UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
(Mark One)
 
   
þ
  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
   
For the fiscal year ended December 31, 2006
 
   
or
 
   
o
  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 0-2525
Huntington Bancshares Incorporated
(Exact name of registrant as specified in its charter)
     
Maryland
(State or other jurisdiction of
incorporation or organization)
  31-0724920

(I.R.S. Employer Identification No.)
     
41 S. High Street, Columbus, Ohio
(Address of principal executive offices)
  43287
(Zip Code)
Registrant’s telephone number, including area code (614) 480-8300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock — Without Par Value
(Title of class)
NASDAQ
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act. þ Yes o No
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes þ No
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ   Accelerated filer  o   Non-accelerated filer  o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) o Yes þ No
     The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2006, determined by using a per share closing price of $23.58, as quoted by NASDAQ on that date, was $5,402,572,093. As of January 31, 2007, there were 235,506,423 shares of common stock without par value outstanding.
Documents Incorporated By Reference
     Parts I and II of this Form 10-K incorporate by reference certain information from the registrant’s Annual Report to shareholders for the period ended December 31, 2006.
     Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2007 Annual Shareholders’ Meeting.
 
 

 


 

HUNTINGTON BANCSHARES INCORPORATED
INDEX
             
Part I.  
 
       
   
 
       
     Item 1.  
Business
    4  
   
 
       
     Item 1A.  
Risk Factors
    11  
   
 
       
     Item 1B.  
Unresolved Staff Comments
    17  
   
 
       
     Item 2.  
Properties
    17  
   
 
       
     Item 3.  
Legal Proceedings
    17  
   
 
       
     Item 4.  
Submission of Matters to a Vote of Security Holders
    17  
   
 
       
Part II.  
 
       
   
 
       
     Item 5.  
Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
    17  
   
 
       
     Item 6.  
Selected Financial Data
    19  
   
 
       
     Item 7.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    19  
   
 
       
     Item 7A.  
Quantitative and Qualitative Disclosures About Market Risk
    19  
   
 
       
     Item 8.  
Financial Statements and Supplementary Data
    19  
   
 
       
     Item 9.  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    19  
   
 
       
     Item 9A.  
Controls and Procedures
    19  
   
 
       
     Item 9A(T).  
Controls and Procedures
    19  
   
 
       
     Item 9B.  
Other Information
    20  
   
 
       
Part III.  
 
       
   
 
       
     Item 10.  
Directors, Executive Officers and Corporate Governance
    20  
   
 
       
     Item 11.  
Executive Compensation
    20  
   
 
       
     Item 12.  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    20  
   
 
       
     Item 13.  
Certain Relationships and Related Transactions, and Director Independence
    20  
   
 
       
     Item 14.  
Principal Accounting Fees and Services
    20  
   
 
       
Part IV.  
 
       
   
 
       
     Item 15.  
Exhibits and Financial Statement Schedules
    20  
   
 
       
Signatures     22  

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Huntington Bancshares Incorporated
PART I
     When we refer to “we,” “our,” and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean The Huntington National Bank, our only bank subsidiary.
Item 1: Business
     We are a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. 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, private mortgage insurance, reinsuring credit life and disability insurance, and other insurance and financial products and services. The Bank, organized in 1866, is our only bank subsidiary. At December 31, 2006, the Bank had:
             
  202 banking offices in Ohio     12 banking offices in Kentucky
  112 banking offices in Michigan     4 private banking offices in Florida
  26 banking offices in West Virginia     one foreign office in the Cayman Islands
  25 banking offices in Indiana     one foreign office in Hong Kong
     We conduct certain activities in other states including Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, and Vermont. Our foreign banking activities, in total or with any individual country, are not significant. At December 31, 2006, we had 8,081 full-time equivalent employees.
     Our lines of business are discussed in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report to shareholders, which is incorporated into this report by reference. The financial statement results for each of our lines of business can be found in Note 27 of the Notes to Consolidated Financial Statements included in Item 8 of this report.
Proposed Acquisition of Sky Financial Group, Inc.
     On December 20, 2006, Huntington announced the signing of a definitive agreement to acquire Sky Financial Group, Inc. (Sky Financial) in a stock and cash transaction expected to be valued at approximately $3.5 billion.
     Under the terms of the agreement, Sky Financial shareholders will receive 1.098 shares of Huntington common stock, on a tax-free basis, and a taxable cash payment of $3.023 for each share of Sky Financial common stock. The merger was unanimously approved by the boards of directors of both companies and is expected to close in the third quarter of 2007, pending customary regulatory approvals, as well as approval by both companies’ shareholders.
Competition
     Competition is intense in most of our markets. We compete on price and service with other banks and financial services companies such as savings and loans, credit unions, finance companies, mortgage banking companies, insurance companies, and brokerage firms. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking reform. For example, financial services reform legislation enacted in 1999 eliminated the long-standing Glass-Steagall Act restrictions on securities activities of bank holding companies and banks. That legislation, among other things, permits securities and insurance firms to engage in banking activities under specified conditions.

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Regulatory Matters
     On March 1, 2005, we announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreement called for independent third-party reviews, as well as the submission of written plans and progress reports by Management, and would remain in effect until terminated by the banking regulators. On May 10, 2006, Huntington announced that the FRBC notified Huntington’s board of directors that Huntington had satisfied the provisions of the written agreement dated February 28, 2005, and that the FRBC, under delegated authority of the Board of Governors of the Federal Reserve System (Federal Reserve), had terminated the written agreement.
General
     We are a bank holding company and are qualified as a financial holding company with the Federal Reserve. We are subject to examination and supervision by the Federal Reserve pursuant to the Bank Holding Company Act. We are required to file reports and other information regarding our business operations and the business operations of our subsidiaries with the Federal Reserve.
     Because we are a public company, we are also subject to regulation by the SEC. On December 15, 2005, the SEC adopted final rules establishing three categories of issuers for the purpose of filing periodic and annual reports. Under the new regulations, we are considered to be a “large accelerated filer” and, as such, must comply with the new SEC accelerated reporting requirements.
     The Bank is subject to examination and supervision by the Office of the Comptroller of the Currency (OCC). Its domestic deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (FDIC), which also has certain regulatory and supervisory authority over it. Our non-bank subsidiaries are also subject to examination and supervision by the Federal Reserve or, in the case of non-bank subsidiaries of the Bank, by the OCC. Our subsidiaries are also subject to examination by other federal and state agencies, including, in the case of certain securities and investment management activities, regulation by the SEC and the National Association of Securities Dealers.
     In addition to the impact of federal and state regulation, the Bank and our non-bank subsidiaries are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.
Holding Company Structure
     We have one national bank subsidiary and numerous non-bank subsidiaries. Exhibit 21.1 of this report lists all of our subsidiaries.
     The Bank is subject to affiliate transaction restrictions under federal laws, which limit the transfer of funds by a subsidiary bank to its parent or any non-bank subsidiary of its parent, whether in the form of loans, extensions of credit, investments, or asset purchases. Such transfers by a subsidiary bank are limited to:
    10% of the subsidiary bank’s capital and surplus for transfers to its parent corporation or to any individual non-bank subsidiary of the parent, and
 
    an aggregate of 20% of the subsidiary bank’s capital and surplus for transfers to such parent together with all such non-bank subsidiaries of the parent.
     Furthermore, such loans and extensions of credit must be secured within specified amounts. In addition, all affiliate transactions must be conducted on terms and under circumstances that are substantially the same as such transactions with unaffiliated entities.
     As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. Under this source of strength doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. They may charge the bank holding company with engaging in

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unsafe and unsound practices if they fail to commit resources to such a subsidiary bank. A capital injection may be required at times when the holding company does not have the resources to provide it.
     Any loans by a holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, the bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations.
     Federal law permits the OCC to order the pro rata assessment of shareholders of a national bank whose capital stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank’s capital stock. This statute also provides for the enforcement of any such pro rata assessment of shareholders of such national bank to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock owned by any assessed shareholder failing to pay the assessment. As the sole shareholder of the Bank, we are subject to such provisions.
     Moreover, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of deposit liabilities of such an institution are accorded priority over the claims of general unsecured creditors of such an institution, including the holders of the institution’s note obligations, in the event of liquidation or other resolution of such institution. Claims of a receiver for administrative expenses and claims of holders of deposit liabilities of the Bank, including the FDIC as the insurer of such holders, would receive priority over the holders of notes and other senior debt of the Bank in the event of liquidation or other resolution and over our interests as sole shareholder of the Bank.
     The Federal Reserve maintains a bank holding company rating system that emphasizes risk management, introduces a framework for analyzing and rating financial factors, and provides a framework for assessing and rating the potential impact of non-depository entities of a holding company on its subsidiary depository institution(s).
     A composite rating is assigned based on the foregoing three components, but a fourth component is also rated, reflecting generally the assessment of depository institution subsidiaries by their principal regulators. Ratings are made on a scale of 1 to 5 (1 highest) and, like current ratings, are not made public. The new rating system applies to us.
Dividend Restrictions
     Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. In the year ended December 31, 2006, we declared cash dividends to shareholders of $239.4 million. There are, however, statutory limits on the amount of dividends that the Bank can pay to us without regulatory approval.
     The Bank may not, without prior regulatory approval, pay a dividend in an amount greater than its undivided profits. In addition, the prior approval of the OCC is required for the payment of a dividend by a national bank if the total of all dividends declared in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years. At December 31, 2006, the Bank could have declared and paid $0.7 million of additional dividends to the parent company without regulatory approval.
     If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, such authority may require, after notice and hearing, that such bank cease and desist from such practice. Depending on the financial condition of the bank, the applicable regulatory authority might deem the bank to be engaged in an unsafe or unsound practice if the bank were to pay dividends. The Federal Reserve and the OCC have issued policy statements that provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings.
FDIC Insurance
     During 2006, the FDIC classified the Bank as a “well-capitalized” institution, the highest supervisory subcategory. The Bank, therefore, was not obliged under then-existing FDIC assessment practices to pay deposit insurance premiums for the year, either on its deposits insured by the Bank Insurance Fund or on that portion of its deposits acquired from savings and loan associations and insured by the Savings Association Insurance Fund. The

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Bank Insurance Fund and the Savings Association Insurance Fund were merged on March 31, 2006, to form the Deposit Insurance Fund (DIF). Although not subject in 2006 to FDIC assessments for deposit insurance premiums, the Bank was required, and continues to be required, to make payments for the servicing of obligations of the Financing Corporation that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding.
     With the enactment in February 2006 of the Federal Deposit Insurance Reform Act of 2005 and related legislation, and the adoption by the FDIC of implementing regulations in November 2006, major changes were introduced in FDIC deposit insurance for 2007 and subsequent years. Henceforth, the FDIC is to designate annually a target reserve ratio for the DIF within the range of 1.15 percent and 1.5 percent, instead of the prior fixed requirement to manage the DIF so as to maintain a designated reserve ratio of 1.25 percent. The FDIC adopted 1.25 percent as the designated reserve ratio for 2007.
     In addition, the FDIC adopted a new risk-based system for assessment of deposit insurance premiums on depository institutions, under which all such institutions would pay at least a minimum level of premiums. The new system is based on an institution’s probability of causing a loss to the DIF, and requires that each depository institution be placed in one of four risk categories, depending on a combination of its capitalization and its supervisory ratings. Under a base rate schedule, institutions in Risk Category I would be assessed between 2 and 4 basis points, while institutions in Risk Category IV could be assessed a maximum of 40 basis points.
     For 2007, the FDIC determined to set assessment rates at three basis points above the base schedule rates. To assist the transition to the new system requiring assessment payments by all insured institutions, depository institutions that were in existence on and paid deposit insurance assessments prior to December 31, 1996, are eligible for a one-time assessment credit based on their shares of the aggregate 1996 assessment base. We received a notification from the FDIC on October 16, 2006, that our one-time assessment credit was $25.3 million. The Bank, as a well capitalized institution, will be in Risk Category I and, therefore, subject to an assessment of 5.65 basis points. We expect our annual FDIC expense to be $15.9 million, which will initially be offset by the assessment credit.
Capital Requirements
     The Federal Reserve has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies. The risk-based capital ratio guidelines establish a systematic analytical framework that:
    makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations,
 
    takes off-balance sheet exposures into explicit account in assessing capital adequacy, and
 
    minimizes disincentives to holding liquid, low-risk assets.
     Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. A bank holding company’s risk-based ratio represents capital divided by total risk weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements.
     Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers. Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted short-term subordinated debt. These tiers are:
    “Tier 1”, or core capital, includes common equity, non-cumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less both goodwill and, with certain limited exceptions, all other intangible assets. Bank holding companies, however, may include up to a limit of 25% of cumulative preferred stock in their Tier 1 capital.
 
    “Tier 2”, or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations.
 
    “Total capital” is Tier 1 plus Tier 2 capital.

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     The Federal Reserve and the other federal banking regulators require that all intangible assets, except originated or purchased mortgage-servicing rights, non-mortgage servicing assets, and purchased credit card relationships, be deducted from Tier 1 capital. However, the total amount of these items included in a bank holding company’s capital cannot exceed 100% of its Tier 1 capital.
     Under the risk-based guidelines, financial institutions are required to maintain a risk-based ratio of 8%, with 4% being Tier 1 capital. The appropriate regulatory authority may set higher capital requirements when an institution’s circumstances warrant.
     Under the leverage guidelines, financial institutions are required to maintain a leverage ratio of at least 3%. The minimum ratio is applicable only to financial institutions that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate risk exposure, and the highest regulatory rating. Financial institutions not meeting these criteria are required to maintain a minimum Tier 1 leverage ratio of 4%.
     Special minimum capital requirements apply to equity investments in nonfinancial companies. The requirements consist of a series of marginal capital charges that increase within a range from 8% to 25% as a financial institution’s over-all exposure to equity investments increases as a percentage of its Tier 1 capital.
     Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described below under “Prompt Corrective Action” as applicable to “under-capitalized” institutions.
     The risk-based capital standards of the Federal Reserve, the OCC , and the FDIC specify that evaluations by the banking agencies of a bank’s capital adequacy will include an assessment of the exposure to declines in the economic value of the bank’s capital due to changes in interest rates. These banking agencies issued a joint policy statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on internal measures of exposure and active oversight of risk management activities by senior management.
Prompt Corrective Action
     The Federal Deposit Insurance Corporation Improvement Act of 1991, known as FDICIA, requires federal banking regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: “well-capitalized,” “adequately-capitalized,” “under-capitalized,” “significantly under-capitalized,” and “critically under-capitalized.”
     An institution is deemed to be:
    “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure;
 
    “adequately-capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a Tier 1 leverage ratio of 4% or greater and the institution does not meet the definition of a “well-capitalized” institution;
 
    “under-capitalized” if it does not meet one or more of the “adequately-capitalized” tests;
 
    “significantly under-capitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a Tier 1 leverage ratio that is less than 3%; and
 
    “critically under-capitalized” if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%.
     Throughout 2006, our regulatory capital ratios and those of the Bank were in excess of the levels established for “well-capitalized” institutions.
     FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company, if the depository institution would be “under-capitalized” after such payment. “Under-capitalized” institutions are subject to growth limitations and are required by the appropriate federal banking agency to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company

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would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan.
     If an “under-capitalized” institution fails to submit an acceptable plan, it is treated as if it is “significantly under-capitalized.” “Significantly undercapitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately-capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.
     “Critically under-capitalized” institutions may not, beginning 60 days after becoming “critically under-capitalized,” make any payment of principal or interest on their subordinated debt. In addition, “critically under-capitalized” institutions are subject to appointment of a receiver or conservator within 90 days of becoming so classified.
     Under FDICIA, a depository institution that is not “well-capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. As previously stated, the Bank is “well-capitalized” and the FDICIA brokered deposit rule did not adversely affect its ability to accept brokered deposits. The Bank had $0.7 billion of such brokered deposits at December 31, 2006.
Financial Holding Company Status
     In order to maintain its status as a financial holding company, a bank holding company’s depository subsidiaries must all be both “well capitalized” and “well managed,” and must meet their Community Reinvestment Act obligations.
     Financial holding company powers relate to “financial activities” that are determined by the Federal Reserve, in coordination with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity, provided that the complementary activity does not pose a safety and soundness risk. The Gramm-Leach-Bliley Act designates certain activities as financial in nature, including:
    underwriting insurance or annuities;
 
    providing financial or investment advice;
 
    underwriting, dealing in, or making markets in securities;
 
    merchant banking, subject to significant limitations;
 
    insurance company portfolio investing, subject to significant limitations; and
 
    any activities previously found by the Federal Reserve to be closely related to banking.
     The Gramm-Leach-Bliley Act also authorizes the Federal Reserve, in coordination with the Secretary of the Treasury , to determine that additional activities are financial in nature or incidental to activities that are financial in nature.
     We are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after such acquisition, we would own or control more than 5% of its voting stock. However, as a financial holding company, we may commence any new financial activity, except for the acquisition of a savings association, with notice to the Federal Reserve within 30 days after the commencement of the new financial activity.
USA Patriot Act
     The USA Patriot Act of 2001 and its related regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The statute and its regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. Originally enacted for five years, the USA Patriot Act was signed into law as permanent legislation in March 2006.

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Customer Privacy and Other Consumer Protections
     Pursuant to the Gramm-Leach-Bliley Act, we, like all other financial institutions, are required to:
    provide notice to our customers regarding privacy policies and practices,
 
    inform our customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties, and
 
    give our customers an option to prevent disclosure of such information to non-affiliated third parties.
     Under the Fair and Accurate Credit Transactions Act of 2003, our customers may also opt out of information sharing between and among us and our affiliates. We are also subject, in connection with our lending and leasing activities, to numerous federal and state laws aimed at protecting consumers, including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, and the Fair Credit Reporting Act.
Sarbanes-Oxley Act of 2002
     The Sarbanes-Oxley Act of 2002 imposed new or revised corporate governance, accounting, and reporting requirements on us and all other companies having securities registered with the SEC. In addition to a requirement that chief executive officers and chief financial officers certify financial statements in writing, the statute imposed requirements affecting, among other matters, the composition and activities of audit committees, disclosures relating to corporate insiders and insider transactions, codes of ethics, and the effectiveness of internal controls over financial reporting.
Recent Regulatory Developments
     Authority for financial holding companies to engage in real estate brokerage and property management services was proposed by the Treasury Department and the Federal Reserve in 2000, but final regulations implementing the proposal have been subject to a statutory moratorium which has been renewed annually by Congress since 2001. Legislation was introduced early in 2007 to ban such activity permanently, and it is not possible at present to assess the prospects either for the permanent ban or the ultimate adoption of the long-pending final regulations.
     The Basel Committee on Banking Supervision’s “Basel II” regulatory capital guidelines, published in June 2004 and amended in November 2005, are designed to promote improved risk measurement and management processes and better align minimum capital requirements with risk. The Basel II guidelines would, however, be mandatory only for “core banks,” i.e., banks with consolidated total assets of $250 billion or more. They would, therefore, not foreseeably be applicable to the Bank, which continues to operate under U.S. risk-based capital guidelines consistent with “Basel I” guidelines published in 1988.
     U.S. banking regulators, however, in December 2006, issued proposed rules involving modifications to the existing U.S. Basel I-based capital framework. The proposed rules, designated as “Basel IA” rules, are intended to avoid future competitive inequalities between Basel I and Basel II organizations, and would, if finally adopted, allow U.S. depository institutions to elect to remain under existing capital rules or come under the Basel IA rules. The proposed rules include:
    increasing the number of risk-weight categories,
 
    expanding the use of external ratings for credit risk,
 
    expanding the range of collateral and guarantors to qualify for a lower risk weight, and
 
    basing residential mortgage risk ratings on loan-to-value ratios.
     The public comment period for the proposed Basel IA rules (as well as on additional questions raised by regulators on a pending rulemaking on Basel II rules) ends in March 2007, and final rules are not expected until late in the year.

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Guide 3 Information
     Information required by Industry Guide 3 relating to statistical disclosure by bank holding companies is contained in the information incorporated by reference in response to Items 7 and 8 of this report.
Available Information
     We make available free of charge on our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after those reports have been electronically filed or submitted to the SEC. These filings can be accessed under the “Investor Relations” link found on the homepage of our website at www.huntington.com. These filings are also accessible on the SEC’s website at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A: Risk Factors
     Like other financial companies, we are subject to a number of risks, 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 that loan and lease customers or other counterparties will be unable to perform their contractual obligations, (2) market risk , which is the risk that changes in market rates and prices will adversely affect our financial condition or results of operation, (3) liquidity risk , which is the risk that the parent company and/or the Bank will have insufficient cash or access to cash to meet its operating needs, and (4) operational risk , which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.
     In addition to the other information included or incorporated by reference into this report, readers should carefully consider that the following important factors, among others, could materially impact our business, future results of operations, and future cash flows.
(1) Credit Risks:
We extend credit to a variety of customers based on internally set standards and judgment. We manage the credit risk through a program of underwriting standards, the review of certain credit decisions, and an on-going process of assessment of the quality of the credit already extended. Our credit standards and on-going process of credit assessment might not protect us from significant credit losses.
     We take credit risk by virtue of making loans and leases, purchasing non-governmental securities, extending loan commitments and letters of credit, and being counterparties to off-balance sheet financial instruments such as interest rate and foreign exchange derivatives.
     Our exposure to credit risk is managed through the use of consistent underwriting standards that emphasize “in-market” lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. Our credit administration function employs risk management techniques to ensure that loans and leases adhere to corporate policy and problem loans and leases are promptly identified. These procedures provide us with the information necessary to implement policy adjustments where necessary, and to take proactive corrective actions.
     For further discussion about our management of credit risk, see the “Credit Risk” section included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
Our loans, leases, and deposits are focused in five states and adverse economic conditions in those states, in particular, could negatively impact results from operations, cash flows, and financial condition.
     Concentration of credit risk can also arise with respect to loans and leases when the borrowers are located in the same geographical region. Our customers with loan and/or deposit balances at December 31, 2006, were

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located predominantly in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Because of the concentration of loans, leases, and deposits in these states, in the event of adverse economic conditions in these states, we could experience more difficulty in attracting deposits and experience higher rates of loss and delinquency on our loans and leases than if the loans and leases were more geographically diversified. Adverse economic conditions and other factors, such as political or business developments or natural hazards that may affect these states, may reduce demand for credit or fee-based products and could negatively affect real estate and other collateral values, interest rate levels, and the availability of credit to refinance loans at or prior to maturity.
Declines in home values in our markets could adversely impact results from operations.
     Like all banks, we are subject to the effects of any economic downturn, and in particular, a significant decline in home values in our markets could have a negative effect on results of operations. At December 31, 2006, we had $4.9 billion of home equity loans and lines with a weighted average loan-to-value ratio for the portfolio of 77%. In addition, at December 31, 2006, we had $4.5 billion in residential real estate loans. Adjustable-rate mortgages, primarily mortgages that have a fixed rate for the first 3 to 5 years and then adjust annually, comprised 54% of this portfolio. A significant decline in home values could lead to higher charge-offs in event of default in both the home equity loan and residential real estate loan portfolios. We also have $1.3 billion of mortgage-backed securities that could be negatively affected by a decline in home values.
(2) Market Risks:
Changes in interest rates could negatively impact our financial condition and results of operations.
     Our results of operations depend substantially on net interest income, which is the difference between interest earned on interest-earning assets (such as investments, loans, and direct financing leases) and interest paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply, and other factors beyond our control may also affect interest rates. If our interest-earning assets mature or reprice more quickly than interest-bearing liabilities in a declining interest rate environment, net interest income could be adversely impacted. Likewise, if interest-bearing liabilities mature or reprice more quickly than interest-earnings assets in a rising interest rate environment, net interest income could be adversely impacted.
     Changes in interest rates also can affect the value of loans and other assets, including retained interests in securitizations, mortgage and non-mortgage servicing rights, and our ability to realize gains on the sale of assets. A portion of our earnings result from transactional income. An example of this type of transactional income is gain on sales of loans and other real estate owned. This type of income can vary significantly from quarter-to-quarter and year-to-year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans and leases may lead to an increase in non-performing assets and a reduction of income recognized, which could have a material, adverse effect on our results of operations and cash flows. For further discussion, see Note 5 of the Notes to Consolidated Financial Statements included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
     Although fluctuations in market interest rates are neither completely predictable nor controllable, our Market Risk Committee (MRC) meets periodically to monitor our interest rate sensitivity position and oversee our financial risk management by establishing policies and operating limits. For further discussion, see the “Interest Rate Risk” section included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
(3) Liquidity Risks:
If we are unable to borrow funds through access to capital markets, we may not be able to meet the cash flow requirements of our depositors and borrowers, or meet the operating cash needs to fund corporate expansion and other activities.
     Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by the board of directors, with operating limits set by MRC, based upon the ratio of loans to deposits and percentage of assets funded with non-core or wholesale funding. The Bank’s MRC regularly monitors the overall liquidity position of the Bank and the parent company to ensure that

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various alternative strategies exist to cover unanticipated events that could affect liquidity. MRC also establishes policies and monitors guidelines to diversify the Bank’s wholesale funding sources to avoid concentrations in any one market source. Wholesale funding sources include Federal funds purchased, securities sold under repurchase agreements, non-core deposits, and medium- and long-term debt, which includes a domestic bank note program and a Euronote program. The Bank is also a member of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB), which provide funding through advances to members that are collateralized with mortgage-related assets.
     We maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity available to us should they be needed. These sources include the sale or securitization of loans, the ability to acquire additional national market, non-core deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common securities in public or private transactions. The Bank also can borrow from the Federal Reserve’s discount window.
     If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see the “Liquidity Risk” section included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
If our credit ratings were downgraded, the ability to access funding sources may be negatively impacted or eliminated, and our liquidity and the market price of our common stock could be adversely impacted.
     Credit ratings by the three major credit rating agencies are an important component of our liquidity profile. Among other factors, the credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of Management, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets, but also the cost of these funds. In addition, certain financial on- and off-balance sheet arrangements contain credit rating triggers that could increase funding needs should a negative rating change occur. Letter of credit commitments for marketable securities, interest rate swap collateral agreements, and certain asset securitization transactions contain credit rating provisions.
     Credit ratings as of December 31, 2006, for the parent company and the Bank can be found in Table 27 included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
     We rely on certain funding sources such as large corporate deposits, public fund deposits, federal funds, Euro deposits, FHLB advances, and bank notes. Although not contractually tied to credit ratings, our ability to access these funding sources may be impacted by negative changes in credit ratings. In the case of public funds or FHLB advances, a credit downgrade may also trigger a requirement that we pledge additional collateral against outstanding borrowings. Credit rating downgrades could result in a loss of equity investor confidence.
We have authorized the use of a substantial amount of our cash for the repurchase of our shares, and this use of funds may limit our ability to complete other transactions or to pursue other business initiatives.
     In April 2006, our board of directors authorized a new program for the repurchase of up to 15 million common shares, of which 3.8 million shares remain under the current authorization. We expect to repurchase the remaining shares for cash as business conditions warrant. The full implementation of this repurchase program will use a significant portion of our capital reserves. This use of capital could limit future flexibility to complete acquisitions of businesses or technology, or other transactions, or make investments in research and development, new employee hiring, or other aspects of operations that might be in our best interests, or could require that we borrow money or issue additional equity securities for such purposes. Any incurrence of debt may not be on favorable terms and could result in our being subject to covenants or other contractual restrictions that limit the ability to take advantage of other opportunities that may arise. Any such incurrence of debt would likely increase our interest expense, and any issuance of additional equity securities would dilute the stock ownership of existing shareholders.
(4) Operational Risks:
We have significant competition in both attracting and retaining deposits and in originating loans and leases.
     Competition is intense in most of our markets. We compete on price and service with other banks and financial services companies such as savings and loans, credit unions, finance companies, mortgage banking

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companies, insurance companies, and brokerage firms. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking reform.
In the normal course of business, we process large volumes of transactions. However, there can be no assurance that we will be able to continue processing at the same or higher levels of transactions. If systems of internal control should fail to work as expected, if systems are used in an unauthorized manner, or if employees subvert the system of internal controls, significant losses could result.
     We process large volumes of transactions on a daily basis and are exposed to numerous types of operational risk. Operational risk resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by persons inside or outside the company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.
     We establish and maintain systems of internal operational controls that provide us with timely and accurate information about our level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost-effective levels. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. From time to time, losses from operational risk may occur, including the effects of operational errors. Such losses are recorded as non-interest expense.
     While we continually monitor and improve the system of internal controls, data processing systems, and corporate-wide processes and procedures, there can be no assurance that future losses will not occur.
We may fail to realize the anticipated cost savings and other financial benefits of the merger on the anticipated schedule, if at all.
     We may face significant challenges in integrating Sky Financial’s operations in our operations in a timely and efficient manner and in retaining Sky Financial personnel. Currently, each company operates as an independent public company. Achieving the anticipated cost savings and financial benefits of the merger will depend on part on whether we integrate Sky Financial’s businesses in an efficient and effective manner. We may not be able to accomplish this integration process smoothly or successfully. In addition, the integration of certain operations following the merger will require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day business of the combined company. Any inability to realize the full extent of, or any of, the anticipated cost savings and financial benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect on the business and results of operations of the combined company, which may affect the market price of Huntington common stock.
An extended disruption of vital infrastructure could negatively impact our business, results of operations, and financial condition.
     Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruptions of our operations.
New or changes in existing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.
     The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a financial company’s shareholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described in this report under the heading “Regulatory Matters.” These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations,

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rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.
     In addition, we may be subject to actions of our regulators that are specific to us. For further discussion, see Note 25 of the Notes to Consolidated Financial Statements included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
     Events that may not have a direct impact on us, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities responding by adopting and/or proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. International capital standards developed in the framework of the Basel Committee on Banking Supervision may also affect the competitive environment for United States banks.
     The nature, extent, and timing of the adoption of significant new laws and regulations, or changes in or repeal of existing laws and regulations, or specific actions of regulators, may have a material impact on our business and results of operations; however, it is impossible to predict at this time the extent of any impact from these items.
Non-compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
     The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. We have developed policies and procedures designed to assist in compliance with these laws and regulations.
The OCC may impose dividend payment and other restrictions on the Bank, which would impact our ability to pay dividends to shareholders or repurchase stock.
     The OCC is the primary regulatory agency that examines the Bank, its subsidiaries, and their respective activities. Under certain circumstances, including any determination that the activities of the Bank or its subsidiaries constitute an unsafe and unsound banking practice, the OCC has the authority by statute to restrict the Bank’s ability to transfer assets, make shareholder distributions, and redeem preferred securities.
     Under applicable statutes and regulations, dividends by a national bank may be paid out of current or retained net profits, but a national bank is prohibited from declaring a cash dividend on shares of its common stock out of net profits until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of capital stock, until certain amounts from net profits are transferred to the surplus fund. Moreover, the prior approval of the OCC is required for the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for the year combined with its net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred securities.
     Payment of dividends could also be subject to regulatory limitations if the Bank became “under-capitalized” for purposes of the OCC “prompt corrective action” regulations. “Under-capitalized” is currently defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a core capital, or leverage, ratio of less than 4.0%. If the Bank were unable to pay dividends to the parent company, it would impact our ability to pay dividends to shareholders or repurchase stock. Throughout 2006, the Bank was in compliance with all regulatory capital requirements and considered to be “well-capitalized.”
     For further discussion, see the “Parent Company Liquidity” section included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.

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The Federal Reserve Board may require us to commit capital resources to support the Bank.
     The Federal Reserve, which examines us and our non-bank subsidiaries, has a policy stating that a bank holding company is expected to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the source of strength doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it, and therefore may be required to borrow the funds. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, the bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s results of operations and cash flows.
If any of our Real Estate Investment Trust (REIT) affiliates fail to qualify as a REIT, we may be subject to a higher consolidated effective tax rate.
     Huntington Preferred Capital, Inc. (HPCI), Huntington Preferred Capital II, Inc. (HPC-II) and Huntington Capital Financing, LLC (HCF) operate as REITs for federal income tax purposes. HPCI, HPC-II, and HCF are consolidated holding company subsidiaries established to acquire, hold, and manage mortgage assets and other authorized investments to generate net income for distribution to their shareholders.
     Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At December 31, 2006, HPCI, HPC-II, and HCF met all of the quarterly asset tests.
     Also, a REIT must annually satisfy two gross income tests: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test plus dividends, interest, and gains from the sale of securities. In addition, a REIT must distribute 90% of the REIT’s taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. For 2006, HPCI, HPC-II, and HCF had met all annual income and distribution tests.
     If any of these REIT affiliates fail to meet any of the required provisions for REITs, they could no longer qualify as a REIT and the resulting tax consequences would increase our effective tax rate.
We could be held responsible for environmental liabilities of properties acquired through foreclosure of loans secured by real estate.
     In the event we foreclose on a defaulted commercial mortgage and/or residential mortgage loan to recover our investment, we may be subject to environmental liabilities in connection with the underlying real property, which could exceed the value of the real property. Although we exercise due diligence to discover potential environmental liabilities prior to acquiring any property through foreclosure, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on properties during our ownership or after a sale to a third party. There can be no assurance that we would not incur full recourse liability for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property, or that we could recover any of the costs from any third party.

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Item 1B: Unresolved Staff Comments
     None.
Item 2: Properties
     Our headquarters, as well as the Bank’s, are located in the Huntington Center, a thirty-seven-story office building located in Columbus, Ohio. Of the building’s total office space available, we lease approximately 39%. The lease term expires in 2015, with nine five-year renewal options for up to 45 years but with no purchase option. The Bank has an indirect minority equity interest of 18.4% in the building. Our other major properties consist of a thirteen-story and a twelve-story office building, both of which are located adjacent to the Huntington Center; a twenty-one story office building, known as the Huntington Building, located in Cleveland, Ohio; an eighteen-story office building in Charleston, West Virginia; a three-story office building located in Holland, Michigan; a Business Service Center in Columbus, Ohio; The Huntington Mortgage Group’s building, located in the greater Columbus area; an office complex located in Troy, Michigan; and two data processing and operations centers (Easton and Northland) located in Ohio. The office buildings above serve as regional administrative offices occupied predominantly by our Regional Banking and Private Financial and Capital Markets Group lines of business. The Dealer Sales line of business is located in the Northland operations center. Of these properties, we own the thirteen-story and twelve-story office buildings, and the Business Service Center. All of the other major properties are held under long-term leases. In 1998, we entered into a sale/leaseback agreement that included the sale of 51 of our locations. The transaction included a mix of branch banking offices, regional offices, and operational facilities, including certain properties described above, which we will continue to operate under a long-term lease.
Item 3: Legal Proceedings
     The Bank is involved in two lawsuits arising out of its banking relationship with Cyberco Holdings, Inc. and a related company, Teleservices Group, Inc. Both companies are subject to bankruptcy estates in December 2006 and January 2007, respectively. The complaints include claims under the Bankruptcy Code and various state law claims and seek recoveries from the Bank in excess of $50 million. Although no assurance can be made that the ultimate outcome of any matter will not exceed reserves or not have a material adverse affect on operating results for a particular period, based on current knowledge and consultation with counsel, Management believes that its reserves are adequate and that is exposure to additional losses arising from these lawsuits is not material.
     Information required by this item is set forth in Note 24 of Notes to Consolidated Financial Statements included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
Item 4: Submission of Matters to a Vote of Security Holders
     Not Applicable.
PART II
Item 5: Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
     The common stock of Huntington Bancshares Incorporated is traded on the NASDAQ Stock Market under the symbol “HBAN”. The stock is listed as “HuntgBcshr” or “HuntBanc” in most newspapers. As of January 31, 2007, we had 26,176 shareholders of record.
     Information regarding the high and low sale prices of our common stock and cash dividends declared on such shares, as required by this item, is set forth in Table 38 entitled “Quarterly Stock Summary, Key Ratios and Statistics, and Capital Data” included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference. Information regarding restrictions on dividends, as required by this item, is set forth in Item 1 “Business-Regulatory Matters-Dividend Restrictions” and in Note 25 of the Notes to Consolidated Financial Statements included in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.

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     The line graph below compares the yearly percentage change in cumulative total shareholder return on Huntington common stock and the cumulative total return of the S&P 500 Index and the KBW 50 Bank Index for the period December 31, 2001, through December 31, 2006. The KBW 50 Bank Index is a market capitalization-weighted bank stock index published by Keefe, Bruyette & Woods. The index is composed of the 50 largest banking companies and includes all money-center banks and most major regional banks. An investment of $100 on December 31, 2001, and the reinvestment of all dividends are assumed.
(PERFORMANCE GRAPH)
                                 
    Total             Total Number of Shares     Maximum Number of  
    Number of     Average     Purchased as Part of     Shares that May Yet Be  
    Shares     Price Paid     Publicly Announced     Purchased Under the  
Period   Purchased     Per Share     Plans or Programs (1)     Plans or Programs (1)  
October 1, 2006 to October 31, 2006
    400,000     $ 24.38       400,000       6,500,000  
November 1, 2006 to November 30, 2006
    2,650,000       24.60       3,050,000       3,850,000  
December 1, 2006 to December 31, 2006
    0       0.00       3,050,000       3,850,000  
 
Total
    3,050,000     $ 0.00       3,050,000       3,850,000  
 
(1) Information is as of the end of the period.
     On April 20, 2006, the Company announced that the board of directors authorized a new program for the repurchase of up to 15 million shares (the 2006 Repurchase Program). The 2006 Repurchase Program does not have an expiration date. The 2005 Repurchase Program, with 5 million shares remaining, was canceled and replaced by the 2006 Repurchase Program. The Company announced its expectation to repurchase the shares from time to time in the open market or through privately negotiated transactions depending on market conditions.
     On May 24, 2006, Huntington repurchased 6.0 million shares of common stock from Bear Stearns under an accelerated share repurchase program. The accelerated share repurchase program enabled Huntington to purchase the shares immediately, while Bear Stearns purchased shares in the market over a period of up to four months (the Repurchase Term). In connection with the repurchase of these shares, Huntington entered into a variable share forward sale agreement, which provides for a settlement, reflecting a price differential based on the adjusted

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volume-weighted average price as defined in the agreement with Bear Stearns. The variable share forward agreement concluded at the end of September, resulting in a nominal settlement of cash to Huntington. This was reflected as an adjustment to treasury shares on Huntington’s balance sheet.
Item 6: Selected Financial Data
     Information required by this item is set forth in Table 1 in our 2006 Annual Report to Shareholders, portions of which are filed as Exhibit 13.1 to this report, and incorporated by reference.
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
     Information required by this item is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2006 Annual Report to shareholders, portions of which are filed as Exhibit 13.1 to this report and incorporated herein by reference.
Item 7a: Quantitative and Qualitative Disclosures About Market Risk
     Information required by this item is set forth in the caption “Market Risk” included in the 2006 Annual Report to shareholders, portions of which are filed as Exhibit 13.1 to this report and incorporated herein by reference.
Item 8: Financial Statements and Supplementary Data
     Information required by this item is set forth in the Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements and Notes, and Selected Quarterly Income Statements included in the 2006 Annual Report to shareholders, portions of which are filed as Exhibit 13.1 to this report and incorporated herein by reference.
Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
     Not applicable.
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
     Our Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
     Information required by this item is set forth in “Report of Management” and “Report of Independent Registered Public Accounting Firm” included in the 2006 Annual Report to shareholders, portions of which are filed as Exhibit 13.1 to this report and incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
     There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2006 to which this report relates that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Item 9A(T): Controls and Procedures
     Not applicable.

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Item 9B: Other Information.
     On February 21, 2007, the Board approved our election to become subject to a provision of Title 3, Subtitle 8 of the Maryland General Corporation Law (“MGCL”). This election became effective on February 22, 2007 upon the filing with and acceptance for record by the State Department of Assessments and Taxation of Maryland of the Articles Supplementary filed as exhibit 3.4. Prior to such election, under the MGCL a director elected by the board of directors of a corporation to fill a vacancy serves until the next annual meeting of shareholders and until his successor is elected and qualifies. Pursuant to such election, our charter now provides, as permitted by the MGCL, that any director elected to fill a vacancy shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until a successor is duly elected and qualifies.
     On and effective February 21, 2007, the Board also amended Section 2.04 of Huntington’s Bylaws to conform the Bylaws to the MGCL election described above and amended Section 1.01 of Huntington’s Bylaws to provide that the 2007 annual meeting of stockholders may be held at such time and on such date during the thirty-one day period beginning April 19, 2007 and ending May 19, 2007 as the Board shall determine. The Bylaws, as amended and restated, are filed as exhibit 3.3.
     On February 22, 2007, Karen A. Holbrook, director of Huntington since 2004, announced that she does not wish to stand for re-election to the board of directors when her current term expires at the 2007 annual meeting of shareholders due to her forthcoming retirement from her position as President of The Ohio State University in June 2007.
PART III
     We refer in Part III of this report to relevant sections of our 2007 Proxy Statement for the 2007 annual meeting of shareholders, which will be filed with the Securities Exchange Commission pursuant to Regulation 14A within 120 days of the close of our 2006 fiscal year. Portions of our 2007 Proxy Statement, including the sections we refer to in this report, are incorporated by reference into this report.
Item 10: Directors and Executive Officers and Corporate Governance
     Information required by this item is set forth under the captions “Election of Directors”, “Corporate Governance”, “Executive Officers of Huntington”, “Board Committees”, “Report of the Audit Committee”, “Involvement in Certain Legal Proceedings” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our 2007 Proxy Statement.
Item 11: Executive Compensation
     Information required by this item is set forth under the captions “Executive Compensation” and “Director Compensation” of our 2007 Proxy Statement.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     Information required by this item is set forth under the caption “Ownership of Voting Stock” and in a table entitled “Equity Compensation Plans Information” of our 2007 Proxy Statement.
Item 13: Certain Relationships and Related Transactions, and Director Independence
     Information required by this item is set forth under the caption “Transactions With Directors and Executive Officers” of our 2007 Proxy Statement.
Item 14: Principal Accounting Fees and Services
     Information required by this item is set forth under the caption “Proposal to Ratify the Appointment of Independent Registered Public Accounting Firm” of our 2007 Proxy Statement.
PART IV
Item 15: Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
The report of independent registered public accounting firm and consolidated financial statements appearing in our 2006 Annual Report on the pages indicated below are incorporated by reference in Item 8.

20


 

         
    Annual  
    Report Page  
Report of Independent Registered Public Accounting Firm
    82  
 
       
Consolidated Balance Sheets as of December 31, 2006 and 2005
    83  
 
       
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
    84  
 
       
Consolidated Statements of Changes in Shareholders Equity For the years ended December 31, 2006, 2005 and 2004
    85  
 
       
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    86  
 
       
Notes to Consolidated Financial Statements
    87-126  
  (1)   We are not filing separately financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the related notes.
 
  (2)   The exhibits required by this item are listed in the Exhibit Index of this Form 10-K. The management contracts and compensation plans or arrangements required to be filed as exhibits to this Form 10-K are listed as Exhibits 10(a) through 10(v) in the Exhibit Index.
(b) The exhibits to this Form 10-K begin on page 23 of this report.
(c) See Item 15(a)(2) above.

21


 

Signatures
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of February 2007.
HUNTINGTON BANCSHARES INCORPORATED
(Registrant)
             
By:
  /s/ Thomas E. Hoaglin   By:   /s/ Donald R. Kimble
 
           
 
  Thomas E. Hoaglin       Donald R. Kimble
 
  Chairman, President, Chief Executive       Executive Vice President and
 
  Officer, and Director (Principal Executive       Chief Financial Officer
 
  Officer)       (Principal Financial Officer)
 
           
 
      By:   /s/ Thomas P. Reed
 
           
 
          Thomas P. Reed
 
          Senior Vice President and Controller
 
          (Principal Accounting Officer)
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 22nd day of February, 2007.
     
 
   
Raymond J. Biggs *
  David L. Porteous *
 
   
Raymond J. Biggs
  David L. Porteous
Director
  Director
 
   
Don M. Casto III *
  Kathleen H. Ransier *
 
   
Don M. Casto III
  Kathleen H. Ransier
Director
  Director
 
   
Michael J. Endres *
  Gene E. Little *
 
   
Michael J. Endres
  Gene E. Little
Director
  Director
 
   
Karen A. Holbrook *
  Wm. J. Lhota *
 
   
Karen A. Holbrook
  Wm. J. Lhota
Director
  Director
 
   
John B. Gerlach, Jr. *
   
 
   
John B. Gerlach, Jr.
   
Director
   
 
   
David P. Lauer *
   
 
   
David P. Lauer
   
Director
   
 
   
* /s/ Donald R. Kimble
   
  Donald R. Kimble
   
Donald R. Kimble
Attorney-in-fact for each of the persons indicated
   

22


 

Exhibit Index
This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains an internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov . The reports and other information filed by us with the SEC are also available at our Internet web site. The address of the site is http://www.huntington.com . Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.
                     
            SEC File or    
Exhibit         Registration   Exhibit
Number   Document Description   Report or Registration Statement   Number   Reference
2.1
  Agreement and Plan of Merger, dated December 20, 2006 by and among Huntington Bancshares Incorporated, Penguin Acquisition, LLC and Sky Financial Group, Inc.   Current Report on Form 8-K dated December 22, 2006.   000-02525     2.1  
 
                   
3.1
  Articles of Restatement of Charter, Articles of Amendment to Articles of Restatement of Charter, and Articles Supplementary.   Annual Report on Form 10-K for the year ended December 31, 1993.   000-02525     3 (i)
 
                   
3.2
  Articles of Amendment to Articles of Restatement of Charter.   Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.   000-02525     3(i )(c)
 
                   
3.3
  Amended and Restated Bylaws as of February 21, 2007.            
 
                   
3.4
  Articles Supplementary.                
 
                   
4.1
  Instruments defining the Rights of Security Holders — reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request.                
 
                   
10.1
  * Form of Executive Agreement for certain executive officers.   Current Report on Form 8-K dated November 21, 2005.   000-02525     99.1  
 
                   
10.2
  * Form of Executive Agreement for certain executive officers.   Current Report on Form 8-K dated November 21, 2005.   000-02525     99.2  
 
                   
10.3
  * Form of Executive Agreement for certain executive officers.   Current Report on Form 8-K dated November 21, 2005.   000-02525     99.3  
 
                   
10.4
  * Huntington Bancshares Incorporated Management Incentive Plan, as amended and restated effective for plan years beginning on or after January 1, 2004.   Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.   000-02525     10 (a)
 
                   
10.5
  * Restated Huntington Supplemental Retirement Income Plan.   Annual Report on Form 10-K for the year ended December 31, 1999.   000-02525     10 (n)
 
                   
10.6
  * Deferred Compensation Plan and Trust for Directors   Post-Effective Amendment No. 2 to Registration Statement on Form S-8 filed on January 28, 1991.   33-10546     4 (a)
 
                   
10.7
  * Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors   Registration Statement on Form S-8 filed on July 19, 1991.   33-41774     4 (a)
 
                   
10.8
  * First Amendment to Huntington Bancshares Incorporated Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors   Quarterly Report 10-Q for the quarter ended March 31, 2001   000-02525     10 (q)
 
                   
10.9
  * Executive Deferred Compensation Plan, as amended and restated on February 18, 2004   Quarterly Report on Form 10-Q for the quarter ended June 30, 2004   000-02525     10 (c)
 
                   
10.10
  * The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust (as amended and restated as of February 9, 1990)   Registration Statement on Form S-8 filed on November 26, 1991   33-44208     4 (a)
 
                   
10.11
  * First Amendment to The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust Plan   Annual Report on Form 10-K for the year ended December 31, 1997   000-02525     10 (o)(2)
 
                   
10.12
  * 1990 Stock Option Plan   Registration Statement on Form S-8 filed on October 18, 1990   33-37373     4 (a)
 
                   

23


 

                     
            SEC File or    
Exhibit         Registration   Exhibit
Number   Document Description   Report or Registration Statement   Number   Reference
10.13
  * First Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan   Annual Report on Form 10-K for the year ended December 31, 1991   000-02525     10(q )(2)
 
                   
10.14
  * Second Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan   Annual Report on Form 10-K for the year ended December 31, 1996   000-02525     10(n )(3)
 
                   
10.15
  * Third Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan   Quarterly Report on Form 10-Q for the quarter ended June 30, 2000   000-02525     10 (b)
 
                   
10.16
  * Fourth Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan   Quarterly Report on Form 10-Q for the quarter ended March 31, 2002   000-02525     10 (a)
 
                   
10.17
  * Fifth Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan   Quarterly Report on Form 10-Q for the quarter ended March 31, 2002   000-02525     10 (b)
 
                   
10.18
  * Amended and Restated 1994 Stock Option Plan   Annual Report on Form 10-K for the year ended December 31, 1996   000-02525     10 (r)
 
                   
10.19
  * First Amendment to Huntington Bancshares Incorporated 1994 Stock Option Plan   Quarterly Report on Form 10-Q for the quarter ended June 30, 2000   000-02525     10 (a)
 
                   
10.20
  * First Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan   Quarterly Report on Form 10-Q for the quarter ended March 31, 2002   000-02525     10 (c)
 
                   
10.21
  * Second Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan   Quarterly Report on Form 10-Q for the quarter ended March 31, 2002   000-02525     10 (d)
 
                   
10.22
  * Third Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan   Quarterly Report on Form 10-Q for the quarter ended March 31, 2002   000-02525     10 (e)
 
                   
10.23
  * Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan   Quarterly Report 10-Q for the quarter ended March 31, 2001   000-02525     10 (r)
 
                   
10.24
  * First Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan   Quarterly Report 10-Q for the quarter ended March 31, 2002   000-02525     10 (h)
 
                   
10.25
  * Second Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan   Quarterly Report 10-Q for the quarter ended March 31, 2002   000-02525     10 (i)
 
                   
10.26
  * Huntington Bancshares Incorporated 2004 Stock and Long-Term Incentive Plan   Quarterly Report on Form 10-Q for the quarter ended June 30, 2004   000-02525     10 (b)
 
                   
10.27
  * First Amendment to the 2004 Stock and Long-Term Incentive Plan   Quarterly Report on Form 10-Q for the quarter ended March 31, 2006   000-02525     10 (e)
 
                   
10.28
  * Huntington Bancshares Incorporated Employee Stock Incentive Plan (incorporating changes made by first amendment to Plan)   Registration Statement on Form S-8 filed on December 13, 2001.   333-75032     4 (a)
 
                   
10.29
  * Second Amendment to Huntington Bancshares Incorporated Employee Stock Incentive Plan   Annual Report on Form 10-K for the year ended December 31, 2002   000-02525     10 (s)
 
                   
10.30
  * Performance criteria and potential awards for executive officers for fiscal year 2005 under the Management Incentive Plan and for a long-term incentive award cycle beginning on January 1, 2005 and ending on December 31, 2007 under the 2004 Stock and Long-Term Incentive Plan   Current Report on Form 8-K dated February 15, 2005   000-02525     99.1  
 
                   
10.31
  * Compensation Schedule for Non-Employee Directors of Huntington Bancshares Incorporated, effective July 19, 2005   Current Report on Form 8-K dated July 19, 2005   000-02525     99.1  
 
                   
10.32
  * Employment Agreement, dated February 15, 2004, between Huntington Bancshares Incorporated and Thomas E. Hoaglin   Annual Report on Form 10-K for the year ended December 31, 2003   000-02525     10 (n)
 
                   
10.33
  * Letter Agreement between Huntington Bancshares Incorporated and Raymond J. Biggs, acknowledged and agreed to by Mr. Biggs on May 1, 2005   Annual Report on Form 10-K for the year ended December 31, 2005   000-02525     10 (t)
 
                   
10.34
  Schedule identifying material details of Executive Agreements 2006                
 
                   

24


 

                     
            SEC File or    
Exhibit         Registration   Exhibit
Number   Document Description   Report or Registration Statement   Number   Reference
10.35
  * Performance criteria and potential awards for executive officers for fiscal year 2006 under the Management Incentive Plan and for a long-term incentive award cycle beginning on January 1, 2006 and ending on December 31, 2008 under the 2004 Stock and Long-Term Incentive Plan   Current Report on Form 8-K dated February 21, 2006   000-02525     99.1  
 
                   
10.36
  * Restricted Stock Unit Grant Notice with
three year vesting
  Current Report on Form 8-K dated July 24, 2006   000-02525     99.1  
 
                   
10.37
  * Restricted Stock Unit Grant Notice with
six month vesting
  Current Report on Form 8-K dated July 24, 2006   000-02525     99.2  
 
                   
10.38
  * Restricted Stock Unit Deferral Agreement   Current Report on Form 8-K dated July 24, 2006   000-02525     99.3  
 
                   
10.39
  * Director Deferred Stock Award Notice   Current Report on Form 8-K dated July 24, 2006   000-02525     99.4  
 
                   
12.1
  Ratio of Earnings to Fixed Charges.                
 
                   
13.1
  Portions of our 2006 Annual Report to shareholders                
 
                   
14.1
  Code of Business Conduct and Ethics dated January 14, 2003 and revised on February 14, 2006 and Financial Code of Ethics for Chief Executive Officer and Senior Financial Officers, adopted January 18, 2003 and revised on April 19, 2005                
 
                   
21.1
  Subsidiaries of the Registrant                
 
                   
23.1
  Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.                
 
                   
24.1
  Power of Attorney                
 
                   
31.1
  Rule 13a-14(a) Certification — Chief Executive Officer.                
 
                   
31.2
  Rule 13a-14(a) Certification — Chief Financial Officer.                
 
                   
32.1
  Section 1350 Certification — Chief Executive Officer.                
 
                   
32.2
  Section 1350 Certification — Chief Financial Officer.                
 
* Denotes management contract or compensatory plan or arrangement.

25


 

Exhibit 3.3
HUNTINGTON BANCSHARES INCORPORATED
BYLAWS
(AMENDED AND RESTATED AS OF FEBRUARY 21, 2007)
ARTICLE I.
STOCKHOLDERS
     SECTION 1.01. ANNUAL MEETING. In 2007, the Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, at such time and on such date during the thirty-one day period beginning April 19, 2007 and ending May 19, 2007 as the Board of Directors shall determine. Commencing in 2008, the Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, at such time and on such date during the thirty-one day period beginning March 30 and ending April 29 of each year as the Board of Directors shall determine. In the absence of a determination by the Board of Directors, commencing in 2008, the annual meeting of stockholders shall be held at 3:00 p.m. on the third Thursday of April in each year if not a legal holiday, and if a legal holiday, then on the next secular day following. At the annual meeting, the stockholders shall elect directors to the Board of Directors and may transact any other business as may be brought before the annual meeting by the Board of Directors or by any stockholder as set forth in Section 1.09 of these Bylaws.
     SECTION 1.02. SPECIAL MEETING. At any time in the interval between annual meetings, a special meeting of the stockholders may be called by the Chairman of the Board, the President, a majority of the Board of Directors by vote at a meeting or in writing (addressed to the Secretary of the Corporation), or by the Secretary of the Corporation on the written request (addressed to the Secretary of the Corporation) of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting. At a special meeting of stockholders, only such business as is set forth in the Corporation’s notice of meeting shall be conducted at the meeting.
     SECTION 1.03. PLACE OF MEETINGS. Meetings of stockholders shall be held at such place in the United States as is set from time to time by the Board of Directors.
     SECTION 1.04. NOTICE OF MEETINGS; WAIVER OF NOTICE. Not less than ten nor more than 90 days before each stockholders’ meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled by statute to notice of the meeting. The notice shall state the time and place of the meeting and, if the meeting is a special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him, left at his residence or usual place of business, mailed to him at his address as it appears on the records of the Corporation or

 


 

transmitted to him by electronic mail to any electronic mail address of such stockholder, or by any other electronic means. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he before or after the meeting signs a waiver of the notice which is filed with the records of stockholders’ meetings, or is present at the meeting in person or by proxy. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders (other than a special meeting requested by the stockholders pursuant to Section 1.02) may be cancelled, by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders.
     SECTION 1.05. QUORUM; VOTING. Unless statute or the Charter provides otherwise, at any meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all votes cast at a meeting at which a quorum is present is sufficient to elect a director.
     SECTION 1.06. ADJOURNMENTS. Whether or not a quorum is present, a meeting of stockholders may be adjourned from time to time by the presiding officer or by the stockholders, present in person or by proxy, by a majority vote. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. No further notice of an adjourned meeting other than by announcement shall be necessary if held on a date not more than 120 days after the original record date.
     SECTION 1.07. GENERAL RIGHT TO VOTE; PROXIES. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter to be submitted at a meeting of stockholders. A stockholder may vote the stock the stockholder owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder’s authorized agent signing the writing or causing the stockholder’s signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a telegram, cablegram, datagram, or other means of electronic or telephonic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission, in each case as the presiding officer of the meeting may determine from time to time. Unless a proxy provides otherwise, it is not valid more than 11 months after its date.
     SECTION 1.08. NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS. No person shall be appointed, nominated or elected a director of the Corporation after having attained the age of 75 years.

 


 

     Only persons nominated in accordance with the procedures set forth in this Section 1.08 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, or by any stockholder of the Corporation entitled to vote for the election of directors at such a meeting who complies with the notice procedures set forth in this Section 1.08. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received by the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day and not later than the close of business on the 60 th day prior to the first anniversary of the date on which the Corporation first mailed to stockholders notice of the preceding year’s annual meeting; provided, however, that in the event that the number of directors constituting the entire Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the date on which the Corporation first mailed to stockholders notice of the preceding year’s annual meeting, a stockholder’s notice required under this Section 1.08 shall also be considered timely, but only with respect to nominees for new directorships created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation; provided, further, that if the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors nominated by the Corporation to the Board of Directors, any such stockholder’s notice required under this Section 1.08 shall be considered timely if notice shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of a postponement or an adjournment of a meeting of stockholders commence a new time period for the giving of a stockholder’s notice as described above. A stockholder’s notice to the Secretary shall set forth (i) as to each person whom the stockholder proposes to nominate for election as a director, (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person during each of the last five years, (c) the class and number of shares of the Corporation which are beneficially owned by such person on the date of such stockholder’s notice, and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor act or regulation (including without limitation such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice, (a) the name and address, as they appear on the Corporation’s books, of the stockholder and any other stockholders known by such stockholder to be supporting such

 


 

nominees, and (b) the class and number of shares of the Corporation which are beneficially owned by such stockholder on the date of such stockholder’s notice and by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder’s notice. The Corporation may require any proposed nominee to furnish such other information as may be reasonably required by the Corporation to determine the qualifications of such proposed nominee to serve as a director of the Corporation.
     No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 1.08. The chairman of the stockholders meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.
     SECTION 1.09. STOCKHOLDER PROPOSALS. At an annual or special meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before such meeting. To be properly brought before a meeting of stockholders, business must be (i) in the case of a special meeting, specified in the notice of the special meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) properly brought before the meeting by or at the direction of the Board of Directors, or (iii) in the case of an annual meeting, otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting of stockholders by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received by the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day and not later than the close of business on the 60th day prior to the first anniversary of the date on which the Corporation first mailed to stockholders notice of the preceding year’s annual meeting. In no event shall the public announcement of a postponement or an adjournment of a meeting of stockholders commence a new time period for the giving of a stockholder’s notice as described above. To be properly brought before a meeting of stockholders, business (i) must be of a proper subject for action by stockholders under applicable law and (ii) must not, if implemented, cause the Company to violate any state, federal, or foreign law or regulation, each as determined in good faith by the Board of Directors. A shareholder’s notice to the Secretary, including any stockholder notice requesting a special meeting pursuant to Section 1.02, shall set forth as to each matter the stockholder proposes to bring before a meeting of stockholders, (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the Corporation’s books, of the stockholder proposing such business and any stockholders known by such stockholder to be supporting such proposal, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder on the date of such stockholder’s notice

 


 

and by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder’s notice, and (iv) any material interest of the stockholder in such proposal.
     Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a meeting of stockholders except in accordance with the procedures set forth in this Section 1.09, except that all matters with respect to the nomination of persons for election to the Board of Directors shall be governed solely by Section 1.08. The chairman of the stockholder meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.
     SECTION 1.10. CONDUCT OF VOTING. At all meetings of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions relating to the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided, in accordance with such procedures as shall from time to time be determined by the presiding officer. If ordered by the presiding officer, the vote upon any election or question shall be taken by ballot. Unless so ordered, no vote need be by ballot.
     The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents, or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the presiding officer shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by law.
ARTICLE II.
BOARD OF DIRECTORS
     SECTION 2.01. FUNCTION OF DIRECTORS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or these Bylaws.
     SECTION 2.02. NUMBER OF DIRECTORS. The Corporation shall have the number of directors provided by the Charter until changed as provided in this Section

 


 

2.02. A majority of the entire Board of Directors may alter the number of directors set by the Charter to not more than 25 nor less than three directors; provided that any such action may not affect the tenure of office of any director.
     SECTION 2.03. ELECTION AND TENURE OF DIRECTORS. Beginning with the election of directors in 1987, the Board of Directors shall be divided into three classes, Class I, Class II and Class III. Each such class shall consist, as nearly as possible, of one-third of the total number of directors, and any remaining directors shall be included within such class or classes as the Board of Directors shall designate. At the annual meeting of stockholders in 1987, Class I directors shall be elected for a one-year term, Class II directors for a two-year term, and Class III directors for a three-year term. Except as provided in Section 2.04 of this Article II, at each succeeding annual meeting of stockholders beginning in 1988, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. Any director who has attained the age of 75 years shall retire effective on the date of the next annual meeting of stockholders. A director may otherwise be removed from office for cause only and, subject to such removal, death, resignation, retirement or disqualification, shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and qualify.
     SECTION 2.04. VACANCY ON BOARD. The stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the retirement or removal of a director. A majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. Any director elected to fill a vacancy shall serve for the remainder of the full term of the class in which the vacancy occurred and until a successor is elected and qualifies.
     SECTION 2.05. REGULAR MEETINGS. After each annual meeting of stockholders at which directors shall have been elected, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business. Such first regular meeting shall be held at any place as may be designated by the Chairman, President or Board of Directors for such first regular meeting, or in default of such designation at the place of the holding of the immediately preceding meeting of stockholders. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Chairman of the Board. No notice of such regular meetings shall be necessary if held as hereinabove provided.
     SECTION 2.06. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, the President or by a majority of the then-acting directors by vote at a meeting or in writing, or by a majority of the members of the executive committee, if one be constituted, by vote at a meeting or

 


 

in writing. A special meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. In the absence of such designation, such meeting shall be held at such place as may be designated in the call.
     SECTION 2.07. NOTICE OF MEETING. Except as provided in Section 2.05, the Secretary shall give notice or cause to be given to each director of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him, left at his residence or usual place of business, or sent by telegraph or telephone, at least 48 hours before the time of the meeting or, in the alternative, by mail to his address as it shall appear on the records of the Corporation, at least 72 hours before the time of the meeting; provided, however, that notice of a special meeting which is called by the Chairman or the President is given to a director when it is delivered personally to him or sent by telegraph or telephone at least one hour before the time of the meeting. Unless these Bylaws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends, or to any director who, in writing executed and filed with the
records of the meeting either before or after the holding thereof, waives such notice. Any regular or special meeting of the Board of Directors may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement.
     SECTION 2.08. ACTION BY DIRECTORS. Unless statute, the Charter or these Bylaws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is the action of the Board of Directors. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present, by majority vote and without notice other than by announcement, may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the Board of Directors and filed with the minutes of the proceedings of the Board of Directors.
     SECTION 2.09. MEETING BY CONFERENCE TELEPHONE. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting.
     SECTION 2.10. COMPENSATION. The Board of Directors shall have the authority to fix the compensation of the Directors. The directors may be paid their expenses, if any, of attendance at each regular and special meeting of the Board of

 


 

Directors or committees thereof. In addition, by resolution of the Board of Directors, a stated annual retainer and/or a fixed sum for attendance at each regular or special meeting of the Board of Directors or committees thereof, and other compensation for their services as such, may be paid to directors. A director who serves the Corporation in any other capacity also may receive compensation for such other services.
ARTICLE III.
COMMITTEES
     SECTION 3.01. COMMITTEES. The Board of Directors may appoint from among its members an Executive Committee and other committees composed of one or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to declare dividends or other distributions on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend these Bylaws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock which provides for or establishes a method or procedure for determining the maximum number of shares to be issued, a committee of the Board of Directors, in accordance with that general authorization or any stock option or other plan or program adopted by the Board of Directors, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors.
     SECTION 3.02. COMMITTEE PROCEDURE. The Board of Directors shall have the power to prescribe the manner in which proceedings of each committee shall be held. Unless the Board of Directors shall otherwise provide, the actions of each committee shall be governed by the following rules of procedure. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. In the absence of any prescription by the Board of Directors or any applicable provision of these Bylaws, each committee may prescribe the manner in which its proceedings shall be conducted.
     SECTION 3.03. DELEGATION. The Board of Directors may delegate to officers, employees or agents, the performance of duties not specifically required by law or these Bylaws to be performed by the Board of Directors.

 


 

ARTICLE IV.
OFFICERS
     SECTION 4.01. EXECUTIVE AND OTHER OFFICERS. The Corporation shall have a President, a Secretary, and a Treasurer and may also have a Chairman of the Board and one or more Vice Chairmen, which officers shall be the executive officers of the Corporation. The Board of Directors may designate who shall serve as Chief Executive Officer, having general supervision of the business and affairs of the Corporation, and as Chief Operating Officer, having supervision of the operations of the Corporation. In the absence of designation the Chairman shall serve as Chief Executive Officer. The Corporation may also have one or more Vice Presidents (which may be designated Executive Vice President, Senior Vice President or Vice President), assistant officers and such other officers as may be established by the Board of Directors. A person may hold more than one office in the Corporation but may not serve concurrently as both President and Vice President of the Corporation. The Chairman of the Board and President shall be directors. The other officers may be directors.
     SECTION 4.02. ELECTION, TENURE AND REMOVAL OF OFFICERS. The Board of Directors or any committee of the Board of Directors shall elect the officers or may from time to time authorize any non-Board committee or officer to appoint any officer subordinate to the level of Senior Vice President, including any Vice President and any assistant and subordinate officers. The officers shall be appointed to hold their respective offices at the pleasure of the Board of Directors. The Board of Directors or, as to any assistant or subordinate officer, any committee or officer authorized by the Board of Directors, may remove an officer at any time. The removal of an officer does not prejudice any of his contractual rights. The Board of Directors or, as to any assistant or subordinate officer, any committee or officer authorized by the Board of Directors, may fill a vacancy which occurs in any office.
     SECTION 4.03. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present; he may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments of every description. In general, he shall perform all such duties as are from time to time assigned to him by the Board of Directors.
     SECTION 4.04. PRESIDENT. The President, in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present; he may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments of every description. In general, he shall perform all duties usually performed by a president of a corporation and such other duties as are from time to time assigned to him by the Board of Directors or the Chief Executive Officer of the Corporation.

 


 

     SECTION 4.05. VICE PRESIDENTS. The Vice President or Vice Presidents, at the request of the Chief Executive Officer or the President, or in the President’s absence or during his inability to act, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice President, the Board of Directors may determine which one or more of the Vice Presidents shall perform any of such duties or exercise any of such functions, or if such determination is not made by the Board of Directors, the Chief Executive Officer or the President may make such determination; otherwise any of the Vice Presidents may perform any of such duties or exercise any of such functions. The Vice President or Vice Presidents shall have such other powers and perform such other duties, and have such additional descriptive designations in their titles, if any, as are from time to time assigned to them by the Board of Directors, the Chief Executive Officer, or the President.
SECTION 4.06. SECRETARY. The Secretary shall keep the minutes of the meetings of the stockholders and the Board of Directors in books provided for such purpose; he shall see that all notices are duly given in accordance with the provision of these Bylaws or as required by law; he shall be custodian of the records of the Corporation; he may witness any document on behalf of the Corporation, the execution of which is duly authorized, see that the corporate seal is affixed where such document is required or desired to be under its seal, and, when so affixed, may attest the same; and, in general, he shall perform all duties incident to the office of a secretary of a corporation, and such other duties as are from time to time assigned to him by the Board of Directors, the Chief Executive Officer, or the President.
     SECTION 4.07. TREASURER. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the executive officers. He shall render to the Chief Executive Officer, the President and the Board of Directors, whenever requested, an account of the financial condition of the Corporation; and, in general, he shall perform all the duties incident to the office of a treasurer of a corporation, and such other duties as are from time to time assigned to him by the Board of Directors, the Chief Executive Officer, or the President.
     SECTION 4.08. ASSISTANT AND SUBORDINATE OFFICERS. The assistant and subordinate officers of the Corporation are all officers below the office of Vice President, Secretary, or Treasurer. The assistant or subordinate officers shall have such duties as are from time to time assigned to them by the Board of Directors, the Chief Executive Officer, the President or any committee or officer authorized by the Board of Directors to appoint any such assistant and subordinate officers.

 


 

ARTICLE V.
STOCK
     SECTION 5.01. CERTIFICATES FOR STOCK. Each stockholder is entitled to certificates which represent and certify the shares of stock he holds in the Corporation. Each stock certificate shall include on its face the name of the Corporation, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. The certificate shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a Vice President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued.
SECTION 5.02. TRANSFER. The Board of Directors shall have the power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined.
     SECTION 5.03. RECORD DATE AND CLOSING OF TRANSFER BOOKS. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to the stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be prior to the close of business on the day the record date is fixed and may not be more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting.
     SECTION 5.04. STOCK LEDGER. The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the executive offices of the Corporation.
     SECTION 5.06. LOST STOCK CERTIFICATES. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have, been lost, stolen, or destroyed, or the Board of Directors

 


 

may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises.
ARTICLE VI.
FINANCE
     SECTION 6.01. CHECKS, DRAFTS, ETC. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall be signed by such agents as may be designated from time to time by the Board of Directors or authorized officers of the Corporation.
     SECTION 6.02. ANNUAL STATEMENT OF AFFAIRS. The Chairman, President, a Vice President or the Treasurer shall prepare or cause to be prepared annually a full and correct statement of the affairs of the Corporation, including a balance sheet and a financial statement of operations for the preceding fiscal year.
     SECTION 6.03. FISCAL YEAR. The fiscal year of the Corporation shall be the twelve calendar months period ending December 31 in each year, unless otherwise provided by the Board of Directors.
     SECTION 6.04. DIVIDENDS. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter.
ARTICLE VII.
SUNDRY PROVISIONS
     SECTION 7.01. BOOKS AND RECORDS. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of the Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of these Bylaws shall be kept at the principal office of the Corporation.
     SECTION 7.02. CORPORATE SEAL. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating

 


 

to a corporate seal to place the word “Seal” adjacent to the signature of the person authorized to sign the document on behalf of the Corporation.
     SECTION 7.03. BONDS. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors.
     SECTION 7.04. VOTING UPON SHARES IN OTHER CORPORATIONS. Stock of other corporations or associations which is registered in the name of, or beneficially owned by, the Corporation, or which the Corporation is entitled to vote or direct the voting of in its fiduciary capacity or otherwise, may be voted by the Chairman, the President, any Vice President, or a proxy appointed by any of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution.
     SECTION 7.05. EXECUTION OF DOCUMENTS. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer.
     SECTION 7.06. AMENDMENTS. The Board of Directors shall have the power, at any regular or special meeting thereof, to amend, alter or repeal the Bylaws of the Corporation, or to make and adopt new bylaws. These Bylaws may be amended, altered or repealed and new bylaws may be adopted by the stockholders of the Corporation to the extent and as provided in the Charter of the Corporation.

 


 

Exhibit 3.4
HUNTINGTON BANCSHARES INCORPORATED
ARTICLES SUPPLEMENTARY
     Huntington Bancshares Incorporated, a Maryland corporation (the “Corporation”), hereby certifies to the State Department of Assessments and Taxation of Maryland (the “SDAT”), that:
     FIRST: Under a power contained in Title 3, Subtitle 8 of the Maryland General Corporation Law (the “MGCL”), and in accordance with resolutions duly adopted by the Board of Directors of the Corporation (the “Board of Directors”) at a meeting duly called and held, the Corporation elects, notwithstanding any provision in its charter or Bylaws to the contrary, to be subject to Section 3-804(c)(3) of the MGCL, the repeal of which may be effected only by the means authorized by Section 3-802(b)(3) of the MGCL.
     SECOND: The election to become subject to Section 3-804(c)(3) of the MGCL has been approved by the Board of Directors in the manner and by the vote required by law.
     THIRD: The undersigned officer of the Corporation acknowledges these Articles Supplementary to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned officer acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 


 

     IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to be executed under seal in its name and on its behalf by its Chief Executive Officer and attested by its Secretary on this 22nd day of February, 2007.
     
ATTEST:
  HUNTINGTON BANCSHARES
INCORPORATED
 
   
 
   
 
   
/s/   Richard A. Cheap
  /s/   Thomas E. Hoaglin
_____________________
  _____________________(SEAL)
Name: Richard A. Cheap
  Name: Thomas E. Hoaglin
Title: Secretary
  Title: Chief Executive Officer

2


 

Exhibit 10.34
Schedule Identifying Material Details of
Executive Agreements Substantially Similar to Exhibit 99.1 to Huntington’s
Current Report on Form 8-K dated November 21, 2005
         
Name   Effective Date  
         
Thomas E. Hoaglin
  January 1, 2006
Schedule Identifying Material Details of
Executive Agreements Substantially Similar to Exhibit 99.2 to Huntington’s
Current Report on Form 8-K dated November 21, 2005
         
         
Name   Effective Date  
         
Daniel B. Benhase
  January 1, 2006
Richard A. Cheap
  January 1, 2006
Donald R. Kimble
  January 1, 2006
Mary W. Navarro
  January 1, 2006
Nicholas G. Stanutz
  January 1, 2006
Schedule Identifying Material Details of
Executive Agreements Substantially Similar to Exhibit 99.3 to Huntington’s
Current Report on Form 8-K dated November 21, 2005
         
Name   Effective Date  
         
James W. Nelson
  January 1, 2006

26


 

Exhibit 12.1
Ratio of Earnings to Fixed Charges
                                         
    Year Ended December 31,  
(in thousands of dollars)   2006     2005     2004     2003     2002  
 
                                       
Earnings:
                                       
Income before taxes
  $ 514,061     $ 543,574     $ 552,666     $ 523,987     $ 522,705  
 
Add: Fixed charges, excluding interest on deposits
    345,253       243,239       191,648       179,903       169,788  
 
Earnings available for fixed charges, excluding interest on deposits
    859,314       786,813       744,314       703,890       692,493  
Add: Interest on deposits
    717,167       446,919       257,099       288,271       385,733  
 
Earnings available for fixed charges, including interest on deposits
  $ 1,576,481     $ 1,233,732     $ 1,001,413     $ 992,161     $ 1,078,226  
 
 
                                       
Fixed Charges:
                                       
Interest expense, excluding interest on deposits
  $ 334,175     $ 232,435     $ 178,842     $ 168,499     $ 157,888  
Interest factor in net rental
    11,078       10,804       12,806       11,404       11,900  
expense
                                       
 
Total fixed charges, excluding interest on deposits
    345,253       243,239       191,648       179,903       169,788  
Add: Interest on deposits
    717,167       446,919       257,099       288,271       385,733  
 
Total fixed charges, including interest on deposits
  $ 1,062,420     $ 690,158     $ 448,747     $ 468,174     $ 555,521  
 
 
                                       
Ratio of Earnings to Fixed Charges
                                       
Excluding interest on deposits
    2.49x       3.23x       3.88x       3.91x       4.08x  
Including interest on deposits
    1.48x       1.79x       2.23x       2.12x       1.94x  

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S ELECTED F INANCIAL D ATA
Exhibit 13.1
H UNTINGTON B ANCSHARES I NCORPORATED
Table 1 — Selected Financial Data (1)
                                           
    Year Ended December 31,
 
(in thousands of dollars, except per share amounts)   2006   2005   2004   2003   2002
 
 
Interest income
  $ 2,070,519     $ 1,641,765     $ 1,347,315     $ 1,305,756     $ 1,293,195  
 
Interest expense
    1,051,342       679,354       435,941       456,770       543,621  
 
 
Net interest income
    1,019,177       962,411       911,374       848,986       749,574  
 
Provision for credit losses
    65,191       81,299       55,062       163,993       194,426  
 
Net interest income after provision for credit losses
    953,986       881,112       856,312       684,993       555,148  
 
 
Service charges on deposit accounts
    185,713       167,834       171,115       167,840       153,564  
 
Automobile operating lease income
    43,115       133,015       285,431       489,698       657,074  
 
Gain on sales of automobile loans
    3,095       1,211       14,206       40,039        
 
Gain on sale of Florida operations
                            182,470  
 
Securities (losses) gains
    (73,191 )     (8,055 )     15,763       5,258       4,902  
 
Other non-interest income
    402,337       338,277       332,083       366,318       343,694  
 
Total non-interest income
    561,069       632,282       818,598       1,069,153       1,341,704  
 
 
Personnel costs
    541,228       481,658       485,806       447,263       418,037  
 
Automobile operating lease expense
    31,286       103,850       235,080       393,270       518,970  
 
Restructuring reserve (releases) charges
                (1,151 )     (6,666 )     48,973  
 
Other non-interest expense
    428,480       384,312       402,509       396,292       388,167  
 
Total non-interest expense
    1,000,994       969,820       1,122,244       1,230,159       1,374,147  
 
Income before income taxes
    514,061       543,574       552,666       523,987       522,705  
Provision for income taxes
    52,840       131,483       153,741       138,294       198,974  
 
Income before cumulative effect of change in accounting principle
    461,221       412,091       398,925       385,693       323,731  
Cumulative effect of change in accounting principle, net of tax (2)
                      (13,330 )      
 
Net income
  $ 461,221     $ 412,091     $ 398,925     $ 372,363     $ 323,731  
 
Income before cumulative effect of change in accounting
principle per common share — basic
    $  1.95       $  1.79       $  1.74       $  1.68       $  1.34  
Net Income per common share — basic
    1.95       1.79       1.74       1.62       1.34  
Income before cumulative effect of change in accounting
principle per common share — diluted
    1.92       1.77       1.71       1.67       1.33  
Net Income per common share — diluted
    1.92       1.77       1.71       1.61       1.33  
Cash dividends declared
    1.000       0.845       0.750       0.670       0.640  
 
Balance sheet highlights
                                       
 
Total assets (period end)
  $ 35,329,019     $ 32,764,805     $ 32,565,497     $ 30,519,326     $ 27,539,753  
Total long-term debt (period end) (3)
    4,512,618       4,597,437       6,326,885       6,807,979       4,246,801  
Total shareholders’ equity (period end)
    3,014,326       2,557,501       2,537,638       2,275,002       2,189,793  
Average long-term debt (3)
    4,942,671       5,168,959       6,650,367       5,816,660       3,613,527  
Average shareholders’ equity
    2,945,597       2,582,721       2,374,137       2,196,348       2,238,761  
Average total assets
    35,111,236       32,639,011       31,432,746       28,971,701       26,063,281  
 
Key ratios and statistics
                                       
 
Margin analysis — as a % of average earnings assets
                                       
 
Interest income (4)
    6.63 %     5.65 %     4.89 %     5.35 %     6.23 %
 
Interest expense
    3.34       2.32       1.56       1.86       2.61  
 
Net interest margin (4)
    3.29 %     3.33 %     3.33 %     3.49 %     3.62 %
 
 
Return on average total assets
    1.31 %     1.26 %     1.27 %     1.29 %     1.24 %
Return on average total shareholders’ equity
    15.7       16.0       16.8       17.0       14.5  
Efficiency ratio (5)
    59.4       60.0       65.0       63.9       65.6  
Dividend payout ratio
    52.1       47.7       43.9       41.6       48.1  
Average shareholders’ equity to average assets
    8.39       7.91       7.55       7.58       8.59  
Effective tax rate
    10.3       24.2       27.8       26.4       38.1  
Tangible equity to tangible assets (period end)
    6.87       7.19       7.18       6.79       7.22  
Tier 1 leverage ratio
    8.00       8.34       8.42       7.98       8.51  
Tier 1 risk-based capital ratio (period end)
    8.93       9.13       9.08       8.53       8.34  
Total risk-based capital ratio (period end)
    12.79       12.42       12.48       11.95       11.25  
 
Other data
                                       
 
Full-time equivalent employees
    8,081       7,602       7,812       7,983       8,177  
Domestic banking offices
    381       344       342       338       343  
(1)  Comparisons for presented periods are impacted by a number of factors. Refer to the ’Significant Factors Influencing Financial Performance Comparisons’ for additional discussion regarding these key factors.
 
(2)  Due to the adoption of FASB Interpretation No. 46 “Consolidation of Variable Interest Entities.
 
(3)  Includes Federal Home Loan Bank advances, other long-term debt, and subordinated notes.
 
(4)  On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)  Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION
AND
R ESULTS OF O PERATIONS
H UNTINGTON B ANCSHARES I NCORPORATED
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, private mortgage insurance, reinsuring credit life and disability insurance, and other insurance and financial products and services. Our banking offices are located in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Certain activities are also conducted in Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, and Vermont. We have a foreign office in the Cayman Islands and another in Hong Kong. The Huntington National Bank (the Bank), organized in 1866, is our only bank subsidiary.
The following discussion and analysis provides you with information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows, and should be read in conjunction with the financial statements, notes, and other information contained in this report.
You should note the following discussion is divided into key segments:
  –  Introduction  — Provides overview comments on important matters including risk factors, the now-terminated written regulatory agreement with the Federal Reserve Bank of Cleveland and critical accounting policies and use of significant estimates. These are essential for understanding our performance and prospects.
 
  –  Discussion of Results of Operations  — Reviews financial performance. It also includes a Significant Factors Influencing Financial Performance Comparisons section that summarizes key issues helpful for understanding performance trends. Key consolidated balance sheet and income statement trends are also discussed in this section.
 
  –  Risk Management and Capital  — Discusses credit, market, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we fund ourselves, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
 
  –  Lines of Business Discussion  — Provides an overview of financial performance for each of our major lines of business and provides additional discussion of trends underlying consolidated financial performance.
 
  –  Results for the Fourth Quarter  — Provides a discussion of results for the 2006 fourth quarter compared with the year-earlier quarter.
A reading of each section is important for you to understand fully the nature of our financial performance and prospects.
Forward-Looking Statements
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. These include descriptions of products or services, plans or objectives for future operations, including any proposed or approved acquisitions, and forecasts of revenues, earnings, cash flows, or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, the businesses of Huntington and that of any pending or approved acquisition may not be integrated successfully or such integration may take longer to accomplish than expected; the expected cost savings and any revenue synergies from the acquisition may not be fully realized within the expected timeframes; disruption from the acquisition may make it more difficult to maintain relationships with clients, associates, or suppliers; the required governmental approvals of the acquisition may not be obtained on the proposed terms and schedule; if required by the acquisition, Huntington and/or the stockholders of any pending or approved acquisition may not approve the acquisition; changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of other business strategies; the nature, extent, and timing of governmental actions and reforms; and extended disruption of vital infrastructure; and other factors including but not limited to those set forth under the heading “Risk Factors” included in Item 1A of Huntington’s Annual Report on Form  10-K for the year ended December 31, 2006, and other factors described from time to time in Huntington’s other filings with the Securities and Exchange Commission.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
You should understand forward-looking statements to be strategic objectives and not absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.
Risk Factors
We, like other financial institutions, are subject to a number of risks, 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 that loan and lease customers or other counter parties will be unable to perform their contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely affect our financial condition or results of operation, (3)  liquidity risk, which is the risk that we and/ or the Bank will have insufficient cash or access to cash to meet operating needs, and (4)  operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our Annual Report on Form  10-K for the year ended December 31, 2006.
Formal Regulatory Supervisory Agreement
On March 1, 2005, we announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreement called for independent third-party reviews, as well as the submission of written plans and progress reports by Management, and would remain in effect until terminated by the banking regulators. On May 10, 2006, Huntington announced that the FRBC notified Huntington’s board of directors that Huntington had satisfied the provisions of the written agreement dated February 28, 2005, and that the FRBC, under delegated authority of the Board of Governors of the Federal Reserve System, had terminated the written agreement.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted 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 this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of 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. Readers of this report should understand that estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed below. This analysis is included to emphasize that estimates are used in connection with the critical and other accounting policies and to illustrate the potential effect on the financial statements if the actual amount were different from the estimated amount.
–  Total allowances for credit losses  — The allowances for credit losses (ACL) is the sum of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). At December 31, 2006, the ACL was $312.2 million. The amount of the ACL was determined by judgments regarding the quality of the loan portfolio and loan commitments. All known relevant internal and external factors that affected loan collectibility were considered. The ACL represents the estimate of the level of reserves appropriate to absorb inherent credit losses in the loan and lease portfolio, as well as unfunded loan commitments. We believe the process for determining the ACL considers all of the potential factors that could result in credit losses. However, the process includes judgmental and quantitative elements that may be subject to significant change. To the extent actual outcomes differ from our estimates, additional provision for credit losses could be required, which could adversely affect earnings or financial performance in future periods. At December 31, 2006, the ACL as a percent of total loans and leases was 1.19%. Based on the December 31, 2006 balance sheet, a 10 basis point increase in this ratio to 1.29% would require $25.2 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted 2006 net income by approximately $16.3 million, or $0.07 per share. A discussion about the process used to estimate the ACL is presented in the Credit Risk section of Management’s Discussion and Analysis in this report.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
–  Fair value Measurements  — A significant portion of our assets is carried at fair value, including securities, derivatives, mortgage servicing rights (MSRs) and trading assets. Additionally, a smaller portion is carried at the lower of fair value or cost, including held-for-sale loans, while another portion is evaluated for impairment using fair value measurements. At December 31, 2006, approximately $4.8 billion of our assets were recorded at either fair value or at the lower of fair value or cost.
  The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The majority of assets reported at fair value are based on quoted market prices or on internally developed models that utilize independently sourced market parameters, including interest rate yield curves, option volatilities, and currency rates.
 
  We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods consider factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk. Other factors such as model assumptions, market dislocations and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded for a particular position.
  Trading securities and securities available-for-sale
  Substantially all of our securities are valued based on quoted market prices. However, certain securities are less actively traded. These securities do not always have quoted market prices. The determination of their fair value, therefore, requires judgment, as this determination may require benchmarking to similar instruments or analyzing default and recovery rates. Examples include certain collateralized mortgage and debt obligations and high-yield debt securities.
 
  Our derivative positions are valued using internally developed models based on observable market parameters (parameters that are actively quoted and can be validated to external sources) or model values where quoted market prices do not exist, including industry-pricing services.
 
  Loans held-for-sale
  The fair value of loans in the held-for-sale portfolio is generally based on observable market prices of similar instruments. If market prices are not available, fair value is determined using internally developed models, based on the estimated cash flows, adjusted for credit risk. The credit risk adjustment is discounted using a rate that is appropriate for each maturity and incorporates the effects of interest rate changes.
 
  Goodwill and Intangible Assets
  Goodwill and intangible assets represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed at the reporting unit level annually as of September 30th, or more frequently if events or circumstances indicate possible impairment. Fair values of reporting units are determined using a combination of a discounted cash flow analyses based on internal forecasts and market-based valuation multiples for comparable businesses. No impairment was identified as a result of the testing performed during 2006 or 2005. Note 9 to the Consolidated Financial Statements contains additional information regarding goodwill and the carrying values by lines of business.
 
  MSRs and other servicing rights
  MSRs and certain other servicing rights do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, we estimate the fair value of the MSRs on a monthly basis using a third-party valuation software package. Fair value is estimated based upon discounted net cash flows calculated from a combination of loan level data and market assumptions. The valuation software combines loans based on common characteristics that impact servicing cash flows (investor, remittance cycle, interest rate, product type, etc.) in order to project net cash flows.
 
  Market valuation assumptions (including discount rate, servicing costs, etc.) are also populated within the software. Valuation assumptions are periodically reviewed against available market data (e.g., broker surveys) for reasonableness and adjusted if deemed appropriate. The recorded MSR asset balance is adjusted up or down to estimated fair value based upon the final month-end valuation, which utilized the month-end rate curve and prepayment assumptions. Note 5 of the Notes to Consolidated Financial Statements contains an analysis of the impact to the fair value of MSRs resulting from changes in the estimates used by management.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
–  Income Taxes  — The calculation of our provision for income taxes is complex and requires the use of estimates and judgments. We have two accruals for income taxes: Our accrued income taxes represent the net estimated amount currently due or to be received from taxing jurisdictions, including any reserve for potential audit issues, and is reported as a component of “accrued expenses and other liabilities” in our consolidated balance sheet; our deferred federal income tax liability represents the estimated impact of temporary differences between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities are recognized under the federal tax code.
  In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and non-income taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.
 
  From time to time, we engage in business transactions that may have an effect on our tax liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of its tax position. However, changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial, and regulatory guidance. Such changes can affect the amount of our accrued taxes and can be material to our financial position and/or results of operations. The potential impact to our operating results for any of these changes cannot be reasonably estimated.
Pending Acquisition of Sky Financial Group, Inc.
On December 20, 2006, Huntington announced the signing of a definitive agreement to acquire Sky Financial Group, Inc. (Sky Financial) in a stock and cash transaction expected to be valued at approximately $3.5 billion. Sky Financial is a $17.6 billion diversified financial holding company with over 330 banking offices and over 400 ATMs. Sky Financial serves communities in Ohio, Pennsylvania, Indiana, Michigan and West Virginia. Sky’s financial service affiliates include: Sky Bank, commercial and retail banking; Sky Trust, asset management services; and Sky Insurance, retail and commercial insurance agency services.
Under the terms of the agreement, Sky Financial shareholders will receive 1.098 shares of Huntington common stock, on a tax-free basis, and a taxable cash payment of $3.023 for each share of Sky Financial common stock. The merger was unanimously approved by both boards and is expected to close in the third quarter of 2007, pending customary regulatory approvals, as well as approval by both companies’ shareholders.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
Table 2 — Selected Annual Income Statements (1)
                                                                           
    Year Ended December 31,
 
    Change from 2005       Change from 2004    
                 
(in thousands, except per share amounts)   2006   Amount   %   2005   Amount   %   2004   2003   2002
 
 
Interest income
  $ 2,070,519     $ 428,754       26.1 %   $ 1,641,765     $ 294,450       21.9 %   $ 1,347,315     $ 1,305,756     $ 1,293,195  
 
Interest expense
    1,051,342       371,988       54.8       679,354       243,413       55.8       435,941       456,770       543,621  
 
 
Net interest income
    1,019,177       56,766       5.9       962,411       51,037       5.6       911,374       848,986       749,574  
 
Provision for credit losses
    65,191       (16,108 )     (19.8 )     81,299       26,237       47.7       55,062       163,993       194,426  
 
Net interest income after provision for credit losses
    953,986       72,874       8.3       881,112       24,800       2.9       856,312       684,993       555,148  
 
 
Service charges on deposit accounts
    185,713       17,879       10.7       167,834       (3,281 )     (1.9 )     171,115       167,840       153,564  
 
Trust services
    89,955       12,550       16.2       77,405       9,995       14.8       67,410       61,649       62,051  
 
Brokerage and insurance income
    58,835       5,216       9.7       53,619       (1,180 )     (2.2 )     54,799       57,844       62,109  
 
Other service charges and fees
    51,354       7,006       15.8       44,348       2,774       6.7       41,574       41,446       42,888  
 
Bank owned life insurance income
    43,775       3,039       7.5       40,736       (1,561 )     (3.7 )     42,297       43,028       43,123  
 
Automobile operating lease income
    43,115       (89,900 )     (67.6 )     133,015       (152,416 )     (53.4 )     285,431       489,698       657,074  
 
Mortgage banking
    41,491       13,158       46.4       28,333       1,547       5.8       26,786       58,180       32,751  
 
Gain on sales of automobile loans
    3,095       1,884       N.M.       1,211       (12,995 )     (91.5 )     14,206       40,039        
 
Securities (losses) gains
    (73,191 )     (65,136 )     N.M.       (8,055 )     (23,818 )     N.M.       15,763       5,258       4,902  
 
Gain on sale of Florida operations
                                                    182,470  
 
Other
    116,927       23,091       24.6       93,836       (5,381 )     (5.4 )     99,217       104,171       100,772  
 
Total non-interest income
    561,069       (71,213 )     (11.3 )     632,282       (186,316 )     (22.8 )     818,598       1,069,153       1,341,704  
 
 
Personnel costs
    541,228       59,570       12.4       481,658       (4,148 )     (0.9 )     485,806       447,263       418,037  
 
Outside data processing and other services
    78,779       4,141       5.5       74,638       2,523       3.5       72,115       66,118       67,368  
 
Net occupancy
    71,281       189       0.3       71,092       (4,849 )     (6.4 )     75,941       62,481       59,539  
 
Equipment
    69,912       6,788       10.8       63,124       (218 )     (0.3 )     63,342       65,921       68,323  
 
Marketing
    31,728       5,449       20.7       26,279       1,679       6.8       24,600       25,648       26,655  
 
Automobile operating lease expense
    31,286       (72,564 )     (69.9 )     103,850       (131,230 )     (55.8 )     235,080       393,270       518,970  
 
Professional services
    27,053       (7,516 )     (21.7 )     34,569       (2,307 )     (6.3 )     36,876       42,448       33,085  
 
Telecommunications
    19,252       604       3.2       18,648       (1,139 )     (5.8 )     19,787       21,979       22,661  
 
Printing and supplies
    13,864       1,291       10.3       12,573       110       0.9       12,463       13,009       15,198  
 
Amortization of intangibles
    9,962       9,133       N.M.       829       12       1.5       817       816       2,019  
 
Restructuring reserve (releases) charges
                            1,151       N.M.       (1,151 )     (6,666 )     48,973  
 
Other
    106,649       24,089       29.2       82,560       (14,008 )     (14.5 )     96,568       97,872       93,319  
 
Total non-interest expense
    1,000,994       31,174       3.2       969,820       (152,424 )     (13.6 )     1,122,244       1,230,159       1,374,147  
 
Income before income taxes
    514,061       (29,513 )     (5.4 )     543,574       (9,092 )     (1.6 )     552,666       523,987       522,705  
Provision for income taxes
    52,840       (78,643 )     (59.8 )     131,483       (22,258 )     (14.5 )     153,741       138,294       198,974  
 
Income before cumulative effect of change in accounting principle
    461,221       49,130       11.9       412,091       13,166       3.3       398,925       385,693       323,731  
Cumulative effect of change in accounting principle, net of tax (2)
                                                    (13,330 )      
 
Net income
  $ 461,221     $ 49,130       11.9 %   $ 412,091     $ 13,166       3.3 %   $ 398,925     $ 372,363     $ 323,731  
 
Average common shares — basic
    236,699       6,557       2.8 %     230,142       229       0.1 %     229,913       229,401       242,279  
Average common shares — diluted
    239,920       6,445       2.8       233,475       (381 )     (0.2 )     233,856       231,582       244,012  
Per common share:
                                                                       
 
Income before cumulative effect of change in accounting principle — basic
    $  1.95       $  0.16       8.9 %     $  1.79       $  0.05       2.9 %     $  1.74       $  1.68       $  1.34  
 
Net income — basic
    1.95       0.16       8.9       1.79       0.05       2.9       1.74       1.62       1.34  
 
 
Income before cumulative effect of change in accounting principle — diluted
    1.92       0.15       8.5       1.77       0.06       3.5       1.71       1.67       1.33  
 
Net income — diluted
    1.92       0.15       8.5       1.77       0.06       3.5       1.71       1.61       1.33  
 
 
Cash dividends declared
    1.000       0.16       18.3       0.845       0.10       12.7       0.750       0.670       0.640  
Revenue — fully taxable equivalent (FTE)                                                                
  Net interest income   $ 1,019,177     $ 56,766       5.9 %   $ 962,411     $ 51,037       5.6 %   $ 911,374     $ 848,986     $ 749,574  
  FTE adjustment     16,025       2,632       19.7       13,393       1,740       14.9       11,653       9,684       5,205  
 
Net interest income (3)
    1,035,202       59,398       6.1       975,804       52,777       5.7       923,027       858,670       754,779  
Non-interest income
    561,069       (71,213 )     (11.3 )     632,282       (186,316 )     (22.8 )     818,598       1,069,153       1,341,704  
 
Total revenue (3)
  $ 1,596,271     $ (11,815 )     (0.7 )%   $ 1,608,086     $ (133,539 )     (7.7 )%   $ 1,741,625     $ 1,927,823     $ 2,096,483  
 
N.M., not a meaningful value.
(1)  Comparisons for presented periods are impacted by a number of factors. Refer to the ‘Significant Factors Influencing Financial Performance Comparisons’ for additional discussion regarding these key factors.
 
(2)  Due to adoption of FASB Interpretation No. 46 for variable interest entities.
 
(3)  On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Factors Influencing Financial Performance Comparisons section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed in this section. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, this section should be read in conjunction with the Lines of Business discussion.
Summary
2006 versus 2005
Earnings for full-year 2006 were $461.2 million, or $1.92 per common share, up 12% and 8%, respectively, compared with $412.1 million, or $1.77 per common share, in 2005. The $49.1 million increase in net income primarily reflected:
  –  $78.6 million decline in income tax expense as the effective tax rate for 2006 was 10.3%, down from 24.2% in 2005. The lower 2006 income tax expense reflected the favorable impact of an $84.5 million reduction related to the resolution of a federal income tax audit covering tax years 2002 and 2003 that resulted in the release of federal income tax reserves, as well as the recognition of federal tax loss carry backs. The 2005 effective tax rate of 24.2% was favorably impacted by a combination of factors including the benefit of a federal tax loss carry back, partially offset by the net impact of repatriating foreign earnings.
 
  –  $56.8 million, or 6%, increase in net interest income, reflecting a 7% increase in average earning assets, as the net interest margin of 3.29% declined 4 basis points from 3.33% in the prior year. The increase in average earning assets reflected 7% growth in average total loans and leases, including 12% growth in average total commercial loans and 3% growth in average total consumer loans, and a 15% increase in average investment securities. Growth in earning assets was positively impact by the acquisition of Unizan Financial Corp. (“Unizan”) on March 1, 2006.
 
  –  A $16.1 million decline in provision for credit losses, reflecting overall net improvement in our credit risk performance as reflected in a decline in our allowance for credit losses as a percent of period end loans and leases to 1.04% at December 31, 2006, from 1.10% at the end of 2005.
Partially offset by:
  –  $71.2 million, or 11%, decline in non-interest income. Contributing to the decrease was an $89.9 million expected decline in operating lease income, and a $65.1 million increase in securities losses, reflecting the impact of a balance sheet restructuring in late 2006. Partially offsetting these negative factors were increases in several other components of non-interest income, primarily due to the Unizan acquisition, including a $23.1 million increase in other income, a $17.9 million increase in service charges on deposit accounts, a $13.2 million increase in mortgage banking income, a $12.6 million increase in trust services income, a $7.0 million increase in other service charges and fees, a $5.2 million increase in brokerage and insurance income, and a $1.9 million increase in gains on sales of automobile loans.
 
  –  $31.2 million, or 3%, increase in non-interest expense, reflecting increases in several components of non-interest expense, primarily related to the acquisition of Unizan, including a $59.6 million increase in personnel costs, a $24.1 million increase in other expense, a $9.1 million increase in amortization of intangibles, a $6.8 million increase in equipment expense, a $5.4 million increase in marketing expense, and a $4.1 million increase in outside data processing and other services, partially offset by a $72.6 million expected decrease in operating lease expense and a $7.5 million decline in professional services.
Compared with 2005, the ROA for 2006 was 1.31%, up from 1.26%, and the ROE was 15.7%, down slightly from 16.0%.
Full-year 2006 earnings were impacted by a number of significant items, the largest of which were (1) the acquisition of Unizan Financial Corp. on March 1, 2006, (2) a reduction in federal income tax expense, and (3) a balance sheet restructuring, undertaken to utilize the excess capital resulting from the reduction of federal income tax expense. The details of these impacts can be found in the detailed discussions that follow and are critical to understanding 2006 performance.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
2005 versus 2004
Earnings for 2005 were $412.1 million, or $1.77 per common share, up 3% and 4%, respectively, from $398.9 million, or $1.71 per common share, in 2004. The $13.2 million increase in net income primarily reflected:
  –  $152.4 million, or 14%, decline in non-interest expense, primarily reflecting a $131.2 million decline in operating lease expenses, a $9.9 million decline in SEC-related expenses, a $4.8 million decline in net occupancy expense, a $4.1 million decline in personnel costs, and a $2.9 million decline in Unizan system conversion expenses.
 
  –  $51.0 million, or 6%, increase in net interest income, reflecting a 6% increase in average earning assets, as the net interest margin of 3.33% was unchanged from the prior year. The increase in average earning assets reflected 10% growth in average total loans and leases, including 11% growth in average total consumer loans and 8% growth in average total commercial loans, partially offset by a 14% decline in average investment securities.
 
  –  $22.3 million decline in income tax expense as the effective tax rate for 2005 was 24.2%, down from 27.8% in 2004. The lower 2005 income tax expense reflected a combination of factors including the benefit of a federal tax loss carry back, partially offset by the net impact of repatriating foreign earnings.
Partially offset by:
  –  $186.3 million, or 23%, decline in non-interest income. Contributing to the decrease were a $152.4 million decline in operating lease income, a $23.8 million decline in securities gains as the current year had $8.1 million of securities losses and the prior year had $15.8 million of securities gains, a $13.0 million decline in gains on sales of automobile loans, a $5.4 million decline in other income, and a $3.3 million decline in service charges on deposit accounts. These declines were partially offset by a $10.0 million increase in trust services income and a $2.8 million increase in other service charges and fees.
 
  –  $26.2 million, or 48%, increase in the provision for credit losses, reflecting higher levels of non-performing assets and problem credits, as well as growth in the loan portfolio.
The ROA and ROE for 2005 were 1.26% and 16.0%, respectively, down slightly from 1.27% and 16.8%, respectively, in 2004.
Results of Operations
Significant Factors Influencing Financial Performance Comparisons
Earnings comparisons from 2004 through 2006 were impacted by a number of factors; some related to changes in the economic and competitive environment, while others reflected specific management strategies or changes in accounting practices. Those key factors are summarized below.
    1.  Unizan acquisition.  — The merger with Unizan Financial Corp. (Unizan) was completed on March 1, 2006. At the time of acquisition, Unizan had assets of $2.5 billion, including $1.6 billion of loans and core deposits of $1.5 billion. Unizan results were only in consolidated results for 10 months of 2006. As a result, performance comparisons between 2006 and 2005 are affected, as Unizan results were not in 2005 results. Comparisons of 2006 reported results compared with 2005 pre-merger results are impacted as follows:
  –  Increased certain reported period-end balance sheet and credit quality items (e.g., non-performing loans).
 
  –  Increased reported average balance sheet, revenue, expense, and credit quality results (e.g., net charge-offs).
 
  –  Increased reported non-interest expense items as a result of costs incurred as part of merger-integration activities, most notably employee retention bonuses, outside programming services related to systems conversions, and marketing expenses related to customer retention initiatives. Merger costs were $3.7 million for 2006, $0.7 million for 2005, and $3.6 million for 2004.
    Given the impact of the merger on reported 2006 results, we believe that an understanding of the impacts of the merger is necessary to understand better underlying performance trends. When comparing post-merger period results to pre-merger periods, two terms relating to the impact of the Unizan merger on reported results are used:
  –  “Merger-related” refers to amounts and percentage changes representing the impact attributable to the merger.
 
  –  “Merger costs” represent expenses associated with merger integration activities.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
    An analysis reflecting the estimated impact of the Unizan merger on our reported average balance sheet and income statement can be found in Table 30 — Estimated Impact of Unizan Merger.
    2.  Mortgage servicing rights (MSRs) and related hedging.  — MSR 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.
  –  Prior to 2006, we recognized impairment when our valuation of MSRs was less than the recorded book value. We recognized temporary impairment due to changes in interest rates through a valuation reserve and recorded a direct write-down of the book value of MSRs for other-than-temporary declines in valuation. Changes and fluctuations in interest rate levels between quarters resulted in some quarters reporting an MSR temporary impairment, with others reporting a recovery of previously recognized MSR temporary impairment. Such swings in MSR valuations have significantly impacted quarterly mortgage banking income trends throughout this period.
 
  –  Beginning in 2006, we adopted Statement of Financial Accounting Standards (Statement) No. 156, Accounting for Servicing of Financial Assets (an amendment of FASB Statement No. 140) , which allowed us to carry MSRs at fair value. This resulted in a $5.1 million pre-tax ($0.01 per common share) positive impact in 2006. Under the fair value approach, servicing assets and liabilities are recorded at fair value at each reporting date. Changes in fair value between reporting dates are recorded as an increase or decrease in mortgage banking income. MSR assets are included in other assets. (See Tables 3, 6, and 7.)
 
  –  Prior to 2005, we used investment securities gains/(losses) as a balance sheet hedge to offset MSR valuation changes. Such gains/(losses) were reported as securities gains/(losses). Beginning in 2005, we used trading account securities and derivatives to offset MSR valuation changes. The valuations of trading securities and derivatives that we use generally react to interest rate changes in an opposite direction compared with changes in MSR valuations. As a result, changes in interest rate levels that impact MSR valuations should result in corresponding offsetting, or partially offsetting, trading gains or losses. As such, in quarters where MSR fair values decline, the fair values of trading account securities and derivatives typically increase, resulting in a recognition of trading gains that offset, or partially offset, the decline in fair value recognized for the MSR, and vice versa. Such trading gains or losses are also recorded as an increase or decrease in mortgage banking income. Net interest income on securities used to hedge MSRs is recorded in interest income.
    3.  Automobile leases originated through April 2002 are accounted for as automobile operating leases.  — Automobile leases originated before May 2002 are accounted for using the operating lease method of accounting because they do not qualify as direct financing leases. Automobile operating leases are carried in other assets with the related rental income, other revenue, and credit recoveries reflected as automobile operating lease income, a component of non-interest income. Under this accounting method, depreciation expenses, as well as other costs and charge-offs, are reflected as automobile operating lease expense, a component of non-interest expense. With no new automobile operating leases originated since April 2002, the automobile operating lease assets have declined rapidly since then. The level of automobile operating lease assets and related automobile operating lease income and expense declined to a point of diminished materiality by the end of 2006. However, since automobile operating lease income and expense represented a significant percentage of total non-interest income and expense, respectively, throughout these reporting periods, their downward trend influenced total revenue, total non-interest income, and total non-interest expense trends.
    In contrast, automobile leases originated since April 2002 are accounted for as direct financing leases, an interest earning asset included in total loans and leases with the related income reflected as interest income and included in the calculation of the net interest margin. Credit charge-offs and recoveries are reflected in the allowance for loan and lease losses (ALLL), with related changes in the ALLL reflected in the provision for credit losses. To better understand overall trends in automobile lease exposure, it is helpful to compare trends in the combined total of direct financing leases plus automobile operating leases.
    4.  Effective tax rate.  — Various items impacted the effective tax rate for 2006 and 2005. For 2006, impacts included an $84.5 million ($0.35 per common share) reduction of federal income tax expense from the release of tax reserves as a result of the resolution of the federal income tax audit for 2002 and 2003, and the recognition of a federal tax loss carry back. For 2005, federal income tax expense benefited by $26.9 million ($0.12 per common share) from the positive impact of a federal tax loss carry-back, partially offset by a $5.0 million after tax ($0.02 per common share) increase in tax expense from the repatriation of foreign earnings.

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H UNTINGTON B ANCSHARES I NCORPORATED
    5.  Share-based compensation.  — In 2006, we adopted Statement No. 123R, Share-Based Payment, which resulted in recognizing as personnel expense, the impact of share-based compensation, primarily in the form of stock option grants. Adoption of stock option expensing added $18.6 million, pre-tax, to personnel expense in 2006. (See Note 19 to the Consolidated Financial Statements.)
 
    6.  Balance sheet restructuring.  — In 2006, we utilized the excess capital resulting from the favorable resolution to certain federal income tax audits to restructure certain under-performing components of the balance sheet. We believe that these actions will benefit the net interest margin in future periods. Our actions included the review of $2.1 billion of securities for potential sale, the refinancing of a portion of our FHLB funding, and the sale of approximately $100 million of residential mortgage loans. The review of securities for sale resulted in an initial impairment of $57.5 million, which was recorded as a securities loss. The completion of this review resulted in an additional $9.0 million of securities losses, as well as $6.8 million of other than temporary impairment on certain sub-prime mortgage backed securities not included in the initial review. Total securities losses as a result of these actions totaled $73.3 million. The refinancing of FHLB funding and the sale of mortgage loans resulted in total charges of $4.4 million, resulting in total balance sheet restructuring costs of $77.7 million ($0.21 per common share).
 
    7.  Other significant items influencing earnings performance comparisons.
    2006
  –  $10.0 million pre-tax contribution to the Huntington Foundation.
 
  –  $7.4 million pre-tax equity investment gains.
 
  –  $5.5 million pre-tax increase in automobile lease residual value losses. This increase reflected higher relative losses on certain vehicles sold at auction, most notably high-line imports and larger sport utility vehicles.
 
  –  $4.8 million in severance and consolidation expenses, pre-tax. This reflected fourth quarter severance-related expenses associated with a reduction of 75 Regional Banking staff positions, as well as costs associated with the previously announced retirements of a vice chairman and an executive vice president.
 
  –  $3.3 million pre-tax gain on the sale of MasterCard ® stock.
 
  –  $3.2 million pre-tax negative impact associated with the write-down of equity method investments.
 
  –  $2.3 million pre-tax unfavorable impact due to a cumulative adjustment to defer home equity annual fees.
    2005
  –  $8.8 million pre-tax investment securities losses, resulting from our decision to reduce our exposure to certain unsecured federal agency securities.
 
  –  $6.5 million pre-tax impact to provision expense associated with the charge-off of a single large commercial credit.
 
  –  $5.1 million of pre-tax severance and consolidation expenses associated with the consolidation of certain operations functions, including the closing of an item-processing center in Michigan. This item increased non-interest expense.
 
  –  $3.7 million pre-tax expense associated with the now-closed SEC investigation and regulatory-related written agreements.
 
  –  $2.6 million pre-tax write-offs of equity investments. This item lowered non-interest income.
    2004
  –  $14.2 million pre-tax gain on the sale of automobile loans associated with the objective of lowering total credit exposure to this sector.
 
  –  $13.6 million pre-tax expense associated with the now-closed SEC investigation and regulatory-related written agreements.
 
  –  $11.1 million pre-tax reduction to provision expense, reflecting a recovery of a single large commercial credit previously charged-off in 2002.
 
  –  $7.8 million pre-tax property lease impairments. This item increased non-interest expense.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
  –  $3.7 million pre-tax one-time funding cost adjustment for a securitization structure consolidated in a prior period, which lowered interest expense and increased net interest income, as well as the net interest margin.
Table 3 — Significant Items Influencing Earnings Performance Comparison (1)
                                                   
    2006   2005   2004
 
(in thousands of dollars)   After-tax   EPS   After-tax   EPS   After-tax   EPS
 
Net income — GAAP
  $ 461,221             $ 412,091             $ 398,925          
Earnings per share, after tax
          $ 1.92             $ 1.77             $ 1.71  
 
Change from prior year — $
            0.15               0.06               0.10  
 
Change from prior year — %
            8.5 %             3.5 %             6.2 %
Significant items — favorable (unfavorable) impact:
    Earnings (2 )     EPS       Earnings (2 )     EPS       Earnings (2 )     EPS  
 
Reduction to federal income tax expense (3)
  $ 84,541     $ 0.35     $     $     $     $  
Equity investment gains
    7,436       0.02                          
MSR FAS 156 accounting change
    5,143       0.01                          
Gain on sale of MasterCard stock
    3,341       0.01                          
Balance sheet restructuring
    (77,698 )     (0.21 )     (8,770 )     (0.02 )            
Huntington Foundation contribution
    (10,000 )     (0.03 )                        
Automobile lease residual value losses
    (5,549 )     (0.01 )                        
Severance and consolidation expenses
    (4,750 )     (0.01 )     (5,064 )     (0.01 )            
Unizan merger costs
    (3,749 )     (0.01 )                 (3,610 )     (0.01 )
Adjustment for equity method investments
    (3,240 )     (0.01 )                        
Adjustment to defer home equity annual fees
    (2,254 )     (0.01 )                        
Net impact of federal tax loss carry back (3)
                26,936       0.12              
MSR mark-to-market net of hedge-related trading activity (4)
                (7,318 )     (0.02 )     (7,174 )     (0.02 )
Single commercial credit net charge-off net of allocated reserves
                (6,464 )     (0.02 )            
Net impact of repatriating foreign earnings (3)
                (5,040 )     (0.02 )            
SEC and regulatory related expenses
                (3,715 )     (0.01 )     (13,597 )     (0.05 )
Write-off of equity investments
                (2,598 )     (0.01 )            
MSR hedging-related securities gains/(losses)
                            15,763       0.04  
Gain on sale of automobile loans
                            14,206       0.04  
Single commercial credit recovery
                            11,095       0.03  
One-time adjustment to consolidated securitization
                            3,682       0.01  
Property lease impairment
                            (7,846 )     (0.02 )
(1) See Significant Factors Influencing Financial Performance discussion.
(2) Pre-tax unless otherwise noted.
(3) After-tax.
(4) Prior to 2005, MSR valuation changes were reflected as recoveries (impairments) net of hedge-related trading activity with securities gains (losses).
Net Interest Income
(This section should be read in conjunction with Significant Factors 1 and 3.)
Our primary source of revenue is net interest income, which is the difference between interest income from earning assets, primarily loans, direct financing leases, securities, and interest expense of funding sources, including interest bearing deposits and borrowings. Earning asset balances and related funding, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the net interest spread. Non-interest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the non-interest bearing sources of funds, often referred to as “free” funds, is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Given the “free” nature of non-interest bearing sources of funds, the net interest margin is generally higher than the net interest spread. Both the net interest spread and net interest margin are presented on a fully taxable equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax equivalent income, assuming a 35% tax rate.
Table 4 shows changes in fully taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest bearing liabilities.

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H UNTINGTON B ANCSHARES I NCORPORATED
Table 4 — Change in Net Interest Income Due to Changes in Average Volume and Interest Rates (1)
                                                   
    2006   2005
 
    Increase (Decrease) From   Increase (Decrease) From
    Previous Year Due To   Previous Year Due To
 
Fully tax equivalent basis (2)       Yield/       Yield/    
(in millions of dollars)   Volume   Rate   Total   Volume   Rate   Total
 
 
Loans and direct financing leases
  $ 100.7     $ 246.9     $ 347.6     $ 118.6     $ 177.7     $ 296.3  
 
Securities
    30.4       46.9       77.3       (29.8 )     19.9       (9.9 )
 
Other earning assets
    (4.3 )     10.7       6.4       3.8       6.2       10.0  
 
Total interest income from earning assets
    126.8       304.5       431.3       92.6       203.8       296.4  
 
 
Deposits
    52.7       217.6       270.3       41.7       148.1       189.8  
 
Short-term borrowings
    12.6       25.3       37.9       (0.3 )     21.6       21.3  
 
Federal Home Loan Bank advances
    9.5       15.8       25.3       (4.7 )     6.1       1.4  
 
Subordinated notes and other long-term debt, including capital securities
    (21.5 )     59.9       38.4       (39.0 )     66.4       27.4  
 
Total interest expense of interest-bearing liabilities
    53.3       318.6       371.9       (2.3 )     242.2       239.9  
 
Net interest income before funding cost adjustment
    73.5       (14.1 )     59.4       94.9       (38.4 )     56.5  
Funding cost adjustment
                            (3.7 )     (3.7 )
 
Net interest income
  $ 73.5     $ (14.1 )   $ 59.4     $ 94.9     $ (42.1 )   $ 52.8  
 
(1)  The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.
 
(2)  Calculated assuming a 35% tax rate.
2006 versus 2005
Fully taxable equivalent net interest income increased $59.4 million, or 6% ($59.0 million merger-related), from 2005, reflecting the favorable impact of a $2.1 billion, or 7%, increase in average earning assets, as the fully taxable equivalent net interest margin declined 4 basis points to 3.29%. Average total loans and leases increased $1.6 billion, or 7% ($1.4 billion merger-related). The remaining increase in average total loans and leases was $0.2 billion, up 1% from a year-ago, which primarily reflected growth in commercial loans and residential mortgages, mostly offset by a decline in total average automobile loans and leases reflecting a decline in automobile leases and little growth in automobile loans given the ongoing program of selling a portion of related loan production.
Average interest bearing deposits increased $2.0 billion from 2005, mostly related to the acquisition of Unizan. Interest expense paid on total deposits and interest bearing liabilities increased at a faster rate than earning assets throughout 2006, reducing the overall spread between interest revenue on earning assets and interest costs paid on interest bearing liabilities. Non-interest bearing deposits grew at a 4% rate, reflecting the addition of Unizan. These added balances favorably impacted the margin for 2006, offsetting lower non-deferred loan fees and the reduction in net interest margin as noted above.
2005 versus 2004
Fully taxable equivalent net interest income increased $52.8 million, or 6%, from 2004, reflecting the favorable impact of a $1.6 billion, or 6%, increase in average earning assets, as the fully taxable equivalent net interest margin remained unchanged at 3.33%.
The stability of the net interest margin reflected a combination of factors including the benefit of a shift in the earning asset mix from lower-yielding investments to higher-yielding loans as a result of decreasing the level of excess liquidity and redirecting part of the proceeds of securities sales to fund loan growth. In addition, the margin also benefited from an increase in non-interest bearing funds. These benefits were partially offset by the negative impact of intense loan and deposit price competition and share repurchases.
Average Balance Sheet
Table 5 shows average annual balance sheets and net interest margin analysis for the last five years. It details average balances for total assets and liabilities, as well as shareholders’ equity, and their various components, most notably loans and leases, deposits, and borrowings. It also shows the corresponding interest income or interest expense associated with each earning asset and interest bearing liability category along with the average rate with the difference resulting in the net interest spread. The net interest spread plus the positive impact from the non-interest bearing funds represents the net interest margin.

21


 

M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
Table 5 — Consolidated Average Balance Sheet and Net Interest Margin Analysis
                                                                                 
    Average Balances
 
    Change from 2005       Change from 2004    
Fully taxable equivalent basis (1)                    
(in millions of dollars)   2006   Amount   %   2005   Amount   %   2004   2003   2002
 
Assets
                                                                       
Interest bearing deposits in banks
  $ 53     $       %   $ 53     $ (13 )     (19.7 )%   $ 66     $ 37     $ 33  
Trading account securities
    92       (115 )     (55.6 )     207       102       97.1       105       14       7  
Federal funds sold and securities purchased under resale agreement
    321       59       22.5       262       (57 )     (17.9 )     319       87       72  
Loans held for sale
    275       (43 )     (13.5 )     318       75       30.9       243       564       322  
 
Investment securities:
                                                                       
   
Taxable
    4,197       514       14.0       3,683       (742 )     (16.8 )     4,425       3,533       2,859  
   
Tax-exempt
    570       95       20.0       475       63       15.3       412       334       135  
 
Total investment securities
    4,767       609       14.6       4,158       (679 )     (14.0 )     4,837       3,867       2,994  
 
Loans and leases: (3)
                                                                       
   
Commercial:
                                                                       
     
Middle market commercial and industrial (4)
    5,504       687       14.3       4,817       361       8.1       4,456       4,633       4,810  
       
Construction
    1,244       (434 )     (25.9 )     1,678       258       18.2       1,420       1,219       1,151  
       
Commercial (4)
    2,703       795       41.7       1,908       (14 )     (0.7 )     1,922       1,800       1,670  
 
     
Middle market commercial real estate
    3,947       361       10.1       3,586       244       7.3       3,342       3,019       2,821  
     
Small business commercial and industrial and commercial real estate
    2,414       190       8.5       2,224       221       11.0       2,003       1,787       1,642  
 
   
Total commercial
    11,865       1,238       11.6       10,627       826       8.4       9,801       9,439       9,273  
 
   
Consumer:
                                                                       
       
Automobile loans
    2,057       14       0.7       2,043       (242 )     (10.6 )     2,285       3,260       2,744  
       
Automobile leases
    2,031       (391 )     (16.1 )     2,422       230       10.5       2,192       1,423       452  
 
     
Automobile loans and leases
    4,088       (377 )     (8.4 )     4,465       (12 )     (0.3 )     4,477       4,683       3,196  
     
Home equity
    4,970       218       4.6       4,752       508       12.0       4,244       3,400       2,976  
     
Residential mortgage
    4,581       500       12.3       4,081       869       27.1       3,212       2,076       1,438  
     
Other loans
    439       54       14.0       385       (8 )     (2.0 )     393       426       534  
 
   
Total consumer
    14,078       395       2.9       13,683       1,357       11.0       12,326       10,585       8,144  
 
 
Total loans and leases
    25,943       1,633       6.7       24,310       2,183       9.9       22,127       20,024       17,417  
 
Allowance for loan and lease losses
    (287 )     (19 )     7.1       (268 )     30       (10.1 )     (298 )     (330 )     (344 )
 
Net loans and leases
    25,656       1,614       6.7       24,042       2,213       10.1       21,829       19,694       17,073  
 
 
Total earning assets
    31,451       2,143       7.3       29,308       1,611       5.8       27,697       24,593       20,845  
 
Automobile operating lease assets
    93       (258 )     (73.5 )     351       (540 )     (60.6 )     891       1,697       2,602  
Cash and due from banks
    825       (20 )     (2.4 )     845       2       0.2       843       774       744  
Intangible assets
    567       349       N.M.       218       2       0.9       216       218       293  
All other assets
    2,463       278       12.7       2,185       101       4.8       2,084       2,020       1,923  
 
Total Assets
  $ 35,112     $ 2,473       7.6 %   $ 32,639     $ 1,206       3.8 %   $ 31,433     $ 28,972     $ 26,063  
 
Liabilities and Shareholders’ Equity
Deposits:
                                                                       
   
Demand deposits — non-interest bearing
  $ 3,530     $ 151       4.5 %   $ 3,379     $ 149       4.6 %   $ 3,230     $ 3,080     $ 2,902  
   
Demand deposits — interest bearing
    7,742       84       1.1       7,658       451       6.3       7,207       6,193       5,161  
   
Savings and other domestic time deposits
    2,992       (163 )     (5.2 )     3,155       (276 )     (8.0 )     3,431       3,462       3,583  
   
Core certificates of deposit
    5,050       1,716       51.5       3,334       645       24.0       2,689       3,115       4,175  
 
 
Total core deposits
    19,314       1,788       10.2       17,526       969       5.9       16,557       15,850       15,821  
 
Other domestic time deposits of $100,000 or more
    1,113       203       22.3       910       317       53.5       593       389       295  
 
Brokered time deposits and negotiable CDs
    3,242       123       3.9       3,119       1,282       69.8       1,837       1,419       731  
 
Deposits in foreign offices
    515       58       12.7       457       (51 )     (10.0 )     508       500       337  
 
Total deposits
    24,184       2,172       9.9       22,012       2,517       12.9       19,495       18,158       17,184  
Short-term borrowings
    1,800       421       30.5       1,379       (31 )     (2.2 )     1,410       1,600       1,856  
Federal Home Loan Bank advances
    1,369       264       23.9       1,105       (166 )     (13.1 )     1,271       1,258       279  
Subordinated notes and other long-term debt
    3,574       (490 )     (12.1 )     4,064       (1,315 )     (24.4 )     5,379       4,559       3,335  
 
 
Total interest bearing liabilities
    27,397       2,216       8.8       25,181       856       3.5       24,325       22,495       19,752  
 
All other liabilities
    1,239       (257 )     (17.2 )     1,496       (8 )     (0.5 )     1,504       1,201       1,170  
Shareholders’ equity
    2,946       363       14.1       2,583       209       8.8       2,374       2,196       2,239  
 
Total Liabilities and Shareholders’ Equity
  $ 35,112     $ 2,473       7.6 %   $ 32,639     $ 1,206       3.8 %   $ 31,433     $ 28,972     $ 26,063  
 
Net interest income
                                                                       
 
 
Net interest rate spread
                                                                       
 
Impact of non-interest bearing funds on margin
                                                                       
 
Net Interest Margin
                                                                       
 
N.M., not a meaningful value.
(1)  Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)  Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)  For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.
 
(4)  2005 reflects a net reclassification of $500 million from middle market commercial real estate to middle market commercial and industrial.

22


 

M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
                                                                             
Interest Income/Expense   Average Rate (2)
 
2006   2005   2004   2003   2002   2006   2005   2004   2003   2002
 
$ 3.2     $ 1.1     $ 0.7     $ 0.6     $ 0.8       6.00 %     2.16 %     1.05 %     1.53 %     2.38 %
  3.8       8.5       4.4       0.6       0.3       4.19       4.08       4.15       4.02       4.11  
  16.1       6.0       5.5       1.6       1.1       5.00       2.27       1.73       1.80       1.56  
  16.8       17.9       13.0       30.0       20.5       6.10       5.64       5.35       5.32       6.35  
  229.4       158.7       171.7       159.6       173.0       5.47       4.31       3.88       4.52       6.05  
  38.5       31.9       28.8       23.5       10.1       6.75       6.71       6.98       7.04       7.47  
 
  267.9       190.6       200.5       183.1       183.1       5.62       4.58       4.14       4.73       6.12  
  406.0       279.0       196.5       223.5       264.5       7.38       5.79       4.41       4.82       5.50  
  100.5       107.8       64.2       51.3       52.6       8.08       6.43       4.52       4.21       4.57  
  201.7       113.2       88.0       89.4       96.2       7.46       5.93       4.58       4.97       5.76  
 
  302.2       221.0       152.2       140.7       148.8       7.65       6.16       4.55       4.66       5.27  
  173.9       137.5       110.3       105.6       110.6       7.20       6.18       5.50       5.91       6.73  
 
  882.1       637.5       459.0       469.8       523.9       7.43       6.00       4.68       5.00       5.65  
 
  135.1       133.3       165.1       242.1       237.9       6.57       6.52       7.22       7.43       8.67  
  102.9       119.6       109.6       72.8       23.2       5.07       4.94       5.00       5.12       5.14  
 
  238.0       252.9       274.7       314.9       261.1       5.82       5.66       6.14       6.73       8.17  
  369.7       288.6       208.6       166.4       166.2       7.44       6.07       4.92       4.89       5.59  
  249.1       212.9       163.0       112.2       91.4       5.44       5.22       5.07       5.40       6.35  
  39.8       39.2       29.5       36.4       50.0       9.07       10.23       7.51       8.55       9.35  
 
  896.6       793.6       675.8       629.9       568.7       6.37       5.80       5.48       5.95       6.98  
 
  1,778.7       1,431.1       1,134.8       1,099.7       1,092.6       6.86       5.89       5.13       5.50       6.27  
 
  2,086.5       1,655.2       1,358.9       1,315.6       1,298.4       6.63       5.65       4.89       5.35       6.23  
 
 
                                                         
  212.4       135.5       74.1       73.0       88.9       2.74       1.77       1.03       1.18       1.71  
  50.2       42.9       44.1       67.7       80.2       1.68       1.36       1.28       1.96       2.24  
  214.8       118.7       90.4       114.3       187.0       4.25       3.56       3.36       3.67       4.48  
 
  477.4       297.1       208.6       255.0       356.1       3.02       2.10       1.56       2.00       2.76  
  55.6       30.8       11.3       4.6       7.4       4.99       3.39       1.90       1.17       2.50  
  169.1       109.4       33.1       24.1       17.3       5.22       3.51       1.80       1.70       2.36  
  15.1       9.6       4.1       4.6       4.9       2.93       2.10       0.82       0.92       1.47  
 
  717.2       446.9       257.1       288.3       385.7       3.47       2.40       1.58       1.91       2.69  
  72.2       34.3       13.0       15.7       29.0       4.01       2.49       0.93       0.98       1.56  
  60.0       34.7       33.3       24.4       5.6       4.38       3.13       2.62       1.94       2.00  
  201.9       163.5       132.5       128.5       123.3       5.65       4.02       2.46       2.82       3.70  
 
  1,051.3       679.4       435.9       456.9       543.6       3.84       2.70       1.79       2.03       2.75  
 
 
                               
$ 1,035.2     $ 975.8     $ 923.0     $ 858.7     $ 754.8                                          
                               
                                          2.79       2.95       3.10       3.32       3.48  
                                          0.50       0.38       0.23       0.17       0.14  
 
                                          3.29 %     3.33 %     3.33 %     3.49 %     3.62 %
 

23


 

M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
Average Balance Sheet — Loans, Leases, and Other Earning Assets
2006 versus 2005
Average total commercial loans increased $1.2 billion, or 12% ($0.7 billion merger-related) from 2005. This growth reflected a $0.7 billion, or 14%, increase in average middle market commercial and industrial (C&I) loans, a $0.4 billion, or 10%, increase in average middle market commercial real estate loans (CRE), and a $0.2 billion, or 9%, increase in average small business loans.
Average residential mortgages increased $0.5 billion, or 12% ($0.3 billion merger-related). Average home equity loans increased $0.2 billion, or 5%, but would have increased less than 1% were it not for the Unizan merger.
Compared with the prior year, average total automobile loans and leases decreased $0.4 billion, or 8%, with the Unizan merger having no significant impact. The decrease reflected the combination of two factors: (1) continued softness in loan and lease production levels over this period from low consumer demand and competitive pricing and (2) little growth in automobile loans as we continued a program of selling a portion of current loan production. Average automobile operating lease assets declined $0.3 billion, or 74%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter end was 15%, down from 18% a year earlier.
Average total investment securities increased $0.6 million, or 15%, from 2005.
2005 versus 2004
Average total loans and leases increased $2.2 billion, or 10%, from 2004, primarily due to growth in consumer loans. Average total consumer loans increased $1.4 billion, or 11%, due to a $0.9 billion, or 27%, increase in average residential mortgages and a $0.5 billion, or 12%, increase in average home equity loans.
Average total automobile loans decreased $0.2 billion, or 11%, reflecting the sale of automobile loans, loan pay downs, and slowing production. Partially offsetting the decline in automobile loans was $0.2 billion, or 10%, growth in direct financing leases due to the continued migration from operating lease assets.
Average total commercial loans increased $0.8 billion, or 8%, from 2004. This reflected a $0.4 billion, or 8%, increase in middle market C&I loans, a $0.2 billion, or 7%, increase in middle market CRE loans, and a $0.2 billion, or 11%, increase in average small business C&I and CRE loans.
Average total investment securities declined $0.7 billion, or 14%, from 2004.
Average Balance Sheet — Deposits and Other Funding
2006 versus 2005
Average total core deposits in 2006 increased $1.8 billion, or 10% ($1.3 billion merger-related), from 2005. Most of the increase reflected higher average core certificates of deposit, which increased $1.7 billion ($0.5 billion merger-related) resulting from continued customer demand for higher, fixed rate deposit products. Average interest bearing demand deposits increased $0.1 billion ($0.2 billion merger-related) and average non-interest bearing deposits increased $0.2 billion ($0.1 billion merger-related). Average savings and other domestic time deposits declined $0.2 billion, despite $0.4 billion of increase related to the Unizan merger.
We use the non-core funding ratio (total liabilities less core deposits and accrued expenses and other liabilities divided by total assets) to measure the extent to which funding is dependent on wholesale deposits and borrowing sources. For 2006, the average non-core funding ratio was 33%, down from 34% in 2005.
2005 versus 2004
Average total core deposits in 2005 were $17.5 billion, up $1.0 billion, or 6%, from 2004, reflecting a $0.6 billion, or 24%, increase in certificates of deposit, a $0.5 billion, or 6%, increase in average interest bearing demand deposit accounts, primarily money market accounts, and a $0.1 billion, or 5%, increase in non-interest bearing deposits. These increases were partially offset by a $0.3 billion, or 8%, decline in savings and other domestic time deposits. With interest rates rising throughout the year, demand for certificates of deposit increased as customers transferred funds from lower rate savings and other domestic time deposits into higher fixed-rate term deposit accounts.
Provision for Credit Losses
(This section should be read in conjunction with Significant Factor 3 and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at a level adequate to absorb our estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments.

24


 

M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
The provision for credit losses in 2006 was $65.2 million, down $16.1 million from a year-ago. The decrease reflected a decline in the transaction component of the allowance for loan and lease losses at year end compared with that at the end of 2005, due to a general improvement in the underlying risk of the loan portfolio, including the resolution and/or upgrades of troubled credits, a change in the composition of non-performing loans that included more residential and government-guaranteed loans, as well as a decline in the economic reserve component due to a net improvement in economic factors. These improvements were reflected in the decline in the allowance for loan and lease losses as a percent of period-end total loans and leases to 1.04% at December 31, 2006, from 1.10% a year earlier.
The provision for credit losses for 2005 was $81.3 million, up $26.2 million, or 48%, from 2004. The increase reflected loan growth as well as a higher transaction component of the allowance for loan and lease losses at the end of 2005 compared to a year earlier, due to a general deterioration in the underlying risk of the loan portfolio. These negative impacts were offset by the positive impact of a decline in the economic reserve component. The net positive impact from these factors was reflected in the decrease in the allowance for loan and lease losses as a percent of period-end total loans and leases to 1.10% at December 31, 2005, from 1.15% a year earlier.
Non-Interest Income
(This section should be read in conjunction with Significant Factors 1, 2, 3, 6, and 7.)
Non-interest income for the three years ended December 31, 2006 was as follows:
Table 6 — Non-Interest Income
                                                             
    Year Ended December 31,
 
    Change from 2005       Change from 2004    
                 
(in thousands of dollars)   2006   Amount   %   2005   Amount   %   2004
 
   
Service charges on deposit accounts
  $ 185,713     $ 17,879       10.7 %   $ 167,834     $ (3,281 )     (1.9 )%   $ 171,115  
   
Trust services
    89,955       12,550       16.2       77,405       9,995       14.8       67,410  
   
Brokerage and insurance income
    58,835       5,216       9.7       53,619       (1,180 )     (2.2 )     54,799  
   
Other service charges and fees
    51,354       7,006       15.8       44,348       2,774       6.7       41,574  
   
Bank owned life insurance income
    43,775       3,039       7.5       40,736       (1,561 )     (3.7 )     42,297  
   
Mortgage banking
    41,491       13,158       46.4       28,333       1,547       5.8       26,786  
   
Gain on sales of automobile loans
    3,095       1,884       N.M.       1,211       (12,995 )     (91.5 )     14,206  
   
Securities gains (losses)
    (73,191 )     (65,136 )     N.M.       (8,055 )     (23,818 )     N.M.       15,763  
   
Other
    116,927       23,091       24.6       93,836       (5,381 )     (5.4 )     99,217  
 
 
Sub-total before automobile operating lease income
    517,954       18,687       3.7       499,267       (33,900 )     (6.4 )     533,167  
 
Automobile operating lease income
    43,115       (89,900 )     (67.6 )     133,015       (152,416 )     (53.4 )     285,431  
 
Total non-interest income
  $ 561,069     $ (71,213 )     (11.3 )%   $ 632,282     $ (186,316 )     (22.8 )%   $ 818,598  
 
N.M., not a meaningful value.
2006 versus 2005
Non-interest income in 2006 decreased $71.2 million, or 11%, from a year-ago, including an $89.9 million decline in automobile operating lease income. That portfolio continued to run off since no automobile operating leases have been originated since April 2002. Non-interest income before automobile operating lease income increased $18.7 million, or 4% ($23.9 million merger-related), reflecting:
  –  $23.1 million increase in other income ($7.1 million merger-related), primarily reflecting $7.0 million in higher equity investment gains, a $5.7 million increase in equipment operating lease income, $3.3 million gain on sale of MasterCard ® stock, and a $2.6 million increase in corporate derivative sales.
 
  –  $17.9 million, or 11% ($5.3 million merger-related), increase in service charges on deposit accounts, reflecting a $14.3 million, or 13%, increase in personal service charges, primarily NSF/ OD, and a $3.6 million, or 6%, increase in commercial service charge income.
 
  –  $13.2 million, or 46%, increase in mortgage banking income, primarily reflecting a $12.6 million positive impact between years related to MSR valuation net of hedge-related trading activity. Specifically, in 2006, MSR recoveries were $4.9 million, with $1.3 million of net trading losses associated with MSR hedging, resulting in a net positive MSR-related impact of $3.6 million. In 2005, MSR recoveries were $4.4 million, with $13.4 million of net trading losses associated with

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  MSR hedging, resulting in a net reduction in mortgage-banking income in 2005 of $9.0 million. The Unizan merger had no material impact on mortgage banking income comparisons.
 
  –  $12.6 million, or 16% ($5.5 million merger-related), increase in trust services income, reflecting (1) a $6.5 million, or 18%, increase in personal trust income, mostly merger-related, (2) a $3.7 million, or 14%, increase in fees from Huntington Funds, reflecting 11% fund asset growth, and (3) a $1.8 million, or 17%, increase in institutional trust fees.
 
  –  $7.0 million, or 16% ($1.0 million merger-related), increase in other service charges and fees, primarily reflecting a $5.3 million, or 17%, increase in fees generated by higher debit card volume.
 
  –  $5.2 million, or 10% ($1.5 million merger-related), increase in brokerage and insurance income, primarily reflecting higher annuities sales related to the continued focus on investment product sales in our retail banking offices.
Partially offset by:
  –  $65.1 million increase in investment securities losses, reflecting the $73.2 million of investment securities impairment and losses during 2006 as the balance sheet restructuring was completed.
2005 versus 2004
Non-interest income decreased $186.3 million, or 23%, from 2004 with $152.4 million of the decline reflecting the decrease in operating lease income. Of the remaining $33.9 million decline from 2004, the primary drivers were:
  –  $23.8 million decline in net securities gains, as the current year reflected $8.1 million of securities losses, compared with $15.8 million of gains in 2004.
 
  –  $13.0 million decline in gains on sale of automobile loans as the year-ago period included $14.2 million of such gains.
 
  –  $5.4 million, or 5%, decline in other income reflected a combination of factors including lower income from automobile lease terminations, the $2.6 million write-off of equity investments, lower investment banking income, and lower equity investment gains.
 
  –  $3.3 million, or 2%, decline in service charges on deposit accounts, all driven by a decline in commercial service charges, reflecting a combination of lower activity and a preference by commercial customers to pay for services with higher compensating balances rather than fees as interest rates increased. Consumer service charges increased slightly.
Partially offset by:
  –  $10.0 million, or 15%, increase in trust services due to higher personal trust and mutual fund fees, reflecting a combination of higher market value of assets, as well as increased activity.
 
  –  $2.8 million, or 7%, increase in other service charges and fees, due to higher debit card fees, partially offset by lower bill pay fees as a result of a decision to eliminate fees for this service beginning in the 2004 fourth quarter.
Table 7 details mortgage banking income and the net impact of MSR hedging activity. Striking a mortgage banking income sub-total before MSR recoveries, impairments, or net trading losses or gains, provides a clearer understanding of the underlying trends in mortgage banking income associated with the primary business activities of origination, sales, and servicing.

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Mortgage banking income for the three years ended December 31, 2006, was as follows:
Table 7 — Mortgage Banking Income
                                                           
    Year Ended December 31,
 
    Change from 2005       Change from 2004    
                 
(in thousands of dollars)   2006   Amount   %   2005   Amount   %   2004
 
Mortgage Banking Income
                                                       
 
Origination and secondary marketing
  $ 18,217     $ (6,717 )     (26.9 )%   $ 24,934     $ 2,225       9.8 %   $ 22,709  
 
Servicing fees
    24,659       2,478       11.2       22,181       485       2.2       21,696  
 
Amortization of capitalized servicing
    (15,144 )     3,215       (17.5 )     (18,359 )     660       (3.5 )     (19,019 )
 
Other mortgage banking income
    10,173       (1,590 )     (18.5 )     8,583       (1,441 )     (14.4 )     10,024  
 
Sub-total
    37,905       566       1.5       37,339       1,929       5.4       35,410  
MSR recovery (1)
    4,871       500       11.4       4,371       2,993       N.M.       1,378  
Net trading (losses) gains related to MSR hedging
    (1,285 )     12,092       (90.4 )     (13,377 )     (3,375 )     33.7       (10,002 )
 
Total mortgage banking income
  $ 41,491     $ 13,158       46.4 %   $ 28,333     $ 1,547       5.8 %   $ 26,786  
 
Capitalized mortgage servicing rights (2)
  $ 131,104     $ 39,845       43.7 %   $ 91,259     $ 14,152       18.4 %   $ 77,107  
MSR allowance (2)
          404       N.M.       (404 )     4,371       91.5       (4,775 )
Total mortgages serviced for others (2)
    8,252,000       976,000       13.4       7,276,000       415,000       6.0       6,861,000  
                                                         
 
N.M., not a meaningful value.
(1)  In 2006, Huntington adopted Statement No. 156, under which MSRs were recorded and accounted for at fair value. Prior periods reflect temporary impairment or recovery, based on accounting for MSRs at the lower of cost or market.
 
(2)  At period end.
Non-Interest Expense
(This section should be read in conjunction with Significant Factors 1, 3, 5, and 7.)
Non-interest expense for the three years ended December 31, 2006 was as follows:
Table 8 — Non-Interest Expense
                                                               
    Year Ended December 31,
 
    Change from 2005       Change from 2004    
                 
(in thousands of dollars)   2006   Amount   %   2005   Amount   %   2004
 
     
Salaries
  $ 425,657     $ 46,068       12.1 %   $ 379,589     $ 3,321       0.9 %   $ 376,268  
     
Benefits
    115,571       13,502       13.2       102,069       (7,469 )     (6.8 )     109,538  
 
   
Personnel costs
    541,228       59,570       12.4       481,658       (4,148 )     (0.9 )     485,806  
 
   
Outside data processing and other services
    78,779       4,141       5.5       74,638       2,523       3.5       72,115  
   
Net occupancy
    71,281       189       0.3       71,092       (4,849 )     (6.4 )     75,941  
   
Equipment
    69,912       6,788       10.8       63,124       (218 )     (0.3 )     63,342  
   
Marketing
    31,728       5,449       20.7       26,279       1,679       6.8       24,600  
   
Professional services
    27,053       (7,516 )     (21.7 )     34,569       (2,307 )     (6.3 )     36,876  
   
Telecommunications
    19,252       604       3.2       18,648       (1,139 )     (5.8 )     19,787  
   
Printing and supplies
    13,864       1,291       10.3       12,573       110       0.9       12,463  
   
Amortization of intangibles
    9,962       9,133       N.M.       829       12       1.5       817  
   
Restructuring reserve releases
                            1,151       N.M.       (1,151 )
   
Other
    106,649       24,089       29.2       82,560       (14,008 )     (14.5 )     96,568  
 
 
Sub-total before automobile operating lease expense
    969,708       103,738       12.0       865,970       (21,194 )     (2.4 )     887,164  
Automobile operating lease expense
    31,286       (72,564 )     (69.9 )     103,850       (131,230 )     (55.8 )     235,080  
 
Total non-interest expense
  $ 1,000,994     $ 31,174       3.2 %   $ 969,820     $ (152,424 )     (13.6 )%   $ 1,122,244  
 
N.M., not a meaningful value.
2006 versus 2005
Non-interest expense in 2006 increased $31.2 million, or 3%, from 2005, despite a $72.6 million decline in automobile operating lease expense as that portfolio continued to run off. Non-interest expense before automobile operating lease expense increased $103.7 million, or 12% ($59.7 million merger-related), reflecting:

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  –  $59.6 million, or 12%, increase in personnel expense, with Unizan contributing $25.8 million, or 43%, of the increase. The remaining $33.8 million increase included $17.0 million increase in share-based compensation primarily related to the expensing of stock options, which began in 2006, and $9.0 million in higher performance and sales-related compensation.
 
  –  $24.1 million, or 29% ($10.0 million merger-related), increase in other expense, including a $10.0 million donation to the Huntington Foundation in the fourth quarter, which will result in reduced contributions in future periods, $5.5 million of higher residual value losses on automobile leases, $3.7 million of Unizan merger-related costs, and $3.5 million related to the fourth quarter restructuring of certain FHLB advances.
 
  –  $9.1 million increase in the amortization of intangibles, substantially all merger-related.
 
  –  $6.8 million, or 11%, increase in equipment expense ($1.7 million merger-related), reflecting higher depreciation associated with recent technology investments.
 
  –  $5.4 million, or 21% ($0.9 million merger-related), increase in marketing expense, reflecting increased campaign and market research expenses.
 
  –  $4.1 million, or 6%, increase in outside data processing and other services ($1.7 million merger-related), with $2.0 million related to Unizan system conversion merger-related costs and a $1.7 million increase in debit card processing costs due to higher activity levels.
Partially offset by:
  –  $7.5 million, or 22%, decline in professional services expenses, despite Unizan adding $4.9 million, including a reduction in SEC/regulatory related expenses, as well as declines in collections and other consulting expenses.
2005 versus 2004
Non-interest expense decreased $152.4 million, or 14%, from 2004 with $131.2 million of the decline reflecting the decrease in operating lease expense. Of the remaining $21.2 million decline, the primary drivers were:
  –  $14.0 million, or 15%, decrease in other expense, reflecting decreased SEC and regulatory-related expenses in 2005, $5.8 million of costs related to investments in partnerships generating tax benefits in the year-ago period, and lower litigation related expense accruals and lower insurance costs in 2005.
 
  –  $4.8 million, or 6%, decline in net occupancy expense, as 2004 included a $7.8 million loss caused by property lease impairments, partially offset by lower rental income and higher depreciation expense in 2005.
 
  –  $4.1 million, or 1%, decline in personnel costs, mainly due to lower commission and benefit expense, partially offset by higher salaries and severance.
SEC-related expenses and accruals, as well as expenses related to Unizan integration planning and systems conversions, contributed to the change in expense from 2005. Specifically, SEC/regulatory-related expenses and accruals while not meaningful in 2006, totaled $3.7 million in 2005, and $13.6 million in 2004. These expenses and accruals impacted the professional services and other expense categories. Unizan merger-related costs, primarily related to integration planning and systems conversion expenses, totaled $3.7 million in 2006, $0.7 million in 2005, and $3.6 million in 2004. In addition to impacting the data processing and other services expense category, a portion of these expenses was also spread across various other expense categories.
Operating Lease Assets
(This section should be read in conjunction with the Significant Factor 3.)
Operating lease assets represent automobile leases originated before May 2002. This operating lease portfolio is running off over time since all automobile lease originations after April 2002 have been recorded as direct financing leases and are reported in the automobile loan and lease category in earning assets. As a result, the non-interest income and non-interest expenses associated

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H UNTINGTON B ANCSHARES I NCORPORATED
with the operating lease portfolio have declined. Operating lease assets performance for the five years ended December 31, 2006 was as follows:
Table 9 — Automobile Operating Lease Performance
                                           
    Year Ended December 31,
 
(in thousands of dollars)   2006   2005   2004   2003   2002
 
Balance Sheet:
                                       
Average automobile operating lease assets outstanding
  $ 92,613     $ 351,213     $ 890,930     $ 1,696,535     $ 2,602,154  
 
Income Statement:
                                       
 
Net rental income
  $ 37,512     $ 121,101     $ 265,542     $ 458,644     $ 615,453  
 
Fees
    2,021       6,531       13,457       21,623       28,542  
 
Recoveries — early termination losses
    3,582       5,383       6,432       9,431       13,079  
 
Total automobile operating lease income
    43,115       133,015       285,431       489,698       657,074  
 
 
Depreciation and residual losses at termination
    28,591       94,816       215,047       350,550       463,783  
 
Losses — early terminations
    2,695       9,034       20,033       42,720       55,187  
 
Total automobile operating lease expense
    31,286       103,850       235,080       393,270       518,970  
 
Net earnings contribution
  $ 11,829     $ 29,165     $ 50,351     $ 96,428     $ 138,104  
 
2006 versus 2005
The net earnings contribution from automobile operating leases was $11.8 million in 2006, down 60% from $29.2 million in 2005. Operating lease income, which totaled $43.1 million in 2006, and represented 8% of non-interest income, declined 68% from 2005, reflecting the decline in average operating leases. The majority of this decline was reflected in lower net rental income, down 69% from 2005. Lower fees and recoveries from early termination losses also contributed to the decline in total automobile operating lease income, but to a much lesser degree. Automobile operating lease expense totaled $31.3 million for 2006, down 70% from a year ago, also reflecting the continued decline in operating lease assets, with the decline related to lower depreciation and residual losses at termination.
2005 versus 2004
The net earnings contribution from automobile operating leases in 2005 was $29.2 million in 2005, down 42% from $50.4 million in 2004. Automobile operating lease income, which totaled $133.0 million in 2005, and represented 21% of non-interest income, declined 53% from 2004, reflecting the decline in average operating leases. The majority of this decline was reflected in lower net rental income, as well as lower fees and recoveries from early termination losses. Automobile operating lease expense totaled $103.9 million for 2005, down 56% from a year ago, also reflecting the continued decline in operating lease assets, with the decline related to lower depreciation and residual losses at termination expenses.
Provision for Income Taxes
(This section should be read in conjunction with Significant Factor 4.)
The provision for income taxes was $52.8 million in 2006, $131.5 million in 2005, and $153.7 million in 2004. The effective tax rate was 10.3%, 24.2%, and 27.8% in 2006, 2005, and 2004 respectively. The lower effective tax rate in 2006 reflected a release of previously established federal income tax reserves due to the resolution of a federal income tax audit covering tax years 2002 and 2003, as well as the recognition of a federal tax loss carryback. The lower effective tax rate in 2005 compared with 2004 reflected an increasing benefit from tax-exempt income and a federal tax loss carryback, partially offset by the effect of the repatriation of foreign earnings. ( See Note 20 of the Notes to Consolidated Financial Statements.)
During 2006, the Internal Revenue Service concluded its audit of our consolidated federal income tax returns for tax years 2002 and 2003. Also, the Internal Revenue Service concluded its examination of the 2003 income tax returns for Unizan. Tax reserves and related interest accruals were adjusted to reflect the resolution of these audits. In addition, we are subject to ongoing tax examinations in various jurisdictions. We believe that the resolution of these examinations will not have a significant, adverse impact on our consolidated financial position or results of operations.

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RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe our primary risk exposures are credit, market, liquidity, and operational risk. Credit risk is the risk of loss due to adverse changes in the borrower’s ability to meet its financial obligations under agreed upon terms. Market risk represents the risk of loss due to changes in the market value of assets and liabilities due to changes in interest rates, exchange rates, and equity prices. Liquidity risk arises from the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, investor perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues. Operational risk arises from the inherent day-to -day operations of the company that could result in losses due to human error, inadequate or failed internal systems and controls, and external events.
We follow a formal policy to identify, measure, and document the key risks facing the company, how those risks can be controlled or mitigated, and how we monitor the controls to ensure that they are effective. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the company. Potential risk concerns are shared with the board of directors, as appropriate. Our internal audit department performs ongoing independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are reported regularly to the audit committee of the board of directors.
Some of the more significant processes used to manage and control credit, market, liquidity, and operational risks are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed upon terms. We are subject to credit risk in lending, trading, and investment activities. The nature and degree of credit risk is a function of the types of transactions, the structure of those transactions, and the parties involved. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is incidental to trading activities and represents a limited portion of the total risks associated with the investment portfolio. Credit risk is mitigated through a combination of credit policies and processes and portfolio diversification.
The maximum level of credit exposure to individual commercial borrowers is limited by policy guidelines based on the risk of default associated with the credit facilities extended to each borrower or related group of borrowers. All authority to grant commitments is delegated through the independent credit administration function and is monitored and regularly updated in a centralized database. Concentration risk is managed via limits on loan type, geography, industry, loan quality factors, and country limits. We have focused on extending credit to commercial customers with existing or expandable relationships within our primary banking markets.
The checks and balances in the credit process and the independence of the credit administration and risk management functions are designed to assess the level of credit risk being accepted, facilitate the early recognition of credit problems when they do occur, and to provide for effective problem asset management and resolution.
Credit Exposure Mix
(This section should be read in conjunction with Significant Factors 1 and 3.)
An overall corporate objective is to avoid undue portfolio concentrations. As shown in Table 10, at December 31, 2006, total credit exposure was $26.2 billion. Of this amount, $13.8 billion, or 53%, represented total consumer loans and leases, and $12.4 billion, or 47%, total commercial loans and leases.
A specific portfolio concentration objective has been to reduce the relative level of total automobile exposure (the sum of automobile loans, automobile leases, securitized and operating lease assets) from its 33% level at the end of 2002. As shown in Table 10, such exposure was 15% at December 31, 2006.
In contrast, another specific portfolio concentration objective has been to increase the relative level of lower-risk residential mortgages and home equity loans. At December 31, 2006, such loans represented 36% of total credit exposure, up from 22% at the end of 2002.
From 2002 through 2005, the level of total commercial loans and leases has remained relatively constant at 42%-44% of total credit exposure. However, at the end of 2006, the level had increased to 47%, reflecting growth in commercial loans, as well as lower relative levels of consumer automobile leases. Middle market C&I loans declined to 19% at year-end 2004 from 22% at

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December 31, 2002, reflecting weak demand, but also a specific objective to reduce exposure to large individual credits, as well as a strategy to focus on commercial lending to customers with existing or potential relationships within our primary markets. Since then, that concentration increased to 23%, reflecting increased customer demand.
Table 10 — Loan and Lease Portfolio Composition
                                                                                       
    At December 31,
 
(in millions of dollars)   2006   2005   2004   2003   2002
 
 
Commercial (1)
                                                                               
   
Middle market commercial and industrial
  $ 5,953       22.7 %   $ 5,084       20.6 %   $ 4,666       19.3 %   $ 4,416       19.7 %   $ 4,757       21.7 %
     
Construction
    987       3.8       1,522       6.2       1,602       6.6       1,264       5.6       983       4.5  
     
Commercial
    2,874       11.0       2,015       8.2       1,917       7.9       1,919       8.6       1,896       8.7  
 
   
Total middle market real estate
    3,861       14.8       3,537       14.4       3,519       14.5       3,183       14.2       2,879       13.2  
   
Small business commercial and industrial and commercial real estate
    2,540       9.6       2,224       9.1       2,118       8.8       1,887       8.4       1,695       7.7  
 
 
Total commercial
    12,354       47.1       10,845       44.1       10,303       42.6       9,486       42.3       9,331       42.6  
 
  Consumer:                                                                                
    Automobile loans     2,126       8.1       1,985       8.1       1,949       8.1       2,992       13.4       3,042       13.9  
    Automobile leases     1,769       6.8       2,289       9.3       2,443       10.1       1,902       8.5       874       4.0  
    Home equity     4,927       18.8       4,763       19.3       4,647       19.2       3,746       16.7       3,142       14.3  
    Residential mortgage     4,549       17.4       4,193       17.0       3,829       15.9       2,531       11.3       1,746       8.0  
    Other loans     428       1.7       397       1.4       389       1.7       418       2.0       452       2.1  
 
 
Total consumer
    13,799       52.8       13,627       55.1       13,257       55.0       11,589       51.9       9,256       42.3  
 
Total loans and direct financing leases
    26,153       99.9       24,472       99.2       23,560       97.6       21,075       94.2       18,587       84.9  
 
Operating lease assets
    28       0.1       189       0.8       587       2.4       1,260       5.6       2,201       10.0  
Securitized loans
                                        37       0.2       1,119       5.1  
 
Total credit exposure
  $ 26,181       100.0 %   $ 24,661       100.0 %   $ 24,147       100.0 %   $ 22,372       100.0 %   $ 21,907       100.0 %
 
Total automobile exposure (2)
  $ 3,923       15.0 %   $ 4,463       18.1 %   $ 4,979       20.6 %   $ 6,191       27.7 %   $ 7,236       33.0 %
 
(1)  There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
 
(2)  Total automobile loans and leases, operating lease assets, and securitized loans.
Table 11 — Commercial & Industrial and CRE Loan and Lease Detail
                                               
    At December 31,
 
(in millions of dollars)   2006   2005   2004   2003   2002
 
     
Commercial and industrial loans
  $ 4,735     $ 3,998     $ 3,632     $ 3,463     $ 4,031  
     
Dealer floor plan loans
    631       615       645       635       534  
     
Equipment direct financing leases
    587       471       389       318       192  
 
   
Middle market commercial and industrial loans and leases
    5,953       5,084       4,666       4,416       4,757  
   
Small business commercial and industrial loans
    1,897       1,725       1,164       898       851  
 
 
Commercial and industrial loans and leases
    7,850       6,809       5,830       5,314       5,608  
 
   
Middle market commercial real estate loans
    3,861       3,537       3,519       3,183       2,879  
   
Small business commercial real estate loans
    643       499       954       989       844  
 
Commercial real estate loans
    4,504       4,036       4,473       4,172       3,723  
 
Total commercial loans and leases
  $ 12,354     $ 10,845     $ 10,303     $ 9,486     $ 9,331  
 
Commercial Credit
Commercial credit approvals are based on the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, and type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. There are two processes for approving credit risk exposures. The first involves a centralized loan approval process for the standard products and structures utilized in small business lending. Even in this centralized decision environment, individual credit authority is granted to certain individuals on a regional basis to preserve our local decision-making focus. The second, and more prevalent

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approach, involves individual approval of exposures. These approvals are consistent with the authority delegated to officers located in the geographic regions who are experienced in the industries and loan structures over which they have responsibility.
Commercial and industrial loan and lease commitments and balances outstanding by industry classification code at December 31, 2006 were as follows:
Table 12 — Commercial and Industrial Loans and Leases by Industry Classification Code
                                   
    At December 31, 2006
 
    Commitments   Loans Outstanding
         
(in thousands of dollars)   Amount   %   Amount   %
 
Industry Classification:
                               
 
Services
  $ 3,359,799       26.2 %   $ 2,135,915       27.2 %
 
Manufacturing
    2,357,190       18.4       1,419,198       18.1  
 
Retail trade
    2,175,921       16.9       1,326,383       16.9  
 
Finance, insurance, and real estate
    2,037,878       15.9       1,223,630       15.6  
 
Contractors and construction
    980,529       7.6       618,794       7.9  
 
Wholesale trade
    747,790       5.8       346,854       4.4  
 
Transportation, communications, and utilities
    662,972       5.2       406,902       5.2  
 
Agriculture and forestry
    302,847       2.4       206,039       2.6  
 
Energy
    158,988       1.2       119,286       1.5  
 
Public administration
    45,030       0.4       38,364       0.5  
 
Other
    14,475             8,547       0.1  
 
Total
  $ 12,843,419       100.0 %   $ 7,849,912       100.0 %
 
Middle market CRE loans and small business CRE loans totaled $4.5 billion at December 31, 2006. These loans were predominantly for properties located in our primary banking markets, and were diversified by the type of property, as reflected in the following table:
Table 13 — Commercial Real Estate Loans by Property Type and Borrower Location
                                                           
    At December 31, 2006
 
    Geographic Region    
         
        West       Total   Percent of
(in thousands of dollars)   Ohio   Michigan   Virginia   Indiana   Other   Amount   Total
 
 
Retail properties
  $ 413,850     $ 181,180     $ 29,101     $ 71,873     $     $ 696,004       15.5 %
 
Office
    333,798       169,781       49,751       17,028       1,644       572,002       12.7  
 
Unsecured lines to real estate companies
    377,375       80,249       11,602       23,372       2,106       494,704       11.0  
 
Industrial and warehouse
    234,783       182,105       13,278       39,318       2,372       471,856       10.5  
 
Multi family
    306,186       58,764       26,070       68,845       3       459,868       10.2  
 
Single family development
    279,756       119,529       18,729       9,881             427,895       9.5  
 
Raw land
    194,262       128,387       23,965       49,005       5,604       401,223       8.9  
 
Condominium construction
    124,679       53,828       4,844       1,043             184,394       4.1  
 
Other land uses
    119,470       41,788       10,780       11,418             183,456       4.1  
 
Hotel
    104,767       60,718       4,523       5,154             175,162       3.9  
 
Single family land development
    113,322       15,126       504       4,988       6,144       140,084       3.1  
 
Recreational
    88,183       18,839       6,995       1,882             115,899       2.6  
 
Health care
    57,213       28,136       11,114       1,821             98,284       2.2  
 
Other land development
    63,686       12,809       1,700       5,514             83,709       1.9  
 
Total
  $ 2,811,330     $ 1,151,239     $ 212,956     $ 311,142     $ 17,873     $ 4,504,540       100.0 %
 
All C&I and CRE credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of -default and loss-in -event-of -default. This two-dimensional rating methodology, which results in 192 individual loan grades, provides granularity in the portfolio management process. The probability-of -default is rated on a scale of 1-12 and is applied at the borrower level. The

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loss-in -event-of -default is rated on a 1-16 scale and is associated with each individual credit exposure based on the type of credit extension and the underlying collateral.
In commercial lending, ongoing credit management is dependent on the type and nature of the loan. In general, quarterly monitoring is normal for all significant exposures. The internal risk ratings are revised and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis. Analysis of actual default experience indicated that the assigned probability of default was higher than our actual experience. Accordingly, during the 2006 third quarter, we updated the criteria used to assess the probability-of -default on commercial and industrial credits. The application of these updated criteria had no significant impact on the allowance for credit losses. We continually review and adjust such criteria based on actual experience, which may result in further changes to such criteria, in future periods.
In addition to the initial credit analysis initiated by the portfolio manager during the underwriting process, the loan review group performs independent credit reviews. The loan review group reviews individual loans and credit processes and conducts a portfolio review at each of the regions on a 15-month cycle, and the loan review group validates the risk grades on a minimum of 50% of the portfolio exposure.
Borrower exposures may be designated as “watch list” accounts when warranted by individual company performance, or by industry and environmental factors. Such accounts are subjected to additional quarterly reviews by the business line management, the loan review group, and credit administration in order to adequately assess the borrower’s credit status and to take appropriate action.
A specialized credit workout group manages problem credits and handles commercial recoveries, workouts, and problem loan sales, as well as the day-to -day management of relationships rated substandard or lower. The group is responsible for developing an action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual status, and the ultimate collectibility of the credits managed.
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength of the borrower, type of exposure, and the transaction structure. Consumer credit decisions are generally made in a centralized environment utilizing decision models. There is also individual credit authority granted to certain individuals on a regional basis to preserve our local decision-making focus. Each credit extension is assigned a specific probability-of -default and loss-in -event-of -default. The probability-of -default is generally a function of the borrower’s most recent credit bureau score (FICO), while the loss-in -event-of -default is related to the type of collateral and the loan-to -value ratio associated with the credit extension.
In consumer lending, credit risk is managed from a loan type and vintage performance analysis. All portfolio segments are continuously monitored for changes in delinquency trends and other asset quality indicators. We make extensive use of portfolio assessment models to continuously monitor the quality of the portfolio and identify under-performing segments. This information is then incorporated into future origination strategies. The independent risk management group has a consumer process review component to ensure the effectiveness and efficiency of the consumer credit processes.
Home equity loans and lines consist of both first and second position collateral with underwriting criteria based on minimum FICO credit scores, debt-to -income ratios, and loan-to -value ratios. We offer closed-end home equity loans with a fixed interest rate and level monthly payments and a variable-rate, interest-only home equity line of credit. At December 31, 2006, we had $1.7 billion of home equity loans and $3.2 billion of home equity lines of credit. The average loan-to -value ratio of our home equity portfolio (both loans and lines) was 77% at December 31, 2006. We do not originate home equity loans or lines that allow negative amortization, or have a loan-to -value ratio at origination greater than 100%. Home equity loans are generally fixed rate with periodic principal and interest payments. We originated $619 million of home equity loans in 2006 with a weighted average loan-to -value ratio of 64% and a weighted average FICO score of 734. Home equity lines of credit generally have variable rates of interest and do not require payment of principal during the 10-year revolving period of the line. During 2006, we originated commitments of $1.3 billion of home equity lines. The lines of credit originated during the year had a weighted average loan-to -value ratio of 75% and a weighted average FICO score of 741.
At December 31, 2006, we had $4.5 billion of residential real estate loans. Adjustable-rate mortgages (ARMs), primarily mortgages that have a fixed-rate for the first 3 to 5 years and then adjust annually, comprised 54% of this portfolio. We do not originate residential mortgage loans that (a) allow negative amortization, (b) have a loan-to -value ratio at origination greater than 100%, or (c) are “option ARMs.” Interest-only loans comprised $0.8 billion, or 18%, of residential real estate loans at December 31,

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2006. Interest only loans are underwritten to specific standards including minimum FICO credit scores, stressed debt-to -income ratios, and extensive collateral evaluation.
Collection action is initiated on an “as needed” basis through a centrally managed collection and recovery function. The collection group employs a series of collection methodologies designed to maintain a high level of effectiveness while maximizing efficiency. In addition to the retained consumer loan portfolio, the collection group is responsible for collection activity on all sold and securitized consumer loans and leases. (See the Non-performing Assets section of Credit Risk, for further information regarding when consumer loans are placed on non-accrual status and when the balances are charged-off to the allowance for loan and lease losses.)
Non-Performing Assets (NPAs)
NPAs consist of loans and leases that are no longer accruing interest, loans and leases that have been renegotiated to below market rates based upon financial difficulties of the borrower, and real estate acquired through foreclosure. Middle-market commercial and industrial (C&I), middle market commercial real-estate (CRE), and small business loans are generally placed on non-accrual status when collection of principal or interest is in doubt or when the loan is 90-days past due. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior-year amounts generally charged-off as a credit loss.
Consumer loans and leases, excluding residential mortgages and home equity lines and leases, are not placed on non-accrual status but are charged-off in accordance with regulatory statutes, which is generally no more than 120-days past due. Residential mortgages and home equity loans and lines, while highly secured, are placed on non-accrual status within 180-days past due as to principal or 210-days past due as to interest, regardless of collateral. A charge-off on a residential mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the real estate. The fair value of the collateral, less the cost to sell, is then recorded as other real estate owned (OREO).
When we believe the borrower’s ability and intent to make periodic interest and principal payments resume and collectibility is no longer in doubt, the loan is returned to accrual status.
Non-performing loans (NPLs) increased during 2006 across most of our product lines. A significant portion of the increase ($33.8 million) was a result of the inclusion of the Unizan portfolio in 2006. It is important to note that the Unizan portfolio included $12 million of NPLs guaranteed by the Small Business Administration. We anticipate that the government guarantees will result in full repayment of principal and interest of the related loans. We have seen an increase in NPLs in the residential real estate portfolio as a result of the general economy and the housing environment in our markets.
The 2006 increase in OREO was entirely a function of the residential loan portfolio, and includes a $16.2 million impact for an accounting reclassification, from residential mortgage loans, associated with assets insured by the Department of Housing and Urban Development (HUD). HUD insures 100% of the unpaid principal balance of the loan and reimburses the lender for interest and expenses in accordance with HUD regulations. In previous periods, these 100% government insured loans were not considered OREO assets. All OREO assets are written down to a net realizable value at transfer to OREO.
While the level of our NPAs was higher at the end of 2006 than a year earlier, the absolute dollar amount of future risk associated with NPAs was not materially different as a result of the improved asset mix and greater relative amount of government guaranteed assets. Of the 2006 increase, 83% consisted of residential real estate and government guaranteed loans.
Non-performing asset activity for the past five years was as follows:

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Table 14 — Non-Performing Assets and Past Due Loans and Leases
                                             
    At December 31,
 
(in thousands of dollars)   2006   2005   2004   2003   2002
 
Non-performing loans and leases (1) :
                                       
   
Middle market commercial and industrial
  $ 35,657     $ 28,888     $ 24,179     $ 33,745     $ 79,691  
   
Middle market commercial real estate
    34,831       15,763       4,582       18,434       19,875  
   
Small business commercial and industrial and commercial real estate
    25,852       28,931       14,601       13,607       19,060  
   
Residential mortgage
    32,527       17,613       13,545       9,695       9,443  
   
Home equity
    15,266       10,720       7,055              
 
Total non-performing loans and leases
    144,133       101,915       63,962       75,481       128,069  
Other real estate, net:
                                       
 
Residential (2)
    47,898       14,214       8,762       6,918       7,915  
 
Commercial (3)
    1,589       1,026       35,844       4,987       739  
 
Total other real estate, net
    49,487       15,240       44,606       11,905       8,654  
 
Total non-performing assets
  $ 193,620     $ 117,155     $ 108,568     $ 87,386     $ 136,723  
 
Non-performing loans and leases as a % of total loans and leases
    0.55 %     0.42 %     0.27 %     0.36 %     0.69 %
Non-performing assets as a % of total loans and leases and other real estate
    0.74       0.48       0.46       0.41       0.74  
Accruing loans and leases past due 90 days or more (2)
  $ 59,114     $ 56,138     $ 54,283     $ 55,913     $ 61,526  
Accruing loans and leases past due 90 days or more as a percent of total loans
and leases
    0.23 %     0.23 %     0.23 %     0.27 %     0.33 %
Total allowances for credit losses (ACL) as % of:
                                       
 
Total loans and leases
    1.19       1.25       1.29       1.59       1.81  
 
Non-performing loans and leases
    217       300       476       444       263  
 
Non-performing assets
    161       261       280       384       246  
(1)  Non-performing loans and leases include loans and leases on non-accrual status and restructured loans and leases. For all periods presented, there were no restructured loans and leases that were not also on non-accrual status.
 
(2)  Beginning in 2006, OREO includes balances of loans in foreclosure, which are fully guaranteed by the U.S. Government, that were reported in 90 day past due loans and leases in prior periods.
 
(3)  At December 31, 2004, other real estate owned included $35.7 million of properties that related to the workout of $5.9 million of mezzanine loans. These properties were subject to $29.8 million of non-recourse debt to another financial institution. These properties were sold in 2005.
Table 15 — Non-Performing Asset Activity
                                           
    Year Ended December 31,
 
(in thousands of dollars)   2006   2005   2004   2003   2002
 
Non-performing assets, beginning of year
  $ 117,155     $ 108,568     $ 87,386     $ 136,723     $ 227,493  
 
New non-performing assets (1),(2)
    222,043       171,150       137,359       222,043       260,229  
 
Acquired non-performing assets
    33,843                          
 
Returns to accruing status
    (43,999 )     (7,547 )     (3,795 )     (16,632 )     (17,124 )
 
Loan and lease losses
    (46,191 )     (38,819 )     (37,337 )     (109,905 )     (152,616 )
 
Payments
    (59,469 )     (64,861 )     (43,319 )     (83,886 )     (136,774 )
 
Sales (1)
    (29,762 )     (51,336 )     (31,726 )     (60,957 )     (44,485 )
 
Non-performing assets, end of year
  $ 193,620     $ 117,155     $ 108,568     $ 87,386     $ 136,723  
 
(1)  In 2004, new non-performing assets included $35.7 million of properties that relate to the workout of $5.9 million of mezzanine loans. These properties were subject to $29.8 million of non-recourse debt to another financial institution. These properties were sold in 2005.
 
(2)  Beginning in 2006, OREO includes balances of loans in foreclosure, which are fully guaranteed by the U.S. Government, that were reported in 90 day past due loans and leases in prior periods.
Allowances for Credit Losses
(This section should be read in conjunction with Significant Factors 1 and 3.)
We maintain two reserves, both of which are available to absorb probable credit losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). When summed together, these reserves constitute the total ACL. Our credit administration group is responsible for developing the methodology and determining the adequacy of the ACL.
The ALLL represents the estimate of probable losses inherent in the loan portfolio at the balance sheet date. Additions to the ALLL result from recording provision expense for loan losses or recoveries, while reductions reflect charge-offs, net of recoveries,

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or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the portfolio adjusted by an applicable funding percentage.
We have an established process to determine the adequacy of the ACL that relies on a number of analytical tools and benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. The allowance is comprised of two components: the transaction reserve and the economic reserve.
The transaction reserve component of the ACL includes both (a) an estimate of loss based on pools of commercial and consumer loans and leases with similar characteristics and (b) an estimate of loss based on an impairment review of each loan greater than $500,000 that is considered to be impaired. For commercial loans, the estimate of loss based on pools of loans and leases with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The reserve factors applied to these portfolios were developed based on internal credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data. In the case of more homogeneous portfolios, such as consumer loans and leases, the determination of the transaction reserve is based on reserve factors that include the use of forecasting models to measure inherent loss in these portfolios. We update the models and analyses frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in the loss mitigation or credit origination strategies. Adjustments to the reserve factors are made, as needed, based on observed results of the portfolio analytics.
The economic reserve incorporates our determination of the impact of risks associated with the general economic environment on the portfolio. The economic reserve is designed to address economic uncertainties and is determined based on economic indices as well as a variety of other economic factors that are correlated to the historical performance of the loan portfolio. Currently, two national and two regionally focused indices are utilized. The two national indices are: (1) the Real Consumer Spending, and (2) Consumer Confidence. The two regionally focused indices are: (1) the Institute for Supply Management Manufacturing, and (2) Non-agriculture Job Creation. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period-to -period, subject to a minimum level specified by policy.
This methodology allows for a more meaningful discussion of our view of the current economic conditions and the potential impact on credit losses. The continued use of quantitative methodologies for the transaction reserve and the introduction of the quantitative methodology for the economic component may have the impact of more period-to -period fluctuation in the absolute and relative level of the reserve than exhibited in prior-period results.
The table below presents the components of the ACL expressed as a percent of total period end loans and leases at the end of the most recent five years:
Table 16 — ACL as a Percent of Total Period End Loans and Leases
                                           
    At December 31,
 
    2006   2005   2004   2003   2002
 
 
Transaction reserve
    0.86 %     0.89 %     0.83 %     N.A.       N.A.  
 
Economic reserve
    0.18       0.21       0.32       N.A.       N.A.  
 
Total ALLL
    1.04       1.10       1.15       1.42 %     1.62 %
Total AULC
    0.15       0.15       0.14       0.17       0.19  
 
Total ACL
    1.19 %     1.25 %     1.29 %     1.59 %     1.81 %
 
N.A., not applicable.
A change in the transaction reserve component of the ACL is a direct indicator of the direction of credit risk in the portfolio. The decline in 2006 from 0.89% to 0.86% is consistent with our general assessment that there is less inherent credit risk in the portfolio today than in the prior period. The economic reserve is a calculated multiplier to the transaction reserve to capture potential volatility associated with the economic environment. The general improvement in the economy, combined with Huntington’s very consistent loss levels result in the lowering of the economic reserve component.

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Table 17 — Allocation of Allowances for Credit Losses (1)
                                                                                   
    At December 31,
 
(in thousands of dollars)   2006   2005   2004   2003   2002
 
Commercial:
                                                                               
 
Middle market commercial and industrial
  $ 83,046       22.9 %   $ 82,963       20.8 %   $ 87,485       19.8 %   $ 103,237       21.0 %   $ 106,998       25.6 %
 
Middle market commercial real estate
    63,729       14.7       60,667       14.4       54,927       14.9       63,294       15.1       35,658       15.5  
 
Small business commercial and industrial and commercial real estate
    42,978       9.7       40,056       9.1       32,009       9.0       30,455       8.9       26,914       9.1  
 
Total commercial
    189,753       47.3       183,686       44.3       174,421       43.7       196,986       45.0       169,570       50.2  
 
Consumer:
                                                                               
 
Automobile loans and leases
    28,400       14.9       33,870       17.5       41,273       18.6       58,375       23.2       51,621       21.1  
 
Home equity
    32,572       18.8       30,245       19.5       29,275       19.3       25,995       17.7       16,878       16.9  
 
Residential mortgage
    13,349       17.4       13,172       17.1       18,995       16.3       11,124       12.0       8,566       9.4  
 
Other loans
    7,994       1.6       7,374       1.6       7,247       2.1       7,252       2.1       8,085       2.4  
 
Total consumer
    82,315       52.7       84,661       55.7       96,790       56.3       102,746       55.0       85,150       49.8  
 
Total unallocated (2)
                                                      45,783        
 
Total allowance for loan and lease losses
  $ 272,068       100.0 %   $ 268,347       100.0 %   $ 271,211       100.0 %   $ 299,732       100.0 %   $ 300,503       100.0 %
 
Allowance for unfunded loan commitments and letters of credit
    40,161               36,957               33,187               35,522               36,145          
 
Total allowances for credit losses
  $ 312,229             $ 305,304             $ 304,398             $ 335,254             $ 336,648          
 
(1)  Percentages represent the percentage of each loan and lease category to total loans and leases.
 
(2)  Prior to 2003, an unallocated component of the ALLL was maintained.

37


 

M ANAGEMENT’S D ISCUSSION AND A NALYSIS
H UNTINGTON B ANCSHARES I NCORPORATED
Table 18 — Summary of Allowances for Credit Losses and Related Statistics
                                               
    Year Ended December 31,
 
(in thousands of dollars)   2006   2005   2004   2003   2002
 
Allowance for loan and lease losses, beginning of year
  $ 268,347     $ 271,211     $ 299,732     $ 300,503     $ 345,402