Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in 1866, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services. Our banking offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial service activities are also conducted in other states including Private Financial Group (PFG) offices in Florida, and Mortgage Banking offices in Maryland and New Jersey. International banking services are available through the headquarters office in Columbus and a limited purpose office located in both the Cayman Islands and Hong Kong.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. This MD&A provides updates to the discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K). This MD&A should be read in conjunction with our 2008 Form 10-K as well as the financial statements, notes, and other information contained in this report.

Our discussion is divided into key segments:

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

This report, including this MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act.

Actual results could differ materially from those contained or implied by such statements for a variety of factors including: (1) deterioration in the loan portfolio could be worse than expected due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) changes in economic conditions; (3) movements in interest rates; (4) competitive pressures on product pricing and services; (5) success and timing of other business strategies; (6) the nature, extent, and timing of governmental actions and reforms, including existing and potential future restrictions and limitations imposed in connection with the Troubled Asset Relief Program (TARP) voluntary Capital Purchase Plan (CPP) or otherwise under the Emergency Economic Stabilization Act of 2008; and (7) extended disruption of vital infrastructure.

Additional factors that could cause results to differ materially from those described above can be found in our 2008 Form 10-K, and documents subsequently filed by us with the Securities and Exchange Commission (SEC). All forward- lookingforward-looking statements included in this filing are based on information available at the time of the filing. We assume no obligation to update any forward-looking statement.

We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1)credit risk, which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2)market risk, which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3)liquidity risk, which is the risk of loss due to the possibility that funds may not be available to satisfy current or future obligations resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues, and (4)operational risk, which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks.

More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2008 Form 10-K. Additional information regarding risk factors can also be found in the “Risk Management and Capital” discussion.

As described in the Credit Risk“Credit Risk” discussion, credit quality performance continued to be under pressure during the first quartersix-month period of 2009, with nonaccrual loans and leases (NALs) and nonperforming assets (NPAs) both increasing at March 31,June 30, 2009, compared with December 31, 2008, and March 31,June 30, 2008. The allowance for loan and leasecredit losses (ALLL)(ACL) of $838.5$964.8 million at March 31,June 30, 2009, was 2.12%2.51% of period-end loans and leases and 54%53% of period-end nonaccrual loans and leases.NALs.

Our business depends on the creditworthinessThe majority of our customerscredit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is mitigated through a combination of credit policies and processes, market risk management activities, and portfolio diversification. However, adverse changes in our borrowers ability to meet their financial obligations under agreed upon terms and, in some cases, to the value of the assets securing our loans to them.them may increase our credit risk. Our commercial portfolio, as well as our real estate-related portfolios, have continued to be negatively affected by the ongoing reduction in real estate values and reduced levels of sales and leasing activities. More generally, all of our loan portfolios, particularly our construction and commercial real estate loans, have been affected by the sustained economic weakness of our Midwest markets and the impact of higher unemployment rates. We periodically review the ALLLACL for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and NPAs. There is no certainty that the ALLLACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ALLLACL is not adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.

Bank regulators periodically review our ALLLACL and may require us to increase our provision for loan and lease losses or loan charge-offs. Any increase in our ALLLACL or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and our financial condition.

In particular, an increase in our ALLLACL could result in a reduction in the amount of our tangible common equity (TCE). and/or our Tier 1 common equity. Given the focus on TCE,these measurements, we may be required to raise additional capital through the issuance of common stock as a result of an increase in our ALLL.ACL. The issuance of additional common stock or other factorsactions could have a dilutive effect on the existing holders of our common stock, and adversely affect the market price of our common stock.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to the U.S. Treasury Department’s CPP under the TARP announced lastin the fall of 2008 and the new Capital Assistance Program (CAP) announced thisin spring of 2009, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, has imposed a number of restrictions and limitations on the operations of financial services firms participating in the federal programs.

These programs subject us and other financial institutions that participate in them to additional restrictions, oversight, and costs that may have an adverse impact on our business, financial condition, results of operations, or the price of our common stock. In addition, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including as related to compensation, interest rates, the impact of bankruptcy proceedings on consumer real property mortgages, and otherwise. Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation, or its application. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, negatively impact the recoverability of certain of our recorded assets, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner.

We are not restricted from issuing additional authorized shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. We continually evaluate opportunities to access capital markets taking into account our regulatory capital ratios, financial condition, and other relevant considerations, and anticipate that, subject to market conditions, we are likely to take further capital actions. Such actions, with regulatory approval when required, may include opportunistically retiring our outstanding securities, including our subordinated debt, trust preferredtrust-preferred securities, and preferred shares, in open market transactions, privately negotiated transactions, or public offers for cash or common shares, as well as the issuance ofissuing additional shares of common stock in public or private transactions in order to increase our capital levels above our already “well-capitalized” levels, as defined by the federal bank regulatory agencies, as well asand other regulatory capital targets.

In addition, both HuntingtonDuring the 2009 second quarter, the Federal Reserve conducted a Supervisory Capital Assessment Program (SCAP) on the country’s 19 largest bank holding companies to determine the amount of capital required to absorb losses that could arise under “baseline” and the Bank are highly regulated, and our regulators could require us to raise additional common equity in the future, whether under the CAP or otherwise.“more adverse” economic scenarios. While we were not one of thethese 19 institutions required to conduct a forward-looking capital assessment, or “stress test”, under the Supervisory Capital Assessment Program (SCAP), it is possible that the U.S. Treasury could extend the SCAP assessment (and related potential requirementwe voluntarily conducted our own analysis and recognized a need to raise additional capital privately or throughto improve certain capital ratios, including our Tier 1 common equity risk based ratio. During the CAP)first six-month period of 2009, we issued an additional 201.6 million shares of common stock. The issuance of these additional shares of common stock was dilutive to other institutions, including us. Alternatively,existing common shareholders.(See the “Capital” section located within the “Risk Management and Capital” section for additional information).

Both Huntington and the Bank are highly regulated, and we, could voluntarily apply to participate in CAP, although we currently do not intend to apply. Furthermore, bothas well as our regulators, and wecontinue to regularly perform a variety of capital analyses, of our assets, including the preparation of stress case scenarios, and asscenarios. As a result of those assessments, we could determine, or our regulators could require us, to raise additional capital.capital in the future. Any such capital raise could include, among other things, the potential issuance of additional common equity to the public, the potential issuance of common equity to the government under the CAP, or the conversionadditional conversions of our existing Series B Preferred Stock to common equity. There could also be market perceptions that we need to raise additional capital, whether as a result of public disclosures that may be made regarding the SCAP stress test methodology or otherwise, and regardless of the outcome of any stress test or other stress case analysis, such perceptions could have an adverse effect on the price of our common stock.

The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities, could be substantially dilutive to existing common stockholders. Holdersshareholders. Shareholders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to existing stockholders.shareholders. The market price of our common stock could decline as a result of sales of shares of our common stock or securities convertible into or exchangeable for common stock in anticipation of such sales.

Furthermore, we still face risk relating to the Franklin Credit Management (Franklin) relationship not withstanding the restructuring announced on March 31, 2009.

Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2009 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent that we believe the adoption of new accounting standards will materially affect our financial condition, results of operations, or liquidity, the impacts or potential impacts are discussed in the applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Consolidated Financial Statements included in our 2008 Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis,MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary to understand and evaluate our company, financial position, results of operations, and cash flows.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed in our 2008 Form 10-K.

The following discussion provides updates of our accounting estimates related to the fair value measurements of certain portfolios within our investment securities portfolio, goodwill, and Franklin loans.

In AprilEffective with the 2009 the Financial Accounting Standards Board (FASB) issuedsecond quarter, we adopted two FASB Staff Positions (FSPs) that could impact estimates and assumptions utilized by us in determining the fair values of securities. The first, FSP Financial Accounting Standard (FAS) 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” reaffirms the exit price fair value measurement guidance in Statement No. 157, “Fair Value Measurements,” and also provides additional guidance for estimating fair value in accordance with Statement No. 157 when the volume and level of activity for the asset or liability have significantly decreased.

Alt-A mortgage-backed and private-label collateralized mortgage obligation (CMO) securities represent securities collateralized by first-lien residential mortgage loans. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within these portfolios as Level 3 onin the fair value hierarchy. The securities were priced with the assistance of an outside third-party consultant using a discounted cash flow approach and the independent third-party’s proprietary pricing model. The model used inputs such as estimated prepayment speeds, losses, recoveries, default rates that were implied by the underlying performance of collateral in the structure or similar structures, discount rates that were implied by market prices for similar securities, collateral structure types, and house price depreciation/appreciation rates that were based upon macroeconomic forecasts.

We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if the securities in these portfolios were other-than-temporarily-impaired. Using the guidance in FSP EITF 99-20-1, weWe used the analysis to determine whether we believed it probable that all contractual cash flows would not be collected. All securities in these portfolios remained current with respect to interest and principal at March 31,June 30, 2009.

Our analysis indicated, as of March 31,June 30, 2009, a total of 14 Alt-A mortgage-backed securities and one4 private-label CMO wouldsecurities could experience loss of principal.principal in the future. The future expected losses of principal on these other-than-temporarily impaired securities ranged from 0.1% to 86.7%89.1% of thetheir par value. The average amount of future principal loss was 6.3%3.9% of thetheir par value. These losses were projected to occur beginning anywhere from 86 months to as many as 235 months18 years in the future. We measured the amount of credit impairment on these securities using the fair value of the security in the scenario we considered to be most likely, using discount rates ranging from 10% to 16%, depending on both the potential variability of outcomes and the expected duration of cash flows fordiscounted at each security.securities effective rate. As a result, in the 2009 firstsecond quarter, we recorded $1.5$5.9 million of credit OTTI in our Alt-A mortgage-backed securities portfolio representing additional impairment on four previously impaired securities and one security that was previously not impaired. NoCredit OTTI of $1.3 million was recorded for ourthree newly impaired and one previously impaired private-label CMO securities in the 2009 firstsecond quarter.

Pooled-trust-preferred securities represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities within this portfolio as Level 3 onin the fair value hierarchy. The collateral generally consisted of trust preferredtrust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. The firstA full cash flow analysis was used to estimate fair values and second-tier bankassess impairment for each security within this portfolio. Impairment was calculated as the difference between the carrying amount and the amount of cash flows discounted at each securities effective rate. We engaged a third party specialist with direct industry experience in pooled trust preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. Relying on cash flows was necessary because there was a lack of observable transactions in the insurance companymarket and many of the original sponsors or dealers for these securities were pricedno longer able to provide a fair value that was compliant with FASB Statement No. 157,Fair Value Measurements.

The analysis was completed by evaluating the assistancerelevant credit and structural aspects of an outside third-party consultanteach pooled trust preferred security in the portfolio, including collateral performance projections for each piece of collateral in each security and terms of each security’s structure. The credit review included analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using a discounted cash flow approach,the most recently available financial and regulatory information for each underlying collateral issuer. We also reviewed historical industry default data and current/near term operating conditions. Using the independent third-party’s proprietary pricing models. The model used inputs such asresults of our analysis, we estimated appropriate default and deferral rates that were implied fromrecovery probabilities for each piece of collateral and then estimated the underlying performance of the issuers in the structure, and discount rates that were implied by market prices for similar securities and collateral structure types.

Goodwill is tested for impairment annually, as of October 1, using a two-step process that begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis, using the same two-step process as the annual testing, if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We had previously performed goodwill impairment tests at June 30, October 1, and December 31, 2008, and concluded no impairment existed at those dates. During the 2009 first quarter, our stock price declined 78%, from $7.66 per common share at December 31, 2008, to $1.66 per common share at March 31, 2009. Peer banks also experienced similar declines in market capitalization. This decline primarily reflected the continuing economic slowdown and increased market concern surrounding financial institutions’ credit risks and capital positions, as well as uncertainty related to increased regulatory supervision and intervention. We determined that these changes would more-likely-than-not reduce the fair value of certain reporting units below their carrying amounts. Therefore, we performed an interim goodwill impairment test during the 2009 first quarter, which is a two-step process.quarter. An independent third party was engaged to assist with the impairment assessment. We had previously performed goodwill impairment tests at June 30, October 1, and December 31, 2008, and concluded no impairment existed at those dates.

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. The assumptions used in the goodwill impairment assessment and the application of these estimates and assumptions are discussed below.

The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. WeFor our impairment testing conducted during the 2009 first quarter, we identified four reporting units: Regional Banking, PFG, Insurance, and Auto Finance and Dealer Services (AFDS).

For Regional Banking, we utilized both the income and market approaches to determine fair value. The income approach was based on discounted cash flows derived from assumptions of balance sheet and income statement activity. An internal forecast was developed by considering several long-term key business drivers such as anticipated loan and deposit growth. The long-term growth rate used in determining the terminal value was estimated at 2.5%. The discount rate of 14% was estimated based on the Capital Asset Pricing Model, which considered the risk-free interest rate (20-year Treasury Bonds), market risk premium, equity risk premium, beta and a company-specific risk factor. The company-specific risk factor was used to address the uncertainty of growth estimates and earnings projections of management. For the market approach, revenue, earnings and market capitalization multiples of comparable public companies were selected and applied to the Regional Banking unit’s applicable metrics such as book and tangible book values. A 20% control premium was used in the market approach. The results of the income and market approaches were weighted 75% and 25%, respectively, to arrive at the final calculation of fair value. As market capitalization declined across the banking industry, we believed that a heavier weighting on the income approach is more representative of a market participant’s view. For the Insurance reporting unit, management utilized a market approach to determine fair value. The aggregate fair market values were compared towith market capitalization as an assessment of the appropriateness of the fair value measurements. As our stock price fluctuated greatly, we used our average stock price for the 30 days preceding the valuation date to determine market capitalization. The aggregate fair market values of the reporting units compared towith market capitalization indicated an implied premium of 27%. A control premium analysis indicated that the implied premium was within range of overall premiums observed in the market place. Neither the Regional Banking nor Insurance reporting units passed Step 1.

The second step (Step 2) of impairment testing is necessary only if the reporting unit does not pass Step 1. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.

To determine the implied fair value of goodwill, the fair value of Regional Banking and Insurance (as determined in Step 1) was allocated to all assets and liabilities of the reporting units including any recognized or unrecognized intangible assets. The allocation was done as if the reporting unit was acquired in a business combination, and the fair value of the reporting unit was the price paid to acquire the reporting unit. This allocation process is only performed for purposes of testing goodwill for impairment. The carrying values of recognized assets or liabilities (other than goodwill, as appropriate) were not adjusted nor were any new intangible assets recorded. Key valuations were the assessment of core deposit intangibles, the mark-to-fair-value of outstanding debt and deposits, and mark-to-fair-value on the loan portfolio. Core deposits were valued using a 15% discount rate. The marks on our outstanding debt and deposits were based upon observable trades or modeled prices using current yield curves and market spreads. The valuation of the loan portfolio indicated discounts in the ranges of 9%-24%, depending upon the loan type. For every 100 basis point change in the valuation of our overall loan portfolio, implied goodwill would be impacted by approximately $325 million. The estimated fair value of these loan portfolios was based on an exit price, and the assumptions used were intended to approximate those that a market participant would have used in valuing the loans in an orderly transaction, including a market liquidity discount. The significant market risk premium that is a consequence of the current distressed market conditions was a significant contributor to the valuation discounts associated with these loans. We believed these discounts were consistent with transactions currently occurring in the marketplace.

Upon completion of Step 2, we determined that the Regional Banking and Insurance reporting units’ goodwill carrying values exceeded their implied fair values of goodwill by $2,573.8 million and $28.9 million, respectively. As a result, we recorded a noncash pretax impairment charge of $2,602.7 million, or $7.09 per common share, in the 2009 first quarter. The impairment charge was included in noninterest expense and did not affect our regulatory and tangible capital ratios.

Primarily as a result of the 2009 first and second quarter impairment charge,charges, our goodwill totaled $0.5$0.4 billion at March 31, 2009, down from $3.1 billion at December 31, 2008.June 30, 2009. Of these amounts,this amount, $0.3 billion and $2.9 billion of our total goodwill was allocated to Regionalthe Retail and Business Banking at March 31, 2009 and December 31, 2008, respectively.segment.

Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future. If our market capitalization decreases or the liquidity discount on our loan portfolio improves significantly without a concurrent increase in market capitalization, we may be required to record additional goodwill impairment losses in future periods, whether in connection with our next annual impairment testing in the 2009 third quarter or prior to that, if any changes constitute a triggering event. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material. However, any such future impairment loss would be limited to the remaining goodwill balance of $0.5$0.4 billion at March 31,June 30, 2009.

Franklin is a specialty consumer finance company primarily engaged in servicing residential mortgage loans. Prior to March 31, 2009, Franklin owned a portfolio of loans secured by firstfirst- and secondsecond- liens on 1-4 family residential properties. At December 31, 2008, our total loans outstanding to Franklin were $650.2 million, all of which were placed on nonaccrual status. Additionally, the specific ALLLallowance for loan and lease losses for the Franklin portfolio was $130.0 million, resulting in our net exposure to Franklin at December 31, 2008, of $520.2 million.

On March 31, 2009, we entered into a transaction with Franklin whereby a Huntington wholly-owned REIT subsidiary (REIT) exchanged a noncontrolling amount of certain equity interests for a 100% interest in Franklin Asset Merger Sub, LLC (Merger Sub); a wholly-owned subsidiary of Franklin. This was accomplished by merging Merger Sub into a wholly-owned subsidiary of REIT. Merger Sub’s sole assets were two trust participation certificates evidencingindirectly acquired an 84% ownership rightsright in a trust (New Trust) which holds all the underlying consumer loans and other real estate owned (OREO) properties that were formerly collateral for the Franklin commercial loans. The equity interests provided to Franklin by the REIT were pledged by Franklin as collateral for the Franklin commercial loans.

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

The below summary provides an update of key events and trends during the current quarter. Comparisons are made with the prior quarter, as we believe this comparison provides the most meaningful measurement relative to analyzing trends.

We reported a net loss of $2,433.2$125.1 million in the 2009 firstsecond quarter, representing a loss per common share of $6.79. This loss included a net negative impact of $6.73 per common share primarily reflecting a noncash $2,602.7 million goodwill impairment charge ($7.09 per common share) that reduced net income but did not impact key capital ratios, partially offset by a $159.9 million nonrecurring tax benefit ($0.44 per common share) associated with the current quarter’s Franklin restructuring.$0.40. This compared unfavorablyfavorably with the prior quarter’s net loss of $417.3$2,433.2 million, or $1.20$6.79 per common share.share, as the prior quarter was significantly impacted by a $2,602.7 million ($7.09 per common share) goodwill impairment charge, partially offset by a $159.9 million ($0.44 per common share) nonrecurring tax benefit associated with the prior quarter’s Franklin restructuring. In addition to the goodwill impairment and tax benefit,these items, comparisons with the prior quarter were significantly impacted by other factors that are discussed later in the “Significant Items” section(see “Significant Items” discussion).

During the currentThe largest contributor to our 2009 second quarter we took proactive stepsnet loss was a $121.9 million, or 42%, increase in our provision for credit losses to $413.7 million. This increase resulted from our capital position. We converted $114.1 milliondecision to continue to build reserves based primarily from our review of our Series A Preferred stock into common stock, and we were able to shrink our balance sheet by securitizing $1.0every “noncriticized” commercial relationship with an aggregate exposure of over $500,000. The review encompassed $13 billion of automobile loans,outstanding balances consisting of commercial and selling $600 million of our municipal securities, as well as $200 million of mortgageindustrial (C&I), CRE, and business banking loans. We also made the difficult decision to cut the quarterly common stock dividend to $0.01 per share, effective with the dividend declared on January 22, 2009. These actions contributed to a 61 basis point improvement in our TCE ratio to 4.65% compared with the prior quarter-end; however, these actions negatively impacted our net interest margin. These actions also contributed, in part, to a substantial improvement of our period-end liquidity position. Other factors contributing to the improvement in our liquidity position included a $1.2 billion increase in period-end core deposits compared with December 31, 2008, and a $600 million debt issuance as part of the Temporary Liquidity Guarantee Program (TLGP). At March 31, 2009, the parent company had sufficient cash for operations and does not have any debt maturities for several years. Further, we believe the Bank has a manageable level of debt maturities during the next 12-month period.

Credit quality performance in the 2009 firstsecond quarter was mixed. Non-Franklin-NCOscontinued to be negatively impacted by the sustained economic weaknesses in our Midwest markets. The continued trend of higher unemployment rates and declining home values in our markets negatively impacted consumer loan credit quality. Non-Franklin net charge-offs (NCOs) totaled $213.2$344.5 million, compared with $137.3$213.2 million in the 2008 fourthprior quarter. The increase was entirelylargely within the commercial loan portfolio, as NCOs in the consumer loan portfolio declined slightly. Non-Franklin-relatedsingle family home builder and retail project segments continued to be stressed. NPAs also increased, primarily within the commercial loan portfolio, reflecting the continued decline in the housing markets, and stress on retail sales. In general, commercial loans supporting the housing or construction segments are experiencing the most stress. Our outlook is that the economy will remain under stress, and that no improvement will be seen through the end of 2009. As a result, we expect that the overall level of NPAs and NCOs will remain elevated, especially as related to continued softness in our commercialC&I and industrial (C&I)CRE portfolios.

During the current quarter, we took proactive steps to increase our capital position as we executed total additions of $704.9 million to Tier 1 common equity. This capital raising was accomplished through several actions including discretionary equity issuances, a common stock offering, conversion of preferred stock, and commercial real estate (CRE) portfolios.a gain on the redemption of a portion of our junior subordinated debt. These actions strengthened all of our period-end capital ratios. Our TCE ratio increased to 5.68% from 4.65%, and our Tier 1 common equity ratio increased to 6.80% from 5.64%.

Certain componentsFrom time to time, revenue, expenses, or taxes, are impacted by items we believe 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 we believe the outsized impact at that time to be one-time 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: regulatory actions/assessments, windfall gains, changes in accounting principles, one-time tax assessments/refunds, and other similar items. In other cases they may result from our decisions associated with significant corporation actions out of the income statementordinary course of business: merger/restructuring charges, recapitalization actions, goodwill impairment, and other similar items.

Even though certain revenue and expense items are inherentlynaturally subject to more volatility than others. Asothers due to changes in market and economic environment conditions, as a result, such items may be viewed differentlygeneral rule, volatility alone does not define a significant item. For example, changes in an assessment of “underlying” or “core” earnings performance compared with expectations and/or assessments of future performance trends.the provision for credit losses, gains/losses from investment activities, and asset valuation writedowns reflect ordinary banking activities and are, therefore, typically excluded from consideration as a significant item.

Therefore, weWe believe the disclosure of certain “Significant Items” affectingin current and prior period results aids in a better understanding our performance and trends so readers can ascertain which of corporate performance. The reader may determine which,such items, if any, itemsthey may wish to include or exclude from an analysis of our performance 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.

“Significant Items” for any particular period are not intended to be a performance analysis.complete list of items that may materially impact current or future period performance. A number of items could materially impact these periods, including those described in our 2008 Annual Report on Form 10-K and other factors described from time to time in our other filings with the SEC.

To this end, we have adopted a practiceThe above description of listing as “Significant Items” individual and/or particularly volatilerepresents a change in definition from that provided in our 2008 Annual Report. Certain components listed within the “Timing Differences” section found within the “Significant Items” section on our 2008 Annual Report are no longer considered within the scope of our definition of “Significant Items”. Although these items only ifare subject to more volatility than other items due to changes in market and economic environment conditions, they impact the current period results by $0.01 per share or more. The following table presents Significant Items for the quarters ended March 31, 2009, December 31, 2008, and March 31, 2008.reflect ordinary banking activities.

Fully-taxable equivalent net interest income decreased $41.2$44.4 million, or 11%, compared withfrom the year-ago quarter. This reflected the unfavorable impact ofquarter primarily reflecting a 2619 basis point decline in the net interest margin to 2.97%3.10% from 3.23%3.29%. This decline primarily reflected the unfavorable impact of maintaining a higher liquidity position partially offset by managed reductions of our balance sheet and other capital management initiatives. Declining market interest rates as well as the impact of increased NALs also contributed to the decline in net interest margin. Average earning assets also decreased $1.1$2.8 billion, or 6%, primarily reflecting a $0.9$2.0 billion, or 77%5%, decline in average trading account securities, and a $0.8 billion reduction in average federal funds sold and securities purchased under resale agreements, partially offset by a $0.5 billion, or 1%, increase in average total loans and leases.

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