10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED September 30, 2011

Commission File Number 1-34073

Huntington Bancshares Incorporated


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

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


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

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

There were 864,074,883 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2011.

Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:


2010 Form 10-K		Annual Report on Form 10-K for the year ended December 31, 2010
ABL		Asset Based Lending
ACL		Allowance for Credit Losses
AFCRE		Automobile Finance and Commercial Real Estate
ALCO		Asset & Liability Management Committee
ALLL		Allowance for Loan and Lease Losses
ARM		Adjustable Rate Mortgage
ARRA		American Recovery and Reinvestment Act of 2009
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
ATM		Automated Teller Machine
AULC		Allowance for Unfunded Loan Commitments
AVM		Automated Valuation Methodology
C&I		Commercial and Industrial
CDARS		Certificate of Deposit Account Registry Service
CDO		Collateralized Debt Obligations
CDs		Certificates of Deposit
CFPB		Bureau of Consumer Financial Protection
CMO		Collateralized Mortgage Obligations
CPP		Capital Purchase Program
CRE		Commercial Real Estate
DDA		Demand Deposit Account
DIF		Deposit Insurance Fund
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act
EESA		Emergency Economic Stabilization Act of 2008
EPS		Earnings Per Share
ERISA		Employee Retirement Income Security Act
EVE		Economic Value of Equity
FASB		Financial Accounting Standards Board
FDIC		Federal Deposit Insurance Corporation
FDICIA		Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC		Federal Financial Institutions Examination Council
FHA		Federal Housing Administration
FHFA		Federal Housing Finance Agency
FHLB		Federal Home Loan Bank
FHLMC		Federal Home Loan Mortgage Corporation
FICA		Federal Insurance Contributions Act
FICO		Fair Isaac Corporation
FOMC		Federal Open Market Committee
FNMA		Federal National Mortgage Association
Franklin		Franklin Credit Management Corporation
FRB		Federal Reserve Bank
FSP		Financial Stability Plan
FTE		Fully-Taxable Equivalent


FTP		Funds Transfer Pricing
GAAP		Generally Accepted Accounting Principles in the United States of America
GSIFI		Globally Systemically Important Financial Institution
GSE		Government Sponsored Enterprise
HASP		Homeowner Affordability and Stability Plan
HCER Act		Health Care and Education Reconciliation Act of 2010
IPO		Initial Public Offering
IRS		Internal Revenue Service
ISE		Interest Sensitive Earnings
LIBOR		London Interbank Offered Rate
LGD		Loss-Given-Default
LTV		Loan to Value
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
MRC		Market Risk Committee
MSA		Metropolitan Statistical Area
MSR		Mortgage Servicing Rights
NALs		Nonaccrual Loans
NAV		Net Asset Value
NCO		Net Charge-off
NPAs		Nonperforming Assets
NSF / OD		Nonsufficient Funds and Overdraft
OCC		Office of the Comptroller of the Currency
OCI		Other Comprehensive Income (Loss)
OCR		Optimal Customer Relationship
OLEM		Other Loans Especially Mentioned
OREO		Other Real Estate Owned
OTTI		Other-Than-Temporary Impairment
PD		Probability-Of-Default
Plan		Huntington Bancshares Retirement Plan
Reg E		Regulation E, of the Electronic Fund Transfer Act
REIT		Real Estate Investment Trust
SAD		Special Assets Division
SBA		Small Business Administration
SEC		Securities and Exchange Commission
SERP		Supplemental Executive Retirement Plan
SIFIs		Systemically Important Financial Institutions
Sky Financial		Sky Financial Group, Inc.
SRIP		Supplemental Retirement Income Plan
Sky Trust		Sky Bank and Sky Trust, National Association
TAGP		Transaction Account Guarantee Program
TARP		Troubled Asset Relief Program
TARP Capital		Series B Preferred Stock
TCE		Tangible Common Equity
TDR		Troubled Debt Restructured Loan
TLGP		Temporary Liquidity Guarantee Program
Treasury		U.S. Department of the Treasury

PART I. FINANCIAL INFORMATION

When we refer to “we,” “our,” and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.


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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 145 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services. Our over 600 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2010 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2010 Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.

Our discussion is divided into key segments:

•

Executive Overview - Provides a summary of our current financial performance, and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the remainder of 2011.

•

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

•

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

•

Additional Disclosures - Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, recent accounting pronouncements and developments, and acquisitions.

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

EXECUTIVE OVERVIEW

Summary of 2011 Third Quarter Results

For the quarter, we reported net income of $143.4 million, or $0.16 per common share, compared with $145.9 million, or $0.16 per common share, in the prior quarter (see Table 1).

Fully-taxable equivalent net interest income was $410.1 million for the quarter, up $3.0 million, or 1%, from the prior quarter. The increase reflected the benefit of a 2% (6% annualized) increase in average earning assets, partially offset by a 6 basis point decline in the fully-taxable equivalent net interest margin to 3.34% from 3.40%.

The provision for credit losses in the 2011 third quarter was $43.6 million, up $7.8 million, or 22%, from the prior quarter. This reflected the combination of strong loan growth and the expectation of a weaker and prolonged economic recovery. These were partially offset by the benefits of an end-of-period decline of 8% in nonaccrual loans and a 4% decline in total Criticized commercial loans.

Total noninterest income increased $2.8 million, or 1%, from the prior quarter. This included an increase in other income of $15.1 million, or 33%, reflecting a $15.5 million gain on sale from the automobile securitization and a $2.8 million increase in market-related gains and capital markets income, which was partially offset by a $5.8 million decline in SBA servicing income. Service charges on deposit accounts and electronic banking income increased $4.5 million, or 7%, and $1.0 million, or 3%, respectively, primarily driven by new account growth. These benefits were partially offset by an $11.0 million decline in mortgage banking income, primarily driven by a negative $13.9 million linked quarter change in the net MSR valuation, the majority of which occurred over the last two weeks of the quarter.

Noninterest expense increased $10.7 million, or 2%. Personnel costs increased $8.3 million, or 4%, due to higher salary, severance, and healthcare costs. Outside data processing and other services increased $5.7 million, or 13%, primarily due to costs associated with a conversion to a new debit card processor.

The period end ACL as a percentage of total loans and leases decreased to 2.71% from 2.84%. However, the ACL as a percentage of period end NALs increased to 187% from 181%. Net charge-offs were $90.6 million, or an annualized 0.92% of average total loans and leases, down 7% from $97.5 million, or 1.01%, in the prior quarter. Credit quality continued its expected improvement. Even so, many of these performance metrics remain elevated compared with historical performance. We expect to see continued declines in nonaccrual loans and net charge-offs going forward.

Business Overview

General

Our general business objectives are: (1) grow revenue and profitability, (2) improve cross-sell and share-of-wallet across all business segments, (3) grow key fee businesses (existing and new), (4) improve credit quality, including lower NCOs and NALs, (5) reduce noncore CRE exposure, and (6) continue to improve our overall management of risk.

Throughout last year, and continuing into this year, we are taking advantage of what we view as an opportunity to make significant investments in strategic initiatives to position us for more profitable and sustainable long-term growth. This includes implementing our “Fair Play” banking philosophy, value proposition for our consumer customers, increasing share-of-wallet, investing in expanding existing business, and launching new businesses.

Our emphasis on cross-sell, coupled with customers increasingly being attracted by the benefits offered through our “Fair Play” banking philosophy is having a positive effect. The number of consumer checking account households grew at a 10.8% annualized rate for the first three quarters of 2011. These new households are not just focused around single service. We have been able to continue to grow our share of wallet with new and existing customers. Almost 73% of our consumer customers now have four or more products or services. On the commercial side, we also saw an increase with commercial relationships growing for the first nine months at an 8.6% annualized rate.

Economy

Wavering business and consumer confidence, U.S. debt and fiscal uncertainties, and slow economic growth remain challenges to the operating environment. Consumer sentiment has dropped to the lowest level since the recessionary period in 2008. Elevated housing inventories continue to present a near-term drag; however housing affordability is near record highs on historically low mortgage rates and lower home prices.

Legislative and Regulatory

Regulatory reforms continue to be adopted which impose additional restrictions on current business practices. Recent actions affecting us included the Federal Reserve’s maturity extension program, and the rules and regulations that have been issued pursuant to the Dodd-Frank Act.

Federal Reserve Maturity Extension Program — Under the maturity extension program announced on September 21, 2011, the Federal Reserve intends to sell $400 billion of shorter-term Treasury securities by the end of 2012 and use the proceeds to buy longer-term securities. This will extend the average maturity of the securities in the Federal Reserve’s portfolio. By reducing the supply of longer-term securities in the market, it is the FOMC’s intention to put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities. Further, it is their objective that the reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery. We do not anticipate that this recent announcement will have a material impact on our current securities portfolio or future investment strategy. However, it could cause our net interest margin to drop modestly.

Resolution Plan — The FRB and FDIC issued final regulations as required by section 165 of the Dodd-Frank Act regarding resolution plans, also referred to as “living wills.” Insured depository institutions with $50 billion or more in total assets must submit to the FDIC a plan whereby the institution can be resolved by the FDIC, in the event of failure, in a manner that ensures depositors will receive access to insured funds within the required timeframes and generally ensures an orderly liquidation of the institution. Additionally, bank holding companies with assets of $50 billion or more are required to submit to the FRB and the FDIC a plan that, in the event of material financial distress or failure, establishes the rapid and orderly liquidation of the company under the bankruptcy code and in a way that would not pose systemic risk to the financial system of the United States. The regulations allow for a tier approach for complying with the requirements based on materiality of the institution. Currently, we are required to submit resolution plans as prescribed by December 31, 2013.

Durbin Amendment — The Durbin Amendment to the Dodd-Frank Act instructed the Federal Reserve to establish the rate merchants pay banks for electronic clearing of debit card transactions (i.e., the interchange rate). The Federal Reserve recently issued its final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction, 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees became effective on October 1, 2011. Based on the final rule, we expect our 2011 fourth quarter electronic banking income to decline from the 2011 third quarter level by approximately 50%, or $16 million.

Recent Industry Developments

Recent industry events and related supervisory guidance brought about by the continued weak housing market have caused us to evaluate certain aspects of our mortgage operations. This included a review of our foreclosure documentation, MSR valuation, and representation and warranty reserve level. Additionally, we are evaluating potential impacts from recent announcements of the enhanced Home Affordable Refinance Program (HARP) and by PMI Mortgage Insurance Co. (PMI).

Foreclosure Documentation — On June 30, 2011, the OCC issued OCC Bulletin 2011-29 clarifying their expectations for the oversight and management of mortgage foreclosure activities by national banks and directing national banks to perform a self-assessment no later than September 30, 2011. We believe that, with the self-assessments we have performed and will continue to perform, we are in compliance with the OCC expectation for self-assessment.

Mortgage Servicing Rights — MSR fair values are estimated based on residential mortgage servicing revenue in excess of estimated market costs to service the underlying loans. Historically, the estimated market cost to service has been stable. Due to changes in the regulatory environment related to loan servicing and foreclosure activities, costs to service may potentially increase, however the potential impact on the market costs to service remains uncertain. Certain large residential mortgage loan servicers entered into consent orders with banking regulators in April 2011, which require the servicers to remedy deficiencies and unsafe or unsound practices and to enhance residential mortgage servicing and foreclosure processes. It is unclear what impact this may ultimately have on market costs to service.

Representation and Warranty Reserve —We primarily conduct our loan sale and securitization activity with FNMA and FHLMC. In connection with these and other sale and securitization transactions, we make representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. We may be required to repurchase individual loans and / or indemnify these organizations against losses due to material breaches of these representations and warranties. At September 30, 2011, we had a reserve for such losses of $23.9 million, which is included in accrued expenses and other liabilities.

Home Affordable Refinance Program — The FHFA has announced changes to the Home Affordable Refinance Program designed to attract more borrowers with FNMA and FHLMC backed mortgages that can benefit from refinancing their residential mortgage loans under current low interest rates. The new operational details are to be issued by November 15, 2011. We do not expect the impact to be material.

PMI Mortgage Insurance Co. (PMI) — On August 19, 2011, PMI informed its customers that it was required to stop writing new commitments and we stopped doing new business with PMI at that time. On October 24, 2011, PMI informed all policyholders, insured parties, and servicers of loans insured by PMI that the Director of the Arizona Department of Insurance (Director) obtained an “Order Directing Full and Exclusive Possession and Control of Insurer” (the Order) with respect to PMI. Effective October 24, 2011, and pursuant to the Order, instead of a moratorium on claims payments, the Director instituted a partial claims payment plan. Claim payments will be made at 50%, with the remaining amount deferred as a policyholder claim. PMI has not been a significant provider of mortgage insurance for loans in our portfolio. We utilize a number of insurance providers, limiting our risk associated with any one provider. We do not expect the exposure associated with our owned residential mortgage portfolio to have a material impact on our results of operations or financial position.

Expectations

The lack of prospects for meaningful economic improvement, higher interest rates, and wider spreads between short-term and long-term interest rates for the foreseeable future is a challenge. For example, broad-based loan growth, as well as growth in certain fee income activities, is expected to be less than would otherwise be the case in an expanding economy, even though growth in certain portfolios and activities is anticipated. Further, a period of prolonged low interest rates is expected to put pressure on our net interest margin. This would reflect more compression in loan and investment securities yields relative to any declines in deposit and funding rates. In addition, deposit inflows over and above any reinvestment opportunities at appropriate risk adjusted spreads means we may elect to curtail deposit growth, typically an engine of revenue growth. These revenue headwinds are magnified by the continued fragility of business and consumer confidence that is expected to continue the postponement of borrowing and investment decisions. Nevertheless, our success in growing and deepening relationships presents us with an opportunity to selectively expand revenue, while maintaining disciplined loan and deposit pricing, as well as conservative credit underwriting.

Net interest income is expected to continue to show very modest improvement from the third quarter level. The momentum we are seeing in loan and low cost deposit growth is expected to continue, yet the benefits will be mostly offset by pressure on the net interest margin due to the expected continued mix shift to higher quality loans and lower securities reinvestment rates that reflect the low absolute level and shape of the yield curve. If the current interest rate environment, which has partially resulted from the Federal Reserve Maturity Extension Program “Operation Twist”, remains unchanged through 2012, it could cause our net interest margin to drop modestly below our long-term range of 3.30% to 3.75%. Our C&I portfolio is expected to continue to show meaningful growth with much of this reflecting the positive impact from strategic initiatives to expand our commercial lending expertise into areas like specialty banking, asset based lending, and equipment financing, in addition to our long-standing continued support of middle market and small business lending. For automobile loans, we expect to see strong growth from September 30, 2011 balances. Residential mortgages are expected to show modest growth, with CRE continuing to experience modest declines.

We again anticipate the increase in total core deposits to match that of loans, reflecting continued growth in consumer households and commercial relationships. Further, we expect the shift toward low and no cost demand deposits and money market accounts will continue.

Noninterest income is expected to show a modest decline in the 2011 fourth quarter, primarily due to an anticipated 50%, or $16 million, decline in electronic banking income from the third quarter, given the newly mandated lower interchange fee structure implemented October 1, 2011. We expect to see continued growth of service charge income commensurate with customer growth and increased product penetration. Mortgage banking income should increase as the third quarter’s sizable MSR impairment is not expected to repeat. We also anticipate continued growth in the contribution from other key fee income activities including capital markets, treasury management services, and brokerage, reflecting the impact of our cross-sell and product penetration initiatives throughout the company as well as the positive impact from strategic initiatives.

Expense levels are expected to modestly decline in coming quarters though strategic actions like the current debit card conversion may cause short-term fluctuations.

Nonaccrual loans and net charge-offs are expected to continue to decline. Provision for credit losses should remain near current levels, yet there could be some volatility given the uncertain and uneven nature of the economic recovery.

We anticipate the effective tax rate for the foreseeable future to be in the range of 24% to 27%.

Table 1 — Selected Quarterly Income Statement Data (1)


	2011									2010
(dollar amounts in thousands, except per share amounts)	Third			Second			First			Fourth			Third
Interest income	$	490,996		$	492,137		$	501,877		$	528,291		$	534,669
Interest expense		84,518			88,800			97,547			112,997			124,707

Net interest income		406,478			403,337			404,330			415,294			409,962
Provision for credit losses		43,586			35,797			49,385			86,973			119,160

Net interest income after provision for credit losses		362,892			367,540			354,945			328,321			290,802

Service charges on deposit accounts		65,184			60,675			54,324			55,810			65,932
Mortgage banking income		12,791			23,835			22,684			53,169			52,045
Trust services		29,473			30,392			30,742			29,394			26,997
Electronic banking		32,714			31,728			28,786			28,900			28,090
Insurance income		17,220			16,399			17,945			19,678			19,801
Brokerage income		20,349			20,819			20,511			16,953			16,575
Bank owned life insurance income		15,644			17,602			14,819			16,113			14,091
Automobile operating lease income		5,890			7,307			8,847			10,463			11,356
Securities gains (losses)		(1,350	)		1,507			40			(103	)		(296	)
Other income		60,644			45,503			38,247			33,843			32,552

Total noninterest income		258,559			255,767			236,945			264,220			267,143

Personnel costs		226,835			218,570			219,028			212,184			208,272
Outside data processing and other services		49,602			43,889			40,282			40,943			38,553
Net occupancy		26,967			26,885			28,436			26,670			26,718
Deposit and other insurance expense		17,492			23,823			17,896			23,320			23,406
Professional services		20,281			20,080			13,465			21,021			20,672
Equipment		22,262			21,921			22,477			22,060			21,651
Marketing		22,251			20,102			16,895			16,168			20,921
Amortization of intangibles		13,387			13,386			13,370			15,046			15,145
OREO and foreclosure expense		4,668			4,398			3,931			10,502			12,047
Automobile operating lease expense		4,386			5,434			6,836			8,142			9,159
Other expense		30,987			29,921			48,083			38,537			30,765

Total noninterest expense		439,118			428,409			430,699			434,593			427,309

Income before income taxes		182,333			194,898			161,191			157,948			130,636
Provision for income taxes		38,942			48,980			34,745			35,048			29,690

Net income	$	143,391		$	145,918		$	126,446		$	122,900		$	100,946

Dividends on preferred shares		7,703			7,704			7,703			83,754			29,495

Net income applicable to common shares	$	135,688		$	138,214		$	118,743		$	39,146		$	71,451

Average common shares — basic		863,911			863,358			863,359			757,924			716,911
Average common shares — diluted (2)		867,633			867,469			867,237			760,582			719,567

Net income per common share — basic	$	0.16		$	0.16		$	0.14		$	0.05		$	0.10
Net income per common share — diluted		0.16			0.16			0.14			0.05			0.10
Cash dividends declared per common share		0.04			0.01			0.01			0.01			0.01

Return on average total assets		1.05	%		1.11	%		0.96	%		0.90	%		0.76	%
Return on average common shareholders’ equity		10.8			11.6			10.3			3.8			7.4
Return on average tangible common shareholders’ equity (3)		13.0			13.3			12.7			5.6			10.0
Net interest margin (4)		3.34			3.40			3.42			3.37			3.45
Efficiency ratio (5)		63.5			62.7			64.7			61.4			60.6
Effective tax rate		21.4			25.1			21.6			22.2			22.7
Revenue — FTE

Net interest income	$	406,478		$	403,337		$	404,330		$	415,294		$	409,962
FTE adjustment		3,658			3,834			3,945			3,708			2,631

Net interest income (4)		410,136			407,171			408,275			419,002			412,593
Noninterest income		258,559			255,767			236,945			264,220			267,143

Total revenue (4)	$	668,695		$	662,938		$	645,220		$	683,222		$	679,736


⁽¹⁾		Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items.

⁽²⁾		For periods presented prior to their repurchase, the impact of the convertible preferred stock issued in 2008 and the warrants issued to the U.S. Department of the Treasury in 2008 related to Huntington’s participation in the voluntary Capital Purchase Program was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for those periods. The convertible preferred stock and warrants were repurchased in December 2010 and January 2011, respectively.

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


	Nine Months Ended September 30,						Change
(dollar amounts in thousands, except per share amounts)	2011			2010			Amount			Percent
Interest income	$	1,485,010		$	1,617,101		$	(132,091	)		(8	)%
Interest expense		270,865			413,590			(142,725	)		(35	)

Net interest income		1,214,145			1,203,511			10,634			1
Provision for credit losses		128,768			547,574			(418,806	)		(76	)

Net interest income after provision for credit losses		1,085,377			655,937			429,440			65

Service charges on deposit accounts		180,183			211,205			(31,022	)		(15	)
Mortgage banking income		59,310			122,613			(63,303	)		(52	)
Trust services		90,607			83,161			7,446			9
Electronic banking		93,228			81,334			11,894			15
Insurance income		51,564			56,735			(5,171	)		(9	)
Brokerage income		61,679			51,901			9,778			19
Bank owned life insurance income		48,065			44,953			3,112			7
Automobile operating lease income		22,044			35,501			(13,457	)		(38	)
Securities gains (losses)		197			(171	)		368			N.R.
Other income		144,394			90,406			53,988			60

Total noninterest income		751,271			777,638			(26,367	)		(3	)

Personnel costs		664,433			586,789			77,644			13
Outside data processing and other services		133,773			118,305			15,468			13
Net occupancy		82,288			81,192			1,096			1
Deposit and other insurance expense		59,211			74,228			(15,017	)		(20	)
Professional services		53,826			67,757			(13,931	)		(21	)
Equipment		66,660			63,860			2,800			4
Marketing		59,248			49,756			9,492			19
Amortization of intangibles		40,143			45,432			(5,289	)		(12	)
OREO and foreclosure expense		12,997			28,547			(15,550	)		(54	)
Automobile operating lease expense		16,656			28,892			(12,236	)		(42	)
Other expense		108,991			94,455			14,536			15

Total noninterest expense		1,298,226			1,239,213			59,013			5

Income before income taxes		538,422			194,362			344,060			177
Provision for income taxes		122,667			4,915			117,752			2,396

Net income	$	415,755		$	189,447		$	226,308			119	%

Dividends declared on preferred shares		23,110			88,278			(65,168	)		(74	)

Net income applicable to common shares	$	392,645		$	101,169		$	291,476			288	%

Average common shares — basic		863,542			716,604			146,938			21	%
Average common shares — diluted (2)		867,446			719,182			148,264			21
Per common share
Net income per common share — basic	$	0.45		$	0.14		$	0.31			221	%
Net income per common share — diluted		0.45			0.14			0.31			221
Cash dividends declared		0.06			0.03			0.03			100
Return on average total assets		1.04	%		0.49	%		0.55	%		112	%
Return on average common shareholders’ equity		10.9			3.6			7.3			203
Return on average tangible common shareholders’ equity (3)		13.2			5.6			7.6			136
Net interest margin (4)		3.39			3.46			(0.07	)		(2	)
Efficiency ratio (5)		63.6			60.0			3.6			6
Effective tax rate		22.8			2.5			20.3			812
Revenue — FTE
Net interest income	$	1,214,145		$	1,203,511		$	10,634			1	%
FTE adjustment		11,437			7,369			4,068			55

Net interest income (4)		1,225,582			1,210,880			14,702			1
Noninterest income		751,271			777,638			(26,367	)		(3	)

Total revenue (4)	$	1,976,853		$	1,988,518		$	(11,665	)		(1)	%


N.R.		- Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.

⁽¹⁾		Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items.


⁽²⁾		For all periods presented, the impact of the convertible preferred stock issued in 2008 and the warrants issued to the U.S. Department of the Treasury in 2008 related to Huntington’s participation in the voluntary Capital Purchase Program was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for the periods. The convertible preferred stock and warrants were repurchased in December 2010 and January 2011, respectively.

⁽³⁾		Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.

⁽⁴⁾		On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.

⁽⁵⁾		Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).

Significant Items

Definition of Significant Items

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

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

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

Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below.

Litigation Reserve. During the 2011 first quarter, $17.0 million of additions to litigation reserves were recorded as other noninterest expense. This resulted in a negative impact of $0.01 per common share.

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

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

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

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

Table 3 — Significant Items Influencing Earnings Performance Comparison


	Three Months Ended
(dollar amounts in thousands, except per	September 30, 2011					June 30, 2011					September 30, 2010
share amounts)	After-tax		EPS			After-tax		EPS			After-tax		EPS
Net income	$	143,391				$	145,918				$	100,946
Earnings per share, after-tax			$	0.16				$	0.16				$	0.10
Change from prior quarter — $				—					0.02					0.07
Change from prior quarter — %				—	%				14.3	%				233.3	%

Change from year-ago — $			$	0.06				$	0.13				$	0.43
Change from year-ago — %				60	%				433	%				N.R.	%

Nine Months Ended

September 30, 2011

September 30, 2010

(dollar amounts in thousands)

After-tax

EPS

After-tax

EPS

Net income

415,755

189,447

Earnings per share, after-tax

0.45

0.14

Change from a year-ago — $

0.31

6.22

Change from a year-ago — %

221

N.R.


Significant Items - favorable (unfavorable) impact:	Earnings (1)			EPS			Earnings (1)			EPS

Franklin-related loans transferred to held for sale	$	—		$	—		$	(75,500	)	$	(0.07	)
Net tax benefit recognized (2)		—			—			38,222			0.05
Litigation reserves addition		(17,028	)		(0.01	)		—			—


N.R.		- Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.

(1)		Pretax unless otherwise noted.

(2)		After-tax.

Pretax, Pre-provision Income Trends

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

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

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


	2011									2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third

Income before income taxes	$	182,333		$	194,898		$	161,191		$	157,948		$	130,636
Add: Provision for credit losses		43,586			35,797			49,385			86,973			119,160
Less: Securities gains (losses)		(1,350	)		1,507			40			(103	)		(296	)
Add: Amortization of intangibles		13,387			13,386			13,370			15,046			15,145
Less: Litigation reserves addition		—			—			(17,028	)		—			—


Total pretax, pre-provision income	$	240,656		$	242,574		$	240,934		$	260,070		$	265,237

Change in total pretax, pre-provision income:
Prior quarter change — amount	$	(1,918	)	$	1,640		$	(19,136	)	$	(5,167	)	$	(5,237	)
Prior quarter change — percent		(1)	%		1	%		(7)	%		(2)	%		(2)	%


(1)		Pretax, pre-provision income is a non-GAAP financial measure. Any ratio utilizing this financial measure is also non-GAAP. This financial measure has been included as it is considered to be an important metric with which to analyze and evaluate our results of operations and financial strength. Other companies may calculate this financial measure differently.

Pretax, pre-provision income was $240.7 million in the 2011 third quarter, down $1.9 million, or 1%, from the prior quarter. As discussed in the sections that follow, the decrease primarily reflected the negative impact from a lower net interest margin percentage and higher noninterest expense as compared to the prior quarter.

Net Interest Income / Average Balance Sheet

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

Table 5 — Average Loans/Leases and Deposits


	Third Quarter				Second Quarter		3Q11 vs 3Q10						3Q11 vs 2Q11
(dollar amounts in millions)	2011		2010		2011		Amount			Percent			Amount			Percent
Loans/Leases
Commercial and industrial	$	13,664	$	12,393	$	13,370	$	1,271			10	%	$	294			2	%
Commercial real estate		6,111		7,073		6,233		(962	)		(14	)		(122	)		(2	)

Total commercial		19,775		19,466		19,603		309			2			172			1
Automobile		6,211		5,140		5,954		1,071			21			257			4
Home equity		8,002		7,567		7,874		435			6			128			2
Residential mortgage		4,788		4,389		4,566		399			9			222			5
Other loans		521		653		538		(132	)		(20	)		(17	)		(3	)

Total consumer		19,522		17,749		18,932		1,773			10			590			3

Total loans and leases	$	39,297	$	37,215	$	38,535	$	2,082			6	%	$	762			2	%

Deposits
Demand deposits — noninterest-bearing	$	8,719	$	6,768	$	7,806	$	1,951			29	%	$	913			12	%
Demand deposits — interest-bearing		5,573		5,319		5,565		254			5			8			—
Money market deposits		13,321		12,336		12,879		985			8			442			3
Savings and other domestic time deposits		4,752		4,639		4,778		113			2			(26	)		(1	)
Core certificates of deposit		7,592		8,948		8,079		(1,356	)		(15	)		(487	)		(6	)

Total core deposits		39,957		38,010		39,107		1,947			5			850			2
Other deposits		2,321		2,636		2,147		(315	)		(12	)		174			8

Total deposits	$	42,278	$	40,646	$	41,254	$	1,632			4	%	$	1,024			2	%

2011 Third Quarter versus 2010 Third Quarter

Fully-taxable equivalent net interest income decreased $2.5 million, or 1%, from the year-ago quarter. This reflected the benefit of a $1.3 billion, or 3%, increase in average total earning assets partially offset by an 11 basis point decline in the net interest margin. The increase in average earning assets reflected:

•

$2.1 billion, or 6%, increase in average total loans and leases.

Partially offset by:

•

$0.3 billion, or 3%, decrease in average total available-for-sale and other securities and held-to-maturity securities.

•

$0.4 billion, or 64%, decrease in average loans held for sale.

The 11 basis point decline in the net interest margin reflected a reduction in derivatives income, lower loan and securities yields, partially offset by the positive impacts of increases in low cost deposits and improved deposit pricing.

The $2.1 billion, or 6%, increase in average total loans and leases primarily reflected:

•

$1.3 billion, or 10%, growth in the average C&I portfolio reflected a combination of factors. This included the benefits from our strategic initiatives including a focus on large corporate, asset based lending, and equipment finance. In addition, we continued to see growth in more traditional middle-market, business banking, and automobile floorplan loans. This growth was evident despite line utilization rates that remained well below historical norms.

•

$1.1 billion, or 21%, increase in the average automobile portfolio. Automobile lending is a core competency and continues to be an area of targeted growth. The growth from the year-ago quarter exhibited further penetration within our historical geographic footprint, as well as the positive impacts of our expansion into Eastern Pennsylvania and five New England states. Origination quality remained high as measured by all of our internal quality metrics.

•

$0.4 billion, or 9%, increase in average residential mortgages.

•

$0.4 billion, or 6%, increase in average home equity loans.

Partially offset by:

•

$1.0 billion, or 14%, decrease in the average CRE portfolio, reflecting the continued execution of our plan to reduce the total CRE exposure, primarily in the noncore CRE portfolio. This reduction is expected to continue, reflecting the combined impact of amortization, pay downs, refinancing, and restructures.

The $1.6 billion, or 4%, increase in average total deposits from the year-ago quarter reflected:

•

$1.9 billion, or 5%, growth in average total core deposits. The drivers of this change were a $2.2 billion, or 18%, growth in average total demand deposits, and a $1.0 billion, or 8%, growth in average money market deposits. Partially offset by $1.4 billion, or 15%, decline in average core certificates of deposit.

Partially offset by:

•

$0.3 billion, or 44%, decline in average other domestic deposits of $250,000 or more, reflecting a strategy of reducing such noncore funding.

2011 Third Quarter versus 2011 Second Quarter

FTE net interest income increased $3.0 million, or 1%, from the 2011 second quarter. This reflected a $0.8 billion, or 2%, increase in average earning assets partially offset by a 6 basis point decline in the FTE net interest margin. The increase in average earning assets reflected:

•

$0.8 billion, or 2%, increase in average total loans and leases.

The 6 basis point decline in the net interest margin reflected a reduction in derivatives income and lower loan yields, partially offset by the positive impact of increases in low cost deposits and improved deposit pricing.

The $0.8 billion, or 2% (8% annualized), increase in average total loans and leases reflected:

•

$0.3 billion, or 2% (9% annualized), growth in the average C&I portfolio. The growth in the C&I portfolio during the third quarter came from several business lines including large corporate, equipment finance, business banking, and middle market. C&I utilization rates were little changed from the end of the prior quarter.

•

$0.3 billion, or 4% (17% annualized), growth in the average automobile portfolio. In September, the bank completed a $1.0 billion securitization of automobile loans. We continued to originate very high quality loans with attractive returns. We focus on larger, multi-franchised, well-capitalized dealers that are rarely reliant on the success of one franchise to generate profitability. While the used car market remained very strong, we increased our originations of new vehicle loans, which reflected a reduced level of manufacturer captive finance company incentive programs due to lower new vehicle inventory levels in the market.

•

$0.2 billion, or 5% (19% annualized), growth in residential mortgages as the bank experienced the continuation of a year-long trend of customer preferences shifting to shorter-term and variable rate mortgages.

Partially offset by:

•

$0.1 billion, or 2% (8% annualized), decline in the average CRE portfolio, primarily as a result of our on-going strategy to reduce our exposure to the commercial real estate market. We were successful in reducing exposure across virtually all of the CRE project types that we actively manage via our concentration management process. The decline in the noncore CRE portfolio accounted for the vast majority of the decline in the total CRE portfolio. The noncore CRE portfolio declines reflected paydowns, refinancing, and NCOs. The core CRE portfolio continued to exhibit high quality characteristics with minimal downgrade or NCO activity.

The $1.0 billion, or 2% (10% annualized), increase in average total deposits from the 2011 second quarter reflected:

•

$0.9 billion, or 7% (28% annualized), increase in total demand deposits. This was driven primarily by growth in commercial and consumer noninterest-bearing demand deposits. Commercial demand deposit growth reflected, in part, temporary deposits from several large relationships.

•

$0.4 billion, or 3% (14% annualized), increase in average money market deposits.

Partially offset by:

•

$0.5 billion, or 6% (24% annualized), decrease in core certificates of deposits.

Tables 6 and 7 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

Table 6 — Consolidated Quarterly Average Balance Sheets


	Average Balances															Change
	2011									2010						3Q11 vs. 3Q10
(dollar amounts in millions)	Third			Second			First			Fourth			Third			Amount			Percent
Assets
Interest-bearing deposits in banks	$	164		$	131		$	130		$	218		$	282		$	(118	)		(42)	%
Trading account securities		92			112			144			297			110			(18	)		(16	)
Federal funds sold and securities purchased under resale agreement		—			21			—			—			—			—			—
Loans held for sale		237			181			420			779			663			(426	)		(64	)
Available-for-sale and other securities:
Taxable		7,902			8,428			9,108			9,747			8,876			(974	)		(11	)
Tax-exempt		421			436			445			449			365			56			15

Total available-for-sale and other securities		8,323			8,864			9,553			10,196			9,241			(918	)		(10	)
Held-to-maturity securities — taxable		665			174			—			—			—			665			—
Loans and leases: (1)
Commercial:
Commercial and industrial		13,664			13,370			13,121			12,767			12,393			1,271			10
Commercial real estate:
Construction		670			554			611			716			989			(319	)		(32	)
Commercial		5,441			5,679			5,913			6,082			6,084			(643	)		(11	)

Commercial real estate		6,111			6,233			6,524			6,798			7,073			(962	)		(14	)

Total commercial		19,775			19,603			19,645			19,565			19,466			309			2

Consumer:
Automobile		6,211			5,954			5,701			5,520			5,140			1,071			21
Home equity		8,002			7,874			7,728			7,709			7,567			435			6
Residential mortgage		4,788			4,566			4,465			4,430			4,389			399			9
Other consumer		521			538			559			576			653			(132	)		(20	)

Total consumer		19,522			18,932			18,453			18,235			17,749			1,773			10

Total loans and leases		39,297			38,535			38,098			37,800			37,215			2,082			6
Allowance for loan and lease losses		(1,066	)		(1,128	)		(1,231	)		(1,323	)		(1,384	)		318			(23	)

Net loans and leases		38,231			37,407			36,867			36,477			35,831			2,400			7

Total earning assets		48,778			48,018			48,345			49,290			47,511			1,267			3

Cash and due from banks		1,700			1,068			1,299			1,187			1,618			82			5
Intangible assets		639			652			665			679			695			(56	)		(8	)
All other assets		4,142			4,160			4,291			4,313			4,277			(135	)		(3	)

Total assets	$	54,193		$	52,770		$	53,369		$	54,146		$	52,717		$	1,476			3	%

Liabilities and Shareholders’ Equity
Deposits:
Demand deposits — noninterest-bearing	$	8,719		$	7,806		$	7,333		$	7,188		$	6,768		$	1,951			29	%
Demand deposits — interest-bearing		5,573			5,565			5,357			5,317			5,319			254			5
Money market deposits		13,321			12,879			13,492			13,158			12,336			985			8
Savings and other domestic deposits		4,752			4,778			4,701			4,640			4,639			113			2
Core certificates of deposit		7,592			8,079			8,391			8,646			8,948			(1,356	)		(15	)

Total core deposits		39,957			39,107			39,274			38,949			38,010			1,947			5
Other domestic time deposits of $250,000 or more		387			467			606			737			690			(303	)		(44	)
Brokered deposits and negotiable CDs		1,533			1,333			1,410			1,575			1,495			38			3
Deposits in foreign offices		401			347			374			443			451			(50	)		(11	)

Total deposits		42,278			41,254			41,664			41,704			40,646			1,632			4
Short-term borrowings		2,251			2,112			2,134			2,134			1,739			512			29
Federal Home Loan Bank advances		285			97			30			112			188			97			52
Subordinated notes and other long-term debt		3,030			3,249			3,525			3,558			3,672			(642	)		(17	)

Total interest-bearing liabilities		39,125			38,906			40,020			40,320			39,477			(352	)		(1	)

All other liabilities		1,017			913			994			993			952			65			7
Shareholders’ equity		5,332			5,145			5,022			5,645			5,520			(188	)		(3	)

Total liabilities and shareholders’ equity	$	54,193		$	52,770		$	53,369		$	54,146		$	52,717		$	1,476			3	%


(1)		For purposes of this analysis, NALs are reflected in the average balances of loans.

Table 7 — Consolidated Quarterly Net Interest Margin Analysis


	Average Rates (2)
	2011									2010
Fully-taxable equivalent basis (1)	Third			Second			First			Fourth			Third
Assets
Interest-bearing deposits in banks		0.04	%		0.22	%		0.11	%		0.63	%		0.21	%
Trading account securities		1.41			1.59			1.37			1.98			1.20
Federal funds sold and securities purchased under resale agreement		—			0.09			—			—			—
Loans held for sale		4.46			4.97			4.08			4.01			5.75
Available-for-sale and other securities:
Taxable		2.43			2.59			2.53			2.42			2.77
Tax-exempt		4.17			4.02			4.70			4.59			4.70

Total available-for-sale and other securities		2.52			2.66			2.63			2.52			2.84
Held-to-maturity securities — taxable		3.04			2.96			—			—			—
Loans and leases: (3)
Commercial:
Commercial and industrial		4.13			4.31			4.57			4.94			5.14
Commercial real estate:
Construction		3.87			3.37			3.36			3.07			2.83
Commercial		3.91			3.90			3.93			3.92			3.91

Commercial real estate		3.91			3.84			3.88			3.83			3.76

Total commercial		4.06			4.16			4.34			4.56			4.64

Consumer:
Automobile		4.89			5.06			5.22			5.46			5.79
Home equity		4.45			4.49			4.54			4.64			4.74
Residential mortgage		4.47			4.62			4.76			4.82			4.97
Other consumer		7.57			7.76			7.85			7.92			7.10

Total consumer		4.68			4.79			4.90			5.04			5.19

Total loans and leases		4.37			4.47			4.61			4.79			4.90

Total earning assets		4.02	%		4.14	%		4.24	%		4.29	%		4.49	%

Liabilities
Deposits:
Demand deposits — noninterest-bearing		—	%		—	%		—	%		—	%		—	%
Demand deposits — interest-bearing		0.10			0.09			0.09			0.13			0.17
Money market deposits		0.41			0.40			0.50			0.77			0.86
Savings and other domestic deposits		0.69			0.74			0.81			0.90			0.99
Core certificates of deposit		1.95			2.04			2.07			2.11			2.31

Total core deposits		0.77			0.82			0.89			1.05			1.18
Other domestic time deposits of $250,000 or more		0.93			1.01			1.08			1.21			1.28
Brokered deposits and negotiable CDs		0.77			0.89			1.11			1.53			2.21
Deposits in foreign offices		0.26			0.26			0.20			0.17			0.22

Total deposits		0.77			0.82			0.90			1.06			1.21
Short-term borrowings		0.16			0.16			0.18			0.20			0.22
Federal Home Loan Bank advances		0.32			0.88			2.98			0.95			1.25
Subordinated notes and other long-term debt		2.43			2.39			2.34			2.15			2.15

Total interest-bearing liabilities		0.86	%		0.91	%		0.99	%		1.11	%		1.25	%

Net interest rate spread		3.11	%		3.19	%		3.21	%		3.16	%		3.24	%
Impact of noninterest-bearing funds on margin		0.23			0.21			0.21			0.21			0.21


Net interest margin		3.34	%		3.40	%		3.42	%		3.37	%		3.45	%


(1)		FTE yields are calculated assuming a 35% tax rate.

(2)		Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3)		For purposes of this analysis, NALs are reflected in the average balances of loans.

Table 8 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis


	YTD Average Balances												YTD Average Rates (2)
Fully-taxable equivalent basis (1)	Nine Months Ended September 30,						Change						Nine Months Ended September 30,
(dollar amounts in millions)	2011			2010			Amount			Percent			2011			2010
Assets
Interest-bearing deposits in banks	$	141		$	313		$	(172	)		(55)	%		0.12	%		0.20	%
Trading account securities		116			111			5			5			1.46			1.68
Federal funds sold and securities purchased under resale agreement		7			—			7			—			0.09			—
Loans held for sale		279			445			(166	)		(37	)		4.39			5.36
Available-for-sale and other securities:
Taxable		8,475			8,428			47			1			2.52			2.85
Tax-exempt		434			399			35			9			4.30			4.56

Total available-for-sale and other securities		8,909			8,827			82			1			2.61			2.93
Total held-to-maturity securities		282			—			282			—			3.00			—
Loans and leases: (3)
Commercial:
Commercial and industrial		13,387			12,317			1,070			9			4.33			5.35
Commercial real estate:
Construction		612			1,224			(612	)		(50	)		3.55			2.69
Commercial		5,676			6,145			(469	)		(8	)		3.91			3.73

Commercial real estate		6,288			7,369			(1,081	)		(15	)		3.88			3.56

Total commercial		19,675			19,686			(11	)		—			4.19			4.68

Consumer:
Automobile		5,958			4,678			1,280			27			5.05			6.27
Home equity		7,869			7,550			319			4			4.49			5.20
Residential mortgage		4,607			4,491			116			3			4.61			4.85
Other consumer		539			690			(151	)		(22	)		7.73			6.98

Total consumer		18,973			17,409			1,564			9			4.79			5.46

Total loans and leases		38,648			37,095			1,553			4			4.48			5.05

Allowance for loan and lease losses		(1,141	)		(1,466	)		325			(22	)

Net loans and leases		37,507			35,629			1,878			5

Total earning assets		48,382			46,791			1,591			3			4.14	%		4.64	%

Cash and due from banks		1,358			1,629			(271	)		(17	)
Intangible assets		652			709			(57	)		(8	)
All other assets		4,196			4,381			(185	)		(4	)

Total assets	$	53,447		$	52,044		$	1,403			3	%


Liabilities and Shareholders’ Equity
Deposits:
Demand deposits — noninterest-bearing	$	7,958		$	6,748		$	1,210			18	%		—	%		—	%
Demand deposits — interest-bearing		5,499			5,667			(168	)		(3	)		0.10			0.20
Money market deposits		13,230			11,267			1,963			17			0.44			0.92
Savings and other domestic deposits		4,744			4,643			101			2			0.75			1.08
Core certificates of deposit		8,017			9,371			(1,354	)		(14	)		2.02			2.65

Total core deposits		39,448			37,696			1,752			5			0.83			1.34
Other domestic time deposits of $250,000 or more		486			683			(197	)		(29	)		1.02			1.36
Brokered deposits and negotiable CDs		1,426			1,613			(187	)		(12	)		0.92			2.43
Deposits in foreign offices		374			421			(47	)		(11	)		0.24			0.20

Total deposits		41,734			40,413			1,321			3			0.83			1.38
Short-term borrowings		2,166			1,214			952			78			0.17			0.21
Federal Home Loan Bank advances		138			193			(55	)		(28	)		0.64			1.94
Subordinated notes and other long-term debt		3,266			3,855			(589	)		(15	)		2.38			2.15

Total interest-bearing liabilities		39,346			38,927			419			1			0.92			1.42

All other liabilities		975			941			34			4
Shareholders’ equity		5,168			5,428			(260	)		(5	)

Total liabilities and shareholders’ equity	$	53,447		$	52,044		$	1,403			3	%

Net interest rate spread														3.17			3.22
Impact of noninterest-bearing funds on margin														0.22			0.24

Net interest margin														3.39	%		3.46	%


(1)		FTE yields are calculated assuming a 35% tax rate.

(2)		Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3)		For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

2011 First Nine Months versus 2010 First Nine Months

Fully-taxable equivalent net interest income for the nine-month period of 2011 increased $14.7 million, or 1%, from the comparable year-ago period. This reflected the benefit of a 3% increase in average total earning assets partially offset by a decrease in the net interest margin to 3.39% from 3.46%. The increase in average earning assets reflected a combination of factors including:

•

$1.6 billion, or 4%, increase in average total loans and leases.

•

$0.4 billion, or 4%, increase in average total available-for-sale and other and held-to-maturity securities.

The 7 basis point decrease in the net interest margin reflected reduction in derivatives income, lower loan and securities yields, partially offset by the positive impact of increases in low cost deposits and improved deposit pricing.

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

Table 9 — Average Loans/Leases and Deposits — 2011 First Nine Months vs. 2010 First Nine Months


	Nine Months Ended September 30,				Change
(dollar amounts in millions)	2011		2010		Amount			Percent
Loans/Leases
Commercial and industrial	$	13,387	$	12,317	$	1,070			9	%
Commercial real estate		6,288		7,369		(1,081	)		(15	)

Total commercial		19,675		19,686		(11	)		—
Automobile		5,958		4,678		1,280			27
Home equity		7,869		7,550		319			4
Residential mortgage		4,607		4,491		116			3
Other consumer		539		690		(151	)		(22	)

Total consumer		18,973		17,409		1,564			9

Total loans and leases	$	38,648	$	37,095	$	1,553			4	%


Deposits
Demand deposits — noninterest-bearing	$	7,958	$	6,748	$	1,210			18	%
Demand deposits — interest-bearing		5,499		5,667		(168	)		(3	)
Money market deposits		13,230		11,267		1,963			17
Savings and other domestic deposits		4,744		4,643		101			2
Core certificates of deposit		8,017		9,371		(1,354	)		(14	)

Total core deposits		39,448		37,696		1,752			5
Other deposits		2,286		2,717		(431	)		(16	)

Total deposits	$	41,734	$	40,413	$	1,321			3	%

The $1.6 billion, or 4%, increase in average total loans and leases primarily reflected:

•

$1.3 billion, or 27%, increase in the average automobile portfolio. Automobile lending is a core competency and continued area of growth. The growth from the year-ago period exhibited further penetration within our historical geographic footprint, as well as the positive impact of our expansion into Eastern Pennsylvania and selected New England states. Origination quality remained high.

•

$1.1 billion, or 9%, increase in the average C&I portfolio. Growth from the year-ago period reflected the benefits from our strategic initiatives including large corporate, asset based lending, business banking, automobile floor plan lending, and equipment finance. Traditional middle-market loans continued to grow despite line utilization rates that remain well below historical norms.

•

$0.3 billion, or 4%, increase in the average home equity portfolio, reflecting higher originations and continued slower runoff.

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 AULC at levels appropriate to absorb our estimate of inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.

The provision for credit losses for the 2011 third quarter was $43.6 million, an increase of $7.8 million, or 22%, from the prior quarter, reflecting the combination of strong loan growth and the expectation of a weaker and prolonged economic recovery. These factors were partially offset by a combination of lower NCOs and commercial Criticized loans. The reduction in commercial Criticized loans reflected the resolution of problem credits for which reserves had been previously established. The current quarter’s provision for credit losses was $47.0 million less than total NCOs.

Compared to the year-ago quarter, provision for credit losses declined $75.6 million, or 63%. The provision for credit losses for the first nine-month period of 2011 was $128.8 million, down $418.8 million, or 76%, from the year-ago period. These declines reflected the combination of lower NCOs and commercial Criticized loans as noted above. The provision for credit losses for the first nine-month period of 2011 was $224.4 million less than total NCOs (see Credit Quality discussion).

Noninterest Income

The following table reflects noninterest income for each of the past five quarters:

Table 10 — Noninterest Income


	2011							2010						3Q11 vs 3Q10						3Q11 vs 2Q11
(dollar amounts in thousands)	Third			Second		First		Fourth			Third			Amount			Percent			Amount			Percent
Service charges on deposit accounts	$	65,184		$	60,675	$	54,324	$	55,810		$	65,932		$	(748	)		(1	)%	$	4,509			7	%
Mortgage banking income		12,791			23,835		22,684		53,169			52,045			(39,254	)		(75	)		(11,044	)		(46	)
Trust services		29,473			30,392		30,742		29,394			26,997			2,476			9			(919	)		(3	)
Electronic banking		32,714			31,728		28,786		28,900			28,090			4,624			16			986			3
Insurance income		17,220			16,399		17,945		19,678			19,801			(2,581	)		(13	)		821			5
Brokerage income		20,349			20,819		20,511		16,953			16,575			3,774			23			(470	)		(2	)
Bank owned life insurance income		15,644			17,602		14,819		16,113			14,091			1,553			11			(1,958	)		(11	)
Automobile operating lease income		5,890			7,307		8,847		10,463			11,356			(5,466	)		(48	)		(1,417	)		(19	)
Securities gains (losses)		(1,350	)		1,507		40		(103	)		(296	)		(1,054	)		356			(2,857	)		(190	)
Other income		60,644			45,503		38,247		33,843			32,552			28,092			86			15,141			33

Total noninterest income	$	258,559		$	255,767	$	236,945	$	264,220		$	267,143		$	(8,584	)		(3	)%	$	2,792			1	%

2011 Third Quarter versus 2010 Third Quarter

The $8.6 million, or 3%, decrease in total noninterest income from the year-ago quarter reflected:

•

$39.3 million, or 75%, decrease in mortgage banking income. This primarily reflected a $21.4 million decrease in net MSR activity and a $20.2 million, or 56%, decrease in origination and secondary marketing income, as originations decreased 41% from the year-ago quarter.

•

$5.5 million, or 48%, decline in automobile operating lease income reflecting the impact of a declining portfolio as a result of having exited that business in 2008.

Partially offset by:

•

$28.1 million, or 86%, increase in other income, of which $15.5 million related to the automobile loan securitization. Also contributing to the growth were increases totaling $6.4 million from the sale of interest rate protection products and capital markets activities.

•

$4.6 million, or 16%, increase in electronic banking income, reflecting an increase in debit card transaction volume and new account growth.

•

$3.8 million, or 23%, increase in brokerage income, primarily reflecting increased sales of investment products.

2011 Third Quarter versus 2011 Second Quarter

The $2.8 million, or 1%, increase in total noninterest income from the prior quarter reflected:

•

$15.1 million, or 33%, increase in other income, reflecting a $15.5 million automobile loan securitization gain on sale, $2.8 million higher market-related gains and capital markets income; partially offset by a $5.8 million reduction in SBA-related servicing income.

•

$4.5 million, or 7%, increase in service charges on deposit accounts, primarily reflecting an increase in personal services charges, mostly due to strong customer growth.

Partially offset by:

•

$11.0 million, or 46%, decline in mortgage banking income reflecting a $13.9 million decrease in net MSR activity, partially offset by a $4.1 million, or 36%, increase in origination and secondary marketing income.

•

$1.4 million securities loss in the current period compared with a $1.5 million securities gain in the second quarter.

2011 First Nine Months versus 2010 First Nine Months

Noninterest income for the first nine-month period of 2011 decreased $26.4 million, or 3%, from the comparable year-ago period.

Table 11 — Noninterest Income — 2011 First Nine Months vs. 2010 First Nine Months


	Nine Months Ended September 30,					Change
(dollar amounts in thousands)	2011		2010			Amount			Percent
Service charges on deposit accounts	$	180,183	$	211,205		$	(31,022	)		(15)	%
Mortgage banking income		59,310		122,613			(63,303	)		(52	)
Trust services		90,607		83,161			7,446			9
Electronic banking		93,228		81,334			11,894			15
Insurance income		51,564		56,735			(5,171	)		(9	)
Brokerage income		61,679		51,901			9,778			19
Bank owned life insurance income		48,065		44,953			3,112			7
Automobile operating lease income		22,044		35,501			(13,457	)		(38	)
Securities gains (losses)		197		(171	)		368			N.R.
Other income		144,394		90,406			53,988			60


Total noninterest income	$	751,271	$	777,638		$	(26,367	)		(3)	%


N.R.		- Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.

The $26.4 million, or 3%, decrease in total noninterest income reflected:

•

$63.3 million, or 52%, decrease in mortgage banking income. This primarily reflected a $46.2 million decrease in net MSR activity and a $22.2 million, or 32%, decrease in origination and secondary marketing income, as originations decreased 23% from the year-ago period.

•

$31.0 million, or 15%, decline in service charges on deposit accounts, reflecting lower personal service charges due to the implementation of the amendment to Reg E and our “Fair Play” consumer banking initiatives.

•

$13.5 million, or 38%, decline in automobile operating lease income reflecting the impact of a declining portfolio as a result of having exited that business in 2008.

Partially offset by:

•

$54.0 million, or 60%, increase in other income, of which $19.3 million was associated with SBA-related loan fees and gains from SBA loan sales, and a $15.5 million automobile loan securitization gain on sale. Also contributing to the growth were increases totaling $13.4 million from the sale of interest rate protection products and capital markets activities.

•

$11.9 million, or 15%, increase in electronic banking income, reflecting an increase in debit card transaction volume and new account growth.

•

$9.8 million, or 19%, increase in brokerage income, primarily reflecting increased sales of investment products.

•

$7.4 million, or 9%, increase in trust services income, due to a $0.8 billion increase in assets under management. This increase reflected improved market values and net growth in accounts.

For additional information regarding noninterest income, see the Legislative and Regulatory section located within the Executive Overview.

Noninterest Expense

(This section should be read in conjunction with Significant Item 1.)

The following table reflects noninterest expense for each of the past five quarters:

Table 12 — Noninterest Expense


	2011						2010				3Q11 vs 3Q10						3Q11 vs 2Q11
(dollar amounts in thousands)	Third		Second		First		Fourth		Third		Amount			Percent			Amount			Percent

Personnel costs	$	226,835	$	218,570	$	219,028	$	212,184	$	208,272	$	18,563			9	%	$	8,265			4	%
Outside data processing and other services		49,602		43,889		40,282		40,943		38,553		11,049			29			5,713			13
Net occupancy		26,967		26,885		28,436		26,670		26,718		249			1			82			—
Deposit and other insurance expense		17,492		23,823		17,896		23,320		23,406		(5,914	)		(25	)		(6,331	)		(27	)
Professional services		20,281		20,080		13,465		21,021		20,672		(391	)		(2	)		201			1
Equipment		22,262		21,921		22,477		22,060		21,651		611			3			341			2
Marketing		22,251		20,102		16,895		16,168		20,921		1,330			6			2,149			11
Amortization of intangibles		13,387		13,386		13,370		15,046		15,145		(1,758	)		(12	)		1			—
OREO and foreclosure expense		4,668		4,398		3,931		10,502		12,047		(7,379	)		(61	)		270			6
Automobile operating lease expense		4,386		5,434		6,836		8,142		9,159		(4,773	)		(52	)		(1,048	)		(19	)
Other expense		30,987		29,921		48,083		38,537		30,765		222			1			1,066			4

Total noninterest expense	$	439,118	$	428,409	$	430,699	$	434,593	$	427,309	$	11,809			3	%	$	10,709			2	%

Number of employees (full-time equivalent), at period-end		11,473		11,457		11,319		11,341		11,279		194			2	%		16			—	%

2011 Third Quarter versus 2010 Third Quarter

The $11.8 million, or 3%, increase in total noninterest expense from the year-ago quarter reflected:

•

$18.6 million, or 9%, increase in personnel costs, primarily reflecting a 2% increase in full-time equivalent staff in support of strategic initiatives, as well as higher benefit-related expenses, including $4.2 million of healthcare related costs.

•

$11.0 million, or 29%, increase in outside data processing and other service, reflecting the costs associated with the conversion to a new debit card processor and outside services supporting increased regulations.

Partially offset by:

•

$7.4 million, or 61%, decrease in OREO and foreclosure expense.

•

$5.9 million, or 25%, decline in deposit and other insurance expenses.

•

$4.8 million, or 52%, decline in automobile operating lease expense as that portfolio continued to run-off having exited that business in 2008.

2011 Third Quarter versus 2011 Second Quarter

The $10.7 million, or 2%, increase in total noninterest expense from the prior quarter reflected:

•

$8.3 million, or 4%, increase in personnel costs, primarily reflecting higher salaries, severance, and healthcare costs.

•

$5.7 million, or 13%, increase in outside data processing and other services, reflecting the costs associated with the conversion to a new debit card processor and the implementation of strategic initiatives.

Partially offset by:

•

$6.3 million, or 27%, decline in deposit and other insurance expenses.

2011 First Nine Months versus 2010 First Nine Months

Noninterest expense for the first nine-month period of 2011 increased $59.0 million, or 5%, from the comparable year-ago period.

Table 13 — Noninterest Expense — 2011 First Nine Months vs. 2010 First Nine Months


	Nine Months Ended September 30,				Change
(dollar amounts in thousands)	2011		2010		Amount			Percent
Personnel costs	$	664,433	$	586,789	$	77,644			13	%
Outside data processing and other services		133,773		118,305		15,468			13
Net occupancy		82,288		81,192		1,096			1
Deposit and other insurance expense		59,211		74,228		(15,017	)		(20	)
Professional services		53,826		67,757		(13,931	)		(21	)
Equipment		66,660		63,860		2,800			4
Marketing		59,248		49,756		9,492			19
Amortization of intangibles		40,143		45,432		(5,289	)		(12	)
OREO and foreclosure expense		12,997		28,547		(15,550	)		(54	)
Automobile operating lease expense		16,656		28,892		(12,236	)		(42	)
Other expense		108,991		94,455		14,536			15

Total noninterest expense	$	1,298,226	$	1,239,213	$	59,013			5	%

The $59.0 million, or 5%, increase in total noninterest expense reflected:

•

$77.6 million, or 13%, increase in personnel costs, primarily reflecting an increase in full-time equivalent staff in support of strategic initiatives, as well as higher benefit related expenses, including the reinstatement of our 401(k) plan matching contribution in May of 2010.

•

$15.5 million, or 13%, increase in outside data processing and other service, reflecting the costs associated with the conversion to a new debit card processor and the implementation of strategic initiatives.

•

$14.5 million, or 15%, increase in other expense, primarily reflecting the 2011 first quarter $17.0 million addition to litigation reserves (see Significant Items).

•

$9.5 million, or 19%, increase in marketing expense, reflecting higher advertising costs.

Partially offset by:

•

$15.6 million, or 54%, decline in OREO and foreclosure expenses as OREO balances declined 69% in the current period.

•

$15.0 million, or 20%, decrease in deposit and other insurance expenses.

•

$13.9 million, or 21%, decrease in professional services, reflecting lower legal costs, as collection activities declined, and consulting expenses.

•

$12.2 million, or 42%, decline in automobile operating lease expense as that portfolio continued to run-off having exited that business in 2008.

Provision for Income Taxes

(This section should be read in conjunction with Significant Item 2.)

The provision for income taxes in the 2011 third quarter was $38.9 million. This compared with a provision for income taxes of $49.0 million in the 2011 second quarter and a provision for income taxes of $29.7 million in the 2010 third quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. At September 30, 2011, we had a net deferred tax asset of $364.2 million. Based on both positive and negative evidence and our level of forecasted future taxable income, there was no impairment to the deferred tax asset at September 30, 2011. The total disallowed deferred tax asset for regulatory capital purposes decreased to $19.4 million at September 30, 2011 compared to the total disallowed deferred tax asset of $48.2 million at June 30, 2011.

The IRS completed audits of our consolidated federal income tax returns for tax years through 2007. In the third quarter 2011, the IRS began its examination of our 2008 and 2009 consolidated federal income tax returns. The IRS, various states, and other jurisdictions remain open to examination, including Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and Illinois. The IRS has proposed adjustments to our previously filed tax returns. We believe our tax positions related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. It is possible the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. However, although no assurance can be given, we believe the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position.

RISK MANAGEMENT AND CAPITAL

Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. We manage risk to an aggregate moderate-to-low risk profile through a control framework and by monitoring and responding to identified potential risks. We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2010 Form 10-K and subsequent filings with the SEC. Additionally, the MD&A included in our 2010 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2010 Form 10-K. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2010 Form 10-K.

Credit Risk

Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have credit risk associated with our available-for-sale and other investment and held-to-maturity securities portfolios (see Note 4 and Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking and for trading activities. Given the current level of global financial issues, we believe it is important to provide clarity around our exposure in this specific area. While there is credit risk associated with derivative activity, we believe this exposure is minimal. The significant change in the economic conditions and the resulting changes in borrower behavior over the past several years resulted in our continuing focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we added more quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. The continued expansion of our portfolio management resources demonstrates our commitment to maintaining an aggregate moderate-to-low risk profile.

Loan and Lease Credit Exposure Mix

At September 30, 2011, our loans and leases totaled $39.0 billion, representing a $0.9 billion, or 2%, increase compared to $38.1 billion at December 31, 2010, primarily reflecting growth in the C&I, residential mortgage, and home equity portfolios. The automobile portfolio was little changed reflecting the 2011 third quarter automobile securitization (see Automobile Portfolio discussion). The CRE portfolio continued to decline reflecting our planned strategy to reduce our CRE exposure.

At September 30, 2011, commercial loans and leases totaled $19.9 billion, and represented 51% of our total credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint and is comprised of the following (see Commercial Credit discussion):

C&I — C&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a function of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we look to grow our C&I portfolio, we have further developed our ABL capabilities by adding experienced ABL professionals to take advantage of market opportunities resulting in better leveraging of the manufacturing base in our primary markets. Also, our Equipment Finance area is targeting larger equipment financings in the manufacturing sector in addition to our core products. We also expanded our large corporate banking group with sufficient resources to ensure we appropriately recognize and manage the risks associated with these types of lending.

CRE — CRE loans consist of loans for income-producing real estate properties, real estate investment trusts, and real estate developers. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers, and are repaid through cash flows related to the operation, sale, or refinance of the property.

Construction CRE — Construction CRE loans are loans to individuals, companies, or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, residential (land, single family, and condominiums), office, and warehouse product types. Generally, these loans are for construction projects that have been presold or preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in each project. These loans are underwritten and managed by a specialized real estate lending group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.

Total consumer loans and leases were $19.1 billion at September 30, 2011, and represented 49% of our total loan and lease credit exposure. The consumer portfolio was primarily diversified among home equity loans and lines-of-credit, residential mortgages, and automobile loans and leases (see Consumer Credit discussion).

Automobile — Automobile loans and leases are primarily comprised of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. No state outside of our primary banking markets represented more than 3% of our total automobile portfolio at September 30, 2011.

Home equity — Home equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first-lien or second-lien on the borrower’s residence, allows customers to borrow against the equity in their home. Given the current low interest rate environment, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home. As a result, the proportion of the home equity portfolio secured by a first-lien has increased significantly over the past three years, positively impacting the portfolio’s risk profile. The credit risk profile is substantially reduced when we hold a first-lien position. During the first nine-month period of 2011, more than 65% of our home equity portfolio originations were secured by a first-lien mortgage. The first-lien position combined with continued high average FICO scores significantly reduces the PD associated with these loans. The combination provides a strong base when assessing the expected future performance of this portfolio. Real estate market values at the time of origination directly affect the amount of credit extended and, in the event of default, subsequent changes in these values impact the severity of losses. We actively manage the extension of credit and the amount of credit extended through a combination of criteria including financial position, debt-to-income policies and LTV policy limits.

Residential mortgage — Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Generally, our practice is to sell a significant portion of our fixed-rate originations in the secondary market. As such, the majority of the loans in our portfolio are ARMs. These ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually. These loans comprised approximately 53% of our total residential mortgage loan portfolio at September 30, 2011. We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. This activity has increased recently reflecting the overall market conditions and GSE activity and an appropriate level of allowance has been established to address the repurchase risk inherent in the portfolio (refer to the Operational Risk section for additional discussion).

Other consumer — This portfolio primarily consists of consumer loans not secured by real estate or automobiles, including personal unsecured loans.

Table 14 — Loan and Lease Portfolio Composition


	2011												2010
(dollar amounts in millions)	September 30,				June 30,				March 31,				December 31,				September 30,
Commercial:⁽¹⁾
Commercial and industrial	$	13,939	36	%	$	13,544	34	%	$	13,299	35	%	$	13,063	34	%	$	12,425	33	%
Commercial real estate:
Construction		520	1			591	2			587	2			650	2			738	2
Commercial		5,414	14			5,573	14			5,711	15			6,001	16			6,174	16

Total commercial real estate		5,934	15			6,164	16			6,298	17			6,651	18			6,912	18

Total commercial		19,873	51			19,708	50			19,597	52			19,714	52			19,337	51

Consumer:
Automobile		5,558	14			6,190	16			5,802	15			5,614	15			5,385	14
Home equity		8,079	21			7,952	20			7,784	20			7,713	20			7,690	21
Residential mortgage		4,986	13			4,751	12			4,517	12			4,500	12			4,511	12
Other consumer		516	1			525	2			546	1			566	1			578	2

Total consumer		19,139	49			19,418	50			18,649	48			18,393	48			18,164	49

Total loans and leases	$	39,012	100	%	$	39,126	100	%	$	38,246	100	%	$	38,107	100	%	$	37,501	100	%


(1)		There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.

The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease:

Table 15 — Loan and Lease Portfolio by Collateral Type


	2011												2010
(dollar amounts in millions)	September 30,				June 30,				March 31,				December 31,				September 30,
Secured loans:
Real estate — commercial	$	9,554	24	%	$	9,781	25	%	$	9,931	26	%	$	10,389	27	%	$	10,516	28	%
Real estate — consumer		13,065	33			12,703	32			12,300	32			12,214	32			12,201	33
Vehicles		6,898	18			7,594	19			7,333	19			7,134	19			6,652	18
Receivables/Inventory		4,297	11			4,171	11			3,819	10			3,763	10			3,524	9
Machinery/Equipment		1,864	5			1,784	5			1,787	5			1,766	5			1,763	5
Securities/Deposits		805	2			802	2			778	2			734	2			730	2
Other		1,103	3			1,095	3			1,139	3			990	2			1,097	2

Total secured loans and leases		37,586	96			37,930	97			37,087	97			36,990	97			36,483	97
Unsecured loans and leases		1,426	4			1,196	3			1,159	3			1,117	3			1,018	3


Total loans and leases	$	39,012	100	%	$	39,126	100	%	$	38,246	100	%	$	38,107	100	%	$	37,501	100	%

Commercial Credit

In commercial lending, on-going credit management is dependent on the type and nature of the loan. We monitor all significant exposures on an on-going basis. All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s PD and LGD (severity of loss). This two-dimensional rating methodology provides granularity in the portfolio management process. The PD is rated and applied at the borrower level. The LGD is rated and applied based on the specific type of credit extension and the quality and lien position associated with the underlying collateral. The internal risk ratings are assessed at origination and updated at each periodic monitoring event. There is also extensive macro portfolio management analysis on an on-going basis. As an example, the retail properties class of the CRE portfolio and manufacturing loans within the C&I portfolio have each received more frequent evaluation at the individual loan level given the weak environment and our portfolio composition. We continually review and adjust our risk-rating criteria based on actual experience, which provides us with the current risk level in the portfolio and is the basis for determining an appropriate allowance amount for this portfolio.

Our Credit Review group performs testing to provide an independent review and assessment of the quality and / or risk of new loan originations. This group is part of our Risk Management area, and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, as well as test the consistency of credit processes. Similarly, to provide consistent oversight, a centralized portfolio management team monitors and reports on the performance of small business loans, which are included within the commercial loan portfolio.

Our standardized loan grading system considers many components that directly correlate to loan quality and likelihood of repayment, one of which is guarantor support. On an annual basis, or more frequently if warranted, we consider, among other things, the guarantor’s reputation and creditworthiness, along with various key financial metrics such as liquidity and net worth. Our assessment of the guarantor’s credit strength is reflected in our risk ratings for such loans. The risk rating is directly tied to, and an integral component of, our allowance for loan loss methodology. When our assessment of the guarantor’s credit strength demonstrates an inherent capacity to perform, we will seek repayment from the guarantor as part of the collection process and have successfully negotiated repayment from guarantors as part of our overall credit risk management process. When a loan goes to impaired status, viable guarantor support is considered in the determination of the recognition of a loan loss.

Substantially all loans categorized as Classified (see Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements) are managed by our SAD. The SAD is a specialized group of credit professionals that handle the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing and implementing action plans, assessing risk ratings, and determining the adequacy of the allowance, the accrual status, and the ultimate collectability of the Classified loan portfolio.

Our commercial portfolio is diversified by product type, customer size, and geography throughout our footprint. No outstanding commercial loans and leases comprised an industry or geographic concentration of lending. Certain segments of our commercial portfolio are discussed in further detail below.

C&I PORTFOLIO

We manage the risks inherent in this portfolio through origination policies, concentration limits, on-going loan level reviews and portfolio level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as LTV and debt service coverage ratios, as applicable.

While C&I borrowers have been challenged by the weak economy, problem loans have trended downward, reflecting a combination of proactive risk identification as well as some relative improvement in the economic conditions. Nevertheless, some borrowers may no longer have sufficient capital to withstand the extended stress. As a result, these borrowers may not be able to comply with the original terms of their credit agreements. We continue to focus attention on the portfolio management process to proactively identify borrowers that may be facing financial difficulty and to assess all potential solutions. The impact of the economic environment is further evidenced by the level of line-of-credit activity, as borrowers continued to maintain relatively low utilization percentages.

As shown in the following table, C&I loans and leases totaled $13.9 billion at September 30, 2011:

Table 16 — Commercial and Industrial Loans and Leases by Class


	September 30, 2011
	Commitments					Loans Outstanding
(dollar amounts in millions)	Amount		Percent			Amount		Percent
Class:
Owner occupied	$	4,390		21	%	$	3,978		29	%
Other commercial and industrial		17,020		79			9,961		71


Total	$	21,410		100	%	$	13,939		100	%

The difference in the composition between the commitments and loans and leases outstanding in the other commercial and industrial class results from a significant amount of working capital lines-of-credit and businesses have reduced these borrowings. The funding percentage associated with the lines-of-credit has been a significant indicator of credit quality. Generally, borrowers that fully utilize their line-of-credit consistently, over time, have a higher risk profile. The overall funding rate on the commercial lines-of-credit has declined compared to pre-2008 levels as borrowers have limited their borrowing and focused on maintaining high liquidity and reducing debt. Line-of-credit utilization is one of many credit risk factors we utilize in assessing the credit risk portfolio of individual borrowers and the overall portfolio.

CRE PORTFOLIO

We manage the risks inherent in this portfolio specific to CRE lending, focusing on the quality of the developer, and the specifics associated with each project. Generally, we: (1) limit our loans to 80% of the appraised value of the commercial real estate, (2) require net operating cash flows to be 125% of required interest and principal payments, and (3) if the commercial real estate is nonowner occupied, require that at least 50% of the space of the project be preleased. Additionally, we established a limit to our CRE exposure of no more than our amount of Tier 1 Capital plus the ACL. We have been actively reducing our CRE exposure during the past three years, and our CRE exposure was below this established limit at September 30, 2011.

Each CRE loan is classified as either core or noncore. We separated the CRE portfolio into these categories in order to provide more clarity around our portfolio management strategies and to provide an additional level of transparency. We believe segregating the noncore CRE from core CRE improves our ability to understand the nature, performance prospects, and problem resolution opportunities, thus allowing us to continue to deal proactively with any emerging credit issues.

A CRE loan is generally considered core when the borrower is an experienced, well-capitalized developer in our Midwest footprint, and has either an established meaningful relationship with us that generates an acceptable return on capital or demonstrates the prospect of becoming one. The core CRE portfolio was $3.9 billion at September 30, 2011, representing 65% of total CRE loans. The performance of the core portfolio met our expectations based on the consistency of the asset quality metrics within the portfolio. Based on our extensive project level assessment process, including forward-looking collateral valuations, we continue to believe the credit quality of the core portfolio is stable.

A CRE loan is generally considered noncore based on the lack of a substantive relationship outside of the loan product, with no immediate prospects for meeting the core relationship criteria. The noncore CRE portfolio declined from $2.6 billion at December 31, 2010, to $2.1 billion at September 30, 2011, and represented 35% of total CRE loans. Of the loans in the noncore portfolio at September 30, 2011, 66% were categorized as Pass, 95% had guarantors, 99% were secured, and 95% were located within our geographic footprint. However, it is within the noncore portfolio where most of the credit quality challenges exist. For example, $0.2 billion, or 11%, of related outstanding balances, are classified as NALs. SAD administered $0.9 billion, or 44%, of total noncore CRE loans at September 30, 2011. We expect to exit the majority of noncore CRE relationships over time through normal repayments and refinancings, possible sales should economically attractive opportunities arise, or the reclassification to a core CRE relationship if it expands to meet the core criteria.

The table below provides a segregation of the CRE portfolio as of September 30, 2011:

Table 17 — Core Commercial Real Estate Loans by Property Type and Property Location


	September 30, 2011
													West
(dollar amounts in millions)	Ohio		Michigan		Pennsylvania		Indiana		Kentucky		Florida		Virginia		Other		Total		%
Core portfolio:
Retail properties	$	505	$	64	$	69	$	84	$	9	$	39	$	29	$	363	$	1,162		20	%
Office		337		105		93		17		11		—		39		56		658		11
Multi family		217		91		66		35		28		1		27		56		521		9
Industrial and warehouse		222		66		21		49		3		2		5		82		450		8
Other commercial real estate		701		121		37		38		—		19		53		111		1,080		18

Total core portfolio		1,982		447		286		223		51		61		153		668		3,871		65
Total noncore portfolio		1,149		350		123		173		28		100		40		100		2,063		35


Total	$	3,131	$	797	$	409	$	396	$	79	$	161	$	193	$	768	$	5,934		100	%

Credit quality data regarding the ACL and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table:

Table 18 — Commercial Real Estate — Core vs. Noncore Portfolios

September 30, 2011

Ending

Nonaccrual

(dollar amounts in millions)

Balance

Prior NCOs

ACL $

ACL %

Credit Mark (1)

Loans

Total core

3,871

122

3.15

3.55

Noncore — SAD (2)

910

286

213

23.41

41.72

202

Noncore — Other

1,153

7.72

8.83

Total noncore

2,063

300

302

14.64

25.48

232

Total commercial real estate

5,934

316

424

7.15

11.84

257


	December 31, 2010
Total core	$	4,042	$	5	$	160	3.96	%	4.08	%	$	16

Noncore — SAD (2)		1,400		379		329	23.50		39.80			307
Noncore — Other		1,209		5		105	8.68		9.06			41

Total noncore		2,609		384		434	16.63		27.33			348

Total commercial real estate	$	6,651	$	389	$	594	8.93	%	13.96	%	$	364


(1)		Calculated as (Prior NCOs + ACL $) / (Ending Balance + Prior NCOs).

(2)		Noncore loans managed by SAD, the area responsible for managing loans and relationships designated as Classified Loans.

As shown in the above table, the ending balance of the CRE portfolio at September 30, 2011, declined $0.7 billion, or 11%, compared with December 31, 2010. Of this decline, 68% occurred in the noncore segment of the portfolio administered by the SAD, and was a result of payoffs and NCOs as we actively focus on the noncore portfolio to reduce our overall CRE exposure. This reduction demonstrates our continued commitment to achieving a materially lower risk profile in the CRE portfolio, consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. We anticipate further significant declines in the noncore segment, consistent with our strategy to continue to reduce our overall CRE exposure. The reduction in the core segment is a result of normal portfolio attrition combined with limited origination activity. We will continue to support our core developer customers as appropriate, however, we do not believe that significant additional CRE activity is appropriate given our current exposure in CRE lending and the current economic conditions.

Also as shown above, substantial reserves for the noncore portfolio have been established. At September 30, 2011, the ACL related to the noncore portfolio was 14.64%, and 23.41% related to the SAD managed noncore portfolio. The combination of the existing ACL and prior NCOs represents the total credit actions taken on each segment of the portfolio. From this data, we calculate a credit mark that provides a consistent measurement of the cumulative credit actions taken against a specific portfolio segment. The 41.72% Credit Mark associated with the SAD-managed noncore portfolio is an indicator of the aggressive portfolio management strategy employed for this portfolio.

Retail Properties

Our portfolio of total CRE loans secured by retail properties totaled $1.6 billion, or approximately 4%, of total loans and leases, at September 30, 2011. Loans within this portfolio segment declined $0.1 billion, or 6%, from $1.8 billion at December 31, 2010. Credit approval in this portfolio segment is generally dependent on preleasing requirements, and net operating income from the project must cover debt service by specified percentages when the loan is fully funded.

The weakness of the economic environment in our geographic regions continued to impact the projects that secure the loans in this portfolio class. Lower occupancy rates, reduced rental rates, and the expectation these levels will remain stressed for the foreseeable future may adversely affect some of our borrowers’ ability to repay these loans. We have increased the level of credit risk management activity on this portfolio segment, and we analyze our retail property loans in detail by combining property type, geographic location, and other data, to assess and manage our credit risks. We review the majority of this portfolio segment on a monthly basis.

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 on-going analysis and review process results in a determination of an appropriate allowance for our consumer loan and lease portfolio.

AUTOMOBILE PORTFOLIO

Our strategy in the automobile portfolio continued to focus on high quality borrowers as measured by both FICO and internal custom scores, combined with appropriate LTVs, terms, and a reasonable level of profitability. Our strategy and operational capabilities allow us to appropriately manage the origination quality across the entire portfolio, including our newer markets. Although increased origination volume and the expansion into new markets can be associated with increased risk levels, we believe our strategy and operational capabilities significantly mitigate these risks.

We have continued to consistently execute our value proposition while taking advantage of market opportunities that allow us to grow our automobile loan portfolio. The significant growth in the portfolio over the past two years was accomplished while maintaining our consistently high credit quality metrics. As we further execute our strategies and take advantage of these opportunities, we are developing alternative plans to address any growth in excess of our established portfolio concentration limits, including both securitizations and loan sales.

During the 2011 third quarter, we transferred automobile loans totaling $1.0 billion to a trust in a securitization transaction. The securitization qualified for sale accounting. As a result of this transaction, we recognized a $15.5 million gain on sale which is reflected in other noninterest income and recorded a $16.0 million servicing asset which is reflected in accrued income and other assets.

RESIDENTIAL-SECURED PORTFOLIOS

The properties securing our residential mortgage and home equity portfolios are primarily located within our footprint. The continued stress on home prices has caused the performance in these portfolios to remain weaker than historical levels. We continue to evaluate all of our policies and processes associated with managing these portfolios to provide as much clarity as possible.

In the 2011 first quarter, we accelerated the timing of charge-off recognition in our residential mortgage portfolio. In addition, we established an immediate charge-off process regardless of the delinquency status for short sale situations. Both of these policy changes resulted in accelerated recognition of residential mortgage charge-offs totaling $6.8 million in the 2011 first quarter. Further, in the 2011 second quarter, we implemented a policy change regarding the placement of loans on nonaccrual status in both our home equity and residential mortgage portfolios. This policy change resulted in accelerated placement of loans on nonaccrual status totaling $6.7 million in the home equity portfolio and $8.0 million in the residential mortgage portfolio.

Table 19 — Selected Home Equity and Residential Mortgage
Portfolio Data
(dollar amounts in millions)


	Home Equity												Residential Mortgage
	Secured by first-lien						Secured by second-lien
	09/30/11			12/31/10			09/30/11			12/31/10			09/30/11			12/31/10
Ending balance	$	3,589		$	3,041		$	4,490		$	4,672		$	4,986		$	4,500
Portfolio weighted average LTV ratio⁽¹⁾		71	%		70	%		80	%		80	%		78	%		77	%
Portfolio weighted average FICO score⁽²⁾		749			745			734			733			731			721


	Home Equity												Residential Mortgage (3)
	Secured by first-lien						Secured by second-lien
	Nine Months Ended September 30,
	2011			2010			2011			2010			2011			2010
Originations	$	1,392		$	922		$	630		$	523		$	1,102		$	1,179
Origination weighted average LTV ratio⁽¹⁾		71	%		69	%		82	%		79	%		84	%		81	%
Origination weighted average FICO score⁽²⁾		768			767			759			756			758			760


(1)		The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination.

(2)		Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination.

(3)		Represents only owned-portfolio originations.

Home Equity Portfolio

Our home equity portfolio (loans and lines-of-credit) consists of both first-lien and second-lien mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios, and LTV ratios. We offer closed-end home equity loans which are generally fixed-rate with principal and interest payments, and variable-rate interest-only home equity lines-of-credit which do not require payment of principal during the 10-year revolving period of the line-of-credit. Applications are underwritten centrally in conjunction with an automated underwriting system.

At September 30, 2011, approximately 44% of our home equity portfolio was secured by first-lien mortgages. The credit risk profile is substantially reduced when we hold a first-lien position. During the first nine-month period of 2011, more than 65% of our home equity portfolio originations were secured by a first-lien mortgage. We focus on high quality borrowers primarily located within our footprint. The majority of our home equity line-of-credit borrowers consistently pay more than the minimum payment required in any given month. Additionally, since we focus on developing complete relationships with our customers, many of our home equity borrowers are utilizing other products and services. The combination of high quality borrowers as measured by financial condition, FICO score, and the lien position status provide a high degree of confidence regarding the performance of the 2009-2011 originations.

Within the home equity line-of-credit portfolio, the standard product is a 10-year interest-only draw period with a balloon payment and represents a majority of the line-of-credit portfolio at September 30, 2011. As previously discussed, a significant portion of recent originations are secured by first-liens on the property as high quality borrowers take advantage of the low variable-rates available with a line-of-credit. If the current 30-year fixed-rate declines substantially from its already low level, we would anticipate some portion of these first-lien line-of-credit borrowers to refinance to a more traditional mortgage at a fixed-rate.

We believe we have underwritten credit conservatively within this portfolio. We have not originated home equity loans or lines-of-credit with an LTV at origination greater than 100%, except for infrequent situations with high quality borrowers. However, continued declines in housing prices have decreased the value of the collateral for this portfolio and have caused a portion of the portfolio to have an LTV greater than 100%. These higher LTV ratios are directly correlated with borrower payment patterns and are a particular focus of our Loss Mitigation and Home Saver groups.

We obtain a property valuation for every loan or line-of-credit. The type of property valuation obtained is based on a series of credit parameters, and ranges from an AVM to a complete walkthrough appraisal. While we believe an AVM estimate is an appropriate valuation source for a portion of our home equity lending activities, we continue to re-evaluate all of our policies on an on-going basis, specifically related to the December 2010 FFIEC guidelines regarding property valuation. The intent of these guidelines is to ensure complete independence in the requesting and review of real estate valuations associated with loan decisions. We are committed to appropriate valuations for all of our real estate lending, and do not anticipate significant impacts to our loan decision process as a result of these guidelines. We update values as appropriate, and in compliance with applicable regulations, for loans identified as higher risk. Loans are identified as higher risk based on performance indicators and the updated values are utilized to facilitate our portfolio management processes, as well as our workout and loss mitigation functions.

We continue to make origination policy adjustments based on our assessment of an appropriate risk profile, as well as industry actions. In addition to origination policy adjustments, we take actions, as necessary, to manage the risk profile of this portfolio.

Residential Mortgage Portfolio

We focus on higher quality borrowers and underwrite all applications centrally. We do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options.

All residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update values on a regular basis in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.

A majority of the loans in our portfolio have adjustable rates. These ARMs comprised approximately 53% of our total residential mortgage loan portfolio at September 30, 2011. At September 30, 2011, ARM loans that were expected to have rates reset totaled $1.5 billion through 2014. These loans scheduled to reset are primarily associated with loans originated subsequent to 2007, and as such, are not subject to the most significant declines in value. 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. Our ARM portfolio has performed substantially better than the fixed-rate portfolio in part due to this proactive management process. Additionally, when borrowers are experiencing payment difficulties, loans may be reunderwritten based on the borrower’s ability to repay the loan.

Several government actions were enacted that impacted the residential mortgage portfolio, including various refinance programs which positively affected the availability of credit for the industry. We are utilizing these programs to enhance our existing strategy of working closely with our customers.

Financial Institution Exposure Risk

In the normal course of business, we engage with other financial institutions for a variety of purposes resulting from ordinary banking activities such as payment processing, transactions entered into for risk management purposes (see Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements), and for investment diversification. As a result, we are exposed to credit risk, or risk of loss, if the other financial institution fails to perform according to the terms of our contract or agreement.

Current European credit pressures have increased concerns about correlated adverse effects upon financial institutions. Specifically, there has been heightened emphasis on direct credit exposure to certain sovereigns, in particular, Greece, Ireland, Portugal, Spain and Italy, as well as to financial institutions headquartered in those countries. We conduct significant due diligence on each financial institution prior to approval as a counterparty. Our Treasury Credit Risk group within Credit Administration is responsible for the initial risk assessment as well as on-going monitoring. We actively manage the level of exposure to each financial institution, with regular assessment of the exposure limits by our Credit Policy and Strategy Committee. We believe our overall exposure to financial institution exposure risk, including direct credit exposure to any of these sovereigns and their banks, is not significant. Nonetheless, we minimize this risk through increased frequency and degree of monitoring of each contract or agreement as we manage the risk exposure on a real-time basis over the course of each day.

Credit Quality

We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.

Credit quality performance in the 2011 third quarter reflected a continued improvement in the levels of our NCOs, NALs, and commercial Criticized assets. Although the commercial Criticized asset levels continued to decline, there was an increase in new commercial Criticized asset inflows compared to the prior quarter. The inflow of new commercial Criticized assets was across all business segments and included one large relationship. We do not believe the increase in this current quarter’s commercial Criticized assets to be either an indication of a future increase in the overall level of commercial Criticized loans or a widespread deterioration in commercial credit performance. Also, our ACL coverage ratios improved compared to the prior quarter. Specifically, our ACL as a percentage of NALs improved to 187% at September 30, 2011 compared with 181% at June 30, 2011 and 166% at December 31, 2010.

NPAs, NALs, AND TDRs

NPAs and NALs

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) impaired loans held for sale, (3) OREO properties, and (4) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt.

C&I and CRE loans are placed on nonaccrual status at no greater than 90-days past due. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, residential mortgage loans are placed on nonaccrual status at 150-days past due. First-lien and second-lien home equity loans are placed on nonaccrual status at 150-days past due and 120-days past due, respectively. Automobile and other consumer loans are not placed on nonaccrual status, but are generally charged-off when the loan is 120-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. When, in our judgment, the borrower’s ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease is returned to accrual status.

The following table reflects period-end NALs and NPAs detail for each of the last five quarters:

Table 20 — Nonaccrual Loans and Leases and Nonperforming Assets


	2011									2010
(dollar amounts in thousands)	September 30,			June 30,			March 31,			December 31,			September 30,

Nonaccrual loans and leases:
Commercial and industrial	$	209,632		$	229,327		$	260,397		$	346,720		$	398,353
Commercial real estate		257,086			291,500			305,793			363,692			478,754
Residential mortgage		61,129			59,853			44,812			45,010			82,984
Home equity		37,156			33,545			25,255			22,526			21,689

Total nonaccrual loans and leases		565,003			614,225			636,257			777,948			981,780
Other real estate owned, net
Residential		18,588			20,803			28,668			31,649			65,775
Commercial		19,418			17,909			25,961			35,155			57,309

Total other real estate owned, net		38,006			38,712			54,629			66,804			123,084
Other nonperforming assets⁽¹⁾		10,972			—			—			—			—

Total nonperforming assets	$	613,981		$	652,937		$	690,886		$	844,752		$	1,104,864


Nonaccrual loans as a % of total loans and leases		1.45	%		1.57	%		1.66	%		2.04	%		2.62	%
Nonperforming assets ratio⁽²⁾		1.57			1.67			1.80			2.21			2.94

Nonperforming Franklin assets:
Residential mortgage	$	—		$	—		$	—		$	—		$	—
Home equity		—			—			—			—			—
OREO		534			883			5,971			9,477			15,330
Impaired loans held for sale		—			—			—			—			—

Total nonperforming Franklin assets	$	534		$	883		$	5,971		$	9,477		$	15,330


(1)		Other nonperforming assets represent an investment security backed by a municipal bond.

(2)		This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate.

The $39.0 million, or 6%, decline in NPAs compared with June 30, 2011, primarily reflected:

•

$34.4 million, or 12%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs. We continue to focus on early recognition of risks through our on-going portfolio management processes.

•

$19.7 million, or 9%, decline in C&I NALs, reflecting both NCO activity and problem credit resolutions, including payoffs. The decline was associated with loans throughout our footprint, with no specific industry concentration.

Partially offset by:

•

$11.0 million increase in other NPAs reflecting an investment security backed by a municipal bond.

•

$3.6 million, or 11%, increase in home equity NALs, primarily reflecting the current weak economic conditions and the continued decline of residential real estate property values. Home equity NALs have been written down to net realizable value, less anticipated selling costs, which substantially limits any significant future risk of loss.

As part of our loss mitigation process, we reunderwrite, modify, or restructure loans when borrowers are experiencing payment difficulties, based on the borrower’s ability to repay the loan.

Compared with December 31, 2010, NPAs decreased $230.8 million, or 27%, primarily reflecting:

•

$137.1 million, or 40%, decline in C&I NALs, reflecting both NCO activity and problem credit resolutions, including payoffs. The decline was associated with loans throughout our footprint, with no specific geographic concentration. From an industry perspective, improvement in the manufacturing-related segment accounted for a significant portion of the decrease.

•

$106.6 million, or 29%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs. This decline was a direct result of our on-going proactive management of these credits by our SAD.

•

$28.8 million, or 43%, decrease in OREO properties, reflecting lower inflow levels combined with aggressive sales activities.

Partially offset by:

•

$16.1 million, or 36%, increase in residential mortgage NALs, reflecting the current weak economic conditions and the continued decline in residential real estate property values, as well as a change in our nonaccrual policy (see Consumer Credit section).

•

$14.6 million, or 65%, increase in home equity NALs, also reflecting the current weak economic conditions and the continued decline in residential real estate property values, as well as a change in our nonaccrual policy (see Consumer Credit section).

•

$11.0 million increase in other NPAs reflecting an investment security backed by a municipal bond.

NPA activity for each of the past five quarters was as follows:

Table 21- Nonperforming Asset Activity


	2011									2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third

Nonperforming assets, beginning of period	$	652,937		$	690,886		$	844,752		$	1,104,864		$	1,582,702
New nonperforming assets		153,626			210,255			192,044			237,802			278,388
Franklin-related impact, net		(349	)		(5,088	)		(3,506	)		(5,853	)		(251,412	)
Returns to accruing status		(25,794	)		(68,429	)		(70,886	)		(100,051	)		(111,168	)
Loan and lease losses		(79,992	)		(74,945	)		(128,730	)		(126,047	)		(151,013	)
Other real estate owned gains (losses)		(242	)		388			1,492			(5,117	)		(5,302	)
Payments		(76,510	)		(73,009	)		(87,041	)		(191,296	)		(210,612	)
Sales		(9,695	)		(27,121	)		(57,239	)		(69,550	)		(26,719	)


Nonperforming assets, end of period	$	613,981		$	652,937		$	690,886		$	844,752		$	1,104,864

As discussed previously, residential mortgage loans are placed on nonaccrual status at 150-days past due, with the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, and first-lien and second-lien home equity loans and lines-of-credit are placed on nonaccrual status at 150-days past due and 120-days past due, respectively.

The following table reflects period-end accruing loans and leases 90 days or more past due for each of the last five quarters:

Table 22 — Accruing Past Due Loans and Leases


	2011									2010
(dollar amounts in thousands)	September 30,			June 30,			March 31,			December 31,			September 30,
Accruing loans and leases past due 90 days or more:
Commercial and industrial	$	—		$	—		$	—		$	—		$	—
Residential mortgage (excluding loans guaranteed by the U.S. government)		32,850			33,975			41,858			53,983			56,803
Home equity		20,420			17,451			24,130			23,497			27,160
Other consumer		7,755			6,227			7,578			10,177			11,423

Total, excl. loans guaranteed by the U.S. government		61,025			57,653			73,566			87,657			95,386
Add: loans guaranteed by the U.S. government		84,413			76,979			94,440			98,288			94,249

Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government	$	145,438		$	134,632		$	168,006		$	185,945		$	189,635


Ratios: (1)

Excluding loans guaranteed by the U.S. government, as a percent of total loans and leases		0.16	%		0.15	%		0.19	%		0.23	%		0.25	%

Guaranteed by the U.S. government, as a percent of total loans and leases		0.21			0.19			0.25			0.26			0.26

Including loans guaranteed by the U.S. government, as a percent of total loans and leases		0.37			0.34			0.44			0.49			0.51


(1)		Ratios are calculated as a percentage of related loans and leases.

Loans guaranteed by the U.S. government accrue interest at the rate guaranteed by the government agency. We are reimbursed from the government agency for reasonable expenses incurred in servicing loans. The FHA reimburses us for 66% of expenses, and the VA reimburses us at a maximum percentage of guarantee which is established for each individual loan. We have not experienced either material losses in excess of guarantees caps or significant delays or rejected claims from the related government entity.

The over 90-day delinquency ratio for total loans not guaranteed by a U.S. government agency was 0.16% at September 30, 2011, representing an 7 basis point decline compared with December 31, 2010. This decline reflected the sale of certain loans in this category.

TDR Loans

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulties. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs as it is probable that all contractual principal and interest due under the restructured terms will be collected.

The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:

Table 23 — Accruing and Nonaccruing Troubled Debt Restructured Loans


	2011						2010
(dollar amounts in thousands)	September 30,		June 30,		March 31,		December 31,		September 30,
Troubled debt restructured loans — accruing:

Residential mortgage	$	304,365	$	313,772	$	333,492	$	328,411	$	304,356
Other consumer⁽¹⁾		89,596		75,036		78,488		76,586		73,210
Commercial		321,598		240,126		206,462		222,632		157,971


Total troubled debt restructured loans — accruing		715,559		628,934		618,442		627,629		535,537

Troubled debt restructured loans — nonaccruing:

Residential mortgage		20,877		14,378		8,523		5,789		10,581
Other consumer⁽¹⁾		279		140		14		—		—
Commercial		74,264		77,745		37,858		33,462		33,236

Total troubled debt restructured loans — nonaccruing		95,420		92,263		46,395		39,251		43,817

Total troubled debt restructured loans	$	810,979	$	721,197	$	664,837	$	666,880	$	579,354


(1)		Includes automobile, home equity, and other consumer TDRs.

TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers having difficulty making their payments. Within commercial accruing TDRs, $40.1 million of the increase from the prior quarter reflected a change based on clarifying language in the FASB’s ASU 2011-02 — Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, related to when a TDR designation is removed.

ACL

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

We maintain two reserves, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our Credit Administration group is responsible for developing the methodology assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs, recoveries, decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.

A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio. The provision for credit losses in the 2011 third quarter was $43.6 million, compared with $35.8 million in the prior quarter and $119.2 million in the year-ago quarter. (See Provision for Credit Losses discussion).

We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, we also consider the impact of declining residential real estate values and the diversification of CRE loans, particularly loans secured by retail properties.

Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. While the total ACL balance has declined in recent quarters, all of the relevant benchmarks improved as a result of the asset quality improvement. The coverage ratios of NALs, Criticized, and Classified loans have significantly improved in recent quarters despite the decline in the ACL level. For example, the ACL coverage ratio associated with NALs was 187% at September 30, 2011, compared with 166% at December 31, 2010 and 140% at September 30, 2010.

The table below reflects activity in the ALLL and the AULC for each of the last five quarters:

Table 24 — Quarterly Allowance for Credit Losses Analysis


	2011									2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third
Allowance for loan and lease losses, beginning of period	$	1,071,126		$	1,133,226		$	1,249,008		$	1,336,352		$	1,402,160
Loan and lease losses		(115,899	)		(128,701	)		(199,007	)		(205,587	)		(221,144	)
Recoveries of loans previously charged-off		25,344			31,167			33,924			33,336			36,630

Net loan and lease losses		(90,555	)		(97,534	)		(165,083	)		(172,251	)		(184,514	)

Provision for loan and lease losses		45,867			36,948			49,301			84,907			118,788
Allowance for assets sold		(6,728	)		(1,514	)		—			—			(82	)


Allowance for loan and lease losses, end of period	$	1,019,710		$	1,071,126		$	1,133,226		$	1,249,008		$	1,336,352


Allowance for unfunded loan commitments and letters of credit, beginning of period	$	41,060		$	42,211		$	42,127		$	40,061		$	39,689

Provision for (reduction in) unfunded loan commitments and letters of credit losses		(2,281	)		(1,151	)		84			2,066			372

Allowance for unfunded loan commitments and letters of credit, end of period	$	38,779		$	41,060		$	42,211		$	42,127		$	40,061

Total allowance for credit losses, end of period	$	1,058,489		$	1,112,186		$	1,175,437		$	1,291,135		$	1,376,413


Allowance for loan and lease losses as % of:

Total loans and leases		2.61	%		2.74	%		2.96	%		3.28	%		3.56	%
Nonaccrual loans and leases		180			174			178			161			136
Nonperforming assets		166			164			164			148			121

Total allowance for credit losses as % of:

Total loans and leases		2.71	%		2.84	%		3.07	%		3.39	%		3.67	%
Nonaccrual loans and leases		187			181			185			166			140
Nonperforming assets		172			170			170			153			125

The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters:

Table 25 — Allocation of Allowance for Credit Losses (1)


	2011												2010
(dollar amounts in thousands)	September 30,				June 30,				March 31,				December 31,				September 30,

Commercial
Commercial and industrial	$	285,254	36	%	$	281,016	35	%	$	299,564	35	%	$	340,614	34	%	$	353,431	33	%
Commercial real estate		418,895	15			463,874	16			511,068	17			588,251	18			654,219	18


Total commercial		704,149	51			744,890	51			810,632	52			928,865	52			1,007,650	51


Consumer

Automobile		49,402	14			55,428	16			50,862	15			49,488	15			44,505	14

Home equity		139,616	21			146,444	20			149,370	20			150,630	20			154,323	21

Residential mortgage		98,974	13			98,992	12			96,741	12			93,289	12			93,407	12

Other consumer		27,569	1			25,372	1			25,621	1			26,736	1			36,467	2


Total consumer		315,561	49			326,236	49			322,594	48			320,143	48			328,702	49

Total allowance for loan and lease losses		1,019,710	100	%		1,071,126	100	%		1,133,226	100	%		1,249,008	100	%		1,336,352	100	%

Allowance for unfunded loan commitments		38,779				41,060				42,211				42,127				40,061

Total allowance for credit losses	$	1,058,489			$	1,112,186			$	1,175,437			$	1,291,135			$	1,376,413


(1)		Percentages represent the percentage of each loan and lease category to total loans and leases.

The reduction in the ALLL, compared with both June 30, 2011, and December 31, 2010, reflected declines in the ALLL in both the commercial and consumer portfolios.

The decline in the commercial-related ALLL reflected NCOs on loans with specific reserves, and an overall reduction in the level of commercial Criticized loans. Commercial Criticized loans are commercial loans rated as OLEM, Substandard, Doubtful, or Loss. As shown in the table below, commercial Criticized loans declined $88.1 million from June 30, 2011, and $783.4 million from December 31, 2010, reflecting significant upgrade and payment activity.

Table 26 — Criticized Commercial Loan Activity


	2011									2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third

Criticized commercial loans, beginning of period	$	2,379,150		$	2,660,792		$	3,074,481		$	3,637,533		$	4,106,602
New additions / increases		357,057			250,422			169,884			289,850			407,514
Advances		46,148			44,442			61,516			52,282			75,386
Upgrades to Pass		(252,388	)		(271,698	)		(238,518	)		(382,713	)		(391,316	)
Payments		(180,845	)		(231,819	)		(294,564	)		(401,302	)		(408,698	)
Loan losses		(58,035	)		(72,989	)		(112,008	)		(121,169	)		(151,955	)

Criticized commercial loans, end of period	$	2,291,088		$	2,379,150		$	2,660,792		$	3,074,481		$	3,637,533

The decline in the consumer-related ALLL primarily reflected the impact of the 2011 third quarter automobile securitization (see Automobile Portfolio discussion) as well as a decrease in the home equity-related ALLL as a result of lower delinquency levels, partially offset by an increase in the mortgage-related ALLL as a result of increased residential mortgage-related balances.

The entire loan and lease portfolio has shown steadily improving credit quality trends throughout 2010 and 2011. The ACL to total loans declined to 2.71% at September 30, 2011 compared to 3.39% at December 31, 2010. We believe the decline in the ratio is appropriate given the continued improvement in the risk profile of our loan portfolio. Further, we believe that early identification of problem loans and aggressive action plans for these problem loans, combined with originating high quality new loans will contribute to continued improvement in our key credit quality metrics. However, the continued weakness in the residential real estate market and the overall economic conditions remained stressed, and additional risks emerged during the first nine-month period of 2011. These additional risks included the European banking sector stress, the continued budget issues in local governments, flat domestic economic growth, and the variety of policy proposals regarding job growth, debt management, and domestic tax policy. Continued high unemployment, among other factors, has slowed any significant recovery. In the near-term, we anticipate a continued high unemployment rate and the concern around the U.S. and local government budget issues will continue to negatively impact the financial condition of some of our retail and commercial borrowers. The pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate values. We have significant exposure to loans secured by residential real estate and continue to be an active lender in our communities. The impact of the downturn in real estate values has had a significant impact on some of our borrowers as evidenced by the higher delinquencies and NCOs since late 2007. We do not anticipate any meaningful economic improvement in the near-term. All of these factors are impacting consumer confidence, as well as business investments and acquisitions. Given the combination of these noted factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.

The table below reflects activity in the ALLL and AULC for the first nine-month periods ended September 30, 2011 and 2010.

Table 27 — Year to Date Allowance for Credit Losses Analysis


	Nine Months Ended September 30,
(dollar amounts in thousands)	2011			2010

Allowance for loan and lease losses, beginning of period	$	1,249,008		$	1,482,479
Loan and lease losses		(443,607	)		(798,320	)
Recoveries of loans previously charged-off		90,435			96,097

Net loan and lease losses		(353,172	)		(702,223	)
Provision for loan and lease losses		132,116			556,392
Allowance for assets sold		(8,242	)		(296	)


Allowance for loan and lease losses, end of period	$	1,019,710		$	1,336,352

Allowance for unfunded loan commitments and letters of credit, beginning of period	$	42,127		$	48,879
Provision for (reduction in) unfunded loan commitments and letters of credit losses		(3,348	)		(8,818	)

Allowance for unfunded loan commitments and letters of credit, end of period	$	38,779		$	40,061


Total allowance for credit losses	$	1,058,489		$	1,376,413


Allowance for loan and lease losses as % of:
Total loans and leases		2.61	%		3.56	%
Nonaccrual loans and leases		180			136
Nonperforming assets		166			121

Total allowance for credit losses as % of:
Total loans and leases		2.71	%		3.67	%
Nonaccrual loans and leases		187			140
Nonperforming assets		172			125

NCOs

(This section should be read in conjunction with Significant Item 2 and the Franklin-related Impacts section.)

Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment.

C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and second-lien home equity loans are charged-off to the estimated fair value of the collateral at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral at 150-days past due.

The following table reflects NCO detail for each of the last five quarters:

Table 28 — Quarterly Net Charge-off Analysis


	2011									2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third
Net charge-offs by loan and lease type:
Commercial:
Commercial and industrial	$	17,891		$	18,704		$	42,191		$	59,124		$	62,241
Commercial real estate:
Construction		1,450			4,145			28,400			11,084			17,936
Commercial		22,990			23,450			39,283			33,787			45,725

Commercial real estate		24,440			27,595			67,683			44,871			63,661

Total commercial		42,331			46,299			109,874			103,995			125,902

Consumer:
Automobile		3,863			2,255			4,712			7,035			5,570
Home equity		26,222			25,441			26,715			29,175			27,827
Residential mortgage⁽¹⁾		11,562			16,455			18,932			26,775			18,961
Other consumer		6,577			7,084			4,850			5,271			6,254

Total consumer		48,224			51,235			55,209			68,256			58,612

Total net charge-offs	$	90,555		$	97,534		$	165,083		$	172,251		$	184,514


Net charge-offs — annualized percentages:
Commercial:
Commercial and industrial		0.52	%		0.56	%		1.29	%		1.85	%		2.01	%
Commercial real estate:
Construction		0.87			2.99			18.59			6.19			7.25
Commercial		1.69			1.65			2.66			2.22			3.01

Commercial real estate		1.60			1.77			4.15			2.64			3.60

Total commercial		0.86			0.94			2.24			2.13			2.59

Consumer:
Automobile		0.25			0.15			0.33			0.51			0.43
Home equity		1.31			1.29			1.38			1.51			1.47
Residential mortgage⁽¹⁾		0.97			1.44			1.70			2.42			1.73
Other consumer		5.05			5.27			3.47			3.66			3.83

Total consumer		0.99			1.08			1.20			1.50			1.32

Net charge-offs as a % of average loans		0.92	%		1.01	%		1.73	%		1.82	%		1.98	%


(1)		The 2010 fourth quarter included net charge-offs of $16,389 thousand related to the sale of certain underperforming residential mortgage loans.

In assessing NCO trends, it is helpful to understand the process of how these loans are treated as they deteriorate over time. The ALLL established at origination is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased as warranted. If the quality of a loan has deteriorated, it migrates to a lower quality risk rating, requiring a higher ALLL amount. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL was established. If the previously established ALLL exceeds that needed to satisfactorily resolve the problem loan, a reduction in the overall level of the ALLL could be recognized. In summary, if loan quality deteriorates, the typical credit sequence would be periods of ALLL building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs.

Residential mortgage NCO annualized percentages generally are greater than those of the home equity portfolio. The NCO annualized percentage in the home equity portfolio is the result of a higher quality customer base as measured by FICO distribution and a substantial portion of the growth is represented by first-lien positions. Additionally, we accelerated the charge-off policy associated with the residential mortgage portfolio in 2010 which shortened the maximum timeframe to charge-off and, during 2011, have executed two NPL sales in the residential mortgage portfolio with resulting charge-offs.

2011 Third Quarter versus 2011 Second Quarter

C&I NCOs declined $0.8 million, or 4%. CRE NCOs decreased $3.2 million, or 11%. These declines were evident across our geographic footprint and generally associated with small relationships. The performance of both portfolios was consistent with our expectations. Based on asset quality trends, we continue to anticipate this lower level of CRE NCOs in future quarters.

Automobile NCOs increased $1.6 million, or 71%. The current quarter’s performance was consistent with our expectations. The prior quarter’s NCOs were historically low reflecting a combination of low delinquency levels and a strong resale market for used vehicles.

Home equity NCOs increased $0.8 million, or 3%. Although the performance of this portfolio continues to be impacted by the weakened overall economy and the continued decline in home values, this slight increase was consistent with our expectations. We continue to manage the default rate through focused delinquency monitoring as essentially all defaults for second-lien home equity loans incur significant losses reflecting the reduction of equity associated with the collateral property.

Residential mortgage NCOs declined $4.9 million, or 30%, consistent with our expectations for a continued downward trend in this portfolio.

The following table reflects NCO activity for the first nine-month periods ended September 30, 2011 and 2010:

Table 29 — Year to Date Net Charge-off Analysis


	Nine Months Ended September 30,
(dollar amounts in thousands)	2011			2010
Net charge-offs by loan and lease type:
Commercial:
Commercial and industrial	$	78,786		$	195,808
Commercial real estate:
Construction		33,995			97,924
Commercial		85,723			132,767

Commercial real estate		119,718			230,691


Total commercial		198,504			426,499

Consumer:
Automobile		10,830			19,537
Home equity⁽¹⁾		78,378			110,198
Residential mortgage⁽²⁾		46,949			126,120
Other loans		18,511			19,869


Total consumer		154,668			275,724


Total net charge-offs	$	353,172		$	702,223


Net charge-offs — annualized percentages:
Commercial:
Commercial and industrial		0.78	%		2.12	%
Commercial real estate:
Construction		7.41			10.67
Commercial		2.01			2.88

Commercial real estate		2.54			4.17


Total commercial		1.35			2.89

Consumer:
Automobile		0.24			0.56
Home equity⁽¹⁾		1.33			1.95
Residential mortgage⁽²⁾		1.36			3.74
Other loans		4.58			3.84


Total consumer		1.09			2.11


Net charge-offs as a % of average loans		1.22	%		2.52	%


(1)		The 2010 first nine-month period included net charge-offs totaling $14,678 thousand associated with the transfer of Franklin-related home equity loans to loans held for sale and $6,143 thousand of other Franklin-related net charge-offs.

(2)		The 2010 first nine-month period included net charge-offs totaling $60,822 thousand associated with the transfer of Franklin-related residential mortgage loans to loans held for sale and $14,914 thousand of other Franklin-related net charge-offs.

2011 First Nine Months versus 2010 First Nine Months

C&I NCOs decreased $117.0 million, or 60%. CRE NCOs decreased $111.0 million, or 48%. These declines primarily reflected significant credit quality improvement in the underlying portfolio as well as our on-going proactive credit management practices.

Automobile NCOs decreased $8.7 million, or 45%, reflected our consistent high quality origination profile, as well as a stronger market for used automobiles. This focus on origination quality has been the primary driver for the improvement in this portfolio in the current period compared with the year-ago period.

Home equity NCOs declined $31.8 million, or 29%. The first nine-month period of 2010 included $20.7 million of Franklin-related NCOs compared with no Franklin-related NCOs in the current period. Excluding the Franklin-related impacts, home equity NCOs decreased $11.1 million compared with the first nine-month period of 2010. Although the performance of this portfolio continued to be impacted by the overall weak economic conditions and the continued decline of residential real estate property values, the performance was consistent with our expectations for the portfolio.

Residential mortgage NCOs declined $79.2 million, or 63%. The first nine-month period of 2010 included $75.7 million of Franklin-related net charge-offs, and the first nine-month period of 2011 included Franklin-related net recoveries of $2.5 million. Excluding the Franklin impacts, residential mortgage NCOs decreased $1.0 million compared with the first nine-month period of 2010. Additionally, the first nine-month period of 2011 included $6.8 million of NCOs related to a change in loss recognition policy (see Consumer Credit section). Excluding these impacts, performance was consistent with our expectations for a continued downward trend in this portfolio.

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

OVERVIEW

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-earning assets and interest-bearing 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 redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where 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 LIBOR (basis risk).

INCOME SIMULATION AND ECONOMIC VALUE 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 ISE to changes in market rates over a one-year time period. Although bank owned life insurance, automobile operating lease assets, and excess cash balances held at the Federal Reserve Bank are classified as noninterest-earning assets, and the net revenue from these assets is recorded in noninterest income and noninterest expense, these portfolios are included in the interest sensitivity analysis because they have attributes similar to interest-earning assets. EVE analysis is used to measure the sensitivity of the values of period-end assets and liabilities to changes in market interest rates. EVE analysis serves as a complement to ISE analysis as it provides risk exposure estimates for time periods beyond the one-year simulation period.

The models used for these measurements take into account prepayment speeds on mortgage loans, mortgage-backed securities, and consumer installment loans, as well as cash flows of other assets and liabilities. Balance sheet growth assumptions are also considered in the ISE analysis. The models include the effects of derivatives, such as interest rate swaps, caps, floors, and other types of interest rate options.

The baseline scenario for ISE analysis, with which all other scenarios are compared, is based on market interest rates implied by the prevailing yield curve as of the period-end. Alternative interest rate scenarios are then compared with the baseline scenario. These alternative interest rate scenarios include parallel rate shifts on both a gradual and an immediate basis, movements in interest rates that alter the shape of the yield curve (e.g., flatter or steeper yield curve), and no changes in current interest rates for the entire measurement period. Scenarios are also developed to measure short-term repricing risks, such as the impact of LIBOR-based interest rates rising or falling faster than the prime rate.

The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual +/-100 and +/-200 basis points parallel shifts in market interest rates over the next one-year period beyond the interest rate change implied by the current yield curve. We assumed market interest rates would not fall below 0% over the next one-year period for the scenarios that used the -100 and -200 basis points parallel shift in market interest rates. The table below shows the results of the scenarios as of September 30, 2011, and December 31, 2010. All of the positions were within the board of directors’ policy limits as of September 30, 2011.

Table 30 — Interest Sensitive Earnings at Risk


	Interest Sensitive Earnings at Risk (%)
Basis point change scenario		-200		-100		+100		+200

Board policy limits		-4.0	%	-2.0	%	-2.0	%	-4.0	%

September 30, 2011		-2.1		-1.3		1.1		2.2
December 31, 2010		-3.2		-1.8		0.3		0.0

The ISE at risk reported as of September 30, 2011, for the +200 basis points scenario shows a significant change to an asset sensitive near-term interest rate risk position compared with December 31, 2010. The ALCO’s strategy is to be near-term asset-sensitive to a rising rate scenario. The primary factors contributing to this change are the 2011 first quarter termination of $4.5 billion of interest rate swaps maturing through June 2012, offset slightly by $1.8 billion of interest rate swaps executed in the 2011 second and third quarters, and the impact of lower interest rates on mortgage asset prepayments.

The following table shows the income sensitivity of select portfolios to changes in market interest rates. A portfolio with 100% sensitivity would indicate that interest income and expense will change with the same magnitude and direction as interest rates. A portfolio with 0% sensitivity is insensitive to changes in interest rates. For the +200 basis points scenario, total interest-sensitive income is 36.8% sensitive to changes in market interest rates, while total interest-sensitive expense is 40.2% sensitive to changes in market interest rates. However, net interest income at risk for the +200 basis points scenario has an asset-sensitive near-term interest rate risk position because of the larger base of total interest-sensitive income relative to total interest-sensitive expense.

Table 31 — Interest Income/Expense Sensitivity


	Percent of			Percent Change in Interest Income/Expense for a Given
	Total Earning			Change in Interest Rates
	Assets (1)			Over / (Under) Base Case Parallel Ramp
Basis point change scenario					-200		-100		+100		+200

Total loans		80	%		-16.2	%	-25.3	%	37.9	%	39.4	%
Total investments and other earning assets		20			-17.8		-22.1		32.5		30.2
Total interest sensitive income					-16.0		-24.0		36.1		36.8

Total interest-bearing deposits		71			-11.5		-18.9		35.5		36.5
Total borrowings		11			-21.0		-37.6		62.7		66.0
Total interest-sensitive expense					-12.7		-21.2		38.9		40.2


(1)		At September 30, 2011.

The primary simulations for EVE at risk assume immediate +/-100 and +/-200 basis points parallel shifts in market interest rates beyond the interest rate change implied by the current yield curve. The table below outlines the September 30, 2011, results compared with December 31, 2010. All of the positions were within the board of directors’ policy limits.

Table 32 — 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	%

September 30, 2011		-4.2		-0.7		-1.0		-3.3
December 31, 2010		-0.5		1.3		-4.0		-8.9

The EVE at risk reported as of September 30, 2011, for the +200 basis points scenario shows a change to a lower long-term liability sensitive position compared with December 31, 2010. The primary factors contributing to this change are the impact of lower interest rates on mortgage asset prepayments, the growth in low-cost deposits, and the 2011 first quarter termination of $4.5 billion of interest rate swaps maturing through June 2012, offset slightly by $1.8 billion of interest rate swaps executed in the 2011 second and third quarters.

The following table shows the economic value sensitivity of select portfolios to changes in market interest rates. The change in economic value for each portfolio is measured as the percent change from the base economic value for that portfolio. For the +200 basis points scenario, total net tangible assets decreased in value 3.1% to changes in market interest rates, while total net tangible liabilities increased in value 3.1% to changes in market interest rates.

Table 33 — Economic Value Sensitivity


	Percent of
	Total Net			Percent Change in Economic Value for a Given
	Tangible			Change in Interest Rates
	Assets (1)			Over / (Under) Base Case Parallel Shocks
Basis point change scenario					-200		-100		+100		+200

Total loans		71	%		0.9	%	0.8	%	-1.3	%	-2.6	%
Total investments and other earning assets		18			2.0		2.0		-2.8		-5.9
Total net tangible assets (2)					1.1		1.0		-1.5		-3.1

Total deposits		79			-2.1		-1.4		1.7		3.3
Total borrowings		9			-1.1		-0.8		0.8		1.6
Total net tangible liabilities (3)					-2.0		-1.3		1.6		3.1


(1)		At September 30, 2011.

(2)		Tangible assets excluding ALLL.

(3)		Tangible liabilities excluding AULC.

MSRs

(This section should be read in conjunction with Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements.)

At September 30, 2011, we had a total of $145.3 million of capitalized MSRs representing the right to service $16.1 billion in mortgage loans. Of this $145.3 million, $73.8 million was recorded using the fair value method, and $71.5 million was recorded using the amortization method.

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 or impairment to MSRs recorded using the amortization method. In addition, we engage a third party to provide valuation tools and assistance with our strategies with the objective to decrease the volatility from MSR fair value changes or impairment to MSRs recorded using the amortization method. 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 a decrease in mortgage banking income. We report MSRs recorded using the amortization method at the lower of cost or fair value and these MSRs generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in other assets in 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.

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 us, such as war, terrorism, or financial institution market specific issues. We manage liquidity risk at both the Bank and the parent company.

Bank Liquidity and Sources of Liquidity

Our primary sources of funding for the Bank are retail and commercial core deposits. At September 30, 2011, these core deposits funded 74% of total assets. At September 30, 2011, total core deposits represented 94% of total deposits, an increase from 93% at December 31, 2010.

Core deposits are comprised of interest-bearing and noninterest-bearing demand deposits, money market deposits, savings and other domestic deposits, consumer certificates of deposit both over and under $250,000, and nonconsumer certificates of deposit less than $250,000. Noncore deposits consist of brokered money market deposits and certificates of deposit, foreign time deposits, and other domestic deposits of $250,000 or more comprised primarily of public fund certificates of deposit more than $250,000.

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.

Demand deposit overdrafts that have been reclassified as loan balances were $14.0 million, $13.1 million, and $13.1 million at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.

Other domestic time deposits of $250,000 or more and brokered deposits and negotiable CDs totaled $2.0 billion, $2.2 billion, and $2.3 billion at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.

The following tables reflect deposit composition and short-term borrowings detail for each of the past five quarters:

Table 34 — Deposit Composition


	2011												2010
(dollar amounts in millions)	September 30,				June 30,				March 31,				December 31,				September 30,
By Type
Demand deposits - noninterest-bearing	$	9,502	22	%	$	8,210	20	%	$	7,597	18	%	$	7,217	17	%	$	6,926	17	%
Demand deposits — interest-bearing		5,763	13			5,642	14			5,532	13			5,469	13			5,347	13
Money market deposits		13,759	32			12,643	31			13,105	32			13,410	32			12,679	31
Savings and other domestic deposits		4,711	11			4,752	11			4,762	12			4,643	11			4,613	11
Core certificates of deposit		7,084	16			7,936	19			8,208	20			8,525	20			8,765	21

Total core deposits		40,819	94			39,183	95			39,204	95			39,264	93			38,330	93
Other domestic deposits of $250,000 or more		421	1			436	1			531	1			675	2			730	2
Brokered deposits and negotiable CDs		1,535	4			1,486	4			1,253	3			1,532	4			1,576	4
Deposits in foreign offices		445	1			297	—			378	1			383	1			436	1


Total deposits	$	43,220	100	%	$	41,402	100	%	$	41,366	100	%	$	41,854	100	%	$	41,072	100	%


Total core deposits:
Commercial	$	15,526	38	%	$	13,541	35	%	$	12,785	33	%	$	12,476	32	%	$	12,262	32	%
Consumer		25,293	62			25,642	65			26,419	67			26,788	68			26,068	68


Total core deposits	$	40,819	100	%	$	39,183	100	%	$	39,204	100	%	$	39,264	100	%	$	38,330	100	%

Table 35 — Federal Funds Purchased and Repurchase Agreements


	2011									2010
(dollar amounts in millions)	September 30,			June 30,			March 31,			December 31,			September 30,
Balance at period-end
Federal Funds purchased and securities sold under agreements to repurchase	$	2,201		$	1,983		$	2,017		$	1,966		$	1,773
Other short-term borrowings		24			40			34			75			86

Weighted average interest rate at period-end
Federal Funds purchased and securities sold under agreements to repurchase		0.16	%		0.15	%		0.17	%		0.19	%		0.22	%
Other short-term borrowings		1.01			0.69			0.92			0.53			0.40

Maximum amount outstanding at month-end during the period
Federal Funds purchased and securities sold under agreements to repurchase	$	2,431		$	2,361		$	2,091		$	2,084		$	1,773
Other short-term borrowings		53			50			86			108			99

Average amount outstanding during the period
Federal Funds purchased and securities sold under agreements to repurchase	$	2,200		$	2,067		$	2,064		$	2,045		$	1,645
Other short-term borrowings		51			45			69			89			94

Weighted average interest rate during the period
Federal Funds purchased and securities sold under agreements to repurchase		0.16	%		0.15	%		0.17	%		0.19	%		0.21	%
Other short-term borrowings		0.56			0.58			0.52			0.38			0.35

To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding. These sources include other domestic time deposits of $250,000 or more, brokered deposits and negotiable CDs, deposits in foreign offices, short-term borrowings, FHLB advances, other long-term debt, and subordinated notes. At September 30, 2011, total wholesale funding was $7.6 billion, a decrease from $8.4 billion at December 31, 2010. There are no maturities of Bank obligations until 2012, when debt maturities of $664.9 million are payable.

The Bank also has access to the Federal Reserve’s discount window. These borrowings are secured by commercial loans and home equity lines-of-credit. The Bank is also a member of the FHLB, and as such, has access to advances from this facility. These advances are generally secured by residential mortgages, other mortgage-related loans, and available-for-sale securities. Information regarding amounts pledged, for the ability to borrow if necessary, and the unused borrowing capacity at both the Federal Reserve Bank and the FHLB, is outlined in the following table:

Table 36 — Federal Reserve and FHLB Borrowing Capacity


	September 30,		December 31,
(dollar amounts in billions)	2011		2010
Loans and securities pledged:
Federal Reserve Bank	$	10.2	$	9.7
FHLB		7.9		7.8

Total loans and securities pledged	$	18.1	$	17.5

Total unused borrowing capacity at Federal Reserve Bank and FHLB	$	9.8	$	8.8

We can also obtain funding through other methods including: (1) purchasing federal funds, (2) selling securities under repurchase agreements, (3) the sale or maturity of investment securities, (4) the sale or securitization of loans, (5) the sale of national market certificates of deposit, (6) paydowns and/or securitization arising from the relatively shorter-term structure of our commercial loans and automobile loans, and (7) the issuance of common and preferred stock.

During the 2011 third quarter, Huntington transferred automobile loans totaling $1.0 billion to a trust in a securitization transaction. The securitization qualified for sale accounting. Net proceeds of $1.0 billion from the transaction will be used for general corporate purposes, including repayment of other long-term debt.

At September 30, 2011, we believe the Bank has 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 nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from interest received from the Bank, interest and 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 September 30, 2011, December 31, 2010, and September 30, 2010, the parent company had $0.7 billion, $0.6 billion and $0.9 billion, respectively, in cash and cash equivalents. The decrease from September 30, 2010, primarily reflected the repurchase of our TARP Capital in the 2010 fourth quarter, along with dividend payments on our common and preferred stock, partially offset by the net impact of the equity and debt public offerings. Appropriate limits and guidelines are in place to ensure the parent company has sufficient cash to meet operating expenses and other commitments over the next 12 months without relying on subsidiaries or capital markets for funding.

During the 2010 fourth quarter, we completed a public offering and sale of 146.0 million shares of common stock at a price of $6.30 per share, or $920.0 million in aggregate gross proceeds. Also during the 2010 fourth quarter, we completed the public offering and sale of $300.0 million aggregate principal amount of 7.00% Subordinated Notes due 2020. We used the net proceeds from these transactions to repurchase our TARP Capital. On January 19, 2011, we repurchased the warrant we had issued to the Treasury at an agreed upon purchase price of $49.1 million. The warrant had entitled the Treasury to purchase 23.6 million shares of common stock.

On October 20, 2011, we announced that the board of directors had declared a quarterly common stock cash dividend of $0.04 per common share. The dividend is payable on January 3, 2012, to shareholders of record on December 20, 2011. Based on the dividend increase to $0.04 per common share, cash demands required for common stock dividends are estimated to be approximately $34.6 million per quarter. Based on the current dividend, cash demands required for Series A Preferred Stock are estimated to be approximately $7.7 million per quarter.

Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend to the parent company at September 30, 2011, without regulatory approval. We do not anticipate that the Bank will need to request regulatory approval to pay dividends in the near future. 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 maturities of parent company obligations until 2013, when a debt maturity of $50.0 million is payable. It is our policy to keep operating cash on hand at the parent company to satisfy any cash demands for the next 12 months.

We sponsor a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan provides benefits based upon length of service and compensation levels. Our policy is to contribute an annual amount that is at least equal to the minimum funding requirements. The Bank and other subsidiaries fund approximately 90% of pension contributions. There is no required minimum contribution for 2011, although we contributed $50 million in March 2011 and anticipate contributing an additional $40 million in the 2011 fourth quarter. Funding requirements are calculated annually as of the end of the year and are heavily dependent on the value of our pension plan assets and the interest rate used to discount plan obligations. To the extent that the low interest rate environment continues, including as a result of the Federal Reserve Maturity Extension Program “Operation Twist”, or the pension plan does not earn the expected asset return rates, annual pension contribution requirements in future years could increase and such increases could be significant. However, any additional pension contributions are not expected to significantly impact liquidity.

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.

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.

Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years and are expected to expire without being drawn upon. Standby letters-of-credit are included in the determination of the amount of risk-based capital that the parent company and the Bank are required to hold.

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 September 30, 2011, we had $0.5 billion of standby letters-of-credit outstanding, of which 80% were collateralized. Included in this $0.5 billion are letters-of-credit issued by the Bank that support securities that were issued by our customers and remarketed by The Huntington Investment Company, our broker-dealer subsidiary.

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 mortgage loans held for sale. At September 30, 2011, December 31, 2010, and September 30, 2010, we had commitments to sell residential real estate loans of $673.5 million, $998.7 million, and $1,254.4 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.

To mitigate operational risks, we have established a senior management Operational Risk Committee and a senior management Legal, Regulatory, and Compliance Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. Both of these committees report any significant findings and recommendations to the Risk Management Committee. Additionally, potential concerns may be escalated to our Board Risk Oversight Committee, as appropriate.

The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.

Representation and Warranty Reserve

We primarily conduct our loan sale and securitization activity with FNMA and FHLMC. In connection with these and other securitization transactions, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. We may be required to repurchase individual loans and / or indemnify these organizations against losses due to a loan not meeting the established criteria. We have a reserve for such losses, which is included in accrued expenses and other liabilities. The reserves were estimated based on historical and expected repurchase activity, average loss rates, and current economic trends. The level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions containing a level of uncertainty and risk that may change over the life of the underlying loans. We do not believe we have sufficient information to estimate the range of reasonably possible loss related to representation and warranty exposure.

The table below reflects activity in the representations and warranties reserve:

Table 37 — Summary of Reserve for Representations and Warranties on Mortgage Loans Serviced for Others


	2011									2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third
Reserve for representations and warranties, beginning of period	$	24,496		$	23,785		$	20,170		$	18,026		$	10,519
Assumed reserve for representations and warranties		—			—			—			—			7,000
Reserve charges		(3,340	)		(365	)		(270	)		(4,242	)		(1,787	)
Provision for representations and warranties		2,697			1,076			3,885			6,386			2,294


Reserve for representations and warranties, end of period	$	23,853		$	24,496		$	23,785		$	20,170		$	18,026

Table 38 — Mortgage Loan Repurchase Statistics


	2011									2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third
Number of loans sold		3,877			3,875			8,933			10,314			6,944

Amount of loans sold (UPB)	$	529,722		$	512,069		$	1,313,994		$	1,577,879		$	1,043,024

Number of loans repurchased		43			36			15			71			118

Amount of loans repurchased (UPB)	$	7,325		$	4,755		$	2,343		$	13,198		$	15,356

Number of claims received		96			130			118			105			108

Successful dispute rate (1)		27	%		49	%		86	%		21	%		36	%

Number of make whole payments		38			8			6			44			19

Amount of make whole payments	$	3,392		$	445		$	560		$	3,835		$	1,444


⁽¹⁾		Successful disputes are a percent of close out requests. Process changes in 2011 significantly decreased close out requests inflating this ratio.

Process changes in 2011 increased the number of make whole payment request disputes and significantly decreased close outs of make whole requests. The related reserves were increased to account for the delay in close out requests.

Foreclosure Documentation

Compared to the high volume servicers, we service a relatively low volume of residential mortgage foreclosures, with approximately 4,100 foreclosure cases as of September 30, 2011, in states that require foreclosures to proceed through the courts. We have reviewed and are continuing to review our residential foreclosure process. We have not found any evidence suggesting that any foreclosure by the Bank should not have proceeded. We have and are strengthening our processes and controls to ensure that our foreclosure processes do not have the deficiencies identified in those institutions which are the subject of the consent orders between the high volume servicers and their respective federal regulators.

Compliance Risk

Financial institutions are subject to several laws, rules, and regulations emanating at both the federal and state levels. These broad-based mandates include, but are not limited to, expectations on anti-money laundering, lending limits, client privacy, fair lending, community reinvestment, and other important areas. Recently, the volume and complexity of regulatory changes have added to the overall compliance risk. We have invested in various resources to help ensure we meet expectations, and we have a team of compliance experts dedicated to ensuring our conformance. We require training for our colleagues for several broad-based laws and regulations. For example, all of our colleagues are expected to pass courses on anti-money laundering and customer privacy. Those colleagues who are engaged in lending activities must also take training related to flood disaster protection, equal credit opportunity, fair lending, and / or a variety of other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.

Capital

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 $5.4 billion at September 30, 2011, an increase of $0.4 billion, or 8%, from December 31, 2010, primarily reflecting an increase in retained earnings. We believe our current level of capital is adequate.

TARP Capital

As discussed in our 2010 Form 10-K, we fully exited our TARP relationship during the 2011 first quarter by repurchasing for $49.1 million the ten-year warrant we had issued to the Treasury as part of the TARP. Refer to the 2010 Form 10-K for a complete discussion regarding the issuing and repayment of our TARP Capital.

Capital Adequacy

The following table presents risk-weighted assets and other financial data necessary to calculate certain financial ratios that we use to measure capital adequacy:

Table 39 — Capital Adequacy


	2011									2010
(dollar amounts in millions)	September 30,			June 30,			March 31,			December 31,			September 30,
Consolidated capital calculations:

Common shareholders’ equity	$	5,037		$	4,890		$	4,676		$	4,618		$	3,867
Preferred shareholders’ equity		363			363			363			363			1,700

Total shareholders’ equity		5,400			5,253			5,039			4,981			5,567
Goodwill		(444	)		(444	)		(444	)		(444	)		(444	)
Other intangible assets		(188	)		(202	)		(215	)		(229	)		(244	)
Other intangible assets deferred tax liability (1)		66			71			75			80			85

Total tangible equity (2)		4,834			4,678			4,455			4,388			4,964
Preferred shareholders’ equity		(363	)		(363	)		(363	)		(363	)		(1,700	)

Total tangible common equity (2)	$	4,471		$	4,315		$	4,092		$	4,025		$	3,264


Total assets	$	54,979		$	53,050		$	52,949		$	53,820		$	53,247
Goodwill		(444	)		(444	)		(444	)		(444	)		(444	)
Other intangible assets		(188	)		(202	)		(215	)		(229	)		(244	)
Other intangible assets deferred tax liability (1)		66			71			75			80			85


Total tangible assets (2)	$	54,413		$	52,475		$	52,365		$	53,227		$	52,644


Tier 1 capital	$	5,488		$	5,352		$	5,179		$	5,022		$	5,480
Preferred shareholders’ equity		(363	)		(363	)		(363	)		(363	)		(1,700	)
Trust-preferred securities		(565	)		(565	)		(570	)		(570	)		(570	)
REIT-preferred stock		(50	)		(50	)		(50	)		(50	)		(50	)


Tier 1 common equity (2)	$	4,510		$	4,374		$	4,196		$	4,039		$	3,160


Risk-weighted assets (RWA)	$	44,376		$	44,080		$	43,024		$	43,471		$	42,759


Tier 1 common equity / RWA ratio (2)		10.17	%		9.92	%		9.75	%		9.29	%		7.39	%

Tangible equity / tangible asset ratio (2)		8.88			8.91			8.51			8.24			9.43

Tangible common equity / tangible asset ratio (2)		8.22			8.22			7.81			7.56			6.20

Tangible common equity / RWA ratio (2)		10.08			9.79			9.51			9.26			7.63


(1)		Other intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.

(2)		Tangible equity, Tier 1 common equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently.

Capital continued to strengthen as period-end capital ratios improved compared to December 31, 2010. Our Tier 1 common risk-based ratio improved 88 basis points to 10.17% at September 30, 2011 compared to 9.29% at December 31, 2010. This increase primarily reflected the combination of an increase in retained earnings and a reduction in the disallowed tax deferred asset.

The Tier 1 common risk-based ratio is the metric that has gained prominence with regulators. The recent international banking Basel III accord sets this ratio minimum at 7.0% with an additional buffer of up to 2.5% for a GSIFI. While we are not a GSIFI, the Dodd-Frank Act requires that any bank with assets over $50.0 billion would be subject to additional scrutiny. U.S. regulators have identified such qualifying banks as SIFIs. With $55 billion in assets at September 30, 2011, we are at the lower range of the SIFI group. Although we do not know at this time how much, if any, our required buffer will be, we believe that our current period-end capital ratios are well positioned.


UCS		Uniform Classification System
Unizan		Unizan Financial Corp.
UPB		Unpaid Principal Balance
USDA		U.S. Department of Agriculture
VA		U.S. Department of Veteran Affairs
VIE		Variable Interest Entity
WGH		Wealth Advisors, Government Finance, and Home Lending


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at September 30, 2011, December 31, 2010, and September 30, 2010			76

Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2011 and 2010			77

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2011 and 2010			78

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010			79

Notes to Unaudited Condensed Consolidated Financial Statements			80

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

Executive Overview			7

Discussion of Results of Operations			10

Risk Management and Capital:

Credit Risk			29

Market Risk			48

Liquidity Risk			50

Operational Risk			54

Compliance Risk			55

Capital			55

Business Segment Discussion			59

Additional Disclosures			73

Item 3. Quantitative and Qualitative Disclosures about Market Risk			142

Item 4. Controls and Procedures			142

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			142

Item 1A. Risk Factors			142

Item 6. Exhibits			142

Signatures			144

Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT