UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-34073

Huntington Bancshares Incorporated

Maryland (State or other jurisdiction of incorporation or organization)		31-0724920 (I.R.S. Employer Identification No.)

Registrant’s telephone number (614) 480-8300

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

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

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

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

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

There were 716,862,118 shares of Registrant’s common stock ($0.01 par value) outstanding on July 31, 2010.

 

 

HUNTINGTON BANCSHARES INCORPORATED
INDEX

Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2010, December 31, 2009, and June 30, 2009			86
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009			87
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2010 and 2009			88
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009			89
Notes to Unaudited Condensed Consolidated Financial Statements			90
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview			4
Discussion of Results of Operations			6
Risk Management and Capital:
Credit Risk			32
Market Risk			59
Liquidity Risk			61
Operational Risk			64
Capital Adequacy			65
Business Segment Discussion			68
Additional Disclosures			81
Item 3. Quantitative and Qualitative Disclosures about Market Risk			132
Item 4. Controls and Procedures			132
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			132
Item 1A. Risk Factors			132
Item 6. Exhibits			133
Signatures			134
Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1. FINANCIAL INFORMATION

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

Huntington Bancshares Incorporated (we or our) is a multi-state diversified regional bank holding company headquartered in Columbus, Ohio. We have more than 144 years of serving the financial needs of our customers. Through our subsidiaries, including our banking subsidiary, The Huntington National Bank (the Bank), we provide full-service commercial and consumer banking services, mortgage banking services, equipment leasing, investment management, trust services, brokerage services, customized insurance service program, and other financial products and services. Our over 600 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. We also offer retail and commercial financial services online at huntington.com; through our 24-hour telephone bank; and through our network of over 1,300 ATMs. The Auto Finance and Dealer Services (AFDS) group offers automobile loans to consumers and commercial loans to automobile dealers within our six-state banking franchise area. Selected financial service activities are also conducted in other states including: Private Financial Group (PFG) offices in Florida, Massachusetts, and New York and Mortgage Banking offices in Maryland and New Jersey. International banking services are available through the headquarters office in Columbus and a limited purpose office located in the Cayman Islands and another in Hong Kong.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. It updates the discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K), and should be read in conjunction with our 2009 Form 10-K, as well as the financial statements, notes, and other information contained in this report.

Our discussion is divided into key segments:

	•		Executive Overview - Provides a summary of our current financial performance, financial condition, and/or business condition. This section also provides our outlook regarding our performance for the remainder of the year.
	•		Discussion of Results of Operations - Reviews financial performance from a consolidated company perspective. It also includes a “Significant Items” section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.
	•		Risk Management and Capital - Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
	•		Business Segment Discussion - Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.
	•		Additional Disclosures - Provides comments on important matters including risk factors, critical accounting policies and use of significant estimates, acquisitions, and other items.

A reading of each section is important to understand fully the nature of our financial performance and prospects.

EXECUTIVE OVERVIEW

Summary of 2010 Second Quarter Results

Continuing to build upon the momentum from the prior quarter, we reported net income of $48.8 million, or $0.03 per common share, compared with $39.7 million, or $0.01 per common share, in the prior quarter (see Table 1). Pretax, pre-provision income was $270.5 million, up $18.6 million, or 7%, from the prior quarter, and primarily resulted from a $34.8 million, or 5% increase in fully-taxable equivalent revenue. Pretax, pre-provision income increased for the sixth consecutive quarter (see Table 4).

Credit quality performance in the current quarter continued to show improvement. This improvement reflected the benefits of our focused actions taken in 2009 to address credit-related issues. Compared with the prior quarter, nonperforming assets (NPAs) declined 17%, new NPAs declined 28%, and our nonaccrual loan coverage ratio improved to 120% from 87%. We also saw a decline in the level of criticized commercial loans reflecting a decrease in the level of inflows. Although net charge-offs (NCOs) increased $40.7 million, the current quarter was impacted by $80.0 million of NCOs related to our relationship with Franklin Credit Management Corporation (Franklin). Non-Franklin-related NCOs declined $27.8 million.

At the end of the current quarter, we transferred all of our Franklin-related loans to loans held-for-sale at a lower of cost or fair value of $323.4 million. This had a significant impact on the current quarter’s performance as this action resulted in $75.5 million of charge-offs, with a commensurate increase in the provision for credit losses. As the current quarter progressed, we saw renewed buyer interest in distressed debt that, among other factors, provided us a business opportunity to move the portfolio to loans held for sale. (See “Significant Items” for additional discussion).

On July 20, 2010, $274.2 million of the Franklin-related residential mortgages were sold, leaving the remaining Franklin-related portfolio balance of only $49.2 million. Going forward, we anticipate this sale will improve our overall future financial performance as we have essentially brought this relationship to a close. We have reinvested the sale proceeds in higher yielding investments and will no longer have expenses related to portfolio servicing and other support costs.

Our period-end capital position remained solid with increases in all of our capital ratios. At June 30, 2010, our regulatory Tier 1 and Total risk-based capital were $2.8 billion and $2.0 billion, respectively, above the “well-capitalized” regulatory thresholds. Our tangible common equity ratio improved 16 basis points to 6.12%. Also, our Tier 1 common risk-based capital ratio improved 53 basis points to 7.06%.

Business Overview

General

Our 2010 objectives remain the same: (a) grow revenue and profitability, (b) improve cross sell and share-of-wallet profitability across all business segments, (c) grow key fee businesses (existing and new), (d) lower NCOs and NPAs, (e) reduce commercial real estate “noncore” exposure, and (f) continue to explore opportunities to further reduce our overall risk profile.

Our main challenge to accomplishing our primary objectives results from an economy that continues to remain weak and uncertain. This impairs our ability to grow loans as customers continue to reduce their debt and/or remain cautious about increasing debt until they have a higher degree of confidence of sustainable economic recovery. One area of loan growth success, however, has been in automobile loans, a business we have been in for over 50 years. We have been able to take advantage of the fact that many competitors have decreased their automobile lending activities or exited the business entirely. We anticipate this will be an area where we will be able to continue to see good loan growth.

We face strong competition from other banks and financial service firms in our markets. As such, we have placed strong strategic emphasis on, and are continuing to develop and expand resources devoted to, improving cross-sell performance to take advantage of a loyal core customer base. To date, we have been successful as measured by our ability to expand our customer bases and successfully grow core deposits.

Legislative and Regulatory

Legislative and regulatory actions continue to be adopted that will impose additional restrictions on current business practices. Recent actions affecting us included an amendment to Regulation E and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The Federal Reserve Board recently amended Regulation E to prohibit charging overdraft fees for ATM or point-of-sale debit card transactions unless the customer opts-in to the overdraft service. For us, such fees are approximately $90 million per year. Our basic strategy is to mitigate the potential impact by alerting our customers that we can no longer cover such overdrafts unless they opt-in to our overdraft service. To date, our results have surpassed our expectations, however, until we have completed opt-in campaign, the ultimate impact to related revenue cannot be estimated.

While the recently passed Dodd-Frank Act is complex and we continue to assess how this legislation and subsequent rule-making will impact us, we currently believe there are two primary areas of focus for us: interchange fees and the eventual inability to include trust preferred capital as a component of our regulatory capital.

Currently, our annual interchange fees are approximately $90 million per year. In the future, the Dodd-Frank Act gives the Federal Reserve, and no longer the banks or system owners, the ability to set the interchange rate charged to merchants for the use of debit cards. The ultimate impact to us cannot be estimated at this time, and there will likely be months of proposals and debate before any specific rules are written.

At June 30, 2010, we had $569.9 million of outstanding trust-preferred-securities that, if disallowed, would reduce our regulatory Tier 1 risk-based capital ratio by approximately 134 basis points. However, there is a 3-year phase-in period beginning on January 1, 2013, that we believe would provide sufficient time to evaluate and address the impacts to our capital structure around this new legislation. Accordingly, we do not anticipate that this potential change would have a significant impact to our business.

Prior legislative and regulatory actions that have affected us included the Federal Deposit Insurance Corporation’s (FDIC) Transaction Account Guarantee Program (TAGP) and the U.S. Department of Treasury’s Troubled Asset Relief Program (TARP). We elected to discontinue our participation in the TAGP, effective July 1, 2010. We intend to repay our TARP capital as soon as it is prudent to do so. Additional discussion regarding TAGP and TARP is located within the “Liquidity Risk” and “Capital” sections, respectively.

2010 Outlook

Our current expectation is that the economy will remain relatively unchanged for the rest of the year. We are not expecting a double-dip recession, but we do believe it will take longer for the economy to recover than we did 90 days ago, especially if home prices continue to decline.

Pretax, pre-provision income levels for the second half of 2010 are anticipated to be consistent with second quarter reported performance. Our net interest margin for the second half of the year is expected to approximate first half performance. We anticipate modest growth in commercial and industrial (C&I) loans and continued strong automobile lending. However, commercial real estate (CRE) loans are expected to continue to contract while home equity and residential mortgages remain relatively flat. We are targeting continued strong growth in demand deposit and savings account balances. Fee income performance for the second half of the year is expected to be mixed with certain fee income activities increasing from the continued rollout of strategic initiatives, offset by lower mortgage banking income, as well as service charges due to Regulation E implementation. Expenses should also be relatively stable with increases related to growth initiatives, mostly offset by the elimination of Franklin-related loan portfolio servicing and other related costs, as well as lower overall loan portfolio monitoring expenses.

Nonperforming loans are expected to continue to decline, with NCOs and provision expense expected to be generally consistent with the current quarter’s performance, excluding any Franklin-related impacts.

DISCUSSION OF RESULTS OF OPERATIONS

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

Percent changes of 100% or more are typically shown as “N.M.” or “Not Meaningful”. Such large percent changes typically reflect the impact of unusual or particularly volatile items within the measured periods. Since the primary purpose of showing a percent change is to discern underlying performance trends, such large percent changes are typically “not meaningful” for such trend analysis purposes.

Table 1 — Selected Quarterly Income Statement Data (1)

		2010								2009
(amounts in thousands, except per share amounts)		Second				First				Fourth				Third				Second
Interest income		$	535,653			$	546,779			$	551,335			$	553,846			$	563,004
Interest expense			135,997				152,886				177,271				191,027				213,105
Net interest income			399,656				393,893				374,064				362,819				349,899
Provision for credit losses			193,406				235,008				893,991				475,136				413,707
Net interest income (loss) after provision for credit losses			206,250				158,885				(519,927	)			(112,317	)			(63,808	)
Service charges on deposit accounts			75,934				69,339				76,757				80,811				75,353
Brokerage and insurance income			36,498				35,762				32,173				33,996				32,052
Mortgage banking income			45,530				25,038				24,618				21,435				30,827
Trust services			28,399				27,765				27,275				25,832				25,722
Electronic banking			28,107				25,137				25,173				28,017				24,479
Bank owned life insurance income			14,392				16,470				14,055				13,639				14,266
Automobile operating lease income			11,842				12,303				12,671				12,795				13,116
Securities gains (losses)			156				(31	)			(2,602	)			(2,374	)			(7,340	)
Other noninterest income			28,785				29,069				34,426				41,901				57,470
Total noninterest income			269,643				240,852				244,546				256,052				265,945
Personnel costs			194,875				183,642				180,663				172,152				171,735
Outside data processing and other services			40,670				39,082				36,812				38,285				40,006
Deposit and other insurance expense			26,067				24,755				24,420				23,851				48,138
Net occupancy			25,388				29,086				26,273				25,382				24,430
OREO and foreclosure expense			4,970				11,530				18,520				38,968				26,524
Equipment			21,585				20,624				20,454				20,967				21,286
Professional services			24,388				22,697				25,146				18,108				16,658
Amortization of intangibles			15,141				15,146				17,060				16,995				17,117
Automobile operating lease expense			9,667				10,066				10,440				10,589				11,400
Marketing			17,682				11,153				9,074				8,259				7,491
Telecommunications			6,205				6,171				6,099				5,902				6,088
Printing and supplies			3,893				3,673				3,807				3,950				4,151
Goodwill impairment			—				—				—				—				4,231
Gain on early extinguishment of debt(2)			—				—				(73,615	)			(60	)			(73,038	)
Other noninterest expense			23,279				20,468				17,443				17,749				13,765
Total noninterest expense			413,810				398,093				322,596				401,097				339,982
Income (loss) before income taxes			62,083				1,644				(597,977	)			(257,362	)			(137,845	)
Provision (benefit) for income taxes			13,319				(38,093	)			(228,290	)			(91,172	)			(12,750	)
Net income (loss)		$	48,764			$	39,737			$	(369,687	)		$	(166,190	)		$	(125,095	)
Dividends on preferred shares			29,426				29,357				29,289				29,223				57,451
Net income (loss) applicable to common shares		$	19,338			$	10,380			$	(398,976	)		$	(195,413	)		$	(182,546	)
Average common shares — basic			716,580				716,320				715,336				589,708				459,246
Average common shares — diluted(3)			719,387				718,593				715,336				589,708				459,246
Net income (loss) per common share — basic		$	0.03			$	0.01			$	(0.56	)		$	(0.33	)		$	(0.40	)
Net income (loss) per common share — diluted			0.03				0.01				(0.56	)			(0.33	)			(0.40	)
Cash dividends declared per common share			0.01				0.01				0.01				0.01				0.01
Return on average total assets			0.38	%			0.31	%			(2.80	)%			(1.28	)%			(0.97	)%
Return on average total shareholders’ equity			3.6				3.0				(25.6	)			(12.5	)			(10.2	)
Return on average tangible shareholders’ equity(4)			4.9				4.2				(27.9	)			(13.3	)			(10.3	)
Net interest margin(5)			3.46				3.47				3.19				3.20				3.10
Efficiency ratio(6)			59.4				60.1				49.0				61.4				51.0
Effective tax rate (benefit)			21.5				N.M.				(38.2	)			(35.4	)			(9.2	)
Revenue — fully-taxable equivalent (FTE)
Net interest income		$	399,656			$	393,893			$	374,064			$	362,819			$	349,899
FTE adjustment			2,490				2,248				2,497				4,177				1,216
Net interest income(5)			402,146				396,141				376,561				366,996				351,115
Noninterest income			269,643				240,852				244,546				256,052				265,945
Total revenue(5)		$	671,789			$	636,993			$	621,107			$	623,048			$	617,060

Table 2 — Selected Year to Date Income Statement Data⁽¹⁾

		Six Months Ended June 30,								Change
(in thousands, except per share amounts)		2010				2009				Amount				Percent
Interest income		$	1,082,432			$	1,132,961			$	(50,529	)			(4	)%
Interest expense			288,883				445,557				(156,674	)			(35	)
Net interest income			793,549				687,404				106,145				15
Provision for credit losses			428,414				705,544				(277,130	)			(39	)
Net interest income (loss) after provision for credit losses			365,135				(18,140	)			383,275				N.M.
Service charges on deposit accounts			145,273				145,231				42				—
Brokerage and insurance income			72,260				72,000				260				—
Mortgage banking income			70,568				66,245				4,323				7
Trust services			56,164				50,532				5,632				11
Electronic banking			53,244				46,961				6,283				13
Bank owned life insurance income			30,862				27,178				3,684				14
Automobile operating lease expense			24,145				26,344				(2,199	)			(8	)
Securities gains (losses)			125				(5,273	)			5,398				N.M.
Other income			57,854				75,829				(17,975	)			(24	)
Total noninterest income			510,495				505,047				5,448				1
Personnel costs			378,517				347,667				30,850				9
Outside data processing and other services			79,752				72,998				6,754				9
Deposit and other insurance expense			50,822				65,559				(14,737	)			(22	)
Net occupancy			54,474				53,618				856				2
OREO and foreclosure expense			16,500				36,411				(19,911	)			(55	)
Equipment			42,209				41,696				513				1
Professional services			47,085				33,112				13,973				42
Amortization of intangibles			30,287				34,252				(3,965	)			(12	)
Automobile operating lease expense			19,733				22,331				(2,598	)			(12	)
Marketing			28,835				15,716				13,119				83
Telecommunications			12,376				11,978				398				3
Printing and supplies			7,566				7,723				(157	)			(2	)
Goodwill impairment			—				2,606,944				(2,606,944	)			N.M.
Gain on early extinguishment of debt(2)			—				(73,767	)			73,767				N.M.
Other expense			43,747				33,513				10,234				31
Total noninterest expense			811,903				3,309,751				(2,497,848	)			(75	)
Income (loss) before income taxes			63,727				(2,822,844	)			2,886,571				N.M.
Benefit for income taxes			(24,774	)			(264,542	)			239,768				(91	)
Net income (loss)		$	88,501			$	(2,558,302	)		$	2,646,803				N.M.	%
Dividends declared on preferred shares			58,783				116,244				(57,461	)			(49	)
Net income (loss) applicable to common shares		$	29,718			$	(2,674,546	)		$	2,704,264				N.M.	%
Average common shares — basic			716,450				413,083				303,367				73	%
Average common shares — diluted(3)			718,990				413,083				305,907				74
Per common share
Net income per common share — basic		$	0.04			$	(6.47	)		$	6.52				N.M.	%
Net income (loss) per common share — diluted			0.04				(6.47	)			6.52				N.M.
Cash dividends declared			0.0200				0.0200				—				—
Return on average total assets			0.35	%			(9.77	)%			10.12	%			N.M.	%
Return on average total shareholders’ equity			3.3				(85.0	)			88.3				N.M.
Return on average tangible shareholders’ equity(4)			4.6				3.5				1.1				31
Net interest margin(5)			3.47				3.03				0.44				15
Efficiency ratio(6)			59.7				55.6				4.1				7
Effective tax rate (benefit)			(38.9	)			(9.4	)			(29.5	)			N.M.
Revenue — fully taxable equivalent (FTE)
Net interest income		$	793,549			$	687,404			$	106,145				15	%
FTE adjustment			4,738				4,798				(60	)			(1	)
Net interest income			798,287				692,202				106,085				15
Noninterest income			510,495				505,047				5,448				1
Total revenue		$	1,308,782			$	1,197,249			$	111,533				9	%

Significant Items

Definition of Significant Items

From time-to-time, revenue, expenses, or taxes, are impacted by items judged by us to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature, or otherwise make period-to-period comparisons less meaningful. We refer to such items as “Significant Items”. Most often, these “Significant Items” result from factors originating outside the company; e.g., regulatory actions/assessments, windfall gains, changes in accounting principles, one-time tax assessments/refunds, etc. In other cases they may result from our decisions associated with significant corporate actions out of the ordinary course of business; e.g., merger/restructuring charges, recapitalization actions, goodwill impairment, etc.

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

We believe the disclosure of “Significant Items” in current and prior period results aids in better understanding our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing “Significant Items” in our external disclosure documents (e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K).

“Significant Items” for any particular period are not intended to be a complete list of items that may materially impact current or future period performance. A number of items could materially impact these periods, including those described in our 2009 Annual Report on Form 10-K and other factors described from time-to-time in our other filings with the Securities and Exchange Commission.

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by a number of “Significant Items” summarized below.

1.

Goodwill Impairment. The impacts of goodwill impairment on our reported results were as follows:

	•		During the 2009 first quarter, bank stock prices continued to decline significantly. Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash $2,602.7 million ($7.09 per common share) pretax charge to noninterest expense.
	•		During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01 per common share) was recorded to noninterest expense relating to the sale of a small payments-related business.

2.

Franklin Relationship. Our relationship with Franklin was acquired in the Sky Financial Group, Inc. (Sky Financial) acquisition in 2007. Significant events relating to this relationship following the acquisition, and the impacts of those events on our reported results, were as follows:

	•		On March 31, 2009, we restructured our relationship with Franklin. As a result of this restructuring, a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) was recorded in the 2009 first quarter. Also, and although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific allowance for loan and lease losses (ALLL) was utilized to writedown the acquired mortgages and other real estate owned (OREO) collateral to fair value.
	•		During the 2010 first quarter, a $38.2 million ($0.05 per common share) net tax benefit was recognized, primarily reflecting the increase in the net deferred tax asset relating to the assets acquired from the March 31, 2009, restructuring.
	•		During the 2010 second quarter, the remaining portfolio of Franklin-related loans ($333.0 million of residential mortgages, and $64.7 million of home equity loans) was transferred to loans held for sale. At the time of the transfer, the loans were marked to the lower of cost or fair value, less costs to sell, of $323.4 million, resulting in $75.5 million of charge-offs, and the provision for credit losses commensurately increased $75.5 million ($0.07 per common share).
	•		On July 20, 2010, $274.2 million of the $275.2 million of residential mortgages were sold.

	3.		Early Extinguishment of Debt. The positive impacts relating to the early extinguishment of debt on our reported results were: $73.6 million ($0.07 per common share) in the 2009 fourth quarter and $67.4 million ($0.10 per common share) in the 2009 second quarter. These amounts were recorded to noninterest expense.
	4.		Preferred Stock Conversion. During the 2009 first and second quarters, we converted 114,109 and 92,384 shares, respectively, of Series A 8.50% Non-cumulative Perpetual Preferred (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 a negative impact of $0.08 per common share for the 2009 first quarter and $0.06 per common share for the 2009 second quarter.
	5.		Visa®. Prior to the Visa® initial public offering (IPO) occurring in March 2008, Visa® was owned by its member banks, which included the Bank. As a result of this ownership, we received shares of Visa® stock at the time of the IPO. In the 2009 second quarter, we sold these Visa® stock shares, resulting in a $31.4 million pretax gain ($0.04 per common share). This amount was recorded to noninterest income.
	6.		Other Significant Items Influencing Earnings Performance Comparisons. In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:

2009 — Fourth Quarter

•

$11.3 million ($0.02 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance.

2009 — Second Quarter

	•		$23.6 million ($0.03 per common share) negative impact due to a special Federal Deposit Insurance Corporation (FDIC) insurance premium assessment. This amount was recorded to noninterest expense.
	•		$2.4 million ($0.01 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance.

The following table reflects the earnings impact of the above-mentioned significant items for periods affected by this Results of Operations discussion:

Table 3 — Significant Items Influencing Earnings Performance Comparison

		Three Months Ended
		June 30, 2010								March 31, 2010								June 30, 2009
(dollar amounts in thousands, except per share amounts)		After-tax				EPS				After-tax				EPS				After-tax				EPS
Net income (loss) — GAAP		$	48,764							$	39,737							$	(125,095	)
Earnings per share, after-tax						$	0.03							$	0.01							$	(0.40	)(3)
Change from prior quarter — $							0.02								0.57								6.39
Change from prior quarter — %							N.M.	%							N.M.	%							(94.1)	%
Change from year-ago — $						$	0.43							$	6.80							$	(0.65	)
Change from year-ago — %							N.M.	%							N.M.	%							N.M.	%

Significant items - favorable (unfavorable) impact:		Earnings (1)				EPS				Earnings (1)				EPS				Earnings (1)				EPS
Franklin-related loans transferred to held for sale		$	(75,500	)		$	(0.07	)		$	—			$	—			$	—			$	—
Net tax benefit recognized (2)			—				—				38,222				0.05				—				—
Net gain on early extinguishment of debt			—				—				—				—				67,409				0.10
Gain related to sale of Visa® stock			—				—				—				—				31,362				0.04
Deferred tax valuation allowance benefit (2)			—				—				—				—				2,388				0.01
Goodwill impairment			—				—				—				—				(4,231	)			(0.01	)
FDIC special assessment			—				—				—				—				(23,555	)			(0.03	)
Preferred stock conversion deemed dividend			—				—				—				—				—				(0.06	)

		Six Months Ended
		June 30, 2010								June 30, 2009
(in thousands)		After-tax				EPS				After-tax				EPS
Net income (loss) — reported earnings		$	88.5							$	(2,558,302	)
Earnings per share, after tax						$	0.04							$	(6.47	)(3)
Change from a year-ago — $							6.51								(7.06	)
Change from a year-ago — %							N.M.	%							N.M.	%

Significant items - favorable (unfavorable) impact:		Earnings (1)				EPS				Earnings (1)				EPS
Franklin-related loans transferred to held for sale		$	(75,500	)		$	(0.07	)		$	—			$	—
Net tax benefit recognized (2)			38,222				0.05				—				—
Franklin relationship restructuring (2)			—				—				159,895				0.39
Gain on redemption of junior subordinated debt			—				—				67,409				0.11
Gain related to Visa® stock			—				—				31,362				0.05
Deferred tax valuation allowance benefit (2)			—				—				3,711				0.01
Goodwill impairment			—				—				(2,606,944	)			(6.30	)
FDIC special assessment			—				—				(23,555	)			(0.04	)
Preferred stock conversion deemed dividend			—				—				—				(0.14	)

Pretax, Pre-provision Income Trends

One non-GAAP performance measurement that we believe is useful in analyzing underlying performance trends is pretax, pre-provision income. This is the level of earnings adjusted to exclude the impact of: (a) provision expense, which is excluded because its absolute level is elevated and volatile, (b) investment securities gains/losses, which are excluded because securities market valuations may also become particularly volatile in times of economic stress, (c) amortization of intangibles expense, which is excluded because the return on tangible common equity is a key measurement that we use to gauge performance trends, and (d) certain other items identified by us (see “Significant Items”) that we believe may distort our underlying performance trends.

The following table reflects pretax, pre-provision income for the each of the past five quarters:

Table 4 — Pretax, Pre-provision Income (1)

		2010								2009
(dollar amounts in thousands)		Second				First				Fourth				Third				Second
Income (loss) before income taxes		$	62,083			$	1,644			$	(597,977	)		$	(257,362	)		$	(137,845	)
Add: Provision for credit losses			193,406				235,008				893,991				475,136				413,707
Less: Securities (losses) gains			156				(31	)			(2,602	)			(2,374	)			(7,340	)
Add: Amortization of intangibles			15,141				15,146				17,060				16,995				17,117
Less: Significant Items
Gain on early extinguishment of debt (2)			—				—				73,615				—				67,409
Goodwill impairment			—				—				—				—				(4,231	)
Gain related to Visa stock			—				—				—				—				31,362
FDIC special assessment			—				—				—				—				(23,555	)
Total pretax, pre-provision income		$	270,474			$	251,829			$	242,061			$	237,143			$	229,334
Change in total pretax, pre-provision income:
Prior quarter change — amount		$	18,645			$	9,768			$	4,918			$	7,809			$	4,715
Prior quarter change — percent			7	%			4	%			2	%			3	%			2	%

As shown in the table above, pretax, pre-provision income was $270.5 million in the 2010 second quarter, up 7% from the prior quarter. As discussed in the sections that follow, the improvement from the prior quarter reflected higher revenue, primarily noninterest income and, to a lesser degree, net interest income. These improvements were partially offset by higher noninterest expense.

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

2010 Second Quarter versus 2009 Second Quarter

Fully-taxable equivalent net interest income increased $51.0 million, or 15%, from the year-ago quarter. This reflected the favorable impact of the significant increase in the net interest margin to 3.46% from 3.10%, as well as a 2% increase in average total earning assets. A significant portion of the increase in the net interest margin reflected a shift in our deposit mix from higher-cost time deposits to lower-cost transaction-based accounts. The increase in average earning assets reflected a $3.5 billion, or 65%, increase in average total investment securities, partially offset by a $1.9 billion, or 5%, decline in average total loans and leases.

The following table details the change in our reported loans and deposits:

Table 5 — Average Loans/Leases and Deposits — 2010 Second Quarter vs. 2009 Second Quarter

		Second Quarter								Change
(dollar amounts in millions)		2010				2009				Amount				Percent
Loans/Leases
Commercial and industrial		$	12,244			$	13,523			$	(1,279	)			(9	)%
Commercial real estate			7,364				9,199				(1,835	)			(20	)
Total commercial			19,608				22,722				(3,114	)			(14	)
Automobile loans and leases			4,634				3,290				1,344				41
Home equity			7,544				7,640				(96	)			(1	)
Residential mortgage			4,608				4,657				(49	)			(1	)
Other consumer			695				698				(3	)			—
Total consumer			17,481				16,285				1,196				7
Total loans and leases		$	37,089			$	39,007			$	(1,918	)			(5	)%
Deposits
Demand deposits — noninterest-bearing		$	6,849			$	6,021			$	828				14	%
Demand deposits — interest-bearing			5,971				4,547				1,424				31
Money market deposits			11,103				6,355				4,748				75
Savings and other domestic time deposits			4,677				5,031				(354	)			(7	)
Core certificates of deposit			9,199				12,501				(3,302	)			(26	)
Total core deposits			37,799				34,455				3,344				10
Other deposits			2,568				5,079				(2,511	)			(49	)
Total deposits		$	40,367			$	39,534			$	833				2	%

The $1.9 billion, or 5%, decrease in average total loans and leases primarily reflected:

•

$3.1 billion, or 14%, decrease in average total commercial loans. A $1.3 billion, or 9%, decline in average C&I loans reflected a general decrease in borrowing as reflected in a decline in line-of-credit utilization, including reductions in our automobile dealer floorplan exposure, charge-off activity, and the reclassification in the 2010 first quarter of variable rate demand notes to municipal securities. These negatives were partially offset by the impact of the 2009 reclassifications of certain CRE loans, primarily representing owner-occupied properties, to C&I loans. The $1.8 billion, or 20%, decrease in average CRE loans reflected these reclassifications, as well as our on-going commitment to lower our overall CRE exposure. We continue to execute our plan to reduce our CRE exposure while maintaining a commitment to our core CRE borrowers. The decrease in average balances is associated with the noncore portfolio, as our core portfolio average balances were little changed during the current period.

Partially offset by:

•

$1.2 billion, or 7%, increase in average total consumer loans. This growth reflected a $1.3 billion, or 41%, increase in average automobile loans and leases primarily as a result of the adoption of a new accounting standard in which, on January 1, 2010, we consolidated a 2009 first quarter $1.0 billion automobile loan securitization. At June 30, 2010, these formerly securitized loans had a remaining balance of $0.7 billion (see Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). In addition, underlying growth in automobile loans continued to be strong, reflecting a 139% increase in loan originations for the first six months of 2010 from the comparable year-ago period. The growth has come while maintaining our commitment to excellent credit quality and an appropriate return. Average home equity loans were little changed as lower origination volume was offset by slower runoff experience and slightly higher line-of-credit utilization. Increased line usage continued to be associated with higher quality customers taking advantage of the low interest rate environment. Average residential mortgages were essentially unchanged, reflecting the impact of the continued refinance of portfolio loans and the related increased sale of fixed-rate originations. The transfer of the Franklin-related loans into held for sale occurred at the end of the quarter and had no impact on related average residential mortgages or home equity loans (see Significant Item 2).

The $3.5 billion, or 65%, increase in average total investment securities reflected the deployment of the cash from core deposit growth and loan runoff over this period, as well as the proceeds from 2009 capital actions.

The $0.8 billion, or 2%, increase in average total deposits reflected:

•

$3.3 billion, or 10%, growth in average total core deposits, primarily reflecting our focus on growing money market and demand deposit accounts.

Partially offset by:

•

$2.2 billion, or 60%, decline in brokered deposits and negotiable CDs and a $0.2 billion, or 25%, decrease in average other domestic deposits over $250,000, primarily reflecting a reduction of noncore funding sources.

2010 Second Quarter versus 2010 First Quarter

Compared with the 2010 first quarter, fully-taxable equivalent net interest income increased $6.0 million, or 2%. This reflected a 1% increase in average earning assets as the fully-taxable equivalent net interest margin declined slightly to 3.46% from 3.47%. The increase in average earning assets primarily reflected a $0.3 billion, or 3%, increase in average investment securities, as average total loans and leases were up $0.1 billion, or less than 1%.

The net interest margin declined 1 basis point. Favorable trends in the mix and pricing of deposits were offset by lower yields on Franklin-related loans, a lower contribution from asset/liability management strategies implemented in the first and second quarters of 2010, and one additional calendar day in the 2010 second quarter.

The following table details the change in our reported loans and deposits:

Table 6 — Average Loans/Leases and Deposits — 2010 Second Quarter vs. 2010 First Quarter

		2010								Change
(dollar amounts in millions)		Second Quarter				First Quarter				Amount				Percent
Loans/Leases
Commercial and industrial		$	12,244			$	12,314			$	(70	)			(1	)%
Commercial real estate			7,364				7,677				(313	)			(4	)
Total commercial			19,608				19,991				(383	)			(2	)
Automobile loans and leases			4,634				4,250				384				9
Home equity			7,544				7,539				5				—
Residential mortgage			4,608				4,477				131				3
Other consumer			695				723				(28	)			(4	)
Total consumer			17,481				16,989				492				3
Total loans and leases		$	37,089			$	36,980			$	109				—	%
Deposits
Demand deposits — noninterest-bearing		$	6,849			$	6,627			$	222				3	%
Demand deposits — interest-bearing			5,971				5,716				255				4
Money market deposits			11,103				10,340				763				7
Savings and other domestic time deposits			4,677				4,613				64				1
Core certificates of deposit			9,199				9,976				(777	)			(8	)
Total core deposits			37,799				37,272				527				1
Other deposits			2,568				2,951				(383	)			(13	)
Total deposits		$	40,367			$	40,223			$	144				—	%

The $0.1 billion increase in average total loans and leases primarily reflected:

•

$0.4 billion, or 2%, decline in average total commercial loans as average C&I loans declined $0.1 billion, or 1%, and average CRE declined $0.3 billion, or 4%. C&I loans declined as underlying growth was more than offset by a combination of continued lower line-of-credit utilization and paydowns on term debt. The economic environment continued to cause many customers to actively reduce their leverage position. Our line-of-credit utilization percentage was 43%, consistent with that of the prior quarter. We continue to believe that we have opportunities to expand our customer base within our markets and are focused on expanding our C&I sales pipeline. The decline in average CRE loans primarily resulted from the continuing paydowns and charge-off activity associated with our noncore CRE portfolio. Paydowns of $124.5 million were a result of our portfolio management and loan workout strategies, augmented by some early stage improvements in the markets. The portion of the CRE portfolio designated as core continued to perform as expected with average balances little changed from the prior quarter.

Partially offset by:

•

$0.5 billion, or 3%, increase in total average consumer loans, primarily reflecting a $0.4 billion, or 9%, increase in average automobile loans and leases. This growth reflected record production of $943.6 million in the quarter. We continue to maintain high credit quality standards on this production while achieving an appropriate return. We have a high degree of confidence in our ability to originate quality automobile loans through our established dealer network, and as a natural extension of our Western Pennsylvania area operations, we have established a presence in the eastern portion of the state. Average residential mortgages increased $0.1 billion, or 3%, and average home equity loans were essentially unchanged from the prior quarter. The transfer of the Franklin-related loans into held for sale occurred at the end of the quarter and had no impact on related average residential mortgages or home equity loans (see Significant Item 2).

The $0.3 billion, or 3%, increase in average total investment securities reflected the reinvestment of excess cash.

Average total deposits increased $0.1 billion from the prior quarter reflecting:

•

$0.5 billion, or 1%, growth in average total core deposits, primarily reflecting our focus on growing money market and demand deposit accounts.

Partially offset by:

•

$0.3 billion, or 18%, decline in brokered deposits and negotiable CDs, reflecting maturities.

Tables 7 and 8 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

Table 7 — Consolidated Quarterly Average Balance Sheets

		Average Balances																				Change
		2010								2009												2Q10 vs. 2Q09
(dollar amounts in millions)		Second				First				Fourth				Third				Second				Amount				Percent
Assets
Interest-bearing deposits in banks		$	309			$	348			$	329			$	393			$	369			$	(60	)			(16	)%
Trading account securities			127				96				110				107				88				39				44
Federal funds sold and securities purchased under resale agreement			—				—				15				7				—				—				—
Loans held for sale			323				346				470				524				709				(386	)			(54	)
Investment securities:
Taxable			8,367				8,025				8,695				6,510				5,181				3,186				61
Tax-exempt			391				445				139				129				126				265				N.M.
Total investment securities			8,758				8,470				8,834				6,639				5,307				3,451				65
Loans and leases: (1)
Commercial:
Commercial and industrial			12,244				12,314				12,570				12,922				13,523				(1,279	)			(9	)
Construction			1,279				1,409				1,651				1,808				1,946				(667	)			(34	)
Commercial			6,085				6,268				6,807				7,071				7,253				(1,168	)			(16	)
Commercial real estate			7,364				7,677				8,458				8,879				9,199				(1,835	)			(20	)
Total commercial			19,608				19,991				21,028				21,801				22,722				(3,114	)			(14	)
Consumer:
Automobile loans			4,472				4,031				3,050				2,886				2,867				1,605				56
Automobile leases			162				219				276				344				423				(261	)			(62	)
Automobile loans and leases			4,634				4,250				3,326				3,230				3,290				1,344				41
Home equity			7,544				7,539				7,561				7,581				7,640				(96	)			(1	)
Residential mortgage			4,608				4,477				4,417				4,487				4,657				(49	)			(1	)
Other loans			695				723				757				756				698				(3	)			—
Total consumer			17,481				16,989				16,061				16,054				16,285				1,196				7
Total loans and leases			37,089				36,980				37,089				37,855				39,007				(1,918	)			(5	)
Allowance for loan and lease losses			(1,506	)			(1,510	)			(1,029	)			(950	)			(930	)			(576	)			62
Net loans and leases			35,583				35,470				36,060				36,905				38,077				(2,494	)			(7	)
Total earning assets			46,606				46,240				46,847				45,525				45,480				1,126				2
Cash and due from banks			1,509				1,761				1,947				2,553				2,466				(957	)			(39	)
Intangible assets			710				725				737				755				780				(70	)			(9	)
All other assets			4,384				4,486				3,956				3,797				3,701				683				18
Total assets		$	51,703			$	51,702			$	52,458			$	51,680			$	51,497			$	206				—	%
Liabilities and Shareholders’ Equity
Deposits:
Demand deposits — noninterest-bearing		$	6,849			$	6,627			$	6,466			$	6,186			$	6,021			$	828				14	%
Demand deposits — interest-bearing			5,971				5,716				5,482				5,140				4,547				1,424				31
Money market deposits			11,103				10,340				9,271				7,601				6,355				4,748				75
Savings and other domestic time deposits			4,677				4,613				4,686				4,771				5,031				(354	)			(7	)
Core certificates of deposit			9,199				9,976				10,867				11,646				12,501				(3,302	)			(26	)
Total core deposits			37,799				37,272				36,772				35,344				34,455				3,344				10
Other domestic time deposits of $250,000 or more			661				698				667				747				886				(225	)			(25	)
Brokered time deposits and negotiable CDs			1,505				1,843				2,353				3,058				3,740				(2,235	)			(60	)
Deposits in foreign offices			402				410				422				444				453				(51	)			(11	)
Total deposits			40,367				40,223				40,214				39,593				39,534				833				2
Short-term borrowings			966				927				879				879				879				87				10
Federal Home Loan Bank advances			212				179				681				924				947				(735	)			(78	)
Subordinated notes and other long-term debt			3,836				4,062				3,908				4,136				4,640				(804	)			(17	)
Total interest-bearing liabilities			38,532				38,764				39,216				39,346				39,979				(1,447	)			(4	)
All other liabilities			924				947				1,042				863				569				355				62
Shareholders’ equity			5,398				5,364				5,734				5,285				4,928				470				10
Total liabilities and shareholders’ equity		$	51,703			$	51,702			$	52,458			$	51,680			$	51,497			$	206				—	%