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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 September 30, 2009
Commission File Number 1-34073
Huntington Bancshares Incorporated
     
Maryland   31-0724920
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  þ  Yes  o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o  Yes  o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.. See the definitions of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o
Non-accelerated filer o
(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 715,049,729 shares of Registrant’s common stock ($0.01 par value) outstanding on October 31, 2009.
 
 

 


 

Huntington Bancshares Incorporated
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  Exhibit 10.1
  Exhibit 10.4
  Exhibit 12.1
  Exhibit 12.2
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2

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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 financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in 1866, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services. Our banking offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial service activities are also conducted in other states including Private Financial Group (PFG) offices in Florida, 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 both the Cayman Islands and Hong Kong.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. This MD&A provides updates to the discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K). This MD&A should be read in conjunction with our 2008 Form 10-K as well as the financial statements, notes, and other information contained in this report.
Our discussion is divided into key segments:
    Introduction — Provides overview comments on important matters including risk factors, acquisitions, and other items. These are essential for understanding our performance and prospects.
 
    Discussion of Results of Operations — Reviews financial performance from a consolidated company perspective. It also includes a “Significant Items” section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.
 
    Risk Management and Capital — Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
 
    Business Segment Discussion — Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.
A reading of each section is important to understand fully the nature of our financial performance and prospects.
Forward-Looking Statements
This report, including this MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act.
Actual results could differ materially from those contained or implied by such statements for a variety of factors including: (1) deterioration in the loan portfolio could be worse than expected due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) changes in economic conditions; (3) movements in interest rates; (4) competitive pressures on product pricing and services; (5) success and timing of other business strategies; (6) the nature, extent, and timing of governmental actions and reforms, including existing and potential future restrictions and limitations imposed in connection with the Troubled Asset Relief Program’s (TARP) voluntary Capital Purchase Plan or otherwise under the Emergency Economic Stabilization Act of 2008; and (7) extended disruption of vital infrastructure.

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Additional factors that could cause results to differ materially from those described above can be found in our 2008 Form 10-K, and documents subsequently filed by us with the Securities and Exchange Commission (SEC). All forward-looking statements included in this filing are based on information available at the time of the filing. We assume no obligation to update any forward-looking statement.
Risk Factors
We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2) market risk , which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3) liquidity risk , which is the risk of loss due to the possibility that funds may not be available to satisfy current or future obligations resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues, and (4) operational risk , which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks.
More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2008 Form 10-K. Additional information regarding risk factors can also be found in the “Risk Management and Capital” discussion.
Update to Risk Factors
All of our loan portfolios, particularly our construction and commercial real estate (CRE) loans, may continue to be affected by the sustained economic weakness of our Midwest markets and the impact of higher unemployment rates . This may significantly adversely affect our business, financial condition, liquidity, capital, and results of operation.
As described in the “Credit Risk” discussion, credit quality performance continued to be under pressure during the first nine-month period of 2009, with nonaccrual loans and leases (NALs) and nonperforming assets (NPAs) both increasing at September 30, 2009, compared with December 31, 2008, and September 30, 2008. The allowance for credit losses (ACL) of $1,082.1 million at September 30, 2009, was 2.90% of period-end loans and leases and 50% of period-end NALs.
The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is mitigated through a combination of credit policies and processes, market risk management activities, and portfolio diversification. However, adverse changes in our borrowers’ ability to meet their financial obligations under agreed upon terms and, in some cases, to the value of the assets securing our loans to them may increase our credit risk. Our commercial portfolio, as well as our real estate-related portfolios, have continued to be negatively affected by the ongoing reduction in real estate values and reduced levels of sales and leasing activities. We regularly review the ACL for adequacy considering changes in economic conditions and trends, as well as loan collateral values. Our ACL reserving methodology uses individual loan portfolio performance factors based on an analysis of historical charge-off experience and migration patterns as part of the determination of ACL adequacy. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. There is no certainty that the ACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ACL is determined to not be adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.
Bank regulators periodically review our ACL and may require us to increase our provision for loan and lease losses or loan charge-offs. Any increase in our ACL or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and our financial condition.
In particular, an increase in our ACL could result in a reduction in the amount of our tangible common equity (TCE) and/or our Tier 1 common equity. Given the focus on these measurements, we may be required to raise additional capital through the issuance of common stock as a result of an increase in our ACL. The issuance of additional common stock or other actions could have a dilutive effect on the existing holders of our common stock, and adversely affect the market price of our common stock.

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Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity, or stock price.
Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to the U.S. Treasury Department’s CPP under the TARP announced in the fall of 2008 and the new Capital Assistance Program (CAP) announced in spring of 2009, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, has imposed a number of restrictions and limitations on the operations of financial services firms participating in the federal programs.
These programs subject us, and other financial institutions, that participate in them to additional restrictions, oversight, and costs that may have an adverse impact on our business, financial condition, results of operations, or the price of our common stock. In addition, new proposals for legislation continue to be introduced in the U.S. Congress that could further increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including as related to compensation, interest rates, the impact of bankruptcy proceedings on consumer real property mortgages, and otherwise. Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation, or its application. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, negatively impact the recoverability of certain of our recorded assets, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner.
Recent legislative proposals in Congress and regulatory proposals at the Federal Reserve could impact how we assess fees on deposit accounts for items and transactions that either overdraw an account or that are returned for nonsufficient funds. These proposals are in the discussion phase and remain subject to significant modification and revision prior to becoming final, and it is uncertain what changes, if any, will be adopted. As such, we cannot predict the impact of these proposals to us, or whether they could have a material and adverse effect on our results of operations.
If the Federal Deposit Insurance Corporation (FDIC) permits the Transaction Account Guarantee Program (TAGP) to expire as scheduled on June 30, 2010, our customers may choose to reduce their deposits with us. This could reduce our retail and commercial deposits, our primary source of funding for the Bank.
We have elected to participate in the TAGP, a voluntary program provided by the FDIC as part of its Temporary Liquidity Guarantee Program (TLGP), that is currently scheduled to expire on June 30, 2010. Under the program, all noninterest bearing transaction deposit accounts are fully guaranteed by the FDIC for the entire amount in the account providing our customers with extra deposit insurance coverage. The coverage under the TAGP is in addition to and separate from the $250,000 coverage available under the FDIC’s general deposit insurance rules. If the FDIC permits the program to expire as scheduled, our customers may choose to reduce their deposits with us in an effort to maintain deposit insurance coverage. This could reduce our retail and commercial core deposits, our primary source of funding for the Bank.

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At September 30, 2009, noninterest bearing transaction account balances exceeding $250,000 totaled $2.0 billion. This $2.0 billion represents the amount of noninterest bearing transaction customer deposits that would not have been FDIC insured without the additional coverage provided by the TAGP.
We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.
During the first nine-month period of 2009, we issued 346.8 million shares of additional common stock through two common stock public offerings, three discretionary equity issuance programs, and conversions of preferred stock into common stock. The issuance of these additional shares of common stock resulted in a 95% increase of outstanding shares of common stock at September 30, 2009, compared with December 31, 2008, and those additional shares were significantly dilutive to existing common shareholders. (See the “Capital” section located within the “Risk Management and Capital” section for additional information). As of September 30, 2009, we had 128.2 million of additional authorized common shares available for issuance, and 4.7 million of additional authorized preferred shares available for issuance.
We are not restricted from issuing additional authorized shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. We continually evaluate opportunities to access capital markets taking into account our regulatory capital ratios, financial condition, and other relevant considerations, and anticipate that, subject to market conditions, we are likely to take further capital actions. Such actions, with regulatory approval when required, may include opportunistically retiring our outstanding securities, including our subordinated debt, trust-preferred securities, and preferred shares, in open market transactions, privately negotiated transactions, or public offers for cash or common shares, as well as issuing additional shares of common stock in public or private transactions in order to increase our capital levels above our already “well-capitalized” levels, as defined by the federal bank regulatory agencies, and other regulatory capital targets. On October 22, 2009, we announced an offer to purchase certain subordinated notes issued previously by the Bank. The offer established the cash prices that we would pay for each of the subordinated note issuances, and established a maximum amount that we would purchase of $400 million of principal outstanding (see “Bank Liquidity and Other Sources of Liquidity” discussion located within the “Risk Management and Capital” section).
Both Huntington and the Bank are highly regulated, and we, as well as our regulators, continue to regularly perform a variety of capital analyses, including the preparation of stress case scenarios. As a result of those assessments, we could determine, or our regulators could require us, to raise additional capital in the future. Any such capital raise could include, among other things, the potential issuance of additional common equity to the public, the potential issuance of common equity to the government under the CAP, or the additional conversions of our existing Series B Preferred Stock to common equity. There could also be market perceptions that we need to raise additional capital, and regardless of the outcome of any stress test or other stress case analysis, such perceptions could have an adverse effect on the price of our common stock.
Furthermore, in order to improve our capital ratios above our already “well-capitalized” levels, we can decrease the amount of our risk-weighted assets, increase capital, or a combination of both. If it is determined that additional capital is required in order to improve or maintain our capital ratios, we may accomplish this through the issuance of additional common stock.
The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities, could be substantially dilutive to existing common shareholders. Shareholders of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to existing shareholders. The market price of our common stock could decline as a result of sales of shares of our common stock or securities convertible into or exchangeable for common stock in anticipation of such sales.
We are subject to ongoing tax examinations in various jurisdictions. The Internal Revenue Service and other taxing jurisdictions may propose various adjustments to our previously filed tax returns. It is possible that the ultimate resolution of such proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs.

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The calculation of our provision for federal and state and local income taxes is complex and requires the use of estimates and judgments. We have two accruals for income taxes: our federal income tax receivable represents the estimated amount currently due from the federal government, net of any reserve for potential audit issues, and is reported as a component of “accrued income and other assets” and state and local tax reserves for potential audit issues are reported as a component of “other liabilities” in our consolidated balance sheet; our deferred federal and state and local income tax asset or liability represents the estimated impact of temporary differences between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities are recognized under federal and state and local tax law.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.
From time to time, we engage in business transactions that may have an effect on our tax liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position. However, changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial, and regulatory guidance. Such changes could affect the amount of our accrued taxes and could be material to our financial position and/or results of operations.
During the 2009 second quarter, the State of Ohio completed the audit of our 2001, 2002, and 2003 corporate franchise tax returns. During 2008, the Internal Revenue Service (IRS) completed the audit of our consolidated federal income tax returns for tax years 2004 and 2005. In addition, we are subject to ongoing tax examinations in various other state and local jurisdictions. Both the IRS and various state tax officials 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 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.
Furthermore, we still face risk relating to the Franklin Credit Management Corporation (Franklin) relationship not withstanding the restructuring announced on March 31, 2009. The Franklin restructuring resulted in a $159.9 million net deferred tax asset equal to the amount of income and equity that was included in our operating results for the 2009 first quarter. While we believe that our position regarding the deferred tax asset and related income recognition is correct, that position could be subject to challenge.
Recent Accounting Pronouncements and Developments
Note 3 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2009 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent that we believe the adoption of new accounting standards will materially affect our financial condition, results of operations, or liquidity, the impacts or potential impacts are discussed in the applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Consolidated Financial Statements included in our 2008 Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary to understand and evaluate our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period.

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Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed in our 2008 Form 10-K.
The following discussion provides updates of our accounting estimates related to the fair value measurements with regard to our ACL, deferred tax assets, investment securities portfolio, goodwill, Franklin loans, our commercial loan portfolio, and other real estate owned (OREO).
Total Allowances for Credit Losses (ACL)
The ACL is the sum of the ALLL and the allowance for unfunded loan commitments and letters of credit (AULC), and represents the estimate of the level of reserves appropriate to absorb inherent credit losses. The amount of the ACL was determined by judgments regarding the quality of each individual loan portfolio and loan commitments. All known relevant internal and external factors that affected loan collectibility were considered, including analysis of historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. We believe the process for determining the ACL considers all of the potential factors that could result in credit losses. However, the process includes judgmental and quantitative elements that may be subject to significant change. There is no certainty that the ACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. To the extent actual outcomes differ from our estimates, the credit quality of our customer base materially decreases, the risk profile of a market, industry, or group of customers changes materially, or if the ACL is determined to not be adequate, additional provision for credit losses could be required, which could adversely affect our business, financial condition, liquidity, capital, and results of operations in future periods.
The ACL of $1,082.1 million at September 30, 2009, was 2.90% of period-end loans and leases. To illustrate the potential effect on the financial statements of our estimates of the ACL, a 10 basis point, or 3%, increase would have required $37.0 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted the net income of the first nine-month period of 2009 by approximately $24.1 million, or $0.05 per common share. The ACL of $1,082.1 million at September 30, 2009, represented a 15% increase from $944.4 million at December 31, 2008.
Deferred Tax Assets
At September 30, 2009, we had a net deferred tax asset of $297.1 million. Based on our ability to offset approximately two-thirds of the net deferred tax asset against taxable income in prior carryback years and level of our forecast of future taxable income, there was no impairment of the deferred tax asset at September 30, 2009. All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized. However, our forecast process includes judgmental and quantitative elements that may be subject to significant change. If our forecast of taxable income within the carryback/carryforward periods available under applicable law is not sufficient to cover the amount of net deferred tax assets, such assets may be impaired.
Securities and Other-Than-Temporary Impairment (OTTI)
(This section should be read in conjunction with the “Investment Securities Portfolio” discussion.)
Effective with the 2009 second quarter, we adopted new guidance from the Financial Accounting Standards Board (FASB) that impacts estimates and assumptions utilized by us in determining the fair values of securities. FASB’s update to Accounting Standards Codification (ASC) 820, “Fair Value Measurements”, reaffirms the exit price fair value measurement guidance and also provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. FASB’s changes to ASC 320, “Investments — Debt and Equity Securities”, amended the other-than-temporary impairment (OTTI) guidance in GAAP for debt securities.
We recognize OTTI through earnings on those debt securities that: (a) have a fair value less than book value, and (b) we intend to sell (or we cannot assert that it is more likely than not that we will not have to sell before recovery). The amount of OTTI recognized is the difference between the fair value and book value of the securities.

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If we do not intend to sell a debt security, but it is probable that we will not collect all amounts due according to the debt’s contractual terms, we separate the impairment into credit and noncredit components. The credit component of the impairment, measured as the difference between amortized cost and the present value of expected cash flows discounted at the security’s effective interest rate, is recognized in earnings. The noncredit component is recognized in other comprehensive income (OCI), separately from other unrealized gains and losses on available-for-sale securities.
The new guidance required an after-tax adjustment at the beginning of the 2009 second quarter of $3.5 million to increase retained earnings, with an equal and offsetting adjustment to OCI, that was recorded to reclassify noncredit related impairment to OCI for previously impaired securities. The adjustment was applicable only to noncredit OTTI relating to the debt securities that we do not have the intent to sell. Noncredit OTTI losses related to debt securities that we intend to sell (or for which we cannot assert that it is more likely than not that we will not have to sell the securities before recovery) were not reclassified.
OTTI ANALYSIS ON CERTAIN SECURITIES PORTFOLIOS
Our three highest risk segments of our investment portfolio are the Alt-A mortgage backed, pooled-trust-preferred, and private-label collateralized mortgage obligation (CMO) portfolios. The Alt-A mortgage backed securities and pooled-trust-preferred securities are located within the asset-backed securities portfolio. The performance of the underlying securities in each of these segments continued to reflect the weakened economic environment. The Alt-A and CMO securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of our pooled-trust-preferred securities portfolio are reviewed quarterly in support of our impairment analysis. These reviews are supported with analysis from independent third parties. These three segments, and the results of our impairment analysis for each segment, are discussed in further detail below:
Alt-A mortgage-backed and private-label collateralized mortgage obligation (CMO) securities represent securities collateralized by first-lien residential mortgage loans. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within these portfolios as Level 3 in the fair value hierarchy. The securities were priced with the assistance of an outside third-party specialist using a discounted cash flow approach and the independent third-party’s proprietary pricing model. The model used inputs such as estimated prepayment speeds, losses, recoveries, default rates that were implied by the underlying performance of collateral in the structure or similar structures, discount rates that were implied by market prices for similar securities, collateral structure types, and house price depreciation/appreciation rates that were based upon macroeconomic forecasts.
We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if the securities in these portfolios were other-than-temporarily impaired. We used the analysis to determine whether we believed it is probable that all contractual cash flows would not be collected. All securities in these portfolios remained current with respect to interest and principal at September 30, 2009.
Our analysis indicated, as of September 30, 2009, a total of 8 Alt-A mortgage-backed securities and 6 private-label CMO securities could experience a loss of principal in the future. The future expected losses of principal on these other-than-temporarily impaired securities ranged from 0.06% to 83.23% of their par value. These losses were projected to occur beginning anywhere from 5 months to as many as 17 years in the future. We measured the amount of credit impairment on these securities using the cash flows discounted at each security’s effective rate. As a result, in the 2009 third quarter, we recorded $2.3 million of credit OTTI in our Alt-A mortgage-backed securities portfolio and $1.7 million of credit OTTI in our private-label CMO securities portfolio.
Pooled-trust-preferred securities represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within this portfolio as Level 3 in the fair value hierarchy. The collateral generally consisted of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis was used to estimate fair values and assess impairment for each security within this portfolio. Impairment was calculated as the difference between the carrying amount and the amount of cash flows discounted at each security’s effective rate. We engaged a third party specialist with direct industry experience in pooled-trust-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. Relying on cash flows was necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities were no longer able to provide a fair value that was compliant with ASC-820, “Fair Value Measurements and Disclosures” .

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The analysis was completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in each security and terms of each security’s structure. The credit review included analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using the most recently available financial and regulatory information for each underlying collateral issuer. We also reviewed historical industry default data and current/near term operating conditions. Using the results of our analysis, we estimated appropriate default and recovery probabilities for each piece of collateral and then estimated the expected cash flows for each security. No recoveries were assumed on issuers who are in default. The recovery assumptions on issuers who are deferring interest ranged from 10% to 55% with a cure assumed after the maximum deferral period. As a result of this testing, we believe we will experience a loss of principal or interest on 11 securities; and as such, recorded credit OTTI of $14.6 million for 3 newly impaired and 8 previously impaired pooled-trust-preferred securities in the 2009 third quarter.
Please refer to the “Investment Securities Portfolio” discussion for additional information regarding OTTI.
Goodwill
Goodwill is tested for impairment annually, as of October 1, using a two-step process that begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis, using the same two-step process as the annual testing, if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We had previously performed goodwill impairment tests at June 30, October 1, and December 31, 2008, and concluded no impairment existed at those dates. During the 2009 first quarter, our stock price declined 78%, from $7.66 per common share at December 31, 2008, to $1.66 per common share at March 31, 2009. Many peer banks also experienced similar significant declines in market capitalization. This decline primarily reflected the continuing economic slowdown and increased market concern surrounding financial institutions’ credit risks and capital positions, as well as uncertainty related to increased regulatory supervision and intervention. We determined that these changes would more-likely-than-not reduce the fair value of certain reporting units below their carrying amounts. Therefore, we performed an interim goodwill impairment test during the 2009 first quarter. An independent third party was engaged to assist with the impairment assessment.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. The assumptions used in the goodwill impairment assessment and the application of these estimates and assumptions are discussed below.
2009 FIRST QUARTER IMPAIRMENT TESTING
The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. For our impairment testing conducted during the 2009 first quarter, we identified four reporting units: Regional Banking, PFG, Insurance, and Auto Finance and Dealer Services (AFDS).
    Although Insurance is included within PFG for business segment reporting, it was evaluated as a separate reporting unit for goodwill impairment testing because it has its own separately allocated goodwill resulting from prior acquisitions. The fair value of PFG (determined using the market approach as described below), excluding Insurance, exceeded its carrying value, and goodwill was determined to not be impaired for this reporting unit.
 
    There was no goodwill associated with AFDS and, therefore, it was not subject to impairment testing.

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For Regional Banking, we utilized both the income and market approaches to determine fair value. The income approach was based on discounted cash flows derived from assumptions of balance sheet and income statement activity. An internal forecast was developed by considering several long-term key business drivers such as anticipated loan and deposit growth. The long-term growth rate used in determining the terminal value was estimated at 2.5%. The discount rate of 14% was estimated based on the Capital Asset Pricing Model, which considered the risk-free interest rate (20-year Treasury Bonds), market risk premium, equity risk premium, and a company-specific risk factor. The company-specific risk factor was used to address the uncertainty of growth estimates and earnings projections of management. For the market approach, revenue, earnings and market capitalization multiples of comparable public companies were selected and applied to the Regional Banking unit’s applicable metrics such as book and tangible book values. A 20% control premium was used in the market approach. The results of the income and market approaches were weighted 75% and 25%, respectively, to arrive at the final calculation of fair value. As market capitalization declined across the banking industry, we believed that a heavier weighting on the income approach is more representative of a market participant’s view. For the Insurance reporting unit, management utilized a market approach to determine fair value. The aggregate fair market values were compared with market capitalization as an assessment of the appropriateness of the fair value measurements. As our stock price fluctuated greatly, we used our average stock price for the 30 days preceding the valuation date to determine market capitalization. The aggregate fair market values of the reporting units compared with market capitalization indicated an implied premium of 27%. A control premium analysis indicated that the implied premium was within range of overall premiums observed in the market place. Neither the Regional Banking nor Insurance reporting units passed Step 1.
The second step (Step 2) of impairment testing is necessary only if the reporting unit does not pass Step 1. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.
To determine the implied fair value of goodwill, the fair value of Regional Banking and Insurance (as determined in Step 1) was allocated to all assets and liabilities of the reporting units including any recognized or unrecognized intangible assets. The allocation was done as if the reporting unit was acquired in a business combination, and the fair value of the reporting unit was the price paid to acquire the reporting unit. This allocation process is only performed for purposes of testing goodwill for impairment. The carrying values of recognized assets or liabilities (other than goodwill, as appropriate) were not adjusted nor were any new intangible assets recorded. Key valuations were the assessment of core deposit intangibles, the mark-to-fair-value of outstanding debt and deposits, and mark-to-fair-value on the loan portfolio. Core deposits were valued using a 15% discount rate. The marks on our outstanding debt and deposits were based upon observable trades or modeled prices using current yield curves and market spreads. The valuation of the loan portfolio indicated discounts in the ranges of 9%-24%, depending upon the loan type. For every 100 basis point change in the valuation of our overall loan portfolio, implied goodwill would be impacted by approximately $325 million. The estimated fair value of these loan portfolios was based on an exit price, and the assumptions used were intended to approximate those that a market participant would have used in valuing the loans in an orderly transaction, including a market liquidity discount. The significant market risk premium that is a consequence of the current distressed market conditions was a significant contributor to the valuation discounts associated with these loans. We believed these discounts were consistent with transactions currently occurring in the marketplace.
Upon completion of Step 2, we determined that the Regional Banking and Insurance reporting units’ goodwill carrying values exceeded their implied fair values of goodwill by $2,573.8 million and $28.9 million, respectively. As a result, we recorded a noncash pretax impairment charge of $2,602.7 million, or $7.09 per common share, in the 2009 first quarter. The impairment charge was included in noninterest expense and did not affect our regulatory and tangible capital ratios.
2009 SECOND QUARTER AND 2009 THIRD QUARTER IMPAIRMENT TESTING
While we recorded an impairment charge of $4.2 million in the 2009 second quarter related to the sale of a small payments-related business completed in July 2009, we concluded that no other goodwill impairment was required during either the 2009 second quarter or the 2009 third quarter.
Subsequent to the 2009 first quarter impairment testing, we reorganized our Regional Banking segment to reflect how our assets and operations are now managed. The Regional Banking business segment, which through March 31, 2009, had been managed geographically, is now managed by a product segment approach. Essentially, Regional Banking has been divided into the new segments of Retail and Business Banking, Commercial Banking, and Commercial Real Estate.

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Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future. If our market capitalization decreases or the liquidity discount on our loan portfolio improves significantly without a concurrent increase in market capitalization, we may be required to record additional goodwill impairment losses in future periods, whether in connection with our next annual impairment testing in the 2009 third quarter or prior to that, if any changes constitute a triggering event. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material. However, any such future impairment loss would be limited as the remaining goodwill balance was only $0.4 billion at September 30, 2009.
Franklin Loans Restructuring Transaction
(This section should be read in conjunction with Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements).
Franklin is a specialty consumer finance company primarily engaged in servicing performing, reperforming, and nonperforming residential mortgage loans. Prior to March 31, 2009, Franklin owned a portfolio of loans secured by first- and second-liens on 1-4 family residential properties. These loans generally fell outside the underwriting standards of the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”), and involve elevated credit risk as a result of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt, and/or past credit difficulties (“nonprime loans”). At December 31, 2008, our total loans outstanding to Franklin were $650.2 million, all of which were placed on nonaccrual status. Additionally, the specific allowance for loan and lease losses for the Franklin portfolio was $130.0 million, resulting in our net exposure to Franklin at December 31, 2008, of $520.2 million.
On March 31, 2009, we entered into a transaction with Franklin whereby a Huntington wholly-owned REIT subsidiary (REIT) indirectly acquired an 83% ownership right in a trust which holds all the underlying consumer loans and OREO properties that were formerly collateral for the Franklin commercial loans. The equity interests provided to Franklin by the REIT were pledged by Franklin as collateral for the Franklin commercial loans.
As a result of the restructuring, on a consolidated basis, the $650.2 million nonaccrual commercial loan to Franklin at December 31, 2008, is no longer reported. Instead, we now report the loans secured by first- and second- mortgages on residential properties and OREO properties both of which had previously been assets of Franklin or its subsidiaries and were pledged to secure our loan to Franklin. At the time of the restructuring, these loans had a fair value of $493.6 million and the OREO properties had a fair value of $79.6 million. As a result, NALs declined by a net amount of $284.1 million as there were $650.2 million commercial NALs outstanding related to Franklin, and $366.1 million mortgage-related NALs outstanding, representing first- and second- lien mortgages that were nonaccruing at March 31, 2009. Also, our specific allowance for loan and lease losses for the Franklin portfolio of $130.0 million was eliminated; however, no initial increase to the allowance for loan and lease losses (ALLL) relating to the acquired mortgages was recorded as these assets were recorded at fair value.
In accordance with ASC 805, “Business Combinations”, we recorded a net deferred tax asset of $159.9 million related to the difference between the tax basis and the book basis in the acquired assets. Because the acquisition price, represented by the equity interests in our wholly-owned subsidiary, was equal to the fair value of the acquired 83% ownership right, no goodwill was created from the transaction. The recording of the net deferred tax asset was a bargain purchase under Statement No. 141R, and was recorded as a tax benefit in the 2009 first quarter.
Commercial Loans
Commercial loans, including CRE loans, are evaluated periodically for impairment. Impairment guidance in ASC 310-10-35, “Receivables — Subsequent Measurement”, requires an allowance to be established as a component of the ALLL when, based upon current information and events, it is probable that all amounts due according to the contractual terms of the loan or lease will not be collected. The amount of the impairment is measured using the present value of expected future cash flows discounted at the loan’s or lease’s effective interest rate, or, as a practical expedient, the observable market price of the loan or lease, or, the fair value of the collateral if the loan or lease is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. Interest income is recognized on impaired loans using a cost recovery method unless the receipt of principal and interest as they become contractually due is not in doubt, such as in a troubled debt restructuring (TDR). TDRs of impaired loans that continue to perform under the restructured terms continue to accrue interest. This process of determining impairment includes judgmental and quantitative elements that may be subject to significant change. To the extent actual outcomes differ from our estimates, additional provision for credit losses could be required in order to increase the ALLL, which could adversely affect earnings or financial performance in future periods. At September 30, 2009, $1.4 billion, or 7%, of our $21.3 billion commercial loan portfolio was considered impaired. Additionally, at September 30, 2009, $818.6 million, or 79%, of our ALLL was allocated to our commercial loan portfolio, compared with 82% at December 31, 2008.

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Other Real Estate Owned (OREO)
OREO obtained in satisfaction of a loan is recorded at its estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the ALLL. Subsequent declines in value are reported as adjustments to the carrying amount, and are charged to noninterest expense. Gains or losses not previously recognized resulting from the sale of OREO are recognized in noninterest expense on the date of sale. At September 30, 2009, OREO totaled $142.6 million, representing a 16% increase compared with $122.5 million at December 31, 2008.

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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 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.
The below summary provides an update of key events and trends during the current quarter. Comparisons are made with the prior quarter, as we believe this comparison provides the most meaningful measurement relative to analyzing trends.
Summary
We reported a net loss of $166.2 million in the 2009 third quarter, representing a loss per common share of $0.33. This compared with the prior quarter’s net loss of $125.1 million, or $0.40 per common share. The loss per common share was impacted in both the current and prior quarters by the issuance of additional shares in both periods (see “Capital” discussion) . Comparisons with the prior quarter were also impacted by other factors that are discussed later in the “Significant Items” section (see “Significant Items” discussion).
The largest contributor to our 2009 third quarter net loss was provision for credit losses of $475.1 million, representing a $61.4 million, or 15%, increase from the prior quarter. This increase resulted from necessary reserve building due to the continued stress on our loan portfolios, especially our commercial real estate (CRE) portfolio, as well as credit actions taken by us during the current quarter that are discussed in the following two paragraphs.
During the 2009 third quarter, we continued to be proactive in our approach in identifying and classifying emerging problem credits. In many cases, commercial loans were placed on nonaccrual status even though the loan was less than 30 days past due for both principal and interest payments. This significantly impacted the inflow of commercial loan NALs for the quarter. Of the commercial loans placed on nonaccrual status in the current quarter, over 55% were less than 30 days past due. Of the period end $1,746.4 million of commercial and industrial (C&I) and CRE -related NALs, approximately 36% were less than 30 days past due. We believe these decisions increase our options for working these loans toward timelier resolutions.
Also during the current quarter, we took specific credit actions related to our residential mortgage portfolio. These actions included taking a more conservative position regarding the timing of loss recognition, continued active loss mitigation and troubled debt restructuring efforts, as well as the sale of some underperforming loans. These actions resulted in significantly higher residential mortgage charge-offs during the current quarter. The timing of loss recognition was a change made to better align our portfolio management strategies with the market dynamics in our regions. We believed that the economics surrounding the portfolio sale of the underperforming loans were favorable for us. We will continue to evaluate this type of transaction in future periods based on market conditions.
Credit quality performance in the 2009 third quarter continued to be negatively impacted by the sustained economic weaknesses in our Midwest markets. The continued trend of higher unemployment rates in our markets negatively impacted consumer loan credit quality. Net charge-offs (NCOs) totaled $355.9 million, and were partially impacted by the residential mortgage credit actions discussed previously. C&I NCOs improved substantially compared with the prior quarter; however, there continued to be concern regarding the impact of the economic conditions on our commercial borrowers. CRE NCOs declined slightly, yet that loan portfolio segment remained the most stressed portfolio. The majority of the CRE NCOs were experienced in the single family home builder and retail projects portfolios. These two portfolios continue to be our highest risk segments, and we continued to work with these borrowers in resolving challenging credit issues. NPAs also increased, primarily within the commercial loan portfolio, reflecting the impact of the weak economic conditions in our markets as well as the impact of the credit actions previously discussed. For the remainder of 2009, we expect that the overall level of NPAs and NCOs will remain elevated, especially as related to continued softness in our C&I and CRE portfolios. However, all consumer loan portfolios showed improved early stage delinquency levels compared with the prior quarter.
As we have done throughout 2009, we took additional proactive steps during the current quarter to increase our capital position as we executed total additions of $587.3 million to Tier 1 common equity. This capital raising was accomplished through a discretionary equity issuance and a common stock offering. These actions strengthened all of our period-end capital ratios. Our TCE ratio increased to 6.46% from 5.68%, and our Tier 1 common equity ratio increased to 7.82% from 6.80%. We believe that we have sufficient capital to withstand a stressed economic scenario.

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Our period-end liquidity position remained strong as average core deposits grew at a 10% annualized rate, thus reducing our reliance on noncore funding. As of September 30, 2009, our total cash and due from banks totaled $1.9 billion. Also, our unpledged investment securities increased $2.2 billion from the end of the prior quarter.
Fully-taxable equivalent net interest income in the 2009 third quarter increased $15.9 million, or 5%, compared with the prior quarter. The increase reflected a 10 basis point improvement in our net interest margin. The margin improvement reflected the favorable impacts of our improved loan pricing and deposit mix, partially offset by the negative impact of maintaining a higher liquidity position and the higher levels of NPAs. We expect that the net interest margin for the 2009 fourth quarter will be flat or improve slightly from the 2009 third quarter level. We expect that average total loans will continue to decline modestly, reflecting the impacts of our efforts to reduce our CRE exposure, the weak economy, and charge-offs. As previously mentioned, average core deposits grew at an annualized 10% rate, despite the competitive market. Deposit growth continues to be a strategic priority for us. Also, on October 2, 2009, we acquired approximately $400 million of deposits from Warren Bank in an FDIC-related transaction.
Noninterest income in the 2009 third quarter declined $9.9 million compared with the 2009 second quarter. The following table reflects the impacts of “Significant Items” to noninterest income (see “Significant Items”) .
Table 1 — Noninterest Income — Significant Items Impact — 2009 Third Quarter vs. 2009 Second Quarter
                         
    Third     Second        
    Quarter     Quarter        
(in thousands)   2009     2009     Change  
Total noninterest income
  $ 256,052     $ 265,945     $ (9,893 )
 
                       
Significant Items:
                       
Gain related to Visa ® stock
          31,362       (31,362 )
 
                 
 
                       
Total noninterest income, excluding Significant Items
  $ 256,052     $ 234,583     $ 21,469  
 
                 
As shown in the table above, after adjusting for “Significant Items”, noninterest income increased $21.5 million. This increase primarily reflected a $22.8 million gain in the current quarter representing the change in fair value of our derivatives that did not qualify for hedge accounting. Overall, noninterest income performance was mixed for the quarter. Service charges on deposit accounts and electronic banking income showed strong increases, while mortgage banking income declined. Services charges on deposits accounts increased $5.5 million, or 7%, reflecting the growth in demand deposits, and electronic banking income increased $3.5 million, or 14%, including additional third-party processing fees. Mortgage banking income declined $9.4 million, or 30%, largely reflecting a 37% decline in loan originations. We expect that fee income will likely continue to be mixed for the remainder of 2009.
The following table reflects the impacts of “Significant Items” to noninterest expense (see “Significant Items”).
Table 2 — Noninterest Expense — Significant Items Impact — 2009 Third Quarter vs. 2009 Second Quarter
                         
    Third     Second        
    Quarter     Quarter        
(in thousands)   2009     2009     Change  
Total noninterest expense
  $ 401,097     $ 339,982     $ 61,115  
 
                       
Significant Items:
                       
Goodwill impairment
          4,231       (4,231 )
FDIC special assessment
          23,555       (23,555 )
Gain on redemption of junior subordinated debt
          (67,409 )     67,409  
 
                 
 
                       
Total noninterest expense, excluding Significant Items
  $ 401,097     $ 379,605     $ 21,492  
 
                 

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As shown in the table above, after adjusting for “Significant Items” (see “Significant Items”) , noninterest expense increased $21.5 million. This increase included a $12.4 million increase in OREO and foreclosure expense, representing higher levels of problem assets, as well as loss mitigation activities. We expect expenses to be well controlled for the remainder of 2009.

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Table 3 — Selected Quarterly Income Statement Data (1)
                                         
    2009     2008  
(in thousands, except per share amounts)   Third     Second     First     Fourth     Third  
Interest income
  $ 553,846     $ 563,004     $ 569,957     $ 662,508     $ 685,728  
Interest expense
    191,027       213,105       232,452       286,143       297,092  
 
                             
Net interest income
    362,819       349,899       337,505       376,365       388,636  
Provision for credit losses
    475,136       413,707       291,837       722,608       125,392  
 
                             
Net interest (loss) income after provision for credit losses
    (112,317 )     (63,808 )     45,668       (346,243 )     263,244  
 
                             
Service charges on deposit accounts
    80,811       75,353       69,878       75,247       80,508  
Brokerage and insurance income
    33,996       32,052       39,948       31,233       34,309  
Trust services
    25,832       25,722       24,810       27,811       30,952  
Electronic banking
    28,017       24,479       22,482       22,838       23,446  
Bank owned life insurance income
    13,639       14,266       12,912       13,577       13,318  
Automobile operating lease income
    12,795       13,116       13,228       13,170       11,492  
Mortgage banking income (loss)
    21,435       30,827       35,418       (6,747 )     10,302  
Securities (losses) gains
    (2,374 )     (7,340 )     2,067       (127,082 )     (73,790 )
Other income
    41,901       57,470       18,359       17,052       37,320  
 
                             
Total noninterest income
    256,052       265,945       239,102       67,099       167,857  
 
                             
Personnel costs
    172,152       171,735       175,932       196,785       184,827  
Outside data processing and other services
    37,999       39,266       32,432       31,230       32,386  
Net occupancy
    25,382       24,430       29,188       22,999       25,215  
OREO and foreclosure expense
    38,968       26,524       9,887       8,171       9,113  
Equipment
    20,967       21,286       20,410       22,329       22,102  
Amortization of intangibles
    16,995       17,117       17,135       19,187       19,463  
Professional services
    18,108       16,658       16,454       16,430       12,234  
Marketing
    8,259       7,491       8,225       9,357       7,049  
Automobile operating lease expense
    10,589       11,400       10,931       10,483       9,093  
Telecommunications
    5,902       6,088       5,890       5,892       6,007  
Printing and supplies
    3,950       4,151       3,572       4,175       4,316  
Goodwill impairment
          4,231       2,602,713              
Other expense
    41,826       (10,395 )     37,000       43,056       7,191  
 
                             
Total noninterest expense
    401,097       339,982       2,969,769       390,094       338,996  
 
                             
(Loss) Income before income taxes
    (257,362 )     (137,845 )     (2,684,999 )     (669,238 )     92,105  
(Benefit) Provision for income taxes
    (91,172 )     (12,750 )     (251,792 )     (251,949 )     17,042  
 
                             
Net (loss) income
  $ (166,190 )   $ (125,095 )   $ (2,433,207 )   $ (417,289 )   $ 75,063  
 
                             
Dividends on preferred shares
    29,223       57,451       58,793       23,158       12,091  
 
                             
Net (loss) income applicable to common shares
  $ (195,413 )   $ (182,546 )   $ (2,492,000 )   $ (440,447 )   $ 62,972  
 
                             
Average common shares — basic
    589,708       459,246       366,919       366,054       366,124  
Average common shares — diluted (2)
    589,708       459,246       366,919       366,054       367,361  
 
                                       
Per common share
                                       
 
Net (loss) income — basic
  $ (0.33 )   $ (0.40 )   $ (6.79 )   $ (1.20 )   $ 0.17  
Net (loss) income — diluted
    (0.33 )   $ (0.40 )   $ (6.79 )   $ (1.20 )   $ 0.17  
Cash dividends declared
    0.0100       0.0100       0.0100       0.1325       0.1325  
 
                                       
Return on average total assets
    (1.28 )%     (0.97 )%     (18.22 )     (3.04 )%     0.55 %
Return on average total shareholders’ equity
    (12.5 )     (10.2 )     N.M.       (23.6 )     4.7  
Return on average tangible shareholders’ equity (3)
    (13.3 )     (10.3 )     18.4       (43.2 )     11.6  
Net interest margin (4)
    3.20       3.10       2.97       3.18       3.29  
Efficiency ratio (5)
    61.4       51.0       60.5       64.6       50.3  
Effective tax rate (benefit)
    (35.4 )     (9.2 )     (9.4 )     (37.6 )     18.5  
 
                                       
Revenue — fully taxable equivalent (FTE)
                                       
Net interest income
  $ 362,819     $ 349,899     $ 337,505     $ 376,365     $ 388,636  
FTE adjustment
    4,177       1,216       3,582       3,641       5,451  
 
                             
Net interest income (4)
    366,996       351,115       341,087       380,006       394,087  
Noninterest income
    256,052       265,945       239,102       67,099       167,857  
 
                             
Total revenue (4)
  $ 623,048     $ 617,060     $ 580,189     $ 447,105     $ 561,944  
 
                             
N.M., not a meaningful value.
     
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items”.
 
(2)   For all the quarterly 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 would have been higher than basic earnings per common share (anti-dilutive) for the periods.
 
(3)   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 stockholders’ 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.
 
(4)   On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)   Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).

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Table 4 — Selected Year to Date Income Statement Data (1)
                                 
    Nine Months Ended September 30,     Change  
(in thousands, except per share amounts)   2009     2008     Amount     Percent  
Interest income
  $ 1,686,807     $ 2,135,814     $ (449,007 )     (21 )%
Interest expense
    636,584       980,488       (343,904 )     (35 )
 
                       
Net interest income
    1,050,223       1,155,326       (105,103 )     (9 )
Provision for credit losses
    1,180,680       334,855       845,825       N.M.  
 
                       
Net interest (loss) income after provision for credit losses
    (130,457 )     820,471       (950,928 )     N.M.  
 
                       
Service charges on deposit accounts
    226,042       232,806       (6,764 )     (3 )
Brokerage and insurance income
    105,996       106,563       (567 )     (1 )
Trust services
    76,364       98,169       (21,805 )     (22 )
Electronic Banking
    74,978       67,429       7,549       11  
Bank owned life insurance income
    40,817       41,199       (382 )     (1 )
Automobile operating lease income
    39,139       26,681       12,458       47  
Mortgage banking income
    87,680       15,741       71,939       N.M.  
Securities (losses) gains
    (7,647 )     (70,288 )     62,641       (89 )
Other income
    117,730       121,739       (4,009 )     (3 )
 
                       
Total noninterest income
    761,099       640,039       121,060       19  
 
                       
Personnel costs
    519,819       586,761       (66,942 )     (11 )
Outside data processing and other services
    109,697       96,933       12,764       13  
Net occupancy
    79,000       85,429       (6,429 )     (8 )
OREO and foreclosure expense
    75,379       25,284       50,095       N.M.  
Equipment
    62,663       71,636       (8,973 )     (13 )
Amortization of intangibles
    51,247       57,707       (6,460 )     (11 )
Professional services
    51,220       33,183       18,037       54  
Marketing
    23,975       23,307       668       3  
Automobile operating lease expense
    32,920       20,799       12,121       58  
Telecommunications
    17,880       19,116       (1,236 )     (6 )
Printing and supplies
    11,673       14,695       (3,022 )     (21 )
Goodwill impairment
    2,606,944             2,606,944        
Other expense
    68,431       52,430       16,001       31  
 
                       
Total noninterest expense
    3,710,848       1,087,280       2,623,568       N.M.  
 
                       
(Loss) Income before income taxes
    (3,080,206 )     373,230       (3,453,436 )     N.M.  
(Benefit) Provision for income taxes
    (355,714 )     69,747       (425,461 )     N.M.  
 
                       
Net (loss) income
  $ (2,724,492 )   $ 303,483     $ (3,027,975 )     N.M. %
 
                       
Dividends declared on preferred shares
    145,467       23,242       122,225       N.M.  
 
                       
Net (loss) income applicable to common shares
  $ (2,869,959 )   $ 280,241     $ (3,150,200 )     N.M. %
 
                       
Average common shares — basic
    471,958       366,188       105,770       29 %
Average common shares — diluted (2)
    471,958       367,268       104,690       29  
 
                               
Per common share
                               
Net income per common share — basic
  $ (6.08 )   $ 0.77     $ (6.85 )     N.M. %
Net income (loss) per common share — diluted
    (6.08 )     0.76       (6.84 )     N.M.  
Cash dividends declared
    0.030       0.530       (0.500 )     (94 )
 
                               
Return on average total assets
    (6.95 )%     0.74 %     (7.69 )     N.M. %
Return on average total shareholders’ equity
    (62.7 )     6.6       (69.3 )     N.M.  
Return on average tangible shareholders’ equity (3)
    (83.8 )     15.9       (99.7 )     N.M.  
Net interest margin (4)
    3.09       3.27       (0.18 )     (6 )
Efficiency ratio (5)
    57.6       54.7       2.9       5  
Effective tax rate (benefit)
    (11.5 )     18.7       (30.2 )     N.M.  
 
                               
Revenue — fully taxable equivalent (FTE)
                               
Net interest income
  $ 1,050,223     $ 1,155,326     $ (105,103 )     (9 )%
FTE adjustment
    8,975       16,577       (7,602 )     (46 )
 
                       
Net interest income
    1,059,198       1,171,903       (112,705 )     (10 )
Noninterest income
    761,099       640,038       121,061       19  
 
                       
Total revenue
  $ 1,820,297     $ 1,811,941     $ 8,356       1 %
 
                       
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)   For all 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.
 
(3)   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.
 
(4)   On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)   Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities (losses) gains.


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Significant Items
Definition of Significant Items
From time to time, revenue, expenses, or taxes, are impacted by items we believe 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 we believe the outsized impact at that time to be one-time or short-term in nature. We refer to such items as “Significant Items”. Most often, these Significant Items result from factors originating outside the company: regulatory actions/assessments, windfall gains, changes in accounting principles, one-time tax assessments/refunds, and other similar items. In other cases they may result from our decisions associated with significant corporation actions out of the ordinary course of business: merger/restructuring charges, recapitalization actions, goodwill impairment, and other similar items.
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, and asset valuation write downs 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 so readers can ascertain which of such items, if any, they may wish to include or exclude from an analysis of our performance 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.
“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 2008 Annual Report on Form 10-K and other factors described from time to time in our other filings with the SEC.
The above description of “Significant Items” represents a change in definition from that provided in our 2008 Annual Report. Certain components listed within the “Timing Differences” section found within the “Significant Items” section on our 2008 Annual Report are no longer considered within the scope of our definition of “Significant Items”. Although these items are subject to more volatility than other items due to changes in market and economic environment conditions, they reflect ordinary banking activities.

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Table 5 — Significant Items Influencing Earnings Performance Comparison
                                                 
    Three Months Ended  
    September 30, 2009     June 30, 2009     September 30, 2008  
(in millions)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
Net income — reported earnings
  $ (166.2 )           $ (125.1 )           $ 75.1          
Earnings per share, after tax
          $ (0.33 )           $ (0.40 )           $ 0.17  
Change from prior quarter — $
            0.07               6.39               (0.08 )
Change from prior quarter — %
            (17.5 )%             94.1 %             (32.0 )
 
                                               
Change from a year-ago — $
          $ (0.50 )           $ (0.65 )           $ (0.21 )
Change from a year-ago — %
            N.M. %             N.M. %             (55.3 )
                                                 
Significant items — favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS     Earnings (1)     EPS  
 
                                               
Gain on redemption of junior subordinated debt
  $     $     $ 67.4     $ 0.10     $     $  
Gain related to Visa ® stock
                31.4       0.04              
FDIC special assessment
                (23.6 )     (0.03 )            
Goodwill impairment
                (4.2 )     (0.01 )            
Preferred stock conversion deemed dividend
                      (0.06 )            
Gain on extinguishment of debt
                            21.4       0.04  
Deferred tax valuation allowance (provision) benefit (2)
                            (3.7 )     (0.01 )
                                 
    Nine Months Ended  
    September 30, 2009     September 30, 2008  
(in millions)   After-tax     EPS     After-tax     EPS  
Net income — reported earnings
  $ (2,724.5 )           $ 303.5          
Earnings per share, after tax
          $ (6.08) (3)           $ 0.76  
Change from a year-ago — $
            (6.84 )             (0.36 )
Change from a year-ago — %
            N.M. %             (32.1 )%
                                 
Significant items — favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS  
 
                               
Franklin relationship restructuring (2)
  $ 159.9     $ 0.34     $     $  
Gain on redemption of junior subordinated debt
    67.4       0.09              
Gain related to Visa ® stock
    31.4       0.04       25.1       0.04  
Goodwill impairment
    (2,606.9 )     (5.52 )            
FDIC special assessment
    (23.6 )     (0.03 )            
Preferred stock conversion deemed dividend
          (0.12 )            
Gain on extinguishment of debt
                23.5       0.04  
Visa ® indemnification liability
                12.4       0.02  
Deferred tax valuation allowance benefit (2)
                10.8       0.03  
Merger and restructuring costs
                (21.8 )     (0.04 )
Asset impairment
                (12.4 )     (0.02 )
     
(1)   Pretax unless otherwise noted.
 
(2)   After-tax.
 
(3)   Reflects the impact of the 346.8 million additional shares of common stock issued during the period through two common stock public offerings, three discretionary equity issuance programs, and conversions of preferred stock into common stock. Of these shares, 24.6 million were issued late in the 2009 first quarter, 177.0 million were issued during the 2009 second quarter, and the remaining 145.2 million were issued during the 2009 third quarter.

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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 pretax ($7.09 per common share) charge. (See “Goodwill” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section for additional information).
 
    During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01 per common share) was recorded relating to the sale of a small payments-related business in July 2009.
  2.   Franklin Relationship Restructuring. The impacts of the Franklin relationship on our reported results were as follows (see “Franklin Relationship” discussion located within the “Risk Management and Capital” section and the “Franklin Loans” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” discussion for additional information.) :
    Performance for the 2009 first quarter included a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) related to the restructuring with Franklin. Also as a result of the restructuring, although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to write-down the acquired mortgages and OREO collateral to fair value.
 
    The restructuring affects the comparability of our 2009 second quarter income statement with prior periods. In the 2009 second quarter, we recorded interest income from the loans that we now own as a result of the restructuring. Interest income was earned through interest payments on accruing loans, from the payoff of loans that were recorded at a discount, and through the accretion of the accretable discount recorded at the time the loans were acquired. Noninterest expense was also impacted as, effective with the 2009 second quarter, we pay Franklin to service the loans, and record the expense of holding foreclosed homes, including any declines in the fair value of these homes below their carrying value.
  3.   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 negative impacts of $0.08 per common share for the 2009 first quarter and $0.06 per common share for the 2009 second quarter. (See “Capital” discussion located within the “Risk Management and Capital” section for additional information.)
 
  4.   Visa ® . Prior to the Visa ® initial public offering (IPO) occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. The impacts related to the Visa ® IPO for the first nine-month periods of 2009 and 2008 are presented in the following table:

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Table 6 — Visa ® impacts — First Nine-Month Periods of 2009 and 2008
                                                 
    2009     2008  
(in millions)   Third Quarter     Second Quarter     First Quarter     Third Quarter     Second Quarter     First Quarter  
 
                                               
Gain related to Visa ® stock sale (1)
  $     $ 31.4     $     $     $     $ 25.1  
Visa ® indemnification liability (2)
                                  12.4  
Deferred tax valuation allowance benefit (3)
                      (3.7 )     3.4       11.1  
     
(1)   Pretax. Recorded to noninterest income, and represents a gain on the sale of ownership interest in Visa ® . As part of the 2009 second quarter sale, we released $8.2 million, as of June 30, 2009, of the remaining indemnification liability. Concurrently, we established a $7.1 million swap liability associated with the conversion protection provided to the purchasers of the Visa ® shares.
 
(2)   Pretax. Recorded to noninterest expense, and represents a reversal of our pro-rata portion of an indemnification charge provided to Visa ® by its member banks for various litigation filed against Visa ® , as an escrow account was established by Visa ® using a portion of the proceeds received from the IPO.
 
(3)   After-tax. Recorded to provision for income taxes, and represents a reduction to the previously established capital loss carry-forward valuation allowance related to the value of Visa ® shares held.
5.  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 — Second Quarter
    $67.4 million pretax gain ($0.10 per common share) related to the redemption of a portion of our junior subordinated debt.
 
    $23.6 million ($0.03 per common share) negative impact due to a special FDIC insurance premium assessment.
2008 — Third Quarter
    $21.4 million ($0.04 per common share) gain related to the extinguishment of debt.
2008 — Second Quarter
    $14.6 million ($0.03 per common share) of merger and restructuring costs related to the Sky Financial Group, Inc. acquisition in 2007.
 
    $2.2 million gain related to the extinguishment of debt.
 
    $1.4 million of asset impairment, included in other noninterest expense, relating to the charge-off of a receivable.
2008 — First Quarter
    $11.0 million ($0.02 per common share) of asset impairment, including (a) $5.9 million venture capital loss included in other noninterest income, (b) $2.6 million charge-off of a receivable included in other noninterest expense, and (c) $2.5 million write-down of leasehold improvements in our Cleveland main office included net occupancy expense.
 
    $7.3 million ($0.01 per common share) of merger and restructuring costs related to the Sky Financial Group, Inc. acquisition in 2007.

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Net Interest Income / Average Balance Sheet
2009 Third Quarter versus 2008 Third Quarter
Fully-taxable equivalent net interest income decreased $27.1 million, or 7%, from the year-ago quarter. This reflected the unfavorable impact of a $2.1 billion, or 4%, decline in total average earning assets, as well as a 9 basis point decline in the net interest margin to 3.20% from 3.29%. The decline in total average earning assets reflected a $3.1 billion, or 8%, decline in average total loans and leases, partially offset by a $1.0 billion, or 16%, increase in other earning assets, primarily investment securities.
The following table details the changes in our average loans and leases and average deposits:
Table 7 — Average Loans/Leases and Deposits — 2009 Third Quarter vs. 2008 Third Quarter
                                 
    Third Quarter     Change  
(in millions)   2009     2008     Amount     Percent  
Average Loans/Leases
                               
Commercial and industrial
  $ 12,922     $ 13,629     $ (707 )     (5 )%
Commercial real estate
    8,879       9,816       (937 )     (10 )
 
                       
Total commercial
    21,801       23,445       (1,644 )     (7 )
 
                               
Automobile loans and leases
    3,230       4,624       (1,394 )     (30 )
Home equity
    7,581       7,453       128       2  
Residential mortgage
    4,487       4,812       (325 )     (7 )
Other consumer
    756       670       86       13  
 
                       
Total consumer
    16,054       17,559       (1,505 )     (9 )
 
                       
Total loans
  $ 37,855     $ 41,004     $ (3,149 )     (8 )%
 
                       
 
                               
Average Deposits
                               
Demand deposits — noninterest bearing
  $ 6,186     $ 5,080     $ 1,106       22 %
Demand deposits — interest bearing
    5,140       4,005       1,135       28  
Money market deposits
    7,601       5,860       1,741       30  
Savings and other domestic time deposits
    4,771       5,100       (329 )     (6 )
Core certificates of deposit
    11,646       11,993       (347 )     (3 )
 
                       
Total core deposits
    35,344       32,038       3,306       10  
Other deposits
    4,249       5,765       (1,516 )     (26 )
 
                       
Total deposits
  $ 39,593     $ 37,803     $ 1,790       5 %
 
                       
The $3.1 billion, or 8%, decrease in average total loans and leases reflected:
    $1.6 billion, or 7%, decrease in average total commercial loans. The $0.9 billion, or 10%, decrease in average CRE loans reflected a combination of factors, including our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of charge-offs and the 2009 first quarter reclassification of CRE loans to C&I loans. The decline in average C&I loans reflected the impact of the reclassification project, offset by paydowns, automobile dealer floorplan reductions, and the Franklin restructuring and related 2008 fourth quarter and 2009 first quarter charge-offs.
 
    $1.5 billion, or 9%, decrease in average total consumer loans. This primarily reflected a $1.4 billion, or 30%, decline in average automobile loans and leases due to the 2009 first quarter securitization of $1.0 billion of automobile loans, as well as the continued runoff of the automobile lease portfolio. The $0.3 billion, or 7%, decline in average residential mortgages reflected 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 additions related to the 2009 first quarter Franklin restructuring. Average home equity loans increased 2%, due primarily to increased line usage and slower runoff experience. The increased line usage continued to be associated with higher quality borrowers taking advantage of the low interest rate environment.

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The $1.0 billion, or 16%, increase in other earning assets reflected a $2.0 billion, or 42%, increase in average total investment securities as the cash proceeds from capital actions during the second and third quarters were deployed (See the “Capital / Capital Adequacy” section located within the “Risk Management and Capital” section for a full discussion) . Average trading account securities declined $0.9 billion, or 89%, from the year-ago quarter, due to the reduction in the use of trading securities to hedge mortgage servicing rights (MSRs).
Average total deposits increased $1.8 billion, or 5%, from the year-ago quarter and reflected:
    $3.3 billion, or 10%, growth in average total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts.
Partially offset by:
    A $1.5 billion, or 26%, decrease in average other deposits, primarily reflecting our deployment of excess liquidity in reducing noncore funding sources.
2009 Third Quarter versus 2009 Second Quarter
Compared with the 2009 second quarter, fully-taxable equivalent net interest income increased $15.9 million, or 5%. This primarily reflected a 10 basis point increase in the net interest margin to 3.20% from 3.10%, as average total earning assets were essentially unchanged. The increase in the net interest margin reflected a combination of factors including favorable impacts from strong core deposit growth and the benefit of lower deposit pricing, partially offset by the negative impact of maintaining a higher liquidity position. Average total earning assets were essentially unchanged as a $1.2 billion, or 18%, increase in other earning assets, primarily investment securities, was offset by a $1.2 billion, or 3%, decline in average total loans and leases.
The following table details the changes in our average loans and leases and average deposits:
Table 8 — Average Loans/Leases and Deposits — 2009 Third Quarter vs. 2009 Second Quarter
                                 
    2009     2009     Change  
(in millions)   Third Quarter     Second Quarter     Amount     Percent  
Average Loans/Leases
                               
Commercial and industrial
  $ 12,922     $ 13,523     $ (601 )     (4 )%
Commercial real estate
    8,879       9,199       (320 )     (3 )
 
                       
Total commercial
    21,801       22,722       (921 )     (4 )
 
                               
Automobile loans and leases
    3,230       3,290       (60 )     (2 )
Home equity
    7,581       7,640       (59 )     (1 )
Residential mortgage
    4,487       4,657       (170 )     (4 )
Other consumer
    756       698       58       8  
 
                       
Total consumer
    16,054       16,285       (231 )     (1 )
 
                       
Total loans
  $ 37,855     $ 39,007     $ (1,152 )     (3 )%
 
                       
 
                               
Average Deposits
                               
Demand deposits — noninterest bearing
  $ 6,186     $ 6,021     $ 165       3 %
Demand deposits — interest bearing
    5,140       4,547       593       13  
Money market deposits
    7,601       6,355       1,246       20  
Savings and other domestic time deposits
  4,771     5,031       (260 )     (5 )
Core certificates of deposit
    11,646       12,501       (855 )     (7 )
 
                       
Total core deposits
    35,344       34,455       889       3  
Other deposits
    4,249       5,079       (830 )     (16 )
 
                       
Total deposits
  $ 39,593     $ 39,534     $ 59       %
 
                       

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Average total loans and leases declined $1.2 billion, or 3%, reflecting:
    $0.9 billion, or 4%, decline in average total commercial loans. Average C&I loans were lower based, in part on lower line utilization across the portfolio, particularly in automobile dealer floorplan loans. The lower floorplan balances were consistent with the lower level of dealer car inventories resulting from the “cash for clunkers” program and lower manufacturer production levels. We continue to expect no material credit impact from dealership closings. The planned decline in average CRE loans primarily reflected payoffs, balance reductions, and charge-offs.
 
    $0.2 billion, or 1%, decline in average total consumer loans. The decline was spread evenly across the portfolio segments. The decline in average automobile loans and leases was consistent with our expectations given market conditions along with the continued run-off of the automobile lease portfolio. Demand for home equity loans remained weak, reflecting the impact of the economic environment and depressed home values. The decline in residential mortgages reflected the impact of lower market interest rates, the related increase in fixed-rate refinancing activity, and our practice of selling virtually all of our longer-term fixed-rate production. It also reflected the more conservative position on loss recognition, active loss mitigation and troubled debt restructuring efforts, as well as the transfer to held for sale, and subsequent sale in the 2009 fourth quarter, of some underperforming loans.
The $1.2 billion, or 18%, increase in other earning assets reflected a $1.3 billion, or 25%, increase in average total investment securities as the cash proceeds from capital actions during the second and third quarters were deployed. (See the “Capital / Capital Adequacy” section located within the “Risk Management and Capital” section for a full discussion) . The increase primarily represented the purchase of agency debt with an average 2-year maturity and agency CMOs with an average 3-year maturity.
Average total deposits increased slightly from the prior quarter and reflected:
    $0.9 billion, or 3%, growth in average total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts.
Partially offset by:
    $0.8 billion, or 16%, decline in other deposits, reflecting our deployment of excess liquidity in reducing noncore funding sources.
Tables 9 and 10 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

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Table 9 — Consolidated Quarterly Average Balance Sheets
                                                         
    Average Balances     Change  
Fully-taxable equivalent basis   2009     2008     3Q09 vs 3Q08  
(in millions)   Third     Second     First     Fourth     Third     Amount     Percent  
Assets
                                                       
Interest bearing deposits in banks
  $ 393     $ 369     $ 355     $ 343     $ 321     $ 72       22 %
Trading account securities
    107       88       278       940       992       (885 )     (89 )
Federal funds sold and securities purchased under resale agreements
    7             19       48       363       (356 )     (98 )
Loans held for sale
    524       709       627       329       274       250       91  
Investment securities:
                                                       
Taxable
    6,510       5,181       3,961       3,789       3,975       2,535       64  
Tax-exempt
    129       126       465       689       712       (583 )     (82 )
 
                                         
Total investment securities
    6,639       5,307       4,426       4,478       4,687       1,952       42  
Loans and leases: (1)
                                                       
Commercial:
                                                       
Commercial and industrial
    12,922       13,523       13,541       13,746       13,629       (707 )     (5 )
Commercial real estate:
                                                       
Construction
    1,808       1,946       2,033       2,103       2,090       (282 )     (13 )
Commercial
    7,071       7,253       8,079       8,115       7,726       (655 )     (8 )
 
                                         
Commercial real estate
    8,879       9,199       10,112       10,218       9,816       (937 )     (10 )
 
                                         
Total commercial
    21,801       22,722       23,653       23,964       23,445       (1,644 )     (7 )
 
                                         
Consumer:
                                                       
Automobile loans
    2,886       2,867       3,837       3,899       3,856       (970 )     (25 )
Automobile leases
    344       423       517       636       768       (424 )     (55 )
 
                                         
Automobile loans and leases
    3,230       3,290       4,354       4,535       4,624       (1,394 )     (30 )
Home equity
    7,581       7,640       7,577       7,523       7,453       128       2  
Residential mortgage
    4,487       4,657       4,611       4,737       4,812       (325 )     (7 )
Other loans
    756       698       671       678       670       86       13  
 
                                         
Total consumer
    16,054       16,285       17,213       17,473       17,559       (1,505 )     (9 )
 
                                         
Total loans and leases
    37,855       39,007       40,866       41,437       41,004       (3,149 )     (8 )
Allowance for loan and lease losses
    (950 )     (930 )     (913 )     (764 )     (731 )     (219 )     (30 )
 
                                         
Net loans and leases
    36,905       38,077       39,953       40,673       40,273       (3,368 )     (8 )
 
                                         
Total earning assets
    45,525       45,480       46,571       47,575       47,641       (2,116 )     (4 )
 
                                         
Cash and due from banks
    2,553       2,466       1,553       928       925       1,628       N.M.  
Intangible assets
    755       780       3,371       3,421       3,441       (2,686 )     (78 )
All other assets
    3,797       3,701       3,571       3,447       3,384       413       12  
 
                                         
Total Assets
  $ 51,680     $ 51,497     $ 54,153     $ 54,607     $ 54,660     $ (2,980 )     (5 )%
 
                                         
 
                                                       
Liabilities and Shareholders’ Equity
                                                       
Deposits:
                                                       
Demand deposits — noninterest bearing
  $ 6,186     $ 6,021     $ 5,544     $ 5,205     $ 5,080     $ 1,106       22 %
Demand deposits — interest bearing
    5,140       4,547       4,076       3,988       4,005       1,135       28  
Money market deposits
    7,601       6,355       5,593       5,500       5,860       1,741       30  
Savings and other domestic deposits
    4,771       5,031       5,041       5,034       5,100       (329 )     (6 )
Core certificates of deposit
    11,646       12,501       12,784       12,588       11,993       (347 )     (3 )
 
                                         
Total core deposits
    35,344       34,455       33,038       32,315       32,038       3,306       10  
Other domestic deposits of $250,000 or more
    747       886       1,069       1,365       1,692       (945 )     (56 )
Brokered deposits and negotiable CDs
    3,058       3,740       3,449       3,049       3,025       33       1  
Deposits in foreign offices
    444       453       633       854       1,048       (604 )     (58 )
 
                                         
Total deposits
    39,593       39,534       38,189       37,583       37,803       1,790       5  
Short-term borrowings
    879       879       1,099       1,748       2,131       (1,252 )     (59 )
Federal Home Loan Bank advances
    924       947       2,414       3,188       3,139       (2,215 )     (71 )
Subordinated notes and other long-term debt
    4,136       4,640       4,612       4,252       4,382       (246 )     (6 )
 
                                         
Total interest bearing liabilities
    39,346       39,979       40,770       41,566       42,375       (3,029 )     (7 )
 
                                         
All other liabilities
    863       569       614       817       882       (19 )     (2 )
Shareholders’ equity
    5,285       4,928       7,225       7,019       6,323       (1,038 )     (16 )
 
                                         
Total Liabilities and Shareholders’ Equity
  $ 51,680     $ 51,497     $ 54,153     $ 54,607     $ 54,660     $ (2,980 )     (5 )%
 
                                         
N.M., not a meaningful value.
     
(1)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

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Table 10 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)  
    2009     2008  
Fully-taxable equivalent basis (1)   Third     Second     First     Fourth     Third  
Assets
                                       
Interest bearing deposits in banks
    0.28 %     0.37 %     0.45 %     1.44 %     2.17 %
Trading account securities
    1.96       2.22       4.04       5.32       5.45  
Federal funds sold and securities purchased under resale agreements
    0.14       0.82       0.20       0.24       2.02  
Loans held for sale
    5.20       5.19       5.04       6.58       6.54  
Investment securities:
                                       
Taxable
    3.99       4.63       5.60       5.74       5.54  
Tax-exempt
    6.77       6.83       6.61       7.02       6.80  
 
                             
Total investment securities
    4.04       4.69       5.71       5.94       5.73  
Loans and leases: (3)
                                       
Commercial:
                                       
Commercial and industrial
    5.19       5.00       4.60       5.01       5.46  
Commercial real estate:
                                       
Construction
    2.61       2.78       2.76       4.55       4.69  
Commercial
    3.43       3.56       3.76       5.07       5.33  
 
                             
Commercial real estate
    3.26       3.39       3.55       4.96       5.19  
 
                             
Total commercial
    4.40       4.35       4.15       4.99       5.35  
 
                             
Consumer:
                                       
Automobile loans
    7.34       7.28       7.20       7.17       7.13  
Automobile leases
    6.25       6.12       6.03       5.82       5.70  
 
                             
Automobile loans and leases
    7.22       7.13       7.06       6.98       6.89  
Home equity
    5.75       5.75       5.13       5.87       6.19  
Residential mortgage
    5.03       5.12       5.71       5.84       5.83  
Other loans
    7.21       8.22       8.97       9.25       9.71  
 
                             
Total consumer
    5.91       5.95       5.92       6.28       6.41  
 
                             
Total loans and leases
    5.04       5.02       4.90       5.53       5.80  
 
                             
Total earning assets
    4.86 %     4.99 %     4.99 %     5.57 %     5.77 %
 
                             
 
                                       
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Demand deposits — noninterest bearing
    %     %     %     %     %
Demand deposits — interest bearing
    0.22       0.18       0.14       0.34       0.51  
Money market deposits
    1.20       1.14       1.02       1.31       1.66  
Savings and other domestic deposits
    1.33       1.37       1.50       1.72       1.79  
Core certificates of deposit
    3.27       3.50       3.81       4.02       4.05  
 
                             
Total core deposits
    1.88       2.06       2.28       2.50       2.58  
Other domestic deposits of $250,000 or more
    2.24       2.61       2.92       3.39       3.50  
Brokered deposits and negotiable CDs
    2.49       2.54       2.97       3.39       3.37  
Deposits in foreign offices
    0.20       0.20       0.17       0.90       1.49  
 
                             
Total deposits
    1.92       2.11       2.33       2.58       2.66  
Short-term borrowings
    0.25       0.26       0.25       0.85       1.42  
Federal Home Loan Bank advances
    0.92       1.13       1.03       3.04       2.92  
Subordinated notes and other long-term debt
    2.58       2.91       3.29       4.49       4.29  
 
                             
Total interest bearing liabilities
    1.93 %     2.14 %     2.31 %     2.74 %     2.79 %
 
                             
Net interest rate spread
    2.93 %     2.85 %     2.68 %     2.83 %     2.98 %
Impact of noninterest bearing funds on margin
    0.27       0.25       0.29       0.35       0.31  
 
                             
Net interest margin
    3.20 %     3.10 %     2.97 %     3.18 %     3.29 %
 
                             
     
(1)   Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 3 for the FTE adjustment.
 
(2)   Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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2009 First Nine Months versus 2008 First Nine Months
Fully-taxable equivalent net interest income for the first nine-month period of 2009 declined $112.7 million, or 10%, from the comparable year-ago period. This decline primarily reflected an 18 basis point decline in the net interest margin, a 4% decline in average earning assets, the unfavorable impact of maintaining a higher liquidity position, and an increase in NALs. These factors were partially offset by managed reductions of our balance sheet and other capital management initiatives.
The following table details the changes in our average loans and leases and average deposits:
 
Table 11 — Average Loans/Leases and Deposits — First Nine Months 2009 vs. First Nine Months 2008
                                 
    Nine Months Ended        
    September 30,     Change  
(in millions)   2009     2008     Amount     Percent  
Average Loans
                               
Commercial and industrial
  $ 13,327     $ 13,535     $ (208 )     (2 )%
Commercial real estate
    9,392       9,568       (176 )     (2 )
 
                       
Total commercial
    22,719       23,103       (384 )     (2 )%
 
                       
Automobile loans and leases
    3,620       4,525       (905 )     (20 )%
Home equity
    7,600       7,364       236       3  
Residential mortgage
    4,584       5,113       (529 )     (10 )
Other consumer
    709       695       14       2  
 
                       
Total consumer
    16,513       17,697       (1,184 )     (7 )
 
                       
Total loans
  $ 39,232     $ 40,800     $ (1,568 )     (4 )%
 
                       
 
                               
Average Deposits
                               
Demand deposits — non-interest bearing
  $ 5,919     $ 5,058     $ 861       17 %
Demand deposits — interest bearing
    4,591       4,008       583       15  
Money market deposits
    6,524       6,292       232       4  
Savings and other domestic time deposits
    4,946       5,185       (239 )     (5 )
Core certificates of deposit
    12,308       11,317       991       9  
 
                       
Total core deposits
    34,288       31,860       2,428       8  
Other deposits
    4,822       6,061       (1,239 )     (20 )
 
                       
Total deposits
  $ 39,110     $ 37,921     $ 1,189       3 %
 
                       
The $1.6 billion, or 4%, decrease in average total loans and leases primarily reflected:
    $0.9 billion, or 20%, decline in average automobile loans and leases due to the 2009 first quarter securitization of $1.0 billion of automobile loans, as well as the continued runoff of the automobile lease portfolio.
 
    $0.5 billion, or 10%, decline in residential mortgages reflecting the impact of loan sales, as well as the continued refinance of portfolio loans. The majority of this refinance activity was fixed-rate loans, which we typically sell in the secondary market.
 
    $0.4 billion, or 2%, decline in average total commercial loans. The decline in average CRE loans reflected our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of charge-offs and the 2009 first quarter reclassification of CRE loans to C&I loans. The decline in average C&I loans reflected paydowns and the Franklin restructuring; partially offset by the 2009 first quarter reclassification project.

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Partially offset by:
    $0.2 billion, or 3%, increase in average home equity loans reflecting higher utilization of existing lines resulting from higher quality borrowers taking advantage of the current relatively lower interest rate environment, as well as a slowdown in runoff.
Other average earning assets declined $0.4 million, reflecting a decline in trading account securities due to the reduction in the use of these securities to hedge MSRs, partially offset by an increase in total investment securities as the cash proceeds from capital actions during the first nine-month period of 2009 were deployed.
The $1.2 billion, or 3%, increase in average total deposits reflected:
    $2.4 billion, or 8%, growth in total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts.
Partially offset by:
    $1.2 billion, or 20%, decline in average noncore deposits, reflecting a managed decline in public fund deposits as well as planned efforts to reduce our reliance on noncore funding sources.

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Table 12 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
                                                 
    YTD Average Balances     YTD Average Rates (2)  
Fully taxable equivalent basis (1)   Nine Months Ending September 30,     Change     Nine Months Ending September 30,  
(in millions of dollars)   2009     2008     Amount     Percent     2009     2008  
Assets
                                               
Interest bearing deposits in banks
  $ 372     $ 290     $ 82       28 %     0.36 %     2.96 %
Trading account securities
    157       1,139       (982 )     (86 )     3.24       5.26  
Federal funds sold and securities purchased under resale agreements
    8       565       (557 )     (99 )     0.19       2.52  
Loans held for sale
    620       446       174       39       5.15       5.86  
Investment securities:
                                               
Taxable
    5,227       3,908       1,319       34       4.60       5.58  
Tax-exempt
    239       711       (472 )     (66 )     6.72       6.77  
 
                                   
Total investment securities
    5,466       4,619       847       18       4.70       5.76  
Loans and leases: (3)
                                               
Commercial:
                                               
Commercial and industrial
    13,327       13,535       (208 )     (2 )     4.92       5.79  
Commercial real estate:
                                               
Construction
    1,928       2,047       (119 )     (6 )     2.72       5.14  
Commercial
    7,464       7,521       (57 )     (1 )     3.59       5.68  
 
                                   
Commercial real estate
    9,392       9,568       (176 )     (2 )     3.41       5.56  
 
                                   
Total commercial
    22,719       23,103       (384 )     (2 )     4.30       5.68  
 
                                   
Consumer:
                                               
Automobile loans
    3,193       3,601       (408 )     (11 )     7.26       7.16  
Automobile leases
    427       924       (497 )     (54 )     6.13       5.60  
Automobile loans and leases
    3,620       4,525       (905 )     (20 )     7.13       6.85  
Home equity
    7,600       7,364       236       3       5.55       6.60  
Residential mortgage
    4,584       5,113       (529 )     (10 )     5.29       5.83  
Other loans
    709       695       14       2       8.09       10.05  
 
                                   
Total consumer
    16,513       17,697       (1,184 )     (7 )     5.93       6.58  
 
                                   
Total loans and leases
    39,232       40,800       (1,568 )     (4 )     4.99       6.08  
 
                                           
Allowance for loan and lease losses
    (931 )     (672 )     (259 )     (39 )                
 
                                       
Net loans and leases
    38,301       40,128       (1,827 )     (5 )                
 
                                   
Total earning assets
    45,855       47,859       (2,004 )     (4 )     4.94 %     6.01 %
 
                                   
Cash and due from banks
    2,195       968       1,227       N.M.                  
Intangible assets
    1,626       3,454       (1,828 )     (53 )                
All other assets
    3,689       3,419       270       8                  
 
                                       
Total Assets
  $ 52,434     $ 55,028     $ (2,594 )     (5 )%                
 
                                       
 
                                               
Liabilities and Shareholders’ Equity
                                               
Deposits:
                                               
Demand deposits — non-interest bearing
  $ 5,919     $ 5,058     $ 861       17 %     %     %
Demand deposits — interest bearing
    4,591       4,008       583       15       0.19       0.62  
Money market deposits
    6,524       6,292       232       4       1.13       2.11  
Savings and other domestic time deposits
    4,946       5,185       (239 )     (5 )     1.40       1.95  
Core certificates of deposit
    12,308       11,317       991       9       3.53       4.36  
 
                                   
Total core deposits
    34,288       31,860       2,428       8       2.07       2.80  
Other domestic time deposits of $250,000 or more
    899       1,737       (838 )     (48 )     2.63       3.87  
Brokered deposits and negotiable CDs
    3,414       3,309       105       3       2.67       3.75  
Deposits in foreign offices
    509       1,015       (506 )     (50 )     0.19       1.75  
 
                                   
Total deposits
    39,110       37,921       1,189       3       2.12       2.93  
Short-term borrowings
    951       2,584       (1,633 )     (63 )     0.26       1.99  
Federal Home Loan Bank advances
    1,423       3,312       (1,889 )     (57 )     1.03       3.30  
Subordinated notes and other long-term debt
    4,461       4,043       418       10       2.94       4.52  
 
                                   
Total interest bearing liabilities
    40,026       42,802       (2,776 )     (6 )     2.12       3.05  
 
                                   
All other liabilities
    684       982       (298 )     (30 )                
Shareholders’ equity
    5,805       6,186       (381 )     (6 )                
 
                                       
Total Liabilities and Shareholders’ Equity
  $ 52,434     $ 55,028     $ (2,594 )     (5 )%                
 
                                       
Net interest rate spread
                                    2.82       2.96  
Impact of non-interest bearing funds on margin
                                    0.27       0.31  
 
                                           
Net interest margin
                                    3.09 %     3.27 %
 
                                           
     
N.M., not a meaningful value.
 
(1)   Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 4 for the FTE adjustment.
 
(2)   Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

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Provision for Credit Losses
(This section should be read in conjunction with Significant Item 2 and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels adequate to absorb our estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit.
The following table details the Franklin-related impact to the provision for credit losses for each of the past five quarters:
Table 13 — Provision for Credit Losses — Franklin-Related Impact
                                         
    2009     2008  
(in millions)   Third     Second     First     Fourth     Third  
 
                                       
Provision for credit losses
                                       
Franklin
  $ (3.5 )   $ (10.1 )   $     $ 438.0     $  
Non-Franklin
    478.6       423.8       291.8       284.6       125.4  
 
                             
Total
  $ 475.1     $ 413.7     $ 291.8     $ 722.6     $ 125.4  
 
                             
 
                                       
Total net charge-offs (recoveries)
                                       
Franklin
  $ (3.5 )   $ (10.1 )   $ 128.3     $ 423.3     $  
Non-Franklin
    359.4       344.5       213.2       137.3       83.8  
 
                             
Total
  $ 355.9     $ 334.4     $ 341.5     $ 560.6     $ 83.8  
 
                             
 
                                       
Provision for credit losses in excess of net charge-offs
                                       
Franklin
  $     $     $ (128.3 )   $ 14.7     $  
Non-Franklin
    119.2       79.3       78.6       147.3       41.6  
 
                             
Total
  $ 119.2     $ 79.3     $ (49.7 )   $ 162.0     $ 41.6  
 
                             
The provision for credit losses in the first nine-month period of 2009 was $1,180.7 million, up $845.8 million from the comparable year-ago period of $334.9 million. The reported provision for credit losses for the first nine-month period of 2009 of $1,180.7 million exceeded total NCOs by $148.8 million ( see the “Credit Quality” section located within the “Risk Management and Capital” section for a full discussion).

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Noninterest Income
(This section should be read in conjunction with Significant Items 4 and 5.)
The following table reflects noninterest income for each of the past five quarters:
Table 14 — Noninterest Income
                                         
    2009     2008  
(in thousands)   Third     Second     First     Fourth     Third  
Service charges on deposit accounts
  $ 80,811     $ 75,353     $ 69,878     $ 75,247     $ 80,508  
Brokerage and insurance income
    33,996       32,052       39,948       31,233       34,309  
Trust services
    25,832       25,722       24,810       27,811       30,952  
Electronic banking
    28,017       24,479       22,482       22,838       23,446  
Bank owned life insurance income
    13,639       14,266       12,912       13,577       13,318  
Automobile operating lease income
    12,795       13,116       13,228       13,170       11,492  
Mortgage banking income (loss)
    21,435       30,827       35,418       (6,747 )     10,302  
Securities (losses) gains
    (2,374 )     (7,340 )     2,067       (127,082 )     (73,790 )
Other income
    41,901       57,470       18,359       17,052       37,320  
 
                             
Total non-interest income
  $ 256,052     $ 265,945     $ 239,102     $ 67,099     $ 167,857  
 
                             
The following table details mortgage banking income and the net impact of MSR hedging activity for each of the past five quarters:
Table 15 — Mortgage Banking Income and Net Impact of MSR Hedging
                                         
    2009     2008  
(in thousands, except as noted)   Third     Second     First     Fourth     Third  
Mortgage Banking Income
                                       
Origination and secondary marketing
  $ 16,491     $ 31,782     $ 29,965     $ 7,180     $ 7,647  
Servicing fees
    12,320       12,045       11,840       11,660       11,838  
Amortization of capitalized servicing (1)
    (10,050 )     (14,445 )     (12,285 )     (6,462 )     (6,234 )
Other mortgage banking income
    4,109       5,381       9,404       2,959       3,519  
 
                             
Sub-total
    22,870       34,763       38,924       15,337       16,770  
MSR valuation adjustment (1)
    (17,348 )     46,551       (10,389 )     (63,355 )     (10,251 )
Net trading gains (losses) related to MSR hedging
    15,913       (50,487 )     6,883       41,271       3,783  
 
                             
Total mortgage banking income (loss)
  $ 21,435     $ 30,827     $ 35,418     $ (6,747 )   $ 10,302  
 
                             
 
                                       
Mortgage originations (in millions)
  $ 998     $ 1,587     $ 1,546     $ 724     $ 680  
Average trading account securites used to hedge MSRs (in millions)
    19       20       223       857       941  
Capitalized mortgage servicing rights (2)
    200,969       219,282       167,838       167,438       230,398  
Total mortgages serviced for others (in millions) (2)
    16,145       16,246       16,315       15,754       15,741  
MSR % of investor servicing portfolio
    1.24 %     1.35 %     1.03 %     1.06 %     1.46 %
 
                             
 
                                       
Net Impact of MSR Hedging
                                       
MSR valuation adjustment (1)
  $ (17,348 )   $ 46,551     $ (10,389 )   $ (63,355 )   $ (10,251 )
Net trading gains (losses) related to MSR hedging
    15,913       (50,487 )     6,883       41,271       3,783  
Net interest income related to MSR hedging
    191       199       2,441       9,473       8,368  
 
                             
Net impact of MSR hedging
  $ (1,244 )   $ (3,737 )   $ (1,065 )   $ (12,611 )   $ 1,900  
 
                             
     
(1)   The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing.
 
(2)   At period end.

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2009 Third Quarter versus 2008 Third Quarter
Noninterest income increased $88.2 million, or 53%, from the year-ago quarter.
Table 16 — Noninterest Income — 2009 Third Quarter vs. 2008 Third Quarter
                                 
    Third Quarter     Change  
(in thousands)   2009     2008     Amount     Percent  
Service charges on deposit accounts
  $ 80,811     $ 80,508     $ 303       %
Brokerage and insurance income
    33,996       34,309       (313 )     (1 )
Trust services
    25,832       30,952       (5,120 )     (17 )
Electronic banking
    28,017       23,446       4,571       19  
Bank owned life insurance income
    13,639       13,318       321       2  
Automobile operating lease income
    12,795       11,492       1,303       11  
Mortgage banking income
    21,435       10,302       11,133       N.M.  
Securities (losses) gains
    (2,374 )     (73,790 )     71,416       (97 )
Other income
    41,901       37,320       4,581       12  
 
                       
Total noninterest income
  $ 256,052     $ 167,857     $ 88,195       53 %
 
                       
N.M., not a meaningful value.
The $88.2 million increase in total noninterest income reflected:
    $71.4 million improvement in securities losses as the current quarter reflected a $2.4 million loss compared with a $73.8 million loss in the year-ago quarter as that period included a $76.6 million OTTI adjustment in the Alt-A mortgage loan-backed securities portfolio.
 
    $11.1 million increase in mortgage banking income, reflecting an $8.8 million increase in origination and secondary marketing income as originations in the current quarter were 47% higher, as well as a $5.0 million net improvement in MSR valuation and hedging activity (see Table 15) .
 
    $4.6 million, or 19%, increase in electronic banking income including additional third-party processing fees.
 
    $4.6 million, or 12%, increase in other income, reflecting the current quarter’s net impact of a $22.8 million change in fair value of our derivatives that did not qualify for hedge accounting, partially offset by a $7.5 million loss on sale of loans held for sale, as well as lower mezzanine lending income, equity investment gains, and derivatives income.
Partially offset by:
    $5.1 million, or 17%, decline in trust services income, reflecting the impact of lower market values on asset management revenues and reduced yields on money market funds.
2009 Third Quarter versus 2009 Second Quarter
Noninterest income decreased $9.9 million, or 4%, from the 2009 second quarter.

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Table 17 — Noninterest Income — 2009 Third Quarter vs. 2009 Second Quarter
                                 
    Third     Second        
    Quarter     Quarter     Change  
(in thousands)   2009     2009     Amount     Percent  
Service charges on deposit accounts
  $ 80,811     $ 75,353     $ 5,458       7 %
Brokerage and insurance income
    33,996       32,052       1,944       6  
Trust services
    25,832       25,722       110        
Electronic banking
    28,017       24,479       3,538       14  
Bank owned life insurance income
    13,639       14,266       (627 )     (4 )
Automobile operating lease income
    12,795       13,116       (321 )     (2 )
Mortgage banking income
    21,435       30,827       (9,392 )     (30 )
Securities (losses) gains
    (2,374 )     (7,340 )     4,966       (68 )
Other income
    41,901       57,470       (15,569 )     (27 )
 
                       
Total noninterest income
  $ 256,052     $ 265,945     $ (9,893 )     (4) %
 
                       
The $9.9 million decrease in total noninterest income reflected:
    $15.6 million, or 27%, decline in other income, as the prior quarter included a $31.4 million gain on the sale of Visa ® stock. The current quarter reflected a $22.8 million benefit representing the change in fair value of our derivatives that did not qualify for hedge accounting. This benefit was partially offset by a $7.5 million loss on commercial loans held for sale as well as other equity investment losses.
 
    $9.4 million, or 30%, decline in mortgage banking income, primarily reflecting a $15.3 million decline in origination and secondary marketing income as loan originations declined 37% from the prior quarter. This was partially offset by a $2.5 million net improvement in MSR valuation and hedging from the prior quarter (see Table 15) .
Partially offset by:
    $5.5 million, or 7%, increase in service charges on deposit accounts, primarily reflecting seasonally higher personal service charges, mostly nonsufficient funds and overdraft related, as well as account growth.
 
    $5.0 million decline in securities losses as the current quarter reflected a $2.4 million loss compared with a $7.3 million loss in the prior quarter.
 
    $3.5 million, or 14%, increase in electronic banking income including additional third-party processing fees.

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2009 First Nine Months versus 2008 First Nine Months
The following table reflects noninterest income for the first nine-month periods of 2009 and 2008:
Table 18 — Noninterest Income — 2009 First Nine Months vs. 2008 First Nine Months
                                 
    Nine Months Ended        
    September 30,     Change  
(in thousands)   2009     2008     Amount     Percent  
Service charges on deposit accounts
  $ 226,042     $ 232,806     $ (6,764 )     (3) %
Brokerage and insurance income
    105,996       106,563       (567 )     (1 )
Trust services
    76,364       98,169       (21,805 )     (22 )
Electronic banking
    74,978       67,429       7,549       11  
Bank owned life insurance income
    40,817       41,199       (382 )     (1 )
Automobile operating lease income
    39,139       26,681       12,458       47  
Mortgage banking income
    87,680       15,741       71,939       N.M.  
Securities (losses) gains
    (7,647 )     (70,288 )     62,641       N.M.  
Other income
    117,730       121,739       (4,009 )     (3 )
 
                       
Total noninterest income
  $ 761,099     $ 640,039     $ 121,060       19 %
 
                       
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 nine-month periods of 2009 and 2008:
Table 19 — Mortgage Banking Income and Net Impact of MSR Hedging
                                 
    Nine Months Ended        
    September 30,     YTD 2009 vs 2008  
(in thousands, except as noted)   2009     2008     Amount     Percent  
Mortgage Banking Income
                               
 
                       
Origination and secondary marketing
  $ 78,238     $ 30,077     $ 48,161       N.M. %
Servicing fees
    36,205       33,898       2,307       7  
Amortization of capitalized servicing (1)
    (36,780 )     (20,172 )     (16,608 )     (82 )
Other mortgage banking income
    18,894       13,809       5,085       37  
 
                       
Sub-total
    96,557       57,612       38,945       68  
 
                               
MSR valuation adjustment (1)
    18,814       10,687       8,127       76  
Net trading losses related to MSR hedging
    (27,691 )     (52,558 )     24,867       47  
 
                       
Total mortgage banking income
  $ 87,680     $ 15,741     $ 71,939       N.M. %
 
                       
 
                               
Mortgage originations (in millions)
  $ 4,131       3,049     $ 1,082       35 %
Average trading account securites used to hedge MSRs (in millions)
    87       1,089       (1,002 )     (92 )
 
                               
Capitalized mortgage servicing rights (2)
  $ 200,969     $ 230,398       (29,429 )     (13 )
 
                               
Total mortgages serviced for others (2) (in millions)
    16,145       15,741       404       3  
 
                               
MSR % of investor servicing portfolio
    1.24 %     1.46 %     (0.22) %     (15) %
 
                               
Net Impact of MSR Hedging
                               
 
                               
MSR valuation adjustment (1)
  $ 18,814     $ 10,687     $ 8,127       76 %
 
                               
Net trading losses related to MSR hedging
    (27,691 )     (52,558 )     24,867       (47 )
 
                               
Net interest income related to MSR hedging
    2,831       23,666       (20,835 )     (88 )
 
                       
Net impact of MSR hedging
  $ (6,046 )   $ (18,205 )   $ 12,159       (67) %
 
                       
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 $121.1 million, or 19%, increase in total noninterest income reflected:
    $71.9 million increase in mortgage banking income, reflecting a $48.2 million increase in origination and secondary marketing income as loans sales and loan originations were substantially higher, and a $33.0 million improvement in MSR hedging (see Table 19) .
 
    $62.6 million improvement in securities losses as the first nine-month period of 2008 included $76.6 million of OTTI adjustments compared with $42.1 million of OTTI adjustments during the 2009 first nine-month period.
 
    $12.5 million increase in automobile operating lease income, reflecting a 40% increase in average operating lease balances as lease originations since the 2007 fourth quarter were recorded as operating leases. All automobile lease originations were discontinued in the 2008 fourth quarter.
 
    $7.5 million increase in electronic banking, reflecting increased transaction volumes and additional third-party processing fees.
Partially offset by:
    $6.8 million decline in service charges on deposit account, reflecting lower consumer NSF and overdraft fees, partially offset by higher commercial service charges.

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    $4.0 million decline in other income, reflecting a $25.1 million gain in the first nine-month period of 2008 reflecting the sale of a portion of our Visa ® stock, a $16.9 million decline customer derivatives revenue from the comparable year-ago period, and a $7.5 million loss on sale of loans held-for-sale during the first nine-month period of 2009. These unfavorable impacts were partially offset by a $31.4 million gain in the first nine-month period of 2009 reflecting the sale of our remaining Visa ® stock, and the net impact of a $22.8 million change in fair value of derivatives that did not qualify for hedge accounting.
Noninterest Expense
(This section should be read in conjunction with Significant Items 1, 4, and 5.)
The following table reflects noninterest expense for each of the past five quarters:
Table 20 — Noninterest Expense
                                         
    2009     2008  
(in thousands)   Third     Second     First     Fourth     Third  
Personnel costs
    172,152     $ 171,735     $ 175,932     $ 196,785     $ 184,827  
Outside data processing and other services
    37,999       39,266       32,432       31,230       32,386  
Net occupancy
    25,382       24,430       29,188       22,999       25,215  
OREO and foreclosure expense
    38,968       26,524       9,887       8,171       9,113  
Equipment
    20,967       21,286       20,410       22,329       22,102  
Amortization of intangibles
    16,995       17,117       17,135       19,187       19,463  
Professional services
    18,108       16,658       16,454       16,430       12,234  
Marketing
    8,259       7,491       8,225       9,357       7,049  
Automobile operating lease expense
    10,589       11,400       10,931       10,483       9,093  
Telecommunications
    5,902       6,088       5,890       5,892       6,007  
Printing and supplies
    3,950       4,151       3,572       4,175       4,316  
Goodwill impairment
          4,231       2,602,713              
Other expense
    41,826       (10,395 )     37,000       43,056       7,191  
 
                             
Total noninterest expense
  $ 401,097     $ 339,982     $ 2,969,769     $ 390,094     $ 338,996  
 
                             
 
                                       
Number of employees (full-time equivalent), at period-end
    10,194       10,342       10,540       10,951       10,901  

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2009 Third Quarter versus 2008 Third Quarter
Noninterest expense increased $62.1 million, or 18%, from the year-ago quarter.
Table 21 — Noninterest Expense — 2009 Third Quarter vs. 2008 Third Quarter
                                 
    Third     Third        
    Quarter     Quarter     Change  
(in thousands)   2009     2008     Amount     Percent  
Personnel costs
  $ 172,152     $ 184,827     $ (12,675 )     (7) %
Outside data processing and other services
    37,999       32,386       5,613       17  
Net occupancy
    25,382       25,215       167       1  
OREO and foreclosure expense
    38,968       9,113       29,855       N.M.  
Equipment
    20,967       22,102       (1,135 )     (5 )
Amortization of intangibles
    16,995       19,463       (2,468 )     (13 )
Professional services
    18,108       12,234       5,874       48  
Marketing
    8,259       7,049       1,210       17  
Automobile operating lease expense
    10,589       9,093       1,496       16  
Telecommunications
    5,902       6,007       (105 )     (2 )
Printing and supplies
    3,950       4,316       (366 )     (8 )
Other expense
    41,826       7,191       34,635       N.M.  
 
                       
Total noninterest expense
  $ 401,097     $ 338,996     $ 62,101       18 %
 
                       
 
                               
Full-time equivalent employees, at period-end
    10,194       10,901       (707 )     (6) %
N.M., not a meaningful value.
The $62.1 million increase reflected:
    $34.6 million increase in other expense, reflecting a $19.8 million increase in FDIC insurance expenses as the prior period’s assessment expense was offset by an assessment credit that has since been fully utilized. In addition, the year-ago quarter included a $21.4 million reduction to expense as a result of a gain on the debt extinguishment.
 
    $29.9 million increase in OREO and foreclosure expense, reflecting higher levels of problem assets, as well as loss mitigation activities.
 
    $5.9 million, or 48%, increase in professional services, reflecting higher consulting and collection-related expenses.
 
    $5.6 million, or 17%, increase in outside data processing and other services, primarily reflecting portfolio servicing fees now paid to Franklin resulting from the 2009 first quarter restructuring of this relationship.
Partially offset by:
    $12.7 million, or 7%, decline in personnel costs, reflecting a decline in salaries and lower benefits and commission expense. Full-time equivalent staff declined 6% from the year-ago period.
 
    $2.5 million, or 13%, decline in amortization of intangibles expense.

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2009 Third Quarter versus 2009 Second Quarter
Noninterest expense increased $61.1 million, or 18%, from the 2009 second quarter.
Table 22 — Noninterest Expense — 2009 Third Quarter vs. 2009 Second Quarter
                                 
    Third     Second        
    Quarter     Quarter     Change  
(in thousands)   2009     2009     Amount     Percent  
Personnel costs
  $ 172,152     $ 171,735     $ 417       %
Outside data processing and other services
    37,999       39,266       (1,267 )     (3 )
Net occupancy
    25,382       24,430       952       4  
OREO and foreclosure expense
    38,968       26,524       12,444       47  
Equipment
    20,967       21,286       (319 )     (1 )
Amortization of intangibles
    16,995       17,117       (122 )     (1 )
Professional services
    18,108       16,658       1,450       9  
Marketing
    8,259       7,491       768       10  
Automobile operating lease expense
    10,589       11,400       (811 )     (7 )
Telecommunications
    5,902       6,088       (186 )     (3 )
Printing and supplies
    3,950       4,151       (201 )     (5 )
Goodwill impairment
          4,231       (4,231 )      
Other expense
    41,826       (10,395 )     52,221       N.M.  
 
                       
Total noninterest expense
  $ 401,097     $ 339,982     $ 61,115       18 %
 
                       
 
                               
Full-time equivalent employees, at period-end
    10,194       10,342       (148 )     (1) %
N.M., not a meaningful value.
The $61.1 million increase in noninterest expense reflected:
    $52.2 million increase in other expense, reflecting the reduction of the prior quarter’s expense by a $67.4 gain on the redemption of a portion of our junior subordinated debt, partially offset by a reduction in FDIC insurance expense as the prior quarter included a $23.6 million special assessment.
 
    $12.4 million, or 47%, increase in OREO and foreclosure expense, reflecting higher levels of problem assets, as well as loss mitigation activities. The current quarter included a $14.3 million charge related to one CRE retail OREO property.

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2009 First Nine Months versus 2008 First Nine Months
Noninterest expense for the first nine-month period of 2009 increased $2.6 billion from the comparable year-ago period.
Table 23 — Noninterest Expense — 2009 First Nine Months vs. 2008 First Nine Months
                                 
    Nine Months Ended        
    September 30,     Change  
(in thousands)   2009     2008     Amount     Percent  
Personnel costs
  $ 519,819     $ 586,761     $ (66,942 )     (11 )%
Outside data processing and other services
    109,697       96,933       12,764       13  
Net occupancy
    79,000       85,429       (6,429 )     (8 )
OREO and foreclosure expense
    75,379       25,284       50,095       N.M.  
Equipment
    62,663       71,636       (8,973 )     (13 )
Amortization of intangibles
    51,247       57,707       (6,460 )     (11 )
Professional services
    51,220       33,183       18,037       54  
Marketing
    23,975       23,307       668       3  
Automobile operating lease expense
    32,920       20,799       12,121       58  
Telecommunications
    17,880       19,116       (1,236 )     (6 )
Printing and supplies
    11,673       14,695       (3,022 )     (21 )
Goodwill impairment
    2,606,944             2,606,944        
Other expense
    68,431       52,430       16,001       31  
 
                       
Total noninterest expense
  $ 3,710,848     $ 1,087,280     $ 2,623,568       N.M. %
 
                       
 
                               
Number of employees (full-time equivalent), at period-end
    10,194       10,901       (707 )     (6 )
N.M., not a meaningful value
The $2,623.6 million increase in total noninterest expense reflected:
    $2,606.9 million of goodwill impairment recorded in 2009. The majority of the goodwill impairment, $2,602.7 million, was recorded during the 2009 first quarter. The remaining $4.2 million of goodwill impairment was recorded in the 2009 second quarter, and was related to the sale of a small payments-related business in July 2009. (See “Goodwill” discussion located within the Critical Account Policies and Use of Significant Estimates” for additional information).
 
    $50.1 million increase in OREO and foreclosure expense, reflecting higher levels of problem assets, as well as loss mitigation activities.
 
    $18.0 million increase in professional services, reflecting higher consulting and collection-related expenses.
 
    $16.0 million, or 31%, increase in other expense. The primary factors contributing to the increase are shown below:
                         
    Nine Months Ended        
    September 30,        
(in millions)   2009     2008     Change  
Total other noninterest expense
  $ 68.4     $ 52.4     $ 16.0  
Primary factors contributing to increase:
                       
Gain on redemption of junior subordinated debt
    (67.4 )           (67.4 )
Decline in non-deposit insurance expense
    (10.0 )           (10.0 )
Increase in deposit insurance expense
    76.2             76.2  
Gain on extinguishment of debt
          (21.4 )     21.4  
 
                 
 
                       
Total other noninterest expense, after adjusting for primary factors contributing to increase
  $ 69.6     $ 73.8     $ (4.2 )
 
                 
      The increase of $76.2 million in deposit insurance expense was comprised of two components: (a) $23.6 million FDIC special assessment during the 2009 second quarter, and (b) $52.6 million increase primarily related to our 2008 FDIC assessments being significantly reduced by a nonrecurring deposit assessment credit provided by the FDIC that was depleted during the 2008 fourth quarter. This deposit insurance credit offset substantially all of our assessment in the first nine-month period of 2008.

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      Also, several other expense categories, such as travel expense, declined as a result of the implementation of expense reduction initiatives.
 
    $12.8 million increase in outside data processing and other services, primarily reflecting portfolio servicing fees paid to Franklin resulting from the 2009 first quarter restructuring of this relationship.
 
    $12.1 million increase in automobile operating lease expense, primarily reflecting the 40% increase in average operating leases discussed previously.
Partially offset by:
    $66.9 million decline in personnel expense, reflecting a decline in salaries, and lower benefits and commission expense. Full-time equivalent staff declined 6% from the comparable year-ago period.
 
    $9.0 million decline in equipment costs, reflecting lower depreciation costs, as well as lower repair and maintenance costs.
Provision for Income Taxes
(This section should be read in conjunction with Significant Items 2 and 4.)
The provision for income taxes in the 2009 third quarter was a benefit of $91.2 million, resulting in an effective tax rate benefit of 35.4%. This compared with a tax benefit of $12.7 million in the 2009 second quarter and a tax expense of $17.0 million in the 2008 third quarter. The effective tax rates in the prior quarter and year-ago quarters were a benefit of 9.2% and an expense of 18.5 %, respectively. The effective tax rate for the first nine-month period of 2009 was a benefit of 11.5% compared with an expense of 18.7% for the first nine-month period of 2008. As of September 30, 2009, a net deferred tax asset of $297.1 million was recorded. There was no impairment to the deferred tax asset as a result of carryback capacity and projected taxable income.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. Also, we are subject to ongoing tax examinations in various jurisdictions. During the 2009 second quarter, the State of Ohio completed the audit of our 2001, 2002, and 2003 corporate franchise tax returns. During 2008, the IRS completed the audit of our consolidated federal income tax returns for tax years 2004 and 2005. In addition, we are subject to ongoing tax examinations in various other state and local jurisdictions. Both the IRS and various state tax officials 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 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.
We account for uncertainties in income taxes in accordance with ASC 740, “Income Taxes”. At September 30, 2009 we had a gross unrecognized tax benefit of $10.8 million in income tax liability related to tax positions taken in prior periods. This balance includes $7.0 million of unrecognized tax benefits that would impact the effective tax rate, if recognized. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. However, any ultimate settlement is not expected to be material to the financial statements as a whole. Our policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in the provision for income taxes. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. It is possible that the amount of the liability for unrecognized tax benefits under examination could change during the next 12 months. An estimate of the range of the possible change cannot be made at this time.

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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 2008 Form 10-K, and subsequent filings with the SEC. Additionally, the MD&A, included as an exhibit to our 2008 Form 10-K, should be read in conjunction with this MD&A as this report provides only material updates to the 2008 Form 10-K. Our definition, philosophy, and approach to risk management are unchanged from the discussion presented in the 2008 Form 10-K.
Credit Risk
Credit risk is the risk of loss due to our counterparties not being able to meet their financial obligations under agreed upon terms. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have credit risk associated with our investment and derivatives activities. Credit risk is incidental to trading activities and represents a significant risk that is associated with our investment securities portfolio (see “Investment Securities Portfolio” discussion) . Credit risk is mitigated through a combination of credit policies and processes, market risk management activities, and portfolio diversification.
Credit Exposure Mix
As shown in Table 24, at September 30, 2009, commercial loans totaled $21.3 billion, and represented 57% of our total credit exposure. This portfolio was diversified between C&I and CRE loans ( see “Commercial Credit” discussion) .
Total consumer loans were $16.0 billion at September 30, 2009, and represented 43% of our total credit exposure. The consumer portfolio included home equity loans and lines of credit, residential mortgages, and automobile loans and leases (see “Consumer Credit” discussion) .

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Table 24 — Loans and Leases Composition
                                                                                 
    2009     2008  
(in millions)   September 30,     June 30,     March 31,     December 31,     September 30,  
 
                                                                               
By Type
                                                                               
Commercial: (1)
                                                                               
Commercial and industrial (2)
  $ 12,547       34 %   $ 13,320       35 %   $ 13,768       35 %   $ 13,541       33 %   $ 13,638       33 %
Commercial real estate:
                                                                               
Construction
    1,815       5       1,857       5       2,074       5       2,080       5       2,111       5  
Commercial (2)
    6,900       19       7,089       18       7,187       18       8,018       20       7,796       19  
 
                                                           
Commercial real estate
    8,715       23       8,946       23       9,261       23       10,098       25       9,907       24  
 
                                                           
Total commercial
    21,262       57       22,266       58       23,029       58       23,639       58       23,545       57  
 
                                                           
Consumer:
                                                                               
Automobile loans (3)
    2,939       8       2,855       7       2,894       7       3,901       10       3,918       10  
Automobile leases
    309       1       383       1       468       1       563       1       698       2  
Home equity
    7,576       20       7,631       20       7,663       19       7,556       18       7,497       18  
Residential mortgage
    4,468       12       4,646       12       4,837       12       4,761       12       4,854       12  
Other loans
    750       2       714       2       657       2       672       2       680       2  
 
                                                           
Total consumer
    16,042       43       16,229       42       16,519       42       17,453       42       17,647       43  
 
                                                           
Total loans and leases
  $ 37,304       100 %   $ 38,495       100 %   $ 39,548       100 %   $ 41,092       100     $ 41,192       100 %
 
                                                           
     
(1)   There were no commercial loans outstanding that would be considered a concentration of lending to a particular group of industries.
 
(2)   The 2009 first quarter reflected a net reclassification of $782.2 million from commercial real estate to commercial and industrial.
 
(3)   The decrease from December 31, 2008, to March 31, 2009, reflected a $1.0 billion automobile loan sale during the 2009 first quarter.

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Franklin relationship
(This section should be read in conjunction with Significant Item 2 and the “Franklin Loans Restructuring Transaction” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section.)
As a result of the March 31, 2009, restructuring, on a consolidated basis, the $650.2 million nonaccrual commercial loan to Franklin at December 31, 2008, is no longer reported. Instead, we now report the loans secured by first- and second- mortgages on residential properties and OREO properties, both of which had previously been assets of Franklin or its subsidiaries and were pledged to secure our loan to Franklin. At the time of the restructuring, the loans had a fair value of $493.6 million and the OREO properties had a fair value of $79.6 million. As a result, NALs declined by a net amount of $284.1 million as there were $650.2 million commercial NALs outstanding related to Franklin, and $366.1 million mortgage-related NALs outstanding, representing first- and second- lien mortgages that were nonaccruing at March 31, 2009. Also, our specific ALLL for the Franklin portfolio of $130.0 million was eliminated; however, no initial increase to the ALLL relating to the acquired mortgages was recorded as these assets were recorded at fair value.
The following table summarizes the Franklin-related balances for accruing loans, NALs, and OREO since the restructuring:
Table 25 — Franklin-related Loan and OREO Balances
                         
    2009  
(in millions)   September 30     June 30     March 31  
Total accruing loans
    126.7       127.4       127.4  
Total nonaccruing loans
    338.5       344.6       366.1  
 
                 
Total Loans
    465.2       472.0       493.5  
OREO
    31.0       43.6       79.6  
 
                 
Total Franklin Loans and OREO
  $ 496.2     $ 515.6     $ 573.1  
 
                 
The changes in the Franklin-related balances since the restructuring have been a result of the collection strategies utilized, and have been consistent with our expectations based on the restructuring agreement. The reduction in the June 30, 2009, balances, compared with March 31, 2009, balances, was significantly impacted by refinance activity. Refinance activity slowed during the 2009 third quarter, and did not have as significant of an impact in reducing the balances. The principal and interest collections associated with the loans remained consistent with expectations. The OREO balances have declined significantly as a direct result of a focused effort to sell the properties.
Commercial Credit
The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic outlook.
In commercial lending, ongoing credit management is dependent upon the type and nature of the loan. We monitor all significant exposures on a regular basis. Internal risk ratings are assigned at the time of each loan approval, and are assessed and updated with each monitoring event. The frequency of the monitoring event is dependent upon the size and complexity of the individual credit, but in no case less frequently than every 12 months. There is also extensive macro portfolio management analysis conducted to identify performance trends or specific portions of the overall portfolio that may need additional monitoring activity. The single family home builder portfolio and retail projects are examples of segments of the portfolio that have received more frequent evaluation at the loan level as a result of the economic environment and performance trends (see “Single Family Home Builder” and “Retail Properties” discussions) . We continually review and adjust our risk rating criteria and rating determination process based on actual experience. This review and analysis process results in a determination of an appropriate ALLL amount for our commercial loan portfolio.
Our commercial loan portfolio is primarily comprised of the following:
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

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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 operation or sale of the real estate is not considered a repayment source for the loan.
Commercial real estate (CRE) loans — CRE loans consist of loans for income producing real estate properties. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with cash flow substantially in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers; and are repaid through cash flows related to the operation, sale, or refinance of the property.
Construction CRE loans — Construction CRE loans are loans to individuals, companies, or developers used for the construction of a commercial property for which repayment will be generated by the sale or permanent financing of the property. A significant portion of our construction CRE portfolio consists of residential product types (land, single family, and condominium loans) within our regions, and to a lesser degree, retail and multi-family projects. 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.
COMMERCIAL LOAN PORTFOLIO REVIEWS AND ACTIONS
In the 2009 first quarter, we restructured our commercial loan relationship with Franklin by taking control of the underlying mortgage loan collateral, and transferring the exposure to the consumer loan portfolio as first- and second- lien loans to individuals secured by residential real estate properties. (See “Franklin Loans Restructuring Transaction” located within the “Critical Accounting Policies and Use of Significant Estimates” section). We also proactively completed a concentrated review of our single family home builder and retail CRE loan portfolio segments, our CRE portfolio’s two highest risk segments. We now review the “criticized” portion of these portfolios on a monthly basis. The increased review activity resulted in more pro-active decisions on nonaccrual status, reserve levels, and charge-offs in the 2009 second and third quarters. This heightened level of portfolio monitoring is ongoing.
During the 2009 second quarter, we updated our evaluation of every “noncriticized” commercial relationship with an aggregate exposure of over $500,000. This review included C&I, CRE, and business banking loans and encompassed $13.2 billion of total commercial loans, and $18.8 billion in related commitments.
This was a detailed, labor-intensive process designed to enhance our understanding of each borrower’s financial position, and to ensure that this understanding was accurately reflected in our internal risk rating system. Our objective was to identify current and potential credit risks across the portfolio consistent with our expectation that the economy in our markets will not improve before the end of this year.
Our activity in the 2009 third quarter represented a continuation of the portfolio management processes established in the first two quarters of 2009. We continue to fully assess our criticized loans over $500,000 on a monthly basis, and have maintained the discipline associated with the ongoing “noncriticized” review process established in the 2009 second quarter. In many cases, we have directly contacted the borrower and obtained the most recent financial information available, including interim financial results. In addition, we discussed the impact of the economic environment on the future direction of their company, industry prospects, collateral values, and other borrower-specific information.
In addition, with respect to our commercial loan exposure to automobile dealers, we have had an ongoing review process in place for some time now. Our automobile dealer commercial loan portfolio is predominantly comprised of larger, “well-capitalized”, multi-franchised dealer groups underwritten to conservative credit standards. These dealer groups have largely remained profitable on a consolidated basis due to franchise diversity and a shift of sales emphasis to higher-margin, used vehicles, as well as a focus on the service department. Additionally, our portfolio is closely monitored through receipt and review of monthly dealer financial statements and ongoing floor plan inventory audits, which allow for rapid response to weakening trends. As a result, we have not experienced any significant deterioration in the credit quality of our automobile dealer commercial loan portfolio and remain comfortable with our expectation of no material losses, even given the substantial stress associated with our dealership closings announced by Chrysler and GM. The more recent announcement regarding the Saturn dealerships also has had no impact on our view of the portfolio. (See “Automobile Industry” section located within the “Commercial and Industrial Portfolio” section for additional information.)

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In summary, we have established an ongoing portfolio management process involving each business segment, providing an improved view of emerging risk issues at a borrower level, enhanced ongoing monitoring capabilities, and strengthened actions and timeliness to mitigate emerging loan risks. Given our stated view of continued economic weakness for the foreseeable future, we anticipate some level of additional negative credit migration. While we can give no assurances given market uncertainties, we believe that as a result of our increased portfolio management actions, a portfolio management process involving each business segment, an improved view of emerging risk issues at the borrower level, enhanced ongoing monitoring capabilities, and strengthened borrower-level loan structures, any future migration will be manageable.
Our commercial loan portfolio, including CRE loans, is diversified by customer size, as well as throughout our geographic footprint. Certain segments of our commercial loan portfolio are discussed in further detail below:
COMMERCIAL AND INDUSTRIAL (C&I) PORTFOLIO
The C&I portfolio is comprised of loans to businesses where the source of repayment is associated with the ongoing operations of the business. Generally, the loans are secured with the financing of the borrower’s assets, such as equipment, accounts receivable, or inventory. In many cases, the loans are secured by real estate, although the sale of the real estate is not a primary source of repayment for the loan. For these loans that are 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 a concentration of lending to a particular industry or within a geographic standpoint. Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home building industry, contractors, and automotive suppliers. However, the combined total of these segments represent less than 10% of the total C&I portfolio. We manage the risks inherent in this portfolio through origination policies, concentration limits, ongoing loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as loan-to-value (LTV), and debt service coverage ratios, as applicable.
To the extent C&I loans are secured by real estate collateral, appropriate appraisals are obtained at origination, and updated on an as needed basis, in compliance with regulatory requirements.
As shown in the following table, C&I loans totaled $12.5 billion at September 30, 2009.
Table 26 — Commercial and Industrial Loans and Leases by Industry Classification
                                 
    At September 30, 2009  
    Commitments     Loans Outstanding  
(in millions of dollars)   Amount     Percent     Amount     Percent  
Industry Classification:
                               
Services
  $ 5,076       27 %   $ 3,893       31 %
Manufacturing
    3,499       19       2,169       17  
Finance, insurance, and real estate
    2,574       14       2,124       17  
Retail trade — Other than Auto Dealers
    1,682       9       966       8  
Retail trade — Auto Dealers
    1,324       7       754       6  
Wholesale trade
    1,357       7       753       6  
Transportation, communications, and utilities
    1,164       6       700       6  
Contractors and construction
    925       5       462       4  
Energy
    567       3       388       3  
Agriculture and forestry
    274       2       189       2  
Public administration
    131       1       123       1  
Other
    29             26        
 
                       
 
                               
Total
  $ 18,602       100 %   $ 12,547       100 %
 
                       

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Credit quality information regarding NCOs and NALs for our C&I loan portfolio is presented in the following table.
Table 27 — Commercial and Industrial Credit Quality Data by Industry Classification
                                         
    Quarter Ended September 30, 2009     At September 30, 2009  
    Net Charge-offs     Nonaccrual Loans  
(in millions)   Amount     Annualized %     Percent     Amount     % of Related
Outstandings
 
Industry Classification:
                                       
Manufacturing
  $ 16.6       2.97 %     24 %   $ 166.4       8 %
Services
    14.1       1.41       20       171.2       4  
Transportation, communications, and utilities
    10.4       5.85       15       21.1       3  
Finance, insurance, and real estate
    10.3       1.90       15       95.3       4  
Retail trade — Other than Auto Dealers
    6.5       2.61       9       66.0       7  
Wholesale trade
    5.3       2.71       8       37.5       5  
Contractors and construction
    4.8       3.92       7       33.3       7  
Energy
    0.5       0.48       1       14.3       4  
Agriculture and forestry
    0.2       0.50       1       4.8       3  
Other
    0.1       1.22             0.8       3  
Retail trade — Auto Dealers
    0.0       0.02             1.6        
Public administration
    0.0       0.05             0.4        
 
                                 
 
                                       
Total
  $ 68.8       2.13 %     100 %   $ 612.7       5 %
 
                                 
Within the C&I portfolio, the automotive industry segment continued to be stressed and is discussed below.
Automotive Industry
The following table provides a summary of loans and total exposure including both loans and unused commitments and standby letters of credit to companies related to the automotive industry since December 31, 2008.
Table 28 — Automotive Industry Exposure (1)
                                                 
    September 30, 2009     December 31, 2008  
            % of Total                     % of Total        
(in millions)   Loans Outstanding     Loans     Total Exposure     Loans Outstanding     Loans     Total Exposure  
Suppliers:
                                               
Domestic
  $ 183.6             $ 307.8     $ 182.4             $ 330.9  
Foreign
    31.0               41.3       32.7               45.7  
 
                                       
Total Suppliers
    214.6       0.58 %     349.1       215.1       0.52 %     376.6  
 
                                               
Dealer:
                                               
Floorplan — domestic
    298.0               790.7       552.6               746.8  
Floorplan — foreign
    251.6               562.0       408.1               544.1  
Other
    351.0               428.6       345.6               463.9  
 
                                       
Total Dealer
    900.6       2.41       1,781.3       1,306.4       3.18       1,754.9  
 
                                       
 
                                               
Total Automotive
  $ 1,115.2       2.99     $ 2,130.4     $ 1,521.4       3.70     $ 2,131.5  
 
                                       
     
(1)   Companies with > 25% of revenue derived from the automotive industry.

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Although we do not have direct exposure to the automobile manufacturing companies, we do have limited exposure to automobile industry suppliers, and automobile dealer-related exposures. The automobile industry supplier exposure is embedded primarily in our C&I portfolio within the Commercial Banking segment, while the dealer exposure is originated and managed within the AFDS business segment. As a result of our geographic locations and the above referenced exposure, we have closely monitored the entire automobile industry, particularly the recent events associated with General Motors and Chrysler, including bankruptcy filings, plant closings, production suspension, and model eliminations. We have anticipated the significant reductions in production across the industry that will result in additional economic distress in some of our markets. Our eastern Michigan and northern Ohio markets are particularly exposed to these reductions, and all our markets are affected. We anticipate the impact will result in additional stress throughout our commercial and consumer loan portfolios, as secondary and tertiary businesses are affected by the actions of the manufacturers. However, as these actions were anticipated, many of the potential impacts have been mitigated through changes in underwriting criteria and regionally focused policies and procedures. Within the AFDS portfolio, our dealer selection criteria and focus is on multiple brand dealership groups, as we have immaterial exposure to single-brand dealerships.
As shown in Table 28, our total direct exposure to the automotive supplier segment is $349.1 million, of which $214.6 million represented loans outstanding. We included companies that derive more than 25% of their revenues from contracts with automobile manufacturing companies. This low level of exposure is reflective of our industry-level risk-limits approach.
While the entire automotive industry is under significant pressure as evidenced by a significant reduction in new car sales and the resulting production declines, we believe that our floorplan exposure of $1.4 billion will not be materially affected. Our floorplan exposure is centered in large, multi-dealership entities, and we have focused on client selection and conservative underwriting standards. We anticipate that the economic environment will affect our dealerships in the near-term, but we believe the majority of our portfolio will perform favorably relative to the industry in the increasingly stressed environment. The decline in floorplan loans outstanding at September 30, 2009, compared with December 31, 2008, reflected reduced dealership inventory, in part as a result of the successful “Cash for Clunkers” program.
While the specific impacts associated with the ongoing changes in the industry are unknown, we believe that we have taken appropriate steps to limit our exposure. When we have chosen to extend credit, our client selection process has focused us on the most diversified and strongest dealership groups. We do not anticipate any material dealer-related losses in the portfolio despite numerous dealership closings during 2009. Our dealer selection criteria, with a focus on multi-dealership groups has proven itself in this environment.
COMMERCIAL REAL ESTATE (CRE) PORTFOLIO
As shown in the following table, CRE loans totaled $8.7 billion and represented 23% of total loans and leases at September 30, 2009.

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Table 29 — Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
At September 30, 2009  
(in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     West Virginia     Other     Total
Amount
    Percent  
Retail properties
  $ 901     $ 240     $ 157     $ 210     $ 10     $ 81     $ 47     $ 591     $ 2,237       26 %
Multi family
    828       138       94       78       41       7       80       135       1,401       16  
Office
    581       204       114       57       24       22       61       65       1,128       13  
Industrial and warehouse
    498       226       35       86       14       43       21       118       1,041       12  
Single family home builders
    628       93       57       35       23       116       20       67       1,039       12  
Lines to real estate companies
    688       120       89       49       4       1       54       17       1,022       12  
Hotel
    152       85       23       26                   10       70       366       4  
Health care
    172       77       24                         5       32       310       4  
Raw land and other land uses
    55       27       3       8       6       3       2       15       119       1  
Other
    32       9       6       1       3                   1       52       1  
 
                                                           
 
                                                                               
Total
  $ 4,535     $ 1,219     $ 602     $ 550     $ 125     $ 273     $ 300     $ 1,111     $ 8,715       100 %
 
                                                           
 
                                                                               
% of total portfolio
    52 %     14 %     7 %     6 %     1 %     3 %     3 %     13 %     100 %        
 
                                                                               
Net charge-offs (three months ended Sept. 30, 2009)
  $ 86.9     $ 37.5     $ 2.0     $ 8.9     $ 0.6     $ 16.5     $     $ 16.8     $ 169.2          
Net charge-offs — annualized percentage
    7.52 %     12.09 %     1.32 %     6.35 %     1.78 %     23.84 %     0.00 %     5.94 %     7.62 %        
 
                                                                               
Nonaccrual loans
  $ 523.9     $ 192.4     $ 41.9     $ 47.6     $ 10.8     $ 89.7     $ 1.2     $ 226.2     $ 1,133.7          
% of portfolio
    12 %     16 %     7 %     9 %     9 %     33 %     0 %     20 %     13 %        
Credit quality data regarding NCOs and NALs for our CRE portfolio is presented in the following table.
Table 30 — Commercial Real Estate Loans Credit Quality Data by Property Type
                                         
    Quarter Ended September 30,2009       At September 30, 2009  
    Net charge-offs     Nonaccrual Loans  
                  % of Related  
(in millions)   Amount     Annualized %     Percent     Amount     Outstandings  
Single family home builders
  $ 62.0       22.67 %     37 %   $ 340.0       33 %
Retail properties
    52.5       9.22       31       331.1       15  
Multi family
    27.3       7.67       16       98.8       7  
Industrial and warehouse
    18.6       7.03       11       138.7       13  
Lines to real estate companies
    3.3       1.26       2       64.6       6  
Office
    2.5       0.86       1       110.3       10  
Raw land and other land uses
    2.4       8.09       1       27.6       23  
Hotel
    0.6       0.64             14.7       4  
Other
    0.1       1.05             6.8       13  
Health care
                      0.9        
 
                             
 
                                       
Total
  $ 169.2       7.62 %     100 %   $ 1,133.7       13 %
 
                             
We manage the risks inherent in this portfolio through origination policies, concentration limits, ongoing loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as LTV, 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. We may require more conservative loan terms, depending on the project.

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Dedicated real estate professionals within our Commercial Real Estate segment team originated the majority of the portfolio, with the remainder obtained from prior acquisitions. Appraisals from approved vendors are reviewed by an internal appraisal review group to ensure the quality of the valuation used in the underwriting process. The portfolio is diversified by project type and loan size, and represents a significant piece of the credit risk management strategies employed for this portfolio. Our loan review staff provides an assessment of the quality of the underwriting and structure and validates the risk rating assigned to the loan.
Appraisal values are obtained in conjunction with all originations and renewals, and on an as needed basis, in compliance with regulatory requirements. Given the stressed environment for some loan types, we have initiated ongoing portfolio level reviews of segments such as single family home builders and retail properties (see “Single Family Home Builders” and “Retail Properties” discussions) . These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. The results of these actions indicated that additional stress is likely due to the current economic conditions. Property values are updated using appraisals on a regular basis to ensure that appropriate decisions regarding the ongoing management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers as well as an in-depth knowledge of CRE project lending and the market environment.
At the portfolio level, we actively monitor the concentrations and performance metrics of all loan types, with a focus on higher risk segments. Macro-level stress-test scenarios based on retail sales and home-price depreciation trends for the segments are embedded in our performance expectations, and lease-up and absorption scenarios are assessed. We anticipate the current stress within this portfolio will continue for the foreseeable future, resulting in elevated charge-offs, NALs, and ALLL levels.
During the 2009 first quarter, a portfolio review resulted in a reclassification of certain CRE loans to C&I loans at the end of the period. This net reclassification of $782 million was primarily associated with loans to businesses secured by the real estate and buildings that house their operations. These owner-occupied loans secured by real estate were underwritten based on the cash flow of the business and are more appropriately classified as C&I loans.
Within the CRE portfolio, the single family home builder and retail properties segments continued to be stressed as a result of the continued decline in the housing markets and general economic conditions. As previously mentioned above, these segments continue to be the highest risk segments within our CRE portfolio, and are discussed further below.
Single Family Home Builders
At September 30, 2009, we had $1,039 million of CRE loans to single family home builders. Such loans represented 3% of total loans and leases. Of this portfolio segment, 69% were to finance projects currently under construction, 15% to finance land under development, and 16% to finance land held for development. The $1,039 million represented a $550 million, or 35%, decrease compared with $1,589 million at December 31, 2008. The decrease primarily reflected the reclassification of loans secured by 1-4 family residential real estate rental properties to C&I loans, consistent with industry practices in the definition of this segment. Other factors contributing to the decrease in exposure include no new originations in this portfolio segment in 2009, increased property sale activity, and substantial charge-offs. The increased sale activity was evident in the 2009 second and third quarters; however, we anticipate a seasonal decline in the 2009 fourth quarter.
The housing market across our geographic footprint remained stressed, reflecting relatively lower sales activity, declining prices, and excess inventories of houses to be sold, particularly impacting borrowers in our eastern Michigan and northern Ohio markets. Further, a portion of the loans extended to borrowers located within our geographic regions was to finance projects outside of our geographic regions. We anticipate the residential developer market will continue to be depressed, and anticipate continued pressure on the single family home builder segment for the foreseeable future. As previously mentioned, all significant exposures are monitored on a periodic basis. For this portfolio segment, the periodic monitoring has included: (a) all loans greater than $50 thousand have been reviewed continuously over the past 18 months and continue to be monitored, (b) credit valuation adjustments have been made when appropriate based on the current condition of each relationship, and (c) reserves have been increased based on proactive risk identification and thorough borrower analysis.

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Retail Properties
Our portfolio of CRE loans secured by retail properties totaled $2,237 million, or approximately 6% of total loans and leases, at September 30, 2009. Loans within this portfolio segment declined 1% from December 31, 2008. 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 significantly impacted the projects that secure the loans in this portfolio segment. 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.
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.
Our consumer loan portfolio is primarily comprised of home equity loans, traditional residential mortgages, and automobile loans and leases.
Home equity — Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first- or second- mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is granted directly affect the amount of credit extended and, in addition, changes in these values impact the severity of losses.
Residential mortgages — Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30- year term, and in most cases, are extended to borrowers to finance their primary residence. In some cases, government agencies or private mortgage insurers guarantee the loan. Generally speaking, our practice is to sell a significant majority of our fixed-rate originations in the secondary market.
Automobile loans/leases — Automobile loans/leases is primarily comprised of loans made through automotive dealerships, and includes exposure in several out-of-market states. However, no out-of-market state represented more than 10% of our total automobile loan portfolio, and we expect to see relatively rapid reductions in these exposures as we ceased automobile loan originations in out-of-market states during the 2009 first quarter. Our automobile lease portfolio will continue to decline as we ceased new originations of all automobile leases during the 2008 fourth quarter.
The residential mortgage and home equity portfolios are primarily located throughout our geographic footprint. The general slowdown in the housing market has impacted the performance of our residential mortgage and home equity portfolios over the past year. While the degree of price depreciation varies across our markets, all regions throughout our footprint have been affected. Given the conditions in our markets as described above in the single family home builder section, the home equity and residential mortgage portfolios are particularly noteworthy, and are discussed in greater detail below:

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Table 31 — Selected Home Equity and Residential Mortgage Portfolio Data (1)
                                                 
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages  
(dollar amounts in millions)   9/30/09     12/31/08     9/30/09     12/31/08     9/30/09     12/31/08  
Ending Balance
  $ 2,670     $ 3,116     $ 4,906     $ 4,440     $ 4,468     $ 4,761  
Portfolio Weighted Average LTV ratio (2)
    71 %     70 %     78 %     78 %     77 %     76 %
Portfolio Weighted Average FICO (3)
    718       725       724       720       699       707  
                         
    Three-Month Period Ended September 30, 2009  
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages (4)  
Originations
  $ 54     $ 338     $ 127  
 
                       
Origination Weighted Average LTV ratio (2)
    63 %     73 %     84 %
 
                       
Origination Weighted Average FICO (3)
    753       766       749  
     
(1)   Excludes Franklin loans.
 
(2)   The loan-to-value (LTV) ratios for home equity loans and home equity lines of credit are cumulative LTVs reflecting the balance of any senior loans.
 
(3)   Portfolio Weighted Average FICO reflects currently updated customer credit scores whereas Origination Weighted Average FICO reflects the customer credit scores at the time of loan origination.
 
(4)   Represents only owned-portfolio originations.
HOME EQUITY PORTFOLIO
Our home equity portfolio (loans and lines of credit) consists of both first and second mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios, and LTV ratios. We offer closed-end home equity loans with a fixed interest rate and level monthly payments and a variable-rate, interest-only home equity line of credit.
We believe we have granted credit conservatively within this portfolio. We have not originated 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, recent 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 of greater than 100%. 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.
For certain home equity loans and lines of credit, we may utilize Automated Valuation Methodology (AVM) or other model driven value estimates during the credit underwriting process. Regardless of the estimate methodology, we supplement our underwriting with a third party fraud detection system to limit our exposure to “flipping”, and outright fraudulent transactions. We update values, as we believe appropriate, and in compliance with applicable regulations, for loans identified as higher risk, based on performance indicators to facilitate our workout and loss mitigation functions.
We continue to make appropriate origination policy adjustments based on our assessment of an appropriate risk profile as well as industry actions. As an example, the significant changes made in 2008 by Fannie Mae and Freddie Mac resulted in the reduction of our maximum LTV ratio on second-mortgage loans, even for customers with high credit scores. In addition to origination policy adjustments, we take appropriate actions, as necessary, to mitigate 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 to limit our exposure to “flipping”, and outright fraudulent transactions. We update values, as we believe appropriate, and in compliance with applicable regulations, for loans identified as higher risk, based on performance indicators to facilitate our workout and loss mitigation functions.
During the 2009 third quarter, we transferred to held for sale, and subsequently sold in the 2009 fourth quarter, $44.8 million of underperforming mortgage loans, resulting in a reduction in residential mortgage NALs. We will continue to evaluate this type of transaction in future periods based on market conditions.
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 58% of our total residential mortgage loan portfolio at September 30, 2009. At September 30, 2009, ARM loans that were expected to have rates reset totaled $159.4 million for the remainder of 2009, and $891.4 million for 2010. Given the quality of our borrowers and the relatively low current interest rates, we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk exposure. We initiate borrower contact at least six months prior to the interest rate resetting, and have been successful in converting many ARMs to fixed-rate loans through this process. Additionally, where borrowers are experiencing payment difficulties, loans may be re-underwritten based on the borrower’s ability to repay the loan.
We had $385.0 million of Alt-A mortgage loans in the residential mortgage loan portfolio at September 30, 2009, compared with $445.4 million at December 31, 2008. 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. At September 30, 2009, borrowers for Alt-A mortgages had an average current FICO score of 664 and the loans had an average LTV ratio of 87%, compared with 671 and 88%, respectively, at December 31, 2008. Total Alt-A NCOs were $18.8 million, or an annualized 6.03%, for the first nine-month period of 2009, compared with $7.1 million, or an annualized 1.87%, for the first nine-month period of 2008. As with the entire residential mortgage portfolio, the increase in NCOs reflected, among other actions, a more conservative position on the timing of loss recognition and the transfer to held for sale, and subsequent sale in the 2009 fourth quarter, of underperforming mortgage loans. The ALLL expressed as a percentage of total related loans was 4.83% at September 30, 2009. Our exposure related to this product will continue to decline in the future as we stopped originating these loans in 2007 .
Interest-only loans comprised $602.8 million of residential real estate loans at September 30, 2009, compared with $691.9 million at December 31, 2008. Interest-only loans are underwritten to specific standards including minimum credit scores, stressed debt-to-income ratios, and extensive collateral evaluation. At September 30, 2009, borrowers for interest-only loans had an average current FICO score of 718 and the loans had an average LTV ratio of 78%, compared with 724 and 78%, respectively, at December 31, 2008. Total interest-only NCOs were $10.3 million, or an annualized 2.13% for the first nine-month period of 2009, compared with $1.3 million, or an annualized 0.22%, for the first nine-month period of 2009. As with the entire residential mortgage portfolio, the increase in NCOs reflected, among other actions, a more conservative position on the timing of loss recognition and the transfer to held for sale, and subsequent sale in the 2009 fourth quarter, of underperforming mortgage loans. The ALLL expressed as a percentage of total related loans was 1.03% at September 30, 2009.
Several recent government actions have been enacted that have affected the residential mortgage portfolio and MSRs in particular. Various refinance programs positively affected the availability of credit for the industry. We are utilizing these programs to enhance our existing strategies of working closely with our customers.

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AUTOMOTIVE INDUSTRY IMPACTS ON CONSUMER LOAN PORTFOLIO
The issues affecting the automotive industry (see “Automotive Industry” discussion located within the “Commercial Credit” section) also have an impact on the performance of the consumer loan portfolio. While there is a direct correlation between the industry situation and our exposure to the automotive suppliers and automobile dealers in our commercial portfolio, the loss of jobs and reduction in wages may have a negative impact on our consumer portfolio. We continue to monitor the potential impact on our geographic regions in the event of significant production changes or plant closings in our markets. This project included assessing the downstream impact on automotive suppliers, related small businesses, and consumers. As a result of this project, we believe that we have made a number of positive decisions regarding the quality of our consumer portfolio given the current environment. In the indirect automobile portfolio, we have focused on borrowers with high credit scores for many years, as reflected by the performance of the portfolio given the economic conditions. In the residential and home equity loan portfolios, we have been operating in a relatively high unemployment situation for an extended period of time, yet have been able to maintain our performance metrics reflecting our focus on strong underwriting. In summary, while we anticipate our performance results may be negatively impacted, we believe the impact will be manageable.
Counterparty Risk
In the normal course of business, we engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and for trading activities. As a result, we are exposed to credit risk, or the risk of loss if the counterparty fails to perform according to the terms of our contract or agreement.
We minimize counterparty risk through credit approvals, actively setting adjusting exposure limits, implementing monitoring procedures similar to those used for our commercial portfolio (see “Commercial Credit” discussion) , generally entering into transactions only with counterparties that carry high quality ratings, and requiring collateral when appropriate.
The majority of the financial institutions with whom we are exposed to counterparty risk are large commercial banks. The potential amount of loss, which would have been recognized at September 30, 2009, if a counterparty defaulted, did not exceed $16 million for any individual counterparty.
Credit Quality
We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the three sections immediately following: NALs and NPAs, ACL, and NCOs.
Credit quality performance in the 2009 third quarter continued to be negatively impacted by the sustained economic weakness in our Midwest markets. In addition, we initiated certain actions with regard to loss recognition on our residential mortgage portfolio that we believe will increase the flexibility in working the loans toward timelier resolution.
NONACCRUAL LOANS (NAL/NALs) AND NONPERFORMING ASSETS (NPA/NPAs)
(This section should be read in conjunction with the “Franklin Relationship” discussion.)
NPAs consist of (a) NALs, which represent loans and leases that are no longer accruing interest, (b) impaired held-for-sale loans, (c) OREO, and (d) other NPAs. A C&I or CRE loan is generally placed on nonaccrual status when collection of principal or interest is in doubt or when the loan is 90-days past due. Home equity and residential mortgage loans are placed on nonaccrual status at 120 days and 180 days, respectively, and are written down to realizable value at no later than 180 days past due . 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.
Accruing restructured loans (ARLs) consists of accruing loans that have been re-underwritten, modified, or restructured when borrowers are experiencing payment difficulties. Generally, prior to restructuring, these loans have not reached a status to be considered as NALs. These loan restructurings are one component of the loss mitigation process, and are made to increase the likelihood of the borrower’s ability to repay the loan. Modifications to these loans include, but are not limited to, changes to any of the following: interest rate, maturity, principal, payment amount, or a combination of each. The decline in the commercial ARL balance at September 30, 2009, compared with June 30, 2009, represented the migration of a significant amount of commercial ARLs to NAL status. The increase in the residential mortgage ARLs represented our continued efforts in working with stressed borrowers.

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Table 32 reflects period-end NALs, NPAs, ARLs, and past due loans and leases detail for each of the last five quarters. Due to the impact of the NALs and NPAs related to Franklin, we believe it is helpful to analyze trends in our portfolio with those Franklin-related NALs and NPAs removed. Table 33 details the Franklin-related impacts to NALs and NPAs for each of the last five quarters.

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Table 32 — Nonaccruing Loans (NALs), Nonperforming Assets (NPAs), and Past Due Loans and Leases
                                         
    2009     2008  
(in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
Nonaccrual loans and leases (NALs):
                                       
Commercial and industrial (1)
  $ 612,701     $ 456,734     $ 398,286     $ 932,648     $ 174,207  
Commercial real estate
    1,133,661       850,846       629,886       445,717       298,844  
Alt-A mortgages
    9,810       25,861       25,175       21,286       18,559  
Interest-only mortgages
    8,336       17,428       20,580       12,221       8,492  
Franklin residential mortgages
    322,796       342,207       360,106              
Other residential mortgages
    49,579       89,992       81,094       65,444       58,112  
 
                             
Total residential mortgage (1)
    390,521       475,488       486,955       98,951       85,163  
Home equity (1)
    44,182       35,299       37,967       24,831       27,727  
 
                             
Total NALs
    2,181,065       1,818,367       1,553,094       1,502,147       585,941  
 
                                       
Other real estate:
                                       
Residential (1)
    81,807       107,954       143,856       63,058       59,302  
Commercial
    60,784       64,976       66,906       59,440       14,176  
 
                             
Total other real estate
    142,591       172,930       210,762       122,498       73,478  
Impaired loans held for sale (2)
    20,386       11,287       11,887       12,001       13,503  
Other NPAs (3)
                            2,397  
 
                             
Total NPAs
  $ 2,344,042     $ 2,002,584     $ 1,775,743     $ 1,636,646     $ 675,319  
 
                             
 
                                       
Nonperforming Franklin loans (1)
                                       
Commercial
  $     $     $     $ 650,225     $  
Residential mortgage
    322,796       342,207       360,106              
OREO
    30,996       43,623       79,596              
Home Equity
    15,704       2,437       6,000              
 
                             
Total nonperforming Franklin loans
  $ 369,496     $ 388,267     $ 445,702     $ 650,225     $  
 
                             
 
                                       
NALs as a % of total loans and leases
    5.85 %     4.72 %     3.93 %     3.66 %     1.42 %
 
                                       
NPA ratio (4)
    6.26       5.18       4.46       3.97       1.64  
 
                                       
Accruing loans and leases past due 90 days or more:
                                       
Commercial and industrial
  $     $     $     $ 10,889     $ 24,407  
Commercial real estate
    2,546                   59,425       58,867  
Residential mortgage (excluding loans guaranteed by the U.S. government)
    46,592       97,937       88,381       71,553       58,280  
Home equity
    45,334       35,328       35,717       29,039       23,224  
Other loans and leases
    14,175       13,474       15,611       18,039       14,580  
 
                             
Total, excl. loans guaranteed by the U.S. government
  $ 108,647     $ 146,739     $ 139,709     $ 188,945     $ 179,358  
Add: loans guaranteed by U.S. government
    122,019       99,379       88,551       82,576       68,729  
 
                             
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government
  $ 230,666     $ 246,118     $ 228,260     $ 271,521     $ 248,087  
 
                             
Excluding loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.29 %     0.38 %     0.35 %     0.46 %     0.44 %
Guaranteed by U.S. government, as a percent of total loans and leases
    0.33 %     0.26 %     0.22 %     0.20 %     0.17 %
Including loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.62 %     0.64 %     0.58 %     0.66 %     0.60 %
 
                                       
Accruing restructured loans:
                                       
Commercial (1)
  $ 153,010     $ 267,975     $ 201,508     $ 185,333     $ 364,939  
Alt-A mortgages
    58,367       46,657       36,642       32,336       28,740  
Interest-only mortgages
    10,072       12,147       8,500       7,183       5,094  
Other residential mortgages
    136,024       99,764       62,869       43,338       37,678  
 
                             
Total residential mortgage
    204,463       158,568       108,011       82,857       71,512  
Other
    42,406       35,720       27,014       41,094       40,414  
 
                             
Total accruing restructured loans
  $ 399,879     $ 462,263     $ 336,533     $ 309,284     $ 476,865  
 
                             
     
(1)   Franklin loans were reported as accruing restructured commercial loans for the three-month period ended September 30, 2008. For the three-month period ended December 31, 2008, Franklin loans were reported as nonaccruing commercial and industrial loans. For the three-month periods ended March 31, 2009, June 30, 2009, and September 30, 2009, nonaccruing Franklin loans were reported as residential mortgage loans, home equity loans, and OREO; reflecting the 2009 first quarter restructuring.
 
(2)   The September 30, 2009, figure primarily represent impaired residential mortgage loans held for sale. All other presented figures represent 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.
 
(3)   Other NPAs represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores.
 
(4)   Nonperforming assets 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 33 — NALs/NPAs — Franklin-Related Impact
                                         
    2009     2008  
(in millions)   Third     Second     First     Fourth     Third  
Nonaccrual loans
                                       
Franklin
  $ 338.5     $ 344.6     $ 366.1     $ 650.2     $  
Non-Franklin
    1,842.6       1,473.8       1,187.0       851.9       585.9  
 
                             
Total
  $ 2,181.1     $ 1,818.4     $ 1,553.1     $ 1,502.1     $ 585.9  
 
                             
Total loans and leases
                                       
Franklin
  $ 465.2     $ 472.0     $ 494.0     $ 650.2     $ 1,095.0  
Non-Franklin
    36,838.9       38,023.0       39,054.0       40,441.8       40,097.0  
 
                             
Total
  $ 37,304.1     $ 38,495.0     $ 39,548.0     $ 41,092.0     $ 41,192.0  
 
                             
NAL ratio
                                       
Total
    5.85 %     4.72 %     3.93 %     3.66 %     1.42 %
Non-Franklin
    5.00       3.88       3.04       2.11       1.46  
                                         
    2009     2008  
(in millions)   Third     Second     First     Fourth     Third  
Nonperforming assets
                                       
Franklin
  $ 369.5     $ 388.3     $ 445.7     $ 650.2     $  
Non-Franklin
    1,974.5       1,614.3       1,330.0       986.4       675.3  
 
                             
Total
  $ 2,344.0     $ 2,002.6     $ 1,775.7     $ 1,636.6     $ 675.3  
 
                             
Total loans and leases
  $ 37,304.1     $ 38,495.0     $ 39,548.0     $ 41,092.0     $ 41,192.0  
Total other real estate, net
    142.6       172.9       210.8       122.5       73.5  
Impaired loans held for sale
    20.4       11.3       11.9       12.0       13.5  
Other NPAs
                            2.4  
 
                             
Total
    37,467.1       38,679.2       39,770.7       41,226.5       41,281.4  
Franklin
    369.5       388.3       445.7       650.2       1,095  
 
                             
Non-Franklin
  $ 37,097.6     $ 38,290.9     $ 39,325.0     $ 40,576.3     $ 40,186.4  
 
                             
NPA ratio
                                       
Total
    6.26 %     5.18 %     4.46 %     3.97 %     1.64 %
Non-Franklin
    5.34       4.23       3.39       2.43       1.68  
The $362.7 million increase in NALs from the prior quarter primarily reflected increases in CRE and C&I-related NALs.
During the 2009 third quarter, and because we believe that there will be no meaningful economic recovery for the foreseeable future, we took a more conservative approach in identifying and classifying emerging problem credits. In many cases, commercial loans were placed on nonaccrual status even though the loan was less than 30 days past due for both principal and interest payments. This significantly impacted the inflow of commercial loan NALs for the quarter. Of the commercial loans placed on nonaccrual status in the current quarter, over 55% were less than 30 days past due. Of the period end $1,746.4 million of CRE and C&I-related NALs, approximately 36% represented loans that were less than 30 days past due. We believe the decisions increase our options for working these loans toward timelier resolution.
C&I NALs increased $156.0 million, or 34%, from the end of the prior quarter. The increase was associated with loans throughout our regions, with no specific geographic concentration, and industry segments. In general, C&I loans that support the home building industry, contractors, and automotive suppliers experienced the most stress, however, less than 10% of the C&I portfolio is associated with these segments. The manufacturing-related segment also showed some deterioration, but we believe this to be more borrower-specific than industry-specific.
CRE NALs increased $282.8 million, or 33%, from the end of the prior quarter. This increase reflected the continued decline in the housing market, stress on retail sales, and the general decline in the economy. The increase was not concentrated in any specific project type, although the single family home builder and retail segments remain the most stressed.

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Residential mortgage NALs declined $85.0 million, or 18%, reflecting the impact of the more conservative position on the timing of loss recognition, active loss mitigation and troubled debt restructuring efforts, as well as the sale of loans. Our efforts to proactively address existing issues with loss mitigation and loan modification transactions have helped to minimize the inflow of new NALs.
Home equity NALs increased $8.9 million, or 25%, reflecting loans migrating into the more serious delinquency stage. However, this does not indicate higher future losses, as all loans have been written down to expected proceeds.
NPAs, which include NALs, increased $341.5 million, or 17%, the end of the prior quarter. This increase in NPAs was less than the increase in NALs as OREO assets declined $30.3 million, or 18%, reflecting a continuation of our focused efforts to sell OREO properties.
Compared with December 31, 2008, NPAs, which include NALs, increased $707.4 million, or 43%, reflecting:
    $687.9 million increase in CRE NALs, reflecting the continued decline in the housing market and stress on retail sales, as the majority of the increase was associated with the retail and the single family home builder segments. The stress of lower retail sales and downward pressure on rents given the economic conditions, have adversely affected retail projects.
 
    $291.6 million increase in residential mortgage NALs. This reflected an increase of $322.8 million related to the Franklin restructuring, partially offset by the impact of the more conservative position regarding the timing of loss recognition, active loss mitigation, as well as the sale of loans. Our efforts to proactively address existing issues with loss mitigation and loan modification transactions have helped to reduce the inflow of new NALs.
 
    $20.1 million increase in OREO. This reflected an increase of $79.6 million in OREO assets recorded as part of the Franklin restructuring. Subsequently, Franklin-related OREO assets declined $48.6 million, reflecting the active marketing and selling of Franklin-related OREO properties over the past nine months. The non-Franklin-related decline also reflects the same active marketing and selling of our OREO properties .
Partially offset by:
    $319.9 million decrease in C&I NALs. This reflected a reduction of $650.2 million related to the 2009 first quarter Franklin relationship, partially offset by an increase on $330.3 million in non-Franklin related NALs reflecting the economic conditions in our markets. In general, the C&I loans experiencing the most stress are those supporting the housing and construction segments, and to a lesser degree, the automobile suppliers and restaurant segments.
The over 90-day delinquent, but still accruing, ratio excluding loans guaranteed by the U.S. Government, was 0.29% at September 30, 2009, down from 0.38% at the end of second quarter, and 15 basis points lower than a year-ago. On this same basis, the delinquency ratio for total consumer loans was 0.66% at September 30, 2009, down from 0.90% at the end of the prior quarter, and up from 0.54% a year-ago.

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NPA activity for each of the past five quarters was as follows:
Table 34 — Nonperforming Assets (NPAs) Activity
                                         
    2009     2008  
(in thousands)   Third     Second     First     Fourth     Third  
NPAs, beginning of period
  $ 2,002,584     $ 1,775,743     $ 1,636,646     $ 675,319     $ 624,736  
New NPAs
    899,855       750,318       622,515       509,320       175,345  
Franklin impact, net (1)
    (18,771 )     (57,436 )     (204,523 )     650,225        
Returns to accruing status
    (52,498 )     (40,915 )     (36,056 )     (13,756 )     (9,104 )
Loan and lease losses
    (305,405 )     (282,713 )     (168,382 )     (95,687 )     (47,288 )
OREO losses
    (30,623 )     (20,614 )     (4,034 )     (4,648 )     (5,504 )
Payments
    (117,710 )     (95,124 )     (61,452 )     (66,536 )     (43,319 )
Sales
    (33,390 )     (26,675 )     (8,971 )     (17,591 )     (19,547 )
 
                             
NPAs, end of period
  $ 2,344,042     $ 2,002,584     $ 1,775,743     $ 1,636,646     $ 675,319  
 
                             
     
(1)   Franklin loans were reported as accruing restructured commercial loans for the three-month period ended September 30, 2008. For the three-month period ended December 31, 2008, Franklin loans were reported as nonaccruing commercial and industrial loans. For the three-month periods ended March 31, 2009, June 30, 2009, and September 30, 2009, nonaccruing Franklin loans were reported as residential mortgage loans, home equity loans, and OREO; reflecting the 2009 first quarter restructuring.
ALLOWANCE FOR CREDIT LOSSES (ACL)
(This section should be read in conjunction with Significant Item 2.)
We maintain two reserves, both of which are available to absorb inherent 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 and determining the adequacy of the ACL.
We have an established monthly process to determine the adequacy of the ACL that relies on a number of analytical tools and benchmarks. No single statistic or measurement, in itself, determines the adequacy of the ACL. Changes to the ACL are impacted by changes in the estimated credit losses inherent in our loan portfolios. For example, our process requires increasingly higher level of reserves as a loan’s internal classification moves from higher quality ratings to lower, and vice versa. This movement across the credit scale is called migration.
We continued to update our probability-of-default and loss-given-default factors based on the actual performance and the expected performance of our portfolios. The updates to these factors made during the first nine-month period of 2009 were primarily associated with the consumer and business banking portfolios.
Table 35 reflects activity in the ALLL and ACL for each of the last five quarters. Due to the Franklin-related impact to the ALLL and ACL, we believe it is helpful to analyze trends in the ALLL and ACL with the Franklin-related impact removed. Table 36 displays the Franklin-related impacts to the ALLL and ACL for each of the last five quarters.

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Table 35 — Quarterly Credit Reserves Analysis
                                         
    2009     2008  
(in thousands)   Third     Second     First     Fourth     Third  
Allowance for loan and lease losses, beginning of period
  $ 917,680     $ 838,549     $ 900,227     $ 720,738     $ 679,403  
Loan and lease losses
    (377,443 )     (359,444 )     (353,005 )     (571,053 )     (96,388 )
Recoveries of loans previously charged off
    21,501       25,037       11,514       10,433       12,637  
 
                             
Net loan and lease losses
    (355,942 )     (334,407 )     (341,491 )     (560,620 )     (83,751 )
 
                             
Provision for loan and lease losses
    472,137       413,538       289,001       728,046       125,086  
Allowance for loans transferred to held-for-sale
    (1,904 )                        
Economic reserve transfer
                      12,063        
Allowance of assets sold
                (9,188 )            
 
                             
Allowance for loan and lease losses, end of period
  $ 1,031,971     $ 917,680     $ 838,549     $ 900,227     $ 720,738  
 
                             
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 47,144     $ 46,975     $ 44,139     $ 61,640     $ 61,334  
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    2,999       169       2,836       (5,438 )     306  
Economic reserve transfer
                      (12,063 )      
 
                             
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 50,143     $ 47,144     $ 46,975     $ 44,139     $ 61,640  
 
                             
Total allowances for credit losses
  $ 1,082,114     $ 964,824     $ 885,524     $ 944,366     $ 782,378  
 
                             
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Total loans and leases
    2.77 %     2.38 %     2.12 %     2.19 %     1.75 %
Nonaccrual loans and leases (NALs)
    47       50       54       60       123  
Nonperforming assets (NPAs)
    44       46       47       55       107  
 
                                       
Total allowances for credit losses (ACL) as % of:
                                       
Total loans and leases
    2.90 %     2.51 %     2.24 %     2.30 %     1.90 %
NALs
    50       53       57       63       134  
NPAs
    46       48       50       58       116  
 
                             

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Table 36 — ALLL/ACL — Franklin-Related Impact
                                         
    2009     2008  
(in millions)   Third     Second     First     Fourth     Third  
Allowance for loan and lease losses
                                       
Franklin
  $     $     $     $ 130.0     $ 115.3  
Non-Franklin
    1,032.0       917.7       838.5       770.2       605.4  
 
                             
Total
  $ 1,032.0     $ 917.7     $ 838.5     $ 900.2     $ 720.7  
 
                             
Allowance for credit losses
                                       
Franklin
  $     $     $     $ 130.0     $ 115.3  
Non-Franklin
    1,082.1       964.8       885.5       814.4       667.1  
 
                             
Total
  $ 1,082.1     $ 964.8     $ 885.5     $ 944.4     $ 782.4  
 
                             
Total loans and leases
                                       
Franklin
  $ 465.2     $ 472.0     $ 494.0     $ 650.2     $ 1,095.0  
Non-Franklin
    36,838.9       38,023.0       39,054.0       40,441.8       40,097.0  
 
                             
Total
  $ 37,304.1     $ 38,495.0     $ 39,548.0     $ 41,092.0     $ 41,192.0  
 
                             
ALLL as % of total loans and leases
                                       
Total
    2.77 %     2.38 %     2.12 %     2.19 %     1.75 %
Non-Franklin
    2.80       2.41       2.15       1.90       1.51  
 
                                       
ACL as % of total loans and leases
                                       
Total
    2.90 %     2.51 %     2.24 %     2.30 %     1.90 %
Non-Franklin
    2.94       2.54       2.27       2.01       1.66  
 
                                       
Nonaccrual loans
                                       
Franklin
  $ 338.5     $ 344.6     $ 366.1     $ 650.2     $  
Non-Franklin
    1,842.6       1,473.8       1,187.0       851.9       586.0  
 
                             
Total
  $ 2,181.1     $ 1,818.4     $ 1,553.1     $ 1,502.1     $ 586.0  
 
                             
 
                                       
ALLL as % of NALs
                                       
Total
    47 %     50 %     54 %     60 %     123 %
Non-Franklin
    56       62       71       90       103  
 
                                       
ACL as % of NALs
                                       
Total
    50 %     53 %     57 %     63 %     134 %
Non-Franklin
    59       65       75       96       114  
As shown in the above table, the ALLL increased to $1,032.0 million at September 30, 2009, compared with $917.7 million at June 30, 2009, and $900.2 million at December 31, 2008. Expressed as a percent of period-end loans and leases, the ALLL ratio increased to 2.77% at September 30, 2009, compared with 2.38% at June 30, 2009, and 2.19% at December 31, 2008. The increase of $114.3 million compared with June 30, 2009 primarily reflected the necessary building of reserves due to the continued economic weaknesses in our markets. As loans were assigned to higher risk ratings, our calculated reserve increased accordingly, consistent with our reserving methodology. The increase of $131.7 million compared with December 31, 2008, also reflected the continued economic weaknesses in our markets as well as an increase of reserves resulting from the 2009 second quarter portfolio review process (See “Commercial Loan Portfolio Review and Actions” section located within the “Commercial Credit” section for additional information) , partially offset by the impact of using the previously established $130.0 million Franklin specific reserve to absorb related NCOs due to the 2009 first quarter Franklin restructuring (see “Franklin Loan” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section) .
On a combined basis, the ACL as a percent of total loans and leases at September 30, 2009, was 2.90% compared with 2.51% at June 30, 2009, and 2.30% at December 31, 2008. Like the ALLL, the Franklin restructuring impacted the change in the ACL from December 31, 2008.

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The table below reflects how our ACL is allocated among our various loan categories:
 
Table 37 — Allocation of Allowances for Credit Losses (1)
                                                                                 
    2009     2008  
(in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
Commercial:
                                                                               
Commercial and industrial
  $ 381,912       34 %   $ 347,339       35 %   $ 309,465       35 %   $ 412,201       33 %   $ 344,074       33 %
Commercial real estate
    436,661       23       368,464       23       349,750       23       322,681       25       241,419       24  
 
                                                           
Total commercial
    818,573       57       715,803       58       659,215       58       734,882       58       585,493       57  
 
                                                           
Consumer:
                                                                               
Automobile loans and leases
    59,134       9       60,995       8       51,235       9       44,712       11       41,144       11  
Home equity
    86,989       20       76,653       20       67,510       19       63,538       18       61,926       18  
Residential mortgage
    50,177       12       48,093       12       45,138       12       44,463       12       19,848       12  
Other loans
    17,098       2       16,136       2       15,451       2       12,632       2       12,327       2  
 
                                                           
Total consumer
    213,398       43       201,877       42       179,334       42       165,345       42       135,245       43  
 
                                                           
 
                                                                               
Total allowance for loan and lease losses
  $ 1,031,971       100 %   $ 917,680       100 %   $ 838,549       100 %   $ 900,227       100 %   $ 720,738       100 %
 
                                                           
 
                                                                               
Allowance for unfunded loan commitments and letters of credit
    50,143               47,144               46,975               44,139               61,640          
 
                                                           
 
                                                                               
Total allowances for credit losses
  $ 1,082,114             $ 964,824             $ 885,524             $ 944,366             $ 782,378