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 June 30, 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). þ 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 (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
There were 716,862,118 shares of Registrant’s common stock ($0.01 par value) outstanding on July 31, 2010.
 
 

 


 

HUNTINGTON BANCSHARES INCORPORATED
INDEX
         
       
 
       
       
 
       
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    65  
 
       
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  Exhibit 12.1
  Exhibit 12.2
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2
  EX-101 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT
  EX-101 DEFINITION LINKBASE DOCUMENT

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PART 1. 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 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.
This 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. It updates the discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K), and 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:
    Executive Overview - Provides a summary of our current financial performance, financial condition, and/or business condition. This section also provides our outlook regarding our performance for the remainder of the year.
 
    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.
 
    Additional Disclosures - Provides comments on important matters including risk factors, critical accounting policies and use of significant estimates, acquisitions, and other items.
A reading of each section is important to understand fully the nature of our financial performance and prospects.

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EXECUTIVE OVERVIEW
Summary of 2010 Second Quarter Results
Continuing to build upon the momentum from the prior quarter, we reported net income of $48.8 million, or $0.03 per common share, compared with $39.7 million, or $0.01 per common share, in the prior quarter ( see Table 1 ). Pretax, pre-provision income was $270.5 million, up $18.6 million, or 7%, from the prior quarter, and primarily resulted from a $34.8 million, or 5% increase in fully-taxable equivalent revenue. Pretax, pre-provision income increased for the sixth consecutive quarter ( see Table 4 ).
Credit quality performance in the current quarter continued to show improvement. This improvement reflected the benefits of our focused actions taken in 2009 to address credit-related issues. Compared with the prior quarter, nonperforming assets (NPAs) declined 17%, new NPAs declined 28%, and our nonaccrual loan coverage ratio improved to 120% from 87%. We also saw a decline in the level of criticized commercial loans reflecting a decrease in the level of inflows. Although net charge-offs (NCOs) increased $40.7 million, the current quarter was impacted by $80.0 million of NCOs related to our relationship with Franklin Credit Management Corporation (Franklin). Non-Franklin-related NCOs declined $27.8 million.
At the end of the current quarter, we transferred all of our Franklin-related loans to loans held-for-sale at a lower of cost or fair value of $323.4 million. This had a significant impact on the current quarter’s performance as this action resulted in $75.5 million of charge-offs, with a commensurate increase in the provision for credit losses. As the current quarter progressed, we saw renewed buyer interest in distressed debt that, among other factors, provided us a business opportunity to move the portfolio to loans held for sale. (See “Significant Items” for additional discussion).
On July 20, 2010, $274.2 million of the Franklin-related residential mortgages were sold, leaving the remaining Franklin-related portfolio balance of only $49.2 million. Going forward, we anticipate this sale will improve our overall future financial performance as we have essentially brought this relationship to a close. We have reinvested the sale proceeds in higher yielding investments and will no longer have expenses related to portfolio servicing and other support costs.
Our period-end capital position remained solid with increases in all of our capital ratios. At June 30, 2010, our regulatory Tier 1 and Total risk-based capital were $2.8 billion and $2.0 billion, respectively, above the “well-capitalized” regulatory thresholds. Our tangible common equity ratio improved 16 basis points to 6.12%. Also, our Tier 1 common risk-based capital ratio improved 53 basis points to 7.06%.
Business Overview
General
Our 2010 objectives remain the same: (a) grow revenue and profitability, (b) improve cross sell and share-of-wallet profitability across all business segments, (c) grow key fee businesses (existing and new), (d) lower NCOs and NPAs, (e) reduce commercial real estate “noncore” exposure, and (f) continue to explore opportunities to further reduce our overall risk profile.
Our main challenge to accomplishing our primary objectives results from an economy that continues to remain weak and uncertain. This impairs our ability to grow loans as customers continue to reduce their debt and/or remain cautious about increasing debt until they have a higher degree of confidence of sustainable economic recovery. One area of loan growth success, however, has been in automobile loans, a business we have been in for over 50 years. We have been able to take advantage of the fact that many competitors have decreased their automobile lending activities or exited the business entirely. We anticipate this will be an area where we will be able to continue to see good loan growth.
We face strong competition from other banks and financial service firms in our markets. As such, we have placed strong strategic emphasis on, and are continuing to develop and expand resources devoted to, improving cross-sell performance to take advantage of a loyal core customer base. To date, we have been successful as measured by our ability to expand our customer bases and successfully grow core deposits.
Legislative and Regulatory
Legislative and regulatory actions continue to be adopted that will impose additional restrictions on current business practices. Recent actions affecting us included an amendment to Regulation E and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

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The Federal Reserve Board recently amended Regulation E to prohibit charging overdraft fees for ATM or point-of-sale debit card transactions unless the customer opts-in to the overdraft service. For us, such fees are approximately $90 million per year. Our basic strategy is to mitigate the potential impact by alerting our customers that we can no longer cover such overdrafts unless they opt-in to our overdraft service. To date, our results have surpassed our expectations, however, until we have completed opt-in campaign, the ultimate impact to related revenue cannot be estimated.
While the recently passed Dodd-Frank Act is complex and we continue to assess how this legislation and subsequent rule-making will impact us, we currently believe there are two primary areas of focus for us: interchange fees and the eventual inability to include trust preferred capital as a component of our regulatory capital.
Currently, our annual interchange fees are approximately $90 million per year. In the future, the Dodd-Frank Act gives the Federal Reserve, and no longer the banks or system owners, the ability to set the interchange rate charged to merchants for the use of debit cards. The ultimate impact to us cannot be estimated at this time, and there will likely be months of proposals and debate before any specific rules are written.
At June 30, 2010, we had $569.9 million of outstanding trust-preferred-securities that, if disallowed, would reduce our regulatory Tier 1 risk-based capital ratio by approximately 134 basis points. However, there is a 3-year phase-in period beginning on January 1, 2013, that we believe would provide sufficient time to evaluate and address the impacts to our capital structure around this new legislation. Accordingly, we do not anticipate that this potential change would have a significant impact to our business.
Prior legislative and regulatory actions that have affected us included the Federal Deposit Insurance Corporation’s (FDIC) Transaction Account Guarantee Program (TAGP) and the U.S. Department of Treasury’s Troubled Asset Relief Program (TARP). We elected to discontinue our participation in the TAGP, effective July 1, 2010. We intend to repay our TARP capital as soon as it is prudent to do so. Additional discussion regarding TAGP and TARP is located within the “Liquidity Risk” and “Capital” sections, respectively.
2010 Outlook
Our current expectation is that the economy will remain relatively unchanged for the rest of the year. We are not expecting a double-dip recession, but we do believe it will take longer for the economy to recover than we did 90 days ago, especially if home prices continue to decline.
Pretax, pre-provision income levels for the second half of 2010 are anticipated to be consistent with second quarter reported performance. Our net interest margin for the second half of the year is expected to approximate first half performance. We anticipate modest growth in commercial and industrial (C&I) loans and continued strong automobile lending. However, commercial real estate (CRE) loans are expected to continue to contract while home equity and residential mortgages remain relatively flat. We are targeting continued strong growth in demand deposit and savings account balances. Fee income performance for the second half of the year is expected to be mixed with certain fee income activities increasing from the continued rollout of strategic initiatives, offset by lower mortgage banking income, as well as service charges due to Regulation E implementation. Expenses should also be relatively stable with increases related to growth initiatives, mostly offset by the elimination of Franklin-related loan portfolio servicing and other related costs, as well as lower overall loan portfolio monitoring expenses.
Nonperforming loans are expected to continue to decline, with NCOs and provision expense expected to be generally consistent with the current quarter’s performance, excluding any Franklin-related impacts.

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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”.
Percent changes of 100% or more are typically shown as “N.M.” or “Not Meaningful”. Such large percent changes typically reflect the impact of unusual or particularly volatile items within the measured periods. Since the primary purpose of showing a percent change is to discern underlying performance trends, such large percent changes are typically “not meaningful” for such trend analysis purposes.

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Table 1 — Selected Quarterly Income Statement Data (1)
                                         
    2010     2009  
(amounts in thousands, except per share amounts)   Second     First     Fourth     Third     Second  
Interest income
  $ 535,653     $ 546,779     $ 551,335     $ 553,846     $ 563,004  
Interest expense
    135,997       152,886       177,271       191,027       213,105  
 
                             
Net interest income
    399,656       393,893       374,064       362,819       349,899  
Provision for credit losses
    193,406       235,008       893,991       475,136       413,707  
 
                             
Net interest income (loss) after provision for credit losses
    206,250       158,885       (519,927 )     (112,317 )     (63,808 )
 
                             
Service charges on deposit accounts
    75,934       69,339       76,757       80,811       75,353  
Brokerage and insurance income
    36,498       35,762       32,173       33,996       32,052  
Mortgage banking income
    45,530       25,038       24,618       21,435       30,827  
Trust services
    28,399       27,765       27,275       25,832       25,722  
Electronic banking
    28,107       25,137       25,173       28,017       24,479  
Bank owned life insurance income
    14,392       16,470       14,055       13,639       14,266  
Automobile operating lease income
    11,842       12,303       12,671       12,795       13,116  
Securities gains (losses)
    156       (31 )     (2,602 )     (2,374 )     (7,340 )
Other noninterest income
    28,785       29,069       34,426       41,901       57,470  
 
                             
Total noninterest income
    269,643       240,852       244,546       256,052       265,945  
 
                             
Personnel costs
    194,875       183,642       180,663       172,152       171,735  
Outside data processing and other services
    40,670       39,082       36,812       38,285       40,006  
Deposit and other insurance expense
    26,067       24,755       24,420       23,851       48,138  
Net occupancy
    25,388       29,086       26,273       25,382       24,430  
OREO and foreclosure expense
    4,970       11,530       18,520       38,968       26,524  
Equipment
    21,585       20,624       20,454       20,967       21,286  
Professional services
    24,388       22,697       25,146       18,108       16,658  
Amortization of intangibles
    15,141       15,146       17,060       16,995       17,117  
Automobile operating lease expense
    9,667       10,066       10,440       10,589       11,400  
Marketing
    17,682       11,153       9,074       8,259       7,491  
Telecommunications
    6,205       6,171       6,099       5,902       6,088  
Printing and supplies
    3,893       3,673       3,807       3,950       4,151  
Goodwill impairment
                            4,231  
Gain on early extinguishment of debt (2)
                (73,615 )     (60 )     (73,038 )
Other noninterest expense
    23,279       20,468       17,443       17,749       13,765  
 
                             
Total noninterest expense
    413,810       398,093       322,596       401,097       339,982  
 
                             
Income (loss) before income taxes
    62,083       1,644       (597,977 )     (257,362 )     (137,845 )
Provision (benefit) for income taxes
    13,319       (38,093 )     (228,290 )     (91,172 )     (12,750 )
 
                             
Net income (loss)
  $ 48,764     $ 39,737     $ (369,687 )   $ (166,190 )   $ (125,095 )
 
                             
Dividends on preferred shares
    29,426       29,357       29,289       29,223       57,451  
 
                             
Net income (loss) applicable to common shares
  $ 19,338     $ 10,380     $ (398,976 )   $ (195,413 )   $ (182,546 )
 
                             
Average common shares — basic
    716,580       716,320       715,336       589,708       459,246  
Average common shares — diluted (3)
    719,387       718,593       715,336       589,708       459,246  
 
                                       
Net income (loss) per common share — basic
  $ 0.03     $ 0.01     $ (0.56 )   $ (0.33 )   $ (0.40 )
Net income (loss) per common share — diluted
    0.03       0.01       (0.56 )     (0.33 )     (0.40 )
Cash dividends declared per common share
    0.01       0.01       0.01       0.01       0.01  
 
                                       
Return on average total assets
    0.38 %     0.31 %     (2.80 )%     (1.28 )%     (0.97 )%
Return on average total shareholders’ equity
    3.6       3.0       (25.6 )     (12.5 )     (10.2 )
Return on average tangible shareholders’ equity (4)
    4.9       4.2       (27.9 )     (13.3 )     (10.3 )
Net interest margin (5)
    3.46       3.47       3.19       3.20       3.10  
Efficiency ratio (6)
    59.4       60.1       49.0       61.4       51.0  
Effective tax rate (benefit)
    21.5       N.M.       (38.2 )     (35.4 )     (9.2 )
 
                                       
Revenue — fully-taxable equivalent (FTE)
                                       
Net interest income
  $ 399,656     $ 393,893     $ 374,064     $ 362,819     $ 349,899  
FTE adjustment
    2,490       2,248       2,497       4,177       1,216  
 
                             
Net interest income (5)
    402,146       396,141       376,561       366,996       351,115  
Noninterest income
    269,643       240,852       244,546       256,052       265,945  
 
                             
Total revenue (5)
  $ 671,789     $ 636,993     $ 621,107     $ 623,048     $ 617,060  
 
                             
     
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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Table 2 — Selected Year to Date Income Statement Data (1)
                                 
    Six Months Ended June 30,     Change  
(in thousands, except per share amounts)   2010     2009     Amount     Percent  
Interest income
  $ 1,082,432     $ 1,132,961     $ (50,529 )     (4 )%
Interest expense
    288,883       445,557       (156,674 )     (35 )
 
                       
Net interest income
    793,549       687,404       106,145       15  
Provision for credit losses
    428,414       705,544       (277,130 )     (39 )
 
                       
 
                               
Net interest income (loss) after provision for credit losses
    365,135       (18,140 )     383,275       N.M.  
 
                       
Service charges on deposit accounts
    145,273       145,231       42        
Brokerage and insurance income
    72,260       72,000       260        
Mortgage banking income
    70,568       66,245       4,323       7  
Trust services
    56,164       50,532       5,632       11  
Electronic banking
    53,244       46,961       6,283       13  
Bank owned life insurance income
    30,862       27,178       3,684       14  
Automobile operating lease expense
    24,145       26,344       (2,199 )     (8 )
Securities gains (losses)
    125       (5,273 )     5,398       N.M.  
Other income
    57,854       75,829       (17,975 )     (24 )
 
                       
 
                               
Total noninterest income
    510,495       505,047       5,448       1  
 
                       
Personnel costs
    378,517       347,667       30,850       9  
Outside data processing and other services
    79,752       72,998       6,754       9  
Deposit and other insurance expense
    50,822       65,559       (14,737 )     (22 )
Net occupancy
    54,474       53,618       856       2  
OREO and foreclosure expense
    16,500       36,411       (19,911 )     (55 )
Equipment
    42,209       41,696       513       1  
Professional services
    47,085       33,112       13,973       42  
Amortization of intangibles
    30,287       34,252       (3,965 )     (12 )
Automobile operating lease expense
    19,733       22,331       (2,598 )     (12 )
Marketing
    28,835       15,716       13,119       83  
Telecommunications
    12,376       11,978       398       3  
Printing and supplies
    7,566       7,723       (157 )     (2 )
Goodwill impairment
          2,606,944       (2,606,944 )     N.M.  
Gain on early extinguishment of debt (2)
          (73,767 )     73,767       N.M.  
Other expense
    43,747       33,513       10,234       31  
 
                       
 
                               
Total noninterest expense
    811,903       3,309,751       (2,497,848 )     (75 )
 
                       
Income (loss) before income taxes
    63,727       (2,822,844 )     2,886,571       N.M.  
Benefit for income taxes
    (24,774 )     (264,542 )     239,768       (91 )
 
                       
 
                               
Net income (loss)
  $ 88,501     $ (2,558,302 )   $ 2,646,803       N.M. %
 
                       
Dividends declared on preferred shares
    58,783       116,244       (57,461 )     (49 )
 
                       
Net income (loss) applicable to common shares
  $ 29,718     $ (2,674,546 )   $ 2,704,264       N.M. %
 
                       
 
                               
Average common shares — basic
    716,450       413,083       303,367       73 %
Average common shares — diluted (3)
    718,990       413,083       305,907       74  
 
Per common share
                               
Net income per common share — basic
  $ 0.04     $ (6.47 )   $ 6.52       N.M. %
Net income (loss) per common share — diluted
    0.04       (6.47 )     6.52       N.M.  
Cash dividends declared
    0.0200       0.0200              
 
Return on average total assets
    0.35 %     (9.77 )%     10.12 %     N.M. %
Return on average total shareholders’ equity
    3.3       (85.0 )     88.3       N.M.  
Return on average tangible shareholders’ equity (4)
    4.6       3.5       1.1       31  
Net interest margin (5)
    3.47       3.03       0.44       15  
Efficiency ratio (6)
    59.7       55.6       4.1       7  
Effective tax rate (benefit)
    (38.9 )     (9.4 )     (29.5 )     N.M.  
 
                               
Revenue — fully taxable equivalent (FTE)
                               
Net interest income
  $ 793,549     $ 687,404     $ 106,145       15 %
FTE adjustment
    4,738       4,798       (60 )     (1 )
 
                       
Net interest income
    798,287       692,202       106,085       15  
Noninterest income
    510,495       505,047       5,448       1  
 
                       
 
Total revenue
  $ 1,308,782     $ 1,197,249     $ 111,533       9 %
 
                       
     
N.M., not a meaningful value.
 
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to the ‘Significant Items” discussion.
 
(2)   The 2009 gain included $67.4 million related to the purchase of certain trust preferred securities.

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(3)   For the periods presented above, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for the period.
 
(4)   Net income 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 divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).
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.

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  2.   Franklin Relationship. Our relationship with Franklin was acquired in the Sky Financial Group, Inc. (Sky Financial) acquisition in 2007. Significant events relating to this relationship following the acquisition, and the impacts of those events on our reported results, were as follows:
    On March 31, 2009, we restructured our relationship with Franklin. As a result of this restructuring, a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) was recorded in the 2009 first quarter. Also, and although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific allowance for loan and lease losses (ALLL) was utilized to writedown the acquired mortgages and other real estate owned (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 March 31, 2009, restructuring.
 
    During the 2010 second quarter, the remaining portfolio of Franklin-related loans ($333.0 million of residential mortgages, and $64.7 million of home equity loans) was transferred to loans held for sale. At the time of the transfer, the loans were marked to the lower of cost or fair value, less costs to sell, of $323.4 million, resulting in $75.5 million of charge-offs, and the provision for credit losses commensurately increased $75.5 million ($0.07 per common share).
 
    On July 20, 2010, $274.2 million of the $275.2 million of residential mortgages were sold.
  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.
 
  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.
 
  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.
 
    $2.4 million ($0.01 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance.

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The following table reflects the earnings impact of the above-mentioned significant items for periods affected by this Results of Operations discussion:
Table 3 — Significant Items Influencing Earnings Performance Comparison
                                                 
    Three Months Ended  
    June 30, 2010     March 31, 2010     June 30, 2009  
(dollar amounts in thousands, except per share amounts)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
 
Net income (loss) — GAAP
  $ 48,764             $ 39,737             $ (125,095 )        
Earnings per share, after-tax
          $ 0.03             $ 0.01             $ (0.40 )(3)
Change from prior quarter — $
            0.02               0.57               6.39  
Change from prior quarter — %
            N.M. %             N.M. %             (94.1) %
 
                                               
Change from year-ago — $
          $ 0.43             $ 6.80             $ (0.65 )
Change from year-ago — %
            N.M. %             N.M. %             N.M. %
                                                 
Significant items - favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS     Earnings (1)     EPS  
 
Franklin-related loans transferred to held for sale
  $ (75,500 )   $ (0.07 )   $     $     $     $  
Net tax benefit recognized (2)
                38,222       0.05              
Net gain on early extinguishment of debt
                            67,409       0.10  
Gain related to sale of Visa ® stock
                            31,362       0.04  
Deferred tax valuation allowance benefit (2)
                            2,388       0.01  
Goodwill impairment
                            (4,231 )     (0.01 )
FDIC special assessment
                            (23,555 )     (0.03 )
Preferred stock conversion deemed dividend
                                  (0.06 )
                                 
    Six Months Ended  
    June 30, 2010     June 30, 2009  
(in thousands)   After-tax     EPS     After-tax     EPS  
 
                               
Net income (loss) — reported earnings
  $ 88.5             $ (2,558,302 )        
Earnings per share, after tax
          $ 0.04             $ (6.47 )(3)
Change from a year-ago — $
            6.51               (7.06 )
Change from a year-ago — %
            N.M. %             N.M. %
                                 
Significant items - favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS  
 
                               
Franklin-related loans transferred to held for sale
  $ (75,500 )   $ (0.07 )   $     $  
Net tax benefit recognized (2)
    38,222       0.05              
Franklin relationship restructuring (2)
                159,895       0.39  
Gain on redemption of junior subordinated debt
                67,409       0.11  
Gain related to Visa ® stock
                31,362       0.05  
Deferred tax valuation allowance benefit (2)
                3,711       0.01  
Goodwill impairment
                (2,606,944 )     (6.30 )
FDIC special assessment
                (23,555 )     (0.04 )
Preferred stock conversion deemed dividend
                      (0.14 )
     
N.M., not a meaningful value.
 
(1)   Pretax unless otherwise noted.
 
(2)   After-tax.
 
(3)   Reflects the impact of additional shares of common stock issued during the period. 24.6 million shares were issued late in the 2009 first quarter and 177.0 million shares were issued during the 2009 second quarter.

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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”) that we believe may distort our underlying performance trends.
The following table reflects pretax, pre-provision income for the each of the past five quarters:
Table 4 — Pretax, Pre-provision Income (1)
                                         
    2010     2009  
(dollar amounts in thousands)   Second     First     Fourth     Third     Second  
 
Income (loss) before income taxes
  $ 62,083     $ 1,644     $ (597,977 )   $ (257,362 )   $ (137,845 )
 
                                       
Add: Provision for credit losses
    193,406       235,008       893,991       475,136       413,707  
Less: Securities (losses) gains
    156       (31 )     (2,602 )     (2,374 )     (7,340 )
Add: Amortization of intangibles
    15,141       15,146       17,060       16,995       17,117  
Less: Significant Items
                                       
Gain on early extinguishment of debt (2)
                73,615             67,409  
Goodwill impairment
                            (4,231 )
Gain related to Visa stock
                            31,362  
FDIC special assessment
                            (23,555 )
 
                             
 
                                       
Total pretax, pre-provision income
  $ 270,474     $ 251,829     $ 242,061     $ 237,143     $ 229,334  
 
                             
 
                                       
Change in total pretax, pre-provision income:
                                       
Prior quarter change — amount
  $ 18,645     $ 9,768     $ 4,918     $ 7,809     $ 4,715  
Prior quarter change — percent
    7 %     4 %     2 %     3 %     2 %
     
(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 an important 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 related to the purchase of certain trust preferred securities during the 2009 second quarter.
As shown in the table above, pretax, pre-provision income was $270.5 million in the 2010 second quarter, up 7% from the prior quarter. As discussed in the sections that follow, the improvement from the prior quarter reflected higher revenue, primarily noninterest income and, to a lesser degree, net interest income. These improvements were partially offset by higher noninterest expense.
Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Item 2.)
2010 Second Quarter versus 2009 Second Quarter
Fully-taxable equivalent net interest income increased $51.0 million, or 15%, from the year-ago quarter. This reflected the favorable impact of the significant increase in the net interest margin to 3.46% from 3.10%, as well as a 2% increase in average total earning assets. A significant portion of the increase in the net interest margin reflected a shift in our deposit mix from higher-cost time deposits to lower-cost transaction-based accounts. The increase in average earning assets reflected a $3.5 billion, or 65%, increase in average total investment securities, partially offset by a $1.9 billion, or 5%, decline in average total loans and leases.

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The following table details the change in our reported loans and deposits:
Table 5 — Average Loans/Leases and Deposits — 2010 Second Quarter vs. 2009 Second Quarter
                                 
    Second Quarter     Change  
(dollar amounts in millions)   2010     2009     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,244     $ 13,523     $ (1,279 )     (9 )%
Commercial real estate
    7,364       9,199       (1,835 )     (20 )
 
                       
Total commercial
    19,608       22,722       (3,114 )     (14 )
 
                               
Automobile loans and leases
    4,634       3,290       1,344       41  
Home equity
    7,544       7,640       (96 )     (1 )
Residential mortgage
    4,608       4,657       (49 )     (1 )
Other consumer
    695       698       (3 )      
 
                       
Total consumer
    17,481       16,285       1,196       7  
 
                       
Total loans and leases
  $ 37,089     $ 39,007     $ (1,918 )     (5 )%
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,849     $ 6,021     $ 828       14 %
Demand deposits — interest-bearing
    5,971       4,547       1,424       31  
Money market deposits
    11,103       6,355       4,748       75  
Savings and other domestic time deposits
    4,677       5,031       (354 )     (7 )
Core certificates of deposit
    9,199       12,501       (3,302 )     (26 )
 
                       
Total core deposits
    37,799       34,455       3,344       10  
Other deposits
    2,568       5,079       (2,511 )     (49 )
 
                       
Total deposits
  $ 40,367     $ 39,534     $ 833       2 %
 
                       
The $1.9 billion, or 5%, decrease in average total loans and leases primarily reflected:
    $3.1 billion, or 14%, decrease in average total commercial loans. A $1.3 billion, or 9%, decline in average C&I loans reflected a general decrease in borrowing as reflected in a decline in line-of-credit utilization, including reductions in our automobile dealer floorplan exposure, charge-off activity, and the reclassification in the 2010 first quarter of variable rate demand notes to municipal securities. These negatives were partially offset by the impact of the 2009 reclassifications of certain CRE loans, primarily representing owner-occupied properties, to C&I loans. The $1.8 billion, or 20%, decrease in average CRE loans reflected these reclassifications, as well as our on-going commitment to lower our overall CRE exposure. We continue to execute our plan to reduce our CRE exposure while maintaining a commitment to our core CRE borrowers. The decrease in average balances is associated with the noncore portfolio, as our core portfolio average balances were little changed during the current period.
Partially offset by:
    $1.2 billion, or 7%, increase in average total consumer loans. This growth reflected a $1.3 billion, or 41%, increase in average automobile loans and leases primarily as a result of the adoption of a new accounting standard in which, on January 1, 2010, we consolidated a 2009 first quarter $1.0 billion automobile loan securitization. At June 30, 2010, these formerly securitized loans had a remaining balance of $0.7 billion (see Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). In addition, underlying growth in automobile loans continued to be strong, reflecting a 139% increase in loan originations for the first six months of 2010 from the comparable year-ago period. The growth has come while maintaining our commitment to excellent credit quality and an appropriate return. Average home equity loans were little changed as lower origination volume was offset by slower runoff experience and slightly higher line-of-credit utilization. Increased line usage continued to be associated with higher quality customers taking advantage of the low interest rate environment. Average residential mortgages were essentially unchanged, reflecting the impact of the continued refinance of portfolio loans and the related increased sale of fixed-rate originations. The transfer of the Franklin-related loans into held for sale occurred at the end of the quarter and had no impact on related average residential mortgages or home equity loans (see Significant Item 2).
The $3.5 billion, or 65%, increase in average total investment securities reflected the deployment of the cash from core deposit growth and loan runoff over this period, as well as the proceeds from 2009 capital actions.

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The $0.8 billion, or 2%, increase in average total deposits reflected:
    $3.3 billion, or 10%, growth in average total core deposits, primarily reflecting our focus on growing money market and demand deposit accounts.
Partially offset by:
    $2.2 billion, or 60%, decline in brokered deposits and negotiable CDs and a $0.2 billion, or 25%, decrease in average other domestic deposits over $250,000, primarily reflecting a reduction of noncore funding sources.
2010 Second Quarter versus 2010 First Quarter
Compared with the 2010 first quarter, fully-taxable equivalent net interest income increased $6.0 million, or 2%. This reflected a 1% increase in average earning assets as the fully-taxable equivalent net interest margin declined slightly to 3.46% from 3.47%. The increase in average earning assets primarily reflected a $0.3 billion, or 3%, increase in average investment securities, as average total loans and leases were up $0.1 billion, or less than 1%.
The net interest margin declined 1 basis point. Favorable trends in the mix and pricing of deposits were offset by lower yields on Franklin-related loans, a lower contribution from asset/liability management strategies implemented in the first and second quarters of 2010, and one additional calendar day in the 2010 second quarter.
The following table details the change in our reported loans and deposits:
Table 6 — Average Loans/Leases and Deposits — 2010 Second Quarter vs. 2010 First Quarter
                                 
    2010     Change  
(dollar amounts in millions)   Second Quarter     First Quarter     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,244     $ 12,314     $ (70 )     (1 )%
Commercial real estate
    7,364       7,677       (313 )     (4 )
 
                       
Total commercial
    19,608       19,991       (383 )     (2 )
 
                               
Automobile loans and leases
    4,634       4,250       384       9  
Home equity
    7,544       7,539       5        
Residential mortgage
    4,608       4,477       131       3  
Other consumer
    695       723       (28 )     (4 )
 
                       
Total consumer
    17,481       16,989       492       3  
 
                       
Total loans and leases
  $ 37,089     $ 36,980     $ 109       %
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,849     $ 6,627     $ 222       3 %
Demand deposits — interest-bearing
    5,971       5,716       255       4  
Money market deposits
    11,103       10,340       763       7  
Savings and other domestic time deposits
    4,677       4,613       64       1  
Core certificates of deposit
    9,199       9,976       (777 )     (8 )
 
                       
Total core deposits
    37,799       37,272       527       1  
Other deposits
    2,568       2,951       (383 )     (13 )
 
                       
Total deposits
  $ 40,367     $ 40,223     $ 144       %
 
                       

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The $0.1 billion increase in average total loans and leases primarily reflected:
    $0.4 billion, or 2%, decline in average total commercial loans as average C&I loans declined $0.1 billion, or 1%, and average CRE declined $0.3 billion, or 4%. C&I loans declined as underlying growth was more than offset by a combination of continued lower line-of-credit utilization and paydowns on term debt. The economic environment continued to cause many customers to actively reduce their leverage position. Our line-of-credit utilization percentage was 43%, consistent with that of the prior quarter. We continue to believe that we have opportunities to expand our customer base within our markets and are focused on expanding our C&I sales pipeline. The decline in average CRE loans primarily resulted from the continuing paydowns and charge-off activity associated with our noncore CRE portfolio. Paydowns of $124.5 million were a result of our portfolio management and loan workout strategies, augmented by some early stage improvements in the markets. The portion of the CRE portfolio designated as core continued to perform as expected with average balances little changed from the prior quarter.
Partially offset by:
    $0.5 billion, or 3%, increase in total average consumer loans, primarily reflecting a $0.4 billion, or 9%, increase in average automobile loans and leases. This growth reflected record production of $943.6 million in the quarter. We continue to maintain high credit quality standards on this production while achieving an appropriate return. We have a high degree of confidence in our ability to originate quality automobile loans through our established dealer network, and as a natural extension of our Western Pennsylvania area operations, we have established a presence in the eastern portion of the state. Average residential mortgages increased $0.1 billion, or 3%, and average home equity loans were essentially unchanged from the prior quarter. The transfer of the Franklin-related loans into held for sale occurred at the end of the quarter and had no impact on related average residential mortgages or home equity loans (see Significant Item 2) .
The $0.3 billion, or 3%, increase in average total investment securities reflected the reinvestment of excess cash.
Average total deposits increased $0.1 billion from the prior quarter reflecting:
    $0.5 billion, or 1%, growth in average total core deposits, primarily reflecting our focus on growing money market and demand deposit accounts.
Partially offset by:
    $0.3 billion, or 18%, decline in brokered deposits and negotiable CDs, reflecting maturities.
Tables 7 and 8 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

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Table 7 — Consolidated Quarterly Average Balance Sheets
                                                         
    Average Balances     Change  
    2010     2009     2Q10 vs. 2Q09  
(dollar amounts in millions)   Second     First     Fourth     Third     Second     Amount     Percent  
Assets
                                                       
Interest-bearing deposits in banks
  $ 309     $ 348     $ 329     $ 393     $ 369     $ (60 )     (16 )%
Trading account securities
    127       96       110       107       88       39       44  
Federal funds sold and securities purchased under resale agreement
                15       7                    
Loans held for sale
    323       346       470       524       709       (386 )     (54 )
Investment securities:
                                                       
Taxable
    8,367       8,025       8,695       6,510       5,181       3,186       61  
Tax-exempt
    391       445       139       129       126       265       N.M.  
 
                                         
Total investment securities
    8,758       8,470       8,834       6,639       5,307       3,451       65  
Loans and leases: (1)
                                                       
Commercial:
                                                       
Commercial and industrial
    12,244       12,314       12,570       12,922       13,523       (1,279 )     (9 )
Construction
    1,279       1,409       1,651       1,808       1,946       (667 )     (34 )
Commercial
    6,085       6,268       6,807       7,071       7,253       (1,168 )     (16 )
 
                                         
Commercial real estate
    7,364       7,677       8,458       8,879       9,199       (1,835 )     (20 )
 
                                         
Total commercial
    19,608       19,991       21,028       21,801       22,722       (3,114 )     (14 )
 
                                         
Consumer:
                                                       
Automobile loans
    4,472       4,031       3,050       2,886       2,867       1,605       56  
Automobile leases
    162       219       276       344       423       (261 )     (62 )
 
                                         
Automobile loans and leases
    4,634       4,250       3,326       3,230       3,290       1,344       41  
Home equity
    7,544       7,539       7,561       7,581       7,640       (96 )     (1 )
Residential mortgage
    4,608       4,477       4,417       4,487       4,657       (49 )     (1 )
Other loans
    695       723       757       756       698       (3 )      
 
                                         
Total consumer
    17,481       16,989       16,061       16,054       16,285       1,196       7  
 
                                         
Total loans and leases
    37,089       36,980       37,089       37,855       39,007       (1,918 )     (5 )
Allowance for loan and lease losses
    (1,506 )     (1,510 )     (1,029 )     (950 )     (930 )     (576 )     62  
 
                                         
Net loans and leases
    35,583       35,470       36,060       36,905       38,077       (2,494 )     (7 )
 
                                         
Total earning assets
    46,606       46,240       46,847       45,525       45,480       1,126       2  
 
                                         
Cash and due from banks
    1,509       1,761       1,947       2,553       2,466       (957 )     (39 )
Intangible assets
    710       725       737       755       780       (70 )     (9 )
All other assets
    4,384       4,486       3,956       3,797       3,701       683       18  
 
                                         
Total assets
  $ 51,703     $ 51,702     $ 52,458     $ 51,680     $ 51,497     $ 206       %
 
                                         
 
                                                       
Liabilities and Shareholders’ Equity
                                                       
Deposits:
                                                       
Demand deposits — noninterest-bearing
  $ 6,849     $ 6,627     $ 6,466     $ 6,186     $ 6,021     $ 828       14 %
Demand deposits — interest-bearing
    5,971       5,716       5,482       5,140       4,547       1,424       31  
Money market deposits
    11,103       10,340       9,271       7,601       6,355       4,748       75  
Savings and other domestic time deposits
    4,677       4,613       4,686       4,771       5,031       (354 )     (7 )
Core certificates of deposit
    9,199       9,976       10,867       11,646       12,501       (3,302 )     (26 )
 
                                         
Total core deposits
    37,799       37,272       36,772       35,344       34,455       3,344       10  
Other domestic time deposits of $250,000 or more
    661       698       667       747       886       (225 )     (25 )
Brokered time deposits and negotiable CDs
    1,505       1,843       2,353       3,058       3,740       (2,235 )     (60 )
Deposits in foreign offices
    402       410       422       444       453       (51 )     (11 )
 
                                         
Total deposits
    40,367       40,223       40,214       39,593       39,534       833       2  
Short-term borrowings
    966       927       879       879       879       87       10  
Federal Home Loan Bank advances
    212       179       681       924       947       (735 )     (78 )
Subordinated notes and other long-term debt
    3,836       4,062       3,908       4,136       4,640       (804 )     (17 )
 
                                         
Total interest-bearing liabilities
    38,532       38,764       39,216       39,346       39,979       (1,447 )     (4 )
 
                                         
All other liabilities
    924       947       1,042       863       569       355       62  
Shareholders’ equity
    5,398       5,364       5,734       5,285       4,928       470       10  
 
                                         
Total liabilities and shareholders’ equity
  $ 51,703     $ 51,702     $ 52,458     $ 51,680     $ 51,497     $ 206       %
 
                                         
N.M., not a meaningful value.
     
(1)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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Table 8 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)  
    2010     2009  
Fully-taxable equivalent basis (1)   Second     First     Fourth     Third     Second  
Assets
                                       
Interest-bearing deposits in banks
    0.20 %     0.18 %     0.16 %     0.28 %     0.37 %
Trading account securities
    1.74       2.15       1.89       1.96       2.22  
Federal funds sold and securities purchased under resale agreement
                0.03       0.14       0.82  
Loans held for sale
    5.02       4.98       5.13       5.20       5.19  
Investment securities:
                                       
Taxable
    2.85       2.94       3.20       3.99       4.63  
Tax-exempt
    4.60       4.35       6.31       6.77       6.83  
 
                             
Total investment securities
    2.93       3.01       3.25       4.04       4.69  
Loans and leases: (3)
                                       
Commercial:
                                       
Commercial and industrial
    5.31       5.60       5.20       5.19       5.00  
Commercial real estate
                                       
Construction
    2.61       2.66       2.63       2.61       2.78  
Commercial
    3.69       3.60       3.40       3.43       3.56  
 
                             
Commercial real estate
    3.49       3.43       3.25       3.26       3.39  
 
                             
Total commercial
    4.63       4.76       4.41       4.40       4.35  
 
                             
Consumer:
                                       
Automobile loans
    6.46       6.64       7.15       7.34       7.28  
Automobile leases
    6.58       6.41       6.40       6.25       6.12  
 
                             
Automobile loans and leases
    6.46       6.63       7.09       7.22       7.13  
Home equity
    5.26       5.59       5.82       5.75       5.75  
Residential mortgage
    4.70       4.89       5.04       5.03       5.12  
Other loans
    6.84       7.00       6.90       7.21       8.22  
 
                             
Total consumer
    5.49       5.73       5.92       5.91       5.95  
 
                             
Total loans and leases
    5.04       5.21       5.07       5.04       5.02  
 
                             
Total earning assets
    4.63 %     4.82 %     4.70 %     4.86 %     4.99 %
 
                             
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Demand deposits — noninterest-bearing
    %     %     %     %     %
Demand deposits — interest-bearing
    0.22       0.22       0.22       0.22       0.18  
Money market deposits
    0.93       1.00       1.21       1.20       1.14  
Savings and other domestic time deposits
    1.07       1.19       1.27       1.33       1.37  
Core certificates of deposit
    2.68       2.93       3.07       3.27       3.50  
 
                             
Total core deposits
    1.33       1.51       1.71       1.88       2.06  
Other domestic time deposits of $250,000 or more
    1.37       1.44       1.88       2.24       2.61  
Brokered time deposits and negotiable CDs
    2.56       2.49       2.52       2.49       2.54  
Deposits in foreign offices
    0.19       0.19       0.18       0.20       0.20  
 
                             
Total deposits
    1.37       1.55       1.75       1.92       2.11  
Short-term borrowings
    0.21       0.21       0.24       0.25       0.26  
Federal Home Loan Bank advances
    1.93       2.71       1.01       0.92       1.13  
Subordinated notes and other long-term debt
    2.05       2.25       2.67       2.58       2.91  
 
                             
Total interest-bearing liabilities
    1.41 %     1.60 %     1.80 %     1.93 %     2.14 %
 
                             
 
Net interest rate spread
    3.22 %     3.22 %     2.90 %     2.93 %     2.85 %
Impact of noninterest-bearing funds on margin
    0.24       0.25       0.29       0.27       0.25  
 
                             
Net interest margin
    3.46 %     3.47 %     3.19 %     3.20 %     3.10 %
 
                             
     
(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, non-deferrable fees, and amortized deferred fees.
 
(3)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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2010 First Six Months versus 2009 First Six Months
Fully-taxable equivalent net interest income for the first six-month period of 2010 increased $106.1 million, or 15%, from the comparable year-ago period. This increase primarily reflected the favorable impact of the significant increase in the net interest margin to 3.47% from 3.03% and, to a lesser degree, a 1% increase in average total earning assets. A significant portion of the increase in the net interest margin reflected a shift in our deposit mix from higher-cost time deposits to lower-cost transaction-based accounts. Although average total earning assets increased only slightly compared with the year-ago period, this change reflected a $3.7 million, or 77%, increase in average total investment securities, mostly offset by a $2.9 billion, or 7%, decline in average total loans and leases.
The following table details the change in our reported loans and deposits:
Table 9 — Average Loans/Leases and Deposits — 2010 First Six Months vs. 2009 First Six Months
                                 
    Six Months Ended June 30,     Change  
(dollar amounts in millions)   2010     2009     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,279     $ 13,532     $ (1,253 )     (9 )%
Commercial real estate
    7,520       9,653       (2,133 )     (22 )
 
                       
Total commercial
    19,799       23,185       (3,386 )     (15 )
 
                               
Automobile loans and leases
    4,443       3,820       623       16  
Home equity
    7,541       7,609       (68 )     (1 )
Residential mortgage
    4,543       4,634       (91 )     (2 )
Other consumer
    709       683       26       4  
 
                       
Total consumer
    17,236       16,746       490       3  
 
                       
Total loans and leases
  $ 37,035     $ 39,931     $ (2,896 )     (7 )%
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,739     $ 5,784     $ 955       17 %
Demand deposits — interest-bearing
    5,844       4,312       1,532       36  
Money market deposits
    10,723       5,975       4,748       79  
Savings and other domestic time deposits
    4,645       5,036       (391 )     (8 )
Core certificates of deposit
    9,586       12,643       (3,057 )     (24 )
 
                       
Total core deposits
    37,537       33,750       3,787       11  
Other deposits
    2,759       5,115       (2,356 )     (46 )
 
                       
Total deposits
  $ 40,296     $ 38,865     $ 1,431       4 %
 
                       
The $2.9 billion, or 7%, decrease in average total loans and leases primarily reflected:
    $3.4 billion, or 15%, decline in average total commercial loans as C&I loans declined $1.3 billion, or 9%, and CRE loans declined $2.1 billion, or 22%. The decline in C& I loans reflected a general decrease in borrowing as reflected in a decline in line-of-credit utilization, including reductions in our automobile dealer floorplan exposure, charge-off activity, the 2009 first quarter Franklin restructuring, and the 2010 first quarter reclassification of variable rate demand notes to municipal securities. These declines were partially offset by the impact of the 2009 reclassifications of certain CRE loans, primarily representing owner-occupied properties, to C&I loans. The decline in CRE loans reflected these reclassifications, as well as our continuing commitment to lower our overall CRE exposure. We continue to execute our plan to reduce the CRE exposure while maintaining a commitment to our core CRE borrowers.
Partially offset by:
    $0.5 billion, or 3%, increase in average total consumer loans. This growth reflected a $0.6 billion, or 16%, increase in average automobile loans and leases primarily as a result of the adoption of a new accounting standard in which, on January 1, 2010, we consolidated a 2009 first quarter $1.0 billion automobile loan securitization (see Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). At June 30, 2010, these securitized loans had a remaining balance of $0.7 billion. Additionally, underlying growth in automobile loans continued to be strong, reflecting a 139% increase in loan originations compared with the year-ago period. These increases were partially offset by a $0.3 billion, or 60%, decline in average automobile leases due to the continued run-off of that portfolio. Average home equity loans were little changed as lower origination volume was offset by slower runoff experience and slightly higher line-of-credit utilization. Average residential mortgages declined slightly reflecting the impact of loan sales, as well as the continued refinance of portfolio loans and the related increased sale of fixed-rate originations, partially offset by the additions related to the 2009 first quarter Franklin restructuring. The transfer of the Franklin-related loans into loans held for sale occurred at the end of the 2010 second quarter and had no impact on related average residential mortgages or home equity loans (see Significant Item 2).

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Offsetting the decline in average total loans and leases on average earning assets was a $3.7 billion, or 77%, increase in average total investment securities, reflected the deployment of the cash from core deposit growth and loan run-off throughout the current period, as well as the proceeds from the 2009 capital actions.
The $1.4 billion, or 4%, increase in average total deposits reflected:
    $3.8 billion, or 11%, growth in average total core deposits, primarily reflecting our focus on growing money market and demand deposit accounts.
Partially offset by:
    $1.9 billion, or 53%, decline in brokered and negotiable CDs, and a $0.3 billion, or 30%, decline in average other domestic deposits over $250,000, primarily reflecting a reduction of noncore funding sources.
Table 10 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
                                                 
    YTD Average Balances     YTD Average Rates (2)  
Fully-taxable equivalent basis (1)   Six Months Ended June 30,     Change     Six Months Ended June 30,  
(dollar amounts in millions)   2010     2009     Amount     Percent     2010     2009  
Assets
                                               
Interest-bearing deposits in banks
  $ 328     $ 362     $ (34 )     (9 )%     0.19 %     0.41 %
Trading account securities
    112       182       (70 )     (38 )     1.92       3.61  
Federal funds sold and securities purchased under resale agreement
          9       (9 )     (100 )           0.21  
Loans held for sale
    334       668       (334 )     (50 )     5.00       5.12  
Investment securities:
                                               
Taxable
    8,197       4,575       3,622       79       2.89       5.05  
Tax-exempt
    418       295       123       42       4.47       6.68  
 
                                   
Total investment securities
    8,615       4,870       3,745       77       2.97       5.15  
Loans and leases: (3)
                                               
Commercial:
                                               
Commercial and industrial
    12,279       13,532       (1,253 )     (9 )     5.45       4.80  
Construction
    1,344       1,989       (645 )     (32 )     2.64       2.77  
Commercial
    6,176       7,664       (1,488 )     (19 )     3.64       3.66  
 
                                   
Commercial real estate
    7,520       9,653       (2,133 )     (22 )     3.46       3.48  
 
                                   
Total commercial
    19,799       23,185       (3,386 )     (15 )     4.70       4.25  
 
                                   
Consumer:
                                               
Automobile loans
    4,253       3,350       903       27       6.55       7.23  
Automobile leases
    190       470       (280 )     (60 )     6.49       6.07  
 
                                   
Automobile loans and leases
    4,443       3,820       623       16       6.54       7.09  
Home equity
    7,541       7,609       (68 )     (1 )     5.42       5.44  
Residential mortgage
    4,543       4,634       (91 )     (2 )     4.79       5.41  
Other loans
    709       683       26       4       6.92       8.58  
 
                                   
Total consumer
    17,236       16,746       490       3       5.61       5.94  
 
                                   
Total loans and leases
    37,035       39,931       (2,896 )     (7 )     5.12       4.96  
 
                                   
Allowance for loan and lease losses
    (1,508 )     (922 )     (586 )     64                  
 
                                   
Net loans and leases
    35,527       39,009       (3,482 )     (9 )                
 
                                   
Total earning assets
    46,424       46,022       402       1       4.72 %     5.00 %
 
                                   
Cash and due from banks
    1,634       2,012       (378 )     (19 )                
Intangible assets
    717       2,069       (1,352 )     (65 )                
All other assets
    4,436       3,637       799       22                  
 
                                   
Total assets
  $ 51,703     $ 52,818     $ (1,115 )     (2 )%                
 
                                   

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    YTD Average Balances     YTD Average Rates (2)  
Fully-taxable equivalent basis (1)   Six Months Ended June 30,     Change     Six Months Ended June 30,  
(dollar amounts in millions)   2010     2009     Amount     Percent     2010     2009  
Liabilities and Shareholders’ Equity
                                               
Deposits:
                                               
Demand deposits — noninterest-bearing
  $ 6,739     $ 5,784     $ 955       17 %     %     %
Demand deposits — interest-bearing
    5,844       4,312       1,532       36       0.22       0.16  
Money market deposits
    10,723       5,975       4,748       79       0.96       1.09  
Savings and other domestic time deposits
    4,645       5,036       (391 )     (8 )     1.13       1.43  
Core certificates of deposit
    9,586       12,643       (3,057 )     (24 )     2.81       3.66  
 
                                   
Total core deposits
    37,537       33,750       3,787       11       1.42       2.17  
Other domestic time deposits of $250,000 or more
    680       977       (297 )     (30 )     1.41       2.78  
Brokered time deposits and negotiable CDs
    1,673       3,596       (1,923 )     (53 )     2.52       2.74  
Deposits in foreign offices
    406       542       (136 )     (25 )     0.19       0.18  
 
                                   
Total deposits
    40,296       38,865       1,431       4       1.46       2.22  
Short-term borrowings
    947       988       (41 )     (4 )     0.21       0.26  
Federal Home Loan Bank advances
    196       1,677       (1,481 )     (88 )     2.28       1.06  
Subordinated notes and other long-term debt
    3,948       4,627       (679 )     (15 )     2.15       3.10  
 
                                   
Total interest-bearing liabilities
    38,648       40,373       (1,725 )     (4 )     1.51       2.22  
 
                                   
All other liabilities
    935       591       344       58                  
Shareholders’ equity
    5,381       6,070       (689 )     (11 )                
 
                                       
Total liabilities and shareholders’ equity
  $ 51,703     $ 52,818     $ (1,115 )     (2 )%                
 
                                       
Net interest rate spread
                                    3.21       2.78  
Impact of noninterest-bearing funds on margin
                                    0.26       0.25  
 
                                           
Net interest margin
                                    3.47 %     3.03 %
 
                                           
     
(1)   Fully-taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)   Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred 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 allowance for unfunded loan commitments and letters of credit (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 second quarter was $193.4 million, down $41.6 million, or 18%, from the prior quarter and down $220.3 million, or 53%, from the year-ago quarter. The 2010 second quarter included $80.0 million of Franklin-related credit provision , and reflected $75.5 million associated with the transfer of Franklin-related loans to loans held for sale (see Significant Item 2), and $4.5 million of other Franklin-related NCOs . Reflecting the utilization of previously established reserves, the current quarter’s provision for credit losses was $85.8 million less than total 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 11 — Provision for Credit Losses — Franklin-Related Impact
                                         
    2010     2009  
(in millions)   Second     First     Fourth     Third     Second  
 
 
Provision for (reduction to) credit losses
                                       
Franklin
  $ 80.0     $ 11.5     $ 1.2     $ (3.5 )   $ (10.1 )
Non-Franklin
    113.4       223.5       892.8       478.6       423.8  
 
                             
Total
  $ 193.4     $ 235.0     $ 894.0     $ 475.1     $ 413.7  
 
                             
 
 
Total net charge-offs (recoveries)
                                       
Franklin — related to transfer to loans held for sale
  $ 75.5     $     $     $     $  
Franklin — unrelated to transfer to loans held for sale
    4.5       11.5       1.2       (3.5 )     (10.1 )
Non-Franklin
    199.2       227.0       443.5       359.4       344.5  
 
                             
Total
  $ 279.2     $ 238.5     $ 444.7     $ 355.9     $ 334.4  
 
                             
 
 
Provision for (reduction to) credit losses in excess of net charge-offs
                                       
Franklin
  $     $     $     $     $  
Non-Franklin
    (85.8 )     (3.5 )     449.3       119.2       79.3  
 
                             
Total
  $ (85.8 )   $ (3.5 )   $ 449.3     $ 119.2     $ 79.3  
 
                             
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 12 — Noninterest Income
                                         
    2010     2009  
(dollar amounts in thousands)   Second     First     Fourth     Third     Second  
 
 
Service charges on deposit accounts
  $ 75,934     $ 69,339     $ 76,757     $ 80,811     $ 75,353  
Brokerage and insurance income
    36,498       35,762       32,173       33,996       32,052  
Mortgage banking income
    45,530       25,038       24,618       21,435       30,827  
Trust services
    28,399       27,765       27,275       25,832       25,722  
Electronic banking
    28,107       25,137       25,173       28,017       24,479  
Bank owned life insurance income
    14,392       16,470       14,055       13,639       14,266  
Automobile operating lease income
    11,842       12,303       12,671       12,795       13,116  
Securities gains (losses)
    156       (31 )     (2,602 )     (2,374 )     (7,340 )
Other income
    28,785       29,069       34,426       41,901       57,470  
 
                             
 
 
Total noninterest income
  $ 269,643     $ 240,852     $ 244,546     $ 256,052     $ 265,945  
 
                             

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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 13 — Mortgage Banking Income
                                         
    2010     2009  
(dollar amounts in thousands)   Second     First     Fourth     Third     Second  
 
 
Mortgage Banking Income
                                       
Origination and secondary marketing
  $ 19,778     $ 13,586     $ 16,473     $ 16,491     $ 31,782  
Servicing fees
    12,178       12,418       12,289       12,320       12,045  
Amortization of capitalized servicing
    (10,137 )     (10,065 )     (10,791 )     (10,050 )     (14,445 )
Other mortgage banking income
    3,664       3,210       4,466       4,109       5,381  
 
                             
Sub-total
    25,483       19,149       22,437       22,870       34,763  
MSR valuation adjustment (1)  
    (26,221 )     (5,772 )     15,491       (17,348 )     46,551  
Net trading gain (loss) related to MSR hedging
    46,268       11,661       (13,310 )     15,913       (50,487 )
 
                             
 
Total mortgage banking income
  $ 45,530     $ 25,038     $ 24,618     $ 21,435     $ 30,827  
 
                             
 
Mortgage originations (in millions)
  $ 1,161     $ 869     $ 1,131     $ 998     $ 1,587  
Average trading account securities used to hedge MSRs (in millions)
    28       18       19       19       20  
Capitalized mortgage servicing rights (2)
    179,138       207,552       214,592       200,969       219,282  
Total mortgages serviced for others (in millions) (2)
    15,954       15,968       16,010       16,145       16,246  
MSR % of investor servicing portfolio
    1.12 %     1.30 %     1.34 %     1.24 %     1.35 %
 
                             
 
Net Impact of MSR Hedging
                                       
 
MSR valuation adjustment (1)
  $ (26,221 )   $ (5,772 )   $ 15,491     $ (17,348 )   $ 46,551  
Net trading gain (loss) related to MSR hedging
    46,268       11,661       (13,310 )     15,913       (50,487 )
Net interest income related to MSR hedging
    58       169       168       191       199  
 
                             
 
Net impact of MSR hedging
  $ 20,105     $ 6,058     $ 2,349     $ (1,244 )   $ (3,737 )
 
                             
(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 Second Quarter versus 2009 Second Quarter
Noninterest income increased $3.7 million, or 1%, from the year-ago quarter.
Table 14 — Noninterest Income — 2010 Second Quarter vs. 2009 Second Quarter
                                 
    Second Quarter     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
 
 
Service charges on deposit accounts
  $ 75,934     $ 75,353     $ 581       1 %
Brokerage and insurance income
    36,498       32,052       4,446       14  
Mortgage banking income
    45,530       30,827       14,703       48  
Trust services
    28,399       25,722       2,677       10  
Electronic banking
    28,107       24,479       3,628       15  
Bank owned life insurance income
    14,392       14,266       126       1  
Automobile operating lease income
    11,842       13,116       (1,274 )     (10 )
Securities gains (losses)
    156       (7,340 )     7,496       N.M.  
Other income
    28,785       57,470       (28,685 )     (50 )
 
                       
 
Total noninterest income
  $ 269,643     $ 265,945     $ 3,698       1 %
 
                       
N.M., not a meaningful value.

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The $3.7 million, or 1%, increase in total noninterest income from the year-ago quarter reflected:
    $14.7 million, or 48%, increase in mortgage banking income. MSR hedging-related activities contributed a $24.0 million net increase. We use an independent outside third party to monitor our MSR asset valuation and assumptions. Based on updated market data and trends, the prepayment assumptions were lowered, which increased the value of the MSR. Partially offsetting this benefit was a $12.0 million, or 38%, decline in origination and secondary marketing income as originations were 27% below the year-ago quarter.
    $7.3 million of securities losses in the year-ago quarter.
    $4.4 million, or 14%, increase in brokerage and insurance income, primarily reflecting higher annuity sales, and to a lesser degree an increase in mutual fund and fixed income product sales.
    $3.6 million, or 15%, increase in electronic banking income reflecting higher debit-card transaction volumes.
    $2.7 million, or 10%, increase in trust services income, reflecting a combination of higher asset market values, asset growth, fee increases, and income related to tax preparation fees.
Partially offset by:
    $28.7 million, or 50%, decline in other income, as the year-ago quarter included a $31.4 million gain on the sale of Visa ® stock.
2010 Second Quarter versus 2010 First Quarter
Noninterest income increased $28.8 million, or 12%, from the prior quarter.
Table 15 — Noninterest Income — 2010 Second Quarter vs. 2010 First Quarter
                                 
    2010     2010     Change  
(dollar amounts in thousands)   Second Quarter     First Quarter     Amount     Percent  
 
                               
Service charges on deposit accounts
  $ 75,934     $ 69,339     $ 6,595       10 %
Brokerage and insurance income
    36,498       35,762       736       2  
Mortgage banking income
    45,530       25,038       20,492       82  
Trust services
    28,399       27,765       634       2  
Electronic banking
    28,107       25,137       2,970       12  
Bank owned life insurance income
    14,392       16,470       (2,078 )     (13 )
Automobile operating lease income
    11,842       12,303       (461 )     (4 )
Securities gains (losses)
    156       (31 )     187       N.M.  
Other income
    28,785       29,069       (284 )     (1 )
 
                       
 
Total noninterest income
  $ 269,643     $ 240,852     $ 28,791       12 %
 
                       
N.M., not a meaningful value.
The $28.8 million, or 12%, increase in total noninterest income from the prior quarter reflected:
    $20.5 million, or 82%, increase in mortgage banking income. MSR hedging-related activities contributed a $14.2 million net increase, with the increase reflecting updated market data and trends, and lowered prepayment assumptions. In addition, origination and secondary marketing income increased $6.2 million, or 46%, from the prior quarter, reflecting a 34% increase in mortgage originations as borrowers took advantage of low interest rates.
    $6.6 million, or 10%, increase in service charges on deposit accounts, primarily reflecting seasonally higher personal nonsufficient funds and overdraft service charges.
    $3.0 million, or 12%, increase in electronic banking income reflecting higher debit-card transaction volumes.

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Partially offset by:
    $2.1 million, or 13%, decline in bank owned life insurance income as the prior quarter included $2.6 million in realized policy benefits.
2010 First Six Months versus 2009 First Six Months
The following table reflects noninterest income for the first six-month period of 2010 and the first six-month period of 2009:
Table 16 — Noninterest Income — 2010 First Six Months vs. 2009 First Six Months
                                 
    Six Months Ended June 30,     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
 
Service charges on deposit accounts
  $ 145,273     $ 145,231     $ 42       %
Brokerage and insurance income
    72,260       72,000       260        
Mortgage banking income
    70,568       66,245       4,323       7  
Trust services
    56,164       50,532       5,632       11  
Electronic banking
    53,244       46,961       6,283       13  
Bank owned life insurance income
    30,862       27,178       3,684       14  
Automobile operating lease income
    24,145       26,344       (2,199 )     (8 )
Securities losses
    125       (5,273 )     5,398       N.M.  
Other income
    57,854       75,829       (17,975 )     (24 )
 
                       
 
Total noninterest income
  $ 510,495     $ 505,047     $ 5,448       1 %
 
                       
N.M., not a meaningful value.

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The following table details mortgage banking income and the net impact of MSR hedging activity for the first six-month period of 2010 and the first six-month period of 2009:
Table 17 — Year to Date Mortgage Banking Income and Net Impact of MSR Hedging
                                 
    Six Months Ended June 30,     YTD Change 2010 vs 2009  
(in thousands, except as noted)   2010     2009     Amount     Percent  
 
Mortgage Banking Income
                               
 
       
Origination and secondary marketing
  $ 33,364     $ 61,747     $ (28,383 )     (46 )%
Servicing fees
    24,596       23,885       711       3  
Amortization of capitalized servicing
    (20,202 )     (26,730 )     6,528       (24 )
Other mortgage banking income
    6,874       14,785       (7,911 )     (54 )
 
                       
 
       
Subtotal
    44,632       73,687       (29,055 )     (39 )
MSR valuation adjustment (1)
    (31,993 )     36,162       (68,155 )     N.M.  
Net trading gains (losses) related to MSR hedging
    57,929       (43,604 )     101,533       N.M.  
 
                       
 
       
Total mortgage banking income
  $ 70,568     $ 66,245     $ 4,323       7 %
 
                       
Mortgage originations (in millions)
  $ 2,030     $ 3,133     $ (1,103 )     (35 )%
MSRs (in millions)
    23       121       (98 )     (81 )
Capitalized mortgage servicing rights (2)
    179,138       219,282       (40,144 )     (18 )
Total mortgages serviced for others (in millions) (2)
    15,954       16,246       (292 )     (2 )
MSR % of investor servicing portfolio
    1.12 %     1.35 %     (0.23 )%     N.M. %
MSR valuation adjustment (1)
  $ (31,993 )   $ 36,162     $ (68,155 )     N.M. %
Net trading gains (losses) related to MSR hedging
    57,929       (43,604 )     101,533       N.M.  
Net interest income related to MSR hedging
    227       2,640       (2,413 )     (91 )
 
                       
 
       
Net impact of MSR hedging
  $ 26,163     $ (4,802 )   $ 30,965       N.M. %
 
                       
N.M., not a meaningful value.
     
(1)   The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing.
 
(2)   At period end.
The $5.4 million, or 1%, increase in total noninterest income reflected:
    $6.3 million, or 13%, increase in electronic banking reflecting increased debit card transaction volumes.
    $5.6 million, or 11%, increase in trust services income reflecting a combination of higher asset market values, asset growth, fee increases, and income related to tax preparation fees.
    $5.3 million securities losses in the year-ago period.
    $4.3 million, or 7%, increase in mortgage banking income. MSR hedging-related activity improved $33.4 million compared with the year-ago period reflecting updated market data and trends, as well as lowered prepayment assumptions. This benefit was partially offset by a $28.4 million decline in origination and secondary marketing income as originations were 35% below the year-ago period.
    $3.7 million, or 14%, increase in bank owned life insurance income reflecting $1.7 million in realized policy benefits.
Partially offset by:
    $18.0 million, or 24%, decline in other income as the year-ago period included a $31.4 million gain on the sale of Visa ® stock, partially offset by a $5.9 million automobile loan securitization loss.
For additional information regarding noninterest income, see the “Legislative and Regulatory” section located within the “Executive Overview” section.

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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 18 — Noninterest Expense
                                         
    2010     2009  
(dollar amounts in thousands)   Second     First     Fourth     Third     Second  
 
Personnel costs
  $ 194,875     $ 183,642     $ 180,663     $ 172,152     $ 171,735  
Outside data processing and other services
    40,670       39,082       36,812       38,285       40,006  
Deposit and other insurance expense
    26,067       24,755       24,420       23,851       48,138  
Net occupancy
    25,388       29,086       26,273       25,382       24,430  
OREO and foreclosure expense
    4,970       11,530       18,520       38,968       26,524  
Equipment
    21,585       20,624       20,454       20,967       21,286  
Professional services
    24,388       22,697       25,146       18,108       16,658  
Amortization of intangibles
    15,141       15,146       17,060       16,995       17,117  
Automobile operating lease expense
    9,667       10,066       10,440       10,589       11,400  
Marketing
    17,682       11,153       9,074       8,259       7,491  
Telecommunications
    6,205       6,171       6,099       5,902       6,088  
Printing and supplies
    3,893       3,673       3,807       3,950       4,151  
Goodwill impairment
                            4,231  
Gain on early extinguishment of debt
                (73,615 )     (60 )     (73,038 )
Other
    23,279       20,468       17,443       17,749       13,765  
 
                             
 
       
Total noninterest expense
  $ 413,810     $ 398,093     $ 322,596     $ 401,097     $ 339,982  
 
                             
Number of employees (full-time equivalent), at period-end
    11,117       10,678       10,272       10,194       10,338  

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2010 Second Quarter versus 2009 Second Quarter
Noninterest expense increased $73.8 million, or 22%, from the year-ago quarter.
Table 19 — Noninterest Expense — 2010 Second Quarter vs. 2009 Second Quarter
                                 
    Second Quarter     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
 
                               
Personnel costs
  $ 194,875     $ 171,735     $ 23,140       13 %
Outside data processing and other services
    40,670       40,006       664       2  
Deposit and other insurance expense
    26,067       48,138       (22,071 )     (46 )
Net occupancy
    25,388       24,430       958       4  
OREO and foreclosure expense
    4,970       26,524       (21,554 )     (81 )
Equipment
    21,585       21,286       299       1  
Professional services
    24,388       16,658       7,730       46  
Amortization of intangibles
    15,141       17,117       (1,976 )     (12 )
Automobile operating lease expense
    9,667       11,400       (1,733 )     (15 )
Marketing
    17,682       7,491       10,191       N.M.  
Telecommunications
    6,205       6,088       117       2  
Printing and supplies
    3,893       4,151       (258 )     (6 )
Goodwill impairment
          4,231       (4,231 )     N.M.  
Gain on early extinguishment of debt
          (73,038 )     73,038       N.M.  
Other expense
    23,279       13,765       9,514       69  
 
                       
 
Total noninterest expense
  $ 413,810     $ 339,982     $ 73,828       22 %
 
                       
 
Number of employees, (full-time equivalent), at period-end
    11,117       10,338       779       8 %
N.M., not a meaningful value.
The $73.8 million, or 22%, increase in total noninterest expense from the year-ago quarter reflected:
    $73.0 million benefit in the year-ago quarter from a gain on the early extinguishment of debt.
    $23.1 million, or 13%, increase in personnel costs, primarily reflecting an 8% increase in full-time equivalent staff in support of strategic initiatives, as well as higher commissions and other incentive expenses and the reinstatement of our 401(k) plan matching contribution.
    $10.2 million increase in marketing expense reflecting increases in branding and product advertising activities in support of strategic initiatives.
    $9.5 million, or 69%, increase in other expense, reflecting a combination of factors including a $5.2 million increase in repurchase reserves related to representations and warranties made on mortgage loans sold and an increase in other miscellaneous expenses in support of implementing strategic initiatives, partially offset by a decrease in franchise and other taxes.
    $7.7 million, or 46%, increase in professional services, reflecting higher consulting and legal expenses.
Partially offset by:
    $22.1 million, or 46%, decrease in deposit and other insurance expense primarily due to a $23.6 million FDIC insurance special assessment in the year-ago quarter.
    $21.6 million, or 81%, decline in OREO and foreclosure expense.
    $4.2 million goodwill impairment in the year-ago quarter.

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2010 Second Quarter versus 2010 First Quarter
Noninterest expense increased $15.7 million, or 4%, from the prior quarter.
Table 20 — Noninterest Expense — 2010 Second Quarter vs. 2010 First Quarter
                                 
    2010     2010     Change  
(dollar amounts in thousands)   Second Quarter     First Quarter     Amount     Percent  
 
Personnel costs
  $ 194,875     $ 183,642     $ 11,233       6 %
Outside data processing and other services
    40,670       39,082       1,588       4  
Deposit and other insurance expense
    26,067       24,755       1,312       5  
Net occupancy
    25,388       29,086       (3,698 )     (13 )
OREO and foreclosure expense
    4,970       11,530       (6,560 )     (57 )
Equipment
    21,585       20,624       961       5  
Professional services
    24,388       22,697       1,691       7  
Amortization of intangibles
    15,141       15,146       (5 )      
Automobile operating lease expense
    9,667       10,066       (399 )     (4 )
Marketing
    17,682       11,153       6,529       59  
Telecommunications
    6,205       6,171       34       1  
Printing and supplies
    3,893       3,673       220       6  
Other expense
    23,279       20,468       2,811       14  
 
                       
 
Total noninterest expense
  $ 413,810     $ 398,093     $ 15,717       4 %
 
                       
 
Number of employees, (full-time equivalent), at period-end
    11,117       10,678       439       4 %
The $15.7 million, or 4%, increase in total noninterest expense from the prior quarter reflected:
    $11.2 million, or 6%, increase in personnel costs, primarily reflecting higher salaries due to a 4% increase in full-time equivalent staff in support of strategic initiatives, as well as a full quarter’s impact of merit increases and reinstatement of our 401(k) plan matching contribution.
    $6.5 million, or 59%, increase in marketing expense, reflecting increases in branding and product advertising activities in support of strategic initiatives.
    $2.8 million, or 14%, increase in other expense, reflecting a $5.4 million increase in repurchase reserves related to representations and warranties made on mortgage loans sold, partially offset by a decrease in franchise and other taxes.
Partially offset by:
    $6.6 million, or 57%, decrease in OREO and foreclosure expense.
    $3.7 million, or 13%, decrease in net occupancy expense, primarily reflecting seasonally lower expenses.

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2010 First Six Months versus 2009 First Six Months
The following table reflects noninterest expense for the first six-month period of 2010 and the first six-month period of 2009:
Table 21 — Noninterest Expense — 2010 First Six Months vs. 2009 First Six Months
                                 
    Six Months Ended June 30,     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
 
Personnel costs
  $ 378,517     $ 347,667     $ 30,850       9 %
Outside data processing and other services
    79,752       72,998       6,754       9  
Deposit and other insurance expense
    50,822       65,559       (14,737 )     (22 )
Net occupancy
    54,474       53,618       856       2  
OREO and foreclosure expense
    16,500       36,411       (19,911 )     (55 )
Equipment
    42,209       41,696       513       1  
Professional services
    47,085       33,112       13,973       42  
Amortization of intangibles
    30,287       34,252       (3,965 )     (12 )
Automobile operating lease expense
    19,733       22,331       (2,598 )     (12 )
Marketing
    28,835       15,716       13,119       83  
Telecommunications
    12,376       11,978       398       3  
Printing and supplies
    7,566       7,723       (157 )     (2 )
Goodwill impairment
          2,606,944       (2,606,944 )     N.M.  
Gain on early extinguishment of debt
          (73,767 )     73,767       N.M.  
Other expense
    43,747       33,513       10,234       31  
 
                       
 
 
Total noninterest expense
  $ 811,903     $ 3,309,751     $ (2,497,848 )     (75 )%
 
                       
 
                               
Number of employees, (full-time equivalent), at period-end
    11,117       10,338       779       8 %
 
                               
N.M., not a meaningful value.
                               
The $2,497.8 million, or 75%, decrease in total noninterest expense reflected:
    $2,606.9 million of goodwill impairment in the year-ago period.
    $19.9 million, or 55%, decline in OREO and foreclosure expense reflecting lower OREO losses.
    $14.7 million, or 22%, decline in deposit and other insurance expense primarily due to a $23.6 million FDIC insurance special assessment in the year-ago period, partially offset by higher FDIC insurance costs in the current period as premium rates increased and the level of deposits grew.
Partially offset by:
    $73.8 million benefit in the year-ago period from a gain on the early extinguishment of debt.
    $30.9 million, or 9%, increase in personnel costs, primarily reflecting an 8% increase in full-time equivalent staff in support of strategic initiatives, as well as higher commissions and other incentive expenses, and the reinstatement of our 401(k) plan matching contribution.
    $14.0 million, or 42%, increase in professional services reflecting higher collection-related expenses, as well as an increase in consulting expenses and legal expenses.
    $13.1 million, or 83%, increase in marketing expense, reflecting increases in branding and product advertising activities in support of strategic initiatives.
    $10.2 million, or 31%, increase in other expense reflecting $7.1 million of higher franchise and other taxes, $5.7 million of legal fees associated with redemption of a bank note, and a $6.3 million increase in repurchase reserves related to representations and warranties made on mortgage loans sold. These increases were partially offset by $5.6 million of lower automobile lease residual value expense as used vehicle prices improved.

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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 second quarter was $13.3 million. This compared with a tax benefit of $38.1 million in the 2010 first quarter and a tax benefit of $12.8 million in the 2009 second quarter. As of June 30, 2010, we had a net deferred tax asset of $389.8 million. 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 on-going 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. The IRS as well as state tax officials from Ohio, Kentucky, and Illinois 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 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 Loan and Lease Exposure Mix
At June 30, 2010, commercial loans totaled $19.6 billion, and represented 53% of our total loan and lease 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 the primary repayment source for the loan.
Commercial real estate (CRE) loans — CRE loans consist of loans for income producing real estate properties, real estate investment trusts, 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 projected cash flow 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 $17.4 billion at June 30, 2010, and represented 47% of our total loan and lease 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. 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. Our automobile lease portfolio will continue to decline as we exited the automobile leasing business during the 2008 fourth quarter.
Table 22 — Loan and Lease Portfolio Composition
                                                                                 
    2010     2009  
(dollar amounts in millions)   June 30,     March 31,     December 31,     September 30,     June 30,  
Commercial (1)
                                                                               
Commercial and industrial (2)
  $ 12,392       34 %   $ 12,245       33 %   $ 12,888       35 %   $ 12,547       34 %   $ 13,320       35 %
Construction
    1,106       3       1,443       4       1,469       4       1,815       5       1,857       5  
Commercial (2)
    6,078       16       6,013       16       6,220       17       6,900       18       7,089       18  
 
                                                           
Total commercial real estate
    7,184       19       7,456       20       7,689       21       8,715       23       8,946       23  
 
                                                           
Total commercial
    19,576       53       19,701       53       20,577       56       21,262       57       22,266       58  
 
                                                           
Consumer:
                                                                               
Automobile loans (3)
    4,712       13       4,212       11       3,144       9       2,939       8       2,855       7  
Automobile leases
    135             191       1       246       1       309       1       383       1  
Home equity
    7,510       20       7,514       20       7,563       21       7,576       20       7,631       20  
Residential mortgage
    4,354       12       4,614       12       4,510       12       4,468       12       4,646       12  
Other loans
    683       2       700       3       751       2       750       2       714       2  
 
                                                           
Total consumer
    17,394       47       17,231       47       16,214       44       16,042       43       16,229       42  
 
                                                           
Total loans and leases
  $ 36,970       100 %   $ 36,932       100 %   $ 36,791       100 %   $ 37,304       100 %   $ 38,495       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 and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook.
In commercial lending, on-going 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 on-going basis. As an example, the retail projects segment of the CRE portfolio has received more frequent evaluation at the loan level as a result of the economic environment and performance trends (see “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 the risk level and 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.
Our 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. Beginning in 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 in 2009 totaling $1.4 billion that increased C&I loan balances, and correspondingly decreased CRE loan balances, primarily representing owner-occupied properties. 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 $7.2 billion and represented 19% of our total loan exposure at June 30, 2010.
Table 23 — Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    June 30, 2010  
(dollar amounts in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     West
Virginia
    Other     Total Amount     %  
 
                                                                               
Retail properties
  $ 786     $ 190     $ 150     $ 201     $ 8     $ 66     $ 46     $ 513     $ 1,960       27 %
Multi family
    791       118       104       71       37       1       75       112       1,309       18  
Office
    596       233       112       59       19       25       59       59       1,162       16  
Industrial and warehouse
    426       187       37       85       14       35       11       84       879       12  
Single family home builders
    429       64       39       18       16       63       18       37       684       10  
Lines to real estate companies
    489       28       17       24       1       1       7       3       570       8  
Hotel
    139       52       18       36                   44       95       384       5  
Raw land and other land uses
    49       31       3       7       5       5       4       17       121       2  
Health care
    27       30       15       2                               74       1  
Other
    26       3       2       1       8                   1       41       1  
 
                                                           
 
                                                                               
Total
  $ 3,758     $ 936     $ 497     $ 504     $ 108     $ 196     $ 264     $ 921     $ 7,184       100 %
 
                                                           
% of total portfolio
    52 %     13 %     7 %     7 %     2 %     3 %     4 %     13 %     100 %        
Net charge-offs (for the first six-month period of 2010)
  $ 79.6     $ 23.1     $ 4.5     $ 1.8     $ 2.6     $ 10.7     $ 0.5     $ 44.2     $ 167.0          
Net charge-offs - annualized %
    4.05 %     4.71 %     1.73 %     0.68 %     4.54 %     10.50 %     0.38 %     9.17 %     4.44 %        
 
                                                                               
Nonaccrual loans
  $ 358.3     $ 54.7     $ 39.1     $ 27.8     $ 8.0     $ 28.0     $ 19.5     $ 127.7     $ 663.1          
% of related outstandings
    10 %     6 %     8 %     6 %     7 %     14 %     7 %     14 %     9 %        

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CRE loan credit quality data regarding NCOs and nonaccrual loans (NALs) by industry classification code are presented in the following table:
Table 24 — Commercial Real Estate Loans Credit Quality Data by Property Type
                                                                 
    Net Charge-offs     Nonaccrual Loans  
    Six Months Ended June 30,     June 30,     December 31,  
    2010     2009     2010     2009  
(dollar amounts in millions)   Amount     Percentage     Amount     Percentage     Amount     Percent (1)     Amount     Percent (1)  
Retail properties
  $ 69.5       6.73 %   $ 79.1       6.88 %   $ 184.6       9 %   $ 253.6       12 %
Industrial and warehouse
    25.9       5.75       15.2       2.53       93.1       11       120.8       13  
Single family home builder
    32.9       8.32       81.8       14.08       150.0       22       262.4       31  
Multi family
    17.3       2.61       29.4       3.69       105.5       8       129.0       9  
Lines to real estate companies
    3.4       1.08       32.1       5.72       18.5       3       22.7       4  
Office
    9.9       1.73       9.8       1.52       62.6       5       87.3       8  
Hotel
    1.8       0.93                   18.0       5       10.9       3  
Raw land and other land uses
    6.0       8.94       7.4       7.56       23.6       20       42.4       32  
Health care
    0.2       0.39                   0.5       1       0.7       1  
Other
    0.1       0.53       0.6       2.01       6.7       17       6.0       16  
 
                                                       
 
                                                               
Total
  $ 167.0       4.44 %   $ 255.4       5.29 %   $ 663.1       9 %   $ 935.8       12 %
 
                                                       
     
(1)   Represents percentage of related outstanding loans.
As shown in the table above, NCOs during the first six-month period of 2010 were materially lower than in the comparable year-ago period. Although NCOs in the industrial and warehouse segment increased, this increase was not an indication of a significant increasing trend. While there has been some recent stabilization in the market, we anticipate the current stress within this portfolio will continue for the foreseeable future.
We manage the risks inherent in this portfolio through origination policies, concentration limits, on-going loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include 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 on-going 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 on-going 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.
Within the CRE portfolio, the retail properties and single family home builder segments continued to be stressed as a result of the continued decline in the housing markets and general economic conditions, and are discussed below.

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Retail Properties
Our portfolio of CRE loans secured by retail properties totaled $2.0 billion, or approximately 5% of total loans and leases, at June 30, 2010. Loans within this portfolio segment declined $0.2 billion, or 7%, 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.
The weakness of the economic environment in our geographic regions continues to significantly impact 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 June 30, 2010, we had $0.7 billion of CRE loans to single family home builders. Such loans represented 2% of total loans and leases. Of this portfolio segment, 66% were to finance construction projects, 15% to finance land under development, and 19% to finance land held for development. The $0.7 billion represented a $0.2 billion, or 20%, decrease compared with $0.9 billion 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 June 30, 2010, representing 55% of total CRE loans. The performance of the core portfolio in the current quarter met our expectations, based on the consistency of the asset quality metrics within the portfolio. 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 $3.2 billion at June 30, 2010, and represented 45% of total CRE loans. Of the loans in the noncore portfolio at June 30, 2010, 46% were classified as “pass” or better, 95% had guarantors, 99% was secured, and 89% was located within our geographic footprint. However, it is within the noncore portfolio where most of the credit quality challenges exist. For example, $0.6 billion, or 19%, of related outstanding balances, are classified as NALs. SAD administered $1.6 billion, or 50%, of total noncore CRE loans at June 30, 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 June 30, 2010.
Table 25 — Core Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    June 30, 2010  
                                                    West                    
(dollar amounts in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     Virginia     Other     Total Amount     %  
Core portfolio:
                                                                               
Retail properties
  $ 462     $ 108     $ 83     $ 84     $ 3     $ 42     $ 39     $ 369     $ 1,190       16 %
Office
    338       149       74       36       11       9       40       43       700       10  
Multi family
    269       87       62       32       8             44       64       566       8  
Industrial and warehouse
    287       64       19       45       1       3       9       84       512       7  
Lines to real estate companies
    346       19       9       19             1       6       2       402       6  
Hotel
    75       35       8       25                   37       82       262       4  
Single family home builders
    127       32       7       3             21       10       1       201       3  
Raw land and other land uses
    22       29       1       2       2       2       4       10       72       1  
Health care
    13       7       13       2                               35        
Other
    11       2       2       1       8                   1       25        
 
                                                           
Total core portfolio
    1,950       532       278       249       33       78       189       656       3,965       55  
Total noncore portfolio
    1,808       404       219       255       75       118       75       265       3,219       45  
 
                                                           
 
                                                                               
Total
  $ 3,758     $ 936     $ 497     $ 504     $ 108     $ 196     $ 264     $ 921     $ 7,184       100 %
 
                                                           
Credit quality data regarding the allowance for credit losses (ACL) and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table.
Table 26 — Commercial Real Estate — Core vs. Noncore portfolios
                                                 
    June 30, 2010  
    Ending                                     Nonaccrual  
(dollar amounts in millions)   Balance     Prior NCOs     ACL $     ACL %     Credit Mark (1)     Loans  
Total core
  $ 3,965     $     $ 165       4.16 %     4.16 %   $ 39.1  
 
                                               
Noncore — Special Assets Division (2)
    1,618       549       390       24.09       43.33       564.3  
Noncore — Other
    1,601       24       150       9.37       10.71       59.7  
 
                                   
Total noncore
    3,219       573       540       16.78       29.35       624.0  
 
                                   
Total commercial real estate
  $ 7,184     $ 573     $ 705       9.81 %     16.48 %   $ 663.1  
 
                                   
 
                                               
    December 31, 2009
     
Total core
  $ 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  
 
                                   
Total noncore
    3,651       537       596       16.32       27.05       932.0  
 
                                   
Total commercial real estate
  $ 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, the ending balance of the CRE portfolio at June 30, 2010 declined $0.5 billion compared with December 31, 2009. Of this decline, 86% occurred in the noncore segment of the portfolio, and was a function of payoffs and NCOs as we actively focus on the noncore portfolio to reduce our overall CRE exposure. We anticipate further declines in future periods based on our overall strategy regarding the CRE portfolio.

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Also as shown above, substantial reserves for the noncore portfolio have been established. At June 30, 2010, the ACL related to the noncore portfolio was 16.78%. 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.
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 on-going 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 represented only 10% of the total C&I portfolio. We manage the risks inherent in this portfolio through origination policies, concentration limits, on-going 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 on-going attention on the portfolio management process to proactively identify borrowers that may be facing financial difficulty. The impact of the economic environment is further evidenced by the level of line-of-credit activity, as borrowers continued to maintain relatively low utilization percentages over the past 12 months.
As shown in the following table, C&I loans totaled $12.4 billion at June 30, 2010.
Table 27 — Commercial and Industrial Loans and Leases by Industry Classification
                                 
    June 30, 2010  
    Commitments     Loans Outstanding  
(dollar amounts in millions)   Amount     Percent     Amount     Percent  
Industry Classification:
                               
Services
  $ 4,655       26 %   $ 3,600       28 %
Manufacturing
    3,371       19       2,162       17  
Finance, insurance, and real estate
    1,920       11       1,455       12  
Retail trade — auto dealers
    1,652       9       1,063       9  
Retail trade — other than auto dealers
    1,706       9       1,238       10  
Wholesale trade
    1,409       8       839       7  
Transportation, communications, and utilities
    1,266       7       720       6  
Contractors and construction
    938       5       561       5  
Energy
    667       4       433       3  
Agriculture and forestry
    330       2       235       2  
Public administration
    85             78       1  
Other
    10             8        
 
                       
 
                               
Total
  $ 18,009       100 %   $ 12,392       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 28 — Commercial and Industrial Credit Quality Data by Industry Classification
                                                                 
    Net Charge-offs     Nonaccrual Loans  
    Six Months Ended June 30,     June 30,     At December 31,  
    2010     2009     2010     2009  
(dollar amounts in millions)   Amount     Annualized %     Amount     Annualized %     Amount     Percent (1)     Amount     Percent (1)  
Industry Classification:
                                                               
Manufacturing
  $ 37.2       3.62 %   $ 59.4       5.09 %   $ 132.9       6 %   $ 136.8       6 %
Services
    49.0       2.67       34.7       1.78       109.5       3       163.9       4  
Contractors and construction
    10.1       4.38       6.6       2.59       22.8       4       41.6       9  
Finance, insurance, and real estate (2)
    12.8       1.25       153.3             54.0       4       98.0       4  
Transportation, communications, and utilities
    8.6       2.53       5.0       1.36       18.3       3       30.6       4  
Retail trade — other than auto dealers
    11.0       2.21       31.2       6.69       53.8       4       58.5       6  
Energy
    1.3       0.64       3.0       1.43       9.9       2       10.7       3  
Retail trade — auto dealers
    1.1       0.23       0.2       0.03       3.0             3.0        
Public administration
    0.2       0.48       0.3       0.44       0.1             0.1        
Wholesale trade
    0.9       0.25       14.2       3.15       21.3       3       29.5       4  
Other
    1.2       18.18       1.0       9.30       0.1       1       0.6       2  
 
                                                       
 
                                                               
Total (2)
  $ 133.6       2.18 %   $ 308.9       4.57 %   $ 429.6       3 %   $ 578.4       4 %
 
                                                       
     
(1)   Represents percentage of total related outstanding loans.
 
(2)   The six-month period of 2009 included charge-offs totaling $118.5 million associated with the 2009 Franklin restructuring (see Significant Item 2).
FRANKLIN RELATIONSHIP
(This section should be read in conjunction with Significant Item 2 and Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
Our relationship with Franklin was acquired in the Sky Financial acquisition in 2007. On March 31, 2009, we restructured this relationship. As a result of the restructuring, we began reporting the loans as 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.
During the 2010 second quarter, the remaining $397.7 million of Franklin-related loans ($333.0 million of residential mortgages and $64.7 million of home equity loans) were transferred to loans held for sale. At the time of the transfer, the loans were marked to the lower of cost or fair value totaling $323.4 million, resulting in $75.5 million of charge-offs. On July 20, 2010, substantially all of the residential mortgage loans were sold. The remaining Franklin-related portfolio after the sale primarily consists of $48.3 million of home equity loans held for sale and $24.5 million of OREO properties, both of which are carried at the lower of cost or current fair value, less costs to sell.
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 negatively 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 29 — Selected Home Equity and Residential Mortgage Portfolio Data (1)
                                                 
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages  
(dollar amounts in millions)   06/30/10     12/31/09     06/30/10     12/31/09     06/30/10     12/31/09  
Ending Balance
  $ 2,416     $ 2,616     $ 5,094     $ 4,946     $ 4,354     $ 4,510  
Portfolio Weighted Average LTV ratio (2)
    71 %     71 %     77 %     77 %     77 %     76 %
Portfolio Weighted Average FICO (3)
    726       716       739       723       717       698  
                         
    Six Months Ended June 30, 2010  
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages (4)  
Originations
  $ 218.9     $ 661.7     $ 694.0  
Origination Weighted Average LTV ratio (2)
    61 %     73 %     80 %
Origination Weighted Average FICO (3)
    762       765       761  
     
(1)   Excludes Franklin-related 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. Over time, borrower FICO scores at loan origination for this portfolio have increased, and loan originations to borrowers with lower FICO scores have 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 June 30, 2010, 45% of our home equity loan portfolio, and 25% 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 second 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. Loans are identified as higher risk based on performance indicators and the updated values are utilized to facilitate our portfolio management, as well as our workout and loss mitigation functions.
We continue to make 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 actions, as necessary, to manage the risk profile of this portfolio. We focus production primarily within our banking footprint or to existing customers.

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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 as used in the Home Equity portfolio to limit our exposure to “flipping”, and outright fraudulent transactions. We update values in compliance with applicable regulations to facilitate our portfolio management, as well as 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 59% of our total residential mortgage loan portfolio at June 30, 2010. At June 30, 2010, ARM loans that were expected to have rates reset totaled $418.3 million for 2010, and $795.6 million for 2011. Given the quality of our borrowers and the relatively low current interest rates, we believe there exists 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 $0.3 billion of Alt-A mortgage loans in the residential mortgage loan portfolio at June 30, 2010, compared with $0.4 billion 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 June 30, 2010, borrowers for Alt-A mortgages had an average current FICO score of 680 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 six-month period of 2010 were $8.6 million, or an annualized 4.87%, compared with $6.2 million, or an annualized 2.91%, in the first six-month period of 2009. As with the entire residential mortgage portfolio, the increase in NCOs reflected, among other actions, earlier recognition of losses. At June 30, 2010, $16.5 million of the ALLL was allocated to the Alt-A mortgage portfolio, representing 4.89% of period-end Alt-A mortgages.
Interest-only loans comprised $0.6 billion of residential real estate loans at June 30, 2010, essentially unchanged from 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 June 30, 2010, borrowers for interest-only loans had an average current FICO score of 733 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 six-month period of 2010 were $5.1 million, or an annualized 3.59%, compared with $4.5 million, or an annualized 2.72%, in the first six-month period of 2009. As with the entire residential mortgage portfolio, the increase in NCOs reflected, among other actions, earlier recognition of losses. At June 30, 2010, $9.9 million of the ALLL was allocated to the interest-only loan portfolio, representing 1.78% of period-end interest-only loans.
Several recent government actions have been enacted that have affected the residential mortgage portfolio and MSR values 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 specific 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.
Overall credit quality performance in the 2010 second quarter showed continued improvement across several credit quality metrics, although NCOs increased from the prior quarter as a result of Franklin-related charge-offs (see Significant Item 2). NCOs increased $40.7 million, or 17%, from the prior quarter including $80.0 million of Franklin-related NCOs. Total NCOs were $199.2 million excluding the Franklin-related impact, representing a $27.8 million decline on this same basis from the prior quarter to the lowest level since the third quarter of 2008. Other key credit quality metrics also showed improvement, including a 17% decline in NPAs. Contributing to the decline in NPAs was a 28% linked-quarter decline in new NPAs to $171.6 million. We also saw a decline in the level of “criticized” commercial loans reflecting pay-offs and loan risk-rating upgrade activity combined with a decrease in the level of inflows. The inflow migration levels for both new criticized loans and NALs in the current quarter were the lowest since 2008, an indicator of likely improved future NAL and NPA trends.

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The current quarter also saw a significant decline in delinquency levels. Our commercial delinquency levels were essentially unchanged compared with the prior quarter, while our consumer delinquency level continued their downward trend of the past four quarters. Home equity loans and residential mortgage delinquencies declined. While there were declines in both NCOs and delinquencies in the home equity and residential mortgage portfolios, there remains significant opportunity for further improvement. Automobile loan delinquency rates also declined in the quarter, continuing a year-long trend. We remain comfortable with the on-going performance of our automobile loan portfolio.
The economic environment remains challenging. Yet, reflecting the benefit of our focused credit actions of last year, this year we are experiencing declines in total NPAs, new NPAs, and the amount of loan exposure on our watchlist . This quarter’s NCOs, with the exception of the $75.5 million associated with the transfer of Franklin-related loans into loans held for sale (see Significant Item 2), were related to reserves established in prior periods. Our allowance for credit losses declined by $86.0 million to $1,441.8 million, or 3.90%, of period-end total loans and leases from $1,527.9 million, or 4.14%, at March 31, 2010. Importantly, our allowance for credit losses as a percent of period-end NALs increased to 120% from 87%, and coverage ratios associated with NPAs and criticized assets also increased. These improved coverage ratios indicate a continued strengthening of our reserve position relative to troubled assets from the prior quarter.
NONPERFORMING ASSETS, NONACCRUAL LOANS, and TROUBLED DEBT RESTRUCTURED LOANS
(This section should be read in conjunction with Significant Item 2.)
Nonperforming Assets (NPAs) and Nonaccrual Loans (NALs)
NPAs consist of (a) nonaccrual loans (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 collateral 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 collateral property 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 consistent with the market. 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.
Troubled Debt Restructured Loans
Troubled debt restructured loans (TDRs) are loans that have been modified in which a concession is provided to a borrower experiencing credit difficulties. The terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded because the borrower remains contractually current. The following is a summary of our TDRs (both accrual and nonaccrual) by loan type as of June 30, 2010:
         
(dollar amounts in thousands)        
Restructured loans and leases — accruing:
       
Mortgage loans
  $ 269,570  
Other consumer loans
    65,061  
Commercial loans
    141,353  
Restructured loans and leases — nonaccrual:
       
Mortgage loans
    13,499  
Other consumer loans
     
Commercial loans
    90,266  
In the workout of a problem loan there are many factors considered when determining the most favorable resolution. For consumer loans, we evaluate the ability and willingness of the borrower to make contractual or reduced payments, the value of the underlying collateral, and the costs associated with the foreclosure or repossession, and remarketing of the property. For commercial loans, we consider similar criteria, including multiple collateral types in some instances, and also evaluate the customer’s business prospects.

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Residential Mortgage loan TDRs — Residential mortgage TDRs represent loan modifications associated with traditional first-lien mortgage loans in which a concession has been provided to the borrower. Residential mortgages identified as TDRs involve borrowers who are unable to refinance their mortgages through our normal channels, or to refinance their mortgages through other sources. Some, but not all, of the loans may be delinquent. Modifications can include adjustments to rates and/or principal.
The modifications are classified as TDRs when we have determined that a concession should be provided given that these borrowers cannot obtain the modified mortgages through other independent sources or our normal mortgage origination channels. Modified loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off. No consideration is given to removing individual loans from the pools.
Non-government guaranteed residential mortgage loans, including restructured loans, are reported as accrual or nonaccrual based upon delinquency status. Nonaccrual loans are those that are greater than 180 days contractually past due. Loans guaranteed by government organizations such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA) continue to accrue interest upon delinquency. Overall, our delinquency rates on TDRs are significantly below industry levels.
Residential mortgage loan TDR classifications resulted in an impairment adjustment of $1.2 million during the 2010 second quarter, and $2.5 million for first six-month period of 2010. Prior to the TDR classification, residential mortgage loans individually had minimal ALLL associated with them because the ALLL is calculated on a total portfolio pooled basis.
Other Consumer loan TDRs — Generally, these are TDRs associated with home equity borrowings and automobile loans. We make similar interest rate, term, and principal concessions as with residential mortgage loan TDRs. The TDR classification for these other consumer loans resulted in an impairment adjustment of $0.5 million during the 2010 second quarter, and $0.9 million for first six-month period of 2010.
Commercial loan TDRs -Commercial accruing TDRs represent loans in which a “substandard”-rated customer is current on contractual principal and interest but undergoes a loan modification. Accruing TDRs often result from “substandard”-rated customers receiving an extension on the maturity of their loan, for example, to allow additional time for the sale or lease of underlying CRE collateral. Often, it is in our best interest to extend the maturity rather than foreclose on a C&I or CRE loan, particularly for borrowers who are generating cash flows to support contractual interest payments. These borrowers cannot obtain the modified loan through other independent sources because of the “substandard” ratings, therefore a concession is provided and the modification is classified as a TDR. The TDR remains in accruing status as long as the customer is current on payments and no loss is probable. Accruing TDRs are excluded from NALs because these customers remain contractually current.
Nonaccrual TDRs result from either workouts where an existing NAL is restructured into multiple new loans, or from an accruing TDR being placed on nonaccrual status. At June 30, 2010, approximately $36.6 million of our nonaccrual TDRs resulted from such workouts, of which $8.5 million were restructured in the 2010 second quarter. The remaining $53.7 million represented the reclassifications of accruing TDRs to NALs.
For certain loan workouts, we create two or more new notes. The senior note is underwritten based upon our normal underwriting standards at current market rates and is sized so that projected cash flows are sufficient to repay contractual principal and interest. The terms on the subordinate note or notes vary by situation, but often defer interest payments until after the senior note is repaid. Creating two or more notes often allows the borrower to continue a project or weather a temporary economic downturn and allows us to right-size a loan based upon the current expectations for a project performance. The senior note is considered for return to accrual status if the borrower has sustained sufficient cash flows for a six-month period of time and we believe that no loss is probable. This six-month period could extend before or after the restructure date. Subordinated notes created in the workout are charged-off immediately. Any interest or principal payments received on the subordinated notes are applied to the principal of the senior note first until the senior note is repaid. Further payments are recorded as recoveries on the subordinated note.
Generally, because the loans are already classified as “substandard”, an adequate ALLL has been recorded . Consequently, a TDR classification on commercial loans does not usually result in significant additional reserves.
We consider removing the TDR status on commercial loans after the restructured loan has performed in accordance with restructured terms for a sustained period of time.

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Table 30 reflects period-end NALs and NPAs detail for each of the last five quarters, and Table 31 reflects period-end accruing TDRs and past due loans and leases detail for each of the last five quarters.
Table 30 — Nonaccrual Loans (NALs) and Nonperforming Assets (NPAs)
                                         
    2010     2009  
(dollar amounts in thousands)   June 30,     March 31,     December 31,     September 30,     June 30,  
Nonaccrual loans and leases (NALs)
                                       
Commercial and industrial
  $ 429,561     $ 511,588     $ 578,414     $ 612,701     $ 456,734  
Commercial real estate
    663,103       826,781       935,812       1,133,661       850,846  
Alt-A mortgages
    15,119       13,368       11,362       9,810       25,861  
Interest-only mortgages
    13,811       8,193       7,445       8,336       17,428  
Franklin residential mortgages
          297,967       299,670       322,796       342,207  
Other residential mortgages
    57,556       53,422       44,153       49,579       89,992  
 
                             
Total residential mortgages
    86,486       372,950       362,630       390,521       475,488  
Home equity
    22,199       54,789       40,122       44,182       35,299  
 
                             
Total nonaccrual loans and leases
    1,201,349       1,766,108       1,916,978       2,181,065       1,818,367  
Other real estate owned (OREO), net
                                       
Residential
    71,937       68,289       71,427       81,807       107,954  
Commercial
    67,189       83,971       68,717       60,784       64,976  
 
                             
Total other real estate, net
    139,126       152,260       140,144       142,591       172,930  
Impaired loans held for sale (1)
    242,227             969       20,386       11,287  
 
                             
Total nonperforming assets (NPAs)
  $ 1,582,702     $ 1,918,368     $ 2,058,091     $ 2,344,042     $ 2,002,584  
 
                             
 
                                       
NALs as a % of total loans and leases
    3.25 %     4.78 %     5.21 %     5.85 %     4.72 %
NPA ratio (2)
    4.24       5.17       5.57       6.26       5.18  
 
                                       
Nonperforming Franklin assets
                                       
Residential mortgage
  $     $ 297,967     $ 299,670     $ 322,796     $ 342,207  
Home equity
          31,067       15,004       15,704       2,437  
OREO
    24,515       24,423       23,826       30,996       43,623  
Impaired loans held for sale
    242,227                          
 
                             
Total Nonperforming Franklin assets
  $ 266,742     $ 353,457     $ 338,500     $ 369,496     $ 388,267  
 
                             
     
(1)   The June 30, 2010, figure represents NALs associated with the transfer of Franklin-related residential mortgage and home equity loans to loans held for sale (see Significant Item 2). 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 31 — Accruing Past Due Loans and Leases and Accruing Troubled Debt Restructured Loans
                                         
    2010     2009  
(dollar amounts in thousands)   June 30,     March 31,     December 31,     September 30,     June 30,  
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
    47,036       72,702       78,915       65,716       97,937  
Home equity
    26,797       29,438       53,343       45,334       35,328  
Other loans and leases
    9,533       10,598       13,400       14,175       13,474  
 
                             
Total, excl. loans guaranteed by the U.S. government
    83,366       113,213       145,658       127,771       146,739  
Add: loans guaranteed by the U.S. government
    95,421       96,814       101,616       102,895       99,379  
 
                             
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government
  $ 178,787     $ 210,027     $ 247,274     $ 230,666     $ 246,118  
 
                             
 
                                       
Ratios: (1)
                                       
 
 
Excluding loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.23 %     0.31 %     0.40 %     0.34 %     0.38 %
 
 
Guaranteed by the U.S. government, as a percent of total loans and leases
    0.26       0.26       0.28       0.28       0.26  
 
 
Including loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.49       0.57       0.68       0.62       0.64  
 
                                       
Accruing troubled debt restructured loans
                                       
Commercial
  $ 141,353     $ 117,667     $ 157,049     $ 153,010     $ 267,975  
 
 
Alt-A mortgages
    57,993       57,897       57,278       58,367       46,657  
Interest-only mortgages
    7,794       8,413       7,890       10,072       12,147  
Other residential mortgages
    203,783       176,560       154,471       136,024       99,764  
 
                             
Total residential mortgages
    269,570       242,870       219,639       204,463       158,568  
Other
    65,061       62,148       52,871       42,406       35,720  
 
                             
Total accruing troubled debt restructured loans
  $ 475,984     $ 422,685     $ 429,559     $ 399,879     $ 462,263  
 
                             
     
(1)   Percent of related loans and leases.
NALs were $1,201.3 million at June 30, 2010, and represented 3.25% of related loans. This compared with $1,766.1 million, or 4.78% of related loans, at March 31, 2010. The decrease of $564.8 million, or 32%, included the transfer of $316.6 million of Franklin related NALs to loans held for sale (see Significant Item 2). Also contributing to the decrease compared with the prior quarter were declines in C&I and CRE NALs.
In addition to the above, the decrease in NALs was a result of a significant decrease in the level of new NALs, as well as increased payments and payoffs of existing NALs. New NALs declined to $171.6 million during the 2010 second quarter, compared with $237.9 million in the 2010 first quarter and $494.6 million in the 2009 fourth quarter. Payments and payoffs of existing commercial NALs were substantially higher than in prior quarters, reflecting the continued impact of our workout efforts by our SAD.

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The decline in NALs by specific loan type is summarized below:
    $286.5 million decline in residential mortgage NALs, of which essentially all were Franklin-related.
    $163.7 million decline in CRE NALs, reflecting both charge-off activity and problem credit resolutions including borrower payments and pay-offs. This category was substantial and is a direct result of our commitment to the on-going proactive management of these credits by our SAD. Also key to this improvement was the significantly lower level of inflows. The level of inflow, or migration, is an important indicator of the future trend for the portfolio.
    $82.0 million decline in C&I NALs, reflecting both charge-off activity and 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. The commercial segment also showed a significant decline in new NALs, giving us additional confidence for further improvement in future periods.
    $32.6 million decline in home equity NALs, essentially all of which were Franklin-related.
NPAs, which include NALs, were $1,582.7 million at June 30, 2010, and represented 4.24% of related assets. This compared with $1,918.4 million, or 5.17% of related assets, at March 31, 2010. The $335.7 million decrease reflected:
    $564.8 million decrease to NALs, discussed above.
Partially offset by:
    $242.2 million increase in impaired loans held for sale, reflecting the transfer of Franklin-related loans to loans held for sale.
The over 90-day delinquent, but still accruing, ratio excluding loans guaranteed by the U.S. Government, was 0.23% at June 30, 2010, representing an 8 basis points decline compared with March 31, 2010. On this same basis, the over 90-day delinquency ratio for total consumer loans was 0.48% at June 30, 2010, representing a 17 basis point decline compared with March 31, 2010.
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.
Compared with December 31, 2009, NALs, decreased $715.6 million, or 37%. This decrease included the transfer of $316.6 million of Franklin related NALs to loans held for sale.
The decline in NALs is summarized below:
    $276.1 million decline in residential mortgage NALs, essentially all Franklin-related.
    $272.7 million decline in CRE NALs, reflecting both charge-off activity and problem credit resolutions including pay-offs. The payment category was substantial and is a direct result of our commitment to the on-going proactive management of these credits by our SAD. Also key to this significant improvement was the significantly lower level of inflows.
    $148.9 million decline in C&I NALs, reflecting both charge-off activity and 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. The commercial segment also showed a significant decline in new NALs.
    $17.9 million decline in home equity NALs, reflecting the transfer of Franklin-related loans to loans held for sale, partially offset by an increase in non-Franklin-related loans. All home equity accruing loans have been written down to the lower of cost or fair value less selling costs.
Compared with December 31, 2009, NPAs, which include NALs, decreased $475.4 million, or 23%, reflecting:
    $715.6 million decrease to NALs, discussed above.
Partially offset by:
    $241.3 million increase in impaired loans held for sale, primarily reflecting the transfer of Franklin-related loans to loans held for sale.

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NPA activity for each of the past five quarters was as follows:
Table 32 — Nonperforming Asset Activity
                                         
    2010     2009  
(dollar amounts in thousands)   Second     First     Fourth     Third     Second  
Nonperforming assets, beginning of year
  $ 1,918,368     $ 2,058,091     $ 2,344,042     $ 2,002,584     $ 1,775,743  
New nonperforming assets
    171,595       237,914       494,607       899,855       750,318  
Franklin impact, net
    (86,715 )     14,957       (30,996 )     (18,771 )     (57,436 )
Returns to accruing status
    (78,739 )     (80,840 )     (85,867 )     (52,498 )     (40,915 )
Loan and lease losses
    (173,159 )     (185,387 )     (391,635 )     (305,405 )     (282,713 )
OREO gains (losses)
    2,483       (4,160 )     (7,394 )     (30,623 )     (20,614 )
Payments
    (140,881 )     (107,640 )     (222,790 )     (117,710 )     (95,124 )
Sales
    (30,250 )     (14,567 )     (41,876 )     (33,390 )     (26,675 )
 
                             
Nonperforming assets, end of period
  $ 1,582,702     $ 1,918,368     $ 2,058,091     $ 2,344,042     $ 2,002,584  
 
                             
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 the methodology assumptions and estimates used in the calculation, 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 increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs, net of recoveries, decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.

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The table below reflects activity in the ALLL and ACL for each of the last five quarters.
Table 33 — Quarterly Allowance for Credit Losses Analysis
                                         
    2010     2009  
(dollar amounts in thousands)   Second     First     Fourth     Third     Second  
Allowance for loan and lease losses, beginning of period
  $ 1,477,969     $ 1,482,479     $ 1,031,971     $ 917,680     $ 838,549  
Loan and lease losses
    (312,954 )     (264,222 )     (471,486 )     (377,443 )     (359,444 )
Recoveries of loans previously charged off
    33,726       25,741       26,739       21,501       25,037  
 
                             
Net loan and lease losses
    (279,228 )     (238,481 )     (444,747 )     (355,942 )     (334,407 )
 
                             
Provision for loan and lease losses
    203,633       233,971       895,255       472,137       413,538  
Allowance for loans transferred to held-for-sale
                      (1,904 )      
Allowance of assets sold
    (214 )                        
 
                             
Allowance for loan and lease losses, end of period
  $ 1,402,160     $ 1,477,969     $ 1,482,479     $ 1,031,971     $ 917,680  
 
                             
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
    49,916     $ 48,879     $ 50,143     $ 47,144     $ 46,975  
 
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    (10,227 )     1,037       (1,264 )     2,999       169  
 
                             
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 39,689     $ 49,916     $ 48,879     $ 50,143     $ 47,144  
 
                             
Total allowances for credit losses
  $ 1,441,849     $ 1,527,885     $ 1,531,358     $ 1,082,114     $ 964,824  
 
                             
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
 
 
Total loans and leases
    3.79 %     4.00 %     4.03 %     2.77 %     2.38 %
Nonaccrual loans and leases (NALs)
    117       84       77       47       50  
Nonperforming assets (NPAs)
    89       77       72       44       46  
 
                                       
Total allowances for credit losses (ACL) as % of:
                                       
Total loans and leases
    3.90 %     4.14 %     4.16 %     2.90 %     2.51 %
NALs
    120       87       80       50       53  
NPAs
    91       80       74       46       48  
The reduction in the ACL, compared with both March 31, 2010 and December 31, 2009, was primarily centered in the C&I and CRE ALLL, reflecting charge-offs on loans with specific reserves, and an overall reduction in the level of problem credits. The consumer loan ALLL was essentially unchanged. The AULC declined as a result of a substantive reduction in the level of unfunded loan commitments in the commercial portfolio. We have made a concerted effort to reduce potential exposure associated with unfunded lines, and to generate an appropriate level of return on those that remain in place. We also experienced a number of our borrowers reassess their borrowing needs and reduce their availability.
Despite the decline in the ACL as a percentage of total loans and leases, the coverage ratio associated with NALs increased to 120%. We believe our ACL coverage levels are appropriate given the continued challenges in the economic environment combined with the positive asset quality trends regarding delinquencies, NPAs, and NCOs.

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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 34 — Allocation of Allowances for Credit Losses (1)
                                                                                 
    2010     2009  
(dollar amounts in thousands)   June 30,     March 31,     December 31,     September 30,     June 30,  
Commercial
                                                                               
Commercial and industrial
  $ 426,767       34 %   $ 459,011       33 %   $ 492,205       35 %   $ 381,912       34 %   $ 347,339       35 %
Commercial real estate
    695,778       19       741,669       20       751,875       21       436,661       23       368,464       23  
 
                                                           
Total commercial
    1,122,545       53       1,200,680       53       1,244,080       56       818,573       57       715,803       58  
 
                                                           
Consumer
                                                                               
Automobile loans and leases
    41,762       13       56,111       12       57,951       9       59,134       9       60,995       8  
Home equity
    117,708       20       127,970       20       102,039       21       86,989       20       76,653       20  
Residential mortgage
    79,105       12       60,295       12       55,903       12       50,177       12       48,093       12  
Other loans
    41,040       2       32,913       3       22,506       2       17,098       2       16,136       2  
 
                                                           
Total consumer
    279,615       47       277,289       47       238,399       44       213,398       43       201,877       42  
 
                                                           
Total ALLL
    1,402,160       100 %     1,477,969       100 %     1,482,479       100 %     1,031,971       100 %     917,680       100 %
 
                                                           
AULC
    39,689               49,916               48,879               50,143               47,144          
 
                                                                     
Total ACL
  $ 1,441,849             $ 1,527,885             $ 1,531,358             $ 1,082,114             $ 964,824          
 
                                                                     
     
(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 NPAs.
Table 35 — ACL/NPA Coverage Ratios
Analysis
June 30, 2010
                         
(dollar amounts in thousands)   Franklin     Other     Total  
Nonperforming Assets (NPAs)
  $ 242,227     $ 1,340,475     $ 1,582,702  
 
                       
Allowance for Credit Losses (ACL)
  NA (1)     1,441,849       1,441,849  
 
                       
ACL as a % of NPAs (coverage ratio)
            108 %     91 %
     
(1)   Not applicable. Franklin-related loans were acquired at the lower of cost of fair value on March 31, 2009. Under guidance provided by the Financial Accounting Standards Board (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/NPA coverage ratio of 91% at June 30, 2010, represented an appropriate level of reserves for the remaining inherent risk in the portfolio. The Franklin-related NPA balance of $242.2 million does not have reserves assigned as those loans are recorded at the lower of cost or fair value . Eliminating the impact of the Franklin-related loans, the ACL/NAL coverage ratio was 108% as of June 30, 2010.

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The table below reflects activity in the ALLL and AULC for the first six-month period of 2010 and the first six-month period of 2009.
Table 36 — Year to Date Allowance for Credit Losses Analysis
                 
    Six Months Ended June 30,  
(in thousands)   2010     2009  
Allowance for loan and lease losses, beginning of period
  $ 1,482,479     $ 900,227  
Acquired allowance for loan and lease losses
           
Loan and lease losses
    (577,176 )     (712,449 )
Recoveries of loans previously charged off
    59,467       36,551  
 
           
Net loan and lease losses
    (517,709 )     (675,898 )
Provision for loan and lease losses
    437,604       702,539  
Allowance for loans transferred to held-for-sale
           
Economic reserve transfer
    (214 )     (9,188 )
 
           
Allowance for loan and lease losses, end of period
  $ 1,402,160     $ 917,680  
 
           
 
               
Allowance for unfunded loan commitments
               
and letters of credit, beginning of period
  $ 48,879     $ 44,139  
Acquired AULC
           
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    (9,190 )     3,005  
 
           
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 39,689     $ 47,144  
 
           
Total allowances for credit losses
  $ 1,441,849     $ 964,824  
 
           
 
               
Allowance for loan and lease losses (ALLL) as % of:
               
Total loans and leases
    3.79 %     2.38 %
Nonaccrual loans and leases (NALs)
    117       50  
Nonperforming assets (NPAs)
    89       46  
 
               
Total allowances for credit losses (ACL) as % of:
               
Total loans and leases
    3.90 %     2.51 %
NALs
    120       53  
Nonperforming assets
    91       48  
NET CHARGE-OFFS (NCOs)
(This section should be read in conjunction with Significant Item 2.)
Table 37 reflects NCO detail for each of the last five quarters. Table 38 displays the Franklin-related impacts for each of the last five quarters.

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Table 37 — Quarterly Net Charge-off Analysis
                                         
    2010     2009  
(dollar amounts in thousands)   Second     First     Fourth     Third     Second  
Net charge-offs by loan and lease type
                                       
Commercial:
                                       
Commercial and industrial (1), (2)
  $ 58,128     $ 75,439     $ 109,816     $ 68,842     $ 98,300  
Construction
    45,562       34,426       85,345       50,359       31,360  
Commercial
    36,169       50,873       172,759       118,866       141,261  
 
                             
Commercial real estate
    81,731       85,299       258,104       169,225       172,621  
 
                             
Total commercial
    139,859       160,738       367,920       238,067       270,921  
 
                             
Consumer:
                                       
Automobile loans
    5,219       7,666       11,374       8,988       12,379  
Automobile leases
    217       865       1,554       1,753       2,227  
 
                             
Automobile loans and leases
    5,436       8,531       12,928       10,741       14,606  
Home equity (3)
    44,470       37,901       35,764       28,045       24,687  
Residential mortgage (4), (5)
    82,848       24,311       17,789       68,955       17,160  
Other loans
    6,615       7,000       10,346       10,134       7,033  
 
                             
Total consumer
    139,369       77,743       76,827       117,875       63,486  
 
                             
Total net charge-offs
  $ 279,228     $ 238,481     $ 444,747     $ 355,942     $ 334,407  
 
                             
 
                                       
Net charge-offs — annualized percentages
                                       
Commercial:
                                       
Commercial and industrial (1), (2)
    1.90 %     2.45 %     3.49 %     2.13 %     2.91 %
Construction
    14.25       9.77       20.68       11.14       6.45  
Commercial
    2.38       3.25       10.15       6.72       7.79  
 
                             
Commercial real estate
    4.44       4.44       12.21       7.62       7.51  
 
                             
Total commercial
    2.85       3.22       7.00       4.37       4.77  
 
                             
Consumer:
                                       
Automobile loans
    0.47       0.76       1.49       1.25       1.73  
Automobile leases
    0.54       1.58       2.25       2.04       2.11  
 
                             
Automobile loans and leases
    0.47       0.80       1.55       1.33       1.78  
Home equity (3)
    2.36       2.01       1.89       1.48       1.29  
Residential mortgage (4), (5)
    7.19       2.17       1.61       6.15       1.47  
Other loans
    3.81       3.87       5.47       5.36       4.03  
 
                             
Total consumer
    3.19       1.83       1.91       2.94       1.56  
 
                             
Net charge-offs as a % of average loans
    3.01 %     2.58 %     4.80 %     3.76 %     3.43 %
 
                             
     
(1)   The 2009 third quarter included net recoveries totaling $4,080 thousand associated with the 2009 Franklin restructuring.
 
(2)   The 2009 second quarter included net recoveries totaling $9,884 thousand associated with the 2009 Franklin restructuring.
 
(3)   The 2010 second quarter included net charge-offs totaling $14,678 thousand associated with the transfer of Franklin-related home equity loans to loans held for sale and $1,262 thousand of other Franklin-related net charge-offs.
 
(4)   The 2010 second quarter included net charge-offs totaling $60,822 thousand associated with the transfer of Franklin-related residential mortgage loans to loans held for sale and $3,403 thousand of other Franklin-related net charge-offs.
 
(5)   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 38 — Quarterly NCOs — Franklin-Related Impact
                                         
    2010     2009  
(dollar amounts in millions)   Second     First     Fourth     Third     Second  
Commercial and industrial net charge-offs (recoveries)
                                       
Franklin
  $ (0.2 )   $ (0.3 )   $ 0.1     $ (4.1 )   $ (9.9 )
Non-Franklin
    58.3       75.7       109.7       72.9       108.2  
 
                             
Total
  $ 58.1     $ 75.4     $ 109.8     $ 68.8     $ 98.3  
 
                             
Commercial and industrial net charge-offs — annualized percentages
                                       
Total
    1.90 %     2.45 %     3.49 %     2.13 %     2.91 %
Non-Franklin
    1.90       2.46       3.49       2.26       3.20  
 
                                       
Total commercial charge-offs (recoveries)
                                       
Franklin
  $ (0.2 )   $ (0.3 )   $ 0.1     $ (4.1 )   $ (9.9 )
Non-Franklin
    140.1       161.0       367.8       242.2       280.8  
 
                             
Total
  $ 139.9     $ 160.7     $ 367.9     $ 238.1     $ 270.9  
 
                             
Total commercial loan net charge-offs — annualized percentages
                                       
Total
    2.85 %     3.22 %     7.00 %     4.37 %     4.77 %
Non-Franklin
    2.86       3.22       7.00       4.44       4.94  
 
                                       
Total home equity loan charge-offs (recoveries)
                                       
Franklin
  $ 15.9     $ 3.7     $     $ (0.1 )   $ (0.1 )
Non-Franklin
    28.6       34.2       35.8       28.1       24.7  
 
                             
Total
  $ 44.5     $ 37.9     $ 35.8     $ 28.0     $ 24.6  
 
                             
Total home equity loan net charge-offs — annualized percentages
                                       
Total
    2.36 %     2.01 %     1.89 %     1.48 %     1.29 %
Non-Franklin
    1.53       1.83       1.91       1.50       1.30  
 
                                       
Total residential mortgage loan charge-offs (recoveries)
                                       
Franklin
  $ 64.2     $ 8.1     $ 1.1     $ 0.6     $ (0.1 )
Non-Franklin
    18.6       16.2       16.7       68.4       17.3  
 
                             
Total
  $ 82.8     $ 24.3     $ 17.8     $ 69.0     $ 17.2  
 
                             
Total residential mortgage loan net charge-offs — annualized percentages
                                       
Total
    7.19 %     2.17 %     1.61 %     6.15 %     1.47 %
Non-Franklin
    1.74       1.57       1.66       6.71       1.64  
 
                                       
Total consumer loan charge-offs (recoveries)
                                       
Franklin
  $ 80.2     $ 11.9     $ 1.1     $ 0.6     $ (0.2 )
Non-Franklin
    59.2       65.8       75.7       117.3       63.7  
 
                             
Total
  $ 139.4     $ 77.7     $ 76.8     $ 117.9     $ 63.5  
 
                             
Total consumer loan net charge-offs — annualized percentages
                                       
Total
    3.19 %     1.83 %     1.91 %     2.94 %     1.56 %
Non-Franklin
    1.39       1.59       1.94       3.01       1.61  
 
                                       
Total net charge-offs (recoveries)
                                       
Franklin
  $ 80.0     $ 11.5     $ 1.2     $ (3.5 )   $ (10.1 )
Non-Franklin
    <