Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-34073
Huntington Bancshares Incorporated
(Exact name of registrant as specified in its charter)
 
     
Maryland
  31-0724920
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
41 S. High Street, Columbus, Ohio   43287
(Address of principal executive offices)
  (Zip Code)
 
Registrant’s telephone number, including area code (614) 480-8300
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Class
 
Name of Exchange on Which Registered
 
8.50% Series A non-voting, perpetual convertible preferred stock
  NASDAQ
Common Stock — Par Value $0.01 per Share                    
  NASDAQ
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act.   þ  Yes   o No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   o  Yes   þ  No
 
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 (or for such shorter period that the registrant was required to file such reports), 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
 
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 Act)      o  Yes      þ  No
 
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2010, determined by using a per share closing price of $5.54, as quoted by NASDAQ on that date, was $3,857,539,827. As of January 31, 2011, there were 863,338,744 shares of common stock with a par value of $0.01 outstanding.
 
Documents Incorporated By Reference
 
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2011 Annual Shareholders’ Meeting.
 


 

 
HUNTINGTON BANCSHARES INCORPORATED
INDEX
 
                 
PART I.     1  
      Business     1  
      Risk Factors     11  
  Item 1B.     Unresolved Staff Comments     19  
      Properties     20  
      Legal Proceedings     20  
      Reserved     20  
       
PART II.     20  
      Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities     20  
      Selected Financial Data     22  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
        Introduction     24  
        Executive Overview     25  
        Discussion of Results of Operations     31  
        Risk Management and Capital:        
        Credit Risk     49  
        Market Risk     78  
        Liquidity Risk     82  
        Operational Risk     87  
        Compliance Risk     88  
        Capital     89  
        Business Segment Discussion     92  
        Additional Disclosures     112  
      Quantitative and Qualitative Disclosures About Market Risk     122  
      Financial Statements and Supplementary Data     122  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     204  
      Controls and Procedures     204  
      Other Information     204  
       
PART III.     205  
      Directors, Executive Officers and Corporate Governance     205  
      Executive Compensation     205  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     205  
  Item 13.     Certain Relationships and Related Transactions, and Director Independence     206  
 
Item 14.
    Principal Accountant Fees and Services     206  
       
PART IV.     206  
      Exhibits and Financial Statement Schedules     206  
Signatures
    207  
  EX-12.1
  EX-12.2
  EX-21.1
  EX-23.1
  EX-24.1
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2
  EX-99.1
  EX-99.2
  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


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Glossary of Acronyms and Terms
 
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
 
     
ABL
  Asset Based Lending
ACL
  Allowance for Credit Losses
AFCRE
  Automobile Finance and Commercial Real Estate
ALCO
  Asset-Liability Management Committee
ALLL
  Allowance for Loan and Lease Losses
ARM
  Adjustable Rate Mortgage
ARRA
  American Recovery and Reinvestment Act of 2009
ASC
  Accounting Standards Codification
ATM
  Automated Teller Machine
AULC
  Allowance for Unfunded Loan Commitments
AVM
  Automated Valuation Methodology
C&I
  Commercial and Industrial
CDARS
  Certificate of Deposit Account Registry Service
CDO
  Collateralized Debt Obligations
CFPB
  Bureau of Consumer Financial Protection
CMO
  Collateralized Mortgage Obligations
CPP
  Capital Purchase Program
CRE
  Commercial Real Estate
DDA
  Demand Deposit Account
DIF
  Deposit Insurance Fund
Dodd-Frank Act
  Dodd-Frank Wall Street Reform and Consumer Protection Act
EESA
  Emergency Economic Stabilization Act of 2008
ERISA
  Employee Retirement Income Security Act
EVE
  Economic Value of Equity
Fannie Mae
  (see FNMA)
FASB
  Financial Accounting Standards Board
FDIC
  Federal Deposit Insurance Corporation
FDICIA
  Federal Deposit Insurance Corporation Improvement Act of 1991
FHA
  Federal Housing Administration
FHLB
  Federal Home Loan Bank
FHLMC
  Federal Home Loan Mortgage Corporation
FICO
  Fair Isaac Corporation
FNMA
  Federal National Mortgage Association
Franklin
  Franklin Credit Management Corporation
Freddie Mac
  (see FHLMC)
FSP
  Financial Stability Plan
FTE
  Fully-Taxable Equivalent
FTP
  Funds Transfer Pricing
GAAP
  Generally Accepted Accounting Principles in the United States of America
HASP
  Homeowner Affordability and Stability Plan
HCER Act
  Health Care and Education Reconciliation Act of 2010
IPO
  Initial Public Offering


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IRS
  Internal Revenue Service
LIBOR
  London Interbank Offered Rate
LTV
  Loan to Value
MD&A
  Management’s Discussion and Analysis of Financial Condition and Results of Operations
MRC
  Market Risk Committee
MSR
  Mortgage Servicing Rights
NALs
  Nonaccrual Loans
NAV
  Net Asset Value
NCO
  Net Charge-off
NPAs
  Nonperforming Assets
NSF / OD
  Nonsufficient Funds and Overdraft
OCC
  Office of the Comptroller of the Currency
OCI
  Other Comprehensive Income (Loss)
OCR
  Optimal Customer Relationship
OLEM
  Other Loans Especially Mentioned
OREO
  Other Real Estate Owned
OTTI
  Other-Than-Temporary Impairment
PFG
  Private Financial, Capital Markets, and Insurance Group
Reg E
  Regulation E, of the Electronic Fund Transfer Act
SAD
  Special Assets Division
SEC
  Securities and Exchange Commission
Sky Financial
  Sky Financial Group, Inc.
Sky Trust
  Sky Bank and Sky Trust, National Association
TAGP
  Transaction Account Guarantee Program
TARP
  Troubled Asset Relief Program
TARP Capital
  Series B Preferred Stock
TCE
  Tangible Common Equity
TDR
  Troubled Debt Restructured loan
TLGP
  Temporary Liquidity Guarantee Program
Treasury
  U.S. Department of the Treasury
UCS
  Uniform Classification System
Unizan
  Unizan Financial Corp.
USDA
  U.S. Department of Agriculture
VA
  U.S. Department of Veteran Affairs
VIE
  Variable Interest Entity
WGH
  Wealth Advisors, Government Finance, and Home Lending

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Huntington Bancshares Incorporated
 
PART I
 
When we refer to “we,” “our,” and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.
 
Item 1:    Business
 
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 145 years of serving the financial needs of our customers. We provide full-service commercial, small business, consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance programs, and other financial products and services. The Bank, organized in 1866, is our only bank subsidiary. At December 31, 2010, the Bank had 611 branches as follows:
 
  •  344 branches in Ohio
 
  •  119 branches in Michigan
 
  •  57 branches in Pennsylvania
 
  •  50 branches in Indiana
 
  •  28 branches in West Virginia
 
  •  13 branches in Kentucky
 
Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands, and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.
 
In late 2010, we reorganized the way in which we manage our business. Our segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. For each of our four business segments, we expect the combination of our business model and exceptional service to provide a competitive advantage that supports revenue and earnings growth. Our business model emphasizes the delivery of a complete set of banking products and services offered by larger banks, but distinguished by local delivery, customer service, and pricing of these products.
 
Beginning in 2010, a key strategic emphasis has been for our business segments to operate in cooperation to provide products and services to our customers to build stronger and more profitable relationships using our Optimal Customer Relationship (OCR) sales and service process. The objectives of OCR are to:
 
1. Provide a consultative sales approach to provide solutions that are specific to each customer.
 
2. Leverage each business segment in terms of its products and expertise to benefit the customer.
 
3. Target prospects who may want to have their full relationship with us.
 
Following is a description of our four business segments and Treasury / Other function:
 
  •  Retail and Business Banking — This segment provides financial products and services to consumer and small business customers located within our primary banking markets consisting of five areas covering the six states of Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Its products include individual and small business checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, and small business loans and leases. Other financial services available to consumers and small business customers include investments, insurance services, interest rate risk protection products, foreign exchange hedging, and treasury management services. Retail and


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  Business Banking provides these services through a banking network of over 600 traditional branches and convenience branches located in grocery stores and retirement centers. In addition, an array of alternative distribution channels is available to customers including internet and mobile banking, telephone banking, and over 1,300 ATMs.
 
  •  Commercial Banking — Our Commercial Banking group provides a wide array of products and services to the middle market and large corporate client base located primarily within our core geographic banking markets. Products and services are delivered through a relationship banking model and include commercial lending, as well as depository and liquidity management products. Dedicated teams collaborate with our primary bankers to deliver complex and customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate protection, foreign exchange hedging and sales, trading of securities, and employee benefit programs (insurance, 410(k)). The Commercial Banking team specializes in serving a number of industry segments such as government entities, not-for-profit organizations, heath-care entities, and large, publicly traded companies.
 
  •  Automobile Finance and Commercial Real Estate — This segment provides lending and other banking products and services to customers outside of our normal retail or commercial channels. More specifically, we serve automotive dealerships, retail customers who obtain financing at the dealerships, professional real estate developers, REITs, and other customers with lending needs that are secured by commercial properties. Most of our customers are located in our primary banking markets. Our products and services include financing for the purchase of automobiles by customers of automotive dealerships; financing for the purchase of new and used vehicle inventory by automotive dealerships; and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs. We also provide other banking products and services to our customers as well as their owners or principals. These products and services are delivered through: (1) our relationships with developers in our primary banking markets believed to be experienced, well-managed, and well-capitalized and are capable of operating in all phases of the real estate cycle (top-tier developers), (2) relationships with established automobile dealerships, (3) our leads through community involvement, and (4) referrals from other professionals.
 
  •  Wealth Advisors, Government Finance, and Home Lending — This segment consists primarily of fee-based businesses including home lending, wealth management, and government finance. We originate and service consumer loans to customers who are generally located in our primary banking markets. Consumer lending products are distributed to these customers primarily through the Retail and Business Banking segment and commissioned loan originators. We provide wealth management banking services to high net worth customers in our primary banking markets and in Florida by utilizing a cohesive model that employs a unified sales force to deliver products and services directly and through the other segments. We provide these products and services through a unified sales team, which consists of former private bankers, trust officers, and investment advisors; Huntington Asset Advisors, which provides investment management services; Huntington Asset Services, which offers administrative and operational support to fund complexes; retirement plan services, and the national settlements business. We also provide banking products and services to government entities across our primary banking markets by utilizing a team of relationship managers providing public finance, brokerage, trust, lending, and treasury management services.
 
A Treasury / Other function includes our insurance brokerage business, which specializes in commercial property/casualty, employee benefits, personal lines, life and disability and specialty lines. We also provide brokerage and agency services for residential and commercial title insurance and excess and surplus product lines. As an agent and broker we do not assume underwriting risks; instead we provide our customers with quality, noninvestment insurance contracts. The Treasury / Other function also includes technology and operations, other unallocated assets, liabilities, revenue, and expense.


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The financial results for each of these business segments are included in Note 25 of Notes to Consolidated Financial Statements and are discussed in the Business Segment Discussion of our MD&A.
 
Competition
 
Although there has been consolidation in the financial services industry, our markets remain competitive. We compete with other banks and financial services companies such as savings and loans, credit unions, and finance and trust companies, as well as mortgage banking companies, automobile and equipment financing companies, insurance companies, mutual funds, investment advisors, and brokerage firms, both within and outside of our primary market areas. Internet companies are also providing nontraditional, but increasingly strong, competition for our borrowers, depositors, and other customers. In addition, our AFCRE segment faces competition from the financing divisions of automobile manufacturers.
 
We compete for loans primarily on the basis of a combination of value and service by building customer relationships as a result of addressing our customers’ entire suite of banking needs, demonstrating expertise, and providing convenience to our customers. We also consider the competitive pricing pressures in each of our markets.
 
We compete for deposits similarly on a basis of a combination of value and service and by providing convenience through a banking network of over 600 branches and over 1,300 ATMs within our markets and our award-winning website at www.huntington.com. We have also instituted new and more customer friendly practices under our Fair Play banking philosophy, such as our 24-Hour Grace tm account feature introduced in 2010, which gives customers an additional business day to cover overdrafts to their consumer account without being charged overdraft fees.
 
The table below shows our competitive ranking and market share based on deposits of FDIC-insured institutions as of June 30, 2010, in the top 12 metropolitan statistical areas (MSA) in which we compete:
 
                         
MSA
  Rank   Deposits   Market Share
        (in millions)    
 
Columbus, OH
    1     $ 9,124       22 %
Cleveland, OH
    5       3,941       8  
Detroit, MI
    8       3,607       4  
Toledo, OH
    1       2,306       23  
Pittsburgh, PA
    7       2,270       3  
Cincinnati, OH
    5       1,999       4  
Indianapolis, IN
    4       1,902       6  
Youngstown, OH
    1       1,877       20  
Canton, OH
    1       1,485       27  
Grand Rapids, MI
    3       1,280       10  
Akron, OH
    5       886       8  
Charleston, WV
    3       604       11  
 
 
Source: FDIC.gov, based on June 30, 2010 survey.
 
Many of our nonfinancial institution competitors have fewer regulatory constraints, broader geographic service areas, greater capital, and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, advances in technology and product delivery systems, consolidation among financial service providers, bank failures, and the conversion of certain former investment banks to bank holding companies.


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Regulatory Matters
 
General
 
We are a bank holding company and are qualified as a financial holding company with the Federal Reserve. We are subject to examination and supervision by the Federal Reserve pursuant to the Bank Holding Company Act. We are required to file reports and other information regarding our business operations and the business operations of our subsidiaries with the Federal Reserve.
 
Because we are a public company, we are also subject to regulation by the SEC. The SEC has established four categories of issuers for the purpose of filing periodic and annual reports. Under these regulations, we are considered to be a large accelerated filer and, as such, must comply with SEC accelerated reporting requirements.
 
The Bank, which is chartered by the OCC, is a national bank, and our only bank subsidiary. In addition, we have numerous nonbank subsidiaries. Exhibit 21.1 of this Form 10-K lists all of our subsidiaries. The Bank is subject to examination and supervision by the OCC. Its domestic deposits are insured by the DIF of the FDIC, which also has certain regulatory and supervisory authority over it. Our nonbank subsidiaries are also subject to examination and supervision by the Federal Reserve or, in the case of nonbank subsidiaries of the Bank, by the OCC. Our subsidiaries are subject to examination by other federal and state agencies, including, in the case of certain securities and investment management activities, regulation by the SEC and the Financial Industry Regulatory Authority.
 
In connection with EESA, we sold TARP Capital and a warrant to purchase shares of common stock to the Treasury pursuant to the CPP under TARP. As a result of our participation in TARP, we were subject to certain restrictions and direct oversight by the Treasury. Upon our repurchase of the TARP Capital on December 22, 2010, we are no longer subject to the TARP-related restrictions on dividends, stock repurchases, or executive compensation.
 
Legislative and regulatory reforms continue to have significant impacts throughout the financial services industry. In July 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act, which is complex and broad in scope, establishes the CFPB, which will have extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank Act alters the authority and duties of the federal banking and securities regulatory agencies, implements certain corporate governance requirements for all public companies including financial institutions with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions, and restricts certain proprietary trading and hedge fund and private equity activities of banks and their affiliates. The Dodd-Frank Act also requires the issuance of many implementing regulations which will take effect over several years, making it difficult to anticipate the overall impact to us, our customers, or the financial industry more generally. While the overall impact cannot be predicted with any degree of certainty, we believe we are likely to be negatively impacted by the Dodd-Frank Act primarily in the areas of capital requirements, restrictions on fees, and other charges to customers.
 
In addition to the impact of federal and state regulation, the Bank and our nonbank subsidiaries are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.
 
As a bank holding company, we must act as a source of financial and managerial strength to the Bank and the Bank is subject to affiliate transaction restrictions.
 
Under changes made by the Dodd-Frank Act, a bank holding company must act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. Under current federal law, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. It may charge the bank holding company with engaging in unsafe and unsound practices if the bank holding company fails to commit resources to such a subsidiary bank or if it undertakes actions that the Federal Reserve believes might jeopardize the bank holding company’s ability to commit resources to such subsidiary bank.


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Any loans by a holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, an appointed bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, the bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations.
 
Federal law permits the OCC to order the pro-rata assessment of shareholders of a national bank whose capital stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank’s capital stock. This statute also provides for the enforcement of any such pro-rata assessment of shareholders of such national bank to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock owned by any assessed shareholder failing to pay the assessment. As the sole shareholder of the Bank, we are subject to such provisions.
 
Moreover, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of deposit liabilities of such an institution are accorded priority over the claims of general unsecured creditors of such an institution, including the holders of the institution’s note obligations, in the event of liquidation or other resolution of such institution. Claims of a receiver for administrative expenses and claims of holders of deposit liabilities of the Bank, including the FDIC as the insurer of such holders, would receive priority over the holders of notes and other senior debt of the Bank in the event of liquidation or other resolution and over our interests as sole shareholder of the Bank.
 
The Bank is subject to affiliate transaction restrictions under federal laws, which limit certain transactions generally involving the transfer of funds by a subsidiary bank or its subsidiaries to its parent corporation or any nonbank subsidiary of its parent corporation, whether in the form of loans, extensions of credit, investments, or asset purchases, or otherwise undertaking certain obligations on behalf of such affiliates. Furthermore, covered transactions which are loans and extensions of credit must be secured within specified amounts. In addition, all covered transactions and other affiliate transactions must be conducted on terms and under circumstances that are substantially the same as such transactions with unaffiliated entities.
 
The Federal Reserve maintains a bank holding company rating system that emphasizes risk management, introduces a framework for analyzing and rating financial factors, and provides a framework for assessing and rating the potential impact of nondepository entities of a holding company on its subsidiary depository institution(s). A composite rating is assigned based on the foregoing three components, but a fourth component is also rated, reflecting generally the assessment of depository institution subsidiaries by their principal regulators. The bank holding company rating system, which became effective in 2005, applies to us. The composite ratings assigned to us, like those assigned to other financial institutions, are confidential and may not be disclosed, except to the extent required by law.
 
In 2008, we sold TARP Capital and a warrant to purchase shares of common stock to the Treasury pursuant to the CPP under TARP. We repurchased the TARP Capital in the 2010 fourth quarter.
 
On October 3, 2008, EESA was enacted. EESA includes, among other provisions, TARP, under which the Secretary of the Treasury was authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that were based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008. Under TARP, the Treasury authorized a voluntary CPP to purchase up to $250 billion of senior preferred shares of stock from qualifying financial institutions that elected to participate.
 
On November 14, 2008, at the request of the Treasury and other regulators, we participated in the CPP by issuing to the Treasury, in exchange for $1.4 billion, 1.4 million shares of Huntington’s fixed-rate cumulative perpetual preferred stock, Series B, par value $0.01 per share, with a liquidation preference of $1,000 per share (TARP Capital), and a ten-year warrant (Warrant), which was immediately exercisable, to purchase up to 23.6 million shares of Huntington’s common stock (approximately 3% of common shares outstanding at December 31, 2010), par value $0.01 per share, at an exercise price of $8.90 per share. The securities issued to the Treasury were accounted for as additions to our regulatory Tier 1 and Total capital. The proceeds were


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used by the holding company to provide potential capital support for the Bank. This helped the Bank to continue its active lending programs for customers. This is evidenced by the increase in mortgage originations from $3.8 billion in 2008, to $5.3 billion in 2009, and $5.5 billion in 2010.
 
In connection with the issuance and sale of the TARP Capital to the Treasury, we agreed, among other things, to (1) limit the payment of quarterly dividends on our common stock, (2) limit our ability to repurchase our common stock or our outstanding serial preferred stock, (3) grant the holders of the TARP Capital, the Warrant, and the common stock to be issued under the Warrant certain registration rights, and (4) subject ourselves to the executive compensation limitations contained in EESA. These compensation limitations included (a) prohibiting “golden parachute” payments, as defined in EESA, to senior executive officers; (b) requiring recovery of any compensation paid to senior executive officers based on criteria that is later proven to be materially inaccurate; and (c) prohibiting incentive compensation that encouraged unnecessary and excessive risks that threaten the value of the financial institution.
 
On December 19, 2010, we sold $920.0 million of our common stock and $300.0 million of subordinated debt in public offerings. On December 22, 2010, these proceeds, along with other available funds, were used to complete the repurchase of our $1.4 billion of TARP Capital. On January 19, 2011, we repurchased the Warrant for our common stock associated with our participation in the TARP CPP for $49.1 million, or $2.08 for each of the 23.6 million common shares to which the Treasury was entitled. Prior to this repurchase, we were in compliance with all TARP standards, restrictions, and dividend payment limitations. Because of the repurchase of our TARP Capital, we are no longer subject to the TARP-related restrictions on dividends, stock repurchases, or executive compensation.
 
We have participated in certain extraordinary programs of the FDIC.
 
EESA temporarily raised the limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increase was made permanent in the Dodd-Frank Act. Separate from EESA, in October 2008, the FDIC also announced the TLGP to guarantee certain debt issued by FDIC-insured institutions.
 
On February 3, 2009, the Bank completed the issuance and sale of $600 million of Floating Rate Senior Bank Notes with a variable interest rate of three month LIBOR plus 40 basis points, due June 1, 2012 (the Notes). The Notes are guaranteed by the FDIC under the TLGP and are backed by the full faith and credit of the United States of America. The FDIC’s guarantee costs $20 million which is being amortized over the term of these notes.
 
Under TAGP, a component of the TLGP, the FDIC temporarily provided unlimited coverage for noninterest-bearing transaction deposit accounts. We voluntarily began participating in the TAGP in October of 2008, but opted out of the TAGP effective July 1, 2010. Subsequently, both the TLGP and TAGP were terminated in light of Section 343 of the Dodd-Frank Act, which amended the Federal Deposit Insurance Act to provide unlimited deposit insurance coverage for noninterest-bearing transaction accounts beginning December 31, 2010, for a two-year period with no opt out provisions.
 
We are subject to capital requirements mandated by the Federal Reserve and these requirements will be changing under the Dodd-Frank Act.
 
The Federal Reserve has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents total capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements.


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Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers. Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted short-term subordinated debt. These tiers are:
 
  •  Tier 1, or core capital, includes total equity plus qualifying capital securities and minority interests, excluding unrealized gains and losses accumulated in other comprehensive income, and nonqualifying intangible and servicing assets.
 
  •  Tier 2, or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the allowance for credit losses, up to 1.25% of risk-weighted assets.
 
  •  Total Capital is Tier 1 plus Tier 2 capital.
 
The Federal Reserve and the other federal banking regulators require that all intangible assets (net of deferred tax), except originated or purchased MSRs, nonmortgage servicing assets, and purchased credit card relationships, be deducted from Tier 1 capital. However, the total amount of these items included in capital cannot exceed 100% of its Tier 1 capital.
 
Under the risk-based guidelines to remain Adequately-capitalized, financial institutions are required to maintain a total risk-based ratio of 8%, with 4% being Tier 1 capital. The appropriate regulatory authority may set higher capital requirements when they believe an institution’s circumstances warrant.
 
Under the leverage guidelines, financial institutions are required to maintain a Tier 1 leverage ratio of at least 3%. The minimum ratio is applicable only to financial institutions that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate risk exposure, and the highest regulatory rating. Financial institutions not meeting these criteria are required to maintain a minimum Tier 1 leverage ratio of 4%.
 
Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a directive to increase capital, and the termination of deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described below under Prompt Corrective Action as applicable to Under-capitalized institutions.
 
The risk-based capital standards of the Federal Reserve, the OCC, and the FDIC specify that evaluations by the banking agencies of a bank’s capital adequacy will include an assessment of the exposure to declines in the economic value of a bank’s capital due to changes in interest rates. These banking agencies issued a joint policy statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on internal measures of exposure and active oversight of risk management activities by senior management.
 
FDICIA requires federal banking regulatory authorities to take Prompt Corrective Action with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: Well-capitalized, Adequately-capitalized, Under-capitalized, Significantly under-capitalized, and Critically under-capitalized.
 
Throughout 2010, our regulatory capital ratios and those of the Bank were in excess of the levels established for Well-capitalized institutions. An institution is deemed to be Well-capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1


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leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.
 
                             
        Well-
  At December 31, 2010
        Capitalized
      Excess
 
      Minimums   Actual   Capital(1)
(Dollar amounts in billions)        
 
Ratios:
                           
Tier 1 leverage ratio
  Consolidated     5.00 %     9.41 %   $ 2.4  
    Bank     5.00       6.97       1.0  
Tier 1 risk-based capital ratio
  Consolidated     6.00       11.55       2.4  
    Bank     6.00       8.51       1.1  
Total risk-based capital ratio
  Consolidated     10.00       14.46       1.9  
    Bank     10.00       12.82       1.2  
 
 
(1) Amount greater than the Well-capitalized minimum percentage.
 
FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company, if the depository institution would become Under-capitalized after such payment. Under-capitalized institutions are also subject to growth limitations and are required by the appropriate federal banking agency to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan.
 
Depending upon the severity of the under capitalization, the Under-capitalized institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become Adequately-capitalized, requirements to reduce total assets, cessation of receipt of deposits from correspondent banks, and restrictions on making any payment of principal or interest on their subordinated debt. Critically Under-capitalized institutions are subject to appointment of a receiver or conservator within 90 days of becoming so classified.
 
Under FDICIA, a depository institution that is not Well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. Since the Bank is Well-capitalized, the FDICIA brokered deposit rule did not adversely affect its ability to accept brokered deposits. The Bank had $1.5 billion of such brokered deposits at December 31, 2010.
 
Under the Dodd-Frank Act, important changes will be implemented concerning the capital requirements for financial institutions. The “Collins Amendment” provision of the Dodd-Frank Act imposes increased capital requirements in the future. The Collins Amendment also requires federal banking regulators to establish minimum leverage and risk-based capital requirements to apply to insured depository institutions, bank and thrift holding companies, and systemically important nonbank financial companies. These capital requirements must not be less than the Generally Applicable Risk-based Capital Requirements and the Generally Applicable Leverage Capital Requirements as of July 21, 2010, and must not be quantitatively lower than the requirements that were in effect for insured depository institution as of July 21, 2010. The Collins Amendment defines Generally Applicable Risk-based Capital Requirements and Generally Applicable Leverage Capital Requirements to mean the risk-based capital requirements and minimum ratios of Tier 1 capital to average total assets, respectively, established by the appropriate federal banking agencies to apply to insured depository institutions under the Prompt Corrective Action provisions, regardless of total consolidated asset size or foreign financial exposure. We will be assessing the impact on us of these new regulations as they are proposed and implemented.


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There are restrictions on our ability to pay dividends.
 
Dividends from the Bank to the parent company are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends that the Bank can pay to us without regulatory approval. The Bank may not, without prior regulatory approval, pay a dividend in an amount greater than its undivided profits. In addition, the prior approval of the OCC is required for the payment of a dividend by a national bank if the total of all dividends declared in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years. As a result, for the year ended December 31, 2010, the Bank did not pay any cash dividends to us. At December 31, 2010, the Bank could not have declared and paid any dividends to the parent company without regulatory approval.
 
Since the first quarter of 2008, the Bank has requested and received OCC approval each quarter to pay periodic dividends to shareholders outside the Bank’s consolidated group on preferred and common stock of its REIT and capital financing subsidiaries to the extent necessary to maintain their REIT status. A wholly-owned nonbank subsidiary of the parent company owns a portion of the preferred shares of the REIT and capital financing subsidiaries. Outside of the REIT and capital financing subsidiary dividends, we do not anticipate that the Bank will declare dividends during 2011.
 
If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice, such authority may require, after notice and hearing, that such bank cease and desist from such practice. Depending on the financial condition of the Bank, the applicable regulatory authority might deem us to be engaged in an unsafe or unsound practice if the Bank were to pay dividends. The Federal Reserve and the OCC have issued policy statements that provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings.
 
The amount and timing of payments for FDIC Deposit Insurance are changing.
 
In late 2008, under the assessment regime that was applicable prior to the Dodd-Frank Act, the FDIC raised assessment rates for the first quarter of 2009 by a uniform 7 basis points of adjusted domestic deposits, resulting in a range between 12 and 50 basis points, depending upon the risk category. At the same time, the FDIC proposed further changes in the assessment system beginning in the second quarter of 2009. As amended in a final rule issued in March 2009, the changes, commencing April 1, 2009, set a five-year target of 1.15% for the designated reserve ratio, and set base assessment rates between 12 and 45 basis points of adjusted domestic deposits, depending on the risk category. In addition to these changes in the basic assessment regime, the FDIC, in an interim rule also issued in March 2009, imposed a 20 basis point emergency special assessment on deposits of insured institutions as of June 30, 2009, to be collected on September 30, 2009. In May 2009, the FDIC imposed a further special assessment on insured institutions of five basis points on their June 30, 2009 assets minus Tier 1 capital, also payable September 30, 2009. And in November 2009, the FDIC required all insured institutions to prepay, on December 30, 2009, slightly over three years of estimated insurance assessments.
 
With the enactment of the Dodd-Frank Act, major changes were introduced to the FDIC deposit insurance system. Under the Dodd-Frank Act, the FDIC now has until the end of September 2020 to bring its reserve ratio to the new statutory minimum of 1.35%. New rules amending the deposit insurance assessment regulations under the requirements of the Dodd-Frank Act have been adopted, including a final rule designating 2% as the designated reserve ratio and a final rule extending temporary unlimited deposit insurance to noninterest bearing transaction accounts maintained in connection with lawyers’ trust accounts. On February 7, 2011, the FDIC adopted regulations effective for the 2011 second quarter assessment and payable in September 2011, which outline significant changes in the risk-based premiums approach for banks with over $10 billion of assets and creates a “Scorecard” system. The “Scorecard” system uses a performance score and loss severity score, which aggregate to an initial base assessment rate. The assessment base also changes from deposits to an institution’s average total assets minus its average tangible equity. We are


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currently evaluating the effect of these new regulations, but do not expect the 2011 FDIC assessment impact on our Consolidated Financial Statements to be materially higher than the prior period.
 
As a financial holding company, we are subject to additional regulations.
 
In order to maintain its status as a financial holding company, a bank holding company’s depository subsidiaries must all be both Well-capitalized and well-managed, and must meet their Community Reinvestment Act obligations.
 
Financial holding company powers relate to financial activities that are determined by the Federal Reserve, in coordination with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity, provided that the complementary activity does not pose a safety and soundness risk. The Gramm-Leach-Bliley Act designates certain activities as financial in nature, including:
 
  •  lending, exchanging, transferring, investing for others, or safeguarding money or securities;
 
  •  underwriting insurance or annuities;
 
  •  providing financial or investment advice;
 
  •  underwriting, dealing in, or making markets in securities;
 
  •  merchant banking, subject to significant limitations;
 
  •  insurance company portfolio investing, subject to significant limitations; and
 
  •  any activities previously found by the Federal Reserve to be closely related to banking.
 
The Gramm-Leach-Bliley Act also authorizes the Federal Reserve, in coordination with the Secretary of the Treasury, to determine if additional activities are financial in nature or incidental to activities that are financial in nature.
 
In addition, we are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after such acquisition, we would own or control more than 5% of its voting stock.
 
We also must comply with anti-money laundering, customer privacy, and consumer protection statutes and regulations as well as corporate governance, accounting, and reporting requirements.
 
The USA Patriot Act of 2001 and its related regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The statute and its regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants.
 
Pursuant to Title V of the Gramm-Leach-Bliley Act, we, like all other financial institutions, are required to:
 
  •  provide notice to our customers regarding privacy policies and practices,
 
  •  inform our customers regarding the conditions under which their nonpublic personal information may be disclosed to nonaffiliated third parties, and
 
  •  give our customers an option to prevent certain disclosure of such information to nonaffiliated third parties.
 
Under the Fair and Accurate Credit Transactions Act of 2003, our customers may also opt-out of certain information sharing between and among us and our affiliates. We are also subject, in connection with our


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lending and leasing activities, to numerous federal and state laws aimed at protecting consumers, including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, and the Fair Credit Reporting Act.
 
The Sarbanes-Oxley Act of 2002 imposed new or revised corporate governance, accounting, and reporting requirements on us and all other companies having securities registered with the SEC. In addition to a requirement that chief executive officers and chief financial officers certify financial statements in writing, the statute imposed requirements affecting, among other matters, the composition and activities of audit committees, disclosures relating to corporate insiders and insider transactions, code of ethics, and the effectiveness of internal controls over financial reporting.
 
In 2010, we implemented compliance with the Amendment to Regulation E dealing with overdraft fees.
 
In November 2009, the Federal Reserve Board amended Regulation E of the Electronic Fund Transfer Act to prohibit banks from charging overdraft fees for ATM or point-of-sale debit card transactions that overdrew the account unless the customer opt-in to the discretionary overdraft service and to require banks to explain the terms of their overdraft services and their fees for the services (Regulation E Amendment). Compliance with the Regulation E Amendment was required by July 1, 2010. Our strategy to comply with the Regulation E Amendment is to alert our customers that we can no longer cover such overdrafts unless they opt-in to our overdraft service while disclosing the terms of our service and our fees for the service.
 
Item 1A:    Risk Factors
 
Risk Governance
 
We use a multi-faceted approach to risk governance. It begins with the board of directors defining our risk appetite in aggregate as moderate-to-low. This does not preclude engagement in higher risk activities when we have the demonstrated expertise and control mechanisms to selectively manage higher risk. Rather, the definition is intended to represent a directional average of where we want our overall risk to be managed.
 
Two board committees oversee implementation of this desired risk profile: The Audit Committee and the Risk Oversight Committee.
 
  •  The Audit Committee is principally involved with overseeing the integrity of financial statements, providing oversight of the internal audit department, and selecting our external auditors. Our chief auditor reports directly to the Audit Committee.
 
  •  The Risk Oversight Committee supervises our risk management processes which primarily cover credit, market, liquidity, operational, and compliance risks. It also approves the charters of executive management committees, sets risk limits on certain risk measures (e.g., economic value of equity), receives results of the risk self-assessment process, and routinely engages management in dialogues pertaining to key risk issues. Our credit review executive reports directly to the Risk Oversight Committee.
 
Both committees are comprised of independent directors and routinely hold executive sessions with our key officers engaged in accounting and risk management.
 
On a periodic basis, the two committees meet in joint session to cover matters relevant to both such as the construct and adequacy of the ACL, which is reviewed quarterly.
 
We maintain a philosophy that each colleague is responsible for risk. This is manifested by the design of a risk management organization that places emphasis on risk-ownership by risk-takers. We believe that by placing ownership of risk within its related business segment, attention to, and accountability for, risk is heightened.
 
Further, through its Compensation Committee, the board of directors seeks to ensure its system of rewards is risk-sensitive and aligns the interests of management, creditors, and shareholders. We utilize a variety of compensation-related tools to induce appropriate behavior, including equity deferrals, holdbacks, clawback provisions, and the right to terminate compensation plans at any time when undesirable outcomes may result.


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Management has introduced a number of steps to help ensure an aggregate moderate-to-low risk appetite is maintained. Foremost is a quarterly, comprehensive self-assessment process in which each business segment produces an analysis of its risks and the strength of its risk controls. The segment analyses are combined with assessments by our risk management organization of major risk sectors (e.g., credit, market, operational, reputational, compliance, etc.) to produce an overall enterprise risk assessment. Outcomes of the process include a determination of the quality of the overall control process, the direction of risk, and our position compared to the defined risk appetite.
 
Management also utilizes a wide series of metrics (key risk indicators) to monitor risk positions throughout the Company. In general, a range for each metric is established that identifies a moderate-to-low position. Deviations from the range will indicate if the risk being measured is moving into a high position, which may then necessitate corrective action.
 
In 2010, we enhanced our process of risk-based capital attribution. Our economic capital model will be upgraded and integrated into a more robust system of stress testing in 2011. We believe this tool will further enhance our ability to manage to the defined risk appetite. Our board level Capital Planning Committee will monitor and react to output from the integrated modeling process.
 
We also have three other executive level committees to manage risk: ALCO, Credit Policy and Strategy, and Risk Management. Each committee focuses on specific categories of risk and is supported by a series of subcommittees that are tactical in nature. We believe this structure helps ensure appropriate elevation of issues and overall communication of strategies.
 
Huntington utilizes three levels of defense with regard to risk management: (1) business segments, (2) corporate risk management, (3) internal audit and credit review. To induce greater ownership of risk within its business segments, segment risk officers have been embedded to identify and monitor risk, elevate and remediate issues, establish controls, perform self-testing, and oversee the quarterly self-assessment process. Segment risk officers report directly to the related segment manager with a dotted line to the Chief Risk Officer. Corporate Risk Management establishes policies, sets operating limits, reviews new or modified products/processes, ensures consistency and quality assurance within the segments, and produces the enterprise risk assessment. The Chief Risk Officer has significant input into the design and outcome of incentive compensation plans as they apply to risk. Internal Audit and Credit Review provide additional assurance that risk-related functions are operating as intended.
 
Huntington believes it has provided a sound risk governance foundation to support the Bank. Our process will be subject to continuous improvement and enhancement. Our objective is to have strong risk management practices and capabilities.
 
Risk Overview
 
We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2) market risk , which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3) liquidity risk , which is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, investor and customer perception of financial strength, and events unrelated to us such as war, terrorism, or financial institution market specific issues, (4) operational risk , which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks, and (5) compliance risk , which exposes us to money penalties, enforcement actions or other sanctions as a result of nonconformance with laws, rules, and regulations that apply to the financial services industry.


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We also expend considerable effort to contain risk which emanates from execution of our business strategies and work relentlessly to protect the Company’s reputation. Strategic and reputational risks do not easily lend themselves to traditional methods of measurement. Rather, we closely monitor them through processes such as new product / initiative reviews, frequent financial performance reviews, employee and client surveys, monitoring market intelligence, periodic discussions between management and our board, and other such efforts.
 
In addition to the other information included or incorporated by reference into this report, readers should carefully consider that the following important factors, among others, could negatively impact our business, future results of operations, and future cash flows materially.
 
Credit Risks :
 
1.   Our ACL may prove inadequate or be negatively affected by credit risk exposures which could materially adversely affect our net income and capital.
 
Our business depends on the creditworthiness of our customers. Our ACL of $1.3 billion at December 31, 2010, represents Management’s estimate of probable losses inherent in our loan and lease portfolio as well as our unfunded loan commitments and letters of credit. We periodically review our ACL for adequacy. In doing so, we consider economic conditions and trends, collateral values, and credit quality indicators, such as past charge-off experience, levels of past due loans, and nonperforming assets. There is no certainty that our ACL will be adequate over time to cover losses in the portfolio because of unanticipated adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries, or markets. If the credit quality of our customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ACL is not adequate, our net income and capital could be materially adversely affected which, in turn, could have a material negative adverse affect on our financial condition and results of operations.
 
In addition, bank regulators periodically review our ACL and may require us to increase our provision for loan and lease losses or loan charge-offs. Any increase in our ACL or loan charge-offs as required by these regulatory authorities could have a material adverse affect on our financial condition and results of operations.
 
2.   A sustained weakness or further weakening in economic conditions could materially adversely affect our business.
 
Our performance could be negatively affected to the extent that further weaknesses in business and economic conditions have direct or indirect material adverse impacts on us, our customers, and our counterparties. These conditions could result in one or more of the following:
 
  •  A decrease in the demand for loans and other products and services offered by us;
 
  •  A decrease in customer savings generally and in the demand for savings and investment products offered by us; and
 
  •  An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to us.
 
An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of NPAs, NCOs, provision for credit losses, and valuation adjustments on loans held for sale. The markets we serve are dependent on industrial and manufacturing businesses and thus are particularly vulnerable to adverse changes in economic conditions affecting these sectors.
 
3.   Further declines in home values or reduced levels of home sales in our markets could result in higher delinquencies, greater charge-offs, and increased losses on the sale of foreclosed real estate in future periods.
 
Like all financial institutions, we are subject to the effects of any economic downturn. There has been a slowdown in the housing market across our geographic footprint, reflecting declining prices and excess


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inventories of houses to be sold. These developments have had, and further declines may continue to have, a negative effect on our financial conditions and results of operations. At December 31, 2010, we had:
 
  •  $7.7 billion of home equity loans and lines, representing 20% of total loans and leases.
 
  •  $4.5 billion in residential real estate loans, representing 12% of total loans and leases.
 
  •  $4.7 billion of Federal Agency mortgage-backed securities, $0.1 billion of private label CMOs, and $0.1 billion of Alt-A mortgage-backed securities that could be negatively affected by a decline in home values.
 
  •  $0.3 billion of bank owned life insurance investments primarily in mortgage-backed securities.
 
Because of the decline in home values, some of our borrowers have mortgages greater than the value of their homes. The decline in home values, coupled with the weakened economy, has increased short sales and foreclosures. The reduced levels of home sales have had a materially adverse affect on the prices achieved on the sale of foreclosed properties. Continued decline in home values may escalate these problems resulting in higher delinquencies, greater charge-offs, and increased losses on the sale of foreclosed real estate in future periods.
 
Market Risks :
 
1.   Changes in interest rates could reduce our net interest income, reduce transactional income, and negatively impact the value of our loans, securities, and other assets. This could have a material adverse impact on our cash flows, financial condition, results of operations, and capital.
 
Our results of operations depend substantially on net interest income, which is the difference between interest earned on interest earning assets (such as investments and loans) and interest paid on interest bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, deflation, recession, unemployment, money supply, and other factors beyond our control may also affect interest rates. If our interest earning assets mature or reprice more quickly than interest bearing liabilities in a declining interest rate environment, net interest income could be materially adversely impacted. Likewise, if interest bearing liabilities mature or reprice more quickly than interest earning assets in a rising interest rate environment, net interest income could be adversely impacted.
 
At December 31, 2010, $2.6 billion, or 13%, of our commercial loan portfolio, as measured by the aggregate outstanding principal balances, was fixed-rate loans and the remainder was adjustable-rate loans. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, and the increased payment increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on the loans underlying our participation interests as borrowers refinance their mortgages at lower interest rates.
 
Changes in interest rates also can affect the value of loans, securities, and other assets, including mortgage and nonmortgage servicing rights and assets under management. Examples of transactional income include trust income, brokerage income, and gain on sales of loans. This type of income can vary significantly from quarter-to-quarter and year-to-year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans and leases may lead to an increase in NPAs and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. When we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of NPAs would have an adverse impact on net interest income.
 
Rising interest rates will result in a decline in value of our fixed-rate debt securities and cash flow hedging derivatives portfolio. The unrealized losses resulting from holding these securities and financial


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instruments would be recognized in OCI and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital ratios; however Tangible Common Equity and the associated ratios would be reduced. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce Tier I and Total Risk-based Capital regulatory ratios. If cash flow hedging derivatives are terminated, the impact is reflected in earnings over the life of the instrument and reduces Tier I and Total Risk-based Capital regulatory ratios. Somewhat offsetting these negative impacts to OCI in a rising interest rate environment, is a decrease in pension and other post-retirement obligations.
 
If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall further, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest bearing liability rates could fail to decline in tandem. This would have a material adverse effect on our net interest income and our results of operations.
 
2.   The value of our Alt-A mortgage-backed, Pooled-Trust-Preferred and Private Label CMO investment securities are volatile and future valuation declines or other-than-temporary impairments could have a materially adverse affect on our future earnings and regulatory capital.
 
Continued volatility in the market value for these securities in our investment securities portfolio, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio, could result in significant fluctuations in the value of these securities. This could have a material adverse impact on our accumulated OCI and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired and limit our ability to sell these securities at reasonable prices. This could have a material negative impact on our future earnings, although the impact on shareholders’ equity would be offset by any amount already included in OCI for securities where we have recorded temporary impairment. At December 31, 2010, the fair value of these securities was $284.6 million.
 
3.   An issuance of additional capital would have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.
 
We and the Bank are highly regulated, and we, as well as our regulators, continue to regularly perform a variety of capital analyses, including the preparation of stress case scenarios. As a result of those assessments, we could determine, or our regulators could require us, to raise additional capital in the future. Any such capital raise could include, among other things, the potential issuance of additional common equity to the public, or the additional conversions of our existing Series A Preferred Stock to common equity. There could also be market perceptions that we need to raise additional capital, and regardless of the outcome of any stress test or other stress case analysis, such perceptions could have an adverse effect on the price of our common stock.
 
Furthermore, in order to improve our capital ratios above our already Well-capitalized levels, we can decrease the amount of our risk-weighted assets, increase capital, or a combination of both. If it is determined that additional capital is required in order to improve or maintain our capital ratios, we may accomplish this through the issuance of additional common stock.
 
The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities, could be substantially dilutive to existing common shareholders. Shareholders of our common stock have no preemptive rights that entitle them to purchase their pro-rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to existing shareholders. The market price of our common stock could decline as a result of sales of shares of our common stock or securities convertible into, or exchangeable for, common stock in anticipation of such sales.


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Liquidity Risks :
 
1.   If we are unable to borrow funds through access to capital markets, we may not be able to meet the cash flow requirements of our depositors, creditors, and borrowers, or have the operating cash needed to fund corporate expansion and other corporate activities.
 
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by our board of directors, with operating limits set by Management. Wholesale funding sources include federal funds purchased, securities sold under repurchase agreements, noncore deposits, and medium- and long-term debt, which includes a domestic bank note program and a Euronote program. The Bank is also a member of the FHLB, which provides funding through advances to members that are collateralized with mortgage-related assets.
 
We maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity available to us should they be needed. These sources include the sale or securitization of loans, the ability to acquire additional national market noncore deposits, issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common securities in public or private transactions. The Bank also can borrow from the Federal Reserve’s discount window.
 
Starting in the middle of 2007, significant turmoil and volatility in worldwide financial markets increased, though current volatility has declined. Such disruptions in the liquidity of financial markets directly impact us to the extent we need to access capital markets to raise funds to support our business and overall liquidity position. This situation could affect the cost of such funds or our ability to raise such funds. If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. We may, from time to time, consider opportunistically retiring our outstanding securities in privately negotiated or open market transactions for cash or common shares. This could adversely affect our liquidity position.
 
2.   Due to the losses that the Bank incurred in 2008 and 2009, at December 31, 2010, the Bank and its subsidiaries could not declare and pay dividends to the holding company, any subsidiary of the holding company outside the Bank’s consolidated group, or any security holder outside the Bank’s consolidated group, without regulatory approval.
 
Dividends from the Bank to the parent company are the primary source of funds for the payment of dividends to our shareholders. Under applicable statutes and regulations, a national bank may not declare and pay dividends in any year in excess of an amount equal to the sum of the total of the net income of the bank for that year and the retained net income of the bank for the preceding two years, minus the sum of any transfers required by the OCC and any transfers required to be made to a fund for the retirement of any preferred stock, unless the OCC approves the declaration and payment of dividends in excess of such amount. Due to the losses that the Bank incurred in 2008 and 2009, at December 31, 2010, the Bank and its subsidiaries could not declare and pay dividends to the parent company, any subsidiary of the parent company outside the Bank’s consolidated group, or any security holder outside the Bank’s consolidated group, without regulatory approval. Since the first quarter of 2008, the Bank has requested and received OCC approval each quarter to pay periodic dividends to shareholders outside the Bank’s consolidated group on the preferred and common stock of its REIT and capital financing subsidiaries to the extent necessary to maintain their REIT status. A wholly-owned nonbank subsidiary of the parent company owns a portion of the preferred shares of the REIT and capital financing subsidiaries. Outside of the REIT and capital financing subsidiary dividends, we do not anticipate that the Bank will declare dividends during 2011.


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Operational Risks :
 
1.   The resolution of significant pending litigation, if unfavorable, could have a material adverse affect on our results of operations for a particular period.
 
We face legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. As more fully described in Note 22 of the Notes to Consolidated Financial Statements, certain putative class actions and shareholder derivative actions were filed against us, certain affiliated committees, and/or certain of our current or former officers and directors. These cases allege violations of the securities laws, breaches of fiduciary duty, waste of corporate assets, abuse of control, gross mismanagement, unjust enrichment, and violations of Employment Retirement Income Security Act (ERISA) laws in connection with our acquisition of Sky Financial, the transactions between Franklin and us, and the financial and other disclosures related to these transactions. Although no assurance can be given, based on information currently available, consultation with counsel, and available insurance coverage, we believe that the eventual outcome of these claims against us will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position or results of operations. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular reporting period.
 
2.   We face significant operational risks which could lead to expensive litigation and loss of confidence by our customers, regulators, and capital markets.
 
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or outsiders, or operational errors by employees, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. In addition, today’s threats to customer information and information systems are complex, more wide spread, continually emerging, and increasing at a rapid pace. Although we establish and maintain systems of internal operational controls that provide us with timely and accurate information about our level of operational risks, continue to invest in better tools and processes in all key areas, and monitor threats with increased rigor and focus, these operational risks could lead to expensive litigation and loss of confidence by our customers, regulators, and the capital markets.
 
Moreover, negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and retain customers and can also expose us to litigation and regulatory action. Relative to acquisitions, we cannot predict if, or when, we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms. We incur risks and challenges associated with the integration of acquired institutions in a timely and efficient manner, and we cannot guarantee that we will be successful in retaining existing customer relationships or achieving anticipated operating efficiencies.
 
3.   We are subject to routine on-going tax examinations by the IRS and by various other jurisdictions, including the states of Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and Illinois. The IRS, Ohio, and Kentucky have proposed various adjustments to our previously filed tax returns. It is possible that the ultimate resolution of all proposed and future adjustments, if unfavorable, may be materially adverse to the results of operations in the period it occurs.
 
The calculation of our provision for federal income taxes is complex and requires the use of estimates and judgments. In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in the Consolidated Financial Statements.


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From time-to-time, we engage in business transactions that may have an effect on our tax liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position.
 
We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed through 2007. In addition, various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and Illinois.
 
The IRS and other taxing jurisdictions, including the states of Ohio and Kentucky, have proposed adjustments to our previously filed tax returns. We do not agree with these adjustments and believe that the tax positions taken by us related to such proposed adjustments were correct and supported by applicable statutes, regulations, and judicial authority, and we intend to vigorously defend our positions. Appropriate tax reserves have been established in accordance with ASC 740, Income Taxes and ASC 450, Contingencies. However, it is also possible that the ultimate resolution of the proposed adjustments, if unfavorable, may result in penalties and interest. Such adjustments, including any penalties and interest, may be material to our results of operations in the period such adjustments occur and increase our effective tax rate. Nevertheless, although no assurances can be given, we believe that the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position in future periods. For further discussion, see Note 17 of the Notes to Consolidated Financial Statements.
 
The Franklin restructuring in the 2009 first quarter resulted in a $159.9 million net deferred tax asset equal to the amount of income and equity that was included in our operating results for the 2009 first quarter. During the 2010 first quarter, a $38.2 million 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 Franklin restructuring. In the 2010 fourth quarter, we entered into an asset monetization transaction that generated a tax benefit of $63.6 million. While we believe that our positions regarding the deferred tax asset and related income recognition is correct, the positions could be subject to challenge.
 
4.   Failure to maintain effective internal controls over financial reporting in the future could impair our ability to accurately and timely report our financial results or prevent fraud, resulting in loss of investor confidence and adversely affecting our business and stock price.
 
Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. As a financial holding company, we are subject to regulation that focuses on effective internal controls and procedures. Management continually seeks to improve these controls and procedures.
 
We believe that our key internal controls over financial reporting are currently effective; however, such controls and procedures will be modified, supplemented, and changed from time-to-time as necessitated by our growth and in reaction to external events and developments. While we will continue to assess our controls and procedures and take immediate action to remediate any future perceived gaps, there can be no guarantee of the effectiveness of these controls and procedures on an on-going basis. Any failure to maintain, in the future, an effective internal control environment could impact our ability to report our financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact our business and stock price.
 
Compliance Risks :
 
1.   If our regulators deem it appropriate, they can take regulatory actions that could materially adversely impact our ability to compete for new business, constrain our ability to fund our liquidity needs or pay dividends, and increase the cost of our services.
 
We are subject to the supervision and regulation of various state and Federal regulators, including the OCC, Federal Reserve, FDIC, SEC, Financial Industry Regulatory Authority, and various state regulatory agencies. As such, we are subject to a wide variety of laws and regulations, many of which are discussed in the Regulatory Matters section. As part of their supervisory process, which includes periodic examinations and


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continuous monitoring, the regulators have the authority to impose restrictions or conditions on our activities and the manner in which we manage the organization. These actions could impact the organization in a variety of ways, including subjecting us to monetary fines, restricting our ability to pay dividends, precluding mergers or acquisitions, limiting our ability to offer certain products or services, or imposing additional capital requirements.
 
2.   Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may materially adversely affect us by increasing our costs, adding complexity in doing business, impeding the efficiency of our internal business processes, negatively impacting the recoverability of certain of our recorded assets, requiring us to increase our regulatory capital, limiting our ability to pursue business opportunities, and otherwise materially adversely impacting our financial condition, results of operation, liquidity, or stock price.
 
Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to the previously enacted governmental assistance programs designed to stabilize and stimulate the U.S. economy, recent economic, political, and market conditions have led to numerous programs and proposals to reform the financial regulatory system and prevent future crises.
 
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal CFPB, and requires the bureau and other federal agencies to implement many new and significant rules and regulations. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact our business. Compliance with these new laws and regulations may result in additional costs, which could be significant, and may have a material and adverse effect on our results of operations.
 
In addition, international banking industry regulators have largely agreed upon significant changes in the regulation of capital required to be held by banks and their holding companies to support their businesses. The new international rules, known as Basel III, generally increase the capital required to be held and narrow the types of instruments which will qualify as providing appropriate capital and impose a new liquidity measurement. The Basel III requirements are complex and will be phased in over many years.
 
The Basel III rules do not apply to U.S. banks or holding companies automatically. Among other things, the Dodd-Frank Act requires U.S. regulators to reform the system under which the safety and soundness of banks and other financial institutions, individually and systemically, are regulated. That reform effort will include the regulation of capital and liquidity. It is not known whether or to what extent the U.S. regulators will incorporate elements of Basel III into the reformed U.S. regulatory system, but it is expected that the U.S. reforms will include an increase in capital requirements, a narrowing of what qualifies as appropriate capital, and impose a new liquidity measurement. One likely effect of a significant tightening of U.S. capital requirements would be to increase our cost of capital, among other things. Any permanent significant increase in our cost of capital could have significant adverse impacts on the profitability of many of our products, the types of products we could offer profitably, our overall profitability, and our overall growth opportunities, among other things. Although most financial institutions would be affected, these business impacts could be felt unevenly, depending upon the business and product mix of each institution. Other potential effects could include less ability to pay cash dividends and repurchase our common shares, higher dilution of common shareholders, and a higher risk that we might fall below regulatory capital thresholds in an adverse economic cycle.
 
Item 1B:    Unresolved Staff Comments
 
None.


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Item 2:    Properties
 
Our headquarters, as well as the Bank’s, are located in the Huntington Center, a thirty-seven-story office building located in Columbus, Ohio. Of the building’s total office space available, we lease approximately 33%. The lease term expires in 2030, with six five-year renewal options for up to 30 years but with no purchase option. The Bank has an indirect minority equity interest of 18.4% in the building.
 
Our other major properties consist of the following:
 
             
Description
 
Location
  Own   Lease
 
13 story office building, located adjacent to the Huntington Center
  Columbus, Ohio      
12 story office building, located adjacent to the Huntington Center
  Columbus, Ohio      
The Crosswoods building
  Columbus, Ohio      
21 story office building, known as the Huntington Building
  Cleveland, Ohio      
12 story office building
  Youngstown, Ohio      
10 story office building
  Warren, Ohio      
18 story office building
  Charleston, West Virginia      
3 story office building
  Holland, Michigan      
office complex
  Troy, Michigan      
data processing and operations center (Easton)
  Columbus, Ohio      
data processing and operations center (Northland)
  Columbus, Ohio      
data processing and operations center (Parma)
  Cleveland, Ohio      
data processing and operations center
  Indianapolis, Indiana      
 
In 1998, we entered into a sale/leaseback agreement that included the sale of 59 of our locations. The transaction included a mix of branch banking offices, regional offices, and operational facilities, including certain properties described above, which we will continue to operate under a long-term lease.
 
Item 3:    Legal Proceedings
 
Information required by this item is set forth in Note 22 of the Notes to Consolidated Financial Statements and incorporated into this Item by reference.
 
Item 4:    Reserved.
 
PART II
 
Item 5:    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
The common stock of Huntington Bancshares Incorporated is traded on the NASDAQ Stock Market under the symbol “HBAN”. The stock is listed as “HuntgBcshr” or “HuntBanc” in most newspapers. As of January 31, 2011, we had 38,676 shareholders of record.
 
Information regarding the high and low sale prices of our common stock and cash dividends declared on such shares, as required by this item, is set forth in Table 58 entitled Selected Quarterly Income Statement Data and incorporated into this Item by reference. Information regarding restrictions on dividends, as required by this item, is set forth in Item 1 Business-Regulatory Matters and in Note 23 of the Notes to Consolidated Financial Statements and incorporated into this Item by reference.
 
As a condition to participate in the TARP, Huntington could not repurchase any additional shares without prior approval from the Treasury. On February 18, 2009, the board of directors terminated the previously authorized program for the repurchase of up to 15 million shares of common stock (the 2006 Repurchase Program). Huntington did not repurchase any common shares for the year ended December 31, 2010.


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The line graph below compares the yearly percentage change in cumulative total shareholder return on Huntington common stock and the cumulative total return of the S&P 500 Index and the KBW Bank Index for the period December 31, 2005, through December 31, 2010. The KBW Bank Index is a market capitalization-weighted bank stock index published by Keefe, Bruyette & Woods. The index is composed of the largest banking companies and includes all money center banks and regional banks, including Huntington. An investment of $100 on December 31, 2005, and the reinvestment of all dividends are assumed.
 
(PERFERMANCE GRAPH)
                                                             
      2005       2006       2007       2008       2009       2010  
HBAN
    $ 100       $ 104       $ 69       $ 39       $ 19       $ 35  
S&P 500
    $ 100       $ 116       $ 122       $ 77       $ 97       $ 112  
KBW Bank Index
    $ 100       $ 117       $ 91       $ 48       $ 47       $ 58  
                                                             
HBAN S&P 500 KBW Bank Index


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Item 6:    Selected Financial Data
 
Table 1 — Selected Financial Data (1), (9)
 
                                         
    Year Ended December 31,  
    2010     2009     2008     2007     2006  
(Dollar amounts in thousands, except per share amounts)                              
 
Interest income
  $ 2,145,392     $ 2,238,142     $ 2,798,322     $ 2,742,963     $ 2,070,519  
Interest expense
    526,587       813,855       1,266,631       1,441,451       1,051,342  
                                         
Net interest income
    1,618,805       1,424,287       1,531,691       1,301,512       1,019,177  
Provision for credit losses
    634,547       2,074,671       1,057,463       643,628       65,191  
                                         
Net interest income after provision for credit losses
    984,258       (650,384 )     474,228       657,884       953,986  
                                         
Noninterest income
    1,041,858       1,005,644       707,138       676,603       561,069  
Noninterest expense:
                                       
Goodwill impairment
          2,606,944                    
Other noninterest expense
    1,673,805       1,426,499       1,477,374       1,311,844       1,000,994  
                                         
Total noninterest expense
    1,673,805       4,033,443       1,477,374       1,311,844       1,000,994  
                                         
Income (loss) before income taxes
    352,311       (3,678,183 )     (296,008 )     22,643       514,061  
Provision (benefit) for income taxes
    39,964       (584,004 )     (182,202 )     (52,526 )     52,840  
                                         
Net income (loss)
  $ 312,347     $ (3,094,179 )   $ (113,806 )   $ 75,169     $ 461,221  
                                         
Dividends on preferred shares
    172,032       174,756       46,400              
                                         
Net income (loss) applicable to common shares
  $ 140,315     $ (3,268,935 )   $ (160,206 )   $ 75,169     $ 461,221  
                                         
Net income (loss) per common share — basic
  $ 0.19     $ (6.14 )   $ (0.44 )   $ 0.25     $ 1.95  
Net income (loss) per common share — diluted
    0.19       (6.14 )     (0.44 )     0.25       1.92  
Cash dividends declared per common share
    0.0400       0.0400       0.6625       1.0600       1.0000  
Balance sheet highlights
                                       
Total assets (period end)
  $ 53,819,642     $ 51,554,665     $ 54,352,859     $ 54,697,468     $ 35,329,019  
Total long-term debt (period end)(2)
    3,813,827       3,802,670       6,870,705       6,954,909       4,512,618  
Total shareholders’ equity (period end)
    4,980,542       5,336,002       7,228,906       5,951,091       3,016,029  
Average long-term debt(2)
    3,953,177       5,558,001       7,374,681       5,714,572       4,942,671  
Average shareholders’ equity
    5,482,502       5,787,401       6,395,690       4,633,465       2,948,367  
Average total assets
    52,574,231       52,440,268       54,921,419       44,711,676       35,111,236  


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    Year Ended December 31,  
    2010     2009     2008     2007     2006  
(Dollar amounts in thousands, except per share amounts)                              
 
Key ratios and statistics
                                       
Margin analysis — as a % of average earnings assets
                                       
Interest income(3)
    4.52 %     4.88 %     5.90 %     7.02 %     6.63 %
Interest expense
    1.08       1.77       2.65       3.66       3.34  
                                         
Net interest margin(3)
    3.44 %     3.11 %     3.25 %     3.36 %     3.29 %
                                         
Return on average total assets
    0.59 %     (5.90 )%     (0.21 )%     0.17 %     1.31 %
Return on average common shareholders’ equity
    3.7       (80.8 )     (2.8 )     1.6       15.6  
Return on average tangible common shareholders’ equity(4)
    5.6       (22.4 )     (4.4 )     3.9       19.5  
Efficiency ratio(5)
    60.4       55.4       57.0       62.5       59.4  
Dividend payout ratio
    0.21       N.R.       N.R.       4.24       52.1  
Average shareholders’ equity to average assets
    10.43       11.04       11.65       10.36       8.40  
Effective tax rate (benefit)
    11.3       (15.9 )     (61.6 )     N.R.       10.3  
Tangible common equity to tangible assets (period end)(6),(8)
    7.56       5.92       4.04       5.09       6.93  
Tangible equity to tangible assets (period end)(7),(8)
    8.24       9.24       7.72       5.09       6.93  
Tier 1 leverage ratio (period end)
    9.41       10.09       9.82       6.77       8.00  
Tier 1 risk-based capital ratio (period end)
    11.55       12.50       10.72       7.51       8.93  
Total risk-based capital ratio (period end)
    14.46       14.55       13.91       10.85       12.79  
Other data
                                       
Full-time equivalent employees (period end)
    11,341       10,272       10,951       11,925       8,081  
Domestic banking offices (period end)
    620       611       613       625       381  
 
 
N.R. — Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.
 
(1) Comparisons for presented periods are impacted by a number of factors. Refer to the Significant Items for additional discussion regarding these key factors.
 
(2) Includes FHLB advances, subordinated notes, and other long-term debt.
 
(3) On an FTE basis assuming a 35% tax rate.
 
(4) Net income (loss) less expense excluding amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
 
(5) Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains.
 
(6) Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.

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(7) Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.
 
(8) Tangible equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently.
 
(9) Comparisons are affected by the Sky Financial acquisition in 2007, and the Unizan acquisition in 2006.
 
Item 7:    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
INTRODUCTION
 
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 145 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services. Our over 600 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. Selected financial service and other activities are also conducted in various states throughout the United States. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong.
 
The following MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and other information contained in this report.
 
Our discussion is divided into key segments:
 
  •  Executive Overview  — Provides a summary of our current financial performance, and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our 2011 expectations.
 
  •  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.
 
  •  Results for the Fourth Quarter  — Provides a discussion of results for the 2010 fourth quarter compared with the 2009 fourth quarter.


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  •  Additional Disclosures  — Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, recent accounting pronouncements and developments, and acquisitions.
 
A reading of each section is important to understand fully the nature of our financial performance and prospects.
 
EXECUTIVE OVERVIEW
 
2010 Financial Performance Review
 
In 2010, we reported net income of $312.3 million, or $0.19 per common share ( see Table 1 ). The current year included a nonrecurring reduction of $0.08 per common share for the deemed dividend resulting from the repurchase of $1.4 billion in TARP Capital. This compared with a net loss of $3,094.2 million, or $6.14 per common share, for 2009.
 
The 2009 loss primarily reflected two items: $2,606.9 million in noncash goodwill impairment charges and $2,074.7 million in provision for credit losses. Most of the $2,606.9 million in goodwill impairment charges related to the acquisitions of Sky Financial and Unizan. While this impairment charge reduced reported net income, equity, and total assets, it had no impact on key regulatory capital ratios. As a noncash charge, it had no affect on our liquidity. The provision for credit losses reflected higher net charge-offs as we addressed issues in our loan portfolio. We also strengthened our allowance for credit losses because of higher levels of nonperforming assets.
 
Fully-taxable equivalent net interest income was $1.6 billion in 2010, up $0.2 billion, or 14%, from 2009. The increase primarily reflected the favorable impact of the increase in net interest margin to 3.44% from 3.11% and, to a lesser degree, a 3% 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. Additionally, we grew our average core deposits $3.1 billion, or 9%, from 2009. Although average total earning assets increased only slightly compared with 2009, this change reflected a $2.9 billion, or 45%, increase in average total investment securities, partially offset by a $1.4 billion, or 4%, decline in average total loans and leases. The change in average loan balances from the prior year reflected our strategy to reduce our CRE exposure as average CRE loans declined $1.9 billion, or 21%, from 2009. Average C&I loans declined $0.7 billion, or 5%, for the full year. Average automobile loans and leases increased $1.3 billion, or 38%, from 2009, reflecting the consolidation of a $0.8 billion automobile loan securitization on January 1, 2010. These changes in loan and investment securities balances from the prior year reflected the execution of our balance sheet management strategy, and not a change in standards for making loans or for investing in securities.
 
Noninterest income was $1.0 billion in 2010, a slight increase compared with 2009. The increase in noninterest income was primarily a result of an increase in mortgage banking income, reflecting an increase in origination and secondary marketing income as loan originations and loan sales were substantially higher, and MSR hedging. This was partially offset by a decline in service charges on deposit accounts, which was due to a decline in personal NSF / OD service charges. The decline reflected our implementation of changes to Regulation E and the introduction of our Fair Play banking philosophy. As part of this philosophy, we voluntarily reduced certain NSF / OD fees and implemented our 24-Hour Grace tm overdraft policy. The goal of our Fair Play banking philosophy is to introduce more customer-friendly fee structures with the objective of accelerating the acquisition and retention of customers.
 
Noninterest expense was $1.7 billion in 2010, a decrease of $2.4 billion, or 59%, compared with 2009. The decrease in noninterest expense was primarily due to goodwill impairment in the year-ago period. The decline also reflected a decrease in OREO and foreclosure expense from lower OREO losses. Further, there was a decline in deposit and other insurance expense, primarily due to a $23.6 million FDIC insurance special assessment in 2009, partially offset by continued growth in total deposits and higher FDIC insurance costs in the current period as premium rates increased. The decline was partially offset by a 2009 benefit from a gain on the early extinguishment of debt, and 2010 increases in personnel costs, reflecting a combination of factors


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including higher salaries due to a 10% increase in full-time equivalent staff in support of strategic initiatives, higher sales commissions, and retirement fund and 401(k) plan expenses.
 
Credit quality performance continued to show strong improvement as our NPAs and 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 year, NPAs declined 59%. NCOs were $874.5 million, or an annualized 2.35% of average total loans and leases, down from $1,476.6 million, or 3.82%, in 2009. While the ACL as a percentage of loans and leases was 3.39%, down from 4.16% at December 31, 2009, the ACL as a percentage of total NALs increased to 166% from 80%.
 
In December 2010, we successfully completed multiple capital actions, particularly improving our then relatively low level of common equity. We sold $920.0 million of common stock in a public offering and issued $300.0 million of subordinated debt. On December 22, 2010, these proceeds, along with other available funds, were used to complete the repurchase of our $1.4 billion of TARP Capital we issued to the Treasury under its TARP CPP. Subsequently, on January 19, 2011, we exited our TARP-related relationship with the Treasury by repurchasing the warrant we had issued to the Treasury as part of the TARP CPP for $49.1 million. The warrant had entitled the Treasury to purchase 23.6 million common shares of stock.
 
At December 31, 2010, our regulatory Tier 1 and Total risk-based capital were $2.4 billion and $1.9 billion, respectively, above the Well-capitalized regulatory thresholds. Our tangible common equity ratio improved 164 basis points to 7.56% and our Tier 1 common risk-based capital ratio improved 253 basis points to 9.29% from December 31, 2009.
 
Business Overview
 
General
 
Our general business objectives are: (1) grow revenue and profitability, (2) grow key fee businesses (existing and new), (3) improve credit quality, including lower NCOs and NPAs, (4) improve cross-sell and share-of-wallet across all business segments, (5) reduce CRE noncore exposure, and (6) continue to improve our overall management of risk.
 
As further described below, our main challenge to accomplishing our primary objectives results from an economy, that while more stable than a year ago, remains fragile. 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 a meaningful sustainable economic recovery. However, growth in our automobile loan portfolio continued with 2010 originations of $3.4 billion, an increase of $1.8 billion compared to 2009. Strong growth in originations reflected increases in all of our markets, as well as the recent expansion of our automobile lending business into Eastern Pennsylvania and five New England states. We expect our growth in the newly entered markets to become more evident over time as we further develop our dealership base. Although our residential real estate portfolio declined slightly from 2009, our mortgage originations increased $214 million, or 4%, from the prior year. Our CRE portfolio declined throughout the year as a result of our on-going strategy to reduce our CRE exposure. The decline was primarily a result of continuing paydowns in the noncore CRE portfolio.
 
We face strong competition from other banks and financial service firms in our markets. As such, we have placed strategic emphasis on, and continue to develop and expand resources devoted to, improving cross-sell performance with our core customer base. One example of this emphasis was our recent agreement with Giant Eagle supermarkets to be its exclusive in-store bank in Ohio. During the 2010 fourth quarter, we opened four such in-store branches. When fully implemented, the partnership will give us an additional 100 branches, which in the aggregate will be 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 and are expected to increase the number of households served and drive revenue. Additionally, it will give customers the convenience of operating seven days per week and extended hours banking.


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Economy
 
The weak residential real estate market and U.S. economy has had a significant adverse impact on the financial services industry as a whole, and specifically on our financial results. In addition, the U.S. recession during 2008 and 2009 and continued high Midwest unemployment have hindered any significant economic recovery. However, some indications of recovery are beginning to take hold. Following is a discussion of certain economic trends in our market area, particularly Ohio and Michigan.
 
The median home prices in the Midwest market have been directionally consistent with the nationwide averages. In the years preceding the economic crisis, home prices in Michigan and Ohio did not increase as rapidly as the national trend and became more in line with the national averages during the crisis. Therefore, when real estate prices began to decline in 2008, the impact in our Midwest markets was reduced because pre-crisis originations were not based on values that were as inflated as in other parts of the country. Home prices in the Midwest are generally expected to follow the national growth rates over the next two years. Residential real estate sales in the Midwest have been consistent with national averages. Single family home building permits are expected to increase both nationally and in the Midwest through 2013.
 
Year-over-year changes in median household income in the Midwest have been consistent with national averages and directionally similar with national trends. Both the U.S. and Midwest are expected to have slight, but positive, income growth over the next two years. Unemployment in the Midwest has been consistently higher than the national average for most of the past decade. However, the relative difference is expected to narrow over the next two years, with the Midwest unemployment rate converging to the U.S. average. The exception is Michigan, which has the second highest unemployment level in the country. From October 2009 through October 2010, Indiana’s employment growth of 1.1% was among the strongest in the country. Over this same time period, Ohio’s manufacturing employment grew 1.4%, which was significantly higher than the 0.8% national average. Cleveland’s overall employment growth of 1.0% exceeded the national growth rate of 0.6%.
 
According to the FRB-Cleveland Beige Book in December 2010, manufacturers in our footprint indicated that new orders and production were stable or rose slightly during the last two months of 2010. Inventory levels were balanced with incoming order demand and capacity utilization trending up for some manufacturers and steel producers. Overall, manufacturers were cautiously optimistic and expect at least modest growth during 2011.
 
Partially resulting from these economic conditions in our footprint, we experienced higher than historical levels of loan delinquencies and NCOs during 2009 and 2010. The pronounced downturn in the residential real estate market that began in early 2007 resulted in lower residential real estate values and higher delinquencies and NCOs, not only in consumer mortgage loans but also in commercial loans to builders and developers of residential real estate. The value of our investment securities backed by residential and commercial real estate was also negatively impacted by a lack of liquidity in the financial markets and anticipated credit losses. Commercial real estate loans for retail businesses were also challenged by the difficult consumer economic conditions over this period. However, as further discussed in the Credit Risk section, we experienced significant improvement in credit performance during 2010.
 
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 relating to certain overdraft fees for consumer deposit accounts and the passage of the 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 that overdraw the customer’s account unless the customer opts-in to the discretionary overdraft service. For us, such fees were approximately $90 million per year prior to the amendment. This change in Regulation E requires us to alert our consumer customers we can no longer allow an overdraft unless they opt-in to our discretionary overdraft service. To date, the number of customers choosing to opt-in has been higher than our expectations. Also, during the second half of 2010, we voluntarily


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reduced certain overdraft fees and introduced 24-Hour Grace tm on overdrafts as part of our Fair Play banking philosophy designed to build on our foundation of service excellence. We expect our 24-Hour Grace tm service to accelerate acquisition of new checking customers, 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 CFPB, and the requirements of the enhanced supervision provisions, among others. Two areas where we are focusing on the financial impact are: interchange fees and the exclusion of trust-preferred securities from our Tier I regulatory capital.
 
Currently, 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 will depend on rules yet to be issued by the Federal Reserve. Proposed rules were issued on December 28, 2010, and the Dodd-Frank Act requires final interchange rules to be issued by April 21, 2011, and effective no later than July 21, 2011. Based on the Federal Reserve’s proposed rules, a maximum interchange rate of $0.07 would reduce our annual interchange fees by approximately 85%. A maximum interchange rate of $0.12 would reduce our annual interchange fees by approximately 75%.
 
At December 31, 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 130 basis points. Even with this reduction, our capital ratios would remain above Well-capitalized levels. There is a three 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 will 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. The FDIC has approved issuance of an interagency proposed rulemaking to implement certain provisions of Section 171 of the Dodd-Frank Act (Section 171). Section 171 provides that the capital requirements generally applicable to insured banks shall serve as a floor for other capital requirements the agencies establish. The FDIC noted that the advanced approaches of Basel III allow for reductions in risk-based capital requirements below those generally applicable to insured banks and, accordingly, need to be modified to be consistent with Section 171.
 
Recent Industry Developments
 
Foreclosure Documentation  — We evaluated our foreclosure documentation procedures given the recent announcements made by other financial institutions regarding problems associated with their foreclosure activities. As a result of our review, we have determined that we do not have any significant issues relating to so-called “robo-signing,” foreclosure affidavits were completed and signed by employees with personal knowledge of the contents of the affidavits, and there is no reason to conclude that foreclosures were filed that should not have been filed. Additionally, we have identified and are implementing process and control enhancements to ensure that affidavits continue to be prepared in compliance with applicable state law. We are consulting with local foreclosure counsel as necessary with respect to additional requirements imposed by the courts in which foreclosure proceedings are pending, which could impact our foreclosure actions.
 
Representation and Warranty Reserve  — We primarily conduct our loan sale and securitization activity with Fannie Mae and Freddie Mac. In connection with these and other sale and securitization transactions, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. In the future, we may be required to repurchase individual loans and / or indemnify


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these organizations against losses due to material breaches of these representations and warranties. At December 31, 2010, we have a reserve for such losses of $20.2 million, which is included in accrued expenses and other liabilities.
 
2011 Expectations
 
Borrower and consumer confidence remains a major factor impacting growth opportunities for 2011. We continue to believe that the economy will remain relatively stable throughout 2011, with the potential for improvement in the latter half. Challenges to earnings growth include (1) revenue headwinds as a result of regulatory and legislative actions, (2) anticipated higher interest rates as we enter 2011, which is expected to reduce mortgage banking income, and (3) continued investments in growing our businesses.
 
Reflecting these factors, pre-tax, pre-provision income levels are expected to remain in line with 2010 second half performance. Nevertheless, net income growth from the 2010 fourth quarter level is anticipated throughout the year. This will primarily reflect on-going reductions in credit costs. We expect the absolute levels of NCOs, NPAs, and Criticized loans will continue to decline, resulting in lower levels of provision expense. Given the significant credit-related improvements in 2010, coupled with our expectation for continued improvement, our return to more normalized levels of credit costs could occur earlier than previously expected.
 
The net interest margin is expected to be flat or increase slightly from the 2010 fourth quarter. We anticipate continued benefit from lower deposit pricing. In addition, the absolute growth in loans compared with deposits is anticipated to be more comparable, thus reducing the absolute growth in lower yield investment securities.
 
The automobile loan portfolio is expected to continue its strong growth, and we anticipate continued growth in C&I loans. Home equity and residential mortgages are likely to show only modest growth. CRE loans are expected to continue to decline, but at a slower rate.
 
Core deposits are expected to show continued growth. Further, we expect the shift toward lower-cost demand deposit accounts will continue.
 
Fee income, compared with the 2010 fourth quarter, will be negatively impacted by lower interchange fees due to regulatory fee change and a decline in mortgage banking revenues due to a higher interest rate environment as we enter 2011. With regard to interchange fees, if enacted as recently outlined, the Federal Reserve’s proposed interchange fee structure will significantly lower interchange revenue. Other fee categories are expected to grow, reflecting the impact of our cross-sell initiatives throughout the Company, as well as the positive impact from strategic initiatives. Over time, we anticipate more than offsetting revenue challenges with revenue we expect to generate by accelerating customer growth and cross-sell results. Expense levels early in the year should be up modestly from 2010 fourth quarter performance, with increases later in the year due to continued investments to grow the business.


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Table 2 — Selected Annual Income Statements (1)
 
                                                         
    Year Ended December 31,  
          Change from 2009           Change from 2008        
    2010     Amount     Percent     2009     Amount     Percent     2008  
(Dollar amounts in thousands, except per share amounts)                                          
 
Interest income
  $ 2,145,392     $ (92,750 )     (4 )%   $ 2,238,142     $ (560,180 )     (20 )%   $ 2,798,322  
Interest expense
    526,587       (287,268 )     (35 )     813,855       (452,776 )     (36 )     1,266,631  
                                                         
Net interest income
    1,618,805       194,518       14       1,424,287       (107,404 )     (7 )     1,531,691  
Provision for credit losses
    634,547       (1,440,124 )     (69 )     2,074,671       1,017,208       96       1,057,463  
                                                         
Net interest income after provision for credit losses
    984,258       1,634,642       N.R.       (650,384 )     (1,124,612 )     N.R.       474,228  
                                                         
Service charges on deposit accounts
    267,015       (35,784 )     (12 )     302,799       (5,254 )     (2 )     308,053  
Mortgage banking income
    175,782       63,484       57       112,298       103,304       1,149       8,994  
Trust services
    112,555       8,916       9       103,639       (22,341 )     (18 )     125,980  
Electronic banking
    110,234       10,083       10       100,151       9,884       11       90,267  
Insurance income
    76,413       3,087       4       73,326       702       1       72,624  
Brokerage income
    68,855       4,012       6       64,843       (329 )     (1 )     65,172  
Bank owned life insurance income
    61,066       6,194       11       54,872       96             54,776  
Automobile operating lease income
    45,964       (5,846 )     (11 )     51,810       11,959       30       39,851  
Securities losses
    (274 )     9,975       (97 )     (10,249 )     187,121       (95 )     (197,370 )
Other income
    124,248       (27,907 )     (18 )     152,155       13,364       10       138,791  
                                                         
Total noninterest income
    1,041,858       36,214       4       1,005,644       298,506       42       707,138  
                                                         
Personnel costs
    798,973       98,491       14       700,482       (83,064 )     (11 )     783,546  
Outside data processing and other services
    159,248       11,153       8       148,095       17,869       14       130,226  
Net occupancy
    107,862       2,589       2       105,273       (3,155 )     (3 )     108,428  
Deposit and other insurance expense
    97,548       (16,282 )     (14 )     113,830       91,393       407       22,437  
Professional services
    88,778       12,412       16       76,366       26,753       54       49,613  
Equipment
    85,920       2,803       3       83,117       (10,848 )     (12 )     93,965  
Marketing
    65,924       32,875       99       33,049       385       1       32,664  
Amortization of intangibles
    60,478       (7,829 )     (11 )     68,307       (8,587 )     (11 )     76,894  
OREO and foreclosure expense
    39,049       (54,850 )     (58 )     93,899       60,444       181       33,455  
Automobile operating lease expense
    37,034       (6,326 )     (15 )     43,360       12,078       39       31,282  
Goodwill impairment
          (2,606,944 )     (100 )     2,606,944       2,606,944              
Gain on early extinguishment of debt
          147,442       (100 )     (147,442 )     (123,900 )     526       (23,542 )
Other expense
    132,991       24,828       23       108,163       (30,243 )     (22 )     138,406  
                                                         
Total noninterest expense
    1,673,805       (2,359,638 )     (59 )     4,033,443       2,556,069       173       1,477,374  
                                                         
Income (loss) before income taxes
    352,311       4,030,494       N.R.       (3,678,183 )     (3,382,175 )     1,143       (296,008 )
Provision (benefit) for income taxes
    39,964       623,968       N.R.       (584,004 )     (401,802 )     221       (182,202 )
                                                         
Net income (loss)
    312,347       3,406,526       N.R.       (3,094,179 )     (2,980,373 )     2,619       (113,806 )
                                                         
Dividends on preferred shares
    172,032       (2,724 )     (2 )     174,756       128,356       277       46,400  
                                                         
Net income (loss) applicable to common shares
  $ 140,315     $ 3,409,250       N.R. %   $ (3,268,935 )   $ (3,108,729 )     1,940 %   $ (160,206 )
                                                         
Average common shares — basic
    726,934       194,132       36 %     532,802       166,647       46 %     366,155  
Average common shares — diluted(2)
    729,532       196,730       37       532,802       166,647       46       366,155  
Per common share:
                                                       
Net income — basic
  $ 0.19     $ 6.33       N.R. %   $ (6.14 )   $ (5.70 )     1,295 %   $ (0.44 )
Net income — diluted
    0.19       6.33       N.R.       (6.14 )     (5.70 )     1,295       (0.44 )
Cash dividends declared
    0.0400                   0.0400       (0.62 )     (94 )     0.6625  
Revenue — FTE
                                                       
Net interest income
  $ 1,618,805     $ 194,518       14 %   $ 1,424,287     $ (107,404 )     (7 )%   $ 1,531,691  
FTE adjustment
    11,077       (395 )     (3 )     11,472       (8,746 )     (43 )     20,218  
                                                         
Net interest income(3)
    1,629,882       194,123       14       1,435,759       (116,150 )     (7 )     1,551,909  
Noninterest income
    1,041,858       36,214       4       1,005,644       298,506       42       707,138  
                                                         
Total revenue(3)
  $ 2,671,740     $ 230,337       9 %   $ 2,441,403     $ 182,356       8 %   $ 2,259,047  
                                                         
 
 
 
N.R. — Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.


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(1) Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items for additional discussion regarding these key factors.
 
(2) For the years ended December 31, 2009, and December 31, 2008, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation. It was excluded because the result would have been higher than basic earnings per common share (anti-dilutive) for the year.
 
(3) On a FTE basis assuming a 35% tax rate.
 
DISCUSSION OF RESULTS OF OPERATIONS
 
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Items section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed. All earnings per share data is reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the Item 7: Business Segment Discussion.
 
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. 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 results provides a better understanding of 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.
 
Significant Items Influencing Financial Performance Comparisons
 
Earnings comparisons among the three years ended December 31, 2010, 2009, and 2008 were impacted by a number of significant items summarized below.
 
1.  TARP Capital Purchase Program Repurchase.   During the 2010 fourth quarter, we issued $920.0 million of our common stock and $300.0 million of subordinated debt. The net proceeds, along with other available funds, were used to repurchase all $1.4 billion of TARP Capital that we issued to the Treasury under its TARP Capital Purchase Program in 2008. As part of this transaction, there was a deemed dividend that did not impact net income, but resulted in a negative impact of $0.08 per common share for 2010.


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2.  Goodwill Impairment.   The impacts of goodwill impairment on our reported results were as follows:
 
  •  During the 2009 first quarter, bank stock prices, including ours, experienced a steep decline. 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 ($4.88 per common share) pretax charge. (See Goodwill discussion located within the Critical Accounting Policies and Use of Significant Estimates section for additional information.)
 
  •  During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01 per common share) was recorded relating to the sale of a small payments-related business in July 2009.
 
3.  Franklin Relationship.   Our relationship with Franklin was acquired in the 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 ($0.30 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 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 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 Franklin-related residential mortgage and home equity loans were sold at essentially book value.
 
4.  Early Extinguishment of Debt.   The positive impacts relating to the early extinguishment of debt on our reported results were: $141.0 million ($0.18 per common share) in 2009 and $23.5 million ($0.04 per common share) in 2008. These amounts were recorded to noninterest expense.
 
5.  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 $0.11 per common share for 2009. (See Capital discussion located within the Risk Management and Capital section for additional information.)
 
6.  Visa ® .   Prior to the Visa ® IPO occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. As a result of this ownership, we received Class B shares of Visa ® stock at the time of the Visa ® IPO. In the 2009 second quarter, we sold these Visa ® stock shares, resulting in a $31.4 million pretax gain ($.04 per common share). This amount was recorded in noninterest income.
 
Table 3 — Visa ® impacts
 
                                                 
    2010   2009   2008
    Earnings   EPS   Earnings   EPS   Earnings   EPS
(Dollar amounts in millions, except per share
                       
amounts)                        
 
Gain related to sale of Visa ® stock(1)
  $     $     $ 31.4     $ 0.04     $ 25.1     $ 0.04  
Visa ® indemnification liability(2)
                            17.0       0.03  


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(1) Pretax.   Recorded to noninterest income, and represented a gain on the sale of ownership interest in Visa ® . As part of the sale of our Visa ® stock in 2009, we released $8.2 million, as of June 30, 2009, of the remaining indemnification liability. Concurrently, we established a swap liability associated with the conversion protection provided to the purchasers of the Visa ® shares.
 
(2) Pretax.   Recorded to noninterest expense, and represented our pro-rata portion of an indemnification liability provided to Visa ® by its member banks for various litigation filed against Visa ® . Subsequently, in 2008, an escrow account was established by Visa ® using a portion of the proceeds received from the IPO. This action resulted in a reversal of a portion of the liability as the escrow account reduced our potential exposure related to the indemnification.
 
7. 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
 
  •  $23.6 million ($0.03 per common share) negative impact due to a special FDIC insurance premium assessment. This amount was recorded to noninterest expense.
 
  •  $12.8 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.
 
2008
 
  •  $20.4 million ($0.06 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance.
 
  •  $21.8 million ($.04 per common share) negative impact due to the merger with Sky Financial completed on July 1, 2007.
 
The following table reflects the earnings impact of the above-mentioned significant items for periods affected by this Results of Operations discussion:
 
Table 4 — Significant Items Influencing Earnings Performance Comparison (1)
 
                                                 
    2010     2009     2008  
    After-tax     EPS     After-tax     EPS     After-tax     EPS  
(Dollar amounts in thousands, except per share amounts)                                    
 
Net income (loss) — GAAP
  $ 312,347             $ (3,094,179 )           $ (113,806 )        
Earnings per share, after-tax
          $ 0.19             $ (6.14 )           $ (0.44 )
Change from prior year — $
            6.33               (5.70 )             (0.69 )
Change from prior year — %
            N.R. %             N.R %             N.R. %
 
 
N.R. — Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.
 


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    2010     2009     2008  
Significant Items — Favorable (Unfavorable) Impact:   Earnings(2)     EPS(3)     Earnings(2)     EPS(3)     Earnings(2)     EPS(3)  
 
Franklin-related loans transferred to held for sale
  $ (75,500 )   $ (0.07 )   $     $     $     $  
Net tax benefit recognized(4)
    38,222       0.05                          
Franklin relationship restructuring(4)
                159,895       0.30              
Net gain on early extinguishment of debt
                141,024       0.18       23,542       0.04  
Gain related to sale of Visa ® stock
                31,362       0.04       25,087       0.04  
Deferred tax valuation allowance benefit(4)
                12,847       0.02       20,357       0.06  
Goodwill impairment
                (2,606,944 )     (4.89 )            
FDIC special assessment
                (23,555 )     (0.03 )            
Preferred stock conversion deemed dividend
          (0.08 )           (0.11 )            
Visa ® indemnification liability
                            16,995       0.03  
Merger/Restructuring costs
                            (21,830 )     (0.04 )
 
(1) See Significant Factors Influencing Financial Performance discussion.
 
(2) Pretax unless otherwise noted.
 
(3) Based upon the annual average outstanding diluted common shares.
 
(4) After-tax.
 
Pretax, Pre-provision Income Trends
 
One non-GAAP performance measurement that we believe is useful in analyzing underlying performance trends, particularly in times of economic stress, is pretax, pre-provision income. This is the level of earnings adjusted to exclude the impact of: (1) provision expense, which is excluded because its absolute level is elevated and volatile in times of economic stress, (2) investment securities gains/losses, which are excluded because securities market valuations may also become particularly volatile in times of economic stress, (3) amortization of intangibles expense, which is excluded because the return on tangible equity common equity is a key measurement that we use to gauge performance trends, and (4) certain other items identified by us (see Significant Items above) that we believe may distort our underlying performance trends.

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The following table reflects pretax, pre-provision income for the three years ended December 31, 2010:
 
Table 5 — Pretax, Pre-provision Income (1)
 
                         
    Twelve Months Ended December 31,  
    2010     2009     2008  
(Dollar amounts in thousands)                  
 
Income (Loss) Before Income Taxes
  $ 352,311     $ (3,678,183 )   $ (296,008 )
Add: Provision for credit losses
    634,547       2,074,671       1,057,463  
Less: Securities gains (losses)
    (274 )     (10,249 )     (197,370 )
Add: Amortization of intangibles
    60,478       68,307       76,894  
Less: Significant Items
                       
Gain on early extinguishment of debt
          141,024       23,542  
Goodwill impairment
          (2,606,944 )      
Gain related to Visa stock
          31,362       25,087  
Visa indemnification liability
                16,995  
FDIC special assessment
          (23,555 )      
Merger/restructuring costs
                (21,830 )
                         
Total pretax, pre-provision income
  $ 1,047,610     $ 933,157     $ 991,925  
                         
Change in total pretax, pre-provision income:
                       
Amount
  $ 114,453     $ (58,768 )        
Percent
    12 %     (6 )%        
 
(1) Pretax, pre-provision income is a non-GAAP financial measure. Any ratio utilizing this financial measure is also non-GAAP. This financial measure has been included as it is considered to be an important metric with which to analyze and evaluate our results of operations and financial strength. Other companies may calculate this financial measure differently.
 
As discussed in more detail in the sections that follow, the increase from 2009 primarily reflected improved revenue, including higher net interest income, partially offset by higher noninterest expense, including personnel costs and marketing.
 
Net Interest Income / Average Balance Sheet
 
Our primary source of revenue is net interest income, which is the difference between interest income from earning assets (primarily loans, securities, and direct financing leases), and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Earning asset balances and related funding sources, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the net interest spread. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest-bearing sources of funds, often referred to as “free” funds, is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a fully-taxable equivalent basis, which means that tax-free interest income has been adjusted to a pretax equivalent income, assuming a 35% tax rate.


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The following table shows changes in fully-taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities.
 
Table 6 — Change in Net Interest Income Due to Changes in Average Volume and Interest Rates (1)
 
                                                 
    2010     2009  
    Increase (Decrease) from
    Increase (Decrease) from
 
    Previous Year Due to     Previous Year Due to  
          Yield/
                Yield/
       
Fully-taxable equivalent basis(2)
  Volume     Rate     Total     Volume     Rate     Total  
(Dollar amounts in millions)                                    
 
Loans and direct financing leases
  $ (71.3 )   $ (9.6 )   $ (80.9 )   $ (130.2 )   $ (371.3 )   $ (501.5 )
Investment securities
    96.8       (103.2 )     (6.4 )     84.4       (86.3 )     (1.9 )
Other earning assets
    (3.8 )     (2.2 )     (6.0 )     (42.1 )     (23.4 )     (65.5 )
                                                 
Total interest income from earning assets
    21.7       (115.0 )     (93.3 )     (87.9 )     (481.0 )     (568.9 )
                                                 
Deposits
    10.9       (246.0 )     (235.1 )     16.5       (274.1 )     (257.6 )
Short-term borrowings
    1.1       (0.5 )     0.6       (16.6 )     (23.3 )     (39.9 )
Federal Home Loan Bank advances
    (15.4 )     5.6       (9.8 )     (45.3 )     (49.6 )     (94.9 )
Subordinated notes and other long-term debt, including capital securities
    (14.3 )     (28.8 )     (43.1 )     9.8       (70.1 )     (60.3 )
                                                 
Total interest expense of interest-bearing liabilities
    (17.7 )     (269.7 )     (287.4 )     (35.6 )     (417.1 )     (452.7 )
                                                 
Net interest income
  $ 39.4     $ 154.7     $ 194.1     $ (52.3 )   $ (63.9 )   $ (116.2 )
                                                 
 
 
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.
 
(2) Calculated assuming a 35% tax rate.
 
2010 versus 2009
 
Fully-taxable equivalent net interest income for 2010 increased $194.1 million, or 14%, from 2009. This reflected the favorable impact of a $1.3 billion, or 3%, increase in average earning assets, due to a $2.9 billion, or 45%, increase in average total investment securities, which was partially offset by a $1.4 billion, or 4%, decrease in average total loans and leases. Also contributing to the increase in net interest income was a 33 basis point increase in the fully-taxable net interest margin to 3.44% from 3.11% in 2009.


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The following table details the change in our reported loans and deposits:
 
Table 7 — Average Loans/Leases and Deposits — 2010 vs. 2009
 
                                 
    Twelve Months Ended
       
    December 31,     Change  
    2010     2009     Amount     Percent  
(Dollar amounts in millions)                        
 
Loans/Leases
                               
Commercial and industrial
  $ 12,431     $ 13,136     $ (705 )     (5 )%
Commercial real estate
    7,225       9,156       (1,931 )     (21 )
                                 
Total commercial
    19,656       22,292       (2,636 )     (12 )
Automobile loans and leases
    4,890       3,546       1,344       38  
Home equity
    7,590       7,590              
Residential mortgage
    4,476       4,542       (66 )     (1 )
Other consumer
    661       722       (61 )     (8 )
                                 
Total consumer
    17,617       16,400       1,217       7  
                                 
Total loans and leases
  $ 37,273     $ 38,692     $ (1,419 )     (4 )%
                                 
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,859     $ 6,057     $ 802       13 %
Demand deposits — interest-bearing
    5,579       4,816       763       16  
Money market deposits
    11,743       7,216       4,527       63  
Savings and other domestic deposits
    4,642       4,881       (239 )     (5 )
Core certificates of deposit
    9,188       11,944       (2,756 )     (23 )
                                 
Total core deposits
    38,011       34,914       3,097       9  
Other deposits
    2,727       4,475       (1,748 )     (39 )
                                 
Total deposits
  $ 40,738     $ 39,389     $ 1,349       3 %
                                 
 
The $1.4 billion, or 4%, decrease in average total loans and leases primarily reflected:
 
  •  $2.6 billion, or 12%, decline in average total commercial loans. The decline in average CRE loans reflected our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of NCOs. The decline in average C&I loans reflected a general decrease in borrowing as evidenced by a decline in line-of-credit utilization, NCO activity, and the reclassification in the 2010 first quarter of variable rate demand notes to municipal securities.
 
Partially offset by:
 
  •  $1.2 billion, or 7%, increase in average total consumer loans. This growth reflected a $1.3 billion, or 38%, 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 an off balance sheet securitization and increasing our automobile loan portfolio by $0.5 billion at December 31, 2010. Underlying growth in automobile loans continued to be strong, reflecting a significant increase in loan originations in 2010 as compared to 2009 in all of our markets. Our recent expansion into Eastern Pennsylvania and the five New England states also began to have a positive impact on our volume.
 
Total average investment securities increased $2.9 billion, or 45%, reflecting the deployment of the cash from core deposit growth and loan runoff over this period, as well as the proceeds from 2009 capital actions.


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The $1.3 billion, or 3%, increase in average total deposits reflected:
 
  •  $3.1 billion, or 9%, growth in total core deposits. The primary driver of this growth was a 63% increase in average money market deposits. Partially offsetting this growth was a 23% decline in average core certificates of deposit.
 
Partially offset by:
 
  •  $1.7 billion, or 39%, decline in average noncore deposits, reflecting a managed decline in public fund deposits as well as planned efforts to reduce our reliance on noncore funding sources.
 
2009 versus 2008
 
Fully-taxable equivalent net interest income for 2009 decreased $116.2 million, or 7%, from 2008. This reflected the unfavorable impact of a $1.7 billion, or 4%, decrease in average earning assets, which included a $2.3 billion decrease in average loans and leases. Also contributing to the decline in net interest income was a 14 basis point decline in the fully-taxable net interest margin to 3.11%, primarily due to the unfavorable impact of our stronger liquidity position and an increase in NALs.
 
The following table details the change in our reported loans and deposits:
 
Table 8 — Average Loans/Leases and Deposits — 2009 vs. 2008
 
                                 
    Twelve Months Ended
       
    December 31,     Change  
    2009     2008     Amount     Percent  
(Dollar amounts in millions)                        
 
Loans/Leases
                               
Commercial and industrial
  $ 13,136     $ 13,588     $ (452 )     (3 )%
Commercial real estate
    9,156       9,732       (576 )     (6 )
                                 
Total commercial
    22,292       23,320       (1,028 )     (4 )
Automobile loans and leases
    3,546       4,527       (981 )     (22 )
Home equity
    7,590       7,404       186       3  
Residential mortgage
    4,542       5,018       (476 )     (9 )
Other consumer
    722       691       31       4  
                                 
Total consumer
    16,400       17,640       (1,240 )     (7 )
                                 
Total loans and leases
  $ 38,692     $ 40,960     $ (2,268 )     (6 )%
                                 
Deposits
                               
Demand deposits — noninterest-bearing
  $ 6,057     $ 5,095     $ 962       19 %
Demand deposits — interest-bearing
    4,816       4,003       813       20  
Money market deposits
    7,216       6,093       1,123       18  
Savings and other domestic deposits
    4,881       5,147       (266 )     (5 )
Core certificates of deposit
    11,944       11,637       307       3  
                                 
Total core deposits
    34,914       31,975       2,939       9  
Other deposits
    4,475       5,861       (1,386 )     (24 )
                                 
Total deposits
  $ 39,389     $ 37,836     $ 1,553       4 %
                                 
 
The $2.3 billion, or 6%, decrease in average total loans and leases primarily reflected:
 
  •  $1.0 billion, or 4%, decline in average total commercial loans. The decline in average CRE loans reflected our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of NCOs and the 2009 reclassifications of CRE loans to C&I loans (see Commercial Credit section) . The decline in average C&I loans reflected paydowns, the Franklin restructuring, and a


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  reduction in the line-of-credit utilization in our automobile dealer floorplan exposure, partially offset by the 2009 reclassifications.
 
  •  $1.0 billion, or 22%, decline in average automobile loans and leases due to the 2009 securitization of $1.0 billion of automobile loans, as well as the continued runoff of the automobile lease portfolio.
 
  •  $0.5 billion, or 9%, decline in residential mortgages reflecting the impact of loan sales, as well as the continued refinance of portfolio loans. The majority of this refinance activity was fixed-rate loans, which we typically sell in the secondary market.
 
Partially offset by:
 
  •  $0.2 billion, or 3%, increase in average home equity loans reflecting higher utilization of existing lines resulting from higher quality borrowers taking advantage of the current relatively lower interest rate environment, as well as a slowdown in runoff.
 
Total average investment securities increased $1.7 billion, or 38%, as the cash proceeds from core deposit growth and the capital actions initiated during 2009 were deployed. This increase was partially offset by a $0.9 billion, or 87%, decline in trading account securities due to the reduction in the use of these securities to hedge MSRs.
 
The $1.6 billion, or 4%, increase in average total deposits reflected:
 
  •  $2.9 billion, or 9%, growth in total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts.
 
Partially offset by:
 
  •  $1.4 billion, or 24%, decline in average noncore deposits, reflecting a managed decline in public fund deposits as well as planned efforts to reduce our reliance on noncore funding sources.


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Table 9 — Consolidated Average Balance Sheet and Net Interest Margin Analysis
 
                                                         
    Average Balances  
          Change from 2009           Change from 2008        
Fully-taxable equivalent basis(1)
  2010     Amount     Percent     2009     Amount     Percent     2008  
(Dollar amounts in millions)                                          
 
ASSETS
Interest-bearing deposits in banks
  $ 289     $ (72 )     (20 )%   $ 361     $ 58       19 %   $ 303  
Trading account securities
    158       13       9       145       (945 )     (87 )     1,090  
Federal funds sold and securities purchased under resale agreement
          (10 )     (100 )     10       (425 )     (98 )     435  
Loans held for sale
    529       (53 )     (9 )     582       166       40       416  
Investment securities:
                                                       
Taxable
    8,760       2,659       44       6,101       2,223       57       3,878  
Tax-exempt
    411       197       92       214       (491 )     (70 )     705  
                                                         
Total investment securities
    9,171       2,856       45       6,315       1,732       38       4,583  
Loans and leases:(3)
                                                       
Commercial:
                                                       
Commercial and industrial
    12,431       (705 )     (5 )     13,136       (452 )     (3 )     13,588  
Commercial real estate:
                                                       
Construction
    1,096       (762 )     (41 )     1,858       (203 )     (10 )     2,061  
Commercial
    6,129       (1,169 )     (16 )     7,298       (373 )     (5 )     7,671  
                                                         
Commercial real estate
    7,225       (1,931 )     (21 )     9,156       (576 )     (6 )     9,732  
                                                         
Total commercial
    19,656       (2,636 )     (12 )     22,292       (1,028 )     (4 )     23,320  
                                                         
Consumer:
                                                       
Automobile loans and leases
    4,890       1,344       38       3,546       (981 )     (22 )     4,527  
Home equity
    7,590                   7,590       186       3       7,404  
Residential mortgage
    4,476       (66 )     (1 )     4,542       (476 )     (9 )     5,018  
Other loans
    661       (61 )     (8 )     722       31       4       691  
                                                         
Total consumer
    17,617       1,217       7       16,400       (1,240 )     (7 )     17,640  
                                                         
Total loans and leases
    37,273       (1,419 )     (4 )     38,692       (2,268 )     (6 )     40,960  
Allowance for loan and lease losses
    (1,430 )     (474 )     50       (956 )     (261 )     38       (695 )
                                                         
Net loans and leases
    35,843       (1,893 )     (5 )     37,736       (2,529 )     (6 )     40,265  
                                                         
Total earning assets
    47,420       1,315       3       46,105       (1,682 )     (4 )     47,787  
                                                         
Cash and due from banks
    1,518       (614 )     (29 )     2,132       1,174       123       958  
Intangible assets
    702       (700 )     (50 )     1,402       (2,044 )     (59 )     3,446  
All other assets
    4,364       825       23       3,539       294       9       3,245  
                                                         
Total Assets
  $ 52,574     $ 134       %   $ 52,440     $ (2,481 )     (5 )%   $ 54,921  
                                                         
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
                                                       
Demand deposits — noninterest-bearing
  $ 6,859     $ 802       13 %   $ 6,057     $ 962       19 %   $ 5,095  
Demand deposits — interest-bearing
    5,579       763       16       4,816       813       20       4,003  
Money market deposits
    11,743       4,527       63       7,216       1,123       18       6,093  
Savings and other domestic deposits
    4,642       (239 )     (5 )     4,881       (266 )     (5 )     5,147  
Core certificates of deposit
    9,188       (2,756 )     (23 )     11,944       307       3       11,637  
                                                         
Total core deposits
    38,011       3,097       9       34,914       2,939       9       31,975  
Other domestic time deposits of $250,000 or more
    697       (144 )     (17 )     841       (802 )     (49 )     1,643  
Brokered time deposits and negotiable CDs
    1,603       (1,544 )     (49 )     3,147       (96 )     (3 )     3,243  
Deposits in foreign offices
    427       (60 )     (12 )     487       (488 )     (50 )     975  
                                                         
Total deposits
    40,738       1,349       3       39,389       1,553       4       37,836  
Short-term borrowings
    1,446       513       55       933       (1,441 )     (61 )     2,374  
Federal Home Loan Bank advances
    173       (1,063 )     (86 )     1,236       (2,045 )     (62 )     3,281  
Subordinated notes and other long-term debt
    3,780       (541 )     (13 )     4,321       227       6       4,094  
                                                         
Total interest-bearing liabilities
    39,278       (544 )     (1 )     39,822       (2,668 )     (6 )     42,490  
                                                         
All other liabilities
    956       182       24       774       (166 )     (18 )     940  
Shareholders’ equity
    5,481       (306 )     (5 )     5,787       (609 )     (10 )     6,396  
                                                         
Total Liabilities and Shareholders’ Equity
  $ 52,574     $ 134       %   $ 52,440     $ (2,481 )     (5 )%   $ 54,921  
                                                         
Continued
                                                       


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Table 9 — Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)
 
                                                 
    Interest Income / Expense     Average Rate(2)  
Fully-taxable equivalent basis(1)
  2010     2009     2008     2010     2009     2008  
(Dollar amounts in millions)                                    
 
ASSETS
Interest-bearing deposits in banks
  $ 0.8     $ 1.1     $ 7.7       0.28 %     0.32 %     2.53 %
Trading account securities
    2.9       4.3       57.5       1.82       2.99       5.28  
Federal funds sold and securities purchased under resale agreement
          0.1       10.7             0.13       2.46  
Loans held for sale
    25.7       30.0       25.0       4.85       5.15       6.01  
Investment securities:
                                               
Taxable
    239.1       250.0       217.9       2.73       4.10       5.62  
Tax-exempt
    18.8       14.2       48.2       4.56       6.68       6.83  
                                                 
Total investment securities
    257.9       264.2       266.1       2.81       4.18       5.81  
Loans and leases:(3)
                                               
Commercial:
                                               
Commercial and industrial
    660.6       664.6       770.2       5.31       5.06       5.67  
Commercial real estate:
                                               
Construction
    30.6       50.8       104.2       2.79       2.74       5.05  
Commercial
    234.9       262.3       430.1       3.83       3.59       5.61  
                                                 
Commercial real estate
    265.5       313.1       534.3       3.67       3.42       5.49  
                                                 
Total commercial
    926.1       977.7       1,304.5       4.71       4.39       5.59  
                                                 
Consumer:
                                               
Automobile loans and leases
    295.2       252.6       311.5       6.04       7.12       6.88  
Home equity
    383.7       426.2       475.2       5.06       5.62       6.42  
Residential mortgage
    216.8       237.4       292.4       4.84       5.23       5.83  
Other loans
    47.5       56.1       68.0       7.18       7.78       9.85  
                                                 
Total consumer
    943.2       972.3       1,147.1       5.35       5.93       6.50  
                                                 
Total loans and leases
    1,869.3       1,950.0       2,451.6       5.02       5.04       5.99  
                                                 
Total earning assets
  $ 2,156.6     $ 2,249.7     $ 2,818.6       4.55 %     4.88 %     5.90 %
                                                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
                                               
Demand deposits — noninterest-bearing
  $     $     $       %     %     %
Demand deposits — interest-bearing
    10.4       9.5       22.2       0.19       0.20       0.55  
Money market deposits
    103.5       83.6       117.5       0.88       1.16       1.93  
Savings and other domestic deposits
    48.2       66.8       100.3       1.04       1.37       1.88  
Core certificates of deposit
    231.6       409.4       495.7       2.52       3.43       4.27  
                                                 
Total core deposits
    393.7       569.3       735.7       1.26       1.97       2.73  
Other domestic time deposits of $250,000 or more
    9.3       20.8       62.1       1.32       2.48       3.76  
Brokered time deposits and negotiable CDs
    35.4       83.1       118.8       2.21       2.64       3.66  
Deposits in foreign offices
    0.8       0.9       15.2       0.20       0.19       1.56  
                                                 
Total deposits
    439.2       674.1       931.8       1.30       2.02       2.85  
Short-term borrowings
    3.0       2.4       42.3       0.21       0.25       1.78  
Federal Home Loan Bank advances
    3.1       12.9       107.8       1.80       1.04       3.29  
Subordinated notes and other long-term debt
    81.4       124.5       184.8       2.15       2.88       4.51  
                                                 
Total interest-bearing liabilities
    526.7       813.9       1,266.7       1.34       2.04       2.98  
                                                 
Net interest income
  $ 1,629.9     $ 1,435.8     $ 1,551.9                          
                                                 
Net interest rate spread
                            3.21       2.84       2.92  
Impact of noninterest-bearing funds on margin
                            0.23       0.27       0.33  
                                                 
Net Interest Margin
                            3.44 %     3.11 %     3.25 %
                                                 
 
 
(1) FTE yields are calculated assuming a 35% tax rate.
 
(2) Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.
 
(3) For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.


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Provision for Credit Losses
(This section should be read in conjunction with Significant Item 3, and the Credit Risk section.)
 
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels adequate to absorb our estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit.
 
The provision for credit losses in 2010 was $634.5 million, down $1,440.1 million from 2009. The decrease from 2009 primarily reflected the improved credit quality in our loan portfolios including lower NCOs, NALs, and NPAs.
 
The provision for credit losses in 2009 was $2,074.7 million, up $1,017.2 million from 2008, and exceeded NCOs by $598.1 million. The increase in 2009 from 2008 primarily reflected the continued economic weakness across all our regions and all our loan portfolios, although our commercial loan portfolios were the most affected.
 
The following table details the Franklin-related impact to the provision for credit losses for each of the past four years.
 
Table 10 — Provision for Credit Losses — Franklin-Related Impact
 
                                 
    2010     2009     2007     2008  
(Dollar amounts in millions)                        
 
Provision for credit losses
                               
Franklin
  $ 87.0     $ (14.1 )   $ 438.0     $ 410.8  
Non-Franklin
    547.5       2,088.8       619.5       232.8  
                                 
Total
  $ 634.5     $ 2,074.7     $ 1,057.5     $ 643.6  
                                 
Total net charge-offs (recoveries)
                               
Franklin
  $ 87.0     $ 115.9     $ 423.3     $ 308.5  
Non-Franklin
    787.5       1,360.7       334.8       169.1  
                                 
Total
  $ 874.5     $ 1,476.6     $ 758.1     $ 477.6  
                                 
Provision for credit losses in excess of net charge-offs
                               
Franklin
  $     $ (130.0 )   $ 14.7     $ 102.3  
Non-Franklin
    (240.0 )     728.1       284.8       63.7  
                                 
Total
  $ (240.0 )   $ 598.1     $ 299.4     $ 166.0  
                                 


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Noninterest Income
 
(This section should be read in conjunction with Significant Item 6.)
 
The following table reflects noninterest income for the three years ended December 31, 2010:
 
Table 11 — Noninterest Income
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2009           Change from 2008        
    2010     Amount     Percent     2009     Amount     Percent     2008  
(Dollar amounts in thousands)                                          
 
Service charges on deposit accounts
  $ 267,015     $ (35,784 )     (12 )%   $ 302,799     $ (5,254 )     (2 )%   $ 308,053  
Mortgage banking income
    175,782       63,484       57       112,298       103,304       1,149       8,994  
Trust services
    112,555       8,916       9       103,639       (22,341 )     (18 )     125,980  
Electronic banking
    110,234       10,083       10       100,151       9,884       11       90,267  
Insurance income
    76,413       3,087       4       73,326       702       1       72,624  
Brokerage income
    68,855       4,012       6       64,843       (329 )     (1 )     65,172  
Bank owned life insurance income
    61,066       6,194       11       54,872       96             54,776  
Automobile operating lease income
    45,964       (5,846 )     (11 )     51,810       11,959       30       39,851  
Securities losses
    (274 )     9,975       (97 )     (10,249 )     187,121       (95 )     (197,370 )
Other income
    124,248       (27,907 )     (18 )     152,155       13,364       10       138,791  
                                                         
Total noninterest income
  $ 1,041,858     $ 36,214       4 %   $ 1,005,644     $ 298,506       42 %   $ 707,138  
                                                         


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The following table details mortgage banking income and the net impact of MSR hedging activity for the three years ended December 31, 2010:
 
Table 12 — Mortgage Banking Income
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2009           Change from 2008        
    2010     Amount     Percent     2009     Amount     Percent     2008  
(Dollar amounts in thousands, unless otherwise noted)                                          
 
Mortgage Banking Income
                                                       
Origination and secondary marketing
  $ 117,440     $ 22,729       24 %   $ 94,711     $ 57,454       154 %   $ 37,257  
Servicing fees
    48,123       (371 )     (1 )     48,494       2,936       6       45,558  
Amortization of capitalized servicing(1)
    (47,165 )     406       (1 )     (47,571 )     (20,937 )     79       (26,634 )
Other mortgage banking income
    16,629       (6,731 )     (29 )     23,360       6,592       39       16,768  
                                                         
Sub-total
    135,027       16,033       13       118,994       46,045       63       72,949  
MSR valuation adjustment(1)
    (12,721 )     (47,026 )     (137 )     34,305       86,973       N.R.       (52,668 )
Net trading gains (losses) related to MSR hedging
    53,476       94,477       N.R.       (41,001 )     (29,714 )     263       (11,287 )
                                                         
Total mortgage banking income
  $ 175,782     $ 63,484       57 %   $ 112,298     $ 103,304       1,149 %   $ 8,994  
                                                         
Mortgage originations (in millions)
  $ 5,476     $ 214       4 %   $ 5,262     $ 1,489       39 %   $ 3,773  
Average trading account securities used to hedge MSRs (in millions)
    64       (6 )     (9 )     70       (961 )     (93 )     1,031  
Capitalized MSRs(2)
    196,194       (18,398 )     (9 )     214,592       47,154       28       167,438  
Total mortgages serviced for others (in millions)(2)
    15,933       (77 )           16,010       256       2       15,754  
MSR % of investor servicing portfolio
    1.23 %     (0.11 )     (8 )%     1.34 %     0.28       26 %     1.06 %
                                                         
Net Impact of MSR Hedging
                                                       
MSR valuation adjustment(1)
  $ (12,721 )   $ (47,026 )     N.R. %   $ 34,305     $ 86,973       N.R. %   $ (52,668 )
Net trading gains (losses) related to MSR hedging
    53,476       94,477       N.R.       (41,001 )     (29,714 )     263       (11,287 )
Net interest income related to MSR hedging
    972       (2,027 )     (68 )     2,999       (30,140 )     (91 )     33,139  
                                                         
Net gain (loss) of MSR hedging
  $ 41,727     $ 45,424       N.R. %   $ (3,697 )   $ 27,119       N.R. %   $ (30,816 )
                                                         
 
 
N.R. — Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.
 
(1) The change in fair value for the period represents the MSR valuation adjustment, net of amortization of capitalized servicing.
 
(2) At period end.


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2010 versus 2009
 
Noninterest income increased $36.2 million, or 4%, from the prior year, primarily reflecting:
 
  •  $63.5 million, or 57%, increase in mortgage banking income. Net MSR hedging-related activities contributed a $45.4 million net increase. We use an independent outside third party to monitor our MSR asset valuation and assumptions. During 2010, interest rates were volatile and generally lower than 2009 rates resulting in higher prepayment speeds and lower MSR valuation, which was economically hedged and offset by hedging gains. However, the negative MSR valuation adjustment was partially offset by model assumption updates. Based on updated market data and trends, the prepayment assumptions were lowered, which increased the value of the MSR. The increase also reflected a $22.7 million increase in origination and secondary marketing income as loan sales and loan originations were substantially higher (see Table 12). (See MSR section located within Market Risk for additional information.)
 
  •  $10.1 million, or 10%, increase in electronic banking, reflecting increased debit card transaction volume.
 
  •  $10.0 million benefit from lower securities losses.
 
  •  $8.9 million, or 9%, increase in trust services income, with 50% of the increase due to increases in asset market values, and the remainder reflecting growth in new business.
 
  •  $6.2 million, or 11%, increase in insurance benefits associated with bank owned life insurance.
 
  •  $4.0 million, or 6%, increase in brokerage income, primarily reflecting an increase in title insurance income due to higher mortgage refinance activity, and to a lesser degree an increase in fixed income product sales, partially offset by lower annuity income.
 
Partially offset by:
 
  •  $35.8 million, or 12%, decrease in service charges on deposit accounts. This decline represented a decrease in personal NSF / OD service charges and reflected a combination of factors. These included the implementation of changes to Regulation E and the introduction of our Fair Play banking philosophy during the 2010 third quarter, as well as the continued underlying decline in activity as customers better manage their account balances. As part of our Fair Play banking philosophy, we voluntary reduced certain NSF / OD fees and implemented our 24-Hour Grace tm overdraft policy. The goal of our Fair Play banking philosophy is to introduce more customer friendly fee structures with the objective of accelerating the acquisition and retention of customers.
 
  •  $27.9 million, or 18%, decline in other income. 2009 included a $31.4 million gain from the sale of Visa ® Class B stock.
 
2009 versus 2008
 
Noninterest income increased $298.5 million, or 42%, from 2008, primarily reflecting:
 
  •  $103.3 million increase in mortgage banking income, reflecting a $57.5 million increase in origination and secondary marketing income as loans sales and loan originations were substantially higher, and a $27.1 million improvement in MSR hedging (see Table 12) .
 
  •  $187.1 million, or 95%, reduction in securities losses as 2008 included $197.1 million of OTTI adjustments compared with $10.2 million in 2009.
 
  •  $12.0 million, or 30%, increase in automobile operating lease income, reflecting a 21% increase in average operating lease balances as lease originations since the 2007 fourth quarter were recorded as operating leases. However, during the 2008 fourth quarter, we exited the automobile leasing business.


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  •  $13.4 million, or 10%, increase in other income, reflecting the net impact of a $22.4 million change in the fair value of derivatives that did not qualify for hedge accounting, partially offset by a $4.7 million decline in mezzanine lending income and a $4.1 million decline in customer derivatives income.
 
  •  $9.9 million, or 11%, increase in electronic banking, reflecting increased transaction volumes and additional third party processing fees.
 
Partially offset by:
 
  •  $22.3 million, or 18%, decline in trust services income, reflecting the impact of reduced market values on asset management revenues, as well as lower yields on proprietary money market funds.
 
Noninterest Expense
(This section should be read in conjunction with Significant Items 2, 4, and 7.)
 
The following table reflects noninterest expense for the three years ended December 31, 2010:
 
Table 13 — Noninterest Expense
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2009           Change from 2008        
    2010     Amount     Percent     2009     Amount     Percent     2008  
(Dollar amounts in thousands)                                          
 
Personnel costs
  $ 798,973     $ 98,491       14 %   $ 700,482     $ (83,064 )     (11 )%   $ 783,546  
Outside data processing and other services
    159,248       11,153       8       148,095       17,869       14       130,226  
Net occupancy
    107,862       2,589       2       105,273       (3,155 )     (3 )     108,428  
Deposit and other insurance expense
    97,548       (16,282 )     (14 )     113,830       91,393       407       22,437  
Professional services
    88,778       12,412       16       76,366       26,753       54       49,613  
Equipment
    85,920       2,803       3       83,117       (10,848 )     (12 )     93,965  
Marketing
    65,924       32,875       99       33,049       385       1       32,664  
Amortization of intangibles
    60,478       (7,829 )     (11 )     68,307       (8,587 )     (11 )     76,894  
OREO and foreclosure expense
    39,049       (54,850 )     (58 )     93,899       60,444       181       33,455  
Automobile operating lease expense
    37,034       (6,326 )     (15 )     43,360       12,078       39       31,282  
Goodwill impairment
          (2,606,944 )     (100 )     2,606,944       2,606,944              
Gain on early extinguishment of debt
          147,442       (100 )     (147,442 )     (123,900 )     526       (23,542 )
Other expense
    132,991       24,828       23       108,163       (30,243 )     (22 )     138,406  
                                                         
Total noninterest expense
  $ 1,673,805     $ (2,359,638 )     (59 )%   $ 4,033,443     $ 2,556,069       173 %   $ 1,477,374  
                                                         
 
2010 versus 2009
 
As shown in the above table, noninterest expense decreased $2,359.6 million from the year-ago period. Excluding the 2009 goodwill impairment of $2,606.9 million, noninterest expense increased $247.3 million and primarily reflected:
 
  •  The absence of $147.4 million in gains on early extinguishment of debt in 2009.


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  •  $98.5 million, or 14%, increase in personnel costs, primarily reflecting a 10% increase in full-time equivalent staff in support of strategic initiatives, as well as higher commissions and other incentive expenses, and the reinstatement of certain employee benefits such as 401(k) plan matching contribution, merit increases, and bonuses.
 
  •  $32.9 million, or 99%, increase in marketing expense, reflecting increases in branding and product advertising activities in support of strategic initiatives.
 
  •  $24.8 million, or 23%, increase in other expense, reflecting $13.1 million increase associated with the provision for repurchase losses related to representations and warranties made on mortgage loans sold, as well as increased travel and miscellaneous fees.
 
Partially offset by:
 
  •  $54.9 million, or 58%, decline in OREO and foreclosure expense.
 
  •  $16.3 million, or 14%, decrease in deposit and other insurance expense. This decrease was comprised of two components: (1) $23.6 million FDIC special assessment during the 2009 second quarter, and (2) increased assessments due to higher levels of deposits.
 
2009 versus 2008
 
Noninterest expense increased $2,556.1 million from 2008, and primarily reflected:
 
  •  $2,606.9 million of goodwill impairment recorded in 2009. The majority of the goodwill impairment, $2,602.7 million, was recorded during the 2009 first quarter. The remaining $4.2 million of goodwill impairment was recorded in the 2009 second quarter, and was related to the sale of a small payments-related business in July 2009. (See Goodwill discussion located within the Critical Account Policies and Use of Significant Estimates for additional information).
 
  •  $91.4 million increase in deposit and other insurance expense. This increase was comprised of two components: (1) $23.6 million FDIC special assessment during the 2009 second quarter, and (2) $67.8 million increase related to our 2008 FDIC assessments being significantly reduced by a nonrecurring deposit assessment credit provided by the FDIC that was depleted during the 2008 fourth quarter. This deposit insurance credit offset substantially all of our assessment in 2008. Higher levels of deposits also contributed to the increase.
 
  •  $60.4 million increase in OREO and foreclosure expense, reflecting higher levels of problem assets, as well as loss mitigation activities.
 
  •  $26.8 million, or 54%, increase in professional services, reflecting higher consulting and collection-related expenses.
 
  •  $17.9 million, or 14%, increase in outside data processing and other services, primarily reflecting portfolio servicing fees paid to Franklin resulting from the 2009 first quarter restructuring of this relationship.
 
  •  $12.1 million, or 39%, increase in automobile operating lease expense, primarily reflecting a 21% increase in average operating leases. However, we exited the automobile leasing business during the 2008 fourth quarter.
 
Partially offset by:
 
  •  $123.9 million positive impact related to gains on early extinguishment of debt.
 
  •  $83.1 million, or 11%, decline in personnel expense, reflecting a decline in salaries, and lower benefits and commission expense. Full-time equivalent staff declined 6% from the comparable year-ago period.
 
  •  $30.2 million, or 22%, decline in other noninterest expense primarily reflecting lower automobile lease residual value expense as used vehicle prices improved.


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  •  $10.8 million, or 12%, decline in equipment costs, reflecting lower depreciation costs, as well as lower repair and maintenance costs.
 
Provision for Income Taxes
(This section should be read in conjunction with Significant Items 3 and 7, and Note 17 of the Notes to Consolidated Financial Statements.)
 
2010 versus 2009
 
The provision for income taxes was $40.0 million for 2010 compared with a benefit of $584.0 million in 2009. Both years included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. In 2010, we entered into an asset monetization transaction that generated a tax benefit of $63.6 million. Also, in 2010, undistributed previously reported earnings of a foreign subsidiary of $142.3 million were distributed and an additional $49.8 million of tax expense was recorded. State tax reserves of $28.8 million ($18.7 million net of federal benefit) for 2010 were recorded.
 
The Franklin restructuring in 2009 resulted in a $159.9 million net deferred tax asset equal to the amount of income and equity that was included in our operating results for 2009. During 2010, a $43.6 million 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 Franklin restructuring.
 
The IRS completed the audit of our consolidated federal income tax returns for tax years through 2007. In addition, various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and Illinois. Both the IRS and state tax officials, including Ohio and Kentucky, have proposed adjustments to our previously filed tax returns. We believe that our tax positions related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. It is possible that the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. However, although no assurance can be given, we believe that the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position.
 
2009 versus 2008
 
The provision for income taxes was a benefit of $584.0 million for 2009 compared with a benefit of $182.2 million in 2008. The tax benefit for both years included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. The tax benefit in 2009 was impacted by the pretax loss combined with the favorable impacts of the Franklin restructuring in 2009 and the reduction of the capital loss valuation reserve, offset by the nondeductible portion of the 2009 goodwill impairment.
 
RISK MANAGEMENT AND CAPITAL
 
Risk awareness, identification, reporting, and active management are key elements in overall risk management. We manage risk to an aggregate moderate-to-low risk profile strategy through a control framework and by monitoring and responding to potential risks. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.
 
As a strategy, we have identified sources of risks and primary risks in coordination with each business unit. We utilize Risk and Control Self-Assessments (RCSA) to identify exposure risks. Through this RCSA process, we continually assess the effectiveness of controls associated with the identified risks, regularly monitor risk profiles and material exposure to losses, and identify stress events and scenarios to which we may be exposed. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company. Potential risk concerns are shared with the Risk Management Committee and the board of directors, as appropriate. Our internal audit department performs on-going independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are reported regularly to the audit committee of the board of directors.


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We believe our primary risk exposures are credit, market, liquidity, operational, and compliance risk. Credit risk is the risk of loss due to adverse changes in our borrowers’ ability to meet their financial obligations under agreed upon terms. Market risk represents the risk of loss due to changes in the market value of assets and liabilities due to changes in interest rates, exchange rates, and equity prices. Liquidity risk arises from the possibility that funds may not be available to satisfy current or future obligations resulting from external macro market issues, investor perception of financial strength, and events unrelated to us such as war, terrorism, or financial institution market specific issues. Operational risk arises from our inherent day-to-day operations that could result in losses due to human error, inadequate or failed internal systems and controls, and external events. Compliance risk exposes us to money penalties, enforcement actions or other sanctions as a result of nonconformance with laws, rules, and regulations that apply to the financial services industry.
 
Some of the more significant processes used to manage and control credit, market, liquidity, operational, and compliance risks are described in the following paragraphs.
 
Credit Risk
 
Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have significant credit risk associated with our investment securities portfolio (see Investment Securities Portfolio discussion) . While there is credit risk associated with derivative activity, we believe this exposure is minimal. The significant change in the economic conditions and the resulting changes in borrower behavior over the past several years resulted in our focusing significant resources to the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we added more quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes.
 
The maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk of each borrower or related group of borrowers. All authority to grant commitments is delegated through the independent credit administration function and is closely monitored and regularly updated. Concentration risk is managed through limits on loan type, geography, industry, and loan quality factors. We continue to focus predominantly on extending credit to retail and commercial customers with existing or expandable relationships within our primary banking markets, although we will consider lending opportunities outside our primary markets if we believe the associated risks are acceptable and aligned with strategic initiatives. We continue to add new borrowers that meet our targeted risk and profitability profile. Although we offer a broad set of products, we continue to develop new lending products and opportunities. Each of these new products and opportunities goes through a rigorous development and approval process prior to implementation to ensure our overall objective of maintaining an aggregate moderate-to-low risk portfolio profile.
 
The checks and balances in the credit process and the independence of the credit administration and risk management functions are designed to appropriately assess the level of credit risk being accepted, facilitate the early recognition of credit problems when they occur, and to provide for effective problem asset management and resolution. For example, we do not extend additional credit to delinquent borrowers except in certain circumstances that substantially improve our overall repayment or collateral coverage position.
 
Asset quality metrics improved significantly in 2010, reflecting our proactive portfolio management initiatives as well as some stabilization in a still relatively weak economy. The improvements in the asset quality metrics, including lower levels of NPAs, Criticized and Classified assets, and delinquencies have all been achieved through these policies and commitments. Our portfolio management policies demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. To that end, we continue to expand resources in our risk management areas.
 
The weak residential real estate market and U.S. economy continued to have significant impact on the financial services industry as a whole, and specifically on our financial results. A pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate


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values and higher delinquencies and NCOs, including loans to builders and developers of residential real estate. In addition, continued high unemployment, among other factors, throughout 2010, has slowed any significant recovery from the U.S. recession during 2008 and 2009. As a result, we experienced higher than historical levels of delinquencies and NCOs in our loan portfolios during 2009 and 2010. The value of our investment securities backed by residential and commercial real estate was also negatively impacted by a lack of liquidity in the financial markets and anticipated credit losses.
 
Loan and Lease Credit Exposure Mix
 
At December 31, 2010, our loans and leases totaled $38.1 billion, representing a 4% increase from December 31, 2009. The composition of the portfolio has changed significantly over the past 12 months. From December 31, 2009, to December 31, 2010, the consumer loan portfolio increased $2.2 billion, or 13%, primarily driven by the automobile loan portfolio. In 2010, our indirect automobile finance business generated significant levels of high credit-quality loan originations, and we also adopted a new accounting standard resulting in the consolidation of a $0.8 billion automobile loan securitization. At December 31, 2010, these securitized loans had a remaining balance of $522.7 million. These increases were partially offset by a $0.9 billion, or 4%, decline in the commercial loan portfolio, primarily as a result of a planned strategy to reduce the concentration of our noncore CRE portfolio.
 
At December 31, 2010, commercial loans totaled $19.7 billion, and represented 52% of our total credit exposure. Our commercial loan portfolio is diversified along product type, size, and geography within our footprint, and is comprised of the following ( see Commercial Credit discussion) :
 
C&I loans  — C&I loans are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner-occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a function of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we look to expand C&I loan growth, we have further developed our ABL capabilities by adding experienced ABL professionals to take advantage of market opportunities resulting in better leveraging of the manufacturing base in our primary markets. We have also added a national banking group with sufficient resources to ensure we appropriately recognize and manage the risks associated with this type of lending.
 
CRE loans  — CRE loans consist of loans for income-producing real estate properties, real estate investment trusts, and real estate developers. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers; and are repaid through cash flows related to the operation, sale, or refinance of the property.
 
Construction CRE loans  — Construction CRE loans are loans to individuals, companies, or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, residential (land, single family, and condominiums), office, and warehouse product types. Generally, these loans are for construction projects that have been presold, preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in each project. These loans are underwritten and managed by a specialized real estate lending group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.


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Total consumer loans were $18.4 billion at December 31, 2010, and represented 48% of our total credit exposure. The consumer portfolio was diversified among home equity loans, residential mortgages, and automobile loans and leases (see Consumer Credit discussion) .
 
Automobile loans/leases  — Automobile loans/leases are primarily comprised of loans made through automotive dealerships and includes exposure in selected states outside of our primary banking markets. In 2009, we exited several states, including Florida, Arizona, and Nevada. In 2010, we expanded into eastern Pennsylvania and five New England states. The recent expansions included hiring experienced colleagues with existing dealer relationships in those markets. No state outside of our primary banking market represented more than 5% of our total automobile loan and lease portfolio at December 31, 2010. Our automobile lease portfolio represents an immaterial portion of the total portfolio as we exited the automobile leasing business during the 2008 fourth quarter.
 
Home equity  — Home equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first- or second- lien on the borrower’s residence, allows customers to borrow against the equity in their home. Given the current low interest rate environment, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home. As a result, the proportion of first-lien loans has increased significantly in our portfolio over the past 24 months. Real estate market values at the time of origination directly affect the amount of credit extended and, in the event of default, subsequent changes in these values may impact the severity of losses. We actively manage the amount of credit extended through debt-to-income policies and LTV policy limits.
 
Residential mortgages  — Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30- year term, and in most cases, are extended to borrowers to finance their primary residence. Generally, our practice is to sell a significant portion of our fixed-rate originations in the secondary market. As such, the majority of the loans in our portfolio are ARMs. These ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually. These loans comprised approximately 57% of our total residential mortgage loan portfolio at December 31, 2010.
 
Other consumer loans/leases  — Primarily consists of consumer loans not secured by real estate or automobiles, including personal unsecured loans.


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Table 14 — Loan and Lease Portfolio Composition
 
                                                                                 
    At December 31,  
    2010     2009     2008     2007     2006  
(Dollar amounts in millions)  
 
Commercial:(1)
                                                                               
Commercial and industrial
  $ 13,063       34 %   $ 12,888       35 %   $ 13,541       33 %   $ 13,126       33 %   $ 7,850       30 %
Commercial real estate:
                                                                               
Construction
    650       2       1,469       4       2,080       5       1,962       5       1,229       5  
Commercial
    6,001       16       6,220       17       8,018       20       7,221       18       3,275       13  
                                                                                 
Total commercial real estate
    6,651       18       7,689       21       10,098       25       9,183       23       4,504       18  
                                                                                 
Total commercial
    19,714       52       20,577       56       23,639       58       22,309       56       12,354       48  
                                                                                 
Consumer:
                                                                               
Automobile loans and leases(2)
    5,614       15       3,390       9       4,464       11       4,294       11       3,895       15  
Home equity
    7,713       20       7,563       21       7,557       18       7,290       18       4,927       19  
Residential mortgage
    4,500       12       4,510       12       4,761       12       5,447       14       4,549       17  
Other loans
    566       1       751       2       671       1       715       1       428       1  
                                                                                 
Total consumer
    18,393       48       16,214       44       17,453       42       17,746       44       13,799       52  
                                                                                 
Total loans and leases
  $ 38,107       100 %   $ 36,791       100 %   $ 41,092       100 %   $ 40,055       100 %   $ 26,153       100 %
                                                                                 
 
 
(1) There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
 
(2) 2010 included an increase of $522.7 million resulting from the adoption of a new accounting standard to consolidate a previously off-balance automobile loan securitization transaction.
 
The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease:
 
Table 15 — Total Loan and Lease Portfolio by Collateral Type
 
                                                                                 
    At December 31,  
    2010     2009     2008     2007     2006  
(Dollar amounts in millions)  
 
Real estate
  $ 22,603       59 %   $ 23,462       64 %   $ 25,439       62 %   $ 25,886       65 %   $ 15,831       60 %
Vehicles
    7,134       19       4,600       13       6,063