News Column

MUFG AMERICAS HOLDINGS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 8, 2014

MUFG Americas Holdings Corporation and Subsidiaries

Consolidated Financial Highlights For the Three Months For the Six Months Ended Ended (Dollars in June 30, June 30, Percent June 30,

June 30, Percent millions) 2014 2013(1) Change 2014 2013(1) Change Results of operations: Net interest income $ 763$ 672 14 % $ 1,446$ 1,325 9 % Noninterest income 202 201 - 383 452 (15 ) Total revenue 965 873 11 1,829 1,777 3 Noninterest expense 649 702 (8 ) 1,309 1,415 (7 ) Pre-tax, pre-provision income(2) 316 171 85 520 362 44 (Reversal of) provision for loan losses 9 (3 ) 400 (7 ) (6 ) (17 ) Income before income taxes and including noncontrolling interests 307 174 76 527 368 43 Income tax expense 62 35 77 112 85 32 Net income including noncontrolling interests 245 139 76 415 283 47 Deduct: Net loss from noncontrolling interests 4 3 33 9 7 29 Net income attributable to MUAH $ 249$ 142 75 $ 424$ 290 46 Balance sheet (period average): Total assets $ 107,871$ 98,714 9 % $ 107,185$ 97,687 10 % Total securities 22,865 23,183 (1 ) 22,739 22,507 1 Total loans held for investment 71,104 63,673 12 70,203 62,122 13 Earning assets 97,405 89,292 9 96,756 88,179 10 Total deposits 81,221 75,350 8 80,829 74,807 8 MUAH stockholder's equity 14,657 12,599 16 14,524 12,591 15 Performance ratios: Return on average assets(3) 0.92 % 0.58 % 0.79 % 0.59 % Return on average MUAH stockholder's equity(3) 6.80 4.53 5.84 4.61 Efficiency ratio(4) 67.23 80.37 71.56 79.59 Adjusted efficiency ratio(5) 60.30 69.45 63.91 68.56 Net interest margin(3)(6) 3.15 3.03 3.02 3.03 Net loans charged-off (recovered) to average total loans held for investment(3) 0.04 0.05 - 0.07 Net loans charged-off to average total loans held for investment, excluding purchased credit-impaired loans and FDIC covered other real estate owned (OREO)(3)(10) 0.04 0.06 - 0.07 As of June 30, December 31, Percent 2014 2013(1) Change Balance sheet (end of period): Total assets $ 108,820$ 105,894 3 % Total securities 22,847 22,326 2 Total loans held for investment 72,369 68,312 6 Nonperforming assets 547 499 10 Core deposits(7) 72,058 69,155 4 Total deposits 81,566 80,101 2 Long-term debt 6,995 6,547 7 MUAH stockholder's equity 14,815 14,215 4 Credit ratios: Allowance for loan losses to total loans held for investment(8) 0.77 % 0.83 % Allowance for loan losses to nonaccrual loans(8) 108.90



128.42

Allowance for credit losses to total loans held for investment(9) 0.97



1.02

Allowance for credit losses to nonaccrual loans(9) 137.13



158.30

Nonperforming assets to total loans held for investment and OREO 0.75



0.74

Nonperforming assets to total assets 0.50



0.48

Nonaccrual loans to total loans held for investment 0.71



0.65

Credit ratios, excluding purchased credit-impaired loans and FDIC covered OREO(10): Allowance for loan losses to total loans held for investment(9) 0.78 % 0.84 % Allowance for loan losses to nonaccrual loans(8) 111.88



132.82

Allowance for credit losses to total loans held for investment(9) 0.98



1.04

Allowance for credit losses to nonaccrual loans(9) 141.06



163.78

Nonperforming assets to total loans held for investment and OREO 0.71



0.66

Nonperforming assets to total assets 0.47



0.43

Nonaccrual loans to total loans held for investment 0.69



0.63

Capital ratios: Common equity tier 1 risk-based capital ratio(11) 12.58 %



n/a

Tier 1 common capital ratio(12) n/a 12.34 % Tier 1 risk-based capital ratio(11) 12.62



12.41

Total risk-based capital ratio(11) 14.57



14.61

Tier 1 leverage ratio(11) 11.35



11.27

Tangible common equity ratio(13) 10.84



10.54

Common equity tier 1 risk-based capital ratio (U.S. Basel III standardized approach; fully phased-in)(14) 11.60 11.14 6



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(1)

During the third quarter of 2013, the Company corrected prior period errors

related to the recognition of income and expense associated with

market-linked certificates of deposits. The Company concluded that these

errors were not material to the periods in which the corrections were made.

For additional information, see Note 2 to our Consolidated Financial

Statements in Part I, Item 1. "Financial Statements" of this Form 10-Q.

(2)

Pre-tax, pre-provision income is total revenue less noninterest expense.

Management believes that this is a useful financial measure because it

enables investors and others to assess the Company's ability to generate

capital to cover loan losses through a credit cycle. (3) Annualized. (4)



The efficiency ratio is total noninterest expense as a percentage of total

revenue (net interest income and noninterest income).

(5)

The adjusted efficiency ratio, a non-GAAP financial measure, is adjusted

noninterest expense (noninterest expense excluding foreclosed asset expense

and other credit costs, (reversal of) provision for losses on unfunded credit commitments, certain costs related to productivity initiatives, low income housing credit (LIHC) investment amortization expense, expenses of the LIHC consolidated variable interest entities, merger and business



integration costs, privatization-related expenses, and intangible asset

amortization) as a percentage of adjusted total revenue (net interest

income (taxable-equivalent basis) and noninterest income), excluding the

impact of gains from productivity initiatives related to the sale of certain business units and premises, accretion related to privatization-related fair value adjustments, and other credit costs. Management discloses the adjusted efficiency ratio as a measure of the



efficiency of our operations, focusing on those costs most relevant to our

business activities. Please refer to Part I, Item 2. "Management's

Discussion and Analysis of Financial Condition and Results of

Operations-Noninterest Income and Noninterest Expense" of this Form 10-Q

for further information.

(6)

Net interest margin is presented on a taxable-equivalent basis using the

federal statutory tax rate of 35 percent.

(7)

Core deposits exclude brokered deposits, foreign time deposits and domestic

time deposits greater than $250,000.

(8)

The allowance for loan losses ratios are calculated using the allowance for

loan losses against end of period total loans held for investment or total

nonaccrual loans, as appropriate.

(9)

The allowance for credit losses ratios include the allowances for loan

losses and for losses on unfunded credit commitments against end of period

total loans held for investment or total nonaccrual loans, as appropriate.

(10)

These ratios exclude the impact of all purchased credit-impaired loans and

FDIC covered OREO. Purchased credit-impaired loans and OREO related to the

April 2010 acquisitions of certain assets and assumption of certain

liabilities of Frontier Bank and Tamalpais Bank are covered under loss

share agreements between the Bank and the FDIC. Management believes the

exclusion of purchased credit-impaired loans and FDIC covered OREO from

certain asset quality ratios that include nonaccrual loans, nonperforming

assets, net loans charged-off, total loans held for investment and the

allowance for loan losses or credit losses in the numerator or denominator

provides a better perspective into underlying asset quality trends.

(11)

The capital ratios displayed as of June 30, 2014 are calculated in

accordance with the transition guidelines set forth in the U.S. federal

banking agencies' revised capital framework for implementing the final U.S.

Basel III regulatory capital rules. The capital ratios as of December 31,

2013 are calculated under Basel I rules.

(12)

The Tier 1 common capital ratio, calculated under Basel I rules, is the

ratio of Tier 1 capital, less qualifying trust preferred securities, to

risk-weighted assets. The Tier 1 common capital ratio, a non-GAAP financial

measure, facilitates the understanding of the Company's capital structure

and is used to assess and compare the quality and composition of the

Company's capital structure to other financial institutions. Refer to

Part I, Item 2. "Management's Discussion and Analysis of Financial

Condition and Results of Operations-Capital Management" in this Form 10-Q

for further information. (13) The tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible common equity divided by tangible assets. The methodology for determining tangible common equity may differ among



companies. The tangible common equity ratio facilitates the understanding

of the Company's capital structure and is used to assess and compare the

quality and composition of the Company's capital structure to other

financial institutions. Refer to Part I, Item 2. "Management's Discussion

and Analysis of Financial Condition and Results of Operations-Capital

Management" in this Form 10-Q for further information.

(14)

Common equity tier 1 risk-based capital is a non-GAAP financial measure

that is used by investors, analysts and bank regulatory agencies to assess

the capital position of financial services companies as if the U.S. Basel

III rules (standardized approach on a fully phased-in basis, which includes

accumulated other comprehensive loss elements as prescribed by the U.S.

Basel III rules) were effective at December 31, 2013. Management reviews

Common equity tier 1 risk-based capital along with other measures of

capital as part of its financial analyses and has included this non-GAAP

financial information, and the corresponding reconciliation from Tier 1 capital determined in accordance with Basel I regulatory requirements, because of current interest in such information on the part of market participants. n/a not applicable. 7



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Please refer to our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K) along with the following discussion and analysis of our consolidated financial position and results of operations for the period ended June 30, 2014 in this Form 10-Q. Averages, as presented in the following tables, are substantially all based upon daily average balances.



As used in this Form 10-Q, terms such as "the Company," "we," "us" and "our" refer to MUFG Americas Holdings Corporation (MUAH), one or more of its consolidated subsidiaries, or to all of them together.

Introduction

We are a financial holding company and bank holding company whose principal subsidiary is MUFG Union Bank, N.A. (MUB or the Bank). We are a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG). Prior to July 1, 2014MUFG Americas Holdings Corporation was named UnionBanCal Corporation and MUFG Union Bank, N.A. was named Union Bank, N.A. We service Corporate Banking, Investment Banking & Markets, and certain Transaction Banking customers through the MUFG brand and continue to serve Retail Banking & Wealth Markets, Commercial Banking, and Transaction Banking customers through the Union Bank brand. We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, both nationally and internationally. The Company had consolidated assets of $108.8 billion at June 30, 2014. The Company's leadership is bi-coastal with Retail Banking & Wealth Markets, Commercial Banking, and Transaction Banking leaders on the West Coast. Corporate Banking and Investment Banking & Markets leaders are based in New York City. The corporate headquarters (principal executive office) for MUB and MUAH is in New York City. MUB's main banking office is in San Francisco.



References to the privatization transaction in this report refer to the transaction on November 4, 2008, when we became a privately held company. All of our issued and outstanding shares of common stock are owned by BTMU.

In November 2013, we completed the acquisition of First Bank Association Bank Services, a unit of First Bank, which provides a full range of banking services to homeowners associations and community management companies. We acquired approximately $570 million in deposits in this transaction.

In the second quarter of 2013, we completed the purchase of PB Capital Corporation's (PB Capital) $3.5 billion institutional commercial real estate (CRE) lending portfolio. The acquisition expanded our CRE presence in the U.S., and provided geographic and asset class diversification.



Executive Overview

We are providing you with an overview of what we believe are the most significant factors and developments that affected our second quarter 2014 results and that could influence our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties that impact us. Our sources of revenue are net interest income and noninterest income (collectively "total revenue"). Net interest income is generated predominantly from interest earned from loans, investment securities and other interest-earning assets, less interest incurred on deposits and borrowings. The primary sources of noninterest income are revenues from service charges on deposit accounts, trust and investment management fees, trading account activities, credit facility fees and merchant banking fees. In the second quarter of 2014, revenue was comprised of 79 percent net interest income and 21 percent noninterest income. Changes in 8



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interest rates, credit quality, economic trends and the capital markets are primary factors that affect our revenue sources. A summary of our financial results is discussed below.

Our primary sources of liquidity are core deposits, securities and wholesale funding. Core deposits exclude brokered deposits, foreign time deposits and domestic time deposits greater than $250,000. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international, and secured funds raised by selling securities under repurchase agreements and by borrowing from the Federal Home Loan Bank of San Francisco (FHLB). We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity when adverse situations arise.



Performance Highlights

In the second quarter of 2014, net income attributable to MUAH was $249 million, compared with $142 million in the second quarter of 2013, substantially driven by higher net interest income. Net interest income was $763 million in the second quarter of 2014, compared with $672 million in the second quarter of 2013. The increase in net interest income was primarily due to growth in loans held for investment and a 12 basis point increase in the net interest margin driven by higher interest income on our purchased credit-impaired (PCI) loan portfolio, which was mostly due to early payoffs of certain loans. In the second quarter of 2014, noninterest expense was down $53 million, or 8%, primarily driven by lower current quarter salaries and employee benefits expense. Noninterest income was $202 million in the second quarter of 2014, up $1 million from the second quarter of 2013. Continued discipline in underwriting standards produced another solid quarter of strong credit quality with low nonperforming assets and charge-offs. Total nonperforming assets were $547 million and $499 million as of June 30, 2014 and December 31, 2013, respectively. Net charge-offs were $7 million for the second quarter of 2014 compared with $8 million for the second quarter of 2013. For the quarter ended June 30, 2014, the provision for credit losses was $6 million compared with a provision reversal of $5 million for the quarter ended June 30, 2013.



Capital Ratios

The Common equity tier 1, Tier 1 and Total risk-based capital ratios, calculated in accordance with the transition guidelines set forth in the U.S. federal banking agencies' revised capital framework for implementing the final U.S. Basel III regulatory capital rules, were 12.58 percent, 12.62 percent and 14.57 percent, respectively, at June 30, 2014. The tangible common equity ratio was 10.84 percent at June 30, 2014.



Business Integration Initiative

Effective July 1, 2014, the U.S. branch banking operations of BTMU were integrated with the Bank. The integration did not involve a legal entity combination, but rather an integration of personnel and certain business activities. As a result of this initiative, all of BTMU's banking activities in the Americas will be managed by employees of the Bank, which includes the addition of approximately 2,300 U.S. employees of BTMU. This initiative also included the transfer of ownership of BTMU's U.S. corporate customer list to the Bank. BTMU and the Bank agreed to certain policies, which generally contemplate that transactions entered into with BTMU's U.S. corporate customers will have the opportunity to be booked at the Bank, subject to its independent credit evaluation and other considerations, such as complying with underwriting standards and lending limits, meeting financial return objectives, and other risk management and regulatory considerations. BTMU's New York, Chicago and Los Angeles branches continue to record transactions and maintain relationships with BTMU's customers not on the aforementioned customer list but supported by the consolidated workforce at the Bank. The BTMU branches also retain their functions and current roles in the foreign exchange and settlement businesses, and continue to provide services to Japanese customers. The operation of BTMU's businesses in the Americas located outside of the U.S. (in Latin America and Canada) remains unchanged, but under the oversight of the Company. 9



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As a result of this initiative, the Bank and BTMU entered into a master services agreement, which provides for employees of the Bank to perform and make available various business, banking, financial, and administrative and support services (the Services) and facilities for BTMU in connection with the operation and administration of BTMU's business in the U.S. (including BTMU's U.S. branches). In consideration for the Services, BTMU will pay to the Bank fee income, which will reflect market-based pricing. Costs related to the Services performed by the transferred employees will be recorded in salaries and benefits. While this initiative will have the effect of increasing noninterest income and noninterest expense, it is not expected to have a significant impact on the Company's net income, financial condition or capital ratios in the near term. Through this business integration, MUFG, BTMU, and the Company aim to deliver enhanced products and services, strengthened U.S. dollar funding capabilities, and an advanced governance and risk management structure, which should also facilitate compliance with the Federal Reserve's recently released enhanced prudential standards for foreign banking organizations operating in the U.S. For additional information, see "Supervision and Regulation-Principal Federal Banking Laws-Dodd-Frank Act" in Part I, Item 1 of our 2013 Form 10-K. 10



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Table of Contents Financial Performance Net Interest Income The following tables show the major components of net interest income and net interest margin: For the Three Months Ended June 30, 2014 June 30, 2013 Interest Average Interest Average (Dollars in Average Income/ Yield/ Average Income/ Yield/ millions) Balance Expense(1) Rate(1)(2) Balance Expense(1) Rate(1)(2) Assets Loans held for investment:(3) Commercial and industrial $ 24,421$ 202 3.33 % $ 21,701$ 185 3.42 % Commercial mortgage 13,529 124 3.66 11,851 112 3.79 Construction 1,146 10 3.24 800 7 3.30 Lease financing 840 14 6.74 1,056 9 3.53 Residential mortgage 27,063 247 3.66 23,428 220 3.77 Home equity and other consumer loans 3,191 32 4.04 3,500 33 3.85 Loans, before purchased credit-impaired loans 70,190 629 3.59 62,336 566 3.64 Purchased credit-impaired loans 914 120 52.45 1,337 83 24.69 Total loans held for investment 71,104 749 4.22 63,673 649 4.08 Securities 22,865 120 2.10 23,183 121 2.11 Interest bearing deposits in banks 2,878 2 0.25 1,923 1 0.25 Federal funds sold and securities purchased under resale agreements 102 - 0.02 123 - 0.16 Trading account assets 194 1 1.04 162 - 0.36 Other earning assets 262 - 0.83 228 1 0.53 Total earning assets 97,405 872 3.58 89,292 772 3.47 Allowance for loan losses (561 ) (642 ) Cash and due from banks 1,450 1,355 Premises and equipment, net 642 704 Other assets 8,935 8,005 Total assets $ 107,871$ 98,714 Liabilities Interest bearing deposits: Transaction and money market accounts $ 37,646 $ 35 0.38 $ 32,296 $ 26 0.32 Savings 5,590 1 0.09 5,666 2 0.13 Time 10,761 25 0.91 12,710 33 1.06 Total interest bearing deposits 53,997 61 0.45 50,672 61 0.49 Commercial paper and other short-term borrowings(4) 2,521 2 0.20 3,224 1 0.18 Long-term debt 6,923 41 2.39 5,326 35 2.64 Total borrowed funds 9,444 43 1.80 8,550 36 1.71 Total interest-bearing liabilities 63,441 104 0.65 59,222 97 0.66 Noninterest bearing deposits 27,224 24,678 Other liabilities 2,298 1,945 Total liabilities 92,963 85,845 Equity MUAH stockholder's equity 14,657 12,599 Noncontrolling interests 251 270 Total equity 14,908 12,869 Total liabilities and equity $ 107,871$ 98,714 Net interest income/spread (taxable-equivalent basis) 768 2.93 % 675 2.81 % Impact of noninterest bearing deposits 0.19 0.19 Impact of other noninterest bearing sources 0.03 0.03 Net interest margin 3.15 3.03 Less: taxable-equivalent adjustment 5 3 Net interest income $ 763$ 672



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(1)

Yields and interest income are presented on a taxable-equivalent basis

using the federal statutory tax rate of 35 percent. (2) Annualized. (3)



Average balances on loans outstanding include all nonperforming loans. The

amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (4) Includes interest bearing trading liabilities 11



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Table of Contents For the Six Months Ended June 30, 2014 June 30, 2013 Interest Average Interest Average (Dollars in Average Income/ Yield/ Average Income/ Yield/ millions) Balance Expense(1) Rate(1)(2) Balance Expense(1) Rate(1)(2) Assets Loans held for investment:(3) Commercial and industrial $ 24,196$ 400 3.34 % $ 21,522$ 362 3.39 % Commercial mortgage 13,380 243 3.63 10,880 213 3.93 Construction 1,047 18 3.43 725 15 4.15 Lease financing 845 25 6.07 1,059 16 3.01 Residential mortgage 26,529 485 3.66 23,145 442 3.82 Home equity and other consumer loans 3,212 64 4.01 3,551 67 3.84 Loans, before purchased credit-impaired loans 69,209 1,235 3.58 60,882 1,115 3.68 Purchased credit-impaired loans 994 181 36.49 1,240 163 26.36 Total loans held for investment 70,203 1,416 4.05 62,122 1,278 4.13 Securities 22,739 240 2.11 22,507 243 2.16 Interest bearing deposits in banks 3,219 4 0.25 2,986 4 0.25 Federal funds sold and securities purchased under resale agreements 116 - 0.11 147 - 0.18 Trading account assets 231 3 2.21 156 - 0.33 Other earning assets 248 1 1.10 261 1 0.46 Total earning assets 96,756 1,664 3.45 88,179 1,526 3.47 Allowance for loan losses (569 ) (647 ) Cash and due from banks 1,475 1,377 Premises and equipment, net 643 704 Other assets 8,880 8,074 Total assets $ 107,185$ 97,687 Liabilities Interest bearing deposits: Transaction and money market accounts $ 37,583 $ 71 0.38 $ 32,002 $ 48 0.30 Savings 5,581 2 0.10 5,760 4 0.13 Time 10,986 50 0.92 12,514 69 1.11 Total interest bearing deposits 54,150 123 0.46 50,276 121 0.49 Commercial paper and other short-term borrowings(4) 2,576 3 0.21 2,534 2 0.19 Long-term debt 6,736 82 2.43 5,366 71 2.66 Total borrowed funds 9,312 85 1.82 7,900 73 1.86 Total interest bearing liabilities 63,462 208 0.66 58,176 194 0.67 Noninterest bearing deposits 26,679 24,531 Other liabilities 2,268 2,122 Total liabilities 92,409 84,829 Equity MUAH stockholder's equity 14,524 12,591 Noncontrolling interests 252 267 Total equity 14,776 12,858 Total liabilities and equity $ 107,185$ 97,687 Net interest income/spread (taxable-equivalent basis) 1,456 2.79 % 1,332 2.80 % Impact of noninterest bearing deposits 0.19 0.20 Impact of other noninterest bearing sources 0.04 0.03 Net interest margin 3.02 3.03 Less: taxable-equivalent adjustment 10 7 Net interest income $ 1,446$ 1,325



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(1)

Yields and interest income are presented on a taxable-equivalent basis

using the federal statutory tax rate of 35 percent. (2) Annualized. (3)



Average balances on loans outstanding include all nonperforming loans. The

amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (4) Includes interest bearing trading liabilities. 12



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Net interest income for the second quarter of 2014 increased $91 million compared with the second quarter of 2013. The increase in net interest income was primarily due to growth in loans held for investment. Average loans held for investment before PCI loans increased $7.9 billion during the quarter ended June 30, 2014 compared with the quarter ended June 30, 2013, primarily due to organic growth and our PB Capital acquisition, which closed late in the second quarter of 2013. Higher interest income from our PCI loan portfolio also contributed to the increase in net interest income and drove a 12 basis point increase in the net interest margin. For the quarter ended June 30, 2014, interest income on our PCI portfolio, which declined 32 percent compared with the same period a year ago, included approximately $56 million resulting from early payoffs of certain commercial mortgage loans due to improving industry conditions.



Average interest-bearing deposits increased $3.3 billion, and average non-interest bearing deposits increased $2.5 billion in the second quarter of 2014 compared with the second quarter of 2013, substantially due to certain large escrow deposits.

Noninterest Income and Noninterest Expense

The following tables detail our noninterest income and noninterest expense for the three and six months ended June 30, 2014 and 2013:

Noninterest Income

For the Three Months Ended



For the Six Months Ended

Increase Increase (Decrease) (Decrease) (Dollars in June 30, June 30, June 30, June 30, millions) 2014 2013 Amount Percent 2014 2013 Amount Percent Service charges on deposit accounts $ 50$ 52$ (2 ) (4 )% $ 101$ 105$ (4 ) (4 )% Securities gains, net 1 27 (26 ) (96 ) 3 123 (120 ) (98 ) Trust and investment management fees 26 38 (12 ) (32 ) 52 73 (21 ) (29 ) Credit facility fees 31 26 5 19 59 52 7 13 Merchant banking fees 27 23 4 17 51 39 12 31 Brokerage commissions and fees 13 11 2 18 26 22 4 18 Trading account activities 14 21 (7 ) (33 ) 30 26 4 15 Card processing fees, net 9 9 - - 17 18 (1 ) (6 ) Other investment income 7 9 (2 ) (22 ) 19 12 7 58 Other, net 24 (15 ) 39 260 25 (18 ) 43 239 Total noninterest income $ 202$ 201$ 1 - % $ 383$ 452$ (69 ) (15 )% Noninterest income in the second quarter of 2014 was $202 million, compared with $201 million in the second quarter of 2013. The increase was primarily due to lower FDIC indemnification asset amortization expense, which is included within other noninterest income, and gains on the sale of other investments, which was largely offset by decreases in gains on sales of securities as well as trust and investment management income. Noninterest income for the six months ended June 30, 2014 decreased to $383 million from $452 million in the same period in 2013. The decrease was substantially due to decreases in gains from the sale of securities and trust and investment management income partially offset by lower FDIC indemnification asset amortization expense and an increase in merchant banking fees. Trust and investment management income decreased in both periods largely due to the reorganization of the affiliated HighMark Funds into shares of unaffiliated mutual funds completed in the third quarter of 2013. 13



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Table of Contents Noninterest Expense For the Three Months Ended For the Six Months Ended Increase Increase (Decrease) (Decrease) (Dollars in June 30, June 30, June 30, June 30, millions) 2014 2013 Amount Percent 2014 2013 Amount Percent Salaries and other compensation $ 318$ 323$ (5 ) (2 )% $

619 $ 635$ (16 ) (3 )% Employee benefits 60 90 (30 ) (33 ) 147 199 (52 ) (26 ) Salaries and employee benefits 378 413 (35 ) (8 ) 766 834 (68 ) (8 ) Net occupancy and equipment 75 84 (9 ) (11 ) 146 159 (13 ) (8 ) Professional and outside services 63 62 1 2 118 120 (2 ) (2 ) Software 22 19 3 16 42 40 2 5



Regulatory

assessments 16 20 (4 ) (20 ) 31 40 (9 ) (23 ) Low income housing credit investment amortization 20 20 - - 40 35 5 14



Intangible

asset

amortization 13 17 (4 ) (24 ) 26 33 (7 ) (21 )



Advertising

and public relations 9 14 (5 ) (36 ) 16 31 (15 ) (48 ) Communications 10 11 (1 ) (9 ) 21 22 (1 ) (5 )



Data

processing 8 10 (2 ) (20 ) 16 20 (4 ) (20 ) (Reversal of) provision for losses on unfunded credit commitments (3 ) (2 ) (1 ) (50 ) 13 13 - - Other 38 34 4 12 74 68 6 9 Total noninterest expense $ 649$ 702$ (53 ) (8 )% $ 1,309$ 1,415$ (106 ) (7 )% Noninterest expense in the second quarter of 2014 was $649 million compared with $702 million in the second quarter of 2013. Salaries and employee benefits decreased $35 million largely due to lower pension expense, including the impact of pension plan amendments in April 2014. Noninterest expense for the six months ended June 30, 2014 decreased $106 million compared with the same period in 2013 largely due to lower pension expense and lower acquisition-related staff expenses. Advertising expense was lower during the six months ended June 30, 2014 due to a large advertising campaign in the comparable 2013 period. The adjusted efficiency ratio is a non-GAAP financial measure used by management to measure the efficiency of our operations, focusing on those costs management believes to be most relevant to our business activities. Productivity initiative costs primarily consist of salaries and benefits associated with operational 14



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efficiency enhancements. The following table shows the calculation of this ratio for the three and six months ended June 30, 2014 and 2013:


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