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, 2007
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   31-0724920
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
41 S. High Street, Columbus, Ohio   43287
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (614) 480-8300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock — Par Value $0.01 per Share
(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.      o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ Accelerated filer  o   Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  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, 2007, determined by using a per share closing price of $22.74, as quoted by NASDAQ on that date, was $5,192,642,048. As of January 31, 2008, there were 366,243,222 shares of common stock with a par value of $0.01 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, 2007.
     Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2008 Annual Shareholders’ Meeting
 
 

HUNTINGTON BANCSHARES INCORPORATED
INDEX
             
Part I.        
 
           
Item 1.
  Business     3  
 
           
Item 1A.
  Risk Factors     10  
 
           
Item 1B.
  Unresolved Staff Comments     15  
 
           
Item 2.
  Properties     15  
 
           
Item 3.
  Legal Proceedings     15  
 
           
Item 4.
  Submission of Matters to a Vote of Security Holders     16  
 
           
Part II.
 
           
Item 5.
  Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities     16  
 
           
Item 6.
  Selected Financial Data     17  
 
           
Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
 
           
Item 7A.
  Quantitative and Qualitative Disclosures About Market Risk     17  
 
           
Item 8.
  Financial Statements and Supplementary Data     17  
 
           
Item 9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     17  
 
           
Item 9A.
  Controls and Procedures     17  
 
           
Item 9A(T).
  Controls and Procedures     18  
 
           
Item 9B.
  Other Information     18  
 
           
Part III.
 
           
Item 10.
  Directors, Executive Officers and Corporate Governance     18  
 
           
Item 11.
  Executive Compensation     18  
 
           
Item 12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     18  
 
           
Item 13.
  Certain Relationships and Related Transactions, and Director Independence     19  
 
           
Item 14.
  Principal Accounting Fees and Services     19  
 
           
Part IV.        
 
           
Item 15.
  Exhibits and Financial Statement Schedules     19  
 
           
Signatures     21  
  EX-10.43
  EX-12.1
  EX-13.1
  EX-21.1
  EX-23.1
  EX-24.1
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2

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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, reinsurance of private mortgage insurance, reinsurance of credit life and disability insurance, retail and commercial insurance agency services, and other financial products and services. The Bank, organized in 1866, is our only bank subsidiary. At December 31, 2007, the Bank had:
  347 banking offices in Ohio
 
  113 banking offices in Michigan
 
  61 banking offices in Pennsylvania
 
  53 banking offices in Indiana
 
  28 banking offices in West Virginia
 
  13 banking offices in Kentucky
 
  4 private banking offices in Florida
 
  one foreign office in the Cayman Islands
 
  one foreign office in Hong Kong
     We conduct certain activities in other states including Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, New York, North Carolina, South Carolina, and Tennessee. Our foreign banking activities, in total or with any individual country, are not significant. At December 31, 2007, we had 11,925 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 24 of the Notes to Consolidated Financial Statements included in Item 8 of this report.
Acquisition of Sky Financial Group, Inc.
     On July 1, 2007, Huntington consummated its acquisition of Sky Financial Group, Inc. (Sky Financial) in a stock and cash transaction valued at approximately $3.5 billion.
     Under the terms of the agreement, Sky Financial shareholders received 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. Conversion of Sky Financial consumer and commercial accounts to Huntington accounts was accomplished in late September 2007.
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

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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.
Regulatory Matters
General
     We are a bank holding company and are qualified as a financial holding company with the Federal Reserve. We are subject to examination and supervision by the Federal Reserve pursuant to the Bank Holding Company Act. We are required to file reports and other information regarding our business operations and the business operations of our subsidiaries with the Federal Reserve.
     Because we are a public company, we are also subject to regulation by the Securities and Exchange Commission (SEC). The SEC has established three categories of issuers for the purpose of filing periodic and annual reports. Under these regulations, we are considered to be a “large accelerated filer” and, as such, must comply with SEC accelerated reporting requirements.
     The Bank is subject to examination and supervision by the Office of the Comptroller of the Currency (OCC). Its domestic deposits are insured by the Deposit Insurance Fund (DIF) 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 Financial Industry Regulatory Authority.
     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 unsafe and unsound practices if it fails 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.

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     Any loans by a holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, 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 are not made public. The bank holding company rating system, which became effective in 2005, applies to us. The composite ratings assigned to us, like those assigned to other financial institutions, are confidential and may not be directly disclosed, except to the extent required by law.
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, 2007, the Bank declared cash dividends to Huntington of $239 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, 2007, the Bank could not have declared and paid any additional dividends to the parent company without regulatory approval. To help meet any additional liquidity needs, Huntington has an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue and unspecified amount of debt or equity securities. Considering anticipated earnings and planned issuances of debt, we believe Huntington has sufficient liquidity to meet its cash flow obligations.
     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.

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FDIC Insurance
     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, effective January 1, 2007.
     Under the reformed deposit insurance regime, the FDIC designates 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. Accordingly, in contrast to 2006, the Bank was required in 2007 to pay premiums for FDIC insurance on its deposits.
     The FDIC determined to set 2007 assessment rates at three basis points above the base schedule rates, i.e., between 5 and 7 basis points for Risk Category I institutions and up to 43 basis points for Risk Category IV institutions. To assist the transition to the new system requiring assessment payments by all insured institutions, the Bank and other depository institutions that were in existence on and paid deposit insurance assessments prior to December 31, 1996, were made eligible for a one-time assessment credit based on their shares of the aggregate 1996 assessment base. The Bank’s assessment rate, like that of other financial institutions, is confidential and may not be directly disclosed, except to the extent required by law.
     In 2007, we were assessed a total of $12.6 million for FDIC insurance on our deposits. This entire amount was applied to the one-time assessment credit and, therefore, none of this was recognized as expense within our financial statements. At December 31, 2007, our assessment credit available for future FDIC insurance assessments was $21.7 million. We anticipate that our one-time assessment credit will continue to offset FDIC insurance assessments until the fourth quarter of 2008.
     The Bank continues to be required to make payments for the servicing of obligations of the Financing Corporation (FICO) that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding.
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. The 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:

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    “Tier 1”, or core capital, includes total equity plus qualifying capital securities and minority interests, excluding unrealized gains and losses accumulated in other comprehensive income, and non-qualifying intangible and servicing assets.
 
    “Tier 2”, or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the allowance for credit losses, subject to certain limitations.
 
    “Total capital” is Tier 1 plus Tier 2 capital.
     The Federal Reserve and the other federal banking regulators require that all intangible assets (net of deferred tax), except originated or purchased 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 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 they believe 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 deductions from Tier 1 capital that increase within a range from 8% to 25% of the adjusted carrying value of the investment.
     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;

7

  “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 2007, 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 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 under-capitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately-capitalized,” requirements to reduce total assets, 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, 2007.
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

8

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.
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 was renewed annually by Congress for the years 2001 through 2007. A further two-year moratorium was included in an omnibus appropriations bill enacted in late 2007, and it is not possible at present to assess the prospects either for a future permanent ban or the ultimate adoption of the long-pending final regulations.
     The Basel Committee on Banking Supervision’s “Basel II” regulatory capital guidelines, originally published in June 2004 and adopted in final form by U.S. regulatory agencies in November 2007, are designed to promote improved risk measurement and management processes and better align minimum capital requirements with risk. The Basel II guidelines are to become operational in April 2008, but are mandatory only for “core banks,” i.e., banks with consolidated total assets of $250 billion or more. They are thus not applicable to the Bank, which continues to operate under U.S. risk-based capital guidelines consistent with “Basel I” guidelines published in 1988.
     Federal regulators issued for public comment in December 2006 proposed rules (designated as “Basel IA”

9

rules) applicable to non-core banks that would have modified the existing U.S. Basel I-based capital framework. These regulators announced in November 2007, however, that instead of the Basel 1A proposals a new rulemaking was being prepared involving a “standardized approach” that would implement some of the simpler approaches for both credit risk and operational risk from the more advanced Basel II framework. Smaller U.S. depository institutions would be allowed to elect to remain under the existing Basel 1-based regulatory capital framework. The new rulemaking is expected to be published in the first half of 2008.
      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 operations, (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:
The largest single contributor to our net loss in the fourth quarter of 2007, and our reduced net income in 2007 as compared with 2006, was $405.8 million in charge-offs and special reserves relating to our credit relationship with Franklin Credit Management Corporation (Franklin). This charge represents our best estimate of the inherent loss within this credit relationship. However, there can be no assurance that we will not incur further losses relating to the Franklin relationship.
     As a result of our acquisition of Sky Financial, we have a significant loan relationship with Franklin. Franklin describes itself as a specialty consumer finance company primarily engaged in the servicing and resolution of performing, re-performing, and non-performing residential mortgage loans. Franklin’s portfolio consists of loans secured by 1-4 family residential real estate that generally fall outside the underwriting standards of Fannie Mae and Freddie Mac and involve elevated credit risk as a result of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt or past credit difficulties. Franklin purchased these loan portfolios at a discount to the unpaid principal balances and originated loans with interest rates and fees calculated to provide a rate of return adjusted to reflect the elevated credit risk inherent in these types of loans. Franklin originated

10

nonprime loans through its wholly-owned subsidiary, Tribeca Lending Corp., and has generally held for investment the loans acquired and a significant portion of the loans originated. In its Current Report on Form 8-K, filed November 15, 2007, Franklin announced a delay in the filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007. In the November 15, 2007 Form 8-K, Franklin stated that due to the rapidly deteriorating real estate and mortgage origination credit market and resulting increased delinquencies industry wide in mortgages originated in the years 2005 and 2006, particularly for second-lien loans, Franklin was in the process of reviewing and assessing its reserves for its portfolio of acquired loans, particularly second-lien mortgage loans acquired in those years. Franklin stated that this credit review would result in a substantial increase in the provision for loan losses for the quarter ended September 30, 2007, again particularly for its portfolio of second-lien loans. In its Current Report on Form 8-K, filed February 6, 2008, Franklin announced that while they previously believed that the reassessment would be complete on or before January 31, 2008, the reassessment and related accountants’ review have not yet been completed. Franklin stated on February 5, 2008, that it expects that it will complete the reassessment in time to file its 2007 third quarter Form 10-Q on or before March 31, 2008. Franklin also stated on February 5, 2008, that it expects to file its Annual Report on Form 10-K for the year ended December 31, 2007, on or before March 31, 2008. At December 31, 2007, following the troubled debt restructuring of our loans to Franklin, we had $1.2 billion of loans to Franklin, net of the amounts charged-off. For further discussion concerning our exposure to Franklin, see the “Significant Items Influencing Financial Performance and Comparisons” section included in our 2007 Annual Report to Shareholders, portions of which are filed as exhibit 13.1 to this report, and incorporated by reference.
     If we were to assume the assets of Franklin, it is possible that we would report higher levels of non-performing loans and charge-offs and while we could report higher levels of interest income from these loans, lower levels of earnings than currently expected could result. If Franklin’s financial or operating condition were to deteriorate, we have established alternatives for loan servicing so that we should not be materially impacted if Franklin were unable to service loans. In the event of default by Franklin, we can terminate servicing responsibilities and appoint a successor servicer. Franklin would be contractually obligated to cooperate with us and incur the costs of transferring all documents, files, and balances to the successor. Franklin’s recent actions have not resulted in an event of default under any of its agreements with us.
     We do not control Franklin, and Franklin’s ability to collect payments of principal and interest on its loans and other recoveries from its real estate assets depends upon the efforts of its own employees and third-party servicers hired by it. Franklin, like other residential mortgage lenders, is likely to be affected by the declines in home prices and disruptions in credit markets in many locales across the United States.
Our commercial real estate loan portfolio has and will continue to be affected by the on-going correction in residential real estate prices and reduced levels of home sales.
     At December 31, 2007, we had $9.2 billion of commercial real estate loans, including $1.5 billion of loans to builders of single family homes. There has been a general slowdown in the housing market across our geographic footprint, reflecting declining prices and excess inventories of houses to be sold, particularly impacting borrowers in our eastern Michigan and northern Ohio markets. As a result, home builders have shown signs of financial deterioration. We expect the home builder market to continue to be volatile and anticipate continued pressure on the home builder segment in the coming months. As we continue our on-going portfolio monitoring, we will make credit and reserve decisions based on the current conditions of the borrower or project combined with our expectations for the future. If the slow down in the housing market continues, we could experience higher charge-offs and delinquencies in this portfolio.
Declines in home values and reduced levels of home sales in our markets could continue to adversely affect us.
     Like all banks, we are subject to the effects of any economic downturn. There has been a slowdown in the housing market across our geographic footprint, reflecting declining prices and excess inventories of houses to be sold, particularly in the eastern Michigan and northern Ohio markets. These developments have had, and further declines may continue to have, a negative effect on our financial condition and results of operations. At December 31, 2007, we had:
    $7.3 billion of home equity loans and lines, representing 18% of total loans and leases.
 
    $5.4 billion in residential real estate loans, representing 14% of total loans and leases. Adjustable-rate mortgages, primarily mortgages that have a fixed rate for the first 3 to 5 years and then adjust annually, comprised 61% of this portfolio.
 
    $1.5 billion of loans to single family home builders, including loans made to both middle market and small business home builders. These loans represented 4% of total loans and leases.
 
    $1.2 billion of loans to Franklin, net of amounts charged-off, substantially all of which is secured by and ultimately reflects exposures to residential real estate loans. These loans represented 3% of total loans and leases.
 
    $2.9 billion of mortgage-backed securities, including $1.6 billion of Federal Agency mortgage-backed securities and $0.8 billion of private label collateralized mortgage obligations with a weighted-average credit rating of AAA, that could be negatively affected by a decline in home values.
     Continuing declines in home values are likely to lead to higher charge-offs and delinquencies in each of these portfolios as compared to the pre-July 2007 historical levels.
The allowance for loan losses may prove inadequate or be negatively affected by credit risk exposures.
     Our business depends on the creditworthiness of our customers. We periodically review the allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. There is no certainty that the allowance for loan losses will be adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.

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(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, securities, and other assets, including retained interests in securitizations, mortgage and non-mortgage servicing rights. A portion of our earnings results 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 2007 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 Market Risk — “Interest Rate Risk” section included in our 2007 Annual Report to Shareholders, portions of which are filed as exhibit 13.1 to this report, and incorporated by reference.
(3) Liquidity Risks:
If the Bank or holding company were 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 the operating cash needs to fund corporate expansion and other corporate activities.
     Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by 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 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 provides funding through advances to members that are collateralized with mortgage-related assets.
     We maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity available to us should they be needed. These sources include the sale or securitization of loans, the ability to acquire additional national market, 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.

12

     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 2007 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. The Bank has issued letters of credit that support $812 million of notes and bonds issued by our customers. The majority of the bonds have been sold by The Huntington Investment Company, our broker-dealer subsidiary. A downgrade in the Bank’s short term rating might influence some of the bond investors to put the bonds back to the remarketing agent. A failure to remarket would require the Bank to obtain funding for the amount of notes and bonds that cannot be remarketed.
     As a result of credit deterioration related to our lending relationship with Franklin, and our related 2007 fourth quarter restructuring of that lending relationship, each of Moody’s Investors Service (Moody’s), Standard and Poor’s, and Fitch Ratings (Fitch) changed their outlook for our ratings from stable to negative, Moody’s placed all ratings on review for possible downgrade, and Fitch downgraded our ratings on our senior unsecured notes and subordinated notes by one grade. That downgrade, and potential future downgrades in our credit ratings, whether relating to credit concerns, including our Franklin exposure, or other considerations, could limit our access to the capital markets, will increase the cost of our debt, and could adversely affect our liquidity and financial position.
     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.
     Credit ratings as of December 31, 2007, for the parent company and the Bank can be found in Table 31, included in our 2007 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.
The OCC may impose dividend payment and other restrictions on the Bank, which could impact our ability to pay dividends to shareholders or repurchase stock. Due to the significant loss that the Bank incurred in the fourth quarter of 2007, at December 31, 2007, the Bank could not declare and pay dividends to the holding company without regulatory approval.
     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.

13

     We do not anticipate that the holding company will receive dividends from the Bank until the second half of 2008. We anticipate increasing the holding company’s liquidity by raising additional funds in early 2008.
     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 could impact our ability to pay dividends to shareholders or repurchase stock. Throughout 2007, 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 2007 Annual Report to Shareholders, portions of which are filed as exhibit 13.1 to this report, and incorporated by reference.
(4) Operational Risks:
The resolution of significant pending litigation, if unfavorable, could have a material adverse affect on our results of operations for a particular period.
     Huntington faces legal risks in its businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against Huntington could have material adverse financial effects or cause significant reputational harm to Huntington, which in turn could seriously harm Huntington’s business prospects. As more fully described in Item 3 of this Form 10-K, three putative class actions and one shareholder derivative action were filed against Huntington, certain affiliated committees, and / or certain of its current or former officers and directors in December 2007 through February 2008 related to Huntington’s transactions with Franklin and the financial disclosures relating to such transactions and, in one case, Huntington stock being offered as an investment in a Huntington employee benefit plan. At this early stage, it is not possible for management to assess the probability of an adverse outcome, or reasonably estimate the amount of any potential loss in connection with these lawsuits. Although no assurance can be given, based on information currently available, consultation with counsel, and available insurance coverage, management believes that the eventual outcome of these claims against us will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position or results of operations. It is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period.
Huntington faces significant operational risk.
     Huntington is exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from Huntington’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect Huntington’s ability to attract and keep customers and can expose it to litigation and regulatory action.
     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. 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.

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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 40%. 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;
 
    a twelve story office building in Youngstown, Ohio
 
    a ten story office building in Warren, Ohio
 
    an office complex located in Troy, Michigan; and
 
    three data processing and operations centers (Easton and Northland) located in Ohio and one in Indianapolis.
     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 in Columbus and the twelve-story office building in Youngstown, Ohio. 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 59 of our locations. The transaction included a mix of branch banking offices, regional offices, and operational facilities, including certain properties described above, which we will continue to operate under a long-term lease.
Item 3: Legal Proceedings
     Between December 19, 2007 and February 1, 2008, two putative class actions were filed in the United States District Court for the Southern District of Ohio, Eastern Division, against the Company and certain of our current or former officers and directors purportedly on behalf of purchasers of our securities during the periods July 20, 2007 to November 16, 2007 or July 20, 2007 to January 10, 2008. These complaints seek to allege that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act by issuing a series of allegedly false and/or misleading statements concerning our financial results, prospects, and condition, relating, in particular, to our transactions with Franklin Credit Management (“Franklin”). It is expected that both cases will be consolidated into a single action. At this early stage of these lawsuits, it is not possible for management to assess the probability of an adverse outcome, or reasonably estimate the amount of any potential loss.
     On January 16, 2008, a shareholder derivative action was filed in the Court of Common Pleas of Delaware County, Ohio, against certain of our current or former officers and directors seeking to allege breach of fiduciary duty, waste of corporate assets, and unjust enrichment, all in connection with our acquisition of Sky Financial Group, Inc., certain transactions between us and Franklin Credit Management, and the financial disclosures relating to such transactions. The Company is named as a nominal defendant in this action. At this early stage of the lawsuit, it is not possible for management to assess the probability of an adverse outcome, or reasonably estimate the amount of any potential loss.

15

     On February 20, 2008, a putative class action lawsuit was filed in the United States District Court for the Southern District of Ohio against the Company, the Huntington Bancshares Incorporated Pension Review Committee, the Huntington Investment and Tax Savings Plan (the Plan) Administrative Committee, and certain of the Company’s officers and directors purportedly on behalf of participants in or beneficiaries of the Plan between July 20, 2007 and the present. The complaint seeks to allege breaches of fiduciary duties in violation of the Employee Retirement Income Security Act (ERISA) relating to the Company’s stock being offered as an investment alternative for participants in the Plan. The complaint seeks money damages and equitable relief. At this early stage of this lawsuit, it is not possible for management to assess the probability of a material adverse outcome, or reasonably estimate the amount of any potential loss.
     It is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period. However, although no assurance can be given, based on information currently available, consultation with counsel, and available insurance coverage, management believes that the eventual outcome of these claims against us will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.
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, 2008, we had 40,992 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 41 entitled “Quarterly Stock Summary, Key Ratios and Statistics, and Capital Data” included in our 2007 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 22 of the Notes to Consolidated Financial Statements included in our 2007 Annual Report to Shareholders, portions of which are filed as exhibit 13.1 to this report, and incorporated by reference.
     Huntington did not repurchase any shares under the 2006 Repurchase Program for the three-month period ended December 31, 2007. At the end of the period, 3,850,000 shares may be purchased under the 2006 Repurchase Program.
     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, 2002, through December 31, 2007. 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, 2002, and the reinvestment of all dividends are assumed.
(GRAPH)

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Item 6: Selected Financial Data
     Information required by this item is set forth in Table 1 in our 2007 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 2007 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 2007 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 2007 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
     Huntington maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Huntington’s Management, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntington’s 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, Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Huntington’s disclosure controls and procedures were effective.
     There have not been any significant changes in Huntington’s 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 fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Huntington’s internal control over financial reporting.
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 2007 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, 2007 to which this report relates that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

17

Item 9A(T): Controls and Procedures
     Not applicable.
Item 9B: Other Information
     Not applicable.
PART III
     We refer in Part III of this report to relevant sections of our 2008 Proxy Statement for the 2007 annual meeting of shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days of the close of our 2007 fiscal year. Portions of our 2008 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 2008 Proxy Statement.
Item 11: Executive Compensation
     Information required by this item is set forth under the captions “Executive Compensation” and “Director Compensation” of our 2008 Proxy Statement.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
     The following table sets forth information about Huntington common stock authorized for issuance under Huntington’s existing equity compensation plans as of December 31, 2007.
             
    Number of   Weighted-average   Number of securities
    securities to be   exercise price of   remaining available for
    issued upon   outstanding options,   future issuance under
    exercise of   warrants, and rights   equity compensation
    outstanding       plans (excluding
    options, warrants,       securities reflected in
Plan category (1)   and rights (3)
(a)
  (b)   column (a)) (4)
(c)
 
Equity compensation plans approved by security holders
  19,715,549   $23.63   6,445,135
Equity compensation not approved by security holders (2)
  9,435,661   18.51   507,155
 
Total
  29,151,210   $21.98   6,952,290
 
(1)   All equity compensation plan authorizations for shares of common stock provide for the number of shares to be adjusted for stock splits, stock dividends, and other changes in capitalization. The Huntington Investment and Tax Savings Plan, a broad-based plan qualified under Code Section 401(a) which includes Huntington common stock as one of a number of investment options available to participants, is excluded from the table.
 
(2)   This category includes the Employee Stock Incentive Plan, a broad-based stock option plan under which active employees, excluding executive officers, have received grants of stock options, and the Executive Deferred Compensation Plan, which provides senior officers designated by the Compensation Committee the opportunity to defer up to 90% of base salary, annual bonus compensation and certain equity awards, and up to 100% of long-term incentive awards.

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(3)   The figures in this column reflect shares of common stock subject to stock option grants outstanding as of December 31, 2007.
 
(4)   The figures in this column reflect shares reserved as of December 31, 2007 for future issuance under employee benefit plans, including shares available for future grants of stock options but excluding shares subject to outstanding options. Of these amounts, shares of common stock available for future issuance other than upon exercise of options, warrants or rights are as follows:
    507,155 shares reserved for the Executive Deferred Compensation Plan;
 
    15,789 shares reserved for the Supplemental Plan under which voluntary participant contributions made by payroll deduction are used to purchase shares;
 
    50,475  shares reserved for the Deferred Compensation Plan for Huntington directors under which directors may defer their director compensation and such amounts may be invested in shares of Huntington common stock; and
 
    82,321 shares reserved for a similar plan (now inactive), the Deferred Compensation Plan for Directors, under which directors of selected subsidiaries of Huntington may defer their director compensation and such amounts may be invested in shares of Huntington common stock.
Other Information
     The other information required by this item is set forth under the caption “Ownership of Voting Stock” of our 2008 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 2008 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 2008 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 2007 Annual Report on the pages indicated below are incorporated by reference in Item 8.
         
    Annual
    Report Page
 
Report of Independent Registered Public Accounting Firm
    73  
 
Consolidated Balance Sheets as of December 31, 2007 and 2006
    74  
 
Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005
    75  
 
Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2007, 2006 and 2005
    76  
 
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    77  
 
Notes to Consolidated Financial Statements
    78-116  

19

  (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 10.1 through 10.42 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.

20

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 25th day of February 2008.
HUNTINGTON BANCSHARES INCORPORATED
(Registrant)
             
By:   /s/ Thomas E. Hoaglin    By:   /s/ Donald R. Kimble 
    Thomas E. Hoaglin       Donald R. Kimble 
    Chairman, President, Chief Executive
Officer, and Director (Principal Executive
Officer)
      Executive Vice President
Chief Financial 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 25th day of February, 2008.
     
Raymond J. Biggs *
  Jonathan A. Levy *
 
   
Raymond J. Biggs
Director
  Jonathan A. Levy
Director
 
   
Don M. Casto III *
  Wm. J. Lhota *
 
   
Don M. Casto III
Director
  Wm. J. Lhota
Director
 
   
Michael J. Endres *
  Gene E. Little *
 
   
Michael J. Endres
Director
  Gene E. Little
Director
 
   
Marylouise Fennell *
  Gerard P. Mastroianni *
 
   
Marylouise Fennell
Director
  Gerard P. Mastroianni
Director
 
   
John B. Gerlach, Jr. *
  David L. Porteous *
 
   
John B. Gerlach, Jr.
Director
  David L. Porteous
Director
 
   
D. James Hilliker *
  Kathleen H. Ransier *
 
   
D. James Hilliker
Director
  Kathleen H. Ransier
Director
 
   
David P. Lauer *
  * /s/ Donald R. Kimble
 
   
David P. Lauer
Director
  Donald R. Kimble
Attorney-in-fact for each of the persons indicated

21

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.   Current Report on Form 8-K dated May 31, 2007   000-02525     3.1  
3.3
  Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of January 22, 2008.   Current Report on Form 8-K dated January 22, 2008.   000-02525     3.1  
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
  First Amendment to the Huntington Bancshares Incorporated 2004 Management Incentive Plan   Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders   000-02525     H  
10.6
  * Huntington Supplemental Retirement Income Plan, amended and restated, effective January 1, 2008.   Quarterly Report on Form 10-Q for the quarter ended September 30, 2007   000-02525     10.6  
10.7
  * 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)  
10.8
  * 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)  
10.9
  * 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)  
10.10
  * 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)  

22

                     
            SEC File or    
Exhibit           Registration   Exhibit
Number   Document Description   Report or Registration Statement   Number   Reference
10.11
  * The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust, amended and restated, effective January 1, 2005   Quarterly Report on Form 10-Q for the quarter ended September 30, 2007   000-02525     10.5  
10.12
  * 1990 Stock Option Plan   Registration Statement on Form S-8 filed on October 18, 1990   33-37373     4(a)  
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 December 20, 2006, between Huntington Bancshares Incorporated and Thomas E. Hoaglin   Registration Statement on Form S-4 filed February 26, 2007   333-140897     10.1  
10.33
  * Employment Agreement, dated December 20, 2006, between Huntington Bancshares Incorporated and Marty E. Adams   Registration Statement on Form S-4 filed February 26, 2007   333-140897     10.2  
10.34
  * 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)  
10.35
  Schedule identifying material details of Executive Agreements 2006   Annual Report on Form 10-K for the year ended December 31, 2006   000-02525     10.34  

23

                     
            SEC File or    
Exhibit           Registration   Exhibit
Number   Document Description   Report or Registration Statement   Number   Reference
10.36
  * 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  
10.37
  * Restricted Stock Unit Grant Notice with
three year vesting
  Current Report on Form 8-K dated July 24, 2006   000-02525     99.1  
10.38
  * Restricted Stock Unit Grant Notice with
six month vesting
  Current Report on Form 8-K dated July 24, 2006   000-02525     99.2  
10.39
  * Restricted Stock Unit Deferral Agreement   Current Report on Form 8-K dated July 24, 2006   000-02525     99.3  
10.40
  * Director Deferred Stock Award Notice   Current Report on Form 8-K dated July 24, 2006   000-02525     99.4  
10.41
  * Huntington Bancshares Incorporated 2007 Stock and Long-Term Incentive Plan   Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders   000-2525     G  
10.42
  * First Amendment to the 2007 Stock and Long-Term Incentive Plan   Quarterly report on Form 10-Q for the quarter ended September 30, 2007            
 
10.43
  * Retention Payment Agreement                
 
12.1
  Ratio of Earnings to Fixed Charges.                
 
13.1
  Portions of our 2007 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, are available on our website at http://www.investquest.com/iq/h/hban/main/cg/cg.htm                
 
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.

24

 

Exhibit 10.43
Terms of Retention Payment Program
Approved January 15, 2008
Retention Payment Terms
    The participating officer will receive payment of the retention amount specified for such participant in the first quarter of 2011, provided the participant remains employed with Huntington through December 31, 2010.
 
    In the event a change-in-control, as defined in Huntington’s forms of Executive Agreement, occurs prior to December 31, 2010, and the participant remains employed at the time of the change-in-control, the retention payment will be vested.
Schedule of Retention Payment Amounts for Executive Officers
         
Executive   Retention Payment  
Daniel B. Benhase
  $ 400,000  
Richard A. Cheap
  $ 200,000  
Donald R. Kimble
  $ 400,000  
Mary W. Navarro
  $ 400,000  
Nicholas G. Stanutz
  $ 300,000  

 

Exhibit 12.1
Ratio of Earnings to Fixed Charges
                                         
    Year Ended December 31,
(in thousands of dollars)   2007   2006   2005   2004   2003
 
                                       
Earnings:
                                       
Income before taxes
  $ 22,643     $ 514,061     $ 543,574     $ 552,666     $ 523,987  
 
Add: Fixed charges, excluding interest on deposits
    431,320       345,253       243,239       191,648       179,902  
 
Earnings available for fixed charges, excluding interest on deposits
    453,963       859,314       786,813       744,314       703,889  
Add: Interest on deposits
    1,026,388       717,167       446,919       257,099       288,271  
 
Earnings available for fixed charges, including interest on deposits
  $ 1,480,351     $ 1,576,481     $ 1,233,732     $ 1,001,413     $ 992,160  
 
 
                                       
Fixed Charges:
                                       
Interest expense, excluding interest on deposits
  $ 415,063     $ 334,175     $ 232,435     $ 178,842     $ 168,499  
Interest factor in net rental expense
    16,257       11,078       10,804       12,806       11,404  
 
Total fixed charges, excluding interest on deposits
    431,320       345,253       243,239       191,648       179,903  
Add: Interest on deposits
    1,026,388       717,167       446,919       257,099       288,271  
 
Total fixed charges, including interest on deposits
  $ 1,457,708     $ 1,062,420     $ 690,158     $ 448,747     $ 468,174  
 
 
                                       
Ratio of Earnings to Fixed Charges
                                       
Excluding interest on deposits
    1.05 x       2.49 x       3.23 x       3.88 x       3.91 x  
Including interest on deposits
    1.02 x       1.48 x       1.79 x       2.23 x       2.12 x  

26

 

Exhibit 13.1
 
S ELECTED F INANCIAL D ATA H UNTINGTON B ANCSHARES I NCORPORATED
 
Table 1 — Selected Financial Data (1)
                                         
    Year Ended December 31,  
(in thousands of dollars, except per share amounts)   2007     2006     2005     2004     2003  
Interest income
  $ 2,742,963     $ 2,070,519     $ 1,641,765     $ 1,347,315     $ 1,305,756  
Interest expense
    1,441,451       1,051,342       679,354       435,941       456,770  
 
Net interest income
    1,301,512       1,019,177       962,411       911,374       848,986  
Provision for credit losses
    643,628       65,191       81,299       55,062       163,993  
 
Net interest income after provision for credit losses
    657,884       953,986       881,112       856,312       684,993  
 
Service charges on deposit accounts
    254,193       185,713       167,834       171,115       167,840  
Automobile operating lease income
    7,810       43,115       133,015       285,431       489,698  
Securities (losses) gains
    (29,738 )     (73,191 )     (8,055 )     15,763       5,258  
Other non-interest income
    444,338       405,432       339,488       346,289       406,357  
 
Total non-interest income
    676,603       561,069       632,282       818,598       1,069,153  
 
Personnel costs
    686,828       541,228       481,658       485,806       447,263  
Automobile operating lease expense
    5,161       31,286       103,850       235,080       393,270  
Other non-interest expense
    619,855       428,480       384,312       401,358       389,626  
 
Total non-interest expense
    1,311,844       1,000,994       969,820       1,122,244       1,230,159  
 
Income before income taxes
    22,643       514,061       543,574       552,666       523,987  
(Benefit) provision for income taxes
    (52,526 )     52,840       131,483       153,741       138,294  
 
Income before cumulative effect of change in accounting principle
    75,169       461,221       412,091       398,925       385,693  
Cumulative effect of change in accounting principle, net of tax (2)
                            (13,330 )
 
Net income
  $ 75,169     $ 461,221     $ 412,091     $ 398,925     $ 372,363  
 
Income before cumulative effect of change in accounting principle per common share — basic
    $0.25       $1.95       $1.79       $1.74       $1.68  
Net income per common share — basic
    0.25       1.95       1.79       1.74       1.62  
Income before cumulative effect of change in accounting principle per common share — diluted
    0.25       1.92       1.77       1.71       1.67  
Net income per common share — diluted
    0.25       1.92       1.77       1.71       1.61  
Cash dividends declared per common share
    1.060       1.000       0.845       0.750       0.670  
                                         
Balance sheet highlights
                                       
 
Total assets (period end)
  $ 54,697,468     $ 35,329,019     $ 32,764,805     $ 32,565,497     $ 30,519,326  
Total long-term debt (period end) (3)
    6,954,909       4,512,618       4,597,437       6,326,885       6,807,979  
Total shareholders’ equity (period end)
    5,949,140       3,014,326       2,557,501       2,537,638       2,275,002  
Average long-term debt (3)
    5,714,572       4,942,671       5,168,959       6,650,367       5,816,660  
Average shareholders’ equity
    4,631,912       2,945,597       2,582,721       2,374,137       2,196,348  
Average total assets
    44,711,676       35,111,236       32,639,011       31,432,746       28,971,701  
                                         
Key ratios and statistics
                                       
 
Margin analysis — as a % of average earnings assets
                                       
Interest income (4)
    7.02 %     6.63 %     5.65 %     4.89 %     5.35 %
Interest expense
    3.66       3.34       2.32       1.56       1.86  
 
Net interest margin (4)
    3.36 %     3.29 %     3.33 %     3.33 %     3.49 %
 
                                         
Return on average total assets
    0.17 %     1.31 %     1.26 %     1.27 %     1.29 %
Return on average total shareholders’ equity
    1.6       15.7       16.0       16.8       17.0  
Return on average tangible shareholders’ equity (5)
    3.9       19.5       17.4       18.5       18.8  
Efficiency ratio (6)
    62.5       59.4       60.0       65.0       63.9  
Dividend payout ratio
    N.M.       52.1       47.7       43.9       41.6  
Average shareholders’ equity to average assets
    10.36       8.39       7.91       7.55       7.58  
Effective tax rate
    N.M.       10.3       24.2       27.8       26.4  
Tangible equity to tangible assets (period end) (7)
    5.08       6.93       7.19       7.18       6.80  
Tier 1 leverage ratio (period end)
    6.77       8.00       8.34       8.42       7.98  
Tier 1 risk-based capital ratio (period end)
    7.51       8.93       9.13       9.08       8.53  
Total risk-based capital ratio (period end)
    10.85       12.79       12.42       12.48       11.95  
                                         
Other data
                                       
 
Full-time equivalent employees (period end)
    11,925       8,081       7,602       7,812       7,983  
Domestic banking offices (period end)
    625       381       344       342       338  
 
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 the adoption of FASB Interpretation No. 46 “ Consolidation of Variable Interest Entities.
 
(3)  Includes Federal Home Loan Bank advances, subordinated notes, and other long-term debt.
 
(4)  On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)  Net income less expense for amortization of intangibles (net of tax) for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less other intangible assets and goodwill. Other intangible assets are net of deferred tax.
 
(6)  Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains.
 
(7)  Tangible common shareholders’ equity divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax.


12

 

M ANAGEMENT’S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION H UNTINGTON B ANCSHARES I NCORPORATED
AND R ESULTS OF O PERATIONS
 
INTRODUCTION
 
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in 1866, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, reinsurance of private mortgage insurance, reinsurance of credit life and disability insurance, retail and commercial insurance-agency services, and other financial products and services. Our banking offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial service activities are also conducted in other states including: Dealer Sales offices in Arizona, Florida, Georgia, Nevada, New Jersey, New York, North Carolina, South Carolina, and Tennessee; Private Financial and Capital Markets Group offices in Florida; and Mortgage Banking offices in Maryland and New Jersey. Sky Insurance offers retail and commercial insurance agency services in Ohio, Pennsylvania, and Indiana. International banking services are available through the headquarters office in Columbus and a limited purpose office located in both the Cayman Islands and Hong Kong.
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides 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.
 
Our discussion is divided into key segments:
 
  –  Introduction  — Provides overview comments on important matters including risk factors, acquisitions, and other items. These are essential for understanding our performance and prospects.
 
  –  Discussion of Results of Operations  — Reviews financial performance from a consolidated company perspective. It also includes a Significant Items Influencing Financial Performance Comparisons section that summarizes key issues helpful for understanding performance trends including our acquisition of Sky Financial Group, Inc. (Sky Financial) and our relationship with Franklin Credit Management Corporation (Franklin). Key consolidated balance sheet and income statement trends are also discussed in this section.
 
  –  Risk Management and Capital  — Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we 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 2007 fourth quarter compared with the year-ago quarter.
 
A reading of each section is important to understand fully the nature of our financial performance and prospects.
 
Forward-Looking Statements
 
This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, and projections, and including statements about the benefits of our merger with Sky Financial, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
 
Actual results could differ materially from those contained or implied by such statements for a variety of factors including: (1) deterioration in the loan portfolio could be worse than expected due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) merger benefits including expense efficiencies and revenue synergies may not be fully realized and/or within the expected timeframes; (3) merger disruptions may make it more difficult to maintain relationships with clients, associates, or suppliers; (4) changes in economic conditions; (5) movements in interest rates; (6) competitive pressures on product pricing and services; (7) success and timing of other business strategies; (8) the nature, extent, and timing of governmental actions and reforms; and (9) extended disruption of vital infrastructure. Additional factors that could cause results to differ materially from those described above can be


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found in Huntington’s 2007 Annual Report on Form 10-K, and documents subsequently filed by us with the Securities and Exchange Commission.
 
All forward-looking statements speak only as of the date they are made and are based on information available at that time. 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 except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, readers of this document are cautioned against placing undue reliance on such statements.
 
Risk Factors
 
We, like other financial companies, 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 we, 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 . Please refer to the “Risk Management and Capital” section for additional information regarding risk factors. Additionally, 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, 2007, and subsequent filings with the SEC.
 
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 allowance 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, 2007, the ACL was $645.0 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, 2007, the ACL as a percent of total loans and leases was 1.61%. Based on the balances at December 31, 2007, a 10 basis point increase in this ratio to 1.71% would require $40.0 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted 2007 net income by approximately $26.0 million, or $0.09 per share.
 
Additionally, we established a specific reserve of $115.3 million associated with our loans to Franklin. To estimate the specific allowance associated with our loans to Franklin, we used estimates of probability-of-default and the loss-given-default for each of Franklin’s three portfolios of loans: acquired first-priority lien residential mortgage loans, acquired second-priority lien residential mortgage loans and originated first-priority lien loans. We used estimates of probability-of-default and the loss-given-default that resulted in an estimated loss of approximately 25% of the $2.1 billion unpaid principal balances of loans that support our loans to Franklin. We estimate that if the probability-of-default from this scenario were increased by 10% for each


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portfolio and, additionally, the loss-given-default increased for each portfolio, that the provision for credit losses would have increased by approximately $102 million. Our relationship with Franklin is discussed in greater detail in the “Significant Items” section of this report.
 
–  Fair Value Measurements  — 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.
 
Many of our assets are 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 loans held-for-sale, while another portion is evaluated for impairment using fair value measurements. At December 31, 2007, approximately $6.2 billion of our assets were recorded at either fair value or at the lower of fair value or cost. In addition to the above mentioned ongoing fair value measurements, fair value is also the unit of measure for recording business combinations. On the date of the Sky Financial acquisition, July 1, 2007, all of Sky Financial’s assets and liabilities, including identifiable intangible assets, were recorded at their estimated fair value. The excess of purchase price over the fair value of net assets acquired was recorded as goodwill. Please refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding the purchase, and related goodwill, of Sky Financial.
 
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.
 
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. We test the goodwill of each reporting unit for impairment annually, as of October 1, or more frequently if events or circumstances indicate possible impairment. We estimate the fair value of each reporting unit using a combination of a discounted cash flow analysis based on internal forecasts and market-based valuation multiples for comparable businesses. We identified no impairment during the three years ended December 31, 2007. For additional information regarding goodwill and the carrying values by lines of business, please refer to Note 8 of the Notes to the Consolidated Financial Statements.
 
Mortgage Servicing Rights (MSRs)
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 model. Fair value is estimated based upon discounted net cash flows calculated from a combination of loan level data and market assumptions. The valuation model combines loans based on common characteristics that impact servicing cash flows (e.g., investor, remittance cycle, interest rate, product type, etc.) in order to project net cash flows. Market valuation assumptions include prepayment speeds, discount rate, and servicing costs. 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 to estimated fair value based upon the final month-end valuation, which utilizes the month-end rate curve and prepayment assumptions. Note 6 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.
 
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 and 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.
 
Derivatives
Our derivative positions are valued using internally and externally 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.


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Loans Held-for-sale
Loans held-for-sale are carried at the lower of (a) historical amortized cost or (b) fair value. The fair value of loans held-for-sale 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 adjusted cash flows are discounted using a rate that is appropriate for each maturity and incorporates the effects of interest rate changes. At December 31, 2007, loans held-for-sale included $73 million acquired from Sky Financial. The value of the Sky Financial impaired commercial loans held-for-sale is primarily determined by analyzing the underlying collateral of the loan and the external market prices of similar assets.
 
Other Investments - Equity Investments
We make certain equity investments through investments in equity funds (holding both private and publicly traded equity securities), directly in companies as a minority interest investor, and directly in companies in conjunction with our mezzanine lending activities. We measure these equity investments at fair value, with adjustments to the fair value recognized as a component of other non-interest income. For additional information regarding equity investments, please refer to “Price Risk” in the “Risk Management and Capital” section of this report.
 
–  Income Taxes  — The calculation of our provision for federal income taxes is complex and requires the use of estimates and judgments. We have two accruals for income taxes: Our income tax receivable represents the estimated amount currently due from the federal government, net of any reserve for potential audit issues, and is reported as a component of “accrued income and other assets” 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, how such assets and liabilities are recognized under the federal tax code, and is reported as a component of “accrued expenses and other liabilities” in our consolidated balance sheet.
 
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 the 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 of our operating results for any of these changes cannot be reasonably estimated. For additional information regarding income taxes, please refer to Note 17 of the Notes to the Consolidated Financial Statements.
 
Recent Accounting Pronouncements and Developments
 
Note 2 to the Consolidated Financial Statements discusses new accounting policies adopted during 2007 and the expected impact of accounting policies recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to the Consolidated Financial Statements.
 
Acquisitions
 
Sky Financial Group, Inc. (Sky Financial)
 
The merger with Sky Financial was completed on July 1, 2007. At the time of acquisition, Sky Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion. The impact of this acquisition was included in our consolidated results for the last six months of 2007. Additionally, in September of 2007, Sky Bank and Sky Trust, National Association (Sky Trust), merged into the Bank and systems integration was completed. As a result, performance comparisons between 2007 and 2006 are affected.
 
As a result of this acquisition, we have a significant loan relationship with Franklin. This relationship is discussed in greater detail in the “Significant Items” section of this report.


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Unizan Financial Corp.
 
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. The impact of this acquisition was included in our consolidated results for the last ten months of 2006. As a result, performance comparisons between 2006 and 2005 are affected.
 
Impact Methodology
 
For both the Sky Financial and Unizan acquisitions, comparisons of the reported results are impacted as follows:
 
  –  Increased the absolute level of reported average balance sheet, revenue, expense, and the absolute level of certain credit quality results.
 
  –  Increased the absolute level of reported non-interest expense items because of costs incurred as part of merger integration activities, most notably employee retention bonuses, outside programming services related to systems conversions, occupancy expenses, and marketing expenses related to customer retention initiatives. These net merger costs were $85.1 million for 2007, $3.7 million for 2006, and $0.7 million for 2005.
 
Given the significant impact of the mergers on reported results, we believe that an understanding of the impacts of each merger is necessary to understand better underlying performance trends. When comparing post-merger period results to premerger periods, we use the following terms when discussing financial performance:
 
  –  “Merger-related” refers to amounts and percentage changes representing the impact attributable to the merger.
 
  –  “Merger costs” represent non-interest expenses primarily associated with merger integration activities, including severance expense for key executive personnel.
 
  –  “Non-merger-related” refers to performance not attributable to the merger, and includes “merger efficiencies”, which represent non-interest expense reductions realized as a result of the merger.
 
After completion of our mergers, we combine the acquired companies’ operations with ours, and do not monitor the subsequent individual results of the acquired companies. As a result, the following methodologies were implemented to estimate the approximate effect of the mergers used to determine “merger-related” impacts.
 
Balance Sheet Items
 
Sky Financial
 
For average loans and leases, as well as total average deposits, Sky Financial’s balances as of June 30, 2007, adjusted for purchase accounting adjustments, and transfers of loans to loans held-for-sale, were used in the comparison. To estimate the impact on 2007 average balances, it was assumed that the June 30, 2007 balances, as adjusted, remained constant over time.
 
Unizan
 
For average loans and leases, as well as core average deposits, balances as of the acquisition date were pro-rated to the post-merger period being used in the comparison. For example, to estimate the impact on 2006 first quarter average balances, one-third of the closing date balance was used as those balances were in reported results for only one month of the quarter. Quarterly estimated impacts for the 2006 second, third, and fourth quarter results were developed using this same pro-rata methodology. Full-year 2006 estimated results represent the annual average of each quarter’s estimate. This methodology assumes acquired balances will remain constant over time.
 
Income Statement Items
 
Sky Financial
 
Sky Financial’s actual results for the first six months of 2007, adjusted for the impact of unusual items and purchase accounting adjustments, were determined. This six-month adjusted amount was multiplied by two to estimate an annual impact. This methodology does not adjust for any market related changes, or seasonal factors in Sky Financial’s 2007 six-month results. Nor does it consider any revenue or expense synergies realized since the merger date. The one exception to this methodology of holding the estimated annual impact constant relates to the amortization of intangibles expense where the amount is known and is therefore used.


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Unizan
 
Unizan’s actual full year 2005 results were used for pro-rating the impact on post-merger periods. For example, to estimate the 2006 first quarter impact of the merger on personnel costs, one-twelfth of Unizan’s full-year 2005 personnel costs was used. Full quarter and year-to-date estimated impacts for subsequent periods were developed using this same pro-rata methodology. This results in an approximate impact since the methodology does not adjust for any unusual items or seasonal factors in Unizan’s 2005 reported results, or synergies realized since the merger date. The one exception to this methodology relates to the amortization of intangibles expense where the amount is known and is therefore used.
 
Certain tables and comments contained within our discussion and analysis provide detail of changes to reported results to quantify the estimated impact of the Sky Financial merger using this methodology.


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Table 3 — Selected Annual Income Statements (1)
                                                                         
    Year Ended December 31,  
          Change from 2006           Change from 2005                    
(in thousands, except per share amounts)   2007     Amount     %     2006     Amount     %     2005     2004     2003  
Interest income
  $ 2,742,963     $ 672,444       32.5 %   $ 2,070,519     $ 428,754       26.1 %   $ 1,641,765     $ 1,347,315     $ 1,305,756  
Interest expense
    1,441,451       390,109       37.1       1,051,342       371,988       54.8       679,354       435,941       456,770  
 
Net interest income
    1,301,512       282,335       27.7       1,019,177       56,766       5.9       962,411       911,374       848,986  
Provision for credit losses
    643,628       578,437       N.M.       65,191       (16,108 )     (19.8 )     81,299       55,062       163,993  
 
Net interest income after provision for credit losses
    657,884       (296,102 )     (31.0 )     953,986       72,874       8.3       881,112       856,312       684,993  
 
Service charges on deposit accounts
    254,193       68,480       36.9       185,713       17,879       10.7       167,834       171,115       167,840  
Trust services
    121,418       31,463       35.0       89,955       12,550       16.2       77,405       67,410       61,649  
Brokerage and insurance income
    92,375       33,540       57.0       58,835       5,216       9.7       53,619       54,799       57,844  
Other service charges and fees
    71,067       19,713       38.4       51,354       7,006       15.8       44,348       41,574       41,446  
Bank owned life insurance income
    49,855       6,080       13.9       43,775       3,039       7.5       40,736       42,297       43,028  
Mortgage banking
    29,804       (11,687 )     (28.2 )     41,491       13,158       46.4       28,333       26,786       58,180  
Securities (losses) gains
    (29,738 )     43,453       (59.4 )     (73,191 )     (65,136 )     N.M.       (8,055 )     15,763       5,258  
Automobile operating lease income
    7,810       (35,305 )     (81.9 )     43,115       (89,900 )     (67.6 )     133,015       285,431       489,698  
Other
    79,819       (40,203 )     (33.5 )     120,022       24,975       26.3       95,047       113,423       144,210  
 
Total non-interest income
    676,603       115,534       20.6       561,069       (71,213 )     (11.3 )     632,282       818,598       1,069,153  
 
Personnel costs
    686,828       145,600       26.9       541,228       59,570       12.4       481,658       485,806       447,263  
Outside data processing and other services
    127,245       48,466       61.5       78,779       4,141       5.5       74,638       72,115       66,118  
Net occupancy
    99,373       28,092       39.4       71,281       189       0.3       71,092       75,941       62,481  
Equipment
    81,482       11,570       16.5       69,912       6,788       10.8       63,124       63,342       65,921  
Amortization of intangibles
    45,151       35,189       N.M.       9,962       9,133       N.M.       829       817       816  
Marketing
    46,043       14,315       45.1       31,728       5,449       20.7       26,279       24,600       25,648  
Professional services
    40,320       13,267       49.0       27,053       (7,516 )     (21.7 )     34,569       36,876       42,448  
Telecommunications
    24,502       5,250       27.3       19,252       604       3.2       18,648       19,787       21,979  
Printing and supplies
    18,251       4,387       31.6       13,864       1,291       10.3       12,573       12,463       13,009  
Automobile operating lease expense
    5,161       (26,125 )     (83.5 )     31,286       (72,564 )     (69.9 )     103,850       235,080       393,270  
Other
    137,488       30,839       28.9       106,649       24,089       29.2       82,560       95,417       91,206  
 
Total non-interest expense
    1,311,844       310,850       31.1       1,000,994       31,174       3.2       969,820       1,122,244       1,230,159  
 
Income before income taxes
    22,643       (491,418 )     (95.6 )     514,061       (29,513 )     (5.4 )     543,574       552,666       523,987  
(Benefit) provision for income taxes
    (52,526 )     (105,366 )     N.M.       52,840       (78,643 )     (59.8 )     131,483       153,741       138,294  
 
Income before cumulative effect of change in accounting principle
    75,169       (386,052 )     (83.7 )     461,221       49,130       11.9       412,091       398,925       385,693  
Cumulative effect of change in accounting principle, net of tax (2)
                                                    (13,330 )
 
Net income
  $ 75,169     $ (386,052 )     (83.7 )%   $ 461,221     $ 49,130       11.9 %   $ 412,091     $ 398,925     $ 372,363  
 
Average common shares — basic
    300,908       64,209       27.1 %     236,699       6,557       2.8 %     230,142       229,913       229,401  
Average common shares — diluted
    303,455       63,535       26.5       239,920       6,445       2.8       233,475       233,856       231,582  
                                                                         
Per common share:
                                                                       
Income before cumulative effect of change in accounting principle — basic
  $ 0.25     $ (1.70 )     (87.2 )%   $ 1.95     $ 0.16       8.9 %   $ 1.79     $ 1.74     $ 1.68  
Net income — basic
    0.25       (1.70 )     (87.2 )     1.95       0.16       8.9       1.79       1.74       1.62  
Income before cumulative effect of change in accounting principle — diluted
    0.25       (1.67 )     (87.0 )     1.92       0.15       8.5       1.77       1.71       1.67  
Net income — diluted
    0.25       (1.67 )     (87.0 )     1.92       0.15       8.5       1.77       1.71       1.61  
Cash dividends declared
    1.060       0.06       6.0       1.000       0.16       18.3       0.845       0.750       0.670  
                                                                 
Revenue — fully taxable equivalent (FTE)
                                                               
Net interest income
  $ 1,301,512     $ 282,335       27.7 %   $ 1,019,177     $ 56,766       5.9 %   $ 962,411     $ 911,374     $ 848,986  
FTE adjustment
    19,249       3,224       20.1       16,025       2,632       19.7       13,393       11,653       9,684  
 
Net interest income (3)
    1,320,761       285,559       27.6       1,035,202       59,398       6.1       975,804       923,027       858,670  
Non-interest income
    676,603       115,534       20.6       561,069       (71,213 )     (11.3 )     632,282       818,598       1,069,153  
 
Total revenue (3)
  $ 1,997,364     $ 401,093       25.1 %   $ 1,596,271     $ (11,815 )     (0.7 ) %   $ 1,608,086     $ 1,741,625     $ 1,927,823  
 
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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DISCUSSION OF RESULTS OF OPERATIONS
 
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Items 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, please read this section in conjunction with the Lines of Business Discussion.
 
Summary
 
2007 versus 2006
 
We reported 2007 net income of $75.2 million and earnings per common share of $0.25. These results compared unfavorably with net income of $461.2 million and earnings per common share of $1.92 in 2006. Comparisons with the prior year were significantly impacted by: (a) our acquisition of Sky Financial, which closed on July 1, 2007, as well as the credit deterioration of the Franklin relationship that was also acquired with Sky Financial, (b) a 2006 reduction in the provision for income taxes as a result of the favorable resolution to certain federal income tax audits and (c) balance sheet restructuring charges taken in 2006 (see “Significant Items”). The Sky Financial acquisition solidified our position in Ohio, greatly expanded our presence in the central Indiana market, and established western Pennsylvania as a new market.
 
While the acquisition of Sky Financial had a positive impact to 2007 in many areas, the credit deterioration of the Franklin relationship late in 2007, acquired as part of the Sky Financial merger, was the largest setback to 2007 performance. A negative impact of $423.6 million pretax ($275.4 million after-tax, or $0.91 per common share based upon the annual average outstanding diluted common shares) related to this relationship. Although disappointing, and while we can give no further assurances, this charge represents our best estimate of the inherent loss within this credit relationship.
 
Other factors negatively impacting our 2007 performance included: (a) the need to build non-Franklin-related allowance for loan losses due to the continued weakness in the residential real estate development markets and (b) the volatility of the financial markets resulting in net market-related losses.
 
Despite the factors discussed above, 2007 showed positive signs. Expense control was a major highlight for the year. Non-merger-related expenses declined $47.5 million, or 4%, and represented the realization of most of the merger efficiencies that were targeted from the acquisition. Also, commercial loans showed good non-merger-related growth, and there was also strong non-merger-related growth in several key non-interest income activities, including deposit service charges, trust services, and other service charges.
 
Net interest income for 2007 increased $282.3 million, or 28%, from 2006. The current year included six months of net interest income attributable to the acquisition of Sky Financial, which added $13.3 billion of loans and $12.9 billion of deposits at July 1, 2007. As stated earlier, we saw good non-merger-related growth in total average commercial loans. However, total average automobile loans and leases continued to decline, as expected, due to lower consumer demand and competitive pricing. Additionally, the non-merger-related declines in total average residential mortgages, as well as the lack of growth in non-merger-related total average home equity loans, reflected the continued softness in the real estate markets. Growth in non-merger-related average total deposits was good in 2007, driven by strong growth in interest-bearing demand deposits. Our net interest margin increased seven basis points to 3.36% from 3.29% in 2006.
 
In addition to the Franklin credit deterioration discussed previously, credit quality generally weakened in 2007 compared with 2006. The ALLL increased to 1.44% in 2007 from 1.04% in the prior year. The ALLL coverage of nonaccruing loans (NALs) decreased to 181% at December 31, 2007, from 189% at December 31, 2006. Nonperforming assets (NPAs) also increased from the prior year, including the NPAs acquired from Sky Financial. The deterioration of all of these measures reflected the continued economic weakness in our Midwest markets, most notably among our borrowers in eastern Michigan and northern Ohio, and within the residential real estate development portfolio.
 
2006 versus 2005
 
2006 net income was $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 provision for income taxes as the effective tax rate for 2006 was 10.3%, down from 24.2% in 2005. The lower 2006 provision for income taxes 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


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  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 impacted by the acquisition of Unizan on March 1, 2006.
 
  –  $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.
 
  –  $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.
 
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%.
 
2006 net income was impacted by a number of significant items, the largest of which were (1) the acquisition of Unizan on March 1, 2006, (2) a reduction in the provision for income taxes, and (3) a balance sheet restructuring, undertaken to utilize the excess capital resulting from the reduction of the provision for income taxes (See “Significant Items”).
 
Basis of Presentation
 
Significant Items
 
Certain components of the income statement are naturally subject to more volatility than others. As a result, readers of this report may view such items differently in their assessment of “underlying” or “core” earnings performance compared with their expectations and/or any implications resulting from them on their assessment of future performance trends.
 
Therefore, we believe the disclosure of certain “Significant Items” affecting current and prior period results aids readers of this report in better understanding corporate performance so that they can ascertain for themselves what, if any, items they may wish to include or exclude from their analysis of performance, within the context of determining how that performance differed from their expectations, as well as how, if at all, to adjust their estimates of future performance accordingly.
 
To this end, we have adopted a practice of listing as “Significant Items” in our external disclosure documents, including earnings press releases, investor presentations, reports on Forms 10-Q and 10-K, individual and/or particularly volatile items that impact the current period results by $0.01 per share or more. Such “Significant Items” generally fall within the categories discussed below:
 
Timing Differences
 
Parts of our regular business activities are naturally volatile, including capital markets income and sales of loans. While such items may generally be expected to occur within a full year reporting period, they may vary significantly from period to period. Such items are also typically a component of an income statement line item and not, therefore, readily discernable. By specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
 
Other Items
 
From time to time, an event or transaction might significantly impact revenues or expenses in a particular reporting period that are judged to be one-time, short-term in nature, and/or materially outside typically expected performance. Examples would be (1) merger costs as they typically impact expenses for only a few quarters during the period of transition; e.g., restructuring charges, asset valuation adjustments, etc.; (2) changes in an accounting principle; (3) one-time tax assessments/refunds; (4) a large gain/loss on the sale of an asset; (5) outsized commercial loan net charge-offs related to fraud; etc. In addition, for the periods covered by this report, the impact of the Franklin restructuring is deemed to be a significant item due to its unusually large size


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and because it was acquired in the Sky Financial merger and thus it is not representative of our typical underwriting criteria. By disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
 
Provision for Credit Losses
 
While the provision for credit losses may vary significantly among periods, and often exceeds $0.01 per share, we typically exclude it from the list of “Significant Items” unless, in our view, there is a significant, specific credit (or multiple significant, specific credits) affecting comparability among periods. In determining whether any portion of the provision for credit losses should be included as a significant item, we consider, among other things, that the provision is a major income statement caption rather than a component of another caption and, therefore, the period-to-period variance can be readily determined. We also consider the additional historical volatility of the provision for credit losses.
 
Other Exclusions
 
“Significant Items” for any particular period are not intended to be a complete list of items that may significantly impact future periods. A number of factors, including those described in Huntington’s 2007 Annual Report on Form 10-K and other factors described from time to time in Huntington’s other filings with the SEC, could also significantly impact future periods.
 
Significant Items Influencing Financial Performance Comparisons
 
Earnings comparisons among the three years ended December 31, 2007 were impacted by a number of significant items summarized below.
 
  1.  Sky Financial Acquisition.  — The merger with Sky Financial was completed on July 1, 2007. At the time of acquisition, Sky Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion. Sky Financial results are reflected in our consolidated results for six months of 2007. The impacts on the 2007 reported results compared with premerger reporting periods are as follows:
 
  –  Increased the absolute level of 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. These net merger costs were $85.1 million in 2007. This included $13.4 million severance expense relating to the retirement of Sky Financial’s former chairman, president, and chief executive officer, who was appointed Huntington’s president and chief operating officer at the time of the acquisition, but subsequently retired on December 31, 2007.
 
  2.  Franklin Relationship Restructuring.  — Performance for 2007 included a $423.6 million ($275.4 million after-tax, or $0.91 per common share based upon the annual average outstanding diluted common shares) negative impact related to our Franklin relationship acquired in the Sky Financial acquisition. On December 28, 2007, the loans associated with Franklin were restructured, resulting in a $405.8 million provision for credit losses and a $17.9 million reduction of net interest income. The net interest income reduction reflected the placement of the Franklin loans on nonaccrual status from November 16, 2007, until December 28, 2007.
 
At December 31, 2007, following the troubled debt restructuring of our loans to Franklin, we had $1.2 billion of loans to Franklin (net of amounts charged off). An additional $0.3 billion of loans were held by other banks. These other participating banks have no recourse to Huntington. Franklin is a specialty consumer finance company primarily engaged in the servicing and resolution of performing, reperforming, and nonperforming residential mortgage loans. Franklin’s portfolio consists of loans secured by 1-4 family residential real estate that generally fall outside the underwriting standards of Fannie Mae and Freddie Mac and involve elevated credit risk as a result of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt or past credit difficulties. Franklin purchased these loan portfolios at a discount to the unpaid principal balance and originated loans with interest rates and fees calculated to provide a rate of return adjusted to reflect the elevated credit risk inherent in these types of loans. Franklin originated nonprime loans through its wholly-owned subsidiary, Tribeca Lending Corp., and has generally held for investment the loans acquired and a significant portion of the loans originated. Franklin does not have significant exposure to repurchase


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loans sold to others as substantially all of its loans have been retained. The following table details our loan relationship with Franklin after the restructuring on December 28, 2007:
 
Table 2 — Commercial Loans to Franklin
 
                                         
                      Participated
       
(in thousands of dollars)   Franklin     Tribeca     Subtotal     to others     Total  
 
Variable rate, term loan (Facility A)
  $ 600,000     $ 400,000     $ 1,000,000     $ (175,303 )   $ 824,697  
Variable rate, subordinated term loan (Facility B)
    318,937       91,133       410,070       (73,994 )     336,076  
Fixed rate, junior subordinated term loan (Facility C)
    125,000             125,000       (8,224 )     116,776  
Line of credit facility (1)
    1,033             1,033             1,033  
Other variable rate term loans
    4,327       44,537       48,864       (22,269 )     26,595  
                                         
Subtotal
    1,049,297       535,670       1,584,967     $ (279,790 )   $ 1,305,177  
                                         
Participated to others
    (194,045 )     (85,745 )     (279,790 )                
                                         
Total principal owed to Huntington
    855,252       449,925       1,305,177                  
Amounts charged off
    (116,776 )           (116,776 )                
                                         
Total book value of loans
  $ 738,476     $ 449,925     $ 1,188,401                  
                                         
 
(1) The line of credit facility was not included in the restructuring.
 
The restructuring resulted in a total debt forgiveness of $300 million, of which Huntington forgave $280 million, which was recorded as a charge-off in 2007. In addition, we charged off our portion of the fixed-rate term loan of $117 million in 2007. These two loan charge-offs were reduced by the unamortized discount associated with the loan and by other amounts received from Franklin.
 
  3.  Unizan Acquisition.  — The merger with 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 included in our consolidated results for ten months of 2006. As a result, performance comparisons between 2006 and 2005 are affected. Significant activity related to the Unizan acquisition is indicated in the “Results of Operations” section.
 
  4.  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. 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 mortgage loans. The review of securities for sale resulted in an initial impairment of $57.3 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 $73.1 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 $77.5 million ($0.21 per common share).
 
  5.  Mortgage Servicing Rights (MSRs) and Related Hedging.  — Included in net market-related losses are net losses or gains from our MSRs and the related hedging. Additional information regarding MSRs is located under the “Market Risk” heading of the “Risk Management and Capital” section. Net income included the following net impact of MSR hedging activity (see Table 10):
 
                                       
                          Per
 
    Net interest
  Non-interest
    Pretax
    Net
    common
 
(amounts in thousands except per common share)   income   income     income     income     share  
2007
  $ 5,797   $ (24,784 )   $ (18,987 )   $ (12,342 )   $ (0.04 )
2006
    36     3,586 (1)     3,622       2,354       0.01  
2005
    1,688     (9,006 )     (7,318 )     (4,757 )     (0.02 )
 
(1) Includes $5.1 million related to the positive impact of adopting SFAS No 156.
 
  6.  Other Net Market-Related Losses.  — Other net market-related losses include losses and gains related to the following market-driven activities: gains and losses from public equity investing included in other non-interest income, net securities gains and losses, net gains and losses from the sale of loans held-for-sale, and the impact from the extinguishment of debt.


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  Total net market-related losses also include the net impact of MSRs and related hedging (see item 5 above). Net income included the following impact from other net market-related losses:
 
                                                       
    Securities
          Loss on
                    Per
 
    gains/
    Public equity
    loans
    Debt
  Pretax
    Net
    common
 
(amounts in thousands except per common share)   (losses)     investments     held-for-sale     extinguishment   income     income     share  
2007
  $ (30,486 )   $ (20,009 )   $ (34,003 )   $ 8,058   $ (76,440 )   $ (49,686 )   $ (0.16 )
2006
    (55 )     7,436                 7,381       4,798       0.02  
2005
    715                       715       465        
 
  7.  Visa ® Indemnification.  — Performance for 2007 included an accrual of $24.9 million ($16.2 million after-tax, or $0.05 per common share) for estimated indemnification losses arising from third-party litigation against Visa ® . Management expects that the value of our future ownership in Visa ® , currently not reflected in the financial statements, will ultimately more than offset this accrual. However, no assurance can be given that the proceeds received, if any, resulting from this future ownership would be sufficient to cover the accrued indemnity liabilities.
 
  8.  Effective Tax Rate.  — Various items impacted the effective tax rates for 2007, 2006, and 2005. For 2007, our effective tax rate was favorably impacted by lower net income and the impact of tax exempt income, bank owned life insurance, asset securitization activities, and general business credits from investments in low income housing and historic property partnerships. For 2006, impacts included the effects of an $84.5 million ($0.35 per common share) reduction of provision for income taxes 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, the effective tax rate benefited $26.9 million ($0.12 per common share) from the positive impact of a federal tax loss carry back, partially offset by a net $5.0 million after tax ($0.02 per common share) increase from the repatriation of foreign earnings.
 
  9.  Other Significant Items Influencing Earnings Performance Comparisons.  — In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:
 
2007
 
  –  $10.8 million pretax negative impact primarily due to increases to litigation reserves on existing cases.
 
2006
 
  –  $10.0 million pretax contribution to the Huntington Foundation.
 
  –  $5.5 million pretax 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 pretax expenses. This reflected fourth quarter severance-related expenses associated with a reduction of 75 Regional Banking staff positions, as well as costs associated with the retirements of a vice chairman and an executive vice president.
 
  –  $3.7 million of Unizan pretax merger costs, primarily associated with systems conversion expenses.
 
  –  $3.3 million pretax gain on the sale of MasterCard ® stock.
 
  –  $3.2 million pretax negative impact associated with the write-down of equity method investments.
 
  –  $2.3 million pretax unfavorable impact due to a cumulative adjustment to defer home equity annual fees.
 
2005
 
  –  $8.8 million pretax investment securities losses, resulting from the decision to reduce exposure to certain unsecured federal agency securities.
 
  –  $5.1 million of pretax severance and consolidation expenses associated with the consolidation of certain operations functions, including the closing of an item-processing center in Michigan.
 
  –  $3.7 million pretax expense associated with the closed SEC investigation and regulatory-related written agreements.
 
  –  $2.6 million pretax write-offs of equity investments.


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Table 4 reflects the earnings impact of the above-mentioned significant items for periods affected by this Discussion of Results of Operations:
 
Table 4 — Significant Items Influencing Earnings Performance Comparison (1)
 
                                                 
    2007     2006     2005  
(in thousands of dollars)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
Net income — GAAP
  $ 75,169             $ 461,221             $ 412,091          
Earnings per share, after tax
          $ 0.25             $ 1.92             $ 1.77  
Change from prior year — $
            (1.67 )             0.15               0.06  
Change from prior year — %
            (87.0 )%             8.5 %             3.5 %
                                                 
                                                 
                                                 
Significant items — favorable (unfavorable) impact:     Earnings (2)       EPS (3)       Earnings (2)       EPS (3)       Earnings (2)       EPS (3)  
 
Franklin Credit relationship restructuring
  $ (423,645 )   $ (0.91 )   $     $     $     $  
Net market-related (losses) gains
    (95,427 )     (0.20 )     5,860       0.02       (6,603 )     (0.02 )
Merger costs
    (85,084 )     (0.18 )     (3,749 )     (0.01 )                
Visa ® anti-trust indemnification
    (24,870 )     (0.05 )                        
Litigation losses
    (10,767 )     (0.02 )                        
Reduction to federal income tax expense (4)
                84,541       0.35              
MSR FAS 156 accounting change
                5,143       0.01              
Gain on sale of MasterCard ® stock
                3,341       0.01              
Balance sheet restructuring
                (77,525 )     (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 )
Accounting adjustment for certain equity investments
                (3,240 )     (0.01 )            
Adjustment to defer home equity annual fees
                (2,254 )     (0.01 )            
Net impact of federal tax loss carry back (4)
                            26,936       0.12  
Net impact of repatriating foreign earnings (4)
                            (5,040 )     (0.02 )
SEC and regulatory related expenses
                            (3,715 )     (0.01 )
Write-off of equity investments
                            (2,598 )     (0.01 )
 
(1) See Significant Factors Influencing Financial Performance discussion.
 
(2) Pre-tax unless otherwise noted.
 
(3) Based upon the annual average outstanding diluted common shares.
 
(4) After-tax.
 
Net Interest Income / Average Balance Sheet
 
(This section should be read in conjunction with Significant Items 1, 2, 3, 4, and 5.)
 
Our primary source of revenue is net interest income, which is the difference between interest income from earning assets (primarily loans, direct financing leases, and securities), and interest expense of funding sources (primarily 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.


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Table 5 shows changes in fully-taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest bearing liabilities.
 
Table 5 — Change in Net Interest Income Due to Changes in Average Volume and Interest Rates (1)
 
                                                 
    2007     2006  
    Increase (Decrease) From
    Increase (Decrease) From
 
    Previous Year Due To     Previous Year Due To  
Fully-taxable equivalent basis (2)
        Yield/
                Yield/
       
(in millions of dollars)   Volume     Rate     Total     Volume     Rate     Total  
Loans and direct financing leases
  $ 519.8     $ 97.8     $ 617.6     $ 100.7     $ 247.1     $ 347.8  
Securities
    (27.7 )     23.2       (4.5)       30.3       49.8       80.1  
Other earning assets
    60.2       2.4       62.6       (4.4 )     7.8       3.4  
 
Total interest income from earning assets
    552.3       123.4       675.7       126.6       304.7       431.3  
 
Deposits
    281.2       28.0       309.2       52.7       217.6       270.3  
Short-term borrowings
    18.3       2.3       20.6       12.6       25.3       37.9  
Federal Home Loan Bank advances
    32.2       10.4       42.6       9.5       15.8       25.3  
Subordinated notes and other long-term debt, including capital securities
    6.6       11.1       17.7       (21.5 )     59.9       38.4  
 
Total interest expense of interest-bearing liabilities
    338.3       51.8       390.1       53.3       318.6       371.9  
 
Net interest income
  $ 214.0     $ 71.6     $ 285.6     $ 73.3     $ (13.9 )   $ 59.4  
 
 
(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.
 
2007 versus 2006
 
Fully-taxable equivalent net interest income for 2007 increased $285.6 million, or 28%, from 2006. This reflected the favorable impact of a $7.9 billion, or 25%, increase in average earning assets, of which $7.3 billion represented an increase in average loans and leases, as well as the benefit of an increase in the fully-taxable net interest margin of seven basis points to 3.36%. The increase to average earning assets, and to average loans and leases, was primarily merger-related.
 
The following table details the estimated merger-related impacts on our reported loans and deposits:
 
Table 6 — Average Loans/Leases and Deposits — Estimated Merger-Related Impacts
 
                                                         
    Twelve Months Ended
                               
    December 31,     Change           Non-merger Related  
            Merger
     
(in millions)   2007     2006     Amount     %     Related     Amount     % (1)  
Loans/Leases
                                                       
Total commercial
  $ 17,443     $ 11,865     $ 5,578       47.0 %   $ 4,373     $ 1,205       7.4 %
Automobile loans and leases
    4,118       4,088       30       0.7       216       (186 )     (4.3 )
Home equity
    6,173       4,970       1,203       24.2       1,193       10       0.2  
Residential mortgage
    4,939       4,581       358       7.8       556       (198 )     (3.9 )
Other consumer
    529       439       90       20.5       72       18       3.5  
 
Total consumer
    15,759       14,078       1,681       11.9       2,037       (356 )     (2.2 )
 
Total loans
  $ 33,202     $ 25,943     $ 7,259       28.0 %   $ 6,410     $ 849       2.6 %
 
Deposits
                                                       
Demand deposits — non-interest bearing
  $ 4,438     $ 3,530     $ 908       25.7 %   $ 915     $ (7 )     (0.2 )%
Demand deposits — interest bearing
    3,129       2,138       991       46.4       730       261       9.1  
Money market deposits
    6,173       5,604       569       10.2       498       71       1.2  
Savings and other domestic time deposits
    3,895       2,992       903       30.2       1,297       (394 )     (9.2 )
Core certificates of deposit
    8,057       5,050       3,007       59.5       2,315       692       9.4  
 
Total core deposits
    25,692       19,314       6,378       33.0       5,755       623       2.5  
Other deposits
    5,374       4,870       504       10.3       672       (168 )     (3.0 )
 
Total deposits
  $ 31,066     $ 24,184     $ 6,882       28.5 %   $ 6,427     $ 455       1.5 %
 
 
(1) Calculated as non-merger related / (prior period + merger-related)


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M ANAGEMENT’S D ISCUSSION AND A NALYSIS H UNTINGTON B ANCSHARES I NCORPORATED
 
The $0.8 billion, or 3%, non-merger-related increase in total average loans compared with the prior year primarily reflected a $1.2 billion, or 7%, increase in average total commercial loans. This increase was the result of strong growth in both middle-market commercial and industrial (C&I) loans and small business loans across substantially all regions. This was partially offset by a $0.4 billion, or 2%, decrease in average total consumer loans reflecting declines in automobile loans and leases and residential mortgages. These declines reflect weaker demand, a softer economy, as well as the continued impact of competitive pricing.
 
Average other earning assets increased $0.6 billion, primarily reflecting the increase in average trading account securities. The increase in these assets reflected a change in our strategy to use trading account securities to hedge the change in fair value of our mortgage servicing rights.
 
The $0.5 billion, or 1%, increase in total non-merger related average deposits primarily reflected a $0.6 billion, or 2%, increase in average total core deposits as interest bearing demand deposits grew $0.3 billion, or 9%. While there was also strong growth in core certificates of deposit, this was partially offset by the decline in savings and other domestic deposits, as customers transferred funds from lower rate to higher rate accounts. In 2007, we reduced our dependence on non-core funds (total liabilities less core deposits and accrued expenses and other liabilities) to 30% of total assets, down from 33% in 2006.
 
2006 versus 2005
 
Fully-taxable equivalent net interest income increased $59.4 million, or 6% ($59.0 million Unizan 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 Unizan merger-related).
 
Average total commercial loans increased $1.2 billion, or 12% ($0.7 billion Unizan merger-related) from 2005. This growth reflected a $0.7 billion, or 15%, increase in average middle-market C&I loans, a $0.4 billion, or 12%, increase in average middle-market commercial real estate loans (CRE), and a $0.1 billion, or 4%, increase in average small business loans.
 
Average residential mortgages increased $0.5 billion, or 12% ($0.3 billion Unizan 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.
 
Average total investment securities increased $0.6 million, or 15%, from 2005.
 
Average total core deposits in 2006 increased $1.8 billion, or 10% ($1.3 billion Unizan merger-related), from 2005. Most of the increase reflected higher average core certificates of deposit, which increased $1.7 billion ($0.5 billion Unizan merger-related) resulting from continued customer demand for higher, fixed rate deposit products. Average interest bearing demand deposits increased $0.2 billion, primarily all 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.
 
Table 7 shows average annual balance sheets and fully-taxable equivalent 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.


27

 

M ANAGEMENT’S D ISCUSSION AND A NALYSIS H UNTINGTON B ANCSHARES I NCORPORATED
 
Table 7 — Consolidated Average Balance Sheet and Net Interest Margin Analysis
 
                                                                         
    Average Balances  
                            Change from
                   
          Change from 2006           2005                    
Fully-taxable equivalent basis (1)
                                     
(in millions of dollars)   2007     Amount     %     2006     Amount     %     2005     2004     2003  
Assets
                                                                       
Interest bearing deposits in banks
  $ 260     $ 207       N.M. %   $ 53     $       %   $ 53     $ 66     $ 37  
Trading account securities
    642       550       N.M.       92       (115 )     (55.6 )     207       105       14  
Federal funds sold and securities purchased under resale agreement
    591       270       84.1       321       59       22.5       262       319       87  
Loans held for sale
    362       87       31.6       275       (43 )     (13.5 )     318       243       564  
Investment securities:
                                                                       
Taxable
    3,653       (544 )     (13.0 )     4,197       514       14.0       3,683       4,425       3,533  
Tax-exempt
    646       76       13.3       570       95       20.0       475       412       334  
 
Total investment securities
    4,299       (468 )     (9.8 )     4,767       609       14.6       4,158       4,837       3,867  
Loans and leases: (3)
Commercial:
                                                                       
Middle market commercial and industrial (4)
    8,252       2,694       48.5       5,558       741       15.4       4,817       4,456       4,633  
Construction (4)
    1,511       261       20.9       1,250       (428 )     (25.5 )     1,678       1,420       1,219  
Commercial (4)
    4,267       1,516       55.1       2,751       843       44.2       1,908       1,922       1,800  
 
Middle market commercial real estate
    5,778       1,777       44.4       4,001       415       11.6       3,586       3,342       3,019  
Small business commercial and industrial and commercial real estate (4)
    3,413       1,107       48.0       2,306       82       3.7       2,224       2,003       1,787  
 
Total commercial
    17,443       5,578       47.0       11,865       1,238       11.6       10,627       9,801       9,439  
 
Consumer:
                                                                       
Automobile loans
    2,633       576       28.0       2,057       14       0.7       2,043       2,285       3,260  
Automobile leases
    1,485       (546 )     (26.9 )     2,031       (391 )     (16.1 )     2,422       2,192       1,423  
 
Automobile loans and leases
    4,118       30       0.7       4,088       (377 )     (8.4 )     4,465       4,477       4,683  
Home equity
    6,173       1,203       24.2       4,970       218       4.6       4,752       4,244       3,400  
Residential mortgage
    4,939       358       7.8       4,581       500       12.3       4,081       3,212       2,076  
Other loans
    529       90       20.5       439       54       14.0       385       393       426  
 
Total consumer
    15,759       1,681       11.9       14,078       395       2.9       13,683       12,326       10,585  
 
Total loans and leases
    33,202       7,259       28.0       25,943       1,633       6.7       24,310       22,127       20,024  
Allowance for loan and lease losses
    (382 )     (95 )     33.1       (287 )     (19 )     7.1       (268 )     (298 )     (330 )
 
Net loans and leases
    32,820       7,164       27.9       25,656       1,614       6.7       24,042       21,829       19,694  
 
Total earning assets
    39,356       7,905       25.1       31,451       2,143       7.3       29,308       27,697       24,593  
 
Automobile operating lease assets
          (93 )     N.M.       93       (258 )     (73.5 )     351       891       1,697  
Cash and due from banks
    930       105       12.7       825       (20 )     (2.4 )     845       843       774  
Intangible assets
    2,019       1,452       N.M.       567       349       N.M.       218       216       218  
All other assets
    2,789       326       13.2       2,463       278       12.7       2,185       2,084       2,020  
 
Total Assets
  $ 44,712     $ 9,600       27.3 %   $ 35,112     $ 2,473       7.6 %   $ 32,639     $ 31,433     $ 28,972  
 
Liabilities and Shareholders’ Equity
                                                                       
Deposits:
                                                                       
Demand deposits — non-interest bearing
  $ 4,438     $ 908       25.7 %   $ 3,530     $ 151       4.5 %   $ 3,379     $ 3,230     $ 3,080  
Demand deposits — interest bearing
    3,129       991       46.4       2,138       218       11.4       1,920       1,953       1,822  
Money market deposits
    6,173       569       10.2       5,604       (134 )     (2.3 )     5,738       5,254       4,371  
Savings and other domestic time deposits
    3,895       903       30.2       2,992       (163 )     (5.2 )     3,155       3,431       3,462  
Core certificates of deposit
    8,057       3,007       59.5       5,050       1,716       51.5       3,334       2,689       3,115  
 
Total core deposits
    25,692       6,378       33.0       19,314       1,788       10.2       17,526       16,557       15,850  
Other domestic time deposits of $100,000 or more
    1,494       381       34.2       1,113       203       22.3       910       593       389  
Brokered time deposits and negotiable CDs
    3,239       (3 )     (0.1 )     3,242       123       3.9       3,119       1,837       1,419  
Deposits in foreign offices
    641       126       24.5       515       58       12.7       457       508       500  
 
Total deposits
    31,066       6,882       28.5       24,184       2,172       9.9       22,012       19,495       18,158  
Short-term borrowings
    2,245       445       24.7       1,800       421       30.5       1,379       1,410       1,600  
Federal Home Loan Bank advances
    2,027       658       48.1       1,369       264       23.9       1,105       1,271       1,258  
Subordinated notes and other long-term debt
    3,688       114       3.2       3,574       (490 )     (12.1 )     4,064       5,379       4,559  
 
Total interest bearing liabilities
    34,588       7,191       26.2       27,397       2,216       8.8       25,181       24,325       22,495  
 
All other liabilities
    1,054       (185 )     (14.9 )     1,239       (257 )     (17.2 )     1,496       1,504       1,201  
Shareholders’ equity
    4,632       1,686       57.2       2,946       363       14.1       2,583       2,374       2,196  
 
Total Liabilities and Shareholders’ Equity
  $ 44,712     $ 9,600       27.3 %   $ 35,112     $ 2,473       7.6 %   $ 32,639     $ 31,433     $ 28,972  
                                                                         
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)  2006 reflects a net reclassification of average balances and related interest income from small business commercial and industrial and commercial real estate to middle market commercial and industrial and middle market commercial real estate.


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Interest Income/Expense     Average Rate (2)  
2007     2006     2005     2004     2003     2007     2006     2005     2004     2003  
                                                                             
$ 12.5     $ 3.2     $ 1.1     $ 0.7     $ 0.6       4.80 %     6.00 %     2.16 %     1.05 %     1.53 %
  37.5       3.8       8.5       4.4       0.6       5.84       4.19       4.08       4.15       4.02  
  29.9       16.1       6.0       5.5       1.6       5.05       5.00       2.27       1.73       1.80  
  20.6       16.8       17.9       13.0       30.0       5.69       6.10       5.64       5.35       5.32  
                                                                             
  221.9       229.4       158.7       171.7       159.6       6.07       5.47       4.31       3.88       4.52  
  43.4       38.5       31.9       28.8       23.5       6.72       6.75       6.71       6.98       7.04  
                                                                             
  265.3       267.9       190.6       200.5       183.1       6.17       5.62       4.58       4.14       4.73  
                                                                             
                                                                             
  614.2       413.1       279.0       196.5       223.5       7.44       7.43       5.79       4.41       4.82  
  117.4       100.9       107.8       64.2       51.3       7.77       8.08       6.43       4.52       4.21  
  318.2       205.1       113.2       88.0       89.4       7.46       7.46       5.93       4.58       4.97  
                                                                             
  435.6       306.0       221.0       152.2       140.7       7.54       7.65       6.16       4.55       4.66  
  256.4       163.0       137.5       110.3       105.6       7.51       7.07       6.18       5.50       5.91  
                                                                             
  1,306.2       882.1       637.5       459.0       469.8       7.49       7.43       6.00       4.68       5.00  
                                                                             
                                                                             
  188.7       135.1       133.3       165.1       242.1       7.17       6.57       6.52       7.22       7.43  
  80.3       102.9       119.6       109.6       72.8       5.41       5.07       4.94       5.00       5.12  
                                                                             
  269.0       238.0       252.9       274.7       314.9       6.53       5.82       5.66       6.14       6.73  
  479.8       369.7       288.6       208.6       166.4       7.77       7.44       6.07       4.92       4.89  
  285.9       249.1       212.9       163.0       112.2       5.79       5.44       5.22       5.07       5.40  
  55.5       39.8       39.2       29.5       36.4       10.51       9.07       10.23       7.51       8.55  
                                                                             
  1,090.2       896.6       793.6       675.8       629.9       6.92       6.37       5.80       5.48       5.95  
                                                                             
  2,396.4       1,778.7       1,431.1       1,134.8       1,099.7       7.22       6.86       5.89       5.13       5.50  
                                                                             
                                                                             
                                                                             
                                                                             
  2,762.2       2,086.5       1,655.2       1,358.9       1,315.6       7.02       6.63       5.65       4.89       5.35  
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                         
  40.3       19.3       10.6       8.3       10.0       1.29       0.90       0.55       0.42       0.55  
  232.5       193.1       124.9       65.8       63.0       3.77       3.45       2.18       1.25       1.44  
  90.7       50.2       42.9       44.1       67.7       2.33       1.68       1.36       1.28       1.96  
  391.3       214.8       118.7       90.4       114.3       4.86       4.25       3.56       3.36       3.67  
                                                                             
  754.8       477.4       297.1       208.6       255.0       3.55       3.02       2.10       1.56       2.00  
  75.7       55.6       30.8       11.3       4.6       5.07       4.99       3.39       1.90       1.17  
  175.4       169.1       109.4       33.1       24.1       5.41       5.22       3.51       1.80       1.70  
  20.5       15.1       9.6       4.1       4.6       3.19       2.93       2.10       0.82       0.92  
                                                                             
  1,026.4       717.2       446.9       257.1       288.3       3.85       3.47       2.40       1.58       1.91  
  92.8       72.2       34.3       13.0       15.7       4.13       4.01       2.49       0.93       0.98  
  102.6       60.0       34.7       33.3       24.4       5.06       4.38       3.13       2.62       1.94  
  219.6       201.9       163.5       132.5       128.5       5.96       5.65       4.02       2.46       2.82  
                                                                             
  1,441.4       1,051.3       679.4       435.9       456.9       4.17       3.84       2.70       1.79       2.03  
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
$ 1,320.8     $ 1,035.2     $ 975.8     $ 923.0     $ 858.7                                          
 
                                          2.85       2.79       2.95       3.10       3.32  
                                          0.51       0.50       0.38       0.23       0.17  
                                                                             
                                          3.36 %     3.29 %     3.33 %     3.33 %     3.49 %1


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M ANAGEMENT’S D ISCUSSION AND A NALYSIS H UNTINGTON B ANCSHARES I NCORPORATED
 
Provision for Credit Losses
 
(This section should be read in conjunction with Significant Items 1, 2, 3, and the Credit Risk section.)
 
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels adequate to absorb our estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments.
 
The provision for credit losses in 2007 was $643.6 million, up from $65.2 million in 2006, primarily reflecting a $405.8 million increase in the 2007 fourth-quarter provision related to Franklin. The remainder of the increase reflected the continued weakness in our Midwest markets, most notably among our borrowers in eastern Michigan and northern Ohio, and within the residential real estate development portfolio.
 
The provision for credit losses in 2006 was $65.2 million, down $16.1 million from 2005. The decrease reflected a decline in the transaction component of the ALLL at year-end compared with that at the end of 2005, due to a general improvement in the underlying risk of the loan portfolio. These improvements were reflected in the decline in the ALLL as a percent of period-end total loans and leases to 1.04% at December 31, 2006, from 1.10% in 2005.
 
Non-Interest Income
 
(This section should be read in conjunction with Significant Items 1, 3, 4, 5, 6, and 9.)
 
Table 8 reflects non-interest income for the three years ended December 31, 2007:
 
Table 8 — Non-Interest Income
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2006           Change from 2005        
(in thousands of dollars)   2007     Amount     %     2006     Amount     %     2005  
Service charges on deposit accounts
  $ 254,193     $ 68,480       36.9 %   $ 185,713     $ 17,879       10.7 %   $ 167,834  
Trust services
    121,418       31,463       35.0       89,955       12,550       16.2       77,405  
Brokerage and insurance income
    92,375       33,540       57.0       58,835       5,216       9.7       53,619  
Other service charges and fees
    71,067       19,713       38.4       51,354       7,006       15.8       44,348  
Bank owned life insurance income
    49,855       6,080       13.9       43,775       3,039       7.5       40,736  
Mortgage banking
    29,804       (11,687 )     (28.2 )     41,491       13,158       46.4       28,333  
Securities losses
    (29,738 )     43,453       (59.4 )     (73,191 )     (65,136 )     N.M.       (8,055 )
Other income
    79,819       (40,203 )     (33.5 )     120,022       24,975       26.3       95,047  
 
Sub-total before automobile operating lease income
    668,793       150,839       29.1       517,954       18,687       3.7       499,267  
Automobile operating lease income
    7,810       (35,305 )     (81.9 )     43,115       (89,900 )     (67.6 )     133,015  
 
Total non-interest income
  $ 676,603     $ 115,534       20.6 %   $ 561,069     $ (71,213 )     (11.3 )%   $ 632,282  
                                                         
N.M., not a meaningful value.


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M ANAGEMENT’S D ISCUSSION AND A NALYSIS H UNTINGTON B ANCSHARES I NCORPORATED
 
 
2007 versus 2006
 
Non-interest income increased $115.5 million, or 21%, from a year ago. The $137.4 million of merger-related non-interest income drove the increase, as non-merger-related non-interest income declined. The following table details the estimated merger-related impact on our reported non-interest income:
 
Table 9 — Non-Interest Income — Estimated Merger-Related Impact
 
                                                         
    Twelve Months Ended
                               
    December 31,     Change           Non-merger Related  
              Merger
     
(in thousands)   2007     2006     Amount     %     Related     Amount     % (1)  
Service charges on deposit accounts
  $ 254,193     $ 185,713     $ 68,480       36.9 %   $ 48,220     $ 20,260       8.7 %
Trust services
    121,418       89,955       31,463       35.0       14,018       17,445       16.8  
Brokerage and insurance income
    92,375       58,835       33,540       57.0       34,122       (582 )     (0.6 )
Other service charges and fees
    71,067       51,354       19,713       38.4       11,600       8,113       12.9  
Bank owned life insurance income
    49,855       43,775       6,080       13.9       3,614       2,466       5.2  
Mortgage banking income
    29,804       41,491       (11,687 )     (28.2 )     12,512       (24,199 )     (44.8 )
Securities losses
    (29,738 )     (73,191 )     43,453       (59.4 )     566       42,887       (59.1 )
Other income
    79,819       120,022       (40,203 )     (33.5 )     12,780       (52,983 )     (39.9 )
                                                         
Sub-total before automobile operating lease income
    668,793       517,954       150,839       29.1       137,432       13,407       2.0  
Automobile operating lease income
    7,810       43,115       (35,305 )     (81.9 )           (35,305 )     (81.9 )
 
Total non-interest income
  $ 676,603     $ 561,069     $ 115,534       20.6 %   $ 137,432     $ (21,898 )     (3.1 )%
                                                         
(1)  Calculated as non-merger related/(prior period + merger-related)
 
The $21.9 million, or 3%, decrease non-merger-related decline primarily reflected:
 
  –  $53.0 million, or 40%, decline in other income. This decline primarily reflected: (a) $34.0 million loss in 2007 on loans held-for-sale, and (b) $20.0 million of public equity investment losses in 2007 compared with $7.4 million of such gains in 2006.
 
  –  $35.3 million, or 82%, decline in automobile operating lease income.
 
  –  $24.2 million, or 45%, decrease in mortgage banking income primarily reflecting a $28.4 million net negative impact between periods related to MSR valuation, net of hedge-related trading activity (see Table 10).
 
Partially offset by:
 
  –  $42.9 million less in investment securities losses. Virtually all of the losses in 2006 related to the balance sheet restructuring (see “Significant Items”) and 2007 losses primarily related to the securities impairment losses recognized on certain investment securities.
 
  –  $20.3 million, or 9%, increase in service charges on deposit accounts, primarily reflecting higher personal and commercial service charge income.
 
  –  $17.4 million, or 17%, increase in trust services income. This increase reflected: (a) $9.7 million of revenues associated with the acquisition of Unified Fund Services, and (b) $4.8 million increase in Huntington Fund fees due to growth in Huntington Funds’ managed assets.
 
  –  $8.1 million, or 13%, increase in other service charges and fees primarily reflecting increased debit card fees due to higher volume.
 
2006 versus 2005
 
Non-interest income in 2006 decreased $71.2 million, or 11%, from 2005, including an $89.9 million decline in automobile operating lease income. Non-interest income before automobile operating lease income increased $18.7 million, or 4% ($23.9 million Unizan merger-related), reflecting:
 
  –  $23.1 million increase in other income ($7.1 million Unizan merger-related), primarily reflecting $7.0 million in higher equity investment gains, a $5.7 million increase in equipment operating lease income, a $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 Unizan merger-related), increase in service charges on deposit accounts, reflecting a $14.3 million, or 13%, increase in personal service charges, primarily non-sufficient fund/overdraft fees, and a $3.6 million, or 6%, increase in commercial service charge income.


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M ANAGEMENT’S D ISCUSSION AND A NALYSIS H UNTINGTON B ANCSHARES I NCORPORATED
 
  –  $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.
 
  –  $12.6 million, or 16% ($5.5 million merger-related), increase in trust services income, primarily reflecting (a) $6.5 million, or 18%, increase in personal trust income, mostly Unizan merger-related, and (b) $3.7 million, or 14%, increase in fees from Huntington Funds, reflecting 11% fund asset growth.
 
  –  $7.0 million, or 16% ($1.0 million Unizan 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.
 
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.
 
Table 10 — Mortgage Banking Income
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2006           Change from 2005        
(In thousands of dollars)   2007     Amount     %     2006     Amount     %     2005  
Mortgage Banking Income
                                                       
Origination and secondary marketing
  $ 25,965     $ 7,748       42.5 %   $ 18,217     $ (6,717 )     (26.9 )%   $ 24,934  
Servicing fees
    36,012       11,353       46.0       24,659       2,478       11.2       22,181  
Amortization of capitalized servicing (1)
    (20,587 )     (5,443 )     35.9       (15,144 )     3,215       (17.5 )     (18,359 )
Other mortgage banking income
    13,198       3,025       29.7       10,173       1,590       18.5       8,583  
                                                         
Sub-total
    54,588       16,683       44.0       37,905       566