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):

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

There were 715,049,729 shares of Registrant’s common stock ($0.01 par value) outstanding on October 31, 2009.

 

 

Huntington Bancshares Incorporated

INDEX

Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2009, December 31, 2008, and September 30, 2008			99
Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2009 and 2008			100
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2009 and 2008			101
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008			102
Notes to Unaudited Condensed Consolidated Financial Statements			103
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			3
Item 3. Quantitative and Qualitative Disclosures about Market Risk			145
Item 4. Controls and Procedures			145
Item 4T. Controls and Procedures			145
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			145
Item 1A. Risk Factors			145
Item 6. Exhibits			145
Signatures			147
Exhibit 10.1
Exhibit 10.4
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

All of our loan portfolios, particularly our construction and commercial real estate (CRE) loans, may continue to be affected by the sustained economic weakness of our Midwest markets and the impact of higher unemployment rates . This may significantly adversely affect our business, financial condition, liquidity, capital, and results of operation.

As described in the “Credit Risk” discussion, credit quality performance continued to be under pressure during the first nine-month period of 2009, with nonaccrual loans and leases (NALs) and nonperforming assets (NPAs) both increasing at September 30, 2009, compared with December 31, 2008, and September 30, 2008. The allowance for credit losses (ACL) of $1,082.1 million at September 30, 2009, was 2.90% of period-end loans and leases and 50% of period-end NALs.

The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is mitigated through a combination of credit policies and processes, market risk management activities, and portfolio diversification. However, adverse changes in our borrowers’ ability to meet their financial obligations under agreed upon terms and, in some cases, to the value of the assets securing our loans to them may increase our credit risk. Our commercial portfolio, as well as our real estate-related portfolios, have continued to be negatively affected by the ongoing reduction in real estate values and reduced levels of sales and leasing activities. We regularly review the ACL for adequacy considering changes in economic conditions and trends, as well as loan collateral values. Our ACL reserving methodology uses individual loan portfolio performance factors based on an analysis of historical charge-off experience and migration patterns as part of the determination of ACL adequacy. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. There is no certainty that the ACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ACL is determined to not be adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.

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

In particular, an increase in our ACL could result in a reduction in the amount of our tangible common equity (TCE) and/or our Tier 1 common equity. Given the focus on these measurements, we may be required to raise additional capital through the issuance of common stock as a result of an increase in our ACL. The issuance of additional common stock or other actions could have a dilutive effect on the existing holders of our common stock, and adversely affect the market price of our common stock.

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

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

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

Recent legislative proposals in Congress and regulatory proposals at the Federal Reserve could impact how we assess fees on deposit accounts for items and transactions that either overdraw an account or that are returned for nonsufficient funds. These proposals are in the discussion phase and remain subject to significant modification and revision prior to becoming final, and it is uncertain what changes, if any, will be adopted. As such, we cannot predict the impact of these proposals to us, or whether they could have a material and adverse effect on our results of operations.

If the Federal Deposit Insurance Corporation (FDIC) permits the Transaction Account Guarantee Program (TAGP) to expire as scheduled on June 30, 2010, our customers may choose to reduce their deposits with us. This could reduce our retail and commercial deposits, our primary source of funding for the Bank.

We have elected to participate in the TAGP, a voluntary program provided by the FDIC as part of its Temporary Liquidity Guarantee Program (TLGP), that is currently scheduled to expire on June 30, 2010. Under the program, all noninterest bearing transaction deposit accounts are fully guaranteed by the FDIC for the entire amount in the account providing our customers with extra deposit insurance coverage. The coverage under the TAGP is in addition to and separate from the $250,000 coverage available under the FDIC’s general deposit insurance rules. If the FDIC permits the program to expire as scheduled, our customers may choose to reduce their deposits with us in an effort to maintain deposit insurance coverage. This could reduce our retail and commercial core deposits, our primary source of funding for the Bank.

At September 30, 2009, noninterest bearing transaction account balances exceeding $250,000 totaled $2.0 billion. This $2.0 billion represents the amount of noninterest bearing transaction customer deposits that would not have been FDIC insured without the additional coverage provided by the TAGP.

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

During the first nine-month period of 2009, we issued 346.8 million shares of additional common stock through two common stock public offerings, three discretionary equity issuance programs, and conversions of preferred stock into common stock. The issuance of these additional shares of common stock resulted in a 95% increase of outstanding shares of common stock at September 30, 2009, compared with December 31, 2008, and those additional shares were significantly dilutive to existing common shareholders. (See the “Capital” section located within the “Risk Management and Capital” section for additional information). As of September 30, 2009, we had 128.2 million of additional authorized common shares available for issuance, and 4.7 million of additional authorized preferred shares available for issuance.

We are not restricted from issuing additional authorized shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. We continually evaluate opportunities to access capital markets taking into account our regulatory capital ratios, financial condition, and other relevant considerations, and anticipate that, subject to market conditions, we are likely to take further capital actions. Such actions, with regulatory approval when required, may include opportunistically retiring our outstanding securities, including our subordinated debt, trust-preferred securities, and preferred shares, in open market transactions, privately negotiated transactions, or public offers for cash or common shares, as well as issuing additional shares of common stock in public or private transactions in order to increase our capital levels above our already “well-capitalized” levels, as defined by the federal bank regulatory agencies, and other regulatory capital targets. On October 22, 2009, we announced an offer to purchase certain subordinated notes issued previously by the Bank. The offer established the cash prices that we would pay for each of the subordinated note issuances, and established a maximum amount that we would purchase of $400 million of principal outstanding (see “Bank Liquidity and Other Sources of Liquidity” discussion located within the “Risk Management and Capital” section).

Both Huntington and the Bank are highly regulated, and we, as well as our regulators, continue to regularly perform a variety of capital analyses, including the preparation of stress case scenarios. As a result of those assessments, we could determine, or our regulators could require us, to raise additional capital in the future. Any such capital raise could include, among other things, the potential issuance of additional common equity to the public, the potential issuance of common equity to the government under the CAP, or the additional conversions of our existing Series B Preferred Stock to common equity. There could also be market perceptions that we need to raise additional capital, and regardless of the outcome of any stress test or other stress case analysis, such perceptions could have an adverse effect on the price of our common stock.

Furthermore, in order to improve our capital ratios above our already “well-capitalized” levels, we can decrease the amount of our risk-weighted assets, increase capital, or a combination of both. If it is determined that additional capital is required in order to improve or maintain our capital ratios, we may accomplish this through the issuance of additional common stock.

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

We are subject to ongoing tax examinations in various jurisdictions. The Internal Revenue Service and other taxing jurisdictions may propose various adjustments to our previously filed tax returns. It is possible that the ultimate resolution of such proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs.

The calculation of our provision for federal and state and local income taxes is complex and requires the use of estimates and judgments. We have two accruals for income taxes: our federal income tax receivable represents the estimated amount currently due from the federal government, net of any reserve for potential audit issues, and is reported as a component of “accrued income and other assets” and state and local tax reserves for potential audit issues are reported as a component of “other liabilities” in our consolidated balance sheet; our deferred federal and state and local income tax asset or liability represents the estimated impact of temporary differences between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities are recognized under federal and state and local tax law.

In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.

From time to time, we engage in business transactions that may have an effect on our tax liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position. However, changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial, and regulatory guidance. Such changes could affect the amount of our accrued taxes and could be material to our financial position and/or results of operations.

During the 2009 second quarter, the State of Ohio completed the audit of our 2001, 2002, and 2003 corporate franchise tax returns. During 2008, the Internal Revenue Service (IRS) completed the audit of our consolidated federal income tax returns for tax years 2004 and 2005. In addition, we are subject to ongoing tax examinations in various other state and local jurisdictions. Both the IRS and various state tax officials have proposed adjustments to our previously filed tax returns. We believe that the tax positions taken by us related to such proposed adjustments were correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. It is possible that the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. However, although no assurances can be given, we believe that the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position.

Furthermore, we still face risk relating to the Franklin Credit Management Corporation (Franklin) relationship not withstanding the restructuring announced on March 31, 2009. The Franklin restructuring resulted in a $159.9 million net deferred tax asset equal to the amount of income and equity that was included in our operating results for the 2009 first quarter. While we believe that our position regarding the deferred tax asset and related income recognition is correct, that position could be subject to challenge.

Recent Accounting Pronouncements and Developments

Note 3 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2009 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent that we believe the adoption of new accounting standards will materially affect our financial condition, results of operations, or liquidity, the impacts or potential impacts are discussed in the applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Use of Significant Estimates

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

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period.

Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed in our 2008 Form 10-K.

The following discussion provides updates of our accounting estimates related to the fair value measurements with regard to our ACL, deferred tax assets, investment securities portfolio, goodwill, Franklin loans, our commercial loan portfolio, and other real estate owned (OREO).

Total Allowances for Credit Losses (ACL)

The ACL is the sum of the ALLL and the allowance for unfunded loan commitments and letters of credit (AULC), and represents the estimate of the level of reserves appropriate to absorb inherent credit losses. The amount of the ACL was determined by judgments regarding the quality of each individual loan portfolio and loan commitments. All known relevant internal and external factors that affected loan collectibility were considered, including analysis of historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. We believe the process for determining the ACL considers all of the potential factors that could result in credit losses. However, the process includes judgmental and quantitative elements that may be subject to significant change. There is no certainty that the ACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. To the extent actual outcomes differ from our estimates, the credit quality of our customer base materially decreases, the risk profile of a market, industry, or group of customers changes materially, or if the ACL is determined to not be adequate, additional provision for credit losses could be required, which could adversely affect our business, financial condition, liquidity, capital, and results of operations in future periods.

The ACL of $1,082.1 million at September 30, 2009, was 2.90% of period-end loans and leases. To illustrate the potential effect on the financial statements of our estimates of the ACL, a 10 basis point, or 3%, increase would have required $37.0 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted the net income of the first nine-month period of 2009 by approximately $24.1 million, or $0.05 per common share. The ACL of $1,082.1 million at September 30, 2009, represented a 15% increase from $944.4 million at December 31, 2008.

Deferred Tax Assets

At September 30, 2009, we had a net deferred tax asset of $297.1 million. Based on our ability to offset approximately two-thirds of the net deferred tax asset against taxable income in prior carryback years and level of our forecast of future taxable income, there was no impairment of the deferred tax asset at September 30, 2009. All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized. However, our forecast process includes judgmental and quantitative elements that may be subject to significant change. If our forecast of taxable income within the carryback/carryforward periods available under applicable law is not sufficient to cover the amount of net deferred tax assets, such assets may be impaired.

Securities and Other-Than-Temporary Impairment (OTTI)

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

Effective with the 2009 second quarter, we adopted new guidance from the Financial Accounting Standards Board (FASB) that impacts estimates and assumptions utilized by us in determining the fair values of securities. FASB’s update to Accounting Standards Codification (ASC) 820, “Fair Value Measurements”, reaffirms the exit price fair value measurement guidance and also provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. FASB’s changes to ASC 320, “Investments — Debt and Equity Securities”, amended the other-than-temporary impairment (OTTI) guidance in GAAP for debt securities.

We recognize OTTI through earnings on those debt securities that: (a) have a fair value less than book value, and (b) we intend to sell (or we cannot assert that it is more likely than not that we will not have to sell before recovery). The amount of OTTI recognized is the difference between the fair value and book value of the securities.

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

The new guidance required an after-tax adjustment at the beginning of the 2009 second quarter of $3.5 million to increase retained earnings, with an equal and offsetting adjustment to OCI, that was recorded to reclassify noncredit related impairment to OCI for previously impaired securities. The adjustment was applicable only to noncredit OTTI relating to the debt securities that we do not have the intent to sell. Noncredit OTTI losses related to debt securities that we intend to sell (or for which we cannot assert that it is more likely than not that we will not have to sell the securities before recovery) were not reclassified.

OTTI ANALYSIS ON CERTAIN SECURITIES PORTFOLIOS

Our three highest risk segments of our investment portfolio are the Alt-A mortgage backed, pooled-trust-preferred, and private-label collateralized mortgage obligation (CMO) portfolios. The Alt-A mortgage backed securities and pooled-trust-preferred securities are located within the asset-backed securities portfolio. The performance of the underlying securities in each of these segments continued to reflect the weakened economic environment. The Alt-A and CMO securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of our pooled-trust-preferred securities portfolio are reviewed quarterly in support of our impairment analysis. These reviews are supported with analysis from independent third parties. These three segments, and the results of our impairment analysis for each segment, are discussed in further detail below:

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

We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if the securities in these portfolios were other-than-temporarily impaired. We used the analysis to determine whether we believed it is probable that all contractual cash flows would not be collected. All securities in these portfolios remained current with respect to interest and principal at September 30, 2009.

Our analysis indicated, as of September 30, 2009, a total of 8 Alt-A mortgage-backed securities and 6 private-label CMO securities could experience a loss of principal in the future. The future expected losses of principal on these other-than-temporarily impaired securities ranged from 0.06% to 83.23% of their par value. These losses were projected to occur beginning anywhere from 5 months to as many as 17 years in the future. We measured the amount of credit impairment on these securities using the cash flows discounted at each security’s effective rate. As a result, in the 2009 third quarter, we recorded $2.3 million of credit OTTI in our Alt-A mortgage-backed securities portfolio and $1.7 million of credit OTTI in our private-label CMO securities portfolio.

Pooled-trust-preferred securities represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within this portfolio as Level 3 in the fair value hierarchy. The collateral generally consisted of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis was used to estimate fair values and assess impairment for each security within this portfolio. Impairment was calculated as the difference between the carrying amount and the amount of cash flows discounted at each security’s effective rate. We engaged a third party specialist with direct industry experience in pooled-trust-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. Relying on cash flows was necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities were no longer able to provide a fair value that was compliant with ASC-820, “Fair Value Measurements and Disclosures” .

The analysis was completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in each security and terms of each security’s structure. The credit review included analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using the most recently available financial and regulatory information for each underlying collateral issuer. We also reviewed historical industry default data and current/near term operating conditions. Using the results of our analysis, we estimated appropriate default and recovery probabilities for each piece of collateral and then estimated the expected cash flows for each security. No recoveries were assumed on issuers who are in default. The recovery assumptions on issuers who are deferring interest ranged from 10% to 55% with a cure assumed after the maximum deferral period. As a result of this testing, we believe we will experience a loss of principal or interest on 11 securities; and as such, recorded credit OTTI of $14.6 million for 3 newly impaired and 8 previously impaired pooled-trust-preferred securities in the 2009 third quarter.

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

Goodwill

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

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

2009 FIRST QUARTER IMPAIRMENT TESTING

The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. For our impairment testing conducted during the 2009 first quarter, we identified four reporting units: Regional Banking, PFG, Insurance, and Auto Finance and Dealer Services (AFDS).

	•		Although Insurance is included within PFG for business segment reporting, it was evaluated as a separate reporting unit for goodwill impairment testing because it has its own separately allocated goodwill resulting from prior acquisitions. The fair value of PFG (determined using the market approach as described below), excluding Insurance, exceeded its carrying value, and goodwill was determined to not be impaired for this reporting unit.
	•		There was no goodwill associated with AFDS and, therefore, it was not subject to impairment testing.

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

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

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

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

2009 SECOND QUARTER AND 2009 THIRD QUARTER IMPAIRMENT TESTING

While we recorded an impairment charge of $4.2 million in the 2009 second quarter related to the sale of a small payments-related business completed in July 2009, we concluded that no other goodwill impairment was required during either the 2009 second quarter or the 2009 third quarter.

Subsequent to the 2009 first quarter impairment testing, we reorganized our Regional Banking segment to reflect how our assets and operations are now managed. The Regional Banking business segment, which through March 31, 2009, had been managed geographically, is now managed by a product segment approach. Essentially, Regional Banking has been divided into the new segments of Retail and Business Banking, Commercial Banking, and Commercial Real Estate.

Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future. If our market capitalization decreases or the liquidity discount on our loan portfolio improves significantly without a concurrent increase in market capitalization, we may be required to record additional goodwill impairment losses in future periods, whether in connection with our next annual impairment testing in the 2009 third quarter or prior to that, if any changes constitute a triggering event. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material. However, any such future impairment loss would be limited as the remaining goodwill balance was only $0.4 billion at September 30, 2009.

Franklin Loans Restructuring Transaction

(This section should be read in conjunction with Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements).

Franklin is a specialty consumer finance company primarily engaged in servicing performing, reperforming, and nonperforming residential mortgage loans. Prior to March 31, 2009, Franklin owned a portfolio of loans secured by first- and second-liens on 1-4 family residential properties. These loans generally fell outside the underwriting standards of the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”), and involve elevated credit risk as a result of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt, and/or past credit difficulties (“nonprime loans”). At December 31, 2008, our total loans outstanding to Franklin were $650.2 million, all of which were placed on nonaccrual status. Additionally, the specific allowance for loan and lease losses for the Franklin portfolio was $130.0 million, resulting in our net exposure to Franklin at December 31, 2008, of $520.2 million.

On March 31, 2009, we entered into a transaction with Franklin whereby a Huntington wholly-owned REIT subsidiary (REIT) indirectly acquired an 83% ownership right in a trust which holds all the underlying consumer loans and OREO properties that were formerly collateral for the Franklin commercial loans. The equity interests provided to Franklin by the REIT were pledged by Franklin as collateral for the Franklin commercial loans.

As a result of the restructuring, on a consolidated basis, the $650.2 million nonaccrual commercial loan to Franklin at December 31, 2008, is no longer reported. Instead, we now report the loans secured by first- and second- mortgages on residential properties and OREO properties both of which had previously been assets of Franklin or its subsidiaries and were pledged to secure our loan to Franklin. At the time of the restructuring, these loans had a fair value of $493.6 million and the OREO properties had a fair value of $79.6 million. As a result, NALs declined by a net amount of $284.1 million as there were $650.2 million commercial NALs outstanding related to Franklin, and $366.1 million mortgage-related NALs outstanding, representing first- and second- lien mortgages that were nonaccruing at March 31, 2009. Also, our specific allowance for loan and lease losses for the Franklin portfolio of $130.0 million was eliminated; however, no initial increase to the allowance for loan and lease losses (ALLL) relating to the acquired mortgages was recorded as these assets were recorded at fair value.

In accordance with ASC 805, “Business Combinations”, we recorded a net deferred tax asset of $159.9 million related to the difference between the tax basis and the book basis in the acquired assets. Because the acquisition price, represented by the equity interests in our wholly-owned subsidiary, was equal to the fair value of the acquired 83% ownership right, no goodwill was created from the transaction. The recording of the net deferred tax asset was a bargain purchase under Statement No. 141R, and was recorded as a tax benefit in the 2009 first quarter.

Commercial Loans

Commercial loans, including CRE loans, are evaluated periodically for impairment. Impairment guidance in ASC 310-10-35, “Receivables — Subsequent Measurement”, requires an allowance to be established as a component of the ALLL when, based upon current information and events, it is probable that all amounts due according to the contractual terms of the loan or lease will not be collected. The amount of the impairment is measured using the present value of expected future cash flows discounted at the loan’s or lease’s effective interest rate, or, as a practical expedient, the observable market price of the loan or lease, or, the fair value of the collateral if the loan or lease is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. Interest income is recognized on impaired loans using a cost recovery method unless the receipt of principal and interest as they become contractually due is not in doubt, such as in a troubled debt restructuring (TDR). TDRs of impaired loans that continue to perform under the restructured terms continue to accrue interest. This process of determining impairment includes judgmental and quantitative elements that may be subject to significant change. To the extent actual outcomes differ from our estimates, additional provision for credit losses could be required in order to increase the ALLL, which could adversely affect earnings or financial performance in future periods. At September 30, 2009, $1.4 billion, or 7%, of our $21.3 billion commercial loan portfolio was considered impaired. Additionally, at September 30, 2009, $818.6 million, or 79%, of our ALLL was allocated to our commercial loan portfolio, compared with 82% at December 31, 2008.

Other Real Estate Owned (OREO)

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

DISCUSSION OF RESULTS OF OPERATIONS

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

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

Summary

We reported a net loss of $166.2 million in the 2009 third quarter, representing a loss per common share of $0.33. This compared with the prior quarter’s net loss of $125.1 million, or $0.40 per common share. The loss per common share was impacted in both the current and prior quarters by the issuance of additional shares in both periods (see “Capital” discussion) . Comparisons with the prior quarter were also impacted by other factors that are discussed later in the “Significant Items” section (see “Significant Items” discussion).

The largest contributor to our 2009 third quarter net loss was provision for credit losses of $475.1 million, representing a $61.4 million, or 15%, increase from the prior quarter. This increase resulted from necessary reserve building due to the continued stress on our loan portfolios, especially our commercial real estate (CRE) portfolio, as well as credit actions taken by us during the current quarter that are discussed in the following two paragraphs.

During the 2009 third quarter, we continued to be proactive in our approach in identifying and classifying emerging problem credits. In many cases, commercial loans were placed on nonaccrual status even though the loan was less than 30 days past due for both principal and interest payments. This significantly impacted the inflow of commercial loan NALs for the quarter. Of the commercial loans placed on nonaccrual status in the current quarter, over 55% were less than 30 days past due. Of the period end $1,746.4 million of commercial and industrial (C&I) and CRE -related NALs, approximately 36% were less than 30 days past due. We believe these decisions increase our options for working these loans toward timelier resolutions.

Also during the current quarter, we took specific credit actions related to our residential mortgage portfolio. These actions included taking a more conservative position regarding the timing of loss recognition, continued active loss mitigation and troubled debt restructuring efforts, as well as the sale of some underperforming loans. These actions resulted in significantly higher residential mortgage charge-offs during the current quarter. The timing of loss recognition was a change made to better align our portfolio management strategies with the market dynamics in our regions. We believed that the economics surrounding the portfolio sale of the underperforming loans were favorable for us. We will continue to evaluate this type of transaction in future periods based on market conditions.

Credit quality performance in the 2009 third quarter continued to be negatively impacted by the sustained economic weaknesses in our Midwest markets. The continued trend of higher unemployment rates in our markets negatively impacted consumer loan credit quality. Net charge-offs (NCOs) totaled $355.9 million, and were partially impacted by the residential mortgage credit actions discussed previously. C&I NCOs improved substantially compared with the prior quarter; however, there continued to be concern regarding the impact of the economic conditions on our commercial borrowers. CRE NCOs declined slightly, yet that loan portfolio segment remained the most stressed portfolio. The majority of the CRE NCOs were experienced in the single family home builder and retail projects portfolios. These two portfolios continue to be our highest risk segments, and we continued to work with these borrowers in resolving challenging credit issues. NPAs also increased, primarily within the commercial loan portfolio, reflecting the impact of the weak economic conditions in our markets as well as the impact of the credit actions previously discussed. For the remainder of 2009, we expect that the overall level of NPAs and NCOs will remain elevated, especially as related to continued softness in our C&I and CRE portfolios. However, all consumer loan portfolios showed improved early stage delinquency levels compared with the prior quarter.

As we have done throughout 2009, we took additional proactive steps during the current quarter to increase our capital position as we executed total additions of $587.3 million to Tier 1 common equity. This capital raising was accomplished through a discretionary equity issuance and a common stock offering. These actions strengthened all of our period-end capital ratios. Our TCE ratio increased to 6.46% from 5.68%, and our Tier 1 common equity ratio increased to 7.82% from 6.80%. We believe that we have sufficient capital to withstand a stressed economic scenario.

Our period-end liquidity position remained strong as average core deposits grew at a 10% annualized rate, thus reducing our reliance on noncore funding. As of September 30, 2009, our total cash and due from banks totaled $1.9 billion. Also, our unpledged investment securities increased $2.2 billion from the end of the prior quarter.

Fully-taxable equivalent net interest income in the 2009 third quarter increased $15.9 million, or 5%, compared with the prior quarter. The increase reflected a 10 basis point improvement in our net interest margin. The margin improvement reflected the favorable impacts of our improved loan pricing and deposit mix, partially offset by the negative impact of maintaining a higher liquidity position and the higher levels of NPAs. We expect that the net interest margin for the 2009 fourth quarter will be flat or improve slightly from the 2009 third quarter level. We expect that average total loans will continue to decline modestly, reflecting the impacts of our efforts to reduce our CRE exposure, the weak economy, and charge-offs. As previously mentioned, average core deposits grew at an annualized 10% rate, despite the competitive market. Deposit growth continues to be a strategic priority for us. Also, on October 2, 2009, we acquired approximately $400 million of deposits from Warren Bank in an FDIC-related transaction.

Noninterest income in the 2009 third quarter declined $9.9 million compared with the 2009 second quarter. The following table reflects the impacts of “Significant Items” to noninterest income (see “Significant Items”) .

As shown in the table above, after adjusting for “Significant Items”, noninterest income increased $21.5 million. This increase primarily reflected a $22.8 million gain in the current quarter representing the change in fair value of our derivatives that did not qualify for hedge accounting. Overall, noninterest income performance was mixed for the quarter. Service charges on deposit accounts and electronic banking income showed strong increases, while mortgage banking income declined. Services charges on deposits accounts increased $5.5 million, or 7%, reflecting the growth in demand deposits, and electronic banking income increased $3.5 million, or 14%, including additional third-party processing fees. Mortgage banking income declined $9.4 million, or 30%, largely reflecting a 37% decline in loan originations. We expect that fee income will likely continue to be mixed for the remainder of 2009.

The following table reflects the impacts of “Significant Items” to noninterest expense (see “Significant Items”).

Table 2 — Noninterest Expense — Significant Items Impact — 2009 Third Quarter vs. 2009 Second Quarter

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

Table 3 — Selected Quarterly Income Statement Data ⁽¹⁾

N.M., not a meaningful value.

N.M., not a meaningful value.

Significant Items

Definition of Significant Items

From time to time, revenue, expenses, or taxes, are impacted by items we believe to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that we believe the outsized impact at that time to be one-time or short-term in nature. We refer to such items as “Significant Items”. Most often, these Significant Items result from factors originating outside the company: regulatory actions/assessments, windfall gains, changes in accounting principles, one-time tax assessments/refunds, and other similar items. In other cases they may result from our decisions associated with significant corporation actions out of the ordinary course of business: merger/restructuring charges, recapitalization actions, goodwill impairment, and other similar items.

Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule, volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains/losses from investment activities, and asset valuation write downs reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.

We believe the disclosure of “Significant Items” in current and prior period results aids in better understanding our performance and trends so readers can ascertain which of such items, if any, they may wish to include or exclude from an analysis of our performance within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly.

“Significant Items” for any particular period are not intended to be a complete list of items that may materially impact current or future period performance. A number of items could materially impact these periods, including those described in our 2008 Annual Report on Form 10-K and other factors described from time to time in our other filings with the SEC.

The above description of “Significant Items” represents a change in definition from that provided in our 2008 Annual Report. Certain components listed within the “Timing Differences” section found within the “Significant Items” section on our 2008 Annual Report are no longer considered within the scope of our definition of “Significant Items”. Although these items are subject to more volatility than other items due to changes in market and economic environment conditions, they reflect ordinary banking activities.

Significant Items Influencing Financial Performance Comparisons

			Earnings comparisons were impacted by a number of Significant Items summarized below.
	1.		Goodwill Impairment. The impacts of goodwill impairment on our reported results were as follows:

	•		During the 2009 first quarter, bank stock prices continued to decline significantly. Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash $2,602.7 million pretax ($7.09 per common share) charge. (See “Goodwill” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section for additional information).
	•		During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01 per common share) was recorded relating to the sale of a small payments-related business in July 2009.

2.

Franklin Relationship Restructuring. The impacts of the Franklin relationship on our reported results were as follows (see “Franklin Relationship” discussion located within the “Risk Management and Capital” section and the “Franklin Loans” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” discussion for additional information.) :

	•		Performance for the 2009 first quarter included a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) related to the restructuring with Franklin. Also as a result of the restructuring, although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to write-down the acquired mortgages and OREO collateral to fair value.
	•		The restructuring affects the comparability of our 2009 second quarter income statement with prior periods. In the 2009 second quarter, we recorded interest income from the loans that we now own as a result of the restructuring. Interest income was earned through interest payments on accruing loans, from the payoff of loans that were recorded at a discount, and through the accretion of the accretable discount recorded at the time the loans were acquired. Noninterest expense was also impacted as, effective with the 2009 second quarter, we pay Franklin to service the loans, and record the expense of holding foreclosed homes, including any declines in the fair value of these homes below their carrying value.

	3.		Preferred Stock Conversion. During the 2009 first and second quarters, we converted 114,109 and 92,384 shares, respectively, of Series A 8.50% Non-cumulative Perpetual Preferred (Series A Preferred Stock) stock into common stock. As part of these transactions, there was a deemed dividend that did not impact net income, but resulted in negative impacts of $0.08 per common share for the 2009 first quarter and $0.06 per common share for the 2009 second quarter. (See “Capital” discussion located within the “Risk Management and Capital” section for additional information.)
	4.		Visa ® . Prior to the Visa ® initial public offering (IPO) occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. The impacts related to the Visa ® IPO for the first nine-month periods of 2009 and 2008 are presented in the following table:

Table 6 — Visa ^® impacts — First Nine-Month Periods of 2009 and 2008

5.  Other Significant Items Influencing Earnings Performance Comparisons. In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:

2009 — Second Quarter

	•		$67.4 million pretax gain ($0.10 per common share) related to the redemption of a portion of our junior subordinated debt.
	•		$23.6 million ($0.03 per common share) negative impact due to a special FDIC insurance premium assessment.

2008 — Third Quarter

•

$21.4 million ($0.04 per common share) gain related to the extinguishment of debt.

2008 — Second Quarter

	•		$14.6 million ($0.03 per common share) of merger and restructuring costs related to the Sky Financial Group, Inc. acquisition in 2007.
	•		$2.2 million gain related to the extinguishment of debt.
	•		$1.4 million of asset impairment, included in other noninterest expense, relating to the charge-off of a receivable.

2008 — First Quarter

	•		$11.0 million ($0.02 per common share) of asset impairment, including (a) $5.9 million venture capital loss included in other noninterest income, (b) $2.6 million charge-off of a receivable included in other noninterest expense, and (c) $2.5 million write-down of leasehold improvements in our Cleveland main office included net occupancy expense.
	•		$7.3 million ($0.01 per common share) of merger and restructuring costs related to the Sky Financial Group, Inc. acquisition in 2007.

Net Interest Income / Average Balance Sheet

2009 Third Quarter versus 2008 Third Quarter

Fully-taxable equivalent net interest income decreased $27.1 million, or 7%, from the year-ago quarter. This reflected the unfavorable impact of a $2.1 billion, or 4%, decline in total average earning assets, as well as a 9 basis point decline in the net interest margin to 3.20% from 3.29%. The decline in total average earning assets reflected a $3.1 billion, or 8%, decline in average total loans and leases, partially offset by a $1.0 billion, or 16%, increase in other earning assets, primarily investment securities.

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

Table 7 — Average Loans/Leases and Deposits — 2009 Third Quarter vs. 2008 Third Quarter

The $3.1 billion, or 8%, decrease in average total loans and leases reflected:

	•		$1.6 billion, or 7%, decrease in average total commercial loans. The $0.9 billion, or 10%, decrease in average CRE loans reflected a combination of factors, including our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of charge-offs and the 2009 first quarter reclassification of CRE loans to C&I loans. The decline in average C&I loans reflected the impact of the reclassification project, offset by paydowns, automobile dealer floorplan reductions, and the Franklin restructuring and related 2008 fourth quarter and 2009 first quarter charge-offs.
	•		$1.5 billion, or 9%, decrease in average total consumer loans. This primarily reflected a $1.4 billion, or 30%, decline in average automobile loans and leases due to the 2009 first quarter securitization of $1.0 billion of automobile loans, as well as the continued runoff of the automobile lease portfolio. The $0.3 billion, or 7%, decline in average residential mortgages reflected the impact of loan sales, as well as the continued refinance of portfolio loans and the related increased sale of fixed-rate originations, partially offset by additions related to the 2009 first quarter Franklin restructuring. Average home equity loans increased 2%, due primarily to increased line usage and slower runoff experience. The increased line usage continued to be associated with higher quality borrowers taking advantage of the low interest rate environment.

The $1.0 billion, or 16%, increase in other earning assets reflected a $2.0 billion, or 42%, increase in average total investment securities as the cash proceeds from capital actions during the second and third quarters were deployed (See the “Capital / Capital Adequacy” section located within the “Risk Management and Capital” section for a full discussion) . Average trading account securities declined $0.9 billion, or 89%, from the year-ago quarter, due to the reduction in the use of trading securities to hedge mortgage servicing rights (MSRs).

Average total deposits increased $1.8 billion, or 5%, from the year-ago quarter and reflected:

•

$3.3 billion, or 10%, growth in average total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts.

Partially offset by:

•

A $1.5 billion, or 26%, decrease in average other deposits, primarily reflecting our deployment of excess liquidity in reducing noncore funding sources.

2009 Third Quarter versus 2009 Second Quarter

Compared with the 2009 second quarter, fully-taxable equivalent net interest income increased $15.9 million, or 5%. This primarily reflected a 10 basis point increase in the net interest margin to 3.20% from 3.10%, as average total earning assets were essentially unchanged. The increase in the net interest margin reflected a combination of factors including favorable impacts from strong core deposit growth and the benefit of lower deposit pricing, partially offset by the negative impact of maintaining a higher liquidity position. Average total earning assets were essentially unchanged as a $1.2 billion, or 18%, increase in other earning assets, primarily investment securities, was offset by a $1.2 billion, or 3%, decline in average total loans and leases.

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

Average total loans and leases declined $1.2 billion, or 3%, reflecting:

	•		$0.9 billion, or 4%, decline in average total commercial loans. Average C&I loans were lower based, in part on lower line utilization across the portfolio, particularly in automobile dealer floorplan loans. The lower floorplan balances were consistent with the lower level of dealer car inventories resulting from the “cash for clunkers” program and lower manufacturer production levels. We continue to expect no material credit impact from dealership closings. The planned decline in average CRE loans primarily reflected payoffs, balance reductions, and charge-offs.
	•		$0.2 billion, or 1%, decline in average total consumer loans. The decline was spread evenly across the portfolio segments. The decline in average automobile loans and leases was consistent with our expectations given market conditions along with the continued run-off of the automobile lease portfolio. Demand for home equity loans remained weak, reflecting the impact of the economic environment and depressed home values. The decline in residential mortgages reflected the impact of lower market interest rates, the related increase in fixed-rate refinancing activity, and our practice of selling virtually all of our longer-term fixed-rate production. It also reflected the more conservative position on loss recognition, active loss mitigation and troubled debt restructuring efforts, as well as the transfer to held for sale, and subsequent sale in the 2009 fourth quarter, of some underperforming loans.

The $1.2 billion, or 18%, increase in other earning assets reflected a $1.3 billion, or 25%, increase in average total investment securities as the cash proceeds from capital actions during the second and third quarters were deployed. (See the “Capital / Capital Adequacy” section located within the “Risk Management and Capital” section for a full discussion) . The increase primarily represented the purchase of agency debt with an average 2-year maturity and agency CMOs with an average 3-year maturity.

Average total deposits increased slightly from the prior quarter and reflected:

•

$0.9 billion, or 3%, growth in average total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts.

Partially offset by:

•

$0.8 billion, or 16%, decline in other deposits, reflecting our deployment of excess liquidity in reducing noncore funding sources.

Tables 9 and 10 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.