41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

There were 401,991,189 shares of Registrant’s common stock ($0.01 par value) outstanding on April 30, 2009.

 

 

Huntington Bancshares Incorporated

INDEX

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2009, December 31, 2008, and March 31, 2008			73
Condensed Consolidated Statements of Income for the three months ended March 31, 2009 and 2008			74
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2009 and 2008			75
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008			76
Notes to Unaudited Condensed Consolidated Financial Statements			77
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			3
Item 3. Quantitative and Qualitative Disclosures about Market Risk			104
Item 4. Controls and Procedures			104
Item 4T. Controls and Procedures			104
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			104
Item 1A. Risk Factors			104
Item 6. Exhibits			105
Signatures			106
Exhibit 10.1
Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART 1. FINANCIAL INFORMATION

Additional factors that could cause results to differ materially from those described above can be found in our 2008 Form 10-K, and documents subsequently filed by us with the Securities and Exchange Commission (SEC). All forward- looking statements included in this filing are based on information available at the time of the filing. We assume no obligation to update any forward-looking statement.

Risk Factors

We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2) market risk , which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3) liquidity risk , which is the risk of loss due to the possibility that funds may not be available to satisfy current or future obligations resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues, and (4) operational risk , which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks.

More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2008 Form 10-K. Additional information regarding risk factors can also be found in the “Risk Management and Capital” discussion.

Update to Risk Factors

During the first quarter of 2009, our commercial and residential real estate and real estate-related portfolios continued to be affected by the ongoing reduction in real estate values and reduced levels of sales and, more generally, all of our loan portfolios have been affected by the sustained economic weakness of our Midwest markets and the impact of higher unemployment rates.

As described in the Credit Risk discussion, credit quality performance continued to be under pressure during the first quarter of 2009, with nonaccrual loans (NALs) and nonperforming assets (NPAs) both increasing at March 31, 2009, compared with December 31, 2008, and March 31, 2008. The allowance for loan and lease losses (ALLL) of $838.5 million at March 31, 2009, was 2.12% of period-end loans and leases and 54% of period-end nonaccrual loans and leases.

Our business depends on the creditworthiness of our customers and, in some cases, the value of the assets securing our loans to them. Our commercial portfolio, as well as our real estate-related portfolios, have continued to be negatively affected by the ongoing reduction in real estate values and reduced levels of sales and leasing activities. More generally, all of our loan portfolios, particularly our construction and commercial real estate loans, have been affected by the sustained economic weakness of our Midwest markets and the impact of higher unemployment rates. We periodically review the ALLL for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and NPAs. There is no certainty that the ALLL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the ALLL is not adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.

Bank regulators periodically review our ALLL and may require us to increase our provision for loan and lease losses or loan charge-offs. Any increase in our ALLL or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and our financial condition.

In particular, an increase in our ALLL could result in a reduction in the amount of our tangible common equity (TCE). Given the focus on TCE, we may be required to raise additional capital through the issuance of common stock as a result of an increase in our ALLL. The issuance of additional common stock or other factors could have a dilutive effect on the existing holders of our common stock, and adversely affect the market price of our common stock.

Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity, or stock price.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to the U.S. Treasury Department’s CPP under the TARP announced last fall and the new Capital Assistance Program (CAP) announced this spring, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, has imposed a number of restrictions and limitations on the operations of financial services firms participating in the federal programs.

These programs subject us and other financial institutions that participate in them to additional restrictions, oversight, and costs that may have an adverse impact on our business, financial condition, results of operations, or the price of our common stock. In addition, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including as related to compensation, interest rates, the impact of bankruptcy proceedings on consumer real property mortgages and otherwise. Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation or its application. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, negatively impact the recoverability of certain of our recorded assets, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner.

We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.

We are not restricted from issuing additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. We continually evaluate opportunities to access capital markets taking into account our regulatory capital ratios, financial condition, and other relevant considerations, and anticipate that, subject to market conditions, we are likely to take further capital actions. Such actions, with regulatory approval when required, may include opportunistically retiring our outstanding securities, including our subordinated debt, trust preferred securities, and preferred shares in open market transactions, privately negotiated transactions, or public offers for cash or common shares, as well as the issuance of additional shares of common stock in public or private transactions in order to increase our capital levels above our already “well-capitalized” levels, as defined by the federal bank regulatory agencies, as well as other regulatory capital targets.

In addition, both Huntington and the Bank are highly regulated, and our regulators could require us to raise additional common equity in the future, whether under the CAP or otherwise. While we were not one of the 19 institutions required to conduct a forward-looking capital assessment, or “stress test”, under the Supervisory Capital Assessment Program (SCAP), it is possible that the U.S. Treasury could extend the SCAP assessment (and related potential requirement to raise additional capital privately or through the CAP) to other institutions, including us. Alternatively, we could voluntarily apply to participate in CAP, although we currently do not intend to apply. Furthermore, both our regulators and we regularly perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital. Any such capital raise could include, among other things, the potential issuance of common equity to the public, the potential issuance of common equity to the government under the CAP, or the conversion of our existing Series B Preferred Stock to common equity. There could also be market perceptions that we need to raise additional capital, whether as a result of public disclosures that may be made regarding the SCAP stress test methodology or otherwise, and, regardless of the outcome of any stress test or other stress case analysis, such perceptions could have an adverse effect on the price of our common stock.

The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities, could be substantially dilutive to existing common stockholders. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to existing stockholders. The market price of our common stock could decline as a result of sales of shares of our common stock or securities convertible into or exchangeable for common stock in anticipation of such sales.

We still face risk relating to the Franklin Credit Management (Franklin) relationship not withstanding the restructuring announced on March 31, 2009.

The restructuring resulted in a $159.9 million net deferred tax asset equal to the amount of income and equity that was included in our operating results for the 2009 first quarter. While we believe that our position regarding the deferred tax asset and related income recognition is correct, that position could be challenged.

Recent Accounting Pronouncements and Developments

Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2009 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent that we believe the adoption of new accounting standards will materially affect our financial condition, results of operations, or liquidity, the impacts or potential impacts are discussed in the applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Use of Significant Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Consolidated Financial Statements included in our 2008 Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary to understand and evaluate our company, financial position, results of operations, and cash flows.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed in our 2008 Form 10-K.

The following discussion provides updates of our accounting estimates related to the fair value measurements of certain portfolios within our investment securities portfolio, goodwill, and Franklin loans.

Securities and Other-Than-Temporary Impairment (OTTI)

(This section should be read in conjunction with the “Investment Securities Portfolio” discussion.)

In April 2009, the Financial Accounting Standards Board (FASB) issued two FASB Staff Positions (FSPs) that could impact estimates and assumptions utilized by us in determining the fair values of securities. The first, FSP Financial Accounting Standard (FAS) 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” reaffirms the exit price fair value measurement guidance in Statement No. 157, “Fair Value Measurements,” and also provides additional guidance for estimating fair value in accordance with Statement No. 157 when the volume and level of activity for the asset or liability have significantly decreased.

The second, FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends the other-than-temporary impairment (OTTI) guidance in US GAAP for debt securities. The pronouncement shifts the focus from an entity’s intent to hold until recovery to its intent to sell. We would recognize OTTI through earnings on those debt securities that: (a) have a fair value less than its book value, and (b) we intend to sell (or we cannot assert that it is more likely than not that we will not have to sell before recovery). The amount of OTTI recognized would be the difference between the fair value and book value of the securities.

If we do not intend to sell a debt security, but it is probable that we will not collect all amounts due according to the debt’s contractual terms, we would separate the impairment into credit and noncredit components. The credit component of the impairment, measured as the difference between amortized cost and the present value of expected cash flows discounted at the security’s effective interest rate, would be recognized in earnings. The noncredit component would be recognized in other comprehensive income (OCI), separately from other unrealized gains and losses on available-for-sale securities.

Both FSPs are effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 could require an adjustment to retained earnings and OCI at the beginning of the period of adoption to reclassify noncredit related impairment to OCI for securities. The adjustment would only be applicable to noncredit OTTI for debt securities that we do not have the intent to sell. Noncredit OTTI losses related to debt securities that we intend to sell (or for which we cannot assert that it is more likely than not that we will not have to sell the securities before recovery) will not be reclassified. We are currently evaluating the impact that the FSPs could have.

OTTI ANALYSIS ON CERTAIN SECURITIES PORTFOLIOS

Alt-A mortgage-backed and private-label collateralized mortgage obligation (CMO) securities represent securities collateralized by first-lien residential mortgage loans. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within these portfolios as Level 3 on the fair value hierarchy. The securities were priced with the assistance of an outside third-party consultant using a discounted cash flow approach and the independent third-party’s proprietary pricing model. The model used inputs such as estimated prepayment speeds, losses, recoveries, default rates that were implied by the underlying performance of collateral in the structure or similar structures, discount rates that were implied by market prices for similar securities, collateral structure types, and house price depreciation/appreciation rates that were based upon macroeconomic forecasts.

We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if the securities in these portfolios were other-than-temporarily-impaired. Using the guidance in FSP EITF 99-20-1, we used the analysis to determine whether we believed it probable that all contractual cash flows would not be collected. All securities in these portfolios remained current with respect to interest and principal at March 31, 2009.

Our analysis indicated, as of March 31, 2009, a total of 14 Alt-A mortgage-backed securities and one private-label CMO would experience loss of principal. The future expected losses of principal on these other-than-temporarily impaired securities ranged from 0.1% to 86.7% of the par value. The average amount of future principal loss was 6.3% of the par value. These losses were projected to occur beginning anywhere from 8 months to as many as 235 months in the future. We measured the amount of impairment on these securities using the fair value of the security in the scenario we considered to be most likely, using discount rates ranging from 10% to 16%, depending on both the potential variability of outcomes and the expected duration of cash flows for each security. As a result, in the 2009 first quarter, we recorded $1.5 million of OTTI in our Alt-A mortgage-backed securities portfolio representing additional impairment on one security that was previously impaired. No OTTI was recorded for our private-label CMO securities in the 2009 first quarter.

Pooled-trust-preferred securities represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within this portfolio as Level 3 on the fair value hierarchy. The collateral generally consisted of trust preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. The first and second-tier bank trust preferred securities and the insurance company securities were priced with the assistance of an outside third-party consultant using a discounted cash flow approach, and the independent third-party’s proprietary pricing models. The model used inputs such as estimated default and deferral rates that were implied from the underlying performance of the issuers in the structure, and discount rates that were implied by market prices for similar securities and collateral structure types.

Cash flow analyses of the first and second-tier bank trust preferred securities issued by banks and bank holding companies were conducted to test for any OTTI. In accordance with FSP EITF 99-20-1, OTTI was recorded in certain securities within these portfolios, as it was probable that all contractual cash flows would not be collected. The discount rate used to calculate the cash flows ranged from 12%-15%, and an illiquidity premium due to the lack of an active market for these securities. We assumed that all issuers currently deferring interest payments would ultimately default, and we assumed a 10% recovery rate on such defaults. In addition, future defaults were estimated based upon an analysis of the financial strength of each respective issuer. As a result of this testing, we recognized OTTI of $2.4 million in the pooled-trust-preferred securities portfolio in the 2009 first quarter.

Please refer to the “Investment Securities Portfolio” discussion for additional information regarding OTTI.

Goodwill

Goodwill is tested for impairment annually, as of October 1, using a two-step process that begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. During the 2009 first quarter, our stock price declined 78%, from $7.66 per common share at December 31, 2008, to $1.66 per common share at March 31, 2009. Peer banks also experienced similar declines in market capitalization. This decline primarily reflected the continuing economic slowdown and increased market concern surrounding financial institutions’ credit risks and capital positions, as well as uncertainty related to increased regulatory supervision and intervention. We determined that these changes would more-likely-than-not reduce the fair value of certain reporting units below their carrying amounts. Therefore, we performed an interim goodwill impairment test during the 2009 first quarter, which is a two-step process. An independent third party was engaged to assist with the impairment assessment. We had previously performed goodwill impairment tests at June 30, October 1, and December 31, 2008, and concluded no impairment existed at those dates.

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. The assumptions used in the goodwill impairment assessment and the application of these estimates and assumptions are discussed below.

The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. We identified four reporting units: Regional Banking, PFG, Insurance, and Auto Finance and Dealer Services (AFDS). Although Insurance is included within PFG for line of business segment reporting, it was evaluated as a separate reporting unit for goodwill impairment testing because it has its own separately allocated goodwill resulting from prior acquisitions. The fair value of PFG (determined using the market approach as described below), excluding Insurance, exceeded its carrying value, and goodwill was determined to not be impaired for this reporting unit. There is no goodwill associated with AFDS and, therefore, it was not subject to impairment testing.

For Regional Banking, we utilized both the income and market approaches to determine fair value. The income approach was based on discounted cash flows derived from assumptions of balance sheet and income statement activity. An internal forecast was developed by considering several long-term key business drivers such as anticipated loan and deposit growth. The long-term growth rate used in determining the terminal value was estimated at 2.5%. The discount rate of 14% was estimated based on the Capital Asset Pricing Model, which considered the risk-free interest rate (20-year Treasury Bonds), market risk premium, equity risk premium, beta and a company-specific risk factor. The company-specific risk factor was used to address the uncertainty of growth estimates and earnings projections of management. For the market approach, revenue, earnings and market capitalization multiples of comparable public companies were selected and applied to the Regional Banking unit’s applicable metrics such as book and tangible book values. A 20% control premium was used in the market approach. The results of the income and market approaches were weighted 75% and 25%, respectively, to arrive at the final calculation of fair value. As market capitalization declined across the banking industry, we believed that a heavier weighting on the income approach is more representative of a market participant’s view. For the Insurance reporting unit, management utilized a market approach to determine fair value. The aggregate fair market values were compared to market capitalization as an assessment of the appropriateness of the fair value measurements. As our stock price fluctuated greatly, we used our average stock price for the 30 days preceding the valuation date to determine market capitalization. The aggregate fair market values of the reporting units compared to market capitalization indicated an implied premium of 27%. A control premium analysis indicated that the implied premium was within range of overall premiums observed in the market place. Neither the Regional Banking nor Insurance reporting units passed Step 1.

The second step (Step 2) of impairment testing is necessary only if the reporting unit does not pass Step 1. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.

To determine the implied fair value of goodwill, the fair value of Regional Banking and Insurance (as determined in Step 1) was allocated to all assets and liabilities of the reporting units including any recognized or unrecognized intangible assets. The allocation was done as if the reporting unit was acquired in a business combination, and the fair value of the reporting unit was the price paid to acquire the reporting unit. This allocation process is only performed for purposes of testing goodwill for impairment. The carrying values of recognized assets or liabilities (other than goodwill, as appropriate) were not adjusted nor were any new intangible assets recorded. Key valuations were the assessment of core deposit intangibles, the mark-to-fair-value of outstanding debt and deposits, and mark-to-fair-value on the loan portfolio. Core deposits were valued using a 15% discount rate. The marks on our outstanding debt and deposits were based upon observable trades or modeled prices using current yield curves and market spreads. The valuation of the loan portfolio indicated discounts in the ranges of 9%-24%, depending upon the loan type. For every 100 basis point change in the valuation of our overall loan portfolio, implied goodwill would be impacted by approximately $325 million. The estimated fair value of these loan portfolios was based on an exit price, and the assumptions used were intended to approximate those that a market participant would have used in valuing the loans in an orderly transaction, including a market liquidity discount. The significant market risk premium that is a consequence of the current distressed market conditions was a significant contributor to the valuation discounts associated with these loans. We believed these discounts were consistent with transactions currently occurring in the marketplace.

Upon completion of Step 2, we determined that the Regional Banking and Insurance reporting units’ goodwill carrying values exceeded their implied fair values of goodwill by $2,573.8 million and $28.9 million, respectively. As a result, we recorded a noncash pretax impairment charge of $2,602.7 million, or $7.09 per common share, in the 2009 first quarter. The impairment charge was included in noninterest expense and did not affect our regulatory and tangible capital ratios.

As a result of the impairment charge, our goodwill totaled $0.5 billion at March 31, 2009, down from $3.1 billion at December 31, 2008. Of these amounts, $0.3 billion and $2.9 billion of our total goodwill was allocated to Regional Banking at March 31, 2009 and December 31, 2008, respectively.

Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future. If our market capitalization decreases or the liquidity discount on our loan portfolio improves significantly without a concurrent increase in market capitalization, we may be required to record additional goodwill impairment losses in future periods, whether in connection with our next annual impairment testing in the 2009 third quarter or prior to that, if any changes constitute a triggering event. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material. However, any such future impairment loss would be limited to the remaining goodwill balance of $0.5 billion at March 31, 2009.

Franklin Loans

Franklin is a specialty consumer finance company primarily engaged in servicing residential mortgage loans. Prior to March 31, 2009, Franklin owned a portfolio of loans secured by first and second liens on 1-4 family residential properties. At December 31, 2008, our total loans outstanding to Franklin were $650.2 million, all of which were placed on nonaccrual status. Additionally, the specific ALLL for the Franklin portfolio was $130.0 million, resulting in our net exposure to Franklin at December 31, 2008 of $520.2 million.

On March 31, 2009, we entered into a transaction with Franklin whereby a Huntington wholly-owned REIT subsidiary (REIT) exchanged a noncontrolling amount of certain equity interests for a 100% interest in Franklin Asset Merger Sub, LLC (Merger Sub); a wholly-owned subsidiary of Franklin. This was accomplished by merging Merger Sub into a wholly-owned subsidiary of REIT. Merger Sub’s sole assets were two trust participation certificates evidencing 84% ownership rights in a trust (New Trust) which holds all the underlying consumer loans and other real estate owned (OREO) properties that were formerly collateral for the Franklin commercial loans. The equity interests provided to Franklin by REIT were pledged by Franklin as collateral for the Franklin commercial loans.

We believe that this restructuring provides us the flexibility to accelerate problem loan resolution to the benefit of our borrowers, as well as our shareholders. Other benefits include the ability to: (a) refinance these loans, in whole or in part, (b) the ability to accept discounted payments, (c) restructure mortgages, while minimizing foreclosures, by providing refinancing opportunities to borrowers using various government sponsored programs, and (d) expedite cash collection on the disposition of OREO assets as we now control the listing prices and liquidation decisions of these assets.

New Trust is a variable interest entity under FASB Interpretation No 46R, Consolidation of Variable Interest Entities (revised December 2003)- an interpretation of ARB No. 51 (FIN 46R), and, as a result of our 84% participation certificates, New Trust was consolidated into our financial results. As required by FIN 46R, the consolidation is treated as a business combination under Statement No. 141R with the fair value of the equity interests issued to Franklin representing the acquisition price. The assets of New Trust, which include first- and second- lien mortgage loans and OREO properties, were recorded at their fair values of $494 million and $80 million, respectively. AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3) provides guidance for accounting for acquired loans, such as these, that have experienced a deterioration of credit quality at the time of acquisition for which it is probable that the investor will be unable to collect all contractually required payments.

Under SOP 03-3, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable discount. Subsequent decreases to the expected cash flows will generally result in a charge to the provision for credit losses and an increase to the ALLL. Subsequent increases in cash flows result in reversal of any nonaccretable discount (or ALLL to the extent any has been recorded) with a positive impact on interest income. The measurement of undiscounted cash flows involves assumptions and judgments for credit risk, interest rate risk, prepayment risk, default rates, loss severity, payment speeds, and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.

The portfolio of first- and second- lien Franklin mortgage loans were accounted for under SOP 03-3 in the 2009 first quarter. No allowance for credit losses related to these loans was recorded at the acquisition date. A $39.8 million difference between the fair value of the loans and the expected cash flows was recognized as an accretable discount that will be recognized over the contractual term of the loans. A $1.1 billion difference between the unpaid principal balance of the loans and the expected cash flows was recognized as a nonaccretable discount. Any future increases to expected cash flows will be recognized as a yield adjustment over the remaining term of the respective loan. Any future decreases to expected cash flows will be recognized through an additional allowance for credit losses.

The fair values of the acquired mortgage loans and OREO assets were based upon a market participant model and calculated in accordance with FASB Statement No. 157, Fair Value Measurements (Statement No. 157). Under this market participant model, expected cash flows for first-lien mortgages were calculated based upon the net expected foreclosure proceeds of the collateral underlying each mortgage loan. Updated appraisals or other indicators of value provided the basis for estimating cash flows. Sales proceeds from the underlying collateral were estimated to be received over a one to three year period, depending on the delinquency status of the loan. Expected proceeds were reduced assuming housing price depreciation of 18%, 12%, and 0% over each year of the next three years of expected collections, respectively. Interest cash flows were estimated to be received for a limited time on each portfolio. The resulting cash flows were discounted at an 18% rate of return. Limited value was assigned to all second-lien mortgages because, after considering the house price depreciation rates above, little if any proceeds would be realized.

The consolidation of New Trust resulted in the recording of a $95.8 million liability, representing the 16% of New Trust certificates not acquired by us. These certificates were retained by Franklin.

In accordance with Statement No. 141R, we recorded a net deferred tax asset of $159.9 million related to the difference between the tax basis and the book basis in the acquired assets. Because the acquisition price, represented by the equity interests in our wholly-owned subsidiary, was equal to the fair value of the 84% interest in the New Trust participant certificate, no goodwill was created from the transaction. The recording of the net deferred tax asset was a bargain purchase under Statement No. 141R, and was recorded as a tax benefit in the current period.

Subsequent to the transaction, $127 million of the acquired current mortgage loans accrue interest while $366 million are on nonaccrual. We have concluded that we cannot reliably estimate the timing of collection of cash flows for delinquent first- and second- lien mortgages because the majority of the expected cash flows for the delinquent portfolio will result from the foreclosure and subsequent disposition of the underlying collateral supporting the loans.

DISCUSSION OF RESULTS OF OPERATIONS

This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Lines of Business” discussion.

The below summary provides an update of key events and trends during the current quarter. Comparisons are made with the prior quarter, as we believe this comparison provides the most meaningful measurement relative to analyzing trends.

Summary

We reported a net loss of $2,433.2 million in the 2009 first quarter, representing a loss per common share of $6.79. This loss included a net negative impact of $6.73 per common share primarily reflecting a noncash $2,602.7 million goodwill impairment charge ($7.09 per common share) that reduced net income but did not impact key capital ratios, partially offset by a $159.9 million nonrecurring tax benefit ($0.44 per common share) associated with the current quarter’s Franklin restructuring. This compared unfavorably with the prior quarter’s net loss of $417.3 million, or $1.20 per common share. In addition to the goodwill impairment and tax benefit, comparisons with the prior quarter were significantly impacted by other factors that are discussed later in the “Significant Items” section (see “Significant Items” discussion).

During the current quarter, we took proactive steps to increase our capital position. We converted $114.1 million of our Series A Preferred stock into common stock, and we were able to shrink our balance sheet by securitizing $1.0 billion of automobile loans, and selling $600 million of our municipal securities, as well as $200 million of mortgage loans. We also made the difficult decision to cut the quarterly common stock dividend to $0.01 per share, effective with the dividend declared on January 22, 2009. These actions contributed to a 61 basis point improvement in our TCE ratio to 4.65% compared with the prior quarter-end; however, these actions negatively impacted our net interest margin. These actions also contributed, in part, to a substantial improvement of our period-end liquidity position. Other factors contributing to the improvement in our liquidity position included a $1.2 billion increase in period-end core deposits compared with December 31, 2008, and a $600 million debt issuance as part of the Temporary Liquidity Guarantee Program (TLGP). At March 31, 2009, the parent company had sufficient cash for operations and does not have any debt maturities for several years. Further, we believe the Bank has a manageable level of debt maturities during the next 12-month period.

Also during the 2009 first quarter, we restructured our Franklin relationship. This restructuring resulted in our acquiring control of the consumer loans that formerly represented the collateral for our Franklin commercial loans. The restructuring increased our flexibility to accelerate problem loan resolution to the benefit of the borrowers under the consumer loans, as well as to the benefit of our shareholders, without releasing Franklin from its legal obligations under the commercial loans. Specifically: (a) the $650 million nonaccrual commercial loan to Franklin at December 31, 2008, was replaced by $494 million of fair value first- and second- lien mortgages and $80 million of OREO properties at fair value, less costs to sell; (b) commercial net charge-offs (NCOs) increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to write-down the acquired mortgages and OREO collateral to fair value; and (c) we entered into a new servicing contract with Franklin to service these acquired first- and second- lien mortgages and OREO properties. Please refer to the “Franklin Loans” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section, and the “Franklin relationship” discussion in the “Risk Management and Capital” section for additional information regarding our Franklin relationship.

Credit quality performance in the 2009 first quarter was mixed. Non-Franklin-NCOs totaled $213.2 million, compared with $137.3 million in the 2008 fourth quarter. The increase was entirely within the commercial loan portfolio as NCOs in the consumer loan portfolio declined slightly. Non-Franklin-related NPAs also increased primarily reflecting the continued decline in the housing markets, and stress on retail sales. In general, commercial loans supporting the housing or construction segments are experiencing the most stress. Our outlook is that the economy will remain under stress, and that no improvement will be seen through the end of 2009. As a result, we expect that the overall level of NPAs and NCOs will remain elevated, especially as related to continued softness in our commercial and industrial (C&I) and commercial real estate (CRE) portfolios.

Fully-taxable equivalent net interest income in the 2009 first quarter decreased $38.9 million, or 10%, compared with the prior quarter. The decrease reflected a $1.0 billion decline in average earning assets and a 21 basis point decline in our net interest margin. The margin decline reflected the impact of our actions taken to improve our liquidity position, the higher levels of NPAs, and the competitive pricing experienced in our markets. We expect that the net interest margin will remain under modest pressure from the current quarter’s level resulting from the absolute low-level of current interest rates and expected continued aggressive deposit pricing in our markets. Despite the competitive market, average core deposits grew at an annualized 9% rate, and the average balances in every category of core deposits grew during the current quarter. Deposit growth is a strategic priority for us through the end of 2009.

Noninterest income in the 2009 first quarter increased $172.0 million compared with the 2008 fourth quarter. Comparisons with the prior quarter were affected by significant market-related losses taken during the prior quarter (see “Significant Items” discussion). Mortgage banking income and brokerage and insurance income were strong during the current quarter. Mortgage originations more than doubled from the prior quarter to $1.5 billion. Mortgage fee income also benefited from improved mortgage servicing right (MSR) hedging results for the current quarter. The $8.7 million, or 28%, increase in brokerage and insurance income reflected record levels of retail investment sales. Deposit service charge income and trust income declined from the previous quarter, reflecting seasonal and market conditions.

Expenses were well controlled during the current quarter. After adjusting for the $2,602.7 million goodwill impairment charge, noninterest expense decreased $23 million compared with the 2008 fourth quarter. The decrease primarily reflected lower personnel costs, reflecting the implementation of our $100 million expense reduction initiatives. We expect to exceed the targeted $100 million of expense savings during 2009.

Table 1 — Selected Quarterly Income Statement Data ⁽¹⁾

Significant Items

Definition of Significant Items

Certain components of the income statement are inherently subject to more volatility than others. As a result, such items may be viewed differently in an assessment of “underlying” or “core” earnings performance compared with expectations and/or assessments of future performance trends.

Therefore, we believe the disclosure of certain “Significant Items” affecting current and prior period results aids in a better understanding of corporate performance. The reader may determine which, if any, items to include or exclude from a performance analysis.

To this end, we have adopted a practice of listing as “Significant Items” individual and/or particularly volatile items only if they impact the current period results by $0.01 per share or more. The following table presents Significant Items for the quarters ended March 31, 2009, December 31, 2008, and March 31, 2008.

Table 2 — Significant Items Influencing Earnings Performance Comparison

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by a number of significant items summarized below.

1.

Goodwill Impairment. During the 2009 first quarter, bank stock prices continued to decline significantly. Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash $2,602.7 million pretax ($7.09 per common share) charge. (See “Goodwill” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section for additional information).

2.

Franklin Relationship Restructuring. The impacts of the Franklin relationship on our reported results are as follows:

•

Performance for the 2009 first quarter included a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) related to the restructuring with Franklin. Also as a result of the restructuring, although earnings were not impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to write-down the acquired mortgages and OREO collateral to fair value (see “Franklin Relationship” discussion located within the “Risk Management and Capital” section and the “Franklin Loans” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” discussion) for additional information.

•

Performance for the 2008 fourth quarter included a $454.3 million ($0.81 per common share) negative impact, reflecting the deterioration of cash flows from Franklin’s mortgages, which represented the collateral for our loans. The $454.3 million impact represented: (a) $438.0 million provision for credit losses, (b) $9.0 million reduction of net interest income as the loans were placed on nonaccrual status, and (c) $7.3 million of interest-rate swap losses recorded to noninterest income.

3.

Preferred Stock Conversion. During the 2009 first quarter, we converted 114,109 shares of Series A 8.50% Non-cumulative Perpetual Preferred (Series A Preferred Stock) stock into common stock. As part of these transactions there was a deemed dividend, which did not impact earnings, but resulted in a negative impact of $0.08 per common share. (See “Capital” discussion located within the “Risk Management and Capital” section for additional information.)

4.

Visa â Initial Public Offering (IPO). Prior to the Visa ® IPO occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. Impacts related to the Visa ® IPO included:

•

In the 2008 fourth quarter, a $2.9 million ($0.01 per common share) increase to provision for income taxes, representing an increase to the previously established capital loss carryforward valuation allowance related to the value of Visa ® shares held and the reduction of shares resulting from the revised conversion ratio.

•

In the 2008 first quarter, a $25.1 million gain ($0.04 per common share), was recorded in other noninterest income resulting from the proceeds of the IPO in 2008 relating to the sale of a portion of our ownership interest in Visa ® .

•

In the 2008 first quarter, a $11.1 million ($0.03 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carryforward valuation allowance as a result of the 2008 first quarter Visa ® IPO.

•

In 2007, we recorded a $24.9 million ($0.05 per common share) for our pro-rata portion of an indemnification charge provided to Visa ® by its member banks for various litigation filed against Visa ® . Subsequently, in the 2008 first quarter, we reversed $12.4 million ($0.02 per common share) of the $24.9 million, as an escrow account was established by Visa ® using a portion of the proceeds received from the IPO. This escrow account was established for the potential settlements relating to this litigation thereby mitigating our potential liability from the indemnification. In the 2008 fourth quarter, we reversed an additional $4.6 million ($0.01 per common share). The accrual, and subsequent reversals, was recorded to noninterest expense.

5.

Net Market-Related Losses. Total net market-related losses has three main components.

	•		Net losses or gains from our Mortgage Servicing Rights and the related hedging. (See “Mortgage Servicing Rights” located within the “Market Risk” section for additional information). The 2009 first quarter also includes the gain from our mortgage portfolio loan sale.
	•		Securities gains and losses.
	•		Other gains and losses, including net gains and losses from equity investments, and the loss from our automobile loan securitization and sale.

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:

2008 — First Quarter

	•		$7.3 million ($0.01 per common share) of merger and restructuring costs related to the Sky Financial Group, Inc. acquisition in 2007.
	•		$5.1 million ($0.01 per common share) of asset impairment, including: (a) $2.6 million charge off of a receivable included in other noninterest expense, and (b) $2.5 million write-down of leasehold improvements in our Cleveland main office included in net occupancy expense.

Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Items 2 and 5.)

2009 First Quarter versus 2008 First Quarter

Fully-taxable equivalent net interest income decreased $41.2 million, or 11%, compared with the year-ago quarter. This reflected the unfavorable impact of a 26 basis point decline in the net interest margin to 2.97% from 3.23%. Average earning assets decreased $1.1 billion, reflecting a $0.9 billion, or 77%, decline in average trading account securities, and a $0.8 billion reduction in average federal funds sold and securities purchased under resale agreements, partially offset by a $0.5 billion, or 1%, increase in average total loans and leases.

The following table details the changes in our average loans and leases and average deposits:

Table 3 — Average Loans/Leases and Deposits — 2009 First Quarter vs. 2008 First Quarter

The $0.5 billion, or 1%, increase in average total loans and leases primarily reflected:

•

$1.0 billion, or 5%, increase in average total commercial loans, with growth reflected in both C&I loans and CRE loans. The $0.8 billion, or 9%, increase in average CRE loans reflected a combination of factors, including draws on existing performing projects and new originations to existing CRE borrowers. The $0.2 billion, or 1%, growth in average C&I loans reflected normal funding and pay downs on lines of credit and by new originations to existing customers.

Partially offset by:

•

$0.5 billion, or 3%, decrease in average total consumer loans. This reflected a $0.7 billion, or 14%, decline in average residential mortgages, reflecting the impact of loan sales; as well as the continued refinance of portfolio loans and increased saleable originations, thus mitigating balance sheet growth. Average home equity loans increased 4%, due to strong 2008 second quarter production and a slowdown in runoff. Average automobile loans and leases were essentially unchanged from the year-ago quarter.

The $0.3 billion, or 1%, increase in average total deposits reflected growth in average total core deposits, as average other deposits declined. Specifically, average core certificates of deposits increased $1.9 billion, or 17%, reflecting the continuation of customers transferring funds into these higher rate accounts from lower rate money market and savings and other domestic deposit accounts, which declined 17% and 3%, respectively.

2009 First Quarter versus 2008 Fourth Quarter

Fully-taxable equivalent net interest income decreased $38.9 million, or 10%, compared with the prior quarter. This reflected a 21 basis point decline in the net interest margin to 2.97% from 3.18%. The decline in the net interest margin reflected a combination of factors including the impact of competitive deposit pricing in our markets, the increase in cash on hand, and other actions taken to improve liquidity, as well as the increased negative impact of funding a higher level of noninterest earning NPAs. The decline in fully-taxable equivalent net interest income also reflected a 2% decline in average earning assets with average total loans and leases decreasing 1% and other earning assets, which includes investment securities, declining 7%.

The following table details the changes in our average loans and leases and average deposits:

Average total loans and leases declined $0.6 billion, or 1%, primarily reflecting declines in total commercial and automobile loans and leases.

Average total commercial loans decreased $0.3 billion, or 1%, reflecting declines in both average CRE loans and average C&I loans. During the quarter, we initiated a portfolio review that resulted in a reclassification of certain CRE loans to C&I loans at the end of the period. The reclassification was primarily associated with loans to businesses secured by the real estate and buildings that house their operations. These owner-occupied loans secured by real estate were underwritten based on the cash flow of the business and are more appropriately classified as C&I loans. The decline in average C&I loans primarily reflected the impact of the actions taken during the 2008 fourth quarter relating to the Franklin relationship (see “Significant Items” discussion) , partially offset by origination activity. The decline in average CRE loans reflected payoffs and pay downs.

Average total consumer loans declined $0.3 billion. Average total automobile loans and leases declined 4%, reflecting the continued runoff of the direct lease portfolio and a declining average loan balance due to lower origination volume. The $1.0 billion automobile loan sale was closed near the end of the quarter so it had a minimal impact on average balances.

Average residential mortgages declined 3%, reflecting the significant refinance activity during the quarter as we sell such refinanced loans in the secondary market. A $200 million portfolio loan sale, as well as the mortgages added as a result of the Franklin restructuring, both occurred late in the quarter and had a minimal impact on reported average balances.

The 7% decline in average other earning assets, which includes investment securities, reflected decisions during the 2009 first and 2008 fourth quarters to improve overall liquidity. Specifically, we sold $600 million of municipal securities near the end of the 2009 first quarter, reduced our trading account securities used to hedge MSRs in the 2008 fourth quarter, and used the proceeds to purchase new investment securities and to increase cash reserves. As a result of these and other strategic balance sheet changes, average cash and due from banks, a nonearning asset, increased $625 million. At the end of the quarter total cash and due from banks was $2.3 billion, up $1.5 billion from the end of last year.

Average total deposits increased $0.6 billion, or 2%, reflecting:

•

$0.8 billion, or 2%, growth in average total core deposits. The primary drivers of the change were 7% growth in average noninterest bearing demand deposits and 2% growth in core certificates of deposits. This growth was the result of (a) the introduction of the Huntington Conservative Deposit Account, a Bank money market account product designed as an alternative deposit option for lower yielding money market mutual funds, (b) the transfer of corporate customer non-deposit accounts to deposits, and (c) an increase in the number of our demand deposit account households.

Partially offset by:

•

3% decrease in average noncore deposits, primarily reflecting a managed decline in public fund and foreign time deposits.

Tables 5 and 6 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.