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, 2010
Commission File Number 1-34073
Huntington Bancshares Incorporated
     
Maryland   31-0724920
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
There were 717,132,197 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2010.
 
 

 


 

HUNTINGTON BANCSHARES INCORPORATED
INDEX
         
       
 
       
       
 
       
    85  
 
       
    86  
 
       
    87  
 
       
    88  
 
       
    89  
 
       
    3  
 
       
    4  
 
       
    6  
 
       
       
 
       
    32  
 
       
    58  
 
       
    60  
 
       
    63  
 
       
    64  
 
       
    67  
 
       
    80  
 
       
    129  
 
       
    129  
 
       
       
 
       
    129  
 
       
    129  
 
       
    130  
 
       
    131  
 
       
  Exhibit 12.1
  Exhibit 12.2
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2
  EX-101 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT
  EX-101 DEFINITION LINKBASE DOCUMENT

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PART 1. FINANCIAL INFORMATION
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified regional bank holding company headquartered in Columbus, Ohio. We have more than 144 years of serving the financial needs of our customers. Through our subsidiaries, including our banking subsidiary, The Huntington National Bank (the Bank), we provide full-service commercial and consumer banking services, mortgage banking services, equipment leasing, investment management, trust services, brokerage services, customized insurance service program, and other financial products and services. Our over 600 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. We also offer retail and commercial financial services online at huntington.com; through our 24-hour telephone bank; and through our network of over 1,300 ATMs. The Auto Finance and Dealer Services (AFDS) group offers automobile loans to consumers and commercial loans to automobile dealers within our six-state banking franchise area. During the quarter, we continued the expansion of our automobile lending operations eastward, complementing our Eastern Pennsylvania operations with expansion into five New England States. Selected financial service activities are also conducted in other states including: Private Financial Group (PFG) offices in Florida, Massachusetts, and New York and Mortgage Banking offices in Maryland and New Jersey. International banking services are available through the headquarters office in Columbus and a limited purpose office located in the Cayman Islands and another in Hong Kong.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. It updates the discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K), and should be read in conjunction with our 2009 Form 10-K, as well as the financial statements, notes, and other information contained in this report.
Our discussion is divided into key segments:
    Executive Overview — Provides a summary of our current financial performance, financial condition, and/or business condition. This section also provides our outlook regarding our performance for the remainder of the year.
    Discussion of Results of Operations - Reviews financial performance from a consolidated company perspective. It also includes a “Significant Items” section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.
    Risk Management and Capital - Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
    Business Segment Discussion - Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.
    Additional Disclosures - Provides comments on important matters including risk factors, critical accounting policies and use of significant estimates, acquisitions, and other items.
A reading of each section is important to understand fully the nature of our financial performance and prospects.

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EXECUTIVE OVERVIEW
Summary of 2010 Third Quarter Results
For the quarter, we reported net income of $100.9 million, or $0.10 per common share, compared with $48.8 million, or $0.03 per common share, in the prior quarter ( see Table 1 ). Total revenue for the 2010 third quarter was $679.7 million, up 1% from the prior quarter driven by a $10.4 million, or 3%, increase in fully-taxable equivalent net interest income. However, noninterest expense increased $13.5 million, or 3%, from the prior quarter resulting primarily from continued implementation of our strategic initiatives via investments in people, product expansion, and distribution designed to grow revenues and improve long-term profitability.
Credit quality performance in the current quarter continued to show improvement as nonperforming assets (NPAs) and net charge-offs (NCOs) declined and reserve coverage increased. This improvement reflected the benefits of our focused actions taken in 2009 to address credit-related issues. Compared with the prior quarter, NPAs declined 30%. NCOs were $184.5 million, or an annualized 1.98% of average total loans and leases, down from $279.2 million, or 3.01%, in the 2010 second quarter. While the period end allowance for credit losses (ACL) as a percentage of loans and leases was 3.67%, down from 3.90% at June 30, 2010, the ACL as a percentage of total nonaccrual loans (NALs) increased to 140% from 120%.
At the end of the prior quarter, we transferred all remaining Franklin-related loans to loans held-for-sale at a lower of cost or fair value of $323.4 million which resulted in 2010 second quarter NCOs of $75.5 million. During the current quarter, the remaining Franklin-related loans were sold at essentially book value. As a result, the only Franklin-related assets remaining at September 30, 2010 were $15.3 million of other-real-estate-owned (OREO) properties, which have been written down to the lower of cost or fair value less cost to sell.
Our period-end capital position remained solid with increases in all of our capital ratios. At September 30, 2010, our regulatory Tier 1 and Total risk-based capital were $2.9 billion and $2.2 billion, respectively, above the “well-capitalized” regulatory thresholds. Our tangible common equity ratio improved 8 basis points to 6.20% and our Tier 1 common risk-based capital ratio improved 33 basis points to 7.39% from June 30, 2010.
Business Overview
General
Our general business objectives remain the same: (a) grow revenue and profitability, (b) grow key fee businesses (existing and new), (c) improve credit quality, including lower NCOs and NPAs, (d) improve cross sell and share-of-wallet across all business segments, (e) reduce commercial real estate “noncore” exposure, and (f) continue to explore opportunities to further reduce our overall risk profile.
Our main challenge to accomplishing our primary objectives results from an economy that remains weak and uncertain. This impairs our ability to grow loans as customers continue to reduce their debt and/or remain cautious about increasing debt until they have a higher degree of confidence in sustainable economic recovery. However, growth in our automobile loan portfolio continued with 2010 third quarter originations of over $1.0 billion. Additionally, we were able to generate modest growth in commercial and industrial (C&I) loans during the quarter.
We face strong competition from other banks and financial service firms in our markets. As such, we have placed strong strategic emphasis on, and continue to develop and expand resources devoted to improving cross-sell performance to take advantage of our loyal core customer base. One example of this emphasis is our recent agreement with Giant Eagle supermarkets to be its exclusive in-store bank in Ohio. When fully implemented, the partnership will give us nearly 500 branches in Ohio, providing us with the largest branch presence among Ohio banks, based on current data. In-store branches have a strong record for checking account acquisition that are expected to increase the number of our households and subsequently drive revenue. Additionally, it will give customers the convenience of seven days per week, and extended hours banking.
Legislative and Regulatory
Legislative and regulatory reforms continue to be adopted which impose additional restrictions on current business practices. Recent actions affecting us included an amendment to Regulation E for allowable deposit service charges and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
Effective July 1, 2010, the Federal Reserve Board amended Regulation E to prohibit charging overdraft fees for ATM or point-of-sale debit card transactions unless the customer opts-in to the overdraft service. For us, such fees were approximately $90 million per year prior to the amendment. Our strategy is to mitigate the potential impact by alerting our customers we can no longer cover such overdrafts unless they opt-in to our overdraft service. To date, our opt-in results have surpassed our expectations. Also, during the quarter, we voluntarily reduced certain nonsufficient funds and overdraft fees (NSF/OD) and introduced 24-Hour Grace™ on overdrafts as part of our “Fair Play” banking philosophy designed to build on our foundation on service excellence by doing what is right and fair for customers. We will accelerate acquisition of new checking households, while improving retention of existing customers.

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The recently passed Dodd-Frank Act is complex and we continue to assess how this legislation and subsequent rule-making will affect us. As hundreds of regulations are promulgated, we will continue to evaluate impacts such as changes in regulatory costs and fees, modifications to consumer products or disclosures required by the Consumer Finance Protection Bureau, the requirements of the enhanced supervision provisions, among others. Two areas where we are focusing on the financial impact are: interchange fees and the eventual inability to include trust preferred capital as a component of our Tier 1 regulatory capital.
Currently, our annual interchange fees are approximately $90 million per year. In the future, the Dodd-Frank Act gives the Federal Reserve, and no longer the banks or system owners, the ability to set the interchange rate charged to merchants for the use of debit cards. The ultimate impact to us cannot be estimated at this time, as there will likely be months of proposals and debate before any specific rules are written.
At September 30, 2010, we had $569.9 million of outstanding trust-preferred-securities that, if disallowed, would reduce our regulatory Tier 1 risk-based capital ratio by approximately 133 basis points. Even with this reduction, our capital ratios would remain above “well-capitalized” levels. There is a 3-year phase-in period beginning on January 1, 2013, that we believe will provide sufficient time to evaluate and address the impacts of this new legislation on our capital structure. Accordingly, we do not anticipate this potential change would have a significant impact to our business.
During the 2010 third quarter, the Basel Committee on Banking Supervision revised the Capital Accord (Basel III), which narrows the definition of capital and increases capital requirements for specific exposures. The new capital requirements will be phased-in over six years beginning in 2013. If these revisions were adopted currently, we estimate they would have a negligible impact on our regulatory capital ratios based on our current understanding of the revisions to capital qualification. We await clarification from our banking regulators on their interpretation of Basel III and any additional requirements to the stated thresholds.
Prior legislative and regulatory actions that have affected us include the U.S. Department of Treasury’s Troubled Asset Relief Program (TARP). We intend to repay our TARP capital as soon as it is prudent to do so. Additional discussion regarding TARP is located within the Capital section.
Near-term expectations
Our current expectation is the economy will remain relatively stable for the rest of the year. Revenue growth will remain challenging in the near-term due to implementing the amendment to Regulation E and our voluntary actions to reduce certain fees as part of implementing our “Fair Play” banking philosophy. We also anticipate noninterest expense to remain at current levels as we continue to make investments to grow the businesses.
Reflecting these factors, pretax pre-provision income levels are expected to be in line with recent reported performance. The net interest margin is expected to be flat to down slightly, reflecting the impact of the flatter, low yield curve. Our net interest margin will also be supported by disciplined loan and deposit pricing. We anticipate continued modest growth in C&I loans, as well as continued declines in commercial real estate (CRE) loans. The automobile loan portfolio is expected to continue its strong growth, though home equity and residential mortgages are likely to remain flat. Core deposits are expected to show continued growth, although at a slower rate due to the lack of reinvestment options at desirable spreads for any funds generated in excess of loan growth. Fee income will continue to be negatively impacted by lower service charges on deposit accounts, as well as lower mortgage banking revenues. In contrast, other fee categories are expected to grow at a faster rate reflecting the impact of our cross-sell initiatives throughout the company. Expense levels should be in line with current quarter performance. Positive credit quality trends are expected to continue, with declines in NCOs, NPAs, and provision for credit losses.

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DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key condensed consolidated balance sheet and income statement trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion”.
Percent changes of 100% or more are typically shown as “N.M.” or “Not Meaningful”. Such large percent changes typically reflect the impact of unusual or particularly volatile items within the measured periods. Since the primary purpose of showing a percent change is to discern underlying performance trends, such large percent changes are typically “not meaningful” for such trend analysis purposes.

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Table 1 — Selected Quarterly Income Statement Data (1)
                                         
    2010     2009  
(amounts in thousands, except per share amounts)   Third     Second     First     Fourth     Third  
Interest income
  $ 534,669     $ 535,653     $ 546,779     $ 551,335     $ 553,846  
Interest expense
    124,707       135,997       152,886       177,271       191,027  
 
                             
Net interest income
    409,962       399,656       393,893       374,064       362,819  
Provision for credit losses
    119,160       193,406       235,008       893,991       475,136  
 
                             
Net interest income (loss) after provision for credit losses
    290,802       206,250       158,885       (519,927 )     (112,317 )
 
                             
Service charges on deposit accounts
    65,932       75,934       69,339       76,757       80,811  
Brokerage and insurance income
    36,376       36,498       35,762       32,173       33,996  
Mortgage banking income
    52,045       45,530       25,038       24,618       21,435  
Trust services
    26,997       28,399       27,765       27,275       25,832  
Electronic banking
    28,090       28,107       25,137       25,173       28,017  
Bank owned life insurance income
    14,091       14,392       16,470       14,055       13,639  
Automobile operating lease income
    11,356       11,842       12,303       12,671       12,795  
Securities gains (losses)
    (296 )     156       (31 )     (2,602 )     (2,374 )
Other noninterest income
    32,552       28,785       29,069       34,426       41,901  
 
                             
Total noninterest income
    267,143       269,643       240,852       244,546       256,052  
 
                             
Personnel costs
    208,272       194,875       183,642       180,663       172,152  
Outside data processing and other services
    38,553       40,670       39,082       36,812       38,285  
Deposit and other insurance expense
    23,406       26,067       24,755       24,420       23,851  
Net occupancy
    26,718       25,388       29,086       26,273       25,382  
OREO and foreclosure expense
    12,047       4,970       11,530       18,520       38,968  
Equipment
    21,651       21,585       20,624       20,454       20,967  
Professional services
    20,672       24,388       22,697       25,146       18,108  
Amortization of intangibles
    15,145       15,141       15,146       17,060       16,995  
Automobile operating lease expense
    9,159       9,667       10,066       10,440       10,589  
Marketing
    20,921       17,682       11,153       9,074       8,259  
Telecommunications
    5,695       6,205       6,171       6,099       5,902  
Printing and supplies
    4,062       3,893       3,673       3,807       3,950  
Gain on early extinguishment of debt (2)
                      (73,615 )     (60 )
Other noninterest expense
    21,008       23,279       20,468       17,443       17,749  
 
                             
Total noninterest expense
    427,309       413,810       398,093       322,596       401,097  
 
                             
Income (loss) before income taxes
    130,636       62,083       1,644       (597,977 )     (257,362 )
Provision (benefit) for income taxes
    29,690       13,319       (38,093 )     (228,290 )     (91,172 )
 
                             
Net income (loss)
  $ 100,946     $ 48,764     $ 39,737     $ (369,687 )   $ (166,190 )
 
                             
Dividends on preferred shares
    29,495       29,426       29,357       29,288       29,223  
 
                             
Net income (loss) applicable to common shares
  $ 71,451     $ 19,338     $ 10,380     $ (398,975 )   $ (195,413 )
 
                             
 
                                       
Average common shares — basic
    716,911       716,580       716,320       715,336       589,708  
Average common shares — diluted (3)
    719,567       719,387       718,593       715,336       589,708  
 
                                       
Net income (loss) per common share — basic
  $ 0.10     $ 0.03     $ 0.01     $ (0.56 )   $ (0.33 )
Net income (loss) per common share — diluted
    0.10       0.03       0.01       (0.56 )     (0.33 )
Cash dividends declared per common share
    0.01       0.01       0.01       0.01       0.01  
 
                                       
Return on average total assets
    0.76 %     0.38 %     0.31 %     (2.80 )%     (1.28 )%
Return on average total shareholders’ equity
    7.30       3.60       3.00       (25.60 )     (12.50 )
Return on average tangible shareholders’ equity (4)
    8.90       4.90       4.20       (27.90 )     (13.30 )
Net interest margin (5)
    3.45       3.46       3.47       3.19       3.20  
Efficiency ratio (6)
    60.60       59.40       60.10       49.00       61.40  
Effective tax rate (benefit)
    22.7       21.5       N.M.       (38.2 )     (35.4 )
 
                                       
Revenue — fully-taxable equivalent (FTE)
                                       
 
                             
Net interest income
  $ 409,962     $ 399,656     $ 393,893     $ 374,064     $ 362,819  
FTE adjustment
    2,631       2,490       2,248       2,497       4,177  
 
                             
Net interest income (5)
    412,593       402,146       396,141       376,561       366,996  
Noninterest income
    267,143       269,643       240,852       244,546       256,052  
 
                             
Total revenue (5)
  $ 679,736     $ 671,789     $ 636,993     $ 621,107     $ 623,048  
 
                             
     
N.M., not a meaningful value.

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

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Table 2 — Selected Year to Date Income Statement Data (1)
                                 
    Nine Months Ended September 30,     Change  
(in thousands, except per share amounts)   2010     2009     Amount     Percent  
Interest income
  $ 1,617,101     $ 1,686,807     $ (69,706 )     (4 )%
Interest expense
    413,590       636,584       (222,994 )     (35 )
 
                       
Net interest income
    1,203,511       1,050,223       153,288       15  
Provision for credit losses
    547,574       1,180,680       (633,106 )     (54 )
 
                       
Net interest income (loss) after provision for credit losses
    655,937       (130,457 )     786,394       N.M.  
 
                       
Service charges on deposit accounts
    211,205       226,042       (14,837 )     (7 )
Brokerage and insurance income
    108,636       105,996       2,640       2  
Mortgage banking income
    122,613       87,680       34,933       40  
Trust services
    83,161       76,364       6,797       9  
Electronic banking
    81,334       74,978       6,356       8  
Bank owned life insurance income
    44,953       40,817       4,136       10  
Automobile operating lease expense
    35,501       39,139       (3,638 )     (9 )
Securities gains (losses)
    (171 )     (7,647 )     7,476       (98 )
Other income
    90,406       117,730       (27,324 )     (23 )
 
                       
Total noninterest income
    777,638       761,099       16,539       2  
 
                       
Personnel costs
    586,789       519,819       66,970       13  
Outside data processing and other services
    118,305       111,283       7,022       6  
Deposit and other insurance expense
    74,228       89,410       (15,182 )     (17 )
Net occupancy
    81,192       79,000       2,192       3  
OREO and foreclosure expense
    28,547       75,379       (46,832 )     (62 )
Equipment
    63,860       62,663       1,197       2  
Professional services
    67,757       51,220       16,537       32  
Amortization of intangibles
    45,432       51,247       (5,815 )     (11 )
Automobile operating lease expense
    28,892       32,920       (4,028 )     (12 )
Marketing
    49,756       23,975       25,781       N.M.  
Telecommunications
    18,071       17,880       191       1  
Printing and supplies
    11,628       11,673       (45 )      
Goodwill impairment
          2,606,944       (2,606,944 )     N.M.  
Gain on early extinguishment of debt (2)
          (73,827 )     73,827       N.M.  
Other expense
    64,756       51,262       13,494       26  
 
                       
Total noninterest expense
    1,239,213       3,710,848       (2,471,635 )     (67 )
 
                       
Income (loss) before income taxes
    194,362       (3,080,206 )     3,274,568       N.M.  
Provision (benefit) for income taxes
    4,915       (355,714 )     360,629       N.M.  
 
                       
Net income (loss)
  $ 189,447     $ (2,724,492 )   $ 2,913,939       N.M. %
 
                       
Dividends declared on preferred shares
    88,278       145,467       (57,189 )     (39 )
 
                       
Net income (loss) applicable to common shares
  $ 101,169     $ (2,869,959 )   $ 2,971,128       N.M. %
 
                       
Average common shares — basic
    716,604       471,958       244,646       52 %
Average common shares — diluted (3)
    719,182       471,958       247,224       52  
 
                               
Per common share
                               
Net income per common share — basic
  $ 0.14     $ (6.08 )   $ 6.22       N.M. %
Net income (loss) per common share — diluted
    0.14       (6.08 )     6.22       N.M.  
Cash dividends declared
    0.03       0.03              
 
                               
Return on average total assets
    0.49 %     (6.95 )%     7.44       N.M. %
Return on average total shareholders’ equity
    4.7       (62.7 )     67.4       N.M.  
Return on average tangible shareholders’ equity (4)
    6.1       (2.6 )     8.7       N.M.  
Net interest margin (5)
    3.46       3.09       0.37       12  
Efficiency ratio (6)
    60.0       57.6       2.4       4  
Effective tax rate (benefit)
    2.5       (11.5 )     14.0       N.M.  
 
                               
Revenue — fully taxable equivalent (FTE)
                               
Net interest income
  $ 1,203,511     $ 1,050,223     $ 153,288       15 %
FTE adjustment
    7,369       8,975       (1,606 )     (18 )
 
                       
Net interest income
    1,210,880       1,059,198       151,682       14  
Noninterest income
    777,638       761,099       16,539       2  
 
                       
Total revenue
  $ 1,988,518     $ 1,820,297     $ 168,221       9 %
 
                       
     
N.M., not a meaningful value.

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(1)   Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” discussion.
 
(2)   The 2009 gain included $67.4 million related to the purchase of certain trust preferred securities.
 
(3)   For the presented periods, the impact of the convertible preferred stock issued in 2008 was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for the periods.
 
(4)   Net income excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
 
(5)   On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(6)   Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).
Significant Items
Definition of Significant Items
From time-to-time, revenue, expenses, or taxes are impacted by items judged by us to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature, or otherwise make period-to-period comparisons less meaningful. We refer to such items as “Significant Items”. Most often, these “Significant Items” result from factors originating outside the company; e.g., regulatory actions/assessments, windfall gains, changes in accounting principles, one-time tax assessments/refunds, etc. In other cases they may result from our decisions associated with significant corporate actions out of the ordinary course of business; e.g., merger/restructuring charges, recapitalization actions, goodwill impairment, etc.
Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a “Significant Item”. For example, changes in the provision for credit losses, gains/losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a “Significant Item”.
We believe the disclosure of “Significant Items” in current and prior period results aids in better understanding our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing “Significant Items” in our external disclosure documents (e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K).
“Significant Items” for any particular period are not intended to be a complete list of items that may materially impact current or future period performance. A number of items could materially impact these periods, including those described in our 2009 Annual Report on Form 10-K and other factors described from time-to-time in our other filings with the Securities and Exchange Commission.
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons were impacted by a number of “Significant Items” summarized below.
  1.   Goodwill Impairment. The impacts of goodwill impairment on our reported results were as follows:
    During the 2009 first quarter, bank stock prices continued to decline significantly. Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash pretax charge of $2,602.7 million ($7.09 per common share) to noninterest expense.

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    During the 2009 second quarter, a noncash pretax goodwill impairment charge of $4.2 million ($0.01 per common share) was recorded to noninterest expense relating to the sale of a small payments-related business.
  2.   Franklin Relationship. Our relationship with Franklin was acquired in the Sky Financial Group, Inc. (Sky Financial) acquisition in 2007. Significant events relating to this relationship, and the impacts of those events on our reported results, were as follows:
    On March 31, 2009, we restructured our relationship with Franklin. As a result of this restructuring, a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) was recorded in the 2009 first quarter . Also, and although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific allowance for loan and lease losses (ALLL) was utilized to writedown the acquired mortgages and OREO collateral to fair value.
    During the 2010 first quarter, a $38.2 million ($0.05 per common share) net tax benefit was recognized, primarily reflecting the increase in the net deferred tax asset relating to the assets acquired from the March 31, 2009 restructuring.
    During the 2010 second quarter, the remaining portfolio of Franklin-related loans ($333.0 million of residential mortgages, and $64.7 million of home equity loans) was transferred to loans held for sale. At the time of the transfer, the loans were marked to the lower of cost or fair value less costs to sell of $323.4 million, resulting in $75.5 million of charge-offs, and the provision for credit losses commensurately increased $75.5 million ($0.07 per common share).
    During the 2010 third quarter, the remaining residential mortgage and home equity loans were sold at essentially book value.
  3.   Early Extinguishment of Debt. The positive impacts relating to the early extinguishment of debt on our reported results were: $73.6 million ($0.07 per common share) in the 2009 fourth quarter and $67.4 million ($0.10 per common share) in the 2009 second quarter. These amounts were recorded to noninterest expense.
  4.   Preferred Stock Conversion. During the 2009 first and second quarters, we converted 114,109 and 92,384 shares, respectively, of Series A 8.50% Non-cumulative Perpetual Preferred Stock (Series A Preferred Stock) into common stock. As part of these transactions, there was a deemed dividend that did not impact net income, but resulted in a negative impact of $0.08 per common share for the 2009 first quarter and $0.06 per common share for the 2009 second quarter.
  5.   Visa â . Prior to the Visa ® initial public offering (IPO) occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. As a result of this ownership, we received shares of Visa ® stock at the time of the IPO. In the 2009 second quarter, we sold these Visa ® stock shares, resulting in a $31.4 million pretax gain ($0.04 per common share). This amount was recorded to noninterest income.
  6.   Other Significant Items Influencing Earnings Performance Comparisons. In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:
2009 — Fourth Quarter
    $11.3 million ($0.02 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance.
2009 — Second Quarter
    $23.6 million ($0.03 per common share) negative impact due to a special Federal Deposit Insurance Corporation (FDIC) insurance premium assessment. This amount was recorded to noninterest expense.
    $2.4 million ($0.01 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance.

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The following table reflects the earnings impact of the above-mentioned significant items for periods affected by this Results of Operations discussion:
Table 3 — Significant Items Influencing Earnings Performance Comparison
                                                 
    Three Months Ended  
    September 30, 2010     June 30, 2010     September 30, 2009  
(dollar amounts in thousands, except per share amounts)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
Net income (loss) — GAAP
  $ 100,946             $ 48,764             $ (166,190 )        
Earnings per share, after-tax
          $ 0.10             $ 0.03             $ (0.33 )
Change from prior quarter — $
            0.07               0.02               0.07  
Change from prior quarter — %
            N.M. %             N.M. %             18.0 %
Change from year-ago — $
          $ 0.43             $ 0.43             $ (0.50 )
Change from year-ago — %
            N.M. %             N.M. %             N.M. %
 
                                               
                                                 
Significant items - favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS     Earnings (1)     EPS  
Franklin-related loans transferred to held for sale
  $     $     $ (75,500 )   $ 0.07     $     $  
                                 
    Nine Months Ended  
    September 30, 2010     September 30, 2009  
(in thousands)   After-tax     EPS     After-tax     EPS  
Net income (loss) — reported earnings
  $ 189,447             $ (2,724,492 )        
Earnings per share, after-tax
          $ 0.14             $ (6.08 )
Change from a year-ago — $
            6.22               (6.84 )
Change from a year-ago — %
            N.M. %             N.M. %
                                 
Significant items - favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS  
 
                               
Franklin-related loans transferred to held for sale
  $ (75,500 )   $ (0.07 )   $     $  
Net tax benefit recognized (2)
    38,222       0.05              
Franklin relationship restructuring (2)
                159,895       0.34  
Gain on redemption of junior subordinated debt
                73,827       0.10  
Gain related to Visa ® stock
                31,362       0.04  
Deferred tax valuation allowance benefit (2)
                1,505       0.01  
Goodwill impairment
                (2,606,944 )     (5.52 )
FDIC special assessment
                (23,555 )     (0.03 )
Preferred stock conversion deemed dividend
                      (0.12 )
     
N.M., not a meaningful value.
 
(1)   Pretax unless otherwise noted.
 
(2)   After-tax.
Pretax, Pre-provision Income Trends
One non-GAAP performance measurement that we believe is useful in analyzing our underlying performance trends is pretax, pre-provision income. This is the level of pretax earnings adjusted to exclude the impact of: (a) provision expense, (b) investment securities gains/losses, which are excluded because securities market valuations may become particularly volatile in times of economic stress, (c) amortization of intangibles expense, which is excluded because the return on tangible common equity is a key measurement we use to gauge performance trends, and (d) certain other items identified by us (see “Significant Items”) that we believe may distort our underlying performance trends.

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The following table reflects pretax, pre-provision income for the each of the past five quarters:
Table 4 — Pretax, Pre-provision Income (1)
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
 
                                       
Income (loss) before income taxes
  $ 130,636     $ 62,083     $ 1,644     $ (597,977 )   $ (257,362 )
 
                                       
Add: Provision for credit losses
    119,160       193,406       235,008       893,991       475,136  
Less: Securities (losses) gains
    (296 )     156       (31 )     (2,602 )     (2,374 )
Add: Amortization of intangibles
    15,145       15,141       15,146       17,060       16,995  
Less: Significant Items
                                       
Gain on early extinguishment of debt (2)
                      73,615        
 
                             
 
                                       
Total pretax, pre-provision income
  $ 265,237     $ 270,474     $ 251,829     $ 242,061     $ 237,143  
 
                             
 
                                       
Change in total pretax, pre-provision income:
                                       
Prior quarter change — amount
  $ (5,237 )   $ 18,645     $ 9,768     $ 4,918     $ 7,809  
Prior quarter change — percent
    (2 )%     7 %     4 %     2 %     3 %
     
(1)   Pretax, pre-provision income is a non-GAAP financial measure. Any ratio utilizing this financial measure is also non-GAAP. This financial measure has been included as it is considered to be an important metric with which to analyze and evaluate our results of operations and financial strength. Other companies may calculate this financial measure differently.
 
(2)   Related to the purchase of certain subordinated bank notes.
As shown in the table above, pretax, pre-provision income was $265.2 million in the 2010 third quarter, down 2% from the prior quarter. As discussed in the sections that follow, the decline from the prior quarter primarily reflected higher noninterest expense due to strategic growth initiatives, partially offset by higher revenue.
Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Item 2.)
2010 Third Quarter versus 2009 Third Quarter
Fully-taxable equivalent net interest income increased $45.6 million, or 12%, from the year-ago quarter. This reflected the favorable impact of the significant increase in the net interest margin to 3.45% from 3.20%. This also reflected the benefit of a $2.0 billion, or 4%, increase in average total earning assets due to a $2.6 billion, or 39%, increase in average total investment securities, partially offset by a $0.6 billion, or 2%, decline in average total loans and leases.

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The following table details the change in our reported loans and deposits:
Table 5 — Average Loans/Leases and Deposits — 2010 Third Quarter vs. 2009 Third Quarter
                                 
    Third Quarter     Change  
(dollar amounts in millions)   2010     2009     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,393     $ 12,922     $ (529 )     (4 )%
Commercial real estate
    7,073       8,879       (1,806 )     (20 )
 
                       
Total commercial
    19,466       21,801       (2,335 )     (11 )
 
                               
Automobile loans and leases
    5,140       3,230       1,910       59  
Home equity
    7,567       7,581       (14 )      
Residential mortgage
    4,389       4,487       (98 )     (2 )
Other consumer
    653       756       (103 )     (14 )
 
                       
Total consumer
    17,749       16,054       1,695       11  
 
                       
Total loans and leases
  $ 37,215     $ 37,855     $ (640 )     (2 )%
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,768     $ 6,186     $ 582       9 %
Demand deposits — interest-bearing
    5,319       5,140       179       3  
Money market deposits
    12,336       7,601       4,735       62  
Savings and other domestic time deposits
    4,639       4,771       (132 )     (3 )
Core certificates of deposit
    8,948       11,646       (2,698 )     (23 )
 
                       
Total core deposits
    38,010       35,344       2,666       8  
Other deposits
    2,636       4,249       (1,613 )     (38 )
 
                       
Total deposits
  $ 40,646     $ 39,593     $ 1,053       3 %
 
                       
The $0.6 billion, or 2%, decrease in average total loans and leases primarily reflected:
    $2.3 billion, or 11%, decrease in average total commercial loans. The $0.5 billion, or 4%, decline in average C&I loans reflected a general decrease in borrowing as evidenced by a decline in line-of-credit utilization, charge-off activity, and the reclassification in the 2010 first quarter of variable rate demand notes to municipal securities. These negatives were partially offset by the impact of the 2009 reclassifications of certain CRE loans, primarily representing owner occupied properties, to C&I loans. The $1.8 billion, or 20%, decrease in average CRE loans reflected these reclassifications, as well as our ongoing commitment to lower our overall CRE exposure. We continue to execute on our plan to reduce the CRE exposure while maintaining a commitment to our core CRE borrowers. The decrease in average balances is associated with the noncore portfolio, as we have maintained relatively consistent balances with good performance in the core portfolio.
    $1.7 billion, or 11%, increase in average total consumer loans. This growth reflected a $1.9 billion, or 59%, increase in average automobile loans and leases. On January 1, 2010, we adopted the new accounting standard “ASC — 810 Consolidation”, resulting in the consolidation of a 2009 first quarter $1.0 billion automobile loan securitization. At September 30, 2010, these securitized loans had a remaining balance of $0.6 billion. Underlying growth in automobile loans continued to be strong, reflecting a significant increase in loan originations for the first nine months of 2010 from the comparable year-ago period. The growth has come while maintaining our commitment to excellent credit quality and an appropriate return. Average home equity loans were little–changed as lower origination volume was offset by slower runoff experience and slightly higher line utilization. We continue to see the utilization increase associated with higher credit quality borrowers and very little funding associated with historically unfunded lines. Average residential mortgages declined $0.1 billion, or 2%, reflecting the impact of loan sales, as well as the continued refinance of portfolio loans and the related increased sale of fixed-rate originations.
The $2.6 billion, or 39%, increase in average total investment securities reflected the deployment of the cash from core deposit growth and loan runoff over this period, as well as the proceeds from 2009 capital actions.

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2010 Third Quarter versus 2010 Second Quarter
Compared with the 2010 second quarter, fully-taxable equivalent net interest income increased $10.3 million, or 3%. This reflected an annualized 8% increase in average earning assets as the fully-taxable equivalent net interest margin declined only slightly to 3.45% from 3.46%. The increase in average earning assets reflected a combination of activities including:
    $0.5 billion, or 6%, increase in average investment securities, reflecting the deployment of cash from asset sales and seasonal deposit growth into short- and intermediate-term securities,
    $0.3 billion, or doubling of average loans held for sale, reflecting strong mortgage originations during the quarter due to low interest rates, and
    $0.1 billion, or less than 1%, increase in average total loans and leases.
The net interest margin declined 1 basis point. Favorable trends in the mix and pricing of deposits were offset by a lower contribution on Franklin-related loans, a lower contribution from asset/liability management strategies, and one more day in the third quarter.
The following table details the change in our loans and deposits:
Table 6 — Average Loans/Leases and Deposits — 2010 Third Quarter vs. 2010 Second Quarter
                                 
    2010     Change  
(dollar amounts in millions)   Third Quarter     Second Quarter     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,393     $ 12,244     $ 149       1 %
Commercial real estate
    7,073       7,364       (291 )     (4 )
 
                       
Total commercial
    19,466       19,608       (142 )     (1 )
 
                               
Automobile loans and leases
    5,140       4,634       506       11  
Home equity
    7,567       7,544       23        
Residential mortgage
    4,389       4,608       (219 )     (5 )
Other consumer
    653       695       (42 )     (6 )
 
                       
Total consumer
    17,749       17,481       268       2  
 
                       
Total loans and leases
  $ 37,215     $ 37,089     $ 126       %
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,768     $ 6,849     $ (81 )     (1 )%
Demand deposits — interest-bearing
    5,319       5,971       (652 )     (11 )
Money market deposits
    12,336       11,103       1,233       11  
Savings and other domestic time deposits
    4,639       4,677       (38 )     (1 )
Core certificates of deposit
    8,948       9,199       (251 )     (3 )
 
                       
Total core deposits
    38,010       37,799       211       1  
Other deposits
    2,636       2,568       68       3  
 
                       
Total deposits
  $ 40,646     $ 40,367     $ 279       1 %
 
                       
The $0.1 billion increase in average total loans and leases primarily reflected:
    $0.3 billion, or 2%, increase in total average consumer loans, led by a $0.5 billion, or 11%, increase in average automobile loans and leases. This growth reflected record production in the quarter. We have consistently maintained historical high credit quality standards on this production while achieving an appropriate return. During the quarter, we benefited from the expansion of our automobile lending operations into Eastern Pennsylvania. We are also in the process of expansion into five New England states. The recent expansions incorporate new experienced colleagues with existing dealer relationships in those markets. Average residential mortgages decreased $0.2 billion, or 5%.

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Partially offset by:
    $0.1 billion, or 1%, decrease in average total commercial loans as average CRE loans declined $0.3 billion, or 4%, primarily as a result of our on-going strategy to reduce our exposure to the commercial real estate market. The 4% decline in the quarter was driven by continuing paydowns and charge-off activity associated with our noncore CRE portfolio. The portion of the CRE portfolio designated as core continued to perform very well as expected, with average balances consistent with the prior quarter. Average C&I loans increased $0.1 billion, or 1%. Underlying growth was mitigated by a combination of on-going lower line-of-credit utilization and paydowns on term debt, as well as the sale of $43.2 million of SBA loans. The economic environment continued to cause many customers to actively reduce their leverage position. Our line-of-credit utilization percentage was 42%, consistent with the prior quarter. We continue to believe that we have opportunities to expand our customer base within our markets and are focused on expanding our C&I pipeline. Average residential mortgages decreased $0.2 billion, or 5%, reflecting run-off and portfolio loan sales.
Average total deposits increased $0.3 billion from the prior quarter reflecting:
    $0.2 billion, or 1%, growth in average total core deposits. The primary driver of this growth was an 11% increase in average money market deposits. Partially offsetting this growth was an 11% decline in average interest-bearing demand deposits and a 3% decline in average core certificates of deposit.
Tables 7 and 8 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

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Table 7 — Consolidated Quarterly Average Balance Sheets
                                                         
    Average Balances     Change  
    2010     2009     3Q10 vs. 3Q09  
(dollar amounts in millions)   Third     Second     First     Fourth     Third     Amount     Percent  
Assets
                                                       
Interest-bearing deposits in banks
  $ 282     $ 309     $ 348     $ 329     $ 393     $ (111 )     (28 )%
Trading account securities
    110       127       96       110       107       3       3  
Federal funds sold and securities purchased under resale agreement
                      15       7       (7 )     N.M.  
Loans held for sale
    663       323       346       470       524       139       27  
Investment securities:
                                                       
Taxable
    8,876       8,369       8,027       8,698       6,511       2,365       36  
Tax-exempt
    365       389       443       136       128       237       N.M.  
 
                                         
Total investment securities
    9,241       8,758       8,470       8,834       6,639       2,602       39  
Loans and leases: (1)
                                                       
Commercial:
                                                       
Commercial and industrial
    12,393       12,244       12,314       12,570       12,922       (529 )     (4 )
Commercial real estate:
                                                       
Construction
    989       1,279       1,409       1,651       1,808       (819 )     (45 )
Commercial
    6,084       6,085       6,268       6,807       7,071       (987 )     (14 )
 
                                         
Commercial real estate
    7,073       7,364       7,677       8,458       8,879       (1,806 )     (20 )
 
                                         
Total commercial
    19,466       19,608       19,991       21,028       21,801       (2,335 )     (11 )
 
                                         
Consumer:
                                                       
Automobile loans
    5,030       4,472       4,031       3,050       2,886       2,144       74  
Automobile leases
    110       162       219       276       344       (234 )     (68 )
 
                                         
Automobile loans and leases
    5,140       4,634       4,250       3,326       3,230       1,910       59  
Home equity
    7,567       7,544       7,539       7,561       7,581       (14 )      
Residential mortgage
    4,389       4,608       4,477       4,417       4,487       (98 )     (2 )
Other loans
    653       695       723       757       756       (103 )     (14 )
 
                                         
Total consumer
    17,749       17,481       16,989       16,061       16,054       1,695       11  
 
                                         
Total loans and leases
    37,215       37,089       36,980       37,089       37,855       (640 )     (2 )
Allowance for loan and lease losses
    (1,384 )     (1,506 )     (1,510 )     (1,029 )     (950 )     (434 )     46  
 
                                         
Net loans and leases
    35,831       35,583       35,470       36,060       36,905       (1,074 )     (3 )
 
                                         
Total earning assets
    47,511       46,606       46,240       46,847       45,525       1,986       4  
 
                                         
Cash and due from banks
    1,618       1,509       1,761       1,947       2,553       (935 )     (37 )
Intangible assets
    695       710       725       737       755       (60 )     (8 )
All other assets
    4,277       4,384       4,486       3,956       3,797       480       13  
 
                                         
Total assets
  $ 52,717     $ 51,703     $ 51,702     $ 52,458     $ 51,680     $ 1,037       2 %
 
                                         
Liabilities and Shareholders’ Equity
                                                       
Deposits:
                                                       
Demand deposits — noninterest-bearing
  $ 6,768     $ 6,849     $ 6,627     $ 6,466     $ 6,186     $ 582       9 %
Demand deposits — interest-bearing
    5,319       5,971       5,716       5,482       5,140       179       3  
Money market deposits
    12,336       11,103       10,340       9,271       7,601       4,735       62  
Savings and other domestic deposits
    4,639       4,677       4,613       4,686       4,771       (132 )     (3 )
Core certificates of deposit
    8,948       9,199       9,976       10,867       11,646       (2,698 )     (23 )
 
                                         
Total core deposits
    38,010       37,799       37,272       36,772       35,344       2,666       8  
Other domestic time deposits of $250,000 or more
    690       661       698       667       747       (57 )     (8 )
Brokered deposits and negotiable CDs
    1,495       1,505       1,843       2,353       3,058       (1,563 )     (51 )
Deposits in foreign offices
    451       402       410       422       444       7       2  
 
                                         
Total deposits
    40,646       40,367       40,223       40,214       39,593       1,053       3  
Short-term borrowings
    1,739       966       927       879       879       860       98  
Federal Home Loan Bank advances
    188       212       179       681       924       (736 )     (80 )
Subordinated notes and other long-term debt
    3,672       3,836       4,062       3,908       4,136       (464 )     (11 )
 
                                         
Total interest-bearing liabilities
    39,477       38,532       38,764       39,216       39,346       131        
 
                                         
All other liabilities
    952       924       947       1,042       863       89       10  
Shareholders’ equity
    5,520       5,398       5,364       5,734       5,285       235       4  
 
                                         
Total liabilities and shareholders’ equity
  $ 52,717     $ 51,703     $ 51,702     $ 52,458     $ 51,680     $ 1,037       2 %
 
                                         
     
N.M., not a meaningful value.
 
(1)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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Table 8 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)  
    2010     2009  
Fully-taxable equivalent basis (1)   Third     Second     First     Fourth     Third  
Assets
                                       
Interest-bearing deposits in banks
    0.21 %     0.20 %     0.18 %     0.16 %     0.28 %
Trading account securities
    1.20       1.74       2.15       1.89       1.96  
Federal funds sold and securities purchased under resale agreement
                      0.03       0.14  
Loans held for sale
    5.75       5.02       4.98       5.13       5.20  
Investment securities:
                                       
Taxable
    2.77       2.85       2.94       3.20       3.99  
Tax-exempt
    4.70       4.62       4.37       6.42       6.81  
 
                             
Total investment securities
    2.84       2.93       3.01       3.25       4.04  
Loans and leases: (3)
                                       
Commercial:
                                       
Commercial and industrial
    5.14       5.31       5.60       5.20       5.19  
Commercial real estate:
                                       
Construction
    2.83       2.61       2.66       2.63       2.61  
Commercial
    3.91       3.69       3.60       3.40       3.43  
 
                             
Commercial real estate
    3.76       3.49       3.43       3.25       3.26  
 
                             
Total commercial
    4.64       4.63       4.76       4.41       4.40  
 
                             
Consumer:
                                       
Automobile loans
    5.77       6.46       6.64       7.15       7.34  
Automobile leases
    6.71       6.58       6.41       6.40       6.25  
 
                             
Automobile loans and leases
    5.79       6.46       6.63       7.09       7.22  
Home equity
    4.74       5.26       5.59       5.82       5.75  
Residential mortgage
    4.97       4.70       4.89       5.04       5.03  
Other loans
    7.10       6.84       7.00       6.90       7.21  
 
                             
Total consumer
    5.19       5.49       5.73       5.92       5.91  
 
                             
Total loans and leases
    4.90       5.04       5.21       5.07       5.04  
 
                             
Total earning assets
    4.49 %     4.63 %     4.82 %     4.70 %     4.86 %
 
                             
 
                                       
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Demand deposits — noninterest-bearing
    %     %     %     %     %
Demand deposits — interest-bearing
    0.17       0.22       0.22       0.22       0.22  
Money market deposits
    0.86       0.93       1.00       1.21       1.20  
Savings and other domestic deposits
    0.99       1.07       1.19       1.27       1.33  
Core certificates of deposit
    2.31       2.68       2.93       3.07       3.27  
 
                             
Total core deposits
    1.18       1.33       1.51       1.71       1.88  
Other domestic time deposits of $250,000 or more
    1.28       1.37       1.44       1.88       2.24  
Brokered deposits and negotiable CDs
    2.21       2.56       2.49       2.52       2.49  
Deposits in foreign offices
    0.22       0.19       0.19       0.18       0.20  
 
                             
Total deposits
    1.21       1.37       1.55       1.75       1.92  
Short-term borrowings
    0.22       0.21       0.21       0.24       0.25  
Federal Home Loan Bank advances
    1.25       1.93       2.71       1.01       0.92  
Subordinated notes and other long-term debt
    2.15       2.05       2.25       2.67       2.58  
 
                             
Total interest-bearing liabilities
    1.25 %     1.41 %     1.60 %     1.80 %     1.93 %
 
                             
 
                                       
Net interest rate spread
    3.24 %     3.22 %     3.22 %     2.90 %     2.93 %
Impact of noninterest-bearing funds on margin
    0.21       0.24       0.25       0.29       0.27  
 
                             
Net interest margin
    3.45 %     3.46 %     3.47 %     3.19 %     3.20 %
 
                             
     
(1)   Fully-taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)   Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.
 
(3)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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2010 First Nine Months versus 2009 First Nine Months
Fully-taxable equivalent net interest income for the first nine-month period of 2010 increased $153.3 million, or 15%, from the comparable year-ago period. This increase primarily reflected the favorable impact of the significant increase in the net interest margin to 3.46% from 3.09% and, to a lesser degree, a 2% increase in average total earning assets. A significant portion of the increase in the net interest margin reflected a shift in our deposit mix from higher-cost time deposits to lower-cost transaction-based accounts. Although average total earning assets increased only slightly compared with the year-ago period, this change reflected a $3.4 billion, or 61%, increase in average total investment securities, mostly offset by a $2.1 billion, or 5%, decline in average total loans and leases.
The following table details the change in our reported loans and deposits:
Table 9 — Average Loans/Leases and Deposits — 2010 First Nine Months vs. 2009 First Nine Months
                                 
    Nine Months Ended September 30,     Change  
(dollar amounts in millions)   2010     2009     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 12,317     $ 13,327     $ (1,010 )     (8 )%
Commercial real estate
    7,369       9,392       (2,023 )     (22 )
 
                       
Total commercial
    19,686       22,719       (3,033 )     (13 )
 
                               
Automobile loans and leases
    4,678       3,620       1,058       29  
Home equity
    7,550       7,600       (50 )     (1 )
Residential mortgage
    4,491       4,584       (93 )     (2 )
Other consumer
    690       709       (19 )     (3 )
 
                       
Total consumer
    17,409       16,513       896       5  
 
                       
Total loans and leases
  $ 37,095     $ 39,232     $ (2,137 )     (5 )%
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,748     $ 5,919     $ 829       14 %
Demand deposits — interest-bearing
    5,667       4,591       1,076       23  
Money market deposits
    11,267       6,524       4,743       73  
Savings and other domestic deposits
    4,643       4,946       (303 )     (6 )
Core certificates of deposit
    9,371       12,308       (2,937 )     (24 )
 
                       
Total core deposits
    37,696       34,288       3,408       10  
Other deposits
    2,717       4,822       (2,105 )     (44 )
 
                       
Total deposits
  $ 40,413     $ 39,110     $ 1,303       3 %
 
                       
The $2.1 billion, or 5%, decrease in average total loans and leases primarily reflected:
    $3.0 billion, or 13%, decline in average total commercial loans as C&I loans declined $1 billion, or 8%, and CRE loans declined $2 billion, or 22%. The decline in C&I loans reflected a general decrease in borrowing as reflected in a decline in line-of-credit utilization, charge-off activity, the 2009 first quarter Franklin restructuring, and the 2010 first quarter reclassification of variable rate demand notes to municipal securities. These declines were partially offset by the impact of the 2009 reclassifications of certain CRE loans, primarily representing owner-occupied properties, to C&I loans. The decline in CRE loans reflected these reclassifications, as well as our continuing commitment to lower our overall CRE exposure. We continue to execute our plan to reduce the CRE exposure while maintaining a commitment to our core CRE borrowers.
Partially offset by:
    $0.9 billion, or 5%, increase in average total consumer loans. This growth reflected a $1.1 billion, or 29%, increase in average automobile loans and leases primarily as a result of the adoption of a new accounting standard in which, on January 1, 2010, we consolidated a 2009 first quarter $1.0 billion automobile loan securitization (see Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). At September 30, 2010, these securitized loans had a remaining balance of $0.6 billion. Additionally, underlying growth in automobile loans continued to be strong, reflecting a $1.6 billion increase in loan originations compared with the year-ago period. These increases were partially offset by a $0.3 billion, or 62%, decline in average automobile leases due to the continued run-off of that portfolio. Average home equity loans were little changed as lower origination volume was offset by slower runoff experience and slightly higher line-of-credit utilization. Average residential mortgages declined slightly reflecting the impact of loan sales, as well as the continued refinance of portfolio loans and the related increased sale of fixed-rate originations, partially offset by the additions related to the 2009 first quarter Franklin restructuring.

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Offsetting the decline in average total loans and leases was a $3.4 billion, or 61%, increase in average total investment securities, reflected the deployment of the cash from core deposit growth and loan run-off throughout the current period, as well as the proceeds from the 2009 capital actions.
The $1.3 billion, or 3%, increase in average total deposits reflected:
    $3.4 billion, or 10%, growth in average total core deposits, primarily reflecting our focus on growing money market and demand deposit accounts. Our MMA average deposit balances continue to grow across all segments as we execute our lower cost deposit strategy. The growth in noninterest-bearing demand deposits reflects improved sales execution of our commercial products, while the growth in interest-bearing demand deposits is driven primarily by consumer products.
Partially offset by:
    $1.8 billion, or 53%, decline in brokered and negotiable CDs, and a $0.2 billion, or 24%, decline in average other domestic deposits over $250,000, primarily reflecting a reduction of noncore funding sources.

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Table 10 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
                                                 
    YTD Average Balances     YTD Average Rates (2)  
Fully-taxable equivalent basis (1)   Nine Months Ended September 30,     Change     Nine Months Ended September 30,  
(dollar amounts in millions)   2010     2009     Amount     Percent     2010     2009  
Assets
                                               
Interest-bearing deposits in banks
  $ 313     $ 372     $ (59 )     (16 )%     0.20 %     0.36 %
Trading account securities
    111       157       (46 )     (29 )     1.68       3.24  
Federal funds sold and securities purchased under resale agreement
          8       (8 )     N.M.             0.19  
Loans held for sale
    445       620       (175 )     (28 )     5.36       5.15  
Investment securities:
                                               
Taxable
    8,428       5,227       3,201       61       2.85       4.60  
Tax-exempt
    399       239       160       67       4.56       6.72  
 
                                   
Total investment securities
    8,827       5,466       3,361       61       2.93       4.70  
Loans and leases: (3)
                                               
Commercial:
                                               
Commercial and industrial
    12,317       13,327       (1,010 )     (8 )     5.35       4.92  
Commercial real estate:
                                               
Construction
    1,224       1,928       (704 )     (37 )     2.69       2.72  
Commercial
    6,145       7,464       (1,319 )     (18 )     3.73       3.59  
 
                                   
Commercial real estate
    7,369       9,392       (2,023 )     (22 )     3.56       3.41  
 
                                   
Total commercial
    19,686       22,719       (3,033 )     (13 )     4.68       4.30  
 
                                   
Consumer:
                                               
Automobile loans
    4,515       3,193       1,322       41       6.26       7.26  
Automobile leases
    163       427       (264 )     (62 )     6.55       6.13  
 
                                   
Automobile loans and leases
    4,678       3,620       1,058       29       6.27       7.13  
Home equity
    7,550       7,600       (50 )     (1 )     5.20       5.55  
Residential mortgage
    4,491       4,584       (93 )     (2 )     4.85       5.29  
Other loans
    690       709       (19 )     (3 )     6.98       8.09  
 
                                   
Total consumer
    17,409       16,513       896       5       5.46       5.93  
 
                                   
Total loans and leases
    37,095       39,232       (2,137 )     (5 )     5.05       4.99  
Allowance for loan and lease losses
    (1,466 )     (931 )     (535 )     57                  
 
                                   
Net loans and leases
    35,629       38,301       (2,672 )     (7 )                
 
                                   
Total earning assets
    46,791       45,855       936       2       4.64 %     4.94 %
 
                                   
Cash and due from banks
    1,629       2,195       (566 )     (26 )                
Intangible assets
    709       1,626       (917 )     (56 )                
All other assets
    4,381       3,689       692       19                  
 
                                   
Total assets
  $ 52,044     $ 52,434     $ (390 )     (1 )%                
 
                                   
Liabilities and Shareholders’ Equity
                                               
Deposits:
                                               
Demand deposits — noninterest-bearing
  $ 6,748     $ 5,919     $ 829       14 %     %     %
Demand deposits — interest-bearing
    5,667       4,591       1,076       23       0.20       0.19  
Money market deposits
    11,267       6,524       4,743       73       0.92       1.13  
Savings and other domestic deposits
    4,643       4,946       (303 )     (6 )     1.08       1.40  
Core certificates of deposit
    9,371       12,308       (2,937 )     (24 )     2.65       3.53  
 
                                   
Total core deposits
    37,696       34,288       3,408       10       1.34       2.07  
Other domestic time deposits of $250,000 or more
    683       899       (216 )     (24 )     1.36       2.63  
Brokered deposits and negotiable CDs
    1,613       3,414       (1,801 )     (53 )     2.43       2.67  
Deposits in foreign offices
    421       509       (88 )     (17 )     0.20       0.19  
 
                                   
Total deposits
    40,413       39,110       1,303       3       1.38       2.12  
Short-term borrowings
    1,214       951       263       28       0.21       0.26  
Federal Home Loan Bank advances
    193       1,423       (1,230 )     (86 )     1.94       1.03  
Subordinated notes and other long-term debt
    3,855       4,461       (606 )     (14 )     2.15       2.94  
 
                                   
Total interest-bearing liabilities
    38,927       40,026       (1,099 )     (3 )            
 
                                   
All other liabilities
    941       684       257       38                  
Shareholders’ equity
    5,428       5,805       (377 )     (6 )                
 
                                   
Total liabilities and shareholders’ equity
  $ 52,044     $ 52,434     $ (390 )     (1 )%                
 
                                   
Net interest rate spread
                                    3.22       2.82  
Impact of noninterest-bearing funds on margin
                                    0.24       0.27  
 
                                   
Net interest margin
                                    3.46 %     3.09 %
 
                                   
     
(1)   Fully-taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)   Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.
 
(3)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

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Provision for Credit Losses
(This section should be read in conjunction with Significant Item 2 and the “Credit Risk” section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the allowance for unfunded loan commitments and letters of credit (AULC) at levels adequate to absorb our estimate of inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit.
The provision for credit losses for the 2010 third quarter was $119.2 million, down $74.2 million, or 38%, from the prior quarter and down $356.0 million, or 75%, from the year-ago quarter. The prior quarter included $80.0 million of Franklin-related credit provision , reflecting $75.5 million associated with the transfer of Franklin-related loans to loans held for sale (see Significant Item 2), and $4.5 million of other Franklin-related NCOs . Reflecting the resolution of problem credits for which reserves had been previously established, the current quarter’s provision for credit losses was $65.3 million less than total NCOs (see “Credit Quality” discussion).
The following table details the Franklin-related impact to the provision for credit losses for each of the past five quarters:
Table 11 — Provision for Credit Losses — Franklin-Related Impact
                                         
    2010     2009  
(in millions)   Third     Second     First     Fourth     Third  
 
                                       
Provision for (reduction to) credit losses
                                       
Franklin
  $     $ 80.0     $ 11.5     $ 1.2     $ (3.5 )
Non-Franklin
    119.2       113.4       223.5       892.8       478.6  
 
                             
Total
  $ 119.2     $ 193.4     $ 235.0     $ 894.0     $ 475.1  
 
                             
 
                                       
Total net charge-offs (recoveries)
                                       
Franklin — related to transfer to loans held for sale
  $     $ 75.5     $     $     $  
Franklin — unrelated to transfer to loans held for sale
          4.5       11.5       1.2       (3.5 )
Non-Franklin
    184.5       199.2       227.0       443.5       359.4  
 
                             
Total
  $ 184.5     $ 279.2     $ 238.5     $ 444.7     $ 355.9  
 
                             
 
                                       
Provision for (reduction to) credit losses in excess of net charge-offs
                                       
Franklin
  $     $     $     $     $  
Non-Franklin
    (65.3 )     (85.8 )     (3.5 )     449.3       119.2  
 
                             
Total
  $ (65.3 )   $ (85.8 )   $ (3.5 )   $ 449.3     $ 119.2  
 
                             
Noninterest Income
(This section should be read in conjunction with Significant Item 5.)
The following table reflects noninterest income for each of the past five quarters:
Table 12 — Noninterest Income
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Service charges on deposit accounts
  $ 65,932     $ 75,934     $ 69,339     $ 76,757     $ 80,811  
Brokerage and insurance income
    36,376       36,498       35,762       32,173       33,996  
Mortgage banking income
    52,045       45,530       25,038       24,618       21,435  
Trust services
    26,997       28,399       27,765       27,275       25,832  
Electronic banking
    28,090       28,107       25,137       25,173       28,017  
Bank owned life insurance income
    14,091       14,392       16,470       14,055       13,639  
Automobile operating lease income
    11,356       11,842       12,303       12,671       12,795  
Securities (losses) gains
    (296 )     156       (31 )     (2,602 )     (2,374 )
Other income
    32,552       28,785       29,069       34,426       41,901  
 
                             
 
             
Total noninterest income
  $ 267,143     $ 269,643     $ 240,852     $ 244,546     $ 256,052  
 
                             

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The following table details mortgage banking income and the net impact of mortgage servicing rights (MSR) hedging activity for each of the past five quarters:
Table 13 — Mortgage Banking Income
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Mortgage Banking Income
                                       
Origination and secondary marketing
  $ 35,840     $ 19,778     $ 13,586     $ 16,473     $ 16,491  
Servicing fees
    12,053       12,178       12,418       12,289       12,320  
Amortization of capitalized servicing
    (13,003 )     (10,137 )     (10,065 )     (10,791 )     (10,050 )
Other mortgage banking income
    4,966       3,664       3,210       4,466       4,109  
 
                             
Sub-total
    39,856       25,483       19,149       22,437       22,870  
MSR valuation adjustment (1)
    (12,047 )     (26,221 )     (5,772 )     15,491       (17,348 )
Net trading gain (loss) related to MSR hedging
    24,236       46,268       11,661       (13,310 )     15,913  
 
                             
 
                                       
Total mortgage banking income
  $ 52,045     $ 45,530     $ 25,038     $ 24,618     $ 21,435  
 
                             
 
                                       
Mortgage originations (in millions)
  $ 1,619     $ 1,161     $ 869     $ 1,131     $ 998  
Average trading account securities used to hedge MSRs (in millions)
    23       28       18       19       19  
Capitalized mortgage servicing rights (2)
    161,594       179,138       207,552       214,592       200,969  
Total mortgages serviced for others (in millions) (2)
    15,713       15,954       15,968       16,010       16,145  
MSR % of investor servicing portfolio
    1.03 %     1.12 %     1.30 %     1.34 %     1.24 %
 
                             
 
                                       
Net Impact of MSR Hedging
                                       
 
                                       
MSR valuation adjustment (1)
  $ (12,047 )   $ (26,221 )   $ (5,772 )   $ 15,491     $ (17,348 )
Net trading gain (loss) related to MSR hedging
    24,236       46,268       11,661       (13,310 )     15,913  
Net interest income related to MSR hedging
    32       58       169       168       191  
 
                             
 
                                       
Net impact of MSR hedging
  $ 12,221     $ 20,105     $ 6,058     $ 2,349     $ (1,244 )
 
                             
     
(1)   The change in fair value for the period represents the MSR valuation adjustment, net of amortization of capitalized servicing.
 
(2)   At period end.
2010 Third Quarter versus 2009 Third Quarter
Noninterest income increased $11.1 million, or 4%, from the year-ago quarter.
Table 14 — Noninterest Income — 2010 Third Quarter vs. 2009 Third Quarter
                                 
    Third Quarter     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
Service charges on deposit accounts
  $ 65,932     $ 80,811     $ (14,879 )     (18 )%
Brokerage and insurance income
    36,376       33,996       2,380       7  
Mortgage banking income
    52,045       21,435       30,610       N.M.  
Trust services
    26,997       25,832       1,165       5  
Electronic banking
    28,090       28,017       73        
Bank owned life insurance income
    14,091       13,639       452       3  
Automobile operating lease income
    11,356       12,795       (1,439 )     (11 )
Securities gains (losses)
    (296 )     (2,374 )     2,078       (88 )
Other income
    32,552       41,901       (9,349 )     (22 )
 
                       
 
                               
Total noninterest income
  $ 267,143     $ 256,052     $ 11,091       4 %
 
                       
     
N.M., not a meaningful value.

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The $11.1 million, or 4%, increase in total noninterest income from the year-ago quarter reflected:
    $30.6 million increase in mortgage banking income. This reflected a $19.3 million increase in origination and secondary marketing income as originations increased 62% from the year-ago quarter, as well as a $13.6 million increase from net MSR hedging-related activities.
    $2.4 million, or 7%, increase in brokerage and insurance income, primarily reflecting an increase in title insurance income due to higher mortgage refinance activity, and to a lesser degree an increase in fixed income product sales, partially offset by lower annuity income.
Partially offset by:
    $14.9 million, or 18%, decrease in service charges on deposit accounts. This decline represented a decrease in personal NSF/OD service charges and was consistent with expectations related to the implementation of changes to Regulation E, the voluntary reduction in certain overdraft fee practices as part of our “Fair Play” banking philosophy introduced during the current quarter, as well as fewer customers overdrafting their accounts. As previously announced, in the 2009 fourth quarter the Federal Reserve Board amended Regulation E to prohibit charging overdraft fees for ATM or point-of-sale debit card transactions effective July 1, 2010, unless the customer opts-in to the overdraft service. Prior to the impact of implementing the amended Regulation E, for us such fees were approximately $90 million per year. Our basic strategy is to mitigate the potential impact by alerting our customers that we can no longer cover such overdrafts unless they opt-in to our overdraft service. To date, our opt-in results have surpassed our expectations. Also, during the quarter, we voluntarily reduced certain NSF/OD fees and introduced 24-Hour Grace™ on overdrafts.
    $9.3 million, or 22%, decline in other income. This decline primarily reflected a $22.8 million benefit in the year-ago quarter representing the change in fair value of derivatives that did not qualify for hedge accounting. This was partially offset by a $7.5 million loss on commercial loans held for sale and other equity investment losses also in that same quarter. The change from the year-ago quarter also reflected the current quarter gain on the sale of SBA loans.
2010 Third Quarter versus 2010 Second Quarter
Noninterest income decreased $2.5 million, or 1%, from the prior quarter.
Table 15 — Noninterest Income — 2010 Third Quarter vs. 2010 Second Quarter
                                 
    2010     Change  
(dollar amounts in thousands)   Third Quarter     Second Quarter     Amount     Percent  
Service charges on deposit accounts
  $ 65,932     $ 75,934     $ (10,002 )     (13 )%
Brokerage and insurance income
    36,376       36,498       (122 )      
Mortgage banking income
    52,045       45,530       6,515       14  
Trust services
    26,997       28,399       (1,402 )     (5 )
Electronic banking
    28,090       28,107       (17 )      
Bank owned life insurance income
    14,091       14,392       (301 )     (2 )
Automobile operating lease income
    11,356       11,842       (486 )     (4 )
Securities (losses) gains
    (296 )     156       (452 )     N.M.  
Other income
    32,552       28,785       3,767       13  
 
                       
 
                               
Total noninterest income
  $ 267,143     $ 269,643     $ (2,500 )     (1 )%
 
                       
     
N.M., not a meaningful value.

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The $2.5 million, or 1%, decrease in total noninterest income from the prior quarter reflected:
    $10.0 million, or 13%, decrease in service charges on deposit accounts. This decline represented a decrease in personal NSF/OD service charges and was consistent with expectations related to the implementation of changes to Regulation E, as well as the voluntary reduction in certain overdraft fee practices as part of our “Fair Play” banking philosophy.
    $1.4 million, or 5%, decline in trust services income, primarily reflecting the seasonal reduction in tax preparation fees.
Partially offset by:
    $6.5 million, or 14%, increase in mortgage banking income. This increase reflected a $16.1 million increase in origination and secondary marketing income, as mortgage originations increased 39% with borrowers continuing to take advantage of low interest rates. This increase was partially offset by a $7.9 million decline in MSR hedging-related activities.
    $3.8 million, or 13%, increase in other income, primarily reflecting a gain on sale of SBA loans.
2010 First Nine Months versus 2009 First Nine Months
Noninterest income for the first nine-month period of 2010 increased $16.5 million, or 2%, from the comparable year-ago period.
Table 16 — Noninterest Income — 2010 First Nine Months vs. 2009 First Nine Months
                                 
    Nine Months Ended September 30,     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
Service charges on deposit accounts
  $ 211,205     $ 226,042     $ (14,837 )     (7 )%
Brokerage and insurance income
    108,636       105,996       2,640       2  
Mortgage banking income
    122,613       87,680       34,933       40  
Trust services
    83,161       76,364       6,797       9  
Electronic banking
    81,334       74,978       6,356       8  
Bank owned life insurance income
    44,953       40,817       4,136       10  
Automobile operating lease income
    35,501       39,139       (3,638 )     (9 )
Securities losses
    (171 )     (7,647 )     7,476       (98 )
Other income
    90,406       117,730       (27,324 )     (23 )
 
                       
 
                               
Total noninterest income
  $ 777,638     $ 761,099     $ 16,539       2 %
 
                       
     
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 period of 2010 and 2009:
Table 17 — Year to Date Mortgage Banking Income and Net Impact of MSR Hedging
                                 
    Nine Months Ended        
    September 30,     YTD Change 2010 vs 2009  
(in thousands, except as noted)   2010     2009     Amount     Percent  
Mortgage Banking Income
                               
Origination and secondary marketing
  $ 69,204     $ 78,238     $ (9,034 )     (12 )%
Servicing fees
    36,649       36,205       444       1  
Amortization of capitalized servicing
    (33,205 )     (36,780 )     3,575       (10 )
Other mortgage banking income
    11,840       18,894       (7,054 )     (37 )
 
                       
Subtotal
    84,488       96,557       (12,069 )     (12 )
MSR valuation adjustment (1)
    (44,040 )     18,814       (62,854 )     N.M.  
Net trading gains (losses) related to MSR hedging
    82,165       (27,691 )     109,856       N.M.  
Total mortgage banking income
  $ 122,613     $ 87,680     $ 34,933       40 %
 
                       
Mortgage originations (in millions)
  $ 3,649     $ 4,131     $ (482 )     (12 )%
 
                       
Average trading account securities used to hedge MSRs (in millions)
    23       87       (64 )     (74 )
Capitalized mortgage servicing rights (2)
    161,594       200,969       (39,375 )     (20 )
Total mortgages serviced for others (in millions) (2)
    15,713       16,145       (432 )     (3 )
MSR % of investor servicing portfolio
    1.03 %     1.24 %     (0.21 )%     N.M. %
Net Impact of MSR Hedging
                               
MSR valuation adjustment (1)
  $ (44,040 )   $ 18,814     $ (62,854 )     N.M. %
Net trading gains (losses) related to MSR hedging
    82,165       (27,691 )     109,856       N.M.  
Net interest income related to MSR hedging
    259       2,831       (2,572 )     (91 )
 
                       
Net impact of MSR hedging
  $ 38,384     $ (6,046 )   $ 44,430       N.M. %
 
                       
     
N.M., not a meaningful value.
 
(1)   The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing.
 
(2)   At period end.
The $16.5 million, or 2%, increase in total noninterest income reflected:
    $34.9 million, or 40%, increase in mortgage banking income. This reflected a $44.4 million increase from net MSR hedging-related activities. This benefit was partially offset by a $9.0 million decline on origination and secondary marketing income, as mortgage originations declined 12% from the prior year-ago period.
    $7.5 million, or 98%, improvement in securities losses.
    $6.8 million, or 9%, increase in trust services income, primarily reflecting a combination of higher asset market values, asset growth, and fee increases.
    $6.4 million, or 8%, increase in electronic banking reflecting increased debit card transaction volumes and a $3.3 million Visa ® rebate for check card volume growth.
Partially offset by:
    $27.3 million, or 23%, decline in other income. This decline primarily reflected a $20.3 million benefit in the year-ago period representing the change in fair value of derivatives that did not qualify for hedge accounting. This was partially offset by a $7.5 million loss on commercial loans held for sale and other equity investment losses also in that same period. The change from the year-ago period also reflected the current quarter gain on the sale of SBA loans.

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    $14.8 million, or 7%, decline in service charges on deposit accounts, reflecting lower personal service charges due to a combination of factors including lower activity levels, as well as the implementation of the amendment to Regulation E and our “Fair Play” banking philosophy.
For additional information regarding noninterest income, see the “Legislative and Regulatory” section located within the “Executive Overview” section.
Noninterest Expense
(This section should be read in conjunction with Significant Items 1, 3, and 6.)
The following table reflects noninterest expense for each of the past five quarters:
Table 18 — Noninterest Expense
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Personnel costs
  $ 208,272     $ 194,875     $ 183,642     $ 180,663     $ 172,152  
Outside data processing and other services
    38,553       40,670       39,082       36,812       38,285  
Deposit and other insurance expense
    23,406       26,067       24,755       24,420       23,851  
Net occupancy
    26,718       25,388       29,086       26,273       25,382  
OREO and foreclosure expense
    12,047       4,970       11,530       18,520       38,968  
Equipment
    21,651       21,585       20,624       20,454       20,967  
Professional services
    20,672       24,388       22,697       25,146       18,108  
Amortization of intangibles
    15,145       15,141       15,146       17,060       16,995  
Automobile operating lease expense
    9,159       9,667       10,066       10,440       10,589  
Marketing
    20,921       17,682       11,153       9,074       8,259  
Telecommunications
    5,695       6,205       6,171       6,099       5,902  
Printing and supplies
    4,062       3,893       3,673       3,807       3,950  
Gain on early extinguishment of debt
                      (73,615 )     (60 )
Other
    21,008       23,279       20,468       17,443       17,749  
 
                             
 
                                       
Total noninterest expense
  $ 427,309     $ 413,810     $ 398,093     $ 322,596     $ 401,097  
 
                             
Number of employees (full-time equivalent), at period-end
    11,279       11,117       10,678       10,272       10,194  

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2010 Third Quarter versus 2009 Third Quarter
Noninterest expense increased $26.2 million, or 7%, from the year-ago quarter.
Table 19 — Noninterest Expense — 2010 Third Quarter vs. 2009 Third Quarter
                                 
    Third Quarter     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
Personnel costs
  $ 208,272     $ 172,152     $ 36,120       21 %
Outside data processing and other services
    38,553       38,285       268       1  
Deposit and other insurance expense
    23,406       23,851       (445 )     (2 )
Net occupancy
    26,718       25,382       1,336       5  
OREO and foreclosure expense
    12,047       38,968       (26,921 )     (69 )
Equipment
    21,651       20,967       684       3  
Professional services
    20,672       18,108       2,564       14  
Amortization of intangibles
    15,145       16,995       (1,850 )     (11 )
Automobile operating lease expense
    9,159       10,589       (1,430 )     (14 )
Marketing
    20,921       8,259       12,662       N.M.  
Telecommunications
    5,695       5,902       (207 )     (4 )
Printing and supplies
    4,062       3,950       112       3  
Gain on early extinguishment of debt
          (60 )     60       N.M.  
Other expense
    21,008       17,749       3,259       18  
 
                       
Total noninterest expense
  $ 427,309     $ 401,097     $ 26,212       7 %
 
                       
Number of employees (full-time equivalent), at period-end
    11,279       10,194       1,085       11 %
     
N.M., not a meaningful value.
The $26.2 million, or 7%, increase in total noninterest expense from the year-ago quarter reflected:
    $36.1 million, or 21%, increase in personnel costs, primarily reflecting an 11% increase in full-time equivalent staff in support of strategic initiatives, as well as higher commissions and other incentive expenses, and the reinstatement of our 401(k) plan matching contribution.
    $12.7 million increase in marketing expense, reflecting increases in branding, direct mail, and product advertising activities in support of strategic initiatives.
    $3.3 million, or 18%, increase in other expense, reflecting increased travel and miscellaneous fees.
    $2.6 million, or 14%, increase in professional services, reflecting higher consulting and legal expenses.
Partially offset by:
    $26.9 million, or 69%, decline in OREO and foreclosure expense.

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2010 Third Quarter versus 2010 Second Quarter
Noninterest expense increased $13.5 million, or 3%, from the prior quarter.
Table 20 — Noninterest Expense — 2010 Third Quarter vs. 2010 Second Quarter
                                 
    2010     Change  
(dollar amounts in thousands)   Third Quarter     Second Quarter     Amount     Percent  
Personnel costs
  $ 208,272     $ 194,875     $ 13,397       7 %
Outside data processing and other services
    38,553       40,670       (2,117 )     (5 )
Deposit and other insurance expense
    23,406       26,067       (2,661 )     (10 )
Net occupancy
    26,718       25,388       1,330       5  
OREO and foreclosure expense
    12,047       4,970       7,077       N.M.  
Equipment
    21,651       21,585       66        
Professional services
    20,672       24,388       (3,716 )     (15 )
Amortization of intangibles
    15,145       15,141       4        
Automobile operating lease expense
    9,159       9,667       (508 )     (5 )
Marketing
    20,921       17,682       3,239       18  
Telecommunications
    5,695       6,205       (510 )     (8 )
Printing and supplies
    4,062       3,893       169       4  
Other expense
    21,008       23,279       (2,271 )     (10 )
 
                       
 
                               
Total noninterest expense
  $ 427,309     $ 413,810     $ 13,499       3 %
 
                       
Number of employees (full-time equivalent), at period-end
    11,279       11,117       162       1 %
     
N.M., not a meaningful value.
The $13.5 million, or 3%, increase in total noninterest expense from the prior quarter reflected:
    $13.4 million, or 7%, increase in personnel costs, reflecting a combination of factors including higher salaries due to a 1% increase in full-time equivalent staff in support of strategic initiatives, higher sales commissions, and retirement fund and 401(k) plan expenses.
    $7.1 million increase in OREO and foreclosure expense, as the prior quarter included a $3.7 million OREO gain and the current quarter included a $2.0 million Franklin-related OREO loss.
    $3.2 million, or 18%, increase in marketing expense, reflecting increases in branding and product advertising activities in support of strategic initiatives.
Partially offset by:
    $3.7 million, or 15%, decrease in professional services, reflecting lower legal and consulting fees.
    $2.7 million, or 10%, decline in deposit and other insurance expense, primarily reflecting our decision to exit the FDIC’s TAGP program.
    $2.3 million, or 10%, decrease in other expense, as the expense associated with increases in repurchase reserves related to representations and warranties made on mortgage loans sold declined $4.2 million.
    $2.1 million, or 5%, decline in outside data processing and other services, reflecting the reduction of Franklin servicing costs given the sale of the related loans, partially offset by higher outside programming costs.

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2010 First Nine Months versus 2009 First Nine Months
Noninterest expense for the first nine-month period of 2010 decreased $2,471.6 million, or 67%, from the comparable year-ago period.
Table 21 — Noninterest Expense — 2010 First Nine Months vs. 2009 First Nine Months
                                 
    Nine Months Ended September 30,     Change  
(dollar amounts in thousands)   2010     2009     Amount     Percent  
Personnel costs
  $ 586,789     $ 519,819     $ 66,970       13 %
Outside data processing and other services
    118,305       111,283       7,022       6  
Deposit and other insurance expense
    74,228       89,410       (15,182 )     (17 )
Net occupancy
    81,192       79,000       2,192       3  
OREO and foreclosure expense
    28,547       75,379       (46,832 )     (62 )
Equipment
    63,860       62,663       1,197       2  
Professional services
    67,757       51,220       16,537       32  
Amortization of intangibles
    45,432       51,247       (5,815 )     (11 )
Automobile operating lease expense
    28,892       32,920       (4,028 )     (12 )
Marketing
    49,756       23,975       25,781       N.M.  
Telecommunications
    18,071       17,880       191       1  
Printing and supplies
    11,628       11,673       (45 )      
Goodwill impairment
          2,606,944       (2,606,944 )     N.M.  
Gain on early extinguishment of debt
          (73,827 )     73,827       N.M.  
Other expense
    64,756       51,262       13,494       26  
 
                       
 
                               
Total noninterest expense
  $ 1,239,213     $ 3,710,848     $ (2,471,635 )     (67 )%
 
                       
Number of employees (full-time equivalent), at period-end
    11,279       10,194       1,085       11 %
     
N.M., not a meaningful value.
The $2,471.6 million, or 67%, decrease in total noninterest expense reflected:
    $2,606.9 million of goodwill impairment in the year-ago period.
    $46.8 million, or 62%, decrease in OREO and foreclosure expense reflecting lower OREO losses.
    $15.2 million, or 17%, decline in deposit and other insurance expense, primarily due to a $23.6 million FDIC insurance special assessment in the year-ago period, partially offset by higher FDIC insurance costs in the current period as premium rates increased and the level of deposits grew.
Partially offset by:
    $73.8 million benefit in the year-ago period from a gain on the early extinguishment of debt.
    $67 million, or 13%, increase in personnel costs, reflecting a combination of factors including higher salaries due to a 11% increase in full-time equivalent staff in support of strategic initiatives, higher sales commissions, and retirement fund and 401(k) plan expenses.
    $25.8 million increase in marketing expense, reflecting increases in branding and product advertising activities in support of strategic initiatives.
    $16.5 million, or 32%, increase in professional services, reflecting higher legal and consulting fees.
    $13.5 million, or 26%, increase in other expense, reflecting a combination of factors including an increase in repurchase reserves related to representations and warranties made on mortgage loans sold and an increase in other miscellaneous expenses in support of implementing strategic initiatives, partially offset by a decrease in franchise and other taxes.

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Provision for Income Taxes
(This section should be read in conjunction with Significant Items 2 and 6.)
The provision for income taxes in the 2010 third quarter was $29.7 million. This compared with a tax expense of $13.3 million in the 2010 second quarter and a tax benefit of $91.2 million in the 2009 third quarter. As of September 30, 2010, a net deferred tax asset of $389.5 million was recorded. There was no impairment to the deferred tax asset as a result of projected taxable income.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. Also, we are subject to on-going tax examinations in various jurisdictions. Federal income tax audits have been completed through 2005. In 2009, the Internal Revenue Service (IRS) began the audit of our consolidated federal income tax returns for tax years 2006 and 2007. Various state and other jurisdictions remain open to examination for tax years 2000 and forward. The IRS as well as state tax officials from Ohio, Kentucky, and Illinois have proposed adjustments to our previously filed tax returns. We believe the tax positions taken by us related to such proposed adjustments were correct and supported by applicable statutes, regulations, and judicial authority, and we intend to vigorously defend them. It is possible that the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. However, although no assurances can be given, we believe the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position. ( See Note 16 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding unrecognized tax benefits. )

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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) . The material change in the economic conditions and the resulting changes in borrower behavior over the past two years resulted in our focusing significant resources to the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we added more quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes.
Asset quality metrics have improved over the first nine-month period of 2010, reflecting our proactive portfolio management policies as well as a stabilizing, yet still weak, economy during 2010 compared with 2009. Our portfolio management policies were enacted in 2009 and continue today, demonstrating our commitment to maintaining a low-to-moderate risk profile. To that end, we continue to expand our resources in the risk management areas of the company. The improvements in the asset quality metrics, including lower levels of NPLs, “criticized” and “classified” assets, and delinquencies have all been achieved through these policies and commitments.
The weak residential real estate market and U.S. economy has had a significant impact on the financial services industry as a whole, and specifically on our financial results. A pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate values and higher delinquencies and charge-offs, including loans to builders and developers of residential real estate. In addition, the U.S. recession during 2008 and 2009 and continued high unemployment have hindered any significant recovery. As a result, we experienced higher than historical levels of delinquencies and charge-offs in our loan portfolios during 2009 and 2010. The value of our investment securities backed by residential and commercial real estate were also impacted by a lack of liquidity in the financial markets and anticipated credit losses.
Loan and Lease Credit Exposure Mix
At September 30, 2010, total loans and leases totaled $37.5 billion, representing a 1% increase from the prior quarter, and essentially unchanged from the year-ago quarter. Despite the relatively small overall change, the composition of the portfolio has changed significantly over the past 12 months. From September 30, 2009 to September 30, 2010, the commercial portfolio decreased by $1.9 billion, or 9%, primarily as a result of a planned strategy to reduce the concentration of our noncore CRE portfolio. This decline was offset by an increase in the consumer portfolio, primarily driven by the automobile loan portfolio. Over the past 12 months, we leveraged our indirect automobile finance business to generate high credit-quality loan originations and consolidated a $1.0 billion loan securitization.
At September 30, 2010, commercial loans totaled $19.3 billion, and represented 52% of our total loan and lease credit exposure. Our commercial loan portfolio is diversified along product type, size, and geography within our footprint, and is comprised of the following ( see “Commercial Credit” discussion) :
Commercial and Industrial (C&I) loans - C&I loans represent loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are commercial customers doing business within our geographic regions. C&I loans are generally underwritten individually and 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, sale, or refinancing of the real estate is not considered the primary repayment source for these types of loans. We have recently enhanced our Asset-Based Lending (ABL) area by adding ABL professionals to take advantage of market opportunities, and to better leverage the manufacturing base in our primary markets.
Commercial real estate (CRE) loans - CRE loans consist of loans for income producing real estate properties, real estate investment trusts, and real estate developers. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers; and are repaid through cash flows related to the operation, sale, or refinance of the property.

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Construction CRE loans - Construction CRE loans are loans to individuals, companies, or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, residential (land, single family, condominiums), office, and warehouse product types. Generally, these loans are for construction projects that have been presold, preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in each project. These loans are underwritten and managed by a specialized real estate group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.
Total consumer loans were $18.2 billion at September 30, 2010, and represented 48% of our total loan and lease credit exposure. The consumer portfolio was diversified among home equity loans, residential mortgages, and automobile loans and leases (see “Consumer Credit” discussion) .
Automobile loans/leases - Automobile loans/leases is primarily comprised of loans made through automotive dealerships and includes exposure in selected out-of-market states. In 2009, we exited several out-of-market states, including Florida, Arizona, and Nevada, positively impacting our 2009 and 2010 loss rates. In the first nine-month period of 2010, we expanded into eastern Pennsylvania and five New England states. The recent expansions included hiring experienced colleagues with existing dealer relationships in those markets. No out-of-market state represented more than 5% of our total automobile loan and lease portfolio. Our automobile lease portfolio represents an immaterial portion of the total portfolio as we exited the automobile leasing business during the 2008 fourth quarter.
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. Given the current low interest rate environment, many borrowers have utilized the home equity product as the primary source of financing their home. The proportion of first-lien loans has increased significantly in our portfolio over the past 24 months. Real estate market values at the time of origination directly affect the amount of credit extended and subsequent changes in these values impact the severity of losses. We actively manage the amount of credit extended through formal debt-to-income policies and loan-to-value (LTV) maximums.
Residential mortgages - Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30- year term, and in most cases, are extended to borrowers to finance their primary residence. Generally speaking, our practice is to sell a significant portion of our fixed-rate originations in the secondary market.
Table 22 — Loan and Lease Portfolio Composition
                                                                                 
    2010     2009  
(dollar amounts in millions)   September 30,     June 30,     March 31,     December 31,     September 30,  
Commercial (1)
                                                                               
Commercial and industrial (2)
  $ 12,425       34 %   $ 12,392       34 %   $ 12,245       33 %   $ 12,888       35 %   $ 12,547       34 %
Commercial real estate:
                                                                               
Construction
    738       2       1,106       3       1,443       4       1,469       4       1,815       5  
Commercial (2)
    6,174       16       6,078       16       6,013       16       6,220       17       6,900       18  
 
                                                           
Total commercial real estate
    6,912       18       7,184       19       7,456       20       7,689       21       8,715       23  
 
                                                           
Total commercial
    19,337       52       19,576       53       19,701       53       20,577       56       21,262       57  
 
                                                           
Consumer:
                                                                               
Automobile loans (3)
    5,296       14       4,712       13       4,212       11       3,144       9       2,939       8  
Automobile leases
    89             135             191       1       246       1       309       1  
Home equity
    7,690       21       7,510       20       7,514       20       7,563       21       7,576       20  
Residential mortgage
    4,511       12       4,354       12       4,614       12       4,510       12       4,468       12  
Other loans
    578       1       683       2       700       3       751       2       750       2  
 
                                                           
Total consumer
    18,164       48       17,394       47       17,231       47       16,214       44       16,042       43  
 
                                                           
Total loans and leases
  $ 37,501       100 %   $ 36,970       100 %   $ 36,932       100 %   $ 36,791       100 %   $ 37,304       100 %
 
                                                           
     
(1)   There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
 
(2)   The 2009 fourth quarter reflected net reclassifications from commercial real estate loans to commercial and industrial loans of $589.0 million.
 
(3)   The 2010 first quarter included an increase of $730.5 million resulting from the adoption of a new accounting standard to consolidate a previously off-balance sheet automobile loan securitization transaction.

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Commercial Credit
The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, type and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook.
In commercial lending, on-going credit management is dependent on the type and nature of the loan. We monitor all significant exposures on an on-going basis. All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-given-default (severity of loss). This two-dimensional rating methodology, which results in 192 individual loan grades, provides granularity in the portfolio management process. The probability-of-default is rated on a scale of 1-12 and is applied at the borrower level. The loss-given-default is rated on a 1-16 scale and is applied based on the type of credit extension and the underlying collateral. The internal risk ratings are assessed and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an on-going basis. As an example, the retail projects segment of the CRE portfolio has received more frequent evaluation at the loan level as a result of the economic environment and performance trends (see “Retail Properties” discussion) . We continually review and adjust our risk-rating criteria based on actual experience. The analysis and review process results in a continuously updated determination of the risk level in the portfolio. The risk-rating process is the basis for the calculation of an appropriate ALLL amount for our commercial loan portfolio.
Commercial loans rated as “Other Loans Especially Mentioned” (OLEM), “substandard”,“doubtful”, or “loss” are categorized as “criticized”. Commercial loans rated as “substandard”, “doubtful”, or “loss” are categorized as “classified.” Commercial loans may be designated as “criticized” when warranted by individual borrower performance or by industry and environmental factors. Commercial “criticized” loans are subjected to additional monthly reviews to adequately assess the borrower’s credit status and take appropriate action. We re-evaluate the risk-rating of these “criticized” commercial loans when conditions change and an adjustment in rating, either an upgrade or downgrade, is warranted. Changes in the rating can be impacted by borrower performance, external factors such as industry and economic changes, as well as structural changes to the loan arrangements including, but not limited to, amortization, collateral, guarantees, and covenants.
Essentially all commercial loans rated “classified” are managed by our Special Assets Division (SAD) workout group. Our SAD group is a specialized credit group that handles the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing an action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual status, and the ultimate collectibility of the managed “classified” loans.
Our commercial loan portfolio, including CRE loans, is diversified by customer size, as well as geographically throughout our footprint. During 2009, we engaged in a large number of enhanced portfolio management initiatives, including a review to ensure the appropriate classification of CRE loans. The results of this initiative included reclassifications in 2009 totaling $1.4 billion that increased C&I loan balances, and correspondingly decreased CRE loan balances, primarily representing owner-occupied properties. We believe the changes provide improved visibility and clarity to us and our investors. We have continued our active portfolio management processes into the first nine-month period of 2010, primarily focusing on improving our ability to identify changing conditions at the borrower level, which in most cases, significantly improves the outcome.
Certain segments of our commercial loan portfolio are discussed in further detail below:
COMMERCIAL REAL ESTATE (CRE) PORTFOLIO
As shown in the following table, CRE loans totaled $6.9 billion and represented 18% of our total loan exposure at September 30, 2010. While there is a concentration in retail properties, we are working to reduce this exposure to less than 20% of the total CRE portfolio. There is no geographic concentration within the Other category, and we have very limited out of footprint lending in the CRE portfolio.

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Table 23 — Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    September 30, 2010  
                                                    West                    
(dollar amounts in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     Virginia     Other     Total Amount     %  
Retail properties
  $ 760     $ 182     $ 141     $ 197     $ 6     $ 54     $ 45     $ 482     $ 1,867       27 %
Multi family
    727       120       91       70       35       2       71       112       1,228       18  
Office
    591       245       105       56       20       23       58       54       1,152       17  
Industrial and warehouse
    421       183       43       73       14       35       11       82       862       12  
Single family home builders
    385       62       34       17       15       60       17       44       634       9  
Lines to real estate companies
    479       35       16       7             1       7       5       550       8  
Hotel
    139       49       18       36                   47       97       386       6  
Raw land and other land uses
    57       32       5       7       5       3       3       12       124       2  
Health care
    27       27       15       3                               72       1  
Other
    23       3       2       1       7                   1       37       1  
 
                                                           
Total
  $ 3,609     $ 938     $ 470     $ 467     $ 102     $ 178     $ 259     $ 889     $ 6,912       100 %
 
                                                           
% of total portfolio
    52 %     14 %     7 %     7 %     1 %     3 %     4 %     13 %     100 %        
 
                                                                               
Net charge-offs (for the first nine-month period of 2010)
  $ 115.8     $ 30.1     $ 3.4     $ 3.4     $ 2.8     $ 13.2     $ 2.6     $ 59.4     $ 230.7          
Net charge-offs - annualized %
    4.01 %     4.02 %     0.91 %     0.91 %     3.36 %     9.26 %     1.27 %     8.35 %     4.17 %        
 
                                                                               
Nonaccrual loans
  $ 273.7     $ 43.3     $ 12.6     $ 11.5     $ 5.1     $ 11.8     $ 26.5     $ 94.3     $ 478.8          
% of related outstandings
    7.58 %     4.62 %     2.68 %     2.46 %     5.00 %     6.63 %     10.23 %     10.61 %     6.93 %        
CRE loan credit quality data regarding NCOs and nonaccrual loans (NALs) by industry classification code are presented in the following table:
Table 24 — Commercial Real Estate Loans Credit Quality Data by Property Type
                                                                 
    Net Charge-offs     Nonaccrual Loans  
    Nine Months Ended September 30,     September 30,     December 31,  
    2010     2009     2010     2009  
(dollar amounts in millions)   Amount     Percentage     Amount     Percentage     Amount     Percent (1)     Amount     Percent (1)  
Retail properties
  $ 86.6       5.72 %   $ 131.6       7.65 %   $ 124.7       6.68 %   $ 253.6       11.99 %
Industrial and warehouse
    25.6       3.84       33.8       3.91       61.4       7.13       120.8       12.96  
Single family home builder
    52.3       9.32       143.8       16.83       130.1       20.52       262.4       30.62  
Multi family
    25.6       2.61       56.6       4.91       67.9       5.53       129.0       9.43  
Lines to real estate companies
    7.3       1.60       35.4       4.32       17.3       3.15       22.7       3.56  
Office
    15.6       1.81       12.3       1.32       38.7       3.36       87.3       7.82  
Hotel
    2.0       0.69       0.6             17.2       4.47       10.9       2.91  
Raw land and other land uses
    14.9       15.09       9.8       7.72       15.6       12.62       42.4       32.12  
Health care
    0.1       0.15                   0.5       0.69       0.7       0.58  
Other
    0.7       2.39       0.7       1.62       5.3       14.43       6.0       15.79  
 
                                                       
 
                                                               
Total
  $ 230.7       4.17 %   $ 424.6       6.03 %   $ 478.8       6.93 %   $ 935.8       12.17 %
 
                                                       
     
(1)   Represents percentage of related outstanding loans.
As shown in the table above, CRE NCOs during the first nine-month period of 2010 were materially lower than in the comparable year-ago period. This is consistent with our view that we were active in addressing problem credits in 2009 and the market has stabilized from the steep decline evident in 2008 and 2009. While we continue to see stress in the CRE portfolio, the results of the first nine-months of 2010 have significantly improved compared with the year-ago period. In terms of dollars, CRE NALs in the Retail Properties and Single Family Home Builders segments were substantially lower at September 30, 2010 compared with September 30, 2009. Total CRE NALs have declined 49% compared with December 31, 2009 levels as a result of our portfolio management strategies and charge-off decisions.

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We manage the risks inherent in this portfolio through origination policies, concentration limits, on-going loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include product-type specific policies such as LTV ratios, debt service coverage ratios, and pre-leasing requirements, as applicable. Generally, we: (a) limit our loans to 80% of the appraised value of the commercial real estate, (b) require net operating cash flows to be 125% of required interest and principal payments, and (c) if the commercial real estate is non-owner-occupied, require that at least 50% of the space of the project be pre-leased.
Dedicated real estate professionals within our Commercial Real Estate business segment team originated the majority of the portfolio, with the remainder obtained from prior acquisitions. Appraisals from approved vendors are reviewed by an internal appraisal review group of MAI certified appraisers 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 credit 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 perform on-going portfolio level reviews of certain segments such as the retail properties segment (see “Retail Properties” discussion) . These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. The results of these reviews indicate that some additional stress is likely due to the current economic conditions. Property values are updated using appraisals on a regular basis to ensure appropriate decisions regarding the on-going management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers as well as an in-depth knowledge of CRE project lending and the market environment.
At the portfolio level, we actively monitor the concentrations and performance metrics of all loan types, with a focus on higher risk segments. Macro-level stress-test scenarios based on retail sales and home-price depreciation trends for the segments are embedded in our performance expectations, and lease-up and absorption scenarios are assessed.
Within the CRE portfolio, the retail properties and single family home builder segments continued to be stressed as a result of the continued decline in the housing markets and general economic conditions, and are discussed below.
Retail Properties
Our portfolio of CRE loans secured by retail properties totaled $1.9 billion, or approximately 5% of total loans and leases, at September 30, 2010. Loans within this portfolio segment declined $0.2 billion, or 12%, from $2.1 billion at December 31, 2009. Credit approval in this portfolio segment is generally dependent on pre-leasing requirements, and net operating income from the project must cover debt service by specified percentages when the loan is fully funded.
The continued weakness of the economic environment in our geographic regions continues to impact the projects that secure the loans in this portfolio segment. Lower occupancy rates, reduced rental rates, and the expectation these levels will remain stressed 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 on this portfolio segment, and we analyze our retail property loans in detail by combining property type, geographic location, and other data, to assess and manage our credit concentration risks. We review the majority of this portfolio segment on a monthly basis.
Single Family Home Builders
At September 30, 2010, we had $0.6 billion of CRE loans to single family home builders. Such loans represented 2% of total loans and leases. Of this portfolio segment, 65% were to finance construction projects, 16% to finance land under development, and 19% to finance land held for development. The $0.6 billion represented a $0.2 billion, or 26%, decrease compared with $0.9 billion at December 31, 2009. The decrease primarily reflected run-off activity as few new loans have been originated since 2008, property sale activity, and charge-offs. Based on portfolio management processes over the past 30 months, including charge-off activity, we believe we have substantially addressed the credit issues in this portfolio. We do not anticipate any future significant credit impact from this portfolio segment.

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Core and Noncore portfolios
Each CRE loan is classified as either core or noncore. We separated the CRE portfolio into these categories in order to provide more clarity around our portfolio management strategies and to provide additional clarity for us and our investors. We believe segregating the noncore CRE from core CRE improves our ability to understand the nature, performance prospects, and problem resolution opportunities of this segment, thus allowing us to continue to deal proactively with future credit issues.
A CRE loan is generally considered core when the borrower is an experienced, well-capitalized developer in our Midwest footprint, and has either an established meaningful relationship that generates an acceptable return on capital or the prospect of establishing one. The core CRE portfolio was $4.0 billion at September 30, 2010, representing 58% of total CRE loans. The performance of the core portfolio in the current quarter met our expectations based on the consistency of the asset quality metrics within the portfolio. Based on our extensive project level assessment process, including forward-looking collateral valuations, we continue to believe the credit quality of the core portfolio is stable.
A CRE loan is generally considered noncore based on the lack of a substantive relationship outside of the credit product, with no immediate prospects for improvement. The noncore CRE portfolio declined from $3.7 billion at December 31, 2009, to $2.9 billion at September 30, 2010, and represented 42% of total CRE loans. Of the loans in the noncore portfolio at September 30, 2010, 51% were classified as “pass” or better, 95% had guarantors, 99% were secured, and 90% were located within our geographic footprint. However, it is within the noncore portfolio where most of the credit quality challenges exist. For example, $0.4 billion, or 15%, of related outstanding balances, are classified as NALs. SAD administered $1.4 billion, or 48%, of total noncore CRE loans at September 30, 2010. We expect to exit the majority of noncore CRE relationships over time through normal repayments, possible sales should economically attractive opportunities arise, or the reclassification to a core CRE relationship if it expands to meet the core requirements.
The table below provides the segregation of the CRE portfolio into core and noncore segments as of September 30, 2010:
Table 25 — Core Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    September 30, 2010  
                                                    West                    
(dollar amounts in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     Virginia     Other     Total Amount     %  
Core portfolio:
                                                                               
Retail properties
  $ 475     $ 106     $ 80     $ 89     $ 3     $ 41     $ 38     $ 372     $ 1,204       17 %
Office
    337       160       72       22       11       8       41       53       704       10  
Multi family
    267       89       51       32       8             43       64       554       8  
Industrial and warehouse
    290       64       25       43       3       3       9       82       519       8  
Lines to real estate companies
    343       26       8       4             1       5       4       391       6  
Hotel
    75       34       8       25                   41       84       267       4  
Single family home builders
    123       31       7       2             21       9       15       208       3  
Raw land and other land uses
    32       30       3       2             2       3       10       82       1  
Health care
    13       7       13       3                               36       1  
Other
    10       2       2       1       8                   1       24        
 
                                                           
Total core portfolio
    1,965       549       269       223       33       76       189       685       3,989       58  
Total noncore portfolio
    1,644       388       201       245       69       102       70       204       2,923       42  
 
                                                           
 
                                                                               
Total commercial real estate
  $ 3,609     $ 937     $ 470     $ 468     $ 102     $ 178     $ 259     $ 889     $ 6,912       100 %
 
                                                           

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Credit quality data regarding the ACL and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table:
Table 26 — Commercial Real Estate — Core vs. Noncore Portfolios
                                                 
    September 30, 2010  
    Ending                                     Nonaccrual  
(dollar amounts in millions)   Balance     Prior NCOs     ACL $     ACL %     Credit Mark (1)     Loans  
Total core
  $ 3,989     $ 2     $ 165       4.14 %     4.18 %   $ 51.3  
 
                                               
Noncore — Special Assets Division (2)
    1,394       469       360       25.82       44.50       352.8  
Noncore — Other
    1,529       33       138       9.03       10.95       74.7  
 
                                   
Total noncore
    2,923       502       498       17.04       29.20       427.5  
 
                                   
Total commercial real estate
  $ 6,912     $ 504     $ 663       9.59 %     15.74 %   $ 478.8  
 
                                   
                                                 
    December 31, 2009  
Total core
  $ 4,038     $     $ 168       4.16 %     4.16 %   $ 3.8  
 
                                               
Noncore — Special Assets Division (2)
    1,809       511       410       22.66       39.70       861.0  
Noncore — Other
    1,842       26       186       10.10       11.35       71.0  
 
                                   
Total noncore
    3,651       537       596       16.32       27.05       932.0  
 
                                   
Total commercial real estate
  $ 7,689     $ 537     $ 764       9.94 %     15.82 %   $ 935.8  
 
                                   
     
(1)   Calculated as (Prior NCOs + ACL $) / (Ending Balance + Prior NCOs)
 
(2)   Noncore loans managed by our Special Assets Division, the area responsible for managing loans and relationships designated as monitored credits.
As shown in the above table, the ending balance of the CRE portfolio at September 30, 2010 declined $0.8 billion compared with December 31, 2009. Of this decline, 94% occurred in the noncore segment of the portfolio and was a result of payoffs and NCOs as we actively focus on the noncore portfolio to reduce our overall CRE exposure. We anticipate further declines in future periods based on our overall strategy regarding the CRE portfolio.
Also as shown above, substantial reserves for the noncore portfolio have been established. At September 30, 2010, the ACL related to the noncore portfolio was 17.04%. The combination of the existing ACL and prior NCOs represents the total credit actions taken on each segment of the portfolio. From this data, we calculate a measurement, called a “credit mark”, that provides a consistent measurement of the cumulative credit actions taken against a specific portfolio segment. We believe the combined credit activity is appropriate for each of the CRE segments.
COMMERCIAL AND INDUSTRIAL (C&I) PORTFOLIO
The C&I portfolio is comprised of loans to businesses where the source of repayment is associated with the on-going operations of the business. Generally, the loans are secured with the financing of the borrower’s assets, such as equipment, accounts receivable, or inventory. In many cases, the loans are secured by real estate, although the operation, sale, or refinancing of the real estate is not a primary source of repayment for the loan. For loans secured by real estate, appropriate appraisals are obtained at origination and updated on an as needed basis in compliance with regulatory requirements.
There were no outstanding commercial loans considered an industry or geographic concentration of lending. Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home building industry, contractors, and automotive suppliers. However, the combined total of these segments represented only 10% of the total C&I portfolio. We manage the risks inherent in this portfolio through origination policies, concentration limits, on-going loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as LTV and debt service coverage ratios, as applicable.
C&I borrowers have been challenged by the continued weak economy, and some borrowers may no longer have sufficient capital to withstand the protracted stress. As a result, these borrowers may not be able to comply with the original terms of their credit agreements. We continue to focus on-going attention on the portfolio management process to proactively identify borrowers that may be facing financial difficulty. The impact of the economic environment is further evidenced by the level of line-of-credit activity, as borrowers continued to maintain relatively low utilization percentages over the past 12 months.

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As shown in the following table, C&I loans totaled $12.4 billion at September 30, 2010:
Table 27 — Commercial and Industrial Loans and Leases by Industry Classification
                                 
    September 30, 2010  
    Commitments     Loans Outstanding  
(dollar amounts in millions)   Amount     Percent     Amount     Percent  
 
                               
Industry Classification:
                               
Services
  $ 4,834       26 %   $ 3,697       30 %
Manufacturing
    3,379       18       2,100       17  
Finance, insurance, and real estate
    1,949       11       1,378       11  
Retail trade — auto dealers
    1,672       9       1,115       9  
Retail trade — other than auto dealers
    1,683       9       1,215       10  
Wholesale trade
    1,538       8       917       7  
Transportation, communications, and utilities
    1,218       7       719       6  
Contractors and construction
    928       5       539       4  
Energy
    641       4       413       3  
Agriculture and forestry
    342       2       246       2  
Public administration
    88       1       81       1  
Other
    7             5        
 
                       
 
                               
Total
  $ 18,279       100 %   $ 12,425       100 %
 
                       
C&I loan credit quality data regarding NCOs and NALs by industry classification are presented in the table below:
Table 28 — Commercial and Industrial Credit Quality Data by Industry Classification
                                                                         
    Net Charge-offs             Nonaccrual Loans  
    Nine Months Ended September 30,             September 30,     At December 31,  
    2010     2009             2010     2009  
(dollar amounts in millions)   Amount     Annualized %     Amount     Annualized %             Amount     Percent (1)     Amount     Percent (1)  
Industry Classification:
                                                                       
Manufacturing
  $ 54.7       3.51 %   $ 76.0       4.40 %           $ 102.9       4.90 %   $ 136.8       6.21 %
Services
    81.6       2.97       48.8       1.65               113.2       3.06       163.9       4.20  
Contractors and construction
    13.0       3.56       11.4       3.02               23.3       4.32       41.6       8.98  
Finance, insurance, and real estate (2)
    19.1       1.37       163.7       9.86               51.3       3.73       98.0       4.17  
Transportation, communications, and utilities
    7.1       1.37       15.4       2.82               25.2       3.50       30.6       4.09  
Retail trade — other than auto dealers
    14.8       1.85       37.7       5.28               43.4       3.57       58.5       6.38  
Energy
    1.3       0.43       3.5       1.13               9.3       2.26       10.7       2.62  
Retail trade — auto dealers
    1.5       0.21       0.2       0.03               2.6       0.24       3.0       0.33  
Public administration
    0.2       0.25       0.3       0.31                     0.06       0.1       0.12  
Agriculture and forestry
    0.5       0.33       0.2       0.14               6.6       2.70       5.1       2.65  
Wholesale trade
    0.7       0.12       19.5       3.02               20.5       2.24       29.5       4.28  
Other
    1.3       16.37       1.1       5.43               0.1       0.84       0.6       2.14  
 
                                                               
 
                                                                       
Total (2)
  $ 195.8       2.12 %   $ 377.8       3.78 %           $ 398.4       3.21 %   $ 578.4       4.49 %
 
                                                               
     
(1)   Represents percentage of total related outstanding loans.
 
(2)   The nine-month period of 2009 included charge-offs totaling $114.4 million associated with the 2009 Franklin restructuring (see Significant Item 2).

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FRANKLIN RELATIONSHIP
(This section should be read in conjunction with Significant Item 2 and Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
During the 2010 second quarter, $397.7 million of Franklin-related loans ($333.0 million of residential mortgages and $64.7 million of home equity loans) at a value of $323.4 million were transferred to loans held for sale. At the time of the transfer to loans held for sale, the loans were marked to the lower of cost or fair value less costs to sell. This resulted in charge-offs at the time of the transfer which, when added to other charge-offs during the quarter, resulted in total 2010 second quarter Franklin-related NCOs of $80.0 million ($64.2 million related to residential mortgages and $15.9 million related to home equity loans, partially offset by $0.2 million of C&I net recoveries). The 2010 second quarter provision for credit losses included $80.0 million related to Franklin, with $75.5 million related to transferring the loans to loans held for sale. During the 2010 third quarter, the Franklin-related residential mortgages and home equity loans were sold at essentially book value. In the 2010 third quarter, Franklin-related consumer NCOs totaled $4.5 million ($3.4 million of residential mortgage NCOs and $1.2 million of home equity loan NCOs), which were offset by $4.5 million of Franklin-related commercial net recoveries. At September 30, 2010, the only Franklin-related assets remaining were $15.3 million of OREO properties, which have been marked to the lower of cost or fair value less costs to sell.
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength and payment history of the borrower, the 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 for loans secured by real estate includes updated value estimates in addition to the quarterly FICO score updates. The results of the on-going performance assessment process are used in the determination of an appropriate ALLL amount for our consumer loan portfolio.
In the first nine-month period of 2010, we took advantage of market opportunities that allowed us to grow our automobile loan portfolio. The significant growth in the portfolio was accomplished while maintaining high credit quality metrics. As we take advantage of these opportunities, we are developing alternative plans to address any growth in excess of our established portfolio concentration limits, including both securitizations and loan sales.
The residential mortgage and home equity portfolios are primarily located throughout our geographic footprint. The continued slowdown in the housing market has negatively impacted the performance of our residential mortgage and home equity portfolios. While the degree of price depreciation varies across our markets, all regions throughout our footprint have been affected. Given the continued economic weaknesses in our markets, the home equity and residential mortgage portfolios are particularly noteworthy, and are discussed in greater detail below:
Table 29 — Selected Home Equity and Residential Mortgage Portfolio Data (1)
                                                 
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages  
(dollar amounts in millions)   09/30/10     12/31/09     09/30/10     12/31/09     09/30/10     12/31/09  
Ending Balance
  $ 2,505     $ 2,616     $ 5,184     $ 4,946     $ 4,511     $ 4,510  
Portfolio Current Weighted Average LTV ratio (2)
    70 %     71 %     77 %     77 %     77 %     76 %
Portfolio Weighted Average FICO (3)
    730       716       740       723       719       698  
                         
    Nine Months Ended September 30, 2010  
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages (4)  
Originations
  $ 369.9     $ 1,075.0     $ 1,179.4  
Origination Weighted Average LTV ratio (2)
    61 %     74 %     81 %
Origination Weighted Average FICO (3)
    765       766       760  
     
(1)   Excludes Franklin-related loans.
 
(2)   The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at origination.
 
(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.

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HOME EQUITY PORTFOLIO
Our home equity portfolio (loans and lines-of-credit) consists of both first- and second- mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios, and LTV ratios. We offer closed-end home equity loans with a fixed interest rate and level monthly payments and a variable-rate, interest-only home equity line-of-credit. Home equity loans are generally fixed-rate with periodic principal and interest payments. Home equity lines-of-credit are generally variable-rate and do not require payment of principal during the 10-year revolving period of the line.
We focus on high-quality borrowers primarily located within our geographic footprint. The majority of our home equity borrowers consistently pay more than the required amount. Additionally, since we focus on developing complete relationships with our customers, many of our home equity borrowers are utilizing other products and services.
We believe we have granted credit conservatively within this portfolio. We have not originated “stated income” home equity loans or lines-of-credit that allow negative amortization. Also, we have not originated home equity loans or lines-of-credit with an LTV ratio at origination greater than 100%, except for infrequent situations with high-quality borrowers. However, continued declines in housing prices have likely eliminated a portion of the collateral for this portfolio and it is likely some loans with an original LTV ratio of less than 100% currently have an LTV ratio above 100%. At September 30, 2010, over 35% of our home equity portfolio was secured by a first-mortgage lien on the property. The risk profile is substantially improved when we hold a first-mortgage lien position. In the first nine-month period of 2010, approximately 65% of our home equity portfolio originations (both loans and lines-of-credit) were secured by a first-mortgage lien.
For certain home equity loans and lines-of-credit, we may utilize Automated Valuation Methodology (AVM) or other model-driven value estimates during the credit underwriting process. We utilize a series of credit parameters to determine the appropriate valuation methodology. We believe the AVM is an appropriate valuation source for a portion of our home equity lending activities. Regardless of the estimate methodology, we supplement our underwriting with a third-party fraud detection system to limit our exposure to “flipping”, and outright fraudulent transactions. We update values as we believe appropriate, and in compliance with applicable regulations, for loans identified as higher risk. Loans are identified as higher risk based on performance indicators and the updated values are utilized to facilitate our portfolio management, as well as our workout and loss mitigation functions.
We continue to make origination policy adjustments based on our assessment of an appropriate risk profile, as well as industry actions. In addition to origination policy adjustments, we take actions, as necessary, to manage the risk profile of this portfolio. We focus production primarily within our banking footprint or to existing customers.
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 allow the borrower multiple payment options.
All residential mortgage loans are originated based on a complete appraisal during the credit underwriting process. Additionally, we supplement our underwriting with a third-party fraud detection system as used in the home equity portfolio to limit our exposure to “flipping” and outright fraudulent transactions. We update values in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.
A majority of our residential mortgage loans 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, 2010. At September 30, 2010, ARM loans expected to have rates reset totaled $173.2 million for the remainder of 2010 and $958.6 million for 2011. Given the quality of our borrowers and the relatively low current interest rates, we believe we have 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 reset date, and have been successful in converting many ARMs to fixed-rate loans through this process. Additionally, where borrowers are experiencing payment difficulties, loans may be reunderwritten based on the borrower’s ability to repay the loan.
We had $0.3 billion of Alt-A mortgage loans in the residential mortgage loan portfolio at September 30, 2010, compared with $0.4 billion at December 31, 2009. These loans have a higher risk profile than the rest of the portfolio as a result of origination policies that included reliance on stated income, stated assets, or higher LTV ratios. This portfolio continues to decline as we stopped originating these loans in 2007 . At September 30, 2010, borrowers for Alt-A mortgages had an average current FICO score of 682 and the loans had an average current LTV ratio of 86%, compared with 662 and 87%, respectively, at December 31, 2009. Total Alt-A NCOs during the first nine-month period of 2010 were $12.2 million, or an annualized 4.69%, compared with $18.7 million, or an annualized 5.98%, in the first nine-month period of 2009. At September 30, 2010, $16.6 million of the ALLL was allocated to the Alt-A mortgage portfolio, representing 5.12% of period-end Alt-A mortgages.

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Interest-only loans comprised $0.6 billion of residential real estate loans at September 30, 2010, essentially unchanged from December 31, 2009. Interest-only loans are underwritten to specific standards including minimum credit scores, stressed debt-to-income ratios, and extensive collateral evaluation. At September 30, 2010, borrowers for interest-only loans had an average current FICO score of 734 and the loans had an average current LTV ratio of 77%, compared with 718 and 77%, respectively, at December 31, 2009. Total interest-only NCOs during the first nine-month period of 2010 were $6.8 million, or an annualized 1.61%, compared with $10.3 million, or an annualized 2.13%, in the first nine-month period of 2009. At September 30, 2010, $12.4 million of the ALLL was allocated to the interest-only loan portfolio, representing 2.25% of period-end interest-only loans.
Several recent government actions have been enacted that have affected the residential mortgage portfolio and MSR values in particular such as various refinance programs which positively affected the availability of credit for the industry. We are utilizing these programs to enhance our existing strategies of working closely with our customers.
Credit Quality
We believe the most meaningful way to assess overall credit quality performance for 2010 is through an analysis of specific credit quality performance ratios. This approach forms the basis of most of the discussion in the three sections immediately following: NALs and NPAs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.
Credit quality performance in the 2010 third quarter continued the positive trends from the previous two quarters. Specifically, the level of NPLs declined 18% from the prior quarter, and commercial “criticized” loans also declined reflecting significant upgrade and payment activity. Excluding the impact of $80.0 million of Franklin-related NCOs included in the 2010 second quarter total NCOs of $279.2 million, current quarter NCOs declined $14.7 million, or 7%. While NCOs remain elevated compared with long-term expectations, the first nine-month period of 2010 continued to show improvement across the portfolio, and delinquency trends improved as well.
The economic environment remains challenging. Yet, reflecting the benefit of our focused credit actions of 2009, we are experiencing declines in total NPAs, new NPAs, and the amount of loan exposure on our watchlist . The current quarter’s NCOs of $184.5 million were primarily related to reserves established in prior periods. Our ACL declined $65.4 million to $1,376.4 million, or 3.67% of period-end loans and leases from $1,441.8 million, or 3.90% at June 30, 2010. Importantly, our ACL as a percent of period-end NALs increased to 140% from 120%, and coverage ratios associated with NPAs and “criticized” assets also increased. These improved coverage ratios indicate a continued strengthening of our reserve position relative to troubled assets from the prior quarter.
NONPERFORMING ASSETS, NONACCRUAL LOANS, and TROUBLED DEBT RESTRUCTURED LOANS
(This section should be read in conjunction with Significant Item 2.)
Nonperforming Assets (NPAs) and Nonaccrual Loans (NALs)
NPAs consist of (a) nonaccrual loans (NALs), which represent loans and leases no longer accruing interest, (b) impaired held-for-sale loans, (c) OREO, and (d) other NPAs. A C&I or CRE loan is generally placed on nonaccrual status when collection of principal or interest is in doubt or when the loan is 90-days past due. Residential mortgage loans are placed on nonaccrual status at 180-days past due, and a charge-off recorded if it is determined that insufficient equity exists in the collateral property to support the entire outstanding loan amount . A home equity loan is placed on nonaccrual status at 120-days past due, and a charge-off recorded if it is determined there is not sufficient equity in the collateral property to cover our position. In instances associated with residential real estate loans, our equity position is determined by a current property valuation based on an expected marketing time period consistent with the market. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior-year amounts generally charged-off as a credit loss. When, in our judgment, the borrower’s ability to make required interest and principal payments has resumed and collectibility is no longer in doubt, the loan or lease is returned to accrual status.

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The following table reflects period-end NALs and NPAs detail for each of the last five quarters:
Table 30 — Nonaccrual Loans (NALs) and Nonperforming Assets (NPAs)
                                         
    2010     2009  
(dollar amounts in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
Nonaccrual loans and leases (NALs)
                                       
Commercial and industrial
  $ 398,353     $ 429,561     $ 511,588     $ 578,414     $ 612,701  
Commercial real estate
    478,754       663,103       826,781       935,812       1,133,661  
Alt-A mortgages
    11,188       15,119       13,368       11,362       9,810  
Interest-only mortgages
    14,334       13,811       8,193       7,445       8,336  
Franklin residential mortgages
                297,967       299,670       322,796  
Other residential mortgages
    57,462       57,556       53,422       44,153       49,579  
 
                             
Total residential mortgages
    82,984       86,486       372,950       362,630       390,521  
Home equity
    21,689       22,199       54,789       40,122       44,182  
 
                             
Total nonaccrual loans and leases
    981,780       1,201,349       1,766,108       1,916,978       2,181,065  
Other real estate owned (OREO), net
                                       
Residential
    65,775       71,937       68,289       71,427       81,807  
Commercial
    57,309       67,189       83,971       68,717       60,784  
 
                             
Total other real estate, net
    123,084       139,126       152,260       140,144       142,591  
Impaired loans held for sale (1)
          242,227             969       20,386  
 
                             
Total nonperforming assets (NPAs)
  $ 1,104,864     $ 1,582,702     $ 1,918,368     $ 2,058,091     $ 2,344,042  
 
                             
 
                                       
NALs as a % of total loans and leases
    2.62 %     3.25 %     4.78 %     5.21 %     5.85 %
NPA ratio (2)
    2.94       4.24       5.17       5.57       6.26  
 
                                       
Nonperforming Franklin assets
                                       
Residential mortgage
  $     $     $ 297,967     $ 299,670     $ 322,796  
Home equity
                31,067       15,004       15,704  
OREO
    15,330       24,515       24,423       23,826       30,996  
Impaired loans held for sale
          242,227                    
 
                             
Total Nonperforming Franklin assets
  $ 15,330     $ 266,742     $ 353,457     $ 338,500     $ 369,496  
 
                             
     
(1)   The June 30, 2010, figure represents NALs associated with the transfer of Franklin-related residential mortgage and home equity loans to loans held for sale (see Significant Item 2). The September 30, 2009, amount primarily represented impaired residential mortgage loans held for sale. All other presented amounts represented impaired loans obtained from the Sky Financial acquisition. Held for sale loans are carried at the lower of cost or fair value less costs to sell.
 
(2)   NPAs divided by the sum of loans and leases, impaired loans held-for-sale, net other real estate, and other NPAs.
NALs were $981.8 million at September 30, 2010, and represented 2.62% of related loans compared to $1,201.3 million, or 3.25% of related loans, at June 30, 2010, a decrease of $219.6 million, or 18%. Although NALs declined compared to the prior quarter, new NPAs increased $106.8 million, primarily reflecting the impact of large-dollar additions associated with three borrowers.
The $219.6 million decline in NALs primarily reflected:
    $184.3 million decline in CRE NALs, reflecting both charge-off activity and problem credit resolutions including borrower payments and pay-offs. This category was substantial and was a direct result of our commitment to the on-going proactive management of these credits by our SAD. Also key to this improvement was the significantly lower level of inflows. The level of inflow, or migration, is an important indicator of the future trend for the portfolio.
    $31.2 million decline in C&I NALs, reflecting both charge-off activity and problem credit resolutions, including pay-offs, and was associated with loans throughout our footprint, with no specific geographic concentration. From an industry perspective, improvement in the manufacturing-related segment accounted for a significant portion of the decrease.

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NPAs, which include NALs, were $1,104.9 million at September 30, 2010, and represented 2.94% of related assets. This compared with $1,582.7 million, or 4.24% of related assets, at June 30, 2010. The $477.8 million decrease reflected:
    $242.2 million decrease in impaired loans held for sale, reflecting the sale of Franklin-related loans held for sale in the 2010 third quarter.
    $219.6 million decrease to NALs, discussed above.
The over 90-day delinquency ratio for total consumer loans was 0.53% at September 30, 2010, representing a five basis point increase compared with 0.48% at June 30, 2010. This increase primarily reflected a seasonal increase in residential mortgage delinquencies as 90-day delinquencies in the other consumer loan portfolios were steady. Seasonal variances are anticipated, and we continue to closely monitor our delinquencies.
As part of our loss mitigation process, we reunderwrite, modify, or restructure loans when borrowers are experiencing payment difficulties, based on the borrower’s ability to repay the loan.
Compared with December 31, 2009, NALs decreased $935.2 million, or 49%. This decrease included a transfer of $316.6 million of Franklin-related NALs to loans held for sale during the 2010 second quarter. These loans were subsequently sold during the 2010 third quarter. The decline in NALs is summarized below:
    $457.1 million decline in CRE NALs, reflecting both charge-off activity and problem credit resolutions including pay-offs. The payment category was substantial and is a direct result of our commitment to the on-going proactive management of these credits by our SAD.
    $279.6 million decline in residential mortgage NALs, essentially all Franklin-related.
    $180.1 million decline in C&I NALs, reflecting both charge-off activity and problem credit resolutions, including pay-offs, and was associated with loans throughout our footprint, with no specific geographic concentration.
    $18.4 million decline in home equity NALs, essentially all Franklin-related.
Compared with December 31, 2009, NPAs, which include NALs, decreased $953.2 million, or 46%, reflecting:
    $935.2 million decrease to NALs, discussed above.
    $17.1 million decrease in OREO properties.
NPA activity for each of the past five quarters was as follows:
Table 31 — Nonperforming Asset Activity
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Nonperforming assets, beginning of period
  $ 1,582,702     $ 1,918,368     $ 2,058,091     $ 2,344,042     $ 2,002,584  
New nonperforming assets
    278,388       171,595       237,914       494,607       899,855  
Franklin impact, net
    (244,389 )     (86,715 )     14,957       (30,996 )     (18,771 )
Returns to accruing status
    (111,168 )     (78,739 )     (80,840 )     (85,867 )     (52,498 )
Loan and lease losses
    (155,553 )     (173,159 )     (185,387 )     (391,635 )     (305,405 )
OREO gains (losses)
    (5,302 )     2,483       (4,160 )     (7,394 )     (30,623 )
Payments
    (213,095 )     (140,881 )     (107,640 )     (222,790 )     (117,710 )
Sales
    (26,719 )     (30,250 )     (14,567 )     (41,876 )     (33,390 )
 
                             
Nonperforming assets, end of period
  $ 1,104,864     $ 1,582,702     $ 1,918,368     $ 2,058,091     $ 2,344,042  
 
                             

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Troubled Debt Restructured Loans
Troubled debt restructured loans (TDRs) are loans that have been modified in which a concession is provided to a borrower experiencing credit difficulties. The terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded because the borrower remains contractually current. The table below provides a summary of our TDRs (both accrual and nonaccrual) by loan type as of September 30, 2010:
Table 32 — Accruing and Nonaccruing Troubled Debt Restructured Loans
September 30, 2010
(dollar amounts in thousands)
         
Restructured loans and leases — accruing:
       
Mortgage loans
  $ 287,481  
Other consumer loans
    73,210  
Commercial loans
    157,971  
 
     
Total restructured loans and leases — accruing
    518,662  
 
       
Restructured loans and leases — nonaccruing:
       
Mortgage loans
    12,787  
Other consumer loans
     
Commercial loans
    33,236  
 
     
Total restructured loans and leases — nonaccruing
    46,023  
 
     
 
 
Total restructured loans and leases
  $ 564,685  
 
     
In the workout of a problem loan there are many factors considered when determining the most favorable resolution. For consumer loans, we evaluate the ability and willingness of the borrower to make contractual or reduced payments, the value of the underlying collateral, and the costs associated with the foreclosure or repossession, and remarketing of the property. For commercial loans, we consider similar criteria, including multiple collateral types in some instances, and also evaluate the borrower’s business prospects.
Residential Mortgage loan TDRs — Residential mortgage TDRs represent loan modifications associated with traditional first-lien mortgage loans in which a concession has been provided to the borrower. Residential mortgages identified as TDRs involve borrowers who are unable to refinance their mortgages through our normal channels, or to refinance their mortgages through other sources. Some, but not all, of the loans may be delinquent. Modifications can include adjustments to rates and/or principal.
Because these borrowers cannot obtain the modified mortgages through other independent sources or our normal mortgage origination channels, the modifications are classified as TDRs when we provide the concession. Modified loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off. No consideration is given to removing individual loans from the pools.
Nongovernment guaranteed residential mortgage loans, including restructured loans, are reported as accrual or nonaccrual based upon delinquency status. NALs are those that are greater than 180 days contractually past due. Loans guaranteed by government organizations such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA) continue to accrue interest upon delinquency. Overall, our delinquency rates on TDRs are significantly below industry levels.
Residential mortgage loan TDR classifications resulted in an impairment adjustment of $2.8 million during the 2010 third quarter, and $5.3 million for the first nine-month period of 2010. Prior to the TDR classification, residential mortgage loans individually had minimal ALLL associated with them because the ALLL is calculated on a total portfolio pooled basis.
Other Consumer loan TDRs — Generally, these are TDRs associated with home equity borrowings and automobile loans. We make similar interest rate, term, and principal concessions as with residential mortgage loan TDRs. The TDR classification for these other consumer loans resulted in an impairment adjustment of $0.3 million during the 2010 third quarter, and $1.2 million for the first nine-month period of 2010.

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Commercial loan TDRs — Commercial accruing TDRs represent loans in which a “substandard”-rated customer is current on contractual principal and interest but undergoes a loan modification. Accruing TDRs often result from “substandard”-rated customers receiving an extension on the maturity of their loan, for example, to allow additional time for the sale or lease of underlying CRE collateral. Often, it is in our best interest to extend the maturity rather than foreclose on a C&I or CRE loan, particularly for borrowers who are generating cash flows to support contractual interest payments. These borrowers cannot obtain the modified loan through other independent sources because of their current financial circumstances, therefore a concession is provided and the modification is classified as a TDR. The TDR remains in accruing status as long as the customer is current on payments and no loss is probable. Accruing TDRs are excluded from NALs because these customers remain contractually current.
Nonaccrual TDRs result from either workouts where an existing NAL is restructured into multiple new loans, or from an accruing TDR being placed on nonaccrual status. At September 30, 2010, approximately $10.5 million of our nonaccrual TDRs resulted from such workouts. The remaining $22.7 million represented the reclassifications of accruing TDRs to NALs.
For certain loan workouts, we create two or more new notes. The senior note is underwritten based upon our normal underwriting standards at current market rates and is sized so projected cash flows are sufficient to repay contractual principal and interest. The terms on the subordinate note or notes vary by situation, but often defer interest payments until after the senior note is repaid. Creating two or more notes often allows the borrower to continue a project or weather a temporary economic downturn and allows us to right-size a loan based upon the current expectations for a project performance. The senior note is considered for return to accrual status if the borrower has sustained sufficient cash flows for a six-month period of time and we believe no loss is probable. This six-month period could extend before or after the restructure date. Subordinated notes created in the workout are charged-off immediately. Any interest or principal payments received on the subordinated notes are applied to the principal of the senior note first until the senior note is repaid. Further payments are recorded as recoveries on the subordinated note.
Generally, because the loans are already classified as “substandard”, an adequate ALLL has been recorded . Consequently, a TDR classification on commercial loans does not usually result in significant additional reserves.
We consider removing the TDR status on commercial loans after the restructured loan has performed in accordance with restructured terms for a sustained period of time.

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The following table reflects period-end accruing TDRs and past due loans and leases detail for each of the last five quarters:
Table 33 — Accruing Past Due Loans and Leases and Accruing Troubled Debt Restructured Loans
                                         
    2010     2009  
(dollar amounts in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
 
                                       
Accruing loans and leases past due 90 days or more
                                       
Commercial and industrial
  $     $     $ 475     $     $  
Commercial real estate
                            2,546  
Residential mortgage (excluding loans guaranteed by the U.S. government
    56,803       47,036       72,702       78,915       65,716  
Home equity
    27,160       26,797       29,438       53,343       45,334  
Other loans and leases
    11,423       9,533       10,598       13,400       14,175  
 
                             
Total, excl. loans guaranteed by the U.S. government
    95,386       83,366       113,213       145,658       127,771  
Add: loans guaranteed by the U.S. government
    94,249       95,421       96,814       101,616       102,895  
 
                             
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government
  $ 189,635     $ 178,787     $ 210,027     $ 247,274     $ 230,666  
 
                             
 
                                       
Ratios: (1)
                                       
 
                                       
Excluding loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.25 %     0.23 %     0.31 %     0.40 %     0.34 %
 
                                       
Guaranteed by the U.S. government, as a percent of total loans and leases
    0.26       0.26       0.26       0.28       0.28  
 
                                       
Including loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.51       0.49       0.57       0.68       0.62  
 
                                       
Accruing troubled debt restructured loans
                                       
Commercial
  $ 157,971     $ 141,353     $ 117,667     $ 157,049     $ 153,010  
 
                                       
Alt-A mortgages
    59,250       57,993       57,897       57,278       58,367  
Interest-only mortgages
    7,798       7,794       8,413       7,890       10,072  
Other residential mortgages
    220,433       203,783       176,560       154,471       136,024  
 
                             
Total residential mortgages
    287,481       269,570       242,870       219,639       204,463  
Other
    73,210       65,061       62,148       52,871       42,406  
 
                             
Total accruing troubled debt restructured loans
  $ 518,662     $ 475,984     $ 422,685     $ 429,559     $ 399,879  
 
                             
     
(1)   Percent of related loans and leases.
Commercial TDRs at September 30, 2010 are consistent with TDRs at December 31, 2009. During the 2010 first quarter, commercial loan TDRs declined $39.4 million as several loans were removed from the TDR classification because the loans had performed in accordance with the restructured terms for a sustained period of time. This decline was offset by increases in the 2010 first quarter and 2010 second quarter as additional “substandard” loans were restructured. Residential mortgage TDRs have increased from December 31, 2009 primarily due to our loss mitigation efforts.

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Commercial “criticized” loan activity for each of the past five quarters was as follows:
Table 34 — “Criticized” Commercial Loan Activity
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
“Criticized” commercial loans, beginning of period
  $ 4,106,602     $ 4,608,610     $ 4,971,637     $ 4,855,464     $ 4,679,943  
New additions / increases
    407,514       280,353       306,499       949,738       795,206  
Advances
    75,386       79,392       91,450       110,305       70,529  
Upgrades to “Pass”
    (391,316 )     (409,092 )     (273,011 )     (134,679 )     (136,099 )
Payments
    (408,698 )     (331,145 )     (324,229 )     (428,247 )     (298,349 )
Loan losses
    (151,955 )     (121,516 )     (163,736 )     (380,944 )     (255,766 )
 
                             
“Criticized” commercial loans, end of period
  $ 3,637,533     $ 4,106,602     $ 4,608,610     $ 4,971,637     $ 4,855,464  
 
                             
ALLOWANCE FOR CREDIT LOSSES (ACL)
(This section should be read in conjunction with Significant Item 2, and the “Critical Accounting Policies and Use of Significant Estimates” discussion.)
We maintain two reserves, both of which in our judgment are adequate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our credit administration group is responsible for developing the methodology assumptions and estimates used in the calculation, as well as determining the adequacy of the ACL. The ALLL represents the estimate of probable losses inherent in the loan portfolio at the balance sheet date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs, recoveries, decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.
A provision for credit losses is recorded to adjust the ACL to the level we have determined to be adequate to absorb credit losses inherent in our loan and lease portfolio. The provision for credit losses in the 2010 third quarter was $119.2 million, compared with $475.1 million in the year-ago quarter and $193.4 million in the prior quarter. While credit quality metrics have significantly improved during the first nine-month period of 2010, provision expense since 2008 has been higher than historical levels, reflecting the pronounced downturn in the U.S. economy, as well as significant deterioration in the residential real estate market that began in early 2007. Declining real estate valuations and higher levels of delinquencies and charge-offs have significantly affected the quality of our loans secured by real estate. Portions of the residential portfolio, specifically the smaller Alt-A segment in the consumer residential mortgage portfolio and the single family builder and developer loans in the commercial portfolio, experienced the majority of the credit issues related to the residential real estate market.
We regularly assess the adequacy of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the adequacy of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, we also consider: the impact of declining residential real estate values; the concentration of CRE loans, particularly the large concentration of loans secured by retail properties; and the amount of C&I loans to businesses in areas of Ohio and Michigan that have historically experienced less economic growth compared with our other footprint markets.
Our ACL assessment process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL adequacy benchmarks to current performance. While the total ACL balance declined in the current quarter, all of the relevant benchmarks improved as a result of the asset quality improvement. The coverage ratios of NALs, “criticized” and “classified” loans all showed significant improvement in the quarter despite the decline in the ACL level.

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The table below reflects activity in the ALLL and ACL for each of the last five quarters:
Table 35 — Quarterly Allowance for Credit Losses Analysis
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Allowance for loan and lease losses, beginning of period
  $ 1,402,160     $ 1,477,969     $ 1,482,479     $ 1,031,971     $ 917,680  
Loan and lease losses
    (221,144 )     (312,954 )     (264,222 )     (471,486 )     (377,443 )
Recoveries of loans previously charged off
    36,630       33,726       25,741       26,739       21,501  
 
                             
Net loan and lease losses
    (184,514 )     (279,228 )     (238,481 )     (444,747 )     (355,942 )
 
                             
Provision for loan and lease losses
    118,788       203,633       233,971       895,255       472,137  
Allowance for loans transferred to held-for-sale
                            (1,904 )
Allowance of assets sold
    (82 )     (214 )                  
 
                             
Allowance for loan and lease losses, end of period
  $ 1,336,352     $ 1,402,160     $ 1,477,969     $ 1,482,479     $ 1,031,971  
 
                             
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 39,689     $ 49,916     $ 48,879     $ 50,143     $ 47,144  
 
                                       
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    372       (10,227 )     1,037       (1,264 )     2,999  
 
                             
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 40,061     $ 39,689     $ 49,916     $ 48,879     $ 50,143  
 
                             
Total allowance for credit losses
  $ 1,376,413     $ 1,441,849     $ 1,527,885     $ 1,531,358     $ 1,082,114  
 
                             
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Total loans and leases
    3.56 %     3.79 %     4.00 %     4.03 %     2.77 %
Nonaccrual loans and leases (NALs)
    136       117       84       77       47  
Nonperforming assets (NPAs)
    121       89       77       72       44  
 
                                       
Total allowance for credit losses (ACL) as % of:
                                       
Total loans and leases
    3.67 %     3.90 %     4.14 %     4.16 %     2.90 %
NALs
    140       120       87       80       50  
NPAs
    125       91       80       74       46  
The reduction in the ACL, compared with both June 30, 2010 and December 31, 2009, reflected a decline in the commercial portfolio ALLL as a result of charge-offs on loans with specific reserves, and an overall reduction in the level of commercial “criticized” loans. As shown in Table 34, commercial “criticized” loans declined $469.1 million from June 30, 2010 and $1,334.1 million from December 31, 2009, reflecting significant upgrade and payment activity.
Compared with December 31, 2009, the AULC declined $8.8 million as a result of a substantive reduction in the level of unfunded loan commitments in the commercial portfolio. A concerted effort was made to reduce potential exposure associated with unfunded lines and to generate an appropriate level of return on those that remain in place. In addition, borrowers continue to reassess their borrowing needs and reduce their availability. Compared with June 30, 2010, the AULC increased slightly.
The ACL coverage ratio associated with NALs was 140% at September 30, 2010, representing an improvement compared with recent prior periods. This improvement reflected substantial payments on C&I and CRE NALs.
Although credit quality asset metrics and trends, including those mentioned above, have improved during the first nine-month period of 2010, the economic environment in our markets remains weak and uncertain as reflected by continued weak residential values, continued weakness in industrial employment in northern Ohio and southeast Michigan, and the significant subjectivity involved in commercial real estate valuations for properties located in areas with limited sale or refinance activities. Residential real estate values continued to be impacted by high unemployment, increased foreclosure activity, and the elimination of home-buyer tax credits. In the near-term, we believe these factors will result in continued stress in our portfolios secured by residential real estate and an elevated level of NCOs compared to historic levels. In the 2010 third quarter, we experienced an increase in the inflow of new commercial “criticized” loans as well as an increase in the inflow of new NPAs. This represented a departure from the trend that appeared to be developing over recent prior quarters and is further evidence of a fragile economic environment. Further, concerns continue to exist regarding the economic conditions in both national and international markets, the state of financial and credit markets, the unemployment rate, the impact of the Federal Reserve monetary policy, and continued uncertainty regarding federal, state, and local government budget deficits. We do not anticipate any meaningful change in the overall economy in the near-term. All of these factors are impacting consumer confidence, as well as business investments and acquisitions. Given the combination of these factors, we believe that our ACL coverage levels are appropriate.

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The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters:
Table 36 — Allocation of Allowance for Credit Losses (1)
                                                                                 
    2010     2009  
(dollar amounts in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
 
                                                                               
Commercial
                                                                               
Commercial and industrial
  $ 353,431       33 %   $ 426,767       34 %   $ 459,011       33 %   $ 492,205       35 %   $ 381,912       34 %
Commercial real estate
    654,219       18       695,778       19       741,669       20       751,875       21       436,661       23  
 
                                                           
Total commercial
    1,007,650       51       1,122,545       53       1,200,680       53       1,244,080       56       818,573       57  
 
                                                           
Consumer
                                                                               
Automobile loans and leases
    44,505       14       41,762       13       56,111       12       57,951       9       59,134       9  
Home equity
    154,323       21       117,708       20       127,970       20       102,039       21       86,989       20  
Residential mortgage
    93,407       12       79,105       12       60,295       12       55,903       12       50,177       12  
Other loans
    36,467       2       41,040       2       32,913       3       22,506       2       17,098       2  
 
                                                           
Total consumer
    328,702       49       279,615       47       277,289       47       238,399       44       213,398       43  
 
                                                           
Total ALLL
    1,336,352       100 %     1,402,160       100 %     1,477,969       100 %     1,482,479       100 %     1,031,971       100 %
 
                                                           
AULC
    40,061               39,689               49,916               48,879               50,143          
 
                                                           
Total ACL
  $ 1,376,413             $ 1,441,849             $ 1,527,885             $ 1,531,358             $ 1,082,114          
 
                                                           
     
(1)   Percentages represent the percentage of each loan and lease category to total loans and leases.
The table below reflects activity in the ALLL and AULC for the first nine-month period of 2010 and the first nine-month period of 2009.
Table 37 — Year to Date Allowance for Credit Losses Analysis
                 
    Nine Months Ended September 30,  
(in thousands)   2010     2009  
Allowance for loan and lease losses, beginning of period
  $ 1,482,479     $ 900,227  
Loan and lease losses
    (798,320 )     (1,089,892 )
Recoveries of loans previously charged off
    96,097       58,052  
 
           
Net loan and lease losses
    (702,223 )     (1,031,840 )
Provision for loan and lease losses
    556,392       1,174,676  
Allowance for loans transferred to held-for-sale
          (1,904 )
Allowance of assets sold
    (296 )     (9,188 )
 
           
Allowance for loan and lease losses, end of period
  $ 1,336,352     $ 1,031,971  
 
           
 
               
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 48,879     $ 44,139  
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    (8,818 )     6,004  
 
           
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 40,061     $ 50,143  
 
           
Total allowance for credit losses
  $ 1,376,413     $ 1,082,114  
 
           
 
               
Allowance for loan and lease losses (ALLL) as % of:
               
Total loans and leases
    3.56 %     2.77 %
Nonaccrual loans and leases (NALs)
    136       47  
Nonperforming assets (NPAs)
    121       44  
 
               
Total allowance for credit losses (ACL) as % of:
               
Total loans and leases
    3.67 %     2.90 %
NALs
    140       50  
Nonperforming assets
    125       46  
NET CHARGE-OFFS (NCOs)
(This section should be read in conjunction with Significant Item 2.)

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Table 38 reflects NCO detail for each of the last five quarters. Table 39 displays the Franklin-related impacts for each of the last five quarters.
Table 38 — Quarterly Net Charge-off Analysis
                                         
    2010     2009  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Net charge-offs by loan and lease type
                                       
Commercial:
                                       
Commercial and industrial (1)
  $ 62,241     $ 58,128     $ 75,439     $ 109,816     $ 68,842  
Construction
    17,936       45,562       34,426       85,345       50,359  
Commercial
    45,725       36,169       50,873       172,759       118,866  
 
                             
Commercial real estate
    63,661       81,731       85,299       258,104       169,225  
 
                             
Total commercial
    125,902       139,859       160,738       367,920       238,067  
 
                             
Consumer:
                                       
Automobile loans
    5,208       5,219       7,666       11,374       8,988  
Automobile leases
    362       217       865       1,554       1,753  
 
                             
Automobile loans and leases
    5,570       5,436       8,531       12,928       10,741  
Home equity (2)
    27,827       44,470       37,901       35,764       28,045  
Residential mortgage (3), (4)
    18,961       82,848       24,311       17,789       68,955  
Other loans
    6,254       6,615       7,000       10,346       10,134  
 
                             
Total consumer
    58,612       139,369       77,743       76,827       117,875  
 
                             
Total net charge-offs
  $ 184,514     $ 279,228     $ 238,481     $ 444,747     $ 355,942  
 
                             
 
                                       
Net charge-offs — annualized percentages
                                       
Commercial:
                                       
Commercial and industrial (1)
    2.01 %     1.90 %     2.45 %     3.49 %     2.13 %
Construction
    7.25       14.25       9.77       20.68       11.14  
Commercial
    3.01       2.38       3.25       10.15       6.72  
 
                             
Commercial real estate
    3.60       4.44       4.44       12.21       7.62  
 
                             
Total commercial
    2.59       2.85       3.22       7.00       4.37  
 
                             
Consumer:
                                       
Automobile loans
    0.41       0.47       0.76       1.49       1.25  
Automobile leases
    1.32       0.54       1.58       2.25       2.04  
 
                             
Automobile loans and leases
    0.43       0.47       0.80       1.55       1.33  
Home equity (2)
    1.47       2.36       2.01       1.89       1.48  
Residential mortgage (3), (4)
    1.73       7.19       2.17       1.61       6.15  
Other loans
    3.83       3.81       3.87       5.47       5.36  
 
                             
Total consumer
    1.32       3.19       1.83       1.91       2.94  
 
                             
Net charge-offs as a % of average loans
    1.98 %     3.01 %     2.58 %     4.80 %     3.76 %
 
                             
     
(1)   The 2009 third quarter included net recoveries totaling $4,080 thousand associated with the 2009 Franklin restructuring.
 
(2)   The 2010 second quarter included net charge-offs totaling $14,678 thousand associated with the transfer of Franklin-related home equity loans to loans held for sale and $1,262 thousand of other Franklin-related net charge-offs.
 
(3)   The 2010 second quarter included net charge-offs totaling $60,822 thousand associated with the transfer of Franklin-related residential mortgage loans to loans held for sale and $3,403 thousand of other Franklin-related net charge-offs.
 
(4)   Effective with the 2009 third quarter, a change to accelerate the timing of when a partial charge-off is recognized was made. This change resulted in $31,952 thousand of charge-offs in the 2009 third quarter.

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Table 39 — Quarterly NCOs — Franklin-Related Impact
                                         
    2010     2009  
(dollar amounts in millions)   Third     Second     First     Fourth     Third  
Commercial and industrial net charge-offs (recoveries)
                                       
Franklin
  $ (4.5 )   $ (0.2 )   $ (0.3 )   $ 0.1     $ (4.1 )
Non-Franklin
    66.7       58.3       75.7       109.7       72.9  
 
                             
Total
  $ 62.2     $ 58.1     $ 75.4     $ 109.8     $ 68.8  
 
                             
Commercial and industrial net charge-offs — annualized percentages
                                       
Total
    2.01 %     1.90 %     2.45 %     3.49 %     2.13 %
Non-Franklin
    2.15       1.90       2.46       3.49       2.26  
 
                                       
Total commercial charge-offs (recoveries)
                                       
Franklin
  $ (4.5 )   $ (0.2 )   $ (0.3 )   $ 0.1     $ (4.1 )
Non-Franklin
    130.4       140.1       161.0       367.8       242.2  
 
                             
Total
  $ 125.9     $ 139.9     $ 160.7     $ 367.9     $ 238.1  
 
                             
Total commercial loan net charge-offs — annualized percentages
                                       
Total
    2.59 %     2.85 %     3.22 %     7.00 %     4.37 %
Non-Franklin
    2.68       2.86       3.22       7.00       4.44  
 
                                       
Total home equity loan charge-offs (recoveries)
                                       
Franklin
  $ 1.1     $ 15.9     $ 3.7     $     $ (0.1 )
Non-Franklin
    26.7       28.6       34.2       35.8       28.1  
 
                             
Total
  $ 27.8     $ 44.5     $ 37.9     $ 35.8     $ 28.0  
 
                             
Total home equity loan net charge-offs — annualized percentages
                                       
Total
    1.47 %     2.36 %     2.01 %     1.89 %     1.48 %
Non-Franklin
    1.41       1.53       1.83       1.91       1.50  
 
                                       
Total residential mortgage loan charge-offs (recoveries)
                                       
Franklin
  $ 3.4     $ 64.2     $ 8.1     $ 1.1     $ 0.6  
Non-Franklin
    15.6       18.6       16.2       16.7       68.4  
 
                             
Total
  $ 19.0     $ 82.8     $ 24.3