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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2009
Commission File Number 1-34073
Huntington Bancshares Incorporated
     
Maryland   31-0724920
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
There were 401,991,189 shares of Registrant’s common stock ($0.01 par value) outstanding on April 30, 2009.
 
 

 


 

Huntington Bancshares Incorporated
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  Exhibit 10.1
  Exhibit 12.1
  Exhibit 12.2
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2

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PART 1. FINANCIAL INFORMATION
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in 1866, 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 banking offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial service activities are also conducted in other states including Private Financial Group (PFG) offices in Florida, and Mortgage Banking offices in Maryland and New Jersey. International banking services are available through the headquarters office in Columbus and a limited purpose office located in both the Cayman Islands and Hong Kong.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. This MD&A provides updates to the discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K). This MD&A should be read in conjunction with our 2008 Form 10-K, the financial statements, notes, and other information contained in this report.
Our discussion is divided into key segments:
    Introduction — Provides overview comments on important matters including risk factors, acquisitions, and other items. These are essential for understanding our performance and prospects.
    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.
    Lines of Business Discussion — Provides an overview of financial performance for each of our major lines of business and provides additional discussion of trends underlying consolidated financial performance.
A reading of each section is important to understand fully the nature of our financial performance and prospects.
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act.
Actual results could differ materially from those contained or implied by such statements for a variety of factors including: (1) deterioration in the loan portfolio could be worse than expected due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) changes in economic conditions; (3) movements in interest rates; (4) competitive pressures on product pricing and services; (5) success and timing of other business strategies; (6) the nature, extent, and timing of governmental actions and reforms, including existing and potential future restrictions and limitations imposed in connection with the Troubled Asset Relief Program (TARP) voluntary Capital Purchase Plan (CPP) or otherwise under the Emergency Economic Stabilization Act of 2008; and (7) extended disruption of vital infrastructure.

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Additional factors that could cause results to differ materially from those described above can be found in our 2008 Form 10-K, and documents subsequently filed by us with the Securities and Exchange Commission (SEC). All forward- looking statements included in this filing are based on information available at the time of the filing. We assume no obligation to update any forward-looking statement.
Risk Factors
We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2) market risk , which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3) liquidity risk , which is the risk of loss due to the possibility that funds may not be available to satisfy current or future obligations resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues, and (4) operational risk , which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks.
More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2008 Form 10-K. Additional information regarding risk factors can also be found in the “Risk Management and Capital” discussion.
Update to Risk Factors
During the first quarter of 2009, our commercial and residential real estate and real estate-related portfolios continued to be affected by the ongoing reduction in real estate values and reduced levels of sales and, more generally, all of our loan portfolios have been affected by the sustained economic weakness of our Midwest markets and the impact of higher unemployment rates.
As described in the Credit Risk discussion, credit quality performance continued to be under pressure during the first quarter of 2009, with nonaccrual loans (NALs) and nonperforming assets (NPAs) both increasing at March 31, 2009, compared with December 31, 2008, and March 31, 2008. The allowance for loan and lease losses (ALLL) of $838.5 million at March 31, 2009, was 2.12% of period-end loans and leases and 54% of period-end nonaccrual loans and leases.
Our business depends on the creditworthiness of our customers and, in some cases, the value of the assets securing our loans to them. Our commercial portfolio, as well as our real estate-related portfolios, have continued to be negatively affected by the ongoing reduction in real estate values and reduced levels of sales and leasing activities. More generally, all of our loan portfolios, particularly our construction and commercial real estate loans, have been affected by the sustained economic weakness of our Midwest markets and the impact of higher unemployment rates. We periodically review the ALLL for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and NPAs. There is no certainty that the ALLL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the ALLL is not adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.
Bank regulators periodically review our ALLL and may require us to increase our provision for loan and lease losses or loan charge-offs. Any increase in our ALLL or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and our financial condition.
In particular, an increase in our ALLL could result in a reduction in the amount of our tangible common equity (TCE). Given the focus on TCE, we may be required to raise additional capital through the issuance of common stock as a result of an increase in our ALLL. The issuance of additional common stock or other factors could have a dilutive effect on the existing holders of our common stock, and adversely affect the market price of our common stock.

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Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity, or stock price.
Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to the U.S. Treasury Department’s CPP under the TARP announced last fall and the new Capital Assistance Program (CAP) announced this spring, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, has imposed a number of restrictions and limitations on the operations of financial services firms participating in the federal programs.
These programs subject us and other financial institutions that participate in them to additional restrictions, oversight, and costs that may have an adverse impact on our business, financial condition, results of operations, or the price of our common stock. In addition, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including as related to compensation, interest rates, the impact of bankruptcy proceedings on consumer real property mortgages and otherwise. Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation or its application. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, negatively impact the recoverability of certain of our recorded assets, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner.
We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.
We are not restricted from issuing additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. We continually evaluate opportunities to access capital markets taking into account our regulatory capital ratios, financial condition, and other relevant considerations, and anticipate that, subject to market conditions, we are likely to take further capital actions. Such actions, with regulatory approval when required, may include opportunistically retiring our outstanding securities, including our subordinated debt, trust preferred securities, and preferred shares in open market transactions, privately negotiated transactions, or public offers for cash or common shares, as well as the issuance of additional shares of common stock in public or private transactions in order to increase our capital levels above our already “well-capitalized” levels, as defined by the federal bank regulatory agencies, as well as other regulatory capital targets.
In addition, both Huntington and the Bank are highly regulated, and our regulators could require us to raise additional common equity in the future, whether under the CAP or otherwise. While we were not one of the 19 institutions required to conduct a forward-looking capital assessment, or “stress test”, under the Supervisory Capital Assessment Program (SCAP), it is possible that the U.S. Treasury could extend the SCAP assessment (and related potential requirement to raise additional capital privately or through the CAP) to other institutions, including us. Alternatively, we could voluntarily apply to participate in CAP, although we currently do not intend to apply. Furthermore, both our regulators and we regularly perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital. Any such capital raise could include, among other things, the potential issuance of common equity to the public, the potential issuance of common equity to the government under the CAP, or the conversion of our existing Series B Preferred Stock to common equity. There could also be market perceptions that we need to raise additional capital, whether as a result of public disclosures that may be made regarding the SCAP stress test methodology or otherwise, and, regardless of the outcome of any stress test or other stress case analysis, such perceptions could have an adverse effect on the price of our common stock.

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The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities, could be substantially dilutive to existing common stockholders. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to existing stockholders. The market price of our common stock could decline as a result of sales of shares of our common stock or securities convertible into or exchangeable for common stock in anticipation of such sales.
We still face risk relating to the Franklin Credit Management (Franklin) relationship not withstanding the restructuring announced on March 31, 2009.
The restructuring resulted in a $159.9 million net deferred tax asset equal to the amount of income and equity that was included in our operating results for the 2009 first quarter. While we believe that our position regarding the deferred tax asset and related income recognition is correct, that position could be challenged.
Recent Accounting Pronouncements and Developments
Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2009 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent that we believe the adoption of new accounting standards will materially affect our financial condition, results of operations, or liquidity, the impacts or potential impacts are discussed in the applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Consolidated Financial Statements included in our 2008 Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary to understand and evaluate our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed in our 2008 Form 10-K.
The following discussion provides updates of our accounting estimates related to the fair value measurements of certain portfolios within our investment securities portfolio, goodwill, and Franklin loans.
Securities and Other-Than-Temporary Impairment (OTTI)
(This section should be read in conjunction with the “Investment Securities Portfolio” discussion.)
In April 2009, the Financial Accounting Standards Board (FASB) issued two FASB Staff Positions (FSPs) that could impact estimates and assumptions utilized by us in determining the fair values of securities. The first, FSP Financial Accounting Standard (FAS) 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” reaffirms the exit price fair value measurement guidance in Statement No. 157, “Fair Value Measurements,” and also provides additional guidance for estimating fair value in accordance with Statement No. 157 when the volume and level of activity for the asset or liability have significantly decreased.

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The second, FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends the other-than-temporary impairment (OTTI) guidance in US GAAP for debt securities. The pronouncement shifts the focus from an entity’s intent to hold until recovery to its intent to sell. We would recognize OTTI through earnings on those debt securities that: (a) have a fair value less than its book value, and (b) we intend to sell (or we cannot assert that it is more likely than not that we will not have to sell before recovery). The amount of OTTI recognized would be the difference between the fair value and book value of the securities.
If we do not intend to sell a debt security, but it is probable that we will not collect all amounts due according to the debt’s contractual terms, we would separate the impairment into credit and noncredit components. The credit component of the impairment, measured as the difference between amortized cost and the present value of expected cash flows discounted at the security’s effective interest rate, would be recognized in earnings. The noncredit component would be recognized in other comprehensive income (OCI), separately from other unrealized gains and losses on available-for-sale securities.
Both FSPs are effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 could require an adjustment to retained earnings and OCI at the beginning of the period of adoption to reclassify noncredit related impairment to OCI for securities. The adjustment would only be applicable to noncredit OTTI for debt securities that we do not have the intent to sell. Noncredit OTTI losses related to debt securities that we intend to sell (or for which we cannot assert that it is more likely than not that we will not have to sell the securities before recovery) will not be reclassified. We are currently evaluating the impact that the FSPs could have.
OTTI ANALYSIS ON CERTAIN SECURITIES PORTFOLIOS
Alt-A mortgage-backed and private-label collateralized mortgage obligation (CMO) securities represent securities collateralized by first-lien residential mortgage loans. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within these portfolios as Level 3 on the fair value hierarchy. The securities were priced with the assistance of an outside third-party consultant using a discounted cash flow approach and the independent third-party’s proprietary pricing model. The model used inputs such as estimated prepayment speeds, losses, recoveries, default rates that were implied by the underlying performance of collateral in the structure or similar structures, discount rates that were implied by market prices for similar securities, collateral structure types, and house price depreciation/appreciation rates that were based upon macroeconomic forecasts.
We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if the securities in these portfolios were other-than-temporarily-impaired. Using the guidance in FSP EITF 99-20-1, we used the analysis to determine whether we believed it probable that all contractual cash flows would not be collected. All securities in these portfolios remained current with respect to interest and principal at March 31, 2009.
Our analysis indicated, as of March 31, 2009, a total of 14 Alt-A mortgage-backed securities and one private-label CMO would experience loss of principal. The future expected losses of principal on these other-than-temporarily impaired securities ranged from 0.1% to 86.7% of the par value. The average amount of future principal loss was 6.3% of the par value. These losses were projected to occur beginning anywhere from 8 months to as many as 235 months in the future. We measured the amount of impairment on these securities using the fair value of the security in the scenario we considered to be most likely, using discount rates ranging from 10% to 16%, depending on both the potential variability of outcomes and the expected duration of cash flows for each security. As a result, in the 2009 first quarter, we recorded $1.5 million of OTTI in our Alt-A mortgage-backed securities portfolio representing additional impairment on one security that was previously impaired. No OTTI was recorded for our private-label CMO securities in the 2009 first quarter.
Pooled-trust-preferred securities represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within this portfolio as Level 3 on the fair value hierarchy. The collateral generally consisted of trust preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. The first and second-tier bank trust preferred securities and the insurance company securities were priced with the assistance of an outside third-party consultant using a discounted cash flow approach, and the independent third-party’s proprietary pricing models. The model used inputs such as estimated default and deferral rates that were implied from the underlying performance of the issuers in the structure, and discount rates that were implied by market prices for similar securities and collateral structure types.

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Cash flow analyses of the first and second-tier bank trust preferred securities issued by banks and bank holding companies were conducted to test for any OTTI. In accordance with FSP EITF 99-20-1, OTTI was recorded in certain securities within these portfolios, as it was probable that all contractual cash flows would not be collected. The discount rate used to calculate the cash flows ranged from 12%-15%, and an illiquidity premium due to the lack of an active market for these securities. We assumed that all issuers currently deferring interest payments would ultimately default, and we assumed a 10% recovery rate on such defaults. In addition, future defaults were estimated based upon an analysis of the financial strength of each respective issuer. As a result of this testing, we recognized OTTI of $2.4 million in the pooled-trust-preferred securities portfolio in the 2009 first quarter.
Please refer to the “Investment Securities Portfolio” discussion for additional information regarding OTTI.
Goodwill
Goodwill is tested for impairment annually, as of October 1, using a two-step process that begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. During the 2009 first quarter, our stock price declined 78%, from $7.66 per common share at December 31, 2008, to $1.66 per common share at March 31, 2009. Peer banks also experienced similar declines in market capitalization. This decline primarily reflected the continuing economic slowdown and increased market concern surrounding financial institutions’ credit risks and capital positions, as well as uncertainty related to increased regulatory supervision and intervention. We determined that these changes would more-likely-than-not reduce the fair value of certain reporting units below their carrying amounts. Therefore, we performed an interim goodwill impairment test during the 2009 first quarter, which is a two-step process. An independent third party was engaged to assist with the impairment assessment. We had previously performed goodwill impairment tests at June 30, October 1, and December 31, 2008, and concluded no impairment existed at those dates.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. The assumptions used in the goodwill impairment assessment and the application of these estimates and assumptions are discussed below.
The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. We identified four reporting units: Regional Banking, PFG, Insurance, and Auto Finance and Dealer Services (AFDS). Although Insurance is included within PFG for line of business segment reporting, it was evaluated as a separate reporting unit for goodwill impairment testing because it has its own separately allocated goodwill resulting from prior acquisitions. The fair value of PFG (determined using the market approach as described below), excluding Insurance, exceeded its carrying value, and goodwill was determined to not be impaired for this reporting unit. There is no goodwill associated with AFDS and, therefore, it was not subject to impairment testing.
For Regional Banking, we utilized both the income and market approaches to determine fair value. The income approach was based on discounted cash flows derived from assumptions of balance sheet and income statement activity. An internal forecast was developed by considering several long-term key business drivers such as anticipated loan and deposit growth. The long-term growth rate used in determining the terminal value was estimated at 2.5%. The discount rate of 14% was estimated based on the Capital Asset Pricing Model, which considered the risk-free interest rate (20-year Treasury Bonds), market risk premium, equity risk premium, beta and a company-specific risk factor. The company-specific risk factor was used to address the uncertainty of growth estimates and earnings projections of management. For the market approach, revenue, earnings and market capitalization multiples of comparable public companies were selected and applied to the Regional Banking unit’s applicable metrics such as book and tangible book values. A 20% control premium was used in the market approach. The results of the income and market approaches were weighted 75% and 25%, respectively, to arrive at the final calculation of fair value. As market capitalization declined across the banking industry, we believed that a heavier weighting on the income approach is more representative of a market participant’s view. For the Insurance reporting unit, management utilized a market approach to determine fair value. The aggregate fair market values were compared to market capitalization as an assessment of the appropriateness of the fair value measurements. As our stock price fluctuated greatly, we used our average stock price for the 30 days preceding the valuation date to determine market capitalization. The aggregate fair market values of the reporting units compared to market capitalization indicated an implied premium of 27%. A control premium analysis indicated that the implied premium was within range of overall premiums observed in the market place. Neither the Regional Banking nor Insurance reporting units passed Step 1.

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The second step (Step 2) of impairment testing is necessary only if the reporting unit does not pass Step 1. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.
To determine the implied fair value of goodwill, the fair value of Regional Banking and Insurance (as determined in Step 1) was allocated to all assets and liabilities of the reporting units including any recognized or unrecognized intangible assets. The allocation was done as if the reporting unit was acquired in a business combination, and the fair value of the reporting unit was the price paid to acquire the reporting unit. This allocation process is only performed for purposes of testing goodwill for impairment. The carrying values of recognized assets or liabilities (other than goodwill, as appropriate) were not adjusted nor were any new intangible assets recorded. Key valuations were the assessment of core deposit intangibles, the mark-to-fair-value of outstanding debt and deposits, and mark-to-fair-value on the loan portfolio. Core deposits were valued using a 15% discount rate. The marks on our outstanding debt and deposits were based upon observable trades or modeled prices using current yield curves and market spreads. The valuation of the loan portfolio indicated discounts in the ranges of 9%-24%, depending upon the loan type. For every 100 basis point change in the valuation of our overall loan portfolio, implied goodwill would be impacted by approximately $325 million. The estimated fair value of these loan portfolios was based on an exit price, and the assumptions used were intended to approximate those that a market participant would have used in valuing the loans in an orderly transaction, including a market liquidity discount. The significant market risk premium that is a consequence of the current distressed market conditions was a significant contributor to the valuation discounts associated with these loans. We believed these discounts were consistent with transactions currently occurring in the marketplace.
Upon completion of Step 2, we determined that the Regional Banking and Insurance reporting units’ goodwill carrying values exceeded their implied fair values of goodwill by $2,573.8 million and $28.9 million, respectively. As a result, we recorded a noncash pretax impairment charge of $2,602.7 million, or $7.09 per common share, in the 2009 first quarter. The impairment charge was included in noninterest expense and did not affect our regulatory and tangible capital ratios.
As a result of the impairment charge, our goodwill totaled $0.5 billion at March 31, 2009, down from $3.1 billion at December 31, 2008. Of these amounts, $0.3 billion and $2.9 billion of our total goodwill was allocated to Regional Banking at March 31, 2009 and December 31, 2008, respectively.
Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future. If our market capitalization decreases or the liquidity discount on our loan portfolio improves significantly without a concurrent increase in market capitalization, we may be required to record additional goodwill impairment losses in future periods, whether in connection with our next annual impairment testing in the 2009 third quarter or prior to that, if any changes constitute a triggering event. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material. However, any such future impairment loss would be limited to the remaining goodwill balance of $0.5 billion at March 31, 2009.
Franklin Loans
Franklin is a specialty consumer finance company primarily engaged in servicing residential mortgage loans. Prior to March 31, 2009, Franklin owned a portfolio of loans secured by first and second liens on 1-4 family residential properties. At December 31, 2008, our total loans outstanding to Franklin were $650.2 million, all of which were placed on nonaccrual status. Additionally, the specific ALLL for the Franklin portfolio was $130.0 million, resulting in our net exposure to Franklin at December 31, 2008 of $520.2 million.
On March 31, 2009, we entered into a transaction with Franklin whereby a Huntington wholly-owned REIT subsidiary (REIT) exchanged a noncontrolling amount of certain equity interests for a 100% interest in Franklin Asset Merger Sub, LLC (Merger Sub); a wholly-owned subsidiary of Franklin. This was accomplished by merging Merger Sub into a wholly-owned subsidiary of REIT. Merger Sub’s sole assets were two trust participation certificates evidencing 84% ownership rights in a trust (New Trust) which holds all the underlying consumer loans and other real estate owned (OREO) properties that were formerly collateral for the Franklin commercial loans. The equity interests provided to Franklin by REIT were pledged by Franklin as collateral for the Franklin commercial loans.

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We believe that this restructuring provides us the flexibility to accelerate problem loan resolution to the benefit of our borrowers, as well as our shareholders. Other benefits include the ability to: (a) refinance these loans, in whole or in part, (b) the ability to accept discounted payments, (c) restructure mortgages, while minimizing foreclosures, by providing refinancing opportunities to borrowers using various government sponsored programs, and (d) expedite cash collection on the disposition of OREO assets as we now control the listing prices and liquidation decisions of these assets.
New Trust is a variable interest entity under FASB Interpretation No 46R, Consolidation of Variable Interest Entities (revised December 2003)- an interpretation of ARB No. 51 (FIN 46R), and, as a result of our 84% participation certificates, New Trust was consolidated into our financial results. As required by FIN 46R, the consolidation is treated as a business combination under Statement No. 141R with the fair value of the equity interests issued to Franklin representing the acquisition price. The assets of New Trust, which include first- and second- lien mortgage loans and OREO properties, were recorded at their fair values of $494 million and $80 million, respectively. AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3) provides guidance for accounting for acquired loans, such as these, that have experienced a deterioration of credit quality at the time of acquisition for which it is probable that the investor will be unable to collect all contractually required payments.
Under SOP 03-3, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable discount. Subsequent decreases to the expected cash flows will generally result in a charge to the provision for credit losses and an increase to the ALLL. Subsequent increases in cash flows result in reversal of any nonaccretable discount (or ALLL to the extent any has been recorded) with a positive impact on interest income. The measurement of undiscounted cash flows involves assumptions and judgments for credit risk, interest rate risk, prepayment risk, default rates, loss severity, payment speeds, and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.
The portfolio of first- and second- lien Franklin mortgage loans were accounted for under SOP 03-3 in the 2009 first quarter. No allowance for credit losses related to these loans was recorded at the acquisition date. A $39.8 million difference between the fair value of the loans and the expected cash flows was recognized as an accretable discount that will be recognized over the contractual term of the loans. A $1.1 billion difference between the unpaid principal balance of the loans and the expected cash flows was recognized as a nonaccretable discount. Any future increases to expected cash flows will be recognized as a yield adjustment over the remaining term of the respective loan. Any future decreases to expected cash flows will be recognized through an additional allowance for credit losses.
The fair values of the acquired mortgage loans and OREO assets were based upon a market participant model and calculated in accordance with FASB Statement No. 157, Fair Value Measurements (Statement No. 157). Under this market participant model, expected cash flows for first-lien mortgages were calculated based upon the net expected foreclosure proceeds of the collateral underlying each mortgage loan. Updated appraisals or other indicators of value provided the basis for estimating cash flows. Sales proceeds from the underlying collateral were estimated to be received over a one to three year period, depending on the delinquency status of the loan. Expected proceeds were reduced assuming housing price depreciation of 18%, 12%, and 0% over each year of the next three years of expected collections, respectively. Interest cash flows were estimated to be received for a limited time on each portfolio. The resulting cash flows were discounted at an 18% rate of return. Limited value was assigned to all second-lien mortgages because, after considering the house price depreciation rates above, little if any proceeds would be realized.

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The consolidation of New Trust resulted in the recording of a $95.8 million liability, representing the 16% of New Trust certificates not acquired by us. These certificates were retained by Franklin.
In accordance with Statement No. 141R, we recorded a net deferred tax asset of $159.9 million related to the difference between the tax basis and the book basis in the acquired assets. Because the acquisition price, represented by the equity interests in our wholly-owned subsidiary, was equal to the fair value of the 84% interest in the New Trust participant certificate, no goodwill was created from the transaction. The recording of the net deferred tax asset was a bargain purchase under Statement No. 141R, and was recorded as a tax benefit in the current period.
Subsequent to the transaction, $127 million of the acquired current mortgage loans accrue interest while $366 million are on nonaccrual. We have concluded that we cannot reliably estimate the timing of collection of cash flows for delinquent first- and second- lien mortgages because the majority of the expected cash flows for the delinquent portfolio will result from the foreclosure and subsequent disposition of the underlying collateral supporting the loans.

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DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Lines of Business” discussion.
The below summary provides an update of key events and trends during the current quarter. Comparisons are made with the prior quarter, as we believe this comparison provides the most meaningful measurement relative to analyzing trends.
Summary
We reported a net loss of $2,433.2 million in the 2009 first quarter, representing a loss per common share of $6.79. This loss included a net negative impact of $6.73 per common share primarily reflecting a noncash $2,602.7 million goodwill impairment charge ($7.09 per common share) that reduced net income but did not impact key capital ratios, partially offset by a $159.9 million nonrecurring tax benefit ($0.44 per common share) associated with the current quarter’s Franklin restructuring. This compared unfavorably with the prior quarter’s net loss of $417.3 million, or $1.20 per common share. In addition to the goodwill impairment and tax benefit, comparisons with the prior quarter were significantly impacted by other factors that are discussed later in the “Significant Items” section (see “Significant Items” discussion).
During the current quarter, we took proactive steps to increase our capital position. We converted $114.1 million of our Series A Preferred stock into common stock, and we were able to shrink our balance sheet by securitizing $1.0 billion of automobile loans, and selling $600 million of our municipal securities, as well as $200 million of mortgage loans. We also made the difficult decision to cut the quarterly common stock dividend to $0.01 per share, effective with the dividend declared on January 22, 2009. These actions contributed to a 61 basis point improvement in our TCE ratio to 4.65% compared with the prior quarter-end; however, these actions negatively impacted our net interest margin. These actions also contributed, in part, to a substantial improvement of our period-end liquidity position. Other factors contributing to the improvement in our liquidity position included a $1.2 billion increase in period-end core deposits compared with December 31, 2008, and a $600 million debt issuance as part of the Temporary Liquidity Guarantee Program (TLGP). At March 31, 2009, the parent company had sufficient cash for operations and does not have any debt maturities for several years. Further, we believe the Bank has a manageable level of debt maturities during the next 12-month period.
Also during the 2009 first quarter, we restructured our Franklin relationship. This restructuring resulted in our acquiring control of the consumer loans that formerly represented the collateral for our Franklin commercial loans. The restructuring increased our flexibility to accelerate problem loan resolution to the benefit of the borrowers under the consumer loans, as well as to the benefit of our shareholders, without releasing Franklin from its legal obligations under the commercial loans. Specifically: (a) the $650 million nonaccrual commercial loan to Franklin at December 31, 2008, was replaced by $494 million of fair value first- and second- lien mortgages and $80 million of OREO properties at fair value, less costs to sell; (b) commercial net charge-offs (NCOs) increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to write-down the acquired mortgages and OREO collateral to fair value; and (c) we entered into a new servicing contract with Franklin to service these acquired first- and second- lien mortgages and OREO properties. Please refer to the “Franklin Loans” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section, and the “Franklin relationship” discussion in the “Risk Management and Capital” section for additional information regarding our Franklin relationship.
Credit quality performance in the 2009 first quarter was mixed. Non-Franklin-NCOs totaled $213.2 million, compared with $137.3 million in the 2008 fourth quarter. The increase was entirely within the commercial loan portfolio as NCOs in the consumer loan portfolio declined slightly. Non-Franklin-related NPAs also increased primarily reflecting the continued decline in the housing markets, and stress on retail sales. In general, commercial loans supporting the housing or construction segments are experiencing the most stress. Our outlook is that the economy will remain under stress, and that no improvement will be seen through the end of 2009. As a result, we expect that the overall level of NPAs and NCOs will remain elevated, especially as related to continued softness in our commercial and industrial (C&I) and commercial real estate (CRE) portfolios.

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Fully-taxable equivalent net interest income in the 2009 first quarter decreased $38.9 million, or 10%, compared with the prior quarter. The decrease reflected a $1.0 billion decline in average earning assets and a 21 basis point decline in our net interest margin. The margin decline reflected the impact of our actions taken to improve our liquidity position, the higher levels of NPAs, and the competitive pricing experienced in our markets. We expect that the net interest margin will remain under modest pressure from the current quarter’s level resulting from the absolute low-level of current interest rates and expected continued aggressive deposit pricing in our markets. Despite the competitive market, average core deposits grew at an annualized 9% rate, and the average balances in every category of core deposits grew during the current quarter. Deposit growth is a strategic priority for us through the end of 2009.
Noninterest income in the 2009 first quarter increased $172.0 million compared with the 2008 fourth quarter. Comparisons with the prior quarter were affected by significant market-related losses taken during the prior quarter (see “Significant Items” discussion). Mortgage banking income and brokerage and insurance income were strong during the current quarter. Mortgage originations more than doubled from the prior quarter to $1.5 billion. Mortgage fee income also benefited from improved mortgage servicing right (MSR) hedging results for the current quarter. The $8.7 million, or 28%, increase in brokerage and insurance income reflected record levels of retail investment sales. Deposit service charge income and trust income declined from the previous quarter, reflecting seasonal and market conditions.
Expenses were well controlled during the current quarter. After adjusting for the $2,602.7 million goodwill impairment charge, noninterest expense decreased $23 million compared with the 2008 fourth quarter. The decrease primarily reflected lower personnel costs, reflecting the implementation of our $100 million expense reduction initiatives. We expect to exceed the targeted $100 million of expense savings during 2009.

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Table 1 — Selected Quarterly Income Statement Data (1)
                                         
    2009     2008  
(in thousands, except per share amounts)   First     Fourth     Third     Second     First  
Interest income
  $ 569,957     $ 662,508     $ 685,728     $ 696,675     $ 753,411  
 
                             
Interest expense
    232,452       286,143       297,092       306,809       376,587  
 
                             
Net interest income
    337,505       376,365       388,636       389,866       376,824  
Provision for credit losses
    291,837       722,608       125,392       120,813       88,650  
 
                             
Net interest income (loss) after provision for credit losses
    45,668       (346,243 )     263,244       269,053       288,174  
 
                             
Service charges on deposit accounts
    69,878       75,247       80,508       79,630       72,668  
Brokerage and insurance income
    39,948       31,233       34,309       35,694       36,560  
Trust services
    24,810       27,811       30,952       33,089       34,128  
Electronic banking
    22,482       22,838       23,446       23,242       20,741  
Bank owned life insurance income
    12,912       13,577       13,318       14,131       13,750  
Automobile operating lease income
    13,228       13,170       11,492       9,357       5,832  
Mortgage banking income (loss)
    35,418       (6,747 )     10,302       12,502       (7,063 )
Securities gains (losses)
    2,067       (127,082 )     (73,790 )     2,073       1,429  
Other income
    18,359       17,052       37,320       26,712       57,707  
 
                             
Total noninterest income
    239,102       67,099       167,857       236,430       235,752  
 
                             
Personnel costs
    175,932       196,785       184,827       199,991       201,943  
Outside data processing and other services
    32,432       31,230       32,386       30,186       34,361  
Net occupancy
    29,188       22,999       25,215       26,971       33,243  
Equipment
    20,410       22,329       22,102       25,740       23,794  
Amortization of intangibles
    17,135       19,187       19,463       19,327       18,917  
Professional services
    18,253       17,420       13,405       13,752       9,090  
Marketing
    8,225       9,357       7,049       7,339       8,919  
Automobile operating lease expense
    10,931       10,483       9,093       7,200       4,506  
Telecommunications
    5,890       5,892       6,007       6,864       6,245  
Printing and supplies
    3,572       4,175       4,316       4,757       5,622  
Goodwill impairment
    2,602,713                          
Other expense
    45,088       50,237       15,133       35,676       23,841  
 
                             
Total noninterest expense
    2,969,769       390,094       338,996       377,803       370,481  
 
                             
(Loss) Income before income taxes
    (2,684,999 )     (669,238 )     92,105       127,680       153,445  
(Benefit) Provision for income taxes
    (251,792 )     (251,949 )     17,042       26,328       26,377  
 
                             
Net (loss) income
  $ (2,433,207 )   $ (417,289 )   $ 75,063     $ 101,352     $ 127,068  
 
                             
Dividends on preferred shares
    58,793       23,158       12,091       11,151        
 
                             
Net (loss) income applicable to common shares
  $ (2,492,000 )   $ (440,447 )   $ 62,972     $ 90,201     $ 127,068  
 
                             
Average common shares — basic
    366,919       366,054       366,124       366,206       366,235  
Average common shares — diluted (2)
    366,919       366,054       367,361       367,234       367,208  
 
                                       
Per common share
                                       
Net (loss) income — basic
  $ (6.79 )   $ (1.20 )   $ 0.17     $ 0.25     $ 0.35  
Net (loss) income — diluted
    (6.79 )     (1.20 )     0.17       0.25       0.35  
Cash dividends declared
    0.0100       0.1325       0.1325       0.1325       0.2650  
 
                                       
Return on average total assets
    (18.22 )%     (3.04 )%     0.55 %     0.73 %     0.93 %
Return on average total shareholders’ equity
    N.M.       (23.6 )     4.7       6.4       8.7  
Return on average tangible shareholders’ equity (3)
    18.4       (43.2 )     11.6       15.0       22.0  
Net interest margin (4)
    2.97       3.18       3.29       3.29       3.23  
Efficiency ratio (5)
    60.5       64.6       50.3       56.9       57.0  
Effective tax rate (benefit)
    (9.4 )     (37.6 )     18.5       20.6       17.2  
 
                                       
Revenue — fully taxable equivalent (FTE)
                                       
Net interest income
  $ 337,505     $ 376,365     $ 388,636     $ 389,866     $ 376,824  
FTE adjustment
    3,582       3,641       5,451       5,624       5,502  
 
                             
Net interest income (4)
    341,087       380,006       394,087       395,490       382,326  
Noninterest income
    239,102       67,099       167,857       236,430       235,752  
 
                             
Total revenue (4)
  $ 580,189     $ 447,105     $ 561,944     $ 631,920     $ 618,078  
 
                             
     
N.M., not a meaningful value.
 
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items”.
 
(2)   For the three-month periods ended March 31, 2009, December 31, 2008, September 30, 2008, and June 30, 2008, the impact of the convertible preferred stock issued in April of 2008 were excluded from the diluted share calculations. They were excluded because the results would have been higher than basic earnings per common share (anti-dilutive) for the periods.
 
(3)   Net income excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total stockholders’ 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.
 
(4)   On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)   Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses).

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Significant Items
Definition of Significant Items
Certain components of the income statement are inherently subject to more volatility than others. As a result, such items may be viewed differently in an assessment of “underlying” or “core” earnings performance compared with expectations and/or assessments of future performance trends.
Therefore, we believe the disclosure of certain “Significant Items” affecting current and prior period results aids in a better understanding of corporate performance. The reader may determine which, if any, items to include or exclude from a performance analysis.
To this end, we have adopted a practice of listing as “Significant Items” individual and/or particularly volatile items only if they impact the current period results by $0.01 per share or more. The following table presents Significant Items for the quarters ended March 31, 2009, December 31, 2008, and March 31, 2008.
Table 2 — Significant Items Influencing Earnings Performance Comparison
                                                 
    Three Months Ended  
    March 31, 2009     December 31, 2008     March 31, 2008  
(in millions)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
Net income — reported earnings
  $ (2,433.2 )           $ (417.3 )           $ 127.1          
Earnings per share, after tax
          $ (6.79 )           $ (1.20 )           $ 0.35  
Change from prior quarter — $
            (5.59 )             (1.37 )             1.00  
Change from prior quarter — %
            N.M. %             N.M. %             N.M. %
 
                                               
Change from a year-ago — $
          $ (7.14 )           $ (0.55 )           $ (0.05 )
Change from a year-ago — %
            N.M. %             84.6 %             (12.5 )%
                                                 
Significant items - favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS     Earnings (1)     EPS  
 
                                               
Goodwill impairment
  $ (2,602.7 )   $ (7.09 )   $     $     $     $  
Franklin relationship restructuring (2)
    159.9       0.44       (454.3 )     (0.81 )            
Preferred stock conversion
          (0.08 )                        
Aggregate impact of Visa ® IPO
                            25.1       0.04  
Deferred tax valuation allowance (provision) benefit (3)
                (2.9 )     (0.01 )     11.1       0.03  
Visa anti-trust indemnification
                4.6       0.01       12.4       0.02  
Net market-related losses
                (141.2 )     (0.25 )     (26.2 )     (0.05 )
Merger and restructuring costs
                            (7.1 )     (0.01 )
Asset impairment
                            (5.1 )     (0.01 )
     
N.M., not a meaningul value.
 
(1)   Pretax unless otherwise noted.
 
(2)   The impact to the three months ended March 31, 2009, is after-tax. The impact to the three months ended December 31, 2008, is pretax.
 
(3)   After-tax.

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Significant Items Influencing Financial Performance Comparisons
Earnings comparisons were impacted by a number of significant items summarized below.
  1.   Goodwill Impairment. During the 2009 first quarter, bank stock prices continued to decline significantly. Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash $2,602.7 million pretax ($7.09 per common share) charge. (See “Goodwill” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section for additional information).
  2.   Franklin Relationship Restructuring. The impacts of the Franklin relationship on our reported results are as follows:
    Performance for the 2009 first quarter included a nonrecurring net tax benefit of $159.9 million ($0.44 per common share) related to the restructuring with Franklin. Also as a result of the restructuring, although earnings were not impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to write-down the acquired mortgages and OREO collateral to fair value (see “Franklin Relationship” discussion located within the “Risk Management and Capital” section and the “Franklin Loans” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” discussion) for additional information.
    Performance for the 2008 fourth quarter included a $454.3 million ($0.81 per common share) negative impact, reflecting the deterioration of cash flows from Franklin’s mortgages, which represented the collateral for our loans. The $454.3 million impact represented: (a) $438.0 million provision for credit losses, (b) $9.0 million reduction of net interest income as the loans were placed on nonaccrual status, and (c) $7.3 million of interest-rate swap losses recorded to noninterest income.
  3.   Preferred Stock Conversion. During the 2009 first quarter, we converted 114,109 shares of Series A 8.50% Non-cumulative Perpetual Preferred (Series A Preferred Stock) stock into common stock. As part of these transactions there was a deemed dividend, which did not impact earnings, but resulted in a negative impact of $0.08 per common share. (See “Capital” discussion located within the “Risk Management and Capital” section for additional information.)
  4.   Visa â Initial Public Offering (IPO). Prior to the Visa ® IPO occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. Impacts related to the Visa ® IPO included:
    In the 2008 fourth quarter, a $2.9 million ($0.01 per common share) increase to provision for income taxes, representing an increase to the previously established capital loss carryforward valuation allowance related to the value of Visa ® shares held and the reduction of shares resulting from the revised conversion ratio.
    In the 2008 first quarter, a $25.1 million gain ($0.04 per common share), was recorded in other noninterest income resulting from the proceeds of the IPO in 2008 relating to the sale of a portion of our ownership interest in Visa ® .
    In the 2008 first quarter, a $11.1 million ($0.03 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carryforward valuation allowance as a result of the 2008 first quarter Visa ® IPO.
    In 2007, we recorded a $24.9 million ($0.05 per common share) for our pro-rata portion of an indemnification charge provided to Visa ® by its member banks for various litigation filed against Visa ® . Subsequently, in the 2008 first quarter, we reversed $12.4 million ($0.02 per common share) of the $24.9 million, as an escrow account was established by Visa ® using a portion of the proceeds received from the IPO. This escrow account was established for the potential settlements relating to this litigation thereby mitigating our potential liability from the indemnification. In the 2008 fourth quarter, we reversed an additional $4.6 million ($0.01 per common share). The accrual, and subsequent reversals, was recorded to noninterest expense.

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  5.   Net Market-Related Losses. Total net market-related losses has three main components.
    Net losses or gains from our Mortgage Servicing Rights and the related hedging. (See “Mortgage Servicing Rights” located within the “Market Risk” section for additional information). The 2009 first quarter also includes the gain from our mortgage portfolio loan sale.
 
    Securities gains and losses.
 
    Other gains and losses, including net gains and losses from equity investments, and the loss from our automobile loan securitization and sale.
                         
    Three Months Ended  
(in millions)   March 31, 2009     December 31, 2008     March 31, 2008  
Net impact of MSR hedging:
                       
MSR valuation adjustment
  $ (10.4 )   $ (63.4 )   $ (18.1 )
Net trading gains (losses)
    6.9       41.3       (6.6 )
 
                 
Impact to mortgage banking income
    (3.5 )     (22.1 )     (24.7 )
Net interest income impact
    2.4       9.5       5.9  
 
                 
Net impact of MSR hedging
    (1.1 )     (12.6 )     (18.8 )
 
                 
 
Gain on portfolio loan sale (1)
    4.3              
 
                       
Securities gains (losses)
    2.1       (127.1 )     1.4  
 
                       
Other noninterest income:
                       
Equity investment losses
    (1.3 )     (1.5 )     (8.8 )
Loss on auto loan securtization and sale
    (5.9 )            
 
                 
Impact to noninterest income
    (7.2 )     (1.5 )     (8.8 )
 
                 
 
                       
Net market-related losses
  $ (1.9) (2)   $ (141.2 )   $ (26.2 )
 
                 
 
                       
Per common share
  $     $ (0.25 )   $ (0.05 )
 
                 
     
(1)   Included in mortgage banking income.
 
(2)   Amount is excluded from Significant Items table as the impact is less than $0.01 per share.
  6.   Other Significant Items Influencing Earnings Performance Comparisons. In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:
2008 — First Quarter
    $7.3 million ($0.01 per common share) of merger and restructuring costs related to the Sky Financial Group, Inc. acquisition in 2007.
 
    $5.1 million ($0.01 per common share) of asset impairment, including: (a) $2.6 million charge off of a receivable included in other noninterest expense, and (b) $2.5 million write-down of leasehold improvements in our Cleveland main office included in net occupancy expense.

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Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Items 2 and 5.)
2009 First Quarter versus 2008 First Quarter
Fully-taxable equivalent net interest income decreased $41.2 million, or 11%, compared with the year-ago quarter. This reflected the unfavorable impact of a 26 basis point decline in the net interest margin to 2.97% from 3.23%. Average earning assets decreased $1.1 billion, reflecting a $0.9 billion, or 77%, decline in average trading account securities, and a $0.8 billion reduction in average federal funds sold and securities purchased under resale agreements, partially offset by a $0.5 billion, or 1%, increase in average total loans and leases.
The following table details the changes in our average loans and leases and average deposits:
Table 3 — Average Loans/Leases and Deposits — 2009 First Quarter vs. 2008 First Quarter
                                 
    First Quarter     Change  
(in thousands)   2009     2008     Amount     Percent  
Net interest income — FTE
  $ 341,087       382,326       (41,239 )     (10.8 )%
 
                       
 
                               
Average Loans and Deposits
                               
(in millions)
                               
Loans/Leases
                               
Commercial and industrial
  $ 13,541     $ 13,343     $ 198       1.5 %
Commercial real estate
    10,112       9,287       825       8.9  
 
                       
Total commercial
    23,653       22,630       1,023       4.5  
 
                               
Automobile loans and leases
    4,354       4,399       (45 )     (1.0 )
Home equity
    7,577       7,274       303       4.2  
Residential mortgage
    4,611       5,351       (740 )     (13.8 )
Other consumer
    671       713       (42 )     (5.9 )
 
                       
Total consumer
    17,213       17,737       (524 )     (3.0 )
 
                       
Total loans
  $ 40,866     $ 40,367     $ 499       1.2 %
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest bearing
  $ 5,544     $ 5,034     $ 510       10.1 %
Demand deposits — interest bearing
    4,076       3,934       142       3.6  
Money market deposits
    5,593       6,753       (1,160 )     (17.2 )
Savings and other domestic time deposits
    4,875       5,004       (129 )     (2.6 )
Core certificates of deposit
    12,663       10,790       1,873       17.4  
 
                       
Total core deposits
    32,751       31,515       1,236       3.9  
Other deposits
    5,438       6,416       (978 )     (15.2 )
 
                       
Total deposits
  $ 38,189     $ 37,931     $ 258       0.7 %
 
                       
The $0.5 billion, or 1%, increase in average total loans and leases primarily reflected:
    $1.0 billion, or 5%, increase in average total commercial loans, with growth reflected in both C&I loans and CRE loans. The $0.8 billion, or 9%, increase in average CRE loans reflected a combination of factors, including draws on existing performing projects and new originations to existing CRE borrowers. The $0.2 billion, or 1%, growth in average C&I loans reflected normal funding and pay downs on lines of credit and by new originations to existing customers.
Partially offset by:
    $0.5 billion, or 3%, decrease in average total consumer loans. This reflected a $0.7 billion, or 14%, decline in average residential mortgages, reflecting the impact of loan sales; as well as the continued refinance of portfolio loans and increased saleable originations, thus mitigating balance sheet growth. Average home equity loans increased 4%, due to strong 2008 second quarter production and a slowdown in runoff. Average automobile loans and leases were essentially unchanged from the year-ago quarter.

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The $0.3 billion, or 1%, increase in average total deposits reflected growth in average total core deposits, as average other deposits declined. Specifically, average core certificates of deposits increased $1.9 billion, or 17%, reflecting the continuation of customers transferring funds into these higher rate accounts from lower rate money market and savings and other domestic deposit accounts, which declined 17% and 3%, respectively.
2009 First Quarter versus 2008 Fourth Quarter
Fully-taxable equivalent net interest income decreased $38.9 million, or 10%, compared with the prior quarter. This reflected a 21 basis point decline in the net interest margin to 2.97% from 3.18%. The decline in the net interest margin reflected a combination of factors including the impact of competitive deposit pricing in our markets, the increase in cash on hand, and other actions taken to improve liquidity, as well as the increased negative impact of funding a higher level of noninterest earning NPAs. The decline in fully-taxable equivalent net interest income also reflected a 2% decline in average earning assets with average total loans and leases decreasing 1% and other earning assets, which includes investment securities, declining 7%.
The following table details the changes in our average loans and leases and average deposits:
Table 4 — Average Loans/Leases and Deposits — 2009 First Quarter vs. 2008 Fourth Quarter
                                 
    2009     2008     Change  
(in thousands)   First Quarter     Fourth Quarter     Amount     Percent  
Net interest income — FTE
  $ 341,087     $ 380,006       (38,919 )     (10.2 )%
 
                       
 
Average Loans and Deposits
                               
(in millions)
                               
Loans/Leases
                               
Commercial and industrial
  $ 13,541     $ 13,746     $ (205 )     (1.5 )%
Commercial real estate
    10,112       10,218       (106 )     (1.0 )
 
                       
Total commercial
    23,653       23,964       (311 )     (1.3 )
 
                               
Automobile loans and leases
    4,354       4,535       (181 )     (4.0 )
Home equity
    7,577       7,523       54       0.7  
Residential mortgage
    4,611       4,737       (126 )     (2.7 )
Other consumer
    671       678       (7 )     (1.0 )
 
                       
Total consumer
    17,213       17,473       (260 )     (1.5 )
 
                       
Total loans
  $ 40,866     $ 41,437     $ (571 )     (1.4 )%
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest bearing
  $ 5,544     $ 5,205     $ 339       6.5 %
Demand deposits — interest bearing
    4,076       3,988       88       2.2  
Money market deposits
    5,593       5,500       93       1.7  
Savings and other domestic time deposits
    4,875       4,837       38       0.8  
Core certificates of deposit
    12,663       12,468       195       1.6  
 
                       
Total core deposits
    32,751       31,998       753       2.4  
Other deposits
    5,438       5,585       (147 )     (2.6 )
 
                       
Total deposits
  $ 38,189     $ 37,583     $ 606       1.6 %
 
                       
Average total loans and leases declined $0.6 billion, or 1%, primarily reflecting declines in total commercial and automobile loans and leases.

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Average total commercial loans decreased $0.3 billion, or 1%, reflecting declines in both average CRE loans and average C&I loans. During the quarter, we initiated a portfolio review that resulted in a reclassification of certain CRE loans to C&I loans at the end of the period. The reclassification was primarily associated with loans to businesses secured by the real estate and buildings that house their operations. These owner-occupied loans secured by real estate were underwritten based on the cash flow of the business and are more appropriately classified as C&I loans. The decline in average C&I loans primarily reflected the impact of the actions taken during the 2008 fourth quarter relating to the Franklin relationship (see “Significant Items” discussion) , partially offset by origination activity. The decline in average CRE loans reflected payoffs and pay downs.
Average total consumer loans declined $0.3 billion. Average total automobile loans and leases declined 4%, reflecting the continued runoff of the direct lease portfolio and a declining average loan balance due to lower origination volume. The $1.0 billion automobile loan sale was closed near the end of the quarter so it had a minimal impact on average balances.
Average residential mortgages declined 3%, reflecting the significant refinance activity during the quarter as we sell such refinanced loans in the secondary market. A $200 million portfolio loan sale, as well as the mortgages added as a result of the Franklin restructuring, both occurred late in the quarter and had a minimal impact on reported average balances.
The 7% decline in average other earning assets, which includes investment securities, reflected decisions during the 2009 first and 2008 fourth quarters to improve overall liquidity. Specifically, we sold $600 million of municipal securities near the end of the 2009 first quarter, reduced our trading account securities used to hedge MSRs in the 2008 fourth quarter, and used the proceeds to purchase new investment securities and to increase cash reserves. As a result of these and other strategic balance sheet changes, average cash and due from banks, a nonearning asset, increased $625 million. At the end of the quarter total cash and due from banks was $2.3 billion, up $1.5 billion from the end of last year.
Average total deposits increased $0.6 billion, or 2%, reflecting:
    $0.8 billion, or 2%, growth in average total core deposits. The primary drivers of the change were 7% growth in average noninterest bearing demand deposits and 2% growth in core certificates of deposits. This growth was the result of (a) the introduction of the Huntington Conservative Deposit Account, a Bank money market account product designed as an alternative deposit option for lower yielding money market mutual funds, (b) the transfer of corporate customer non-deposit accounts to deposits, and (c) an increase in the number of our demand deposit account households.
Partially offset by:
    3% decrease in average noncore deposits, primarily reflecting a managed decline in public fund and foreign time deposits.
Tables 5 and 6 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

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Table 5 — Consolidated Quarterly Average Balance Sheets
                                                         
                                            Change  
Fully-taxable equivalent basis   2009     2008     1Q09 vs 1Q08  
(in millions)   First     Fourth     Third     Second     First     Amount     Percent  
Assets
                                                       
Interest bearing deposits in banks
  $ 355     $ 343     $ 321     $ 256     $ 293     $ 62       21.2 %
Trading account securities
    278       940       992       1,243       1,186       (908 )     (76.6 )
Federal funds sold and securities purchased under resale agreements
    19       48       363       566       769       (750 )     (97.5 )
Loans held for sale
    627       329       274       501       565       62       11.0  
Investment securities:
                                                       
Taxable
    3,930       3,789       3,975       3,971       3,774       156       4.1  
Tax-exempt
    496       689       712       717       703       (207 )     (29.4 )
 
                                         
Total investment securities
    4,426       4,478       4,687       4,688       4,477       (51 )     (1.1 )
Loans and leases: (1)
                                                       
Commercial:
                                                       
Commercial and industrial
    13,541       13,746       13,629       13,631       13,343       198       1.5  
Commercial real estate:
                                                       
Construction
    2,033       2,103       2,090       2,038       2,014       19       0.9  
Commercial
    8,079       8,115       7,726       7,563       7,273       806       11.1  
 
                                         
Commercial real estate
    10,112       10,218       9,816       9,601       9,287       825       8.9  
 
                                         
Total commercial
    23,653       23,964       23,445       23,232       22,630       1,023       4.5  
 
                                         
Consumer:
                                                       
Automobile loans
    3,837       3,899       3,856       3,636       3,309       528       16.0  
Automobile leases
    517       636       768       915       1,090       (573 )     (52.6 )
 
                                         
Automobile loans and leases
    4,354       4,535       4,624       4,551       4,399       (45 )     (1.0 )
Home equity
    7,577       7,523       7,453       7,365       7,274       303       4.2  
Residential mortgage
    4,611       4,737       4,812       5,178       5,351       (740 )     (13.8 )
Other loans
    671       678       670       699       713       (42 )     (5.9 )
 
                                         
Total consumer
    17,213       17,473       17,559       17,793       17,737       (524 )     (3.0 )
 
                                         
Total loans and leases
    40,866       41,437       41,004       41,025       40,367       499       1.2  
Allowance for loan and lease losses
    (913 )     (764 )     (731 )     (654 )     (630 )     (283 )     (44.9 )
 
                                         
Net loans and leases
    39,953       40,673       40,273       40,371       39,737       216       0.5  
 
                                         
Total earning assets
    46,571       47,575       47,641       48,279       47,657       (1,086 )     (2.3 )
 
                                         
Cash and due from banks
    1,553       928       925       943       1,036       517       49.9  
Intangible assets
    3,371       3,421       3,441       3,449       3,472       (101 )     (2.9 )
All other assets
    3,571       3,447       3,384       3,522       3,350       221       6.6  
 
                                         
Total Assets
  $ 54,153     $ 54,607     $ 54,660     $ 55,539     $ 54,885     $ (732 )     (1.3 )%
 
                                         
 
                                                       
Liabilities and Shareholders’ Equity
                                                       
Deposits:
                                                       
Demand deposits — noninterest bearing
  $ 5,544     $ 5,205     $ 5,080     $ 5,061     $ 5,034     $ 510       10.1 %
Demand deposits — interest bearing
    4,076       3,988       4,005       4,086       3,934       142       3.6  
Money market deposits
    5,593       5,500       5,860       6,267       6,753       (1,160 )     (17.2 )
Savings and other domestic deposits
    4,875       4,837       4,911       5,047       5,004       (129 )     (2.6 )
Core certificates of deposit
    12,663       12,468       11,883       10,950       10,790       1,873       17.4  
 
                                         
Total core deposits
    32,751       31,998       31,739       31,411       31,515       1,236       3.9  
Other domestic deposits of $100,000 or more
    1,356       1,682       1,991       2,145       1,989       (633 )     (31.8 )
Brokered deposits and negotiable CDs
    3,449       3,049       3,025       3,361       3,542       (93 )     (2.6 )
Deposits in foreign offices
    633       854       1,048       1,110       885       (252 )     (28.5 )
 
                                         
Total deposits
    38,189       37,583       37,803       38,027       37,931       258       0.7  
Short-term borrowings
    1,100       1,748       2,131       2,854       2,772       (1,672 )     (60.3 )
Federal Home Loan Bank advances
    2,414       3,188       3,139       3,412       3,389       (975 )     (28.8 )
Subordinated notes and other long-term debt
    4,611       4,252       4,382       3,928       3,814       797       20.9  
 
                                         
Total interest bearing liabilities
    40,770       41,566       42,375       43,160       42,872       (2,102 )     (4.9 )
 
                                         
All other liabilities
    614       817       882       961       1,102       (488 )     (44.3 )
Shareholders’ equity
    7,225       7,019       6,323       6,357       5,877       1,348       22.9  
 
                                         
Total Liabilities and Shareholders’ Equity
  $ 54,153     $ 54,607     $ 54,660     $ 55,539     $ 54,885     $ (732 )     (1.3 )%
 
                                         
     
(1)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

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Table 6 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    2009     2008  
Fully-taxable equivalent basis (1)   First     Fourth     Third     Second     First  
Assets
                                       
Interest bearing deposits in banks
    0.45 %     1.44 %     2.17 %     2.77 %     3.97 %
Trading account securities
    4.04       5.32       5.45       5.13       5.27  
Federal funds sold and securities purchased under resale agreements
    0.20       0.24       2.02       2.08       3.07  
Loans held for sale
    5.04       6.58       6.54       5.98       5.41  
Investment securities:
                                       
Taxable
    5.64       5.74       5.54       5.50       5.71  
Tax-exempt
    6.19       7.02       6.80       6.77       6.75  
 
                             
Total investment securities
    5.71       5.94       5.73       5.69       5.88  
Loans and leases: (3)
                                       
Commercial:
                                       
Commercial and industrial
    4.60       5.01       5.46       5.53       6.32  
Commercial real estate:
                                       
Construction
    2.76       4.55       4.69       4.81       5.86  
Commercial
    3.76       5.07       5.33       5.47       6.27  
 
                             
Commercial real estate
    3.55       4.96       5.19       5.32       6.18  
 
                             
Total commercial
    4.15       4.99       5.35       5.45       6.27  
 
                             
Consumer:
                                       
Automobile loans
    7.20       7.17       7.13       7.12       7.25  
Automobile leases
    6.03       5.82       5.70       5.59       5.53  
 
                             
Automobile loans and leases
    7.06       6.98       6.89       6.81       6.82  
Home equity
    5.13       5.87       6.19       6.43       7.21  
Residential mortgage
    5.71       5.84       5.83       5.78       5.86  
Other loans
    8.97       9.25       9.71       9.98       10.43  
 
                             
Total consumer
    5.92       6.28       6.41       6.48       6.84  
 
                             
Total loans and leases
    4.90       5.53       5.80       5.89       6.51  
 
                             
Total earning assets
    4.99 %     5.57 %     5.77 %     5.85 %     6.40 %
 
                             
 
                                       
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Demand deposits — noninterest bearing
    %     %     %     %     %
Demand deposits — interest bearing
    0.14       0.34       0.51       0.55       0.82  
Money market deposits
    1.02       1.31       1.66       1.76       2.83  
Savings and other domestic deposits
    1.45       1.66       1.74       1.83       2.27  
Core certificates of deposit
    3.82       4.02       4.05       4.37       4.68  
 
                             
Total core deposits
    2.27       2.49       2.57       2.67       3.18  
Other domestic deposits of $100,000 or more
    2.96       3.38       3.47       3.77       4.38  
Brokered deposits and negotiable CDs
    2.97       3.39       3.37       3.38       4.43  
Deposits in foreign offices
    0.17       0.90       1.49       1.66       2.16  
 
                             
Total deposits
    2.33       2.58       2.66       2.78       3.36  
Short-term borrowings
    0.25       0.85       1.42       1.66       2.78  
Federal Home Loan Bank advances
    1.03       3.04       2.92       3.01       3.94  
Subordinated notes and other long-term debt
    3.29       4.49       4.29       4.21       5.12  
 
                             
Total interest bearing liabilities
    2.31 %     2.74 %     2.79 %     2.85 %     3.53 %
 
                             
Net interest rate spread
    2.68 %     2.83 %     2.98 %     3.00 %     2.87 %
Impact of noninterest bearing funds on margin
    0.29       0.35       0.31       0.29       0.36  
 
                             
Net interest margin
    2.97 %     3.18 %     3.29 %     3.29 %     3.23 %
 
                             
     
(1)   Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 1 for the FTE adjustment.
 
(2)   Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable 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 2 and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the allowance for unfunded loan commitments (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 table below details the Franklin-related impact to the provision for credit losses for each of the past five quarters:
Table 7 — Provision for Credit Losses — Franklin-Related Impact
                                         
    2009     2008  
(in millions)   First     Fourth     Third     Second     First  
 
Total Provision for credit losses
                                       
Total
  $ 291.8     $ 722.6     $ 125.4     $ 120.8     $ 88.7  
Franklin
          (438.0 )                  
 
                             
Non-Franklin
  $ 291.8     $ 284.6     $ 125.4     $ 120.8     $ 88.7  
 
                             
 
                                       
Total net charge-offs
                                       
Total
  $ 341.5     $ 560.6     $ 83.8     $ 65.2     $ 48.4  
Franklin
    (128.3 )     (423.3 )                  
 
                             
Non-Franklin
  $ 213.2     $ 137.3     $ 83.8     $ 65.2     $ 48.4  
 
                             
 
                                       
Provision for non-Franklin credit losses in excess of non-Franklin net charge-offs
  $ 78.6     $ 147.3     $ 41.6     $ 55.6     $ 40.3  
 
                             
The provision for credit losses in the 2009 first quarter was $291.8 million, down $430.8 million from the 2008 fourth quarter, as that quarter included $438.0 million of provision expense related to our Franklin relationship (see “Franklin relationship” discussion located within the “Risk Management and Capital” section for additional information) . The provision for credit losses in the current quarter was $203.1 million higher than in the year-ago quarter. The current quarter’s provision for credit losses of $291.8 million, exceeded non-Franklin related NCOs by $78.6 million ( see “Credit Quality” discussion).
Noninterest Income
(This section should be read in conjunction with Significant Items 2, 4, and 5.)
The following table reflects noninterest income for each of the past five quarters:
Table 8 — Noninterest Income
                                         
    2009     2008  
(in thousands)   First     Fourth     Third     Second     First  
Service charges on deposit accounts
  $ 69,878     $ 75,247     $ 80,508     $ 79,630     $ 72,668  
Brokerage and insurance income
    39,948       31,233       34,309       35,694       36,560  
Trust services
    24,810       27,811       30,952       33,089       34,128  
Electronic banking
    22,482       22,838       23,446       23,242       20,741  
Bank owned life insurance income
    12,912       13,577       13,318       14,131       13,750  
Automobile operating lease income
    13,228       13,170       11,492       9,357       5,832  
Mortgage banking income (loss)
    35,418       (6,747 )     10,302       12,502       (7,063 )
Securities gains (losses)
    2,067       (127,082 )     (73,790 )     2,073       1,429  
Other income
    18,359       17,052       37,320       26,712       57,707  
 
                             
Total noninterest income
  $ 239,102     $ 67,099     $ 167,857     $ 236,430     $ 235,752  
 
                             

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The following table details mortgage banking income and the net impact of MSR hedging activity for each of the past five quarters:
Table 9 — Mortgage Banking Income and Net Impact of MSR Hedging
                                                         
    2009     2008     1Q09 vs 1Q08  
(in thousands, except as noted)   First     Fourth     Third     Second     First     Amount     Percent  
Mortgage Banking Income
                                                       
Origination and secondary marketing
  $ 29,965       7,180     $ 7,647     $ 13,098     $ 9,332     $ 20,633       N.M. %
Servicing fees
    11,840       11,660       11,838       11,166       10,894       946       8.7  
Amortization of capitalized servicing (1)
    (12,285 )     (6,462 )     (6,234 )     (7,024 )     (6,914 )     (5,371 )     (77.7 )
Other mortgage banking income
    9,404       2,959       3,519       5,959       4,331       5,073       N.M.  
 
                                         
Sub-total
    38,924       15,337       16,770       23,199       17,643       21,281       N.M.  
MSR valuation adjustment (1)
    (10,389 )     (63,355 )     (10,251 )     39,031       (18,093 )     7,704       (42.6 )
Net trading gains (losses) related to MSR hedging
    6,883       41,271       3,783       (49,728 )     (6,613 )     13,496       N.M.  
 
                                         
Total mortgage banking income (loss)
  $ 35,418     $ (6,747 )   $ 10,302     $ 12,502     $ (7,063 )   $ 42,481       N.M. %
 
                                         
 
                                                       
Average trading account securities used to hedge MSRs (in millions)
  $ 223     $ 857     $ 941     $ 1,190     $ 1,139                  
Capitalized mortgage servicing rights (2)
    167,838       167,438       230,398       240,024       191,806     $ (23,968 )     (12.5 )%
Total mortgages serviced for others (in millions) (2)
    16,315       15,754       15,741       15,770       15,138       1,177       7.8  
MSR % of investor servicing portfolio
    1.03 %     1.06 %     1.46 %     1.52 %     1.27 %     (0.24 )%     (18.8 )
 
                                         
 
                                                       
Net Impact of MSR Hedging
                                                       
MSR valuation adjustment (1)
  $ (10,389 )   $ (63,355 )   $ (10,251 )   $ 39,031     $ (18,093 )   $ 7,704       (42.6 )%
Net trading gains (losses) related to MSR hedging
    6,883       41,271       3,783       (49,728 )     (6,613 )     13,496       N.M.  
Net interest income related to MSR hedging
    2,441       9,473       8,368       9,364       5,934       (3,493 )     (58.9 )
 
                                         
Net impact of MSR hedging
  $ (1,065 )   $ (12,611 )   $ 1,900     $ (1,333 )   $ (18,772 )   $ 17,707       (94.3 )%
 
                                         
     
N.M., not a meaningful value.
 
(1)   The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing.
 
(2)   At period end.

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2009 First Quarter versus 2008 First Quarter
Noninterest income increased $3.4 million, or 1%, from the year-ago quarter.
Table 10 — Noninterest Income — 2009 First Quarter vs. 2008 First Quarter
                                 
    First Quarter     Change  
(in thousands)   2009     2008     Amount     Percent  
Service charges on deposit accounts
  $ 69,878     $ 72,668     $ (2,790 )     (3.8 )%
Brokerage and insurance income
    39,948       36,560       3,388       9.3  
Trust services
    24,810       34,128       (9,318 )     (27.3 )
Electronic banking
    22,482       20,741       1,741       8.4  
Bank owned life insurance income
    12,912       13,750       (838 )     (6.1 )
Automobile operating lease income
    13,228       5,832       7,396       N.M.  
Mortgage banking income (loss)
    35,418       (7,063 )     42,481       N.M.  
Securities gains
    2,067       1,429       638       44.6  
Other income
    18,359       57,707       (39,348 )     (68.2 )
 
                       
Total noninterest income
  $ 239,102     $ 235,752     $ 3,350       1.4 %
 
                       
     
N.M., not a meaningful value.
The $3.4 million increase in total noninterest income reflected:
    $42.5 million increase in mortgage banking income. Contributing to this increase was a $21.2 million improvement in MSR hedging, and a $20.6 million increase in origination and secondary marketing income as current quarter loan sales were more than double the year-ago quarter and loan originations that were 24% higher than in the year-ago quarter. Also contributing to the increase was a $4.3 million portfolio loan sale gain in the 2009 first quarter.
    $7.4 million increase in automobile operating lease income reflecting automobile lease originations since the 2007 fourth quarter recorded as operating leases. However, the automobile operating lease portfolio and related income will decline in the future as lease origination activities were discontinued during the 2008 fourth quarter.
    $3.4 million, or 9%, increase in brokerage and insurance income reflecting higher annuity sales.
Partially offset by:
    $39.3 million decline in other income as the year-ago quarter included a $25.1 million gain related to the Visa ® IPO, a $9.9 million decrease in customer derivative income from the year-ago quarter, and a $5.9 million loss on the current quarter’s automobile loan sale.
    $9.3 million, or 27%, decline in trust services income, reflecting the impact of lower market values on asset management revenues.
    $2.8 million, or 4%, decline in service charges on deposit accounts primarily reflecting lower consumer NSF and overdraft fees, partially offset by higher commercial service charges.

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2009 First Quarter versus 2008 Fourth Quarter
Noninterest income increased $172.0 million from the prior quarter.
Table 11 — Noninterest Income — 2009 First Quarter vs. 2008 Fourth Quarter
                                 
    First     Fourth        
    Quarter     Quarter     Change  
(in thousands)   2009     2008     Amount     Percent  
Service charges on deposit accounts
  $ 69,878     $ 75,247     $ (5,369 )     (7.1 )%
Brokerage and insurance income
    39,948       31,233       8,715       27.9  
Trust services
    24,810       27,811       (3,001 )     (10.8 )
Electronic banking
    22,482       22,838       (356 )     (1.6 )
Bank owned life insurance income
    12,912       13,577       (665 )     (4.9 )
Automobile operating lease income
    13,228       13,170       58       0.4  
Mortgage banking income (loss)
    35,418       (6,747 )     42,165       N.M.  
Securities gains (losses)
    2,067       (127,082 )     129,149       N.M.  
Other income
    18,359       17,052       1,307       7.7  
 
                       
Total noninterest income
  $ 239,102     $ 67,099     $ 172,003       N.M. %
 
                       
     
N.M., not a meaningful value.
The $172.0 million increase in total noninterest income reflected:
    $129.1 million improvement in securities gains (losses) as the prior quarter reflected a $127.1 million securities impairment.
    $42.2 million increase in mortgage banking income. Contributing to this increase was a $22.8 million increase in origination and secondary marketing income as current quarter loan sales increased 163% and loan originations totaled $1.5 billion, more than double the originations in the prior quarter. Also contributing to the increase was an $18.6 million improvement in MSR hedging, and a $4.3 million gain on the current quarter’s $200 million portfolio loan sale at quarter end.
    $8.7 million, or 28%, increase in brokerage and insurance income, reflecting a $5.5 million increase in insurance agency income, partially due to seasonal contingency fees, $2.5 million increase in annuity sale commissions, and $1.2 million increase in title insurance fees due to increased mortgage origination activity. The first quarter represented a record level of investment sales.
    $1.3 million, or 8%, increase in other income, reflecting a decline in asset losses. The current quarter included a $5.9 million automobile loan sale loss and $1.3 million of equity investment losses. This was less than losses in the prior quarter that included a $7.3 million loss on Franklin-related swaps as part of that quarter’s restructuring and $1.5 million of equity investment losses.
Partially offset by:
    $5.4 million, or 7%, decline in service charges on deposit accounts primarily reflecting lower consumer NSF and overdraft fees, partially offset by higher commercial service charges.
    $3.0 million, or 11%, decline in trust services income, reflecting the impact of lower yields and reduced market values on asset management revenues.

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Noninterest Expense
(This section should be read in conjunction with Significant Items 1, 4, and 6.)
The following table reflects noninterest expense for each of the past five quarters:
Table 12 — Noninterest Expense
                                         
    2009     2008  
(in thousands)   First     Fourth     Third     Second     First  
Personnel costs
  $ 175,932     $ 196,785     $ 184,827     $ 199,991     $ 201,943  
Outside data processing and other services
    32,432       31,230       32,386       30,186       34,361  
Net occupancy
    29,188       22,999       25,215       26,971       33,243  
Equipment
    20,410       22,329       22,102       25,740       23,794  
Amortization of intangibles
    17,135       19,187       19,463       19,327       18,917  
Professional services
    18,253       17,420       13,405       13,752       9,090  
Marketing
    8,225       9,357       7,049       7,339       8,919  
Automobile operating lease expense
    10,931       10,483       9,093       7,200       4,506  
Telecommunications
    5,890       5,892       6,007       6,864       6,245  
Printing and supplies
    3,572       4,175       4,316       4,757       5,622  
Goodwill impairment
    2,602,713                          
Other expense
    45,088       50,237       15,133       35,676       23,841  
 
                             
Total noninterest expense
  $ 2,969,769     $ 390,094     $ 338,996     $ 377,803     $ 370,481  
 
                             
Number of employees (full-time equivalent), at period-end
    10,533       10,951       10,901       11,251       11,787  
2009 First Quarter versus 2008 First Quarter
Noninterest expense increased $2,599.3 million from the year-ago quarter.
Table 13 — Noninterest Expense — 2009 First Quarter vs. 2008 First Quarter
                                 
    First     First        
    Quarter     Quarter     Change  
(in thousands)   2009     2008     Amount     Percent  
Personnel costs
  $ 175,932     $ 201,943     $ (26,011 )     (12.9 )%
Outside data processing and other services
    32,432       34,361       (1,929 )     (5.6 )
Net occupancy
    29,188       33,243       (4,055 )     (12.2 )
Equipment
    20,410       23,794       (3,384 )     (14.2 )
Amortization of intangibles
    17,135       18,917       (1,782 )     (9.4 )
Professional services
    18,253       9,090       9,163       N.M.  
Marketing
    8,225       8,919       (694 )     (7.8 )
Automobile operating lease expense
    10,931       4,506       6,425       N.M.  
Telecommunications
    5,890       6,245       (355 )     (5.7 )
Printing and supplies
    3,572       5,622       (2,050 )     (36.5 )
Goodwill impairment
    2,602,713             2,602,713       N.M.  
Other expense
    45,088       23,841       21,247       89.1  
 
                       
Total noninterest expense
  $ 2,969,769     $ 370,481     $ 2,599,288       N.M. %
 
                       
Number of employees (full-time equivalent), at period-end
    10,533       11,787       (1,254 )     (10.6 )%
     
N.M., not a meaningful value.
The $2,599.3 million increase in total noninterest expense was entirely due to the current quarter’s $2,602.7 million goodwill impairment charge (see “Goodwill” discussion located within the Critical Account Policies and Use of Significant Estimates” for additional information) . The remaining $3.4 million, or 1%, decrease reflected:
    $26.0 million, or 13%, decline in personnel costs, reflecting the impact of our 2008 and 2009 expense initiatives. Full-time equivalent staff declined 11% from the year-ago period.

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Partially offset by:
    $21.2 million increase in other expense as the 2008 first quarter included a $12.4 million Visa ® indemnification expense reversal, as well as higher FDIC insurance expense in the current quarter.
    $9.2 million increase in professional services costs, reflecting higher legal and collection-related expenses.
2009 First Quarter versus 2008 Fourth Quarter
Noninterest expense increased $2,579.7 million from the prior quarter.
Table 14 — Noninterest Expense — 2009 First Quarter vs. 2008 Fourth Quarter
                                 
    First     Fourth        
    Quarter     Quarter     Change  
(in thousands)   2009     2008     Amount     Percent  
Personnel costs
  $ 175,932     $ 196,785     $ (20,853 )     (10.6 )%
Outside data processing and other services
    32,432       31,230       1,202       3.8  
Net occupancy
    29,188       22,999       6,189       26.9  
Equipment
    20,410       22,329       (1,919 )     (8.6 )
Amortization of intangibles
    17,135       19,187       (2,052 )     (10.7 )
Professional services
    18,253       17,420       833       4.8  
Marketing
    8,225       9,357       (1,132 )     (12.1 )
Automobile operating lease expense
    10,931       10,483       448       4.3  
Telecommunications
    5,890       5,892       (2 )     (0.0 )
Printing and supplies
    3,572       4,175       (603 )     (14.4 )
Goodwill impairment
    2,602,713             2,602,713       N.M.  
Other expense
    45,088       50,237       (5,149 )     (10.2 )
 
                       
Total noninterest expense
  $ 2,969,769     $ 390,094     $ 2,579,675       N.M. %
 
                       
Number of employees (full-time equivalent), at period-end
    10,533       10,951       (418 )     (3.8 )
     
N.M., not a meaningful value.
The $2,579.7 million increase in total noninterest expense was primarily due to the $2,602.7 million goodwill impairment charge (see “Goodwill” discussion located within the Critical Account Policies and Use of Significant Estimates” for additional information). The remaining $23.0 million, or 6%, decrease reflected:
    $20.9 million, or 11%, decline in personnel costs, reflecting the impact of incentive accrual reversals and actions taken as part of our $100 million expense reduction initiative.
    $5.1 million, or 10%, decline in other expense reflecting lower automobile lease residual losses, partially offset by higher FDIC insurance expense.
Partially offset by:
    $6.2 million, or 27%, increase in net occupancy expense, reflecting higher seasonal expenses, as well as lower property sale gains.

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Provision for Income Taxes
(This section should be read in conjunction with Significant Items 2 and 4.)
The provision for income taxes in the 2009 first quarter was a benefit of $251.8 million, resulting in an effective tax rate benefit of 9.4%. This compared with a tax benefit of $251.9 million in the 2008 fourth quarter and a tax expense of $26.4 million in the 2008 first quarter. The effective tax rates in the prior quarter and year-ago quarter were a benefit of 37.6% and an expense of 17.2%, respectively. During the 2009 first quarter, the effective tax rate included a $159.9 million nonrecurring tax benefit resulting from the Franklin restructuring (see “Franklin Loans” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” for additional information) , and the non-deductibility of $2,595.0 million of the total $2,602.7 million of goodwill impairment (see “Goodwill” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” for additional information).
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. Also, we are subject to ongoing tax examinations in various jurisdictions. Both the Internal Revenue Service and other taxing jurisdictions have proposed various adjustments to our previously filed tax returns. We believe that our tax positions related to such proposed were correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. It is possible that the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. However, 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.

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RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe our primary risk exposures are credit, market, liquidity, and operational risk. More information on risk can be found under the heading “Risk Factors” included in Item 1A of our 2008 Form 10-K, and subsequent filings with the SEC. Additionally, the MD&A appearing in our 2008 annual report should be read in conjunction with this discussion and analysis as this report provides only material updates to the 2008 Form 10-K. Our definition, philosophy, and approach to risk management are unchanged from the discussion presented in the 2008 Form 10-K.
Credit Risk
Credit risk is the risk of loss due to our counterparties not being able to meet their financial obligations under agreed upon terms. 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 credit risk associated with our investment and derivatives activities. Credit risk is incidental to trading activities and represents a significant risk that is associated with our investment securities portfolio (see “Investment Securities Portfolio” discussion) . Credit risk is mitigated through a combination of credit policies and processes, market risk management activities, and portfolio diversification.
Counterparty Risk
In the normal course of business, we engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and for trading activities. As a result, we are exposed to credit risk, or the risk of loss if the counterparty fails to perform according to the terms of our contract or agreement.
We minimize counterparty risk through credit approvals, limits, and monitoring procedures similar to those used for our commercial portfolio (see “Commercial Credit” discussion) , generally entering into transactions only with counterparties that carry high quality ratings, and obtain collateral when appropriate.
The majority of the financial institutions with whom we are exposed to counterparty risk are large commercial banks. The potential amount of loss, which would have been recognized at March 31, 2009, if a counterparty defaulted, did not exceed $13 million for any individual counterparty.
Credit Exposure Mix
As shown in Table 15, at March 31, 2009, commercial loans totaled $23.0 billion, and represented 58% of our total credit exposure. This portfolio was diversified between C&I and CRE loans ( see “Commercial Credit” discussion) .
Total consumer loans were $16.5 billion at March 31, 2009, and represented 42% of our total credit exposure. The consumer portfolio included home equity loans and lines of credit, residential mortgages, and automobile loans and leases (see “Consumer Credit” discussion) .

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Table 15 — Loans and Leases Composition
                                                                                 
    2009     2008  
(in millions)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                                                               
By Type
                                                                               
Commercial: (1)
                                                                               
Commercial and industrial (2)
  $ 13,768       34.8 %   $ 13,541       33.0 %   $ 13,638       33.1 %   $ 13,746       33.5 %   $ 13,646       33.3 %
Commercial real estate:
                                                                               
Construction
    2,074       5.2       2,080       5.1       2,111       5.1       2,136       5.2       2,058       5.0  
Commercial (2)
    7,187       18.2       8,018       19.5       7,796       18.9       7,565       18.4       7,458       18.2  
 
                                                           
Commercial real estate
    9,261       23.4       10,098       24.6       9,907       24.0       9,701       23.6       9,516       23.2  
 
                                                           
Total commercial
    23,029       58.2       23,639       57.6       23,545       57.1       23,447       57.1       23,162       56.5  
 
                                                           
Consumer:
                                                                               
Automobile loans (4)
    2,894       7.3       3,901       9.5       3,918       9.5       3,759       9.2       3,491       8.5  
Automobile leases
    468       1.2       563       1.4       698       1.7       835       2.0       1,000       2.4  
Home equity
    7,663       19.4       7,556       18.4       7,497       18.2       7,410       18.1       7,296       17.8  
Residential mortgage
    4,837       12.2       4,761       11.6       4,854       11.8       4,901       11.9       5,366       13.1  
Other loans
    657       1.7       672       1.5       680       1.7       695       1.7       699       1.7  
 
                                                           
Total consumer
    16,519       41.8       17,453       42.4       17,647       42.9       17,600       42.9       17,852       43.5  
 
                                                           
Total loans and leases
  $ 39,548       100.0 %   $ 41,092       100.0 %   $ 41,192       100.0 %   $ 41,047       100.0 %   $ 41,014       100.0 %
 
                                                           
 
                                                                               
By Business Segment
                                                                               
Regional Banking
  $ 31,661       80.1 %   $ 31,875       77.6 %   $ 31,590       76.7 %   $ 31,346       76.4 %   $ 31,447       76.7 %
Auto Finance and Dealer Services
    4,837       12.2       5,956       14.5       5,900       14.3       5,959       14.5       5,862       14.3  
PFG
    2,555       6.5       2,611       6.4       2,607       6.3       2,612       6.4       2,548       6.2  
Treasury / Other (3)
    495       1.2       650       1.5       1,095       2.7       1,130       2.7       1,157       2.8  
 
                                                           
Total loans and leases
  $ 39,548       100.0 %   $ 41,092       100.0 %   $ 41,192       100.0 %   $ 41,047       100.0 %   $ 41,014       100.0 %
 
                                                           
     
(1)   There were no commercial loans outstanding that would be considered a concentration of lending to a particular group of industries.
 
(2)   The 2009 first quarter reflected a net reclassification of $782.2 million from commercial real estate to commercial and industrial.
 
(3)   Comprised primarily of Franklin loans.
 
(4)   The decrease from December 31, 2008, to March 31, 2009, reflected a $1.0 billion automobile loan sale during the 2009 first quarter.

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Franklin relationship
(This section should be read in conjunction with Significant Item 2 and the “Franklin loan” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section.)
As a result of the March 31, 2009, restructuring, on a consolidated basis, the $650 million nonaccrual commercial loan to Franklin at December 31, 2008, was replaced by $494 million (recorded at fair value) of residential mortgage loans secured by first- and second- liens, and $80 million of OREO properties (recorded at fair value) that had previously been assets of Franklin or its subsidiaries and pledged to secure our loan to Franklin.
From a credit quality perspective, our NALs were reduced by a net amount of $284 million as the outstanding $650 million NAL Franklin balance at December 31, 2008 was eliminated, partially offset by a $366 million increase in mortgage-related NALs representing the acquired first and second lien mortgages that were nonaccruing. Also, our specific ALLL for the Franklin portfolio of $130 million was eliminated; however, no initial increase to the ALLL relating to the acquired mortgages was recorded as these assets were recorded at fair value. Any future adjustments to the ALLL will reflect the ongoing performance of these assets consistent with our policies.
Commercial Credit
The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic outlook.
In commercial lending, ongoing credit management is dependent upon the type and nature of the loan. We monitor all significant exposures on a periodic basis. Internal risk ratings are assigned at the time of each loan approval, and are assessed and updated with each periodic monitoring event. The frequency of the monitoring event is dependent upon the size and complexity of the individual credit, but in no case less frequently than every 12 months. There is also extensive macro portfolio management analysis conducted to identify trends or specific segments of the portfolio that may need additional monitoring activity. The single family home builder portfolio is an example of a segment of the portfolio that has received more frequent evaluation at the loan level as a result of the economic environment and performance trends (see “Single Family Home Builder” discussion) . We continually review and adjust our risk rating criteria based on actual experience. The continuous analysis and review process results in a determination of an appropriate ALLL amount for our commercial loan portfolio.
Our commercial loan portfolio, including CRE loans, is diversified by customer size, as well as throughout our geographic footprint. However, the following segments are noteworthy:
COMMERCIAL AND INDUSTRIAL (C&I) PORTFOLIO
The C&I portfolio is comprised of loans to businesses where the source of repayment is associated with the ongoing operations of the business. Generally, the loans are secured with the financing of the borrower’s assets, such as equipment, accounts receivable, or inventory. In many cases, the loans are secured by real estate, although the sale of the real estate is not a primary source of repayment for the loan. C&I loans totaled $13.8 billion and represented 35% of our total loan exposure at March 31, 2009. There were no outstanding commercial loans that would be considered a concentration of lending to a particular industry or within a geographic standpoint. Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home building industry, contractors, and automotive suppliers. However, the combined total of these segments represent less than 10% of the total C&I portfolio. We manage the risks inherent in this portfolio through origination policies, concentration limits, ongoing loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as loan-to-value (LTV), and debt service coverage ratios, as applicable.
Within the C&I portfolio, the automotive industry segment continued to be stressed and is discussed below.
Automotive Industry
The table below provides a summary of loans and total exposure including both loans and unused commitments and standby letters of credit to companies related to the automotive industry.

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Table 16 — Automotive Industry Exposure (1)
                                                 
    March 31, 2009     December 31, 2008  
            % of Total     Total             % of Total     Total  
(in millions)   Loans     Loans/Leases     Exposure     Loans     Loans/Leases     Exposure  
Suppliers:
                                               
Domestic
  $ 209             $ 355     $ 182             $ 331  
Foreign
    33               50       33               46  
 
                                   
Total Suppliers
    242       0.6 %     405       215       0.5 %     377  
 
                                               
Dealer:
                                               
Floorplan — domestic
    549               777       553               747  
Floorplan — foreign
    395               559       408               544  
Other
    347               417       346               464  
 
                                   
Total Dealer
    1,290       3.3       1,753       1,306       3.2       1,755  
 
                                   
 
                                               
Total Automotive
  $ 1,533       3.9 %   $ 2,158     $ 1,521       3.7 %   $ 2,131  
 
                                   
     
(1)   Companies with > 25% of revenue derived from the automotive industry.
Although we do not have direct exposure to the automobile manufacturing companies, we do have limited exposure to automobile industry suppliers, and automobile dealer-related exposures. The automobile industry supplier exposure is embedded in our C&I portfolio within the Regional Banking line of business, while the dealer exposure is originated and managed within the AFDS line of business. As a result of our geographic locations and the above referenced exposure, we closely monitor the entire automobile industry. In particular, the recent events associated with General Motors and Chrysler, including the Chrysler bankruptcy filing as of April 30, 2009, plant closings, production suspension, and model eliminations are noteworthy. We have anticipated the significant reductions in production across the industry that will result in additional economic distress in some of our markets. Our East Michigan and northern Ohio regions are particularly exposed to these reductions, but all regions are affected. We anticipate the impact will be experienced throughout our commercial portfolio, and in general, our consumer loan portfolios. However, as these actions were anticipated, many of the potential impacts have been mitigated. As an example, we do not have exposure to single-brand Pontiac, Hummer, or Saab dealers.
As shown in Table 16, our direct total exposure to the automotive supplier segment is $405 million, of which $242 million represented loans outstanding. We included companies that derive more than 25% of their revenues from contracts with automobile manufacturing companies. This low level of exposure is reflective of our industry-level risk-limits approach.
While the entire automotive industry is under significant pressure as evidenced by a significant reduction in new car sales and the resulting production declines, we believe that our floorplan exposure of $1.3 billion will not be materially affected. Our floorplan exposure is centered in large, multi-dealership entities, and we have focused on client selection, and conservative underwriting standards. We anticipate that the economic environment will affect our dealerships in the coming quarters, but we believe the majority of our portfolio will perform favorably relative to the industry in the increasingly stressed environment.
While the specific impacts associated with the ongoing changes in the industry are unknown, we believe that we have taken steps to limit our exposure. When we have chosen to extend credit, our client selection process has focused us on the most diversified and strongest dealership groups.

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COMMERCIAL REAL ESTATE (CRE) PORTFOLIO
As shown in the table below, CRE loans totaled $9.3 billion and represented 23% of our total loan exposure at March 31, 2009.
Table 17 — Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    At March 31, 2009  
                                                                    Total     % of  
(in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     West Virginia     Other     Amount     portfolio  
Retail properties
  $ 955     $ 277     $ 162     $ 218     $ 17     $ 93     $ 49     $ 596     $ 2,367       25.6 %
Multi family
    842       148       131       75       42       9       75       140       1,462       15.8  
Single family home builders
    731       125       68       41       29       151       19       76       1,240       13.4  
Office
    594       202       115       58       28       21       63       65       1,146       12.4  
Lines to real estate companies
    817       144       53       42             1       50       19       1,126       12.2  
Industrial and warehouse
    517       242       32       75       14       44       22       131       1,077       11.6  
Hotel
    142       75       25       18                   11       47       318       3.4  
Health care
    174       58       15                         4       31       282       3.0  
Raw land and other land uses
    85       39       13       14       10       7       6       24       198       2.1  
Other
    30       4       7       2       1                   1       45       0.5  
 
                                                           
 
                                                                               
Total
  $ 4,887     $ 1,314     $ 621     $ 543     $ 141     $ 326     $ 299     $ 1,130     $ 9,261       100.0 %
 
                                                           
% of total portfolio
    52.8 %     14.2 %     6.7 %     5.9 %     1.5 %     3.5 %     3.2 %     12.2 %     100.0 %        
 
                                                                               
Net charge-offs
  $ 57.4     $ 11.8     $ 0.7     $ 1.1     $ 1.6     $ 10.1     $     $ 0.1     $ 82.8          
Net charge-offs — annualized percentage
    4.27 %     3.31 %     0.43 %     0.77 %     4.09 %     11.38 %     0.00 %     0.04 %     3.27 %        
 
                                                                               
Nonaccrual loans
  $ 316.7     $ 150.2     $ 13.3     $ 23.1     $ 11.9     $ 90.2     $ 0.7     $ 23.8     $ 629.9          
% of portfolio
    6.48 %     11.43 %     2.14 %     4.25 %     8.44 %     27.67 %     0.23 %     2.11 %     6.80 %        
CRE loan and credit quality data regarding NCOs and NALs is presented in the table below.
Table 18 — Commercial Real Estate Loans Credit Quality Data by Property Type
                                         
    Quarter Ended March 31,2009     At March 31, 2009  
    Net charge-offs     Nonaccrual Loans  
(in thousands)   Amount     Annualized %     % of Total     Amount     % of Total  
Single family home builders
  $ 29,632       8.16 %     35.8 %   $ 289,208       45.9 %
Retail properties
    25,292       5.00       30.6       102,701       16.3  
Multi family
    11,970       2.85       14.5       65,607       10.4  
Lines to real estate companies
    7,964       2.45       9.6       38,346       6.1  
Office
    3,461       1.05       4.2       36,118       5.7  
Raw land and other land uses
    2,982       5.32       3.6       25,505       4.0  
Industrial and warehouse
    1,217       0.39       1.5       50,558       8.0  
Hotel
                0.0       1,510       0.2  
Health care
    (2 )     (0.00 )     0.0       15,444       2.5  
Other
    264       2.15       0.3       4,889       0.8  
 
                             
 
                                       
Total
  $ 82,781       3.27 %     100.0 %   $ 629,886       100.0 %
 
                             
We manage the risks inherent in this portfolio through origination policies, concentration limits, ongoing loan level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as loan-to-value (LTV), debt service coverage ratios, and pre-leasing requirements, as applicable. Generally, we: (a) limit our loans to 80% of the appraised value of the commercial real estate, (b) require net operating cash flows to be 125% of required interest and principal payments, and (c) if the commercial real estate is non-owner occupied, require that at least 50% of the space of the project be pre-leased. We may require more conservative loan terms, depending on the project.

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Dedicated real estate professionals located in our banking regions originated the majority of this portfolio. Appraisals from approved vendors are reviewed by an internal appraisal review group to ensure the quality of the valuation used in the underwriting process. The portfolio is diversified by project type and loan size, and represents a significant piece of the credit risk management strategies employed for this portfolio. Our loan review staff provides an assessment of the quality of the underwriting and structure and validates the risk rating assigned to the loan. Effective with the 2009 second quarter, as part of the reorganization of our internal reporting structure, commercial real estate will become a separate line of business. Further, the commercial real estate line of business will be managed by a newly appointed executive reporting directly to our chief executive officer.
Appraisal values are updated as needed, in compliance with regulatory requirements. Given the stressed environment for some loan types, we have initiated ongoing portfolio level reviews of segments such as single family home builders and retail properties (see “Single Family Home Builders” and “Retail properties” discussions) . These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. The results of the 2009 first quarter reviews of these two portfolio segments indicated that additional stress was likely due to the current economic conditions. Based on our assessment, the increased levels of risk are manageable. Appraisals are updated on a regular basis to ensure that appropriate decisions regarding the ongoing management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers as well as an in-depth knowledge of CRE project lending and the market environment.
At the portfolio level, we actively monitor the concentrations and performance metrics of all loan types, with a focus on higher risk segments. Macro-level stress-test scenarios based on home-price depreciation trends for the segments are embedded in our performance expectations, and lease-up and absorption is assessed. We anticipate the current stress within this portfolio will continue throughout 2009, resulting in elevated charge-offs, NALs, and ALLL levels.
During the 2009 first quarter, a portfolio review resulted in a reclassification of certain CRE loans to C&I loans at the end of the period. This net reclassification of $782 million was primarily associated with loans to businesses secured by the real estate and buildings that house their operations. These owner-occupied loans secured by real estate were underwritten based on the cash flow of the business and are more appropriately classified as C&I loans.
Within the CRE portfolio, the single family home builder and retail properties segments continued to be stressed as a result of the continued decline in the housing markets and general economic conditions. These segments continue to be the highest risk segments within our CRE portfolio, and are discussed below.
Single Family Home Builders
At March 31, 2009, we had $1,240 million of loans to single family home builders. Such loans represented 3% of total loans and leases. Of this portfolio segment, 68% were to finance projects currently under construction, 16% to finance land under development, and 16% to finance land held for development. The $1,240 million represented a $349 million, or 22%, decrease compared with $1,589 million at December 31, 2008. The decrease primarily reflects the reclassification of loans secured by 1-4 family residential real estate rental properties to C&I loans, consistent with industry practices in the definition of this segment. Also, we have not originated any new loans within this portfolio segment in 2009. This portfolio segment is included within our CRE portfolio, discussed above.
The housing market across our geographic footprint remained stressed, reflecting relatively lower sales activity, declining prices, and excess inventories of houses to be sold, particularly impacting borrowers in our East Michigan and northern Ohio regions. Further, a portion of the loans extended to borrowers located within our geographic regions was to finance projects outside of our geographic regions. We anticipate the residential developer market will continue to be depressed, and anticipate continued pressure on the single family home builder segment throughout 2009. As previously mentioned, all significant exposures are monitored on a periodic basis. For this portfolio segment, the periodic monitoring has included: (a) all loans greater than $50 thousand have been reviewed continuously over the past 18 months and continue to be monitored, (b) credit valuation adjustments have been made when appropriate based on the current condition of each relationship, and (c) reserves have been increased based on proactive risk identification and thorough borrower analysis.

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Retail properties
Our portfolio of commercial real estate loans secured by retail properties totaled $2.4 billion, or approximately 6% of total loans and leases, at March 31, 2009. Loans within this portfolio segment increased from $2.3 billion at December 31, 2008, primarily reflecting construction draws. Credit approval in this portfolio segment is generally dependant on pre-leasing requirements, and net operating income from the project must cover interest expense by specified percentages when the loan is fully funded.
The weakness of the economic environment in our geographic regions significantly impacted the projects that secure the loans in this portfolio segment. Increased unemployment levels compared with recent years, and the expectation that these levels will continue to increase for the foreseeable future, are expected to adversely affect our borrowers’ ability to repay these loans. We have increased the level of credit risk management activity to this portfolio segment, and we analyze our retail property loans in detail by combining property type, geographic location, tenants, and other data, to assess and manage our credit concentration risks.
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength and payment history of the borrower, type of exposure, and the transaction structure. We make extensive use of portfolio assessment models to continuously monitor the quality of the portfolio, which may result in changes to future origination strategies. The continuous analysis and review process results in a determination of an appropriate ALLL amount for our consumer loan portfolio.
Our consumer loan portfolio is primarily comprised of traditional residential mortgages, home equity loans and lines of credit, and automobile loans and leases. The residential mortgage and home equity portfolios are primarily located throughout our geographic footprint. Our automobile loan and lease portfolio includes exposure in several out-of-market states; however, no out-of-market state represented more than 10% of the total automobile loan portfolio, and we expect to see relatively rapid reductions in these exposures. Effective in the 2009 first quarter, we ceased automobile loan originations in out-of-market states. Also, lease origination activities were discontinued during the 2008 fourth quarter.
The general slowdown in the housing market has impacted the performance of our residential mortgage and home equity portfolios over the past year. While the degree of price depreciation varies across our markets, all regions throughout our footprint have been affected. Given the conditions in our markets as described above in the single family home builder section, the home equity and residential mortgage portfolios are particularly noteworthy, and are discussed below:

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Table 19 — Selected Home Equity and Residential Mortgage Portfolio Data
                                                 
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages  
    3/31/09     12/31/08     3/31/09     12/31/08     3/31/09 (1)     12/31/08  
Ending Balance
  $3.0 billion   $3.1 billion   $4.7 billion   $4.4 billion   $4.4 billion   $4.8 billion
Portfolio Weighted Average LTV ratio (2)
    71%       70%       78%       78%       77%       76%  
Portfolio Weighted Average FICO (3)
    721       725       720       720       701       707  
                         
    Three-Month Period Ended March 31, 2009  
    Home Equity Loans     Home Equity Lines of Credit     Residential Mortgages (4)  
Originations
  $39 million   $522 million   $56 million
Origination Weighted Average LTV ratio (2)
    59%       75%       79%  
Origination Weighted Average FICO (3)
    743       763       730  
     
(1)   Excludes Franklin loans.
 
(2)   The loan-to-value (LTV) ratios for home equity loans and home equity lines of credit are cumulative LTVs reflecting the balance of any senior loans.
 
(3)   Portfolio Weighted Average FICO reflects currently updated customer credit scores whereas Origination Weighted Average FICO reflects the customer credit scores at the time of loan origination.
 
(4)   Represents only owned-portfolio originations.
HOME EQUITY PORTFOLIO
Our home equity portfolio (loans and lines of credit) consists of both first and second mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios, and LTV ratios. Included in our home equity loan portfolio are $1.4 billion of loans where the loan is secured by a first-mortgage lien on the property. We offer closed-end home equity loans with a fixed interest rate and level monthly payments and a variable-rate, interest-only home equity line of credit. The weighted average cumulative LTV ratio at origination of our home equity portfolio was 75% at March 31, 2009, unchanged compared with December 31, 2008.
We believe we have granted credit conservatively within this portfolio. We have not originated home equity loans or lines of credit that allow negative amortization. Also, we have not originated home equity loans or lines of credit with an LTV ratio at origination greater than 100%, except for infrequent situations with high quality borrowers. Home equity loans are generally fixed-rate with periodic principal and interest payments. Home equity lines of credit are generally variable-rate and do not require payment of principal during the 10-year revolving period of the line.
We continue to make appropriate origination policy adjustments based on our own assessment of an appropriate risk profile as well as industry actions. As an example, the significant changes made in 2008 by Fannie Mae and Freddie Mac resulted in the reduction of our maximum LTV ratio on second-mortgage loans, even for customers with high credit scores.
In addition to origination policy adjustments, we take appropriate actions, as necessary, to mitigate the risk profile of this portfolio. We reduced, and in 2007, ultimately stopped originating new production through brokers. Reducing our concentration of broker originations to less than 10% of the portfolio has had significant positive impacts on the performance of the portfolio. We focus production primarily within our banking footprint. In 2008, a home equity line of credit management program was initiated to reduce our exposure to higher-risk customers including, but not limited to, the reduction of line of credit limits.
While it is still too early to make any declarative statements regarding the impact of these actions, our more recent originations have shown consistent, or lower, levels of cumulative risk during the first twelve months of the loan or line of credit term compared with earlier originations. Specifically, the performance of our 2006 and 2007 originations improved substantially compared with our 2004 and 2005 originations.

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RESIDENTIAL MORTGAGES
We focus on higher quality borrowers, and underwrite all applications centrally, or through the use of an automated underwriting system. We do not originate residential mortgage loans that allow negative amortization or are “payment option adjustable-rate mortgages.” Additionally, we generally do not originate residential mortgage loans that have an LTV ratio greater than 90%, although such loans with an LTV ratio of up to 100% are originated in very limited situations.
A majority of the loans in our loan portfolio have adjustable rates. Our adjustable-rate mortgages (ARMs) are primarily residential mortgages that have a fixed rate for the first 3 to 5 years and then adjust annually. These loans comprised approximately 58% of our total residential mortgage loan portfolio at March 31, 2009. At March 31, 2009, ARM loans that were expected to have rates reset in 2009 and 2010 totaled $673 million and $564 million, respectively. Given the quality of our borrowers and the relatively low current interest rates, we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk exposure. We initiate borrower contact at least six months prior to the interest rate resetting, and have been successful in converting many ARMs to fixed-rate loans through this process. Additionally, where borrowers are experiencing payment difficulties, loans may be re-underwritten based on the borrower’s ability to repay the loan.
We had $427.7 million of Alt-A mortgage loans in the residential mortgage loan portfolio at March 31, 2009, representing a 4% decline, compared with $445.4 million at December 31, 2008. These loans have a higher risk profile than the rest of the portfolio as a result of origination policies for this limited segment including reliance on stated income, stated assets, or higher acceptable LTV ratios. At March 31, 2009, borrowers for Alt-A mortgages had an average current FICO score of 666 and the loans had an average LTV ratio of 88%, compared with 671 and 88%, respectively, at December 31, 2008. Total Alt-A NCOs were an annualized 2.51% for the 2009 first quarter, compared with an annualized 2.03% for the 2008 fourth quarter. Our exposure related to this product will decline in the future as we stopped originating these loans in 2007 .
Interest-only loans comprised $664.4 million, or 14%, of residential real estate loans at March 31, 2009, representing a 4% decline, compared with $691.9 million, or 15%, at December 31, 2008. Interest-only loans are underwritten to specific standards including minimum credit scores, stressed debt-to-income ratios, and extensive collateral evaluation. At March 31, 2009, borrowers for interest-only loans had an average current FICO score of 720 and the loans had an average LTV ratio of 78%, compared with 724 and 78%, respectively, at December 31, 2008. Total interest-only NCOs were an annualized 0.06% for the 2009 first quarter, compared with an annualized 0.20% for the 2008 fourth quarter. We continue to believe that we have mitigated the risk of such loans by matching this product with appropriate borrowers.
Several recent government actions have been enacted that have affected the residential mortgage portfolio and MSRs in particular. Various refinance programs positively affected the availability of credit for the industry. We are utilizing these programs to enhance our existing strategies of working closely with our customers.
AUTOMOTIVE INDUSTRY IMPACTS
The issues affecting the automotive industry (see “Automotive Industry” discussion located within the “Commercial Credit” section) also have an impact on the performance of the consumer loan portfolio. While there is a direct correlation between the industry situation and our exposure to the automotive suppliers and automobile dealers in our commercial portfolio, the loss of jobs and reduction in wages may have a negative impact on our consumer portfolio. In 2008, we initiated a project to assess the impact on our geographic regions in the event of significant production changes or plant closings in our markets. This project included assessing the downstream impact on automotive suppliers, related small businesses, and consumers. As a result of this project, we believe that we have made a number of positive decisions regarding the quality of our consumer portfolio given the current environment. In the indirect automobile portfolio, we have focused on borrowers with high credit scores for many years, as reflected by the performance of the portfolio given the economic conditions. In the residential and home equity loan portfolios, we have been operating in a relatively high unemployment situation for an extended period of time, yet have been able to maintain our performance metrics reflecting our focus on strong underwriting. In sum, while we anticipate our performance results may be negatively impacted, we believe the impact will be manageable, and will not differ significantly from the general positive performance trends demonstrated in recent years.

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Credit Quality
We believe the most meaningful way to assess overall credit quality performance for the 2009 first quarter is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the three sections immediately following: NALs and NPAs, ACL, and NCOs.
Credit quality performance in the 2009 first quarter was mixed. Relative to NCOs, the consumer portfolio performed well, while there was stress on the commercial portfolio. The total loan portfolio continued to be negatively impacted by the sustained economic weakness in our Midwest markets. The impact of the higher unemployment rate in particular can be seen in higher residential mortgage delinquencies. The overall economic slowdown impacted our commercial loan portfolio as reflected in the increase in commercial NCOs, NALs, and NPAs.
NONACCRUING LOANS (NAL/NALs) AND NONPERFORMING ASSETS (NPA/NPAs)
(This section should be read in conjunction with the “Franklin Relationship” discussion.)
NPAs consist of (a) NALs, which represent loans and leases that are no longer accruing interest, (b) impaired held-for-sale, (c) OREO, and (d) other NPAs. C&I and CRE loans are generally placed on nonaccrual status when collection of principal or interest is in doubt or when the loan is 90-days past due. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior-year amounts generally charged-off as a credit loss.
Table 20 reflects period-end NALs, NPAs, accruing restructured loans (ARLs), and past due loans and leases detail for each of the last five quarters. Table 24 details the Franklin-related impacts to NALs and NPAs for each of the last five quarters.

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Table 20 — Nonaccruing Loans (NALs), Nonperforming Assets (NPAs), and Past Due Loans and Leases
                                         
    2009     2008  
(in thousands)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                       
Nonaccrual loans and leases:
                                       
Commercial and industrial (1)
  $ 398,286     $ 932,648     $ 174,207     $ 161,345     $ 101,842  
Commercial real estate
    629,886       445,717       298,844       261,739       183,000  
Residential mortgage (1)
    486,955       98,951       85,163       82,882       66,466  
Home equity (1)
    37,967       24,831       27,727       29,076       26,053  
 
                             
Total NALs
    1,553,094       1,502,147       585,941       535,042       377,361  
 
                                       
Other real estate:
                                       
Residential (1)
    143,856       63,058       59,302       59,119       63,675  
Commercial
    66,906       59,440       14,176       13,259       10,181  
 
                             
Total other real estate
    210,762       122,498       73,478       72,378       73,856  
Impaired loans held for sale (2)
    11,887       12,001       13,503       14,759       66,353  
Other NPAs (3)
                2,397       2,557       2,836  
 
                             
Total NPAs
  $ 1,775,743     $ 1,636,646     $ 675,319     $ 624,736     $ 520,406  
 
                             
 
                                       
Nonperforming Franklin loans (1)
                                       
Commercial
  $     $ 650,225     $     $     $  
Residential mortgage
    360,106                          
OREO
    79,596                          
Home Equity
    6,000                          
 
                             
Total nonperforming Franklin loans
  $ 445,702     $ 650,225     $     $     $  
 
                             
 
                                       
NALs as a % of total loans and leases
    3.93 %     3.66 %     1.42 %     1.30 %     0.92 %
 
                                       
NPA ratio (4)
    4.46       3.97       1.64       1.52       1.26  
 
                                       
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government
  $ 228,260     $ 271,521     $ 248,087     $ 190,923     $ 200,231  
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.58 %     0.66 %     0.60 %     0.47 %     0.49 %
 
                                       
Accruing loans and leases past due 90 days or more, excluding loans guaranteed by the U.S. government
  $ 139,709     $ 188,945     $ 179,358     $ 125,902     $ 142,328  
Accruing loans and leases past due 90 days or more, excluding loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.35 %     0.46 %     0.44 %     0.31 %     0.35 %
 
                                       
Accruing restructured loans
                                       
Commercial (1)
  $ 201,508     $ 185,333     $ 1,094,564     $ 1,130,412     $ 1,157,361  
Residential mortgage
    108,011       82,857       71,512       57,802       45,608  
Other
    45,061       38,227       35,008       29,349       14,215  
 
                             
Total accruing restructured loans
  $ 354,580     $ 306,417     $ 1,201,084     $ 1,217,563     $ 1,217,184  
 
                             
     
(1)   Franklin loans were reported as accruing restructured commercial loans for the three-month periods ending March 31, 2008, June 30, 2008, and September 30, 2008. For the three-month period ending December 31, 2008, Franklin loans were reported as nonaccruing commercial and industrial loans. For the three-month period ended March 31, 2009, nonaccruing Franklin loans were reported as residential mortgage loans, home equity loans, and OREO; reflecting the 2009 first quarter restructuring.
 
(2)   Represent impaired loans obtained from the Sky Financial acquisition. Impaired loans held for sale are carried at the lower of cost or fair value less costs to sell. The decline from March 31, 2008 to June 30, 2008 was primarily due to the sale of these loans.
 
(3)   Other NPAs represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores.
 
(4)   Nonperforming assets divided by the sum of loans and leases, impaired loans held for sale, other real estate, and other NPAs.

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NPAs, which include NALs, were $1,775.7 million at March 31, 2009, and represented 4.46% of related assets. This compared with $1,636.6 million, or 3.97%, at December 31, 2008. The $139.1 million, or 8%, increase reflected:
    $88.3 million increase in OREO. Of the $88.3 million, $79.6 million resulted from the current quarter’s restructuring of the Franklin relationship (see “Franklin Relationship” discussion) .
    $50.9 million increase to NALs, discussed below.
NALs were $1,553.1 million at March 31, 2009, compared with $1,502.1 million at December 31, 2008. The increase of $50.9 million, or 3%, primarily reflected:
    $184.2 million, or 41%, increase in CRE NALs reflected the continued decline in the housing market and stress on retail sales. The single family home builder and retail segments accounted for 61% of the increase (see “Single Family Homebuilders” and “Retail Properties” discussion). These continue to be the two highest risk segments of our CRE portfolio.
    $115.9 million non-Franklin related increase in C&I NALs reflected the impact of the economic conditions in our markets. The increase was not centered in any specific region or industry. In general, those C&I loans supporting the housing or construction segment are experiencing the most stress. Importantly, less than 8% of the portfolio was associated with these segments. Loans to auto suppliers are also under a great deal of stress, and we have seen continued deterioration in the performance of these loans.
    $27.9 million and $7.1 million increases in non-Franklin related residential mortgage and home equity NALs, respectively, reflected increases in the more severe delinquency categories.
Partially offset by:
    $284.1 million net reduction in NALs from the current quarter’s restructuring of the Franklin relationship (see “Franklin Relationship” discussion) .
The over 90-day delinquent, but still accruing, ratio excluding loans guaranteed by the U.S. Government, was 0.35%, down from 0.46% at the end of last year, and unchanged from the end of the year-ago quarter. The guaranteed loans represent loans currently in Government National Mortgage Association (GNMA) pools that have met the eligibility requirements for voluntary repurchase. Because there is insignificant loss potential in these loans, as they remain supported by a guarantee from the Federal Housing Administration (FHA) or the Department of Veteran Affairs (VA), we believe this measure represents a better leading indicator of loss potential and also aligns better with our regulatory reporting.
As part of our loss mitigation process, we may re-underwrite, modify, or restructure loans when borrowers are experiencing payment difficulties, and these loan restructurings are based on the borrower’s ability to repay the loan.

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NPA activity for each of the past five quarters was as follows:
Table 21 — Nonperforming Assets (NPAs) Activity
                                         
    2009     2008  
(in thousands)   First     Fourth     Third     Second     First  
 
                                       
NPAs, beginning of period
  $ 1,636,646     $ 675,319     $ 624,736     $ 520,406     $ 472,902  
New NPAs
    622,515       509,320       175,345       256,308       141,090  
Franklin impact, net (1)
    (204,523 )     650,225                    
Returns to accruing status
    (36,056 )     (13,756 )     (9,104 )     (5,817 )     (13,484 )
Loan and lease losses
    (172,416 )     (100,335 )     (52,792 )     (40,808 )     (27,896 )
Payments
    (61,452 )     (66,536 )     (43,319 )     (46,091 )     (38,746 )
Sales
    (8,971 )     (17,591 )     (19,547 )     (59,262 )     (13,460 )
 
                             
NPAs, end of period
  $ 1,775,743     $ 1,636,646     $ 675,319     $ 624,736     $ 520,406  
 
                             
     
(1)   Franklin loans were reported as accruing restructured commercial loans for the three-month periods ending March 31, 2008, June 30, 2008, and September 30, 2008. For the three-month period ending December 31, 2008, Franklin loans were reported as nonaccruing commercial and industrial loans. For the three-month period ended March 31, 2009, nonaccruing Franklin loans were reported as residential mortgage loans, home equity loans, and OREO; reflecting the 2009 first quarter restructuring.
ALLOWANCE FOR CREDIT LOSSES (ACL)
(This section should be read in conjunction with Significant Item 2.)
We maintain two reserves, both of which are available to absorb inherent credit losses: the ALLL and the AULC. When summed together, these reserves comprise the total ACL. Our credit administration group is responsible for developing the methodology and determining the adequacy of the ACL.
We have an established monthly process to determine the adequacy of the ACL that relies on a number of analytical tools and benchmarks. No single statistic or measurement, in itself, determines the adequacy of the ACL. Changes to the ACL are impacted by changes in the estimated credit losses inherent in our loan portfolios. For example, our process requires increasingly higher level of reserves as a loan’s internal classification moves from higher quality rankings to lower, and vice versa. This movement across the credit scale is called migration.
Table 22 reflects activity in the ALLL and AULC for each of the last five quarters. Table 26 displays the Franklin-related impacts to the ALLL and ACL for each of the last five quarters.

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Table 22 — Quarterly Credit Reserves Analysis
                                         
    2009     2008  
(in thousands)   First     Fourth     Third     Second     First  
Allowance for loan and lease losses, beginning of period
  $ 900,227     $ 720,738     $ 679,403     $ 627,615     $ 578,442  
Loan and lease losses
    (353,005 )     (571,053 )     (96,388 )     (78,084 )     (60,804 )
Recoveries of loans previously charged off
    11,514       10,433       12,637       12,837       12,355  
 
                             
Net loan and lease losses
    (341,491 )     (560,620 )     (83,751 )     (65,247 )     (48,449 )
 
                             
Provision for loan and lease losses
    289,001       728,046       125,086       117,035       97,622  
Economic reserve transfer
          12,063                    
Allowance of assets sold
    (9,188 )                        
 
                             
Allowance for loan and lease losses, end of period
  $ 838,549     $ 900,227     $ 720,738     $ 679,403     $ 627,615  
 
                             
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 44,139     $ 61,640     $ 61,334     $ 57,556     $ 66,528  
 
                                       
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    2,836       (5,438 )     306       3,778       (8,972 )
Economic reserve transfer
          (12,063 )                  
 
                             
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 46,975     $ 44,139     $ 61,640     $ 61,334     $ 57,556  
 
                             
Total allowances for credit losses
  $ 885,524     $ 944,366     $ 782,378     $ 740,737     $ 685,171  
 
                             
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Total loans and leases
    2.12 %     2.19 %     1.75 %     1.66 %     1.53 %
Nonaccrual loans and leases (NALs)
    54       60       123       127       166  
Nonperforming assets (NPAs)
    47       55       107       109       121  
 
Total allowances for credit losses (ACL) as % of:
                                       
Total loans and leases
    2.24 %     2.30 %     1.90 %     1.80 %     1.67 %
NALs
    57       63       134       138       182  
NPAs
    50       58       116       119       132  
As shown in the above table, the ALLL declined to $838.5 million at March 31, 2009, from $900.2 million at December 31, 2008. Expressed as a percent of period-end loans and leases, the ALLL ratio decreased to 2.12% at March 31, 2009, from 2.19% at December 31, 2008. This $61.7 million decrease primarily reflected the impact of using the previously established $130.0 million Franklin specific reserve to absorb related NCOs due to the current quarter’s Franklin restructuring (see “Franklin Loan” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section) .

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The period-end non-Franklin related ALLL was $838.5 million and represented 2.15% of non-Franklin related loans and leases, up $68.3 million, or 9%, from $770.2 million, or 1.90% of non-Franklin loans and leases, at the end of last year. The non-Franklin ALLL as a percent of non-Franklin related NALs was 71% at March 31, 2009.
On a combined basis, the ACL as a percent of total loans and leases at March 31, 2009, was 2.24%, down from 2.30% at December 31, 2008. Like the ALLL, the current quarter’s Franklin restructuring impacted the change in the ACL from December 31, 2008.
The period-end non-Franklin related ACL was $885.5 million and represented 2.27% of non-Franklin related loans and leases, up $71.2 million, or 9%, from $814.4 million, or 2.01% of non-Franklin loans and leases, at the end of last year. The non-Franklin ACL as a percent of non-Franklin related NALs was 75% at March 31, 2009.
NET CHARGE-OFFS (NCOs )
(This section should be read in conjunction with Significant Item 2.)
Table 23 reflects NCO detail for each of the last five quarters. Table 25 displays the Franklin-related impacts for each of the last five quarters.

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Table 23 — Quarterly Net Charge-Off Analysis
                                         
    2009     2008  
(in thousands)   First     Fourth     Third     Second     First  
Net charge-offs by loan and lease type:
                                       
Commercial:
                                       
Commercial and industrial
  $ 210,648 (1)   $ 473,426 (2)   $ 29,646     $ 12,361     $ 10,732  
Commercial real estate:
                                       
Construction
    25,642       2,390       3,539       575       122  
Commercial
    57,139       35,991       7,446       14,524       4,153  
 
                             
Commercial real estate
    82,781       38,381       10,985       15,099       4,275  
 
                             
Total commercial
    293,429       511,807       40,631       27,460       15,007  
 
                             
Consumer:
                                       
Automobile loans
    14,971       14,885       9,813       8,522       8,008  
Automobile leases
    3,086       3,666       3,532       2,928       3,211  
 
                             
Automobile loans and leases
    18,057       18,551       13,345       11,450       11,219  
Home equity
    17,680       19,168       15,828       17,345       15,215  
Residential mortgage
    6,298       7,328       6,706       4,286       2,927  
Other loans
    6,027       3,766       7,241       4,706       4,081  
 
                             
Total consumer
    48,062       48,813       43,120       37,787       33,442  
 
                             
Total net charge-offs
  $ 341,491     $ 560,620     $ 83,751     $ 65,247     $ 48,449  
 
                             
 
                                       
Net charge-offs — annualized percentages:
                                       
Commercial:
                                       
Commercial and industrial (1)
    6.22 %     13.78 %     0.87 %     0.36 %     0.32 %
Commercial real estate:
                                       
Construction
    5.05       0.45       0.68       0.11       0.02  
Commercial
    2.83       1.77       0.39       0.77       0.23  
 
                             
Commercial real estate
    3.27       1.50       0.45       0.63       0.18  
 
                             
Total commercial
    4.96       8.54       0.69       0.47       0.27  
 
                             
Consumer:
                                       
Automobile loans
    1.56       1.53       1.02       0.94       0.97  
Automobile leases
    2.39       2.31       1.84       1.28       1.18  
 
                             
Automobile loans and leases
    1.66       1.64       1.15       1.01       1.02  
Home equity
    0.93       1.02       0.85       0.94       0.84  
Residential mortgage
    0.55       0.62       0.56       0.33       0.22  
Other loans
    3.59       2.22       4.32       2.69       2.29  
 
                             
Total consumer
    1.12       1.12       0.98       0.85       0.75  
 
                             
Net charge-offs as a % of average loans
    3.34 %     5.41 %     0.82 %     0.64 %     0.48 %
 
                             
     
(1)   The 2009 first quarter included charge-offs totaling $128,338 thousand associated with the Franklin restructuring.
 
(2)   The 2008 fourth quarter included charge-offs totaling $423,269 thousand associated with Franklin.
The 2009 first quarter and 2008 fourth quarter included Franklin-related commercial loan charge-offs of $128.3 million and $423.3 million, respectively. Importantly, the 2009 first quarter charge-offs utilized the $130.0 million Franklin-specific reserve that existed at December 31, 2008, so these charge-offs had no material impact on related provision for credit losses or earnings in the 2009 first quarter.

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Excluding the Franklin-related NCOs in the current and prior quarter as noted above, non-Franklin related C&I NCOs in the 2009 first quarter were $82.3 million, or an annualized 2.55% of related average non-Franklin C&I loans. This compared with non-Franklin related C&I loan NCOs of $50.1 million, or an annualized 1.58%, in the prior quarter. The losses were concentrated in smaller loans, as a more active credit review process was utilized throughout the quarter. The current quarter also reflected charge-offs and increased reserves related to loans moved to nonaccrual status in the quarter. The increase in C&I NCOs from the prior quarter was concentrated in our northern Ohio regions. The majority of the charge-offs was associated with smaller loans, reflecting the granularity of the portfolio.
Current quarter CRE NCOs were centered within the single family home builder and the retail development segments of the portfolio. There was a $15 million loss associated with one CRE retail development project located in the Cleveland market. The remainder of the losses was associated with smaller loans spread across all regions, consistent with our very granular portfolio.
In assessing commercial NCOs trends, it is helpful to understand how these loans are treated as they deteriorate over time. Reserves for loans are established at origination consistent with the level or risk associated with the transaction. If the quality of a commercial loan deteriorates, it migrates from a higher quality loan classification to a lower quality classification. As a part of our normal portfolio management process, the loan is reviewed and reserves are increased as warranted. Charge-offs, if necessary, are generally recognized in a period subsequent to the period the reserves were established. If the previously established reserves exceed that needed to satisfactorily resolve the problem credit, a reduction in the overall level of the reserve could be recognized. In sum, if loan quality deteriorates, the typical credit sequence for commercial loans are periods of reserve building, followed by periods of higher NCOs. Additionally, it is helpful to understand that increases in reserves either precede or are in conjunction with increases in NALs. When a credit is classified as NAL, it is evaluated for specific reserves or charge-off. As a result, an increase in NALs does not necessarily result in an increase in reserves or an expectation of higher future NCOs.
Automobile loan and lease NCOs, which declined in absolute dollars during the current quarter, were consistent with our expectations. The performance of the portfolio relative to NCOs reflected the positive impact of increasing used-automobile prices, offset by the continued market stresses. The automobile lease NCO performance continues to be negatively impacted as the portfolio is running off and no new leases are being originated. The level of delinquencies dropped in the current quarter, further substantiating our longer-term view of flat to improved performance through 2009.
The decline in our home equity NCOs reflected a continuation of better than industry performance in this portfolio. The NCO performance of the portfolio continued to be impacted by lower housing prices, and the general market conditions. The impact is evident across all regions, but particularly so in our Michigan markets. Home equity NCOs during the current quarter were lower than the prior quarter, and generally consistent with our view of the performance expectations over the next 12 to 18 months.
The current quarter’s decline in residential mortgage NCOs compared with the prior quarter is encouraging given the market conditions. While the delinquency rates continue to increase, indicating the economic stress on borrowers, our losses have remained manageable.
Total NCOs during the 2009 first quarter were $341.5 million, or an annualized 3.34% of average related balances compared with $560.6 million, or annualized 5.41% of average related balances during the 2008 fourth quarter. After adjusting for Franklin-related NCOs of $128.3 million in the 2009 first quarter and $423.3 million in the 2008 fourth quarter, non-Franklin-related total NCOs during the 2009 first quarter were $213.2 million, compared with $137.3 million during the 2008 fourth quarter.

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The following tables detail the Franklin-impacts to NPAs, NALs, NCOs, and the ALLL and ACL for each of the past five quarters.
Table 24 — NALs/NPAs — Franklin-Related Impact
                                         
    2009     2008  
(in millions)   First     Fourth     Third     Second     First  
Nonaccrual loans
                                       
Total
  $ 1,553.1     $ 1,502.1     $ 585.9     $ 535.0     $ 377.4  
Franklin
    (366.1 )     (650.2 )                  
 
                             
Non-Franklin
  $ 1,187.0     $ 851.9     $ 585.9     $ 535.0     $ 377.4  
 
                             
 
                                       
Total loans and leases
                                       
Total
  $ 39,548.0     $ 41,092.0     $ 41,192.0     $ 41,047.0     $ 41,014.0  
Franklin
    (494.0 )     (650.2 )     (1,095.0 )     (1,130.0 )     (1,157.0 )
 
                             
Non-Franklin
  $ 39,054.0     $ 40,441.8     $ 40,097.0     $ 39,917.0     $ 39,857.0  
 
                             
 
                                       
NAL ratio
                                       
Total
    3.93 %     3.66 %     1.42 %     1.30 %     0.92 %
Non-Franklin
    3.04       2.11       1.46       1.34       0.95  
                                         
    2009     2008  
(in millions)   First     Fourth     Third     Second     First  
Nonperforming assets
                                       
Total
  $ 1,775.7     $ 1,636.6     $ 675.3     $ 624.7     $ 520.4  
Franklin
    (445.7 )     (650.2 )                  
 
                             
Non-Franklin
  $ 1,330.0     $ 986.4     $ 675.3     $ 624.7     $ 520.4  
 
                             
Total loans and leases
  $ 39,548.0     $ 41,092.0     $ 41,192.0     $ 41,047.0     $ 41,014.0  
Total other real estate, net
    210.8       122.5       73.5       72.4       73.9  
Impaired loans held for sale
    11.9       12.0       13.5       14.8       66.4  
Other NPAs
                2.4       2.6       2.8  
 
                             
Total
    39,770.7       41,226.5       41,281.4       41,136.8       41,157.1  
Franklin
    (573.1 )     (650.2 )     (1,095 )     (1,130 )     (1,157 )
 
                             
Non-Franklin
  $ 39,197.6     $ 40,576.3     $ 40,186.4     $ 40,006.8     $ 40,000.1  
 
                             
 
       
NPA ratio
                                       
Total
    4.46 %     3.97 %     1.64 %     1.52 %     1.26 %
Non-Franklin
    3.39       2.43       1.68       1.56       1.30  

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Table 25 — NCOs — Franklin-Related Impact
                                         
    2009     2008  
(in millions)   First     Fourth     Third     Second     First  
Commercial and industrial net charge-offs
                                       
Total
  $ 210.6     $ 473.4     $ 29.6     $ 12.4     $ 10.7  
Franklin
    (128.3 )     (423.3 )                  
 
                             
Non-Franklin
  $ 82.3     $ 50.1     $ 29.6     $ 12.4     $ 10.7  
 
                             
 
                                       
Commercial and industrial average loan balances
                                       
Total
  $ 13,541.0     $ 13,746.0     $ 13,629.0     $ 13,631.0     $ 13,343.0  
Franklin
    (628.0 )     (1,085.0 )     (1,114.0 )     (1,143.0 )     (1,166.0 )
 
                             
Non-Franklin
  $ 12,913.0     $ 12,661.0     $ 12,515.0     $ 12,488.0     $ 12,177.0  
 
                             
 
                                       
Commercial and industrial net charge-offs — annualized percentages
                                       
Total
    6.22 %     13.78 %     0.87 %     0.36 %     0.32 %
Non-Franklin
    2.55       1.58       0.95       0.40       0.35  
                                         
    2009     2008  
(in millions)   First     Fourth     Third     Second     First  
Total net charge-offs
                                       
Total
  $ 341.5     $ 560.6     $ 83.8     $ 65.2     $ 48.4  
Franklin
    (128.3 )     (423.3 )                  
 
                             
Non-Franklin
  $ 213.2     $ 137.3     $ 83.8     $ 65.2     $ 48.4  
 
                             
 
                                       
Total average loan balances
                                       
Total
  $ 40,866.0     $ 41,437.0     $ 41,004.0     $ 41,025.0     $ 40,367.0  
Franklin
    (630.0 )     (1,085.0 )     (1,114.0 )     (1,143.0 )     (1,166.0 )
 
                             
Non-Franklin
  $ 40,236.0     $ 40,352.0     $ 39,890.0     $ 39,882.0     $ 39,201.0  
 
                             
 
                                       
Total net charge-offs — annualized percentages
                                       
Total
    3.34 %     5.41 %     0.82 %     0.64 %     0.48 %
Non-Franklin
    2.12       1.36       0.84       0.65       0.49  

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Table 26 — ALLL/ACL — Franklin-Related Impact
                                         
    2009     2008  
(in millions)   First     Fourth     Third     Second     First  
Allowance for loan and lease losses
                                       
Total
  $ 838.5     $ 900.2     $ 720.7     $ 679.4     $ 627.6  
Franklin
          (130.0 )     (115.3 )     (115.3 )     (115.3 )
 
                             
Non-Franklin
  $ 838.5     $ 770.2     $ 605.4     $ 564.1     $ 512.3  
 
                             
 
                                       
Allowance for credit losses
                                       
Total
  $ 885.5     $ 944.4     $ 782.4     $ 740.7     $ 685.2  
Franklin
          (130.0 )     (115.3 )     (115.3 )     (115.3 )
 
                             
Non-Franklin
  $ 885.5     $ 814.4     $ 667.1     $ 625.4     $ 569.9  
 
                             
 
                                       
Total loans and leases
                                       
Total
  $ 39,548.0     $ 41,092.0     $ 41,192.0     $ 41,047.0     $ 41,014.0  
Franklin
    (494.0 )     (650.2 )     (1,095.0 )     (1,130.0 )     (1,157.0 )
 
                             
Non-Franklin
  $ 39,054.0     $ 40,441.8     $ 40,097.0     $ 39,917.0     $ 39,857.0  
 
                             
 
                                       
ALLL as % of total loans and leases
                                       
Total
    2.12 %     2.19 %     1.75 %     1.66 %     1.53 %
Non-Franklin
    2.15       1.90       1.51       1.41       1.29  
 
                                       
ACL as % of total loans and leases
                                       
Total
    2.24       2.30       1.90       1.80       1.67  
Non-Franklin
    2.27       2.01       1.66       1.57       1.43  
 
                                       
Nonaccrual loans
                                       
Total
  $ 1,553.1     $ 1,502.1     $ 586.0     $ 535.0     $ 377.4  
Franklin
    (366.1 )     (650.2 )                  
 
                             
Non-Franklin
  $ 1,187.0     $ 851.9     $ 586.0     $ 535.0     $ 377.4  
 
                             
 
                                       
ALLL as % of NALs
                                       
Total
    54 %     60 %     123 %     127 %     166 %
Non-Franklin
    71       90       103       105       136  
 
                                       
ACL as % of NALs
                                       
Total
    57       63       134       138       182  
Non-Franklin
    75       96       114       117       151  
INVESTMENT SECURITIES PORTFOLIO
(This section should be read in conjunction with the “Securities” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section.)
We routinely review our available for sale investment securities portfolio, and recognize impairment based on fair value, issuer-specific factors and results, and our intent to hold such investments. Our available for sale investment securities portfolio is evaluated taking into consideration established asset/liability management objectives, and changing market conditions that could affect the profitability of the portfolio, as well as the level of interest rate risk to which we are exposed.
Our available for sale investment securities portfolio is comprised of various financial instruments. At March 31, 2009, our available for sale investment securities portfolio totaled $4.9 billion.

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Declines in the fair value of available for sale investment securities are recorded as either temporary impairment or OTTI. Temporary adjustments are recorded when the fair value of a security fluctuates from its historical cost. Temporary adjustments are recorded in accumulated other comprehensive income, and impact our equity position. Temporary adjustments do not impact net income, liquidity, or risk-based capital. A recovery of available for sale security prices also is recorded as an adjustment to other comprehensive income for securities that are temporarily impaired, and results in a positive impact to our equity position.
OTTI is recorded when the fair value of an available for sale security is less than historical cost, and it is probable that all contractual cash flows will not be collected. OTTI is recorded to noninterest income and, therefore, results in a negative impact to net income. Additionally, OTTI reduces our regulatory capital ratios. Because the available for sale securities portfolio is recorded at fair value, the conclusion as to whether an investment decline is other-than-temporarily impaired, does not significantly impact our equity position as the amount of temporary adjustment has already been reflected in accumulated other comprehensive income/loss. A recovery in the value of an other-than-temporarily impaired security is recorded as additional interest income over the remaining life of the security.
Given the continued disruption in the financial markets, we may be required to recognize additional OTTI losses in future periods with respect to our available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities.
The table below presents the credit ratings for certain available for sale investment securities as of March 31, 2009:
Table 27 — Credit Ratings of Selected Investment Securities (1)
                                                                 
    Amortized             Average Credit Rating of Fair Value Amount  
(in thousands)   Cost     Fair Value     AAA     AA +/-     A +/-     BBB +/-     <BBB-     Not Rated  
Municipal securities
  $ 119,734     $ 124,971     $ 57,990     $ 54,085     $     $     $     $ 12,896  
Private label CMO securities
    649,620       511,949       261,213       44,637       79,373       61,064       65,662        
Alt-A mortgage-backed securities
    365,367       355,729       18,759       26,104       33,252       16,401       261,214        
Pooled-trust-preferred securities
    281,532       130,498       22,757       10,272             24,465       73,004        
 
                                               
 
                                                               
Total at March 31, 2009 (2)
  $ 1,416,253     $ 1,123,147     $ 360,719     $ 135,098     $ 112,625     $ 101,930     $ 399,880     $ 12,896  
 
                                               
 
                                                               
Total at December 31, 2008
  $ 2,037,535     $ 1,697,888     $ 486,917     $ 556,470     $ 291,680     $ 61,095     $ 288,710     $ 13,016  
 
                                               
     
(1)   Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.
 
(2)   The decline in amortized costs and fair value from December 31, 2008 to March 31, 2009 primarily reflects the $0.6 billion sale of municipal securities during the 2009 first quarter.
In April 2009, an additional $177 million of investment securities were downgraded from investment grade (“BBB+/-” or higher) to below investment grade (“<BBB-”). The entire $177 million occurred within the portfolios presented in the above table. Negative changes to the above credit ratings could have an impact on the determination of risk-weighted assets, which could result in reductions to our regulatory capital ratios.
Given the current economic conditions, the Alt-A mortgage backed, pooled-trust-preferred, and private-label CMO portfolios are noteworthy, and are discussed below. The Alt-A mortgage backed securities and pooled-trust-preferred securities are located within the asset-backed securities portfolio.

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Alt-A, Pooled-Trust-Preferred, and Private-Label CMO Securities
Table 28 details our Alt-A, pooled-trust-preferred, and private-label CMO securities exposure at March 31, 2009:
Table 28 — Alt-A, Pooled-Trust-Preferred, and Private-Label CMO Securities Selected Data
At March 31, 2009
(in thousands)
Alt-A mortgage-backed securities
                         
    Impaired     Unimpaired     Total  
 
                       
Par value
  $ 400,337     $ 142,826     $ 543,163  
 
                       
Book value
    225,069       140,298       365,367  
Unrealized gains (losses)
    27,133       (36,771 )     (9,638 )
 
                 
Fair value
  $ 252,202     $ 103,527     $ 355,729  
 
                 
 
                       
Cumulative credit OTTI
  $ 26,551     $     $ 26,551  
Cumulative noncredit OTTI
    151,882             151,882  
 
                 
Cumulative total OTTI
  $ 178,433     $     $ 178,433  
 
                 
 
                       
Average Credit Rating
                  BBB-
 
                       
Weighted average: (1)
                       
Fair value
    63.0 %     72.0 %     65.0 %
Expected loss
    6.6             4.9  
Pooled-trust-preferred securities
                         
Par value
  $ 25,500     $ 273,324     $ 298,824  
 
                       
Book value
    8,323       273,208       281,531  
Unrealized losses
          (151,034 )     (151,034 )
 
                 
Fair value
  $ 8,323     $ 122,174     $ 130,497  
 
                 
 
                       
Cumulative credit OTTI
  $ 13,515     $     $ 13,515  
Cumulative noncredit OTTI
    3,426             3,426  
 
                 
Cumulative total OTTI
  $ 16,940     $     $ 16,940  
 
                 
 
                       
Average Credit Rating
                  BBB-
 
       
Weighted average: (1)
                       
Fair value
    33.0 %     45.0 %     44.0 %
Expected loss
    53.0             4.5  
Private-label CMO securities
                         
Par value
  $ 22,285     $ 640,247     $ 662,532  
 
                       
Book value
    16,444       633,176       649,620  
Unrealized gains (losses)
    2,040       (139,711 )     (137,671 )
 
                 
Fair value
  $ 18,484     $ 493,465     $ 511,949  
 
                 
 
                       
Cumulative credit OTTI
  $ 24     $     $ 24  
Cumulative noncredit OTTI
    5,704             5,704  
 
                 
Cumulative total OTTI
  $ 5,728     $     $ 5,728  
 
                 
 
                       
Average Credit Rating
                    A-  
 
                       
Weighted average: (1)
                       
Fair value
    83.0 %     77.1 %     77.0 %
Expected loss
    0.1              
     
(1)   Based on par values.

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As shown in the above table, the securities in the Alt-A, pooled-trust-preferred, and private-label CMO securities portfolios had a fair value that was $298.3 million less than their book value (net of impairment) at March 31, 2009, resulting from increased liquidity spreads and extended duration. We consider the $298.3 million of impairment to be temporary, as we believe that it is not probable that not all contractual cash flows will be collected on the related securities. During the 2009 first quarter, we recognized OTTI of $1.5 million within the Alt-A securities portfolio, and $2.4 million within the pooled-trust-preferred securities portfolio. No OTTI was recognized within the private-label CMO securities portfolio during the 2009 first quarter. We anticipate that the OTTI exceeds the expected actual future loss (that is, credit losses) that we will experience. Any subsequent recovery of OTTI will be recorded to interest income over the remaining life of the security. Please refer to the “Critical Account Policies and Use of Significant Estimates” for additional information.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, foreign exchange rates, equity prices, credit spreads, and expected lease residual values. We have identified two primary sources of market risk: interest rate risk and price risk. Interest rate risk is our primary market risk.
Interest Rate Risk
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest bearing assets and liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to terminate certificates of deposit before maturity (option risk), changes in the shape of the yield curve whereby interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and London Interbank Offered Rate (LIBOR) (basis risk).
“Asset sensitive position” refers to an increase in short-term interest rates that is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities. Conversely, “liability sensitive position” refers to an increase in short-term interest rates that is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets.
INCOME SIMULATION AND ECONOMIC VALUE OF EQUITY ANALYSIS
Interest rate risk measurement is performed monthly. Two broad approaches to modeling interest rate risk are employed: income simulation and economic value analysis. An income simulation analysis is used to measure the sensitivity of forecasted net interest income to changes in market rates over a one-year time horizon. Although bank owned life insurance and automobile operating lease assets are classified as non-interest earning assets, and the income from these assets is in non-interest income, these portfolios are included in the interest sensitivity analysis because both have attributes similar to fixed-rate interest earning assets. Economic value of equity (EVE) analysis is used to measure the sensitivity of the values of period-end assets and liabilities to changes in market interest rates. EVE serves as a complement to income simulation modeling as it provides risk exposure estimates for time periods beyond the one-year simulation horizon.
The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual “+/-100” and “+/-200” basis point parallel shifts in market interest rates over the next 12-month period beyond the interest rate change implied by the current yield curve. As of March 31, 2009, management instituted an assumption that market interest rates would not fall below 0% over the next 12-month period for the scenarios that used the “-100” and “-200” basis point parallel shift in market interest rates. The table below shows the results of the scenarios as of March 31, 2009, and December 31, 2008. All of the positions were within the board of directors’ policy limits.

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Table 29 — Net Interest Income at Risk
                                 
    Net Interest Income at Risk (%)  
Basis point change scenario
    -200       -100       +100       +200  
 
                       
Board policy limits
    -4.0 %     -2.0 %     -2.0 %     -4.0 %
 
                       
March 31, 2009
    -0.4 %     -1.5 %     +1.6 %     +2.9 %
December 31, 2008
    -0.3 %     -0.9 %     +0.6 %     +1.1 %
The net interest income at risk reported as of March 31, 2009 for the “+200” basis points scenario shows a change to a higher near-term asset sensitive position compared with December 31, 2008, reflecting actions taken by us to improve our liquidity position. The primary factors contributing to the change include:
    1.8% incremental liability sensitivity reflecting the execution of $1.3 billion receive-fixed interest rates swaps during the 2009 first quarter, as well as the anticipated execution of $1.5 billion receive-fixed interest rates swaps early in the 2009 second quarter, primarily to offset the impact of actual and anticipated reductions in fixed-rate assets.
    1.3% incremental asset sensitivity reflecting the sale of municipal securities, the securitization and sale of automobile loans, and the sale of residential mortgage loans, slightly offset by an increase in other securities.
    0.9% incremental asset sensitivity reflecting the anticipated slow down in fixed-rate loan originations due to customer preferences for variable-rate loans.
The remainder of the change in net interest income at risk “+200” basis points was primarily related to improvements made in modeling assumptions associated with deposit pricing and mortgage asset prepayments, and lower levels of fixed-rate liabilities. In addition to the $2.8 billion increase in fixed-rate interest rate swaps noted above, we are reviewing opportunities to further reduce the near-term asset-sensitive interest rate risk profile.
The primary simulations for EVE at risk assume immediate “+/-100” and “+/-200” basis point parallel shifts in market interest rates beyond the interest rate change implied by the current yield curve. The table below outlines the March 31, 2009, results compared with December 31, 2008. All of the positions were within the board of directors’ policy limits.
Table 30 — Economic Value of Equity at Risk
                                 
    Economic Value of Equity at Risk (%)  
Basis point change scenario
    -200       -100       +100       +200  
 
                       
Board policy limits
    -12.0 %     -5.0 %     -5.0 %     -12.0 %
 
                       
March 31, 2009
    +1.8 %     +1.2 %     -1.5 %     -3.8 %
December 31, 2008
    -3.4 %     -1.0 %     -2.6 %     -7.2 %
The EVE at risk reported as of March 31, 2009 for the “+200” basis points scenario shows a change to a lower long-term liability sensitive position compared with December 31, 2008, reflecting actions taken by us to improve our liquidity position and improvements made in modeling assumptions associated with deposit pricing and mortgage asset prepayments. The primary factors contributing to the change include:
    3.2% incremental asset sensitivity reflecting the improvements made in modeling assumptions associated with deposit pricing and mortgage asset prepayments.
    2.2% incremental asset sensitivity reflecting the sale of municipal securities, the securitization and sale of automobile loans, and the sale of residential mortgage loans, slightly offset by an increase in other securities.
    2.1% incremental liability sensitivity reflecting the execution of $1.3 billion receive-fixed interest rates swaps during the 2009 first quarter, as well as the anticipated execution of $1.5 billion receive-fixed interest rates swaps early in the 2009 second quarter, primarily to offset the impact of actual and anticipated reductions in fixed-rate assets.
In addition to the $2.8 billion increase in fixed rate interest rate swaps noted above, we are reviewing opportunities to slightly increase the long-term liability-sensitive interest rate risk profile.

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MORTGAGE SERVICING RIGHTS (MSRs)
(This section should be read in conjunction with Significant Item 5.)
MSR fair values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed strategies to reduce the risk of MSR fair value changes. In addition, we engage a third party to provide improved valuation tools and assistance with our strategies with the objective to decrease the volatility from MSR fair value changes. However, volatile changes in interest rates can diminish the effectiveness of these hedges. We typically report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or decrease in mortgage banking income. MSR assets are included in other assets, and are presented in Table 8.
At March 31, 2009, we had a total of $167.8 million of MSRs representing the right to service $16.3 billion in mortgage loans (see Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements).
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiaries, foreign exchange positions, equity investments, investments in securities backed by mortgage loans, and marketable equity securities held by our insurance subsidiaries. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held by the insurance subsidiaries.
EQUITY INVESTMENT PORTFOLIOS
(This section should be read in conjunction with Significant Item 5.)
In reviewing our equity investment portfolio, we consider general economic and market conditions, including industries in which private equity merchant banking and community development investments are made, and adverse changes affecting the availability of capital. We determine any impairment based on all of the information available at the time of the assessment. New information or economic developments in the future could result in recognition of additional impairment.
From time to time, we invest in various investments with equity risk. Such investments include investment funds that buy and sell publicly traded securities, investment funds that hold securities of private companies, direct equity or venture capital investments in companies (public and private), and direct equity or venture capital interests in private companies in connection with our mezzanine lending activities. These investments are included in “accrued income and other assets” on our consolidated balance sheet. At March 31, 2009, we had a total of $40.3 million of such investments, down from $44.7 million at December 31, 2008. The following table details the components of this change during the 2009 first quarter:
Table 31 — Equity Investment Activity
(in thousands)
                                         
    Balance at     New     Returns of             Balance at  
Type:   December 31, 2008     Investments     Capital     Gain / (Loss)     March 31, 2009  
Public equity
  $ 12,129     $     $ (1,728 )   $ (417 )   $ 9,984  
Private equity
    25,951       750       (2,091 )     (844 )     23,766  
Direct investment
    6,576                   (47 )     6,529  
 
                             
Total
  $ 44,656     $ 750     $ (3,819 )   $ (1,308 )   $ 40,279  
 
                             
The equity investment losses in the 2009 first quarter primarily reflected $1.3 million of losses on equity investment funds that buy and sell publicly traded securities, and private equity investments. These investments were in funds that focus on the financial services sector that, during the 2009 first quarter, performed worse than the broad equity market.

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Investment decisions that incorporate credit risk require the approval of the independent credit administration function. The degree of initial due diligence and subsequent review is a function of the type, size, and collateral of the investment. Performance is monitored on a regular basis, and reported to the Market Risk Committee.
Liquidity Risk
Liquidity risk is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues. We manage liquidity risk at both the Bank and at the parent company, Huntington Bancshares Incorporated.
The overall objective of liquidity risk management is to ensure that we can obtain cost-effective funding to meet current and future obligations under both normal “business as usual” and unanticipated, stressed circumstances. The Risk Management Committee was appointed by the HBI Board Risk Committee to oversee liquidity risk management and establish policies and limits, based upon analyses of the ratio of loans to deposits, the percentage of assets funded with noncore or wholesale funding, net cash capital, free securities and contingency borrowing capacity. In addition, operating guidelines are established to ensure diversification of noncore funding by type, source, and maturity and provide sufficient liquidity to cover 100% of wholesale funds maturing within a six-month period. A contingency funding plan is in place, which includes forecasted sources and uses of funds under various scenarios in order to prepare for unexpected liquidity shortages, including the implications of any credit rating changes and/or other trigger events related to financial ratios, deposit fluctuations, debt issuance capacity, stock performance, or negative news related to us or the banking industry. Liquidity risk is reviewed monthly for the Bank and the parent company, as well as its subsidiaries. In addition, two liquidity subcommittees meet regularly to identify and monitor liquidity positions, provide policy guidance, review funding strategies, and oversee adherence to, and the maintenance of, the contingency funding plan(s). A Contingency Funding Working Group monitors daily cash flow trends, branch activity, significant transactions, and parent company subsidiary sources and uses of funds, identify areas of concern, and establish specific funding strategies. This group works closely with the Risk Management Committee and the HBI Communication Team in order to identify issues that may require a more proactive communication plan to shareholders, associates, and customers regarding specific events or issues that could have an impact to us.
In the normal course of business, in order to better manage liquidity risk, we perform stress tests to determine the effect that a potential downgrade in our credit ratings or other market disruptions could have on liquidity over various time periods. These credit ratings, which are presented in Table 33, have a direct impact on our cost of funds and ability to raise funds under normal, as well as adverse, circumstances. The results of these stress tests indicate that sufficient sources of funds are available to meet our financial obligations and fund our operations for a 12-month period. The stress test scenarios include testing to determine the impact of an interruption to our access to the national markets for funding, significant run-off in core deposits and liquidity triggers inherent in other financial agreements. To compensate for the effect of these assumed liquidity pressures, we consider alternative sources of liquidity over different time periods to project how funding needs would be managed. The specific alternatives for enhancing liquidity include generating client deposits, securitizing or selling loans, selling or maturing of investment securities, and extending the level or maturity of wholesale borrowings.
Most credit markets in which we participate and rely upon as sources of funding have been significantly disrupted and highly volatile since mid-2007. Reflecting concern about the stability of the financial markets generally, many lenders reduced, and in some cases, ceased unsecured funding to borrowers, including other financial institutions. Since that time, as a means of maintaining adequate liquidity, we, like many other financial institutions, have relied more heavily on the liquidity and stability present in the secured credit markets since access to unsecured term debt has been restricted. Throughout this period, we continued to extend maturities ensuring that we maintained adequate liquidity in the event the crisis became prolonged. In addition to managing our maturities, we strengthened our overall liquidity position by significantly reducing our noncore funds and wholesale borrowings, as well as shifting from the net purchasing of overnight federal funds to an excess reserve position at the end of the 2009 first quarter. However, we are part of a financial system, and a systemic lack of available credit, a lack of confidence in the financial sector, and increased volatility in the financial markets could materially and adversely affect our liquidity position.

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Bank Liquidity and Sources of Liquidity
Our primary sources of funding for the Bank are retail and commercial core deposits. Core deposits are comprised of interest bearing and noninterest bearing demand deposits, money market deposits, savings and other domestic time deposits, consumer certificates of deposit both over and under $100,000, and nonconsumer certificates of deposit less than $100,000. Noncore deposits are comprised of brokered money market deposits and certificates of deposit, foreign time deposits, and other domestic time deposits of $100,000 or more comprised primarily of public fund certificates of deposit greater than $100,000. The above-mentioned stated amounts of $100,000 will be increased to $250,000 effective with the 2009 second quarter.
Core deposits may increase our need for liquidity as certificates of deposit mature or are withdrawn before maturity and as nonmaturity deposits, such as checking and savings account balances, are withdrawn. Additionally, we are exposed to the risk that customers with large deposit balances will withdraw all or a portion of such deposits as the FDIC establishes certain limits on the amount of insurance coverage provided to depositors (see “Risk Factors” included in Item 1A of our 2008 Form 10-K ) . To mitigate our uninsured deposit risk, we have joined the Certificate of Deposit Account Registry Service (CDARS), a program that allows customers to invest up to $50 million in certificates of deposit through one participating financial institution, with the entire amount being covered by FDIC insurance.
Table 32 reflects deposit composition detail for each of the past five quarters.

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Table 32 — Deposit Composition
                                                                                 
    2009     2008  
(in millions)   March 31,     December 31,     September 30,     June 30,     March 31,  
 
       
By Type
                                                                               
Demand deposits — noninterest bearing
  $ 5,887       15.1 %   $ 5,477       14.4 %   $ 5,135       13.7 %   $ 5,253       13.8 %   $ 5,160       13.5 %
Demand deposits — interest bearing
    4,306       11.0       4,083       10.8       4,052       10.8       4,074       10.7       4,041       10.6  
Money market deposits
    5,857       15.0       5,182       13.7       5,565       14.8       6,171       16.2       6,681       17.5  
Savings and other domestic deposits
    4,929       12.6       4,846       12.8       4,816       12.8       5,009       13.1       5,083       13.3  
Core certificates of deposit
    12,496       32.0       12,727       33.5       12,157       32.4       11,274       29.6       10,583       27.8  
 
                                                           
Total core deposits
    33,475       85.7       32,315       85.2       31,725       84.5       31,781       83.4       31,548       82.7  
Other domestic deposits of $100,000 or more
    1,239       3.2       1,541       4.1       1,949       5.2       2,139       5.6       2,160       5.7  
Brokered deposits and negotiable CDs
    3,848       9.8       3,355       8.8       2,925       7.8       3,101       8.1       3,362       8.8  
Deposits in foreign offices
    508       1.3       732       1.9       970       2.5       1,103       2.9       1,046       2.8  
 
                                                           
Total deposits
  $ 39,070       100.0 %   $ 37,943       100.0 %   $ 37,569       100.0 %   $ 38,124       100.0 %   $ 38,116       100.0 %
 
                                                           
 
                                                                               
Total core deposits:
                                                                               
Commercial
  $ 8,737       26.1 %   $ 7,758       24.0 %   $ 8,008       25.2 %   $ 8,472       26.7 %   $ 8,716       27.6 %
Personal
    24,738       73.9       24,557       76.0       23,717       74.8       23,309       73.3       22,832       72.4  
 
                                                           
Total core deposits
  $ 33,475       100.0 %   $ 32,315       100.0 %   $ 31,725       100.0 %   $ 31,781       100.0 %   $ 31,548       100.0 %
 
                                                           
 
                                                                               
By Business Segment
                                                                               
Regional Banking
    33,413       85.5       32,874       86.6       32,990       87.8       33,263       87.2       33,114       86.9  
Auto Finance and Dealer Services
    71       0.2       66       0.2       67       0.2       56       0.1       56       0.1  
PFG
    2,251       5.8       1,785       4.7       1,553       4.1       1,666       4.4       1,542       4.0  
Treasury / Other (1)
    3,335       8.5       3,218       8.5       2,959       7.9       3,139       8.3       3,404       9.0  
 
                                                           
Total deposits
  $ 39,070       100.0 %   $ 37,943       100.0 %   $ 37,569       100.0 %   $ 38,124       100.0 %   $ 38,116       100.0 %
 
                                                           
     
(1)   Comprised largely of national market deposits.

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To the extent that we are unable to obtain sufficient liquidity through deposits, we may meet our liquidity needs through short-term borrowings by purchasing federal funds or by selling securities under repurchase agreements. The Bank also has access to the Federal Reserve’s discount window and Term Auction Facility (TAF). As of March 31, 2009, a total of $8.7 billion of commercial loans and home equity lines of credit were pledged to these facilities. Specific percentages of these amounts pledged are available for borrowing. We had $6.9 billion of borrowing capacity available from both facilities at March 31, 2009, however, as part of a periodic review conducted by the Federal Reserve, our discount window and TAF borrowing capacity was reduced to approximately $4.9 billion as of April 27, 2009. The reduction was based on the lowering of the specific percentages of pledged amounts available for borrowing. As of March 31, 2009, we did not have any outstanding discount window or TAF borrowings. Additionally, the Bank had a $4.4 billion borrowing capacity at the Federal Home Loan Bank (FHLB) of Cincinnati, of which $3.4 billion remained unused at March 31, 2009. The FHLB uses the Bank’s credit rating in its calculation of borrowing capacity. As a result of credit rating changes (see “Credit Ratings” discussion) , the FHLB reduced our borrowing capacity by $370 million. Other potential sources of liquidity include the sale or maturity of investment securities, the sale or securitization of loans, the relatively shorter-term structure of our commercial loans and automobile loans, and the issuance of common and preferred stock.
During the 2009 first quarter, we initiated various strategies with the intent of further strengthening our liquidity position, as well as reducing the size of our balance sheet to, among other objectives, provide additional support to our TCE ratio (see “Capital” discussion). Our actions taken during the 2009 first quarter included: (a) $1.2 billion core deposit growth, (b) $1.0 billion automobile loan securitization, (c) $0.6 billion sale of municipal securities, (d) $0.6 billion debt issuance as part of the TLGP, and (e) $0.2 billion mortgage loan sale. The proceeds from these actions were used primarily to pay down wholesale borrowings.
At March 31, 2009, we believe that the Bank had sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Parent Company Liquidity
The parent company’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.
At March 31, 2009, the parent company had $1.17 billion in cash or cash equivalents, compared with $1.12 billion at December 31, 2008. Cash demands required for common stock dividends will be approximately $4 million per quarter. We recognize the importance of the dividend to our shareholders. While our overall capital and liquidity positions are strong, extreme and economic market deterioration, and the changing regulatory environment drove the difficult but prudent decision to reduce the dividend during the 2009 first quarter to $0.01 per common share. This proactive measure will enable us to build capital and strengthen our balance sheet. Table 34 provides additional detail regarding quarterly dividends declared per common share.
During 2008, we issued an aggregate $569 million of Series A Non-cumulative Perpetual Convertible Preferred Stock. The Series A Preferred Stock will pay, as declared by our board of directors, dividends in cash at a rate of 8.50% per annum, payable quarterly (see Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements). During the 2009 first quarter, we entered into agreements with various institutional investors exchanging shares of our common stock for shares of the Series A Preferred Stock held by them (see “Capital” discussion) . In the aggregate, these exchanges are anticipated to reduce our total annual dividend cash requirements (common, Series A Preferred Stock, and Series B Preferred Stock) by an estimated $8.7 million.
Also during 2008, we received $1.4 billion of equity capital by issuing to the U.S. Department of Treasury 1.4 million shares of Series B Preferred Stock as a result of our participation in the TARP voluntary CPP. The Series B Preferred Stock will pay cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter, resulting in quarterly cash demands of approximately $18 million through 2012, and $32 million thereafter (see Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding the Series B Preferred Stock issuance).

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Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend to the parent company at March 31, 2009, without regulatory approval. We do not anticipate that the Bank will request regulatory approval to pay dividends in the near future as we continue to build Bank regulatory capital above our already “well-capitalized” level. To help meet any additional liquidity needs, we have an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt or equity securities.
With the exception of the common and preferred dividends previously discussed, the parent company does not have any significant cash demands. There are no debt maturities until 2013, when a debt maturity of $50 million is payable.
Considering the factors discussed above, and other analyses that we have performed, we believe the parent company has sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Credit Ratings
Credit ratings provided by the three major credit rating agencies are an important component of our liquidity profile. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and our ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact our ability to raise funds at a reasonable cost in the capital markets. In addition, certain financial on- and off-balance sheet arrangements contain credit rating triggers that could increase funding needs if a negative rating change occurs. Other arrangements that could be impacted by credit rating changes include, but are not limited to, letter of credit commitments for marketable securities, interest rate swap collateral agreements, and certain asset securitization transactions contain credit rating provisions or could otherwise be impacted by credit rating changes.
The most recent credit ratings for the parent company and the Bank are as follows:
Table 33 — Credit Ratings
                                 
    May 08, 2009  
    Senior Unsecured     Subordinated              
    Notes   Notes   Short-term     Outlook
Huntington Bancshares Incorporated
                               
Moody’s Investor Service
  Baa2   Baa3     P-2     Negative
Standard and Poor’s
  BBB   BBB-     A-2     Negative
Fitch Ratings
  BBB+   BBB     F2     Negative
 
                               
The Huntington National Bank
                               
Moody’s Investor Service
  Baa1   Baa2     P-2     Negative
Standard and Poor’s
  BBB+   BBB     A-2     Negative
Fitch Ratings
  BBB+   BBB     F2     Negative
During the 2009 first and early-second quarter, all three rating agencies lowered their credit ratings for both the parent company and the Bank. The credit ratings to senior unsecured notes, subordinated notes, and short-term debt were changed. The above table reflects these changes. The FHLB uses the Bank’s credit rating in its calculation of borrowing capacity. As a result of these credit rating changes, the FHLB reduced our borrowing capacity by $370 million (see “Risk Factors” included in Item 1A of our 2008 Form 10-K ).
Also, early in the 2009 second quarter, Standard & Poor’s placed their credit ratings for both the parent company and the Bank, along with the credit ratings of 22 other financial institutions, on CreditWatch with negative implications. The CreditWatch placement is part of an ongoing industry review and follows its recently published criteria on stress testing and U.S. banks. These reviews are targeted to be complete by May 31, 2009. At the conclusion of the review, Standard and Poor’s have noted that it might downgrade ratings for banks under review by one grade or more, or affirm with a negative outlook.

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A security rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include financial guarantees contained in standby letters of credit issued by the Bank and commitments by the Bank to sell mortgage loans.
Through our credit process, we monitor the credit risks of outstanding standby letters of credit. When it is probable that a standby letter of credit will be drawn and not repaid in full, losses are recognized in the provision for credit losses. At March 31, 2009, we had $1.0 billion of standby letters of credit outstanding, of which 48% were collateralized. Included in this $1.0 billion total are letters of credit issued by the Bank that support $0.4 billion of securities that were issued by our customers and remarketed by The Huntington Investment Company (HIC), our broker-dealer subsidiary. If the Bank’s short-term credit ratings were downgraded, the Bank could be required to obtain funding in order to purchase the entire amount of these securities pursuant to its letters of credit. During the first and early second quarter, investors began returning these securities to the Bank due to the dislocation in money market funds and as a result of recent rating agency actions for Huntington and peer banks. Subsequently, the Bank tendered these securities to its trustee, where the securities were held for re-marketing, maturity, or payoff. Pursuant to the letters of credit issued by the Bank, the Bank repurchased $70.4 million of these securities, net of payments and maturities, during the 2009 first quarter and an additional $112.1 million in April of 2009 (see “Risk Factors” included in Item 1A of our Form 10-K for additional information).
We enter into forward contracts relating to the mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our held-for-sale mortgage loans. At March 31, 2009, December 31, 2008, and March 31, 2008, we had commitments to sell residential real estate loans of $912.5 million, $759.4 million, and $803.2 million, respectively. These contracts mature in less than one year.
We do not believe that off-balance sheet arrangements will have a material impact on our liquidity or capital resources.
Operational Risk
As with all companies, we are subject to operational risk. Operational risk 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. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.
The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational losses, and strengthen our overall performance.
Capital
(This section should be read in conjunction with Significant Item 3.)
Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, liquidity, and operational risks inherent in our business, and to provide the flexibility needed for future growth and new business opportunities. Shareholders’ equity totaled $4.8 billion at March 31, 2009. This represented a decrease compared with $7.2 billion at December 31, 2008, primarily reflecting the negative impact of the $2.6 billion goodwill impairment charge.
During 2008, we received $1.4 billion of equity capital by issuing to the U.S. Department of Treasury 1.4 million shares of Series B Preferred Stock, and a ten-year warrant to purchase up to 23.6 million shares of Huntington’s common stock, par value $0.01 per share, at an exercise price of $8.90 per share. The proceeds received were allocated to the preferred stock and additional paid-in-capital. The resulting discount on the preferred stock will be amortized, resulting in additional dilution to our earnings per share (See Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding the Series B Preferred Stock issuance).

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In 2008, we issued an aggregate $569 million of Series A Preferred Stock. The Series A Preferred Stock is nonvoting and may be convertible at any time, at the option of the holder, into 83.668 shares of our common stock. During the 2009 first quarter, we entered into agreements with various institutional investors exchanging shares of our common stock for shares of the Series A Preferred Stock held by them. The table below provides details of the aggregate activities and impacts of these exchanges:
Table 34 — Preferred Stock to Common Stock Conversion Impacts
                         
    January 1, 2009 -     April 1, 2009 -        
(in whole amounts)   March 31, 2009     April 2, 2009     TOTAL  
 
                       
Preferred shares exchanged
    114,109       20,000       134,109  
 
                       
Common shares issued:
                       
At stated convertible option
    9,547,272       1,673,360       11,220,632  
As conversion inducement
    15,044,012       3,026,640       18,070,652  
 
                 
Total common shares issued:
    24,591,284       4,700,000       29,291,284  
 
                       
Inducement value
  $ 27,742,251     $ 4,812,358     $ 32,554,609  
 
                       
Increase to common equity
  $ 114,109,000     $ 20,000,000     $ 134,109,000  
Impact to earnings per share
    (0.08 )     (0.01 )     (0.09 )
Impact to tangible common equity ratio
    0.22 %     0.04 %     0.26 %
Additionally, to accelerate the building of capital, we reduced our quarterly common stock dividend to $0.1325 per common share, effective with the dividend paid July 1, 2008. The quarterly common stock dividend was further reduced to $0.01 per common share, effective with the dividend paid April 1, 2009.
On February 18, 2009, the 2006 Repurchase Program was terminated. Additionally, as a condition to participate in the TARP, we may not repurchase any shares without prior approval from the Department of Treasury. No shares were repurchased during the 2009 first quarter.

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Table 35 — Capital Adequacy
                                                     
        “Well-              
        Capitalized”     2009     2008  
(in millions)       Minimums     March 31,     December 31,     September 30,     June 30,     March 31,  
 
                                                   
Total risk-weighted assets
  Consolidated           $ 46,313     $ 46,994     $ 46,608     $ 46,602     $ 46,546  
 
  Bank             45,951       46,477       45,883       46,346       46,333  
 
                                                   
Tier 1 leverage ratio (1)
  Consolidated     5.00 %     9.67 %     9.82 %     7.99 %     7.88 %     6.83 %
 
  Bank     5.00       5.95       5.99       6.36       6.37       6.24  
 
                                                   
Tier 1 risk-based capital ratio (1)
  Consolidated     6.00       11.16       10.72       8.80       8.82       7.56  
 
  Bank     6.00       6.79       6.44       7.01       7.10       6.89  
 
                                                   
Total risk-based capital ratio (1)
  Consolidated     10.00       14.28       13.91       12.03       12.05       10.87  
 
  Bank     10.00       11.00       10.71       10.25       10.32       10.39  
 
                                                   
Tangible equity / asset ratio
  Consolidated             8.12       7.72       5.99       5.90       4.92  
 
                                                   
Tangible common equity / asset ratio
  Consolidated             4.65       4.04       4.88       4.81       4.92  
 
                                                   
Tangible equity / risk-weighted assets ratio
  Consolidated             8.94       8.39       6.60       6.59       5.58  
 
                                                   
Tangible common equity / risk-weighted assets ratio
  Consolidated             5.13       4.39       5.38       5.37       5.58  
     
(1)   Based on an interim decision by the banking agencies on December 14, 2006, Huntington has excluded the impact of adopting Statement 158 from the regulatory capital calculations.
As shown in Table 35, our consolidated TCE ratio was 4.65% at March 31, 2009, an increase from 4.04% at December 31, 2008. The 61 basis point increase from December 31, 2008, primarily reflected the $114.1 million conversion of Series A Preferred Stock to common stock and the shrinking of our balance sheet through the securitizing of automobile loans, and the selling of a portion of our municipal securities portfolio, as well as mortgage loans.
As part of our strategy to increase TCE, we completed a “discretionary equity issuance” program in the 2009 second quarter. This program allowed us to take advantage of market opportunities to issue 38.5 million new shares of common stock worth $120 million. Sales of the common shares were made through ordinary brokers’ transactions on the NASDAQ Global Select Market or otherwise at the prevailing market prices. In addition to this program, we may consider similar actions to those taken in the 2009 first quarter in the future.
Regulatory capital ratios are the primary metrics used by regulators in assessing the “safety and soundness” of banks. We intend to maintain both the parent company’s and the Bank’s risk-based capital ratios at levels at which each would be considered “well-capitalized” by regulators. At March 31, 2009, the parent company had Tier 1 and Total risk-based capital in excess of the minimum level required to be considered “well-capitalized” of $2.4 billion and $2.0 billion, respectively. The parent company has the ability to provide additional capital to the Bank.
The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average assets for the quarter, adjusted to exclude period-end goodwill and intangibles. The impairment recorded during the 2009 first quarter lowered our period-end goodwill by $2.6 billion compared with the prior period. However, as the impairment was recorded at the end of the period, average assets for the 2009 first quarter were not significantly impacted, and therefore, the impact of the goodwill impairment was not fully reflected in average assets for the 2009 first quarter. If the impact of the impairment had been reflected in average assets for the full quarter, the Tier 1 leverage ratio would have been 49 basis points higher. This inconsistency between average and ending asset balances only impacts the 2009 first quarter ratio.

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The Bank is primarily supervised and regulated by the Office of the Comptroller of the Currency (OCC), which establishes regulatory capital guidelines for banks similar to those established for bank holding companies by the Federal Reserve Board. At March 31, 2009, the Bank had Tier 1 and Total risk-based capital in excess of the minimum level required to be considered “well-capitalized” of $0.4 billion and $0.5 billion, respectively.
Table 36 — Quarterly Common Stock Summary
                                         
    2009     2008  
(in thousands, except per share amounts)   First     Fourth     Third     Second     First  
 
                                       
Common stock price, per share
                                       
High (1)
  $ 8.000     $ 11.650     $ 13.500     $ 11.750     $ 14.870  
Low (1)
    1.000       5.260       4.370       4.940       9.640  
Close
    1.660       7.660       7.990       5.770       10.750  
Average closing price
    2.733       8.276       7.510       8.783       12.268  
 
                                       
Dividends, per share
                                       
Cash dividends declared per common share
  $ 0.0100     $ 0.1325     $ 0.1325     $ 0.1325     $ 0.2650  
 
                                       
Common shares outstanding
                                       
Average — basic
    366,919       366,054       366,124       366,206       366,235  
Average — diluted (2)
    366,919       366,054       367,361       367,234       367,208  
Ending
    390,682       366,058       366,069       366,197       366,226  
 
       
Book value per share
  $ 7.80     $ 14.62     $ 15.86     $ 15.88     $ 16.13  
Tangible book value per share
    6.08       5.64       6.85       6.83       7.09  
 
                                       
Common share repurchases
                                       
Number of shares repurchased
                             
     
(1)   High and low stock prices are intra-day quotes obtained from NASDAQ.
 
(2)   For the three-month periods ended March 31, 2009, December 31, 2008, September 30, 2008, and June 30, 2008, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculations. They were excluded because the results would have been higher than basic earnings per common share (anti-dilutive) for the periods.

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LINES OF BUSINESS DISCUSSION
Overview
This section reviews financial performance from a line of business perspective and should be read in conjunction with the Discussion of Results of Operations, Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements, and other sections for a full understanding of consolidated financial performance.
We have three distinct lines of business: Regional Banking, AFDS, and the Private Financial Group (PFG). A fourth segment includes our Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon our management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. An overview of this system is provided below, along with a description of each segment and discussion of financial results.
(FLOW CHART)
Effective with the 2009 second quarter, our internal reporting structure will be reorganized. Regional Banking, which through March 31, 2009, had been managed geographically, will be managed on a product approach. Regional Banking will be replaced by Commercial Banking, Retail and Business Banking, and Commercial Real Estate. AFDS, PFG, and Treasury/Other will remain essentially unchanged. Segments will be restated for the new organizational structure beginning with the 2009 second quarter.
We believe this new structure will provide more focus and create better business results while also allowing for more strategic management of risks and opportunities.
Funds Transfer Pricing
We use a centralized funds transfer pricing (FTP) methodology to allocate appropriate net interest income to the business segments. The Treasury/Other business segment charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each line of business. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities). Deposits of an indeterminate maturity receive an FTP credit based on vintage-based pool rates. Other assets, liabilities, and capital are charged (credited) with a four-year moving average FTP rate. The intent of the FTP methodology is to eliminate all interest rate risk from the lines of business by providing matched duration funding of assets and liabilities, centralize the financial impact of interest rate and liquidity risk in the Treasury/Other segment, and monitor, manage, and report interest rate risk from within the Treasury/Other segment.

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Fee Sharing
Our lines of business operate in cooperation with each other to provide products and services to our customers. Revenue is recorded in the line of business responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other lines of business involved in selling to or providing service to customers. The most significant revenues for which fee sharing is recorded relate to customer derivatives and brokerage services, which are recorded by PFG and shared with Regional Banking.
Treasury/Other
The Treasury function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the other three business segments. Assets in this segment include investment securities, bank owned life insurance, and the loans and OREO properties acquired in the Franklin restructuring. The financial impact associated with our FTP methodology, as described above, is also included in this segment.
Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Noninterest income includes miscellaneous fee income not allocated to other business segments such as bank owned life insurance income, and any investment securities and trading assets gains or losses. Noninterest expense includes certain corporate administrative, merger, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the other business segments is calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a result, Treasury/Other reflects a credit for income taxes representing the difference between the lower actual effective tax rate and the statutory tax rate used to allocate income taxes to the other segments.
Net Income by Business Segment
We reported a net loss of $2,433.2 million in the 2009 first quarter. This compared with net income of $127.1 million in the 2008 first quarter. The breakdown of the net loss for the 2009 first quarter by business segment is as follows:
    Regional Banking: $2,550.3 million loss ($2,631.5 million decrease compared with the 2008 first quarter)
    AFDS: $17.9 million loss ($21.5 million decline compared with the 2008 first quarter)
    PFG: $12.9 million loss ($28.5 million decrease compared with the 2008 first quarter)
    Treasury/Other: $147.9 million income ($121.3 million increase compared with the 2008 first quarter)

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Regional Banking
(This section should be read in conjunction with Significant Items 1, 4, 5, and 6.)
Objectives, Strategies, and Priorities
Our Regional Banking line of business provides traditional banking products and services to consumer, small business, and commercial customers located in its 11 operating regions within the six states of Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. It provides these services through a banking network of over 600 branches, and over 1,300 ATMs, along with internet and telephone banking channels. It also provides certain services on a limited basis outside of these six states, including mortgage banking and equipment leasing. Each region is further divided into retail and commercial banking units. Retail products and services include home equity loans and lines of credit, mortgage loans, direct installment loans, small business loans, personal and business deposit products, as well as sales of investment and insurance services. At March 31, 2009, Retail Banking (including Home Lending) accounted for 52% and 84% of total Regional Banking loans and deposits, respectively. Commercial Banking serves middle market commercial banking relationships, which use a variety of banking products and services including, but not limited to, commercial loans, international trade, cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.
We have a business model that emphasizes the delivery of a complete set of banking products and services offered by larger banks, but distinguished by local decision-making. Our strategy focuses on building a deeper relationship with our customers by providing a “Simply the Best” service experience. This focus on service requires continued investments in state-of-the-art platform technology in our branches, award-winning retail and business internet sites for our customers, extensive development of associates, and internal processes that empower our local bankers to serve our customers better. We believe the combination of local decision-making and “Simply the Best” service provides a competitive advantage that supports revenue and earnings growth.
2009 First Quarter versus 2008 First Quarter
Table 37 — Key Performance Indicators for Regional Banking
                                 
    Three Months Ended        
    March 31,     Change March ’09 vs ’08  
(in thousands unless otherwise noted)   2009     2008     Amount     Percent  
Net interest income
  $ 359,148     $ 343,238     $ 15,910       4.6 %
Provision for credit losses
    236,920       69,736       167,184       N.M.  
Noninterest income
    153,258       103,901       49,357       47.5  
Noninterest expense excluding goodwill impairment
    239,347       252,448       (13,101 )     (5.2 )
Goodwill impairment
    2,573,818             2,573,818        
Provision for income taxes
    12,649       43,734       (31,085 )     (71.1 )
 
                       
Net income (loss)
  $ (2,550,328 )   $ 81,221     $ (2,631,549 )     N.M. %
 
                       
 
                               
Total average assets (in millions)
  $ 33,751     $ 33,331     $ 420       1.3 %
Total average loans/leases (in millions)
    31,803       30,932       871       2.8  
Total average deposits (in millions)
    33,017       32,712       305       0.9  
Net interest margin
    4.51 %     4.40 %     0.11 %     2.5  
Net charge-offs (NCOs)
  $ 188,790     $ 34,821     $ 153,969       N.M.  
NCOs as a % of average loans and leases
    2.37 %     0.45 %     1.9 %     N.M.  
Return on average equity
    N.M.       14.5       N.M.       N.M.  
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