013 and December 31, 2012, of which $254 million and $246 million was repledged, respectively. The Company has also pledged $926 million and $727 million of trading assets to secure $934 million and $703 million of repurchase agreements at June 30, 2013 and December 31, 2012, respectively.

Notes to Consolidated Financial Statements (Unaudited), continued

Netting of Securities - Repurchase and Resell Agreements

The Company has various financial assets and financial liabilities that are subject to enforceable master netting agreements or similar agreements. The Company's derivatives that are subject to enforceable master netting agreements or similar agreements are discussed in Note 11, "Derivative Financial Instruments." Securities purchased under agreements to resell and securities sold under agreements to repurchase are governed by a MRA. Under the terms of the MRA, all transactions between the Company and the counterparty constitute a single business relationship such that in the event of default, the nondefaulting party is entitled to set off claims and apply property held by that party in respect of any transaction against obligations owed. Any payments, deliveries, or other transfers may be applied against each other and netted.

The following table presents the Company's eligible securities borrowed or purchased under agreements to resell and securities sold under agreements to repurchase at June 30, 2013 and December 31, 2012:



(Dollars in millions)	Gross Amount		Amount Offset		Net Amount Presented in Consolidated Balance Sheets			Held/Pledged Financial Instruments		Net Amount
June 30, 2013
Financial assets:
Securities borrowed or purchased under agreements to resell		$1,042		$—		$1,042	^{1, 2}		$1,033		$9
Financial liabilities:
Securities sold under agreements to repurchase	1,869		—		1,869		¹	1,869		—

December 31, 2012
Financial assets:
Securities borrowed or purchased under agreements to resell		$1,072		$—		$1,072	^1,2		$1,069		$3
Financial liabilities:
Securities sold under agreements to repurchase	1,574		—		1,574		¹	1,574		—

¹None of the Company's repurchase and reverse repurchase transactions met the right of setoff criteria at June 30, 2013 and December 31, 2012.

²Excludes $69 million and $29 million of Fed funds sold which are not subject to a master netting agreement at June 30, 2013 and December 31, 2012, respectively.

Notes to Consolidated Financial Statements (Unaudited), continued

NOTE 3 – SECURITIES AVAILABLE FOR SALE

Securities Portfolio Composition



	June 30, 2013
(Dollars in millions)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury securities		$793		$7		$22		$778
Federal agency securities	2,203		57		38		2,222
U.S. states and political subdivisions	248		10		2		256
MBS - agency	18,784		453		324		18,913
MBS - private	181		1		1		181
ABS	124		2		1		125
Corporate and other debt securities	37		3		—		40
Other equity securities¹	873		1		—		874
Total securities AFS		$23,243		$534		$388		$23,389

	December 31, 2012
(Dollars in millions)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury securities		$212		$10		$—		$222
Federal agency securities	1,987		85		3		2,069
U.S. states and political subdivisions	310		15		5		320
MBS - agency	17,416		756		3		18,169
MBS - private	205		4		—		209
ABS	214		5		3		216
Corporate and other debt securities	42		4		—		46
Other equity securities¹	701		1		—		702
Total securities AFS		$21,087		$880		$14		$21,953

¹At June 30, 2013, other equity securities was comprised of the following: $334 million in FHLB of Atlanta stock, $402 million in Federal Reserve Bank stock, $137 million in mutual fund investments, and $1 million of other. At December 31, 2012, other equity securities was comprised of the following: $229 million in FHLB of Atlanta stock, $402 million in Federal Reserve Bank stock, $69 million in mutual fund investments, and $2 million of other.

The following table presents interest and dividends on securities AFS:



	Three Months Ended June 30				Six Months Ended June 30
(Dollars in millions)	2013		2012		2013		2012
Taxable interest		$133		$153		$265		$322
Tax-exempt interest	3		4		5		8
Dividends¹	7		23		16		45
Total interest and dividends		$143		$180		$286		$375

¹Includes dividends on the Coke common stock of $15 million and $31 million for the three and six months ended June 30, 2012, respectively.

Securities AFS that were pledged to secure public deposits, repurchase agreements, trusts, and other funds had a fair value of $9.3 billion and $10.6 billion at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013 and December 31, 2012, there were no securities AFS pledged under secured borrowing arrangements under which the secured party has possession of the collateral and would customarily sell or repledge that collateral, other than in an event of default of the Company.

The amortized cost and fair value of investments in debt securities at June 30, 2013, by estimated average life, are shown below. Actual cash flows may differ from estimated average lives and contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

Notes to Consolidated Financial Statements (Unaudited), continued



	Distribution of Maturities
(Dollars in millions)	1 Year or Less			1-5 Years			5-10 Years			After 10 Years			Total
Amortized Cost:
U.S. Treasury securities		$1			$201			$591			$—			$793
Federal agency securities	63			1,391			594			155			2,203
U.S. states and political subdivisions	90			102			11			45			248
MBS - agency	1,539			10,915			2,926			3,404			18,784
MBS - private	—			142			39			—			181
ABS	87			35			2			—			124
Corporate and other debt securities	—			17			20			—			37
Total debt securities		$1,780			$12,803			$4,183			$3,604			$22,370
Fair Value:
U.S. Treasury securities		$1			$208			$569			$—			$778
Federal agency securities	63			1,439			567			153			2,222
U.S. states and political subdivisions	92			108			12			44			256
MBS - agency	1,620			11,231			2,852			3,210			18,913
MBS - private	—			142			39			—			181
ABS	86			37			2			—			125
Corporate and other debt securities	—			19			21			—			40
Total debt securities		$1,862			$13,184			$4,062			$3,407			$22,515
Weighted average yield¹	3.02		%	2.87		%	2.26		%	2.68		%	2.72		%

¹Average yields are based on amortized cost and presented on a FTE basis.

Securities in an Unrealized Loss Position

The Company held certain investment securities where amortized cost exceeded fair market value, resulting in unrealized loss positions. Market changes in interest rates and credit spreads may result in temporary unrealized losses as the market price of securities fluctuates. At June 30, 2013, the Company did not intend to sell these securities nor was it more-likely-than-not that the Company would be required to sell these securities before their anticipated recovery or maturity. The Company has reviewed its portfolio for OTTI in accordance with the accounting policies in the Company's 2012 Annual Report on Form 10-K.



	June 30, 2013
	Less than twelve months				Twelve months or longer				Total
(Dollars in millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Temporarily impaired securities:
U.S. Treasury securities		$569		$22		$—		$—		$569		$22
Federal agency securities	670		38		—		—		670		38
U.S. states and political subdivisions	1		—		20		2		21		2
MBS - agency	7,405		324		—		—		7,405		324
ABS	—		—		13		1		13		1
Total temporarily impaired securities	8,645		384		33		3		8,678		387
OTTI securities¹:
MBS - private	63		1		—		—		63		1
Total OTTI securities	63		1		—		—		63		1
Total impaired securities		$8,708		$385		$33		$3		$8,741		$388

Notes to Consolidated Financial Statements (Unaudited), continued



	December 31, 2012
	Less than twelve months				Twelve months or longer				Total
(Dollars in millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Temporarily impaired securities:
Federal agency securities		$298		$3		$—		$—		$298		$3
U.S. states and political subdivisions	1		—		24		5		25		5
MBS - agency	1,212		3		—		—		1,212		3
ABS	—		—		13		2		13		2
Total temporarily impaired securities	1,511		6		37		7		1,548		13
OTTI securities¹:
ABS	—		—		3		1		3		1
Total OTTI securities	—		—		3		1		3		1
Total impaired securities		$1,511		$6		$40		$8		$1,551		$14

¹Includes OTTI securities for which credit losses have been recorded in earnings in current or prior periods.

At June 30, 2013 and December 31, 2012, unrealized losses on securities that have been in a temporarily impaired position for longer than twelve months included municipal ARS and one ABS collateralized by 2004 vintage home equity loans. The municipal securities are backed by investment grade rated obligors; however, the fair value of these securities continues to be impacted by the lack of a functioning ARS market and the extension of time for expected refinance and repayment. No credit loss is expected on these securities. The ABS continues to receive timely principal and interest payments, and is evaluated quarterly for credit impairment. Cash flow analysis shows that the underlying collateral can withstand highly stressed loss assumptions without incurring a credit loss.

The portion of unrealized losses on securities that have been other-than-temporarily impaired that relates to factors other than credit is recorded in AOCI. Losses related to credit impairment on these securities are determined through estimated cash flow analyses and have been recorded in earnings in current or prior periods.

Realized Gains and Losses and Other-than-Temporarily Impaired Securities



	Three Months Ended June 30						Six Months Ended June 30
(Dollars in millions)	2013			2012			2013			2012
Gross realized gains		$1			$16			$4			$36
Gross realized losses	(1		)	—			(1		)	—
OTTI	—			(2		)	(1		)	(4		)
Net securities gains		$—			$14			$2			$32

Credit impairment that is determined through the use of cash flow models is estimated using cash flows on security specific collateral and the transaction structure. Future expected credit losses are determined by using various assumptions, the most significant of which include default rates, prepayment rates, and loss severities. If, based on this analysis, the security is in an unrealized loss position and the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are then discounted at the security’s initial effective interest rate to arrive at a present value amount. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis of these securities.

The Company continues to reduce existing exposure primarily through paydowns. In certain instances, the amount of impairment losses recognized in earnings includes credit losses on debt securities that exceeds the total impairment, and as a result, the securities may have unrealized gains in AOCI relating to factors other than credit.

Notes to Consolidated Financial Statements (Unaudited), continued

The securities that gave rise to credit impairments recognized during the three and six months ended June 30, 2013 and 2012, as shown in the table below, consisted of private MBS with a fair value of approximately $2 million and $140 million, respectively, at June 30, 2013 and 2012.



	Three Months Ended June 30				Six Months Ended June 30
(Dollars in millions)	2013		2012		2013		2012
OTTI¹		$—		$—		$—		$—
Portion of gains/(losses) recognized in OCI (before taxes)	—		2		1		4
Net impairment losses recognized in earnings		$—		$2		$1		$4

¹The initial OTTI amount represents the excess of the amortized cost over the fair value of AFS debt securities. For subsequent impairments of the same security, amount includes additional declines in the fair value subsequent to the previously recorded OTTI, if applicable, until such time the security is no longer in an unrealized loss position.

The following is a rollforward of credit losses recognized in earnings for the three and six months ended June 30, 2013 and 2012, related to securities for which the Company does not intend to sell and it is not more-likely-than-not that the Company will be required to sell as of the end of each period presented. Subsequent credit losses may be recorded on securities without a corresponding further decline in fair value when there has been a decline in expected cash flows.



	Three Months Ended June 30					Six Months Ended June 30
(Dollars in millions)	2013		2012			2013		2012
Balance, beginning of period		$32		$27			$31		$25
Additions:
OTTI credit losses on previously impaired securities	—		2			1		4
Reductions:
Increases in expected cash flows recognized over the remaining life of the securities	—		(1		)	—		(1		)
Balance, end of period		$32		$28			$32		$28

The following table presents a summary of the significant inputs used in determining the measurement of credit losses recognized in earnings for private MBS and ABS for the six months ended June 30:



	2013	2012
Default rate	6 - 9%	2 - 6%
Prepayment rate	7 - 8%	7 - 21%
Loss severity	61 - 74%	47 - 56%

Assumption ranges represent the lowest and highest lifetime average estimates of each security for which credit losses were recognized in earnings. Ranges may vary from period to period as the securities for which credit losses are recognized vary. Additionally, severity may vary widely when losses are few and large.

Notes to Consolidated Financial Statements (Unaudited), continued

NOTE 4 - LOANS

Composition of Loan Portfolio

The composition of the Company's loan portfolio is shown in the following table:



(Dollars in millions)	June 30, 2013		December 31, 2012
Commercial loans:
C&I		$55,070		$54,048
Commercial real estate	4,308		4,127
Commercial construction	667		713
Total commercial loans	60,045		58,888
Residential loans:
Residential mortgages - guaranteed	3,622		4,252
Residential mortgages - nonguaranteed¹	23,341		23,389
Home equity products	14,682		14,805
Residential construction	635		753
Total residential loans	42,280		43,199
Consumer loans:
Guaranteed student loans	5,431		5,357
Other direct	2,483		2,396
Indirect	11,151		10,998
Credit cards	641		632
Total consumer loans	19,706		19,383
LHFI		$122,031		$121,470
LHFS		$3,647		$3,399

¹Includes $339 million and $379 million of loans carried at fair value at June 30, 2013 and December 31, 2012, respectively.

During the three months ended June 30, 2013 and 2012, the Company transferred $87 million and $687 million in LHFI to LHFS, and $5 million and $20 million in LHFS to LHFI, respectively. Additionally, during the three months ended June 30, 2013 and 2012, the Company sold $159 million and $907 million in loans and leases for a gain of $3 million and $30 million, respectively.

During the six months ended June 30, 2013 and 2012, the Company transferred $144 million and $1.1 billion in LHFI to LHFS, and $17 million and $31 million in LHFS to LHFI, respectively. Additionally, during the six months ended June 30, 2013 and 2012, the Company sold $662 million and $1.0 billion in loans and leases for a gain of $7 million and $36 million, respectively.

Credit Quality Evaluation

The Company evaluates the credit quality of its loan portfolio by employing a dual internal risk rating system, which assigns both PD and LGD ratings to derive expected losses. Assignment of PD and LGD ratings are predicated upon numerous factors, including consumer credit risk scores, rating agency information, borrower/guarantor financial capacity, LTV ratios, collateral type, debt service coverage ratios, collection experience, other internal metrics/analysis, and qualitative assessments.

For the commercial portfolio, the Company believes that the most appropriate credit quality indicator is an individual loan’s risk assessment expressed according to the broad regulatory agency classifications of Pass or Criticized. The Company's risk rating system is granular, with multiple risk ratings in both the Pass and Criticized categories. Pass ratings reflect relatively low PDs; whereas, criticized assets have a higher PD. The granularity in Pass ratings assists in the establishment of pricing, loan structures, approval requirements, reserves, and ongoing credit management requirements. The Company conforms to the following regulatory classifications for Criticized assets: Other Assets Especially Mentioned (or Special Mention), Adversely Classified, Doubtful, and Loss. However, for the purposes of disclosure, management believes the most meaningful distinction within the Criticized categories is between Accruing Criticized (which includes Special Mention and a portion of Adversely Classified) and Nonaccruing Criticized (which includes a portion of Adversely Classified and Doubtful and Loss). This distinction identifies those relatively higher risk

Notes to Consolidated Financial Statements (Unaudited), continued

loans for which there is a basis to believe that the Company will collect all amounts due from those where full collection is less certain.

Risk ratings are refreshed at least annually, or more frequently as appropriate, based upon considerations such as market conditions, loan characteristics, and portfolio trends. Additionally, management routinely reviews portfolio risk ratings, trends, and concentrations to support risk identification and mitigation activities.

For consumer and residential loans, the Company monitors credit risk based on indicators such as delinquencies and FICO scores. The Company believes that consumer credit risk, as assessed by the industry-wide FICO scoring method, is a relevant credit quality indicator. Borrower-specific FICO scores are obtained at origination as part of the Company’s formal underwriting process, and refreshed FICO scores are obtained by the Company at least quarterly.

For government-guaranteed loans, the Company monitors the credit quality based primarily on delinquency status, as it is a more relevant indicator of credit quality due to the government guarantee. At June 30, 2013 and December 31, 2012, 87% and 89%, respectively, of the guaranteed student loan portfolio was current with respect to payments. At June 30, 2013 and December 31, 2012, 82% and 83%, respectively, of the guaranteed residential loan portfolio was current with respect to payments. Loss exposure to the Company on these loans is mitigated by the government guarantee.

LHFI by credit quality indicator are shown in the tables below:



	Commercial Loans
	C&I				Commercial real estate				Commercial construction
(Dollars in millions)	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Credit rating:
Pass		$53,339		$52,292		$3,876		$3,564		$534		$506
Criticized accruing	1,504		1,562		378		497		110		173
Criticized nonaccruing	227		194		54		66		23		34
Total		$55,070		$54,048		$4,308		$4,127		$667		$713



	Residential Loans ¹
	Residential mortgages - nonguaranteed				Home equity products				Residential construction
(Dollars in millions)	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Current FICO score range:
700 and above		$17,671		$17,410		$11,376		$11,339		$482		$561
620 - 699	3,730		3,850		2,244		2,297		107		123
Below 620²	1,940		2,129		1,062		1,169		46		69
Total		$23,341		$23,389		$14,682		$14,805		$635		$753



	Consumer Loans ³
	Other direct				Indirect				Credit cards
(Dollars in millions)	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Current FICO score range:
700 and above		$2,051		$1,980		$8,391		$8,300		$442		$435
620 - 699	367		350		2,141		2,038		155		152
Below 620²	65		66		619		660		44		45
Total		$2,483		$2,396		$11,151		$10,998		$641		$632

¹Excludes $3.6 billion and $4.3 billion at June 30, 2013 and December 31, 2012, respectively, of guaranteed residential loans. At June 30, 2013 and December 31, 2012, the majority of these loans had FICO scores of 700 and above.

²For substantially all loans with refreshed FICO scores below 620, the borrower’s FICO score at the time of origination exceeded 620 but has since deteriorated as the loan has seasoned.

³Excludes $5.4 billion of guaranteed student loans at June 30, 2013 and December 31, 2012.

Notes to Consolidated Financial Statements (Unaudited), continued

The payment status for the LHFI portfolio is shown in the tables below: