UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

QUARTERLY PERIOD ENDED September 30, 2010

Huntington Bancshares Incorporated

Maryland		31-0724920
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

There were 717,132,197 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2010.

 

 

HUNTINGTON BANCSHARES INCORPORATED
INDEX

Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2010, December 31, 2009, and September 30, 2009			85
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009			86
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2010 and 2009			87
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009			88
Notes to Unaudited Condensed Consolidated Financial Statements			89
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			3
Executive Overview			4
Discussion of Results of Operations			6
Risk Management and Capital:
Credit Risk			32
Market Risk			58
Liquidity Risk			60
Operational Risk			63
Capital Adequacy			64
Business Segment Discussion			67
Additional Disclosures			80
Item 3. Quantitative and Qualitative Disclosures about Market Risk			129
Item 4. Controls and Procedures			129
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			129
Item 1A. Risk Factors			129
Item 6. Exhibits			130
Signatures			131
Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1. FINANCIAL INFORMATION

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

INTRODUCTION

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

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

Our discussion is divided into key segments:

•

Executive Overview — Provides a summary of our current financial performance, financial condition, and/or business condition. This section also provides our outlook regarding our performance for the remainder of the year.

•

Discussion of Results of Operations - Reviews financial performance from a consolidated company perspective. It also includes a “Significant Items” section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.

•

Risk Management and Capital - Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.

•

Business Segment Discussion - Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.

•

Additional Disclosures - Provides comments on important matters including risk factors, critical accounting policies and use of significant estimates, acquisitions, and other items.

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

EXECUTIVE OVERVIEW

Summary of 2010 Third Quarter Results

For the quarter, we reported net income of $100.9 million, or $0.10 per common share, compared with $48.8 million, or $0.03 per common share, in the prior quarter (see Table 1). Total revenue for the 2010 third quarter was $679.7 million, up 1% from the prior quarter driven by a $10.4 million, or 3%, increase in fully-taxable equivalent net interest income. However, noninterest expense increased $13.5 million, or 3%, from the prior quarter resulting primarily from continued implementation of our strategic initiatives via investments in people, product expansion, and distribution designed to grow revenues and improve long-term profitability.

Credit quality performance in the current quarter continued to show improvement as nonperforming assets (NPAs) and net charge-offs (NCOs) declined and reserve coverage increased. This improvement reflected the benefits of our focused actions taken in 2009 to address credit-related issues. Compared with the prior quarter, NPAs declined 30%. NCOs were $184.5 million, or an annualized 1.98% of average total loans and leases, down from $279.2 million, or 3.01%, in the 2010 second quarter. While the period end allowance for credit losses (ACL) as a percentage of loans and leases was 3.67%, down from 3.90% at June 30, 2010, the ACL as a percentage of total nonaccrual loans (NALs) increased to 140% from 120%.

At the end of the prior quarter, we transferred all remaining Franklin-related loans to loans held-for-sale at a lower of cost or fair value of $323.4 million which resulted in 2010 second quarter NCOs of $75.5 million. During the current quarter, the remaining Franklin-related loans were sold at essentially book value. As a result, the only Franklin-related assets remaining at September 30, 2010 were $15.3 million of other-real-estate-owned (OREO) properties, which have been written down to the lower of cost or fair value less cost to sell.

Our period-end capital position remained solid with increases in all of our capital ratios. At September 30, 2010, our regulatory Tier 1 and Total risk-based capital were $2.9 billion and $2.2 billion, respectively, above the “well-capitalized” regulatory thresholds. Our tangible common equity ratio improved 8 basis points to 6.20% and our Tier 1 common risk-based capital ratio improved 33 basis points to 7.39% from June 30, 2010.

Business Overview

General

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

Our main challenge to accomplishing our primary objectives results from an economy that remains weak and uncertain. This impairs our ability to grow loans as customers continue to reduce their debt and/or remain cautious about increasing debt until they have a higher degree of confidence in sustainable economic recovery. However, growth in our automobile loan portfolio continued with 2010 third quarter originations of over $1.0 billion. Additionally, we were able to generate modest growth in commercial and industrial (C&I) loans during the quarter.

We face strong competition from other banks and financial service firms in our markets. As such, we have placed strong strategic emphasis on, and continue to develop and expand resources devoted to improving cross-sell performance to take advantage of our loyal core customer base. One example of this emphasis is our recent agreement with Giant Eagle supermarkets to be its exclusive in-store bank in Ohio. When fully implemented, the partnership will give us nearly 500 branches in Ohio, providing us with the largest branch presence among Ohio banks, based on current data. In-store branches have a strong record for checking account acquisition that are expected to increase the number of our households and subsequently drive revenue. Additionally, it will give customers the convenience of seven days per week, and extended hours banking.

Legislative and Regulatory

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

Effective July 1, 2010, the Federal Reserve Board amended Regulation E to prohibit charging overdraft fees for ATM or point-of-sale debit card transactions unless the customer opts-in to the overdraft service. For us, such fees were approximately $90 million per year prior to the amendment. Our strategy is to mitigate the potential impact by alerting our customers we can no longer cover such overdrafts unless they opt-in to our overdraft service. To date, our opt-in results have surpassed our expectations. Also, during the quarter, we voluntarily reduced certain nonsufficient funds and overdraft fees (NSF/OD) and introduced 24-Hour Grace™ on overdrafts as part of our “Fair Play” banking philosophy designed to build on our foundation on service excellence by doing what is right and fair for customers. We will accelerate acquisition of new checking households, while improving retention of existing customers.

The recently passed Dodd-Frank Act is complex and we continue to assess how this legislation and subsequent rule-making will affect us. As hundreds of regulations are promulgated, we will continue to evaluate impacts such as changes in regulatory costs and fees, modifications to consumer products or disclosures required by the Consumer Finance Protection Bureau, the requirements of the enhanced supervision provisions, among others. Two areas where we are focusing on the financial impact are: interchange fees and the eventual inability to include trust preferred capital as a component of our Tier 1 regulatory capital.

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

At September 30, 2010, we had $569.9 million of outstanding trust-preferred-securities that, if disallowed, would reduce our regulatory Tier 1 risk-based capital ratio by approximately 133 basis points. Even with this reduction, our capital ratios would remain above “well-capitalized” levels. There is a 3-year phase-in period beginning on January 1, 2013, that we believe will provide sufficient time to evaluate and address the impacts of this new legislation on our capital structure. Accordingly, we do not anticipate this potential change would have a significant impact to our business.

During the 2010 third quarter, the Basel Committee on Banking Supervision revised the Capital Accord (Basel III), which narrows the definition of capital and increases capital requirements for specific exposures. The new capital requirements will be phased-in over six years beginning in 2013. If these revisions were adopted currently, we estimate they would have a negligible impact on our regulatory capital ratios based on our current understanding of the revisions to capital qualification. We await clarification from our banking regulators on their interpretation of Basel III and any additional requirements to the stated thresholds.

Prior legislative and regulatory actions that have affected us include the U.S. Department of Treasury’s Troubled Asset Relief Program (TARP). We intend to repay our TARP capital as soon as it is prudent to do so. Additional discussion regarding TARP is located within the Capital section.

Near-term expectations

Our current expectation is the economy will remain relatively stable for the rest of the year. Revenue growth will remain challenging in the near-term due to implementing the amendment to Regulation E and our voluntary actions to reduce certain fees as part of implementing our “Fair Play” banking philosophy. We also anticipate noninterest expense to remain at current levels as we continue to make investments to grow the businesses.

Reflecting these factors, pretax pre-provision income levels are expected to be in line with recent reported performance. The net interest margin is expected to be flat to down slightly, reflecting the impact of the flatter, low yield curve. Our net interest margin will also be supported by disciplined loan and deposit pricing. We anticipate continued modest growth in C&I loans, as well as continued declines in commercial real estate (CRE) loans. The automobile loan portfolio is expected to continue its strong growth, though home equity and residential mortgages are likely to remain flat. Core deposits are expected to show continued growth, although at a slower rate due to the lack of reinvestment options at desirable spreads for any funds generated in excess of loan growth. Fee income will continue to be negatively impacted by lower service charges on deposit accounts, as well as lower mortgage banking revenues. In contrast, other fee categories are expected to grow at a faster rate reflecting the impact of our cross-sell initiatives throughout the company. Expense levels should be in line with current quarter performance. Positive credit quality trends are expected to continue, with declines in NCOs, NPAs, and provision for credit losses.

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)		Third				Second				First				Fourth				Third
Interest income		$	534,669			$	535,653			$	546,779			$	551,335			$	553,846
Interest expense			124,707				135,997				152,886				177,271				191,027
Net interest income			409,962				399,656				393,893				374,064				362,819
Provision for credit losses			119,160				193,406				235,008				893,991				475,136
Net interest income (loss) after provision for credit losses			290,802				206,250				158,885				(519,927	)			(112,317	)
Service charges on deposit accounts			65,932				75,934				69,339				76,757				80,811
Brokerage and insurance income			36,376				36,498				35,762				32,173				33,996
Mortgage banking income			52,045				45,530				25,038				24,618				21,435
Trust services			26,997				28,399				27,765				27,275				25,832
Electronic banking			28,090				28,107				25,137				25,173				28,017
Bank owned life insurance income			14,091				14,392				16,470				14,055				13,639
Automobile operating lease income			11,356				11,842				12,303				12,671				12,795
Securities gains (losses)			(296	)			156				(31	)			(2,602	)			(2,374	)
Other noninterest income			32,552				28,785				29,069				34,426				41,901
Total noninterest income			267,143				269,643				240,852				244,546				256,052
Personnel costs			208,272				194,875				183,642				180,663				172,152
Outside data processing and other services			38,553				40,670				39,082				36,812				38,285
Deposit and other insurance expense			23,406				26,067				24,755				24,420				23,851
Net occupancy			26,718				25,388				29,086				26,273				25,382
OREO and foreclosure expense			12,047				4,970				11,530				18,520				38,968
Equipment			21,651				21,585				20,624				20,454				20,967
Professional services			20,672				24,388				22,697				25,146				18,108
Amortization of intangibles			15,145				15,141				15,146				17,060				16,995
Automobile operating lease expense			9,159				9,667				10,066				10,440				10,589
Marketing			20,921				17,682				11,153				9,074				8,259
Telecommunications			5,695				6,205				6,171				6,099				5,902
Printing and supplies			4,062				3,893				3,673				3,807				3,950
Gain on early extinguishment of debt(2)			—				—				—				(73,615	)			(60	)
Other noninterest expense			21,008				23,279				20,468				17,443				17,749
Total noninterest expense			427,309				413,810				398,093				322,596				401,097
Income (loss) before income taxes			130,636				62,083				1,644				(597,977	)			(257,362	)
Provision (benefit) for income taxes			29,690				13,319				(38,093	)			(228,290	)			(91,172	)
Net income (loss)		$	100,946			$	48,764			$	39,737			$	(369,687	)		$	(166,190	)
Dividends on preferred shares			29,495				29,426				29,357				29,288				29,223
Net income (loss) applicable to common shares		$	71,451			$	19,338			$	10,380			$	(398,975	)		$	(195,413	)
Average common shares — basic			716,911				716,580				716,320				715,336				589,708
Average common shares — diluted(3)			719,567				719,387				718,593				715,336				589,708
Net income (loss) per common share — basic		$	0.10			$	0.03			$	0.01			$	(0.56	)		$	(0.33	)
Net income (loss) per common share — diluted			0.10				0.03				0.01				(0.56	)			(0.33	)
Cash dividends declared per common share			0.01				0.01				0.01				0.01				0.01
Return on average total assets			0.76	%			0.38	%			0.31	%			(2.80	)%			(1.28	)%
Return on average total shareholders’ equity			7.30				3.60				3.00				(25.60	)			(12.50	)
Return on average tangible shareholders’ equity(4)			8.90				4.90				4.20				(27.90	)			(13.30	)
Net interest margin(5)			3.45				3.46				3.47				3.19				3.20
Efficiency ratio(6)			60.60				59.40				60.10				49.00				61.40
Effective tax rate (benefit)			22.7				21.5				N.M.				(38.2	)			(35.4	)
Revenue — fully-taxable equivalent (FTE)
Net interest income		$	409,962			$	399,656			$	393,893			$	374,064			$	362,819
FTE adjustment			2,631				2,490				2,248				2,497				4,177
Net interest income(5)			412,593				402,146				396,141				376,561				366,996
Noninterest income			267,143				269,643				240,852				244,546				256,052
Total revenue(5)		$	679,736			$	671,789			$	636,993			$	621,107			$	623,048

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

		Nine Months Ended September 30,								Change
(in thousands, except per share amounts)		2010				2009				Amount				Percent
Interest income		$	1,617,101			$	1,686,807			$	(69,706	)			(4	)%
Interest expense			413,590				636,584				(222,994	)			(35	)
Net interest income			1,203,511				1,050,223				153,288				15
Provision for credit losses			547,574				1,180,680				(633,106	)			(54	)
Net interest income (loss) after provision for credit losses			655,937				(130,457	)			786,394				N.M.
Service charges on deposit accounts			211,205				226,042				(14,837	)			(7	)
Brokerage and insurance income			108,636				105,996				2,640				2
Mortgage banking income			122,613				87,680				34,933				40
Trust services			83,161				76,364				6,797				9
Electronic banking			81,334				74,978				6,356				8
Bank owned life insurance income			44,953				40,817				4,136				10
Automobile operating lease expense			35,501				39,139				(3,638	)			(9	)
Securities gains (losses)			(171	)			(7,647	)			7,476				(98	)
Other income			90,406				117,730				(27,324	)			(23	)
Total noninterest income			777,638				761,099				16,539				2
Personnel costs			586,789				519,819				66,970				13
Outside data processing and other services			118,305				111,283				7,022				6
Deposit and other insurance expense			74,228				89,410				(15,182	)			(17	)
Net occupancy			81,192				79,000				2,192				3
OREO and foreclosure expense			28,547				75,379				(46,832	)			(62	)
Equipment			63,860				62,663				1,197				2
Professional services			67,757				51,220				16,537				32
Amortization of intangibles			45,432				51,247				(5,815	)			(11	)
Automobile operating lease expense			28,892				32,920				(4,028	)			(12	)
Marketing			49,756				23,975				25,781				N.M.
Telecommunications			18,071				17,880				191				1
Printing and supplies			11,628				11,673				(45	)			—
Goodwill impairment			—				2,606,944				(2,606,944	)			N.M.
Gain on early extinguishment of debt(2)			—				(73,827	)			73,827				N.M.
Other expense			64,756				51,262				13,494				26
Total noninterest expense			1,239,213				3,710,848				(2,471,635	)			(67	)
Income (loss) before income taxes			194,362				(3,080,206	)			3,274,568				N.M.
Provision (benefit) for income taxes			4,915				(355,714	)			360,629				N.M.
Net income (loss)		$	189,447			$	(2,724,492	)		$	2,913,939				N.M.	%
Dividends declared on preferred shares			88,278				145,467				(57,189	)			(39	)
Net income (loss) applicable to common shares		$	101,169			$	(2,869,959	)		$	2,971,128				N.M.	%
Average common shares — basic			716,604				471,958				244,646				52	%
Average common shares — diluted(3)			719,182				471,958				247,224				52
Per common share
Net income per common share — basic		$	0.14			$	(6.08	)		$	6.22				N.M.	%
Net income (loss) per common share — diluted			0.14				(6.08	)			6.22				N.M.
Cash dividends declared			0.03				0.03				—				—
Return on average total assets			0.49	%			(6.95	)%			7.44				N.M.	%
Return on average total shareholders’ equity			4.7				(62.7	)			67.4				N.M.
Return on average tangible shareholders’ equity(4)			6.1				(2.6	)			8.7				N.M.
Net interest margin(5)			3.46				3.09				0.37				12
Efficiency ratio(6)			60.0				57.6				2.4				4
Effective tax rate (benefit)			2.5				(11.5	)			14.0				N.M.
Revenue — fully taxable equivalent (FTE)
Net interest income		$	1,203,511			$	1,050,223			$	153,288				15	%
FTE adjustment			7,369				8,975				(1,606	)			(18	)
Net interest income			1,210,880				1,059,198				151,682				14
Noninterest income			777,638				761,099				16,539				2
Total revenue		$	1,988,518			$	1,820,297			$	168,221				9	%

Significant Items

Definition of Significant Items

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

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

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

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

Significant Items Influencing Financial Performance Comparisons

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

1.

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

•

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

•

During the 2009 second quarter, a noncash pretax goodwill impairment charge of $4.2 million ($0.01 per common share) was recorded to noninterest expense relating to the sale of a small payments-related business.

2.

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

•

On March 31, 2009, we restructured our relationship with Franklin. As a result of this restructuring, a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) was recorded in the 2009 first quarter. Also, and although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific allowance for loan and lease losses (ALLL) was utilized to writedown the acquired mortgages and OREO collateral to fair value.

•

During the 2010 first quarter, a $38.2 million ($0.05 per common share) net tax benefit was recognized, primarily reflecting the increase in the net deferred tax asset relating to the assets acquired from the March 31, 2009 restructuring.

•

During the 2010 second quarter, the remaining portfolio of Franklin-related loans ($333.0 million of residential mortgages, and $64.7 million of home equity loans) was transferred to loans held for sale. At the time of the transfer, the loans were marked to the lower of cost or fair value less costs to sell of $323.4 million, resulting in $75.5 million of charge-offs, and the provision for credit losses commensurately increased $75.5 million ($0.07 per common share).

•

During the 2010 third quarter, the remaining residential mortgage and home equity loans were sold at essentially book value.

3.

Early Extinguishment of Debt. The positive impacts relating to the early extinguishment of debt on our reported results were: $73.6 million ($0.07 per common share) in the 2009 fourth quarter and $67.4 million ($0.10 per common share) in the 2009 second quarter. These amounts were recorded to noninterest expense.

4.

Preferred Stock Conversion. During the 2009 first and second quarters, we converted 114,109 and 92,384 shares, respectively, of Series A 8.50% Non-cumulative Perpetual Preferred Stock (Series A Preferred Stock) into common stock. As part of these transactions, there was a deemed dividend that did not impact net income, but resulted in a negative impact of $0.08 per common share for the 2009 first quarter and $0.06 per common share for the 2009 second quarter.

5.

Visaâ. 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
		September 30, 2010								June 30, 2010								September 30, 2009
(dollar amounts in thousands, except per share amounts)		After-tax				EPS				After-tax				EPS				After-tax				EPS
Net income (loss) — GAAP		$	100,946							$	48,764							$	(166,190	)
Earnings per share, after-tax						$	0.10							$	0.03							$	(0.33	)
Change from prior quarter — $							0.07								0.02								0.07
Change from prior quarter — %							N.M.	%							N.M.	%							18.0	%
Change from year-ago — $						$	0.43							$	0.43							$	(0.50	)
Change from year-ago — %							N.M.	%							N.M.	%							N.M.	%
Significant items - favorable (unfavorable) impact:		Earnings (1)				EPS				Earnings (1)				EPS				Earnings (1)				EPS
Franklin-related loans transferred to held for sale		$	—			$	—			$	(75,500	)		$	0.07			$	—			$	—

		Nine Months Ended
		September 30, 2010								September 30, 2009
(in thousands)		After-tax				EPS				After-tax				EPS
Net income (loss) — reported earnings		$	189,447							$	(2,724,492	)
Earnings per share, after-tax						$	0.14							$	(6.08	)
Change from a year-ago — $							6.22								(6.84	)
Change from a year-ago — %							N.M.	%							N.M.	%
Significant items - favorable (unfavorable) impact:		Earnings (1)				EPS				Earnings (1)				EPS
Franklin-related loans transferred to held for sale		$	(75,500	)		$	(0.07	)		$	—			$	—
Net tax benefit recognized (2)			38,222				0.05				—				—
Franklin relationship restructuring (2)			—				—				159,895				0.34
Gain on redemption of junior subordinated debt			—				—				73,827				0.10
Gain related to Visa® stock			—				—				31,362				0.04
Deferred tax valuation allowance benefit (2)			—				—				1,505				0.01
Goodwill impairment			—				—				(2,606,944	)			(5.52	)
FDIC special assessment			—				—				(23,555	)			(0.03	)
Preferred stock conversion deemed dividend			—				—				—				(0.12	)

Pretax, Pre-provision Income Trends

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

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

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

		2010												2009
(dollar amounts in thousands)		Third				Second				First				Fourth				Third
Income (loss) before income taxes		$	130,636			$	62,083			$	1,644			$	(597,977	)		$	(257,362	)
Add: Provision for credit losses			119,160				193,406				235,008				893,991				475,136
Less: Securities (losses) gains			(296	)			156				(31	)			(2,602	)			(2,374	)
Add: Amortization of intangibles			15,145				15,141				15,146				17,060				16,995
Less: Significant Items
Gain on early extinguishment of debt (2)			—				—				—				73,615				—
Total pretax, pre-provision income		$	265,237			$	270,474			$	251,829			$	242,061			$	237,143
Change in total pretax, pre-provision income:
Prior quarter change — amount		$	(5,237	)		$	18,645			$	9,768			$	4,918			$	7,809
Prior quarter change — percent			(2	)%			7	%			4	%			2	%			3	%

As shown in the table above, pretax, pre-provision income was $265.2 million in the 2010 third quarter, down 2% from the prior quarter. As discussed in the sections that follow, the decline from the prior quarter primarily reflected higher noninterest expense due to strategic growth initiatives, partially offset by higher revenue.

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

2010 Third Quarter versus 2009 Third Quarter

Fully-taxable equivalent net interest income increased $45.6 million, or 12%, from the year-ago quarter. This reflected the favorable impact of the significant increase in the net interest margin to 3.45% from 3.20%. This also reflected the benefit of a $2.0 billion, or 4%, increase in average total earning assets due to a $2.6 billion, or 39%, increase in average total investment securities, partially offset by a $0.6 billion, or 2%, decline in average total loans and leases.

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

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

		Third Quarter								Change
(dollar amounts in millions)		2010				2009				Amount				Percent
Loans/Leases
Commercial and industrial		$	12,393			$	12,922			$	(529	)			(4	)%
Commercial real estate			7,073				8,879				(1,806	)			(20	)
Total commercial			19,466				21,801				(2,335	)			(11	)
Automobile loans and leases			5,140				3,230				1,910				59
Home equity			7,567				7,581				(14	)			—
Residential mortgage			4,389				4,487				(98	)			(2	)
Other consumer			653				756				(103	)			(14	)
Total consumer			17,749				16,054				1,695				11
Total loans and leases		$	37,215			$	37,855			$	(640	)			(2	)%
Deposits
Demand deposits — noninterest-bearing		$	6,768			$	6,186			$	582				9	%
Demand deposits — interest-bearing			5,319				5,140				179				3
Money market deposits			12,336				7,601				4,735				62
Savings and other domestic time deposits			4,639				4,771				(132	)			(3	)
Core certificates of deposit			8,948				11,646				(2,698	)			(23	)
Total core deposits			38,010				35,344				2,666				8
Other deposits			2,636				4,249				(1,613	)			(38	)
Total deposits		$	40,646			$	39,593			$	1,053				3	%

The $0.6 billion, or 2%, decrease in average total loans and leases primarily reflected:

•

$2.3 billion, or 11%, decrease in average total commercial loans. The $0.5 billion, or 4%, decline in average C&I loans reflected a general decrease in borrowing as evidenced by a decline in line-of-credit utilization, charge-off activity, and the reclassification in the 2010 first quarter of variable rate demand notes to municipal securities. These negatives were partially offset by the impact of the 2009 reclassifications of certain CRE loans, primarily representing owner occupied properties, to C&I loans. The $1.8 billion, or 20%, decrease in average CRE loans reflected these reclassifications, as well as our ongoing commitment to lower our overall CRE exposure. We continue to execute on our plan to reduce the CRE exposure while maintaining a commitment to our core CRE borrowers. The decrease in average balances is associated with the noncore portfolio, as we have maintained relatively consistent balances with good performance in the core portfolio.

•

$1.7 billion, or 11%, increase in average total consumer loans. This growth reflected a $1.9 billion, or 59%, increase in average automobile loans and leases. On January 1, 2010, we adopted the new accounting standard “ASC — 810 Consolidation”, resulting in the consolidation of a 2009 first quarter $1.0 billion automobile loan securitization. At September 30, 2010, these securitized loans had a remaining balance of $0.6 billion. Underlying growth in automobile loans continued to be strong, reflecting a significant increase in loan originations for the first nine months of 2010 from the comparable year-ago period. The growth has come while maintaining our commitment to excellent credit quality and an appropriate return. Average home equity loans were little–changed as lower origination volume was offset by slower runoff experience and slightly higher line utilization. We continue to see the utilization increase associated with higher credit quality borrowers and very little funding associated with historically unfunded lines. Average residential mortgages declined $0.1 billion, or 2%, reflecting the impact of loan sales, as well as the continued refinance of portfolio loans and the related increased sale of fixed-rate originations.

The $2.6 billion, or 39%, increase in average total investment securities reflected the deployment of the cash from core deposit growth and loan runoff over this period, as well as the proceeds from 2009 capital actions.

2010 Third Quarter versus 2010 Second Quarter

Compared with the 2010 second quarter, fully-taxable equivalent net interest income increased $10.3 million, or 3%. This reflected an annualized 8% increase in average earning assets as the fully-taxable equivalent net interest margin declined only slightly to 3.45% from 3.46%. The increase in average earning assets reflected a combination of activities including:

•

$0.5 billion, or 6%, increase in average investment securities, reflecting the deployment of cash from asset sales and seasonal deposit growth into short- and intermediate-term securities,

•

$0.3 billion, or doubling of average loans held for sale, reflecting strong mortgage originations during the quarter due to low interest rates, and

•

$0.1 billion, or less than 1%, increase in average total loans and leases.

The net interest margin declined 1 basis point. Favorable trends in the mix and pricing of deposits were offset by a lower contribution on Franklin-related loans, a lower contribution from asset/liability management strategies, and one more day in the third quarter.

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

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

		2010								Change
(dollar amounts in millions)		Third Quarter				Second Quarter				Amount				Percent
Loans/Leases
Commercial and industrial		$	12,393			$	12,244			$	149				1	%
Commercial real estate			7,073				7,364				(291	)			(4	)
Total commercial			19,466				19,608				(142	)			(1	)
Automobile loans and leases			5,140				4,634				506				11
Home equity			7,567				7,544				23				—
Residential mortgage			4,389				4,608				(219	)			(5	)
Other consumer			653				695				(42	)			(6	)
Total consumer			17,749				17,481				268				2
Total loans and leases		$	37,215			$	37,089			$	126				—	%
Deposits
Demand deposits — noninterest-bearing		$	6,768			$	6,849			$	(81	)			(1	)%
Demand deposits — interest-bearing			5,319				5,971				(652	)			(11	)
Money market deposits			12,336				11,103				1,233				11
Savings and other domestic time deposits			4,639				4,677				(38	)			(1	)
Core certificates of deposit			8,948				9,199				(251	)			(3	)
Total core deposits			38,010				37,799				211				1
Other deposits			2,636				2,568				68				3
Total deposits		$	40,646			$	40,367			$	279				1	%

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

•

$0.3 billion, or 2%, increase in total average consumer loans, led by a $0.5 billion, or 11%, increase in average automobile loans and leases. This growth reflected record production in the quarter. We have consistently maintained historical high credit quality standards on this production while achieving an appropriate return. During the quarter, we benefited from the expansion of our automobile lending operations into Eastern Pennsylvania. We are also in the process of expansion into five New England states. The recent expansions incorporate new experienced colleagues with existing dealer relationships in those markets. Average residential mortgages decreased $0.2 billion, or 5%.

Partially offset by:

•

$0.1 billion, or 1%, decrease in average total commercial loans as average CRE loans declined $0.3 billion, or 4%, primarily as a result of our on-going strategy to reduce our exposure to the commercial real estate market. The 4% decline in the quarter was driven by continuing paydowns and charge-off activity associated with our noncore CRE portfolio. The portion of the CRE portfolio designated as core continued to perform very well as expected, with average balances consistent with the prior quarter. Average C&I loans increased $0.1 billion, or 1%. Underlying growth was mitigated by a combination of on-going lower line-of-credit utilization and paydowns on term debt, as well as the sale of $43.2 million of SBA loans. The economic environment continued to cause many customers to actively reduce their leverage position. Our line-of-credit utilization percentage was 42%, consistent with the prior quarter. We continue to believe that we have opportunities to expand our customer base within our markets and are focused on expanding our C&I pipeline. Average residential mortgages decreased $0.2 billion, or 5%, reflecting run-off and portfolio loan sales.

Average total deposits increased $0.3 billion from the prior quarter reflecting:

•

$0.2 billion, or 1%, growth in average total core deposits. The primary driver of this growth was an 11% increase in average money market deposits. Partially offsetting this growth was an 11% decline in average interest-bearing demand deposits and a 3% decline in average core certificates of deposit.

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

Table 7 — Consolidated Quarterly Average Balance Sheets

		Average Balances																				Change
		2010												2009								3Q10 vs. 3Q09
(dollar amounts in millions)		Third				Second				First				Fourth				Third				Amount				Percent
Assets
Interest-bearing deposits in banks		$	282			$	309			$	348			$	329			$	393			$	(111	)			(28	)%
Trading account securities			110				127				96				110				107				3				3
Federal funds sold and securities purchased under resale agreement			—				—				—				15				7				(7	)			N.M.
Loans held for sale			663				323				346				470				524				139				27
Investment securities:
Taxable			8,876				8,369				8,027				8,698				6,511				2,365				36
Tax-exempt			365				389				443				136				128				237				N.M.
Total investment securities			9,241				8,758				8,470				8,834				6,639				2,602				39
Loans and leases: (1)
Commercial:
Commercial and industrial			12,393				12,244				12,314				12,570				12,922				(529	)			(4	)
Commercial real estate:
Construction			989				1,279				1,409				1,651				1,808				(819	)			(45	)
Commercial			6,084				6,085				6,268				6,807				7,071				(987	)			(14	)
Commercial real estate			7,073				7,364				7,677				8,458				8,879				(1,806	)			(20	)
Total commercial			19,466				19,608				19,991				21,028				21,801				(2,335	)			(11	)
Consumer:
Automobile loans			5,030				4,472				4,031				3,050				2,886				2,144				74
Automobile leases			110				162				219				276				344				(234	)			(68	)
Automobile loans and leases			5,140				4,634				4,250				3,326				3,230				1,910				59
Home equity			7,567				7,544				7,539				7,561				7,581				(14	)			—
Residential mortgage			4,389				4,608				4,477				4,417				4,487				(98	)			(2	)
Other loans			653				695				723				757				756				(103	)			(14	)
Total consumer			17,749				17,481				16,989				16,061				16,054				1,695				11
Total loans and leases			37,215				37,089				36,980				37,089				37,855				(640	)			(2	)
Allowance for loan and lease losses			(1,384	)			(1,506	)			(1,510	)			(1,029	)			(950	)			(434	)			46
Net loans and leases			35,831				35,583				35,470				36,060				36,905				(1,074	)			(3	)
Total earning assets			47,511				46,606				46,240				46,847				45,525				1,986				4
Cash and due from banks			1,618				1,509				1,761				1,947				2,553				(935	)			(37	)
Intangible assets			695				710				725				737				755				(60	)			(8	)
All other assets			4,277				4,384				4,486				3,956				3,797				480				13
Total assets		$	52,717			$	51,703			$	51,702			$	52,458			$	51,680			$	1,037				2	%
Liabilities and Shareholders’ Equity
Deposits:
Demand deposits — noninterest-bearing		$	6,768			$	6,849			$	6,627			$	6,466			$	6,186			$	582				9	%
Demand deposits — interest-bearing			5,319				5,971				5,716				5,482				5,140				179				3
Money market deposits			12,336				11,103				10,340				9,271				7,601				4,735				62
Savings and other domestic deposits			4,639				4,677				4,613				4,686				4,771				(132	)			(3	)
Core certificates of deposit			8,948				9,199				9,976				10,867				11,646				(2,698	)			(23	)
Total core deposits			38,010				37,799				37,272				36,772				35,344				2,666				8
Other domestic time deposits of $250,000 or more			690				661				698				667				747				(57	)			(8	)
Brokered deposits and negotiable CDs			1,495				1,505				1,843				2,353				3,058				(1,563	)			(51	)
Deposits in foreign offices			451				402				410				422				444				7				2
Total deposits			40,646				40,367				40,223				40,214				39,593				1,053				3
Short-term borrowings			1,739				966				927				879				879				860				98
Federal Home Loan Bank advances			188				212				179				681				924				(736	)			(80	)
Subordinated notes and other long-term debt			3,672				3,836				4,062				3,908				4,136				(464	)			(11	)
Total interest-bearing liabilities			39,477				38,532				38,764				39,216				39,346				131				—
All other liabilities			952				924				947				1,042				863				89				10
Shareholders’ equity			5,520				5,398				5,364				5,734				5,285				235				4
Total liabilities and shareholders’ equity		$	52,717			$	51,703			$	51,702			$	52,458			$	51,680			$	1,037				2	%