UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2010
Commission File Number 1-34073
Huntington Bancshares Incorporated
     
Maryland
(State or other jurisdiction of
incorporation or organization)
  31-0724920
(I.R.S. Employer
Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
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 and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). o Yes o 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. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
There were 716,575,382 shares of Registrant’s common stock ($0.01 par value) outstanding on April 30, 2010.
 
 

 


 

HUNTINGTON BANCSHARES INCORPORATED
INDEX
         
       
 
       
       
 
       
    69  
 
       
    70  
 
       
    71  
 
       
    72  
 
       
    73  
 
       
    3  
 
       
    109  
 
       
    109  
 
       
    109  
 
       
       
 
       
    109  
 
       
    109  
 
       
    109  
 
       
    111  
 
       
  Exhibit 10.2
  Exhibit 12.1
  Exhibit 12.2
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2

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PART I. FINANCIAL INFORMATION
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified regional bank holding company headquartered in Columbus, Ohio. We have more than 144 years of serving the financial needs of our customers. Through our subsidiaries, including our banking subsidiary, The Huntington National Bank (the Bank), we provide full-service commercial and consumer banking services, mortgage banking services, equipment leasing, investment management, trust services, brokerage services, customized insurance service program, and other financial products and services. Our over 600 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. We also offer retail and commercial financial services online at huntington.com; through our technologically advanced, 24-hour telephone bank; and through our network of over 1,300 ATMs. The Auto Finance and Dealer Services (AFDS) group offers automobile loans to consumers and commercial loans to automobile dealers within our six-state banking franchise area. Selected financial service activities are also conducted in other states including: Private Financial Group (PFG) offices in Florida, Massachusetts, and New York, and Mortgage Banking offices in Maryland and New Jersey. International banking services are available through the headquarters office in Columbus and a limited purpose office located in the Cayman Islands and another in Hong Kong.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. This MD&A provides updates to the discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K). This MD&A should be read in conjunction with our 2009 Form 10-K, as well as the financial statements, notes, and other information contained in this report.
Our discussion is divided into key segments:
    Introduction — Provides overview comments on important matters including risk factors, acquisitions, and other items. These are essential for understanding our performance and prospects.
    Discussion of Results of Operations — Reviews financial performance from a consolidated company perspective. It also includes a “Significant Items” section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.
    Risk Management and Capital — Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
    Business Segment Discussion — Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.
A reading of each section is important to understand fully the nature of our financial performance and prospects.
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Actual results could differ materially from those contained or implied by such statements for a variety of factors including: (1) deterioration in the loan portfolio could be worse than expected due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) changes in economic conditions; (3) movements in interest rates; (4) competitive pressures on product pricing and services; (5) success and timing of other business strategies; (6) extended disruption of vital infrastructure; and (7) the nature, extent, and timing of governmental actions and reforms. Additional factors that could cause results to differ materially from those described above can be found in our 2009 Annual Report on Form 10-K, and documents subsequently filed by us with the Securities and Exchange Commission.

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All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Risk Factors
We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2) market risk , which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3) liquidity risk , which is the risk of loss due to the possibility that funds may not be available to satisfy current or future obligations resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues, and (4) operational risk , which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, external influences, fraudulent activities, disasters, and security risks.
More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2009 Form 10-K. Additional information regarding risk factors can also be found in the “Risk Management and Capital” discussion.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Consolidated Financial Statements included in our 2009 Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that significantly differ from when those estimates were made.
Our most significant accounting estimates relate to our allowance for credit losses (ACL), fair value measurements, and income taxes and deferred tax assets. These significant accounting estimates and their related application are discussed in our 2009 Form 10-K, and the discussion below provides pertinent updates to those accounting estimates.
Total Allowances for Credit Losses
The ACL is the sum of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC), and represents the estimate of the level of reserves appropriate to absorb inherent credit losses. The amount of the ACL was determined by judgments regarding the quality of each individual loan portfolio and loan commitments. All known relevant internal and external factors that affected loan collectibility were considered, including analysis of historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress such as were experienced throughout 2009, and have continued into 2010. We believe the process for determining the ACL considers all of the potential factors that could result in credit losses. However, the process includes judgmental and quantitative elements that may be subject to significant change. There is no certainty that the ACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. To the extent actual outcomes differ from our estimates, the credit quality of our customer base materially decreases, the risk profile of a market, industry, or group of customers changes materially, or if the ACL is determined to not be adequate, additional provision for credit losses could be required, which could adversely affect our business, financial condition, liquidity, capital, and results of operations in future periods.
At March 31, 2010, the ACL was $1,527.9 million, or 4.14% of total loans and leases. To illustrate the potential effect on the financial statements of our estimates of the ACL, a 50 basis point increase in the ACL would have required $184.7 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted net income for the first three-month period of 2010 by approximately $120.0 million after-tax, or $0.17 per common share.

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Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. We characterize active markets as those where transaction volumes are sufficient to provide objective pricing information, with reasonably narrow bid/ask spreads, and where received quoted prices do not vary widely. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. Inactive markets are characterized by low transaction volumes, price quotations that vary substantially among market participants, or in which minimal information is released publicly. When observable market prices do not exist, we estimate fair value primarily by using cash flow and other financial modeling methods. Our valuation methods consider factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Changes in these underlying factors, assumptions, or estimates in any of these areas could materially impact the amount of revenue or loss recorded.
The Financial Accounting Standard Board’s (FASB) Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements”, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
    Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.
    Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
    Level 3 — inputs that are unobservable and significant to the fair value measurement. Financial instruments are considered Level 3 when values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unoberservable.
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. Occasionally, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs at the measurement date. The fair values measured at each level of the fair value hierarchy, as well as additional discussion regarding fair value measurements, can be found in Note 13 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
AUTOMOBILE LOAN SECURITIZATION
Effective January 1, 2010, we consolidated an automobile loan securitization that previously had been accounted for as an off-balance sheet transaction. We elected to account for the automobile loan receivables and the associated notes payable at fair value per guidance supplied in ASC 810, “Consolidation”.
The key assumptions used to determine the fair value of the automobile loan receivables included a projection of expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. Certain interest rates are available from similarly traded securities while other interest rates are developed internally based on similar asset-backed security transactions in the market. The associated notes payable are valued based upon Level 1 prices because they are actively traded in the market.
INVESTMENT SECURITIES
(This section should be read in conjunction with the “Investment Securities Portfolio” discussion and Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements.)

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Level 3 Analysis on Certain Securities Portfolios
Our Alt-A, collateralized mortgage obligation (CMO), and pooled-trust-preferred securities portfolios are classified as Level 3, and as such, the significant estimates used to determine the fair value of these securities have greater subjectivity. The Alt-A and CMO securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of our pooled-trust-preferred securities portfolio are reviewed quarterly. These reviews are supported with analysis from independent third parties, and are used as a basis for impairment analysis. These three portfolios, and the results of our impairment analysis for each portfolio, are discussed in further detail below:
Alt-A mortgage-backed / Private-label CMO securities represent securities collateralized by first-lien residential mortgage loans. At March 31, 2010, our Alt-A securities portfolio had a fair value of $113.7 million, and our CMO securities portfolio had a fair value of $462.7 million. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within these portfolios as Level 3 in the fair value hierarchy. The securities were priced with the assistance of an outside third-party specialist using a discounted cash flow approach and the independent third-party’s proprietary pricing model. The model used inputs such as estimated prepayment speeds, losses, recoveries, default rates that were implied by the underlying performance of collateral in the structure or similar structures, discount rates that were implied by market prices for similar securities, collateral structure types, and house price depreciation/appreciation rates that were based upon macroeconomic forecasts.
We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if the securities in these portfolios were other-than-temporarily impaired. We used the analysis to determine whether we believed it is probable that all contractual cash flows would not be collected. All securities in these portfolios remained current with respect to interest and principal at March 31, 2010.
Our analysis indicated, as of March 31, 2010, a total of 4 Alt-A mortgage-backed securities and 10 private-label CMO securities could experience a loss of principal in the future. The future expected losses of principal on these other-than-temporarily impaired securities ranged from 1.33% to 88.79% of their par value. These losses were projected to occur beginning anywhere from 6 months to 21 months in the future. We measured the amount of credit impairment on these securities using the cash flows discounted at each security’s effective rate. As a result, during the 2010 first quarter, we recorded $0.6 million of other-than-temporary impairment (OTTI) in our Alt-A mortgage-backed securities portfolio and $2.6 million of OTTI in our private-label CMO securities portfolio. These OTTI adjustments negatively impacted our earnings.
Pooled-trust-preferred securities represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. At March 31, 2010, our pooled-trust-preferred securities portfolio had a fair value of $105.4 million. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within this portfolio as Level 3 in the fair value hierarchy. The collateral generally consisted of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis was used to estimate fair values and assess impairment for each security within this portfolio. Impairment was calculated as the difference between the carrying amount and the amount of cash flows discounted at each security’s effective rate. We engaged a third-party specialist with direct industry experience in pooled-trust-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. Relying on cash flows was necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities were no longer able to provide a fair value that was compliant with ASC 820, “Fair Value Measurements and Disclosures”.
The analysis was completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in each security and terms of each security’s structure. The credit review included analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using the most recently available financial and regulatory information for each underlying collateral issuer. We also reviewed historical industry default data and current/near term operating conditions. Using the results of our analysis, we estimated appropriate default and recovery probabilities for each piece of collateral and then estimated the expected cash flows for each security. No recoveries were assumed on issuers who are in default. The recovery assumptions on issuers who are deferring interest ranged from 10% to 55% with a cure assumed after the maximum deferral period. As a result of this testing, we believe we will experience a loss of principal or interest on 11 securities; and as such, recorded OTTI of $3.2 million in the 2010 first quarter relating to these securities. These OTTI adjustments negatively impacted our earnings.
Certain other assets and liabilities which are not financial instruments also involve fair value measurements, and were discussed in our 2009 Form 10-K. Pertinent updates regarding these assets and liabilities are discussed below:

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GOODWILL
Goodwill is tested for impairment annually, as of October 1, using a two-step process that begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis, using the same two-step process as the annual testing, if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Impairment losses, if any, are reflected in noninterest expense.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. Changes in market capitalization, certain judgments, and projections could result in a significantly different estimate of the fair value of the reporting units and could result in an impairment of goodwill.
We concluded that no goodwill impairment was required or existed during the 2010 first quarter.
OTHER REAL ESTATE OWNED (OREO)
OREO property obtained in satisfaction of a loan is recorded at its estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property, less anticipated selling costs, and the carrying value of the loan charged to the ALLL. Subsequent declines in value are reported as adjustments to the carrying amount, and are charged to noninterest expense. Gains or losses not previously recognized resulting from the sale of OREO are recognized in noninterest expense on the date of sale. At March 31, 2010, OREO totaled $152.3 million, representing a 9% increase compared with $140.1 million at December 31, 2009.
Income Taxes and Deferred Tax Assets
DEFERRED TAX ASSETS
At March 31, 2010, we had a net deferred tax asset of $557.2 million. Based on our ability to offset the net deferred tax asset against our forecast of future taxable income, there was no impairment of the deferred tax asset at March 31, 2010. All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized. However, our forecast process includes judgmental and quantitative elements that may be subject to significant change. If our forecast of taxable income within the carryforward periods available under applicable law is not sufficient to cover the amount of net deferred tax assets, such assets may be impaired.
On March 31, 2010, the net deferred tax asset relating to the assets acquired from Franklin Credit Management Corporation (Franklin) on March 31, 2009 (see “Significant Items” discussion) increased by $43.6 million relating to the expiration of the 12-month recognition period under Internal Revenue Code of 1986 (IRC) Section 382. In general, IRC Section 382 imposes a one-year limitation on bad debt deductions allowed for tax purposes under IRC section 166. Any bad debt deductions recognized after March 31, 2010, would not be limited by IRC Section 382.
Recent Accounting Pronouncements and Developments
Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2010 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.

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Table 1 — Selected Quarterly Income Statement Data (1)
                                             
        2010     2009  
(amounts in thousands, except per share amounts)       First     Fourth     Third     Second     First  
Interest income
      $ 546,779     $ 551,335     $ 553,846     $ 563,004     $ 569,957  
Interest expense
        152,886       177,271       191,027       213,105       232,452  
 
                                 
Net interest income
        393,893       374,064       362,819       349,899       337,505  
Provision for credit losses
        235,008       893,991       475,136       413,707       291,837  
 
                                 
Net interest income (loss) after provision for credit losses
        158,885       (519,927 )     (112,317 )     (63,808 )     45,668  
 
                                 
Service charges on deposit accounts
        69,339       76,757       80,811       75,353       69,878  
Brokerage and insurance income
        35,762       32,173       33,996       32,052       39,948  
Mortgage banking income
        25,038       24,618       21,435       30,827       35,418  
Trust services
        27,765       27,275       25,832       25,722       24,810  
Electronic banking
        25,137       25,173       28,017       24,479       22,482  
Bank owned life insurance income
        16,470       14,055       13,639       14,266       12,912  
Automobile operating lease income
        12,303       12,671       12,795       13,116       13,228  
Securities (losses) gains
        (31 )     (2,602 )     (2,374 )     (7,340 )     2,067  
Other noninterest income
        29,069       34,426       41,901       57,470       18,359  
 
                                 
Total noninterest income
        240,852       244,546       256,052       265,945       239,102  
 
                                 
Personnel costs
        183,642       180,663       172,152       171,735       175,932  
Outside data processing and other services
        39,082       36,812       38,285       40,006       32,992  
Deposit and other insurance expense
        24,755       24,420       23,851       48,138       17,421  
Net occupancy
        29,086       26,273       25,382       24,430       29,188  
OREO and foreclosure expense
        11,530       18,520       38,968       26,524       9,887  
Equipment
        20,624       20,454       20,967       21,286       20,410  
Professional services
        22,697       25,146       18,108       16,658       16,454  
Amortization of intangibles
        15,146       17,060       16,995       17,117       17,135  
Automobile operating lease expense
        10,066       10,440       10,589       11,400       10,931  
Marketing
        11,153       9,074       8,259       7,491       8,225  
Telecommunications
        6,171       6,099       5,902       6,088       5,890  
Printing and supplies
        3,673       3,807       3,950       4,151       3,572  
Goodwill impairment
                          4,231       2,602,713  
Gain on early extinguishment of debt (2)
              (73,615 )     (60 )     (73,038 )     (729 )
Other noninterest expense
        20,468       17,443       17,749       13,765       19,748  
 
                                 
Total noninterest expense
        398,093       322,596       401,097       339,982       2,969,769  
 
                                 
Income (Loss) before income taxes
        1,644       (597,977 )     (257,362 )     (137,845 )     (2,684,999 )
Benefit for income taxes
        (38,093 )     (228,290 )     (91,172 )     (12,750 )     (251,792 )
 
                                 
Net income (loss)
      $ 39,737     $ (369,687 )   $ (166,190 )   $ (125,095 )   $ (2,433,207 )
 
                                 
Dividends on preferred shares
        29,357       29,289       29,223       57,451       58,793  
 
                                 
Net income (loss) applicable to common shares
      $ 10,380     $ (398,976 )   $ (195,413 )   $ (182,546 )   $ (2,492,000 )
 
                                 
 
Average common shares — basic
        716,320       715,336       589,708       459,246       366,919  
Average common shares — diluted (3)
        718,593       715,336       589,708       459,246       366,919  
 
Net income (loss) per common share — basic
      $ 0.01     $ (0.56 )   $ (0.33 )   $ (0.40 )   $ (6.79 )
Net income (loss) per common share — diluted
        0.01       (0.56 )     (0.33 )     (0.40 )     (6.79 )
Cash dividends declared per common share
        0.01       0.01       0.01       0.01       0.01  
 
Return on average total assets
        0.31 %     (2.80 )%     (1.28 )%     (0.97 )%     (18.22 )%
Return on average total shareholders’ equity
        3.0       (25.6 )     (12.5 )     (10.2 )     N.M.  
Return on average tangible shareholders’ equity (4)
        4.2       (27.9 )     (13.3 )     (10.3 )     18.4  
Net interest margin (5)
        3.47       3.19       3.20       3.10       2.97  
Efficiency ratio (6)
        60.1       49.0       61.4       51.0       60.5  
Effective tax rate (benefit)
        N.M.       (38.2 )     (35.4 )     (9.2 )     (9.4 )
 
Revenue — fully-taxable equivalent (FTE)
                                           
Net interest income
      $ 393,893     $ 374,064     $ 362,819     $ 349,899     $ 337,505  
FTE adjustment
        2,248       2,497       4,177       1,216       3,582  
 
                                 
Net interest income (5)
        396,141       376,561       366,996       351,115       341,087  
Noninterest income
        240,852       244,546       256,052       265,945       239,102  
 
                                 
Total revenue (5)
      $ 636,993     $ 621,107     $ 623,048     $ 617,060     $ 580,189  
 
                                 
N.M., not a meaningful value.
     
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to “Significant Items” for additional discussion regarding these key factors.

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(2)   The 2009 fourth quarter gain related to the purchase of certain subordinated bank notes. The 2009 second quarter gain included $67.4 million related to the purchase of certain trust preferred securities.
 
(3)   For all the quarterly periods presented above, the impact of the convertible preferred stock issued in 2008 was excluded from the diluted share calculation. It was excluded because the result would have been higher than basic earnings per common share (anti-dilutive) for the periods.
 
(4)   Net income (loss) excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
 
(5)   On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(6)   Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).

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DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key condensed consolidated balance sheet and income statement trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion”.
Summary
We reported net income of $39.7 million in the 2010 first quarter, representing net income per common share of $0.01. These results compared favorably with a net loss of $369.7 million, or $0.56 per common share in the prior quarter. Comparisons with the prior quarter were impacted by factors that are discussed later in the “Significant Items” section (see “Significant Items” discussion) .
The return to profitability was a significant step forward and represents a resetting of our expectations, as we now expect to report a profit for the full-year of 2010. While this is positive, the economic environment remains challenging and we still do not believe there will be any significant economic turnaround in 2010, although there were signs of stabilization.
Credit quality performance in the 2010 first quarter continued to improve. Net charge-offs (NCOs) declined 46% from the prior quarter and represented the lowest level since the third quarter of 2008. Nonperforming assets (NPAs) decreased 7% during the quarter, partially as a result of a 52% decline in new NPAs to $237.9 million in the current quarter from $494.6 million in the prior quarter. Early stage delinquencies in both the commercial and consumer loan portfolios also declined. Despite these improved asset quality measures, and given the current challenging economic environment, we believed it was prudent to maintain our period end allowance for credit losses at 4.14% of total loans and leases, essentially unchanged from the end of the prior quarter. For the remainder of 2010, we expect that the level of NCOs and provision expense will continue to be below 2009 levels.
At the beginning of 2010, we viewed our commercial real estate (CRE) portfolio as our highest-risk loan portfolio. Total average CRE balances declined $0.8 billion as a result of our overall strategy to reduce the level of CRE exposure. The majority of the decline occurred within the noncore portfolio, consistent with our strategy to exit these noncore relationships.
Fully-taxable net interest income in the 2010 first quarter increased $19.6 million, or 5%, compared with the prior quarter, and primarily reflected a 28 basis point increase in the net interest margin. The increase in the net margin reflected a combination of factors including better pricing on deposits and loans, as well as a shift in our deposit mix to lower cost demand deposit and money market accounts. We are continuing to make progress in increasing our net interest income. We expect net interest income to continue to increase throughout 2010. This growth is expected to reflect a combination of factors, but primarily: (a) continued growth in lower-cost core deposits, (b) slightly higher loan and investment securities balances, and (c) a slightly higher net interest margin, reflecting improved loan and deposit spreads, as well as the benefit of continuing to shift our deposit mix to a higher concentration in noninterest-bearing accounts.
Noninterest income in the 2010 first quarter decreased $3.7 million, or 2%, compared with the prior quarter, primarily due to seasonal factors. We expect noninterest income to increase slightly from the current quarter level for the remainder of 2010. While we expect growth in asset management, as well as brokerage and insurance income, we expect those increases to be offset by declines in deposit service charge fees as the changes in related Federal Reserve’s regulations are implemented.
Noninterest expense in the 2010 first quarter increased $75.5 million, or 23%, compared with the prior quarter, primarily resulting from a $73.6 million gain on early extinguishment of debt that lowered the prior quarter’s noninterest expense. For the remainder of 2010, expenses will remain well-controlled, but are expected to increase slightly from the current quarter level, reflecting investments for growth and the continued implementation of key strategic initiatives.
Both liquidity and capital remained strong. Average total core deposits grew at a 5% annualized rate and our period-end loan-to-deposit ratio was 92%. Our tangible-common-equity-to-tangible-asset (TCE) ratio improved to 5.96% from 5.92%, and our regulatory capital ratios remain well above the regulatory “well-capitalized” thresholds. We are comfortable with our current level of capital. We do not have any current plans to issue additional capital.

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Significant Items
Definition of Significant Items
From time-to-time, revenue, expenses, or taxes, are impacted by items judged by us to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature, or otherwise make period-to-period comparisons less meaningful. We refer to such items as “Significant Items”. Most often, these “Significant Items” result from factors originating outside the company; e.g., regulatory actions/assessments, windfall gains, changes in accounting principles, one-time tax assessments/refunds, etc. In other cases they may result from our decisions associated with significant corporate actions out of the ordinary course of business; e.g., merger/restructuring charges, recapitalization actions, goodwill impairment, etc.
Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a “Significant Item”. For example, changes in the provision for credit losses, gains/losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a “Significant Item”.
We believe the disclosure of “Significant Items” in current and prior period results aids in better understanding our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing “Significant Items” in our external disclosure documents (e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K).
“Significant Items” for any particular period are not intended to be a complete list of items that may materially impact current or future period performance. A number of items could materially impact these periods, including those described in our 2009 Annual Report on Form 10-K and other factors described from time-to-time in our other filings with the Securities and Exchange Commission.
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons were impacted by a number of “Significant Items” summarized below.
  1.   Goodwill Impairment. The impacts of goodwill impairment on our reported results were as follows:
    During the 2009 first quarter, bank stock prices continued to decline significantly. Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash $2,602.7 million ($7.09 per common share) pretax charge to noninterest expense.
    During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01 per common share) was recorded to noninterest expense relating to the sale of a small payments-related business.
  2.   Franklin Relationship. Our relationship with Franklin was acquired in the Sky Financial Group, Inc. (Sky Financial) acquisition in 2007. On March 31, 2009, we restructured our relationship with Franklin . The impacts of this restructuring on our reported results were as follows:
    During the 2009 first quarter, a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) was recorded . Also, and although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to writedown the acquired mortgages and OREO collateral to fair value.
    During the 2010 first quarter, a $38.2 million ($0.05 per common share) net tax benefit was recognized, primarily reflecting the increase in the net deferred tax asset relating to the assets acquired from the restructuring.
  3.   Early Extinguishment of Debt. The positive impacts relating to the early extinguishment of debt on our reported results were: $73.6 million ($0.07 per common share) in the 2009 fourth quarter and $67.4 million ($0.10 per common share) in the 2009 second quarter. These amounts were recorded to noninterest expense.
  4.   Preferred Stock Conversion. During the 2009 first and second quarters, we converted 114,109 and 92,384 shares, respectively, of Series A 8.50% Non-cumulative Perpetual Preferred (Series A Preferred Stock) stock into common stock. As part of these transactions, there was a deemed dividend that did not impact net income, but resulted in a negative impact of $0.08 per common share for the 2009 first quarter and $0.06 per common share for the 2009 second quarter. (See “Capital” discussion located within the “Risk Management and Capital” section for additional information.)
  5.   Visa ® . Prior to the Visa ® initial public offering (IPO) occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. As a result of this ownership, we received shares of Visa ® stock at the time of the IPO. In the 2009 second quarter, we sold these Visa ® stock shares, resulting in a $31.4 million pretax gain ($0.04 per common share). This amount was recorded to noninterest income.

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  6.   Other Significant Items Influencing Earnings Performance Comparisons. In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:
2009 — Fourth Quarter
    $11.3 million ($0.02 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance.
2009 — Second Quarter
    $23.6 million ($0.03 per common share) negative impact due to a special Federal Deposit Insurance Corporation (FDIC) insurance premium assessment. This amount was recorded to noninterest expense.
The following table reflects the earnings impact of the above-mentioned significant items for periods affected by this Results of Operations discussion:
Table 2 — Significant Items Influencing Earnings Performance Comparison (1)
                                                 
    Three Months Ended  
    March 31, 2010     December 31, 2009     March 31, 2009  
(dollar amounts in thousands, except per share amounts)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
Net income — GAAP
  $ 39,737             $ (369,687 )           $ (2,433,207 )        
Earnings per share, after-tax
          $ 0.01             $ (0.56 )           $ (6.79 )
Change from prior quarter — $
            0.57               (0.23 )             (5.59 )
Change from prior quarter — %
            N.M. %             (69.7 )%             N.M. %
 
Change from year-ago — $
          $ 6.80             $ 0.64             $ (7.14 )
Change from year-ago — %
            N.M. %             N.M. %             N.M. %
                                                 
    Earnings (2)     EPS     Earnings (2)     EPS     Earnings (2)     EPS  
Significant items — favorable (unfavorable) impact:
                                               
Net tax benefit recognized (3)
  $ 38,222     $ 0.05     $     $     $     $  
Franklin relationship restructuring (3)
                            159,895       0.44  
Net gain on early extinguishment of debt
                73,615       0.07              
Deferred tax valuation allowance benefit (3)
                11,341       0.02              
Goodwill impairment
                            (2,602,713 )     7.09  
Preferred stock conversion deemed dividend
                                  (0.08 )
     
N.M., not a meaningful value.
 
(1)   See “Significant Items” discussion.
 
(2)   Pretax unless otherwise noted.
 
(3)   After-tax.
Pretax, Pre-provision Income Trends
One non-GAAP performance measurement that we believe is useful in analyzing underlying performance trends is pretax, pre-provision income. This is the level of earnings adjusted to exclude the impact of: (a) provision expense, which is excluded because its absolute level is elevated and volatile, (b) investment securities gains/losses, which are excluded because securities market valuations may also become particularly volatile in times of economic stress, (c) amortization of intangibles expense, which is excluded because the return on tangible common equity is a key measurement that we use to gauge performance trends, and (d) certain other items identified by us (see “Significant Items” above) that we believe may distort our underlying performance trends.

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The following table reflects pretax, pre-provision income for the each of the past five quarters:
Table 3 — Pretax, Pre-provision Income (1)
                                         
    2010     2009  
(dollar amounts in thousands)   First     Fourth     Third     Second     First  
 
                                       
Income (Loss) Before Income Taxes
  $ 1,644     $ (597,977 )   $ (257,362 )   $ (137,845 )   $ (2,684,999 )
 
                                       
Add: Provision for credit losses
    235,008       893,991       475,136       413,707       291,837  
Less: Securities (losses) gains
    (31 )     (2,602 )     (2,374 )     (7,340 )     2,067  
Add: Amortization of intangibles
    15,146       17,060       16,995       17,117       17,135  
Less: Significant Items
                                       
Gain on early extinguishment of debt (2)
          73,615             67,409        
Goodwill impairment
                      (4,231 )     (2,602,713 )
Gain related to Visa stock
                      31,362        
FDIC special assessment
                      (23,555 )      
 
                             
 
                                       
Total pretax, pre-provision income
  $ 251,829     $ 242,061     $ 237,143     $ 229,334     $ 224,619  
 
                             
 
                                       
Change in total pretax, pre-provision income:
                                       
Prior quarter change — amount
  $ 9,768     $ 4,918     $ 7,809     $ 4,715     $ 29,540  
Prior quarter change — percent
    4 %     2 %     3 %     2 %     15 %
     
(1)   Pretax, pre-provision income is a non-GAAP financial measure. Any ratio utilizing this financial measure is also non-GAAP. This financial measure has been included as it is considered to be a critical metric with which to analyze and evaluate our results of operations and financial strength. Other companies may calculate this financial measure differently.
 
(2)   Includes only transactions deemed significant.
Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Item 1.)
2010 First Quarter versus 2009 First Quarter
Fully-taxable equivalent net interest income increased $55.1 million, or 16%, from the year-ago quarter. This reflected the favorable impact of the significant increase in the net interest margin to 3.47% from 2.97%. The net interest margin increase reflected a combination of factors including better pricing on both deposits and loans. It also reflected the benefits of asset and liability management strategies to adjust the asset sensitivity of the balance sheet over the next year while maintaining the flexibility to be prepared for a rising interest rate environment. Although average total earning assets were little changed from the year-ago quarter, this reflected a $4.0 billion, or 91%, increase in average total investment securities, mostly offset by a $3.9 billion, or 10%, decline in average total loans and leases.

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The following table details the change in our reported loans and deposits:
Table 4 — Average Loans/Leases and Deposits — 2010 First Quarter vs. 2009 First Quarter
                                 
    First Quarter     Change  
(dollar amounts in millions)   2010     2009     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,314     $ 13,541     $ (1,227 )     (9 )%
Commercial real estate
    7,677       10,112       (2,435 )     (24 )
 
                       
Total commercial
    19,991       23,653       (3,662 )     (15 )
 
Automobile loans and leases
    4,250       4,354       (104 )     (2 )
Home equity
    7,539       7,577       (38 )     (1 )
Residential mortgage
    4,477       4,611       (134 )     (3 )
Other consumer
    723       671       52       8  
 
                       
Total consumer
    16,989       17,213       (224 )     (1 )
 
                       
Total loans
  $ 36,980     $ 40,866     $ (3,886 )     (10 )%
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,627     $ 5,544     $ 1,083       20 %
Demand deposits — interest-bearing
    5,716       4,076       1,640       40  
Money market deposits
    10,340       5,593       4,747       85  
Savings and other domestic time deposits
    4,613       5,041       (428 )     (8 )
Core certificates of deposit
    9,976       12,784       (2,808 )     (22 )
 
                       
Total core deposits
    37,272       33,038       4,234       13  
Other deposits
    2,951       5,151       (2,200 )     (43 )
 
                       
Total deposits
  $ 40,223     $ 38,189     $ 2,034       5 %
 
                       
The $3.9 billion, or 10%, decrease in average total loans and leases primarily reflected:
    $3.7 billion, or 15%, decrease in average total commercial loans. The $1.2 billion, or 9%, decline in average commercial and industrial (C&I) loans reflected a general decrease in borrowing as reflected in a decline in line-of-credit utilization, including significant reductions in our automobile dealer floorplan portfolio, charge-off activity, the 2009 first quarter Franklin restructuring, and the reclassification in the current quarter of variable rate demand notes to municipal securities. These negatives were partially offset by the impact of the reclassifications in 2009 of certain CRE loans, primarily representing owner occupied properties, to C&I loans. The $2.4 billion, or 24%, decrease in average CRE loans reflected our ongoing commitment to reduce balance sheet risk. We are executing several initiatives, which have resulted in portfolio reductions through payoffs and pay-downs, as well as the impact of charge-offs.
    $0.2 billion, or 1%, decrease in average total consumer loans. This decrease primarily reflected a $0.3 billion decline in average automobile leases due to the continued run-off of that portfolio, partially offset by a $0.2 billion increase in average automobile loans. The increase in average automobile loans reflected a 70% increase in loan originations from the year-ago quarter. The decline in average residential mortgages reflected the impact of loan sales, as well as the continued refinancing of portfolio loans and the related increased sale of fixed-rate originations, partially offset by additions related to the 2009 first quarter Franklin restructuring. Average home equity loans were little changed as lower origination volume was offset by slower runoff experience and slightly higher line utilization. Increased line usage continued to be associated with higher quality customers taking advantage of the low interest rate environment.
Offsetting the decline in average total loans and leases was a $4.0 billion, or 91%, increase in average total investment securities, reflecting the deployment of the cash from core deposit growth and loan runoff over this period, as well as the proceeds from 2009 capital actions.
The $2.0 billion, or 5%, increase in average total deposits reflected:
    $4.2 billion, or 13%, growth in average total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts.
Partially offset by:
    A $1.6 billion, or 47%, decline in brokered deposits and negotiable CDs and a $0.4 billion, or 35%, decrease in average other domestic deposits over $250,000, primarily reflecting the reduction of noncore funding sources.

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2010 First Quarter versus 2009 Fourth Quarter
Fully-taxable equivalent net interest income increased $19.6 million, or 5%, from the prior quarter. This reflected an increase in the net interest margin to 3.47% from 3.19%, as average earnings assets declined $0.6 billion, or 1%. The decrease in average earning assets primarily reflected a $0.4 billion, or 4%, decrease in average investment securities, as average total loans and leases were down only $0.1 billion, or less than 1%.
The net interest margin increase reflected a combination of factors including better pricing on both deposits and loans. It also reflected the benefits of asset and liability management strategies to reduce the asset sensitivity of the balance sheet over the next year while maintaining the flexibility to be prepared for a rising rate environment.
The following table details the change in our reported loans and deposits:
Table 5 — Average Loans/Leases and Deposits — 2010 First Quarter vs. 2009 Fourth Quarter
                                 
    2010     2009        
    First     Fourth     Change  
(dollar amounts in millions)   Quarter     Quarter     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,314     $ 12,570     $ (256 )     (2 )%
Commercial real estate
    7,677       8,458       (781 )     (9 )
 
                       
Total commercial
    19,991       21,028       (1,037 )     (5 )
 
                               
Automobile loans and leases
    4,250       3,326       924       28  
Home equity
    7,539       7,561       (22 )      
Residential mortgage
    4,477       4,417       60       1  
Other consumer
    723       757       (34 )     (4 )
 
                       
Total consumer
    16,989       16,061       928       6  
 
                       
Total loans
  $ 36,980     $ 37,089     $ (109 )     %
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,627     $ 6,466     $ 161       2 %
Demand deposits — interest-bearing
    5,716       5,482       234       4  
Money market deposits
    10,340       9,271       1,069       12  
Savings and other domestic time deposits
    4,613       4,686       (73 )     (2 )
Core certificates of deposit
    9,976       10,867       (891 )     (8 )
 
                       
Total core deposits
    37,272       36,772       500       1  
Other deposits
    2,951       3,442       (491 )     (14 )
 
                       
Total deposits
  $ 40,223     $ 40,214     $ 9       %
 
                       
The $0.1 billion decrease in average total loans and leases primarily reflected:
    $0.8 billion, or 9%, decline in CRE loans, primarily resulting from the pay-down and charge-off activity in the current quarter. While charge-offs remain a significant contributor to the decline in balances, we also continued to see substantial net pay-downs totaling $135 million in the current quarter. The pay-down activity was a result of our portfolio management and loan workout strategies, and some very early stage improvements in some of our markets.
    $0.3 billion, or 2%, decline in average C&I loans, reflecting a reclassification of $0.3 billion of variable rate demand notes to municipal securities. Underlying growth was more than offset by a combination of continued lower line-of-credit utilization and pay-downs on term debt as the economic environment has caused many customers to actively reduce their leverage position. Our line-of-credit utilization percentage was 42%, consistent with that of the prior quarter.

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Partially offset by:
    $0.9 billion, or 28%, increase in average automobile loans and leases, of which $0.8 billion was the result of adopting a new accounting standard to consolidate a previously off-balance sheet automobile loan securitization transaction. At the end of the 2009 first quarter, we transferred $1.0 billion of automobile loans to a trust in a securitization transaction as part of a funding strategy. Upon adoption of the new accounting standard, the trust was consolidated as of January 1, 2010, and at March 31, 2010, the loans had a remaining balance of $0.7 billion.
In addition to the decline in average total loans and leases, average total investment securities decreased $0.4 billion, or 4%, primarily reflecting normal maturities.
Average total deposits were essentially unchanged from the prior quarter reflecting:
    $0.5 billion, or 1%, growth in average total core deposits reflecting our focus on growing money market and transaction accounts.
Partially offset by:
    $0.5 billion, or 22%, decline in brokered deposits and negotiable CDs, reflecting the intentional reduction in noncore funding sources given the growth in core deposits.
Tables 6 and 7 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

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Table 6 — Consolidated Quarterly Average Balance Sheets
                                                         
    Average Balances     Change  
Fully-taxable equivalent basis   2010     2009     1Q10 vs. 1Q09  
(dollar amounts in millions)   First     Fourth     Third     Second     First     Amount     Percent  
Assets
                                                       
Interest-bearing deposits in banks
  $ 348     $ 329     $ 393     $ 369     $ 355     $ (7 )     (2 )%
Trading account securities
    96       110       107       88       278       (182 )     (65 )
Federal funds sold and securities purchased under resale agreement
          15       7             19       (19 )     (100 )
Loans held for sale
    346       470       524       709       627       (281 )     (45 )
Investment securities:
                                                       
Taxable
    8,025       8,695       6,510       5,181       3,961       4,064       103  
Tax-exempt
    445       139       129       126       465       (20 )     (4 )
 
                                         
Total investment securities
    8,470       8,834       6,639       5,307       4,426       4,044       91  
Loans and leases: (1)
                                                       
Commercial:
                                                       
Commercial and industrial
    12,314       12,570       12,922       13,523       13,541       (1,227 )     (9 )
Construction
    1,409       1,651       1,808       1,946       2,033       (624 )     (31 )
Commercial
    6,268       6,807       7,071       7,253       8,079       (1,811 )     (22 )
 
                                         
Commercial real estate
    7,677       8,458       8,879       9,199       10,112       (2,435 )     (24 )
 
                                         
Total commercial
    19,991       21,028       21,801       22,722       23,653       (3,662 )     (15 )
 
                                         
Consumer:
                                                       
Automobile loans
    4,031       3,050       2,886       2,867       3,837       194       5  
Automobile leases
    219       276       344       423       517       (298 )     (58 )
 
                                         
Automobile loans and leases
    4,250       3,326       3,230       3,290       4,354       (104 )     (2 )
Home equity
    7,539       7,561       7,581       7,640       7,577       (38 )     (1 )
Residential mortgage
    4,477       4,417       4,487       4,657       4,611       (134 )     (3 )
Other loans
    723       757       756       698       671       52       8  
 
                                         
Total consumer
    16,989       16,061       16,054       16,285       17,213       (224 )     (1 )
 
                                         
Total loans and leases
    36,980       37,089       37,855       39,007       40,866       (3,886 )     (10 )
Allowance for loan and lease losses
    (1,510 )     (1,029 )     (950 )     (930 )     (913 )     (597 )     65  
 
                                         
Net loans and leases
    35,470       36,060       36,905       38,077       39,953       (4,483 )     (11 )
 
                                         
Total earning assets
    46,240       46,847       45,525       45,480       46,571       (331 )     (1 )
 
                                         
Cash and due from banks
    1,761       1,947       2,553       2,466       1,553       208       13  
Intangible assets
    725       737       755       780       3,371       (2,646 )     (78 )
All other assets
    4,486       3,956       3,797       3,701       3,571       915       26  
 
                                         
Total Assets
  $ 51,702     $ 52,458     $ 51,680     $ 51,497     $ 54,153     $ (2,451 )     (5 )%
 
                                         
 
                                                       
Liabilities and Shareholders’ Equity
                                                       
Deposits:
                                                       
Demand deposits — noninterest-bearing
  $ 6,627     $ 6,466     $ 6,186     $ 6,021     $ 5,544     $ 1,083       20 %
Demand deposits — interest-bearing
    5,716       5,482       5,140       4,547       4,076       1,640       40  
Money market deposits
    10,340       9,271       7,601       6,355       5,593       4,747       85  
Savings and other domestic time deposits
    4,613       4,686       4,771       5,031       5,041       (428 )     (8 )
Core certificates of deposit
    9,976       10,867       11,646       12,501       12,784       (2,808 )     (22 )
 
                                           
Total core deposits
    37,272       36,772       35,344       34,455       33,038       4,234       13  
Other domestic time deposits of $250,000 or more
    698       667       747       886       1,069       (371 )     (35 )
Brokered time deposits and negotiable CDs
    1,843       2,353       3,058       3,740       3,449       (1,606 )     (47 )
Deposits in foreign offices
    410       422       444       453       633       (223 )     (35 )
 
                                         
Total deposits
    40,223       40,214       39,593       39,534       38,189       2,034       5  
Short-term borrowings
    927       879       879       879       1,099       (172 )     (16 )
Federal Home Loan Bank advances
    179       681       924       947       2,414       (2,235 )     (93 )
Subordinated notes and other long-term debt
    4,062       3,908       4,136       4,640       4,612       (550 )     (12 )
 
                                         
Total interest-bearing liabilities
    38,764       39,216       39,346       39,979       40,770       (2,006 )     (5 )
 
                                         
All other liabilities
    947       1,042       863       569       614       333       54  
Shareholders’ equity
    5,364       5,734       5,285       4,928       7,225       (1,861 )     (26 )
 
                                         
Total Liabilities and Shareholders’ Equity
  $ 51,702     $ 52,458     $ 51,680     $ 51,497     $ 54,153     $ (2,451 )     (5 )%
 
                                         
     
(1)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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Table 7 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)  
    2010     2009  
Fully-taxable equivalent basis (1)   First     Fourth     Third     Second     First  
Assets
                                       
Interest-bearing deposits in banks
    0.18 %     0.16 %     0.28 %     0.37 %     0.45 %
Trading account securities
    2.15       1.89       1.96       2.22       4.04  
Federal funds sold and securities purchased under resale agreement
          0.03       0.14       0.82       0.20  
Loans held for sale
    4.98       5.13       5.20       5.19       5.04  
Investment securities:
                                       
Taxable
    2.94       3.20       3.99       4.63       5.60  
Tax-exempt
    4.35       6.31       6.77       6.83       6.61  
 
                             
Total investment securities
    3.01       3.25       4.04       4.69       5.71  
Loans and leases: (3)
                                       
Commercial:
                                       
Commercial and industrial
    5.60       5.20       5.19       5.00       4.60  
Commercial real estate
                                       
Construction
    2.66       2.63       2.61       2.78       2.76  
Commercial
    3.60       3.40       3.43       3.56       3.76  
 
                             
Commercial real estate
    3.43       3.25       3.26       3.39       3.55  
 
                             
Total commercial
    4.76       4.41       4.40       4.35       4.15  
 
                             
Consumer:
                                       
Automobile loans
    6.64       7.15       7.34       7.28       7.20  
Automobile leases
    6.41       6.40       6.25       6.12       6.03  
 
                             
Automobile loans and leases
    6.63       7.09       7.22       7.13       7.06  
Home equity
    5.59       5.82       5.75       5.75       5.13  
Residential mortgage
    4.89       5.04       5.03       5.12       5.71  
Other loans
    7.00       6.90       7.21       8.22       8.97  
 
                             
Total consumer
    5.73       5.92       5.91       5.95       5.92  
 
                             
Total loans and leases
    5.21       5.07       5.04       5.02       4.90  
 
                             
Total earning assets
    4.82 %     4.70 %     4.86 %     4.99 %     4.99 %
 
                             
 
                                       
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Demand deposits — noninterest-bearing
    %     %     %     %     %
Demand deposits — interest-bearing
    0.22       0.22       0.22       0.18       0.14  
Money market deposits
    1.00       1.21       1.20       1.14       1.02  
Savings and other domestic time deposits
    1.19       1.27       1.33       1.37       1.50  
Core certificates of deposit
    2.93       3.07       3.27       3.50       3.81  
 
                             
Total core deposits
    1.51       1.71       1.88       2.06       2.28  
Other domestic time deposits of $250,000 or more
    1.44       1.88       2.24       2.61       2.92  
Brokered time deposits and negotiable CDs
    2.49       2.52       2.49       2.54       2.97  
Deposits in foreign offices
    0.19       0.18       0.20       0.20       0.17  
 
                             
Total deposits
    1.55       1.75       1.92       2.11       2.33  
Short-term borrowings
    0.21       0.24       0.25       0.26       0.25  
Federal Home Loan Bank advances
    2.71       1.01       0.92       1.13       1.03  
Subordinated notes and other long-term debt
    2.25       2.67       2.58       2.91       3.29  
 
                             
Total interest-bearing liabilities
    1.60 %     1.80 %     1.93 %     2.14 %     2.31 %
 
                             
 
                                       
Net interest rate spread
    3.22 %     2.90 %     2.93 %     2.85 %     2.68 %
Impact of noninterest-bearing funds on margin
    0.25       0.29       0.27       0.25       0.29  
 
                             
 
                                       
Net Interest Margin
    3.47 %     3.19 %     3.20 %     3.10 %     2.97 %
 
                             
     
(1)   Fully-taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)   Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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Provision for Credit Losses
(This section should be read in conjunction with Significant Item 2 and the “Credit Risk” section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels adequate to absorb our estimate of inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit.
The provision for credit losses for the 2010 first quarter was $235.0 million, down $659.0 million, or 74%, from the prior quarter and down $56.8 million, or 19%, from the year-ago quarter. The current quarter’s provision for credit losses essentially matched the $238.5 million of NCOs ( see “Credit Quality” discussion).
The following table details the Franklin-related impact to the provision for credit losses for each of the past five quarters.
Table 8 — Provision for Credit Losses — Franklin-Related Impact
                                         
    2010     2009  
(in millions)   First     Fourth     Third     Second     First  
 
                                       
Provision for (reduction to) credit losses
                                       
Franklin
  $ 11.5     $ 1.2     $ (3.5 )   $ (10.1 )   $ (1.7 )
Non-Franklin
    223.5       892.8       478.6       423.8       293.5  
 
                             
Total
  $ 235.0     $ 894.0     $ 475.1     $ 413.7     $ 291.8  
 
                             
 
                                       
Total net charge-offs (recoveries)
                                       
Franklin
  $ 11.5     $ 1.2     $ (3.5 )   $ (10.1 )   $ 128.3  
Non-Franklin
    227.0       443.5       359.4       344.5       213.2  
 
                             
Total
  $ 238.5     $ 444.7     $ 355.9     $ 334.4     $ 341.5  
 
                             
 
                                       
Provision for (reduction to) credit losses in excess of net charge-offs
                                       
Franklin
  $     $     $     $     $ (130.0 )
Non-Franklin
    (3.5 )     449.3       119.2       79.3       80.3  
 
                             
 
                                       
Total
  $ (3.5 )   $ 449.3     $ 119.2     $ 79.3     $ (49.7 )
 
                             
Noninterest Income
(This section should be read in conjunction with Significant Item 5.)
The following table reflects noninterest income for each of the past five quarters:
Table 9 — Noninterest Income
                                         
    2010     2009  
(dollar amounts in thousands)   First     Fourth     Third     Second     First  
 
                                       
Service charges on deposit accounts
  $ 69,339     $ 76,757     $ 80,811     $ 75,353     $ 69,878  
Brokerage and insurance income
    35,762       32,173       33,996       32,052       39,948  
Mortgage banking income
    25,038       24,618       21,435       30,827       35,418  
Trust services
    27,765       27,275       25,832       25,722       24,810  
Electronic banking
    25,137       25,173       28,017       24,479       22,482  
Bank owned life insurance income
    16,470       14,055       13,639       14,266       12,912  
Automobile operating lease income
    12,303       12,671       12,795       13,116       13,228  
Securities (losses) gains
    (31 )     (2,602 )     (2,374 )     (7,340 )     2,067  
Other income
    29,069       34,426       41,901       57,470       18,359  
 
                             
 
                                       
Total noninterest income
  $ 240,852     $ 244,546     $ 256,052     $ 265,945     $ 239,102  
 
                             

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The following table details mortgage banking income and the net impact of mortgage servicing rights (MSR) hedging activity for each of the past five quarters:
Table 10 — Mortgage Banking Income
                                         
    2010     2009  
(dollar amounts in thousands)   First     Fourth     Third     Second     First  
 
                                       
Mortgage Banking Income
                                       
Origination and secondary marketing
  $ 13,586     $ 16,473     $ 16,491     $ 31,782     $ 29,965  
Servicing fees
    12,418       12,289       12,320       12,045       11,840  
Amortization of capitalized servicing (1)
    (10,065 )     (10,791 )     (10,050 )     (14,445 )     (12,285 )
Other mortgage banking income
    3,210       4,466       4,109       5,381       9,404  
 
                             
Sub-total
    19,149       22,437       22,870       34,763       38,924  
MSR valuation adjustment (1)
    (5,772 )     15,491       (17,348 )     46,551       (10,389 )
Net trading gain (loss) related to MSR hedging
    11,661       (13,310 )     15,913       (50,487 )     6,883  
 
                             
 
                                       
Total mortgage banking income
  $ 25,038     $ 24,618     $ 21,435     $ 30,827     $ 35,418  
 
                             
 
                                       
Mortgage originations (in millions)
  $ 869     $ 1,131     $ 998     $ 1,587     $ 1,546  
Average trading account securities used to hedge MSRs (in millions)
    18       19       19       20       223  
Capitalized mortgage servicing rights (2)
    207,552       214,592       200,969       219,282       167,838  
Total mortgages serviced for others (in millions) (2)
    15,968       16,010       16,145       16,246       16,315  
MSR % of investor servicing portfolio
    1.30 %     1.34 %     1.24 %     1.35 %     1.03 %
 
                             
 
                                       
Net Impact of MSR Hedging
                                       
MSR valuation adjustment (1)
  $ (5,772 )   $ 15,491     $ (17,348 )   $ 46,551     $ (10,389 )
Net trading gain (loss) related to MSR hedging
    11,661       (13,310 )     15,913       (50,487 )     6,883  
Net interest income related to MSR hedging
    169       168       191       199       2,441  
 
                             
 
                                       
Net impact of MSR hedging
  $ 6,058     $ 2,349     $ (1,244 )   $ (3,737 )   $ (1,065 )
 
                             
     
(1)   The change in fair value for the period represents the MSR valuation adjustment, net of amortization of capitalized servicing.
 
(2)   At period end.
2010 First Quarter versus 2009 First Quarter
Noninterest income increased $1.8 million, or 1%, from the year-ago quarter.
Table 11 — Noninterest Income — 2010 First Quarter vs. 2009 First Quarter
                                 
    First Quarter     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
 
                               
Service charges on deposit accounts
  $ 69,339     $ 69,878     $ (539 )     (1) %
Brokerage and insurance income
    35,762       39,948       (4,186 )     (10 )
Mortgage banking income
    25,038       35,418       (10,380 )     (29 )
Trust services
    27,765       24,810       2,955       12  
Electronic banking
    25,137       22,482       2,655       12  
Bank owned life insurance income
    16,470       12,912       3,558       28  
Automobile operating lease income
    12,303       13,228       (925 )     (7 )
Securities (losses) gains
    (31 )     2,067       (2,098 )     N.M.  
Other income
    29,069       18,359       10,710       58  
 
                       
 
                               
Total noninterest income
  $ 240,852     $ 239,102     $ 1,750       1 %
 
                       
N.M., not a meaningful value.

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The $1.8 million increase in total noninterest income from the year-ago quarter reflected:
    $10.7 million, or 58%, increase in other income, as the year-ago quarter included a $5.9 million automobile loan securitization loss. The improvement also reflected growth in standby letter of credit fees and trading income.
    $3.6 million, or 28%, increase in bank owned life insurance income, reflecting $2.6 million in realized policy benefits.
    $3.0 million, or 12%, increase in trust services income, primarily reflecting the positive impact of higher asset market values.
    $2.7 million, or 12%, increase in electronic banking income, reflecting higher debit card transaction volumes.
Partially offset by:
    $10.4 million, or 29%, decline in mortgage banking income, reflecting a $16.4 million, or 55%, decline in origination and secondary marketing income as originations in the current quarter were down 44% from the year-ago quarter, partially offset by a net benefit from MSR valuation and hedging activity (see Table 10) .
    $4.2 million, or 10%, decline in brokerage and insurance income, reflecting a $1.4 million, or 8%, decline in investment product income, primarily due to a 21% decline in annuity sales volume, as well as a $2.8 million, or 13%, decline in insurance income, primarily due to lower contingent fees.
    $2.1 million of securities gains in the year-ago quarter.
2010 First Quarter versus 2009 Fourth Quarter
Noninterest income decreased $3.7 million, or 2%, from the prior quarter.
Table 12 — Noninterest Income — 2010 First Quarter vs. 2009 Fourth Quarter
                                 
    2010     2009     Change  
(dollar amounts in thousands)   First Quarter     Fourth Quarter     Amount     Percent  
 
               
Service charges on deposit accounts
  $ 69,339     $ 76,757     $ (7,418 )     (10) %
Brokerage and insurance income
    35,762       32,173       3,589       11  
Mortgage banking income
    25,038       24,618       420       2  
Trust services
    27,765       27,275       490       2  
Electronic banking
    25,137       25,173       (36 )     (0 )
Bank owned life insurance income
    16,470       14,055       2,415       17  
Automobile operating lease income
    12,303       12,671       (368 )     (3 )
Securities losses
    (31 )     (2,602 )     2,571       (99 )
Other income
    29,069       34,426       (5,357 )     (16 )
 
                       
 
                               
Total noninterest income
  $ 240,852     $ 244,546     $ (3,694 )     (2) %
 
                       
The $3.7 million, or 2%, decrease in total noninterest income from the prior quarter reflected:
    $7.4 million, or 10%, decline in service charges on deposit accounts, reflecting seasonally lower personal service charges, mostly related to nonsufficient funds/overdrafts.
    $5.4 million, or 16%, decline in other income, as the prior quarter included a benefit from the change in fair value of our derivatives that did not qualify for hedge accounting.
Partially offset by:
    $3.6 million, or 11%, increase in brokerage and insurance income, including a 17% increase in insurance income, reflecting improved sales and seasonal factors.
    $2.6 million improvement in securities losses as the prior quarter reflected $2.6 million in securities losses.
    $2.4 million, or 17%, increase in bank owned life insurance income, reflecting $2.1 million in realized policy benefits.

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Noninterest Expense
(This section should be read in conjunction with Significant Items 1, 3, and 6.)
The following table reflects noninterest expense for each of the past five quarters:
Table 13 — Noninterest Expense
                                         
    2010     2009  
(dollar amounts in thousands)   First     Fourth     Third     Second     First  
 
               
Personnel costs
  $ 183,642     $ 180,663     $ 172,152     $ 171,735     $ 175,932  
Outside data processing and other services
    39,082       36,812       38,285       40,006       32,992  
Deposit and other insurance expense
    24,755       24,420       23,851       48,138       17,421  
Net occupancy
    29,086       26,273       25,382       24,430       29,188  
OREO and foreclosure expense
    11,530       18,520       38,968       26,524       9,887  
Equipment
    20,624       20,454       20,967       21,286       20,410  
Professional services
    22,697       25,146       18,108       16,658       16,454  
Amortization of intangibles
    15,146       17,060       16,995       17,117       17,135  
Automobile operating lease expense
    10,066       10,440       10,589       11,400       10,931  
Marketing
    11,153       9,074       8,259       7,491       8,225  
Telecommunications
    6,171       6,099       5,902       6,088       5,890  
Printing and supplies
    3,673       3,807       3,950       4,151       3,572  
Goodwill impairment
                      4,231       2,602,713  
Gain on early extinguishment of debt
          (73,615 )     (60 )     (73,038 )     (729 )
Other
    20,468       17,443       17,749       13,765       19,748  
 
                             
 
                                       
Total noninterest expense
  $ 398,093     $ 322,596     $ 401,097     $ 339,982     $ 2,969,769  
 
                             
2010 First Quarter versus 2009 First Quarter
Noninterest expense decreased $2,571.7 million, or 87%, from the year-ago quarter.
Table 14 — Noninterest Expense — 2010 First Quarter vs. 2009 First Quarter
                                 
    First Quarter     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
 
               
Personnel costs
  $ 183,642     $ 175,932     $ 7,710       4 %
Outside data processing and other services
    39,082       32,992       6,090       18  
Deposit and other insurance expense
    24,755       17,421       7,334       42  
Net occupancy
    29,086       29,188       (102 )      
OREO and foreclosure expense
    11,530       9,887       1,643       17  
Equipment
    20,624       20,410       214       1  
Professional services
    22,697       16,454       6,243       38  
Amortization of intangibles
    15,146       17,135       (1,989 )     (12 )
Automobile operating lease expense
    10,066       10,931       (865 )     (8 )
Marketing
    11,153       8,225       2,928       36  
Telecommunications
    6,171       5,890       281       5  
Printing and supplies
    3,673       3,572       101       3  
Goodwill impairment
          2,602,713       (2,602,713 )     (100 )
Gain on early extinguishment of debt
          (729 )     729       (100 )
Other expense
    20,468       19,748       720       4  
 
                       
 
                               
Total noninterest expense
  $ 398,093     $ 2,969,769     $ (2,571,676 )     (87 )%
 
                       
The $2,571.7 million, or 87%, decrease in total noninterest expense from the year-ago quarter reflected:
    $2,602.7 million of goodwill impairment in the year-ago quarter.
    $2.0 million, or 12%, decline in amortization of intangibles.

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Partially offset by:
    $7.7 million, or 4%, increase in personnel costs, reflecting a 1% increase in full-time equivalent staff, which contributed to higher salaries and sales commission expense in the current period, as well as lower benefits expense in the year-ago period.
    $7.3 million, or 42%, increase in deposit and other insurance expense primarily due to higher FDIC insurance costs as premiums rates increased and the level of deposits grew.
    $6.2 million, or 38%, increase in professional services, reflecting higher commercial loan collection-related expenses, as well as an increase in consulting expenses.
    $6.1 million, or 18%, increase in outside data processing and other services, primarily reflecting portfolio servicing fees now paid to Franklin as a result of the 2009 first quarter restructuring of this relationship, as well as higher outside appraisal costs.
    $2.9 million, or 36%, increase in marketing expense, reflecting an increase in product advertising activities.
2010 First Quarter versus 2009 Fourth Quarter
Noninterest expense increased $75.5 million, or 23%, from the prior quarter.
Table 15 — Noninterest Expense — 2010 First Quarter vs. 2009 Fourth Quarter
                                 
    2010     2009     Change  
(dollar amounts in thousands)   First Quarter     Fourth Quarter     Amount     Percent  
 
               
Personnel costs
  $ 183,642     $ 180,663     $ 2,979       2 %
Outside data processing and other services
    39,082       36,812       2,270       6  
Deposit and other insurance expense
    24,755       24,420       335       1  
Net occupancy
    29,086       26,273       2,813       11  
OREO and foreclosure expense
    11,530       18,520       (6,990 )     (38 )
Equipment
    20,624       20,454       170       1  
Professional services
    22,697       25,146       (2,449 )     (10 )
Amortization of intangibles
    15,146       17,060       (1,914 )     (11 )
Automobile operating lease expense
    10,066       10,440       (374 )     (4 )
Marketing
    11,153       9,074       2,079       23  
Telecommunications
    6,171       6,099       72       1  
Printing and supplies
    3,673       3,807       (134 )     (4 )
Gain on early extinguishment of debt
          (73,615 )     73,615       (100 )
Other expense
    20,468       17,443       3,025       17  
 
                       
 
               
Total noninterest expense
  $ 398,093     $ 322,596     $ 75,497       23 %
 
                       
The $75.5 million, or 23%, increase in total noninterest expense from the prior quarter reflected:
    $73.6 million gain on the early extinguishment of debt that lowered the prior quarter’s noninterest expense.
    $3.0 million, or 17%, increase in other expenses, primarily reflecting higher franchise and other taxes.
    $3.0 million, or 2%, increase in personnel costs, reflecting higher salaries due to a 4% increase in full-time equivalent staff as well as a seasonal increase in FICA-related benefits expense, partially offset by lower commission expense. The increase in full-time equivalent staff was related to our strategic initiatives.
    $2.8 million, or 11%, increase in net occupancy expense, primarily reflecting higher seasonal snow removal expense.
    $2.3 million, or 6%, increase in outside data processing and other services expense, primarily reflecting an increase in outside computer expenses.
    $2.1 million, or 23%, increase in marketing expense, reflecting an increase in product advertising activities.
Partially offset by:
    $7.0 million, or 38%, decrease in OREO and foreclosure expense.
    $2.4 million, or 10%, decrease in professional services, reflecting lower commercial loan collection-related expenses.

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Provision for Income Taxes
(This section should be read in conjunction with Significant Items 2 and 6.)
The provision for income taxes in the 2010 first quarter was a benefit of $38.1 million. This compared with a tax benefit of $228.3 million in the 2009 fourth quarter and a tax benefit of $251.8 million in the 2009 first quarter. As of March 31, 2010, a net deferred tax asset of $557.2 million was recorded. There was no impairment to the deferred tax asset as a result of projected taxable income.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. Also, we are subject to ongoing tax examinations in various jurisdictions. Federal income tax audits have been completed through 2005. In 2009, the Internal Revenue Service (IRS) began the audit of our consolidated federal income tax returns for tax years 2006 and 2007. Various state and other jurisdictions remain open to examination for tax years 2000 and forward. In addition, we are subject to ongoing tax examinations in various other state and local jurisdictions. The IRS as well as state tax officials from Ohio, Indiana, and Kentucky have proposed adjustments to our previously filed tax returns. We believe that the tax positions taken by us related to such proposed adjustments were correct and are supported by applicable statutes, regulations, and judicial authority, and we intend to vigorously defend them. It is possible that the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. However, although no assurances can be given, we believe that the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position. (See Note 16 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding unrecognized tax benefits.)

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RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe our primary risk exposures are credit, market, liquidity, and operational risk. We hold capital proportionately against these risks. More information on risk can be found under the heading “Risk Factors” included in Item 1A of our 2009 Form 10-K, and subsequent filings with the Securities and Exchange Commission. Additionally, the MD&A included in our 2009 Form 10-K, should be read in conjunction with the MD&A as this report provides only material updates to the 2009 Form 10-K. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2009 Form 10-K.
Credit Risk
Credit risk is the risk of loss due to our counterparties not being able to meet their financial obligations under agreed upon terms. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have credit risk associated with our investment and derivatives activities. Credit risk is incidental to trading activities and represents a significant risk that is associated with our investment securities portfolio (see “Investment Securities Portfolio” discussion) . Credit risk is mitigated through a combination of credit policies and processes, market risk management activities, and portfolio diversification.
Credit Exposure Mix
At March 31, 2010, commercial loans totaled $19.7 billion, and represented 53% of our total credit exposure. Our commercial loan portfolio is diversified along product type, size, and geography within our footprint, and is comprised of the following ( see “Commercial Credit” discussion) :
Commercial and Industrial (C&I) loans - C&I loans represent loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The vast majority of these borrowers are commercial customers doing business within our geographic regions. C&I loans are generally underwritten individually and usually secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner-occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a function of the underwriting process, which focuses on cash flow from operations to repay the debt. The sale of the real estate is not considered either a primary or secondary repayment source for the loan.
Commercial real estate (CRE) loans - CRE loans consist of loans for income producing real estate properties and real estate developers. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with cash flow substantially in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers; and are repaid through cash flows related to the operation, sale, or refinance of the property.
Construction CRE loans - Construction CRE loans are loans to individuals, companies, or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, residential (land, single family, condominiums), office, and warehouse product types. Generally, these loans are for construction projects that have been presold, preleased, or otherwise have secured permanent financing, as well as loans to real estate companies that have significant equity invested in each project. These loans are generally underwritten and managed by a specialized real estate group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.
Total consumer loans were $17.2 billion at March 31, 2010, and represented 47% of our total credit exposure. The consumer portfolio was diversified among home equity loans, residential mortgages, and automobile loans and leases (see “Consumer Credit” discussion) .
Home equity - Home equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first- or second- mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is granted directly affect the amount of credit extended and, in addition, changes in these values impact the severity of losses.
Residential mortgages - Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30- year term, and in most cases, are extended to borrowers to finance their primary residence. In some cases, government agencies or private mortgage insurers guarantee the loan. Generally speaking, our practice is to sell a significant majority of our fixed-rate originations in the secondary market.

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Automobile loans/leases - Automobile loans/leases is primarily comprised of loans made through automotive dealerships, and includes exposure in selected out-of-market states. However, no out-of-market state represented more than 10% of our total automobile loan and lease portfolio, and we expect to see further reductions in these exposures as we ceased automobile loan originations in out-of-market states during the 2009 first quarter. Our automobile lease portfolio will continue to decline as we exited the automobile leasing business during the 2008 fourth quarter.
Table 16 — Loan and Lease Portfolio Composition
                                                                                 
    2010     2009  
(dollar amounts in millions)   First     Fourth     Third     Second     First  
 
                                                                               
Commercial (1)
                                                                               
Commercial and industrial (2)
  $ 12,245       33 %   $ 12,888       35 %   $ 12,547       34 %   $ 13,320       35 %   $ 13,768       35 %
Construction
    1,443       4       1,469       4       1,815       5       1,857       5       2,074       5  
Commercial (2)
    6,013       16       6,220       17       6,900       18       7,089       18       7,187       18  
 
                                                           
 
                                                                               
Total commercial real estate
    7,456       20       7,689       21       8,715       23       8,946       23       9,261       23  
 
                                                           
 
                                                                               
Total commercial
    19,701       53       20,577       56       21,262       57       22,266       35       23,029       58  
 
                                                           
 
                                                                               
Consumer:
                                                                               
Automobile loans (3)
    4,212       11       3,144       9       2,939       8       2,855       7       2,894       7  
Automobile leases
    191       1       246       1       309       1       383       1       468       1  
Home equity
    7,514       20       7,563       21       7,576       20       7,631       20       7,663       19  
Residential mortgage
    4,614       12       4,510       12       4,468       12       4,646       12       4,837       12  
Other loans
    700       3       751       2       750       2       714       25       657       3  
 
                                                           
 
                                                                               
Total consumer
    17,231       47       16,214       44       16,042       43       16,229       65       16,519       42  
 
                                                           
 
                                                                               
Total loans and leases
  $ 36,932       100 %   $ 36,791       100 %   $ 37,304       100 %   $ 38,495       100 %   $ 39,548       100 %
 
                                                           
     
(1)   There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
 
(2)   The 2009 first quarter and 2009 fourth quarter reflected net reclassifications from commercial real estate loans to commercial and industrial loans of $782.2 million and $589.0 million, respectively.
 
(3)   The 2010 first quarter included an increase of $730.5 million resulting from the adoption of a new accounting standard to consolidate a previously off-balance automobile loan securitization transaction.
Commercial Credit
The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic outlook.
In commercial lending, ongoing credit management is dependent on the type and nature of the loan. We monitor all significant exposures on an on-going basis. All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-given-default. This two-dimensional rating methodology, which results in 192 individual loan grades, provides granularity in the portfolio management process. The probability-of-default is rated on a scale of 1-12 and is applied at the borrower level. The loss-given-default is rated on a 1-16 scale and is applied based on the type of credit extension and the underlying collateral. The internal risk ratings are assessed and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis. The retail projects portfolio is an example of a segment of the portfolio that has received more frequent evaluation at the loan level as a result of the economic environment and performance trends (“Retail Properties” discussion) . We continually review and adjust our risk-rating criteria based on actual experience. The continuous analysis and review process results in a determination of an appropriate ALLL amount for our commercial loan portfolio.
Credit exposures may be designated as monitored credits when warranted by individual borrower performance, or by industry and environmental factors. Monitored credits are subjected to additional monthly reviews in order to adequately assess the borrower’s credit status and to take appropriate action.
The Special Assets Division (SAD) is a specialized credit group that handles workouts, commercial recoveries, and problem loan sales. This group is involved in the day-to-day management of relationships rated substandard or lower. Its responsibilities include developing an action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual status, and the ultimate collectibility of the managed monitored credits.

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Our commercial loan portfolio, including CRE loans, is diversified by customer size, as well as throughout our geographic footprint. Throughout 2009, we engaged in a large number of enhanced portfolio management initiatives, including a review to ensure the appropriate classification of CRE loans. The results of this initiative included reclassifications totaling $1.4 billion that increased C&I loan balances, and correspondingly decreased CRE loan balances. We believe that the changes provide improved visibility and clarity to us and our investors.
Certain segments of our commercial loan portfolio are discussed in further detail below:
COMMERCIAL REAL ESTATE (CRE) PORTFOLIO
As shown in the following table, CRE loans totaled $7.5 billion and represented 20% of our total loan exposure at March 31, 2010.
Table 17 — Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    March 31, 2010  
                                                    West                    
(dollar amounts in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     Virginia     Other     Total Amount     %  
 
Retail properties
  $ 834     $ 199     $ 157     $ 209     $ 8     $ 70     $ 47     $ 540     $ 2,064       28 %
Multi family
    794       119       82       72       37       5       75       134       1,318       18  
Office
    606       202       114       59       23       24       59       58       1,145       15  
Industrial and warehouse
    410       187       35       77       14       35       9       102       869       12  
Single family home builders
    515       77       43       21       20       67       20       42       805       11  
Lines to real estate companies
    485       68       30       27       4       1       8       4       627       8  
Hotel
    147       53       23       32                   42       86       383       5  
Raw land and other land uses
    50       32       5       7       5       5       2       33       139       2  
Health care
    25       30       14                                     69       1  
Other
    28       4       2       1       1                   1       37        
 
                                                           
 
                                                                               
Total
  $ 3,894     $ 971     $ 505     $ 505     $ 112     $ 207     $ 262     $ 1,000     $ 7,456       100 %
 
                                                           
 
% of total portfolio
    52 %     13 %     7 %     7 %     2 %     3 %     4 %     13 %     100 %        
 
                                                                               
Net charge-offs (for the first three-month period of 2010)
  $ 34.5     $ 18.9     $ 3.9     $ 1.9     $ 1.5     $ 5.5     $     $ 19.1     $ 85.3          
Net charge-offs - annualized %
    3.44 %     7.57 %     2.99 %     1.49 %     5.19 %     10.38 %     %     7.41 %     4.44 %        
 
                                                                               
Nonaccrual loans
  $ 424.5     $ 97.6     $ 39.7     $ 30.1     $ 9.3     $ 35.2     $ 18.2     $ 172.2     $ 826.8          
% of related outstandings
    11 %     10 %     8 %     6 %     8 %     17 %     7 %     17 %     11 %        
CRE loan credit quality data regarding NCOs, nonaccrual loans (NALs), and accruing loans 90-days past due or more by industry classification code are presented in the following table:

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Table 18 — Commercial Real Estate Loans Credit Quality Data by Property Type
                                                                 
    Net Charge-offs     Nonaccrual Loans  
    Three Months Ended March 31,     March 31,     December 31,  
    2010     2009     2010     2009  
(dollar amounts in millions)   Amount     Percentage     Amount     Percentage     Amount     Percent (1)     Amount     Percent (1)  
 
                                                               
Retail properties
  $ 26.0       4.94 %   $ 25.3       5.00 %   $ 250.8       12.0 %   $ 253.6       12 %
Industrial and warehouse
    19.3       8.48       1.2       0.39       99.0       11.0       120.8       13  
Single family home builder
    18.4       8.78       29.6       8.16       218.4       27.0       262.4       31  
Multi family
    9.0       2.69       12.0       2.85       104.3       8.0       129.0       9  
Lines to real estate companies
    5.5       3.35       8.0       2.45       21.7       3.0       22.7       4  
Office
    3.1       1.08       3.4       1.05       75.1       7.0       87.3       8  
Hotel
    1.9       2.00                   8.4       2.0       10.9       3  
Raw land and other land uses
    1.8       5.18       3.0       5.32       42.7       31.0       42.4       32  
Health care
    0.2       0.73                   0.4       1.0       0.7       1  
Other
    0.1       0.64       0.3       2.15       5.9       17.0       6.0       16  
 
                                                       
 
                                                               
Total
  $ 85.3       4.44 %   $ 82.8       3.27 %   $ 826.8       11.0 %   $ 935.8       12 %
 
                                                       
     
(1)   Represents percentage of related outstanding loans.
We manage the risks inherent in this portfolio through origination policies, concentration limits, ongoing loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as loan-to-value (LTV), debt service coverage ratios, and pre-leasing requirements, as applicable. Generally, we: (a) limit our loans to 80% of the appraised value of the commercial real estate, (b) require net operating cash flows to be 125% of required interest and principal payments, and (c) if the commercial real estate is non-owner occupied, require that at least 50% of the space of the project be pre-leased.
Dedicated real estate professionals within our Commercial Real Estate business segment team originated the majority of the portfolio, with the remainder obtained from prior acquisitions. Appraisals from approved vendors are reviewed by an internal appraisal review group to ensure the quality of the valuation used in the underwriting process. The portfolio is diversified by project type and loan size, and represents a significant piece of the credit risk management strategies employed for this portfolio. Our loan review staff provides an assessment of the quality of the underwriting and structure and validates the risk rating assigned to the loan.
Appraisal values are obtained in conjunction with all originations and renewals, and on an as needed basis, in compliance with regulatory requirements. Given the stressed environment for some loan types, we have initiated ongoing portfolio level reviews of certain segments such as the retail properties segment (see “Retail Properties” discussion) . These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. The results of these actions indicated that additional stress is likely due to the current economic conditions. Property values are updated using appraisals on a regular basis to ensure that appropriate decisions regarding the ongoing management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers as well as an in-depth knowledge of CRE project lending and the market environment.
At the portfolio level, we actively monitor the concentrations and performance metrics of all loan types, with a focus on higher risk segments. Macro-level stress-test scenarios based on retail sales and home-price depreciation trends for the segments are embedded in our performance expectations, and lease-up and absorption scenarios are assessed. We anticipate the current stress within this portfolio will continue for the foreseeable future, resulting in elevated NCOs, NALs, and ALLL levels.
Within the CRE portfolio, the retail properties segment continued to be stressed as a result of the continued decline in the housing markets and general economic conditions, and is discussed further below.
Retail Properties
Our portfolio of CRE loans secured by retail properties totaled $2,064 million, or approximately 6% of total loans and leases, at March 31, 2010. Loans within this portfolio segment declined $51 million, or 2%, from December 31, 2009. Credit approval in this portfolio segment is generally dependent on pre-leasing requirements, and net operating income from the project must cover debt service by specified percentages when the loan is fully funded.

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The weakness of the economic environment in our geographic regions significantly impacted the projects that secure the loans in this portfolio segment. Lower occupancy rates, reduced rental rates, increased unemployment levels compared with recent years, and the expectation that these levels will continue to increase for the foreseeable future are expected to adversely affect our borrowers’ ability to repay these loans. We have increased the level of credit risk management activity to this portfolio segment, and we analyze our retail property loans in detail by combining property type, geographic location, tenants, and other data, to assess and manage our credit concentration risks.
Single Family Home Builders
At March 31, 2010, we had $805 million of CRE loans to single family home builders. Such loans represented 2% of total loans and leases. Of this portfolio segment, 69% were to finance projects currently under construction, 14% to finance land under development, and 17% to finance land held for development. The $805 million represented a $52 million, or 6%, decrease compared with $857 million at December 31, 2009. The decrease primarily reflected run-off activity as no new loans have been originated since 2008, property sale activity, and charge-offs. Based on portfolio management processes, including charge-off activity, over the past 30 months, we believe that we have substantially addressed the credit issues in this portfolio. We do not anticipate any future significant credit impact from this portfolio segment.
Core and Noncore portfolios
Each CRE loan is classified as either core or noncore. We segmented the CRE portfolio into these designations in order to provide more clarity around our portfolio management strategies and to provide additional clarity for us and our investors. A CRE loan is generally considered core when the borrower is an experienced, well-capitalized developer in our Midwest footprint, and has either an established meaningful relationship or the prospective of establishing one, that generates an acceptable return on capital. The core CRE portfolio was $4.0 billion at March 31, 2010, representing 53% of total CRE loans. Based on the extensive project level assessment process, including forward-looking collateral valuations, we are comfortable with the credit quality of the core portfolio at this time.
A CRE loan is generally considered noncore based on a lack of a substantive relationship outside of the credit product, with no immediate prospects for improvement. The noncore CRE portfolio declined from $3.7 billion at December 31, 2009, to $3.5 billion at March 31, 2010, and represented 47% of total CRE loans. It is within the noncore segment where most of the credit quality challenges exist. For example, $810.6 million, or 23%, of related outstanding balances, are classified as NALs. The Special Assets Division (SAD) administered $1.7 billion, or 49%, of total noncore CRE loans at March 31, 2010. It is expected that we will exit the majority of noncore CRE relationships over time. This would reflect normal repayments, possible sales should economically attractive opportunities arise, or the reclassification as a core CRE relationship if it expands to meet the core requirements.

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The table below provides the segregation of the CRE portfolio into core and noncore segments as of March 31, 2010.
Table 19 — Core Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    March 31, 2010  
                                                    West                    
(dollar amounts in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     Virginia     Other     Total Amount     %  
 
Core portfolio:
                                                                               
Retail properties
  $ 471     $ 94     $ 89     $ 91     $ 3     $ 42     $ 40     $ 375     $ 1,205       16 %
Office
    347       110       74       37       12       8       39       43       670       9  
Multi family
    275       87       38       32       8             44       64       548       7  
Industrial and warehouse
    268       62       17       35       3       3       8       84       480       6  
Lines to real estate companies
    343       58       20       22       3       1       7       2       456       6  
Hotel
    79       36       13       21                   36       82       267       4  
Single family home builders
    133       41       8       4             23       10       4       223       3  
Raw land and other land uses
    21       29       4       1       1       2       2       10       70       1  
Health care
    12       7       12                                     31        
Other
    12       3       2       1       1                   1       20        
 
                                                           
Total core portfolio
    1,961       527       277       244       31       79       186       665       3,970       53  
Total noncore portfolio
    1,933       444       228       261       81       128       76       335       3,486       47  
 
                                                           
 
                                                                               
Total
  $ 3,894     $ 971     $ 505     $ 505     $ 112     $ 207     $ 262     $ 1,000     $ 7,456       100 %
 
                                                           
Credit quality data regarding the ACL and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table.
Table 20 — Commercial Real Estate — Core vs. Noncore portfolios
                                                 
    March 31, 2010  
    Ending                                     Nonaccrual  
(dollar amounts in millions)   Balance     Prior NCOs     ACL $     ACL %     Credit Mark (1)     Loans  
Core Total
  $ 3,970     $     $ 165       4.16 %     4.16 %   $ 16.2  
 
                                               
Noncore — Special Assets Division (2)
    1,702       519       413       24.27       41.96       732.9  
Noncore — Other
    1,784       29       176       9.87       11.31       77.7  
 
                                   
Noncore Total
    3,486       548       589       16.90       28.19       810.6  
 
                                   
Commercial Real Estate Total
  $ 7,456     $ 548     $ 754       10.11 %     16.27 %   $ 826.8  
 
                                   
 
                                               
    December 31, 2009  
Core Total
  $ 4,038     $     $ 168       4.16 %     4.16 %   $ 3.8  
 
                                               
Noncore — Special Assets Division (2)
    1,809       511       410       22.66       39.70       861.0  
Noncore — Other
    1,842       26       186       10.10       11.35       71.0  
 
                                   
Noncore Total
    3,651       537       596       16.32       27.05       932.0  
 
                                   
Commercial Real Estate Total
  $ 7,689     $ 537     $ 764       9.94 %     15.82 %   $ 935.8  
 
                                   
     
(1)   Calculated as (Prior NCOs + ACL $) / (Ending Balance + Prior NCOs)
 
(2)   Noncore loans managed by our Special Assets Division, the area responsible for managing loans and relationships designated as monitored credits.
As shown in the above table, substantial reserves for the noncore portfolio have been established. At March 31, 2010, the ACL of related total loans and leases for the noncore portfolio was 16.90%. We believe segregating the noncore CRE from core CRE improves our ability to understanding the nature, performance prospects, and problem resolution opportunities of this segment, thus allowing us to continue to deal proactively with future credit issues.
The combination of prior NCOs and the existing ACL represents the total credit actions taken on each segment of the portfolio. From this data, we calculate a measurement, called a “Credit Mark”, that provides a consistent measurement of the cumulative credit actions taken against a specific portfolio segment. We believe that the combined credit activity is appropriate for each of the CRE segments.

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COMMERCIAL AND INDUSTRIAL (C&I) PORTFOLIO
The C&I portfolio is comprised of loans to businesses where the source of repayment is associated with the ongoing operations of the business. Generally, the loans are secured with the financing of the borrower’s assets, such as equipment, accounts receivable, or inventory. In many cases, the loans are secured by real estate, although the sale of the real estate is not a primary source of repayment for the loan. For loans secured by real estate, appropriate appraisals are obtained at origination, and updated on an as needed basis, in compliance with regulatory requirements.
There were no outstanding commercial loans that would be considered an unwarranted industry or geographic concentration of lending. Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home building industry, contractors, and automotive suppliers. However, the combined total of these segments represent less than 10% of the total C&I portfolio. We manage the risks inherent in this portfolio through origination policies, concentration limits, ongoing loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as LTV, and debt service coverage ratios, as applicable.
C&I borrowers have been challenged by the weak economy for consecutive years, and some borrowers may no longer have sufficient capital to withstand the protracted stress and, as a result, may not be able to comply with the original terms of their credit agreements. We continue to focus ongoing attention on the portfolio management process to proactively identify borrowers that may be facing financial difficulty.
As shown in the following table, C&I loans totaled $12.2 billion at March 31, 2010.
Table 21 — Commercial and Industrial Loans and Leases by Industry Classification
                                 
    March 31, 2010  
    Commitments     Loans Outstanding  
(dollar amounts in millions)   Amount     Percent     Amount     Percent  
 
Industry Classification:
                               
Services
  $ 4,954       28 %   $ 3,706       30 %
Manufacturing
    3,241       18       2,029       17  
Finance, insurance, and real estate
    2,564       14       2,134       17  
Retail trade — auto dealers
    1,495       8       897       7  
Retail trade — other than auto dealers
    1,394       8       965       8  
Wholesale trade
    1,238       7       698       6  
Transportation, communications, and utilities
    1,169       7       677       6  
Contractors and construction
    896       5       442       3  
Energy
    573       3       404       3  
Agriculture and forestry
    258       1       188       2  
Public administration
    99       1       91       1  
Other
    28             14        
 
                       
 
                               
Total
  $ 17,909       100 %   $ 12,245       100 %
 
                       

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C&I loan credit quality data regarding NCOs and NALs by industry classification are presented in the table below:
Table 22 — Commercial and Industrial Credit Quality Data by Industry Classification
                                                                 
    Net Charge-offs     Nonaccrual Loans  
    Three Months Ended March 31,     March 31,     At December 31,  
    2010     2009     2010     2009  
(dollar amounts in millions)   Amount     Annualized %     Amount     Annualized %     Amount     Percentage (1)     Amount     Percentage (1)  
 
Industry Classification:
                                                               
Manufacturing
  $ 26.6       5.16 %   $ 19.8       3.41 %   $ 133.4       7 %   $ 136.8       6 %
Services
    26.1       2.85       14.9       1.60       135.0       4       163.9       4  
Contractors and construction
    8.1       7.30       4.0       2.88       27.0       6       41.6       9  
Finance, insurance, and real estate (2)
    4.6       0.84       138.2       24.62       80.2       4       98.0       4  
Transportation, communications, and utilities
    4.0       2.36       3.0       1.46       33.5       5       30.6       4  
Retail trade — other than auto dealers
    3.2       1.34       18.8       7.95       55.9       6       58.5       6  
Energy
    1.2       1.17       3.0       3.01       11.0       3       10.7       3  
Retail trade — auto dealers
    0.2       0.11             0.08       1.5             3.0        
Public administration
    0.1       0.63                   0.1             0.1        
Agriculture and forestry
    0.1       0.23             0.17       5.0       3       5.1       3  
Wholesale trade
    (0.0 )           7.9       3.12       27.3       4       29.5       4  
Other
    1.0       28.18       1.0       12.02       1.6       12       0.6       2  
 
                                                       
 
                                                               
Total (2)
  $ 75.4       2.45 %   $ 210.6       6.22 %   $ 511.6       4 %   $ 578.4       4 %
 
                                                       
     
(1)   Represents percentage of total related outstanding loans.
 
(2)   The first-three month period of 2009 included charge-offs totaling $128.3 million associated with the Franklin restructuring.
FRANKLIN RELATIONSHIP
(This section should be read in conjunction with Significant Item 2.)
As a result of the March 31, 2009, restructuring, we report the loans secured by first- and second- mortgages on residential properties and OREO properties, both of which had previously been assets of Franklin or its subsidiaries and were pledged to secure our loan to Franklin. At the time of the restructuring, the loans had a fair value of $493.6 million and the OREO properties had a fair value of $79.6 million. As of March 31, 2010, the balances had reduced to $418.9 million and $24.4 million, respectively, as a result of paydowns. There is not a specific ALLL for the Franklin portfolio, as these loans are carried at their fair values.
The following table summarizes the Franklin-related balances for accruing loans, NALs, and OREO since the restructuring:
Table 23 — Franklin-related Loan and OREO Balances
                                         
    2010     2009  
(dollar amounts in millions)   March 31,     December 31,     September 30,     June 30,     March 31,  
Total accruing loans
  $ 89.9     $ 129.2     $ 126.7     $ 127.4     $ 127.5  
Total nonaccrual loans
    329.0       314.7       338.5       344.6       366.1  
 
                             
Total Loans
    418.9       443.9       465.2       472.0       493.6  
OREO
    24.4       23.8       31.0       43.6       79.6  
 
                             
Total Franklin loans and OREO
  $ 443.3     $ 467.7     $ 496.2     $ 515.6     $ 573.2  
 
                             
The changes in the Franklin-related balances since the restructuring have been consistent with our expectations based on the restructuring agreement. Collection strategies were designed to generate cash flow with the intention of reducing our exposure associated with these loans.
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength and payment history of the borrower, type of exposure, and the transaction structure. We make extensive use of portfolio assessment models to continuously monitor the quality of the portfolio, which may result in changes to future origination strategies. The continuous analysis and review process results in a determination of an appropriate ALLL amount for our consumer loan portfolio.

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The residential mortgage and home equity portfolios are primarily located throughout our geographic footprint. The general slowdown in the housing market has impacted the performance of our residential mortgage and home equity portfolios. While the degree of price depreciation varies across our markets, all regions throughout our footprint have been affected. Given the continued economic weaknesses in our markets, the home equity and residential mortgage portfolios are particularly noteworthy, and are discussed in greater detail below:
Table 24 — Selected Home Equity and Residential Mortgage Portfolio Data (1)
                                                 
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages  
(dollar amounts in millions)   03/31/10     12/31/09     03/31/10     12/31/09     03/31/10     12/31/09  
Ending Balance
  $ 2,532     $ 2,616     $ 4,982     $ 4,946     $ 4,614     $ 4,510  
Portfolio Weighted Average LTV ratio (2)
    71 %     71 %     77 %     77 %     76 %     76 %
Portfolio Weighted Average FICO (3)
    726       716       737       723       716       698  
                                                 
    Three Months Ended March 31, 2010  
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages (4)  
Originations
          $ 100             $ 262             $ 242  
Origination Weighted Average LTV ratio (2)
            59 %             72 %             73 %
Origination Weighted Average FICO (3)
            763               766               764  
     
(1)   Excludes Franklin loans.
 
(2)   The loan-to-value (LTV) ratios for home equity loans and home equity lines of credit are cumulative LTVs reflecting the balance of any senior loans.
 
(3)   Portfolio Weighted Average FICO reflects currently updated customer credit scores whereas Origination Weighted Average FICO reflects the customer credit scores at the time of loan origination.
 
(4)   Represents only owned-portfolio originations.
HOME EQUITY PORTFOLIO
Our home equity portfolio (loans and lines-of-credit) consists of both first and second mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios, and LTV ratios. We offer closed-end home equity loans with a fixed interest rate and level monthly payments and a variable-rate, interest-only home equity line-of-credit. Home equity loans are generally fixed-rate with periodic principal and interest payments. Home equity lines-of-credit are generally variable-rate and do not require payment of principal during the 10-year revolving period of the line.
We focus on high-quality borrowers primarily located within our geographic footprint. Borrower FICO scores at loan origination for this portfolio have consistently increased, and loan originations to borrowers with lower FICO scores have consistently decreased. The majority of our home equity borrowers consistently pay more than the required amount. Additionally, since we focus on developing complete relationships with our customers, many of our home equity borrowers have utilized other products and services.
We believe we have granted credit conservatively within this portfolio. We have not originated “stated income” home equity loans or lines-of-credit that allow negative amortization. Also, we have not originated home equity loans or lines-of-credit with an LTV ratio at origination greater than 100%, except for infrequent situations with high-quality borrowers. However, continued declines in housing prices have likely eliminated a portion of the collateral for this portfolio as some loans with an original LTV ratio of less than 100% currently have an LTV ratio above 100%. At March 31, 2010, 46% of our home equity loan portfolio, and 27% of our home equity line-of-credit portfolio were secured by a first-mortgage lien on the property. The risk profile is substantially improved when we hold a first-mortgage lien position. In the 2010 first quarter, over 50% of our home equity portfolio originations (both loans and lines-of-credit) were loans where the loan was secured by a first-mortgage lien.
For certain home equity loans and lines-of-credit, we may utilize Automated Valuation Methodology (AVM) or other model-driven value estimates during the credit underwriting process. Regardless of the estimate methodology, we supplement our underwriting with a third-party fraud detection system to limit our exposure to “flipping”, and outright fraudulent transactions. We update values, as we believe appropriate, and in compliance with applicable regulations, for loans identified as higher risk, based on performance indicators to facilitate our workout and loss mitigation functions.

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We continue to make appropriate origination policy adjustments based on our assessment of an appropriate risk profile as well as industry actions. In addition to origination policy adjustments, we take appropriate actions, as necessary, to manage the risk profile of this portfolio. We focus production primarily within our banking footprint or to existing customers.
RESIDENTIAL MORTGAGES
We focus on higher quality borrowers, and underwrite all applications centrally, often through the use of an automated underwriting system. We do not originate residential mortgage loans that allow negative amortization or are “payment option adjustable-rate mortgages.”
All residential mortgage loans are originated based on a full appraisal during the credit underwriting process. Additionally, we supplement our underwriting with a third-party fraud detection system to limit our exposure to “flipping”, and outright fraudulent transactions. We update values, as we believe appropriate, and in compliance with applicable regulations, for loans identified as higher risk, based on performance indicators to facilitate our workout and loss mitigation functions.
A majority of the loans in our loan portfolio have adjustable rates. Our adjustable-rate mortgages (ARMs) are primarily residential mortgages that have a fixed-rate for the first 3 to 5 years and then adjust annually. These loans comprised approximately 54% of our total residential mortgage loan portfolio at March 31, 2010. At March 31, 2010, ARM loans that were expected to have rates reset totaled $700.1 million for 2010, and $591.2 million for 2011. Given the quality of our borrowers and the relatively low current interest rates, we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk exposure. We initiate borrower contact at least six months prior to the interest rate resetting, and have been successful in converting many ARMs to fixed-rate loans through this process. Additionally, where borrowers are experiencing payment difficulties, loans may be reunderwritten based on the borrower’s ability to repay the loan.
We had $352.3 million of Alt-A mortgage loans in the residential mortgage loan portfolio at March 31, 2010, compared with $363.3 million at December 31, 2009. These loans have a higher risk profile than the rest of the portfolio as a result of origination policies for this limited segment including reliance on “stated income”, “stated assets”, or higher acceptable LTV ratios. Our exposure related to this product will continue to decline in the future as we stopped originating these loans in 2007 . At March 31, 2010, borrowers for Alt-A mortgages had an average current FICO score of 677 and the loans had an average LTV ratio of 87%, compared with 662 and 87%, respectively, at December 31, 2009. Total Alt-A NCOs during the first three-month period of 2010 were $4.5 million, or an annualized 5.07%, compared with $2.7 million, or an annualized 2.51%, in the first three-month period of 2009. As with the entire residential mortgage portfolio, the increase in NCOs reflected, among other actions, a more conservative position on the timing of loss recognition. At March 31, 2010, $15.4 million of the ALLL was allocated to the Alt-A mortgage portfolio, representing 4.37% of period-end related loans and leases.
Interest-only loans comprised $568.0 million of residential real estate loans at March 31, 2010, compared with $576.7 million at December 31, 2009. Interest-only loans are underwritten to specific standards including minimum credit scores, stressed debt-to-income ratios, and extensive collateral evaluation. At March 31, 2010, borrowers for interest-only loans had an average current FICO score of 730 and the loans had an average LTV ratio of 77%, compared with 718 and 77%, respectively, at December 31, 2009. Total interest-only NCOs during the first three-month period of 2010 were $1.5 million, or an annualized 1.06%, compared with $0.1 million, or an annualized 0.06%, in the first three-month period of 2009. As with the entire residential mortgage portfolio, the increase in NCOs reflected, among other actions, a more conservative position on the timing of loss recognition. At March 31, 2010, $8.4 million of the ALLL was allocated to the interest-only loan portfolio, representing 1.48% of period-end related loans and leases.
Several recent government actions have been enacted that have affected the residential mortgage portfolio and MSRs in particular. Various refinance programs positively affected the availability of credit for the industry. We are utilizing these programs to enhance our existing strategies of working closely with our customers.
Credit Quality
We believe the most meaningful way to assess overall credit quality performance for 2010 is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the three sections immediately following: NALs and NPAs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.

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Credit quality performance in the 2010 first quarter continued to improve. NCOs declined 46% from the prior quarter and represented the lowest level since the third quarter of 2008. NPAs decreased 7% during the quarter, partially as a result of a 52% decline in new NPAs to $237.9 million in the current quarter from $494.6 million in the prior quarter. Consistent with seasonal trends, early stage delinquency rates declined across all of our products. In addition, we saw a reduction in both the absolute level and the rate of inflow of “criticized” loans. The 2010 first quarter represented the first decline in the level of “criticized” loans since the first quarter of 2009. In the consumer portfolio, we continued to originate higher quality loans as measured by the average FICO score at origination. In addition, we observed a decline in the negative migration toward lower updated FICO scores in the existing portfolio. Despite these improved asset quality measures, the economic environment remains challenging. As such, we believe it was prudent to maintain our period end allowance at 4.14% of total loans and leases, essentially unchanged from the end of the prior quarter.
NONACCRUAL LOANS (NALs) AND NONPERFORMING ASSETS (NPAs)
(This section should be read in conjunction with Significant Item 2.)
NPAs consist of (a) NALs, which represent loans and leases that are no longer accruing interest, (b) impaired held-for-sale loans, (c) OREO, and (d) other NPAs. A C&I or CRE loan is generally placed on nonaccrual status when collection of principal or interest is in doubt or when the loan is 90-days past due. Residential mortgage loans are placed on nonaccrual status at 180-days past due, and a charge-off recorded if it is determined that insufficient equity exists in the property to support the entire outstanding loan amount . A home equity loan is placed on nonaccrual status at 120-days past due, and a charge-off recorded if it is determined that there is not sufficient equity in the loan to cover our position. In all instances associated with residential real estate loans, our equity position is determined by a current property valuation based on an expected marketing time period. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior-year amounts generally charged-off as a credit loss. When, in our judgment, the borrower’s ability to make required interest and principal payments has resumed and collectiblity is no longer in doubt, the loan or lease is returned to accrual status.
Accruing restructured loans (ARLs) consists of accruing loans that have been reunderwritten, modified, or restructured when borrowers are experiencing payment difficulties. ARLs are excluded from NALs because the borrower remains contractually current. These loan restructurings are one component of the loss mitigation process, and are made to increase the likelihood of repayment, and include, but are not limited to, changes to any of the following: interest rate, maturity, principal, payment amount, or a combination of each.
Table 25 reflects period-end NALs and NPAs detail for each of the last five quarters, and Table 26 reflects period-end ARLs and past due loans and leases detail for each of the last five quarters.

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Table 25 — Nonaccrual Loans (NALs) and Nonperforming Assets (NPAs)
                                         
           
  2010     2009  
(dollar amounts in thousands)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                       
Nonaccrual loans and leases (NALs)
                                       
Commercial and industrial
  $ 511,588     $ 578,414     $ 612,701     $ 456,734     $ 398,286  
Commercial real estate
    826,781       935,812       1,133,661       850,846       629,886  
 
                                       
Alt-A mortgages
    13,368       11,362       9,810       25,861       25,175  
Interest-only mortgages
    8,193       7,445       8,336       17,428       20,580  
Franklin residential mortgages
    297,967       299,670       322,796       342,207       360,106  
Other residential mortgages
    53,422       44,153       49,579       89,992       81,094  
 
                             
Total residential mortgages
    372,950       362,630       390,521       475,488       486,955  
Home equity
    54,789       40,122       44,182       35,299       37,967  
 
                             
Total nonaccrual loans and leases
    1,766,108       1,916,978       2,181,065       1,818,367       1,553,094  
Other real estate owned (OREO), net
                                       
Residential
    68,289       71,427       81,807       107,954       143,856  
Commercial
    83,971       68,717       60,784       64,976       66,906  
 
                             
Total other real estate, net
    152,260       140,144       142,591       172,930       210,762  
Impaired loans held for sale (1)
          969       20,386       11,287       11,887  
 
                             
Total nonperforming assets (NPAs)
  $ 1,918,368     $ 2,058,091     $ 2,344,042     $ 2,002,584     $ 1,775,743  
 
                             
 
                                       
NALs as a % of total loans and leases
    4.78 %     5.21 %     5.85 %     4.72 %     3.93 %
NPA ratio (2)
    5.17       5.57       6.26       5.18       4.46  
 
                                       
Nonperforming Franklin assets
                                       
Residential mortgage
  $ 297,967     $ 299,670     $ 322,796     $ 342,207     $ 360,106  
OREO
    24,423       23,826       30,996       43,623       79,596  
Home equity
    31,067       15,004       15,704       2,437       6,000  
 
                             
Total Nonperforming Franklin assets
  $ 353,457     $ 338,500     $ 369,496     $ 388,267     $ 445,702  
 
                             
     
(1)   The September 30, 2009, amount primarily represented impaired residential mortgage loans held for sale. All other presented amounts represented impaired loans obtained from the Sky Financial acquisition. Held for sale loans are carried at the lower of cost or fair value less costs to sell.
 
(2)   NPAs divided by the sum of loans and leases, impaired loans held-for-sale, net other real estate, and other NPAs.

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Table 26 — Accruing Past Due Loans and Leases and Accruing Restructured Loans
                                         
           
  2010     2009  
(dollar amounts in thousands)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                       
Accruing loans and leases past due 90 days or more
                                       
Commercial and industrial
  $ 475     $     $     $     $  
Commercial real estate
                2,546              
Residential mortgage (excluding loans guaranteed by the U.S. government
    72,702       78,915       65,716       97,937       88,381  
Home equity
    29,438       53,343       45,334       35,328       35,717  
Other loans and leases
    10,598       13,400       14,175       13,474       15,611  
 
                             
Total, excl. loans guaranteed by the U.S. government
    113,213       145,658       127,771       146,739       139,709  
Add: loans guaranteed by the U.S. government
    96,814       101,616       102,895       99,379       88,551  
 
                             
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government
  $ 210,027     $ 247,274     $ 230,666     $ 246,118     $ 228,260  
 
                             
 
                                       
Excluding loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.31 %     0.40 %     0.34 %     0.38 %     0.35 %
 
                                       
Guaranteed by the U.S. government, as a percent of total loans and leases
    0.26       0.28       0.28       0.26       0.22  
 
                                       
Including loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.57       0.68       0.62       0.64       0.58  
 
                                       
Accruing restructured loans
                                       
Commercial
  $ 117,667     $ 157,049     $ 153,010     $ 267,975     $ 201,508  
 
                                       
Alt-A mortgages
    57,897       57,278       58,367       46,657       36,642  
Interest-only mortgages
    8,413       7,890       10,072       12,147       8,500  
Other residential mortgages
    176,560       154,471       136,024       99,764       62,869  
 
                             
Total residential mortgages
    242,870       219,639       204,463       158,568       108,011  
Other
    62,148       52,871       42,406       35,720       27,014  
 
                             
Total accruing restructured loans
  $ 422,685     $ 429,559     $ 399,879     $ 462,263     $ 336,533  
 
                             
NALs were $1,766.1 million at March 31, 2010, and represented 4.78% of related loans. This compared with $1,917.0 million, or 5.21% of related loans, at December 31, 2009. The decrease of $150.9 million, or 8%, primarily reflected:
    $109.0 million, or 12%, decrease in CRE NALs, reflecting both charge-off activity, as well as problem credit resolutions, including pay-offs. The payment category was substantial and is a direct result of our commitment to the ongoing proactive management of these credits by our Special Assets department.
 
    $66.8 million, or 12%, decrease in C&I NALs, also reflecting both charge-off activity, as well as problem credit resolutions, including pay-offs, and was associated with loans throughout our footprint, with no specific geographic concentration. From an industry perspective, improvement in the manufacturing-related segment accounted for a significant portion of the decrease.
Partially offset by:
    $14.7 million, or 37%, increase in home equity NALs, reflecting activity in the Franklin portfolio, and the continued stress in some of our markets. All home equity NALs have been written down to current value less selling costs, and as such, we do not expect any significant amount of additional losses from these loans.
    $10.3 million, or 3%, increase in residential mortgage NALs, also reflected activity in the Franklin portfolio, and the continued stress in some of our markets. Our efforts to proactively address existing issues with loss mitigation and loan modification transactions have helped to minimize the inflow of new NALs. As with home equity NALs, all residential mortgage NALs have been written down to current value less selling costs.

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NPAs, which include NALs, were $1,918.4 million at March 31, 2010, and represented 5.17% of related assets. This compared with $2,058.1 million, or 5.57% of related assets, at December 31, 2009. The $139.7 million decrease reflected:
    $150.9 million decrease to NALs, discussed above.
Partially offset by:
    $12.1 million, or 9%, increase to OREO.
The over 90-day delinquent, but still accruing, ratio excluding loans guaranteed by the U.S. Government, was 0.31% at March 31, 2010, representing a 9 basis points decline compared with December 31, 2009. On this same basis, the over 90-day delinquency ratio for total consumer loans was 0.65% at March 31, 2010, representing a 25 basis point decline compared with December 31, 2009.
As part of our loss mitigation process, we reunderwrite, modify, or restructure loans when borrowers are experiencing payment difficulties, and these loan restructurings are based on the borrower’s ability to repay the loan.
NPA activity for each of the past five quarters was as follows:
Table 27 — Nonperforming Asset Activity
                                         
    2010     2009  
(dollar amounts in thousands)   First     Fourth     Third     Second     First  
 
                                       
Nonperforming assets, beginning of year
  $ 2,058,091     $ 2,344,042     $ 2,002,584     $ 1,775,743     $ 1,636,646  
New nonperforming assets
    237,914       494,607       899,855       750,318       622,515  
Franklin impact, net
    14,957       (30,996 )     (18,771 )     (57,436 )     (204,523 )
Returns to accruing status
    (80,840 )     (85,867 )     (52,498 )     (40,915 )     (36,056 )
Loan and lease losses
    (185,387 )     (391,635 )     (305,405 )     (282,713 )     (168,382 )
OREO losses
    (4,160 )     (7,394 )     (30,623 )     (20,614 )     (4,034 )
Payments
    (107,640 )     (222,790 )     (117,710 )     (95,124 )     (61,452 )
Sales
    (14,567 )     (41,876 )     (33,390 )     (26,675 )     (8,971 )
 
                             
Nonperforming assets, end of period
  $ 1,918,368     $ 2,058,091     $ 2,344,042     $ 2,002,584     $ 1,775,743  
 
                             
ALLOWANCES FOR CREDIT LOSSES (ACL)
(This section should be read in conjunction with Significant Item 2, and the “Critical Accounting Policies and Use of Significant Estimates” discussion.)
We maintain two reserves, both of which are available to absorb credit losses: the ALLL and the AULC. When summed together, these reserves comprise the total ACL. Our credit administration group is responsible for developing methodology assumptions and estimates, as well as determining the adequacy of the ACL. The ALLL represents the estimate of probable losses inherent in the loan portfolio at the balance sheet date. Additions to the ALLL result from recording provision expense for loan losses or recoveries, while reductions reflect charge-offs, net of recoveries, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the portfolio adjusted by an applicable funding expectation.
Table 28 reflects activity in the ALLL and ACL for each of the last five quarters.

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Table 28 — Quarterly Credit Reserves Analysis
                                         
    2010     2009  
(dollar amounts in thousands)   First     Fourth     Third     Second     First  
 
Allowance for loan and lease losses, beginning of period
  $ 1,482,479     $ 1,031,971     $ 917,680     $ 838,549     $ 900,227  
Loan and lease losses
    (264,222 )     (471,486 )     (377,443 )     (359,444 )     (353,005 )
Recoveries of loans previously charged off
    25,741       26,739       21,501       25,037       11,514  
 
                             
Net loan and lease losses
    (238,481 )     (444,747 )     (355,942 )     (334,407 )     (341,491 )
 
                             
Provision for loan and lease losses
    233,971       895,255       472,137       413,538       289,001  
Allowance for loans transferred to held-for-sale
                (1,904 )            
Allowance of assets sold
                            (9,188 )
 
                             
Allowance for loan and lease losses, end of period
  $ 1,477,969     $ 1,482,479     $ 1,031,971     $ 917,680     $ 838,549  
 
                             
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 48,879     $ 50,143     $ 47,144     $ 46,975     $ 44,139  
 
                                       
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    1,037       (1,264 )     2,999       169       2,836  
 
                             
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 49,916     $ 48,879     $ 50,143     $ 47,144     $ 46,975  
 
                             
Total allowances for credit losses
  $ 1,527,885     $ 1,531,358     $ 1,082,115     $ 964,824     $ 885,524  
 
                             
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Total loans and leases
    4.00 %     4.03 %     1.75 %     2.38 %     2.12 %
Nonaccrual loans and leases (NALs)
    84       77       123       50       54  
Nonperforming assets (NPAs)
    77       72       107       46       47  
 
                                       
Total allowances for credit losses (ACL) as % of:
                                       
Total loans and leases
    4.14 %     4.16 %     1.90 %     2.51 %     2.24 %
NALs
    87       80       134       53       57  
NPAs
    80       74       116       48       50  
As shown in the tables above, the ALLL decreased to $1,478.0 million at March 31, 2010, compared with $1,482.5 million at December 31, 2009. Expressed as a percent of period-end loans and leases, the ALLL ratio decreased to 4.00% at March 31, 2010, compared with 4.03% at December 31, 2009.
On a combined basis, the ACL as a percent of total loans and leases at March 31, 2010, was 4.14% compared with 4.16% at December 31, 2009.
While there have been signs of increasing economic stability in some of our markets, we believed that it was important to maintain our reserve levels essentially unchanged from December 31, 2009.

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The table below reflects how our ACL was allocated among our various loan categories during each of the past five quarters:
Table 29 — Allocation of Allowances for Credit Losses (1)
                                                                                 
    2010     2009  
(dollar amounts in thousands)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                                                               
Commercial
                                                                               
Commercial and industrial
  $ 459,011       33 %   $ 492,205       35 %   $ 381,912       34 %   $ 347,339       35 %   $ 309,465       35 %
Commercial real estate
    741,669       20       751,875       21       436,661       23       368,464       23       349,750       23  
 
                                                           
Total commercial
    1,200,680       53       1,244,080       56       818,573       57       715,803       58       659,215       58  
 
                                                           
Consumer
                                                                               
Automobile loans and leases
    56,111       12       57,951       9       59,134       9       60,995       8       51,235       9  
Home equity
    127,970       20       102,039       21       86,989       20       76,653       20       67,510       19  
Residential mortgage
    60,295       13       55,903       12       50,177       12       48,093       12       45,138       12  
Other loans
    32,913       2       22,506       2       17,098       2       16,136       2       15,451       2  
 
                                                           
Total consumer
    277,289       47       238,399       44       213,398       43       201,877       42       179,334       42  
 
                                                           
Total ALLL
    1,477,969       100 %     1,482,479       100 %     1,031,971       100 %     917,680       100 %     838,549       100 %
 
                                                           
AULC
    49,916               48,879               50,143               47,144               46,975          
 
                                                                     
Total ACL
  $ 1,527,885             $ 1,531,358             $ 1,082,114             $ 964,824             $ 885,524          
 
                                                                     
     
(1)   Percentages represent the percentage of each loan and lease category to total loans and leases.
The following table provides additional detail regarding the ACL coverage ratio for NALs.
Table 30 — ACL/NAL Coverage Ratios Analysis
March 31, 2010
                         
(dollar amounts in thousands)   Franklin     Other     Total  
Nonaccrual Loans (NALs)
  $ 329,034     $ 1,437,074     $ 1,766,108  
 
Allowance for Credit Losses (ACL)
  NA (1)     1,527,885       1,527,885  
 
ACL as a % of NALs (coverage ratio)
            106 %     87 %
     
(1)   Not applicable. Franklin loans were acquired at fair value on March 31, 2009. Under guidance provided by the FASB regarding acquired impaired loans, a nonaccretable discount was recorded to reduce the carrying value of the loans to the amount of future cash flows we expect to receive.
We believe that the total ACL/NAL coverage ratio of 87% at March 31, 2010, represented an appropriate level of reserves for the remaining inherent risk in the portfolio. The Franklin NAL balance of $329.0 million does not have reserves assigned as those loans were written down to fair value as a part of the restructuring agreement on March 31, 2009. Eliminating the impact of the Franklin loans, the ACL/NAL coverage ratio was 106% as of March 31, 2010.
NET CHARGE-OFFS (NCOs)
(This section should be read in conjunction with Significant Item 2.)
Table 31 reflects NCO detail for each of the last five quarters. Table 32 displays the Franklin-related impacts for each of the last five quarters.

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Table 31 — Net Loan and Lease Charge-offs
                                         
    2010     2009  
(dollar amounts in thousands)   First     Fourth     Third     Second     First  
Net charge-offs by loan and lease type
                                       
Commercial:
                                       
Commercial and industrial
  $ 75,439     $ 109,816     $ 68,842     $ 98,300     $ 210,648  
Construction
    34,426       85,345       50,359       31,360       25,642  
Commercial
    50,873       172,759       118,866       141,261       57,139  
 
                             
Commercial real estate
    85,299       258,104       169,225       172,621       82,781  
 
                             
Total commercial
    160,738       367,920       238,067       270,921       293,429  
 
                             
Consumer:
                                       
Automobile loans
    7,666       11,374       8,988       12,379       14,971  
Automobile leases
    865       1,554       1,753       2,227       3,086  
 
                             
Automobile loans and leases
    8,531       12,928       10,741       14,606       18,057  
Home equity
    37,901       35,764       28,045       24,687       17,680  
Residential mortgage (1)
    24,311       17,789       68,955       17,160       6,298  
Other loans
    7,000       10,346       10,134       7,033       6,027  
 
                             
Total consumer
    77,743       76,827       117,875       63,486       48,062  
 
                             
Total net charge-offs
  $ 238,481     $ 444,747     $ 355,942     $ 334,407     $ 341,491  
 
                             
 
                                       
Net charge-offs — annualized percentages
                                       
Commercial:
                                       
Commercial and industrial
    2.45 %     3.49 %     2.13 %     2.91 %     6.22 %
Construction
    9.77       20.68       11.14       6.45       5.05  
Commercial
    3.25       10.15       6.72       7.79       2.83  
 
                             
Commercial real estate
    4.44       12.21       7.62       7.51       3.27  
 
                             
Total commercial
    3.22       7.00       4.37       4.77       4.96  
 
                             
Consumer:
                                       
Automobile loans
    0.76       1.49       1.25       1.73       1.56  
Automobile leases
    1.58       2.25       2.04       2.11       2.39  
 
                             
Automobile loans and leases
    0.80       1.55       1.33       1.78       1.66  
Home equity
    2.01       1.89       1.48       1.29       0.93  
Residential mortgage (1)
    2.17       1.61       6.15       1.47       0.55  
Other loans
    3.87       5.47       5.36       4.03       3.59  
 
                             
Total consumer
    1.83       1.91       2.94       1.56       1.12  
 
                             
Net charge-offs as a % of average loans
    2.58 %     4.80 %     3.76 %     3.43 %     3.34 %
 
                             
     
(1)   Effective with the 2009 third quarter, a change to accelerate the timing for when a partial charge-off is recognized was made. This change resulted in $31,952 thousand of charge-offs in the 2009 third quarter.

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Table 32 — NCOs — Franklin-Related Impact
                                         
    2010     2009  
(dollar amounts in millions)   First     Fourth     Third     Second     First  
Commercial and industrial net charge-offs (recoveries)
                                       
Franklin
  $ (0.3 )   $ 0.1     $ (4.1 )   $ (9.9 )   $ 128.3  
Non-Franklin
    75.7       109.7       72.9       108.2       82.3  
 
                             
Total
  $ 75.4     $ 109.8     $ 68.8     $ 98.3     $ 210.6  
 
                             
 
Commercial and industrial average loan balances
                                       
Franklin
  $     $     $     $     $ 628.0  
Non-Franklin
    12,314.4       12,570.3       12,922.4       13,523.0       12,913.0  
 
                             
Total
  $ 12,314.4     $ 12,570.3     $ 12,922.4     $ 13,523.0     $ 13,541.0  
 
                             
 
Commercial and industrial net charge-offs - annualized percentages
                                       
Total
    2.45 %     3.49 %     2.13 %     2.91 %     6.22 %
Non-Franklin
    2.46       3.49       2.26       3.20       2.55  
                                         
    2010     2009  
(in millions)   First     Fourth     Third     Second     First  
Total net charge-offs (recoveries)
                                       
Franklin
  $ 11.5     $ 1.2     $ (3.5 )   $ (10.1 )   $ 128.3  
Non-Franklin
    227.0       443.5       359.4       344.5       213.2  
 
                             
Total
  $ 238.5     $ 444.7     $ 355.9     $ 334.4     $ 341.5  
 
                             
 
Total average loan balances
                                       
Franklin
  $ 431.4     $ 454.5     $ 470.5     $ 489.0     $ 630.0  
Non-Franklin
    36,548.6       36,634.7       37,384.7       38,518.0       40,236.0  
 
                             
Total
  $ 36,980.0     $ 37,089.2     $ 37,855.2     $ 39,007.0     $ 40,866.0  
 
                             
 
Total net charge-offs — annualized percentages
                                       
Total
    2.58 %     4.80 %     3.76 %     3.43 %     3.34 %
Non-Franklin
    2.48       4.84       3.85       3.58       2.12  
Total NCOs during the 2010 first quarter were $238.5 million, or an annualized 2.58% of average related balances, compared with $444.7 million, or annualized 4.80%, of average related balances in 2009 fourth quarter. We anticipate NCOs for the remainder of 2010 to show improvement from 2010 first quarter levels.
Total commercial NCOs during 2010 first quarter were $160.7 million, or an annualized 3.22% of average related balances, compared with $367.9 million, or an annualized 7.00% in 2009 fourth quarter.
C&I NCOs in the 2010 first quarter were $75.4 million, or an annualized 2.45%, compared with $109.8 million, or an annualized 3.49%, in the 2009 fourth quarter. The decrease of $34.4 million reflected a reduced level of large dollar charge-offs. Also, there continued to be improvement in delinquencies, as early stage delinquencies declined from the prior quarter, and represented the first quarterly decline since 2008. While there continued to be concern regarding the impact of the economic conditions on our commercial customers, the lower inflow of new nonaccruals, the reduction in “criticized” loans, and the significant decline in early stage delinquencies supports our outlook for improved credit quality performance for the remainder of 2010.
CRE NCOs in the 2010 first quarter were $85.3 million, or an annualized 4.44%, compared with $258.1 million, or an annualized 12.21%, in the 2009 fourth quarter. The $172.8 million decrease reflected a reduced level of large-dollar charge-offs. In the prior quarter, $82.8 million of charge-offs were associated with the activity of nine relationships. In the current quarter, there was only one loss in excess of $5 million. Retail projects continued to represent a significant portion, or 30%, of the losses. The improvement was evident across all of our regions. The retail property portfolio remains susceptible to the ongoing market disruption, but we also believe that the combination of prior charge-offs and existing reserve balances positions us well to make effective credit decisions in the future. We continued our ongoing portfolio management efforts during the current quarter, including obtaining updated appraisals on properties and assessing a project status within the context of market environment expectations.

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In assessing commercial NCOs trends, it is helpful to understand the process of how these loans are treated as they deteriorate over time. Reserves for loans are established at origination consistent with the level of risk associated with the original underwriting. If the quality of a commercial loan deteriorates, it migrates to a lower quality risk rating as a result of our normal portfolio management process, and a higher reserve amount is assigned. As a part of our normal portfolio management process, the loan is reviewed and reserves are increased as warranted. Charge-offs, if necessary, are generally recognized in a period after the reserves were established. If the previously established reserves exceed that needed to satisfactorily resolve the problem credit, a reduction in the overall level of the reserve could be recognized. In summary, if loan quality deteriorates, the typical credit sequence for commercial loans are periods of reserve building, followed by periods of higher NCOs as previously established reserves are utilized. Additionally, it is helpful to understand that increases in reserves either precede or are in conjunction with increases in NALs. When a credit is classified as NAL, it is evaluated for specific reserves or charge-off. As a result, an increase in NALs does not necessarily result in an increase in reserves or an expectation of higher future NCOs.
Total consumer NCOs during the 2010 first quarter were $77.7 million, or an annualized 1.83%, compared with $76.8 million, or an annualized 1.91%, in 2009 fourth quarter. The decline in the annualized NCO rate despite a higher level of absolute charge-offs reflected an increase in average consumer loans during the 2010 first quarter.
Automobile loan and lease NCOs in the 2010 first quarter were $8.5 million, or an annualized 0.80%, compared with $12.9 million, or an annualized 1.55%, in 2009 fourth quarter. The decline in the annualized NCO percentage reflected in part the increase in average automobile balances resulting from the previously discussed consolidation of the automobile securitization trust effective January 1, 2010. Underlying performance of this portfolio on both an absolute and relative basis continued to be consistent with our views regarding the quality of the portfolio. The level of delinquencies continued to decline from recent prior periods, further supporting our view of improved performance going forward.
Home equity NCOs in the 2010 first quarter were $37.9 million, or an annualized 2.01%, compared with $35.8 million, or an annualized 1.89%, in 2009 fourth quarter. Although NCOs were higher than prior quarters, there continued to be a declining trend in the early-stage delinquency level in the home equity line of credit portfolio, supporting our longer-term positive view for home equity portfolio performance. The performance continued to be impacted by borrowers defaulting with no available equity. We continue to focus on loss mitigation activity and short sales, as we believe that our more proactive loss mitigation strategies are in the best interest of both the company and our customers. While losses have increased over the past several quarters, given the market conditions, performance remained within expectations.
Residential mortgage NCOs in the 2010 first quarter were $24.3 million, or an annualized 2.17%, compared with $17.8 million, or an annualized 1.61%, in 2009 fourth quarter. The increase from the prior quarter represents a return to a more consistent level after the impact of the 2009 third quarter nonaccrual loan sale on 2009 fourth quarter performance. The 2009 third quarter sale had the effect of pulling some 2009 fourth quarter losses into the 2009 third quarter. We continued to see positive trends in early-stage delinquencies, although there continues to be valuation pressure.
The table below reflects NCO activity for the first three-month period of 2010 and the first three-month period of 2009.

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Table 33 — 2010 First Quarter versus 2009 First Quarter
                 
    Three Months Ended March 31,  
(dollar amounts in thousands)   2010     2009  
 
Net charge-offs by loan and lease type:
               
Commercial:
               
Commercial and industrial (1)
  $ 75,439     $ 210,648  
Commercial real estate:
               
Construction
    34,426       25,642  
Commercial
    50,873       57,139  
 
           
Commercial real estate
    85,299       82,781  
 
           
Total commercial
    160,738       293,429  
 
           
Consumer:
               
Automobile loans
    7,666       14,971  
Automobile leases
    865       3,086  
 
           
Automobile loans and leases
    8,531       18,057  
Home equity
    37,901       17,680  
Residential mortgage
    24,311       6,298  
Other loans
    7,000       6,027  
 
           
Total consumer
    77,743       48,062  
 
           
Total net charge-offs
  $ 238,481     $ 341,491  
 
           
 
               
Net charge-offs — annualized percentages:
               
Commercial:
               
Commercial and industrial (1)
    2.45 %     6.22 %
Commercial real estate:
               
Construction
    9.77       5.05  
Commercial
    3.25       2.83  
 
           
Commercial real estate
    4.44       3.27  
 
           
Total commercial
    3.22       4.96  
 
           
Consumer:
               
Automobile loans
    0.76       1.56  
Automobile leases
    1.58       2.39  
 
           
Automobile loans and leases
    0.80       1.66  
Home equity
    2.01       0.93  
Residential mortgage
    2.17       0.55  
Other loans
    3.87       3.59  
 
           
Total consumer
    1.83       1.12  
 
           
Net charge-offs as a % of average loans
    2.58 %     3.34 %
 
           
     
(1)   The first three-month period of 2009 included net charge-offs totaling $128,338 thousand associated with the Franklin restructuring.
Total NCOs during the first three-month period of 2010 were $238.5 million, or an annualized 2.58% of average related balances, compared with $341.5 million, or annualized 3.34% of average related balances in the first three-month period of 2009.
Total commercial NCOs during first three-month period of 2010 were $160.7 million, or an annualized 3.22% of average related balances, compared with $293.4 million, or an annualized 4.96% in first three-month period of 2009. The decreases were almost entirely in the C&I portfolio, as CRE NCOs declined only slightly.
C&I NCOs in the first three-month period of 2010 decreased $135.2 million compared with the first three-month period of 2009, reflecting $128.3 million of Franklin-related NCOs during the first three-month period of 2009. Non-Franklin related C&I NCOs decreased $6.9 million.

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CRE NCOs in the first three-month period of 2010 decreased $2.5 million compared with the first three-month period of 2009, however the annualized percentage of related balances increased to 4.44% from 3.27%. The increase in the annualized percentage reflected a $2.5 billion, or 24%, decline in total average CRE loans resulting from our planned efforts to shrink this portfolio through pay-offs and paydowns, as well as the impact of charge-offs and the 2009 reclassifications of CRE loans to C&I loans. This substantial decline in CRE exposure with relatively consistent loss levels resulted in the significantly higher charge-off ratio.
Total consumer NCOs during the first three-month period of 2010 were $77.7 million, or an annualized 1.83%, compared with $48.1 million, or an annualized 1.12%, in first three-month period of 2009. The increases were largely centered in the residential mortgage and home equity portfolios reflecting the continued stress in our markets, and a more aggressive loss recognition policy implemented during the 2009 third quarter.
Automobile loan and lease NCOs in the first three-month period of 2010 decreased $9.5 million, or 53%, compared with the first three-month period of 2009, reflecting the expected decline based on our consistent high quality origination profile over the past 24 months. This focus on quality associated with the 2008 and 2009 originations was the primary driver for the improvement in this portfolio in the current quarter compared with the year-ago period.
Home equity NCOs in the first three-month period of 2010 increased $20.2 million compared with the first three-month period of 2009. This increase reflected the impact of declining housing prices throughout 2009. While NCOs were higher compared with prior quarters, there continued to be a declining trend in the early-stage delinquency level in the home equity line-of-credit portfolio, supporting our longer-term positive view for home equity portfolio performance. The performance also continued to be impacted by borrowers defaulting with no available equity. We continue to focus on loss mitigation activity and short sales, as we believe that our more proactive loss mitigation strategies are in the best interest of both us and our customers. Although NCOs increased, given the market conditions, performance remained within expectations.
Residential mortgage NCOs in the first three-month period of 2010 increased $18.0 million compared with the first three-month period of 2009. This increase reflected continued housing-related pressures. The increased NCOs were a direct result of our continued emphasis on loss mitigation strategies, an increased number of short sales, and a more conservative position regarding the timing of loss recognition. We continued to see some positive trends in early-stage delinquencies, indicating that even with the economic stress on our borrowers, losses are expected to remain manageable.
INVESTMENT SECURITIES PORTFOLIO
(This section should be read in conjunction with the “Critical Accounting Policies and Use of Significant Estimates” discussion, and Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements.)
We routinely review our investment securities portfolio, and recognize impairment writedowns based primarily on fair value, issuer-specific factors and results, and our intent and ability to hold such investments. Our investment securities portfolio is evaluated in light of established asset/liability management objectives, and changing market conditions that could affect the profitability of the portfolio, as well as the level of interest rate risk to which we are exposed.
Our investment securities portfolio is comprised of various financial instruments. At March 31, 2010, our investment securities portfolio totaled $8.9 billion.
Declines in the fair value of available-for-sale investment securities are recorded as temporary impairment, noncredit OTTI, or credit OTTI adjustments.
Temporary impairment adjustments are recorded when the fair value of a security fluctuates from its historical cost. Temporary impairment adjustments are recorded in accumulated other comprehensive income (OCI), and therefore, reduce equity. Temporary impairment adjustments do not impact net income or risk-based capital. A recovery of available-for-sale security prices also is recorded as an adjustment to OCI for securities that are temporarily impaired, and results in an increase to equity.
Because the available-for-sale securities portfolio is recorded at fair value, the conclusion as to whether an investment decline is other-than-temporarily impaired does not significantly impact our equity position, as the amount of temporary adjustment has already been reflected in accumulated OCI. A recovery in the value of an other-than-temporarily impaired security is recorded as additional interest income over the remaining life of the security.
During the 2009 first quarter, we recorded $6.5 million of credit OTTI losses. This amount was comprised of $3.2 million related to the pooled-trust-preferred securities portfolio, $2.6 million related to the CMO securities portfolio, and $0.6 million related to the Alt-A securities portfolio (see below for additional discussion of these portfolios) . Given the continued disruption in the financial markets, we may be required to recognize additional credit OTTI losses in future periods with respect to our available-for-sale investment securities portfolio. The amount and timing of any additional credit OTTI will depend on the decline in the underlying cash flows of the securities. If our intent regarding the decision to hold temporarily impaired securities changes in future periods, we may be required to record noncredit OTTI, which will negatively impact our earnings.

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Alt-A, Pooled-Trust-Preferred, and Private-Label CMO Securities
Our three highest risk segments of our investment portfolio are the Alt-A mortgage-backed, pooled-trust-preferred, and private-label CMO portfolios. The Alt-A mortgage-backed securities and pooled-trust-preferred securities are located within the asset-backed securities portfolio. The performance of the underlying securities in each of these segments continues to reflect the economic environment. Each of these securities in these three segments is subjected to a rigorous review of their projected cash flows. These reviews are supported with analysis from independent third parties.
The following table presents the credit ratings for our Alt-A, pooled-trust-preferred, and private label CMO securities as of March 31, 2010:
Table 34 — Credit Ratings of Selected Investment Securities (1)
                                                         
    Amortized             Average Credit Rating of Fair Value Amount  
(dollar amounts in millions)   Cost     Fair Value     AAA     AA +/-     A +/-     BBB +/-     <BBB-  
Private label CMO securities
  $ 509.1     $ 462.7     $ 35.1     $ 21.6     $ 33.4     $ 94.0     $ 278.7  
Alt-A mortgage-backed securities
    131.4       113.7       22.1       27.7                   63.9  
Pooled-trust-preferred securities
    238.3       105.4             24.6             12.2       68.5  
 
                                         
 
Total At March 31, 2010
  $ 878.8     $ 681.8     $ 57.2     $ 73.9     $ 33.4     $ 106.2     $ 411.1  
 
                                         
 
Total At December 31, 2009
  $ 912.3     $ 700.3     $ 62.1     $ 72.9     $ 35.6     $ 121.3     $ 408.4  
 
                                         
     
(1)   Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.
Negative changes to the above credit ratings would generally result in an increase of our risk-weighted assets, which could result in a reduction to our regulatory capital ratios.
The following table summarizes the relevant characteristics of our pooled-trust-preferred securities portfolio at March 31, 2010. Each of the securities is part of a pool of issuers and each support a more senior tranche of securities except for the I-Pre TSL II security that is the most senior class.
Table 35 — Trust Preferred Securities Data
March 31, 2010
(dollar amounts in thousands)
                                                                     
                                                Actual              
                                              Deferrals     Expected        
                                              and     Defaults        
                                      # of Issuers     Defaults     as a % of        
                                  Lowest   Currently     as a % of     Remaining        
          Book     Fair     Unrealized     Credit   Performing/     Original     Performing     Excess  
Deal Name   Par Value     Value     Value     Loss     Rating(2)   Remaining(3)     Collateral     Collateral     Subordination(4)  
Alesco II (1)
  $ 40,422     $ 31,549     $ 10,873     $ 20,676     C     33/43       23 %     13 %     %
Alesco IV (1)
    20,353       10,612       2,324       8,288     C     38/53       28       21        
ICONS
    20,000       20,000       12,192       7,808     BBB     29/30       3       16       53  
I-Pre TSL II
    36,916       36,813       24,648       12,165     AA     29/29             16       71  
MM Comm II (1)
    24,544       23,457       17,903       5,554     BB     5/8       5       6        
MM Comm III (1)
    11,930       11,398       6,137       5,261     B     8/12       5       37        
Pre TSL IX (1)
    5,000       4,117       1,595       2,522     C     35/49       26       20        
Pre TSL X (1)
    17,236       9,914       2,737       7,177     C     37/57       40       31        
Pre TSL XI (1)
    25,000       24,040       8,973       15,067     C     48/65       24       23        
Pre TSL XIII (1)
    27,530       23,414       7,907       15,507     C     53/65       20       26        
Reg Diversified (1)
    25,500       7,499       513       6,986     D     28/45       34       26        
Soloso (1)
    12,500       4,486       599       3,887     C     51/70       19       25        
Tropic III
    31,000       31,000       8,981       22,019     CCC-     29/45       32       33       17  
 
                                                           
Total
  $ 297,931     $ 238,299     $ 105,382     $ 132,917                                      
 
                                                           
     
(1)   Security was determined to have other-than-temporary impairment. As such, the book value is net of recorded credit impairment.
 
(2)   For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where lowest rating is based on another nationally recognized credit rating agency.

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(3)   Includes both banks and/or insurance companies.
 
(4)   Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the security can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by: (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, foreign exchange rates, equity prices, credit spreads, and expected lease residual values. We have identified two primary sources of market risk: interest rate risk and price risk. Interest rate risk is our primary market risk.
Interest Rate Risk
OVERVIEW
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-bearing assets and liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to terminate certificates of deposit before maturity (option risk), changes in the shape of the yield curve whereby interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and London Interbank Offered Rate (LIBOR) (basis risk.)
“Asset sensitive position” refers to an increase in short-term interest rates that is expected to generate higher net interest income as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, “liability sensitive position” refers to an increase in short-term interest rates that is expected to generate lower net interest income as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS
Interest rate risk measurement is performed monthly. Two broad approaches to modeling interest rate risk are employed: income simulation and economic value analysis. An income simulation analysis is used to measure the sensitivity of forecasted net interest income to changes in market rates over a one-year time period. Although bank owned life insurance, automobile operating lease assets, and excess cash balances held at the Federal Reserve Bank are classified as noninterest earning assets, and the net revenue from these assets is in noninterest income and noninterest expense, these portfolios are included in the interest sensitivity analysis because they have attributes similar to interest earning assets. Economic value of equity (EVE) analysis is used to measure the sensitivity of the values of period-end assets and liabilities to changes in market interest rates. EVE serves as a complement to income simulation modeling as it provides risk exposure estimates for time periods beyond the one-year simulation period.
The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual “+/-100” and “+/-200” basis point parallel shifts in market interest rates over the next 12-month period beyond the interest rate change implied by the current yield curve. We assumed that market interest rates would not fall below 0% over the next 12-month period for the scenarios that used the “-100” and “-200” basis point parallel shift in market interest rates. The table below shows the results of the scenarios as of March 31, 2010, and December 31, 2009. All of the positions were within the board of directors’ policy limits.

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Table 36 — Net Interest Income at Risk
                                 
    Net Interest Income at Risk (%)  
Basis point change scenario
    -200       -100       +100       +200  
 
                       
 
Board policy limits
    -4.0 %     -2.0 %     -2.0 %     -4.0 %
 
                       
 
March 31, 2010
    -1.4 %     -0.5 %     0.0 %     +0.1 %
 
December 31, 2009
    -0.3 %     +0.2 %     -0.1 %     -0.4 %
The net interest income at risk reported as of March 31, 2010 for the “+200” basis points scenario shows a change to a slight near-term asset sensitive position compared with December 31, 2009.
The primary simulations for EVE at risk assume immediate “+/-100” and “+/-200” basis point parallel shifts in market interest rates beyond the interest rate change implied by the current yield curve. The table below outlines the March 31, 2010, results compared with December 31, 2009. All of the positions were within the board of directors’ policy limits.
Table 37 — Economic Value of Equity at Risk
                                 
    Economic Value of Equity at Risk (%)  
Basis point change scenario
    -200       -100       +100       +200  
 
                       
 
Board policy limits
    -12.0 %     -5.0 %     -5.0 %     -12.0 %
 
                       
 
March 31, 2010
    -4.6 %     +0.1 %     -2.6 %     -6.5 %
 
December 31, 2009
    +0.8 %     +2.7 %     -3.7 %     -9.1 %
The EVE at risk reported as of March 31, 2010 for the “+200” basis points scenario shows a change to a lower long-term liability sensitive position compared with December 31, 2009. The primary factors contributing to this change include lower fixed-rate loan balances, expectations for faster prepayments on loans and securities, an increase in core deposits, and a slight reduction in the remaining life of our interest rate swap portfolio.
MORTGAGE SERVICING RIGHTS (MSRs)
(This section should be read in conjunction with Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements.)
At March 31, 2010, we had a total of $207.6 million of capitalized MSRs representing the right to service $16.0 billion in mortgage loans. Of this $207.6 million, $162.1 million was recorded using the fair value method, and $45.5 million was recorded using the amortization method. If we actively engage in hedging, the MSR asset is carried at fair value. If we do not actively engage in hedging, the MSR asset is adjusted using the amortization method, and is carried at the lower of cost or market value.
MSR fair values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed strategies to reduce the risk of MSR fair value changes or impairment. In addition, we engage a third party to provide improved valuation tools and assistance with our strategies with the objective to decrease the volatility from MSR fair value changes. However, volatile changes in interest rates can diminish the effectiveness of these hedges. We typically report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or decrease in mortgage banking income.
MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in other assets, and are presented in Table 10.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiaries, foreign exchange positions, equity investments, investments in securities backed by mortgage loans, and marketable equity securities held by our insurance subsidiaries. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held by the insurance subsidiaries.

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Liquidity Risk
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. We manage liquidity risk at both the Bank and at the parent company, Huntington Bancshares Incorporated. The liquidity of the Bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. The overall objective of liquidity risk management is to ensure that we can obtain cost-effective funding to meet current and future obligations, as well as maintain sufficient levels of on-hand liquidity, under both normal “business as usual” and unanticipated, stressed circumstances. The Asset, Liability, and Capital Management Committee (ALCO) was appointed by the HBI Board Risk Oversight Committee to oversee liquidity risk management and establish policies and limits, based upon the analyses of the ratio of loans to deposits, the percentage of assets funded with noncore or wholesale funding, and other considerations. Operating guidelines have been established to ensure diversification of noncore funding by type, source, and maturity and that sufficient liquidity exists to cover 100% of wholesale funds maturing within a six-month period. A contingency funding plan is in place, which includes forecasted sources and uses of funds under various scenarios, to prepare for unexpected liquidity shortages and to cover unanticipated events that could affect liquidity.
Bank Liquidity and Sources of Liquidity
Our primary sources of funding for the Bank are retail and commercial core deposits. Core deposits are comprised of interest bearing and noninterest bearing demand deposits, money market deposits, savings and other domestic time deposits, consumer certificates of deposit both over and under $250,000, and nonconsumer certificates of deposit less than $250,000. Noncore deposits consist of brokered money market deposits and certificates of deposit, foreign time deposits, and other domestic time deposits of $250,000 or more comprised primarily of public fund certificates of deposit more than $250,000.
Core deposits may increase our need for liquidity as certificates of deposit mature or are withdrawn before maturity and as nonmaturity deposits, such as checking and savings account balances, are withdrawn. The Transaction Account Guarantee Program (TAGP) is a voluntary program provided by the FDIC as part of its Temporary Liquidity Guarantee Program (TLGP). Under the program, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the customer’s entire account balance. This program provides our customers with additional deposit insurance coverage, and is in addition to and separate from the $250,000 coverage available under the FDIC’s general deposit insurance rules.
At March 31, 2010, noninterest-bearing transaction account balances exceeding $250,000 totaled $2.4 billion, and represented the amount of noninterest-bearing transaction customer deposits that would not have been FDIC insured without the additional coverage provided by the TAGP. In April 2010, the FDIC adopted an interim rule extending the TAGP through December 31, 2010 for financial institutions that desire to continue TAGP participation. On April 30, 2010, we notified the FDIC of our decision to opt-out for the FDIC’s TAGP extension, effective July, 1, 2010. The impact of this decision on our deposit levels cannot be readily determined at this time, although we anticipate that a portion of deposits that will no longer be FDIC-insured may shift into collateralized deposit products or other collateralized liabilities.
As referenced in the above paragraph, the FDIC establishes a coverage limit, generally $250,000 currently, for interest-bearing deposit balances. To provide our customers deposit insurance above the established $250,000, we have joined the Certificate of Deposit Account Registry Service (CDARS), a program that allows customers to invest up to $50 million in certificates of deposit through one participating financial institution, with the entire amount covered by FDIC insurance. At March 31, 2010, we had $439.4 million of CDARS deposit balances.

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The following table reflects deposit composition detail for each of the past five quarters.
Table 38 — Deposit Composition
                                                                                 
  2010     2009  
(dollar amounts in millions)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                                                               
By Type
                                                                               
Demand deposits - noninterest-bearing
  $ 6,938       17 %   $ 6,907       17 %   $ 6,306       16 %   $ 6,169       16 %   $ 5,887       15 %
Demand deposits — interest-bearing
    5,948       15       5,890       15       5,401       14       4,842       12       4,306       11  
Money market deposits
    10,644       26       9,485       23       8,548       21       6,622       17       5,857       15  
Savings and other domestic time deposits
    4,666       12       4,652       11       4,631       12       4,859       12       5,007       13  
Core certificates of deposit
    9,441       23       10,453       26       11,205       28       12,197       31       12,616       32  
 
                                                           
Total core deposits
    37,637       93       37,387       92       36,091       91       34,689       88       33,673       86  
Other domestic time deposits of $250,000 or more
    684       2       652       2       689       2       846       2       1,041       3  
Brokered deposits and negotiable CDs
    1,605       4       2,098       5       2,630       7       3,229       8       3,848       10  
Deposits in foreign offices
    377       1       357       1       419             401       2       508       1  
 
                                                           
 
                                                                               
Total deposits
  $ 40,303       100 %   $ 40,494       100 %   $ 39,829       100 %   $ 39,165       100 %   $ 39,070       100 %
 
                                                           
 
                                                                               
Total core deposits:
                                                                               
Commercial
  $ 11,844       31 %   $ 11,368       30 %   $ 10,884       30 %   $ 9,738       28 %   $ 8,934       27 %
Personal
    25,793       69       26,019       70       25,207       70       24,951       72       24,739       73  
 
                                                           
 
                                                                               
Total core deposits
  $ 37,637       100 %   $ 37,387       100 %   $ 36,091       100 %   $ 34,689       100 %   $ 33,673       100 %
 
                                                           
Core deposits grew $0.3 billion during the first three-month period of 2010. This increase reduced our reliance upon noncore funding sources.
To the extent that we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding. These sources include other domestic time deposits of $250,000 or more, brokered deposits and negotiable CDs, deposits in foreign offices, short-term borrowings, Federal Home Loan Bank (FHLB) advances, other long-term debt, and subordinated notes.
The Bank also has access to the Federal Reserve’s discount window. These borrowings are secured by commercial loans and home equity lines-of-credit. The Bank is also a member of the FHLB-Cincinnati, and as such, has access to advances from this facility. These advances are generally secured by residential mortgages, other mortgage-related loans, and available-for-sale securities. Information regarding amounts pledged, for the ability to borrow if necessary, and unused borrowing capacity at both the Federal Reserve and the FHLB-Cincinnati, are outlined in the following table:
Table 39 — Federal Reserve and FHLB-Cincinnati Borrowing Capacity
                 
    March 31,     December 31,  
(dollar amounts in billions)   2010     2009  
 
               
Loans and Securities Pledged:
               
Federal Reserve Bank
  $ 8.3     $ 8.5  
FHLB-Cincinnati
    8.0       8.0  
 
           
Total loans and securities pledged
  $ 16.3     $ 16.5  
 
               
Total unused borrowing capacity at Federal Reserve Bank and FHLB-Cincinnati
  $ 7.3     $ 7.9  
We can also obtain funding through other methods including: (a) purchasing federal funds, (b) selling securities under repurchase agreements, (c) the sale or maturity of investment securities, (d) the sale or securitization of loans, (e) the sale of national market certificates of deposit, (f) the relatively shorter-term structure of our commercial loans and automobile loans, and (g) the issuance of common and preferred stock.

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At March 31, 2010, we believe that the Bank has sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Parent Company Liquidity
The parent company’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.
At March 31, 2010, the parent company had $1.1 billion in cash or cash equivalents, compared with $1.4 billion at December 31, 2009, reflecting a $0.3 billion contribution of additional capital to the Bank. The contribution increased the Bank’s regulatory capital levels above its already “well-capitalized” levels.
Based on the current dividend of $0.01 per common share, cash demands required for common stock dividends are estimated to be approximately $7.2 million per quarter.
We have an aggregate outstanding amount of $362.5 million of Series A Non-cumulative Perpetual Convertible Preferred Stock. The Series A Preferred Stock pays, as declared by our board of directors, dividends in cash at a rate of 8.50% per annum, payable quarterly (see Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements). Cash demands required for Series A Preferred Stock are estimated to be approximately $7.7 million per quarter.
In 2008, we received $1.4 billion of equity capital by issuing 1.4 million shares of Series B Preferred Stock to the U.S. Department of Treasury as a result of our participation in the Troubled Asset Relief Program (TARP) voluntary capital purchase program. The Series B Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter, resulting in quarterly cash demands of approximately $18 million through 2012, and $32 million thereafter (see Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding the Series B Preferred Stock issuance).
Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend to the parent company at March 31, 2010, without regulatory approval. We do not anticipate that the Bank will request regulatory approval to pay dividends in the near future as we continue to build Bank regulatory capital above our already “well-capitalized” level. To help meet any additional liquidity needs, we have an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt or equity securities.
With the exception of the common and preferred dividends previously discussed, the parent company does not have any significant cash demands. There are no maturities of parent company obligations until 2013, when a debt maturity of $50 million is payable.
Considering the factors discussed above, and other analyses that we have performed, we believe the parent company has sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Credit Ratings
Credit ratings provided by the three major credit rating agencies are an important component of our liquidity profile. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and and our ability to access a broad array of wholesale funding sources, as well as the overall operating and economic environment of our markets. Adverse changes in these factors could result in a negative change in credit ratings and impact our ability to raise funds at a reasonable cost in the capital markets. In addition, certain financial on- and off-balance sheet arrangements contain credit rating triggers that could increase funding needs if a negative rating change occurs. Other arrangements that could be impacted by credit rating changes include, but are not limited to, letter of credit commitments for marketable securities, interest rate swap collateral agreements, and certain asset securitization transactions contain credit rating provisions or could otherwise be impacted by credit rating changes.

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The most recent credit ratings for the parent company and the Bank are as follows:
Table 40 — Credit Ratings
                                 
    March 31, 2010  
    Senior Unsecured     Subordinated              
    Notes     Notes     Short-term     Outlook  
 
                               
Huntington Bancshares Incorporated
                               
Moody’s Investor Service
  Baa2   Baa3   WR   Negative
Standard and Poor’s
  BB+   BB   WR   Negative
Fitch Ratings
  BBB   BBB-     F2     Negative
 
                               
The Huntington National Bank
                               
Moody’s Investor Service
  Baa1   Baa2     P-2     Negative
Standard and Poor’s
  BBB-   BB+   WR   Negative
Fitch Ratings
  BBB+   BBB     F2     Negative
     
WR=Withdrawn rating. The Moody’s Investor Service rating was withdrawn effective March 1, 2010. The Standard and Poor’s ratings were withdrawn effective April 1, 2010.
As of March 31, 2010, we did not have any outstanding short-term debt that required more than one rating from a nationally recognized statistical rating organization (NRSRO). As a result, we elected to withdraw the Moody’s Investor Service short-term rating for the parent company as well as the Standard and Poor’s short-term rating for both the parent company and the Bank.
A security rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include financial guarantees contained in standby letters of credit issued by the Bank and commitments by the Bank to sell mortgage loans.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years, and are expected to expire without being drawn upon. Standby letters of credit are included in the determination of the amount of risk-based capital that the parent company, and the Bank, are required to hold.
Through our credit process, we monitor the credit risks of outstanding standby letters of credit. When it is probable that a standby letter of credit will be drawn and not repaid in full, losses are recognized in the provision for credit losses. At March 31, 2010, we had $0.6 billion of standby letters of credit outstanding, of which 65% were collateralized.
We enter into forward contracts relating to the mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our held-for-sale mortgage loans. At March 31, 2010, December 31, 2009, and March 31, 2009, we had commitments to sell residential real estate loans of $600.9 million, $662.9 million, and $912.5 million, respectively. These contracts mature in less than one year.
Effective January 1, 2010, we consolidated an automobile loan securitization that previously had been accounted for as an off-balance sheet transaction. We elected to account for the automobile loan receivables and the associated notes payable at fair value per accounting guidance supplied in ASC 810 — Consolidation (See Note 2 and Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional details.)
We do not believe that off-balance sheet arrangements will have a material impact on our liquidity or capital resources.

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Operational Risk
As with all companies, we are subject to operational risk. Operational risk is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.
To mitigate operational and compliance risks, we have established a senior management level Operational Risk Committee, and a senior management level Legal, Regulatory, and Compliance Committee. The responsibilities of these committees, among other things, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and develop recommendations to address the identified issues. Both of these committees report any significant findings and recommendations to the Risk Management Committee. Additionally, potential concerns may be escalated to the HBI Board Risk Oversight Committee, as appropriate.
The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational losses, and strengthen our overall performance.
Capital / Capital Adequacy
(This section should be read in conjunction with Significant Item 4.)
Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, liquidity, and operational risks inherent in our business, and to provide the flexibility needed for future growth and new business opportunities. Shareholders’ equity totaled $5.4 billion at March 31, 2010, an increase of $0.1 billion, or 1%, compared with December 31, 2009. This increase primarily reflected improvements in the components of accumulated OCI.

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The following table presents risk-weighed assets and other financial data necessary to calculate certain financial ratios that we use to measure capital adequacy.
Table 41 — Capital Adequacy
                                         
    2010     2009  
(dollar amounts in millions)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                       
Consolidated capital calculations:
                                       
 
                                       
Shareholders’ common equity
  $ 3,678     $ 3,648     $ 3,992     $ 3,541     $ 3,047  
Shareholders’ preferred equity
    1,692       1,688       1,683       1,679       1,768  
 
                             
Total shareholders’ equity
    5,370       5,336       5,675       5,220       4,815  
Goodwill
    (444 )     (444 )     (444 )     (448 )     (452 )
Intangible assets
    (274 )     (289 )     (303 )     (322 )     (340 )
Intangible asset deferred tax liability (1)
    95       101       106       113       119  
 
                             
Total tangible equity (2)
    4,747       4,704       5,034       4,563       4,142  
Shareholders’ preferred equity
    (1,692 )     (1,688 )     (1,683 )     (1,679 )     (1,768 )
 
                             
Total tangible common equity (2)
  $ 3,055     $ 3,016     $ 3,351     $ 2,884     $ 2,374  
 
                             
Total assets
  $ 51,867     $ 51,555     $ 52,513     $ 51,397     $ 51,702  
Goodwill
    (444 )     (444 )     (444 )     (448 )     (452 )
Other intangible assets
    (274 )     (289 )     (303 )     (322 )     (340 )
Intangible asset deferred tax liability (1)
    95       101       106       113       119  
 
                             
 
Total tangible assets (2)
  $ 51,244     $ 50,923     $ 51,872     $ 50,740     $ 51,029  
 
                             
 
                                       
Tier 1 equity
  $ 5,090     $ 5,201     $ 5,755     $ 5,390     $ 5,167  
Shareholders’ preferred equity
    (1,692 )     (1,688 )     (1,683 )     (1,679 )     (1,768 )
Trust preferred securities
    (570 )     (570 )     (570 )     (570 )     (736 )
REIT preferred stock
    (50 )     (50 )     (50 )     (50 )     (50 )
 
                             
Tier 1 common equity (2)
  $ 2,778     $ 2,893     $ 3,452     $ 3,091     $ 2,613  
 
                             
 
Risk-weighted assets (RWA)
                                       
Consolidated
  $ 42,522     $ 43,248     $ 44,142     $ 45,463     $ 46,383  
Bank
    42,511       43,149       43,964       45,137       45,951  
 
                             
 
                                       
Tier 1 common equity / RWA ratio (2), (3)
    6.53 %     6.69 %     7.82 %     6.80 %     5.63 %
 
                                       
Tangible equity / tangible asset ratio (2)
    9.26       9.24       9.71       8.99       8.12  
 
                                       
Tangible common equity / tangible asset ratio (2)
    5.96       5.92       6.46       5.68       4.65  
     
(1)   Intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
 
(2)   Tangible equity, Tier 1 common equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently.
 
(3)   Based on an interim decision by the banking agencies on December 14, 2006, we have excluded the impact of adopting ASC Topic 715, “Compensation — Retirement Benefits”, from the regulatory capital calculations.
Our consolidated TCE ratio was 5.96% at March 31, 2010, an increase from 5.92% at December 31, 2009. The four basis point increase from December 31, 2009, primarily reflected improvements in the components of accumulated OCI. Also, at March 31, 2010, our Tier 1 common equity decreased by $0.1 billion from December 31, 2009, primarily reflecting an increase in the portion of our deferred tax assets disallowed for regulatory capital purposes.
We are comfortable with our current level of capital. In April of 2010, shareholders’ passed a proposal to amend our charter that resulted in an increase of authorized common stock to 1.5 billion shares from 1.0 billion shares. Although we do not have any current plans to issue additional capital, we may continue to seek opportunities to further strengthen our capital position.

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Table of Contents

Regulatory Capital
Regulatory capital ratios are the primary metrics used by regulators in assessing the “safety and soundness” of banks. We intend to maintain both the company’s and the Bank’s risk-based capital ratios at levels at which each would be considered “well-capitalized” by regulators. The Bank is primarily supervised and regulated by the Office of the Comptroller of the Currency (OCC), which establishes regulatory capital guidelines for banks similar to those established for bank holding companies by the Federal Reserve Board.
Regulatory capital primarily consists of Tier 1 capital and Tier 2 capital. The sum of Tier 1 capital and Tier 2 capital equals our total risk-based capital. The following table reflects changes and activity to the various components utilized in the calculation our consolidated Tier 1, Tier 2, and total risk-based capital amounts during the first three-month period of 2010.
Table 42 — Regulatory Capital Activity
                                                 
    Shareholder                     Disallowed     Disallowed        
    Common     Preferred     Qualifying     Goodwill &     Other     Tier 1  
(dollar amounts in millions)   Equity (1)     Equity     Core Capital (2)     Intangible assets     Adjustments (net)     Capital  
 
                                               
Balance at December 31, 2009
  $ 3,804.9     $ 1,687.5     $ 620.5     $ (632.2 )   $ (279.5 )   $ 5,201.2  
Cumulative effect accounting changes
    (3.5 )                             (3.5 )
Earnings
    39.7                               39.7  
Changes to disallowed adjustments
                      8.7       (0.5 )     8.2  
Dividends
    (32.3 )